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MBIA INC - Quarter Report: 2022 March (Form 10-Q)

 
 
United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
Form
10-Q
 
 
 
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2022
or
 
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                  to                 
Commission File Number:
1-9583
 
 
MBIA INC.
(Exact name of registrant as specified in its charter)
 
 
 
Connecticut
  
06-1185706
(State or other jurisdiction of
incorporation or organization)
  
(I.R.S. Employer
Identification No.)
   
1 Manhattanville Road, Suite 301, Purchase, New York
  
10577
(Address of principal executive offices)
  
(Zip Code)
(914) 273-4545
(Registrant’s telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common Stock
  
MBI
  
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  
☒
    No  
☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  
☒
    No  
☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company,” and “emerging growth company” in Rule
12b-2
of the Exchange Act.
 
Large accelerated filer  
☐
    Accelerated filer  
☒
       
Non-accelerated filer  
☐
    Smaller reporting company  
☐
       
         Emerging growth company  
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  
☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule
12b-2
of the Exchange Act).    Yes  
☐
    No  
☒
As of May 2, 2022, 54,857,375 shares of Common Stock, par value $1 per share, were outstanding.
 
 
 
Table of Contents
 
  
 
  
PAGE
 
  
Item 1.
  
  
  
  
 
1
 
  
  
 
2
 
  
  
 
3
 
  
  
 
4
 
  
  
 
5
 
  
  
 
6
 
  
  
 
6
 
  
  
 
8
 
  
  
 
8
 
  
  
 
9
 
  
  
 
11
 
  
  
 
16
 
  
  
 
24
 
  
  
 
28
 
  
  
 
30
 
  
  
 
31
 
  
  
 
33
 
  
  
 
34
 
  
  
 
35
 
Item 2.
  
  
 
39
 
Item 3.
  
  
 
61
 
Item 4.
  
  
 
61
 
  
Item 1.
  
  
 
62
 
Item 1A.
  
  
 
62
 
Item 2.
  
  
 
64
 
Item 6.
  
  
 
64
 
  
 
65
 
 
i
Table of Contents
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
This quarterly report of MBIA Inc., together with its consolidated subsidiaries, (collectively, “MBIA”, the “Company”, “we”, “us” or “our”) includes statements that are not historical or current facts and are “forward-looking statements” made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The words “believe”, “anticipate”, “project”, “plan”, “expect”, “estimate”, “intend”, “will likely result”, “looking forward”, or “will continue” and similar expressions identify forward-looking statements. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. MBIA cautions readers not to place undue reliance on any such forward-looking statements, which speak only to their respective dates. We undertake no obligation to publicly correct or update any forward-looking statement if the Company later becomes aware that such result is not likely to be achieved.
The following are some of the general factors that could affect financial performance or could cause actual results to differ materially from estimates contained in or underlying the Company’s forward-looking statements:
 
 
•
 
increased credit losses or impairments on public finance obligations that National Public Finance Guarantee Corporation (“National”) insures issued by state, local and territorial governments and finance authorities and other providers of public services, located in the U.S. or abroad, that are experiencing fiscal stress;
 
 
•
 
the possibility that loss reserve estimates are not adequate to cover potential claims;
 
 
•
 
a disruption in the cash flow from National or an inability to access the capital markets and our exposure to significant fluctuations in liquidity and asset values in the global credit markets as a result of collateral posting requirements;
 
 
•
 
our ability to fully implement our strategic plan;
 
 
•
 
the possibility that MBIA Insurance Corporation will have inadequate liquidity or resources to timely pay claims as a result of higher than expected losses on certain insured transactions or as a result of a delay or failure in collecting expected recoveries, which could lead the New York State Department of Financial Services (“NYSDFS”) to put MBIA Insurance Corporation into a rehabilitation or liquidation proceeding under Article 74 of the New York Insurance Law and/or take such other actions as the NYSDFS may deem necessary to protect the interests of MBIA Insurance Corporation’s policyholders;
 
 
•
 
the impact on our insured portfolios or business operations caused by the global spread of the novel coronavirus
COVID-19;
 
 
•
 
deterioration in the economic environment and financial markets in the United States or abroad, real estate market performance, credit spreads, interest rates and foreign currency levels; and
 
 
•
 
the effects of changes to governmental regulation, including insurance laws, securities laws, tax laws, legal precedents and accounting rules.
The above factors provide a summary of and are qualified in their entirety by the risk factors discussed under “Risk Factors” in Part II, Other Information, Item 1A included in this Quarterly Report on Form
10-Q.
The Company encourages readers to review these risk factors in their entirety.
This quarterly report of MBIA Inc. also includes statements of the opinion and belief of MBIA management which may be forward-looking statements subject to the preceding cautionary disclosure. Unless otherwise indicated herein, the basis for each statement of opinion or belief of MBIA management in this report is the relevant industry or subject matter experience and views of certain members of MBIA’s management. Accordingly, MBIA cautions readers not to place undue reliance on any such statements, because like all statements of opinion or belief they are not statements of fact and may prove to be incorrect. We undertake no obligation to publicly correct or update any statement of opinion or belief if the Company later becomes aware that such statement of opinion or belief was not or is not then accurate. In addition, readers are cautioned that each statement of opinion or belief may be further qualified by disclosures set forth elsewhere in this report or in other disclosures by MBIA.
 
ii
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
MBIA INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In millions except share and per share amounts)
 
          
          
 
  
March 31, 2022
 
December 31, 2021
Assets
 
        
Investments:
                 
Fixed-maturity securities held as
available-for-sale,
at fair value (net of allowance for credit losses $3 and $-, amortized cost $2,710 and $2,016)
   
$
2,677
 
  
$
2,157
 
Investments carried at fair value
   
 
356
 
  
 
258
 
Investments pledged as collateral, at fair value (amortized cost $- and $4)
   
 
-
 
  
 
4
 
Short-term investments, at fair value (amortized cost $441 and $374)
   
 
441
 
  
 
374
 
    
 
 
 
  
 
 
 
Total investments
   
 
3,474
 
  
 
2,793
 
Cash and cash equivalents
   
 
147
 
  
 
151
 
Premiums receivable (net of allowance for credit losses $5 and $5)
   
 
177
 
  
 
178
 
Deferred acquisition costs
   
 
41
 
  
 
42
 
Insurance loss recoverable
   
 
366
 
  
 
1,296
 
Other assets
   
 
81
 
  
 
67
 
Assets of consolidated variable interest entities:
                 
Cash
   
 
4
 
  
 
9
 
Investments carried at fair value
   
 
53
 
  
 
60
 
Loans receivable at fair value
   
 
76
 
  
 
77
 
Other assets
   
 
24
 
  
 
23
 
    
 
 
 
  
 
 
 
Total assets
   
$
4,443
 
  
$
4,696
 
    
 
 
 
  
 
 
 
Liabilities and Equity
                 
Liabilities:
                 
Unearned premium revenue
   
$
308
 
  
$
322
 
Loss and loss adjustment expense reserves
   
 
886
 
  
 
894
 
Long-term debt
   
 
2,344
 
  
 
2,331
 
Medium-term notes (includes financial instruments carried at fair value of $99 and $98)
   
 
589
 
  
 
590
 
Investment agreements
   
 
274
 
  
 
274
 
Derivative liabilities
   
 
99
 
  
 
131
 
Other liabilities
   
 
210
 
  
 
163
 
Liabilities of consolidated variable interest entities:
                 
Variable interest entity notes carried at fair value
   
 
285
 
  
 
291
 
    
 
 
 
  
 
 
 
Total liabilities
   
 
4,995
 
  
 
4,996
 
    
 
 
 
  
 
 
 
Commitments and contingencies (Refer to Note 13: Commitments and Contingencies)
               
Equity:
                 
Preferred stock, par value $1 per share; authorized shares - 10,000,000; issued and outstanding - none
   
 
-
 
  
 
-
 
Common stock, par value $1 per share; authorized shares - 400,000,000; issued shares - 283,186,115 and 283,186,115
   
 
283
 
  
 
283
 
Additional
paid-in
capital
   
 
2,919
 
  
 
2,931
 
Retained earnings (deficit)
   
 
(531
) 
  
 
(458
) 
Accumulated other comprehensive income (loss), net of tax of $8 and $8
   
 
(82
) 
  
 
100
 
Treasury stock, at cost - 228,329,115 and 228,630,003 shares
   
 
(3,154
) 
  
 
(3,169
) 
    
 
 
 
  
 
 
 
Total shareholders’ equity of MBIA Inc.
   
 
(565
) 
  
 
(313
) 
Preferred stock of subsidiary
   
 
13
 
  
 
13
 
    
 
 
 
  
 
 
 
Total equity
   
 
(552
) 
  
 
(300
) 
    
 
 
 
  
 
 
 
Total liabilities and equity
   
$
4,443
 
  
$
4,696
 
    
 
 
 
  
 
 
 
The accompanying notes are an integral part of the consolidated financial statements.
 
1
MBIA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In millions except share and per share amounts)
 
                                   
    
Three Months Ended March 31,
    
2022
  
2021
Revenues:
                 
Premiums earned:
                 
Scheduled premiums earned
   
$
11
 
  
$
15
 
Refunding premiums earned
   
 
4
 
  
 
5
 
    
 
 
 
  
 
 
 
Premiums earned (net of ceded premiums of $- and $1)
   
 
15
 
  
 
20
 
Net investment income
   
 
18
 
  
 
15
 
Net realized investment gains (losses)
   
 
(3
) 
  
 
(1
) 
Net gains (losses) on financial instruments at fair value and foreign exchange
   
 
17
 
  
 
52
 
Other net realized gains (losses)
   
 
(3
) 
  
 
-
 
Revenues of consolidated variable interest entities:
                 
Net gains (losses) on financial instruments at fair value and foreign exchange
   
 
(4
) 
  
 
(14
) 
    
 
 
 
  
 
 
 
Total revenues
   
 
40
 
  
 
72
 
Expenses:
                 
Losses and loss adjustment
   
 
49
 
  
 
98
 
Amortization of deferred acquisition costs
   
 
2
 
  
 
2
 
Operating
   
 
19
 
  
 
26
 
Interest
   
 
41
 
  
 
41
 
Expenses of consolidated variable interest entities:
                 
Operating
   
 
2
 
  
 
2
 
Interest
   
 
-
 
  
 
9
 
    
 
 
 
  
 
 
 
Total expenses
   
 
113
 
  
 
178
 
    
 
 
 
  
 
 
 
Income (loss) before income taxes
   
 
(73
) 
  
 
(106
) 
Provision (benefit) for income taxes
   
 
-
 
  
 
-
 
    
 
 
 
  
 
 
 
Net income (loss)
   
$
(73
) 
  
$
(106
) 
    
 
 
 
  
 
 
 
Net income (loss) per common share:
                 
Basic
   
$
(1.48
) 
  
$
(2.16
) 
Diluted
   
$
(1.48
) 
  
$
(2.16
) 
Weighted average number of common shares outstanding:
                 
Basic
   
 
49,631,448
 
  
 
49,258,110
 
Diluted
   
 
49,631,448
 
  
 
49,258,110
 
The accompanying notes are an integral part of the consolidated financial statements.
 
2
MBIA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
(In millions)
 
                                   
    
Three Months Ended March 31,
    
2022
  
2021
Net income (loss)
   
$
(73
) 
  
$
(106
) 
Other comprehensive income (loss):
                 
Available-for-sale
securities with no credit losses:
                 
Unrealized gains (losses) arising during the period
   
 
(171
) 
  
 
(87
) 
Reclassification adjustments for (gains) losses included in net income (loss)
   
 
-
 
  
 
(5
) 
Foreign currency translation gains (losses)
   
 
-
 
  
 
1
 
Instrument-specific credit risk of liabilities measured at fair value:
                 
Unrealized gains (losses) arising during the period
   
 
(14
) 
  
 
(5
) 
Reclassification adjustments for (gains) losses included in net income (loss)
   
 
3
 
  
 
20
 
    
 
 
 
  
 
 
 
Total other comprehensive income (loss)
   
 
(182
) 
  
 
(76
) 
    
 
 
 
  
 
 
 
Comprehensive income (loss)
   
$
(255
) 
  
$
(182
) 
    
 
 
 
  
 
 
 
The accompanying notes are an integral part of the consolidated financial statements.
 
3
MBIA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)
(In millions except share amounts)
 
                                   
    
Three Months Ended March 31,
    
2022
  
2021
Common shares
                 
Balance at beginning and end of period
   
 
283,186,115
 
  
 
283,186,115
 
Common stock amount
                 
Balance at beginning and end of period
   
$
283
 
  
$
283
 
Additional
paid-in
capital
                 
Balance at beginning of period
   
$
2,931
 
  
$
2,962
 
Period change
   
 
(12
) 
  
 
(28
) 
    
 
 
 
  
 
 
 
Balance at end of period
   
$
2,919
 
  
$
2,934
 
Retained earnings
                 
Balance at beginning of period
   
$
(458
) 
  
$
(13
) 
Net income (loss)
   
 
(73
) 
  
 
(106
) 
    
 
 
 
  
 
 
 
Balance at end of period
   
$
(531
) 
  
$
(119
) 
Accumulated other comprehensive income (loss)
                 
Balance at beginning of period
   
$
100
 
  
$
115
 
Other comprehensive income (loss)
   
 
(182
) 
  
 
(76
) 
    
 
 
 
  
 
 
 
Balance at end of period
   
$
(82
) 
  
$
39
 
Treasury shares
                 
Balance at beginning of period
   
 
(228,630,003
) 
  
 
(229,508,967
) 
Other
   
 
300,888
 
  
 
671,502
 
    
 
 
 
  
 
 
 
Balance at end of period
   
 
(228,329,115
) 
  
 
(228,837,465
) 
Treasury stock amount
                 
Balance at beginning of period
   
$
(3,169
) 
  
$
(3,211
) 
Other
   
 
15
 
  
 
33
 
    
 
 
 
  
 
 
 
Balance at end of period
   
$
(3,154
) 
  
$
(3,178
) 
Total shareholders’ equity of MBIA Inc.
                 
Balance at beginning of period
   
$
(313
) 
  
$
136
 
Period change
   
 
(252
) 
  
 
(177
) 
    
 
 
 
  
 
 
 
Balance at end of period
   
$
(565
) 
  
$
(41
) 
    
 
 
 
  
 
 
 
Preferred stock of subsidiary shares
                 
Balance at beginning and end of period
   
 
1,315
 
  
 
1,315
 
Preferred stock of subsidiary amount
                 
Balance at beginning and end of period
   
$
13
 
  
$
13
 
    
 
 
 
  
 
 
 
Total equity
   
$
(552
) 
  
$
(28
) 
    
 
 
 
  
 
 
 
The accompanying notes are an integral part of the consolidated financial statements.
 
4
MBIA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In millions)
 
                                   
    
Three Months Ended March 31,
    
2022
  
2021
Cash flows from operating activities:
                 
Premiums, fees and reimbursements received
   
$
2
 
  
$
3
 
Investment income received
   
 
19
 
  
 
21
 
Financial guarantee losses and loss adjustment expenses paid
   
 
(336
) 
  
 
(58
) 
Proceeds from recoveries and reinsurance
   
 
622
 
  
 
17
 
Proceeds from loan repurchase commitments
   
 
-
 
  
 
600
 
Operating expenses paid and other operating
   
 
(22
) 
  
 
(32
) 
Interest paid, net of interest converted to principal
   
 
(12
) 
  
 
(22
) 
    
 
 
 
  
 
 
 
Net cash provided (used) by operating activities
   
 
273
 
  
 
529
 
    
 
 
 
  
 
 
 
Cash flows from investing activities:
                 
Purchases of
available-for-sale
investments
   
 
(352
) 
  
 
(299
) 
Sales of
available-for-sale
investments
   
 
106
 
  
 
178
 
Paydowns and maturities of
available-for-sale
investments
   
 
65
 
  
 
96
 
Purchases of investments at fair value
   
 
(47
) 
  
 
(62
) 
Sales, paydowns, maturities and other proceeds of investments at fair value
   
 
44
 
  
 
59
 
Sales, paydowns and maturities (purchases) of short-term investments, net
   
 
(68
) 
  
 
(342
) 
Paydowns and maturities of loans receivable
   
 
2
 
  
 
5
 
(Payments) proceeds for derivative settlements
   
 
(4
) 
  
 
(53
) 
    
 
 
 
  
 
 
 
Net cash provided (used) by investing activities
   
 
(254
) 
  
 
(418
) 
    
 
 
 
  
 
 
 
Cash flows from financing activities:
                 
Proceeds from investment agreements
   
 
2
 
  
 
-
 
Principal paydowns of investment agreements
   
 
(1
) 
  
 
-
 
Principal paydowns of variable interest entity notes
   
 
(11
) 
  
 
(156
) 
Principal paydowns of long-term debt
   
 
(17
) 
  
 
-
 
Purchases of treasury stock
   
 
(2
) 
  
 
(1
) 
    
 
 
 
  
 
 
 
Net cash provided (used) by financing activities
   
 
(29
) 
  
 
(157
) 
    
 
 
 
  
 
 
 
Effect of exchange rate changes on cash and cash equivalents
   
 
1
 
  
 
-
 
Net increase (decrease) in cash and cash equivalents
   
 
(9
) 
  
 
(46
) 
Cash and cash equivalents - beginning of period
   
 
160
 
  
 
167
 
    
 
 
 
  
 
 
 
Cash and cash equivalents - end of period
   
$
151
 
  
$
121
 
    
 
 
 
  
 
 
 
Reconciliation of net income (loss) to net cash provided (used) by operating activities:
                 
Net income (loss)
   
$
(73
) 
  
$
(106
) 
Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities:
                 
Change in:
                 
Accrued investment income
   
 
(5
) 
  
 
23
 
Unearned premium revenue
   
 
(15
) 
  
 
(19
) 
Loss and loss adjustment expense reserves
   
 
(13
) 
  
 
1
 
Insurance loss recoverable
   
 
392
 
  
 
55
 
Loan repurchase commitments
   
 
-
 
  
 
604
 
Accrued interest payable
   
 
24
 
  
 
25
 
Accrued expenses
   
 
(36
) 
  
 
(33
) 
Net realized investment gains (losses)
   
 
3
 
  
 
1
 
Net (gains) losses on financial instruments at fair value and foreign exchange
   
 
(13
) 
  
 
(42
) 
Other net realized (gains) losses
   
 
3
 
  
 
-
 
Other operating
   
 
6
 
  
 
20
 
    
 
 
 
  
 
 
 
Total adjustments to net income (loss)
   
 
346
 
  
 
635
 
    
 
 
 
  
 
 
 
Net cash provided (used) by operating activities
   
$
273
 
  
$
529
 
    
 
 
 
  
 
 
 
The accompanying notes are an integral part of the consolidated financial statements.
 
5
MBIA Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 1: Business Developments and Risks and Uncertainties
Summary

MBIA Inc., together with its consolidated subsidiaries, (collectively, “MBIA” or the “Company”) operates within the financial guarantee insurance industry. MBIA manages three operating segments: 1) United States (“U.S.”) public finance insurance; 2) corporate; and 3) international and structured finance insurance. The Company’s U.S. public finance insurance business is managed through National Public Finance Guarantee Corporation (“National”), the corporate segment is operated through MBIA Inc. and several of its subsidiaries, including its service company, MBIA Services Corporation (“MBIA Services”) and its international and structured finance insurance business is primarily operated through MBIA Insurance Corporation and its subsidiary (“MBIA Corp.”).
Refer to “Note 10: Business Segments” for further information about the Company’s operating segments.
Business Developments
Puerto Rico
On January 1, 2022, the Commonwealth of Puerto Rico and certain of its instrumentalities (“Puerto Rico”) defaulted on scheduled debt service for National insured bonds and National paid gross claims in the aggregate of $47 million. As of March 31, 2022, National had $2.1 billion of debt service outstanding related to Puerto Rico.
PREPA
In September of 2019, National agreed to join the restructuring support agreement, as amended (“RSA”), with the Puerto Rico Electric Power Authority (“PREPA”), other monoline insurers, a group of uninsured PREPA bondholders, Puerto Rico, and the Financial Oversight and Management Board for Puerto Rico (the “Oversight Board”). The Rule 9019 hearing to approve the RSA had been delayed several times, and most recently was adjourned due to the outbreak of the novel coronavirus
COVID-19
(“COVID-19”)
until further notice. On March 8, 2022, the Puerto Rico Fiscal Agency and Financial Advisory Authority (“AAFAF”) and PREPA terminated the RSA under a provision permitting termination if an order approving the RSA had not been entered by September 30, 2019. On April 8, 2022, the Court appointed a new panel of judges to commence mediation among the Oversight Board, the Ad Hoc creditor group as holders of PREPA Senior Bonds, Assured, National and Syncora (the “April 8 Order”). The April 8 Order provides that mediation will terminate on June 1, 2022 unless the mediation team extends the time to July 1, 2022. The April 8 Order further provides that nothing therein acts as a stay of any pending adversary proceedings or contested matters in the PREPA case, subject to the Court’s pending request to the Oversight Board for a status report by June 1, 2022.
In January of 2022, National sold an additional $231 
million of PREPA bankruptcy claims related to insurance claims paid on matured National-insured PREPA bonds. As of March 31, 2022, National has sold approximatel
y 35%
of National’s par claims to PREPA. These sales monetized a portion of National’s salvage asset and reduced potential volatility and ongoing risk of remediation around the PREPA credit. Currently, National does not have a material amount of additional par claims to PREPA that have matured and can be sold.
GO and HTA
On February 22, 2021, National agreed to join a plan support agreement, dated as of February 22, 2021 (the “GO PSA”), among the Oversight Board, certain holders of Puerto Rico Commonwealth GO (“GO”) Bonds and Puerto Rico Public Buildings Authority (“PBA”) Bonds, Assured Guaranty Corp. and Assured Guaranty Municipal Corp, and Syncora Guarantee Inc. in connection with the GO and PBA Title III cases. The Commonwealth Plan of Adjustment was confirmed on January 18, 2022. The GO PSA was effective and implemented on March 15, 2022, and among other things, National received cash, including certain fees, newly issued General Obligation bonds and a contingent value instrument (“CVI”) totaling approximately
 $1.0 billion. Subsequent to the GO PSA implementation, National made $277 
million of acceleration and commutation payments pursuant to the GO PSA. Accordingly, National’s GO and PBA gross par outstanding and debt service outstanding have been reduced to
 
zero
from approximately $
380
 million and $
495
 million, respectively.
On April 12, 2021, National, Assured Guaranty Corp., Assured Guaranty Municipal Corp. and the Oversight Board reached an agreement in principle settling certain clawback claims and providing for a distribution of cash, bonds and a CVI to Puerto Rico Highway and Transportation Authority (“HTA”) bondholders subject to completing negotiations on a plan support agreement in respect of an plan of adjustment (the “HTA PSA”). On May 5, 2021, National, Assured Guaranty Corp., Assured Guaranty Municipal Corp. and the Oversight Board entered into the HTA PSA. On May 2, 2022, the Oversight Board filed the Title III Plan of Adjustment for the Puerto Rico Highways and Transportation Authority (the “HTA Plan”), together with the Disclosure Statement and supporting documents. National expects to receive during the second quarter of 2022 its allocable portion of cash and CVI relating to HTA, which aggregate amounts to be distributed to bondholders totals approximately
 $264 million and $2.2 billion, respectively. In addition, National shall receive its allocable portion of approximately $1.2 
billion of newly issued HTA bonds (or cash equivalent) following the effective date of the HTA Plan.
 

6
MBIA Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 1: Business Developments and Risks and Uncertainties (continued)

 
Refer to “Note 5: Loss and Loss Adjustment Expense Reserves” for a further discussion of the Company’s Puerto Rico reserves and recoveries.
Risks and Uncertainties
The Company’s financial statements include estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. The outcome of certain significant risks and uncertainties could cause the Company to revise its estimates and assumptions or could cause actual results to differ materially from the Company’s estimates. The discussion below highlights the significant risks and uncertainties that could have a material effect on the Company’s financial statements and business objectives in future periods.
National’s Insured Portfolio
National continues to monitor and remediate its existing insured portfolio and may also pursue strategic alternatives that could enhance shareholder value. Certain state and local governments and territory obligors that National insures are under financial and budgetary stress. This could lead to an increase in defaults by such entities on the payment of their obligations and losses or impairments on a greater number of National’s insured transactions. In particular, HTA and PREPA are currently in bankruptcy-like proceedings in the United States District Court for the District of Puerto Rico, pursuant to the PROMESA. Since 2016, Puerto Rico has been unable or unwilling to pay its obligations as and when due, and National has been required to pay claims of unpaid principal and interest when due under its insurance policies as a consequence. Puerto Rico may continue to fail to make payments when due, which could cause National to make additional claims payments which could be material. While National will seek to recover any claim payments it makes under its guarantees, there is no assurance that it will be able to recover such payments. National monitors and analyzes these situations and other stressed credits closely, and the overall extent and duration of this stress is uncertain.
MBIA Corp.’s Insured Portfolio
MBIA Corp.’s primary objectives are to satisfy all claims by its policyholders and to maximize future recoveries, if any, for its senior lending and surplus note holders, and then its preferred stock holders. MBIA Corp. is executing this strategy by, among other things, taking steps to maximize the collection of recoveries and by reducing and mitigating potential losses on its insurance exposures. MBIA Corp.’s insured portfolio performance could deteriorate and result in additional significant loss reserves and claim payments. MBIA Corp.’s ability to meet its obligations is limited by available liquidity and its ability to secure additional liquidity through financing and other transactions. There can be no assurance that MBIA Corp. will be successful in generating sufficient resources to meet its obligations.
Zohar and RMBS Recoveries
Payment of claims on MBIA Corp.’s policies insuring the
Class A-1
and
A-2
notes issued by Zohar CDO
2003-1,
Limited (“Zohar I”) and Zohar II
2005-1,
Limited (“Zohar II”), entitles MBIA Corp. to reimbursement of such amounts plus interest and expenses and/or to exercise certain rights and remedies to seek recovery of such amounts. MBIA Corp. anticipates that it will receive substantial recoveries on the loans made to, and equity interests in, companies that, until late March of 2020, were purportedly controlled and managed by the sponsor and former collateral manager of the Zohar collateralized debt obligations (“CDOs”) referenced above (collectively, the “Zohar Collateral”). There still remains significant uncertainty with respect to the realizable value of the remaining Zohar Collateral. Further, as the monetization process at the remaining portfolio companies continues to unfold in coordination with the new directors and managers in place, and new information concerning the financial condition of the portfolio companies is disclosed, the Company will continue to revise its expectations for recoveries.
MBIA Corp. also projects to collect recoveries from prior claims associated with insured residential mortgage-backed securities (“RMBS”); however, the amount and timing of these collections are uncertain.
Failure to collect its expected recoveries could impede MBIA Corp.’s ability to make payments when due on other policies. MBIA Corp. believes that if the New York State Department of Financial Services (“NYSDFS”) concludes at any time that MBIA Insurance Corporation will not be able to pay its policyholder claims, the NYSDFS would likely put MBIA Insurance Corporation into a rehabilitation or liquidation proceeding under Article 74 of the New York Insurance Law (“NYIL”) and/or take such other actions as the NYSDFS may deem necessary to protect the interests of MBIA Insurance Corporation’s policyholders. The determination to commence such a proceeding or take other such actions is within the exclusive control of the NYSDFS.
 
