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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 "Risk Factors" in Part II, Item 1A and "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 2022 and 2021 items and
year-to-year comparisons between 2022 and 2021 results. Discussions of 2020
items and year-to-year comparisons between 2021 and 2020 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 ended
2021
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 subsidiaries ("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 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. The Company has also announced its retention of a financial advisor to assist in exploring strategic alternatives that could enhance shareholder value.
Economic Environment
U.S. economic activity indicators point to modest growth in spending and production, with robust job gains and a low unemployment rate. Inflation remains elevated. TheUkraine andRussia conflict continues to cause human and economic hardship, which is creating upward pressure on inflation and is weighing on global economic activity. With theFederal Open Market Committee ("FOMC") seeking to achieve maximum employment and 2% inflation, theFOMC has increased its target range for the federal funds rate to 4.50% to 4.75% at its most recent meetings. Economic and financial market trends could impact the Company's financial results. Economic improvement at the state and local level strengthens the credit quality of the issuers of our insured municipal bonds, improves the performance of our insuredU.S. public finance portfolio and could reduce the amount of National's potential incurred losses. Also, higher energy and oil prices could have an adverse impact on certain sales taxes to the extent consumer spending decreases as a result. Some states and municipalities may experience a decrease in revenues if their economies are reliant on the oil and gas industries. In addition, higher projected interest rates could adversely affect the values of our Company's investment portfolio, but increase investment portfolio yield and income, increase the value of the Company's interest rate swaps, and decrease the present value of loss reserves.
We do not insure any sovereign or sub-sovereign debt of
Additionally, we have an immaterial amount of direct or indirect Russian or
and unrealized losses on these investments in 2022. Refer to the following
"Results of Operations-
additional information on these credit losses.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
OVERVIEW (continued) 2022 Business Developments
The following is a summary of 2022 business developments:
• During 2022, the
instrumentalities ("Puerto Rico") defaulted on scheduled debt service for
National insured bonds and National paid gross claims in the aggregate of
service outstanding related to
to the
2023, PREPA defaulted on scheduled debt service for National insured
bonds and National paid gross claims in the aggregate of $18 million .
PREPA
• On March 8, 2022 , the Puerto Rico Fiscal Agency and Financial Advisory
Authority ("AAFAF") and PREPA terminated the pending restructuring
support agreement. On
judges to commence mediation among the Financial Oversight and Management
of holders of PREPA Senior Bonds, Assured, National and Syncora. The
mediation initially terminated on
through
2023. On
Agreement ("PREPA PSA") with the Oversight Board, on behalf of itself and
as the sole Title III representative of PREPA. An amended reorganization
plan for PREPA and related disclosure statement, including the PREPA PSA,
was filed onFebruary 9, 2023 . There is no assurance the amended plan of adjustment will ultimately be confirmed and go effective.
• As of
bankruptcy claims related to insurance claims paid on matured
National-insured PREPA bonds. These sales monetized a portion of
National's salvage asset and reduced potential volatility and ongoing
risk of remediation around the PREPA credit.
GO and HTA
• On
dated as ofFebruary 22, 2021 (the "GO PSA"), among the Oversight Board, certain holders of Puerto Rico Commonwealth GO ("GO") Bonds and Puerto
with the Puerto Rico Commonwealth GO ("GO") and PBA Title III cases. The
GO PSA went effective and was implemented on
things, National received cash, including certain fees, newly issued
General Obligation bonds ("GO Bonds") and a contingent value instrument
("CVI") totaling approximately $1.0 billion . The CVI is intended to
provide creditors with additional recoveries based on potential
outperformance of Puerto Rico 5.5% Sales and Use Tax receipts based on
the projections in the 2020 certified fiscal plan, subject to certain
caps. Subsequent to the GO PSA implementation, National made $277 million
of acceleration and commutation payments pursuant to the GO PSA.
Accordingly, National's GO and PBA gross par outstanding and debt service
outstanding have been reduced to zero from approximately
$495 million , respectively.
• On
settling certain clawback claims and providing for a distribution of
cash, bonds and a CVI to
("HTA") bondholders subject to completing negotiations on a plan support
agreement in respect of a plan of adjustment (the "HTA PSA"). On May 5 ,
2021, National,
and the Oversight Board entered into the HTA PSA. OnMay 2, 2022 , the Oversight Board filed the Title III Plan of Adjustment for the Puerto
with the Disclosure Statement and supporting documents. On
the Disclosure Statement was approved by the Court. During July of 2022,
National received
relating to HTA. The Court entered the HTA confirmation
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
OVERVIEW (continued)
order on
Plan effective date, National made
commutation payments pursuant to the HTA PSA. Accordingly, National's HTA
gross par outstanding and debt service outstanding have been reduced to
zero from approximately
Refer to the following "
section for additional information on our
Zohar CDOs
• Pursuant to a plan of liquidation that became effective in August of
2022,MBIA Corp.'s interest in the remaining collateral of the Zohar collateralized debt obligation ("CDO") 2003-1, Limited ("Zohar I") and Zohar II 2005-1, Limited ("Zohar II") (collectively, the "Zohar CDOs")
was distributed to
in certain asset recovery entities. Refer to "Note 1: Business
Developments and Risks and Uncertainties" and "Note 6: Loss and Loss
Adjustment Expense Reserves" in the Notes to Consolidated Financial
Statements for a further discussion of the Zohar CDOs.
