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 Mexico S.A. de C.V. , ("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.
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 of
MBIA Inc.'s Annual Report on Form 10-K for the year ended December 31, 2021 for
a discussion of risks and uncertainties concerning COVID-19.
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 with supply and demand issues related to COVID-19, higher food and
energy prices, and broader price pressures. The Ukraine and Russia conflict
continues to cause human and economic hardship, which is creating upward
pressure on inflation and is weighing on global economic activity. With the
Federal Open Market Committee ("FOMC") seeking to achieve maximum employment and
2% inflation, the FOMC increased its target for the federal funds rate by 75
basis at its July and September 2022 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 insured U.S. public
finance portfolio and could reduce the amount of National's potential incurred
losses. In addition, higher projected interest rates could adversely affect the
values of our Company's investment portfolio but increase investment portfolio
yield and income. 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.
We do not insure any sovereign or sub-sovereign debt of
Additionally, we have an immaterial amount of direct or indirect Russian or
losses on these investments in the first nine months of 2022. Refer to the
following "Results of Operations -
section for additional information on these credit losses.
45
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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:
• On
instrumentalities ("Puerto Rico") defaulted on scheduled debt service for
National insured bonds and National paid gross claims in the aggregate of
scheduled debt service for National insured bonds and National paid gross
claims in the aggregate of$142 million . As ofSeptember 30, 2022 , National had$2.0 billion of debt service outstanding related toPuerto Rico . PREPA
• On
Authority ("AAFAF") and the
("PREPA") terminated the restructuring support agreement, as amended
("RSA"). On
commence mediation among the Financial Oversight and
Puerto Rico (the "Oversight Board"), the Ad Hoc creditor group of holders of PREPA Senior Bonds, Assured, National and Syncora (the "April 8 Order"). The mediation initially terminated onSeptember 16, 2022 ;
however on
mediation through
litigation to recommence on an expedited schedule concerning the
objections by the Oversight Board to bondholder liens and claims. The
Oversight Board filed an amended complaint addressing these objections on
National, filed their answer, affirmative defenses and counterclaims on
Court order. In addition, in its
directed the Oversight Board to file a plan of adjustment for PREPA by
the appointment of a receiver or to dismiss the case until the earlier of
(a) the day after the deadline set by the Court for filing a proposed
plan, if such plan deadline is not met, or (b) the termination of the
plan confirmation process.
• As of September 30, 2022 , National has sold approximately 35% of its
PREPA 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 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 $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. 46
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
OVERVIEW (continued)
• 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. Confirmation was
scheduled for
received
to HTA. The Court entered the HTA confirmation order on
National expects the HTA Plan to become effective in November of 2022 and
anticipates receiving approximately (i) an additional
and (ii)
commutation and acceleration should occur shortly after the HTA Plan
effective date and, accordingly, will reduce National's insured HTA
exposures to zero.
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, all 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
which will be managed by a special manager. Refer to "Note 1: Business
Developments and Risks and Uncertainties" and "Note 5: Loss and Loss
Adjustment Expense Reserves" in the Notes to Consolidated Financial
Statements for a further discussion of the Zohar CDOs.
47
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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 and nine months ended
Three Months Ended September 30 , Nine Months Ended September
30,
In millions except for per share, percentage and share amounts 2022 2021 2022 2021 Total revenues $ 17 $ 72 $ 97$ 162 Total expenses 52 195 241 452 Income (loss) from continuing operations before income taxes (35 ) (123 ) (144 ) (290 ) Provision (benefit) for income taxes - - - - Net income (loss) from continuing operations (35 ) (123 ) (144 ) (290 ) Income (loss) from discontinued operations, net of income taxes 1 - 1 - Net income (loss) $ (34 )$ (123 ) $ (143 )$ (290 ) Net income (loss) per basic and diluted common share $
(0.67 )
Effective tax rate
0.0% 0.0% 0.0% 0.0% Adjusted net income (loss)(1) $
(17 )
Adjusted net income (loss) per diluted share(1)
$
(0.34 )
Weighted average basic and diluted common shares outstanding
49,878,191 49,552,796 49,779,681 49,434,177
(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.
