Investments and Cash

Accounting Policy

The vast majority of the Company's investment portfolio consists of fixed-maturity and short-term investments, classified as available-for-sale at the time of purchase (approximately 99.5% based on fair value as of December 31, 2018), and therefore carried at fair value. Changes in fair value for other-than-temporarily-impaired securities are bifurcated between credit losses and non-credit changes in fair value. The credit loss on other-than-temporarily-impaired securities is recorded in the statement of operations and the non-credit component of the change in fair value of securities 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 (OTTI) 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, 2018, 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. See "Adoption of ASU 2016-01" below.

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 OTTI 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 OTTI 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 such as default rates, recoveries and changes in value. The assumptions used in these projections require the use of significant management judgment.

In addition to 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.

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 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 are accounted at cost less any impairment, plus or minus the change resulting from observable price changes in orderly transactions for identical or a similar investment of the same issuer in the consolidated statements of operations.

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 $91 million and $97 million as of December 31, 2018 and December 31, 2017, respectively.

Net Investment Income



	Year Ended December 31,
	2018			2017			2016
	(in millions)
Income from fixed-maturity securities managed by third parties	$	297		$	298		$	306
Income from internally managed securities (1)	110			129			111
Gross investment income	407			427			417
Investment expenses	(9		)	(9		)	(9		)
Net investment income	$	398		$	418		$	408

____________________


(1)	Year ended December 31, 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).

Net Realized Investment Gains (Losses)



	Year Ended December 31,
	2018			2017			2016
	(in millions)
Gross realized gains on available-for-sale securities (1)	$	20		$	95		$	28
Gross realized losses on available-for-sale securities	(12		)	(12		)	(8		)
Net realized gains (losses) on other invested assets	(1		)	—			2
OTTI:
Total OTTI	(35		)	(33		)	(47		)
Less: portion of OTTI recognized in OCI	4			10			4
Net OTTI recognized in net income (loss) (2)	(39		)	(43		)	(51		)
Net realized investment gains (losses)	$	(32	)	$	40		$	(29	)

____________________


(1)	Year ended December 31, 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)	Net OTTI recognized in net income (loss) was primarily a result of a decline in expected cash flows on loss mitigation securities.

The proceeds from sales of fixed-maturity securities available-for-sale were $1,180 million, $1,701 million and $1,365 million for the years ended December 31, 2018, 2017 and 2016, respectively.

The Company recorded a gain on change in fair value of equity securities in other income of $27 million for the year ended December 31, 2018, which includes a gain of $31 million related to the Company's minority interest in the parent company of TMC Bonds LLC, which it sold in 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



	Year Ended December 31,
	2018		2017			2016
	(in millions)
Balance, beginning of period	$	162	$	134		$	108
Additions for credit losses on securities for which an OTTI was not previously recognized	—		13			3
Reductions for securities sold and other settlements	—		(4		)	(4		)
Additions for credit losses on securities for which an OTTI was previously recognized	23		19			27
Balance, end of period	$	185	$	162		$	134

Investment Portfolio

As of December 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 an allocation not to exceed 5% of the aggregate externally managed portfolio, to corporate securities not rated lower than BBB by S&P or Baa2 by Moody’s.

The investment portfolio tables shown below include assets managed both externally and internally. The internally managed portfolio primarily consists 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 (until redemption in 2018) 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 of which $83 million remains to be invested as of December 31, 2018.

Investment Portfolio

Carrying Value



	As of December 31,
	2018		2017
	(in millions)
Fixed-maturity securities (1):
Externally managed	$	8,909	$	9,443
Internally managed	1,180		1,231
Short-term investments	729		627
Other invested assets:
Internally managed
Alternative investments	39		69
Other	16		25
Total	$	10,873	$	11,395

____________________


(1)	10.8% and 10.5% of fixed-maturity securities are rated BIG as of December 31, 2018 and December 31, 2017, respectively.

Fixed-Maturity Securities and Short-Term Investments

by Security Type

As of December 31, 2018



Investment Category	Percent of Total(1)		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		AOCI Gain (Loss) on Securities with OTTI (2)			Weighted Average Credit Rating (3)
	(dollars in millions)
Fixed-maturity securities:
Obligations of state and political subdivisions	45	%	$	4,761	$	168	$	(18	)	$	4,911	$	40		AA-
U.S. government and agencies	2		167		9		(1		)	175		—			AA+
Corporate securities	20		2,175		13		(52		)	2,136		(4		)	A
Mortgage-backed securities(4):	—
RMBS	9		999		17		(34		)	982		(15		)	A-
CMBS	5		542		4		(7		)	539		—			AAA
Asset-backed securities	9		942		131		(5		)	1,068		97			BB
Non-U.S. government securities	3		298		2		(22		)	278		—			AA
Total fixed-maturity securities	93		9,884		344		(139		)	10,089		118			A+
Short-term investments	7		729		—		—			729		—			AAA
Total investment portfolio	100	%	$	10,613	$	344	$	(139	)	$	10,818	$	118		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 (2)			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		—			896		136			B
Non-U.S. government securities	3		316		6		(17		)	305		—			AA
Total fixed-maturity securities	94		10,187		554		(67		)	10,674		152			A+
Short-term investments	6		627		—		—			627		—			AAA
Total investment portfolio	100	%	$	10,814	$	554	$	(67	)	$	11,301	$	152		A+

____________________


(1)	Based on amortized cost.