RESULTS OF OPERATIONS
Summary of Consolidated Results
The following table presents a summary of our consolidated financial results for the years endedDecember 31, 2022 , 2021 and 2020. 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 2022 2021 2020 Total revenues$ 154 $ 189 $ 282 Total expenses 302 634 860 Income (loss) from continuing operations before income taxes (148) (445) (578) Provision (benefit) for income taxes 1 - - Net income (loss) from continuing operations (149) (445) (578) Income (loss) from discontinued operations, net of income taxes (54) - - Net income (loss) (203) (445) (578)
Less: Net income (loss) from discontinued operations
attributable to noncontrolling interests
(8) - - Net income (loss) attributable to MBIA Inc.$ (195) $ (445) $ (578)
Net income (loss) per basic and diluted common share
attributable to
$ (3.92) $ (8.99) $ (9.78) Adjusted net income (loss)(1)$ (145) $ (261) $ (173) Adjusted net income (loss) per diluted share(1)$ (2.90) $ (5.27) $ (2.93) Weighted average basic and diluted common shares outstanding 49,803,739 49,472,281 59,071,843 (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. 28
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
RESULTS OF OPERATIONS (continued)
2022 vs. 2021 GAAP Results
Income (loss) from Continuing Operations Before Income Taxes
The decrease in consolidated total revenues was principally due to losses from fair valuing investments, sales of investments and impairing investments to fair value for investments we intend to sell, as well as lower gains from extinguishing debt and a decrease in net premiums earned. 2022 includes$51 million of losses from fair valuing investments,$41 million of net realized losses from investments sold and$21 million of impairments on investments as a result of our intent to sell these securities before they recover their cost bases. In addition, in 2021, revenues included$30 million of gains on the extinguishment of debt compared with$4 million in 2022 and net premiums earned decreased$21 million in 2022 primarily due to the acceleration of premium earnings from the termination of an international public finance insurance policy in 2021. These unfavorable changes in revenues were partially offset by fair value gains on interest rate swaps, an increase in net gains of consolidated variable interest entities ("VIEs") and an increase in net investment income. Fair value gains on our interest rate swaps for 2022 was$89 million compared with gains of$36 million for 2021. The favorable variance was due to a larger increase in interest rates in 2022. Net gains on our consolidated VIEs for 2022 was$5 million compared with net losses of$23 million for 2021. The favorable change in VIE revenue was primarily due to gains in 2022 from the settlement of litigation and 2021 included$14 million of losses from the deconsolidation of VIEs with no comparable loss in 2022. Net investment income increased$33 million compared with 2021 primarily due to higher average asset balances and higher yields on investments in 2022. Consolidated total expenses for 2022 and 2021 included net insurance losses and loss adjustment expense ("LAE") of$38 million and$350 million , respectively. The decrease in losses and LAE was primarily due to favorable changes from insured CDOs, an incurred benefit from increases in risk-free interest rates on the present value of first-lien RMBS loss reserves in 2022 and a decrease in net losses and LAE on certainPuerto Rico insured credits to reflect actual and anticipated settlement. Refer to the following "Losses and Loss Adjustment Expenses" sections in the Results of Operations of ourU.S. Public Finance Insurance and International andStructured Finance Insurance segments for additional information on our insurance losses and LAE. Operating expense decreased in 2022 compared with 2021 primarily due to a decrease in compensation expense related to the Company's deferred compensation plan and lower litigation expenses. Provision for Income Taxes For 2022 and 2021, our effective tax rate applied to our loss before income taxes was below the 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, 2022 and 2021, the Company's valuation allowance against its net deferred tax asset was$1.2 billion and$1.1 billion , 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.
Income (loss) from discontinued operations, net of income taxes
The Company classifies certain portfolio companies that the Company acquired from the Zohar CDOs bankruptcy distribution as discontinued operations. Included in this amount are the results of operations for the period fromAugust 2, 2022 toDecember 31, 2022 . In addition, during the fourth quarter of 2022, the Company received new information relating to the net value of a portfolio company which resulted in the Company recognizing a loss of$54 million on its net assets held for sale. Refer to "Note 1: Business Developments and Risks and Uncertainties" in the Notes to Consolidated Financial Statements for a further discussion of our discontinued operations. 29
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
RESULTS OF OPERATIONS (continued)
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. 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. and its discontinued operations net of noncontrolling interest and income taxes, which givenMBIA Corp.'s capital structure and business prospects, we do not expect its financial performance to have a material economic impact onMBIA Inc. , as well as adjusting the following:
• Mark-to-market gains (losses) on financial instruments - We remove the
impact of mark-to-market gains (losses) on financial instruments such as
interest rate swaps, investment securities 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.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
RESULTS OF OPERATIONS (continued)
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, 2022 , 2021 and 2020: Years Ended December 31, In millions, except share and per share amounts 2022 2021 2020 Net income (loss)$ (195) $ (445) $ (578) Less: adjusted net income adjustments: Income (loss) from discontinued operations, net of income taxes (46) - -
Income (loss) before income taxes of our international
and structured finance insurance segment and
eliminations