Three Months Ended
Income (loss) from Continuing Operations Before Income Taxes
Consolidated total revenues decreased for the three months endedSeptember 30, 2022 compared with the same period of 2021 principally due to losses from consolidated variable interest entities ("VIEs"), a decrease in net premiums earned, unfavorable changes in gains on extinguishment of debt and losses from sales of investments. Consolidated VIE revenue for the three months endedSeptember 30, 2022 included a$26 million loss primarily due to the reclassification of credit risk losses from accumulated other comprehensive income ("AOCI") due to the early redemption of VIE liabilities carried at fair value. Net premiums earned decreased$17 million primarily due to the acceleration of premium earnings from the termination of an international public finance insurance policy in 2021. In addition, in 2021, revenues included$16 million of gains on extinguishment of debt with no comparable amount in 2022, and the three months endedSeptember 30, 2022 included$13 million of realized losses on investments sold compared to$2 million of realized gains in 2021. These unfavorable changes in revenues were partially offset by fair value gains on interest rate swaps and an increase in net investment income. Fair value gains of$25 million on our interest rate swaps for the three months endedSeptember 30, 2022 were due to increases in interest rates compared with$10 million of gains in the same period of 2021. In addition, for the three months endedSeptember 30, 2022 , net investment income increased$8 million compared with the same period of 2021 primarily due to higher average asset balances. Consolidated total expenses for the three months endedSeptember 30, 2022 included a loss and loss adjustment expense ("LAE") benefit of$12 million compared with losses and LAE of$125 million for the same period of 2021. This decrease in losses and LAE was primarily due to favorable changes in losses and LAE from insured CDOs, first-lien RMBS and on certainPuerto Rico credits in 2022 when compared with 2021. 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 for the three months endedSeptember 30, 2022 compared with the same period of 2021 primarily due to a decrease in compensation expense related to the Company's deferred compensation plan and lower litigation expenses. 48
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS (continued)
Nine Months Ended
Income (loss) from Continuing Operations Before Income Taxes
Consolidated total revenues decreased for the nine months endedSeptember 30, 2022 compared with the same period of 2021 principally due to losses from fair valuing investments, sales of investments and impairing investments to fair value for investments we intend to sell, unfavorable changes in gains on extinguishment of debt and a decrease in net premiums earned. The nine months endedSeptember 30, 2022 includes$64 million of losses from fair valuing investments,$37 million of realized losses on investments sold and$21 million of impairments on investments as a result of our intent to sell these securities before they recover their cost basis. In addition, in 2021, revenues included$30 million of gains on extinguishment of debt compared with$4 million in 2022 and net premiums earned decreased$26 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 and an increase in net investment income. Fair value gains on our interest rate swaps for the nine months endedSeptember 30, 2022 were$87 million compared with gains of$35 million for the same period of 2021. The increase was due to a larger increase in interest rates in 2022. Net investment income increased$23 million compared with the same period of 2021 primarily due to higher average asset balances. Consolidated total expenses for the nine months endedSeptember 30, 2022 included$57 million of losses and LAE compared with losses and LAE of$232 million for the same period of 2021. This decrease in losses and LAE was primarily due to favorable changes from insured CDOs and first-lien RMBS in 2022 when compared with 2021. This decrease was partially offset by an increase in net losses and LAE on certainPuerto Rico credits. 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 for the nine months endedSeptember 30, 2022 compared with the same period of 2021 primarily due to a decrease in compensation expense related to the Company's deferred compensation plan and lower litigation expenses. Also, interest expense of consolidated VIEs decreased for the nine months endedSeptember 30, 2022 compared with the same period of 2021 due to the repayment of the outstanding insured senior notes ofMBIA Corp.'s financing facility between MZ Funding and certain purchasers ("Refinanced Facility") in 2021.
Three and Nine Months Ended
Provision for Income Taxes
For the three and nine months endedSeptember 30, 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"). As ofSeptember 30, 2022 andDecember 31, 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 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. 49
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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 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.
