THE PROVEN LEADER
IN BOND INSURANCE
2 0 1 7 A N N U A L R E P O R T
FOR OVER THREE DECADES…
Assured Guaranty has helped to lower the
cost of building and maintaining essential
public infrastructure. We have also
assisted in expanding the buying power
of consumers and the financial resources
of businesses through insured structured
financings, and our financial guaranty
has served as a tool for institutions to
manage capital efficiently. Bond issuers
use our credit enhancement to lower their
cost of capital, and investors rely on our
unconditional and irrevocable guaranty
of timely debt service payments. Assured
Guaranty insurance also provides the added
value of experienced credit selection,
underwriting and surveillance. With this
value proposition, our risk management
discipline and our strategic vision and
execution, we have built a financially
strong company to stand the test of time.
Please see the inside back cover for the forward-looking
statements disclaimer.
We further strengthened Assured Guaranty in 2017
through our proven abilities to form a vision of future
possibilities, to define strategies for achieving our
goals and to execute those strategies effectively.
1
Dominic J. Frederico
President and Chief Executive Officer
Assured Guaranty is in a very strong financial position, and
we have the strategy and resources to protect policyholders
and create value for shareholders.
2
DEAR SHAREHOLDERS AND POLICYHOLDERS
In 2017, Assured Guaranty demonstrated once again that our
long-term vision, well-conceived strategy and skilled execution
can create impressive growth in the value of our company.
We earned $661 million in non-GAAP operating income,*
increased our non-GAAP adjusted book value* to a record
$9 billion, further advanced our financial strength and broad-
ened the scope of the company, all while paying substantial
claims to protect insured bondholders.
Our 2017 Accomplishments Include:
• our greatest annual dollar increase in non-GAAP adjusted
book value per share,* which ended the year at a record
$77.74, up 17% from a year earlier
• a record year-end non-GAAP operating shareholders’
equity per share* of $56.20, 13% higher than a year earlier
• the return to shareholders of $571 million of excess
capital through $70 million in dividends and repurchases
of 12.7 million common shares
• an increase of almost 10% in our quarterly dividend per
share to 14.25 cents and, in February 2018, a further
increase of over 12% to 16 cents per share
• 35% annual growth in the present value of new business
production (PVP*), which reached $289 million, the
highest annual amount since 2010
• a widening of our leadership in the U.S. municipal bond
insurance market, guaranteeing more than 58% of
insured par sold
• the completion of our acquisition of the European arm
of MBIA Insurance Corp., which generated $57 million of
after-tax gain and increased non-GAAP adjusted book
value* by $322 million at the acquisition date
• our first investments in the asset management sector, as
part of our strategy to identify diversification opportu-
nities that complement our existing financial guaranty
business, provide accretive returns, and benefit from our
core strengths
• continued success in loss mitigation efforts, one of our key
strategies, including major structured finance settlements
for a pre-tax gain of $151 million.
With significant contributions in 2017 from each of our three
financial guaranty markets—U.S. public finance, international
infrastructure finance, and U.S. and international structured
finance—we increased our overall PVP* for the fourth
consecutive year. We accomplished this in a year of continued
low interest rates, exceptionally tight credit spreads, and dis-
turbing headlines about the crisis in Puerto Rico and improper
actions by the Commonwealth government and federally
appointed Financial Oversight and Management Board
(Oversight Board).
* On all pages, an asterisk denotes a financial measure that is not in accord with generally accepted accounting principles (non-GAAP financial measure).
For a definition and a reconciliation of a non-GAAP financial measure to the most directly comparable GAAP measure, please refer to the section
entitled “Non-GAAP Financial Measures” on pages 91–95 in the Form 10-K at the back of this book.
3
1000
800
600
400
200
0
1000
800
600
400
200
0
NON-GAAP OPERATING INCOME
(dollars in millions)
500
NON-GAAP OPERATING INCOME
500
400
(dollars in millions)
300
400
200
$801
100
$801
0
300
200
100
ASSURED GUAR ANT Y LTD.
0
$895
$647
$647
$710
$895
$661
$710
$661
NON-GAAP OPERATING INCOME
(dollars in millions)
NON-GAAP OPERATING INCOME
(dollars in millions)
$801
$647
$710
$661
$895
$895
$801
$647
$710
$661
’13
’14
’15
’16
’17
NET INVESTMENT INCOME
(dollars in millions)
’13
’14
’15
’16
’17
NET INVESTMENT INCOME
(dollars in millions)
$393
$403
$423
$408
$418
$393
$403
$423
$408
$418
’13
’13
’14
’14
’15
’16
’17
’15
’16
’17
’13
’13
’14
’14
’15
’16
’17
’15
’16
’17
NET INVESTMENT INCOME
(dollars in millions)
NET INVESTMENT INCOME
(dollars in millions)
TOTAL INVESTMENT PORTFOLIO AND CASH
TOTAL INVESTMENT PORTFOLIO AND CASH
(dollars in millions at fair value)
(dollars in millions at fair value)
GAAP basis investment portfolio and cash
GAAP basis investment portfolio and cash
12000
$393
$393
12000
$403
$403
10000
$423
$423
$408
$408
$418
$418
$10,969
$10,969
$11,459
$11,358
$11,103
$11,539
$11,459
$11,358
$11,103
$11,539
10000
8000
8000
6000
6000
4000
’13
2000
’13
0
4000
2000
0
’14
’14
’15
’16
’17
’15
’16
’17
’13
’14
’15
’16
’17
’13
’14
’15
’16
’17
Even Stronger Leadership in U.S. Public Finance
We continued to lead the municipal bond insurance industry
in terms of both par and the number of transactions insured
TOTAL INVESTMENT PORTFOLIO AND CASH
(dollars in millions at fair value)
during 2017. Issuers continued to increase their use of our
TOTAL INVESTMENT PORTFOLIO AND CASH
insurance on larger deals, attaching Assured Guaranty Municipal
GAAP basis investment portfolio and cash
(dollars in millions at fair value)
(AGM) insurance to 23 new issues with $100 million or more
GAAP basis investment portfolio and cash
of AGM-insured par. We also led the industry in the number
of smaller transactions, with AGM and Municipal Assurance
$11,358
Corp. (MAC) guaranteeing almost 400 bank-qualified issues.
$11,103
$11,539
$10,969
$11,459
12000
15000
$11,459
$11,358
$11,103
9000
6000
15000
12000
$10,969
In the secondary market in 2017, we insured approximately
$1.7 billion of par and, for the second consecutive year,
generated PVP* in the vicinity of 30% of our total U.S.
public finance PVP.* Aggregating all of our 2017 U.S. public
finance business, including transactions in both the primary
and secondary markets, Assured Guaranty generated U.S.
’15
public finance PVP* of $196 million, a year-over-year increase
of 22%.
’17
3000
6000
9000
’16
’13
’14
3000
0
CONSOLIDATED CLAIMS-PAYING RESOURCES
AND INSURED PORTFOLIO LEVERAGE
(dollars in millions)
Because international infrastructure transactions often take
a long time to complete, transaction flows tend to be less
regular and the timing of closings is not easy to predict. It is
therefore encouraging that we have generated PVP* in the
international market for nine consecutive quarters. While we
are still likely to see some volatility in international production,
we believe it is clear we have the value proposition and
investor acceptance to succeed in this market.
$12,306
CONSOLIDATED CLAIMS-PAYING RESOURCES
AND INSURED PORTFOLIO LEVERAGE
(dollars in millions)
Ratio of statutory net par outstanding
to total claims-paying resources
Consolidated claims-paying resources
Consolidated claims-paying resources
$12,630
$12,839
40x
42x
$11,701
$12,147
$12,328
$12,189
Ratio of statutory net par outstanding
to total claims-paying resources
In January 2017, we expanded our international presence by
completing our acquisition of MBIA’s European subsidiary,
which we renamed Assured Guaranty (London) plc. The
$12,147
acquisition added approximately $12 billion of primarily
European infrastructure and utility transactions to our
42x
insured portfolio.
’12
’11
$12,306
$12,189
$12,839
$12,328
$11,701
$11,752
40x
22x
20x
36x
31x
27x
’13
’14
’15
’16
’17
36x
47x
’10
$12,630
$11,539
47x
’17
’10
’13
0
’14
’15
’16
Consolidated claims-paying resources
CONSOLIDATED CLAIMS-PAYING RESOURCES
AND INSURED PORTFOLIO LEVERAGE
(dollars in millions)
An Outstanding Year in International Markets
International infrastructure and regulated utility transactions
generated $66 million of PVP* in 2017, $14 million more
than in the previous two years combined. The transactions
we closed show we have returned to being an important
participant in international infrastructure capital markets,
particularly in the United Kingdom. A selection of our 2017
transactions include:
47x
Consolidated claims-paying resources
CONSOLIDATED CLAIMS-PAYING RESOURCES
AND INSURED PORTFOLIO LEVERAGE
(dollars in millions)
In February 2018, we increased our
$12,306
quarterly dividend by 12% to $0.16
per share ($0.64 annualized).
Ratio of statutory net par outstanding
to total claims-paying resources
Total Paid (dollars in millions)
DIVIDENDS
Per Share ($)
$12,630
$12,839
$12,189
$12,328
$12,147
$11,701
• three transactions in the U.K. student housing sector, where
42x
DIVIDENDS
Ratio of statutory net par outstanding
to total claims-paying resources
$11,752
40x
we see ongoing opportunities
36x
$12,630
47x
’10
Per Share ($)
31x
Total Paid (dollars in millions)
27x
$12,839
$12,328
$12,189
one of the largest teaching hospitals in Europe
$11
• a £261 million refinancing for St. James’s Hospital in Leeds,
$12,147
In February 2018, we increased our
quarterly dividend by 12% to $0.16
’12
’13
per share ($0.64 annualized).
Per Share:
40x
$22
$11,701
20x
$9
• a long-term financial guaranty that improves the debt service
’17
$0.12
$0.18
liquidity for bonds issued to refinance Eurotunnel, introducing
’09
’05
to Europe an application of our product that has the potential
to enhance the long-term debt service liquidity for many
other issuers
$12,306
22x
’11
42x
$0.18
$0.16
$0.14
$0.06
31x
36x
27x
$10
$16
’04*
$5
’08
’16
’07
’14
’15
’06
$22
• two transactions located elsewhere in Europe, which further
reflects the recognition, value and acceptance of our guaranty
’11
$5
in that market.
$10
$16
$11
$9
’12
’13
’14
’16
’15
22x
’10
Varied Applications in Structured Finance
During 2017, our Structured Finance group generated $27
million of PVP* in a variety of structured finance sectors.
27x
31x
’14
’15
’11
’12
’13
Structured finance results included production in the aviation
sector, where we executed a number of residual value trans-
actions on aviation equipment. We also focused on capital
management solutions for financial institutions, such as life
insurance reserve financings and risk transfers for regula-
tory compliance.
$76
$70
$69
$75
$72
$69
22x
’16
Additionally, we wrote secondary market policies on some
issues in the asset-backed market, where we see additional
opportunities in consumer loan, auto loan and whole business
securitizations. This secondary market program has stimulated
interest in our guarantees in the primary asset-backed market.
$11,752
$76
$69
$75
$72
$69
$33
$33
$70
’14
’13
’12
’10
’11
$33
$0.18
$0.18
$0.48
$0.40
$0.44
$0.52
Ratings Affirmed, Outlook Stable
$0.36
During the year, S&P Global Ratings conducted its compre-
hensive annual review of Assured Guaranty and reaffirmed,
once again, the AA stable financial strength rating it assigns
to our principal operating subsidiaries. Separately, Kroll Bond
Rating Agency (KBRA) reaffirmed its AA+ stable rating for
MAC, its AA stable rating for Assured Guaranty Corp. (AGC)
and, in January 2018, its AA+ stable rating for AGM.
$0.57
$33
20x
’17
’17
’16
’15
*In 2004, dividends were paid following our April IPO. The amount shown is the quarterly dividend, annualized.
$11,752
20x
’17
50
40
30
20
10
50
40
30
20
10
0.6
0.5
0.4
0.3
0.2
0.1
0.0
DIVIDENDS
Per Share:
$0.06
$0.12
$0.14
$0.16
$0.18
$0.18
$0.18
$0.18
$0.36
$0.40
$0.44
$0.48
$0.52
$0.57
’04*
$75
’05
$76
’06
$72
’07
’08
$70
’09
’10
’11
’12
’13
’14
’15
’16
’17
*In 2004, dividends were paid following our April IPO. The amount shown is the quarterly dividend, annualized.
$69
$69
Per Share ($)
Total Paid (dollars in millions)
4
In February 2018, we increased our
quarterly dividend by 12% to $0.16
per share ($0.64 annualized).
DIVIDENDS
Per Share ($)
$5
$9
$10
$11
In February 2018, we increased our
Per Share:
$0.14
$0.12
$0.06
$0.16
quarterly dividend by 12% to $0.16
’05
’06
’07
’04*
per share ($0.64 annualized).
$33
$33
$22
$16
$5
$9
$10
$11
$33
$33
Total Paid (dollars in millions)
$16
$22
$75
$76
$72
$69
$69
$70
*In 2004, dividends were paid following our April IPO. The amount shown is the quarterly dividend, annualized.
$0.18
$0.18
$0.18
$0.18
$0.36
$0.40
$0.44
$0.48
$0.52
$0.57
’08
’09
’10
’11
’12
’13
’14
’15
’16
’17
Per Share:
$0.06
$0.12
$0.14
$0.16
$0.18
$0.18
$0.18
$0.18
$0.36
$0.40
$0.44
$0.48
$0.52
$0.57
’04*
’05
’06
’07
’08
’09
’10
’11
’12
’13
’14
’15
’16
’17
*In 2004, dividends were paid following our April IPO. The amount shown is the quarterly dividend, annualized.
200
400
1000
800
600
400
0
500
400
300
200
100
0
1000
800
600
200
0
500
400
300
200
100
0
12000
8000
10000
6000
12000
10000
4000
2000
0
8000
6000
4000
2000
0
80
70
60
50
40
30
20
10
0
15000
12000
9000
6000
3000
0
15000
12000
9000
6000
3000
0
0.6
0.5
0.4
0.3
0.2
0.1
0.0
50
40
30
20
10
80
70
60
50
40
30
20
10
0
50
40
30
20
10
0.6
0.5
0.4
0.3
0.2
0.1
0.0
0.6
0.5
0.4
0.3
0.2
0.1
0.0
80
70
60
50
40
30
20
10
0
80
70
60
50
40
30
20
10
0
VISION
See The Landscape. Determine What’s Possible.
5
ASSURED GUAR ANT Y LTD.
1000
1000
NON-GAAP OPERATING INCOME
(dollars in millions)
NON-GAAP OPERATING INCOME
(dollars in millions)
$801
$647
$710
$801
$895
$647
$661
$895
$710
$661
’13
’14
’15
’16
’17
’13
’14
’15
NET INVESTMENT INCOME
(dollars in millions)
’16
’17
NON-GAAP ADJUSTED BOOK VALUE PER SHARE
NET INVESTMENT INCOME
(dollars in millions)
Net unearned premium reserve on financial
guaranty contracts in excess of net expected
loss to be expensed less deferred acquisition
costs, after tax (per share)
Present value of estimated net future
non-financial guaranty revenue, after tax
(per share)
$393
Non-GAAP operating shareholders’ equity
(per share)
$403
$423
$393
$48.22
$14.63
$0.80
$408
$53.27
$403
$15.34
$0.69
$418
$60.87
$423
$17.07
$0.84
$66.46
$15.85
$408
$0.72
$77.74
$20.53
$418
$1.01
$32.79
$37.24
$42.96
$49.89
$56.20
’13
’13
’13
’14
’15
’16
’15
’15
’16
’16
’17
’17
’14
’14
’17
CONSOLIDATED NET PAR OUTSTANDING
(as of December 31, 2017)
TOTAL INVESTMENT PORTFOLIO AND CASH
(dollars in millions at fair value)
79% U.S. Public Finance A– average rating
4% U.S. Structured Finance BBB+ average rating
16% Non-U.S. Public Finance BBB+ average rating
1% Non-U.S. Structured Finance A average rating
TOTAL INVESTMENT PORTFOLIO AND CASH
(dollars in millions at fair value)
GAAP basis investment portfolio and cash
GAAP basis investment portfolio and cash
$10,969
$11,459
$11,358
$11,103
$11,539
$10,969
$11,459
$265.0
billion
A– average rating
$11,358
$11,103
$11,539
Ratings are based on our
internal rating scale.
’13
’14
’15
’16
’17
’13
’14
’15
’16
’17
U.S. PUBLIC FINANCE NET PAR OUTSTANDING BY SECTOR
CONSOLIDATED CLAIMS-PAYING RESOURCES
(as of December 31, 2017)
AND INSURED PORTFOLIO LEVERAGE
43% General Obligation
4% Healthcare
(dollars in millions)
CONSOLIDATED CLAIMS-PAYING RESOURCES
15% Municipal Utilities
4% Other Public Finance
AND INSURED PORTFOLIO LEVERAGE
8% Transportation
21% Tax-Backed
4% Higher Education
Consolidated claims-paying resources
(dollars in millions)
Ratio of statutory net par outstanding
to total claims-paying resources
$12,147
$12,189
$12,306
$11,701
$11,752
15000
12000
9000
6000
3000
0
Consolidated claims-paying resources
$209.4
billion
A– average rating
$12,328
$12,630
$12,839
47x
42x
Total may not equal 100%
due to rounding.
40x
36x
$12,630
$12,839
Ratio of statutory net par outstanding
$12,328
to total claims-paying resources
47x
42x
40x
$12,147
$12,189
$12,306
$11,701
36x
$11,752
31x
27x
22x
’16
20x
’17
’10
31x
’11
27x
’12
’13
’14
’15
22x
20x
’10
’11
U.S. PUBLIC FINANCE NET PAR OUTSTANDING BY RATING
’17
’13
’14
’16
’12
’15
(as of December 31, 2017)
Less than 1% AAA
14% AA
57% A
25% BBB
3% BIG*
DIVIDENDS
Per Share ($)
*Below investment grade
Total Paid (dollars in millions)
$75
$76
$72
$69
$69
$70
800
600
400
200
0
80
70
60
50
40
30
20
10
0
800
600
400
200
0
500
400
300
200
100
0
12000
10000
8000
6000
4000
2000
6
0
1000
800
600
400
200
0
500
400
300
200
100
0
12000
10000
8000
6000
4000
2000
0
0.6
0.5
0.4
0.3
0.2
0.1
0.0
50
40
30
20
15000
12000
9000
3000
0
10
6000
50
40
30
20
10
80
70
60
50
40
30
20
10
0
0.6
0.5
0.4
0.3
0.2
0.1
0.0
80
70
60
50
40
30
20
10
0
DIVIDENDS
In February 2018, we increased our
quarterly dividend by 12% to $0.16
Per Share ($)
Total Paid (dollars in millions)
per share ($0.64 annualized).
In February 2018, we increased our
quarterly dividend by 12% to $0.16
per share ($0.64 annualized).
$209.4
$69
billion
$75
$76
$72
$69
$70
$33
$33
Total may not equal 100%
due to rounding.
$22
$16
$9
$33
$10
$33
$11
$5
$0.06
$22
’04*
Per Share:
$16
$0.12
$0.14
$0.16
$0.18
$0.18
$0.18
$0.18
$0.36
$0.40
$0.44
$0.48
$0.52
$0.57
’05
’06
’07
’08
’09
’10
’11
’12
’13
’14
’15
’16
’17
$5
$9
$10
$11
*In 2004, dividends were paid following our April IPO. The amount shown is the quarterly dividend, annualized.
Per Share:
$0.06
$0.12
$0.14
$0.16
$0.18
$0.18
$0.18
$0.18
$0.36
$0.40
$0.44
$0.48
$0.52
$0.57
’04*
’05
’06
’07
’08
’09
’10
’11
’12
’13
’14
’15
’16
’17
*In 2004, dividends were paid following our April IPO. The amount shown is the quarterly dividend, annualized.
Non-GAAP operating income reconciliation
(dollars in millions, except per share amounts)
Net Income (loss)
Less pre-tax adjustments:
Realized gains (losses) on investments
Non-credit impairment unrealized fair value gains (losses) on credit derivatives
Fair value gains (losses) on CCS
Foreign exchange gains (losses) on remeasurement of premiums receivable and loss and LAE reserves
Total pre-tax adjustments
Less tax effect on pre-tax adjustments
Non-GAAP operating income
Years-Ended December 31,
2017
2016
2015
2014
2013
Total
Per
Share
Total
Per
Share
Total
Per
Share
Total
Per
Share
Total
Per
Share
$ 730
$ 5.96
$ 881
$ 6.56
$ 1,056
$ 7.08
$ 1,088
$ 6.26
$ 808
$ 4.30
40
43
(2)
57
138
(69)
0.33
0.35
(0.02)
0.46
1.12
(0.57)
(30)
36
0
(33)
(27)
13
(0.23)
0.27
0.00
(0.25)
(0.21)
0.09
(27)
505
27
(15)
490
(144)
(0.18)
3.39
0.18
(0.10)
3.29
(0.97)
(56)
687
(11)
(21)
599
(158)
(0.32)
3.95
(0.06)
(0.12)
3.45
(0.92)
56
(49)
10
(1)
16
(9)
0.30
(0.26)
0.05
(0.01)
0.08
(0.06)
$ 661
$ 5.41
$ 895
$ 6.68
$ 710
$ 4.76
$ 647
$ 3.73
$ 801
$ 4.28
Gain (loss) related to FG VIE consolidation (net of tax) included in non-GAAP operating income
$
11
$ 0.10
$
12
$ 0.10
$
11
$ 0.07
$ 156
$ 0.90
$ 192
$ 1.03
Non-GAAP adjusted book value reconciliation
(dollars in millions, except per share amounts)
Reconciliation of shareholders’ equity to adjusted book value:
Shareholders’ equity
Less pre-tax adjustments:
Non-credit impairment unrealized fair value gains (losses) on credit derivatives
Fair value gains (losses) on CCS
Unrealized gain (loss) on investment portfolio excluding foreign exchange effect
Less Taxes
Non-GAAP operating shareholders’ equity
Pre-tax adjustments:
Less: Deferred acquisition costs
Plus: Net present value of estimated net future revenue
Plus: Net unearned premium reserve on financial guaranty contracts in excess of
expected loss to be expensed
Plus Taxes
Non-GAAP adjusted book value
Gain (loss) related to FG VIE consolidation (net of tax) included in non-GAAP operating shareholders’ equity
Gain (loss) related to FG VIE consolidation (net of tax) included in non-GAAP adjusted book value
2017
2016
2015
2014
2013
Total
Per
Share
Total
Per
Share
Total
Per
Share
Total
Per
Share
Total
Per
Share
As of December 31,
$ 6,839
$ 58.95
$ 6,504
$ 50.82
$ 6,063
$ 43.96
$ 5,758
$ 36.37
$ 5,115
$ 28.07
(146)
60
487
(83)
(1.26)
0.52
4.20
(0.71)
(189)
62
316
(71)
(1.48)
0.48
2.47
(0.54)
(241)
62
373
(56)
(1.75)
0.45
2.71
(0.41)
(741)
35
523
45
(4.68)
0.22
3.30
0.29
(1,447)
46
236
306
(7.94)
0.25
1.29
1.68
6,521
56.20
6,386
49.89
5,925
42.96
5,896
37.24
5,974
32.79
101
146
0.87
1.26
106
136
0.83
1.07
114
169
0.83
1.23
121
159
0.76
1.00
124
214
0.68
1.17
2,966
(512)
25.56
(4.41)
2,922
(832)
22.83
(6.50)
3,384
(968)
24.53
(7.02)
3,461
(960)
21.86
(6.07)
3,791
(1,070)
20.81
(5.87)
$ 9,020
$ 77.74
$ 8,506
$ 66.46
$ 8,396
$ 60.87
$ 8,435
$ 53.27
$ 8,785
$ 48.22
$
$
5
$ 0.03
(14)
$ (0.12)
$
$
(7)
$ (0.06)
(24)
$ (0.18)
$
$
(21)
(43)
$ (0.15)
$ (0.31)
$
$
(37)
(60)
$ (0.24)
$ (190)
$ (1.04)
$ (0.39)
$ (248)
$ (1.36)
7
200
500
$393
$403
$423
$408
$418
1000
800
600
400
200
0
500
400
300
100
0
1000
800
600
400
200
0
400
300
200
100
0
12000
10000
8000
6000
4000
2000
12000
10000
8000
6000
4000
0
0
2000
NON-GAAP OPERATING INCOME
(dollars in millions)
$801
$801
’13
NON-GAAP OPERATING INCOME
$647
(dollars in millions)
$895
$710
$661
$895
$647
’14
$710
’15
’16
$661
’17
NET INVESTMENT INCOME
(dollars in millions)
’13
’14
’15
’16
’17
NET INVESTMENT INCOME
$403
$393
(dollars in millions)
$423
$408
$418
’13
’14
’15
’16
’17
’13
’14
’15
’16
’17
TOTAL INVESTMENT PORTFOLIO AND CASH
(dollars in millions at fair value)
GAAP basis investment portfolio and cash
TOTAL INVESTMENT PORTFOLIO AND CASH
(dollars in millions at fair value)
GAAP basis investment portfolio and cash
$10,969
$11,459
$11,358
$11,103
$11,539
$10,969
$11,459
$11,358
$11,103
$11,539
ASSURED GUAR ANT Y LTD.
’13
’14
’15
’16
’17
’13
’14
’15
’16
’17
CONSOLIDATED CLAIMS-PAYING RESOURCES
CONSOLIDATED CLAIMS-PAYING RESOURCES
AND INSURED PORTFOLIO LEVERAGE
AND INSURED PORTFOLIO LEVERAGE
(dollars in millions)
(dollars in millions)
Consolidated claims-paying resources
Consolidated claims-paying resources
Ratio of statutory net par outstanding
to total claims-paying resources
Ratio of statutory net par outstanding
to total claims-paying resources
$12,630
$12,630
$12,839
$12,839
$12,328
$12,328
$12,147
$12,147
$12,189
$12,306
$12,189
$12,306
$11,701
$11,752
$11,701
$11,752
47x
47x
’10
’10
42x
42x
40x
40x
36x
36x
31x
27x
31x
22x
27x
’11
’12
’13
’14
’15
’16
’11
’12
’13
’14
’15
20x
22x
’17
’16
20x
’17
Total Paid (dollars in millions)
In February 2018, we increased our
quarterly dividend by 12% to $0.16
Total Paid (dollars in millions)
$5
$9
$10
$11
$16
Per Share:
$0.06
$0.12
$0.14
$0.16
$0.18
’04*
’05
’06
’07
’08
*In 2004, dividends were paid following our April IPO. The amount shown is the quarterly dividend, annualized.
$16
$11
Per Share:
$0.06
$0.12
$0.14
$0.16
$0.18
’04*
’05
’06
’07
’08
*In 2004, dividends were paid following our April IPO. The amount shown is the quarterly dividend, annualized.
As for Moody’s Investors Service (Moody’s), we have long disputed their subjective
methodology, which results in their failure to rate us in a manner reflecting the
quantifiable improvement in our financial strength. Given AGC’s AA stable
ratings from both S&P and KBRA, we no longer consider a Moody’s rating
essential for AGC and have asked Moody’s to withdraw its AGC rating.
$75
$76
$69
$69
$76
$69
Strategic Acquisitions and Alternative Investments
Acquisition of legacy bond insurers or, through reinsurance, assumption of their
$75
insured portfolios results in large and immediate increases to the size of our
insured portfolio, which is equivalent to writing new policies in the same par
amount. Such acquisitions add to the reserve of unearned premiums that set a
predictable basis for each quarter’s revenues. In February 2018, we announced
that, subject to regulatory approval and certain third-party consents, we would
reinsure substantially all of Syncora Guarantee Inc.’s insured portfolio and com-
mute a significant portion of the exposure we had previously ceded to Syncora.
$72
$69
$70
$22
$33
$33
$0.44
$0.48
$0.52
$0.57
$33
$0.18
$33
$0.18
$0.18
$0.40
$0.36
$72
$70
’11
’10
’09
$22
Our Alternative Investments group is also tasked with identifying and investing in
diversification opportunities where there is synergy with our core competencies,
a risk profile in line with ours, and high potential for attractive returns and growth.
’14
’15
’12
’13
’17
’16
’12
’11
’10
’09
$0.18
$0.36
$0.44
$0.18
$0.18
$0.40
During 2017, we made two such investments in the asset management sector,
’13
purchasing a limited partnership interest in a fund that invests in the equity of
private equity managers and a minority interest in investment advisor Wasmer,
Schroeder & Company, LLC. Subsequently, in February 2018, we acquired a
minority interest in the holding company of Rubicon Infrastructure Advisors,
a full-service investment banking firm serving the global infrastructure sector.
$0.48
$0.52
$0.57
’17
’16
’15
’14
Managing Capital for Financial Strength and Shareholder Returns
Over the ten years from 2008 to 2017, including AGM pro forma before we
acquired it in July 2009, we have maintained our total claims-paying resources
at approximately $12 billion, which is a remarkable achievement considering that
during that period we paid out more than $7.1 billion, comprising $4.4 billion
in net claim payments to keep insured investors whole, over $535 million in
dividends to shareholders, and $2.2 billion to repurchase 42% of the common
shares outstanding when our share repurchase program began in 2013.
During the same period, our insured portfolio amortized and insured leverage
ratios declined, creating significant excess capital. From 189:1 in September 2009,
the ratio of our net par outstanding to non-GAAP operating shareholders’ equity
decreased 78% to 41:1 at year-end 2017.
8
50
40
30
20
10
50
40
30
20
10
0.6
0.5
0.4
0.3
0.2
0.1
0.0
0.6
0.5
0.4
0.3
0.2
0.1
0.0
15000
15000
12000
12000
9000
6000
3000
0
9000
6000
3000
0
DIVIDENDS
Per Share ($)
DIVIDENDS
Per Share ($)
per share ($0.64 annualized).
In February 2018, we increased our
quarterly dividend by 12% to $0.16
per share ($0.64 annualized).
$5
$9
$10
80
70
60
50
40
30
20
10
0
80
70
60
50
40
30
20
10
0
STRATEGY
Define Objectives. Formulate Action.
9
ASSURED GUAR ANT Y LTD.
10
1000
1000
800
1000
800
600
800
600
400
600
400
200
400
200
0
200
0
0
80
70
80
60
70
80
50
60
70
40
50
60
30
40
50
20
30
40
10
20
30
0
10
20
0
10
0
NON-GAAP ADJUSTED BOOK VALUE PER SHARE
Net unearned premium reserve on financial
NON-GAAP ADJUSTED BOOK VALUE PER SHARE
guaranty contracts in excess of net expected
NON-GAAP ADJUSTED BOOK VALUE PER SHARE
Net unearned premium reserve on financial
loss to be expensed less deferred acquisition
costs, after tax (per share)
guaranty contracts in excess of net expected
Net unearned premium reserve on financial
loss to be expensed less deferred acquisition
Present value of estimated net future
guaranty contracts in excess of net expected
costs, after tax (per share)
non-financial guaranty revenue, after tax
loss to be expensed less deferred acquisition
(per share)
Present value of estimated net future
costs, after tax (per share)
non-financial guaranty revenue, after tax
Non-GAAP operating shareholders’ equity
Present value of estimated net future
non-financial guaranty revenue, after tax
Non-GAAP operating shareholders’ equity
(per share)
(per share)
(per share)
(per share)
Non-GAAP operating shareholders’ equity
(per share)
$48.22
$14.63
$48.22
$14.63
$0.80
$48.22
$14.63
$0.80
$32.79
$0.80
’13
$32.79
’13
$32.79
’13
$53.27
$15.34
$53.27
$15.34
$0.69
$53.27
$15.34
$0.69
$0.69
$37.24
’14
$37.24
’14
$37.24
’14
$60.87
$17.07
$60.87
$17.07
$60.87
$0.84
$17.07
$0.84
$0.84
$42.96
’15
$42.96
’15
$42.96
’15
$66.46
$15.85
$66.46
$15.85
$0.72
$66.46
$15.85
$0.72
$0.72
$49.89
’16
$49.89
’16
$49.89
’16
$77.74
$20.53
$77.74
$20.53
$77.74
$1.01
$20.53
$1.01
$1.01
$56.20
’17
$56.20
’17
$56.20
’17
CONSOLIDATED NET PAR OUTSTANDING
(as of December 31, 2017)
CONSOLIDATED NET PAR OUTSTANDING
(as of December 31, 2017)
79% U.S. Public Finance A– average rating
CONSOLIDATED NET PAR OUTSTANDING
4% U.S. Structured Finance BBB+ average rating
(as of December 31, 2017)
79% U.S. Public Finance A– average rating
16% Non-U.S. Public Finance BBB+ average rating
4% U.S. Structured Finance BBB+ average rating
1% Non-U.S. Structured Finance A average rating
79% U.S. Public Finance A– average rating
16% Non-U.S. Public Finance BBB+ average rating
4% U.S. Structured Finance BBB+ average rating
1% Non-U.S. Structured Finance A average rating
16% Non-U.S. Public Finance BBB+ average rating
1% Non-U.S. Structured Finance A average rating
A– average rating
$265.0
billion
$265.0
billion
$265.0
billion
A– average rating
Ratings are based on our
A– average rating
internal rating scale.
Ratings are based on our
internal rating scale.
Ratings are based on our
internal rating scale.
U.S. PUBLIC FINANCE NET PAR OUTSTANDING BY SECTOR
(as of December 31, 2017)
U.S. PUBLIC FINANCE NET PAR OUTSTANDING BY SECTOR
(as of December 31, 2017)
U.S. PUBLIC FINANCE NET PAR OUTSTANDING BY SECTOR
43% General Obligation
21% Tax-Backed
(as of December 31, 2017)
43% General Obligation
15% Municipal Utilities
21% Tax-Backed
8% Transportation
43% General Obligation
15% Municipal Utilities
21% Tax-Backed
8% Transportation
15% Municipal Utilities
8% Transportation
4% Healthcare
4% Higher Education
4% Healthcare
4% Other Public Finance
4% Higher Education
4% Healthcare
4% Other Public Finance
4% Higher Education
4% Other Public Finance
A– average rating
$209.4
billion
$209.4
billion
$209.4
billion
A– average rating
Total may not equal 100%
due to rounding.
A– average rating
Total may not equal 100%
due to rounding.
Total may not equal 100%
due to rounding.
U.S. PUBLIC FINANCE NET PAR OUTSTANDING BY RATING
(as of December 31, 2017)
U.S. PUBLIC FINANCE NET PAR OUTSTANDING BY RATING
(as of December 31, 2017)
Less than 1% AAA
U.S. PUBLIC FINANCE NET PAR OUTSTANDING BY RATING
14% AA
(as of December 31, 2017)
Less than 1% AAA
57% A
14% AA
25% BBB
Less than 1% AAA
57% A
3% BIG*
14% AA
25% BBB
57% A
3% BIG*
25% BBB
3% BIG*
*Below investment grade
*Below investment grade
*Below investment grade
$209.4
billion
$209.4
billion
$209.4
billion
Total may not equal 100%
due to rounding.
Total may not equal 100%
due to rounding.
Total may not equal 100%
due to rounding.
11
1000
800
600
400
200
0
500
400
300
200
100
0
12000
10000
8000
6000
4000
2000
0
50
40
30
20
10
15000
12000
9000
6000
3000
0
ASSURED GUAR ANT Y LTD.
NON-GAAP OPERATING INCOME
(dollars in millions)
$801
$647
$710
$661
$895
’13
’14
’15
’16
’17
NET INVESTMENT INCOME
(dollars in millions)
$393
$403
$423
$408
$418
’13
’14
’15
’16
’17
TOTAL INVESTMENT PORTFOLIO AND CASH
(dollars in millions at fair value)
GAAP basis investment portfolio and cash
$10,969
$11,459
$11,358
$11,103
$11,539
’13
’14
’15
’16
’17
CONSOLIDATED CLAIMS-PAYING RESOURCES
AND INSURED PORTFOLIO LEVERAGE
(dollars in millions)
Consolidated claims-paying resources
Ratio of statutory net par outstanding
to total claims-paying resources
$12,328
$12,147
$12,189
$12,306
$11,701
$11,752
$12,630
$12,839
47x
42x
40x
36x
’10
’11
’12
’13
’14
’15
31x
27x
22x
’16
20x
’17
$75
$76
$72
$69
$69
$70
DIVIDENDS
Per Share ($)
Total Paid (dollars in millions)
In February 2018, we increased our
quarterly dividend by 12% to $0.16
per share ($0.64 annualized).
$33
$33
$22
$16
$5
$9
$10
$11
Per Share:
$0.06
$0.12
$0.14
$0.16
$0.18
$0.18
$0.18
$0.18
$0.36
$0.40
$0.44
$0.48
$0.52
$0.57
’04*
’05
’06
’07
’08
’09
’10
’11
’12
’13
’14
’15
’16
’17
*In 2004, dividends were paid following our April IPO. The amount shown is the quarterly dividend, annualized.
Our capital management program focuses on reducing excess
capital to increase value per share, while maintaining our
financial strength. In 2017, we met our stated goal of
repurchasing $500 million of shares.
To provide holding company liquidity for share repurchases,
we need to upstream capital from our operating subsidiaries,
while keeping a watchful eye on the appropriate capitalization
for each insurance company and adhering to the dividend
limitations set by insurance regulators.
To this end, during 2017, MAC repurchased $250 million of
its shares from its immediate holding company, which distrib-
uted the proceeds proportionately to its owners, AGM and
AGC. Subsequently, with the consent of their respective state
regulators, AGM redeemed $101 million of its stock from its
parent and, in early 2018, AGC redeemed $200 million of its
stock from its parent, with these funds becoming available
for corporate purposes, including share repurchases.
Loss Mitigation: A Key Strategy
We have been very successful over the years in obtaining
recoveries for breaches of representations and warranties in
residential mortgage-backed securities (RMBS) transactions.
After concluding a significant settlement in 2017, and due
to the greatly diminished size of our exposure, we believe that
concerns about our legacy RMBS transactions are substan-
tially behind us.
On the public finance side, we have seen over the years that
municipal issuers’ optimal path out of bankruptcy is to work
closely with creditors, tapping their knowledge and experience
to help navigate complicated debt restructurings.
Unfortunately, the government of Puerto Rico and the Oversight
Board have ignored these lessons. They have resisted working
constructively toward a consensual restructuring and taken
various actions that we believe violate numerous provisions
of the federal Puerto Rico Oversight, Management and
Economic Stability Act (PROMESA) and the law and consti-
tutions of both Puerto Rico and the United States. If they
continue this pattern, the citizens of Puerto Rico will bear the
cost of extensive litigation and lack of market access for
years to come.
All stakeholders should be focused cooperatively on the near-
term recovery needs of Puerto Rico. A first step would be
for the Oversight Board and the creditors of the Puerto Rico
Electric Power Authority (PREPA) to agree on a well-qualified,
experienced receiver the court could approve to steer PREPA
through its current emergency. Any attempts at privatization
that disregard creditors’ rights will only further disrupt the
reconstruction of PREPA and delay any real improvement in
its operations due to litigation.
If the Commonwealth and Oversight Board continue to
ignore creditors’ rights, costly litigation will continue for the
foreseeable future. Ultimately, we expect creditors to prevail
in these disputes for a number of reasons, one of which is
that the Puerto Rico constitution is crystal clear that general
obligation bonds are to be paid first, and PROMESA requires
that fiscal plans respect debt payment priorities and liens
recognized under Puerto Rico law.
Critically, attempts to retroactively treat creditors unfairly will
reverberate across the United States, undermining municipal
bond investors’ confidence in the terms of their contracts and
in politicians’ willingness to abide by the commitments they
make or inherit. Advocates of repudiating Puerto Rico’s debt
show no understanding of the far-reaching implications of
actually doing so. If allowed, such retroactive disregard for
the rule of law would make it more expensive for municipali-
ties throughout the United States to fund essential services
and infrastructure.
12
80
70
60
50
40
30
20
10
0
0.6
0.5
0.4
0.3
0.2
0.1
0.0
EXECUTION
Commit and Follow Through.
13
ASSURED GUAR ANT Y LTD.
14
The developments in Puerto Rico have demonstrated the value of our guaranty
for both default protection and the support of insured bonds’ market value. As
we continue to defend our rights, we are confident that we have the financial
strength and liquidity to continue the effort as long as necessary while protect-
ing holders of Assured Guaranty insured bonds.
Prepared for Future Success
Looking toward the year ahead, we remain focused on our central objective,
to build long-term value for our policyholders and shareholders.
Indications are that the Federal Reserve’s rate-setting committee will continue
to raise short-term rates. This should eventually push up long-term rates, which
has historically led to wider credit spreads and greater demand for bond insur-
ance. It may take time, however, to see the full benefit of an interest-rate-driven
increase in demand for insurance.
Additionally, we expect that recent tax reform in the U.S. is likely to have mixed
effects on the municipal bond market, possibly including reduced new issue vol-
ume in the absence of advance refundings and higher yields because of the
potential reduced demand from institutional investors for tax-exempt debt.
While we must be prepared for a potential decline in total U.S. public finance
issuance in 2018, we believe the market is increasingly recognizing the value of
our product. We have the additional advantage of a diversified strategy that
includes international infrastructure finance and structured finance. In both of
these markets, we are seeing growing recognition of our value proposition
along with regulatory incentives to use our products to manage capital more
efficiently. Additionally, our alternative investments strategy provides a separate
avenue for growth and positive results, and our capital management program
will continue to benefit shareholders.
Our business model has proven successful for more than three decades. As we
continue to maintain exceptional financial strength, we continually evaluate the
environment and pursue new opportunities to put capital to work effectively.
Assured Guaranty is in a very strong financial position, and we have the strategy
and resources to protect policyholders and create value for shareholders.
Dominic J. Frederico
President and Chief Executive Officer
March 2018
15
EXECUTIVE OFFICERS
Robert A. Bailenson
Chief Financial Officer
Ling Chow
U.S. General Counsel
Howard W. Albert
Chief Risk Officer
Stephen Donnarumma
Chief Credit Officer
Russell B. Brewer II
Chief Surveillance Officer
Bruce E. Stern
Executive Officer
General Counsel and Secretary
as of January 1, 2018
SENIOR MANAGEMENT AND BUSINESS LEADERS
Gary F. Burnet
President, Assured
Guaranty Re Ltd.
David A. Buzen
Senior Managing Director,
Alternative Investments
Ivana M. Grillo
Managing Director,
Human Resources
William J. Hogan
Senior Managing Director,
Public Finance
Paul R. Livingstone
Senior Managing Director,
Structured Finance
William B. O’Keefe
Senior Managing Director,
Public Finance
Donald H. Paston
Managing Director
and Treasurer
Nicholas J. Proud
Senior Managing Director,
International
Benjamin G. Rosenblum
Chief Actuary
Robert S. Tucker
Senior Managing Director,
Investor Relations and
Corporate Communications
James M. Michener
General Counsel
and Secretary
Senior Advisor to
Assured Guaranty CEO
as of January 1, 2018
16
FINANCIAL HIGHLIGHTS
(dollars in millions, except per share amounts) Years ended December 31,
Summary of Annual Operations
Revenues:
Net earned premiums
Net investment income
Net realized investment gains (losses)
Net change in fair value of credit derivatives, committed
capital securities and FG VIEs
Bargain purchase gain and settlement of pre-existing relationships
Other income (loss)
Total revenues
Expenses:
Loss and loss adjustment expenses
Interest expense
Other expenses (1)
Total expenses in net income
Income before income taxes
Provision (benefit) for income taxes
Net income
Non-GAAP operating income (2)(3)(4)
Gain (loss) related to FG VIE consolidation (net of tax) included in
non-GAAP operating income (3)
Net income per diluted share
Non-GAAP operating income per diluted share (net of tax) (2)(3)(4)
Gain (loss) related to FG VIE consolidation included in non-GAAP
operating income per diluted share (3)
Total gross written premiums (GWP)
Less: Installment GWP and other GAAP adjustments (5)
Plus: Financial guaranty installment premium PVP
$
$
$
Total present value of new business production (PVP) (2)
Year-End Data
Shareholders’ equity (book value)
Book value per share
Non-GAAP operating shareholders’ equity (2)(3)(4)
Non-GAAP operating shareholders’ equity per share (2)(3)(4)
Non-GAAP adjusted book value (2)(3)(4)
Non-GAAP adjusted book value per share (2)(3)(4)
Gain (loss) related to FG VIE consolidation included in:
Non-GAAP operating shareholders’ equity
Non-GAAP operating shareholders’ equity per share
Non-GAAP adjusted book value
Non-GAAP adjusted book value per share
Net debt service outstanding (end of period) (6)
Net par outstanding (end of period) (6)
Public finance
Structured finance
Total net par outstanding
Policyholders’ surplus
Contingency reserve
Qualified statutory capital
Claims-paying resources (7)
2017
2016
2015
2014
2013
$
690
418
40
139
58
394
$
$
864
408
(29)
136
259
39
766
423
(26)
793
214
37
1,739
1,677
2,207
$
$
570
403
(60)
1,067
—
14
1,994
126
92
245
463
1,531
443
424
101
251
776
1,431
375
$
$
$
$ 1,056
710
$ 1,088
647
$
$
11
7.08
4.76
0.07
181
55
53
179
$
$
156
6.26
3.73
0.90
104
(22)
42
168
752
393
52
421
—
(10)
1,608
154
82
230
466
1,142
334
808
801
192
4.30
4.28
1.03
123
8
26
141
388
97
263
748
991
261
730
661
11
5.96
5.41
0.10
307
99
81
289
295
102
263
660
1,017
136
881
895
12
6.56
6.68
0.10
154
(10)
50
214
$
$
$
$ 6,839
58.95
$ 6,521
56.20
$ 9,020
77.74
5
0.03
(14)
(0.12)
$ 401,118
$ 252,314
12,638
$ 264,952
$ 5,211
1,750
$ 6,961
$ 11,752
$ 6,504
50.82
$ 6,386
49.89
$ 8,506
66.46
$ 6,063
43.96
$ 5,925
42.96
$ 8,396
60.87
$ 5,758
36.37
$ 5,896
37.24
$ 8,435
53.27
$ 5,115
28.07
$ 5,974
32.79
$ 8,785
48.22
(7)
(0.06)
(24)
(0.18)
$ 437,535
(21)
(0.15)
(43)
(0.31)
$ 536,341
(37)
(0.24)
(60)
(0.39)
$ 609,622
(190)
(1.04)
(248)
(1.36)
$690,535
$ 271,179
25,139
$ 296,318
$ 5,036
2,008
$ 7,044
$ 11,701
$ 321,443
37,128
$ 358,571
$ 4,550
2,263
$ 6,813
$ 12,306
$ 353,482
50,247
$ 403,729
$ 4,142
2,330
$ 6,472
$ 12,189
$386,179
72,928
$459,107
$ 3,202
2,934
$ 6,136
$ 12,147
(1) Includes operating expenses and amortization of deferred acquisition costs.
(2) Non-GAAP operating income, non-GAAP operating shareholders’ equity, non-GAAP adjusted book value, along with per-share equivalents, and PVP are financial measures that are not in
accordance with U.S. generally accepted accounting principles (GAAP), and we refer to them as non-GAAP financial measures. Please see Assured Guaranty’s Form 10-K filing with the U.S.
Securities and Exchange Commission (SEC), which is bound into this Annual Report, for definitions of these non-GAAP financial measures and reconciliations of such measures to the most
comparable financial information prepared in accordance with GAAP.
(3) The Company does not adjust for the effect of consolidating financial guaranty variable interest entities (FG VIE consolidation) in its non-GAAP financial measures (non-GAAP operating income,
non-GAAP operating shareholders’ equity and non-GAAP adjusted book value). The Company has separately disclosed the effect of FG VIE consolidation that is now included in its non-GAAP
financial measures.
(4) See page 7 for five-year reconciliation to the most comparable GAAP measure.
(5) Includes present value of new business on installment policies discounted at the prescribed GAAP discount rates, gross written premium adjustments on existing installment policies due to
changes in assumptions, any cancellations of assumed reinsurance contracts, and other GAAP adjustments.
(6) Net debt service and net par outstanding amounts exclude amounts relating to securities or assets owned by the Company as a result of loss mitigation strategies, including loss mitigation
securities held in the investment portfolio. See AGL’s Form 10-K, Part II, Item 8, Financial Statements and Supplementary Data, Note 4, Outstanding Exposure for additional information.
(7) Based on accounting practices prescribed or permitted by U.S. insurance regulatory authorities, for all insurance subsidiaries. Claims-paying resources is calculated as the sum of statutory policy-
holders’ surplus, statutory contingency reserve, unearned premium reserves, statutory loss and LAE reserves, present value of installment premium on financial guaranty and credit derivatives,
discounted at 6%, standby lines of credit/stop loss and excess-of-loss reinsurance facility. Total claims-paying resources is used by the Company to evaluate the adequacy of capital resources.
17
ASSURED GUAR ANT Y LTD. BOARD OF DIREC TORS
Francisco L. Borges
Chairman of the Board
and of the Nominating
and Governance and
Executive Committees
Dominic J. Frederico
President and Chief Executive
Officer and member of the
Executive Committee
G. Lawrence Buhl
Chairman of the Audit
Committee and member of
the Compensation Committee
Bonnie L. Howard
Chairman of the Risk Oversight
Committee and member
of the Nominating and
Governance Committee
Thomas W. Jones
Member of the Audit and
Finance Committees
Patrick W. Kenny
Chairman of the
Compensation Committee;
member of the Nominating
and Governance and
Executive Committees
Alan J. Kreczko
Member of the Audit and
Finance Committees
Simon W. Leathes
Member of the
Compensation, Risk
Oversight, and Executive
Committees
Michael T. O’Kane
Chairman of the Finance
Committee and member of
the Audit Committee
Yukiko Omura
Member of the Finance
and Risk Oversight Committees
18
2 0 1 7 F O R M 1 0 - K
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________________________________________
FORM 10-K
ý
o
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
Or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 001-32141
ASSURED GUARANTY LTD.
(Exact name of Registrant as specified in its charter)
Bermuda
(State or other jurisdiction of incorporation or organization)
98-0429991
(I.R.S. Employer Identification No.)
30 Woodbourne Avenue, Hamilton HM 08 Bermuda
(441) 279-5700
(Address, including zip code, and telephone number, including area code, of Registrant's principal executive office)
None
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Shares, $0.01 per share
Name of each exchange on which registered
New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ý
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files). Yes ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or
an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth
company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
Non-accelerated filer o
(Do not check if a smaller reporting company)
Accelerated filer o
Smaller reporting company o
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
The aggregate market value of Common Shares held by non-affiliates of the Registrant as of the close of business on June 30, 2017 was
$4,900,141,702 (based upon the closing price of the Registrant's shares on the New York Stock Exchange on that date, which was $41.74). For purposes of this
information, the outstanding Common Shares which were owned by all directors and executive officers of the Registrant were deemed to be the only shares of
Common Stock held by affiliates.
As of February 20, 2018, 115,328,631 Common Shares, par value $0.01 per share, were outstanding (including 50,225 unvested restricted shares).
Certain portions of Registrant's definitive proxy statement relating to its 2017 Annual General Meeting of Shareholders are incorporated by reference
DOCUMENTS INCORPORATED BY REFERENCE
to Part III of this report.
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Forward Looking Statements
This Form 10-K contains information that includes or is based upon forward looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. Forward looking statements give the expectations or forecasts of future
events of Assured Guaranty Ltd. (AGL) and its subsidiaries (collectively with AGL, Assured Guaranty or the Company). These
statements can be identified by the fact that they do not relate strictly to historical or current facts and relate to future operating
or financial performance.
Any or all of Assured Guaranty’s forward looking statements herein are based on current expectations and the current
economic environment and may turn out to be incorrect. Assured Guaranty’s actual results may vary materially. Among factors
that could cause actual results to differ adversely are:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
reduction in the amount of available insurance opportunities and/or in the demand for Assured Guaranty's
insurance;
rating agency action, including a ratings downgrade, a change in outlook, the placement of ratings on watch for
downgrade, or a change in rating criteria, at any time, of AGL or any of its subsidiaries, and/or of any securities
AGL or any of its subsidiaries have issued, and/or of transactions that AGL’s subsidiaries have insured;
developments in the world’s financial and capital markets that adversely affect obligors’ payment rates or Assured
Guaranty’s loss experience;
the possibility that budget or pension shortfalls or other factors will result in credit losses or impairments on
obligations of state, territorial and local governments and their related authorities and public corporations that
Assured Guaranty insures or reinsures;
the failure of Assured Guaranty to realize loss recoveries that are assumed in its expected loss estimates;
increased competition, including from new entrants into the financial guaranty industry;
rating agency action on obligors, including sovereign debtors, resulting in a reduction in the value of securities in
Assured Guaranty's investment portfolio and in collateral posted by and to Assured Guaranty;
the inability of Assured Guaranty to access external sources of capital on acceptable terms;
changes in the world’s credit markets, segments thereof, interest rates or general economic conditions;
the impact of market volatility on the mark-to-market of Assured Guaranty’s contracts written in credit default
swap form;
changes in applicable accounting policies or practices;
changes in applicable laws or regulations, including insurance, bankruptcy and tax laws, or other governmental
actions;
the impact of changes in the world’s economy and credit and currency markets and in applicable laws or
regulations relating to the decision of the United Kingdom (U.K.) to exit the European Union (EU);
the possibility that acquisitions or alternative investments made by Assured Guaranty do not result in the benefits
anticipated or subject Assured Guaranty to unanticipated consequences;
deterioration in the financial condition of Assured Guaranty’s reinsurers, the amount and timing of reinsurance
recoverables actually received and the risk that reinsurers may dispute amounts owed to Assured Guaranty under
its reinsurance agreements;
difficulties with the execution of Assured Guaranty’s business strategy;
loss of key personnel;
the effects of mergers, acquisitions and divestitures;
natural or man-made catastrophes;
•
•
other risk factors identified in AGL’s filings with the U.S. Securities and Exchange Commission (the SEC);
other risks and uncertainties that have not been identified at this time; and
• management’s response to these factors.
The foregoing review of important factors should not be construed as exhaustive, and should be read in conjunction
with the other cautionary statements that are included in this Form 10-K. The Company undertakes no obligation to update
publicly or review any forward looking statement, whether as a result of new information, future developments or otherwise,
except as required by law. Investors are advised, however, to consult any further disclosures the Company makes on related
subjects in the Company’s reports filed with the SEC.
If one or more of these or other risks or uncertainties materialize, or if the Company’s underlying assumptions prove to
be incorrect, actual results may vary materially from what the Company projected. Any forward looking statements in this
Form 10-K reflect the Company’s current views with respect to future events and are subject to these and other risks,
uncertainties and assumptions relating to its operations, results of operations, growth strategy and liquidity.
For these statements, the Company claims the protection of the safe harbor for forward looking statements contained
in Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act
of 1934, as amended (the Exchange Act).
Convention
Unless otherwise noted, ratings on Assured Guaranty's insured portfolio and on bonds or notes purchased pursuant to
loss mitigation strategies or other risk management strategies (loss mitigation securities) are Assured Guaranty’s internal
ratings. Internal credit ratings are expressed on a rating scale similar to that used by the rating agencies and generally reflect an
approach similar to that employed by the rating agencies, except that Assured Guaranty's internal credit ratings focus on future
performance, rather than lifetime performance.
In addition, unless otherwise noted, the Company excludes amounts from its outstanding par and debt service relating
to securities or assets owned by the Company as a result of loss mitigation strategies, including loss mitigation securities held
in the investment portfolio. The Company manages the loss mitigation securities as investments and not insurance exposure.
ASSURED GUARANTY LTD.
FORM 10-K
TABLE OF CONTENTS
PART I
Item 1.
Business
Overview
Insurance Portfolio
Credit Policy and Underwriting Procedure
Risk Management Procedures
Importance of Financial Strength Ratings
Investments
Competition
Regulation
Tax Matters
Description of Share Capital
Other Provisions of AGL's Bye-Laws
Employees
Available Information
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Properties
Legal Proceedings Mine
Safety Disclosures
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Introduction
Executive Summary
Results of Operations
Non-GAAP Financial Measures
Insured Portfolio
Item 7A.
Liquidity and Capital Resources
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2017 and December 31, 2016
Consolidated Statements of Operations for Years Ended December 31, 2017, 2016 and 2015
Consolidated Statements of Comprehensive Income for Years Ended December 31, 2017, 2016 and 2015
Consolidated Statement of Shareholders’ Equity for Years Ended December 31, 2017, 2016 and 2015
Consolidated Statements of Cash Flows for Years Ended December 31, 2017, 2016 and 2015
Notes to Consolidated Financial Statements
Page
5
5
5
7
10
12
14
15
16
17
32
40
41
42
42
43
60
60
61
62
64
64
67
69
69
69
77
91
96
108
121
126
127
129
130
131
132
133
134
1. Business and Basis of Presentation
2. Acquisitions
3. Ratings
4. Outstanding Exposure
5. Expected Loss to be Paid
6. Contracts Accounted for as Insurance
7. Fair Value Measurement
8. Contracts Accounted for as Credit Derivatives
9. Consolidated Variable Interest Entities
10. Investments and Cash
11. Insurance Company Regulatory Requirements
12. Income Taxes
13. Reinsurance and Other Monoline Exposures
14. Related Party Transactions
15. Commitments and Contingencies
16. Long-Term Debt and Credit Facilities
17. Earnings Per Share
18. Shareholders' Equity
19. Employee Benefit Plans
20. Other Comprehensive Income
21. Subsidiary Information
22. Quarterly Financial Information (Unaudited)
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9.
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11.
Item 12.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accounting Fees and Services
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
PART IV
Item 15.
Item 16.
Exhibits, Financial Statement Schedules
Form 10-K Summary
134
138
143
144
157
168
178
191
196
200
209
213
218
222
222
223
227
228
230
235
237
245
246
246
247
248
248
248
248
248
248
249
249
255
ITEM 1. BUSINESS
Overview
PART I
Assured Guaranty Ltd. (AGL and, together with its subsidiaries, Assured Guaranty or the Company) is a Bermuda-
based holding company incorporated in 2003 that provides, through its operating subsidiaries, credit protection products to the
United States (U.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 financial
guaranty insurance that protects holders of debt instruments and other monetary obligations from defaults in scheduled
payments. If an obligor defaults on a scheduled payment due on an obligation, including a scheduled principal or interest
payment (debt service), 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 financial guaranty insurance 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 the U.S. and the U.K., and also guarantees obligations issued in other countries and
regions, including Australia and Western Europe. The Company also provides other forms of insurance that are in line with its
risk profile and benefit from its underwriting experience.
The Company conducts its financial guaranty business on a direct basis from the following companies: Assured
Guaranty Municipal Corp. (AGM), Municipal Assurance Corp. (MAC), Assured Guaranty Corp. (AGC), and Assured Guaranty
(Europe) plc (AGE). It also conducts business through Bermuda-based reinsurers Assured Guaranty Re Ltd. (AG Re) and
Assured Guaranty Re Overseas Ltd. (AGRO). The following is a description of AGL's principal operating subsidiaries:
•
Assured Guaranty Municipal Corp. AGM is located and domiciled in New York, was organized in 1984 and
commenced operations in 1985. Since mid-2008, AGM has provided financial guaranty insurance and reinsurance
only on debt obligations issued in the U.S. public finance and global infrastructure markets, including bonds
issued by U.S. state or governmental authorities or notes issued to finance infrastructure projects. Previously,
AGM also offered insurance and reinsurance in the global structured finance market, including asset-backed
securities issued by special purpose entities. AGM's subsidiary AGE offers insurance and reinsurance in the global
structured finance market. AGM formerly was named Financial Security Assurance Inc. Assured Guaranty
acquired AGM, together with its holding company Financial Security Assurance Holdings Ltd. (renamed Assured
Guaranty Municipal Holdings Inc., AGMH) and the subsidiaries owned by that holding company, on July 1, 2009.
• Municipal Assurance Corp. MAC is located and domiciled in New York and was organized in 2008. Assured
Guaranty acquired MAC on May 31, 2012. On July 16, 2013, Assured Guaranty completed a series of
transactions that increased the capitalization of MAC and resulted in MAC assuming a portfolio of geographically
diversified U.S. public finance exposure from AGM and AGC. MAC offers insurance and reinsurance on bonds
issued by U.S. state or municipal governmental authorities, focusing on investment grade obligations in select
sectors of the municipal market.
•
Assured Guaranty Corp. AGC is located in New York and domiciled in Maryland, was organized in 1985 and
commenced operations in 1988. It provides insurance and reinsurance on debt obligations in the global structured
finance market and also offers guarantees on obligations in the U.S. public finance and international infrastructure
markets.
On January 10, 2017, AGC acquired MBIA UK Insurance Limited (MBIA UK) (MBIA UK Acquisition), the
European operating subsidiary of MBIA Insurance Corporation (MBIA). As of December 31, 2016, MBIA UK
had an insured portfolio of approximately $12 billion of net par. MBIA UK immediately changed its name and
subsequently converted to a public limited company, and is now Assured Guaranty (London) plc (AGLN).
Assured Guaranty currently maintains AGLN as a stand-alone entity. Assured Guaranty is actively working to
combine AGLN with its other affiliated European insurance companies. See Part II, Item 8, Financial Statements
and Supplementary Data, Note 1, Business and Basis and Presentation, for additional information on the proposed
combination.
On July 1, 2016, AGC acquired all of the issued and outstanding capital stock of CIFG Holding Inc. (CIFGH, and
together with its subsidiaries, CIFG) (the CIFG Acquisition). AGC merged CIFG Assurance North America, Inc.
(CIFGNA), a financial guaranty insurer subsidiary of CIFGH, with and into AGC, with AGC as the surviving
5
company of the merger, on July 5, 2016. The CIFG Acquisition added $4.2 billion of net par insured on July 1,
2016.
•
•
On April 1, 2015 (Radian Acquisition Date), AGC acquired all of the issued and outstanding capital stock of
financial guaranty insurer Radian Asset Assurance Inc. (Radian Asset) (Radian Asset Acquisition). Radian Asset
was merged with and into AGC, with AGC as the surviving company of the merger. The Radian Asset Acquisition
added $13.6 billion to the Company's net par outstanding on April 1, 2015.
Assured Guaranty (Europe) plc AGE is a U.K. incorporated company licensed as a U.K. insurance company and
authorized to operate in various countries throughout the European Economic Area (EEA). It was organized in
1990 and issued its first financial guarantee in 1994. AGE offers financial guarantees in both the international
public finance and structured finance markets and is the primary entity from which the Company writes business
in the EEA. As discussed further under "Business" below, AGE has agreed with its regulator that any new
business it writes would be guaranteed using a co-insurance structure pursuant to which AGE would co-insure
municipal and infrastructure transactions with AGM, and structured finance transactions with AGC.
Assured Guaranty Re Ltd. and Assured Guaranty Re Overseas Ltd. AG Re is incorporated under the laws of
Bermuda and is licensed as a Class 3B insurer under the Insurance Act 1978 and related regulations of Bermuda.
AG Re owns, indirectly, AGRO, which is a Bermuda Class 3A and Class C insurer. AG Re and AGRO underwrite
financial guaranty reinsurance, and AGRO also underwrites other reinsurance that is in line with the Company's
risk profile and benefits from its underwriting experience. AG Re and AGRO write business as reinsurers of third-
party primary insurers and of certain affiliated companies.
Assured Guaranty is the market leader in the financial guaranty industry. The Company's position in the market has
benefited from its acquisition of AGMH in 2009 as well as subsequent acquisitions of financial guarantors, its ability to
maintain strong financial strength ratings, its strong claims-paying resources, its proven willingness and ability to make claim
payments to policyholders after obligors have defaulted, and its ability to achieve recoveries in respect of the claims that it has
paid on insured residential mortgage-backed and other securities and to resolve its troubled municipal exposures.
The Company faces competition in the U.S. public finance financial guaranty market. The Company estimates, based
on third party industry compilations, that of the insured U.S. public finance bonds issued in the primary market in 2017, the
Company insured approximately 58% of the par, while Build America Mutual Assurance Company (BAM), insured 39% of the
par. National Public Finance Guarantee Corporation (National), an affiliate of MBIA, insured the remaining 3% of the balance.
The continued presence in the market of BAM affects the Company's insured volume as well as the amount of premium the
Company is able to charge.
The sustained low interest rate environment in the U.S. has also presented the Company with challenges. Over the last
several years, interest rates generally have been lower than historical norms. While higher than in 2016, when the benchmark
AAA 30-year Municipal Market Data index published by Thomson Reuters (MMD Index) was at times below 2%, the average
for that rate was 2.85% in 2017, still low by historical standards. As a result, the difference in yield (or the credit spread)
between a bond insured by Assured Guaranty and an uninsured bond has provided comparatively little room for issuer savings
and insurance premium, and Assured Guaranty has seen a lower demand for its financial guaranty insurance from issuers over
the past several years than it saw historically.
In addition, the Company's business continues to be affected by negative perceptions of the value of the financial
guaranty insurance sold by other companies that had been active in the industry. The losses suffered by such other insurers
resulted in those companies being downgraded to below-investment-grade (BIG) levels by the rating agencies and/or subject to
intervention by their state insurance regulators. In a number of cases, the state insurance regulators prevented the distressed
financial guaranty insurers from paying claims or paying such claims in full; also, such financial guaranty insurers were
perceived by market participants not to be actively conducting surveillance on transactions or fully exercising rights and
remedies to mitigate losses.
The Company believes that issuers and investors in securities will continue to purchase financial guaranty insurance,
especially if interest rates rise and credit spreads widen. U.S. municipalities have budgetary requirements that are best met
through financings in the fixed income capital markets. In particular, smaller municipal issuers frequently use financial
guaranties in order to access the capital markets with new debt offerings at a lower all-in interest rate than on an unguaranteed
basis. In addition, the Company expects long-term debt financings for infrastructure projects will grow throughout the world, as
will the financing needs associated with privatization initiatives or refinancing of infrastructure projects in developed countries.
6
During 2016, the Company established an alternative investments group to focus on deploying a portion of the Company's
excess capital to pursue acquisitions and develop new business opportunities that complement the Company's financial guaranty
business, are in line with its risk profile and benefit from its core competencies. The alternative investments group has been
investigating a number of such opportunities, including, among others, both controlling and non-controlling investments in
investment managers. In February 2017, the Company agreed to purchase up to $100 million of limited partnership interests in a
fund that invests in the equity of private equity managers. Separately, in September 2017, the Company acquired a minority interest
in Wasmer, Schroeder & Company LLC, an independent investment advisory firm specializing in separately managed accounts
(SMAs).
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, or by commuting business that it had
previously ceded. In the last several years, the Company has reassumed a number of previously ceded portfolios and has completed
the Radian Asset Acquisition, the CIFG Acquisition and the MBIA UK Acquisition. In February 2018, the Company announced
an agreement with Syncora Guarantee Inc. (SGI) to reinsure, generally on a 100% quota share basis, substantially all of SGI’s
insured portfolio. The Company continues to investigate additional opportunities.
Insurance Portfolio - Financial Guaranty
Financial guaranty insurance generally provides an unconditional and irrevocable guaranty that protects the holder of a
debt instrument or other monetary obligation against non-payment of scheduled principal and interest payments when due.
Upon an obligor's default on scheduled debt service payments due on the debt obligation, whether due to its insolvency or
otherwise, the Company is generally required under the financial guaranty contract to pay the investor the principal or interest
shortfall then due.
Financial guaranty insurance may be issued to all of the investors of the guaranteed series or tranche of a municipal
bond or structured finance security at the time of issuance of those obligations or it may be issued in the secondary market to
only specific individual holders of such obligations who purchase the Company's credit protection.
Both issuers of and investors in financial instruments may benefit from financial guaranty insurance. Issuers benefit
when they purchase financial guaranty insurance for their new issue debt transaction because the insurance may have the effect
of lowering an issuer's interest cost over the life of the debt transaction to the extent that the insurance premium charged by the
Company is less than the net present value of the difference between the yield on the obligation insured by Assured Guaranty
(which carries the credit rating of the specific subsidiary that guarantees the debt obligation) and the yield on the debt
obligation if sold on the basis of its uninsured credit rating. The principal benefit to investors is that the Company's guaranty
provides certainty that scheduled payments will be received when due. The guaranty may also improve the marketability of
obligations issued by infrequent or unknown issuers, as well as obligations with complex structures or backed by asset classes
new to the market. This benefit to market liquidity (liquidity benefit) results from the increase in secondary market trading
values for Assured Guaranty-insured obligations as compared with uninsured obligations by the same issuer. In general, the
liquidity benefit of financial guaranties is that investors are able to sell insured bonds more quickly and, depending on the
financial strength rating of the insurer, at a higher secondary market price than for uninsured debt obligations.
As an alternative to traditional financial guaranty insurance, in the past the Company also provided credit protection
relating to a particular security or obligor through a credit derivative contract, such as a credit default swap (CDS). Under the
terms of a CDS, the seller of credit protection agreed to make a specified payment to the buyer of credit protection if one or
more specified credit events occurs with respect to a reference obligation or entity. In general, the credit events specified in the
Company's CDS are for interest and principal defaults on the reference obligation. One difference between CDS and traditional
primary financial guaranty insurance is that credit default protection was typically provided to a particular buyer of credit
protection, who is not always required to own the reference obligation, rather than to all investors in the reference obligation.
As a result, the Company's rights and remedies under a CDS may be different and more limited than on a financial guaranty of
an entire issuance. Credit derivatives were preferred by some investors, however, because they generally offered the investor
ease of execution and standardized terms as well as more favorable accounting or capital treatment. Due to changes in the
regulatory environment, the Company has not provided credit protection in the U.S. through a CDS since March 2009, other
than in connection with loss mitigation and other remediation efforts relating to its existing book of business. See the Risk
Factor captioned "Changes in or inability to comply with applicable law could adversely affect the Company's ability to do
business" under Risks Related to accounting principles generally accepted in the United States of America (GAAP) and
Applicable Law in "Item 1A. Risk Factors" for additional detail about the regulatory environment.
The Company also offers credit protection through reinsurance, and in the past has provided reinsurance to other
financial guaranty insurers with respect to their guaranty of public finance, infrastructure and structured finance obligations.
7
The Company believes that the opportunities currently available to it in the reinsurance market consist primarily of potentially
assuming portfolios of transactions from inactive primary insurers and recapturing portfolios that it has previously ceded to
third party reinsurers.
The Company's financial guaranty direct and assumed businesses provide credit protection on public finance,
infrastructure and structured finance obligations. When the Company directly insures an obligation, it assigns the obligation to
a geographic location or locations based on its view of the geographic location of the risk. For information on the geographic
breakdown of the Company's financial guaranty portfolio and on its income and revenue by jurisdiction, see Part II, Item 8,
Financial Statements and Supplementary Data, Note 4, Outstanding Exposure, Geographic Distribution of Net Par Outstanding.
U.S. Public Finance Obligations The Company insures and reinsures a number of different types of U.S. public
finance obligations, including the following:
General Obligation Bonds are full faith and credit bonds that are issued by states, their political subdivisions and
other municipal issuers, and are supported by the general obligation of the issuer to pay from available funds and by a
pledge of the issuer to levy ad valorem taxes in an amount sufficient to provide for the full payment of the bonds.
Tax-Backed Bonds are obligations that are supported by the issuer from specific and discrete sources of taxation.
They include tax-backed revenue bonds, general fund obligations and lease revenue bonds. Tax-backed obligations
may be secured by a lien on specific pledged tax revenues, such as a gasoline or excise tax, or incrementally from
growth in property tax revenue associated with growth in property values. These obligations also include obligations
secured by special assessments levied against property owners and often benefit from issuer covenants to enforce
collections of such assessments and to foreclose on delinquent properties. Lease revenue bonds typically are general
fund obligations of a municipality or other governmental authority that are subject to annual appropriation or
abatement; projects financed and subject to such lease payments ordinarily include real estate or equipment serving an
essential public purpose. Bonds in this category also include moral obligations of municipalities or governmental
authorities.
Municipal Utility Bonds are obligations of all forms of municipal utilities, including electric, water and sewer
utilities and resource recovery revenue bonds. These utilities may be organized in various forms, including municipal
enterprise systems, authorities or joint action agencies.
Transportation Bonds include a wide variety of revenue-supported bonds, such as bonds for airports, ports,
tunnels, municipal parking facilities, toll roads and toll bridges.
Healthcare Bonds are obligations of healthcare facilities, including community based hospitals and systems, as
well as of health maintenance organizations and long-term care facilities.
Higher Education Bonds are obligations secured by revenue collected by either public or private secondary
schools, colleges and universities. Such revenue can encompass all of an institution's revenue, including tuition and
fees, or in other cases, can be specifically restricted to certain auxiliary sources of revenue.
Infrastructure Bonds include obligations issued by a variety of entities engaged in the financing of infrastructure
projects, such as roads, airports, ports, social infrastructure and other physical assets delivering essential services
supported by long-term concession arrangements with a public sector entity.
Housing Revenue Bonds are obligations relating to both single and multi-family housing, issued by states and
localities, supported by cash flow and, in some cases, insurance from entities such as the Federal Housing
Administration.
Investor-Owned Utility Bonds are obligations primarily backed by investor-owned utilities, first mortgage bond
obligations of for-profit electric or water utilities providing retail, industrial and commercial service, and also include
sale-leaseback obligation bonds supported by such entities.
Other Public Finance Bonds include other debt issued, guaranteed or otherwise supported by U.S. national or
local governmental authorities, as well as student loans, revenue bonds, and obligations of some not-for-profit
organizations.
8
A portion of the Company's exposure to tax-backed bonds, municipal utility bonds and transportation bonds constitutes
"special revenue" bonds under the U.S. Bankruptcy Code. Even if an obligor under a special revenue bond were to seek
protection from creditors under Chapter 9 of the U.S. Bankruptcy Code, holders of the special revenue bond should continue to
receive timely payments of principal and interest during the bankruptcy proceeding, subject to the special revenues being
sufficient to pay debt service and the lien on the special revenues being subordinate to the necessary operating expenses of the
project or system from which the revenues are derived. While "special revenues" acquired by the obligor after bankruptcy
remain subject to the pre-petition pledge, special revenue bonds may be adjusted if their claim is determined to be
"undersecured."
Non-U.S. Public Finance Obligations The Company insures and reinsures a number of different types of non-U.S.
public finance obligations, which consist of both infrastructure projects and other projects essential for municipal function such
as regulated utilities. Credit support for the exposures written by the Company may come from a variety of sources, including
some combination of subordinated tranches, over-collateralization or cash reserves. Additional support also may be provided by
transaction provisions intended to benefit noteholders or credit enhancers. The types of non-U.S. public finance securities the
Company insures and reinsures include the following:
Infrastructure Finance Obligations are obligations issued by a variety of entities engaged in the financing of
international infrastructure projects, such as roads, airports, ports, social infrastructure, and other physical assets
delivering essential services supported either by long-term concession arrangements with a public sector entity or a
regulatory regime. The majority of the Company's international infrastructure business is conducted in the U.K.
Regulated Utility Obligations are issued by government-regulated providers of essential services and
commodities, including electric, water and gas utilities. The majority of the Company's international regulated utility
business is conducted in the U.K.
Pooled Infrastructure Obligations are synthetic asset-backed obligations that take the form of CDS obligations or
credit-linked notes that reference either infrastructure finance obligations or a pool of such obligations, with a defined
deductible to cover credit risks associated with the referenced obligations.
Other Public Finance Obligations include obligations of local, municipal, regional or national governmental
authorities or agencies.
U.S. and Non-U.S. Structured Finance Obligations The Company insures and reinsures a number of different types
of U.S. and non-U.S. structured finance obligations. Credit support for the exposures written by the Company may come from a
variety of sources, including some combination of subordinated tranches, excess spread, over-collateralization or cash reserves.
Additional support also may be provided by transaction provisions intended to benefit noteholders or credit enhancers. The
types of U.S. and non-U.S. structured finance obligations the Company insures and reinsures include the following:
Residential Mortgage-Backed Securities (RMBS) are obligations backed by closed-end and open-end first and
second lien mortgage loans on one-to-four family residential properties, including condominiums and cooperative
apartments. First lien mortgage loan products in these transactions include fixed rate, adjustable rate and option
adjustable-rate mortgages (Option ARMs). The credit quality of borrowers covers a broad range, including "prime",
"subprime" and "Alt-A". A prime borrower is generally defined as one with strong risk characteristics as measured by
factors such as payment history, credit score, and debt-to-income ratio. A subprime borrower is a borrower with higher
risk characteristics, usually as determined by credit score and/or credit history. An Alt-A borrower is generally defined
as a prime quality borrower that lacks certain ancillary characteristics, such as fully documented income. The
Company has not insured a RMBS transaction since January 2008.
Consumer Receivables Securities are obligations backed by non-mortgage consumer receivables, such as student
loans, automobile loans and leases, manufactured home loans and other consumer receivables.
Pooled Corporate Obligations are securities primarily backed by various types of corporate debt obligations, such
as secured or unsecured bonds, bank loans or loan participations and trust preferred securities (TruPS). These
securities are often issued in "tranches," with subordinated tranches providing credit support to the more senior
tranches. The Company's financial guaranty exposures generally are to the more senior tranches of these issues.
Insurance Securitization Obligations are obligations secured by the future earnings from pools of various types of
insurance/reinsurance policies and income produced by invested assets.
9
Financial Products Business is the guaranteed investment contracts (GICs) portion of a line of business
previously conducted by AGMH that the Company did not acquire when it purchased AGMH in 2009 from Dexia SA
and that is being run off. That line of business was comprised of AGMH's guaranteed investment contracts business,
its medium term notes business and the equity payment agreements associated with AGMH's leveraged lease business.
Assured Guaranty is indemnified by Dexia SA and certain of its affiliates (Dexia) against loss from the former
Financial Products Business.
Commercial Receivables Securities are obligations backed by equipment loans or leases, aircraft and aircraft
engine financings, business loans and trade receivables. Credit support is derived from the cash flows generated by the
underlying obligations, as well as property or equipment values as applicable.
Other Structured Finance Obligations are obligations backed by assets not generally described in any of the other
described categories.
Insurance Portfolio - Non-Financial Guaranty Reinsurance
The Company also provides non-financial guaranty reinsurance in transactions with similar risk profiles to its
structured finance exposures written in financial guaranty form. The Company provides such non-financial guaranty
reinsurance, for example, for capital relief triple-X excess of loss life transactions and aircraft residual value insurance (RVI)
transactions.
Credit Policy and Underwriting Procedure
Credit Policy
The Company establishes exposure limits and underwriting criteria for obligors, sectors and countries, and in the case
of structured finance and infrastructure exposures, for individual transactions. Risk exposure limits for single obligors are
based on the Company's assessment of potential frequency and severity of loss as well as other factors, such as historical and
stressed collateral performance. Sector limits are based on the Company’s view of stress losses for the sector and on its
assessment of intra-sector correlation. Country limits are based on the size and stability of the relevant economy, and the
Company’s view of the political environment and legal system. All of the foregoing limits are established in relation to the
Company's capital base.
For U.S. public finance transactions, the Company focuses principally on the credit quality of the obligor based on
population size and trends, wealth factors, and strength of the economy. The Company evaluates the obligor’s liquidity
position; its fiscal management policies and track record; its ability to raise revenues and control expenses; and its exposure to
derivative contracts and to debt subject to acceleration. The Company assesses the obligor’s pension and other post-
employment benefits obligations and funding policies and evaluates the obligor’s ability to adequately fund such obligations in
the future. The Company analyzes other critical risk factors including the type of issue; the repayment source; pledged security,
if any; the presence of restrictive covenants and the tenor of the risk. The Company also considers the ability of obligors to file
for bankruptcy or receivership under applicable statutes (and on related statutes that provide for state oversight or fiscal control
over financially troubled obligors). In addition, the Company weighs the risk of a rating agency downgrade of an obligation's
underlying uninsured rating.
For certain transactions, underwriting considerations may also include: the importance of the proposed project to the
community; the financial management of a specific project; the potential refinancing risk; and legal or administrative risks.
In cases of not-for-profit institutions, such as healthcare issuers and private higher education issuers, the Company
emphasizes the financial stability of the institution, its competitive position and its management experience.
For U.S. infrastructure transactions, the Company's due diligence is generally the same as it is for international
infrastructure transactions, as described below.
U.S. structured finance obligations generally present three distinct forms of risk: asset risk, pertaining to the amount
and quality of assets underlying an issue; structural risk, pertaining to the extent to which an issue's legal structure provides
protection from loss; and execution risk, which is the risk that poor performance by a servicer or collateral manager contributes
to a decline in the cash flow available to the transaction. Each of these risks is addressed through the Company's underwriting
process.
10
Generally, the amount and quality of asset coverage required with respect to a structured finance exposure is
dependent upon both the historic performance of the asset class, as well as the Company’s view of the future performance of
the subject assets. Future performance expectations are developed from historical loss experience, taking into account
economic, social and political factors affecting that asset class as well as, to the extent feasible, the subject assets themselves.
Conclusions are then drawn about the amount of over-collateralization or other credit enhancement necessary in a particular
transaction in order to protect investors (and therefore the insurer or reinsurer) against poor asset performance. In addition,
structured securities usually are designed to protect investors (and therefore the insurer or reinsurer) from the bankruptcy or
insolvency of the entity that originated the underlying assets, as well as the bankruptcy or insolvency of the servicer or manager
of those assets.
The Company conducts extensive due diligence on the collateral that supports its insured transactions. The principal
focus of the due diligence is to confirm the underlying collateral was originated in accordance with the stated underwriting
criteria of the asset originator. To this end, such collateral is reviewed, either internally by the Company or by outside
consultants that the Company engages. The Company also conducts audits of servicing or other management procedures,
reviewing critical aspects of these procedures such as cash management and collections. The Company may, for certain
transactions, obtain background checks on key managers of the originator, servicer or manager of the obligations underlying
that transaction.
In general, non-U.S. transactions are comprised of structured finance transactions, transactions with regulated utilities,
or infrastructure transactions. For these transactions, the Company undertakes an analysis of the country or countries in which
the risk resides, which includes political risk as well as economic and demographic characteristics. For each transaction, the
Company also performs an assessment of the legal framework governing the transaction and the laws affecting the underlying
assets supporting the obligations to be insured.
The underwriting of structured finance and regulated utilities is generally the same as for U.S. transactions, but for
considerations related to the specific country as described in the previous paragraph. For infrastructure transactions, the
Company reviews the type of project (e.g., hospital, road, social housing, transportation or student accommodation) and the
source of repayment of the debt. For certain transactions, debt service and operational expenses are covered by availability
payments made by either a governmental entity or a not-for-profit entity. The availability payments are due if the project is
available for use, regardless of whether the project actually is in use. The principal risks for such transactions are construction
risk and operational risk. The project must be completed on time and must be available for use during the life of the
concession. For other transactions, notably transactions secured by toll-roads, revenues derived from the project must be
sufficient to make debt service payments as well as cover operating expenses during the concession period. The Company
undertakes due diligence to assess demand risks in such projects and often uses consultants to help assess future demand and
revenue and expense projections.
The Company’s due diligence for infrastructure projects also includes: a financial review of the entity seeking the
development of the project (usually a governmental entity or university); a financial and operational review of the developer,
the construction companies, and the project operator; and a financial review of the various providers of operational financial
protection for the bondholders (and therefore the insurer), including construction surety providers, letter-of-credit providers,
liquidity banks or account banks. The Company uses outside consultants to review the construction program and to assess
whether the project can be completed on time and on budget. The Company projects the cost of replacing the construction
company, including delays in construction, in the event that a construction company is unable to complete the construction for
any reason. Construction security packages are sized appropriately to cover these risks and the Company requires such
coverage from credit-worthy institutions.
Underwriting Procedure
Each transaction underwritten by the Company involves persons with different expertise across various departments
within the Company. The Company's transaction underwriting teams include both underwriting and legal personnel, who
analyze the structure of a potential transaction and the credit and legal issues pertinent to the particular line of business or asset
class, and accounting and finance personnel, who review the more complex transactions for compliance with applicable
accounting standards and investment guidelines.
In the public finance portion of the Company's financial guaranty direct business, underwriters generally analyze the
issuer's historical financial statements and, where warranted, develop stress case projections to test the issuers' ability to make
timely debt service payments under stressful economic conditions. In the structured and infrastructure finance portions of the
Company's financial guaranty direct business, underwriters generally use financial models in order to evaluate the ability of the
transaction to generate adequate cash flow to service the debt under a variety of scenarios. The models include economically
11
stressed scenarios that the underwriters use for their assessment of the potential credit risk inherent in a particular transaction.
Stress models developed internally by the Company's underwriters reflect both empirical research and information gathered
from third parties, such as rating agencies or investment banks. The Company may also engage advisors such as consultants
and external counsel to assist in analyzing a transaction's financial or legal risks. The Company may also conduct a due
diligence review that includes, among other things, a site visit to the project or facility, meetings with issuer management,
review of underwriting and operational procedures, file reviews, and review of financial procedures and computer systems.
Upon completion of the underwriting analysis, the underwriter prepares a formal credit report that is submitted to a
credit committee for review. An oral presentation is usually made to the committee, followed by questions from committee
members and discussion among the committee members and the underwriters. In some cases, additional information may be
presented at the meeting or required to be submitted prior to approval. Each credit committee decision is documented and any
further requirements, such as specific terms or evidence of due diligence, are noted. The Company's credit committees are
composed of senior officers of the Company. The committees are organized by asset class, such as for public finance or
structured finance, or along regulatory lines, to assess the various potential exposures.
Risk Management Procedures
Organizational Structure
The Company's policies and procedures relating to risk assessment and risk management are overseen by its Board of
Directors (the Board). The Board takes an enterprise-wide approach to risk management that is designed to support the
Company's business plans at a reasonable level of risk. A fundamental part of risk assessment and risk management is not only
understanding the risks a company faces and what steps management is taking to manage those risks, but also understanding
what level of risk is appropriate for the Company. The Board annually approves the Company's business plan, factoring risk
management into account. It also approves the Company's risk appetite statement, which articulates the Company's tolerance
for risk and describes the general types of risk that the Company accepts or attempts to avoid. The involvement of the Board in
setting the Company's business strategy is a key part of its assessment of management's risk tolerance and also a determination
of what constitutes an appropriate level of risk for the Company.
While the Board has the ultimate oversight responsibility for the risk management process, various committees of the
Board also have responsibility for risk assessment and risk management. The Risk Oversight Committee of the Board oversees
the standards, controls, limits, underwriting guidelines and policies that the Company establishes and implements in respect of
credit underwriting and risk management. It focuses on management's assessment and management of both (i) credit risks and
(ii) other risks, including, but not limited to, financial, legal and operational risks (including cybersecurity risks), and risks
relating to the Company's reputation and ethical standards. In addition, the Audit Committee of the Board is responsible for,
among other matters, reviewing policies and processes related to the evaluation of risk assessment and risk management,
including the Company's major financial risk exposures and the steps management has taken to monitor and control such
exposures. It also reviews compliance with legal and regulatory requirements (including cybersecurity requirements). The
Compensation Committee of the Board reviews compensation-related risks to the Company. The Finance Committee of the
Board oversees the investment of the Company's investment portfolio and the Company's capital structure, liquidity, financing
arrangements, rating agency matters, and any corporate development activities in support of the Company's financial plan. The
Nominating and Governance Committee of the Board oversees risk at the Company by developing appropriate corporate
governance guidelines and identifying qualified individuals to become board members.
The Company has established a number of management committees to develop underwriting and risk management
guidelines, policies and procedures for the Company's insurance and reinsurance subsidiaries that are tailored to their respective
businesses, providing multiple levels of credit review and analysis.
•
•
Portfolio Risk Management Committee—This committee establishes company-wide credit policy for the
Company's direct and assumed business. It implements specific underwriting procedures and limits for the
Company and allocates underwriting capacity among the Company's subsidiaries. The Portfolio Risk
Management Committee focuses on measuring and managing credit, market and liquidity risk for the overall
company. All transactions in new asset classes or new jurisdictions must be approved by this committee.
U.S. Management Committee—This committee establishes strategic policy and reviews the implementation of
strategic initiatives and general business progress in the U.S. The U.S. Management Committee approves risk
policy at the U.S. operating company level.
12
•
Risk Management Committees—The U.S., U.K., AG Re and AGRO risk management committees conduct an
in-depth review of the insured portfolios of the relevant subsidiaries, focusing on varying portions of the portfolio
at each meeting. They assign internal ratings of the insured transactions and review sector reports, monthly
product line surveillance reports and compliance reports.
• Workout Committee—This committee receives reports from surveillance and workout personnel on transactions
that might benefit from active loss mitigation or risk reduction, and approves loss mitigation or risk reduction
strategies for such transactions.
•
Reserve Committees—Oversight of reserving risk is vested in the U.S. Reserve Committee, the U.K. Reserve
Committee, the AG Re Reserve Committee and the AGRO Reserve Committee. The committees review the
reserve methodology and assumptions for each major asset class or significant BIG transaction, as well as the loss
projection scenarios used and the probability weights assigned to those scenarios. The reserve committees
establish reserves for the relevant subsidiaries, taking into consideration supporting information provided by
surveillance personnel.
The Company's surveillance personnel are responsible for monitoring and reporting on all transactions in the insured
portfolio, including exposures in both the financial guaranty direct and assumed businesses. The primary objective of the
surveillance process is to monitor trends and changes in transaction credit quality, detect any deterioration in credit quality, and
recommend remedial actions to management. All transactions in the insured portfolio are assigned internal credit ratings, and
surveillance personnel recommend adjustments to those ratings to reflect changes in transaction credit quality.
The Company's workout personnel are responsible for managing workout, loss mitigation and risk reduction
situations. They work together with the Company's surveillance personnel to develop and implement strategies on transactions
that are experiencing loss or could possibly experience loss. They develop strategies designed to enhance the ability of the
Company to enforce its contractual rights and remedies and mitigate potential losses. The Company's workout personnel also
engage in negotiation discussions with transaction participants and, when necessary, manage (along with legal personnel) the
Company's litigation proceedings. They may also make open market or negotiated purchases of securities that the Company has
insured, or negotiate or otherwise implement consensual terminations of insurance coverage prior to contractual maturity. The
Company's workout personnel work with servicers of RMBS transactions to enhance their performance.
Direct Business
The Company monitors the performance of each risk in its portfolio and tracks aggregation of risk. The review cycle
and scope vary based upon transaction type and credit quality. In general, the review process includes the collection and
analysis of information from various sources, including trustee and servicer reports, financial statements, general industry or
sector news and analyses, and rating agency reports. For public finance risks, the surveillance process includes monitoring
general economic trends, developments with respect to state and municipal finances, and the financial situation of the issuers.
For structured finance transactions, the surveillance process can include monitoring transaction performance data and cash
flows, compliance with transaction terms and conditions, and evaluation of servicer or collateral manager performance and
financial condition. Additionally, the Company uses various quantitative tools and models to assess transaction performance
and identify situations where there may have been a change in credit quality. For all transactions, surveillance activities may
include discussions with or site visits to issuers, servicers or other parties to a transaction.
Assumed Business
For transactions that the Company has assumed, the ceding insurers are responsible for conducting ongoing
surveillance of the exposures that have been ceded to the Company. The Company's surveillance personnel monitor the ceding
insurer's surveillance activities on exposures ceded to the Company through a variety of means, including reviews of
surveillance reports provided by the ceding insurers, and meetings and discussions with their analysts. The Company's
surveillance personnel also monitor general news and information, industry trends and rating agency reports to help focus
surveillance activities on sectors or exposures of particular concern. For certain exposures, the Company also will undertake an
independent analysis and remodeling of the exposure. The Company's surveillance personnel also take steps to ensure that the
ceding insurer is managing the risk pursuant to the terms of the applicable reinsurance agreement.
Ceded Business
As part of its risk management strategy prior to the financial crisis, the Company obtained third party reinsurance or
retrocessions to reduce its exposure to risk concentrations, such as for single risk limits, portfolio credit rating or exposure
13
limits, geographic limits or other factors, to increase its underwriting capacity, both on an aggregate-risk and a single-risk basis,
to meet internal, rating agency and regulatory risk limits, diversify risks, reduce the need for additional capital, and strengthen
financial ratios. The Company receives capital credit for ceded reinsurance in the capital models used by the rating agencies to
evaluate the Company's capital position for its financial strength ratings and in its own internal capital models. The amount of
the credit depends on the reinsurer's rating and any collateral it may post. Over the past several years the Company has entered
into commutation agreements reassuming portions of the previously ceded business from certain reinsurers; as of December 31,
2017, approximately 2%, or $4.4 billion, of its principal amount outstanding was still ceded to third party reinsurers, down
from 12%, or $86.5 billion, as of December 31, 2009.
The Company has obtained excess-of-loss reinsurance in part to augment its capital in the capital models used by
several rating agencies to evaluate the Company's financial strength ratings. Specifically, effective January 1, 2018, AGC,
AGM and MAC entered into a $400 million aggregate excess of loss reinsurance facility of which $180 million was placed
with an unaffiliated reinsurer. At its inception, the facility covered losses occurring from January 1, 2018 through December 31,
2024, or from January 1, 2019 through December 31, 2025, at the option of AGC, AGM and MAC. See Part II, Item 8,
Financial Statements and Supplementary Data, Note 13, Reinsurance and Other Monoline Exposures, for more information.
The Company may in the future enter into new third party reinsurance or retrocessions or other arrangements to reduce
its exposure to risk concentrations, such as for single risk limits, portfolio credit rating or exposure limits, geographic limits or
other factors, to increase its underwriting capacity, both on an aggregate-risk and a single-risk basis, to meet internal, rating
agency and regulatory risk limits, diversify risks, reduce the need for additional capital, or strengthen financial ratios. The
Company may also in the future enter into new commutation agreements reassuming portions of its remaining previously ceded
business.
Importance of Financial Strength Ratings
Low financial strength ratings or uncertainty over the Company's ability to maintain its financial strength ratings
would have a negative impact on issuers' and investors' perceptions of the value of the Company's insurance product.
Therefore, the Company manages its business with the goal of achieving high financial strength ratings, preferably the highest
that an agency will assign to a financial guarantor. However, the models used by rating agencies differ, presenting conflicting
goals that may make it inefficient or impractical to reach the highest rating level. In addition, the models are not fully
transparent, contain subjective factors and may change.
Historically, insurance financial strength ratings reflect an insurer's ability to pay under its insurance policies and
contracts in accordance with their terms. The rating is not specific to any particular policy or contract. It does not refer to an
insurer's ability to meet non-insurance obligations and is not a recommendation to purchase any policy or contract issued by an
insurer or to buy, hold, or sell any security insured by an insurer. The insurance financial strength ratings assigned by the rating
agencies are based upon factors that the rating agencies believe are relevant to policyholders and are not directed toward the
protection of investors in AGL's common shares. Ratings reflect only the views of the respective rating agencies assigning them
and are subject to continuous review and revision or withdrawal at any time.
Following the financial crisis, the rating process has been challenging for the Company due to a number of factors,
including:
•
•
Instability of Rating Criteria and Methodologies. Rating agencies purport to issue ratings pursuant to published
rating criteria and methodologies. Beginning during the financial crisis, the rating agencies made material changes to
their rating criteria and methodologies applicable to financial guaranty insurers, sometimes through formal changes
and other times through ad hoc adjustments to the conclusions reached by existing criteria. Furthermore, these criteria
and methodology changes were typically implemented without any transition period, making it difficult for an insurer
to comply quickly with new standards.
Instability of Severe Stress Case Loss Assumptions. A major component in arriving at a financial guaranty insurer's
rating has been the rating agency’s assessment of the insurer’s capital adequacy, with each rating agency employing its
own proprietary model. These capital adequacy approaches include “stress case” loss assumptions for various risks or
risk categories. Since the financial crisis, the rating agencies have at various times materially increased stress case loss
assumptions for various risks or risk categories, in some cases later reducing such stress case losses. This approach has
made predicting the amount of capital required to maintain or attain a certain rating more difficult.
• More Reliance on Qualitative Rating Criteria. In prior years, the financial strength ratings of the Company’s
insurance company subsidiaries were largely consistent with the rating agency’s assessment of the insurers’ capital
14
adequacy, such that a rating downgrade could generally be avoided by raising additional capital or otherwise
improving capital adequacy under the rating agency’s model. In recent years, however, both S&P Global Ratings, a
division of Standard & Poor's Financial Services LLC (S&P) and Moody’s Investors Service, Inc. (Moody’s) have
applied other factors, some of which are subjective, such as the insurer's business strategy and franchise value or the
anticipated future demand for its product, to justify ratings for the Company’s insurance company subsidiaries
significantly below the ratings implied by their own capital adequacy models. Currently, for example, S&P has
concluded that Assured Guaranty has “AAA” capital adequacy under the S&P model (but subject to a downward
adjustment due to a “largest obligor test”) and Moody’s has concluded that AGM has “Aa” capital adequacy under the
Moody’s model (offset by other factors including the rating agency’s assessment of competitive profile, future
profitability and market share).
Despite the difficult rating agency process following the financial crisis, the Company has been able to maintain
strong financial strength ratings. However, if a substantial downgrade of the financial strength ratings of the Company's
insurance subsidiaries were to occur in the future, such downgrade would adversely affect its business and prospects and,
consequently, its results of operations and financial condition. The Company believes that if the financial strength ratings of
AGM, AGC and/or MAC were downgraded from their current levels, such downgrade could result in downward pressure on
the premium that such insurance subsidiary would be able to charge for its insurance. The Company periodically assesses the
value of each rating assigned to each of its companies, and may as a result of such assessment request that a rating agency add
or drop a rating from certain of its companies. For example, Kroll Bond Rating Agency (KBRA) ratings were first assigned to
MAC in 2013, to AGM in 2014 and to AGC in 2016 and A.M. Best Company, Inc. (Best) rating was first assigned to AGRO in
2015, while a Moody's rating was never requested for MAC, was dropped from AG Re and AGRO in 2015, and, was the
subject of a rating withdrawal request in the case of AGC (which request was declined).
