(1) Source: The amounts in the table are those reported by Thomson Reuters. The table excludes Corporate-CUSIP transactions insured by Assured Guaranty, which the Company also considers to be public finance business.
(5) See “- Overview - Key Business Strategies - Capital Management” above for information on common share repurchases.
U.S. public finance GWP in 2020 increased 48%, and PVP increased 45%, compared with 2019, primarily driven by wider credit spreads and greater insured penetration, which was 7.6% (based on par) in 2020, compared with 5.9% in 2019. The average rating of U.S. public finance par written was A-. The par written represented 58% of the total U.S. municipal market insured issuance in 2020.
U.S. RMBS: The net benefit attributable to U.S. RMBS of $71 million was mainly related to higher excess spread of approximately $88 million on certain transactions supported by large portions of fixed rate assets (either originally fixed or modified to be fixed) and with insured floating rate debt linked to LIBOR, which decreased in 2020. This was partially offset primarily by the impact of COVID-19 related forbearances.
Interest expense relates to debt issued by the U.S. Holding Companies. Intersegment interest expense of $10 million in 2020, related primarily to the $250 million AGUS debt to the U.S. Insurance Subsidiaries, which was borrowed in October 2019 in connection with the BlueMountain Acquisition. Intersegment interest expense was $5 million in 2019. See Item 8, Financial Statements and Supplementary Data, Note 14, Long-Term Debt and Credit Facilities, for additional information.
Other primarily consists of intersegment eliminations, reclassifications of reimbursable fund expenses, and consolidation adjustments, including the effect of consolidating FG VIEs and certain AssuredIM investment vehicles. The net effect on adjusted operating income (loss) of these items is presented in the table below. See Item 8, Financial Statements and Supplementary Data, Note 3, Segment Information.
(1)Presented in other income (loss) on the consolidated statements of operations.
During 2020, non-credit impairment unrealized fair value gains were generated primarily as a result of the increased cost to buy protection on AGC, as the market cost of AGC's credit protection increased during the period. For those CDS transactions that were pricing at or above their floor levels, when the cost of purchasing CDS protection on AGC, which management refers to as the CDS spread on AGC, increased, the implied spreads that the Company would expect to receive on these transactions decreased. Some of the unrealized fair value gains from the increased cost to buy protection on AGC was limited by certain transactions reaching their floor levels. As of December 31, 2020, approximately 51% of the fair value of CDS contracts was related to transactions that had reached their floors, which consisted of two transactions with $2.4 billion in net par outstanding.
The Company believes its presentation of non-GAAP financial measures 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.
Actual installment premiums may differ from those estimated in the Company's PVP calculation due to factors including, but not limited to, changes in foreign exchange rates, prepayment speeds, terminations, credit defaults, or other factors that affect par outstanding or the ultimate maturity of an obligation.
(1) 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.
Beyond the next twelve months, the ability of the operating subsidiaries to declare and pay dividends may be influenced by a variety of factors, including market conditions, general economic conditions, and, in the case of the Company's insurance subsidiaries, insurance regulations and rating agency capital requirements.
The Company's other invested assets primarily consist of equity method investments, including investments in renewable and clean energy and a private equity fund. Other invested assets also includes certain of the Company's investments in AssuredIM Funds that are not consolidated. The Company agreed to purchase up to $125 million of limited partnership interests in these and other similar investments, of which $104 million was not yet funded as of December 31, 2020.
See Item 8, Financial Statements and Supplementary Data, Note 10, Variable Interest Entities, for additional information.
As described in Notes 5 and 6 to the consolidated financial statements, the loss and LAE reserve and the salvage and subrogation recoverable reported on the consolidated balance sheet relate only to direct and assumed reinsurance contracts that are accounted for as insurance, substantially all of which are financial guaranty insurance contracts. As of December 31, 2020, the loss and LAE reserve was $1.1 billion and the salvage and subrogation recoverable was $991 million. A loss and LAE reserve for a financial guaranty 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. The expected loss to be paid (recovered) is equal to the present value of expected future cash outflows for claim and LAE payments, net of inflows for expected salvage and subrogation and net of excess spread on underlying collateral, using current risk-free rates. If a transaction is in a net recovery position, this results in the recording of a salvage and subrogation recoverable. 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 management. The determination of expected loss to be paid is a subjective process involving numerous significant assumptions and judgments relating to internal credit ratings, severity of loss, delinquencies, liquidation rates, prepayment rates, timing of cash flows, recovery rates, and probability weightings, as used in the respective cash flow models used by management.
The consolidated financial statements include the accounts of AGL, its direct and indirect subsidiaries and including its consolidated financial guaranty VIEs (FG VIEs) and consolidated investment vehicles (CIVs). Intercompany accounts and transactions between and among all consolidated entities have been eliminated.
AGM, AGC and MAC (collectively the U.S. Insurance Subsidiaries), jointly own an investment subsidiary, AG Asset Strategies LLC (AGAS), which invest in funds managed by AssuredIM (AssuredIM Funds).
The Portfolio Risk Management Committee, which includes members of senior management and senior risk and surveillance officers, is responsible for enterprise risk management for the overall company and focuses on measuring and managing credit, market and liquidity risk for the Company. 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. All transactions in new asset classes or new jurisdictions must be approved by this committee.