50
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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 and nine months endedSeptember 30, 2022 and 2021: Three Months Ended September 30, Nine Months Ended September 30, In millions except share and per share amounts 2022 2021 2022 2021 Net income (loss) $ (34 )
Less: adjusted net income (loss) adjustments:
Income (loss) from discontinued operations, net of
income taxes
1 - 1 -
Income (loss) before income taxes of our international
and structured finance insurance segment and
eliminations
(39 ) (80 ) (21 ) (223 ) Adjustments to income before income taxes of ourU.S. public finance insurance and corporate segments: Mark-to-market gains (losses) on financial instruments(1) 23 10 60 39 Foreign exchange gains (losses)(1) 10 5 29 18 Net realized investment gains (losses) (13 ) 2 (36 ) 1 Net gains (losses) on extinguishment of debt - 16 5 30 Net investment losses related to impairments of securities(2) 1 - (21 ) - Adjusted net income adjustment to the (provision) benefit for income tax - - - - Adjusted net income (loss) $ (17 ) $ (76 )$ (160 ) $ (155 )
Adjusted net income (loss) per diluted common share(3)
$ (1.54 ) $ (3.21 ) $ (3.14 )
(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 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
condition, the regulatory regime in 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 MBIA Inc. Further, MBIA Inc. 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.
51
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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 September 30, As of December 31,
In millions except share and per share amounts 2022 2021
Total shareholders' equity of MBIA Inc. $ (863 ) $ (313 )
Common shares outstanding 54,900,209 54,556,112
GAAP book value per share $ (15.70 ) $ (5.73 )
Management's adjustments described above:
Remove negative book value per share of MBIA
Corp. (37.03 ) (35.94 )
Remove net unrealized gains (losses) on
available-for-sale securities included in other
comprehensive income (loss) (4.30 ) 2.02
Include net unearned premium revenue in excess
of expected losses 3.17 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 ofSeptember 30, 2022 , National had total insured gross par outstanding of$33.0 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. 52
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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 and nine months ended
Three Months Ended September 30, Percent Nine Months Ended September 30, Percent
In millions 2022 2021 Change 2022 2021 Change
Net premiums earned $ 9 $ 13
-31% $ 31 $ 41 -24%
Net investment income
20 15 33% 58 43 35% Net realized investment gains (losses) (7 ) 1 n/m (28 ) 1 n/m Net gains (losses) on financial instruments at fair value and foreign exchange (6 ) - n/m (43 ) - n/m Fees and reimbursements 1 - n/m 2 2 -% Other net realized gains (losses) - - n/m (19 ) - n/m Total revenues 17 29 -41% 1 87 -99% Losses and loss adjustment 16 68 -76% 152 135 13% Amortization of deferred acquisition costs 2 2 -% 7 9 -22% Operating 10 15 -33% 32 41 -22% Total expenses 28 85 -67% 191 185 3% Income (loss) from continuing operations before income taxes $ (11 ) $ (56 ) -80%$ (190 ) $ (98 ) 94%
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 endedSeptember 30, 2022 and 2021, scheduled premiums earned were$8 million and$9 million , respectively, and refunded premiums earned were$1 million and$4 million , respectively. For the nine months endedSeptember 30, 2022 and 2021, scheduled premiums earned were$24 million and$28 million , respectively, and refunded premiums earned were$7 million and$13 million , respectively. NET INVESTMENT INCOME The increase in net investment income for the three and nine months endedSeptember 30, 2022 compared with the same periods 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 REALIZED INVESTMENT GAINS (LOSSES) The decrease in net realized investment gains (losses) for the three and nine months endedSeptember 30, 2022 compared with the same periods of 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 the three and nine months endedSeptember 30, 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 the nine months ended
other net realized losses were primarily related to impairments of certain
investments that had unrealized losses and which we intend to sell before
recovery of their amortized cost basis.