The Company believes that so long as AGM, AGC and/or MAC continue to have financial strength ratings in the
double-A category from at least one of the legacy rating agencies (S&P or Moody’s), they are likely to be able to continue
writing financial guaranty business with a credit quality similar to that historically written. However, if neither legacy rating
agency maintained financial strength ratings of AGM, AGC and/or MAC in the double-A category, or if either legacy rating
agency were to downgrade AGM, AGC and/or MAC below the single-A level, it could be difficult for the Company to originate
the current volume of new financial guaranty business with comparable credit characteristics.
See "Item 1A. Risk Factors", Risk Factor captioned "Risks Related to the Company's Financial Strength and Financial
Enhancement Ratings" and Part II, Item 8, Financial Statements and Supplementary Data, Note 3, Ratings, for more
information about the Company's ratings.
Investments
Investment income from the Company's investment portfolio is one of the primary sources of cash flow supporting its
operations and claim payments. The Company's total investment portfolio was $11.4 billion and $11.0 billion as of
December 31, 2017 and 2016, respectively, and generated net investment income of $418 million, $408 million and $423
million in 2017, 2016 and 2015, respectively.
The Company's principal objectives in managing its investment portfolio are to support the highest possible ratings for
each operating company; maintain sufficient liquidity to cover unexpected stress in the insurance portfolio; and maximize total
after-tax net investment income. If the Company's calculations with respect to its policy liabilities are incorrect or other
unanticipated payment obligations arise, or if the Company improperly structures its investments to meet these liabilities, it
could have unexpected losses, including losses resulting from forced liquidation of investments before their maturity. The
investment policies of the Company's insurance subsidiaries are subject to insurance law requirements, and may change
depending upon regulatory, economic and market conditions and the existing or anticipated financial condition and operating
requirements, including the tax position, of the businesses.
Approximately 87% of the Company's investment portfolio is externally managed by six investment managers:
BlackRock Financial Management, Inc., Goldman Sachs Asset Management, L.P., General Re-New England Asset
Management, Inc., Wellington Management Company, LLP, Cutwater Investment Services Corp. and Wasmer, Schroeder &
Company, LLC. In January 2018 MacKay Shields LLC began managing a portion of the Company's investment portfolio. The
performance of the Company's invested assets is subject to the ability of the investment managers to select and manage
appropriate investments. The Company's investment managers have discretionary authority over the Company's investment
portfolio within the limits of the Company's investment guidelines approved by the Company's Board. Each manager is
compensated based upon a fixed percentage of the market value of the portion of the portfolio being managed by such manager.
BlackRock Financial Management, Inc. and Wellington Management Company LLP both own more than 5% of the Company's
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common shares, and the Company has a minority interest in Wasmer, Schroeder & Company, LLC. During the years ended
December 31, 2017, 2016 and 2015, the Company recorded investment management fee and related expenses of $9 million, $9
million, and $10 million, respectively.
As of December 31, 2017, the Company internally managed 13% of the investment portfolio, either in connection with
its loss mitigation or risk management strategy, or because the Company believes a particular security or asset presents an
attractive investment opportunity.
The largest component of the Company’s internally managed portfolio consists of obligations that the Company
purchases in connection with its loss mitigation or risk management strategy for its insured exposure. Purchasing such
obligations enables the Company to exercise rights available to holders of the obligations. The Company also holds other
invested assets that were obtained or purchased as part of negotiated settlements with insured counterparties or under the terms
of its financial guaranties. The Company held approximately $1,251 million and $1,600 million of securities based on their fair
value, after elimination of the benefit of any insurance provided by the Company, that were obtained for loss mitigation or risk
management purposes in its internally managed investment accounts as of December 31, 2017 and December 31, 2016,
respectively.
Another component of the Company's internally managed portfolio consists of alternative investments. Such
investments include various funds investing in both equity and debt securities and catastrophe bonds as well as investments in
investment managers. During 2016, the Company established an alternative investments group to focus on deploying a portion
of the Company's excess capital to pursue acquisitions and develop new business opportunities that complement the Company's
financial guaranty business, are in line with its risk profile and benefit from its core competencies. The alternative investments
group has been investigating a number of such opportunities including both controlling and non-controlling investments in
investment managers. In February 2017 the Company agreed to purchase up to $100 million of limited partnership interests in a
fund that invests in the equity of private equity managers. Separately, in September 2017 the Company acquired a minority
interest in Wasmer, Schroeder & Company LLC, an independent investment advisory firm specializing in separately managed
accounts (SMAs).
Competition
Assured Guaranty is the market leader in the financial guaranty industry. Assured Guaranty believes its financial strength,
protection against defaults, credit selection policies, underwriting standards, history of making claim payments and surveillance
procedures make it an attractive provider of financial guaranties.
Assured Guaranty's principal competition is in the form of obligations that issuers decide to issue on an uninsured
basis. In the U.S. public finance market, when interest rates are low, investors may prefer greater yield over insurance
protection, and issuers may find the cost savings from insurance less compelling. Over the last several years, interest rates
generally have been lower than historical norms. Average municipal interest rates in 2017, while above the historic lows
experienced in 2016, remained low when compared to historical norms. As a result, the difference in yield (or the credit spread)
between a bond insured by Assured Guaranty and an uninsured bond has provided comparatively little room for issuer savings
and insurance premium. In the U.S. public finance market in 2017, market penetration of municipal bond insurance decreased
to approximately 5.6% of the par amount of new issues sold, compared with approximately 6.0% in 2016. The Company
believes this decrease was due in large part to the extremely low interest rates prevailing during most of 2017.
In the international infrastructure finance market, the uninsured execution serving as the Company’s principal
competition occurs primarily in privately funded transactions where no bonds are sold in the public markets. In the structured
finance market, the uninsured execution occurs in both public and primary transactions primarily where bonds are sold with
sufficient credit or structural enhancement embedded in transactions, such as through overcollateralization, first loss insurance,
excess spread or other terms, to make the bonds attractive to investors without bond insurance.
Assured Guaranty is the only financial guaranty company active before the global financial crisis of 2008 that has
maintained sufficient financial strength to write new business continuously since the crisis began. As a result of rating agency
downgrades of the financial strength ratings of financial guaranty competitors active before the crisis, Assured Guaranty has
only one direct competitor for financial guaranty, BAM, a mutual insurance company that commenced business in 2012.
Based on industry statistics, the Company estimates that, of the new U.S. public finance bonds sold with insurance in
2017, the Company insured approximately 58% of the par, while BAM insured approximately 39%. A third insurer that ceased
writing new business in 2017 insured the remainder. BAM is effective in competing with the Company for small to medium
sized U.S. public finance transactions in certain sectors. BAM sometimes prices its guarantees for such transactions at levels
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the Company does not believe produces an adequate rate of return and so does not match, but BAM's pricing and underwriting
strategies may have a negative impact on the amount of premium the Company is able to charge for its insurance for such
transactions. However, the Company believes it has competitive advantages over BAM due to: AGM's and MAC's larger
capital base; AGM's ability to insure larger transactions and issuances in more diverse U.S. bond sectors; BAM's inability to
date to generate profits and to increase its statutory capital meaningfully, its higher leverage ratios than those of AGM and
MAC, and its increasing unpaid debt obligations; and AGM's and MAC's strong financial strength ratings from multiple rating
agencies (in the case of AGM, AA+ from KBRA, AA from S&P and A2 from Moody's, and in the case of MAC, AA+ from
KBRA and AA from S&P, compared with BAM's AA solely from S&P). Additionally, as a public company with access to both
the equity and debt capital markets, Assured Guaranty may have greater flexibility to raise capital, if needed.
In the global structured finance and infrastructure markets, Assured Guaranty is the only financial guaranty insurance
company currently writing new guarantees. Management considers the Company’s greater diversification to be a competitive
advantage in the long run because it means the Company is not wholly dependent on conditions in any one market.
In the future, additional new entrants into the financial guaranty industry could reduce the Company's new business
prospects, including by furthering price competition or offering financial guaranty insurance on transactions with structural and
security features that are more favorable to the issuers than those required by Assured Guaranty. However, the Company believes
that the presence of multiple guarantors might also increase the overall visibility and acceptance of the product by a broadening
group of investors, and the fact that investors are willing to commit fresh capital to the industry may promote market confidence
in the product.
In addition to monoline insurance companies, Assured Guaranty competes with other forms of credit enhancement, such
as letters of credit or credit derivatives provided by banks and other financial institutions, some of which are governmental
enterprises, or direct guaranties of municipal, structured finance or other debt by federal or state governments or government
sponsored or affiliated agencies. Alternative credit enhancement structures, and in particular federal government credit
enhancement or other programs, can interfere with the Company's new business prospects, particularly if they provide direct
governmental-level guaranties, restrict the use of third-party financial guaranties or reduce the amount of transactions that might
qualify for financial guaranties.
Regulation
General
The business of insurance and reinsurance is regulated in most countries, although the degree and type of regulation
varies significantly from one jurisdiction to another. Reinsurers are generally subject to less direct regulation than primary
insurers. The Company is subject to regulation under applicable statutes in the U.S., the U.K. and Bermuda, as well as France.
United States
AGL has three operating insurance subsidiaries domiciled in the U.S., which the Company refers to collectively as the
Assured Guaranty U.S. Subsidiaries.
•
AGM is a New York domiciled insurance company licensed to write financial guaranty insurance and reinsurance
in 50 U.S. states, the District of Columbia, Guam, Puerto Rico and the U.S. Virgin Islands.
• MAC is a New York domiciled insurance company licensed to write financial guaranty insurance and reinsurance
in 50 U.S. states and the District of Columbia. MAC will only insure U.S. public finance debt obligations,
focusing on investment grade bonds in select sectors of that market.
•
AGC is a Maryland domiciled insurance company licensed to write financial guaranty insurance and reinsurance
in 50 U.S. states, the District of Columbia and Puerto Rico.
Insurance Holding Company Regulation
AGL and the Assured Guaranty U.S. Subsidiaries are subject to the insurance holding company laws of their
jurisdiction of domicile, as well as other jurisdictions where these insurers are licensed to do insurance business. These laws
generally require each of the Assured Guaranty U.S. Subsidiaries to register with its respective domestic state insurance
department and annually to furnish financial and other information about the operations of companies within their holding
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company system. Generally, all transactions among companies in the holding company system to which any of the Assured
Guaranty U.S. Subsidiaries is a party (including sales, loans, reinsurance agreements and service agreements) must be fair and,
if material or of a specified category, such as reinsurance or service agreements, require prior notice and approval or non-
disapproval by the insurance department where the applicable subsidiary is domiciled.
Change of Control
Before a person can acquire control of a U.S. domestic insurance company, prior written approval must be obtained
from the insurance commissioner of the state where the domestic insurer is domiciled. Generally, state statutes provide that
control over a domestic insurer is presumed to exist if any person, directly or indirectly, owns, controls, holds with the power to
vote, or holds proxies representing, 10% or more of the voting securities of the domestic insurer. Prior to granting approval of
an application to acquire control of a domestic insurer, the state insurance commissioner will consider such factors as the
financial strength of the applicant, the integrity and management of the applicant's board of directors and executive officers, the
acquirer's plans for the management of the applicant's board of directors and executive officers, the acquirer's plans for the
future operations of the domestic insurer and any anti-competitive results that may arise from the consummation of the
acquisition of control. These laws may discourage potential acquisition proposals and may delay, deter or prevent a change of
control involving AGL that some or all of AGL's stockholders might consider to be desirable, including in particular unsolicited
transactions.
State Insurance Regulation
State insurance authorities have broad regulatory powers with respect to various aspects of the business of U.S.
insurance companies, including licensing these companies to transact business, accreditation of reinsurers, admittance of assets
to statutory surplus, regulating unfair trade and claims practices, establishing reserve requirements and solvency standards,
regulating investments and dividends and, in certain instances, approving policy forms and related materials and approving
premium rates. State insurance laws and regulations require the Assured Guaranty U.S. Subsidiaries to file financial statements
with insurance departments everywhere they are licensed, authorized or accredited to conduct insurance business, and their
operations are subject to examination by those departments at any time. The Assured Guaranty U.S. Subsidiaries prepare
statutory financial statements in accordance with Statutory Accounting Practices, or SAP, and procedures prescribed or
permitted by these departments. State insurance departments also conduct periodic examinations of the books and records,
financial reporting, policy filings and market conduct of insurance companies domiciled in their states, generally once every
three to five years. Market conduct examinations by regulators other than the domestic regulator are generally carried out in
cooperation with the insurance departments of other states under guidelines promulgated by the National Association of
Insurance Commissioners.
The New York State Department of Financial Services (the NYDFS), the regulatory authority of the domiciliary
jurisdiction of AGM and MAC, conducts a periodic examination of insurance companies domiciled in New York, usually at
five-year intervals. In 2012, the NYDFS commenced examinations of AGM and MAC in order for its examinations of these
companies to coincide with the Maryland Insurance Administration (the MIA's) examination of AGC. In 2013, the NYDFS
completed its examinations and issued Reports on Examination of AGM for the four-year period ending December 31, 2011
and MAC for the period September 26, 2008 through June 30, 2012. The reports did not note any significant regulatory issues
concerning those companies.
The MIA, the regulatory authority of the domiciliary jurisdiction of AGC, conducts a periodic examination of
insurance companies domiciled in Maryland every five years. In 2013, the MIA issued an Examination Report with respect to
AGC for the five year period ending December 31, 2011; no significant regulatory issues were noted in such report.
The NYDFS and MIA commenced an examination, respectively, of AGM and MAC, and AGC, in 2017 for the period
covering the end of the last applicable examination period for each company through December 31, 2016.
State Dividend Limitations
New York. One of the primary sources of cash for repurchases of shares and the payment of debt service and
dividends by the Company is the receipt of dividends from AGM. Under the New York Insurance Law, AGM and MAC may
only pay dividends out of "earned surplus," which is the portion of the company's surplus that represents the net earnings, gains
or profits (after deduction of all losses) that have not been distributed to shareholders as dividends, transferred to stated capital
or capital surplus, or applied to other purposes permitted by law, but does not include unrealized appreciation of assets. AGM
and MAC may each pay dividends without the prior approval of the New York Superintendent of Financial Services (New York
Superintendent) that, together with all dividends declared or distributed by it during the preceding 12 months, do not exceed the
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lesser of 10% of its policyholders' surplus (as of its last annual or quarterly statement filed with the New York Superintendent)
or 100% of its adjusted net investment income during that period. See Part II, Item 7, Management's Discussion and Analysis,
Liquidity and Capital Resources, for the maximum amount of dividends that can be paid without regulatory approval, recent
dividend history and other recent capital movements.
Maryland. Another primary source of cash for the repurchases of shares and payment of debt service and dividends
by the Company is the receipt of dividends from AGC. Under Maryland's insurance law, AGC may, with prior notice to the
MIA, pay an ordinary dividend that, together with all dividends paid in the prior 12 months, does not exceed the lesser of 10%
of its policyholders' surplus (as of the prior December 31) or 100% of its adjusted net investment income during that period. A
dividend or distribution to a stockholder in excess of this limitation would constitute an "extraordinary dividend," which must
be paid out of "earned surplus" and reported to, and approved by, the MIA prior to payment. "Earned surplus" is that portion of
the company's surplus that represents the net earnings, gains or profits (after deduction of all losses) that have not been
distributed to shareholders as dividends or transferred to stated capital or capital surplus, or applied to other purposes permitted
by law, but does not include unrealized capital gains and appreciation of assets. AGC may not pay any dividend or make any
distribution, including ordinary dividends, unless it notifies the MIA of the proposed payment within five business days
following declaration and at least ten days before payment. The MIA may declare that such dividend not be paid if it finds that
AGC's policyholders' surplus would be inadequate after payment of the dividend or the dividend could lead AGC to a
hazardous financial condition. See Part II, Item 7, Management's Discussion and Analysis, Liquidity and Capital Resources, for
the maximum amount of dividends that can be paid without regulatory approval, recent dividend history and other recent
capital movements.
Contingency Reserves
Under the New York Insurance Law, each of AGM and MAC must establish a contingency reserve to protect
policyholders. New York Insurance Law determines the calculation of the contingency reserve and the period of time over
which it must be established and, subsequently, can be taken down.
Likewise, in accordance with Maryland insurance law and regulations, AGC also maintains a statutory contingency
reserve for the protection of policyholders. Maryland insurance law determines the calculation of the contingency reserve and
the period of time over which it must be established, and subsequently, can be taken down.
In both New York and Maryland, when considering the principal amount guaranteed, the insurer is permitted to take
into account amounts that it has ceded to reinsurers. In addition, releases from the insurer's contingency reserve may be
permitted under specified circumstances in the event that actual loss experience exceeds certain thresholds or if the reserve
accumulated is deemed excessive in relation to the insurer's outstanding insured obligations.
From time to time, AGM and AGC have obtained the approval of their regulators to release contingency reserves
based on losses or because the accumulated reserve is deemed excessive in relation to the insurer's outstanding insured
obligations. See Part II, Item 8, Financial Statements and Supplementary Data, Note 11, Insurance Company Regulatory
Requirements, for information on the regulators' approval of contingency reserves releases in 2017 and 2016.
Applicable Maryland and New York laws and regulations require regular, quarterly contributions to contingency
reserves while they are being established, but such laws and regulations permit the discontinuation of such quarterly
contributions to an insurer's contingency reserves when such insurer's aggregate contingency reserves for a particular line of
business (i.e., municipal or non-municipal) exceed the sum of the insurer's outstanding principal for each specified category of
obligations within the particular line of business multiplied by the specified contingency reserve factor for each such category.
In accordance with such laws and regulations, and with the approval of the MIA and the NYDFS, respectively, AGC ceased
making quarterly contributions to its contingency reserves for both municipal and non-municipal business and AGM ceased
making quarterly contributions to its contingency reserves for non-municipal business, in each case beginning in the fourth
quarter of 2014. Such cessations are expected to continue for as long as AGC and AGM satisfy the foregoing condition for their
applicable line(s) of business.
Financial guaranty insurers are also required to maintain a loss and loss adjustment expense (LAE) reserve (on a case-
by-case basis) and unearned premium reserve.
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Single and Aggregate Risk Limits
The New York Insurance Law and the Code of Maryland Regulations establish single risk limits for financial guaranty
insurers applicable to all obligations issued by a single entity and backed by a single revenue source. For example, under the
limit applicable to qualifying asset-backed securities, the lesser of:
•
•
the insured average annual debt service for a single risk, net of qualifying reinsurance and collateral, or
the insured unpaid principal (reduced by the extent to which the unpaid principal of the supporting assets exceeds
the insured unpaid principal) divided by nine, net of qualifying reinsurance and collateral, may not exceed 10% of
the sum of the insurer's policyholders' surplus and contingency reserves, subject to certain conditions.
Under the limit applicable to municipal obligations, the insured average annual debt service for a single risk, net of
qualifying reinsurance and collateral, may not exceed 10% of the sum of the insurer's policyholders' surplus and contingency
reserves. In addition, insured principal of municipal obligations attributable to any single risk, net of qualifying reinsurance and
collateral, is limited to 75% of the insurer's policyholders' surplus and contingency reserves. Single-risk limits are also
specified for other categories of insured obligations, and generally are more restrictive than those listed for asset-backed or
municipal obligations. Obligations not qualifying for an enhanced single-risk limit are generally subject to the "corporate" limit
(applicable to insurance of unsecured corporate obligations) equal to 10% of the sum of the insurer's policyholders' surplus and
contingency reserves. For example, "triple-X" and "future flow" securitizations, as well as unsecured investor-owned utility
obligations, are generally subject to these "corporate" single-risk limits.
The New York Insurance Law and the Code of Maryland Regulations also establish aggregate risk limits on the basis
of aggregate net liability insured as compared with statutory capital. "Aggregate net liability" is defined as outstanding
principal and interest of guaranteed obligations insured, net of qualifying reinsurance and collateral. Under these limits,
policyholders' surplus and contingency reserves must not be less than the sum of various percentages of aggregate net liability
for various categories of specified obligations. The percentage varies from 0.33% for certain municipal obligations to 4% for
certain non-investment-grade obligations. As of December 31, 2017, the aggregate net liability of each of AGM, MAC and
AGC utilized approximately 24.4%, 29.9% and 7.6% of their respective policyholders' surplus and contingency reserves.
The New York Superintendent has broad discretion to order a financial guaranty insurer to cease new business
originations if the insurer fails to comply with single or aggregate risk limits. In practice, the New York Superintendent has
shown a willingness to work with insurers to address these concerns.
Group Regulation
In connection with AGL’s establishment of tax residence in the U.K., as discussed in greater detail under "Tax
Matters" below, the NYDFS has assumed responsibility for regulation of the Assured Guaranty group. Group supervision by
the NYDFS results in additional regulatory oversight over Assured Guaranty, and may subject Assured Guaranty to new
regulatory requirements and constraints.
Investments
The Assured Guaranty U.S. Subsidiaries are subject to laws and regulations that require diversification of their
investment portfolio and limit the amount of investments in certain asset categories, such as BIG fixed-maturity securities,
equity real estate, other equity investments, and derivatives. Failure to comply with these laws and regulations would cause
investments exceeding regulatory limitations to be treated as non-admitted assets for purposes of measuring surplus, and, in
some instances, would require divestiture of such non-qualifying investments. The Company believes that the investments
made by the Assured Guaranty U.S. Subsidiaries complied with such regulations as of December 31, 2017. In addition, any
investment must be approved by the insurance company's board of directors or a committee thereof that is responsible for
supervising or making such investment.
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Operations of the Company's Non-U.S. Insurance Subsidiaries
In addition to the regulatory requirements imposed by the jurisdictions in which they are licensed, the business
operations of the Company's reinsurance subsidiaries are affected by regulatory requirements in various states of the United
States governing "credit for reinsurance", which are imposed on the ceding companies of the reinsurers. The Nonadmitted and
Reinsurance Reform Act (NRRA) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act)
streamlined the regulation of reinsurance by applying single state regulation for credit for reinsurance. Under the NRRA, credit
for reinsurance determinations are controlled by the ceding company’s state of domicile and non-domiciliary states are
prohibited from applying their reinsurance laws extraterritorially. In general, a ceding company which obtains reinsurance
from a reinsurer that is licensed, accredited or approved by the ceding company's state of domicile is permitted to reflect in its
statutory financial statements a credit in an aggregate amount equal to the ceding company's liability for unearned premiums
(which are that portion of premiums written which applies to the unexpired portion of the policy period), loss and loss expense
reserves ceded to the reinsurer. The great majority of states, however, also permit a credit on the statutory financial statements
of a ceding insurer for reinsurance obtained from a non-licensed or non-accredited reinsurer to the extent that the reinsurer
secures its reinsurance obligations to the ceding insurer by providing collateral in the form of a letter of credit, trust fund or
other acceptable security arrangement. Certain of those state permit such non-licensed/non-accredited reinsurers that meet
certain specified requirements to apply for certified reinsurer status. If granted, such status allows the certified reinsurer to post
less than 100% collateral (the exact percentage depends on the certifying state's view of the reinsurer's financial strength) and
the applicable ceding company will still qualify, on the basis of such reduced collateral, for full credit for reinsurance on its
statutory financial statements with respect to reinsurance contracts renewed or entered into with the certified reinsurer on or
after the date the reinsurer becomes certified. A few states do not allow credit for reinsurance ceded to non-licensed reinsurers
except in certain limited circumstances and others impose additional requirements that make it difficult to become accredited.
The Company's reinsurance subsidiaries AG Re and AGRO are not licensed, accredited or approved in any state and have
established trusts to secure their reinsurance obligations. In 2017, AGRO obtained certified reinsurer status in Missouri, which
status will allow AGRO to post 10% collateral in respect of any reinsurance assumed from Missouri-domiciled ceding
companies on or after the date of AGRO’s certification.
U.S. Federal Regulation
The Company’s businesses are subject to direct and indirect regulation under U.S. federal law. In particular, the
Company’s derivatives activities are directly and indirectly subject to a variety of regulatory requirements under the Dodd-
Frank Act. Based on the size of its subsidiaries' remaining legacy derivatives portfolios, AGL does not believe any of its
subsidiaries is required to register with the Commodity Futures Trading Commission (CFTC) as a “major swap participant” or
with the SEC as a "major securities-based swap participant". Certain of the Company's subsidiaries may be subject to Dodd-
Frank Act requirements to post margin or to clear on a regulated execution facility future swap transactions or with respect to
certain amendments to legacy swap transactions, if they enter into such transactions.
Bermuda
AG Re and AGRO are each an insurance company currently registered and licensed under the Insurance Act 1978 of
Bermuda, amendments thereto and related regulations (collectively, the Insurance Act). AG Re is registered and licensed as a
Class 3B insurer and AGRO is registered and licensed as a Class 3A insurer and a Class C long-term insurer.
Bermuda Insurance Regulation
The Insurance Act imposes on insurance companies solvency and liquidity standards; restrictions on the declaration
and payment of dividends and distributions; restrictions on the reduction of statutory capital; restrictions on the winding up of
long-term insurers; and auditing and reporting requirements; and the need to have a principal representative and a principal
office (as understood under the Insurance Act) in Bermuda. The Insurance Act grants to the Bermuda Monetary Authority (the
Authority) the power to cancel insurance licenses, supervise, investigate and intervene in the affairs of insurance companies
and in certain circumstances share information with foreign regulators. Class 3A and Class 3B insurers are authorized to carry
on general insurance business (as understood under the Insurance Act), subject to conditions attached to the license and to
compliance with minimum capital and surplus requirements, solvency margin, liquidity ratio and other requirements imposed
by the Insurance Act. Class C long-term insurers are permitted to carry on long-term business (as understood under the
Insurance Act) subject to conditions attached to the license and to similar compliance requirements and the requirement to
maintain its long-term business fund (a segregated fund).
Each of AG Re and AGRO is required annually to file statutorily mandated financial statements and returns, audited
by an auditor approved by the Authority (no approved auditor of an insurer may have an interest in that insurer, other than as an
21
insured, and no officer, servant or agent of an insurer shall be eligible for appointment as an insurer's approved auditor),
together with an annual loss reserve opinion of the loss reserve specialist, who is approved by the Authority, and in respect of
AGRO, the required actuary's certificate with respect to the long-term business. When each of AG Re and AGRO files its
statutory financial statements, it is also required to deliver to the Authority a declaration of compliance, declaring whether or
not the insurer has, with respect to the preceding financial year complied with all requirements of the minimum criteria
applicable to it; complied with the minimum margin of solvency as at its financial year end; complied with the applicable
enhanced capital requirements as at its financial year end; complied with the minimum liquidity ratio for general business as at
its financial year end; and complied with applicable conditions, directions and restrictions imposed on, or approvals granted to
the insurer. AG Re and AGRO are also required to file annual financial statements prepared in conformity with GAAP, which
must be available to the public.
In addition, AG Re and AGRO are required to file a capital and solvency return that includes its Bermuda Solvency
Capital Requirement (BSCR) model (or an approved internal capital model in lieu thereof), a schedule of fixed income
investments by BSCR rating, a schedule of funds held by ceding reinsurers in segregated accounts/trusts by BSCR rating, a
schedule of net reserves for losses and loss expense provisions by line of business, a schedule of premiums written by line of
business, a schedule of geographic diversification of net premiums written by line of business, a schedule of risk management,
a schedule of fixed income securities, a schedule of commercial insurer's solvency self-assessment (CISSA), a schedule of
catastrophe risk return, a schedule of loss triangles or reconciliation of net loss reserves, a schedule of eligible capital, a
statutory economic balance sheet, the loss reserve specialist's opinion, a schedule of regulated non-insurance financial operating
entities and a schedule of solvency. AGRO’s capital and solvency return must also include, among other details, a schedule of
long-term premiums written by line of business, a schedule of long-term business data, a schedule of long-term variable
annuity guarantees data and reconciliation, a schedule of long-term variable annuity guarantees - internal capital model and the
approved actuary’s opinion.
Each of AG Re and AGRO are also required to prepare and file with the Authority, and publish on its website, a
financial condition report. The Authority has discretion to approve modifications and exemptions to the public disclosure rules,
on application by the insurer if, among other things, the Authority is satisfied that the disclosure of certain information will
result in a competitive disadvantage or compromise confidentiality obligations of the insurer.
Finally, in lieu of the standard legal and regulatory requirements, AG Re is required to make a modified filing with the
Authority, consisting of its board of directors quarterly meeting package (which includes AG Re’s unaudited quarterly financial
statements), no later than 30 days after the date of its quarterly board meetings.
Shareholder Controllers
Pursuant to provisions in the Insurance Act, any person who becomes a holder of 10% or more, 20% or more, 33% or
more or 50% or more of the Company's common shares must notify the Authority in writing within 45 days of becoming such a
holder. The Authority has the power to object to such a person if it appears to the Authority that the person is not fit and proper
to be such a holder. In such a case, the Authority may require the holder to reduce their shareholding in the Company and may
direct, among other things, that the voting rights attached to their common shares are not exercisable. A person that does not
comply with such a notice or direction from the Authority will be guilty of an offense.
Notification of Material Changes
All registered insurers are required to give notice to the Authority of their intention to effect a material change within
the meaning of the Insurance Act. For the purposes of the Insurance Act, the following changes are material: (i) the transfer or
acquisition of insurance business being part of a scheme falling within, or any transaction relating to a scheme of arrangement
under section 25 of the Insurance Act or section 99 of the Companies Act 1981 of Bermuda (the Companies Act), (ii) the
amalgamation or merger with or acquisition of another firm, (iii) engaging in unrelated business that is retail business, (iv) the
acquisition of a controlling interest in an undertaking that is engaged in non-insurance business which offers services or
products to non-affiliated persons, (v) outsourcing all or substantially all of the functions of actuarial, risk management,
compliance and internal audit functions, (vi) outsourcing all or a material part of an insurer's underwriting activity,
(vii) transferring other than by way of reinsurance all or substantially all of a line of business, (viii) expanding into a material
new line of business, (ix) the sale of an insurer, and (x) outsourcing an officer role (in this context meaning a chief executive or
senior executive performing the roles of underwriting, actuarial, risk management, compliance, internal audit, finance or
investment matters).
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Registered insurers are not permitted to take any steps to give effect to a material change listed above unless it has first
served notice on the Authority that it intends to effect such material change and, before the end of 30 days, either the Authority
has notified such company in writing that it has no objection to such change or that period has lapsed without the Authority
having issued a notice of objection. A person who fails to give the required notice or who effects a material change, or allows
such material change to be effected, before the prescribed period has elapsed or after having received a notice of objection is
guilty of an offence.
Minimum Solvency Margin and Enhanced Capital Requirements
Under the Insurance Act, AG Re and AGRO must each ensure that the value of its general business statutory assets
exceeds the amount of its general business statutory liabilities by an amount greater than the prescribed minimum solvency
margin and each company's applicable enhanced capital requirement.
The minimum solvency margin for Class 3A and Class 3B insurers is the greater of (i) $1 million, or (ii) 20% of the
first $6 million of net premiums written; if in excess of $6 million, the figure is $1.2 million plus 15% of net premiums written
in excess of $6 million, or (iii) 15% of net discounted aggregate loss and loss expense provisions and other insurance reserves,
or (iv) 25% of that insurer's applicable enhanced capital requirement reported at the end of its relevant year.
In addition, as a Class C long-term insurer, AGRO is required, with respect to its long-term business, to maintain a
minimum solvency margin equal to the greater of (i) $500,000, (ii) 1.5% of its assets or (iii) 25% its enhanced capital
requirement reported at the end of the relevant year. For the purpose of this calculation, assets are defined as the total assets
pertaining to its long-term business reported on the balance sheet in the relevant year less the amounts held in a segregated
account. AGRO is also required to keep its accounts in respect of its long-term business separate from any accounts kept in
respect of any other business and all receipts of its long-term business form part of its long-term business fund.
Each of AG Re and AGRO is required to maintain available statutory capital and surplus at a level equal to or in
excess of its applicable enhanced capital requirement, which is established by reference to either its BSCR model or an
approved internal capital model. The BSCR model is a risk-based capital model which provides a method for determining an
insurer's capital requirements (statutory economic capital and surplus) by taking into account the risk characteristics of different
aspects of the insurer's business. The BSCR formula establishes capital requirements for ten categories of risk: fixed income
investment risk, equity investment risk, interest rate/liquidity risk, currency risk, concentration risk, premium risk, reserve risk,
credit risk, catastrophe risk and operational risk. For each category, the capital requirement is determined by applying factors to
asset, premium, reserve, creditor, probable maximum loss and operation items, with higher factors applied to items with greater
underlying risk and lower factors for less risky items.
While not specifically referred to in the Insurance Act, the Authority has also established a target capital level (TCL)
for each insurer subject to an enhanced capital requirement equal to 120% of its enhanced capital requirement. While such an
insurer is not currently required to maintain its statutory capital and surplus at this level, the TCL serves as an early warning
tool for the Authority and failure to maintain statutory capital at least equal to the TCL will likely result in increased regulatory
oversight.
For each insurer subject to an enhanced capital requirement, there is a three-tiered capital system designed to assess
the quality of capital resources that a company has available to meet its capital requirements. Under this system, all of an
insurer's capital instruments will be classified as either basic or ancillary capital which in turn will be classified into one of
three tiers based on their “loss absorbency” characteristics. Highest quality capital is classified as Tier 1 Capital; lesser quality
capital is classified as either Tier 2 Capital or Tier 3 Capital. Under this regime, up to certain specified percentages of Tier 1,
Tier 2 and Tier 3 Capital (determined by registration classification) may be used to support the company's minimum solvency
margin, enhanced capital requirement and TCL.
Restrictions on Dividends and Distributions
The Insurance Act limits the declaration and payment of dividends and other distributions by AG Re and AGRO.
Under the Insurance Act:
•
The minimum share capital must be always issued and outstanding and cannot be reduced. For AG Re, which is
registered as a Class 3B insurer, the minimum share capital is $120,000. For AGRO, which is registered both as a
Class 3A and a Class C long-term insurer, the minimum share capital is $370,000.
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• With respect to the distribution (including repurchase of shares) of any share capital, contributed surplus or other
statutory capital:
(a) any such distribution that would reduce AG Re's or AGRO's total statutory capital by 15% or more of their
respective total statutory capital as set out in their previous year's financial statements requires the prior
approval of the Authority. Any application for such approval must include an affidavit stating that the
company will continue to meet the required margins and such other information as the Authority may require;
and
(b) as a Class C long-term insurer, AGRO may not use the funds allocated to its long-term business fund, directly
or indirectly, for any purpose other than a purpose of its long-term business except in so far as such payment
can be made out of any surplus certified by AGRO's approved actuary to be available for distribution
otherwise than to policyholders.
• With respect to the declaration and payment of dividends:
(a) each of AG Re and AGRO is prohibited from declaring or paying any dividends during any financial year if it
is in breach of its solvency margin, minimum liquidity ratio or enhanced capital requirement, or if the
declaration or payment of such dividends would cause such a breach (if it has failed to meet its minimum
solvency margin or minimum liquidity ratio on the last day of any financial year, the insurer will be
prohibited, without the approval of the Authority, from declaring or paying any dividends during the next
financial year). Dividends are paid out of each insurer's statutory surplus and, therefore, dividends cannot
exceed such surplus. See "—Minimum Solvency Margin and Enhanced Capital Requirements" above and "—
Minimum Liquidity Ratio" below;
(b) an insurer which at any time fails to meet its minimum solvency margin or comply with the enhanced capital
requirement may not declare or pay any dividend until the failure is rectified, and also in such circumstances
the insurer must report, within 14 days after becoming aware of its failure or having reason to believe that
such failure has occurred, to the Authority in writing giving particulars of the circumstances leading to the
failure and giving a plan detailing the manner, specific actions to be taken and time frame in which the
insurer intends to rectify the failure. A failure to comply with the enhanced capital requirement will also
result in the insurer furnishing certain other information to the Authority within 45 days after becoming aware
of its failure or having reason to believe that such failure has occurred;
(c) each of AG Re and AGRO is prohibited from declaring or paying in any financial year dividends of more
than 25% of its total statutory capital and surplus (as shown on its previous financial year's statutory balance
sheet) unless it files (at least seven days before payments of such dividends) with the Authority an affidavit
signed by at least two directors (one of whom must be a Bermuda resident director if any of the insurer's
directors are resident in Bermuda) and the principal representative stating that it will continue to meet its
solvency margin and minimum liquidity ratio. Where such an affidavit is filed, it shall be available for public
inspection at the offices of the Authority; and
(d) as a Class C long-term insurer, AGRO may not declare or pay a dividend to any person other than a
policyholder unless the value of the assets of its long-term business fund, as certified by AGRO's approved
actuary, exceeds the extent (as so certified) of the liabilities of AGRO's long-term business, and the amount of
any such dividend shall not exceed the aggregate of (1) that excess; and (2) any other funds properly
available for the payment of dividends being funds arising out of AGRO's business other than its long-term
business.
The Companies Act also limits the declaration and payment of dividends and other distributions by Bermuda
companies such as AGL and its Bermuda Subsidiaries. Such companies may only declare and pay a dividend or make a
distribution out of contributed surplus (as understood under the Companies Act) if there are reasonable grounds for believing
that the company is and after the payment will be able to meet and pay its liabilities as they become due and the realizable
value of the company's assets will not be less than its liabilities. The Companies Act also regulates and restricts the reduction
and return of capital and paid in share premium, including the repurchase of shares. See Part II, Item 7, Management's
Discussion and Analysis, Liquidity and Capital Resources, for the maximum amount of dividends that can be paid without
regulatory approval, recent dividend history and other recent capital movements.
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Minimum Liquidity Ratio
The Insurance Act provides a minimum liquidity ratio for general business. An insurer engaged in general business is
required to maintain the value of its relevant assets at not less than 75% of the amount of its relevant liabilities. Relevant assets
include cash and time deposits, quoted investments, unquoted bonds and debentures, first liens on real estate, investment
income due and accrued, accounts and premiums receivable, reinsurance balances receivable, funds held by ceding reinsurers
and any other assets which the Authority on application in any particular case made to it with reasons, accepts in that case.
There are certain categories of assets which, unless specifically permitted by the Authority, do not automatically qualify as
relevant assets, such as unquoted equity securities, investments in and advances to affiliates and real estate and collateral loans.
The relevant liabilities are total general business insurance reserves and total other liabilities less deferred income tax
and sundry liabilities (by interpretation, those not specifically defined) and letters of credit, corporate guarantees and other
instruments.
Insurance Code of Conduct
Each of AG Re and AGRO is subject to the Insurance Code of Conduct, which establishes duties, standards,
procedures and sound business principles which must be complied with to ensure sound corporate governance, risk
management and internal controls are implemented by all insurers registered under the Insurance Act. The Authority will assess
an insurer's compliance with the Code of Conduct in a proportionate manner relative to the nature, scale and complexity of its
business. Failure to comply with the requirements under the Insurance Code of Conduct will be a factor taken into account by
the Authority in determining whether an insurer is conducting its business in a sound and prudent manner as prescribed by the
Insurance Act. Such failure to comply with the requirements of the Insurance Code of Conduct could result in the Authority
exercising its powers of intervention and investigation and will be a factor in calculating the operational risk charge applicable
in accordance with the insurer's BSCR model or approved internal model.
Certain Other Bermuda Law Considerations
Although AGL is incorporated in Bermuda, it is classified as a non-resident of Bermuda for exchange control purposes
by the Authority. Pursuant to its non-resident status, AGL may engage in transactions in currencies other than Bermuda dollars
and there are no restrictions on its ability to transfer funds (other than funds denominated in Bermuda dollars) in and out of
Bermuda or to pay dividends to U.S. residents who are holders of its common shares.
Under Bermuda law, "exempted" companies are companies formed for the purpose of conducting business outside
Bermuda from a principal place of business in Bermuda. As an "exempted" company, AGL (as well as each of AG Re and
AGRO) may not, without the express authorization of the Bermuda legislature or under a license or consent granted by the
Minister of Finance (the Minister), participate in certain business and other transactions, including: (1) the acquisition or
holding of land in Bermuda (except that held by way of lease or tenancy agreement which is required for its business and held
for a term not exceeding 50 years, or which is used to provide accommodation or recreational facilities for its officers and
employees and held with the consent of the Minister, for a term not exceeding 21 years), (2) the taking of mortgages on land in
Bermuda to secure a principal amount in excess of $50,000 unless the Minister consents to a higher amount, and (3) the
carrying on of business of any kind or type for which it is not duly licensed in Bermuda, except in certain limited
circumstances, such as doing business with another exempted undertaking in furtherance of AGL's business carried on outside
Bermuda.
The Bermuda government actively encourages foreign investment in "exempted" entities like AGL that are based in
Bermuda, but which do not operate in competition with local businesses. AGL is not currently subject to taxes computed on
profits or income or computed on any capital asset, gain or appreciation. Bermuda companies pay, as applicable, annual
government fees, business fees, payroll tax and other taxes and duties. See "—Tax Matters—Taxation of AGL and Subsidiaries
—Bermuda."
Special considerations apply to the Company's Bermuda operations. Under Bermuda law, non-Bermudians, other than
spouses of Bermudians and individuals holding permanent resident certificates or working resident certificates, are not
permitted to engage in any gainful occupation in Bermuda without a work permit issued by the Bermuda government. A work
permit is only granted or extended if the employer can show that, after a proper public advertisement, no Bermudian, spouse of
a Bermudian or individual holding a permanent resident certificate or working resident certificate is available who meets the
minimum standards for the position. A waiver from advertising is automatically granted in respect of any chief executive
officer position and other chief officer positions. The employer can also make a request for a waiver from the requirement to
advertise in certain other cases, as expressed in the Bermuda government's work permit policies. Currently, all of the
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Company's Bermuda based professional employees who require work permits have been granted work permits by the Bermuda
government.
United Kingdom
This section concerns AGE and its affiliates Assured Guaranty (UK) plc (AGUK), AGLN and Assured Guaranty
Finance Overseas Ltd (AGFOL), each of which is regulated in the U.K., as well as Assured Guaranty Credit Protection Ltd.
(AGCPL), which is an authorized representative of AGE. AGE, AGUK and AGLN are regulated by the PRA as insurers.
AGUK has been placed into runoff. AGLN (formerly MBIA UK Insurance Limited and renamed on January 13, 2017) was
acquired as an authorized insurer in run-off by AGC on January 10, 2017. The Company is actively working to combine AGE,
AGUK, AGLN and its affiliate CIFG Europe S.A. (CIFGE). Any such combination is subject to regulatory and court approvals.
As a result, the Company cannot predict when, or if, such combination will be completed, and, if so, what conditions may be
attached. See Part II, Item 8, Financial Statements and Supplementary Data, Note 1, Business and Basis and Presentation, for
additional information on the proposed combination.
General
Each of AGE, AGUK, AGLN and AGFOL are subject to the U.K.'s Financial Services and Markets Act 2000 (FSMA),
which covers financial services relating to deposits, insurance, investments and certain other financial products.
Under FSMA, effecting or carrying out contracts of insurance by way of business in the U.K. each constitutes a
“regulated activity” requiring authorization by the appropriate regulator. An authorized insurance company must have
permission for each class of insurance business it intends to write.
Insurance companies in the U.K. are authorized and regulated by the PRA and the Financial Conduct Authority (FCA).
The PRA and the FCA were established on April 1, 2013 and are the main regulatory authorities responsible for financial
regulation in the U.K. These two regulatory bodies cover the following areas:
•
•
the PRA, a part of the Bank of England, is responsible for prudential regulation of certain classes of financial
services firms (which includes insurance companies, among others), and
the FCA is responsible for the conduct of business regulation of all firms and the regulation of market conduct and
the prudential regulation of all non-PRA firms.
While the two regulators coordinate and cooperate in some areas, they have separate and independent mandates and separate
rule-making and enforcement powers. AGE, AGUK and AGLN are regulated by both the PRA and the FCA. AGFOL is
regulated by the FCA.
The PRA carries out the prudential supervision of insurance companies through a variety of methods, including the
collection of information from statistical returns, the review of accountants' reports and insurers' annual reports and disclosures,
visits to insurance companies and regular formal interviews. The PRA takes a risk-based approach to the supervision of
insurance companies.
The primary source of rules relating to the prudential supervision of AGE, AGUK and AGLN is the Solvency II
Directive (Directive 2009/138/EC) as amended by the Omnibus II Directive (Directive 2014/51/EU) (together, Solvency II),
which came into force and effect on January 1, 2016. The PRA remains the prudential regulator for U.K. insurers such as AGE,
AGUK and AGLN under Solvency II. Solvency II provides rules on capital adequacy, governance and risk management and
regulatory reporting and public disclosure. It is intended to align capital requirements with the risk profile of each EEA
insurance company and to ensure adequate diversification of an insurer's or reinsurer's exposures to any credit risks of its
reinsurers. Each of AGE, AGUK and AGLN has calculated its minimum required capital according to the Solvency II criteria
and is in compliance.
The PRA applies threshold conditions, which insurers must meet, and against which the PRA assesses them on a
continuous basis. At a high level, these conditions are that:
•
an insurer's head office, and in particular its mind and management, must be in the U.K. if it is incorporated in the
U.K.;
26
•
•
•
an insurer's business must be conducted in a prudent manner — in particular, the insurer must maintain
appropriate financial and non-financial resources;
the insurer must be fit and proper, and be appropriately staffed; and
the insurer and its group must be capable of being effectively supervised.
The PRA assesses, on an ongoing basis, whether insurers are acting in a manner consistent with safety and soundness
and appropriate policyholder protection, and so whether they meet, and are likely to continue to meet, the threshold conditions.
It weights its supervision towards those issues and those insurers that, in its judgment, pose the greatest risk to its objectives. It
is forward-looking, assessing its objectives not just against current risks, but also against those that could plausibly arise further
ahead and will rely significantly on judgments based on evidence and analysis. Its risk assessment framework looks at the
potential impact of failure of the insurer, its risk context and mitigating factors.
The key EU legislation that is relevant to AGFOL is the Markets in Financial Instruments Directive (MiFID), which
harmonizes the regulatory regime for investment services and activities across the EEA and the Insurance Mediation Directive
(which is due to be replaced during 2018 by the Insurance Distribution Directive). AGFOL’s MiFID activities are limited to
receiving and transmitting orders and giving investment advice and it cannot hold client money. Accordingly, although it is
subject to MiFID, AGFOL is exempt from the Capital Requirements Directive (CRD) and Capital Requirements Regulations,
which are the EU regulations on capital for certain MiFID firms. AGFOL has therefore calculated its minimum required capital
according to the FCA’s rules for non-CRD firms, and is in compliance.
Currently, the regulatory regime in the U.K. must be consistent with relevant EU legislation, which is either directly
applicable in, or must be implemented into national law by, all EU member states. The key EU legislation that is relevant to
AGE, AGUK and AGLN is Solvency II, which provides the framework for the solvency and supervisory regime for insurers in
the EEA. The key EU legislation that is relevant to AGFOL is MiFID.
Position of U.K. Regulated Entities within the AGL Group
AGE is authorized by the PRA to effect and carry out certain classes of general insurance, specifically: classes 14
(credit), 15 (suretyship) and 16 (miscellaneous financial loss) for eligible counterparties and professional clients only (i.e., not
retail clients). This scope of permission is sufficient to enable AGE to effect and carry out financial guaranty insurance and
reinsurance. The insurance and reinsurance businesses of AGE are subject to close supervision by the PRA. AGE also has
permission to arrange and advise on transactions it guarantees, and to take deposits in the context of its insurance business.
Following the Company's decision in 2010 to place AGUK into run-off, the Company has been utilizing AGE as the
entity from which to write business in the EEA. It was agreed between management and AGE's then regulator, the Financial
Services Authority (now the PRA), that any new business written by AGE would be guaranteed using a co-insurance structure
pursuant to which AGE would co-insure municipal and infrastructure transactions with AGM, and structured finance
transactions with AGC. AGE's financial guaranty for each transaction covers a proportionate share (expected to be
approximately 3 to 10%) of the total exposure, and AGM or AGC, as the case may be, guarantees the remaining exposure under
the transaction (subject to compliance with EEA licensing requirements). AGM or AGC, as the case may be, will also provide a
second-to-pay guaranty to cover AGE's financial guaranty.
AGE also is the principal of AGCPL. AGCPL is not PRA or FCA authorized, but is an appointed representative of
AGE. This means AGCPL can carry on insurance mediation activities without a license, because AGE has regulatory
responsibility for it.
AGCPL is subject to the requirements of Regulation (EU) No 648/2012 of the European Parliament and of the Council
of July 4, 2012 on OTC derivatives, central counterparties and trade repositories (EMIR) which, as a European regulation, is
directly applicable in all the member states of the EU. AGCPL is the only European entity within the AGL group which has
entered into derivative contracts and as such it is the only entity in the group which is directly subject to EMIR. AGCPL has
notified the European Securities and Markets Authority (ESMA) and the FCA of its status under EMIR as a non-financial
counterparty which has exceeded the clearing threshold (an NFC+) as described in Article 10 of EMIR. AGCPL is subject to
certain requirements under EMIR with respect to its portfolio of derivative contracts including: (i) the requirement to centrally
clear standardized OTC derivatives (although AGCPL does not currently enter into such derivatives, and so this requirement is
not currently relevant); (ii) an obligation to employ certain risk mitigation techniques relating to derivatives that cannot be
centrally cleared; and (iii) a requirement to report derivative transactions to a trade depository. The Company is aware that
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circumstances exist in which EMIR may apply directly to non-European entities when transacting derivatives, but has
determined that these circumstances do not apply to the non-European entities in AGL’s group.
AGFOL, a subsidiary of AGL, is authorized by the FCA to carry out designated investment business activities
(including insurance mediation) in that it may “advise on investments (except on pension transfers and pension opt outs)”
relating to most investment instruments. In addition, it may arrange or bring about transactions in investments and make
“arrangements with a view to transactions in investments.” In all cases, it may deal only with clients who are eligible
counterparties or professional customers (i.e., not retail clients), or, when arranging in relation to insurance contracts,
commercial customers. AGFOL is not authorized as an insurer and does not itself take risk in the transactions it arranges or
places, and may not hold funds on behalf of its customers. AGFOL's permissions also allow it to introduce business to AGC
and AGM, so that AGFOL can arrange financial guaranties underwritten by AGC and AGM.
Solvency II and Solvency Requirements
In the U.K., Solvency II has been transposed into national law through changes to existing provisions in the FCA and
the PRA’s respective handbooks and rulebook and through amendments to primary legislation. The Solvency II “Delegated
Acts”, which set out more detailed rules underlying Solvency II have direct effect in all EEA member states, including the U.K.
Among other things, Solvency II introduced a revised risk-based prudential regime which includes the following "Pillar 1"
regulatory capital rules:
•
•
•
assets and liabilities are generally to be valued at their market value;
the amount of required economic capital is intended to ensure, with a probability of 99.5%, that regulated firms
are able to meet their obligations to policyholders and beneficiaries over the following 12 months; and
reinsurance recoveries will be treated as a separate asset (rather than being netted against the underlying insurance
liabilities).
AGE, AGLN and AGUK have agreed with the PRA that they will use the "Standard Formula" prescribed by Solvency II for
calculation of their capital requirements.
In addition to regulatory capital rules, Solvency II also contains a number of “Pillar 2” qualitative requirements,
obliging firms to develop and embed systems to identify, measure and proactively manage the risks they are, or may be,
exposed to. Among other things, firms must:
•
•
•
have in place an effective system of governance that provides for the sound and prudent management of its business;
establish effective risk-management systems; and
take a comprehensive approach to considering their risks through an Own Risk and Solvency Assessment (ORSA) as
proportionate to the nature, scale and complexity of the risks inherent in their business.
“Pillar 3” reporting and disclosure requirements also exist, including a requirement to publish a public Solvency and
Financial Condition Report (SFCR) and a private Regular Supervisory Report (RSR). For more information on reporting
requirements and the ORSA, see “Reporting Requirements” below.
Solvency II contains a regime for the supervision of groups, including groups in which the parent undertaking has its
head office in a country that is outside the EEA. The treatment of such groups in part depends on whether the jurisdiction in
which the non-EEA parent has its head office is determined to have a supervisory regime which is equivalent to the Solvency II
regime. In the absence of such a determination, the Solvency II rules on supervision apply to the group on a worldwide basis,
unless the PRA elects to apply “other methods” which ensure appropriate supervision. AGE, AGLN and AGUK are direct or
indirect subsidiaries of U.S. parent companies. As AGLN, AGUK and CIFGE are subsidiaries of AGE, the group regime also
applies in respect of the sub-group comprising these four companies.
The PRA has issued a Direction to AGE, AGLN and AGUK which confirms the “other methods” that the PRA will
apply to ensure appropriate supervision. These include, among other things, requirements for AGE, AGLN and AGUK to notify
the PRA in advance of any material changes in their intra-group arrangements and any payments of dividends or capital
extractions to a group undertaking outside the EEA. AGE, AGLN and AGUK must also provide the PRA with certain other
information, such as internal and external solvency, capital adequacy and risk assessment reports. The Direction applies from
January 1, 2016 until January 1, 2019, unless it is revoked earlier or no longer applicable.
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Restrictions on Dividend Payments
U.K. company law prohibits each of AGE, AGUK, AGLN and AGFOL from declaring a dividend to its shareholders
unless it has “profits available for distribution.” The determination of whether a company has profits available for distribution
is based on its accumulated realized profits less its accumulated realized losses. While the U.K. insurance regulatory laws
impose no statutory restrictions on a general insurer's ability to declare a dividend, the PRA's capital requirements may in
practice act as a restriction on dividends for AGE, AGUK and AGLN.
Reporting Requirements
U.K. insurance companies must prepare their financial statements under the Companies Act 2006, which requires the
filing with Companies House of audited financial statements and related reports. In addition, as from January 1, 2016, the
reporting requirements for U.K. insurance companies were modified by Solvency II. AGE, AGUK and AGLN are required to
produce certain key reports including an annual SFCR, RSR and an ORSA, the latter as part of the so-called “Pillar 2”
individual capital assessment requirements.
The PRA will review each firm’s ORSA and then consider whether in its view the firm needs to hold capital in excess
of its Pillar 1 capital (see “Solvency II and Solvency Requirements” above) and, if so, may impose a “capital add-on”. The
prescribed information to be contained in the ORSA, as well as the frequency with which the assessment must be carried out, is
subject to guidance issued by the European Insurance and Occupational Pensions Authority (EIOPA) in September 2015 and a
supervisory statement issued by the PRA in October 2015. The PRA has advised AGE, AGUK and AGLN that it is not
imposing a capital add-on for those companies at this time. The PRA may determine to impose a capital add-on in relation to
AGE, AGUK and AGLN in the future.
Supervision of Management
AGE, AGUK and AGLN are subject to the rules contained in the Senior Insurance Managers Regime (SIMR). This
requires that individuals undertaking particular roles need to be registered with the PRA as undertaking a “Senior Insurance
Manager Function”. This broadly includes individuals undertaking the executive functions and the oversight functions of each
entity. Directors of those entities not serving in the roles specified in the SIMR are required to be “approved persons” with the
FCA (as detailed further in respect of AGFOL below).
In respect of AGFOL, individuals who perform one or more “controlled functions” such as significant influence
functions (which includes all board members and other senior managers) or the customer function within authorized firms must
be approved by the FCA to carry out that function. Individuals performing these functions are “Approved Persons” for the
purpose of Part V of FSMA and staff performing these specified “controlled functions” within an authorized firm must be
approved by the FCA.
Change of Control
Under FSMA, when a person decides to acquire or increase “control” of a U.K. authorized firm (including an
insurance company) they must give the PRA notice in writing before making the acquisition. The PRA has up to 60 working
days (without including any period of interruption) in which to assess a change of control case. Any person (a company or
individual) that directly or indirectly acquires 10% or 20% (depending on the type of firm, the “Control Percentage Threshold”)
or more of the shares, or is entitled to exercise or control the exercise of the Control Percentage Threshold or more of the voting
power, in a U.K. authorized firm or its parent undertaking is considered to “acquire control” of the authorized firm. Broadly
speaking, the 10% threshold applies to banks, insurers and reinsurers (but not brokers) and MiFID investment firms, and the
20% threshold to insurance brokers and certain other firms that are non-directive firms.
Intervention and Enforcement
The PRA has extensive powers to intervene in the affairs of an authorized firm, culminating in the sanction of the
suspension of authorization to carry on a regulated activity. The PRA can also vary or cancel a firm's permissions under its own
initiative if it considers that the firm is failing, or is likely to fail, to satisfy the Threshold Conditions. FSMA gives the PRA
significant investigation and enforcement powers. It also gives the PRA a rule-making power, under which it makes the various
rules that constitute its Rulebook.
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The PRA also has the power to prosecute criminal offenses arising under FSMA. The FCA has the power to prosecute
offenses under FSMA and to prosecute insider dealing under Part V of the Criminal Justice Act of 1993, and breaches by
authorized firms of money laundering and terrorist financing regulations.
“Passporting”
EU directives currently allow AGE, AGUK, AGLN and AGFOL to conduct business in EU states other than the U.K.
where they are authorized by the PRA or FCA under a single market directive. This right extends to the EEA. A firm taking
advantage of a right under a single market directive to conduct business in another EEA state can rely on its "home state"
authorization. This ability to operate in other jurisdictions of the EEA on the basis of home state authorization and supervision
is sometimes referred to as “passporting.” Each of AGE, AGUK, AGLN and AGFOL is passported to conduct business in EEA
states other than the U.K. Passporting is not applicable to firms not authorized in the EEA, such as AGM and AGC.
Accordingly, the co-insurance model described above cannot be “passported” throughout the EEA. Instead, it is a question of
local law in each EEA member state as to whether AGM's or AGC’s participation in a co-insurance structure, protecting
insureds or risks located in that jurisdiction, would amount to the conduct of insurance business in that jurisdiction. (See also
“U.K. referendum vote to leave the EU” below.)
Fees and Levies
Each of AGE, AGUK, AGLN and AGFOL is subject to regulatory fees and levies based on its gross premium income
and gross technical liabilities. These fees are collected by the FCA (though they relate to regulation by both the PRA and the
FCA). The PRA also requires authorized firms, including authorized insurers, to participate in an investors' protection fund,
known as the Financial Services Compensation Scheme. The Financial Services Compensation Scheme was established to
compensate consumers of financial services firms, including the buyers of insurance, against failures in the financial services
industry. Eligible claimants (identified in the Compensation Sourcebook of the PRA Handbook) may be compensated by the
Financial Services Compensation Scheme when an authorized insurer is unable, or likely to be unable, to satisfy policyholder
claims. General insurance in class 14 (credit) is not protected by the Financial Services Compensation Scheme, nor is
reinsurance in any class; however, other direct insurance classes written by AGUK and AGE are covered (namely, classes 15
(suretyship) and 16 (miscellaneous financial loss)).
Material Contracts
AGE’s New York affiliate, AGM, currently provides support to AGE, through a quota share and excess of loss
reinsurance agreement (the Reinsurance Agreement) and a net worth maintenance agreement (the AGE Net Worth Agreement).
For transactions closed prior to 2011, AGE typically guaranteed all of the guaranteed obligations directly and AGM reinsured
under the quota share cover of the Reinsurance Agreement approximately 92% of AGE's retention after cessions to other
reinsurers. In 2011, AGE and AGM implemented a co-guarantee structure pursuant to which (i) AGE directly guarantees a
portion of the guaranteed obligations in an amount equal to what would have been AGE's pro rata retention percentage under
the quota share cover, (ii) AGM directly guarantees the balance of the guaranteed obligations, and (iii) AGM also provides a
second-to-pay guarantee for AGE's portion of the guaranteed obligations. AGM's ability to provide such direct guaranties
outside of the U.K. depends on the law of the insured's domicile. See "Passporting" above.
Under the excess of loss cover of the Reinsurance Agreement, AGM pays AGE quarterly the amount by which (i) the
sum of (a) AGE’s incurred losses calculated in accordance with U.K. GAAP as reported by AGE in its financial returns filed with
the PRA and (b) AGE’s paid losses and LAE, in both cases net of all other performing reinsurance, including the reinsurance
provided by the Company under the quota share cover of the Reinsurance Agreement, exceeds (ii) an amount equal to (a) AGE’s
capital resources under U.K. law minus (b) 110% of the greatest of the amounts as may be required by the PRA as a condition for
AGE to maintain its authorization to carry on a financial guarantee business in the U.K. The Reinsurance Agreement permits AGE
to terminate the Reinsurance Agreement upon the following events: a downgrade of AGM’s ratings by Moody’s below Aa3 or by
S&P below AA- if AGM fails to restore its rating(s) to the required level within a prescribed period of time; AGM's insolvency;
failure by AGM to maintain the minimum capital required by its domiciliary jurisdiction; or AGM filing a petition in bankruptcy,
going into liquidation or rehabilitation or having a receiver appointed.
The quota share and excess loss covers each exclude transactions guaranteed by AGE on or after July 1, 2009 that are
not municipal, utility, project finance or infrastructure risks or similar types of risks.
The Reinsurance Agreement also contemplates the establishment of collateral by AGM to support AGM’s reinsurance
obligations to AGE. In December 2014, to satisfy the PRA’s collateral requirements, AGM and AGE entered into a trust
agreement pursuant to which AGM established and deposited assets into a reinsurance trust account for the benefit of AGE.
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AGM’s collateral requirement was measured during 2015, as of the end of each calendar quarter, by (i) using the PRA’s FG
Benchmark Model to calculate at the 99.5% confidence interval the losses expected to be borne collectively by AGE’s three
affiliated reinsurers, AGM, AG Re and AGRO; (ii) deducting from such calculation AGE’s capital resources under such model;
and (iii) requiring AGM, AG Re and AGRO collectively to maintain collateral equal to fifty percent (50%) of such difference,
i.e., the excess of AGM’s, AG Re’s and AGRO’s assumed modeled losses over AGE’s capital resources. As of January 1, 2016,
the PRA agreed to allow AGM’s collateral requirement to be determined using AGE’s internal capital requirement model
instead of the FG Benchmark Model under the same formula described above. This change in the calculation of AGM's
required collateral was reflected in an amendment to the Reinsurance Agreement approved by the NYDFS and made effective
in April 2016.
Pursuant to the AGE Net Worth Agreement, AGM is obligated to cause AGE to maintain capital resources equal to 110%
of the greatest of the amounts as may be required by the PRA as a condition for AGE to maintain its authorization to carry on a
financial guarantee business in the U.K., provided that AGM's contributions (a) do not exceed 35% of AGM's policyholders'
surplus on an accumulated basis as determined by the laws of the State of New York, and (b) are in compliance with Section 1505
of the New York Insurance Law. AGM has never been required to make any contributions to AGE's capital under the AGE Net
Worth Agreement or the prior net worth maintenance agreement. With the approval of the NYDFS, AGE and AGM amended the
AGE Net Worth Agreement effective in April 2016 to provide for use of the internal capital requirement model.
AGUK’s former parent company, AGC, currently provides support to AGUK through a further amended and restated
quota share reinsurance agreement (the Quota Share Agreement), a further amended and restated excess of loss reinsurance
agreement (the XOL Agreement), and a further amended and restated net worth maintenance agreement (the AGUK Net Worth
Agreement). Pursuant to the Quota Share Agreement, AGUK cedes 90% of its financial guaranty insurance and reinsurance
exposure to AGC. Pursuant to the XOL Agreement, AGC indemnifies AGUK for 100% of losses (net of the quota share
reinsurance agreement discussed above) incurred by AGUK in excess of an amount equal to (a) AGUK’s capital resources
minus (b) 110% of the greatest of the amounts as may be required by the PRA as a condition for AGUK maintaining its
authorization to carry on a financial guarantee business in the U.K. Pursuant to the AGUK Net Worth Agreement, if AGUK's
net worth falls below 110% of the minimum level of capital required by the PRA, AGC must invest additional funds in order to
bring the capital of AGUK back into compliance with the required amount.
In 2016, AGC and AGUK reached an agreement with the PRA that, in order for AGC to secure its outstanding
reinsurance of AGUK under the Quota Share Agreement and XOL Agreement, AGC shall post as collateral its share of AGUK-
guaranteed triple-X insurance bonds that have been purchased by AGC for loss mitigation and an additional amount to be
determined by (i) using AGUK’s internal capital requirement model to calculate at the 99.5% confidence interval the losses
expected to be borne by AGC for the exposures it has assumed from AGUK that do not have loss reserves (non-reserve
exposures); (ii) adding the amount of loss reserves ceded by AGUK to AGC under U.K. GAAP; (iii) subtracting from such sum
AGUK’s capital resources under its internal capital requirement model (the result of clauses (i) through (iii) being referred to as
the resulting amount); and then (iv) reducing the resulting amount by 50% of the portion of the resulting amount that was
contributed by the non-reserve exposures. Accordingly, AGC and AGUK entered into a trust agreement pursuant to which AGC
established a reinsurance trust account for the benefit of AGUK and deposits therein sufficient assets to satisfy the above-
described collateral requirement agreed with the PRA. This collateral requirement is reflected in the Quota Share Agreement
and XOL Agreement, which were approved by the MIA and made effective in July 2016.
Certain of these reinsurance and net worth maintenance agreements will be amended to address requests from the PRA
in connection with the proposed European business combination, including that the collateral requirement be calculated using a
different methodology, which may materially increase the amount of collateral that AGM and AGC will be required to post in
support of their respective reinsurance obligations to AGE and AGUK. The amendments are still being discussed with the PRA
and will require the approval of the NYDFS and the MIA before being implemented.
U.K. referendum vote to leave the European Union
On June 23, 2016, the U.K. voted in a national referendum to withdraw from the EU. The result of the referendum
does not legally oblige the U.K. to exit the EU (a so-called Brexit). However, on March 29, 2017 the U.K. government served
notice to the European Council of its desire to withdraw in accordance with Article 50 of the Treaty on European Union
(Article 50).
Article 50 envisages a negotiation period leading to an exit on a mutually agreed date. However, in the absence of
such mutual agreement, the default date for exit is two years after the member state serves the Article 50 notice. EU treaties
will therefore cease to apply to the U.K. on the earlier of (i) the entry into force of any withdrawal agreement or (ii) two years
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after the giving of notice (unless the U.K. and all remaining Member States unanimously agree to extend the negotiation
period).
As part of the negotiations, the U.K. is seeking a transition period during which it will have ceased to be a member
state of the EU, but will continue to have rights and obligations under EU law, other than the right to participate formally in the
EU decision making process. The EU published a paper setting out its terms for a transition period on January 29, 2018, one of
which was that the transition period should not last beyond December 31, 2020.
Until the U.K. leaves the EU, EU legislation will remain in force and the role of EU institutions will be unchanged. On
withdrawal of the U.K. from the EU, in the absence of any agreement to the contrary, all treaty obligations would lapse,
directives, directly effective decisions and regulations (as well as rulings of the Court of Justice of the EU) would cease to
apply and the competencies of EU institutions would fall away. The EU's paper on the transition arrangements published on
January 29, 2018 envisages EU legislation continuing to apply to the UK throughout the transition period.
The U.K. Government has proposed legislation to bring all aspects of European law into U.K. law prior to the U.K.
exiting the EU. It seems most likely, given the relatively short timescales available, that initially Solvency II will be brought
into U.K. law in its current form. Retaining Solvency II in its current form would also make it easier for the U.K. to obtain a
ruling of “equivalence” from the European Commission under Solvency II, which would accord insurers certain advantages
when it comes to the Solvency II rules on reinsurance, the calculation of group capital and group supervision.
The U.K. Government could take time to review whether there might be any changes which are desired on a national
level. The Treasury Select Committee of the House of Commons has conducted a review of Solvency II against the backdrop of
Brexit, taking into account certain features which are regarded as unsuitable by the U.K. industry. The results of the Treasury
Select Committee’s work are being considered by the PRA and may feed in to future discussions about potential changes to UK
insurance regulation.
Any changes to UK insurance regulation following Brexit could reduce the chances of the U.K. obtaining (or
subsequently preserving) a ruling of equivalence.
A further question arising from Brexit is whether U.K. authorised financial services firms such as AGE and AGUK
will continue to enjoy passporting rights to the other 27 EEA states after Brexit. In the event that passporting rights are not
retained, Assured Guaranty is assessing a number of options in order to continue with the ability to write new business, and to
run off existing business, in those EEA states.
France
In connection with the CIFG Acquisition in July 2016, the Company acquired a French insurer called CIFG Europe
S.A. which is now in run off. CIFGNA had reinsured all of CIFGE’s outstanding financial guaranty business and also had
issued a “second-to-pay policy” pursuant to which CIFGNA guaranteed the full and complete payment of any shortfall in
amounts due from CIFGE on its insured portfolio. AGC assumed these obligations as part of the CIFGNA merger with and into
AGC. CIFGE remains a separate subsidiary in run off, now owned by AGE. Prior to the CIFG Acquisition, CIFGE had
prepared a run off plan which was approved by its French regulator, the Autorité de Contrôle Prudentiel et de Résolution
(ACPR). CIFGE has been in run off for more than two years, and therefore has surrendered its license under French law to
write new insurance business. The withdrawal of the license has no practical impact on the level of supervision exercised by
the ACPR over CIFGE as an insurer.
Tax Matters
United States Tax Reform
Recent tax reform commonly referred to as the 2017 Tax Cuts and Jobs Act (Tax Act) was passed by the U.S.
Congress and was signed into law on December 22, 2017. The Tax Act lowered the corporate U.S. tax rate to 21%, eliminated
the alternative minimum tax (AMT), limited the deductibility of interest expense and requires a one-time tax on a deemed
repatriation of untaxed earnings of non-U.S. subsidiaries. In the context of the taxation of U.S. property/casualty insurance
companies such as the Company, the Tax Act also modifies the loss reserve discounting rules and the proration rules that apply
to reduce reserve deductions to reflect the lower corporate income tax rate. In addition, the Tax Act included certain provisions
intended to eliminate certain perceived tax advantages of companies (including insurance companies) that have legal domiciles
outside the United States but have certain U.S. connections and United States persons investing in such companies. For
example, the Tax Act includes a base erosion anti-avoidance tax (BEAT) that could make affiliate reinsurance between United
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States and non-U.S. members of the Company's group economically unfeasible. In addition, the Tax Act introduced a current
tax on global intangible low taxed income that may result in an increase in U.S. corporate income tax imposed on the
Company's U.S. group members with respect to earnings of their non-U.S. subsidiaries. As discussed in more detail below, the
Tax Act also revised the rules applicable to passive foreign investment companies (PFICs) and controlled foreign corporations
(CFCs). Although the Company is currently unable to predict the ultimate impact of the Tax Act on its business, shareholders
and results of operations, it is possible that the Tax Act may increase the U.S. federal income tax liability of U.S. members of
the group that cede risk to non-U.S. group members and may affect the timing and amount of U.S. federal income taxes
imposed on certain U.S. shareholders. Further, it is possible that other legislation could be introduced and enacted by the
current Congress or future Congresses that could have an adverse impact on the Company. Additionally, tax laws and
interpretations regarding whether a company is engaged in a U.S. trade or business or whether a company is a CFC or a PFIC
or has related person insurance income (RPII) are subject to change, possibly on a retroactive basis. Currently there are only
proposed regulations regarding the application of the PFIC rules to an insurance company. Additionally, the regulations
regarding RPII have been in proposed form since 1991. New regulations or pronouncements interpreting or clarifying such
rules may be forthcoming. The Company cannot be certain if, when or in what form such regulations or pronouncements may
be provided and whether such guidance will have a retroactive effect. See Part II, Item 8, Financial Statements and
Supplementary Data, Note 1, Business and Basis of Presentation and Note 12, Income Taxes.
Taxation of AGL and Subsidiaries
Bermuda
Under current Bermuda law, there is no Bermuda income, corporate or profits tax or withholding tax, capital gains tax
or capital transfer tax payable by AGL or its Bermuda subsidiaries. AGL, AG Re and AGRO have each obtained from the
Minister of Finance under the Exempted Undertakings Tax Protection Act 1966, as amended, an assurance that, in the event
that Bermuda enacts legislation imposing tax computed on profits, income, any capital asset, gain or appreciation, or any tax in
the nature of estate duty or inheritance, then the imposition of any such tax shall not be applicable to AGL, AG Re or AGRO or
to any of their operations or their shares, debentures or other obligations, until March 31, 2035. This assurance is subject to the
proviso that it is not to be construed so as to prevent the application of any tax or duty to such persons as are ordinarily resident
in Bermuda, or to prevent the application of any tax payable in accordance with the provisions of the Land Tax Act 1967 or
otherwise payable in relation to any land leased to AGL, AG Re or AGRO. AGL, AG Re and AGRO each pays annual Bermuda
government fees, and AG Re and AGRO pay annual insurance license fees. In addition, all entities employing individuals in
Bermuda are required to pay a payroll tax and there are other sundry taxes payable, directly or indirectly, to the Bermuda
government.
United States
AGL has conducted and intends to continue to conduct substantially all of its operations outside the U.S. and to limit
the U.S. contacts of AGL and its non-U.S. subsidiaries (except AGRO, which elected to be taxed as a U.S. corporation) so that
they should not be engaged in a trade or business in the U.S. A non-U.S. corporation, such as AG Re, that is deemed to be
engaged in a trade or business in the United States would be subject to U.S. income tax at regular corporate rates, as well as the
branch profits tax, on its income which is treated as effectively connected with the conduct of that trade or business, unless the
corporation is entitled to relief under the permanent establishment provision of an applicable tax treaty, as discussed below.
Such income tax, if imposed, would be based on effectively connected income computed in a manner generally analogous to
that applied to the income of a U.S. corporation, except that a non-U.S. corporation would generally be entitled to deductions
and credits only if it timely files a U.S. federal income tax return. AGL, AG Re and certain of the other non-U.S. subsidiaries
have and will continue to file protective U.S. federal income tax returns on a timely basis in order to preserve the right to claim
income tax deductions and credits if it is ever determined that they are subject to U.S. federal income tax. The highest marginal
federal income tax rates currently are 21% for a corporation's effectively connected income and 30% for the "branch profits"
tax.
Under the income tax treaty between Bermuda and the U.S. (the Bermuda Treaty), a Bermuda insurance company
would not be subject to U.S. income tax on income found to be effectively connected with a U.S. trade or business unless that
trade or business is conducted through a permanent establishment in the U.S. AG Re currently intends to conduct its activities
so that it does not have a permanent establishment in the U.S.
An insurance enterprise resident in Bermuda generally will be entitled to the benefits of the Bermuda Treaty if
(i) more than 50% of its shares are owned beneficially, directly or indirectly, by individual residents of the U.S. or Bermuda or
U.S. citizens and (ii) its income is not used in substantial part, directly or indirectly, to make disproportionate distributions to,
or to meet certain liabilities of, persons who are neither residents of either the U.S. or Bermuda nor U.S. citizens.
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Non-U.S. insurance companies carrying on an insurance business within the U.S. have a certain minimum amount of
effectively connected net investment income, determined in accordance with a formula that depends, in part, on the amount of
U.S. risk insured or reinsured by such companies. If AG Re or another of the Company's Bermuda subsidiaries is considered to
be engaged in the conduct of an insurance business in the U.S. and is not entitled to the benefits of the Bermuda Treaty in
general (because it fails to satisfy one of the limitations on treaty benefits discussed above), the Internal Revenue Code of 1986,
as amended (the Code), could subject a significant portion of AG Re's or another of the Company's Bermuda subsidiary's
investment income to U.S. income tax.
AGL, as a U.K. tax resident, would not be subject to U.S. income tax on any income found to be effectively connected
with a U.S. trade or business under the income tax treaty between the U.S. and the U.K. (the U.K. Treaty), unless that trade or
business is conducted through a permanent establishment in the United States. AGL intends to conduct its activities so that it
does not have a permanent establishment in the United States.
Non-U.S. corporations not engaged in a trade or business in the U.S., and those that are engaged in a U.S. trade or
business with respect to their non-effectively connected income are nonetheless subject to U.S. withholding tax on certain
"fixed or determinable annual or periodic gains, profits and income" derived from sources within the U.S. (such as dividends
and certain interest on investments), subject to exemption under the Code or reduction by applicable treaties. The standard non-
treaty rate of U.S. withholding tax is currently 30%. The Bermuda Treaty does not reduce the U.S. withholding rate on U.S.-
sourced investment income. The U.K. Treaty reduces or eliminates U.S. withholding tax on certain U.S. sourced investment
income, including dividends from U.S. companies to U.K. resident persons entitled to the benefit of the U.K. Treaty.
The U.S. also imposes an excise tax on insurance and reinsurance premiums paid to non-U.S. insurers with respect to
risk of a U.S. person located wholly or partly within the U.S. or risks of a foreign person engaged in a trade or business in the
U.S. which are located within the U.S. The rates of tax applicable to premiums paid are 4% for direct casualty insurance
premiums and 1% for reinsurance premiums.
AGRO has elected to be treated as a U.S. corporation for all U.S. federal tax purposes and, as such, AGRO, together
with AGL's U.S. subsidiaries, is subject to taxation in the U.S. at regular corporate rates.
If AGRO were to pay dividends to its U.S. holding company parent and that U.S. holding company were to pay
dividends to its Bermudian parent AG Re, such dividends would be subject to U.S. withholding tax at a rate of 30%.
United Kingdom
In November 2013, AGL became tax resident in the U.K. AGL remains a Bermuda-based company and its
administrative and head office functions continue to be carried on in Bermuda. The AGL common shares have not changed and
continue to be listed on the New York Stock Exchange (NYSE).
As a company that is not incorporated in the U.K., AGL will be considered tax resident in the U.K. only if it is
“centrally managed and controlled” in the U.K. Central management and control constitutes the highest level of control of a
company’s affairs. Effective November 6, 2013, the AGL Board intends to manage the affairs of AGL in such a way as to
maintain its status as a company that is tax resident in the U.K.
As a U.K. tax resident company, AGL is subject to the tax rules applicable to companies resident in the U.K.,
including the benefits afforded by the U.K.’s tax treaties.
As a U.K. tax resident, AGL is required to file a corporation tax return with Her Majesty’s Revenue & Customs
(HMRC). AGL will be subject to U.K. corporation tax in respect of its worldwide profits (both income and capital gains),
subject to any applicable exemptions. The rate of corporation tax is currently 19% and will be reduced to 17% with effect from
April 1, 2020. AGL has also registered in the U.K. to report its value added tax (VAT) liability. The current rate of VAT is 20%.
The dividends AGL receives from its direct subsidiaries should be exempt from U.K. corporation tax due to the
exemption in section 931D of the U.K. Corporation Tax Act 2009. In addition, any dividends paid by AGL to its shareholders
should not be subject to any withholding tax in the U.K. The non-U.K. resident subsidiaries intend to operate in such a manner
that their profits are outside the scope of the charge under the "controlled foreign companies" (CFC) regime. Accordingly,
Assured Guaranty does not expect any profits of non-U.K. resident members of the group to be attributed to AGL and taxed in
the U.K. under the CFC regime and has obtained clearance from HMRC confirming this on the basis of current facts and
intentions.
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Taxation of Shareholders
Bermuda Taxation
Currently, there is no Bermuda capital gains tax, or withholding or other tax payable on principal, interest or dividends
paid to the holders of the AGL common shares.
United States Taxation
This discussion is based upon the Code, the regulations promulgated thereunder and any relevant administrative
rulings or pronouncements or judicial decisions, all as in effect on the date hereof and as currently interpreted, and does not
take into account possible changes in such tax laws or interpretations thereof, which may apply retroactively. This discussion
does not include any description of the tax laws of any state or local governments within the U.S. or any foreign government.
The following summary sets forth the material U.S. federal income tax considerations related to the purchase,
ownership and disposition of AGL's shares. Unless otherwise stated, this summary deals only with holders that are U.S. Persons
(as defined below) who purchase and hold their shares and who hold their shares as capital assets within the meaning of
section 1221 of the Code. The following discussion is only a discussion of the material U.S. federal income tax matters as
described herein and does not purport to address all of the U.S. federal income tax consequences that may be relevant to a
particular shareholder in light of such shareholder's specific circumstances. For example, special rules apply to certain
shareholders, such as partnerships, insurance companies, regulated investment companies, real estate investment trusts, dealers
or traders in securities, tax exempt organizations, expatriates, persons that do not hold their securities in the U.S. dollar, persons
who are considered with respect to AGL or any of its non-U.S. subsidiaries as "United States shareholders" for purposes of the
CFC rules of the Code (generally, a U.S. Person, as defined below, who owns or is deemed to own 10% or more of the total
combined voting power or value of all classes of AGL or the stock of any of AGL's non-U.S. subsidiaries (i.e., 10% U.S.
Shareholders)), or persons who hold the common shares as part of a hedging or conversion transaction or as part of a short-sale
or straddle. Any such shareholder should consult their tax advisor.
If a partnership holds AGL's shares, the tax treatment of the partners will generally depend on the status of the partner
and the activities of the partnership. Partners of a partnership owning AGL's shares should consult their tax advisers.
For purposes of this discussion, the term "U.S. Person" means: (i) a citizen or resident of the U.S., (ii) a partnership or
corporation, created or organized in or under the laws of the U.S., or organized under any political subdivision thereof, (iii) an
estate the income of which is subject to U.S. federal income taxation regardless of its source, (iv) a trust if either (x) a court
within the U.S. is able to exercise primary supervision over the administration of such trust and one or more U.S. Persons have
the authority to control all substantial decisions of such trust or (y) the trust has a valid election in effect to be treated as a U.S.
Person for U.S. federal income tax purposes or (v) any other person or entity that is treated for U.S. federal income tax
purposes as if it were one of the foregoing.
Taxation of Distributions. Subject to the discussions below relating to the potential application of the CFC, RPII and
PFIC rules, cash distributions, if any, made with respect to AGL's shares will constitute dividends for U.S. federal income tax
purposes to the extent paid out of current or accumulated earnings and profits of AGL (as computed using U.S. tax principles).
Dividends paid by AGL to corporate shareholders will not be eligible for the dividends received deduction. To the extent such
distributions exceed AGL's earnings and profits, they will be treated first as a return of the shareholder's basis in the common
shares to the extent thereof, and then as gain from the sale of a capital asset.
AGL believes dividends paid by AGL on its common shares to non-corporate holders will be eligible for reduced rates
of tax at the rates applicable to long-term capital gains as "qualified dividend income," provided that AGL is not a PFIC and
certain other requirements, including stock holding period requirements, are satisfied.
Classification of AGL or its Non-U.S. Subsidiaries as a CFC. Each 10% U.S. Shareholder (as defined below) of a
non-U.S. corporation that is a CFC at any time during a taxable year that owns, directly or indirectly through non-U.S. entities,
shares in the non-U.S. corporation on the last day of the non-U.S. corporation's taxable year in which it is a CFC, must include
in its gross income, for U.S. federal income tax purposes, its pro rata share of the CFC's "subpart F income," even if the subpart
F income is not distributed. "Subpart F income" of a non-U.S. insurance corporation typically includes non-U.S. personal
holding company income (such as interest, dividends and other types of passive income), as well as insurance and reinsurance
income (including underwriting and investment income). A non-U.S. corporation is considered a CFC if 10% U.S. Shareholders
own (directly, indirectly through non-U.S. entities or by attribution by application of the constructive ownership rules of
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section 958(b) of the Code (i.e., constructively)) more than 50% of the total combined voting power of all classes of voting
stock of such non-U.S. corporation, or more than 50% of the total value of all stock of such corporation on any day during the
taxable year of such corporation. For purposes of taking into account insurance income, a CFC also includes a non-U.S.
insurance company in which more than 25% of the total combined voting power of all classes of stock (or more than 25% of
the total value of the stock) is owned by 10% U.S. Shareholders, on any day during the taxable year of such corporation. A
"10% U.S. Shareholder" is a U.S. Person who owns (directly, indirectly through non-U.S. entities or constructively) at least
10% of the total combined voting power or value of all classes of stock of the non-U.S. corporation. The Tax Act expanded the
definition of 10% U.S. Shareholder to include ownership by value (rather than just vote), so provisions in the Company's
organizational documents that cut back voting power to potentially avoid 10% U.S. Shareholder status will no longer mitigate
the risk of 10% U.S. Shareholder status. AGL believes that because of the dispersion of AGL's share ownership, no U.S. Person
who owns shares of AGL directly or indirectly through one or more non-U.S. entities should be treated as owning (directly,
indirectly through non-U.S. entities, or constructively), 10% or more of the total voting power or value of all classes of shares
of AGL or any of its non-U.S. subsidiaries. However, AGL’s shares may not be as widely dispersed as the Company believes
due to, for example, the application of certain ownership attribution rules, and no assurance may be given that a U.S. Person
who owns the Company's shares will not be characterized as a 10% U.S. Shareholder. In addition, the direct and indirect
subsidiaries of Assured Guaranty U.S. Holdings Inc. (AGUS) are characterized as CFCs and any subpart F income generated
will be included in the gross income of the applicable domestic subsidiaries in the AGL group.
The RPII CFC Provisions. The following discussion generally is applicable only if the RPII of AG Re or any other
non-U.S. insurance subsidiary that has not made an election under section 953(d) of the Code to be treated as a U.S.
corporation for all U.S. federal tax purposes or are CFCs owned directly or indirectly by AGUS (each a "Foreign Insurance
Subsidiary" or collectively, with AG Re, the "Foreign Insurance Subsidiaries") determined on a gross basis, is 20% or more of
the Foreign Insurance Subsidiary's gross insurance income for the taxable year and the 20% Ownership Exception (as defined
below) is not met. The following discussion generally would not apply for any taxable year in which the Foreign Insurance
Subsidiary's gross RPII falls below the 20% threshold or the 20% Ownership Exception is met. Although the Company cannot
be certain, it believes that each Foreign Insurance Subsidiary has been, in prior years of operations, and will be, for the
foreseeable future, either below the 20% threshold or in compliance with the requirements of 20% Ownership Exception for
each tax year.
RPII is any "insurance income" (as defined below) attributable to policies of insurance or reinsurance with respect to
which the person (directly or indirectly) insured is a "RPII shareholder" (as defined below) or a "related person" (as defined
below) to such RPII shareholder. In general, and subject to certain limitations, "insurance income" is income (including
premium and investment income) attributable to the issuing of any insurance or reinsurance contract which would be taxed
under the portions of the Code relating to insurance companies if the income were the income of a domestic insurance
company. For purposes of inclusion of the RPII of a Foreign Insurance Subsidiary in the income of RPII shareholders, unless
an exception applies, the term "RPII shareholder" means any U.S. Person who owns (directly or indirectly through non-U.S.
entities) any amount of AGL's common shares. Generally, the term "related person" for this purpose means someone who
controls or is controlled by the RPII shareholder or someone who is controlled by the same person or persons which control the
RPII shareholder. Control is measured by either more than 50% in value or more than 50% in voting power of stock applying
certain constructive ownership principles. A non-U.S. Insurance Subsidiary will be treated as a CFC under the RPII provisions
if RPII shareholders are treated as owning (directly, indirectly through non-U.S. entities or constructively) 25% or more of the
shares of AGL by vote or value.
RPII Exceptions. The special RPII rules do not apply if (i) at all times during the taxable year less than 20% of the
voting power and less than 20% of the value of the stock of AGL (the 20% Ownership Exception) is owned (directly or
indirectly through entities) by persons who are (directly or indirectly) insured under any policy of insurance or reinsurance
issued by a Foreign Insurance Subsidiary or related persons to any such person, (ii) RPII, determined on a gross basis, is less
than 20% of a Foreign Insurance Subsidiary's gross insurance income for the taxable year (the 20% Gross Income Exception),
(iii) a Foreign Insurance Subsidiary elects to be taxed on its RPII as if the RPII were effectively connected with the conduct of
a U.S. trade or business, and to waive all treaty benefits with respect to RPII and meet certain other requirements or (iv) a
Foreign Insurance Subsidiary elects to be treated as a U.S. corporation and waive all treaty benefits and meet certain other
requirements. The Foreign Insurance Subsidiaries do not intend to make either of these elections. Where none of these
exceptions applies, each U.S. Person owning or treated as owning any shares in AGL (and therefore, indirectly, in a Foreign
Insurance Subsidiary) on the last day of AGL's taxable year will be required to include in its gross income for U.S. federal
income tax purposes its share of the RPII for the portion of the taxable year during which a Foreign Insurance Subsidiary was a
CFC under the RPII provisions, determined as if all such RPII were distributed proportionately only to such U.S. Persons at
that date, but limited by each such U.S. Person's share of a Foreign Insurance Subsidiary's current-year earnings and profits as
reduced by the U.S. Person's share, if any, of certain prior-year deficits in earnings and profits. The Foreign Insurance
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Subsidiaries intend to operate in a manner that is intended to ensure that each qualifies for either the 20% Gross Income
Exception or 20% Ownership Exception.
Computation of RPII. For any year in which a Foreign Insurance Subsidiary does not meet the 20% Ownership
Exception or the 20% Gross Income Exception, AGL may also seek information from its shareholders as to whether beneficial
owners of shares at the end of the year are U.S. Persons so that the RPII may be determined and apportioned among such
persons; to the extent AGL is unable to determine whether a beneficial owner of shares is a U.S. Person, AGL may assume that
such owner is not a U.S. Person, thereby increasing the per share RPII amount for all known RPII shareholders. The amount of
RPII includable in the income of a RPII shareholder is based upon the net RPII income for the year after deducting related
expenses such as losses, loss reserves and operating expenses. If a Foreign Insurance Subsidiary meets the 20% Ownership
Exception or the 20% Gross Income Exception, RPII shareholders will not be required to include RPII in their taxable income.
Apportionment of RPII to U.S. Holders. Every RPII shareholder who owns shares on the last day of any taxable year
of AGL in which a Foreign Insurance Subsidiary does not meet the 20% Ownership Exception or the 20% Gross Income
Exception should expect that for such year it will be required to include in gross income its share of a Foreign Insurance
Subsidiary's RPII for the portion of the taxable year during which the Foreign Insurance Subsidiary was a CFC under the RPII
provisions, whether or not distributed, even though it may not have owned the shares throughout such period. A RPII
shareholder who owns shares during such taxable year but not on the last day of the taxable year is not required to include in
gross income any part of the Foreign Insurance Subsidiary's RPII.
Basis Adjustments. An RPII shareholder's tax basis in its common shares will be increased by the amount of any
RPII the shareholder includes in income. The RPII shareholder may exclude from income the amount of any distributions by
AGL out of previously taxed RPII income. The RPII shareholder's tax basis in its common shares will be reduced by the
amount of such distributions that are excluded from income.
Uncertainty as to Application of RPII. The RPII provisions are complex and have never been interpreted by the
courts or the Treasury Department in final regulations; regulations interpreting the RPII provisions of the Code exist only in
proposed form. It is not certain whether these regulations will be adopted in their proposed form or what changes or
clarifications might ultimately be made thereto or whether any such changes, as well as any interpretation or application of
RPII by the Internal Revenue Service (IRS), the courts or otherwise, might have retroactive effect. These provisions include the
grant of authority to the Treasury Department to prescribe "such regulations as may be necessary to carry out the purpose of
this subsection including regulations preventing the avoidance of this subsection through cross insurance arrangements or
otherwise." Accordingly, the meaning of the RPII provisions and the application thereof to the Foreign Insurance Subsidiaries is
uncertain. In addition, the Company cannot be certain that the amount of RPII or the amounts of the RPII inclusions for any
particular RPII shareholder, if any, will not be subject to adjustment based upon subsequent IRS examination. Any prospective
investor which does business with a Foreign Insurance Subsidiary and is considering an investment in common shares should
consult his tax advisor as to the effects of these uncertainties.
Information Reporting. Under certain circumstances, U.S. Persons owning shares (directly, indirectly or
constructively) in a non-U.S. corporation are required to file IRS Form 5471 with their U.S. federal income tax returns.
Generally, information reporting on IRS Form 5471 is required by (i) a person who is treated as a RPII shareholder, (ii) a 10%
U.S. Shareholder of a non-U.S. corporation that is a CFC for an uninterrupted period of 30 days or more during any tax year of
the non-U.S. corporation and who owned the stock on the last day of that year; and (iii) under certain circumstances, a U.S.
Person who acquires stock in a non-U.S. corporation and as a result thereof owns 10% or more of the voting power or value of
such non-U.S. corporation, whether or not such non-U.S. corporation is a CFC. For any taxable year in which AGL determines
that the 20% Gross Income Exception and the 20% Ownership Exception does not apply, AGL will provide to all U.S. Persons
registered as shareholders of its shares a completed IRS Form 5471 or the relevant information necessary to complete the form.
Failure to file IRS Form 5471 may result in penalties. In addition, U.S. shareholders should consult their tax advisors with
respect to other information reporting requirements that may be applicable to them.
U.S. Persons holding the Company's shares should consider their possible obligation to file FINCEN Form 114,
Foreign Bank and Financial Accounts Report, with respect to their shares. Additionally, such U.S. and non-U.S. persons should
consider their possible obligations to annually report certain information with respect to the non-U.S. accounts with their
U.S. federal income tax returns. Shareholders should consult their tax advisors with respect to these or any other reporting
requirement which may apply with respect to their ownership of the Company's shares.
Tax-Exempt Shareholders. Tax-exempt entities will be required to treat certain subpart F insurance income, including
RPII, that is includable in income by the tax-exempt entity as unrelated business taxable income. Prospective investors that are
tax exempt entities are urged to consult their tax advisors as to the potential impact of the unrelated business taxable income
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provisions of the Code. A tax-exempt organization that is treated as a 10% U.S. Shareholder or a RPII Shareholder also must
file IRS Form 5471 in certain circumstances.
Dispositions of AGL's Shares. Subject to the discussions below relating to the potential application of the Code
section 1248 and PFIC rules, holders of shares generally should recognize capital gain or loss for U.S. federal income tax
purposes on the sale, exchange or other disposition of shares in the same manner as on the sale, exchange or other disposition
of any other shares held as capital assets. If the holding period for these shares exceeds one year, any gain will be subject to tax
at a current maximum marginal tax rate of 20% for individuals and 35% for corporations. Moreover, gain, if any, generally will
be a U.S. source gain and generally will constitute "passive income" for foreign tax credit limitation purposes.
Code section 1248 provides that if a U.S. Person sells or exchanges stock in a non-U.S. corporation and such person
owned, directly, indirectly through non-U.S. entities or constructively, 10% or more of the voting power of the corporation at
any time during the five-year period ending on the date of disposition when the corporation was a CFC, any gain from the sale
or exchange of the shares will be treated as a dividend to the extent of the CFC's earnings and profits (determined under U.S.
federal income tax principles) during the period that the shareholder held the shares and while the corporation was a CFC (with
certain adjustments). The Company believes that because of the dispersion of AGL's share ownership, no U.S. shareholder of
AGL should be treated as owning (directly, indirectly through non-U.S. entities or constructively) 10% of more of the total
voting power or value of AGL; to the extent this is the case this application of Code Section 1248 under the regular CFC rules
should not apply to dispositions of AGL's shares. A 10% U.S. Shareholder may in certain circumstances be required to report a
disposition of shares of a CFC by attaching IRS Form 5471 to the U.S. federal income tax or information return that it would
normally file for the taxable year in which the disposition occurs. In the event this is determined necessary, AGL will provide a
completed IRS Form 5471 or the relevant information necessary to complete the Form. Code section 1248 in conjunction with
the RPII rules also applies to the sale or exchange of shares in a non-U.S. corporation if the non-U.S. corporation would be
treated as a CFC for RPII purposes regardless of whether the shareholder is a 10% U.S. Shareholder or whether the 20%
Ownership Exception or 20% Gross Income Exception applies. Existing proposed regulations do not address whether Code
section 1248 would apply if a non-U.S. corporation is not a CFC but the non-U.S. corporation has a subsidiary that is a CFC
and that would be taxed as an insurance company if it were a domestic corporation. The Company believes, however, that this
application of Code section 1248 under the RPII rules should not apply to dispositions of AGL's shares because AGL will not
be directly engaged in the insurance business. The Company cannot be certain, however, that the IRS will not interpret the
proposed regulations in a contrary manner or that the Treasury Department will not amend the proposed regulations to provide
that these rules will apply to dispositions of common shares. Prospective investors should consult their tax advisors regarding
the effects of these rules on a disposition of common shares.
Passive Foreign Investment Companies. In general, a non-U.S. corporation will be a PFIC during a given year if
(i) 75% or more of its gross income constitutes "passive income" (the 75% test) or (ii) 50% or more of its assets produce
passive income (the 50% test) and once characterized as a PFIC will generally retain PFIC status for future taxable years with
respect to its U.S. shareholders in the taxable year of the initial PFIC characterization.
If AGL were characterized as a PFIC during a given year, each U.S. Person holding AGL's shares would be subject to
a penalty tax at the time of the sale at a gain of, or receipt of an "excess distribution" with respect to, their shares, unless such
person (i) is a 10% U.S. Shareholder and AGL is a CFC or (ii) made a "qualified electing fund election" or "mark-to-market"
election. It is uncertain that AGL would be able to provide its shareholders with the information necessary for a U.S. Person to
make a qualified electing fund election. In addition, if AGL were considered a PFIC, upon the death of any U.S. individual
owning common shares, such individual's heirs or estate would not be entitled to a "step-up" in the basis of the common shares
that might otherwise be available under U.S. federal income tax laws. In general, a shareholder receives an "excess
distribution" if the amount of the distribution is more than 125% of the average distribution with respect to the common shares
during the three preceding taxable years (or shorter period during which the taxpayer held common shares). In general, the
penalty tax is equivalent to an interest charge on taxes that are deemed due during the period the shareholder owned the
common shares, computed by assuming that the excess distribution or gain (in the case of a sale) with respect to the common
shares was taken in equal portion at the highest applicable tax rate on ordinary income throughout the shareholder's period of
ownership. The interest charge is equal to the applicable rate imposed on underpayments of U.S. federal income tax for such
period. In addition, a distribution paid by AGL to U.S. shareholders that is characterized as a dividend and is not characterized
as an excess distribution would not be eligible for reduced rates of tax as qualified dividend income. A U.S. Person that is a
shareholder in a PFIC may also be subject to additional information reporting requirements, including the annual filing of IRS
Form 8621.
