Contracts Accounted for as Credit Derivatives

3 Months Ended

Mar. 31, 2024

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Contracts Accounted for as Credit Derivatives

Amounts presented in this note relate only to contracts accounted for as derivatives, which are primarily CDS, and also include interest rate swaps.

The Company’s credit derivatives are generally governed by International Swaps and Derivatives Association, Inc. documentation and have certain characteristics that differ from financial guaranty insurance contracts. For example, the Company’s control rights with respect to a reference obligation under a CDS 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. In certain credit derivative transactions, the Company also specifically agreed to pay if the obligor were to become bankrupt or if the reference obligation were restructured. Furthermore, in certain credit derivative transactions, 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 credit derivative contract; however, the Company on occasion has mutually agreed with various counterparties to terminate certain CDS transactions.

The components of the Company’s credit derivative net par outstanding by sector are presented in the table below. The estimated remaining weighted average life of credit derivatives was 10.9 years and 11.1 years as of March 31, 2024 and December 31, 2023, respectively.

Credit Derivatives (1)


	As of March 31, 2024				As of December 31, 2023
Sector	Net Par Outstanding		Net Fair Value Asset (Liability)		Net Par Outstanding		Net Fair Value Asset (Liability)
	(in millions)
U.S. public finance	$	1,077	$	(14)	$	1,149	$	(15)
Non-U.S. public finance	1,507		(19)		1,522		(20)
U.S. structured finance	223		(5)		322		(13)
Non-U.S. structured finance	614		(1)		615		(2)
Total	$	3,421	$	(39)	$	3,608	$	(50)

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(1) Expected loss to be paid was $1 million and $2 million as of March 31, 2024 and December 31, 2023, respectively.

Fair Value Gains (Losses) on Credit Derivatives


	First Quarter
	2024		2023
	(in millions)
Realized gains (losses) and other settlements	$	(1)	$	1
Net unrealized gains (losses)	11		14
Fair value gains (losses) on credit derivatives	$	10	$	15

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 change in fair value of each transaction may vary considerably. The fair value of credit derivative contracts generally also reflects the Company’s own credit cost based on the price to purchase credit protection on AGC. The Company determines its own credit risk primarily based on quoted CDS prices traded on AGC at each balance sheet date.

CDS Spread on AGC (in basis points)


	As of March 31, 2024	As of December 31, 2023	As of March 31, 2023	As of December 31, 2022
Five-year CDS spread	52	66	83	63
One-year CDS spread	19	23	31	26

Fair Value of Credit Derivative Assets (Liabilities)

and Effect of AGC Credit Spread


	As of
	March 31, 2024		December 31, 2023
	(in millions)
Fair value of credit derivatives before effect of AGC credit spread	$	(56)	$	(76)
Plus: Effect of AGC credit spread	17		26
Net fair value of credit derivatives	$	(39)	$	(50)

The fair value of CDS contracts as of March 31, 2024, before considering the benefit applicable to AGC’s credit spread, is a direct result of the relatively wider credit spreads under current market conditions compared to those at the time of underwriting for certain underlying credits with longer tenor.