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Investments and Cash
 12 Months Ended
Dec. 31, 2017
Investments, Debt and Equity Securities [Abstract]  
Investments and Cash
Investments and Cash
 
Accounting Policy

The vast majority of the Company's investment portfolio is composed of fixed-maturity and short-term investments, classified as available-for-sale at the time of purchase (approximately 99.2% based on fair value as of December 31, 2017), and therefore carried at fair value. Changes in fair value for other-than-temporarily-impaired (OTTI) securities are bifurcated between credit losses and non-credit changes in fair value. The credit loss on OTTI securities is recorded in the statement of operations and the non-credit component of the change in fair value of securities, whether OTTI or not, is recorded in OCI. For securities in an unrealized loss position where the Company has the intent to sell or it is more-likely-than-not that it will be required to sell the security before recovery, the entire impairment loss (i.e., the difference between the security's fair value and its amortized cost) is recorded in the consolidated statements of operations.

Credit losses reduce the amortized cost of impaired securities. The amortized cost basis is adjusted for accretion and amortization (using the effective interest method) with a corresponding entry recorded in net investment income.

Realized gains and losses on sales of investments are determined using the specific identification method. Realized loss includes amounts recorded for other-than-temporary impairments on debt securities and the declines in fair value of securities for which the Company has the intent to sell the security or inability to hold until recovery of amortized cost.

For mortgage‑backed securities, and any other holdings for which there is prepayment risk, prepayment assumptions are evaluated and revised as necessary. Any necessary adjustments due to changes in effective yields and maturities are recognized in net investment income using the retrospective method.

Loss mitigation securities are generally purchased at a discount and are accounted for based on their underlying investment type, excluding the effects of the Company’s insurance. Interest income on loss mitigation securities is recognized on a level yield basis over the remaining life of the security.

Short-term investments, which are those investments with a maturity of less than one year at time of purchase, are carried at fair value and include amounts deposited in money market funds.

Other invested assets, as of December 31, 2017, primarily include an investment in the limited partnership interest of a fund that invests in the equity of private equity managers and a minority interest in an independent investment advisory firm specializing in separately managed accounts, both of which are accounted for under the equity method, and preferred stocks, which are carried at fair value with changes in unrealized gains and losses recorded in OCI.

Cash consists of cash on hand and demand deposits. 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.

Assessment for Other-Than Temporary Impairments

The Company has a formal review process to determine other-than-temporary-impairment for securities in its investment portfolio where there is no intent to sell and it is not more-likely-than-not that it will be required to sell the security before recovery. Factors considered when assessing impairment include:

•
a decline in the market value of a security by 20% or more below amortized cost for a continuous period of at least six months;

•
a decline in the market value of a security for a continuous period of 12 months;

•
recent credit downgrades of the applicable security or the issuer by rating agencies;

•
the financial condition of the applicable issuer;

•
whether loss of investment principal is anticipated;

•
the impact of foreign exchange rates; and

•
whether scheduled interest payments are past due.

The Company assesses the ability to recover the amortized cost by comparing the net present value of projected future cash flows with the amortized cost of the security. If the security is in an unrealized loss position and its net present value is less than the amortized cost of the investment, an other-than-temporary impairment is recorded. The net present value is calculated by discounting the Company's estimate of projected future cash flows at the effective interest rate implicit in the debt security at the time of purchase. The Company's estimates of projected future cash flows are driven by assumptions regarding probability of default and estimates regarding timing and amount of recoveries associated with a default. The Company develops these estimates using information based on historical experience, credit analysis and market observable data, such as industry analyst reports and forecasts, sector credit ratings and other relevant data. For mortgage‑backed and asset backed securities, cash flow estimates also include prepayment and other assumptions regarding the underlying collateral including default rates, recoveries and changes in value. The assumptions used in these projections requires the use of significant management judgment.

The Company's assessment of a decline in value included management's current assessment of the factors noted above. The Company also seeks advice from its outside investment managers. If that assessment changes in the future, the Company may ultimately record a loss after having originally concluded that the decline in value was temporary.

Net Investment Income and Realized Gains (Losses)

Net investment income is a function of the yield that the Company earns on invested assets and the size of the portfolio. The investment yield is a function of market interest rates at the time of investment as well as the type, credit quality and maturity of the invested assets. Accrued investment income, which is recorded in Other Assets, was $97 million and $91 million as of December 31, 2017 and December 31, 2016, respectively.
 