For the above purposes, passive income generally includes interest, dividends, annuities and other investment income.
The PFIC rules, as amended by the Tax Act, provide that income derived in the active conduct of an insurance business by a
qualifying insurance corporation is not treated as passive income. The PFIC provisions also contain a look-through rule under
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which a non-U.S. corporation shall be treated as if it "received directly its proportionate share of the income..." and as if it "held
its proportionate share of the assets..." of any other corporation in which it owns at least 25% of the value of the stock. A
second PFIC look-through rule would treat stock of a U.S. corporation owned by another U.S. corporation which is at least
25% owned (by value) by a non-U.S. corporation as a non-passive asset that generates non-passive income for purposes of
determining whether the non-U.S. corporation is a PFIC.
The insurance income exception originally was intended to ensure that income derived by a bona fide insurance
company is not treated as passive income, except to the extent such income is attributable to financial reserves in excess of the
reasonable needs of the insurance business. The Company expects, for purposes of the PFIC rules, that each of AGL's insurance
subsidiaries is unlikely to have financial reserves in excess of the reasonable needs of its insurance business in each year of
operations. However, the Tax Act limits the insurance income exception to a non-U.S. insurance company that is a qualifying
insurance corporation that would be taxable as an insurance company if it were a U.S. corporation and maintains insurance
liabilities of more than 25% of such company’s assets for a taxable year (or maintains insurance liabilities that at least equal or
exceed 10% of its assets and it satisfies a facts and circumstances test that requires a showing that the failure to exceed the 25%
threshold is due to run-off or rating agency circumstances) (the Reserve Test). Further, the IRS issued proposed regulations in
2015 intended to clarify the application of the PFIC provisions to an insurance company. These proposed regulations provide
that a non-U.S. insurance company may only qualify for an exception to the PFIC rules if, among other things, the non-U.S.
insurance company’s officers and employees perform its substantial managerial and operational activities. This proposed
regulation will not be effective until adopted in final form. The Company believes that, based on the application of the PFIC
look-through rules described above and the Company's plan of operations for the current and future years, AGL should not be
characterized as a PFIC. However, as the Company cannot predict the likelihood of finalization of the proposed regulations or
the scope, nature, or impact of the proposed regulations on us, should they be formally adopted or enacted or whether the
Company's non-U.S. insurance subsidiaries will be able to satisfy the Reserve Test in future years and the interaction of the
PFIC look-through rules is not clear, no assurance may be given that the Company will not be characterized as a PFIC.
Prospective investors should consult their tax advisor as to the effects of the PFIC rules.
Foreign tax credit. If U.S. Persons own a majority of AGL's common shares, only a portion of the current income
inclusions, if any, under the CFC, RPII and PFIC rules and of dividends paid by AGL (including any gain from the sale of
common shares that is treated as a dividend under section 1248 of the Code) will be treated as foreign source income for
purposes of computing a shareholder's U.S. foreign tax credit limitations. The Company will consider providing shareholders
with information regarding the portion of such amounts constituting foreign source income to the extent such information is
reasonably available. It is also likely that substantially all of the "subpart F income," RPII and dividends that are foreign source
income will constitute either "passive" or "general" income. Thus, it may not be possible for most shareholders to utilize excess
foreign tax credits to reduce U.S. tax on such income.
Information Reporting and Backup Withholding on Distributions and Disposition Proceeds. Information returns may
be filed with the IRS in connection with distributions on AGL's common shares and the proceeds from a sale or other
disposition of AGL's common shares unless the holder of AGL's common shares establishes an exemption from the information
reporting rules. A holder of common shares that does not establish such an exemption may be subject to U.S. backup
withholding tax on these payments if the holder is not a corporation or non-U.S. Person or fails to provide its taxpayer
identification number or otherwise comply with the backup withholding rules. The amount of any backup withholding from a
payment to a U.S. Person will be allowed as a credit against the U.S. Person's U.S. federal income tax liability and may entitle
the U.S. Person to a refund, provided that the required information is furnished to the IRS.
United Kingdom
The following discussion is intended to be only a general guide to certain U.K. tax consequences of holding AGL
common shares, under current law and the current practice of HMRC, either of which is subject to change at any time, possibly
with retrospective effect. Except where otherwise stated, this discussion applies only to shareholders who are not (and have not
recently been) resident or (in the case of individuals) domiciled for tax purposes in the U.K., who hold their AGL common
shares as an investment and who are the absolute beneficial owners of their common shares. This discussion may not apply to
certain shareholders, such as dealers in securities, life insurance companies, collective investment schemes, shareholders who
are exempt from tax and shareholders who have (or are deemed to have) acquired their shares by virtue of an office or
employment. Such shareholders may be subject to special rules.
The following statements do not purport to be a comprehensive description of all the U.K. considerations that may be
relevant to any particular shareholder. Any person who is in any doubt as to their tax position should consult an appropriate
professional tax adviser.
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AGL's Tax Residency. AGL is not incorporated in the U.K., but effective November 6, 2013, the AGL Board manages
its affairs with the intent to maintain its status as a company that is tax resident in the U.K.
Dividends. Under current U.K. tax law, AGL is not required to withhold tax at source from dividends paid to the
holders of the AGL common shares.
Capital gains. U.K. tax is not normally charged on any capital gains realized by non-U.K. shareholders in AGL unless,
in the case of a corporate shareholder, at or before the time the gain accrues, the shareholding is used in or for the purposes of a
trade carried on by the non-resident shareholder through a permanent establishment in the U.K. or for the purposes of that
permanent establishment. Similarly, an individual shareholder who carries on a trade, profession or vocation in the U.K.
through a branch or agency may be liable for U.K. tax on the gain if such shareholder disposes of shares that are, or have been,
used, held or acquired for the purposes of such trade, profession or vocation or for the purposes of such branch or agency. This
treatment applies regardless of the U.K. tax residence status of AGL.
Stamp Taxes. On the basis that AGL does not currently intend to maintain a share register in the U.K., there should be
no U.K. stamp duty reserve tax on a purchase of common shares in AGL. A conveyance or transfer on sale of common shares
in AGL will not be subject to U.K. stamp duty, provided that the instrument of transfer is not executed in the U.K. and does not
relate to any property situated, or any matter or thing done, or to be done, in the U.K.
Description of Share Capital
The following summary of AGL's share capital is qualified in its entirety by the provisions of Bermuda law, AGL's
memorandum of association and its Bye-Laws, copies of which are incorporated by reference as exhibits to this Annual Report
on Form 10-K.
AGL's authorized share capital of $5,000,000 is divided into 500,000,000 shares, par value U.S. $0.01 per share, of
which 115,278,406 common shares were issued and outstanding as of February 20, 2018. Except as described below, AGL's
common shares have no pre-emptive rights or other rights to subscribe for additional common shares, no rights of redemption,
conversion or exchange and no sinking fund rights. In the event of liquidation, dissolution or winding-up, the holders of AGL's
common shares are entitled to share equally, in proportion to the number of common shares held by such holder, in AGL's
assets, if any remain after the payment of all AGL's debts and liabilities and the liquidation preference of any outstanding
preferred shares. Under certain circumstances, AGL has the right to purchase all or a portion of the shares held by a
shareholder. See "—Acquisition of Common Shares by AGL" below.
Voting Rights and Adjustments
In general, and except as provided below, shareholders have one vote for each common share held by them and are
entitled to vote with respect to their fully paid shares at all meetings of shareholders. However, if, and so long as, the common
shares (and other of AGL's shares) of a shareholder are treated as "controlled shares" (as determined pursuant to section 958 of
the Code) of any U.S. Person and such controlled shares constitute 9.5% or more of the votes conferred by AGL's issued and
outstanding shares, the voting rights with respect to the controlled shares owned by such U.S. Person shall be limited, in the
aggregate, to a voting power of less than 9.5% of the voting power of all issued and outstanding shares, under a formula
specified in AGL's Bye-laws. The formula is applied repeatedly until there is no U.S. Person whose controlled shares constitute
9.5% or more of the voting power of all issued and outstanding shares and who generally would be required to recognize
income with respect to AGL under the Code if AGL were a CFC as defined in the Code and if the ownership threshold under
the Code were 9.5% (as defined in AGL's Bye-Laws as a 9.5% U.S. Shareholder). In addition, AGL's Board may determine that
shares held carry different voting rights when it deems it appropriate to do so to (i) avoid the existence of any 9.5% U.S.
Shareholder; and (ii) avoid adverse tax, legal or regulatory consequences to AGL or any of its subsidiaries or any direct or
indirect holder of shares or its affiliates. "Controlled shares" includes, among other things, all shares of AGL that such U.S.
Person is deemed to own directly, indirectly or constructively (within the meaning of section 958 of the Code). Further, these
provisions do not apply in the event one shareholder owns greater than 75% of the voting power of all issued and outstanding
shares.
Under these provisions, certain shareholders may have their voting rights limited to less than one vote per share, while
other shareholders may have voting rights in excess of one vote per share. Moreover, these provisions could have the effect of
reducing the votes of certain shareholders who would not otherwise be subject to the 9.5% limitation by virtue of their direct
share ownership. AGL's Bye-laws provide that it will use its best efforts to notify shareholders of their voting interests prior to
any vote to be taken by them.
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AGL's Board is authorized to require any shareholder to provide information for purposes of determining whether any
holder's voting rights are to be adjusted, which may be information on beneficial share ownership, the names of persons having
beneficial ownership of the shareholder's shares, relationships with other shareholders or any other facts AGL's Board may
deem relevant. If any holder fails to respond to this request or submits incomplete or inaccurate information, AGL's Board may
eliminate the shareholder's voting rights. All information provided by the shareholder will be treated by AGL as confidential
information and shall be used by AGL solely for the purpose of establishing whether any 9.5% U.S. Shareholder exists and
applying the adjustments to voting power (except as otherwise required by applicable law or regulation).
Restrictions on Transfer of Common Shares
AGL's Board may decline to register a transfer of any common shares under certain circumstances, including if they
have reason to believe that any adverse tax, regulatory or legal consequences to the Company, any of its subsidiaries or any of
its shareholders or indirect holders of shares or its Affiliates may occur as a result of such transfer (other than such as AGL's
Board considers de minimis). Transfers must be by instrument unless otherwise permitted by the Companies Act.
The restrictions on transfer and voting restrictions described above may have the effect of delaying, deferring or
preventing a change in control of Assured Guaranty.
Acquisition of Common Shares by AGL
Under AGL's Bye-Laws and subject to Bermuda law, if AGL's Board determines that any ownership of AGL's shares
may result in adverse tax, legal or regulatory consequences to AGL, any of AGL's subsidiaries or any of AGL's shareholders or
indirect holders of shares or its Affiliates (other than such as AGL's Board considers de minimis), AGL has the option, but not
the obligation, to require such shareholder to sell to AGL or to a third party to whom AGL assigns the repurchase right the
minimum number of common shares necessary to avoid or cure any such adverse consequences at a price determined in the
discretion of the Board to represent the shares' fair market value (as defined in AGL's Bye-Laws).
Other Provisions of AGL's Bye-Laws
AGL's Board and Corporate Action
AGL's Bye-Laws provide that AGL's Board shall consist of not less than three and not more than 21 directors, the
exact number as determined by the Board. AGL's Board consists of ten persons who are elected for annual terms.
Shareholders may only remove a director for cause (as defined in AGL's Bye-Laws) at a general meeting, provided
that the notice of any such meeting convened for the purpose of removing a director shall contain a statement of the intention to
do so and shall be provided to that director at least two weeks before the meeting. Vacancies on the Board can be filled by the
Board if the vacancy occurs in those events set out in AGL's Bye-Laws as a result of death, disability, disqualification or
resignation of a director, or from an increase in the size of the Board.
Generally under AGL's Bye-Laws, the affirmative votes of a majority of the votes cast at any meeting at which a
quorum is present is required to authorize a resolution put to vote at a meeting of the Board, including one relating to a merger,
acquisition or business combination. Corporate action may also be taken by a unanimous written resolution of the Board
without a meeting. A quorum shall be at least one-half of directors then in office present in person or represented by a duly
authorized representative, provided that at least two directors are present in person.
Shareholder Action
At the commencement of any general meeting, two or more persons present in person and representing, in person or
by proxy, more than 50% of the issued and outstanding shares entitled to vote at the meeting shall constitute a quorum for the
transaction of business. In general, any questions proposed for the consideration of the shareholders at any general meeting
shall be decided by the affirmative votes of a majority of the votes cast in accordance with the Bye-Laws.
The Bye-Laws contain advance notice requirements for shareholder proposals and nominations for directors, including
when proposals and nominations must be received and the information to be included.
Amendment
The Bye-Laws may be amended only by a resolution adopted by the Board and by resolution of the shareholders.
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Voting of Non-U.S. Subsidiary Shares
When AGL is required or entitled to vote at a general meeting (for example, an annual meeting) of any of AG Re,
AGFOL or any other of its directly held non-U.S. subsidiaries, AGL's Board is required to refer the subject matter of the vote to
AGL's shareholders and seek direction from such shareholders as to how they should vote on the resolution proposed by the
non-U.S. subsidiary. AGL's Board in its discretion shall require that substantially similar provisions are or will be contained in
the bye-laws (or equivalent governing documents) of any direct or indirect non-U.S. subsidiaries other than AGRO and
subsidiaries incorporated in the U.K.
Employees
As of December 31, 2017, the Company had approximately 310 employees. None of the Company's employees are
subject to collective bargaining agreements. The Company believes that employee relations are satisfactory.
Available Information
The Company maintains an Internet web site at www.assuredguaranty.com. The Company makes available, free of
charge, on its web site (under assuredguaranty.com/sec-filings) the Company's annual report on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13 (a) or
15 (d) of the Exchange Act as soon as reasonably practicable after the Company files such material with, or furnishes it to, the
SEC. The Company also makes available, free of charge, through its web site (under assuredguaranty.com/governance) links to
the Company's Corporate Governance Guidelines, its Code of Conduct, AGL's Bye-Laws and the charters for its Board
committees.
The Company routinely posts important information for investors on its web site (under assuredguaranty.com/
company-statements and, more generally, under the Investor Information and Businesses pages). The Company uses this web
site as a means of disclosing material information and for complying with its disclosure obligations under SEC Regulation FD
(Fair Disclosure). Accordingly, investors should monitor the Company Statements, Investor Information and Businesses
portions of the Company's web site, in addition to following the Company's press releases, SEC filings, public conference calls,
presentations and webcasts.
The information contained on, or that may be accessed through, the Company's web site is not incorporated by
reference into, and is not a part of, this report.
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ITEM 1A. RISK FACTORS
You should carefully consider the following information, together with the information contained in AGL's other
filings with the SEC. The risks and uncertainties discussed below are not the only ones the Company faces. However, these are
the risks that the Company's management believes are material. The Company may face additional risks or uncertainties that
are not presently known to the Company or that management currently deems immaterial, and such risks or uncertainties also
may impair its business or results of operations. The risks discussed below could result in a significant or material adverse
effect on the Company's financial condition, results of operations, liquidity or business prospects.
Risks Related to the Company's Expected Losses
Estimates of expected losses are subject to uncertainties and may not be adequate to cover potential paid claims.
The financial guaranties issued by the Company's insurance subsidiaries insure the credit performance of the
guaranteed obligations over an extended period of time, in some cases over 30 years, and, in most circumstances, the Company
has no right to cancel such financial guaranties. As a result, the Company's estimate of ultimate losses on a policy is subject to
significant uncertainty over the life of the insured transaction. Credit performance can be adversely affected by economic, fiscal
and financial market variability as well as changes in law over the long duration of most contracts. If the Company's actual
losses exceed its current estimate, this may result in adverse effects on the Company's financial condition, results of operations,
liquidity, business prospects, financial strength ratings and ability to raise additional capital.
The determination of expected loss is an inherently subjective process involving numerous estimates, assumptions and
judgments by management, using both internal and external data sources with regard to frequency, severity of loss, economic
projections, the perceived strength of legal protections, governmental actions, negotiations and other factors that affect credit
performance. The Company does not use traditional actuarial approaches to determine its estimates of expected losses. Actual
losses will ultimately depend on future events or transaction performance. As a result, the Company's current estimates of
probable and estimable losses may not reflect the Company's future ultimate claims paid.
Certain sectors and large risks within the Company's insured portfolio have experienced credit deterioration in excess
of the Company’s initial expectations, which has led or may lead to losses in excess of the Company’s initial expectations. The
Company's expected loss models take into account current and expected future trends, which contemplate the impact of current
and probable developments in the performance of the exposure. These factors, which are integral elements of the Company's
reserve estimation methodology, are updated on a quarterly basis based on current information. Because such information
changes, sometimes materially, from over time, the Company’s projection of losses may also change materially. Much of the
recent development in the Company's loss projections relate to the Company's insured Puerto Rico exposures. The Company
had net par outstanding to general obligation bonds of the Commonwealth of Puerto Rico and various obligations of its related
authorities and public corporations as of December 31, 2017 and December 31, 2016 aggregating to $5.0 billion and $4.8
billion, respectively, all of which was rated BIG under the Company’s rating methodology. For a discussion of the Company's
Puerto Rico risks and RMBS transactions, see Part II, Item 8, Financial Statements and Supplementary Data, Note 4,
Outstanding Exposure.
Risks Related to the Financial, Credit and Financial Guaranty Markets
Claim payments on obligations of the Commonwealth of Puerto Rico and its related authorities and public corporations
insured by the Company in excess of that expected by the Company could have a negative effect on the Company's liquidity
and results of operations.
The Company has an aggregate $5.0 billion net par exposure as of December 31, 2017, to the Commonwealth of
Puerto Rico (Puerto Rico or the Commonwealth) and various obligations of its related authorities and public corporations, and
claim payments on such insured exposures in excess of that expected by the Company could have a negative effect on the
Company's liquidity and results of operations. Most of the Puerto Rican entities with obligations insured by the Company have
defaulted on their debt service payments, and the Company has paid claims on them.
On June 30, 2016, the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) was signed into
law by the President of the United States. PROMESA established a seven-member federal financial oversight board (Oversight
Board) with authority to require that balanced budgets and fiscal plans be adopted and implemented by Puerto Rico.
PROMESA provides a legal framework under which the debt of the Commonwealth and its related authorities and public
corporations may be voluntarily restructured, and grants the Oversight Board the sole authority to file restructuring petitions in
a federal court to restructure the debt of the Commonwealth and its related authorities and public corporations if voluntary
43
negotiations fail, provided that any such restructuring must be in accordance with an Oversight Board approved fiscal plan that
respects the liens and priorities provided under Puerto Rico law.
On September 20, 2017, Hurricane Maria made landfall in Puerto Rico as a Category 4 hurricane on the Saffir-
Simpson scale, causing loss of life and widespread devastation. Damage to the Commonwealth’s infrastructure, including the
power grid, water system and transportation system, was extensive, and has impacted the ability and willingness of Puerto
Rican obligors to make timely and full debt service payments and participants’ efforts to resolve the Commonwealth’s financial
issues under PROMESA.
The Company believes that a number of the actions taken by the Commonwealth, the Oversight Board and others with
respect to obligations it insures are illegal or unconstitutional or both, and has taken legal action, and may take additional legal
action in the future, to enforce its rights with respect to these matters. Any adverse decisions in litigation relating to Puerto Rico
may impact both the Company's exposure in Puerto Rico as well as the strength of its legal protections in other exposures. For
example, on January 30, 2018, the Federal District Court in Puerto Rico held, in an action initiated by the Company relating to
the Puerto Rico Highways and Transportation Authority, among other things, that (i) even though the special revenue
provisions of the Bankruptcy Code protect a lien on pledged special revenues, those provisions do not mandate the turnover of
pledged special revenues to the payment of bonds and (ii) actions to enforce liens on pledged special revenues remain stayed.
On February 9, 2018, the Company filed a notice of appeal of the Court’s decision to the United States Court of Appeals for the
First Circuit.
The final shape, timing and validity of responses to Puerto Rico’s distress eventually enacted or implemented under
the auspices of PROMESA and the Oversight Board or otherwise, and the impact, after resolution of any legal challenges, of
any such responses on obligations insured by the Company, are uncertain, but could be significant. Additional information
about the Company's exposure to Puerto Rico and legal actions it has initiated may be found in Part II, Item 8, Financial
Statements and Supplementary Data, Note 4, Outstanding Exposure, Exposure to Puerto Rico.
The Company's business, liquidity, financial condition and stock price may be adversely affected by developments in the
U.S. and world-wide financial markets.
The Company's loss reserves, profitability, financial position, insured portfolio, investment portfolio, cash flow,
statutory capital and stock price could be materially affected by the U.S. and global financial markets. Upheavals in the
financial markets affect economic activity and employment and therefore can affect the Company's business. The global
economic outlook remains uncertain, including the overall growth rate of the U.S. economy, the impact of Brexit in Europe and
the impact of recent political trends on the global economic order. These and other risks could materially and negatively affect
the Company’s ability to access the capital markets, the cost of the Company's debt, the demand for its products, the amount of
losses incurred on transactions it guarantees, the value of its investment portfolio (including its alternative investments), its
financial ratings and the price of its common shares.
Some of the state and local governments and entities that issue obligations the Company insures are experiencing
significant budget deficits and pension funding and revenue shortfalls that could result in increased credit losses or
impairments and capital charges on those obligations.
Some of the state and local governments that issue the obligations the Company insures have experienced significant
budget deficits and pension funding and revenue collection shortfalls that required them to significantly raise taxes and/or cut
spending in order to satisfy their obligations. While the U.S. government has provided some financial support and although
overall state revenues have increased in recent years, significant budgetary pressures remain, especially at the local government
level and in relation to retirement obligations. Certain local governments, including ones that have issued obligations insured
by the Company, have sought protection from creditors under chapter 9 of the U.S. Bankruptcy Code as a means of
restructuring their outstanding debt. In some recent instances where local governments were seeking to restructure their
outstanding debt, and partially in response to concerns that materially reducing pension payments would lead to employee
flight and, therefore, an inadequate level of local government services, pension and other obligations owed to workers were
treated more favorably than senior bond debt owed to the capital markets. If the issuers of the obligations in the Company's
public finance portfolio do not have sufficient funds to cover their expenses and are unable or unwilling to raise taxes, decrease
spending or receive federal assistance, the Company may experience increased levels of losses or impairments on its public
finance obligations, which could materially and adversely affect its business, financial condition and results of operations. If
such issuers succeed in restructuring pension and other obligations owed to workers so that they are treated more favorably
than obligations insured by the Company, such losses or impairments could be greater than the Company otherwise anticipated
when the insurance was written.
44
The Company's risk of loss on and capital charges for municipal exposures could also be exacerbated by rating agency
downgrades of municipal exposure ratings. A downgraded municipal issuer may be unable to refinance maturing obligations or
issue new debt, which could reduce the municipality's ability to service its debt. Downgrades could also affect the interest rate
that the municipality must pay on its variable rate debt or for new debt issuance. Municipal exposure downgrades, as with other
downgrades, result in an increase in the capital charges the rating agencies assess when evaluating the Company's capital
adequacy in their rating models. Significant municipal downgrades could result in higher capital requirements for the Company
in order to maintain its financial strength ratings.
In addition, obligations supported by specified revenue streams, such as revenue bonds issued by toll road authorities,
municipal utilities or airport authorities, may be adversely affected by revenue declines resulting from reduced demand,
changing demographics or other factors associated with an economy in which unemployment remains high, housing prices
have not yet stabilized and growth is slow. These obligations, which may not necessarily benefit from financial support from
other tax revenues or governmental authorities, may also experience increased losses if the revenue streams are insufficient to
pay scheduled interest and principal payments.
Persistently low interest rate levels and credit spreads could adversely affect demand for financial guaranty insurance as
well as the Company's financial condition.
Demand for financial guaranty insurance generally fluctuates with changes in market credit spreads. Credit spreads,
which are based on the difference between interest rates on high-quality or "risk free" securities versus those on lower-rated or
uninsured securities, fluctuate due to a number of factors and are sensitive to the absolute level of interest rates, current credit
experience and investors' risk appetite. While average municipal interest rates were not quite as low during 2017 as they were
in 2016, when the benchmark AAA 30-year Municipal Market Data index published by Thomson Reuters (MMD Index) was at
times below 2% (a threshold not previously crossed in the modern era.), they were still low by historical standards, with the
MMD Index averaging 2.85% for 2017. When interest rates are low, or when the market is relatively less risk averse, the credit
spread between high-quality or insured obligations versus lower- rated or uninsured obligations typically narrows. As a result,
financial guaranty insurance typically provides lower interest cost savings to issuers than it would during periods of relatively
wider credit spreads. When issuers are less likely to use financial guaranties on their new issues when credit spreads are narrow,
this results in decreased demand or premiums obtainable for financial guaranty insurance, and a resulting reduction in the
Company's results of operations. While interest rates began to rise at the beginning of 2018, a return to and continued
persistence of low interest rate levels and or low credit spreads could continue to dampen demand for financial guaranty
insurance.
Conversely, in a deteriorating credit environment, credit spreads increase and become "wide", which increases the
interest cost savings that financial guaranty insurance may provide and can result in increased demand for financial guaranties
by issuers. However, if the weakening credit environment is associated with economic deterioration, the Company's insured
portfolio could generate claims and loss payments in excess of normal or historical expectations. In addition, increases in
market interest rate levels could reduce new capital markets issuances and, correspondingly, a decreased volume of insured
transactions.
Competition in the Company's industry may adversely affect its revenues.
As described in greater detail under "Competition" in "Item 1. Business," the Company can face competition, either in
the form of current or new providers of credit enhancement or in terms of alternative structures, including uninsured offerings,
or pricing competition. Increased competition could have an adverse effect on the Company's insurance business.
The Company's financial position, results of operations and cash flows may be adversely affected by fluctuations in foreign
exchange rates.
The Company's reporting currency is the U.S. dollar. The functional currencies of AGL's primary insurance and
reinsurance subsidiaries are the U.S. dollar and pound sterling. Exchange rate fluctuations may materially impact the
Company's financial position, results of operations and cash flows. The Company's non-U.S. subsidiaries maintain both assets
and liabilities in currencies different from their functional currency, which exposes the Company to changes in currency
exchange rates. In addition, locally-required capital levels are invested in local currencies in order to satisfy regulatory
requirements and to support local insurance operations regardless of currency fluctuations.
The principal currencies creating foreign exchange risk are the British pound sterling and the European Union euro.
The Company's purchase of MBIA UK in 2017 increased its exposure to the British pound sterling. The Company cannot
accurately predict the nature or extent of future exchange rate variability between these currencies or relative to the U.S. dollar.
45
Foreign exchange rates are sensitive to factors beyond the Company's control. The separation of the U.K. from the EU may
increase currency fluctuations in the next several years. See “Risks Related to the Financial, Credit and Financial Guaranty
Markets - ‘Brexit’ may adversely impact exposures insured by the Company and may also adversely impact the Company
through currency exchange rates.” The Company does not engage in active management, or hedging, of its foreign exchange
rate risk. Therefore, fluctuation in exchange rates between these currencies and the U.S. dollar could adversely impact the
Company's financial position, results of operations and cash flows. See Part II, Item 7A, Quantitative and Qualitative
Disclosures About Market Risk, Sensitivity of Investment Portfolio to Foreign Exchange Risk and Part II, Item 7A,
Quantitative and Qualitative Disclosures About Market Risk, Sensitivity of Premiums Receivable to Foreign Exchange Risk.
The Company's international operations expose it to less predictable credit and legal risks.
The Company pursues new business opportunities in international markets. The underwriting of obligations of an
issuer in a foreign country involves the same process as that for a domestic issuer, but additional risks must be addressed, such
as the evaluation of foreign currency exchange rates, foreign business and legal issues, and the economic and political
environment of the foreign country or countries in which an issuer does business. Changes in such factors could impede the
Company's ability to insure, or increase the risk of loss from insuring, obligations in the countries in which it currently does
business and limit its ability to pursue business opportunities in other countries.
The Company's investment portfolio may be adversely affected by credit, interest rate and other market changes.
The Company's operating results are affected, in part, by the performance of its investment portfolio which consists
primarily of fixed-income securities and short-term investments. As of December 31, 2017, the fixed-maturity securities and
short-term investments had a fair value of approximately $11.3 billion. Credit losses and changes in interest rates could have an
adverse effect on the Company's shareholders' equity and net income. Credit losses result in realized losses on the Company's
investment portfolio, which reduce net income and shareholders' equity. Changes in interest rates can affect both shareholders'
equity and investment income. For example, if interest rates decline, funds reinvested will earn less than expected, reducing the
Company's future investment income compared to the amount it would earn if interest rates had not declined. However, the
value of the Company's fixed-rate investments would generally increase if interest rates decreased, resulting in an unrealized
gain on investments included in shareholders' equity. Conversely, if interest rates increase, the value of the investment portfolio
will be reduced, resulting in unrealized losses that the Company is required to include in shareholders' equity as a change in
accumulated other comprehensive income (AOCI). Accordingly, interest rate increases could reduce the Company's
shareholders' equity.
Interest rates are highly sensitive to many factors, including monetary policies, domestic and international economic
and political conditions and other factors beyond the Company's control. The Company does not engage in active management,
or hedging, of interest rate risk, and may not be able to mitigate interest rate sensitivity effectively.
The market value of the investment portfolio also may be adversely affected by general developments in the capital
markets, including decreased market liquidity for investment assets, market perception of increased credit risk with respect to
the types of securities held in the portfolio, downgrades of credit ratings of issuers of investment assets and/or foreign exchange
movements impacting investment assets. In addition, the Company invests in securities insured by other financial guarantors,
the market value of which may be affected by the rating instability of the relevant financial guarantor.
The Company also invests a portion of its excess capital in alternative investments, which also may be affected by
credit, interest rate and other market changes as well as factors specific to those investments. See "Risks Related to the
Company's Business - Alternative investments may not result in the benefits anticipated."
‘Brexit’ may adversely impact exposures insured by the Company and may also adversely impact the Company through
currency exchange rates.
On June 23, 2016, a referendum was held in the U.K. in which a majority voted to exit the EU, known as “Brexit”.
The U.K. government served notice to the European Council on March 29, 2017 of its desire to withdraw in accordance with
Article 50 of the Treaty on European Union. Negotiations between the U.K. and the EU will determine the future terms of the
U.K’s relationship with the EU, including the terms of trade between the U.K. and the EU. Any resulting political, social and
economic uncertainty and changes arising from Brexit may have a negative impact on the economies of the U.K. as well as
non-U.K. EU and EEA countries, which may increase the probability of losses on obligations insured by the Company that are
exposed to risks in the U.K. and non-U.K. EU and EEA countries.
46
Brexit may also impact currency exchange rates. The Company reports its accounts in U.S. dollars, while some of its
income, expenses and assets are denominated in other currencies, primarily the pound sterling and the euro. For example, from
December 31, 2015 to December 31, 2016, which period encompasses the Brexit vote, the value of pound sterling dropped
from £0.68 per dollar to £0.81 per dollar, while the euro dropped from €0.83 per dollar to €0.95 per dollar. For the year ended
2016, the Company recognized losses of approximately $21 million in the consolidated statement of operations, net of tax, and
approximately $32 million in OCI, net of tax, for foreign currency translation, that were primarily driven by the exchange rate
fluctuations of the pound sterling. If the Company had owned AGLN during 2016, these impacts would have been greater.
Currency exchange rates may also move materially as the terms of Brexit become known.
Risks Related to the Company's Business
The Company's insurance products may subject it to significant risks from individual or correlated exposures.
The Company is exposed to the risk that issuers of debt that it insures or other counterparties may default in their
financial obligations, whether as a result of insolvency, lack of liquidity, operational failure or other reasons. Similarly, the
Company could be exposed to corporate credit risk if a corporation or financial institution is the originator or servicer of loans,
mortgages or other assets backing structured securities that the Company has insured.
In addition, because the Company insures or reinsures municipal bonds, it can have significant exposures to single
municipal risks; see Part II, Item 7, Management's Discussion and Analysis, Insured Portfolio, for a list of the Company's
largest ten municipal risks by revenue source. While the Company's risk of a complete loss, where it would have to pay the
entire principal amount of an issue of bonds and interest thereon with no recovery, is generally lower for municipal bonds than
for corporate bonds as most municipal bonds are backed by tax or other revenues, there can be no assurance that a single
default by a municipality would not have a material adverse effect on its results of operations or financial condition.
The Company's ultimate exposure to a single risk may exceed its underwriting guidelines (caused by, for example,
acquisitions, reassumptions or amortization of the portfolio faster than the risk), and an event with respect to a single risk may
cause a significant loss. The Company seeks to reduce this risk by managing exposure to large single risks, as well as
concentrations of correlated risks, through tracking its aggregate exposure to single risks in its various lines of business and
establishing underwriting criteria to manage risk aggregations. It has also in the past obtained third party reinsurance for such
exposure. The Company may insure and has insured individual public finance and asset-backed risks well in excess of
$1 billion. Should the Company's risk assessments prove inaccurate and should the applicable limits prove inadequate, the
Company could be exposed to larger than anticipated losses, and could be required by the rating agencies to hold additional
capital against insured exposures whether or not downgraded by the rating agencies.
The Company is exposed to correlation risk across the various assets the Company insures. During periods of strong
macroeconomic performance, stress in an individual transaction generally occurs in a single asset class or for idiosyncratic
reasons. During a broad economic downturn, a wider range of the Company's insurance portfolio could be exposed to stress at
the same time. This stress may manifest itself in ratings downgrades, which may require more capital, or in actual losses. In
addition, while the Company has experienced many catastrophic events in the past without material loss, unexpected
catastrophic events may have a material adverse effect upon the Company's insured portfolio and/or its investment portfolios.
For example, Hurricane Maria will likely negatively impact the Company’s exposure to Puerto Rico its related authorities and
public corporations. See “Risks Related to the Financial, Credit and Financial Guaranty Markets - Claim payments on
obligations of the Commonwealth of Puerto Rico insured by the Company in excess of that expected by the Company could
have a negative effect on the Company's liquidity and results of operations.”
Some of the Company's direct financial guaranty products may be riskier than traditional financial guaranty insurance.
As of December 31, 2017 and 2016, 2% and 7%, respectively, of the Company's financial guaranty direct exposures
were executed as credit derivatives. Traditional financial guaranty insurance provides an unconditional and irrevocable
guaranty that protects the holder of a municipal finance or structured finance obligation against non-payment of principal and
interest, while credit derivatives provide protection from the occurrence of specified credit events, including non-payment of
principal and interest. In general, the Company structures credit derivative transactions such that circumstances giving rise to
its obligation to make payments are similar to those for financial guaranty policies and generally occur when issuers fail to
make payments on the underlying reference obligations. The tenor of credit derivatives exposures, like exposure under financial
guaranty insurance policies, is also generally for as long as the reference obligation remains outstanding.
Nonetheless, credit derivative transactions are governed by International Swaps and Derivatives Association, Inc.
(ISDA) documentation and operate differently from financial guaranty insurance policies. For example, the Company's control
47
rights with respect to a reference obligation under a credit derivative may be more limited than when it issues a financial
guaranty insurance policy on a direct primary basis. In addition, a credit derivative may be terminated for a breach of the ISDA
documentation or other specific events, unlike financial guaranty insurance policies. In addition, under a limited number of
credit derivative contracts, the Company may be required to post eligible securities as collateral, generally cash or U.S.
government or agency securities, under specified circumstances. See Part II, Item 8, Financial Statements and Supplementary
Data, Note 8, Contracts Accounted for as Credit Derivatives, Collateral Posting for Certain Credit Derivative Contracts.
Acquisitions may not result in the benefits anticipated and may subject the Company to non-monetary consequences.
From time to time the Company evaluates financial guaranty portfolio and company acquisition opportunities and
conducts diligence activities with respect to transactions with other financial guarantors and financial services companies. For
example, during 2015 the Company acquired Radian Asset and in 2016 the Company acquired CIFG, and in each case merged
it with and into AGC, with AGC as the surviving company of the merger. In January 2017, the Company acquired MBIA UK,
and in February 2018 the Company announced an agreement with SGI to reinsure, generally on a 100% quota share basis,
substantially all of SGI’s insured portfolio. Acquiring other financial guaranty portfolios or companies or other financial
services companies may involve some or all of the various risks commonly associated with acquisitions, including, among
other things: (a) failure to adequately identify and value potential exposures and liabilities of the target portfolio or entity; (b)
difficulty in estimating the value of the target portfolio or entity; (c) potential diversion of management’s time and attention; (d)
exposure to asset quality issues of the target entity; (e) difficulty and expense of integrating the operations, systems and
personnel of the target entity; and (f) concentration of exposures, including exposures which may exceed single risk limits, due
to the addition of the target portfolio. Such acquisitions may also have unintended consequences on ratings assigned by the
rating agencies to the Company or its subsidiaries (see “— Risks Related to the Company’s Ratings”) or on the applicability of
laws and regulations to the Company’s existing businesses. These or other factors may cause any future acquisitions of
financial guaranty portfolios or companies or other financial services companies not to result in the benefits to the Company
anticipated when the acquisition was agreed. Past or future acquisitions may also subject the Company to non-monetary
consequences that may or may not have been anticipated or fully mitigated at the time of the acquisition. In addition,
acquisitions may also have other unintended consequences including the applicability of laws and regulations to the the
Company.
Alternative investments may not result in the benefits anticipated.
From time to time in order to deploy a portion of the Company's excess capital the Company may invest in business
opportunities that complement the Company's financial guaranty business, are in line with its risk profile and benefit from its
core competencies. The alternative investments group has been investigating a number of such opportunities, including, among
others, both controlling and non-controlling investments in investment managers. For example, in February 2017 the Company
agreed to purchase up to $100 million of limited partnership interests in a fund that invests in the equity of private equity
managers. Separately, in September 2017, the Company acquired a minority interest in Wasmer, Schroeder & Company LLC,
an independent investment advisory firm specializing in separately managed accounts (SMAs). The Company continues to
investigate additional opportunities. Alternative investments may be riskier than many of the other investments the Company
makes, and may not result in the benefits anticipated at the time of the investment. In addition, although the Company uses
what it believes to be excess capital to make alternative investments, measures of required capital can fluctuate and such
investments may not be given much, or any, value under the various rating agency, regulatory and internal capital models to
which the Company is subject. Also, alternative investments may be less liquid than most of the Company's other investments
and so may be difficult to convert to cash or investments that do receive credit under the capital models to which the Company
is subject. See "Risks Related to the Company's Capital and Liquidity Requirements — The ability of AGL and its subsidiaries
to meet their liquidity needs may be limited."
The Company is dependent on key executives and the loss of any of these executives, or its inability to retain other key
personnel, could adversely affect its business.
The Company's success substantially depends upon its ability to attract and retain qualified employees and upon the
ability of its senior management and other key employees to implement its business strategy. The Company believes there are
only a limited number of available qualified executives in the business lines in which the Company competes. The Company
relies substantially upon the services of Dominic J. Frederico, President and Chief Executive Officer, and other executives.
Although the Company has designed its executive compensation with the goal of retaining and creating incentives for its
executive officers, the Company may not be successful in retaining their services. The loss of the services of any of these
individuals or other key members of the Company's management team could adversely affect the implementation of its
business strategy.
48
The Company is dependent on its information technology and that of certain third parties, and a cyberattack, security
breach or failure in such systems could adversely affect the Company’s business.
The Company relies upon information technology and systems, including technology and systems provided by or
interfacing with those of third parties, to support a variety of its business processes and activities. In addition, the Company
has collected and stored confidential information including, in connection with certain loss mitigation and due diligence
activities related to its structured finance business, personally identifiable information. While the Company does not believe
that the financial guaranty industry is as inherently prone to cyberattacks as industries relating to, for example, payment card
processing, banking, critical infrastructure or defense contracting, the Company’s data systems and those of third parties on
which it relies are still vulnerable to security breaches due to cyberattacks, viruses, malware, ransomware, hackers and other
external hazards, as well as inadvertent errors, equipment and system failures, and employee misconduct. Problems in or
security breaches of these systems could, for example, result in lost business, reputational harm, the disclosure or misuse of
confidential or proprietary information, incorrect reporting, inaccurate loss projections, legal costs and regulatory penalties.
The Company’s business operations rely on the continuous availability of its computer systems as well as those of
certain third parties. In addition to disruptions caused by cyberattacks or other data breaches, such systems may be adversely
affected by natural and man-made catastrophes. The Company’s failure to maintain business continuity in the wake of such
events, particularly if there were an interruption for an extended period, could prevent the timely completion of critical
processes across its operations, including, for example, claims processing, treasury and investment operations and payroll.
These failures could result in additional costs, loss of business, fines and litigation.
The Company and its subsidiaries are subject to numerous laws and regulations of a number of jurisdictions regarding
its information systems, particularly with regard to personally identifiable information. The Company's failure to comply with
these requirements, even absent a security breach, could result in penalties, reputational harm or difficulty in obtaining desired
consents from regulatory authorities.
Risks Related to the Company's Financial Strength and Financial Enhancement Ratings
A downgrade of the financial strength or financial enhancement ratings of any of the Company's insurance and
reinsurance subsidiaries would adversely affect its business and prospects and, consequently, its results of operations and
financial condition.
The financial strength and financial enhancement ratings assigned by S&P, Moody's, KBRA and Best to AGL's
insurance and reinsurance subsidiaries represent the rating agencies' opinions of the insurer's financial strength and ability to
meet ongoing obligations to policyholders and cedants in accordance with the terms of the financial guaranties it has issued or
the reinsurance agreements it has executed. The ratings also reflect qualitative factors, such as the rating agencies' opinion of an
insurer's business strategy and franchise value, the anticipated future demand for its product, the composition of its insured
portfolio, and its capital adequacy, profitability and financial flexibility. Issuers, investors, underwriters, ceding companies and
others consider the Company's financial strength or financial enhancement ratings an important factor when deciding whether
or not to utilize a financial guaranty or purchase reinsurance from one of the insurance or reinsurance subsidiaries. A
downgrade by a rating agency of the financial strength or financial enhancement ratings of one or more of AGL's subsidiaries
could impair the Company's financial condition, results of operation, liquidity, business prospects or other aspects of the
Company's business.
The ratings assigned by the rating agencies that publish financial strength or financial enhancement ratings on AGL's
insurance subsidiaries are subject to review and may be lowered by a rating agency as a result of a number of factors,
including, but not limited to, the rating agency's revised stress loss estimates for the Company's insurance portfolio, adverse
developments in the Company's or the subsidiary's financial conditions or results of operations due to underwriting or
investment losses or other factors, changes in the rating agency's outlook for the financial guaranty industry or in the markets in
which the Company operates, or a revision in the rating agency's capital model or ratings methodology. Their reviews can occur
at any time and without notice to the Company and could result in a decision to downgrade, revise or withdraw the financial
strength or financial enhancement ratings of AGL's insurance and reinsurance subsidiaries. For example, while all of the rating
agencies that rate AGL subsidiaries with exposure to Puerto Rico have indicated that their evaluations of such AGL subsidiaries
already take into account stress scenarios related to developments in Puerto Rico, actual developments in Puerto Rico beyond
what a rating agency previously considered could cause that rating agency to review its ratings of such AGL subsidiaries.
The Company periodically assesses the value of each rating assigned to each of its companies, and may as a result of
such assessment request that a rating agency add or drop a rating from certain of its companies. For example, the KBRA ratings
were first assigned to MAC in 2013, to AGM in 2014, and to AGC in 2016 and the Best rating was first assigned to AGRO in
49
2015, while a Moody's rating was never requested for MAC and was dropped from AG Re and AGRO in 2015. In January
2017, AGC requested that Moody's withdraw its financial strength rating of AGC, but Moody’s denied that request and still
rates AGC.
The insurance subsidiaries' financial strength ratings are an important competitive factor in the financial guaranty
insurance and reinsurance markets. If the financial strength or financial enhancement ratings of one or more of the Company's
insurance subsidiaries were reduced below current levels, the Company expects that would reduce the number of transactions
that would benefit from the Company's insurance; consequently, a downgrade by rating agencies could harm the Company's
new business production, results of operations and financial condition.
In addition, a downgrade may have a negative impact on the Company in respect of transactions that it has insured or
reinsurance that it has assumed. For example, a downgrade of one of the Company's insurance subsidiaries may result in
increased claims under financial guaranties such subsidiary has issued. Under variable rate demand obligations insured by
AGM, further downgrades past rating levels specified in the transaction documents could result in the municipal obligor paying
a higher rate of interest and in such obligations amortizing on a more accelerated basis than expected when the obligations
originally were issued; if the municipal obligor is unable to make such interest or principal payments, AGM may receive a
claim under its financial guaranty. Under interest rate swaps insured by AGM, further downgrades past specified rating levels
could entitle the municipal obligor's swap counterparty to terminate the swap; if the municipal obligor owed a termination
payment as a result and were unable to make such payment, AGM may receive a claim if its financial guaranty guaranteed such
termination payment. For more information about increased claim payments the Company may potentially make, see Part II,
Item 8, Financial Statements and Supplementary Data, Note 6, Contracts Accounted for as Insurance, Ratings Impact on
Financial Guaranty Business. In certain other transactions, beneficiaries of financial guaranties issued by the Company's
insurance subsidiaries may have the right to cancel the credit protection offered by the Company, which would result in the loss
of future premium earnings and the reversal of any fair value gains recorded by the Company. In addition, a downgrade of AG
Re, AGC or AGRO could result in certain ceding companies recapturing business that they had ceded to these reinsurers. See
"The downgrade of the financial strength ratings of AG Re, AGC or AGRO would give certain reinsurance counterparties the
right to recapture certain ceded business, which would lead to a reduction in the Company's unearned premium reserve and
related earnings" below.
If AGM's financial strength or financial enhancement ratings were downgraded, AGM-insured GICs issued by the
former AGMH subsidiaries that conducted AGMH's Financial Products Business (the Financial Products Companies) may
come due or may come due absent the posting of collateral by the GIC issuers. The Company relies on agreements pursuant to
which Dexia has agreed to lend certain amounts under a liquidity facility in order to satisfy needs under GIC collateral posting
requirements in regards to AGMH’s former financial products business. See "Risks Related to the Company's Business,
Acquisitions may subject the Company to non-monetary consequences."
Furthermore, if the financial strength ratings of AGE or AGUK were downgraded, AGM or AGC, respectively, may be
required to contribute additional capital to AGE or AGUK, respectively, pursuant to the terms of the support arrangements for
such subsidiaries, including those described in "Item 1. Business, Regulation, United Kingdom, Material Contracts."
The downgrade of the financial strength ratings of AG Re, AGC or AGRO would give certain reinsurance counterparties the
right to recapture certain ceded business, which would lead to a reduction in the Company's unearned premium reserve and
related earnings.
The downgrade of the financial strength ratings of AG Re, AGC or AGRO gives certain reinsurance counterparties the
right to recapture certain ceded business, which would involve payments by the Company and lead to a reduction in the
Company's unearned premium reserve and related earnings. As of December 31, 2017, if each third party company ceding
business to AG Re, AGC and/or AGRO had a right to recapture such business, and chose to exercise such right, the aggregate
amounts that AG Re, AGC and AGRO could be required to pay to all such companies would be approximately $46 million, $15
million and $13 million, respectively.
Actions taken by the rating agencies with respect to capital models and rating methodology of the Company's business or
changes in capital charges or downgrades of transactions within its insured portfolio may adversely affect its ratings,
business prospects, results of operations and financial condition.
The rating agencies from time to time have evaluated the Company's capital adequacy under a variety of scenarios and
assumptions. The rating agencies do not always supply clear guidance on their approach to assessing the Company's capital
adequacy and the Company may disagree with the rating agencies' approach and assumptions. For example, S&P assesses each
individual exposure (including potential new exposures) insured by the Company based on a variety of factors, including the
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nature of the exposure, the nature of the support or credit enhancement for the exposure, its tenor, and its expected and actual
performance. This assessment determines the amount of capital the Company is required to maintain against that exposure to
maintain its financial strength ratings under S&P's capital adequacy model. Sometimes the rating agencies consider the amount
of additional capital that could be required for certain risks or sectors under certain stress scenarios based on their views of
developments in the market, as each have done recently with respect to the Company's exposures to Puerto Rico. Factors
influencing the rating agencies are beyond management's control and not always known to the Company. In the event of an
actual or perceived deterioration in creditworthiness, or a change in a rating agency's capital model or rating methodology, that
rating agency may require the Company to increase the amount of capital allocated to support the affected exposures,
regardless of whether losses actually occur, or against potential new business. Significant reductions in the rating agencies'
assessments of exposures in the Company's insured portfolio can produce significant increases in the amount of capital required
for the Company to maintain its financial strength ratings under the rating agencies' capital adequacy models, which may
require the Company to seek additional capital. The amount of such capital required may be substantial, and may not be
available to the Company on favorable terms and conditions or at all. Accordingly, the Company cannot ensure that it will seek
to, or be able to, raise additional capital. The failure to raise additional required capital could result in a downgrade of the
Company's ratings and thus have an adverse impact on its business, results of operations and financial condition. See "Risks
Related to the Company's Capital and Liquidity Requirements—The Company may require additional capital from time to
time, including from soft capital and liquidity credit facilities, which may not be available or may be available only on
unfavorable terms."
Risks Related to the Company's Capital and Liquidity Requirements
Significant claim payments may reduce the Company's liquidity.
Claim payments reduce the Company's invested assets and result in reduced liquidity and net investment income, even
if the Company is reimbursed in full over time and does not experience ultimate loss on a particular policy. Since the financial
crisis in 2008, many of the claims paid by the Company were with respect to insured U.S. RMBS securities. More recently,
there has been credit deterioration with respect to certain insured Puerto Rico exposures. The Company had net par outstanding
to general obligation bonds of the Commonwealth of Puerto Rico and various obligations of its related authorities and public
corporations aggregating of $5.0 billion and $4.8 billion, respectively, as of December 31, 2017 and December 31, 2016, all of
which was rated BIG under the Company’s rating methodology as of December 31, 2017. For a discussion of the Company's
Puerto Rico risks and RMBS transactions, see Part II, Item 8, Financial Statements and Supplementary Data, Note 4,
Outstanding Exposure.
The Company plans for future claim payments. If the amount of future claim payments is significantly more than
projected by the Company, however, the Company's ability to make other claim payments and its financial condition, financial
strength ratings and business prospects could be adversely affected.
The Company may require additional capital from time to time, including from soft capital and liquidity credit facilities,
which may not be available or may be available only on unfavorable terms.
The Company's capital requirements depend on many factors, primarily related to its in-force book of business and
rating agency capital requirements. The Company needs liquid assets to make claim payments on its insured portfolio and to
write new business. Failure to raise additional capital as needed may result in the Company being unable to write new business
and may result in the ratings of the Company and its subsidiaries being downgraded by one or more rating agency. The
Company's access to external sources of financing, as well as the cost of such financing, is dependent on various factors,
including the market supply of such financing, the Company's long-term debt ratings and insurance financial strength ratings
and the perceptions of its financial strength and the financial strength of its insurance subsidiaries. The Company's debt ratings
are in turn influenced by numerous factors, such as financial leverage, balance sheet strength, capital structure and earnings
trends. If the Company's need for capital arises because of significant losses, the occurrence of these losses may make it more
difficult for the Company to raise the necessary capital.
Future capital raises for equity or equity-linked securities could also result in dilution to the Company's shareholders.
In addition, some securities that the Company could issue, such as preferred stock or securities issued by the Company's
operating subsidiaries, may have rights, preferences and privileges that are senior to those of its common shares.
Financial guaranty insurers and reinsurers typically rely on providers of lines of credit, excess of loss reinsurance
facilities and similar capital support mechanisms (often referred to as "soft capital") to supplement their existing capital base, or
"hard capital." The ratings of soft capital providers directly affect the level of capital credit which the rating agencies give the
Company when evaluating its financial strength. The Company currently maintains soft capital facilities with providers having
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ratings adequate to provide the Company's desired capital credit. For example, effective January 1, 2018, AGC, AGM and
MAC entered into a $400 million aggregate excess of loss reinsurance facility of which $180 million was placed with an
unaffiliated reinsurer, that covers certain U.S. public finance exposures insured or reinsured by those companies. (For
additional information, see Part II, Item 8, Financial Statements and Supplementary Data, Note 13, Reinsurance and Other
Monoline Exposures). However, no assurance can be given that the Company will be able to renew any existing soft capital
facilities or that one or more of the rating agencies will not downgrade or withdraw the applicable ratings of such providers in
the future. In addition, the Company may not be able to replace a downgraded soft capital provider with an acceptable
replacement provider for a variety of reasons, including if an acceptable replacement provider is unwilling to provide the
Company with soft capital commitments or if no adequately-rated institutions are actively providing soft capital facilities.
Furthermore, the rating agencies may in the future change their methodology and no longer give credit for soft capital, which
may necessitate the Company having to raise additional capital in order to maintain its ratings.
An increase in AGL's subsidiaries' leverage ratio may prevent them from writing new insurance.
Insurance regulatory authorities impose capital requirements on AGL's insurance subsidiaries. These capital
requirements, which include leverage ratios and surplus requirements, may limit the amount of insurance that the subsidiaries
may write. The insurance subsidiaries have several alternatives available to control their leverage ratios, including obtaining
capital contributions from affiliates, purchasing reinsurance or entering into other loss mitigation agreements, or reducing the
amount of new business written. However, a material reduction in the statutory capital and surplus of a subsidiary, whether
resulting from underwriting or investment losses, a change in regulatory capital requirements or otherwise, or a
disproportionate increase in the amount of risk in force, could increase a subsidiary's leverage ratio. This in turn could require
that subsidiary to obtain reinsurance for existing business (which may not be available, or may be available on terms that the
Company considers unfavorable), or add to its capital base to maintain its financial strength ratings. Failure to maintain
regulatory capital levels could limit that subsidiary's ability to write new business.
The Company's holding companies' ability to meet their obligations may be constrained.
Each of AGL, AGUS and AGMH is a holding company and, as such, has no direct operations of its own. None of the
holding companies expects to have any significant operations or assets other than its ownership of the shares of its subsidiaries.
The insurance company subsidiaries’ ability to pay dividends and make other payments depends, among other things,
upon their financial condition, results of operations, cash requirements, 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. Restrictions
applicable to AGM, AGC and MAC, and to AG Re and AGRO, are described under the "Regulation, United States, State
Dividend Limitations" and "Regulation, Bermuda, Restrictions on Dividends and Distributions" sections of “Item 1. Business.”
Such dividends and permitted payments are currently expected to be the primary source of funds for the holding companies to
meet ongoing cash requirements, including operating expenses, any future debt service payments and other expenses, and to
pay dividends to their respective shareholders. Accordingly, if the insurance subsidiaries cannot pay sufficient dividends or
make other permitted payments at the times or in the amounts that are required, that would have an adverse effect on the ability
of AGL, AGUS and AGMH to satisfy their ongoing cash requirements and on their ability to pay dividends to shareholders.
If AGRO were to pay dividends to its U.S. holding company parent and that U.S. holding company were to pay
dividends to its Bermudian parent AG Re, such dividends would be subject to U.S. withholding tax at a rate of 30%.
The ability of AGL and its subsidiaries to meet their liquidity needs may be limited.
Each of AGL, AGUS and AGMH requires liquidity, either in the form of cash or in the ability to easily sell investment
assets for cash, in order to meet its payment obligations, including, without limitation, its operating expenses, interest on debt
and dividends on common shares, and to make capital investments in operating subsidiaries. The Company's operating
subsidiaries require substantial liquidity in order to meet their respective payment and/or collateral posting obligations,
including under financial guaranty insurance policies, CDS contracts or reinsurance agreements. They also require liquidity to
pay operating expenses, reinsurance premiums, dividends to AGUS or AGMH for debt service and dividends to AGL, as well
as, where appropriate, to make capital investments in their own subsidiaries. In addition, the Company may require substantial
liquidity to fund any future acquisitions. The Company cannot give any assurance that the liquidity of AGL and its subsidiaries
will not be adversely affected by adverse market conditions, changes in insurance regulatory law or changes in general
economic conditions.
AGL anticipates that its liquidity needs will be met by the ability of its operating subsidiaries to pay dividends or to
make other payments; external financings; investment income from its invested assets; and current cash and short-term
52
investments. The Company expects that its subsidiaries' need for liquidity will be met by the operating cash flows of such
subsidiaries; external financings; investment income from their invested assets; and proceeds derived from the sale of its
investment portfolio, a significant portion of which is in the form of cash or short-term investments. All of these sources of
liquidity are subject to market, regulatory or other factors that may impact the Company's liquidity position at any time. As
discussed above, AGL's insurance subsidiaries are subject to regulatory and rating agency restrictions limiting their ability to
declare and to pay dividends and make other payments to AGL. As further noted above, external financing may or may not be
available to AGL or its subsidiaries in the future on satisfactory terms.
In addition, investment income at AGL and its subsidiaries may fluctuate based on interest rates, defaults by the
issuers of the securities AGL or its subsidiaries hold in their respective investment portfolios, the performance of alternative
investments, or other factors that the Company does not control. Also, the value of the Company's investments may be
adversely affected by changes in interest rates, credit risk and capital market conditions and therefore may adversely affect the
Company's potential ability to sell investments quickly and the price which the Company might receive for those investments.
Alternative investments may be particularly difficult to sell at adequate prices or at all.
Risks Related to Taxation
Changes in U.S. tax laws could reduce the demand or profitability of financial guaranty insurance, or negatively impact the
Company's investment portfolio.
The Tax Act did not repeal the tax exemption for private activity bonds as proposed in the House version of the bill but
included provisions that could result in a reduction of supply, such as the termination of advance refunding bonds. Any such
lower volume of municipal obligations could impact the amount of such obligations that could benefit from insurance. In
addition, the reduction of the U.S. corporate income tax rate to 21% could make municipal obligations less attractive to certain
institutional investors such as banks and property and casualty insurance companies, resulting in lower demand for municipal
obligations.
Further, future changes in U.S. federal, state or local laws that materially adversely affect the tax treatment of
municipal securities or the market for those securities, or other changes negatively affecting the municipal securities market,
may lower volume and demand for municipal obligations and also may adversely impact the Company's investment portfolio, a
significant portion of which is invested in tax-exempt instruments. These adverse changes may adversely affect the value of the
Company's tax-exempt portfolio, or its liquidity.
Certain of the Company's non-U.S. subsidiaries may be subject to U.S. tax.
The Company manages its business so that AGL and its non-U.S. subsidiaries (other than AGRO) operate in such a
manner that none of them should be subject to U.S. federal tax (other than U.S. excise tax on insurance and reinsurance
premium income attributable to insuring or reinsuring U.S. risks, and U.S. withholding tax on certain U.S. source investment
income). However, because there is considerable uncertainty as to the activities which constitute being engaged in a trade or
business within the U.S., the Company cannot be certain that the IRS will not contend successfully that AGL or any of its non-
U.S. subsidiaries (other than AGRO) is/are engaged in a trade or business in the U.S. If AGL and its non-U.S. subsidiaries
(other than AGRO) were considered to be engaged in a trade or business in the U.S., each such company could be subject to
U.S. corporate income and branch profits taxes on the portion of its earnings effectively connected to such U.S. business.
AGL, AG Re and AGRO may become subject to taxes in Bermuda after March 2035, which may have a material adverse
effect on the Company's results of operations and on an investment in the Company.
The Bermuda Minister of Finance, under Bermuda's Exempted Undertakings Tax Protection Act 1966, as amended,
has given AGL, AG Re and AGRO an assurance that if any legislation is enacted in Bermuda that would impose tax computed
on profits or income, or computed on any capital asset, gain or appreciation, or any tax in the nature of estate duty or
inheritance tax, then subject to certain limitations the imposition of any such tax will not be applicable to AGL, AG Re or
AGRO, or any of AGL's or its subsidiaries' operations, shares, debentures or other obligations until March 31, 2035. Given the
limited duration of the Minister of Finance's assurance, the Company cannot be certain that it will not be subject to Bermuda
tax after March 31, 2035.
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U.S. Persons who hold 10% or more of AGL's shares directly or through non-U.S. entities may be subject to taxation under
the U.S. controlled non-U.S. corporation rules.
Each 10% U.S. shareholder of a non-U.S. corporation that is a CFC at any time during a taxable year that owns shares
in the non-U.S. corporation directly or indirectly through non-U.S. entities on the last day of the non-U.S. corporation's taxable
year during which it is a CFC, must include in its gross income for U.S. federal income tax purposes its pro rata share of the
CFC's "subpart F income," even if the subpart F income is not distributed. In addition, upon a sale of shares of a CFC, 10%
U.S. shareholders may be subject to U.S. federal income tax on a portion of their gain at ordinary income rates.
The Company believes that because of the dispersion of the share ownership in AGL, no U.S. Person who owns AGL's
shares directly or indirectly through non-U.S. entities should be treated as a 10% U.S. shareholder of AGL or of any of its non-
U.S. subsidiaries. However, AGL’s shares may not be as widely dispersed as the Company believes due to, for example, the
application of certain ownership attribution rules, and no assurance may be given that a U.S. Person who owns the Company's
shares will not be characterized as a 10% U.S. shareholder, in which case such U.S. Person may be subject to taxation under
U.S. CFC rules.
U.S. Persons who hold shares may be subject to U.S. income taxation at ordinary income rates on their proportionate share
of the Company's related person insurance income.
If the following conditions are true, then a U.S. Person who owns AGL's shares (directly or indirectly through non-
U.S. entities) on the last day of the taxable year would be required to include in its income for U.S. federal income tax purposes
such person's pro rata share of the RPII of such Foreign Insurance Subsidiary (as defined below) for the entire taxable year,
determined as if such RPII were distributed proportionately only to U.S. Persons at that date, regardless of whether such
income is distributed:
•
•
•
the Company is 25% or more owned directly, indirectly through non-U.S. entities or by attribution by U.S.
Persons;
the gross RPII of AG Re or any other AGL non-U.S. subsidiary engaged in the insurance business that has not
made an election under section 953(d) of the Code to be treated as a U.S. corporation for all U.S. tax purposes or
are CFCs owned directly or indirectly by AGUS (each, with AG Re, a Foreign Insurance Subsidiary) equals or
exceeds 20% of such Foreign Insurance Subsidiary's gross insurance income in any taxable year; and
direct or indirect insureds (and persons related to such insureds) own (or are treated as owning directly or
indirectly through entities) 20% or more of the voting power or value of the Company's shares.
In addition, any RPII that is includible in the income of a U.S. tax-exempt organization may be treated as unrelated
business taxable income.
The amount of RPII earned by a Foreign Insurance Subsidiary (generally, premium and related investment income
from the direct or indirect insurance or reinsurance of any direct or indirect U.S. holder of shares or any person related to such
holder) will depend on a number of factors, including the geographic distribution of a Foreign Insurance Subsidiary's business
and the identity of persons directly or indirectly insured or reinsured by a Foreign Insurance Subsidiary. The Company believes
that each of its Foreign Insurance Subsidiaries either should not in the foreseeable future have RPII income which equals or
exceeds 20% of its gross insurance income or have direct or indirect insureds, as provided for by RPII rules, that directly or
indirectly own 20% or more of either the voting power or value of AGL's shares. However, the Company cannot be certain that
this will be the case because some of the factors which determine the extent of RPII may be beyond its control.
U.S. Persons who dispose of AGL's shares may be subject to U.S. income taxation at dividend tax rates on a portion of their
gain, if any.
The meaning of the RPII provisions and the application thereof to AGL and its Foreign Insurance Subsidiaries is
uncertain. The RPII rules in conjunction with section 1248 of the Code provide that if a U.S. Person disposes of shares in a
non-U.S. insurance corporation in which U.S. Persons own (directly, indirectly, through non-U.S. entities or by attribution)
25% or more of the shares (even if the amount of gross RPII is less than 20% of the corporation's gross insurance income and
the ownership of its shares by direct or indirect insureds and related persons is less than the 20% threshold), any gain from the
disposition will generally be treated as dividend income to the extent of the holder's share of the corporation's undistributed
earnings and profits that were accumulated during the period that the holder owned the shares. This provision applies whether
54
or not such earnings and profits are attributable to RPII. In addition, such a holder will be required to comply with certain
reporting requirements, regardless of the amount of shares owned by the holder.
In the case of AGL's shares, these RPII rules should not apply to dispositions of shares because AGL is not itself
directly engaged in the insurance business. However, the RPII provisions have never been interpreted by the courts or the U.S.
Treasury Department in final regulations, and regulations interpreting the RPII provisions of the Code exist only in proposed
form. It is not certain whether these regulations will be adopted in their proposed form, what changes or clarifications might
ultimately be made thereto, or whether any such changes, as well as any interpretation or application of the RPII rules by the
IRS, the courts, or otherwise, might have retroactive effect. The U.S. Treasury Department has authority to impose, among
other things, additional reporting requirements with respect to RPII.
U.S. Persons who hold common shares will be subject to adverse tax consequences if AGL is considered to be a "passive
foreign investment company" for U.S. federal income tax purposes.
If AGL is considered a PFIC for U.S. federal income tax purposes, a U.S. Person who owns any shares of AGL will be
subject to adverse tax consequences that could materially adversely affect its investment, including subjecting the investor to
both a greater tax liability than might otherwise apply and an interest charge. The Company believes that AGL was not a PFIC
for U.S. federal income tax purposes for taxable years through 2017 and, based on the application of certain PFIC look-through
rules and the Company's plan of operations for the current and future years, should not be a PFIC in the future. However, as
discussed above, the Tax Act limits the insurance income exception to a non-U.S. insurance company that is a qualifying
insurance corporation that would be taxable as an insurance company if it were a U.S. corporation and maintains insurance
liabilities of more than 25% of such company’s assets for a taxable year (or maintains insurance liabilities that at least equal or
exceed 10% of its assets and it satisfies a facts and circumstances test that requires a showing that the failure to exceed the 25%
threshold is due to run-off or rating agency circumstances) (the Reserve Test).
In addition, the IRS issued proposed regulations in 2015 intended to clarify the application of the PFIC provisions to
an insurance company. These proposed regulations provide that a non-U.S. insurance company may only qualify for an
exception to the PFIC rules if, among other things, the non-U.S. insurance company’s officers and employees perform its
substantial managerial and operational activities. This proposed regulation will not be effective unless and until adopted in
final form. The Company cannot predict the likelihood of finalization of the proposed regulations or the scope, nature, or
impact of the proposed regulations on it, should they be formally adopted or enacted or whether its non-U.S. insurance
subsidiaries will be able to satisfy the Reserve Test in future years and the interaction of the PFIC look-through rules is not
clear, no assurance may be given that the Company will not be characterized as a PFIC.
Changes in U.S. federal income tax law could materially adversely affect an investment in AGL's common shares.
The Tax Act was passed by the U.S. Congress and was signed into law on December 22, 2017, with certain provisions
intended to eliminate certain perceived tax advantages of companies (including insurance companies) that have legal domiciles
outside the United States but have certain U.S. connections and United States persons investing in such companies. For
example, the Tax Act includes a BEAT that could make affiliate reinsurance between United States and non-U.S. members of
the group economically unfeasible and a current tax on global intangible income that may result in an increase in U.S.
corporate income tax imposed on U.S. group members with respect to certain earnings at their non-U.S. subsidiaries, and
revises the rules applicable to PFICs and CFCs. Although the Company is currently unable to predict the ultimate impact of the
Tax Act on its business, shareholders and results of operations, it is possible that the Tax Act may increase the U.S. federal
income tax liability of the U.S. members of its group that cede risk to non-U.S. group members and may affect the timing and
amount of U.S. federal income taxes imposed on certain U.S. shareholders. Further, it is possible that other legislation could be
introduced and enacted by the current Congress or future Congresses that could have an adverse impact on the Company.
U.S. federal income tax laws and interpretations regarding whether a company is engaged in a trade or business within
the U.S. is a PFIC, or whether U.S. Persons would be required to include in their gross income the "subpart F income" of a
CFC or RPII are subject to change, possibly on a retroactive basis. There currently are only recently proposed regulations
regarding the application of the PFIC rules to insurance companies, and the regulations regarding RPII have been in proposed
form since 1991. New regulations or pronouncements interpreting or clarifying such rules may be forthcoming. The Company
cannot be certain if, when, or in what form such regulations or pronouncements may be implemented or made, or whether such
guidance will have a retroactive effect.
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An ownership change under Section 382 of the Code could have adverse U.S. federal tax consequences.
If AGL were to issue equity securities in the future, including in connection with any strategic transaction, or if
previously issued securities of AGL were to be sold by the current holders, AGL may experience an "ownership change" within
the meaning of Section 382 of the Code. In general terms, an ownership change would result from transactions increasing the
aggregate ownership of certain stockholders in AGL's stock by more than 50 percentage points over a testing period (generally
three years). If an ownership change occurred, the Company's ability to use certain tax attributes, including certain built-in
losses, credits, deductions or tax basis and/or the Company's ability to continue to reflect the associated tax benefits as assets on
AGL's balance sheet, may be limited. The Company cannot give any assurance that AGL will not undergo an ownership change
at a time when these limitations could materially adversely affect the Company's financial condition.
A change in AGL’s U.K. tax residence or its ability to otherwise qualify for the benefits of income tax treaties to which the
U.K. is a party could adversely affect an investment in AGL’s common shares.
AGL is not incorporated in the U.K. and, accordingly, is only resident in the U.K. for U.K. tax purposes if it is
“centrally managed and controlled” in the U.K. Central management and control constitutes the highest level of control of a
company’s affairs. AGL believes it is entitled to take advantage of the benefits of income tax treaties to which the U.K. is a
party on the basis that it is has established central management and control in the U.K. AGL has obtained confirmation that
there is a low risk of challenge to its residency status from HMRC under the facts as they stand today. The Board intends to
manage the affairs of AGL in such a way as to maintain its status as a company that is tax-resident in the U.K. for U.K. tax
purposes and to qualify for the benefits of income tax treaties to which the U.K. is a party. However, the concept of central
management and control is a case-law concept that is not comprehensively defined in U.K. statute. In addition, it is a question
of fact. Moreover, tax treaties may be revised in a way that causes AGL to fail to qualify for benefits thereunder. Accordingly, a
change in relevant U.K. tax law or in tax treaties to which the U.K. is a party, or in AGL’s central management and control as a
factual matter, or other events, could adversely affect the ability of Assured Guaranty to manage its capital in the efficient
manner that it contemplated in establishing U.K. tax residence.
Changes in U.K. tax law or in AGL’s ability to satisfy all the conditions for exemption from U.K. taxation on dividend
income or capital gains in respect of its direct subsidiaries could affect an investment in AGL’s common shares.
As a U.K. tax resident, AGL is subject to U.K. corporation tax in respect of its worldwide profits (both income and
capital gains), subject to applicable exemptions. The rate of corporation tax is currently 19%.
• With respect to income, the dividends that AGL receives from its subsidiaries should be exempt from U.K.
corporation tax under the exemption contained in section 931D of the Corporation Tax Act 2009.
• With respect to capital gains, if AGL were to dispose of shares in its direct subsidiaries or if it were deemed to
have done so, it may realize a chargeable gain for U.K. tax purposes. Any tax charge would be based on AGL’s
original acquisition cost. It is anticipated that any such future gain should qualify for exemption under the
substantial shareholding exemption in Schedule 7AC to the Taxation of Chargeable Gains Act 1992. However, the
availability of such exemption would depend on facts at the time of disposal, in particular the “trading” nature of
the relevant subsidiary. There is no statutory definition of what constitutes “trading” activities for this purpose and
in practice reliance is placed on the published guidance of HMRC.
A change in U.K. tax law or its interpretation by HMRC, or any failure to meet all the qualifying conditions for
relevant exemptions from U.K. corporation tax, could affect Assured Guaranty’s financial results of operations or its ability to
provide returns to shareholders.
Assured Guaranty's financial results may be affected by measures taken in response to the OECD BEPS project.
The Organization for Economic Co-operation and Development published its final reports on Base Erosion and Profit
Shifting (the BEPS Reports) in October 2015. The recommended actions include an examination of the definition of a
“permanent establishment” and the rules for attributing profit to a permanent establishment. There are also recommended
actions relating to the goal of ensuring that transfer pricing outcomes are in line with value creation, noting that the current
rules may facilitate the transfer of risks or capital away from countries where the economic activity takes place. In response to
this, the U.K. Government has already introduced legislation to implement changes to transfer pricing, hybrid financial
instruments and the deductibility of interest. Any further changes in U.K. tax law or changes in U.S. tax law in response to the
BEPS Reports could adversely affect Assured Guaranty’s tax liability.
56
A new U.K. tax, the diverted profits tax (DPT), which is levied at 25%, came into effect from April 1, 2015, and, in
substance, effectively anticipated some of the recommendations emerging from the BEPS Reports. This is an anti-avoidance
measure, aimed at protecting the U.K. tax base against the diversion of profits away from the U.K. tax charge. In particular,
DPT may apply to profits generated by economic activities carried out in the U.K., that are not taxed in the U.K. by reason of
arrangements between companies in the same multinational group and involving a low-tax jurisdiction, including co-insurance
and reinsurance. It is currently unclear whether DPT would constitute a creditable tax for U.S. foreign tax credit purposes. If
any member of the Assured Guaranty group is liable to DPT, this could adversely affect the Company's results of operations.
An adverse adjustment under U.K. legislation governing the taxation of U.K. tax resident holding companies on the profits
of their non-U.K. subsidiaries could adversely impact Assured Guaranty’s tax liability.
Under the U.K. “controlled foreign company” regime, the income profits of non-U.K. resident companies may, in
certain circumstances, be attributed to controlling U.K. resident shareholders for U.K. corporation tax purposes. The non-U.K.
resident members of the Assured Guaranty group intend to operate and manage their levels of capital in such a manner that
their profits would not be taxed on AGL under the U.K. CFC regime. Assured Guaranty has obtained clearance from HMRC
that none of the profits of the non-U.K. resident members of the Assured Guaranty group should be subject to U.K. tax as a
result of attribution under the CFC regime on the facts as they currently stand. However, a change in the way in which Assured
Guaranty operates or any further change in the CFC regime, resulting in an attribution to AGL of any of the income profits of
any of AGL’s non-U.K. resident subsidiaries for U.K. corporation tax purposes, could adversely affect Assured Guaranty’s
financial results of operations.
Risks Related to GAAP and Applicable Law
Changes in the fair value of the Company's insured credit derivatives portfolio may subject net income to volatility.
The Company is required to mark-to-market certain derivatives that it insures, including CDS that are considered
derivatives under GAAP. Although there is no cash flow effect from this "marking-to-market," net changes in the fair value of
the derivative are reported in the Company's consolidated statements of operations and therefore affect its reported earnings. As
a result of such treatment, and given the large principal balance of the Company's CDS portfolio, small changes in the market
pricing for insurance of CDS will generally result in the Company recognizing material gains or losses, with material market
price increases generally resulting in large reported losses under GAAP. Accordingly, the Company's GAAP earnings will be
more volatile than would be suggested by the actual performance of its business operations and insured portfolio.
The fair value of a credit derivative will be affected by any event causing changes in the credit spread (i.e., the
difference in interest rates between comparable securities having different credit risk) on an underlying security referenced in
the credit derivative. Common events that may cause credit spreads on an underlying municipal or corporate security
referenced in a credit derivative to fluctuate include changes in the state of national or regional economic conditions, industry
cyclicality, changes to a company's competitive position within an industry, management changes, changes in the ratings of the
underlying security, movements in interest rates, default or failure to pay interest, or any other factor leading investors to revise
expectations about the issuer's ability to pay principal and interest on its debt obligations. Similarly, common events that may
cause credit spreads on an underlying structured security referenced in a credit derivative to fluctuate may include the
occurrence and severity of collateral defaults, changes in demographic trends and their impact on the levels of credit
enhancement, rating changes, changes in interest rates or prepayment speeds, or any other factor leading investors to revise
expectations about the risk of the collateral or the ability of the servicer to collect payments on the underlying assets sufficient
to pay principal and interest. The fair value of credit derivative contracts also reflects the change in the Company's own credit
cost, based on the price to purchase credit protection on AGC and AGM. For discussion of the Company's fair value
methodology for credit derivatives, see Part II, Item 8, Financial Statements and Supplementary Data, Note 7, Fair Value
Measurement.
If a credit derivative is held to maturity and no credit loss is incurred, any unrealized gains or losses previously
reported would be offset as the transactions reach maturity. Due to the complexity of fair value accounting and the application
of GAAP requirements, future amendments or interpretations of relevant accounting standards may cause the Company to
modify its accounting methodology in a manner which may have an adverse impact on its financial results.
Change in industry and other accounting practices could impair the Company's reported financial results and impede its
ability to do business.
Changes in or the issuance of new accounting standards, as well as any changes in the interpretation of current
accounting guidance, may have an adverse effect on the Company's reported financial results, including future revenues, and
57
may influence the types and/or volume of business that management may choose to pursue. See Part II, Item 8, Financial
Statements and Supplementary Data, Note 1, Business and Basis of Presentation, for the accounting of the Company's financial
guaranty variable interest entities' liabilities effective January 1, 2018.
Changes in or inability to comply with applicable law could adversely affect the Company's ability to do business.
The Company’s businesses are subject to direct and indirect regulation under state insurance laws, federal securities,
commodities and tax laws affecting public finance and asset backed obligations, and federal regulation of derivatives, as well as
applicable laws in the other countries in which the Company operates. Future legislative, regulatory, judicial or other legal
changes in the jurisdictions in which the Company does business may adversely affect its ability to pursue its current mix of
business, thereby materially impacting its financial results by, among other things, limiting the types of risks it may insure,
lowering applicable single or aggregate risk limits, increasing required reserves or capital, increasing the level of supervision or
regulation to which the Company’s operations may be subject, imposing restrictions that make the Company’s products less
attractive to potential buyers, lowering the profitability of the Company’s business activities, requiring the Company to change
certain of its business practices and exposing it to additional costs (including increased compliance costs).
If the Company fails to comply with applicable insurance laws and regulations it could be exposed to fines, the loss of
insurance licenses, limitations on the right to originate new business and restrictions on its ability to pay dividends, all of which
could have an adverse impact on its business results and prospects. If an insurance company’s surplus declines below minimum
required levels, the insurance regulator could impose additional restrictions on the insurer or initiate insolvency proceedings.
AGM, AGC and MAC may increase surplus by various means, including obtaining capital contributions from the Company,
purchasing reinsurance or entering into other loss mitigation arrangements, reducing the amount of new business written or
obtaining regulatory approval to release contingency reserves. From time to time, AGM, MAC and AGC have obtained
approval from their regulators to release contingency reserves based on losses and, in the case of AGM and MAC, also based
on the expiration of their insured exposure.
AGL's ability to pay dividends may be constrained by certain insurance regulatory requirements and restrictions.
AGL is subject to Bermuda regulatory requirements that affect its ability to pay dividends on common shares and to
make other payments. Under the Bermuda Companies Act 1981, as amended, AGL may declare or pay a dividend only if it has
reasonable grounds for believing that it is, and after the payment would be, able to pay its liabilities as they become due, and if
the realizable value of its assets would not be less than its liabilities. While AGL currently intends to pay dividends on its
common shares, investors who require dividend income should carefully consider these risks before investing in AGL. In
addition, if, pursuant to the insurance laws and related regulations of Bermuda, Maryland and New York, AGL's insurance
subsidiaries cannot pay sufficient dividends to AGL at the times or in the amounts that it requires, it would have an adverse
effect on AGL's ability to pay dividends to shareholders. See "Risks Related to the Company's Capital and Liquidity
Requirements—The ability of AGL and its subsidiaries to meet their liquidity needs may be limited."
Applicable insurance laws may make it difficult to effect a change of control of AGL.
Before a person can acquire control of a U.S. or U.K. insurance company, prior written approval must be obtained
from the insurance commissioner of the state or country where the insurer is domiciled. Because a person acquiring 10% or
more of AGL's common shares would indirectly control the same percentage of the stock of its U.S. insurance company
subsidiaries, the insurance change of control laws of Maryland, New York and the U.K. would likely apply to such a
transaction. These laws may discourage potential acquisition proposals and may delay, deter or prevent a change of control of
AGL, including through transactions, and in particular unsolicited transactions, that some or all of its shareholders might
consider to be desirable. While AGL's Bye-Laws limit the voting power of any shareholder to less than 10%, the Company
cannot provide assurances that the applicable regulatory body would agree that a shareholder who owned 10% or more of its
common shares did not control the applicable insurance company subsidiary, notwithstanding the limitation on the voting
power of such shares.
Changes in applicable laws and regulations resulting from Brexit may adversely affect the Company.
Brexit could lead to legal uncertainty and politically divergent national laws and regulations as the U.K. determines
which EU laws to replace or replicate. Depending on the terms of Brexit, AGE may lose the ability to insure new transactions,
or to service existing contracts, in non-U.K. EU and EEA countries without obtaining additional licenses, which may require a
presence in another EU country. Brexit-related changes in laws and regulations may also adversely affect the Company’s
surveillance and loss mitigation activities with respect to existing insured transactions in non-U.K. EU and EEA countries,
especially to the extent Brexit inhibits the issuance of new guaranties in distressed situations. Brexit may also impact laws,
58
rules and regulations applicable to U.K. entities with obligations insured by the Company and could adversely impact the
ability of non-U.K. EU or EEA citizens to continue to be employed at AGE in London.
Risks Related to AGL's Common Shares
The market price of AGL's common shares may be volatile, which could cause the value of an investment in the Company to
decline.
The market price of AGL's common shares has experienced, and may continue to experience, significant volatility.
Numerous factors, including many over which the Company has no control, may have a significant impact on the market price
of its common shares. These risks include those described or referred to in this "Risk Factors" section as well as, among other
things:
•
•
•
•
•
•
•
•
•
investor perceptions of the Company, its prospects and that of the financial guaranty industry and the markets in
which the Company operates;
the Company's operating and financial performance;
the Company's access to financial and capital markets to raise additional capital, refinance its debt or replace
existing senior secured credit and receivables-backed facilities;
the Company's ability to repay debt;
the Company's dividend policy;
the amount of share repurchases authorized by the Company;
future sales of equity or equity-related securities;
changes in earnings estimates or buy/sell recommendations by analysts; and
general financial, economic and other market conditions.
In addition, the stock market in recent years has experienced extreme price and trading volume fluctuations that often
have been unrelated or disproportionate to the operating performance of individual companies. These broad market fluctuations
may adversely affect the price of AGL's common shares, regardless of its operating performance.
Furthermore, future sales or other issuances of AGL equity may adversely affect the market price of its common
shares.
AGL's common shares are equity securities and are junior to existing and future indebtedness.
As equity interests, AGL's common shares rank junior to indebtedness and to other non-equity claims on AGL and its
assets available to satisfy claims on AGL, including claims in a bankruptcy or similar proceeding. For example, upon
liquidation, holders of AGL debt securities and shares of preferred stock and creditors would receive distributions of AGL's
available assets prior to the holders of AGL common shares. Similarly, creditors, including holders of debt securities, of AGL's
subsidiaries, have priority on the assets of those subsidiaries. Future indebtedness may restrict payment of dividends on the
common shares.
Additionally, unlike indebtedness, where principal and interest customarily are payable on specified due dates, in the
case of common shares, dividends are payable only when and if declared by AGL's Board or a duly authorized committee of
the Board. Further, the common shares place no restrictions on its business or operations or on its ability to incur indebtedness
or engage in any transactions, subject only to the voting rights available to stockholders generally.
59
Provisions in the Code and AGL's Bye-Laws may reduce or increase the voting rights of its common shares.
Under the Code, AGL's Bye-Laws and contractual arrangements, certain shareholders have their voting rights limited
to less than one vote per share, resulting in other shareholders having voting rights in excess of one vote per share. Moreover,
the relevant provisions of the Code and AGL's Bye-Laws may have the effect of reducing the votes of certain shareholders who
would not otherwise be subject to the limitation by virtue of their direct share ownership.
More specifically, pursuant to the relevant provisions of the Code, if, and so long as, the common shares of a
shareholder are treated as "controlled shares" (as determined under section 958 of the Code) of any U.S. Person (as defined
below) and such controlled shares constitute 9.5% or more of the votes conferred by AGL's issued shares, the voting rights with
respect to the controlled shares of such U.S. Person (a 9.5% U.S. Shareholder) are limited, in the aggregate, to a voting power
of less than 9.5%, under a formula specified in AGL's Bye-Laws. The formula is applied repeatedly until the voting power of
all 9.5% U.S. Shareholders has been reduced to less than 9.5%. For these purposes, "controlled shares" include, among other
things, all shares of AGL that such U.S. Person is deemed to own directly, indirectly or constructively (within the meaning of
section 958 of the Code).
In addition, the Board may limit a shareholder's voting rights where it deems appropriate to do so to (1) avoid the
existence of any 9.5% U.S. Shareholders, and (2) avoid certain material adverse tax, legal or regulatory consequences to the
Company or any of the Company's subsidiaries or any shareholder or its affiliates. AGL's Bye-Laws provide that shareholders
will be notified of their voting interests prior to any vote taken by them.
As a result of any such reallocation of votes, the voting rights of a holder of AGL common shares might increase
above 5% of the aggregate voting power of the outstanding common shares, thereby possibly resulting in such holder becoming
a reporting person subject to Schedule 13D or 13G filing requirements under the Securities Exchange Act of 1934. In addition,
the reallocation of votes could result in such holder becoming subject to the short swing profit recovery and filing requirements
under Section 16 of the Exchange Act.
AGL also has the authority under its Bye-Laws to request information from any shareholder for the purpose of
determining whether a shareholder's voting rights are to be reallocated under the Bye-Laws. If a shareholder fails to respond to
a request for information or submits incomplete or inaccurate information in response to a request, the Company may, in its
sole discretion, eliminate such shareholder's voting rights.
Provisions in AGL's Bye-Laws may restrict the ability to transfer common shares, and may require shareholders to sell their
common shares.
AGL's Board may decline to approve or register a transfer of any common shares (1) if it appears to the Board, after
taking into account the limitations on voting rights contained in AGL's Bye-Laws, that any adverse tax, regulatory or legal
consequences to AGL, any of its subsidiaries or any of its shareholders may occur as a result of such transfer (other than such
as the Board considers to be de minimis), or (2) subject to any applicable requirements of or commitments to the NYSE, if a
written opinion from counsel supporting the legality of the transaction under U.S. securities laws has not been provided or if
any required governmental approvals have not been obtained.
AGL's Bye-Laws also provide that if the Board determines that share ownership by a person may result in adverse tax,
legal or regulatory consequences to the Company, any of the subsidiaries or any of the shareholders (other than such as the
Board considers to be de minimis), then AGL has the option, but not the obligation, to require that shareholder to sell to AGL or
to third parties to whom AGL assigns the repurchase right for fair market value the minimum number of common shares held
by such person which is necessary to eliminate such adverse tax, legal or regulatory consequences.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The principal executive offices of AGL and AG Re consist of approximately 8,250 square feet of office space located
in Hamilton, Bermuda; the lease for this space expires in April 2021 and is renewable at the option of the Company.
60
The U.S. subsidiaries of the Company lease 103,500 square feet of office space in New York City; the lease expires in
February 2032, with an option, subject to certain conditions, to renew for five years at a fair market rent. The U.S. subsidiaries
also lease office space in San Francisco. In addition, the European subsidiaries of the Company lease space in London.
Management believes its office space is adequate for its current and anticipated needs.
ITEM 3. LEGAL PROCEEDINGS
Lawsuits arise in the ordinary course of the Company's business. It is the opinion of the Company's management,
based upon the information available, that the expected outcome of litigation against the Company, individually or in the
aggregate, will not have a material adverse effect on the Company's financial position or liquidity, although an adverse
resolution of litigation against the Company in a fiscal quarter or year could have a material adverse effect on the Company's
results of operations in a particular quarter or year.
In addition, in the ordinary course of their respective businesses, certain of the Company's subsidiaries assert claims in
legal proceedings against third parties to recover losses paid in prior periods or prevent losses in the future. For example, the
Company has commenced a number of legal actions in the U.S. District Court for the District of Puerto Rico to enforce its
rights with respect to the obligations it insures of Puerto Rico and various of its related authorities and public corporations. See
the "Exposure to Puerto Rico" section of Part II, Item 8, Financial Statements and Supplementary Data, Note 4, Outstanding
Exposure, for a description of such actions. See also the "Recovery Litigation" section of Part II, Item 8, Financial Statements
and Supplementary Data, Note 5, Expected Losses to be Paid, for a description of recovery litigation unrelated to Puerto Rico.
The amounts, if any, the Company will recover in these and other proceedings to recover losses are uncertain, and recoveries, or
failure to obtain recoveries, in any one or more of these proceedings during any quarter or year could be material to the
Company's results of operations in that particular quarter or year.
The Company establishes accruals for litigation and regulatory matters to the extent it is probable that a loss has been
incurred and the amount of that loss can be reasonably estimated. For litigation and regulatory matters where a loss may be
reasonably possible, but not probable, or is probable but not reasonably estimable, no accrual is established, but if the matter is
material, it is disclosed, including matters discussed below. The Company reviews relevant information with respect to its
litigation and regulatory matters on a quarterly and annual basis and updates its accruals, disclosures and estimates of
reasonably possible loss based on such reviews.
The Company receives subpoenas duces tecum and interrogatories from regulators from time to time.
On November 28, 2011, Lehman Brothers International (Europe) (in administration) (LBIE) sued AG Financial
Products Inc. (AGFP), an affiliate of AGC which in the past had provided credit protection to counterparties under CDS. AGC
acts as the credit support provider of AGFP under these CDS. LBIE's complaint, which was filed in the Supreme Court of the
State of New York, alleged that AGFP improperly terminated nine credit derivative transactions between LBIE and AGFP and
improperly calculated the termination payment in connection with the termination of 28 other credit derivative transactions
between LBIE and AGFP. Following defaults by LBIE, AGFP properly terminated the transactions in question in compliance
with the agreement between AGFP and LBIE, and calculated the termination payment properly. AGFP calculated that LBIE
owes AGFP approximately $29 million in connection with the termination of the credit derivative transactions, whereas LBIE
asserted in the complaint that AGFP owes LBIE a termination payment of approximately $1.4 billion. On February 3, 2012,
AGFP filed a motion to dismiss certain of the counts in the complaint, and on March 15, 2013, the court granted AGFP's motion
to dismiss the count relating to improper termination of the nine credit derivative transactions and denied AGFP's motion to
dismiss the counts relating to the remaining transactions. On February 22, 2016, AGFP filed a motion for summary judgment on
the remaining causes of action asserted by LBIE and on AGFP's counterclaims. LBIE’s administrators disclosed in an April 10,
2015 report to LBIE’s unsecured creditors that LBIE's valuation expert has calculated LBIE's damages in aggregate for the 28
transactions to range between a minimum of approximately $200 million and a maximum of approximately $500 million,
depending on what adjustment, if any, is made for AGFP's credit risk and excluding any applicable interest.
61
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
Executive Officers of the Company
The table below sets forth the names, ages, positions and business experience of the executive officers of AGL.
Name
Dominic J. Frederico
Robert A. Bailenson
Ling Chow
Russell B. Brewer II
Bruce E. Stern
Howard W. Albert
Stephen Donnarumma
Age
65
51
47
61
63
58
55
President and Chief Executive Officer; Deputy Chairman
Position(s)
Chief Financial Officer
General Counsel and Secretary(1)
Chief Surveillance Officer
Executive Officer
Chief Risk Officer
Chief Credit Officer
____________________
(1)
Ms. Chow became General Counsel and Secretary of AGL on January 1, 2018. James M. Michener served as General
Counsel and Secretary of AGL from February 2004 through December 31, 2017. Mr. Michener has been appointed the
Senior Advisor to the Chief Executive Officer through December 31, 2018, but is no longer an executive officer of
AGL.
Dominic J. Frederico has been a director of AGL since the Company's 2004 initial public offering and the President
and Chief Executive Officer of AGL since December 2003. Mr. Frederico served as Vice Chairman of ACE Limited from 2003
until 2004 and served as President and Chief Operating Officer of ACE Limited and Chairman of ACE INA Holdings, Inc. from
1999 to 2003. Mr. Frederico was a director of ACE Limited from 2001 through 2005. From 1995 to 1999 Mr. Frederico served
in a number of executive positions with ACE Limited. Prior to joining ACE Limited, Mr. Frederico spent 13 years working for
various subsidiaries of American International Group.
Robert A. Bailenson has been Chief Financial Officer of AGL since June 2011. Mr. Bailenson has been with Assured
Guaranty and its predecessor companies since 1990. Mr. Bailenson became Chief Accounting Officer of AGM in July 2009 and
has been Chief Accounting Officer of AGL since May 2005 and Chief Accounting Officer of AGC since 2003. He was Chief
Financial Officer and Treasurer of AG Re from 1999 until 2003 and was previously the Assistant Controller of Capital Re
Corp., the Company's predecessor.
Ling Chow has been General Counsel and Secretary of AGL since January 1, 2018. Ms. Chow previously served as
Deputy General Counsel and Assistant Secretary of AGL from May 2015 and as Assured Guaranty's U.S. General Counsel
from June 2016. Prior to that, Ms. Chow served as Deputy General Counsel of Assured Guaranty's U.S. subsidiaries in several
capacities from 2004. Before joining Assured Guaranty in 2002, Ms. Chow was an associate at Brobeck, Phleger & Harrison
LLP, Cahill Gordon & Reindel and LeBoeuf, Lamb, Greene & MacRae, L.L.P.
Russell B. Brewer II has been Chief Surveillance Officer of AGL since November 2009 and Chief Surveillance
Officer of AGC and AGM since July 2009 and has also been responsible for information technology at Assured Guaranty since
April 2015. Mr. Brewer has been with AGM since 1986. Mr. Brewer was Chief Risk Management Officer of AGM from
September 2003 until July 2009 and Chief Underwriting Officer of AGM from September 1990 until September 2003.
Mr. Brewer was also a member of the Executive Management Committee of AGM. He was a Managing Director of AGMH
from May 1999 until July 2009. From March 1989 to August 1990, Mr. Brewer was Managing Director, Asset Finance Group,
of AGM. Prior to joining AGM, Mr. Brewer was an Associate Director of Moody's Investors Service, Inc.
Bruce E. Stern has been Executive Officer of AGC and AGM since July 2009. Mr. Stern was General Counsel,
Managing Director, Secretary and Executive Management Committee member of AGM from 1987 until July 2009. Prior to
joining AGM, Mr. Stern was an associate at the New York office of Cravath, Swaine & Moore. Mr. Stern has served as
Chairman of the Association of Financial Guaranty Insurers since April 2010.
Howard W. Albert has been Chief Risk Officer of AGL since May 2011. Prior to that, he was Chief Credit Officer of
AGL from 2004 to April 2011. Mr. Albert joined Assured Guaranty in September 1999 as Chief Underwriting Officer of
62
Capital Re Company, the predecessor to AGC. Before joining Assured Guaranty, he was a Senior Vice President with
Rothschild Inc. from February 1997 to August 1999. Prior to that, he spent eight years at Financial Guaranty Insurance
Company from May 1989 to February 1997, where he was responsible for underwriting guaranties of asset-backed securities
and international infrastructure transactions. Prior to that, he was employed by Prudential Capital, an investment arm of The
Prudential Insurance Company of America, from September 1984 to April 1989, where he underwrote investments in asset-
backed securities, corporate loans and project financings.
Stephen Donnarumma has been the Chief Credit Officer of AGC since 2007, of AGM since its 2009 acquisition, and
of MAC since its 2012 capitalization. Mr. Donnarumma has been with Assured Guaranty since 1993. Over the past 25 years,
Mr. Donnarumma has held a number of positions at Assured Guaranty, including Deputy Chief Credit Officer of AGL, Chief
Operating Officer and Chief Underwriting Officer of AG Re, Chief Risk Officer of AGC, and Senior Managing Director, Head
of Mortgage and Asset-backed Securities of AGC. Prior to joining Assured Guaranty, Mr. Donnarumma was with Financial
Guaranty Insurance Company from 1989 until 1993, where his responsibilities included underwriting domestic and
international financial guaranty transactions. Prior to that, he served as a Director of Credit Risk Analysis at Fannie Mae
from 1987 until 1989. Mr. Donnarumma was also an analyst with Moody’s Investors Services from 1985 until 1987.
63
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
AGL's common shares are listed on the NYSE under the symbol "AGO." The table below sets forth, for the calendar
quarters indicated, the reported high and low sales prices and amount of any cash dividends declared.
Common Stock Prices and Dividends
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Sales Price
High
2017
Low
Cash
Dividends
Sales Price
High
2016
Low
Cash
Dividends
$
$
42.94
42.49
45.73
39.75
$
36.01
36.70
37.15
33.53
$
0.1425
0.1425
0.1425
0.1425
$
26.82
27.45
28.07
39.03
$
21.79
23.43
24.69
27.42
0.13
0.13
0.13
0.13
On February 20, 2018, the closing price for AGL's common shares on the NYSE was $37.44, and the approximate
number of shareholders of record at the close of business on that date was 73.
AGL is a holding company whose principal source of income is dividends from its operating subsidiaries. The ability of
the operating subsidiaries to pay dividends to AGL and AGL's ability to pay dividends to its shareholders are each subject to
legal and regulatory restrictions. The declaration and payment of future dividends will be at the discretion of AGL's Board and
will be dependent upon the Company's profits and financial requirements and other factors, including legal restrictions on the
payment of dividends and such other factors as the Board deems relevant. For more information concerning AGL's dividends,
see Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, Liquidity and
Capital Resources and Item 8, Financial Statements and Supplementary Data, Note 11, Insurance Company Regulatory
Requirements.
