Derivative Instruments

3 Months Ended

Mar. 31, 2015

Text Block [Abstract]

Derivative Instruments

Note 8: Derivative Instruments

Overview

MBIA has entered into derivative instruments through its financial guarantee of CDS and for purposes of managing risks associated with existing assets and liabilities. In certain instances, the Company purchased or issued securities that contain embedded derivatives that were separated from the host contract and accounted for as derivative instruments. In accordance with the accounting guidance for derivative instruments and hedging activities, the balance sheet location of the Company’s embedded derivative instruments is determinedby the location of the related security.Derivative instruments are recorded at fair value on the Company’s consolidated balance sheets with the changes in fair value recorded on the Company’s consolidated statements of operations within “Unrealized gains (losses) on insured derivatives,” for the insured derivatives, or “Net gains (losses) on financial instruments at fair value and foreign exchange” for the embedded derivatives.Refer to “Note 6: Fair Value of Financial Instruments” for themethod of determining the fair value of derivative instruments.

U.S. Public Finance Insurance

The Company’s derivative exposure within its U.S. public finance insurance operations primarily consists of insured interest rate and inflation-linked swaps related to insured U.S. public finance debt issues. These derivatives do not qualify for the financial guarantee scope exception and are accounted for as derivative instruments.

Internationaland StructuredFinanceInsurance

The Company entered into derivative instruments that it viewed as an extension of its core financial guarantee business that do not qualify for the financial guarantee scope exception and, therefore, are accounted for as derivative instruments. These insured CDS contracts, primarily referencing corporate, asset-backed, residential mortgage-backed, commercial mortgage-backed, CRE loans and CDO securities, are intended to be held for the entire term of the contract absent a negotiated settlement with the counterparty.

Changes in the fair value of derivatives, excluding insured derivatives, are recorded each period in current earnings within “Net gains (losses) on financial instruments at fair value and foreign exchange.” Changes in the fair value of insured derivatives are recorded each period in current earnings within “Net change in fair value of insured derivatives.” The net change in the fair value of the Company’s insured derivatives has two primary components: (i) realized gains (losses) and other settlements on insured derivatives and (ii) unrealized gains (losses) on insured derivatives. “Realized gains (losses) and other settlements on insured derivatives” include (i) premiums received and receivable on sold CDS contracts, (ii) premiums paid and payable to reinsurers in respect to CDS contracts, (iii) net amounts received or paid on reinsurance commutations, (iv) losses paid and payable to CDS contract counterparties due to the occurrence of a credit event or settlement agreement, (v) losses recovered and recoverable on purchased CDS contracts due to the occurrence of a credit event or settlement agreement and (vi) fees relating to CDS contracts. “Unrealized gains (losses) on insured derivatives” includes all other changes in fair value of the insured derivative contracts.

The Company has also entered into a derivative contract as a result of a commutation occurring in 2014. Changes in the fair value of the Company’s non-insured derivative are included in “Net gains (losses) on financial instruments at fair value and foreign exchange” on the Company’s consolidated statements of operations.

Variable Interest Entities

VIEs consolidated by the Company have entered into derivative instruments consisting of interest rate swaps, interest rate caps and cross currency swaps. Interest rate swaps and interest rate caps are entered into to mitigate the risks associated with fluctuations in interest rates or fair values of certain contracts.Cross currency swaps are entered into to manage the variability in cash flows resulting from fluctuations in foreign currency rates.

Corporate

The Company has entered into derivative instruments primarily consisting of interest rate swaps. Interest rate swaps are entered into to manage the risks associated with fluctuations in interest rates or fair values of certain contracts.

Changes in the fair value of these derivatives are recorded on the Company’s consolidated statements of operations within “Net gains (losses) on financial instruments at fair value and foreign exchange.”

Credit Derivatives Sold

The following tables present information about credit derivatives sold by the Company’s insurance operations that were outstanding as of March 31,2015 and December 31,2014. Credit ratings represent the lower of underlying ratings assigned to the collateral by Moody’s, S&P or MBIA.

$ in millions	As of March 31, 2015
		Notional Value
Credit Derivatives Sold	Weighted Average Remaining Expected Maturity		AAA		AA		A		BBB		Below Investment Grade		Total Notional		Fair Value Asset (Liability)
Insured credit default swaps	1.4 Years	$	5,846	$	-	$	968	$	146	$	1,126	$	8,086	$	(207)
Insured swaps	19.5 Years		-		115		2,778		961		23		3,877		(3)
Total notional		$	5,846	$	115	$	3,746	$	1,107	$	1,149	$	11,963
Total fair value		$	(2)	$	-	$	(2)	$	(2)	$	(204)			$	(210)

