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The following discussion and analysis of financial condition and results of operations of MBIA Inc. should be read in conjunction with the other sections of our Annual Report on Form 10-K for the year ended December 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 of MBIA Inc.'s management which may be forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. Refer to "Risk Factors" in Part II, Item 1A and "Forward-Looking and Cautionary Statements" and "Risk Factors" in Part I, Item 1A of MBIA Inc.'s Annual Report on Form 10-K for the year ended December 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. Our U.S. public finance
insurance portfolio is managed through National Public Finance Guarantee
Corporation ("National"), our corporate segment is managed through MBIA 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 through MBIA 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 or MBIA
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.
During the second quarter of 2022, overall U.S. economic activity picked up with
the employment rate remaining low with robust job gains. Inflation remains
elevated with supply and demand issues related to COVID-19, higher energy
prices, and broader price pressures. The Ukraine and Russia conflict is causing
tremendous 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 each of its June and July 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 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 of Russia or Ukraine.
Additionally, we have an immaterial amount of direct or indirect Russian or
Ukraine debt holdings in our investment portfolios and have recorded credit
losses and unrealized losses on these investments in the first six months of
2022. Refer to the following “Results of Operations-U.S. Public Finance
Insurance Segment” section for additional information on these credit losses.
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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:
Puerto Rico
• 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 of June 30, 2022, National had $2.1 billion of debt
service outstanding related to Puerto Rico.
• On July 1, 2022, Puerto Rico defaulted on scheduled debt service for
National insured bonds and National paid gross claims in the aggregate of
$142 million, which decreased the $2.1 billion of debt service
outstanding related to Puerto Rico.
PREPA
• On March 8, 2022, the Puerto Rico Fiscal Agency and Financial Advisory
Authority (“AAFAF”) and Puerto Rico Electric Power Authority (“PREPA”)
terminated the RSA. On April 8, 2022, the Court appointed a new panel 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 “April 8 Order”). The mediation deadline is currently
August 15, 2022. The April 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 by August 15, 2022.
• As of June 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 February 22, 2021, National agreed to join a plan support agreement,
dated as of February 22, 2021 (the “GO PSA”), among the Financial
Oversight and Management Board for Puerto Rico (the “Oversight Board”),
certain holders of Puerto Rico Commonwealth GO (“GO”) Bonds and Puerto
Rico Public Buildings Authority (“PBA”) bonds, Assured Guaranty Corp. and
Assured Guaranty Municipal Corp, and Syncora Guarantee Inc. in connection
with the Puerto Rico Commonwealth GO (“GO”) and PBA Title III cases. The
GO PSA was effective and implemented on March 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 $380 million and
$495 million, respectively.
• On April 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 contingent value instrument to Puerto Rico Highway and
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 May 5, 2021, National, Assured Guaranty
Corp., Assured Guaranty Municipal Corp. and the Oversight Board entered
into the HTA PSA. On May 2, 2022, the Oversight Board filed the Title III
Plan of Adjustment for the Puerto Rico Highways and Transportation
Authority (the “HTA Plan”), together with the Disclosure Statement and
supporting documents. On June 22, 2022, the Disclosure Statement was
approved by the Court. Confirmation is scheduled for August 17 and 18,
2022. During July of 2022 and pursuant to the HTA PSA, National received
$33 million of cash and $358 million face amount of CVI relating to HTA.
In addition, National expects to receive additional cash and newly issued
HTA bonds, or cash equal to the face amount of the newly issued HTA
bonds, following the effective date of the HTA Plan.
Refer to the following “U.S. Public Finance Insurance Puerto Rico Exposures”
section for additional information on our Puerto Rico exposures.