(20) (283) (391) Adjustments to income before income taxes of ourU.S. public finance insurance and corporate segments: Mark-to-market gains (losses) on financial instruments(1) 58 39 (27) Foreign exchange gains (losses)(1) 15 25 (35) Net realized investment gains (losses) (40) 5 48 Net gains (losses) on extinguishment of debt 5 30 - Net investment losses related to impairments of securities(2) (21) - - Adjusted net income adjustment to the (provision) benefit for income tax (1) - - Adjusted net income (loss)$ (145) $ (261) $ (173)
Adjusted net income (loss) per diluted common share(3)
(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 "Other net realized gains (losses)" 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 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 of MBIA Corp. , its
discontinued operations, 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
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
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.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
RESULTS OF OPERATIONS (continued)
• 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 2022 2021
Total shareholders' equity of MBIA Inc. $ (882) $ (313)
Common shares outstanding 54,852,671 54,556,112
GAAP book value per share $ (16.07) $ (5.73)
Management's adjustments described above:
Remove negative book value per share of MBIA
Corp. (37.76) (35.94)
Remove net unrealized gains (losses) on
available-for-sale securities included in
other comprehensive income (loss) (3.96) 2.02
Include net unearned premium revenue in excess
of expected losses 3.08 3.58
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 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, 2022 , National had total insured gross par outstanding of$31.7 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 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. 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. 32
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
RESULTS OF OPERATIONS (continued)
The following table presents our
for the years ended
Years Ended December 31, Percent Change
In millions 2022 2021 2020 2022 vs. 2021 2021 vs. 2020
Net premiums earned $ 47 $ 49 $ 57 -4% -14%
Net investment income 81 58 70 40% -17%
Net realized investment gains
(losses) (30) 2 37 n/m -95%
Net gains (losses) on financial
instruments at fair value and
foreign exchange (47) (2) 2 n/m n/m
Fees and reimbursements 3 3 3 -% -%
Other net realized gains (losses) (19) - (1) n/m -100%
Total revenues 35 110 168 -68% -35%
Losses and loss adjustment 143 227 163 -37% 39%
Amortization of deferred
acquisition costs 11 11 11 -% -%
Operating 41 51 48 -20% 6%
Total expenses 195 289 222 -33% 30%
Income (loss) from continuing
operations before income taxes
-11% n/m
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 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 2022 and 2021, scheduled premiums earned were$32 million and$36 million , respectively, and refunded premiums earned were$15 million and$13 million , respectively. NET INVESTMENT INCOME The increase in net investment income for 2022 compared with 2021 was primarily due to a higher average invested asset base driven by proceeds from sales of the PREPA bankruptcy claims and the receipt of the cash and bonds from the GO PSA in the first quarter of 2022. In addition, higher yields on investments also contributed to the increase in net investment income in 2022 compared with 2021. NET REALIZED INVESTMENT GAINS (LOSSES) Net realized investment losses in 2022 compared with gains in 2021 was primarily due to losses from the sales of securities from the ongoing management of ourU.S. public finance investment portfolio, including to generate liquidity to pay claims.NET GAINS (LOSSES) ON FINANCIAL INSTRUMENTS AT FAIR VALUE AND FOREIGN EXCHANGE For 2022, net losses on financial instruments at fair value and foreign exchange were driven by fair value losses on investments for which the fair value option was elected and investments designated as trading. The losses on the fair value option investments were driven by increases in interest rates and widening of credit spreads during 2022. The losses on the trading investments were driven by mark-to-market changes on the Puerto Rico GO and HTA CVI.
OTHER NET REALIZED GAINS (LOSSES) For 2022, other net realized losses were
primarily related to impairments of certain investments with fair values below
amortized cost and for which we intend to sell before recovery of their
amortized cost.
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 33
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
RESULTS OF OPERATIONS (continued)
insured issue. 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 2022, losses and LAE incurred primarily related to changes in our estimate of expected recoveries on National's PREPA exposure, partially offset by benefits related to Puerto Rico HTA and GO recoveries. National's expected recoveries on PREPA reflect assumptions based on the PREPA PSA agreed to in January of 2023. In addition, an increase in risk-free rates during 2022 contributed to the decrease in our estimated present value of expected PREPA recoveries. This was partially offset by loss incurred benefits on our HTA and GO recoveries to reflect the fair values of the consideration received as of the acquisition dates, which were higher than our previous estimates. 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 expected to receive cash, bonds, and the 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 had been fully satisfied by National's insurance claim payments, which decreased its expected PREPA recoveries, partially offset by additional expected recoveries under the then 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 expected to receive cash, bonds and the CVI, which resulted in an increased recovery value. The following table presents information about ourU.S. public finance insurance loss recoverable assets and loss and LAE reserves liabilities as ofDecember 31, 2022 and 2021: In millions December 31, 2022 December 31, 2021 Percent Change Assets: Insurance loss recoverable $ 107 $ 1,054 -90% Reinsurance recoverable on paid and unpaid losses(1) 6 3 100% Liabilities: Loss and LAE reserves 154 425 -64% Insurance loss recoverable-ceded(2) 1 55 -98% Net reserve (salvage) $ 42 $ (577) -107%
(1)-Reported within "Other assets" on our consolidated balance sheets.
(2)-Reported within "Other liabilities" on our consolidated balance sheets.
