Investments and Cash

12 Months Ended

Dec. 31, 2019

Investments, Debt and Equity Securities [Abstract]

Investments and Cash

Investments and Cash

The amounts and descriptions in the note relate to the Company's investments and cash other than those of the consolidated investment vehicles described in Note 14, Variable interest Entities.

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 98.8% based on fair value as of December 31, 2019), 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, other than loss mitigation 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 primarily consist of equity method investments. The Company's equity method investments primarily consist of an investment in a renewable energy company, as well as investments in private equity funds and managed account investment advisors. Changes in the value of equity method investments are recorded in the consolidated statements of operations in "equity in earnings of investees." Other invested assets also includes other equity investments carried at fair value. 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. 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.

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. If management's assessment changes in the future, the Company may ultimately record a loss after having originally concluded that the decline in value was temporary.

In addition to the factors noted above, the Company also seeks advice from its outside investment managers.

Net Investment Income and Equity Method Investment Earnings

Net investment income is a function of the yield that the Company earns on invested assets and the size of the portfolio. Net investment income includes the income earned on fixed-maturity securities, short-term investments and other invested assets, other than investments accounted for under the equity method, which are recorded in equity in earnings of investees. 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 $79 million and $91 million as of December 31, 2019 and December 31, 2018, respectively.

Net Investment Income

	Year Ended December 31,
	2019			2018			2017
	(in millions)
Income from securities managed by third parties	$	273		$	297		$	298
Income from internally managed securities (1)	114			107			128
Gross investment income	387			404			426
Investment expenses	(9		)	(9		)	(9		)
Net investment income	$	378		$	395		$	417

____________________

(1) Year ended December 31, 2017 included accretion on Zohar II Notes used as consideration for the MBIA UK Acquisition. See Note 2, Business Combinations and Assumption of Insured Portfolio.

Realized Investment Gains (Losses)

The table below presents the components of net realized investment gains (losses).

Net Realized Investment Gains (Losses)

	Year Ended December 31,
	2019			2018			2017
	(in millions)
Gross realized gains on available-for-sale securities (1)	$	63		$	20		$	95
Gross realized losses on available-for-sale securities	(5		)	(12		)	(12		)
Net realized gains (losses) on other invested assets	(1		)	(1		)	—
OTTI:
Total OTTI	(29		)	(35		)	(33		)
Less: portion of OTTI recognized in OCI	6			4			10
Net OTTI recognized in net income (loss) (2)	(35		)	(39		)	(43		)
Net realized investment gains (losses) (3)	$	22		$	(32	)	$	40

____________________

(1) Year ended December 31, 2017 included a gain on Zohar II Notes used as consideration for the MBIA UK Acquisition. See Note 2, Business Combinations and Assumption of Insured Portfolio.

(2) Net OTTI recognized in net income for 2019, 2018 and 2017 was attributable to securities purchased for loss mitigation and other risk management purposes and change in foreign exchange rates.

(3) Includes foreign currency gains (losses) of $(15) million, $1 million and $18 million for 2019, 2018 and 2017, respectively.

The proceeds from sales of fixed-maturity securities classified as available-for-sale were $1,805 million, $1,180 million and $1,701 million for the years ended December 31, 2019, 2018 and 2017, 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 loss on change in fair value of equity securities for the year ended December 31, 2019 was de minimis.

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,
	2019			2018		2017
	(in millions)
Balance, beginning of period	$	185		$	162	$	134
Additions for credit losses on securities for which an OTTI was not previously recognized	—			—		13
Reductions for securities sold and other settlements	(15		)	—		(4		)
Additions for credit losses on securities for which an OTTI was previously recognized	16			23		19
Balance, end of period	$	186		$	185	$	162

Investment Portfolio

As of December 31, 2019, the majority of the investment portfolio is managed by six 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 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. The Company has made minority investments in investment managers as part of its strategy of participating in that market and has also made other unrelated investments that it believes present attractive investment opportunities. 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 December 31, 2019. In December 2019, the Company invested in a limited liability company that owns fuel cells.

The insurance subsidiaries currently intend to invest $500 million in Assured Investment Management funds plus additional amounts in other accounts managed by Assured Investment Management. As of December 31, 2019, the Insurance segment had committed capital to the three consolidated Assured Investment Management funds, of which $79 million has been drawn and invested by the respective Assured Investment Management funds and $114 million on the commitment remained outstanding. See Note 14. Variable Interest Entities. As of December 31, 2019, the uninvested portion is reflected in short-term investments in the table below.

