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Variable Interest Entities
 12 Months Ended
Dec. 31, 2020
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Variable Interest Entities Variable Interest Entities
Accounting Policy

    The types of entities the Company assesses for consolidation principally include (1) entities whose debt obligations the insurance subsidiaries insure in its financial guaranty business, and (2) investment vehicles such as collateralized financing entities (CFEs) and AssuredIM Funds, in which AGAS has a variable interest. For each of these types of entities, the Company assesses whether it is the primary beneficiary. If the Company concludes that it is the primary beneficiary, it consolidates the VIE in the Company's financial statements and eliminates the effects of intercompany transactions with the Insurance and Asset Management segments, as well as intercompany transactions between consolidated VIEs.

The Company determines whether it is the primary beneficiary of a VIE at the time it becomes involved with a VIE and continuously reconsiders the conclusion at each reporting date. In determining whether it is the primary beneficiary, the Company evaluates its direct and indirect interests in the VIE. 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.

FG VIEs

The Company has elected the fair value option for assets and liabilities of FG VIEs because the carrying amount transition method was not practical. The Company records the fair value of FG VIEs’ assets and liabilities based on modeled prices.

The net change in the fair value of consolidated FG VIEs’ assets and liabilities is recorded in "fair value gains (losses) on FG VIEs" in the consolidated statements of operations, except for change in fair value of FG VIEs’ liabilities with recourse caused by changes in instrument-specific credit risk (ISCR) which is separately presented in OCI. Interest income and interest expense are derived from the trustee reports and also included in "fair value gains (losses) on FG VIEs."

The inception to date change in fair value of the FG VIEs’ liabilities with recourse attributable to the ISCR is calculated by holding all current period assumptions constant for each security and isolating the effect of the change in the
Company’s CDS spread from the most recent date of consolidation to the current period. In general, if the Company’s CDS spread tightens, more value will be assigned to the Company’s credit; however, if the Company’s CDS widens, less value is assigned to the Company’s credit.

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. 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. 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 cash flows generated by the FG VIEs’ assets are classified as cash flows from investing activities. Paydowns of FG VIEs' liabilities are supported by the cash flows generated by FG VIEs’ assets, and for liabilities with recourse, possibly claim payments made by AGM or AGC under their financial guaranty insurance contracts. Paydowns of FG VIEs' liabilities both with and without recourse are classified as cash flows used in financing activities. Interest income, interest expense and other expenses of the FG VIEs’ assets and liabilities are classified as operating cash flows. Claim payments made by AGM and AGC 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 VIEs’ liabilities and as a financing activity as opposed to an operating activity of AGM and AGC.

CIVs

CIVs consist of certain AssuredIM Funds, CLOs and CLO warehouses in which the Company is deemed to be the primary beneficiary. The consolidated AssuredIM Funds are investment companies for accounting purposes and therefore account for their underlying investments at fair value. The assets and liabilities of consolidated CLOs managed by AssuredIM (collectively, the consolidated CLOs), are recorded at fair value. The assets and liabilities in consolidated CLO warehouses are also carried at fair value. Changes in the fair value of assets and liabilities of CIVs, interest income and interest expense are recorded in "fair value gains (losses) on consolidated investment vehicles" in the consolidated statements of operations. Certain AssuredIM private equity funds, whose financial statements are not prepared in time for the Company's quarterly reporting, are reported on a quarter lag.

Upon consolidation of an AssuredIM Fund, the Company records noncontrolling interest (NCI) for the portion of each fund owned by employees and any third party investors. Redeemable NCI is classified outside of shareholders’ equity, within temporary equity, and non-redeemable NCI is presented within shareholders' equity in the consolidated balance sheets. Amendments to redemption features may result in reclassifications between redeemable NCI and non-redeemable NCI.

Money market funds in consolidated AssuredIM Funds are classified as cash equivalents, consistent with those funds' separately issued financial statements, and therefore the Company has included these amounts in the total amount of cash on the consolidated statements of cash flows. Cash flows of the CIVs attributable to such entities' investment purchases and dispositions, as well as operating expenses of the investment vehicles, are presented as cash flow from operating activities in the consolidated statements of cash flows. Borrowings under credit facilities, debt issuances and repayments, and capital cash flows to and from investors are presented as financing activities consistent with investment company guidelines.

