Item 7A. Quantitative and Qualitative Disclosures About Market Risk
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 movements in market prices. The Company’s primary market risk exposures include interest rate risk, foreign currency exchange rate risk and credit spread 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 primarily affected by market risk in the following areas.
• 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 investment portfolio contains non-U.S. dollar denominated securities whose value also fluctuates based on changes in foreign exchange rates. Premiums receivable includes foreign denominated receivables whose values fluctuate based on changes in foreign exchange rates.
• 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 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 New Business Production to Changes in Interest Rates and Credit Spreads
Fluctuations in interest rates and credit spreads affect the demand for the Company’s product. When interest rates are lower or when the market is 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. 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. See Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, Results of Operations — Insurance Segment — New Business Production, for additional information.
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Sensitivity of Expected Loss to be Paid (Recovered) to Interest Rates
Changes in interest rates or future interest rate expectations can affect the Company's expected loss to be paid or recovered. Higher interest rates can decrease the present value of future expected cash flows (whether recoveries or losses), reduce excess spread recoveries in transactions with mismatches between collateral and liability interest rates and reduce the value of fixed maturity bonds that may be part of the Company's recoveries. Lower interest rates would generally have the opposite effect. The effect of changes in discount rates on expected losses to be paid were losses of $7 million in 2025, $4 million in 2024 and $3 million in 2023. As of December 31, 2025, the Company projects that the maximum potential excess spread at risk in the U.S. RMBS transactions is approximately $1 million.
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,
2025 2024
(in millions)
Decrease of 300 bps $ 1,006 $ 875
Decrease of 200 bps 648 572
Decrease of 100 bps 321 281
Increase of 100 bps (317) (275)
Increase of 200 bps (625) (546)
Increase of 300 bps (916) (804)
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(1) Sensitivity analysis assumes a floor of zero for interest rates.
See Item 8, Financial Statements and Supplementary Data, Note 7. Investments and Cash, for additional information.
Sensitivity 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 as well as foreign denominated premium receivables. The Company’s material exposure is to changes in U.S. dollar/pound sterling and U.S. dollar/euro exchange rates. Securities denominated in currencies other than U.S. dollar were 12.1% and 8.9% of the fixed-maturity securities and short-term investments as of December 31, 2025 and 2024, respectively. Changes in fair value of available-for-sale investments attributable to changes in foreign exchange rates are recorded in other comprehensive income. Approximately 68% and 69% of installment premiums as of December 31, 2025 and December 31, 2024, respectively, are denominated in currencies other than the U.S. dollar, primarily the pound sterling and euro. Changes in premiums receivable attributable to changes in foreign exchange rates are reported in the consolidated statements of operations.
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Increase (Decrease) in Carrying Value
of Fixed-Maturity Securities and Short-Term Investments and Premiums Receivable
from Changes in Foreign Exchange Rates
Fixed-Maturity Securities and Short-Term Investments Premium Receivable, net of Reinsurance and Commissions Payable
As of December 31, As of December 31,
2025 2024 2025 2024
(in millions)
Decrease of 30% $ (237) $ (207) $ (320) $ (319)
Decrease of 20% (158) (138) (213) (213)
Decrease of 10% (79) (69) (107) (106)
Increase of 10% 79 69 107 106
Increase of 20% 158 138 213 213
Increase of 30% 237 207 320 319
See 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 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 as of December 31, 2025 and December 31, 2024 was 69 bps and 75 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. 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 AG. Historically, the price of CDS traded on AG typically moved directionally the same as general market spreads, although this is not always 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, 2025 or December 31, 2024. 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 following table summarizes the estimated change in fair value 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 AG.
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Effect of Changes in Credit Spread on Credit Derivatives
As of December 31, 2025 As of December 31, 2024
Credit Spreads 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)
(in millions)
Increase of 25 bps $ (72) $ (57) $ (92) $ (63)
Base Scenario (15) — (29) —
Decrease of 25 bps (6) 9 (14) 15
All transactions priced at floor (5) 10 (12) 17
See 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
The fair value of the Company’s FG VIEs’ 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 fair value of the FG VIEs’ assets and the implied collateral losses or recoveries within the transaction. In general, the fair value of the FG VIEs’ assets is most sensitive to changes in the projected collateral losses, where an increase in collateral losses or a decrease in recoveries typically leads to a decrease in the fair value of FG VIEs’ assets, while a decrease in collateral losses or an increase in recoveries typically leads to an increase in the fair value of FG VIEs’ assets. The third-party pricing provider 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 that price the FG VIEs’ liabilities used, where appropriate, the same inputs used in determining fair value of FG VIEs’ 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 certain 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 VIEs 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 VIEs’ 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 VIEs’ liabilities with recourse.
See Item 8, Financial Statements and Supplementary Data, Note 8. Variable Interest Entities, for additional information.
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