Net Investment Income  

 
Year Ended December 31,
 
2017
 
2016
 
2015
 
(in millions)
Income from fixed-maturity securities managed by third parties
$
298


$
306


$
335

Income from internally managed securities:
 
 
 
 
 
Fixed maturities
120


103


61

Other
9

 
8

 
37

Gross investment income
427


417


433

Investment expenses
(9
)

(9
)

(10
)
Net investment income
$
418

 
$
408

 
$
423




Net Realized Investment Gains (Losses)
 
 
Year Ended December 31,
 
2017
 
2016
 
2015
 
(in millions)
Gross realized gains on available-for-sale securities (1)
$
95

 
$
28

 
$
44

Gross realized losses on available-for-sale securities
(12
)
 
(8
)
 
(15
)
Net realized gains (losses) on other invested assets
0

 
2

 
(8
)
Other-than-temporary impairment
(43
)
 
(51
)
 
(47
)
Net realized investment gains (losses)
$
40

 
$
(29
)
 
$
(26
)

____________________
(1)
Year ended December 31, 2017 includes a gain on Zohar II Notes used as consideration for the MBIA UK Acquisition. See Note 2, Acquisitions.
 

The following table presents the roll-forward of the credit losses of fixed-maturity securities for which the Company has recognized an other-than-temporary-impairment and where the portion of the fair value adjustment related to other factors was recognized in OCI.
 
Roll Forward of Credit Losses
in the Investment Portfolio

 
Year Ended December 31,
 
2017
 
2016
 
2015
 
(in millions)
Balance, beginning of period
$
134

 
$
108

 
$
124

Additions for credit losses on securities for which an other-than-temporary-impairment was not previously recognized
13

 
3

 
3

Reductions for securities sold and other settlements
(4
)
 
(4
)
 
(28
)
Additions for credit losses on securities for which an other-than-temporary-impairment was previously recognized
19

 
27

 
9

Balance, end of period
$
162

 
$
134

 
$
108


 
Investment Portfolio

Fixed-Maturity Securities and Short-Term Investments
by Security Type 
As of December 31, 2017

Investment Category
 
Percent
of
Total(1)
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
AOCI(2)
Gain
(Loss) on
Securities
with
Other-Than-Temporary Impairment
 
Weighted
Average
Credit
Rating
 (3)
 
 
(dollars in millions)
Fixed-maturity securities:
 
 

 
 

 
 

 
 

 
 

 
 

 
 
Obligations of state and political subdivisions
 
51
%
 
$
5,504

 
$
267

 
$
(11
)
 
$
5,760

 
$
23

 
AA
U.S. government and agencies
 
2

 
272

 
14

 
(1
)
 
285

 
—

 
AA+
Corporate securities
 
18

 
1,973

 
63

 
(18
)
 
2,018

 
(6
)
 
A
Mortgage-backed securities(4):
 
—

 
 
 
 
 
 

 
 
 
 

 

RMBS
 
8

 
852

 
26

 
(17
)
 
861

 
(1
)
 
BBB+
CMBS
 
5

 
540

 
12

 
(3
)
 
549

 
—

 
AAA
Asset-backed securities
 
7

 
730

 
166

 
0

 
896

 
136

 
B
Foreign government securities
 
3

 
316

 
6

 
(17
)
 
305

 
0

 
AA
Total fixed-maturity securities
 
94

 
10,187

 
554

 
(67
)
 
10,674

 
152

 
A+
Short-term investments
 
6

 
627

 
0

 
0

 
627

 
—

 
AAA
Total investment portfolio
 
100
%
 
$
10,814

 
$
554

 
$
(67
)
 
$
11,301

 
152

 
A+

Fixed-Maturity Securities and Short-Term Investments
by Security Type 
As of December 31, 2016

Investment Category
 
Percent
of
Total(1)
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
AOCI(2)
Gain
(Loss) on
Securities
with
Other-Than-Temporary Impairment
 
Weighted
Average
Credit
Rating
 (3)
 
 
(dollars in millions)
Fixed-maturity securities:
 
 

 
 

 
 

 
 

 
 

 
 

 
 
Obligations of state and political subdivisions
 
50
%
 
$
5,269

 
$
202

 
$
(39
)
 
$
5,432

 
$
13

 
AA
U.S. government and agencies
 
4

 
424

 
17

 
(1
)
 
440

 
—

 
AA+
Corporate securities
 
15

 
1,612

 
32

 
(31
)
 
1,613

 
(8
)
 
A-
Mortgage-backed securities(4):
 
 