LOSSES AND LOSS ADJUSTMENT EXPENSES OurU.S. public finance insured portfolio management group is responsible for monitoring ourU.S. public finance segment's insured obligations. The level and frequency of monitoring of any insured obligation depends on the type, size, rating and our assessed performance of the insured issue. 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 endedSeptember 30, 2022 , losses and LAE incurred primarily related to changes in our estimated recoveries on National's HTA exposure. HTA 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. 53
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS (continued)
During the three months endedSeptember 30, 2022 , we updated assumptions used to estimate the fair value of the new HTA bonds that National expects to receive. These assumption changes resulted in a decrease in our estimated present value of HTA recoveries. In addition, losses and LAE incurred related to changes in our estimated recoveries and claims payments on National's PREPA exposure. For the nine months endedSeptember 30, 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. During the nine months endedSeptember 30, 2022 , we updated our PREPA assumptions used to estimate the value of recoveries and the timing and amount of claim payments to reflect the current status of a remediation. These assumption changes resulted in a decrease in our estimated present value of expected PREPA recoveries. PREPA losses were partially offset by loss benefits related to HTA and GO recoveries. During the nine months endedSeptember 30, 2022 , our HTA recoveries increased based on updated information related to the fair value of the HTA CVI that National received in July of 2022 and our estimated value of the HTA bonds National expects to receive. In addition, we recorded a loss 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. For the three months endedSeptember 30, 2021 , the losses and LAE incurred primarily related to the changes in loss scenario assumptions on thePuerto Rico GO and PREPA credits. In the third quarter of 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. In addition, National updated its GO loss reserve scenarios to include certain assumptions about recovery valuation on the date it expects to receive cash, bonds and a contingent value instrument. These assumption changes decreased expected GO recoveries. Also in the third quarter of 2021, National modified its PREPA scenario assumptions to reflect the market insight gained from the anticipated sale of a portion of the recoverable 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 PREPA RSA. For the nine months endedSeptember 30, 2021 , the losses and LAE incurred primarily related to the changes in loss reserve scenario assumptions on the PREPA credit discussed above, and to changes in loss reserve scenario assumptions on HTA exposure to reflect the most recent Plan of Adjustment. In addition, an increase in the risk-free rates used to discount the value of long-dated future recoveries onPuerto Rico exposures contributed to loss and LAE incurred. The following table presents information about ourU.S. public finance insurance loss recoverable asset and loss and LAE reserves liabilities as ofSeptember 30, 2022 andDecember 31, 2021 : September 30, December 31, Percent In millions 2022 2021 Change Assets: Insurance loss recoverable $ 242$ 1,054 -77% Reinsurance recoverable on paid and unpaid losses (1) 12 3 n/m Liabilities: Loss and LAE reserves 688 425 62% Insurance loss recoverable-ceded (2) 6 55 -89% Net reserve (salvage) $ 440$ (577 ) n/m
(1) - Reported within "Other assets" on our consolidated balance sheets.
(2) - Reported within "Other liabilities" on our consolidated balance sheets.
n/m-Percent change not meaningful.
The insurance loss recoverable as ofSeptember 30, 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 CVI. In addition, the insurance loss recoverable declined due to the sale of PREPA bankruptcy claims partially offset by changes in assumptions related to the value of the remaining expected PREPA recoveries on paid claims. The insurance loss recoverable also declined as a result of the receipt of cash and CVI on National's paid claims related to its HTA exposure. Loss and LAE reserves as ofSeptember 30, 2022 increased compared withDecember 31, 2021 , primarily due to a decrease in expected PREPA recoveries on claims not yet paid, which are netted in loss and LAE reserves, as well as higher expected losses due to changes in scenario assumptions to reflect the current status of a PREPA remediation. In addition, loss reserves increased on National's HTA exposure, as a result of the receipt of cash and CVI in the third quarter of 2022 on claims not yet paid, which were previously netted in loss and LAE reserves. These increases to Loss and LAE reserves were offset by claims payments related to the acceleration and commutation of GO exposure, and scheduled claim payments onPuerto Rico exposures during the nine months endedSeptember 30, 2022 . 54
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS (continued)
