Investments and Cash

Adoption of ASU 2016-01

Up until December 31, 2017, the change in fair value of 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 fair value of these investments is recorded in other income in the condensed consolidated statements of operations. Upon adoption of this section of ASU 2016-01, the Company reclassified a loss of approximately $1 million, net of tax, from AOCI to retained earnings. See also Note 9, 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 $98 million and $97 million as of September 30, 2018 and December 31, 2017, respectively.

Net Investment Income



	Third Quarter						Nine Months
	2018			2017			2018			2017
	(in millions)
Income from fixed-maturity securities managed by third parties	$	75		$	74		$	224		$	224
Income from internally managed securities (1)	25			28			81			105
Gross investment income	100			102			305			329
Investment expenses	(2		)	(3		)	(7		)	(7		)
Net investment income	$	98		$	99		$	298		$	322

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

The table below presents the components of net realized investment gains (losses). Realized gains and losses on sales of investments are determined using the specific identification method.

Net Realized Investment Gains (Losses)



	Third Quarter						Nine Months
	2018			2017			2018			2017
	(in millions)
Gross realized gains on available-for-sale securities (1)	$	5		$	23		$	16		$	92
Gross realized losses on available-for-sale securities	(3		)	(3		)	(9		)	(9		)
Net realized gains (losses) on other invested assets	0			0			(1		)	0
Other-than-temporary impairment (OTTI) (2)	(9		)	(13		)	(20		)	(29		)
Net realized investment gains (losses)	$	(7	)	$	7		$	(14	)	$	54

____________________


(1)	Nine 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.


(2)	OTTI was primarily a result of a decline in expected cash flows on loss mitigation securities. See Note 10, Investments and Cash, in Part II, Item 8. “Financial Statements and Supplementary Data” of AGL’s Annual Report on Form 10-K for the year ended December 31, 2017 for a discussion of the Company's policy for determining OTTI.

The proceeds from sales of fixed-maturity securities available-for-sale were $316 million in Third Quarter 2018, $350 million in Third Quarter 2017, $908 million in Nine Months 2018 and $1,128 million in Nine Months 2017.

The Company recorded, in other income, a gain on change in fair value of equity securities of $32 million and $29 million in Third Quarter 2018 and Nine Months 2018, respectively. Both periods include a gain of $31 million related to the Company's minority interest in the parent company of TMC Bonds LLC, which it sold in Third Quarter 2018.

The following table presents the roll-forward of the credit losses on fixed-maturity securities for which the Company has recognized an OTTI and for which unrealized loss was recognized in OCI.

Roll Forward of Credit Losses

in the Investment Portfolio



	Third Quarter				Nine Months
	2018		2017		2018		2017
	(in millions)
Balance, beginning of period	$	170	$	145	$	162	$	134
Additions for credit losses on securities for which an OTTI was not previously recognized	0		3		0		6
Reductions for securities sold and other settlements	0		0		0		(4		)
Additions for credit losses on securities for which an OTTI was previously recognized	2		5		10		17
Balance, end of period	$	172	$	153	$	172	$	153

Investment Portfolio

Fixed-Maturity Securities and Short-Term Investments

by Security Type

As of September 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	45	%	$	4,885	$	141	$	(38	)	$	4,988	$	39		AA-
U.S. government and agencies	2		235		8		(1		)	242		—			AA+
Corporate securities	21		2,187		15		(55		)	2,147		(12		)	A
Mortgage-backed securities (4):	0
RMBS	9		967		16		(35		)	948		(10		)	A-
CMBS	5		537		2		(11		)	528		0			AAA
Asset-backed securities	8		893		164		(2		)	1,055		128			BB-
Non-U.S. government securities	3		302		3		(21		)	284		—			AA
Total fixed-maturity securities	93		10,006		349		(163		)	10,192		145			A+
Short-term investments	7		738		0		0			738		—			AAA
Total investment portfolio	100	%	$	10,744	$	349	$	(163	)	$	10,930	$	145		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 47% of mortgage backed securities as of September 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 September 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	$	1,305	$	(25	)	$	273	$	(13	)	$	1,578	$	(38	)
U.S. government and agencies	20		0			25		(1		)	45		(1		)
Corporate securities	1,144		(26		)	260		(29		)	1,404		(55		)
Mortgage-backed securities:
RMBS	386		(8		)	331		(27		)	717		(35		)
CMBS	229		(5		)	80		(6		)	309		(11		)
Asset-backed securities	280		(1		)	11		(1		)	291		(2		)
Non-U.S. government securities	86		(4		)	101		(17		)	187		(21		)
Total	$	3,450	$	(69	)	$	1,081	$	(94	)	$	4,531	$	(163	)
Number of securities (1)			1,003					311					1,283
Number of securities with OTTI			23					16					39

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 September 30, 2018, 35 securities had unrealized losses greater than 10% of book value. The total unrealized loss for these securities as of September 30, 2018 was $49 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 considered the credit quality, cash flows, interest rate movements, ability to hold a security to recovery and intent to sell a security in determining whether a security had a credit loss. The Company determined that the unrealized losses recorded as of September 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 September 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 September 30, 2018



	Amortized Cost		Estimated Fair Value
	(in millions)
Due within one year	$	229	$	229
Due after one year through five years	1,499		1,492
Due after five years through 10 years	2,426		2,411
Due after 10 years	4,348		4,584
Mortgage-backed securities:
RMBS	967		948
CMBS	537		528
Total	$	10,006	$	10,192

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 September 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 $1,725 million and $1,677 million, based on fair value as of September 30, 2018 and December 31, 2017, respectively.

Externally Managed Portfolio

As of September 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 assets managed both 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 12% and 12% of the investment portfolio, on a fair value basis as of September 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) other alternative investments that the Company believes present 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. 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.

Internally Managed Portfolio

Carrying Value



	As of September 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	$	1,184	$	1,231
Other invested assets (1)	13		20
Alternative investments	78		69
Other	4		5
Total	$	1,279	$	1,325

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(1)	The Company recognized a $31 million fair value gain in other income related to the Company's minority interest in the parent company of TMC Bonds LLC, which it sold in Third Quarter 2018.

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 September 30, 2018		As of December 31, 2017		As of September 30, 2017		As of December 31, 2016
	(in millions)
Cash	$	82	$	144	$	72	$	118
Restricted cash (1)	0		0		0		9
Total cash and restricted cash	$	82	$	144	$	72	$	127

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