2019 Assets Investments: Fixed-maturity securities held asavailable-for-sale, at fair value (amortized cost $4,203 and $4,713) Investments carried at fair value Investments pledged as collateral, at fair value (amortized cost $169 and $234) Short-term investments held asavailable-for-sale, at fair value (amortized cost $452 and $552) Other investments (includes investments at fair value of $4 and $5) Total investments Cash and cash equivalents Premiums receivable Deferred acquisition costs Insurance loss recoverable Assets held for sale Deferred income taxes, net Other assets Assets of consolidated variable interest entities: Cash Investmentsheld-to-maturity, at amortized cost (fair value $897 and $876) Investments carried at fair value Loans receivable at fair value Loan repurchase commitments Other assets Total assets Liabilities and Equity Liabilities: Unearned premium revenue Loss and loss adjustment expense reserves Long-term debt Medium-term notes (includes financial instruments carried at fair value of $127 and $101) Investment agreements Derivative liabilities Liabilities held for sale Other liabilities Liabilities of consolidated variable interest entities: Variable interest entity notes (includes financial instruments carried at fair value of $1,140 and $1,351) Total liabilities Commitments and contingencies (Refer to Note 14) Equity: Preferred stock, par value $1 per share; authorized shares—10,000,000; issued and outstanding—none Common stock, par value $1 per share; authorized shares—400,000,000; issued shares—283,967,973 and 283,989,999 Additionalpaid-in capital Retained earnings Accumulated other comprehensive income (loss), net of tax of $6 and $37 Treasury stock, at cost—160,858,509 and 148,789,168 shares Total shareholders’ equity of MBIA Inc. Preferred stock of subsidiary Total equity Total liabilities and equity Revenues: Premiums earned: Scheduled premiums earned Refunding premiums earned Premiums earned (net of ceded premiums of $1, $2, $4 and $5) Net investment income Fees and reimbursements Change in fair value of insured derivatives: Realized gains (losses) and other settlements on insured derivatives Unrealized gains (losses) on insured derivatives Net change in fair value of insured derivatives Net gains (losses) on financial instruments at fair value and foreign exchange Net investment losses related to other-than-temporary impairments: Investment losses related to other-than-temporary impairments Other-than-temporary impairments recognized in accumulated other comprehensive income (loss) Net investment losses related to other-than-temporary impairments Net gains (losses) on extinguishment of debt Other net realized gains (losses) Revenues of consolidated variable interest entities: Net investment income Net gains (losses) on financial instruments at fair value and foreign exchange Other net realized gains (losses) Total revenues Expenses: Losses and loss adjustment Amortization of deferred acquisition costs Operating Interest Expenses of consolidated variable interest entities: Operating Interest Total expenses Income (loss) before income taxes Provision (benefit) for income taxes Net income (loss) Net income (loss) per common share: Basic Diluted Weighted average number of common shares outstanding: Basic Diluted Net income (loss) Other comprehensive income (loss): Unrealized gains (losses) onavailable-for-sale securities: Unrealized gains (losses) arising during the period Provision (benefit) for income taxes Total Reclassification adjustments for (gains) losses included in net income (loss) Provision (benefit) for income taxes Total Available-for-sale securities with other-than-temporary impairments: Other-than-temporary impairments and unrealized gains (losses) arising during the period Provision (benefit) for income taxes Total Reclassification adjustments for (gains) losses included in net income (loss) Provision (benefit) for income taxes Total Foreign currency translation: Foreign currency translation gains (losses) Provision (benefit) for income taxes Total Total other comprehensive income (loss) Comprehensive income (loss) Accumulated Balance, December 31, 2016 Net income (loss) Other comprehensive income (loss) Share-based compensation Treasury shares acquired under share repurchase program Balance, September 30, 2017 Cash flows from operating activities: Premiums, fees and reimbursements received Investment income received Insured derivative commutations and losses paid Financial guarantee losses and loss adjustment expenses paid Proceeds from recoveries and reinsurance Operating and employee related expenses paid Interest paid, net of interest converted to principal Income taxes (paid) received Net cash provided (used) by operating activities Cash flows from investing activities: Purchases ofavailable-for-sale investments Sales ofavailable-for-sale investments Paydowns and maturities ofavailable-for-sale investments Purchases of investments at fair value Sales, paydowns and maturities of investments at fair value Sales, paydowns and maturities (purchases) of short-term investments, net Sales, paydowns and maturities ofheld-to-maturity investments Sales, paydowns and maturities of other investments Paydowns and maturities of loans receivable Consolidation/(deconsolidation) of variable interest entities, net (Payments) proceeds for derivative settlements Collateral (to) from counterparties Capital expenditures Other investing Net cash provided (used) by investing activities Cash flows from financing activities: Proceeds from investment agreements Principal paydowns of investment agreements Principal paydowns of medium-term notes Proceeds from the MBIA Corp. Financing Facility Principal paydowns of variable interest entity notes Purchases of treasury stock Other financing Net cash provided (used) by financing activities Effect of exchange rate changes on cash and cash equivalents Net increase (decrease) in cash and cash equivalents Cash and cash equivalents—beginning of period Cash and cash equivalents—end of period Reconciliation of net income (loss) to net cash provided (used) by operating activities: Net income (loss) Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Change in: Premiums receivable Deferred acquisition costs Unearned premium revenue Loss and loss adjustment expense reserves Insurance loss recoverable Accrued interest payable Accrued expenses Unrealized (gains) losses on insured derivatives Net (gains) losses on financial instruments at fair value and foreign exchange Other net realized (gains) losses Deferred income tax provision (benefit) Interest on variable interest entities, net Other operating Total adjustments to net income (loss) Net cash provided (used) by operating activities Supplementary Disclosure of Consolidated Cash Flow Information Non-cash investing activities: Non-cash consideration received from the sale of MBIA UK Insurance Limited COFINA VIEs. RMBS Recoveries In addition, prior period amounts included in the Company’s disclosures have been updated to reflect the new presentation. In millions Insurance: Global structured finance: Mortgage-backed residential Mortgage-backed commercial Consumer asset-backed Corporate asset-backed Total global structured finance Global public finance Total insurance In millions Insurance: Global structured finance: Collateralized debt obligations Mortgage-backed residential Mortgage-backed commercial Consumer asset-backed Corporate asset-backed Total global structured finance Global public finance Total insurance Zohar Bankruptcy Settlement. the Company. exposures. The Company’s settlement amounts on its prior put-back claims have been consistent with the put-back recoveries that had been included in the Company’s financial statements at the times preceding the settlements. Based on the Company’s assessment of the strength of its contractualput-back rights against Credit Suisse, as well as on its prior settlements with other sellers/servicers and success of other monolines’put-back settlements, the Company believes it will prevail in enforcing its contractual rights and that it is entitled to collect the full amount of its incurred and Recoveries In millions U.S. Public Finance Insurance International and Structured Finance Insurance: Before VIE eliminations VIE eliminations Total international and structured finance insurance Total Gross Loss the consolidation of credits, with loss reserves, as VIEs. In millions Insurance loss recoverable Recoveries on unpaid losses (2) Total In millions U.S. Public Finance Insurance Segment International and Structured Finance Insurance Segment: Second-lien RMBS First-lien RMBS CDOs Other(1) Losses and loss adjustment expense actual and expected payments on Puerto Rico exposures and first-lien RMBS transactions, partially offset by an incurred loss benefit related to CDO transactions. For the three and six months ended exposures. $ in millions Number of policies Number of issues(1) Remaining weighted average contract period (in years) Gross insured contractual payments outstanding:(2) Principal Interest Total Gross Claim Liability(3) Less: Gross Potential Recoveries(4) Discount, net(5) Net claim liability (recoverable) Unearned premium revenue $ in millions Number of policies Number of issues(1) Remaining weighted average contract period (in years) Gross insured contractual payments outstanding:(2) Principal Interest Total Gross Claim Liability(3) Less: Gross Potential Recoveries(4) Discount, net(5) Net claim liability (recoverable) Unearned premium revenue net claim liability (recoverable). securities funds would be sold for a value other than net asset value. recoveries, under MBIA Corp.’s policies. a recurring basis. The fair values of certain MTNs are based on quoted market prices provided by third-party sources, where available. When quoted market prices are not available, the Company applies a matrix pricing grid to determine fair value based on the quoted market prices received for similar instruments and considering the MTNs’ stated maturity and interest rate. Nonperformance risk is included in the quoted market prices and the matrix pricing grid. In millions Valuation Techniques Unobservable Input Assets of consolidated VIEs: Loans receivable at fair value Discounted cash flow Multiples(1) Loan repurchase commitments Liabilities of consolidated VIEs: Variable interest entity notes Credit derivative liabilities, net: CMBS and multi-sector CDO Other derivative liabilities In millions Valuation Techniques Unobservable Input Assets of consolidated VIEs: Loans receivable at fair value Discounted cash flow Multiples(1) Loan repurchase commitments Liabilities of consolidated VIEs: Variable interest entity notes Credit derivative liabilities, net: CMBS Multi-sector CDO Other derivative liabilities Discounted cash flow Cash flows In millions Assets: Fixed-maturity investments: U.S. Treasury and government agency State and municipal bonds Foreign governments Corporate obligations Mortgage-backed securities: Residential mortgage-backed agency Residential mortgage-backednon-agency Commercial mortgage-backed Asset-backed securities: Collateralized debt obligations Other asset-backed Total fixed-maturity investments Money market securities Perpetual debt and equity securities Fixed-income fund Cash and cash equivalents Derivative assets: Non-insured derivative assets: Interest rate derivatives 2018: In millions Assets of consolidated VIEs: Corporate obligations Mortgage-backed securities: Residential mortgage-backednon-agency Commercial mortgage-backed Asset-backed securities: Collateralized debt obligations Other asset-backed Cash Loans receivable at fair value: Residential loans receivable Corporate loans receivable Loan repurchase commitments Other assets: Currency derivatives Other Total assets Liabilities: Medium-term notes Derivative liabilities: Insured derivatives: Credit derivatives Non-insured derivatives: Interest rate derivatives Other Other liabilities: Warrants Other payable Liabilities of consolidated VIEs: Variable interest entity notes Total liabilities In millions Assets: Fixed-maturity investments: U.S. Treasury and government agency State and municipal bonds Foreign governments Corporate obligations Mortgage-backed securities: Residential mortgage-backed agency Residential mortgage-backednon-agency Commercial mortgage-backed Asset-backed securities: Collateralized debt obligations Other asset-backed Total fixed-maturity investments Money market securities Perpetual debt and equity securities Fixed-income fund Cash and cash equivalents Derivative assets: Non-insured derivative assets: Interest rate derivatives In millions Assets of consolidated VIEs: Corporate obligations Mortgage-backed securities: Residential mortgage-backednon-agency Commercial mortgage-backed Asset-backed securities: Collateralized debt obligations Other asset-backed Cash Loans receivable at fair value: Residential loans receivable Corporate loans receivable Loan repurchase commitments Derivative assets: Currency derivatives Total assets Liabilities: Medium-term notes Derivative liabilities: Insured derivatives: Credit derivatives Non-insured derivatives: Interest rate derivatives Other Other liabilities: Warrants Liabilities of consolidated VIEs: Variable interest entity notes Total liabilities In millions Assets: Other investments Accrued investment income(1) Receivable for investments sold(1) Assets of consolidated VIEs: Investmentsheld-to-maturity Total assets Liabilities: Long-term debt Medium-term notes Investment agreements Payable for investments purchased(2) Interest payable for derivatives(2) Liabilities of consolidated VIEs: Variable interest entity notes Total liabilities Financial Guarantees: Gross Ceded In millions Assets: Other investments Accrued investment income(1) Assets held for sale Assets of consolidated VIEs: Investmentsheld-to-maturity Total assets Liabilities: Long-term debt Medium-term notes Investment agreements Payable for investments purchased(2) Liabilities of consolidated VIEs: Variable interest entity notes Total liabilities Financial Guarantees: Gross Ceded 2018: 2018: In millions Assets: Commercial mortgage-backed Other asset-backed Assets of consolidated VIEs: Commercial mortgage-backed Collateralized debt obligations Loans receivable- residential Loans receivable- corporate Loan repurchase commitments Currency derivatives, net Other Total assets In millions Liabilities: Medium-term notes Credit derivatives, net Other derivatives Other payable Liabilities of consolidated VIEs: VIE notes Total liabilities In millions Assets: Foreign governments Corporate obligations Commercial mortgage-backed Collateralized debt obligations Other asset-backed State and municipal bonds Assets of consolidated VIEs: Corporate obligations Residential mortgage-backednon-agency Commercial mortgage-backed Collateralized debt obligations Other asset-backed Loans receivable-residential Loans receivable-corporate Loan repurchase commitments Currency derivatives, net Total assets In millions Liabilities: Medium-term notes Credit derivatives, net Other derivatives, net Liabilities of consolidated VIEs: VIE notes Total liabilities 2018. In millions Assets: Corporate obligations Commercialmortgage-backed Collateralized debt obligations Otherasset-backed State and municipal bonds Assets of consolidated VIEs: Corporate obligations Commercialmortgage-backed Collateralized debt obligations Other asset-backed Loansreceivable-residential Loansreceivable-corporate Loan repurchase commitments Currency derivatives, net Other Total assets In millions Liabilities: Medium-term notes Credit derivatives, net Other derivatives, net Other payable Liabilities of consolidated VIEs: VIE notes Total liabilities In millions Assets: Foreign governments Corporate obligations Commercial mortgage-backed Collateralized debt obligations Other asset-backed State and municipal bonds Assets of consolidated VIEs: Corporate obligations Residential mortgage-backednon-agency Commercial mortgage-backed Collateralized debt obligations Other asset-backed Loans receivable-residential Loans receivable-corporate Loan repurchase commitments Currency derivatives, net Total assets In millions Liabilities: Medium-term notes Credit derivatives, net Other derivatives, net Liabilities of consolidated VIEs: VIE notes Total liabilities In millions Revenues: Unrealized gains (losses) on insured derivatives Realized gains (losses) and other settlements on insured derivatives Net gains (losses) on financial instruments at fair value and foreign exchange Other net realized gains (losses) Revenues of consolidated VIEs: Net gains (losses) on financial instruments at fair value and foreign exchange Total In millions Revenues: Unrealized gains (losses) on insured derivatives Realized gains (losses) and other settlements on insured derivatives Net gains (losses) on financial instruments at fair value and foreign exchange Net investment losses related to other-than-temporary impairments Other net realized gains (losses) Revenues of consolidated VIEs: Net gains (losses) on financial instruments at fair value and foreign exchange Total In millions Investments carried at fair value(1) Fixed-maturity securities held at fairvalue-VIE(2) Loans receivable at fair value: Residential mortgage loans(2) Corporate loans(2) Loan repurchase commitments(2) Medium-term notes(1) Variable interest entity notes(2) Other liabilities(3) In millions Loans receivable at fair value: Residential mortgage loans Residential mortgage loans (90 days or more past due) Corporate loans (90 days or more past due) Total loans receivable at fair value Variable interest entity notes Medium-term notes In millions AFS Investments Fixed-maturity investments: U.S. Treasury and government agency State and municipal bonds Foreign governments Corporate obligations Mortgage-backed securities: Residential mortgage-backed agency Residential mortgage-backednon-agency Commercial mortgage-backed Asset-backed securities: Collateralized debt obligations Other asset-backed Total fixed-maturity investments Money market securities Perpetual debt and equity securities Total AFS investments HTM Investments Assets of consolidated VIEs: Corporate obligations Total HTM investments In millions AFS Investments Fixed-maturity investments: U.S. Treasury and government agency State and municipal bonds Foreign governments Corporate obligations Mortgage-backed securities: Residential mortgage-backed agency Residential mortgage-backednon-agency Commercial mortgage-backed Asset-backed securities: Collateralized debt obligations Other asset-backed Total fixed-maturity investments Money market securities Perpetual debt and equity securities Total AFS investments HTM Investments Assets of consolidated VIEs: Corporate obligations Total HTM investments In millions Due in one year or less Due after one year through five years Due after five years through ten years Due after ten years Mortgage-backed and asset-backed Total fixed-maturity investments “Note In millions AFS Investments Fixed-maturity investments: U.S. Treasury and government agency State and municipal bonds Foreign governments Corporate obligations Mortgage-backed securities: Residential mortgage-backed agency Residential mortgage-backednon-agency Commercial mortgage-backed Asset-backed securities: Collateralized debt obligations Other asset-backed Total AFS investments In millions AFS Investments Fixed-maturity investments: U.S. Treasury and government agency State and municipal bonds Foreign governments Corporate obligations Mortgage-backed securities: Residential mortgage-backed agency Residential mortgage-backednon-agency Commercial mortgage-backed Asset-backed securities: Collateralized debt obligations Other asset-backed Total AFS investments HTM Investments Assets of consolidated VIEs: Corporate obligations Total HTM investments 2018: Percentage of Fair Value Below Book Value > 5% to 15% > 15% to 25% > 25% to 50% > 50% Total 2019: In millions Credit Losses Recognized in Earnings Related to Beginning balance Additions for credit loss impairments recognized in the current period on securities not previously impaired Additions for credit loss impairments recognized in the current period on securities previously impaired Reductions for credit loss impairments previously recognized on securities sold during the period Reductions for credit loss impairments previously recognized on securities impaired to fair value during the period Ending balance In millions Mortgage-backed: MBIA(1) Corporate obligations: MBIA(1) Other: Other Total In millions Proceeds from sales Gross realized gains Gross realized losses $ in millions Credit Derivatives Sold Insured credit default swaps Insured swaps Total notional Total fair value $ in millions Credit Derivatives Sold Insured credit default swaps Insured swaps Insured swaps — held for sale Total notional Total fair value In millions Derivative Instruments Not designated as hedging instruments: Insured credit default swaps Insured swaps Interest rate swaps Interest rate swaps-embedded Currencyswaps-VIE All other All other-embedded Totalnon-designated derivatives In millions Derivative Instruments Not designated as hedging instruments: Insured credit default swaps Insured swaps Insured swaps—held for sale Interest rate swaps Interest rate swaps-embedded Currencyswaps-VIE All other Allother-VIE All other-embedded Totalnon-designated derivatives In millions Hedging Instruments Location of Gain (Loss) Recognized in Income on Derivative Insured credit default swaps Insured credit default swaps Interest rate swaps Currencyswaps-VIE All other Total 2018: In millions Hedging Instruments Location of Gain (Loss) Recognized in Income on Derivative Insured credit default swaps Insured credit default swaps Interest rate swaps Interest rateswaps-VIE Currencyswaps-VIE All other Total 2018: In millions Income (loss) before income taxes Provision (benefit) for income taxes Effective tax rate In millions Deferred tax liabilities: Unearned premium revenue Deferral of cancellation of indebtedness income Deferred acquisition costs Net gains on financial instruments at fair value and foreign exchange Net unrealized gains in accumulated other comprehensive income Partnership basis difference Basis difference in foreign subsidiaries Net deferred taxes on VIEs Other Total gross deferred tax liabilities Deferred tax assets: Compensation and employee benefits Accrued interest Loss and loss adjustment expense reserves Net operating loss Foreign tax credits Other-than-temporary impairments Net unrealized losses on insured derivatives Net losses on financial instruments at fair value and foreign exchange Net unrealized losses in accumulated other comprehensive income Alternative minimum tax credit carryforward Total gross deferred tax assets Valuation allowance Net deferred tax asset the As of As a result of tax reform, AMT credits are now fully refundable no later than In millions Revenues(1) Net change in fair value of insured derivatives Net gains (losses) on financial instruments at fair value and foreign exchange Net investment losses related to other-than-temporary impairments Net gains (losses) on extinguishment of debt Other net realized gains (losses) Revenues of consolidated VIEs Inter-segment revenues(2) Total revenues Losses and loss adjustment Operating Interest Expenses of consolidated VIEs Inter-segment expenses(2) Total expenses Income (loss) before income taxes Provision (benefit) for income taxes Net income (loss) Identifiable assets In millions Revenues(1) Net change in fair value of insured derivatives Net gains (losses) on financial instruments at fair value and foreign exchange Other net realized gains (losses) Revenues of consolidated VIEs Inter-segment revenues(2) Total revenues Losses and loss adjustment Operating Interest Expenses of consolidated VIEs Inter-segment expenses(2) Total expenses Income (loss) before income taxes Provision (benefit) for income taxes Net income (loss) Identifiable assets In millions Revenues(1) Net change in fair value of insured derivatives Net gains (losses) on financial instruments at fair value and foreign exchange Net investment losses related to other-than-temporary impairments Net gains (losses) on extinguishment of debt Other net realized gains (losses) Revenues of consolidated VIEs Inter-segment revenues(2) Total revenues Losses and loss adjustment Operating Interest Expenses of consolidated VIEs Inter-segment expenses(2) Total expenses Income (loss) before income taxes Provision (benefit) for income taxes Net income (loss) Identifiable assets In millions Revenues(1) Net change in fair value of insured derivatives Net gains (losses) on financial instruments at fair value and foreign exchange Net investment losses related to other-than-temporary impairments Net gains (losses) on extinguishment of debt Other net realized gains (losses) Revenues of consolidated VIEs Inter-segment revenues(2) Total revenues Losses and loss adjustment Operating Interest Expenses of consolidated VIEs Inter-segment expenses(2) Total expenses Income (loss) before income taxes Provision (benefit) for income taxes Net income (loss) Identifiable assets In millions Total premiums earned: United States United Kingdom Europe (excluding United Kingdom) Internationally diversified Other Americas Asia Other Total In millions except per share amounts Basic earnings per share: Net income (loss) Less: undistributed earnings allocated to participating securities Net income (loss) available to common shareholders Basic weighted average shares (1) Net income (loss) per basic common share: Diluted earnings per share: Net income (loss) Less: undistributed earnings allocated to participating securities Net income (loss) available to common shareholders Basic weighted average shares (1) Effect of common stock equivalents: Stock options Diluted weighted average shares Net income (loss) per diluted common share: Potentially dilutive securities excluded from the calculation of diluted EPS because of antidilutive affect In millions Balance, December 31, 2016 Other comprehensive income (loss) before reclassifications Amounts reclassified from AOCI Total other comprehensive income (loss) Balance, September 30, 2017 2019: In millions Details about AOCI Components Affected Line Item on the Consolidated Statements of Operations Unrealized gains (losses) on AFS securities: Realized gains (losses) on sale of securities Net gains (losses) on financial instruments at fair value and foreign exchange OTTI Amortization on securities Total reclassifications for the period 2018: concluded on August 2, 2019. 