2017 Share Purchases
In 2017, the Company repurchased a total of 12.7 million common shares for approximately $501 million at an average
price of $39.57 per share. From time to time, the Board authorizes the repurchase of common shares. Most recently, on
November 1, 2017, the Board approved an incremental $300 million in share repurchases, and the remaining authorization, as
of February 23, 2018, is $305 million. The Company expects future common share repurchases under the current authorization
to be made from time to time in the open market or in privately negotiated transactions. The timing, form and amount of the
share repurchases are at the discretion of management and will depend on a variety of factors, including availability of funds at
the holding companies, other potential uses for such funds, market conditions, the Company's capital position, legal
requirements and other factors. The repurchase authorization may be modified, extended or terminated by the Board at any
time. It does not have an expiration date. See Part II, Item 8, Financial Statements and Supplementary Data, Note 18,
Shareholders' Equity for additional information about share repurchases and authorizations.
64
Issuer’s Purchases of Equity Securities
The following table reflects purchases of AGL common shares made by the Company during Fourth Quarter 2017.
Period
October 1 - October 31
November 1 - November 30
December 1 - December 31
Total
Total
Number of
Shares
Purchased
Average
Price Paid
Per Share
533,618
543,547
857,825
1,934,990
$
$
$
$
37.48
36.80
34.97
36.18
Total Number of
Shares Purchased as
Part of Publicly
Announced Program (1)
533,618
543,547
857,825
1,934,990
Maximum Number (or
Approximate Dollar
Value)
of Shares that
May Yet Be
Purchased
Under the Program(2)
97,872,908
$
377,872,931
$
347,872,935
$
____________________
(1)
After giving effect to repurchases since the beginning of 2013 through February 23, 2018, the Company has
repurchased a total of 82.5 million common shares for approximately $2,259 million, excluding commissions, at an
average price of $27.37 per share.
(2)
Excludes commissions.
65
Performance Graph
Set forth below are a line graph and a table comparing the dollar change in the cumulative total shareholder return on
AGL's common shares from December 31, 2012 through December 31, 2017 as compared to the cumulative total return of the
Standard & Poor's 500 Stock Index and the cumulative total return of the Standard & Poor's 500 Financials Sector GICS Level
1 Index. The chart and table depict the value on December 31 of each year from 2012 through 2017 of a $100 investment made
on December 31, 2012, with all dividends reinvested:
Comparison of Cumulative Total Return
$300
$250
$200
$150
$100
$50
$0
12/31/12
12/31/13
12/31/14
12/31/15
12/31/16
12/31/17
Assured Guaranty
S&P 500 Index
S&P 500 Financials Sector GICS Level 1 Index
12/31/2012
12/31/2013
12/31/2014
12/31/2015
12/31/2016
12/31/2017
Assured Guaranty
S&P 500 Index
$
100.00
$
100.00
$
168.84
189.42
196.05
285.45
259.65
132.37
150.48
152.54
170.77
208.03
S&P 500
Financials Sector
GICS Level 1 Index
100.00
135.59
156.17
153.74
188.71
230.49
___________________
Source: Calculated from total returns published by Bloomberg.
66
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read together with the other information contained in this Form 10-K,
including "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements and related notes included elsewhere in this Form 10-K.
Year Ended December 31,
2017
2016
2015
2014
2013
(dollars in millions, except per share amounts)
Statement of operations data:
Revenues:
Net earned premiums
Net investment income
$
Net realized investment gains (losses)
Realized gains and other settlements on credit
derivatives
Net unrealized gains (losses) on credit derivatives
Fair value gains (losses) on committed capital
securities
Fair value gains (losses) on financial guaranty
variable interest entities
Bargain purchase gain and settlement of pre-existing
relationships
Other income (loss)
Total revenues
Expenses:
Loss and loss adjustment expenses
Amortization of deferred acquisition costs
Interest expense
Other operating expenses
Total expenses
Income (loss) before (benefit) provision for income
taxes
Provision (benefit) for income taxes
Net income (loss)
Earnings (loss) per share:
Basic
Diluted
Dividends per share
690
418
40
(10)
121
(2)
30
58
394
1,739
388
19
97
244
748
991
261
730
$
864
$
766
$
570
$
408
(29)
29
69
0
38
259
39
1,677
295
18
102
245
660
1,017
136
881
423
(26)
(18)
746
27
38
214
37
2,207
424
20
101
231
776
1,431
375
1,056
403
(60)
23
800
(11)
255
—
14
1,994
126
25
92
220
463
1,531
443
1,088
$
$
$
6.05
5.96
0.57
$
$
$
6.61
6.56
0.52
$
$
$
7.12
7.08
0.48
$
$
$
6.30
6.26
0.44
$
$
$
67
752
393
52
(42)
107
10
346
—
(10)
1,608
154
12
82
218
466
1,142
334
808
4.32
4.30
0.40
As of December 31,
2017
2016
2015
2014
2013
(dollars in millions, except per share amounts)
Balance sheet data (end of period):
Assets:
Investments and cash
$
11,539
$
11,103
$
11,358
$
11,459
$
10,969
Premiums receivable, net of commissions payable
Ceded unearned premium reserve
Salvage and subrogation recoverable
Credit derivative assets
Total assets
Liabilities and shareholders' equity:
Unearned premium reserve
Loss and loss adjustment expense reserve
Reinsurance balances payable, net
Long-term debt
Credit derivative liabilities
Total liabilities
Accumulated other comprehensive income
Shareholders' equity
Book value per share
Consolidated statutory financial information:
Contingency reserve
Policyholders' surplus
Claims-paying resources(1)
Outstanding Exposure:
Net debt service outstanding
Net par outstanding
___________________
915
119
572
2
576
206
365
13
693
232
126
81
729
381
151
68
876
452
174
94
14,433
14,151
14,544
14,919
16,285
3,475
1,444
61
1,292
271
7,594
372
6,839
58.95
3,511
1,127
64
1,306
402
7,647
149
6,504
50.82
3,996
1,067
51
1,300
446
8,481
237
6,063
43.96
4,261
799
107
1,297
963
9,161
370
5,758
36.37
$
1,750
$
2,008
$
2,263
$
2,330
$
5,211
11,752
5,036
11,701
4,550
12,306
4,142
12,189
4,595
592
148
814
1,787
11,170
160
5,115
28.07
2,934
3,202
12,147
$ 401,118
264,952
$ 437,535
296,318
$ 536,341
358,571
$ 609,622
403,729
$ 690,535
459,107
(1)
Based on accounting practices prescribed or permitted by U.S. insurance regulatory authorities, for all insurance subsidiaries.
Claims-paying resources is calculated as the sum of statutory policyholders' surplus, statutory contingency reserve, unearned
premium reserves, statutory loss and LAE reserves, present value of installment premium on financial guaranty and credit
derivatives, discounted at 6%, standby lines of credit/stop loss and excess-of-loss reinsurance facility. Total claims-paying resources
is used by the Company to evaluate the adequacy of capital resources.
68
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis of the Company’s financial condition and results of operations should be read in
conjunction with the Company’s consolidated financial statements and accompanying notes which appear elsewhere in this
Form 10-K. It 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.”
Introduction
The Company provides credit protection products to the U.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 scheduled 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 the U.S. and the U.K., and also guarantees obligations
issued in other countries and regions, including Australia and Western Europe. The Company also provides other forms of
insurance that are in line with its risk profile and benefit from its underwriting experience.
Executive Summary
This executive summary of management’s discussion and analysis highlights selected information and may not contain
all of the information that is important to readers of this Annual Report. 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, this Annual Report should be read in its entirety.
Economic Environment
The positive economic momentum in the U.S. since the beginning of 2016 continued throughout 2017. According to
the U.S. Bureau of Labor Statistics (BLS), the unemployment rate continued to fall in 2017, starting the year at 4.7% and
finishing the year at 4.1%, a seventeen year low, averaging 4.4% for the year. Payroll employment growth in 2017 totaled 2.1
million jobs, compared with a gain of 2.2 million in 2016.
Real gross domestic product (GDP) increased 2.3% in 2017, compared with an increase of 1.5% in 2016. The third and
fourth quarters saw annualized real GDP increases of 3.2% and 2.6% (initial estimate), respectively, representing fifteen
consecutive quarters of positive growth in real GDP.
U.S. home prices also continued to rise, as measured by the S&P CoreLogic Case-Shiller U.S. National Home Price
NSA Index, which reported a gain of 6.2% over the 12 months ended November 2017 (the latest figures available) while the 20-
City Composite posted a 6.4% year-over-year gain for the same period.
At the December 2017 Federal Open Market Committee (FOMC) meeting, the FOMC raised the target range for the
federal funds rate to between 1.25% and 1.50%. It was the third time in 2017 that the FOMC raised rates and continued the
FOMC’s gradual move toward higher rates, which the Company believes may signal the FOMC's confidence that the U.S.
economy is overall in good health.
A quarterly update of the Federal Reserve’s economic forecast showed that its officials expect to raise interest rates
three times in 2018, which was unchanged from the last economic forecast. Officials concluded, after seeing details of the tax
legislation that passed at the end of the year, that there was no need to raise rates more quickly than was originally planned. In
Janet Yellen’s last meeting as the Fed Chairman on January 30-31, 2018, the FOMC held rates steady.
Average municipal interest rates in 2017 remained above the historic lows experienced in 2016, during which 30-year
AAA MMD rates were at times below 2%. The 30-year AAA MMD rate increased to as high as 3.25% in March 2017. Since
then, that MMD rate declined to 2.54% as of December 29, 2017. Increases in long-term municipal bond yields generally lag
increases in short-term rates related to FOMC decisions.
69
Credit spreads tightened in December and finished the year at their narrowest levels since July 2008, having tightened
by approximately 15 bps over the course of 2017. At year-end, the spread between the 20-year “A” rated index and the “AAA”
was 48 bps.
Stock prices rose to record highs in the U.S. equity market during 2017, as strong earnings and the passage of the U.S.
tax bill led to continued investor optimism. The Dow Jones Industrial Average (DJIA), Nasdaq composite and the S&P 500
Index all set record highs during the year, with the DJIA finishing the year approaching 25,000.
Financial Performance of Assured Guaranty
Financial Results
Net income (loss)
Non-GAAP operating income(1)
$
Gain (loss) related to the effect of consolidating FG VIEs (FG VIE
consolidation) included in non-GAAP operating income
Net income (loss) per diluted share
Non-GAAP operating income per share(1)
Gain (loss) related to FG VIE consolidation included in non-GAAP
operating income per share
Diluted shares
Gross written premiums (GWP)
Present value of new business production (PVP)(1)
Gross par written
Year Ended December 31,
2017
2016
2015
(in millions, except per share amounts)
$
730
661
11
5.96
5.41
0.10
122.3
307
289
18,024
$
881
895
12
6.56
6.68
0.10
134.1
154
214
17,854
1,056
710
11
7.08
4.76
0.07
149.0
181
179
17,336
As of December 31, 2017
As of December 31, 2016
Amount
Per Share
Amount
Per Share
Shareholders' equity
Non-GAAP operating shareholders' equity(1)
Non-GAAP adjusted book value(1)
$
Gain (loss) related to FG VIE consolidation included in
non-GAAP operating shareholders' equity
Gain (loss) related to FG VIE consolidation included in
non-GAAP adjusted book value
Common shares outstanding (2)
6,839
6,521
9,020
5
(14)
116.0
(in millions, except per share amounts)
6,504
$
6,386
58.95
56.20
$
77.74
0.03
(0.12)
8,506
(7)
(24)
128.0
$
50.82
49.89
66.46
(0.06)
(0.18)
____________________
(1)
See “—Non-GAAP Financial Measures” for a definition of the financial measures that were not determined in
accordance with GAAP and a reconciliation of the non-GAAP financial measure to the most directly comparable
GAAP measure, if available. See “—Non-GAAP Financial Measures” for additional details.
(2)
See "Key Business Strategies – Capital Management" below for information on common share repurchases.
70
Several primary drivers of volatility in net income or loss are not necessarily indicative of credit impairment or
improvement, or ultimate economic gains or losses: changes in credit spreads of insured credit derivative obligations, changes
in fair value of assets and liabilities of financial guaranty variable interest entities (FG VIEs) and committed capital securities
(CCS), changes in the Company's own credit spreads, and changes in risk-free rates used to discount expected losses. Changes
in the Company's and/or collateral credit spreads generally have the most significant effect on the fair value of credit derivatives
and FG VIE assets and liabilities. In addition to non-economic factors, other factors such as: changes in expected losses, the
amount and timing of the refunding and/or termination of insured obligations, realized gains and losses on the investment
portfolio (including other-than-temporary impairments), the effects of large settlements, commutations, acquisitions, and the
effects of the Company's various loss mitigation strategies, and changes in laws and regulations, among others, may also have a
significant effect on reported net income or loss in a given reporting period.
Year Ended December 31, 2017
Net income for 2017 was $730 million compared with $881 million in 2016. Net income in both 2017 and 2016
included significant gains attributable to the Company's strategic initiatives. The year ended December 31, 2017 included
pretax commutation gains of $328 million related to the reassumption of previously ceded contracts, a pretax gain of $58
million related the MBIA UK Acquisition and a pretax gain of $151 million related to litigation and R&W settlements. The year
ended December 31, 2016 included pretax gains of $259 million related to CIFG Acquisition and a pretax gain of $89 million
related to a loss mitigation transaction. Excluding these gains, net income decreased due mainly to increased loss and LAE
attributable to U.S. public finance losses on the Company's Puerto Rico exposures, lower net earned premiums from refundings
and terminations, and a $61 million provisional tax expense related to the enactment of the Tax Act.
Non-GAAP operating income was $661 million in 2017, compared with $895 million in 2016. The variances in non-
GAAP operating income are attributable to the same items described for net income. Non-GAAP operating shareholders'
equity and non-GAAP adjusted book value also increased since December 31, 2016 due primarily to the MBIA UK Acquisition,
new business production and commutations, offset in part by loss development, share repurchases and dividends. The Tax Act
resulted in a charge of $114 million to non-GAAP operating shareholders' equity and a benefit of $239 million in non-GAAP
adjusted book value.
Shareholders' equity increased since December 31, 2016 due primarily to positive net income and higher net
unrealized gains on available for sale investment securities recorded in AOCI, partially offset by share repurchases and
dividends. Shareholders' equity per share, non-GAAP operating shareholders' equity per share and non-GAAP adjusted book
value per share benefited from the repurchase program that has been in place since the beginning of 2013. See "Accretive Effect
of Cumulative Repurchases" table below.
Key Business Strategies
The Company continually evaluates its business strategies. Currently, the Company is pursuing the following business
strategies, each described in more detail below:
•
•
•
•
New business production
Capital management
Alternative strategies to create value, including through acquisitions, investments and commutations
Loss mitigation
New Business Production
The Company believes high-profile defaults by municipal obligors, such as Puerto Rico, Detroit, Michigan and
Stockton, California 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.
71
On the other hand, the persistently low interest rate environment has dampened demand for bond insurance and, after a
number of years in which the Company was essentially the only financial guarantor, there is now one other financial guarantor
active in one of its markets.
U.S. Municipal Market Data and Bond Insurance Penetration Rates (1)
Based on Sale Date
Par:
New municipal bonds issued
Total insured
Insured by Assured Guaranty
Number of issues:
New municipal bonds issued
Total insured
Insured by Assured Guaranty
Bond insurance market penetration based on:
Par
Number of issues
Single A par sold
Single A transactions sold
$25 million and under par sold
$25 million and under transactions sold
____________________
(1)
Source: Thomson Reuters.
Year Ended December 31,
2017
2016
2015
(dollars in billions, except number of issues and percent)
$
$
$
409.5
23.0
13.5
$
$
$
423.7
25.3
14.2
$
$
$
10,589
1,637
833
12,271
1,889
904
5.6%
15.5%
23.3%
57.3%
18.7%
18.3%
6.0%
15.4%
22.6%
55.8%
17.8%
17.5%
377.6
25.2
15.1
12,076
1,880
1,009
6.7%
15.6%
22.1%
54.1%
18.7%
17.6%
72
Gross Written Premiums and
New Business Production
Year Ended December 31,
2017
2016
(in millions)
2015
$
$
$
$
$
$
190
105
(1)
13
307
196
66
12
15
289
15,957
1,376
489
202
18,024
$
$
$
$
$
$
142
15
(1)
(2)
154
161
25
27
1
214
16,039
677
1,114
24
17,854
$
$
$
$
$
$
119
41
23
(2)
181
124
27
22
6
179
16,377
567
327
65
17,336
GWP
Public Finance—U.S.
Public Finance—non-U.S.
Structured Finance—U.S.
Structured Finance—non-U.S.
Total GWP
PVP(1):
Public Finance—U.S.
Public Finance—non-U.S.
Structured Finance—U.S. (2)
Structured Finance—non-U.S. (3)
Total PVP
Gross Par Written (1):
Public Finance—U.S.
Public Finance—non-U.S.
Structured Finance—U.S. (2)
Structured Finance—non-U.S. (3)
Total gross par written
____________________
(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.”
(2)
(3)
Includes capital relief triple-X excess of loss life reinsurance transactions written in 2017 and 2016.
Relates to reinsurance of aircraft RVI policies.
GWP include amounts collected upfront on all new business written, the present value of future premiums on new
financial guaranty business written (discounted at risk free rates), the effects of changes in the estimated lives of transactions in
the inforce book of financial guaranty business, and the current installments of non-financial guaranty new business.
In 2017, GWP increased to $307 million from $154 million in 2016, due to increased new financial guaranty business
production in U.S. public finance and international infrastructure markets.
U.S. public finance PVP increased in 2017 compared with the comparable prior-year period due mainly to a higher
number of large transactions and a more diverse book of underlying credits. The Company's market share, based on par, rose to
58.5% in 2017 from 56.2% in 2016. The Company once again guaranteed the majority of insured par issued in the U.S. while
maintaining an A- average rating on new business written.
Outside the U.S., the Company generated $66 million of public finance PVP, in 2017, compared with $25 million in
2016. In 2017 this included several university housing and regulated utilities transactions, a senior liquidity guarantee as part of
a European infrastructure refinancing and a project finance infrastructure/public-private-partnership healthcare transaction.
Non-U.S. PVP was strong in both the primary and secondary markets in 2017.
In addition, the Company generated $15 million of non-U.S. structured finance PVP in 2017 by providing reinsurance
of aircraft residual value policies.
The Company believes its financial guaranty product is competitive with other financing options in certain segments
of the infrastructure market. Future business activity will be influenced by the typically long lead times for these types of
73
transactions. Structured finance transactions tend to have long lead times and may vary from period to period. In general, the
Company expects that structured finance opportunities will increase in the future as the global economy recovers, interest rates
rise, more issuers return to the capital markets for financings and institutional investors again utilize financial guaranties. The
Company considers its involvement in both structured finance and international infrastructure transactions to be beneficial
because such transactions diversify both the Company's business opportunities and its risk profile beyond U.S. public finance.
Capital Management
In recent years, the Company has developed strategies to manage capital within the Assured Guaranty group more
efficiently.
From 2013 through February 23, 2018, the Company has repurchased 82.5 million common shares for approximately
$2,259 million, excluding commissions. The Board of Directors authorized, on November 1, 2017, an additional $300 million
of share repurchases, and as of February 23, 2018, $305 million remains available under the share repurchase authorizations.
The Company expects the repurchases to be made 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 free funds available at the parent company, other potential uses for such free funds, market
conditions, the Company's capital position, legal requirements and other factors. The repurchase program may be modified,
extended or terminated by the Board at any time. It does not have an expiration date. See Part II, Item 8, Financial Statements
and Supplementary Data, Note 18, Shareholders' Equity, for additional information about the Company's repurchases of its
common shares.
Summary of Share Repurchases
Amount
Number of
Shares
Average price
per share
2013
2014
2015
2016
2017
2018 (through February 23, 2018)
$
(in millions, except per share data)
264
12.5
$
590
555
306
501
43
24.4
21.0
10.7
12.7
1.2
Cumulative repurchases since the beginning of 2013
$
2,259
82.5
$
Accretive Effect of Cumulative Repurchases(1)
21.12
24.17
26.43
28.53
39.57
34.90
27.37
Year Ended December 31,
2017
2016
As of
December 31,
2017
As of
December 31,
2016
$
$
2.03
1.81
(per share)
1.90
1.94
$
$
12.92
11.80
20.58
8.92
8.59
14.38
Net income
Non-GAAP operating income
Shareholders' equity
Non-GAAP operating shareholders' equity
Non-GAAP adjusted book value
_________________
(1)
Cumulative repurchases since the beginning of 2013.
74
In 2017, the respective regulators of AGC, AGM and MAC approved those companies' repurchases of shares of
common stock from their respective direct parent companies. AGC implemented a $200 million share repurchase in January
2018, AGM implemented a $101 million share repurchase in December 2017 and MAC implemented a $250 million share
repurchase in September 2017.
In December 2016, AGM repurchased $300 million of its common stock from AGMH, the majority of which was
ultimately distributed to AGL. AGL has used these funds predominantly to repurchase its publicly traded common shares. In
June 2016, MAC repaid its $300 million surplus note to MAC Holdings and its $100 million surplus note (plus accrued
interest) to AGM with a mixture of cash and/ or marketable securities. MAC Holdings, in turn, distributed $182 million to
AGM and $118 million to AGC. See Part II, Item 8, Financial Statements, Note 11, Insurance Company Regulatory
Requirements, for information about dividend capacity of the Company's insurance companies.
The Company also considers the appropriate mix of debt and equity in its capital structure, and may repurchase some
of its debt from time to time. For example, in 2017, Assured Guaranty US Holdings Inc. (AGUS) purchased $28 million of
AGMH's outstanding Junior Subordinated Debentures. The Company may choose to make additional purchases of this or other
Company debt in the future.
In order to reduce leverage, and possibly rating agency capital charges, the Company has mutually agreed with
beneficiaries to terminate selected financial guaranty insurance and credit derivative contracts. In particular, the Company has
targeted investment grade securities for which claims are not expected but which carry a disproportionately large rating agency
capital charge. The Company terminated investment grade financial guaranty and CDS contracts with net par of $401 million in
2017, $6.6 billion in 2016 and $2.8 billion in 2015.
Alternative Strategies
The Company considers alternative strategies in order to create long-term shareholder value. For example, the
Company considers opportunities to acquire financial guaranty portfolios, whether by acquiring financial guarantors who are no
longer actively writing new business or their insured portfolios, or by commuting business that it had previously ceded. These
transactions enable the Company to improve its future earnings and deploy some of its excess capital.
On January 10, 2017, AGC completed its acquisition of MBIA UK. On July 1, 2016, AGC acquired all of the issued
and outstanding capital stock of CIFGH, and on April 1, 2015 AGC completed the acquisition of Radian Asset. These
acquisitions added a total of $29.8 billion in net par, and contributed total net income per share of $1.04 in 2017, $2.41 in 2016
and $2.46 in 2015 upon acquisition. At acquisition, these companies contributed shareholders' equity of $84 million in 2017,
$296 million in 2016 and $159 million in 2015, and non-GAAP adjusted book value of $322 million in 2017, $512 million in
2016 and $570 million in 2015. See Part II, Item 8, Financial Statements and Supplementary Data, Note 2, Acquisitions, for
additional information.
On February 2, 2018, AGC entered into an agreement with SGI to reinsure, generally on a 100% quota share basis,
substantially all of SGI’s insured portfolio. The transaction also includes the commutation of a book of business ceded to SGI
by AGM. The transactions reinsured and commuted will total approximately $14.5 billion. As consideration for the transaction,
at closing, SGI will pay $360 million and assign installment premiums estimated to total $55 million in present value to
Assured Guaranty. The reinsured portfolio consists predominantly of public finance and infrastructure obligations that meet
AGC’s new business underwriting criteria. Additionally, on behalf of SGI, AGC will provide certain administrative services on
the assumed portfolio, including surveillance, risk management, and claims processing. The transaction is subject to regulatory
approval and other closing conditions, and is expected to close by the end of the second quarter of 2018.
Alternative Investments. The alternative investments group has been investigating a number of new business
opportunities that complement the Company's financial guaranty business, are in line with its risk profile and benefit from its
core competencies, including, among others, both controlling and non-controlling investments in investment managers. In
February 2017 the Company agreed to purchase up to $100 million of limited partnership interests in a fund that invests in the
equity of private equity managers. Separately, in September 2017 the Company acquired a minority interest in Wasmer,
Schroeder & Company LLC, an independent investment advisory firm specializing in separately managed accounts (SMAs).
The Company continues to investigate additional opportunities.
Commutations. The Company entered into various commutation agreements to reassume previously ceded business in
2017, 2016 and 2015 that resulted in gains (recorded in other income) of $328 million in 2017, $8 million in 2016 and $28
million in 2015 and additional net unearned premium reserve of $82 million in 2017 and $23 million in 2015. The Company
75
may also in the future enter into new commutation agreements to reassume portions of its remaining ceded business. See Part
II, Item 8, Financial Statements, Note 13, Reinsurance and Other Monoline Exposures, for additional information.
Loss Mitigation
In an effort to avoid or reduce potential losses in its insurance portfolios, the Company employs a number of strategies.
In the public finance area, the Company believes that 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, has resulted in more favorable outcomes in
distressed public finance situations than would have been the case without its participation, as illustrated, for example, by the
Company's role in the Detroit, Michigan; Stockton, California; and Jefferson County, Alabama financial crises. Currently, for
example, the Company is actively working to mitigate potential losses in connection with the obligations it insures of the
Commonwealth 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, and it has initiated several legal actions to enforce its rights in
Puerto Rico. For more information about developments in Puerto Rico and related recovery litigation being pursued by the
Company, see Part II, Item 8, Financial Statements and Supplementary Data, Note 4, Outstanding Exposure.
The Company is currently 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 and so
improve the performance of the related RMBS.
The Company also continues to purchase attractively priced obligations, including BIG obligations, that it has insured
and for which it has expected losses to be paid, in order to mitigate the economic effect of insured losses (loss mitigation
securities). The fair value of assets purchased for loss mitigation purposes as of December 31, 2017 (excluding the value of the
Company's insurance) was $1,024 million, with a par of $1,634 million (including bonds related to FG VIEs of $43 million in
fair value and $226 million in par).
In some instances, the terms of the Company's policy gives 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.
Other Events
Brexit
The Company is evaluating the impact on its business of the referendum held in the U.K on June 23, 2016, in which a
majority voted for the UK to exit the EU, known as “Brexit”. Negotiations are ongoing to determine the future terms of the
U.K’s relationship with the EU, including the terms of trade between the U.K. and the EU. The negotiations are likely to last at
least until December 2018. Brexit may impact laws, rules and regulations applicable to the Company’s U.K. subsidiaries and
U.K. operations.
The Company cannot predict the direction Brexit-related developments will take nor the impact of those developments
on the economies of the markets the Company serves, which may materially adversely affect the Company’s business, results of
operations and financial condition, but the Company has identified certain areas where Brexit may impact its business:
•
•
Currency Impact. The Company reports its accounts in U.S. dollars, while some of its income, expenses, assets
and liabilities are denominated in other currencies, primarily the pound sterling and the euro. During 2016, the
year in which a majority in the U.K. voted for Brexit, the value of pound sterling dropped from £0.68 per dollar to
£0.81 per dollar, while the euro dropped from €0.83 per dollar to €0.95 per dollar. For the year ended 2016 the
Company recognized losses of approximately $21 million in the consolidated statement of operations, net of tax,
and approximately $32 million in OCI, net of tax, for foreign currency translation, that were primarily driven by
the exchange rate fluctuations of the pound sterling. Currency exchange rates may also move materially as the
terms of Brexit become known.
U.K. Business. As of December 31, 2017, approximately $30.1 billion of the Company’s insured net par is to
risks located in the U.K., and most of that exposure is to utilities, with much of the rest to hospital facilities, toll
roads, government accommodation, housing associations, universities and other public purpose enterprises that
76
the Company believes are not overly vulnerable to Brexit pressures. AGE is currently authorized by the PRA of
the Bank of England with permissions sufficient to enable AGE to effect and carry out financial guaranty
insurance and reinsurance in the U.K. Most of the new transactions insured by AGE since 2008 have been in the
U.K.
•
Business Elsewhere in the EU. As of December 31, 2017, approximately $7.5 billion of the Company’s insured
net par is to risks located in EU and EEA countries other than the U.K. Currently, EU directives allow AGE to
conduct business in other EU or EEA states based on its PRA permissions. This is sometimes called “passporting”.
Depending on the terms of Brexit, and of any transitional arrangements, AGE may, once Brexit is implemented,
lose the ability to insure new transactions, or service existing contracts in non-U.K., EU and EEA countries
without obtaining additional licenses, which may require a presence in another EU country. While pertinent laws
and regulations have yet to be adopted or passed, the Company does not believe Brexit will adversely affect its
surveillance and loss mitigation activities with respect to existing insured transactions in non-U.K. EU and EEA
countries, except to the extent Brexit inhibits the issuance of new guaranties in distressed situations in non-U.K.
EU or EEA countries. As noted above, most of the new transactions insured by AGE since 2008 have been in the
U.K.
•
Employees. While nearly one-third of the employees working in AGE’s London office are non-U.K. EU or EEA
citizens, all but two of those employees currently qualify to become permanent residents under current U.K. law.
Results of Operations
Estimates and Assumptions
The Company’s consolidated financial statements include amounts that are determined using estimates and
assumptions. The actual amounts realized could ultimately be materially different from the amounts currently provided for in
the Company’s consolidated financial statements. Management believes the most significant items requiring inherently
subjective and complex estimates are expected losses, fair value estimates, other-than-temporary impairment, deferred income
taxes, and premium revenue recognition. The following discussion of the results of operations includes information regarding
the estimates and assumptions used for these items and should be read in conjunction with the notes to the Company’s
consolidated financial statements.
An understanding of the Company’s accounting policies is of critical importance to understanding its consolidated
financial statements. See Part II, Item 8, Financial Statements and Supplementary Data, for a discussion of the significant
accounting policies, the loss estimation process, and the fair value methodologies.
The Company carries a significant amount of its assets and a portion of its liabilities at fair value, the majority of
which are measured at fair value on a recurring basis. Level 3 assets, consisting primarily of investments and FG VIE assets,
represented approximately 17% and 19% of the total assets that are measured at fair value on a recurring basis as of
December 31, 2017 and 2016, respectively. All of the Company's liabilities that are measured at fair value are Level 3. See Part
II, Item 8, Financial Statements and Supplementary Data, Note 7, Fair Value Measurement, for additional information about
assets and liabilities classified as Level 3.
77
Consolidated Results of Operations
Consolidated Results of Operations
Revenues:
Net earned premiums
Net investment income
Net realized investment gains (losses)
Net change in fair value of credit derivatives:
Realized gains (losses) and other settlements
Net unrealized gains (losses)
Net change in fair value of credit derivatives
Fair value gains (losses) on CCS
Fair value gains (losses) on FG VIEs
Bargain purchase gain and settlement of pre-existing relationships
Other income (loss)
Total revenues
Expenses:
Loss and LAE
Amortization of deferred acquisition costs
Interest expense
Other operating expenses
Total expenses
Income (loss) before provision for income taxes
Provision (benefit) for income taxes
Net income (loss)
Year Ended December 31,
2017
2016
(in millions)
2015
$
$
690
418
40
(10)
121
111
(2)
30
58
394
1,739
388
19
97
244
748
991
261
730
$
864
$
408
(29)
29
69
98
0
38
259
39
1,677
295
18
102
245
660
1,017
136
881
$
$
766
423
(26)
(18)
746
728
27
38
214
37
2,207
424
20
101
231
776
1,431
375
1,056
78
Net Earned Premiums
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. The Company estimates remaining expected lives of its
insured obligations 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, reassumptions of previously ceded business, or books
of business acquired in a business combination. See Part II, Item 8, Financial Statements and Supplementary Data, Note 6,
Contracts Accounted for as Insurance, Financial Guaranty Insurance Premiums, for additional information and the expected
timing of future premium earnings.
Net Earned Premiums
Financial guaranty insurance:
Public finance
Scheduled net earned premiums and accretion
$
315
$
299
$
Year Ended December 31,
2017
2016
(in millions)
2015
Accelerations:
Refundings
Terminations
Total accelerations
Total Public finance
Structured finance(1)
Scheduled net earned premiums and accretion
Terminations
Total structured finance
Other
Total net earned premiums
269
2
271
586
87
15
102
2
390
34
424
723
96
45
141
0
$
690
$
864
$
308
294
23
317
625
125
14
139
2
766
____________________
(1)
Excludes net earned premiums of $15 million, $16 million and $21 million for 2017, 2016 and 2015, respectively,
related to consolidated FG VIEs.
2017 compared with 2016: Net earned premiums decreased in 2017 compared with 2016 due to lower refundings and
terminations. At December 31, 2017, $3.4 billion of net deferred premium revenue remained to be earned over the life of the
insurance contracts. The MBIA UK Acquisition increased deferred premium revenue by $383 million at the date of the
acquisition.
2016 compared with 2015: Net earned premiums increased in 2016 compared with 2015 due primarily to higher
refundings and terminations, partially offset by the lower earned premiums resulting from the scheduled decline in par
outstanding. The CIFG Acquisition increased deferred premium revenue by $296 million at the date of the acquisition.
The change in net earned premiums due to accelerations is attributable to changes in the expected lives of insured
obligations driven by (a) refundings of insured obligations or (b) terminations of insured obligations either through negotiated
agreements or the exercise of contractual rights to make claim payments on an accelerated basis.
Refundings occur in the public finance market and have been at historically high levels in recent years due primarily to
the low interest rate environment, which has allowed many municipalities and other public finance issuers to refinance their
debt obligations at lower rates. 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 nonrefundable deferred premium revenue remaining.
79
The Tax Act included provisions that eliminated advance refunding bonds, which may result in lower volume of
municipal obligation refundings in the future and impact the amount of such obligations that could benefit from insurance.
Terminations are generally negotiated agreements with beneficiaries resulting in the extinguishment of the Company’s
insurance obligation with respect to the insured obligations. 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, such that the Company accelerates the recognition of the associated unearned
premiums and reduces any remaining premiums receivable.
Net Investment Income
Net investment income is a function of the yield that the Company earns on invested assets and the size of the
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 invested assets.
Net Investment Income (1)
Income from fixed-maturity securities managed by third parties
Income from internally managed securities:
Fixed maturities (1)
Other
Gross investment income
Investment expenses
Net investment income
Year Ended December 31,
2017
2016
(in millions)
2015
298
$
306
$
335
120
9
427
(9)
418
$
103
8
417
(9)
408
$
61
37
433
(10)
423
$
$
____________________
(1)
Net investment income excludes $5 million for 2017 and $10 million for 2016 and $32 million in 2015, related to
securities in the investment portfolio owned by AGC and AGM that were issued by consolidated FG VIEs.
2017 compared with 2016: Net investment income increased compared to 2016 due primarily to improved underlying
cash flows of internally managed securities due to the settlement. The overall pre-tax book yield was 3.68% as of December 31,
2017 and 3.80% as of December 31, 2016, respectively. Excluding the internally managed portfolio, pre-tax book yield was
3.14% as of December 31, 2017 compared with 3.30% as of December 31, 2016.
2016 compared with 2015: Net investment income decreased due primarily to lower average investment balances and
lower average investment yield. The overall pre-tax book yield was 3.80% as of December 31, 2016 and 4.56% as of
December 31, 2015, respectively. Excluding the internally managed portfolio, pre-tax book yield was 3.30% as of
December 31, 2016 compared with 3.58% as of December 31, 2015.
Net Realized Investment Gains (Losses)
The table below presents the components of net realized investment gains (losses).
Net Realized Investment Gains (Losses)
Gross realized gains on available-for-sale securities
Gross realized losses on available-for-sale securities
Net realized gains (losses) on other invested assets
Other-than-temporary impairment
Net realized investment gains (losses)
80
Year Ended December 31,
2017
2016
(in millions)
2015
$
$
95
(12)
0
(43)
40
$
$
$
28
(8)
2
(51)
(29) $
44
(15)
(8)
(47)
(26)
Realized gains in 2017 comprise primarily gains on sales of internally managed investments including the gain on sale
of the Zohar II Notes exchanged in the MBIA UK Acquisition. Other-than-temporary-impairments in all periods presented were
primarily attributable to securities purchased for loss mitigation purposes.
Realized gains in 2016 were due primarily to sales of securities in order to fund the purchase of CIFGH by AGC.
Other-than-temporary-impairments in 2016 were attributable to loss mitigation securities and changes in foreign exchange
rates.
The realized gains in 2015 were due primarily to sales of securities in order to fund the purchase of Radian Asset by
AGC. Net realized investment losses for 2015 include a loss on a forward contract. Other-than-temporary-impairments in 2015
were primarily attributable to loss mitigation securities.
Net Change in Fair Value of Credit Derivatives
Changes in the fair value of credit derivatives occur primarily because of changes in the issuing 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. With volatility continuing in the market,
unrealized gains (losses) on credit derivatives may fluctuate significantly in future periods.
Except for net estimated credit impairments (i.e., net expected payments), the unrealized gains and losses on credit
derivatives are expected to reduce 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. Changes in expected losses in respect of
contracts accounted for as credit derivatives are included in the discussion of “Economic Loss Development” below.
The impact of changes in credit spreads will vary based upon the volume, tenor, interest rates, and other market
conditions at the time these fair values are determined. In addition, since each transaction has unique collateral and structural
terms, the underlying change in fair value of each transaction may vary considerably. The fair value of credit derivative
contracts also reflects the change in the Company’s own credit cost based on the price to purchase credit protection on AGC
and AGM. The Company determines its own credit risk based on quoted CDS prices traded on the Company 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 and
AGM 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 and AGM 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 over the past several years and as of December 31, 2017,
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 Part
II, Item 8, Financial Statements and Supplementary Data, Note 7, Fair Value Measurement, for additional information.
81
Net Change in Fair Value of Credit Derivative Gain (Loss)
Realized gains on credit derivatives
$
17
$
56
$
Year Ended December 31,
2017
2016
(in millions)
2015
Net credit derivative losses (paid and payable) recovered and recoverable
and other settlements
Realized gains (losses) and other settlements (1)
Net unrealized gains (losses):
Pooled corporate obligations
U.S. RMBS
Pooled infrastructure
Infrastructure finance
Other
Net unrealized gains (losses)
Net change in fair value of credit derivatives
$
(27)
(10)
35
23
5
4
54
121
111
$
(27)
29
(16)
22
17
4
42
69
98
$
63
(81)
(18)
147
396
17
—
186
746
728
____________________
(1)
Includes realized gains and losses due to terminations and settlements of CDS contracts.
Net credit derivative premiums included in the realized gains on credit derivatives line in the table above have
declined in 2017, 2016 and 2015 due primarily to the decline in the net par outstanding to $6.2 billion at December 31, 2017
from $17.0 billion at December 31, 2016 and $25.6 billion at December 31, 2015. In addition, as part of its strategic initiative,
the Company has been negotiating terminations of investment grade and BIG CDS contracts with its counterparties.The
following table presents the effect of terminations on realized gains (losses) and other settlements on credit derivatives.
Terminations and Settlements
of Direct Credit Derivative Contracts
Year Ended December 31,
2017
2016
(in millions)
2015
Net par of terminated credit derivative contracts
$
331
$
3,811
$
Realized gains on credit derivatives
Net credit derivative losses (paid and payable) recovered and recoverable
and other settlements
Net unrealized gains (losses) on credit derivatives
0
(15)
26
20
—
103
2,777
13
(116)
465
During 2017, unrealized fair value gains were generated primarily as a result of CDS terminations, run-off of net par
outstanding, and price improvements on the underlying collateral of the Company’s CDS. The termination of several CDS
transactions in the pooled corporate collateralized loan obligation (CLO), U.S. RMBS and Other sectors was the primary driver
of the unrealized fair value gains. The cost to buy protection in AGC’s and AGM’s name, specifically the five-year CDS spread,
did not change materially during the period, and therefore did not have a material impact on the Company’s unrealized fair
value gains and losses on CDS.
During 2016, unrealized fair value gains were generated primarily as a result of CDS terminations in the U.S. RMBS
and other sectors, run-off of CDS par and price improvements on the underlying collateral of the Company’s CDS. The
majority of the CDS transactions that were terminated were as a result of settlement agreements with several CDS
counterparties. The unrealized fair value gains were partially offset by unrealized losses resulting from wider implied net
spreads across all sectors. The wider implied net spreads were primarily a result of the decreased cost to buy protection in
AGC’s and AGM’s name, as the market cost of AGC’s and AGM’s credit protection decreased significantly during the period.
For those CDS transactions that were pricing at or above their floor levels, when the cost of purchasing CDS protection on
82
AGC and AGM, which management refers to as the CDS spread on AGC and AGM, decreased the implied spreads that the
Company would expect to receive on these transactions increased.
During 2015, unrealized fair value gains were generated primarily as a result of CDS terminations. The Company
reached a settlement agreement with one CDS counterparty to terminate five Alt-A first lien CDS transactions resulting in
unrealized fair value gains of $213 million and was the primary driver of the unrealized fair value gains in the U.S. RMBS
sector. The Company also terminated a CMBS transaction, a Triple-X life insurance securitization transaction, and a distressed
middle market CLO securitization during the period and recognized unrealized fair value gains of $41 million, $99 million and
$99 million, respectively. These were the primary drivers of the unrealized fair value gains in the CMBS, Other, and pooled
corporate CLO sectors, respectively, during the period. The remainder of the fair value gains for the period were a result of
tighter implied net spreads across all sectors. The tighter implied net spreads were primarily a result of the increased cost to buy
protection in AGC’s and AGM’s name, particularly for the one year CDS spread. For those CDS transactions that were pricing
at or above their floor levels, when the cost of purchasing CDS protection on AGC and AGM increased, the implied spreads
that the Company would expect to receive on these transactions decreased. Finally, during 2015, there was a refinement in
methodology to address an instance in a U.S. RMBS transaction where the Company now expects recoveries. This refinement
resulted in approximately $49 million in fair value gains in 2015.
CDS Spread on AGC and AGM
Quoted price of CDS contract (in basis points)
Five-year CDS spread:
AGC
AGM
One-year CDS spread
AGC
AGM
As of
December 31, 2017
As of
December 31, 2016
As of
December 31, 2015
163
145
70
28
158
158
35
29
376
366
139
131
Effect of Changes in the Company’s Credit Spread on
Net Unrealized Gains (Losses) on Credit Derivatives
Year Ended December 31,
2017
2016
(in millions)
2015
Change in unrealized gains (losses) on credit derivatives:
Before considering implication of the Company’s credit spreads
Resulting from change in the Company’s credit spreads
After considering implication of the Company’s credit spreads
$
$
118
3
121
$
$
183
(114)
69
$
$
663
83
746
Management believes that the trading level of AGC’s and AGM’s credit spreads over the past several years has been
due to the correlation between AGC’s and AGM’s risk profile and the current risk profile of the broader financial markets.
Offsetting the benefit attributable to AGC’s and AGM’s credit spread were higher credit spreads in the fixed income security
markets relative to pre-financial crisis levels. The higher credit spreads in the fixed income security market are due to the lack
of liquidity in the high-yield CDO, TruPS CDOs, and CLO markets as well as continuing market concerns over the 2005-2007
vintages of RMBS.
83
Financial Guaranty Variable Interest Entities
As of December 31, 2017 and 2016, the Company consolidated 32 VIEs. The table below presents the effects on
reported GAAP income resulting from consolidating these FG VIEs and eliminating intercompany transactions. The
consolidation of FG VIEs has an effect on net income and shareholders' equity due to:
•
•
•
changes in fair value gains (losses) on FG VIE assets and liabilities,
the elimination of premiums and losses related to the AGC and AGM FG VIE liabilities with recourse, and
the elimination of investment balances related to the Company’s purchase of AGC and AGM insured FG VIE
debt.
Upon consolidation of a FG VIE, the related insurance and, if applicable, the related investment balances, are
considered intercompany transactions and therefore eliminated. See Part II, Item 8, Financial Statements and Supplementary
Data, Note 9, Consolidated Variable Interest Entities, for additional information.
Effect of Consolidating FG VIEs on Net Income (Loss)
Fair value gains (losses) on FG VIEs
Elimination of insurance and investment balances
Effect on income before tax
Less: tax provision (benefit)
Effect on net income (loss)
Year Ended December 31,
2017
2016
(in millions)
2015
$
$
30
(13)
17
6
11
$
$
38
(18)
20
7
13
$
$
38
(13)
25
8
17
Fair value gains (losses) on FG VIEs represent the net change in fair value on the consolidated FG VIEs’ assets and
liabilities. In 2017, the Company recorded a pre-tax net fair value gain on consolidated FG VIEs of $30 million. The primary
driver of the 2017 gain in fair value of FG VIE assets and liabilities is price appreciation on the FG VIE assets resulting from
improvement in the underlying collateral.
In 2016, the Company recorded a pre-tax net fair value gain on consolidated FG VIEs of $38 million which was
primarily driven by net mark-to-market gains due to price appreciation resulting from improvements in the underlying
collateral of home equity lines of credit RMBS assets of the FG VIEs.
In 2015, the Company recorded a pre-tax net fair value gain on consolidated FG VIEs of $38 million which was
primarily driven by price appreciation on the Company's FG VIE assets during the year that resulted from improvements in the
underlying collateral, as well as large principal paydowns made on the Company's FG VIEs.
In accordance with Accounting Standards Update (ASU) 2016-01, Financial Instruments - Overall (Subtopic 825-10) -
Recognition and Measurement of Financial Assets and Financial Liabilities, beginning in 2018, the portion of fair value change
in FG VIE liabilities that is related to instrument specific credit risk will be separately presented in OCI as opposed to the
income statement.
84
Bargain Purchase Gain and Settlement of Pre-existing Relationships
In connection with the MBIA UK Acquisition in 2017, the CIFG Acquisition in 2016 and the Radian Asset Acquisition
in 2015, the Company recognized bargain purchase gains and gains (losses) on settlements of pre-existing relationships.
Bargain Purchase Gain and Settlement of Pre-existing Relationships
Bargain purchase gain
Settlement of pre-existing relationships
Total
Year Ended December 31,
2017
2016
(in millions)
2015
$
$
56
2
58
$
$
357
(98)
259
$
$
55
159
214
See Part II, Item 8, Financial Statements and Supplementary Data, Note 2, Acquisitions, for additional information.
Other Income (Loss)
Other income (loss) comprises recurring items such as foreign exchange remeasurement gains and losses, ancillary
fees on financial guaranty policies such as commitment and consent, and if applicable, other revenue items on financial
guaranty insurance and reinsurance contracts such as commutation gains on re-assumptions of previously ceded business, loss
mitigation recoveries and certain non-recurring items.
Other Income (Loss)
Foreign exchange gain (loss) on remeasurement of premium
receivable and loss reserves (1)
Commutation gains
Loss on extinguishment of debt (2)
Other (3)
Total other income (loss)
Year Ended December 31,
2017
2016
(in millions)
2015
$
$
57
$
328
(9)
18
394
$
(33) $
8
—
64
39
$
(15)
28
—
24
37
____________________
(1)
Foreign exchange gains are due primarily to changes in the exchange rate of the British pound sterling.
(2)
In 2017, the loss on extinguishment of debt was related to AGUS' purchase of $28 million principal amount of
AGMH's outstanding Junior Subordinated Debentures. The loss represents the difference between the amount paid to
purchase AGMH's debt and the carrying value of the debt, which includes the remaining unamortized fair value
adjustments that were recorded upon the Company's acquisition of AGMH in 2009.
(3)
Includes primarily benefits due to loss mitigation recoveries.
Economic Loss Development
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. See Part II, Item 8, Financial Statements and Supplementary
Data, Note 4, Outstanding Exposures, and Note 5, Expected Loss to be Paid, for a discussion of the assumptions and
methodologies used in calculating the expected loss to be paid for all contracts and the surveillance process for identifying
transactions with expected losses. More extensive monitoring and intervention is employed for all BIG surveillance categories,
with internal credit ratings reviewed quarterly. In order to effectively evaluate and manage the economics of the entire insured
portfolio, management compiles and analyzes expected loss information for all policies on a consistent basis. That is,
85
management monitors and assigns ratings and calculates expected losses in the same manner for all its exposures. Management
also considers contract specific characteristics that affect the estimates of expected loss.
For a discussion of measurement and recognition policies under GAAP for each type of contract, see the following in
Part II, Item 8. "Financial Statements and Supplementary Data" in the Annual Report:
•
•
•
•
Note 6 for contracts accounted for as insurance.
Note 7 for fair value methodologies for credit derivatives and FG VIE assets and liabilities.,
Note 8 for contracts accounted for as credit derivatives, and
Note 9 for consolidated FG VIEs.
The discussion of losses that follows encompasses losses on all contracts in the insured portfolio regardless of
accounting model, unless otherwise specified. Net expected loss to be paid consists primarily of the present value of future:
expected claim and LAE payments, expected recoveries from issuers or excess spread and other collateral in the transaction
structures, cessions to reinsurers, and expected recoveries/payables for breaches of R&W and the effects of other loss
mitigation strategies. 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. Assumptions used in the
determination of the net expected loss to be paid such as delinquency, severity, and discount rates and expected time frames to
recovery in the mortgage market were consistent by sector regardless of the accounting model used. The primary drivers of
economic loss development are discussed below. 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.
Net Expected Loss to be Paid
Public finance
Structured finance
U.S. RMBS
Other structured finance
Structured finance
Total
Public finance
Structured finance
U.S. RMBS
Other structured finance
Structured finance
Total
As of
December 31, 2017
As of
December 31, 2016
$
$
(in millions)
1,203
$
73
27
100
904
206
88
294
1,303
$
1,198
Economic Loss Development (Benefit) (1)
Year Ended December 31,
2017
2016
(in millions)
2015
549
$
269
$
(181)
(55)
(236)
313
$
(91)
(39)
(130)
139
$
405
(82)
(4)
(86)
319
$
$
____________________
(1)
Economic loss development includes the effects of changes in assumptions based on observed market trends, changes
in discount rates, accretion of discount and the economic effects of loss mitigation efforts.
86
2017 Net Economic Loss Development
The total economic loss development of $313 million in 2017 was primarily related to the public finance sector, offset
in part by improvements in the structured finance sector. The risk-free rates for U.S. dollar denominated obligations used to
discount expected losses ranged from 0.0% to 2.78% with a weighted average of 2.38% as of December 31, 2017 and 0.0% to
3.23% with a weighted average of 2.73% as of December 31, 2016. The effect of changes in the risk-free rates used to discount
expected losses was a loss of $25 million in 2017.
U.S. Public Finance Economic Loss Development: The net par outstanding for U.S. public finance obligations rated
BIG by the Company was $7.1 billion as of December 31, 2017 compared with $7.4 billion as of December 31, 2016. The
Company projects that its total net expected loss across its troubled U.S. public finance exposures as of December 31, 2017 will
be $1,157 million, compared with $871 million as of December 31, 2016. Economic loss development in 2017 was $554
million, which was primarily attributable to Puerto Rico exposures. See "Insured Portfolio-Exposure to Puerto Rico" below for
details about significant developments that have taken place in Puerto Rico.
U.S. RMBS Economic Loss Development: The net benefit attributable to U.S. RMBS was $181 million and was
mainly related to an R&W litigation settlement, and improved second lien U.S. RMBS recoveries. See Part II, Item 8, Financial
Statements and Supplementary Data, Note 5, Expected Loss to be Paid for additional information.
Other Structured Finance Economic Loss Development: The net benefit attributable to structured finance (excluding
U.S. RMBS) was $55 million, due primarily to a benefit from a litigation settlement related to two triple-X transactions. See
Part II, Item 8, Financial Statements and Supplementary Data, Note 5, Expected Loss to be Paid for additional information.
2016 Net Economic Loss Development
The total economic loss development of $139 million in 2016 was primarily related to the public finance sector, offset
in part by improvements in the structured finance sector. The risk-free rates used to discount expected losses ranged from 0.0%
to 3.23% as of December 31, 2016 with a weighted average of 2.73% as of December 31, 2016, and 0.0% to 3.25% as of
December 31, 2015 with a weighted average of 2.36% as of December 31, 2015. The effect of changes in the risk-free rates
used to discount expected losses was a benefit of $15 million in 2016.
U.S. Public Finance Economic Loss Development: The net par outstanding for U.S. public finance obligations rated
BIG by the Company was $7.4 billion as of December 31, 2016 compared with $7.8 billion as of December 31, 2015. The
Company projected that its total net expected loss across its troubled U.S. public finance exposures as of December 31, 2016
would be $871 million, compared with $771 million as of December 31, 2015. Economic loss development in 2016 was $276
million, which was primarily attributable to Puerto Rico exposures.
U.S. RMBS Economic Loss Development: The net benefit attributable to U.S. RMBS was $91 million and was due
mainly to the acceleration of claim payments as a means of mitigating future losses on certain Alt-A transactions.
Other Structured Finance Economic Loss Development: The net benefit attributable to structured finance (excluding
U.S. RMBS) was $39 million, due primarily to a benefit from the purchase of a portion of an insured obligation as part of a loss
mitigation strategy and and the commutation of certain assumed student loan exposures.
2015 Net Economic Loss Development
Total economic loss development was $319 million in 2015, due primarily to higher U.S. public finance losses on
Puerto Rico exposures, partially offset by a net benefit in the U.S. RMBS sector. The risk-free rates used to discount expected
losses ranged from 0.0% to 3.25% as of December 31, 2015 compared with 0.0% to 2.95% as of December 31, 2014. The
change in the risk-free rates used to discount expected losses was a benefit of $23 million in 2015.
U.S. Public Finance Economic Loss Development: The net par outstanding for U.S. public finance obligations rated
BIG by the Company was $7.8 billion as of December 31, 2015 compared with $7.9 billion as of December 31, 2014. The
Company projected that its total net expected loss across its troubled U.S. public finance exposures as of December 31, 2015
would be $771 million, compared with $303 million as of December 31, 2014. Economic loss development in 2015 was
approximately $416 million, which was primarily attributable to certain Puerto Rico exposures.
U.S. RMBS Economic Loss Development: The net benefit attributable to U.S. RMBS of $82 million was primarily due
to the R&W settlements during the year and a benefit due to the acceleration of claim payments as a means of mitigating future
87
losses on certain Alt-A transactions, which was partially offset by losses in certain second lien U.S. RMBS transactions due to
rising delinquencies and collateral deterioration associated with the increase in monthly payments when their loans reach their
principal amortization period.
Loss and LAE (Financial Guaranty Insurance Contracts)
The primary differences between net economic loss development and loss and LAE are that the amount reported in the
consolidated statements of operations:
•
•
•
considers deferred premium revenue in the calculation of loss reserves and loss and LAE for financial guaranty
insurance contracts. For these transactions, each transaction’s expected loss to be expensed, is compared with the
deferred premium revenue of that transaction. When the expected loss to be expensed exceeds the deferred
premium revenue, a loss is recognized in the consolidated statements of operations for the amount of such excess,
eliminates loss and LAE related to FG VIEs and
does not include estimated losses on credit derivatives.
Loss and LAE reported in non-GAAP operating income (i.e. operating loss and LAE) includes losses on financial
guaranty insurance contracts (other than those eliminated due to consolidation of FG VIEs) and credit derivatives.
For financial guaranty insurance contracts, the loss and LAE reported in the consolidated statements of operations is
generally recorded only when expected losses exceed deferred premium revenue. 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 generally have the largest
deferred premium revenue balances because of the purchase accounting fair value adjustments made at acquisition. Therefore
the largest differences between net economic loss development and loss and LAE on financial guaranty insurance contracts
generally relate to these policies.
The amount of loss and LAE recognized in the consolidated statements of operations for financial guaranty contracts
accounted for as insurance is dependent on 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 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 loss and LAE that will be recognized in future periods as deferred premium revenue
amortizes into income in the consolidated statements of operations for financial guaranty insurance policies.
The following table presents the loss and LAE recorded in the consolidated statements of operations. Amounts
presented are net of reinsurance.
88
Loss and LAE Reported
on the Consolidated Statements of Operations
Public finance
Structured finance
U.S. RMBS
Other structured finance
Structured finance
Total insurance contracts before FG VIE consolidation
Elimination of losses attributable to FG VIEs
Total loss and LAE (1)
Year Ended December 31,
2017
2016
(in millions)
2015
549
$
304
$
(106)
(48)
(154)
395
(7)
388
$
37
(39)
(2)
302
(7)
295
$
393
54
5
59
452
(28)
424
$
$
____________________
(1)
Excludes credit derivative benefit of $43 million and $20 million for 2017 and 2016, respectively, and credit derivative
loss expense of $22 million for 2015.
Loss and LAE in 2017 was mainly driven by higher loss reserves on certain Puerto Rico exposures, partially offset by
a benefit from litigation settlements related to an R&W benefit of $105 million and a triple-X litigation settlement. See Part II,
Item 8, Financial Statements and Supplementary Data, Note 5, Expected Loss to be Paid for additional information.
Loss and LAE in 2016 was mainly driven by higher loss reserves on certain Puerto Rico exposures.
Loss and LAE in 2015 comprised mainly changes in loss estimates on Puerto Rico exposures, second lien U.S. RMBS
transactions and Triple-X life insurance transactions. Some of the increases were partially offset by improvements in first lien
U.S. RMBS and student loan transactions.
For additional information on schedule of the expected timing of net expected losses to be expensed see Part II, Item
8, Financial Statements and Supplementary Data, Note 6, Contracts Accounted for as Insurance, Financial Guaranty Insurance
Losses.
Interest Expense
The following table presents the components of interest expense. For additional information, see Part II, Item 8,
Financial Statements and Supplementary Data, Note 16, Long-Term Debt and Credit Facilities.
Interest Expense
Debt issued by AGUS
Debt issued by AGMH
Notes payable by AGM
Purchased debt
Total
Year Ended December 31,
2017
2016
(in millions)
2015
$
$
44
54
0
(1)
97
$
$
$
48
54
0
—
102
$
49
54
(2)
—
101
In December 2016, $150 million of debt issued by AGUS became floating rate interest debt, that resets quarterly, at a
rate equal to three month London Interbank Offered Rate (LIBOR) plus a margin equal to 2.38%. The interest rate on the debt
was previously a fixed rate of 6.4%.
89
Other Operating Expenses and Amortization of Deferred Acquisition Costs
2017 compared with 2016: Other operating expenses in 2017 decreased slightly compared to 2016 due primarily to
lower rent and depreciation expense, offset in part by higher compensation expense.
2016 compared with 2015: Other operating expenses increased in 2016 compared to 2015 due primarily to higher
compensation expense and accelerated amortization of leasehold improvements as a result of the Company's move of its New
York offices.
Provision for Income Tax
Deferred income tax assets and liabilities are established for the temporary differences between the financial statement
carrying amounts and tax bases of assets and liabilities using enacted rates in effect for the year in which the differences are
expected to reverse. Such temporary differences relate principally to unrealized gains and losses on investments and credit
derivatives, investment basis difference, loss and LAE reserves, unearned premium reserves and tax attributes for net operating
losses, alternative minimum tax credits and foreign tax credits.
As of December 31, 2017 and December 31, 2016, the Company had a net deferred income tax asset of $98 million
and $497 million, respectively. The decrease in 2017 from 2016 is mainly attributable to tax losses incurred on Puerto Rico
policies as well as the revaluation of ending deferred taxes using the new corporate tax rate of 21%, pursuant to the Tax Act
enacted on December 22, 2017.
Provision for Income Taxes and Effective Tax Rates
Year Ended December 31,
2017
2016
(in millions)
2015
Total provision (benefit) for income taxes
Effective tax rate
$
$
261
26.3%
$
136
13.4%
375
26.2%
The Company’s effective tax rate reflects the proportion of income recognized by each of the Company’s operating
subsidiaries, with U.S. subsidiaries taxed at the U.S. marginal corporate income tax rate of 35%, U.K. subsidiaries taxed at the
U.K. blended marginal corporate tax rate of 19.25% unless taxed as a U.S. CFC, and no taxes for the Company’s Bermuda
subsidiaries, which consist of AG Re, AGRO, and Cedar Personnel Ltd., unless subject to U.S tax by election or as a U.S. CFC.
AGE, the Company’s U.K. subsidiary, had previously elected under U.S. Internal Revenue Code Section 953(d) to be taxed as a
U.S. company. In January 2017, AGE filed a request with the U.S. IRS to revoke the election, which was approved in May
2017. As a result of the revocation of the Section 953(d) election, AGE will no longer be liable to pay future U.S. taxes
beginning in 2017. Pursuant to the Tax Act, previously untaxed unremitted earnings of the Company's CFCs were subject to a
one-time tax charge at an effective tax rate of 15.5%.
The impact of the Tax Act includes the deemed repatriation of all previously untaxed unremitted earnings of CFCs as
previously discussed as well as the permanent write down of various tax attributes and other net deferred tax assets related to
the reduction of the statutory corporate tax rate from 35% to 21% as of January 1, 2018. The net impact of the Tax Act in 2017
was a charge of $61 million. See Part II, Item 8, Financial Statements and Supplementary Data, Note 12, Income Taxes, for
more details.
In April 2017, the Company received a final letter from the IRS to close the audit for the period of 2009 - 2012, with
no additional findings or changes, and as a result the Company released previously recorded uncertain tax position reserves and
accrued interest of approximately $37 million in the second quarter of 2017. Other non-taxable book-to-tax differences were
mostly consistent compared with the prior period, with the exception of the benefit on bargain purchase gains from the MBIA
UK Acquisition, the CIFG Acquisition and the Radian Asset Acquisition.
90
Non-GAAP Financial Measures
To reflect the key financial measures that management analyzes in evaluating the Company’s operations and progress
towards long-term goals, the Company discloses both financial measures determined in accordance with GAAP and 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.
By disclosing non-GAAP financial measures, the Company gives investors, analysts and financial news reporters
access to information that management and the Board of Directors review internally. The Company believes its presentation of
non-GAAP financial measures, along with the effect of FG VIE consolidation, provides information that is necessary for
analysts to calculate their estimates of Assured Guaranty’s financial results in their research reports on Assured Guaranty and
for investors, analysts and the financial news media to evaluate Assured Guaranty’s financial results.
GAAP requires the Company to consolidate certain VIEs that have issued debt obligations insured by the Company.
However, the Company does not own such VIEs and its exposure is limited to its obligation under its financial guaranty
insurance contract. Management and the Board of Directors use non-GAAP financial measures adjusted to remove FG 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 these core financial measures in its decision making process and in its calculation of certain components of
management compensation. Wherever possible, the Company has separately disclosed the effect of FG VIE consolidation.
Many investors, analysts and financial news reporters use non-GAAP operating shareholders’ equity, adjusted to
remove the effect of FG VIE consolidation, as the principal financial measure 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. Many of the
Company’s fixed income investors also use this measure to evaluate the Company’s capital adequacy.
Many investors, analysts and financial news reporters also use non-GAAP adjusted book value, adjusted to remove the
effect of FG VIE consolidation, to evaluate AGL’s share price and as the basis of their decision to recommend, buy or sell the
AGL common shares. Non-GAAP operating income adjusted for the effect of FG VIE 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 core financial measures that the Company uses to help determine compensation are: (1) non-GAAP operating
income, adjusted to remove the effect of FG VIE consolidation, (2) non-GAAP operating shareholders' equity, adjusted to
remove the effect of FG VIE consolidation, (3) growth in non-GAAP adjusted book value per share, adjusted to remove the
effect of FG VIE consolidation, and (4) PVP.
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.
Non-GAAP Operating Income
Management believes that non-GAAP operating income is a useful measure because it clarifies the understanding of
the underwriting results and financial condition of the Company and presents the results of operations of the Company
excluding the fair value adjustments on credit derivatives and CCS that are not expected to result in economic gain or loss, as
well as other adjustments described below. Management adjusts non-GAAP operating income further by removing FG VIE
consolidation to arrive at its core operating income measure. Non-GAAP 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.
91
2)
3)
4)
5)
Elimination of non-credit-impairment 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, the Company's credit spreads, and other market factors
and are not expected to result in an economic gain or loss.
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.
Elimination of foreign exchange gains (losses) on remeasurement of net premium receivables and loss and
LAE reserves. 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.
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.
Reconciliation of Net Income (Loss)
to Non-GAAP Operating Income
Net income (loss)
Less pre-tax adjustments:
Realized gains (losses) on investments
Non-credit impairment unrealized fair value gains (losses) on credit
derivatives
Fair value gains (losses) on CCS
Foreign exchange gains (losses) on remeasurement of premiums
receivable and loss and LAE reserves
Total pre-tax adjustments
Less tax effect on pre-tax adjustments
Non-GAAP operating income
Gain (loss) related to FG VIE consolidation (net of tax provision of $6, $7
and $4) included in non-GAAP operating income
Year Ended December 31,
2017
2016
(in millions)
2015
$
730
$
881
$
1,056
40
43
(2)
57
138
(69)
661
11
$
$
(30)
36
0
(33)
(27)
13
895
12
$
$
(27)
505
27
(15)
490
(144)
710
11
$
$
Non-GAAP Operating Shareholders’ Equity and Non-GAAP Adjusted Book Value
Management believes that non-GAAP operating shareholders’ equity is a useful measure because it presents the equity
of the Company excluding the fair value adjustments on investments, credit derivatives and CCS, that are not expected to result
in economic gain or loss, along with other adjustments described below. Management adjusts non-GAAP operating
shareholders’ equity further by removing FG VIE consolidation to arrive at its core operating shareholders' equity and core
adjusted book value.
Non-GAAP operating shareholders’ equity is the basis of the calculation of non-GAAP adjusted book value (see
below). Non-GAAP 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 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
92
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)
3)
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.
Elimination of unrealized gains (losses) on the Company’s investments that are recorded as a component of
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 non-GAAP adjusted book value, adjusted for FG VIE consolidation, to measure the intrinsic value
of the Company, excluding franchise value. Growth in non-GAAP adjusted book value per share, adjusted for FG VIE
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 non-GAAP 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. Non-GAAP adjusted book value is non-GAAP operating shareholders’ equity, as defined
above, further adjusted for the following:
1)
2)
3)
4)
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.
Addition of the net present value of estimated net future revenue on non-financial guaranty contracts. See
below.
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 expected future net earned premiums, net of
expected losses to be expensed, which are not reflected in GAAP equity.
Elimination of the tax asset or liability 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 non-GAAP adjusted book value will be earned in future periods, but
actual earnings may differ materially from the estimated amounts used in determining current non-GAAP adjusted book value
due to changes in foreign exchange rates, prepayment speeds, terminations, credit defaults and other factors.
93
Reconciliation of Shareholders’ Equity
to Non-GAAP Adjusted Book Value
As of December 31, 2017
As of December 31, 2016
After-Tax
Per Share
After-Tax
Per Share
Shareholders’ equity
Less pre-tax adjustments:
Non-credit impairment unrealized fair value gains
(losses) on credit derivatives
Fair value gains (losses) on CCS
Unrealized gain (loss) on investment portfolio
excluding foreign exchange effect
Less taxes
Non-GAAP operating shareholders’ equity
Pre-tax adjustments:
Less: Deferred acquisition costs
Plus: Net present value of estimated net future
revenue
Plus: Net unearned premium reserve on financial
guaranty contracts in excess of expected loss to be
expensed
Plus taxes
Non-GAAP adjusted book value
Gain (loss) related to FG VIE consolidation included in
non-GAAP operating shareholders' equity (net of tax
(provision) benefit of $(2) and $4)
Gain (loss) related to FG VIE consolidation included in
non-GAAP adjusted book value (net of tax benefit of
$3 and $12)
Net Present Value of Estimated Net Future Revenue
$
6,839
$
(dollars in millions, except
per share amounts)
58.95
$
6,504
$
50.82
(146)
60
487
(83)
6,521
101
146
(1.26)
0.52
4.20
(0.71)
56.20
0.87
1.26
(189)
62
316
(71)
6,386
106
136
2,966
(512)
9,020
$
25.56
(4.41)
77.74
$
2,922
(832)
8,506
$
(1.48)
0.48
2.47
(0.54)
49.89
0.83
1.07
22.83
(6.50)
66.46
5
$
0.03
$
(7) $
(0.06)
(14) $
(0.12) $
(24) $
(0.18)
$
$
$
Management believes that this amount is a useful measure because it enables an evaluation of the value of future
estimated revenue for non-financial guaranty insurance contracts. There is no corresponding GAAP financial measure. This
amount represents the present value of estimated future revenue from the Company’s non-financial guaranty insurance
contracts, net of reinsurance, ceding commissions and premium taxes, for contracts without expected economic losses, and is
discounted at 6%. Estimated net future revenue may change from period to period 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.
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 premium supplements and additional installment premium on existing contracts as
to which the issuer has the right to call the insured obligation but has not exercised such right, whether in insurance or credit
derivative contract form, which management believes GAAP gross written premiums and the net credit derivative premiums
received and receivable portion of net realized gains and other settlements on credit derivatives (Credit Derivative Realized
Gains (Losses)) 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, discounted, in each
case, at 6%. Under GAAP, financial guaranty installment premiums are discounted at a risk free rate. Additionally, under
94
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 future earned or written premiums and Credit Derivative Realized Gains (Losses)
may differ from PVP 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
GWP
Less: Installment GWP and other GAAP adjustments(1)
Upfront GWP
Plus: Installment premium PVP
PVP
GWP
Less: Installment GWP and other GAAP adjustments(1)
Upfront GWP
Plus: Installment premium PVP
PVP
GWP
Less: Installment GWP and other GAAP adjustments(1)
Upfront GWP
Plus: Installment premium PVP
PVP
Year Ended December 31, 2017
Public Finance
Structured Finance
U.S.
Non - U.S.
U.S.
Non - U.S.
Total
$
$
190
(3)
193
3
$
196
$
(in millions)
$
(1) $
(1)
0
12
12
$
$
105
103
2
64
66
13
0
13
2
15
$
$
307
99
208
81
289
Year Ended December 31, 2016
Public Finance
Structured Finance
U.S.
Non - U.S.
U.S.
Non - U.S.
Total
$
$
142
(19)
161
0
$
161
$
(in millions)
$
(1) $
(4)
3
24
27
$
$
15
15
0
25
25
(2) $
(2)
0
1
1
$
154
(10)
164
50
214
Year Ended December 31, 2015
Public Finance
Structured Finance
U.S.
Non - U.S.
U.S.
Non - U.S.
Total
$
$
119
(5)
124
0
$
124
$
(in millions)
$
23
21
2
20
22
$
$
$
41
41
0
27
27
(2) $
(2)
0
6
6
$
181
55
126
53
179
_____________
(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, any cancellations of assumed
reinsurance contracts, and other GAAP adjustments.
95
Insured Portfolio
Financial Guaranty Exposure
The following tables present the insured portfolio by asset class 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 VIE consolidation). The
Company excludes amounts attributable to loss mitigation securities from par and debt service outstanding. These amounts are
included in the investment portfolio, because the Company manages such securities as investments, and not insurance exposure.
As of December 31, 2017 and December 31, 2016, the Company excluded $2.0 billion and $2.1 billion, respectively, of net par
attributable to loss mitigation securities and other loss mitigation strategies.
96
Net Par Outstanding and Average Internal Rating by Sector
Sector
Public finance:
U.S.:
General obligation
Tax backed
Municipal utilities
Transportation
Healthcare
Higher education
Infrastructure finance
Housing revenue
Investor-owned utilities
Other public finance—U.S.
Total public finance—U.S.
Non-U.S.:
Infrastructure finance
Regulated utilities
Pooled infrastructure
Other public finance
Total public finance—non-U.S.
Total public finance
Structured finance:
U.S.:
RMBS
Consumer receivables
Insurance securitizations
Financial products
Pooled corporate obligations
Commercial receivables
Other structured finance—U.S.
Total structured finance—U.S.
Non-U.S.:
RMBS
Commercial receivables
Pooled corporate obligations
Other structured finance
Total structured finance—non-U.S.
Total structured finance
Total net par outstanding
As of December 31, 2017
As of December 31, 2016
Net Par
Outstanding
Avg.
Rating
Net Par
Outstanding
Avg.
Rating
(dollars in millions)
A-
A-
A-
A-
A
A
BBB+
BBB+
A-
A
A-
BBB
BBB+
AAA
A
BBB+
A-
BBB-
A-
A+
AA-
A
BBB
A+
BBB+
A-
A
A+
A
A
A-
A-
$
$
107,717
49,931
37,603
19,403
11,238
10,085
3,769
1,559
697
2,796
244,798
10,731
9,263
1,513
4,874
26,381
271,179
5,637
1,652
2,308
1,540
10,050
230
640
22,057
604
356
1,535
587
3,082
25,139
296,318
A
A-
A
A-
A
A
BBB+
A-
BBB+
A
A
BBB
BBB+
AAA
A
BBB+
A-
BBB-
BBB+
A+
AA-
AAA
BBB-
AA-
A+
A-
BBB+
AA
AA
AA-
AA-
A
$
$
90,705
44,350
32,357
17,030
8,763
8,195
4,216
1,319
523
1,934
209,392
18,234
16,689
1,561
6,438
42,922
252,314
4,818
1,590
1,449
1,418
1,347
146
456
11,224
637
296
157
324
1,414
12,638
264,952
97
The following tables set forth the Company’s net financial guaranty portfolio by internal rating.
Financial Guaranty Portfolio by Internal Rating
As of December 31, 2017
Public Finance
U.S.
Public Finance
Non-U.S.
Structured Finance
U.S
Structured Finance
Non-U.S
Total
Rating
Category
Net Par
Outstanding
%
Net Par
Outstanding
%
Net Par
Outstanding
%
Net Par
Outstanding
%
Net Par
Outstanding
%
AAA
AA
A
BBB
BIG
Total net par
outstanding
$
877
0.4% $
30,016
118,620
52,739
7,140
14.3
56.7
25.2
3.4
(dollars in millions)
2,541
205
13,936
24,509
1,731
5.9% $
0.5
32.5
57.1
4.0
1,655
3,915
1,630
763
3,261
14.7% $
34.9
14.5
6.8
29.1
319
76
210
703
106
22.5% $
5.4
14.9
49.7
7.5
5,392
34,212
134,396
78,714
12,238
2.1%
12.9
50.7
29.7
4.6
$
209,392
100.0% $
42,922
100.0% $
11,224
100.0% $
1,414
100.0% $
264,952
100.0%
Financial Guaranty Portfolio by Internal Rating
As of December 31, 2016
Public Finance
U.S.
Public Finance
Non-U.S.
Structured Finance
U.S
Structured Finance
Non-U.S
Total
Rating
Category
Net Par
Outstanding
%
Net Par
Outstanding
%
Net Par
Outstanding
%
Net Par
Outstanding
%
Net Par
Outstanding
%
(dollars in millions)
AAA
AA
A
BBB
BIG
Total net par
outstanding
$
2,066
46,420
133,829
55,103
7,380
0.8% $
19.0
54.7
22.5
3.0
2,221
170
6,270
16,378
1,342
8.4% $
0.6
23.8
62.1
5.1
9,757
5,773
1,589
879
26.2
7.2
4.0
4,059
18.4
44.2% $
1,447
47.0% $
127
456
759
293
4.1
14.8
24.6
9.5
15,491
52,490
142,144
73,119
13,074
5.2%
17.7
48.0
24.7
4.4
$
244,798
100.0% $
26,381
100.0% $
22,057
100.0% $
3,082
100.0% $
296,318
100.0%
98
The tables below show the Company's ten largest U.S. public finance, U.S. structured finance and non-U.S. exposures
by revenue source, excluding related authorities and public corporations, as of December 31, 2017:
Ten Largest U.S. Public Finance Exposures
by Revenue Source
As of December 31, 2017
New Jersey (State of)
Illinois (State of)
Chicago (City of) Illinois
Puerto Rico, General Obligation, Appropriations and Guarantees of the
Commonwealth
Pennsylvania (Commonwealth of)
North Texas Tollway Authority
Puerto Rico Highways & Transportation Authority
California (State of)
Chicago Public Schools, Illinois
Massachusetts (Commonwealth of)
$
Net Par
Outstanding
4,821
2,059
1,659
1,578
1,481
1,383
1,377
1,312
1,227
1,200
Total of top ten U.S. public finance exposures
$
18,097
Ten Largest U.S. Structured Finance Exposures
As of December 31, 2017
Private US Insurance Securitization
SLM Private Credit Student Trust 2007-A
Private US Insurance Securitization
SLM Private Credit Student Loan Trust 2006-C
Private US Insurance Securitization
Option One 2007-FXD2
Timberlake Financial, LLC Floating Insured Notes
Soundview 2007-WMC1
Countrywide HELOC 2006-I
Nomura Asset Accept. Corp. 2007-1
$
Net Par
Outstanding
500
500
424
327
250
217
190
163
160
140
Total of top ten U.S. structured finance exposures
$
2,871
Percent of Total
U.S. Public
Finance Net Par
Outstanding
(dollars in millions)
2.3%
1.0
0.8
0.7
0.7
0.7
0.6
0.6
0.6
0.6
8.6%
Percent of Total
U.S. Structured
Finance Net Par
Outstanding
(dollars in millions)
4.5%
4.5
3.8
2.9
2.2
1.9
1.7
1.5
1.4
1.2
25.6%
Rating
BBB
BBB
BBB+
CCC-
A-
A
CC-
A
BBB-
AA-
Rating
AA
A+
AA
A+
AA
CCC
BBB-
CCC
BB
CCC
99
Ten Largest Non-U.S. Exposures
As of December 31, 2017
Country
Net Par
Outstanding
Percent of Total
Non-U.S. Net
Par Outstanding
(dollars in millions)
5.8%
4.6
4.1
3.4
3.3
3.3
2.4
2.3
2.2
2,567
2,062
1,808
1,519
1,466
1,447
1,082
1,014
978
Rating
A-
A+
BBB+
A-
A-
A-
BBB
BBB
BBB+
A+
959
14,902
$
2.2
33.6%
Southern Water Services Limited
United Kingdom
$
Hydro-Quebec, Province of Quebec
Societe des Autoroutes du Nord et de l'Est de
France S.A.
Canada
France
Thames Water Utility Finance PLC
Anglian Water Services Financing
Dwr Cymru Financing Limited
Southern Gas Networks PLC
United Kingdom
United Kingdom
United Kingdom
United Kingdom
Channel Link Enterprises Finance PLC
France, United Kingdom
National Grid Gas PLC
British Broadcasting Corporation
Total of top ten non-U.S. exposures
United Kingdom
United Kingdom
100
Financial Guaranty Portfolio by Geographic Area
The following table sets forth the geographic distribution of the Company's financial guaranty portfolio.
Geographic Distribution
of Financial Guaranty Portfolio
As of December 31, 2017
U.S.:
California
Texas
Pennsylvania
Illinois
New York
New Jersey
Florida
Michigan
Puerto Rico
Alabama
Other
Total U.S. public finance
U.S. Structured finance (multiple states)
Total U.S.
Non-U.S.:
United Kingdom
France
Canada
Australia
Italy
Other
Total non-U.S.
Total
Number of Risks
Net Par
Outstanding
(dollars in millions)
Percent of Total
Net Par
Outstanding
$
1,368
1,229
744
702
871
444
294
439
18
296
3,112
9,517
512
10,029
126
10
9
12
9
44
210
10,239
$
36,507
19,027
18,061
17,044
15,672
12,441
10,272
6,353
4,968
4,808
64,239
209,392
11,224
220,616
30,062
3,167
2,690
2,309
1,497
4,611
44,336
264,952
13.8%
7.2
6.8
6.4
5.9
4.7
3.9
2.4
1.9
1.8
24.3
79.1
4.2
83.3
11.3
1.2
1.0
0.9
0.6
1.7
16.7
100.0%
101
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 table sets 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, 2017
Number of
Issues
Net Par
Outstanding
(dollars in millions)
35,572
$
73,913
41,516
40,424
60,889
252,314
$
13,504
4,546
802
404
251
19,507
% of Public
Finance
Net Par
Outstanding
14.1%
29.3
16.5
16.0
24.1
100.0%
Structured Finance Portfolio by Issue Size
As of December 31, 2017
Number of
Issues
Net Par
Outstanding
% of Structured
Finance
Net Par
Outstanding
(dollars in millions)
65
$
1,286
1,580
3,240
6,467
12,638
$
162
191
69
98
106
626
0.5%
10.2
12.5
25.6
51.2
100.0%
Original Par Amount Per Issue
Less than $10 million
$10 through $50 million
$50 through $100 million
$100 million to $200 million
$200 million or greater
Total
Original Par Amount Per Issue
Less than $10 million
$10 through $50 million
$50 through $100 million
$100 million to $200 million
$200 million or greater
Total
Exposure to Puerto Rico
The Company has insured exposure to general obligation bonds of the Commonwealth of Puerto Rico (Puerto Rico or
the Commonwealth) and various obligations of its related authorities and public corporations aggregating $5.0 billion net par as
of December 31, 2017, all of which is rated BIG. Puerto Rico experienced significant general fund budget deficits and a
challenging economic environment since at least the financial crisis. More recently, Hurricane Maria created additional
challenges for Puerto Rico. Beginning on January 1, 2016, a number of Puerto Rico exposures have defaulted on bond
payments, and the Company has now paid claims on all of its Puerto Rico exposures except for Puerto Rico Aqueduct and
Sewer Authority (PRASA), Municipal Finance Agency (MFA) and University of Puerto Rico (U of PR). Additional information
about recent developments in Puerto Rico and the individual exposures insured by the Company may be found in Part II, Item
8, Financial Statements and Supplementary Data, Note 4, Outstanding Exposure.
The Company groups its Puerto Rico exposure into three categories:
•
•
Constitutionally Guaranteed. The Company includes in this category public debt benefiting from Article VI of
the Constitution of the Commonwealth, which expressly provides that interest and principal payments on the
public debt are to be paid before other disbursements are made.
Public Corporations – Certain Revenues Potentially Subject to Clawback. The Company includes in this
category the debt of public corporations for which applicable law permits the Commonwealth to claw back,
102
subject to certain conditions and for the payment of public debt, at least a portion of the revenues supporting the
bonds the Company insures. As a constitutional condition to clawback, available Commonwealth revenues for any
fiscal year must be insufficient to pay Commonwealth debt service before the payment of any appropriations for
that year. The Company believes that this condition has not been satisfied to date, and accordingly that the
Commonwealth has not to date been entitled to claw back revenues supporting debt insured by the Company.
Prior to the enactment of PROMESA, the Company sued various Puerto Rico governmental officials in the United
States District Court, District of Puerto Rico asserting that Puerto Rico's attempt to "claw back" pledged taxes is
unconstitutional, and demanding declaratory and injunctive relief.
•
Other Public Corporations. The Company includes in this category the debt of public corporations that are
supported by revenues it does not believe are subject to clawback.
103
Exposure to Puerto Rico (1)
As of December 31, 2017
Net Par Outstanding
AGM
AGC
AG Re
Eliminations
(2)
Total Net
Par
Outstanding
(3)
Gross Par
Outstanding
(in millions)
$
670
$
343
$
407
$
(1) $
1,419
$
1,469
9
141
0
(9)
141
146
252
358
—
—
547
—
221
263
—
511
93
152
17
73
284
54
—
1
204
44
—
1
233
89
85
9
—
(85)
—
—
—
—
—
—
—
—
(95) $
882
495
152
18
853
373
360
272
1
913
556
152
18
870
373
416
272
1
4,966
$
5,186
Commonwealth Constitutionally
Guaranteed
Commonwealth of Puerto Rico - General
Obligation Bonds (4)
Puerto Rico Public Buildings Authority
(PBA)
Public Corporations - Certain Revenues
Potentially Subject to Clawback
Puerto Rico Highways and Transportation
Authority (PRHTA) (Transportation
revenue) (4)
PRHTA (Highway revenue) (4)
Puerto Rico Convention Center District
Authority (PRCCDA)
Puerto Rico Infrastructure Financing
Authority (PRIFA)
Other Public Corporations
Puerto Rico Electric Power Authority
(PREPA) (4)
PRASA
MFA
Puerto Rico Sales Tax Financing
Corporation (COFINA) (4)
U of PR
Total exposure to Puerto Rico
$
2,320
$
1,669
$
1,072
$
____________________
(1)
The December 31, 2017 amounts include $389 million (which comprises $36 million of General Obligation Bonds,
$134 million of PREPA, $144 million of PRHTA (Highways revenue), and $75 million of MFA) related to 2017
commutations of previously ceded business. See Part II, Item 8, Financial Statements and Supplementary Data, Note
13, Reinsurance and Other Monoline Exposures, for more information.
(2)
(3)
(4)
Net par outstanding eliminations relate to second-to-pay policies under which an Assured Guaranty insurance
subsidiary guarantees an obligation already insured by another Assured Guaranty insurance subsidiary.
Includes exposure to capital appreciation bonds with a current aggregate net par outstanding of $26 million and a fully
accreted net par at maturity of $56 million. Of these amounts, current net par of $20 million and fully accreted net par
at maturity of $50 million relate to the COFINA, current net par of $4 million and fully accreted net par at maturity of
$4 million relate to the PRHTA, and current net par of $2 million and fully accreted net par at maturity of $2 million
relate to the Commonwealth General Obligation Bonds.
As of the date of this filing, the seven-member federal financial oversight board established by PROMESA has
certified a filing under Title III of PROMESA for these exposures.
The following table shows the scheduled amortization of the general obligation bonds of Puerto Rico and various
obligations of its related authorities and public corporations insured by the Company. The Company guarantees payments of
interest and principal 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 principal and interest
due in any given period and the amount paid by the obligors.
104
Amortization Schedule
of Net Par Outstanding of Puerto Rico
As of December 31, 2017
2018
(1Q)
2018
(2Q)
2018
(3Q)
2018
(4Q)
2019
2020
2021
2022
(in millions)
2023
-2027
2028
-2032
2033
-2037
2038
-2042
2043
-2047
Total
Scheduled Net Par Amortization
Commonwealth
Constitutionally Guaranteed
Commonwealth of Puerto
Rico - General Obligation
Bonds
$
0 $
0 $
78 $
0 $
87 $ 141 $
15 $
37 $ 279 $ 215 $ 567 $ — $ — $ 1,419
PBA
—
—
—
—
3
5
13
0
64
16
40
—
—
141
Public Corporations - Certain
Revenues Potentially Subject
to Clawback
PRHTA (Transportation
revenue)
PRHTA (Highway revenue)
PRCCDA
PRIFA
Other Public Corporations
PREPA
PRASA
MFA
COFINA
U of PR
Total
Commonwealth
Constitutionally Guaranteed
Commonwealth of Puerto
Rico - General Obligation
Bonds
0
—
—
—
—
—
—
0
—
0
—
—
—
—
—
—
0
—
38
20
—
2
5
—
57
0
0
—
—
—
—
—
—
—
0
—
32
21
—
—
26
—
55
(1)
0
25
22
—
—
48
—
45
(1)
0
18
35
—
—
28
—
40
(2)
0
28
6
—
—
28
—
40
(2)
0
120
100
19
2
467
81
102
(5)
0
157
112
24
—
238
29
21
(1)
1
279
179
109
—
13
—
—
30
0
185
—
—
14
—
2
—
252
—
—
—
—
—
—
261
—
2
—
882
495
152
18
853
373
360
272
1
$
0 $
0 $ 200 $
0 $ 223 $ 285 $ 147 $ 137 $ 1,229 $ 812 $ 1,217 $ 453 $ 263 $ 4,966
Amortization Schedule
of Net Debt Service Outstanding of Puerto Rico
As of December 31, 2017
Scheduled Net Debt Service Amortization
2018
(1Q)
2018
(2Q)
2018
(3Q)
2018
(4Q)
2019
2020
2021
2022
(in millions)
2023
-2027
2028
-2032
2033
-2037
2038
-2042
2043
-2047
Total
$
37 $
0 $ 114 $
0 $ 156 $ 206 $
74 $
94 $ 536 $ 396 $ 649 $ — $ — $ 2,262
PBA
4
—
4
—
10
12
20
6
93
30
45
—
—
224
Public Corporations - Certain
Revenues Potentially Subject
to Clawback
PRHTA (Transportation
revenue)
PRHTA (Highway revenue)
PRCCDA
PRIFA
Other Public Corporations
PREPA
PRASA
MFA
COFINA
U of PR
Total
23
13
3
0
18
10
9
6
0
0
—
—
—
3
—
—
0
—
61
33
3
2
22
10
67
6
0
—
—
—
—
3
—
—
0
—
76
47
7
1
65
19
70
13
0
67
46
7
1
87
19
58
13
0
59
58
7
1
63
19
50
13
0
68
27
7
1
62
19
48
13
0
301
186
54
6
588
172
123
70
0
300
182
55
4
273
99
22
74
1
372
203
121
3
15
68
—
96
0
210
— 1,537
—
—
16
—
69
—
307
—
—
—
—
795
264
35
— 1,199
314
—
2
—
818
447
613
1
$ 123 $
3 $ 322 $
3 $ 464 $ 516 $ 364 $ 345 $ 2,129 $ 1,436 $ 1,572 $ 602 $ 316 $ 8,195
105
Financial Guaranty Exposure to U.S. Residential Mortgage-Backed Securities
The tables below provide information on the risk ratings and certain other risk characteristics of the Company’s
financial guaranty insurance, FG VIE and credit derivative U.S. RMBS exposures. As of December 31, 2017, U.S. RMBS
exposures represent 2% of the total net par outstanding, and BIG U.S. RMBS represent 23% of total BIG net par outstanding.
See Part II, Item 8, Financial Statements and Supplementary Data, Note 5, Expected Loss to be Paid, for a discussion of
expected losses to be paid on U.S. RMBS exposures.
Distribution of U.S. RMBS by Rating and Type of Exposure as of December 31, 2017
Ratings:
AAA
AA
A
BBB
BIG
Total exposures
Prime
First Lien
Alt-A
First Lien
Option
ARMs
Subprime
First Lien
Second
Lien
Total Net Par
Outstanding
$
$
4
25
0
2
117
150
$
$
117
207
—
0
490
814
$
$
(dollars in millions)
25
31
0
—
59
115
$
$
1,257
238
85
63
1,055
2,698
$
$
0
—
0
2
1,039
1,041
$
$
1,404
500
85
67
2,761
4,818
Distribution of U.S. RMBS by Year Insured and Type of Exposure as of December 31, 2017
Year
insured:
2004 and prior
2005
2006
2007
2008
Total exposures
Prime
First Lien
Alt-A
First Lien
Option
ARMs
Subprime
First Lien
Second
Lien
Total Net Par
Outstanding
$
$
19
74
57
—
—
150
$
$
37
268
57
451
—
814
$
$
(in millions)
13
27
20
55
—
115
$
$
815
155
573
1,084
70
2,698
$
$
51
217
301
472
—
1,041
$
$
935
742
1,009
2,063
70
4,818
Financial Guaranty Exposure to the U.S. Virgin Islands
As of December 31, 2017, the Company had $498 million insured net par outstanding to the U.S. Virgin Islands and
its related authorities (USVI), of which it rated $224 million BIG. The $274 million USVI net par the Company rated
investment grade was comprised primarily of bonds secured by a lien on matching fund revenues related to excise taxes on
products produced in the USVI and exported to the U.S., primarily rum. The $224 million BIG USVI net par comprised (a)
Public Finance Authority bonds secured by a gross receipts tax and the general obligation, full faith and credit pledge of the
USVI and (b) bonds of the Virgin Islands Water and Power Authority secured by a net revenue pledge of the electric system.
Hurricane Irma caused significant damage in St. John and St. Thomas, while Hurricane Maria made landfall on St.
Croix as a Category 4 hurricane on the Saffir-Simpson scale, causing loss of life and substantial damage to St. Croix’s
businesses and infrastructure, including the power grid. The USVI is benefiting from the federal response to the 2017
hurricanes and has made its debt service payments to date.
Non-Financial Guaranty Exposure
The Company also provides non-financial guaranty reinsurance in transactions with similar risk profiles to its
structured finance exposures written in financial guaranty form.
The Company provided capital relief triple-X excess of loss life reinsurance approximating $675 million of net
exposure as of December 31, 2017 and $390 million as of December 31, 2016. The capital relief triple-X excess of loss life
reinsurance net exposure is expected to increase to approximately $1.0 billion prior to September 30, 2036.
106
In addition, the Company started providing reinsurance on aircraft RVI policies in the first quarter of 2017 and had net
exposure of $140 million to such reinsurance as of December 31, 2017.
The capital relief triple-X excess of loss life reinsurance and aircraft residual value reinsurance are all rated investment
grade internally. This non-financial guaranty exposure has a similar risk profile to the Company's other structured finance
investment grade exposure written in financial guaranty form.
Monoline and Reinsurer Exposures
The Company has exposure to other monolines and reinsurers through reinsurance arrangements (both as a ceding
company and as an assuming company) and in "second-to-pay" transactions. A number of the monolines and reinsurers to
which the Company has exposure have experienced financial distress and, as a result, have been downgraded by the rating
agencies. In addition, state insurance regulators have intervened with respect to some of these distressed insurers, in some
instances limiting the amount of claim payments they are permitted to pay currently in cash.
Ceded par outstanding represents the portion of insured risk ceded to external reinsurers. Under these relationships, the
Company cedes a portion of its insured risk in exchange for a premium paid to the reinsurer. The Company remains primarily
liable for all risks it directly underwrites and is required to pay all gross claims. It then seeks reimbursement from the reinsurer
for its proportionate share of claims. The Company may be exposed to risk for this exposure if it were required to pay the gross
claims and not be able to collect ceded claims from an assuming company experiencing financial distress.
In accordance with U.S. statutory accounting requirements and U.S. insurance laws and regulations, in order for the
Company to receive credit for liabilities ceded to reinsurers domiciled outside of the U.S., such reinsurers must secure their
liabilities to the Company. These reinsurers are required to post collateral for the benefit of the Company in an amount at least
equal to the sum of their ceded unearned premium reserve, loss reserves and contingency reserves all calculated on a statutory
basis of accounting. In addition, certain authorized reinsurers post collateral on terms negotiated with the Company. The total
collateral posted by all non-affiliated reinsurers as of December 31, 2017 was approximately $118 million.
Assumed par outstanding represents the amount of par assumed by the Company from third party insurers and
reinsurers, including other monoline financial guaranty companies. Under these relationships, the Company assumes a portion
of the ceding company’s insured risk in exchange for a premium. The Company may be exposed to risk in this portfolio in that
the Company may be required to pay losses without a corresponding premium in circumstances where the ceding company is
experiencing financial distress and is unable to pay premiums.
In "second-to-pay" transactions, the Company provides insurance on an obligation that is already insured by another
financial guarantor. In that case, if the underlying obligor and the financial guarantor both fail to pay an amount scheduled to be
paid, the Company would be obligated to pay. The Company underwrites these transactions based on the underlying obligation,
without regard to the financial guarantor. See Part II, Item 8, Financial Statements and Supplementary Data, Note 13,
Reinsurance and Other Monoline Exposures, for additional information.
107
Exposure to Reinsurers (1)
Par Outstanding:
Ceded par outstanding (2)
Assumed par outstanding
Second-to-pay insured par outstanding (3)
As of December 31,
2017
2016
(in millions)
$
$
4,434
8,383
6,605
11,156
13,264
11,539
____________________
(1)
The total collateral posted by all non-affiliated reinsurers required to post, or that had agreed to post, collateral as of
December 31, 2017 and December 31, 2016 was approximately $118 million and $387 million, respectively.
(2)
(3)
Of the total ceded par to unrated or BIG rated reinsurers, $296 million and $384 million is rated BIG as of
December 31, 2017 and December 31, 2016, respectively.
The par on second-to-pay exposure where the primary insurer and underlying transaction rating are both BIG and/or
not rated is $204 million and $788 million as of December 31, 2017 and December 31, 2016, respectively.
Liquidity and Capital Resources
Liquidity Requirements and Sources
AGL and its Holding Company Subsidiaries
The liquidity of AGL, AGUS and AGMH is largely dependent on dividends from their operating subsidiaries and their
access to external financing. The liquidity requirements of these entities include the payment of operating expenses, interest on
debt issued by AGUS and AGMH, and dividends on AGL's common shares. AGL and its holding company subsidiaries may
also require liquidity to make periodic capital investments in their operating subsidiaries, purchase outstanding Company debt,
or in the case of AGL, to repurchase its common shares pursuant to its 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 “Distributions From Subsidiaries”
below for a discussion of the dividend restrictions of its insurance company subsidiaries.
108
AGL and Holding Company Subsidiaries
Significant Cash Flow Items
Intercompany sources (uses):
Distributions to AGL from:
AG Re
AGUS
Distributions to AGUS from:
AGC
AGMH
Distributions from AGUS to:
AGMH
Distributions to AGMH from:
AGM
External sources (uses):
Dividends paid to AGL shareholders
Repurchases of common shares(1)
Interest paid by AGMH and AGUS(2)
Purchase of AGMH's debt by AGUS
Year Ended December 31,
2017
2016
(in millions)
2015
$
$
125
470
107
278
(25)
297
(70)
(501)
(78)
(28)
$
100
288
79
513
—
547
(69)
(306)
(95)
—
150
455
90
234
—
240
(72)
(555)
(95)
—
____________________
(1)
See Part II, Item 8, Financial Statements and Supplementary Data, Note 18, Shareholders' Equity, for additional
information about share repurchases and authorizations.
(2)
See Long-Term Obligations below for interest paid by subsidiary.
Distributions From Subsidiaries
The Company anticipates that for the next twelve months, amounts paid by AGL’s direct and indirect insurance
company subsidiaries as dividends or other distributions will be a major source of its liquidity. The insurance company
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. Dividend restrictions applicable to AGC, AGM, MAC and
to AG Re are described in Part II, Item 8, Financial Statements and Supplementary Data, Note 11, Insurance Company
Regulatory Requirements.
Dividend restrictions by insurance company subsidiaries are as follows:
•
•
•
•
The maximum amount available during 2018 for AGM to distribute as dividends without regulatory approval is
estimated to be approximately $190 million, of which approximately $73 million is estimated to be available for
distribution in the first quarter of 2018.
The maximum amount available during 2018 for AGC to distribute as ordinary dividends is approximately $133
million, of which approximately $54 million is available for distribution in the first quarter of 2018.
The maximum amount available during 2018 for MAC to distribute as dividends to Municipal Assurance
Holdings Inc. (MAC Holdings), which is owned by AGM and AGC, without regulatory approval is estimated to
be approximately $27 million, of which approximately $3 million is available for distribution in the first quarter
of 2018.