POLICY ACQUISITION COSTS AND OPERATING EXPENSESU.S. public finance insurance segment expenses for the three and nine months endedSeptember 30, 2022 and 2021 are presented in the following table: Three Months Ended September 30, Percent Nine Months Ended September 30, Percent In millions 2022 2021 Change 2022 2021 Change Gross expenses $ 9 $ 15 -40% $ 32 $ 41 -22% Amortization of deferred acquisition costs $ 2 $ 2 -% $ 7 $ 9 -22% Operating 10 15 -33% 32 41 -22% Total insurance operating expenses $ 12 $ 17 -29% $ 39 $ 50 -22% Gross expenses represent total insurance expenses before the deferral of any policy acquisition costs. Operating expenses decreased for the three and nine months endedSeptember 30, 2022 compared with the same periods 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. The following table presents the credit quality distribution of National'sU.S. public finance outstanding gross par insured as ofSeptember 30, 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 September 30, 2022 December 31, 2021 Rating Amount % Amount % AAA$ 1,465 4.4%$ 1,682 4.6% AA 13,740 41.6% 14,874 40.8% A 10,232 31.0% 10,439 28.6% BBB 4,854 14.7% 6,187 17.0% Below investment grade 2,741 8.3% 3,269 9.0% Total$ 33,032 100.0%$ 36,451 100.0% 55
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS (continued)
The following is a summary of exposures within the insured portfolio of ourU.S. public finance insurance segment related toPuerto Rico as ofSeptember 30, 2022 : Debt National Gross Par Service Internal In millions Outstanding Outstanding Rating Puerto Rico Electric Power Authority (PREPA)$ 710 $ 944 d Puerto Rico Highway and Transportation d Authority Transportation Revenue (PRHTA)(1) 523
829
Puerto Rico Highway and Transportation d Authority-Subordinated Transportation Revenue (PRHTA)(1) 19
25
Puerto Rico Highway and Transportation d Authority Highway Revenue (PRHTA)(1) 39 (2)
56
University of Puerto Rico System Revenue 67 85 d Inter American University of Puerto Rico Inc. 17 20 a3 Total$ 1,375 $ 1,959
(1) - Pursuant to the HTA Plan implementation that National expects to be
effective in the fourth quarter of 2022, National's HTA gross par
outstanding and debt service outstanding will be reduced to zero.
(2) - Includes CABs that reflect the gross par amount at the time of issuance of
the insurance policy. As ofSeptember 30, 2022 , gross par outstanding plus CABs accreted interest was$41 million . OnJune 30, 2016 , PROMESA was signed into law by the President ofthe United States . PROMESA provides for the creation of the Oversight Board with powers relating to the development and implementation of a fiscal plan for the Commonwealth and each of its instrumentalities as well as a court-supervised Title III process that allowsPuerto Rico to restructure its debt if voluntary agreements cannot be reached with creditors through a collective action process. Following the resignation and replacement of several Oversight Board members, the Oversight Board has been reconstituted with four new members while three existing members have been reappointed by the President for another three year term. The newly elected Governor ofPuerto Rico has appointed himself as a non-voting member of the reconstituted Oversight Board. OnMay 3, 2017 , the Oversight Board certified and filed a petition under Title III of PROMESA forPuerto Rico with theDistrict Court of Puerto Rico thereby commencing a bankruptcy-like case for the Commonwealth GO. Under separate petitions, the Oversight Board subsequently commenced Title III proceedings for COFINA, PRHTA, PREPA and PBA onMay 5, 2017 ,May 21, 2017 ,July 2, 2017 andSeptember 27, 2019 , respectively. 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 . There can be no assurance that the Title III proceedings for PREPA will be resolved with similar outcomes. As a result of prior defaults, various stays and the Title III cases,Puerto Rico failed to make certain scheduled debt service payments for National insured bonds. As a consequence, National has paid gross claims in the aggregate amount of$2.3 billion relating to GO bonds, PBA bonds, PREPA bonds and PRHTA bonds throughSeptember 30, 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 remaining exposure to
is to PREPA.
56
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS (continued)
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 "April 8 Order"). The mediation initially terminated onSeptember 16, 2022 ; however onSeptember 29, 2022 , the Court entered an order of restarting mediation throughDecember 31, 2022 , but simultaneously permitting litigation to recommence on an expedited schedule concerning the objections by the Oversight Board to bondholder liens and claims. The Oversight Board filed an amended complaint addressing these objections onSeptember 30, 2022 . The parties and intervenor defendants, including National, filed their answer, affirmative defenses and counterclaims onOctober 17, 2022 . Litigation over the counterclaims has been stayed by Court order. In addition, in itsSeptember 29, 2022 Order, the Court directed the Oversight Board to file a plan of adjustment for PREPA byDecember 1, 2022 . The Court stayed the pending bondholder motion seeking the appointment of a receiver or to dismiss the case until the earlier of (a) the day after the deadline set by the Court for filing a proposed plan, if such plan deadline is not met, or (b) the termination of the plan confirmation process. OnJuly 1, 2019 the Oversight Board and AAFAF had 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, which was subject to a stay pending the completion of the RSA and, subsequent to that, the mediation. Following the entry of theSeptember 29 Order, the Oversight Board filed its amended adversary complaint onSeptember 30, 2022 . Bondholders filed its answer and counterclaim onOctober 17, 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.
