Fair Value Of Financial Instruments

3 Months Ended

Mar. 31, 2020

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, loans receivables at fair value and loan repurchase commitments 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, medium-term notes (“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,

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.

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, CDS spreads, prepayment and volatility scores, diversity scores, cross-currency basis index spreads, and credit spreads for structures similar to the financial instrument in terms of issuer, maturity and seniority. Unobservable inputs include cash flow projections and the value of any credit enhancement.

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

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

Cash and Cash Equivalents

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

Loans Receivable at Fair Value

Loans receivable at fair value are comprised of loans and other instruments held by consolidated VIEs consisting of residential mortgage loans are categorized in Level 3 of the fair value hierarchy. Fair values of residential mortgage loans are determined using quoted prices for MBS issued by the respective VIE and adjusted for the fair values of the financial guarantees provided by MBIA Corp. on the related MBS. The fair values of the financial guarantees consider expected claim payments, net of recoveries, under MBIA Corp.’s policies.

Loan Repurchase Commitments

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

Other Assets

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

Other assets also include receivables representing the right to receive reimbursement payments on claim payments expected to be made on certain insured VIE liabilities due to risk mitigating transactions with third parties executed to effectively defease, or,

in-substance

commute the Company’s exposure on its financial guarantee policies. The right to receive reimbursement payments is based on the value of the Company’s financial guarantee determined using the cash flow model. The fair value of the financial guarantee primarily contains unobservable inputs and is categorized in Level 3 of the fair value hierarchy.

Medium-term Notes at Fair Value

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

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.

The Company uses an internally developed Direct Price Model to value an insured credit derivative that incorporates market prices or estimated prices for all collateral within the transaction, the present value of the market-implied potential losses, and nonperformance risk. The valuation of the insured credit derivative includes the impact of its credit standing. The insured credit derivative is categorized in Level 3 of the fair value hierarchy based on unobservable inputs that are significant to the fair value measurement in its entirety.

Derivatives—Other

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

Other Liabilities

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

Significant Unobservable Inputs

The following tables provide quantitative information regarding the significant unobservable inputs used by the Company for assets and liabilities measured at fair value on a recurring basis as of March 31, 2020 and December 31, 2019:

In millions

Fair Value as of

March 31, 2020

Valuation Techniques

Unobservable Input

Range
(Weighted Average)

Assets of consolidated VIEs:

Loans receivable at fair value

Market prices adjusted for financial guarantees provided to VIE obligations

Impact of financial guarantee

(2)

-28% - 161% (19%)

(1)

Loan repurchase commitments

506

Discounted cash flow

Recovery rates

(3)

Breach rates

(3)

Liabilities of consolidated VIEs:

Variable interest entity notes

281

Market prices of VIE assets adjusted for financial guarantees provided

Impact of financial guarantee

34%

74% (60%)

(1)

redit d

eri

vative liabilit

–

CMBS

Direct Price Model

Nonperformance risk

54% - 54% (54%)

Other derivative liabilities

Discounted cash flow

Cash flows

$0 - $49 ($25)

(4)

(1) -

Weighted average represents the total MBIA guarantees as a percentage of total instrument fair value.

(2) -

Negative percentage represents financial guarantee policies in a receivable position.

(3) -

Recovery rates include assumptions about legal risk in the enforcement of the Company’s contract and breach rates represent estimates of the percentage of ineligible loans.

(4) -

Midpoint of cash flows are used for the weighted average.

In millions

Fair Value as of
December 31, 2019

Valuation Techniques

Unobservable Input

Range

(Weighted Average)

Assets of consolidated VIEs:

Loans receivable at fair value

136

Market prices adjusted for financial guarantees provided to VIE obligations

Impact of financial guarantee

(1)

-20%

99% (22%)

Loan repurchase commitments

486

Discounted cash flow

Recovery rates

(2)

Breach rates

(2)

Liabilities of consolidated VIEs:

Variable interest entity notes

347

Market prices of VIE assets adjusted for financial guarantees provided

Impact of financial guarantee

37% - 76% (61%)

Credit d

rivative liabilities –

CMBS

Direct Price Model

Nonperformance risk

54% - 54% (54%)

Other derivative liabilities

Discounted cash flow

Cash flows

$0 - $49 ($25)

(3)

(1) -

Negative percentage represents financial guarantee policies in a receivable position.