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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 six months ended June 30, 2022 and 2021:
Three
Months Ended June 30, Six Months Ended June 30,
In millions except for per share, percentage and share amounts 2022
2021 2022 2021 Total revenues $ 40 $ 18 $ 80 $ 90 Total expenses 76 79 189 257 Income (loss) before income taxes (36 ) (61 ) (109 ) (167 ) Provision (benefit) for income taxes - - - - Net income (loss) $ (36 )$ (61 )$ (109 )$ (167 ) Net income (loss) per basic and diluted common share $
(0.72 ) $ (1.23 )$ (2.20 )$ (3.38 )
Effective tax rate
0.0% 0.0% 0.0% 0.0% Adjusted net income (loss) (1) $
(47 ) $ 37 $ (143 )$ (79 )
Adjusted net income (loss) per diluted share
(1)
$
(0.93 ) $ 0.76$ (2.87 )$ (1.60 )
Weighted average basic and diluted common shares outstanding 49,826,695 49,488,368 49,729,610 49,373,883
(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 June 30, 2022 vs. Three Months Ended June 30, 2021
Income (loss) Before Income Taxes
Consolidated total revenues increased for the three months ended June 30, 2022
compared with the same period of 2021 principally due to fair value gains on
interest rate swaps, gains from changes in foreign exchange rates, gains from
consolidated variable interest entities ("VIEs") and an increase in net
investment income. These favorable changes in revenues were partially offset by
losses from fair valuing investments, sales of investments and impairing
investments to fair value for investments we intend to sell. Fair value gains of
$29 million on our interest rate swaps for the three months ended June 30, 2022
were due to increases in interest rates compared with a loss of $14 million from
a decrease in interest rates in the same period of 2021. Foreign exchange gains
for the three months ended June 30, 2022 on Euro-denominated liabilities were
$15 million compared with losses of $5 million for the same period of 2021.
Consolidated VIE revenue for the three months ended June 30, 2022 included $24
million primarily due to the reclassification of credit risk gains from
accumulated other comprehensive income ("AOCI") due to the early redemption of
VIE liabilities carried at fair value. In addition, for the three months ended
June 30, 2022, net investment income increased $10 million compared with the
same period of 2021 primarily due to higher average asset balances. The three
months ended June 30, 2022 includes $34 million of losses from fair valuing
investments, $21 million of realized losses on investments sold and $19 million
of impairments on investments as a result of our intent to sell these securities
before they recover their cost basis.
Consolidated total expenses for the three months ended June 30, 2022 included
$20 million of losses and loss adjustment expense ("LAE") compared with losses
and LAE of $9 million for the same period of 2021. This increase in losses and
LAE was primarily due to an increase in net losses and LAE on certain Puerto
Rico credits, partially offset by favorable changes in losses and LAE from
insured CDOs and first-lien RMBS in 2022 when compared with 2021. Refer to the
following "Losses and Loss Adjustment Expenses" sections in the Results of
Operations of our U.S. Public Finance Insurance and International and Structured
Finance Insurance segments for additional information on our insurance losses
and LAE. Operating expense decreased for the three months ended June 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. Also,
interest expense of consolidated VIEs decreased for the three months ended
June 30, 2022 compared with the same period of 2021 due to the repayment of the
outstanding insured senior notes of MBIA Corp.'s financing facility between MZ
Funding and certain purchasers ("Refinanced Facility") during 2021.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS (continued)
Six Months Ended June 30, 2022 vs. Six Months Ended June 30, 2021
Income (loss) Before Income Taxes
Consolidated total revenues decreased for the six months ended June 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. These unfavorable changes in revenues were partially offset by fair value gains on interest rate swaps, gains from consolidated VIEs and an increase in net investment income. The six months ended June 30, 2022 includes $53 million of losses from fair valuing investments, $24 million of realized losses on investments sold and $19 million of impairments on investments as a result of our intent to sell these securities before they recover their cost basis. Fair value gains on our interest rate swaps for the six months ended June 30, 2022 were $62 million compared with gains of $25 million for the same period of 2021. The increase was due to a larger increase in interest rates in 2022. Consolidated VIE revenue for the six months ended June 30, 2022 was a gain of $20 million compared with a loss of $19 million for the same period of 2021. This favorable change is primarily due to the reclassification of credit risk gains from AOCI compared with the reclassification of credit risk losses in 2021 due to the early redemption of VIE liabilities carried at fair value. In addition, for the six months ended June 30, 2022, net investment income increased $14 million compared with the same period of 2021 primarily due to higher average asset balances. Consolidated total expenses for the six months ended June 30, 2022 included $69 million of losses and LAE compared with losses and LAE of $107 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 certain Puerto Rico credits. Refer to the following "Losses and Loss Adjustment Expenses" sections in the Results of Operations of our U.S. Public Finance Insurance and International and Structured Finance Insurance segments for additional information on our insurance losses and LAE. Operating expense decreased for the six months ended June 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. Also, interest expense of consolidated VIEs decreased for the six months ended June 30, 2022 compared with the same period of 2021 due to the repayment of the Refinanced Facility during 2021.
Three and Six Months Ended June 30, 2022 vs. Three and Six Months Ended June 30,
2021
Provision for Income Taxes
For the three and six months ended June 30, 2022 and 2021, our effective tax
rate applied to our loss before income taxes was 0% compared with the U.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 of June 30, 2022 and December 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.
