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MBIA INC – 10-K – Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of financial condition and results of operations ofMBIA Inc. should be read in conjunction with the other sections of this Form 10-K. In addition, this discussion and analysis of financial condition and results of operations includes statements of the opinion ofMBIA Inc.'s management which may be forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. Refer to "Forward-Looking and Cautionary Statements" and "Risk Factors" in Part I, Item 1A of this Form 10-K for a further discussion of risks and uncertainties. This section of this Form 10-K generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020 results. Discussions of 2019 items and year-to-year comparisons between 2020 and 2019 results not included in this Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the Company's Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 .
OVERVIEW
MBIA Inc. , together with its consolidated subsidiaries, (collectively, "MBIA", the "Company", "we", "us", or "our") operates within the financial guarantee insurance industry. MBIA manages its business within three operating segments: 1)United States ("U.S.") public finance insurance; 2) corporate; and 3) international and structured finance insurance. OurU.S. public finance insurance portfolio is managed throughNational Public Finance Guarantee Corporation ("National"), our corporate segment is managed throughMBIA Inc. and several of its subsidiaries, including our service company,MBIA Services Corporation ("MBIA Services"), and our international and structured finance insurance business is primarily managed throughMBIA Insurance Corporation and its subsidiary ("MBIA Corp. "). National's primary objectives are to maximize the performance of its existing insured portfolio through effective surveillance and remediation activity and effectively manage its investment portfolio. Our corporate segment consists of general corporate activities, including providing support services to MBIA's operating subsidiaries and asset and capital management.MBIA Corp.'s primary objectives are to satisfy all claims by its policyholders and to maximize future recoveries, if any, for its senior lending and surplus note holders, and then its preferred stock holders.MBIA Corp. is executing this strategy by, among other things, taking steps to maximize the collection of recoveries and reducing and mitigating potential losses on its insurance exposures. We do not expect National orMBIA Corp. to write significant new business. COVID-19 and the Economic Environment The novel coronavirus COVID-19 ("COVID-19") continues to be an ongoing pandemic. While efforts to contain COVID-19 inthe United States have been effective (distribution of vaccines and boosters, promotion of and the use of masks, and social distancing), the current and longer-term impacts of COVID-19 remain uncertain. The existence or extent of any impact on our insured or investment portfolios, or general business operations, will depend on future developments which are highly uncertain, including but not limited to the future severity of the pandemic, and the effectiveness of financial and regulatory actions taken at the state and federal levels to contain or address its impact. We also cannot predict how political, legal and regulatory responses to the pandemic, such as the nature of and conditions to aid to states or municipalities, tax policy, or programs designed to assist impacted individuals, will impact our business. Federal legislation passed to combat the economic impact of the pandemic has been significant, including the$2.7 trillion Coronavirus Aid, Relief, and Economic Security ("CARES") Act in 2020, which included significant aid to offset COVID-19 related expenditures of public sector issuers including states, territories, healthcare, higher education and transportation issuers. Also, theFederal Reserve has shown a willingness to promote the stability of the financial system that is directly supportive of the municipal market, such as the Municipal Lending Facility created in 2020. In March of 2021, the American Rescue Plan Act of 2021 was enacted, a$1.9 trillion economic stimulus package designed to further stabilize the financial system. This law allocated nearly$350 billion of aid to state and local governments to replace lost revenues resulting from the pandemic with relatively few restrictions on use of said funds. However, economic activity, employment and inflation remain at risk as the path of 29
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
OVERVIEW (continued) economic recovery will still be significantly affected by the course of the virus, including new variants, and the continuing progress on vaccinations throughout the country. With inflation elevating, theFederal Reserve has signaled that the economy is healthy enough and in need of a tighter monetary policy that will likely entail interest rate hikes, tapering of monthly asset purchases and a reduced balance sheet.
Insured portfolios
Any adverse developments on macroeconomic factors resulting from COVID-19, including without limitation reduced economic activity and certainty, increased unemployment, increased loan defaults or delinquencies, and increased stress on municipal budgets, including due to reduced tax revenues and the ability to raise taxes or limit spending, could materially and adversely affect the performance of the Company's insured portfolios. Any impact of the pandemic on the Company's financial guarantee credits would vary based on the nature of the taxes, fees and revenues pledged to debt repayment and their sensitivity to the related slowdown in economic activity. Economic deterioration at the state and local level weakens the credit quality of the issuers of our insured municipal bonds, reduces the performance of our insuredU.S. public finance portfolio and, while such has not yet occurred materially, could increase the amount of National's potential incurred losses. The duration of the pandemic, the efficacy of vaccines, spending of federal aid to state and local governments, and the breadth and speed of economic recovery will determine the degree of economic stress, if any, incurred by the credits in the Company's insured portfolios. While the unprecedented amount of federal aid directed to state and local municipalities has blunted the impact of the pandemic, not all of the issuers of the obligations in National's insured portfolio were eligible to receive it. Further, if issuers are unable to raise taxes, reduce spending, or receive federal assistance, while such has not yet occurred materially, the Company may experience new or additional losses or impairments on those obligations, which could materially and adversely affect its business, financial condition and financial results. Certain ofMBIA Corp.'s structured finance policies, including those in which the underlying principal obligations are comprised of residential or commercial mortgages and mortgage-backed securities ("MBS"), could be negatively impacted by delays or failures of borrowers to make payments of principal and interest when due, or delays or moratoriums on foreclosures or enforcement actions with respect to delinquent or defaulted mortgages imposed by governmental authorities.MBIA Corp. has recorded significant loss reserves on its residential mortgage-backed securities ("RMBS") and collateralized debt obligations ("CDO") exposures, and there can be no assurance that these reserves will be sufficient if the pandemic causes further deterioration to the economy. These transactions are also subject to servicer risks, which relate to problems with the transaction's servicer that could adversely impact performance of the underlying assets. Additionally, several of our credits, particularly within our international public finance sector, feature large, near term debt-service payments, while there can be no assurance that the liquidity position ofMBIA Corp. will enable it to satisfy any claims that arise if the issuers of such credits are unable or unwilling to refinance or repay their obligations.MBIA Corp. has recorded expected recoveries on certain RMBS transactions, and the forbearance options that mortgage borrowers who were facing financial difficulties took advantage of under the CARES Act may continue to delay or impair collections on these recoveries.
Liquidity
The Company continues to monitor its cash and liquid asset resources using cash
forecasting and stress-scenario testing. Members of the Company's senior
management meet regularly to review liquidity metrics, discuss contingency plans
and establish target liquidity levels. While liquidity levels and collateral
amounts have normalized since the beginning of the pandemic, any additional
impact the pandemic may have on our future liquidity position remains uncertain.
Declines in the market value or rating eligibility of assets pledged against the
Company's obligations as a result of credit market deterioration caused by
COVID-19
or other factors may require additional eligible assets to be pledged in order
to meet minimum required collateral amounts against these obligations. This
could require the Company to sell assets, potentially with substantial losses or
use free cash or other assets to meet the collateral requirements, thus
negatively impacting the Company's liquidity position. Additionally, declines in
the yields in our insurance companies' fixed-income investment portfolios could
materially impact investment income.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
OVERVIEW (continued) 2021 Business Developments
The following is a summary of 2021 business developments:
section for additional information on our
• During 2021, the
instrumentalities ("Puerto Rico") defaulted on scheduled debt service for
National insured bonds and National paid gross claims in the aggregate of
debt service for National insured bonds and National paid gross claims in
the aggregate of$47 million . As ofDecember 31, 2021 , National had$2.6 billion of debt service outstanding related toPuerto Rico .
• In January of 2021, the reconstitution of the Oversight Board with the
reappointment of three existing members and appointment of four new
members for three-year terms, including the newly elected Governor
sitting as an
ex officio
member, was confirmed.
• On
dated as ofFebruary 22, 2021 (the "GO PSA"), among the Financial Oversight andManagement Board for Puerto Rico (the "Oversight Board"), certain holders of GO Bonds and PBA Bonds,Assured Guaranty Corp. and
with the GO and PBA Title III cases. The GO PSA provides that, among
other things, National shall receive a pro rata share of allocable cash,
newly issued General Obligation bonds, a contingent value instrument and
certain fees. The GO PSA was amended on
PSA") to move the termination date fromJanuary 31, 2022 toMarch 15, 2022 .
• On
settling certain clawback claims and providing for a distribution of
cash, bonds and a contingent value instrument to
Transportation Authority ("HTA") bondholders subject to completing
negotiations on a plan support agreement in respect of an HTA plan of
adjustment (the "HTA PSA"). On
Corp.,
into the HTA PSA.
• The Confirmation Hearing for the Commonwealth Title III case concluded on
November 23, 2021 . OnJanuary 14, 2022 , the Oversight Board filed its final draft of the Modified Eighth Amended Plan of Adjustment for theCommonwealth of Puerto Rico , and onJanuary 18, 2022 , the Court signed the confirmation order. There can be no assurance that the plan will
become effective within the time permitted under the Amended GO PSA or by
theBankruptcy Court .
• Pursuant to the plan of adjustment, GO Bondholders were required to
choose between commuting their insurance policy with National or having
their insurance policy accelerated and receiving a
one-time
payment of par and accrued interest from National. Approximately 27% of
bondholders voted by the deadline of October 18, 2021 to commute their
insurance policies with National. The expected commutation and
acceleration should occur shortly after Plan effectiveness and will
reduce National's insured Puerto Rico Commonwealth GO ("GO") exposure to
zero.
• In October of 2021 and January of 2022, National sold
("PREPA") bankruptcy claims related to insurance claims paid on matured
National-insured PREPA bonds. These transactions represented
approximately 35% of National's par claims to PREPA, monetized a portion
of National's salvage asset at a discount to National's previous carrying
value, and reduced potential volatility and ongoing risk of remediation
around the PREPA credit. Subsequent to the sale of these PREPA bankruptcy
claims, National does not have a material amount of additional par claims
to PREPA that have matured and can be sold.
Credit Suisse
In January of 2021, the Court overseeing
Suisse Securities (USA) LLC
"Credit Suisse"), involving the ineligibility of a majority of the loans in the
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
OVERVIEW (continued) HEMT
2007-2
RMBS transaction sponsored by Credit Suisse, issued an order declaring that Credit Suisse was liable to MBIA for approximately$604 million in damages. In February of 2021, the parties to the litigation entered into a settlement agreement pursuant to which Credit Suisse paidMBIA Corp. $600 million , and the Court entered an order dismissing the case. Refer to "Note 6: Loss and Loss Adjustment Expense Reserves" in the Notes to Consolidated Financial Statements for a discussion of our Credit Suisse put-back claims. RESULTS OF OPERATIONS
Summary of Consolidated Results
The following table presents a summary of our consolidated financial results for the years endedDecember 31, 2021 , 2020 and 2019. Refer to the "Liquidity and Capital Resources-Capital Resources-Insurance Statutory Capital " section for a discussion of National's andMBIA Insurance Corporation's capital position under statutory accounting principles ("U.S. STAT"). Years Ended December 31, In millions except for per share, percentage and share amounts 2021 2020 2019 Total revenues$ 189 $ 282 $ 280 Total expenses 634 860 637 Income (loss) before income taxes (445) (578) (357) Provision (benefit) for income taxes - - 2 Net income (loss)$ (445) $ (578) $ (359) Net income (loss) per basic and diluted common share$ (8.99) $ (9.78) $ (4.43) Effective tax rate 0.0% 0.0% -0.6% Adjusted net income (loss) (1)$ (261) $ (173) $ (17) Adjusted net income (loss) per diluted share (1)$ (5.27) $ (2.93) $ (0.21) Cost of shares repurchased $
-
Weighted average basic and diluted common shares outstanding 49,472,281 59,071,843 81,014,285
(1)-Adjusted net income (loss) and adjusted net income (loss) per diluted share are non-GAAP measures. Refer to the following Non-GAAP Adjusted Net Income (Loss) section for a discussion of adjusted net income (loss) and adjusted net income (loss) per diluted share and a reconciliation of GAAP net income (loss) to adjusted net income (loss) and GAAP net income (loss) per diluted share to adjusted net income (loss) per diluted share.