Based on the applicable law and regulations, in 2018 AG Re has the capacity to (i) make capital distributions in an
aggregate amount up to $128 million without the prior approval of the Bermuda Monetary Authority and (ii)
declare and pay dividends in an aggregate amount up to approximately $324 million as of December 31, 2017.
109
Such dividend capacity is further limited by the actual amount of AG Re’s unencumbered assets, which amount
changes from time to time due in part to collateral posting requirements. As of December 31, 2017, AG Re had
unencumbered assets of approximately $554 million.
Generally, dividends paid by a U.S. company to a Bermuda holding company are subject to a 30% withholding tax.
After AGL became tax resident in the U.K., it became subject to the tax rules applicable to companies resident in the U.K.,
including the benefits afforded by the U.K.’s tax treaties. The income tax treaty between the U.K. and the U.S. reduces or
eliminates the U.S. withholding tax on certain U.S. sourced investment income (to 5% or 0%), including dividends from U.S.
subsidiaries to U.K. resident persons entitled to the benefits of the treaty.
Other recent capital distributions from the insurance company subsidiaries are as follows:
•
•
•
•
On December 21, 2017, the MIA approved and in January 2018, AGC repurchased $200 million in shares of its
common stock from its direct parent, AGUS.
On November 20, 2017 and November 25, 2016, the New York Superintendent approved and AGM repurchased
$101 million and $300 million, respectively, in shares of its common stock from its direct parent, AGMH.
On August 17, 2017, the New York Superintendent approved MAC's request to repurchase its shares of common
stock from its direct parent, MAC Holdings, for approximately $250 million. On September 25, 2017, MAC
transferred approximately $104 million in cash and $146 million in marketable securities to MAC Holdings,
which then distributed such assets to its shareholders, AGM and AGC, in proportion to their respective 61% and
39% ownership interests.
On June 30, 2016, MAC obtained approval from the NYDFS to repay its $300 million surplus note to MAC
Holdings and its $100 million surplus note (plus accrued interest) to AGM. Accordingly, on June 30, 2016, MAC
transferred cash and/or marketable securities to (i) MAC Holdings in an aggregate amount equal to $300 million,
and (ii) AGM in an aggregate amount of $102.5 million. MAC Holdings then distributed $182 million to AGM
and $118 million to AGC.
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.
Intercompany Loans and Guarantees
From time to time, AGL and its subsidiaries have entered into intercompany loan facilities. For example, on October
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. Such commitment terminates on October 25, 2018 (the loan 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 Federal
short-term or mid-term interest rate, as the case may be, as determined under Internal Revenue Code Section 1274(d), and
interest on all loans will be computed for the actual number of days elapsed on the basis of a year consisting of 360
days. Accrued interest on all loans will be paid on the last day of each June and December, beginning on December 31, 2013,
and at maturity. AGL must repay the then unpaid principal amounts of the loans, if any, by the third anniversary of the loan
termination date. AGL has not drawn upon the credit facility.
In addition, in 2012 AGUS borrowed $90 million from its affiliate AGRO to fund the acquisition of MAC. During
2017 and 2016, AGUS repaid $10 million and $20 million, respectively, in outstanding principal as well as accrued and unpaid
interest, and the parties agreed to extend the maturity date of the loan from May 2017 to November 2019. As of December 31,
2017, $60 million remained outstanding.
Furthermore, AGL fully and unconditionally guarantees the payment of the principal of, and interest on, the $1,130
million aggregate principal amount of senior notes issued by AGUS and AGMH, and the $450 million aggregate principal
amount of junior subordinated debentures issued by AGUS and AGMH, in each case, as described under "Commitments and
Contingencies -- Long-Term Debt Obligations" below.
110
Cash and Investments
As of December 31, 2017, AGL had $36 million in cash and short-term investments. AGUS and AGMH had a total of
$170 million in cash and short-term investments. In addition, the Company's U.S. holding companies have $149 million in
fixed-maturity securities (excluding AGUS' investment in AGMH's debt) with weighted average duration of 0.1 years.
Insurance Company Subsidiaries
Liquidity of the insurance company subsidiaries is primarily used to pay for:
•
•
•
•
•
•
•
operating expenses,
claims on the insured portfolio,
dividends to AGL, AGUS and/or AGMH, as applicable,
posting of collateral in connection with credit derivatives and reinsurance transactions,
reinsurance premiums,
principal of and, where applicable, interest on surplus notes, and
capital investments in their own subsidiaries, where appropriate.
Management believes that its 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. The Company targets a balance of its most liquid assets
including cash and short-term securities, 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 temporarily impaired debt securities until the date of anticipated recovery.
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, insurance regulations and rating agency capital requirements
and general economic conditions.
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.
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.
Claims (Paid) Recovered
Public finance
Structured finance:
U.S. RMBS
Other structured finance
Structured finance
Claims (paid) recovered, net of reinsurance(1)
Year Ended December 31,
2017
2016
(in millions)
2015
(263) $
(216) $
(29)
48
(14)
34
(229) $
(90)
(48)
(138)
(354) $
(97)
(161)
(258)
(287)
$
$
____________________
(1)
Includes $8 million, $11 million and $21 million paid in 2017, 2016 and 2015, respectively, for consolidated FG VIEs.
111
In addition, the Company has net par exposure to the general obligation bonds of Puerto Rico and various obligations
of its related authorities and public corporations aggregating $5.0 billion, all of which is rated BIG. Puerto Rico has
experienced significant general fund budget deficits in recent years. Beginning in 2016, the Commonwealth and certain related
authorities and public corporations have defaulted on obligations to make payments on its debt. In addition to high debt levels,
Puerto Rico faces a challenging economic environment exacerbated by the impact of hurricane Maria in September 2017.
Information regarding the Company's exposure to the Commonwealth of Puerto Rico and its related authorities and public
corporations is set forth in Part II, Item 8, Financial Statements and Supplementary Data, Note 4, Outstanding Exposure.
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 as subway 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 do not make the required early termination payments, then AGM would be exposed to possible liquidity
claims on gross exposure of approximately $853 million as of December 31, 2017. 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. At
December 31, 2017, approximately $1.6 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 by
ISDA 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. Some contracts the Company entered into as the credit protection seller, however, utilize standard
ISDA settlement mechanics of cash settlement (i.e., a process to value the loss of market value of a reference obligation) or
physical settlement (i.e., delivery of the reference obligation against payment of principal by the protection seller) in the event
of a “credit event,” as defined in the relevant contract. Cash settlement or physical settlement generally requires the payment of
a larger amount, prior to the maturity of the reference obligation, than would settlement on a “pay-as-you-go” basis.
The transaction documentation for $497 million of the CDS insured by AGC requires AGC to post collateral, in some
cases subject to a cap, to secure its obligation to make payments under such contracts. As of December 31 2017, AGC was
posting $18 million of collateral to satisfy these requirements and the maximum posting requirement was $464 million.
112
Consolidated Cash Flows
Consolidated Cash Flow Summary
Year Ended December 31,
2017
2016
(in millions)
2015
Net cash flows provided by (used in) operating activities before effects of
FG VIE consolidation
$
414
$
Effect of FG VIE consolidation
Net cash flows provided by (used in) operating activities - reported
Net cash flows provided by (used in) investing activities before effects of
acquisitions and FG VIE consolidation
Acquisitions, net of cash acquired
Effect of FG VIE consolidation
Net cash flows provided by (used in) investing activities - reported
Net cash flows provided by (used in) financing activities before effects of
dividends, share repurchases and FG VIE consolidation
Dividends paid
Repurchases of common stock
Effect of FG VIE consolidation
Net cash flows provided by (used in) financing activities - reported (1)
Effect of exchange rate changes
Cash and restricted cash at beginning of period
Total cash and restricted cash at the end of the period
$
19
433
112
95
138
345
(38)
(70)
(501)
(157)
(766)
5
127
144
(156) $
24
(132)
924
(435)
587
1,076
8
(69)
(306)
(611)
(978)
(5)
166
(114)
43
(71)
1,623
(800)
171
994
(6)
(72)
(555)
(214)
(847)
(4)
94
166
$
127
$
____________________
(1)
Claims paid on consolidated FG VIEs are presented in the consolidated cash flow statements as a component of
paydowns on FG VIE liabilities in financing activities as opposed to operating activities.
Excluding net cash flows from consolidated FG VIEs, cash inflows from operating activities increased in 2017
compared with 2016 due primarily to lower net claim payments, commutation premiums received and higher premium
collections on new business in 2017.
Excluding net cash flows from FG VIE consolidation, cash outflows from operating activities increased in 2016
compared with 2015 due primarily to claim payments on Puerto Rico bonds, higher accelerated claim payments as a means of
mitigating future losses and lower cash received from commutations.
Investing activities were primarily net sales (purchases) of fixed-maturity and short-term investment securities,
acquisitions and FG VIEs. Investing cash flows in 2017, 2016 and 2015 include inflows of $147 million, $629 million and
$400 million from paydowns on FG VIE assets, respectively. The increase in inflows from FG VIEs in 2016 was due to the
proceeds from a paydown of a large transaction.
Financing activities consisted primarily of paydowns of FG VIE liabilities, share repurchases and dividends. Financing
cash flows in 2017, 2016 and 2015 include outflows of $157 million, $611 million and $214 million for FG VIEs, respectively.
The increase in outflows from FG VIEs in 2016 was due to the paydown of a large transaction.
From January 1, 2018 through February 23, 2018, the Company repurchased an additional 1.2 million common shares.
As of February 23, 2018, the Company had remaining authorization to purchase common shares of $305 million on a
settlement basis. For more information about the Company's share repurchases and authorizations, see Part II, Item 8, Financial
Statements and Supplementary Data, Note 18, Shareholders' Equity.
113
Commitments and Contingencies
Leases
AGL and its subsidiaries are party to various lease agreements accounted for as operating leases. The Company leases
and occupies approximately 103,500 square feet in New York City through 2032. Subject to certain conditions, the Company
has an option to renew the lease for five years at a fair market rent. In addition, AGL and its subsidiaries lease additional office
space in various locations under non-cancelable operating leases which expire at various dates through 2029. See “–Contractual
Obligations” or Part II, Item 8, Financial Statements and Supplementary Data, Note 15, Commitments and Contingencies, for
lease payments due by period. Rent expense was $8.7 million in 2017, $13.4 million in 2016 and $10.5 million in 2015.
Long-Term Debt Obligations
The Company has outstanding long-term debt comprising primarily debt issued by AGUS and AGMH. All of such
debt is fully and unconditionally guaranteed by AGL; AGL's guarantee of the junior subordinated debentures is on a junior
subordinated basis. The outstanding principal, and interest paid, on long-term debt were as follows:
Principal Outstanding
and Interest Paid on Long-Term Debt
Principal Amount
As of December 31,
2017
2016
Interest Paid
Year Ended December 31,
2016
2015
2017
(in millions)
$
$
850
730
6
(28)
1,558
$
$
850
730
9
—
1,589
$
$
32
46
0
(1)
77
$
$
49
46
0
—
95
$
$
49
46
0
—
95
AGUS (1)
AGMH
AGM
Purchased debt (2)
Total
____________________
(1)
Semi-annual debt service for 5% senior notes was paid on the last business day of 2015 and 2016 and on the first
business day of 2018. Due date for the payment is the first business day of each year.
(2)
In 2017, AGUS purchased $28 million principal amount of AGMH's outstanding Junior Subordinated Debentures.
Issued by AGUS:
7% Senior Notes. On May 18, 2004, AGUS issued $200 million of 7% Senior Notes due 2034 for net proceeds of
$197 million. Although the coupon on the Senior Notes is 7%, the effective rate is approximately 6.4%, taking into account the
effect of a cash flow hedge. The notes are redeemable, in whole or in part at their principal amount plus accrued and unpaid
interest to the date of redemption or, if greater, the make-whole redemption price.
5% Senior Notes. On June 20, 2014, AGUS issued $500 million of 5% Senior Notes due 2024 for net proceeds of
$495 million. The net proceeds from the sale of the notes were used for general corporate purposes, including the purchase of
common shares of AGL. The notes are redeemable, in whole or in part at their principal amount plus accrued and unpaid
interest to the date of redemption or, if greater, the make-whole redemption price.
Series A Enhanced Junior Subordinated Debentures. On December 20, 2006, AGUS issued $150 million of
Debentures due 2066. The Debentures paid a fixed 6.4% rate of interest until December 15, 2016, and thereafter pay a floating
rate of interest, reset quarterly, at a rate equal to three month LIBOR plus a margin equal to 2.38%. AGUS may select at one or
more times to defer payment of interest for one or more consecutive periods for up to ten years. Any unpaid interest bears
interest at the then applicable rate. AGUS may not defer interest past the maturity date. The debentures are redeemable, in
whole or in part at their principal amount plus accrued and unpaid interest to the date of redemption.
114
Issued by AGMH:
6 7/8% QUIBS. On December 19, 2001, AGMH issued $100 million face amount of 6 7/8% QUIBS due
December 15, 2101, which are redeemable without premium or penalty in whole or in part at their principal amount plus
accrued and unpaid interest up to but not including the date of redemption.
6.25% Notes. On November 26, 2002, AGMH issued $230 million face amount of 6.25% Notes due November 1,
2102, which are redeemable without premium or penalty in whole or in part at their principal amount plus accrued and unpaid
interest up to but not including the date of redemption.
5.6% Notes. On July 31, 2003, AGMH issued $100 million face amount of 5.6% Notes due July 15, 2103, which are
redeemable without premium or penalty in whole or in part at their principal amount plus accrued and unpaid interest up to but
not including the date of redemption.
Junior Subordinated Debentures. On November 22, 2006, AGMH issued $300 million face amount of Junior
Subordinated Debentures with a scheduled maturity date of December 15, 2036 and a final repayment date of December 15,
2066. The final repayment date of December 15, 2066 may be automatically extended up to four times in five-year increments
provided certain conditions are met. The debentures are redeemable, in whole or in part, at any time prior to December 15,
2036 at their principal amount plus accrued and unpaid interest to the date of redemption or, if greater, the make-whole
redemption price. Interest on the debentures will accrue from November 22, 2006 to December 15, 2036 at the annual rate of
6.4%. If any amount of the debentures remains outstanding after December 15, 2036, then the principal amount of the
outstanding debentures will bear interest at a floating interest rate equal to one-month LIBOR plus 2.215% until repaid. AGMH
may elect at one or more times to defer payment of interest on the debentures for one or more consecutive interest periods that
do not exceed ten years. In connection with the completion of this offering, AGMH entered into a replacement capital covenant
for the benefit of persons that buy, hold or sell a specified series of AGMH long-term indebtedness ranking senior to the
debentures. Under the covenant, the debentures will not be repaid, redeemed, repurchased or defeased by AGMH or any of its
subsidiaries on or before the date that is twenty years prior to the final repayment date, except to the extent that AGMH has
received proceeds from the sale of replacement capital securities. The proceeds from this offering were used to pay a dividend
to the shareholders of AGMH.
Committed Capital Securities
Each of AGC and AGM have entered into put agreements with four separate custodial trusts allowing 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. The custodial trusts were 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
does not consider itself to be the primary beneficiary of the trusts and the trusts are not consolidated in Assured 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 the 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 basis points, and the annualized rate on the AGM Committed Preferred Trust Securities
(CPS) is one-month LIBOR plus 200 basis points.
115
Contractual Obligations
The following table summarizes the Company's obligations under its contracts, including debt and lease obligations,
and also includes estimated claim payments, based on its loss estimation process, under financial guaranty policies it has
issued.
Long-term debt(1):
7% Senior Notes
5% Senior Notes
Series A Enhanced Junior Subordinated
Debentures
67/8% QUIBS
6.25% Notes
5.6 Notes
Junior Subordinated Debentures
Notes Payable
Operating lease obligations (2)
Other compensation plans (3)
Estimated claim payments (4)
Ceded premium payable, net of commission
Other
Total
Less Than
1 Year
1-3
Years
As of December 31, 2017
3-5
Years
(in millions)
More Than
5 Years
Total
$
$
14
25
7
7
14
6
19
2
8
13
328
7
36
$
28
50
13
14
29
11
38
3
18
—
1,059
9
—
$
28
50
14
14
29
11
38
1
17
—
375
9
—
$
360
550
466
643
1,378
551
1,145
1
80
—
341
33
—
430
675
500
678
1,450
579
1,240
7
123
13
2,103
58
36
$
486
$
1,272
$
586
$
5,548
$
7,892
____________________
(1)
Includes interest and principal payments. See Part II, Item 8, Financial Statements and Supplementary Data, Note 16,
Long-Term Debt and Credit Facilities, for expected maturities of debt.
(2)
Operating lease obligations exclude escalations in building operating costs and real estate taxes.
(3)
(4)
Amount excludes approximately $66 million of liabilities under various supplemental retirement plans, which are fair
valued and payable at the time of termination of employment by either employer or employee. Amount also excludes
approximately $17 million of liabilities under Performance Retention Plan, which are payable at the time of vesting or
termination of employment by either employer or employee. Given the nature of these awards, the Company is unable
to determine the year in which they will be paid.
Claim payments represent estimated 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. The amounts presented are not reduced for cessions under reinsurance contracts. Amounts include any benefit
anticipated from excess spread or other recoveries within the contracts but do not reflect any benefit for recoveries
under breaches of R&W.
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.
116
The Company’s fixed-maturity securities and short-term investments had a duration of 5.3 years as of December 31,
2017 and December 31, 2016. Generally, the Company’s fixed-maturity securities are designated as available-for-sale. For
more information about the Investment Portfolio and a detailed description of the Company’s valuation of investments see Part
II, Item 8, Financial Statements and Supplementary Data, Note 7, Fair Value Measurement and Note 10, Investments and Cash.
Fixed-Maturity Securities and Short-Term Investments
by Security Type
As of December 31, 2017
As of December 31, 2016
Amortized
Cost
Estimated
Fair Value
Amortized
Cost
Estimated
Fair Value
(in millions)
Fixed-maturity securities:
Obligations of state and political subdivisions
$
5,504
$
5,760
$
5,269
$
U.S. government and agencies
Corporate securities
Mortgage-backed securities(1):
RMBS
CMBS
Asset-backed securities
Foreign government securities
Total fixed-maturity securities
Short-term investments
272
1,973
852
540
730
316
10,187
627
285
2,018
861
549
896
305
10,674
627
424
1,612
998
575
835
261
9,974
590
5,432
440
1,613
987
583
945
233
10,233
590
Total fixed-maturity and short-term investments
$
10,814
$
11,301
$
10,564
$
10,823
____________________
(1)
Government-agency obligations were approximately 39% of mortgage backed securities as of December 31, 2017 and
42% as of December 31, 2016, based on fair value.
The following tables summarize, for all fixed-maturity securities in an unrealized loss position as of December 31,
2017 and December 31, 2016, the aggregate fair value and gross unrealized loss by length of time the amounts have
continuously been in an unrealized loss position.
117
Fixed-Maturity Securities
Gross Unrealized Loss by Length of Time
As of December 31, 2017
Less than 12 months
12 months or more
Total
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
Obligations of state and
political subdivisions
$
U.S. government and agencies
Corporate securities
Mortgage-backed securities:
RMBS
CMBS
Asset-backed securities
Foreign government securities
Total
Number of securities(1)
Number of securities with
other-than-temporary
impairment(1)
$
166
151
201
191
29
48
20
$
806
$
(dollars in millions)
281
$
18
240
213
80
3
140
975
$
(7) $
(1)
(17)
(12)
(3)
0
(17)
(57) $
264
15
(4) $
0
(1)
(5)
0
0
0
(10) $
244
17
$
447
169
441
404
109
51
160
1,781
$
(11)
(1)
(18)
(17)
(3)
0
(17)
(67)
499
31
Fixed-Maturity Securities
Gross Unrealized Loss by Length of Time
As of December 31, 2016
Less than 12 months
12 months or more
Total
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
(dollars in millions)
Obligations of state and
political subdivisions
U.S. government and agencies
Corporate securities
Mortgage-backed securities:
RMBS
CMBS
Asset-backed securities
Foreign government securities
$
1,110
$
87
492
391
165
36
44
Total
$
2,325
$
Number of securities(1)
Number of securities with
other-than-temporary
impairment
(38) $
(1)
(11)
(23)
(5)
0
(5)
(83) $
622
8
6
—
118
94
—
0
114
332
$
$
1,116
$
87
610
485
165
36
158
2,657
$
(1) $
—
(20)
(15)
—
0
(27)
(63) $
60
9
(39)
(1)
(31)
(38)
(5)
0
(32)
(146)
676
17
___________________
(1)
The number of securities does not add across because lots consisting of the same securities have been purchased at
different times and appear in both categories above (i.e., less than 12 months and 12 months or more). If a security
appears in both categories, it is counted only once in the total column.
118
Of the securities in an unrealized loss position for 12 months or more as of December 31, 2017, 28 securities had
unrealized losses greater than 10% of book value. The total unrealized loss for these securities as of December 31, 2017 was
$27 million. As of December 31, 2016, of the securities in an unrealized loss position for 12 months or more, 41 securities had
unrealized losses greater than 10% of book value with an unrealized loss of $59 million. The Company has determined that the
unrealized losses recorded as of December 31, 2017 and December 31, 2016 were yield related and not the result of other-than-
temporary-impairment.
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 consists primarily of high-quality, liquid instruments.
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, 2017
Due within one year
Due after one year through five years
Due after five years through 10 years
Due after 10 years
Mortgage-backed securities:
RMBS
CMBS
Total
Amortized
Cost
Estimated
Fair Value
$
(in millions)
254
1,574
2,368
4,599
852
540
10,187
$
256
1,604
2,443
4,961
861
549
10,674
$
$
The following table summarizes the ratings distributions of the Company’s investment portfolio as of December 31,
2017 and December 31, 2016. Ratings reflect the lower of Moody's and S&P classifications, except for bonds purchased for
loss mitigation or other risk management strategies, which use Assured Guaranty’s internal ratings classifications.
Distribution of
Fixed-Maturity Securities by Rating
Rating
AAA
AA
A
BBB
BIG(1)
Not rated
Total
As of
December 31, 2017
As of
December 31, 2016
14.3%
52.4
18.9
3.4
10.5
0.5
100.0%
11.6%
54.8
17.9
1.9
13.5
0.3
100.0%
____________________
(1)
Comprised primarily of loss mitigation and other risk management assets. See Part II, Item 8, Financial Statements
and Supplementary Data, Note 10, Investments and Cash, for additional information.
119
Based on fair value, investments and restricted cash 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
restricted total $269 million and $285 million, as of December 31, 2017 and December 31, 2016, respectively. The investment
portfolio also contains securities that are held in trust by certain AGL subsidiaries for the benefit of other AGL subsidiaries in
accordance with statutory and regulatory requirements in the amount of $1,677 million and $1,420 million, based on fair value,
as of December 31, 2017 and December 31, 2016, respectively.
The fair value of the Company’s pledged securities to secure its obligations under its CDS exposure totaled $18
million and $116 million as of December 31, 2017 and December 31, 2016, respectively. In February 2017, the Company
terminated all of its remaining CDS contracts with one of its counterparties as to which it had collateral posting obligations and
all of the collateral that the Company had been posting to that counterparty was returned to the Company. See Part II, Item 8,
Financial Statements and Supplementary Data, Note 8, Contracts Accounted for as Credit Derivatives, for additional
information.
Liquidity Arrangements with respect to AGMH’s former Financial Products Business
AGMH’s former financial products segment had been in the business of borrowing funds through the issuance of GICs
and medium term notes and reinvesting the proceeds in investments that met AGMH’s investment criteria. The financial
products business also included the equity payment undertaking agreement portion of the leveraged lease business, described
under "--Insurance Company Subsidiaries" above.
The GIC Business
Until November 2008, AGMH, through its financial products business, offered GICs to municipalities and other
market participants. The GICs were issued through certain non-insurance subsidiaries of AGMH. In return for an initial
payment, each GIC entitles its holder to receive the return of the holder’s invested principal plus interest at a specified rate, and
to withdraw principal from the GIC as permitted by its terms. AGM insures the payment obligations on all these GICs.
The proceeds of GICs were loaned to AGMH’s former subsidiary FSA Asset Management LLC (FSAM). FSAM in
turn invested these funds in fixed-income obligations (the FSAM assets).
As of December 31, 2017, approximately 38% of the FSAM assets (measured by aggregate principal balance) were in
cash or were obligations backed by the full faith and credit of the U.S. Although AGMH no longer holds any ownership interest
in FSAM or the GIC issuers, AGM’s insurance policies on the GICs remain in place, and must remain in place until each GIC
is terminated.
In June 2009, in connection with the Company's acquisition of AGMH from Dexia Holdings Inc., Dexia SA, the
ultimate parent of Dexia Holdings Inc., and certain of its affiliates, entered into a number of agreements intended to mitigate
the credit, interest rate and liquidity risks associated with the GIC business and the related AGM insurance policies. Some of
those agreements have since terminated or expired, or been modified.
To support the primary payment obligations under the GICs, each of Dexia SA and Dexia Crédit Local S.A. are party
to a put contract. Pursuant to the put contract, FSAM may put an amount of its FSAM assets to Dexia SA and Dexia Crédit
Local S.A. in exchange for funds that FSAM would in turn make available to meet demands for payment under the GICs. To
secure their obligations under this put contract, Dexia SA and Dexia Crédit Local S.A. are required to post eligible highly liquid
collateral having an aggregate value (subject to agreed reductions and advance rates) equal to at least the excess of (i) the
aggregate principal amount of all outstanding GICs over (ii) the aggregate mark-to-market value of FSAM’s assets.
As of December 31, 2017, the aggregate accreted GIC balance was approximately $1.4 billion, compared with
approximately $10.2 billion as of December 31, 2009. As of December 31, 2017, the aggregate fair market value of the assets
supporting the GIC business (disregarding the agreed upon reductions) plus cash and positive derivative value exceeded by
nearly $0.7 billion the aggregate principal amount of all outstanding GICs and certain other business and hedging costs of the
GIC business. Even after applying the agreed upon reductions to the fair market value of the assets, the aggregate value of the
assets supporting the GIC business plus cash and positive derivative value exceeded the aggregate principal amount of all
outstanding GICs and certain other business and hedging costs of the GIC business. Accordingly, no posting of collateral was
required under the primary put contract.
To provide additional support, Dexia Crédit Local S.A. provides a liquidity commitment to FSAM to lend against
FSAM assets under a revolving credit agreement. As of December 31, 2017 the commitment totaled $1.1 billion, of which
120
approximately $0.7 billion was drawn. The agreement requires the commitment remain in place, generally until the GICs have
been paid in full.
Despite the put contract and revolving credit agreement, and the significant portion of FSAM assets comprised of
highly liquid securities backed by the full faith and credit of the U.S., AGM remains subject to the risk that Dexia SA and its
affiliates may not fulfill their contractual obligations. In that case, the GIC issuers may not have the financial ability to pay
upon the withdrawal of GIC funds or post collateral or make other payments in respect of the GICs, thereby resulting in claims
upon the AGM financial guaranty insurance policies.
A downgrade of the financial strength rating of AGM could trigger a payment obligation of AGM with respect to
AGMH's former GIC business. Most GICs insured by AGM allow for the termination of the GIC contract and a withdrawal of
GIC funds at the option of the GIC holder in the event of a downgrade of AGM below a specified threshold, generally below A-
by S&P or A3 by Moody's. FSAM is expected to have sufficient eligible and liquid assets to satisfy any expected withdrawal
and collateral posting obligations resulting from future rating actions affecting AGM.
The Medium Term Notes Business
In connection with the acquisition of AGMH, Dexia Crédit Local S.A. agreed to fund, on behalf of AGM, 100% of all
policy claims made under financial guaranty insurance policies issued by AGM in relation to the medium term notes issuance
program of FSA Global Funding Limited. As of December 31, 2017, FSA Global Funding Limited had approximately $278
million of medium term notes outstanding.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss due to factors that affect the overall performance of the financial markets or moves in
market prices. The Company's primary market risk exposures include interest rate risk, foreign currency exchange rate risk and
credit spread risk, and primarily affect the following areas.
•
•
•
•
•
The fair value of credit derivatives within the financial guaranty portfolio of insured obligations which fluctuate
based on changes in credit spreads of the underlying obligations and the Company's own credit spreads.
The fair value of the investment portfolio is primarily driven by changes in interest rates and also affected by
changes in credit spreads.
The fair value of the investment portfolio contains foreign denominated securities whose value fluctuates based
on changes in foreign exchange rates.
The carrying value of premiums receivable include foreign denominated receivables whose value fluctuates based
on changes in foreign exchange rates.
The fair value of the assets and liabilities of consolidated FG VIE's may fluctuate based on changes in prepayment
spreads, default rates, interest rates, and house price depreciation/appreciation. The fair value of the FG VIE
liabilities would also fluctuate based on changes in the Company's credit spread.
Sensitivity of Credit Derivatives to Credit Risk
Unrealized gains and losses on credit derivatives are a function of changes in credit spreads of the underlying
obligations and the Company's own credit spread. Market liquidity could also impact valuations of the underlying obligations.
The Company considers the impact of its own credit risk, together with credit spreads on the exposures that it insured through
CDS contracts, in determining their fair value.
The Company determines its own credit risk based on quoted CDS prices traded on the Company at each balance
sheet date. The quoted price of five-year CDS contracts traded on AGC at December 31, 2017 and December 31, 2016 was 163
bps and 158 bps, respectively. Movements in AGM's CDS prices no longer have a significant impact on the estimated fair value
of the Company's credit derivative contracts due to the run-off of CDS exposure at AGM.
121
Historically, the price of CDS traded on AGC and AGM moves directionally the same as general market spreads,
although this may not always be the case. An overall narrowing of spreads generally results in an unrealized gain on credit
derivatives for the Company, and an overall widening of spreads generally results in an unrealized loss for the Company. In
certain circumstances, due to the fact that spread movements are not perfectly correlated, the narrowing or widening of the
price of CDS traded on AGC can have a more significant financial statement impact than the changes in underlying collateral
prices. Due to the low volume of CDS contracts remaining in AGM's portfolio, changes in the price of CDS traded on AGM
will have a smaller financial statement impact.
The impact of changes in credit spreads will vary based upon the volume, tenor, interest rates, and other market
conditions at the time these fair values are determined. In addition, since each transaction has unique collateral and structural
terms, the underlying change in fair value of each transaction may vary considerably. The fair value of credit derivative
contracts also reflects the change in the Company's own credit cost, based on the price to purchase credit protection on AGC
and AGM.
The Company generally holds these credit derivative contracts to maturity. The unrealized gains and losses on
derivative financial instruments will reduce to zero as the exposure approaches its maturity date, unless there is a payment
default on the exposure or early termination. Given these facts, the Company does not actively hedge these exposures.
The following table summarizes the estimated change in fair values on the net balance of the Company’s credit
derivative positions assuming immediate parallel shifts in credit spreads on AGC and AGM and on the risks that they both
assume.
Effect of Changes in Credit Spread
Credit Spreads(1)
100% widening in spreads
50% widening in spreads
25% widening in spreads
10% widening in spreads
Base Scenario
10% narrowing in spreads
25% narrowing in spreads
50% narrowing in spreads
As of December 31, 2017
As of December 31, 2016
Estimated Net
Fair Value
(Pre-Tax)
Estimated Change
in Gain/(Loss)
(Pre-Tax)
Estimated Net
Fair Value
(Pre-Tax)
Estimated Change
in Gain/(Loss)
(Pre-Tax)
$
(501) $
(385)
(327)
(292)
(269)
(250)
(222)
(174)
(in millions)
(232) $
(116)
(58)
(23)
—
19
47
95
(791) $
(590)
(490)
(430)
(389)
(351)
(295)
(203)
(402)
(201)
(101)
(41)
—
38
94
186
____________________
(1)
Includes the effects of spreads on both the underlying asset classes and the Company's own credit spread.
Sensitivity of Investment Portfolio to Interest Rate Risk
Interest rate risk is the risk that financial instruments' values will change due to changes in the level of interest rates, in
the spread between two rates, in the shape of the yield curve or in any other interest rate relationship. The Company is exposed
to interest rate risk primarily in its investment portfolio. As interest rates rise for an available-for-sale investment portfolio, the
fair value of fixed‑income securities generally decreases; as interests rates fall for an available-for-sale portfolio, the fair value
of fixed-income securities generally increases. The Company's policy is generally to hold assets in the investment portfolio to
maturity. Therefore, barring credit deterioration, interest rate movements do not result in realized gains or losses unless assets
are sold prior to maturity. The Company does not hedge interest rate risk, however, interest rate fluctuation risk is managed
through the investment guidelines which limit duration and prohibit investment in historically high volatility sectors.
Interest rate sensitivity in the investment portfolio can be estimated by projecting a hypothetical instantaneous increase
or decrease in interest rates. The following table presents the estimated pre-tax change in fair value of the Company's fixed-
maturity securities and short-term investments from instantaneous parallel shifts in interest rates.
122
Sensitivity to Change in Interest Rates on the Investment Portfolio
December 31, 2017
December 31, 2016
Increase (Decrease) in Fair Value from Changes in Interest Rates
300 Basis
Point
Decrease
200 Basis
Point
Decrease
100 Basis
Point
Decrease
100 Basis
Point
Increase
200 Basis
Point
Increase
300 Basis
Point
Increase
$
$
1,162
1,215
$
$
1,033
957
$
$
(in millions)
552
$
537
$
(552) $
(528) $
(1,106) $
(1,063) $
(1,667)
(1,578)
Sensitivity of Other Areas to Interest Rate Risk
Insurance
Fluctuation in interest rates also affects the demand for the Company's product. When interest rates are lower or when
the market is otherwise relatively less risk averse, the spread between insured and uninsured obligations typically narrows and,
as a result, financial guaranty insurance typically provides lower cost savings to issuers than it would during periods of
relatively wider spreads. These lower cost savings generally lead to a corresponding decrease in demand and premiums
obtainable for financial guaranty insurance. Changes in interest rates also impact the amount of losses in the future. In
addition, increases in prevailing interest rate levels can lead to a decreased volume of capital markets activity and,
correspondingly, a decreased volume of insured transactions.
In addition, fluctuations in interest rates also impact the performance of insured transactions where there are
differences between the interest rates on the underlying collateral and the interest rates on the insured securities. For example, a
rise in interest rates could increase the amount of losses the Company projects for certain RMBS, Triple-X life insurance
securitizations, student loan transactions and TruPS CDOs. The impact of fluctuations in interest rates on such transactions
varies, depending on, among other things, the interest rates on the underlying collateral and insured securities, the relative
amounts of underlying collateral and liabilities, the structure of the transaction, and the sensitivity to interest rates of the
behavior of the underlying borrowers and the value of the underlying assets.
In the case of RMBS, fluctuations in interest rates impact the amount of periodic excess spread, which is created when
a trust’s assets produce interest that exceeds the amount required to pay interest on the trust’s liabilities. There are several
RMBS transactions in the Company's insured portfolio which benefit from excess spread either by covering losses in a
particular period, or reimbursing past claims under the Company's policies. As of December 31, 2017, the Company projects
approximately $178 million of excess spread for all of its RMBS transactions over their remaining lives.
Since RMBS excess spread is determined by the relationship between interest rates on the underlying collateral and
the trust’s certificates, it can be affected by unmatched moves in either of these interest rates. For example, modifications to
underlying mortgage rates (e.g. rate reductions for troubled borrowers) can reduce excess spread since there would be no
equivalent decrease in the certificate interest rates of the trust's certificates. Similarly, an upswing in short-term rates that
increases the trust’s certificate interest rate that is not met with equal increases to the interest rates on the underlying mortgages
can decrease excess spread. These potential reductions in excess spread are mitigated by an interest rate cap, which goes into
effect once the collateral rate falls below the stated certificate rate. Most of the RMBS securities the Company insures are
capped at the collateral rate. The Company is not obligated to pay additional claims because the collateral interest rate drops
below the trust's certificate stated interest rate, rather this just causes the Company to lose the benefit of potential positive
excess spread. Additionally, faster than expected prepayments can decrease the dollar amount of excess spread and therefore
reduce the cash flow available to cover losses or reimburse past claims.
Interest Expense
Beginning in the fourth quarter of 2016, fluctuation in interest rates also impacts the Company’s interest expense. On
December 15, 2016, the series A enhanced junior subordinated debentures issued by AGUS began to accrue interest at a
floating rate, reset quarterly, equal to three-month LIBOR plus a margin equal to 2.38% (prior to December 15, 2016, the
debentures paid a fixed 6.4% rate of interest). The three-month LIBOR rate used for the December 15, 2017 interest rate reset
is 1.59%. Increases to three-month LIBOR will cause the Company’s interest expense to rise while decreases to three month
LIBOR will lower the Company’s interest expense. If three-month LIBOR increases by 40%, the Company’s annual interest
123
expense will increase by approximately $1 million. Conversely, if three-month LIBOR decreases by 40%, the Company’s
annual interest expense will decrease by approximately $1 million.
The three-month LIBOR rate used for the December 15, 2016 interest rate reset was 0.96%. If three-month LIBOR
increases by 70%, the Company’s annual interest expense will increase by approximately $1 million. Conversely, if three-
month LIBOR decreases by 70%, the Company’s annual interest expense will decrease by approximately $1 million.
Sensitivity of Investment Portfolio to Foreign Exchange Rate Risk
Foreign exchange risk is the risk that a financial instrument's value will change due to a change in the foreign currency
exchange rates. The Company has foreign denominated securities in its investment portfolio. Securities denominated in
currencies other than U.S. Dollar were 7.6% and 4.7% of the fixed-maturity securities and short-term investments as of
December 31, 2017 and 2016, respectively. The Company's material exposure is to changes in the dollar/pound sterling
exchange rate. Changes in fair value of available-for-sale investments attributable to changes in foreign exchange rates are
recorded in OCI.
Sensitivity to Change in Foreign Exchange Rates on the Investment Portfolio
December 31, 2017
December 31, 2016
Increase (Decrease) in Fair Value from Changes in Foreign Exchange Rates
30%
Decrease
20%
Decrease
10%
Decrease
10%
Increase
20%
Increase
30%
Increase
$
$
(257) $
(153) $
(171) $
(102) $
(in millions)
(86) $
(51) $
86
51
$
$
171
102
$
$
257
153
Sensitivity of Premiums Receivable to Foreign Exchange Rate Risk
The Company has foreign denominated premium receivables. The Company's material exposure is to changes in
dollar/pound sterling and dollar/euro exchange rates. The increase in the sensitivity to movements in foreign exchange rates in
2017 is primarily due to the acquisition of MBIA UK.
Sensitivity to Change in Foreign Exchange Rates
on Premium Receivable, Net of Reinsurance
December 31, 2017
December 31, 2016
Increase (Decrease) in Premium Receivable from Changes in Foreign Exchange Rates
30%
Decrease
20%
Decrease
10%
Decrease
10%
Increase
20%
Increase
30%
Increase
$
$
(190) $
(77) $
(127) $
(52) $
(in millions)
(63) $
(26) $
63
26
$
$
127
52
$
$
190
77
Sensitivity of FG VIE Assets and Liabilities to Market Risk
The fair value of the Company’s FG VIE assets is generally sensitive to changes related to estimated prepayment
speeds; estimated default rates (determined on the basis of an analysis of collateral attributes such as: historical collateral
performance, borrower profiles and other features relevant to the evaluation of collateral credit quality); yields implied by
market prices for similar securities; and house price depreciation/appreciation rates based on macroeconomic forecasts.
Significant changes to some of these inputs could materially change the market value of the FG VIE’s assets and the implied
collateral losses within the transaction. In general, the fair value of the FG VIE assets is most sensitive to changes in the
projected collateral losses, where an increase in collateral losses typically leads to a decrease in the fair value of FG VIE assets,
while a decrease in collateral losses typically leads to an increase in the fair value of FG VIE assets. The third-party utilizes an
internal model to determine an appropriate yield at which to discount the cash flows of the security, by factoring in collateral
types, weighted-average lives, and other structural attributes specific to the security being priced. The expected yield is further
calibrated by utilizing algorithms designed to aggregate market color, received by the independent third-party, on comparable
bonds.
124
The models to price the FG VIEs’ liabilities used, where appropriate, the same inputs used in determining fair value of
FG VIE assets and, for those liabilities insured by the Company, the benefit from the Company's insurance policy guaranteeing
the timely payment of principal and interest, taking into account the Company's own credit risk.
Significant changes to any of the inputs described above could materially change the timing of expected losses within
the insured transaction which is a significant factor in determining the implied benefit from the Company’s insurance policy
guaranteeing the timely payment of principal and interest for the tranches of debt issued by the FG VIE that is insured by the
Company. In general, extending the timing of expected loss payments by the Company into the future typically leads to a
decrease in the value of the Company’s insurance and a decrease in the fair value of the Company’s FG VIE liabilities with
recourse, while a shortening of the timing of expected loss payments by the Company typically leads to an increase in the value
of the Company’s insurance and an increase in the fair value of the Company’s FG VIE liabilities with recourse.
125
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2017 and 2016
Consolidated Statements of Operations for the years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Comprehensive Income for the years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Shareholders' Equity for the years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015
Notes to Consolidated Financial Statements
127
129
130
131
132
133
134
126
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Assured Guaranty Ltd.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Assured Guaranty Ltd. and its subsidiaries (“the
Company”) as of December 31, 2017 and December 31, 2016, and the related consolidated statements of operations, of
comprehensive income, of shareholders’ equity and of cash flows for each of the three years in the period ended December 31,
2017, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the
Company's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control -
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of the Company as of December 31, 2017 and December 31, 2016, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 2017 in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control -
Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective
internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to
express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial
reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight
Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S.
federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material
misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in
all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material
misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to
those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of
internal control over financial reporting included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in
the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions
and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
127
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
New York, New York
February 23, 2018
We have served as the Company’s auditor since 2003.
128
Assured Guaranty Ltd.
Consolidated Balance Sheets
(dollars in millions except per share and share amounts)
As of
December 31, 2017
As of
December 31, 2016
Assets
Investment portfolio:
Fixed-maturity securities, available-for-sale, at fair value (amortized cost of $10,187
and $9,974)
Short-term investments, at fair value
Other invested assets
$
Total investment portfolio
Cash
Premiums receivable, net of commissions payable
Ceded unearned premium reserve
Deferred acquisition costs
Reinsurance recoverable on unpaid losses
Salvage and subrogation recoverable
Credit derivative assets
Deferred tax asset, net
Current income tax receivable
Financial guaranty variable interest entities’ assets, at fair value
Other assets
Total assets
Liabilities and shareholders’ equity
Unearned premium reserve
Loss and loss adjustment expense reserve
Reinsurance balances payable, net
Long-term debt
Credit derivative liabilities
Financial guaranty variable interest entities’ liabilities with recourse, at fair value
Financial guaranty variable interest entities’ liabilities without recourse, at fair value
Other liabilities
Total liabilities
Commitments and contingencies (see Note 15)
Common stock ($0.01 par value, 500,000,000 shares authorized; 116,020,852 and
127,988,230 shares issued and outstanding)
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income, net of tax of $89 and $70
Deferred equity compensation
Total shareholders’ equity
Total liabilities and shareholders’ equity
$
$
$
10,674
627
94
11,395
144
915
119
101
44
572
2
98
21
700
322
14,433
3,475
1,444
61
1,292
271
627
130
294
7,594
1
573
5,892
372
1
6,839
14,433
$
$
$
$
10,233
590
162
10,985
118
576
206
106
80
365
13
497
12
876
317
14,151
3,511
1,127
64
1,306
402
807
151
279
7,647
1
1,060
5,289
149
5
6,504
14,151
The accompanying notes are an integral part of these consolidated financial statements.
129
Assured Guaranty Ltd.
Consolidated Statements of Operations
(dollars in millions except per share amounts)
Revenues
Net earned premiums
Net investment income
Net realized investment gains (losses):
Other-than-temporary impairment losses
Less: portion of other-than-temporary impairment loss recognized in
other comprehensive income
Net impairment loss
Other net realized investment gains (losses)
Net realized investment gains (losses)
Net change in fair value of credit derivatives:
Realized gains (losses) and other settlements
Net unrealized gains (losses)
Net change in fair value of credit derivatives
Fair value gains (losses) on committed capital securities
Fair value gains (losses) on financial guaranty variable interest entities
Bargain purchase gain and settlement of pre-existing relationships, net
Other income (loss) (includes commutation gains of $328 in 2017, $8 in
2016 and $28 in 2015, see Note 13)
Total revenues
Expenses
Loss and loss adjustment expenses
Amortization of deferred acquisition costs
Interest expense
Other operating expenses
Total expenses
Income (loss) before income taxes
Provision (benefit) for income taxes
Current
Deferred
Total provision (benefit) for income taxes
Net income (loss)
Earnings per share:
Basic
Diluted
Dividends per share
Year Ended December 31,
2017
2016
2015
$
$
690
418
$
864
408
(33)
10
(43)
83
40
(10)
121
111
(2)
30
58
394
1,739
388
19
97
244
748
991
11
250
261
730
6.05
5.96
0.57
$
$
$
$
(47)
4
(51)
22
(29)
29
69
98
0
38
259
39
1,677
295
18
102
245
660
1,017
117
19
136
881
6.61
6.56
0.52
$
$
$
$
$
$
$
$
766
423
(47)
0
(47)
21
(26)
(18)
746
728
27
38
214
37
2,207
424
20
101
231
776
1,431
75
300
375
1,056
7.12
7.08
0.48
The accompanying notes are an integral part of these consolidated financial statements.
130
Assured Guaranty Ltd.
Consolidated Statements of Comprehensive Income
(in millions)
Net income (loss)
Unrealized holding gains (losses) arising during the period on:
Investments with no other-than-temporary impairment, net of tax
provision (benefit) of $61, $(34) and $(36)
Investments with other-than-temporary impairment, net of tax provision
(benefit) of $36, $(5) and $(23)
Unrealized holding gains (losses) arising during the period, net of tax
Less: reclassification adjustment for gains (losses) included in net income
(loss), net of tax provision (benefit) of $24, $(10) and $(7)
Change in net unrealized gains (losses) on investments
Other, net of tax provision
Other comprehensive income (loss)
Comprehensive income (loss)
Year Ended December 31,
2017
2016
2015
$
730
$
881
$
1,056
128
69
197
44
153
14
167
897
$
(71)
(9)
(80)
(16)
(64)
(24)
(88)
793
$
(93)
(43)
(136)
(10)
(126)
(7)
(133)
923
$
The accompanying notes are an integral part of these consolidated financial statements.
131
Assured Guaranty Ltd.
Consolidated Statements of Shareholders’ Equity
Years Ended December 31, 2017, 2016 and 2015
(dollars in millions, except share data)
Common
Shares
Outstanding
Common
Stock Par
Value
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income
Deferred
Equity
Compensation
Total
Shareholders’
Equity
Balance at December 31,
2014
Net income
Dividends ($0.48 per share)
158,306,661
$
—
—
Common stock repurchases
(20,995,419)
Share-based compensation
and other
Other comprehensive loss
Balance at December 31,
2015
Net income
Dividends ($0.52 per share)
617,310
—
137,928,552
—
—
Common stock repurchases
(10,721,248)
Share-based compensation
and other
Other comprehensive loss
Balance at December 31,
2016
Net income
Dividends ($0.57 per share)
780,926
—
127,988,230
$
—
—
Common stock repurchases
(12,669,643)
Share-based compensation
and other
Other comprehensive income
Reclassification of stranded
tax effects (see Note 1)
Other
Balance at December 31,
2017
702,265
—
—
—
2
—
—
(1)
0
—
1
—
—
0
0
—
1
—
—
0
0
—
—
—
$
1,887
$
3,494
$
370
$
—
—
(554)
9
—
1,056
(72)
—
—
—
1,342
4,478
—
—
(306)
24
—
881
(70)
—
—
—
—
—
—
—
(133)
237
—
—
—
—
(88)
$
1,060
$
5,289
$
149
$
—
—
(501)
14
—
—
—
730
(70)
—
—
—
(56)
(1)
—
—
—
—
167
56
5
—
—
—
—
—
5
—
—
—
—
—
5
—
—
—
(4)
—
—
—
$
5,758
1,056
(72)
(555)
9
(133)
6,063
881
(70)
(306)
24
(88)
$
6,504
730
(70)
(501)
10
167
—
(1)
116,020,852
$
1
$
573
$
5,892
$
372
$
1
$
6,839
The accompanying notes are an integral part of these consolidated financial statements.
132
Assured Guaranty Ltd.
Consolidated Statements of Cash Flows
(in millions)
Operating Activities:
Net Income
Adjustments to reconcile net income to net cash flows provided by operating activities:
Non-cash interest and operating expenses
Net amortization of premium (discount) on investments
Provision (benefit) for deferred income taxes
Net realized investment losses (gains)
Net unrealized losses (gains) on credit derivatives
Fair value losses (gains) on committed capital securities
Bargain purchase gain and settlement of pre-existing relationships
Change in deferred acquisition costs
Change in premiums receivable, net of premiums and commissions payable
Change in ceded unearned premium reserve
Change in unearned premium reserve
Change in loss and loss adjustment expense reserve, net
Change in current income tax
Change in financial guaranty variable interest entities' assets and liabilities, net
Other
Net cash flows provided by (used in) operating activities
Investing activities
Fixed-maturity securities:
Purchases
Sales
Maturities
Net sales (purchases) of short-term investments
Net proceeds from paydowns on financial guaranty variable interest entities’ assets
Acquisitions, net of cash acquired (see Note 2)
Other
Net cash flows provided by (used in) investing activities
Financing activities
Dividends paid
Repurchases of common stock
Repurchases of common stock to pay withholding taxes
Net paydowns of financial guaranty variable interest entities’ liabilities
Paydown of long-term debt
Proceeds from option exercises
Net cash flows provided by (used in) financing activities
Effect of foreign exchange rate changes
Increase (decrease) in cash and restricted cash
Cash and restricted cash at beginning of period (see Note 10)
Cash and restricted cash at end of period (see Note 10)
Supplemental cash flow information
Cash paid (received) during the period for:
Income taxes
Interest
Year Ended December 31,
2017
2016
2015
$
730
$
881
$
1,056
26
(46)
250
(40)
(121)
2
(58)
2
(69)
90
(424)
142
(10)
(15)
(26)
433
(2,552)
1,701
821
74
147
95
59
345
(70)
(501)
(13)
(157)
(30)
5
(766)
5
17
127
144
10
77
$
$
$
39
(34)
19
29
(69)
0
(259)
9
128
22
(777)
(105)
27
(24)
(18)
(132)
(1,646)
1,365
1,155
17
629
(435)
(9)
1,076
(69)
(306)
(2)
(611)
(2)
12
(978)
(5)
(39)
166
127
74
95
$
$
$
27
(25)
300
17
(746)
(27)
(214)
9
(8)
79
(744)
244
(45)
(6)
12
(71)
(2,577)
2,107
898
897
400
(800)
69
994
(72)
(555)
(7)
(214)
(4)
5
(847)
(4)
72
94
166
103
95
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
133
Assured Guaranty Ltd.
Notes to Consolidated Financial Statements
December 31, 2017, 2016 and 2015
1.
Business and Basis of Presentation
Business
Assured Guaranty Ltd. (AGL and, together with its subsidiaries, Assured Guaranty or the Company) is a Bermuda-
based holding company that provides, through its operating subsidiaries, credit protection products to the United States (U.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 financial guaranty insurance
that protects holders of debt instruments and other monetary obligations from defaults in scheduled payments. If an obligor
defaults on a scheduled payment due on an obligation, including a scheduled principal or interest payment (debt service), 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 financial guaranty insurance 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 the U.S. and the United Kingdom (U.K.), and also guarantees obligations issued in other countries and regions,
including Australia and Western Europe. The Company also provides other forms of insurance (non-financial guaranty
insurance) that are in line with its risk profile and benefit from its underwriting experience.
In the past, the Company sold credit protection by issuing policies that guaranteed payment obligations under credit
derivatives, primarily credit default swaps (CDS). Contracts accounted for as credit derivatives are generally structured such
that the circumstances giving rise to the Company’s obligation to make loss payments are similar to those for financial guaranty
insurance contracts. The Company’s credit derivative transactions are governed by International Swaps and Derivative
Association, Inc. (ISDA) documentation. The Company has not entered into any new CDS in order to sell credit protection in
the U.S. since the beginning of 2009, when regulatory guidelines were issued that limited the terms under which such
protection could be sold. The capital and margin requirements applicable under the Dodd-Frank Wall Street Reform and
Consumer Protection Act also contributed to the Company not entering into such new CDS in the U.S. since 2009. The
Company actively pursues opportunities to terminate existing CDS, which terminations have the effect of reducing future fair
value volatility in income and/or reducing rating agency capital charges.
Basis of Presentation
The consolidated financial statements have been prepared in conformity with accounting principles generally accepted
in the United States of America (GAAP) and, in the opinion of management, reflect all material adjustments that are of a
normal recurring nature, necessary for a fair statement of the financial condition, results of operations and cash flows of the
Company and its consolidated variable interest entities (VIEs) for the periods presented. The preparation of financial statements
in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The 2016 and
2015 financial information in Note 21, Subsidiary Information reflects transfers of businesses between entities within the
consolidated group that occurred in the current reporting period, consistently for all prior periods presented.
The consolidated financial statements include the accounts of AGL, its direct and indirect subsidiaries and its
consolidated VIEs. Intercompany accounts and transactions between and among all consolidated entities have been eliminated.
Certain prior-year balances have been reclassified to conform to the current year's presentation.
The Company's principal insurance company subsidiaries are:
Assured Guaranty Municipal Corp. (AGM), domiciled in New York;
•
• Municipal Assurance Corp. (MAC), domiciled in New York;
Assured Guaranty Corp. (AGC), domiciled in Maryland;
•
Assured Guaranty (Europe) plc (AGE), organized in the U.K.; and
•
Assured Guaranty Re Ltd. (AG Re) and Assured Guaranty Re Overseas Ltd. (AGRO), domiciled in Bermuda.
•
134
The Company’s organizational structure includes various holding companies, two of which - Assured Guaranty US
Holdings Inc. (AGUS) and Assured Guaranty Municipal Holdings Inc. (AGMH) - have public debt outstanding. See Note 16,
Long-Term Debt and Credit Facilities and Note 21, Subsidiary Information.
The Company is actively working to combine the operations of its European subsidiaries, AGE, Assured Guaranty
(UK) plc (AGUK), Assured Guaranty (London) plc (AGLN) and CIFG Europe S.A. (CIFGE), through a multi-step transaction,
which ultimately is expected to result in AGUK, AGLN and CIFGE transferring their insurance portfolios to and merging with
and into AGE. Any such combination will be subject to regulatory and court approvals. As a result, the Company cannot
predict when, or if, such combination will be completed, and, if so, what conditions may be attached.
Significant Accounting Policies
The Company revalues assets, liabilities, revenue and expenses denominated in non-U.S. currencies into U.S. dollars
using applicable exchange rates. Gains and losses relating to translating foreign functional currency financial statements for
U.S. GAAP reporting are recorded in other comprehensive income (loss) (OCI). Gains and losses relating to transactions in
foreign denominations in subsidiaries where the functional currency is the U.S. dollar, are reported in the consolidated
statement of operations.
The chief operating decision maker manages the operations of the Company at a consolidated level. Therefore, all
results of operations are reported as one segment.
Other significant accounting policies are included in the following notes.
Significant Accounting Policies
Acquisitions
Expected loss to be paid (insurance, credit derivatives and financial guaranty (FG) VIE contracts)
Contracts accounted for as insurance (premium revenue recognition, loss and loss adjustment expense and policy
acquisition cost)
Fair value measurement
Credit derivatives (at fair value)
Variable interest entities (at fair value)
Investments and cash
Income taxes
Long term debt
Earnings per share
Stock based compensation
Note 2
Note 5
Note 6
Note 7
Note 8
Note 9
Note 10
Note 12
Note 16
Note 17
Note 19
Adopted Accounting Standards
Accounting for the 2017 Tax Cuts and Jobs Act
In January 2018, the Securities and Exchange Commission issued Staff Accounting Bulletin 118 (SAB 118), providing
guidance to companies on the accounting for the income tax effects of the 2017 Tax Cuts and Jobs Act (Tax Act) in financial
statements for the period that includes the date of enactment, December 22, 2017. SAB 118 states that:
•
•
•
for income tax effects of the Tax Act for which the accounting is incomplete and for which the Company cannot
reasonably estimate an amount, qualitative disclosures must be provided;
for income tax effects of the Tax Act for which the accounting is incomplete but for which the Company has
determined a reasonable estimate and recorded a provisional amount, disclosures of such items; and
for income tax effects of the Tax Act for which the Company has completed its accounting and determined a final
amount, disclosure of such amounts.
135
For those effects for which the accounting has not been completed by the time the financial statements that include the
enactment date are released, SAB 118 allows for a measurement period not to extend beyond one year after the enactment date
to adjust those tax effects. In 2017, the Company recorded a provisional tax expense of $61 million attributable to the Tax Act.
See Note 12, Income Taxes for the Company’s disclosures regarding the effects of the Tax Act.
In February 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update
(ASU) 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects
from Accumulated Comprehensive Income, which allows entities to elect to reclassify, from AOCI to retained earnings, stranded
tax effects resulting from the Tax Act.
Under existing U.S. GAAP, deferred tax assets and liabilities are required to be adjusted for the effect of a change in
tax laws or rates, with the effect included in income from continuing operations in the reporting period that includes the
enactment date, even in situations in which the related income tax effects of items in accumulated other comprehensive income
(AOCI) were originally recognized in other comprehensive income (rather than in net income). This results in the tax rate for
items within AOCI continuing to be recorded at the previous tax rate (stranded tax effects).
The Company adopted this ASU in its 2017 financial statements and elected to reclassify approximately $56 million
from AOCI to retained earnings, which is primarily attributable to the reduction in the corporate tax rate.
Statement of Cash Flows
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a
consensus of the Emerging Issues Task Force), which addresses the presentation of changes in restricted cash and restricted
cash equivalents in the statement of cash flows with the objective of reducing the existing diversity in practice. Under the ASU,
entities are required to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in
the statement of cash flows. As a result, entities will no longer present transfers between cash and cash equivalents and
restricted cash and restricted cash equivalents in the statement of cash flows. When cash, cash equivalents, restricted cash and
restricted cash equivalents are presented in more than one line item on the balance sheet, the ASU requires a reconciliation be
presented either on the face of the statement of cash flows or in the notes to the financial statements showing the totals in the
statement of cash flows to the related captions in the balance sheet. The ASU was adopted on January 1, 2017 and was applied
retrospectively. The required reconciliation is shown in Note 10, Investments and Cash.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash
Receipts and Cash Payments (a consensus of the Emerging Issues Task Force), which addresses eight specific cash flow issues
with the objective of reducing the existing diversity in practice. The ASU was adopted on January 1, 2017 and did not have an
effect on the Company’s consolidated statements of cash flows for the periods presented.
Share-Based Payments
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718) - Improvements to
Employee Share-Based Payment, which simplifies several aspects of the accounting for employee share-based payment
transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as
classification in the statement of cash flows. The new guidance requires all income tax effects of awards to be recognized in
the income statement when the awards vest or are settled. It also allows an employer to repurchase more of an employee’s
shares than it previously could for tax withholding purposes without triggering liability accounting and to make a policy
election to account for forfeitures as they occur. The ASU was adopted on January 1, 2017 with no material effect on the
consolidated financial statements.
Future Application of Accounting Standards
Income Taxes
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740) - Intra-Entity Transfers of Assets Other
Than Inventory, which removes the current prohibition against immediate recognition of the current and deferred income tax
effects of intra-entity transfers of assets other than inventory. Under the ASU, the selling (transferring) entity is required to
recognize a current income tax expense or benefit upon transfer of the asset. Similarly, the purchasing (receiving) entity is
required to recognize a deferred tax asset or deferred tax liability, as well as the related deferred tax benefit or expense, upon
receipt of the asset. The ASU is to be applied on a modified retrospective basis (i.e. by recording a cumulative effect
136
adjustment to the statement of financial position as of the beginning of the first reporting period in which the guidance is
adopted). The ASU was adopted on January 1, 2018 with no material effect on the consolidated financial statements.
Financial Instruments
In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10) - Recognition and
Measurement of Financial Assets and Financial Liabilities. The amendments in this ASU are intended to make targeted
improvements to GAAP by addressing certain aspects of recognition, measurement, presentation, and disclosure of financial
instruments. Amendments under this ASU apply to the Company's FG VIE liabilities, for which the Company has historically
elected to measure through the income statement under the fair value option, and to certain equity securities in the Company’s
investment portfolio.
For FG VIE liabilities, the portion of the change in fair value caused by instrument specific credit risk will be
separately presented in OCI as opposed to the income statement. Equity securities, except those that are accounted for under the
equity method of accounting or that resulted in consolidation of the investee by the Company, will need to be accounted for at
fair value with changes in fair value recognized through net income instead of OCI. Effective January 1, 2018, the Company
adopted this ASU with a cumulative-effect adjustment to the statement of financial position as of January 1, 2018. This resulted
in a reclassification of a $32 million loss, net of tax, from retained earnings to AOCI.
Premium Amortization on Purchased Callable Debt Securities
In March 2017, the FASB issued ASU 2017-08, Receivables-Nonrefundable Fees and Other Costs (Topic 310-20) -
Premium Amortization on Purchased Callable Debt Securities. This ASU shortens the amortization period for the premium on
certain purchased callable debt securities to the earliest call date. This ASU has no effect on the accounting for purchased
callable debt securities held at a discount. It is to be applied using a modified retrospective approach and the ASU is effective
for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company does not
expect this ASU to have a material effect on its consolidated financial statements.
Leases
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This ASU requires lessees to present right-of-
use assets and lease liabilities on the balance sheet. ASU 2016-02 is to be applied using a modified retrospective approach and
is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The
Company intends to adopt this ASU on January 1, 2019. The Company is evaluating the effect that this ASU will have on its
consolidated financial statements. The Company currently accounts for its lease agreements where the Company is the lessee as
operating leases and, therefore, recognizes its lease expense on a straight-line basis. See Note 15, Commitments and
Contingencies for additional information on the Company's leases.
Credit Losses on Financial Instruments
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of
Credit Losses on Financial Instruments. The amendments in this ASU are intended to improve financial reporting by requiring
timelier recording of credit losses on loans and other financial instruments held by financial institutions and other
organizations. The ASU requires the measurement of all expected credit losses for financial assets held at the reporting date
based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions will be
required to use forward-looking information to better inform their credit loss estimates as a result of the ASU. While many of
the loss estimation techniques applied today will still be permitted, the inputs to those techniques will change to reflect the full
amount of expected credit losses. The ASU requires enhanced disclosures to help investors and other financial statement users
to better understand significant estimates and judgments used in estimating credit losses, as well as credit quality and
underwriting standards of an organization’s portfolio.
In addition, the ASU amends the accounting for credit losses on available-for-sale securities and purchased financial
assets with credit deterioration. The ASU also eliminates the concept of “other than temporary” from the impairment model for
certain available-for-sale securities. Accordingly, the ASU states that an entity must use an allowance approach, must limit the
allowance to an amount by which the security’s fair value is less than its amortized cost basis, may not consider the length of
time fair value has been less than amortized cost, and may not consider recoveries in fair value after the balance sheet date
when assessing whether a credit loss exists. For purchased financial assets with credit deterioration, the ASU requires an
137
entity’s method for measuring credit losses to be consistent with its method for measuring expected losses for originated and
purchased non-credit-deteriorated assets.
The ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal
years. For debt securities classified as available-for-sale, entities will be required to record a cumulative-effect adjustment to
the statement of financial position as of the beginning of the first reporting period in which the guidance is adopted. The
changes to the impairment model for available-for-sale securities and changes to purchased financial assets with credit
deterioration are to be applied prospectively. The Company is evaluating the effect that this ASU will have on its consolidated
financial statements. See Note 10, Investments and Cash for the Company's current accounting policy with respect to available-
for-sale securities.
2.
Acquisitions
Accounting Policies
Consistent with one of its key business strategies of supplementing its book of business through acquisitions, the
Company has acquired three financial guaranty companies since January 1, 2015, as described below. The acquisitions were
accounted for under the acquisition method of accounting which requires that the assets and liabilities acquired be recorded at
fair value. The Company exercised significant judgment to determine the fair value of the assets it acquired and liabilities it
assumed in each of the acquisitions. The most significant of these determinations related to the valuation of the acquired
financial guaranty insurance contracts. On an aggregate basis, the acquired companies' contractual premiums for financial
guaranty insurance contracts acquired were less than the premiums a market participant of similar credit quality would demand
to acquire those contracts at the date of acquisition (particularly for below-investment-grade (BIG) transactions) resulting in a
significant amount of the purchase price being allocated to these contracts. For information on the methodology used to
measure the fair value of assets acquired and liabilities assumed in the acquisitions, see Note 7, Fair Value Measurement.
The fair value of the Company's stand-ready obligation on the date of acquisition is recorded in unearned premium
reserve. Thereafter, loss reserves and loss and loss adjustment expenses (LAE) are recorded in accordance with the Company's
accounting policy described in the Note 5, Expected Losses to be Paid, and Note 6, Contracts Accounted for as Insurance.
The excess of the fair value of net assets acquired over the consideration transferred was recorded as a bargain
purchase gain in "bargain purchase gain and settlement of pre-existing relationships" in net income. In addition, the Company
and each of the acquired companies had pre-existing reinsurance relationships, which were effectively settled at fair value on
the acquisition dates. The gain or loss on settlement of these pre-existing reinsurance relationships represents the net difference
between the historical assumed or ceded balances that were recorded by the Company and the fair value of ceded or assumed
balances acquired.
MBIA UK Insurance Limited
On January 10, 2017 (the MBIA UK Acquisition Date), AGC completed its acquisition of MBIA UK Insurance
Limited (MBIA UK), the U.K. operating subsidiary of MBIA Insurance Corporation (MBIA) (the MBIA UK Acquisition). As
consideration for the outstanding shares of MBIA UK plus $23 million in cash, AGC exchanged all its holdings of notes issued
in the Zohar II 2005-1 transaction (Zohar II Notes), which were insured by MBIA. AGC’s Zohar II Notes had total outstanding
principal of approximately $347 million and fair value of $334 million as of the MBIA UK Acquisition Date. The MBIA UK
Acquisition added approximately $12 billion of net par insured on January 10, 2017.
MBIA UK was renamed Assured Guaranty (London) Ltd. and on June 1, 2017, was re-registered as a public limited
company (plc). Further, AGLN was sold by AGC to AGM and then contributed by AGM to AGE on June 26, 2017. See Note
1, Business and Basis of Presentation for additional information on the Company's European subsidiaries combination.
138
The following table shows the net effect of the MBIA UK Acquisition, including the effects of the settlement of pre-
existing relationships.
Fair Value of Net
Assets Acquired,
before Settlement of
Pre-existing
Relationships
Net effect of
Settlement of Pre-
existing
Relationships
(in millions)
Net Effect of
MBIA UK
Acquisition
$
334
$
— $
Purchase price (1)
Identifiable assets acquired:
Investments
Cash
Premiums receivable, net of commissions payable
Other assets
Total assets
Liabilities assumed:
Unearned premium reserves
Current tax payable
Other liabilities
Total liabilities
Net assets of MBIA UK
Cash acquired from MBIA Holdings
Deferred tax liability
Net asset effect of MBIA UK Acquisition
Bargain purchase gain and settlement of pre-existing
relationships resulting from MBIA UK Acquisition, after-tax
Deferred tax
459
72
274
16
821
389
25
4
418
403
23
(36)
390
56
—
334
459
72
270
10
811
383
25
(1)
407
404
23
(36)
391
57
1
58
—
—
(4)
(6)
(10)
(6)
—
(5)
(11)
1
—
—
1
1
1
2
$
Bargain purchase gain and settlement of pre-existing
relationships resulting from MBIA UK Acquisition, pre-tax
$
56
$
_____________________
(1)
The purchase price of $334 million was allocated as follows: (1) $329 million for the purchase of net assets of $385
million, and (2) the settlement of pre-existing relationships between MBIA UK and Assured Guaranty at a fair value of
$5 million
The Company believes the bargain purchase gain resulted from MBIA's strategy to address its insurance obligations
with regards to the Zohar II Notes, the issuers of which MBIA did not expect would have sufficient funds to repay such notes in
full on the scheduled maturity date of such notes in January 2017.
Revenue and net income (excluding the effects of subsequent tax reform) related to MBIA UK from the MBIA UK
Acquisition Date through December 31, 2017 included in the consolidated statement of operations were approximately $192
million and $139 million, respectively, including the bargain purchase gain, settlement of pre-existing relationships, activity
during the year and realized gain on the disposition of AGC's Zohar II Notes. For 2017, the Company recognized transaction
expenses related to the MBIA UK Acquisition of $7 million, comprising primarily legal and financial advisors fees.
Unaudited Pro Forma Results of Operations
The following unaudited pro forma information presents the combined results of operations of Assured Guaranty and
MBIA UK as if the acquisition had been completed on January 1, 2016, as required under GAAP. The pro forma accounts
include the estimated historical results of the Company and MBIA UK and pro forma adjustments primarily comprising the
earning of the unearned premium reserve and the expected losses that would be recognized in net income for each prior period
presented, as well as the accounting for bargain purchase gain, settlement of pre-existing relationships, the realized gain on the
disposition of the Zohar II Notes and MBIA UK acquisition related expenses, all net of tax at the applicable statutory rate.
139
The unaudited pro forma combined financial information is presented for illustrative purposes only and does not
indicate the financial results of the combined company had the companies actually been combined as of January 1, 2016, nor is
it indicative of the results of operations in future periods. The Company did not include any pro forma combined financial
information for 2017 as substantially all of MBIA UK's results of operations for 2017 are included in the year ended
December 31, 2017 consolidated statements of operations.
Unaudited Pro Forma Results of Operations
Pro forma revenues
Pro forma net income
Pro forma earnings per share (EPS):
Basic
Diluted
CIFG Holding Inc.
Year Ended
December 31, 2016
(in millions, except
per share amounts)
1,849
$
1,005
7.55
7.49
On July 1, 2016, AGC acquired all of the issued and outstanding capital stock of CIFG Holding Inc. (CIFGH, and
together with its subsidiaries, CIFG) (the CIFG Acquisition), the parent of financial guaranty insurer CIFG Assurance North
America, Inc. (CIFGNA), for $450.6 million in cash. AGUS previously owned 1.6% of the outstanding shares of CIFGH, for
which it received $7.1 million in consideration from AGC, resulting in a net consolidated purchase price of $443 million. AGC
merged CIFGNA with and into AGC, with AGC as the surviving company, on July 5, 2016. The CIFG Acquisition added $4.2
billion of net par insured on July 1, 2016.
At the time of the CIFG Acquisition, CIFGNA had a subsidiary financial guaranty company domiciled in France,
CIFGE, which had been put into run-off and surrendered its licenses. CIFGNA had reinsured all of CIFGE’s outstanding
financial guaranty business and also had issued a “second-to-pay policy” pursuant to which CIFGNA guaranteed the full and
complete payment of any shortfall in amounts due from CIFGE on its insured portfolio; AGC assumed these obligations as part
of the CIFGNA merger with and into AGC. CIFGE remains a separate subsidiary in runoff, now indirectly owned by AGM.
See Note 1, Business and Basis of Presentation for additional information on the Company's European subsidiaries
combination.
140
The following table shows the net effect of the CIFG Acquisition, including the effects of the settlement of pre-
existing relationships.
Fair Value of Net
Assets Acquired,
before Settlement of
Pre-existing
Relationships
Net effect of
Settlement of Pre-
existing
Relationships
(in millions)
Net Effect of CIFG
Acquisition
Cash Purchase Price (1)
Identifiable assets acquired:
Investments
Cash
Premiums receivable, net of commissions payable
Ceded unearned premium reserve
Deferred acquisition costs
Salvage and subrogation recoverable
Credit derivative assets
Deferred tax asset, net
Other assets
Total assets
Liabilities assumed:
Unearned premium reserves
Loss and loss adjustment expense reserve
Credit derivative liabilities
Other liabilities
Total liabilities
Net asset effect of CIFG Acquisition
Bargain purchase gain and settlement of pre-existing relationships
resulting from CIFG Acquisition, after-tax
Deferred tax
$
443
$
— $
770
8
18
173
1
23
1
194
4
1,192
306
1
68
17
392
800
357
—
—
—
—
(173)
(1)
—
—
34
—
(140)
(10)
(66)
0
—
(76)
(64)
(64)
(34)
Bargain purchase gain and settlement of pre-existing relationships
resulting from CIFG Acquisition, pre-tax
$
357
$
(98) $
443
770
8
18
—
—
23
1
228
4
1,052
296
(65)
68
17
316
736
293
(34)
259
_____________________
(1)
The cash purchase price of $443 million represents the cash transferred for the acquisition which was allocated as
follows: (1) $270 million for the purchase of net assets of $627 million, and (2) the settlement of pre-existing
relationships between CIFGH and Assured Guaranty at a fair value of $173 million.
The bargain purchase gain reflects the fair value of CIFGH’s assets and liabilities, as well as tax attributes that were
recorded in deferred taxes comprising net operating losses (NOL) (after Internal Revenue Code change in control provisions)
and other temporary book-to-tax differences for which CIFGH had recorded a full valuation allowance. The Company believes
the bargain purchase gain resulted from the nature of the financial guaranty business and the desire of investors in CIFGH to
monetize their investments in CIFGH.
Revenue and net income related to CIFGH from the CIFG Acquisition Date through 2016 included in the consolidated
statement of operations were approximately $307 million and $323 million, respectively. For 2016, the Company recognized
transaction expenses related to the CIFG Acquisition of $6 million, comprising primarily legal and financial advisors fees.
The Company has determined that the presentation of pro forma information is impractical for the CIFG Acquisition
as historical financial records are not available on a U.S. GAAP basis.
141
Radian Asset Assurance Inc.
On April 1, 2015 (Radian Acquisition Date), AGC completed the acquisition (Radian Asset Acquisition) of all of the
issued and outstanding capital stock of financial guaranty insurer Radian Asset Assurance Inc. (Radian Asset) for $804.5
million; the cash consideration was paid from AGC's available funds and from the proceeds of a $200 million loan from AGC’s
direct parent, AGUS. AGC repaid the loan in full to AGUS on April 14, 2015. Radian Asset was merged with and into AGC,
with AGC as the surviving company of the merger. The Radian Asset Acquisition added $13.6 billion to the Company's net par
outstanding on April 1, 2015.
The following table shows the net effect of the Radian Asset Acquisition at the Radian Acquisition Date, including the
effects of the settlement of pre-existing relationships.
Cash purchase price(1)
Identifiable assets acquired:
Investments
Cash
Ceded unearned premium reserve
Credit derivative assets
Deferred tax asset, net
Financial guaranty variable interest entities’ assets
Other assets
Total assets
Liabilities assumed:
Unearned premium reserves
Credit derivative liabilities
Financial guaranty variable interest entities’ liabilities
Other liabilities
Total liabilities
Net asset effect of Radian Asset Acquisition
Bargain purchase gain and settlement of pre-existing relationships
resulting from Radian Asset Acquisition, after-tax
Deferred tax
Fair Value of Net
Assets Acquired,
before Settlement of
Pre-existing
Relationships
Net effect of
Settlement of Pre-
existing
Relationships
(in millions)
Net Effect of
Radian Asset
Acquisition
$
804
$
— $
804
1,473
4
(3)
30
263
122
86
1,975
697
271
118
30
1,116
859
55
—
—
—
(65)
—
(56)
—
(67)
(188)
(216)
(26)
—
(49)
(291)
103
103
56
1,473
4
(68)
30
207
122
19
1,787
481
245
118
(19)
825
962
158
56
214
Bargain purchase gain and settlement of pre-existing relationships
resulting from Radian Asset Acquisition, pre-tax
$
55
$
159
$
_____________________
(1)
The cash purchase price of $804 million was the cash transferred for the acquisition which was allocated as follows:
(1) $987 million for the purchase of net assets of $1,042 million, and (2) the settlement of pre-existing relationships
between Radian Asset and Assured Guaranty at a fair value of $(183) million.
The Company believes the bargain purchase resulted from the announced desire of Radian Guaranty Inc. to focus its
business strategy on the mortgage and real estate markets and to monetize its investment in Radian Asset and thereby accelerate
its ability to comply with the financial requirements of the final Private Mortgage Insurer Eligibility Requirements.
Revenue and net income related to Radian Asset from the Radian Acquisition Date through December 31, 2015
included in the consolidated statement of operations were approximately $560 million and $366 million, respectively. For 2015,
the Company recognized transaction expenses related to the Radian Asset Acquisition of $12 million, comprising primarily
legal and financial advisors fees.
142
Unaudited Pro Forma Results of Operations
The following unaudited pro forma information presents the combined results of operations of Assured Guaranty and
Radian Asset as if the acquisition had been completed on January 1, 2014, as required under GAAP. The pro forma accounts
include the estimated historical results of the Company and Radian Asset and pro forma adjustments primarily comprising the
earning of the unearned premium reserve and the expected losses that would be recognized in net income for each prior period
presented, as well as the accounting for bargain purchase gain, settlement of pre-existing relationships and Radian Asset
acquisition related expenses, all net of tax at the applicable statutory rate.
The unaudited pro forma combined financial information is presented for illustrative purposes only and does not
indicate the financial results of the combined company had the companies actually been combined as of January 1, 2014, nor is
it indicative of the results of operations in future periods.
Unaudited Pro Forma Results of Operations
Pro forma revenues
Pro forma net income
Pro forma EPS:
Basic
Diluted
3.
Ratings
Year Ended
December 31, 2015
(in millions, except
per share amounts)
2,030
$
922
6.22
6.18
The financial strength ratings (or similar ratings) for the Company’s insurance companies, along with the date of the
most recent rating action (or confirmation) by the rating agency, are shown in the table below. 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.
S&P Global Ratings, a
division of Standard & Poor’s
Financial Services LLC
AA (stable) (6/26/17)
Kroll Bond Rating
Agency
AA+ (stable) (1/23/18)
Moody’s Investors Service,
Inc.
A2 (stable) (8/8/16)
A.M. Best Company,
Inc.
—
AA (stable) (6/26/17)
AA (stable) (12/1/17)
AA (stable) (6/26/17)
AA+ (stable) (7/14/17)
AA (stable) (6/26/17)
AA (stable) (6/26/17)
AA (stable) (6/26/17)
AA (stable) (6/26/17)
BB (positive) (1/12/17)
—
—
—
—
—
—
—
(1)
—
—
—
—
—
—
A+ (stable) (6/15/17)
A2 (stable) (8/8/16)
(1)
(2)
—
—
—
—
—
AGM
AGC
MAC
AG Re
AGRO
AGE
AGUK
AGLN
CIFGE
____________________
(1)
AGC requested that Moody’s Investors Service, Inc. (Moody's) withdraw its financial strength ratings of AGC and
AGUK in January 2017, but Moody's denied that request. Moody’s continues to rate AGC A3 (stable) and AGUK A3;
Moody's put AGUK on review for upgrade on June 27, 2017, following its transfer to AGM.
(2)
Assured Guaranty did not request that Moody's rate AGLN. Moody's continues to rate AGLN, and upgraded its rating
to Baa2 (stable) on January 13, 2017, following its acquisition by AGC, and then to Baa1 on review for further
upgrade on June 27, 2017, following its transfer to AGM.
143
There can be no assurance that any of the rating agencies will not take negative action on their financial strength
ratings of AGL's insurance subsidiaries in the future.
For a discussion of the effects of rating actions on the Company, see Note 6, Contracts Accounted for as Insurance,
and Note 13, Reinsurance and Other Monoline Exposures.
4.
Outstanding Exposure
The Company primarily writes financial guaranty contracts in insurance form. Until 2009, the Company also wrote
some of its financial guaranty contacts in credit derivative form, and has acquired or reinsured portfolios both before and after
2009 that include financial guaranty contracts in credit derivative form. Whether written as an insurance contract or as a credit
derivative, the Company considers these financial guaranty contracts. The Company also writes a relatively small amount of
non-financial guaranty insurance. The Company seeks to limit its exposure to losses by underwriting obligations that it views
as investment grade at inception, although, as part of its loss mitigation strategy for existing troubled exposures, it may
underwrite new issuances that it views as BIG. The Company diversifies its insured portfolio across asset classes and, in the
structured finance portfolio, requires rigorous subordination or collateralization requirements. Reinsurance may be used in
order to reduce net exposure to certain insured transactions.
Public finance obligations insured by the Company consist primarily of general obligation bonds supported by the
taxing powers of U.S. state or municipal governmental authorities, as well as tax-supported bonds, revenue bonds and other
obligations supported by covenants from state or municipal governmental authorities or other municipal obligors to impose and
collect fees and charges for public services or specific infrastructure projects. The Company also includes within public finance
obligations those obligations backed by the cash flow from leases or other revenues from projects serving substantial public
purposes, including utilities, toll roads, health care facilities and government office buildings. The Company also includes
within public finance similar obligations issued by territorial and non-U.S. sovereign and sub-sovereign issuers and
governmental authorities.
Structured finance obligations insured by the Company are generally issued by special purpose entities, including
VIEs, and backed by pools of assets having an ascertainable cash flow or market value or other specialized financial
obligations. Some of these VIEs are consolidated as described in Note 9, Consolidated Variable Interest Entities. Unless
otherwise specified, the outstanding par and debt service amounts presented in this note include outstanding exposures on VIEs
whether or not they are consolidated.
Significant Risk Management Activities
The Portfolio Risk Management Committee, which includes members of senior management and senior risk and
surveillance officers, sets specific risk policies and limits and is responsible for enterprise risk management, establishing the
Company's risk appetite, credit underwriting of new business, surveillance and work-out.
All transactions in the insured portfolio are assigned internal credit ratings, which are updated based on changes in
transaction credit quality. As part of the surveillance process, the Company monitors trends and changes in transaction credit
quality, and recommends such remedial actions as may be necessary or appropriate. The Company also develops strategies to
enforce its contractual rights and remedies and to mitigate its losses, engage in negotiation discussions with transaction
participants and, when necessary, manage the Company's litigation proceedings.
Surveillance Categories
The Company segregates its insured portfolio into investment grade and BIG surveillance categories to facilitate the
appropriate allocation of resources to monitoring and loss mitigation efforts and to aid in establishing the appropriate cycle for
periodic review for each exposure. BIG exposures include all exposures with internal credit ratings below BBB-. The
Company’s internal credit ratings are based on internal assessments of the likelihood of default and loss severity in the event of
default. Internal credit ratings are expressed on a ratings scale similar to that used by the rating agencies and are generally
reflective of an approach similar to that employed by the rating agencies, except that the Company's internal credit ratings
focus on future performance rather than lifetime performance.
The Company monitors its insured portfolio and refreshes its internal credit ratings on individual exposures in
quarterly, semi-annual or annual cycles based on the Company’s view of the exposure’s quality, loss potential, volatility and
sector. Ratings on exposures in sectors identified as under the most stress or with the most potential volatility are reviewed
144
every quarter. For assumed exposures, the Company may use the ceding company’s credit ratings of transactions where it is
impractical for it to assign its own rating.
Exposures identified as BIG are subjected to further review to determine the probability of a loss. See Note 5,
Expected Loss to be Paid, for additional information. Surveillance personnel then assign each BIG transaction to the
appropriate BIG surveillance category based upon whether a future loss is expected and whether a claim has been paid. The
Company uses a tax-equivalent yield, which reflects long-term trends in interest rates, to calculate the present value of
projected payments and recoveries and determine whether a future loss is expected in order to assign the appropriate BIG
surveillance category to a transaction. On the other hand, the Company uses risk-free rates, which are determined each quarter,
to calculate the expected loss for financial statement measurement purposes.
More extensive monitoring and intervention is employed for all BIG surveillance categories, with internal credit
ratings reviewed quarterly. The Company expects “future losses” on a transaction when the Company believes there is at least a
50% chance that, on a present value basis, it will pay more claims on that transaction in the future than it will have reimbursed.
The three BIG categories are:
•
•
•
BIG Category 1: Below-investment-grade transactions showing sufficient deterioration to make future losses
possible, but for which none are currently expected.
BIG Category 2: Below-investment-grade transactions for which future losses are expected but for which no
claims (other than liquidity claims, which are claims that the Company expects to be reimbursed within one year)
have yet been paid.
BIG Category 3: Below-investment-grade transactions for which future losses are expected and on which claims
(other than liquidity claims) have been paid.
Unless otherwise noted, ratings disclosed herein on the Company's insured portfolio reflect its internal ratings. The
Company classifies those portions of risks benefiting from reimbursement obligations collateralized by eligible assets held in
trust in acceptable reimbursement structures as the higher of 'AA' or their current internal rating.
Financial Guaranty Exposure
The Company purchases securities that it has insured, and for which it has expected losses to be paid, in order to
mitigate the economic effect of insured losses (loss mitigation securities). The Company excludes amounts attributable to loss
mitigation securities from par and debt service outstanding, which amounts are included in the investment portfolio, because it
manages such securities as investments and not insurance exposure. As of December 31, 2017 and December 31, 2016, the
Company excluded $2.0 billion and $2.1 billion, respectively, of net par attributable to loss mitigation securities (which are
mostly BIG), and other loss mitigation strategies. The following table presents the gross and net debt service for financial
guaranty contracts.
Financial Guaranty
Debt Service Outstanding
Gross Debt Service
Outstanding
Net Debt Service
Outstanding
December 31,
2017
December 31,
2016
December 31,
2017
December 31,
2016
$
$
393,010
15,482
408,492
$
$
(in millions)
425,849
29,151
455,000
$
$
386,092
15,026
401,118
$
$
409,447
28,088
437,535
Public finance
Structured finance
Total financial guaranty
In addition to amounts shown in the tables above, the Company had outstanding commitments to provide guaranties of
$69 million as of the date of this filing. The commitments are contingent on the satisfaction of all conditions set forth in them
and may expire unused or be canceled at the counterparty’s request. Therefore, the total commitment amount does not
necessarily reflect actual future guaranteed amounts.
145
Financial Guaranty Portfolio by Internal Rating
As of December 31, 2017
Public Finance
U.S.
Public Finance
Non-U.S.
Structured Finance
U.S
Structured Finance
Non-U.S
Total
Rating
Category
Net Par
Outstanding
%
Net Par
Outstanding
%
Net Par
Outstanding
%
Net Par
Outstanding
%
Net Par
Outstanding
%
AAA
AA
A
BBB
BIG
Total net par
outstanding
$
877
0.4% $
30,016
118,620
52,739
7,140
14.3
56.7
25.2
3.4
(dollars in millions)
2,541
205
13,936
24,509
1,731
5.9% $
0.5
32.5
57.1
4.0
1,655
3,915
1,630
763
3,261
14.7% $
34.9
14.5
6.8
29.1
319
76
210
703
106
22.5% $
5.4
14.9
49.7
7.5
5,392
34,212
134,396
78,714
12,238
2.1%
12.9
50.7
29.7
4.6
$
209,392
100.0% $
42,922
100.0% $
11,224
100.0% $
1,414
100.0% $
264,952
100.0%
Financial Guaranty Portfolio by Internal Rating
As of December 31, 2016
Public Finance
U.S.
Public Finance
Non-U.S.
Structured Finance
U.S
Structured Finance
Non-U.S
Total
Rating
Category
Net Par
Outstanding
%
Net Par
Outstanding
%
Net Par
Outstanding
%
Net Par
Outstanding
%
Net Par
Outstanding
%
(dollars in millions)
AAA
AA
A
BBB
BIG
Total net par
outstanding
$
2,066
46,420
133,829
55,103
7,380
0.8% $
19.0
54.7
22.5
3.0
2,221
170
6,270
16,378
1,342
8.4% $
0.6
23.8
62.1
5.1
9,757
5,773
1,589
879
26.2
7.2
4.0
4,059
18.4
44.2% $
1,447
47.0% $
127
456
759
293
4.1
14.8
24.6
9.5
15,491
52,490
142,144
73,119
13,074
5.2%
17.7
48.0
24.7
4.4
$
244,798
100.0% $
26,381
100.0% $
22,057
100.0% $
3,082
100.0% $
296,318
100.0%
146
Financial Guaranty Portfolio
by Sector
Gross Par Outstanding
Net Par Outstanding
As of
December 31,
2017
As of
December 31,
2016
As of
December 31,
2017
As of
December 31,
2016
(in millions)
$
91,531
$
110,167
$
90,705
$
107,717
44,783
32,584
17,193
9,087
8,210
4,259
1,336
523
1,935
51,325
38,442
19,915
11,940
10,114
3,902
1,593
697
2,810
44,350
32,357
17,030
8,763
8,195
4,216
1,319
523
1,934
49,931
37,603
19,403
11,238
10,085
3,769
1,559
697
2,796
Sector
Public finance:
U.S.:
General obligation
Tax backed
Municipal utilities
Transportation
Healthcare
Higher education
Infrastructure finance
Housing revenue
Investor-owned utilities
Other public finance
Total public finance—U.S.
211,441
250,905
209,392
244,798
Non-U.S.:
Infrastructure finance
Regulated utilities
Pooled infrastructure
Other public finance
Total public finance—non-U.S.
Total public finance
Structured finance:
U.S.:
Residential Mortgage-Backed Securities (RMBS)
Consumer receivables
Insurance securitizations
Financial products
Pooled corporate obligations
Commercial receivables
Other structured finance
Total structured finance—U.S.
Non-U.S.:
RMBS
Commercial receivables
Pooled corporate obligations
Other structured finance
Total structured finance—non-U.S.
Total structured finance
Total net par outstanding
18,916
17,691
1,561
6,692
44,860
256,301
4,864
1,591
1,825
1,418
1,347
146
461
11,652
655
296
157
325
1,433
13,085
11,818
11,395
1,621
5,653
30,487
281,392
5,933
1,707
2,355
1,540
10,273
234
689
22,731
661
373
1,716
601
3,351
26,082
18,234
16,689
1,561
6,438
42,922
252,314
4,818
1,590
1,449
1,418
1,347
146
456
11,224
637
296
157
324
1,414
12,638
10,731
9,263
1,513
4,874
26,381
271,179
5,637
1,652
2,308
1,540
10,050
230
640
22,057
604
356
1,535
587
3,082
25,139
$
269,386
$
307,474
$
264,952
$
296,318
147
Actual maturities of insured obligations could differ from contractual maturities because borrowers have the right to
call or prepay certain obligations. The expected maturities of structured finance obligations are, in general, considerably shorter
than the contractual maturities for such obligations.
Expected Amortization of
Net Par Outstanding
As of December 31, 2017
0 to 5 years
5 to 10 years
10 to 15 years
15 to 20 years
20 years and above
Total net par outstanding
Public Finance
Structured Finance
Total
(in millions)
$
78,860
$
51,541
45,634
34,974
41,305
$
6,106
2,632
1,718
1,892
290
84,966
54,173
47,352
36,866
41,595
$
252,314
$
12,638
$
264,952
Components of BIG Net Par Outstanding
As of December 31, 2017
Public finance:
U.S. public finance
Non-U.S. public finance
Public finance
Structured finance:
U.S. RMBS
Triple-X life insurance transactions
Trust preferred securities (TruPS)
Other structured finance
Structured finance
Total
BIG Net Par Outstanding
Net Par
BIG 1
BIG 2
BIG 3
Total BIG
Outstanding
(in millions)
$
2,368
$
1,455
3,823
374
—
161
170
705
663
276
939
304
—
—
118
422
$
4,109
$
7,140
$
209,392
—
4,109
2,083
85
—
72
2,240
1,731
8,871
2,761
85
161
360
3,367
42,922
252,314
4,818
1,199
1,349
5,272
12,638
$
4,528
$
1,361
$
6,349
$
12,238
$
264,952
148
Components of BIG Net Par Outstanding
As of December 31, 2016
Public finance:
U.S. public finance
Non-U.S. public finance
Public finance
Structured finance:
U.S. RMBS
Triple-X life insurance transactions
TruPS
Other structured finance
Structured finance
Total
BIG Net Par Outstanding
Net Par
BIG 1
BIG 2
BIG 3
Total BIG
Outstanding
(in millions)
$
2,402
$
3,123
$
1,855
$
7,380
$
244,798
1,288
3,690
197
—
304
304
805
54
3,177
493
—
126
263
882
—
1,855
2,461
126
—
78
2,665
1,342
8,722
3,151
126
430
645
4,352
26,381
271,179
5,637
2,057
1,892
15,553
25,139
$
4,495
$
4,059
$
4,520
$
13,074
$
296,318
BIG Net Par Outstanding
and Number of Risks
As of December 31, 2017
Description
BIG:
Category 1
Category 2
Category 3
Total BIG
Description
BIG:
Category 1
Category 2
Category 3
Total BIG
$
$
$
$
Net Par Outstanding
Number of Risks(2)
Financial
Guaranty
Insurance(1)
Credit
Derivative
Total
Financial
Guaranty
Insurance(1)
Credit
Derivative
Total
(dollars in millions)
4,301
$
227
$
1,344
6,255
17
94
4,528
1,361
6,349
11,900
$
338
$
12,238
139
46
150
335
7
3
9
19
BIG Net Par Outstanding
and Number of Risks
As of December 31, 2016
Net Par Outstanding
Number of Risks(2)
Financial
Guaranty
Insurance(1)
Credit
Derivative
Total
Financial
Guaranty
Insurance(1)
Credit
Derivative
Total
(dollars in millions)
3,861
$
3,857
4,383
12,101
$
634
202
137
973
$
$
4,495
4,059
4,520
13,074
165
79
148
392
10
6
9
25
146
49
159
354
175
85
157
417
_____________________
(1)
Includes net par outstanding for VIEs.
(2)
A risk represents the aggregate of the financial guaranty policies that share the same revenue source for purposes of
making debt service payments.
149
The Company seeks to maintain a diversified portfolio of insured obligations designed to spread its risk across a
number of geographic areas.
Geographic Distribution of
Net Par Outstanding
As of December 31, 2017
Number of Risks
Net Par
Outstanding
Percent of Total Net
Par Outstanding
(dollars in millions)
U.S.:
U.S. Public finance:
California
Texas
Pennsylvania
Illinois
New York
New Jersey
Florida
Michigan
Puerto Rico
Alabama
Other
Total U.S. public finance
U.S. Structured finance (multiple states)
Total U.S.
Non-U.S.:
United Kingdom
France
Canada
Australia
Italy
Other
Total non-U.S.
Total
Exposure to Puerto Rico
$
1,368
1,229
744
702
871
444
294
439
18
296
3,112
9,517
512
10,029
126
10
9
12
9
44
210
10,239
$
36,507
19,027
18,061
17,044
15,672
12,441
10,272
6,353
4,968
4,808
64,239
209,392
11,224
220,616
30,062
3,167
2,690
2,309
1,497
4,611
44,336
264,952
13.8%
7.2
6.8
6.4
5.9
4.7
3.9
2.4
1.9
1.8
24.3
79.1
4.2
83.3
11.3
1.2
1.0
0.9
0.6
1.7
16.7
100.0%
The Company has insured exposure to general obligation bonds of the Commonwealth of Puerto Rico (Puerto Rico or
the Commonwealth) and various obligations of its related authorities and public corporations aggregating $5.0 billion net par as
of December 31, 2017, all of which is rated BIG. Puerto Rico experienced significant general fund budget deficits and a
challenging economic environment since at least the financial crisis. Beginning on January 1, 2016, a number of Puerto Rico
exposures have defaulted on bond payments, and the Company has now paid claims on all of its Puerto Rico exposures except
for Puerto Rico Aqueduct and Sewer Authority (PRASA), Municipal Finance Agency (MFA) and University of Puerto Rico (U
of PR).
On November 30, 2015 and December 8, 2015, the former governor of Puerto Rico (the Former Governor) issued
executive orders (Clawback Orders) directing the Puerto Rico Department of Treasury and the Puerto Rico Tourism Company
to "claw back" certain taxes pledged to secure the payment of bonds issued by the Puerto Rico Highways and Transportation
Authority (PRHTA), Puerto Rico Infrastructure Financing Authority (PRIFA), and Puerto Rico Convention Center District
150
Authority (PRCCDA). The Puerto Rico exposures insured by the Company subject to clawback are shown in the table “Puerto
Rico Net Par Outstanding” below.
On June 30, 2016, the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) was signed into
law by the President of the United States. PROMESA established a seven-member federal financial oversight board (Oversight
Board) with authority to require that balanced budgets and fiscal plans be adopted and implemented by Puerto Rico.
PROMESA provides a legal framework under which the debt of the Commonwealth and its related authorities and public
corporations may be voluntarily restructured, and grants the Oversight Board the sole authority to file restructuring petitions in
a federal court to restructure the debt of the Commonwealth and its related authorities and public corporations if voluntary
negotiations fail, provided that any such restructuring must be in accordance with an Oversight Board approved fiscal plan that
respects the liens and priorities provided under Puerto Rico law.
In May and July 2017 the Oversight Board filed petitions under Title III of PROMESA with the Federal District Court
of Puerto Rico for the Commonwealth, the Puerto Rico Sales Tax Financing Corporation (COFINA), PRHTA, and Puerto Rico
Electric Power Authority (PREPA). Title III of PROMESA provides for a process analogous to a voluntary bankruptcy process
under chapter 9 of the United States Bankruptcy Code (Bankruptcy Code).
Judge Laura Taylor Swain of the Southern District of New York was selected by Chief Justice John Roberts of the
United States Supreme Court to preside over any legal proceedings under PROMESA. Judge Swain has selected a team of five
federal judges to act as mediators for certain issues and disputes.
On September 20, 2017, Hurricane Maria made landfall in Puerto Rico as a Category 4 hurricane on the Saffir-
Simpson scale, causing loss of life and widespread devastation in the Commonwealth. Damage to the Commonwealth’s
infrastructure, including the power grid, water system and transportation system, was extensive, and rebuilding and economic
recovery are expected to take years. While the federal government is expected to provide substantial resources for relief and
rebuilding -- which is expected to help economic activity and address the Commonwealth’s infrastructure needs in the
intermediate and longer term -- economic activity in general and tourism in particular, as well as tax collections, have declined
in the aftermath of the storm, and out migration to the mainland also has increased.