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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 in the 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 of MBIA Corp. which given its capital structure and
business prospects, we do not expect its financial performance to have a
material economic impact on MBIA 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 such as interest rate swaps, investment securities and hybrid
financial instruments. These amounts fluctuate based on market interest
rates, credit spreads and other market factors.
• Foreign exchange gains (losses)
- We remove foreign exchange gains (losses) on the remeasurement of
certain assets and liabilities and transactions in non-functional
currencies. Given the possibility of volatility in foreign exchange
markets, we exclude the impact of foreign exchange gains (losses) to
provide a measurement of comparability of adjusted net income (loss).
• Net realized investment gains (losses), impaired securities and
extinguishment of debt
- We remove realized gains (losses) on the sale of investments, net
investment losses related to impairment of securities and net gains
(losses) on extinguishment of debt since the timing of these transactions
are subject to management's assessment of market opportunities and
conditions and capital liquidity positions.
• Income taxes
-We apply a zero effective tax rate for federal income tax purposes to
our pre-tax adjustments, if applicable, consistent with our consolidated
effective tax rate.
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Item 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 six months ended
June 30, 2022 and 2021:
Three Months Ended June 30, Six Months Ended June 30,
In millions except share and per share amounts 2022 2021 2022 2021
Net income (loss) $ (36 )
$ (61 )$ (109 )$ (167 )
Less: adjusted net income (loss) adjustments:
Income (loss) before income taxes of our international and
structured finance insurance segment and eliminations
23 (99 ) 18 (143 )
Adjustments to income before income taxes of our U.S.
public finance insurance and corporate segments:
Mark-to-market gains (losses) on financial instruments
(1)
13 (9 ) 37 29 Foreign exchange gains (losses) (1) 13 (4 ) 19 13 Net realized investment gains (losses) (21 ) - (23 ) (1 ) Net gains (losses) on extinguishment of debt 5 14 5 14
Net investment losses related to impairments of securities
(2)
(22 ) - (22 ) - Adjusted net income adjustment to the (provision) benefit for income tax - - - - Adjusted net income (loss) $ (47 )$ 37$ (143 )$ (79 ) Adjusted net income (loss) per diluted common share (3) $ (0.93 )$ 0.76$ (2.87 )$ (1.60 )
(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 MBIA Corp.
– We remove the negative book value of MBIA Corp. based on our view that
given MBIA Corp.’s current financial 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 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 June 30, December 31,
In millions except share and per share amounts 2022 2021
Total shareholders' equity of MBIA Inc. $ (748 )$ (313 )
Common shares outstanding 54,899,716 54,556,112
GAAP book value per share $ (13.63 )$ (5.73 )
Management's adjustments described above:
Remove negative book value per share of MBIA Corp.
(36.48 ) (35.94 )
Remove net unrealized gains (losses) on available-for-sale securities
included in other comprehensive income (loss)
(2.72 ) 2.02
Include net unearned premium revenue in excess of expected losses
3.28 3.58
U.S. Public Finance Insurance Segment
Our U.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 of U.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 of June 30, 2022, National had total insured gross
par outstanding of $34.6 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 for Puerto Rico. Refer to the "U.S.
Public Finance Insurance Puerto Rico Exposures" section for additional
information on our Puerto 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.
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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 U.S. public finance insurance segment results
for the three and six months ended June 30, 2022 and 2021:
Three Months Ended June 30, Percent Six Months Ended June 30, Percent
In millions 2022 2021 Change 2022 2021 Change
Net premiums earned $ 9 $ 11 -18% $ 22$ 28 -21%
Net investment income 21 14 50% 38 28 36%
Net realized investment gains
(losses) (20 ) 1 n/m (21 ) - n/m
Net gains (losses) on financial
instruments at fair
value and foreign exchange (21 ) 2 n/m (37 ) - n/m
Fees and reimbursements - 2 -100% 1 2 -50%
Other net realized gains (losses) (17 ) - n/m (19 ) - n/m
Total revenues (28 ) 30 n/m (16 ) 58 -128%
Losses and loss adjustment 49 (42 ) n/m 136 67 103%
Amortization of deferred
acquisition costs 2 3 -33% 5 7 -29%
Operating 9 12 -25% 22 26 -15%
Total expenses 60 (27 ) n/m 163 100 63%
Income (loss) before income taxes $ (88 )$ 57
n/m $ (179 )$ (42 ) n/m
n/m-Percent change not meaningful.