2018. On January 30, 2018, the court granted the Commonwealth defendants’ motion to dismiss the PRHTA-related adversary complaint. On February 9, 2018, National, COFINA. The Plan effective date was February 12, 2019. 2019. business. In millions except per share amounts Net income (loss) Net income (loss) per diluted share Combined operating income(1) Combined operating income per diluted share(1) Cost of shares repurchased In millions except per share amounts Shareholders’ equity of MBIA Inc. Book value per share Adjusted book value per share(1) continued to slow. financial developments. inputs. In millions except for share and per share amounts Total revenues Total expenses Income (loss) before income taxes Provision (benefit) for income taxes Net income (loss) Net income (loss) per common share: Basic Diluted Weighted average number of common shares outstanding: Basic Diluted 2018: net present value of projected cash flows. Lower earned premiums were the result of the acceleration of premiums related to the termination of a policy in 2018 and overall decreases in premiums from maturities and early settlements of other insured transactions with no meaningful writings of new insurance policies. These unfavorable changes were partially offset by a decrease in net losses on an insured derivative and a decrease in other net realized losses on In millions except share and per share amounts Net income (loss) Less: operating income adjustments: Income (loss) before income taxes of our international and structured finance insurance segment and eliminations 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) Foreign exchange gains (losses)(1) Net gains (losses) on sales of investments(1) Net investment losses related to OTTI Net gains (losses) on extinguishment of debt Other net realized gains (losses) Operating income adjustment to the (provision) benefit for income tax(2) Operating income (loss) Operating income (loss) per diluted common share Adjustments Per Share In millions except share and per share amounts Total shareholders’ equity of MBIA Inc. Common shares outstanding Book value per share Reverse book value of the MBIA Corp. legal entity(1) Book value after MBIA Corp. legal entity adjustment Other book value adjustments: Reverse net unrealized (gains) losses included in other comprehensive income (loss) Add net unearned premium revenue(2) Add tax effect on unrealized (gains) losses and unearned premium revenue (3) Total other book value adjustments per share Adjusted book value per share share used in our internal analysis: In millions Net premiums earned Net investment income Fees and reimbursements Net gains (losses) on financial instruments at fair value and foreign exchange Net investment losses related to other-than-temporary impairments Other net realized gains (losses) Total revenues Losses and loss adjustment Amortization of deferred acquisition costs Operating Total expenses Income (loss) before income taxes Provision (benefit) for income taxes Net income (loss) 2018: VIEs. The Company did not consolidate any VIEs in its U.S. Public Finance segment during the six months ended June 30, 2018. first half of 2019. issuer. 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. In millions Loss and LAE related to actual and expected payments (1) Recoveries of actual and expected payments Gross losses incurred Reinsurance Losses and loss adjustment expenses In millions Assets: Insurance loss recoverable Reinsurance recoverable on paid and unpaid losses (1) Liabilities: Gross loss and LAE reserves (2) Expected recoveries on unpaid losses Loss and LAE reserves Insurance loss recoverable - ceded (3) $ in millions Gross of reinsurance: Issues with defaults Issues without defaults Total gross of reinsurance In millions Gross expenses Amortization of deferred acquisition costs Operating Total insurance operating expenses In millions Net income (loss) Less: operating income adjustments: Mark-to-market gains (losses) on financial instruments(1) Net gains (losses) on sales of investments(1) Net investment losses related to OTTI Operating income adjustment to the (provision) benefit for income tax(2) Operating income (loss) 2018. In millions Rating AAA AA A BBB Below investment grade Total In millions Puerto Rico Electric Power Authority (PREPA) Puerto Rico Commonwealth GO(1) Puerto Rico Public Buildings Authority (PBA)(2) Puerto Rico Highway and Transportation Authority Transportation Revenue (PRHTA)(1) Puerto Rico Highway and Transportation Authority- Subordinated Transportation Revenue (PRHTA) Puerto Rico Sales Tax Financing Corporation (COFINA)(1) Puerto Rico Highway and Transportation Authority Highway Revenue (PRHTA)(1) University of Puerto Rico System Revenue Inter American University of Puerto Rico Inc. Total mandate pending the Supreme Court’s final disposition. Trust Agreement that secure insured obligations of National. The adversary proceeding is stayed until the earlier of (a) 60 days after the Court denies the 9019 Motion, (b) consummation of a Plan, (c) 60 days after the filing by the Oversight Board and AAFAF of a Litigation Notice, or (d) further order of the Court. mediation. requirements for affiliations. In millions Puerto Rico Electric Power Authority (PREPA) Puerto Rico Commonwealth GO Puerto Rico Public Buildings Authority (PBA) Puerto Rico Highway and Transportation Authority Transportation Revenue (PRHTA) Puerto Rico Highway and Transportation Authority — Subordinated Transportation Revenue (PRHTA) Puerto Rico Sales Tax Financing Corporation (COFINA) Puerto Rico Highway and Transportation Authority Highway Revenue (PRHTA) University of Puerto Rico System Revenue Inter American University of Puerto Rico Inc. Total In millions Net investment income Fees Net gains (losses) on financial instruments at fair value and foreign exchange Net investment losses related to other-than-temporary impairments Net gains (losses) on extinguishment of debt Other net realized gains (losses) Total revenues Operating Interest Total expenses Income (loss) before income taxes Provision (benefit) for income taxes Net income (loss) 2018: the transfer of employees into our corporate segment. The transfer of employees increased compensation expenses in the corporate segment which were recharged to our U.S. public finance segment. dollar. In millions Net income (loss) Less: operating income adjustments: Mark-to-market gains (losses) on financial instruments(1) Foreign exchange gains (losses)(1) Net gains (losses) on sales of investments(1) Net investment losses related to OTTI Net gains (losses) on extinguishment of debt Other net realized gains (losses) Operating income adjustment to the (provision) benefit for income tax(2) Operating income (loss) U.S. public finance segment. Financial Condition and Results of Operations (continued) In millions Net premiums earned Net investment income Fees and reimbursements Change in fair value of insured derivatives: Realized gains (losses) and other settlements on insured derivatives Unrealized gains (losses) on insured derivatives Net change in fair value of insured derivatives Net gains (losses) on financial instruments at fair value and foreign exchange Other net realized gains (losses) Revenues of consolidated VIEs: Net investment income Net gains (losses) on financial instruments at fair value and foreign exchange Other net realized gains (losses) Total revenues Losses and loss adjustment Amortization of deferred acquisition costs Operating Interest Expenses of consolidated VIEs: Operating Interest Total expenses Income (loss) before income taxes Provision (benefit) for income taxes Net income (loss) 2018: In millions Net premiums earned: U.S. Non-U.S. Total net premiums earned VIEs (eliminated in consolidation) 2018: 2018. U.S. dollar. 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. In millions Losses and LAE related to actual and expected payments(1) Recoveries of actual and expected payments Gross losses incurred Reinsurance Losses and loss adjustment expenses(2) In millions Assets: Insurance loss recoverable Reinsurance recoverable on paid and unpaid losses(2) Liabilities: Gross loss and LAE reserves(3) Expected recoveries on unpaid losses Loss and LAE reserves $ in millions Gross of reinsurance: Issues with defaults Issues without defaults Total gross of reinsurance In millions Gross expenses Amortization of deferred acquisition costs Operating Total insurance operating expenses In millions Collateral Type HELOC Second-lien CES Second-lien Alt-A First-lien(1) Subprime First-lien Prime First-lien Total In millions Collateral Type Multi-sector CDOs(1) High yield corporate CDOs Structured CMBS pools CRE CDOs Total In millions Reinsurers Assured Guaranty Re Ltd. Assured Guaranty Corp. Overseas Private Investment Corporation Others Total portfolio. For a 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, 2018. In millions Income (loss) before income taxes Provision (benefit) for income taxes Effective tax rate was $839 million and $834 million, respectively. 2018. our shareholders. In millions except per share amounts First Quarter of 2017 Second Quarter of 2017 Third Quarter of 2017 Total 2019. income for the foreseeable future. In millions Policyholders’ surplus Contingency reserves Statutory capital Unearned premiums Present value of installment premiums (1) Premium resources (2) Net loss and LAE reserves (1) Salvage reserves Gross loss and LAE reserves Total claims-paying resources 2018. In millions Policyholders’ surplus Contingency reserves Statutory capital Unearned premiums Present value of installment premiums (1) (4) Premium resources (2) Net loss and LAE reserves (1) Salvage reserves (3) Gross loss and LAE reserves Total claims-paying resources 2018. put-backs. During the the Facility. Operations (continued) In millions Statement of cash flow data: Net cash provided (used) by: Operating activities Investing activities Financing activities Effect of exchange rate changes on cash and cash equivalents Cash and cash equivalents—beginning of period Cash and cash equivalents—end of period 2018: $274 million. treasury stock of $43 million. In millions Available-for-sale investments(1): U.S. public finance insurance Amortized cost Unrealized net gain (loss) Fair value Corporate Amortized cost Unrealized net gain (loss) Fair value International and structured finance insurance Amortized cost Unrealized net gain (loss) Fair value Totalavailable-for-sale investments: Amortized cost Unrealized net gain (loss) Totalavailable-for-sale investments at fair value Investments carried at fair value(2): U.S. public finance insurance Corporate Total investments carried at fair value Other investments at amortized cost: U.S. public finance insurance Consolidated investments at carrying value Weighted average credit quality ratings Investment grade percentage 2018. In credit spreads will vary by security. The changes in fair value reflect partially offsetting effects as the value of the investment portfolios generally changes in an opposite direction from the liability portfolio. 2018. for the District of Puerto Rico entered the order confirming the Third Amended Title III Plan of Adjustment for COFINA. The plan became effective on February 12, 2019. Month July August September /s/ Anthony McKiernan /s/ Joseph R. Schachinger September2017NumberNumber: Connecticut 06-1185706(State of incorporation) (914) 273-4545(Registrant’s telephone number, including area code)Not applicable(Former name, former address and former fiscal year, if changed since last report)and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of RegulationS-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐ ☒ Accelerated filer ☐ Non-accelerated filer Non-accelerated filer ☐ (Do not check if a smaller reporting company) Smaller reporting company ☐ Emerging growth company ☐ November 3, 2017, 91,777,937July 30, 2019, 84,756,483 shares of Common Stock, par value $1 per share, were outstanding. PAGE Item 1. 1 2 3 4 5 6 6 8 9 910 Note 4: Variable Interest Entities11 13 2019 3736 4140 43 43 44 4447 4648 49 51 Note 14: Commitments and Contingencies 51Note 15: Subsequent Events 53 5452 Item 3. 8981 Item 4.Controls and Procedures 89Item 1.Legal Proceedings 90 1A.4. 9081 Item 2. 82 82 9183 Item 6.Exhibits 93 9483 84 85 our subsidiariesNational or an inability to access the capital markets and our exposure to significant fluctuations in liquidity and asset values in the global credit markets as a result of collateral posting requirements;structured financeinsured transactions or as a result of a delay or failure in collecting expected recoveries, which could lead the New York State Department of Financial Services (“NYSDFS”) to put MBIA Insurance Corporation into a rehabilitation or liquidation proceeding under Article 74 of the New York Insurance Law and/or take such other actions as the NYSDFS may deem necessary to protect the interests of MBIA Insurance Corporation’s policyholders;“Note 1:“Note1: Business Developments and Risks and Uncertainties” in the Notes to Consolidated Financial Statements included in this Quarterly Report on Form10-Q for a discussion of certain risks and uncertainties related to our financial statements.1.Financial1. Financial Statements September 30, 2017 December 31, 2016 $ 4,234 $ 4,694 164 146 170 233 452 552 6 8 5,026 5,633 116 163 382 409 96 118 611 504 - 555 - 970 146 113 20 24 890 890 189 255 1,632 1,066 406 404 30 33 $ 9,544 $ 11,137 $ 808 $ 958 818 541 2,093 1,986 898 895 350 399 284 299 - 346 221 233 2,352 2,241 7,824 7,898 - - 284 284 3,170 3,160 1,132 2,700 15 (128) (2,893) (2,789) 1,708 3,227 12 12 1,720 3,239 $ 9,544 $ 11,137
and $3,601)
$1,120 and $480) - - Three Months Ended September 30, Nine Months Ended September 30, 2017 2016 2017 2016 $ 26 $ 42 $ 82 $ 131 27 35 64 94 53 77 146 225 33 39 122 115 1 22 9 24 (7) (4) (41) (20) 6 20 (10) - (1) 16 (51) (20) (11) 38 (55) (17) (26) - (80) (1) (45) - (4) - (71) - (84) (1) 1 - 9 5 (1) (2) 36 (3) 8 5 20 25 21 8 2 - - - 28 - 33 203 182 353 205 50 469 149 8 10 23 30 21 32 82 97 50 49 148 148 3 3 8 10 19 4 55 20 306 148 785 454 (273) 55 (603) (101) (6) 24 965 (28) $ (267) $ 31 $ (1,568) $ (73) $ (2.17) $ 0.23 $ (12.38) $ (0.55) $ (2.17) $ 0.23 $ (12.38) $ (0.55) 122,967,924 131,633,411 126,643,642 133,368,752 122,967,924 132,042,067 126,643,642 133,368,752 $ $ $ $
and $3)
derivatives $ $ $ $ $ $ $ $ Three Months Ended September 30, Nine Months Ended September 30, 2017 2016 2017 2016 $ (267) $ 31 $ (1,568) $ (73) 16 (20) 20 204 7 (7) 7 72 9 (13) 13 132 1 (1) (4) 7 (1) (1) (1) 2 2 - (3) 5 40 - 6 7 2 - 2 2 38 - 4 5 4 - 6 - 1 - 2 - 3 - 4 - 1 (15) 145 (70) (1) (5) 20 (24) 2 (10) 125 (46) 54 (23) 143 96 $ (213) $ 8 $ (1,425) $ 23 $ $ $ $
(loss)
arising during the period
(loss) STATEMENTSTATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)For The Nine Months Ended September 30, 2017 Common Stock Additional
Paid-in Retained
Other
Comprehensive Treasury Stock Total
Shareholders’
Equity Preferred Stock
of Subsidiary Total Shares Amount Capital Earnings Income (Loss) Shares Amount of MBIA Inc. Shares Amount Equity 283,989,999 $ 284 $ 3,160 $ 2,700 $ (128) (148,789,168) $ (2,789) $ 3,227 1,315 $ 12 $ 3,239 - - - (1,568) - - - (1,568) - - (1,568) - - - - 143 - - 143 - - 143 (22,026) - 10 - - (359,335) (4) 6 - - 6 - - - - - (11,710,006) (100) (100) - - (100) 283,967,973 $ 284 $ 3,170 $ 1,132 $ 15 (160,858,509) $ (2,893) $ 1,708 1,315 $ 12 $ 1,720 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ Nine Months Ended September 30, 2017 2016 $ 41 $ 87 193 249 (41) (24) (744) (324) 100 88 (103) (98) (119) (102) - (4) (673) (128) (1,146) (2,112) 1,300 1,785 392 410 (199) (88) 270 197 67 90 - 1,799 - 1 202 188 18 1 (58) (36) 4 10 (1) (1) (23) (8) 826 2,236 13 17 (66) (63) (67) (122) 328 - (311) (2,136) (98) (109) (3) - (204) (2,413) - (1) (51) (306) 187 522 $ 136 $ 216 $ (1,568) $ (73) 34 61 22 31 (149) (197) 615 (1) (781) (98) 101 82 (26) 4 10 - 53 17 (64) 3 961 (33) 26 45 93 31 895 (55) $ (673) $ (128) $ 332 $ - $ $ Other financing (7) - $ $ $ $ ) $ $ one ofwithin the largest financial guarantee insurance businesses in the industry. MBIA manages three operating segments: 1) United States (“U.S.”) public finance insurance; 2) corporate; 3)primarily operatedmanaged through National Public Finance Guarantee Corporation (“National”), the corporate segment is operated through MBIA Inc. and several of its subsidiaries, including its service company, MBIA Services Corporation (“MBIA Services”) and its international and structured finance insurance business is primarily operated through MBIA Insurance Corporation and its subsidiaries (“MBIA Corp.”). Effective on January 10, 2017, MBIA Corp.’s wholly-owned subsidiary, MBIA UK (Holdings) Limited (“MBIA UK Holdings”), sold its operating subsidiary, MBIA UK Insurance Limited (“MBIA UK”), to Assured Guaranty Corp. (“Assured”), a subsidiary of Assured Guaranty Ltd. Refer below for a further discussion of the sale of MBIA UK. Unless otherwise indicated or the context otherwise requires, references to “MBIA Corp.” are (i) for any references relating to the period ended January 10, 2017, to MBIA Insurance Corporation, together with its subsidiaries, MBIA UK, and MBIA Mexico S.A. de C.V. (“MBIA Mexico”) and (ii) for any references relating to the period after January 10, 2017, to MBIA Insurance Corporation together with MBIA Mexico.Financial Strength RatingsJune 26, 2017, Standard & Poor’s Financial Services LLCJanuary 1, 2019 and July 1, 2019, the Commonwealth of Puerto Rico and certain of its instrumentalities (“S&P”Puerto Rico”) downgraded the financial strength rating of National fromAA- with a stable outlook to A with a stable outlook. National’s ability to write new business and to compete with other financial guarantors is largely dependentdefaulted on the financial strength ratings assigned to National by major rating agencies. At the current S&P rating it is difficultscheduled debt service for National insured bonds and National paid gross claims in the aggregate compete with higher-rated competitors, therefore, at this time, National has ceased its effortsPuerto Rico. Refer to actively pursue writing new financial guarantee business. National continues to surveilthe “Risks and remediate its existing insured portfolio and will proactively seek opportunities to enhance shareholder value using its strong financial resources, while protecting the interests of all of its policyholders.On September 28, 2017, MBIA Inc., on behalf of its subsidiaries, National and MBIA Corp., provided notice to Moody’s Investors Services (“Moody’s”) terminating the agreement by which Moody’s agreed to provide financial strength ratings to MBIA Inc., National and MBIA Corp. Also on September 28, 2017, National provided notice to Kroll Bond Rating Agency (“Kroll”) terminating the agreement by which Kroll agreed to provide a financial strength rating to National. These termination notices were effective in October of 2017.Full Valuation AllowanceUncertainties” section below for additional information on the Company’s Net DeferredPuerto Rico exposures.AssetDuringFinancing Corporation (“COFINA”) Plan of Adjustment, including the nine months ended September 30, 2017,settlement agreement between Puerto Rico and COFINA. National insured bondholders were given the Company establishedoption of commuting their insurance policy and receiving uninsured COFINA bonds or placing their new uninsured COFINA bonds into the National Custodial Trusts (the “Trusts”), receive Trust certificates and continue to benefit from a full valuation allowanceNational insurance policy. The Trusts operate on its net deferred tax asset, which resulted in a chargepass-through basis; as the Trusts receive debt service payments from the new COFINA bonds, or sells these new bonds, the Trusts’ cash will be paid to earningsthe Trusts’ certificate holders and National’s insured exposure will reduce accordingly. To the extent National’s policy obligations have not been satisfied by the maturity date of $1.2 billion. This charge was included in “Provision (benefit)the original National insurance policies, the Trusts’ certificate holders will receive a claim payment from National at their maturity date for income taxes” onany remaining amounts. The Trusts were consolidated as variable interest entities (“VIEs”) within the Company’s consolidated statementU.S. public finance segment during the first quarter of operations.2019. Refer to “Note 10: Income Taxes”4: Variable Interest Entities” for furtheradditional information about this valuation allowance on the Company’s net deferred tax asset.Sale of MBIA UKOn January 10, 2017, MBIA UK Holdings sold its operating subsidiary, MBIA UK, and made a cash payment of $23 million, to Assured in exchange for the receipt by MBIA UK Holdings of certain notes owned by Assured that were issued by Zohar II2005-1, Limited (“Zohar II”) with an aggregate outstanding principal amount of $347 million as of January 10, 2017 (the “Sale Transaction”). For the nine months ended September 30, 2017, the Company recorded a gain of $5 million to adjust the carrying value of MBIA UK to its fair value less costs to sell as of the sale date. This gain was reflected in the results of the Company’s international and structured finance insurance segment and included in “Other net realized gains (losses)” on the Company’s consolidated statement of operations.MBIA Inc. and SubsidiariesNotes to Consolidated Financial Statements (Unaudited)Note 1: Business Developments and Risks and Uncertainties (continued)Held for Sale ClassificationThe assets and liabilities of MBIA UK were classified as held for sale as of December 31, 2016 and presented within “Assets held for sale” and “Liabilities held for sale” on the Company’s consolidated balance sheet. Income before income taxes for MBIA UK was $9 and $32 million, respectively, for the three and nine months ended September 30, 2016. The following table summarizes the components of assets and liabilities held for sale as of December 31, 2016:As ofIn millionsDecember 31, 2016AssetsInvestments$466 Cash and cash equivalents73 Premiums receivable267 Other assets19 Valuation allowance(270) Total assets held for sale$555 LiabilitiesUnearned premium revenue$304 Other liabilities42 Total liabilities held for sale$346 On January 10, 2017,“Facility”“Refinanced Facility”) withbetween MZ Funding LLC (“MZ Funding”) and certain purchasers, pursuant to which the purchasers or their affiliates of certain holders of 14%Fixed-to-Floating Rate Surplus Notes of MBIA Corp. (collectively, the “Senior Lenders”), and with MBIA Inc., pursuanthave agreed to whichrefinance the Senior Lenders have provided $325 millionoutstanding insured senior notes of senior financingMZ Funding, and MBIA