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Investments and Cash
 9 Months Ended
Sep. 30, 2019
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 $86 million and $91 million as of September 30, 2019 and December 31, 2018, respectively.
 
Net Investment Income
 
 
Third Quarter
 
Nine Months
 
2019
 
2018
 
2019
 
2018
 
(in millions)
Income from fixed-maturity securities managed by third parties
$
66

 
$
75

 
$
207

 
$
224

Income from internally managed securities
24

 
26

 
95

 
80

Gross investment income
90

 
101

 
302

 
304

Investment expenses
(2
)
 
(2
)
 
(6
)
 
(7
)
Net investment income
$
88

 
$
99

 
$
296

 
$
297




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
 
2019
 
2018
 
2019
 
2018
 
(in millions)
Gross realized gains on available-for-sale securities
$
29

 
$
5

 
$
48

 
$
16

Gross realized losses on available-for-sale securities
(1
)
 
(3
)
 
(4
)
 
(9
)
Net realized gains (losses) on other invested assets
—

 
—

 
—

 
(1
)
Other-than-temporary impairment (OTTI):
 
 
 
 
 
 
 
Total OTTI
(12
)
 
(8
)
 
(29
)
 
(23
)
Less: portion of OTTI recognized in OCI
—

 
1

 
3

 
(3
)
Net OTTI recognized in net income (loss) (1)
(12
)
 
(9
)
 
(32
)
 
(20
)
Net realized investment gains (losses)
$
16

 
$
(7
)
 
$
12

 
$
(14
)

____________________
(1)
Net OTTI recognized in net income was mainly attributable to change in foreign exchange rates in Third Quarter 2019 and Third Quarter 2018. OTTI for Nine Months 2019 and Nine Months 2018 was attributable to change in foreign exchange rates and securities purchased for loss mitigation and other risk management purposes.

The proceeds from sales of fixed-maturity securities available-for-sale were $405 million in Third Quarter 2019, $316 million in Third Quarter 2018, $1,306 million in Nine Months 2019 and $908 million in Nine Months 2018.

In Nine Months 2019 and 2018, the Company received $144 million and $4 million in bonds under financial guaranty contract settlement agreements, primarily the COFINA Exchange Senior Bonds. In Third Quarter 2019, the Company exchanged $44 million in COFINA taxable bonds for COFINA non-taxable bonds. During Third Quarter 2019 the Company sold all of its COFINA Exchange Senior Bonds. These transactions were non-cash and are not shown in the investing cash flows in the condensed consolidated statements of cash flows.

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
 
2019
 
2018
 
2019
 
2018
 
(in millions)
Balance, beginning of period
$
191

 
$
170

 
$
185

 
$
162

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

 
2

 
13

 
10

Reductions for securities sold and other settlements
—

 
—

 
(7
)
 
—

Balance, end of period
$
191

 
$
172

 
$
191

 
$
172




See Part II, Item 8, Financial Statements and Supplementary Data, Note 10, Investments and Cash, of the Company's 2018 Annual Report on Form 10-K for a discussion of the accounting policy for evaluating investments for OTTI.

Investment Portfolio

As of September 30, 2019, 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 permit its outside managers to purchase only a small amount of securities rated lower than BBB- by S&P or Baa3 by Moody’s, and then only those securities rated no lower than B by S&P or B2 by Moody’s and subject to certain other specific requirements. Additionally, the managed portfolio must maintain a minimum average rating of A+ by S&P or A1 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 investing in both equity and debt securities 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 $86 million of the commitment was not funded as of September 30, 2019.
Investment Portfolio
Carrying Value

 
As of
September 30, 2019
 
As of
December 31, 2018
 
(in millions)
Fixed-maturity securities (1):
 
 
 
Externally managed
$
8,363

 
$
8,909

Internally managed
914

 
1,180

Short-term investments
1,142

 
729

Other invested assets:
 
 
 
Internally managed
 
 
 
Alternative investments
42

 
39

Other
15

 
16

Total
$
10,476

 
$
10,873

____________________
(1)
8.4% and 10.8% of fixed-maturity securities are rated BIG as of September 30, 2019 and December 31, 2018, respectively.