FG VIEs

    The insurance subsidiaries provide financial guaranties with respect to debt obligations of special purpose entities, including VIEs but do not act as the servicer or collateral manager for any VIE obligations they guarantee. The transaction structure generally provides certain financial protections to the insurance subsidiaries. This financial protection can take several forms, the most common of which are overcollateralization, first loss protection (or subordination) and excess spread. In the case of overcollateralization (i.e., the principal amount of the securitized assets exceeds the principal amount of the structured finance obligations), the structure allows defaults of the securitized assets before a default is experienced on the structured finance obligation guaranteed by the Company. In the case of first loss, the Company's financial guaranty insurance policy only covers a senior layer of losses experienced by multiple obligations issued by the VIEs. The first loss exposure with respect to the assets is either retained by the seller or sold off in the form of equity or mezzanine debt to other investors. In the case of excess spread, the financial assets contributed to VIEs, generate interest income that are in excess of the interest payments on the debt issued by the VIE. Such excess spread is typically distributed through the transaction’s cash flow waterfall and may be
used to create additional credit enhancement, applied to redeem debt issued by the VIE (thereby, creating additional overcollateralization), or distributed to equity or other investors in the transaction.

The insurance subsidiaries are not primarily liable for the debt obligations issued by the VIEs they insure and would only be required to make payments on those insured debt obligations in the event that the issuer of such debt obligations defaults on any principal or interest due and only for the amount of the shortfall. AGL’s and its insurance subsidiaries’ creditors do not have any rights with regard to the collateral supporting the debt issued by the FG VIEs. Proceeds from sales, maturities, prepayments and interest from such underlying collateral may only be used to pay debt service on FG VIEs’ liabilities. Net fair value gains and losses on FG VIEs are expected to reverse to zero by maturity of the FG VIEs’ debt, except for net premiums received and net claims paid by the insurance subsidiaries under the financial guaranty insurance contract. The Company’s estimate of expected loss to be paid (recovered) for FG VIEs is included in Note 5, Expected Loss to be Paid (Recovered).
 
As part of the terms of its financial guaranty contracts, the insurance subsidiaries, under their insurance contracts, obtain certain protective rights with respect to the VIE that give them additional controls over a VIE. These protective rights are triggered by the occurrence of certain events, such as failure to be in compliance with a covenant due to poor deal performance or a deterioration in a servicer or collateral manager's financial condition. At deal inception, the insurance subsidiaries typically are not deemed to control the VIE; however, once a trigger event occurs, the insurance subsidiaries' control of the VIE typically increases. The Company continuously evaluates its power to direct the activities that most significantly impact the economic performance of VIEs that have debt obligations insured by the insurance subsidaries and, accordingly, where they are obligated to absorb VIE losses or receive benefits that could potentially be significant to the VIE. The insurance subsidiaries are deemed to be the control party for certain VIEs under GAAP, typically when their protective rights give them the power to both terminate and replace the deal servicer, which are characteristics specific to the Company's financial guaranty contracts. If the protective rights that could make the insurance subsidiaries the control party have not been triggered, then the VIE is not consolidated. If the insurance companies are deemed no longer to have those protective rights, the VIE is deconsolidated.

The FG VIEs’ liabilities that are guaranteed by the insurance subsidiaries are considered to be with recourse, because they guarantee the payment of principal and interest regardless of the performance of the related FG VIEs’ assets. FG VIEs’ liabilities that are not guaranteed by the insurance subsidiaries are considered to be without recourse, because the payment of principal and interest of these liabilities is wholly dependent on the performance of the FG VIEs’ assets.
    
Number of FG VIEs Consolidated
 Year Ended December 31,
 202020192018
 
Beginning of year27 31 32 
Consolidated (1)2 1 — 
Deconsolidated (1)(2)(3)(1)
Matured(2)(2)— 
December 3125 27 31 
____________________
(1)    Net loss on consolidation was $1 million in 2020 and de minimis in 2019. Net gain on deconsolidation was $1 million in 2020 and de minims in 2019 and 2018.

     The change in the ISCR of the FG VIEs’ assets held as of December 31, 2020 that was recorded in the consolidated statements of operations for 2020 was a gain of $6 million. The change in the ISCR of the FG VIEs’ assets held as of December 31, 2019 and 2018 was a gain of $39 million and $7 million for 2019 and 2018, respectively. The ISCR amount is determined by using expected cash flows at the original date of consolidation discounted at the effective yield less current expected cash flows discounted at that same original effective yield.
As of
 December 31, 2020December 31, 2019
 (in millions)
Excess of unpaid principal over fair value of:
FG VIEs' assets$274 $279 
FG VIEs' liabilities with recourse 15 19 
FG VIEs' liabilities without recourse16 52 
Unpaid principal balance for FG VIEs’ assets that were 90 days or more past due68 21 
Unpaid principal for FG VIEs’ liabilities with recourse (1)330 388 
____________________
(1)    FG VIEs’ liabilities with recourse will mature at various dates through 2038.
 
