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 this section 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. See also Note 9, Consolidated Variable Interest Entities, for the effect of this ASU on FG VIEs.

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 $93 million and $97 million as of June 30, 2018 and December 31, 2017, respectively.

Net Investment Income



	Second Quarter						Six Months
	2018			2017			2018			2017
	(in millions)
Income from fixed-maturity securities managed by third parties	$	74		$	75		$	149		$	150
Income from internally managed securities (1)	28			28			56			77
Gross investment income	102			103			205			227
Investment expenses	(3		)	(2		)	(5		)	(4		)
Net investment income	$	99		$	101		$	200		$	223

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(1) Six Months 2017 included accretion on Zohar II Notes.

Net Realized Investment Gains (Losses)



	Second Quarter						Six Months
	2018			2017			2018			2017
	(in millions)
Gross realized gains on available-for-sale securities (1)	$	2		$	26		$	11		$	69
Gross realized losses on available-for-sale securities	(1		)	(4		)	(6		)	(6		)
Net realized gains (losses) on other invested assets	0			0			(1		)	0
Other-than-temporary impairment (OTTI)	(3		)	(7		)	(11		)	(16		)
Net realized investment gains (losses)	$	(2	)	$	15		$	(7	)	$	47

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(1)	Six Months 2017 included a gain on Zohar II Notes used as consideration for the MBIA UK Acquisition. See Note 2, Assumption of Insured Portfolio and Business Combinations.

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



	Second Quarter					Six Months
	2018		2017			2018		2017
	(in millions)
Balance, beginning of period	$	169	$	142		$	162	$	134
Reductions for securities sold and other settlements	0		(4		)	0		(4		)
Additions for credit losses on securities for which an OTTI was previously recognized	1		7			8		15
Balance, end of period	$	170	$	145		$	170	$	145

Investment Portfolio

Fixed-Maturity Securities and Short-Term Investments

by Security Type

As of June 30, 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	47	%	$	5,139	$	175	$	(25	)	$	5,289	$	33		AA-
U.S. government and agencies	3		275		9		(1		)	283		—			AA+
Corporate securities	19		2,009		22		(48		)	1,983		(7		)	A
Mortgage-backed securities(4):	0
RMBS	8		857		18		(31		)	844		(10		)	A-
CMBS	5		553		3		(10		)	546		—			AAA
Asset-backed securities	7		794		175		(1		)	968		140			B+
Non-U.S. government securities	3		330		4		(22		)	312		—			AA
Total fixed-maturity securities	92		9,957		406		(138		)	10,225		156			A+
Short-term investments	8		911		0		0			911		—			AAA
Total investment portfolio	100	%	$	10,868	$	406	$	(138	)	$	11,136	$	156		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+

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(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 June 30, 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 June 30, 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	$	993	$	(15	)	$	229	$	(10	)	$	1,222	$	(25	)
U.S. government and agencies	22		0			18		(1		)	40		(1		)
Corporate securities	973		(26		)	208		(22		)	1,181		(48		)
Mortgage-backed securities:
RMBS	385		(13		)	194		(18		)	579		(31		)
CMBS	245		(5		)	77		(5		)	322		(10		)
Asset-backed securities	121		(1		)	3		0			124		(1		)
Non-U.S. government securities	102		(3		)	112		(19		)	214		(22		)
Total	$	2,841	$	(63	)	$	841	$	(75	)	$	3,682	$	(138	)
Number of securities (1)			823					240					1,043
Number of securities with OTTI (1)			26					15					40

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

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(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 June 30, 2018, 34 securities had unrealized losses greater than 10% of book value. The total unrealized loss for these securities as of June 30, 2018 was $37 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 June 30, 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 June 30, 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 June 30, 2018



	Amortized Cost		Estimated Fair Value
	(in millions)
Due within one year	$	235	$	231
Due after one year through five years	1,456		1,458
Due after five years through 10 years	2,403		2,410
Due after 10 years	4,453		4,736
Mortgage-backed securities:
RMBS	857		844
CMBS	553		546
Total	$	9,957	$	10,225

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 $262 million and $287 million, as of June 30, 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 $1,713 million and $1,677 million, based on fair value as of June 30, 2018 and December 31, 2017, respectively.

No material investments of the Company were non-income producing for Six Months 2018 and Six Months 2017, respectively.

Externally Managed Portfolio

As of June 30, 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. The table below presents the components of the total investment portfolio that are internally managed (excluding short-term investments). The internally managed portfolio (other than short term investments) represents approximately 11% and 12% of the investment portfolio, on a fair value basis as of June 30, 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. The Company also 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 Second Quarter 2018 and Six Months 2018 on equity investments held as of June 30, 2018 were $(1) million and $(4) million, respectively.

Internally Managed Portfolio

Carrying Value



	As of June 30, 2018		As of December 31, 2017
	(in millions)
Assets purchased for loss mitigation and other risk management purposes:
Fixed-maturity securities, at fair value	$	1,189	$	1,231
Other invested assets	17		20
Alternative investments	81		69
Other	4		5
Total	$	1,291	$	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 June 30, 2018		As of December 31, 2017		As of June 30, 2017		As of December 31, 2016
	(in millions)
Cash	$	185	$	144	$	200	$	118
Restricted cash (1)	4		0		1		9
Total cash and restricted cash	$	189	$	144	$	201	$	127

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(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.