Fair Value Of Financial Instruments

3 Months Ended

Mar. 31, 2023

Text Block [Abstract]

Fair Value Of Financial Instruments

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 and equity 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.

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 equity investments.

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 (“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, the value of any credit enhancement and for certain equity investments, EBITDA multiples, discount rates, hard asset values and type certificate values.

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 equity investments. 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 internal cash flow models, 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

Other assets 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 Debt

The fair values of VIE debt 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 or internal cash flow models. Fair values based on quoted prices of similar securities and internal cash flow models may be adjusted for factors unique to the securities, including any credit enhancement. Observable inputs include interest rate yield curves, bond spreads of similar securities and MBIA Corp.’s CDS spreads. Unobservable inputs include the value of any credit enhancement. VIE debt are categorized in 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 of the fair value hierarchy based on the lowest level input that is significant to the fair value measurement in its entirety.

 

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 was determined based on the valuation provided by an independent third party, which is included in “Liabilities of consolidated variable interest entities – Derivative liabilities” on the Company’s consolidated balance sheets. As the significant inputs are unobservable, the derivative contract 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, 2023 and December 31, 2022:

In millions	Fair Value as of March 31, 2023		Valuation Techniques	Unobservable Input	Range (Weighted Average)
Assets:
Equity Investments	$	115	Discounted cash flow	EBITDA multiples(1)
				Discount rate(1)
			Sum of the parts	Hard asset values(1)
				Type certificate values(1)
Assets of consolidated VIEs:
Loans receivable at fair value		83	Market prices of similar liabilities or internal cash flow models adjusted for financial guarantees provided to VIE obligations	Impact of financial guarantee		13% - 98%	(58%)(2)
Liabilities of consolidated VIEs:
Variable interest entity notes		154	Market prices of VIE assets adjusted for financial guarantees provided or market prices of similar liabilities	Impact of financial guarantee		44% - 72%	(68%)(2)

(1) -   Range for EBITDA multiples, discount rate, hard asset values and type certificate values reflects their potential variability.

(2) -   Weighted average represents the total MBIA guarantees as a percentage of total instrument fair value.

In millions	Fair Value as of December 31, 2022		Valuation Techniques	Unobservable Input	Range (Weighted Average)
Assets:
Equity Investments	$	115	Discounted cash flow	EBITDA multiples(1)
				Discount rate(1)
			Sum of the parts	Hard asset values(1)
				Type certificate values(1)
Assets of consolidated VIEs:
Loans receivable at fair value		78	Market prices of similar liabilities or internal cash flow models adjusted for financial guarantees provided to VIE obligations	Impact of financial guarantee		12% - 88%	(52%)(2)
Liabilities of consolidated VIEs:
Variable interest entity notes		172	Market prices of VIE assets adjusted for financial guarantees provided or market prices of similar liabilities	Impact of financial guarantee		34% - 82%	(68%)(2)

(1) -   Range for EBITDA multiples, discount rate, hard asset values and type certificate values reflects their potential variability.

(2) -   Weighted average represents the total MBIA guarantees as a percentage of total instrument fair value.

Sensitivity of Significant Unobservable Inputs

The significant unobservable inputs used in the fair value measurement of the Company’s equity investments at fair value are EBITDA multiples, the discount rate, hard asset values and type certificate values. The fair value of equity investments is determined by taking a weighted average of valuation scenarios. If there had been lower or higher EBITDA multiples, hard asset values or type certificate values, the value of equity investments would have been lower or higher, respectively. If there had been a lower or higher discount rate, the value of equity investments would have been higher or lower, respectively.

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 similar instruments to that of the VIE liabilities or the market value derived from internal cash flow models. 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 or internal cash flow models. 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, 2023 and December 31, 2022:

