Derivative Instruments

9 Months Ended

Sep. 30, 2020

Text Block [Abstract]

Derivative Instruments

Note 8: 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. Changes in the fair values of the Company’s insured derivatives within its U.S. Public Finance segment are included in “Net change in fair value of insured derivatives” on the Company’s consolidated statements of operations.

Corporate

The Company has entered into derivative instruments primarily consisting of interest rate swaps to manage the risks associated with fluctuations in interest rates affecting the value of certain assets. Changes in the fair values of the Company’s derivatives within its corporate segment are included in “Net gains (losses) on financial instruments at fair value and foreign exchange” on the Company’s consolidated statements of operations.

International and Structured Finance Insurance

The Company has entered into a derivative instrument to provide financial guarantee insurance to a structured finance transaction that does not qualify for the financial guarantee scope exception and, therefore, is accounted for as a derivative. The insured CDS contract, referencing CMBS, is intended to be held for the entire term of the contract unless a settlement with the counterparty is negotiated. The Company no longer insures new CDS contracts except for transactions related to the restructuring of existing exposures. The Company’s derivative exposure within its international and structured finance insurance segment also includes insured interest rate and inflation-linked swaps related to insured debt issues. Changes in the fair values of the Company’s insured derivatives within its International and Structured Finance segment are included in “Net change in fair value of insured derivatives” on the Company’s consolidated statements of operations.

The Company has also entered into a derivative contract in connection with the commutation of certain insurance exposure, which occurred in 2014. Changes in the fair value of this 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

A VIE consolidated by the Company is party to a cross currency swap, which was entered into to manage the variability in cash flows resulting from fluctuations in foreign currency rates. Changes in the fair value of the VIE derivative are included in “Net gains (losses) on financial instruments at fair value and foreign exchange-VIE” on the Company’s consolidated statements of operations.

Credit Derivatives Sold

The following tables present information about credit derivatives sold by the Company’s insurance operations that were outstanding as of September 30, 2020 and December 31, 2019. 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 September 30, 2020
	Notional Value
Credit Derivatives Sold	Weighted Average Remaining Expected Maturity		AAA		AA		A			BBB			Below Investment Grade			Total Notional		Fair Value Asset (Liability)
Insured credit default swaps		0.3 Years	$	-	$	-	$	-		$	-		$	23		$	23	$	(8	)
Insured swaps		14.1 Years		-		59		1,341			362			-			1,762		(2	)
Total notional			$	-	$	59	$	1,341		$	362		$	23		$	1,785
Total fair value			$	-	$	-	$	(1	)	$	(1	)	$	(8	)			$	(10	)

$ in millions	As of December 31, 2019
	Notional Value
Credit Derivatives Sold	Weighted Average Remaining Expected Maturity		AAA		AA			A			BBB			Below Investment Grade			Total Notional			Fair Value Asset (Liability)
Insured credit default swaps		1.0 Years	$	—	$	—		$	—		$	—		$	32		$	32		$	(7	)
Insured swaps		14.0 Years		—		121	(1)		1,371	(2)		433	(3)		—			1,925	(4)		(2	)
Total notional			$	—	$	121		$	1,371		$	433		$	32		$	1,957
Total fair value			$	—	$	—		$	(1	)	$	(1	)	$	(7	)				$	(9	)

(1) -  The Company revised its previously reported amount of $66 million to $121 million.

(2) -  The Company revised its previously reported amount of $1,284 million to $1,371 million.

(3) -  The Company revised its previously reported amount of $445 million to $433 million.

(4) -  The Company revised its previously reported amount of $1,795 million to $1,925 million.

Internal credit ratings assigned by MBIA on the underlying collateral are derived 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. Also, where appropriate, cash flow analyses and collateral valuations are considered. The maximum potential amount of future payments (undiscounted) on insured CDS and insured swaps is estimated as the notional value of such contracts.

MBIA may hold recourse provisions with third parties in derivative instruments through subrogation rights, whereby if MBIA makes a claim payment, it may be entitled to any rights of the insured counterparty, including the right to any assets held as collateral.

Counterparty Credit Risk

The Company manages counterparty credit risk on an individual counterparty basis through master netting agreements covering derivative instruments in the corporate segment. These agreements allow the Company to contractually net amounts due from a counterparty with those amounts due to such counterparty when certain triggering events occur. The Company only executes swaps under master netting agreements, which typically contain mutual credit downgrade provisions that generally provide the ability to require assignment or termination in the event either MBIA or the counterparty is downgraded below a specified credit rating.