2021 vs. 2020 GAAP Results
Income (loss) Before Income Taxes
The decrease in consolidated total revenues was primarily due to VIE net losses
in 2021 compared with net gains in 2020 and a decrease in investment-related
revenues and gains, partially offset by gains on interest rate swaps and foreign
exchange gains in 2021 compared with net losses in 2020. Net losses of
consolidated variable interest entities ("VIEs") of $23 million during 2021
declined from net gains of $163 million during 2020. The unfavorable changes in
VIE revenues were primarily due to gains in 2020 from an increase in the Credit
Suisse
put-back
recoveries of $118 million . These
put-back
claims were settled and received in the first quarter of 2021. In addition, 2021
included losses of $14 million from the deconsolidation of VIEs compared with
gains of $37 million in 2020 related to a reversal of an allowance for credit
losses on the assets of a VIE. Also, 2020 included $18 million of net investment
income of VIEs with no comparable income for the same period of 2021 due to the
deconsolidation of VIEs in 2020. The decrease in investment related revenues
resulted from lower average investment yields in 2021 and higher gains from
sales of investments in 2020. In 2021, fair value gains were $36 million on our
interest rate swaps for which we receive floating rates compared with fair value
losses of $26 million during 2020.The fair value gains on our interest rate
swaps in 2021 were due to favorable changes in interest rates compared with
unfavorable changes in the same period of 2020. The foreign exchange gains in
2021 was due to the strengthening of the U.S. dollar compared with foreign
exchange losses in 2020 on Euro-denominated liabilities.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
RESULTS OF OPERATIONS (continued)
Consolidated total expenses for 2021 and 2020 included net insurance losses and
loss adjustment expense ("LAE") of $350 million and $530 million , respectively.
The decrease in losses and LAE was primarily due to a smaller write-down of
expected salvage collections from insured CDOs in 2021 when compared with 2020
and an incurred benefit from changes in risk-free rates on first-lien RMBS in
2021. These decreases losses and LAE were partially offset by an increase in net
losses and LAE on certain Puerto Rico credits. Refer to the following "Losses
and Loss Adjustment Expenses" sections of National and MBIA Corp. for additional
information on our insurance losses and LAE. In addition, interest expense was
lower in 2021 primarily due to the redemption of corporate debt in December of
2020. Also, interest expense of consolidated VIEs decreased in 2021 compared
with 2020 due to the deconsolidation of VIEs in 2020 and the repayment of the
outstanding insured senior notes of MBIA Corp.'s financing facility between MZ
Funding and certain purchasers ("Refinanced Facility") during 2021.
Provision for Income Taxes
For 2021 and 2020, our effective tax rate applied to our loss before income taxes was 0% compared with theU.S. statutory tax rate of 21% due to the full valuation allowance on the changes in our net deferred tax asset, which includes our net operating loss ("NOL"). As ofDecember 31, 2021 and 2020, the Company's valuation allowance against its net deferred tax asset was$1.1 billion and$966 million , respectively. Notwithstanding the full valuation allowance on its net deferred tax asset, the Company believes that it may be able to use some of its net deferred tax asset before the expirations associated with that asset based upon expected earnings at National. Accordingly, the Company will continue to re-evaluate its net deferred tax asset on a quarterly basis. There is no assurance that the Company will reverse any of its valuation allowance on its net deferred tax asset in the future. Refer to "Note 11: Income Taxes" in the Notes to Consolidated Financial Statements for a further discussion of income taxes, including the valuation allowance against the Company's net deferred tax asset and its accounting for tax uncertainties.
The CARES Act established new tax provisions including, but not limited to:
(1) five-year carryback of NOLs generated in 2018, 2019 and 2020; (2)
accelerated refund of alternative minimum tax credit carryforwards; and
(3) retroactive changes to allow accelerated depreciation for certain
depreciable property. The legislation did not have a material impact on the
Company's tax positions due to the lack of taxable income in the carryback
periods.
In December of 2020,Congress passed the Consolidated Appropriations Act ("the Act") to respond to the health and economic impacts of COVID-19. The Act includes a number of tax law changes, including the expansion of the Employee Retention Credit, important changes to the Paycheck Protection Program, and extension of a variety of expiring tax provisions. OnMarch 6, 2021 ,Congress passed the American Rescue Plan Act to further respond to the health and economic impacts of COVID-19. Among other changes, the legislation provided for an extension of the Employee Retention Credit through 2021. In November of 2021, theInfrastructure Investment and Jobs Act amended the law so that the Employee Retention Credit applied only to wages paid beforeOctober 1, 2021 . These legislations do not have a material impact on the Company's tax positions.
Non-GAAP
Adjusted Net Income (Loss)
In addition to our results prepared in accordance with accounting principles generally accepted inthe United States of America ("GAAP), we also analyze the operating performance of the Company using adjusted net income (loss) and adjusted net income (loss) per diluted common share, both non-GAAP measures. Since adjusted net income (loss) is used by management to assess performance and make business decisions, we consider adjusted net income (loss) and adjusted net income (loss) per diluted common share fundamental measures of periodic financial performance which are useful in understanding our results. Adjusted net income (loss) and adjusted net income (loss) per diluted common share are not substitutes for net income (loss) and net income (loss) per diluted common share determined in accordance with GAAP, and our definitions of adjusted net income (loss) and adjusted net income (loss) per diluted common share may differ from those used by other companies. 33
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
RESULTS OF OPERATIONS (continued)
Adjusted net income (loss) and adjusted net income (loss) per diluted common share include the after-tax results of the Company and remove the after-tax results of our international and structured finance insurance segment, comprising the results ofMBIA Corp. which given its capital structure and business prospects, we do not expect its financial performance to have a material economic impact onMBIA Inc. , as well as the following: • Mark-to-market gains (losses) on financial instruments - We remove the impact of mark-to-market
gains (losses) on financial instruments that primarily include interest
rate swaps and hybrid financial instruments. These amounts fluctuate
based on market interest rates, credit spreads and other market factors.
• Foreign exchange gains (losses)
- We remove foreign exchange gains (losses) on the remeasurement of
certain assets and liabilities and transactions in
non-functional
currencies. Given the possibility of volatility in foreign exchange
markets, we exclude the impact of foreign exchange gains (losses) to
provide a measurement of comparability of adjusted net income (loss).
• Net realized investment gains (losses), impaired securities and
extinguishment of debt
- We remove realized gains (losses) on the sale of investments, net
investment losses related to impairment of securities and net gains
(losses) on extinguishment of debt since the timing of these transactions
are subject to management's assessment of market opportunities and
conditions and capital liquidity positions.
• Income taxes
- We apply a zero effective tax rate for federal income tax purposes to
our
pre-tax
adjustments, if applicable, consistent with our consolidated effective
tax rate.
The following table presents our adjusted net income (loss) and adjusted net income (loss) per diluted common share and provides a reconciliation of GAAP net income (loss) to adjusted net income (loss) for the years endedDecember 31, 2021 , 2020 and 2019: Years Ended December 31, In millions, except share and per share amounts 2021 2020 2019 Net income (loss)$ (445) $ (578) $ (359) Less: adjusted net income adjustments: Income (loss) before income taxes of our international and structured finance insurance segment and eliminations (283) (391) (369) Adjustments to income before income taxes of ourU.S. public finance insurance and corporate segments: Mark-to-market gains (losses) on financial instruments (1) 39 (27) (39) Foreign exchange gains (losses) (1) 25 (35) 7 Net realized investment gains (losses) 5 48 129 Net investment losses related to impairments of securities - - (67) Net gains (losses) on extinguishment of debt 30 - (1) Other net realized gains (losses) - - (2) Adjusted net income adjustment to the (provision) benefit for income tax (2) - - - Adjusted net income (loss)$ (261) $ (173) $ (17) Adjusted net income (loss) per diluted common share (3)$ (5.27) $ (2.93) $ (0.21) (1)-Reported within "Net gains (losses) on financial instruments at fair value and foreign exchange" on the Company's consolidated statements of operations. (2)-Reported within "Provision (benefit) for income taxes" on the Company's consolidated statements of operations. (3)-Adjusted net income (loss) per diluted common share is calculated by taking adjusted net income (loss) divided by GAAP weighted average number of diluted common shares outstanding.
Book Value Adjustments Per Share
In addition to GAAP book value per share, for internal purposes management also
analyzes adjusted book value ("ABV") per share, changes to which we view as an
important indicator of financial performance. ABV is also used
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RESULTS OF OPERATIONS (continued)
by management in certain components of management's compensation. Since many of the Company's investors and analysts continue to use ABV to evaluate MBIA's share price and as the basis for their investment decisions, we present GAAP book value per share as well as the individual adjustments used by management to calculate its internal ABV metric. Management adjusts GAAP book value to remove the book value ofMBIA Corp. and for certain items which the Company believes will reverse from GAAP book value through GAAP earnings and comprehensive income, as well as add in the impact of certain items which the Company believes will be realized in GAAP book value in future periods. The Company has limited such adjustments to those items that it deems to be important to fundamental value and performance and for which the likelihood and amount can be reasonably estimated. The following provides a description of management's adjustments to GAAP book value:
• Negative Book value of
- We remove the negative book value of
given
which it operates, the priority given to its policyholders, surplus note
holders and preferred stock holders with respect to the distribution of
assets, and its legal structure, it is not and will not likely be in a
position to upstream any economic benefit to
does not face any material financial liability arising from MBIA Corp.
• Net unrealized (gains) losses on
available-for-sale
("AFS") securities excluding MBIA Corp.
- We remove net unrealized gains and losses on AFS securities recorded in
accumulated other comprehensive income since they will reverse from GAAP
book value when such securities mature. Gains and losses from sales and
impairments of AFS securities are recorded in book value through
earnings.
• Net unearned premium revenue in excess of expected losses of National
- We include net unearned premium revenue in excess of expected losses.
Net unearned premium revenue in excess of expected losses consists of the
financial guarantee unearned premium revenue of National in excess of
expected insurance losses, net of reinsurance and deferred acquisition
costs. In accordance with GAAP, a loss reserve on a financial guarantee
policy is only recorded when expected losses exceed the amount of
unearned premium revenue recorded for that policy. As a result, we only
add to GAAP book value the amount of unearned premium revenue in excess
of expected losses for each policy in order to reflect the full amount of
our expected losses. The Company's net unearned premium revenue will be
recognized in GAAP book value in future periods, however, actual amounts
could differ from estimated amounts due to such factors as credit
defaults and policy terminations, among others.
Since the Company has a full valuation allowance against its net deferred tax
asset and a zero consolidated effective tax rate, the book value per share
adjustments reflect a zero effective tax rate.
The following table provides the Company's GAAP book value per share and
management's adjustments to book value per share used in our internal analysis:
As of December 31, As of December 31,
In millions except share and per share amounts 2021 2020
Total shareholders' equity of MBIA Inc. $ (313) $ 136
Common shares outstanding 54,556,112 53,677,148
GAAP book value per share $ (5.73) $ 2.55
Management's adjustments described above:
Remove negative book value per share of MBIA
Corp. (35.94) (31.97)
Remove net unrealized gains (losses) on
available-for-sale
securities included in other comprehensive
income (loss) 2.02 2.86
Include net unearned premium revenue in excess
of expected losses 3.58 4.29
OurU.S. public finance insurance portfolio is managed through National. The financial guarantees issued by National provide unconditional and irrevocable guarantees of the payment of the principal of, and interest or other 35
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
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RESULTS OF OPERATIONS (continued)
amounts owing on, insured obligations when due or, in the event National has exercised, at its discretion, the right to accelerate the payment under its policies upon the acceleration of the underlying insured obligations due to default or otherwise. National's guarantees insure municipal bonds, including tax-exempt and taxable indebtedness ofU.S. political subdivisions, as well as utility districts, airports, healthcare institutions, higher educational facilities, housing authorities and other similar agencies and obligations issued by private entities that finance projects that serve a substantial public purpose. Municipal bonds and privately issued bonds used for the financing of public purpose projects are generally supported by taxes, assessments, user fees or tariffs related to the use of these projects, lease payments or other similar types of revenue streams. As ofDecember 31, 2021 , National had total insured gross par outstanding of$36.5 billion . National continues to monitor and remediate its existing insured portfolio and may also pursue strategic alternatives that could enhance shareholder value. Some state and local governments and territory obligors that National insures are experiencing financial and budgetary stress which may be exacerbated by COVID-19. As a result of COVID-19, we have increased our monitoring of certain credits. Financial and budgetary stress could lead to an increase in defaults by such entities on the payment of their obligations and, while such has not yet occurred materially, losses or impairments on a greater number of the Company's insured transactions. In particular,Puerto Rico had been experiencing significant fiscal stress and constrained liquidity, and in response,Congress passed PROMESA, which established the Oversight Board vested with the sole power to certify fiscal plans forPuerto Rico . Refer to the "U.S. Public Finance Insurance Puerto Rico Exposures" section for additional information on ourPuerto Rico exposures. We continue to monitor and analyze these situations and other stressed credits closely, and the overall extent and duration of stress affecting our insured credits remains uncertain.