(2) -

Recovery rates include assumptions about legal risk in the enforcement of the Company’s contract and breach rates represent estimates of the percentage of ineligible loans.

(3) -

Midpoint of cash flows are used for the weighted average.

Sensitivity of Significant Unobservable Inputs

The significant unobservable input used in the fair value measurement of the Company’s residential loans receivable at fair value of consolidated VIEs is the impact of the financial guarantee. The fair value of residential loans receivable is calculated by subtracting the value of the financial guarantee from the market value of VIE liabilities. The value of a financial guarantee is estimated by the Company as the present value of expected cash payments, net of recoveries, under the policy. If there 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 inputs used in the fair value measurement of the Company’s loan repurchase commitments of consolidated VIEs are a breach rate, which represents the percentage of ineligible loans held within a trust, and a recovery rate, which reflects the estimate of future cash receipts including legal risk in the enforcement of the Company’s contractual rights. Significant increases or decreases in the breach rate assumptions would have resulted in significantly higher or lower fair values of the loan repurchase commitments, respectively. Additionally, changes in assumptions about the Company’s legal risk would have impacted the recovery rate assumptions, which would have significantly impacted the fair value measurement. The estimated recoveries of the loan repurchase commitments may differ from the actual recoveries that may be received in the future.

The significant unobservable input used in the fair value measurement of the Company’s VIE notes of consolidated VIEs is the impact of the financial guarantee. The fair value of VIE notes is calculated by adding the value of the financial guarantee to the market value of VIE assets. The value of a financial guarantee is estimated by the Company as the present value of expected cash payments under the policy. 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.

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

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

Fair Value Measurements

The following tables present the fair value of the Company’s assets (including short-term investments) and liabilities measured and reported at fair value on a recurring basis as of March 31, 2020 and December 31, 2019:


	Fair Value Measurements at Reporting Date Using
In millions	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Counterparty and Cash Collateral Netting		Balance as of March 31, 2020
Assets:
Fixed-maturity investments:
U.S. Treasury and government agency	$	763	$	105	$	-	$	-	$	868
State and municipal bonds		-		192		-		-		192
Foreign governments		-		11		-		-		11
Corporate obligations		-		1,234		-		-		1,234
Mortgage-backed securities:
Residential mortgage-backed agency		-		283		-		-		283
Residential mortgage-backed non-agency		-		22		-		-		22
Commercial mortgage-backed		-		21		-		-		21
Asset-backed securities:
Collateralized debt obligations		-		114		-		-		114
Other asset-backed		-		279		1		-		280

Total fixed-maturity investments		763		2,261		1		-		3,025
Money market securities		35		-		-		-		35
Perpetual debt and equity securities		27		21		-		-		48
Fixed-income fund		-		-		-		-		45	(1)
Cash and cash equivalents		212		-		-		-		212
Derivative assets:
Non-insured derivative assets:
Interest rate derivatives		-		1		-		-		1


	Fair Value Measurements at Reporting Date Using
In millions	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Counterparty and Cash Collateral Netting			Balance as of March 31, 2020
Assets of consolidated VIEs:
Corporate obligations		-		8		-		-			8
Mortgage-backed securities:
Residential mortgage-backed non-agency		-		38		-		-			38
Commercial mortgage-backed		-		15		-		-			15
Asset-backed securities:
Collateralized debt obligations		-		7		-		-			7
Other asset-backed		-		7		-		-			7
Cash		5		-		-		-			5
Loans receivable at fair value:
Residential loans receivable		-		-		98		-			98
Loan repurchase commitments		-		-		506		-			506
Other assets:
Currency derivatives		-		-		18		-			18
Other		-		-		15		-			15