In December 2017 the Tax Act was enacted. Many of the provisions under the new law are geared toward increasing
production in the U.S. and discouraging companies from having operations or intangibles off-shore. Since Puerto Rico is
considered a foreign territory under the U.S. tax system, it is possible the new law may have adverse consequences to Puerto
Rico’s economy. However, the Company is unable to predict the full impact of the new law on Puerto Rico.
On January 24, 2018, Puerto Rico released new fiscal plans for the Commonwealth, PRASA and PREPA. In response
to comments from the Oversight Board and the enactment of a significant federal disaster relief package by the U.S. Congress,
Puerto Rico released a further revised Commonwealth fiscal plan on February 12, 2018. The further revised Commonwealth
fiscal plan indicates a primary budget surplus of $2.8 billion that would be available for debt service over the six-year forecast
period (as compared to contractual debt service of approximately $17.5 billion over the same period). The PREPA fiscal plan is
silent as to the treatment of legacy debt and the current governor of Puerto Rico (the Governor) announced an intention to
privatize PREPA. The PRASA fiscal plan projects cash flows available for debt service to equal approximately 47% of
aggregate debt service during the five-year projection period, based on projection assumptions (including receipt of certain
federal funding).
The Company believes that a number of the actions taken by the Commonwealth, the Oversight Board and others with
respect to obligations the Company insures are illegal or unconstitutional or both, and has taken legal action, and may take
additional legal action in the future, to enforce its rights with respect to these matters. See “Puerto Rico Recovery Litigation”
below.
Litigation and mediation related to the Commonwealth’s debt have been delayed by Hurricane Maria. The final form
and timing of responses to Puerto Rico’s financial distress and the devastation of Hurricane Maria eventually taken by the
federal government or implemented under the auspices of PROMESA and the Oversight Board or otherwise, and the final
impact, after resolution of legal challenges, of any such responses on obligations insured by the Company, are uncertain.
The Company groups its Puerto Rico exposure into three categories:
•
Constitutionally Guaranteed. The Company includes in this category public debt benefiting from Article VI of
the Constitution of the Commonwealth, which expressly provides that interest and principal payments on the
public debt are to be paid before other disbursements are made.
151
•
Public Corporations – Certain Revenues Potentially Subject to Clawback. The Company includes in this
category the debt of public corporations for which applicable law permits the Commonwealth to claw back,
subject to certain conditions and for the payment of public debt, at least a portion of the revenues supporting the
bonds the Company insures. As a constitutional condition to clawback, available Commonwealth revenues for any
fiscal year must be insufficient to pay Commonwealth debt service before the payment of any appropriations for
that year. The Company believes that this condition has not been satisfied to date, and accordingly that the
Commonwealth has not to date been entitled to claw back revenues supporting debt insured by the Company.
Prior to the enactment of PROMESA, the Company sued various Puerto Rico governmental officials in the United
States District Court, District of Puerto Rico asserting that Puerto Rico's attempt to "claw back" pledged taxes is
unconstitutional, and demanding declaratory and injunctive relief. See "Puerto Rico Recovery Litigation" below.
•
Other Public Corporations. The Company includes in this category the debt of public corporations that are
supported by revenues it does not believe are subject to clawback.
Constitutionally Guaranteed
General Obligation. As of December 31, 2017, the Company had $1,419 million insured net par outstanding of the
general obligations of Puerto Rico, which are supported by the good faith, credit and taxing power of the Commonwealth.
Despite the requirements of Article VI of its Constitution, the Commonwealth defaulted on the debt service payment due on
July 1, 2016, and the Company has been making claim payments on these bonds since that date. As noted above, the Oversight
Board filed a petition under Title III of PROMESA with respect to the Commonwealth. Also as noted above, on February 12,
2018, Puerto Rico released a further revised Commonwealth fiscal plan indicates a primary budget surplus of $2.8 billion that
would be available for debt service over the six-year forecast period (as compared to contractual debt service of approximately
$17.5 billion over the same period). The Company does not believe the Commonwealth’s fiscal plan in its current form
complies with certain mandatory requirements of PROMESA.
Puerto Rico Public Buildings Authority (PBA). As of December 31, 2017, the Company had $141 million insured net
par outstanding of PBA bonds, which are supported by a pledge of the rents due under leases of government facilities to
departments, agencies, instrumentalities and municipalities of the Commonwealth, and that benefit from a Commonwealth
guaranty supported by a pledge of the Commonwealth’s good faith, credit and taxing power. Despite the requirements of
Article VI of its Constitution, the PBA defaulted on most of the debt service payment due on July 1, 2016, and the Company
has been making claim payments on these bonds since then.
Public Corporations - Certain Revenues Potentially Subject to Clawback
PRHTA. As of December 31, 2017, the Company had $882 million insured net par outstanding of PRHTA
(transportation revenue) bonds and $495 million insured net par of PRHTA (highways revenue) bonds. The transportation
revenue bonds are secured by a subordinate gross lien on gasoline and gas oil and diesel oil taxes, motor vehicle license fees
and certain tolls, plus a first lien on up to $120 million annually of taxes on crude oil, unfinished oil and derivative products.
The highways revenue bonds are secured by a gross lien on gasoline and gas oil and diesel oil taxes, motor vehicle license fees
and certain tolls. The non-toll revenues consisting of excise taxes and fees collected by the Commonwealth on behalf of
PRHTA and its bondholders that are statutorily allocated to PRHTA and its bondholders are potentially subject to clawback.
Despite the presence of funds in relevant debt service accounts that the Company believes should have been employed to fund
debt service, PRHTA defaulted on the full July 1, 2017 insured debt service payment, and the Company has been making claim
payments on these bonds since that date.
PRCCDA. As of December 31, 2017, the Company had $152 million insured net par outstanding of PRCCDA bonds,
which are secured by certain hotel tax revenues. These revenues are sensitive to the level of economic activity in the area and
are potentially subject to clawback. There were sufficient funds in the PRCCDA bond accounts to make only partial payments
on the July 1, 2017 PRCCDA bond payments guaranteed by the Company, and the Company has been making claim payments
on these bonds since that date.
PRIFA. As of December 31, 2017, the Company had $18 million insured net par outstanding of PRIFA bonds, which
are secured primarily by the return to Puerto Rico of federal excise taxes paid on rum. These revenues are potentially subject to
the clawback. The Company has been making claim payments in the PRIFA bonds since January 2016.
152
Other Public Corporations
PREPA. As of December 31, 2017, the Company had $853 million insured net par outstanding of PREPA obligations,
which are secured by a lien on the revenues of the electric system.
On December 24, 2015, AGM and AGC entered into a Restructuring Support Agreement (RSA) with PREPA, an ad
hoc group of uninsured bondholders and a group of fuel-line lenders that subject to certain conditions, would have resulted in,
among other things, modernization of the utility and a restructuring of current debt.
The Oversight Board did not certify the RSA under Title VI of PROMESA as the Company believes was required by
PROMESA, but rather, on July 2, 2017, commenced proceedings for PREPA under Title III of PROMESA. The Company has
been making claim payments on these bonds since July 1, 2017.
As noted above, on January 24, 2018, PREPA released a new fiscal plan that is silent with respect to the treatment of
its legacy debt, and the Governor announced an intention to privatize PREPA. The Company believes that a number of the
actions taken by the Commonwealth, the Oversight Board and others with respect to the PREPA obligations it insures and the
RSA are illegal or unconstitutional or both, and has taken legal action, and may take additional legal action in the future, to
enforce its rights with respect to these matters. See “Puerto Rico Recovery Litigation” below.
PRASA. As of December 31, 2017, the Company had $373 million of insured net par outstanding to PRASA bonds,
which are secured by a lien on the gross revenues of the water and sewer system. On September 15, 2015, PRASA entered into
a settlement with the U.S.Department of Justice and the U.S. Environmental Protection Agency that requires it to spend $1.6
billion to upgrade and improve its sewer system island-wide. The PRASA bond accounts contained sufficient funds to make the
PRASA bond payments due through the date of this filing that were guaranteed by the Company, and those payments were
made in full. As noted above, on January 24, 2018, PRASA released a new fiscal plan for PRASA that projects cash flows
available for debt service to equal approximately 47% of aggregate debt service during the five-year projection period, based
on projection assumptions (including receipt of certain federal funding).
MFA. As of December 31, 2017, the Company had $360 million net par outstanding of bonds issued by MFA secured
by a lien on local property tax revenues. The MFA bond accounts contained sufficient funds to make the MFA bond payments
due through the date of this filing that were guaranteed by the Company, and those payments were made in full.
COFINA. As of December 31, 2017, the Company had $272 million insured net par outstanding of junior COFINA
bonds, which are secured primarily by a second lien on certain sales and use taxes. As noted above, the Oversight Board filed a
petition on behalf of the Commonwealth under Title III of PROMESA. COFINA bond debt service payments were not made on
August 1, 2017, and the Company made its first claim payments on these bonds. The Company has continued to make claim
payments on these bonds.
U of PR. As of December 31, 2017, the Company had $1 million insured net par outstanding of U of PR bonds, which
are general obligations of the university and are secured by a subordinate lien on the proceeds, profits and other income of the
University, subject to a senior pledge and lien for the benefit of outstanding university system revenue bonds. As of the date of
this filing, all debt service payments on U of PR bonds insured by the Company have been made.
Puerto Rico Recovery Litigation
The Company believes that a number of the actions taken by the Commonwealth, the Oversight Board and others with
respect to obligations it insures are illegal or unconstitutional or both, and has taken legal action, and may take additional legal
action in the future, to enforce its rights with respect to these matters.
On January 7, 2016, AGM, AGC and Ambac Assurance Corporation (Ambac) commenced an action for declaratory
judgment and injunctive relief in the U.S. District Court for the District of Puerto Rico (Federal District Court in Puerto Rico)
to invalidate the executive orders issued by the Former Governor on November 30, 2015 and December 8, 2015 directing that
the Secretary of the Treasury of the Commonwealth of Puerto Rico and the Puerto Rico Tourism Company claw back certain
taxes and revenues pledged to secure the payment of bonds issued by the PRHTA, the PRCCDA and the PRIFA. The
Commonwealth defendants filed a motion to dismiss the action for lack of subject matter jurisdiction, which the Court denied
on October 4, 2016. On October 14, 2016, the Commonwealth defendants filed a notice of PROMESA automatic stay. While
the PROMESA automatic stay expired on May 1, 2017, on May 17, 2017, the Court stayed the action under Title III of
PROMESA.
153
On May 16, 2017, The Bank of New York Mellon, as trustee for the bonds issued by COFINA, filed an adversary
complaint for interpleader and declaratory relief with the Federal District Court in Puerto Rico to resolve competing and
conflicting demands made by various groups of COFINA bondholders, insurers of certain COFINA Bonds and COFINA,
regarding funds held by the trustee for certain COFINA bond debt service payments scheduled to occur on and after June 1,
2017. On May 19, 2017, an order to show cause was entered permitting AGC and AGM to intervene in this matter. While AGM
has insured COFINA Bonds, AGC has not.
On June 3, 2017, AGC and AGM filed an adversary complaint in Federal District Court in Puerto Rico seeking (i) a
judgment declaring that the application of pledged special revenues to the payment of the PRHTA Bonds is not subject to the
PROMESA Title III automatic stay and that the Commonwealth has violated the special revenue protections provided to the
PRHTA Bonds under the Bankruptcy Code; (ii) an injunction enjoining the Commonwealth from taking or causing to be taken
any action that would further violate the special revenue protections provided to the PRHTA Bonds under the Bankruptcy
Code; and (iii) an injunction ordering the Commonwealth to remit the pledged special revenues securing the PRHTA Bonds in
accordance with the terms of the special revenue provisions set forth in the Bankruptcy Code. On January 30, 2018, the Court
rendered an opinion dismissing the complaint and holding, among other things, that (i) even though the special revenue
provisions of the Bankruptcy Code protect a lien on pledged special revenues, those provisions do not mandate the turnover of
pledged special revenues to the payment of bonds and (ii) actions to enforce liens on pledged special revenues remain stayed.
On February 9, 2018, AGC and AGM filed a notice of appeal of the Court’s decision to the United States Court of Appeals for
the First Circuit.
On June 26, 2017, AGM and AGC filed a complaint in Federal District Court in Puerto Rico seeking (i) a declaratory
judgment that the PREPA RSA is a “Preexisting Voluntary Agreement” under Section 104 of PROMESA and the Oversight
Board’s failure to certify the PREPA RSA is an unlawful application of Section 601 of PROMESA; (ii) an injunction enjoining
the Oversight Board from unlawfully applying Section 601 of PROMESA and ordering it to certify the PREPA RSA; and (iii) a
writ of mandamus requiring the Oversight Board to comply with its duties under PROMESA and certify the PREPA RSA. On
July 21, 2017, in light of its PREPA Title III petition on July 2, 2017, the Oversight Board filed a notice of stay under
PROMESA.
On July 18, 2017, AGM and AGC filed a motion for relief from the automatic stay in the PREPA Title III bankruptcy
proceeding and a form of complaint seeking the appointment of a receiver for PREPA. That motion was denied on September
14, 2017. On January 31, 2018, AGM and AGC filed a brief appealing the trial court's decision with the United States Court of
Appeals for the First Circuit.
Complaints voluntarily withdrawn without prejudice following Hurricane Maria.
On May 3, 2017, AGM and AGC had filed in the Federal District Court in Puerto Rico an adversary complaint seeking
a judgment that the Commonwealth's Fiscal Plan violates various sections of PROMESA and the Contracts, Takings and Due
Process Clauses of the U.S. Constitution, an injunction enjoining the Commonwealth and Oversight Board from presenting or
proceeding with confirmation of any plan of adjustment based on the Fiscal Plan, and a stay on the confirmation of any plan of
adjustment based on the Fiscal Plan pending development of a fiscal plan that complies with PROMESA and the U.S.
Constitution. On October 6, 2017, AGC and AGM voluntarily withdrew without prejudice the complaint, based on their
expectation that the Fiscal Plan would be modified as a result of Hurricane Maria.
On August 7, 2017, AGC and AGM had filed an adversary complaint in Federal District Court in Puerto Rico seeking,
among other things, judgment against defendants (i) declaring that the application of pledged special revenues to the payment
of the PREPA Bonds is not subject to the PROMESA Title III automatic stay and that the Commonwealth has violated the
special revenue protections provided to the PREPA Bonds under the Bankruptcy Code; (ii) declaring that capital expenditures
and all other expenses that do not constitute current, reasonable and necessary operating expenses may not be paid from
pledged special revenues prior to the payment of debt service on the PREPA Bonds, and (iii) enjoining defendants from taking
or causing to be taken any action that would further violate the special revenue protections provided to the PREPA Bonds under
the Bankruptcy Code; and (iv) ordering defendants to remit the pledged special revenues securing the PREPA Bonds in
accordance with the terms of the special revenue provisions set forth in the Bankruptcy Code. On October 13, 2017, AGC and
AGM voluntarily withdrew without prejudice the complaint, in order to allow PREPA to focus on emergency efforts to restore
electricity to the island's residents and businesses in the wake of Hurricane Maria.
154
Puerto Rico Par and Debt Service Schedules
All Puerto Rico exposures are internally rated BIG. The following tables show the Company’s insured exposure to
general obligation bonds of Puerto Rico and various obligations of its related authorities and public corporations.
Puerto Rico
Gross Par and Gross Debt Service Outstanding
Exposure to Puerto Rico
$
5,186
$
5,435
$
8,514
$
9,038
Gross Par Outstanding
Gross Debt Service Outstanding
December 31,
2017
December 31,
2016
December 31,
2017
December 31,
2016
(in millions)
Puerto Rico
Net Par Outstanding (1)
As of
December 31, 2017
As of
December 31, 2016
(in millions)
Commonwealth Constitutionally Guaranteed
Commonwealth of Puerto Rico - General Obligation Bonds (2)
$
1,419
$
PBA
Public Corporations - Certain Revenues Potentially Subject to Clawback
PRHTA (Transportation revenue) (2)
PRHTA (Highways revenue) (2)
PRCCDA
PRIFA
Other Public Corporations
PREPA (2)
PRASA
MFA
COFINA (2)
U of PR
141
882
495
152
18
853
373
360
272
1
1,476
169
918
350
152
18
724
373
334
271
1
Total net exposure to Puerto Rico
$
4,966
$
4,786
____________________
(1)
The December 31, 2017 amounts include $389 million (which comprises $36 million of General Obligation Bonds,
$134 million of PREPA, $144 million of PRHTA (Highways revenue), and $75 million of MFA) related to 2017
commutations of previously ceded business. See Note 13, Reinsurance and Other Monoline Exposures, for more
information.
(2)
As of the date of this filing, the Oversight Board has certified a filing under Title III of PROMESA for these
exposures.
The following table shows the scheduled amortization of the insured general obligation bonds of Puerto Rico and
various obligations of its related authorities and public corporations. The Company guarantees payments of interest and
principal 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 be required to pay the shortfall between the principal and
interest due in any given period and the amount paid by the obligors.
155
Amortization Schedule of Puerto Rico Net Par Outstanding
and Net Debt Service Outstanding
As of December 31, 2017
2018 (January 1 - March 31)
2018 (April 1 - June 30)
2018 (July 1 - September 30)
2018 (October 1 - December 31)
Subtotal 2018
2019
2020
2021
2022
2023-2027
2028-2032
2033-2037
2038-2042
2043-2047
Total
Scheduled Net Par
Amortization
Scheduled Net Debt
Service Amortization
(in millions)
$
$
0
0
200
0
200
223
285
147
137
1,229
812
1,217
453
263
$
4,966
$
123
3
322
3
451
464
516
364
345
2,129
1,436
1,572
602
316
8,195
Exposure to the U.S. Virgin Islands
As of December 31, 2017, the Company had $498 million insured net par outstanding to the U.S. Virgin Islands and
its related authorities (USVI), of which it rated $224 million BIG. The $274 million USVI net par the Company rated
investment grade was comprised primarily of bonds secured by a lien on matching fund revenues related to excise taxes on
products produced in the USVI and exported to the U.S., primarily rum. The $224 million BIG USVI net par comprised (a)
Public Finance Authority bonds secured by a gross receipts tax and the general obligation, full faith and credit pledge of the
USVI and (b) bonds of the Virgin Islands Water and Power Authority secured by a net revenue pledge of the electric system.
Hurricane Irma caused significant damage in St. John and St. Thomas, while Hurricane Maria made landfall on St.
Croix as a Category 4 hurricane on the Saffir-Simpson scale, causing loss of life and substantial damage to St. Croix’s
businesses and infrastructure, including the power grid. The USVI is benefiting from the federal response to the 2017
hurricanes and has made its debt service payments to date.
Non-Financial Guaranty Exposure
The Company also provides non-financial guaranty reinsurance in transactions with similar risk profiles to its
structured finance exposures written in financial guaranty form.
The Company provided capital relief triple-X excess of loss life reinsurance approximating $675 million of net
exposure as of December 31, 2017 and $390 million as of December 31, 2016. The capital relief triple-X excess of loss life
reinsurance net exposure is expected to increase to approximately $1.0 billion prior to September 30, 2036.
In addition, the Company started providing reinsurance on aircraft residual value insurance (RVI) policies in the first
quarter of 2017 and had net exposure of $140 million to such reinsurance as of December 31, 2017.
The capital relief triple-X excess of loss life reinsurance and aircraft residual value reinsurance are all rated investment
grade internally.
156
5.
Expected Loss to be Paid
Management compiles and analyzes loss information for all exposures on a consistent basis, in order to effectively
evaluate and manage the economics and liquidity of the entire insured portfolio. The Company monitors and assigns ratings and
calculates expected losses in the same manner for all its exposures regardless of form or differing accounting models. This note
provides information regarding expected claim payments to be made under all contracts in the insured portfolio.
Expected loss to be paid is important from a liquidity perspective in that it represents the present value of amounts that
the Company expects to pay or recover in future periods for all contracts. The expected loss to be paid is equal to the present
value of expected future cash outflows for claim and LAE payments, net of inflows for expected salvage and subrogation (e.g.,
excess spread on the underlying collateral, and estimated recoveries, including those for breaches of representations and
warranties (R&W)), using current risk-free rates. Expected cash outflows and inflows are probability weighted cash flows that
reflect management's assumptions about the likelihood of all possible outcomes based on all information available to it. Those
assumptions consider the relevant facts and circumstances and are consistent with the information tracked and monitored
through the Company's risk-management activities. The Company updates the discount rates each quarter and reflects the
effect of such changes in economic loss development. Net expected loss to be paid is defined as expected loss to be paid, net of
amounts ceded to reinsurers.
In circumstances where the Company has purchased its own insured obligations that have expected losses, expected
loss to be paid is reduced by the proportionate share of the insured obligation that is held in the investment portfolio. The
difference between the purchase price of the obligation and the fair value excluding the value of the Company's insurance is
treated as a paid loss. Assets that are purchased by the Company are recorded in the investment portfolio, at fair value
excluding the value of the Company's insurance. Additionally, in certain cases, issuers of insured obligations elected, or the
Company and an issuer mutually agreed as part of a negotiation, to deliver the underlying collateral or insured obligation to the
Company. See Note 10, Investments and Cash and Note 7, Fair Value Measurement.
Economic loss development represents the change in net expected loss to be paid attributable to the effects of changes
in assumptions based on observed market trends, changes in discount rates, accretion of discount and the economic effects of
loss mitigation efforts.
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. The three models are: (1) insurance as described in "Financial
Guaranty Insurance Losses" in Note 6, Contracts Accounted for as Insurance, (2) derivative as described in Note 7, Fair Value
Measurement and Note 8, Contracts Accounted for as Credit Derivatives, and (3) VIE consolidation as described in Note 9,
Consolidated Variable Interest Entities. The Company has paid and expects to pay future losses (net of recoveries) on policies
which fall under each of the three accounting models.
Loss Estimation Process
The Company’s loss reserve committees estimate expected loss to be paid for all contracts by reviewing analyses that
consider various scenarios with corresponding probabilities assigned to them. Depending upon the nature of the risk, the
Company’s view of the potential size of any loss and the information available to the Company, that analysis may be based
upon individually developed cash flow models, internal credit rating assessments, sector-driven loss severity assumptions and/
or judgmental assessments. In the case of its assumed business, the Company may conduct its own analysis as just described or,
depending on the Company’s view of the potential size of any loss and the information available to the Company, the Company
may use loss estimates provided by ceding insurers. The Company monitors the performance of its transactions with expected
losses and each quarter the Company’s loss reserve committees review and refresh their loss projection assumptions, scenarios
and the probabilities they assign to those scenarios based on actual developments during the quarter and their view of future
performance.
The financial guaranties issued by the Company insure the credit performance of the guaranteed obligations over an
extended period of time, in some cases over 30 years, and in most circumstances the Company has no right to cancel such
financial guaranties. As a result, the Company's estimate of ultimate losses on a policy is subject to significant uncertainty over
the life of the insured transaction. Credit performance can be adversely affected by economic, fiscal and financial market
variability over the life of most contracts.
The determination of expected loss to be paid is an inherently subjective process involving numerous estimates,
assumptions and judgments by management, using both internal and external data sources with regard to frequency, severity of
loss, economic projections, governmental actions, negotiations and other factors that affect credit performance. These
157
estimates, assumptions and judgments, and the factors on which they are based, may change materially over a reporting period,
and as a result the Company’s loss estimates may change materially over that same period.
Changes over a reporting period in the Company’s loss estimates for municipal obligations supported by specified
revenue streams, such as revenue bonds issued by toll road authorities, municipal utilities or airport authorities, generally will
be influenced by factors impacting their revenue levels, such as changes in demand; changing demographics; and other
economic factors, especially if the obligations do not benefit from financial support from other tax revenues or governmental
authorities. Changes over a reporting period in the Company’s loss estimates for its tax-supported public finance transactions
generally will be influenced by factors impacting the public issuer’s ability and willingness to pay, such as changes in the
economy and population of the relevant area; changes in the issuer’s ability or willingness to raise taxes, decrease spending or
receive federal assistance; new legislation; rating agency actions that affect the issuer’s ability to refinance maturing obligations
or issue new debt at a reasonable cost; changes in the priority or amount of pensions and other obligations owed to workers;
developments in restructuring or settlement negotiations; and other political and economic factors. Changes in loss estimates
may also be affected by the Company's loss mitigation efforts.
Changes in the Company’s loss estimates for structured finance transactions generally will be influenced by factors
impacting the performance of the assets supporting those transactions. For example, changes over a reporting period in the
Company’s loss estimates for its RMBS transactions may be influenced by such factors as the level and timing of loan defaults
experienced; changes in housing prices; results from the Company's loss mitigation activities; and other variables.
The Company does not use traditional actuarial approaches to determine its estimates of expected losses. Actual losses
will ultimately depend on future events or transaction performance and may be influenced by many interrelated factors that are
difficult to predict. As a result, the Company's current projections of losses may be subject to considerable volatility and may
not reflect the Company's ultimate claims paid.
In some instances, the terms of the Company's policy gives it the option to pay principal losses that have been
recognized in the transaction but which it is not yet required to pay, thereby reducing the amount of guaranteed interest due in
the future. The Company has sometimes exercised this option, which uses cash but reduces projected future losses.
The following tables present a roll forward of net expected loss to be paid for all contracts. The Company used risk-
free rates for U.S. dollar denominated obligations that ranged from 0.0% to 2.78% with a weighted average of 2.38% as of
December 31, 2017 and 0.0% to 3.23% with a weighted average of 2.73% as of December 31, 2016. Expected losses to be paid
for transactions denominated in currencies other than the U.S. dollar represented approximately 3.7% and 2.8% of the total as
of December 31, 2017 and December 31, 2016, respectively.
Net Expected Loss to be Paid
Roll Forward
Net expected loss to be paid, beginning of period
Net expected loss to be paid on the MBIA UK portfolio as of January 10, 2017
Net expected loss to be paid on the CIFG portfolio as of July 1, 2016
Economic loss development (benefit) due to:
Accretion of discount
Changes in discount rates
Changes in timing and assumptions
Total economic loss development (benefit)
Net (paid) recovered losses
Net expected loss to be paid, end of period
Year Ended December 31,
2017
2016
(in millions)
1,198
$
21
—
33
25
255
313
(229)
1,303
$
1,391
—
22
26
(15)
128
139
(354)
1,198
$
$
158
Net Expected Loss to be Paid
Roll Forward by Sector
Year Ended December 31, 2017
Net Expected
Loss to be
Paid (Recovered) as of
December 31, 2016 (2)
Net Expected
Loss to be Paid on
MBIA UK as of
January 10, 2017
Economic Loss
Development /
(Benefit)
(in millions)
(Paid)
Recovered
Losses (1)
Net Expected
Loss to be
Paid (Recovered) as of
December 31, 2017 (2)
Public finance:
U.S. public finance
$
871
$
Non-U.S. public finance
Public finance
Structured finance:
U.S. RMBS
Other structured finance
Structured finance
33
904
206
88
294
— $
13
13
—
8
8
Total
$
1,198
$
21
$
$
554
(5)
549
(181)
(55)
(236)
313
$
(268) $
5
(263)
48
(14)
34
(229) $
1,157
46
1,203
73
27
100
1,303
Net Expected Loss to be Paid
Roll Forward by Sector
Year Ended December 31, 2016
Net Expected
Loss to be
Paid (Recovered) as of
December 31, 2015
Net Expected
Loss to be Paid
(Recovered)
on CIFG as of
July 1, 2016
Economic Loss
Development /
(Benefit)
(in millions)
(Paid)
Recovered
Losses (1)
Net Expected
Loss to be
Paid (Recovered) as of
December 31, 2016 (2)
Public finance:
U.S. public finance
$
Non-U.S. public finance
Public finance
Structured finance:
U.S. RMBS
Other structured finance
Structured finance
Total
$
771
$
38
809
409
173
582
1,391
$
40
2
42
(22)
2
(20)
22
$
$
$
276
(7)
269
(91)
(39)
(130)
139
$
(216) $
—
(216)
(90)
(48)
(138)
(354) $
871
33
904
206
88
294
1,198
____________________
(1)
Net of ceded paid losses, whether or not such amounts have been settled with reinsurers. Ceded paid losses are
typically settled 45 days after the end of the reporting period. Such amounts are recorded in reinsurance recoverable on
paid losses included in other assets. The Company paid $24 million and $16 million in LAE for the years ended
December 31, 2017 and 2016, respectively.
(2)
Includes expected LAE to be paid of $23 million as of December 31, 2017 and $12 million as of December 31, 2016.
159
The following table presents the present value of net expected loss to be paid and the net economic loss development
for all contracts by accounting model.
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, 2017
As of
December 31, 2016
Year Ended
December 31, 2017
Year Ended
December 31, 2016
Financial guaranty insurance
FG VIEs (1) and other
Credit derivatives (2)
Total
$
$
____________________
(1)
See Note 9, Consolidated Variable Interest Entities.
1,226
$
91
(14)
1,303
(in millions)
1,083
$
105
10
$
1,198
$
353
(6)
(34)
313
$
$
164
(8)
(17)
139
(2)
See Note 8, Contracts Accounted for as Credit Derivatives.
Selected U.S. Public Finance Transactions
The Company insures general obligation bonds of the Commonwealth of Puerto Rico and various obligations of its
related authorities and public corporations aggregating $5.0 billion net par as of December 31, 2017, all of which are BIG. For
additional information regarding the Company's exposure to general obligations of the Commonwealth of Puerto Rico and
various obligations of its related authorities and public corporations, see "Exposure to Puerto Rico" in Note 4, Outstanding
Exposure.
As of December 31, 2017, the Company has insured $341 million net par outstanding of general obligation bonds
issued by the City of Hartford, Connecticut, which has recently experienced financial distress. The Company rates $339
million net par of that BIG, with the remainder being a second-to-pay policy rated investment grade. The mayor of Hartford
announced that the city would be unable to meet its financial obligations by early November 2017 if the State of Connecticut
failed to enact a budget, and hired bankruptcy consultants. On October 31, 2017, the State adopted a budget providing for
substantial payments to the City, placing the City under State oversight and providing an avenue for the City to issue debt
backed by the State. While these are welcome developments, the City remains in financial distress and its bonds are still rated
BIG by the Company.
The Company has approximately $19 million of net par exposure as of December 31, 2017 to bonds issued by
Parkway East Public Improvement District (District), which is located in Madison County, Mississippi (the County). The
bonds, which are rated BIG, are payable from special assessments on properties within the District, as well as amounts paid
under a contribution agreement with the County in which the County covenants that it will provide funds in the event special
assessments are not sufficient to make a debt service payment. The special assessments have not been sufficient to pay debt
service in full. In earlier years, the County provided funding to cover the balance of the debt service requirement, but
subsequently claimed the District’s failure to reimburse it within the two years stipulated in the contribution agreement means
that the County is not required to provide funding until it is reimbursed. On May 31, 2017, the United States Court of Appeals
for the Fifth Circuit reversed a district court ruling favorable to the Company in its declaratory judgment action disputing the
County’s interpretation. See “Recovery Litigation” below.
On February 25, 2015, a plan of adjustment resolving the bankruptcy filing of the City of Stockton, California under
chapter 9 of the U.S. Bankruptcy Code became effective. As of December 31, 2017, the Company’s net par subject to the plan
consists of $113 million of pension obligation bonds. As part of the plan of adjustment, the City will repay any claims paid on
the pension obligation bonds from certain fixed payments and certain variable payments contingent on the City's revenue
growth.
The Company projects that its total net expected loss across its troubled U.S. public finance exposures as of
December 31, 2017, including those mentioned above, will be $1,157 million, compared with a net expected loss of $871
160
million as of December 31, 2016. Economic loss development in 2017 was $554 million, which was primarily attributable to
Puerto Rico exposures.
Selected Non - U.S. Public Finance Transactions
The Company insures and reinsures exposures with sub-sovereign exposure to various Spanish and Portuguese issuers
where a Spanish and Portuguese sovereign default may cause the sub-sovereigns also to default. The Company's exposure net
of reinsurance to these Spanish and Portuguese exposures is $461 million and $74 million, respectively. The Company rates all
of these exposures BIG due to the financial condition of Spain and Portugal and their dependence on the sovereign.
The Company's Hungary exposure is to infrastructure bonds dependent on payments from Hungarian governmental
entities. The Company's exposure, net of reinsurance, to these Hungarian exposures is $218 million, all of which is rated BIG.
As part of the MBIA UK Acquisition, the Company now also insures an obligation backed by the availability and toll
revenues of a major arterial road into a city in the U.K. with $222 million of net par outstanding as of December 31, 2017. This
transaction has been underperforming due to lower traffic volume and higher costs compared with expectations at underwriting.
These transactions, together with other non-U.S. public finance insured obligations, had expected loss to be paid of
$46 million as of December 31, 2017, compared with $33 million as of December 31, 2016. The MBIA UK Acquisition added
$13 million of net expected loss as of January 2017. The economic benefit of approximately $5 million during 2017 was due
mainly to the improved internal outlook of certain European sovereigns and sub-sovereign entities.
U.S. RMBS
The Company projects losses on its insured U.S. RMBS on a transaction-by-transaction basis by projecting the
performance of the underlying pool of mortgages over time and then applying the structural features (i.e., payment priorities
and tranching) of the RMBS and any expected R&W recoveries/payables to the projected performance of the collateral over
time. The resulting projected claim payments or reimbursements are then discounted using risk-free rates.
The further behind a mortgage borrower falls in making payments, the more likely it is that he or she will default. The
rate at which borrowers from a particular delinquency category (number of monthly payments behind) eventually default is
referred to as the “liquidation rate.” The Company derives its liquidation rate assumptions from observed roll rates, which are
the rates at which loans progress from one delinquency category to the next and eventually to default and liquidation. The
Company applies liquidation rates to the mortgage loan collateral in each delinquency category and makes certain timing
assumptions to project near-term mortgage collateral defaults from loans that are currently delinquent.
Mortgage borrowers that are not more than one payment behind (generally considered performing borrowers) have
demonstrated an ability and willingness to pay throughout the recession and mortgage crisis, and as a result are viewed as less
likely to default than delinquent borrowers. Performing borrowers that eventually default will also need to progress through
delinquency categories before any defaults occur. The Company projects how many of the currently performing loans will
default and when they will default, by first converting the projected near term defaults of delinquent borrowers derived from
liquidation rates into a vector of conditional default rates (CDR), then projecting how the CDR will develop over time. Loans
that are defaulted pursuant to the CDR after the near-term liquidation of currently delinquent loans represent defaults of
currently performing loans and projected re-performing loans. A CDR is the outstanding principal amount of defaulted loans
liquidated in the current month divided by the remaining outstanding amount of the whole pool of loans (or “collateral pool
balance”). The collateral pool balance decreases over time as a result of scheduled principal payments, partial and whole
principal prepayments, and defaults.
In order to derive collateral pool losses from the collateral pool defaults it has projected, the Company applies a loss
severity. The loss severity is the amount of loss the transaction experiences on a defaulted loan after the application of net
proceeds from the disposal of the underlying property. The Company projects loss severities by sector and vintage based on its
experience to date. The Company continues to update its evaluation of these loss severities as new information becomes
available.
The Company had been enforcing claims for breaches of R&W regarding the characteristics of the loans included in
the collateral pools. The Company calculates R&W recoveries and payables to include in its cash flow projections based on its
agreements with R&W providers.
161
The Company projects the overall future cash flow from a collateral pool by adjusting the payment stream from the
principal and interest contractually due on the underlying mortgages for the collateral losses it projects as described above;
assumed voluntary prepayments; and servicer advances. The Company then applies an individual model of the structure of the
transaction to the projected future cash flow from that transaction’s collateral pool to project the Company’s future claims and
claim reimbursements for that individual transaction. Finally, the projected claims and reimbursements are discounted using
risk-free rates. The Company runs several sets of assumptions regarding mortgage collateral performance, or scenarios, and
probability weights them.
The Company's RMBS loss projection methodology assumes that the housing and mortgage markets will continue
improving. Each period the Company makes a judgment as to whether to change the assumptions it uses to make RMBS loss
projections based on its observation during the period of the performance of its insured transactions (including early stage
delinquencies, late stage delinquencies and loss severity) as well as the residential property market and economy in general,
and, to the extent it observes changes, it makes a judgment as whether those changes are normal fluctuations or part of a trend.
U.S. RMBS Loss Projections
Based on its observation during the period of the performance of its insured transactions (including delinquencies,
liquidation rates and loss severities) as well as the residential property market and economy in general, the Company chose to
make the changes to the assumptions it uses to project RMBS losses shown in the tables of assumptions in the sections below.
In 2017 the economic loss development was $1 million for first lien U.S. RMBS and the economic benefit was $182 million for
second lien U.S. RMBS. In 2016 the economic benefit was $68 million for first lien U.S. RMBS and $23 million for second
lien U.S. RMBS.
U.S. First Lien RMBS Loss Projections: Alt-A First Lien, Option ARM, Subprime and Prime
The majority of projected losses in first lien RMBS transactions are expected to come from non-performing mortgage
loans (those that are or in the past twelve months have been two or more payments behind, have been modified, are in
foreclosure, or have been foreclosed upon). Changes in the amount of non-performing loans from the amount projected in the
previous period are one of the primary drivers of loss development in this portfolio. In order to determine the number of
defaults resulting from these delinquent and foreclosed loans, the Company applies a liquidation rate assumption to loans in
each of various non-performing categories. The Company arrived at its liquidation rates based on data purchased from a third
party provider and assumptions about how delays in the foreclosure process and loan modifications may ultimately affect the
rate at which loans are liquidated. Each quarter the Company reviews the most recent twelve months of this data and (if
necessary) adjusts its liquidation rates based on its observations. The following table shows liquidation assumptions for various
non-performing categories.
162
Delinquent/Modified in the Previous 12 Months
Alt A and Prime
Option ARM
Subprime
30 – 59 Days Delinquent
Alt A and Prime
Option ARM
Subprime
60 – 89 Days Delinquent
Alt A and Prime
Option ARM
Subprime
90+ Days Delinquent
Alt A and Prime
Option ARM
Subprime
Bankruptcy
Alt A and Prime
Option ARM
Subprime
Foreclosure
Alt A and Prime
Option ARM
Subprime
Real Estate Owned
All
First Lien Liquidation Rates
December 31, 2017
December 31, 2016
December 31, 2015
20%
25%
25%
20
20
30
35
40
40
50
50
55
60
55
45
50
40
65
70
65
25
25
35
35
40
45
50
50
55
55
55
45
50
40
65
65
65
25
25
35
40
45
45
50
55
55
60
60
45
50
40
65
70
70
100
100
100
While the Company uses liquidation rates as described above to project defaults of non-performing loans (including
current loans modified or delinquent within the last 12 months), it projects defaults on presently current loans by applying a
CDR trend. The start of that CDR trend is based on the defaults the Company projects will emerge from currently
nonperforming, recently nonperforming and modified loans. The total amount of expected defaults from the non-performing
loans is translated into a constant CDR (i.e., the CDR plateau), which, if applied for each of the next 36 months, would be
sufficient to produce approximately the amount of defaults that were calculated to emerge from the various delinquency
categories. The CDR thus calculated individually on the delinquent collateral pool for each RMBS is then used as the starting
point for the CDR curve used to project defaults of the presently performing loans.
In the most heavily weighted scenario (the base case), after the initial 36-month CDR plateau period, each
transaction’s CDR is projected to improve over 12 months to an intermediate CDR (calculated as 20% of its CDR plateau); that
intermediate CDR is held constant for 36 months and then trails off in steps to a final CDR of 5% of the CDR plateau. In the
base case, the Company assumes the final CDR will be reached 5.5 years after the initial 36-month CDR plateau period. Under
the Company’s methodology, defaults projected to occur in the first 36 months represent defaults that can be attributed to loans
that were modified or delinquent in the last 12 months or that are currently delinquent or in foreclosure, while the defaults
projected to occur using the projected CDR trend after the first 36 month period represent defaults attributable to borrowers that
are currently performing or are projected to reperform.
Another important driver of loss projections is loss severity, which is the amount of loss the transaction incurs on a
loan after the application of net proceeds from the disposal of the underlying property. Loss severities experienced in first lien
163
transactions have reached historically high levels, and the Company is assuming in the base case that these high levels
generally will continue for another 18 months. The Company determines its initial loss severity based on actual recent
experience. Each quarter the Company reviews available data and (if necessary) adjusts its severities based on its observations.
The Company then assumes that loss severities begin returning to levels consistent with underwriting assumptions beginning
after the initial 18 month period, declining to 40% in the base case over 2.5 years.
The following table shows the range as well as the average, weighted by outstanding net insured par, for key
assumptions used in the calculation of expected loss to be paid for individual transactions for direct vintage 2004 - 2008 first
lien U.S. RMBS.
Key Assumptions in Base Case Expected Loss Estimates
First Lien RMBS
As of
December 31, 2017
As of
December 31, 2016
As of
December 31, 2015
Range
Weighted
Average
Range
Weighted
Average
Range
Weighted
Average
1.3% – 9.8%
0.1% – 0.5%
5.2%
0.3%
1.0% – 13.5%
0.0% – 0.7%
5.7%
0.3%
1.7% – 26.4%
0.1% – 1.3%
6.4%
0.3%
60%
80%
70%
60%
80%
70%
60%
70%
65%
2.5% – 7.0%
0.1% – 0.3%
5.9%
0.3%
3.2% – 7.0%
0.2% – 0.3%
5.6%
0.3%
3.5% – 10.3%
0.2% – 0.5%
7.8%
0.4%
60%
70%
75%
60%
70%
75%
60%
70%
65%
3.5% – 13.1%
0.2% – 0.7%
7.8%
0.4%
2.8% – 14.1%
0.1% – 0.7%
8.1%
0.4%
4.7% – 13.2%
0.2% – 0.7%
9.5%
0.4%
80%
90%
95%
80%
90%
90%
75%
90%
90%
Alt-A First Lien
Plateau CDR
Final CDR
Initial loss severity:
2005 and prior
2006
2007+
Option ARM
Plateau CDR
Final CDR
Initial loss severity:
2005 and prior
2006
2007+
Subprime
Plateau CDR
Final CDR
Initial loss severity:
2005 and prior
2006
2007+
The rate at which the principal amount of loans is voluntarily prepaid may impact both the amount of losses projected
(since that amount is a function of the CDR, the loss severity and the loan balance over time) as well as the amount of excess
spread (the amount by which the interest paid by the borrowers on the underlying loan exceeds the amount of interest owed on
the insured obligations). The assumption for the voluntary conditional prepayment rate (CPR) follows a similar pattern to that
of the CDR. The current level of voluntary prepayments is assumed to continue for the plateau period before gradually
increasing over 12 months to the final CPR, which is assumed to be 15% in the base case. For transactions where the initial
CPR is higher than the final CPR, the initial CPR is held constant and the final CPR is not used. These CPR assumptions are
the same as those the Company used for December 31, 2016.
In estimating expected losses, the Company modeled and probability weighted sensitivities for first lien transactions
by varying its assumptions of how fast a recovery is expected to occur. One of the variables used to model sensitivities was how
quickly the CDR returned to its modeled equilibrium, which was defined as 5% of the initial CDR. The Company also stressed
CPR and the speed of recovery of loss severity rates. The Company probability weighted a total of five scenarios as of
December 31, 2017.
164
Total expected loss to be paid on all first lien U.S. RMBS was $123 million and $119 million as of December 31, 2017
and December 31, 2016, respectively. The Company used a similar approach to establish its pessimistic and optimistic
scenarios as of December 31, 2017 as it used as of December 31, 2016, increasing and decreasing the periods of stress from
those used in the base case.
In the Company's most stressful scenario where loss severities were assumed to rise and then recover over nine years
and the initial ramp-down of the CDR was assumed to occur over 15 months, expected loss to be paid would increase from
current projections by approximately $71 million for all first lien U.S. RMBS transactions.
In the Company's least stressful scenario where the CDR plateau was six months shorter (30 months, effectively
assuming that liquidation rates would improve) and the CDR recovery was more pronounced, (including an initial ramp-down
of the CDR over nine months), expected loss to be paid would decrease from current projections by approximately $51 million
for all first lien U.S. RMBS transactions.
U.S. Second Lien RMBS Loss Projections
Second lien RMBS transactions include both home equity lines of credit (HELOC) and closed end second lien
mortgages. The Company believes the primary variable affecting its expected losses in second lien RMBS transactions is the
amount and timing of future losses in the collateral pool supporting the transactions. Expected losses are also a function of the
structure of the transaction, the voluntary prepayment rate (typically also referred to as CPR of the collateral), the interest rate
environment, and assumptions about loss severity.
In second lien transactions the projection of near-term defaults from currently delinquent loans is relatively
straightforward because loans in second lien transactions are generally “charged off” (treated as defaulted) by the
securitization’s servicer once the loan is 180 days past due. The Company estimates the amount of loans that will default over
the next six months by calculating current representative liquidation rates. Similar to first liens, the Company then calculates a
CDR for six months, which is the period over which the currently delinquent collateral is expected to be liquidated. That CDR
is then used as the basis for the plateau CDR period that follows the embedded plateau losses.
For the base case scenario, the CDR (the plateau CDR) was held constant for six months. Once the plateau period has
ended, the CDR is assumed to gradually trend down in uniform increments to its final long-term steady state CDR. (The long-
term steady state CDR is calculated as the constant CDR that would have yielded the amount of losses originally expected at
underwriting.) In the base case scenario, the time over which the CDR trends down to its final CDR is 28 months. Therefore,
the total stress period for second lien transactions is 34 months, comprising six months of delinquent data and 28 months of
decrease to the steady state CDR, the same as of December 31, 2016.
HELOC loans generally permit the borrower to pay only interest for an initial period (often ten years) and, after that
period, require the borrower to make both the monthly interest payment and a monthly principal payment. This causes the
borrower's total monthly payment to increase, sometimes substantially, at the end of the initial interest-only period. In the prior
periods, as the HELOC loans underlying the Company's insured HELOC transactions reached their principal amortization
period, the Company incorporated an assumption that a percentage of loans reaching their principal amortization periods would
default around the time of the payment increase.
Most of the HELOC loans underlying the Company's insured HELOC transactions are now past their interest only
reset date, although a significant number of HELOC loans were modified to extend the interest only period for another five
years. As a result, in 2017, the Company eliminated the CDR increase that was applied when such loans reached their principal
amortization period. In addition, based on the average performance history, starting in third quarter 2017, the Company applied
a CDR floor of 2.5% for the future steady state CDR on all its HELOC transactions and reduced the liquidation rate assumption
for selected delinquency categories.
When a second lien loan defaults, there is generally a very low recovery. The Company assumed as of December 31,
2017 that it will generally recover only 2% of future defaulting collateral at the time of charge-off, with additional amounts of
post charge-off recoveries assumed to come in over time. This is the same assumption used as of December 31, 2016.
The rate at which the principal amount of loans is prepaid may impact both the amount of losses projected as well as
the amount of excess spread. In the base case, an average CPR (based on experience of the past year) is assumed to continue
until the end of the plateau before gradually increasing to the final CPR over the same period the CDR decreases. The final
CPR is assumed to be 15% for second lien transactions (in the base case), which is lower than the historical average but reflects
the Company’s continued uncertainty about the projected performance of the borrowers in these transactions. For transactions
165
where the initial CPR is higher than the final CPR, the initial CPR is held constant and the final CPR is not used. This pattern is
generally consistent with how the Company modeled the CPR as of December 31, 2016. To the extent that prepayments differ
from projected levels it could materially change the Company’s projected excess spread and losses.
In estimating expected losses, the Company modeled and probability weighted five possible CDR curves applicable to
the period preceding the return to the long-term steady state CDR. The Company used five scenarios at December 31, 2017 and
December 31, 2016. The Company believes that the level of the elevated CDR and the length of time it will persist and the
ultimate prepayment rate are the primary drivers behind the likely amount of losses the collateral will suffer.
The Company continues to evaluate the assumptions affecting its modeling results. The Company believes the most
important driver of its projected second lien RMBS losses is the performance of its HELOC transactions. Total expected
recovery on all second lien U.S. RMBS was $50 million as of December 31, 2017 and total expected loss to be paid on all
second lien U.S. RMBS was $87 million as of December 31, 2016, respectively.
The following table shows the range as well as the average, weighted by outstanding net insured par, for key
assumptions for the calculation of expected loss to be paid for individual transactions for direct vintage 2004 - 2008 HELOCs.
Key Assumptions in Base Case Expected Loss Estimates
HELOCs
As of
December 31, 2017
As of
December 31, 2016
As of
December 31, 2015
Plateau CDR
Range
2.7% – 19.9%
Final CDR trended down to
2.5% – 3.2%
Weighted
Average
11.4%
2.5%
Range
3.5% – 24.8%
0.5% – 3.2%
Weighted
Average
13.6%
1.3%
Range
4.9% – 23.5%
0.5% – 3.2%
Weighted
Average
10.3%
1.2%
Liquidation rates:
Delinquent/Modified in the
Previous 12 Months
30 – 59 Days Delinquent
60 – 89 Days Delinquent
90+ Days Delinquent
Bankruptcy
Foreclosure
Real Estate Owned
Loss severity
20%
45
60
75
55
70
100
98%
25%
50
65
80
55
75
100
98%
25%
50
65
75
55
75
100
98%
The Company’s base case assumed a six month CDR plateau and a 28 month ramp-down (for a total stress period of
34 months). The Company also modeled a scenario with a longer period of elevated defaults and another with a shorter period
of elevated defaults. Increasing the CDR plateau to eight months and increasing the ramp-down by three months to 31 months
(for a total stress period of 39 months) would increase the expected loss by approximately $12 million for HELOC transactions.
On the other hand, reducing the CDR plateau to four months and decreasing the length of the CDR ramp-down to 25 months
(for a total stress period of 29 months), and lowering the ultimate prepayment rate to 10% would decrease the expected loss by
approximately $14 million for HELOC transactions.
Breaches of Representations and Warranties
As of December 31, 2017, the Company had a net R&W receivable of $117 million from R&W counterparties,
compared to an R&W payable of $6 million as of December 31, 2016. The increase was due primarily to a favorable settlement
of R&W litigation. The Company received cash from the settlement in January 2018. See " -- Recovery Litigation -- RMBS
Transactions" below.
166
Other Structured Finance
The Company had $1.2 billion of net par exposure to financial guaranty triple-X life insurance transactions as of
December 31, 2017, of which $85 million in net par is rated BIG. The triple-X life insurance transactions are based on discrete
blocks of individual life insurance business. In older vintage triple-X life insurance transactions, which include the BIG-rated
transactions, the amounts raised by the sale of the notes insured by the Company were used to capitalize a special purpose
vehicle that provides reinsurance to a life insurer or reinsurer. The amounts have been invested since inception in accounts
managed by third-party investment managers. In the case of the BIG-rated transactions, material amounts of their assets were
invested in U.S. RMBS.
The Company has insured or reinsured $1.4 billion net par of student loan securitizations issued by private issuers that
are classified as structured finance. Of this amount, $114 million is rated BIG. In general, the projected losses are due to: (i) the
poor credit performance of private student loan collateral and high loss severities, or (ii) high interest rates on auction rate
securities with respect to which the auctions have failed.
The Company projects that its total net expected loss across its troubled non-RMBS structured finance exposures as of
December 31, 2017, including those mentioned above, will be $27 million and is primarily attributable to structured student
loans. The economic benefit of $55 million was due primarily to a settlement with the former investment manager of the BIG
transactions.
Recovery Litigation
In the ordinary course of their respective businesses, certain of AGL's subsidiaries assert claims in legal proceedings
against third parties to recover losses paid in prior periods or prevent losses in the future.
Public Finance Transactions
The Company has asserted claims in a number of legal proceedings in connection with its exposure to Puerto Rico.
See Note 4, Outstanding Exposure, for a discussion of the Company's exposure to Puerto Rico and related recovery litigation
being pursued by the Company.
On November 1, 2013, Radian Asset commenced a declaratory judgment action in the U.S. District Court for the
Southern District of Mississippi against Madison County, Mississippi and the Parkway East Public Improvement District to
establish its rights under a contribution agreement from the County supporting certain special assessment bonds issued by the
District and insured by Radian Asset (now AGC). As of December 31, 2017, $19 million of such bonds were outstanding. The
County maintained that its payment obligation is limited to two years of annual debt service, while AGC contended the
County’s obligations under the contribution agreement continue so long as the bonds remain outstanding. On April 27, 2016,
the Court granted AGC's motion for summary judgment, agreeing with AGC's interpretation of the County's obligations. The
County appealed the District Court’s summary judgment ruling to the United States Court of Appeals for the Fifth Circuit, and
on May 31, 2017, the appellate court reversed the District Court’s ruling and remanded the matter to the District Court.
RMBS Transactions
On February 5, 2009, U.S. Bank National Association, as indenture trustee (U.S. Bank), CIFGNA, as insurer of the
Class Ac Notes, and Syncora Guarantee Inc. (SGI), as insurer of the Class Ax Notes, filed a complaint in the Supreme Court of
the State of New York against GreenPoint Mortgage Funding, Inc. (GreenPoint) alleging GreenPoint breached its R&W with
respect to the underlying mortgage loans in the GreenPoint Mortgage Funding Trust 2006-HE1 transaction. On March 3, 2010,
the court dismissed CIFGNA's and SGI’s causes of action on standing grounds. On December 16, 2013, GreenPoint moved to
dismiss the remaining claims of U.S. Bank on the grounds that it too lacked standing. U.S. Bank cross-moved for partial
summary judgment striking GreenPoint’s defense that U.S. Bank lacked standing to directly pursue claims against GreenPoint.
On January 28, 2016, the court denied GreenPoint’s motion for summary judgment and granted U.S. Bank’s cross-motion for
partial summary judgment, finding that as a matter of law U.S. Bank has standing to directly assert claims against
GreenPoint. On November 28, 2016, GreenPoint filed an appeal. On December 12, 2017, the New York Appellate Division,
First Department, ruled that whether U.S. Bank has standing to directly pursue claims against GreenPoint with respect to the
underlying mortgage loans in the transaction that are HELOCs (approximately 95% of the underlying mortgage loans) is an
issue of fact to be determined at trial and that U.S. Bank lacked standing as a matter of law to directly pursue claims against
GreenPoint with respect to the underlying mortgage loans in the transaction that are closed-end seconds (approximately 5% of
the underlying mortgage loans). On December 29, 2017, U.S. Bank, AGC (as successor to CIFG), and SGI reached a settlement
167
with GreenPoint. As part of the settlement, on December 31, 2017, GreenPoint made a cash payment to US Bank to be
distributed pursuant to the transaction’s waterfall provisions. The distribution of the settlement proceeds resulted in the
payment in full of the remaining outstanding balances of the Class Ac and Class Ax Notes and the partial reimbursement of the
insurers’ claim payments.
On November 26, 2012, CIFGNA filed a complaint in the Supreme Court of the State of New York against JP Morgan
Securities LLC (JP Morgan) for material misrepresentation in the inducement of insurance and common law fraud, alleging that
JP Morgan fraudulently induced CIFGNA to insure $400 million of securities issued by ACA ABS CDO 2006-2 Ltd. and $325
million of securities issued by Libertas Preferred Funding II, Ltd. On June 26, 2015, the Court dismissed with prejudice
CIFGNA’s material misrepresentation in the inducement of insurance claim and dismissed without prejudice CIFGNA’s
common law fraud claim. On September 24, 2015, the Court denied CIFGNA’s motion to amend but allowed CIFGNA to re-
plead a cause of action for common law fraud. On November 20, 2015, CIFGNA filed a motion for leave to amend its
complaint to re-plead common law fraud. On April 29, 2016, CIFGNA filed an appeal to reverse the Court’s decision
dismissing CIFGNA’s material misrepresentation in the inducement of insurance claim. On November 29, 2016, the Appellate
Division of the Supreme Court of the State of New York ruled that the Court’s decision dismissing with prejudice CIFGNA’s
material misrepresentation in the inducement of insurance claim should be modified to grant CIFGNA leave to re-plead such
claim. On February 27, 2017, AGC (as successor to CIFGNA) filed an amended complaint which includes a claim for material
misrepresentation in the inducement of insurance.
6.
Contracts Accounted for as Insurance
Premiums
The portfolio of outstanding exposures discussed in Note 4, Outstanding Exposure, includes contracts that meet the
definition of insurance contracts, contracts that meet the definition of a derivative, and contracts that are accounted for as
consolidated FG VIEs. Amounts presented in this note relate to insurance contracts. See Note 8, Contracts Accounted for as
Credit Derivatives for amounts that relate to CDS and Note 9, Consolidated Variable Interest Entities for amounts that relate to
FG VIEs.
Accounting Policies
Accounting for financial guaranty contracts that meet the scope exception under derivative accounting guidance are
subject to industry specific guidance for financial guaranty insurance. The accounting for contracts that fall under the financial
guaranty insurance definition are consistent whether the contract was written on a direct basis, assumed from another financial
guarantor under a reinsurance treaty, ceded to another insurer under a reinsurance treaty, or acquired in a business combination.
Premiums receivable comprise the present value of contractual or expected future premium collections discounted
using risk free rates. Unearned premium reserve represents deferred premium revenue, less claim payments made and
recoveries received that have not yet been recognized in the statement of operations (contra-paid). The following discussion
relates to the deferred premium revenue component of the unearned premium reserve, while the contra-paid is discussed below
under "Financial Guaranty Insurance Losses."
The amount of deferred premium revenue at contract inception is determined as follows:
•
•
For premiums received upfront on financial guaranty insurance contracts that were originally underwritten by the
Company, deferred premium revenue is equal to the amount of cash received. Upfront premiums typically relate
to public finance transactions.
For premiums received in installments on financial guaranty insurance contracts that were originally underwritten
by the Company, deferred premium revenue is the present value of either (1) contractual premiums due or (2) in
cases where the underlying collateral is comprised of homogeneous pools of assets, the expected premiums to be
collected over the life of the contract. To be considered a homogeneous pool of assets, prepayments must be
contractually allowable, the amount of prepayments must be probable, and the timing and amount of prepayments
must be reasonably estimable. When the Company adjusts prepayment assumptions or expected premium
collections, an adjustment is recorded to the deferred premium revenue, with a corresponding adjustment to the
premium receivable. Premiums receivable are discounted at the risk-free rate at inception and such discount rate is
updated only when changes to prepayment assumptions are made that change the expected date of final maturity.
Installment premiums typically relate to structured finance transactions, where the insurance premium rate is
168
determined at the inception of the contract but the insured par is subject to prepayment throughout the life of the
transaction.
•
For financial guaranty insurance contracts acquired in a business combination, deferred premium revenue is equal
to the fair value of the Company's stand-ready obligation portion of the insurance contract at the date of
acquisition based on what a hypothetical similarly rated financial guaranty insurer would have charged for the
contract at that date and not the actual cash flows under the insurance contract. The amount of deferred premium
revenue may differ significantly from cash collections due primarily to fair value adjustments recorded in
connection with a business combination.
The Company recognizes deferred premium revenue as earned premium over the contractual period or expected
period of the contract in proportion to the amount of insurance protection provided. As premium revenue is recognized, a
corresponding decrease to the deferred premium revenue is recorded. The amount of insurance protection provided is a function
of the insured principal amount outstanding. Accordingly, the proportionate share of premium revenue recognized in a given
reporting period is a constant rate calculated based on the relationship between the insured principal amounts outstanding in the
reporting period compared with the sum of each of the insured principal amounts outstanding for all periods. When an insured
financial obligation is retired before its maturity, the financial guaranty insurance contract is extinguished. Any nonrefundable
deferred premium revenue related to that contract is accelerated and recognized as premium revenue. When a premium
receivable balance is deemed uncollectible, it is written off to bad debt expense.
For assumed reinsurance contracts, net earned premiums reported in the consolidated statements of operations are
calculated based upon data received from ceding companies, however, some ceding companies report premium data between
30 and 90 days after the end of the reporting period. The Company estimates net earned premiums for the lag period.
Differences between such estimates and actual amounts are recorded in the period in which the actual amounts are determined.
When installment premiums are related to assumed reinsurance contracts, the Company assesses the credit quality and liquidity
of the ceding companies and the impact of any potential regulatory constraints to determine the collectability of such amounts.
Deferred premium revenue ceded to reinsurers (ceded unearned premium reserve) is recorded as an asset. Direct,
assumed and ceded earned premiums are presented together as net earned premiums in the statement of operations, and
comprise the following:
Net Earned Premiums
Year Ended December 31,
2017
2016
(in millions)
2015
Scheduled net earned premiums
$
385
$
381
$
Accelerations
Refundings
Terminations
Total Accelerations
Accretion of discount on net premiums receivable
Financial guaranty insurance net earned premiums
Other
Net earned premiums (1)
269
17
286
17
688
2
390
79
469
14
864
0
$
690
$
864
$
___________________
(1)
Excludes $15 million, $16 million and $21 million for the year ended December 31, 2017, 2016 and 2015,
respectively, related to consolidated FG VIEs.
416
294
37
331
17
764
2
766
169
Gross Premium Receivable,
Net of Commissions on Assumed Business
Roll Forward
December 31,
FG insurance
Premiums receivable from acquisitions (see Note 2)
Gross written premiums on new business, net of commissions
Gross premiums received, net of commissions
Adjustments:
Changes in the expected term
Accretion of discount, net of commissions on assumed business
Foreign exchange translation
Consolidation/deconsolidation of FG VIEs
Subtotal (1)
Other
December 31,
Year Ended December 31,
2017
2016
(in millions)
2015
$
576
$
693
$
729
270
301
(301)
(8)
12
64
0
914
1
18
193
(258)
(38)
9
(41)
0
576
0
$
915
$
576
$
2
198
(206)
(19)
18
(25)
(4)
693
—
693
____________________
(1)
Excludes $10 million, $11 million and $17 million as of December 31, 2017 , 2016 and 2015, respectively, related to
consolidated FG VIEs.
Foreign exchange translation relates to installment premiums receivable denominated in currencies other than the U.S.
dollar. As of December 31, 2017, 72% of installment premiums are denominated in currencies other than the U.S. dollar,
primarily the euro and pound sterling. This represents an increase from 50% as of December 31, 2016, due mainly to the
acquisition of MBIA UK.
170
The timing and cumulative amount of actual collections may differ from expected collections in the tables below due
to factors such as foreign exchange rate fluctuations, counterparty collectability issues, accelerations, commutations and
changes in expected lives.
Expected Collections of
Financial Guaranty Insurance Gross Premiums Receivable,
Net of Commissions on Assumed Business
(Undiscounted)
2018 (January 1 – March 31)
2018 (April 1 – June 30)
2018 (July 1 – September 30)
2018 (October 1 – December 31)
2019
2020
2021
2022
2023-2027
2028-2032
2033-2037
After 2037
Total(1)
____________________
(1)
Excludes expected cash collections on FG VIEs of $12 million.
Scheduled Financial Guaranty Insurance Net Earned Premiums
2018 (January 1 – March 31)
2018 (April 1 – June 30)
2018 (July 1 – September 30)
2018 (October 1 – December 31)
Subtotal 2018
2019
2020
2021
2022
2023-2027
2028-2032
2033-2037
After 2037
Net deferred premium revenue(1)
Future accretion
Total future net earned premiums
As of December 31, 2017
(in millions)
$
$
38
31
22
18
82
78
77
70
289
193
106
105
1,109
As of December 31, 2017
(in millions)
$
$
89
88
84
82
343
295
266
244
223
866
565
324
281
3,407
188
3,595
____________________
(1)
Excludes scheduled net earned premiums on consolidated FG VIEs of $76 million, non-financial guaranty business net
earned premium of $9 million and contra-paid related to FG VIEs of $17 million.
171
Selected Information for Financial Guaranty Insurance
Policies Paid in Installments
Premiums receivable, net of commission payable
Gross deferred premium revenue
Weighted-average risk-free rate used to discount premiums
Weighted-average period of premiums receivable (in years)
Financial Guaranty Insurance Acquisition Costs
Accounting Policy
As of
December 31, 2017
As of
December 31, 2016
(dollars in millions)
$
$
914
1,205
2.3%
9.2
576
1,041
3.0%
9.1
Policy acquisition costs that are directly related and essential to successful insurance contract acquisition, as well as
ceding commission income on ceded reinsurance contracts are deferred and reported net. Amortization of deferred policy
acquisition costs includes the accretion of discount on ceding commission receivable and payable.
Capitalized policy acquisition costs include expenses such as ceding commission expense on assumed reinsurance
contracts and the cost of underwriting personnel attributable to successful underwriting efforts. Ceding commission expense on
assumed reinsurance contracts and ceding commission income on ceded reinsurance contracts that are associated with
premiums received in installments are calculated at their contractually defined commission rates, discounted consistent with
premiums receivable for all future periods, and included in deferred acquisition costs (DAC), with a corresponding offset to net
premiums receivable or reinsurance balances payable. Management uses its judgment in determining the type and amount of
costs to be deferred. The Company conducts an annual study to determine which operating costs qualify for deferral. Costs
incurred for soliciting potential customers, market research, training, administration, unsuccessful acquisition efforts, and
product development as well as all overhead type costs are charged to expense as incurred. DAC is amortized in proportion to
net earned premiums. When an insured obligation is retired early, the remaining related DAC is recognized at that time.
Expected losses and LAE, investment income, and the remaining costs of servicing the insured or reinsured business,
are considered in determining the recoverability of DAC.
Rollforward of
Deferred Acquisition Costs
December 31,
DAC adjustments from acquisitions (see Note 2)
Costs deferred during the period:
Commissions on assumed and ceded business
Premium taxes
Compensation and other acquisition costs
Total
Costs amortized during the period
December 31,
Year Ended December 31,
2017
2016
(in millions)
2015
$
$
$
106
(2)
0
5
11
16
(19)
101
$
114
$
0
(2)
4
9
11
(19)
106
$
121
1
(1)
2
11
12
(20)
114
172
Financial Guaranty Insurance Losses
Accounting Policies
Loss and LAE Reserve
Loss and LAE reserve reported on the balance sheet relates only to direct and assumed reinsurance contracts that are
accounted for as insurance, substantially all of which are financial guaranty insurance contracts. The corresponding reserve
ceded to reinsurers is reported as reinsurance recoverable on unpaid losses. As discussed in Note 7, Fair Value Measurement,
contracts that meet the definition of a derivative, as well as consolidated FG VIE assets and liabilities, are recorded separately
at fair value. Any expected losses related to consolidated FG VIEs are eliminated upon consolidation.
Under financial guaranty insurance accounting, the sum of unearned premium reserve and loss and LAE reserve
represents the Company's stand‑ready obligation. Unearned premium reserve is deferred premium revenue, less claim
payments and recoveries received that have not yet been recognized in the statement of operations (contra-paid). At contract
inception, the entire stand-ready obligation is represented by unearned premium reserve. A loss and LAE reserve for an
insurance contract is recorded only to the extent, and for the amount, that expected loss to be paid plus contra-paid (“total
losses”) exceed the deferred premium revenue, on a contract by contract basis. As a result, the Company has expected loss to be
paid that has not yet been expensed. Such amounts will be recognized in future periods as deferred premium revenue amortizes
into income.
When a claim or LAE payment is made on a contract, it first reduces any recorded loss and LAE reserve. To the extent
there is no loss and LAE reserve on a contract, then such claim payment is recorded as “contra-paid,” which reduces the
unearned premium reserve. The contra-paid is recognized in the line item “loss and LAE” in the consolidated statement of
operations when and for the amount that total losses exceed the remaining deferred premium revenue on the insurance contract.
Loss and LAE in the consolidated statement of operations is presented net of cessions to reinsurers.
Salvage and Subrogation Recoverable
When the Company becomes entitled to the cash flow from the underlying collateral of an insured exposure under
salvage and subrogation rights as a result of a claim payment or estimated future claim payment, it reduces the expected loss to
be paid on the contract. Such reduction in expected loss to be paid can result in one of the following:
•
•
•
a reduction in the corresponding loss and LAE reserve with a benefit to the income statement,
no entry recorded, if “total loss” is not in excess of deferred premium revenue, or
the recording of a salvage asset with a benefit to the income statement if the transaction is in a net recovery
position at the reporting date.
The Company recognizes the expected recovery of claim payments (including recoveries from settlement with R&W
providers) made by an acquired subsidiary prior to the date of acquisition, consistent with its policy for recognizing recoveries
on all financial guaranty insurance contracts. To the extent that the estimated amount of recoveries increases or decreases due to
changes in facts and circumstances, the Company would recognize a benefit or expense consistent with how changes in the
expected recovery of all other claim payments are recorded. The ceded component of salvage and subrogation recoverable is
recorded in the line item reinsurance balances payable.
Expected Loss to be Expensed
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.
173
Insurance Contracts' Loss Information
The following table provides information on net reserve (salvage), comprised of loss and LAE reserves and salvage
and subrogation recoverable, both net of reinsurance. The Company used risk-free rates for U.S. dollar denominated financial
guaranty insurance obligations that ranged from 0.0% to 2.78% with a weighted average of 2.39% as of December 31, 2017
and 0.0% to 3.23% with a weighted average of 2.74% as of December 31, 2016.
Net Reserve (Salvage)
As of
December 31, 2017
As of
December 31, 2016
(in millions)
Public finance:
U.S. public finance
Non-U.S. public finance
Public finance
Structured finance:
U.S. RMBS
Other structured finance
Structured finance
Subtotal
Other recoverable (payable)
Subtotal
$
901
$
21
922
(59)
40
(19)
903
(4)
899
(55)
844
$
625
21
646
21
96
117
763
1
764
(64)
700
Elimination of losses attributable to FG VIEs
Total
$
Components of Net Reserves (Salvage)
Loss and LAE reserve
Reinsurance recoverable on unpaid losses
Loss and LAE reserve, net
Salvage and subrogation recoverable
Salvage and subrogation payable(1)
Other payable (recoverable)
Salvage and subrogation recoverable, net, and other recoverable
Net reserves (salvage)
____________________
(1) Recorded as a component of reinsurance balances payable.
As of
December 31, 2017
As of
December 31, 2016
$
$
(in millions)
1,444
(44)
1,400
(572)
20
(4)
(556)
844
$
$
1,127
(80)
1,047
(365)
17
1
(347)
700
The table below provides a reconciliation of net expected loss to be paid to net expected loss to be expensed. Expected
loss to be paid differs from expected loss to be expensed due to: (i) the contra-paid which represent the claim payments made
and recoveries received that have not yet been recognized in the statement of operations, (ii) salvage and subrogation
recoverable for transactions that are in a net recovery position where the Company has not yet received recoveries on claims
previously paid (and therefore recognized in income but not yet received), and (iii) loss reserves that have already been
established (and therefore expensed but not yet paid).
174
Reconciliation of Net Expected Loss to be Paid and
Net Expected Loss to be Expensed
Financial Guaranty Insurance Contracts
Net expected loss to be paid - financial guaranty insurance (1)
Contra-paid, net
Salvage and subrogation recoverable, net of reinsurance
Loss and LAE reserve - financial guaranty insurance contracts, net of reinsurance
Other recoverable (payable)
Net expected loss to be expensed (present value) (2)
As of
December 31, 2017
(in millions)
$
$
1,226
59
552
(1,399)
4
442
____________________
(1)
See "Net Expected Loss to be Paid (Recovered) by Accounting Model" table in Note 5, Expected Loss to be Paid.
(2)
Excludes $52 million as of December 31, 2017 related to consolidated FG VIEs.
The following table provides a schedule of the expected timing of net expected losses to be expensed. The amount and
timing of actual loss and LAE may differ from the estimates shown below due to factors such as accelerations, commutations,
changes in expected lives and updates to loss estimates. This table excludes amounts related to FG VIEs, which are eliminated
in consolidation.
Net Expected Loss to be Expensed
Financial Guaranty Insurance Contracts
2018 (January 1 – March 31)
2018 (April 1 – June 30)
2018 (July 1 – September 30)
2018 (October 1 – December 31)
Subtotal 2018
2019
2020
2021
2022
2023-2027
2028-2032
2033-2037
After 2037
Net expected loss to be expensed
Future accretion
Total expected future loss and LAE
175
As of
December 31, 2017
(in millions)
$
$
8
9
10
10
37
42
39
35
32
131
78
36
12
442
88
530
The following table presents the loss and LAE recorded in the consolidated statements of operations by sector for
insurance contracts. Amounts presented are net of reinsurance.
Loss and LAE
Reported on the
Consolidated Statements of Operations
Public finance:
U.S. public finance
Non-U.S. public finance
Public finance
Structured finance:
U.S. RMBS
Other structured finance
Structured finance
Loss and LAE on insurance contracts before FG VIE consolidation
Gain (loss) related to FG VIE consolidation
Loss and LAE
Year Ended December 31,
2017
2016
(in millions)
2015
$
$
$
553
(4)
549
(106)
(48)
(154)
395
(7)
388
$
307
(3)
304
37
(39)
(2)
302
(7)
295
$
$
392
1
393
54
5
59
452
(28)
424
The following table provides information on financial guaranty insurance contracts categorized as BIG.
Financial Guaranty Insurance
BIG Transaction Loss Summary
As of December 31, 2017
BIG 1
BIG 2
BIG Categories
BIG 3
Gross
Ceded
Gross
Ceded
Gross
Ceded
Total
BIG, Net
Effect of
Consolidating
FG VIEs
Total
(22)
46
(3)
150
(41)
(dollars in millions)
7.3
14.0
2.9
9.6
9.3
335
9.9
139
8.9
4,397
2,110
6,507
186
(595)
(409)
66
$
$
$
Number of risks(1)
Remaining weighted-
average contract period
(in years)
Outstanding exposure:
Principal
Interest
Total(2)
Expected cash outflows
(inflows)
Potential recoveries(3)
Subtotal
Discount
Present value of expected
cash flows
Deferred premium
revenue
Reserves (salvage)
$
$
$
$
$
$
(96) $
(42)
(138) $
(5) $
20
15
(4)
1,352
1,002
2,354
492
(145)
347
(93)
(343) $
11
$
254
112
$
(380) $
(5) $
11
$
129
202
—
—
335
9.9
— $
11,900
—
6,081
— $
17,981
(307) $
4,046
194
(113)
23
(2,732)
1,314
(88)
(90) $
1,226
(74) $
(55) $
696
843
$
$
$
$
$
$
(8) $
(1)
(9) $
6,445
3,098
9,543
(1) $
3,785
0
(1)
0
(2,273)
1,512
(78)
(1) $
1,434
0
$
540
(1) $
1,100
$
$
$
$
$
$
(190) $
11,900
(86)
6,081
(276) $
17,981
(104) $
4,353
67
$
(2,926)
(37)
(2)
1,427
(111)
(39) $
1,316
(6) $
(34) $
770
898
$
$
$
$
$
$
176
Financial Guaranty Insurance
BIG Transaction Loss Summary
As of December 31, 2016
BIG 1
BIG 2
BIG Categories
BIG 3
Gross
Ceded
Gross
Ceded
Gross
Ceded
Total
BIG, Net
Effect of
Consolidating
FG VIEs
Total
Number of risks(1)
Remaining weighted-
average contract period
(in years)
Outstanding exposure:
165
8.6
(35)
79
(11)
148
(49)
392
(dollars in millions)
7.0
13.2
10.5
8.1
6.0
10.1
—
—
392
10.1
Principal
Interest
Total(2)
$
$
4,187
1,932
6,119
$
$
(326) $
(140)
(466) $
4,273
2,926
7,199
$
$
(416) $
(219)
(635) $
Expected cash outflows
(inflows)
Potential recoveries(3)
Subtotal
Discount
Present value of expected
cash flows
Deferred premium
revenue
Reserves (salvage)
172
(440)
(268)
61
(207)
(19)
23
4
(4)
0
$
$
131
$
(255) $
(5) $
5
$
1,404
(146)
1,258
(355)
903
246
738
(86)
4
(82)
19
(63)
$
$
(6) $
(58) $
4,703
1,867
6,570
1,435
(743)
692
(114)
578
476
343
$
$
$
$
(320) $
12,101
(87)
6,279
(407) $
18,380
$
$
— $
12,101
—
6,279
— $
18,380
(65)
45
(20)
(4)
(24)
2,841
(1,257)
1,584
(397)
1,187
(326)
198
(128)
24
(104)
2,515
(1,059)
1,456
(373)
1,083
(30) $
(10) $
812
763
$
$
(86) $
(64) $
726
699
____________________
(1)
A risk represents the aggregate of the financial guaranty policies that share the same revenue source for purposes of
making debt service payments. The ceded number of risks represents the number of risks for which the Company
ceded a portion of its exposure.
(2)
(3)
Includes BIG amounts related to FG VIEs.
Includes excess spread and R&W receivables and payables.
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 the insured obligors were unable to pay.
For example, AGM has issued financial guaranty insurance policies in respect of the obligations of municipal obligors
under interest rate swaps. AGM insures periodic payments owed by the municipal obligors to the bank counterparties. In
certain cases, AGM also insures termination payments that may be owed by the municipal obligors to the bank counterparties.
If (i) AGM has been downgraded below the rating trigger set forth in a swap under which it has insured the termination
payment, which rating trigger varies on a transaction by transaction basis; (ii) the municipal obligor has the right to cure by, but
has failed in, posting collateral, replacing AGM or otherwise curing the downgrade of AGM; (iii) the transaction documents
include as a condition that an event of default or termination event with respect to the municipal obligor has occurred, such as
the rating of the municipal obligor being downgraded past a specified level, and such condition has been met; (iv) the bank
counterparty has elected to terminate the swap; (v) a termination payment is payable by the municipal obligor; and (vi) the
municipal obligor has failed to make the termination payment payable by it, then AGM would be required to pay the
termination payment due by the municipal obligor, in an amount not to exceed the policy limit set forth in the financial
guaranty insurance policy. At AGM's current financial strength ratings, if the conditions giving rise to the obligation of AGM to
make a termination payment under the swap termination policies were all satisfied, then AGM could pay claims in an amount
not exceeding approximately $133 million in respect of such termination payments. Taking into consideration whether the
rating of the municipal obligor is below any applicable specified trigger, if the financial strength ratings of AGM were further
downgraded below "A" by S&P or below "A2" by Moody's, and the conditions giving rise to the obligation of AGM to make a
payment under the swap policies were all satisfied, then AGM could pay claims in an additional amount not exceeding
approximately $260 million in respect of such termination payments.
177
As another example, with respect to variable rate demand obligations (VRDOs) for which a bank has agreed to
provide a liquidity facility, a downgrade of AGM or AGC may provide the bank with the right to give notice to bondholders
that the bank will terminate the liquidity facility, causing the bondholders to tender their bonds to the bank. Bonds held by the
bank accrue interest at a “bank bond rate” that is higher than the rate otherwise borne by the bond (typically the prime rate plus
2.00% — 3.00%, and capped at the lesser of 25% and the maximum legal limit). In the event the bank holds such bonds for
longer than a specified period of time, usually 90-180 days, the bank has the right to demand accelerated repayment of bond
principal, usually through payment of equal installments over a period of not less than five years. In the event that a municipal
obligor is unable to pay interest accruing at the bank bond rate or to pay principal during the shortened amortization period, a
claim could be submitted to AGM or AGC under its financial guaranty policy. As of December 31, 2017, AGM and AGC had
insured approximately $3.7 billion net par of VRDOs, of which approximately $0.1 billion of net par constituted VRDOs
issued by municipal obligors rated BBB- or lower pursuant to the Company’s internal rating. The specific terms relating to the
rating levels that trigger the bank’s termination right, and whether it is triggered by a downgrade by one rating agency or a
downgrade by all rating agencies then rating the insurer, vary depending on the transaction.
In addition, AGM may be required to pay claims in respect of AGMH’s former financial products business if Dexia
SA and its affiliates, from which the Company had purchased AGMH and its subsidiaries, do not comply with their obligations
following a downgrade of the financial strength rating of AGM. A downgrade of the financial strength rating of AGM could
trigger a payment obligation of AGM in respect to AGMH's former guaranteed investment contracts (GIC) business. Most
GICs insured by AGM allow for the termination of the GIC contract and a withdrawal of GIC funds at the option of the GIC
holder in the event of a downgrade of AGM below a specified threshold, generally below A- by S&P or A3 by Moody's.
AGMH's former subsidiary FSA Asset Management LLC is expected to have sufficient eligible and liquid assets to satisfy any
expected withdrawal and collateral posting obligations resulting from future rating actions affecting AGM.
7.
Fair Value Measurement
The Company carries a significant portion of its assets and liabilities at fair value. Fair value is defined as the price
that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date (i.e., exit price). The price represents the price available in the principal market for the asset or liability. If
there is no principal market, then the price is based on a hypothetical market that maximizes the value received for an asset or
minimizes the amount paid for a liability (i.e., the most advantageous market).
Fair value is based on quoted market prices, where available. If listed prices or quotes are not available, fair value is
based on either internally developed models that primarily use, as inputs, market-based or independently sourced market
parameters, including but not limited to yield curves, interest rates and debt prices or with the assistance of an independent
third-party using a discounted cash flow approach and the third party’s proprietary pricing models. In addition to market
information, models also incorporate transaction details, such as maturity of the instrument and contractual features designed to
reduce the Company’s credit exposure, such as collateral rights as applicable.
Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments
include amounts to reflect counterparty credit quality, the Company’s creditworthiness and constraints on liquidity. As markets
and products develop and the pricing for certain products becomes more or less transparent, the Company may refine its
methodologies and assumptions. During 2017, no changes were made to the Company’s valuation models that had or are
expected to have, a material impact on the Company’s consolidated balance sheets or statements of operations and
comprehensive income.
The Company’s methods for calculating fair value produce a fair value that may not be indicative of net realizable
value or reflective of future fair values. The use of different methodologies or assumptions to determine fair value of certain
financial instruments could result in a different estimate of fair value at the reporting date.
The categorization within the fair value hierarchy is determined based on whether the inputs to valuation techniques
used to measure fair value are observable or unobservable. Observable inputs reflect market data obtained from independent
sources, while unobservable inputs reflect Company estimates of market assumptions. The fair value hierarchy prioritizes
model inputs into three broad levels as follows, with Level 1 being the highest and Level 3 the lowest. An asset's or liability’s
categorization is based on the lowest level of significant input to its valuation.
Level 1—Quoted prices for identical instruments in active markets. The Company generally defines an active market
as a market in which trading occurs at significant volumes. Active markets generally are more liquid and have a lower bid-ask
spread than an inactive market.
178
Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in
markets that are not active; and observable inputs other than quoted prices, such as interest rates or yield curves and other
inputs derived from or corroborated by observable market inputs.
Level 3—Model derived valuations in which one or more significant inputs or significant value drivers are
unobservable. Financial instruments are considered Level 3 when their values are determined using pricing models, discounted
cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable. Level 3
financial instruments also include those for which the determination of fair value requires significant management judgment or
estimation.
Transfers between Levels 1, 2 and 3 are recognized at the end of the period when the transfer occurs. The Company
reviews the classification between Levels 1, 2 and 3 quarterly to determine whether a transfer is necessary. During the periods
presented, there were no transfers between Level 1 and Level 2. There was a transfer of a fixed-maturity security from Level 2
into Level 3 during 2017 because starting in the second quarter of 2017 the price of the security includes a significant
unobservable assumption. There were transfers of fixed-maturity securities from Level 2 into Level 3 during 2016 because of a
lack of observability relating to the valuation inputs and collateral pricing.
Measured and Carried at Fair Value
Fixed-Maturity Securities and Short-Term Investments
The fair value of bonds in the investment portfolio is generally based on prices received from third party pricing
services or alternative pricing sources with reasonable levels of price transparency. The pricing services prepare estimates of
fair value measurements using their pricing models, which take into account: benchmark yields, reported trades, broker/dealer
quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, industry and economic events and
sector groupings. Additional valuation factors that can be taken into account are nominal spreads and liquidity adjustments. The
pricing services evaluate each asset class based on relevant market and credit information, perceived market movements, and
sector news.
Benchmark yields have in many cases taken priority over reported trades for securities that trade less frequently or
those that are distressed trades, and therefore may not be indicative of the market. The extent of the use of each input is
dependent on the asset class and the market conditions. The valuation of fixed-maturity investments is more subjective when
markets are less liquid due to the lack of market based inputs.
Short-term investments, that are traded in active markets, are classified within Level 1 in the fair value hierarchy and
their value is based on quoted market prices. Securities such as discount notes are classified within Level 2 because these
securities are typically not actively traded due to their approaching maturity and, as such, their cost approximates fair value.
Annually, the Company reviews each pricing service’s procedures, controls and models, as well as the competency of
the pricing service’s key personnel. In addition, on a quarterly basis, the Company holds a meeting of the internal valuation
committee (comprised of individuals within the Company with market, valuation, accounting, and/or finance experience) that
reviews and approves prices and assumptions used by the pricing services.
The Company, on a quarterly basis:
•
•
•
reviews methodologies for Level 3 securities, any model updates and inputs for Level 3 securities, and
compares such information to management’s own market information and, where applicable, the internal
models,
reviews internally developed analytic packages for all securities that highlight, at a CUSIP level, price
changes from the previous quarter to the current quarter, and evaluates, documents, and resolves any
significant pricing differences with the assistance of the third party pricing source, and
compares prices received from different third party pricing sources for Level 3, and evaluates, documents the
rationale for, and resolves any significant pricing differences for Level 3.
179
As of December 31, 2017, the Company used models to price 93 securities (primarily securities that were purchased or
obtained for loss mitigation or other risk management purposes), which were 11% or $1,265 million of the Company’s fixed-
maturity securities and short-term investments at fair value. Most Level 3 securities were priced with the assistance of an
independent third-party. The pricing is based on a discounted cash flow approach using the third-party’s proprietary pricing
models. The models use inputs such as projected prepayment speeds; severity assumptions; recovery lag assumptions;
estimated default rates (determined on the basis of an analysis of collateral attributes, historical collateral performance,
borrower profiles and other features relevant to the evaluation of collateral credit quality); home price appreciation/depreciation
rates based on macroeconomic forecasts and recent trading activity. The yield used to discount the projected cash flows is
determined by reviewing various attributes of the bond including collateral type, weighted average life, sensitivity to losses,
vintage, and convexity, in conjunction with market data on comparable securities. Significant changes to any of these inputs
could materially change the expected timing of cash flows within these securities which is a significant factor in determining
the fair value of the securities.
Other Invested Assets
As of December 31, 2017 and December 31, 2016, other invested assets include investments carried and measured at
fair value on a recurring basis of $48 million and $52 million, respectively, and include primarily an investment in the global
property catastrophe risk market and an investment in a fund that invests primarily in senior loans and bonds. Fair values for
the majority of these investments are based on their respective net asset value (NAV) per share or equivalent.
Other Assets
Committed Capital Securities
The fair value of committed capital securities (CCS), which is recorded in “other assets” on the consolidated balance
sheets, represents the difference between the present value of remaining expected put option premium payments under AGC’s
CCS (the AGC CCS) and AGM’s Committed Preferred Trust Securities (the AGM CPS) agreements, and the estimated present
value that the Company would hypothetically have to pay currently for a comparable security (see Note 16, Long Term Debt
and Credit Facilities). The AGC CCS and AGM CPS are carried at fair value with changes in fair value recorded in the
consolidated statement of operations. The estimated current cost of the Company’s CCS is based on several factors, including
AGM and AGC CDS spreads, London Interbank Offered Rate (LIBOR) curve projections, the Company's publicly traded debt
and the term the securities are estimated to remain outstanding.
Supplemental Executive Retirement Plans
The Company classifies the fair value measurement of the assets of the Company's various supplemental executive
retirement plans as either Level 1 or Level 2. The fair value of these assets is valued based on the observable published daily
values of the underlying mutual fund included in the aforementioned plans (Level 1) or based upon the NAV of the funds if a
published daily value is not available (Level 2). The NAV's are based on observable information.
Contracts Accounted for as Credit Derivatives
The Company’s credit derivatives consist primarily of insured CDS contracts, and also include interest rate swaps that
fall under derivative accounting standards requiring fair value accounting through the statement of operations. The following is
a description of the fair value methodology applied to the Company's insured CDS that are accounted for as credit derivatives,
which constitute the vast majority of the net credit derivative liability in the consolidated balance sheets. The Company did not
enter into CDS with the intent to trade these contracts and the Company may not unilaterally terminate a CDS contract absent
an event of default or termination event that entitles the Company to terminate such contracts; however, the Company has
mutually agreed with various counterparties to terminate certain CDS transactions. In transactions where the counterparty does
not have the right to terminate, such transactions are generally terminated for an amount that approximates the present value of
future premiums or for a negotiated amount, rather than at fair value.
The terms of the Company’s CDS contracts differ from more standardized credit derivative contracts sold by
companies outside the financial guaranty industry. The non-standard terms generally include the absence of collateral support
agreements or immediate settlement provisions. In addition, the Company employs relatively high attachment points and does
not exit derivatives it sells, except under specific circumstances such as mutual agreements with counterparties. Management
considers the non-standard terms of its credit derivative contracts in determining the fair value of these contracts.
180
Due to the lack of quoted prices and other observable inputs for its instruments or for similar instruments, the
Company determines the fair value of its credit derivative contracts primarily through internally developed, proprietary models
that use both observable and unobservable market data inputs. There is no established market where financial guaranty insured
credit derivatives are actively traded, therefore, management has determined that the exit market for the Company’s credit
derivatives is a hypothetical one based on its entry market. Management has tracked the historical pricing of the Company’s
transactions to establish historical price points in the hypothetical market that are used in the fair value calculation. These
contracts are classified as Level 3 in the fair value hierarchy since there is reliance on at least one unobservable input deemed
significant to the valuation model, most importantly the Company’s estimate of the value of the non-standard terms and
conditions of its credit derivative contracts and how the Company’s own credit spread affects the pricing of its transactions.
The fair value of the Company’s credit derivative contracts represents the difference between the present value of
remaining premiums the Company expects to receive or pay and the estimated present value of premiums that a financial
guarantor of comparable credit-worthiness would hypothetically charge or pay at the reporting date for the same protection.
The fair value of the Company’s credit derivatives depends on a number of factors, including notional amount of the contract,
expected term, credit spreads, changes in interest rates, the credit ratings of referenced entities, the Company’s own credit risk
and remaining contractual cash flows. The expected remaining contractual premium cash flows are the most readily observable
inputs since they are based on the CDS contractual terms. Credit spreads capture the effect of recovery rates and performance
of underlying assets of these contracts, among other factors. Consistent with previous years, market conditions at December 31,
2017 were such that market prices of the Company’s CDS contracts were not available.
Assumptions and Inputs
The various inputs and assumptions that are key to the establishment of the Company’s fair value for CDS contracts
are as follows: the gross spread, the allocation of gross spread among the bank profit, net spread and hedge cost, and the
weighted average life which is based on debt service schedules. The Company obtains gross spreads on its outstanding
contracts from market data sources published by third parties (e.g., dealer spread tables for the collateral similar to assets within
the Company’s transactions), as well as collateral-specific spreads provided by trustees or obtained from market sources. The
bank profit represents the profit the originator, usually an investment bank, realizes for structuring and funding the transaction;
the net spread represents the premiums paid to the Company for the Company’s credit protection provided; and the hedge cost
represents the cost of CDS protection purchased by the originator to hedge its counterparty credit risk exposure to the
Company.
With respect to CDS transactions for which there is an expected claim payment within the next twelve months, the
allocation of gross spread reflects a higher allocation to the cost of credit rather than the bank profit component. In the current
market, it is assumed that a bank would be willing to accept a lower profit on distressed transactions in order to remove these
transactions from its financial statements.
The following spread hierarchy is utilized in determining which source of gross spread to use. Market sources
determine credit spreads by reviewing new issuance pricing for specific asset classes and receiving price quotes from their
trading desks for the specific asset in question. Management validates these quotes by cross-referencing quotes received from
one market source against quotes received from another market source to ensure reasonableness. In addition, the Company
compares the relative change in price quotes received from one quarter to another, with the relative change experienced by
published market indices for a specific asset class. Collateral specific spreads obtained from third-party, independent market
sources are un-published spread quotes from market participants or market traders who are not trustees. Management obtains
this information as the result of direct communication with these sources as part of the valuation process.
•
•
•
•
•
Actual collateral specific credit spreads (if up-to-date and reliable market-based spreads are available).
Transactions priced or closed during a specific quarter within a specific asset class and specific rating. No
transactions closed during the periods presented.
Credit spreads interpolated based upon market indices adjusted to reflect the non-standard terms of the Company's
CDS contracts.
Credit spreads provided by the counterparty of the CDS.
Credit spreads extrapolated based upon transactions of similar asset classes, similar ratings, and similar time to
maturity.
181
Information by Credit Spread Type (1)
As of
December 31, 2017
As of
December 31, 2016
14%
48%
38%
100%
7%
77%
16%
100%
Based on actual collateral specific spreads
Based on market indices
Provided by the CDS counterparty
Total
____________________
(1)
Based on par.
The shift in sources of credit spreads away from market indices was a function of the run-off of collateralized loan
obligations (CLOs) and synthetic CLO exposures during the period which had priced using market indices in the past.
The rates used to discount future expected premium cash flows ranged from 1.72% to 2.55% at December 31, 2017
and 1.00% to 2.55% at December 31, 2016.
The Company interpolates a curve based on the historical relationship between the premium the Company receives
when a credit derivative is closed to the daily closing price of the market index related to the specific asset class and rating of
the transaction. This curve indicates expected credit spreads at each indicative level on the related market index. For
transactions with unique terms or characteristics where no price quotes are available, management extrapolates credit spreads
based on a similar transaction for which the Company has received a spread quote from one of the first three sources within the
Company’s spread hierarchy. This alternative transaction will be within the same asset class, have similar underlying assets,
similar credit ratings, and similar time to maturity. The Company then calculates the percentage of relative spread change
quarter over quarter for the alternative transaction. This percentage change is then applied to the historical credit spread of the
transaction for which no price quote was received in order to calculate the transaction's current spread.
The premium the Company receives is referred to as the “net spread.” The Company’s pricing model takes into
account not only how credit spreads on risks that it assumes affect pricing, but also how the Company’s own credit spread
affects the pricing of its transactions. The Company’s own credit risk is factored into the determination of net spread based on
the impact of changes in the quoted market price for credit protection bought on the Company, as reflected by quoted market
prices on CDS referencing AGC or AGM. For credit spreads on the Company’s name the Company obtains the quoted price of
CDS contracts traded on AGC and AGM from market data sources published by third parties. The cost to acquire CDS
protection referencing AGC or AGM affects the amount of spread on CDS transactions that the Company retains and, hence,
their fair value. As the cost to acquire CDS protection referencing AGC or AGM increases, the amount of premium the
Company retains on a transaction generally decreases.
In the Company’s valuation model, the premium the Company captures is not permitted to go below the minimum rate
that the Company would currently charge to assume similar risks. This assumption can have the effect of mitigating the amount
of unrealized gains that are recognized on certain CDS contracts. Given the current market conditions and the Company’s own
credit spreads, approximately 16% and 19% based on fair value, of the Company's CDS contracts are fair valued using this
minimum premium as of December 31, 2017 and December 31, 2016, respectively. The percentage of transactions that price
using the minimum premiums fluctuates due to changes in AGC's credit spreads. In general when AGC's credit spreads narrow,
the cost to hedge AGC's name declines and more transactions price above previously established floor levels. Meanwhile, when
AGC's credit spreads widen, the cost to hedge AGC's name increases causing more transactions to price at previously
established floor levels. Due to the low volume of CDS contracts remaining in AGM's portfolio, changes in AGM's credit
spreads do not significantly affect the overall percentage of transactions fair valued using the minimum premium. The
Company corroborates the assumptions in its fair value model, including the portion of exposure to AGC and AGM hedged by
its counterparties, with independent third parties each reporting period. The current level of AGC’s and AGM’s own credit
spread has resulted in the bank or transaction originator hedging a significant portion of its exposure to AGC and AGM. This
reduces the amount of contractual cash flows AGC and AGM can capture as premium for selling its protection.
The amount of premium a financial guaranty insurance market participant can demand is inversely related to the cost
of credit protection on the insurance company as measured by market credit spreads assuming all other assumptions remain
constant. This is because the buyers of credit protection typically hedge a portion of their risk to the financial guarantor, due to
the fact that the contractual terms of the Company's contracts typically do not require the posting of collateral by the guarantor.
The extent of the hedge depends on the types of instruments insured and the current market conditions.
182
A credit derivative liability on protection sold is the result of contractual cash inflows on in-force transactions that are
less than what a hypothetical financial guarantor could receive if it sold protection on the same risk as of the reporting date. If
the Company were able to freely exchange these contracts (i.e., assuming its contracts did not contain proscriptions on transfer
and there was a viable exchange market), it would realize a loss representing the difference between the lower contractual
premiums to which it is entitled and the current market premiums for a similar contract. The Company determines the fair value
of its CDS contracts by applying the difference between the current net spread and the contractual net spread for the remaining
duration of each contract to the notional value of its CDS contracts and taking the present value of such amounts discounted at
the corresponding LIBOR over the weighted average remaining life of the contract.
Strengths and Weaknesses of Model
The Company’s credit derivative valuation model, like any financial model, has certain strengths and weaknesses.
The primary strengths of the Company’s CDS modeling techniques are:
•
•
•
The model takes into account the transaction structure and the key drivers of market value.
The model maximizes the use of market-driven inputs whenever they are available.
The model is a consistent approach to valuing positions.
The primary weaknesses of the Company’s CDS modeling techniques are:
•
•
•
•
There is no exit market or any actual exit transactions, therefore, the Company’s exit market is a hypothetical one
based on the Company’s entry market.
There is a very limited market in which to validate the reasonableness of the fair values developed by the
Company’s model.
The markets for the inputs to the model are highly illiquid, which impacts their reliability.
Due to the non-standard terms under which the Company enters into derivative contracts, the fair value of its
credit derivatives may not reflect the same prices observed in an actively traded market of credit derivatives that
do not contain terms and conditions similar to those observed in the financial guaranty market.
