MBIA INC – 10-Q – 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 our Annual Report on Form 10-K for the year endedDecember 31, 2021 and the consolidated financial statements and notes thereto included in this Form 10-Q. 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 ofMBIA Inc.'s Annual Report on Form 10-K for the year endedDecember 31, 2021 for a further discussion of risks and uncertainties.
OVERVIEW
MBIA Inc. , together with its consolidated subsidiaries, (collectively, "MBIA", the "Company", "we", "us", or "our") operates within the financial guarantee insurance industry. MBIA manages its business within three operating segments: 1)United States ("U.S.") public finance insurance; 2) corporate; and 3) international and structured finance insurance. OurU.S. public finance insurance portfolio is managed throughNational Public Finance Guarantee Corporation ("National"), our corporate segment is managed throughMBIA Inc. and several of its subsidiaries, including our service company,MBIA Services Corporation ("MBIA Services"), and our international and structured finance insurance business is primarily managed throughMBIA Insurance Corporation and its subsidiary ("MBIA Corp. "). National's primary objectives are to maximize the performance of its existing insured portfolio through effective surveillance and remediation activity and effectively manage its investment portfolio. Our corporate segment consists of general corporate activities, including providing support services to MBIA's operating subsidiaries and asset and capital management.MBIA Corp.'s primary objectives are to satisfy all claims by its policyholders and to maximize future recoveries, if any, for its senior lending and surplus note holders, and then its preferred stock holders.MBIA Corp. is executing this strategy by, among other things, taking steps to maximize the collection of recoveries and reducing and mitigating potential losses on its insurance exposures. We do not expect National orMBIA Corp. to write significant new business. COVID-19 and the Economic Environment While the novel coronavirus COVID-19 ("COVID-19") pandemic has not had an adverse material impact on our business and financial condition, the current and longer-term impacts of COVID-19 remain uncertain. The existence or extent of any impact on our insured or investment portfolios, or general business operations, will depend on future developments which are highly uncertain, including but not limited to the future severity of the pandemic, and the effectiveness of financial and regulatory actions taken at the state and federal levels to contain or address its impact. Refer to "Risk Factors" in Part I, Item 1A ofMBIA Inc.'s Annual Report on Form 10-K for the year endedDecember 31, 2021 for a discussion of risks and uncertainties concerning COVID-19. During the first quarter of 2022, theU.S. economic activity and employment have continued to strengthen with strong job gains and a declining unemployment rate. Inflation remains elevated with supply and demand issues related to COVID-19 and higher energy prices, and the overall uncertainty of the impact on theU.S. economy related to theUkraine andRussia conflict. With theFederal Open Market Committee ("FOMC") seeking to achieve maximum employment and 2% inflation, theFOMC increased its target for the federal funds rate by 25 basis points in the first quarter of 2022. 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. In addition, higher projected interest rates could yield increased returns on our Company's investment portfolio. Alternatively, higher energy 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. We do not insure any sovereign or sub-sovereign debt ofRussia orUkraine . Additionally, we have an immaterial amount of direct or indirect Russian orUkraine debt holdings in our investment portfolios and have recorded credit losses and unrealized losses on these investments in the first quarter of 2022. Refer to the following "Results of Operations -U.S. Public Finance Insurance Segment" section for additional information on these credit losses. 39
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
OVERVIEW (continued) 2022 Business Developments
The following is a summary of 2022 business developments:
section for additional information on our
• On
dated as of
Oversight and
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 was effective and implemented onMarch 15, 2022 and among other things, National received cash, including certain fees, newly issued
General Obligation bonds ("GO Bonds") and a contingent value instrument
("CVI") totaling approximately
implementation, National made
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 $380 million and $495 million ,
respectively.
• On January 1, 2022 , the Commonwealth of Puerto Rico and certain of its
instrumentalities ("Puerto Rico") defaulted on scheduled debt service for
National insured bonds and National paid gross claims in the aggregate of
$47 million . As ofMarch 31, 2022 , National had$2.1 billion of debt service outstanding related toPuerto Rico .
• In January of 2022, National sold an additional
Rico Electric Power Authority ("PREPA") bankruptcy claims related to insurance claims paid on matured National-insured PREPA bonds. As ofMarch 31, 2022 , National has sold approximately 35% of National's par
claims to PREPA. These sales monetized a portion of National's salvage
asset and reduced potential volatility and ongoing risk of remediation
around the PREPA credit. Currently, National does not have a material
amount of additional par claims to PREPA that have matured and can be
sold.