The following table presents our
for the years ended
Years Ended December 31, Percent Change
In millions 2021 2020 2019 2021 vs. 2020 2020 vs. 2019
Net premiums earned $ 49 $ 57 $ 66 -14% -14%
Net investment income 58 70 98 -17% -29%
Net realized investment gains
(losses) 2 37 124 -95% -70%
Net gains (losses) on financial
instruments at fair value and
foreign exchange (2) 2 15 n/m -87%
Net investment losses related to
other-than-temporary impairments - - (67) n/m -100%
Fees and reimbursements 3 3 3 -% -%
Other net realized gains (losses) - (1) 2 -100% -150%
Revenues of consolidated VIEs:
Net gains (losses) on financial
instruments at fair value and
foreign exchange - - 64 n/m -100%
Other net realized gains (losses) - - (43) n/m -100%
Total revenues 110 168 262 -35% -36%
Losses and loss adjustment 227 163 53 39% n/m
Amortization of deferred
acquisition costs 11 11 16 -% -31%
Operating 51 48 49 6% -2%
Total expenses 289 222 118 30% 88%
Income (loss) before income taxes
144 n/m -138%
n/m-Percent change not meaningful.
NET PREMIUMS EARNED Net premiums earned on financial guarantees represent gross
premiums earned net of premiums ceded to reinsurers, and include scheduled
premium earnings and premium earnings from refunded
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
RESULTS OF OPERATIONS (continued)
issues. Refunding activity over the past several years has accelerated premium earnings in prior years and reduced the amount of scheduled premiums that would have been earned in the current year. Refunding activity can vary significantly from period to period based on issuer refinancing behavior. For 2021 and 2020, scheduled premiums earned were$36 million and$42 million , respectively, and refunded premiums earned were$13 million and$15 million , respectively. NET INVESTMENT INCOME The decrease in net investment income for 2021 compared with 2020 was primarily due to a lower average invested asset base in 2021 resulting from claim payments and payments of dividends toMBIA Inc. , and from purchases ofMBIA Inc. common shares during 2020. NET REALIZED INVESTMENT GAINS (LOSSES) For the year endedDecember 31, 2020 , net realized investment gains resulted from the sales of securities from the ongoing management of ourU.S. public finance investment portfolio, which includes ensuring National has adequate liquidity to pay claims. LOSSES AND LOSS ADJUSTMENT EXPENSES OurU.S. public finance insured portfolio management group is responsible for monitoring ourU.S. public finance segment's insured obligations. The level and frequency of monitoring of any insured obligation depends on the type, size, rating and our assessed performance of the insured issue. As a result of COVID-19, we have increased our monitoring of certain credits. Refer to "Note 6: Loss and Loss Adjustment Expense Reserves" in the Notes to Consolidated Financial Statements for additional information related to the Company's loss reserves. For 2021, losses and LAE incurred primarily related to changes in loss scenario assumptions on Puerto Rico HTA, PREPA and GO credits and the impact of an increase in risk-free rates used to discount net reserves. The loss and LAE incurred related to HTA was driven by changes in loss reserve scenario assumptions to reflect the most recent Plan of Adjustment including certain assumptions about recovery valuation on the date National expects to receive cash, bonds, and the contingent value instrument ("CVI"), which resulted in a decreased recovery value. Also in 2021, National modified its PREPA scenario assumptions to reflect actual and expected sales of recoverables on PREPA bankruptcy claims that have been fully satisfied by National's insurance claim payments, which decreased its expected PREPA recoveries, partially offset by additional expected recoveries under the PREPA RSA. In addition, during 2021, National modified its GO scenario assumptions to incorporate the final terms of the Plan of Adjustment. This included a commutation of 27% of National's outstanding insured bonds and an acceleration of National's remaining insured bonds. National also updated its GO loss reserve scenarios to include certain assumptions about recovery valuation on the date it expects to receive cash, bonds and the CVI, which resulted in an increased recovery value. For 2020, losses and LAE primarily related to certainPuerto Rico exposures as a result of updating scenarios and assumptions as well as a change in the timing on expected settlements, and losses related to an investor owned utility exposure, partially offset by the decline in risk-free rates used to discount net reserves which caused future recoveries to increase The following table presents information about ourU.S. public finance insurance loss recoverable assets and loss and LAE reserves liabilities as ofDecember 31, 2021 and 2020: In millions December 31, 2021 December 31, 2020 Percent Change Assets: Insurance loss recoverable $ 1,054 $ 1,220 -14% Reinsurance recoverable on paid and unpaid losses (1) 3 6 -50% Liabilities: Loss and LAE reserves 425 469 -9% Insurance loss recoverable-ceded (2) 55 48 15% Net reserve (salvage) $ (577) $ (709) -19%
(1)-Reported within "Other assets" on our consolidated balance sheets.
(2)-Reported within "Other liabilities" on our consolidated balance sheets.
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The insurance loss recoverable as ofDecember 31, 2021 decreased compared withDecember 31, 2020 primarily as a result of the sale of a portion of PREPA bankruptcy claims that have been fully satisfied by National's insurance claim payments. InJanuary 2022 , National completed the sale of its remaining PREPA bankruptcy claims. Loss and LAE reserves as ofDecember 31, 2021 declined compared withDecember 31, 2020 primarily due to actual payments made related to certainPuerto Rico exposures, partially offset by an increase in expected payments and unfavorable changes in future recoveries of unpaid losses due to changes in assumptions and an increase in risk-free discount rates.
POLICY ACQUISITION COSTS AND OPERATING EXPENSES
segment expenses for the years ended
presented in the following table:
Years Ended December 31, Percent Change
In millions 2021 2020 2019 2021 vs. 2020 2020 vs. 2019
Gross expenses $ 51 $ 48 $ 49 6% -2%
Amortization of deferred
acquisition costs $ 11 $ 11 $ 16 -% -31%
Operating 51 48 49 6% -2%
Total insurance expenses $ 62 $ 59 $ 65 5% -9%
Gross expenses represent total insurance expenses before the deferral of any
policy acquisition costs. Operating expenses increased in 2021 compared with
2020 primarily due to increases in legal costs.
When an insured obligation refunds, we accelerate to expense any remaining
deferred acquisition costs associated with the policy covering the refunded
insured obligation. We did not defer a material amount of policy acquisition
costs during 2021 or 2020 as we did not write any new insurance business in
those years.
INSURED PORTFOLIO EXPOSURE Financial guarantee insurance companies use a variety of approaches to assess the underlying credit risk profile of their insured portfolios. National uses both an internally developed credit rating system as well as third-party rating sources in the analysis of credit quality measures of its insured portfolio. In evaluating credit risk, we obtain, when available, the underlying rating(s) of the insured obligation before the benefit of National's insurance policy from nationally recognized rating agencies,Moody's Investor Services ("Moody's") andStandard & Poor's Financial Services LLC ("S&P"). Other companies within the financial guarantee industry may report credit quality information based upon internal ratings that would not be comparable to our presentation. We maintain internal ratings on our entire portfolio, and our ratings may be higher or lower than the underlying ratings assigned by Moody's or S&P. The following table presents the credit quality distribution of National'sU.S. public finance outstanding gross par insured as ofDecember 31, 2021 and 2020. Capital appreciation bonds ("CABs") are reported at the par amount at the time of issuance of the insurance policy. All ratings are as of the period presented and represent S&P underlying ratings, where available. If transactions are not rated by S&P, a Moody's equivalent rating is used. If transactions are not rated by either S&P or Moody's, an internal equivalent rating is used. Gross Par Outstanding In millions December 31, 2021 December 31, 2020 Rating Amount % Amount % AAA$ 1,682 4.6%$ 2,080 5.0% AA 14,874 40.8% 16,299 39.0% A 10,439 28.6% 12,888 30.8% BBB 6,187 17.0% 7,019 16.7% Below investment grade 3,269 9.0% 3,570 8.5% Total$ 36,451 100.0%$ 41,856 100.0% 38
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The following is a summary of exposures within the insured portfolio of ourU.S. public finance insurance segment related toPuerto Rico as ofDecember 31, 2021 . Debt National Gross Par Service Internal In millions Outstanding Outstanding Rating Puerto Rico Electric Power Authority (PREPA) $ 809$ 1,085 d Puerto Rico Commonwealth GO 224 295 dPuerto Rico Public Buildings Authority (PBA) (1) 156 200 dPuerto Rico Highway and Transportation Authority Transportation Revenue (PRHTA) 523 856 dPuerto Rico Highway and Transportation Authority-Subordinated Transportation Revenue (PRHTA) 27 33 d Puerto Rico Highway and Transportation (2) Authority Highway Revenue (PRHTA) 39 57 d University of Puerto Rico System Revenue 70 91 dInter American University ofPuerto Rico Inc. 17 21 a3 Total$ 1,865 $ 2,638 (1)-Additionally secured by the guarantee of theCommonwealth of Puerto Rico . (2)-Includes CABs that reflect the gross par amount at the time of issuance of the insurance policy. As ofDecember 31, 2021 , gross par outstanding plus CABs accreted interest was$41 million . OnJune 30, 2016 , PROMESA was signed into law by the President ofthe United States . PROMESA provides for the creation of the Oversight Board with powers relating to the development and implementation of a fiscal plan for the Commonwealth and each of its instrumentalities as well as a court-supervised Title III process that allowsPuerto Rico to restructure its debt if voluntary agreements cannot be reached with creditors through a collective action process. Following the resignation and replacement of several Oversight Board members, the Oversight Board has been reconstituted with four new members while three existing members have been reappointed by the President for another three year term. The newly elected Governor ofPuerto Rico has appointed himself as a non-voting member of the reconstituted Oversight Board. OnMay 3, 2017 , the Oversight Board certified and filed a petition under Title III of PROMESA forPuerto Rico with theDistrict Court of Puerto Rico thereby commencing a bankruptcy-like case for the Commonwealth GO. Under separate petitions, the Oversight Board subsequently commenced Title III proceedings for COFINA, PRHTA, PREPA and PBA onMay 5, 2017 ,May 21, 2017 ,July 2, 2017 andSeptember 27, 2019 , respectively. One of the proceedings was resolved onFebruary 4, 2019 , when the District ofPuerto Rico entered the order confirming the Third Amended Title III Plan of Adjustment for COFINA. The Title III cases for theCommonwealth of Puerto Rico and PBA were confirmed onJanuary 18, 2022 , and are expected to exit bankruptcy before the end of the first quarter of 2022. There can be no assurance that the Title III proceedings for PREPA and PRHTA will be resolved with similar outcomes. As a result of prior defaults, various stays and the Title III cases,Puerto Rico failed to make certain scheduled debt service payments for National insured bonds. As a consequence, National has paid gross claims in the aggregate amount of$1.8 billion relating to GO bonds, PBA bonds, PREPA bonds and PRHTA bonds throughDecember 31, 2021 , inclusive of the commutation payment and the additional payment in the amount of$66 million onDecember 17, 2019 related to COFINA. OnMay 2, 2019 , the Oversight Board and theOfficial Committee of Unsecured Creditors of all Title III Debtors (other than COFINA) (the "Committee") filed lien avoidance adversary complaints against several hundred defendants, including National, challenging the existence, extent, and enforceability of GO bondholders' liens. After an approximately five-month stay of litigation entered by the Court onJuly 24, 2019 , these adversary proceedings resumed pursuant to an interim schedule entered by the Court inDecember 2019 . OnFebruary 5 , 39
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2020,
the adversary proceeding. The adversary proceeding hearing was stayed
indefinitely by further order of the Court.
OnFebruary 22, 2021 , National agreed to join a plan support agreement, dated as ofFebruary 22, 2021 (the "GO PSA"), among the Oversight Board, certain holders of GO Bonds and PBA Bonds,Assured Guaranty Corp. andAssured Guaranty Municipal Corp , andSyncora Guarantee Inc. in connection with the GO and PBA Title III cases. The GO PSA provides that, among other things, National shall receive a pro rata share of allocable cash, newly issued General Obligation bonds, a contingent value instrument and certain fees. The GO PSA was amended onJanuary 30, 2022 (the "Amended GO PSA") to move the termination date fromJanuary 31, 2022 toMarch 15, 2022 . Pursuant to the GO PSA, the Oversight Board and National jointly obtained the entry of an order in the Title III court staying National's participation in actions related to the clawback of HTA funds from the Commonwealth, and National shall take no further action with respect to those proceedings subject to the Commonwealth plan becoming effective.