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 dividends, the Company does not believe that a rehabilitation or liquidation proceeding with respect to MBIA Insurance Corporation would have any significant liquidity impact on MBIA Inc. Such a proceeding could have material adverse consequences for MBIA Corp., including the termination of derivative contracts for which counterparties may assert market-based claims, the acceleration of debt obligations issued by affiliates and insured by MBIA Corp., the loss of control of MBIA Insurance Corporation to a rehabilitator or liquidator, and unplanned costs.
Refer to “Note 5: Loss and Loss Adjustment Expense Reserves” for additional information about MBIA Corp.’s recoveries.
Corporate Liquidity
Based on the Company’s projections of National’s dividends and other cash inflows, the Company expects that MBIA Inc. will have sufficient cash to satisfy its debt service and general corporate needs. However, MBIA Inc. continues to have liquidity risk that could be caused by interruption of or reduction in dividends from National, deterioration in the performance of invested assets, impaired access to the capital markets, as well as other factors, which are not anticipated at this time. Furthermore, failure by MBIA Inc. to settle liabilities that are insured by MBIA Corp. could result in claims on MBIA Corp.
Note 2: Significant Accounting Policies
The Company has disclosed its significant accounting policies in “Note 2: Significant Accounting Policies” in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form
10-K
for the year ended December 31, 2021. The following significant accounting policies provide an update to those included in the Company’s Annual Report on Form
10-K.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form
10-Q
and Article 10 of Regulation
S-X
and, accordingly, do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) for annual periods. These statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Annual Report on Form
10-K
for the year ended December 31, 2021. The accompanying consolidated financial statements have not been audited by an independent registered public accounting firm in accordance with the standards of the Public Company Accounting Oversight Board (U.S.), but in the opinion of management such financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for the fair statement of the Company’s consolidated financial position and results of operations. All material intercompany balances and transactions have been eliminated.
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. As additional information becomes available or actual amounts become determinable, the recorded estimates are revised and reflected in operating results.
The results of operations for the three months ended March 31, 2022 may not be indicative of the results that may be expected for the year ending December 31, 2022. The December 31, 2021 consolidated balance sheet was derived from audited financial statements, but does not include all disclosures required by GAAP for annual periods.
Investments
The Company classifies its investments as available-for-sale (“AFS”), held-to-maturity (“HTM”), or trading. AFS investments are reported in the consolidated balance sheets at fair value with non-credit related unrealized gains and losses, net of applicable deferred income taxes, reflected in accumulated other comprehensive income (loss) (“AOCI”) in shareholders’ equity. The specific identification method is used to determine realized gains and losses on AFS securities. Investments carried at fair value consist of equity instruments, investments elected under the fair value option, and investments classified as trading. Short-term investments include all fixed-maturity securities held as AFS with a remaining maturity of less than one year at the date of purchase, including commercial paper and money market securities.
Changes in the fair values of investments carried at fair value are reflected in earnings as part of “Net gains (losses) on financial instruments at fair value and foreign exchange” on the Company’s consolidated statements of operations. For fixed-maturity securities classified as trading and for VIE investments carried at fair value, interest income is also recorded as part of fair value changes within “Net gains (losses) on financial instruments at fair value and foreign exchange”. Realized gains and losses from the sale and other dispositions of AFS investments are reflected in earnings as part of “Net realized investment gains (losses)” on the Company’s consolidated statements of operations.
Investment income is recorded as earned which includes the current period interest accruals deemed collectible. Accrued interest income is recorded as part of “Other assets” on the Company’s consolidated balance sheets. Bond discounts and premiums are amortized using the effective yield method over the remaining term of the securities and reported in “Net investment income” on the Company’s consolidated statements of operations. However, premiums on certain callable debt securities are amortized to the next call date. For MBS and asset-backed securities (“ABS”), discounts and premiums are amortized using the retrospective or prospective method
Accrued interest income on debt securities is not assessed for credit losses since the Company reverses any past due accrued interest income through earnings as a charge against net investment income. Interest income is subsequently recognized to the extent cash is received.
Credit Losses on Debt Securities
For AFS debt securities, the Company’s consolidated statements of operations reflect the full impairment (the difference between a security’s amortized cost basis and fair value) if the Company intends to sell or would more likely than not be required to sell before the expected recovery of the amortized cost basis. AFS debt securities in an unrealized loss position are evaluated on a quarterly basis to determine if credit losses exist. The Company considers that credit losses exist when the Company does not expect to recover the entire amortized cost basis of the debt security. The Company measures an allowance for credit losses on a security-by-security basis as the difference between the recorded investment and the present value of the cash flows expected to be collected, discounted at the instrument’s effective interest rate. Only the amounts of impairment associated with the credit losses are recognized as charges to earnings.
The carrying values of debt securities are presented net of any allowance for credit losses. For AFS debt securities, adjustments to the amortized cost basis are recorded if there is an intent to sell before recovery of the impairment. For debt securities with an allowance for credit loss, changes in credit losses including accretion of the allowance for credit losses are recognized in earnings through other net realized gains (losses) with a corresponding change to the allowance for credit losses.
Note 3: Recent Accounting Pronouncements
Recently Adopted Accounting Standards
During the three months ended March 31, 2022, the Company did not adopt any new accounting pronouncements that had a material impact on its consolidated financial statements.
 
8
MBIA Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 3: Recent Accounting Pronouncements (continued)
 
Recent Accounting Developments
Reference Rate Reform (Topic 848): Scope (ASU
2021-01)
and Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (ASU
2020-04)
In January of 2021, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”)
2021-01,
“Reference Rate Reform – Scope,” which clarified the scope and application of the original guidance, ASU
2020-04,
“Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting,” issued in March of 2020. ASU
2020-04
provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships that reference London Interbank Offered Rate (“LIBOR”) or other rates that are expected to be discontinued, subject to meeting certain criteria. Both
 
ASU
2020-04
and ASU
2021-01
were effective upon issuance, and the Company may elect to apply the amendments prospectively through December 31, 2022. The Company is evaluating the potential impact of adopting ASU
2021-01
and
2020-04
and expect to adopt these ASUs when LIBOR is discontinued by June of 2023.
Note 4: Variable Interest Entities
Primarily through MBIA’s international and structured finance insurance segment, the Company provides credit protection to issuers of obligations that may involve issuer-sponsored special purpose entities (“SPEs”). An SPE may be considered a variable interest entity (“VIE”) to the extent the SPE’s total equity at risk is not sufficient to permit the SPE to finance its activities without additional subordinated financial support or its equity investors lack any one of the following characteristics: (i) the power to direct the activities of the SPE that most significantly impact the entity’s economic performance or (ii) the obligation to absorb the expected losses of the entity or the right to receive the expected residual returns of the entity. A holder of a variable interest or interests in a VIE is required to assess whether it has a controlling financial interest, and thus is required to consolidate the entity as primary beneficiary. An assessment of a controlling financial interest identifies the primary beneficiary as the variable interest holder that has both of the following characteristics: (i) the power to direct the activities of the VIE that most significantly impact the entity’s economic performance and (ii) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. The primary beneficiary is required to consolidate the VIE. An ongoing reassessment of controlling financial interest is required to be performed based on any substantive changes in facts and circumstances involving the VIE and its variable interests.
The Company evaluates issuer-sponsored SPEs initially to determine if an entity is a VIE, and is required to reconsider its initial determination if certain events occur. For all entities determined to be VIEs, MBIA performs an ongoing reassessment to determine whether its guarantee to provide credit protection on obligations issued by VIEs provides the Company with a controlling financial interest. Based on its ongoing reassessment of controlling financial interest, the Company determines whether a VIE is required to be consolidated or deconsolidated.
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 that most significantly impact the VIE’s economic performance. The Company generally considers its guarantee of principal and interest payments of insured obligations, given nonperformance by a VIE, to be an obligation to absorb losses of the entity that could potentially be significant to the VIE. At the time the Company determines it has the ability to direct the activities of a VIE that most significantly impact the economic performance of the entity based on facts and circumstances, MBIA is deemed to have a controlling financial interest in the VIE and is required to consolidate the entity as primary beneficiary. The Company performs an ongoing reassessment of controlling financial interest that may result in consolidation or deconsolidation of any VIE.
 
9
MBIA Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 4: Variable Interest Entities (continued)
 
Consolidated VIEs
The carrying amounts of assets and liabilities of consolidated VIEs were $157 million and $285 million, respectively, as of March 31, 2022 and $169 million and $291 million, respectively, as of December 31, 2021. The carrying amounts of assets and liabilities are presented separately in “Assets of consolidated variable interest entities” and “Liabilities of consolidated variable interest entities” on the Company’s consolidated balance sheets. VIEs are consolidated or deconsolidated based on an ongoing reassessment of controlling financial interest, when events occur or circumstances arise, and whether the ability to exercise rights that constitute power to direct activities of any VIEs are present according to the design and characteristics of these entities. During the first quarter of 2022 and 2021, there were no consolidation or deconsolidation of VIEs by the Company. Consolidation and deconsolidation gains and losses, if any, are recorded within “Other net realized gains (losses)” under “Revenues of consolidated variable interest entities” on the Company’s consolidated statements of operations.
Holders of insured obligations of issuer-sponsored VIEs do not have recourse to the general assets of the Company. In the event of nonpayment of an insured obligation issued by a consolidated VIE, the Company is obligated to pay principal and interest, when due, on the respective insured obligation only. The Company’s exposure to consolidated VIEs is limited to the credit protection provided on insured obligations and any additional variable interests held by the Company.
 
Nonconsolidated VIEs
The following tables present the Company’s maximum exposure to loss for nonconsolidated VIEs and carrying values of the assets and liabilities for its interests in these VIEs in its insurance operations as of March 31, 2022 and December 31, 2021. The maximum exposure to loss as a result of MBIA’s variable interests in VIEs is represented by insurance in force. Insurance in force is the maximum future payments of principal and interest which may be required under commitments to make payments on insured obligations issued by nonconsolidated VIEs. The Company has aggregated nonconsolidated VIEs based on the underlying credit exposure of the insured obligation. The nature of the Company’s variable interests in nonconsolidated VIEs is related to financial guarantees and any investments in obligations issued by nonconsolidated VIEs. 
 
          
          
          
          
          
          
 
  
March 31, 2022
 
  
 
  
Carrying Value of Assets
  
Carrying Value of Liabilities
In millions
  
Maximum
Exposure
to Loss
  
Investments
  
Premiums
Receivable
  
Insurance Loss
Recoverable
  
Unearned
Premium
Revenue
  
Loss and Loss
Adjustment
Expense
Reserves
Insurance:
  
  
  
  
  
  
Global structured finance:
  
  
  
  
  
  
Mortgage-backed residential
   
$
1,228
 
   
$
119
 
   
$
13
 
   
$
34
 
   
$
11
 
   
$
395
 
Consumer asset-backed
   
 
210
 
   
 
-
 
   
 
1
 
   
 
3
 
   
 
-
 
   
 
6
 
Corporate asset-backed
   
 
490
 
   
 
-
 
   
 
3
 
   
 
201
 
   
 
4
 
   
 
4
 
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total global structured finance
   
 
1,928
 
   
 
119
 
   
 
17
 
   
 
238
 
   
 
15
 
   
 
405
 
Global public finance
   
 
848
 
   
 
-
 
   
 
6
 
   
 
-
 
   
 
5
 
   
 
-
 
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total insurance
   
$
2,776
 
   
$
119
 
   
$
23
 
   
$
238
 
   
$
20
 
   
$
405
 
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
 
          
          
          
          
          
          
 
  
December 31, 2021
 
  
 
  
Carrying Value of Assets
  
Carrying Value of Liabilities
In millions
  
Maximum
Exposure
to Loss
  
Investments
  
Premiums
Receivable
  
Insurance Loss
Recoverable
  
Unearned
Premium
Revenue
  
Loss and Loss
Adjustment
Expense
Reserves
Insurance:
  
  
  
  
  
  
Global structured finance:
  
  
  
  
  
  
Mortgage-backed residential
   
$
1,261
 
   
$
87
 
   
$
14
 
   
$
40
 
   
$
11
 
   
$
430
 
Consumer asset-backed
   
 
226
 
   
 
-
 
   
 
1
 
   
 
1
 
   
 
1
 
   
 
6
 
Corporate asset-backed
   
 
503
 
   
 
-
 
   
 
3
 
   
 
200
 
   
 
4
 
   
 
11
 
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total global structured finance
   
 
1,990
 
   
 
87
 
   
 
18
 
   
 
241
 
   
 
16
 
   
 
447
 
Global public finance
   
 
834
 
   
 
-
 
   
 
6
 
   
 
-
 
   
 
5
 
   
 
-
 
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total insurance
   
$
2,824
 
   
$
87
 
   
$
24
 
   
$
241
 
   
$
21
 
   
$
447
 
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
 
1
0
MBIA Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
 
Note 5: Loss and Loss Adjustment Expense Reserves
U.S. Public Finance Insurance
U.S. public finance insured transactions consist of municipal bonds, including
tax-exempt
and taxable indebtedness of U.S. political subdivisions, as well as utilities, airports, health care institutions, higher educational facilities, 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.
 
Puerto Rico
Puerto Rico had been experiencing significant fiscal stress and constrained liquidity. In formulating loss reserves, the Company considers the following: environmental and political impacts; litigation; ongoing discussions with creditors; timing and amount of debt service payments and future recoveries; existing proposed restructuring plans or agreements; and deviations from these proposals in its probability-weighted scenarios.
For recoveries on paid Puerto Rico losses, the estimates include assumptions related to the following: economic conditions and trends; political developments; the Company’s ability to enforce contractual rights through litigation and otherwise; discussions with other creditors and the obligors, any existing proposals; and the remediation strategy for an insured obligation that has defaulted or is expected to default.
As part of the GO PSA, in March of 2022, National received certain consideration including cash, bonds and the CVI and it is anticipated that National will receive cash, the CVI and bonds related to the HTA PSA. The ultimate recovery value to National will depend on the value of these assets upon issuance and over time. Refer to “Note 1: Business Developments and Risks and Uncertainties” for further information on the Company’s Puerto Rico exposures and “Note 13: Commitments and Contingencies” for information on the Company’s Puerto Rico litigation.
International and Structured Finance Insurance
The international and structured finance insurance segment’s case basis reserves and insurance loss recoveries recorded in accordance with GAAP do not include reserves and recoveries on consolidated VIEs, since they are eliminated in consolidation.
RMBS Case Basis Reserves (Financial Guarantees)
The Company’s RMBS case basis reserves primarily relate to RMBS backed by alternative
A-paper
and subprime mortgage loans. The Company calculated RMBS case basis reserves as of March 31, 2022 using a process called the Roll Rate Methodology (“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. Roll Rate is defined as the probability that current loans become delinquent and subsequently default and loans in the delinquent pipeline are
charged-off
or liquidated. The loss reserve estimates are based on a probability-weighted average of potential scenarios of loan losses. Additional data used for both first and second-lien loans include historic averages of deal specific voluntary prepayment rates, forward projections of the LIBOR interest rates, and historic averages of deal-specific loss severities. Where applicable, the Company factors in termination scenarios when clean up calls are imminent.
In calculating ultimate cumulative losses for RMBS, the Company estimates the amount of first-lien loans that are expected to be liquidated in the future through foreclosure or short sale, and estimates, the amount of second-lien loans that are expected to be
charged-off
(deemed uncollectible by servicers of the transactions). The time to liquidation for a defaulted loan is specific to the loan’s delinquency bucket.
For all RMBS transactions, cash flow models consider allocations and other structural aspects and claims against MBIA Corp.’s insurance policy consistent with such policy’s terms and conditions. The estimated net claims from the procedure above are then discounted using a risk-free rate to a net present value reflecting MBIA’s general obligation to pay claims over time and not on an accelerated basis.
The Company monitors RMBS 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 and
re-evaluate
its assumptions.
 
11
MBIA Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 5: Loss and Loss Adjustment Expense Reserves (continued)
 
RMBS Recoveries
The Company’s RMBS recoveries relate to structural features within the trust structures that allow for the Company to be reimbursed for prior claims paid. These reimbursements for specific trusts include recoveries that are generated from the excess spread of the transactions. Excess spread within insured RMBS securitizations is the difference between interest inflows on mortgage loan collateral and interest outflows on the insured RMBS notes.
CDO Reserves and Recoveries
The Company also has loss and loss adjustment expense (“LAE”) reserves on certain transactions within its CDO portfolio, primarily its multi-sector CDO asset class that was insured in the form of financial guarantee policies. MBIA’s insured multi-sector CDOs are transactions that include a variety of collateral ranging from corporate bonds to structured finance assets (which includes, but are not limited to, RMBS, commercial mortgage-backed securities (“CMBS”), asset-backed securities (“ABS”) and CDO collateral). The Company’s process for estimating reserves and credit impairments on these policies is determined as the present value of the probability-weighted potential future losses, net of estimated recoveries, across multiple scenarios. The Company considers several factors when developing the range of potential outcomes and their impact on MBIA. A range of loss scenarios is considered under different default and severity rates for each transaction’s collateral. Additionally, each transaction is evaluated for its commutation potential.
Zohar Recoveries
MBIA Corp. is seeking to recover the payments it made (plus interest and expenses) with respect to Zohar I and Zohar II. Salvage and subrogation recoveries related to Zohar I and Zohar II are reported within “Insurance loss recoverable” on the Company’s consolidated balance sheet. The Company’s estimate of the insurance loss recoverable for Zohar I and Zohar II includes probability-weighted scenarios of the ultimate monetized recovery from the Zohar Collateral.
MBIA Corp. anticipates that it will receive substantial recoveries on the Zohar Collateral. There still remains significant uncertainty with respect to the realizable value of the remaining Zohar Collateral. Further, as the monetization process at the remaining portfolio companies continues to unfold in coordination with the new directors and managers in place, and new information concerning the financial condition of the portfolio companies is disclosed, the Company will continue to revise its expectations for recoveries.
 
12
MBIA Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 5: Loss and Loss Adjustment Expense Reserves (continued)
 
Summary of Loss and LAE Reserves and Recoveries
The Company’s loss and LAE reserves and recoveries before consolidated VIE eliminations, along with amounts that were eliminated as a result of consolidating VIEs for the international and structured finance insurance segment, which are included in the Company’s consolidated balance sheets as of March 31, 2022 and December 31, 2021 are presented in the following table:
 
          
          
          
          
 
  
As of March 31, 2022
 
As of December 31, 2021
In millions
  
Balance Sheet Line Item
 
Balance Sheet Line Item
 
  
Insurance
loss
recoverable
 
Loss and
LAE
reserves 
(1)
 
Insurance
loss
recoverable
 
Loss and
LAE
reserves 
(1)
U.S. Public Finance Insurance
   
$
128
 
  
$
460
 
  
$
1,054
 
  
$
425
 
International and Structured Finance Insurance:
                                 
Before VIE eliminations
   
 
240
 
  
 
635
 
  
 
244
 
  
 
687
 
VIE eliminations
   
 
(2
) 
  
 
(209
) 
  
 
(2
) 
  
 
(218
) 
    
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total international and structured finance insurance
   
 
238
 
  
 
426
 
  
 
242
 
  
 
469
 
    
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total
   
$
366
 
  
$
886
 
  
$
1,296
 
  
$
894
 
    
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
 
(1) - Amounts are net of estimated recoveries of expected future claims.
Changes in Loss and LAE Reserves
Loss and LAE reserves represent the Company’s estimate of future claims and LAE payments, net of any future recoveries of such payments. The following table presents changes in the Company’s loss and LAE reserves for the three months ended March 31, 2022. Changes in loss and LAE reserves, with the exception of loss and LAE payments and the impact of the revaluation of loss reserves denominated in amounts other than U.S. dollars, are recorded in “Losses and loss adjustment” expenses in the Company’s consolidated statements of operations. As of March 31, 2022, the weighted average risk-free rate used to discount the Company’s loss reserves (claim liability) was 2.46%. LAE reserves are generally expected to be settled within a
one-year
period and are not discounted. As of March 31, 2022 and December 31, 2021, the Company’s gross loss and LAE reserves included $34 million and $38 
million, respectively, related to LAE.

 
In millions
 
Changes in Loss and LAE Reserves for the Three Months Ended March 31, 2022
 
 
Gross Loss
and LAE
Reserves as of
December 31,
2021
(1)
 
Loss Payments
 
Accretion of
Claim Liability
Discount
 
Changes in
Discount Rates
 
Changes in
Assumptions
 
Changes in
Unearned
Premium
Revenue
 
Gross Loss and
LAE
Reserves as of
March 31, 2022
(1)
$894   $(326)   $3   $(22)   $336   $1   $886
 
 
 
 
 
 
 
 
 
 
 
 
 

(1) - 
Includes
 
changes in amount and timing of estimated payments and recoveries.
The Company’s loss and LAE reserves declined from December 31, 2021, primarily due to an increase in the estimated value of recoveries related to the HTA restructuring, which is netted in loss and LAE reserves, claims payments related to the acceleration and commutation of GO exposure, scheduled claim payments on Puerto Rico exposures during the three months ended March 31, 2022, and a decline in net reserves on RMBS exposure as a result of an increase in risk-free rates used to present value loss reserves. This decline was partially offset by a decrease in PREPA recoveries on claims not yet paid, which are netted in loss and LAE reserves.
 
13
MBIA Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 5: Loss and Loss Adjustment Expense Reserves (continued)
 
Changes in Insurance Loss Recoverable
Insurance loss recoverable represents the Company’s estimate of recoveries on paid claims and LAE. The Company recognizes potential recoveries on paid claims based on the probability-weighted net cash inflows present valued at applicable risk-free rates as of the measurement date. The following table presents changes in the Company’s insurance loss recoverable for the three months ended March 31, 2022. Changes in insurance loss recoverable with the exception of collections, are recorded in “Losses and loss adjustment” expenses in the Company’s consolidated statements of operations.
 
          
          
          
          
          
          
 
  
 
  
Changes in Insurance Loss Recoverable
  
 
 
  
 
  
for the Three Months Ended March 31,
2022
  
 
In millions
  
Gross
Recoverable as of
December 31,
2021
  
Collections
for Cases
 
Accretion
of
Recoveries
  
Changes in
Discount
Rates
 
Changes in
Assumptions
  
Gross
Recoverable as of
March 31,
2022
Insurance loss recoverable
  
$
1,296
 
  
$
(1,197
) 
 
$
1
 
  
$
(18
) 
 
$
284
 
 
$
366
 
    
 
 
 
   
 
 
 
  
 
 
 
   
 
 
 
  
 
 
 
  
 
 
 
The decrease in the Company’s insurance loss recoverable reflected in the preceding table was primarily due to the receipt of recoveries pursuant to the implemented GO PSA whereby National received cash, GO Bonds, and a CVI. In addition, the insurance loss recoverable declined due to the sale of PREPA bankruptcy claims and due to changes in assumptions related to the value of the remaining PREPA recoveries on paid claims.
Loss and LAE Activity
For the three months ended March 31, 2022, loss and LAE incurred primarily related to changes in the Company’s estimate of expected recoveries on National’s PREPA exposure. PREPA loss reserves and recoveries include certain assumptions about the timing and amount of claims payments and recoveries, including assumptions about the values of recoveries on the date the Company expects to receive reimbursement under an implemented RSA. During the first quarter of 2022, the Company updated assumptions used to estimate the value of recoveries, the timing and amount of claim payments, as well as the timing of an implemented plan. These assumption changes resulted in a decrease in the Company’s estimated present value of PREPA recoveries. Loss and LAE incurred during the quarter related to PREPA was partially offset by benefits related to Puerto Rico HTA and GO recoveries. During the first quarter of 2022, the Company increased the estimated values of recoveries expected to be received as part of the HTA restructuring to reflect updated information about potential values when received, including considering the current fair values of similar recently issued GO securities. In addition, the Company recorded a benefit on its GO recoveries to reflect the fair values of the consideration received as of the acquisition date, which was higher than its previous estimate. Additionally, an increase in risk-free rates during the first quarter of 2022, resulted in a decrease in the present value of net case reserves on first-lien RMBS.
For the three months ended March 31, 2021, loss and LAE incurred primarily reflected changes in assumptions within the Company’s HTA loss scenarios and an increase in the risk-free rates used to discount the value of long-dated future recoveries on all Puerto Rico exposures, which caused the present value of the recoveries to decline and a decrease in expected salvage collections related to CDOs. These losses were partially offset by a benefit driven by a change in certain assumptions related to the Puerto Rico GO restructuring and a decrease in loss reserves on the Company’s first-lien RMBS transactions, as a result of the increase in risk-free discount rates.
Costs associated with remediating insured obligations assigned to the Company’s surveillance categories are recorded as LAE and are included in “Losses and loss adjustment” expenses on the Company’s consolidated statements of operations. For the three months ended March 31, 2022 and 2021, gross LAE related to remediating insured obligations were $5 million and $12 million, respectively.
 
14
MBIA Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 5: Loss and Loss Adjustment Expense Reserves (continued)
 
Surveillance Categories
The following table provides information about the financial guarantees and related claim liability included in each of MBIA’s surveillance categories as of March 31, 2022: 
 
          
          
          
          
          
 
  
Surveillance Categories
$ in millions
  
Caution
List
Low
  
Caution
List
Medium
  
Caution
List
High
  
Classified
List
  
Total
Number of policies
   
 
55
 
   
 
3
 
   
 
-
 
   
 
174
 
   
 
232
 
Number of issues
(1)
   
 
16
 
   
 
2
 
   
 
-
 
   
 
87
 
   
 
105
 
Remaining weighted average contract period (in years)
   
 
6.0
 
   
 
2.3
 
   
 
-
 
   
 
8.5
 
   
 
7.6
 
Gross insured contractual payments outstanding:
(2)
                                             
Principal
   
$
1,325
 
   
$
6
 
   
$
-
 
   
$
2,321
 
   
$
3,652
 
Interest
   
 
1,825
 
   
 
1
 
   
 
-
 
   
 
1,053
 
   
 
2,879
 
Total
   
$
3,150
 
   
$
7
 
   
$
-
 
   
$
3,374
 
   
$
6,531
 
Gross Claim Liability
(3)
   
$
-
 
   
$
-
 
   
$
-
 
   
$
1,118
 
   
$
1,118
 
Less:
                                             
Gross Potential Recoveries
(4)
   
 
-
 
   
 
-
 
   
 
-
 
   
 
421
 
   
 
421
 
Discount, net
(5)
   
 
-
 
   
 
-
 
   
 
-
 
   
 
187
 
   
 
187
 
Net claim liability (recoverable)
   
$
-
 
   
$
-
 
   
$
-
 
   
$
510
 
   
$
510
 
Unearned premium revenue
   
$
8
 
   
$
-
 
   
$
-
 
   
$
25
 
   
$
33
 
Reinsurance recoverable on paid and unpaid losses
(6)
                                       
$
14
 
 
(1) - An “issue” represents the aggregate of financial guarantee policies that share the same revenue source for purposes of making debt service payments on the insured debt.
(2) - Represents contractual principal and interest payments due by the issuer of the obligations insured by MBIA.
(3) - The gross claim liability with respect to Puerto Rico exposures are net of expected recoveries for policies in a net payable position.
(4) - Gross potential recoveries with respect to certain Puerto Rico exposures are net of the claim liability for policies in a net recoverable position.
(5) - Represents discount related to Gross Claim Liability and Gross Potential Recoveries.
(6) - Included in “Other assets” on the Company’s consolidated balance sheets.
 

15
MBIA Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 5: Loss and Loss Adjustment Expense Reserves (continued)
 
The following table provides information about the financial guarantees and related claim liability included in each of MBIA’s surveillance categories as of December 31, 2021:

                                                                                      
    
Surveillance Categories
  
$ in millions
   
Caution
List
Low
     
Caution
List
Medium
     
Caution
List
High
     
Classified
List
    
Total
  
Number of policies
   
 
55
 
   
 
3
 
   
 
-
 
   
 
202
 
  
 
260
 
Number of issues
(1)
   
 
16
 
   
 
2
 
   
 
-
 
   
 
88
 
  
 
106
 
Remaining weighted average contract period (in years)
   
 
6.1
 
   
 
2.6
 
   
 
-
 
   
 
8.1
 
  
 
7.4
 
Gross insured contractual payments outstanding:
(2)
                                            
Principal
   
$
1,366
 
   
$
6
 
   
$
-
 
   
$
2,719
 
  
$
4,091
 
Interest
   
 
1,867
 
   
 
1
 
   
 
-
 
   
 
1,214
 
  
 
3,082
 
    
 
 
     
 
 
     
 
 
     
 
 
    
 
 
  
Total
   
$
3,233
 
   
$
7
 
   
$
-
 
   
$
3,933
 
  
$
7,173
 
    
 
 
     
 
 
     
 
 
     
 
 
    
 
 
  
Gross Claim Liability
(3)
   
$
-
 
   
$
-
 
   
$
-
 
   
$
1,051
 
  
$
1,051
 
Less:
                                            
Gross Potential Recoveries
(4)
   
 
-
 
   
 
-
 
   
 
-
 
   
 
1,498
 
  
 
1,498
 
Discount, net
(5)
   
 
-
 
   
 
-
 
   
 
-
 
   
 
(32
) 
  
 
(32
) 
    
 
 
     
 
 
     
 
 
     
 
 
    
 
 
  
Net claim liability (recoverable)
   
$
-
 
   
$
-
 
   
$
-
 
   
$
(415
) 
  
$
(415
) 
    
 
 
     
 
 
     
 
 
     
 
 
    
 
 
  
Unearned premium revenue
   
$
8
 
   
$
-
 
   
$
-
 
   
$
29
 
  
$
37
 
Reinsurance recoverable on paid and unpaid losses
(6)
                                      
$
7
 
 
(1) -  An “issue” represents the aggregate of financial guarantee policies that share the same revenue source for purposes of making debt service payments on the insured debt.
 