The insurance loss recoverable as ofDecember 31, 2022 decreased compared withDecember 31, 2021 , primarily due to the receipt of recoveries pursuant to the implemented GO PSA and the HTA settlement, whereby National received cash and new GO and HTA bonds and CVIs. In addition, the insurance loss recoverable declined due to the sale of PREPA bankruptcy claims as well as changes in assumptions related to the value of the remaining expected PREPA recoveries on paid claims. Loss and LAE reserves as ofDecember 31, 2022 decreased compared withDecember 31, 2021 primarily due to the acceleration and commutation payments on National's GO and HTA exposures, as well as claims payments made on the Company's PREPA exposure during 2022. This was partially offset by a decrease in expected PREPA recoveries on claims not yet paid, which are netted in loss and LAE reserves. 34
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
RESULTS OF OPERATIONS (continued)
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 2022 2021 2020 2022 vs. 2021 2021 vs. 2020
Gross expenses $ 41 $ 51 $ 48 -20% 6%
Amortization of deferred
acquisition costs $ 11 $ 11 $ 11 -% -%
Operating 41 51 48 -20% 6%
Total insurance expenses $ 52 $ 62 $ 59 -16% 5%
Gross expenses represent total insurance expenses before the deferral of any
policy acquisition costs. Operating expenses decreased for 2022 compared with
2021 primarily due to a decrease 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 2022 or 2021 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, 2022 and 2021. 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, 2022 December 31, 2021 Rating Amount % Amount % AAA$ 1,433 4.5%$ 1,682 4.6% AA 13,448 42.5% 14,874 40.8% A 9,672 30.5% 10,439 28.6% BBB 5,055 16.0% 6,187 17.0% Below investment grade 2,044 6.5% 3,269 9.0% Total$ 31,652 100.0%$ 36,451 100.0%
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. OnFebruary 4, 2019 , 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 became effective onMarch 15, 2022 . The confirmation hearing for the PRHTA Title III case was completed onAugust 17, 2022 , and the confirmation order was entered onOctober 12, 2022 , which became effective onDecember 6, 2022 . 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)
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$2.9 billion relating to GO bonds, PBA bonds, PREPA bonds and PRHTA bonds throughDecember 31, 2022 , inclusive of the commutation payment and the additional payment in the amount of$66 million in 2019 related to COFINA and the GO PSA and HTA PSA acceleration and commutation payments of$277 million and$556 million , respectively, in 2022.
Status of
The Oversight Board certified fiscal plans for PREPA,University of Puerto Rico (the "University") and PRHTA onJune 28, 2022 ,May 27, 2022 andOctober 14, 2022 , respectively. The Oversight Board also certified the fiscal year 2023 budgets for Commonwealth, PREPA, the University and PRHTA onJune 30, 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 toMay 31, 2023 . National is not a party to the standstill agreement. As ofDecember 31, 2022 , National had$84 million of debt service outstanding related to the University.
PREPA
National's largest remaining exposure to
is to PREPA.
OnMay 3, 2019 , PREPA, the Oversight Board, the 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. OnMarch 8, 2022 , AAFAF and PREPA terminated the RSA. OnApril 8, 2022 , the Court appointed a new panel of judges to commence mediation among the Oversight Board, the Ad Hoc creditor group of holders of PREPA Senior Bonds, Assured, National and Syncora. The mediation initially terminated onSeptember 16, 2022 ; however onSeptember 29, 2022 , the Court entered an order of restarting mediation throughJanuary 31, 2023 . Mediation will be further continued untilApril 28, 2023 . OnJanuary 31, 2023 , National entered into the PREPA PSA with the Oversight Board, on behalf of itself and as the sole Title III representative of PREPA. OnFebruary 9, 2023 , the Oversight Board filed an amendment to the Plan of Adjustment originally filed with the Title III court onDecember 16, 2022 (the "Amended Plan"), that reflects the entry into the PREPA PSA and the settlement described therein. The PREPA PSA provides, among other things, for the consensual resolution of the treatment of claims held by National related to insured PREPA revenue bonds and the settlement of National's participation in litigation related to such claims. The PREPA PSA provides that, upon the effective date of a plan of adjustment, National shall receive in exchange for its bond and reimbursement claims newly issued PREPA secured revenue bonds together with certain fees and expense reimbursement payments, including an interim payment subject to regulatory approval. The PREPA PSA also provides National with the potential to receive additional consideration. The PREPA PSA remains subject to a number of conditions, including (but not limited to) the Title III Court's approval, and confirmation and effectiveness, of the Amended Plan. There is no assurance the Amended Plan or a substantially similar plan of adjustment will ultimately be confirmed and go effective. 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$9.4 billion (net) of this amount is designated for PREPA.LUMA is now involved in the planning of the related projects as well as proceedings related thereto in front thePR Energy Bureau as well as PR-COR3. 36
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
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RESULTS OF OPERATIONS (continued)
The following table presents our scheduled gross debt service due on our PREPA insured exposures as ofDecember 31, 2022 , for each of the subsequent five years endingDecember 31 and thereafter: In millions 2023 2024 2025 2026 2027 Thereafter Total Puerto Rico Electric Power Authority (PREPA)$ 137 $ 138 $ 105 $ 57 $ 20 $ 488 $ 945 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 subsidiary,MBIA Global Funding, LLC ("GFL").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. MBIA 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 ceased issuing new MTNs and investment agreements and the outstanding liability balances and corresponding asset balances have declined over time as liabilities matured, terminated, 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 2022, 2021 and 2020:
Years Ended December 31, Percent Change
In millions 2022 2021 2020 2022 vs. 2021 2021 vs. 2020
Net investment income $ 22 $ 29 $ 30 -24% -3%
Net realized investment gains
(losses) (10) 3 11 n/m -73%
Net gains (losses) on financial
instruments at fair value and
foreign exchange 99 56 (74) 77% n/m
Net gains (losses) on
extinguishment of debt 5 30 - -83% n/m
Fees and reimbursements 51 55 56 -7% -2%
Other net realized gains
(losses) - (7) - -100% n/m
Total revenues 167 166 23 1% n/m
Operating 58 74 72 -22% 3%
Interest 76 75 84 1% -11%
Total expenses 134 149 156 -10% -4%
Income (loss) from continuing
operations before income taxes $ 33 $ 17 $ (133) 94% -113%
n/m-Percent change not meaningful.