The Company has a de minimis amount of restricted cash as of September 30, 2019 and December 31, 2018.

Fixed-Maturity Securities and Short-Term Investments
by Security Type 
As of September 30, 2019

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

 
 

 
 

 
 

 
 

 
 

 
 
Obligations of state and political subdivisions
 
42
%
 
$
4,132

 
$
331

 
$
—

 
$
4,463

 
$
42

 
AA-
U.S. government and agencies
 
1

 
144

 
11

 
—

 
155

 
—

 
AA+
Corporate securities
 
24

 
2,286

 
80

 
(27
)
 
2,339

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

 
 
 
 
 
 

 
 
 
 

 
 
RMBS
 
8

 
846

 
41

 
(10
)
 
877

 
4

 
A-
CMBS
 
5

 
448

 
21

 
—

 
469

 
—

 
AAA
Asset-backed securities
 
7

 
745

 
33

 
(3
)
 
775

 
10

 
BBB-
Non-U.S. government securities
 
2

 
210

 
1

 
(12
)
 
199

 
—

 
AA
Total fixed-maturity securities
 
89

 
8,811

 
518

 
(52
)
 
9,277

 
52

 
A+
Short-term investments
 
11

 
1,142

 
—

 
—

 
1,142

 
—

 
AAA
Total investment portfolio
 
100
%
 
$
9,953

 
$
518

 
$
(52
)
 
$
10,419

 
$
52

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

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

 
 

 
 

 
 

 
 

 
 

 
 
Obligations of state and political subdivisions
 
45
%
 
$
4,761

 
$
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+
____________________
(1)
Based on amortized cost.
 
(2)
Accumulated OCI (AOCI).

(3)
Ratings 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 44% of mortgage backed securities as of September 30, 2019 and 48% as of December 31, 2018 based on fair value.


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, 2019
 
 
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
$
5

 
$
—

 
$
4

 
$
—

 
$
9

 
$
—

U.S. government and agencies
13

 
—

 
4

 
—

 
17

 
—

Corporate securities
349

 
(8
)
 
170

 
(19
)
 
519

 
(27
)
Mortgage-backed securities:
 
 
 
 
 
 
 

 


 


RMBS
7

 
—

 
193

 
(10
)
 
200

 
(10
)
CMBS
1

 
—

 
4

 
—

 
5

 
—

Asset-backed securities
83

 
(2
)
 
147

 
(1
)
 
230

 
(3
)
Non-U.S. government securities
53

 
(2
)
 
80

 
(10
)
 
133

 
(12
)
Total
$
511

 
$
(12
)
 
$
602

 
$
(40
)
 
$
1,113

 
$
(52
)
Number of securities (1)
 

 
133

 
 

 
143

 
 

 
256

Number of securities with OTTI
 

 
12

 
 

 
9

 
 

 
21

 

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


___________________
(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, 2019 and December 31, 2018, 27 and 38 securities, respectively, had unrealized losses greater than 10% of book value. The total unrealized loss for these securities was $24 million as of September 30, 2019 and $43 million as of December 31, 2018. 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 September 30, 2019 and December 31, 2018 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, 2019 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, 2019
 
 
Amortized
Cost
 
Estimated
Fair Value
 
(in millions)
Due within one year
$
274

 
$
275

Due after one year through five years
1,617

 
1,635

Due after five years through 10 years
2,133

 
2,242

Due after 10 years
3,493

 
3,779

Mortgage-backed securities:
 

 
 

RMBS
846

 
877

CMBS
448

 
469

Total
$
8,811

 
$
9,277


 
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 $278 million and $266 million, as of September 30, 2019 and December 31, 2018, respectively. The investment portfolio also contains securities that are held in trust by certain AGL subsidiaries or otherwise restricted for the benefit of other AGL subsidiaries in accordance with statutory and regulatory requirements in the amount of $1,596 million and $1,855 million, based on fair value as of September 30, 2019 and December 31, 2018, respectively.