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 the respective debt obligations for FG VIEs’ liabilities with recourse.

Consolidated FG VIEs
By Type of Collateral 
 As of December 31, 2020As of December 31, 2019
 AssetsLiabilitiesAssetsLiabilities
 (in millions)
With recourse:    
U.S. RMBS first lien$226 $260 $270 $297 
U.S. RMBS second lien53 56 70 70 
Total with recourse279 316 340 367 
Without recourse17 17 102 102 
Total$296 $333 $442 $469 

CIVs

    The Company consolidated seven AssuredIM Funds, three CLOs and a CLO warehouse as of December 31, 2020. Substantially all of the CIVs are VIEs. The Company consolidates these investment vehicles as it is deemed to be the primary beneficiary based on its power to direct the most significant activities of each VIE (through AssuredIM) and its level of economic interest in the entities (through AGAS).

    The assets and liabilities of the Company's CIVs are held within separate legal entities. The assets of the CIVs are not available to creditors of the Company, other than creditors of the applicable CIVs. In addition, creditors of the CIVs have no recourse against the assets of the Company, other than the assets of such applicable CIVs. Liquidity available at the Company's CIVs is not available for corporate liquidity needs, except to the extent of the Company's investment in the fund, subject to redemption provisions.
                        Assets and Liabilities
of CIVs
 
As of
December 31, 2020December 31, 2019
 (in millions)
Assets:
Fund assets:
Cash and cash equivalents$117 $2 
Fund investments, at fair value (1)
Corporate securities9 47 
Structured products39 17 
Obligations of state and political subdivisions61 — 
Equity securities, warrants and other18 — 
Due from brokers and counterparties35 — 
CLO and CLO warehouse assets:
Cash17 12 
CLO investments, at fair value
Loans of CFE1,291 494 
Loans, at fair value option170 — 
Short-term investments139 — 
Due from brokers and counterparties17 — 
Total assets (2)$1,913 $572 
Liabilities:
CLO obligations of CFE, at fair value (3)
$1,227 $481 
Warehouse financing debt, at fair value option (4)25 — 
Securities sold short, at fair value47 — 
Due to brokers and counterparties290 — 
Other liabilities1 1 
Total liabilities$1,590 $482 
____________________
(1)    Includes investment in affiliates of $10 million and $9 million as of December 31, 2020 and December 31, 2019, respectively.
(2)    The December 31, 2020 amount included $10 million for an entity that is a voting interest entity.
(3)     The weighted average maturity and weighted average interest rate of CLO obligations were 5.6 years and 2.4%, respectively, for December 31, 2020, and 12.8 years and 3.8%, respectively, for December 31, 2019. CLO obligations will mature at various dates ranging from 2031 to 2033.
(4)    The weighted average maturity and weighted average interest rate of warehouse financing debt of a CLO warehouse were 1.7 years and 1.7%, respectively, for December 31, 2020. Warehouse financing debt will mature in 2022.

As of December 31, 2020, the CIVs had an unfunded commitment to invest of $6 million.

As of December 31, 2020, the CIVs included forward currency contracts and interest rate swaps with a notional of $11 million and $8 million, respectively, and average notional of $6 million and $4 million, respectively. The fair value of the forward contracts and interest rate swaps recorded on the consolidated balance sheets was de minimis, and the net change in fair value recorded in the consolidated statements of operations for 2020 was a $1 million loss.

The following table shows the information for assets and liabilities of the CIVs measured using the fair value option.
As of
 December 31, 2020
 (in millions)
Excess of unpaid principal over fair value of CLO loans$1 
Unpaid principal for warehouse financing debt25 
The change in the ISCR of the loans held in the warehouse as of December 31, 2020 that was recorded in the consolidated statement of operations for 2020 was a de minimis gain.