NET REALIZED INVESTMENT GAINS (LOSSES) Net realized investment losses in 2022
compared with gains in 2021 was primarily due to losses from the sales of
securities from the ongoing management of our corporate investment portfolio.
NET GAINS (LOSSES) ON FINANCIAL INSTRUMENTS AT FAIR VALUE AND FOREIGN EXCHANGE Net gains (losses) on financial instruments at fair value and foreign exchange were primarily driven by changes in market values on interest rate swaps and investments and changes in the revaluation of euro-denominated liabilities.
2022 includes fair value net gains of
compared with fair value net gains of
increase in net gains is due to the impact of larger increases in interest
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RESULTS OF OPERATIONS (continued)
rates in 2022 on swaps for which we receive floating rates. Fair value losses on investments was$11 million for 2022 compared with gains of$6 million for 2021. 2022 also includes foreign currency gains of$16 million on euro-denominated liabilities compared with foreign currency gains of$26 million on these liabilities for 2021. This decline was due to a smaller increase in the strength of theU.S. dollar against the euro in 2022 compared with 2021.
extinguishment of debt for all periods include gains from purchases, at
discounts, of MTNs issued by the Company.
OTHER NET REALIZED GAINS (LOSSES) Other net realized losses for 2021 related to
settling litigation disputes.
OPERATING EXPENSE Operating expense decreased for 2022 compared with 2021
primarily due to a decrease in compensation expense related to the Company's
deferred compensation plan.
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, 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 GFL and 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, 2022 ,MBIA Corp.'s total insured gross par outstanding was$3.4 billion . In addition,MBIA Corp. consolidates insured transactions as VIEs if it determines it is the primary beneficiary, and deconsolidates such VIEs when it is no longer the primary beneficiary.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. 38
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
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RESULTS OF OPERATIONS (continued)
The following table presents our international and structured finance insurance
segment results for the years ended
Years Ended December 31, Percent Change
In millions 2022 2021 2020 2022 vs. 2021 2021 vs. 2020
Net premiums earned $ 11 $ 32 $ 24 -66% 33%
Net investment income 17 6 5 n/m 20%
Net realized investment gains
(losses) (1) - - n/m n/m
Net gains (losses) on
financial instruments at fair
value and foreign exchange (7) (14) (8) -50% 75%
Fees and reimbursements 14 17 12 -18% 42%
Other net realized gains
(losses) 7 1 1 n/m -%
Revenues of consolidated VIEs:
Net investment income - - 18 n/m -100%
Net gains (losses) on
financial instruments at fair
value and foreign exchange (14) (8) 108 75% -107%
Other net realized gains
(losses) 19 (15) 37 n/m -141%
Total revenues 46 19 197 142% -90%
Losses and loss adjustment (105) 123 367 n/m -66%
Amortization of deferred
acquisition costs 12 13 16 -8% -19%
Operating 22 24 27 -8% -11%
Interest 127 109 116 17% -6%
Expenses of consolidated VIEs:
Operating 8 6 5 33% 20%
Interest 3 26 57 -88% -54%
Total expenses 67 301 588 -78% -49%
Income (loss) from continuing
operations before income taxes
-93% -28%
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.
The following table provides net premiums earned from our financial guarantee
contracts for the years ended
Years Ended December 31, Percent Change
In millions 2022 2021 2020 2022 vs. 2021 2021 vs. 2020
Net premiums earned:
Non-U.S. $ 9 $ 29 $ 18 -69% 61%
U.S. 2 3 6 -33% -50%
Total net premiums earned $ 11 $ 32 $ 24 -66% 33%
VIEs (eliminated in consolidation) $ -
-100% -143%
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 decrease in net premiums earned for 2022 compared with 2021
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.
Net premiums earned will continue to decrease over time due to the maturity or
termination of insurance contracts with no new business written.
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RESULTS OF OPERATIONS (continued)
NET INVESTMENT INCOME The increase in net investment income for 2022 compared
with 2021 was primarily due to higher yields on investment assets in 2022.