Total assets	$	1,042	$	2,358	$	638	$	-		$	4,083

Liabilities:
Medium-term notes	$	-	$	-	$	98	$	-		$	98
Derivative liabilities:
Insured derivatives:
Credit derivatives		-		2		8		-			10
Non-insured derivatives:
Interest rate derivatives		-		190		-		(31	)		159
Other		-		-		37		-			37
Liabilities of consolidated VIEs:
Variable interest entity notes		-		50		281		-			331

Total liabilities	$	-	$	242	$	424	$	(31	)	$	635

(1) -

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


	Fair Value Measurements at Reporting Date Using
	Quoted Prices in		Significant
	Active Markets		Other		Significant
	for Identical		Observable		Unobservable		Balance as of
	Assets		Inputs		Inputs		December 31,
In millions	(Level 1)		(Level 2)		(Level 3)		2019
Assets:
Fixed-maturity investments:
U.S. Treasury and government agency	$	791	$	97	$	-	$	888
State and municipal bonds		-		200		-		200
Foreign governments		-		10		-		10
Corporate obligations		-		1,266		-		1,266
Mortgage-backed securities:
Residential mortgage-backed agency		-		330		-		330
Residential mortgage-backed non-agency		-		19		-		19
Commercial mortgage-backed		-		22		-		22
Asset-backed securities:
Collateralized debt obligations		-		140		-		140
Other asset-backed		-		326		1		327

Total fixed-maturity investments		791		2,410		1		3,202
Money market securities		154		-		-		154
Perpetual debt and equity securities		30		25		-		55
Fixed-income fund		-		-		-		51	(1)
Cash and cash equivalents		75		-		-		75
Derivative assets:
Non-insured derivative assets:
Interest rate derivatives		-		1		-		1


	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, 2019
Assets of consolidated VIEs:
Corporate obligations		-		8		-		8
Mortgage-backed securities:
Residential mortgage-backed non-agency		-		45		-		45
Commercial mortgage-backed		-		16		-		16
Asset-backed securities:
Collateralized debt obligations		-		6		-		6
Other asset-backed		-		8		-		8
Cash		8		-		-		8
Loans receivable at fair value:
Residential loans receivable		-		-		136		136
Loan repurchase commitments		-		-		486		486
Other assets:
Currency derivatives		-		-		8		8
Other		-		-		18		18

Total assets	$	1,058	$	2,519	$	649	$	4,277

Liabilities:
Medium-term notes	$	-	$	-	$	108	$	108
Derivative liabilities:
Insured derivatives:
Credit derivatives		-		2		7		9
Non-insured derivatives:
Interest rate derivatives		-		132		-		132
Other		-		-		34		34
Other liabilities:
Other payable		-		-		4		4
Liabilities of consolidated VIEs:
Variable interest entity notes		-		56		347		403

Total liabilities	$	-	$	190	$	500	$	690

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

Level 3 assets at fair value as of March 31, 2020 and December 31, 2019 represented approximately 16% and 15%, respectively, of total assets measured at fair value. Level 3 liabilities at fair value as of March 31, 2020 and December 31, 2019 represented approximately 67% and 72%, respectively, of total liabilities measured at fair value.

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, 2020 and December 31, 2019. The majority of the financial assets and liabilities that the Company requires fair value reporting or disclosures are valued based on the estimated value of the underlying collateral, the Company’s or a third-party’s estimate of discounted cash flow model estimated, or quoted market values for 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, 2020		Carry Value Balance as of March 31, 2020
Assets:
Assets of consolidated VIEs:
Investments held-to-maturity	$	-	$	-	$	572	$	572	$	529

Total assets	$	-	$	-	$	572	$	572	$	529

Liabilities:
Long-term debt	$	-	$	856	$	-	$	856	$	2,261
Medium-term notes		-		-		377		377		563
Investment agreements		-		-		415		415		295
Liabilities of consolidated VIEs:
Variable interest entity notes		-		261		570		831		829

Total liabilities	$	-	$	1,117	$	1,362	$	2,479	$	3,948

Financial Guarantees:
Gross liability (recoverable)	$	-	$	-	$	723	$	723	$	(177	)
Ceded		-		-		51		51		15



	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, 2019		Carry Value Balance as of December 31, 2019
Assets:
Assets of consolidated VIEs:
Investments held-to-maturity	$	-	$	-	$	892	$	892	$	890