(2) -  Represents contractual principal and interest payments due by the issuer of the obligations insured by MBIA.
(3) -  The gross claim liability with respect to Puerto Rico exposures are net of expected recoveries for policies in a net payable position.
(4) -  Gross potential recoveries with respect to certain Puerto Rico exposures are net of the claim liability for policies in a net recoverable position.
(5) -  Represents discount related to Gross Claim Liability and Gross Potential Recoveries.
(6) -  Included in “Other assets” on the Company’s consolidated balance sheets.
Note 6: Fair Value of Financial Instruments
Fair Value Measurement
Financial Assets and Liabilities
Financial assets held by the Company primarily consist of investments in debt securities and loans receivables at fair value held by consolidated VIEs. 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 and debt issued by consolidated VIEs. The Company’s derivative liabilities are primarily interest rate swaps and insured credit derivatives.
Valuation Techniques
Valuation techniques for financial instruments measured at fair value are described below.
Fixed-Maturity Securities Held as
Available-For-Sale
or Trading, Investments Carried at Fair Value, Investments Pledged as Collateral and Short-term Investments
These investments include investments in U.S. Treasury and government agencies, state and municipal bonds, foreign governments, corporate obligations, MBS, ABS, money market securities, and perpetual debt and equity securities.    
 
16
MBIA Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 6: Fair Value of Financial Instruments (continued)
 
Substantially all of these investments are valued based on recently executed transaction prices or quoted market prices by independent third parties, including pricing services and brokers. 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, credit default swap 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.

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, 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 assets held by consolidated VIEs consisting of residential mortgage loans and are categorized in Level 3 of the fair value hierarchy. Fair values of residential mortgage loans are determined using quoted prices for similar securities or 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.
 
Other Assets
A VIE consolidated by the Company entered into a derivative instrument consisting of a cross currency swap. The cross currency swap was entered into to manage the variability in cash flows resulting from fluctuations in foreign currency rates. The fair value of the VIE derivative is determined based on inputs from unobservable cash flows projection of the derivative, discounted using observable discount rates. As the significant inputs are unobservable, the derivative contract is categorized in Level 3 of the fair value hierarchy.
Other assets also include receivables representing the right to receive reimbursement payments on claim payments expected to be made on certain insured VIE liabilities due to risk mitigating transactions with third parties executed to effectively defease, or,
in-substance
commute the Company’s exposure on its financial guarantee policies. The right to receive reimbursement payments is based on the value of the Company’s financial guarantee determined using a 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 medium-term notes (“MTNs”) at fair value on a recurring basis. The fair values of certain MTNs are based on quoted market prices provided by third-party sources, where available. When quoted market prices are not available, the Company applies a matrix pricing grid to determine fair value based on the quoted market prices received for similar instruments and considering the MTNs’ stated maturity and interest rate. Nonperformance risk is included in the quoted market prices and the matrix pricing grid. MTNs are categorized in Level 3 of the fair value hierarchy and do not include accrued interest. 
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.
 
17
MBIA Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 6: Fair Value of Financial Instruments (continued)
 
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.
Derivatives—Insurance
The derivative contracts insured by the Company cannot be legally traded and generally do not have observable market prices. The Company determines the fair values of certain insured credit derivatives using valuation models based on observable inputs and considering nonperformance risk of the Company. These insured credit derivatives are categorized in Level 2 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, 2022 and December 31, 2021:
 
          
          
          
          
In millions
  
Fair Value as of
March 31,

2022
  
Valuation Techniques
  
Unobservable Input
  
Range
(Weighted Average)
Assets of consolidated
VIEs:
  
  
  
  
Loans receivable at fair value
   
$
76
 
   
Market prices of similar liabilities adjusted for financial
 
guarantees provided to VIE obligations
   
Impact of financial guarantee

   
 
18% - 76
%  (
55
%)
(1)
 
Liabilities of consolidated VIEs:
                            
Variable interest entity notes
   
 
285
 
   
Market
 
prices
 
of
 
VIE
assets adjusted for financial guarantees provided or market prices of similar liabilities
   
Impact of financial guarantee
   
 
36% - 76% (65
%)
(1)
 
 
(1)
- Weighted average represents the total MBIA guarantees as a percentage of total instrument fair value.
 
     
          
    
          
  
          
    
          
  
In millions
  
Fair Value as of
December 31,
2021
  
Valuation Techniques
  
Unobservable Input
  
Range

(Weighted Average)
Assets of consolidated VIEs:
  
      
  
  
  
  
  
      
Loans receivable at fair value
   
$
77
 
   
Market prices of similar liabilities adjusted for financial
 
guarantees provided to VIE obligations
   
Impact of financial guarantee
   
 
23% - 72
%  (
55
%)
(1)
 
Liabilities of consolidated VIEs:
                            
Variable interest entity notes
   
 
291
 
   
Market
 
prices
 
of
 
VIE
assets adjusted for financial guarantees provided or market prices of similar liabilities
   
Impact of financial guarantee
   
 
33% - 73
%  (59%)
(1)
 
 
(1)
- Weighted average represents the total MBIA guarantees as a percentage of total instrument fair value.
 

 
18
MBIA Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 6: Fair Value of Financial Instruments (continued)
 
Sensitivity of Significant Unobservable Inputs
The significant unobservable input used in the fair value measurement of the Company’s residential loans receivable at fair value of consolidated VIEs is the impact of the financial guarantee. The fair value of residential loans receivable is calculated by subtracting the value of the financial guarantee from the quoted price of VIE liabilities or the market value of similar instruments to that of the VIE liabilities. The value of a financial guarantee is estimated by the Company as the present value of expected cash payments, net of recoveries, under the policy. If there had been a lower expected cash flow on the underlying loans receivable of the VIE, the value of the financial guarantee provided by the Company under the insurance policy would have been higher. This would have resulted in a lower fair value of the residential loans receivable in relation to the obligations of the VIE.
The significant unobservable input used in the fair value measurement of the Company’s VIE notes of consolidated VIEs is the impact of the financial guarantee. The fair value of VIE notes is calculated by adding the value of the financial guarantee to the market value of VIE assets. When the VIE note is backed by RMBS, the fair value of the VIE liability is calculated by applying the market value of similar instruments to that of the VIE liabilities. The value of a financial guarantee is estimated by the Company as the present value of expected cash payments under the policy. If the value of the guarantee provided by the Company to the obligations issued by the VIE had increased, the credit support would have added value to the liabilities of the VIE. This would have resulted in an increased fair value of the liabilities of the VIE.
Fair Value Measurements
The following tables present the fair value of the Company’s assets (including short-term investments) and liabilities measured and reported at fair value on a recurring basis as of March 31, 2022 and December 31, 2021:
 
                                                                     
    
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,

2022
Assets:
                                    
Fixed-maturity investments:
                                    
U.S. Treasury and government agency
   
$
801
 
   
$
86
 
   
$
-
 
   
$
887
 
State and municipal bonds
   
 
-
 
   
 
705
 
   
 
-
 
   
 
705
 
Foreign governments
   
 
-
 
   
 
23
 
   
 
-
 
   
 
23
 
Corporate obligations
   
 
-
 
   
 
1,070
 
   
 
-
 
   
 
1,070
 
Mortgage-backed securities:
                                    
Residential mortgage-backed agency
   
 
-
 
   
 
183
 
   
 
-
 
   
 
183
 
Residential mortgage-backed
non-agency
   
 
-
 
   
 
99
 
   
 
38
 
   
 
137
 
Commercial mortgage-backed
   
 
-
 
   
 
12
 
   
 
-
 
   
 
12
 
Asset-backed securities:
                                    
Collateralized debt obligations
   
 
-
 
   
 
176
 
   
 
-
 
   
 
176
 
Other asset-backed
   
 
-
 
   
 
189
 
   
 
-
 
   
 
189
 
    
 
 
 
   
 
 
 
   
 
 
 
   
 
 
 
Total fixed-maturity investments
   
 
801
 
   
 
2,543
 
   
 
38
 
   
 
3,382
 
Money market securities
   
 
24
 
   
 
-
 
   
 
-
 
   
 
24
 
Perpetual debt and equity securities
   
 
46
 
   
 
22
 
   
 
-
 
   
 
68
 
Cash and cash equivalents
   
 
147
 
   
 
-
 
   
 
-
 
   
 
147
 
Assets of consolidated VIEs:
                                    
Corporate obligations
   
 
-
 
   
 
4
 
   
 
-
 
   
 
4
 
Mortgage-backed securities:
                                    
Residential mortgage-backed
non-agency
   
 
-
 
   
 
25
 
   
 
-
 
   
 
25
 
Commercial mortgage-backed
   
 
-
 
   
 
10
 
   
 
-
 
   
 
10
 
Asset-backed securities:
                                    
Collateralized debt obligations
   
 
-
 
   
 
6
 
   
 
-
 
   
 
6
 
Other asset-backed
   
 
-
 
   
 
8
 
   
 
-
 
   
 
8
 
Cash
   
 
4
 
   
 
-
 
   
 
-
 
   
 
4
 
Loans receivable at fair value:
                                    
Residential loans receivable
   
 
-
 
   
 
-
 
   
 
76
 
   
 
76
 
Other assets:
                                    
Currency derivatives
   
 
-
 
   
 
-
 
   
 
9
 
   
 
9
 
Other
   
 
-
 
   
 
-
 
   
 
15
 
   
 
15
 
    
 
 
 
   
 
 
 
   
 
 
 
   
 
 
 
Total assets
   
$
1,022
 
   
$
2,618
 
   
$
138
 
   
$
3,778
 
    
 
 
 
   
 
 
 
   
 
 
 
   
 
 
 
Liabilities:
                                    
Medium-term notes
   
$
-
 
   
$
-
 
   
$
99
 
   
$
99
 
Derivative liabilities:
                                    
Insured credit derivatives
   
 
-
 
   
 
1
 
   
 
-
 
   
 
1
 
Non-insured
interest rate derivatives
   
 
-
 
   
 
98
 
   
 
-
 
   
 
98
 
Liabilities of consolidated VIEs:
                                    
Variable interest entity notes
   
 
-
 
   
 
-
 
   
 
285
 
   
 
285
 
    
 
 
 
   
 
 
 
   
 
 
 
   
 
 
 
Total liabilities
   
$
-
 
   
$
99
 
   
$
384
 
   
$
483
 
    
 
 
 
   
 
 
 
   
 
 
 
   
 
 
 
 
19
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,
2021
                                                                     
Assets:
                                    
Fixed-maturity investments:
                                    
U.S. Treasury and government agency
   
$
750
 
   
$
95
 
   
$
-
 
   
$
845
 
State and municipal bonds
   
 
-
 
   
 
168
 
   
 
-
 
   
 
168
 
Foreign governments
   
 
-
 
   
 
17
 
   
 
-
 
   
 
17
 
Corporate obligations
   
 
-
 
   
 
1,050
 
   
 
-
 
   
 
1,050
 
Mortgage-backed securities:
                                    
Residential mortgage-backed agency
   
 
-
 
   
 
198
 
   
 
-
 
   
 
198
 
Residential mortgage-backed
non-agency
   
 
-
 
   
 
98
 
   
 
-
 
   
 
98
 
Commercial mortgage-backed
   
 
-
 
   
 
13
 
   
 
-
 
   
 
13
 
Asset-backed securities:
                                    
Collateralized debt obligations
   
 
-
 
   
 
150
 
   
 
-
 
   
 
150
 
Other asset-backed
   
 
-
 
   
 
106
 
   
 
-
 
   
 
106
 
    
 
 
 
   
 
 
 
   
 
 
 
   
 
 
 
Total fixed-maturity investments
   
 
750
 
   
 
1,895
 
   
 
-
 
   
 
2,645
 
Money market securities
   
 
78
 
   
 
-
 
   
 
-
 
   
 
78
 
Perpetual debt and equity securities
   
 
47
 
   
 
23
 
   
 
-
 
   
 
70
 
Cash and cash equivalents
   
 
151
 
   
 
-
 
   
 
-
 
   
 
151
 
Derivative assets:
                                    
Non-insured
interest rate derivatives
   
 
-
 
   
 
1
 
   
 
-
 
   
 
1
 
Assets of consolidated VIEs:
                                    
Corporate obligations
   
 
-
 
   
 
5
 
   
 
-
 
   
 
5
 
Mortgage-backed securities:
                                    
Residential mortgage-backed
non-agency
   
 
-
 
   
 
27
 
   
 
-
 
   
 
27
 
Commercial mortgage-backed
   
 
-
 
   
 
10
 
   
 
-
 
   
 
10
 
Asset-backed securities:
                                    
Collateralized debt obligations
   
 
-
 
   
 
6
 
   
 
4
 
   
 
10
 
Other asset-backed
   
 
-
 
   
 
8
 
   
 
-
 
   
 
8
 
Cash
   
 
9
 
   
 
-
 
   
 
-
 
   
 
9
 
Loans receivable at fair value:
                                    
Residential loans receivable
   
 
-
 
   
 
-
 
   
 
77
 
   
 
77
 
Other assets:
                                    
Currency derivatives
   
 
-
 
   
 
-
 
   
 
9
 
   
 
9
 
Other
   
 
-
 
   
 
-
 
   
 
14
 
   
 
14
 
    
 
 
 
   
 
 
 
   
 
 
 
   
 
 
 
Total assets
   
$
1,035
 
   
$
1,975
 
   
$
104
 
   
$
3,114
 
    
 
 
 
   
 
 
 
   
 
 
 
   
 
 
 
Liabilities:
                                    
Medium-term notes
   
$
-
 
   
$
-
 
   
$
98
 
   
$
98
 
Derivative liabilities:
                                    
Insured credit derivatives
   
 
-
 
   
 
1
 
   
 
-
 
   
 
1
 
Non-insured
interest rate derivatives
   
 
-
 
   
 
130
 
   
 
-
 
   
 
130
 
Liabilities of consolidated VIEs:
                                    
Variable interest entity notes
   
 
-
 
   
 
-
 
   
 
291
 
   
 
291
 
    
 
 
 
   
 
 
 
   
 
 
 
   
 
 
 
Total liabilities
   
$
-
 
   
$
131
 
   
$
389
 
   
$
520
 
    
 
 
 
   
 
 
 
   
 
 
 
   
 
 
 
Level 3 assets at fair value as of March 31, 2022 and December 31, 2021 represented approximately 4% and 3%, respectively, of total assets measured at fair value. Level 3 liabilities at fair value as of March 31, 2022 and December 31, 2021 represented approximately 80% and 75%, respectively, of total liabilities measured at fair
value.
 
 
20
MBIA Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 6: Fair Value of Financial Instruments (continued)

The following tables present the fair values and carrying values of the Company’s assets and liabilities that are disclosed at fair value but not reported at fair value on the Company’s consolidated balance sheets as of March 31, 2022 and December 31, 2021. The majority of the financial assets and liabilities that the Company requires fair value reporting or disclosures are valued based on the Company’s or a third-party’s estimate of discounted cash flow model estimates, or quoted market values for identical or similar products.
 
          
          
          
          
          
 
  
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,
2022
  
Carry Value
Balance as of
March 31,
2022
Liabilities:
  
  
  
  
  
Long-term debt
   
$
-
 
   
$
413
 
   
$
-
 
   
$
413
 
   
$
2,344
 
Medium-term notes
   
 
-
 
   
 
-
 
   
 
329
 
   
 
329
 
   
 
487
 
Investment agreements
   
 
-
 
   
 
-
 
   
 
331
 
   
 
331
 
   
 
274
 
    
 
 
 
   
 
 
 
   
 
 
 
   
 
 
 
   
 
 
 
Total liabilities
   
$
-
 
   
$
413
 
   
$
660
 
   
$
1,073
 
   
$
3,105
 
    
 
 
 
   
 
 
 
   
 
 
 
   
 
 
 
   
 
 
 
Financial Guarantees:
                                             
Gross liability (recoverable)
   
$
-
 
   
$
-
 
   
$
1,214
 
   
$
1,214
 
   
$
828
 
Ceded recoverable (liability)
   
 
-
 
   
 
-
 
   
 
33
 
   
 
33
 
   
 
17
 
 
    
  
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,
2021
  
Carry Value
Balance as of
December 31,
2021
Liabilities:
  
  
  
  
  
Long-term debt
   
$
-
 
   
$
433
 
   
$
-
 
   
$
433
 
   
$
2,331
 
Medium-term notes
   
 
-
 
   
 
-
 
   
 
322
 
   
 
322
 
   
 
490
 
Investment agreements
   
 
-
 
   
 
-
 
   
 
355
 
   
 
355
 
   
 
274
 
    
 
 
 
   
 
 
 
   
 
 
 
   
 
 
 
   
 
 
 
Total liabilities
   
$
-
 
   
$
433
 
   
$
677
 
   
$
1,110
 
   
$
3,095
 
    
 
 
 
   
 
 
 
   
 
 
 
   
 
 
 
   
 
 
 
Financial Guarantees:
                                             
Gross liability (recoverable)
   
$
-
 
   
$
-
 
   
$
848
 
   
$
848
 
   
$
(80
) 
Ceded recoverable (liability)
   
 
-
 
   
 
-
 
   
 
30
 
   
 
30
 
   
 
(42
) 
 
21
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, 2022 and 2021:​​​​​​​
Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Three Months Ended
March 31, 2022
 
          
          
          
          
          
          
          
          
          
          
          
          
In millions
  
Balance,
Beginning
of Period
  
Total
Gains /
(Losses)
Included
in
Earnings
  
Unrealized
Gains /
(Losses)
Included
in OCI
(1)
  
Purchases
  
Issuances
  
Settlements
 
Sales
  
Transfers
into
Level 3
  
Transfers
out of
Level 3
  
Ending
Balance
  
Change in
Unrealized
Gains
(Losses) for
the Period
Included in
Earnings
for Assets
still held as
of
March 31,
2022
 
Change in
Unrealized
Gains
(Losses) for
the Period
Included in
OCI for
Assets

still held as
of
March 31,
2022
(1)
Assets:
  
  
  
  
  
  
 
  
  
  
  
 
Residential mortgage-
backed
non-agency
  
$
-
 
  
$
-
 
  
$
-
 
  
$
38
 
  
$
-
 
  
$
-
 
  
$
-
 
  
$
-
 
  
$
-
 
  
$
38
 
  
$
-
 
  
$
-
 
Assets of consolidated VIEs:
                                                                                                
Collateralized debt obligations
  
 
4
 
  
 
-
 
  
 
-
 
  
 
-
 
  
 
-
 
  
 
(4
) 
  
 
-
 
  
 
-
 
  
 
-
 
  
 
-
 
  
 
-
 
  
 
-
 
Loans receivable - residential
  
 
77
 
  
 
1
 
  
 
-
 
  
 
-
 
  
 
-
 
  
 
(2
) 
  
 
-
 
  
 
-
 
  
 
-
 
  
 
76
 
  
 
(1
) 
  
 
-
 
Currency derivatives
  
 
9
 
  
 
-
 
  
 
-
 
  
 
-
 
  
 
-
 
  
 
-
 
  
 
-
 
  
 
-
 
  
 
-
 
  
 
9
 
  
 
-
 
  
 
-
 
Other
  
 
14
 
  
 
1
 
  
 
-
 
  
 
-
 
  
 
-
 
  
 
-
 
  
 
-
 
  
 
-
 
  
 
-
 
  
 
15
 
  
 
1
 
  
 
-
 
   
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total assets
  
$
104
 
  
$
2
 
  
$
-
 
  
$
38
 
  
$
-
 
  
$
(6
) 
  
$
-
 
  
$
-
 
  
$
-
 
  
$
138
 
  
$
-
 
  
$
-
 
   
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
 
          
          
          
          
          
          
          
          
          
          
          
          
In millions
  
Balance,
Beginning
of Period
  
Total
(Gains) /
Losses
Included
in
Earnings
 
Unrealized
(Gains) /
Losses
Included
in OCI
(2)
  
Purchases
  
Issuances
  
Settlements
 
Sales
  
Transfers
into
Level 3
  
Transfers
out of
Level 3
  
Ending
Balance
  
Change in
Unrealized
(Gains)
Losses for
the Period
Included in
Earnings
for Liabilities
still held as
of

March 31,
2022
 
Change in
Unrealized
(Gains)
Losses for
the Period
Included in
OCI for
Liabilities still
held as of
March 31,
2022
(2)
Liabilities:
  
  
 
  
  
  
 
  
  
  
  
 
Medium-term notes
  
$
98
 
  
$
(8
) 
  
$
9
 
  
$
-
 
  
$
-
 
  
$
-
 
  
$
-
 
  
$
-
 
  
$
-
 
  
$
99
 
  
$
(8
) 
  
$
9
 
Liabilities of consolidated VIEs:
                                                                                                
VIE notes
  
 
291
 
  
 
4
 
  
 
1
 
  
 
-
 
  
 
-
 
  
 
(11
) 
  
 
-
 
  
 
-
 
  
 
-
 
  
 
285
 
  
 
(3
) 
  
 
4
 
   
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total liabilities
  
$
389
 
  
$
(4
) 
  
$
10
 
  
$
-
 
  
$
-
 
  
$
(11
) 
  
$
-
 
  
$
-
 
  
$
-
 
  
$
384
 
  
$
(11
) 
  
$
13
 
   
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
 
(1) - Reported
within the “Unrealized gains (losses) on
available-for-sale
securities” on MBIA’s Consolidated Statement of Comprehensive Income/Loss.
 
(2) - Reported
within the “Instrument-specific credit risk of liabilities measured at fair value” on MBIA’s Consolidated Statement of Comprehensive Income/Loss.
Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Three Months
Ended March 31, 2021
 
 
     
          
      
          
      
          
      
          
      
          
      
          
      
          
      
          
      
          
      
          
      
          
      
          
  
In millions
  
Balance,
Beginning
of Period
  
Total
Gains /
(Losses)
Included
in
Earnings
 
Unrealized
Gains /
(Losses)
Included
in OCI
(1)
  
Purchases
  
Issuances
  
Settlements
 
Sales
  
Transfers
into
Level 3
  
Transfers
out of
Level 3
  
Ending
Balance
  
Change in
Unrealized
Gains
(Losses) for
the Period
Included in
Earnings
for Assets
still held as
of
March 31,
2021
  
Change in
Unrealized
Gains
(Losses) for
the Period
Included in
OCI for
Assets still
held as of
March 31,
2021
(1)
Assets:
  
      
  
      
 
      
  
      
  
      
  
      
 
      
  
      
  
      
  
      
  
      
  
      
Assets of consolidated VIEs:
  
      
  
      
 
      
  
      
  
      
  
      
 
      
  
      
  
      
  
      
  
      
  
      
Loans receivable-residential
  
$
120
 
  
$
9
 
  
$
-
 
  
$
-
 
  
$
-
 
  
$
(5
) 
  
$
-
 
  
$
-
 
  
$
-
 
  
$
124
 
  
$
8
 
  
$
-
 
Loan repurchase
 
commitments
  
 
604
 
  
 
(4
) 
  
 
-
 
  
 
-
 
  
 
-
 
  
 
(600
) 
  
 
-
 
  
 
-
 
  
 
-
 
  
 
-
 
  
 
-
 
  
 
-
 
Currency derivatives
  
 
6
 
  
 
3
 
  
 
-
 
  
 
-
 
  
 
-
 
  
 
-
 
  
 
-
 
  
 
-
 
  
 
-
 
  
 
9
 
  
 
3
 
  
 
-
 
Other
  
 
14
 
  
 
-
 
  
 
-
 
  
 
-
 
  
 
-
 
  
 
-
 
  
 
-
 
  
 
-
 
  
 
-
 
  
 
14
 
  
 
-
 
  
 
-
 
   
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total assets
  
$
744
 
  
$
8
 
  
$
-
 
  
$
-
 
  
$
-
 
  
$
(605
) 
  
$
-
 
  
$
-
 
  
$
-
 
  
$
147
 
  
$
11
 
  
$
-
 
   
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
 
22
MBIA Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 6: Fair Value of Financial Instruments (continued)
 
     
          
      
          
      
          
      
          
      
          
      
          
      
          
      
          
      
          
      
          
      
          
      
          
  
In millions
 
Balance,
Beginning
of Period
 
Total
(Gains) /
Losses
Included
in
Earnings
 
Unrealized
(Gains) /
Losses
Included
in OCI
(2)
 
Purchases
 
Issuances
 
Settlements
 
Sales
 
Transfers
into
Level 3
 
Transfers
out of
Level 3
 
Ending
Balance
 
Change in
Unrealized
(Gains)
Losses for
the Period
Included
in
Earnings

for
Liabilities
still held
as of

March 31,
2021
 
Change in
Unrealized
(Gains)
Losses for
the Period
Included
in OCI for
Liabilities
still held
as of
March 31,
2021
(2)
Liabilities:
 
      
 
      
 
      
 
      
 
      
 
      
 
      
 
      
 
      
 
      
 
      
 
      
Medium-term notes
  
$
110
 
  
$
(7
) 
  
$
2
 
  
$
-
 
  
$
-
 
  
$
-
 
  
$
-
 
  
$
-
 
  
$
-
 
  
$
105
 
  
$
(7
) 
  
$
2
 
Other derivatives
  
 
49
 
  
 
-
 
  
 
-
 
  
 
-
 
  
 
-
 
  
 
(49
) 
  
 
-
 
  
 
-
 
  
 
-
 
  
 
-
 
  
 
-
 
  
 
-
 
Liabilities of consolidated VIEs:
                                                                                                
VIE notes
  
 
303
 
  
 
22
 
  
 
(16
) 
  
 
-
 
  
 
-
 
  
 
(29
) 
  
 
-
 
  
 
-
 
  
 
-
 
  
 
280
 
  
 
4
 
  
 
3
 
   
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total liabilities
  
$
462
 
  
$
15
 
  
$
(14
) 
  
$
-
 
  
$
-
 
  
$
(78
) 
  
$
-
 
  
$
-
 
  
$
-
 
  
$
385
 
  
$
(3
) 
  
$
5
 
   
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
 
(1)
- Reported within the “Unrealized gains (losses) on
available-for-sale
securities” on MBIA’s Consolidated Statement of Comprehensive Income/Loss.
 