	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, 2023
Assets:
Fixed-maturity investments:
U.S. Treasury and government agency	$	494	$	56	$	-	$	550
State and municipal bonds		-		131		-		131
Foreign governments		-		24		-		24
Corporate obligations		-		967		1		968
Mortgage-backed securities:
Residential mortgage-backed agency		-		231		-		231
Residential mortgage-backed non-agency		-		104		-		104
Commercial mortgage-backed		-		27		-		27
Asset-backed securities:
Collateralized debt obligations		-		160		-		160
Other asset-backed		-		106		-		106
Total fixed-maturity investments		494		1,806		1		2,301
Money market securities		208		-		-		208
Equity investments		37		19		115		171
Cash and cash equivalents		67		-		-		67
Assets of consolidated VIEs:
Mortgage-backed securities:
Residential mortgage-backed non-agency		-		11		-		11
Commercial mortgage-backed		-		9		-		9
Asset-backed securities:
Collateralized debt obligations		-		1		-		1
Other asset-backed		-		1		-		1
Cash		16		-		-		16
Loans receivable at fair value:
Residential loans receivable		-		-		83		83
Other assets:
Other		-		-		9		9
Total assets	$	822	$	1,847	$	208	$	2,877
Liabilities:
Medium-term notes	$	-	$	-	$	42	$	42
Derivative liabilities:
Non-insured interest rate derivatives		-		57		-		57
Liabilities of consolidated VIEs:
Variable interest entity notes		-		-		154		154
Currency derivatives		-		-		11		11
Total liabilities	$	-	$	57	$	207	$	264

	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, 2022
Assets:
Fixed-maturity investments:
U.S. Treasury and government agency	$	463	$	54	$	-	$	517
State and municipal bonds		-		323		-		323
Foreign governments		-		21		-		21
Corporate obligations		-		797		-		797
Mortgage-backed securities:
Residential mortgage-backed agency		-		207		-		207
Residential mortgage-backed non-agency		-		95		-		95
Commercial mortgage-backed		-		24		-		24
Asset-backed securities:
Collateralized debt obligations		-		159		-		159
Other asset-backed		-		127		-		127
Total fixed-maturity investments		463		1,807		-		2,270
Money market securities		234		-		-		234
Equity investments		38		19		115		172
Cash and cash equivalents		50		-		-		50
Assets of consolidated VIEs:
Corporate obligations		-		4		-		4
Mortgage-backed securities:
Residential mortgage-backed non-agency		-		22		-		22
Commercial mortgage-backed		-		9		-		9
Asset-backed securities:
Collateralized debt obligations		-		5		-		5
Other asset-backed		-		7		-		7
Cash		16		-		-		16
Loans receivable at fair value:
Residential loans receivable		-		-		78		78
Other assets:
Other		-		-		23		23
Total assets	$	801	$	1,873	$	216	$	2,890
Liabilities:
Medium-term notes	$	-	$	-	$	41	$	41
Derivative liabilities:
Non-insured interest rate derivatives		-		49		-		49
Liabilities of consolidated VIEs:
Variable interest entity notes		-		-		172		172
Currency derivatives		-		-		6		6
Total liabilities	$	-	$	49	$	219	$	268

Level 3 assets at fair value as of March 31, 2023 and December 31, 2022 represented approximately 7% of total assets measured at fair value. Level 3 liabilities at fair value as of March 31, 2023 and December 31, 2022 represented approximately 78% and 82%, 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, 2023 and December 31, 2022. 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, 2023		Carry Value Balance as of March 31, 2023
Liabilities:
Long-term debt	$	-	$	296	$	-	$	296	$	2,467
Medium-term notes		-		-		309		309		462
Investment agreements		-		-		259		259		233
Liabilities of consolidated VIEs:
Variable interest entity loans payable		-		-		2		2		2
Total liabilities	$	-	$	296	$	570	$	866	$	3,164
Financial Guarantees:
Gross liability (recoverable)	$	-	$	-	$	876	$	876	$	541
Ceded recoverable (liability)		-		-		22		22		8

	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, 2022		Carry Value Balance as of December 31, 2022
Liabilities:
Long-term debt	$	-	$	330	$	-	$	330	$	2,428
Medium-term notes		-		-		310		310		458
Investment agreements		-		-		257		257		233
Liabilities of consolidated VIEs:
Variable interest entity loans payable		-		-		2		2		2
Total liabilities	$	-	$	330	$	569	$	899	$	3,121
Financial Guarantees:
Gross liability (recoverable)	$	-	$	-	$	864	$	864	$	568
Ceded recoverable (liability)		-		-		21		21		15

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, 2023 and 2022:

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Three Months Ended March 31, 2023

