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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2025-02-28 compared with 2024-02-28 · 65 added, 85 removed, 78 unchanged (66% of the section changed)

4 unchanged sentences

The Company is primarily affected by market risk in the following areas.

• The fair value of credit derivatives within the financial guaranty portfolio of insured obligations is sensitive to 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.

• New business production is sensitive to changes in interest rates.

• New business production is sensitive to changes in interest rates and credit spreads.

• Expected loss to be paid (recovered) is sensitive to changes in interest rates.

• 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 non-U.S.

1 unchanged sentence

The carrying value of premiums receivable includes foreign denominated receivables whose values fluctuate based on changes in foreign exchange rates.

• The fair value of CIVs are sensitive to changes in market risk.

• The fair value of the assets and liabilities of consolidated FG VIEs may fluctuate based on changes in prepayments, spreads, default rates, interest rates and house prices.

The fair value of the FG VIEs’ liabilities also fluctuates based on changes in the Company’s credit spread.

Sensitivity of Credit Derivatives to Changes in Credit Spreads

Fair value gains and losses on credit derivatives are sensitive to 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 AGC at each balance sheet date.

The quoted price of five-year CDS contracts traded on AGC at December 31, 2023 and December 31, 2022 was 66 bps and 63 bps, respectively.

Movements in AGM’s CDS prices do not have a significant impact on the estimated fair value of the

Company’s credit derivative contracts due to the relatively low volume and characteristics of CDS contracts in AGM’s portfolio.

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.

An overall narrowing of spreads generally results in a fair value gain on credit derivatives for the Company, and an overall widening of spreads generally results in a fair value loss for the Company.

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.

Historically, the price of CDS traded on AGC typically moved directionally the same as general market spreads, although this may not always be the case.

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 credit spread of risks it insures.

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 fair value gains that are recognized on certain CDS contracts.

Based on fair value, approximately 11.5% of the Company’s CDS contracts used this minimum premium in determining fair value as of December 31, 2023.

As of December 31, 2022, the use of the minimum premium did not have an effect on fair value.

The percentage of transactions that price using the minimum premium 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 established floor levels.

The following table summarizes the estimated change in fair values on the net balance of the Company’s credit derivative positions assuming an immediate shift in the net spreads assumed by the Company.

The net spread includes the spread of the underlying collateral and the credit spreads on AGC.

Effect of Changes in Credit Spread on Credit Derivatives

As of December 31, 2023 As of December 31, 2022

Credit Spreads Estimated Net

(Pre-Tax) Estimated Change

in Gain/(Loss)

(Pre-Tax) Estimated Net

(Pre-Tax) Estimated Change

in Gain/(Loss)

(in millions)

Increase of 25 bps $ (115) $ (65) $ (233) $ (71)

Base Scenario (50) — (162) —

Decrease of 25 bps (29) 21 (99) 63

All transactions priced at floor (12) 38 (27) 135

See Part II, Item 8, Financial Statements and Supplementary Data, Note 6, Contracts Accounted for as Credit Derivatives, for additional information.

Sensitivity of Investment Portfolio to Interest Rate Risk

The Company is exposed to interest rate risk in its investment portfolio.

As interest rates rise for an available-for-sale investment portfolio, the fair value of fixed-maturity securities generally decreases;

as interest rates fall for an available-for-sale portfolio, the fair value of fixed-maturity securities generally increases.

The Company’s policy is generally to hold assets in the investment portfolio to maturity.

Therefore, barring a default, interest rate movements do not result in realized gains or losses unless securities are sold prior to maturity.

The Company does not hedge interest rate risk;

instead, 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.

Increase (Decrease) in Fair Value (Pre-Tax)

of Fixed-Maturity Securities and Short-Term Investments

from Changes in Interest Rates (1)

As of December 31,

(in millions)

Decrease of 300 bps $ 804 $ 1,315

Decrease of 200 bps 547 854

Decrease of 100 bps 267 404

Increase of 100 bps (261) (378)

Increase of 200 bps (520) (734)

Increase of 300 bps (774) (1,069)

____________________

(1) Sensitivity analysis assumes a floor of zero for interest rates.

See Part II, Item 8, Financial Statements and Supplementary Data, Note 7, Investments and Cash, for additional information.

Sensitivity of New Business Production to Interest Rate Risk

Fluctuations in interest rates also affect the demand for the Company’s product.

Sensitivity of New Business Production to Changes in Interest Rates and Credit Spreads

Fluctuations in interest rates and credit spreads also affect 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.

5 unchanged sentences

First, expected losses to be paid are discounted at the end of each reporting period at the risk-free rate, such that an increase in discount rates has the effect of reducing net expected loss to be paid or reducing net expected recoverables.

The effect of changes in discount rates on expected losses to be paid was a loss of $3 million in 2023, a gain of $115 million in 2022, and a gain of $33 million in 2021.

The effect of changes in discount rates on expected losses to be paid was a loss of $4 million in 2024, a loss of $3 million in 2023 and a gain of $115 million in 2022.

