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Investments and Cash
 6 Months Ended
Jun. 30, 2020
Investments, Debt and Equity Securities [Abstract]  
Investments and Cash Investments and Cash

Accounting Policy

Refer to Note 1, Business and Basis of Presentation for a description of new accounting guidance adopted as of January 1, 2020 related to credit impairment of financial assets.

Investment Portfolio

As of June 30, 2020, the majority of the investment portfolio is managed by six outside managers. The Company has established detailed guidelines regarding credit quality, exposure to a particular sector and exposure to a particular obligor within a sector. The externally managed portfolio must maintain a minimum average rating of A+ by S&P or A1 by Moody’s Investors Service, Inc. (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 (i) securities acquired for loss mitigation purposes or other risk management purposes, (ii) securities managed under Investment Management Agreements (IMAs) with BlueMountain, and (iii) other alternative investments, including both equity and debt securities, that the Company believes present an attractive investment opportunity. Alternative investments include assets invested in Assured Investment Management funds, which are accounted for as consolidated investment vehicles and therefore not included in this note.
    
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).

The insurance subsidiaries currently intend to invest $500 million in Assured Investment Management funds. As of June 30, 2020, the Insurance segment had committed capital to the four consolidated Assured Investment Management funds, of which $354 million has been drawn by the respective Assured Investment Management funds, and which had a fair value of $367 million as of June 30, 2020. The remaining outstanding commitment to the Assured Investment Management funds was $112 million as of June 30, 2020. The undrawn portion is reflected in short-term investments in the table below. All of the Assured Investment Management funds in which the insurance subsidiaries invest were consolidated as of June 30, 2020 and December 31, 2019. See Note 11, Variable Interest Entities.

In Second Quarter 2020, AGM, AGC and MAC entered into IMAs with BlueMountain to manage a portfolio of municipal obligations and a portfolio of CLOs. As of June 30, 2020, they have together allocated $250 million to municipal obligation strategies and $100 million to CLO strategies, with authorization to allocate an additional $200 million to CLOs strategies.

The Company has 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 $84 million of the commitment was not funded as of June 30, 2020. The Company has also invested in a limited liability company that owns fuel cells with a fair value of $61 million as of June 30, 2020.

Investment Portfolio
Carrying Value

 
As of
June 30, 2020
 
As of
December 31, 2019
 
(in millions)
Fixed-maturity securities (1):
 
 
 
Externally managed
$
7,503

 
$
7,978

Internally managed:
 
 
 
Assured Investment Management
354

 
—

Loss mitigation and other securities
773

 
876

Short-term investments
821

 
1,268

Other invested assets
 
 
 
Equity method investments
107

 
111

Other
15

 
7

Total
$
9,573

 
$
10,240

____________________
(1)
7.7% and 8.6% of fixed-maturity securities are rated BIG as of June 30, 2020 and December 31, 2019, respectively.

Accrued investment income, which is recorded in other assets, was $75 million and $79 million as of June 30, 2020 and December 31, 2019, respectively. In Six Months 2020, the Company did not write off any accrued investment income.

Fixed-Maturity Securities and Short-Term Investments
by Security Type 
As of June 30, 2020

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

 
 

 
 
 
 

 
 

 
 

 
 

 
 
Obligations of state and political subdivisions
 
42
%
 
$
3,789

 
$
(11
)
 
$
336

 
$
(1
)
 
$
4,113

 
$
(1
)
 
AA-
U.S. government and agencies
 
2

 
160

 
—

 
14

 
—

 
174

 
—

 
AA+
Corporate securities
 
26

 
2,327

 
(38
)
 
138

 
(38
)
 
2,389

 
(18
)
 
A
Mortgage-backed securities (4):
 
0

 
 
 
 
 
 
 
 

 


 
 

 
 
RMBS
 
7

 
649

 
(20
)
 
37

 
(31
)
 
635

 
(29
)
 
A-
CMBS
 
4

 
384

 
—

 
27

 
—

 
411

 
—

 
AAA
Asset-backed securities
 
8

 
780

 
(6
)
 
12

 
(18
)
 
768

 
(4
)
 
BBB-
Non-U.S. government securities
 
2

 
148

 
—

 
1

 
(9
)
 
140

 
—

 
AA
Total fixed-maturity securities
 
91

 
8,237

 
(75
)
 
565

 
(97
)
 
8,630

 
(52
)
 
A+
Short-term investments
 
9

 
821

 
—

 
1

 
(1
)
 
821

 
—

 
AAA
Total
 
100
%
 
$
9,058

 
$
(75
)
 
$
566

 
$
(98
)
 
$
9,451

 
$
(52
)
 
A+
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
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
 
100
%
 
$
9,639

 
$
517

 
$
(34
)
 
$
10,122

 
$
59

 
AA-
____________________
(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 39% of mortgage backed securities as of June 30, 2020 and 42% as of December 31, 2019 based on fair value.