$ in millions	As of December 31, 2014
		Notional Value
Credit Derivatives Sold	Weighted Average Remaining Expected Maturity		AAA		AA		A		BBB		Below Investment Grade		Total Notional		Fair Value Asset (Liability)
Insured credit default swaps	1.6 Years	$	6,914	$	246	$	968	$	193	$	1,160	$	9,481	$	(244)
Insured swaps	16.7 Years		-		117		2,935		970		22		4,044		(2)
Total notional		$	6,914	$	363	$	3,903	$	1,163	$	1,182	$	13,525
Total fair value		$	(2)	$	-	$	(2)	$	(2)	$	(240)			$	(246)

Internal credit ratings assigned by MBIA on the underlying collateral are derived bythe Company’ssurveillance group.In assigning aninternal rating,currentstatusreportsfromissuersand trustees,aswell aspubliclyavailable transaction-specificinformation,are reviewed.Also,where appropriate,cash flowanalysesand collateralvaluationsare considered.Themaximumpotentialamountoffuturepayments(undiscounted)onCDScontractsareestimatedasthe notionalvalue plusanyadditional debtservicecosts,suchasinterestorotheramountsowing on CDScontracts.The maximumamountoffuture paymentsthatMBIAmaybe required tomake undertheseguarantees as of March 31,2015is $8.3 billion.The maximumpotential amountoffuture payments(undiscounted)on insuredswapsare estimated asthe notionalvalue ofsuchcontracts.

MBIAmayhold recourse provisionswiththird partiesin derivativeinstrumentsthroughboth reinsuranceandsubrogation rights.MBIA’sreinsurance arrangementsprovidethatin the eventMBIApaysa claimundera guarantee ofa derivative contract,MBIAhasthe rightto collectamountsfromanyreinsurersthathave reinsuredthe guarantee on eithera proportional ornon-proportional basis,depending upon theunderlying reinsuranceagreement.MBIAmayalso have recourse throughsubrogation rightswherebyifMBIAmakesa claimpayment,itmay beentitled to anyrightsofthe insured counterparty,including the rightto anyassetsheld ascollateral.

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 U.S. Treasury and other highly rated securities or cash 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 31,2015, the Company did not hold cash collateral to derivative counterparties but posted cash collateral to derivative counterparties of $127 million. Of this amount, $108million is netted within “Derivative liabilities” and $19 million is included within “Other liabilities” as cash collateral netted against accrued interest on derivative liabilities. As of December 31,2014, the Company did not hold cash collateral to derivative counterparties but posted cash collateral to derivative counterparties of $12 million. All of the $12 million is included within “Other liabilities” as cash collateral netted against accrued interest on derivative liabilities. As of March 31,2015, the Company had securities with a fair value of $215 million posted to derivative counterparties and this amount is included within “Fixed-maturity securities held as available-for-sale, at fair value” on the Company’s consolidated balance sheet.As of December 31,2014, the Company had securities with a fair value of $198 million posted to derivative counterparties and this amount is included within “Fixed-maturity securities held as available-for-sale, at fair value” on the Company’s consolidated balance sheet.

As of March 31,2015 andDecember 31,2014, the fair value on one Credit Support Annex (“CSA”) was $1million and $2 million, respectively.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 31,2015 and December 31,2014, the counterparty was rated A2 by Moody’s and A by S&P.

Financial Statement Presentation

The fair value of amounts recognized for eligible derivative contracts executed with the same counterparty under a master netting agreement, including any cash collateral that may have been received or posted by the Company, is presented on a net basis in accordance with accounting guidance for the offsetting of fair value amounts related to derivative instruments. Insured CDS and insured swaps are not subject to master netting agreements. VIE derivative assets and liabilities are not presented net of any master netting agreements.Counterparty netting of derivative assets and liabilities offsets balances in “Interest rate swaps” as of March 31,2015 and December 31,2014.

As of March 31,2015, the total fair value of the Company’s derivative assets, after counterparty netting of $1 million, was $13 million, of which $6 million was reported within “Other assets” on the Company’s consolidated balance sheets. Embedded derivatives of $7 million were reported within “Medium-term notes” on the Company’s consolidated balance sheets.

As of March 31,2015, the total fair value of the Company’s derivative liabilities, after counterparty netting of$1 millionand cash collateral posted by the company of $108 million, was $481million, of which $467 million was reported within “Derivative liabilities” and “Derivative liabilities” presented under “Liabilities of consolidated variable interest entities” on the Company’s consolidated balance sheets. Embedded derivatives of $14 million were reported within “Medium-term notes” on the Company’s consolidated balance sheets.