PRHTA
OnApril 12, 2021 , National,Assured Guaranty Corp. ,Assured Guaranty Municipal Corp. and the Oversight Board reached an agreement in principle settling certain clawback claims and providing for a distribution of cash, bonds and a CVI to Puerto Rico HTA bondholders subject to completing negotiations on 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. OnJune 22, 2022 , the Disclosure Statement was approved by the Court. Confirmation was scheduled forAugust 17 and 18, 2022. During July of 2022, National received$33 million of cash and$358 million face amount of CVI relating to HTA. The Court entered the HTA confirmation order onOctober 12, 2022 . National expects the HTA Plan to become effective in November of 2022 and anticipates receiving approximately (i) an additional$45 million of cash and (ii)$133 million face amount of newly issued HTA bonds. The expected commutation and acceleration should occur shortly after the HTA Plan effective date and, accordingly, will reduce National's insured HTA exposures to zero.
Status of
The Oversight Board certified fiscal plans for PREPA,
(the "University") and PRHTA on
2022
budgets for Commonwealth, PREPA, the University and PRHTA on
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 toNovember 30, 2022 . National is not a party to the standstill agreement. 57
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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 scheduled gross debt service due on ourPuerto Rico insured exposures for the three months endingDecember 31, 2022 , for each of the subsequent four years endingDecember 31 and thereafter: Three Months Ending December 31, In millions 2022 2023 2024
2025 2026 Thereafter
Puerto Rico Electric Power Authority
(PREPA)
$ 137 $
137
- Transportation Authority Transportation Revenue (PRHTA)(1) 36 33 36 35 689 829 Puerto Rico Highway and - Transportation Authority-Subordinated Transportation Revenue (PRHTA)(1) 1 1 1 1 21 25 Puerto Rico Highway and -Transportation Authority Highway Revenue (PRHTA)(1) 4 2 2 2 46 56 University of Puerto Rico System - Revenue 12 11 16 6 40 85 Inter American University of Puerto 2 Rico Inc. 3 3 3 3 6 20 Total $ 2$ 193 $ 187 $ 163 $ 104 $ 1,310 $ 1,959
(1) - Pursuant to the HTA Plan implementation that National expects to be
effective in the fourth quarter of 2022, National's HTA gross par
outstanding and debt service outstanding will be reduced to zero.
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, 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 three and nine months ended
Three Months Ended September 30, Percent Nine Months Ended September 30, Percent
In millions 2022 2021 Change 2022 2021 Change
Net investment income $ 5 $ 7 -29% $ 16 $ 21 -24% Net realized investment n/m n/m gains (losses) (6 ) 1 (8 ) - Net gains (losses) on financial instruments at fair value and foreign n/m 122% exchange 35 12 111 50 Net gains (losses) on -100% -83% extinguishment of debt - 16 5 30 Fees 11 13 -15% 38 42 -10% Total revenues 45 49 -8% 162 143 13% Operating 12 15 -20% 37 54 -31% Interest 19 19 -% 57 56 2% Total expenses 31 34 -9% 94 110 -15% Income (loss) from continuing operations before income taxes $ 14 $ 15 -7% $ 68 $ 33 106%
n/m - Percent change not meaningful.
58
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS (continued)
NET GAINS (LOSSES) ON FINANCIAL INSTRUMENTS AT FAIR VALUE AND FOREIGN EXCHANGE The changes in net gains (losses) on financial instruments at fair value and foreign exchange for the three and nine months endedSeptember 30, 2022 compared with same periods of 2021 were primarily due to the impact of increasing interest rates on the values of interest rate swaps for which we receive floating rates and changes in the foreign currency exchange rate on Euro-denominated liabilities as a result of the strengthening of theU.S. dollar. These favorable changes were partially offset by fair value losses on investments. The three months endedSeptember 30, 2022 includes fair value net gains of$25 million on interest rate swaps compared with fair value net gains of$10 million on these swaps for the same period of 2021 due to larger increases in interest rates in 2022. The three months endedSeptember 30, 2022 includes foreign currency gains of$11 million on Euro-denominated liabilities compared with foreign currency gains of$7 million on these liabilities for the same period of 2021 as a result of a larger increase in the strength of theU.S. dollar against the Euro. Fair value losses on investments was$2 million for the three months endedSeptember 30, 2022 with no comparable amount in the same period of 2021. The nine months endedSeptember 30, 2022 includes fair value net gains of$87 million on interest rate swaps compared with fair value net gains of$35 million on these swaps for the same period of 2021. This increase in net gains is due to larger increases in interest rates in 2022. The nine months endedSeptember 30, 2022 includes foreign currency gains of$30 million on Euro-denominated liabilities compared with foreign currency gains of$19 million on these liabilities for the same period of 2021 due to a larger increase in the strength of theU.S. dollar against the Euro in 2022. Fair value losses on investments was$13 million for the nine months endedSeptember 30, 2022 compared with gains of$5 million for the same period of 2021.