NET GAINS (LOSSES) ON FINANCIAL INSTRUMENTS AT FAIR VALUE AND FOREIGN EXCHANGE The net losses in 2022 and 2021 were primarily driven by foreign exchange losses on the revaluation of non-U.S. dollar insurance balances. The favorable change for 2022 compared with 2021 was primarily due to fair value net gains on investments in 2022. REVENUES OF CONSOLIDATED VIEs The favorable change for 2022 compared with 2021 was principally due to a gain in 2022 from a litigation settlement by a litigation trust that we consolidated as a VIE and the reclassification of credit risk losses from AOCI to earnings in 2021 from the deconsolidation of VIEs. 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. 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. For 2022, the losses and LAE benefit primarily related to an increase in risk free rates during 2022 which resulted in the value of expected future payments, net of future recoveries to decline, primarily on our first-lien RMBS portfolio and an increase in expected salvage collections from insured CDOs. For 2021, losses and LAE incurred primarily related to a decrease in expected salvage collections from insured CDOs, partially offset by an increase in risk free rates during 2021, which caused the value of expected future payments, net of future recoveries to decline, primarily on our first-lien RMBS portfolio. As a result of the consolidation of VIEs, loss and LAE excludes losses and LAE benefits of$9 million and$21 million for 2022 and 2021, respectively, as VIE losses and LAE activity is eliminated in consolidation. 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 as ofDecember 31, 2022 andDecember 31, 2021 . December 31, December 31, Percent In millions 2022 2021 Change Assets: Insurance loss recoverable $ 30 $ 242 -88% Reinsurance recoverable on paid and unpaid losses (1) 4 5 -20% Liabilities: Loss and LAE reserves 285 469 -39% Net reserve (salvage) $ 251 $ 222 13%
(1)-Reported within "Other assets" on our consolidated balance sheets.
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 insurance loss recoverable decreased from 2021 primarily due to the distribution of the remaining collateral in the Zohar CDOs toMBIA Corp. As a result of this distribution, the insurance loss recoverable was replaced with the fair values ofMBIA Corp.'s interests in entities comprising the collateral. These interests are now reported within various other asset and liability financial statement lines based on the nature of and the Company's accounting policy for each interest, including within assets held for sale and liabilities held for sale classified as discontinued operations. Also contributing to the decline in the insurance loss recoverable was a decrease in RMBS recoveries due to an increase in risk-free interest rates used to discount future recoveries of paid claims, which lowered the present value of recoveries in 2022. 40
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RESULTS OF OPERATIONS (continued)
The decline in loss and LAE reserves from 2021 is primarily due to the increase
in risk-free rates, which caused the present value of case reserves, net of
future recoveries, to decline.
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, 2022 , 2021 and 2020 are presented in the following table: Years Ended December 31, Percent Change In millions 2022 2021 2020 2022 vs. 2021 2021 vs. 2020 Gross expenses$ 22 $ 25 $ 28 -12% -11% Amortization of deferred acquisition costs$ 12 $ 13 $ 16 -8% -19% Operating 22 24 27 -8% -11% Total insurance expenses$ 34 $ 37 $ 43 -8% -14% 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 2022 or 2021 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 to
are indexed to the London Interbank Offered Rate ("LIBOR"). The increase in
interest expense for 2022 compared with 2021 is due to an increase in LIBOR
during 2022.
INTEREST EXPENSE OF CONSOLIDATED VIEs Interest expense of consolidated VIEs decreased for 2022 compared with 2021 primarily due to the repayment of the outstanding insured senior notes ofMBIA Corp.'s financing facility between MZ Funding and certain purchasers in 2021 and of the subordinated notes betweenMZ Funding andMBIA Inc. in April of 2022 ("Refinanced Facility").
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, 2022 andDecember 31, 2021 , 30% and 26%, 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 first-lien RMBS and CDO exposures. Selected Portfolio ExposuresMBIA Corp. insures RMBS backed by residential mortgage loans, including first-lien alternative A-paper and subprime mortgage loans directly through RMBS securitizations. As ofDecember 31, 2022 andDecember 31, 2021 ,MBIA Corp. had$802 million and$979 million , respectively, of first-lien RMBS gross par outstanding. These amounts include the gross par outstanding related to transactions that the Company consolidates under accounting guidance for VIEs and includes international exposure of$149 million and$238 million , as ofDecember 31, 2022 andDecember 31, 2021 , respectively.
In addition, as of
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RESULTS OF OPERATIONS (continued)
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. Effective in the first quarter of 2022,MBIA Corp. was granted a permitted practice by theNew York State Department of Financial Services ("NYSDFS") related to the purchase of certainMBIA Corp. -insured securities with gross case base loss reserves ("Remediation Securities ").The Remediation Securities are being acquired with the intent to terminate or commute the related insurance policies.MBIA Corp. may elect to sell theRemediation Securities to facilitate a termination or commutation.
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 included in this Form 10-K for a further discussion about reinsurance agreements.
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.
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 2022 2021 2020 2022 vs. 2021 2021 vs. 2020
Statement of cash flow data:
Net cash provided (used) by:
Operating activities $ (418) $ 511 $ (390) n/m n/m
Investing activities 623 (61) 1,738 n/m -104%
Financing activities (285) (457) (1,265) -38% -64%
Effect of exchange rate changes
on cash and cash equivalents (2) - 1 n/m -100%
Cash and cash
equivalents-beginning of year 160 167 83 -4% 101%
Cash and cash equivalents-end
of year $ 78 $ 160 $ 167 -51% -4%
n/m-Percent change not meaningful.
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LIQUIDITY AND CAPITAL RESOURCES (continued)
Operating activities
Net cash provided by operating activities decreased for 2022 compared with 2021 primarily due to an increase of$765 million of losses and LAE paid in 2022 compared with 2021. This increase in losses and LAE paid was primarily due to the acceleration and commutation payments in connection with the GO and HTA PSAs. In addition, in 2021, we received proceeds of$600 million from loan repurchase commitments as a result of the settlement of the Credit Suisse litigation. These decreases in net cash provided by operating activities were partially offset by an increase in proceeds from recoveries and reinsurance of$412 million , primarily from the sale of certain PREPA bankruptcy claims and in connection with the GO and HTA PSAs, during 2022.