(2)
- Reported within the “Instrument-specific credit risk of liabilities measured at fair value” on MBIA’s Consolidated Statement of Comprehensive Income/Loss.
For the three
months ended March 31, 2022 and 2021, there were no transfers into or out of Level 3.
Gains and losses (realized and unrealized) included in earnings related to Level 3 assets and liabilities for the three months ended March 31, 2022 and 2021 are reported on the Company’s consolidated statements of operations as follows:
 
                                                                     
    
Three Months Ended March 31, 2022
   
Three Months Ended March 31, 2021
In millions
   
Total

Gains

(Losses)
Included

in

Earnings
   
Change in Unrealized
Gains (Losses) for the

Period Included in
Earnings for Assets

and Liabilities still held
as of March 31,

2022
   
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,

2021
Revenues:
                                    
Net gains (losses) on financial instruments at fair value and foreign exchange
   
$
8
 
   
$
8
 
   
$
7
 
   
$
7
 
Revenues of consolidated VIEs:
                                    
Net gains (losses) on
financial
instruments at fair value
and foreign exchange
   
 
(2
) 
   
 
3
 
   
 
(14
) 
   
 
7
 
    
 
 
 
   
 
 
 
   
 
 
 
   
 
 
 
Total
   
$
6
 
   
$
11
 
   
$
(7
) 
   
$
14
 
    
 
 
 
   
 
 
 
   
 
 
 
   
 
 
 
 
23
MBIA Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 6: Fair Value of Financial Instruments (continued)
 
Fair Value Option
The Company elected to record at fair value certain financial instruments, including financial instruments that are consolidated in connection with the adoption of the accounting guidance for consolidation of VIEs.
The following table presents the gains and (losses) included in the Company’s consolidated statements of operations for the three months ended March 31, 2022 and 2021 for financial instruments for which the fair value option was elected:

     
          
      
          
  
 
  
Three Months Ended March 31,
In millions
  
2022
 
2021
Investments carried at fair value
(1)
   
$
(8
) 
  
$
3
 
Fixed-maturity securities held at fair
value-VIE
(2)
   
 
(1
) 
  
 
1
 
Loans receivable at fair value:
                 
Residential mortgage loans
(2)
   
 
1
 
  
 
9
 
Loan repurchase commitments
(2)
   
 
-
 
  
 
(4
) 
Other
assets-VIE
(2)
   
 
1
 
  
 
-
 
Medium-term notes
(1)
   
 
8
 
  
 
7
 
Variable interest entity notes
(2)
   
 
(5
) 
  
 
(23
) 
 
(1) - Reported within “Net gains (losses) of financial instruments at fair value and foreign exchange” on MBIA’s consolidated statements of operations.
(2) - Reported within “Net gains (losses) of financial instruments at fair value and foreign
exchange-VIE”
on MBIA’s consolidated statements of operations.
The following table reflects the difference between the aggregate fair value and the aggregate remaining contractual principal balance outstanding as of March 31, 2022 and December 31, 2021 for loans and notes for which the fair value option was elected:
 
                                                                                                       
    
As of March 31, 2022
   
As of December 31, 2021
    
Contractual
Outstanding
   
Fair
        
Contractual
Outstanding
   
Fair
     
In millions
   
Principal
   
Value
   
Difference
   
Principal
   
Value
   
Difference
Loans receivable at fair value:
                                                      
Residential mortgage loans - current
   
$
40
 
   
$
40
 
   
$
-
 
   
$
40
 
   
$
40
 
   
$
-
 
Residential mortgage loans (90 days or more past due)
   
 
146
 
   
 
36
 
   
 
110
 
   
 
141
 
   
 
37
 
   
 
104
 
    
 
 
 
   
 
 
 
   
 
 
 
   
 
 
 
   
 
 
 
   
 
 
 
Total loans receivable and other instruments at fair value
   
$
186
 
   
$
76
 
   
$
110
 
   
$
181
 
   
$
77
 
   
$
104
 
Variable interest entity notes
   
$
925
 
   
$
285
 
   
$
640
 
   
$
922
 
   
$
291
 
   
$
631
 
Medium-term notes
   
$
106
 
   
$
99
 
   
$
7
 
   
$
108
 
   
$
98
 
   
$
10
 
The differences 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 (90 days or more past due), the collateral supporting the VIE notes and the nonperformance risk of the Company on its MTNs, all of which resulted in depressed pricing of the financial instruments.
Instrument-Specific Credit Risk of Liabilities Elected Under the Fair Value Option
As of March 31, 2022 and December 31, 2021, the cumulative changes in instrument-specific credit risk of liabilities elected under the fair value option were losses of $43 million and $32 million, respectively, reported in “Accumulated other comprehensive income” on the Company’s consolidated balance sheets. Changes in value attributable to instrument-specific credit risk were derived principally from changes in the Company’s credit spread. For liabilities of VIEs, 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, 2022 and 2021, the portions of instrument-specific credit risk
included in accumulated other comprehensive income (“AOCI”) 
that were recognized in earnings due to settlement of liabilities were losses of $3 million and $20 million, respectively.

Note 7: Investments
Investments, excluding equity instruments, those elected under the fair value option and those classified as trading, consist of debt instruments classified as
available-for-sale
(“AFS”).
 
24
MBIA Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 7: Investments (continued)
The following tables present the amortized cost, allowance for credit losses, corresponding gross unrealized gains and losses and fair value for AFS investments in the Company’s consolidated investment portfolio as of March 31, 2022 and December 31, 2021:
 
                                                                                      
    
March 31, 2022
In millions
   
Amortized
Cost
   
Allowance
for Credit
Losses
  
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
  
Fair
Value
AFS Investments
                                           
Fixed-maturity investments:
                                           
U.S. Treasury and government agency
   
$
862
 
   
$
-
 
  
$
28
 
   
$
(15
) 
  
$
875
 
State and municipal bonds
   
 
606
 
   
 
-
 
  
 
13
 
   
 
(20
) 
  
 
599
 
Foreign governments
   
 
23
 
   
 
-
 
  
 
-
 
   
 
(1
) 
  
 
22
 
Corporate obligations
   
 
1,013
 
   
 
(3
) 
  
 
13
 
   
 
(44
) 
  
 
979
 
Mortgage-backed securities:
                                           
Residential mortgage-backed agency
   
 
186
 
   
 
-
 
  
 
-
 
   
 
(8
) 
  
 
178
 
Residential mortgage-backed
non-agency
   
 
124
 
   
 
-
 
  
 
8
 
   
 
(1
) 
  
 
131
 
Commercial mortgage-backed
   
 
10
 
   
 
-
 
  
 
-
 
   
 
(1
) 
  
 
9
 
Asset-backed securities:
                                           
Collateralized debt obligations
   
 
125
 
   
 
-
 
  
 
-
 
   
 
(1
) 
  
 
124
 
Other asset-backed
   
 
179
 
   
 
-
 
  
 
-
 
   
 
(2
) 
  
 
177
 
    
 
 
 
   
 
 
 
  
 
 
 
   
 
 
 
  
 
 
 
Total AFS investments
   
$
3,128
 
   
$
(3
) 
  
$
62
 
   
$
(93
) 
  
$
3,094
 
    
 
 
 
   
 
 
 
  
 
 
 
   
 
 
 
  
 
 
 
 
                                                                                      
    
December 31, 2021
In millions
   
Amortized
Cost
   
Allowance
for Credit
Losses
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
  
Fair
Value
AFS Investments
                                            
Fixed-maturity investments:
                                            
U.S. Treasury and government agency
   
$
782
 
   
$
-
 
   
$
54
 
   
$
(2
) 
  
$
834
 
State and municipal bonds
   
 
140
 
   
 
-
 
   
 
27
 
   
 
-
 
  
 
167
 
Foreign governments
   
 
13
 
   
 
-
 
   
 
1
 
   
 
-
 
  
 
14
 
Corporate obligations
   
 
905
 
   
 
-
 
   
 
53
 
   
 
(5
) 
  
 
953
 
Mortgage-backed securities:
                                            
Residential mortgage-backed agency
   
 
190
 
   
 
-
 
   
 
3
 
   
 
(1
) 
  
 
192
 
Residential mortgage-backed
non-agency
   
 
80
 
   
 
-
 
   
 
12
 
   
 
-
 
  
 
92
 
Commercial mortgage-backed
   
 
10
 
   
 
-
 
   
 
-
 
   
 
-
 
  
 
10
 
Asset-backed securities:
                                            
Collateralized debt obligations
   
 
101
 
   
 
-
 
   
 
-
 
   
 
-
 
  
 
101
 
Other asset-backed
   
 
95
 
   
 
-
 
   
 
-
 
   
 
(1
) 
  
 
94
 
    
 
 
 
   
 
 
 
   
 
 
 
   
 
 
 
  
 
 
 
Total AFS investments
   
$
2,316
 
   
$
-
 
   
$
150
 
   
$
(9
) 
  
$
2,457
 
    
 
 
 
   
 
 
 
   
 
 
 
   
 
 
 
  
 
 
 
Total AFS investments increased as of March 31, 2022 compared to December 31, 2021 primarily due to the GO bonds received as part of the GO PSA.
The following table presents the distribution by contractual maturity of AFS fixed-maturity securities at amortized cost, net of allowance for credit losses, and fair value as of March 31, 2022. Contractual maturity may differ from expected maturity as borrowers may have the right to call or prepay obligations.
 
                                   
    
AFS Securities
In millions
   
Net
Amortized
Cost
   
Fair
Value
Due in one year or less
   
$
519
 
   
$
520
 
Due after one year through five years
   
 
470
 
   
 
466
 
Due after five years through ten years
   
 
512
 
   
 
495
 
Due after ten years
   
 
1,000
 
   
 
994
 
Mortgage-backed and asset-backed
   
 
624
 
   
 
619
 
    
 
 
 
   
 
 
 
Total fixed-maturity investments
   
$
3,125
 
   
$
3,094
 
    
 
 
 
   
 
 
 
 
25
MBIA Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 7: Investments (continued)
 
Deposited and Pledged Securities
The fair value of securities on deposit with various regulatory authorities as of March 31, 2022 and December 31, 2021 was $11 million. These deposits are required to comply with state insurance laws.
Pursuant to the Company’s 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 Company’s 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, 2022 and December 31, 2021, the fair value of securities pledged as collateral for these investment agreements approximated $282 million and $280 million, respectively. The Company’s collateral as of March 31, 2022 consisted principally of U.S. Treasury and government agency and corporate obligations, and was primarily held with major U.S. banks.
Refer to “Note 8: Derivative Instruments” for information about securities posted to derivative counterparties.
Impaired Investments
The following tables present the
non-credit
related gross unrealized losses related to AFS investments as of March 31, 2022 and December 31, 2021:
 
                                                                                                       
    
March 31, 2022
    
Less than 12 Months
  
12 Months or Longer
  
Total
In millions
   
Fair
Value
   
Unrealized
Losses
  
Fair
Value
   
Unrealized
Losses
  
Fair
Value
   
Unrealized
Losses
AFS Investments
                                                    
Fixed-maturity investments:
                                                    
U.S. Treasury and government agency
   
$
239
 
   
$
(13
) 
  
$
20
 
   
$
(2
) 
  
$
259
 
   
$
(15
) 
State and municipal bonds
   
 
486
 
   
 
(20
) 
  
 
-
 
   
 
-
 
  
 
486
 
   
 
(20
) 
Foreign governments
   
 
14
 
   
 
(1
) 
  
 
-
 
   
 
-
 
  
 
14
 
   
 
(1
) 
Corporate obligations
   
 
576
 
   
 
(40
) 
  
 
32
 
   
 
(4
) 
  
 
608
 
   
 
(44
) 
Mortgage-backed securities:
                                                    
Residential mortgage-backed agency
   
 
113
 
   
 
(4
) 
  
 
37
 
   
 
(4
) 
  
 
150
 
   
 
(8
) 
Residential mortgage-backed
non-agency
   
 
28
 
   
 
(1
) 
  
 
1
 
   
 
-
 
  
 
29
 
   
 
(1
) 
Commercial mortgage-backed
   
 
9
 
   
 
(1
) 
  
 
-
 
   
 
-
 
  
 
9
 
   
 
(1
) 
Asset-backed securities:
                                                    
Collateralized debt obligations
   
 
86
 
   
 
-
 
  
 
33
 
   
 
(1
) 
  
 
119
 
   
 
(1
) 
Other asset-backed
   
 
175
 
   
 
(2
) 
  
 
1
 
   
 
-
 
  
 
176
 
   
 
(2
) 
    
 
 
 
   
 
 
 
  
 
 
 
   
 
 
 
  
 
 
 
   
 
 
 
Total AFS investments
   
$
1,726
 
   
$
(82
) 
  
$
124
 
   
$
(11
) 
  
$
1,850
 
   
$
(93
) 
    
 
 
 
   
 
 
 
  
 
 
 
   
 
 
 
  
 
 
 
   
 
 
 
 
 
  
December 31, 2021
 
  
Less than 12 Months
 
12 Months or Longer
 
Total
In millions
  
Fair
Value
  
Unrealized
Losses
 
Fair
Value
  
Unrealized
Losses
 
Fair
Value
  
Unrealized
Losses
                                                                                                       
AFS Investments
                                                    
Fixed-maturity investments:
                                                    
U.S. Treasury and government agency
   
$
161
 
   
$
(1
) 
  
$
16
 
   
$
(1
) 
  
$
177
 
   
$
(2
) 
State and municipal bonds
   
 
11
 
   
 
-
 
  
 
-
 
   
 
-
 
  
 
11
 
   
 
-
 
Foreign governments
   
 
3
 
   
 
-
 
  
 
-
 
   
 
-
 
  
 
3
 
   
 
-
 
Corporate obligations
   
 
270
 
   
 
(5
) 
  
 
8
 
   
 
-
 
  
 
278
 
   
 
(5
) 
Mortgage-backed securities:
                                                    
Residential mortgage-backed agency
   
 
94
 
   
 
(1
) 
  
 
1
 
   
 
-
 
  
 
95
 
   
 
(1
) 
Residential mortgage-backed
non-agency
   
 
3
 
   
 
-
 
  
 
1
 
   
 
-
 
  
 
4
 
   
 
-
 
Commercial mortgage-backed
   
 
2
 
   
 
-
 
  
 
-
 
   
 
-
 
  
 
2
 
   
 
-
 
Asset-backed securities:
                                                    
Collateralized debt obligations
   
 
60
 
   
 
-
 
  
 
29
 
   
 
-
 
  
 
89
 
   
 
-
 
Other asset-backed
   
 
72
 
   
 
(1
) 
  
 
-
 
   
 
-
 
  
 
72
 
   
 
(1
) 
    
 
 
 
   
 
 
 
  
 
 
 
   
 
 
 
  
 
 
 
   
 
 
 
Total AFS investments
   
$
676
 
   
$
(8
) 
  
$
55
 
   
$
(1
) 
  
$
731
 
   
$
(9
) 
    
 
 
 
   
 
 
 
  
 
 
 
   
 
 
 
  
 
 
 
   
 
 
 
 
26
MBIA Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 7: Investments (continued)
 
Gross unrealized losses on AFS investments increased as of March 31, 2022 compared with December 31, 2021 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, 2022 and December 31, 2021 was 12 and 11 years, respectively. As of March 31, 2022 and December 31, 2021, there were 93 and 36 securities, respectively, that were in an unrealized loss position for a continuous twelve-month period or longer, of which, fair values of 75 and 7 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, 2022:
 
                                                    
    
AFS Securities
Percentage of Fair Value Below Book Value
   
Number of
Securities
   
Book Value
(in millions)
   
Fair Value
(in millions)
> 5% to 15%
   
 
50
 
   
$
84
 
   
$
75
 
> 15% to 25%
   
 
21
 
   
 
11
 
   
 
9
 
> 25% to 50%
   
 
2
 
   
 
2
 
   
 
2
 
> 50%
   
 
2
 
   
 
-
 
   
 
-
 
    
 
 
 
   
 
 
 
   
 
 
 
Total
   
 
75
 
   
$
97
 
   
$
86
 
    
 
 
 
   
 
 
 
   
 
 
 
Impaired securities that the Company intends to sell before the expected recovery of such securities’ fair values have been written down to fair value. As of March 31, 2022, 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, 2022 that would require the sale of impaired securities.
Credit Losses on Investments
The Company’s fixed-maturity securities for which fair value is less than amortized cost are reviewed quarterly in order to determine whether a credit loss exists. If the Company determines that the declines in the fair value are related to credit loss, the Company will establish an allowance for credit losses and recognize the credit component through earnings. Refer to “Note 8: Investments” in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form
10-K
for the year ended December 31, 2021 for a discussion of the Company’s policy for its determination of credit losses. The Company did not purchase any credit-deteriorated assets for the three months ended March 31, 2022 and 2021.
Allowance for Credit Losses Rollforward
The following table presents the rollforward of allowance for credit losses on AFS investments for the three months ended March 31, 2022:
 
          
          
          
          
          
          
          
          
          
 
  
Three Months Ended March 31, 2022
In millions
  
Balance

as of
December 31,
2021
  
Additions
not
previously
recorded
  
Additions
arising
from PCD
Assets
  
Reductions
from
Securities
Sold
  
Reductions-
Intent to
sell or
MLTN
  
Change in
Allowance
Previously
Recorded
  
Write Offs
  
Recoveries
  
Balance as of
March 31,
2022
AFS Investments
  
  
  
  
  
  
  
  
  
Fixed-maturity investments:
  
  
  
  
  
  
  
  
  
Corporate obligations
   
$
-
 
   
$
3
 
   
$
-
 
   
$
-
 
   
$
-
 
   
$
-
 
   
$
-
 
   
$
-
 
   
$
3
 
    
 
 
 
   
 
 
 
   
 
 
 
   
 
 
 
   
 
 
 
   
 
 
 
   
 
 
 
   
 
 
 
   
 
 
 
Total Allowance on AFS investments
   
$
-
 
   
$
3
 
   
$
-
 
   
$
-
 
   
$
-
 
   
$
-
 
   
$
-
 
   
$
-
 
   
$
3
 
    
 
 
 
   
 
 
 
   
 
 
 
   
 
 
 
   
 
 
 
   
 
 
 
   
 
 
 
   
 
 
 
   
 
 
 
The additions to credit losses for the three months ended March 31, 2022 were related to concerns on an issuer’s credit deterioration as a result of the Ukraine and Russia conflict. 
 
27
MBIA Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 7: Investments (continued)
 
The Company does not recognize credit losses 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, 2022 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. The Company did not hold any securities in an unrealized loss position that were insured by a third-party financial guarantor as of March 31, 2022.
 
          
          
          
In millions
  
Fair
Value
 
  
Unrealized
Loss
 
  
Insurance
Loss
Reserve 
(1)
 
Mortgage-backed
   
$
18
 
   
$
-
 
   
$
18
 
Corporate obligations
   
 
11
 
   
 
-
 
   
 
-
 
    
 
 
     
 
 
     
 
 
  
Total
   
$
29
 
   
$
-
 
   
$
18
 
    
 
 
     
 
 
     
 
 
  
 
  (1) - 
Insurance loss reserve estimates are based on the proportion of par value owned to the total amount of par value insured and are discounted using a discount rate equal to the risk-free rate applicable to the currency and weighted average remaining life of the insurance contract and may differ from the fair value.
Sales of
Available-for-Sale
Investments
Gross realized gains and losses from sales of AFS investments are recorded within “Net realized investment gains (losses)” on the Company’s 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, 2022 and 2021 are as follows:
 
                                   
    
Three Months Ended March 31,
In millions
   
2022
  
2021
Proceeds from sales
   
$
106
 
  
$
178
 
Gross realized gains
   
$
-
 
  
$
4
 
Gross realized losses
   
$
(3
) 
  
$
(5
) 
Equity and Trading Investments
Unrealized gains and losses recognized on equity and trading investments held as of the end of each period for the three months ended March 31, 2022 and 2021 are as follows:

 
     
          
      
          
  
In millions
  
Three Months Ended March 31,
 
  
2022
 
2021
                                   
Net gains and (losses) recognized during the period on equity and trading securities
   
$
(10
) 
  
$
2
 
Less:
                 
Net gains and (losses) recognized during the period on equity and trading securities sold during the period
   
 
1
 
  
 
-
 
    
 
 
 
  
 
 
 
Unrealized gains and (losses) recognized during the period on equity and trading securities still held at the reporting date
   
$
(11
) 
  
$
2
 
    
 
 
 
  
 
 
 
Note 8: Derivative Instruments

The Company has primarily entered into derivative instruments consisting of interest rate swaps to manage the risks associated with fluctuations in interest rates affecting the value of certain assets in the corporate segment. Additionally, the Company has insured interest rate swaps and inflation-linked swaps related to its insured debt issuances in the U.S. public finance insurance and the international and structured finance insurance segments. These derivatives do not qualify for the financial guarantee scope exception and are accounted for as derivative instruments. The Company’s international and structured finance insurance segment consolidated a VIE which is party to a cross currency swap, entered into to manage the variability in cash flows resulting from fluctuations in foreign currency rates.
 
28
MBIA Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 8: Derivative Instruments (continued)
 
Credit Derivatives Sold
The following tables present information about credit derivatives sold by the Company’s insurance operations that were outstanding as of March 31, 2022 and December 31, 2021. Credit ratings represent the lower of underlying ratings assigned to the collateral by Moody’s Investor Services (“Moody’s”), Standard & Poor’s Financial Services, LLC (“S&P”) or MBIA.
 
                                                                                                                                         
$ in millions
   
As of March 31, 2022
Credit Derivatives Sold
   
Weighted
Average
Remaining
Expected
Maturity
   
AAA
   
AA
   
A
  
BBB
   
Below
Investment
Grade
   
Total
Notional
   
Fair
Value
Asset
(Liability)
Insured swaps
   
 
14.0 Years
 
   
$
-
 
   
$
59
 
   
$
1,122
 
  
$
292
 
   
$
-
 
   
$
1,473
 
   
$
(1
) 
Total fair value
            
$
-
 
   
$
-
 
   
$
(1
) 
  
$
-
 
   
$
-
 
            
$
(1
) 
             
 
 
 
   
 
 
 
   
 
 
 
  
 
 
 
   
 
 
 
            
 
 
 
 
                                                                                                                                         
$ in millions
   
As of December 31, 2021
Credit Derivatives Sold
   
Weighted
Average
Remaining
Expected
Maturity
   
AAA
   
AA
   
A
  
BBB
   
Below
Investment
Grade
   
Total
Notional
   
Fair
Value
Asset
(Liability)
Insured swaps
   
 
14.1 Years
 
   
$
-
 
   
$
61
 
   
$
1,136
 
  
$
292
 
   
$
-
 
   
$
1,489
 
   
$
(1
) 
             
 
 
 
   
 
 
 
   
 
 
 
  
 
 
 
   
 
 
 
   
 
 
 
   
 
 
 
Total fair value
            
$
-
 
   
$
-
 
   
$
(1
) 
  
$
-
 
   
$
-
 
            
$
(1
) 
             
 
 
 
   
 
 
 
   
 
 
 
  
 
 
 
   
 
 
 
            
 
 
 
Internal credit ratings assigned by MBIA on the underlying credit exposures are assigned by the Company’s surveillance group. In assigning an internal rating, current status reports from issuers and trustees, as well as publicly available transaction-specific information, are reviewed. The maximum potential amount of future payments (undiscounted) on insured swaps that are primarily insured interest rate swaps is estimated as the net interest settlements plus principal payments where applicable, on amortizing swaps.
MBIA may hold recourse provisions through subrogation rights of the swap counterparty, whereby if MBIA makes a claim payment, it may be entitled to receive net swap settlements from the issuer under the swap agreement.
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, 2022 and December 31, 2021, the Company did not hold or post cash collateral to derivative counterparties.
As of March 31, 2022 and December 31, 2021, the Company had securities with a fair value of $124 million and $159 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 Company’s consolidated balance
sheets.
As of March 31, 2022 the fair value on one Credit Support Annex (“CSA”) was immaterial. As of December 31, 2021, the fair value on one Credit Support Annex (“CSA”) was $1 
million. This CSA governs collateral posting requirements between MBIA and its derivative counterparties. The Company did not receive collateral due to the Company’s credit rating, which was below the CSA minimum credit ratings level for holding counterparty collateral. As of March 31, 2022 and December 31, 2021, the counterparty was rated Aa3 by Moody’s and A+ by S&P.
 
29
MBIA Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 8: Derivative Instruments (continued)
 
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 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 tables present the total fair value of the Company’s derivative assets and liabilities by instrument and balance sheet location, before counterparty netting, as of March 31, 2022 and December 31, 2021: 
 
          
          
          
          
          
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 swaps
   
$
1,473
 
   
 
Other assets
 
   
$
-
 
   
 
Derivative liabilities
 
   
$
(1
) 
Interest rate swaps
   
 
384
 
   
 
Other assets
 
   
 
-
 
   
 
Derivative liabilities
 
   
 
(98
) 
Interest rate swaps-embedded
   
 
203
 
   
 
Medium-term notes
 
   
 
-
 
   
 
Medium-term notes
 
   
 
(6
) 
Currency
swaps-VIE
   
 
49
 
   
 
Other
assets-VIE
 
   
 
9
 
   
 
Derivative liabilities-VIE
 
   
 
-
 
    
 
 
 
            
 
 
 
            
 
 
 
Total
non-designated
derivatives
   
$
2,109
 
            
$
9
 
            
$
(105
) 
    
 
 
 
            
 
 
 
            
 
 
 
 
(1) - 
In accordance with the accounting guidance for derivative instruments and hedging activities, the balance sheet location of the Company’s embedded derivative instruments is determined by the location of the related host contract.
 
          
          
          
          
          
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 swaps
   
$
1,489
 
   
 
Other assets
 
   
$
-
 
   
 
Derivative liabilities
 
   
$
(1
) 
Interest rate swaps
   
 
399
 
   
 
Other assets
     
 
1
 
   
 
Derivative liabilities
 
   
 
(130
) 
Interest rate swaps-embedded
   
 
206
 
   
 
Medium-term notes
 
   
 
-
 
   
 
Medium-term notes
 
   
 
(9
) 
Currency
swaps-VIE
   
 
50
 
   
 
Other
assets-VIE
 
   
 
9
 
   
 
Derivative liabilities-VIE
 
   
 
-
 
    
 
 
 
            
 
 
 
            
 
 
 
Total
non-designated
derivatives
   
$
2,144
 
            
$
10
 
            
$
(140
) 
    
 
 
 
            
 
 
 
            
 
 
 
 
(1) - 
In accordance with the accounting guidance for derivative instruments and hedging activities, the balance sheet location of the Company’s 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, 2022 and 2021:
 
In millions
  
 
  
 
 
  
 
 
Derivatives Not Designated as
  
 
  
Three Months Ended March 31,
 
Hedging Instruments
  
Location of Gain (Loss) Recognized in Income on Derivative
  
2022
 
  
2021
 
Interest rate swaps
   
Net gains (losses) on financial instruments at fair value and foreign exchange
   
$
30
 
   
$
35
 
Currency
swaps-VIE
   
Net gains (losses) on financial instruments at fair value and foreign
exchange-VIE
   
 
-
 
   
 
2
 
         
 
 
 
   
 
 
 
Total
        
$
30
 
   
$
37
 
         
 
 
 
   
 
 
 
Note 9: Income Taxes
The
 
Company’s income taxes and the related effective tax rates for the three months ended March 31, 2022 and 2021 are as follows:
 
                                   
    
Three Months Ended March 31,
In millions
   
2022
  
2021
Income (loss) before income taxes
   
$
(73
) 
  
$
(106
) 
Provision (benefit) for income taxes
   
$
-
 
  
$
-
 
Effective tax rate
   
 
0.0%
 
  
 
0.0%
 

30
MBIA Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 9: Income Taxes (continued)
For the three months ended March 31, 2022 and 2021, the Company’s effective tax rate applied to its loss before income taxes was lower than the U.S. statutory tax rate due to the full valuation allowance on the changes in its net deferred tax asset.
Deferred Tax Asset, Net of Valuation Allowance
The Company assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of its existing deferred tax assets. A significant piece of objective negative evidence evaluated was the Company having a three-year cumulative loss. Such objective evidence limits the ability to consider other subjective evidence, such as the Company’s projections of
pre-tax
income. On the basis of this evaluation, the Company has recorded a full valuation allowance against its net deferred tax asset of $1.1 
billion as of March 31, 2022 and December 31, 2021. The Company will continue to analyze the valuation allowance on a quarterly basis. 
Net operating losses (“NOLs”) of 
property and casualty insurance companies are permitted to be carried back two years and carried forward 20 years. NOLs of property and casualty insurance companies are not subject to the 80 percent taxable income limitation and indefinite lived carryforward period required by the Tax Cuts and Jobs Act applicable to general corporate NOLs.
Accounting for Uncertainty in Income Taxes
The Company’s policy is to record and disclose any change in unrecognized tax benefit (“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, 2022 and December 31, 2021, the Company had no UTB.
Federal income tax returns through 2011 have been examined or surveyed. As of March 31, 2022, the Company’s NOL is approximately $3.7 billion. NOLs generated prior to tax reform and property and casualty NOLs generated after tax reform will expire between tax years 2031 through 2042. As of March 31, 2022, the Company has a foreign tax credit carryforward of $58 million, which will expire between tax years 2022 through 2032.
Section 382 of the Internal Revenue Code
On May 2, 2018, MBIA Inc.’s shareholders ratified an amendment to the Company’s
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. With certain exceptions, 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 Company’s common stock.
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 Company’s 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 Company’s reportable operating segments.
 