Inc. has provided $38 millionreceived amended subordinated notes of subordinated financing toMZ Funding. In connection with the refinancing transaction, MZ Funding LLC (“MZ Funding”), a newly formed wholly-owned subsidiary of the Company, which in turn lent the proceeds of such financing toand MBIA Corp. entered into an amended and restated credit agreement (the “New Credit Agreement” and the loans thereunder, the “MBIA Loans”). MBIA Corp. issued new financial guarantee insurance policies insuring MZ Funding’s obligations under the Refinanced Facility. Refer to “Note 9: Debt” for further information abouton the Refinanced Facility.National’scontinuedand will seek opportunities to perform satisfactorily against a backdropenhance shareholder value using its substantial financial resources, while protecting the interests of strengthening domestic economic activity. While a stable or growing economy will generally benefit tax revenues and fees charged for essential municipal services which secure National’s insured bond portfolio, someall policyholders. Certain state and local governments and territory obligors that National insures remainare under financial and budgetary stress. This could lead to an increase in defaults by such entities on the payment of their obligations and losses or impairments on a greater number of the Company’sNational’s insured transactions. The CompanyNational monitors and analyzes these situations and other stressed credits closely, and the overall extent and duration of this stress is uncertain.MBIA Inc. and SubsidiariesNotes to Consolidated Financial Statements (Unaudited)Note 1: Business Developments and Risks and Uncertainties (continued)In particular, the Commonwealth of and certain of its instrumentalities (“Puerto Rico”) areis experiencing significant fiscal stress and constrained liquidity due to, among other things, Puerto Rico’s structural budget imbalance, limitedthe lack of access to the capital markets, a stagnating local economy, net migration of people out of Puerto Rico and a high debt burden. Although Puerto Rico has triedcontinues in its efforts to addressrebuild its challenges through various fiscal policies, it continuesinfrastructure and to experience significant fiscal stress. On January 1, 2017 and July 1, 2017, Puerto Rico also defaulted on a scheduled debt service for National insured bonds and National paid gross claims inotherwise recover from the aggregateimpact of $242 million as a result. On September 20, 2017, Hurricane Maria made landfall in Puerto Rico as a Category 4 hurricane resulting2017, aided in catastrophic damage to much of the island’s basic infrastructure, including its electrical transmission and distribution grid, telecommunications network, housing, roads, bridges, water and sewer systems. On September 21, 2017, the President of the United States approved a Major Disaster Declaration for Puerto Rico and thepart by Federal Emergency Management Agency (“FEMA”) made federal disaster assistance available to Puerto Rico to supplement its recovery efforts. Hurricane Maria’s impact on Puerto Rico will likely also impact its ability to both repay its legacy indebtedness and participate in ongoing debt restructuring negotiations. The physical damage and resultant lost economic activity may exceed the collective aid Puerto Rico receives from private insurance, relief from FEMA and other federal agencies and programs. Economic activity inagencies. As part of the Title III proceedings under Puerto Rico may not return to pre-hurricane levelsOversight, Management and Puerto Rico’s recovery could be more shallow and protracted than that experienced by other similarly affected governments, given Puerto Rico’s prior constrained liquidity and economic activity. While the federal government has made aid available toEconomic Stability Act (“PROMESA”), Puerto Rico theresubmitted several draft fiscal plans and an independent Financial Oversight and Management Board for Puerto Rico (“Oversight Board”) voted to certify the most recent fiscal plan. The current plan, or any revisions thereto, can beprovide no assurance that National will fully recover past amounts paid or future amounts that may be covered under its insurance policies. In addition, the extent and duration of such aid will continue in the amounts necessary to offset the adverse impacts from Hurricane Maria in their entirety. In addition,is inherently uncertain, and the necessary and greater involvement of the federal government, through its actions to deliver disaster relief and other support services, in addition to the evolving role of the Financial Oversight and Management Board for Puerto Rico (“Oversight Board”) and the role of Puerto Rico in its own recovery, heightens political risk in connection with the restructuring of legacy debt. This risk could lead the Oversight Board, Puerto Rico or the federal government to seek to extract greater concessions from creditors based on the uncertainty of Puerto Rico’s long term recovery prospects. In this event, losses at National on select Puerto Rico exposures could increase materially.ofby its policyholders and to maximize future recoveries, if any, for its Senior Lenderssenior lending and surplus note holders, and thereafter,then its preferred stock holders. MBIA Corp. is executing this strategy by, among other things, pursuing various actions focused on maximizing the collection of recoveries and by reducing potential losses on its insurance exposures. MBIA Corp.’s insured portfolio performance could deteriorate and result in additional significant loss reserves and claim payments. MBIA Corp.’s ability to meet its obligations is limited by available liquidity and its ability to secure additional liquidity through financing and other transactions. There can be no assurance that MBIA Corp. will be successful in generating sufficient cashresources to meet its obligations.On January 20, 2017, MBIA Corp. was presented withfully satisfied a claim of $770 million (the “Zohar II Claim”) on an insurance policy it had written insuring the certain notes issued by Zohar II. MBIA Corp. was able to satisfy the Zohar II Claim as a result of having completed the Sale Transaction and by borrowing from the Facility, as described above, together with using approximately $60 million from its own resources. Refer to “Note 1: Business Developments and Risks and Uncertainties” in the Notes to Consolidated Financial Statements included in the Company’s Annual Report onForm 10-K for the year ended December 31, 2016 for additional information about these transactions.The amount and timing of projected collections from excess spread from residential mortgage-backed securities (“RMBS”) and theput-back recoverable from Credit Suisse are uncertain.Zohar Recoveriesa claimclaims totaling $919 million in November of 2015 and January of 2017, on MBIA Corp.’s policypolicies insuring the classClass A-1 andA-2 notes issued by Zohar CDO2003-1,satisfying the insuring certain notes issued byClaim2005-1, Limited (“Zohar II”), entitles MBIA Corp. to reimbursement of such amounts plus interest and expenses and/or to exercise certain rights and remedies to seek recovery of such amounts. ThereMBIA Corp. anticipates that the primary source of the recoveries will come from the monetization of the assets of Zohar I and Zohar II, which include, among other things, loans made to, and equity interests in, companies purportedly controlled by the sponsor and former collateral manager of Zohar I and Zohar II (the “Zohar Sponsor”) (all the assets of Zohar I and Zohar II, the “Zohar Assets”). On March 11, 2018, the then-director of Zohar I and Zohar II placed those funds into voluntary bankruptcy proceedings in federal bankruptcy court in the District of Delaware (the “Zohar Funds Bankruptcy Cases”). On May 21, 2018, the Court granted the Zohar funds’ motion to approve a settlement (the “Zohar Bankruptcy Settlement”) which established a process by which the debtor funds, through an independent director and a chief restructuring officer, will work with the original sponsor of the funds to monetize the Zohar Assets and repay creditors, including MBIA Corp. In addition, the Zohar Bankruptcy Settlement provides for a stay of all pending litigation between the parties for a minimum of fifteen months. Salvage and subrogation recoveries related to Zohar I and Zohar II are reported within “Insurance loss recoverable” on the Company’s consolidated balance sheet. Notwithstanding the Zohar Bankruptcy Settlement, there can be no assurance however, that the value of the Zohar assetsAssets will be sufficient to permit MBIA Corp. to recover all or substantially all of the payments it made on Zohar I and Zohar II.MBIA Inc. and SubsidiariesNotes to Consolidated Financial Statements (Unaudited)Note 1: Business Developments and Risks and Uncertainties (continued)Subsequent to September 30, 2017, National declared and paid a dividend of $118 million to its ultimate parent, MBIA Inc. Also, subsequent to September 30, 2017, National purchased from MBIA Inc., certain MBIA Inc. 5.700% Senior Notes due 2034 that were previously repurchased by MBIA Inc. and had not been retired, resulting in an increase to MBIA Inc.’s liquidity of $130 million. whichthat could be triggeredcaused by deterioration in the performance of invested assets, interruption of or reduction in dividends or tax payments received from operating subsidiaries, deterioration in the performance of invested assets, impaired access to the capital markets, as well as other factors, which cannot beare not anticipated at this time. Furthermore, failure by MBIA Inc. to settle liabilities that are also insured by MBIA Corp. could result in claims on MBIA Corp.2016.2018. The following significant accounting policies provide an update to those included in the Company’s Annual Report on Form10-K.2016.2018. The accompanying consolidated financial statements have not been audited by an independent registered public accounting firm in accordance with the standards of the Public Company Accounting Oversight Board (U.S.), but in the opinion of management such financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for the fair statement of the Company’s consolidated financial position and results of operations. All material intercompany balances and transactions have been eliminated.ninesix months ended SeptemberJune 30, 20172019 may not be indicative of the results that may be expected for the year ending December 31, 2017.2019. The December 31, 20162018 consolidated balance sheet was derived from audited financial statements, but does not include all disclosures required by GAAP for annual periods.the prior year’syears’ financial statements to conform to the current presentation. This includes a changereclassification of $31 million resulting in the presentation of cash paid when withholding shares fortax-withholding purposes in “Purchases of treasury stock”an increase to insurance loss recoverable and a corresponding increase to loss and LAE reserves on the Company’s consolidated statementbalance sheet as of cash flows as required under Accounting Standards Update (“ASU”)2016-09, “Compensation-Stock Compensation (Topic 718)”. The change in presentation effected “Operating and employee related expenses paid”, in operating cash flows and “Purchases of treasury stock”, in financing cash flows,December 31, 2018. This reclassification had no impact on the Company’s consolidated statement of cash flows in prior periods. Such reclassifications did not materially impact total revenues, total expenses, assets, liabilities, shareholders’ equity, operating cash flows, investing cash flows, or financing cash flows for all periods presented.The Company has not adopted any new accounting pronouncements that had a material impact on its consolidated financial statements.MBIA Inc. and SubsidiariesNotes to Consolidated Financial Statements (Unaudited)Note 3: Recent Accounting Pronouncements (continued)Recent Accounting DevelopmentsRevenue from Contracts with Customers606)842) (ASU2014-09) and Deferral 2016-02)the Effective Date (ASU2015-14)In May of 2014,2016, the Financial Accounting Standards Board (“FASB”) issued ASU2014-09, “Revenue from Contracts with Customers (Topic 606).” ASU2014-09 amends the accounting guidance for recognizing revenue for the transfer of goods or services from contracts with customers unless those contracts are within the scope of other accounting standards. ASU2014-09 does not apply to financial guarantee insurance contracts within the scope of Topic 944, “Financial Services — Insurance.” ASU2014-09 applies to certain fees and reimbursements, and is not expected to materially impact revenue recognition of these fees and reimbursements. In August of 2015, the FASB issued ASU2015-14, “Revenue from Contracts with Customers (Topic 606) — Deferral of the Effective Date.” ASU2015-14 defers the effective date of ASU2014-09 to interim and annual periods beginning January 1, 2018, and is applied on a retrospective or modified retrospective basis. The adoption of ASU2014-09 is not expected to materially impact the Company’s consolidated financial statements.Financial Instruments-Overall (Subtopic825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (ASU2016-01)In January of 2016, the FASB issued ASU2016-01, “Financial Instruments-Overall (Subtopic825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU2016-01 requires certain equity investments other than those accounted for under the equity method of accounting or result in consolidation of the investee to be measured at fair value with changes in fair value recognized in net income, and permits an entity to measure equity investments that do not have readily determinable fair values at cost less any impairment plus or minus adjustments for certain changes in observable prices. An entity is also required to evaluate the need for a valuation allowance on a deferred tax asset related toavailable-for-saleAccounting Standards Updated (“AFS”ASU”) debt securities in combination with the entity’s other deferred tax assets. ASU2016-01 requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability that results from a change in the instrument-specific credit risk for financial liabilities that the entity has elected to measure at fair value in accordance with the fair value option for financial instruments. ASU2016-01 is effective for interim and annual periods beginning January 1, 2018, and is applied on a modified retrospective basis. Early adoption is not permitted with the exception of early application of the guidance that requires separate presentation in other comprehensive income of the change in the instrument-specific credit risk for financial liabilities measured at fair value in accordance with the fair value option.Based on fair values as of September 30, 2017 of equity investments, the cumulative-effect adjustment, net of tax, related to net unrealized gains of such investments was approximately $1 million, which represents the amount that would have been reclassed from accumulated other comprehensive income (loss) (“AOCI”) to retained earnings had the Company adopted ASU2016-01 on September 30, 2017. As of September 30, 2017, the Company had a full valuation allowance against its deferred tax asset. Refer to “Note 10: Income Taxes” for further information about this valuation allowance on the Company’s deferred tax asset. The Company is continuing to assess the impact of adopting ASU2016-01 on its financial liabilities measured at fair value in accordance with the fair value option. The amount previously disclosed in its Quarterly Report on Form10-Q for the quarterly period ended March 31, 2017 may change materially based on its continued assessment, including as a result of the valuation allowance on its deferred tax assets recorded in the second quarter of 2017. The Company plans to adopt ASU2016-01 in its entirety on January 1, 2018 and does not expect there to be a material impact to the Company’s consolidated financial statements.Leases (Topic 842) (ASU2016-02)In February of 2016, the FASB issued ASU2016-02, “Leases (Topic 842)”, that amends the accounting guidance for leasing transactions. ASU2016-02 requires a lessee to classify lease contracts as finance or operating leases, and to recognize assets and liabilities for the rights and obligations created by leasing transactions with lease terms more than twelve months. ASU2016-02 substantially retains the criteria for classifying leasing transactions as finance or operating leases. For finance leases, a lessee recognizes aright-of-use asset and a lease liability initially measured at the present value of the lease payments, and recognizes interest expense on the lease liability separately from the amortization of theright-of-use asset. For operating leases, a lessee recognizes aright-of-use asset and a lease liability initially measured at the present value of the lease payments, and recognizes lease expense on a straight-line basis. is effective for interim and annual periods beginning January 1,with early adoption permitted, and is applied on ausing an additional (and optional) modified retrospective basis. Thetransition approach. Comparative periods are presented in accordance with Topic 840, Leases, and do not include any retrospective adjustments to comparative periods to reflect the adoption of ASU2016-02 isexpectedhave a cumulative effect adjustment to materiallythe opening balance of retained earnings and does not impact the Company’s statement of operations. Refer to “Note 14: Commitments and Contingencies” for information about the Company’s lease commitments.AFSavailable-for-sale (“AFS”) debt securities to be presented through an allowance for credit losses with changes in the allowance recorded in the period of the change as credit loss expense or reversal of credit loss expense. Any impairment amount not recorded through an allowance for credit losses on AFS debt securities is recorded through other comprehensive income. ASU2016-13 is effective for interim and annual periods beginning January 1, 2020 with early adoption permitted beginning January 1, 2019. ASU2016-13 is applied on a modified retrospective basis except that prospective application is applied to AFS debt securities with other-than-temporary impairments (“OTTI”) recognized before the date of adoption. The Company is evaluating the impact of adopting ASU2016-13.Throughvariable interest entity (“VIE”)VIE to the extent the SPE’s total equity at risk is not sufficient to permit the SPE to finance its activities without additional subordinated financial support or its equity investors lack any one of the following characteristics: (i) the power to direct the activities of the SPE that most significantly impact the entity’s economic performance or (ii) the obligation to absorb the expected losses of the entity or the right to receive the expected residual returns of the entity. A holder of a variable interest or interests in a VIE is required to assess whether it has a controlling financial interest, and thus is required to consolidate the entity as primary beneficiary. An assessment of a controlling financial interest identifies the primary beneficiary as the variable interest holder that has both of the following characteristics: (i) the power to direct the activities of the VIE that most significantly impact the entity’s economic performance and (ii) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. The primary beneficiary is required to consolidate the VIE. An ongoing reassessment of controlling financial interest is required to be performed based on any substantive changes in facts and circumstances involving the VIE and its variable interests.Nonconsolidated VIEsThe following tables present the total assets of nonconsolidated VIEs in which the Company holds a variable interest as of September 30, 2017 and December 31, 2016, through its insurance operations. The following tables also present the Company’s maximum exposure to loss for nonconsolidated VIEs and carrying values of the assets and liabilities for its interests in these VIEs as of September 30, 2017 and December 31, 2016. The Company has aggregated nonconsolidated VIEs based on the underlying credit exposure of the insured obligation. The nature of the Company’s variable interests in nonconsolidated VIEs is related to financial guarantees, insured credit default swap (“CDS”) contracts and any investments in obligations issued by nonconsolidated VIEs.MBIA Inc. and SubsidiariesNotes to Consolidated Financial Statements (Unaudited)Note 4: Variable Interest Entities (continued) September 30, 2017 Carrying Value of Assets Carrying Value of Liabilities VIE
Assets Maximum
Exposure
to Loss Investments(1) Premiums
Receivable(2) Insurance Loss
Recoverable(3) Unearned
Premium
Revenue(4) Loss and Loss
Adjustment
Expense
Reserves(5) $ 7,660 $ 3,955 $ 19 $ 24 $ 248 $ 22 $ 407 226 106 - - - - - 4,939 1,107 - 5 2 4 11 2,481 1,744 - 13 - 15 - 15,306 6,912 19 42 250 41 418 19,850 3,104 - 10 - 15 - $ 35,156 $ 10,016 $ 19 $ 52 $ 250 $ 56 $ 418 (1) -Reported within “Investments” on MBIA’s consolidated balance sheets.(2) -Reported within “Premiums receivable” on MBIA’s consolidated balance sheets.(3) -Reported within “Insurance loss recoverable” on MBIA’s consolidated balance sheets.(4) -Reported within “Unearned premium revenue” on MBIA’s consolidated balance sheets.(5) -Reported within “Loss and loss adjustment expense reserves” on MBIA’s consolidated balance sheets. December 31, 2016 Carrying Value of Assets Carrying Value of Liabilities VIE
Assets Maximum
Exposure
to Loss Investments(1) Premiums
Receivable(2) Insurance Loss
Recoverable(3) Unearned
Premium
Revenue(4) Loss and Loss
Adjustment
Expense
Reserves(5) $ 3,167 $ 1,914 $ 51 $ 2 $ - $ - $ 73 9,146 4,796 20 28 304 27 325 257 145 - - - - - 4,893 1,331 - 7 2 5 8 2,625 2,205 5 18 - 20 - 20,088 10,391 76 55 306 52 406 44,306 12,051 - 11 - 18 - $ 64,394 $ 22,442 $ 76 $ 66 $ 306 $ 70 $ 406 (1) -Reported within “Investments” on MBIA’s consolidated balance sheets.(2) -Reported within “Premiums receivable” on MBIA’s consolidated balance sheets. Excludes $125 million that is included within “Assets held for sale” on the Company’s consolidated balance sheets.(3) -Reported within “Insurance loss recoverable” on MBIA’s consolidated balance sheets.(4) -Reported within “Unearned premium revenue” on MBIA’s consolidated balance sheets. Excludes $134 million that is included within “Liabilities held for sale” on the Company’s consolidated balance sheets.(5) -Reported within “Loss and loss adjustment expense reserves” on MBIA’s consolidated balance sheets.The maximum exposure to loss as a result of MBIA’s variable interests in VIEs is represented by insurance in force. Insurance in force is the maximum future payments of principal and interest which may be required under commitments to make payments on insured obligations issued by nonconsolidated VIEs.$3.2$2.3 billion, and $2.4 billion, respectively, as of SeptemberJune 30, 2017,2019, and $2.7$1.7 billion, and $2.2 billion, respectively, as of December 31, 2016.2018. The carrying amounts of assets and liabilities are presented separately in “Assets of consolidated variable interest entities” and “Liabilities of consolidated variable interest entities” on the Company’s consolidated balance sheets. VIEs are consolidated or deconsolidated based on an ongoing reassessment of controlling financial interest, when events occur or circumstances arise, and whether the ability to exercise rights that constitute power to direct activities of any VIEs are present according to the design and characteristics of these entities. Two additional In the first quarter of 2019, the Company consolidatedduringvariable interest entities” on the nine months ended September 30, 2017Company’s consolidated statement of operations. Refer to “Note 1: Business Developments and one additional VIE was consolidated duringRisks and Uncertainties” for further information about COFINA and the nine months ended September 30, 2016.MBIA Inc. and SubsidiariesNotes to Consolidated Financial Statements (Unaudited)Note 4: Variable Interest Entities (continued) related to the Company’s international and structured finance insurance segment do not have recourse to the general assets of MBIA.the Company. In the event of nonpayment of an insured obligation issued by a consolidated VIE, the Company is obligated to pay principal and interest, when due, on the respective insured obligation only. The Company’s exposure to consolidated VIEs is limited to the credit protection provided on insured obligations and any additional variable interests held by MBIA.