Investment Portfolio

Carrying Value

	As of December 31,
	2019		2018
	(in millions)
Fixed-maturity securities (1):
Externally managed	$	7,978	$	8,909
Internally managed	876		1,180
Short-term investments	1,268		729
Other invested assets-internally managed
Equity method investments	111		47
Other	7		8
Total	$	10,240	$	10,873

____________________

(1) 8.6% and 10.8% of fixed-maturity securities are rated BIG as of December 31, 2019 and December 31, 2018, respectively.

Fixed-Maturity Securities and Short-Term Investments

by Security Type 

As of December 31, 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	%	$	4,036	$	305	$	(1	)	$	4,340	$	40		AA-
U.S. government and agencies	1		137		10		—			147		—			AA+
Corporate securities	23		2,137		103		(19		)	2,221		(8		)	A
Mortgage-backed securities(4):	—
RMBS	8		745		37		(7		)	775		8			A-
CMBS	4		402		17		—			419		—			AAA
Asset-backed securities	7		684		38		(2		)	720		16			BB+
Non-U.S. government securities	2		230		7		(5		)	232		3			AA
Total fixed-maturity securities	87		8,371		517		(34		)	8,854		59			A+
Short-term investments	13		1,268		—		—			1,268		—			AAA
Total investment portfolio	100	%	$	9,639	$	517	$	(34	)	$	10,122	$	59		AA-

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 42% of mortgage backed securities as of December 31, 2019 and 48% as of December 31, 2018, 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, 2019 and December 31, 2018 by state.

Fair Value of Available-for-Sale Portfolio of

Obligations of State and Political Subdivisions

As of December 31, 2019 (1)

State	State General Obligation		Local General Obligation		Revenue Bonds		Total Fair Value		Amortized Cost		Average Credit Rating
	(in millions)
California	68		70		380		$	518	457		A
New York	$	6	$	46	$	408	$	460	$	431	AA
Texas	23		122		287		432		404		AA
Washington	52		69		181		302		284		AA
Florida	8		3		233		244		229		A+
Illinois	18		53		125		196		182		A
Massachusetts	71		—		115		186		171		AA
Pennsylvania	38		4		95		137		128		A+
Georgia	11		10		92		113		104		AA-
District of Columbia	30		—		69		99		94		AA
All others	71		172		915		1,158		1,080		AA-
Total	$	396	$	549	$	2,900	$	3,845	$	3,564	AA-

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		Total 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-

____________________

(1) Excludes $495 million and $508 million as of December 31, 2019 and 2018, 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, 2019				As of December 31, 2018
Type	Fair Value		Amortized Cost		Fair Value		Amortized Cost
	(in millions)
Transportation	$	916	$	835	$	967	$	925
Higher education	488		456		557		543
Water and sewer	453		422		580		566
Tax backed	426		397		471		458
Healthcare	236		220		278		270
Municipal utilities	234		212		287		267
All others	147		137		145		143
Total	$	2,900	$	2,679	$	3,285	$	3,172

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, 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	$	45	$	(1	)	$	—	$	—		$	45	$	(1	)
U.S. government and agencies	5		—			5		—			10		—
Corporate securities	61		—			119		(19		)	180		(19		)
Mortgage-backed securities:
RMBS	10		—			75		(7		)	85		(7		)
CMBS	—		—			4		—			4		—
Asset-backed securities	24		—			183		(2		)	207		(2		)
Non-U.S. government securities	—		—			56		(5		)	56		(5		)
Total	$	145	$	(1	)	$	442	$	(33	)	$	587	$	(34	)
Number of securities			57					119					176
Number of securities with OTTI			1					7					8

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 December 31, 2019 and December 31, 2018, 19 and 38 securities, respectively, had unrealized losses greater than 10% of book value. The total unrealized loss for these securities was $25 million as of December 31, 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 December 31, 2019 and December 31, 2018 were not related to credit quality.

The amortized cost and estimated fair value of available-for-sale fixed-maturity securities by contractual maturity as of December 31, 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 December 31, 2019

	Amortized Cost		Estimated Fair Value
	(in millions)
Due within one year	$	326	$	334
Due after one year through five years	1,538		1,591
Due after five years through 10 years	2,022		2,128
Due after 10 years	3,338		3,607
Mortgage-backed securities:
RMBS	745		775
CMBS	402		419
Total	$	8,371	$	8,854

Based on fair value, investments and restricted assets 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 $280 million and $266 million, as of December 31, 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 $1,502 million and $1,855 million, based on fair value as of December 31, 2019 and December 31, 2018, respectively.

No material investments of the Company were non-income producing for years ended December 31, 2019 and 2018, respectively.