Under these agreements, the Company may receive or provide cash, U.S. Treasury or other highly rated securities to secure counterparties’ exposure to the Company or its exposure to counterparties, respectively. Such collateral is available to the holder to pay for replacing the counterparty in the event that the counterparty defaults. As of September 30, 2020 and December 31, 2019, the Company did not hold or post cash collateral to derivative counterparties.

As of September 30, 2020 and December 31, 2019, the Company had securities with a fair value of $237 million and $181 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 September 30, 2020 and December 31, 2019, 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 September 30, 2020 and December 31, 2019, the counterparty was rated Aa3 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”, when applicable.

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, as of September 30, 2020:

In millions			Derivative Assets (1)				Derivative Liabilities (1)
Derivative Instruments	Notional Amount Outstanding		Balance Sheet Location		Fair Value		Balance Sheet Location		Fair Value
Not designated as hedging instruments:
Insured credit default swaps	$	23		Other assets	$	-		Derivative liabilities	$	(8	)
Insured swaps		1,762		Other assets		-		Derivative liabilities		(2	)
Interest rate swaps		435		Other assets		1		Derivative liabilities		(180	)
Interest rate swaps-embedded		242		Medium-term notes		-		Medium-term notes		(9	)
Currency swaps-VIE		55		Other assets-VIE		12		Derivative liabilities- VIE		-
All other		49		Other assets		-		Derivative liabilities		(38	)
Total non-designated derivatives	$	2,566			$	13			$	(237	)

(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 total fair value of the Company’s derivative assets and liabilities by instrument and balance sheet location, before counterparty netting, as of December 31, 2019:

In millions				Derivative Assets (1)				Derivative Liabilities (1)
Derivative Instruments	Notional Amount Outstanding			Balance Sheet Location		Fair Value		Balance Sheet Location		Fair Value
Not designated as hedging instruments:
Insured credit default swaps	$	32			Other assets	$	-		Derivative liabilities	$	(7	)
Insured swaps		1,925	(2)		Other assets		-		Derivative liabilities		(2	)
Interest rate swaps		441			Other assets		1		Derivative liabilities		(132	)
Interest rate swaps-embedded		232			Medium- term notes		-		Medium- term notes		(15	)
Currency swaps-VIE		58			Other assets-VIE		8		Derivative liabilities-VIE		-
All other		49			Other assets		-		Derivative liabilities		(34	)
Total non-designated derivatives	$	2,737				$	9			$	(190	)

(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.

(2) -  The Company revised its previously reported amount of $1,795 million to $1,925 million.

The following table presents the effect of derivative instruments on the consolidated statements of operations for the three months ended September 30, 2020 and 2019:

In millions
Derivatives Not Designated as		Three Months Ended September 30,
Hedging Instruments	Location of Gain (Loss) Recognized in Income on Derivative	2020			2019
Insured credit default swaps	Unrealized gains (losses) on insured derivatives	$	-		$	9
Insured credit default swaps	Realized gains (losses) and other settlements on insured derivatives		-			(10	)
Interest rate swaps	Net gains (losses) on financial instruments at fair value and foreign exchange		6			(30	)
Currency swaps-VIE	Net gains (losses) on financial instruments at fair value and foreign exchange-VIE		(1	)		(3	)
All other	Net gains (losses) on financial instruments at fair value and foreign exchange		(1	)		(14	)
Total		$	4		$	(48	)

The following table presents the effect of derivative instruments on the consolidated statements of operations for the nine months ended September 30, 2020 and 2019:

In millions
Derivatives Not Designated as		Nine Months Ended September 30,
Hedging Instruments	Location of Gain (Loss) Recognized in Income on Derivative	2020			2019
Insured credit default swaps	Unrealized gains (losses) on insured derivatives	$	(1	)	$	23
Insured credit default swaps	Realized gains (losses) and other settlements on insured derivatives		-			(11	)
Interest rate swaps	Net gains (losses) on financial instruments at fair value and foreign exchange		(53	)		(85	)
Currency swaps-VIE	Net gains (losses) on financial instruments at fair value and foreign exchange-VIE		4			(8	)
All other	Net gains (losses) on financial instruments at fair value and foreign exchange		(4	)		(23	)
Total		$	(54	)	$	(104	)