• On
Authority ("AAFAF") and PREPA terminated the RSA under a provision
permitting termination if an order approving the RSA had not been entered
by
of judges to commence mediation among the Oversight Board, the Ad Hoc
creditor group as holders of PREPA Senior Bonds, Assured, National and
Syncora (the "
will terminate on
to
acts as a stay of any pending adversary proceedings or contested matters
in the PREPA case, subject to the Court's pending request to the
Oversight Board for a status report by June 1, 2022 .
• On
settling certain clawback claims and providing for a distribution of
cash, bonds and a contingent value instrument to
Transportation Authority ("HTA") bondholders subject to completing
negotiations on a plan support agreement in respect of an HTA plan of
adjustment (the "HTA PSA"). On
Corp.,
into the HTA PSA. On
Plan of Adjustment for the Puerto Rico Highways and Transportation
Authority (the "HTA Plan"), together with the Disclosure Statement and
supporting documents. National expects to receive during the second
quarter of 2022 its allocable portion of cash and CVI relating to HTA,
which aggregate amounts to be distributed to bondholders totals
approximately
National shall receive its allocable portion of approximately
effective date of the HTA Plan.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
Summary of Consolidated Results
The following table presents a summary of our consolidated financial results for
the three months ended
Three Months Ended March 31,
In millions except for per share, percentage and share amounts 2022 2021
Total revenues $ 40 $ 72
Total expenses 113 178
Income (loss) before income taxes (73) (106)
Provision (benefit) for income taxes - -
Net income (loss) $ (73) $ (106)
Net income (loss) per basic and diluted common share $ (1.48) $ (2.16)
Effective tax rate 0.0% 0.0%
Adjusted net income (loss)
(1) $ (96) $ (116)
Adjusted net income (loss) per diluted share
(1) $ (1.94) $ (2.36)
Weighted average basic and diluted common shares outstanding 49,631,448 49,258,110
(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.
Income (loss) Before Income Taxes
Consolidated total revenues decreased for the three months endedMarch 31, 2022 compared with the same period of 2021 principally due to unfavorable fair value changes on investments, smaller fair value gains on interest rate swaps, and smaller gains from changes in foreign exchange rates. For the three months endedMarch 31, 2022 , fair value losses on investments was$20 million and fair value gains on interest rate swaps was$34 million . For the three months endedMarch 31, 2021 , fair value gains or losses on investments was not material and fair value gains on interest rate swaps was$39 million . The fair value losses on investments were principally due to increased interest rates and wider credit spreads. The lower fair value gains on our interest rate swaps were largely driven by a smaller increase in interest rates on the long-term yield curve compared to the three months endedMarch 31, 2021 . Foreign exchange gains for the three months endedMarch 31, 2022 on Euro-denominated liabilities were$5 million compared with gains of$17 million for the same period of 2021. For the three months endedMarch 31, 2022 and 2021, these gains were driven by the strengthening of theU.S. dollar against the euro. Consolidated total expenses for the three months endedMarch 31, 2022 included$49 million of losses and loss adjustment expense ("LAE") compared with$98 million for the same period of 2021. This decrease in losses and LAE was primarily due to decreases in losses incurred on collateralized debt obligations ("CDOs") and a net decrease in losses on certainPuerto Rico credits. Refer to the following "Loss and Loss Adjustment Expenses" sections of theU.S. Public Finance Insurance and International andStructured Finance Insurance segments for additional information on our losses and LAE. In addition, interest expense of consolidated variable interest entities ("VIEs") decreased for the three months endedMarch 31, 2022 compared with the same period of 2021 due to the repayment of the outstanding insured senior notes ofMBIA Corp.'s financing facility betweenMZ Funding LLC ("MZ Funding") and certain purchasers ("Refinanced Facility") during 2021.
Provision for Income Taxes
For the three months endedMarch 31, 2022 and 2021, our effective tax rate applied to our loss before income taxes was 0% compared with theU.S. statutory tax rate of 21% due to the full valuation allowance on the changes in our net deferred tax asset, which includes our net operating loss ("NOL"). 41
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS (continued)
As ofMarch 31, 2022 andDecember 31, 2021 , the Company's valuation allowance against its net deferred tax asset was$1.1 billion . 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 9: 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.