31

MBIA Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 10: Business Segments (continued)
 
U.S. Public Finance Insurance
The Company’s 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. National’s 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, 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.
Corporate
The Company’s 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 Company’s service company, MBIA Services, 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 subsidiary, MBIA Global Funding, LLC (“GFL”). 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. MBIA Inc. also 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 Company’s 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:
 
  •  
MBIA Inc.;
 
  •  
GFL; and
 
  •  
MZ Funding LLC.
Subsequent to March 31, 2022, the debt obligations affiliated with MZ Funding LLC were repaid in full.
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, structured settlements, consumer loans, and corporate loans and bonds. MBIA Corp. has also written policies guaranteeing obligations under certain derivative contracts, including termination payments that may become due upon certain insolvency or payment defaults of the financial guarantor or the issuer. MBIA Corp. has not written any meaningful amount of business since 2008.
 
3
2
MBIA Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 10: Business Segments (continued)
 
Segments Results
The following tables provide the Company’s segment results for the three months ended March 31, 2022 and 2021:
 
     
          
      
          
      
          
      
          
      
          
  
 
  
Three Months Ended March 31, 2022
In millions
  
U.S.
Public
Finance
Insurance
 
Corporate
  
International
and
Structured
Finance
Insurance
 
Eliminations
 
Consolidated
 
  
 
 
 
  
 
 
 
 
 
Revenues
(1)
   
$
20
 
  
$
2
 
   
$
5
 
  
$
-
 
  
$
27
 
Net gains (losses) on financial instruments at fair value and foreign exchange
   
 
(16
) 
  
 
39
 
   
 
(6
) 
  
 
-
 
  
 
17
 
Revenues of consolidated VIEs
   
 
-
 
  
 
-
 
   
 
(4
) 
  
 
-
 
  
 
(4
) 
Inter-segment revenues
(2)
   
 
8
 
  
 
17
 
   
 
3
 
  
 
(28
) 
  
 
-
 
    
 
 
 
  
 
 
 
   
 
 
 
  
 
 
 
  
 
 
 
Total revenues
   
 
12
 
  
 
58
 
   
 
(2
) 
  
 
(28
) 
  
 
40
 
Losses and loss adjustment
   
 
87
 
  
 
-
 
   
 
(38
) 
  
 
-
 
  
 
49
 
Amortization of deferred acquisition costs and operating
   
 
3
 
  
 
15
 
   
 
3
 
  
 
-
 
  
 
21
 
Interest
   
 
-
 
  
 
14
 
   
 
27
 
  
 
-
 
  
 
41
 
Expenses of consolidated VIEs
   
 
-
 
  
 
-
 
   
 
2
 
  
 
-
 
  
 
2
 
Inter-segment expenses
(2)
   
 
13
 
  
 
6
 
   
 
9
 
  
 
(28
) 
  
 
-
 
    
 
 
 
  
 
 
 
   
 
 
 
  
 
 
 
  
 
 
 
Total expenses
   
 
103
 
  
 
35
 
   
 
3
 
  
 
(28
) 
  
 
113
 
    
 
 
 
  
 
 
 
   
 
 
 
  
 
 
 
  
 
 
 
Income (loss) before income taxes
   
$
(91
) 
  
$
23
 
   
$
(5
) 
  
$
-
 
  
$
(73
) 
    
 
 
 
  
 
 
 
   
 
 
 
  
 
 
 
  
 
 
 
Identifiable assets
   
$
3,196
 
  
$
798
 
   
$
1,877
 
  
$
(1,428
)
(3)
 
  
$
4,443
 
    
 
 
 
  
 
 
 
   
 
 
 
  
 
 
 
  
 
 
 
 
(1) -
 Consists of net premiums earned, net investment income, net realized investment gains (losses), fees and reimbursements and other net realized gains (losses).
(2) -
 Primarily represents intercompany service charges and intercompany net investment income and expenses.
(3) -
 Consists principally of intercompany reinsurance balances.
 
          
          
          
          
          
 
  
Three Months Ended March 31, 2021
In millions
  
U.S.
Public
Finance
Insurance
 
Corporate
  
International
and
Structured
Finance
Insurance
 
Eliminations
 
Consolidated
 
  
 
 
 
  
 
 
 
 
 
 
  
 
 
 
  
 
 
 
 
 
Revenues
(1)
   
$
22
 
  
$
5
 
   
$
7
 
  
$
-
 
  
$
34
 
Net gains (losses) on financial instruments at fair value
and foreign exchange
   
 
(2
) 
  
 
55
 
   
 
(1
) 
  
 
-
 
  
 
52
 
Revenues of consolidated VIEs
   
 
-
 
  
 
-
 
   
 
(14
) 
  
 
-
 
  
 
(14
) 
Inter-segment revenues
(2)
   
 
8
 
  
 
18
 
   
 
4
 
  
 
(30
) 
  
 
-
 
    
 
 
 
  
 
 
 
   
 
 
 
  
 
 
 
  
 
 
 
Total revenues
   
 
28
 
  
 
78
 
   
 
(4
) 
  
 
(30
) 
  
 
72
 
Losses and loss adjustment
   
 
109
 
  
 
-
 
   
 
(11
) 
  
 
-
 
  
 
98
 
Amortization
 
of
 
deferred
 
acquisition
 
costs
 
and
 
operating
   
 
4
 
  
 
21
 
   
 
3
 
  
 
-
 
  
 
28
 
Interest
   
 
-
 
  
 
14
 
   
 
27
 
  
 
-
 
  
 
41
 
Expenses of consolidated VIEs
   
 
-
 
  
 
-
 
   
 
11
 
  
 
-
 
  
 
11
 
Inter-segment expenses
(2)
   
 
14
 
  
 
6
 
   
 
10
 
  
 
(30
) 
  
 
-
 
    
 
 
 
  
 
 
 
   
 
 
 
  
 
 
 
  
 
 
 
Total expenses
   
 
127
 
  
 
41
 
   
 
40
 
  
 
(30
) 
  
 
178
 
    
 
 
 
  
 
 
 
   
 
 
 
  
 
 
 
  
 
 
 
Income (loss) before income taxes
   
$
(99
) 
  
$
37
 
   
$
(44
) 
  
$
-
 
  
$
(106
) 
    
 
 
 
  
 
 
 
   
 
 
 
  
 
 
 
  
 
 
 
 
(1) -
 Consists of net premiums earned, net investment income, net realized investment gains (losses) and fees and reimbursements.
(2) -
 Primarily represents intercompany service charges and intercompany net investment income and expense.
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 to certain employees and
non-employee
directors in accordance with the Company’s 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.
 
33
MBIA Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 11: Earnings Per Share (continued)
 
Basic earnings per share excludes dilution and is computed by dividing net income (loss) 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 unvested restricted stock outstanding during the period that could potentially result in the issuance of common stock. The dilution from unvested restricted stock is calculated by applying the
two-class
method and using the treasury stock method. The treasury stock method assumes the proceeds from the unrecognized compensation expense from unvested restricted stock will be used to purchase shares of the Company’s common stock at the average market price during the period. If the potentially dilutive securities disclosed in the table below become vested, the transaction would be net share settled resulting in a significantly lower impact to the outstanding share balance in comparison to the total amount of the potentially dilutive securities. During periods of net loss, unvested restricted stock is 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, 2022 and 2021:
 
     
          
      
          
  
 
  
Three Months
Ended March 31,
In millions except per share amounts
  
2022
 
2021
Basic earnings per share:
  
      
 
      
Net income (loss) available to common shareholders
   
$
(73
) 
  
$
(106
) 
Basic weighted average shares
(1)
   
 
49.6
 
  
 
49.3
 
    
 
 
 
  
 
 
 
Net income (loss) per basic common share
   
$
(1.48
) 
  
$
(2.16
) 
    
 
 
 
  
 
 
 
Diluted earnings per share:
                 
Net income (loss) available to common shareholders
   
$
(73
) 
  
$
(106
) 
Diluted weighted average shares
(1)
   
 
49.6
 
  
 
49.3
 
    
 
 
 
  
 
 
 
Net income (loss) per diluted common share
   
$
(1.48
) 
  
$
(2.16
) 
    
 
 
 
  
 
 
 
Potentially
 
dilutive
 
securities
 
excluded
 
from
 
the
 
calculation
 
of
 
diluted
 
EPS
 
because
 
of
 
antidilutive
 
affect
   
 
5.1
 
  
 
5.0
 
 
(1) -
 Includes 0.9 million of participating securities that met the service condition and were eligible to receive nonforfeitable dividends or dividend equivalents for each of the three months ended March 31, 2022 and 2021, respectively.
Note 12: Accumulated Other Comprehensive Income
The following table presents the changes in the components of AOCI for the three months ended March 31, 2022 and 2021:
 
                                                                     
    
Unrealized
      
Instrument-Specific
    
    
Gains (Losses)
      
Credit Risk of
    
    
on AFS
  
Foreign Currency
  
Liabilities Measured
    
In millions
   
Securities, Net
  
Translation, Net
  
at Fair Value, Net
  
Total
Balance, December 31, 2021
   
$
138
 
  
$
(6
) 
  
$
(32
) 
  
$
100
 
Other comprehensive income (loss) before reclassifications
   
 
(171
) 
  
 
-
 
  
 
(14
) 
  
 
(185
) 
Amounts reclassified from AOCI
   
 
-
 
  
 
-
 
  
 
3
 
  
 
3
 
    
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Net period other comprehensive income (loss)
   
 
(171
) 
  
 
-
 
  
 
(11
) 
  
 
(182
) 
    
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Balance, March 31, 2022
   
$
(33
) 
  
$
(6
) 
  
$
(43
) 
  
$
(82
) 
    
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
 

34
MBIA Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 12: Accumulated Other Comprehensive Income (continued)
 
The following table presents the details of the reclassifications from AOCI for the three months ended March 31, 2022 and 2021:
 
In millions
  
Amounts Reclassified from AOCI
 
  
 
 
  
Three Months Ended March 31,
 
  
 
Details about AOCI Components
  
2022
 
  
2021
 
  
Affected Line Item on the Consolidated
Statements of Operations
Unrealized gains (losses) on AFS securities:
  
  
  
Realized
 
gains
 
(losses)
 
on
 
sale
 
of
 
securities
   
$
-
 
  
$
5
 
  
Net realized investment gains (losses)
    
 
 
 
  
 
 
 
    
Total unrealized gains (losses) on AFS securities
   
 
  
 
  
 
  
 
    
Instrument-specific credit risk of liabilities:
     
-
      
5
      
Settlement of liabilities
   
 
(3
) 
  
 
(20
) 
  
Net gains (losses) on financial
instruments
at fair value and foreign exchange
    
 
 
 
  
 
 
 
    
Total reclassifications for the period
   
$
(3
) 
  
$
(15
) 
  
Net income (loss)
    
 
 
 
  
 
 
 
    
Note 13: Commitments and Contingencies
The following commitments and contingencies provide an update of those discussed in “Note 19: Commitments and Contingencies” in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form
10-K
for the year ended December 31, 2021, and should be read in conjunction with the complete descriptions provided in the aforementioned Form
10-K.
Litigation
Tilton et al. v. MBIA Inc. et al.,
Adversary Case
No. 19-50390
(KBO) (Bankr. Del.)
On October 1, 2019, Lynn Tilton and certain affiliated entities commenced an adversary proceeding in the Zohar Funds Bankruptcy Cases against MBIA Inc., MBIA Corp. and other Zohar Funds creditor seeking the equitable subordination of those creditors’ claims with respect to the Zohar Funds. Plaintiffs claimed they were entitled to relief due to inequitable and unfair conduct by defendants. Plaintiffs filed an amended complaint on January 6, 2022. Defendants motion to dismiss the amended complaint was granted on March 25, 2022. Plaintiffs have appealed the decision.
Zohar CDO
2003-1,
Ltd., et al. v. Patriarch Partners, LLC et al.,
Case No.
1:17-cv-0307-WHP
(S.D.N.Y.)
On November 27, 2017, Lynn Tilton and certain affiliated entities including Patriarch Partners, LLC commenced a third-party complaint against MBIA Inc., MBIA Insurance Corp. and other Zohar Fund stakeholders seeking damages for alleged breaches of the contracts governing the Zohar Funds and additional alleged legal duties and obligations relating to the Funds. On December 22, 2020, the Company and the other third-party defendants moved to dismiss the third-party complaint. On July 6, 2021, following the completion of briefing on those motions to dismiss, the presiding judge, the Honorable William H. Pauley died, and the case was reassigned to the Honorable P. Kevin Castel. On September 29, 2021, Judge Castel issued a decision on the motions to dismiss; granting them almost in full, with certain claims being stayed rather than dismissed, pending further developments in the Adversary Proceedings pending in the Zohar Funds Bankruptcy Cases in Delaware Bankruptcy Court.
MBIA Insurance Corp. v. Tilton et al.,
Adversary Case
No. 20-50776
(KBO) (Bankr. Del.)
On July 30, 2020, MBIA Corp. commenced an adversary proceeding in the Zohar Funds Bankruptcy Cases against Lynn Tilton and certain affiliated entities seeking damages incurred by MBIA Corp. in connection with insurance policies it issued on senior notes issued by Zohar I and Zohar II. On July 23, 2021, the court denied in part and granted in part Tilton’s and her affiliated defendants’ motion to dismiss the complaint. The court denied defendants’ motion with respect to MBIA’s claims for breach of contract, tortious interference, unjust enrichment, and malicious prosecution of claims commenced by Tilton in Delaware. On February 1, 2022, MBIA filed an Amended Complaint consistent with the court’s rulings on defendants’ motion to dismiss and related filings. Defendants filed their Answer to the Amended Complaint on April 13,
2022.
 
35
MBIA Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 13: Commitments and Contingencies (continued)
 
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 PREPA’s Title III proceeding to lift the automatic 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. The bondholders appealed the decision to the First Circuit. On August 8, 2018, the First Circuit issued an order reversing the Court’s decision on jurisdictional grounds and remanding the motion. On October 3, 2018, National, together with other monolines filed an updated motion for relief from the automatic stay to allow Movants to exercise their statutory right to have a receiver appointed at PREPA. The Oversight Board filed a motion to dismiss the receiver motion. These motions had been stayed but following the termination of the RSA on March 8, 2022 and pursuant to Judge Swain’s April 8, 2022 order, this proceeding is no longer stayed subject to Judge Swain’s pending status report request to the Oversight Board on June 1, 2022.
On May 3, 2019, PREPA, the Oversight Board, the Puerto Rico Fiscal Agency and Financial Advisory Authority (“AAFAF”), the Ad Hoc Group of PREPA bondholders (the “Ad Hoc Group”), and Assured Guaranty Corp. and Assured Guaranty Municipal Corp. (“Assured”) (together, the “RSA Parties”) entered into the RSA. On September 9, 2019 National, Syncora Guarantee Inc. (“Syncora”), and the RSA Parties agreed on an amendment to the RSA pursuant to which National and Syncora joined the RSA.
Pursuant to the RSA, the Oversight Board filed a Rule 9019 motion with the Title III court in May of 2019 seeking approval of the RSA. The RSA requires, upon entry of the order approving the Settlement Motion, that Movants will withdraw the Receiver Motion, and the Ad Hoc Group will support such withdrawal. As contemplated by the RSA, on July 1, 2019, the Oversight Board and AAFAF also filed an adversary complaint against the Trustee for the PREPA Bonds, challenging the validity of the liens arising under the Trust Agreement that secure insured obligations of National. On March 8, 2022, the RSA was terminated and, pursuant to the Court’s April 8 order, this action is no longer stayed subject to Judge Swain’s pending status report request to the Oversight Board on June 1, 2022.
Cortland Capital Market Services LLC, et al. v. The Financial Oversight and Management Board for Puerto Rico et al.,
Case
No. 19-00396
(D.P.R. July 9, 2019) (Swain, J.)
On July 9, 2019, the “Fuel Line Lenders,” parties who extended approximately $700 million to PREPA beginning in 2012 to fund fuel purchases, filed an adversary complaint against the Oversight Board, PREPA, AAFAF, and the Trustee for the PREPA Bonds, alleging that they are entitled to be paid in full before National and other bondholders have any lien on or recourse to PREPA’s assets, including pursuant to the RSA. On September 30, 2019, the Fuel Line Lenders filed an amended complaint which added National, Assured, Syncora, and the Ad Hoc Group as defendants. Defendants moved to dismiss the Fuel Line Lenders’ adversary complaint on November 11, 2019. The Fuel Line Lenders filed their opposition to the motion to dismiss on December 5, 2019. Defendants’ reply in support of the motion to dismiss was filed February 3, 2020. The hearing on the motion to dismiss was adjourned until the Court determines when the 9019 Settlement Motion, but following the termination of the RSA on March 8, 2022,
will
return to the active
 
calendar.
 
36
MBIA Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 13: Commitments and Contingencies (continued)
 
National Public Finance Guarantee Corporation et al. v. UBS Financial Services, Inc. et al.,
No. SJ2019CV07932 (Superior Court San Juan)
On August 8, 2019, National and MBIA Corp. filed suit in the Court of First Instance in San Juan, Puerto Rico against UBS Financial Services, Inc., UBS Securities LLC, Citigroup Global Markets Inc., Goldman Sachs & Co. LLC, J.P. Morgan Securities LLC, Morgan Stanley & Co. LLC, Merrill Lynch, Fenner & Smith Inc., RBC Capital Markets LLC, and Santander Securities LLC, bringing two claims under Puerto Rico law: doctrina de actos propios (the doctrine of one’s own acts) and unilateral declaration of will. These claims concern the insurance by National of bonds issued by the Commonwealth of Puerto Rico and its instrumentalities that were underwritten by these defendants. National alleges that, when the defendants solicited bond insurance, they represented through their acts that they would investigate certain information they provided to National and that they had a reasonable basis to believe that information was true and complete. National further alleges that the defendants did not perform such investigations and that key information was untrue or incomplete. National seeks damages to be proven at trial. On September 16, 2020, Defendants filed a motion to dismiss the complaint. National filed its objection to that motion on October 7, 2020, and briefing concluded on November 30, 2020. On June 2, 2021, the Superior Court denied Defendants’ motion to dismiss. Defendants appealed but filed an answer to the complaint on July 15, 2021. On December 17, 2021, the Commonwealth of Puerto Rico Court of Appeals issued a judgment reversing the Superior Court’s decision on the motion to dismiss. On January 4, 2022, National filed with the Court of Appeals a motion for reconsideration of its judgment concerning the motion to dismiss. On February 17, 2022, the Court of Appeals issued an order denying National’s motion for reconsideration. On March 23, 2022, National filed a Petition for Certiorari to the Supreme Court of the Commonwealth of Puerto Rico. On April 3, 2022, Defendants filed their response to National’s Petition for Certiorari.
Complaint Objecting to Defendants’ Claims and Seeking Related Relief,
Case No.
17-03283-LTS
(D.P.R. January 16, 2020) (Swain J.)
On January 16, 2020, the Oversight Board filed an adversary complaint against National, Ambac, Assured Guaranty, Assured Guaranty Municipal Corp., Financial Guaranty Insurance Company, Peaje Investments LLC and the Bank of New York Mellon as fiscal agent. The Oversight Board challenges the claims and validity of the liens asserted against the Commonwealth by holders of HTA bonds. The complaint contains 201 counts against the bondholder parties objecting to proofs of claim and security interests asserted regarding the Commonwealth’s retention of certain revenues previously assigned to HTA. This matter is currently stayed but the Court permitted the Oversight Board to file certain limited cross motions on April 28, 2020. The cross motions for summary judgment were filed on July 16, 2020. On September 23, 2020, the Court heard argument on the limited cross motions for summary judgment, which remain pending. On January 20, 2021, the Court issued an order deferring the adjudication of the summary judgment motions so that defendant monolines can seek limited discovery from the Oversight Board on all documents related to the collection and flow of Excise Taxes and pledged revenue into and out of its accounts, among other things. On April 6, 2021, the Oversight Board filed a motion to lift the litigation stay for the limited purpose of filing further summary judgment motions that would dispose of substantially all of the remaining claims challenged in this complaint. The hearing on this motion was held April 28, 2021, and the motion was denied. As part of the GO PSA and HTA PSA, National has agreed to stay its participation in this litigation subject to the effective date of the HTA Plan.
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 Company’s 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.

 

37
MBIA Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 13: Commitments and Contingencies (continued)
 
Lease Commitments
The Company has a lease agreement for its headquarters in Purchase, New York. The 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 is recognized on a straight-line basis. The following table provides information about the Company’s leases as of March 31, 2022:
 
                                   
$ in millions
   
As of
March 31, 2022
     
Balance Sheet Location
  
Right-of-use
asset
   
$
18
 
   
 
Other assets
 
Lease liability
   
$
18
 
   
 
Other liabilities
 
Weighted average remaining lease term (years)
   
 
7.4
 
         
Discount rate used for operating leases
   
 
7.5%
 
         
Total future minimum lease payments
   
$
25
 
         
 
3
8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion and analysis of financial condition and results of operations of MBIA Inc. should be read in conjunction with the other sections of our Annual Report on Form
10-K
for the year ended December 31, 2021 and the consolidated financial statements and notes thereto included in this Form
10-Q.
In addition, this discussion and analysis of financial condition and results of operations includes statements of the opinion of MBIA Inc.’s management which may be forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. Refer to “Risk Factors” in Part II, Item 1A and “Forward-Looking and Cautionary Statements” and “Risk Factors” in Part I, Item 1A of MBIA Inc.’s Annual Report on Form
10-K
for the year ended December 31, 2021 for a further discussion of risks and uncertainties.
OVERVIEW
MBIA Inc., together with its consolidated subsidiaries, (collectively, “MBIA”, the “Company”, “we”, “us”, or “our”) operates within the financial guarantee insurance industry. MBIA manages its business within three operating segments: 1) United States (“U.S.”) public finance insurance; 2) corporate; and 3) international and structured finance insurance. Our U.S. public finance insurance portfolio is managed through National Public Finance Guarantee Corporation (“National”), our corporate segment is managed through MBIA Inc. and several of its subsidiaries, including our service company, MBIA Services Corporation (“MBIA Services”), and our international and structured finance insurance business is primarily managed through MBIA Insurance Corporation and its subsidiary (“MBIA Corp.”).
National’s primary objectives are to maximize the performance of its existing insured portfolio through effective surveillance and remediation activity and effectively manage its investment portfolio. Our corporate segment consists of general corporate activities, including providing support services to MBIA’s operating subsidiaries and asset and capital management. MBIA Corp.’s primary objectives are to satisfy all claims by its policyholders and to maximize future recoveries, if any, for its senior lending and surplus note holders, and then its preferred stock holders. MBIA Corp. is executing this strategy by, among other things, taking steps to maximize the collection of recoveries and reducing and mitigating potential losses on its insurance exposures. We do not expect National or MBIA Corp. to write significant new business.
COVID-19
and the Economic Environment
While the novel coronavirus
COVID-19
(“COVID-19”)
pandemic has not had an adverse material impact on our business and financial condition, the current and longer-term impacts of
COVID-19
remain uncertain. The existence or extent of any impact on our insured or investment portfolios, or general business operations, will depend on future developments which are highly uncertain, including but not limited to the future severity of the pandemic, and the effectiveness of financial and regulatory actions taken at the state and federal levels to contain or address its impact. Refer to “Risk Factors” in Part I, Item 1A of MBIA Inc.’s Annual Report on Form
10-K
for the year ended December 31, 2021 for a discussion of risks and uncertainties concerning
COVID-19.
During the first quarter of 2022, the U.S. economic activity and employment have continued to strengthen with strong job gains and a declining unemployment rate. Inflation remains elevated with supply and demand issues related to
COVID-19
and higher energy prices, and the overall uncertainty of the impact on the U.S. economy related to the Ukraine and Russia conflict. With the Federal Open Market Committee (“FOMC”) seeking to achieve maximum employment and 2% inflation, the FOMC increased its target for the federal funds rate by 25 basis points in the first quarter of 2022. Economic and financial market trends could impact the Company’s financial results. Economic improvement at the state and local level strengthens the credit quality of the issuers of our insured municipal bonds, improves the performance of our insured U.S. public finance portfolio and could reduce the amount of National’s potential incurred losses. In addition, higher projected interest rates could yield increased returns on our Company’s investment portfolio. Alternatively, higher energy prices could have an adverse impact on certain sales taxes to the extent consumer spending decreases as a result. Some states and municipalities may experience a decrease in revenues if their economies are reliant on the oil and gas industries.
We do not insure any sovereign or
sub-sovereign
debt of Russia or Ukraine. Additionally, we have an immaterial amount of direct or indirect Russian or Ukraine debt holdings in our investment portfolios and have recorded credit losses and unrealized losses on these investments in the first quarter of 2022. Refer to the following “Results of Operations - U.S. Public Finance Insurance Segment” section for additional information on these credit losses.
 
39
Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
OVERVIEW (continued)
 
2022 Business Developments
The following is a summary of 2022 business developments:
Puerto Rico (Refer to the “U.S. Public Finance Insurance Puerto Rico Exposures” section for additional information on our Puerto Rico exposures)
 
  •  
On February 22, 2021, National agreed to join a plan support agreement, dated as of February 22, 2021 (the “GO PSA”), among the Financial Oversight and Management Board for Puerto Rico (the “Oversight Board”), certain holders of Puerto Rico Commonwealth GO (“GO”) Bonds and Puerto Rico Public Buildings Authority (“PBA”) bonds, Assured Guaranty Corp. and Assured Guaranty Municipal Corp, and Syncora Guarantee Inc. in connection with the Puerto Rico Commonwealth GO (“GO”) and PBA Title III cases. The GO PSA was effective and implemented on March 15, 2022 and among other things, National received cash, including certain fees, newly issued General Obligation bonds (“GO Bonds”) and a contingent value instrument (“CVI”) totaling approximately $1.0 billion. Subsequent to the GO PSA implementation, National made $277 million of acceleration and commutation payments pursuant to the GO PSA. Accordingly, National’s GO and PBA gross par outstanding and debt service outstanding have been reduced to zero from approximately $380 million and $495 million, respectively.
 
  •  
On January 1, 2022, the Commonwealth of Puerto Rico and certain of its instrumentalities (“Puerto Rico”) defaulted on scheduled debt service for National insured bonds and National paid gross claims in the aggregate of $47 million. As of March 31, 2022, National had $2.1 billion of debt service outstanding related to Puerto Rico.
 
  •  
In January of 2022, National sold an additional $231 million of Puerto Rico Electric Power Authority (“PREPA”) bankruptcy claims related to insurance claims paid on matured National-insured PREPA bonds. As of March 31, 2022, National has sold approximately 35% of National’s par claims to PREPA. These sales monetized a portion of National’s salvage asset and reduced potential volatility and ongoing risk of remediation around the PREPA credit. Currently, National does not have a material amount of additional par claims to PREPA that have matured and can be sold.
 
  •  
On March 8, 2022, the Puerto Rico Fiscal Agency and Financial Advisory Authority (“AAFAF”) and PREPA terminated the RSA under a provision permitting termination if an order approving the RSA had not been entered by September 30, 2019. On April 8, 2022, the Court appointed a new panel of judges to commence mediation among the Oversight Board, the Ad Hoc creditor group as holders of PREPA Senior Bonds, Assured, National and Syncora (the “April 8 Order”). The April 8 Order provides that mediation will terminate on June 1, 2022 unless the mediation team extends the time to July 1, 2022. The April 8 Order further provides that nothing therein acts as a stay of any pending adversary proceedings or contested matters in the PREPA case, subject to the Court’s pending request to the Oversight Board for a status report by June 1, 2022.
 