 
 

 
 

 
 

 
 

 
 

 
 
RMBS
 
9

 
998

 
27

 
(38
)
 
987

 
(21
)
 
A-
CMBS
 
5

 
575

 
13

 
(5
)
 
583

 
—

 
AAA
Asset-backed securities
 
8

 
835

 
110

 
0

 
945

 
33

 
B
Foreign government securities
 
3

 
261

 
4

 
(32
)
 
233

 
—

 
AA
Total fixed-maturity securities
 
94

 
9,974

 
405

 
(146
)
 
10,233

 
17

 
A+
Short-term investments
 
6

 
590

 
0

 
0

 
590

 
—

 
AAA
Total investment portfolio
 
100
%
 
$
10,564

 
$
405

 
$
(146
)
 
$
10,823

 
$
17

 
A+
____________________
(1)
Based on amortized cost.
 
(2)
Also refer to Note 20, Other Comprehensive Income.
 
(3)
Ratings in the tables above represent the lower of the Moody’s and S&P Global Ratings, a division of Standard & Poor's Financial Services LLC (S&P) classifications except for bonds purchased for loss mitigation or risk management strategies, which use internal ratings classifications. The Company’s portfolio consists primarily of high-quality, liquid instruments.
 
(4)
Government-agency obligations were approximately 39% of mortgage backed securities as of December 31, 2017 and 42% as of December 31, 2016 based on fair value.

The Company’s investment portfolio in tax-exempt and taxable municipal securities includes issuances by a wide number of municipal authorities across the U.S. and its territories.



The following tables present the fair value of the Company’s available-for-sale portfolio of obligations of state and political subdivisions as of December 31, 2017 and December 31, 2016 by state.
 
Fair Value of Available-for-Sale Portfolio of
Obligations of State and Political Subdivisions
As of December 31, 2017 (1)
 
State
 
State
General
Obligation
 
Local
General
Obligation
 
Revenue Bonds
 
Fair
Value
 
Amortized
Cost
 
Average
Credit
Rating
 
 
(in millions)
Fixed-maturity securities:
 
 
 
 
 
 
 
 
 
 
 
 
New York
 
$
13

 
$
44

 
$
568

 
$
625

 
$
598

 
AA
California
 
76

 
83

 
421

 
580

 
527

 
A
Texas
 
17

 
212

 
321

 
550

 
528

 
AA
Washington
 
93

 
87

 
214

 
394

 
381

 
AA
Florida
 
5

 
17

 
244

 
266

 
254

 
AA-
Massachusetts
 
70

 
—

 
151

 
221

 
208

 
AA
Illinois
 
18

 
51

 
131

 
200

 
189

 
A
Ohio
 
16

 
22

 
102

 
140

 
136

 
AA
Pennsylvania
 
33

 
21

 
76

 
130

 
125

 
A+
District of Columbia
 
43

 
—

 
85

 
128

 
123

 
AA
All others
 
138

 
263

 
1,233

 
1,634

 
1,577

 
AA-
Total
 
$
522

 
$
800

 
$
3,546

 
$
4,868

 
$
4,646

 
AA-


Fair Value of Available-for-Sale Portfolio of
Obligations of State and Political Subdivisions
As of December 31, 2016 (1)

State
 
State
General
Obligation
 
Local
General
Obligation
 
Revenue Bonds
 
Fair
Value
 
Amortized
Cost
 
Average
Credit
Rating
 
 
(in millions)
Fixed-maturity securities:
 
 
 
 
 
 
 
 
 
 
 
 
New York
 
$
13

 
$
38

 
$
570

 
$
621

 
$
604

 
AA
California
 
73

 
62

 
391

 
526

 
497

 
A+
Texas
 
16

 
186

 
316

 
518

 
503

 
AA
Washington
 
81

 
68

 
201

 
350

 
348

 
AA
Florida
 
16

 
11

 
247

 
274

 
266

 
AA-
Massachusetts
 
74

 
—

 
149

 
223

 
215

 
AA
Illinois
 
18

 
65

 
127

 
210

 
205

 
A+
Arizona
 
—

 
3

 
122

 
125

 
122

 
AA
Georgia
 
—

 
9

 
104

 
113

 
109

 
A+
Pennsylvania
 
38

 
17

 
58

 
113

 
111

 
A+
All others
 
153

 
155

 
1,085

 
1,393

 
1,364

 
AA-
Total
 
$
482

 
$
614

 
$
3,370

 
$
4,466

 
$
4,344

 
AA-
____________________
(1)
Excludes $892 million and $966 million as of December 31, 2017 and 2016, respectively, of pre-refunded bonds, at fair value. The credit ratings are based on the underlying ratings and do not include any benefit from bond insurance.