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. which given its capital structure and business prospects, we do not expect its financial performance to have a material economic impact onMBIA Inc. , as well as the following: • Mark-to-market gains (losses) on financial instruments - We remove the impact of mark-to-market
gains (losses) on financial instruments that primarily include interest
rate swaps and hybrid financial instruments. These amounts fluctuate
based on market interest rates, credit spreads and other market factors.
• Foreign exchange gains (losses)
- We remove foreign exchange gains (losses) on the remeasurement of
certain assets and liabilities and transactions in
non-functional
currencies. Given the possibility of volatility in foreign exchange
markets, we exclude the impact of foreign exchange gains (losses) to
provide a measurement of comparability of adjusted net income (loss).
• Net realized investment gains (losses), impaired securities and
extinguishment of debt
- We remove realized gains (losses) on the sale of investments, net
investment losses related to impairment of securities and net gains
(losses) on extinguishment of debt since the timing of these transactions
are subject to management's assessment of market opportunities and
conditions and capital liquidity positions.
• Income taxes
-We apply a zero effective tax rate for federal income tax purposes to
our
pre-tax
adjustments, if applicable, consistent with our consolidated effective
tax rate.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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 three months endedMarch 31, 2022 and 2021: Three Months EndedMarch 31 , In millions except share and per share amounts 2022
2021
Net income (loss) $ (73 )$ (106 ) Less: adjusted net income (loss) adjustments: Income (loss) before income taxes of our international and structured finance insurance segment and eliminations (5 ) (44 ) Adjustments to income before income taxes of ourU.S. public finance insurance and corporate segments: Mark-to-market gains (losses) on financial instruments (1) 24 38 Foreign exchange gains (losses) (1) 6 17 Net realized investment gains (losses) (2 ) (1 ) Adjusted net income adjustment to the (provision) benefit for income tax - - Adjusted net income (loss) $ (96 )$ (116 ) Adjusted net income (loss) per diluted common share (2) (1.94 ) (2.36 ) (1) - Reported within "Net gains (losses) on financial instruments at fair value and foreign exchange" on the Company's consolidated statements of operations. (2) - Adjusted net income (loss) per diluted common share is calculated by taking adjusted net income (loss) divided by the 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. and
for certain items which the Company believes will reverse from GAAP book value
through GAAP earnings and comprehensive income, as well as add in the impact of
certain items which the Company believes will be realized in GAAP book value in
future periods. The Company has limited such adjustments to those items that it
deems to be important to fundamental value and performance and for which the
likelihood and amount can be reasonably estimated. The following provides a
description of management's adjustments to GAAP book value:
• Negative Book value of
- We remove the negative book value of
given
which it operates, the priority given to its policyholders, surplus note
holders and preferred stock holders with respect to the distribution of
assets, and its legal structure, it is not and will not likely be in a
position to upstream any economic benefit to
does not face any material financial liability arising from MBIA Corp.
• Net unrealized (gains) losses on
available-for-sale
("AFS") securities excluding MBIA Corp.
- We remove net unrealized gains and losses on AFS securities recorded in
accumulated other comprehensive income since they will reverse from GAAP
book value when such securities mature. Gains and losses from sales and
impairments of AFS securities are recorded in book value through
earnings.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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 As of
March 31 , December 31 ,
In millions except share and per share amounts 2022
2021
Total shareholders' equity of MBIA Inc.$ (565 ) $ (313 ) Common shares outstanding 54,857,000 54,556,112 GAAP book value per share$ (10.29 ) $ (5.73 ) Management's adjustments described above: Remove negative book value per share of MBIA Corp. (36.16 ) (35.94 ) Remove net unrealized gains (losses) on available-for-sale securities included in other comprehensive income (loss) (0.80 )
2.02
Include net unearned premium revenue in excess of expected losses 3.39
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 ofMarch 31, 2022 , National had total insured gross par outstanding of$35.2 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, and in response,Congress passed PROMESA, which established the Oversight Board vested with the sole power to certify fiscal plans forPuerto Rico . Refer to the "U.S. Public Finance Insurance Puerto Rico Exposures" section for additional information on ourPuerto Rico exposures. We continue to monitor and analyze these situations and other stressed credits closely, and the overall extent and duration of stress affecting our insured credits remains uncertain. 44
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS (continued)
The following table presents our
for the three months ended