Total assets	$	-	$	-	$	892	$	892	$	890

Liabilities:
Long-term debt	$	-	$	1,073	$	-	$	1,073	$	2,228
Medium-term notes		-		-		396		396		570
Investment agreements		-		-		394		394		304
Liabilities of consolidated VIEs:
Variable interest entity notes		-		261		892		1,153		1,136

Total liabilities	$	-	$	1,334	$	1,682	$	3,016	$	4,238

Financial Guarantees:
Gross liability (recoverable)	$	-	$	-	$	556	$	556	$	(311	)
Ceded		-		-		56		56		24

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, 2020 and 2019:

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Three Months Ended March 31, 2020


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, 2020			Change in Unrealized Gains (Losses) for the Period Included in OCI for Assets still held as of March 31, 2020 (1)
Assets:
Other asset-backed	$	1	$	-		$	-	$	-	$	-	$	-		$	-	$	-	$	-	$	1	$	-		$	-
Assets of consolidated VIEs:
Loans receivable- residential		136		(35	)		-		-		-		(3	)		-		-		-		98		(35	)		-
Loan repurchase commitments		486		20			-		-		-		-			-		-		-		506		20			-
Currency derivatives		8		10			-		-		-		-			-		-		-		18		10			-
Other		18		(3	)		-		-		-		-			-		-		-		15		(3	)		-

Total assets	$	649	$	(8	)	$	-	$	-	$	-	$	(3	)	$	-	$	-	$	-	$	638	$	(8	)	$	-


In millions	Balance, Beginning of Period		Total (Gains) / Losses Included in Earnings			Unrealized (Gains) / Losses Included in 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, 2020			Change in Unrealized (Gains) Losses for the Period Included in OCI for Liabilities still held as of March 31, 2020 (2)
Liabilities:
Medium-term notes	$	108	$	2		$	(12	)	$	-	$	-	$	-		$	-	$	-	$	-	$	98	$	2		$	(12	)
Credit derivatives		7		1			-			-		-		-			-		-		-		8		1			-
Other derivatives		34		3			-			-		-		-			-		-		-		37		3			-
Other payable		4		-			-			-		-		(4	)		-		-		-		-		-			-
Liabilities of consolidated VIEs:
VIE notes		347		(25	)		(36	)		-		-		(5	)		-		-		-		281		(28	)		(34	)

Total liabilities	$	500	$	(19	)	$	(48	)	$	-	$	-	$	(9	)	$	-	$	-	$	-	$	424	$	(22	)	$	(46	)

(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, 2019


In millions	Balance, Beginning of Period		Total Gains / (Losses) Included in Earnings			Unrealized Gains / (Losses) Included in OCI		Purchases		Issuances		Settlements			Sales		Transfers into Level 3 (1)		Transfers out of Level 3 (1)		Ending Balance		Change in Unrealized Gains (Losses) for the Period Included in Earnings for Assets still held as of March 31, 2019
Assets:
Commercial mortgage-backed	$	7	$	-		$	-	$	-	$	-	$	(1	)	$	-	$	-	$	-	$	6	$	-
Other asset-backed		3		-			-		-		-		(1	)		-		-		-		2		-
Assets of consolidated VIEs:
Corporate obligations		5		-			-		-		-		-			-		-		-		5		-
Collateralized debt obligations		1		-			-		-		-		-			-		-		-		1		-
Loans receivable-residential		172		42			-		-		-		(8	)		-		-		-		206		42
Loan repurchase commitments		418		2			-		-		-		-			-		-		-		420		2
Currency derivatives		17		(3	)		-		-		-		-			-		-		-		14		(3	)
Other		14		1			-		-		-		-			-		-		-		15		1