  •  
On April 12, 2021, National, Assured Guaranty Corp., Assured Guaranty Municipal Corp. and the Oversight Board reached an agreement in principle settling certain clawback claims and providing for a distribution of cash, bonds and a contingent value instrument to Puerto Rico Highway and Transportation Authority (“HTA”) bondholders subject to completing negotiations on a plan support agreement in respect of an HTA plan of adjustment (the “HTA PSA”). On May 5, 2021, National, Assured Guaranty Corp., Assured Guaranty Municipal Corp. and the Oversight Board entered into the HTA PSA. On May 2, 2022, the Oversight Board filed the Title III Plan of Adjustment for the Puerto Rico Highways and Transportation Authority (the “HTA Plan”), together with the Disclosure Statement and supporting documents. National expects to receive during the second quarter of 2022 its allocable portion of cash and CVI relating to HTA, which aggregate amounts to be distributed to bondholders totals approximately $264 million and $2.2 billion, respectively. In addition, National shall receive its allocable portion of approximately $1.2 billion of newly issued HTA bonds (or cash equivalent) following the effective date of the HTA Plan.
 
40
Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
RESULTS OF OPERATIONS
 
Summary of Consolidated Results
The following table presents a summary of our consolidated financial results for the three months ended March 31, 2022 and 2021:
 
                     
    
Three Months Ended March 31,
In millions except for per share, percentage and share amounts
   
2022
   
2021
Total revenues
   
$
40
 
   
$
72
 
Total expenses
   
 
113
 
   
 
178
 
  
 
 
 
   
 
 
 
Income (loss) before income taxes
   
 
(73)
 
   
 
(106)
 
Provision (benefit) for income taxes
   
 
-
 
   
 
-
 
  
 
 
 
   
 
 
 
Net income (loss)
   
$
(73)
 
   
$
(106)
 
  
 
 
 
   
 
 
 
Net income (loss) per basic and diluted common share
   
$
(1.48)
 
   
$
(2.16)
 
Effective tax rate
   
 
0.0%
 
   
 
0.0%
 
Adjusted net income (loss)
(1)
   
$
(96)
 
   
$
(116)
 
Adjusted net income (loss) per diluted share
(1)
   
$
(1.94)
 
   
$
(2.36)
 
Weighted average basic and diluted common shares outstanding
   
 
49,631,448
 
   
 
49,258,110
 
 
 
  (1) 
- Adjusted net income (loss) and adjusted net income (loss) per diluted share are
non-GAAP
measures. Refer to the following
Non-GAAP
Adjusted Net Income (Loss) section for a discussion of adjusted net income (loss) and adjusted net income (loss) per diluted share and a reconciliation of GAAP net income (loss) to adjusted net income (loss) and GAAP net income (loss) per diluted share to adjusted net income (loss) per diluted share.
Income (loss) Before Income Taxes
Consolidated total revenues decreased for the three months ended March 31, 2022 compared with the same period of 2021 principally due to unfavorable fair value changes on investments, smaller fair value gains on interest rate swaps, and smaller gains from changes in foreign exchange rates. For the three months ended March 31, 2022, fair value losses on investments was $20 million and fair value gains on interest rate swaps was $34 million. For the three months ended March 31, 2021, fair value gains or losses on investments was not material and fair value gains on interest rate swaps was $39 million. The fair value losses on investments were principally due to increased interest rates and wider credit spreads. The lower fair value gains on our interest rate swaps were largely driven by a smaller increase in interest rates on the long-term yield curve compared to the three months ended March 31, 2021. Foreign exchange gains for the three months ended March 31, 2022 on Euro-denominated liabilities were $5 million compared with gains of $17 million for the same period of 2021. For the three months ended March 31, 2022 and 2021, these gains were driven by the strengthening of the U.S. dollar against the euro.
Consolidated total expenses for the three months ended March 31, 2022 included $49 million of losses and loss adjustment expense (“LAE”) compared with $98 million for the same period of 2021. This decrease in losses and LAE was primarily due to decreases in losses incurred on collateralized debt obligations (“CDOs”) and a net decrease in losses on certain Puerto Rico credits. Refer to the following “Loss and Loss Adjustment Expenses” sections of the U.S. Public Finance Insurance and International and Structured Finance Insurance segments for additional information on our losses and LAE. In addition, interest expense of consolidated variable interest entities (“VIEs”) decreased for the three months ended March 31, 2022 compared with the same period of 2021 due to the repayment of the outstanding insured senior notes of MBIA Corp.’s financing facility between MZ Funding LLC (“MZ Funding”) and certain purchasers (“Refinanced Facility”) during 2021.
Provision for Income Taxes
For the three months ended March 31, 2022 and 2021, our effective tax rate applied to our loss before income taxes was 0% compared with the U.S. statutory tax rate of 21% due to the full valuation allowance on the changes in our net deferred tax asset, which includes our net operating loss (“NOL”).
 
41
Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
RESULTS OF OPERATIONS (continued)
 
As of March 31, 2022 and December 31, 2021, the Company’s valuation allowance against its net deferred tax asset was $1.1 billion. Notwithstanding the full valuation allowance on its net deferred tax asset, the Company believes that it may be able to use some of its net deferred tax asset before the expirations associated with that asset based upon expected earnings at National. Accordingly, the Company will continue to
re-evaluate
its net deferred tax asset on a quarterly basis. There is no assurance that the Company will reverse any of its valuation allowance on its net deferred tax asset in the future. Refer to “Note 9: Income Taxes” in the Notes to Consolidated Financial Statements for a further discussion of income taxes, including the valuation allowance against the Company’s net deferred tax asset and its accounting for tax uncertainties.
Non-GAAP
Adjusted Net Income (Loss)
In addition to our results prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP), we also analyze the operating performance of the Company using adjusted net income (loss) and adjusted net income (loss) per diluted common share, both
non-GAAP
measures. Since adjusted net income (loss) is used by management to assess performance and make business decisions, we consider adjusted net income (loss) and adjusted net income (loss) per diluted common share fundamental measures of periodic financial performance which are useful in understanding our results. Adjusted net income (loss) and adjusted net income (loss) per diluted common share are not substitutes for net income (loss) and net income (loss) per diluted common share determined in accordance with GAAP, and our definitions of adjusted net income (loss) and adjusted net income (loss) per diluted common share may differ from those used by other companies.
Adjusted net income (loss) and adjusted net income (loss) per diluted common share include the
after-tax
results of the Company and remove the
after-tax
results of our international and structured finance insurance segment, comprising the results of MBIA Corp. which given its capital structure and business prospects, we do not expect its financial performance to have a material economic impact on MBIA Inc., as well as the following:
 
  •  
Mark-to-market
gains (losses) on financial instruments
– We remove the impact of
mark-to-market
gains (losses) on financial instruments that primarily include interest rate swaps and hybrid financial instruments. These amounts fluctuate based on market interest rates, credit spreads and other market factors.
 
  •  
Foreign exchange gains (losses)
– We remove foreign exchange gains (losses) on the remeasurement of certain assets and liabilities and transactions in
non-functional
currencies. Given the possibility of volatility in foreign exchange markets, we exclude the impact of foreign exchange gains (losses) to provide a measurement of comparability of adjusted net income (loss).
 
  •  
Net realized investment gains (losses), impaired securities and extinguishment of debt
– We remove realized gains (losses) on the sale of investments, net investment losses related to impairment of securities and net gains (losses) on extinguishment of debt since the timing of these transactions are subject to management’s assessment of market opportunities and conditions and capital liquidity positions.
 
  •  
Income taxes
–We apply a zero effective tax rate for federal income tax purposes to our
pre-tax
adjustments, if applicable, consistent with our consolidated effective tax rate.
 
42
Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
RESULTS OF OPERATIONS (continued)
 
The following table presents our adjusted net income (loss) and adjusted net income (loss) per diluted common share and provides a reconciliation of GAAP net income (loss) to adjusted net income (loss) for the three months ended March 31, 2022 and 2021:
 
                     
    
Three Months Ended March 31,
  
In millions except share and per share amounts
   
2022
     
2021
  
Net income (loss)
   
$
(73
) 
   
$
(106
) 
Less: adjusted net income (loss) adjustments:
      
Income (loss) before income taxes of our international and structured finance insurance segment and eliminations
   
 
(5
) 
   
 
(44
) 
Adjustments to income before income taxes of our U.S. public finance insurance and corporate segments:
      
Mark-to-market
gains (losses) on financial instruments
(1)
   
 
24
 
   
 
38
 
Foreign exchange gains (losses)
(1)
   
 
6
 
   
 
17
 
Net realized investment gains (losses)
   
 
(2
) 
   
 
(1
) 
Adjusted net income adjustment to the (provision) benefit for income tax
   
 
-
 
   
 
-
 
  
 
 
     
 
 
  
Adjusted net income (loss)
   
$
(96
) 
   
$
(116
) 
  
 
 
     
 
 
  
Adjusted net income (loss) per diluted common share
(2)
   
 
(1.94
) 
   
 
(2.36
) 
 
  (1) - Reported
within “Net gains (losses) on financial instruments at fair value and foreign exchange” on the Company’s consolidated statements of operations.
  (2) - Adjusted
net income (loss) per diluted common share is calculated by taking adjusted net income (loss) divided by the GAAP weighted average number of diluted common shares outstanding.
Book Value Adjustments Per Share
In addition to GAAP book value per share, for internal purposes management also analyzes adjusted book value (“ABV”) per share, changes to which we view as an important indicator of financial performance. ABV is also used by management in certain components of management’s compensation. Since many of the Company’s investors and analysts continue to use ABV to evaluate MBIA’s share price and as the basis for their investment decisions, we present GAAP book value per share as well as the individual adjustments used by management to calculate its internal ABV metric.
Management adjusts GAAP book value to remove the book value of MBIA Corp. and for certain items which the Company believes will reverse from GAAP book value through GAAP earnings and comprehensive income, as well as add in the impact of certain items which the Company believes will be realized in GAAP book value in future periods. The Company has limited such adjustments to those items that it deems to be important to fundamental value and performance and for which the likelihood and amount can be reasonably estimated. The following provides a description of management’s adjustments to GAAP book value:
 
  •  
Negative Book value of MBIA Corp.
– We remove the negative book value of MBIA Corp. based on our view that given MBIA Corp.’s current financial condition, the regulatory regime in which it operates, the priority given to its policyholders, surplus note holders and preferred stock holders with respect to the distribution of assets, and its legal structure, it is not and will not likely be in a position to upstream any economic benefit to MBIA Inc. Further, MBIA Inc. does not face any material financial liability arising from MBIA Corp.
 
  •  
Net unrealized (gains) losses on
available-for-sale
(“AFS”) securities excluding MBIA Corp.
– We remove net unrealized gains and losses on AFS securities recorded in accumulated other comprehensive income since they will reverse from GAAP book value when such securities mature. Gains and losses from sales and impairments of AFS securities are recorded in book value through earnings.
 
43
Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
RESULTS OF OPERATIONS (continued)
 
  •  
Net unearned premium revenue in excess of expected losses of National
- We include net unearned premium revenue in excess of expected losses. Net unearned premium revenue in excess of expected losses consists of the financial guarantee unearned premium revenue of National in excess of expected insurance losses, net of reinsurance and deferred acquisition costs. In accordance with GAAP, a loss reserve on a financial guarantee policy is only recorded when expected losses exceed the amount of unearned premium revenue recorded for that policy. As a result, we only add to GAAP book value the amount of unearned premium revenue in excess of expected losses for each policy in order to reflect the full amount of our expected losses. The Company’s net unearned premium revenue will be recognized in GAAP book value in future periods, however, actual amounts could differ from estimated amounts due to such factors as credit defaults and policy terminations, among others.
Since the Company has a full valuation allowance against its net deferred tax asset and a zero consolidated effective tax rate, the book value per share adjustments reflect a zero effective tax rate.
The following table provides the Company’s GAAP book value per share and management’s adjustments to book value per share used in our internal analysis:
 
                     
    
As of
March 31,
  
As of
December 31,
In millions except share and per share amounts
   
2022
  
2021
Total shareholders’ equity of MBIA Inc.
   
$
(565
) 
  
$
(313
) 
Common shares outstanding
   
 
54,857,000
 
  
 
54,556,112
 
GAAP book value per share
   
$
(10.29
) 
  
$
(5.73
) 
Management’s adjustments described above:
     
Remove negative book value per share of MBIA Corp.
   
 
(36.16
) 
  
 
(35.94
) 
Remove net unrealized gains (losses) on
available-for-sale
securities included in other comprehensive income (loss)
   
 
(0.80
) 
  
 
2.02
 
Include net unearned premium revenue in excess of expected losses
   
 
3.39
 
  
 
3.58
 
U.S. Public Finance Insurance Segment
Our 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, insured obligations when due or, in the event National has exercised, at its discretion, the right to accelerate the payment under its policies upon the acceleration of the underlying insured obligations due to default or otherwise. National’s guarantees insure municipal bonds, including
tax-exempt
and taxable indebtedness of U.S. political subdivisions, as well as utility districts, airports, healthcare institutions, higher educational facilities, 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, user fees or tariffs related to the use of these projects, lease payments or other similar types of revenue streams. As of March 31, 2022, National had total insured gross par outstanding of $35.2 billion.
National continues to monitor and remediate its existing insured portfolio and may also pursue strategic alternatives that could enhance shareholder value. Some state and local governments and territory obligors that National insures are experiencing financial and budgetary stress which could lead to an increase in defaults by such entities on the payment of their obligations and, while such has not yet occurred materially, losses or impairments on a greater number of the Company’s insured transactions. In particular, Puerto Rico had been experiencing significant fiscal stress and constrained liquidity, and in response, Congress passed PROMESA, which established the Oversight Board vested with the sole power to certify fiscal plans for Puerto Rico. Refer to the “U.S. Public Finance Insurance Puerto Rico Exposures” section for additional information on our Puerto Rico exposures. We continue to monitor and analyze these situations and other stressed credits closely, and the overall extent and duration of stress affecting our insured credits remains uncertain.
 
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
RESULTS OF OPERATIONS (continued)
 
The following table presents our U.S. public finance insurance segment results for the three months ended March 31, 2022 and 2021:
 
                                
    
Three Months Ended March 31,
  
Percent
In millions
   
2022
  
2021
  
Change
Net premiums earned
   
$
13
 
  
$
17
 
  
 
-24%
 
Net investment income
   
 
17
 
  
 
14
 
  
 
21%
 
Net realized investment gains (losses)
   
 
(1
) 
  
 
(1
) 
  
 
-%
 
Net gains (losses) on financial instruments at fair value and foreign exchange
   
 
(16
) 
  
 
(2
) 
  
 
n/m
 
Fees and reimbursements
   
 
2
 
  
 
-
 
  
 
n/m
 
Other net realized gains (losses)
   
 
(3
) 
  
 
-
 
  
 
n/m
 
  
 
 
 
  
 
 
 
  
 
 
 
Total revenues
   
 
12
 
  
 
28
 
  
 
-57%
 
  
 
 
 
  
 
 
 
  
 
 
 
Losses and loss adjustment
   
 
87
 
  
 
109
 
  
 
-20%
 
Amortization of deferred acquisition costs
   
 
3
 
  
 
4
 
  
 
-25%
 
Operating
   
 
13
 
  
 
14
 
  
 
-7%
 
  
 
 
 
  
 
 
 
  
 
 
 
Total expenses
   
 
103
 
  
 
127
 
  
 
-19%
 
  
 
 
 
  
 
 
 
  
 
 
 
Income (loss) before income taxes
   
$
(91
) 
  
$
(99
) 
  
 
-8%
 
  
 
 
 
  
 
 
 
  
 
 
 
 
n/m - Percent change not meaningful.
NET PREMIUMS EARNED Net premiums earned on financial guarantees represent gross premiums earned net of premiums ceded to reinsurers, and include scheduled premium earnings and premium earnings from refunded issues. Refunding activity over the past several years has accelerated premium earnings in prior years and reduced the amount of scheduled premiums that would have been earned in the current year. Refunding activity can vary significantly from period to period based on issuer refinancing behavior. For the three months ended March 31, 2022 and 2021, scheduled premiums earned were $8 million and $10 million, respectively, and refunded premiums earned were $5 million and $7 million, respectively.
NET INVESTMENT INCOME The increase in net investment income for the three months ended March 31, 2022 compared with the same period of 2021 was primarily due to a higher average invested asset base resulting from sales of the PREPA bankruptcy claims and receipt of the cash and bonds from the GO PSA.
NET GAINS (LOSSES) ON FINANCIAL INSTRUMENTS AT FAIR VALUE AND FOREIGN EXCHANGE For the three months ended March 31, 2022, net losses on financial instruments at fair value and foreign exchange were driven by fair value losses on investments for which the fair value option was elected and investments designated as trading. The losses on the fair value option investments were driven by increases in interest rates and widening of credit spreads during the first quarter of 2022. The losses on the trading investments were driven by
mark-to-market
changes on the CVI after the distribution from the GO PSA.
OTHER NET REALIZED GAINS (LOSSES) For the three months ended March 31, 2022, other net realized losses was primarily related to credit losses on investments as a result of the Ukraine and Russia conflict.
LOSS AND LOSS ADJUSTMENT EXPENSES Our U.S. public finance insured portfolio management group is responsible for monitoring our U.S. public finance segment’s insured obligations. The level and frequency of monitoring of any insured obligation depends on the type, size, rating and our assessed performance of the insured issue. Refer to “Note 5: Loss and Loss Adjustment Expense Reserves” in the Notes to Consolidated Financial Statements for additional information related to the Company’s loss reserves.
For the three months ended March 31, 2022, loss and LAE incurred primarily related to changes in our estimate of expected recoveries on National’s PREPA exposure. PREPA loss reserves and recoveries include certain assumptions about the timing and amount of claims payments and recoveries, including assumptions about the values of recoveries on the date we expect to receive reimbursement under an implemented RSA. During the first quarter of 2022, we updated assumptions used to estimate the value of recoveries, the timing and amount of claim payments, as well as the timing of an implemented plan. These assumption changes resulted in a decrease in our estimated present value of PREPA recoveries. Loss and LAE incurred during the quarter related to PREPA was partially offset by benefits related to Puerto Rico HTA and GO recoveries. During the first quarter of 2022, we increased the estimated values of recoveries expected to be received as part of the HTA restructuring to reflect updated information about potential values when received, including considering the current fair values of similar recently issued GO securities. In addition, we recorded a benefit on our GO recoveries to reflect the fair values of the consideration received as of the acquisition date, which was higher than our previous estimate.
 
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
RESULTS OF OPERATIONS (continued)
 
For the three months ended March 31, 2021, loss and LAE incurred reflected changes in assumptions within our HTA loss scenarios and an increase in the risk-free rates used to discount the value of long-dated future recoveries on all Puerto Rico exposures, which caused the present value of the recoveries to decline. These losses were partially offset by a benefit driven by a change in certain assumptions related to the Puerto Rico GO restructuring.
The following table presents information about our U.S. public finance insurance loss recoverable asset and loss and LAE reserves liabilities as of March 31, 2022 and December 31, 2021:
 
In millions
   
March 31,
2022
   
December 31,
2021
  
Percent
Change
Assets:
        
Insurance loss recoverable
    $ 128      $ 1,054       -88 % 
Reinsurance recoverable on paid and unpaid losses
(1)
      10        3       n/ m 
Liabilities:
        
Loss and LAE reserves
      460        425       8 % 
Insurance loss recoverable - ceded
(2)
      3        55       -95 % 
  
 
 
 
   
 
 
 
  
 
 
 
Net reserve (salvage)
    $ 325      $ (577 )      n/ m 
  
 
 
 
   
 
 
 
  
 
 
 
 
(1) - Reported within “Other assets” on our consolidated balance sheets.
(2) - Reported within “Other liabilities” on our consolidated balance sheets.
The insurance loss recoverable as of March 31, 2022 decreased compared with December 31, 2021 primarily due to the receipt of recoveries pursuant to the implemented GO PSA whereby National received cash, GO Bonds, and a CVI. In addition, the insurance loss recoverable declined due to the sale of PREPA bankruptcy claims and due to changes in assumptions related to the value of the remaining PREPA recoveries on paid claims. Loss and LAE reserves as of March 31, 2022 increased compared with December 31, 2021 primarily due to a decrease in PREPA recoveries on claims not yet paid, which are netted in loss and LAE reserves. The increase in PREPA net loss reserves was partially offset by an increase in the estimated value of recoveries related to the HTA restructuring, which is also netted in loss and LAE reserves, claims payments related to the acceleration and commutation of GO exposure, and scheduled claim payments on Puerto Rico exposures during the three months ended March 31, 2022.
POLICY ACQUISITION COSTS AND OPERATING EXPENSES U.S. public finance insurance segment expenses for the three months ended March 31, 2022 and 2021 are presented in the following table:
 
                                
    
Three Months Ended March 31,
     
Percent
  
In millions
   
2022
     
2021
     
Change
  
Gross expenses
   
$
13
 
   
$
15
 
   
 
-13%
 
  
 
 
     
 
 
     
 
 
  
Amortization of deferred acquisition costs
   
$
3
 
   
$
4
 
   
 
-25%
 
Operating
   
 
13
 
   
 
14
 
   
 
-7%
 
  
 
 
     
 
 
     
 
 
  
Total insurance operating expenses
   
$
16
 
   
$
18
 
   
 
-11%
 
  
 
 
     
 
 
     
 
 
  
Gross expenses represent total insurance expenses before the deferral of any policy acquisition costs. Operating expenses decreased for the three months ended March 31, 2022 compared with the same period of 2021 primarily due to a decrease in legal costs.
When an insured obligation refunds, we accelerate to expense any remaining deferred acquisition costs associated with the policy covering the refunded insured obligation. We did not defer a material amount of policy acquisition costs during 2022 or 2021 as we did not write any new insurance business in those years.
INSURED PORTFOLIO EXPOSURE Financial guarantee insurance companies use a variety of approaches to assess the underlying credit risk profile of their insured portfolios. National uses both an internally developed credit rating system as well as third-party rating sources in the analysis of credit quality measures of its insured portfolio. In evaluating credit risk, we obtain, when available, the underlying rating(s) of the insured obligation before the benefit of National’s insurance policy from nationally recognized rating agencies, Moody’s Investor Services (“Moody’s”) and Standard & Poor’s Financial Services LLC (“S&P”). Other companies within the financial guarantee industry may report credit quality information based upon internal ratings that would not be comparable to our presentation. We maintain internal ratings on our entire portfolio, and our ratings may be higher or lower than the underlying ratings assigned by Moody’s or S&P.
 
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
RESULTS OF OPERATIONS (continued)
 
The following table presents the credit quality distribution of National’s U.S. public finance outstanding gross par insured as of March 31, 2022 and December 31, 2021. Capital appreciation bonds (“CABs”) are reported at the par amount at the time of issuance of the insurance policy. All ratings are as of the period presented and represent S&P underlying ratings, where available. If transactions are not rated by S&P, a Moody’s equivalent rating is used. If transactions are not rated by either S&P or Moody’s, an internal equivalent rating is used.
 
                                           
    
Gross Par Outstanding
  
In millions
   
March 31, 2022
     
December 31, 2021
  
Rating
   
Amount
     
%
     
Amount
     
%
  
AAA
   
$
1,614
 
   
 
4.6%
 
   
$
1,682
 
   
 
4.6%
 
AA
   
 
14,559
 
   
 
41.4%
 
   
 
14,874
 
   
 
40.8%
 
A
   
 
10,167
 
   
 
28.9%
 
   
 
10,439
 
   
 
28.6%
 
BBB
   
 
5,968
 
   
 
17.0%
 
   
 
6,187
 
   
 
17.0%
 
Below investment grade
   
 
2,870
 
   
 
8.1%
 
   
 
3,269
 
   
 
9.0%
 
  
 
 
     
 
 
     
 
 
     
 
 
  
Total
   
$
35,178
 
   
 
100.0%
 
   
$
36,451
 
   
 
100.0%
 
  
 
 
     
 
 
     
 
 
     
 
 
  
U.S. Public Finance Insurance Puerto Rico Exposures
The following is a summary of exposures within the insured portfolio of our U.S. public finance insurance segment related to Puerto Rico as of March 31, 2022:
 
In millions
   
Gross Par
Outstanding
  
Debt
Service
Outstanding
   
National
Internal
Rating
Puerto Rico Electric Power Authority (PREPA)
    $ 809     $ 1,063        d  
Puerto Rico Highway and Transportation Authority Transportation Revenue (PRHTA)
      523       842        d  
Puerto Rico Highway and Transportation Authority—Subordinated Transportation Revenue (PRHTA)
      27       33        d  
Puerto Rico Highway and Transportation Authority Highway Revenue (PRHTA)
      39
(1)
 		     57        d  
University of Puerto Rico System Revenue
      70       90        d  
Inter American University of Puerto Rico Inc.
      17       21        a3  
  
 
 
 
  
 
 
 
   
Total
    $ 1,485     $ 2,106     
  
 
 
 
  
 
 
 
   
 
(1) - Includes CABs that reflect the gross par amount at the time of issuance of the insurance policy. As of March 31, 2022, gross par outstanding plus CABs accreted interest was $41 million.
On June 30, 2016, PROMESA was signed into law by the President of the United States. PROMESA provides for the creation of the Oversight Board with powers relating to the development and implementation of a fiscal plan for the Commonwealth and each of its instrumentalities as well as a court-supervised Title III process that allows Puerto Rico to restructure its debt if voluntary agreements cannot be reached with creditors through a collective action process. Following the resignation and replacement of several Oversight Board members, the Oversight Board has been reconstituted with four new members while three existing members have been reappointed by the President for another three year term. The newly elected Governor of Puerto Rico has appointed himself as a
non-voting
member of the reconstituted Oversight Board.
On May 3, 2017, the Oversight Board certified and filed a petition under Title III of PROMESA for Puerto Rico with the District Court of Puerto Rico thereby commencing a bankruptcy-like case for the Commonwealth GO. Under separate petitions, the Oversight Board subsequently commenced Title III proceedings for COFINA, PRHTA, PREPA and PBA on May 5, 2017, May 21, 2017, July 2, 2017 and September 27, 2019, respectively. One of the proceedings was resolved on February 4, 2019, when the District of Puerto Rico entered the order confirming the Third Amended Title III Plan of Adjustment for COFINA. The Title III cases for the Commonwealth of Puerto Rico and PBA were confirmed on January 18, 2022, and became effective on March 15, 2022. There can be no assurance that the Title III proceedings for PREPA and PRHTA will be resolved with similar outcomes.
 