Three Months Ended March 31, Percent
In millions 2022 2021 Change
Net premiums earned $ 13 $ 17 -24%
Net investment income 17 14 21%
Net realized investment gains (losses) (1 ) (1 ) -%
Net gains (losses) on financial instruments
at fair value and foreign exchange (16 ) (2 ) n/m
Fees and reimbursements 2 - n/m
Other net realized gains (losses) (3 ) - n/m
Total revenues 12 28 -57%
Losses and loss adjustment 87 109 -20%
Amortization of deferred acquisition costs 3 4 -25%
Operating 13 14 -7%
Total expenses 103 127 -19%
Income (loss) before income taxes $ (91 ) $ (99 ) -8%
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 the three months endedMarch 31, 2022 and 2021, scheduled premiums earned were$8 million and$10 million , respectively, and refunded premiums earned were$5 million and$7 million , respectively. NET INVESTMENT INCOME The increase in net investment income for the three months endedMarch 31, 2022 compared with the same period of 2021 was primarily due to a higher average invested asset base resulting from sales of the PREPA bankruptcy claims and receipt of the cash and bonds from the GO PSA.NET GAINS (LOSSES) ON FINANCIAL INSTRUMENTS AT FAIR VALUE AND FOREIGN EXCHANGE For the three months endedMarch 31, 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 the first quarter of 2022. The losses on the trading investments were driven by mark-to-market changes on the CVI after the distribution from the GO PSA. OTHER NET REALIZED GAINS (LOSSES) For the three months endedMarch 31, 2022 , other net realized losses was primarily related to credit losses on investments as a result of theUkraine andRussia conflict. LOSS AND LOSS ADJUSTMENT EXPENSES OurU.S. public finance insured portfolio management group is responsible for monitoring ourU.S. public finance segment's insured obligations. The level and frequency of monitoring of any insured obligation depends on the type, size, rating and our assessed performance of the insured issue. Refer to "Note 5: Loss and Loss Adjustment Expense Reserves" in the Notes to Consolidated Financial Statements for additional information related to the Company's loss reserves. For the three months endedMarch 31, 2022 , loss and LAE incurred primarily related to changes in our estimate of expected recoveries on National's PREPA exposure. PREPA loss reserves and recoveries include certain assumptions about the timing and amount of claims payments and recoveries, including assumptions about the values of recoveries on the date we expect to receive reimbursement under an implemented RSA. During the first quarter of 2022, we updated assumptions used to estimate the value of recoveries, the timing and amount of claim payments, as well as the timing of an implemented plan. These assumption changes resulted in a decrease in our estimated present value of PREPA recoveries. Loss and LAE incurred during the quarter related to PREPA was partially offset by benefits related to Puerto Rico HTA and GO recoveries. During the first quarter of 2022, we increased the estimated values of recoveries expected to be received as part of the HTA restructuring to reflect updated information about potential values when received, including considering the current fair values of similar recently issued GO securities. In addition, we recorded a benefit on our GO recoveries to reflect the fair values of the consideration received as of the acquisition date, which was higher than our previous estimate. 45
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS (continued)
For the three months endedMarch 31, 2021 , loss and LAE incurred reflected changes in assumptions within our HTA loss scenarios and an increase in the risk-free rates used to discount the value of long-dated future recoveries on allPuerto Rico exposures, which caused the present value of the recoveries to decline. These losses were partially offset by a benefit driven by a change in certain assumptions related to the Puerto Rico GO restructuring. The following table presents information about ourU.S. public finance insurance loss recoverable asset and loss and LAE reserves liabilities as ofMarch 31, 2022 andDecember 31, 2021 : March 31, December 31, Percent In millions 2022 2021 Change Assets: Insurance loss recoverable$ 128 $ 1,054 -88 % Reinsurance recoverable on paid and unpaid losses (1) 10 3 n/ m Liabilities: Loss and LAE reserves 460 425 8 % Insurance loss recoverable - ceded (2) 3 55 -95 % Net reserve (salvage)$ 325 $ (577 ) n/ m
(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 ofMarch 31, 2022 decreased compared withDecember 31, 2021 primarily due to the receipt of recoveries pursuant to the implemented GO PSA whereby National received cash, GO Bonds, and a CVI. In addition, the insurance loss recoverable declined due to the sale of PREPA bankruptcy claims and due to changes in assumptions related to the value of the remaining PREPA recoveries on paid claims. Loss and LAE reserves as ofMarch 31, 2022 increased compared withDecember 31, 2021 primarily due to a decrease in PREPA recoveries on claims not yet paid, which are netted in loss and LAE reserves. The increase in PREPA net loss reserves was partially offset by an increase in the estimated value of recoveries related to the HTA restructuring, which is also netted in loss and LAE reserves, claims payments related to the acceleration and commutation of GO exposure, and scheduled claim payments onPuerto Rico exposures during the three months endedMarch 31, 2022 .