The Confirmation Hearing for the Commonwealth of Puerto Rico Title III case
concluded on
its final draft of the Modified Eighth Amended Plan of Adjustment for the
confirmation order. There can be no assurance that the plan will become
effective within the time permitted under the Amended GO PSA, currently
In October of 2021, bondholders voted to approve the GO PSA which included the option for National insured bondholders to choose between commuting their insurance policy with National or receiving a one-time cash payment equal to outstanding par and accrued interest via an acceleration of National's insurance policy. Insured bondholders were required to choose one of these two options. Therefore, shortly after implementation of the PSA National's insured GO exposure will be reduced to zero. The GO PSA was amended onJanuary 30, 2022 (the "Amended GO PSA") to move the termination date fromJanuary 31, 2022 toMarch 15, 2022 . OnJuly 24, 2019 , the Court entered an order staying certain adversary proceedings and contested matters untilDecember 31, 2019 , and imposing mandatory mediation underJudge Houser . Among the matters stayed in which National is either a party in interest or intervenor are the (i) PBA adversary proceeding seeking to recharacterize the PBA bonds as financings and (ii) GO adversary and HTA adversary proceedings, both challenging bondholder liens. Pursuant to interim schedules entered by the Court inDecember 2019 , the PBA adversary proceeding and the HTA adversary proceeding were to remain stayed untilMarch 11, 2020 , but the Court subsequently stayed all such adversary proceedings indefinitely subject to the progress of the GO confirmation process. As part of the Amended GO PSA, National's participation in this litigation will be stayed subject to the effective date of the Commonwealth plan of adjustment.
PBA
OnDecember 21, 2018 , the Oversight Board filed an adversary complaint seeking to disallow the PBA's administrative rent claims against the Commonwealth. The PBA bonds are payable from the rent the Commonwealth pays under its lease agreements with the PBA. The Oversight Board alleges that the Commonwealth has no obligation to make rent payments under section 365(d)(3) of the Bankruptcy Code and that the PBA is not entitled to a priority administrative expense claim under the leases. OnApril 16, 2019 , the Court entered an order setting a discovery schedule. OnSeptember 27, 2019 , the Oversight Board filed a Title III petition for the PBA.
The proceeding is currently stayed in the Title III court subject to the
occurrence of the effective date of the Commonwealth plan of adjustment.
PREPA
National's largest exposure to
PREPA.
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OnOctober 3, 2018 , National, together withAssured Guaranty Corp. ,Assured Guaranty Municipal Corp. , andSyncora Guarantee Inc. (collectively, "Movants") filed a motion in the Title III case for PREPA for relief from the automatic stay to allow Movants to exercise their statutory right to have a receiver appointed at PREPA (the "Receiver Motion"). This motion is stayed pending a resolution of the 9019 Order, discussed below. OnMay 3, 2019 , PREPA, the Oversight Board, thePuerto Rico Fiscal Agency andFinancial Advisory Authority ("AAFAF"), theAd Hoc Group of PREPA bondholders (the "Ad Hoc Group "), andAssured Guaranty Corp. andAssured Guaranty Municipal Corp. ("Assured") entered into the a restructuring support agreement ("RSA") which was amended onSeptember 9, 2019 to includeNational andSyncora Guarantee, Inc. ("Syncora") as supporting parties. Approximately 90% of PREPA's bondholders have joined the RSA. The RSA initially contemplated the filing of a plan of adjustment for PREPA byMarch 31, 2020 ; the timing of that action is now uncertain. The Oversight Board filed a status report with the Court onOctober 5, 2021 in which it stated its intention to file a PREPA plan of adjustment by the end of 2021 or early 2022. Pursuant to the RSA, the Oversight Board filed a Rule 9019 motion with the Title III court inMay 2019 seeking approval of the RSA (the "Settlement Motion") and a Motion to Dismiss the Receiver Motion. The RSA requires, upon entry of the order approving the Settlement Motion (the "9019 Order"), that Movants will withdraw the Receiver Motion, and theAd Hoc Group will support such withdrawal. The Receiver Motion and the Motion to Dismiss the Receiver Motion have been delayed several times, and most recently were adjourned due to the outbreak of COVID-19 until further notice. The debt restructuring contemplated by the RSA will not be effective until (i) confirmation of a plan of adjustment under thePuerto Rico Oversight, Management and Economic Stability Act ("PROMESA"), (ii) negotiation and consummation of definitive documentation and legal opinions, (iii) enactment and implementation of supportivePuerto Rico legislation and (iv) receipt ofPuerto Rico regulatory approval, each of which outcome is uncertain and subject to varying degrees of risk. In addition, the restructuring the RSA contemplates has received criticism from various parties including members of thePuerto Rico government and other stakeholders. This opposition could adversely affect the ability of the Oversight Board and RSA Parties to obtain the Rule 9019 Order and approve the RSA. OnFebruary 18, 2022 , theAd Hoc Group of PREPA Bondholders filed an urgent motion to compel mediation and impose deadlines for a PREPA Plan, and onFebruary 22, 2022 , National filed a joinder to the motion. The Court agreed to set an expedited briefing schedule on the urgent motion, and will consider the pleadings on submission not beforeMarch 1, 2022 . As contemplated by the RSA, onJuly 1, 2019 the Oversight Board and AAFAF also filed an adversary complaint against the Trustee for the PREPA Bonds, challenging the validity of the liens arising under the Trust Agreement that secure insured obligations of National. The adversary proceeding is stayed until the earlier of (a) 60 days after the Court denies the 9019 Motion, (b) consummation of a Plan, (c) 60 days after the filing by the Oversight Board and AAFAF of a Litigation Notice, or (d) further order of the Court. Certain objectors to the RSA have filed adversary proceedings challenging the payment priority arising under the PREPA Trust Agreement, alleging that they are entitled to be paid in full before National and other bondholders have any lien on or recourse to PREPA's assets, including pursuant to the RSA. All litigation on this matter has been stayed until the Court places the 9019 Motion back on the calendar for hearing. OnJune 22, 2020 , the Oversight Board and thePuerto Rico P3 Authority announced an agreement and contract withLUMA Energy, LLC ("LUMA") which calls forLUMA to take full responsibility for the operation and maintenance of PREPA's transmission and distribution system; the contract runs for 15-years following a transition period expected to take 12 months. PREPA retains ownership of the system as well as responsibility for the power generation system.LUMA assumed responsibility for operations onJune 1, 2021 . OnSeptember 18, 2020 ,FEMA and thePR COR3 Authority announced the commitment byFEMA to provide approximately$11.6 billion (net of the required 10% cost share) to fund projects built by PREPA and thePR Department of Education ; approximately$9.4 billion (net) of this amount is designated for PREPA.LUMA is now 41
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involved in the planning of the related projects as well as proceedings related thereto in front thePR Energy Bureau as well as PR-COR3. In October of 2021 and January of 2022, National sold$199 million and$231 million , respectively, of PREPA bankruptcy claims related to insurance claims paid on matured National-insured PREPA bonds. These transactions represented approximately 35% of National's par claims to PREPA, monetized a portion of National's salvage asset at a discount to National's previous carrying value, and reduced potential volatility and ongoing risk of remediation around the PREPA credit. Subsequent to the sale of these PREPA bankruptcy claims, National does not have a material amount of additional par claims to PREPA that have matured and can be sold.
PRHTA
OnMay 20, 2019 , the Oversight Board and the Committee filed a lien avoidance adversary complaint against fiscal agents, holders, and insurers of certain PRHTA bonds, including National. The complaint challenges the extent and enforceability of certain security interests in PRHTA's revenues. Pursuant to an interim schedule entered by the Court inDecember 2019 , the Court has stayed the proceedings, with the understanding that the issues raised in these proceedings would be addressed in new adversary proceedings filed by the Oversight Board onJanuary 16, 2020 . Subsequent to those filings, these proceedings were stayed by order of the Court. OnApril 12, 2021 , National,Assured Guaranty Corp. ,Assured Guaranty Municipal Corp. and the Oversight Board reached an agreement in principle settling certain HTA clawback claims in the Commonwealth Title III case and providing for a distribution to HTA holders of cash, bonds and a contingent value instrument subject to completing negotiations on a plan support agreement in respect of the HTA PSA. OnMay 5, 2021 , National,Assured Guaranty Corp. ,Assured Guaranty Municipal Corp. and the Oversight Board entered into the HTA PSA.
Status of
In January of 2021, the Oversight Board requested that thePuerto Rico government submit a proposed updated Fiscal Plan for the Commonwealth. The Commonwealth submitted a revised fiscal plan onMarch 8, 2021 . OnMarch 15, 2021 , the Oversight Board deemed thePuerto Rico government's fiscal plan to be non-compliant, and has required the government to submit a revised updated fiscal plan, including all financial and supporting models. The Oversight Board certified the government's fiscal plan onApril 23, 2021 . For the remaining component units, the Oversight Board certified fiscal plans for PREPA, theUniversity of Puerto Rico (the "University") and PRHTA onMay 27, 2021 . The Oversight Board also certified the fiscal year 2022 budgets for Commonwealth, PREPA, the University and PRHTA onJune 27, 2021 . In connection with the anticipated implementation of the Commonwealth and PRHTA plans of adjustments, the Oversight Board has commenced the process of approving revised Fiscal Plans for fiscal year 2023, which commences onJuly 1, 2022 .
The University is not a debtor in Title III and continues to be current on its
debt service payment. However, the University is subject to a standstill
agreement with its senior bondholders, which has been extended to
2022
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The following table presents our scheduled gross debt service due on ourPuerto Rico insured exposures as ofDecember 31, 2021 , for each of the subsequent five years endingDecember 31 and thereafter: In millions 2022 2023 2024 2025 2026 Thereafter TotalPuerto Rico Electric Power Authority (PREPA)$ 140 $ 137 $ 137 $ 105 $ 58 $ 508 $ 1,085 Puerto Rico Commonwealth GO (1) 19 14 13 75 62 112 295Puerto Rico Public Buildings Authority (PBA) 9 27 43 36 11 74 200Puerto Rico Highway and Transportation Authority Transportation Revenue (PRHTA) 27 36 33 36 35 689 856Puerto Rico Highway and Transportation Authority-Subordinated Transportation Revenue (PRHTA) 9 1 1 1 - 21 33Puerto Rico Highway and Transportation Authority Highway Revenue (PRHTA) 2 4 2 2 2 45 57University of Puerto Rico System Revenue 7 12 11 16 5 40 91Inter American University of Puerto Rico Inc. 3 3 3 3 1 8 21 Total$ 216 $ 234 $ 243 $ 274 $ 174 $ 1,497 $ 2,638
(1)-GO scheduled debt service payments are based on the original insurance
policy and do not include updates based on the GO PSA.
Corporate Segment
Our corporate segment consists of general corporate activities, including providing support services toMBIA Inc.'s subsidiaries and asset and capital management. Support services are provided by our service company, MBIA Services, and include, among others, management, legal, accounting, treasury, information technology, and insurance portfolio surveillance, on a fee-for-service basis. Capital management includes activities related to servicing obligations issued byMBIA Inc. and its subsidiaries,MBIA Global Funding, LLC ("GFL") andMBIA Investment Management Corp. ("IMC"). During 2020, the remaining investment agreements issued by IMC matured, and as ofDecember 31, 2020 , there were no outstanding investment agreements issued by IMC.MBIA Inc. issued debt to finance the operations of the MBIA group. GFL raised funds through the issuance of medium-term notes ("MTNs") with varying maturities, which were in turn guaranteed byMBIA Corp. GFL lent the proceeds of these MTN issuances toMBIA Inc. IMC, along withMBIA Inc. , provided customized investment agreements, guaranteed byMBIA Corp. , for bond proceeds and other public funds for such purposes as construction, loan origination, escrow and debt service or other reserve fund requirements. The Company has ceased issuing new MTNs and investment agreements and the outstanding liability balances and corresponding asset balances have declined over time as liabilities matured, terminated or were called or repurchased. All of the debt within the corporate segment is managed collectively and is serviced by available liquidity.
The following table summarizes the consolidated results of our corporate segment
for the years ended
Years Ended December 31, Percent Change
In millions 2021 2020 2019 2021 vs. 2020 2020 vs. 2019
Net investment income $ 29 $ 30 $ 37 -3% -19%
Net realized investment gains
(losses) 3 11 5 -73% 120%
Net gains (losses) on financial
instruments at fair value and
foreign exchange 56 (74) (59) n/m 25%
Net gains (losses) on
extinguishment of debt 30 - (1) n/m -100%
Fees and reimbursements 55 56 53 -2% 6%
Other net realized gains (losses) (7) - (2) n/m -100%
Total revenues 166 23 33 n/m -30%
Operating 74 72 73 3% -1%
Interest 75 84 92 -11% -9%
Total expenses 149 156 165 -4% -5%
Income (loss) before income taxes
-113% 1%
n/m-Percent change not meaningful.