Investing activities
Net cash provided by investing activities increased for 2022 compared with 2021 primarily due to an increase of$503 million from the sale of AFS investments in 2022, which, to a large extent, was used to make the GO and HTA acceleration and termination payments. Financing activities
Net cash used by financing activities decreased for 2022 compared with 2021
primarily due to a decrease of
primarily as a result of the repayment of the Refinanced Facility in 2021.
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, 2022 , 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, 2022 and 2021, the Company had$233 million of unrealized losses and$139 million of unrealized gains, respectively, net of deferred taxes related to its investment portfolio recorded in accumulated other comprehensive income within equity. The unrealized losses during 2022 resulted from higher interest rates and wider 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
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LIQUIDITY AND CAPITAL RESOURCES (continued)
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 ofDecember 31, 2022 , Insured Investments at fair value represented$198 million or 7% of consolidated investments, of which$173 million or 6% of consolidated investments were Company-Insured Investments. As ofDecember 31, 2022 , 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 theNational and MBIA Corp. guarantees of the Company-Insured Investments in the consolidated investment portfolio, as ofDecember 31, 2022 , based on actual or estimated underlying ratings, the weighted average rating of the consolidated investment portfolio was in the Aa 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 6% of the total consolidated investment portfolio.
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 December 31, 2022 and December 31, 2021 , National held cash and
investments of $2.1 billion and $2.0 billion , respectively, of which
$230 million and $199 million , respectively, were cash and cash equivalents or
short-term investments comprised of highly rated commercial paper, money market
funds and municipal, U.S. agency and corporate bonds.
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. The U.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.
Corporate Liquidity
The primary sources of cash available to
• dividends from National;
• available cash and liquid assets not subject to collateral posting
requirements;
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LIQUIDITY AND CAPITAL RESOURCES (continued)
• 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; • payments of operating expenses; and • funding share repurchases and debt buybacks. As ofDecember 31, 2022 andDecember 31, 2021 , the liquidity positions ofMBIA Inc. were$230 million and$239 million , respectively, and included cash and cash equivalents and other investments comprised of highly rated commercial paper andU.S. government and asset-backed bonds. 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 "Liquidity and Capital Resources- Capital Resources" section for additional information on payments of dividends. We do not expectMBIA Inc. to receive dividends 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; and • payments of operating expenses.
As of
investments of
and
45
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
LIQUIDITY AND CAPITAL RESOURCES (continued)
liquid investments comprised of money market funds and municipal,
and corporate bonds that were immediately available to
Corporation
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 the second quarter of 2022,
amount of the subordinated notes between
Refinanced Facility. These subordinated notes and the related interest were
eliminated in our 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, 2022 and 2021, 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, 2022 . 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)$ 821 $ 137 Lease liability 23 3 Corporate segment: Long-term debt 373 18 Investment agreements 311 25 Medium-term notes 730 18
International and structured finance insurance segment:
Gross insurance claim obligations(1)
828 96 Surplus notes 3,598 1,325 Total$ 6,684 $ 1,622
(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 expect to make
(before reinsurance and the consolidation of VIEs) under insurance policies
46
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
LIQUIDITY AND CAPITAL RESOURCES (continued)
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 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, 2022 , VIE notes issued by issuer-sponsored consolidated VIEs totaled$172 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, 2022 . 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$1.2 billion of unpaid interest related to 2013 through 2022 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 and surplus notes
issued by MBIA Corp. Total capital resources were $0.3 billion and $0.9 billion
as of December 31, 2022 and 2021, 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
47
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
LIQUIDITY AND CAPITAL RESOURCES (continued)
to meet the Company's general corporate needs and debt service. Based onMBIA Inc.'s debt service requirements and expected operating expenses, we expect thatMBIA Inc. will have sufficient resources to satisfy 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.Insurance Statutory Capital National andMBIA Insurance Corporation are incorporated and licensed in, and are subject to primary insurance regulation and supervision by the NYSDFS. MBIAMexico 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 of statutory accounting principles and assist our regulators in evaluating minimum standards of solvency, including minimum capital requirements, and business conduct.
National -
National had statutory capital of$1.9 billion as ofDecember 31, 2022 compared with$2.0 billion as ofDecember 31, 2021 . As ofDecember 31, 2022 , National's unassigned surplus was$955 million . For the year endedDecember 31, 2022 , National had statutory net income of$75 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, 2022 , 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, 2022 from which it may pay dividends, subject to the limitations described above. During 2022 and 2021, National declared and paid a dividend of$72 million and$60 million , respectively, 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
48
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
LIQUIDITY AND CAPITAL RESOURCES (continued)
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 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
2021
As of As of
December 31, December 31,
In millions 2022 2021
Policyholders' surplus $ 1,545 $ 1,569
Contingency reserves 379 402
Statutory capital 1,924 1,971
Unearned premiums 262 311
Present value of installment premiums(1) 110 121
Premium resources(2) 372 432
Net loss and LAE reserves(1) (140) (386)
Salvage reserves on paid claims(1) 288 944
Gross loss and LAE reserves 148 558
Total claims-paying resources $ 2,444 $ 2,961
(1)-Calculated using a discount rate of 4.29% and 3.65% as of December 31, 2022
and 2021, respectively.
