Company Quick10K Filing
Quick10K
MBIA
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$10.14 90 $914
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-06-10 Enter Agreement
8-K 2019-05-08 Earnings, Regulation FD, Exhibits
8-K 2019-05-01 Shareholder Vote
8-K 2018-11-13 Officers, Regulation FD, Exhibits
8-K 2018-11-08 Officers
8-K 2018-11-06 Earnings, Regulation FD, Exhibits
8-K 2018-08-08 Earnings, Regulation FD, Exhibits
8-K 2018-05-02 Amend Bylaw, Shareholder Vote
8-K 2018-04-13 Sale of Shares
8-K 2018-03-28 Regulation FD, Exhibits
ABEV Ambev 69,510
HOV Hovnanian Enterprises 2,380
ORTX Orchard Therapeutics 1,720
TNAV Telenav 314
RLH Red Lion Hotels 185
AIRG Airgain 158
SURF Surface Oncology 121
FORD Forward Industries 14
ALQA Alliqua Biomedical 0
CURR Cure Pharmaceutical Holding 0
MBI 2019-03-31
Part I Financial Information
Item 1. Financial Statements
Note 1: Business Developments and Risks and Uncertainties
Note 2: Significant Accounting Policies
Note 3: Recent Accounting Pronouncements
Note 4: Variable Interest Entities
Note 5: Loss and Loss Adjustment Expense Reserves
Note 6: Fair Value of Financial Instruments
Note 7: Investments
Note 8: Derivative Instruments
Note 9: Income Taxes
Note 10: Business Segments
Note 11: Earnings per Share
Note 12: Accumulated Other Comprehensive Income
Note 13: Commitments and Contingencies
Note 14: Subsequent Events
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
EX-31.1 d708661dex311.htm
EX-31.2 d708661dex312.htm
EX-32.1 d708661dex321.htm
EX-32.2 d708661dex322.htm

MBIA Earnings 2019-03-31

MBI 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 d708661d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

United States

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                  to                 

Commission File Number 1-9583

 

 

MBIA INC.

(Exact name of registrant as specified in its charter)

 

 

 

Connecticut   06-1185706
(State of incorporation)  

(I.R.S. Employer

Identification No.)

1 Manhattanville Road, Suite 301, Purchase, New York   10577
(Address of principal executive offices)   (Zip Code)

(914) 273-4545

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer      Accelerated filer   
Non-accelerated filer      Smaller reporting company   
Emerging growth company        

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes      No  

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading symbol(s)

 

Name of exchange on which registered

Common Stock   MBI   New York Stock Exchange

As of May 1, 2019, 90,180,453 shares of Common Stock, par value $1 per share, were outstanding.


Table of Contents

    

            PAGE  

PART I FINANCIAL INFORMATION

  
Item 1.    Financial Statements MBIA Inc. and Subsidiaries (Unaudited)   
   Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018 (Unaudited)      1  
   Consolidated Statements of Operations for the three months ended March 31, 2019 and 2018 (Unaudited)      2  
   Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2019 and 2018 (Unaudited)      3  
   Consolidated Statements of Changes in Shareholders’ Equity for the three months ended March 31, 2019 and 2018 (Unaudited)      4  
   Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018 (Unaudited)      5  
   Notes to Consolidated Financial Statements (Unaudited)      6  
   Note 1: Business Developments and Risks and Uncertainties      6  
   Note 2: Significant Accounting Policies      8  
   Note 3: Recent Accounting Pronouncements      8  
   Note 4: Variable Interest Entities      9  
   Note 5: Loss and Loss Adjustment Expense Reserves      12  
   Note 6: Fair Value of Financial Instruments      17  
   Note 7: Investments      31  
   Note 8: Derivative Instruments      35  
   Note 9: Income Taxes      37  
   Note 10: Business Segments      38  
   Note 11: Earnings Per Share      41  
   Note 12: Accumulated Other Comprehensive Income      42  
   Note 13: Commitments and Contingencies      43  
   Note 14: Subsequent Events      45  
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations      46  
Item 3.    Quantitative and Qualitative Disclosures About Market Risk      72  
Item 4.    Controls and Procedures      72  
PART II OTHER INFORMATION   
Item 1.    Legal Proceedings      73  
Item 1A.    Risk Factors      73  
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds      73  
Item 6.    Exhibits      74  
SIGNATURES      75  

 


Table of Contents

FORWARD-LOOKING AND CAUTIONARY STATEMENTS

This quarterly report of MBIA Inc., together with its consolidated subsidiaries, (collectively, “MBIA”, the “Company”, “we”, “us” or “our”) includes statements that are not historical or current facts and are “forward-looking statements” made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The words “believe”, “anticipate”, “project”, “plan”, “expect”, “estimate”, “intend”, “will likely result”, “looking forward”, or “will continue” and similar expressions identify forward-looking statements. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. MBIA cautions readers not to place undue reliance on any such forward-looking statements, which speak only to their respective dates. We undertake no obligation to publicly correct or update any forward-looking statement if the Company later becomes aware that such result is not likely to be achieved.

The following are some of the general factors that could affect financial performance or could cause actual results to differ materially from estimates contained in or underlying the Company’s forward-looking statements:

 

   

increased credit losses or impairments on public finance obligations that National Public Finance Guarantee Corporation (“National”) insures issued by state, local and territorial governments and finance authorities and other providers of public services, located in the U.S. or abroad, that are experiencing fiscal stress;

 

   

the possibility that loss reserve estimates are not adequate to cover potential claims;

 

   

a disruption in the cash flow from National or an inability to access the capital markets and our exposure to significant fluctuations in liquidity and asset values in the global credit markets as a result of collateral posting requirements;

 

   

our ability to fully implement our strategic plan;

 

   

the possibility that MBIA Insurance Corporation will have inadequate liquidity or resources to timely pay claims as a result of higher than expected losses on certain insured transactions or as a result of a delay or failure in collecting expected recoveries, which could lead the New York State Department of Financial Services (“NYSDFS”) to put MBIA Insurance Corporation into a rehabilitation or liquidation proceeding under Article 74 of the New York Insurance Law and/or take such other actions as the NYSDFS may deem necessary to protect the interests of MBIA Insurance Corporation’s policyholders;

 

   

deterioration in the economic environment and financial markets in the United States or abroad, real estate market performance, credit spreads, interest rates and foreign currency levels; and

 

   

the effects of changes to governmental regulation, including insurance laws, securities laws, tax laws, legal precedents and accounting rules.

The above factors provide a summary of and are qualified in their entirety by the risk factors discussed under “Risk Factors” in Part II Other Information, Item 1A included in this Quarterly Report on Form 10-Q. In addition, refer to “Note1: Business Developments and Risks and Uncertainties” in the Notes to Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for a discussion of certain risks and uncertainties related to our financial statements.

This quarterly report of MBIA Inc. also includes statements of the opinion and belief of MBIA management which may be forward-looking statements subject to the preceding cautionary disclosure. Unless otherwise indicated herein, the basis for each statement of opinion or belief of MBIA management in this report is the relevant industry or subject matter experience and views of certain members of MBIA’s management. Accordingly, MBIA cautions readers not to place undue reliance on any such statements, because like all statements of opinion or belief they are not statements of fact and may prove to be incorrect. We undertake no obligation to publicly correct or update any statement of opinion or belief if the Company later becomes aware that such statement of opinion or belief was not or is not then accurate. In addition, readers are cautioned that each statement of opinion or belief may be further qualified by disclosures set forth elsewhere in this report or in other disclosures by MBIA.


Table of Contents

PART I FINANCIAL INFORMATION

Item 1. Financial Statements

MBIA INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (Unaudited)

(In millions except share and per share amounts)

 

                     
     March 31, 2019      December 31, 2018  

Assets

     

Investments:

                 

Fixed-maturity securities held as available-for-sale, at fair value (amortized cost $3,415 and $3,601)

   $ 3,458       $ 3,565   

Investments carried at fair value

     231         222   

Investments pledged as collateral, at fair value (amortized cost $7 and $46)

            43   

Short-term investments, at fair value (amortized cost $407 and $241)

     407         241   

Other investments at amortized cost

             
  

 

 

    

 

 

 

Total investments

     4,100         4,072   

Cash and cash equivalents

     132         222   

Premiums receivable

     293         296   

Deferred acquisition costs

     69         74   

Insurance loss recoverable

     1,583         1,564   

Other assets

     161         122   

Assets of consolidated variable interest entities:

                 

Cash

     31         58   

Investments held-to-maturity, at amortized cost (fair value $948 and $925)

     890         890   

Investments carried at fair value

     861         157   

Loans receivable at fair value

     206         172   

Loan repurchase commitments

     420         418   

Other assets

     32         31   
  

 

 

    

 

 

 

Total assets

   $ 8,778       $ 8,076   
  

 

 

    

 

 

 

Liabilities and Equity

     

Liabilities:

           

Unearned premium revenue

   $ 544       $ 587   

Loss and loss adjustment expense reserves

     806         934   

Long-term debt

     2,284         2,249   

Medium-term notes (includes financial instruments carried at fair value of $106 and $102)

     721         722   

Investment agreements

     313         311   

Derivative liabilities

     199         199   

Other liabilities

     152         198   

Liabilities of consolidated variable interest entities:

           

Variable interest entity notes (includes financial instruments carried at fair value of $1,325 and $480)

     2,558         1,744   
  

 

 

    

 

 

 

Total liabilities

     7,577         6,944   
  

 

 

    

 

 

 

Commitments and contingencies (Refer to Note 13: Commitments and Contingencies)

     

Equity:

     

Preferred stock, par value $1 per share; authorized shares--10,000,000; issued and outstanding—none

             

Common stock, par value $1 per share; authorized shares--400,000,000; issued shares--283,625,689 and 283,625,689

     284         284   

Additional paid-in capital

     2,996         3,025   

Retained earnings

     949         966   

Accumulated other comprehensive income (loss), net of tax of $4 and $8

     (74)        (156)  

Treasury stock, at cost--193,446,168 and 193,803,976 shares

     (2,967)        (3,000)  
  

 

 

    

 

 

 

Total shareholders’ equity of MBIA Inc.

     1,188         1,119   

Preferred stock of subsidiary

     13         13   
  

 

 

    

 

 

 

Total equity

     1,201         1,132   
  

 

 

    

 

 

 

Total liabilities and equity

   $ 8,778       $ 8,076   
  

 

 

    

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

1


Table of Contents

MBIA INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(In millions except share and per share amounts)

 

                     
     Three Months Ended March 31,  
     2019      2018  

Revenues:

     

Premiums earned:

     

Scheduled premiums earned

   $ 18       $ 23   

Refunding premiums earned

            17   
  

 

 

    

 

 

 

Premiums earned (net of ceded premiums of $1 and $1)

     23         40   

Net investment income

     32         31   

Fees and reimbursements

             

Change in fair value of insured derivatives:

     

Realized gains (losses) and other settlements on insured derivatives

            (19)  

Unrealized gains (losses) on insured derivatives

     14         14   
  

 

 

    

 

 

 

Net change in fair value of insured derivatives

     14         (5)  

Net gains (losses) on financial instruments at fair value and foreign exchange

     22         (9)  

Net investment losses related to other-than-temporary impairments:

     

Investment losses related to other-than-temporary impairments

             

Other-than-temporary impairments recognized in accumulated other comprehensive income (loss)

     (28)        (1)  
  

 

 

    

 

 

 

Net investment losses related to other-than-temporary impairments

     (28)        (1)  

Other net realized gains (losses)

            (1)  

Revenues of consolidated variable interest entities:

     

Net investment income

     10          

Net gains (losses) on financial instruments at fair value and foreign exchange

     18          

Other net realized gains (losses)

     (42)         
  

 

 

    

 

 

 

Total revenues

     50         73   

Expenses:

                 

Losses and loss adjustment

     (38)        72   

Amortization of deferred acquisition costs

             

Operating

     26         20   

Interest

     52         51   

Expenses of consolidated variable interest entities:

           

Operating

             

Interest

     22         20   
  

 

 

    

 

 

 

Total expenses

     69         169   
  

 

 

    

 

 

 

Income (loss) before income taxes

     (19)        (96)  

Provision (benefit) for income taxes

     (2)         
  

 

 

    

 

 

 

Net income (loss)

   $ (17)      $ (98)  
  

 

 

    

 

 

 

Net income (loss) per common share:

     

Basic

   $ (0.20)      $ (1.12)  

Diluted

   $ (0.20)      $ (1.12)  

Weighted average number of common shares outstanding:

     

Basic

     85,554,236         88,131,373   

Diluted

     85,554,236         88,131,373   

The accompanying notes are an integral part of the consolidated financial statements.

 

2


Table of Contents

MBIA INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)

(In millions)

 

                     
     Three Months Ended March 31,  
     2019      2018  

Net income (loss)

   $ (17)      $ (98)  

Other comprehensive income (loss):

     

Unrealized gains (losses) on available-for-sale securities:

     

Unrealized gains (losses) arising during the period

     79         (43)  

Provision (benefit) for income taxes

             
  

 

 

    

 

 

 

Total

     75         (48)  

Reclassification adjustments for (gains) losses included in net income (loss)

     (39)        (1)  

Available-for-sale securities with other-than-temporary impairments:

     

Other-than-temporary impairments and unrealized gains (losses) arising during the period

     11          

Reclassification adjustments for (gains) losses included in net income (loss)

     28          

Foreign currency translation:

     

Foreign currency translation gains (losses)

             

Instrument-specific credit risk of liabilities measured at fair value:

     

Unrealized gains (losses) arising during the period

            (14)  

Reclassification adjustments for (gains) losses included in net income (loss)

             
  

 

 

    

 

 

 

Total other comprehensive income (loss)

     82         (55)  
  

 

 

    

 

 

 

Comprehensive income (loss)

   $ 65       $ (153)  
  

 

 

    

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

3


Table of Contents

MBIA INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

(In millions except share amounts)

 

                     
     Three Months Ended March 31,  
     2019      2018  

Common shares

     

Balance at beginning of period

     283,625,689         283,717,973   

Common shares issued (cancelled), net

            (148,719)  
  

 

 

    

 

 

 

Balance at end of period

     283,625,689         283,569,254   

Common stock amount

     

Balance at beginning and end of period

   $ 284       $ 284   

Additional paid-in capital

     

Balance at beginning of period

   $ 3,025       $ 3,171   

Period change

     (29)         
  

 

 

    

 

 

 

Balance at end of period

   $ 2,996       $ 3,174   

Retained earnings

     

Balance at beginning of period

   $ 966       $ 1,095   

ASU 2016-01 transition adjustment

            164   

ASU 2018-02 transition adjustment

             

Net income (loss)

     (17)        (98)  
  

 

 

    

 

 

 

Balance at end of period

   $ 949       $ 1,164   

Accumulated other comprehensive income (loss)

     

Balance at beginning of period

   $ (156)      $ (19)  

ASU 2016-01 transition adjustment

            (164)  

ASU 2018-02 transition adjustment

            (3)  

Other comprehensive income (loss)

     82         (55)  
  

 

 

    

 

 

 

Balance at end of period

   $ (74)      $ (241)  

Treasury shares

     

Balance at beginning of period

     (193,803,976)        (192,233,526)  

Treasury shares acquired under share repurchase program

     (487,606)        (1,961,711)  

Other

     845,414         (48,452)  
  

 

 

    

 

 

 

Balance at end of period

     (193,446,168)        (194,243,689)  

Treasury stock amount

     

Balance at beginning of period

   $ (3,000)      $ (3,118)  

Treasury shares acquired under share repurchase program

     (4)        (14)  

Other

     37         (1)  
  

 

 

    

 

 

 

Balance at end of period

   $ (2,967)      $ (3,133)  

Total shareholders’ equity of MBIA Inc.

     

Balance at beginning of period

   $ 1,119       $ 1,413   

Period change

     69         (165)  
  

 

 

    

 

 

 

Balance at end of period

   $ 1,188       $ 1,248   
  

 

 

    

 

 

 

Preferred stock of subsidiary shares

     

Balance at beginning and end of period

     1,315         1,315   

Preferred stock of subsidiary amount

     

Balance at beginning and end of period

   $ 13       $ 12   
  

 

 

    

 

 

 

Total equity

   $ 1,201       $ 1,260   
  

 

 

    

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

4


Table of Contents

MBIA INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In millions)

 

                     
     Three Months Ended March 31,  
     2019      2018  

Cash flows from operating activities:

     

Premiums, fees and reimbursements received

   $      $ 10   

Investment income received

     44         59   

Insured derivative commutations and losses paid

            (19)  

Financial guarantee losses and loss adjustment expenses paid

     (95)        (86)  

Proceeds from recoveries and reinsurance

     60         16   

Operating and employee related expenses paid

     (34)        (38)  

Interest paid, net of interest converted to principal

     (46)        (42)  

Income taxes (paid) received

     (2)        (1)  
  

 

 

    

 

 

 

Net cash provided (used) by operating activities

     (70)        (101)  
  

 

 

    

 

 

 

Cash flows from investing activities:

     

Purchases of available-for-sale investments

     (747)        (819)  

Sales of available-for-sale investments

     683         651   

Paydowns and maturities of available-for-sale investments

     234         94   

Purchases of investments at fair value

     (69)        (53)  

Sales, paydowns, maturities and other proceeds of investments at fair value

     122         57   

Sales, paydowns and maturities (purchases) of short-term investments, net

     (154)        222   

Paydowns and maturities of loans receivable

            48   

Consolidation of variable interest entities

     72          

(Payments) proceeds for derivative settlements

     (11)        (9)  

Collateral (to) from counterparties

     (9)         
  

 

 

    

 

 

 

Net cash provided (used) by investing activities

     128         191   
  

 

 

    

 

 

 

Cash flows from financing activities:

     

Proceeds from investment agreements

             

Principal paydowns of investment agreements

            (8)  

Principal paydowns of medium-term notes

            (20)  

Principal paydowns of variable interest entity notes

     (168)        (55)  

Purchases of treasury stock

     (10)        (15)  
  

 

 

    

 

 

 

Net cash provided (used) by financing activities

     (175)        (95)  
  

 

 

    

 

 

 

Net increase (decrease) in cash and cash equivalents

     (117)        (5)  

Cash and cash equivalents—beginning of period

     280         146   
  

 

 

    

 

 

 

Cash and cash equivalents—end of period

   $ 163       $ 141   
  

 

 

    

 

 

 

Reconciliation of net income (loss) to net cash provided (used) by operating activities:

     

Net income (loss)

   $ (17)      $ (98)  

Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities:

     

Change in:

     

Premiums receivable

     22          

Deferred acquisition costs

             

Unearned premium revenue

     (43)        (39)  

Loss and loss adjustment expense reserves

     (58)        21   

Insurance loss recoverable

     (20)        (19)  

Accrued interest payable

     30         33   

Accrued expenses

     (11)        (18)  

Net investment losses related to other-than-temporary impairments

     28          

Unrealized (gains) losses on insured derivatives

     (14)        (14)  

Net (gains) losses on financial instruments at fair value and foreign exchange

     (40)         

Other net realized (gains) losses

     41          

Deferred income tax provision (benefit)

     (4)         

Interest on variable interest entities, net

     (2)         

Other operating

     15         11   
  

 

 

    

 

 

 

Total adjustments to net income (loss)

     (53)        (3)  
  

 

 

    

 

 

 

Net cash provided (used) by operating activities

   $ (70)      $ (101)  
  

 

 

    

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

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Table of Contents

MBIA Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 1: Business Developments and Risks and Uncertainties

Summary

MBIA Inc., together with its consolidated subsidiaries, (collectively, “MBIA” or the “Company”) operates within the financial guarantee insurance industry. MBIA manages three operating segments: 1) United States (“U.S.”) public finance insurance; 2) corporate; and 3) international and structured finance insurance. The Company’s U.S. public finance insurance business is managed through National Public Finance Guarantee Corporation (“National”), the corporate segment is operated through MBIA Inc. and several of its subsidiaries, including its service company, MBIA Services Corporation (“MBIA Services”) and its international and structured finance insurance business is primarily operated through MBIA Insurance Corporation and its subsidiaries (“MBIA Corp.”).

Refer to “Note 10: Business Segments” for further information about the Company’s operating segments.

Business Developments

Puerto Rico

On January 1, 2019, the Commonwealth of Puerto Rico and certain of its instrumentalities (“Puerto Rico”) defaulted on scheduled debt service for National insured bonds and National paid gross claims in the aggregate of $65 million. As of March 31, 2019, National had $3.1 billion of gross insured par outstanding ($3.4 billion of gross insured par outstanding when including accreted interest on insured capital appreciation bonds (“CABs”)) related to Puerto Rico. Refer to the “Risks and Uncertainties” section below for additional information on the Company’s Puerto Rico exposures.

COFINA Plan of Adjustment

In February of 2019, the District Court confirmed the Puerto Rico Sales Tax Financing Corporation (“COFINA”) Plan of Adjustment, including the settlement agreement between Puerto Rico and COFINA. National insured bondholders were given the option of commuting their insurance policy and receiving uninsured COFINA bonds or placing their new uninsured COFINA bonds into the National Custodial Trusts (the “Trusts”), receive Trust certificates and continue to benefit from a National insurance policy. The Trusts operate on a pass-through basis; as the Trusts receive debt service payments from the new COFINA bonds, or sells these new bonds, the Trusts’ cash will be paid to the Trusts’ certificate holders and National’s insured exposure will reduce accordingly. To the extent National’s policy obligations have not been satisfied by the maturity date of the original National insurance policies, the Trusts’ certificate holders will receive a claim payment from National at their maturity date for any remaining amounts. The Trusts were consolidated as variable interest entities (“VIEs”) within the U.S. public finance segment during the first quarter of 2019. Refer to “Note 4: Variable Interest Entities” for additional information about the COFINA VIEs.

Risks and Uncertainties

The Company’s financial statements include estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. The outcome of certain significant risks and uncertainties could cause the Company to revise its estimates and assumptions or could cause actual results to differ from the Company’s estimates. The discussion below highlights the significant risks and uncertainties that could have a material effect on the Company’s financial statements and business objectives in future periods.

U.S. Public Finance Market Conditions

National continues to monitor and remediate its existing insured portfolio and will seek opportunities to enhance shareholder value using its substantial financial resources, while protecting the interests of all policyholders. Certain state and local governments and territory obligors that National insures are under financial and budgetary stress. This could lead to an increase in defaults by such entities on the payment of their obligations and losses or impairments on a greater number of National’s insured transactions. National monitors and analyzes these situations and other stressed credits closely, and the overall extent and duration of this stress is uncertain.

Puerto Rico is experiencing significant fiscal stress and constrained liquidity due to, among other things, Puerto Rico’s structural budget imbalance, the lack of access to the capital markets, a stagnating local economy, net migration of people out of Puerto Rico and a high debt burden. Puerto Rico continues in its efforts to rebuild its infrastructure and to otherwise recover from the impact of Hurricane Maria in 2017, aided in part by Federal Emergency Management Agency and other federal agencies. As part of the Title III proceedings under Puerto Rico Oversight, Management and Economic Stability Act (“PROMESA”), Puerto Rico submitted several draft fiscal plans and an independent Financial Oversight and Management Board for Puerto Rico (“Oversight Board”) voted to certify the most recent fiscal plan. The current plan, or any revisions thereto, can provide no assurance that National will fully recover past amounts paid or future amounts that may be covered under its insurance policies. In addition, the extent and duration of such aid is inherently uncertain, and the necessary and greater involvement of the federal government, through its actions to deliver disaster relief and other support services, in addition to the role of the Oversight Board and the role of Puerto Rico in its own recovery, heightens political risk in connection with the restructuring of legacy debt. This risk could lead the Oversight Board, Puerto Rico or the federal government to seek to extract greater concessions from creditors based on the uncertainty of Puerto Rico’s long term recovery prospects. In this event, losses at National on select Puerto Rico exposures could increase materially.

 

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Table of Contents

MBIA Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 1: Business Developments and Risks and Uncertainties (continued)

 

MBIA Corp. Insured Portfolio

MBIA Corp.’s primary objectives are to satisfy all claims by its policyholders and to maximize future recoveries, if any, for its senior lending and surplus note holders, and then its preferred stock holders. MBIA Corp. is executing this strategy by, among other things, pursuing various actions focused on maximizing the collection of recoveries and by reducing potential losses on its insurance exposures. MBIA Corp.’s insured portfolio performance could deteriorate and result in additional significant loss reserves and claim payments. MBIA Corp.’s ability to meet its obligations is limited by available liquidity and its ability to secure additional liquidity through financing and other transactions. There can be no assurance that MBIA Corp. will be successful in generating sufficient resources to meet its obligations.

Zohar and RMBS Recoveries

Payment of claims totaling $919 million in November of 2015 and January of 2017, on MBIA Corp.’s policies insuring the Class A-1 and A-2 notes issued by Zohar CDO 2003-1, Limited (“Zohar I”) and insuring certain notes issued by Zohar II, entitles MBIA Corp. to reimbursement of such amounts plus interest and expenses and/or to exercise certain rights and remedies to seek recovery of such amounts. MBIA Corp. anticipates that the primary source of the recoveries will come from the monetization of the assets of Zohar I and Zohar II, which include, among other things, loans made to, and equity interests in, companies purportedly controlled by the sponsor and former collateral manager of Zohar I and Zohar II (the “Zohar Sponsor”) (all the assets of Zohar I and Zohar II, the “Zohar Assets”). On March 11, 2018, the then-director of Zohar I and Zohar II placed those funds into voluntary bankruptcy proceedings in federal bankruptcy court in the District of Delaware (the “Zohar Funds Bankruptcy Cases”). On May 21, 2018, the Court granted the Zohar funds’ motion to approve a settlement (the “Zohar Bankruptcy Settlement”) which established a process by which the debtor funds, through an independent director and a chief restructuring officer, will work with the original sponsor of the funds to monetize the Zohar Assets and repay creditors, including MBIA Corp. In addition, the Zohar Bankruptcy Settlement provides for a stay of all pending litigation between the parties for a minimum of fifteen months. Salvage and subrogation recoveries related to Zohar I and Zohar II are reported within “Insurance loss recoverable” on the Company’s consolidated balance sheet. Notwithstanding the Zohar Bankruptcy Settlement, there can be no assurance that the value of the Zohar Assets will be sufficient to permit MBIA Corp. to recover all or substantially all of the payments it made on Zohar I and Zohar II.

MBIA Corp. also projects to collect excess spread from insured residential mortgage-backed securities (“RMBS”), and to recover proceeds from Credit Suisse Securities (USA) LLC, DLJ Mortgage Capital, Inc. and Select Portfolio Servicing Inc. (collectively, “Credit Suisse”) arising from its failure to repurchase ineligible loans that were included in a Credit Suisse sponsored RMBS transaction. However, the amount and timing of these recoveries and collections are uncertain.

Failure to collect a substantial amount of its expected recoveries could impede MBIA Corp.’s ability to make payments when due on other policies. MBIA Corp. believes that if the New York State Department of Financial Services (“NYSDFS”) concludes at any time that MBIA Insurance Corporation will not be able to pay its policyholder claims, the NYSDFS would likely put MBIA Insurance Corporation into a rehabilitation or liquidation proceeding under Article 74 of the New York Insurance Law (“NYIL”) and/or take such other actions as the NYSDFS may deem necessary to protect the interests of MBIA Insurance Corporation’s policyholders. The determination to commence such a proceeding or take other such actions is within the exclusive control of the NYSDFS.

Given the separation of MBIA Inc. and MBIA Corp. as distinct legal entities, the absence of any cross defaults between the entities and the lack of reliance by MBIA Inc. on MBIA Corp. for the receipt of dividends, the Company does not believe that a rehabilitation or liquidation proceeding with respect to MBIA Insurance Corporation would have any significant liquidity impact on MBIA Inc. Such a proceeding could have material adverse consequences for MBIA Corp., including the termination of insured credit default swaps (“CDS”) and other derivative contracts for which counterparties may assert market-based claims, the acceleration of debt obligations issued by affiliates and insured by MBIA Corp., the loss of control of MBIA Insurance Corporation to a rehabilitator or liquidator, and unplanned costs.

Refer to “Note 5: Loss and Loss Adjustment Expense Reserves” for additional information about MBIA Corp.’s recoveries.

Corporate Liquidity

Based on the Company’s projections of National’s dividends, additional anticipated releases under its tax sharing agreement and related tax escrow account (“Tax Escrow Account”), and other cash inflows, the Company expects that MBIA Inc. will have sufficient cash to satisfy its debt service and general corporate needs. However, MBIA Inc. continues to have liquidity risk that could be triggered by interruption of or reduction in dividends or tax payments received from operating subsidiaries, deterioration in the performance of invested assets, impaired access to the capital markets, as well as other factors, which are not anticipated at this time. Furthermore, failure by MBIA Inc. to settle liabilities that are insured by MBIA Corp. could result in claims on MBIA Corp.

 

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Table of Contents

MBIA Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

 

Note 2: Significant Accounting Policies

The Company has disclosed its significant accounting policies in “Note 2: Significant Accounting Policies” in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. The following significant accounting policies provide an update to those included in the Company’s Annual Report on Form 10-K.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X and, accordingly, do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) for annual periods. These statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2018. The accompanying consolidated financial statements have not been audited by an independent registered public accounting firm in accordance with the standards of the Public Company Accounting Oversight Board (U.S.), but in the opinion of management such financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for the fair statement of the Company’s consolidated financial position and results of operations. All material intercompany balances and transactions have been eliminated.

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. As additional information becomes available or actual amounts become determinable, the recorded estimates are revised and reflected in operating results.

The results of operations for the three months ended March 31, 2019 may not be indicative of the results that may be expected for the year ending December 31, 2019. The December 31, 2018 consolidated balance sheet was derived from audited financial statements, but does not include all disclosures required by GAAP for annual periods.

Note 3: Recent Accounting Pronouncements

Recently Adopted Accounting Standards

Leases (Topic 842) (ASU 2016-02)

In February of 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842)”, that amends the accounting guidance for leasing transactions. ASU 2016-02 requires a lessee to classify lease contracts as finance or operating leases, and to recognize assets and liabilities for the rights and obligations created by leasing transactions with lease terms more than twelve months. ASU 2016-02 substantially retains the criteria for classifying leasing transactions as finance or operating leases. For finance leases, a lessee recognizes a right-of-use asset and a lease liability initially measured at the present value of the lease payments, and recognizes interest expense on the lease liability separately from the amortization of the right-of-use asset. For operating leases, a lessee recognizes a right-of-use asset and a lease liability initially measured at the present value of the lease payments, and recognizes lease expense on a straight-line basis.

The Company adopted ASU 2016-02 in its entirety in the first quarter of 2019, using an additional (and optional) modified retrospective transition approach. Comparative periods are presented in accordance with Topic 840, Leases, and do not include any retrospective adjustments to comparative periods to reflect the adoption of ASU 2016-02. The Company recorded a right-of-use asset and lease liability of $23 million. The gross up of the assets and liabilities does not have a cumulative effect adjustment to the opening balance of retained earnings and does not impact the Company’s statement of operations. Refer to “Note 13: Commitments and Contingencies” for information about the Company’s lease commitments.

Disclosure Update and Simplification

In August of 2018, the Securities and Exchange Commission (“SEC”) published Release No. 33-10532, Disclosure Update and Simplification, which amends certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, these amendments updated the disclosure requirements for the interim financial statement requirements to include a reconciliation of each caption of shareholders’ equity, in the notes or as a separate statement for each period for which a statement of comprehensive income is required to be included. The Company updated the presentation of its consolidated statements of changes in shareholders’ equity for the first quarter of 2019 for all periods presented.

The Company has not adopted any other new accounting pronouncements that had a material impact on its consolidated financial statements.

 

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MBIA Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

 

Note 3: Recent Accounting Pronouncements (continued)

 

Recent Accounting Developments

Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13)

In June of 2016, the FASB issued ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 requires financing receivables and other financial assets measured at amortized cost to be presented at the net amount expected to be collected by recording an allowance for credit losses with changes in the allowance recorded as credit loss expense or reversal of credit loss expense based on management’s current estimate of expected credit losses each period. ASU 2016-13 does not apply to credit losses on financial guarantee insurance contracts within the scope of Topic 944, “Financial Services-Insurance.” ASU 2016-13 also requires impairment relating to credit losses on available-for-sale (“AFS”) debt securities to be presented through an allowance for credit losses with changes in the allowance recorded in the period of the change as credit loss expense or reversal of credit loss expense. Any impairment amount not recorded through an allowance for credit losses on AFS debt securities is recorded through other comprehensive income. ASU 2016-13 is effective for interim and annual periods beginning January 1, 2020 with early adoption permitted beginning January 1, 2019. ASU 2016-13 is applied on a modified retrospective basis except that prospective application is applied to AFS debt securities with other-than-temporary impairments (“OTTI”) recognized before the date of adoption. The Company is evaluating the impact of adopting ASU 2016-13.

Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (ASU 2018-13)

In August of 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement.” ASU 2018-13 modifies the disclosure requirements on fair value measurements. ASU 2018-13 is effective for interim and annual periods beginning January 1, 2020 with early adoption permitted to remove or modify disclosures upon issuance of the standard and delay adoption of the additional disclosures until the effective date. Upon the effective date, certain amendments should be applied prospectively, while others are to be applied retrospectively to all periods presented. The Company is evaluating the impact of adopting ASU 2018-13. Since the amendments of ASU 2018-13 only impact disclosure requirements, the Company does not expect the adoption of ASU 2018-13 to have an impact on its consolidated financial statements.

Note 4: Variable Interest Entities

Primarily through MBIA’s international and structured finance insurance segment, the Company provides credit protection to issuers of obligations that may involve issuer-sponsored special purpose entities (“SPEs”). An SPE may be considered a VIE to the extent the SPE’s total equity at risk is not sufficient to permit the SPE to finance its activities without additional subordinated financial support or its equity investors lack any one of the following characteristics: (i) the power to direct the activities of the SPE that most significantly impact the entity’s economic performance or (ii) the obligation to absorb the expected losses of the entity or the right to receive the expected residual returns of the entity. A holder of a variable interest or interests in a VIE is required to assess whether it has a controlling financial interest, and thus is required to consolidate the entity as primary beneficiary. An assessment of a controlling financial interest identifies the primary beneficiary as the variable interest holder that has both of the following characteristics: (i) the power to direct the activities of the VIE that most significantly impact the entity’s economic performance and (ii) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. The primary beneficiary is required to consolidate the VIE. An ongoing reassessment of controlling financial interest is required to be performed based on any substantive changes in facts and circumstances involving the VIE and its variable interests.

The Company evaluates issuer-sponsored SPEs initially to determine if an entity is a VIE, and is required to reconsider its initial determination if certain events occur. For all entities determined to be VIEs, MBIA performs an ongoing reassessment to determine whether its guarantee to provide credit protection on obligations issued by VIEs provides the Company with a controlling financial interest. Based on its ongoing reassessment of controlling financial interest, the Company determines whether a VIE is required to be consolidated or deconsolidated.

 

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MBIA Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

 

Note 4: Variable Interest Entities (continued)

 

The Company makes its determination for consolidation based on a qualitative assessment of the purpose and design of a VIE, the terms and characteristics of variable interests of an entity, and the risks a VIE is designed to create and pass through to holders of variable interests. The Company generally provides credit protection on obligations issued by VIEs, and holds certain contractual rights according to the purpose and design of a VIE. The Company may have the ability to direct certain activities of a VIE depending on facts and circumstances, including the occurrence of certain contingent events, and these activities may be considered the activities of a VIE that most significantly impact the entity’s economic performance. The Company generally considers its guarantee of principal and interest payments of insured obligations, given nonperformance by a VIE, to be an obligation to absorb losses of the entity that could potentially be significant to the VIE. At the time the Company determines it has the ability to direct the activities of a VIE that most significantly impact the economic performance of the entity based on facts and circumstances, MBIA is deemed to have a controlling financial interest in the VIE and is required to consolidate the entity as primary beneficiary. The Company performs an ongoing reassessment of controlling financial interest that may result in consolidation or deconsolidation of any VIE.

Consolidated VIEs

The carrying amounts of assets and liabilities of consolidated VIEs were $2.4 and $2.6 billion, respectively, as of March 31, 2019, and $1.7 billion, as of December 31, 2018. The carrying amounts of assets and liabilities are presented separately in “Assets of consolidated variable interest entities” and “Liabilities of consolidated variable interest entities” on the Company’s consolidated balance sheets. VIEs are consolidated or deconsolidated based on an ongoing reassessment of controlling financial interest, when events occur or circumstances arise, and whether the ability to exercise rights that constitute power to direct activities of any VIEs are present according to the design and characteristics of these entities. In the first quarter of 2019, the Company consolidated seven VIEs related to the Trusts. On the initial consolidation of the Trusts, the Company recorded a loss of $42 million, representing the difference between the fair value of the Company’s financial guarantee within the trusts and the carrying value of the insurance related balances on the COFINA policies. This loss is recorded within “Other net realized gains (losses)” under “Revenues of consolidated variable interest entities” on the Company’s consolidated statement of operations. Refer to “Note 1: Business Developments and Risks and Uncertainties” for further information about COFINA. In 2019, no VIEs were deconsolidated. The consolidation or deconsolidation of VIEs could have a material effect on the Company’s financial statements.

Holders of insured obligations of issuer-sponsored VIEs do not have recourse to the general assets of the Company. In the event of nonpayment of an insured obligation issued by a consolidated VIE, the Company is obligated to pay principal and interest, when due, on the respective insured obligation only. The Company’s exposure to consolidated VIEs is limited to the credit protection provided on insured obligations and any additional variable interests held by the Company.

 

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MBIA Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 4: Variable Interest Entities (continued)

 

Nonconsolidated VIEs

The following tables present the Company’s maximum exposure to loss for nonconsolidated VIEs and carrying values of the assets and liabilities for its interests in these VIEs in its insurance operations as of March 31, 2019 and December 31, 2018. The maximum exposure to loss as a result of MBIA’s variable interests in VIEs is represented by insurance in force. Insurance in force is the maximum future payments of principal and interest which may be required under commitments to make payments on insured obligations issued by nonconsolidated VIEs. The Company has aggregated nonconsolidated VIEs based on the underlying credit exposure of the insured obligation. The nature of the Company’s variable interests in nonconsolidated VIEs is related to financial guarantees and any investments in obligations issued by nonconsolidated VIEs.

 

                                                                 
     March 31, 2019  
            Carrying Value of Assets      Carrying Value of Liabilities  

In millions

   Maximum
Exposure
to Loss
     Investments(1)      Premiums
Receivable(2)
     Insurance  Loss
Recoverable(3)
     Unearned
Premium
Revenue(4)
     Loss and Loss
Adjustment
Expense
Reserves(5)
 

Insurance:

                 

Global structured finance:

                 

Mortgage-backed residential

   $ 2,593      $ 16      $ 17      $ 88      $ 16      $ 366  

Mortgage-backed commercial

     44        -        -        -        -        -  

Consumer asset-backed

     465        -        2        1        1        10  

Corporate asset-backed

     1,179        -        8        858        9        -  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total global structured finance

     4,281        16        27        947        26        376  

Global public finance

     2,238        -        9        -        11        -  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total insurance

   $ 6,519      $ 16      $ 36      $ 947      $ 37      $ 376  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) -

Reported within “Investments” on MBIA’s consolidated balance sheets.

 

(2) -

Reported within “Premiums receivable” on MBIA’s consolidated balance sheets.

 

(3) -

Reported within “Insurance loss recoverable” on MBIA’s consolidated balance sheets.

 

(4) -

Reported within “Unearned premium revenue” on MBIA’s consolidated balance sheets.

 

(5) -

Reported within “Loss and loss adjustment expense reserves” on MBIA’s consolidated balance sheets.

 

                                                                 
     December 31, 2018  
            Carrying Value of Assets      Carrying Value of Liabilities  

In millions

   Maximum
Exposure
to Loss
     Investments(1)      Premiums
Receivable(2)
     Insurance  Loss
Recoverable(3)
     Unearned
Premium
Revenue(4)
     Loss and Loss
Adjustment
Expense
Reserves(5)
 

Insurance:

                 

Global structured finance:

                 

Mortgage-backed residential

   $ 3,103      $ 17      $ 19      $ 128      $ 17      $ 345  

Mortgage-backed commercial

     52        -        -        -        -        -  

Consumer asset-backed

     560        -        3        1        2        12  

Corporate asset-backed

     1,338        -        9        858        10        -  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total global structured finance

     5,053        17        31        987        29        357  

Global public finance

     2,231        -        9        -        12        -  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total insurance

   $ 7,284      $ 17      $ 40      $ 987      $ 41      $ 357  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) -

Reported within “Investments” on MBIA’s consolidated balance sheets.

 

(2) -

Reported within “Premiums receivable” on MBIA’s consolidated balance sheets.

 

(3) -

Reported within “Insurance loss recoverable” on MBIA’s consolidated balance sheets.

 

(4) -

Reported within “Unearned premium revenue” on MBIA’s consolidated balance sheets.

 

(5) -

Reported within “Loss and loss adjustment expense reserves” on MBIA’s consolidated balance sheets.

 

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MBIA Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

 

Note 5: Loss and Loss Adjustment Expense Reserves

U.S. Public Finance Insurance

U.S. public finance insured transactions consist of municipal bonds, including tax-exempt and taxable indebtedness of U.S. political subdivisions, as well as utilities, airports, health care institutions, higher educational facilities, student loan issuers, housing authorities and other similar agencies and obligations issued by private entities that finance projects that serve a substantial public purpose. The Company estimates future losses by using probability-weighted cash flow scenarios that are customized to each insured transaction. Future loss estimates consider debt service due for each insured transaction, which includes par outstanding and interest due, as well as recoveries for such payments, if any. Gross par outstanding for capital appreciation bonds represents the par amount at the time of issuance of the insurance policy.

Certain local governments remain under financial and budgetary stress and a few have filed for protection under Title 11 of the United States Code (the “Bankruptcy Code”), or have entered into state statutory proceedings established to assist municipalities in managing through periods of severe fiscal stress. In the case of Puerto Rico, certain credits that the Company insures have filed petitions for covered instrumentalities under Title III of PROMESA, which incorporates by reference provisions from the Bankruptcy Code. This could lead to an increase in defaults by such entities on the payment of their obligations and losses or impairments in greater amounts on the Company’s insured transactions. The filing for protection under the Bankruptcy Code or entering state statutory proceedings does not necessarily result in a default or indicate that an ultimate loss will occur. In February of 2019, the COFINA Plan of Adjustment was confirmed by the District Court. Refer to “Note 1: Business Development and Risk and Uncertainties”, for further information on the Company’s Puerto Rico exposures.

International and Structured Finance Insurance

The international and structured finance insurance segment’s case basis reserves and insurance loss recoveries recorded in accordance with GAAP do not include estimates for a policy insuring a credit derivative or on financial guarantee VIEs that are eliminated in consolidation. The policy insuring a credit derivative contract is accounted for as a derivative and is carried at fair value in the Company’s consolidated financial statements under GAAP. The fair value of an insured credit derivative contract is influenced by a variety of market and transaction-specific factors that may be unrelated to potential future claim payments under the Company’s insurance policies. Refer to “Note 8: Derivative Instruments” for a further discussion of the Company’s use of derivatives and their impact on the Company’s consolidated financial statements.

RMBS Case Basis Reserves (Financial Guarantees)

The Company’s RMBS reserves and recoveries relate to financial guarantee insurance policies, excluding those on consolidated VIEs. The Company’s first-lien RMBS case basis reserves primarily relate to RMBS backed by alternative A-paper and subprime mortgage loans. The Company’s second-lien RMBS case basis reserves relate to RMBS backed by home equity lines of credit and closed-end second mortgages. The Company calculated RMBS case basis reserves as of March 31, 2019 for both first and second-lien RMBS transactions using a process called the “Roll Rate Methodology.” The Roll Rate Methodology is a multi-step process using databases of loan level information, proprietary internal cash flow models, and commercially available models to estimate potential losses and recoveries on insured bonds. Refer to “Note 6: Loss and Loss Adjustment Expense Reserves” in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, for additional information on the Company’s Roll Rate methodology for its RMBS case basis reserves.

The Company monitors portfolio performance on a monthly basis against projected performance, reviewing delinquencies, roll rates, and prepayment rates (including voluntary and involuntary). However, loan performance remains difficult to predict and losses may exceed expectations. In the event of a material deviation in actual performance from projected performance, the Company would increase or decrease the case basis reserves accordingly.

RMBS Recoveries

The Company primarily records two types of recoveries related to insured RMBS exposures: excess spread that is generated from the trust structures in the insured transactions; and second-lien “put-back” claims related to those mortgage loans whose inclusion in an insured securitization failed to comply with representations and warranties (“ineligible loans”).

 

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MBIA Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 5: Loss and Loss Adjustment Expense Reserves (continued)

 

Excess Spread

Excess spread within insured RMBS securitizations is the difference between interest inflows on mortgage loan collateral and interest outflows on the insured RMBS notes. The aggregate amount of excess spread depends on the future loss trends, which include future delinquency trends, average time to charge-off/liquidate delinquent loans, the future spread between Prime and the LIBOR interest rates, and borrower refinancing behavior (which may be affected by changes in the interest rate environment) that results in voluntary prepayments. Minor deviations in loss trends and voluntary prepayments may substantially impact the amounts collected from excess spread. Excess spread also includes subsequent recoveries on previously charged-off loans associated with insured second-lien RMBS securitizations.

Second-lien Put-Back Claims Related to Ineligible Loans

The Company has settled the majority of the Company’s put-back claims relating to the inclusion of ineligible loans in securitizations it insured. Only its claims against Credit Suisse remain outstanding. Credit Suisse has challenged the Company’s assessment of the ineligibility of individual mortgage loans and the dispute is the subject of litigation for which there is no assurance that the Company will prevail. The Company’s settlement amounts on its prior put-back claims have been consistent with the put-back recoveries that had been included in the Company’s financial statements at the times preceding the settlements. Based on the Company’s assessment of the strength of its contractual put-back rights against Credit Suisse, as well as on its prior settlements with other sellers/servicers and success of other monolines’ put-back settlements, the Company believes it will prevail in enforcing its contractual rights and that it is entitled to collect the full amount of its incurred losses. The Company is also entitled to collect interest on amounts paid; it believes that in the context of its put-back litigation, the appropriate interest rate should be the New York State statutory rate. However, the Company currently calculates its put-back recoveries using the contractual interest rate, which is lower than the New York State statutory rate.

Notwithstanding the foregoing, uncertainty remains with respect to the ultimate outcome of the litigation with Credit Suisse, which is contemplated in the probability-weighted cash flow scenario based-modeling the Company uses. The Credit Suisse recovery scenarios are based on the amount of incurred losses measured against certain probabilities of ultimate resolution of the dispute with Credit Suisse. Most of the probability weight is assigned to partial recovery scenarios and are discounted using the current risk-free discount rates associated against the underlying transaction’s cash flows.

The Company continues to consider relevant facts and circumstances in developing its assumptions on expected cash inflows, probability of potential recoveries (including the outcome of litigation) and recovery period. The estimated amount and likelihood of potential recoveries are expected to be revised and supplemented to the extent there are developments in the pending litigation and/or changes to the financial condition of Credit Suisse. While the Company believes it will be successful in realizing its recoveries from its put-back contract claims against Credit Suisse, the ultimate amount recovered may be materially different from that recorded by the Company given the inherent uncertainty of the manner of resolving the claims (i.e., litigation and/or negotiated out-of-court settlement) and the assumptions used in the required estimation process for accounting purposes which are based, in part, on judgments and other information that are not easily corroborated by historical data or other relevant benchmarks. Refer to “Note 13: Commitments and Contingencies” for further information about the Company’s litigation with Credit Suisse.

CDO Reserves and Recoveries

The Company also has loss and LAE reserves on certain transactions within its collateralized debt obligations (“CDO”) portfolio, primarily its multi-sector CDO asset class that was insured in the form of financial guarantee policies. MBIA’s insured multi-sector CDOs are transactions that include a variety of collateral ranging from corporate bonds to structured finance assets (which includes, but are not limited to, RMBS-related collateral, multi-sector and corporate CDOs). Refer to “Note 6: Loss and Loss Adjustment Expense Reserves” in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, for additional information on the Company’s process for estimating reserves on these policies.

 

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MBIA Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 5: Loss and Loss Adjustment Expense Reserves (continued)

 

Zohar Recoveries

MBIA Corp. will seek to recover the payments it made (plus interest and expenses) with respect to Zohar I and Zohar II. MBIA Corp. anticipates that the primary source of the recoveries will come from the monetization of the Zohar Assets as anticipated in the Zohar Bankruptcy Settlement. Refer to “Note 1: Business Developments and Risks and Uncertainties” for additional information about the estimated Zohar recoveries. Notwithstanding the procedures agreed to in the Zohar Bankruptcy Settlement, there can be no assurance that the value of the Zohar Assets will be sufficient to permit MBIA Corp. to recover all or substantially all of the payments it made on Zohar I and Zohar II. Failure to recover a substantial amount of such payments could impede MBIA Corp.’s ability to make payments when due on other policies. MBIA Corp. believes that if the NYSDFS concludes at any time that MBIA Insurance Corporation will not be able to pay its policyholder claims, the NYSDFS would likely put MBIA Insurance Corporation into a rehabilitation or liquidation proceeding under Article 74 of the NYIL and/or take such other actions as the NYSDFS may deem necessary to protect the interests of MBIA Insurance Corporation’s policyholders. The determination to commence such a proceeding or take other such actions is within the exclusive control of the NYSDFS.

Summary of Loss and LAE Reserves and Recoveries

The Company’s loss and LAE reserves and recoveries before consolidated VIE eliminations, along with amounts that were eliminated as a result of consolidated VIEs, which are included in the Company’s consolidated balance sheets as of March 31, 2019 and December 31, 2018 are presented in the following table:

 

                                           
     As of March 31, 2019      As of December 31, 2018  

In millions

   Balance Sheet Line Item      Balance Sheet Line Item  
     Insurance
loss
recoverable
     Loss
and LAE
reserves
     Insurance
loss
recoverable
     Loss
and LAE
reserves
 

U.S. Public Finance Insurance

           

Before VIE eliminations

   $ 630       $ 478       $ 571       $ 551   

VIE eliminations

            (75)                
  

 

 

    

 

 

    

 

 

    

 

 

 

Total U.S. public finance insurance

     630         403         571         551   

International and Structured Finance Insurance:

           

Before VIE eliminations(1)

     1,389         668         1,430         637   

VIE eliminations(1)

     (436)        (265)        (437)        (254)  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total international and structured finance insurance

     953         403         993         383   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,583       $ 806       $ 1,564       $ 934   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) -

Includes loan repurchase commitments of $420 million and $418 million as of March 31, 2019 and December 31, 2018, respectively.    

Changes in Loss and LAE Reserves

The following table presents changes in the Company’s loss and LAE reserves for the three months ended March 31, 2019. Changes in loss reserves attributable to the accretion of the claim liability discount, changes in discount rates, changes in amount and timing of estimated claim payments and recoveries, changes in assumptions and changes in LAE reserves are recorded in “Losses and loss adjustment” expenses in the Company’s consolidated statements of operations. As of March 31, 2019, the weighted average risk-free rate used to discount the Company’s loss reserves (claim liability) was 2.38%. LAE reserves are generally expected to be settled within a one-year period and are not discounted. As of March 31, 2019 and December 31, 2018, the Company’s gross loss and LAE reserves included $51 million and $60 million, respectively, related to LAE.

 

In millions     Changes in Loss and LAE Reserves for the Three Months Ended March 31, 2019         
Gross Loss
and LAE
Reserves as of
December 31,
2018
    Loss
Payments
    Accretion
of

Claim
Liability
Discount
    Changes in
Discount
Rates
    Changes in
Assumptions
     Changes in
Unearned
Premium
Revenue
     Changes in
LAE
Reserves
     Gross Loss
and LAE
Reserves as of
March 31,
2019
 
$ 934     $ (84)     $ 5     $ (27)     $ (37)      $ 24      $ (9)      $ 806  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

 

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MBIA Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 5: Loss and Loss Adjustment Expense Reserves (continued)

 

The decrease in the Company’s loss reserves primarily relates to payments made on certain Puerto Rico credits and the consolidation of credits, with loss reserves, as VIEs, partially offset by an increase in reserves on RMBS transactions.

Changes in Insurance Loss Recoverable and Recoveries on Unpaid Losses

Current period changes in the Company’s estimate of potential recoveries may be recorded as an insurance loss recoverable asset, netted against the gross loss and LAE reserve liability, or both. The following table presents changes in the Company’s insurance loss recoverable and changes in recoveries on unpaid losses reported within the Company’s claim liability for the three months ended March 31, 2019. Changes in insurance loss recoverable attributable to the accretion of the discount on the recoverable, changes in discount rates, changes in amount and timing of estimated collections, changes in assumptions and changes in LAE recoveries are recorded in “Losses and loss adjustment” expenses in the Company’s consolidated statements of operations.

 

                                                                                       
            Changes in Insurance Loss Recoverable and Recoveries on Unpaid Losses for the
Three Months Ended March 31, 2019
        

In millions

   Gross
Reserve as of
December 31,
2018
     Collections
for Cases
     Accretion
of
Recoveries
     Changes in
Discount
Rates
     Changes in
Assumptions
    Changes in
LAE
Recoveries
     Other(1)      Gross
Reserve
as of
March 31,
2019
 

Insurance loss recoverable

   $ 1,564      $ (58)      $ 10      $ 28      $ 40 (2)    $      $ (1)      $ 1,583  

Recoveries on unpaid losses (3)

     19                      1        (1)                     19  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total

   $ 1,583      $ (58)      $ 10      $ 29      $ 39     $      $ (1)      $ 1,602  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

(1) -

Primarily changes in amount and timing of collections.

 

(2) -

Includes amounts which have been paid and are expected to be recovered in the future.

 

(3) -

Excludes certain Puerto Rico recoveries which have been netted against reserves.

The increase in the Company’s insurance loss recoverable reflected in the preceding table was primarily due to amounts related to the anticipated recovery of claims paid to certain Puerto Rico credits offset by collections on insured RMBS transactions.

Loss and LAE Activity

For the three months ended March 31, 2019, the benefit to losses and LAE primarily related to an increase in expected recoveries on Puerto Rico exposures partially offset by incurred losses related to first-lien RMBS transactions. For the three months ended March 31, 2018, losses and LAE related to increases in actual and expected payments on Puerto Rico exposures.

Costs associated with remediating insured obligations assigned to the Company’s surveillance categories are recorded as LAE and are included in “Losses and loss adjustment” expenses on the Company’s consolidated statements of operations. For the three months ended March 31, 2019 and 2018, gross LAE related to remediating insured obligations were $1 million and $13 million, respectively.

 

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MBIA Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 5: Loss and Loss Adjustment Expense Reserves (continued)

 

Surveillance Categories

The following table provides information about the financial guarantees and related claim liability included in each of MBIA’s surveillance categories as of March 31, 2019:

 

                                                      
     Surveillance Categories  

$ in millions

   Caution
List
Low
     Caution
List
Medium
     Caution
List
High
     Classified
List
     Total  

Number of policies

     47        18        -        229         294   

Number of issues (1)

     15        4        -        99         118   

Remaining weighted average contract period (in years)

     6.6        7.8        -        7.6         7.4   

Gross insured contractual payments outstanding: (2)

              

Principal

   $ 1,527      $ 249      $ -      $ 4,267       $ 6,043   

Interest

     2,068        122        -        1,781         3,971   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,595      $ 371      $ -      $ 6,048       $ 10,014   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Gross Claim Liability (3)

   $ -      $ -      $ -      $ 928       $ 928   

Less:

              

Gross Potential Recoveries (4)

     -        -        -        1,999         1,999   

Discount, net (5)

     -        -        -        (300)        (300)  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net claim liability (recoverable)

   $ -      $ -      $ -      $ (771)      $ (771)  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Unearned premium revenue

   $ 5      $ 4      $ -      $ 41       $ 50   

Reinsurance recoverable on paid and unpaid losses (6)

               $ 19   

 

(1) -

An “issue” represents the aggregate of financial guarantee policies that share the same revenue source for purposes of making debt service payments on the insured debt.

 

(2) -

Represents contractual principal and interest payments due by the issuer of the obligations insured by MBIA.

 

(3) -

The gross claim liability with respect to Puerto Rico exposures are net of expected recoveries for policies in a net payable position.

 

(4) -

Gross potential recoveries with respect to certain Puerto Rico exposures are net of the claim liability for policies in a net recoverable position.

 

(5) -

Represents discount related to Gross Claim Liability and Gross Potential Recoveries.

 

(6) -

Included in “Other assets” on the Company’s consolidated balance sheets.

 

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Table of Contents

MBIA Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 5: Loss and Loss Adjustment Expense Reserves (continued)

 

The following table provides information about the financial guarantees and related claim liability included in each of MBIA’s surveillance categories as of December 31, 2018:

 

                                                      
     Surveillance Categories  

$ in millions

   Caution
List
Low
     Caution
List
Medium
     Caution
List
High
     Classified
List
     Total  

Number of policies

     50        18        -        233         301   

Number of issues (1)

     16        4        -        102         122   

Remaining weighted average contract period (in years)

     6.7        8.0        -        9.7         8.9   

Gross insured contractual payments outstanding: (2)

              

Principal

   $ 1,604      $ 249      $ -      $ 5,353       $ 7,206   

Interest

     2,118        123        -        5,414         7,655   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,722      $ 372      $ -      $ 10,767       $ 14,861   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Gross Claim Liability (3)

   $ -      $ -      $ -      $ 977       $ 977   

Less:

              

Gross Potential Recoveries (4)

     -        -        -        2,255         2,255   

Discount, net (5)

     -        -        -        (670)        (670)  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net claim liability (recoverable)

   $ -      $ -      $ -      $ (608)      $ (608)  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Unearned premium revenue

   $ 5      $ 4      $ -      $ 63       $ 72   

Reinsurance recoverable on paid and unpaid losses (6)

               $ 21   

 

(1) -

An “issue” represents the aggregate of financial guarantee policies that share the same revenue source for purposes of making debt service payments on the insured debt.

 

(2) -

Represents contractual principal and interest payments due by the issuer of the obligations insured by MBIA.

 

(3) -

The gross claim liability with respect to Puerto Rico exposures are net of expected recoveries for policies in a net payable position.

 

(4) -

Gross potential recoveries with respect to certain Puerto Rico exposures are net of the claim liability for policies in a net recoverable position.

 

(5) -

Represents discount related to Gross Claim Liability and Gross Potential Recoveries.

 

(6) -

Included in “Other assets” on the Company’s consolidated balance sheets.

Note 6: Fair Value of Financial Instruments

Fair Value Measurement

Financial Assets

Financial assets held by the Company primarily consist of investments in debt securities. Substantially all of the Company’s investments are priced by independent third parties, including pricing services and brokers. Typically, the Company receives one pricing service value or broker quote for each instrument, which represents a non-binding indication of value. The Company, along with its third-party portfolio manager, reviews the assumptions, inputs and methodologies used by pricing services and brokers to obtain reasonable assurance that the prices used in its valuations reflect fair value. When the Company and its third-party portfolio manager believe a third-party quotation differs significantly from its internally developed expectation of fair value, whether higher or lower, the Company reviews its data or assumptions with the provider. This review includes comparing significant assumptions such as prepayment speeds, default ratios, forward yield curves, credit spreads and other significant quantitative inputs to internal assumptions, and working with the price provider to reconcile the differences. The price provider may subsequently provide an updated price. In the event that the price provider does not update its price, and the Company still does not agree with the price provided, its third-party portfolio manager will obtain a price from another third-party provider or use an internally developed price which it believes represents the fair value of the investment. The fair values of investments for which internal prices were used were not significant to the aggregate fair value of the Company’s investment portfolio as of March 31, 2019 and December 31, 2018. All challenges to third-party prices are reviewed by staff of the Company as well as its third-party portfolio manager with relevant expertise to ensure reasonableness of assumptions. A pricing analysis is reviewed and approved by the Company’s valuation committee.

 

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Table of Contents

MBIA Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 6: Fair Value of Financial Instruments (continued)

 

Financial Liabilities (excluding derivative liabilities)

Financial liabilities, excluding derivative liabilities, issued by the Company primarily consist of debt issued for general corporate purposes within its corporate segment, medium-term notes (“MTNs”), investment agreements and debt issued by consolidated VIEs. The majority of the financial liabilities that the Company has elected to fair value or that require fair value reporting or disclosures are valued based on the estimated value of the underlying collateral, the Company’s or a third-party’s estimate of discounted cash flow model estimates, or quoted market values for similar products. These valuations include adjustments for expected nonperformance risk of the Company.

Derivative Liabilities

The Company’s derivative liabilities are primarily interest rate swaps and an insured credit derivative. The Company’s insured credit derivative contract is a non-traded structured credit derivative transaction and since it is highly customized, there is generally no observable market for this derivative. The Company estimates its fair value in a hypothetical market based on an internal model that incorporates market or estimated prices of similar securities that are obtained for all collateral within a transaction, the present value of the market-implied potential loss and nonperformance risk. The Company reviews its valuation model results on a quarterly basis to assess the appropriateness of the assumptions and results in light of current market activity and conditions. This review is performed by internal staff with relevant expertise.

Internal Review Process

All significant financial assets and liabilities are reviewed by the valuation committee to ensure compliance with the Company’s policies and risk procedures in the development of fair values of financial assets and liabilities. The valuation committee reviews, among other things, key assumptions used for internally developed prices, significant changes in sources and uses of inputs, including changes in model approaches, and any adjustments from third-party inputs or prices to internally developed inputs or prices. The committee also reviews any significant impairment or improvements in fair values of the financial instruments from prior periods. The committee is comprised of senior finance and other team members with relevant experience in the financial instruments the committee is responsible for. The committee documents its agreement with the fair value measurements reported in the Company’s consolidated financial statements.

Valuation Techniques

Valuation techniques for financial instruments measured at fair value are described below.

Fixed-Maturity Securities Held as Available-For-Sale, Investments Carried at Fair Value, Investments Pledged as Collateral and Short-term Investments

These investments include investments in U.S. Treasury and government agencies, state and municipal bonds, foreign governments, corporate obligations, mortgage-backed securities (“MBS”), ABS, money market securities, and perpetual debt and equity securities.

These investments are generally valued based on recently executed transaction prices or quoted market prices. When quoted market prices are not available, fair value is generally determined using quoted prices of similar investments or a valuation model based on observable and unobservable inputs. Inputs vary depending on the type of investment. Observable inputs include contractual cash flows, interest rate yield curves, CDS spreads, prepayment and volatility scores, diversity scores, cross-currency basis index spreads, and credit spreads for structures similar to the financial instrument in terms of issuer, maturity and seniority. Unobservable inputs include cash flow projections and the value of any credit enhancement.

The investment in the fixed-income fund was measured at fair value by applying the net asset value per share practical expedient. The investment in the fixed-income fund may be redeemed on a quarterly basis with prior redemption notification of ninety days subject to withdrawal limitations. The investment is required to be held for a minimum of twelve months, and any subsequent quarterly redemption is limited to 25% of the investment or a complete redemption over four consecutive quarters in the amounts of 25%, 33%, 50%, and 100% of the remaining investment balance as of the first, second, third and fourth consecutive quarters, respectively.

The investment in money market securities was also measured at fair value by applying the net asset value per share practical expedient. These funds are backed by high quality, very liquid short-term instruments and the probability is remote that the funds would be sold for a value other than net asset value.

Investments based on quoted market prices of identical investments in active markets are classified as Level 1 of the fair value hierarchy. Level 1 investments generally consist of U.S. Treasury and government agency and perpetual debt and equity securities. Quoted market prices of investments in less active markets, as well as investments which are valued based on other than quoted prices for which the inputs are observable, such as interest rate yield curves, are categorized in Level 2 of the fair value hierarchy. Investments that contain significant inputs that are not observable are categorized as Level 3.

 

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Table of Contents

MBIA Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 6: Fair Value of Financial Instruments (continued)

 

Cash and Cash Equivalents

The carrying amounts of cash and cash equivalents approximate fair value due to the short-term nature and credit worthiness of these instruments and are categorized in Level 1 of the fair value hierarchy.

Loans Receivable at Fair Value

Loans receivable at fair value are comprised of loans and other instruments held by consolidated VIEs consisting of residential mortgage loans. Fair values of residential mortgage loans are determined using quoted prices for MBS issued by the respective VIE and adjusted for the fair values of the financial guarantees provided by MBIA Corp. on the related MBS. The fair values of the financial guarantees consider expected claim payments, net of recoveries, under MBIA Corp.’s policies.

Loan Repurchase Commitments

Loan repurchase commitments are obligations owed by the sellers/servicers of mortgage loans to MBIA as reimbursement of paid claims. Loan repurchase commitments are assets of the consolidated VIEs. This asset represents the rights of MBIA against the sellers/servicers for breaches of representations and warranties that the securitized residential mortgage loans sold to the trust to comply with stated underwriting guidelines and for the sellers/servicers to cure, replace, or repurchase mortgage loans. Fair value measurements of loan repurchase commitments represent the amounts owed by the sellers/servicers to MBIA as reimbursement of paid claims. Loan repurchase commitments are not securities and no quoted prices or comparable market transaction information are observable or available. Fair values of loan repurchase commitments are determined using discounted cash flow techniques and are categorized in Level 3 of the fair value hierarchy.

Other Assets

A VIE consolidated by the Company has entered into a derivative instrument consisting of a cross currency swap. The cross currency swap is entered into to manage the variability in cash flows resulting from fluctuations in foreign currency rates. The fair value of the VIE derivative is determined based on inputs from unobservable cash flows projection of the derivative, discounted using observable discount rates. As the significant inputs are unobservable, the derivative contract is categorized in Level 3 of the fair value hierarchy.

Other assets also include receivables representing the right to receive reimbursement payments on claim payments expected to be made on certain insured VIE liabilities due to risk mitigating transactions with third parties executed to effectively defease, or, in-substance commute the Company’s exposure on its financial guarantee policies. The right to receive reimbursement payments is based on the value of the Company’s financial guarantee determined using the cash flow model. The fair value of the financial guarantee primarily contains unobservable inputs and is categorized in Level 3 of the fair value hierarchy.

Medium-term Notes at Fair Value

The Company has elected to measure certain MTNs at fair value on a recurring basis. The fair values of certain MTNs are based on quoted market prices provided by third-party sources, where available. When quoted market prices are not available, the Company applies a matrix pricing grid to determine fair value based on the quoted market prices received for similar instruments and considering the MTNs’ stated maturity and interest rate. Nonperformance risk is included in the quoted market prices and the matrix pricing grid. MTNs are categorized in Level 3 of the fair value hierarchy.

Variable Interest Entity Notes

The fair values of VIE notes are determined based on recently executed transaction prices or quoted prices where observable. When position-specific quoted prices are not observable, fair values are based on quoted prices of similar securities. Fair values based on quoted prices of similar securities may be adjusted for factors unique to the securities, including any credit enhancement. Observable inputs include interest rate yield curves and bond spreads of similar securities. Unobservable inputs include the value of any credit enhancement. VIE notes are categorized in Level 2 or Level 3 of the fair value hierarchy based on the lowest level input that is significant to the fair value measurement in its entirety.

Derivatives

The corporate segment has entered into derivative transactions primarily consisting of interest rate swaps. Fair values of over-the-counter derivatives are determined using valuation models based on observable inputs, nonperformance risk of the Company and nonperformance risk of the counterparties. Observable and market-based inputs include interest rate yields, credit spreads and volatilities. These derivatives are categorized in Level 2 or Level 3 of the fair value hierarchy based on the lowest level input that is significant to the fair value measurement in its entirety.

 

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Table of Contents

MBIA Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 6: Fair Value of Financial Instruments (continued)

 

Derivatives—Insurance

The derivative contracts insured by the Company cannot be legally traded and generally do not have observable market prices. The Company determines the fair values of insured credit derivatives using valuation models based on observable inputs and considering nonperformance risk of the Company. Negotiated settlements are also considered to validate the valuation models and to reflect assumptions the Company believes market participants would use. The Company uses an internally developed Direct Price Model to value its insured credit derivative that incorporates market prices or estimated prices of similar securities that are obtained for all collateral within a transaction, the present value of the market-implied potential losses, and nonperformance risk. The valuation of the insured credit derivative includes the impact of its credit standing. The insured credit derivative is categorized in Level 3 of the fair value hierarchy based on unobservable inputs that are significant to the fair value measurement in its entirety.

Derivatives—Other

The Company also has other derivative liabilities as a result of a commutation that occurred in 2014. The fair value of the derivative is determined using a discounted cash flow model. Key inputs include unobservable cash flows projected over the expected term of the derivative. As the significant inputs are unobservable, the derivative contract is categorized in Level 3 of the fair value hierarchy.

Other Liabilities

Other payable relates to certain contingent consideration. The fair value of the liability is based on the cash flow methodologies using observable and unobservable inputs. Unobservable inputs include invested asset balances and asset management fees that are significant to the fair value estimate and the liability is categorized in Level 3 of the fair value hierarchy.

Significant Unobservable Inputs

The following tables provide quantitative information regarding the significant unobservable inputs used by the Company for assets and liabilities measured at fair value on a recurring basis as of March 31, 2019 and December 31, 2018.

 

                                           

In millions

   Fair Value as of
March 31, 2019
    

Valuation Techniques

   Unobservable Input     Range
(Weighted Average)
 

Assets of consolidated VIEs:

          

Loans receivable at fair value

   $ 206      Market prices adjusted for financial guarantees provided to VIE obligations     

Impact of
financial
guarantee
(1)
 
 
 
    -9% - 50% (8%)  

Loan repurchase commitments

     420      Discounted cash flow     
Recovery
rates
(2)
 
 
 
           Breach rates(2)    

Liabilities of consolidated VIEs:

          

Variable interest entity notes

     397      Market prices of VIE assets adjusted for financial guarantees provided     

Impact of
financial
guarantee
 
 
 
    0% - 65% (41%)  

Credit derivative liabilities:

          

CMBS

     19      Direct Price Model     
Nonperformance
risk
 
 
    54% - 54% (54%)  

Other derivative liabilities

     7      Discounted cash flow      Cash flows       $0 - $49 ($25)(3)  

 

(1) -

Negative percentage represents financial guarantee policies in a receivable position.

(2) -

Recovery rates and breach rates include estimates about potential variations in the outcome of litigation with a counterparty.

(3) -

Midpoint of cash flows are used for the weighted average.

 

20


Table of Contents

MBIA Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 6: Fair Value of Financial Instruments (continued)

 

                                           

In millions

   Fair Value as of
December 31, 2018
    

Valuation Techniques

   Unobservable Input     Range
(Weighted Average)
 

Assets of consolidated VIEs:

          

Loans receivable at fair value

   $ 172      Market prices adjusted for financial guarantees provided to VIE obligations     

Impact of
financial
guarantee
(1)
 
 
 
    -17% - 75% (7%)  

Loan repurchase commitments

     418      Discounted cash flow      Recovery rates(2)    
           Breach rates(2)    

Liabilities of consolidated VIEs:

          

Variable interest entity notes

     366      Market prices of VIE assets adjusted for financial guarantees provided     

Impact of
financial
guarantee
 
 
 
    0% - 63% (39%)  

Credit derivative liabilities:

          

CMBS

     33      Direct Price Model     
Nonperformance
risk
 
 
    54% - 54% (54%)  

Other derivative liabilities

     7      Discounted cash flow      Cash flows       $0 - $49 ($25)(3)  

 

(1) -

Negative percentage represents financial guarantee policies in a receivable position.

 

(2) -

Recovery rates and breach rates include estimates about potential variations in the outcome of litigation with a counterparty.

 

(3) -

Midpoint of cash flows are used for the weighted average.

Sensitivity of Significant Unobservable Inputs

The significant unobservable input used in the fair value measurement of the Company’s residential loans receivable at fair value of consolidated VIEs is the impact of the financial guarantee. The fair value of residential loans receivable is calculated by subtracting the value of the financial guarantee from the market value of VIE liabilities. The value of a financial guarantee is estimated by the Company as the present value of expected cash payments, net of recoveries, under the policy. If there is a lower expected cash flow on the underlying loans receivable of the VIE, the value of the financial guarantee provided by the Company under the insurance policy increases. This results in a lower fair value of the residential loans receivable in relation to the obligations of the VIE.

The significant unobservable inputs used in the fair value measurement of the Company’s loan repurchase commitments of consolidated VIEs are the recovery rates and breach rates. Recovery rates reflect the estimates of future cash flows reduced for litigation delays and risks and/or potential financial distress of the sellers/servicers. The estimated recoveries of the loan repurchase commitments may differ from the actual recoveries that may be received in the future. Breach rates represent the rate at which mortgages fail to comply with stated representations and warranties of the sellers/servicers. Significant increases or decreases in the recovery rates and the breach rates would result in significantly higher or lower fair values of the loan repurchase commitments, respectively. Additionally, changes in the legal environment and the ability of the counterparties to pay would impact the recovery rate assumptions, which could significantly impact the fair value measurement. Any significant challenges by the counterparties to the Company’s determination of breaches of representations and warranties could have a material adverse impact on the fair value measurement. Recovery rates and breach rates are determined independently. Changes in one input will not necessarily have any impact on the other input.

The significant unobservable input used in the fair value measurement of the Company’s VIE notes of consolidated VIEs is the impact of the financial guarantee. The fair value of VIE notes is calculated by adding the value of the financial guarantee to the market value of VIE assets. The value of a financial guarantee is estimated by the Company as the present value of expected cash payments under the policy. As the value of the guarantee provided by the Company to the obligations issued by the VIE increases, the credit support adds value to the liabilities of the VIE. This results in an increase in the fair value of the liabilities of the VIE.

The significant unobservable input used in the fair value measurement of MBIA Corp.’s commercial mortgage-backed securities (“CMBS”) credit derivative, which is valued using the Direct Price Model, is nonperformance risk. The nonperformance risk is an assumption of MBIA Corp.’s own ability to pay and whether MBIA Corp. will have the necessary resources to pay the obligations as they come due. Any significant increase or decrease in MBIA Corp.’s nonperformance risk would result in a decrease or increase in the fair value of the derivative liabilities, respectively.

 

21


Table of Contents

MBIA Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 6: Fair Value of Financial Instruments (continued)

 

The significant unobservable input used in the fair value measurement of MBIA Corp.’s other derivatives, which are valued using a discounted cash flow model, is the estimates of future cash flows discounted using market rates and CDS spreads. Any significant increase or decrease in future cash flows would result in an increase or decrease in the fair value of the derivative liability, respectively.

Fair Value Measurements

The following tables present the fair value of the Company’s assets (including short-term investments) and liabilities measured and reported at fair value on a recurring basis as of March 31, 2019 and December 31, 2018:

 

                                                      
    Fair Value Measurements at Reporting Date Using        

In millions

  Quoted Prices in
Active Markets  for
Identical Assets
(Level 1)
    Significant
Other
Observable
Inputs
(Level 2)
    Significant
Unobservable Inputs

(Level 3)
    Counterparty
and Cash
Collateral
Netting
    Balance as of
March 31,
2019
 

Assets:

         

Fixed-maturity investments:

         

U.S. Treasury and government agency

  $ 871      $ 93      $     $     $ 964  

State and municipal bonds

          582                    582  

Foreign governments

          13                    13  

Corporate obligations

          1,689                    1,689  

Mortgage-backed securities:

               

Residential mortgage-backed agency

          229                    229  

Residential mortgage-backed non-agency

          26                    26  

Commercial mortgage-backed

          49                    55  

Asset-backed securities:

         

Collateralized debt obligations

          113                    113  

Other asset-backed

          197                    199  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed-maturity investments

    871        2,991                    3,870  

Money market securities

                            91 (1)  

Perpetual debt and equity securities

    26        37                    63  

Fixed-income fund

                            75 (1)  

Cash and cash equivalents

    132                          132  

Derivative assets:

         

Non-insured derivative assets:

         

Interest rate derivatives

                            1  

 

22


Table of Contents

MBIA Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 6: Fair Value of Financial Instruments (continued)

 

                                                      
     Fair Value Measurements at Reporting Date Using         

In millions

   Quoted Prices in
Active Markets  for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable

Inputs
(Level 3)
     Counterparty
and Cash
Collateral
Netting
     Balance as of
March 31,
2019
 

Assets of consolidated VIEs:

              

State and municipal bonds

            707                      707  

Corporate obligations

            9        5               14  

Mortgage-backed securities:

              

Residential mortgage-backed non-agency

            89                      89  

Commercial mortgage-backed

            33                      33  

Asset-backed securities:

              

Collateralized debt obligations

            6        1               7  

Other asset-backed

            11                      11  

Cash

     31                             31  

Loans receivable at fair value:

              

Residential loans receivable

                   206               206  

Loan repurchase commitments

                   420               420  

Other assets:

              

Currency derivatives

                   14               14  

Other

                   15               15  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 1,060      $ 3,884      $ 669      $      $ 5,779  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

              

Medium-term notes

   $      $      $ 106      $      $ 106  

Derivative liabilities:

              

Insured derivatives:

              

Credit derivatives

            2        19               21  

Non-insured derivatives:

              

Interest rate derivatives

            172               (1)        171  

Other

                   7               7  

Other liabilities:

              

Other payable

                   3               3  

Liabilities of consolidated VIEs:

              

Variable interest entity notes

            928        397               1,325  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $      $ 1,102      $ 532      $ (1)      $ 1,633  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) -

Investment that was measured at fair value by applying the net asset value per share practical expedient, and was required not to be classified in the fair value hierarchy.

 

23


Table of Contents

MBIA Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 6: Fair Value of Financial Instruments (continued)

 

                                           
     Fair Value Measurements at Reporting Date Using         

In millions

   Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
     Balance as of
December 31,
2018
 

Assets:

           

Fixed-maturity investments:

           

U.S. Treasury and government agency

   $ 1,028      $ 90      $      $ 1,118  

State and municipal bonds

            728               728  

Foreign governments

            9               9  

Corporate obligations

            1,410               1,410  

Mortgage-backed securities:

           

Residential mortgage-backed agency

            219               219  

Residential mortgage-backed non-agency

            28               28  

Commercial mortgage-backed

            47        7        54  

Asset-backed securities:

           

Collateralized debt obligations

            121               121  

Other asset-backed

            181        3        184  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed-maturity investments

     1,028        2,833        10        3,871  

Money market securities

                          67 (1)  

Perpetual debt and equity securities

     23        35               58  

Fixed-income fund

                          75 (1)  

Cash and cash equivalents

     222                      222  

Derivative assets:

           

Non-insured derivative assets:

           

Interest rate derivatives

            2               2  

 

24


Table of Contents

MBIA Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 6: Fair Value of Financial Instruments (continued)

 

                                           
     Fair Value Measurements at Reporting Date Using         

In millions

   Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
     Balance as of
December 31,
2018
 

Assets of consolidated VIEs:

           

Corporate obligations

            9        5        14  

Mortgage-backed securities:

           

Residential mortgage-backed non-agency

            92               92  

Commercial mortgage-backed

            34               34  

Asset-backed securities:

           

Collateralized debt obligations

            6        1        7  

Other asset-backed

            10               10  

Cash

     58                      58  

Loans receivable at fair value:

           

Residential loans receivable

                   172        172  

Loan repurchase commitments

                   418        418  

Other assets:

           

Currency derivatives

                   17        17  

Other

                   14        14  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 1,331      $ 3,021      $ 637      $ 5,131  
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Medium-term notes

   $      $      $ 102      $ 102  

Derivative liabilities:

           

Insured derivatives:

           

Credit derivatives

            2        33        35  

Non-insured derivatives:

           

Interest rate derivatives

            157               157  

Other

                   7        7  

Other liabilities:

           

Other payable

                   5        5  

Liabilities of consolidated VIEs:

           

Variable interest entity notes

            114        366        480  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $      $ 273      $ 513      $ 786  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) -

Investment that was measured at fair value by applying the net asset value per share practical expedient, and was required not to be classified in the fair value hierarchy.

Level 3 assets at fair value as of March 31, 2019 and December 31, 2018 represented approximately 12% of total assets measured at fair value. Level 3 liabilities at fair value as of March 31, 2019 and December 31, 2018 represented approximately 33% and 65%, respectively, of total liabilities measured at fair value.

 

25


Table of Contents

MBIA Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 6: Fair Value of Financial Instruments (continued)

 

The following tables present the fair values and carrying values of the Company’s assets and liabilities that are disclosed at fair value but not reported at fair value on the Company’s consolidated balance sheets as of March 31, 2019 and December 31, 2018:

 

                                                      
     Fair Value Measurements at Reporting Date Using              

In millions

   Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
    Significant Other
Observable  Inputs

(Level 2)
    Significant
Unobservable Inputs
(Level 3)
    Fair Value
Balance as of

March 31,
2019
    Carry Value
Balance as of
March 31,
2019
 

Assets:

          

Other investments

   $     $     $ 1     $ 1     $  

Assets of consolidated VIEs:

          

Investments held-to-maturity

                 948       948       890   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $     $     $ 949     $ 949     $ 891   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities:

          

Long-term debt

   $     $ 1,165     $     $ 1,165     $ 2,284   

Medium-term notes

                 425       425       615   

Investment agreements

                 400       400       313   

Liabilities of consolidated VIEs:

          

Variable interest entity notes

           352       948       1,300       1,233   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

   $     $ 1,517     $ 1,773     $ 3,290     $ 4,445   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financial Guarantees:

          

Gross liability (recoverable)

   $     $     $ 1,027     $ 1,027     $ (233)  

Ceded

                 69       69       30   
     Fair Value Measurements at Reporting Date Using              

In millions

   Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
    Significant Other
Observable Inputs

(Level 2)
    Significant
Unobservable Inputs
(Level 3)
    Fair Value
Balance as of
December 31,
2018
    Carry Value
Balance as of
December 31,
2018
 

Assets:

          

Other investments

   $     $ 1     $     $ 1     $  

Assets of consolidated VIEs:

          

Investments held-to-maturity

                 925       925       890   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $     $ 1     $ 925     $ 926     $ 891   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities:

          

Long-term debt

   $     $ 1,101     $     $ 1,101     $ 2,249   

Medium-term notes

                 422       422       620   

Investment agreements

                 388       388       311   

Liabilities of consolidated VIEs:

          

Variable interest entity notes

           378       925       1,303       1,264   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

   $     $ 1,479     $ 1,735     $ 3,214     $ 4,444   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financial Guarantees:

          

Gross liability (recoverable)

   $     $     $ 993     $ 993     $ (43)  

Ceded

                 65       65       35   

 

26


Table of Contents

MBIA Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 6: Fair Value of Financial Instruments (continued)

 

The following tables present information about changes in Level 3 assets (including short-term investments) and liabilities measured at fair value on a recurring basis for the three months ended March 31, 2019 and 2018:

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Three Months Ended

March 31, 2019

 

                                                                                                                                              

In millions

   Balance,
Beginning
of Period
     Realized
Gains /
(Losses)
     Unrealized
Gains /
(Losses)
Included
in
Earnings
     Unrealized
Gains /
(Losses)
Included
in OCI
     Foreign
Exchange
Recognized
in OCI or
Earnings
     Purchases      Issuances      Settlements      Sales      Transfers
into
Level  3(1)
     Transfers
out of
Level  3(1)
     Ending
Balance
     Change  in
Unrealized
Gains
(Losses)
for

the Period
Included in
Earnings
for Assets
still held
as of
March 31,
2019
 

Assets:

                                      

Commercial mortgage-backed

   $ 7      $ -      $      $ -      $      $ -      $ -      $ (1)      $ -      $ -      $ -      $ 6      $  

Other asset-backed

     3        -               -               -        -        (1)        -        -        -        2         

Assets of consolidated VIEs:

                                      

Corporate obligations

     5        -               -               -        -               -        -        -        5         

Collateralized debt obligations

     1        -               -               -        -               -        -        -        1         

Loans receivable- residential

     172        -        42         -               -        -        (8)        -        -        -        206        42   

Loan repurchase commitments

     418        -               -               -        -               -        -        -        420         

Currency derivatives

     17        -        (2)        -        (1)        -        -               -        -        -        14        (3)  

Other

     14        -               -               -        -               -        -        -        15         
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 637      $ -      $ 43       $ -      $ (1)      $ -      $ -      $ (10)      $ -      $ -      $ -      $ 669      $ 42   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

                                                                                                                                              

In millions

   Balance,
Beginning
of Period
     Realized
(Gains) /
Losses
     Unrealized
(Gains) /
Losses
Included
in
Earnings
     Unrealized
(Gains) /
Losses
Included
in Credit
Risk in
OCI
     Foreign
Exchange
Recognized
in OCI or
Earnings
     Purchases      Issuances      Settlements      Sales      Transfers
into
Level  3(1)
     Transfers
out of
Level 3(1)
     Ending
Balance
     Change in
Unrealized
(Gains)
Losses for
the Period
Included in
Earnings
for
Liabilities
still held
as of
March 31,
2019
 

Liabilities:

                                      

Medium-term notes

   $ 102      $ -      $ 10       $ (4)      $ (2)      $ -      $ -      $      $ -      $ -      $ -      $ 106      $  

Credit derivatives

     33        -        (14)                      -        -               -        -        -        19        (14)  

Other derivatives

     7        -                             -        -               -        -        -        7         

Other payable

     5        -                             -        -        (3)        -        -        -        3         

Liabilities of consolidated VIEs:

                                      

VIE notes

     366        9        32         (7)               -        5        (8)        -        -        -        397        32   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 513      $ 9      $ 29       $ (11)      $ (2)      $ -      $ 5      $ (11)      $ -      $ -      $ -      $ 532      $ 26   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) -

Transferred in and out at the end of the period.

 

27


Table of Contents

MBIA Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 6: Fair Value of Financial Instruments (continued)

 

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Three Months Ended

March 31, 2018

 

In millions

  Balance,
Beginning
of Period
    Realized
Gains /
(Losses)
    Unrealized
Gains /
(Losses)
Included
in
Earnings
    Unrealized
Gains /
(Losses)
Included
in OCI
    Foreign
Exchange
Recognized
in OCI or
Earnings
    Purchases     Issuances     Settlements     Sales     Transfers
into
Level  3(1)
    Transfers
out of
Level 3(1)
    Ending
Balance
    Change in
Unrealized
Gains
(Losses)
for

the Period
Included in
Earnings
for Assets
still held
as of
March 31,
2018
 

Assets:

                         

Corporate obligations

  $ 2     $ -     $     $ -     $     $ -     $ -     $     $     $ -     $ (2)     $ -     $  

Commercial mortgage-backed

    7       -             -             -       -                   -             7        

Other asset-backed

    5       -             -             2       -       (1)       (2)       -             4        

Assets of consolidated VIEs:

                         

Corporate obligations

    -       -             -             -       -                   3             3        

Commercial mortgage-backed

    6       -             -             -       -                   -             6        

Collateralized debt obligations

    1       -             -             -       -                   -             1        

Loans receivable-residential

    759       -       20       -             -       -       (42)             -             737       20   

Loans receivable-corporate

    920       -       11       -             -       -       (6)             -             925       11   

Loan repurchase

commitments

    407       -             -             -       -                   -             407        

Currency derivatives

    19       -       (3)       -       (3)       -       -                   -             13       (6)  

Other

    14       -             -             -       -                   -             14        
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 2,140     $ -     $ 28      $ -     $ (3)     $ 2     $ -     $ (49)     $ (2)     $ 3     $ (2)     $ 2,117     $ 25   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

                                                                                                                                              

In millions

   Balance,
Beginning
of Period
     Realized
(Gains) /
Losses
     Unrealized
(Gains) /
Losses
Included
in
Earnings
     Unrealized
(Gains) /
Losses
Included
in OCI
     Foreign
Exchange
Recognized
in OCI or
Earnings
     Purchases      Issuances      Settlements      Sales      Transfers
into
Level  3(1)
     Transfers
out of
Level 3(1)
     Ending
Balance
     Change in
Unrealized
(Gains)
Losses for
the Period
Included in
Earnings
for
Liabilities
still held
as of
March 31,
2018
 

Liabilities:

                                      

Medium-term notes

   $ 115      $ -      $      $ 25       $ 6      $ -      $ -      $      $ -      $      $ -      $ 146      $  

Credit derivatives

     63        19        (14)               -        -        -        (19)        -               -        49        (14)  

Other derivatives

     4        -                      -        -        -               -               -        4         

Other payable

     7        -                      -        -        -        (4)        -               -        5         

Liabilities of consolidated VIEs:

                                      

VIE notes

     406        8        (3)        (8)        5        -        5        (13)        -               -        400         
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 595      $ 27      $ (15)      $ 17       $ 11      $ -      $ 5      $ (36)      $ -      $      $ -      $ 604      $ (4)  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) -

Transferred in and out at the end of the period.

For the three months ended March 31, 2018, transfers into Level 3 and out of Level 2 were related to corporate obligations, where inputs, which are significant to their valuation, became unobservable during the quarter. These inputs included spreads, prepayment speeds, default speeds, default severities, yield curves observable at commonly quoted intervals, and market corroborated inputs. Corporate obligations comprised the instruments transferred out of Level 3 where inputs, which are significant to their valuation, became observable during the quarter.

There were no transfers into or out of Level 1 for the three months ended March 31, 2019 and 2018.

All Level 1, 2 and 3 designations are made at the end of each accounting period.

 

28


Table of Contents

MBIA Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 6: Fair Value of Financial Instruments (continued)

 

Gains and losses (realized and unrealized) included in earnings related to Level 3 assets and liabilities for the three months ended March 31, 2019 and 2018 are reported on the Company’s consolidated statements of operations as follows:

 

                                           
    Three Months Ended March 31, 2019     Three Months Ended March 31, 2018  

In millions

  Total Gains
(Losses)
Included in
Earnings
    Change in
Unrealized

Gains
(Losses)
for the
Period
Included
in Earnings
for Assets
and
Liabilities still
held as of
March 31,

2019
    Total Gains
(Losses)
Included in
Earnings
    Change in
Unrealized

Gains
(Losses)
for the
Period
Included
in Earnings
for Assets
and
Liabilities still
held as of
March 31,

2018
 

Revenues:

       

Unrealized gains (losses) on insured derivatives

  $ 14      $ 14      $ 14      $ 14   

Realized gains (losses) and other settlements on insured derivatives

                (19)        

Net gains (losses) on financial instruments at fair value and foreign exchange

    (7)       (7)       (6)       (6)  

Other net realized gains (losses)

    (1)       (1)       (2)       (2)  

Revenues of consolidated VIEs:

       

Net gains (losses) on financial instruments at fair value and foreign exchange

          10        15        23   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $     $ 16      $     $ 29   
 

 

 

   

 

 

   

 

 

   

 

 

 

Fair Value Option

The Company elected to record at fair value certain financial instruments that have been consolidated in connection with the adoption of the accounting guidance for consolidation of VIEs, among others.

The following table presents the gains and (losses) included in the Company’s consolidated statements of operations for the three months ended March 31, 2019 and 2018 for financial instruments for which the fair value option was elected:

 

                     
    Three Months Ended March 31,  

In millions

  2019     2018  

Investments carried at fair value(1)

  $     $ (2)  

Fixed-maturity securities held at fair value-VIE(2)

    26        (6)  

Loans receivable at fair value:

   

Residential mortgage loans(2)

    34        (21)  

Other loans(2)

          11   

Loan repurchase commitments(2)

           

Medium-term notes(1)

    (7)       (6)  

Other liabilities(3)

    (1)       (2)  

Variable interest entity notes(2)

    84        27   

 

(1) -

Reported within “Net gains (losses) of financial instruments at fair value and foreign exchange” on MBIA’s consolidated statements of operations.

 

(2) -

Reported within “Net gains (losses) of financial instruments at fair value and foreign exchange-VIE” on MBIA’s consolidated statements of operations.

 

(3) -

Reported within “Other net realized gains (losses)” on MBIA’s consolidated statements of operations.

 

29


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