(2)	See Note 20, Other Comprehensive Income.


(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 primarily consists of high-quality, liquid instruments.


(4)	U.S. government-agency obligations were approximately 48% of mortgage backed securities as of December 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 present the fair value of the Company’s available-for-sale portfolio of obligations of state and political subdivisions as of December 31, 2018 and December 31, 2017 by state.

Fair Value of Available-for-Sale Portfolio of

Obligations of State and Political Subdivisions

As of December 31, 2018 (1)



State	State General Obligation		Local General Obligation		Revenue Bonds		Fair Value		Amortized Cost		Average Credit Rating
	(in millions)
New York	$	5	$	49	$	492	$	546	$	536	AA
Texas	19		170		344		533		520		AA
California	63		77		378		518		482		A
Washington	80		81		193		354		349		AA
Florida	8		13		220		241		236		A+
Massachusetts	75		—		144		219		211		AA
Illinois	16		55		127		198		192		A
Pennsylvania	35		5		98		138		136		A+
District of Columbia	41		—		92		133		131		AA
Georgia	10		10		94		114		110		AA-
All others	96		210		1,103		1,409		1,369		AA-
Total	$	448	$	670	$	3,285	$	4,403	$	4,272	AA-

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)
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-

____________________


(1)	Excludes $508 million and $892 million as of December 31, 2018 and 2017, 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 primarily consists of essential service revenue bonds issued by transportation authorities and other utilities, water and sewer authorities and universities.

Revenue Bonds

Sources of Funds



	As of December 31, 2018				As of December 31, 2017
Type	Fair Value		Amortized Cost		Fair Value		Amortized Cost
	(in millions)
Transportation	$	967	$	925	$	955	$	889
Water and sewer	580		566		670		641
Higher education	557		543		515		492
Tax backed	471		458		600		570
Municipal utilities	287		267		324		315
Healthcare	278		270		308		293
All others	145		143		174		169
Total	$	3,285	$	3,172	$	3,546	$	3,369

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, 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	$	195	$	(4	)	$	658	$	(14	)	$	853	$	(18	)
U.S. government and agencies	11		—			24		(1		)	35		(1		)
Corporate securities	836		(19		)	522		(33		)	1,358		(52		)
Mortgage-backed securities:
RMBS	85		(2		)	447		(32		)	532		(34		)
CMBS	111		(1		)	164		(6		)	275		(7		)
Asset-backed securities	322		(4		)	38		(1		)	360		(5		)
Non-U.S. government securities	83		(4		)	99		(18		)	182		(22		)
Total	$	1,643	$	(34	)	$	1,952	$	(105	)	$	3,595	$	(139	)
Number of securities (1)			417					608					997
Number of securities with OTTI (1)			22					22					42

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		—			18		(1		)	169		(1		)
Corporate securities	201		(1		)	240		(17		)	441		(18		)
Mortgage-backed securities:
RMBS	191		(5		)	213		(12		)	404		(17		)
CMBS	29		—			80		(3		)	109		(3		)
Asset-backed securities	48		—			3		—			51		—
Non-U.S. government securities	20		—			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 December 31, 2018, 38 securities had unrealized losses greater than 10% of book value. The total unrealized loss for these securities as of December 31, 2018 was $43 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 has determined that the unrealized losses recorded as of December 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 December 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 December 31, 2018



	Amortized Cost		Estimated Fair Value
	(in millions)
Due within one year	$	206	$	203
Due after one year through five years	1,507		1,497
Due after five years through 10 years	2,387		2,393
Due after 10 years	4,243		4,475
Mortgage-backed securities:
RMBS	999		982
CMBS	542		539
Total	$	9,884	$	10,089

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 totaled $266 million and $287 million, as of December 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 $1,855 million and $1,677 million, based on fair value as of December 31, 2018 and December 31, 2017, respectively.

No material investments of the Company were non-income producing for years ended December 31, 2018 and 2017, respectively.

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,
	2018		2017
	(in millions)
Cash	$	104	$	144
Restricted cash	—		—
Total cash and restricted cash	$	104	$	144