The revenue bond portfolio is comprised primarily of essential service revenue bonds issued by transportation authorities and other utilities, water and sewer authorities, universities and healthcare providers.
 
Revenue Bonds
Sources of Funds
 
 
 
As of December 31, 2017
 
As of December 31, 2016
Type
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
 
(in millions)
Fixed-maturity securities:
 
 
 
 
 
 
 
 
Transportation
 
$
955

 
$
889

 
$
860

 
$
824

Water and sewer
 
670

 
641

 
545

 
531

Tax backed
 
600

 
570

 
617

 
601

Higher education
 
515

 
492

 
513

 
499

Municipal utilities
 
324

 
315

 
365

 
360

Healthcare
 
308

 
293

 
310

 
298

All others
 
174

 
169

 
160

 
158

Total
 
$
3,546

 
$
3,369

 
$
3,370

 
$
3,271


 

The following tables summarize, for all fixed-maturity securities in an unrealized loss position, the aggregate fair value and gross unrealized loss by length of time the amounts have continuously been in an unrealized loss position.
 
Fixed-Maturity Securities
Gross Unrealized Loss by Length of Time
As of December 31, 2017
 
 
Less than 12 months
 
12 months or more
 
Total
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
(dollars in millions)
Obligations of state and political subdivisions
$
166

 
$
(4
)
 
$
281

 
$
(7
)
 
$
447

 
$
(11
)
U.S. government and agencies
151

 
0

 
18

 
(1
)
 
169

 
(1
)
Corporate securities
201

 
(1
)
 
240

 
(17
)
 
441

 
(18
)
Mortgage-backed securities:
 
 
 
 
 
 
 

 


 


RMBS
191

 
(5
)
 
213

 
(12
)
 
404

 
(17
)
CMBS
29

 
0

 
80

 
(3
)
 
109

 
(3
)
Asset-backed securities
48

 
0

 
3

 
0

 
51

 
0

Foreign government securities
20

 
0

 
140

 
(17
)
 
160

 
(17
)
Total
$
806

 
$
(10
)
 
$
975

 
$
(57
)
 
$
1,781

 
$
(67
)
Number of securities(1)
 

 
244

 
 

 
264

 
 

 
499

Number of securities with other-than-temporary impairment(1)
 

 
17

 
 

 
15

 
 

 
31

 
Fixed-Maturity Securities
Gross Unrealized Loss by Length of Time
As of December 31, 2016

 
Less than 12 months
 
12 months or more
 
Total
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
(dollars in millions)
Obligations of state and political subdivisions
$
1,110

 
$
(38
)
 
$
6

 
$
(1
)
 
$
1,116

 
$
(39
)
U.S. government and agencies
87

 
(1
)
 
—

 
—

 
87

 
(1
)
Corporate securities
492

 
(11
)
 
118

 
(20
)
 
610

 
(31
)
Mortgage-backed securities:
 

 
 

 
 

 
 

 
 
 
 
RMBS
391

 
(23
)
 
94

 
(15
)
 
485

 
(38
)
CMBS
165

 
(5
)
 
—

 
—

 
165

 
(5
)
Asset-backed securities
36

 
0

 
0

 
0

 
36

 
0

Foreign government securities
44

 
(5
)
 
114

 
(27
)
 
158

 
(32
)
Total
$
2,325

 
$
(83
)
 
$
332

 
$
(63
)
 
$
2,657

 
$
(146
)
Number of securities(1)
 

 
622

 
 

 
60

 
 

 
676

Number of securities with other-than-temporary impairment
 

 
8

 
 

 
9

 
 

 
17

___________________
(1)
The number of securities does not add across because lots consisting of the same securities have been purchased at different times and appear in both categories above (i.e., less than 12 months and 12 months or more). If a security appears in both categories, it is counted only once in the total column.
 
Of the securities in an unrealized loss position for 12 months or more as of December 31, 2017, 28 securities had unrealized losses greater than 10% of book value. The total unrealized loss for these securities as of December 31, 2017 was $27 million. As of December 31, 2016, of the securities in an unrealized loss position for 12 months or more, 41 securities had unrealized losses greater than 10% of book value with an unrealized loss of $59 million. The Company has determined that the unrealized losses recorded as of December 31, 2017 and December 31, 2016 were yield-related and not the result of other-than-temporary-impairment.
 