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
RESULTS OF OPERATIONS (continued)
 
As a result of prior defaults, various stays and the Title III cases, Puerto Rico failed to make certain scheduled debt service payments for National insured bonds. As a consequence, National has paid gross claims in the aggregate amount of $2.2 billion relating to GO bonds, PBA bonds, PREPA bonds and PRHTA bonds through March 31, 2022, inclusive of the commutation payment and the additional payment in the amount of $66 million on December 17, 2019 related to COFINA and the GO PSA acceleration and commutation payments of $277 million in March of 2022.
PREPA
National’s largest exposure to Puerto Rico, by gross par outstanding, is to PREPA.
On October 3, 2018, National, together with Assured Guaranty Corp., Assured Guaranty Municipal Corp., and Syncora Guarantee Inc. (collectively, “Movants”) filed a motion in the Title III case for PREPA for relief from the automatic stay to allow Movants to exercise their statutory right to have a receiver appointed at PREPA (the “Receiver Motion”). This motion was stayed pending a resolution of the 9019 Order approving the RSA, but is no longer stayed pursuant to the April 8 Order, discussed below.
On May 3, 2019, PREPA, the Oversight Board, AAFAF, the Ad Hoc Group of PREPA bondholders (the “Ad Hoc Group”), and Assured Guaranty Corp. and Assured Guaranty Municipal Corp. (“Assured”) entered into the a restructuring support agreement (“RSA”) which was amended on September 9, 2019 to include National and Syncora Guarantee, Inc. (“Syncora”) as supporting parties.
On March 8, 2022, AAFAF and PREPA terminated the RSA under a provision permitting termination if an order approving the RSA had not been entered by September 30, 2019. On April 8, 2022, the Court issued the April 8 Order which provides that mediation will terminate on June 1, 2022 unless the mediation team extends the time to July 1, 2022. The April 8 Order further provides that nothing therein acts as a stay of any pending adversary proceedings or contested matters in the PREPA case, subject to the Court’s pending request to the Oversight Board for a status report by June 1, 2022.
On July 1, 2019 the Oversight Board and AAFAF also filed an adversary complaint against the Trustee for the PREPA Bonds, challenging the validity of the liens arising under the Trust Agreement that secure insured obligations of National. The adversary proceeding was stayed but the April 8 Order dissolved the stay as to any pending adversary proceedings or contested matters, subject to the Court’s pending status report request to the Oversight Board on June 1, 2022.
On June 22, 2020, the Oversight Board and the Puerto Rico P3 Authority announced an agreement and contract with LUMA Energy, LLC (“LUMA”) which calls for LUMA to take full responsibility for the operation and maintenance of PREPA’s transmission and distribution system; the contract runs for
15-years
following a transition period expected to take 12 months. PREPA retains ownership of the system as well as responsibility for the power generation system. LUMA assumed responsibility for operations on June 1, 2021.
On September 18, 2020, FEMA and the PR COR3 Authority announced the commitment by FEMA to provide approximately $11.6 billion (net of the required 10% cost share) to fund projects built by PREPA and the PR Department of Education; approximately $9.4 billion (net) of this amount is designated for PREPA. LUMA is now involved in the planning of the related projects as well as proceedings related thereto in front the PR Energy Bureau as well as
PR-COR3.
In October of 2021 and January of 2022, National sold $199 million and $231 million, respectively, of PREPA bankruptcy claims related to insurance claims paid on matured National-insured PREPA bonds. These transactions represented approximately 35% of National’s par claims to PREPA, monetized a portion of National’s salvage asset at a discount to National’s previous carrying value, and reduced potential volatility and ongoing risk of remediation around the PREPA credit. Subsequent to the sale of these PREPA bankruptcy claims, National does not have a material amount of additional par claims to PREPA that have matured and can be sold.
PRHTA
On May 20, 2019, the Oversight Board and the Committee filed a lien avoidance adversary complaint against fiscal agents, holders, and insurers of certain PRHTA bonds, including National. The complaint challenges the extent and enforceability of certain security interests in PRHTA’s revenues. Pursuant to an interim schedule entered by the Court in December 2019, the Court has stayed the proceedings, with the understanding that the issues raised in these proceedings would be addressed in new adversary proceedings filed by the Oversight Board on January 16, 2020. Subsequent to those filings, these proceedings were stayed by order of the Court.
 
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Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
RESULTS OF OPERATIONS (continued)
 
On April 12, 2021, National, Assured Guaranty Corp., Assured Guaranty Municipal Corp. and the Oversight Board reached an agreement in principle settling certain HTA clawback claims in the Commonwealth Title III case and providing for a distribution to HTA holders of cash, bonds and a CVI subject to completing negotiations on a plan support agreement in respect of the HTA PSA. On May 5, 2021, National, Assured Guaranty Corp., Assured Guaranty Municipal Corp. and the Oversight Board entered into the HTA PSA. On May 2, 2022, the Oversight Board filed the HTA Plan, together with the Disclosure Statement and supporting documents. National expects to receive during the second quarter of 2022 its allocable portion of cash and CVI relating to HTA, which aggregate amounts to be distributed to bondholders totals approximately $264 million and $2.2 billion, respectively. In addition, National shall receive its allocable portion of approximately $1.2 billion of newly issued HTA bonds (or cash equivalent) following the effective date of the HTA Plan.
Status of Puerto Rico’s Fiscal Plans
The Oversight Board certified fiscal plans for PREPA, the University of Puerto Rico (the “University”) and PRHTA on May 27, 2021. The Oversight Board also certified the fiscal year 2022 budgets for Commonwealth, PREPA, the University and PRHTA on June 27, 2021. In connection with the implementation of the Commonwealth and PRHTA plans of adjustments, the Oversight Board has commenced the process of approving revised Fiscal Plans for fiscal year 2023, which commences on July 1, 2022.
University of Puerto Rico
The University is not a debtor in Title III and continues to be current on its debt service payment. However, the University is subject to a standstill agreement with its senior bondholders, which has been extended to May 31, 2022. National is not a party to the standstill agreement.
The following table presents our scheduled gross debt service due on our Puerto Rico insured exposures for the nine months ending December 31, 2022, for each of the subsequent four years ending December 31 and thereafter:
 
                                                                            
In millions
   
Nine Months
Ending
December 31,
2022
   
2023
   
2024
   
2025
   
2026
   
Thereafter
   
Total
Puerto Rico Electric Power Authority (PREPA)
   
$
119
 
   
$
137
 
   
$
137
 
   
$
105
 
   
$
57
 
   
$
508
 
   
$
1,063
 
Puerto Rico Highway and Transportation Authority Transportation Revenue (PRHTA)
   
 
13
 
   
 
36
 
   
 
33
 
   
 
36
 
   
 
35
 
   
 
689
 
   
 
842
 
Puerto Rico Highway and Transportation Authority—Subordinated Transportation Revenue (PRHTA)
   
 
8
 
   
 
1
 
   
 
1
 
   
 
1
 
   
 
1
 
   
 
21
 
   
 
33
 
Puerto Rico Highway and Transportation Authority Highway Revenue (PRHTA)
   
 
2
 
   
 
4
 
   
 
2
 
   
 
2
 
   
 
2
 
   
 
45
 
   
 
57
 
University of Puerto Rico System Revenue
   
 
5
 
   
 
12
 
   
 
11
 
   
 
16
 
   
 
6
 
   
 
40
 
   
 
90
 
Inter American University of Puerto Rico Inc.
   
 
3
 
   
 
3
 
   
 
3
 
   
 
3
 
   
 
2
 
   
 
7
 
   
 
21
 
  
 
 
 
   
 
 
 
   
 
 
 
   
 
 
 
   
 
 
 
   
 
 
 
   
 
 
 
Total
   
$
150
 
   
$
193
 
   
$
187
 
   
$
163
 
   
$
103
 
   
$
1,310
 
   
$
2,106
 
  
 
 
 
   
 
 
 
   
 
 
 
   
 
 
 
   
 
 
 
   
 
 
 
   
 
 
 
Corporate Segment
Our corporate segment consists of general corporate activities, including providing support services to MBIA Inc.’s subsidiaries and asset and capital management. Support services are provided by our service company, MBIA Services, 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 subsidiary, MBIA Global Funding, LLC (“GFL”). MBIA Inc. issued debt to finance the operations of the MBIA group. GFL raised funds through the issuance of medium-term notes (“MTNs”) with varying maturities, which were in turn guaranteed by MBIA Corp. GFL lent the proceeds of these MTN issuances to MBIA Inc. 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.
 
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Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
RESULTS OF OPERATIONS (continued)
 
The following table summarizes the consolidated results of our corporate segment for the three months ended March 31, 2022 and 2021:
 
                                
    
Three Months Ended March 31,
   
Percent
In millions
   
2022
  
2021
   
Change
Net investment income
   
$
6
 
  
$
7
 
   
 
-14%
 
Net realized investment gains (losses)
   
 
(1
) 
  
 
-
 
   
 
n/m
 
Net gains (losses) on financial instruments at fair value and foreign exchange
   
 
39
 
  
 
55
 
   
 
-29%
 
Fees
   
 
14
 
  
 
16
 
   
 
-13%
 
  
 
 
 
  
 
 
 
   
 
 
 
Total revenues
   
 
58
 
  
 
78
 
   
 
-26%
 
  
 
 
 
  
 
 
 
   
 
 
 
Operating
   
 
16
 
  
 
22
 
   
 
-27%
 
Interest
   
 
19
 
  
 
19
 
   
 
-%
 
  
 
 
 
  
 
 
 
   
 
 
 
Total expenses
   
 
35
 
  
 
41
 
   
 
-15%
 
  
 
 
 
  
 
 
 
   
 
 
 
Income (loss) before income taxes
   
$
23
 
  
$
37
 
   
 
-38%
 
  
 
 
 
  
 
 
 
   
 
 
 
 
n/m - Percent change not meaningful.
NET GAINS (LOSSES) ON FINANCIAL INSTRUMENTS AT FAIR VALUE AND FOREIGN EXCHANGE The change in net gains (losses) on financial instruments at fair value and foreign exchange for the three months ended March 31, 2022 compared with same period of 2021 was primarily due to variances in foreign currency gains and net gains on interest rate swaps. The three months ended March 31, 2022 includes foreign currency gains of $5 million on Euro-denominated liabilities compared with foreign currency gains of $17 million on these liabilities as a result of the strengthening of the U.S. dollar. In addition, the three months ended March 31, 2022 includes fair value net gains of $34 million on interest rate swaps compared with fair value net gains of $39 million on these swaps for the same period of 2021 due to a smaller increase in interest rates.
OPERATING EXPENSE The change in operating expense for the three months ended March 31, 2022 compared with the same period of 2021 was primarily due to a decrease in compensation expense related to the Company’s deferred compensation plan.
International and Structured Finance Insurance Segment
Our international and structured finance insurance portfolio is managed through MBIA Corp. The financial guarantees issued by MBIA Corp. generally provide unconditional and irrevocable guarantees of the payment of the 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 sovereign-related and
sub-sovereign
bonds, privately issued bonds used for the financing of utilities, 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 cash flows generated by a specified pool of assets, such as residential and commercial mortgages, structured settlements, consumer loans, and corporate loans and bonds. MBIA Insurance Corporation insures the investment agreements written by MBIA Inc., and if MBIA Inc. were to have insufficient assets to pay amounts due upon maturity or termination, MBIA Insurance Corporation would be required to make such payments under its insurance policies. MBIA Insurance Corporation also insures debt obligations of other affiliates, including GFL, and MZ Funding. In addition, MBIA Corp. insures obligations under certain types of derivative contracts. MBIA Insurance Corporation provides 100% reinsurance to its subsidiary, MBIA Mexico S.A. de C.V. (“MBIA Mexico”). As of March 31, 2022, MBIA Corp.’s total insured gross par outstanding was $4.5 billion.
MBIA Corp. has contributed to the Company’s NOL carryforward, which is used in the calculation of our consolidated income taxes. If MBIA Corp. becomes profitable, it is not expected to make any tax payments under our tax sharing agreement. Based on MBIA Corp.’s current projected earnings and our expectation that it will not write significant new business, we believe it is unlikely that MBIA Corp. will generate significant income in the near future. As a result of MBIA Corp.’s capital structure and business prospects, we do not expect its financial performance to have a material economic impact on MBIA Inc.
 
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Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
RESULTS OF OPERATIONS (continued)
 
The following table presents our international and structured finance insurance segment results for the three months ended March 31, 2022 and 2021:
 
                                
    
Three Months Ended March 31,
  
Percent
In millions
   
2022
  
2021
  
Change
Net premiums earned
   
$
4
 
  
$
6
 
  
 
-33%
 
Net investment income
   
 
2
 
  
 
1
 
  
 
100%
 
Net realized investment gains (losses)
   
 
(1
) 
  
 
-
 
  
 
n/m
 
Net gains (losses) on financial instruments at fair value and foreign exchange
   
 
(6
) 
  
 
(1
) 
  
 
n/m
 
Fees and reimbursements
   
 
3
 
  
 
4
 
  
 
-25%
 
Revenues of consolidated VIEs:
       
Net gains (losses) on financial instruments at fair value and foreign exchange
   
 
(4
) 
  
 
(14
) 
  
 
-71%
 
  
 
 
 
  
 
 
 
  
 
 
 
Total revenues
   
 
(2
) 
  
 
(4
) 
  
 
-50%
 
  
 
 
 
  
 
 
 
  
 
 
 
Losses and loss adjustment
   
 
(38
) 
  
 
(11
) 
  
 
n/m
 
Amortization of deferred acquisition costs
   
 
4
 
  
 
4
 
  
 
-%
 
Operating
   
 
6
 
  
 
7
 
  
 
-14%
 
Interest
   
 
28
 
  
 
27
 
  
 
4%
 
Expenses of consolidated VIEs:
       
Operating
   
 
2
 
  
 
2
 
  
 
-%
 
Interest
   
 
1
 
  
 
11
 
  
 
-91%
 
  
 
 
 
  
 
 
 
  
 
 
 
Total expenses
   
 
3
 
  
 
40
 
  
 
-93%
 
  
 
 
 
  
 
 
 
  
 
 
 
Income (loss) before income taxes
   
$
(5
) 
  
$
(44
) 
  
 
-89%
 
  
 
 
 
  
 
 
 
  
 
 
 
 
n/m - Percent change not meaningful.
NET PREMIUMS EARNED Our international and structured finance insurance segment generates net premiums from insurance policies accounted for as financial guarantee contracts. Net premiums earned represent gross premiums earned net of premiums ceded to reinsurers, and include scheduled premium earnings and premium earnings from refunded issues. Certain premiums may be eliminated in our consolidated financial statements as a result of the Company consolidating VIEs. The following table provides net premiums earned from our financial guarantee contracts for the three months ended March 31, 2022 and 2021:
 
                                
    
Three Months Ended March 31,
     
Percent
  
In millions
   
2022
     
2021
     
Change
  
Net premiums earned:
         
Non-U.S.
   
$
3
 
   
$
5
 
   
 
-40%
 
U.S.
   
 
1
 
   
 
1
 
   
 
-%
 
  
 
 
     
 
 
     
 
 
  
Total net premiums earned
   
$
4
 
   
$
6
 
   
 
-33%
 
  
 
 
     
 
 
     
 
 
  
VIEs (eliminated in consolidation)
   
$
-
 
   
$
1
 
   
 
-100%
 
NET GAINS (LOSSES) ON FINANCIAL INSTRUMENTS AT FAIR VALUE AND FOREIGN EXCHANGE The unfavorable change for the three months ended March 31, 2022 compared with the same period of 2021 was primarily due to losses from foreign currency revaluations of loss reserves denominated in Unidad de Inversion, as a result of the weakening of U.S. dollar.
REVENUES OF CONSOLIDATED VIEs: The favorable change for the three months ended March 31, 2022 compared with the same period of 2021 was primarily due to lower losses in 2022 from CDO transactions. The net loss for the three months ended March 31, 2021 was primarily related to a release of an allowance for credit loss on a CDO VIE.
LOSSES AND LOSS ADJUSTMENT EXPENSES Our international and structured finance insured portfolio management group is responsible for monitoring international and structured finance insured obligations. The level and frequency of monitoring of any insured obligation depends on the type, size, rating and our assessed performance of the insured issue. Refer to “Note 5: Loss and Loss Adjustment Expense Reserves” in the Notes to Consolidated Financial Statements for a description of the Company’s loss reserving policy and additional information related to its loss reserves.
For the three months ended March 31, 2022 and 2021, the loss and LAE benefits primarily related to increases in the risk-free rates used to discount expected claim payments, which decreased the present value of net loss reserves, primarily on insured first-lien residential mortgage-backed securities (“RMBS”) transactions. For the three months ended March 31, 2021, the benefit was partially offset by a decline in expected salvage collections from insured CDOs.
 
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
RESULTS OF OPERATIONS (continued)
 
As a result of the consolidation of VIEs, loss and LAE excludes losses and LAE benefits of $9 million and $16 million, for the three months ended March 31, 2022 and 2021, respectively, as VIE losses and LAE activity is eliminated in consolidation.
Refer to “Note 5: Loss and Loss Adjustment Expense Reserves” in the Notes to Consolidated Financial Statements for further information about our insurance loss recoverable and loss and LAE reserves. The following table presents information about our insurance loss recoverable and loss and LAE reserves as of March 31, 2022 and December 31, 2021:
 
                                
In millions
   
March 31,
2022
     
December 31,
2021
     
Percent
Change
  
Assets:
         
Insurance loss recoverable
   
$
238
 
   
$
242
 
   
 
-2%
 
Reinsurance recoverable on paid and unpaid losses
(1)
   
 
4
 
   
 
5
 
   
 
-20%
 
Liabilities:
         
Loss and LAE reserves
   
 
426
 
   
 
469
 
   
 
-9%
 
  
 
 
     
 
 
     
Net reserve (salvage)
   
$
184
 
   
$
222
 
   
 
-17%
 
  
 
 
     
 
 
     
 
(1) – Reported within “Other assets” on our consolidated balance sheets.
The insurance loss recoverable primarily relates to reimbursement rights arising from the payment of claims on MBIA Corp.’s policies insuring certain CDOs and RMBS. Such payments also entitle MBIA Corp. to exercise certain rights and remedies to seek recovery of its reimbursement entitlements. The decrease in the insurance loss recoverable from 2021 is due to an increase in risk-free rates used to discount future recoveries of paid claims, which lowered the present value of those recoveries, and the collection of RMBS recoveries. The decline in loss and LAE reserves from 2021 is primarily due to the increase in risk-free rates which caused the present value of case reserves, net of future recoveries, to decline.
Refer to “Note 1: Business Developments and Risks and Uncertainties” in the Notes to Consolidated Financial Statements for information regarding risks and uncertainties related to future collections of estimated recoveries. Refer to “Note 5: Loss and Loss Adjustment Expense Reserves” in the Notes to Consolidated Financial Statements for additional information about our loss reserving policy, loss reserves and recoverables.
POLICY ACQUISITION COSTS AND OPERATING EXPENSES International and structured finance insurance segment expenses for the three months ended March 31, 2022 and 2021 are presented in the following table:
 
                                
    
Three Months Ended March 31,
     
Percent

Change
  
In millions
   
2022
     
2021
  
Gross expenses
   
$
6
 
   
$
7
 
   
 
-14%
 
  
 
 
     
 
 
     
 
 
  
Amortization of deferred acquisition costs
   
$
4
 
   
$
4
 
   
 
-%
 
        
 
 
  
Operating
   
 
6
 
   
 
7
 
   
 
-14%
 
  
 
 
     
 
 
     
 
 
  
Total insurance operating expenses
   
$
10
 
   
$
11
 
   
 
-9%
 
  
 
 
     
 
 
     
 
 
  
Gross expenses represent total insurance expenses before the deferral of any policy acquisition costs. We did not defer a material amount of policy acquisition costs during 2022 or 2021 as no new business was written. Policy acquisition costs in these periods were primarily related to ceding commissions and premium taxes on installment policies written in prior periods.
 
52
Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
RESULTS OF OPERATIONS (continued)
 
INTEREST EXPENSE OF CONSOLIDATED VIEs Interest expense of consolidated VIEs decreased for the three months ended March 31, 2022 compared with the same period of 2021 due to the repayment of the outstanding insured senior notes of the Refinanced Facility during 2021.
International and Structured Finance Insurance Portfolio Exposures
Credit Quality
The credit quality of our international and structured finance insured portfolio is assessed in the same manner as our U.S. public finance insured portfolio. As of March 31, 2022 and December 31, 2021, 29% and 26%, respectively, of our international and structured finance insured portfolio was rated below investment grade, before giving effect to MBIA’s guarantees, based on MBIA’s internal ratings, which are generally more current than the underlying ratings provided by S&P and Moody’s for this subset of our insured portfolio. Below investment grade insurance policies primarily include our first-lien RMBS and CDO exposures.
Selected Portfolio Exposures
MBIA Corp. insures RMBS backed by residential mortgage loans, including first-lien alternative
A-paper
and subprime mortgage loans directly through RMBS securitizations. As of March 31, 2022 and December 31, 2021, MBIA Corp. had $ 956 million and $ 979 million, respectively, of first-lien RMBS gross par outstanding. These amounts include the gross par outstanding related to transactions that the Company consolidates under accounting guidance for VIEs and includes international exposure of $ 245 million and $ 238 million, as of March 31, 2022 and December 31, 2021, respectively.
In addition, as of March 31, 2022 and December 31, 2021, MBIA Corp. insured $228 million and $231 million, respectively, of CDOs and related instruments.
We may experience considerable incurred losses in certain of these sectors. There can be no assurance that the loss reserves recorded in our financial statements will be sufficient or that we will not experience losses on transactions on which we currently have no loss reserves, in particular if the economy deteriorates. We may seek to purchase, directly or indirectly, obligations guaranteed by MBIA Corp. or seek to commute policies. The amount of insurance exposure reduced, if any, and the nature of any such actions will depend on market conditions, pricing levels from time to time, and other considerations. In some cases, these activities may result in a reduction of loss reserves, but in all cases they are intended to limit our ultimate losses and reduce the future volatility in loss development on the related policies. Our ability to purchase guaranteed obligations and to commute policies will depend on management’s assessment of available liquidity.
U.S. Public Finance and International and Structured Finance Reinsurance
Reinsurance enables the Company to cede exposure for purposes of syndicating risk. The Company generally retains the right to reassume the business ceded to reinsurers under certain circumstances, including a reinsurer’s rating downgrade below specified thresholds. Currently, we do not intend to use reinsurance to decrease the insured exposure in our portfolio.
As of March 31, 2022, the aggregate amount of insured par outstanding ceded by MBIA to reinsurers under reinsurance agreements was $994 million compared with $1.0 billion as of December 31, 2021. Under National’s reinsurance agreement with MBIA Corp., if a reinsurer of MBIA Corp. is unable to pay claims ceded by MBIA Corp. on U.S. public finance exposure, National will assume liability for such ceded claim payments. For a further discussion of the Company’s reinsurance, refer to “Note 13: Insurance in Force” in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form
10-K
for the year ended December 31, 2021.
 
53
Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
LIQUIDITY AND CAPITAL RESOURCES
 
Liquidity
We use a liquidity risk management framework, the primary objective of which is to match liquidity resources to needs. We monitor our cash and liquid asset resources using cash forecasting and stress-scenario testing. Members of MBIA’s senior management meet regularly to review liquidity metrics, discuss contingency plans and establish target liquidity levels. We evaluate and manage liquidity on a legal-entity basis to take into account the legal, regulatory and other limitations on available liquidity resources within the enterprise.
Consolidated Cash Flows
Information about our consolidated cash flows by category is presented on our consolidated statements of cash flows. The following table summarizes our consolidated cash flows for the three months ended March 31, 2022 and 2021:
 
                                
    
Three Months Ended March 31,
    
In millions
   
2022
  
2021
  
Percent Change
Statement of cash flow data:
       
Net cash provided (used) by:
       
Operating activities
   
$
273
 
  
$
529
 
  
 
-48%
 
Investing activities
   
 
(254
) 
  
 
(418
) 
  
 
-39%
 
Financing activities
   
 
(29
) 
  
 
(157
) 
  
 
-82%
 
Effect of exchange rate changes on cash and cash equivalents
   
 
1
 
  
 
-
 
  
 
n/m
 
Cash and cash equivalents - beginning of period
   
 
160
 
  
 
167
 
  
 
-4%
 
  
 
 
 
  
 
 
 
  
 
 
 
Cash and cash equivalents - end of period
   
$
151
 
  
$
121
 
  
 
25%
 
  
 
 
 
  
 
 
 
  
 
 
 
 
n/m - Percent change not meaningful.
Operating activities
Net cash provided by operating activities decreased for the three months ended March 31, 2022 compared with the same period of 2021 primarily due to proceeds received in the first quarter of 2021 from loan repurchase commitments of $600 million as a result of the settlement of the Credit Suisse litigation and an increase of $278 million of losses and LAE paid in the first quarter of 2022 when compared to the same period of 2021. This was partially offset by an increase of $605 million of proceeds from insurance recoveries and reinsurance in the first quarter of 2022 when compared to the same period of 2021, primarily from the GO PSA and the sale of certain PREPA bankruptcy claims.
Investing activities
Net cash used by investing activities decreased for the three months ended March 31, 2022 compared with the same period of 2021 primarily due to less cash received from operating activities for purchases and paydowns in the first quarter of 2022 compared with the same period of 2021.
Financing activities
Net cash used by financing activities decreased for the three months ended March 31, 2022 compared with the same period of 2021 primarily due to a decrease in principal paydowns of VIE notes of $145 million, driven by the partial repayment of the MZ Funding senior notes in the first quarter of 2021.
Consolidated Investments
The following discussion of investments, including references to consolidated investments, excludes investments reported under “Assets of consolidated variable interest entities” on our consolidated balance sheets. Investments of VIEs support the repayment of VIE obligations and are not available to settle obligations of MBIA. Fixed-maturity securities purchased by the Company are generally designated as AFS. Our AFS investments comprise high-quality fixed-income securities and short-term investments.
 
54
Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
LIQUIDITY AND CAPITAL RESOURCES (continued)
 
The credit quality distribution of the Company’s AFS fixed-maturity investment portfolios, excluding short-term investments, are based on ratings from Moody’s and alternate ratings sources, such as S&P or the best estimate of the ratings assigned by the Company, have been used for a small percentage of securities that are not rated by Moody’s. As of March 31, 2022, the weighted average credit quality rating of the Company’s AFS fixed-maturity investment portfolio, excluding short-term investments, was A and 75% of the investments were investment grade. The investments in investment grade decreased from 92% in 2021 to 75% in 2022 as a result of the GO PSA and the receipt of the GO bonds.
The fair values of securities in the Company’s AFS fixed-maturity investment portfolio are sensitive to changes in interest rates. Decreases in interest rates generally result in increases in the fair values of fixed-maturity securities and increases in interest rates generally result in decreases in the fair values of fixed-maturity securities.
As of March 31, 2022 and December 31, 2021, the Company had $33 million of unrealized losses and $139 million of unrealized gains, respectively, net of deferred taxes related to its investment portfolio recorded in accumulated other comprehensive income within equity. The unrealized losses during 2022 resulted from higher interest rates and wider credit spreads.
Refer to “Note 2: Significant Accounting Policies,” and “Note 7: Investments” in the Notes to Consolidated Financial Statements for further information about our accounting policies and investments.
Insured Investments
MBIA’s consolidated investment portfolio includes investments that are insured by various financial guarantee insurers (“Insured Investments”), including investments insured by National and MBIA Corp. (“Company-Insured Investments”). When purchasing Insured Investments, the Company’s third-party portfolio manager independently assesses the underlying credit quality, structure and liquidity of each investment, in addition to the creditworthiness of the insurer. Insured Investments are diverse by sector, issuer and size of holding. The third-party portfolio manager assigns underlying ratings to Insured Investments without giving effect to financial guarantees based on underlying ratings assigned by Moody’s or S&P, when a rating is not published by Moody’s. When a Moody’s or S&P underlying rating is not available, the underlying rating is based on the portfolio manager’s best estimate of the rating of such investment. If the Company determines that declines in the fair values of third-party Insured Investments are related to credit loss, the Company will establish an allowance for credit losses and recognize the credit component through earnings.
As of March 31, 2022, Insured Investments at fair value represented $256 million or 7% of consolidated investments, of which $231 million or 7% of consolidated investments were Company-Insured Investments. As of March 31, 2022, based on the actual or estimated underlying ratings of our consolidated investment portfolio, without giving effect to financial guarantees, the weighted average rating of only the Insured Investments in the investment portfolio would be in the below investment grade range. Without giving effect to the National and MBIA Corp. guarantees of the Company-Insured Investments in the consolidated investment portfolio, as of March 31, 2022, based on actual or estimated underlying ratings, the weighted average rating of the consolidated investment portfolio was in the A range. The weighted average rating of only the Company-Insured Investments was in the below investment grade range, and investments rated below investment grade in the Company-Insured Investments were 6% of the total consolidated investment portfolio.
National Liquidity
The primary sources of cash available to National are:
 
  •  
principal and interest receipts on assets held in its investment portfolio, including proceeds from the sale of assets;
 
  •  
recoveries associated with insurance loss payments; and
 
  •  
installment premiums.
The primary uses of cash by National are:
 
  •  
loss payments and LAE on insured transactions;
 
  •  
payments of dividends; and
 
  •  
payments of operating expenses, taxes and investment portfolio asset purchases.
As of March 31, 2022 and December 31, 2021, National held cash and investments of $2.7 billion and $2.0 billion, respectively, of which $310 million and $199 million, respectively, were cash and cash equivalents or short-term investments comprised of highly rated commercial paper, money market funds and municipal, U.S. agency and corporate bonds.
 