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NET REALIZED INVESTMENT GAINS (LOSSES) Net realized investment gains (losses) are due to the sales of securities from the ongoing management of our corporate segment investment portfolio.NET GAINS (LOSSES) ON FINANCIAL INSTRUMENTS AT FAIR VALUE AND FOREIGN EXCHANGE The favorable change in net gains (losses) on financial instruments at fair value and foreign exchange for 2021 compared with 2020 was primarily due to changes in the value of interest rate swaps and foreign currency fluctuations. 2021 includes net gains of$36 million related to the impact of increases in interest rates on the fair values of interest rate swaps compared with fair value net losses of$26 million on these swaps in 2020 due to decreases in interest rates. In addition, 2021 includes foreign currency gains of$26 million on Euro-denominated liabilities as a result of the strengthening of theU.S. dollar in 2021 compared with foreign exchange losses of$33 million on these liabilities as a result of the weakening of theU.S. dollar in 2020.
extinguishment of debt for 2021 include gains from purchases, at discounts, of
MTNs issued by the Company.
OTHER NET REALIZED GAINS (LOSSES) Other net realized losses increased for 2021
compared with 2020 primarily as a result of settling litigation disputes in
2021.
INTEREST EXPENSE Interest expense decreased for 2021 compared with 2020
primarily due to the redemption of corporate debt in December of 2020.
International and Structured Finance Insurance Segment
Our international and structured finance insurance portfolio is managed throughMBIA Corp. The financial guarantees issued byMBIA Corp. generally provide unconditional and irrevocable guarantees of the payment of the principal of, and interest or other amounts owing on, non-U.S. public finance and global structured finance insured obligations when due or, in the eventMBIA Corp. has the right, at its discretion, to accelerate insured obligations upon default or otherwise.MBIA Corp. insures sovereign-related and sub-sovereign bonds, privately issued bonds used for the financing of utilities, toll roads, bridges, airports, public transportation facilities, and other types of infrastructure projects serving a substantial public purpose. Global structured finance and asset-backed obligations typically are securities repayable from cash flows generated by a specified pool of assets, such as residential and commercial mortgages, structured settlements, consumer loans, and corporate loans and bonds.MBIA Insurance Corporation insures the investment agreements written byMBIA Inc. , and ifMBIA Inc. were to have insufficient assets to pay amounts due upon maturity or termination,MBIA Insurance Corporation would be required to make such payments under its insurance policies.MBIA Insurance Corporation also insures debt obligations of other affiliates, including GFL, andMZ Funding LLC ("MZ Funding"). In addition,MBIA Corp. insures obligations under certain types of derivative contracts.MBIA Insurance Corporation provides 100% reinsurance to its subsidiary,MBIA Mexico S.A. de C.V. ("MBIA Mexico"). As ofDecember 31, 2021 ,MBIA Corp.'s total insured gross par outstanding was$5.2 billion .MBIA Corp. has contributed to the Company's NOL carryforward, which is used in the calculation of our consolidated income taxes. IfMBIA Corp. becomes profitable, it is not expected to make any tax payments under our tax sharing agreement. Based onMBIA Corp.'s current projected earnings and our expectation that it will not write significant new business, we believe it is unlikely thatMBIA Corp. will generate significant income in the near future. As a result ofMBIA Corp.'s capital structure and business prospects, we do not expect its financial performance to have a material economic impact onMBIA Inc. 44
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The following table presents our international and structured finance insurance
segment results for the years ended
Years Ended December 31, Percent Change
In millions 2021 2020 2019 2021 vs. 2020 2020 vs. 2019
Net premiums earned $ 32 $ 24 $ 27 33% -11%
Net investment income 6 5 7 20% -29%
Net realized investment gains
(losses) - - 1 -% -100%
Change in fair value of insured
derivatives:
Realized gains (losses) and
other settlements on insured
derivatives - (1) (10) -100% -90%
Unrealized gains (losses) on
insured derivatives - 7 25 -100% -72%
Net change in fair value of
insured derivatives - 6 15 -100% -60%
Net gains (losses) on financial
instruments at fair value and
foreign exchange (14) (14) (34) -% -59%
Fees and reimbursements 17 12 21 42% -43%
Other net realized gains
(losses) 1 1 4 -% -75%
Revenues of consolidated VIEs:
Net investment income - 18 34 -100% -47%
Net gains (losses) on financial
instruments at fair value and
foreign exchange (8) 108 41 -107% n/m
Other net realized gains
(losses) (15) 37 (20) -141% n/m
Total revenues 19 197 96 -90% 105%
Losses and loss adjustment 123 367 189 -66% 94%
Amortization of deferred
acquisition costs 13 16 21 -19% -24%
Operating 24 27 26 -11% 4%
Interest 109 116 131 -6% -11%
Expenses of consolidated VIEs:
Operating 6 5 9 20% -44%
Interest 26 57 89 -54% -36%
Total expenses 301 588 465 -49% 26%
Income (loss) before income
taxes $ (282) $ (391) $ (369) -28% 6%
n/m-Percent change not meaningful.
NET PREMIUMS EARNED Our international and structured finance insurance segment generates net premiums from insurance policies accounted for as financial guarantee contracts. Certain premiums are eliminated in our consolidated financial statements as a result of the Company consolidating VIEs. In addition, we generate net premiums from insured derivatives that are included in "Realized gains (losses) and other settlements on insured derivatives" on our consolidated statements of operations. Net premiums from insured derivatives have decreased significantly over time due to the maturity and termination of contracts.
The following table provides net premiums earned from our financial guarantee
contracts for the years ended
Years Ended December 31, Percent Change
In millions 2021 2020 2019 2021 vs. 2020 2020 vs. 2019
Net premiums earned:
Non-U.S. $ 29 $ 18 $ 21 61% -14%
U.S. 3 6 6 -50% -%
Total net premiums earned $ 32 $ 24 $ 27 33% -11%
VIEs (eliminated in consolidation)
(3) -143% 133%
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of Operations (continued)
RESULTS OF OPERATIONS (continued)
Net premiums earned represent gross premiums earned net of premiums ceded to reinsurers, and include scheduled premium earnings and premium earnings from refunded issues. The increase in net premiums earned for 2021 compared with 2020 was due to the acceleration of premium earnings related to the termination of an international public finance insurance policy during the third quarter of 2021. The negative VIE net premiums earned (eliminated in consolidation) for 2020 was primarily due to the termination of policies, resulting in the reversal of previously eliminated net premiums in excess of cash received.NET GAINS (LOSSES) ON FINANCIAL INSTRUMENTS AT FAIR VALUE AND FOREIGN EXCHANGE In 2021, the net losses were primarily due to losses from foreign currency revaluations of premium receivables and loss reserves denominated in Chilean unidad de fomento and Unidad de Inversion, respectively, as a result of fluctuations in the value of theU.S. dollar to those foreign currencies. The net losses for 2020 were primarily due to unfavorable mark-to-market fluctuations on derivatives. FEES AND REIMBURSEMENTS The increase in fees and reimbursements for 2021 compared with 2020 was primarily due to an increase in waiver and consent fees related to the termination of an international public finance insurance policy during the third quarter of 2021. Due to the transaction-specific nature inherent in fees and reimbursements, these revenues can vary significantly from period to period. REVENUES OF CONSOLIDATED VIEs: NET INVESTMENT INCOME There was net investment income of$18 million in 2020 with no comparable income for 2021. During 2020, we deconsolidated all remaining VIEs for which net investment income was recorded. REVENUES OF CONSOLIDATED VIEs:NET GAINS (LOSSES) ON FINANCIAL INSTRUMENTS AND FOREIGN EXCHANGE The unfavorable change for 2021 compared with 2020 was primarily due to gains of$118 million related to the increase in expected recoveries from the Credit Suisse put-back claims in 2020. REVENUES OF CONSOLIDATED VIEs: OTHER NET REALIZED GAINS (LOSSES) The losses for 2021 related to losses from the deconsolidation of VIEs. The gains for 2020 were primarily due to$37 million of reversals of allowances for credit losses. LOSSES AND LOSS ADJUSTMENT EXPENSES Our international and structured finance insured portfolio management group is responsible for monitoring international and structured finance insured obligations. The level and frequency of monitoring of any insured obligation depends on the type, size, rating and our assessed performance of the insured issue. As a result of COVID-19, we have increased our monitoring of certain credits. Refer to "Note 6: Loss and Loss Adjustment Expense Reserves" in the Notes to Consolidated Financial Statements for a description of the Company's loss reserving policy and additional information related to its loss reserves. Losses and LAE incurred decreased for the year endedDecember 31, 2021 , when compared to the same period of 2020, primarily due to a smaller write-down of expected salvage collections from insured CDOs in 2021 when compared with 2020. In addition, during 2021, risk-free rates used to discount our first-lien RMBS net loss reserves increased, which decreased the present value of loss reserves, compared with a decrease in those risk-free rates during 2020, which increased the present value of the net loss reserves. As a result of the consolidation of VIEs, loss and LAE excludes losses and LAE benefits of$21 million and$144 million for the years endedDecember 31, 2021 andDecember 31, 2020 , respectively, as VIE losses and LAE activity is eliminated in consolidation. 46
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
RESULTS OF OPERATIONS (continued)
Refer to "Note 6: Loss and Loss Adjustment Expense Reserves" in the Notes to Consolidated Financial Statements for further information about our insurance loss recoverable and loss and LAE reserves. The following table presents information about our insurance loss recoverable and loss and LAE reserves for the years endedDecember 31, 2021 and 2020: December 31, December 31, Percent In millions 2021 2020 Change Assets: Insurance loss recoverable $ 242 $ 457 -47% Reinsurance recoverable on paid and unpaid losses (1) 5 5 0% Liabilities: Loss and LAE reserves 469 521 -10% Net reserve (salvage) $ 222 $ 59 n/m
(1)-Reported within "Other assets" on our consolidated balance sheets.
n/m-Percent change not meaningful.
The insurance loss recoverable primarily relates to reimbursement rights arising from the payment of claims onMBIA Corp.'s policies insuring certain CDOs and RMBS. Such payments also entitleMBIA Corp. to exercise certain rights and remedies to seek recovery of its reimbursement entitlements. The decrease in the insurance loss recoverable from 2020 is primarily due to a decline in expected salvage collections on insured CDOs as well as the collection of salvage related to certain CDO transactions and the collection of excess spread related to the termination of certain second-lien RMBS trusts. Refer to "Note 1: Business Developments and Risks and Uncertainties" in the Notes to Consolidated Financial Statements for information regarding risks and uncertainties related to future collections of estimated recoveries. Refer to "Note 6: Loss and Loss Adjustment Expense Reserves" in the Notes to Consolidated Financial Statements for additional information about our loss reserving policy, loss reserves and recoverables.POLICY ACQUISITION COSTS AND OPERATING EXPENSES International and structured finance insurance segment expenses for the years endedDecember 31, 2021 , 2020 and 2019 are presented in the following table: Years Ended December 31, Percent Change In millions 2021 2020 2019 2021 vs. 2020 2020 vs. 2019 Gross expenses$ 25 $ 28 $ 26 -11% 8% Amortization of deferred acquisition costs$ 13 $ 16 $ 21 -19% -24% Operating 24 27 26 -11% 4% Total insurance expenses$ 37 $ 43 $ 47 -14% -9% Gross expenses represent total insurance expenses before the deferral of any policy acquisition costs. We did not defer a material amount of policy acquisition costs during 2021 or 2020 as no new business was written. Policy acquisition costs in these periods were primarily related to ceding commissions and premium taxes on installment policies written in prior periods. INTEREST EXPENSE Interest expense relates toMBIA Corp.'s surplus notes which are indexed to London Interbank Offered Rate ("LIBOR"). The decrease in 2021 compared with 2020 is due to changes in LIBOR.
INTEREST EXPENSE OF CONSOLIDATED VIEs Interest expense of consolidated VIEs
decreased in 2021 compared with 2020 due to the deconsolidation of VIEs in 2020
and the repayment of the outstanding insured senior notes of the Refinanced
Facility during 2021.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
RESULTS OF OPERATIONS (continued)
International and Structured Finance Insurance Portfolio Exposures
Credit Quality
The credit quality of our international and structured finance insured portfolio is assessed in the same manner as ourU.S. public finance insured portfolio. As ofDecember 31, 2021 and 2020, 26% and 24%, respectively, of our international and structured finance insured portfolio was rated below investment grade, before giving effect to MBIA's guarantees, based on MBIA's internal ratings, which are generally more current than the underlying ratings provided by S&P and Moody's for this subset of our insured portfolio. Below investment grade insurance policies primarily include our residential mortgage and CDO exposures.