extinguishment of debt for all periods include gains from purchases, at
discounts, of MTNs issued by the Company.
OPERATING EXPENSE The change in operating expense for the three and nine months endedSeptember 30, 2022 compared with the same periods 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 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 ofSeptember 30, 2022 ,MBIA Corp.'s total insured gross par outstanding was$4.1 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. 59
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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 international and structured finance insurance segment results for the three and nine months endedSeptember 30, 2022 and 2021: Three Months Ended September 30, Percent Nine Months Ended September 30, Percent In millions 2022 2021 Change 2022 2021 Change Net premiums earned $ 3 $ 17
-82% $ 10 $ 28 -64%
Net investment income
5 1 n/m 12 4 n/m Net realized investment gains (losses) - - -% (1 ) - n/m Net gains (losses) on financial instruments at fair value and foreign exchange (4 ) (3 ) 33% (17 ) (9 ) 89% Fees and reimbursements 2 8 -75% 11 15 -27% Other net realized gains (losses) 1 - n/m 1 - n/m Revenues of consolidated VIEs: Net gains (losses) on financial instruments at fair value and foreign exchange (36 ) 4 n/m (16 ) (10 ) 60% Other net realized gains (losses) 5 (9 ) n/m 5 (14 ) -136% Total revenues (24 ) 18 n/m 5 14 -64% Losses and loss adjustment (28 ) 57 -149% (95 ) 97 n/m Amortization of deferred acquisition costs 2 3 -33% 8 11 -27% Operating 5 5 0% 16 18 -11% Interest 33 26 27% 90 82 10% Expenses of consolidated VIEs: Operating 2 2 -% 5 5 -% Interest - 7 -100% 2 24 -92% Total expenses 14 100 -86% 26 237 -89% Income (loss) from continuing operations before income taxes $ (38 ) $ (82 ) -54% $ (21 )$ (223 ) -91%
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. Net premiums earned represent gross premiums earned net of premiums ceded to reinsurers, and include scheduled premium earnings and premium earnings from refunded issues. Certain premiums may be eliminated in our consolidated financial statements as a result of the Company consolidating insured transactions as VIEs. The following table provides net premiums earned from our financial guarantee contracts for the three and nine months endedSeptember 30, 2022 and 2021: Three Months Ended September 30, Percent Nine Months Ended September 30, Percent In millions 2022 2021 Change 2022 2021 Change Net premiums earned: U.S. $ - $ - n/m $ 2 $ 2 0% Non-U.S. 3 17 -82% 8 26 -69% Total net premiums earned $ 3 $ 17 -82% $ 10 $ 28 -64% VIEs (eliminated in consolidation) $ - $ 2 -100% $ - $ 3 -100% 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 the three and nine months endedSeptember 30, 2022 compared with the same periods of 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 INVESTMENT INCOME The increase in net investment income for the three and nine months endedSeptember 30, 2022 compared with the same periods of 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 unfavorable change for the nine months endedSeptember 30, 2022 compared with the same period of 2021 was primarily due to fair value losses on investments in 2022. FEES AND REIMBURSEMENTS The decreases in fees and reimbursements for the three and nine months endedSeptember 30, 2022 compared with the same periods of 2021 were primarily due to higher waiver and consent fees received in the third quarter of 2021 related to the termination of an international public finance insurance policy. Due to the transaction-specific nature inherent in fees and reimbursements, these revenues can vary significantly from period to period. 60
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS (continued)
REVENUES OF CONSOLIDATED VIEs: The unfavorable changes for the three months endedSeptember 30, 2022 compared with the same period of 2021 was principally due to the reclassification of$26 million of credit risk losses from AOCI to earnings and an additional$9 million of fair value losses related to the early redemption of VIE liabilities in 2022. The favorable changes for the nine months endedSeptember 30, 2022 compared with the same period of 2021 was principally due to 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 5: 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 the three months ended
primarily related to increases in the risk-free rates used to discount expected
claim payments, which decreased the present value of net loss reserves,
primarily on insured RMBS transactions.