Fair Value Option on FG VIEs’ Assets and Liabilities
The Company elected the fair value option for all the FG VIEs’ assets and liabilities and classifies them as Level 3 in
the fair value hierarchy as the lowest level input that is significant to their fair value is unobservable. The prices are generally
determined with the assistance of an independent third-party, based on a discounted cash flow approach. The FG VIEs issued
securities collateralized by first lien and second lien RMBS as well as loans and receivables.
The fair value of the Company’s FG VIE assets is generally sensitive to changes related to estimated prepayment
speeds; estimated default rates (determined on the basis of an analysis of collateral attributes such as: historical collateral
performance, borrower profiles and other features relevant to the evaluation of collateral credit quality); yields implied by
market prices for similar securities; and house price depreciation/appreciation rates based on macroeconomic forecasts.
Significant changes to some of these inputs could materially change the market value of the FG VIE’s assets and the implied
collateral losses within the transaction. In general, the fair value of the FG VIE assets is most sensitive to changes in the
projected collateral losses, where an increase in collateral losses typically leads to a decrease in the fair value of FG VIE assets,
while a decrease in collateral losses typically leads to an increase in the fair value of FG VIE assets. The third-party utilizes an
internal model to determine an appropriate yield at which to discount the cash flows of the security, by factoring in collateral
types, weighted-average lives, and other structural attributes specific to the security being priced. The expected yield is further
calibrated by utilizing algorithms designed to aggregate market color, received by the independent third-party, on comparable
bonds.
The models to price the FG VIEs’ liabilities used, where appropriate, the same inputs used in determining fair value of
FG VIE assets and, for those liabilities insured by the Company, the benefit from the Company's insurance policy guaranteeing
the timely payment of principal and interest, taking into account the Company's own credit risk.
183
Significant changes to any of the inputs described above could materially change the timing of expected losses within
the insured transaction which is a significant factor in determining the implied benefit from the Company’s insurance policy
guaranteeing the timely payment of principal and interest for the tranches of debt issued by the FG VIE that is insured by the
Company. In general, extending the timing of expected loss payments by the Company into the future typically leads to a
decrease in the value of the Company’s insurance and a decrease in the fair value of the Company’s FG VIE liabilities with
recourse, while a shortening of the timing of expected loss payments by the Company typically leads to an increase in the value
of the Company’s insurance and an increase in the fair value of the Company’s FG VIE liabilities with recourse.
Not Carried at Fair Value
Financial Guaranty Insurance Contracts
For financial guaranty insurance contracts that are acquired in a business combination, the Company measures each
contract at fair value on the date of acquisition, and then follows insurance accounting guidance on a recurring basis thereafter.
In addition, the Company discloses the fair value of its outstanding financial guaranty insurance contracts. In both cases, fair
value is based on management’s estimate of what a similarly rated financial guaranty insurance company would demand to
acquire the Company’s in-force book of financial guaranty insurance business. It is based on a variety of factors that may
include pricing assumptions management has observed for portfolio transfers, commutations, and acquisitions that have
occurred in the financial guaranty market, as well as prices observed in the credit derivative market with an adjustment for
illiquidity so that the terms would be similar to a financial guaranty insurance contract, and includes adjustments to the carrying
value of unearned premium reserve for stressed losses, ceding commissions and return on capital. The Company classified this
fair value measurement as Level 3.
Long-Term Debt
The Company’s long-term debt, excluding notes payable, is valued by broker-dealers using third party independent
pricing sources and standard market conventions. The market conventions utilize market quotations, market transactions for the
Company’s comparable instruments, and to a lesser extent, similar instruments in the broader insurance industry. The fair value
measurement was classified as Level 2 in the fair value hierarchy.
The fair value of the notes payable was determined by calculating the present value of the expected cash flows. The
fair value measurement was classified as Level 3 in the fair value hierarchy.
Other Invested Assets
As of December 31, 2016, other invested assets not carried at fair value consisted primarily of an investment in a
guaranteed investment contract, which matured in 2017. The fair value of the guaranteed investment contract approximated its
carrying value due to its short term nature and was classified as Level 2 in the fair value hierarchy.
Other Assets and Other Liabilities
The Company’s other assets and other liabilities consist predominantly of accrued interest, receivables for securities
sold and payables for securities purchased, the carrying values of which approximate fair value.
184
Financial Instruments Carried at Fair Value
Amounts recorded at fair value in the Company’s financial statements are presented in the tables below.
Fair Value Hierarchy of Financial Instruments Carried at Fair Value
As of December 31, 2017
Assets:
Investment portfolio, available-for-sale:
Fixed-maturity securities
Obligations of state and political subdivisions
U.S. government and agencies
Corporate securities
Mortgage-backed securities:
RMBS
Commercial mortgage-backed securities (CMBS)
Asset-backed securities
Foreign government securities
Total fixed-maturity securities
Short-term investments
Other invested assets (1)
Credit derivative assets
FG VIEs’ assets, at fair value
Other assets
Total assets carried at fair value
Liabilities:
Credit derivative liabilities
FG VIEs’ liabilities with recourse, at fair value
FG VIEs’ liabilities without recourse, at fair value
Total liabilities carried at fair value
$
$
$
$
Fair Value
Level 1
Level 2
Level 3
Fair Value Hierarchy
(in millions)
$
5,760
285
2,018
— $
—
—
861
549
896
305
10,674
627
7
2
700
121
12,131
271
627
130
1,028
$
$
$
—
—
—
—
—
464
—
—
—
25
489
$
— $
—
—
— $
5,684
285
1,951
527
549
109
305
9,410
162
0
—
—
36
9,608
$
$
— $
—
—
— $
76
—
67
334
—
787
—
1,264
1
7
2
700
60
2,034
271
627
130
1,028
185
Fair Value Hierarchy of Financial Instruments Carried at Fair Value
As of December 31, 2016
Assets:
Investment portfolio, available-for-sale:
Fixed-maturity securities
Obligations of state and political subdivisions
U.S. government and agencies
Corporate securities
Mortgage-backed securities:
RMBS
CMBS
Asset-backed securities
Foreign government securities
Total fixed-maturity securities
Short-term investments
Other invested assets(1)
Credit derivative assets
FG VIEs’ assets, at fair value
Other assets
Total assets carried at fair value
Liabilities:
Credit derivative liabilities
FG VIEs’ liabilities with recourse, at fair value
FG VIEs’ liabilities without recourse, at fair value
Total liabilities carried at fair value
Fair Value
Level 1
Level 2
Level 3
Fair Value Hierarchy
(in millions)
$
$
$
$
$
5,432
440
1,613
— $
—
—
987
583
945
233
10,233
590
8
13
876
114
11,834
402
807
151
1,360
$
$
$
—
—
—
—
—
319
—
—
—
24
343
$
— $
—
—
— $
5,393
440
1,553
622
583
140
233
8,964
271
0
—
—
28
9,263
$
$
— $
—
—
— $
39
—
60
365
—
805
—
1,269
—
8
13
876
62
2,228
402
807
151
1,360
____________________
(1)
Excluded from the table above are investments of $45 million and $48 million as of December 31, 2017 and
December 31, 2016, respectively, measured using NAV per share. Includes Level 3 mortgage loans that are recorded at
fair value on a non-recurring basis.
186
Changes in Level 3 Fair Value Measurements
The tables below present a roll forward of the Company’s Level 3 financial instruments carried at fair value on a
recurring basis during the years ended December 31, 2017 and 2016.
Fair Value Level 3 Rollforward
Recurring Basis
Year Ended December 31, 2017
Fixed-Maturity Securities
Obligations
of State and
Political
Subdivisions
Corporate
Securities
RMBS
Asset-
Backed
Securities
FG VIEs’
Assets at
Fair
Value
(in millions)
Other
(7)
Credit
Derivative
Asset
(Liability),
net (5)
FG VIEs'
Liabilities
with
Recourse,
at Fair
Value
FG VIEs'
Liabilities
without
Recourse,
at Fair
Value
Fair value as of
December 31, 2016
$
MBIA UK
Acquisition
Total pretax realized
and unrealized gains/
(losses) recorded in:
(1)
$
39
—
60
—
$
365
$
805
$
876
$
—
7
—
65
—
$
(389)
$
(807)
$
(151)
—
—
—
Net income (loss)
(13) (2)
6 (2)
27 (2)
113 (2)
37 (3)
(2) (4)
107 (6)
(16) (3)
(6) (3)
Other
comprehensive
income (loss)
Purchases
Settlements
FG VIE
consolidations
FG VIE
deconsolidations
Transfers into Level 3
Fair value as of
December 31, 2017
$
Change in unrealized
gains/(losses) related
to financial
instruments held as
of December 31, 2017 $
(2)
—
(2)
—
—
54
76
$
1
—
—
—
—
—
67
23
42
(123)
—
—
—
56
173
(367)
—
—
—
—
—
(147)
39
(105)
—
$
334
$
787
$
700
$
0
1
—
—
—
—
64
—
—
13
—
—
—
—
—
145
0
51
—
—
—
12
(39)
54
—
$
(269)
$
(627)
$
(130)
(2)
$
1
$
23
$
123
$
59 (3) $
(2) (4) $
96 (6) $
(11) (3) $
(6) (3)
187
Fair Value Level 3 Rollforward
Recurring Basis
Year Ended December 31, 2016
Fixed-Maturity Securities
Obligations
of State and
Political
Subdivisions
Corporate
Securities
RMBS
Asset-
Backed
Securities
Short-Term
Investments
FG VIEs’
Assets at
Fair
Value
Other
(8)
(in millions)
Credit
Derivative
Asset
(Liability),
net (5)
FG VIEs'
Liabilities
with
Recourse,
at Fair
Value
FG VIEs'
Liabilities
without
Recourse,
at Fair
Value
Fair value as of
December 31, 2015
$
CIFG Acquisition
Total pretax realized
and unrealized gains/
(losses) recorded in:
(1)
8
1
$
71
—
$ 348
$
657
$
20
36
60
0
$ 1,261
$
—
65
—
$
(365)
$ (1,225)
$ (124)
(67)
—
—
Net income (loss)
2 (2)
(16) (2)
10 (2)
51 (2)
0 (2)
167 (3)
0 (4)
74 (6)
(125) (3)
(18) (3)
Other
comprehensive
income (loss)
Purchases
Settlements
FG VIE
consolidations
FG VIE
deconsolidations
Transfers into Level 3
Fair value as of
December 31, 2016
Change in unrealized
gains/(losses) related
to financial
instruments held as
of December 31,
2016
$
$
(4)
33
(1)
—
—
—
39
$
5
—
—
—
—
—
60
(13)
70
(70)
—
0
—
116
76
(139)
—
—
8
$ 365
$
805
$
0
—
(60)
—
—
—
—
—
—
(629)
97
(20)
—
0
—
—
—
—
—
—
—
(31)
—
—
—
—
—
597
—
—
14
(54)
(43)
—
—
20
—
$
876
$
65
$
(389)
$ (807)
$ (151)
(4)
$
5
$ (15)
$
116
$
—
$
93 (3) $
0 (4) $
(33) (6) $
(12) (3) $
(17) (3)
____________________
(1)
Realized and unrealized gains (losses) from changes in values of Level 3 financial instruments represent gains (losses)
from changes in values of those financial instruments only for the periods in which the instruments were classified as
Level 3.
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Included in net realized investment gains (losses) and net investment income.
Included in fair value gains (losses) on FG VIEs.
Recorded in fair value gains (losses) on CCS, net realized investment gains (losses), net investment income and other
income.
Represents net position of credit derivatives. The consolidated balance sheet presents gross assets and liabilities based
on net counterparty exposure.
Reported in net change in fair value of credit derivatives and other income.
Includes short-term investments, CCS and other invested assets.
Includes CCS and other invested assets.
188
Level 3 Fair Value Disclosures
Quantitative Information About Level 3 Fair Value Inputs
At December 31, 2017
Fair Value at
December 31, 2017
(in millions)
Significant Unobservable
Inputs
Range
Weighted
Average as a
Percentage of
Current Par
Outstanding
Financial Instrument Description(1)
Assets (2):
Fixed-maturity securities:
4.5% - 40.8%
12.5%
Obligations of state and political
subdivisions
$
Corporate securities
RMBS
Asset-backed securities:
Triple-X life insurance transactions
CLO/TruPS
Others
FG VIEs’ assets, at fair value
Other assets
Liabilities:
76
67
334
613
116
58
700
Yield
Yield
CPR
CDR
Loss severity
Yield
Yield
Yield
Yield
CPR
CDR
Loss severity
Yield
60
Implied Yield
Term (years)
Credit derivative liabilities, net
(269) Year 1 loss estimates
Hedge cost (in bps)
Bank profit (in bps)
Internal floor (in bps)
22.5%
1.3% - 17.4%
1.5% - 9.2%
40.0% - 125.0%
4.0% - 7.5%
6.2% - 6.4%
2.6% - 4.6%
10.7%
3.0% - 14.9%
1.3% - 21.7%
60.0% - 100.0%
3.7% - 10.0%
5.2% - 5.9%
10 years
0.0% - 42.0%
17.6 - 122.6
6.0 - 852.5
8.0 - 30.0
FG VIEs’ liabilities, at fair value
(757)
Internal credit rating
AAA - CCC
CPR
CDR
Loss severity
Yield
3.0% - 14.9%
1.3% - 21.7%
60.0% - 100.0%
3.4% - 10.0%
____________________
(1)
Discounted cash flow is used as valuation technique for all financial instruments.
(2)
Excludes short-term investments with fair value of $1 million and several investments recorded in other invested
assets with fair value of $7 million.
189
6.4%
5.9%
82.5%
5.6%
6.3%
3.3%
9.5%
5.4%
79.6%
6.2%
5.5%
3.3%
48.1
107.5
21.8
AA-
9.5%
5.4%
79.6%
4.9%
Quantitative Information About Level 3 Fair Value Inputs
At December 31, 2016
Fair Value at
December 31, 2016
(in millions)
Significant Unobservable
Inputs
Range
Weighted
Average as a
Percentage of
Current Par
Outstanding
Financial Instrument Description(1)
Assets (2):
Fixed-maturity securities :
4.3% - 22.8%
11.1%
20.1%
1.6% - 17.0%
1.5% - 10.1%
30.0% - 100.0%
3.3% - 9.7%
4.6%
6.7%
77.8%
6.0%
5.7% - 6.0%
5.8%
10.0%
1.5% - 4.8%
3.1%
7.2%
3.5% - 12.0%
2.5% - 21.6%
35.0% - 100.0%
2.9% - 20.0%
4.5% - 5.1%
10 years
7.8%
5.7%
78.6%
6.5%
4.8%
1.3%
24.5
61.8
13.9
AA+
7.8%
5.7%
78.6%
5.0%
Obligations of state and political
subdivisions
$
Corporate securities
RMBS
Asset-backed securities:
Triple-X life insurance transactions
Collateralized debt obligations
(CDO)
CLO/TruPS
Others
FG VIEs’ assets, at fair value
Other assets
Liabilities:
39
60
365
425
332
19
29
876
Yield
Yield
CPR
CDR
Loss severity
Yield
Yield
Yield
Yield
Yield
CPR
CDR
Loss severity
Yield
62
Implied Yield
Term (years)
Credit derivative liabilities, net
(389) Year 1 loss estimates
0.0% - 38.0%
FG VIEs’ liabilities, at fair value
(958)
Hedge cost (in bps)
Bank profit (in bps)
Internal floor (in bps)
7.2 - 118.1
3.8 - 825.0
7.0 - 100.0
Internal credit rating
AAA - CCC
CPR
CDR
Loss severity
Yield
3.5% - 12.0%
2.5% - 21.6%
35.0% - 100.0%
2.4% - 20.0%
____________________
(1)
Discounted cash flow is used as valuation technique for all financial instruments.
(2)
Excludes several investments recorded in other invested assets with fair value of $8 million.
190
The carrying amount and estimated fair value of the Company’s financial instruments are presented in the following
table.
Fair Value of Financial Instruments
Assets:
Fixed-maturity securities
Short-term investments
Other invested assets
Credit derivative assets
FG VIEs’ assets, at fair value
Other assets
Liabilities:
Financial guaranty insurance contracts (1)
Long-term debt
Credit derivative liabilities
FG VIEs’ liabilities with recourse, at fair value
FG VIEs’ liabilities without recourse, at fair value
Other liabilities
As of
December 31, 2017
As of
December 31, 2016
Carrying
Amount
Estimated
Fair Value
Carrying
Amount
Estimated
Fair Value
(in millions)
$
10,674
$
10,674
$
10,233
$
10,233
627
60
2
700
218
3,330
1,292
271
627
130
55
627
61
2
700
218
7,104
1,627
271
627
130
55
590
146
13
876
205
3,483
1,306
402
807
151
12
590
147
13
876
205
8,738
1,546
402
807
151
12
____________________
(1)
Carrying amount includes the assets and liabilities related to financial guaranty insurance contract premiums, losses,
and salvage and subrogation and other recoverables net of reinsurance.
8.
Contracts Accounted for as Credit Derivatives
The Company has a portfolio of financial guaranty contracts that meet the definition of a derivative in accordance with
GAAP (primarily CDS). The credit derivative portfolio also includes interest rate swaps.
Credit derivative transactions are governed by ISDA documentation and have different characteristics from financial
guaranty insurance contracts. For example, the Company’s control rights with respect to a reference obligation under a credit
derivative may be more limited than when the Company issues a financial guaranty insurance contract. In addition, there are
more circumstances under which the Company may be obligated to make payments. Similar to a financial guaranty insurance
contract, the Company would be obligated to pay if the obligor failed to make a scheduled payment of principal or interest in
full. However, the Company may also be required to pay if the obligor becomes bankrupt or if the reference obligation were
restructured if, after negotiation, those credit events are specified in the documentation for the credit derivative transactions.
Furthermore, the Company may be required to make a payment due to an event that is unrelated to the performance of the
obligation referenced in the credit derivative. If events of default or termination events specified in the credit derivative
documentation were to occur, the non-defaulting or the non-affected party, which may be either the Company or the
counterparty, depending upon the circumstances, may decide to terminate a credit derivative prior to maturity. In that case, the
Company may be required to make a termination payment to its swap counterparty upon such termination. Absent such an
event of default or termination event, the Company may not unilaterally terminate a CDS contract; however, the Company on
occasion has mutually agreed with various counterparties to terminate certain CDS transactions.
Accounting Policy
Credit derivatives are recorded at fair value. Changes in fair value are recorded in “net change in fair value of credit
derivatives” on the consolidated statement of operations. Realized gains (losses) and other settlements on credit derivatives
include credit derivative premiums received and receivable for credit protection the Company has sold under its insured CDS
contracts, premiums paid and payable for credit protection the Company has purchased, claims paid and payable and received
191
and receivable related to insured credit events under these contracts, ceding commission expense or income and realized gains
or losses related to their early termination. Fair value of credit derivatives is reflected as either net assets or net liabilities
determined on a contract by contract basis in the Company's consolidated balance sheets. See Note 7, Fair Value Measurement,
for a discussion on the fair value methodology for credit derivatives.
Credit Derivative Net Par Outstanding by Sector
The estimated remaining weighted average life of credit derivatives was 11.7 years at December 31, 2017 and
5.3 years at December 31, 2016. The increase in the weighted average life of the credit derivative portfolio was primarily
attributable to the run-off of short-dated pooled corporate obligations. The components of the Company’s credit derivative net
par outstanding are presented below.
Asset Type
Pooled corporate obligations:
CLO /collateralized bond obligations
Synthetic investment grade pooled corporate
TruPS CDOs
Total pooled corporate obligations
U.S. RMBS
Pooled infrastructure
Infrastructure finance
Other(1)
Total
Credit Derivatives
As of December 31, 2017
As of December 31, 2016
Net Par
Outstanding
Weighted Average
Credit Rating
Net Par
Outstanding
Weighted Average
Credit Rating
(dollars in millions)
$
$
—
—
878
878
916
1,561
572
2,280
6,207
--
--
A
A
AA
AAA
A
A-
AA-
$
2,022
7,224
1,179
10,425
1,142
1,513
1,021
2,896
$
16,997
AAA
AAA
BBB+
AAA
AA-
AAA
BBB+
A
AA+
____________________
(1)
This comprises numerous transactions across various asset classes, such as commercial receivables, international
RMBS, regulated utilities and consumer receivables.
The underlying collateral in TruPS CDOs consists primarily of subordinated debt instruments such as TruPS issued by
bank holding companies and similar instruments issued by insurance companies, real estate investment trusts and other real
estate related issuers. Due to the fact that the debt is subordinated, TruPS CDOs were typically structured with higher levels of
embedded credit enhancement, which allowed the Company to mitigate the risks associated with TruPS CDOs.
Distribution of Credit Derivative Net Par Outstanding by Internal Rating
Ratings
AAA
AA
A
BBB
BIG
Credit derivative net par outstanding
As of December 31, 2017
As of December 31, 2016
Net Par
Outstanding
% of Total
Net Par
Outstanding
% of Total
$
$
2,144
1,170
1,517
1,038
338
6,207
(dollars in millions)
34.6% $
18.8
24.5
16.7
5.4
100.0% $
10,967
2,167
1,499
1,391
973
16,997
64.6%
12.7
8.8
8.2
5.7
100.0%
192
Fair Value of Credit Derivatives
Net Change in Fair Value of Credit Derivative Gain (Loss)
Realized gains on credit derivatives
$
17
$
56
$
Year Ended December 31,
2017
2016
(in millions)
2015
Net credit derivative losses (paid and payable) recovered and recoverable
and other settlements
Realized gains (losses) and other settlements
Net unrealized gains (losses):
Pooled corporate obligations
U.S. RMBS
Pooled infrastructure
Infrastructure finance
Other
Net unrealized gains (losses)
Net change in fair value of credit derivatives
$
Terminations and Settlements
of Direct Credit Derivative Contracts
(27)
(10)
35
23
5
4
54
121
111
$
(27)
29
(16)
22
17
4
42
69
98
$
63
(81)
(18)
147
396
17
0
186
746
728
Net par of terminated credit derivative contracts
$
331
$
3,811
$
Realized gains on credit derivatives
Net credit derivative losses (paid and payable) recovered and recoverable
and other settlements
Net unrealized gains (losses) on credit derivatives
0
(15)
26
20
—
103
2,777
13
(116)
465
Year Ended December 31,
2017
2016
(in millions)
2015
During 2017, unrealized fair value gains were generated primarily as a result of CDS terminations, run-off of net par
outstanding, and price improvements on the underlying collateral of the Company’s CDS. The termination of several CDS
transactions in the pooled corporate CLO, U.S. RMBS and Other sectors was the primary driver of the unrealized fair value
gains. The cost to buy protection in AGC’s and AGM’s name, specifically the five-year CDS spread, did not change materially
during the period, and therefore did not have a material impact on the Company’s unrealized fair value gains and losses on
CDS.
During 2016, unrealized fair value gains were generated primarily as a result of CDS terminations in the U.S. RMBS
and other sectors, run-off of CDS par and price improvements on the underlying collateral of the Company’s CDS. The
majority of the CDS transactions that were terminated were as a result of settlement agreements with several CDS
counterparties. The unrealized fair value gains were partially offset by unrealized losses resulting from wider implied net
spreads across all sectors. The wider implied net spreads were primarily a result of the decreased cost to buy protection in
AGC’s and AGM’s name, as the market cost of AGC’s and AGM’s credit protection decreased significantly 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 and AGM, which management refers to as the CDS spread on AGC and AGM, decreased the implied spreads that the
Company would expect to receive on these transactions increased.
193
During 2015, unrealized fair value gains were generated primarily as a result of CDS terminations. The Company
reached a settlement agreement with one CDS counterparty to terminate five Alt-A first lien CDS transactions resulting in
unrealized fair value gains of $213 million and was the primary driver of the unrealized fair value gains in the U.S. RMBS
sector. The Company also terminated a CMBS transaction, a Triple-X life insurance securitization transaction, and a distressed
middle market CLO securitization during the period and recognized unrealized fair value gains of $41 million, $99 million and
$99 million, respectively. These were the primary drivers of the unrealized fair value gains in the CMBS, Other, and pooled
corporate CLO sectors, respectively, during the period. The remainder of the fair value gains for the period were a result of
tighter implied net spreads across all sectors. The tighter implied net spreads were primarily a result of the increased cost to buy
protection in AGC’s and AGM’s name, particularly for the one year CDS spread. For those CDS transactions that were pricing
at or above their floor levels, when the cost of purchasing CDS protection on AGC and AGM increased, the implied spreads
that the Company would expect to receive on these transactions decreased. Finally, during 2015, there was a refinement in
methodology to address an instance in a U.S. RMBS transaction where the Company now expects recoveries. This refinement
resulted in approximately $49 million in fair value gains in 2015.
The impact of changes in credit spreads will vary based upon the volume, tenor, interest rates, and other market
conditions at the time these fair values are determined. In addition, since each transaction has unique collateral and structural
terms, the underlying change in fair value of each transaction may vary considerably. The fair value of credit derivative
contracts also reflects the change in the Company’s own credit cost based on the price to purchase credit protection on AGC
and AGM. The Company determines its own credit risk based on quoted CDS prices traded on the Company at each balance
sheet date.
CDS Spread on AGC and AGM
Quoted price of CDS contract (in basis points)
Five-year CDS spread:
AGC
AGM
One-year CDS spread
AGC
AGM
As of
December 31,
2017
As of
December 31,
2016
As of
December 31,
2015
163
145
70
28
158
158
35
29
376
366
139
131
Fair Value of Credit Derivatives Assets (Liabilities)
and Effect of AGC and AGM
Credit Spreads
Fair value of credit derivatives before effect of AGC and AGM credit spreads
Plus: Effect of AGC and AGM credit spreads
Net fair value of credit derivatives
As of
December 31, 2017
As of
December 31, 2016
$
$
(in millions)
(555) $
286
(269) $
(811)
422
(389)
The fair value of CDS contracts at December 31, 2017, before considering the implications of AGC’s and AGM’s
credit spreads, is a direct result of continued wide credit spreads in the fixed income security markets and ratings downgrades.
The asset classes that remain most affected are TruPS, pooled infrastructure and infrastructure finance securities, as well as
2005-2007 vintages of Alt-A, Option ARM and subprime RMBS transactions. The mark to market benefit between
December 31, 2017 and December 31, 2016, resulted primarily from several CDS terminations, run-off of net par outstanding,
and a narrowing of credit spreads related to the Company's TruPS and U.S. RMBS obligations.
194
Management believes that the trading level of AGC’s and AGM’s credit spreads over the past several years has been
due to the correlation between AGC’s and AGM’s risk profile and the current risk profile of the broader financial markets.
Offsetting the benefit attributable to AGC’s and AGM’s credit spread were higher credit spreads in the fixed income security
markets. The higher credit spreads in the fixed income security market are due to the lack of liquidity in the TruPS CDO, and
pooled infrastructure markets as well as continuing market concerns over the 2005-2007 vintages of RMBS.
The following table presents the fair value and the present value of expected claim payments or recoveries (i.e., net
expected loss to be paid as described in Note 5) for contracts accounted for as derivatives.
Net Fair Value and Expected Losses
of Credit Derivatives
Fair value of credit derivative asset (liability), net
Expected loss to be (paid) recovered
Collateral Posting for Certain Credit Derivative Contracts
As of
December 31, 2017
As of
December 31, 2016
$
(in millions)
(269) $
14
(389)
(10)
The transaction documentation for $497 million of the CDS insured by AGC requires AGC to post collateral, in some
cases subject to a cap, to secure its obligation to make payments under such contracts. Eligible collateral is generally cash or
U.S. government or agency securities; eligible collateral other than cash is valued at a discount to the face amount. The table
below summarizes AGC’s CDS collateral posting requirements as of December 31, 2017 and December 31, 2016.
AGC Insured CDS Collateral Posting Requirements
Gross par of CDS with collateral posting requirement
Maximum posting requirement
Collateral posted
As of
December 31, 2017
As of
December 31, 2016
$
$
(in millions)
497
464
18
690
674
116
The reduction in the collateral posting requirement is primarily attributable to the termination in February 2017 by the
Company of its remaining CDS contracts with one of its counterparties as to which it had a posting requirement; the CDS
contracts related to approximately $183 million in gross par and $73 million of collateral posted as of December 31, 2016.
195
Sensitivity to Changes in Credit Spread
The following table summarizes the estimated change in fair values on the net balance of the Company’s credit
derivative positions assuming immediate parallel shifts in credit spreads on AGC and AGM and on the risks that they both
assume.
Effect of Changes in Credit Spread
As of December 31, 2017
Credit Spreads(1)
100% widening in spreads
50% widening in spreads
25% widening in spreads
10% widening in spreads
Base Scenario
10% narrowing in spreads
25% narrowing in spreads
50% narrowing in spreads
$
Estimated Net
Fair Value
(Pre-Tax)
Estimated Change
in Gain/(Loss)
(Pre-Tax)
(in millions)
(501) $
(385)
(327)
(292)
(269)
(250)
(222)
(174)
(232)
(116)
(58)
(23)
—
19
47
95
____________________
(1)
Includes the effects of spreads on both the underlying asset classes and the Company’s own credit spread.
9.
Consolidated Variable Interest Entities
Consolidated FG VIEs
The Company provides financial guaranties with respect to debt obligations of special purpose entities, including
VIEs. Assured Guaranty does not act as the servicer or collateral manager for any VIE obligations insured by its companies.
The transaction structure generally provides certain financial protections to the Company. This financial protection can take
several forms, the most common of which are overcollateralization, first loss protection (or subordination) and excess spread.
In the case of overcollateralization (i.e., the principal amount of the securitized assets exceeds the principal amount of the
structured finance obligations guaranteed by the Company), the structure allows defaults of the securitized assets before a
default is experienced on the structured finance obligation guaranteed by the Company. In the case of first loss, the financial
guaranty insurance policy only covers a senior layer of losses experienced by multiple obligations issued by special purpose
entities, including VIEs. The first loss exposure with respect to the assets is either retained by the seller or sold off in the form
of equity or mezzanine debt to other investors. In the case of excess spread, the financial assets contributed to special purpose
entities, including VIEs, generate interest income that are in excess of the interest payments on the debt issued by the special
purpose entity. Such excess spread is typically distributed through the transaction’s cash flow waterfall and may be used to
create additional credit enhancement, applied to redeem debt issued by the special purpose entities, including VIEs (thereby,
creating additional overcollateralization), or distributed to equity or other investors in the transaction.
Assured Guaranty is not primarily liable for the debt obligations issued by the VIEs it insures 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 subsidiaries’ creditors do not have any
rights with regard to the collateral supporting the debt issued by the FG VIEs. Proceeds from sales, maturities, prepayments
and interest from such underlying collateral may only be used to pay debt service on VIE liabilities. Net fair value gains and
losses on FG VIEs are expected to reverse to zero at maturity of the VIE debt, except for net premiums received and net claims
paid by Assured Guaranty under the financial guaranty insurance contract. The Company’s estimate of expected loss to be paid
for FG VIEs is included in Note 5, Expected Loss to be Paid.
196
Accounting Policy
The Company evaluates whether it is the primary beneficiary of its VIEs. If the Company concludes that it is the
primary beneficiary, it is required to consolidate the entire VIE in the Company's financial statements and eliminate the effects
of the financial guaranty insurance contracts issued by AGM and AGC on the consolidated FG VIEs debt obligations.
The primary beneficiary of a VIE is the enterprise that has both 1) the power to direct the activities of a VIE that most
significantly impact the entity's economic performance; and 2) the obligation to absorb losses of the entity that could
potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the
VIE.
As part of the terms of its financial guaranty contracts, the Company, under its insurance contract, obtains certain
protective rights with respect to the VIE that give the Company additional controls over a VIE. These protective rights are
triggered by the occurrence of certain events, such as failure to be in compliance with a covenant due to poor deal performance
or a deterioration in a servicer or collateral manager's financial condition. At deal inception, the Company typically is not
deemed to control a VIE; however, once a trigger event occurs, the Company's control of the VIE typically increases. The
Company continuously evaluates its power to direct the activities that most significantly impact the economic performance of
VIEs that have debt obligations insured by the Company and, accordingly, where the Company is obligated to absorb VIE
losses or receive benefits that could potentially be significant to the VIE. The Company is deemed to be the control party for
certain VIEs under GAAP, typically when its protective rights give it the power to both terminate and replace the deal servicer,
which are characteristics specific to the Company's financial guaranty contracts. If the protective rights that could make the
Company the control party have not been triggered, then the VIE is not consolidated. If the Company is deemed no longer to
have those protective rights, the VIE is deconsolidated.
The FG VIEs' liabilities that are insured by the Company are considered to be with recourse, because the Company
guarantees the payment of principal and interest regardless of the performance of the related FG VIEs' assets. FG VIEs'
liabilities that are not insured by the Company are considered to be without recourse, because the payment of principal and
interest of these liabilities is wholly dependent on the performance of the FG VIEs' assets.
The Company has limited contractual rights to obtain the financial records of its consolidated FG VIEs. The FG VIEs
do not prepare separate GAAP financial statements; therefore, the Company compiles GAAP financial information for them
based on trustee reports prepared by and received from third parties. Such trustee reports are not available to the Company until
approximately 30 days after the end of any given period. The time required to perform adequate reconciliations and analyses of
the information in these trustee reports results in a one quarter lag in reporting the FG VIEs' activities. The Company records
the fair value of FG VIE assets and liabilities based on modeled prices. The Company updates the model assumptions each
reporting period for the most recent available information, which incorporates the impact of material events that may have
occurred since the quarter lag date. The net change in the fair value of consolidated FG VIE assets and liabilities is recorded in
"fair value gains (losses) on FG VIEs" in the consolidated statements of operations. Interest income and interest expense are
derived from the trustee reports and also included in “fair value gains (losses) on FG VIEs.” The Company has elected the fair
value option for assets and liabilities classified as FG VIEs' assets and liabilities because the carrying amount transition method
was not practical.
The cash flows generated by the FG VIE assets are classified as cash flows from investing activities. Paydowns of FG
liabilities are supported by the cash flows generated by FG VIE assets, and for liabilities with recourse, possibly claim
payments made by AGM or AGC under its financial guaranty insurance contracts. Paydowns of FG liabilities both with and
without recourse are classified as cash flows used in financing activities by the Company. Interest income, interest expense and
other expenses of the FG VIE assets and liabilities are classified as operating cash flows. Claim payments made by AGC and
AGM under the financial guaranty contracts issued to the FG VIEs are eliminated upon consolidation and therefore such claim
payments are treated as paydowns of FG VIE liabilities as a financing activity as opposed to an operating activity of AGM and
AGC.
197
Consolidated FG VIEs
Number of FG VIEs Consolidated
Beginning of the period, December 31
Radian Asset Acquisition
Consolidated (1)
Deconsolidated (1)
Matured
End of the period, December 31
Year Ended December 31,
2017
2016
2015
32
—
2
(2)
—
32
34
—
1
(2)
(1)
32
32
4
1
(1)
(2)
34
____________________
(1)
Net loss on consolidation and deconsolidation was de minimis in 2017 and 2016. Net loss on consolidation was $26
million in 2015 and was recorded in "fair value gains (losses) on FG VIEs" in the consolidated statement of
operations.
The total unpaid principal balance for the FG VIEs’ assets that were over 90 days or more past due was approximately
$99 million at December 31, 2017 and $137 million at December 31, 2016. The aggregate unpaid principal of the FG VIEs’
assets was approximately $361 million greater than the aggregate fair value at December 31, 2017. The aggregate unpaid
principal of the FG VIEs’ assets was approximately $432 million greater than the aggregate fair value at December 31, 2016.
The change in the instrument-specific credit risk of the FG VIEs’ assets held as of December 31, 2017 that was
recorded in the consolidated statements of operations for 2017 were gains of $35 million. The change in the instrument-specific
credit risk of the FG VIEs’ assets held as of December 31, 2016 that was recorded in the consolidated statements of operations
for 2016 were gains of $55 million. The change in the instrument-specific credit risk of the FG VIEs’ assets for 2015 were
gains of $90 million. To calculate the instrument specific credit risk, the changes in the fair value of the FG VIE assets are
allocated between changes that are due to the instrument specific credit risk and changes due to other factors, including interest
rates. The instrument specific credit risk amount is determined by using expected contractual cash flows versus current
expected cash flows discounted at original contractual rate. The net present value is calculated by discounting the expected cash
flows of the underlying security, at the relevant effective interest rate.
The unpaid principal for FG VIE liabilities with recourse, which represent obligations insured by AGC or AGM, was
$674 million and $871 million as of December 31, 2017 and December 31, 2016, respectively. FG VIE liabilities with recourse
will mature at various dates ranging from 2025 to 2038. The aggregate unpaid principal balance of the FG VIE liabilities with
and without recourse was approximately $73 million greater than the aggregate fair value of the FG VIEs’ liabilities as of
December 31, 2017. The aggregate unpaid principal balance was approximately $109 million greater than the aggregate fair
value of the FG VIEs’ liabilities as of December 31, 2016.
The table below shows the carrying value of the consolidated FG VIEs’ assets and liabilities in the consolidated
financial statements, segregated by the types of assets that collateralize their respective debt obligations for FG VIE liabilities
with recourse.
198
Consolidated FG VIEs
By Type of Collateral
As of December 31, 2017
As of December 31, 2016
Assets
Liabilities
Assets
Liabilities
$
$
362
144
64
570
130
700
$
$
(in millions)
385
177
65
627
130
757
$
$
473
178
74
725
151
876
$
$
509
223
75
807
151
958
With recourse:
U.S. RMBS first lien
U.S. RMBS second lien
Manufactured housing
Total with recourse
Without recourse
Total
The consolidation of FG VIEs affects net income and shareholders' equity due to (i) changes in fair value gains
(losses) on FG VIE assets and liabilities, (ii) the elimination of premiums and losses related to the AGC and AGM FG VIE
liabilities with recourse and (iii) the elimination of investment balances related to the Company’s purchase of AGC and AGM
insured FG VIE debt. Upon consolidation of a FG VIE, the related insurance and, if applicable, the related investment balances,
are considered intercompany transactions and therefore eliminated. Such eliminations are included in the table below to present
the full effect of consolidating FG VIEs.
Effect of Consolidating FG VIEs on Net Income (Loss),
Cash Flows From Operating Activities and Shareholders’ Equity
Net earned premiums
Net investment income
Net realized investment gains (losses)
Fair value gains (losses) on FG VIEs
Bargain purchase gain
Loss and LAE
Effect on income before tax
Less: tax provision (benefit)
Effect on net income (loss)
Effect on cash flows from operating activities
Effect on shareholders’ equity (decrease) increase
$
$
$
Year Ended December 31,
2017
2016
(in millions)
2015
(15) $
(5)
0
30
—
7
17
6
11
$
(16) $
(10)
1
38
—
7
20
7
13
$
19
$
24
$
(21)
(32)
10
38
2
28
25
8
17
43
As of
December 31, 2017
As of
December 31, 2016
$
(in millions)
2
$
(9)
Fair value gains (losses) on FG VIEs represent the net change in fair value on the consolidated FG VIEs’ assets and
liabilities. In 2017, the Company recorded a pre-tax net fair value gain on consolidated FG VIEs of $30 million. The primary
driver of the 2017 gain in fair value of FG VIE assets and liabilities is price appreciation on the FG VIE assets resulting from
improvement in the underlying collateral.
199
In 2016, the Company recorded a pre-tax net fair value gain on consolidated FG VIEs of $38 million. The primary
driver of the 2016 gain in fair value of FG VIE assets and liabilities was net mark-to-market gains due to price appreciation
resulting from improvements in the underlying collateral of HELOC RMBS assets of the FG VIEs.
In 2015, the Company recorded a pre-tax net fair value gain on consolidated FG VIEs of $38 million which was
primarily driven by price appreciation on the Company's FG VIE assets during the year that resulted from improvements in the
underlying collateral, as well as large principal paydowns made on the Company's FG VIEs.
Other Consolidated VIEs
In certain instances where the Company consolidates a VIE that was established as part of a loss mitigation negotiated
settlement agreement that results in the termination of the original insured financial guaranty insurance or credit derivative
contract the Company classifies the assets and liabilities of those VIEs in the line items that most accurately reflect the nature
of the items, as opposed to within the FG VIE assets and FG VIE liabilities.
Non-Consolidated VIEs
As of December 31, 2017 and December 31, 2016, the Company had financial guaranty contracts outstanding for
approximately 510 and 600 VIEs, respectively, that it did not consolidate based on the Company’s analyses which indicate that
it is not the primary beneficiary of any other VIEs. The Company’s exposure provided through its financial guaranties with
respect to debt obligations of special purpose entities is included within net par outstanding in Note 4, Outstanding Exposure.
10.
Investments and Cash
Accounting Policy
The vast majority of the Company's investment portfolio is composed of fixed-maturity and short-term investments,
classified as available-for-sale at the time of purchase (approximately 99.2% based on fair value as of December 31, 2017), and
therefore carried at fair value. Changes in fair value for other-than-temporarily-impaired (OTTI) securities are bifurcated
between credit losses and non-credit changes in fair value. The credit loss on OTTI securities is recorded in the statement of
operations and the non-credit component of the change in fair value of securities, whether OTTI or not, is recorded in OCI. For
securities in an unrealized loss position where the Company has the intent to sell or it is more-likely-than-not that it will be
required to sell the security before recovery, the entire impairment loss (i.e., the difference between the security's fair value and
its amortized cost) is recorded in the consolidated statements of operations.
Credit losses reduce the amortized cost of impaired securities. The amortized cost basis is adjusted for accretion and
amortization (using the effective interest method) with a corresponding entry recorded in net investment income.
Realized gains and losses on sales of investments are determined using the specific identification method. Realized
loss includes amounts recorded for other-than-temporary impairments on debt securities and the declines in fair value of
securities for which the Company has the intent to sell the security or inability to hold until recovery of amortized cost.
For mortgage‑backed securities, and any other holdings for which there is prepayment risk, prepayment assumptions
are evaluated and revised as necessary. Any necessary adjustments due to changes in effective yields and maturities are
recognized in net investment income using the retrospective method.
Loss mitigation securities are generally purchased at a discount and are accounted for based on their underlying
investment type, excluding the effects of the Company’s insurance. Interest income on loss mitigation securities is recognized
on a level yield basis over the remaining life of the security.
Short-term investments, which are those investments with a maturity of less than one year at time of purchase, are
carried at fair value and include amounts deposited in money market funds.
200
Other invested assets, as of December 31, 2017, primarily include an investment in the limited partnership interest of a
fund that invests in the equity of private equity managers and a minority interest in an independent investment advisory firm
specializing in separately managed accounts, both of which are accounted for under the equity method, and preferred stocks,
which are carried at fair value with changes in unrealized gains and losses recorded in OCI.
Cash consists of cash on hand and demand deposits. As a result of the lag in reporting FG VIEs, cash and short-term
investments do not reflect cash outflow to the holders of the debt issued by the FG VIEs for claim payments made by the
Company's insurance subsidiaries to the consolidated FG VIEs until the subsequent reporting period.
Assessment for Other-Than Temporary Impairments
The Company has a formal review process to determine other-than-temporary-impairment for securities in its
investment portfolio where there is no intent to sell and it is not more-likely-than-not that it will be required to sell the security
before recovery. Factors considered when assessing impairment include:
•
•
•
•
•
•
•
a decline in the market value of a security by 20% or more below amortized cost for a continuous period of at
least six months;
a decline in the market value of a security for a continuous period of 12 months;
recent credit downgrades of the applicable security or the issuer by rating agencies;
the financial condition of the applicable issuer;
whether loss of investment principal is anticipated;
the impact of foreign exchange rates; and
whether scheduled interest payments are past due.
The Company assesses the ability to recover the amortized cost by comparing the net present value of projected future
cash flows with the amortized cost of the security. If the security is in an unrealized loss position and its net present value is
less than the amortized cost of the investment, an other-than-temporary impairment is recorded. The net present value is
calculated by discounting the Company's estimate of projected future cash flows at the effective interest rate implicit in the debt
security at the time of purchase. The Company's estimates of projected future cash flows are driven by assumptions regarding
probability of default and estimates regarding timing and amount of recoveries associated with a default. The Company
develops these estimates using information based on historical experience, credit analysis and market observable data, such as
industry analyst reports and forecasts, sector credit ratings and other relevant data. For mortgage‑backed and asset backed
securities, cash flow estimates also include prepayment and other assumptions regarding the underlying collateral including
default rates, recoveries and changes in value. The assumptions used in these projections requires the use of significant
management judgment.
The Company's assessment of a decline in value included management's current assessment of the factors noted above.
The Company also seeks advice from its outside investment managers. If that assessment changes in the future, the Company
may ultimately record a loss after having originally concluded that the decline in value was temporary.
Net Investment Income and Realized Gains (Losses)
Net investment income is a function of the yield that the Company earns on invested assets and the size of the
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 invested assets. Accrued investment income, which is recorded in Other Assets, was $97 million and $91
million as of December 31, 2017 and December 31, 2016, respectively.
201
61
37
433
(10)
423
44
(15)
(8)
(47)
(26)
Net Investment Income
Income from fixed-maturity securities managed by third parties
Income from internally managed securities:
Fixed maturities
Other
Gross investment income
Investment expenses
Net investment income
$
$
Year Ended December 31,
2017
2016
(in millions)
2015
298
$
306
$
335
120
9
427
(9)
418
$
103
8
417
(9)
408
$
Net Realized Investment Gains (Losses)
Gross realized gains on available-for-sale securities (1)
Gross realized losses on available-for-sale securities
Net realized gains (losses) on other invested assets
Other-than-temporary impairment
Net realized investment gains (losses)
Year Ended December 31,
2016
2015
2017
(in millions)
$
$
95
(12)
0
(43)
40
$
$
$
28
(8)
2
(51)
(29) $
____________________
(1)
Year ended December 31, 2017 includes a gain on Zohar II Notes used as consideration for the MBIA UK Acquisition.
See Note 2, Acquisitions.
The following table presents the roll-forward of the credit losses of fixed-maturity securities for which the Company
has recognized an other-than-temporary-impairment and where the portion of the fair value adjustment related to other factors
was recognized in OCI.
Roll Forward of Credit Losses
in the Investment Portfolio
Balance, beginning of period
Additions for credit losses on securities for which an other-than-
temporary-impairment was not previously recognized
Reductions for securities sold and other settlements
Additions for credit losses on securities for which an other-than-
temporary-impairment was previously recognized
Balance, end of period
$
$
Year Ended December 31,
2017
2016
(in millions)
2015
134
$
108
$
13
(4)
3
(4)
19
162
$
27
134
$
124
3
(28)
9
108
202
Investment Portfolio
Fixed-Maturity Securities and Short-Term Investments
by Security Type
As of December 31, 2017
Investment Category
Fixed-maturity securities:
Obligations of state and
political subdivisions
U.S. government and agencies
Corporate securities
Mortgage-backed securities
(4):
RMBS
CMBS
Asset-backed securities
Foreign government securities
Total fixed-maturity
securities
Short-term investments
Percent
of
Total(1)
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
(dollars in millions)
AOCI(2)
Gain
(Loss) on
Securities
with
Other-Than-
Temporary
Impairment
Weighted
Average
Credit
Rating
(3)
51% $
2
18
—
8
5
7
3
94
6
5,504
$
267
$
272
1,973
852
540
730
316
10,187
627
14
63
26
12
166
6
554
0
(11) $
(1)
(18)
5,760
$
285
2,018
(17)
(3)
0
(17)
861
549
896
305
(67)
0
(67) $
10,674
627
11,301
23
—
(6)
(1)
—
136
0
152
—
152
AA
AA+
A
BBB+
AAA
B
AA
A+
AAA
A+
Total investment portfolio
100% $
10,814
$
554
$
203
Fixed-Maturity Securities and Short-Term Investments
by Security Type
As of December 31, 2016
Percent
of
Total(1)
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
(dollars in millions)
AOCI(2)
Gain
(Loss) on
Securities
with
Other-Than-
Temporary
Impairment
Weighted
Average
Credit
Rating
(3)
50% $
4
15
$
5,269
424
1,612
9
5
8
3
94
6
998
575
835
261
9,974
590
10,564
$
202
17
32
27
13
110
4
405
0
405
$
$
(39) $
(1)
(31)
$
5,432
440
1,613
(38)
(5)
0
(32)
987
583
945
233
(146)
0
(146) $
10,233
590
10,823
$
13
—
(8)
(21)
—
33
—
17
—
17
AA
AA+
A-
A-
AAA
B
AA
A+
AAA
A+
Investment Category
Fixed-maturity securities:
Obligations of state and
political subdivisions
U.S. government and agencies
Corporate securities
Mortgage-backed securities
(4):
RMBS
CMBS
Asset-backed securities
Foreign government securities
Total fixed-maturity
securities
Short-term investments
Total investment portfolio
100% $
____________________
(1)
Based on amortized cost.
(2)
(3)
(4)
Also refer to Note 20, Other Comprehensive Income.
Ratings in the tables above represent the lower of the Moody’s and S&P Global Ratings, a division of Standard &
Poor's Financial Services LLC (S&P) classifications except for bonds purchased for loss mitigation or risk
management strategies, which use internal ratings classifications. The Company’s portfolio consists primarily of high-
quality, liquid instruments.
Government-agency obligations were approximately 39% of mortgage backed securities as of December 31, 2017 and
42% as of December 31, 2016 based on fair value.
The Company’s investment portfolio in tax-exempt and taxable municipal securities includes issuances by a wide
number of municipal authorities across the U.S. and its territories.
204
The following tables present the fair value of the Company’s available-for-sale portfolio of obligations of state and
political subdivisions as of December 31, 2017 and December 31, 2016 by state.
Fair Value of Available-for-Sale Portfolio of
Obligations of State and Political Subdivisions
As of December 31, 2017 (1)
State
General
Obligation
Local
General
Obligation
Fair
Value
Amortized
Cost
Average
Credit
Rating
Revenue Bonds
(in millions)
13
76
17
93
5
70
18
16
33
43
138
522
$
$
44
83
212
87
17
—
51
22
21
—
263
800
$
$
568
421
321
214
244
151
131
102
76
85
1,233
3,546
$
$
625
580
550
394
266
221
200
140
130
128
1,634
4,868
$
$
598
527
528
381
254
208
189
136
125
123
1,577
4,646
AA
A
AA
AA
AA-
AA
A
AA
A+
AA
AA-
AA-
Fair Value of Available-for-Sale Portfolio of
Obligations of State and Political Subdivisions
As of December 31, 2016 (1)
State
General
Obligation
Local
General
Obligation
Fair
Value
Amortized
Cost
Average
Credit
Rating
Revenue Bonds
(in millions)
13
73
16
81
16
74
18
—
—
38
153
482
$
$
38
62
186
68
11
—
65
3
9
17
155
614
$
$
570
391
316
201
247
149
127
122
104
58
1,085
3,370
$
$
621
526
518
350
274
223
210
125
113
113
1,393
4,466
$
$
604
497
503
348
266
215
205
122
109
111
1,364
4,344
AA
A+
AA
AA
AA-
AA
A+
AA
A+
A+
AA-
AA-
$
$
$
$
State
Fixed-maturity securities:
New York
California
Texas
Washington
Florida
Massachusetts
Illinois
Ohio
Pennsylvania
District of Columbia
All others
Total
State
Fixed-maturity securities:
New York
California
Texas
Washington
Florida
Massachusetts
Illinois
Arizona
Georgia
Pennsylvania
All others
Total
____________________
(1)
Excludes $892 million and $966 million as of December 31, 2017 and 2016, respectively, 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.
205
The revenue bond portfolio is comprised primarily of essential service revenue bonds issued by transportation
authorities and other utilities, water and sewer authorities, universities and healthcare providers.
Type
Fixed-maturity securities:
Transportation
Water and sewer
Tax backed
Higher education
Municipal utilities
Healthcare
All others
Total
Revenue Bonds
Sources of Funds
As of December 31, 2017
As of December 31, 2016
Fair
Value
Amortized
Cost
Fair
Value
Amortized
Cost
$
$
955
670
600
515
324
308
174
3,546
$
$
(in millions)
889
641
570
492
315
293
169
3,369
$
$
860
545
617
513
365
310
160
3,370
$
$
824
531
601
499
360
298
158
3,271
The following tables summarize, for all fixed-maturity securities in an unrealized loss position, the aggregate fair
value and gross unrealized loss by length of time the amounts have continuously been in an unrealized loss position.
Fixed-Maturity Securities
Gross Unrealized Loss by Length of Time
As of December 31, 2017
Less than 12 months
12 months or more
Total
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
Obligations of state and
political subdivisions
$
U.S. government and agencies
Corporate securities
Mortgage-backed securities:
RMBS
CMBS
Asset-backed securities
Foreign government securities
$
166
151
201
191
29
48
20
Total
$
806
$
Number of securities(1)
Number of securities with
other-than-temporary
impairment(1)
(dollars in millions)
281
$
18
240
213
80
3
140
975
$
(7) $
(1)
(17)
(12)
(3)
0
(17)
(57) $
264
15
$
447
169
441
404
109
51
160
1,781
$
(11)
(1)
(18)
(17)
(3)
0
(17)
(67)
499
31
(4) $
0
(1)
(5)
0
0
0
(10) $
244
17
206
Fixed-Maturity Securities
Gross Unrealized Loss by Length of Time
As of December 31, 2016
Less than 12 months
12 months or more
Total
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
(dollars in millions)
Obligations of state and
political subdivisions
U.S. government and agencies
Corporate securities
Mortgage-backed securities:
RMBS
CMBS
Asset-backed securities
Foreign government securities
Total
Number of securities(1)
Number of securities with
other-than-temporary
impairment
$
1,110
$
87
492
391
165
36
44
$
2,325
$
(38) $
(1)
(11)
(23)
(5)
0
(5)
(83) $
622
8
6
—
118
94
—
0
114
332
$
$
1,116
$
87
610
485
165
36
158
2,657
$
(1) $
—
(20)
(15)
—
0
(27)
(63) $
60
9
(39)
(1)
(31)
(38)
(5)
0
(32)
(146)
676
17
___________________
(1)
The number of securities does not add across because lots consisting of the same securities have been purchased at
different times and appear in both categories above (i.e., less than 12 months and 12 months or more). If a security
appears in both categories, it is counted only once in the total column.
Of the securities in an unrealized loss position for 12 months or more as of December 31, 2017, 28 securities had
unrealized losses greater than 10% of book value. The total unrealized loss for these securities as of December 31, 2017 was
$27 million. As of December 31, 2016, of the securities in an unrealized loss position for 12 months or more, 41 securities had
unrealized losses greater than 10% of book value with an unrealized loss of $59 million. The Company has determined that the
unrealized losses recorded as of December 31, 2017 and December 31, 2016 were yield-related and not the result of other-than-
temporary-impairment.
The amortized cost and estimated fair value of available-for-sale fixed-maturity securities by contractual maturity as of
December 31, 2017 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, 2017
Due within one year
Due after one year through five years
Due after five years through 10 years
Due after 10 years
Mortgage-backed securities:
RMBS
CMBS
Total
207
Amortized
Cost
Estimated
Fair Value
$
(in millions)
254
1,574
2,368
4,599
852
540
10,187
$
256
1,604
2,443
4,961
861
549
10,674
$
$
Based on fair value, investments and restricted cash 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
restricted total $269 million and $285 million, as of December 31, 2017 and December 31, 2016, respectively. The investment
portfolio also contains securities that are held in trust by certain AGL subsidiaries for the benefit of other AGL subsidiaries in
accordance with statutory and regulatory requirements in the amount of $1,677 million and $1,420 million, based on fair value
as of December 31, 2017 and December 31, 2016, respectively.
The fair value of the Company’s pledged securities to secure its obligations under its CDS exposure totaled $18
million and $116 million as of December 31, 2017 and December 31, 2016, respectively. See Note 8, Contracts Accounted for
as Credit Derivatives, for more information.
No material investments of the Company were non-income producing for years ended December 31, 2017 and 2016,
respectively.
Externally Managed Portfolio
As of December 31, 2017, the majority of the investment portfolio is managed by six outside managers (including
Wasmer, Schroeder & Company LLC, in which the Company has a minority interest as indicated below), and a seventh outside
manager was added in January 2018. The Company has established detailed guidelines regarding credit quality, exposure to a
particular sector and exposure to a particular obligor within a sector. The Company's investment guidelines generally do not
permit its outside managers to purchase securities rated lower than A- by S&P or A3 by Moody’s, excluding a minimal
allocation to corporate securities not rated lower than BBB by S&P or Baa2 by Moody’s.
Internally Managed Portfolio
The investment portfolio tables shown above include both assets managed externally and internally. In the table
below, more detailed information is provided for the component of the total investment portfolio that is internally managed
(excluding short-term investments). The internally managed portfolio (other than short term investments) represents
approximately 12% and 15% of the investment portfolio, on a fair value basis as of December 31, 2017 and December 31,
2016, respectively. The internally managed portfolio consists primarily of the Company's investments in securities for (i) loss
mitigation purposes, (ii) other risk management purposes and (iii) where the Company believes a particular security presents an
attractive investment opportunity.
One of the Company's strategies for mitigating losses has been to purchase loss mitigation securities, at discounted
prices. In addition, the Company holds other invested assets that were obtained or purchased as part of negotiated settlements
with insured counterparties or under the terms of the financial guaranties (other risk management assets).
Alternative investments include various funds investing in both equity and debt securities and catastrophe bonds as
well as investments in investment managers. In February 2017 the Company agreed to purchase up to $100 million of limited
partnership interests in a fund that invests in the equity of private equity managers. Separately, in September 2017 the Company
acquired a minority interest in Wasmer, Schroeder & Company LLC, an independent investment advisory firm specializing in
separately managed accounts (SMAs).
Internally Managed Portfolio
Carrying Value
Assets purchased for loss mitigation and other risk management purposes:
Fixed-maturity securities, at fair value
Other invested assets
Alternative investments
Other
Total
208
As of December 31,
2017
2016
(in millions)
$
$
1,231
20
69
5
1,325
$
$
1,492
107
48
7
1,654
Cash and Restricted Cash
The following table provides a reconciliation of the cash reported on the consolidated balance sheets and the cash and
restricted cash reported in the statements of cash flows.
Cash and Restricted Cash
2017
2016
2015
2014
As of December 31,
Cash
Restricted cash (1)
Total cash and restricted cash
$
$
144
0
144
$
$
$
(in millions)
118
9
127
$
166
0
166
$
$
75
19
94
____________________
(1)
Amounts relate to cash held in trust accounts and are reported in other assets in consolidated balance sheets. See Note
13, Reinsurance and Other Monoline Exposures, for more information.
11.
Insurance Company Regulatory Requirements
The following table summarizes the equity and income amounts reported to local regulatory bodies in the U.S. and
Bermuda for insurance company subsidiaries within the group. The discussion that follows describes the basis of accounting
and differences to U.S. GAAP.
Insurance Regulatory Amounts Reported
Policyholders' Surplus
As of December 31,
2017
2016
Net Income (Loss)
Year Ended December 31,
2016
2015
2017
(in millions)
$
2,254
$
2,073
270
1,294
$
2,321
1,896
487
1,255
$
152
219
32
156
$
191
108
142
139
217
(92)
102
51
U.S. statutory companies:
AGM(1)
AGC(1)(2)
MAC
Bermuda statutory company:
AG Re
____________________
(1)
Policyholders' surplus of AGM and AGC include their indirect share of MAC. AGM and AGC own approximately
61% and 39%, respectively, of the outstanding stock of Municipal Assurance Holdings Inc. (MAC Holdings), which
owns 100% of the outstanding common stock of MAC.
(2)
As indicated in Note 2, Acquisitions, AGC completed the acquisition of MBIA UK (now AGLN) on January 10, 2017,
CIFGH (the parent company of CIFGNA) on July 1, 2016 and Radian Asset on April 1, 2015. As mentioned in Note
1, Business and Basis of Presentation, AGC sold AGLN to AGM on June 26, 2017. Both CIFGNA and Radian Asset
were merged with and into AGC, with AGC as the surviving company of the merger. The impact to AGC's
policyholders' surplus was a decrease of approximately $36 million from the MBIA UK acquisition, on a statutory
basis, as of January 10, 2017, and an increase of $287 million from the CIFGH acquisition, on a statutory basis, as of
July 1, 2016.
209
Basis of Regulatory Financial Reporting
United States
Each of the Company's U.S. domiciled insurance companies' ability to pay dividends depends, among other things,
upon their financial condition, results of operations, cash requirements, compliance with rating agency requirements, and is
also subject to restrictions contained in the insurance laws and related regulations of their state of domicile and other states.
Financial statements prepared in accordance with accounting practices prescribed or permitted by local insurance regulatory
authorities differ in certain respects from GAAP.
The Company's U.S. domiciled insurance companies prepare statutory financial statements in accordance with
accounting practices prescribed or permitted by the National Association of Insurance Commissioners (NAIC) and their
respective insurance departments. Prescribed statutory accounting practices are set forth in the NAIC Accounting Practices and
Procedures Manual. The Company has no permitted accounting practices on a statutory basis, except for those related to
CIFGNA which was merged into AGC in 2016 and therefore subject to statutory merger accounting requiring the restatement
of prior year balances of AGC to include CIFGNA. On the CIFG Acquisition Date, accounting policies were conformed with
AGC's accounting policies which do not include any permitted practices.
GAAP differs in certain significant respects from U.S. insurance companies' statutory accounting practices prescribed
or permitted by insurance regulatory authorities. The principal differences result from the following statutory accounting
practices:
•
•
•
•
•
•
•
•
•
•
•
upfront premiums are earned when related principal and interest have expired rather than earned over the
expected period of coverage;
acquisition costs are charged to expense as incurred rather than over the period that related premiums are earned;
a contingency reserve is computed based on statutory requirements, whereas no such reserve is required under
GAAP;
certain assets designated as “non-admitted assets” are charged directly to statutory surplus, rather than reflected as
assets under GAAP;
investments in subsidiaries are carried on the balance sheet on the equity basis, to the extent admissible, rather
than consolidated with the parent;
the amount of deferred tax assets that may be admitted is subject to an adjusted surplus threshold and is generally
limited to the lesser of those assets the Company expects to realize within three years of the balance sheet date or
fifteen percent of the Company's adjusted surplus. This realization period and surplus percentage is subject to
change based on the amount of adjusted surplus. Under GAAP there is no non-admitted asset determination,
rather a valuation allowance is recorded to reduce the deferred tax asset to an amount that is more likely than not
to be realized;
insured credit derivatives are accounted for as insurance contracts rather than as derivative contracts measured at
fair value;
bonds are generally carried at amortized cost rather than fair value;
insured obligations of VIEs and refinancing vehicles debt, where the Company is deemed the primary beneficiary,
are accounted for as insurance contracts. Under GAAP, such VIEs and refinancing vehicles are consolidated and
any transactions with the Company are eliminated;
surplus notes are recognized as surplus and each payment of principal and interest is recorded only upon approval
of the insurance regulator rather than liabilities with periodic accrual of interest;
acquisitions are accounted for as either statutory purchases or statutory mergers, rather than the purchase method
under GAAP;
210
•
•
losses are discounted at a rate of 4.0% or 4.5%, recorded when the loss is deemed probable and without
consideration of the deferred premium revenue. Under GAAP, expected losses are discounted at the risk free rate
at the end of each reporting period and are recorded only to the extent they exceed deferred premium revenue;
the present value of installment premiums and commissions are not recorded on the balance sheet as they are
under GAAP; and
• mergers of acquired companies are treated as statutory mergers at historical balances and financial statements are
retroactively revised assuming the merger occurred at the beginning of the prior year, rather than prospectively
beginning with the date of acquisition at fair value under GAAP.
Contingency Reserves
From time to time, AGM and AGC have obtained the approval of their regulators to release contingency reserves
based on losses or because the accumulated reserve is deemed excessive in relation to the insurer's outstanding insured
obligations. In 2017, on the latter basis, AGM obtained the New York State Department of Financial Services' (NYDFS's)
approval for a contingency reserve release of approximately $246 million and AGC obtained the Maryland Insurance
Administration's (MIA's) approval for a contingency reserve release of approximately $134 million. In 2016, AGM obtained
the NYDFS's approval for a contingency reserve release of approximately $175 million and AGC obtained the MIA's approval
for a contingency reserve release of approximately $152 million. In addition, MAC also released approximately $62 million
and $53 million of contingency reserves in 2017 and 2016, respectively, which consisted of the assumed contingency reserves
maintained by MAC, as reinsurer of AGM, in respect of the same obligations that were the subject of AGM's $246 million and
$175 million releases in 2017 and 2016, respectively.
With respect to the regular, quarterly contributions to contingency reserves required by the applicable Maryland and
New York laws and regulations, such laws and regulations permit the discontinuation of such quarterly contributions to a
company’s contingency reserves when such company’s aggregate contingency reserves for a particular line of business (i.e.,
municipal or non-municipal) exceed the sum of the company’s outstanding principal for each specified category of obligations
within the particular line of business multiplied by the specified contingency reserve factor for each such category. In
accordance with such laws and regulations, and with the approval of the MIA and the NYDFS, respectively, AGC ceased
making quarterly contributions to its contingency reserves for both municipal and non-municipal business and AGM ceased
making quarterly contributions to its contingency reserves for non-municipal business, in each case beginning in the fourth
quarter of 2014. Such cessations are expected to continue for as long as AGC and AGM satisfy the foregoing condition for their
applicable lines of business.
Bermuda
AG Re, a Bermuda regulated Class 3B insurer, prepares its statutory financial statements in conformity with the
accounting principles set forth in the Insurance Act 1978, amendments thereto and related regulations. As of December 31,
2016, the Bermuda Monetary Authority (Authority) now requires insurers to prepare statutory financial statements in
accordance with the particular accounting principles adopted by the insurer (which, in the case of AG Re, are U.S. GAAP),
subject to certain adjustments. The principal difference relates to certain assets designated as “non-admitted assets” which are
charged directly to statutory surplus rather than reflected as assets as they are under U.S. GAAP.
United Kingdom
AGE prepares its solvency and condition report based on Prudential Regulation Authority (PRA) and Solvency II
Regulations (Solvency II). AGE adopted the full framework required by Solvency II on January 1, 2016, which is the date they
became effective. In calculating its Own Funds (regulatory capital resources under Solvency II), AGE starts with its UK GAAP
Balance Sheet and makes the adjustments required by Solvency II. The significant adjustments relate to reinsurance
recoverable, future premiums and reinsurance commissions receivable, provision for unearned premiums and unexpired risks
provisions, technical provision, future reinsurance premiums payable, and reinsurance commissions deferred. As of December
31, 2017 and December 31, 2016, AGE's Own Funds were in excess of its Solvency Capital Requirement.
211
Insurance Company Dividends and Capital
Dividends and Return of Capital
By Insurance Company Subsidiaries
Year Ended December 31,
2017
2016
(in millions)
2015
$
Dividends paid by AGC to AGUS
Dividends paid by AGM to AGMH
Dividends paid by AG Re to AGL
Dividends paid by MAC to MAC Holdings (1)
Redemption of common stock by AGM to AGMH
Redemption of common stock by MAC to MAC Holdings (1)
Repayment of surplus note by MAC to AGM
Repayment of surplus note by MAC to MAC Holdings (1)
Repayment of surplus note by AGM to AGMH
107
196
125
36
101
250
—
—
—
$
79
$
247
100
—
300
—
100
300
—
90
215
150
—
—
—
—
—
25
____________________
(1)
MAC Holdings distributed nearly the entire amounts to AGM and AGC, in proportion to their ownership percentages.
On December 21, 2017, the MIA approved AGC's request to repurchase its shares of common stock from its direct
parent, AGUS. AGC paid $200 million in January 2018.
United States
Under New York insurance law, AGM and MAC may only pay dividends out of "earned surplus," which is the portion
of the company's surplus that represents the net earnings, gains or profits (after deduction of all losses) that have not been
distributed to shareholders as dividends, transferred to stated capital or capital surplus, or applied to other purposes permitted
by law, but does not include unrealized appreciation of assets. AGM and MAC may each pay dividends without the prior
approval of the New York Superintendent of Financial Services (New York Superintendent) that, together with all dividends
declared or distributed by it during the preceding 12 months, do not exceed the lesser of 10% of its policyholders' surplus (as of
its last annual or quarterly statement filed with the New York Superintendent) or 100% of its adjusted net investment income
during that period.
The maximum amount available during 2018 for AGM to distribute as dividends without regulatory approval is
estimated to be approximately $190 million. Of such $190 million, approximately $73 million is available for distribution in
the first quarter of 2018. The maximum amount available during 2018 for MAC to distribute as dividends to MAC Holdings,
which is owned by AGM and AGC, without regulatory approval is estimated to be approximately $27 million, of which
approximately $3 million is available for distribution in the first quarter of 2018.
Under Maryland's insurance law, AGC may, with prior notice to the Maryland Insurance Commissioner, pay an
ordinary dividend that, together with all dividends paid in the prior 12 months, does not exceed the lesser of 10% of its
policyholders' surplus (as of the prior December 31) or 100% of its adjusted net investment income during that period. The
maximum amount available during 2018 for AGC to distribute as ordinary dividends is approximately $133 million. Of such
$133 million, approximately $54 million is available for distribution in the first quarter of 2018.
Bermuda
For AG Re, any distribution (including repurchase of shares) of any share capital, contributed surplus or other
statutory capital that would reduce its total statutory capital by 15% or more of its total statutory capital as set out in its
previous year's financial statements requires the prior approval of the Authority. Separately, dividends are paid out of an
insurer's statutory surplus and cannot exceed that surplus. Further, annual dividends cannot exceed 25% of total statutory
capital and surplus as set out in its previous year's financial statements, which is $324 million, without AG Re certifying to the
Authority that it will continue to meet required margins. As of December 31, 2016, the Authority now requires insurers to
prepare statutory financial statements in accordance with the particular accounting principles adopted by the insurer (which, in
212
the case of AG Re, are U.S. GAAP), subject to certain adjustments. As a result of this new requirement, certain assets
previously non-admitted by AG Re are now admitted, resulting in an increase to AG Re’s statutory capital and surplus
limitation. Based on the foregoing limitations, in 2018 AG Re has the capacity to (i) make capital distributions in an aggregate
amount up to $128 million without the prior approval of the Authority and (ii) declare and pay dividends in an aggregate
amount up to approximately $324 million as of December 31, 2017. Such dividend capacity can be further limited by the actual
amount of AG Re’s unencumbered assets, which amount changes from time to time due in part to collateral posting
requirements. As of December 31, 2017, AG Re had unencumbered assets of approximately $554 million.
United Kingdom
U.K. company law prohibits each of AGE, AGLN and AGUK from declaring a dividend to its shareholders unless it
has “profits available for distribution.” The determination of whether a company has profits available for distribution is based
on its accumulated realized profits less its accumulated realized losses. While the U.K. insurance regulatory laws impose no
statutory restrictions on a general insurer's ability to declare a dividend, the PRA's capital requirements may in practice act as a
restriction on dividends. In addition, AGLN currently must confirm that the PRA does not object to the payment of any
dividend to its parent company before AGLN makes any dividend payment.
12.
Income Taxes
Accounting Policy
The provision for income taxes consists of an amount for taxes currently payable and an amount for deferred taxes.
Deferred income taxes are provided for temporary differences between the financial statement carrying amounts and tax bases
of assets and liabilities, using enacted rates in effect for the year in which the differences are expected to reverse. A valuation
allowance is recorded to reduce the deferred tax asset to an amount that is more likely than not to be realized.
Non-interest-bearing tax and loss bonds are purchased in the amount of the tax benefit that results from deducting
contingency reserves as provided under Internal Revenue Code Section 832(e). The Company records the purchase of tax and
loss bonds in deferred taxes.
The Company recognizes tax benefits only if a tax position is “more likely than not” to prevail.
Overview
AGL, and its "Bermuda Subsidiaries," which consist of AG Re, AGRO, and Cedar Personnel Ltd., are not subject to
any income, withholding or capital gains taxes under current Bermuda law. The Company has received an assurance from the
Minister of Finance in Bermuda that, in the event of any taxes being imposed, AGL and its Bermuda Subsidiaries will be
exempt from taxation in Bermuda until March 31, 2035. AGL's U.S. and U.K. subsidiaries are subject to income taxes imposed
by U.S. and U.K. authorities, respectively, and file applicable tax returns. In addition, AGRO, a Bermuda domiciled company,
has elected under Section 953(d) of the U.S. Internal Revenue Code (the Code) to be taxed as a U.S. domestic corporation.
In November 2013, AGL became tax resident in the U.K. although it remains a Bermuda-based company and its
administrative and head office functions continue to be carried on in Bermuda. As a U.K. tax resident company, AGL is
required to file a corporation tax return with Her Majesty’s Revenue & Customs (HMRC). AGL is subject to U.K. corporation
tax in respect of its worldwide profits (both income and capital gains), subject to any applicable exemptions. The blended rate
of corporation tax was at 19.25% for 2017. AGL has also registered in the U.K. to report its Value Added Tax (VAT) liability.
The current rate of VAT is 20%. Assured Guaranty expects that the dividends AGL receives from its direct subsidiaries will be
exempt from U.K. corporation tax due to the exemption in section 931D of the U.K. Corporation Tax Act 2009. In addition, any
dividends paid by AGL to its shareholders should not be subject to any withholding tax in the U.K. Assured Guaranty does not
expect any profits of non-U.K. resident members of the group to be taxed under the U.K. "controlled foreign companies"
regime and has obtained a clearance from HMRC confirming this on the basis of current facts.
AGUS files a consolidated federal income tax return with all of its U.S. subsidiaries. AGE, the Company’s U.K.
subsidiary, had previously elected under U.S. Internal Revenue Code Section 953(d) to be taxed as a U.S. company. In January
2017, AGE filed a request with the U.S. Internal Revenue Service (IRS) to revoke the election, which was approved in May
2017. As a result of the revocation of the Section 953(d) election, AGE will no longer be liable to pay future U.S. taxes
beginning in 2017.
213
On January 10, 2017, AGC purchased MBIA UK, a U.K. based insurance company. After the purchase, MBIA UK
changed its name to AGLN and continues to file its tax returns in the U.K. as a separate entity. For additional information on
the MBIA UK Acquisition, see Note 2, Acquisitions. Assured Guaranty Overseas US Holdings Inc. and its subsidiaries AGRO
and AG Intermediary Inc. file their own consolidated federal income tax return.
Effect of the Tax Act
On December 22, 2017, the Tax Act was signed into law. The Tax Act changed many items of U.S. corporate income
taxation, including a reduction of the corporate income tax rate from 35% to 21%, implementation of a territorial tax system
and imposition of a tax on deemed repatriated earnings of non-U.S. subsidiaries. At December 31, 2017, the Company had not
completed accounting for the tax effects of the Tax Act; however, the Company made a reasonable estimate of the effects on the
existing deferred tax balances and the one-time transition tax. The Company recognized a provisional amount of $61 million,
which is included as a component of income tax expense from continuing operations. The Company will continue to assess its
provision for income taxes as future guidance is issued. Any adjustments, if necessary, during the measurement period guidance
outlined in Staff Accounting Bulletin No. 118 will be included in net earnings from continuing operations as an adjustment to
income tax expense in the reporting period when such adjustments are determined.
Provisional Amounts
Deferred Tax Assets and Liabilities
The Company remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to
reverse in the future, which is generally 21%. However, the Company is still analyzing certain aspects of the Tax Act and
refining its calculations, which could potentially affect the measurement of these balances or potentially give rise to new
deferred tax amounts. The provisional amount recorded related to the remeasurement of its deferred tax balance was $37
million.
Foreign Tax Effects
The one-time transition tax is based on total post-1986 earnings and profits (E&P) for which the Company had
previously deferred U.S. income taxes. The Company recorded a provisional amount for its one-time transition tax liability on
non-U.S. subsidiaries less realizable foreign tax credits (FTCs) and a write off of deferred tax liabilities on unremitted earnings,
resulting in an increase in income tax expense of $24 million. The Company has not yet completed its calculation of the total
post-1986 foreign E&P for these non-U.S. subsidiaries. Further, the transition tax is based in part on the amount of those
earnings held in cash and other specified assets. This amount may change when the Company finalizes the calculation of
post-1986 foreign E&P previously deferred from U.S. federal taxation.
The table below summarizes the impact of the Tax Act on the consolidated statements of operations.
Summary of the Tax Act Effect
Transition tax
Foreign tax credit realized
Write down of unremitted earnings
Net impact of repatriation
Write down of deferred tax asset due to tax rate change
Net impact of Tax Act
Year Ended
December 31, 2017
(in millions)
$
$
93
(31)
(38)
24
37
61
214
Provision for Income Taxes
The effective tax rates reflect the proportion of income recognized by each of the Company’s operating subsidiaries,
with U.S. subsidiaries taxed at the U.S. marginal corporate income tax rate of 35%, U.K. subsidiaries taxed at the U.K. blended
marginal corporate tax rate of 19.25% unless taxed as a U.S. controlled foreign corporation, and no taxes for the Company’s
Bermuda Subsidiaries unless subject to U.S. tax by election. For periods subsequent to April 1, 2017, the U.K. corporation tax
rate has been reduced to 19%. For the periods between April 1, 2015 and March 31, 2017, the U.K. corporation tax rate was
20%. The Company’s overall effective tax rate fluctuates based on the distribution of income across jurisdictions.
A reconciliation of the difference between the provision for income taxes and the expected tax provision at statutory
rates in taxable jurisdictions is presented below.
Effective Tax Rate Reconciliation
Expected tax provision (benefit) at statutory rates in taxable jurisdictions
$
Tax-exempt interest
Goodwill impairment and gain on bargain purchase price
Change in liability for uncertain tax positions
Effect of provision to tax return filing adjustments
State taxes
Effect of Tax Act
Other
Total provision (benefit) for income taxes
$
Effective tax rate
Year Ended December 31,
2017
2016
2015
$
$
300
(49)
(20)
(26)
(8)
9
61
(6)
261
26.3%
(in millions)
316
(49)
(125)
11
(15)
3
—
(5)
136
13.4%
$
$
443
(54)
(19)
12
(11)
1
—
3
375
26.2%
The change in liability for uncertain tax positions for 2017 is driven by the closure of the 2009 – 2012 IRS Audit, see
"Audits" below for further discussion.
The expected tax provision at statutory rates in taxable jurisdictions is calculated as the sum of pretax income in each
jurisdiction multiplied by the statutory tax rate of the jurisdiction by which it will be taxed. Pretax income of the Company’s
subsidiaries which are not U.S. or U.K. domiciled but are subject to U.S. or U.K. tax by election, establishment of tax residency
or as controlled foreign corporations, are included at the U.S. or U.K. statutory tax rate. Where there is a pretax loss in one
jurisdiction and pretax income in another, the total combined expected tax rate may be higher or lower than any of the
individual statutory rates.
The following table presents pretax income and revenue by jurisdiction.
Pretax Income (Loss) by Tax Jurisdiction
United States
Bermuda
U.K.
Total
Year Ended December 31,
2017
2016
(in millions)
2015
$
$
873
145
(27)
991
$
$
921
126
(30)
1,017
$
$
1,284
177
(30)
1,431
215
Revenue by Tax Jurisdiction
Year Ended December 31,
2017
2016
(in millions)
2015
$
$
1,543
216
(20)
1,739
$
$
1,442
239
(4)
1,677
$
$
1,853
361
(7)
2,207
United States
Bermuda
U.K.
Total
Pretax income by jurisdiction may be disproportionate to revenue by jurisdiction to the extent that insurance losses
incurred are disproportionate.
Components of Net Deferred Tax Assets
Deferred tax assets:
Unrealized losses on credit derivative financial instruments, net
Unearned premium reserves, net
Loss and LAE reserve
Tax and loss bonds
Alternative minimum tax credit
Foreign tax credit
DAC
Investment basis difference
Deferred compensation
Net operating loss
FG VIE
Other
Total deferred income tax assets
Deferred tax liabilities:
Contingency reserves
Public debt
Unrealized appreciation on investments
Unrealized gains on CCS
Market discount
Loss and LAE reserve
DAC
Deferred balances related to non-US affiliates
Other
Total deferred income tax liabilities
Less: Valuation allowance
Net deferred income tax asset
As of December 31,
2017
2016
(in millions)
$
$
20
124
—
—
59
43
—
63
21
38
13
14
395
—
53
91
13
28
27
12
16
14
254
43
$
98
$
66
229
216
50
17
20
29
76
40
64
14
29
850
82
91
84
22
22
—
—
3
30
334
19
497
As of December 31, 2017, the Company had alternative minimum tax credits of $59 million which, pursuant to the
Tax Act, are available as a credit to offset regular tax liability over the next three years with any excess refundable by 2021.
216
During 2017 the Company generated $31 million of FTC to carry forward as a result of the Tax Act’s deemed
repatriation of previously untaxed unremitted foreign earnings. The Company has established a full valuation allowance against
the entire FTC balance. See the valuation allowance discussion below.
As part of the CIFG Acquisition, the Company acquired $189 million of NOL which will begin to expire in 2033. The
NOL has been limited under Internal Revenue Code Section 382 due to a change in control as a result of the acquisition. As of
December 31, 2017, the Company had $182 million of NOL’s available to offset its future U.S. taxable income.
Valuation Allowance
The Company has $12 million of FTC from previous acquisitions and $31 million of FTC due to the Tax Act for use
against regular tax in future years. FTCs will begin to expire in 2020 and will fully expire by 2027. In analyzing the future
realizability of FTCs, the Company notes limitations on future foreign source income due to overall foreign losses as negative
evidence. After reviewing positive and negative evidence, the Company came to the conclusion that it is more likely than not
that the FTC of $43 million will not be utilized, and therefore recorded a valuation allowance with respect to this tax attribute.
The Company came to the conclusion that it is more likely than not that the remaining net deferred tax asset will be
fully realized after weighing all positive and negative evidence available as required under GAAP. The positive evidence that
was considered included the cumulative income the Company has earned over the last three years, and the significant unearned
premium income to be included in taxable income. The positive evidence outweighs any negative evidence that exists. As such,
the Company believes that no valuation allowance is necessary in connection with this deferred tax asset. The Company will
continue to analyze the need for a valuation allowance on a quarterly basis.
Audits
As of December 31, 2017, AGUS had open tax years with the U.S. Internal Revenue Service (IRS) for 2013 to
present. In December 2016, the IRS issued a Revenue Agent Report (RAR) which did not identify any material adjustments
that were not already accounted for in the prior periods. In April 2017, the Company received a final letter from the IRS to
close the audit with no additional findings or changes, and as a result the Company released previously recorded uncertain tax
position reserves and accrued interest of approximately $37 million in the second quarter of 2017. Assured Guaranty Oversees
US Holdings Inc. has open tax years of 2014 forward. The Company's U.K. subsidiaries are not currently under examination
and have open tax years of 2015 forward. CIFGNA, which was acquired by AGC during 2016, is not currently under
examination and has open tax years of 2014 to present. The Company's French subsidiary, CIFGE, is under examination for the
period January 1, 2015 through December 31, 2016, and has open tax years of 2014 to present.
Uncertain Tax Positions
The following table provides a reconciliation of the beginning and ending balances of the total liability for
unrecognized tax positions.
Balance as of January 1,
Effect of provision to tax return filing adjustments
Increase in unrecognized tax positions as a result of position taken during
the current period
Decrease in unrecognized tax positions as a result of settlement of
positions taken during the prior period
Balance as of December 31,
$
$
2017
2016
(in millions)
2015
50
$
40
$
8
1
(31)
28
$
6
4
—
50
$
28
10
2
—
40
The Company's policy is to recognize interest related to uncertain tax positions in income tax expense and has accrued
$1 million for 2017, $2 million for 2016 and $1 million for 2015. As of December 31, 2017 and December 31, 2016, the
Company has accrued $3 million and $7 million of interest, respectively.
217
The total amount of reserves for unrecognized tax positions, including accrued interest, as of December 31, 2017
would affect the effective tax rate, if recognized. The reduction in reserves is driven by the closure of the 2009- 2012 IRS
Audit.
13.
Reinsurance and Other Monoline Exposures
The Company assumes exposure (Assumed Business) and may cede portions of exposure it has insured (Ceded
Business) in exchange for premiums, net of ceding commissions. Substantially all of the Company’s Assumed Business and
Ceded Business relates to financial guaranty insurance, except for a modest amount that relates to non-financial guaranty
business assumed by AGRO. The Company historically entered into, and with respect to new business originated by AGRO
continues to enter into, ceded reinsurance contracts in order to obtain greater business diversification and reduce the net
potential loss from large risks.
Accounting Policy
For business assumed and ceded, the accounting model of the underlying direct financial guaranty contract dictates the
accounting model used for the reinsurance contract (except for those eliminated as FG VIEs). For any assumed or ceded
financial guaranty insurance premiums and losses, the accounting models described in Note 6 are followed. For any assumed or
ceded credit derivative contracts, the accounting model in Note 8 is followed.
Assumed and Ceded Financial Guaranty Business
The Company assumes financial guaranty business (Assumed Financial Guaranty Business) from third party insurers,
primarily other monoline financial guaranty companies. Under these relationships, the Company assumes a portion of the
ceding company’s insured risk in exchange for a portion of the ceding company's premium for the insured risk (typically, net of
a ceding commission). The Company’s facultative and treaty agreements are generally subject to termination at the option of
the ceding company:
•
•
if the Company fails to meet certain financial and regulatory criteria and to maintain a specified minimum
financial strength rating, or
upon certain changes of control of the Company.
Upon termination under these conditions, the Company may be required (under some of its reinsurance agreements) to
return to the ceding company unearned premiums (net of ceding commissions) and loss reserves calculated on a statutory basis
of accounting, attributable to reinsurance assumed pursuant to such agreements after which the Company would be released
from liability with respect to the Assumed Financial Guaranty Business.
Upon the occurrence of the conditions set forth in the first bullet above, whether or not an agreement is terminated, the
Company may be required to obtain a letter of credit or alternative form of security to collateralize its obligation to perform
under such agreement or it may be obligated to increase the level of ceding commission paid.
The downgrade of the financial strength ratings of AG Re or of AGC gives certain ceding companies the right to
recapture business they had ceded to AG Re and AGC, which would lead to a reduction in the Company's unearned premium
reserve and related earnings on such reserve. With respect to a significant portion of the Company's in-force Assumed Financial
Guaranty Business, based on AG Re's and AGC's current ratings and subject to the terms of each reinsurance agreement, the
third party ceding company may have the right to recapture business it had ceded to AG Re and/or AGC, and in connection
therewith, to receive payment from AG Re or AGC of an amount equal to the statutory unearned premium (net of ceding
commissions) and statutory loss reserves (if any) associated with that business, plus, in certain cases, an additional required
payment. As of December 31, 2017, if each third party insurer ceding business to AG Re and/or AGC had a right to recapture
such business, and chose to exercise such right, the aggregate amounts that AG Re and AGC could be required to pay to all
such companies would be approximately $46 million and $15 million, respectively.
The Company has ceded financial guaranty business to non-affiliated companies to limit its exposure to risk. Under
these relationships, the Company ceded a portion of its insured risk to the reinsurer in exchange for the reinsurer receiving a
share of the Company's premiums for the insured risk (typically, net of a ceding commission). The Company remains primarily
liable for all risks it directly underwrites and is required to pay all gross claims. It then seeks reimbursement from the reinsurer
for its proportionate share of claims. The Company may be exposed to risk for this exposure if it were required to pay the gross
claims and not be able to collect ceded claims from an assuming company experiencing financial distress. A number of the
218
financial guaranty insurers to which the Company has ceded par have experienced financial distress and been downgraded by
the rating agencies as a result. In addition, state insurance regulators have intervened with respect to some of these insurers.
The Company’s ceded contracts generally allow the Company to recapture ceded financial guaranty business after certain
triggering events, such as reinsurer downgrades.
The following table presents the components of premiums and losses reported in the consolidated statements of
operations and the contribution of the Company's Assumed and Ceded Businesses (both financial guaranty and non-financial
guaranty).
Effect of Reinsurance on Statement of Operations
Premiums Written:
Direct
Assumed(1)
Ceded(2)
Net
Premiums Earned:
Direct
Assumed
Ceded
Net
Loss and LAE:
Direct
Assumed
Ceded
Net
Year Ended December 31,
2017
2016
(in millions)
2015
$
$
$
$
$
$
297
$
10
18
325
693
27
(30)
690
404
11
(27)
388
$
$
$
$
$
165
(11)
(17)
137
887
27
(50)
864
327
0
(32)
295
$
$
$
$
$
$
164
17
10
191
792
40
(66)
766
399
45
(20)
424
____________________
(1)
Negative assumed premiums written were due to changes in expected debt service schedules.
(2)
Positive ceded premiums written were due to commutations and changes in expected debt service schedules.
In addition to the items presented in the table above, the Company records in the consolidated statements of
operations, the effect of assumed and ceded credit derivative exposures. These amounts were losses of $0.8 million in 2017,
$27 million in 2016 and $3 million in 2015.
219
Exposure to Reinsurers (1)
As of December 31,
2017
2016
(in millions)
$
$
53
(42)
(71)
29
4,434
8,383
6,605
65
(46)
(70)
87
11,156
13,264
11,539
Due (To) From:
Assumed premium, net of commissions
Ceded premium, net of commissions
Assumed expected loss to be paid
Ceded expected loss to be paid
Par Outstanding:
Ceded par outstanding (2)
Assumed par outstanding
Second-to-pay insured par outstanding (3)
____________________
(1)
The total collateral posted by all non-affiliated reinsurers required to post, or that had agreed to post, collateral as of
December 31, 2017 and December 31, 2016 was approximately $118 million and $387 million, respectively.
(2)
(3)
Of the total ceded par to unrated or BIG rated reinsurers, $296 million and $384 million is rated BIG as of
December 31, 2017 and December 31, 2016, respectively.
The par on second-to-pay exposure where the primary insurer and underlying transaction rating are both BIG and/or
not rated is $204 million and $788 million as of December 31, 2017 and December 31, 2016, respectively. Second-to-
pay insured par outstanding represents transactions the Company has insured that were previously insured by such
other monoline financial guaranty insurers. The Company underwrites such transactions based on the underlying
insured obligation without regard to the primary insurer.
In accordance with U.S. statutory accounting requirements and U.S. insurance laws and regulations, in order for the
Company to receive credit for liabilities ceded to reinsurers domiciled outside of the U.S., such reinsurers must secure their
liabilities to the Company. These reinsurers are required to post collateral for the benefit of the Company in an amount at least
equal to the sum of their ceded unearned premium reserve, loss reserves and contingency reserves all calculated on a statutory
basis of accounting. In addition, certain authorized reinsurers post collateral on terms negotiated with the Company.
Commutations
During the first quarter of 2017, the Company entered into a commutation agreement to reassume the entire portfolio
previously ceded to one of its unaffiliated reinsurers, consisting predominantly (over 97%) of U.S. public finance and
international public and project finance exposures. During the third quarter of 2017, the Company entered into two
commutation agreements. In one case, it reassumed the entire portfolio previously ceded to one of its unaffiliated reinsurers
under quota share reinsurance, consisting predominantly of U.S. public finance and international public and project finance
exposures. In the other case, it reassumed a portion of the portfolio previously ceded to one of its other unaffiliated reinsurers.
The table below summarizes the effect of commutations.
Commutations of Ceded Reinsurance Contracts
Increase (decrease) in net unearned premium reserve
$
82
$
Increase (decrease) in net par outstanding
Commutation gains (losses)
5,107
328
— $
28
8
23
855
28
Year Ended December 31,
2017
2016
(in millions)
2015
220
Excess of Loss Reinsurance Facility
Effective January 1, 2018, AGC, AGM and MAC entered into a $400 million aggregate excess of loss reinsurance
facility of which $180 million was placed with an unaffiliated reinsurer. This facility replaces a similar $400 million aggregate
excess of loss reinsurance facility, of which $360 million was placed with unaffiliated reinsurers, that AGC, AGM and MAC
had entered into effective January 1, 2016 and which terminated on December 31, 2017. The new facility covers losses
occurring either from January 1, 2018 through December 31, 2024, or January 1, 2019 through December 31, 2025, at the
option of AGC, AGM and MAC. It terminates on January 1, 2020, unless AGC, AGM and MAC choose to extend it. The new
facility covers certain U.S. public finance exposures insured or reinsured by AGC, AGM and MAC as of September 30, 2017,
excluding exposures that were rated non-investment grade as of December 31, 2017 by Moody’s or S&P or internally by AGC,
AGM or MAC and is subject to certain per credit limits. Among the exposures excluded are those associated with the
Commonwealth of Puerto Rico and its related authorities and public corporations. The new facility attaches when AGC’s,
AGM’s and MAC’s net losses (net of AGC’s and AGM's reinsurance (including from affiliates) and net of recoveries) exceed
$0.8 billion in the aggregate. The new facility covers a portion of the next $400 million of losses, with the reinsurer assuming
$180 million of the $400 million of losses and AGC, AGM and MAC jointly retaining the remaining $220 million. The
reinsurer is required to be rated at least AA- or to post collateral sufficient to provide AGM, AGC and MAC with the same
reinsurance credit as reinsurers rated AA-. AGM, AGC and MAC are obligated to pay the reinsurer its share of recoveries
relating to losses during the coverage period in the covered portfolio. AGC, AGM and MAC paid approximately $3.2 million of
premiums in 2018 for the term January 1, 2018 through December 31, 2018 and deposited approximately $3.2 million in cash
into a trust account for the benefit of the reinsurer to be used to pay the premiums for 2019. The main differences between the
new facility and the prior facility that terminated on December 31, 2017 are the reinsurance attachment point ($0.8 billion
versus $1.25 billion), the total reinsurance coverage ($180 million part of $400 million versus $360 million part of $400
million) and the annual premium ($3.2 million versus $9 million).
Reinsurance of SGI’s Insured Portfolio
On February 2, 2018, AGC entered into an agreement with SGI to reinsure, generally on a 100% quota share basis,
substantially all of SGI’s insured portfolio. The transaction also includes the commutation of a book of business ceded to SGI
by AGM. The transactions reinsured and commuted will total approximately $14.5 billion. As consideration for the transaction,
at closing, SGI will pay $360 million and assign installment premiums estimated to total $55 million in present value to
Assured Guaranty. The reinsured portfolio consists predominantly of public finance and infrastructure obligations that meet
AGC’s new business underwriting criteria. Additionally, on behalf of SGI, AGC will provide certain administrative services on
the assumed portfolio, including surveillance, risk management, and claims processing. The transaction is subject to regulatory
approval and other closing conditions, and is expected to close by the end of the second quarter of 2018.
Assumed and Ceded Non-Financial Guaranty Business
As described in Note 4, Outstanding Exposure, Non-Financial Guaranty Insurance, the Company, through AGRO,
assumes non-financial guaranty business from third party insurers (Assumed Non-Financial Guaranty Business). It also
retrocedes some of this business to third party reinsurers. The downgrade of AGRO’s financial strength rating by S&P below
“A” would require AGRO to post, as of December 31, 2017, an estimated $4 million of collateral in respect of certain of its
Assumed Non-Financial Guaranty Business. A further downgrade of AGRO’s S&P rating below A- would give the company
ceding such business the right to recapture the business for AGRO’s collateral amount, and, if also accompanied by a
downgrade of AGRO's financial strength rating by A.M. Best Company, Inc. below A-, would also require AGRO to post, as of
December 31, 2017, an estimated $9 million of collateral in respect of a different portion of AGRO’s Assumed Non-Financial
Guaranty Business. AGRO’s ceded contracts generally have equivalent provisions requiring the assuming reinsurer to post
collateral and/or allowing AGRO to recapture the ceded business upon certain triggering events, such as reinsurer rating
downgrades.
Other Monoline Exposure
As of December 31, 2017, based on fair value, the Company had fixed-maturity securities in its investment portfolio
consisting of $91 million insured by National Public Finance Guarantee Corporation, $68 million insured by Ambac and $8
million insured by other guarantors.
221
14.
Related Party Transactions
Wellington Management Company, LLP (Wellington) and BlackRock Financial Management, Inc. (BlackRock), each
own more than 5% of the Company's common shares, and each are investment managers for a portion of the Company's
investment portfolio. The net expenses from transactions with Wellington and BlackRock were approximately $4.1 million in
2017 and $4.2 million in 2016. The net expenses from transactions with Wellington were $1.9 million in 2015. As of
December 31, 2017 and 2016 there were no other significant amounts payable to or amounts receivable from related parties,
other than compensation in the ordinary course of business.
The Company used a portion of its share repurchase program to repurchase 297,131 common shares from its Chief
Executive Officer and 23,062 common shares from its then General Counsel on January 6, 2017. The shares were purchased at
the closing price of a common share of the Company on the New York Stock Exchange on January 6, 2017. Separately, these
officers also received 297,131 and 23,062 common shares, respectively, on January 6, 2017 in settlement of 297,131 share units
and 23,062 share units held by them in the employer stock fund of the Assured Guaranty Ltd. Supplemental Employee
Retirement Plan (the AGL SERP). The distribution of shares occurred in January 2017 pursuant to the terms of an amendment
adopted in 2011 to the AGL SERP. Such amendment was adopted to comply with requirements of Section 409A of the Code
and Section 457A of the Code, which required all grandfathered amounts (within the meaning of Section 457A of the Code),
including the units in the employer stock fund in the AGL SERP, to be included in the income of the applicable participant no
later than 2017.
15.
Commitments and Contingencies
Leases
AGL and its subsidiaries are party to various lease agreements accounted for as operating leases. The Company leases
and occupies approximately 103,500 square feet in New York City through 2032. Subject to certain conditions, the Company
has an option to renew the lease for five years at a fair market rent. In addition, AGL and its subsidiaries lease additional office
space in various locations under non-cancelable operating leases which expire at various dates through 2029. Rent expense was
$8.7 million in 2017, $13.4 million in 2016 and $10.5 million in 2015.