POLICY ACQUISITION COSTS AND OPERATING EXPENSES
segment expenses for the three months ended
presented in the following table:
Three Months Ended March 31, Percent
In millions 2022 2021 Change
Gross expenses $ 13 $ 15 -13%
Amortization of deferred acquisition costs $ 3 $ 4 -25%
Operating 13 14 -7%
Total insurance operating expenses $ 16 $ 18 -11%
Gross expenses represent total insurance expenses before the deferral of any
policy acquisition costs. Operating expenses decreased for the three months
ended March 31, 2022 compared with the same period of 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. 46
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS (continued)
The following table presents the credit quality distribution of National'sU.S. public finance outstanding gross par insured as ofMarch 31, 2022 andDecember 31, 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 March 31, 2022 December 31, 2021 Rating Amount % Amount % AAA$ 1,614 4.6%$ 1,682 4.6% AA 14,559 41.4% 14,874 40.8% A 10,167 28.9% 10,439 28.6% BBB 5,968 17.0% 6,187 17.0% Below investment grade 2,870 8.1% 3,269 9.0% Total$ 35,178 100.0%$ 36,451 100.0%
The following is a summary of exposures within the insured portfolio of ourU.S. public finance insurance segment related toPuerto Rico as ofMarch 31, 2022 : Debt National Gross Par Service Internal In millions Outstanding
Outstanding
Puerto Rico Electric Power Authority
dPuerto Rico Highway and Transportation Authority Transportation Revenue (PRHTA) 523 842 dPuerto Rico Highway and Transportation Authority-Subordinated Transportation Revenue (PRHTA) 27 33 d Puerto Rico Highway and Transportation (1) Authority Highway Revenue (PRHTA) 39 57 d University of Puerto Rico System Revenue 70 90 d Inter American University of Puerto Rico Inc. 17 21 a3 Total$ 1,485 $ 2,106
(1) - Includes CABs that reflect the gross par amount at the time of issuance of
the insurance policy. As of
accreted interest was
OnJune 30, 2016 , PROMESA was signed into law by the President ofthe United States . PROMESA provides for the creation of the Oversight Board with powers relating to the development and implementation of a fiscal plan for the Commonwealth and each of its instrumentalities as well as a court-supervised Title III process that allowsPuerto Rico to restructure its debt if voluntary agreements cannot be reached with creditors through a collective action process. Following the resignation and replacement of several Oversight Board members, the Oversight Board has been reconstituted with four new members while three existing members have been reappointed by the President for another three year term. The newly elected Governor ofPuerto Rico has appointed himself as a non-voting member of the reconstituted Oversight Board. OnMay 3, 2017 , the Oversight Board certified and filed a petition under Title III of PROMESA forPuerto Rico with theDistrict Court of Puerto Rico thereby commencing a bankruptcy-like case for the Commonwealth GO. Under separate petitions, the Oversight Board subsequently commenced Title III proceedings for COFINA, PRHTA, PREPA and PBA onMay 5, 2017 ,May 21, 2017 ,July 2, 2017 andSeptember 27, 2019 , respectively. One of the proceedings was resolved onFebruary 4, 2019 , when the District ofPuerto Rico entered the order confirming the Third Amended Title III Plan of Adjustment for COFINA. The Title III cases for theCommonwealth of Puerto Rico and PBA were confirmed onJanuary 18, 2022 , and became effective onMarch 15, 2022 . There can be no assurance that the Title III proceedings for PREPA and PRHTA will be resolved with similar outcomes. 47
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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$2.2 billion relating to GO bonds, PBA bonds, PREPA bonds and PRHTA bonds throughMarch 31, 2022 , inclusive of the commutation payment and the additional payment in the amount of$66 million onDecember 17, 2019 related to COFINA and the GO PSA acceleration and commutation payments of$277 million in March of 2022. PREPA
National's largest exposure to
PREPA.