Selected Portfolio Exposures
The following is a summary of selected significant exposures within our residential mortgage insured portfolio of our international and structured finance insurance segment. In addition, as ofDecember 31, 2021 ,MBIA Corp. insured$231 million of CDOs and related instruments. We may experience considerable incurred losses in certain of these sectors. There can be no assurance that the loss reserves recorded in our financial statements will be sufficient or that we will not experience losses on transactions on which we currently have no loss reserves, in particular if the economy deteriorates. We may seek to purchase, directly or indirectly, obligations guaranteed byMBIA Corp. or seek to commute policies. The amount of insurance exposure reduced, if any, and the nature of any such actions will depend on market conditions, pricing levels from time to time, and other considerations. In some cases, these activities may result in a reduction of loss reserves, but in all cases they are intended to limit our ultimate losses and reduce the future volatility in loss development on the related policies. Our ability to purchase guaranteed obligations and to commute policies will depend on management's assessment of available liquidity.
Residential Mortgage Exposure
MBIA Corp. insures RMBS backed by residential mortgage loans, including second-lien RMBS transactions and first-lien alternative A-paper ("Alt-A") and subprime mortgage loans directly through RMBS securitizations. The following table presents the gross par outstanding ofMBIA Corp.'s total direct RMBS insured exposure as ofDecember 31, 2021 and 2020. Amounts include the gross par outstanding related to transactions that the Company consolidates under accounting guidance for VIEs. In millions Gross Par Outstanding as of December 31, December 31, Percent Collateral Type 2021 2020 Change Second-lien (1) $ 4 $ 373 -99% Alt-A First-lien (2) 760 825 -8% Subprime First-lien 215 285 -25% Prime First-lien 4 6 -33% Total $ 983 $ 1,489 -34% (1)-Decline in second-lien RMBS exposure was primarily due to the termination of insured exposures. (2)-Includes international exposure of$238 million and$237 million as ofDecember 31, 2021 andDecember 31, 2020 , respectively.
Reinsurance enables the Company to cede exposure for purposes of syndicating
risk. The Company generally retains the right to reassume the business ceded to
reinsurers under certain circumstances, including a reinsurer's rating downgrade
below specified thresholds. Currently, we do not intend to use reinsurance to
decrease the insured exposure in our portfolio. Refer to "Note 13: Insurance in
Force" in the Notes to Consolidated Financial Statements in this Form
10-K
for a further discussion about reinsurance agreements.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
We use a liquidity risk management framework, the primary objective of which is to match liquidity resources to needs. We monitor our cash and liquid asset resources using cash forecasting and stress-scenario testing. Members of MBIA's senior management meet regularly to review liquidity metrics, discuss contingency plans and establish target liquidity levels. We evaluate and manage liquidity on a legal-entity basis to take into account the legal, regulatory and other limitations on available liquidity resources within the enterprise. Additionally, we continue to monitor the current COVID-19 pandemic with respect to our cash and liquid asset positions and resources. Refer to the "Overview-COVID-19 and the Economic Environment" section for additional information about liquidity and COVID-19. Consolidated Cash Flows
Information about our consolidated cash flows by category is presented on our
consolidated statements of cash flows. The following table summarizes our
consolidated cash flows for the years ended
Years Ended December 31, Percent Change
In millions 2021 2020 2019 2021 vs. 2020 2020 vs. 2019
Statement of cash flow data:
Net cash provided (used) by:
Operating activities $ 511 $ (390) $ (368) n/m 6%
Investing activities (61) 1,738 1,267 -104% 37%
Financing activities (457) (1,265) (1,096) -64% 15%
Effect of exchange rate changes
on cash and cash equivalents - 1 - -100% n/m
Cash and cash
equivalents-beginning of year 167 83 280 101% -70%
Cash and cash equivalents-end of
year $ 160 $ 167 $ 83 -4% 101%
n/m-Percent change not meaningful.
Operating activities
Net cash provided by operating activities increased for 2021 compared with 2020 primarily due to proceeds received from loan repurchase commitments of$600 million as a result of the settlement of the Credit Suisse litigation in the first quarter of 2021, an increase in proceeds from recoveries and reinsurance of$198 million primarily from the sale of certain PREPA bankruptcy claims and a decrease in losses and loss adjustment expenses paid of$133 million .
Investing activities
Net cash used by investing activities increased for 2021 compared with 2020 primarily due to paydowns of held-to-maturity investments of$890 million within VIEs, a decrease in net cash provided by purchases, sales, paydowns and maturities of AFS investments of$626 million , and an increase in net cash used for purchases, sales, paydowns and maturities of short-term investments of$242 million .
Financing activities
Net cash used by financing activities decreased for 2021 compared with 2020
primarily due to decreases in principal paydowns of VIE notes of
and decreases in purchases of treasury stock of
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
LIQUIDITY AND CAPITAL RESOURCES (continued)
Consolidated Investments
The following discussion of investments, including references to consolidated investments, excludes investments reported under "Assets of consolidated variable interest entities" on our consolidated balance sheets. Investments of VIEs support the repayment of VIE obligations and are not available to settle obligations of MBIA. Fixed-maturity securities purchased by the Company are generally designated as AFS. Our AFS investments comprise high-quality fixed-income securities and short-term investments. The credit quality distribution of the Company's AFS fixed-maturity investment portfolios, excluding short-term investments, are based on ratings from Moody's and alternate ratings sources, such as S&P or the best estimate of the ratings assigned by the Company, have been used for a small percentage of securities that are not rated by Moody's. As ofDecember 31, 2021 , the weighted average credit quality rating of the Company's AFS fixed-maturity investment portfolio, excluding short-term investments, was Aa and 92% of the investments were investment grade. The fair values of securities in the Company's AFS fixed-maturity investment portfolio are sensitive to changes in interest rates. Decreases in interest rates generally result in increases in the fair values of fixed-maturity securities and increases in interest rates generally result in decreases in the fair values of fixed-maturity securities. As ofDecember 31, 2021 and 2020, the Company had$139 million and$177 million of unrealized gains net of deferred taxes related to its investment portfolio recorded in accumulated other comprehensive income within equity. The decrease in unrealized gains during 2021 resulted from higher interest rates, partially offset by tightening credit spreads. Refer to "Note 2: Significant Accounting Policies," and "Note 8: Investments" in the Notes to Consolidated Financial Statements for further information about our accounting policies and investments.
Insured Investments
MBIA's consolidated investment portfolio includes investments that are insured
by various financial guarantee insurers ("Insured Investments"), including
investments insured by National and MBIA Corp. ("Company-Insured Investments").
When purchasing Insured Investments, the Company's third-party portfolio manager
independently assesses the underlying credit quality, structure and liquidity of
each investment, in addition to the creditworthiness of the insurer. Insured
Investments are diverse by sector, issuer and size of holding. The third-party
portfolio manager assigns underlying ratings to Insured Investments without
giving effect to financial guarantees based on underlying ratings assigned by
Moody's or S&P, when a rating is not published by Moody's. When a Moody's or S&P
underlying rating is not available, the underlying rating is based on the
portfolio manager's best estimate of the rating of such investment. If the
Company determines that declines in the fair values of third-party Insured
Investments are related to credit loss, the Company will establish an allowance
for credit losses and recognize the credit component through earnings.
As of December 31, 2021 , Insured Investments at fair value represented
$279 million or 10% of consolidated investments, of which $251 million or 9% of
consolidated investments were Company-Insured Investments. As of December 31,
2021 , based on the actual or estimated underlying ratings of our consolidated
investment portfolio, without giving effect to financial guarantees, the
weighted average rating of only the Insured Investments in the investment
portfolio would be in the below investment grade range. Without giving effect to
the National and MBIA Corp. guarantees of the Company-Insured Investments in the
consolidated investment portfolio, as of December 31, 2021 , based on actual or
estimated underlying ratings, the weighted average rating of the consolidated
investment portfolio was in the A range. The weighted average rating of only the
Company-Insured Investments was in the below investment grade range, and
investments rated below investment grade in the Company-Insured Investments were
8% of the total consolidated investment portfolio.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
LIQUIDITY AND CAPITAL RESOURCES (continued)
National Liquidity
The primary sources of cash available to National are:
• principal and interest receipts on assets held in its investment
portfolio, including proceeds from the sale of assets; • recoveries associated with insurance loss payments; and • installment premiums.
The primary uses of cash by National are:
• loss payments and LAE on insured transactions;
• payments of dividends; and
• payments of operating expenses, taxes and investment portfolio asset
purchases.
As of
investments comprised of highly rated commercial paper, money market funds and
municipal,
The insurance policies issued or reinsured by National provide unconditional and irrevocable guarantees of payments of the principal of, and interest or other amounts owing on, insured obligations when due. In the event of a default in payment of principal, interest or other insured amounts by an issuer, National generally promises to make funds available in the insured amount within one to three business days following notification. In some cases, the amount due can be substantial, particularly if the default occurs on a transaction to which National has a large notional exposure or on a transaction structured with large, bullet-type principal maturities. TheU.S. public finance insurance segment's financial guarantee contracts generally cannot be accelerated by a party other than the insurer which helps to mitigate liquidity risk in this segment. In October of 2021 and January of 2022, National sold$199 million and$231 million , respectively, of PREPA bankruptcy claims related to insurance claims paid on matured National-insured PREPA bonds. These transactions monetized a portion of National's salvage asset at a discount to National's previous carrying value and, as a result, strengthened National's balance sheet, increased National's projected investment income and furthers the Company's objective of reducing its exposure toPuerto Rico over the short to medium term. Subsequent to the sale of these PREPA bankruptcy claims, National does not have a material amount of additional par claims to PREPA that have matured and can be sold. Corporate Liquidity
The primary sources of cash available to
• dividends from National;
• available cash and liquid assets not subject to collateral posting
requirements;
• principal and interest receipts on assets held in its investment
portfolio, including proceeds from the sale of assets; and • access to capital markets.
The primary uses of cash by
• servicing outstanding unsecured corporate debt obligations and MTNs;
• meeting collateral posting requirements under investment agreements and
derivative arrangements;
• payments related to interest rate swaps;
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
LIQUIDITY AND CAPITAL RESOURCES (continued)
• payments of operating expenses; and • funding share repurchases and debt buybacks.
As of
equivalents and other investments comprised of highly rated commercial paper and
During 2021,MBIA Inc. returned$10 million of tax payments to National as a result of tax losses incurred by National. The return was pursuant to the terms of the tax sharing agreement. Under the CARES Act, National's 2020 taxable loss became subject to a five-year NOL carry-back, which allowed it to recover taxes paid in years in which the tax rate was 35%. There can be no assurance that any future payments under the Tax Escrow Account from subsidiaries will be released toMBIA Inc. due to deductible or creditable tax attributes of those subsidiaries and/or the market value performance of the assets supporting the Tax Escrow Account. Based on our projections of National's andMBIA Corp.'s future earnings and losses, we expect that for the foreseeable future National will be the primary source of payments toMBIA Inc. There can be no assurance as to the amount and timing of any future dividends from National. Also, absent a special dividend subject to the approval of the NYSDFS, we expect the declared and paid dividend amounts from National to be limited to the prior twelve months of adjusted net investment income as reported in its most recent statutory filings. Refer to the following "Capital Resources" section for additional information on payments of dividends. We do not expectMBIA Inc. to receive dividends or utilize the Company's tax escrow account fromMBIA Corp. Currently, a significant portion of the cash and securities held byMBIA Inc. is pledged against investment agreement liabilities, the Asset Swap (simultaneous repurchase and reverse repurchase agreement) and derivatives, which limits its ability to raise liquidity through asset sales. As the market value or rating eligibility of the assets pledged againstMBIA Inc.'s obligations declines, we are required to pledge additional eligible assets in order to meet minimum required collateral amounts against these liabilities. To mitigate these risks, we seek to maintain cash and liquidity resources that we believe will be sufficient to make all payments due on our obligations and to meet other financial requirements, such as posting collateral. Contingent liquidity resources include: (1) sales of invested assets exposed to credit spread stress risk, which may occur at losses; (2) termination and settlement of interest rate swap agreements; and (3) accessing the capital markets. These actions, if taken, are expected to result in either additional liquidity or reduced exposure to adverse credit spread movements. There can be no assurance that these actions will be sufficient to fully mitigate this risk.
The primary sources of cash available to
• recoveries associated with insurance loss payments; • installment premiums and fees; and
• principal and interest receipts on assets held in its investment
portfolio, including the proceeds from the sale of assets.