55
Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
LIQUIDITY AND CAPITAL RESOURCES (continued)
 
The insurance policies issued or reinsured by National provide unconditional and irrevocable guarantees of payments of the principal of, and interest or other amounts owing on, insured obligations when due. In the event of a default in payment of principal, interest or other insured amounts by an issuer, National generally promises to make funds available in the insured amount within one to three business days following notification. In some cases, the amount due can be substantial, particularly if the default occurs on a transaction to which National has a large notional exposure or on a transaction structured with large, bullet-type principal maturities. The U.S. public finance insurance segment’s financial guarantee contracts generally cannot be accelerated by a party other than the insurer which helps to mitigate liquidity risk in this segment.
Corporate Liquidity
The primary sources of cash available to MBIA Inc. are:
 
  •  
dividends from National;
 
  •  
available cash and liquid assets not subject to collateral posting requirements;
 
  •  
principal and interest receipts on assets held in its investment portfolio, including proceeds from the sale of assets; and
 
  •  
access to capital markets.
The primary uses of cash by MBIA Inc. are:
 
  •  
servicing outstanding unsecured corporate debt obligations and MTNs;
 
  •  
meeting collateral posting requirements under investment agreements and derivative arrangements;
 
  •  
payments related to interest rate swaps;
 
  •  
payments of operating expenses; and
 
  •  
funding share repurchases and debt buybacks.
As of March 31, 2022 and December 31, 2021, the liquidity positions of MBIA Inc. were $216 million and $239 million, respectively, and included cash and cash equivalents and other investments comprised of highly rated commercial paper and U.S. government and asset-backed bonds.
Based on our projections of National’s and MBIA Corp.’s future earnings and losses, we expect that for the foreseeable future National will be the primary source of payments to MBIA Inc. There can be no assurance as to the amount and timing of any future dividends from National. Also, absent a special dividend subject to the approval of the NYSDFS, we expect the declared and paid dividend amounts from National to be limited to the prior twelve months of adjusted net investment income as reported in its most recent statutory filings. Refer to the following “Liquidity and Capital Resources- Capital Resources” section for additional information on payments of dividends. We do not expect MBIA Inc. to receive dividends from MBIA Corp.
Currently, a significant portion of the cash and securities held by MBIA Inc. is pledged against investment agreement liabilities, the Asset Swap (simultaneous repurchase and reverse repurchase agreement) and derivatives, which limits its ability to raise liquidity through asset sales. As the market value or rating eligibility of the assets pledged against MBIA Inc.’s obligations declines, we are required to pledge additional eligible assets in order to meet minimum required collateral amounts against these liabilities. To mitigate these risks, we seek to maintain cash and liquidity resources that we believe will be sufficient to make all payments due on our obligations and to meet other financial requirements, such as posting collateral. Contingent liquidity resources include: (1) sales of invested assets exposed to credit spread stress risk, which may occur at losses; (2) termination and settlement of interest rate swap agreements; and (3) accessing the capital markets. These actions, if taken, are expected to result in either additional liquidity or reduced exposure to adverse credit spread movements. There can be no assurance that these actions will be sufficient to fully mitigate this risk.
MBIA Corp. Liquidity
The primary sources of cash available to MBIA Corp. are:
 
  •  
recoveries associated with insurance loss payments;
 
  •  
installment premiums and fees; and
 
  •  
principal and interest receipts on assets held in its investment portfolio, including the proceeds from the sale of assets.
The primary uses of cash by MBIA Corp. are:
 
  •  
loss and LAE or commutation payments on insured transactions;
 
  •  
repayment of MZ Funding’s debt obligations; and
 
  •  
payments of operating expenses.
 
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Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
LIQUIDITY AND CAPITAL RESOURCES (continued)
 
As of March 31, 2022 and December 31, 2021, MBIA Corp. held cash and investments of $560 million and $544 million, respectively, of which $272 million and $310 million, respectively, were cash and cash equivalents or liquid investments comprised of money market funds and municipal, U.S. Treasury and corporate bonds that were immediately available to MBIA Insurance Corporation.
Insured transactions that require payment of scheduled debt service payments insured when due or payment in full of the principal insured at maturity could present liquidity risk for MBIA Corp., as any salvage recoveries from such payments could be recovered over an extended period of time after the payment is made. MBIA Corp. is generally required to satisfy claims within one to three business days, and as a result seeks to identify potential claims in advance through our monitoring process. In order to monitor liquidity risk and maintain appropriate liquidity resources, we use the same methodology as we use to monitor credit quality and losses within our insured portfolio, including stress scenarios.
Subsequent to March 31, 2022, MBIA Corp. repaid in full the outstanding amount of the subordinated notes between MZ Funding and MBIA Inc. of the Refinanced Facility. These subordinated notes and the related interest are eliminated in our consolidated financial statements.
Contractual Obligations
For a discussion of the Company’s contractual obligations, refer to “Liquidity and Capital Resources-Liquidity-Contractual Obligations” in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the Company’s Annual Report on Form
10-K
for the year ended December 31, 2021. As a result of the GO PSA, implemented in March of 2022, and changes to the timing and assumptions related to the HTA and PREPA credits, U.S. public finance insurance segment’s gross claim obligations due within
one-year
and total gross claim obligations was $732 million and $1.5 billion, respectively. Gross insurance claim obligations represent the future value of probability-weighted payments the Company’s insurance companies expects to make (before reinsurance and the consolidation of VIEs) under insurance policies for which the Company has recorded loss reserves. Certain probability-weighted payments incorporate commutation and/or acceleration of specific exposures and, therefore, expected payments may differ from those the Company is contractually obligated to make. Also, these amounts exclude any recoveries the Company expects to receive related to these estimated payments or to claims paid in prior periods. For certain of our estimated future payments, the amount of recoveries expected to be received in the future will offset some or all of the payments. There were no other material changes in contractual obligations since December 31, 2021.
Capital Resources
The Company manages its capital resources to minimize its cost of capital while maintaining appropriate claims-paying resources (“CPR”) for National and MBIA Corp. The Company’s capital resources consist of total shareholders’ equity, total debt issued by MBIA Inc. for general corporate purposes and surplus notes issued by MBIA Corp. Total capital resources were $0.7 billion and $0.9 billion as of March 31, 2022 and December 31, 2021, respectively.
 
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Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
LIQUIDITY AND CAPITAL RESOURCES (continued)
 
In addition to scheduled debt maturities, from time to time, we reduce unsecured debt through calls or repurchases. Also, MBIA Inc. may repurchase or National may purchase outstanding MBIA Inc. common shares when we deem it beneficial to our shareholders. Purchases or repurchases of debt and common stock may be made from time to time in the open market or in private transactions as permitted by securities laws and other legal requirements. We may also choose to redeem debt obligations where permitted by the relevant agreements. MBIA Inc. or National may acquire or redeem outstanding common shares of MBIA Inc. and outstanding debt obligations at prices when we deem it beneficial to our shareholders. We seek to maintain sufficient liquidity and capital resources to meet the Company’s general corporate needs and debt service. Based on MBIA Inc.’s debt service requirements and expected operating expenses, we expect that MBIA Inc. will have sufficient resources to satisfy its debt obligations and its general corporate needs over time from distributions from National; however, there can be no assurance that MBIA Inc. will have sufficient resources to do so. In addition, the Company may also consider raising third-party capital. Refer to “Capital, Liquidity and Market Related Risk Factors” in Part I, Item 1A of our Form
10-K
for the year ended December 31, 2021 and the “Liquidity and Capital Resources—Liquidity—Corporate Liquidity” section included herein for additional information about MBIA Inc.’s liquidity.
Insurance Statutory Capital
National and MBIA Insurance Corporation are incorporated and licensed in, and are subject to primary insurance regulation and supervision by New York State Department of Financial Services (“NYSDFS”). MBIA Mexico is regulated by the Comisión Nacional de Seguros y Fianzas in Mexico. MBIA Corp.’s Spanish Branch is subject to local regulation in Spain. National and MBIA Insurance Corporation each are required to file detailed annual financial statements, as well as interim financial statements, with the NYSDFS and similar supervisory agencies in each of the other jurisdictions in which it is licensed. These financial statements are prepared in accordance with New York State and the National Association of Insurance Commissioners’ statements of statutory accounting principles and assist our regulators in evaluating minimum standards of solvency, including minimum capital requirements, and business conduct.
National – Statutory Capital and Surplus
National had statutory capital of $2.1 billion as of March 31, 2022 compared with $2.0 billion as of December 31, 2021. As of March 31, 2022, National’s unassigned surplus was $1.1 billion. For the three months ended March 31, 2022, National had statutory net income of $104 million. Refer to the “National—Claims-Paying Resources (Statutory Basis)” section below for additional information on National’s statutory capital.
In order to maintain its New York State financial guarantee insurance license, National is required to maintain a minimum of $65 million of policyholders’ surplus. National is also required to maintain contingency reserves to provide protection to policyholders in the event of extreme losses in adverse economic events. As of March 31, 2022, National was in compliance with its aggregate risk limits under New York Insurance Law (“NYIL”), but was not in compliance with certain of its single risk limits. Since National does not comply with certain of its single risk limits, the NYSDFS could prevent National from transacting any new financial guarantee insurance business.
NYIL regulates the payment of dividends by financial guarantee insurance companies and provides that such companies may not declare or distribute dividends except out of statutory earned surplus. Under NYIL, the sum of (i) the amount of dividends declared or distributed during the preceding
12-month
period and (ii) the dividend to be declared may not exceed the lesser of (a) 10% of policyholders’ surplus, as reported in the latest statutory financial statements or (b) 100% of adjusted net investment income for such
12-month
period (the net investment income for such
12-month
period plus the excess, if any, of net investment income over dividends declared or distributed during the
two-year
period preceding such
12-month
period), unless the Superintendent of the NYSDFS approves a greater dividend distribution based upon a finding that the insurer will retain sufficient surplus to support its obligations.
National had positive earned surplus as of March 31, 2022 from which it may pay dividends, subject to the limitations described above. We expect the
as-of-right
declared and paid dividend amounts from National to be limited to prior year adjusted net investment income for the foreseeable future.
National - Claims-Paying Resources (Statutory Basis)
CPR is a key measure of the resources available to National to pay claims under its insurance policies. CPR consists of total financial resources and reserves calculated on a statutory basis. CPR has been a common measure used by financial guarantee insurance companies to report and compare resources and continues to be used by MBIA’s management to evaluate changes in such resources. We have provided CPR to allow investors and analysts to evaluate National using the same measure that MBIA’s management uses to evaluate National’s resources to pay claims under its insurance policies. There is no directly comparable GAAP measure. Our calculation of CPR may differ from the calculation of CPR reported by other companies.
 
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Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
LIQUIDITY AND CAPITAL RESOURCES (continued)
 
National’s CPR and components thereto, as of March 31, 2022 and December 31, 2021 are presented in the following table:
 
                     
In millions
   
As of
March 31,
2022
     
As of
December 31,
2021
  
Policyholders’ surplus
   
$
1,671
 
   
$
1,569
 
Contingency reserves
   
 
399
 
   
 
402
 
  
 
 
     
 
 
  
Statutory capital
   
 
2,070
 
   
 
1,971
 
Unearned premiums
   
 
294
 
   
 
311
 
Present value of installment premiums
(1)
   
 
122
 
   
 
121
 
  
 
 
     
 
 
  
Premium resources
(2)
   
 
416
 
   
 
432
 
Net loss and LAE reserves
(1)
   
 
(201)
 
   
 
(386)
 
Salvage reserves on paid claims
(1)
   
 
661
 
   
 
944
 
  
 
 
     
 
 
  
Gross loss and LAE reserves
   
 
460
 
   
 
558
 
  
 
 
     
 
 
  
Total claims-paying resources
   
$
2,946
 
   
$
2,961
 
  
 
 
     
 
 
  
 
  (1) - Calculated
using a discount rate of 3.65% as of March 31, 2022 and December 31, 2021.
  (2) - Includes
financial guarantee and insured derivative related premiums.
MBIA Insurance Corporation – Statutory Capital and Surplus
MBIA Insurance Corporation had statutory capital of $131 million as of March 31, 2022 compared with $134 million as of December 31, 2021. As of March 31, 2022, MBIA Insurance Corporation’s negative unassigned surplus was $1.9 billion. For the three months ended March 31, 2022, MBIA Insurance Corporation had a statutory net loss of $14 million. Refer to the “MBIA Insurance Corporation—Claims-Paying Resources (Statutory Basis)” section below for additional information on MBIA Insurance Corporation’s statutory capital.
In order to maintain its New York State financial guarantee insurance license, MBIA Insurance Corporation is required to maintain a minimum of $65 million of policyholders’ surplus. MBIA Insurance Corporation is also required to maintain contingency reserves to provide protection to policyholders in the event of extreme losses in adverse economic events. As of March 31, 2022, MBIA Insurance Corporation was in compliance with its aggregate risk limits under the NYIL, but was not in compliance with certain of its single risk limits. Since MBIA Insurance Corporation does not comply with its single risk limits, the NYSDFS could prevent MBIA Insurance Corporation from transacting any new financial guarantee insurance business.
Due to its significant earned surplus deficit, MBIA Insurance Corporation has not had the statutory capacity to pay dividends since December 31, 2009. Based on estimated future income, MBIA Insurance Corporation is not expected to have any statutory capacity to pay dividends.
The NYSDFS has not approved MBIA Insurance Corporation’s requests to make interest payments on MBIA Insurance Corporation’s Surplus Notes due January 15, 2033 (the “Surplus Notes”) since, and including, the January 15, 2013 interest payment. The NYSDFS has cited both MBIA Insurance Corporation’s liquidity and financial condition as well as the availability of “free and divisible surplus” as the basis for such
non-approvals.
As of April 15, 2022, the most recent scheduled interest payment date, there was $1.1 billion of unpaid interest on the par amount outstanding of $953 million of the Surplus Notes. Under Section 1307 of the NYIL and the Fiscal Agency Agreement governing the surplus notes, Surplus Note payments may be made only with the prior approval by the NYSDFS and if MBIA Insurance Corporation has sufficient “Eligible Surplus”, or as we believe, “free and divisible surplus” as an appropriate calculation of “Eligible Surplus.” As of March 31, 2022, MBIA Insurance Corporation had “free and divisible surplus” of $76 million. There is no assurance the NYSDFS will approve Surplus Note payments, notwithstanding the sufficiency of MBIA Insurance Corporation’s liquidity and financial condition. The unpaid interest on the Surplus Notes will become due on the first business day on or after which MBIA Insurance Corporation obtains approval to pay some or all of such unpaid interest. No interest has been accrued or will accrue on the deferred interest.
 
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Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
LIQUIDITY AND CAPITAL RESOURCES (continued)
 
MBIA Insurance Corporation - Claims-Paying Resources (Statutory Basis)
CPR is a key measure of the resources available to MBIA Corp. to pay claims under its insurance policies. CPR consists of total financial resources and reserves calculated on a statutory basis. CPR has been a common measure used by financial guarantee insurance companies to report and compare resources, and continues to be used by MBIA’s management to evaluate changes in such resources. We have provided CPR to allow investors and analysts to evaluate MBIA Corp., using the same measure that MBIA’s management uses to evaluate MBIA Corp.’s resources to pay claims under its insurance policies. There is no directly comparable GAAP measure. Our calculation of CPR may differ from the calculation of CPR reported by other companies.
MBIA Corp.’s CPR and components thereto, as of March 31, 2022 and December 31, 2021 are presented in the following table:
 
                     
In millions
   
As of
March 31,
2022
     
As of
December 31,
2021
  
Policyholders’ surplus
   
$
94
 
   
$
97
 
Contingency reserves
   
 
37
 
   
 
37
 
  
 
 
     
 
 
  
Statutory capital
   
 
131
 
   
 
134
 
Unearned premiums
   
 
45
 
   
 
46
 
Present value of installment premiums
(1)
  
 
48
 
   
 
48
 
  
 
 
     
 
 
  
Premium resources
(2)
  
 
93
 
   
 
94
 
Net loss and LAE reserves
(1)
   
 
203
 
   
 
266
 
Salvage reserves on paid claims
(1) (3)
   
 
299
 
   
 
231
 
  
 
 
     
 
 
  
Gross loss and LAE reserves
   
 
502
 
   
 
497
 
  
 
 
     
 
 
  
Total claims-paying resources
   
$
726
 
   
$
725
 
  
 
 
     
 
 
  
 
  (1) - Calculated
using a discount rate of 4.99% as of March 31, 2022 and December 31, 2021.
  (2) - Includes
financial guarantee and insured derivative related premiums.
  (3) - This
amount primarily consists of expected recoveries related to the payment of claims on insured CDOs and RMBS. In addition, the March 31, 2022 balance includes salvage related to a permitted practice granted by NYSDFS.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We prepare our consolidated financial statements in accordance with GAAP, which requires the use of estimates and assumptions. Management has discussed and reviewed the development, selection, and disclosure of critical accounting estimates with the Company’s Audit Committee. Our most critical accounting estimates include loss and LAE reserves and valuation of financial instruments, since these estimates require significant judgment. Any modifications in these estimates could materially impact our financial results.
For a discussion of the Company’s critical accounting estimates, refer to “Critical Accounting Estimates” in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the Company’s Annual Report on Form
10-K
for the year ended December 31, 2021. In addition, refer to “Note 5: Loss and Loss Adjustment Expense Reserves” and “Note 6: Fair Value of Financial Instruments” in the Notes to Consolidated Financial Statements for a current description of estimates used in our insurance loss reserving process and information about our financial assets and liabilities that are accounted for at fair value, including valuation techniques and significant inputs.
RECENT ACCOUNTING PRONOUNCEMENTS
Refer to “Note 3: Recent Accounting Pronouncements” in the Notes to Consolidated Financial Statements for a discussion of accounting guidance recently adopted by the Company.
 
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Table of Contents
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company’s market risk exposures relate to changes in interest rates, foreign exchange rates and credit spreads that affect the fair value of its financial instruments, primarily investment securities, MTNs and investment agreement liabilities. The Company’s investments are primarily U.S. dollar-denominated fixed-income securities including municipal bonds, U.S. government bonds, corporate bonds, MBS and asset-backed securities. In periods of rising and/or volatile interest rates, foreign exchange rates and credit spreads, profitability could be adversely affected should the Company have to liquidate these securities. The Company minimizes its exposure to interest rate risk, foreign exchange risk and credit spread movement through active portfolio management to ensure a proper mix of the types of securities held and to stagger the maturities of its fixed-income securities. There were no material changes in market risk since December 31, 2021 related to interest rates, foreign exchange rates and credit spreads. For a discussion of our quantitative and qualitative disclosures about market risk related to these risks, refer to Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” included in the Company’s Annual Report on Form
10-K
for the year ended December 31, 2021.
Item 4. Controls and Procedures
As of the end of the period covered by this report, an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as such term is defined in Rules
13a-15(e)
and
15(d)-15(e)
under the Securities Exchange Act of 1934) was performed under the supervision and with the participation of the Company’s senior management, including the Chief Executive Officer and the Chief Financial Officer. Based on that evaluation, the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report. In addition, there have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules
13a-15(f)
and
15d-15(f)
under the Securities Exchange Act of 1934) during the fiscal quarter to which this report relates that have materially affected, or are likely to materially affect, the Company’s internal control over financial reporting.
 
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Table of Contents
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
For a discussion of the Company’s litigation and related matters, see “Note 13: Commitments and Contingencies” in the Notes to Consolidated Financial Statements of MBIA Inc. and Subsidiaries in Part I, Item 1. In the normal course of operating its businesses, MBIA Inc. may be involved in various legal proceedings. As a courtesy, the Company posts on its website under the section “Legal Proceedings,” selected information and documents in reference to selected legal proceedings in which the Company is the plaintiff or the defendant. The Company will not necessarily post all documents for each proceeding and undertakes no obligation to revise or update them to reflect changes in events or expectations. The complete official court docket can be publicly accessed by contacting the clerk’s office of the respective court where each litigation is pending.
Item 1A. Risk Factors
The following should be read in conjunction with and supplements the risk factors described under Part I, Item 1A, “Risk Factors” of the Company’s Annual Report on Form
10-K
for the year ended December 31, 2021. Except as set forth below, there have been no material changes to the risk factors previously disclosed in the Company’s Annual Report on Form
10-K
for the year ended December 31, 2021.
Insured Portfolio Loss Related Risk Factors
Some of the state, local and territorial governments and finance authorities and other providers of public services, located in the U.S. or abroad, that issued public finance obligations we insured are experiencing fiscal stress that could result in increased credit losses or impairments on those obligations.
Certain issuers are reporting fiscal stress that has resulted in a significant increase in taxes and/or a reduction in spending or other measures in efforts to satisfy their financial obligations. In particular, certain jurisdictions have significantly underfunded pension liabilities which are placing additional stress on their finances and are particularly challenging to restructure either through negotiation or under Chapter 9 of the United States Bankruptcy Code. If the issuers of the obligations in our public finance portfolio are unable to raise taxes, or increase other revenues, cut spending, reduce liabilities, and/or receive state or federal assistance, we may experience losses or impairments on those obligations, which could materially and adversely affect our business, financial condition and results of operations. The financial stress experienced by certain municipal issuers could result in the filing of Chapter 9 proceedings in states where municipal issuers are permitted to seek bankruptcy protection. In these proceedings, which remain rare, the resolution of bondholder claims (and by extension, those of bond insurers) may be subject to legal challenge by other creditors.
In particular, while the Commonwealth of Puerto has completed its court-ordered restructuring pursuant to the Puerto Rico Oversight, Management and Economic Stability Act (“PROMESA”), two of its public corporations and instrumentalities, the Puerto Rico Highway and Transportation Authority (“HTA”) and the Puerto Rico Electric Power Authority (“PREPA”), are currently in bankruptcy-like proceedings under PROMESA in the United States District Court for the District of Puerto Rico.
The extent and duration of any aid from the Federal Emergency Management Agency and other federal agencies that may be offered to Puerto Rico is uncertain. Further, greater involvement of the federal government through its action to deliver disaster relief and support services to Puerto Rico heightens the political risk already inherent in the legacy debt restructuring. This risk could lead the independent oversight board created by PROMESA to oversee Puerto Rico’s debt restructuring (the “Oversight Board”), Puerto Rico itself, or the federal government to seek to extract greater concessions from creditors based on the uncertainty of Puerto Rico’s long term recovery prospects. In this event, losses at National on select Puerto Rico exposures could increase materially.
As of March 31, 2022, National had $2.1 billion of debt service outstanding related to Puerto Rico. Since 2016, Puerto Rico has been unable or unwilling to pay its obligations as and when due, and National has been required to pay claims of unpaid principal and interest when due under its insurance policies as a consequence. Puerto Rico may continue to fail to make payments when due, which could cause National to make additional claims payments which could be material. On January 1, 2022, Puerto Rico defaulted on scheduled debt service for certain National insured bonds and National paid gross claims in the aggregate of $47 million. While National will seek to recover any claim payments it makes under its guarantees, there is no assurance that it will be able to recover such payments. To the extent that its claims payments are ultimately substantially greater than its claims recoveries, National would experience losses on those obligations, which could materially and adversely affect our business, financial condition and results of operations.
 
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Table of Contents
Item 1A. Risk Factors
 
The Title III cases for the Commonwealth of Puerto Rico and PBA were confirmed on January 18, 2022, and became effective on March 15, 2022. On April 12, 2021, National, Assured Guaranty Corp., Assured Guaranty Municipal Corp. and the Oversight Board reached an agreement in principle settling certain clawback claims and providing for a distribution of cash, bonds and a contingent value instrument to bondholders in the Puerto Rico Highway and Transportation Authority (“HTA”) Title III case subject to completing negotiations on a plan support agreement in respect of an HTA plan of adjustment (the “HTA PSA”). On May 5, 2021, National, Assured Guaranty Corp., Assured Guaranty Municipal Corp. and the Oversight Board entered into the HTA PSA. On May 2, 2022, the Oversight Board filed the Title III Plan of Adjustment for the Puerto Rico Highways and Transportation Authority (the “HTA Plan”), together with the Disclosure Statement and supporting documents. In accordance with the HTA PSA, National expects to receive its allocable portion of cash and CVI relating to HTA during the second quarter of 2022 and, in addition, National will also receive its allocable portion of newly issued HTA bonds (or the cash equivalent) following the effective date of the HTA Plan.
On May 3, 2019, PREPA, the Oversight Board, the Puerto Rico Fiscal Agency and Financial Advisory Authority (“AAFAF”), the Ad Hoc Group of PREPA bondholders (the “Ad Hoc Group”), and Assured Guaranty Corp. and Assured Guaranty Municipal Corp. entered into a Definitive Restructuring Support Agreement which was amended on September 9, 2019 to include National and Syncora Guarantee, Inc. as supporting parties (as amended, the “RSA”).
On March 8, 2022, AAFAF and PREPA terminated the RSA under a provision permitting termination if an order approving the RSA had not been entered by September 30, 2019. On April 8, 2022, the Court appointed a new panel of judges to commence mediation among the Oversight Board, the Ad Hoc Group, Assured, National and Syncora (the “April 8 Order”). The April 8 Order provides that mediation will terminate on June 1, 2022 unless the mediation team extends the time to July 1, 2022. The April 8 Order further provides that nothing therein acts as a stay of any pending adversary proceedings or contested matters in the PREPA case, subject to the Court’s pending request to the Oversight Board for a status report by June 1, 2022.
On July 1, 2019 the Oversight Board and AAFAF filed an adversary complaint against the Trustee for the PREPA Bonds, challenging the validity of the liens arising under the Trust Agreement that secure insured obligations of National. The adversary proceeding was stayed but the April 8 Order dissolved the stay as to any pending adversary proceedings or contested matters, subject to the Court’s pending status report request to the Oversight Board on June 1, 2022.
Refer to the “U.S. Public Finance Insurance Puerto Rico Exposures” section in Part I, Item 2 of this Form
10-Q
for additional information on our Puerto Rico exposures.
 
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Table of Contents
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
The table below presents purchases or repurchases made by the Company or National in each month during the first quarter of 2022:
 
                                           
              
Total Number
   
Maximum
    
Total
   
Average
   
of Shares
   
Amount That May
    
Number
   
Price
   
Purchased as
   
Be Purchased
    
of Shares
   
Paid Per
   
Part of Publicly
   
Under the Plan
Month
   
Purchased 
(1)
   
Share
   
Announced Plan
   
(in millions)
January
   
 
-
 
   
$
-
 
   
 
-
 
   
$
-
 
February
   
 
1,260
 
   
 
15.22
 
   
 
-
 
   
 
-
 
March
   
 
179,428
 
   
 
14.10
 
   
 
-
 
   
 
-
 
  
 
 
 
         
  
 
180,688
 
   
$
14.11
 
   
 
-
 
   
$
-
 
 
  (1)
1,260 shares in February and 45 shares in March were repurchased in open market transactions as investments in the Company’s
non-qualified
deferred compensation plan. 179,383 shares in March were repurchased by the Company in open market transactions for settling awards under the Company’s long term incentive plan.
Item 6. Exhibits
 
*31.1.   Chief Executive Officer - Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
*31.2.   Chief Financial Officer - Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
**32.1.   Chief Executive Officer - Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
**32.2.   Chief Financial Officer - Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
*101.INS.   XBRL Instance Document – the instance document does not appear in the Interactive Data File because iXBRL tags are embedded within the Inline XBRL document.
*101.SCH.   XBRL Taxonomy Extension Schema Document.
*101.CAL.   XBRL Taxonomy Extension Calculation Linkbase Document.
*101.DEF.   XBRL Taxonomy Extension Definition Linkbase Document.
*101.LAB.   XBRL Taxonomy Extension Label Linkbase Document.
*101.PRE.   XBRL Taxonomy Extension Presentation Linkbase Document.
*104.   Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)
 
*
Filed herewith.
**
Furnished herewith.
 
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Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
  
MBIA Inc.
Registrant
Date: May 9, 2022   
/s/ Anthony McKiernan
  
Anthony McKiernan
  
Chief Financial Officer
Date: May 9, 2022   
/s/ Joseph R. Schachinger
  
Joseph R. Schachinger
  
Controller (Chief Accounting Officer)
 
65