OnOctober 3, 2018 , National, together withAssured Guaranty Corp. ,Assured Guaranty Municipal Corp. , andSyncora Guarantee Inc. (collectively, "Movants") filed a motion in the Title III case for PREPA for relief from the automatic stay to allow Movants to exercise their statutory right to have a receiver appointed at PREPA (the "Receiver Motion"). This motion was stayed pending a resolution of the 9019 Order approving the RSA, but is no longer stayed pursuant to theApril 8 Order, discussed below. OnMay 3, 2019 , PREPA, the Oversight Board, 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 under a provision permitting termination if an order approving the RSA had not been entered bySeptember 30, 2019 . OnApril 8, 2022 , the Court issued theApril 8 Order which provides that mediation will terminate onJune 1, 2022 unless the mediation team extends the time toJuly 1, 2022 . TheApril 8 Order further provides that nothing therein acts as a stay of any pending adversary proceedings or contested matters in the PREPA case, subject to the Court's pending request to the Oversight Board for a status report byJune 1, 2022 . OnJuly 1, 2019 the Oversight Board and AAFAF also filed an adversary complaint against the Trustee for the PREPA Bonds, challenging the validity of the liens arising under the Trust Agreement that secure insured obligations of National. The adversary proceeding was stayed but theApril 8 Order dissolved the stay as to any pending adversary proceedings or contested matters, subject to the Court's pending status report request to the Oversight Board onJune 1, 2022 . 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. In October of 2021 and January of 2022, National sold$199 million and$231 million , respectively, of PREPA bankruptcy claims related to insurance claims paid on matured National-insured PREPA bonds. These transactions represented approximately 35% of National's par claims to PREPA, monetized a portion of National's salvage asset at a discount to National's previous carrying value, and reduced potential volatility and ongoing risk of remediation around the PREPA credit. Subsequent to the sale of these PREPA bankruptcy claims, National does not have a material amount of additional par claims to PREPA that have matured and can be sold.
PRHTA
OnMay 20, 2019 , the Oversight Board and the Committee filed a lien avoidance adversary complaint against fiscal agents, holders, and insurers of certain PRHTA bonds, including National. The complaint challenges the extent and enforceability of certain security interests in PRHTA's revenues. Pursuant to an interim schedule entered by the Court inDecember 2019 , the Court has stayed the proceedings, with the understanding that the issues raised in these proceedings would be addressed in new adversary proceedings filed by the Oversight Board onJanuary 16, 2020 . Subsequent to those filings, these proceedings were stayed by order of the Court. 48
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS (continued)
OnApril 12, 2021 , National,Assured Guaranty Corp. ,Assured Guaranty Municipal Corp. and the Oversight Board reached an agreement in principle settling certain HTA clawback claims in the Commonwealth Title III case and providing for a distribution to HTA holders of cash, bonds and a CVI subject to completing negotiations on a plan support agreement in respect of the HTA PSA. OnMay 5, 2021 , National,Assured Guaranty Corp. ,Assured Guaranty Municipal Corp. and the Oversight Board entered into the HTA PSA. OnMay 2, 2022 , the Oversight Board filed the HTA Plan, together with the Disclosure Statement and supporting documents. National expects to receive during the second quarter of 2022 its allocable portion of cash and CVI relating to HTA, which aggregate amounts to be distributed to bondholders totals approximately$264 million and$2.2 billion , respectively. In addition, National shall receive its allocable portion of approximately$1.2 billion of newly issued HTA bonds (or cash equivalent) following the effective date of the HTA Plan.
Status of
The Oversight Board certified fiscal plans for PREPA, theUniversity of Puerto Rico (the "University") and PRHTA onMay 27, 2021 . The Oversight Board also certified the fiscal year 2022 budgets for Commonwealth, PREPA, the University and PRHTA onJune 27, 2021 . In connection with the implementation of the Commonwealth and PRHTA plans of adjustments, the Oversight Board has commenced the process of approving revised Fiscal Plans for fiscal year 2023, which commences onJuly 1, 2022 .