The Company's Surveillance department has established supplemental periodic surveillance procedures to monitor the impact on its insured portfolio of COVID-19 and governmental and private responses to COVID-19, with emphasis on state and local governments and entities that were already experiencing significant budget deficits and pension funding and revenue shortfalls, as well as obligations supported by revenue streams most impacted by various closures and capacity and travel restrictions or an economic downturn. In addition, the Company's surveillance department has been in contact with certain of its credits that it believes may be more at risk from COVID-19 and governmental and private responses to COVID-19. The Company's internal ratings and loss projections reflect this augmented surveillance activity. Through February 25, 2021, the Company has paid only relatively small first-time insurance claims it believes are due at least in part to credit stress arising specifically from COVID-19. The Company currently projects full reimbursement of these claims.
On May 3, 2019, AGM and AGC entered into a restructuring support agreement with PREPA (PREPA RSA) and other stakeholders, including a group of uninsured PREPA bondholders, the Commonwealth of Puerto Rico, and the Oversight Board, that is intended to, among other things, provide a framework for the consensual resolution of the treatment of the Company’s insured PREPA revenue bonds in PREPA's recovery plan. Upon consummation of the restructuring transaction, PREPA’s revenue bonds will be exchanged into new securitization bonds issued by a special purpose corporation and secured by a segregated transition charge assessed on electricity bills.
risk-free rates. The Company runs several sets of assumptions regarding mortgage collateral performance, or scenarios, and probability weights them.
In addition, based on the average performance history, the Company applies a CDR floor of 2.5% for the future steady state CDR on all its HELOC transactions.
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 loss to be paid for all second lien U.S. RMBS was $15 million as of December 31, 2020 and total expected recovery was $20 million as of December 31, 2019. The $26 million economic benefit in 2020 was primarily attributable to improved performance in certain transactions and higher actual recoveries received for previously charged-off loans, partially offset by COVID-19 related forbearances.
Under financial guaranty insurance accounting, the sum of unearned premium reserve and loss and LAE reserve represents the Company's stand-ready obligation. At contract inception, the entire stand-ready obligation is represented entirely 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. Unearned premium reserve is deferred premium revenue, less claim payments (net of recoveries received) that have not yet been recognized in the statement of operations (contra-paid). 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.
The following table provides information on net reserve (salvage), which includes loss and LAE reserves and salvage and subrogation recoverable, both net of reinsurance.
(1) Excludes $31 million as of December 31, 2020 related to consolidated FG VIEs.
The revenue bond portfolio primarily consists of essential service revenue bonds issued by transportation authorities and other utilities, water and sewer authorities and universities.
(1)Credit impairment in 2020 was related primarily to an increase in the allowance for credit loss on loss mitigation securities. Shut-downs due to COVID-19 pandemic restrictions contributed to the increase in the allowance for credit losses in 2020. Credit impairment in 2019 and 2018 was primarily attributable to foreign exchange losses and loss mitigation securities.
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.
(2) The December 31, 2020 amount included $10 million for an entity that is a voting interest entity.
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 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.
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. 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.
•There is a very limited market in which to validate the reasonableness of the fair values developed by the Company’s model.
(1) Includes Level 3 mortgage loans that are recorded at fair value on a non-recurring basis. Excludes $91 million of equity method investments measured at NAV as a practical expedient as of December 31, 2020.
Assured Guaranty Overseas US Holdings Inc. and its subsidiaries AGRO and AG Intermediary Inc. file their own consolidated federal income tax return.
The Company's policy is to recognize interest related to uncertain tax positions in income tax expense and has accrued $0.3 million, $1 million and $1 million for full years 2020, 2019 and 2018, respectively. As of December 31, 2020 and 2019, the Company has accrued zero and $2 million of interest, respectively.
The total amount of reserves for unrecognized tax positions, including accrued interest, as of December 31, 2020, 2019 and 2018 that would affect the effective tax rate, if recognized, was zero, $17 million and $16 million, respectively.
For AGRO, annual dividends cannot exceed $107 million, without AGRO certifying to the Authority that it will continue to meet required margins. Based on the foregoing limitations, in 2021 AGRO has the capacity to (i) make capital distributions in an aggregate amount up to $21 million without the prior approval of the Authority and (ii) declare and pay dividends in an aggregate amount up to approximately $107 million as of December 31, 2020. Such dividend capacity is further limited by (i) the actual amount of AGRO’s unencumbered assets, which amount changes from time to time due in part to collateral posting requirements and which was approximately $408 million as of December 31, 2020, and (ii) the amount of statutory surplus, which as of December 31, 2020 was $292 million.
From time to time, certain officers, directors, employees, their family members and related charitable foundations may make investments in various private funds, vehicles or accounts managed by AssuredIM. These investments are available to those of the Company's employees whom the Company has determined to have a status that reasonably permits the Company to offer them these types of investments in compliance with applicable laws. Generally, these investments are not subject to the management fees and performance allocations or incentive fees charged to other investors. All noncontrolling interests in the consolidated balance sheets represent employees' or former employees' ownership interests in consolidated AssuredIM Funds. See also Note 12, Asset Management Fees, for additional information.
The investment management expense from transactions with Wellington, Blackrock and Wasmer related parties was approximately $3.4 million in 2020, $3.8 million in 2019 and $4.0 million in 2018. In addition, the Company recognized $0.5 million, $1.0 million and $1.2 million in 2020, 2019 and 2018, respectively, in income from its investment in Wasmer, which is included in "equity in earnings of investees" in the consolidated statements of operations. Accrued expenses from transactions with these related parties were $1 million and $2 million as of December 31, 2020 and December 31, 2019, respectively.
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.