The primary uses of cash by
• loss and LAE or commutation payments on insured transactions; • repayment of MZ Funding's debt obligations; and • payments of operating expenses. As ofDecember 31, 2021 and 2020,MBIA Corp. held cash and investments of$544 million and$243 million , respectively, of which$310 million and$130 million , respectively, were cash and cash equivalents or liquid investments comprised of money market funds and municipal,U.S. Treasury and corporate bonds that were immediately available toMBIA Insurance Corporation . The increase in cash and investments in 2021 was due to the collection of proceeds from the settlement of the Credit Suisse litigation. 52
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
LIQUIDITY AND CAPITAL RESOURCES (continued)
Insured transactions that require payment of scheduled debt service payments insured when due or payment in full of the principal insured at maturity could present liquidity risk forMBIA Corp. , as any salvage recoveries from such payments could be recovered over an extended period of time after the payment is made.MBIA Corp. is generally required to satisfy claims within one to three business days, and as a result seeks to identify potential claims in advance through our monitoring process. In order to monitor liquidity risk and maintain appropriate liquidity resources, we use the same methodology as we use to monitor credit quality and losses within our insured portfolio, including stress scenarios. During 2021,MBIA Corp. repaid in full the outstanding amount of the senior notes of the Refinanced Facility. As ofDecember 31, 2021 , the subordinated notes betweenMZ Funding andMBIA Inc. remained outstanding. These subordinated notes and the related interest are eliminated in our consolidated financial statements. For additional information on these notes, refer to "Note 10: Debt" in the Notes to Consolidated Financial Statements.
Advances Agreement
MBIA Inc. , National,MBIA Insurance Corporation and certain other affiliates are party to an intercompany advances agreement (the "MBIA Advances Agreement"). The MBIA Advances Agreement permits National to make advances toMBIA Inc. and other MBIA group companies that are party to the agreement at a rate per annum equal to LIBOR plus 0.25%. The agreement also permits other affiliates to make advances to National orMBIA Insurance Corporation at a rate per annum equal to LIBOR minus 0.10%. Advances by National cannot exceed 3% of its net admitted assets as of the last quarter end. As ofDecember 31, 2021 and 2020, there were no amounts drawn under the agreement.
Contractual Obligations
The following table summarizes the Company's future estimated cash payments relating to contractual obligations as ofDecember 31, 2021 . Estimating these payments requires management to make estimates and assumptions regarding these obligations. The estimates and assumptions used by management are described below. Since these estimates and assumptions are subjective, actual payments in future periods may vary from those reported in the following table. Refer to the Notes to the Consolidated Financial Statements for additional information about these contractual obligations, including "Note 6: Loss and Loss Adjustment Expense Reserves" and "Note 13: Insurance in Force" for additional information about our insurance claim obligations and exposures under our insurance contracts. Due Within In millions Total 1 YearU.S. public finance insurance segment: Gross insurance claim obligations (1)$ 1,985 $ 469 Lease liability 26 3 Corporate segment: Long-term debt 434 20 Investment agreements 379 11 Medium-term notes 826 55 International and structured finance insurance segment: Gross insurance claim obligations (1) 967 41 Surplus notes 3,210 1,173 Total$ 7,827 $ 1,772
(1)-Amounts exclude any recoveries the Company expects to receive related to
these estimated payments or to prior paid claims.
Gross insurance claim obligations represent the future value of
probability-weighted payments the Company's insurance companies expects to make
(before reinsurance and the consolidation of VIEs) under insurance policies for
which the Company has recorded loss reserves. Certain probability-weighted
payments incorporate commutation and/or acceleration of specific exposures and,
therefore, expected payments may differ from those
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
LIQUIDITY AND CAPITAL RESOURCES (continued)
the Company is contractually obligated to make. Also, these amounts exclude any recoveries National orMBIA Corp. expect to receive related to these estimated payments or to claims paid in prior periods. For certain of our estimated future payments, the amount of recoveries expected to be received in the future will offset some or all of the payments. Estimated potential insurance claim payments for obligations issued by VIEs consolidated in our international and structured finance insurance segment are included within "Gross insurance claim obligations" in the preceding table. Obligations of these VIEs are collateralized by assets held by the VIEs, and investors in such obligations do not have recourse to the general credit of MBIA. As ofDecember 31, 2021 , VIE notes issued by issuer-sponsored consolidated VIEs totaled$291 million and are not considered contractual obligations of MBIA beyond MBIA's insurance claim obligation. The Company's involvement with VIEs is continually reassessed as required by consolidation guidance, and may result in consolidation or deconsolidation of VIEs in future periods. As the Company consolidates and deconsolidates VIEs, the amount of VIE debt obligations recorded on its balance sheet may change significantly. Long-term debt, investment agreements, MTNs and surplus notes include principal and interest and exclude premiums or discounts. Liabilities issued at discounts reflect principal due at maturity. Interest payments on floating rate obligations are estimated using applicable forward rates. Principal and interest on callable obligations or obligations that allow investors to withdraw funds prior to legal maturity are based on the expected call or withdrawal dates of such obligations. Liabilities denominated in foreign currencies are presented inU.S. dollars using applicable exchange rates as ofDecember 31, 2021 . Principal payments under investment agreements are based on contractual maturity and exclude puttable options. All other principal payments are based on contractual maturity dates. Refer to "Note 10: Debt" in the Notes to Consolidated Financial Statements for information aboutMBIA Inc.'s debt obligations. Included in the international and structured finance insurance segment's surplus notes due within one year is$1.1 billion of unpaid interest related to 2013 through 2021 interest payments for whichMBIA Insurance Corporation's requests for approval to pay was not approved by the NYSDFS. This deferred interest payment will be due on the first business day on or after whichMBIA Insurance Corporation obtains approval to make such payment from NYSDFS. No interest will accrue on the deferred interest. There can be no assurance that the NYSDFS will approve any subsequent payments, or that it will approve any payment by its scheduled interest payment date. Refer to "MBIA Insurance Corporation-Capital and surplus" section below for additional information onMBIA Insurance Corporation's surplus notes and statutory capital.
Capital Resources
The Company manages its capital resources to minimize its cost of capital while
maintaining appropriate claims-paying resources ("CPR") for National and MBIA
Corp. The Company's capital resources consist of total shareholders' equity,
total debt issued by MBIA Inc. for general corporate purposes, surplus notes
issued by MBIA Corp. , and the Refinanced Facility prior to being repaid. Total
capital resources were $0.9 billion and $1.6 billion as of December 31, 2021 and
2020, respectively.
In addition to scheduled debt maturities, from time to time, we reduce unsecured
debt through calls or repurchases. Also, MBIA Inc. may repurchase or National
may purchase outstanding MBIA Inc. common shares when we deem it beneficial to
our shareholders. Purchases or repurchases of debt and common stock may be made
from time to time in the open market or in private transactions as permitted by
securities laws and other legal requirements. We may also choose to redeem debt
obligations where permitted by the relevant agreements. MBIA Inc. or National
may acquire or redeem outstanding common shares of MBIA Inc. and outstanding
debt obligations at prices when we deem it beneficial to our shareholders. Refer
to "Note 17: Common and Preferred Stock" in the Notes to Consolidated Financial
Statements for information about MBIA Inc.'s share repurchases and National's
share purchases and "Note 10: Debt" in the Notes to Consolidated Financial
Statements for information about debt repurchases or redemptions. We seek to
maintain sufficient liquidity and capital resources to meet the Company's
general corporate needs and debt service. Based on MBIA Inc.'s debt service
requirements and expected operating expenses, we expect that MBIA Inc. will have
sufficient resources to satisfy
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
LIQUIDITY AND CAPITAL RESOURCES (continued)
its debt obligations and its general corporate needs over time from distributions from National; however, there can be no assurance thatMBIA Inc. will have sufficient resources to do so. In addition, the Company may also consider raising third-party capital. Refer to "Capital, Liquidity and Market Related Risk Factors" in Part I, Item 1A of this Form 10-K and the "Liquidity and Capital Resources-Liquidity-Corporate Liquidity" section included herein for additional information aboutMBIA Inc.'s liquidity.
National andMBIA Insurance Corporation are incorporated and licensed in, and are subject to primary insurance regulation and supervision byNew York State Department of Financial Services ("NYSDFS"). MBIA Mexico is regulated by the Comisión Nacional de Seguros y Fianzas inMexico .MBIA Corp.'s Spanish Branch is subject to local regulation inSpain .National andMBIA Insurance Corporation each are required to file detailed annual financial statements, as well as interim financial statements, with the NYSDFS and similar supervisory agencies in each of the other jurisdictions in which it is licensed. These financial statements are prepared in accordance withNew York State and theNational Association of Insurance Commissioners' statements ofU.S. STAT and assist our regulators in evaluating minimum standards of solvency, including minimum capital requirements, and business conduct.
National had statutory capital of$2.0 billion as ofDecember 31, 2021 and 2020. As ofDecember 31, 2021 , National's unassigned surplus was$1.0 billion . For 2021, National had statutory net income of$55 million . Refer to the "National-Claims-Paying Resources (Statutory Basis)" section below for additional information on National's statutory capital. In order to maintain itsNew York State financial guarantee insurance license, National is required to maintain a minimum of$65 million of policyholders' surplus. National is also required to maintain contingency reserves to provide protection to policyholders in the event of extreme losses in adverse economic events. As ofDecember 31, 2021 , National was in compliance with its aggregate risk limits under New York Insurance Law ("NYIL"), but was not in compliance with certain of its single risk limits. Since National does not comply with certain of its single risk limits, the NYSDFS could prevent National from transacting any new financial guarantee insurance business. NYIL regulates the payment of dividends by financial guarantee insurance companies and provides that such companies may not declare or distribute dividends except out of statutory earned surplus. Under NYIL, the sum of (i) the amount of dividends declared or distributed during the preceding 12-month period and (ii) the dividend to be declared may not exceed the lesser of (a) 10% of policyholders' surplus, as reported in the latest statutory financial statements or (b) 100% of adjusted net investment income for such 12-month period (the net investment income for such 12-month period plus the excess, if any, of net investment income over dividends declared or distributed during the two-year period preceding such 12-month period), unless the Superintendent of the NYSDFS approves a greater dividend distribution based upon a finding that the insurer will retain sufficient surplus to support its obligations. National had positive earned surplus as ofDecember 31, 2021 from which it may pay dividends, subject to the limitations described above. During 2021, National declared and paid a dividend of$60 million to its ultimate parent,MBIA Inc. We expect the as-of-right declared and paid dividend amounts from National to be limited to prior year adjusted net investment income for the foreseeable future.
National-Claims-Paying Resources (Statutory Basis)
CPR is a key measure of the resources available to National to pay claims under
its insurance policies. CPR consists of total financial resources and reserves
calculated on a statutory basis. CPR has been a common measure used by financial
guarantee insurance companies to report and compare resources and continues to
be used by MBIA's management to evaluate changes in such resources. We have
provided CPR to allow investors and analysts to evaluate National using the same
measure that MBIA's management uses to evaluate National's
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
LIQUIDITY AND CAPITAL RESOURCES (continued)
resources to pay claims under its insurance policies. There is no directly
comparable GAAP measure. Our calculation of CPR may differ from the calculation
of CPR reported by other companies.
National's CPR and components thereto, as of
presented in the following table:
As of As of
December 31, December 31,
In millions 2021 2020
Policyholders' surplus $ 1,569 $ 1,526
Contingency reserves 402 445
Statutory capital 1,971 1,971
Unearned premiums 311 355
Present value of installment premiums
(1) 121 129
Premium resources
(2) 432 484
Net loss and LAE reserves
(1) (386) (301)
Salvage reserves on paid claims
(1) 944 961
Gross loss and LAE reserves 558 660
Total claims-paying resources $ 2,961 $ 3,115
(1)-Calculated using a discount rate of 3.65% and 3.49% as of December 31, 2021
and 2020, respectively.
(2)-Includes financial guarantee and insured derivative related premiums.
MBIA Insurance Corporation had statutory capital of$134 million as ofDecember 31, 2021 compared with$273 million as ofDecember 31, 2020 . As ofDecember 31, 2021 ,MBIA Insurance Corporation's negative unassigned surplus was$1.9 billion . For 2021,MBIA Insurance Corporation had a statutory net loss of$129 million . Refer to the "MBIA Insurance Corporation-Claims-Paying Resources (Statutory Basis)" section below for additional information onMBIA Insurance Corporation's statutory capital. In order to maintain itsNew York State financial guarantee insurance license,MBIA Insurance Corporation is required to maintain a minimum of$65 million of policyholders' surplus.MBIA Insurance Corporation is also required to maintain contingency reserves to provide protection to policyholders in the event of extreme losses in adverse economic events. Pursuant to a non-disapproval by the NYSDFS, and in accordance with NYIL,MBIA Insurance Corporation released to surplus$125 million of excessive contingency reserves during 2021. As ofDecember 31, 2021 ,MBIA Insurance Corporation was in compliance with its aggregate risk limits under the NYIL, but was not in compliance with certain of its single risk limits. SinceMBIA Insurance Corporation does not comply with its single risk limits, the NYSDFS could preventMBIA Insurance Corporation from transacting any new financial guarantee insurance business. Due to its significant earned surplus deficit,MBIA Insurance Corporation has not had the statutory capacity to pay dividends sinceDecember 31, 2009 . Based on estimated future income,MBIA Insurance Corporation is not expected to have any statutory capacity to pay dividends. The NYSDFS has not approvedMBIA Insurance Corporation's requests to make interest payments onMBIA Insurance Corporation's Surplus Notes dueJanuary 15, 2033 (the "Surplus Notes") since, and including, theJanuary 15, 2013 interest payment. The NYSDFS has cited bothMBIA Insurance Corporation's liquidity and financial condition as well as the availability of "free and divisible surplus" as the basis for such non-approvals. As ofJanuary 15, 2022 , the most recent scheduled interest payment date, there was$1.1 billion of unpaid interest on the par amount outstanding of$953 million of the Surplus Notes. Under Section 1307 of the NYIL and the Fiscal Agency Agreement governing the surplus notes, Surplus Note payments may be made only with the prior approval by the NYSDFS and ifMBIA Insurance Corporation has sufficient "Eligible Surplus", or as we believe, "free and divisible surplus" as an appropriate calculation of "Eligible Surplus." As ofDecember 31, 2021 , MBIA 56
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
LIQUIDITY AND CAPITAL RESOURCES (continued)
Insurance Corporation had "free and divisible surplus" of$80 million . There is no assurance the NYSDFS will approve Surplus Note payments, notwithstanding the sufficiency ofMBIA Insurance Corporation's liquidity and financial condition. The unpaid interest on the Surplus Notes will become due on the first business day on or after whichMBIA Insurance Corporation obtains approval to pay some or all of such unpaid interest. No interest has been accrued or will accrue on the deferred interest.
