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Investments and Cash
 3 Months Ended
Mar. 31, 2018
Investments, Debt and Equity Securities [Abstract]  
Investments and Cash
Investments and Cash
 
Adoption of ASU 2016-01

Up until December 31, 2017, the change in fair value of the preferred stock investments and certain other equity investments was recorded in OCI. Effective January 1, 2018, in accordance with ASU 2016-01, the change in the fair value of these investments is recorded in other income in the condensed consolidated statements of operations. On adoption of ASU 2016-01, on January 1, 2018, the Company reclassified a loss of approximately $1 million, net of tax, from AOCI to retained earnings.

In addition, in accordance with ASU 2016-01, the Company elected the new measurement alternative for equity securities that were accounted for under the cost method as of December 31, 2017 because they did not have a readily determinable fair value. Effective January 1, 2018, these equity securities will be accounted at cost less any impairment, plus or minus the change resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.

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 $101 million and $97 million as of March 31, 2018 and December 31, 2017, respectively.
 
Net Investment Income
 
 
First Quarter
 
2018
 
2017
 
(in millions)
Income from fixed-maturity securities managed by third parties
$
75

 
$
75

Income from internally managed securities (1)
28

 
49

Gross investment income
103

 
124

Investment expenses
(2
)
 
(2
)
Net investment income
$
101

 
$
122


____________________
(1)    First Quarter 2017 includes accretion on Zohar II Notes.


Net Realized Investment Gains (Losses)
 
 
First Quarter
 
2018
 
2017
 
(in millions)
Gross realized gains on available-for-sale securities (1)
$
9

 
$
43

Gross realized losses on available-for-sale securities
(5
)
 
(2
)
Net realized gains (losses) on other invested assets
(1
)
 
0

Other-than-temporary impairment (OTTI)
(8
)
 
(9
)
Net realized investment gains (losses)
$
(5
)
 
$
32


____________________
(1)
First Quarter 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 OTTI 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

 
First Quarter
 
2018
 
2017
 
(in millions)
Balance, beginning of period
$
162

 
$
134

Additions for credit losses on securities for which an OTTI was previously recognized
7

 
8

Balance, end of period
$
169

 
$
142




Investment Portfolio

Fixed-Maturity Securities and Short-Term Investments
by Security Type 
As of March 31, 2018

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

 
 

 
 

 
 

 
 

 
 

 
 
Obligations of state and political subdivisions
 
50
%
 
$
5,323

 
$
178

 
$
(27
)
 
$
5,474

 
$
26

 
 AA-
U.S. government and agencies
 
2

 
265

 
11

 
(1
)
 
275

 
—

 
 AA+
Corporate securities
 
18

 
1,911

 
45

 
(32
)
 
1,924

 
(6
)
 
 A
Mortgage-backed securities(4):
 
0

 
 
 
 
 
 

 
 
 
 

 
 
RMBS
 
8

 
857

 
20

 
(28
)
 
849

 
(8
)
 
 A-
CMBS
 
5

 
561

 
5

 
(7
)
 
559

 
—

 
 AAA
Asset-backed securities
 
7

 
721

 
169

 
(1
)
 
889

 
137

 
 B
Non-U.S. government securities
 
3

 
331

 
9

 
(13
)
 
327

 
—

 
 AA
Total fixed-maturity securities
 
93

 
9,969

 
437

 
(109
)
 
10,297

 
149

 
A+
Short-term investments
 
7

 
751

 
0

 
0

 
751

 
—

 
AAA
Total investment portfolio
 
100
%
 
$
10,720

 
$
437

 
$
(109
)
 
$
11,048

 
$
149

 
A+


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
Gain
(Loss) on
Securities
with
OTTI
 
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
Non-U.S. 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+
____________________
(1)
Based on amortized cost.
 
(2)
See Note 17, Shareholders' Equity.