Exposure
to Loss
Receivable
Recoverable
Premium
Revenue
Adjustment
Expense
Reserves - (1) - Reported within “Investments” on MBIA’s consolidated balance sheets. (2) - Reported within “Premiums receivable” on MBIA’s consolidated balance sheets. (3) - Reported within “Insurance loss recoverable” on MBIA’s consolidated balance sheets. (4) - Reported within “Unearned premium revenue” on MBIA’s consolidated balance sheets. (5) - Reported within “Loss and loss adjustment expense reserves” on MBIA’s consolidated balance sheets.
Exposure
to Loss
Receivable
Recoverable
Premium
Revenue
Adjustment
Expense
Reserves (1) - Reported within “Investments” on MBIA’s consolidated balance sheets. (2) - Reported within “Premiums receivable” on MBIA’s consolidated balance sheets. (3) - Reported within “Insurance loss recoverable” on MBIA’s consolidated balance sheets. (4) - Reported within “Unearned premium revenue” on MBIA’s consolidated balance sheets. (5) - Reported within “Loss and loss adjustment expense reserves” on MBIA’s consolidated balance sheets. titleTitle 11 of the United States Code (the “Bankruptcy Code”), or have entered into state statutory proceedings established to assist municipalities in managing through periods of severe fiscal stress. In the case of Puerto Rico, certain credits that the Company insures have filed petitions for covered instrumentalities under Title III of the Puerto Rico Oversight, Management and Economic Stability Act (“PROMESA”),PROMESA, which incorporates by reference provisions from the Bankruptcy Code. This could lead to an increase in defaults by such entities on the payment of their obligations and losses or impairments in greater amounts on the Company’s insured transactions. The filing for protection under the Bankruptcy Code or entering state statutory proceedings does not necessarily result in a default or indicate that an ultimate loss will occur.On September 20, 2017, Hurricane Maria made landfall in In February of 2019, the COFINA Plan of Adjustment was confirmed by the District Court. Refer to “Note 1: Business Development and Risk and Uncertainties”, for further information on the Company’s Puerto Rico as a Category 4 hurricane resulting in catastrophic damage to much of the island’s basic infrastructure, including its electrical transmission and distribution grid, telecommunications network, housing, roads, bridges, water and sewer systems. On September 21, 2017, the President of the United States approved a Major Disaster Declaration for Puerto Rico and the FEMA made federal disaster assistance available to Puerto Rico to supplement its recovery efforts. Hurricane Maria’s impact on Puerto Rico will likely also impact its ability to both repay its legacy indebtedness and participate in ongoing debt restructuring negotiations. The physical damage and resultant lost economic activity may exceed the collective aid Puerto Rico receives from private insurance, relief from FEMA and other federal agencies and programs. Economic activity in Puerto Rico may not return to pre-hurricane levels and Puerto Rico’s recovery could be more shallow and protracted than that experienced by other similarly affected governments, given Puerto Rico’s prior constrained liquidity and economic activity. While the federal government has made aid available to Puerto Rico, there can be no assurance that such aid will continue in the amounts necessary to offset the adverse impacts from Hurricane Maria in their entirety. In addition, the necessary and greater involvement of the federal government, through its actions to deliver disaster relief and other support services, in addition to the evolving role of the Oversight Board and the role of Puerto Rico in its own recovery, heightens political risk in connection with the restructuring of legacy debt. This risk could lead the Oversight Board, Puerto Rico or the federal government to seek to extract greater concessions from creditors based on the uncertainty of Puerto Rico’s long term recovery prospects. In this event, losses at National on select Puerto Rico exposures could increase materially. The Company monitors and analyzes these situations closely, however, the overall extent and duration of such events are uncertain.policiesa policy insuring a credit derivativesderivative or on financial guarantee VIEs that are eliminated in consolidation. PoliciesThe policy insuring a credit derivative contracts arecontract is accounted for as derivativesa derivative and areis carried at fair value in the Company’s consolidated financial statements under GAAP. The fair valuesvalue of an insured credit derivative contracts arecontract is influenced by a variety of market and transaction-specific factors that may be unrelated to potential future claim payments under the Company’s insurance policies. In the absence of credit impairments on insured credit derivative contracts or the early termination of such contracts at a loss, the cumulative unrealized losses recorded from these contracts should reverse before or at the maturity of the contracts. As the Company’s insured credit derivatives have similar terms, conditions, risks, and economic profiles to its financial guarantee insurance policies, the Company evaluates them for impairment, under Statutory accounting, in the same way that it estimates loss and loss adjustment expense (“LAE”) for its financial guarantee policies. Refer to “Note 8: Derivative Instruments” for a further discussion of the Company’s use of derivatives and their impact on the Company’s consolidated financial statements.MBIA Inc. and SubsidiariesNotes to Consolidated Financial Statements (Unaudited)Note 5: Loss and Loss Adjustment Expense Reserves (continued)SeptemberJune 30, 20172019 for both first and second-lien RMBS transactions using a process called the “Roll Rate Methodology.” The Roll Rate Methodology is a multi-step process using databases of loan level information, proprietary internal cash flow models, and commercially available models to estimate potential losses and recoveries on insured bonds. Refer to “Note 6: Loss and Loss Adjustment Expense Reserves” in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form10-K for the year ended December 31, 2016,2018, for additional information on the Company’s Roll Rate Methodologymethodology for its RMBS case basis reserves.“put-back” “put-back” claims related to those mortgage loans whose inclusion in an insured securitization failed to comply with representations and warranties (“ineligible loans”).(whichwhich include future delinquency trends, average time tocharge-off/liquidate delinquent loans, and the availability of pool mortgage insurance), the future spread between Prime and the London Interbank Offered RateLIBOR interest rates, and borrower refinancing behavior (which may be affected by changes in the interest rate environment) that results in voluntary prepayments. Minor deviations in loss trends and voluntary prepayments may substantially impact the amounts collected from excess spread. Excess spread may also include estimated recoverables from mortgage insurance contracts andincludes subsequent recoveries on previously charged-off loans associated with the insured second-lien RMBS securitizations. claims. claims relating to the inclusion of ineligible loans in securitizations it insured. Only its claims against Credit Suisse remain outstanding. The Company’s settlement amounts have been consistent with theput-back recoveries that had been included in the Company’s financial statements at the times preceding the settlements.Theput-back contract claim remaining with Credit Suisse is related to the inclusion of ineligible loans in the2007-2 Home Equity Mortgage Trust securitization. Credit Suisse has challenged the Company’s assessment of the ineligibility of individual mortgage loans and the dispute is the subject of litigation for which there is no assurance that the Company will prevail.losses, which totaled $435 million through September 30, 2017.losses. The Company is also entitled to collect interest on amounts paid; it believes that in the context of itsput-back litigation, the appropriate interest rate should be the New York State statutory rate. However, the Company currently calculates itsput-back recoveries using the contractual interest rate, which is lower than the New York State statutory rate.MBIA Inc. and SubsidiariesNotes to Consolidated Financial Statements (Unaudited)Note 5: Loss and Loss Adjustment Expense Reserves (continued)obligationobligations (“CDO”) portfolio, includingprimarily its multi-sector CDO and high yield corporate CDO asset classesclass that werewas insured in the form of financial guarantee policies. MBIA’s insured multi-sector CDOs are transactions that include a variety of collateral ranging from corporate bonds to structured finance assets (which includes, but are not limited to, RMBS-related collateral, multi-sector and corporate CDOs). TheRefer to “Note 6: Loss and Loss Adjustment Expense Reserves” in the Notes to Consolidated Financial Statements included in the Company’s high yield corporate CDO portfolio consistsAnnual Report on Form 10-K for the year ended December 31, 2018, for additional information on the Company’s process for estimating reserves on these policies.will seekis seeking to recover the payments it made (plus interest and expenses) with respect to Zohar I and the Zohar II Claim.II. MBIA Corp. anticipates that the primary source of the recovery of the Zohar II Claimrecoveries will come from the monetization of the assets of Zohar II, which include, among other things, loans made to, and equity interests in, companies purportedly controlled by the sponsor and former collateral manager of Zohar I and Zohar II (the “Zohar Sponsor”) (all the assets of Zohar II, the “Zohar II Assets”).In connection with the exercise of its rights and remedies, MBIA Corp. directed the trustee for Zohar I to commence an auction (the “Auction”) of all of the assets of Zohar I, which occurred in 2016. MBIA Corp. was the winning bidderAssets as anticipated in the Auction,Zohar Bankruptcy Settlement. Refer to “Note 1: Business Developments and in connection therewith, acquiredRisks and Uncertainties” for additional information about the beneficial ownership ofestimated Zohar recoveries. Notwithstanding the procedures agreed to in the Zohar I assets, which include loans made to, and equity interests in, companies purportedly controlled by the Zohar Sponsor (all the assets of Zohar I, the “Zohar I Assets”). Over time, MBIA Corp. expects to acquire the legal ownership of the Zohar I Assets and recover all or substantially all of the payment it made (plus interest and expenses) with regards to the Zohar I claim. As of September 30, 2017, the recoveries of Zohar I and Zohar II are included in “Loans receivable at fair value” which are presented in “Assets of consolidated variable interest entities” on the Company’s consolidated balance sheets.ThereBankruptcy Settlement, there can be no assurance however, that the value of the Zohar II Assets and the Zohar I Assets will be sufficient to permit MBIA Corp. to recover all or substantially all of the payments it made on the Zohar I and the Zohar II Claims.II. Failure to recover a substantial amount of such payments could impede itsMBIA Corp.’s ability to make payments when due on other policies. MBIA Corp. believes that if the New York State Department of Financial Services (“NYSDFS”)NYSDFS concludes at any time that MBIA Insurance Corporation will not be able to pay its policyholder claims, the NYSDFS would likely put MBIA Insurance Corporation into a rehabilitation or liquidation proceeding under Article 74 of the New York Insurance LawNYIL and/or take such other actions as the NYSDFS may deem necessary to protect the interests of MBIA Insurance Corporation’s policyholders. The determination to commence such a proceeding or take other such actions is within the exclusive control of the NYSDFS.Refer to “Note 6: Loss and Loss Adjustment Expense Reserves” in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form10-K for the year ended December 31, 2016, for additional information on the Company’s loss reserving process including risk-management activities.MBIA Inc. and SubsidiariesNotes to Consolidated Financial Statements (Unaudited)Note 5: Loss and Loss Adjustment Expense Reserves (continued)consolidatedconsolidating VIEs, which are included in the Company’s consolidated balance sheets as of SeptemberJune 30, 20172019 and December 31, 20162018, are presented in the following table: As of September 30, 2017 As of December 31, 2016 Balance Sheet Line Item Balance Sheet Line Item Insurance
loss
recoverable Loan
repurchase
commitments Loss
and LAE
reserves Insurance
loss
recoverable Loan
repurchase
commitments Loss and
LAE
reserves $ 356 $ - $ 348 $ 174 $ - $ 97 1,559 406 694 551 404 650 (1,304) - (224) (221) - (206) 255 406 470 330 404 444 $ 611 $ 406 $ 818 $ 504 $ 404 $ 541
recoverable
LAE
reserves
recoverable
and LAE
reserves $ $ $ $ $ $ $ $ (1) - Includes loan repurchase commitments of $ (2) - Amounts are net of expected recoveries. ninesix months ended September June 2017.September June 2017,2.17%2.07%. LAE reserves are generally expected to be settled within aSeptember June 2017 2016,$69$47 million and $60 million, respectively, related to LAE. In millions Changes in Loss and LAE Reserves for the Nine Months Ended September 30, 2017
and LAE
Reserves as of
December 31,
2016 Loss
Payments
for Cases
with
Reserves(1) Accretion
of
Claim
Liability
Discount Changes in
Discount
Rates Changes in
Assumptions Changes in
Unearned
Premium
Revenue Changes in
LAE
Reserves Other(2) Gross Loss
and LAE
Reserves as of
September 30,
2017 $ 541 $ (1,057) $ 7 $ 8 $ 498 $ (32) $ 9 $ 844 $ 818
Reserves as of
December 31,
Discount
Assumptions
Unearned
LAE
Reserves
and LAE
Reserves as of
June 30,
2019 $ 965 $ (92) $ 10 $ (29) $ 135 $ 21 $ (13 ) $ 1 $ 998 (1) - Includes payments made to satisfy the Zohar II Claim.Amounts are net of expected recoveries of unpaid claims.(2) - Primarily changes in the amount to satisfy the Zohar II Claim.gross loss and LAE reserves reflectedprimarily relates to an increase in the preceding table was primarily related to increases due to changes in assumptionsreserves on certain Puerto Rico exposures.MBIA Inc.credits and SubsidiariesNotes to Consolidated Financial Statements (Unaudited)Note 5: Lossfirst-lien RMBS transactions partially offset by payments made on certain Puerto Rico credits and Loss Adjustment Expense Reserves (continued) and Recoveries on Unpaid Losses Current period changes inpotential recoveries may be recorded as an insurance loss recoverable asset, netted against the gross losson paid claims and LAE reserve liability, or both.LAE. The following table presents changes in the Company’s insurance loss recoverable and changes in recoveries on unpaid losses reported within the Company’s claim liability for the ninesix months ended SeptemberJune 30, 2017.2019. Changes in insurance loss recoverable attributable to the accretion of the discount on the recoverable, changes in discount rates, changes in amount and timing of estimated collections, changes in assumptions and changes in LAE recoveries are recorded in “Losses and loss adjustment” expenses in the Company’s consolidated statements of operations. Changes in Insurance Loss Recoverable and Recoveries on Unpaid Losses
for the Nine Months Ended September 30, 2017 Gross
Reserve as of
December 31,
2016 Collections
for Cases
with
Recoveries Accretion
of
Recoveries Changes in
Discount
Rates Changes in
Assumptions Changes in
LAE
Recoveries Other(1) Gross
Reserve
as of
September 30,
2017 $ 504 $ (56) $ 7 $ 7 $ 133 $ - $ 16 $ 611 79 - 1 1 (42) (5) - 34 $ 583 $ (56) $ 8 $ 8 $ 91 $ (5) $ 16 $ 645
December 31,
2018
for Cases
of
Recoveries
Discount
Assumptions
as of (1) - Primarily changes in amount and timing of collections. (2) - As of September 30, 2017Includes amounts related to paid claims and December 31, 2016, excludes Puerto Rico recoveries, and as of December 31, 2016,LAE that are expected to be recovered in the Zohar II recoveries, which have been netted against reserves.future.changes in assumptionsamounts related to the anticipated recovery of claims paid on certain Puerto Rico credits, and to a lesser extent, additional recoveries on insured RMBS transactions partially offset by a decrease incollections on insured RMBS transactions. The decrease in the Company’s recoveries on unpaid losses is primarily related to insured RMBS transactions.The Company’s financial guarantee insurance losses and LAE (excluding insured credit derivatives and consolidated VIEs), net of reinsurance forninesix months ended SeptemberJune 30, 20172019, loss and 2016 are presentedLAE activity primarily related to an increase in the following table: Three Months Ended September 30, Nine Months Ended September 30, 2017 2016 2017 2016 $ 141 $ 28 $ 310 $ 46 54 44 58 78 9 - 84 61 1 (23) 9 (46) - 1 8 10 $ 205 $ 50 $ 469 $ 149 (1) - Includes non-U.S.public finance and other issues.SeptemberJune 30, 2017,2018, losses and LAE primarily related to increases in actual and expected payments on certain Puerto Rico exposures and decreases in projected collections from mortgage insurance included in the Company’s excess spread within its second-lien RMBS transactions from the settlement of litigation regarding insurance coverage involving Old Republic Insurance Corporation, Bank of America, N.A. and The Bank of New York Mellon.For the three months ended September 30, 2016, losses and LAE primarily related to increases in actual and expected payments on certain Puerto Rico exposures and second-lien RMBS transactions. These were partially offset by increases in recoveries of expected payments on certain Puerto Rico exposures and decreases in expected payments on CDOs.For the nine months ended September 30, 2017, losses and LAE primarily related to increases in actual and expected payments on certain Puerto Rico exposures, insured first-lien RMBS transactions and a decrease in actual and projected collections from mortgage insurance included in the Company’s excess spread within its second-lien RMBS transactions from the settlement of litigation regarding insurance coverage involving Old Republic Insurance Corporation, Bank of America, N.A. and The Bank of New York Mellon.MBIA Inc. and SubsidiariesNotes to Consolidated Financial Statements (Unaudited)Note 5: Loss and Loss Adjustment Expense Reserves (continued)For the nine months ended September 30, 2016, losses and LAE primarily related to increases in actual and expected payments on certain Puerto Rico exposures and insured first and second-lien RMBS transactions and decreases in projected collections from excess spread within insured second-lien RMBS transactions. These were partially offset by increases in recoveries of expected payments on certain Puerto Rico exposures and decreases in expected payments on CDOs.SeptemberJune 30, 20172019 and 2016,2018, gross LAE related to remediating insured obligations was $$6 million. For the nine months ended September 30, 2017 and 2016, gross LAE related to remediating insured obligations were $33$10 million and $34$22 million, respectively.September June 2017: Surveillance Categories Caution
List
Low Caution
List
Medium Caution
List
High Classified
List Total 93 5 1 284 383 20 4 1 120 145 7.1 4.6 8.6 9.7 8.8 $ 3,016 $ 13 $ 108 $ 6,218 $ 9,355 2,772 4 49 5,795 8,620 $ 5,788 $ 17 $ 157 $ 12,013 $ 17,975 $ - $ - $ - $ 934 $ 934 - - - 934 934 - - - (215) (215) $ - $ - $ - $ 215 $ 215 $ 10 $ - $ 4 $ 79 $ 93 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ (1) - An “issue” represents the aggregate of financial guarantee policies that share the same revenue source for purposes of making debt service payments on the insured debt. (2) - Represents contractual principal and interest payments due by the issuer of the obligations insured by MBIA. (3) - The gross claim liability with respect to Puerto Rico exposures are net of expected recoveries for policies in a net payable position. (4) - Gross potential recoveries with respect to certain Puerto Rico exposures are net of the claim liability for policies in a net recoverable position. (5) - Represents discount related to Gross Claim Liability and Gross Potential Recoveries. (6) - Included in “Other assets” on the Company’s consolidated balance sheets. 2016: Surveillance Categories Caution
List
Low Caution
List
Medium Caution
List
High Classified