For the nine months endedSeptember 30, 2022 , the losses and LAE benefit primarily related to insured RMBS transactions and was the result of an increase in risk-free rates during 2022, which caused case reserves, net of recoveries, to decline. Also contributing to the benefit was an increase in expected salvage collections from insured CDOs.
For the three months ended
related to a decline in expected salvage collections from insured CDOs.
For the nine months endedSeptember 30, 2021 , losses and LAE incurred primarily related to a decline in expected salvage collections from insured CDOs, partially offset by a benefit related to insured RMBS transactions as a result of an increase in risk-free rates, which caused case reserves, net of recoveries, to decline. As a result of the consolidation of VIEs, loss and LAE excludes a loss and LAE expense of$3 million and a loss and LAE benefit of$5 million for the three and nine months endedSeptember 30, 2022 , respectively, and excludes a loss and LAE benefit of$9 million and$24 million for the three and nine months endedSeptember 30, 2021 , respectively, as VIE losses and LAE are eliminated in consolidation. Refer to "Note 5: 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 ofSeptember 30, 2022 andDecember 31, 2021 . September 30, December 31, Percent In millions 2022 2021 Change Assets: Insurance loss recoverable $ 31$ 242 -87% Reinsurance recoverable on paid and unpaid losses (1) 4 5 -20% Liabilities: Loss and LAE reserves 359 469 -23% Net reserve (salvage) $ 324$ 222 46%
(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. A decrease in RMBS recoveries due to an increase in risk-free rates during 2022 used to discount future recoveries of paid claims, which lowered the present value of recoveries, also contributed to the decline in the insurance loss recoverable.
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.
61
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS (continued)
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 5: 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.
finance insurance segment expenses for the three and nine months ended
Three Months Ended September 30, Percent Nine Months Ended September 30, Percent
In millions 2022 2021 Change 2022 2021 Change
Gross expenses $ 5 $ 6 -17% $ 17 $ 19 -11%
Amortization of deferred
acquisition costs $ 2 $ 3 -33% $ 8 $ 11 -27%
Operating 5 5 -% 16 18 -11%
Total insurance
operating expenses $ 7 $ 8 -13% $ 24 $ 29 -17%
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 MBIA Corp.'s surplus notes which
are indexed to London Interbank Offered Rate ("LIBOR"). The increases for the
three and nine months ended September 30, 2022 compared with 2021 are due to
changes in LIBOR.
INTEREST EXPENSE OF CONSOLIDATED VIEs Interest expense of consolidated VIEs
decreased for the three and nine months ended
the same periods of 2021 primarily due to the repayment of the Refinanced
Facility in 2021.
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 ofSeptember 30, 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 ofSeptember 30, 2022 andDecember 31, 2021 ,MBIA Corp. had$911 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$246 million and$238 million , as ofSeptember 30, 2022 andDecember 31, 2021 , respectively. 62
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS (continued)
In addition, as of
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. As ofSeptember 30, 2022 , the aggregate amount of insured par outstanding ceded by MBIA to reinsurers under reinsurance agreements was$911 million compared with$1.0 billion as ofDecember 31, 2021 . Under National's reinsurance agreement withMBIA Corp. , if a reinsurer ofMBIA Corp. is unable to pay claims ceded byMBIA Corp. onU.S. public finance exposure, National will assume liability for such ceded claim payments. For a further discussion of the Company's reinsurance, refer to "Note 13: Insurance in Force" in the Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2021 .
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.
Seasoned Insurance and Cannabis Industry Veterans Form Frontier Risk Group to Develop First Tech-Enabled Insurance Solution for the Cannabis Sector: Frontier Risk Group
BAUSCH & LOMB CORP – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations
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