The University is not a debtor in Title III and continues to be current on its
debt service payment. However, the University is subject to a standstill
agreement with its senior bondholders, which has been extended to
2022
The following table presents our scheduled gross debt service due on ourPuerto Rico insured exposures for the nine months endingDecember 31, 2022 , for each of the subsequent four years endingDecember 31 and thereafter: Nine Months Ending December 31, In millions 2022 2023
2024 2025 2026 Thereafter
Puerto Rico Electric Power Authority
(PREPA)
$ 119 $ 137 $ 137 $ 105 $ 57 $ 508 $ 1,063 Puerto Rico Highway and Transportation Authority Transportation Revenue (PRHTA) 13 36 33 36 35 689 842Puerto Rico Highway and Transportation Authority-Subordinated Transportation Revenue (PRHTA) 8 1 1 1 1 21 33Puerto Rico Highway and Transportation Authority Highway Revenue (PRHTA) 2 4 2 2 2 45 57University of Puerto Rico System Revenue 5 12 11 16 6 40 90Inter American University of Puerto Rico Inc. 3 3 3 3 2 7 21 Total$ 150 $ 193 $ 187 $ 163 $ 103 $ 1,310 $ 2,106 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 has ceased issuing new MTNs and investment agreements and the outstanding liability balances and corresponding asset balances have declined over time as liabilities matured, terminated or were called or repurchased. All of the debt within the corporate segment is managed collectively and is serviced by available liquidity. 49
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS (continued)
The following table summarizes the consolidated results of our corporate segment
for the three months ended
Three Months Ended March 31, Percent
In millions 2022 2021 Change
Net investment income $ 6 $ 7 -14%
Net realized investment gains (losses) (1 ) - n/m
Net gains (losses) on financial instruments
at fair value and foreign exchange 39 55 -29%
Fees 14 16 -13%
Total revenues 58 78 -26%
Operating 16 22 -27%
Interest 19 19 -%
Total expenses 35 41 -15%
Income (loss) before income taxes $ 23 $ 37 -38%
n/m - Percent change not meaningful.
NET GAINS (LOSSES) ON FINANCIAL INSTRUMENTS AT FAIR VALUE AND FOREIGN EXCHANGE The change in net gains (losses) on financial instruments at fair value and foreign exchange for the three months endedMarch 31, 2022 compared with same period of 2021 was primarily due to variances in foreign currency gains and net gains on interest rate swaps. The three months endedMarch 31, 2022 includes foreign currency gains of$5 million on Euro-denominated liabilities compared with foreign currency gains of$17 million on these liabilities as a result of the strengthening of theU.S. dollar. In addition, the three months endedMarch 31, 2022 includes fair value net gains of$34 million on interest rate swaps compared with fair value net gains of$39 million on these swaps for the same period of 2021 due to a smaller increase in interest rates. OPERATING EXPENSE The change in operating expense for the three months endedMarch 31, 2022 compared with the same period of 2021 was 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, airports, public transportation facilities, and other types of infrastructure projects serving a substantial public purpose. Global structured finance and asset-backed obligations typically are securities repayable from cash flows generated by a specified pool of assets, such as residential and commercial mortgages, structured settlements, consumer loans, and corporate loans and bonds.MBIA Insurance Corporation insures the investment agreements written byMBIA Inc. , and ifMBIA Inc. were to have insufficient assets to pay amounts due upon maturity or termination,MBIA Insurance Corporation would be required to make such payments under its insurance policies.MBIA Insurance Corporation also insures debt obligations of other affiliates, including GFL, and MZ Funding. In addition,MBIA Corp. insures obligations under certain types of derivative contracts.MBIA Insurance Corporation provides 100% reinsurance to its subsidiary,MBIA Mexico S.A. de C.V. ("MBIA Mexico"). As ofMarch 31, 2022 ,MBIA Corp.'s total insured gross par outstanding was$4.5 billion .MBIA Corp. has contributed to the Company's NOL carryforward, which is used in the calculation of our consolidated income taxes. IfMBIA Corp. becomes profitable, it is not expected to make any tax payments under our tax sharing agreement. Based onMBIA Corp.'s current projected earnings and our expectation that it will not write significant new business, we believe it is unlikely thatMBIA Corp. will generate significant income in the near future. As a result ofMBIA Corp.'s capital structure and business prospects, we do not expect its financial performance to have a material economic impact onMBIA Inc. 50
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New Health and Medicine Findings from Alexandria University Described (Healthcare Utilization with Drug Acquisition and Expenses at the National Health Insurance Fund in Sudan): Health and Medicine
BROWN & BROWN, INC. – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations
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