(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)
U.S. government-agency obligations were approximately 42% of mortgage backed securities as of March 31, 2018 and 39% as of December 31, 2017 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 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 March 31, 2018
 
 
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
$
988

 
$
(15
)
 
$
260

 
$
(12
)
 
$
1,248

 
$
(27
)
U.S. government and agencies
62

 
0

 
17

 
(1
)
 
79

 
(1
)
Corporate securities
692

 
(14
)
 
226

 
(18
)
 
918

 
(32
)
Mortgage-backed securities:
 
 
 
 
 
 
 

 


 


RMBS
350

 
(11
)
 
203

 
(17
)
 
553

 
(28
)
CMBS
222

 
(3
)
 
78

 
(4
)
 
300

 
(7
)
Asset-backed securities
55

 
(1
)
 
3

 
0

 
58

 
(1
)
Non-U.S. government securities
21

 
0

 
119

 
(13
)
 
140

 
(13
)
Total
$
2,390

 
$
(44
)
 
$
906

 
$
(65
)
 
$
3,296

 
$
(109
)
Number of securities (1)
 

 
716

 
 

 
244

 
 

 
944

Number of securities with OTTI (1)
 

 
20

 
 

 
16

 
 

 
35

 

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

Non-U.S. 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 OTTI (1)
 

 
17

 
 

 
15

 
 

 
31


___________________
(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 March 31, 2018, 27 securities had unrealized losses greater than 10% of book value. The total unrealized loss for these securities as of March 31, 2018 was $25 million. As of December 31, 2017, of the securities in an unrealized loss position for 12 months or more, 28 securities had unrealized losses greater than 10% of book value with an unrealized loss of $27 million. The Company had determined that the unrealized losses recorded as of March 31, 2018 and December 31, 2017 were yield-related and not the result of OTTI.
 
The amortized cost and estimated fair value of available-for-sale fixed maturity securities by contractual maturity as of March 31, 2018 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 March 31, 2018
 
 
Amortized
Cost
 
Estimated
Fair Value
 
(in millions)
Due within one year
$
274

 
$
272

Due after one year through five years
1,438

 
1,467

Due after five years through 10 years
2,345

 
2,378

Due after 10 years
4,494

 
4,772

Mortgage-backed securities:
 

 
 

RMBS
857

 
849

CMBS
561

 
559

Total
$
9,969

 
$
10,297



 
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 pledged or restricted total $264 million and $287 million, as of March 31, 2018 and December 31, 2017, 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 $1,689 million and $1,677 million, based on fair value as of March 31, 2018 and December 31, 2017, respectively.
 
No material investments of the Company were non-income producing for First Quarter 2018 and First Quarter 2017, respectively.

Externally Managed Portfolio

As of March 31, 2018, the majority of the investment portfolio is managed by seven outside managers (including Wasmer, Schroeder & Company LLC, in which the Company has a minority interest). 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 12% of the investment portfolio, on a fair value basis as of March 31, 2018 and December 31, 2017, 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, including catastrophe bonds, as well as investments in investment managers.

The unrealized gains (losses) recognized during First Quarter 2018 on equity investments held as of March 31, 2018 were $(3) million.

Internally Managed Portfolio
Carrying Value

 
As of
March 31, 2018
 
As of
December 31, 2017
 
(in millions)
Assets purchased for loss mitigation and other risk management purposes:
 
 
 
Fixed-maturity securities, at fair value
$
1,199

 
$
1,231

Other invested assets
18

 
20

Alternative investments
80

 
69

Other
5

 
5

Total
$
1,302

 
$
1,325




Cash and Restricted Cash

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

Cash and Restricted Cash

 
As of
March 31, 2018
 
As of
December 31, 2017
 
As of
March 31, 2017
 
As of
December 31, 2016
 
(in millions)
Cash
$
114

 
$
144

 
$
147

 
$
118

Restricted cash (1)
3

 
0

 
1

 
9

Total cash and restricted cash
$
117

 
$
144

 
$
148

 
$
127

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