NET PREMIUMS EARNED Net premiums earned on financial guarantees represent gross
premiums earned net of premiums ceded to reinsurers, and include scheduled
premium earnings and premium earnings from refunded issues. Refunding activity
over the past several years has accelerated premium earnings in prior years and
reduced the amount of scheduled premiums that would have been earned in the
current year. Refunding activity can vary significantly from period to period
based on issuer refinancing behavior. For the three months ended June 30, 2022
and 2021, scheduled premiums earned were $8 million and $9 million,
respectively, and refunded premiums earned were $1 million and $2 million,
respectively. For the six months ended June 30, 2022 and 2021, scheduled
premiums earned were $16 million and $19 million, respectively, and refunded
premiums earned were $6 million and $9 million, respectively.
NET INVESTMENT INCOME The increase in net investment income for the three and
six months ended June 30, 2022 compared with the same periods of 2021 were
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 six months ended June 30, 2022 compared with
the same periods of 2021 were primarily due to losses from the sales of
securities from the ongoing management of our U.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 six months ended June 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 CVI.
OTHER NET REALIZED GAINS (LOSSES) For the three and six months ended June 30,
2022, other net realized losses were primarily related to impairments of certain
investments that had unrealized losses as we intend to sell these investments
before they recover their amortized cost basis.
LOSS AND LOSS ADJUSTMENT EXPENSES Our U.S. public finance insured portfolio
management group is responsible for monitoring our U.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 ended June 30, 2022, loss and LAE incurred primarily
related to changes in our actual and 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. During
the three months ended June 30, 2022, we updated assumptions used to estimate
the current fair value of new HTA CVI that National received in July of 2022.
These assumption changes resulted in a decrease in our estimated present value
of HTA recoveries.
48
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS (continued)
For the six months ended June 30, 2022, loss 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 six months ended June 30, 2022, we updated our PREPA 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 expected PREPA recoveries. This was
partially offset by loss benefits related to HTA and GO recoveries. During the
six months June 30, 2022, our HTA recoveries increased, based on updates to the
fair value of the HTA CVI that National received in July of 2022 and updated
information relating to the values of the expected receipt of HTA bonds,
including the consideration of the fair values of similar issued GO bonds. 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 ended June 30, 2021, the loss and LAE incurred benefit
primarily related to a decline in the risk-free rates used to discount the value
of long-dated future recoveries on certain Puerto Rico exposures. For the six
months ended June 30, 2021, the loss and LAE incurred primarily related to an
increase in the risk-free rates used to discount the value of long-date future
expected recoveries on certain Puerto Rico exposures.
The following table presents information about our U.S. public finance insurance
loss recoverable asset and loss and LAE reserves liabilities as of June 30, 2022
and December 31, 2021:
June 30, December 31, Percent
In millions 2022 2021 Change
Assets:
Insurance loss recoverable $ 205$ 1,054 -81%
Reinsurance recoverable on paid and unpaid losses
(1) 13 3 n/m
Liabilities:
Loss and LAE reserves 576 425 36%
Insurance loss recoverable-ceded
(2) 6 55 -89%
Net reserve (salvage) $ 364$ (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 of June 30, 2022 decreased compared with
December 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. Loss and LAE
reserves as of June 30, 2022 increased compared with December 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
extending the timing of a PREPA settlement. The increase in PREPA net loss
reserves was partially offset by an increase in the estimated expected
recoveries on claims not yet paid related to HTA, which is also netted in loss
and LAE reserves, claims payments related to the acceleration and commutation of
GO exposure, and scheduled claim payments on Puerto Rico exposures during the
six months ended June 30, 2022.
POLICY ACQUISITION COSTS AND OPERATING EXPENSES U.S. public finance insurance
segment expenses for the three and six months ended June 30, 2022 and 2021 are
presented in the following table:
Three Months Ended June 30, Percent Six Months Ended June 30, Percent
In millions 2022 2021 Change 2022 2021 Change
Gross expenses $ 10 $ 12 -17% $ 23 $ 26 -12%
Amortization of deferred
acquisition costs $ 2 $ 3 -33% $ 5 $ 7 -29%
Operating 9 12 -25% 22 26 -15%
Total insurance operating
expenses $ 11 $ 15 -27% $ 27 $ 33 -18%
Gross expenses represent total insurance expenses before the deferral of any
policy acquisition costs. Operating expenses decreased for the three and six
months ended June 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.