The amortized cost and estimated fair value of available-for-sale fixed-maturity securities by contractual maturity as of December 31, 2017 are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
Distribution of Fixed-Maturity Securities
by Contractual Maturity
As of December 31, 2017
 
 
Amortized
Cost
 
Estimated
Fair Value
 
(in millions)
Due within one year
$
254

 
$
256

Due after one year through five years
1,574

 
1,604

Due after five years through 10 years
2,368

 
2,443

Due after 10 years
4,599

 
4,961

Mortgage-backed securities:
 

 
 

RMBS
852

 
861

CMBS
540

 
549

Total
$
10,187

 
$
10,674


 
Based on fair value, investments and restricted cash that are either held in trust for the benefit of third party ceding insurers in accordance with statutory requirements, placed on deposit to fulfill state licensing requirements, or otherwise restricted total $269 million and $285 million, as of December 31, 2017 and December 31, 2016, respectively. The investment portfolio also contains securities that are held in trust by certain AGL subsidiaries for the benefit of other AGL subsidiaries in accordance with statutory and regulatory requirements in the amount of $1,677 million and $1,420 million, based on fair value as of December 31, 2017 and December 31, 2016, respectively.

The fair value of the Company’s pledged securities to secure its obligations under its CDS exposure totaled $18 million and $116 million as of December 31, 2017 and December 31, 2016, respectively. See Note 8, Contracts Accounted for as Credit Derivatives, for more information.
 
No material investments of the Company were non-income producing for years ended December 31, 2017 and 2016, respectively.
 
Externally Managed Portfolio

As of December 31, 2017, the majority of the investment portfolio is managed by six outside managers (including Wasmer, Schroeder & Company LLC, in which the Company has a minority interest as indicated below), and a seventh outside manager was added in January 2018. The Company has established detailed guidelines regarding credit quality, exposure to a particular sector and exposure to a particular obligor within a sector. The Company's investment guidelines generally do not permit its outside managers to purchase securities rated lower than A- by S&P or A3 by Moody’s, excluding a minimal allocation to corporate securities not rated lower than BBB by S&P or Baa2 by Moody’s.

Internally Managed Portfolio

The investment portfolio tables shown above include both assets managed externally and internally. In the table below, more detailed information is provided for the component of the total investment portfolio that is internally managed (excluding short-term investments). The internally managed portfolio (other than short term investments) represents approximately 12% and 15% of the investment portfolio, on a fair value basis as of December 31, 2017 and December 31, 2016, respectively. The internally managed portfolio consists primarily of the Company's investments in securities for (i) loss mitigation purposes, (ii) other risk management purposes and (iii) where the Company believes a particular security presents an attractive investment opportunity.
    
One of the Company's strategies for mitigating losses has been to purchase loss mitigation securities, at discounted prices. In addition, the Company holds other invested assets that were obtained or purchased as part of negotiated settlements with insured counterparties or under the terms of the financial guaranties (other risk management assets).

Alternative investments include various funds investing in both equity and debt securities and catastrophe bonds as well as investments in investment managers. In February 2017 the Company agreed to purchase up to $100 million of limited partnership interests in a fund that invests in the equity of private equity managers. Separately, in September 2017 the Company acquired a minority interest in Wasmer, Schroeder & Company LLC, an independent investment advisory firm specializing in separately managed accounts (SMAs).

Internally Managed Portfolio
Carrying Value

 
As of December 31,
 
2017
 
2016
 
(in millions)
Assets purchased for loss mitigation and other risk management purposes:
 
 
 
   Fixed-maturity securities, at fair value
$
1,231

 
$
1,492

   Other invested assets
20

 
107

Alternative investments
69

 
48

Other
5

 
7

Total
$
1,325

 
$
1,654




Cash and Restricted Cash

The following table provides a reconciliation of the cash reported on the consolidated balance sheets and the cash and restricted cash reported in the statements of cash flows.

Cash and Restricted Cash

 
As of December 31,
 
2017
 
2016
 
2015
 
2014
 
(in millions)
Cash
$
144

 
$
118

 
$
166

 
$
75

Restricted cash (1)
0

 
9

 
0

 
19

Total cash and restricted cash
$
144

 
$
127

 
$
166

 
$
94

____________________
(1)
Amounts relate to cash held in trust accounts and are reported in other assets in consolidated balance sheets. See Note 13, Reinsurance and Other Monoline Exposures, for more information.