Total assets	$	637	$	42		$	-	$	-	$	-	$	(10	)	$	-	$	-	$	-	$	669	$	42


In millions	Balance, Beginning of Period		Total (Gains) / Losses Included in Earnings			Unrealized (Gains) / Losses Included in OCI			Purchases		Issuances		Settlements			Sales		Transfers into Level 3 (1)		Transfers out of Level 3 (1)		Ending Balance		Change in Unrealized (Gains) Losses for the Period Included in Earnings for Liabilities still held as of March 31, 2019
Liabilities:
Medium-term notes	$	102	$	8		$	(4	)	$	-	$	-	$	-		$	-	$	-	$	-	$	106	$	7
Credit derivatives		33		(14	)		-			-		-		-			-		-		-		19		(14	)
Other derivatives		7		-			-			-		-		-			-		-		-		7		-
Other payable		5		1			-			-		-		(3	)		-		-		-		3		1
Liabilities of consolidated VIEs:
VIE notes		366		41			(7	)		-		5		(8	)		-		-		-		397		32

Total liabilities	$	513	$	36		$	(11	)	$	-	$	5	$	(11	)	$	-	$	-	$	-	$	532	$	26

(1)	- Transferred in and out at the end of the period.

For the three months ended March 31, 2020 and 2019, 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, 2020 and 2019 are reported on the Company’s consolidated statements of operations as follows:


	Three Months Ended March 31, 2020						Three Months Ended March 31, 2019
				Change in						Change in
				Unrealized						Unrealized
				Gains (Losses)						Gains (Losses)
				for the						for the
				Period Included						Period Included
				in Earnings						in Earnings
				for Assets						for Assets
				and						and
	Total Gains			Liabilities still			Total Gains			Liabilities still
	(Losses)			held as of			(Losses)			held as of
	Included			March 31,			Included			March 31,
In millions	in Earnings			2020			in Earnings			2019
Revenues:
Unrealized gains (losses) on insured derivatives	$	(1	)	$	(1	)	$	14		$	14
Net gains (losses) on financial instruments at fair value and foreign exchange		(5	)		(5	)		(7	)		(7	)
Other net realized gains (losses)		-			-			(1	)		(1	)
Revenues of consolidated VIEs:
Net gains (losses) on financial instruments at fair value and foreign exchange		17			20			1			10

Total	$	11		$	14		$	7		$	16

Fair Value Option

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

The following table presents the gains and (losses) included in the Company’s consolidated statements of operations for the three months ended March 31, 2020 and 2019 for financial instruments for which the fair value option was elected:


	Three Months Ended March 31,
In millions	2020			2019
Investments carried at fair value (1)	$	(20	)	$	6
Fixed-maturity securities held at fair value-VIE (2)		(6	)		26
Loans receivable at fair value:
Residential mortgage loans (2)		(35	)		34
Loan repurchase commitments (2)		20			2
Other assets-VIE (2)		(3	)		-
Medium-term notes (1)		(2	)		(7	)
Other liabilities (3)		-			(1	)
Variable interest entity notes (2)		27			84

(1) -

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

(2) -

Reported within “Net gains (losses) of financial instruments at fair value and foreign

exchange-VIE”

on MBIA’s consolidated statements of operations.

(3) -

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

The following table reflects the difference between the aggregate fair value and the aggregate remaining contractual principal balance outstanding as of March 31, 2020 and December 31, 2019 for loans and notes for which the fair value option was elected:


	As of March 31, 2020						As of December 31, 2019
	Contractual						Contractual
	Outstanding		Fair				Outstanding		Fair
In millions	Principal		Value		Difference		Principal		Value		Difference
Loans receivable at fair value:
Residential mortgage loans	$	96	$	87	$	9	$	107	$	107	$	-
Residential mortgage loans (90 days or more past due)		123		11		112		154		29		125

Total loans receivable and other instruments at fair value	$	219	$	98	$	121	$	261	$	136	$	125
Variable interest entity notes	$	1,097	$	331	$	766	$	1,126	$	403	$	723
Medium-term notes	$	110	$	98	$	12	$	112	$	108	$	4

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, 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, 2020 and December 31, 2019, the cumulative changes in instrument-specific credit risk of liabilities elected under the fair value option were losses of $59 million and $107 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, 2020 and 2019, the portions of instrument-specific credit risk included in AOCI that were recognized in earnings due to settlement of liabilities were losses of $2 million and $4 million, respectively.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References + Details