49
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS (continued)
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") and Standard & 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's U.S.
public finance outstanding gross par insured as of June 30, 2022 and
December 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 June 30, 2022 December 31, 2021
Rating Amount % Amount %
AAA $ 1,579 4.6% $ 1,682 4.6%
AA 14,342 41.5% 14,874 40.8%
A 10,790 31.2% 10,439 28.6%
BBB 5,024 14.5% 6,187 17.0%
Below investment grade 2,853 8.2% 3,269 9.0%
Total $ 34,588 100.0% $ 36,451 100.0%
U.S. Public Finance Insurance Puerto Rico Exposures
The following is a summary of exposures within the insured portfolio of our U.S.
public finance insurance segment related to Puerto Rico as of June 30, 2022:
Debt National
Gross Par Service Internal
In millions Outstanding
Outstanding Rating
Puerto Rico Electric Power Authority (PREPA) $ 809$ 1,063
d
Puerto Rico Highway and Transportation
Authority Transportation Revenue (PRHTA) 523 842 d
Puerto 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 89 d
Inter American University of Puerto Rico Inc. 17 21 a3
Total $ 1,485$ 2,105
(1) - Includes CABs that reflect the gross par amount at the time of issuance of
the insurance policy. As of June 30, 2022, gross par outstanding
plus CABs accreted interest was $41 million.
On June 30, 2016, PROMESA was signed into law by the President of the 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 allows Puerto 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 of Puerto Rico has appointed himself as a
non-voting member of the reconstituted Oversight Board.
50
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS (continued)
On May 3, 2017, the Oversight Board certified and filed a petition under Title III of PROMESA for Puerto Rico with the District 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 on May 5, 2017, May 21, 2017, July 2, 2017 and September 27, 2019, respectively. On February 4, 2019, the District of Puerto Rico entered the order confirming the Third Amended Title III Plan of Adjustment for COFINA. The Title III cases for the Commonwealth of Puerto Rico and PBA were confirmed on January 18, 2022, and became effective on March 15, 2022. There can be no assurance that the Title III proceedings for PREPA and PRHTA will be resolved with similar outcomes. As a result of prior defaults, various stays and the Title III cases, Puerto Rico failed to make certain scheduled debt service payments for National insured bonds. As a consequence, National has paid gross claims in the aggregate amount of $2.2 billion relating to GO bonds, PBA bonds, PREPA bonds and PRHTA bonds through June 30, 2022, inclusive of the commutation payment and the additional payment in the amount of $66 million on December 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 Puerto Rico, by gross par outstanding, is to
PREPA.
On May 3, 2019, PREPA, the Oversight Board, the AAFAF, the Ad Hoc Group of PREPA
bondholders (the "Ad Hoc Group"), and Assured Guaranty Corp. and Assured
Guaranty Municipal Corp. ("Assured") entered into the a restructuring support
agreement ("RSA") which was amended on September 9, 2019 to include National and
Syncora Guarantee, Inc. ("Syncora") as supporting parties. On March 8, 2022,
AAFAF and PREPA terminated the RSA. On April 8, 2022, the Court issued the
April 8 Order. The mediation deadline is currently August 15, 2022. The April 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 by August 15,
2022.
On July 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 the April 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 on August 15, 2022.
On June 22, 2020, the Oversight Board and the Puerto Rico P3 Authority announced
an agreement and contract with LUMA Energy, LLC ("LUMA") which calls for LUMA 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 on June 1, 2021.
On September 18, 2020, FEMA and the PR COR3 Authority announced the commitment
by FEMA to provide approximately $11.6 billion (net of the required 10% cost
share) to fund projects built by PREPA and the PR 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 the PR 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
On April 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. On May 5,
2021, National, Assured Guaranty Corp., Assured Guaranty Municipal Corp. and the
Oversight Board entered into the HTA PSA. On May 2, 2022, the Oversight Board
filed the HTA Plan, together with the Disclosure Statement and supporting
documents. On June 22, 2022, the Disclosure Statement was approved by the Court.
Confirmation is scheduled for August 17 and 18, 2022. In July of 2022 and
pursuant to the HTA PSA, National received $33 million of cash and $358 million
face amount of CVI relating to HTA. In addition, National expects to receive
additional cash and newly issued HTA bonds, or cash equal to the face amount of
the newly issued HTA bonds, following the effective date of the HTA Plan.
