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Derivative Instruments
 9 Months Ended
Sep. 30, 2021
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 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’s derivative exposure within its international and structured finance insurance segment 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 had 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. This derivative contract was settled in the first quarter of 2021 for an amount consistent with the amount reported at fair value as of December 31, 2020.
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, 2021 and December 31, 2020. 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, 2021
    
Notional Value
     
Credit Derivatives Sold
   
Weighted
Average
Remaining
Expected
Maturity
   
AAA
   
AA
   
A
  
BBB
   
Below
Investment
Grade
   
Total
Notional
   
Fair
Value
Asset
(Liability)
Insured swaps
   
 
13.4 Years
 
   
$
-
 
   
$
52
 
   
$
1,285
 
  
$
359
 
   
$
-
 
   
$
1,696
 
   
$
(1
) 
             
 
 
 
   
 
 
 
   
 
 
 
  
 
 
 
   
 
 
 
   
 
 
 
   
 
 
 
Total notional
            
$
-
 
   
$
52
 
   
$
1,285
 
  
$
359
 
   
$
-
 
   
$
1,696
 
         
             
 
 
 
   
 
 
 
   
 
 
 
  
 
 
 
   
 
 
 
   
 
 
 
         
Total fair value
            
$
-
 
   
$
-
 
   
$
(1
) 
  
$
-
 
   
$
-
 
            
$
(1
) 
             
 
 
 
   
 
 
 
   
 
 
 
  
 
 
 
   
 
 
 
            
 
 
 
 
                                                                                                                                         
$ in millions
   
As of December 31, 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 swaps
   
 
13.9 Years
 
   
$
-
 
   
$
58
 
   
$
1,327
 
  
$
358
 
  
$
-
 
   
$
1,743
 
   
$
(2
) 
             
 
 
 
   
 
 
 
   
 
 
 
  
 
 
 
  
 
 
 
   
 
 
 
   
 
 
 
Total notional
            
$
-
 
   
$
58
 
   
$
1,327
 
  
$
358
 
  
$
-
 
   
$
1,743
 
         
             
 
 
 
   
 
 
 
   
 
 
 
  
 
 
 
  
 
 
 
   
 
 
 
         
Total fair value
            
$
-
 
   
$
-
 
   
$
(1
) 
  
$
(1
) 
  
$
-
 
            
$
(2
) 
             
 
 
 
   
 
 
 
   
 
 
 
  
 
 
 
  
 
 
 
            
 
 
 
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 September 30, 2021 and December 31, 2020, the Company did not hold or post cash collateral to derivative counterparties.
As of September 30, 2021 and December 31, 2020, the Company had securities with a fair value of $163 million and $214 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, 2021 and December 31, 2020, 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, 2021 and December 31, 2020, 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, 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
   
$
1,696
 
   
Other assets
   
$
-
 
   
Derivative liabilities
   
$
(1
) 
Interest rate swaps
   
 
425
 
   
Other assets
   
 
1
 
   
Derivative liabilities
   
 
(132
) 
Interest rate swaps-embedded
   
 
211
 
   
Medium-term notes
   
 
-
 
   
Medium-term notes
   
 
(8
) 
Currency
swaps-VIE
   
 
50
 
   
Other
assets-VIE
   
 
9
 
   
Derivative liabilities-VIE
   
 
-
 
    
 
 
 
        
 
 
 
        
 
 
 
Total
non-designated
derivatives
   
$
2,382
 
        
$
10
 
        
$
(141
) 
    
 
 
 
        
 
 
 
        
 
 
 
 
(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, 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 swaps
   
$
1,743
 
   
Other assets
   
$
-
 
   
Derivative liabilities
   
$
(2
) 
Interest rate swaps
   
 
437
 
   
Other assets
   
 
1
 
   
Derivative liabilities
   
 
(164
) 
Interest rate swaps-embedded
   
 
252
 
   
Medium-term notes
   
 
-
 
   
Medium-term notes
   
 
(10
) 
Currency
swaps-VIE
   
 
53
 
   
Other
assets-VIE
   
 
6
 
   
Derivative liabilities-VIE
   
 
-
 
All other
   
 
49
 
   
Other assets
   
 
-
 
   
Derivative liabilities
   
 
(49
) 
    
 
 
 
        
 
 
 
        
 
 
 
Total
non-designated
derivatives
   
$
2,534
 
        
$
7
 
        
$
(225
) 
    
 
 
 
        
 
 
 
        
 
 
 
 
(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 September 30, 2021 and 2020:
 
                                
In millions
               
Derivatives Not Designated as
        
Three Months Ended September 30,
Hedging Instruments
   
Location of Gain (Loss) Recognized in Income on Derivative
   
2021
   
2020
Interest rate swaps
    Net gains (losses) on financial instruments at fair value and foreign exchange    $ 5      $ 6  
Currency
swaps-VIE
    Net gains (losses) on financial instruments at fair value and foreign
exchange-VIE
      1        (1 ) 
All other
    Net gains (losses) on financial instruments at fair value and foreign exchange      -        (1 ) 
         
 
 
 
   
 
 
 
Total
         $ 6      $ 4  
         
 
 
 
   
 
 
 
The following table presents the effect of derivative instruments on the consolidated statements of operations for the nine months ended September 30, 2021 and 2020:
 
                                
In millions
               
Derivatives Not Designated as
        
Nine Months Ended September 30,
Hedging Instruments
   
Location of Gain (Loss) Recognized in Income on Derivative
   
2021
   
2020
Insured credit default swaps
    Unrealized gains (losses) on insured derivatives    $ -      $ (1 ) 
Interest rate swaps
    Net gains (losses) on financial instruments at fair value and foreign exchange      22        (53 ) 
Currency
swaps-VIE
    Net gains (losses) on financial instruments at fair value and foreign
exchange-VIE
      3        4  
All other
    Net gains (losses) on financial instruments at fair value and foreign exchange      -        (4 ) 
         
 
 
 
   
 
 
 
Total
         $ 25      $ (54 )