List Total 90 6 3 331 430 17 4 2 126 149 7.5 3.4 7.2 7.0 7.1 $ 2,917 $ 17 $ 320 $ 7,031 $ 10,285 2,795 4 107 2,777 5,683 $ 5,712 $ 21 $ 427 $ 9,808 $ 15,968 $ - $ - $ - $ 718 $ 718 - - - 770 770 - - - (75) (75) $ - $ - $ - $ 23 $ 23 $ 9 $ - $ 8 $ 68 $ 85 Number of policies 50 18 - 233 301 16 4 - 102 122 Remaining weighted average contract period (in years) 6.7 8.0 - 9.7 8.9 Principal $ 1,604 $ 249 $ - $ 5,353 $ 7,206 Interest 2,118 123 - 5,414 7,655 Total $ 3,722 $ 372 $ - $ 10,767 $ 14,861 $ - $ - $ - $ 1,085 $ 1,085 Less: - - - 2,363 2,363 - - - (670) (670) Net claim liability (recoverable) $ - $ - $ - $ (608) $ (608 ) Unearned premium revenue $ 5 $ 4 $ - $ 63 $ 72 $ 21 (1) - An “issue” represents the aggregate of financial guarantee policies that share the same revenue source for purposes of making debt service payments on the insured debt. (2) - Represents contractual principal and interest payments due by the issuer of the obligations insured by MBIA. (3) - The gross claim liability with respect to Puerto Rico and Zohar II exposures are net of expected recoveries for policies in a net payable position.(4) - Gross potential recoveries with respect to certain Puerto Rico exposures are net of the claim liability for policies in a net recoverable position. (5) - Represents discount related to Gross Claim Liability and Gross Potential Recoveries. (6) - Included in “Other assets” on the Company’s consolidated balance sheets. September 30, 2017, the gross claim liability primarilyCompany changing its presentation of its insurance loss recoverable and its loss and LAE reserves related to insuredits first-lien RMBS transactionsexposure as well as certain Puerto Rico exposures. As of December 31, 2016,discussed above, the gross claim liability primarilyamounts in the preceding table related to insured first-lien RMBS transactions. As of September 30, 2017 and December 31, 2016, the gross potential recoveries principally related to certain Puerto Rico exposures and insured second-lien RMBS transactions. As of September 30, 2017, these potential recoveries exclude the recoveries of Zohar I and Zohar II that are included in “Loans receivable at fair value” which are presented in “Assets of consolidated variable interest entities” on the Company’s consolidated balance sheets.The Company’s recoveries have been, and remain based on either salvage rights, the rights conferred to MBIA through the transactional documents (inclusive of the insurance agreement), or subrogation rights embedded within financial guarantee insurance policies. Expected salvage and subrogation recoveries, as well as recoveries from other remediation efforts, reduce the Company’s claim liability. Once a claim payment has been made, the claim liability has been satisfied and MBIA’s right to recovery is no longer considered an offset to future expected claim payments, it is recorded as a salvage asset. The amount of recoveries recorded by the Company is limited to paid claims plus the present value of projected estimated future claim payments. As claim payments are made, the recorded amount of potential recoveries may exceed the remaining amount of the claim liability for a given policy. The gross claim liability and gross potential recoveries reflect the eliminationhave been increased by $ claim liabilities and potential recoveries related to VIEs consolidated by the Company. As of September 30, 2017 and December 31, 2016, reinsurance recoverable on paid and unpaid losses was $15 million and $6 million, respectively, and was included in “Other assets” on2018 withCompany’s consolidated balance sheets.SeptemberJune 30, 2017 or2019 and December 31, 2016.2018. All challenges to third-party prices are reviewed by staff of the Company as well as its third-party portfolio manager with relevant expertise to ensure reasonableness of assumptions. A pricing analysis is reviewed and approved by the Company’s valuation committee.VIEs and warrants.VIEs. The majority of the financial liabilities that the Company has elected to fair value or that require fair value reporting or disclosures are valued based on the estimated value of the underlying collateral, the Company’s or a third-party’s estimate of discounted cash flow model estimates, or quoted market values for similar products. These valuations include adjustments for expected nonperformance risk of the Company.derivatives.derivative. The Company’s insured credit derivative contracts arecontract is atransactions. Since insured derivatives aretransaction and since it is highly customized, and there is generally no observable market for these derivatives, thethis derivative. The Company estimates theirits fair values in a hypothetical marketvalue based on an internal models simulating what a similar company would charge to assume the Company’s position inmodel that incorporates market or estimated prices for all collateral within the transaction, at the measurement date. This pricing would be based on the expected losspresent value of the exposure.market-implied potential loss and nonperformance risk. The Company reviews its valuation model results on a quarterly basis to assess the appropriateness of the assumptions and results in light of current market activity and conditions. This review is performed by internal staff with relevant expertise. When market spreads or securities prices are observable for similar transactions, those spreads are an integral part of the analysis.theirthe committee is responsible for. The committee documents its agreement with the fair value measurements reported in the Company’s consolidated financial statements.or disclosed at fair value are described below.(including short-term investments) Held asInvestmentsHeld-to-Maturity,and OtherShort-term Investments(“ABS”), money market securities, and perpetual debt and equity securities.Theofby applying theheld-to-maturity (“HTM”) investments net asset value per share practical expedient and was not required to be classified in the fair value hierarchy. These funds were backed by high quality, very liquid short-term instruments and the probability is determined using discounted cash flow models. Key inputs include unobservable cash flows projected overremote that the expected term of the investment discounted using observable interest rate yield curves of similar securities. foreign government, money market securities and perpetual debt and equity securities. Quoted market prices of investments in less active markets, as well as investments which are valued based on other than quoted prices for which the inputs are observable, such as interest rate yield curves, are categorized in Level 2 of the fair value hierarchy. Investments that contain significant inputs that are not observable are categorized as Level 3. Receivable for Investments Sold, Payable for Investments Purchased, Accrued Investment Income and Interest Payable for Derivativesreceivable for investments sold, payable for investments purchased, accrued investment income and interest payable for derivatives approximate fair valuesvalue due to the short-term nature and credit worthiness of these instruments. These itemsinstruments and are categorized in Level 1 or Level 2 of the fair value hierarchy.and corporate loans.loans are categorized in Level 3 of the fair value hierarchy. Fair values of residential mortgage loans are determined using quoted prices for MBS issued by the respective VIE and adjusted for the fair values of the financial guarantees provided by MBIA Corp. on the related MBS. FairThe fair values of corporate loans are based on discounted cash flow methodologies. Loans receivable at fair value are determined using market prices adjusted forthe financial guarantees provided to VIE obligations and discounted cash flow techniques and are categorized in Level 3consider expected claim payments, net of the fair value hierarchy.This asset representsThese assets represent the rights of MBIA against the sellers/servicers for breaches of representations and warranties that the securitized residential mortgage loans sold to the trust to comply with stated underwriting guidelines and for the sellers/servicers to cure, replace, or repurchase mortgage loans. Fair value measurements of loan repurchase commitments represent the amounts owed by the sellers/servicers to MBIA as reimbursement of paid claims. Loan repurchase commitments are not securities and no quoted prices or comparable market transaction information are observable or available. Fair values of loan repurchase commitments are determined using discounted cash flow techniques and are categorized in Level 3 of the fair value hierarchy.VIEshavehas entered into a derivative instrumentsinstrument consisting of a cross currency swaps. Crossswap. The cross currency swaps areswap is entered into to manage the variability in cash flows resulting from fluctuations in foreign currency rates. The fair valuesvalue of the VIE derivativesderivative is determined based on inputs from unobservable cash flows projection of the derivative, discounted using observable discount rates. As the significant inputs are unobservable, the derivative contract is categorized in Level 3 of the fair value hierarchy.MBIA Inc. and SubsidiariesNotes to Consolidated Financial Statements (Unaudited)Note 6: Fair Value of Financial Instruments (continued)Long-term Debtof long-term notes, debentures and surplus notes are estimated based on quoted prices for these or similar securities.The fair value of the accrued interest expense on the surplus notes due in 2033 is determined based on the carrying amount of the accrued interest expense, adjusted for the credit risk of the Company. The carrying amounts of accrued interest expense on all other long-term debt approximate fair value due to the short-term nature of the interest payment. Long-term debt is categorized in Level 2 of the fair value hierarchy.Medium-term NotesThe Company has elected to measure certain MTNs at fair value on a recurring basis with changes in fair value reflected in earnings. MTNs are categorized in Level 3 of the fair value hierarchy.Investment AgreementsThe fair values of investment agreements are determined using discounted cash flow techniques based on contractual cash flows and observable interest rates currently being offered for similar agreements with comparable maturity dates. Investment agreements contain collateralization and termination agreements that substantially mitigate the nonperformance risk of the Company. As the terms of the notes are private, and the timing and amount of contractual cash flows are not observable, these investment agreements are categorized in Level 3 of the fair value hierarchy.When observable quoted prices are not available, fair value is determined based on discounted cash flow techniques of the underlying collateral using observable and unobservable inputs. Observable inputs include interest rate yield curves and bond spreads of similar securities. Unobservable inputs include the value of any credit enhancement. VIE notes are categorized in Level 2 or Level 3 of the fair value hierarchy based on the lowest level input that is significant to the fair value measurement in its entirety.Valuation Model OverviewFor the nine months ended September 30, 2017, the The Company useduses an internally developed Direct Price Model to value its insured CDS contractscredit derivative that incorporateincorporates market prices or estimated prices of similar securities that are obtained for all collateral within athe transaction, the present value of the market-implied potential losses, and nonperformance risk. The valuation of the insured derivativescredit derivative includes the impact of its credit standing. The insured credit derivatives arederivative is categorized in Level 3 of the fair value hierarchy based on unobservable inputs that are significant to the fair value measurement in its entirety.MBIA Inc. and SubsidiariesNotes to Consolidated Financial Statements (Unaudited)Note 6: Fair Value of Financial Instruments (continued)Prior to 2017, the Company used the Binomial Expansion Technique (“BET”) Model and the Direct Price Model to value insured CDS contracts. The BET Model estimates what a bond insurer would charge to guarantee a transaction at the measurement date, based on the market-implied default risk of the underlying collateral and the remaining structural protection in a deductible or subordination. Inputs to the process of determining fair value for structured transactions using the BET Model include estimates of collateral loss, allocation of loss to separate tranches of the capital structure, credit spreads, recovery rates and nonperformance risk and weighted average life.also entered into aother derivative contractliabilities as a result of a commutation.commutation that occurred in 2014. The fair value of the derivative is determined using a discounted cash flow model. Key inputs include unobservable cash flows projected over the expected term of the derivative, discounted using observable discount rates and CDS spreads.derivative. As the significant inputs are unobservable, the derivative contract is categorized in Level 3 of the fair value hierarchy.Stock warrants issued by the Company are valued using the Black-Scholes model and are recorded at fair value. Inputs into the warrant valuation include the Company’s stock price, the strike price of the warrant, time expiration, a volatility parameter, interest rates, and dividend data. As all significant inputs are market-based and observable, warrants are categorized in Level 2 of the fair value hierarchy.Other liabilities also include payables for certain contingent consideration. The fair value of the liability is based on the cash flow methodologies using observable and unobservable inputs. Unobservable inputs include invested asset balances and asset management fees that are significant to the fair value estimate and the liability is categorized in Level 3 of the fair value hierarchy.Held For SaleAsSeptemberJune 30, 20172019 and December 31, 2016. Fair Value as of
September 30, 2017 Range
(Weighted Average) $ 1,632 Market prices adjusted for financial guarantees provided to VIE obligations Impact of financial guarantee 0% - 34% (6%) 406 Discounted cash flow Recovery rates(2) Breach rates(2) 430 Market prices of VIE assets adjusted for financial guarantees provided Impact of financial guarantee 0% - 65% (39%) 74 Direct Price Model Nonperformance risk 46% - 46% (46%) 4 Discounted cash flow Cash flows $0 - $49 ($25)(3)
June 30, 2019 Assets of consolidated
VIEs: Loans receivable at
fair value $ 154
financial guarantees Loan repurchase commitments 428 Discounted cash flow Liabilities of
consolidated VIEs: Variable interest
entity notes 342 Market prices of VIE assets adjusted for financial guarantees provided Impact of financial guarantee Credit derivative
liabilities: CMBS 18 Direct Price Model Nonperformance risk Other derivative
liabilities 16 Discounted cash flow Cash flows (1) - Unobservable inputs are primarily based on comparable companies’ EBITDA Multiples.Negative percentage represents financial guarantee policies in a receivable position.(2) - Recovery rates and breach rates include estimates about potential variations in the outcome of litigation with a counterparty. (3) - Midpoint of cash flows are used for the weighted average. Fair Value as of
December 31, 2016 Range
(Weighted Average) $ 916 Market prices adjusted for financial guarantees provided to VIE obligations Impact of financial guarantee 0% - 28% (3%) 404 Discounted cash flow Recovery rates(2) Breach rates(2) 476 Market prices of VIE assets adjusted for financial guarantees provided Impact of financial guarantee 0% - 54% (24%) Recovery rates 25% - 40% (33%) 62 BET Model Nonperformance risk 10% - 32% (32%) Weighted average life (in years) 1.1 - 1.5 (1.3) CMBS spreads 25% - 35% (30%) 2 Direct Price Model Nonperformance risk 58% - 58% (58%) 20 $0 - $83 ($42)(3)
(Weighted Average)
VIEs:
fair $
financial guarantees
provided to VIE
obligations
commitments
consolidated VIEs: Impact of financial guarantee
liabilities Unobservable inputs are primarily based on comparable companies’ EBITDA Multiples.MBIA Inc. and SubsidiariesNotes to Consolidated Financial Statements (Unaudited)Note 6: Fair Value of Financial Instruments (continued)inputsinput used in the fair value measurement of the Company’s residential loans receivable at fair value of consolidated VIEs areis the impact of the financial guarantee and multiples.guarantee. The fair value of residential loans receivable areis calculated by subtracting the value of the financial guarantee from the market value of VIE liabilities and by discounted cash flow methodologies.liabilities. The value of a financial guarantee is estimated by the Company as the present value of expected cash payments, net of recoveries, under the policy. As expected cash payments provided by the Company under the insurance policy increase,If there is a lower expected cash flow on the underlying loans receivable of the VIE.VIE, the value of the financial guarantee provided by the Company under the insurance policy increases. This results in a lower fair value of the residential loans receivable in relation to the obligations of the VIE. Multiples are external factors that are considered when determining the fair valuesEffective in 2017, the Company used the Direct Price Model to value its commercial mortgage-backed securities (“CMBS”) and multi-sector CDO credit derivatives. wasof MBIA Corp.’s commercial mortgage-backed securities (“CMBS”) credit derivative, which is valued using the Direct Price Model, is nonperformance risk. The nonperformance risk is an assumption of MBIA Corp.’s own ability to pay and whether MBIA Corp. will have the necessary resources to pay the obligations as they come due. Any significant increase or decrease in MBIA Corp.’s nonperformance risk would result in a decrease or increase in the fair value of the derivative liabilities, respectively. Prior to 2017, the Company used the BET Model to value its CMBS credit derivatives. The significant unobservable inputs used in the fair value measurement of its CMBS credit derivatives were CMBS spreads, recovery rates, nonperformance risk and weighted average life. The CMBS spread is an indicator of credit risk of the collateral securities. The recovery rate represents the percentage of notional expected to be recovered after an asset defaults, indicating the severity of a potential loss. The nonperformance risk is an assumption of MBIA Corp.’s own ability to pay and whether MBIA Corp. will have the necessary resources to pay the obligations as they come due. Weighted average life is based on the Company’s estimate of when the principal of the underlying collateral of the CMBS structure will be repaid. A significant increase or decrease in CMBS spreads would result in an increase or decrease in the fair value of the derivative liability, respectively. A significant increase in weighted average life can result in an increase or decrease in the fair value of the derivative liability, depending on the discount rate and the timing of significant losses. Any significant increase or decrease in recovery rates, or MBIA Corp.’s nonperformance risk would result in a decrease or increase in the fair value of the derivative liabilities, respectively. CMBS spreads, recovery rates, nonperformance risk and weighted average lives are determined independently. Changes in one input will not necessarily have any impact on the other inputs.SeptemberJune 30, 20172019 and December 31, 2016: Fair Value Measurements at Reporting Date Using Quoted Prices in
Active Markets for
Identical Assets
(Level 1) Significant
Other
Observable
Inputs
(Level 2) Significant
Unobservable Inputs
(Level 3) Counterparty
and Cash
Collateral
Netting Balance as of
September 30,
2017 $ 724 $ 93 $ - $ - $ 817 - 1,113 - - 1,113 - 8 - - 8 - 1,511 - - 1,511 - 699 - - 699 - 36 - - 36 - 51 - - 51 - 72 - - 72 - 315 5 (1) - 320 724 3,898 5 - 4,627 269 - - - 269 26 21 - - 47 - - - - 81 (2) 116 - - - 116 - 3 - - 3
Active Markets for
Other
Observable
Inputs
(Level 2)
Unobservable Inputs
(Level 3)
and Cash
Collateral
Netting
June 30,
2019 $ $ $ $ $
agency
backed
obligations
investments
securities Fair Value Measurements at Reporting Date Using Quoted Prices in
Active Markets
for Identical
Assets (Level 1) Significant
Other
Observable
Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3) Counterparty
and Cash
Collateral
Netting Balance as of
September 30,
2017 - 20 - - 20 - 111 - - 111 - 39 - - 39 - 8 1 (1) - 9 - 10 - - 10 20 - - - 20 - - 759 - 759 - - 873 - 873 - - 406 - 406 - - 13 (1) - 13 - - 17 (1) - 17 $ 1,155 $ 4,110 $ 2,074 $ - $ 7,420 $ - $ - $ 127 (1) $ - $ 127 - 2 74 - 76 - 204 - - 204 - - 4 - 4 - 12 - - 12 - - 7 (1) - 7 - 710 430 - 1,140 $ - $ 928 $ 642 $ - $ 1,570
Active Markets for
Other
Observable
Inputs
(Level 2)
Unobservable
Inputs
(Level 3)
and Cash
Collateral
Netting
June 30,
2019 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $
Active Markets for
Other
Observable
Inputs
(Level 2)
Unobservable
Inputs
(Level 3)
December 31,
2018 $ $ $ $
Active Markets
Other
Observable
Inputs
(Level 2)
Unobservable
Inputs
(Level 3)
December 31,
2018 $ $ $ $ $ $ $ $ $ $ $ $ (1) -Unobservable inputs are either not developed by the Company or do not significantly impact the overall fair values of the aggregate financial assets and liabilities.(2) -Investment that was measured at fair value by applying the net asset value per share practical expedient, and was required not to be classified in the fair value hierarchy. MBIA Inc. and SubsidiariesNotes to Consolidated Financial Statements (Unaudited)Note 6: Fair Value of Financial Instruments (continued) Fair Value Measurements at Reporting Date Using Quoted Prices in
Active Markets for
Identical Assets
(Level 1) Significant
Other
Observable
Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3) Counterparty
and Cash
Collateral
Netting Balance as of
December 31,
2016 $ 825 $ 112 $ - $ - $ 937 - 1,440 - - 1,440 - 9 - - 9 - 1,332 2 (1) - 1,334 - 868 - - 868 - 45 - - 45 - 43 - - 43 - 7 15 (1) - 22 - 257 44 (1) - 301 825 4,113 61 - 4,999 521 - - - 521 26 9 - - 35 - - - - 75 (2) 163 - - - 163 - 3 - - 3 MBIA Inc. and SubsidiariesNotes to Consolidated Financial Statements (Unaudited)Note 6: Fair Value of Financial Instruments (continued) Fair Value Measurements at Reporting Date Using Quoted Prices in
Active Markets for
Identical Assets
(Level 1) Significant
Other
Observable
Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3) Counterparty
and Cash
Collateral
Netting Balance as of
December 31,
2016 - 27 - - 27 - 149 - - 149 - 52 - - 52 - 7 1 (1) - 8 - 18 1 (1) - 19 24 - - - 24 - - 916 - 916 - - 150 (1) - 150 - - 404 - 404 - - 19 (1) - 19 $ 1,559 $ 4,378 $ 1,552 $ - $ 7,564 $ - $ - $ 101 (1) $ - $ 101 - 2 64 - 66 - 213 - - 213 - - 20 - 20 - 33 - - 33 - 875 476 - 1,351 $ - $ 1,123 $ 661 $ - $ 1,784 (1) -Unobservable inputs are either not developed by the Company or do not significantly impact the overall fair values of the aggregate financial assets and liabilities.(2) -Investment that was measured at fair value by applying the net asset value per share practical expedient, and was required not to be classified in the fair value hierarchy.SeptemberJune 30, 20172019 and December 31, 20162018 represented approximately 28%11% and 21%12%, respectively, of total assets measured at fair value. Level 3 liabilities at fair value as of SeptemberJune 30, 20172019 and December 31, 20162018 represented approximately 41%34% and 37%65%, respectively, of total liabilities measured at fair value.September June 20172019 and December 31, 2016: Fair Value Measurements at Reporting Date Using Quoted Prices in
Active Markets for
Identical Assets
(Level 1) Significant Other
Observable Inputs
(Level 2) Significant
Unobservable Inputs
(Level 3) Fair Value
Balance as of
September 30,
2017 Carry Value
Balance as of
September 30,
2017 $ - $ 2 $ - $ 2 $ 2 - 28 - 28 28 - 49 - 49 49 - - 897 897 890 $ - $ 79 $ 897 $ 976 $ 969 $ - $ 1,054 $ - $ 1,054 $ 2,093 - - 497 497 771 - - 453 453 350 - 74 - 74 74 - 15 - 15 15 - 353 897 1,250 1,212 $ - $ 1,496 $ 1,847 $ 3,343 $ 4,515 $ - $ - $ 2,116 $ 2,116 $ 1,015 - - 71 71 36 (1) - Reported within “Other assets” on MBIA’s consolidated balance sheets.(2) - Reported within “Other liabilities” on MBIA’s consolidated balance sheets. Fair Value Measurements at Reporting Date Using Quoted Prices in
Active Markets for
Identical Assets
(Level 1) Significant Other
Observable Inputs
(Level 2) Significant
Unobservable Inputs
(Level 3) Fair Value
Balance as of
December 31,
2016 Carry Value
Balance as of
December 31,
2016 $ - $ 2 $ - $ 2 $ 3 - 40 - 40 40 - 306 - 306 306 - - 876 876 890 $ - $ 348 $ 876 $ 1,224 $ 1,239 $ - $ 1,030 $ - $ 1,030 $ 1,986 - - 478 478 794 - - 508 508 399 - 32 - 32 32 - - 882 882 890 $ - $ 1,062 $ 1,868 $ 2,930 $ 4,101 $ - $ - $ 2,638 $ 2,638 $ 995 - - 18 18 43 (1) -Reported within “Other assets” on MBIA’s consolidated balance sheets.(2) -Reported within “Other liabilities” on MBIA’s consolidated balance sheets. $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $
Active Markets
for Identical
Assets (Level 1)
Observable Inputs
(Level 2)
Unobservable Inputs
(Level 3)
Balance as of
December 31,
2018
Balance as of
December 31,
2018 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ SeptemberJune 30, 20172019 and 2016: September2017 Balance,
Beginning
of Period Realized
Gains /
(Losses) Unrealized
Gains /
(Losses)
Included
in
Earnings Unrealized
Gains /
(Losses)
Included
in OCI Foreign
Exchange
Recognized
in OCI or
Earnings Purchases Issuances Settlements Sales Transfers
into
Level 3(1) Transfers
out of
Level 3(1) Ending
Balance Change in
Unrealized
Gains
(Losses)
for
the Period
Included in
Earnings
for Assets
still held
as of
September 30,
2017 $ 7 $ - $ - $ - $ - $ - $ - $ - $ - $ - $ (7) $ - $ - 5 - - - - - - - - - - 5 - 3 - - - - - - - (3) - - - - 1 - - - - - - - - - - 1 - 815 - 2 - - - - (58) - - - 759 2 875 - 4 - - - - (6) - - - 873 4 407 - (1) - - - - - - - - 406 (1) 9 - 3 - 1 - - - - - - 13 4 - - - - - 17 - - - - - 17 - $ 2,122 $ - $ 8 $ - $ 1 $ 17 $ - $ (64) $ (3) $ - $ (7) $ 2,074 $ 9 Balance,
Beginning
of Period Realized
(Gains) /
Losses Unrealized
(Gains) /
Losses
Included
in
Earnings Unrealized
(Gains) /
Losses
Included
in OCI Foreign
Exchange
Recognized
in OCI or
Earnings Purchases Issuances Settlements Sales Transfers
into
Level 3(1) Transfers
out of
Level 3(1) Ending
Balance Change in
Unrealized
(Gains)
Losses for
the Period
Included in
Earnings
for
Liabilities
still held
as of
September 30,
2017 $ 123 $ - $ (1) $ - $ 5 $ - $ - $ - $ - $ - $ - $ 127 $ 4 80 7 (6) - - - - (7) - - - 74 (6) 4 - - - - - - - - - - 4 - - - 1 - - 6 - - - - - 7 1 491 - 4 - - - - (14) (51) - - 430 4 $ 698 $ 7 $ (2) $ - $ 5 $ 6 $ - $ (21) $ (51) $ - $ - $ 642 $ 3 (1) - Transferred in and out at the end of the period.MBIA Inc. and SubsidiariesNotes to Consolidated Financial Statements (Unaudited)Note 6: Fair Value of Financial Instruments (continued)Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Three Months Ended September 30, 2016 Balance,
Beginning
of Period Realized
Gains /
(Losses) Unrealized
Gains /
(Losses)
Included
in
Earnings Unrealized
Gains /
(Losses)
Included
in OCI Foreign
Exchange
Recognized
in OCI or
Earnings Purchases Issuances Settlements Sales Transfers
into
Level 3(1) Transfers
out of
Level 3(1) Ending
Balance Change in
Unrealized
Gains
(Losses)
for
the Period
Included in
Earnings
for Assets
still held
as of
September 30,
2016 $ 7 $ - $ - $ - $ - $ 5 $ - $ (6) $ - $ - $ - $ 6 $ - 2 - - - - - - (1) - - - 1 - - - - - - - - - - 1 - 1 - 20 - - - - - - (3) - - - 17 - 41 - - - - - - - - - (3) 38 - 124 - - - - - - - - 2 (122) 4 - 3 - - - - - - - - - - 3 - 1 - (1) - - - - - - - - - - 2 - (1) - - - - - - 2 - 3 (1) 1 - - - - - - - - - - 1 - 4 - - - - - - - - - (3) 1 - 1,045 - 25 - - - - (75) - - - 995 25 147 - - - - - - - - - - 147 - 401 - 3 - - - - - - - - 404 3 9 - - - 4 - - - - - - 13 4 $ 1,807 $ - $ 26 $ - $ 4 $ 5 $ - $ (85) $ - $ 5 $ (128) $ 1,634 $ 31 Balance,
Beginning
of Period Realized
(Gains) /
Losses Unrealized
(Gains) /
Losses
Included
in
Earnings Unrealized
(Gains) /
Losses
Included
in OCI Foreign
Exchange
Recognized
in OCI or
Earnings Purchases Issuances Settlements Sales Transfers
into
Level 3(1) Transfers
out of
Level 3(1) Ending
Balance Change in
Unrealized
(Gains)
Losses for
the Period
Included in
Earnings
for
Liabilities
still held
as of
September 30,
2016 $ 161 $ - $ - $ - $ 2 $ - $ - $ (57) $ - $ - $ - $ 106 $ 2 104 5 (19) - - - - (5) - - - 85 12 21 - (2) - - - - - - - - 19 (2) 523 - 2 - - - - (27) - - - 498 2 $ 809 $ 5 $ (19) $ - $ 2 $ - $ - $ (89) $ - $ - $ - $ 708 $ 14
Beginning
of Period
Gains /
(Losses)
Gains /
(Losses)
Included
in
Earnings
Gains /
(Losses)
Included
in OCI
Exchange
Recognized
in OCI or
Earnings
into
Level 3
out of
Level 3
Balance
Unrealized
Gains
(Losses)
for
Included in
Earnings
still held
June 30, Assets: Commercial
mortgage-
backed $ 6 $ - $ - $ - $ - $ - $ - $ (2) $ - $ - $ - $ 4 $ - Other asset-
backed 2 (1) - - - - - - - - - 1 - Assets of
consolidated
VIEs: Corporate
obligations 5 - - - - - - (2) - - (3) - - Collateralized debt obligations 1 - - - - - - - (1) - - - - Loans receivable- residential 206 - 1 - - - - (5) (48) - - 154 (1) Loan repurchase
commitments 420 - 8 - - - - - - - - 428 8 Currency
derivatives 14 - (3) - - - - - - - - 11 (3) Other 15 - - - - - - - - - - 15 - Total assets $ 669 $ (1) $ 6 $ - $ - $ - $ - $ (9) $ (49) $ - $ (3) $ 613 $ 4
Beginning
of Period
(Gains) /
Losses
(Gains) /
Losses
Included
in
Earnings
(Gains) /
Losses
Included
in Credit
Risk in
OCI
Exchange
Recognized
in OCI or
Earnings
into
Level 3
out of
Level 3
Balance
Unrealized
(Gains)
Losses for
the Period
Included in
Earnings
for
Liabilities
still held
as of
June 30,
2019 Liabilities: Medium-term
notes $ 106 $ - $ (5) $ 10 $ 2 $ - $ - $ (3) $ - $ - $ - $ 110 $ (2) Credit
derivatives 19 1 - - - - - (2) - - - 18 - Other
derivatives 7 - 9 - - - - - - - - 16 9 Other payable 3 - - - - - - - - - - 3 - Liabilities of
consolidated
VIEs: VIE notes 397 (2) 10 (1) 1 - - (3) (60) - - 342 10 Total liabilities $ 532 $ (1) $ 14 $ 9 $ 3 $ - $ - $ (8) $ (60) $ - $ - $ 489 $ 17 (1) - Transferred in and out at the end of the period.
Beginning
of Period
Gains /
(Losses)
Gains /
(Losses)
Included
in
Earnings
Gains /
(Losses)
Included
in OCI
Exchange
Recognized
in OCI or
Earnings
into
Level 3
out of
Level 3
Balance
Unrealized
Gains
(Losses)
Included in
Earnings
still held
June 30,
2018
mortgage-backed $ $ $ $ $ $ $ $ $ $ $ $ $
consolidated
VIEs:
obligations
mortgage-backed
obligations
residential
corporate
commitments $ $ $ $ $ $ $ $ $ $ $ $ $
Beginning
of Period
(Gains)
/ Losses
(Gains) /
Losses
Included
in
Earnings
(Gains) /
Losses
Included
in OCI
Exchange
Recognized
in OCI or
Earnings
Balance
Unrealized
(Gains)
Losses
Included in
Earnings
Liabilities
still held
June 30,
2018 $ $ $ $ $ $ $ $ $ $ $ $ $
consolidated VIEs: $ $ $ $ $ $ $ $ $ $ $ $ $ SeptemberJune 30, 2017,2019 and 2018, sales included the impact of the deconsolidation of VIEs. Refer to “Note 4: Variable Interest Entities” for additional information about the deconsolidation of VIEs.SeptemberJune 30, 2017.MBIA Inc.2019 and SubsidiariesNotes to Consolidated Financial Statements (Unaudited)Note 6: Fair Value of Financial Instruments (continued)For the three months ended September 30, 2016, transfers into Level 3 and out of Level 2 were principally related to CMBS and state and municipal bonds, where inputs, which are significant to their valuation, became unobservable during the quarter. These inputs included spreads, prepayment speeds, default speeds, default severities, yield curves observable at commonly quoted intervals, and market corroborated inputs. State and municipal bonds and other asset-backed comprised the instruments transferred out of Level 3 where inputs, which are significant to their valuation, became observable during the quarter. There were no transfers into or out of Level 1 for the three months ended September 30, 2016.ninesix months ended SeptemberJune 30, 20172019 and 2016.Changes2018:
Beginning
of Year
Gains /
(Losses)
Gains /
(Losses)
Included
in
Earnings
Gains /
(Losses)
Included
in OCI
Exchange
Recognized
in OCI or
Earnings
into
Level 3
out of
Level 3
Balance
Unrealized
Gains
(Losses)
for
Earnings
for Assets
still held
as of
June 30,
2019
mortgage-backed $ $ $ $ $ $ $ $ $ $ $ $ $
consolidated VIEs:
obligations
obligations
residential $ $ $ $ $ $ $ $ $ $ $ $ $
Beginning
of Year
(Gains)
/ Losses
(Gains) /
Losses
Included
in
Earnings
(Gains) /
Losses
Included
in Credit
Risk in
OCI
Exchange
Recognized
in OCI or
Earnings
into
Level 3
out of
Level 3
Balance
Unrealized
(Gains)
Losses for
the Period
Included
in
Earnings
for
Liabilities
still held
as of
June 30,
2019 $ $ $ $ $ $ $ $ $ $ $ $ $
derivatives
derivatives $ $ $ $ $ $ $ $ $ ) $ $ $ $ Level 3 Assets and Liabilities Measuredout at the end of the period.on a Recurring Basis for the Nine Months Ended September 30, 2017 Balance,
Beginning
of Year Realized
Gains /
(Losses) Unrealized
Gains /
(Losses)
Included
in
Earnings Unrealized
Gains /
(Losses)
Included
in OCI Foreign
Exchange
Recognized
in OCI or
Earnings Purchases Issuances Settlements Sales Transfers
into
Level 3(1) Transfers
out of
Level 3(1) Ending
Balance Change in
Unrealized
Gains
(Losses)
for
the Period
Included in
Earnings
for Assets
still held
as of
September 30,
2017 $ 2 $ - $ - $ - $ - $ - $ - $ - $ - $ - $ (2) $ - $ - - - - - - - - - - 7 (7) - - 15 - - - - - - (7) - - (8) - - 44 - - 2 - - - (41) - - - 5 - - - - - - - - - - 1 (1) - - - - - - - - - (2) - 6 (4) - - - - - - - - - - (3) 3 - - - 1 - - - - - - - - - - 1 - 1 - - - - - - - - 1 (2) - - 916 - 29 - - - - (186) - - - 759 29 150 - 36 - - 719 - (32) - - - 873 36 404 - 2 - - - - - - - - 406 2 19 - (2) - (4) - - - - - - 13 (6) - - - - - 17 - - - - - 17 - $ 1,552 $ - $ 65 $ 2 $ (4) $ 736 $ - $ (268) $ (3) $ 18 $ (24) $ 2,074 $ 61 Balance,
Beginning
of Year Realized
(Gains) /
Losses Unrealized
(Gains) /
Losses
Included
in
Earnings Unrealized
(Gains) /
Losses
Included
in OCI Foreign
Exchange
Recognized
in OCI or
Earnings Purchases Issuances Settlements Sales Transfers
into
Level 3(1) Transfers
out of
Level 3(1) Ending
Balance Change in
Unrealized
(Gains)
Losses for
the Period
Included in
Earnings
for
Liabilities
still held
as of
September 30,
2017 $ 101 $ - $ 13 $ - $ 13 $ - $ - $ - $ - $ - $ - $ 127 $ 26 64 41 10 - - - - (41) - - - 74 12 20 - 18 - - - - (34) - - - 4 18 - - 1 - - 6 - - - - - 7 1 476 - 56 - - - - (51) (51) - - 430 56 $ 661 $ 41 $ 98 $ - $ 13 $ 6 $ - $ (126) $ (51) $ - $ - $ 642 $ 113
Beginning
of Year
Gains /
(Losses)
Gains /
(Losses)
Included
in
Earnings
Gains /
(Losses)
Included
in OCI
Exchange
Recognized
in OCI or
Earnings
into
Level 3
out of
Level 3
Balance
Unrealized
Gains
(Losses)
for
the Period
Included in
Earnings
for Assets
still held
as of
June 30,
2018
obligations $ $ $ $ $ $ $ $ $ $ $ $ $
mortgage-backed
consolidated VIEs:
obligations
mortgage-backed $ $ $ $ $ $ $ $ $ $ $ $ $
Beginning
of Year
(Gains)
/ Losses
(Gains) /
Losses
Included
in
Earnings
(Gains) /
Losses
Included
in OCI
Exchange
Recognized
in OCI or
Earnings
into
Level 3
out of
Level 3
Balance
Unrealized
(Gains)
Losses for
the Period
Included in
Earnings
for
Liabilities
still held
as of
June 30,
2018
notes $ $ $ $ $ $ $ $ $ $ $ $ $
derivatives
derivatives
VIEs: $ $ $ $ $ $ $ $ $ $ $ $ $ Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Nine Months Ended September 30, 2016 Balance,
Beginning
of Year Realized
Gains /
(Losses) Unrealized
Gains /
(Losses)
Included
in
Earnings Unrealized
Gains /
(Losses)
Included
in OCI Foreign
Exchange
Recognized
in OCI or
Earnings Purchases Issuances Settlements Sales Transfers
into
Level 3(1) Transfers
out of
Level 3(1) Ending
Balance Change in
Unrealized
Gains
(Losses)
for
the Period
Included in
Earnings
for Assets
still held
as of
September 30,
2016 $ 2 $ - $ - $ - $ (1) $ 10 $ - $ (5) $ - $ - $ - $ 6 $ - 7 - - - - - - - - - (6) 1 - - - - - - - - - - 1 - 1 - 29 - - 18 �� - - - (30) - - - 17 - 38 (1) (1) 8 - - - (3) - - (3) 38 (1) 41 - - - - 122 - (39) - 2 (122) 4 - 11 - (4) - - - - (1) - 2 (5) 3 - - - (1) - - - - - - 1 - - - - - (1) - - - - - - 4 - 3 (1) 1 - - - - - - - - - - 1 - 6 - (6) - - - - - - 4 (3) 1 - 1,185 - (5) - - - - (185) - - - 995 (5) 107 - 1 - - 146 - - (107) - - 147 1 396 - 8 - - - - - - - - 404 8 11 - (2) - 4 - - - - - - 13 2 $ 1,834 $ (1) $ (11) $ 26 $ 3 $ 278 $ - $ (263) $ (107) $ 14 $ (139) $ 1,634 $ 4 Balance,
Beginning
of Year Realized
(Gains) /
Losses Unrealized
(Gains) /
Losses
Included
in
Earnings Unrealized
(Gains) /
Losses
Included
in OCI Foreign
Exchange
Recognized
in OCI or
Earnings Purchases Issuances Settlements Sales Transfers
into
Level 3 (1) Transfers
out of
Level 3 (1) Ending
Balance Change in
Unrealized
(Gains)
Losses for
the Period
Included in
Earnings
for
Liabilities
still held
as of
September 30,
2016 $ 161 $ - $ (4) $ - $ 6 $ - $ - $ (57) $ - $ - $ - $ 106 $ 2 85 21 - - - - - (21) - - - 85 9 18 - 1 - - - - - - - - 19 (1) 1,267 - (41) - - 9 - (106) (631) - - 498 (41) $ 1,531 $ 21 $ (44) $ - $ 6 $ 9 $ - $ (184) $ (631) $ - $ - $ 708 $ (31) (1) -Transferred in and out at the end of the period.MBIA Inc. and SubsidiariesNotes to Consolidated Financial Statements (Unaudited)Note 6: Fair Value of Financial Instruments (continued)ninesix months ended SeptemberJune 30, 2017,2018, transfers into Level 3 and out of Level 2 were principally related to CMBS and corporate obligations, where inputs, which are significant to their valuation, became unobservable during the period. CDOs, CMBS and corporate obligations comprised the majority of the instruments transferred out of Level 3 where inputs, which are significant to their valuation, became observable during the period. These inputs included spreads, prepayment speeds, default speeds, default severities, yield curves observable at commonly quoted intervals, and market corroborated inputs. There were no transfers into or out of Level 1.For the nine months ended September 30, 2016, transfers into Level 3 and out of Level 2 were principally related to CMBS, other asset-backed, corporate obligations, state and municipal bonds, and RMBS, where inputs, which are significant to their valuation, became unobservable during the period. State and municipal bonds and corporate obligations comprised the majority of the instruments transferred out of Level 3 where inputs, which are significant to their valuation, became observable during the period. These inputs included spreads, prepayment speeds, default speeds, default severities, yield curves observable at commonly quoted intervals, and market corroborated inputs. There were no transfers into or out of Level 1.SeptemberJune 30, 20172019 and 20162018 are reported on the Company’s consolidated statements of operations as follows: Three Months Ended September 30, 2017 Three Months Ended September 30, 2016 Total Gains
(Losses)
Included in
Earnings Change in
Unrealized
Gains
(Losses)
for the
Period
Included
in Earnings
for Assets
and
Liabilities still
held as of
September 30,
2017 Total Gains
(Losses)
Included in
Earnings Change in
Unrealized
Gains
(Losses)
for the
Period
Included
in Earnings
for Assets
and
Liabilities still
held as of
September 30,
2016 $ 6 $ 6 $ 19 $ (12) (7) - (5) - (4) (4) - - (1) (1) - - 5 5 28 29 $ (1) $ 6 $ 42 $ 17
Unrealized
held as of
June 30,
derivatives $ $ $ $ ) $ ) $ $ $ ninesix months ended SeptemberJune 30, 20172019 and 20162018 are reported on the Company’s consolidated statements of operations as follows: Nine Months Ended September 30, 2017 Nine Months Ended September 30, 2016 Total Gains
(Losses)
Included in
Earnings Change in
Unrealized
Gains
(Losses)
for the
Period
Included
in Earnings
for Assets
and
Liabilities still
held as of
September 30,
2017 Total Gains
(Losses)
Included in
Earnings Change in
Unrealized
Gains
(Losses)
for the
Period
Included
in Earnings
for Assets
and
Liabilities still
held as of
September 30,
2016 $ (10) $ (12) $ - $ (9) (41) - (21) - (44) (44) (5) (2) - - (1) - (1) (1) - - 5 5 35 46 $ (91) $ (52) $ 8 $ 35
(Losses)
Included in
Unrealized
Gains
for the
Included
Liabilities still
held as of
(Losses)
Included in
Unrealized
Gains
for the
Included
Liabilities still
held as of 14 14 32 32 (1) (44 (14) (13) 6 6 (1) (1) (1) (2) (2) (2 ) 26 27 (5 ) - 18 63 have beenare consolidated in connection with the adoption of the accounting guidance for consolidation of VIEs, among others.changes in fair valuegains and (losses) included in the Company’s consolidated statements of operations for the three and ninesix months ended SeptemberJune 30, 20172019 and 20162018 for financial instruments for which the fair value option was elected: Three Months Ended September 30, Nine Months Ended September 30, 2017 2016 2017 2016 $ 2 $ 2 $ 8 $ 8 (2) (12) (16) (109) (55) (50) (157) (190) (2) - 4 - (1) 3 3 8 (4) (2) (26) (2) 70 70 160 307 (1) - (1) - $ 4 (3 ) 11 (5 ) 26 (6 ) 56 (12 ) 1 (54 ) 43 (76 ) 11 9 9 10 9 3 12 (5 ) 6 (1 ) (1 ) (2 ) (24 ) 56 (80 ) 83 (1) - Reported within “Net gains (losses) on financial instruments at fair value and foreign exchange” on MBIA’s consolidated statements of operations. (2) - Reported within “Net gains (losses) on financial instruments at fair value and foreignexchange-VIE” on MBIA’s consolidated statements of operations. (3) - Reported within “Other net realized gains (losses)” on MBIA’s consolidated statements of operations. September June 20172019 and December 31, 20162018 for loans and notes for which the fair value option was elected: As of September 30, 2017 As of December 31, 2016 Contractual