Fixed-Maturity Securities
Gross Unrealized Loss by Length of Time
For Which an Allowance for Credit Loss was Not Recorded
As of June 30, 2020
 
 
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
$
35

 
$
(1
)
 
$
—

 
$
—

 
$
35

 
$
(1
)
Corporate securities
341

 
(8
)
 
61

 
(12
)
 
402

 
(20
)
Mortgage-backed securities:
 
 
 
 
 
 
 

 
 
 
 
RMBS
30

 
(2
)
 
1

 
—

 
31

 
(2
)
CMBS
—

 
—

 
1

 
—

 
1

 
—

Asset-backed securities
468

 
(10
)
 
118

 
(3
)
 
586

 
(13
)
Non-U.S. government securities
74

 
(1
)
 
40

 
(8
)
 
114

 
(9
)
Total
$
948

 
$
(22
)
 
$
221

 
$
(23
)
 
$
1,169

 
$
(45
)
Number of securities (1)
 

 
196

 
 

 
65

 
 

 
244

 

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

___________________
(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 which an allowance for credit loss was not recorded, 25 securities had unrealized losses in excess of 10% of their carrying value as of June 30, 2020. The total unrealized loss for these securities was $18 million as of June 30, 2020. 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 June 30, 2020 were not related to credit quality. In addition, the Company currently does not intend to and is not required to sell investments in an unrealized loss position prior to expected recovery in value.

Of the securities in an unrealized loss position for 12 months or more as of December 31, 2019, 19 securities had unrealized losses greater than 10% of book value. The total unrealized loss for these securities was $25 million as of December 31, 2019. 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 December 31, 2019 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 June 30, 2020 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, 2020
 
 
Amortized
Cost
 
Estimated
Fair Value
 
(in millions)
Due within one year
$
338

 
$
335

Due after one year through five years
1,577

 
1,631

Due after five years through 10 years
1,994

 
2,078

Due after 10 years
3,295

 
3,540

Mortgage-backed securities:
 

 
 

RMBS
649

 
635

CMBS
384

 
411

Total
$
8,237

 
$
8,630

 
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 $290 million and $280 million, as of June 30, 2020 and December 31, 2019, 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 $1,422 million and $1,502 million, based on fair value as of June 30, 2020 and December 31, 2019, respectively.

Net Investment Income

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 (excluding investments accounted for under the equity method, which are recorded in equity in earnings of investees in the condensed consolidated statements of operations). 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.
Net Investment Income
 
 
Second Quarter
 
Six Months
 
2020
 
2019
 
2020
 
2019
 
(in millions)
Interest income:
 
 
 
 
 
 
 
Externally managed
$
62

 
$
69

 
$
124

 
$
141

Internally managed
18

 
43

 
38

 
71

Interest income
80

 
112

 
162

 
212

Investment expenses
(2
)
 
(2
)
 
(4
)
 
(4
)
Net investment income
$
78

 
$
110

 
$
158

 
$
208



Realized Investment Gains (Losses)

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)
 
 
Second Quarter
 
Six Months
 
2020
 
2019
 
2020
 
2019
 
(in millions)
Gross realized gains on available-for-sale securities
$
16

 
$
13

 
$
23

 
$
19

Gross realized losses on available-for-sale securities
(8
)
 
(1
)
 
(9
)
 
(3
)
Credit impairments (1)
(4
)
 
(4
)
 
(15
)
 
(20
)
Net realized investment gains (losses) (2)
$
4

 
$
8

 
$
(1
)
 
$
(4
)

____________________
(1)
Credit impairment in Second Quarter 2020 and Six Months 2020 was related primarily to an increase in the allowance for credit loss on loss mitigation securities. Shut-downs due to COVID-19 pandemic restrictions contributed to the increase in the allowance for credit losses in Six Months 2020. Credit impairment in Second Quarter 2019 was primarily attributable to foreign exchange losses while Six Months 2019 was primarily attributable to loss mitigation securities and foreign exchange losses.

(2)
Includes foreign currency losses of $2 million for Second Quarter 2020, $3 million for Second Quarter 2019 and $5 million for Six Months 2019, and foreign currency gains of $1 million for Six Months 2020.

The proceeds from sales of fixed-maturity securities classified as available-for-sale were $404 million in Second Quarter 2020, $443 million in Second Quarter 2019, $490 million in Six Months 2020 and $914 million in Six Months 2019.

The following table presents the roll-forward of the credit losses on fixed-maturity securities for which the Company has recognized an allowance for credit losses in 2020 or an OTTI and for which unrealized loss was recognized in OCI for 2019.

Roll Forward of Credit Losses
for Fixed-Maturity Securities

 
Second Quarter
 
Six Months
 
2020
 
2019
 
2020
 
2019
 
(in millions)
Balance, beginning of period
$
73

 
$
197

 
$
—

 
$
185

Effect of adoption of accounting guidance on credit losses on January 1, 2020
—

 
—

 
62

 
—

Additions for credit losses on securities for which credit impairments were not previously recognized
—

 
—

 
1

 
—

Reductions for securities sold and other settlements
(1
)
 
(6
)
 
(1
)
 
(6
)
Additions (reductions) for credit losses on securities for which credit impairments were previously recognized
3

 
—

 
13

 
12

Balance, end of period
$
75

 
$
191

 
$
75

 
$
191