The following table presents the total fair value of the Company’s derivative assets and liabilities by instrument and balance sheet location, before counterparty netting and posting ofcash collateral, as of March 31,2015:

In millions				Derivative Assets (1)			Derivative Liabilities (1)
		Notional
		Amount			Fair			Fair
Derivative Instruments		Outstanding		Balance Sheet Location	Value		Balance Sheet Location	Value
Not designated as hedging instruments:
	Insured credit default swaps	$	8,086	Other assets	$	-	Derivative liabilities	$	(207)
	Insured swaps		3,877	Other assets		-	Derivative liabilities		(3)
	Interest rate swaps		1,179	Other assets		2	Derivative liabilities		(269)
	Interest rate swaps-VIE		903	Derivative assets-VIE		-	Derivative liabilities-VIE		(76)
	Interest rate swaps-embedded		392	Medium-term notes		7	Medium-term notes		(14)
	Currency swaps-VIE		89	Derivative assets-VIE		5	Derivative liabilities-VIE		-
	All other		83	Other assets		-	Derivative liabilities		(21)
	All other-VIE		241	Derivative assets-VIE		-	Derivative liabilities-VIE		-
	All other-embedded		12	Other investments		-	Other investments		-
Total non-designated derivatives		$	14,862		$	14		$	(590)
__________
(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.

As of December 31,2014, the total fair value of the Company’s derivative assets, after counterparty netting of $81 million, was $10 million, of which $2 million was reported within “Other assets” on the Company’s consolidated balance sheets. Embedded derivatives of $8 million were reported within “Medium-term notes” on the Company’s consolidated balance sheets.

As of December 31,2014, the total fair value of the Company’s derivative liabilities, after counterparty netting of $81 million was $456million, ofwhich $437 million was reported within “Derivative liabilities” and “Derivative liabilities” presented under “Liabilities of consolidated variable interest entities” on the Company’s consolidated balance sheets. Embedded derivatives of $19 million were reported within “Medium-term notes” and “Other investments” on the Company’s consolidated balance sheets.

The following table presents the total fair value of the Company’s derivative assets and liabilities by instrument and balance sheet location, before counterparty netting and posting of cash collateral, as of December 31,2014:

In millions				Derivative Assets (1)			Derivative Liabilities (1)
			Notional
			Amount		Fair			Fair
Derivative Instruments			Outstanding	Balance Sheet Location	Value		Balance Sheet Location	Value
Not designated as hedging instruments:
	Insured credit default swaps	$	9,481	Other assets	$	-	Derivative liabilities	$	(244)
	Insured swaps		4,044	Other assets		-	Derivative liabilities		(2)
	Interest rate swaps		1,450	Other assets		83	Derivative liabilities		(248)
	Interest rate swaps-embedded		437	Medium-term notes		8	Medium-term notes		(19)
	Currency swaps-VIE		91	Derivative assets-VIE		-	Derivative liabilities-VIE		-
	All other		83	Other assets		-	Derivative liabilities		(24)
	All other-VIE		241	Derivative assets-VIE		-	Derivative liabilities-VIE		-
	All other-embedded		12	Other investments		-	Other investments		-
Total non-designated derivatives		$	15,839		$	91		$	(537)
__________
(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.

Thefollowing tablepresentsthe effectofderivativeinstrumentson the consolidated statementsofoperationsforthe three months endedMarch 31,2015:

In millions
		Net Gain
		(Loss)
Derivatives Not Designated as		Recognized
Hedging Instruments	Location of Gain (Loss) Recognized in Income on Derivative	in Income
Insured credit default swaps	Unrealized gains (losses) on insured derivatives	$	37
Insured credit default swaps	Realized gains (losses) and other settlements on insured derivatives		(9)
Interest rate swaps	Net gains (losses) on financial instruments at fair value and foreign exchange		(107)
Currency swaps-VIE	Net gains (losses) on financial instruments at fair value and foreign exchange-VIE		4
All other	Net gains (losses) on financial instruments at fair value and foreign exchange		3
Total		$	(72)

Thefollowing tablepresentsthe effectofderivativeinstrumentson the consolidated statementsofoperationsforthe three months endedMarch 31,2014:

In millions
		Net Gain
		(Loss)
Derivatives Not Designated as		Recognized
Hedging Instruments	Location of Gain (Loss) Recognized in Income on Derivative	in Income
Insured credit default swaps	Unrealized gains (losses) on insured derivatives	$	823
Insured credit default swaps	Realized gains (losses) and other settlements on insured derivatives		(339)
Interest rate swaps	Net gains (losses) on financial instruments at fair value and foreign exchange		(23)
Currency swaps-VIE	Net gains (losses) on financial instruments at fair value and foreign exchange-VIE		6
All other	Unrealized gains (losses) on insured derivatives		15
All other	Net gains (losses) on financial instruments at fair value and foreign exchange		(1)
All other	Realized gains (losses) and other settlements on insured derivatives		(30)
Total		$	451