The future minimum rental payments as of December 31, 2017 are as follows:
Future Minimum Rental Payments
Year
2018
2019
2020
2021
2022
Thereafter
Total
Legal Proceedings
(in millions)
8
9
9
8
9
80
123
$
$
Lawsuits arise in the ordinary course of the Company’s business. It is the opinion of the Company’s management,
based upon the information available, that the expected outcome of litigation against the Company, individually or in the
aggregate, will not have a material adverse effect on the Company’s financial position or liquidity, although an adverse
resolution of litigation against the Company in a fiscal quarter or year could have a material adverse effect on the Company’s
results of operations in a particular quarter or year.
In addition, in the ordinary course of their respective businesses, certain of AGL's subsidiaries assert claims in legal
proceedings against third parties to recover losses paid in prior periods or prevent losses in the future. For example, the
Company has commenced a number of legal actions in the U.S. District Court for the District of Puerto Rico to enforce its
rights with respect to the obligations it insures of Puerto Rico and various of its related authorities and public corporations. See
the "Exposure to Puerto Rico" section of Note 4, Outstanding Exposure, for a description of such actions. Also refer to the
222
"Recovery Litigation" section of Note 5, Expected Loss to be Paid, for a description of recovery litigation unrelated to Puerto
Rico. The amounts, if any, the Company will recover in these and other proceedings to recover losses are uncertain, and
recoveries, or failure to obtain recoveries, in any one or more of these proceedings during any quarter or year could be material
to the Company's results of operations in that particular quarter or year.
The Company also receives subpoenas duces tecum and interrogatories from regulators from time to time.
Accounting Policy
The Company establishes accruals for litigation and regulatory matters to the extent it is probable that a loss has been
incurred and the amount of that loss can be reasonably estimated. For litigation and regulatory matters where a loss may be
reasonably possible, but not probable, or is probable but not reasonably estimable, no accrual is established, but if the matter is
material, it is disclosed, including matters discussed below. The Company reviews relevant information with respect to its
litigation and regulatory matters on a quarterly basis and updates its accruals, disclosures and estimates of reasonably possible
loss based on such reviews.
Litigation
On November 28, 2011, Lehman Brothers International (Europe) (in administration) (LBIE) sued AG Financial
Products Inc. (AGFP), an affiliate of AGC which in the past had provided credit protection to counterparties under CDS. AGC
acts as the credit support provider of AGFP under these CDS. LBIE’s complaint, which was filed in the Supreme Court of the
State of New York, alleged that AGFP improperly terminated nine credit derivative transactions between LBIE and AGFP and
improperly calculated the termination payment in connection with the termination of 28 other credit derivative transactions
between LBIE and AGFP. Following defaults by LBIE, AGFP properly terminated the transactions in question in compliance
with the agreement between AGFP and LBIE, and calculated the termination payment properly. AGFP calculated that LBIE
owes AGFP approximately $29 million in connection with the termination of the credit derivative transactions, whereas LBIE
asserted in the complaint that AGFP owes LBIE a termination payment of approximately $1.4 billion. On February 3, 2012,
AGFP filed a motion to dismiss certain of the counts in the complaint, and on March 15, 2013, the court granted AGFP's
motion to dismiss the count relating to improper termination of the nine credit derivative transactions and denied AGFP's
motion to dismiss the counts relating to the remaining transactions. On February 22, 2016, AGFP filed a motion for summary
judgment on the remaining causes of action asserted by LBIE and on AGFP's counterclaims. LBIE's administrators disclosed in
an April 10, 2015 report to LBIE’s unsecured creditors that LBIE's valuation expert has calculated LBIE's claim for damages in
aggregate for the 28 transactions to range between a minimum of approximately $200 million and a maximum of
approximately $500 million, depending on what adjustment, if any, is made for AGFP's credit risk and excluding any applicable
interest.
16.
Long-Term Debt and Credit Facilities
Accounting Policy
Long-term debt is recorded at principal amounts net of any unamortized original issue discount or premium and
unamortized fair value adjustment for AGMH debt (as of the date of the AGMH acquisition). Discounts and acquisition date
fair value adjustments are accreted into interest expense over the life of the applicable debt.
Long Term Debt
The Company has outstanding long-term debt comprising primarily debt issued by AGUS and AGMH. All of such
debt is fully and unconditionally guaranteed by AGL; AGL's guarantee of the junior subordinated debentures is on a junior
subordinated basis.
223
Debt Issued by AGUS
7% Senior Notes. On May 18, 2004, AGUS issued $200 million of 7% Senior Notes due 2034 (7% Senior Notes) for
net proceeds of $197 million. Although the coupon on the Senior Notes is 7%, the effective rate is approximately 6.4%, taking
into account the effect of a cash flow hedge executed by the Company in March 2004. The notes are redeemable, in whole or in
part at their principal amount plus accrued and unpaid interest to the date of redemption or, if greater, the make-whole
redemption price.
5% Senior Notes. On June 20, 2014, AGUS issued $500 million of 5% Senior Notes due 2024 (5% Senior Notes) for
net proceeds of $495 million. The notes are guaranteed by AGL. The net proceeds from the sale of the notes were used for
general corporate purposes, including the purchase of AGL common shares. The notes are redeemable, in whole or in part at
their principal amount plus accrued and unpaid interest to the date of redemption or, if greater, the make-whole redemption
price.
Series A Enhanced Junior Subordinated Debentures. On December 20, 2006, AGUS issued $150 million of
Debentures due 2066. The Debentures paid a fixed 6.4% rate of interest until December 15, 2016, and thereafter pay a floating
rate of interest, reset quarterly, at a rate equal to three month LIBOR plus a margin equal to 2.38%. AGUS may select at one or
more times to defer payment of interest for one or more consecutive periods for up to ten years. Any unpaid interest bears
interest at the then applicable rate. AGUS may not defer interest past the maturity date. The debentures are redeemable, in
whole or in part at their principal amount plus accrued and unpaid interest to the date of redemption.
Debt Issued by AGMH
6 7/8% QUIBS. On December 19, 2001, AGMH issued $100 million face amount of 6 7/8% QUIBS due
December 15, 2101, which are redeemable without premium or penalty in whole or in part at their principal amount plus
accrued and unpaid interest to the date of redemption.
6.25% Notes. On November 26, 2002, AGMH issued $230 million face amount of 6.25% Notes due November 1,
2102, which are redeemable without premium or penalty in whole or in part at their principal amount plus accrued and unpaid
interest to the date of redemption.
5.6% Notes. On July 31, 2003, AGMH issued $100 million face amount of 5.6% Notes due July 15, 2103, which are
redeemable without premium or penalty in whole or in part at their principal amount plus accrued and unpaid interest to the
date of redemption.
Junior Subordinated Debentures. On November 22, 2006, AGMH issued $300 million face amount of Junior
Subordinated Debentures with a scheduled maturity date of December 15, 2036 and a final repayment date of December 15,
2066. The final repayment date of December 15, 2066 may be automatically extended up to four times in five-year increments
provided certain conditions are met. The debentures are redeemable, in whole or in part, at any time prior to December 15,
2036 at their principal amount plus accrued and unpaid interest to the date of redemption or, if greater, the make-whole
redemption price. Interest on the debentures will accrue from November 22, 2006 to December 15, 2036 at the annual rate of
6.4%. If any amount of the debentures remains outstanding after December 15, 2036, then the principal amount of the
outstanding debentures will bear interest at a floating interest rate equal to one-month LIBOR plus 2.215% until repaid. AGMH
may elect at one or more times to defer payment of interest on the debentures for one or more consecutive interest periods that
do not exceed ten years. In connection with the completion of this offering, AGMH entered into a replacement capital covenant
for the benefit of persons that buy, hold or sell a specified series of AGMH long-term indebtedness ranking senior to the
debentures. Under the covenant, the debentures will not be repaid, redeemed, repurchased or defeased by AGMH or any of its
subsidiaries on or before the date that is 20 years prior to the final repayment date, except to the extent that AGMH has
received proceeds from the sale of replacement capital securities. The proceeds from this offering were used to pay a dividend
to the shareholders of AGMH.
224
The principal and carrying values of the Company’s long-term debt are presented in the table below.
Principal and Carrying Amounts of Debt
As of December 31, 2017
As of December 31, 2016
Principal
Carrying
Value
Principal
Carrying
Value
AGUS:
7% Senior Notes (1)
5% Senior Notes (1)
Series A Enhanced Junior Subordinated Debentures (2)
$
Total AGUS
AGMH(3):
67/8% QUIBS (1)
6.25% Notes (1)
5.6% Notes (1)
Junior Subordinated Debentures (2)
Total AGMH
AGM(3):
AGM Notes Payable
Total AGM
Purchased debt (4)
Total
(in millions)
$
197
496
150
843
70
142
57
192
461
$
200
500
150
850
100
230
100
300
730
$
200
500
150
850
100
230
100
300
730
6
6
(28)
1,558
$
6
6
(18)
1,292
$
9
9
—
1,589
$
$
197
496
150
843
69
141
56
187
453
10
10
—
1,306
____________________
(1)
AGL fully and unconditionally guarantees these obligations.
(2)
(3)
(4)
Guaranteed by AGL on a junior subordinated basis.
Carrying amounts are different than principal amounts due primarily to fair value adjustments at the AGMH
acquisition date, which are accreted or amortized into interest expense over the remaining terms of these obligations.
In 2017, AGUS purchased $28 million principal amount of AGMH's outstanding Junior Subordinated Debentures. The
Company recognized a $9 million loss on extinguishment of debt, which is included in other income.
Principal payments due under the long-term debt are as follows:
Expected Maturity Schedule of Debt
As of December 31, 2017
2018-2022
2023-2042
2043-2062
2063-2082
Thereafter
Total
____________________
(1)
Includes AGMH's purchased debt.
AGUS
AGMH
AGM
Total (1)
$
$
— $
700
—
150
—
850
$
(in millions)
— $
—
—
300
430
730
$
5
1
—
—
—
6
$
$
5
701
—
450
430
1,586
225
AGUS:
7% Senior Notes
5% Senior Notes
Series A Enhanced Junior Subordinated Debentures
Total AGUS
AGMH:
67/8% QUIBS
6.25% Notes
5.6% Notes
Junior Subordinated Debentures
Total AGMH
AGM:
Notes Payable
Total AGM
Purchased debt
Total
Interest Expense
Year Ended December 31,
2017
2016
(in millions)
2015
$
$
$
13
26
5
44
7
16
6
25
54
$
13
26
9
48
7
16
6
25
54
0
0
(1)
97
$
0
0
—
102
$
13
26
10
49
7
16
6
25
54
(2)
(2)
—
101
Intercompany Credit Facility and Intercompany Debt
On October 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. Such commitment terminates on October 25, 2018 (the loan
termination date). The unpaid principal amount of each loan will bear interest at a fixed rate equal to 100% of the then
applicable Federal short-term or mid-term interest rate, as the case may be, as determined under Section 1274(d) of the Code,
and interest on all loans will be computed for the actual number of days elapsed on the basis of a year consisting of 360
days. Accrued interest on all loans will be paid on the last day of each June and December, beginning on December 31, 2013,
and at maturity. AGL must repay the then unpaid principal amounts of the loans by the third anniversary of the loan
termination date. No amounts are currently outstanding under the credit facility.
In addition, in 2012 AGUS borrowed $90 million from its affiliate AGRO to fund the acquisition of MAC. During
2017 and 2016, AGUS repaid $10 million and $20 million, respectively, in outstanding principal as well as accrued and unpaid
interest, and the parties agreed to extend the maturity date of the loan from May 2017 to November 2019. As of December 31,
2017, $60 million remained outstanding.
Committed Capital Securities
Each of AGC and AGM have entered into put agreements with four separate custodial trusts allowing 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. The custodial trusts were 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
does not consider itself to be the primary beneficiary of the trusts and the trusts are not consolidated in Assured 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 the 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)
226
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 basis points, and the annualized rate on the AGM CPS is one-month LIBOR plus 200 basis
points.
See Note 7, Fair Value Measurement, –Other Assets–Committed Capital Securities, for a fair value measurement
discussion.
17.
Earnings Per Share
Accounting Policy
The Company computes EPS using a two-class method, which is an earnings allocation formula that determines EPS
for (i) each class of common stock (the Company has a single class of common stock), and (ii) participating securities
according to dividends declared (or accumulated) and participation rights in undistributed earnings. Restricted stock awards
and share units under the AGC supplemental executive retirement plan (AGC SERP) are considered participating securities as
they received non-forfeitable rights to dividends (or dividend equivalents) as common stock.
Basic EPS is then calculated by dividing net (loss) income available to common shareholders of Assured Guaranty by
the weighted‑average number of common shares outstanding during the period. Diluted EPS adjusts basic EPS for the effects of
restricted stock, restricted stock units, stock options and other potentially dilutive financial instruments (dilutive securities),
only in the periods in which such effect is dilutive. The effect of the dilutive securities is reflected in diluted EPS by application
of the more dilutive of (1) the treasury stock method or (2) the two-class method assuming nonvested shares are not converted
into common shares.
227
Computation of Earnings Per Share
Basic EPS:
Net income (loss) attributable to AGL
Less: Distributed and undistributed income (loss) available to nonvested
shareholders
Distributed and undistributed income (loss) available to common
shareholders of AGL and subsidiaries, basic
Basic shares
Basic EPS
Diluted EPS:
Distributed and undistributed income (loss) available to common
shareholders of AGL and subsidiaries, basic
Plus: Re-allocation of undistributed income (loss) available to nonvested
shareholders of AGL and subsidiaries
Distributed and undistributed income (loss) available to common
shareholders of AGL and subsidiaries, diluted
Basic shares
Dilutive securities:
Options and restricted stock awards
Diluted shares
Diluted EPS
Potentially dilutive securities excluded from computation of EPS because
of antidilutive effect
$
$
$
$
$
$
Year Ended December 31,
2017
2016
2015
(in millions, except per share amounts)
730
$
1
729
120.6
6.05
$
$
881
1
880
133.0
6.61
$
1,056
1
1,055
148.1
7.12
729
$
880
$
1,055
0
0
0
729
$
880
$
1,055
120.6
1.7
122.3
5.96
0.1
$
133.0
1.1
134.1
6.56
0.3
$
148.1
0.9
149.0
7.08
0.5
18.
Shareholders' Equity
Share Issuances
AGL has authorized share capital of $5 million divided into 500,000,000 shares with a par value $0.01 per share.
Except as described below, AGL's common shares have no preemptive rights or other rights to subscribe for additional common
shares, no rights of redemption, conversion or exchange and no sinking fund rights. In the event of liquidation, dissolution or
winding-up, the holders of AGL's common shares are entitled to share equally, in proportion to the number of common shares
held by such holder, in AGL's assets, if any remain after the payment of all its liabilities and the liquidation preference of any
outstanding preferred shares. Under certain circumstances, AGL has the right to purchase all or a portion of the shares held by a
shareholder at fair market value. All of the common shares are fully paid and non assessable. Holders of AGL's common shares
are entitled to receive dividends as lawfully may be declared from time to time by AGL's Board of Directors (the Board).
In general, and except as provided below, shareholders have one vote for each common share held by them and are
entitled to vote with respect to their fully paid shares at all meetings of shareholders. However, if, and so long as, the common
shares (and other of AGL's shares) of a shareholder are treated as "controlled shares" (as determined pursuant to section 958 of
the Code) of any U.S. Person and such controlled shares constitute 9.5% or more of the votes conferred by AGL's issued and
outstanding shares, the voting rights with respect to the controlled shares owned by such U.S. Person shall be limited, in the
aggregate, to a voting power of less than 9.5% of the voting power of all issued and outstanding shares, under a formula
specified in AGL's Bye-laws. The formula is applied repeatedly until there is no U.S. Person whose controlled shares constitute
9.5% or more of the voting power of all issued and outstanding shares and who generally would be required to recognize
income with respect to AGL under the Code if AGL were a controlled foreign corporation as defined in the Code and if the
ownership threshold under the Code were 9.5% (as defined in AGL's Bye-Laws as a 9.5% U.S. Shareholder).
228
Subject to AGL's Bye-Laws and Bermuda law, AGL's Board has the power to issue any of AGL's unissued shares as it
determines, including the issuance of any shares or class of shares with preferred, deferred or other special rights.
Under AGL's Bye-Laws and subject to Bermuda law, if AGL's Board determines that any ownership of AGL's shares
may result in adverse tax, legal or regulatory consequences to the Company, any of the Company's subsidiaries or any of its
shareholders or indirect holders of shares or its Affiliates (other than such as AGL's Board considers de minimis), the Company
has the option, but not the obligation, to require such shareholder to sell to AGL or to a third party to whom AGL assigns the
repurchase right the minimum number of common shares necessary to avoid or cure any such adverse consequences at a price
determined in the discretion of the Board to represent the shares' fair market value (as defined in AGL's Bye-Laws). In
addition, AGL's Board may determine that shares held carry different voting rights when it deems it appropriate to do so to
(i) avoid the existence of any 9.5% U.S. Shareholder; and (ii) avoid adverse tax, legal or regulatory consequences to AGL or
any of its subsidiaries or any direct or indirect holder of shares or its affiliates. "Controlled shares" includes, among other
things, all shares of AGL that such U.S. Person is deemed to own directly, indirectly or constructively (within the meaning of
section 958 of the Code). Further, these provisions do not apply in the event one shareholder owns greater than 75% of the
voting power of all issued and outstanding shares.
Under these provisions, certain shareholders may have their voting rights limited to less than one vote per share, while
other shareholders may have voting rights in excess of one vote per share. Moreover, these provisions could have the effect of
reducing the votes of certain shareholders who would not otherwise be subject to the 9.5% limitation by virtue of their direct
share ownership. AGL's Bye-laws provide that it will use its best efforts to notify shareholders of their voting interests prior to
any vote to be taken by them.
Share Repurchases
The Board of Directors (the Board) most recently authorized share repurchases on November 1, 2017, for an additional
$300 million. The total remaining capacity for share repurchases under Board authorizations was $305 million as of February
23, 2018. The Company expects to repurchase shares 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. The repurchase program may be modified,
extended or terminated by the Board at any time. It does not have an expiration date. As indicated in Note 14, Related Party
Transactions, in 2017 the Company repurchased shares from its Chief Executive Officer and former General Counsel.
Share Repurchases
Year
2015
2016
2017
2018 (through February 23, 2018 on a settlement date basis)
Deferred Compensation
Number of
Shares
Repurchased
Total Payments
(in millions)
20,995,419
10,721,248
12,669,643
1,230,941
$
$
$
$
555
306
501
43
Average Price
Paid Per Share
26.43
$
$
$
$
28.53
39.57
34.90
Each of the Chief Executive Officer and the former General Counsel of the Company elected to invest a portion of his
AGL SERP account in the employer stock fund within the AGL SERP. Each unit in the employer stock fund represents the right
to receive one AGL common share upon a distribution from the AGL SERP. Each unit equals the number of AGL common
shares which could have been purchased with the value of the account deemed invested in the employer stock fund as of the
date of such election. At the same time such investment elections were made, the Company purchased AGL common shares and
placed such shares in trust to be distributed to the Chief Executive Officer and the former General Counsel upon a distribution
from the AGL SERP in settlement of their units invested in the employer stock fund. As of December 31, 2016, the Company
had 320,193 shares in the trust. The Company recorded the purchase of such shares in “deferred equity compensation” in the
consolidated balance sheet. As indicated in Note 14, Related Party Transactions, on January 6, 2017, the 320,193 shares were
distributed in settlement of the AGL SERP units and therefore, there are no shares remaining in trust.
229
Certain executives of the Company elected to invest a portion of their AGC SERP accounts in the employer stock fund
in the AGC SERP. Each unit in the employer stock fund represents the right to receive one AGL common share upon a
distribution from the AGC SERP. Each unit equals the number of AGL common shares which could have been purchased with
the value of the account deemed invested in the employer stock fund as of the date of such election. As of December 31, 2017
and 2016, there were 74,309 and 74,309 units, respectively, in the AGC SERP. See Note 19, Employee Benefit Plans.
Dividends
Any determination to pay cash dividends is at the discretion of the Company's Board, and depends upon the
Company's results of operations, cash flows from operating activities, its financial position, capital requirements, general
business conditions, legal, tax, regulatory, rating agency and contractual restrictions on the payment of dividends, other
potential uses for such funds, and any other factors the Company's Board deems relevant. For more information concerning
regulatory constraints that affect the Company's ability to pay dividends, see Note 11, Insurance Company Regulatory
Requirements.
On February 21, 2018, the Company declared a quarterly dividend of $0.16 per common share, an increase of nearly
12% from a quarterly dividend of $0.1425 per common share paid in 2017.
19.
Employee Benefit Plans
Accounting Policy
Share-based compensation expense is based on the grant date fair value using the grant date closing price, the lattice,
Monte Carlo or Black-Scholes-Merton (Black-Scholes) pricing models. The Company amortizes the fair value of share-based
awards on a straight-line basis over the requisite service periods of the awards, which are generally the vesting periods, with the
exception of retirement‑eligible employees. For retirement-eligible employees, certain awards contain retirement provisions
and therefore are amortized over the period through the date the employee first becomes eligible to retire and is no longer
required to provide service to earn part or all of the award.
The fair value of each award under the Assured Guaranty Ltd. Employee Stock Purchase Plan is estimated at the
beginning of each offering period using the Black-Scholes option valuation model.
The expense for Performance Retention Plan awards is recognized straight-line over the requisite service period, with
the exception of retirement eligible employees. For retirement eligible employees, the expense is recognized immediately.
Assured Guaranty Ltd. 2004 Long-Term Incentive Plan
Under the Assured Guaranty Ltd. 2004 Long-Term Incentive Plan, as amended (the Incentive Plan), the number of
AGL common shares that may be delivered under the Incentive Plan may not exceed 18,670,000. In the event of certain
transactions affecting AGL's common shares, the number or type of shares subject to the Incentive Plan, the number and type of
shares subject to outstanding awards under the Incentive Plan, and the exercise price of awards under the Incentive Plan, may
be adjusted.
The Incentive Plan authorizes the grant of incentive stock options, non-qualified stock options, stock appreciation
rights, and full value awards that are based on AGL's common shares. The grant of full value awards may be in return for a
participant's previously performed services, or in return for the participant surrendering other compensation that may be due, or
may be contingent on the achievement of performance or other objectives during a specified period, or may be subject to a risk
of forfeiture or other restrictions that will lapse upon the achievement of one or more goals relating to completion of service by
the participant, or achievement of performance or other objectives. Awards under the Incentive Plan may accelerate and become
vested upon a change in control of AGL.
The Incentive Plan is administered by the Compensation Committee of the Board, except as otherwise determined by
the Board. The Board may amend or terminate the Incentive Plan. As of December 31, 2017, 10,034,895 common shares were
available for grant under the Incentive Plan.
230
Time Vested Stock Options
Stock options are generally granted once a year with exercise prices equal to the closing price on the date of grant. To
date, the Company has only issued non-qualified stock options. All stock options, except for performance stock options, granted
to employees vest in equal annual installments over a three-year period and expire seven years or ten years from the date of
grant. Stock options granted to directors vest over one year and expire in seven years or ten years from grant date. None of the
Company's options, except for performance stock options, have a performance or market condition.
Time Vested Stock Options
Balance as of December 31, 2016
Options granted
Options exercised
Options forfeited/expired
Balance as of December 31, 2017
Options for
Common Shares
Weighted
Average
Exercise Price
1,170,593
$
—
(331,639)
—
838,954
$
18.43
—
21.02
—
17.41
Number of
Exercisable
Options
1,145,356
838,954
As of December 31, 2017, the aggregate intrinsic value and weighted average remaining contractual term of stock
options outstanding were $14 million and 1.4 years, respectively. As of December 31, 2017, the aggregate intrinsic value and
weighted average remaining contractual term of exercisable stock options were $14 million and 1.4 years, respectively.
No options were granted in 2017, 2016 and 2015. As of December 31, 2017, there were no unexpensed outstanding
non-vested options.
The total intrinsic value of stock options exercised during the years ended December 31, 2017, 2016 and 2015 was
$6.6 million, $4.6 million and $2.8 million, respectively. During the years ended December 31, 2017, 2016 and 2015, $4.7
million, $12 million and $4.9 million, respectively, was received from the exercise of stock options. In order to satisfy stock
option exercises, the Company issues new shares. The tax benefit from stock options exercised during 2017 was $1.8 million.
Performance Stock Options
The Company grants performance stock options under the Incentive Plan. These awards are non-qualified stock
options with exercise prices equal to the closing price of an AGL common share on the applicable date of grant. These awards
vest 35%, 50% or 100%, if the price of AGL's common shares using the highest 40-day average share price during the relevant
three-year performance period reaches certain hurdles. If the share price is between the specified levels, the vesting level will
be interpolated accordingly. These awards expire seven years from the date of grant.
Performance Stock Options
Balance as of December 31, 2016
Options granted
Options exercised
Options forfeited/expired
Balance as of December 31, 2017
Options for
Common Shares
Weighted
Average
Exercise Price
221,409
$
—
(30,508)
—
190,901
$
17.89
—
18.45
—
17.80
Number of
Exercisable
Options
221,409
190,901
As of December 31, 2017, the aggregate intrinsic value and weighted average remaining contractual term of
performance stock options outstanding were $3 million and 1.3 years, respectively. As of December 31, 2017, the aggregate
intrinsic value and weighted average remaining contractual term of exercisable performance stock options were $3 million and
1.3 years, respectively.
231
No options were granted in 2017, 2016 and 2015. As of December 31, 2017, there were no unexpensed outstanding
nonvested performance stock options.
The total intrinsic value of performance stock options exercised during the years ended December 31, 2017, 2016 and
2015 was $699 thousand, $41 thousand and $75 thousand, respectively. During the years ended December 31, 2017, 2016 and
2015, $206 thousand, $106 thousand and $98 thousand, respectively, was received from the exercise of performance stock
options. In order to satisfy stock option exercises, the Company issues new shares.
Restricted Stock Awards
Restricted stock awards are valued based on the closing price of the underlying shares at the date of grant (adjusted for
the timing of dividends). Restricted stock awards to employees generally vest in equal annual installments over a four-year
period and restricted stock awards to outside directors vest in full in one year. Restricted stock awards to employees are
amortized on a straight-line basis over the requisite service periods of the awards, and restricted stock awards to outside
directors are amortized over one year, which are generally the vesting periods, with the exception of retirement‑eligible
employees, discussed above.
Restricted Stock Award Activity
Nonvested Shares
Nonvested at December 31, 2016
Granted
Vested
Forfeited
Nonvested at December 31, 2017
Number of
Shares
Weighted
Average Grant
Date Fair Value
Per Share
58,858
50,225
(58,858)
—
50,225
$
$
25.57
37.93
25.57
—
37.93
As of December 31, 2017 the total unrecognized compensation cost related to outstanding nonvested restricted stock
awards was $0.7 million, which the Company expects to recognize over the weighted‑average remaining service period of 0.4
years. The total fair value of shares vested during the years ended December 31, 2017, 2016 and 2015 was $1.5 million, $1.6
million and $1 million, respectively.
Restricted Stock Units
Restricted stock units are valued based on the closing price of the underlying shares at the date of grant. Restricted
stock units awarded to employees have vesting terms similar to those of the restricted stock awards and are delivered on the
vesting date. The Company has granted restricted stock units to directors of the Company. Restricted stock units awarded to
directors vested over a one-year period and were delivered in January 2017.
Restricted Stock Unit Activity
Nonvested Stock Units
Nonvested at December 31, 2016
Granted
Vested
Forfeited
Nonvested at December 31, 2017
Number of
Stock Units
Weighted
Average Grant
Date Fair Value
Per Share
945,509
245,735
(289,176)
(47,449)
854,619
$
$
24.01
41.37
22.74
23.35
29.67
As of December 31, 2017, the total unrecognized compensation cost related to outstanding nonvested restricted stock
units was $12.7 million, which the Company expects to recognize over the weighted‑average remaining service period of 1.8
232
years. The total fair value of restricted stock units delivered during the years ended December 31, 2017, 2016 and 2015 was $7
million, $2 million and $6 million, respectively.
Performance Restricted Stock Units
The Company has granted performance restricted stock units under the Incentive Plan. These awards vest 35%, 50%,
100%, or 200%, if the price of AGL's common shares using the highest 40-day average share price during the relevant three-
year performance period reaches certain hurdles. If the share price is between the specified levels, the vesting level will be
interpolated accordingly.
Performance Restricted Stock Unit Activity
Performance Restricted Stock
Units
Nonvested at December 31, 2016
Granted (1)
Delivered
Forfeited
Nonvested at December 31, 2017 (2)
Number of
Performance Share
Units
Weighted
Average Grant
Date Fair Value
Per Share
609,435
315,896
(318,467)
—
606,864
$
$
26.22
53.74
25.17
—
33.80
____________________
(1)
Includes 155,000 performance restricted stock units that were granted prior to 2017 at a weighted average grant date
fair value of $25.17, but met performance hurdles and vested in February 2017. The weighted average grant date fair
value per share excludes these shares.
Excludes 426,670 performance restricted stock units that have met performance hurdles and will be eligible for vesting
after December 31, 2017.
(2)
As of December 31, 2017, the total unrecognized compensation cost related to outstanding nonvested performance
share units was $8.8 million, which the Company expects to recognize over the weighted‑average remaining service period of
1.8 years. The total value of performance restricted stock units delivered during the years ended December 31, 2017, 2016 and
2015 was based on grant date fair value and was $8 million, $2 million and $6 million, respectively.
The Company uses a Monte Carlo model to value its performance restricted stock units.
Monte Carlo Pricing
Weighted Average Assumptions
Dividend yield
Expected volatility
Risk free interest rate
Weighted average grant date fair value
2017
2016
2015
1.37%
25.19%
1.48%
53.74
$
2.12%
30.84%
0.90%
25.62
$
1.90%
32.20%
0.82%
28.31
$
The expected dividend yield is based on the current expected annual dividend and share price on the grant date. The
expected volatility is estimated at the date of grant based on an average of the 3-year historical share price volatility and
implied volatilities of certain at-the-money actively traded call options in the Company. The risk-free interest rate is the implied
3-year yield currently available on U.S. Treasury zero-coupon issues at the date of grant. The expected life is based on the 18-
month term of the performance period.
233
Employee Stock Purchase Plan
The Company established the AGL Employee Stock Purchase Plan (Stock Purchase Plan) in accordance with Internal
Revenue Code Section 423, and participation is available to all eligible employees. Maximum annual purchases by participants
are limited to the number of whole shares that can be purchased by an amount equal to 10% of the participant's compensation
or, if less, shares having a value of $25,000. Participants may purchase shares at a purchase price equal to 85% of the lesser of
the fair market value of the stock on the first day or the last day of the subscription period. The Company has reserved for
issuance and purchases under the Stock Purchase Plan 600,000 Assured Guaranty Ltd. common shares.
The fair value of each award under the Stock Purchase Plan is estimated at the beginning of each offering period using
the Black‑Scholes option‑pricing model and the following assumptions: a) the expected dividend yield is based on the current
expected annual dividend and share price on the grant date; b) the expected volatility is estimated at the date of grant based on
the historical share price volatility, calculated on a daily basis; c) the risk-free rate for periods within the contractual life of the
option is based on the U.S. Treasury yield curve in effect at the time of grant; and d) the expected life is based on the term of
the offering period.
Stock Purchase Plan
2017
Year Ended December 31,
2016
2015
Proceeds from purchase of shares by employees
Number of shares issued by the Company
Recorded in share-based compensation, net of deferral
$
$
Share‑Based Compensation Expense
(dollars in millions)
0.9
$
1.0
33,666
0.3
$
$
$
0.8
38,565
0.2
39,055
0.2
The following table presents stock based compensation costs and the effect of deferring such costs as policy
acquisition costs, pre-tax. Amortization of previously deferred stock compensation costs is not shown in the table below.
Share‑Based Compensation Expense Summary
Share‑based compensation expense
Share‑based compensation capitalized as DAC
Income tax benefit
Defined Contribution Plan
Year Ended December 31,
2017
2016
(in millions)
2015
$
$
16
0.6
2
$
13
0.4
3
10
0.5
2
The Company maintains a savings incentive plan, which is qualified under Section 401(a) of the Internal Revenue
Code for U.S. employees. The savings incentive plan is available to eligible full-time employees upon hire. Eligible participants
could contribute a percentage of their salary subject to a maximum of $18,000 for 2017. Contributions are matched by the
Company at a rate of 100% up to 6% of participant's compensation, subject to IRS limitations. Any amounts over the IRS limits
are contributed to and matched by the Company into a nonqualified supplemental executive retirement plan for employees
eligible to participate in such nonqualified plan. The Company also makes a core contribution of 6% of the participant's
compensation to the qualified plan, subject to IRS limitations, and the nonqualified supplemental executive retirement plan for
eligible employees, regardless of whether the employee contributes to the plan(s). Employees become fully vested in Company
contributions after one year of service, as defined in the plan. Plan eligibility is immediate upon hire. The Company also
maintains similar non-qualified plans for non-U.S. employees.
The Company recognized defined contribution expenses of $11 million, $11 million and $10 million for the years
ended December 31, 2017, 2016 and 2015, respectively.
234
Cash-Based Compensation Plans
The Company maintains a Performance Retention Plan (PRP) that permits the grant of deferred cash based awards to
selected employees. Generally, each PRP award is divided into three installments that vest over four years. The cash payment
depends on growth in certain measures of intrinsic value and financial return defined in each PRP award agreement. The
Company recognized performance retention plan expenses of $12 million, $12 million and $11 million for the years ended
December 31, 2017, 2016 and 2015, respectively.
The Company’s executive officers are eligible to receive compensation under a non-equity incentive plan. The amount
of compensation payable is subject to a performance goal being met. The Compensation Committee then uses discretion to
determine the actual amount of cash incentive compensation payable to each executive officer for such performance year based
on factors and criteria as determined by the Compensation Committee, provided that such discretion cannot be used to increase
the amount that was determined to be payable to each executive officer. For an applicable performance year, the Compensation
Committee establishes target financial performance measures for the Company and individual non-financial objectives for the
executive officers. Most employees other than executive officers are eligible to receive discretionary bonuses.
20.
Other Comprehensive Income
The following tables present the changes in each component of AOCI and the effect of reclassifications out of AOCI
on the respective line items in net income.
Changes in Accumulated Other Comprehensive Income by Component
Year Ended December 31, 2017
Net Unrealized
Gains (Losses) on
Investments with
no Other-Than-
Temporary
Impairment
Net Unrealized
Gains (Losses) on
Investments with
Other-Than-
Temporary
Impairment
Cumulative
Translation
Adjustment
(in millions)
Total Accumulated
Other
Comprehensive
Income
Cash Flow Hedge
Balance, December 31, 2016
$
171
$
10
$
(39) $
Reclassification of stranded tax
effects (see Note 1)
Other comprehensive income (loss)
before reclassifications
Amounts reclassified from AOCI
to:
Net realized investment gains
(losses)
Net investment income
Interest expense
Total before tax
Tax (provision) benefit
Total amount reclassified from
AOCI, net of tax
Net current period other
comprehensive income (loss)
38
128
(71)
(27)
—
(98)
34
(64)
64
21
69
31
(1)
—
30
(10)
20
89
Balance, December 31, 2017
$
273
$
120
$
(5)
15
—
—
—
—
—
—
15
(29) $
7
2
—
—
—
(1)
(1)
0
(1)
(1)
8
$
$
149
56
212
(40)
(28)
(1)
(69)
24
(45)
167
372
235
Changes in Accumulated Other Comprehensive Income by Component
Year Ended December 31, 2016
Net Unrealized
Gains (Losses) on
Investments with
no Other-Than-
Temporary
Impairment
Net Unrealized
Gains (Losses) on
Investments with
Other-Than-
Temporary
Impairment
Cumulative
Translation
Adjustment
(in millions)
Cash Flow Hedge
Total
Accumulated
Other
Comprehensive
Income
Balance, December 31, 2015
$
260
$
(15) $
(16) $
8
$
Other comprehensive income (loss)
before reclassifications
Amounts reclassified from AOCI
to:
Net realized investment gains
(losses)
Net investment income
Interest expense
Total before tax
Tax (provision) benefit
Total amount reclassified from
AOCI, net of tax
Net current period other
comprehensive income (loss)
Balance, December 31, 2016
$
(71)
(9)
(23)
(23)
(3)
—
(26)
8
(18)
(89)
171
$
52
—
—
52
(18)
34
25
10
—
—
—
—
—
—
$
(23)
(39) $
—
—
—
(1)
(1)
0
(1)
(1)
7
$
237
(103)
29
(3)
(1)
25
(10)
15
(88)
149
Changes in Accumulated Other Comprehensive Income by Component
Year Ended December 31, 2015
Net Unrealized
Gains (Losses) on
Investments with
no Other-Than-
Temporary
Impairment
Net Unrealized
Gains (Losses) on
Investments with
Other-Than-
Temporary
Impairment
Total
Accumulated
Other
Comprehensive
Income
Cash Flow
Hedge
Cumulative
Translation
Adjustment
(in millions)
Balance, December 31, 2014
$
367
$
4
$
(10) $
9
$
Other comprehensive income (loss)
before reclassifications
Amounts reclassified from AOCI
to:
Net realized investment gains
(losses)
Net investment income
Interest expense
Total before tax
Tax (provision) benefit
Total amount reclassified from
AOCI, net of tax
Net current period other
comprehensive income (loss)
Balance, December 31, 2015
$
(93)
(43)
(6)
(11)
(9)
—
(20)
6
(14)
37
—
—
37
(13)
24
—
—
—
—
—
—
(107)
260
$
(19)
(15) $
(6)
(16) $
—
—
—
(1)
(1)
0
(1)
(1)
8
236
370
(142)
26
(9)
(1)
16
(7)
9
$
(133)
237
21.
Subsidiary Information
The following tables present the condensed consolidating financial information for AGUS and AGMH, 100%-owned
subsidiaries of AGL, which have issued publicly traded debt securities (see Note 16, Long Term Debt and Credit Facilities).
The information for AGL, AGUS and AGMH presents its subsidiaries on the equity method of accounting. The following tables
reflect transfers of businesses between entities within the consolidated group that occurred in the current reporting period
consistently for all prior periods presented.
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 2017
(in millions)
Assured
Guaranty Ltd.
(Parent)
AGUS
(Issuer)
AGMH
(Issuer)
Other
Entities
Consolidating
Adjustments
Assured
Guaranty Ltd.
(Consolidated)
ASSETS
Total investment portfolio and cash $
Investment in subsidiaries
Premiums receivable, net of
commissions payable
Ceded unearned premium reserve
Deferred acquisition costs
Reinsurance recoverable on unpaid
losses
Credit derivative assets
Deferred tax asset, net
Intercompany receivable
Financial guaranty variable interest
entities’ assets, at fair value
Other
TOTAL ASSETS
LIABILITIES AND
SHAREHOLDERS’ EQUITY
Unearned premium reserves
Loss and LAE reserve
Long-term debt
Intercompany payable
Credit derivative liabilities
Deferred tax liabilities, net
Financial guaranty variable interest
entities’ liabilities, at fair value
Other
TOTAL LIABILITIES
TOTAL SHAREHOLDERS’
EQUITY ATTRIBUTABLE TO
ASSURED GUARANTY LTD.
Noncontrolling interest
TOTAL SHAREHOLDERS’
EQUITY
TOTAL LIABILITIES AND
SHAREHOLDERS’ EQUITY
36
$
319
$
28
$
11,484
$
(328) $
11,539
6,794
6,126
4,048
216
(17,184)
—
—
—
—
—
—
—
—
26
—
—
—
—
—
59
—
—
0
—
—
—
—
—
—
—
—
40
1,074
1,002
144
433
39
93
60
700
1,171
$
6,856
$
6,504
$
4,116
$
16,416
$
—
915
119
101
44
2
98
—
(159)
(883)
(43)
(389)
(37)
(54)
(60)
—
(322)
(19,459) $
700
915
14,433
—
—
—
—
—
—
17
17
—
—
843
60
—
—
—
59
—
—
461
—
—
51
—
20
4,423
1,793
6
300
308
—
757
740
962
532
8,327
(948)
(349)
(18)
(360)
(37)
(51)
—
(481)
(2,244)
6,839
—
6,839
5,542
—
5,542
3,584
—
3,584
7,873
216
(16,999)
(216)
8,089
(17,215)
3,475
1,444
1,292
—
271
—
757
355
7,594
6,839
—
6,839
$
6,856
$
6,504
$
4,116
$
16,416
$
(19,459) $
14,433
237
ASSETS
Total investment portfolio and cash $
Investment in subsidiaries
Premiums receivable, net of
commissions payable
Ceded unearned premium reserve
Deferred acquisition costs
Reinsurance recoverable on unpaid
losses
Credit derivative assets
Deferred tax asset, net
Intercompany receivable
Financial guaranty variable interest
entities’ assets, at fair value
Dividend receivable from affiliate
Other
TOTAL ASSETS
LIABILITIES AND
SHAREHOLDERS’ EQUITY
Unearned premium reserves
Loss and LAE reserve
Long-term debt
Intercompany payable
Credit derivative liabilities
Deferred tax liabilities, net
Financial guaranty variable interest
entities’ liabilities, at fair value
Dividend payable to affiliate
Other
TOTAL LIABILITIES
TOTAL SHAREHOLDERS’
EQUITY ATTRIBUTABLE TO
ASSURED GUARANTY LTD.
Noncontrolling interest
TOTAL SHAREHOLDERS’
EQUITY
TOTAL LIABILITIES AND
SHAREHOLDERS’ EQUITY
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 2016
(in millions)
Assured
Guaranty Ltd.
(Parent)
AGUS
(Issuer)
AGMH
(Issuer)
Other
Entities
Consolidating
Adjustments
Assured
Guaranty Ltd.
(Consolidated)
36
$
384
$
22
$
11,029
$
(368) $
11,103
6,164
5,696
3,799
296
(15,955)
—
576
206
106
80
13
497
—
876
—
694
14,151
3,511
1,127
1,306
—
402
—
958
—
343
7,647
6,504
—
6,504
—
—
—
—
—
—
—
—
300
11
—
—
—
—
—
16
—
—
—
78
—
—
—
—
—
—
—
—
—
26
699
1,099
156
484
69
597
70
876
—
801
$
6,511
$
6,174
$
3,847
$
16,176
$
—
—
—
—
—
—
—
—
7
7
—
—
843
70
—
—
—
300
3
—
—
453
—
—
88
—
—
14
4,488
1,596
10
300
458
—
958
—
665
1,216
555
8,475
(123)
(893)
(50)
(404)
(56)
(116)
(70)
—
(300)
(222)
(18,557) $
(977)
(469)
—
(370)
(56)
(88)
—
(300)
(346)
(2,606)
6,504
—
6,504
4,958
—
4,958
3,292
—
3,292
7,405
296
(15,655)
(296)
7,701
(15,951)
$
6,511
$
6,174
$
3,847
$
16,176
$
(18,557) $
14,151
238
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
AND COMPREHENSIVE INCOME
FOR THE YEAR ENDED DECEMBER 31, 2017
(in millions)
Assured
Guaranty Ltd.
(Parent)
AGUS
(Issuer)
AGMH
(Issuer)
Other
Entities
Consolidating
Adjustments
Assured
Guaranty Ltd.
(Consolidated)
$
728
427
45
(38) $
(11)
(5)
690
418
40
(10)
121
111
58
422
1,739
388
19
97
244
748
991
(261)
—
730
—
0
—
0
—
(196)
(250)
61
(7)
(15)
(201)
(162)
(88)
27
(1,821)
(1,882)
(32)
REVENUES
Net earned premiums
Net investment income
Net realized investment gains
(losses)
Net change in fair value of credit
derivatives:
Realized gains (losses) and other
settlements
Net unrealized gains (losses)
Net change in fair value of
credit derivatives
Bargain purchase gain and
settlement of pre-existing
relationships
Other
TOTAL REVENUES
EXPENSES
Loss and LAE
Amortization of deferred
acquisition costs
Interest expense
Other operating expenses
TOTAL EXPENSES
$
— $
0
— $
2
— $
0
—
—
—
—
—
10
10
—
—
—
38
38
0
—
—
—
—
—
2
—
—
47
12
59
0
—
—
—
—
—
0
—
—
54
1
55
(10)
121
111
58
608
1,977
327
26
11
394
758
INCOME (LOSS) BEFORE
INCOME TAXES AND EQUITY
IN NET EARNINGS OF
SUBSIDIARIES
Total (provision) benefit for
income taxes
Equity in net earnings of
subsidiaries
NET INCOME (LOSS)
Less: noncontrolling interest
NET INCOME (LOSS)
ATTRIBUTABLE TO
ASSURED GUARANTY LTD.
COMPREHENSIVE INCOME
(LOSS)
$
$
(28)
(57)
(55)
1,219
—
758
730
—
17
636
596
—
54
395
394
—
(359)
32
892
32
730
$
596
$
394
$
860
$
(1,850) $
730
897
$
754
$
482
$
1,084
$
(2,320) $
897
239
REVENUES
Net earned premiums
Net investment income
Net realized investment gains
(losses)
Net change in fair value of credit
derivatives:
Realized gains (losses) and other
settlements
Net unrealized gains (losses)
Net change in fair value of
credit derivatives
Bargain purchase gain and
settlement of pre-existing
relationships
Other
TOTAL REVENUES
EXPENSES
Loss and LAE
Amortization of deferred
acquisition costs
Interest expense
Other operating expenses
TOTAL EXPENSES
INCOME (LOSS) BEFORE
INCOME TAXES AND EQUITY
IN NET EARNINGS OF
SUBSIDIARIES
Total (provision) benefit for
income taxes
Equity in net earnings of
subsidiaries
NET INCOME (LOSS)
Less: noncontrolling interest
NET INCOME (LOSS)
ATTRIBUTABLE TO
ASSURED GUARANTY LTD.
COMPREHENSIVE INCOME
(LOSS)
$
$
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
AND COMPREHENSIVE INCOME
FOR THE YEAR ENDED DECEMBER 31, 2016
(in millions)
Assured
Guaranty Ltd.
(Parent)
AGUS
(Issuer)
AGMH
(Issuer)
Other
Entities
Consolidating
Adjustments
Assured
Guaranty Ltd.
(Consolidated)
$
— $
0
— $
0
— $
0
$
892
412
(28) $
(4)
(28)
(3)
0
—
—
—
—
0
0
—
—
—
29
29
2
—
—
—
—
—
2
—
—
52
2
54
0
—
—
—
—
—
0
—
—
54
2
56
29
69
98
257
78
1,709
296
30
10
217
553
(29)
(52)
(56)
1,156
—
910
881
—
18
794
760
—
20
274
238
—
(175)
44
1,025
44
0
—
—
2
(1)
(34)
(1)
(12)
(14)
(5)
(32)
(2)
1
(2,022)
(2,023)
(44)
864
408
(29)
29
69
98
259
77
1,677
295
18
102
245
660
1,017
(136)
—
881
—
881
$
760
$
238
$
981
$
(1,979) $
881
793
$
685
$
144
$
953
$
(1,782) $
793
240
REVENUES
Net earned premiums
Net investment income
Net realized investment gains
(losses)
Net change in fair value of credit
derivatives:
Realized gains (losses) and other
settlements
Net unrealized gains (losses)
Net change in fair value of
credit derivatives
Bargain purchase gain and
settlement of pre-existing
relationships
Other
TOTAL REVENUES
EXPENSES
Loss and LAE
Amortization of deferred
acquisition costs
Interest expense
Other operating expenses
TOTAL EXPENSES
INCOME (LOSS) BEFORE
INCOME TAXES AND EQUITY
IN NET EARNINGS OF
SUBSIDIARIES
Total (provision) benefit for
income taxes
Equity in net earnings of
subsidiaries
NET INCOME (LOSS)
Less: noncontrolling interest
NET INCOME (LOSS)
ATTRIBUTABLE TO
ASSURED GUARANTY LTD.
COMPREHENSIVE INCOME
(LOSS)
$
$
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
AND COMPREHENSIVE INCOME
FOR THE YEAR ENDED DECEMBER 31, 2015
(in millions)
Assured
Guaranty Ltd.
(Parent)
AGUS
(Issuer)
AGMH
(Issuer)
Other
Entities
Consolidating
Adjustments
Assured
Guaranty Ltd.
(Consolidated)
$
— $
0
— $
1
— $
0
$
783
432
(17) $
(10)
(19)
(8)
0
—
—
—
—
—
0
—
—
—
30
30
0
—
—
—
—
0
1
—
—
52
1
53
1
—
—
—
—
—
1
—
—
54
1
55
(18)
773
755
54
102
2,107
434
29
14
202
679
(30)
—
1,086
1,056
—
(52)
(54)
1,428
18
923
889
—
19
464
429
—
(365)
39
1,102
39
0
(27)
(27)
160
0
98
(10)
(9)
(19)
(3)
(41)
139
(47)
(2,512)
(2,420)
(39)
766
423
(26)
(18)
746
728
214
102
2,207
424
20
101
231
776
1,431
(375)
—
1,056
—
1,056
$
889
$
429
$
1,063
$
(2,381) $
1,056
923
$
787
$
348
$
967
$
(2,102) $
923
241
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2017
(in millions)
Assured
Guaranty Ltd.
(Parent)
AGUS
(Issuer)
AGMH
(Issuer)
Other
Entities
Consolidating
Adjustments
Assured
Guaranty Ltd.
(Consolidated)
$
579
$
442
$
158
$
477
$
(1,223) $
433
Net cash flows provided by
(used in) operating activities
Cash flows from investing
activities
Fixed-maturity securities:
Purchases
Sales
Maturities
Sales (purchases) of short-term
investments, net
Net proceeds from FG VIE assets
Investment in subsidiaries
Intercompany debt
Proceeds from sale of subsidiaries
Proceeds from return of capital
from subsidiaries
Acquisition of MBIA UK, net of
cash acquired
Other
Net cash flows provided by
(used in) investing activities
Cash flows from financing
activities
Return of capital
Capital contribution
Dividends paid
Repurchases of common stock
Repurchases of common stock to
pay withholding taxes
Net paydowns of FG VIE
liabilities
Paydown of long-term debt
Proceeds from options exercises
Intercompany debt
Net cash flows provided by
(used in) financing activities
Effect of exchange rate changes
Increase (decrease) in cash and
restricted cash
Cash and restricted cash at
beginning of period
Cash and restricted cash at end
of period
$
(17)
21
0
(8)
—
—
—
—
101
—
—
97
—
25
(278)
—
—
—
—
—
—
(253)
—
2
0
2
(2,404)
1,568
808
(49)
147
(139)
10
139
70
95
59
27
—
—
—
—
167
(10)
(139)
(171)
—
—
(2,552)
1,701
821
74
147
—
—
—
—
95
59
304
(126)
345
(70)
3
(475)
(101)
—
(157)
(3)
—
—
(803)
5
(17)
126
70
(28)
1,223
101
—
—
(27)
—
10
1,349
—
—
—
$
109
$
— $
—
—
(70)
(501)
(13)
(157)
(30)
5
—
(766)
5
17
127
144
—
—
—
0
—
—
—
—
—
—
—
0
—
—
(70)
(501)
(13)
—
—
5
—
(579)
—
0
0
0
(158)
112
13
131
—
(28)
—
—
—
—
—
70
—
—
(470)
—
—
—
—
—
(10)
(480)
—
32
1
$
33
$
242
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2016
(in millions)
Assured
Guaranty Ltd.
(Parent)
AGUS
(Issuer)
AGMH
(Issuer)
Other
Entities
Consolidating
Adjustments
Assured
Guaranty Ltd.
(Consolidated)
$
391
$
533
$
213
$
72
$
(1,341) $
(132)
Net cash flows provided by
(used in) operating activities
Cash flows from investing
activities
Fixed-maturity securities:
Purchases
Sales
Maturities
Sales (purchases) of short-term
investments, net
Net proceeds from FG VIE assets
Intercompany debt
Proceeds from return of capital
from subsidiaries
Acquisition of CIFG, net of cash
acquired
Other
Net cash flows provided by
(used in) investing activities
Cash flows from financing
activities
Return of capital
Dividends paid
Repurchases of common stock
Repurchases of common stock to
pay withholding taxes
Net paydowns of FG VIE
liabilities
Paydown of long-term debt
Proceeds from options exercised
Intercompany debt
Net cash flows provided by
(used in) financing activities
Effect of exchange rate changes
Increase (decrease) in cash and
restricted cash
Cash and restricted cash at
beginning of period
Cash and restricted cash at end
of period
$
(1,489)
1,325
1,125
290
629
20
4
(442)
(9)
—
—
—
—
—
(20)
(304)
7
(7)
(1,646)
1,365
1,155
17
629
—
—
(435)
(9)
1,453
(324)
1,076
(4)
(540)
(300)
—
(611)
(2)
—
—
63
63
4
1,341
300
—
—
—
—
20
1,665
—
—
—
(513)
—
(1,457)
(5)
$
126
$
— $
—
—
(69)
(306)
(2)
(611)
(2)
12
—
(978)
(5)
(39)
166
127
(10)
12
—
(10)
—
—
300
—
—
292
—
(513)
—
—
—
—
—
—
(8)
8
0
(4)
4
—
(26)
—
—
—
—
—
(143)
24
30
(237)
—
—
—
—
7
(26)
(319)
—
(69)
(306)
(2)
—
—
12
—
(365)
—
—
0
0
—
(288)
—
—
—
—
—
(20)
(308)
—
(94)
95
$
1
$
243
Net cash flows provided by
(used in) operating activities
Cash flows from investing
activities
Fixed-maturity securities:
Purchases
Sales
Maturities
Sales (purchases) of short-term
investments, net
Net proceeds from FG VIE assets
Proceeds from repayment of
surplus notes
Acquisition of Radian Asset, net
of cash acquired
Other
Net cash flows provided by
(used in) investing activities
Cash flows from financing
activities
Return of capital
Dividends paid
Repurchases of common stock
Repurchases of common stock to
pay withholding taxes
Net paydowns of FG VIE
liabilities
Paydown of long-term debt
Proceeds from options exercised
Net cash flows provided by
(used in) financing activities
Effect of exchange rate changes
Increase (decrease) in cash and
restricted cash
Cash and restricted cash at
beginning of period
Cash and restricted cash at end
of period
$
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2015
(in millions)
Assured
Guaranty Ltd.
(Parent)
AGUS
(Issuer)
AGMH
(Issuer)
Other
Entities
Consolidating
Adjustments
Assured
Guaranty Ltd.
(Consolidated)
$
513
$
408
$
185
$
33
$
(1,210) $
(71)
(21)
30
—
19
—
25
—
—
53
—
(234)
—
—
—
—
—
(234)
—
4
4
8
(2,550)
1,900
889
729
400
—
(800)
74
642
(25)
(455)
—
—
(214)
(4)
—
(698)
(4)
(27)
90
66
—
—
—
—
(25)
—
—
41
25
1,144
—
—
—
—
—
1,169
—
—
—
(2,577)
2,107
898
897
400
—
(800)
69
994
—
(72)
(555)
(7)
(214)
(4)
5
(847)
(4)
72
94
$
63
$
— $
166
—
—
—
116
—
—
—
—
116
—
(72)
(555)
(7)
—
—
5
(629)
—
—
0
0
(72)
177
9
33
—
—
—
(5)
142
—
(455)
—
—
—
—
—
(455)
—
95
0
$
95
$
244
22.
Quarterly Financial Information (Unaudited)
A summary of selected quarterly information follows:
2017
Revenues
Net earned premiums
Net investment income
Net realized investment gains (losses)
Net change in fair value of credit derivatives
Fair value gains (losses) on CCS
Fair value gains (losses) on FG VIEs
Bargain purchase gain and settlement of pre-
existing relationships
Other income (loss)
Expenses
Loss and LAE
Amortization of DAC
Interest expense
Other operating expenses
Income (loss) before provision for income taxes
Provision (benefit) for income taxes
Net income (loss)
Earnings (loss) per share(1):
Basic
Diluted
Dividends per share
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Full
Year
(dollars in millions, except per share data)
$
$
164
122
32
54
(2)
10
58
89
59
4
24
68
372
55
317
$
162
101
15
(6)
2
12
—
22
72
4
25
57
150
(3)
153
$
186
99
7
58
(4)
3
—
274
223
5
24
58
313
105
208
$
178
96
(14)
5
2
5
—
9
34
6
24
61
156
104
52
$
$
$
2.53
2.49
0.1425
$
$
$
1.26
1.24
0.1425
$
$
$
1.75
1.72
0.1425
$
$
$
0.44
0.44
0.1425
$
$
$
690
418
40
111
(2)
30
58
394
388
19
97
244
991
261
730
6.05
5.96
0.57
245
2016
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Full
Year
(dollars in millions, except per share data)
Revenues
Net earned premiums
Net investment income
Net realized investment gains (losses)
Net change in fair value of credit derivatives
Fair value gains (losses) on CCS
Fair value gains (losses) on FG VIEs
$
$
183
99
(13)
(60)
(16)
18
Bargain purchase gain and settlement of pre-
existing relationships
Other income (loss)
Expenses
Loss and LAE
Amortization of DAC
Interest expense
Other operating expenses
Income (loss) before provision for income
taxes
Provision (benefit) for income taxes
Net income (loss)
Earnings (loss) per share(1):
Basic
Diluted
Dividends per share
—
34
90
4
26
60
65
6
59
$
214
98
10
63
(11)
4
—
18
102
5
25
63
201
55
146
231
94
(2)
21
(23)
(11)
259
(3)
(9)
4
26
65
480
1
479
3.63
3.60
0.13
$
$
236
117
(24)
74
50
27
—
(10)
112
5
25
57
271
74
197
$
$
$
1.51
1.49
0.13
$
$
$
864
408
(29)
98
0
38
259
39
295
18
102
245
1,017
136
881
6.61
6.56
0.52
$
$
$
0.43
0.43
0.13
$
$
$
1.09
1.09
0.13
$
$
$
____________________
(1)
Per share amounts for the quarters and the full years have each been calculated separately. Accordingly, quarterly
amounts may not sum up to the annual amounts because of differences in the average common shares outstanding
during each period and, with regard to diluted per share amounts only, because of the inclusion of the effect of
potentially dilutive securities only in the periods in which such effect would have been dilutive.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Assured Guaranty's management, with the participation of AGL's President and Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of AGL's disclosure controls and procedures (as such term is defined in
Rules 13a 15(e) and 15d 15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the
period covered by this report. Based on this evaluation, AGL's President and Chief Executive Officer and Chief Financial
Officer have concluded that, as of the end of such period, AGL's disclosure controls and procedures are effective in recording,
processing, summarizing and reporting, on a timely basis, information required to be disclosed by AGL (including its
consolidated subsidiaries) in the reports that it files or submits under the Exchange Act.
There has been no change in the Company's internal controls over financial reporting during the Company's quarter
ended December 31, 2017, that has materially affected, or is reasonably likely to materially affect, the Company's internal
controls over financial reporting.
246
Management's Report on Internal Control over Financial Reporting
The management of AGL is responsible for establishing and maintaining adequate internal control over financial
reporting, as such term is defined in Exchange Act Rule 13a-15(f). Internal control over financial reporting is a process
designed by, or under the supervision of the Company's President and Chief Executive Officer and Chief Financial Officer to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company's consolidated
financial statements for external purposes in accordance with GAAP.
Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
On January 10, 2017, the Company acquired MBIA UK. See Part II, Item 8, Financial Statements and Supplementary
Data, Note 2, Acquisitions, for additional information. The Company extended its Section 404 compliance program under the
Sarbanes-Oxley Act of 2002 and the applicable rules and regulations under such Act to include the integration of MBIA UK
financial data into the Company’s existing systems, processes and related controls, as well as the new processes and controls to
accommodate the business combination accounting and financial consolidation of MBIA UK.
Management of the Company has assessed the effectiveness of the Company's internal control over financial reporting
as of December 31, 2017 using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in the 2013 Internal Control-Integrated Framework. Based on this evaluation, management concluded
that the Company's internal control over financial reporting was effective as of December 31, 2017 based on criteria in the 2013
Internal Control- Integrated Framework issued by the COSO.
The effectiveness of the Company's internal control over financial reporting as of December 31, 2017 has been audited
by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their "Report of Independent
Registered Public Accounting Firm" included in Part II, Item 8, Financial Statements and Supplementary Data.
ITEM 9B. OTHER INFORMATION
None.
247
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information pertaining to this item is incorporated by reference to the sections entitled “Proposal No. 1: Election of
Directors”, “Corporate Governance—Did Our Insiders Comply with Section 16(a) Beneficial Ownership Reporting in 2017?”,
“Corporate Governance—How Are Directors nominated?” and “Corporate Governance—The Committees of the Board—The
Audit Committee” of the definitive proxy statement for the Annual General Meeting of Shareholders, which involves the
election of directors and will be filed with the SEC not later than 120 days after the close of the fiscal year pursuant to
regulation 14A.
Information about the executive officers of AGL is set forth at the end of Part I of this Form 10-K and is hereby
incorporated by reference.
Code of Conduct
The Company has adopted a Code of Conduct, which sets forth standards by which all employees, officers and
directors of the Company must abide as they work for the Company. The Code of Conduct is available at
www.assuredguaranty.com/governance. The Company intends to disclose on its internet site any amendments to, or waivers
from, its Code of Conduct that are required to be publicly disclosed pursuant to the rules of the SEC or the NYSE.
ITEM 11. EXECUTIVE COMPENSATION
This item is incorporated by reference to the sections entitled “Executive Compensation”, “Corporate Governance—
Compensation Committee interlocking and insider participation” and “Corporate Governance—How are the directors
compensated?” of the definitive proxy statement for the Annual General Meeting of Shareholders, which will be filed with the
SEC not later than 120 days after the close of the fiscal year pursuant to regulation 14A.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
This item is incorporated by reference to the sections entitled "Information about our Common Share Ownership" and
"Equity Compensation Plans Information" of the definitive proxy statement for the Annual General Meeting of Shareholders,
which will be filed with the SEC not later than 120 days after the close of the fiscal year pursuant to regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
This item is incorporated by reference to the sections entitled “Corporate Governance—What is our related person
transactions approval policy and what procedures do we use to implement it?”, “Corporate Governance—What related person
transactions do we have?” and “Corporate Governance—Director independence” of the definitive proxy statement for the
Annual General Meeting of Shareholders, which will be filed with the SEC not later than 120 days after the close of the fiscal
year pursuant to regulation 14A.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
This item is incorporated by reference to the section entitled “Proposal No. 3: Appointment of Independent Auditors—
Independent Auditor Fee Information” and “Proposal No. 3: Appointment of Independent Auditors—Pre-Approval Policy of
Audit and Non-Audit Services” of the definitive proxy statement for the Annual General Meeting of Shareholders, which will
be filed with the SEC not later than 120 days after the close of the fiscal year pursuant to regulation 14A.
248
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)
Financial Statements, Financial Statement Schedules and Exhibits
1.
Financial Statements
The following financial statements of Assured Guaranty Ltd. have been included in Part II, Item 8, Financial
Statements and Supplementary Data, hereof:
127
Report of Independent Registered Public Accounting Firm
129
Consolidated Balance Sheets as of December 31, 2017 and 2016
Consolidated Statements of Operations for the years ended December 31, 2017, 2016 and 2015
130
Consolidated Statements of Comprehensive Income for the years ended December 31, 2017, 2016 and 2015 131
Consolidated Statements of Shareholders' Equity for the years ended December 31, 2017, 2016 and 2015
132
133
Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015
134
Notes to Consolidated Financial Statements
2.
Financial Statement Schedules
The financial statement schedules are omitted because they are not applicable or the required information is shown in
the consolidated financial statements or notes thereto.
3.
Exhibits*
Exhibit
Number
Description of Document
Certificate of Incorporation and Memorandum of Association of the Registrant, as amended by Certificate of
Incorporation on Change of Name dated March 30, 2004 and Certificate of Deposit of Memorandum of Increase
of Capital dated April 21, 2004 (Incorporated by reference to Exhibit 3.1 to Form 10-K for the year ended
December 31, 2009)
3.1
First Amended and Restated Bye-laws of the Registrant, as amended (Incorporated by reference to Exhibit 3.1 to
Form 8-K filed on May 10, 2011)
3.2
4.1 Specimen Common Share Certificate (Incorporated by reference to Exhibit 4.1 to Form S-1 (#333-111491))
Certificate of Incorporation and Memorandum of Association of the Registrant, as amended by Certificate of
Incorporation on Change of Name dated March 30, 2004 and Certificate of Deposit of Memorandum of Increase
of Capital dated April 21, 2004 (See Exhibit 3.1)
4.2
4.3 Bye-laws of the Registrant (See Exhibit 3.2)
Indenture, dated as of May 1, 2004, among the Company, Assured Guaranty U.S. Holdings Inc. and The Bank of
New York, as trustee (Incorporated by reference to Exhibit 4.1 to Form 10-Q for the quarter ended March 31,
2004)
Indenture, dated as of December 1, 2006, entered into among Assured Guaranty Ltd., Assured Guaranty U.S.
Holdings Inc. and The Bank of New York, as trustee (Incorporated by reference to Exhibit 4.1 to Form 8-K filed
on December 20, 2006)
First Supplemental Subordinated Indenture, dated as of December 20, 2006, entered into among Assured
Guaranty Ltd., Assured Guaranty U.S. Holdings Inc. and The Bank of New York, as trustee (Incorporated by
reference to Exhibit 4.2 to Form 8-K filed on December 20, 2006)
Replacement Capital Covenant, dated as of December 20, 2006, between Assured Guaranty U.S. Holdings Inc.
and Assured Guaranty Ltd., in favor of and for the benefit of each Covered Debtholder (as defined therein)
(Incorporated by reference to Exhibit 4.1 to Form 8-K filed on December 20, 2006)
Replacement Capital Covenant, dated as of November 22, 2006, by Financial Security Assurance
Holdings Ltd.(Incorporated by reference to Exhibit 10.5 to Financial Security Assurance Holdings Ltd.'s
Form 8-K filed on November 28, 2006)
4.4
4.5
4.6
4.7
4.8
249
Exhibit
Number
Description of Document
Amended and Restated Trust Indenture dated as of February 24, 1999 between Financial Security Assurance
Holdings Ltd. and the Senior Debt Trustee (Incorporated by reference to Exhibit 4.1 to Financial Security
Assurance Holdings Ltd.'s Registration Statement to Form S-3 (#333-74165))
Form of Assured Guaranty Municipal Holdings Inc., formerly known as Financial Security Assurance
Holdings Ltd. 67/8% Quarterly Interest Bond Securities due 2101 (Incorporated by reference to Exhibit 4.1 to
Form 10-Q for the quarter ended March 31, 2010)
Form of Assured Guaranty Municipal Holdings Inc., formerly known as Financial Security Assurance
Holdings Ltd. 6.25% Notes due November 1, 2102 (Incorporated by reference to Exhibit 4.2 to Form 10-Q for
the quarter ended March 31, 2010)
Form of Assured Guaranty Municipal Holdings Inc., formerly known as Financial Security Assurance
Holdings Ltd. 5.60% Notes due July 15, 2103 (Incorporated by reference to Exhibit 4.3 to Form 10-Q for the
quarter ended March 31, 2010)
Supplemental indenture, dated as of August 26, 2009, between Assured Guaranty Ltd., Financial Security
Assurance Holdings Ltd. and U.S. Bank National Association, as trustee (Incorporated by reference to
Exhibit 99.1 to Form 8-K filed on September 1, 2009)
Indenture, dated as of November 22, 2006, between Financial Security Assurance Holdings Ltd. and The Bank of
New York, as Trustee (Incorporated by reference to Exhibit 4.1 to Financial Security Assurance Holdings Ltd.'s
Form 8-K filed on November 28, 2006)
Form of Financial Security Assurance Holdings Ltd. Junior Subordinated Debenture, Series 2006-1
(Incorporated by reference to Exhibit 10.3 to Financial Security Assurance Holdings Ltd.'s Form 8-K filed on
November 28, 2006)
Supplemental indenture, dated as of August 26, 2009, between Assured Guaranty Ltd., Financial Security
Assurance Holdings Ltd. and The Bank of New York Mellon, as trustee (Incorporated by reference to
Exhibit 99.2 to Form 8-K filed on September 1, 2009)
Officers’ Certificate, dated June 20, 2014, related to 5.000% Senior Notes due 2024, containing form of
5.000%Senior Notes due 2024 as Exhibit A thereto (Incorporated by reference to Exhibit 4.1 to Form 8-K filed
on June 20, 2014)
Guaranty by Assured Guaranty Re Ltd. in favor of Assured Guaranty Re Overseas Ltd., amended and restated as
of May 1, 2014 (Incorporated by reference to Exhibit 10.1 to Form 10-Q for the quarter ended June 30, 2014)
Put Agreement between Assured Guaranty Corp. and Woodbourne Capital Trust [I][II][III][IV] (Incorporated by
reference to Exhibit 10.6 to Form 10-Q for the quarter ended March 31, 2005)
Custodial Trust Expense Reimbursement Agreement (Incorporated by reference to Exhibit 10.7 to Form 10-Q for
the quarter ended March 31, 2005)
Assured Guaranty Corp. Articles Supplementary Classifying and Designating Series of Preferred Stock as
Series A Perpetual Preferred Stock, Series B Perpetual Preferred Stock, Series C Perpetual Preferred Stock,
Series D Perpetual Preferred Stock (Incorporated by reference to Exhibit 10.8 to Form 10-Q for the quarter
ended March 31, 2005)
Purchase Agreement among Dexia Holdings Inc., Dexia Crédit Local S.A. and the Company dated as of
November 14, 2008 (Incorporated by reference to Exhibit 99.1 to Form 8-K filed on November 17, 2008)
Amended and Restated Revolving Credit Agreement dated as of June 30, 2009 among FSA Asset
Management LLC, Dexia Crédit Local S.A. and Dexia Bank Belgium S.A. (Incorporated by reference to
Exhibit 10.1 to Form 8-K filed on July 8, 2009)
First Amendment to Amended and Restated Revolving Credit Agreement dated as of September 20, 2010 among
FSA Asset Management LLC, Dexia Crédit Local S.A. and Dexia Bank Belgium S.A. (Incorporated by reference
to Exhibit 10.11 to Form 10-K for the year ended December 31, 2013)
Second Amendment to Amended and Restated Revolving Credit Agreement dated as of May 16, 2012 among
FSA Asset Management LLC, Dexia Crédit Local S.A. and Dexia Bank Belgium S.A. (Incorporated by reference
to Exhibit 10.12 to Form 10-K for the year ended December 31, 2013)
Assignment Pursuant to the Amended and Restated Revolving Credit Agreement, as amended, dated as of
December 12, 2013 between Belfius Bank SA/NV and Dexia Crédit Local S.A. (Incorporated by reference to
Exhibit 10.13 to Form 10-K for the year ended December 31, 2013)
ISDA Master Agreement (Multicurrency-Cross Border) dated as of June 30, 2009 among Dexia SA, Dexia
Crédit Local S.A. and FSA Asset Management LLC (Incorporated by reference to Exhibit 10.3.1 to Form 8-K
filed on July 8, 2009)
4.9
4.10
4.11
4.12
4.13
4.14
4.15
4.16
4.17
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
250
Exhibit
Number
Description of Document
Schedule to the 1992 Master Agreement, Guaranteed Put Contract, dated as of June 30, 2009 among Dexia
Crédit Local S.A., Dexia SA and FSA Asset Management LLC (Incorporated by reference to Exhibit 10.3.2 to
Form 8-K filed on July 8, 2009)
Put Option Confirmation, Guaranteed Put Contract, dated June 30, 2009 to FSA Asset Management LLC from
Dexia SA and Dexia Crédit Local S.A. (Incorporated by reference to Exhibit 10.3.3 to Form 8-K filed on July 8,
2009)
ISDA Credit Support Annex (New York Law) to the Schedule to the ISDA Master Agreement, Guaranteed Put
Contract, dated as of June 30, 2009 between Dexia Crédit Local S.A. and Dexia SA and FSA Asset
Management LLC (Incorporated by reference to Exhibit 10.3.4 to Form 8-K filed on July 8, 2009)
ISDA Master Agreement (Multicurrency-Cross Border) dated as of June 30, 2009 among Dexia SA, Dexia
Crédit Local S.A. and FSA Asset Management LLC (Incorporated by reference to Exhibit 10.4.1 to Form 8-K
filed on July 8, 2009)
Schedule to the 1992 Master Agreement, Non-Guaranteed Put Contract, dated as of June 30, 2009 among Dexia
Crédit Local S.A., Dexia SA and FSA Asset Management LLC (Incorporated by reference to Exhibit 10.4.2 to
Form 8-K filed on July 8, 2009)
Put Option Confirmation, Non-Guaranteed Put Contract, dated June 30, 2009 to FSA Asset Management LLC
from Dexia SA and Dexia Crédit Local S.A. (Incorporated by reference to Exhibit 10.4.3 to Form 8-K filed on
July 8, 2009)
ISDA Credit Support Annex (New York Law) to the Schedule to the ISDA Master Agreement, Non-Guaranteed
Put Contract, dated as of June 30, 2009 between Dexia Crédit Local S.A. and Dexia SA and FSA Asset
Management LLC (Incorporated by reference to Exhibit 10.4.4 to Form 8-K filed on July 8, 2009)
First Demand Guarantee Relating to the “Financial Products” Portfolio of FSA Asset Management LLC issued
by the Belgian State and the French State and executed as of June 30, 2009 (Incorporated by reference to
Exhibit 10.5 to Form 8-K filed on July 8, 2009)
Guaranty, dated as of June 30, 2009, made jointly and severally by Dexia SA and Dexia Crédit Local S.A., in
favor of Financial Security Assurance Inc. (Incorporated by reference to Exhibit 10.6 to Form 8-K filed on
July 8, 2009)
Indemnification Agreement (GIC Business) dated as of June 30, 2009 by and among Financial Security
Assurance Inc., Dexia Crédit Local S.A. and Dexia SA (Incorporated by reference to Exhibit 10.7 to Form 8-K
filed on July 8, 2009)
Pledge and Administration Agreement, dated as of June 30, 2009, among Dexia SA, Dexia Crédit Local S.A.,
Dexia Bank Belgium SA, Dexia FP Holdings Inc., Financial Security Assurance Inc., FSA Asset
Management LLC, FSA Portfolio Asset Limited, FSA Capital Markets Services LLC, FSA Capital Markets
Services (Caymans) Ltd., FSA Capital Management Services LLC and The Bank of New York Mellon Trust
Company, National Association (Incorporated by reference to Exhibit 10.8 to Form 8-K filed on July 8, 2009)
Separation Agreement, dated as of July 1, 2009, among Dexia Crédit Local S.A., Financial Security
Assurance Inc., Financial Security Assurance International, Ltd., FSA Global Funding Limited and Premier
International Funding Co. (Incorporated by reference to Exhibit 10.9 to Form 8-K filed on July 8, 2009)
Funding Guaranty, dated as of July 1, 2009, made by Dexia Crédit Local S.A. in favor of Financial Security
Assurance Inc. and Financial Security Assurance International, Ltd. (Incorporated by reference to Exhibit 10.10
to Form 8-K filed on July 8, 2009)
Reimbursement Guaranty, dated as of July 1, 2009, made by Dexia Crédit Local S.A. in favor of Financial
Security Assurance Inc. and Financial Security Assurance International, Ltd. (Incorporated by reference to
Exhibit 10.11 to Form 8-K filed on July 8, 2009)
Indemnification Agreement (FSA Global Business), dated as of July 1, 2009, by and between Financial Security
Assurance Inc., Assured Guaranty Ltd. and Dexia Crédit Local S.A. (Incorporated by reference to Exhibit 10.13
to Form 8-K filed on July 8, 2009)
Pledge and Administration Annex Amendment Agreement dated as of July 1, 2009 among Dexia SA, Dexia
Crédit Local S.A., Dexia Bank Belgium SA, Dexia FP Holdings Inc., Financial Security Assurance Inc., FSA
Asset Management LLC, FSA Portfolio Asset Limited, FSA Capital Markets Services LLC, FSA Capital
Markets Services (Caymans) Ltd., FSA Capital Management Services LLC and The Bank of New York Mellon
Trust Company, National Association (Incorporated by reference to Exhibit 10.14 to Form 8-K filed on July 8,
2009)
Put Confirmation Annex Amendment Agreement dated as of July 1, 2009 among Dexia SA and Dexia Crédit
Local S.A. and FSA Asset Management LLC and Financial Security Assurance Inc. (Incorporated by reference to
Exhibit 10.15 to Form 8-K filed on July 8, 2009)
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
251
Exhibit
Number
Description of Document
Master Repurchase Agreement between FSA Capital Management Services LLC and FSA Capital Markets
Services LLC (Incorporated by reference to Exhibit 10.20 to Form 10-Q for the quarter ended June 30, 2009)
Confirmation to Master Repurchase Agreement (Incorporated by reference to Exhibit 10.21 to Form 10-Q for the
quarter ended June 30, 2009)
Master Repurchase Agreement Annex I (Incorporated by reference to Exhibit 10.22 to Form 10-Q for the quarter
ended June 30, 2009)
Pledge and Intercreditor Agreement, among Dexia Crédit Local, Dexia Bank Belgium S.A., Financial Security
Assurance Inc. and FSA Asset Management LLC, dated November 13, 2008 (Incorporated by reference to
Exhibit 10.3 to Financial Security Assurance Holdings Ltd.'s Form 10-Q for the quarter ended September 30,
2008)
Amended and Restated Pledge and Intercreditor Agreement, dated as of February 20, 2009, between Dexia
Crédit Local, Dexia Bank Belgium S.A., Financial Security Assurance Inc., FSA Asset Management LLC, FSA
Capital Markets Services LLC and FSA Capital Management Services LLC (Incorporated by reference to
Exhibit 10.19 to Financial Security Assurance Holdings Ltd.'s Form 10-K for the year ended December 31,
2008)
Put Option Agreement, dated as of June 23, 2003 by and between FSA and Sutton Capital Trust I (Incorporated
by reference to Exhibit 99.5 to Financial Security Assurance Holdings Ltd.'s Form 10-Q for the quarter ended
June 30, 2003)
Put Option Agreement, dated as of June 23, 2003 by and between FSA and Sutton Capital Trust II (Incorporated
by reference to Exhibit 99.6 to Financial Security Assurance Holdings Ltd.'s Form 10-Q for the quarter ended
June 30, 2003)
Put Option Agreement, dated as of June 23, 2003 by and between FSA and Sutton Capital Trust III (Incorporated
by reference to Exhibit 99.7 to Financial Security Assurance Holdings Ltd.'s Form 10-Q for the quarter ended
June 30, 2003)
Put Option Agreement, dated as of June 23, 2003 by and between FSA and Sutton Capital Trust IV (Incorporated
by reference to Exhibit 99.8 to Financial Security Assurance Holdings Ltd.'s Form 10-Q for the quarter ended
June 30, 2003)
Contribution Agreement, dated as of November 22, 2006, between Dexia S.A. and Financial Security Assurance
Holdings Ltd. (Incorporated by reference to Exhibit 10.4 to Financial Security Assurance Holdings Ltd.'s
Form 8-K filed on November 28, 2006)
Agreement and Amendment between Dexia Holdings Inc., Dexia Credit Local S.A. and the Company dated as of
June 9, 2009 (Incorporated by reference to Exhibit 10.1 to Form 8-K filed on June 12, 2009)
Stock Purchase Agreement, dated as of December 22, 2014, between Assured Guaranty Corp. and Radian
Guaranty Inc. (Incorporated by reference to Exhibit 10.44 to Form 10-K for the year ended December 31, 2014)
10.28
10.29
10.30
10.31
10.32
10.33
10.34
10.35
10.36
10.37
10.38
10.39
10.40 Summary of Annual Compensation*
Director Compensation Summary (Incorporated by reference to Exhibit 10.3 to Form 10-Q for the quarter ended
May 5, 2017)*
Assured Guaranty Ltd. 2004 Long-Term Incentive Plan, as amended and restated as of May 7, 2009 and as
amended through the Fourth Amendment (Incorporated by reference to Exhibit 10.43 to Form 10-K for the year
ended December 31, 2016)*
Non-Qualified Stock Option Agreement under Assured Guaranty Ltd. 2004 Long-Term Incentive Plan to be used
with employment agreement (Incorporated by reference to Exhibit 10.71 to Form 10-K for the year ended
December 31, 2008)*
Non-Qualified Stock Option Agreement for Outside Directors under Assured Guaranty Ltd. 2004 Long-Term
Incentive Plan (Incorporated by reference to Exhibit 10.19 to Form 10-Q for the quarter ended June 30, 2009)*
2010 Form of Non-Qualified Stock Option Agreement under Assured Guaranty Ltd. 2004 Long-Term Incentive
Plan to be used with employment agreement (Incorporated by reference to Exhibit 10.3 to Form 10-Q for the
quarter ended March 31, 2010)*
2010 Form of Non-Qualified Stock Option Agreement under Assured Guaranty Ltd. 2004 Long-Term Incentive
Plan for use without employment agreement (Incorporated by reference to Exhibit 10.4 to Form 10-Q for the
quarter ended March 31, 2010)*
2012 Form of Executive Non-Qualified Stock Option Agreement under Assured Guaranty Ltd. 2004 Long-Term
Incentive Plan (Incorporated by reference to Exhibit 10.7 to Form 10-Q for the quarter ended March 31, 2012)*
10.41
10.42
10.43
10.44
10.45
10.46
10.47
252
Exhibit
Number
Description of Document
2013 Form of Executive Non-Qualified Stock Option Agreement under Assured Guaranty Ltd. 2004 Long-Term
Incentive Plan (Incorporated by reference to Exhibit 10.1 to Form 10-Q for the quarter ended March 31, 2013)*
Restricted Stock Unit Agreement for Outside Directors under Assured Guaranty Ltd. 2004 Long Term Incentive
Plan (Incorporated by reference to Exhibit 10.37 to Form 10-K for the year ended December 31, 2005)*
10.48
10.49
Restricted Stock Unit Agreement for Outside Directors under Assured Guaranty Ltd. 2004 Long-Term Incentive
Plan (Incorporated by reference to Exhibit 10.1 to Form 10-Q for the quarter ended June 30, 2007)*
10.50
Restricted Stock Unit Agreement for Outside Directors under Assured Guaranty Ltd. 2004 Long-Term Incentive
Plan (Incorporated by reference to Exhibit 10.1 to Form 10-Q for the quarter ended June 30, 2008)*
Form of amendment to Restricted Stock Unit Awards for Outside Directors (Incorporated by reference to
Exhibit 10.3 to Form 10-Q for the quarter ended June 30, 2008)*
Restricted Stock Agreement for Outside Directors under Assured Guaranty Ltd. 2004 Long-Term Incentive Plan
(Incorporated by reference to Exhibit 10.2 to Form 10-Q for the quarter ended June 30, 2008)*
2014 Restricted Stock Agreement for Outside Directors under Assured Guaranty Ltd. 2004 Long-Term
Incentive Plan (Incorporated by reference to Exhibit 10.5 to Form 10-Q for the quarter ended June 30, 2014)*
Form of Restricted Stock Agreement for Outside Directors under Assured Guaranty Ltd. 2004 Long-Term
Incentive Plan, as in effect for awards commencing in 2015 (Incorporated by reference to Exhibit 10.4 to Form
10-Q for the quarter ended March 31, 2015)*
2013 Form of Executive Restricted Stock Unit Agreement under Assured Guaranty Ltd. 2004 Long-Term
Incentive Plan (Incorporated by reference to Exhibit 10.2 to Form 10-Q for the quarter ended March 31, 2013)*
2014 Form of Executive Restricted Stock Unit Agreement under Assured Guaranty Ltd. 2004 Long-Term
Incentive Plan (Incorporated by reference to Exhibit 10.2 to Form 10-Q for the quarter ended June 30, 2014)*
Form of Executive Restricted Stock Unit Agreement under Assured Guaranty Ltd. 2004 Long-Term Incentive
Plan, as in effect for awards commencing in 2015 (Incorporated by reference to Exhibit 10.3 to Form 10-Q for
the quarter ended March 31, 2015)*
2013 Form of Executive Performance-Based Restricted Stock Unit Agreement under Assured Guaranty Ltd.
2004 Long-Term Incentive Plan (Incorporated by reference to Exhibit 10.3 to Form 10-Q for the quarter ended
March 31, 2013)*
2014 Form of Executive Performance-Based Restricted Stock Unit Agreement under Assured Guaranty Ltd.
2004 Long-Term Incentive Plan (Incorporated by reference to Exhibit 10.3 to Form 10-Q for the quarter ended
June 30, 2014)*
2015 Form of Executive Performance-Based Restricted Stock Unit Agreement under Assured Guaranty Ltd.
2004 Long-Term Incentive Plan (Incorporated by reference to Exhibit 10.2 to Form 10-Q for the quarter ended
March 31, 2015)*
First Amendment to the Restricted Stock Unit Agreement for Outside Directors (Incorporated by reference to
Exhibit 10.106 to Form 10-K for the year ended December 31, 2012)*
10.51
10.52
10.53
10.54
10.55
10.56
10.57
10.58
10.59
10.60
10.61
10.62
Assured Guaranty Ltd. Employee Stock Purchase Plan, as amended through the second amendment
(Incorporated by reference to Exhibit 10.5 to Form 10-Q for the quarter ended March 31, 2013)*
10.63
Assured Guaranty Ltd. Performance Retention Plan (As Amended and Restated as of February 14, 2008)
(Incorporated by reference to Exhibit 10.58 to Form 10-K for the year ended December 31, 2007)*
Terms of Performance Retention Award Four Year Installment Vesting Granted on February 7, 2013 for
Participants Subject to $1 million Limit (Incorporated by reference to Exhibit 10.4 to Form 10-Q for the quarter
ended March 31, 2013)*
Terms of Performance Retention Award Four Year Installment Vesting Granted on February 5, 2014 for
Participants Subject to $1 million Limit (Incorporated by reference to Exhibit 10.4 to Form 10-Q for the quarter
ended June 30, 2014)*
Assured Guaranty Ltd. Executive Severance Plan (Incorporated by reference to Exhibit 10.5 to Form 10-Q for
the quarter ended March 31, 2012)*
Form of Acknowledgement Letter for Participants in Assured Guaranty Ltd. Executive Severance Plan
(Incorporated by reference to Exhibit 10.11 to Form 10-Q for the quarter ended March 31, 2012)*
10.64
10.65
10.66
10.67
10.68
253
Exhibit
Number
10.69
10.70
10.71
10.72
10.73
10.74
10.75
10.76
10.77
10.78
10.79
10.80
10.81
10.82
Description of Document
Assured Guaranty Ltd. Perquisite Policy (Incorporated by reference to Exhibit 10.6 to Form 10-Q for the quarter
ended March 31, 2012)*
Form of Indemnification Agreement between the Company and its executive officers and directors (Incorporated
by reference to Exhibit 10.42 to Form 10-K for the year ended December 31, 2005)*
Amended and Restated Assured Guaranty Ltd. Executive Officer Recoupment Policy (amended and restated
effective November 3, 2015) (Incorporated by reference to Exhibit 10.84 to Form 10-K for the year ended
December 31, 2015)*
Form of Acknowledgement of Amended and Restated Assured Guaranty Ltd. Executive Officer Recoupment
Policy (Incorporated by reference to Exhibit 10.85 to Form 10-K for the year ended December 31, 2015)*
Assured Guaranty Ltd. Supplemental Employee Retirement Plan, as amended and restated effective January 1,
2009 and as amended by the First, Second, Third, Fourth and Fifth Amendments (Incorporated by reference to
Exhibit 10.1 to Form 10-Q for the quarter ended September 30, 2012)*
AG US Group Services Inc. Supplemental Executive Retirement Plan as amended through the Fifth Amendment
thereto*
Financial Security Assurance Holdings Ltd. 1989 Supplemental Executive Retirement Plan (amended and
restated as of December 17, 2004) (Incorporated by reference to Exhibit 10.4 to Financial Security Assurance
Holdings Ltd.'s Form 8-K filed on December 17, 2004)*
Amendment to the Financial Security Assurance Holdings Ltd. 1989 Supplemental Employee Retirement Plan
(Incorporated by reference to Exhibit 10.29 to Form 10-Q for the quarter ended June 30, 2009)*
Financial Security Assurance Holdings Ltd. 2004 Supplemental Executive Retirement Plan, as amended on
February 14, 2008 (Incorporated by reference to Exhibit 10.3 to Financial Security Assurance Holdings Ltd.'s
Form 8-K filed on February 15, 2008)*
Agreement and Plan of Merger, dated as of April 12, 2016, among Assured Guaranty Corp., Cultivate Merger
Sub, Inc. and CIFG Holding Inc. (Incorporated by reference to Exhibit 10.2 to Form 10-Q for the quarter ended
March 31, 2016)
Share Purchase Agreement relating to the sale and purchase of MBIA UK Insurance Limited, dated September
29, 2016, between MBIA UK (Holdings) Limited and Assured Guaranty Corp. (Incorporated by reference to
Exhibit 10.1 to Form 10-Q for the quarter ended September 30, 2016)
Share Repurchase Agreement dated as of January 3, 2017 between the Company and the Chief Executive Officer
(Incorporated by reference to Exhibit 10.90 to Form 10-K for the year ended December 31, 2016)*
Share Repurchase Agreement dated as of January 5, 2017 between the Company and the General Counsel
(Incorporated by reference to Exhibit 10.91 to Form 10-K for the year ended December 31, 2016)*
2016 Form of Executive Restricted Stock Unit Agreement under Assured Guaranty Ltd. 2004 Long-Term
Incentive Plan (Incorporated by reference to Exhibit 10.92 to Form 10-K for the year ended December 31, 2016) *
10.83
2016 Form of Performance-Based Restricted Stock Unit Agreement under Assured Guaranty Ltd. 2004 Long-Term
Incentive Plan (Incorporated by reference to Exhibit 10.93 to Form 10-K for the year ended December 31, 2016*
2017 Form of Executive Restricted Stock Unit Agreement under Assured Guaranty Ltd. 2004 Long-Term
Incentive Plan (Incorporated by reference to Exhibit 10.1 to Form 10-Q for the quarter ended May 5, 2017)*
2017 Form of Performance-Based Restricted Stock Unit Agreement under Assured Guaranty Ltd. 2004 Long-
Term Incentive Plan (Incorporated by reference to Exhibit 10.2 to Form 10-Q for the quarter ended May 5, 2017)*
10.84
10.85
10.86 Separation Agreement dated November 1, 2017 between the Company and James Michener*
12.1 Computation of Ratio of Earnings to Fixed Charges
21.1 Subsidiaries of the Registrant
23.1 Accountants Consent
Certification of CEO Pursuant to Exchange Act Rules 13A-14 and 15D-14, as Adopted Pursuant to Section 302
of the Sarbanes‑Oxley Act of 2002
Certification of CFO Pursuant to Exchange Act Rules 13A-14 and 15D-14, as Adopted Pursuant to Section 302
of the Sarbanes‑Oxley Act of 2002
31.1
31.2
32.1
Certification of CEO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes‑
Oxley Act of 2002
254
Exhibit
Number
32.2
101.1
Description of Document
Certification of CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes‑
Oxley Act of 2002
The following financial information from Registrant's Annual Report on Form 10-K for the year ended
December 31, 2017 formatted in XBRL (eXtensible Business Reporting Language) interactive data files pursuant
to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets at December 31, 2017 and 2016;
(ii) Consolidated Statements of Operations for the years ended December 31, 2017, 2016 and 2015;
(iii) Consolidated Statements of Comprehensive Income for the years ended December 31, 2017, 2016 and 2015;
(iv) Consolidated Statements of Shareholders' Equity for the years ended December 31, 2017, 2016 and 2015;
(v) Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015; and
(vi) Notes to Consolidated Financial Statements.
*
Management contract or compensatory plan
ITEM 16.
FORM 10-K SUMMARY
None.
255
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Assured Guaranty Ltd.
By:
/s/ Dominic J. Frederico
Name: Dominic J. Frederico
Title: President and Chief Executive Officer
Date: February 23, 2018
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Name
Position
Date
/s/ Francisco L. Borges
Francisco L. Borges
/s/ Dominic J. Frederico
Dominic J. Frederico
/s/ Robert A. Bailenson
Robert A. Bailenson
/s/ G. Lawrence Buhl
G. Lawrence Buhl
/s/ Bonnie L. Howard
Bonnie L. Howard
/s/ Thomas W. Jones
Thomas W. Jones
/s/ Patrick W. Kenny
Patrick W. Kenny
/s/ Alan J. Kreczko
Alan J. Kreczko
/s/ Simon W. Leathes
Simon W. Leathes
/s/ Michael T. O'Kane
Michael T. O'Kane
/s/ Yukiko Omura
Yukiko Omura
Chairman of the Board; Director
February 23, 2018
President and Chief Executive Officer;
Director
February 23, 2018
Chief Financial Officer (Principal
Financial and Accounting Officer and
Duly Authorized Officer)
Director
Director
Director
Director
Director
Director
Director
Director
256
February 23, 2018
February 23, 2018
February 23, 2018
February 23, 2018
February 23, 2018
February 23, 2018
February 23, 2018
February 23, 2018
February 23, 2018
CORPOR ATE INFORMATION
Corporate Headquarters
Assured Guaranty Ltd.
30 Woodbourne Avenue
Hamilton HM 08
Bermuda
Phone: +1 (441) 279 5700
Other Locations
Bermuda
Assured Guaranty Re Ltd.
Assured Guaranty Re Overseas Ltd.
30 Woodbourne Avenue
Hamilton HM 08
Phone: +1 (441) 279 5700
United States
Assured Guaranty Municipal Corp.
Municipal Assurance Corp.
Assured Guaranty Corp.
1633 Broadway
New York, NY 10019
Phone: +1 (212) 974 0100
150 California Street
Suite 500
San Francisco, CA 94111
Phone: +1 (415) 995 8000
United Kingdom
Assured Guaranty (Europe) plc
11th Floor, 6 Bevis Marks
London, EC3A 7BA
Phone: +44 (0) 20 7562 1900
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Stock Exchange Listing
Assured Guaranty Ltd. is listed on the New
York Stock Exchange under the symbol AGO.
Investor Inquiries
Our annual report on Form 10-K, quarterly
reports on Form 10-Q, proxy statement,
quarterly earnings releases and other investor
information may be obtained at no cost by
contacting our Investor Rela tions Department.
Links to our SEC filings, press releases and
product descriptions and other information
may be found on our website at
AssuredGuaranty.com.
Our Code of Conduct, Corporate Governance
Guidelines and Categorical Standards of
Director Independence, Board Committee
Charters and other information relating to
corporate governance are also available on
our website at AssuredGuaranty.com/
governance.
Our Investor Relations Department can be
contacted at:
Assured Guaranty Ltd.
Investor Relations Department
30 Woodbourne Avenue
Hamilton HM 08
Bermuda
Phone: +1 (441) 279 5705
E-mail: ir@agltd.com
Independent Auditors
PricewaterhouseCoopers LLP
300 Madison Avenue
New York, NY 10017
Transfer Agent of
Shareholder Records
Shareholder correspondence should be
mailed to:
Computershare
P.O. Box 30170
College Station, TX 77842-3170
Overnight correspondence should
be sent to:
Computershare
211 Quality Circle, Suite 210
College Station, TX 77845
Shareholder website
www.computershare.com/investor
Shareholder online inquiries
https://www-us.computershare.com/investor/
contact
In the U.S.
Phone: 1 (866) 214 2267
Outside the U.S.
Phone: +1 (201) 680 6578
For hearing impaired in the U.S.
Phone: 1 (800) 231 5469
For hearing impaired outside the U.S.
Phone: +1 (201) 680 6610
Forward-Looking Statements
Forward-looking statements are being made in this Annual Report that reflect the current views of Assured Guaranty with respect to future events and financial performance. They are made
pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from these statements. Assured Guaranty’s forward-looking
statements, including those about the future longevity of Assured Guaranty and the strength and adequacy of its financial position, liquidity, resources and strategies; Assured Guaranty’s view
of the legality and constitutionality of actions taken by the Oversight Board and the governor of Puerto Rico; Assured Guaranty’s position and importance in the international infrastructure
capital markets; future liquidity of obligations guaranteed by Assured Guaranty; demand and growth potential for its financial guaranty insurance, including in particular sectors; Assured
Guaranty’s calculations of non-GAAP adjusted book value, PVP, net present value of estimated future installment premiums in force and total estimated net future premium earnings; the
adequacy of its capital and its ability to manage such capital; the impact of the acquisition of legacy bond insurers or, through reinsurance, their portfolios on Assured Guaranty, its shareholders
and policyholders; the adequacy of Assured Guaranty’s loss reserves for insured RMBS transactions; Assured Guaranty’s ability to realize loss recoveries assumed in its expected loss estimates, to
appropriately reserve for and to resolve its exposure to troubled credits within its insured portfolio, particularly distressed U.S. public finance credits, and to purchase securities it has insured
for loss mitigation purposes; the impact on Assured Guaranty of any actions by the Oversight Board in Puerto Rico and any resolution of Puerto Rico credits under the Puerto Rico Oversight,
Management and Economic Stability Act; the consequences of action or inaction by the Oversight Board, the government of Puerto Rico and other actors in the Puerto Rico debt crisis on the
citizens of Puerto Rico, Puerto Rico’s future access to the capital markets, and the U.S. municipal debt markets generally; the future direction and impact of interest rates on Assured Guaranty
and its markets; the impact of recent tax reform on Assured Guaranty and its markets; the direction or success of its alternative investment program; Assured Guaranty’s future share repurchase
activity; its financial strength ratings and rating agency capital, including the extent of its excess capital; and the trading value of Assured Guaranty’s insured securities relative to uninsured
securities, could be affected by a number of factors, including those identified in Assured Guaranty’s filings with the Securities and Exchange Commission, which are available on its website.
Do not place undue reliance on these forward-looking statements, which are made only as of the date of the statement or, if a date is not specified, as of February 23, 2018, with respect to
statements contained in the Annual Report on Form 10-K and otherwise March 13, 2018. Assured Guaranty does not undertake to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise, except as required by law.
30 Woodbourne Avenue
Hamilton HM 08, Bermuda
+1 (441) 279 5700
AssuredGuaranty.com
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