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Investments and Cash
 3 Months Ended
Mar. 31, 2017
Investments, Debt and Equity Securities [Abstract]  
Investments and Cash
Investments and Cash
 
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 $99 million and $91 million as of March 31, 2017 and December 31, 2016, respectively.
 
Net Investment Income
 
 
First Quarter
 
2017
 
2016
 
(in millions)
Income from fixed-maturity securities managed by third parties
$
75

 
$
79

Income from internally managed securities:
 
 
 
Fixed maturities (1)
46

 
17

Other
3

 
5

Gross investment income
124

 
101

Investment expenses
(2
)
 
(2
)
Net investment income
$
122

 
$
99


(1) Includes accretion on Zohar II Notes.

Net Realized Investment Gains (Losses)
 
 
First Quarter
 
2017
 
2016
 
(in millions)
Gross realized gains on available-for-sale securities (1)
$
43

 
$
6

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

 
(1
)
Other-than-temporary impairment
(9
)
 
(16
)
Net realized investment gains (losses)
$
32

 
$
(13
)

____________________
(1)
First Quarter 2017 primarily consists of 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 other comprehensive income (OCI).
 
Roll Forward of Credit Losses
in the Investment Portfolio

 
First Quarter
 
2017
 
2016
 
(in millions)
Balance, beginning of period
$
134

 
$
108

Additions for credit losses on securities for which an other-than-temporary-impairment was not previously recognized
0

 
1

Reductions for securities sold and other settlement during the period
0

 
(2
)
Additions for credit losses on securities for which an other-than-temporary-impairment was previously recognized
8

 
0

Balance, end of period
$
142

 
$
107




Investment Portfolio

Fixed-Maturity Securities and Short-Term Investments
by Security Type 
As of March 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
 
50
%
 
$
5,432

 
$
219

 
$
(29
)
 
$
5,622

 
$
13

 
AA
U.S. government and agencies
 
4

 
399

 
16

 
(1
)
 
414

 
0

 
AA+
Corporate securities
 
17

 
1,851

 
50

 
(27
)
 
1,874

 
(7
)
 
A
Mortgage-backed securities(4):
 
0

 
 
 
 
 
 

 
 
 
 

 
 
RMBS
 
9

 
978

 
40

 
(26
)
 
992

 
5

 
BBB+
CMBS
 
5

 
561

 
12

 
(5
)
 
568

 
—

 
AAA
Asset-backed securities
 
6

 
573

 
117

 
0

 
690

 
93

 
B-
Foreign government securities
 
3

 
341

 
7

 
(29
)
 
319

 
—

 
AA
Total fixed-maturity securities
 
94

 
10,135

 
461

 
(117
)
 
10,479

 
104

 
A+
Short-term investments
 
6

 
687

 
2

 
0

 
689

 
—

 
AAA
Total investment portfolio
 
100
%
 
$
10,822

 
$
463

 
$
(117
)
 
$
11,168

 
$
104

 
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
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

 
0

 
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)
Accumulated OCI. See also Note 17, Shareholders' Equity for additional information as applicable.
 
(3)
Ratings in the tables above represent the lower of the Moody’s and 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 40% of mortgage backed securities as of March 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 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, 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
$
994

 
$
(28
)
 
$
6

 
$
(1
)
 
$
1,000

 
$
(29
)
U.S. government and agencies
172

 
(1
)
 
—

 
—

 
172

 
(1
)
Corporate securities
356

 
(8
)
 
120

 
(19
)
 
476

 
(27
)
Mortgage-backed securities:
 
 
 
 
 
 
 

 


 


RMBS
377

 
(13
)
 
93

 
(13
)
 
470

 
(26
)
CMBS
160

 
(5
)
 
1

 
0

 
161

 
(5
)
Asset-backed securities
52

 
0

 
0

 
0

 
52

 
0

Foreign government securities
45

 
(4
)
 
115

 
(25
)
 
160

 
(29
)
Total
$
2,156

 
$
(59
)
 
$
335

 
$
(58
)
 
$
2,491

 
$
(117
)
Number of securities (1)
 

 
542

 
 

 
62

 
 

 
598

Number of securities with other-than-temporary impairment
 

 
12

 
 

 
9

 
 

 
21

 
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 March 31, 2017, 41 securities had unrealized losses greater than 10% of book value. The total unrealized loss for these securities as of March 31, 2017 was $52 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 March 31, 2017 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 March 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 March 31, 2017
 
 
Amortized
Cost
 
Estimated
Fair Value
 
(in millions)
Due within one year
$
284

 
$
283

Due after one year through five years
1,798

 
1,828

Due after five years through 10 years
2,171

 
2,227

Due after 10 years
4,343

 
4,581

Mortgage-backed securities:
 

 
 

RMBS
978

 
992

CMBS
561

 
568

Total
$
10,135

 
$
10,479


 
Investments and restricted cash that are either held in trust for the benefit of third party ceding insurers in accordance with statutory requirements, invested in a guaranteed investment contract for future claims payments, placed on deposit to fulfill state licensing requirements, or otherwise restricted aggregate to the amount of $282 million and $285 million, based on fair value, as of March 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 $1,508 million and $1,420 million, based on fair value. as of March 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 $36 million and $116 million as of March 31, 2017 and December 31, 2016, respectively.
 
No material investments of the Company were non-income producing for First Quarter 2017 and First Quarter 2016, respectively.

Externally Managed Portfolio

The majority of the investment portfolio is managed by five outside managers. 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 2.5% 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, as defined below, represents approximately 13% and 15% of the investment portfolio, on a fair value basis as of March 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 securities it has insured that have expected losses, at discounted prices (loss mitigation securities). 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 our financial guaranties (other risk management assets). During 2016, the Company established an alternative investments group to focus on deploying a portion of the Company's excess capital to pursue acquisitions and develop new business opportunities that complement the Company's financial guaranty business, are in line with its risk profile and benefit from its core competencies. The alternative investments group has been investigating a number of such opportunities, including, among others, both controlling and non-controlling investments in investment managers.

Internally Managed Portfolio
Carrying Value

 
As of
March 31, 2017
 
As of
December 31, 2016
 
(in millions)
Assets purchased for loss mitigation and other risk management purposes:
 
 
 
Fixed-maturity securities, at fair value
$
1,304

 
$
1,492

Other invested assets
106

 
107

Other
66

 
55

Total
$
1,476

 
$
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 March 31, 2017
 
As of December 31, 2016
 
As of March 31, 2016
 
As of December 31, 2015
 
(in millions)
Cash
$
147

 
$
118

 
$
112

 
$
166

Restricted cash (1)
1

 
9

 
0

 
0

Total cash and restricted cash
$
148

 
$
127

 
$
112

 
$
166

____________________
(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.