On August 26, 2020, BlueMountain EUR 2021-1 CLO DAC (EUR 2021-1) and AssuredIM, as borrowers, entered into a credit facility with counterparties, pursuant to which EUR 2021-1 and AssuredIM may borrow for purposes of purchasing loans during the CLO warehouse stage. A CLO warehouse is a special purpose vehicle that invests in a diverse portfolio of loans until such time as sufficient loans have been acquired and the market conditions are opportune to issue a new CLO. Under the EUR 2021-1 credit facility, the principal amount may not exceed €140 million (which was equivalent to $171 million as of December 31, 2020). The current available commitment is determined by an advance rate of 70% based on the amount of equity contributed to the warehouse. Based on the current advance rate and amount of equity contributed, the available commitment for EUR 2021-1 as of December 31, 2020 was €21 million (or $26 million). As of December 31, 2020, €20 million (or $25 million) and €1 million (or $1 million) had been drawn under this facility by EUR 2021-1 and AssuredIM, respectively. The ramp up period under the credit facility terminates on August 26, 2021 and the final maturity date is August 25, 2022. During the ramp up period the unpaid principal amounts will bear interest at a rate of 3-month Euribor plus 170 basis points (bps). Thereafter the interest rate increases by 50 bps per quarter until maturity. Accrued interest on all loans will be paid on the last day of the ramp up period or the closing date of the CLO, whichever is earlier, and then quarterly thereafter until maturity, or upon the payment in full by the borrower of all secured obligations, or upon CLO closing, whichever is earlier.

Redeemable Noncontrolling Interests in CIVs

Year Ended December 31, 2020Year Ended December 31, 2019
 (in millions)
Beginning balance$7 $— 
Reallocation of ownership interests(10)— 
Contributions to investment vehicles25 12 
Distributions from investment vehicles— (4)
Net income (loss)(1)(1)
December 31,$21 $7 


Effect of Consolidating FG VIEs and CIVs
    
The effect of consolidating FG VIEs (as opposed to accounting for the related insurance contracts in the Insurance segment), includes (1) the establishment of the FG VIEs assets and liabilities and related changes in fair value on the consolidated financial statement, (2) eliminating the premiums and losses associated with the financial guaranty insurance contracts between the insurance subsidiaries and the FG VIEs, and (3) the investment balances associated with the insurance subsidiaries' purchases of the debt obligations of the FG VIEs.

The effect of consolidating CIVs (as opposed to accounting for them as equity method investments in the Insurance segment) has a significant effect on the presentation of assets, liabilities and cash flows, with only de minimus effect on net income or shareholders' equity attributable to AGL. The economic effect of the Company's ownership interest in CIVs are presented in the Insurance segment as equity in earnings of investees, and as separate line items on a consolidated basis.

The table below reflect the effect of consolidating CIVs and FG VIEs as compared to the presentation of such items on a segment basis.
Effect of Consolidating FG VIEs and CIVs
on the Consolidated Balance Sheets
Increase (Decrease)
As of
 December 31, 2020December 31, 2019
 (in millions)
Assets
Investment portfolio:
Fixed-maturity securities and short-term investments (1)$(32)$(39)
Equity method investments (2)(254)(77)
Other invested assets(2)— 
Total investments(288)(116)
Premiums receivable, net of commissions payable (3)(6)(7)
Salvage and subrogation recoverable (3)(9)(8)
FG VIEs’ assets, at fair value296 442 
Assets of CIVs1,913 572 
Other assets(3)— 
Total assets$1,903 $883 
Liabilities and shareholders’ equity
Unearned premium reserve (3)$(38)$(39)
Loss and LAE reserve (3)(41)(41)
FG VIEs’ liabilities with recourse, at fair value316 367 
FG VIEs’ liabilities without recourse, at fair value17 102 
Liabilities of CIVs1,590 482 
Total liabilities1,844 871 
Redeemable noncontrolling interests (4)21 7 
Retained earnings22 34 
AOCI (5)(25)(35)
Total shareholders’ equity attributable to Assured Guaranty Ltd.(3)(1)
Nonredeemable noncontrolling interests (4)41 6 
Total shareholders’ equity 38 5 
Total liabilities, redeemable noncontrolling interests and shareholders’ equity$1,903 $883 
 ____________________
(1)    Represents the elimination of investment balances related to the insurance subsidiaries' purchases of insured FG VIEs’ debt.
(2)    Represents the elimination of the equity method investment related to AGAS and the other subsidiaries' investments in the consolidated AssuredIM Funds.
(3)    Represents the elimination of insurance balances related to the insurance subsidiaries' guarantee of FG VIEs’ liabilities with recourse.
(4)    Represents the proportion of consolidated AssuredIM Funds that is not owned by AGAS or other subsidiaries.
(5)    Represents (a) changes in fair value of the FG VIEs’ liabilities with recourse that are attributable to changes in the Company's own credit risk and (b) elimination of the AOCI related to the insurance subsidiaries' purchases of insured FG VIEs' debt.
Effect of Consolidating FG VIEs and CIVs
on the Consolidated Statements of Operations
Increase (Decrease)
 Year Ended December 31,
 202020192018
 (in millions)
Net earned premiums (1)$(5)$(18)$(12)
Net investment income (2)(5)(4)(4)
Asset management fees (3)(9)— — 
Fair value gains (losses) on FG VIEs (4)(10)42 14 
Fair value gains (losses) on CIVs41 (3)— 
Loss and LAE (1)3 (20)(3)
Other operating expenses4 — — 
Equity in earnings of investees (5)(28)2 — 
Effect on income before tax(9)(1)(5)
Less: Tax provision (benefit)(3)— (1)
Effect on net income (loss)(6)(1)(4)
Less: Effect on noncontrolling interests (6)6 (1)— 
Effect on net income (loss) attributable to AGL$(12)$— $(4)
  ____________________
(1)    Represents the elimination of insurance balances related to the insurance subsidiaries' guarantee of FG VIEs’ liabilities with recourse.
(2)    Represents the elimination of investment balances related to the insurance subsidiaries' purchases of insured FG VIEs’ debt.
(3)    Represents the elimination of intercompany asset management fees.
(4)    Changes in fair value of the FG VIEs’ liabilities with recourse that are attributable to factors other than changes in the Company's own credit risk.
(5)    Represents the elimination of the equity in earnings in investees related to AGAS and the other subsidiaries' investments in the consolidated AssuredIM Funds.
(6)    Represents the proportion of consolidated AssuredIM Funds that is not owned by AGAS or other subsidiaries.