MBIA Insurance Corporation-Claims-Paying Resources (Statutory Basis)
CPR is a key measure of the resources available toMBIA Corp. to pay claims under its insurance policies. CPR consists of total financial resources and reserves calculated on a statutory basis. CPR has been a common measure used by financial guarantee insurance companies to report and compare resources, and continues to be used by MBIA's management to evaluate changes in such resources. We have provided CPR to allow investors and analysts to evaluateMBIA Corp. , using the same measure that MBIA's management uses to evaluateMBIA Corp.'s resources to pay claims under its insurance policies. There is no directly comparable GAAP measure. Our calculation of CPR may differ from the calculation of CPR reported by other companies.
presented in the following table:
As of As of
December 31, December 31,
In millions 2021 2020
Policyholders' surplus $ 97 $ 106
Contingency reserves 37 167
Statutory capital 134 273
Unearned premiums 46 79
Present value of installment premiums
(1) 48 73
Premium resources
(2) 94 152
Net loss and LAE reserves
(1) 266 (478)
Salvage reserves on paid claims (3) (4)
(1) 231 1,045
Gross loss and LAE reserves 497 567
Total claims-paying resources $ 725 $ 992
(1)-Calculated using a discount rate of 4.99% and 5.10% as of December 31, 2021
and 2020, respectively.
(2)-Includes financial guarantee and insured derivative related premiums.
(3)-This amount primarily consists of expected recoveries related to the
Company's CDOs and excess spread.
(4)-This amount primarily consists of expected recoveries related to the
Company's
put-back,
CDOs and excess spread.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We prepare our consolidated financial statements in accordance with GAAP, which requires the use of estimates and assumptions. Refer to "Note 2: Significant Accounting Policies" in the Notes to Consolidated Financial Statements for a discussion of our significant accounting policies and methods used in the preparation of our consolidated financial statements. The following accounting estimates are viewed by management to be critical because they require significant judgment on the part of management. Management has discussed and reviewed the development, selection, and disclosure of critical accounting estimates with the Company's Audit Committee. Financial results could be materially different if other methodologies were used or if management modified its assumptions.
Loss and Loss Adjustment Expense Reserves
Loss and LAE reserves are established by loss reserve committees in each of our major operating insurance companies (National andMBIA Insurance Corporation ) and reviewed by our executive Loss Reserve Committee, 57
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
CRITICAL ACCOUNTING POLICIES AND ESTIMATES (continued)
which consists of members of senior management. Loss and LAE reserves include case basis reserves and accruals for LAE incurred with respect to non-derivative financial guarantees. Case basis reserves represent our estimate of expected losses to be paid under insurance contracts, net of expected recoveries, on insured obligations that have defaulted or are expected to default. These reserves require the use of judgment and estimates with respect to the occurrence, timing and amount of paid losses and recoveries on insured obligations. Given that the reserves are based on such estimates and assumptions, there can be no assurance that the actual ultimate losses will not be greater than or less than such estimates, resulting in the Company recognizing additional or reversing excess loss and LAE reserves through earnings. We take into account a number of variables in establishing specific case basis reserves for individual policies that depend primarily on the nature of the underlying insured obligation. These variables include the nature and creditworthiness of the issuers of the insured obligations, expected recovery rates on unsecured obligations, the projected cash flow or market value of any assets pledged as collateral on secured obligations, and the expected rates of recovery, cash flow or market values on such obligations or assets. Factors that may affect the actual ultimate realized losses for any policy include economic conditions and trends, political developments, the extent to which sellers/servicers comply with the representations or warranties made in connection therewith, levels of interest rates, borrower behavior, the default rate and salvage values of specific collateral, and our ability to enforce contractual rights through litigation and otherwise. Also, any adverse developments on macroeconomic factors resulting from COVID-19 could result in new or additional losses on insured obligations. Our remediation strategy for an insured obligation that has defaulted or is expected to default may also have an impact on our loss reserves. In establishing case basis loss reserves, we calculate the present value of probability-weighted estimated loss payments, net of estimated recoveries, using a discount rate equal to the risk-free rate applicable to the currency and the weighted average remaining life of the insurance contract. Yields onU.S. Treasury offerings are used to discount loss reserves denominated inU.S. dollars, which represent the majority of our loss reserves. Similarly, yields on foreign government offerings are used to discount loss reserves denominated in currencies other than theU.S. dollar. Refer to "Note 6: Loss and Loss Adjustment Expense Reserves" in the Notes to Consolidated Financial Statements for further information on our loss reserves and recoveries, including critical accounting estimates used in the determination of these amounts.
Valuation of Financial Instruments
We have categorized our financial instruments measured at fair value into the
three-level hierarchy according to accounting guidance for fair value
measurements and disclosures based on the significance of pricing inputs to the
measurement in its entirety. Fair value measurements of financial instruments
that use quoted prices in active markets for identical assets or liabilities are
generally categorized as Level 1, fair value measurements of financial
instruments that use quoted prices in markets that are not active where
significant inputs are observable are generally categorized as Level 2, and fair
value measurements of financial instruments where significant inputs are not
observable are generally categorized as Level 3. We categorize our financial
instruments based on the lowest level category at which we can generate reliable
fair values. The determination of reliability requires management to exercise
judgment. The degree of judgment used to determine the fair values of financial
instruments generally correlates to the degree that pricing is not observable.
The fair value measurements of financial instruments held or issued by the
Company are determined through the use of observable market data when available.
Market data is obtained from a variety of third-party sources, including dealer
quotes. If dealer quotes are not available for an instrument that is
infrequently traded, we use alternate valuation methods, including either dealer
quotes for similar contracts or modeling using market data inputs. The use of
alternate valuation methods generally requires considerable judgment in the
application of estimates and assumptions and changes to these variables may
produce materially different values.
58
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
CRITICAL ACCOUNTING POLICIES AND ESTIMATES (continued)
The fair value pricing of assets and liabilities is a function of many components which include interest rate risk, market risk, liquidity risk and credit risk. For financial instruments that are internally valued by the Company, as well as those for which the Company uses broker quotes or pricing services, credit risk is typically incorporated by using appropriate credit spreads or discount rates as inputs. Substantially all of the Company's investments carried and reported at fair value are priced by independent third parties, including pricing services and brokers. Instruments that trade infrequently and, therefore, have little or no price transparency are classified within Level 3 of the fair value hierarchy. Also included in Level 3 are financial instruments that have significant unobservable inputs deemed significant to the instrument's overall fair value. Level 3 assets represented approximately 3% and 20% of total assets measured at fair value on a recurring basis as ofDecember 31, 2021 and 2020, respectively. Level 3 liabilities represented approximately 75% and 68% of total liabilities measured at fair value on a recurring basis as ofDecember 31, 2021 and 2020, respectively. Refer to "Note 7: Fair Value of Financial Instruments" in the Notes to Consolidated Financial Statements for further information about our financial assets and liabilities that are accounted for at fair value, including valuation techniques and significant inputs used to estimate fair values.
RECENT ACCOUNTING PRONOUNCEMENTS
Refer to "Note 3: Recent Accounting Pronouncements" in the Notes to Consolidated Financial Statements for a discussion of accounting guidance recently adopted by the Company.
Interbank Offered Rates Transition
InJuly 2017 , theU.K. Financial Conduct Authority (the "U.K. Authority") announced that after 2021, it will no longer persuade or require banks to submit rates for LIBOR. Subsequently, onNovember 30, 2020 ,ICE Benchmark Administration , the administrator for LIBOR, announced plans to cease publication (i) immediately afterDecember 31, 2021 of one week and two month USD LIBOR settings and (ii) immediately following the LIBOR publication onJune 30, 2023 of the remaining USD LIBOR settings i.e., overnight and one, three, six and twelve month settings. While we expect LIBOR to be available in substantially its current form until at least the end of June of 2023, there is uncertainty that it will become unavailable prior to that point, which may adversely affect the value of, return on and trading market for our financial assets and liabilities that are based on or are linked to LIBOR. The Company has identified LIBOR transition risk related to its insurance portfolio exposures that reference or are indexed to LIBOR, insured interest rate swaps referencing LIBOR, financial investments indexed to an interbank offered rate, including LIBOR, andMBIA Corp.'s surplus notes. Currently, the Company is evaluating the impact of such changes on existing exposures, transactions and debt and developing the processes and protocols to execute the upcoming LIBOR transition.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company's market risk exposures relate to changes in interest rates, foreign exchange rates and credit spreads that affect the fair value of its financial instruments, primarily investment securities, MTNs and investment agreement liabilities. The Company's investments are primarilyU.S. dollar-denominated fixed-income securities including municipal bonds,U.S. government bonds, corporate bonds, MBS and asset-backed securities. In periods of rising and/or volatile interest rates, foreign exchange rates and credit spreads, profitability could be adversely affected should the Company have to liquidate these securities. The Company minimizes its exposure to interest rate risk, foreign exchange risk and credit spread movement through active portfolio management to ensure a proper mix of the types of securities held and to stagger the maturities of its fixed-income securities. 59
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk (continued)
INTEREST RATE SENSITIVITY
Interest rate sensitivity can be estimated by projecting a hypothetical instantaneous increase or decrease in interest rates. The following table presents the estimated pre-tax change in fair value of the Company's financial instruments as ofDecember 31, 2021 from instantaneous shifts in interest rates: Change in Interest Rates 300 Basis Point 200 Basis Point 100 Basis Point 100 Basis Point 200 Basis Point 300 Basis Point In millions Decrease Decrease Decrease Increase Increase Increase Estimated change in fair value $ 373 $ 214 $ 94 $ (76) $ (138) $ (188)
FOREIGN EXCHANGE RATE SENSITIVITY
The Company is exposed to foreign exchange rate risk in respect of liabilities denominated in currencies other thanU.S. dollars. Certain liabilities included in our corporate segment are denominated in currencies other thanU.S. dollars. The majority of the Company's foreign exchange rate risks is with the Euro. Foreign exchange rate sensitivity can be estimated by projecting a hypothetical instantaneous increase or decrease in foreign exchange rates. The following table presents the estimated pre-tax change in fair value of the Company's financial instruments as ofDecember 31, 2021 from instantaneous shifts in foreign exchange rates: Change in Foreign Exchange Rates Dollar Weakens Dollar Strengthens In millions 20% 10% 10% 20%
Estimated change in fair value
$ 47 CREDIT SPREAD SENSITIVITY Credit spread sensitivity can be estimated by projecting a hypothetical instantaneous increase or decrease in credit spreads. The following table presents the estimated pre-tax change in fair value of the Company's financial instruments as ofDecember 31, 2021 from instantaneous shifts in credit spread curves. It was assumed that all credit spreads move by the same amount. It is more likely that the actual changes in credit spreads will vary by security. The changes in fair value reflect partially offsetting effects as the value of the investment portfolios generally changes in an opposite direction from the liability portfolio: Change in Credit Spreads 50 Basis Point 50 Basis Point 200 Basis Point In millions Decrease Increase Increase Estimated change in fair value $ 61 $ (56) $ (195) 60
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Table of Contents
OLD REPUBLIC INTERNATIONAL CORP – 10-K – Management Analysis of Financial Position and Results of Operations ($ in Millions, Except Share Data)
EVEREST RE GROUP LTD – 10-K – Management's Discussion and Analysis of Financial Condition and Results of Operation
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