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, 2023		Change in Unrealized Gains (Losses) for the Period Included in OCI for Assets still held as of March 31, 2023(1)
Assets:
Corporate obligations	$	-	$	-	$	-	$	-	$	-	$	-		$	-		$	1	$	-	$	1	$	-	$	-
Equity investments		115		-		-		-		-		-			-			-		-		115		-		-
Assets of consolidated VIEs:
Loans receivable - residential		78		7		-		-		-		(2	)		-			-		-		83		5		-
Other		23		2		-		-		-		-			(16	)		-		-		9		1		-
Total assets	$	216	$	9	$	-	$	-	$	-	$	(2	)	$	(16	)	$	1	$	-	$	208	$	6	$	-

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, 2023		Change in Unrealized (Gains) Losses for the Period Included in OCI for Liabilities still held as of March 31, 2023(2)
Liabilities:
Medium-term notes	$	41	$	3	$	(2	)	$	-	$	-	$	-		$	-		$	-	$	-	$	42	$	3	$	(2	)
Liabilities of consolidated VIEs:
VIE notes		172		15		(14	)		-		-		(1	)		(18	)		-		-		154		1		-
Currency derivatives		6		5		-			-		-		-			-			-		-		11		5		-
Total liabilities	$	219	$	23	$	(16	)	$	-	$	-	$	(1	)	$	(18	)	$	-	$	-	$	207	$	9	$	(2	)

(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, 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.

For the three months ended March 31, 2023, sales included the impact of the deconsolidation of VIEs. Refer to “Note 4: Variable Interest Entities” for additional information about the deconsolidation of VIEs.

For the three months ended March 31, 2023, transfers into Level 3 and out of Level 2 were related to corporate obligations, where inputs, which are significant to their valuation, became unobservable during the quarter. These inputs included spreads, prepayment speeds, default speeds, default severities, yield curves observable at commonly quoted intervals, and market corroborated inputs. There were no transfers out of Level 3.

For the three months ended March 31, 2022, 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, 2023 and 2022 are reported on the Company’s consolidated statements of operations as follows:

	Three Months Ended March 31, 2023						Three Months Ended March 31, 2022
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, 2023			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
Revenues:
Net gains (losses) on financial instruments at fair value and foreign exchange	$	(3	)	$	(3	)	$	8		$	8
Revenues of consolidated VIEs:
Net gains (losses) on financial instruments at fair value and foreign exchange		3			-			(2	)		3
Other net realized gains (losses)		(14	)		-			-			-
Total	$	(14	)	$	(3	)	$	6		$	11

Fair Value Option

The Company elected to record at fair value certain financial instruments, including certain equity investments and 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, 2023 and 2022 for financial instruments for which the fair value option was elected:

	Three Months Ended March 31,
In millions	2023			2022
Investments carried at fair value(1)	$	3		$	(8	)
Fixed-maturity securities held at fair value-VIE(3)		(4	)		(1	)
Loans receivable at fair value:
Residential mortgage loans(2)		7			1
Other assets-VIE(3)		2			1
Medium-term notes(1)		(3	)		8
Variable interest entity notes (3)		(15	)		(5	)

(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 “Net gains (losses) of financial instruments at fair value and foreign exchange-VIE” and “Other net realized gains (losses)-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, 2023 and December 31, 2022 for loans and notes for which the fair value option was elected: 

	As of March 31, 2023						As of December 31, 2022
In millions	Contractual Outstanding Principal		Fair Value		Difference		Contractual Outstanding Principal		Fair Value		Difference
Loans receivable at fair value:
Residential mortgage loans - current	$	42	$	42	$	-	$	39	$	39	$	-
Residential mortgage loans (90 days or more past due)		161		41		120		149		39		110
Total loans receivable and other instruments at fair value	$	203	$	83	$	120	$	188	$	78	$	110
Variable interest entity notes	$	610	$	154	$	456	$	780	$	172	$	608
Medium-term notes	$	54	$	42	$	12	$	53	$	41	$	12

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, 2023 and December 31, 2022, the cumulative changes in instrument-specific credit risk of liabilities elected under the fair value option were losses of $30 million and $45 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, 2023 and 2022, the portions of instrument-specific credit risk included in AOCI that were recognized in earnings due to settlement of liabilities were losses of $14 million and $3 million, respectively.