(2)-Includes financial guarantee and insured derivative related premiums.
MBIA Insurance Corporation had statutory capital of$169 million as ofDecember 31, 2022 compared with$134 million as ofDecember 31, 2021 . As ofDecember 31, 2022 ,MBIA Insurance Corporation's negative unassigned surplus was$1.9 billion . For the year endedDecember 31, 2022 ,MBIA Insurance Corporation had statutory net income of$46 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. In addition, under NYIL,MBIA Insurance Corporation is required to invest its minimum surplus and contingency reserves and 50% of its loss reserves and unearned premium reserves in certain qualifying assets. As ofDecember 31, 2022 ,MBIA Insurance Corporation maintained its minimum requirement of policyholders' surplus but did not have enough qualifying assets to support its contingency reserves and 50% of its loss reserves and unearned premium reserves. As ofDecember 31, 2022 ,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.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$32 million of excessive contingency reserves during 2022. In accordance with this contingency reserve release,MBIA Corp. will maintain a fixed$5 million of contingency reserves. 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. 49
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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 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, 2023 , the most recent scheduled interest payment date, there was$1.2 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, 2022 ,MBIA Insurance Corporation had "free and divisible surplus" of$146 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.
As of As of
December 31, December 31,
In millions 2022 2021
Policyholders' surplus $ 164 $ 97
Contingency reserves 5 37
Statutory capital 169 134
Unearned premiums 36 46
Present value of installment premiums(1) 34 48
Premium resources(2) 70 94
Net loss and LAE reserves(1) 35 266
Salvage reserves on paid claims(1) (3) 395 231
Gross loss and LAE reserves 430 497
Total claims-paying resources $ 669 $ 725
(1)-Calculated using a discount rate of 5.53% and 4.99% as of December 31, 2022
and 2021, respectively.
(2)-Includes financial guarantee and insured derivative related premiums.
(3)-This amount primarily consists of expected recoveries related to the payment
of claims on insured CDOs and RMBS. In addition, the 2022 balance includes
salvage related to a permitted practice granted by NYSDFS.
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.
50
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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 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, 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 other expected consideration. Factors that may affect the actual ultimate realized losses for any policy include economic conditions and trends, political developments, levels of interest rates, borrower behavior, the default rate and salvage values of specific collateral or other expected consideration, and our ability to enforce contractual rights through litigation and otherwise. Also, any adverse developments on macroeconomic factors 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.
51
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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 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. 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 7% and 3% of total assets measured at fair value on a recurring basis as ofDecember 31, 2022 and 2021, respectively. Level 3 liabilities represented approximately 82% and 75% of total liabilities measured at fair value on a recurring basis as ofDecember 31, 2022 and 2021, 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. 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 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. OnMarch 15, 2022 , the Adjustable Interest Rate (LIBOR) Act (the "LIBOR Act") was enacted to establish a clear and uniform process for replacing LIBOR in existing contracts and preclude litigation, among other things. As a general matter, the LIBOR Act provides that on the firstLondon banking day afterJune 30, 2023 , a benchmark replacement recommended by theBoard of Governors of theFederal Reserve System (the "Board") will automatically replace the USD LIBOR benchmark in existing contracts that (after disregarding certain types of fallback provisions invalidated by the LIBOR Act) contain no LIBOR fallback provisions or contain LIBOR fallback provisions that identify neither a benchmark replacement nor a person with authority to determine a benchmark replacement. The Board-recommended benchmark replacement will be based on the Secured Overnight Financing Rate ("SOFR") published by theFederal Reserve Bank of New York , including any recommended spread adjustment and benchmark replacement conforming changes. Pursuant to the LIBOR Act and the regulations, the Board has identified (i) the one-, three, six-, or 12-month CME Term SOFR plus (ii) the applicable tenor spread adjustment specified in the LIBOR Act, as the board selected benchmark replacement for references to the corresponding one-, three-, six-, and 12-month LIBOR in contracts governing a cash transaction that is not a consumer loan, an FHFA-regulated-entity contract or a FFELP ABS, as referenced in the LIBOR Regulations. 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. 52
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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)
These announcements, among other developments, about the discontinuance of LIBOR as a benchmark rate 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. Furthermore, there can be no assurance that we and other market participants will be adequately prepared for the discontinuation of LIBOR which could have an unpredictable impact on contractual mechanics that could also produce an adverse economic impact.
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.
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 of
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 $ 260 $ 154 $ 69 $ (56) $ (102) $ (139)
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, 2022 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
$ 17 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, 2022 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 $ 71 $ (65) $ (222) 53
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P0YP0YP3Yhttp://fasb.org/us-gaap/2022#OtherAssetshttp://fasb.org/us-gaap/2022#OtherLiabilitieshttp://fasb.org/us-gaap/2022#RealizedInvestmentGainsLosseshttp://fasb.org/us-gaap/2022#GainsLossesOnExtinguishmentOfDebthttp://www.mbia.com/20221231#NetGainsLossesOnFinancialInstrumentsAtFairValueAndForeignExchangehttp://www.mbia.com/20221231#NetGainsLossesOnFinancialInstrumentsAtFairValueAndForeignExchange
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