The fair value gains on CIVs for the year ended December 31, 2020 were attributable to price appreciation on the investments held by the CIVs.

The fair value losses on FG VIEs for 2020 were primarily attributable to observed tightening in market spreads, offset in part by the deconsolidation of an FG VIE. For 2019, the fair value gains on FG VIEs were attributable to higher recoveries on second lien U.S. RMBS FG VIEs' assets. For 2018, the primary driver of the gain in fair value of FG VIEs’ assets and FG VIEs’ liabilities was an increase in the value of the FG VIEs’ assets resulting from improvement in the underlying collateral.

Other Consolidated VIEs

    In certain instances where the Company consolidates a VIE that was established as part of a loss mitigation negotiated settlement that results in the termination of the 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 VIEs’ assets and FG VIEs’ liabilities. The largest of these VIEs had assets of $96 million and liabilities of $3 million as of December 31, 2020 and assets of $91 million and liabilities of $12 million as of December 31, 2019, primarily recorded in the investment portfolio and credit derivative liabilities on the consolidated balance sheets.

Non-Consolidated VIEs
 
    As described in Note 4, Outstanding Insurance Exposure, the Company monitors all policies in the insured portfolio. Of the approximately 17 thousand policies monitored as of December 31, 2020, approximately 15 thousand policies are not within the scope of FASB Accounting Standards Codification (ASC) 810 because these financial guaranties relate to the debt obligations of governmental organizations or financing entities established by a governmental organization. The majority of the remaining policies involve transactions where the Company is not deemed to currently have control over the FG VIEs’ most significant activities. As of December 31, 2020 and 2019, the Company identified 79 and 90 policies, respectively, that contain
provisions and experienced events that may trigger consolidation. Based on management’s assessment of these potential triggers or events, the Company consolidated 25 and 27 FG VIEs as of December 31, 2020 and December 31, 2019, respectively. The Company’s exposure provided through its financial guaranties with respect to debt obligations of FG VIEs is included within net par outstanding in Note 4, Outstanding Insurance Exposure.

    The Company manages funds and CLOs that have been determined to be VIEs, in which the Company concluded that it held no variable interests, through either equity interests held, debt interests held or decision-making fees received by the Asset Management subsidiaries. As such, the Company does not consolidate these entities.

The Company holds variable interests in a VIE which is not consolidated, as it has been determined that the Company is not the primary beneficiary, but in which it holds a significant variable interest. This VIE has $204 million of assets and $9 million of liabilities as of December 31, 2020 and the Company has $77 million maximum exposure to losses relating to this VIE as of December 31, 2020.