The gain related to changes in discount rates was highest in 2022 as interest rates rose from historically low levels during 2022.

9 unchanged sentences

For example, modifications to underlying mortgage rates (e.g., rate reductions for troubled borrowers) can reduce excess spread when an upswing in short-term rates that increases the trust’s certificate interest rate is not met with equal increases to the interest rates on the underlying mortgages.

These potential reductions in excess spread are often mitigated by an interest rate cap, which goes into effect once

the collateral rate falls below the stated certificate rate.

These potential reductions in excess spread are often mitigated by an interest rate cap, which goes into effect once the collateral rate falls below the stated certificate rate.

Interest due on most of the RMBS transactions the Company insures is capped at the collateral rate.

6 unchanged sentences

See Item 8, Financial Statements and Supplementary Data, Note 3, Outstanding Exposure and Note 4, Expected Loss to be Paid (Recovered).

Sensitivity of Investment Portfolio to Interest Rate Risk

The Company is exposed to interest rate risk in its investment portfolio.

As interest rates rise for an available-for-sale investment portfolio, the fair value of fixed-maturity securities generally decreases;

as interest rates fall for an available-for-sale portfolio, the fair value of fixed-maturity securities generally increases.

The Company’s policy is generally to hold assets in the investment portfolio to maturity.

Therefore, barring a default, interest rate movements do not result in realized gains or losses unless securities are sold prior to maturity.

The Company does not hedge interest rate risk;

instead, 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.

Increase (Decrease) in Fair Value (Pre-Tax)

of Fixed-Maturity Securities and Short-Term Investments

from Changes in Interest Rates (1)

As of December 31,

(in millions)

Decrease of 300 bps $ 875 $ 804

Decrease of 200 bps 572 547

Decrease of 100 bps 281 267

Increase of 100 bps (275) (261)

Increase of 200 bps (546) (520)

Increase of 300 bps (804) (774)

____________________

(1) Sensitivity analysis assumes a floor of zero for interest rates.

See Part II, Item 8, Financial Statements and Supplementary Data, Note 7, Investments and Cash, for additional information.

Sensitivity to Foreign Exchange Rate Risk

24 unchanged sentences

See Part II, Item 8, Financial Statements and Supplementary Data, Note 7, Investments and Cash, and Note 5, Contracts Accounted for as Insurance, for additional information.

Sensitivity of CIVs to Market Risk

The fair value of the consolidated CLO fund, which is the largest CIV, 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);

reinvestment assumptions;

yields implied by market prices for similar securities;

and changes to the market prices of loans similar to those held by the CLO fund.

Significant changes to some of these inputs could materially change the NAV of the consolidated CLO fund, as these are all inputs used to project and discount future cash flows.

The Company’s sensitivity to changes in fair value of the CIVs is summarized below.

Sensitivity of CIVs

to Changes in Fair Value (Pre-Tax)

As of December 31,

Sensitivity of Credit Derivatives to Changes in Credit Spreads

Fair value gains and losses on credit derivatives are sensitive to 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 AG at each balance sheet date.

The quoted price of five-year CDS contracts traded on AG at December 31, 2024 and December 31, 2023 was 75 bps and 66 bps, respectively.

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 AG.

Historically, the price of CDS traded on AG typically moved directionally the same as general market spreads, although this may not always be the case.

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 AG can have a more significant financial statement impact than the changes in credit spread of risks it insures.

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 fair value gains that are recognized on certain CDS contracts.

The minimum premium assumption had no effect on the fair

value of CDS contracts as of December 31, 2024 or December 31, 2023.

The percentage of transactions that price using the minimum premium fluctuates due to changes in AG’s credit spreads.

In general, when AG’s credit spreads narrow, the cost to hedge AG’s name declines and more transactions price above previously established floor levels.

Meanwhile, when AG’s credit spreads widen, the cost to hedge AG’s name increases causing more transactions to price at established floor levels.

The net spread includes the spread of the underlying collateral and the credit spreads on AG.

Effect of Changes in Credit Spread on Credit Derivatives

As of December 31, 2024 As of December 31, 2023

Credit Spreads Estimated Net

(Pre-Tax) Estimated Change

in Gain/(Loss)

(Pre-Tax) Estimated Net

(Pre-Tax) Estimated Change

in Gain/(Loss)

(in millions)

Decrease of 10% $ (28) $ (19)

Increase of 10% 28 19

See Part II, Item 8, Financial Statements and Supplementary Data, Note 7, Investments and Cash, for additional information.

Increase of 25 bps $ (92) $ (63) $ (115) $ (65)

Base Scenario (29) — (50) —

Decrease of 25 bps (14) 15 (29) 21

All transactions priced at floor (12) 17 (12) 38

See Part II, Item 8, Financial Statements and Supplementary Data, Note 6, Contracts Accounted for as Credit Derivatives, for additional information.

Sensitivity of FG VIEs’ Assets and Liabilities to Market Risk

13 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk