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 Companys U.S. public finance insurance business is primarily operated through National Public Finance Guarantee Corporation (National) 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 Companys operating segments.
Business Developments
Financial Strength Ratings
In June of 2017, Standard & Poors Financial Services LLC
(S&P) downgraded the financial strength rating of National which made it difficult for National to compete with higher-rated competitors. Therefore, at that time, National ceased its efforts to actively pursue writing new financial
guarantee business. The Company then terminated its agreements with S&P, Kroll Bond Rating Agency (Kroll) and Moodys Investors Services (Moodys) to provide financial strength ratings to MBIA Inc. and certain
of its subsidiaries. S&P and Kroll subsequently withdrew all of their ratings. On January 17, 2018, Moodys downgraded the financial strength rating of National to Baa2 from A3 with a stable outlook, affirmed the financial strength
rating of MBIA Corp. at Caa1 with a developing outlook, downgraded MBIA Inc.s rating to Ba3 with a stable outlook from Ba1 with a negative outlook, and affirmed the financial strength rating of MBIA Mexico S.A. de C.V. at Caa1/B3.mx with a
developing outlook. Moodys, at its discretion and in the absence of a contract with the Company, continues to maintain ratings on MBIA Inc. and its subsidiaries.
Stock Warrants
In April of 2018, the holder of certain MBIA Inc. warrants exercised its right to purchase
9.94 million shares of MBIA Inc. common stock at an exercise price of $9.59 per share. As a result, the Company issued 1.2 million shares of MBIA Inc. common stock to the holder in accordance with the cashless settlement provision of the
warrants.
Risks and Uncertainties
The
Companys 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 Companys estimates. The discussion below highlights the significant risks and uncertainties that could have a material effect on the Companys financial statements
and business objectives in future periods.
U.S. Public Finance Market Conditions
National continues to surveil and remediate its existing insured portfolio and will seek opportunities to enhance shareholder value using its strong financial resources, while protecting the interests of all of its
policyholders. Certain state and local governments and territory obligors that National insures remain 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 Nationals insured transactions. National monitors and analyzes these situations and other stressed credits closely, and the overall extent and duration of this stress is uncertain.
6
MBIA Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 1: Business Developments and Risks and
Uncertainties (continued)
In particular, the Commonwealth of Puerto Rico and certain of its instrumentalities (Puerto Rico) are
experiencing significant fiscal stress and constrained liquidity due to, among other things, Puerto Ricos 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. Although Puerto Rico has tried to address its challenges through various fiscal policies, it continues to experience significant fiscal stress. On January 1, 2018, Puerto Rico defaulted on scheduled debt service for
National insured bonds and National paid gross claims in the aggregate of $69 million. On September 20, 2017, Hurricane Maria made landfall in Puerto Rico as a Category 4 hurricane resulting in catastrophic damage to much of the
islands basic infrastructure, including its electrical transmission and distribution grid, telecommunications network, housing, roads, bridges, water and sewer systems. On September 21, 2017, the President of the United States approved a
Major Disaster Declaration for Puerto Rico and the Federal Emergency Management Agency (FEMA) made federal disaster assistance available to Puerto Rico to supplement its recovery efforts. Hurricane Marias impact on Puerto Rico will
likely also impact its ability to both repay its legacy indebtedness and participate in ongoing debt restructuring negotiations. The physical damage and resultant lost economic activity may exceed the collective aid Puerto Rico receives from private
insurance, relief from FEMA and other federal agencies and programs. Economic activity in Puerto Rico may not return to
pre-hurricane
levels and Puerto Ricos recovery could be more shallow and protracted
than that experienced by other similarly affected governments, given Puerto Ricos prior constrained liquidity and economic activity. While the federal government has made aid available to Puerto Rico, there can be no assurance that such aid
will continue in the amounts necessary to offset the adverse impacts from Hurricane Maria in their entirety. In addition, the necessary and greater involvement of the federal government, through its actions to deliver disaster relief and other
support services, in addition to the evolving role of the Financial Oversight and Management Board for Puerto Rico (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 Ricos long term recovery prospects. In this
event, losses at National on select Puerto Rico exposures could increase materially.
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 other
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 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 cash to meet its obligations.
Zohar and RMBS Recoveries
Payment of a claim in November of 2015 on MBIA Corp.s policy insuring the
class
A-1
and
A-2
notes issued by Zohar CDO
2003-1,
Limited (Zohar I) and satisfying the claim on an insurance policy
it had written insuring certain notes issued by Zohar II
2005-1,
Limited (Zohar II) in 2017, 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 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 April 30, 2018, the debtor funds in
the Zohar Funds Bankruptcy Cases filed a motion to approve a settlement (the Zohar Bankruptcy Settlement Motion) which, if granted, would establish a process by which the debtor funds, through an independent director and a chief
restructuring officer, would work with the original sponsor of the funds to monetize the assets of the debtor funds and repay creditors, including MBIA Corp. However, 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 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 collections and recoveries are uncertain.
Refer to Note 5: Loss and Loss Adjustment Expense Reserves for
additional information about MBIA Corp.s recoveries.
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 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 Corporations policyholders. The determination to commence such a proceeding or take other such actions is within the exclusive control of the NYSDFS.
7
MBIA Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 1: Business Developments and Risks and
Uncertainties (continued)
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. or result in a liquidation or similar proceeding of MBIA Mexico. 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.
Corporate Liquidity
Based on the Companys projections of Nationals 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 which could be triggered by deterioration in the performance of
invested assets, interruption of or reduction in dividends or tax payments received from operating subsidiaries, 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 also insured by MBIA Corp. could result in claims on MBIA Corp.
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 Companys Annual Report on Form
10-K
for the year ended December 31, 2017. The following significant accounting policies provide an update
to those included in the Companys 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, 2017. 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 Companys
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, 2018 may not be indicative of the results that may be expected
for the year ending December 31, 2018. The December 31, 2017 consolidated balance sheet was derived from audited financial statements, but does not include all disclosures required by GAAP for annual periods. Certain amounts have been
reclassified in the prior years financial statements to conform to the current presentation. This includes a change in the classification of certain cash receipts and cash payments on the Companys consolidated statement of cash flows as
required under Accounting Standards Update (ASU)
2016-15,
Statement of Cash Flows (Topic 230). This classification change effected Interest paid, net of interest converted to
principal, in operating cash flows, and Principal paydowns of investment agreements and Principal paydowns of medium-term notes, in financing cash flows, on the Companys consolidated statement of cash flows for
the prior period. In addition, the Company revised a disclosure for the three months ended March 31, 2017 to correct an error related to variable interest entities (VIE or VIEs) notes for which the fair value option was
elected. Refer to the Fair Value Option section of Note 6: Fair Value of Financial Instruments for additional information about this disclosure revision. Such reclassifications and revision did not materially impact total
revenues, expenses, assets, liabilities, shareholders equity, operating cash flows, investing cash flows, or financing cash flows for all periods presented.
8
MBIA Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 3: Recent Accounting Pronouncements
Recently Adopted Accounting Standards
Revenue from
Contracts with Customers (Topic 606) (ASU
2014-09)
and
Deferral of the Effective Date
(ASU
2015-14)
In May of 2014, the Financial Accounting Standards Board (FASB) issued ASU
2014-09,
Revenue from Contracts
with Customers (Topic 606). ASU
2014-09
amends the accounting guidance for recognizing revenue for the transfer of goods or services from contracts with customers unless those contracts are within the
scope of other accounting standards. ASU
2014-09
does not apply to financial guarantee insurance contracts within the scope of Topic 944, Financial Services Insurance. In August of 2015, the
FASB issued ASU
2015-14,
Revenue from Contracts with Customers (Topic 606) Deferral of the Effective Date. ASU
2015-14
defers the effective date of
ASU
2014-09
to interim and annual periods beginning January 1, 2018, and is applied on a retrospective or modified retrospective basis. The Company adopted ASU
2014-09
in the first quarter of 2018 and the adoption of ASU
2014-09
did not affect the Companys consolidated financial statements.
Financial Instruments-Overall (Subtopic
825-10):
Recognition and Measurement of Financial Assets and Financial
Liabilities (ASU
2016-01)
In January of 2016, the FASB issued ASU
2016-01,
Financial Instruments-Overall (Subtopic
825-10):
Recognition and Measurement of Financial Assets and Financial Liabilities. ASU
2016-01
requires certain equity investments other than those accounted for under the equity method of accounting or result in consolidation of the investee to be measured at fair value with changes in fair value
recognized in net income, and permits an entity to measure equity investments that do not have readily determinable fair values at cost less any impairment plus or minus adjustments for certain changes in observable prices. An entity is also
required to evaluate the need for a valuation allowance on a deferred tax asset related to
available-for-sale
(AFS) debt securities in combination with the
entitys other deferred tax assets. ASU
2016-01
requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability that results from a
change in the instrument-specific credit risk for financial liabilities that the entity has elected to measure at fair value in accordance with the fair value option for financial instruments. ASU
2016-01
was
effective for interim and annual periods beginning January 1, 2018. As such, the Company reclassed a loss of $162 million from retained earnings to accumulated other comprehensive income (AOCI) related to the
instrument-specific credit risk portion of financial liabilities measured at fair value in accordance with the fair value option. In addition, the Company reclassed net unrealized gains of $2 million from AOCI to retained earnings related to
equity investments. As of March 31, 2018 and December 31, 2017, the Company had a full valuation allowance against its deferred tax asset.
Income Statement Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (ASU
2018-02)
In February of 2018, the FASB issued ASU
2018-02,
Income
Statement Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. ASU
2018-02
permits, but does not require, the
reclassification of the income tax effects of the Tax Cuts and Jobs Act (the Act) from AOCI to retained earnings. ASU
2018-02
is effective for interim and annual periods beginning after
December 15, 2018. Early adoption of ASU
2018-02
is permitted and is applied in the period of adoption or retroactively to each period in which the effect of the change in the U.S. federal corporate
income tax rate in the Act is recognized. The Company adopted ASU
2018-02
in the first quarter of 2018. As such, the Company reclassed income taxes of $3 million from AOCI to retained earnings. The
Companys accounting policy related to releasing income tax effects that are lodged in AOCI is on a portfolio approach basis.
The Company has not
adopted any other new accounting pronouncements that had a material impact on its consolidated financial statements.
9
MBIA Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 3: Recent Accounting Pronouncements (continued)
Recent Accounting Developments
Leases (Topic 842) (ASU
2016-02)
In February of 2016, the FASB issued
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. ASU
2016-02
is effective for interim and annual periods beginning
January 1, 2019 with early adoption permitted, and is applied on a modified retrospective basis. The adoption of ASU
2016-02
is not expected to materially impact the Companys consolidated financial
statements.
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 managements 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 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.
Note 4: Variable Interest Entities
Through MBIAs 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 SPEs 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 entitys 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 entitys 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.
10
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 entitys 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.
Nonconsolidated VIEs
The following tables present the total assets of nonconsolidated VIEs in which the Company holds a variable interest as of March 31, 2018 and December 31,
2017, through its insurance operations. The following tables also present the Companys maximum exposure to loss for nonconsolidated VIEs and carrying values of the assets and liabilities for its interests in these VIEs as of March 31,
2018 and December 31, 2017. The Company has aggregated nonconsolidated VIEs based on the underlying credit exposure of the insured obligation. The nature of the Companys variable interests in nonconsolidated VIEs is related to financial
guarantees, CDS contracts and any investments in obligations issued by nonconsolidated VIEs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
|
|
|
|
|
|
|
|
Carrying Value of Assets
|
|
|
Carrying Value of Liabilities
|
|
In millions
|
|
VIE
Assets
|
|
|
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
|
|
$
|
6,783
|
|
|
$
|
3,573
|
|
|
$
|
20
|
|
|
$
|
22
|
|
|
$
|
159
|
|
|
$
|
20
|
|
|
$
|
379
|
|
Mortgage-backed commercial
|
|
|
205
|
|
|
|
82
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Consumer asset-backed
|
|
|
5,089
|
|
|
|
926
|
|
|
|
-
|
|
|
|
3
|
|
|
|
1
|
|
|
|
3
|
|
|
|
10
|
|
Corporate asset-backed
|
|
|
2,260
|
|
|
|
1,526
|
|
|
|
-
|
|
|
|
11
|
|
|
|
-
|
|
|
|
12
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total global structured finance
|
|
|
14,337
|
|
|
|
6,107
|
|
|
|
20
|
|
|
|
36
|
|
|
|
160
|
|
|
|
35
|
|
|
|
389
|
|
Global public finance
|
|
|
16,065
|
|
|
|
2,493
|
|
|
|
-
|
|
|
|
10
|
|
|
|
-
|
|
|
|
13
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total insurance
|
|
$
|
30,402
|
|
|
$
|
8,600
|
|
|
$
|
20
|
|
|
$
|
46
|
|
|
$
|
160
|
|
|
$
|
48
|
|
|
$
|
389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) -
|
Reported within Investments on MBIAs consolidated balance sheets.
|
(2) -
|
Reported within Premiums receivable on MBIAs consolidated balance sheets.
|
(3) -
|
Reported within Insurance loss recoverable on MBIAs consolidated balance sheets.
|
(4) -
|
Reported within Unearned premium revenue on MBIAs consolidated balance sheets.
|
(5) -
|
Reported within Loss and loss adjustment expense reserves on MBIAs consolidated balance sheets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
Carrying Value of Assets
|
|
|
Carrying Value of Liabilities
|
|
In millions
|
|
VIE
Assets
|
|
|
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
|
|
$
|
7,295
|
|
|
$
|
3,741
|
|
|
$
|
19
|
|
|
$
|
22
|
|
|
$
|
172
|
|
|
$
|
20
|
|
|
$
|
396
|
|
Mortgage-backed commercial
|
|
|
216
|
|
|
|
94
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Consumer asset-backed
|
|
|
5,010
|
|
|
|
981
|
|
|
|
-
|
|
|
|
4
|
|
|
|
1
|
|
|
|
3
|
|
|
|
10
|
|
Corporate asset-backed
|
|
|
2,418
|
|
|
|
1,645
|
|
|
|
-
|
|
|
|
13
|
|
|
|
-
|
|
|
|
14
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total global structured finance
|
|
|
14,939
|
|
|
|
6,461
|
|
|
|
19
|
|
|
|
39
|
|
|
|
173
|
|
|
|
37
|
|
|
|
406
|
|
Global public finance
|
|
|
15,568
|
|
|
|
2,524
|
|
|
|
-
|
|
|
|
10
|
|
|
|
-
|
|
|
|
14
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total insurance
|
|
$
|
30,507
|
|
|
$
|
8,985
|
|
|
$
|
19
|
|
|
$
|
49
|
|
|
$
|
173
|
|
|
$
|
51
|
|
|
$
|
406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) -
|
Reported within Investments on MBIAs consolidated balance sheets.
|
(2) -
|
Reported within Premiums receivable on MBIAs consolidated balance sheets.
|
(3) -
|
Reported within Insurance loss recoverable on MBIAs consolidated balance sheets.
|
(4) -
|
Reported within Unearned premium revenue on MBIAs consolidated balance sheets.
|
(5) -
|
Reported within Loss and loss adjustment expense reserves on MBIAs consolidated balance sheets.
|
11
MBIA Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 4: Variable Interest Entities (continued)
The maximum exposure to loss as a result of MBIAs 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.
Consolidated VIEs
The carrying amounts of assets and
liabilities of consolidated VIEs were $3.2 billion and $2.3 billion, respectively, as of March 31, 2018 and December 31, 2017. 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 Companys 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. No
additional VIEs were consolidated during the three months ended March 31, 2018. The Zohar Funds Bankruptcy Cases have as debtors two consolidated VIEs. As of March 31, 2018 and December 31, 2017, the assets of these VIEs are included
in Loans receivable at fair value under Assets of consolidated variable interest entities on the Companys consolidated balance sheets, and comprise a significant portion of the amount reported for each period. The
liabilities of these VIEs are eliminated in consolidation. Refer to Note 1: Business Developments and Risks and Uncertainties for further information about the Zohar Funds Bankruptcy Cases.
Holders of insured obligations of issuer-sponsored VIEs related to the Companys international and structured finance insurance segment do not have recourse
to the general assets of MBIA. 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 Companys exposure
to consolidated VIEs is limited to the credit protection provided on insured obligations and any additional variable interests held by MBIA.
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, 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 the Puerto Rico Oversight, Management and Economic Stability Act (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 Companys 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.
12
MBIA Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 5: Loss and Loss Adjustment Expense Reserves
(continued)
On September 20, 2017, Hurricane Maria made landfall in Puerto Rico as a Category 4 hurricane resulting in
catastrophic damage to much of the islands basic infrastructure, including its electrical transmission and distribution grid, telecommunications network, housing, roads, bridges and water and sewer systems. On September 21, 2017, the
President of the United States approved a Major Disaster Declaration for Puerto Rico and FEMA made federal disaster assistance available to Puerto Rico to supplement its recovery efforts. Hurricane Marias impact on Puerto Rico will likely also
impact its ability to both repay its legacy indebtedness and participate in ongoing debt restructuring negotiations. The physical damage and resultant lost economic activity may exceed the collective aid Puerto Rico receives from private insurance,
relief from FEMA and other federal agencies and programs. Economic activity in Puerto Rico may not return to
pre-hurricane
levels and Puerto Ricos recovery could be more shallow and protracted than that
experienced by other similarly affected governments, given Puerto Ricos prior constrained liquidity and economic activity. While the federal government has made aid available to Puerto Rico, there can be no assurance that such aid will
continue in the amounts necessary to offset the adverse impacts from Hurricane Maria in their entirety. In addition, the necessary and greater involvement of the federal government, through its actions to deliver disaster relief and other support
services, in addition to the evolving 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 Ricos long term recovery prospects. In this event, losses at National on select Puerto Rico exposures could increase materially.
The Company monitors and analyzes these situations closely, however, the overall extent and duration of such events are uncertain.
International
and Structured Finance Insurance
The international and structured finance insurance segments 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 Companys 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 Companys insurance policies. In the absence of credit impairments on an insured credit derivative contract or the early termination of such contract at a loss, the cumulative unrealized
losses recorded from this contract should reverse before or at the maturity of the contract. As the Companys insured credit derivative has similar terms, conditions, risks, and economic profiles to its financial guarantee insurance policies,
the Company evaluates it for impairment, under statutory accounting principles, in the same way that it estimates loss and loss adjustment expense (LAE) for its financial guarantee policies. Refer to Note 8: Derivative
Instruments for a further discussion of the Companys use of derivatives and their impact on the Companys consolidated financial statements.
RMBS Case Basis Reserves (Financial Guarantees)
The Companys RMBS reserves and recoveries relate to
financial guarantee insurance policies, excluding those on consolidated VIEs. The Companys first-lien RMBS case basis reserves primarily relate to RMBS backed by alternative
A-paper
and subprime mortgage
loans. The Companys 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, 2018 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
Companys Annual Report on Form
10-K
for the year ended December 31, 2017, for additional information the Companys 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).
13
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 the insured second-lien RMBS securitizations.
Second-lien
Put-Back
Claims Related to Ineligible Loans
The Company
has settled the majority of the Companys
put-back
claims. Only its claims against Credit Suisse remain outstanding. The Companys settlement amounts have been consistent with the
put-back
recoveries that had been included in the Companys financial statements at the times preceding the settlements. The
put-back
contract claim remaining with Credit
Suisse is related to the inclusion of ineligible loans in the
2007-2
Home Equity Mortgage Trust securitization. Credit Suisse has challenged the Companys 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.
Based on the Companys
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, which totaled $436 million through
March 31, 2018. 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 transactions 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 Companys 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. MBIAs 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).
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.
14
MBIA Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 5: Loss and Loss Adjustment Expense Reserves
(continued)
As of March 31, 2018, the recoveries of Zohar I and Zohar II are included in Loans receivable at fair
value which are presented in Assets of consolidated variable interest entities on the Companys consolidated balance sheets.
On
March 11, 2018, the director of Zohar I and Zohar II commenced the Zohar Funds Bankruptcy Cases. On April 30, 2018, the debtor funds in the Zohar Funds Bankruptcy Cases filed the Zohar Bankruptcy Settlement Motion, which, if granted, would establish
a process by which the debtor funds, through an independent director and a chief restructuring officer, would work with the original sponsor of the funds to monetize the Zohar Assets and repay creditors, including MBIA Corp. There can be no
assurance, however, 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
its 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 New York Insurance Law and/or take such other actions as the NYSDFS may deem necessary to protect the interests of MBIA Insurance Corporations 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 Companys 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 Companys consolidated balance sheets as of March 31, 2018 and December 31, 2017 are presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2018
|
|
|
As of December 31, 2017
|
|
In millions
|
|
Balance Sheet Line Item
|
|
|
Balance Sheet Line Item
|
|
|
|
Insurance
loss
recoverable
|
|
|
Loan
repurchase
commitments
|
|
|
Loss
and LAE
reserves
|
|
|
Insurance
loss
recoverable
|
|
|
Loan
repurchase
commitments
|
|
|
Loss
and LAE
reserves
|
|
U.S. Public Finance Insurance
|
|
$
|
364
|
|
|
$
|
-
|
|
|
$
|
553
|
|
|
$
|
333
|
|
|
$
|
-
|
|
|
$
|
512
|
|
|
|
|
|
|
|
International and Structured Finance Insurance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before VIE eliminations
|
|
|
1,466
|
|
|
|
407
|
|
|
|
694
|
|
|
|
1,478
|
|
|
|
407
|
|
|
|
710
|
|
VIE eliminations
|
|
|
(1,300)
|
|
|
|
-
|
|
|
|
(241)
|
|
|
|
(1,300)
|
|
|
|
-
|
|
|
|
(243)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total international and structured finance insurance
|
|
|
166
|
|
|
|
407
|
|
|
|
453
|
|
|
|
178
|
|
|
|
407
|
|
|
|
467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
530
|
|
|
$
|
407
|
|
|
$
|
1,006
|
|
|
$
|
511
|
|
|
$
|
407
|
|
|
$
|
979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in Loss and LAE Reserves
The following table presents changes in the Companys loss and LAE reserves for the three months ended March 31, 2018. 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 Companys
consolidated statements of operations. As of March 31, 2018, the weighted average risk-free rate used to discount the Companys loss reserves (claim liability) was 2.67%. LAE reserves are generally expected to be settled within a
one-year
period and are not discounted. As of March 31, 2018 and December 31, 2017, the Companys gross loss and LAE reserves included $74 million and $66 million, respectively, related to
LAE.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
|
|
Changes in Loss and LAE Reserves for the Three Months Ended March 31, 2018
|
|
|
|
|
Gross Loss
and LAE
Reserves as of
December 31,
2017
|
|
|
Loss
Payments
|
|
|
Accretion
of
Claim
Liability
Discount
|
|
|
Changes in
Discount
Rates
|
|
|
Changes in
Assumptions
|
|
|
Changes in
Unearned
Premium
Revenue
|
|
|
Changes in
LAE
Reserves
|
|
|
Other
|
|
|
Gross Loss
and LAE
Reserves as of
March 31,
2018
|
|
$
|
979
|
|
|
$
|
(81)
|
|
|
$
|
5
|
|
|
$
|
11
|
|
|
$
|
79
|
|
|
$
|
2
|
|
|
$
|
8
|
|
|
$
|
3
|
|
|
$
|
1,006
|
|
15
MBIA Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 5: Loss and Loss Adjustment Expense Reserves
(continued)
The increase in the Companys gross loss and LAE reserves during the three months ended March 31, 2018
was primarily related to changes in assumptions on certain Puerto Rico exposures partially offset by actual loss payments on certain Puerto Rico exposures and RMBS transactions.
Changes in Insurance Loss Recoverable and Recoveries on Unpaid Losses
Current
period changes in the Companys 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
Companys insurance loss recoverable and changes in recoveries on unpaid losses reported within the Companys claim liability for the three months ended March 31, 2018. 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 Companys consolidated statements of operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in Insurance Loss Recoverable and Recoveries on Unpaid Losses for the
Three Months Ended March 31,
2018
|
|
|
|
|
In millions
|
|
Gross
Reserve as of
December 31,
2017
|
|
|
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,
2018
|
|
Insurance loss recoverable
|
|
$
|
511
|
|
|
$
|
(14)
|
|
|
$
|
3
|
|
|
$
|
(15)
|
|
|
$
|
44
|
(2)
|
|
$
|
-
|
|
|
$
|
1
|
|
|
$
|
530
|
|
Recoveries on unpaid losses
(3)
|
|
|
35
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1)
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
546
|
|
|
$
|
(14)
|
|
|
$
|
3
|
|
|
$
|
(16)
|
|
|
$
|
44
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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) -
|
As of March 31, 2018 and December 31, 2017, excludes Puerto Rico recoveries which have been netted against reserves.
|
The increase in the Companys insurance loss recoverable reflected in the preceding table was primarily due to actual loss payments on certain Puerto Rico
credits partially offset by excess spread collections on certain RMBS transactions.
Loss and LAE Activity
The Companys financial guarantee insurance losses and LAE (excluding insured credit derivatives and consolidated VIEs), net of reinsurance for the three
months ended March 31, 2018 and 2017 are presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
In millions
|
|
2018
|
|
|
2017
|
|
U.S. Public Finance Insurance Segment
|
|
$
|
77
|
|
|
$
|
11
|
|
|
|
|
International and Structured Finance Insurance Segment:
|
|
|
|
|
|
|
|
|
Second-lien RMBS
|
|
|
2
|
|
|
|
23
|
|
First-lien RMBS
|
|
|
(12)
|
|
|
|
57
|
|
CDOs
|
|
|
5
|
|
|
|
2
|
|
Other
(1)
|
|
|
-
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
Losses and LAE expense (benefit)
|
|
$
|
72
|
|
|
$
|
94
|
|
|
|
|
|
|
|
|
|
|
(1) - Includes non-U.S.
|
public finance and other issues.
|
For three months ended
March 31, 2018, losses and LAE primarily related to increases in actual and expected payments on Puerto Rico exposures.
For three months ended
March 31, 2017, losses and LAE primarily related to increases in expected payments on insured RMBS transactions and decreases in projected collections from excess spread within insured RMBS securitizations.
Costs associated with remediating insured obligations assigned to the Companys surveillance categories are recorded as LAE and included in Losses and
loss adjustment expenses on the Companys consolidated statements of operations. For the three months ended March 31, 2018 and 2017, gross LAE related to remediating insured obligations were $13 million and $12 million,
respectively.
16
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 MBIAs surveillance categories as of March 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Surveillance Categories
|
|
$ in millions
|
|
Caution
List
Low
|
|
|
Caution
List
Medium
|
|
|
Caution
List
High
|
|
|
Classified
List
|
|
|
Total
|
|
Number of policies
|
|
|
72
|
|
|
|
19
|
|
|
|
1
|
|
|
|
275
|
|
|
|
367
|
|
Number of issues
(1)
|
|
|
18
|
|
|
|
5
|
|
|
|
1
|
|
|
|
115
|
|
|
|
139
|
|
Remaining weighted average contract period (in years)
|
|
|
7.0
|
|
|
|
8.5
|
|
|
|
8.4
|
|
|
|
9.6
|
|
|
|
8.8
|
|
Gross insured contractual payments outstanding:
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
|
|
$
|
2,371
|
|
|
$
|
159
|
|
|
$
|
104
|
|
|
$
|
5,983
|
|
|
$
|
8,617
|
|
Interest
|
|
|
2,451
|
|
|
|
93
|
|
|
|
46
|
|
|
|
5,658
|
|
|
|
8,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,822
|
|
|
$
|
252
|
|
|
$
|
150
|
|
|
$
|
11,641
|
|
|
$
|
16,865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Claim Liability
(3)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,107
|
|
|
$
|
1,107
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Potential Recoveries
(4)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
878
|
|
|
|
878
|
|
Discount, net
(5)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(248)
|
|
|
|
(248)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net claim liability (recoverable)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
477
|
|
|
$
|
477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned premium revenue
|
|
$
|
7
|
|
|
$
|
1
|
|
|
$
|
3
|
|
|
$
|
75
|
|
|
$
|
86
|
|
(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.
|
The following table provides information about the financial guarantees and related claim liability included in each of MBIAs surveillance categories as of December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Surveillance Categories
|
|
$ in millions
|
|
Caution
List
Low
|
|
|
Caution
List
Medium
|
|
|
Caution
List
High
|
|
|
Classified
List
|
|
|
Total
|
|
Number of policies
|
|
|
89
|
|
|
|
5
|
|
|
|
1
|
|
|
|
280
|
|
|
|
375
|
|
Number of issues
(1)
|
|
|
20
|
|
|
|
4
|
|
|
|
1
|
|
|
|
119
|
|
|
|
144
|
|
Remaining weighted average contract period (in years)
|
|
|
7.4
|
|
|
|
4.3
|
|
|
|
8.7
|
|
|
|
9.7
|
|
|
|
8.9
|
|
Gross insured contractual payments outstanding:
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
|
|
$
|
2,764
|
|
|
$
|
13
|
|
|
$
|
104
|
|
|
$
|
6,083
|
|
|
$
|
8,964
|
|
Interest
|
|
|
2,676
|
|
|
|
3
|
|
|
|
46
|
|
|
|
5,756
|
|
|
|
8,481
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,440
|
|
|
$
|
16
|
|
|
$
|
150
|
|
|
$
|
11,839
|
|
|
$
|
17,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Claim Liability
(3)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,082
|
|
|
$
|
1,082
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Potential Recoveries
(4)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
782
|
|
|
|
782
|
|
Discount, net
(5)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(178)
|
|
|
|
(178)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net claim liability (recoverable)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
478
|
|
|
$
|
478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned premium revenue
|
|
$
|
9
|
|
|
$
|
-
|
|
|
$
|
4
|
|
|
$
|
77
|
|
|
$
|
90
|
|
(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.
|
17
MBIA Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 5: Loss and Loss Adjustment Expense Reserves
(continued)
As of March 31, 2018 and December 31, 2017, the gross claim liability and gross potential recoveries
primarily related to insured RMBS transactions as well as certain Puerto Rico exposures. As of March 31, 2018 and December 31, 2017, these potential recoveries exclude the recoveries of Zohar I and Zohar II that are included in Loans
receivable at fair value which are presented in Assets of consolidated variable interest entities on the Companys consolidated balance sheets.
The Companys recoveries have been, and remain based on either salvage rights, the rights conferred to MBIA through the transactional documents (inclusive of the insurance agreement), or subrogation rights
embedded within financial guarantee insurance policies. Expected salvage and subrogation recoveries, as well as recoveries from other remediation efforts, reduce the Companys claim liability. Once a claim payment has been made, the claim
liability has been satisfied and MBIAs right to recovery is no longer considered an offset to future expected claim payments, it is recorded as a salvage asset. The amount of recoveries recorded by the Company is limited to paid claims plus
the present value of projected estimated future claim payments. As claim payments are made, the recorded amount of potential recoveries may exceed the remaining amount of the claim liability for a given policy. The gross claim liability and gross
potential recoveries reflect the elimination of claim liabilities and potential recoveries related to VIEs consolidated by the Company. As of March 31, 2018 and December 31, 2017, reinsurance recoverable on paid and unpaid losses was
$20 million and $17 million, respectively, and was included in Other assets on the Companys 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 Companys 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 Companys investment portfolio
as of March 31, 2018 or December 31, 2017. 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 Companys valuation committee.
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, MTNs, investment agreements, debt issued by consolidated VIEs and warrants. 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 Companys or a third-partys 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 Companys derivative liabilities are primarily interest rate swaps and an insured credit derivative. The Companys 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.
18
MBIA Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 6: Fair Value of Financial Instruments
(continued)
Internal Review Process
All significant financial assets and liabilities are reviewed by the valuation committee to ensure compliance with the Companys 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
team members with relevant experience in the financial instruments their committee is responsible for. The committee documents its agreement with the fair value measurements reported in the Companys consolidated financial statements.
Valuation Techniques
Valuation
techniques for financial instruments measured at fair value are described below.
Fixed-Maturity Securities (including short-term investments) Held
as
Available-For-Sale,
Investments Carried at Fair Value and Investments Pledged as Collateral
These investments include investments in U.S. Treasury and government agencies, state and municipal bonds, foreign governments, corporate obligations, mortgage-backed securities (MBS), asset-backed
securities (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.
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, foreign government, money market securities 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.
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 held by consolidated VIEs consisting of residential mortgage and corporate 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. Fair values of corporate loans,
which are to privately held companies, are based on methodologies that generally use comparable EBITDA multiples and the most current available EBITDAs. Loans receivable at fair value are categorized in Level 3 of the fair value hierarchy.
19
MBIA Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 6: Fair Value of Financial Instruments
(continued)
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
VIEs consolidated by the Company
have entered into derivative instruments consisting of cross currency swaps. Cross currency swaps are entered into to manage the variability in cash flows resulting from fluctuations in foreign currency rates. The fair value of VIE derivatives 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 Companys exposure on its financial guarantee policies.
The right to receive reimbursement payments is based on the value of the Companys 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 with changes in fair value reflected in earnings. 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.
DerivativesInsurance
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.
20
MBIA Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 6: Fair Value of Financial Instruments
(continued)
Valuation Model Overview
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.
The Company
also has other derivative liabilities as a result of a commutation occurring 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
Stock warrants issued by the Company are
valued using the Black-Scholes model and are recorded at fair value. Inputs into the warrant valuation include the Companys stock price, the strike price of the warrant, time to expiration, a volatility parameter, interest rates, and dividend
data. As all significant inputs are market-based and observable, warrants are categorized in Level 2 of the fair value hierarchy.
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, 2018 and December 31, 2017.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
|
Fair Value as of
March 31, 2018
|
|
|
Valuation Techniques
|
|
Unobservable Input
|
|
|
Range
(Weighted Average)
|
|
Assets of consolidated VIEs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable at fair value
|
|
$
|
1,662
|
|
|
Market prices adjusted for financial guarantees provided to VIE obligations
|
|
|
Impact of financial
guarantee
(1)
|
|
|
|
-15% - 39% (-2%)
|
|
|
|
|
|
|
|
Multiples of EBITDA
|
|
|
Multiples
(2)
|
|
|
|
|
|
Loan repurchase commitments
|
|
|
407
|
|
|
Discounted cash flow
|
|
|
Recovery
rates
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Breach
rates
(3)
|
|
|
|
|
|
Liabilities of consolidated VIEs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable interest entity notes
|
|
|
400
|
|
|
Market prices of VIE assets adjusted for financial guarantees provided
|
|
|
Impact of financial
guarantee
|
|
|
|
0% - 63% (37%)
|
|
Credit derivative liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CMBS
|
|
|
49
|
|
|
Direct Price Model
|
|
|
Nonperformance
risk
|
|
|
|
54% - 54% (54%)
|
|
Other derivative liabilities
|
|
|
4
|
|
|
Discounted cash flow
|
|
|
Cash flows
|
|
|
|
$0 - $49 ($25)
(4)
|
|
(1) -
|
Negative percentage represents financial guarantee policies in a receivable position.
|
(2) -
|
Unobservable inputs are primarily based on comparable companies EBITDA multiples.
|
(3) -
|
Recovery rates and breach rates include estimates about potential variations in the outcome of litigation with a counterparty.
|
(4) -
|
Midpoint of cash flows are used for the weighted average.
|
21
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, 2017
|
|
|
Valuation Techniques
|
|
|
Unobservable Input
|
|
|
Range
(Weighted Average)
|
|
Assets of consolidated VIEs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable at fair value
|
|
$
|
1,679
|
|
|
|
Market prices adjusted for
financial guarantees provided to
VIE obligations
|
|
|
|
Impact of
financial
guarantee
(1)
|
|
|
|
-25% - 35% (-2%)
|
|
|
|
|
|
|
|
|
Multiples of EBITDA
|
|
|
|
Multiples
(2)
|
|
|
|
|
|
Loan repurchase commitments
|
|
|
407
|
|
|
|
Discounted cash flow
|
|
|
|
Recovery
rates
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Breach
rates
(3)
|
|
|
|
|
|
Liabilities of consolidated VIEs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable interest entity notes
|
|
|
406
|
|
|
|
Market prices of VIE assets
adjusted for financial
guarantees provided
|
|
|
|
Impact of
financial
guarantee
|
|
|
|
0% - 60% (36%)
|
|
Credit derivative liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CMBS
|
|
|
63
|
|
|
|
Direct Price Model
|
|
|
|
Nonperformance
risk
|
|
|
|
54% - 54% (54%)
|
|
Other derivative liabilities
|
|
|
4
|
|
|
|
Discounted cash flow
|
|
|
|
Cash flows
|
|
|
|
$0 - $49 ($25)
(4)
|
|
(1) -
|
Negative percentage represents financial guarantee policies in a receivable position.
|
(2) -
|
Unobservable inputs are primarily based on comparable companies EBITDA multiples.
|
(3) -
|
Recovery rates and breach rates include estimates about potential variations in the outcome of litigation with a counterparty.
|
(4) -
|
Midpoint of cash flows are used for the weighted average.
|
Sensitivity of Significant Unobservable Inputs
The
significant unobservable inputs used in the fair value measurement of the Companys loans receivable at fair value of consolidated VIEs are the impact of the financial guarantee and multiples. The fair value of loans receivable is calculated by
subtracting the value of the financial guarantee from the market value of VIE liabilities. The fair value of loans receivable also includes certain methodologies using multiples of EBITDA. 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. As the value of the financial guarantee provided by the Company under the insurance policy increases, there is a lower expected cash flow on the underlying
loans receivable of the VIE. This results in a lower fair value of the loans receivable in relation to the obligations of the VIE. Multiples are external factors that are considered when determining the fair values of corporate loans. These loans
are to privately held companies for which MBIA has limited information. Therefore, the Company uses multiples of EBITDA of comparable companies and any increase or decrease in these multiples would result in an increase or decrease in the fair
values of the loans, respectively.
The significant unobservable inputs used in the fair value measurement of the Companys 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 Companys 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 Companys 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.
22
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 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.
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 Companys assets (including short-term investments) and liabilities measured and reported at fair value on a
recurring basis as of March 31, 2018 and December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
March 31,
2018
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-maturity investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and government agency
|
|
$
|
897
|
|
|
$
|
94
|
|
|
$
|
-
|
|
|
$
|
991
|
|
State and municipal bonds
|
|
|
-
|
|
|
|
843
|
|
|
|
-
|
|
|
|
843
|
|
Foreign governments
|
|
|
-
|
|
|
|
10
|
|
|
|
-
|
|
|
|
10
|
|
Corporate obligations
|
|
|
-
|
|
|
|
1,651
|
|
|
|
-
|
|
|
|
1,651
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed agency
|
|
|
-
|
|
|
|
304
|
|
|
|
-
|
|
|
|
304
|
|
Residential mortgage-backed
non-agency
|
|
|
-
|
|
|
|
31
|
|
|
|
-
|
|
|
|
31
|
|
Commercial mortgage-backed
|
|
|
-
|
|
|
|
58
|
|
|
|
7
|
(1)
|
|
|
65
|
|
Asset-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized debt obligations
|
|
|
-
|
|
|
|
116
|
|
|
|
-
|
|
|
|
116
|
|
Other asset-backed
|
|
|
-
|
|
|
|
219
|
|
|
|
4
|
(1)
|
|
|
223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed-maturity investments
|
|
|
897
|
|
|
|
3,326
|
|
|
|
11
|
|
|
|
4,234
|
|
Money market securities
|
|
|
91
|
|
|
|
-
|
|
|
|
-
|
|
|
|
91
|
|
Perpetual debt and equity securities
|
|
|
26
|
|
|
|
37
|
|
|
|
-
|
|
|
|
63
|
|
Fixed-income fund
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
77
|
(2)
|
Cash and cash equivalents
|
|
|
120
|
|
|
|
-
|
|
|
|
-
|
|
|
|
120
|
|
Derivative assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-insured
derivative assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate derivatives
|
|
|
-
|
|
|
|
2
|
|
|
|
-
|
|
|
|
2
|
|
23
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
March 31,
2018
|
|
Assets of consolidated VIEs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate obligations
|
|
|
-
|
|
|
|
15
|
|
|
|
3
|
(1)
|
|
|
18
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed
non-agency
|
|
|
-
|
|
|
|
104
|
|
|
|
-
|
|
|
|
104
|
|
Commercial mortgage-backed
|
|
|
-
|
|
|
|
30
|
|
|
|
6
|
(1)
|
|
|
36
|
|
Asset-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized debt obligations
|
|
|
-
|
|
|
|
8
|
|
|
|
1
|
(1)
|
|
|
9
|
|
Other asset-backed
|
|
|
-
|
|
|
|
9
|
|
|
|
-
|
|
|
|
9
|
|
Cash
|
|
|
21
|
|
|
|
-
|
|
|
|
-
|
|
|
|
21
|
|
Loans receivable at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential loans receivable
|
|
|
-
|
|
|
|
-
|
|
|
|
737
|
|
|
|
737
|
|
Corporate loans receivable
|
|
|
-
|
|
|
|
-
|
|
|
|
925
|
|
|
|
925
|
|
Loan repurchase commitments
|
|
|
-
|
|
|
|
-
|
|
|
|
407
|
|
|
|
407
|
|
Other assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency derivatives
|
|
|
-
|
|
|
|
-
|
|
|
|
13
|
(1)
|
|
|
13
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
14
|
(1)
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,155
|
|
|
$
|
3,531
|
|
|
$
|
2,117
|
|
|
$
|
6,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medium-term notes
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
146
|
(1)
|
|
$
|
146
|
|
Derivative liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insured derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit derivatives
|
|
|
-
|
|
|
|
2
|
|
|
|
49
|
|
|
|
51
|
|
Non-insured
derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate derivatives
|
|
|
-
|
|
|
|
164
|
|
|
|
-
|
|
|
|
164
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
4
|
|
|
|
4
|
|
Other liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
-
|
|
|
|
8
|
|
|
|
-
|
|
|
|
8
|
|
Other payable
|
|
|
-
|
|
|
|
-
|
|
|
|
5
|
(1)
|
|
|
5
|
|
Liabilities of consolidated VIEs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable interest entity notes
|
|
|
-
|
|
|
|
631
|
|
|
|
400
|
|
|
|
1,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
-
|
|
|
$
|
805
|
|
|
$
|
604
|
|
|
$
|
1,409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) -
|
Unobservable inputs are either not developed by the Company or do not significantly impact the overall fair values of the aggregate financial assets and liabilities.
|
(2) -
|
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.
|
24
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,
2017
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-maturity investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and government agency
|
|
$
|
1,256
|
|
|
$
|
96
|
|
|
$
|
-
|
|
|
$
|
1,352
|
|
State and municipal bonds
|
|
|
-
|
|
|
|
858
|
|
|
|
-
|
|
|
|
858
|
|
Foreign governments
|
|
|
-
|
|
|
|
10
|
|
|
|
-
|
|
|
|
10
|
|
Corporate obligations
|
|
|
-
|
|
|
|
1,338
|
|
|
|
2
|
(1)
|
|
|
1,340
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed agency
|
|
|
-
|
|
|
|
368
|
|
|
|
-
|
|
|
|
368
|
|
Residential mortgage-backed
non-agency
|
|
|
-
|
|
|
|
32
|
|
|
|
-
|
|
|
|
32
|
|
Commercial mortgage-backed
|
|
|
-
|
|
|
|
60
|
|
|
|
7
|
(1)
|
|
|
67
|
|
Asset-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized debt obligations
|
|
|
-
|
|
|
|
118
|
|
|
|
-
|
|
|
|
118
|
|
Other asset-backed
|
|
|
-
|
|
|
|
178
|
|
|
|
5
|
(1)
|
|
|
183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed-maturity investments
|
|
|
1,256
|
|
|
|
3,058
|
|
|
|
14
|
|
|
|
4,328
|
|
Money market securities
|
|
|
180
|
|
|
|
-
|
|
|
|
-
|
|
|
|
180
|
|
Perpetual debt and equity securities
|
|
|
26
|
|
|
|
37
|
|
|
|
-
|
|
|
|
63
|
|
Fixed-income fund
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
82
|
(2)
|
Cash and cash equivalents
|
|
|
122
|
|
|
|
-
|
|
|
|
-
|
|
|
|
122
|
|
Derivative assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-insured
derivative assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate derivatives
|
|
|
-
|
|
|
|
2
|
|
|
|
-
|
|
|
|
2
|
|
25
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,
2017
|
|
Assets of consolidated VIEs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate obligations
|
|
|
-
|
|
|
|
19
|
|
|
|
-
|
|
|
|
19
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed
non-agency
|
|
|
-
|
|
|
|
108
|
|
|
|
-
|
|
|
|
108
|
|
Commercial mortgage-backed
|
|
|
-
|
|
|
|
30
|
|
|
|
6
|
(1)
|
|
|
36
|
|
Asset-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized debt obligations
|
|
|
-
|
|
|
|
8
|
|
|
|
1
|
(1)
|
|
|
9
|
|
Other asset-backed
|
|
|
-
|
|
|
|
10
|
|
|
|
-
|
|
|
|
10
|
|
Cash
|
|
|
24
|
|
|
|
-
|
|
|
|
-
|
|
|
|
24
|
|
Loans receivable at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential loans receivable
|
|
|
-
|
|
|
|
-
|
|
|
|
759
|
|
|
|
759
|
|
Corporate loans receivable
|
|
|
-
|
|
|
|
-
|
|
|
|
920
|
|
|
|
920
|
|
Loan repurchase commitments
|
|
|
-
|
|
|
|
-
|
|
|
|
407
|
|
|
|
407
|
|
Other assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency derivatives
|
|
|
-
|
|
|
|
-
|
|
|
|
19
|
(1)
|
|
|
19
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
14
|
(1)
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,608
|
|
|
$
|
3,272
|
|
|
$
|
2,140
|
|
|
$
|
7,102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medium-term notes
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
115
|
(1)
|
|
$
|
115
|
|
Derivative liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insured derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit derivatives
|
|
|
-
|
|
|
|
2
|
|
|
|
63
|
|
|
|
65
|
|
Non-insured
derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate derivatives
|
|
|
-
|
|
|
|
193
|
|
|
|
-
|
|
|
|
193
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
4
|
|
|
|
4
|
|
Other liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
-
|
|
|
|
6
|
|
|
|
-
|
|
|
|
6
|
|
Other payable
|
|
|
-
|
|
|
|
-
|
|
|
|
7
|
(1)
|
|
|
7
|
|
Liabilities of consolidated VIEs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable interest entity notes
|
|
|
-
|
|
|
|
663
|
|
|
|
406
|
|
|
|
1,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
-
|
|
|
$
|
864
|
|
|
$
|
595
|
|
|
$
|
1,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) -
|
Unobservable inputs are either not developed by the Company or do not significantly impact the overall fair values of the aggregate financial assets and liabilities.
|
(2) -
|
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, 2018 and December 31, 2017 represented approximately 31% and 30%,
respectively, of total assets measured at fair value. Level 3 liabilities at fair value as of March 31, 2018 and December 31, 2017 represented approximately 43% and 41%, respectively, of total liabilities measured at fair value.
26
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 Companys assets and liabilities that
are disclosed at fair value but not reported at fair value on the Companys consolidated balance sheets as of March 31, 2018 and December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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,
2018
|
|
|
Carry Value
Balance as of
March 31,
2018
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other investments
|
|
$
|
-
|
|
|
$
|
1
|
|
|
$
|
-
|
|
|
$
|
1
|
|
|
$
|
1
|
|
Assets of consolidated VIEs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
held-to-maturity
|
|
|
-
|
|
|
|
-
|
|
|
|
901
|
|
|
|
901
|
|
|
|
890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
-
|
|
|
$
|
1
|
|
|
$
|
901
|
|
|
$
|
902
|
|
|
$
|
891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
-
|
|
|
$
|
929
|
|
|
$
|
-
|
|
|
$
|
929
|
|
|
$
|
2,154
|
|
Medium-term notes
|
|
|
-
|
|
|
|
-
|
|
|
|
408
|
|
|
|
408
|
|
|
|
644
|
|
Investment agreements
|
|
|
-
|
|
|
|
-
|
|
|
|
411
|
|
|
|
411
|
|
|
|
330
|
|
Liabilities of consolidated VIEs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable interest entity notes
|
|
|
-
|
|
|
|
354
|
|
|
|
901
|
|
|
|
1,255
|
|
|
|
1,229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
-
|
|
|
$
|
1,283
|
|
|
$
|
1,720
|
|
|
$
|
3,003
|
|
|
$
|
4,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Guarantees:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,630
|
|
|
$
|
1,630
|
|
|
$
|
1,188
|
|
Ceded
|
|
|
-
|
|
|
|
-
|
|
|
|
56
|
|
|
|
56
|
|
|
|
39
|
|
|
|
|
|
|
|
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,
2017
|
|
|
Carry Value
Balance as of
December 31,
2017
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other investments
|
|
$
|
-
|
|
|
$
|
2
|
|
|
$
|
-
|
|
|
$
|
2
|
|
|
$
|
2
|
|
Assets of consolidated VIEs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
held-to-maturity
|
|
|
-
|
|
|
|
-
|
|
|
|
916
|
|
|
|
916
|
|
|
|
890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
-
|
|
|
$
|
2
|
|
|
$
|
916
|
|
|
$
|
918
|
|
|
$
|
892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
-
|
|
|
$
|
1,002
|
|
|
$
|
-
|
|
|
$
|
1,002
|
|
|
$
|
2,121
|
|
Medium-term notes
|
|
|
-
|
|
|
|
-
|
|
|
|
406
|
|
|
|
406
|
|
|
|
650
|
|
Investment agreements
|
|
|
-
|
|
|
|
-
|
|
|
|
433
|
|
|
|
433
|
|
|
|
337
|
|
Liabilities of consolidated VIEs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable interest entity notes
|
|
|
-
|
|
|
|
352
|
|
|
|
916
|
|
|
|
1,268
|
|
|
|
1,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
-
|
|
|
$
|
1,354
|
|
|
$
|
1,755
|
|
|
$
|
3,109
|
|
|
$
|
4,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Guarantees:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,785
|
|
|
$
|
1,785
|
|
|
$
|
1,220
|
|
Ceded
|
|
|
-
|
|
|
|
-
|
|
|
|
61
|
|
|
|
61
|
|
|
|
39
|
|
27
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, 2018 and 2017:
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 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,
2018
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medium-term notes
|
|
$
|
115
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
25
|
|
|
$
|
6
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
146
|
|
|
$
|
6
|
|
Credit derivatives
|
|
|
63
|
|
|
|
19
|
|
|
|
(14)
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(19)
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
49
|
|
|
|
(14)
|
|
Other derivatives
|
|
|
4
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4
|
|
|
|
-
|
|
Other payable
|
|
|
7
|
|
|
|
-
|
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4)
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5
|
|
|
|
2
|
|
Liabilities of consolidated VIEs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VIE notes
|
|
|
406
|
|
|
|
8
|
|
|
|
(3)
|
|
|
|
(8)
|
|
|
|
5
|
|
|
|
-
|
|
|
|
5
|
|
|
|
(13)
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
400
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
595
|
|
|
$
|
27
|
|
|
$
|
(15)
|
|
|
$
|
17
|
|
|
$
|
11
|
|
|
$
|
-
|
|
|
$
|
5
|
|
|
$
|
(36)
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
604
|
|
|
$
|
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) -
Transferred in and out at the end of the period.
28
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, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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,
2017
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate obligations
|
|
$
|
2
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(2)
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Collateralized debt obligations
|
|
|
15
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2)
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13
|
|
|
|
-
|
|
Other asset-backed
|
|
|
44
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(41)
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5
|
|
|
|
-
|
|
State and municipal bonds
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
Assets of consolidated VIEs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate obligations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6
|
|
|
|
-
|
|
|
|
6
|
|
|
|
-
|
|
Collateralized debt obligations
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
Other asset-backed
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
(1)
|
|
|
|
1
|
|
|
|
-
|
|
Loans receivable-residential
|
|
|
916
|
|
|
|
-
|
|
|
|
(4)
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(68)
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
844
|
|
|
|
(3)
|
|
Loans receivable-corporate
|
|
|
150
|
|
|
|
-
|
|
|
|
3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
719
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
872
|
|
|
|
3
|
|
Loan repurchase
commitments
|
|
|
404
|
|
|
|
-
|
|
|
|
5
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
409
|
|
|
|
5
|
|
Currency derivatives
|
|
|
19
|
|
|
|
-
|
|
|
|
(3)
|
|
|
|
-
|
|
|
|
(3)
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13
|
|
|
|
(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,552
|
|
|
$
|
-
|
|
|
$
|
1
|
|
|
$
|
2
|
|
|
$
|
(3)
|
|
|
$
|
719
|
|
|
$
|
-
|
|
|
$
|
(111)
|
|
|
$
|
-
|
|
|
$
|
8
|
|
|
$
|
(3)
|
|
|
$
|
2,165
|
|
|
$
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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,
2017
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medium-term notes
|
|
$
|
101
|
|
|
$
|
-
|
|
|
$
|
1
|
|
|
$
|
-
|
|
|
$
|
2
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
104
|
|
|
$
|
3
|
|
Credit derivatives
|
|
|
64
|
|
|
|
31
|
|
|
|
22
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(31)
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
86
|
|
|
|
22
|
|
Other derivatives
|
|
|
20
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
20
|
|
|
|
-
|
|
Liabilities of consolidated VIEs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VIE notes
|
|
|
476
|
|
|
|
-
|
|
|
|
34
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(19)
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
491
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
661
|
|
|
$
|
31
|
|
|
$
|
57
|
|
|
$
|
-
|
|
|
$
|
2
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(50)
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
701
|
|
|
$
|
59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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, 2018.
29
MBIA Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 6: Fair Value of Financial Instruments
(continued)
For the three months ended March 31, 2017, transfers into Level 3 and out of Level 2 were related
to corporate obligations, state and municipal bonds and other ABS, 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 and other ABS 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, 2017.
All Level 1, 2
and 3 designations are made at the end of each accounting period.
Gains and losses (realized and unrealized) included in earnings related to
Level 3 assets and liabilities for the three months ended March 31, 2018 and 2017 are reported on the Companys consolidated statements of operations as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
|
Three Months Ended March 31, 2018
|
|
|
Three Months Ended March 31, 2017
|
|
|
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
|
|
|
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,
2017
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) on insured derivatives
|
|
$
|
14
|
|
|
$
|
14
|
|
|
$
|
(22)
|
|
|
$
|
(22)
|
|
Realized gains (losses) and other settlements on insured derivatives
|
|
|
(19)
|
|
|
|
-
|
|
|
|
(31)
|
|
|
|
-
|
|
Net gains (losses) on financial instruments at fair value and foreign exchange
|
|
|
(6)
|
|
|
|
(6)
|
|
|
|
(3)
|
|
|
|
(3)
|
|
Other net realized gains (losses)
|
|
|
(2)
|
|
|
|
(2)
|
|
|
|
-
|
|
|
|
-
|
|
Revenues of consolidated VIEs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gains (losses) on financial instruments at fair value and foreign exchange
|
|
|
15
|
|
|
|
23
|
|
|
|
(36)
|
|
|
|
(35)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2
|
|
|
$
|
29
|
|
|
$
|
(92)
|
|
|
$
|
(60)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Companys consolidated statements of
operations for the three months ended March 31, 2018 and 2017 for financial instruments for which the fair value option was elected:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
In millions
|
|
2018
|
|
|
2017
|
|
Investments carried at fair value
(1)
|
|
$
|
(2)
|
|
|
$
|
3
|
|
Fixed-maturity securities held at fair value- VIE
(2)
|
|
|
(6)
|
|
|
|
(8)
|
|
Loans receivable at fair value:
|
|
|
|
|
|
|
|
|
Residential mortgage loans
(2)
|
|
|
(21)
|
|
|
|
(72)
|
|
Other
loans
(2)
|
|
|
11
|
|
|
|
3
|
|
Loan repurchase commitments
(2)
|
|
|
-
|
|
|
|
6
|
|
Medium-term
notes
(1)
|
|
|
(6)
|
|
|
|
(3)
|
|
Other
liabilities
(3)
|
|
|
(2)
|
|
|
|
-
|
|
Variable interest entity notes
(2)
|
|
|
27
|
|
|
|
45
|
(4)
|
(1) -
|
Reported within Net gains (losses) of financial instruments at fair value and foreign exchange on MBIAs consolidated statements of operations.
|
(2) -
|
Reported within Net gains (losses) of financial instruments at fair value and foreign
exchange-VIE
on MBIAs consolidated
statements of operations.
|
(3) -
|
Reported within Other net realized gains (losses) on MBIAs consolidated statements of operations.
|
(4) -
|
The Company revised its previously reported amount of a loss of $(45) million to a gain of $45 million.
|
30
MBIA Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 6: Fair Value of Financial Instruments
(continued)
Instrument-Specific Credit Risk of Liabilities Elected Under the Fair Value Option
As of March 31, 2018, the cumulative changes in instrument-specific credit risk of liabilities elected under the fair value option were a loss of
$176 million reported in Accumulated other comprehensive income on the Companys consolidated balance sheets. Changes in value attributable to instrument-specific credit risk were derived principally from changes in the
Companys credit spread. For liabilities of variable interest entities, additional adjustments to instrument-specific credit risk are required, which is determined by an analysis of deal specific performance of collateral that support these
liabilities. During the three months ended March 31, 2018, the portion of instrument-specific credit risk included in accumulated other comprehensive income that was recognized in earnings due to settlement of liabilities was a loss of
$5 million.
The following table reflects the difference between the aggregate fair value and the aggregate remaining contractual principal balance
outstanding as of March 31, 2018 and December 31, 2017 for loans and notes for which the fair value option was elected:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2018
|
|
|
As of December 31, 2017
|
|
In millions
|
|
Contractual
Outstanding
Principal
|
|
|
Fair
Value
|
|
|
Difference
|
|
|
Contractual
Outstanding
Principal
|
|
|
Fair
Value
|
|
|
Difference
|
|
Loans receivable at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage loans
|
|
$
|
687
|
|
|
$
|
686
|
|
|
$
|
1
|
|
|
$
|
732
|
|
|
$
|
727
|
|
|
$
|
5
|
|
Residential mortgage loans (90 days or more past due)
|
|
|
189
|
|
|
|
51
|
|
|
|
138
|
|
|
|
170
|
|
|
|
32
|
|
|
|
138
|
|
Corporate loans (90 days or more past due)
|
|
|
1,394
|
|
|
|
925
|
|
|
|
469
|
|
|
|
1,394
|
|
|
|
920
|
|
|
|
474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans receivable at fair value
|
|
|
2,270
|
|
|
|
1,662
|
|
|
|
608
|
|
|
|
2,296
|
|
|
|
1,679
|
|
|
|
617
|
|
Variable interest entity notes
|
|
|
1,848
|
|
|
|
1,031
|
|
|
|
817
|
|
|
|
1,882
|
|
|
|
1,069
|
|
|
|
813
|
|
Medium-term notes
|
|
|
184
|
|
|
|
146
|
|
|
|
39
|
|
|
|
180
|
|
|
|
115
|
|
|
|
65
|
|
The difference between the contractual outstanding principal and the fair values on loans receivable, VIE notes and MTNs, in the
preceding table, are primarily attributable to credit risk. This is due to the high rate of defaults on loans and the collateral supporting the VIE notes and the nonperformance risk of the Company on its MTNs, which resulted in depressed pricing of
the financial instruments.
31
MBIA Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 7: Investments
Investments, excluding those elected under the fair value option, include debt and equity securities classified as either AFS or
held-to-maturity
(HTM).
The following tables present the
amortized cost, fair value, corresponding gross unrealized gains and losses and OTTI for AFS and HTM investments in the Companys consolidated investment portfolio as of March 31, 2018 and December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
In millions
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Other-Than-
Temporary
Impairments
(1)
|
|
AFS Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-maturity investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and government agency
|
|
$
|
971
|
|
|
$
|
27
|
|
|
$
|
(13)
|
|
|
$
|
985
|
|
|
$
|
-
|
|
State and municipal bonds
|
|
|
808
|
|
|
|
44
|
|
|
|
(9)
|
|
|
|
843
|
|
|
|
9
|
|
Foreign governments
|
|
|
10
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10
|
|
|
|
-
|
|
Corporate obligations
|
|
|
1,677
|
|
|
|
11
|
|
|
|
(104)
|
|
|
|
1,584
|
|
|
|
(74)
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed agency
|
|
|
306
|
|
|
|
-
|
|
|
|
(7)
|
|
|
|
299
|
|
|
|
-
|
|
Residential mortgage-backed
non-agency
|
|
|
32
|
|
|
|
1
|
|
|
|
(3)
|
|
|
|
30
|
|
|
|
-
|
|
Commercial mortgage-backed
|
|
|
64
|
|
|
|
-
|
|
|
|
(1)
|
|
|
|
63
|
|
|
|
-
|
|
Asset-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized debt obligations
|
|
|
113
|
|
|
|
1
|
|
|
|
-
|
|
|
|
114
|
|
|
|
-
|
|
Other asset-backed
|
|
|
216
|
|
|
|
1
|
|
|
|
(1)
|
|
|
|
216
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total AFS investments
|
|
$
|
4,197
|
|
|
$
|
85
|
|
|
$
|
(138)
|
|
|
$
|
4,144
|
|
|
$
|
(64)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HTM Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets of consolidated VIEs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate obligations
|
|
$
|
890
|
|
|
$
|
11
|
|
|
$
|
-
|
|
|
$
|
901
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total HTM investments
|
|
$
|
890
|
|
|
$
|
11
|
|
|
$
|
-
|
|
|
$
|
901
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) -
|
Represents unrealized gains or losses on OTTI securities recognized in AOCI, which includes the
non-credit
component of impairments, as
well as all subsequent changes in fair value of such impaired securities reported in AOCI.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
In millions
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Other-Than-
Temporary
Impairments
(1)
|
|
AFS Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-maturity investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and government agency
|
|
$
|
1,317
|
|
|
$
|
34
|
|
|
$
|
(6)
|
|
|
$
|
1,345
|
|
|
$
|
-
|
|
State and municipal bonds
|
|
|
840
|
|
|
|
29
|
|
|
|
(12)
|
|
|
|
857
|
|
|
|
-
|
|
Foreign governments
|
|
|
10
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10
|
|
|
|
-
|
|
Corporate obligations
|
|
|
1,332
|
|
|
|
25
|
|
|
|
(80)
|
|
|
|
1,277
|
|
|
|
(72)
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed agency
|
|
|
365
|
|
|
|
1
|
|
|
|
(4)
|
|
|
|
362
|
|
|
|
-
|
|
Residential mortgage-backed
non-agency
|
|
|
35
|
|
|
|
1
|
|
|
|
(4)
|
|
|
|
32
|
|
|
|
-
|
|
Commercial mortgage-backed
|
|
|
66
|
|
|
|
-
|
|
|
|
-
|
|
|
|
66
|
|
|
|
-
|
|
Asset-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized debt obligations
|
|
|
116
|
|
|
|
-
|
|
|
|
-
|
|
|
|
116
|
|
|
|
-
|
|
Other asset-backed
|
|
|
175
|
|
|
|
-
|
|
|
|
-
|
|
|
|
175
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed-maturity investments
|
|
|
4,256
|
|
|
|
90
|
|
|
|
(106)
|
|
|
|
4,240
|
|
|
|
(71)
|
|
Money market securities
|
|
|
179
|
|
|
|
-
|
|
|
|
-
|
|
|
|
179
|
|
|
|
-
|
|
Perpetual debt and equity securities
|
|
|
3
|
|
|
|
1
|
|
|
|
-
|
|
|
|
4
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total AFS investments
|
|
$
|
4,438
|
|
|
$
|
91
|
|
|
$
|
(106)
|
|
|
$
|
4,423
|
|
|
$
|
(71)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HTM Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets of consolidated VIEs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate obligations
|
|
$
|
890
|
|
|
$
|
26
|
|
|
$
|
-
|
|
|
$
|
916
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total HTM investments
|
|
$
|
890
|
|
|
$
|
26
|
|
|
$
|
-
|
|
|
$
|
916
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) -
|
Represents unrealized gains or losses on OTTI securities recognized in AOCI, which includes the
non-credit
component of impairments, as
well as all subsequent changes in fair value of such impaired securities reported in AOCI.
|
32
MBIA Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 7: Investments (continued)
The following table presents the distribution by contractual maturity of AFS and HTM fixed-maturity securities at
amortized cost and fair value as of March 31, 2018. Contractual maturity may differ from expected maturity as borrowers may have the right to call or prepay obligations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AFS Securities
|
|
|
HTM Securities
|
|
|
|
|
|
|
|
|
|
Consolidated VIEs
|
|
In millions
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
Due in one year or less
|
|
$
|
667
|
|
|
$
|
671
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Due after one year through five years
|
|
|
1,038
|
|
|
|
1,038
|
|
|
|
-
|
|
|
|
-
|
|
Due after five years through ten years
|
|
|
641
|
|
|
|
562
|
|
|
|
-
|
|
|
|
-
|
|
Due after ten years
|
|
|
1,120
|
|
|
|
1,151
|
|
|
|
890
|
|
|
|
901
|
|
Mortgage-backed and asset-backed
|
|
|
731
|
|
|
|
722
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed-maturity investments
|
|
$
|
4,197
|
|
|
$
|
4,144
|
|
|
$
|
890
|
|
|
$
|
901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposited and Pledged Securities
The fair value of securities on deposit with various regulatory authorities as of March 31, 2018 and December 31, 2017 was $10 million. These deposits are required to comply with state insurance
laws.
Pursuant to the Companys tax sharing agreement, securities held by MBIA Inc. in the Tax Escrow Account are included as Investments
pledged as collateral, at fair value on the Companys consolidated balance sheets.
Investment agreement obligations require the Company to
pledge securities as collateral. Securities pledged in connection with investment agreements may not be repledged by the investment agreement counterparty. As of March 31, 2018 and December 31, 2017, the fair value of securities pledged as
collateral for these investment agreements approximated $348 million and $353 million, respectively. The Companys collateral as of March 31, 2018 consisted principally of U.S. Treasury and government agency and state and
municipal bonds, and was primarily held with major U.S. banks.
Impaired Investments
The following tables present the gross unrealized losses related to AFS and HTM investments as of March 31, 2018 and December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
|
|
Less than 12 Months
|
|
|
12 Months or Longer
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
In millions
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
AFS Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-maturity investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and government agency
|
|
$
|
456
|
|
|
$
|
(6)
|
|
|
$
|
165
|
|
|
$
|
(7)
|
|
|
$
|
621
|
|
|
$
|
(13)
|
|
State and municipal bonds
|
|
|
190
|
|
|
|
(3)
|
|
|
|
99
|
|
|
|
(6)
|
|
|
|
289
|
|
|
|
(9)
|
|
Foreign governments
|
|
|
4
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4
|
|
|
|
-
|
|
Corporate obligations
|
|
|
1,139
|
|
|
|
(20)
|
|
|
|
156
|
|
|
|
(84)
|
|
|
|
1,295
|
|
|
|
(104)
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed agency
|
|
|
144
|
|
|
|
(2)
|
|
|
|
117
|
|
|
|
(5)
|
|
|
|
261
|
|
|
|
(7)
|
|
Residential mortgage-backed
non-agency
|
|
|
-
|
|
|
|
-
|
|
|
|
16
|
|
|
|
(3)
|
|
|
|
16
|
|
|
|
(3)
|
|
Commercial mortgage-backed
|
|
|
30
|
|
|
|
(1)
|
|
|
|
4
|
|
|
|
-
|
|
|
|
34
|
|
|
|
(1)
|
|
Asset-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized debt obligations
|
|
|
9
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9
|
|
|
|
-
|
|
Other asset-backed
|
|
|
136
|
|
|
|
(1)
|
|
|
|
23
|
|
|
|
-
|
|
|
|
159
|
|
|
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total AFS investments
|
|
$
|
2,108
|
|
|
$
|
(33)
|
|
|
$
|
580
|
|
|
$
|
(105)
|
|
|
$
|
2,688
|
|
|
$
|
(138)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
MBIA Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 7: Investments (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
Less than 12 Months
|
|
|
12 Months or Longer
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
In millions
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
AFS Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-maturity investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and government agency
|
|
$
|
353
|
|
|
$
|
(1)
|
|
|
$
|
124
|
|
|
$
|
(5)
|
|
|
$
|
477
|
|
|
$
|
(6)
|
|
State and municipal bonds
|
|
|
203
|
|
|
|
(8)
|
|
|
|
116
|
|
|
|
(4)
|
|
|
|
319
|
|
|
|
(12)
|
|
Foreign governments
|
|
|
8
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8
|
|
|
|
-
|
|
Corporate obligations
|
|
|
425
|
|
|
|
(3)
|
|
|
|
163
|
|
|
|
(77)
|
|
|
|
588
|
|
|
|
(80)
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed agency
|
|
|
105
|
|
|
|
(1)
|
|
|
|
156
|
|
|
|
(3)
|
|
|
|
261
|
|
|
|
(4)
|
|
Residential mortgage-backed
non-agency
|
|
|
-
|
|
|
|
-
|
|
|
|
14
|
|
|
|
(4)
|
|
|
|
14
|
|
|
|
(4)
|
|
Commercial mortgage-backed
|
|
|
27
|
|
|
|
-
|
|
|
|
5
|
|
|
|
-
|
|
|
|
32
|
|
|
|
-
|
|
Asset-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized debt obligations
|
|
|
12
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12
|
|
|
|
-
|
|
Other asset-backed
|
|
|
71
|
|
|
|
-
|
|
|
|
39
|
|
|
|
-
|
|
|
|
110
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total AFS investments
|
|
$
|
1,204
|
|
|
$
|
(13)
|
|
|
$
|
617
|
|
|
$
|
(93)
|
|
|
$
|
1,821
|
|
|
$
|
(106)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross unrealized losses on AFS investments increased as of March 31, 2018 compared with December 31, 2017 primarily due
to higher interest rates and widening credit spreads.
With the weighting applied on the fair value of each security relative to the total fair value,
the weighted average contractual maturity of securities in an unrealized loss position as of March 31, 2018 and December 31, 2017 was 11 and 12 years, respectively. As of March 31, 2018 and December 31, 2017, there were 120 and
133 securities, respectively, that were in an unrealized loss position for a continuous twelve-month period or longer, of which, fair values of 43 and 24 securities, respectively, were below book value by more than 5%.
The following table presents the distribution of securities in an unrealized loss position for a continuous twelve-month period or longer where fair value was
below book value by more than 5% as of March 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AFS Securities
|
|
Percentage of Fair Value Below Book Value
|
|
Number of
Securities
|
|
|
Book Value
(in millions)
|
|
|
Fair Value
(in millions)
|
|
> 5% to 15%
|
|
|
37
|
|
|
$
|
225
|
|
|
$
|
206
|
|
> 15% to 25%
|
|
|
2
|
|
|
|
12
|
|
|
|
10
|
|
> 25% to 50%
|
|
|
1
|
|
|
|
1
|
|
|
|
-
|
|
> 50%
|
|
|
3
|
|
|
|
101
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
43
|
|
|
$
|
339
|
|
|
$
|
243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company concluded that it does not have the intent to sell securities in an unrealized loss position and it is more likely than
not, that it would not have to sell these securities before recovery of their cost basis. In making this conclusion, the Company examined the cash flow projections for its investment portfolios, the potential sources and uses of cash in its
businesses, and the cash resources available to its business other than sales of securities. It also considered the existence of any risk management or other plans as of March 31, 2018 that would require the sale of impaired securities.
Impaired securities that the Company intends to sell before the expected recovery of such securities fair values have been written down to fair value.
34
MBIA Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 7: Investments (continued)
Other-Than-Temporary Impairments
The Companys fixed-maturity securities for which fair value is less than amortized cost are reviewed quarterly in order to determine whether a credit loss exists. The portion of certain OTTI losses on
fixed-maturity securities that does not represent credit losses is recognized in AOCI. Refer to Note 8: Investments in the Notes to Consolidated Financial Statements included in the Companys Annual Report on Form
10-K
for the year ended December 31, 2017 for a discussion of the Companys policy for OTTI and its determination of credit loss. The following table presents the amount of credit loss impairments
recognized in earnings on fixed-maturity securities held by MBIA as of the dates indicated, for which a portion of the OTTI losses was recognized in AOCI, and the corresponding changes in such amounts. The additional credit loss impairments for the
three months ended March 31, 2018 and 2017 were primarily related to an impaired security for which a loss was recognized as the difference between the amortized cost and net present value of projected cash flows. This OTTI resulted from
liquidity concerns and other adverse financial conditions of the issuer.
|
|
|
|
|
|
|
|
|
In millions
|
|
Three Months Ended March 31,
|
|
Credit Losses Recognized in Earnings Related to
Other-Than-Temporary Impairments
|
|
2018
|
|
|
2017
|
|
Beginning balance
|
|
$
|
32
|
|
|
$
|
29
|
|
Additions for credit loss impairments recognized in the current period on securities previously impaired
|
|
|
1
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
33
|
|
|
$
|
31
|
|
|
|
|
|
|
|
|
|
|
The Company does not recognize OTTI on securities insured by MBIA Corp. and National since those securities, whether or not owned
by the Company, are evaluated for impairments in accordance with its loss reserving policy. The following table provides information about securities held by the Company as of March 31, 2018 that were in an unrealized loss position and insured
by a financial guarantor, along with the amount of insurance loss reserves corresponding to the par amount owned by the Company:
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Insurance Loss
Reserve
(2)
|
|
Mortgage-backed:
|
|
|
|
|
|
|
|
|
|
|
|
|
MBIA
(1)
|
|
$
|
16
|
|
|
$
|
(3)
|
|
|
$
|
14
|
|
Corporate obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
MBIA
(1)
|
|
|
51
|
|
|
|
(1)
|
|
|
|
-
|
|
Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
MBIA
(1)
|
|
|
6
|
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other
|
|
|
7
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
74
|
|
|
$
|
(4)
|
|
|
$
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) -
|
Includes investments insured by MBIA Corp. and National.
|
|
(2) -
|
Insurance loss reserve estimates are based on the proportion of par value owned to the total amount of par value insured.
|
Sales of
Available-for-Sale
Investments
Gross realized gains and losses are recorded within Net gains (losses) on financial instruments at fair value and foreign exchange on the Companys
consolidated statements of operations. The proceeds and the gross realized gains and losses from sales of fixed-maturity securities held as AFS for the three months ended March 31, 2018 and 2017 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
In millions
|
|
2018
|
|
|
2017
|
|
Proceeds from sales
|
|
$
|
651
|
|
|
$
|
271
|
|
Gross realized gains
|
|
$
|
2
|
|
|
$
|
4
|
|
Gross realized losses
|
|
$
|
(6)
|
|
|
$
|
(1)
|
|
35
MBIA Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 8: Derivative Instruments
U.S. Public Finance Insurance
The Companys
derivative exposure within its U.S. public finance insurance operations primarily consists of insured interest rate and inflation-linked swaps related to insured U.S. public finance debt issues. These derivatives do not qualify for the financial
guarantee scope exception and are accounted for as derivative instruments.
Corporate
The Company has entered into derivative instruments primarily consisting of interest rate swaps to manage the risks associated with fluctuations in interest rates
affecting the value of certain assets and liabilities.
International and Structured Finance Insurance
The Company has entered into a derivative instrument to provide financial guarantee insurance to a structured finance transaction that does not qualify for the
financial guarantee scope exception and, therefore, is accounted for as a derivative. The insured CDS contract, referencing CMBS, is intended to be held for the entire term of the contract unless a settlement with the counterparty is negotiated. The
Company no longer insures new CDS contracts except for transactions related to the restructuring or reduction of existing derivative exposure. The Companys derivative exposure within its international and structured finance insurance segment
also includes insured interest rate and inflation-linked swaps related to insured debt issues.
The Company has also entered into a derivative contract
as a result of a commutation occurring in 2014. Changes in the fair value of the Companys
non-insured
derivative are included in Net gains (losses) on financial instruments at fair value and
foreign exchange on the Companys consolidated statements of operations.
Variable Interest Entities
A VIE consolidated by the Company has entered into a cross currency swap, which was entered into to manage the variability in cash flows resulting from fluctuations
in foreign currency rates.
Credit Derivatives Sold
The following tables present information about credit derivatives sold by the Companys insurance operations that were outstanding as of March 31, 2018 and December 31, 2017. Credit ratings represent
the lower of underlying ratings assigned to the collateral by Moodys, S&P or MBIA.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ in millions
|
|
As of March 31, 2018
|
|
|
|
Notional Value
|
|
|
|
|
Credit Derivatives Sold
|
|
Weighted
Average
Remaining
Expected
Maturity
|
|
|
AAA
|
|
|
AA
|
|
|
A
|
|
|
BBB
|
|
|
Below
Investment
Grade
|
|
|
Total
Notional
|
|
|
Fair
Value
Asset
(Liability)
|
|
Insured credit default swaps
|
|
|
0.8 Years
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
107
|
|
|
$
|
107
|
|
|
$
|
(49)
|
|
Insured swaps
|
|
|
15.7 Years
|
|
|
|
-
|
|
|
|
113
|
|
|
|
1,766
|
|
|
|
670
|
|
|
|
-
|
|
|
|
2,549
|
|
|
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total notional
|
|
|
|
|
|
$
|
-
|
|
|
$
|
113
|
|
|
$
|
1,766
|
|
|
$
|
670
|
|
|
$
|
107
|
|
|
$
|
2,656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fair value
|
|
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(1)
|
|
|
$
|
(1)
|
|
|
$
|
(49)
|
|
|
|
|
|
|
$
|
(51)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ in millions
|
|
As of December 31, 2017
|
|
|
|
Notional Value
|
|
|
|
|
Credit Derivatives Sold
|
|
Weighted
Average
Remaining
Expected
Maturity
|
|
|
AAA
|
|
|
AA
|
|
|
A
|
|
|
BBB
|
|
|
Below
Investment
Grade
|
|
|
Total
Notional
|
|
|
Fair
Value
Asset
(Liability)
|
|
Insured credit default swaps
|
|
|
1.0 Years
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
127
|
|
|
$
|
127
|
|
|
$
|
(63)
|
|
Insured swaps
|
|
|
15.5 Years
|
|
|
|
-
|
|
|
|
117
|
|
|
|
1,818
|
|
|
|
846
|
|
|
|
20
|
|
|
|
2,801
|
|
|
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total notional
|
|
|
|
|
|
$
|
-
|
|
|
$
|
117
|
|
|
$
|
1,818
|
|
|
$
|
846
|
|
|
$
|
147
|
|
|
$
|
2,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fair value
|
|
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(1)
|
|
|
$
|
(1)
|
|
|
$
|
(63)
|
|
|
|
|
|
|
$
|
(65)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal credit ratings assigned by MBIA on the underlying collateral are derived by the Companys surveillance group. In
assigning an internal rating, current status reports from issuers and trustees, as well as publicly available transaction-specific information, are reviewed. Also, where appropriate, cash flow analyses and collateral valuations are considered. The
maximum potential amount of future payments (undiscounted) on insured credit default swaps and insured swaps are estimated as the notional value of such contracts.
36
MBIA Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 8: Derivative Instruments (continued)
MBIA may hold recourse provisions with third parties in derivative instruments through subrogation rights, whereby
if MBIA makes a claim payment, it may be entitled to any rights of the insured counterparty, including the right to any assets held as collateral.
Counterparty Credit Risk
The Company manages
counterparty credit risk on an individual counterparty basis through master netting agreements covering derivative instruments in the corporate segment. These agreements allow the Company to contractually net amounts due from a counterparty with
those amounts due to such counterparty when certain triggering events occur. The Company only executes swaps under master netting agreements, which typically contain mutual credit downgrade provisions that generally provide the ability to require
assignment or termination in the event either MBIA or the counterparty is downgraded below a specified credit rating.
Under these agreements, the
Company may receive or provide cash, U.S. Treasury or other highly rated securities to secure counterparties exposure to the Company or its exposure to counterparties, respectively. Such collateral is available to the holder to pay for
replacing the counterparty in the event that the counterparty defaults. As of March 31, 2018, the Company did not hold cash collateral to derivative counterparties but posted an immaterial amount of cash collateral to derivative counterparties
which is included within Other liabilities as cash collateral netted against accrued interest on derivative liabilities. As of December 31, 2017, the Company did not hold or post cash collateral to derivative counterparties.
As of March 31, 2018 and December 31, 2017, the Company had securities with a fair value of $205 million and $237 million,
respectively, posted to derivative counterparties and these amounts are included within Fixed-maturity securities held as
available-for-sale,
at fair value
on the Companys consolidated balance sheets.
As of March 31, 2018 and December 31, 2017, the fair value on one Credit Support Annex
(CSA) was $2 million. This CSA governs collateral posting requirements between MBIA and its derivative counterparties. The Company did not receive collateral due to the Companys credit rating, which was below the CSA minimum
credit ratings level for holding counterparty collateral. As of March 31, 2018 and December 31, 2017, the counterparty was rated A1 by Moodys and A by S&P.
Financial Statement Presentation
The fair value of amounts recognized for eligible derivative contracts
executed with the same counterparty under a master netting agreement, including any cash collateral that may have been received or posted by the Company, is presented on a net basis in accordance with accounting guidance for the offsetting of fair
value amounts related to derivative instruments. Insured CDS and insured swaps are not subject to master netting agreements. VIE derivative assets and liabilities are not presented net of any master netting agreements. Counterparty netting of
derivative assets and liabilities offsets balances in Interest rate swaps, when applicable.
The following table presents the total fair
value of the Companys derivative assets and liabilities by instrument and balance sheet location, before counterparty netting and posting of cash collateral, as of March 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
|
|
|
|
Derivative Assets
(1)
|
|
|
Derivative Liabilities
(1)
|
|
Derivative Instruments
|
|
Notional
Amount
Outstanding
|
|
|
Balance Sheet Location
|
|
|
Fair Value
|
|
|
Balance Sheet Location
|
|
|
Fair Value
|
|
Not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insured credit default swaps
|
|
$
|
107
|
|
|
|
Other assets
|
|
|
$
|
-
|
|
|
|
Derivative liabilities
|
|
|
$
|
(49)
|
|
Insured swaps
|
|
|
2,549
|
|
|
|
Other assets
|
|
|
|
-
|
|
|
|
Derivative liabilities
|
|
|
|
(2)
|
|
Interest rate swaps
|
|
|
743
|
|
|
|
Other assets
|
|
|
|
2
|
|
|
|
Derivative liabilities
|
|
|
|
(164)
|
|
Interest rate swaps-embedded
|
|
|
314
|
|
|
|
Medium-term notes
|
|
|
|
1
|
|
|
|
Medium-term notes
|
|
|
|
(7)
|
|
Currency
swaps-VIE
|
|
|
66
|
|
|
|
Other
assets-VIE
|
|
|
|
13
|
|
|
|
Derivative liabilities-VIE
|
|
|
|
-
|
|
All other
|
|
|
49
|
|
|
|
Other assets
|
|
|
|
-
|
|
|
|
Derivative liabilities
|
|
|
|
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
non-designated
derivatives
|
|
$
|
3,828
|
|
|
|
|
|
|
$
|
16
|
|
|
|
|
|
|
$
|
(226)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) -
|
In accordance with the accounting guidance for derivative instruments and hedging activities, the balance sheet location of the Companys embedded derivative instruments is
determined by the location of the related host contract.
|
37
MBIA Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 8: Derivative Instruments (continued)
The following table presents the total fair value of the Companys derivative assets and liabilities by
instrument and balance sheet location, before counterparty netting and posting of cash collateral, as of December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
|
|
|
|
Derivative Assets
(1)
|
|
|
Derivative Liabilities
(1)
|
|
Derivative Instruments
|
|
Notional
Amount
Outstanding
|
|
|
Balance Sheet Location
|
|
|
Fair Value
|
|
|
Balance Sheet Location
|
|
|
Fair Value
|
|
Not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insured credit default swaps
|
|
$
|
127
|
|
|
|
Other assets
|
|
|
$
|
-
|
|
|
|
Derivative liabilities
|
|
|
$
|
(63)
|
|
Insured swaps
|
|
|
2,801
|
|
|
|
Other assets
|
|
|
|
-
|
|
|
|
Derivative liabilities
|
|
|
|
(2)
|
|
Interest rate swaps
|
|
|
747
|
|
|
|
Other assets
|
|
|
|
2
|
|
|
|
Derivative liabilities
|
|
|
|
(193)
|
|
Interest rate swaps-embedded
|
|
|
305
|
|
|
|
Medium-term notes
|
|
|
|
1
|
|
|
|
Medium-term notes
|
|
|
|
(6)
|
|
Currency
swaps-VIE
|
|
|
69
|
|
|
|
Other
assets-VIE
|
|
|
|
19
|
|
|
|
Derivative liabilities-VIE
|
|
|
|
-
|
|
All other
|
|
|
49
|
|
|
|
Other assets
|
|
|
|
-
|
|
|
|
Derivative liabilities
|
|
|
|
(4)
|
|
All other-embedded
|
|
|
2
|
|
|
|
Other investments
|
|
|
|
-
|
|
|
|
Other investments
|
|
|
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
non-designated
derivatives
|
|
$
|
4,100
|
|
|
|
|
|
|
$
|
22
|
|
|
|
|
|
|
$
|
(269)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) -
|
In accordance with the accounting guidance for derivative instruments and hedging activities, the balance sheet location of the Companys embedded derivative instruments is
determined by the location of the related host contract.
|
The following table presents the effect of derivative instruments on the
consolidated statements of operations for the three months ended March 31, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
In millions
|
|
|
|
|
|
|
|
|
Derivatives Not Designated as
|
|
|
|
Three Months Ended March 31,
|
|
Hedging Instruments
|
|
Location of Gain (Loss) Recognized in Income on
Derivative
|
|
2018
|
|
|
2017
|
|
Insured credit default swaps
|
|
Unrealized gains (losses) on insured derivatives
|
|
$
|
14
|
|
|
$
|
(22
|
)
|
Insured credit default swaps
|
|
Realized gains (losses) and other settlements on insured derivatives
|
|
|
(19
|
)
|
|
|
(31
|
)
|
Interest rate swaps
|
|
Net gains (losses) on financial instruments at fair value and foreign exchange
|
|
|
18
|
|
|
|
4
|
|
Currency
swaps-VIE
|
|
Net gains (losses) on financial instruments at fair value and foreign
exchange-VIE
|
|
|
(6
|
)
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
7
|
|
|
$
|
(55
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Note 9: Income Taxes
The Companys income taxes and the related effective tax rates for the three months ended March 31, 2018 and 2017 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
In millions
|
|
|
2018
|
|
|
|
2017
|
|
Income (loss) before income taxes
|
|
$
|
(96)
|
|
|
$
|
(120)
|
|
Provision (benefit) for income taxes
|
|
$
|
2
|
|
|
$
|
(48)
|
|
Effective tax rate
|
|
|
-2.1%
|
|
|
|
40.0%
|
|
For the three months ended March 31, 2018, the Companys effective tax rate applied to its loss before income taxes is
less than the U.S. statutory tax rate primarily due to a full valuation allowance against its net deferred tax asset. For the three months ended March 31, 2017, the Companys effective tax rate applied to its loss before income taxes is
greater than the U.S. statutory effective tax rate primarily due to the fluctuation of the value of nontaxable warrants issued by the Company and tax exempt interest income.
Deferred Tax Asset, Net of Valuation Allowance
On June 26, 2017, S&P downgraded the financial
strength rating of National, which led the Company to cease its efforts to actively pursue writing new financial guarantee business. In addition to Nationals cessation of new business activity, there was an increase in loss and LAE due to
changes in assumptions on certain Puerto Rico credits. As a result of the increase in loss and LAE, the Company has a three-year cumulative loss, which is considered significant negative evidence in the assessment of its ability to use its deferred
tax assets. In addition, the Company considered all available positive and negative evidence as required by GAAP, to estimate if sufficient taxable income will be generated to use its deferred tax assets. After considering all positive and negative
evidence, including the Companys inability to objectively identify and forecast future sources of taxable income, the Company concluded in the second quarter of 2017 it did not have sufficient positive evidence to support its ability to use
its deferred tax assets before they would expire. Accordingly, the Company has a full valuation allowance against its net deferred tax asset of $809 million and $770 million as of March 31, 2018 and December 31, 2017,
respectively. The Company will continue to analyze the valuation allowance on a quarterly basis.
38
MBIA Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 9: Income Taxes (continued)
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (the
Act), which among other items reduces the federal corporate tax rate to 21% effective January 1, 2018. As a result, during the fourth quarter of 2017, the Company revalued its net tax deferred tax asset using the newly enacted tax
rate of 21%.
The Companys revaluation of its net deferred tax asset is subject to further clarifications of the new law that cannot be estimated
at this time. However, as further clarification of the new law is determined, any adjustment would be offset with a valuation allowance resulting in no change to the Companys net deferred tax asset. The Company does not anticipate future cash
expenditures as a result of the reduction to its net deferred tax asset.
Under the Act, net operating losses (NOLs) of property and
casualty insurance companies retain their current
two-year
carryback and
20-year
carryforward periods and will not be subject to the 80 percent taxable income
limitation and indefinite lived carryforward period applicable to general corporate NOLs. Therefore, NOLs generated after 2017 by the Companys insurance companies and
non-insurance
companies will be
treated differently under the Act.
Accounting for Uncertainty in Income Taxes
The Companys policy is to record and disclose any change in unrecognized tax benefits (UTB) and related interest and/or penalties to income tax in the consolidated statements of operations. The
Company includes interest as a component of income tax expense. As of March 31, 2018 and December 31, 2017, the Company had no UTB.
Federal
income tax returns through 2011 have been examined or surveyed. As of March 31, 2018, the Companys NOL is approximately $2.7 billion. The NOL will expire between tax years 2031 through 2037. As of March 31, 2018, the Company has
a foreign tax credit carryforward of $62 million, which will expire between tax years 2020 through 2028. As of March 31, 2018, the Company has an alternative minimum tax (AMT) credit carryforward of $24 million, which does
not expire. As a result of tax reform, AMT credits are now fully refundable no later than 2022. The AMT credit has been reclassed out of the deferred tax asset and into other assets as the AMT credits are now a receivable.
Section 382 of the Internal Revenue Code
On
May 2, 2018, MBIA Inc.s shareholders ratified an amendment to the Companys
By-Laws,
which had been adopted earlier by MBIA Inc.s Board of Directors. The amendment places restrictions on
certain acquisitions of Company stock that otherwise may have increased the likelihood of an ownership change within the meaning of Section 382 of the Internal Revenue Code. The amendment generally prohibits a person from becoming a
Section 382 five-percent shareholder by acquiring, directly or by attribution, 5% or more of the outstanding shares of the Companys common stock and will generally restrict existing Section 382 five-percent
shareholders from increasing their ownership interest under Section 382 by more than one percentage point over their percentage stock ownership immediately prior to the effective date of the amendment or, if lower, their percentage
thereafter.
Note 10: Business Segments
As defined by segment reporting, an operating segment is a component of a company (i) that engages in business activities from which it earns revenue and incurs expenses, (ii) whose operating results are
regularly reviewed by the Chief Operating Decision Maker to assess the performance of the segment and to make decisions about the allocation of resources to the segment and, (iii) for which discrete financial information is available.
The Company manages its businesses across three operating segments: 1) U.S. public finance insurance; 2) corporate; and 3) international and structured
finance insurance. The Companys U.S. public finance insurance business is operated through National and its international and structured finance insurance business is operated through MBIA Corp.
The following sections provide a description of each of the Companys reportable operating segments.
U.S. Public Finance Insurance
The Companys U.S. public finance insurance portfolio is managed
through National. The financial guarantees issued by National provide unconditional and irrevocable guarantees of the payment of the principal of, and interest or other amounts owing on, U.S. public finance insured obligations when due. The
obligations are not subject to acceleration, except that National may have the right, at its discretion, to accelerate insured obligations upon default or otherwise. Nationals guarantees insure 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. Municipal bonds and privately issued bonds used for the financing of public purpose projects are generally supported by taxes,
assessments, fees or tariffs related to the use of these projects, lease payments or other similar types of revenue streams.
39
MBIA Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 10: Business Segments (continued)
Corporate
The Companys corporate segment consists of general corporate activities, including providing support services to MBIA Inc.s subsidiaries as well as asset and capital management. Support services are
provided by the Companys service company, MBIA Services Corporation, and include, among others, management, legal, accounting, treasury, information technology, and insurance portfolio surveillance, on a
fee-for-service
basis. Capital management includes activities related to servicing obligations issued by MBIA Inc. and its subsidiaries, MBIA Global Funding, LLC (GFL) and MBIA Investment
Management Corp. (IMC). MBIA Inc. issued debt to finance the operations of the MBIA group. GFL raised funds through the issuance of MTNs with varying maturities, which were in turn guaranteed by MBIA Corp. GFL lent the proceeds of these
MTN issuances to MBIA Inc. IMC, along with MBIA Inc., provided customized investment agreements, guaranteed by MBIA Corp., for bond proceeds and other public funds for such purposes as construction, loan origination, escrow and debt service or other
reserve fund requirements. The Company has ceased issuing new MTNs and investment agreements and the outstanding liability balances and corresponding asset balances have declined over time as liabilities matured, terminated or were called or
repurchased. All of the debt within the corporate segment is managed collectively and is serviced by available liquidity.
International and
Structured Finance Insurance
The Companys international and structured finance insurance segment is principally conducted through MBIA
Corp. The financial guarantees issued by MBIA Corp. generally provide unconditional and irrevocable guarantees of the payment of principal of, and interest or other amounts owing on,
non-U.S.
public finance
and global structured finance insured obligations when due, or in the event MBIA Corp. has the right, at its discretion, to accelerate insured obligations upon default or otherwise. MBIA Corp. insures the investment contracts written by MBIA Inc.,
and if MBIA Inc. were to have insufficient assets to pay amounts due upon maturity or termination, MBIA Corp. would make such payments. MBIA Corp. insures debt obligations of the following affiliates:
|
|
|
LaCrosse Financial Products, LLC, a wholly-owned affiliate, to which MBIA Insurance Corporation has written insurance policies guaranteeing the obligations under
CDS. Certain policies cover payments potentially due under CDS, including termination payments that may become due in certain circumstances, including the occurrence of certain insolvency or payment defaults under the CDS or derivatives contracts by
the insured counterparty or by the guarantor.
|
MBIA Corp. insures
non-U.S.
public finance
and global structured finance obligations, including asset-backed obligations. MBIA Corp. has insured sovereign-related and
sub-sovereign
bonds, utilities, privately issued bonds used for the financing of
projects that include toll roads, bridges, airports, public transportation facilities, and other types of infrastructure projects serving a substantial public purpose. Global structured finance and asset-backed obligations typically are securities
repayable from expected cash flows generated by a specified pool of assets, such as residential and commercial mortgages, insurance policies, consumer loans, corporate loans and bonds, trade and export receivables, and leases for equipment, aircraft
and real estate property. MBIA Corp. has also written policies guaranteeing obligations under certain other derivative contracts, including termination payments that may become due upon certain insolvency or payment defaults of the financial
guarantor or the issuer. The Company is no longer insuring new credit derivative contracts except for transactions related to the restructuring or reduction of existing derivative exposure. MBIA Corp. has not written any meaningful amount of
business since 2008.
40
MBIA Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 10: Business Segments (continued)
Segments Results
The following tables provide the Companys segment results for the three months ended March 31, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2018
|
|
In millions
|
|
U.S. Public
Finance
Insurance
|
|
|
Corporate
|
|
|
International
and Structured
Finance
Insurance
|
|
|
Eliminations
|
|
|
Consolidated
|
|
Revenues
(1)
|
|
$
|
53
|
|
|
$
|
7
|
|
|
$
|
17
|
|
|
$
|
-
|
|
|
$
|
77
|
|
Net change in fair value of insured derivatives
|
|
|
-
|
|
|
|
-
|
|
|
|
(5)
|
|
|
|
-
|
|
|
|
(5)
|
|
Net gains (losses) on financial instruments at fair value and foreign exchange
|
|
|
(6)
|
|
|
|
3
|
|
|
|
(6)
|
|
|
|
-
|
|
|
|
(9)
|
|
Net investment losses related to other-than-temporary impairments
|
|
|
(1)
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1)
|
|
Other net realized gains (losses)
|
|
|
-
|
|
|
|
(2)
|
|
|
|
1
|
|
|
|
-
|
|
|
|
(1)
|
|
Revenues of consolidated VIEs
|
|
|
-
|
|
|
|
-
|
|
|
|
12
|
|
|
|
-
|
|
|
|
12
|
|
Inter-segment
revenues
(2)
|
|
|
7
|
|
|
|
13
|
|
|
|
7
|
|
|
|
(27)
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
53
|
|
|
|
21
|
|
|
|
26
|
|
|
|
(27)
|
|
|
|
73
|
|
Losses and loss adjustment
|
|
|
77
|
|
|
|
-
|
|
|
|
(5)
|
|
|
|
-
|
|
|
|
72
|
|
Operating
|
|
|
3
|
|
|
|
13
|
|
|
|
8
|
|
|
|
-
|
|
|
|
24
|
|
Interest
|
|
|
-
|
|
|
|
20
|
|
|
|
31
|
|
|
|
-
|
|
|
|
51
|
|
Expenses of consolidated VIEs
|
|
|
-
|
|
|
|
-
|
|
|
|
22
|
|
|
|
-
|
|
|
|
22
|
|
Inter-segment
expenses
(2)
|
|
|
15
|
|
|
|
6
|
|
|
|
6
|
|
|
|
(27)
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
95
|
|
|
|
39
|
|
|
|
62
|
|
|
|
(27)
|
|
|
|
169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(42)
|
|
|
|
(18)
|
|
|
|
(36)
|
|
|
|
-
|
|
|
|
(96)
|
|
Provision (benefit) for income taxes
|
|
|
(9)
|
|
|
|
(33)
|
|
|
|
(5)
|
|
|
|
49
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(33)
|
|
|
$
|
15
|
|
|
$
|
(31)
|
|
|
$
|
(49)
|
|
|
$
|
(98)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets
|
|
$
|
4,508
|
|
|
$
|
1,159
|
|
|
$
|
5,359
|
|
|
$
|
(2,133)
|
(3)
|
|
$
|
8,893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) -
|
Represents the sum of third-party financial guarantee net premiums earned, net investment income, insurance-related fees and reimbursements and other fees.
|
(2) -
|
Represents intercompany premium income and expense and intercompany interest income and expense pertaining to intercompany receivables and payables.
|
(3) -
|
Consists of intercompany reinsurance balances and repurchase agreements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2017
|
|
In millions
|
|
U.S. Public
Finance
Insurance
|
|
|
Corporate
|
|
|
International
and Structured
Finance
Insurance
|
|
|
Eliminations
|
|
|
Consolidated
|
|
Revenues
(1)
|
|
$
|
68
|
|
|
$
|
8
|
|
|
$
|
27
|
|
|
$
|
-
|
|
|
$
|
103
|
|
Net change in fair value of insured derivatives
|
|
|
-
|
|
|
|
-
|
|
|
|
(53)
|
|
|
|
-
|
|
|
|
(53)
|
|
Net gains (losses) on financial instruments at fair value and foreign exchange
|
|
|
4
|
|
|
|
16
|
|
|
|
(3)
|
|
|
|
-
|
|
|
|
17
|
|
Net investment losses related to other-than-temporary impairments
|
|
|
(2)
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2)
|
|
Net gains (losses) on extinguishment of debt
|
|
|
-
|
|
|
|
8
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8
|
|
Other net realized gains (losses)
|
|
|
-
|
|
|
|
(1)
|
|
|
|
4
|
|
|
|
-
|
|
|
|
3
|
|
Revenues of consolidated VIEs
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
1
|
|
Inter-segment
revenues
(2)
|
|
|
5
|
|
|
|
16
|
|
|
|
9
|
|
|
|
(30)
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
75
|
|
|
|
47
|
|
|
|
(15)
|
|
|
|
(30)
|
|
|
|
77
|
|
Losses and loss adjustment
|
|
|
11
|
|
|
|
-
|
|
|
|
83
|
|
|
|
-
|
|
|
|
94
|
|
Operating
|
|
|
10
|
|
|
|
18
|
|
|
|
8
|
|
|
|
-
|
|
|
|
36
|
|
Interest
|
|
|
-
|
|
|
|
22
|
|
|
|
26
|
|
|
|
-
|
|
|
|
48
|
|
Expenses of consolidated VIEs
|
|
|
-
|
|
|
|
-
|
|
|
|
19
|
|
|
|
-
|
|
|
|
19
|
|
Inter-segment
expenses
(2)
|
|
|
15
|
|
|
|
1
|
|
|
|
14
|
|
|
|
(30)
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
36
|
|
|
|
41
|
|
|
|
150
|
|
|
|
(30)
|
|
|
|
197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
39
|
|
|
|
6
|
|
|
|
(165)
|
|
|
|
-
|
|
|
|
(120)
|
|
Provision (benefit) for income taxes
|
|
|
12
|
|
|
|
(4)
|
|
|
|
(57)
|
|
|
|
1
|
|
|
|
(48)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
27
|
|
|
$
|
10
|
|
|
$
|
(108)
|
|
|
$
|
(1)
|
|
|
$
|
(72)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets
|
|
$
|
5,128
|
|
|
$
|
2,335
|
|
|
$
|
6,502
|
|
|
$
|
(2,948)
|
(3)
|
|
$
|
11,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) -
|
Represents the sum of third-party financial guarantee net premiums earned, net investment income, insurance-related fees and reimbursements and other fees.
|
(2) -
|
Represents intercompany premium income and expense and intercompany interest income and expense pertaining to intercompany receivables and payables.
|
(3) -
|
Consists of intercompany deferred income taxes, reinsurance balances and repurchase agreements.
|
41
MBIA Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 11: Earnings Per Share
Earnings per share is calculated using the
two-class
method in which earnings are allocated to common stock and
participating securities based on their rights to receive nonforfeitable dividends or dividend equivalents. The Company grants restricted stock and restricted stock units to certain employees and
non-employee
directors in accordance with the Companys long-term incentive programs, which entitle the participants to receive nonforfeitable dividends or dividend equivalents during the vesting period on the same basis as those dividends are paid to
common shareholders. These unvested stock awards represent participating securities. During periods of net income, the calculation of earnings per share exclude the income attributable to participating securities in the numerator and the dilutive
impact of these securities from the denominator. During periods of net loss, no effect is given to participating securities in the numerator and the denominator excludes the dilutive impact of these securities since they do not share in the losses
of the Company.
Basic earnings per share excludes dilution and is computed by dividing net income available to common shareholders by the weighted
average number of common shares outstanding during the period. Diluted earnings per share reflects the dilutive effect of all stock options, warrants and unvested restricted stock outstanding during the period that could potentially result in the
issuance of common stock. The dilution from stock options, warrants and unvested restricted stock are calculated by applying the
two-class
method and using the treasury stock method. The treasury stock method
assumes the proceeds from the exercise of stock options and warrants or the unrecognized compensation expense from unvested restricted stock will be used to purchase shares of the Companys common stock at the average market price during the
period. During periods of net loss, stock options, warrants and unvested restricted stock are excluded from the calculation because they would have an antidilutive affect. Therefore, in periods of net loss, the calculation of basic and diluted
earnings per share would result in the same value.
The following table presents the computation of basic and diluted earnings per share for the three
months ended March 31, 2018, and 2017:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
In millions except per share amounts
|
|
2018
|
|
|
2017
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
Net income (loss) available to common shareholders
|
|
$
|
(98)
|
|
|
$
|
(72)
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares
(1)
|
|
|
88.1
|
|
|
|
131.4
|
|
Net income (loss) per basic common share
|
|
$
|
(1.12)
|
|
|
$
|
(0.55)
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
Net income (loss) available to common shareholders
|
|
|
(98)
|
|
|
|
(72)
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares
(1)
|
|
|
88.1
|
|
|
|
131.4
|
|
Net income (loss) per diluted common share
|
|
$
|
(1.12)
|
|
|
$
|
(0.55)
|
|
|
|
|
|
|
|
|
|
|
Potentially dilutive securities excluded from the calculation of diluted EPS because of antidilutive affect
|
|
|
13.7
|
|
|
|
14.8
|
|
(1) -
|
Includes 0.3 million of participating securities that met the service condition and were eligible to receive nonforfeitable dividends or dividend equivalents for the three
months ended March 31, 2018 and 2017.
|
42
MBIA Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 12: Accumulated Other Comprehensive Income
The following table presents the changes in the components of AOCI for the three months ended March 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
|
Unrealized
Gains (Losses)
on AFS
Securities, Net
|
|
|
Foreign Currency
Translation, Net
|
|
|
Instrument-Specific
Credit Risk of
Liabilities
Measured at
Fair
Value, Net
|
|
|
Total
|
|
Balance, December 31, 2017
|
|
$
|
(10)
|
|
|
$
|
(9)
|
|
|
$
|
-
|
|
|
$
|
(19)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASU
2016-01
transition adjustment
|
|
|
(2)
|
|
|
|
-
|
|
|
|
(162)
|
|
|
|
(164)
|
|
ASU
2018-02
transition adjustment
|
|
|
(3)
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3)
|
|
Other comprehensive income (loss) before reclassifications
|
|
|
(42)
|
|
|
|
1
|
|
|
|
(14)
|
|
|
|
(55)
|
|
Amounts reclassified from AOCI
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net period other comprehensive income (loss)
|
|
|
(42)
|
|
|
|
1
|
|
|
|
(14)
|
|
|
|
(55)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2018
|
|
$
|
(57)
|
|
|
$
|
(8)
|
|
|
$
|
(176)
|
|
|
$
|
(241)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the details of the reclassifications from AOCI for the three months ended March 31, 2018 and
2017:
|
|
|
|
|
|
|
|
|
|
|
In millions
|
|
Amounts Reclassified from AOCI
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
Details about AOCI Components
|
|
2018
|
|
|
2017
|
|
|
Affected Line Item on the Consolidated
Statements of Operations
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) on AFS securities:
|
|
|
|
|
|
|
|
|
|
|
Realized gains (losses) on sale of securities
|
|
$
|
1
|
|
|
$
|
2
|
|
|
Net gains (losses) on financial instruments
at fair value and foreign exchange
|
OTTI
|
|
|
(1)
|
|
|
|
(2)
|
|
|
Net investment losses related to OTTI
|
Amortization on securities
|
|
|
-
|
|
|
|
-
|
|
|
Net investment income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
Income (loss) before income taxes
|
|
|
|
-
|
|
|
|
-
|
|
|
Provision (benefit) for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
Total reclassifications for the period
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
Note 13: Commitments and Contingencies
The following commitments and contingencies provide an update of those discussed in Note 20: Commitments and Contingencies in the Notes to Consolidated Financial Statements included in the
Companys Annual Report on Form
10-K
for the year ended December 31, 2017, and should be read in conjunction with the complete descriptions provided in the aforementioned Form
10-K.
Litigation
MBIA Insurance Corp. v. Credit Suisse Securities (USA) LLC, et al.
; Index No. 603751/2009 (N.Y. Sup. Ct., N.Y. County)
Expert discovery concluded in March of 2016. Oral argument before the Appellate Division of the Supreme Court, First Judicial Department on the parties cross-appeals from the courts March 31, 2017
decision and order on the parties summary judgment motions took place on October 24, 2017 and a decision is pending. On April 26, 2018, the New York Supreme Court announced on its website that Justice Kornreich, who has presided over
the above-captioned case since its inception, will be retiring from the bench in May of 2018.
Ambac Bond Insurance Coverage Cases,
Coordinated
Proceeding Case No. JCCP 4555 (Super. Ct. of Cal., County of San Francisco)
Following an appeal of the dismissal of the plaintiffs anti-trust
claim under Californias Cartwright Act, the California Court of Appeal reinstated those claims against the bond insurer defendants on February 18, 2016. On December 11, 2017, the parties reached a settlement of the litigation, which
has been implemented by the parties and the cases have been dismissed with prejudice.
43
MBIA Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 13: Commitments and Contingencies (continued)
Lynn Tilton and Patriarch Partners XV, LLC v. MBIA Inc. and MBIA Insurance Corp. v.
; Index
No.68880/2015 (N.Y. Sup. Ct., County of Westchester)
On November 2, 2015, Lynn Tilton and Patriarch Partners XV, LLC filed a complaint in New
York State Supreme Court, Westchester County, against MBIA Inc. and MBIA Corp., alleging fraudulent inducement and related claims arising from purported promises made in connection with insurance policies issued by MBIA Corp. on certain
collateralized loan obligations managed by Ms. Tilton and affiliated Patriarch entities, and seeking damages. The plaintiffs filed an amended complaint on January 15, 2016. On December 27, 2016, Justice Alan D. Scheinkman granted in
part and denied in part MBIAs motion to dismiss. On January 17, 2017, MBIA filed its answer. Discovery concluded in October 2017 and a Trial Readiness Conference was held on November 3, 2017, at which the Court set a schedule for the
briefing of summary judgment motions, which was completed as of February 1, 2018 and a decision on which is now pending. On January 8, 2018, Justice Gretchen Walsh was assigned to the case. On March 11, 2018, Ms. Tilton commenced the Zohar
Funds Bankruptcy Cases. On April 30, 2018, the debtor funds in the Zohar Funds Bankruptcy Cases filed the Zohar Bankruptcy Settlement Motion. If the Zohar Bankruptcy Settlement Motion is granted, the parties to the above-captioned litigation would
jointly file a request to stay the case for, at minimum, fifteen months.
National Public Finance Guarantee Corporation v. Padilla, Civ. No.
16-cv-2101
(D.P.R. June 15, 2016) (Besosa, J.)
On June 15, 2016,
National filed a complaint in federal court in Puerto Rico challenging the Puerto Rico Emergency Moratorium and Financial Rehabilitation Act (Law
21-2016
or the Moratorium Act) as unconstitutional
under the United States Constitution. On June 22, 2016, National filed a motion for partial summary judgment on its claim that the Moratorium Act is preempted by the federal Bankruptcy Code. On July 7, 2016, the Puerto Rico defendants
filed a motion to stay the case pursuant to PROMESA, which was granted by the Court in August of 2016. The defendants filed their answer to the complaint on July 26, 2016. On November 15, 2016, the District Court denied Nationals
motion to lift the litigation stay granted pursuant to PROMESA and on January 30, 2017, the District Court denied Nationals partial motion for a summary judgment without prejudice. On January 11, 2017, the U.S. Court of Appeals for
the First Circuit affirmed the denial of a separate plaintiffs motion to lift the PROMESA stay in a related action challenging the Moratorium Act. Accordingly, the case remained stayed through May 1, 2017, at which time the PROMESA stay
expired. However, on May 3, 2017, Puerto Rico filed a Title III petition under PROMESA, thereby staying this dispute under Section 405(e) of PROMESA. On August 1, 2017, the District Court dismissed the case with prejudice.
On August 28, 2017, National filed a motion for reconsideration.
Assured Guaranty Corp. et al. v. Commonwealth of Puerto Rico et al.,
Case
No.
3:17-cv-01578
(D.P.R. May 3, 2017) (Swain, J.)
On May 3,
2017, the Financial Oversight and Management Board filed a petition under Title III of PROMESA to adjust the debts of Puerto Rico. On the same day, National, together with Assured Guaranty Corp. and Assured Guaranty Municipal Corp., filed an
adversary complaint in the case commenced by the Title III filing, alleging that the Fiscal Plan and the Fiscal Plan Compliance Act, signed into law by the Governor of Puerto Rico on April 29, 2017, violate PROMESA and the United States
Constitution. On October 6, 2017, National, together with the other plaintiffs in the filing, voluntarily dismissed the complaint without prejudice.
The Bank of New York Mellon v. Puerto Rico Sales Tax Financing Corporation, et al.
, Case No.
17-133-LTS
(D.P.R. May 16, 2017) (Swain, J.)
On May 16, 2017,
the Bank of New York Mellon, as trustee for COFINA, filed an adversary complaint seeking an interpleader and declaratory relief relating to conflicting directions from multiple stakeholders regarding alleged events of default. National has
intervened in this matter. Given the complexity of the issues, the judge granted Bank of New Yorks interpleader request ordering a freeze on disbursements to all bondholders and temporarily setting aside the funds until the dispute can be
resolved between the parties. Motions for summary judgment were fully briefed as of January 5, 2018. The Court has not yet ruled on the motions for summary judgement.
Assured Guaranty Corp. et al. v. Commonwealth of Puerto Rico et al.
, Case No. 17 BK
3567-LTS
(D.P.R. June 3, 2017) (Swain, J.)
On May 21, 2017, the Oversight Board filed a petition under Title III of PROMESA to adjust the debts for the Puerto Rico Highways & Transportation
Authority (PRHTA). On June 3, 2017, National, together with Assured Guaranty Corp. and Assured Guaranty Municipal Corp. and Financial Guaranty Insurance Company, filed an adversary complaint in the case commenced by the Title III
filing, alleging that the Commonwealth and PRHTA are unlawfully diverting pledged special revenues from the payment of certain PRHTA bonds to the Commonwealths General Fund. Motions to dismiss were filed on June 28, 2017, and oral
arguments were heard on November 21, 2017. On January 30, 2018, the court granted the Commonwealth defendants motion to dismiss the PRHTA-related adversary complaint. On February 9, 2018, National, together with Assured, Assured
Guaranty Municipal Corp. and Financial Guaranty Insurance Company filed their notice of appeal of the motions to dismiss to the United States Court of Appeals for the First Circuit.
44
MBIA Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 13: Commitments and
Contingencies (continued)
National Public Finance Guarantee Corp. et al. v. The Financial Oversight and Mgmt. Bd. et al.
, Case No.
3:17-cv-01882
(D.P.R. June 26, 2017) (Besosa, J.)
On June 26, 2017,
National, together with Assured Guaranty Corp. and Assured Guaranty Municipal Corp., filed a complaint against the Oversight Board, its chairman and certain of its members seeking declaratory, injunctive and mandamus relief requiring the Oversight
Board to comply with certain of its obligations under PROMESA. On July 17, 2017, National, again joined by Assured Guaranty Corp. and Assured Guaranty Municipal Corp., filed an amended complaint against the Oversight Board, its chairman, and
certain of its members in their official and individual capacities, seeking declaratory relief under PROMESA and asserting a claim for nominal damages against the individual defendants for tortious interference with the PREPA Restructuring Support
Agreement. By order of the Court date August 7, 2017, the litigation was stayed.
The Financial Oversight and Management Board for Puerto Rico,
as representative of The Puerto Rico Electric Power Authority, et al.
, Case No. 17 BK
4780-LTS
(D.P.R. July 19, 2017) (Swain, J.)
On July 18, 2017, National, together with other PREPA bondholders, asked the court overseeing PREPAs Title III bankruptcy proceeding to lift the automatic bankruptcy stay, and permit bondholders to seek
appointment of a receiver to oversee PREPA. On September 14, 2017, the court held that PROMESA barred relief from the stay because the appointment of a receiver would (i) interfere with PREPAs property and governmental powers, and
(ii) violate the courts exclusive jurisdiction over PREPAs property. The court also held that a comparison of the harms facing both parties pointed towards denying relief from the stay. The bondholders appealed the decision to the
First Circuit. As of April 23, 2018, the appeal was fully briefed. The First Circuit has not yet scheduled oral argument.
National Public
Finance Guarantee Corp. et al. v. The Financial Oversight and Mgmt. Bd. et al., Case No. 17
BK-04780
(D.P.R. August 7, 2017)
On August 7, 2017, National, together with Assured Guaranty Corp. , Assured Guaranty Municipal Corp., f/k/a Financial Security Assurance Inc., National Public Finance Guarantee Corporation, the Ad Hoc Group of
PREPA Bondholders, and Syncora Guarantee Inc. filed an adversary complaint under Title III of PROMESA against PREPA, Financial Oversight and Management Board for Puerto Rico, Puerto Rico Fiscal Agency and Financial Advisory Authority,
et al
to enforce Plaintiffs contractual interest and constitutional right to revenues that PREPA pledged to bondholders but has thus far refused to turn over. Plaintiffs seek a declaration that Defendants have violated sections 922(d) and
928(a) of the Bankruptcy Code, and that efforts to compel Defendants to apply such revenues to pay for debt service on the Bonds are not stayed as provided under section 922(d) of the Bankruptcy Code. Plaintiffs also seek a declaration that,
pursuant to sections 922(d) and 928 of the Bankruptcy Code as incorporated into PROMESA, PREPA is only authorized to use Revenues to pay for current operating expenses in the current time period, not for future expenses that may be deferred to or
payable at a later date. In addition to declaratory relief, Plaintiffs also seek injunctive relief prohibiting Defendants from taking or causing to be taken any action that would further violate sections 922(d) and 928(a) of the Bankruptcy Code
and ordering Defendants to remit Revenues for the uninterrupted and timely payment of debt service on the Bonds in accordance with sections 922(d) and 928(a) of the Bankruptcy Code. On October 13, 2017, National, together with the other
plaintiffs in the filing, voluntarily dismissed without prejudice the above referenced adversary complaint.
The Official Committee of Unsecured
Creditors of the Commonwealth of Puerto Rico, as agent for the Commonwealth of Puerto Rico v. Bettina Whyte, as agent of the Puerto Rico Sales Tax Financing Corporation,
Adv. Proc. No.
17-257-LTS
in Case No. 17 BK
3283-LTS
(D.P.R. Sept. 8, 2017)
On
August 10, 2017, the Court approved and entered a Stipulation and Order Approving Procedure to Resolve Commonwealth-COFINA Dispute in the PROMESA Title III proceeding relating to whether sales and use taxes purportedly pledged by COFINA to
secure debt are property of the Commonwealth or COFINA under applicable law. On November 16, 2017, National intervened as a Defendant in the adversary proceeding and filed its answer, affirmative defenses, and counterclaims. On
December 21, 2017, the Court issued an order, which, inter alia, dismissed without prejudice, certain claims of the intervenors that exceeded the scope of the Commonwealth-COFINA dispute including certain of Nationals counterclaims.
Nationals first counterclaim which seeks a declaratory judgment that the COFINA statutes are constitutional remains a part of this litigation. On January 13, 2018, the Court permitted the Commonwealth Agent to file a second amended
complaint. Nationals answer was filed on January 30, 2018. The parties filed opening motions for summary judgment on February 21, 2018, opposition briefs on March 14, 2018, and reply briefs on March 21, 2018. National
joined each of the COFINA Agents summary judgment filings. On April 10, 2018, the Court heard oral argument on motions for summary judgment and took the motions under advisement. The Court has not yet ruled on the motions for summary
judgment.
45
MBIA Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 13: Commitments and
Contingencies (continued)
For those aforementioned actions in which it is a defendant, the Company is defending against those actions and
expects ultimately to prevail on the merits. There is no assurance, however, that the Company will prevail in these actions. Adverse rulings in these actions could have a material adverse effect on the Companys ability to implement its
strategy and on its business, results of operations, cash flows and financial condition. At this stage of the litigation, there has not been a determination as to the amount, if any, of damages. Accordingly, the Company is not able to estimate any
amount of loss or range of loss. The Company similarly can provide no assurance that it will be successful in those actions in which it is a plaintiff.
There are no other material lawsuits pending or, to the knowledge of the Company, threatened, to which the Company or any of its subsidiaries is a party.
Lease Commitments
The Company has a
lease agreement for its headquarters in Purchase, New York as well as other immaterial leases for offices in New York, New York and San Francisco, California. The Purchase, New York initial lease term expires in 2030 with the option to terminate the
lease in 2025 upon the payment of a termination amount. This lease agreement included an incentive amount to fund certain leasehold improvements, renewal options, escalation clauses and a free rent period. This lease agreement has been classified as
an operating lease, and operating rent expense has been recognized on a straight-line basis since the second quarter of 2014. As of March 31, 2018, total future minimum lease payments remaining on this lease were $35 million.
Note 14: Subsequent Events
Refer to Note 13: Commitments and Contingencies for information about legal proceedings that occurred after March 31, 2018.
46