51
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS (continued)
Status of Puerto Rico’s Fiscal Plans
The Oversight Board certified fiscal plans for PREPA, University of Puerto Rico (the "University") and PRHTA on June 28, 2022, May 27, 2022 and February 22, 2022, respectively. The Oversight Board also certified the fiscal year 2023 budgets for Commonwealth, PREPA, the University and PRHTA on June 30, 2022.
University of Puerto Rico
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 November 30,
2022. National is not a party to the standstill agreement.
The following table presents our scheduled gross debt service due on our Puerto
Rico insured exposures for the nine months ending December 31, 2022, for each of
the subsequent four years ending December 31 and thereafter:
Six Months
Ending
December 31,
In millions 2022 2023
2024 2025 2026 Thereafter Total
Puerto Rico Electric Power Authority
(PREPA)
$ 119$ 137$ 137$ 105$ 57$ 508$ 1,063Puerto Rico Highway and Transportation
Authority Transportation Revenue
(PRHTA) 13 36 33 36 35 689 842
Puerto Rico Highway and Transportation
Authority-Subordinated Transportation
Revenue (PRHTA) 8 1 1 1 1 21 33
Puerto Rico Highway and Transportation
Authority Highway Revenue (PRHTA) 2 4 2 2 2 45 57
University of Puerto Rico System
Revenue 5 12 11 16 6 39 89
Inter American University of Puerto
Rico Inc. 2 3 3 3 3 7 21
Total $ 149$ 193$ 187$ 163$ 104$ 1,309$ 2,105
Corporate Segment
Our corporate segment consists of general corporate activities, including
providing support services to MBIA 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
by MBIA 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 by MBIA Corp. GFL lent the proceeds of these MTN
issuances to MBIA Inc.MBIA Inc. provided customized investment agreements,
guaranteed by MBIA 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.
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 summarizes the consolidated results of our corporate segment
for the three and six months ended June 30, 2022 and 2021:
Three Months Ended June 30, Percent Six Months Ended June 30, Percent
In millions 2022 2021 Change 2022 2021 Change
Net investment income $ 5 $ 7
-29% $ 11$ 14 -21%
Net realized investment gains
(losses)
(1 ) (1 ) -% (2 ) (1 ) 100% Net gains (losses) on financial instruments at fair value and foreign exchange 37 (17 ) n/m 76 38 100% Net gains (losses) on extinguishment of debt 5 14 -64% 5 14 -64% Fees 13 13 -% 27 29 -7% Total revenues 59 16 n/m 117 94 24% Operating 9 17 -47% 25 39 -36% Interest 19 18 6% 38 37 3% Total expenses 28 35 -20% 63 76 -17% Income (loss) before income taxes $ 31$ (19 ) n/m $ 54$ 18 n/m
n/m-Percent change not meaningful.
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 six months ended June 30, 2022 compared with same periods of 2021 were primarily due to the impact of favorable changes on the value of interest rate swaps for which we receive floating rates and foreign currency exchange rates on Euro-denominated liabilities as a result of the strengthening of the U.S. dollar. These favorable changes were partially offset by fair value losses on investments. The three months ended June 30, 2022 includes fair value net gains of $29 million on interest rate swaps compared with fair value net losses of $14 million on these swaps for the same period of 2021 due to an increase in interest rates in 2022 compared with a decrease in interest rates in 2021. The three months ended June 30, 2022 includes foreign currency gains of $15 million on Euro-denominated liabilities compared with foreign currency losses of $5 million on these liabilities for the same period of 2021 as a result of the strengthening of the U.S. dollar against the Euro in 2022. Fair value losses on investments was $8 million for the three months ended June 30, 2022 compared with gains of $3 million for the same period of 2021. The six months ended June 30, 2022 includes fair value net gains of $62 million on interest rate swaps compared with fair value net gains of $25 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 six months ended June 30, 2022 includes foreign currency gains of $20 million on Euro-denominated liabilities compared with foreign currency gains of $12 million on these liabilities for the same period of 2021 due to a larger increase in the strength of the U.S. dollar in 2022 against the Euro. Fair value losses on investments was $11 million for the six months ended June 30, 2022 compared with gains of $5 million for the same period of 2021.
NET GAINS (LOSSES) ON EXTINGUISHMENT OF DEBT Net gains (losses) on
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 six months ended June 30, 2022 compared with the same periods of 2021 were 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 through
MBIA Corp. The financial guarantees issued by MBIA 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 event MBIA Corp. has
the right, at its discretion, to accelerate insured obligations upon default or
otherwise.
53
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS (continued)
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 by MBIA Inc.,
and if MBIA 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 of June 30, 2022,
MBIA Corp.'s total insured gross par outstanding was $4.2 billion.
MBIA Corp. has contributed to the Company's NOL carryforward, which is used in
the calculation of our consolidated income taxes. If MBIA Corp. becomes
profitable, it is not expected to make any tax payments under our tax sharing
agreement. Based on MBIA Corp.'s current projected earnings and our expectation
that it will not write significant new business, we believe it is unlikely that
MBIA Corp. will generate significant income in the near future. As a result of
MBIA Corp.'s capital structure and business prospects, we do not expect its
financial performance to have a material economic impact on MBIA Inc.
The following table presents our international and structured finance insurance
segment results for the three and six months ended June 30, 2022 and 2021:
Three Months Ended June 30, Percent Six Months Ended June 30, Percent
In millions 2022 2021 Change 2022 2021 Change
Net premiums earned $ 3 $ 5 -40% $ 7 $ 11 -36%
Net investment income 5 2 150% 7 3 133%
Net realized investment gains
(losses) - - -% (1 ) - n/m
Net gains (losses) on financial
instruments at fair value and
foreign exchange (7 ) (5 ) 40% (13 ) (6 ) 117%
Fees and reimbursements 6 3 100% 9 7 29%
Revenues of consolidated VIEs:
Net gains (losses) on financial
instruments at fair value and
foreign exchange 24 - n/m 20 (14 ) n/m
Other net realized gains (losses) - (5 ) -100% - (5 ) -100%
Total revenues 31 - n/m 29 (4 ) n/m
Losses and loss adjustment (29 ) 51 n/m (67 ) 40 n/m
Amortization of deferred
acquisition costs 2 4 -50% 6 8 -25%
Operating 5 6 -17% 11 13 -15%
Interest 29 29 -% 57 56 2%
Expenses of consolidated VIEs:
Operating 1 1 -% 3 3 -%
Interest 1 6 -83% 2 17 -88%
Total expenses 9 97 -91% 12 137 -91%
Income (loss) before income taxes $ 22$ (97 ) -123% $ 17$ (141 ) -112%
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 VIEs.
The following table provides net premiums earned from our financial guarantee
contracts for the three and six months ended June 30, 2022 and 2021:
Three Months Ended June 30, Percent Six Months Ended June 30, Percent
In millions 2022 2021 Change 2022 2021 Change
Net premiums earned:
U.S. $ - $ 1 -100% $ 1 $ 2 -50%
Non-U.S. 3 4 -25% 6 9 -33%
Total net premiums earned $ 3 $ 5 -40% $ 7 $ 11 -36%
VIEs (eliminated in
consolidation) $ - $ 1 -100% $ - $ 1 -100%
54
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS (continued)
NET INVESTMENT INCOME The increase in net investment income for the three and
six months ended June 30, 2022 compared with the same periods of 2021 were
primarily due to a higher yields on investment assets in 2022.
NET GAINS (LOSSES) ON FINANCIAL INSTRUMENTS AT FAIR VALUE AND FOREIGN EXCHANGE The unfavorable change for the six months ended June 30, 2022 compared with the same period of 2021 was primarily due to fair value losses on investments in 2022. FEES AND REIMBURSEMENTS The increases in fees and reimbursements for the three and six months ended June 30, 2022 compared with the same periods of 2021 were primarily due to an increase in waiver and consent fees in 2022. Due to the transaction-specific nature inherent in fees and reimbursements, these revenues can vary significantly from period to period. REVENUES OF CONSOLIDATED VIEs: The favorable changes for the three and six months ended June 30, 2022 compared with the same periods of 2021 were principally due to the reclassification of credit risk gains from AOCI in 2022 compared with the reclassification of credit risk losses from AOCI in 2021 from the early redemption of VIE liabilities carried at fair value. 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 June 30, 2022, the losses and LAE benefit 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, as well as an increase in expected salvage collections from insured CDO transactions. These benefits were partially offset by an increase in LIBOR rates, which increased estimated claims payments on floating rate insured debt in both RMBS and CDO transactions. For the six months ended June 30, 2022, the losses and LAE benefit primarily related to insured RMBS transactions, as a result of an increase in year-to-date risk-free rates during 2022, which caused case reserves, net of recoveries, to decline, as well as an increase in expected salvage collections from insured CDOs. This was partially offset by an increase in LIBOR rates, which increased estimated claims payments on floating rate insured debt in both RMBS and CDO transactions.
For the three months ended June 30, 2021, loss and LAE incurred primarily
related to a decline in expected salvage collections from insured CDOs, and
losses on first-lien RMBS transactions due to a decline in the risk free rates
used to discount the present value of net loss reserves, which caused case
reserves, net of recoveries, to increase.
For the six months ended June 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 losses and LAE
benefit of $62 thousand and $9 million for the three and six months ended
June 30, 2022, respectively, and excludes a losses and LAE expense of $1 million
and a losses and LAE benefit of $15 million for the three and six months ended
June 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 of
June 30, 2022 and December 31, 2021.
June 30, December 31, Percent
In millions 2022 2021 Change
Assets:
Insurance loss recoverable $ 238$ 242 -2%
Reinsurance recoverable on paid and unpaid losses
(1) 4 5 -20%
Liabilities:
Loss and LAE reserves 389 469 -17%
Net reserve (salvage) $ 147$ 222 -34%
(1) - Reported within "Other assets" on our consolidated balance sheets.
55
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS (continued)
The insurance loss recoverable primarily relates to reimbursement rights arising
from the payment of claims on MBIA Corp.'s policies insuring certain CDOs and
RMBS. Such payments also entitle MBIA Corp. to exercise certain rights and
remedies to seek recovery of its reimbursement entitlements. The insurance loss
recoverable decreased slightly from 2021 due to the increase in risk-free rates
during 2022 used to discount future recoveries of paid claims, which lowered the
present value of those recoveries, as well as the collection of RMBS recoveries,
partially offset by an increase in expected salvage collections on CDOs. The
decline in loss and LAE reserves from 2021 is primarily due to the increase in
risk-free rates, which caused the present value of case reserves, net of future
recoveries, to decline.
Refer to "Note 1: Business Developments and Risks and Uncertainties" in the
Notes to Consolidated Financial Statements for information regarding risks and
uncertainties related to future collections of estimated recoveries. Refer to
"Note 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.
POLICY ACQUISITION COSTS AND OPERATING EXPENSES International and structured
finance insurance segment expenses for the three and six months ended June 30,
2022 and 2021 are presented in the following table:
Three Months Ended June 30, Percent Six Months Ended June 30, Percent
In millions 2022 2021 Change 2022 2021 Change
Gross expenses $ 5 $ 6 -17% $ 11 $ 13 -15%
Amortization of deferred
acquisition costs $ 2 $ 4 -50% $ 6 $ 8 -25%
Operating 5 6 -17% 11 13 -15%
Total insurance operating
expenses $ 7 $ 10 -30% $ 17 $ 21 -19%
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 OF CONSOLIDATED VIEs Interest expense of consolidated VIEs
decreased for the three and six months ended June 30, 2022 compared with the
same periods of 2021 due to the repayment of the Refinanced Facility in 2021 and
2022. As of June 30, 2022, the Refinanced Facility was paid in full.
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 our U.S. public finance insured portfolio. As
of June 30, 2022 and December 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 Exposures
MBIA Corp. insures RMBS backed by residential mortgage loans, including
first-lien alternative A-paper and subprime mortgage loans directly through RMBS
securitizations. As of June 30, 2022 and December 31, 2021, MBIA Corp. had $927
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 $244 million and $238 million, as of
June 30, 2022 and December 31, 2021, respectively.
56
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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 June 30, 2022 and December 31, 2021, MBIA Corp. insured $216
million and $231 million, respectively, of CDOs and related instruments.
We may experience considerable incurred losses in certain of these sectors.
There can be no assurance that the loss reserves recorded in our financial
statements will be sufficient or that we will not experience losses on
transactions on which we currently have no loss reserves, in particular if the
economy deteriorates. We may seek to purchase, directly or indirectly,
obligations guaranteed by MBIA 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 the New York State Department of Financial Services ("NYSDFS")
related to the purchase of certain MBIA 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 the Remediation Securities to facilitate
a termination or commutation.
U.S. Public Finance and International and Structured Finance Reinsurance
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 of June 30, 2022, the aggregate amount of insured par outstanding ceded by MBIA to reinsurers under reinsurance agreements was $970 million compared with $1.0 billion as of December 31, 2021. Under National's reinsurance agreement with MBIA Corp., if a reinsurer of MBIA Corp. is unable to pay claims ceded by MBIA Corp. on U.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 ended December 31, 2021.
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.
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