Outstanding
Principal Fair
Value Difference Contractual
Outstanding
Principal Fair
Value Difference $ 766 $ 721 $ 44 $ 965 $ 894 $ 71 157 38 119 143 22 121 873 873 - 150 150 - 1,796 1,632 163 1,258 1,066 192 1,941 1,140 801 2,449 1,351 1,098 177 127 51 158 101 57 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ HTM. Other AFS investments primarily comprise money market funds.SeptemberJune 30 20172016: September 30, 2017 Amortized
Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Fair
Value Other-Than-
Temporary
Impairments(1) $ 785 $ 32 $ (5) $ 812 $ - 1,054 65 (6) 1,113 - 8 - - 8 - 1,489 28 (75) 1,442 (64) 699 2 (8) 693 - 38 2 (4) 36 - 49 - - 49 - 70 - - 70 - 311 1 - 312 1 4,503 130 (98) 4,535 (63) 267 - - 267 - 4 1 - 5 - $ 4,774 $ 131 $ (98) $ 4,807 $ (63) $ 890 $ 7 $ - $ 897 $ - $ 890 $ 7 $ - $ 897 $ - $ $ $ ) $ $ ) ) ) ) ) ) $ $ $ ) $ $ $ $ $ $ $ $ $ $ $ $ (1) - Represents unrealized gains or losses on OTTI securities recognized in AOCI, which includes thenon-credit component of impairments, as well as all subsequent changes in fair value of such impaired securities reported in AOCI. MBIA Inc. and SubsidiariesNotes to Consolidated Financial Statements (Unaudited)Note 7: Investments (continued) December 31, 2016 Amortized
Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Fair
Value Other-Than-
Temporary
Impairments(1) $ 909 $ 30 $ (10) $ 929 $ - 1,382 72 (15) 1,439 - 8 - - 8 - 1,352 20 (102) 1,270 (73) 871 3 (12) 862 - 50 1 (6) 45 (3) 41 - - 41 - 22 - - 22 - 294 2 (3) 293 1 4,929 128 (148) 4,909 (75) 517 - - 517 - 4 1 - 5 - $ 5,450 $ 129 $ (148) $ 5,431 $ (75) $ 890 $ - $ (14) $ 876 $ - $ 890 $ - $ (14) $ 876 $ - $ $ $ ) $ $ ) ) ) ) ) ) ) ) $ $ $ ) $ $ ) $ $ $ $ $ $ $ $ $ $ (1) - Represents unrealized gains or losses on OTTI securities recognized in AOCI, which includes thenon-credit component of impairments, as well as all subsequent changes in fair value of such impaired securities reported in AOCI. September June 2017.2019. Contractual maturity may differ from expected maturity as borrowers may have the right to call or prepay obligations. AFS Securities HTM Securities Consolidated VIEs Amortized
Cost Fair
Value Amortized
Cost Fair
Value $ 508 $ 509 $ - $ - 874 883 - - 684 635 - - 1,270 1,348 890 897 1,167 1,160 - - $ 4,503 $ 4,535 $ 890 $ 897 $ $ $ $ $ $ $ $ September June 20172019 and December 31, 20162018 was $10 million and $11 million, respectively.million. These deposits are required to comply with state insurance laws.SeptemberJune 30, 20172019 and December 31, 2016,2018, the fair value of securities pledged as collateral for these investment agreements approximated $380$318 million and $416$314 million, respectively. The Company’s collateral as of SeptemberJune 30, 20172019 consisted principally of U.S. Treasury and government agency and state and municipal bonds,corporate obligations, and was primarily held with major U.S. banks.and money market securities as collateral under investment agreements in the amount of $1 million and $6 million as of SeptemberJune 30, 2017 and December 31, 2016.MBIA Inc. and SubsidiariesNotes2019.Consolidated Financial Statements (Unaudited)Note 7: Investments (continued)September June 20172019 and December 31, 2016: September 30, 2017 Less than 12 Months 12 Months or Longer Total Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses $ 279 $ (2) $ 87 $ (3) $ 366 $ (5) 162 (3) 53 (3) 215 (6) 4 - - - 4 - 388 (4) 135 (71) 523 (75) 344 (4) 140 (4) 484 (8) 9 - 15 (4) 24 (4) 25 - 6 - 31 - - 5 - - - 5 - 149 - 2 - 151 - $ 1,365 $ (13) $ 438 $ (85) $ 1,803 $ (98) December 31, 2016 Less than 12 Months 12 Months or Longer Total Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses $ 432 $ (10) $ - $ - $ 432 $ (10) 339 (13) 18 (2) 357 (15) 5 - - - 5 - 534 (29) 52 (73) 586 (102) 436 (9) 122 (3) 558 (12) 1 - 29 (6) 30 (6) 6 - 15 - 21 - 7 - 15 - 22 - 112 (1) 49 (2) 161 (3) $ 1,872 $ (62) $ 300 $ (86) $ 2,172 $ (148) $ - $ - $ 876 $ (14) $ 876 $ (14) $ - $ - $ 876 $ (14) $ 876 $ (14) $ $ $ $ ) $ $ ) ) ) ) ) ) ) ) ) ) ) ) ) $ $ ) $ $ ) $ $ ) $ $ ) $ $ ) $ $ ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) $ $ ) $ $ ) $ $ ) September June 20172019 compared with December 31, 20162018 primarily due to tightening credit spreadslower interest rates and lower long-term interest rates. Gross unrealized losses on HTM investments decreased as of September 30, 2017 compared with December 31, 2016 primarily due to tightening credit spreads.September June 20172019 and December 31, 20162018 was 159 and 2211 years, respectively. As of SeptemberJune 30, 20172019 and December 31, 2016,2018, there were 59109 and 46182 securities, respectively, that were in an unrealized loss position for a continuous twelve-month period or longer, of which, fair values of 2717 and 1264 securities, respectively, were below book value by more than 5%.MBIA Inc. and SubsidiariesNotes to Consolidated Financial Statements (Unaudited)Note 7: Investments (continued)SeptemberJune 30, 2017: AFS Securities HTM Securities Number of
Securities Book Value
(in millions) Fair Value
(in millions) Number of
Securities Book Value
(in millions) Fair Value
(in millions) 21 $ 136 $ 126 - $ - $ - 2 15 12 - - - 1 1 - - - - 3 101 37 - - - 27 $ 253 $ 175 - $ - $ - $ $ $ $ September June 20172019 that would require the sale of impaired securities. Impaired securities that the Company intends to sell before the expected recovery of such securities’ fair values have been written down to fair value.20162018 for a discussion of the Company’s policy for OTTI and its determination of credit loss. The following table presents the amount of credit loss impairments recognized in earnings on fixed-maturity securities held by MBIA as of the dates indicated, for which a portion of the OTTI losses was recognized in AOCI, and the corresponding changes in such amounts. The additional credit loss impairmentimpairments for the ninethree and six months ended SeptemberJune 30, 2017 was2019 and 2018 were primarily related to municipal bondsan impaired security for which a loss was recognized as the difference between theirthe amortized cost and their fair values in the second quarternet present value of 2017.projected cash flows. This OTTI resulted from updated liquidity concerns recent credit rating downgrades and other adverse financial conditions of the issuer. The reduction from credit loss impairment for the three and nine months ended September 30, 2017 was primarily related to municipal bonds previously impaired which were further impaired to fair value during the third quarter of 2017. Three Months Ended September 30, Nine Months Ended September 30,
Other-Than-Temporary Impairments 2017 2016 2017 2016 $ 42 $ 26 $ 29 $ 26 - - 11 - 2 - 4 - (2) - (2) - (11) - (11) - $ 31 $ 26 $ 31 $ 26 MBIA Inc. and SubsidiariesNotes to Consolidated Financial Statements (Unaudited)Note 7: Investments (continued) Beginning balance $ 65 $ 33 $ 37 $ 32 Additions for credit loss impairments recognized in the current
period on securities previously impaired 9 1 37 2 Ending balance $ 74 $ 34 $ 74 $ 34 September June 20172019 that were in an unrealized loss position and insured by a financial guarantor, along with the amount of insurance loss reserves corresponding to the par amount owned by the Company: Fair
Value Unrealized
Loss Insurance Loss
Reserve (2) $ 15 $ (4) $ 16 13 (1) - 2 - - $ 30 $ (5) $ 16
Value
Loss $ $ ) $ (1) - Includes investments insured by MBIA Corp. and National. (2) - Insurance loss reserve estimates are based on the proportion of par value owned to the total amount of par value insured. ninesix months ended September June 20172019 and 20162018 are as follows: Three Months Ended
September 30, Nine Months Ended
September 30, 2017 2016 2017 2016 $ 312 $ 848 $ 1,300 $ 1,785 $ 5 $ 33 $ 24 $ 70 $ (5) $ - $ (9) $ (18)
June
June $ $ $ $ $ $ $ $ $ ) $ ) $ ) $ )
June 30,
June 30, Net gains (losses) recognized during the period on equity securities $ 2 $ - $ 7 $ - Less: Net gains (losses) recognized during the period on equity securities sold
during the period - 1 1 1 Unrealized gains (losses) recognized during the period on equity securities
still held at the reporting date $ 2 $ (1) $ 6 $ (1) instrumentsinstrument to provide financial guarantee insurance to a structured finance transactionstransaction that dodoes not qualify for the financial guarantee scope exception and, therefore, areis accounted for as derivatives. Thesea derivative. The insured CDS contracts, primarilycontract, referencing CMBS, and ABS, areis intended to be held for the entire term of the contract unless a settlement with the counterparty is negotiated. The Company no longer insures new CDS contracts except for transactions related to the restructuring or reduction of existing derivative exposure. The Company’s derivative exposure within its international and structured finance insurance segment also includes insured interest rate and inflation-linked swaps related to insured debt issues.occurringthat occurred in 2014. Changes in the fair value of the Company’snon-insured derivative are included in “Net gains (losses) on financial instruments at fair value and foreign exchange” on the Company’s consolidated statements of operations.VIEshavehas entered into derivative instruments consisting ofa cross currency swaps. Cross currency swaps areswap, which was entered into to manage the variability in cash flows resulting from fluctuations in foreign currency rates.MBIA Inc. and SubsidiariesNotes to Consolidated Financial Statements (Unaudited)Note 8: Derivative Instruments (continued)SeptemberJune 30, 20172019 and December 31, 2016.2018. Credit ratings represent the lower of underlying ratings assigned to the collateral by Moody’s, S&P or MBIA. As of September 30, 2017 Notional Value Weighted
Average
Remaining
Expected
Maturity AAA AA A BBB Below
Investment
Grade Total
Notional Fair
Value
Asset
(Liability) 3.0 Years $ - $ - $ 115 $ - $ 137 $ 252 $ (74) 15.6 Years - 125 1,903 847 20 2,895 (2) $ - $ 125 $ 2,018 $ 847 $ 157 $ 3,147 $ - $ - $ (1) $ (1) $ (74) $ (76) As of December 31, 2016 Notional Value Weighted
Average
Remaining
Expected
Maturity AAA AA A BBB Below
Investment
Grade Total
Notional Fair
Value
Asset
(Liability) 3.8 Years $ - $ - $ 115 $ - $ 473 $ 588 $ (64) 15.7 Years - 137 2,146 732 20 3,035 (2) 14.3 Years - - - 420 - 420 - $ - $ 137 $ 2,261 $ 1,152 $ 493 $ 4,043 $ - $ - $ (1) $ (1) $ (64) $ (66)
Average
Remaining
Expected
Maturity
Investment
Grade
Notional
Asset
(Liability) Insured credit default swaps 0.5 Years $ - $ - $ - $ - $ 52 $ 52 $ (18) Insured swaps 14.8 Years - 68 1,419 460 - 1,947 (2) Total notional $ - $ 68 $ 1,419 $ 460 $ 52 $ 1,999 Total fair value $ - $ - $ (1) $ (1) $ (18) $ (20)
Average
Remaining
Expected
Maturity
Investment
Grade
Notional
Asset
(Liability) Insured credit default swaps 1.0 Years $ - $ - $ - $ - $ 70 $ 70 $ (33) Insured swaps 15.7 Years - 74 1,463 896 - 2,433 (2) Total notional $ - $ 74 $ 1,463 $ 896 $ 70 $ 2,503 Total fair value $ - $ - $ (1) $ (1) $ (33) $ (35) contracts are estimated as the notional value plus any additional debt service costs, such as interest or other amounts owing on CDS contracts. The maximum amount of future debt service payments that MBIA may be required to make under these guarantees as of September 30, 2017 is $282 million. The maximum potential amount of future payments (undiscounted) onand insured swaps areis estimated as the notional value of such contracts.SeptemberJune 30, 2017, the Company did not hold or post cash collateral to derivative counterparties. As of December 31, 2016,2019, the Company did not hold cash collateral to derivative counterparties but posted $21 million cash collateral to derivative counterpartiescounterparties. As of $1 million. All ofDecember 31, 2018, the $1 million is included within “Other liabilities” asCompany didnetted against accrued interest onto derivative liabilities. counterparties.SeptemberJune 30, 20172019 and December 31, 2016,2018, the Company had securities with a fair value of $250$231 million and $276$205 million, respectively, posted to derivative counterparties and these amounts are included within “Fixed-maturity securities held asMBIA Inc. and SubsidiariesNotes to Consolidated Financial Statements (Unaudited)Note 8: Derivative Instruments (continued)SeptemberJune 30, 20172019 and December 31, 2016,2018, the fair value on$3$2 million. This CSA governs collateral posting requirements between MBIA and its derivative counterparties. The Company did not receive collateral due to the Company’s credit rating, which was below the CSA minimum credit ratings level for holding counterparty collateral. As of SeptemberJune 30, 20172019 and December 31, 2016,2018, the counterparty was rated A1 by Moody’s and AA+ by S&P.and posting of cash collateral, as of SeptemberJune 30, 2017: Derivative Assets (1) Derivative Liabilities (1) Notional
Amount
Outstanding Balance Sheet Location Fair Value Balance Sheet Location Fair Value $ 252 Other assets $ - Derivative liabilities $ (74) 2,895 Other assets - Derivative liabilities (2) 749 Other assets 3 Derivative liabilities (204) 419 Medium-term notes 2 Medium-term notes (14) 63 Other assets-VIE 13 Derivative liabilities-VIE - 49 Other assets - Derivative liabilities (4) 1 Other investments - Other investments (1) $ 4,428 $ 18 $ (299)
Outstanding
instruments: $ 52 $ - $ (18) 1,947 - (2) 681 2 (199) 235 - (18) 60 11 - 49 - (16) $ 3,024 $ 13 $ (253) (1) - In accordance with the accounting guidance for derivative instruments and hedging activities, the balance sheet location of the Company’s embedded derivative instruments is determined by the location of the related host contract. and posting of cash collateral, as of December 31, 2016: Derivative Assets (1) Derivative Liabilities (1) Notional
Amount
Outstanding Balance Sheet Location Fair Value Balance Sheet Location Fair Value $ 588 Other assets $ - Derivative liabilities $ (64) 3,035 Other assets - Derivative liabilities (2) 420 Assets held for sale - Liabilities held for sale - 1,062 Other assets 3 Derivative liabilities (213) 376 Medium-term notes 2 Medium-term notes (17) 71 Otherassets-VIE 20 Derivative liabilities-VIE - 83 Other assets - Derivative liabilities (20) 35 Otherassets-VIE - Derivativeliabilities-VIE - 5 Other investments - Other investments - $ 5,675 $ 25 $ (316)
Amount
Outstanding
instruments: $ $ $ ) ) ) ) ) $ $ $ ) (1) - In accordance with the accounting guidance for derivative instruments and hedging activities, the balance sheet location of the Company’s embedded derivative instruments is determined by the location of the related host contract. MBIA Inc. and SubsidiariesNotes to Consolidated Financial Statements (Unaudited)Note 8: Derivative Instruments (continued)SeptemberJune 30, 20172019 and 2016: Derivatives Not Designated as Three Months Ended September 30, 2017 2016 Unrealized gains (losses) on insured derivatives $ 6 $ 20 Realized gains (losses) and other settlements on insured derivatives (7 ) (4 ) Net gains (losses) on financial instruments at fair value and foreign exchange (3 ) (1 ) Net gains (losses) on financial instruments at fair value and foreignexchange-VIE 4 4 Net gains (losses) on financial instruments at fair value and foreign exchange - 2 $ - $ 21 $ $
derivatives ) )
foreign exchange )
foreign exchange-VIE (2 ) -
foreign exchange ) $ ) $ ninesix months ended SeptemberJune 30, 20172019 and 2016: Derivatives Not Designated as Nine Months Ended September 30, 2017 2016 Unrealized gains (losses) on insured derivatives $ (10 ) $ - Realized gains (losses) and other settlements on insured derivatives (41 ) (20 ) Net gains (losses) on financial instruments at fair value and foreign exchange (8 ) (86 ) Net gains (losses) on financial instruments at fair value and foreignexchange-VIE - 8 Net gains (losses) on financial instruments at fair value and foreignexchange-VIE (6 ) 3 Net gains (losses) on financial instruments at fair value and foreign exchange (19 ) (1 ) $ (84 ) $ (96 ) 14 32 (1 ) (44 ) (55 ) 25 (5 ) (5 (9 ) - (56 ) 8 2016.2018. The following debt discussion is an update and should be read in conjunction with the Company’s Annual Report on Form10-K.Zohar II Claim inRefinanced Facility, original notes issued by MZ Funding on January of10, 2017 MBIA Corp. entered into(the “Original MZ Funding Notes”) were redeemed or amended, as applicable, and the Facility. The initial outstandingSenior Lenders purchased new senior notes issued by MZ Funding (the “Insured Senior Notes”) with an aggregate principal amount of the Facility was $366 million, of which, $38 million of subordinated financing was provided by$278 million. In addition, MBIA Inc. received amended subordinated notes issued by MZ Funding (the “Insured Subordinated Notes” and eliminated in consolidation. As of September 30, 2017,together with the consolidated outstandingInsured Senior Notes, the “New MZ Funding Notes”) with an aggregate principal amount of $54 million (with the Facility was $322 million and included in “Variable interest entity notes” which is presented in “Liabilities of consolidated variable interest entities” on the Company’s consolidated balance sheets. Under the Facility, MBIA Inc. has agreed to provide an additional $50 million subordinated financing toNew MZ Funding whichNotes replacing the Original MZ Funding would then lend to MBIA Corp., if needed by MBIA Insurance Corporation for liquidity purposes.Notes). The New MZ Funding Notes mature onany claims that the Company may haveexist against the Zohar Sponsor. MBIA Corp. was obligated to pay a commitment fee of $10 million for this facility. The Facility matures on January 20, 2020 and bears interest at 14% per annum. If funds received from MBIA Corp. under the Facility are insufficient to pay interest on interest payment dates, MZ Funding may elect to pay interest in kind, which increases the outstanding principal amount.ninesix months ended SeptemberJune 30, 20172019 and 20162018 are as follows: Three Months Ended September 30, Nine Months Ended September 30, 2017 2016 2017 2016 $ (273) $ 55 $ (603) $ (101) $ (6) $ 24 $ 965 $ (28) 2.2% 43.6% -160.0% 27.7% MBIA Inc. and SubsidiariesNotes to Consolidated Financial Statements (Unaudited)Note 10: Income Taxes (continued) $ ) $ ) $ ) $ ) $ ) $ $ ) $ 0.0% 17.3% -0.8% ninesix months ended SeptemberJune 30, 2017,2019, the Company’ effective tax rate applied to its loss before income taxes was lower than the U.S. statutory tax rate of 21% due to the full valuation allowance on the changes in its net deferred tax asset and the application of intraperiod tax accounting. There is an offsetting expense recorded to other comprehensive income for the change in the valuation allowance.is lesswas lower than the U.S. statutory tax rate primarilyof 21% due to athe full valuation allowance againston the changes in its net deferred tax asset. For the nine months ended September 30, 2016, the Company’s effective tax rate applied to its loss before income taxes is less than the U.S. statutory effective tax rate primarily due to a foreign tax credit adjustment, partially offset by the fluctuation of the value of nontaxable warrants issued by the Company and tax exempt interest income.recognizes deferred tax assets and liabilities forassesses the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax assets and liabilities are determined based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on tax assets and liabilities is recognized in income in the period that includes the enactment date. Valuation allowances are established to reduce deferred tax assets to the amount that more likely than not will be realized.The tax effects of temporary differences that give rise to deferred tax assets and liabilities as of September 30, 2017 and December 31, 2016 are presented in the following table: As of September 30, 2017 December 31, 2016 $ 139 $ 143 28 46 34 42 - 4 10 - 29 36 1 64 13 - 28 27 282 362 15 19 208 177 121 142 996 929 62 7 28 4 28 29 30 - - 6 30 26 1,518 1,339 1,236 7 $ - $ 970 On June 26, 2017, S&P downgraded the financial strength rating of National, which led the Company to cease its efforts to actively pursue writing new financial guarantee business. In addition to National’s cessation of new business activity, there was an increase in loss and LAE due to changes in assumptions on certain Puerto Rico credits. As a result of the increase in loss and LAE, the Company has a three-year cumulative loss, which is considered significant negative evidence in the assessment of its ability to use its deferred tax assets. In addition, the Company considered all available positive and negative evidence as required by GAAP, to estimate ifwhether sufficient future taxable income will be generated to permit use of its existing deferred tax assets. After considering all positive andA significant piece of objective negative evidence includingevaluated was the Company having a three-year cumulative loss. Such objective evidence limits the ability to consider other subjective evidence, such as the Company’s inability to objectively identify and forecast future sourcesprojections of taxable income,pre-tax income. On the basis of this evaluation, the Company concluded in the second quarter of 2017 it did not have sufficient positive evidence to support its ability to use its deferred tax assets before they would expire. Accordingly, the Company has recorded a full valuation allowance against its net deferred tax asset of $1.2 billion in the nine months ended September2017.2019 and December 31, 2018, respectively. The Company will continue to analyze the valuation allowance on a quarterly basis.MBIA Inc.SubsidiariesNotescasualty insurance companies retain their current two-year carryback andConsolidated Financial Statements (Unaudited)Note 10: Income Taxes (continued)benefitsbenefit (“UTB”) and related interest and/or penalties to income tax in the consolidated statements of operations. The Company includes interest as a component of income tax expense. As of September June 2017 December 31, 2016,September June 2017,net operating loss (“NOL”)NOL is approximately $2.8$2.6 billion. The NOL will expire between tax years 2031 2037.September June 2017, 2027.September June 2017,$30$26 million, which does not expire.segmentportfolio is principally conductedmanaged 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, U.S. public finance insured obligations when due. The obligations are not subject to acceleration, except that National may have the right, at its discretion, to accelerate insured obligations upon default or otherwise. National’s guarantees insure municipal bonds, includingtax-exempt and taxable indebtedness of U.S. political subdivisions, as well as utilities, airports, health care institutions, higher educational facilities, student loan issuers, 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, fees or tariffs related to the use of these projects, lease payments or other similar types of revenue streams. general support services to MBIA Inc.’s subsidiaries as well as asset and capital management. General supportSupport services are provided by the Company’s service company, MBIA Services, Corporation, and include, among others, management, legal, accounting, treasury, information technology, and insurance portfolio surveillance, on afee-for-service basis. Capital management includes activities related to servicing obligations issued by MBIA Inc. and its subsidiaries, MBIA Global Funding, LLC (“GFL”) and MBIA Investment Management Corp. (“IMC”). MBIA Inc. issued debt to finance the operations of the MBIA group. GFL raised funds through the issuance of MTNs with varying maturities, which were in turn guaranteed by MBIA Corp. GFL lent the proceeds of these MTN issuances to MBIA Inc. IMC, along with 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 thesenew MTNs and investment agreements and the outstanding liability balances and corresponding asset balances have declined over time as liabilities mature, terminatematured, terminated or are retired.were called or repurchased. All of the debt within the corporate segment is managed collectively and is serviced by available liquidity.into which MBIA Insurance Corporation has written insurance policies guaranteeing the obligations under CDS. Certain policies cover payments potentially due under CDS, including termination payments that may become due in certain circumstances, including the occurrence of certain insolvency or payment defaults under the CDS or derivatives contracts by the insured counterparty or by the guarantor.SeptemberJune 30, 20172019 and 2016: Three Months Ended September 30, 2017 U.S. Public
Finance
Insurance Corporate International
and Structured
Finance
Insurance Eliminations Consolidated $ 70 $ 7 $ 10 $ - $ 87 - - (1) - (1) 2 (15) 2 - (11) (71) - - - (71) - 1 - - 1 (1) (1) 1 - (1) - - 29 - 29 4 15 11 (30) - 4 7 52 (30) 33 141 - 64 - 205 8 14 7 - 29 - 22 28 - 50 - - 22 - 22 16 - 14 (30) - 165 36 135 (30) 306 (161) (29) (83) - (273) (55) (1) 1 49 (6) $ (106) $ (28) $ (84) $ (49) $ (267) $ 5,051 $ 1,205 $ 5,320 $ (2,032) (3) $ 9,544 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ (1) - Represents the sum of third-party financial guarantee net premiums earned, net investment income, insurance-related fees and reimbursements and other fees. (2) - Represents intercompany premium income and expense and intercompany interest income and expense pertaining to intercompany receivables and payables. (3) - Consists primarily of intercompany reinsurance balances and repurchase agreements. Three Months Ended September 30, 2016 U.S. Public
Finance
Insurance Corporate International
and Structured
Finance
Insurance Eliminations Consolidated $ 84 $ 6 $ 48 $ - $ 138 - - 16 - 16 31 (2) 9 - 38 - (2) - - (2) - - 13 - 13 6 15 12 (33) - 121 17 98 (33) 203 28 - 22 - 50 9 16 17 - 42 - 22 27 - 49 - - 7 - 7 18 2 13 (33) - 55 40 86 (33) 148 66 (23) 12 - 55 22 (8) 7 3 24 $ 44 $ (15) $ 5 $ (3) $ 31 $ 5,343 $ 2,407 $ 7,020 $ (2,983) (3) $ 11,787
and Structured
Finance
Insurance $ $ $ $ $ $ $ $ $ $ $ $ $ $ (3) $ (1) - Represents the sum of third-party financial guarantee net premiums earned, net investment income, insurance-related fees and reimbursements and other fees. (2) - Represents intercompany premium income and expense and intercompany interest income and expense pertaining to intercompany receivables and payables. (3) - Consists primarily of intercompany deferred income taxes, reinsurance balances and repurchase agreements.ninesix months ended SeptemberJune 30, 20172019 and 2016: Nine Months Ended September 30, 2017 U.S. Public
Finance
Insurance Corporate International
and Structured
Finance
Insurance Eliminations Consolidated $ 200 $ 23 $ 54 $ - $ 277 - - (51) - (51) 20 (54) (21) - (55) (84) - - - (84) - 9 - - 9 (1) (3) 40 - 36 - - 50 - 50 14 46 31 (91) - 149 21 103 (91) 182 310 - 159 - 469 34 46 25 - 105 - 66 82 - 148 - - 63 - 63 47 2 42 (91) - 391 114 371 (91) 785 (242) (93) (268) - (603) (86) 1,069 1,143 (1,161) 965 $ (156) $ (1,162) $ (1,411) $ 1,161 $ (1,568) $ 5,051 $ 1,205 $ 5,320 $ (2,032) (3) $ 9,544 $ $ $ $ $ ) ) ) $ $ $ $ $ ) $ $ $ $ $ (1) - Represents the sum of third-party financial guarantee net premiums earned, net investment income, insurance-related fees and reimbursements and other fees. (2) - Represents intercompany premium income and expense and intercompany interest income and expense pertaining to intercompany receivables and payables. (3) - Consists primarily of intercompany reinsurance balances and repurchase agreements. Nine Months Ended September 30, 2016 U.S. Public
Finance
Insurance Corporate International
and Structured
Finance
Insurance Eliminations Consolidated $ 250 $ 17 $ 97 $ - $ 364 - - (20) - (20) 65 (105) 23 - (17) - (1) - - (1) - 5 - - 5 - (4) 1 - (3) - - 25 - 25 16 43 35 (94) - 331 (45) 161 (94) 353 46 - 103 - 149 29 52 46 - 127 - 69 79 - 148 - - 30 - 30 52 3 38 (93) - 127 124 296 (93) 454 204 (169) (135) (1) (101) 69 (50) (48) 1 (28) $ 135 $ (119) $ (87) $ (2) $ (73) $ 5,343 $ 2,407 $ 7,020 $ (2,983) (3) $ 11,787 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ (1) - Represents the sum of third-party financial guarantee net premiums earned, net investment income, insurance-related fees and reimbursements and other fees. (2) - Represents intercompany premium income and expense and intercompany interest income and expense pertaining to intercompany receivables and payables. (3) - Consists primarily of intercompany deferred income taxes, reinsurance balances and repurchase agreements.Premiums on financial guarantees and insured derivatives reported within the Company’s insurance segments are generated within and outside the U.S. The following table summarizes premiums earned on financial guarantees and insured derivatives by geographic location of risk for the three and nine months ended September 30, 2017 and 2016: Three Months Ended September 30, Nine Months Ended September 30, 2017 2016 2017 2016 $ 46 $ 59 $ 122 $ 176 - 6 1 20 - 1 1 4 - 3 1 3 7 6 19 20 - 1 - 2 - 1 2 3 $ 53 $ 77 $ 146 $ 228 and restricted stock units to certain employees andnon-employee directors in accordance with the Company’s long-term incentive programs, which entitle the participants to receive nonforfeitable dividends or dividend equivalents during the vesting period on the same basis as those dividends are paid to common shareholders. These unvested stock awards represent participating securities. During periods of net income, the calculation of earnings per share exclude the income attributable to participating securities in the numerator and the dilutive impact of these securities from the denominator. During periods of net loss, no effect is given to participating securities in the numerator and the denominator excludes the dilutive impact of these securities since they do not share in the losses of the Company.MBIA Inc. and SubsidiariesNotes to Consolidated Financial Statements (Unaudited)Note 12: Earnings Per Share (continued)stock options, warrants and unvested restricted stock outstanding during the period that could potentially result in the issuance of common stock. The dilution from stock options, warrants and unvested restricted stock are calculated by applying thetwo-class method and using the treasury stock method. The treasury stock method assumes the proceeds from the exercise of stock options and warrants or the unrecognized compensation expense from unvested restricted stock will be used to purchase shares of the Company’s common stock at the average market price during the period. If the potentially dilutive securities disclosed in the table below are either exercised or vested, the transaction would be net share settled resulting in a significantly lower impact to the outstanding share balance in comparison to the total amount of the potentially dilutive securities. During periods of net loss, stock options, warrants and unvested restricted stock are excluded from the calculation because they would have an antidilutive effect. Therefore, in periods of net loss, the calculation of basic and diluted earnings per share would result in the same value.ninesix months ended SeptemberJune 30, 20172019 and 2016: Three Months Ended September 30, Nine Months Ended September 30, 2017 2016 2017 2016 $ (267) $ 31 $ (1,568) $ (73) - 1 - - (267) 30 (1,568) (73) 123.0 131.6 126.6 133.4 $ (2.17) $ 0.23 $ (12.38) $ (0.55) $ (267) $ 31 $ (1,568) $ (73) - 1 - - (267) 30 (1,568) (73) 123.0 131.6 126.6 133.4 - 0.4 - - 123.0 132.0 126.6 133.4 $ (2.17) $ 0.23 $ (12.38) $ (0.55) 14.4 16.1 14.4 17.3 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 0.3 0.9SeptemberJune 30, 20172019 and 2016,2018 respectively. Includes 0.3 0.9ninesix months ended SeptemberJune 30, 20172019 and 2016,2018, respectively.MBIA Inc. and SubsidiariesNotes to Consolidated Financial Statements (Unaudited)ninesix months ended SeptemberJune 30, 2017: Unrealized
Gains (Losses)
on AFS
Securities, Net Foreign Currency
Translation, Net Total $ 6 $ (134) $ (128) 17 125 142 (1) 1 - 1 18 125 143 $ 24 $ (9) $ 15 (1) -Includes items included in the Company’s loss calculation to adjust the carrying value of MBIA UK to its fair value less costs to sell for the year ended December 31, 2016. The sale was completed in January of 2017 and as such, these amounts included in AOCI were reversed and included in the Sale Transaction.
Gains (Losses)
on AFS
Securities, Net
Translation, Net
Credit Risk of
Liabilities
Measured at Fair
Value, Net $ $ $ ) $ ) �� $ $ $ ) $ nine monthssix months ended SeptemberJune 30, 20172019 and 2016: Amounts Reclassified from AOCI Three Months Ended September 30, Nine Months Ended September 30, 2017 2016 2017 2016 $ - $ 1 $ 6 $ (3) (4) - (6) - Net investment losses related to OTTI (1) - (2) (4) Net investment income (5) 1 (2) (7) Income (loss) before income taxes - 1 (1) (2) Provision (benefit) for income taxes $ (5) $ - $ (1) $ (5) Net income (loss)
on AFS securities:
at fair value and foreign
(losses) on AFS
securities
risk of liabilities:
the period $ $ $ $ 21:20: Commitments and Contingencies” in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form10-K for the year ended December 31, 2016,2018, and should be read in conjunction with the complete descriptions provided in the aforementioned Form10-K.Expert discovery concluded in March of 2016. Oral argument beforemotions took place on October 24, 2017.Ambac Bond Insurance Coverage Cases, Coordinated Proceeding Case No. JCCP 4555 (Super. Ct.motions. The ruling affirmed the trial court’s decision, except reversed as to the trial court’s determination to interpret as a matter of Cal., County of San Francisco)Following an appeallaw, prior to trial, certain of the dismissalrepresentations and warranties that form the predicate for certain of the plaintiff’s anti-trust claim under California’s Cartwright Act, the California CourtMBIA Corp.’s breach of Appeal reinstated those claims against the bond insurer defendantscontract claims. The trial began on February 18, 2016. On April 8, 2016, Judge Mary E. Wiss recusedJuly 22, 2019 and disqualified herself from further proceedings in the matter. On April 14, 2016, Judge Curtis E. A. Karnow was assigned to sit as the Coordination Trial Judge. On June 24, 2016, the defendants, including the MBIA parties, filed their answers to the complaints. A discovery deadline is set for July 16, 2018 and a trial scheduled for October 1, 2018.MBIA Inc. and SubsidiariesNotes to Consolidated Financial Statements (Unaudited)Note 14: Commitments and Contingencies (continued)December 27, 2016, Justice Alan D. Scheinkman granted in part and denied in part MBIA’s motionMarch 11, 2018, Ms. Tilton commenced the Zohar Funds Bankruptcy Cases. On May 21, 2018, the court approved the Zohar Bankruptcy Settlement. Subsequently, the parties to dismiss. On January 17, 2017, MBIA filed its answer. Discovery concluded in October 2017 and a Trial Readiness Conference was held on November 3, 2017, at which the Court set a schedule for the briefing of summary judgment motions.National Public Finance Guarantee Corporation v. Padilla, Civ. No.16-cv-2101(D.P.R. June 15, 2016) (Besosa, J.)On June 15, 2016, Nationalabove-captioned litigation jointly filed a complaint in federal court in Puerto Rico challenging the Puerto Rico Emergency Moratorium and Financial Rehabilitation Act (Law21-2016 or the “Moratorium Act”) as unconstitutional under the United States Constitution. On June 22, 2016, National filed a motion for partial summary judgment on its claim that the Moratorium Act is preempted by the federal Bankruptcy Code. On July 7, 2016, the Puerto Rico defendants filed a motionrequest to stay the case pursuant to PROMESA,for, at minimum, fifteen months, which was granted by the Court in August of 2016. The defendants filed their answer to the complaintJustice Walsh on July 26, 2016. On November 15, 2016, the District Court denied National’s motion to lift the litigation stay granted pursuant to PROMESA and on January 30, 2017, the District Court denied National’s partial motion for a summary judgment without prejudice. On JanuaryJune 11, 2017, the U.S. Court of Appeals for the First Circuit affirmed the denial of a separate plaintiff’s motion to lift the PROMESA stay in a related action challenging the Moratorium Act. Accordingly, the case remained stayed through May 1, 2017, at which time the PROMESA stay expired. However, on May 3, 2017, Puerto Rico filed a Title III petition under PROMESA, thereby staying this dispute under Section 405(e) of PROMESA.,Case No.3:17-cv-01578 (D.P.R. May 3, 2017)(Swain, J.)On May 3, 2017, the Financial Oversight and Management Board filed a petition under Title III of PROMESA to adjust the debts of Puerto Rico. On the same day, National, together with Assured Guaranty Corp. and Assured Guaranty Municipal Corp.filed an adversary complaint in the case commenced by the Title III filing, alleging that the Fiscal Plan and the Fiscal Plan Compliance Act, signed into law by the Governor of Puerto Rico on April 29, 2017, violate PROMESA and the United States Constitution. On October 6, 2017, National, together with the other plaintiffs in the filing, voluntarily dismissed without prejudice the above referenced adversary complaint.The Bank of New York Mellon v. Puerto Rico Sales Tax Financing Corporation, et al.,Case No.17-133-LTS (D.P.R. May 16, 2017) (Swain, J.)On May 16, 2017, the Bank of New York Mellon, as trustee for COFINA, filed an adversary complaint seeking an interpleader and declaratory relief relating to conflicting directions from multiple stakeholders regarding alleged events of default. National has intervened in this matter. Given the complexity of the issues, the judge granted Bank of New York’s interpleader request ordering a freeze on disbursements to all bondholders and temporarily setting aside the funds until the dispute can be resolved between the parties. Under a scheduling order, discovery is underway and motions for summary judgment and opening briefs were due by November 6, 2017.Assured Guaranty Corp. et al. v. Commonwealth of Puerto Rico et al.,Case No. 17 BK3567-LTS (D.P.R. June 3, 2017) (Swain, J.)the hearing will beoral arguments were heard on November 21, 2017.Public Finance Guaranteetogether with Assured, Assured Guaranty Municipal Corp. et al. v. and Financial Guaranty Insurance Company filed their notice of appeal of the motions to dismiss to the United States Court of Appeals for the First Circuit. Appellants filed their opening brief on May 9, 2018, and Appellees filed their opposition brief on July 9, 2018. Appellants’ reply brief was filed on August 8, 2018. Oral argument was held on November 5, 2018. On March 26, 2019, the First Circuit held that consensual prepetition liens on special revenues will remain in place after the filing of the bankruptcy petition, but agreed with the district court that the provision “does not mandate the turnover of special revenues or require continuity of payments of the PRHTA Bonds during the pendency of the Title III proceeding.” Appellants have submitted a motion seeking review of this opinion by the full First Circuit panel, and will determine within the 90 days of this decision whether to file a writ of certiorari for hearing before the United States Supreme Court. On July 31, 2019, the First Circuit denied the request for full panel review, which will permit the movants to file a writ of certiorari requesting a Supreme Court review of the First Circuit’s ruling.Mgmt. Bd.Management Board for Puerto Rico, as representative of The Puerto Rico Electric Power Authority, et al.3:17-cv-01882 17 BK 4780-LTS (D.P.R. June 26,July 19, 2017) (Besosa,(Swain, J.)June 26,July 18, 2017, National, together with other PREPA bondholders, asked the court overseeing PREPA’s Title III bankruptcy proceeding to lift the automatic bankruptcy stay, and permit bondholders to seek appointment of a receiver to oversee PREPA. On September 14, 2017, the court held that PROMESA barred relief from the stay because the appointment of a receiver would (i) interfere with PREPA’s property and governmental powers, and (ii) violate the court’s exclusive jurisdiction over PREPA’s property. The court also held that a comparison of the harms facing both parties pointed towards denying relief from the stay. The bondholders appealed the decision to the First Circuit. As of April 23, 2018, the appeal was fully briefed. The First Circuit heard oral argument on June 5, 2018. On August 8, 2018, the United State Court of Appeals for the First Circuit issued an order reversing Judge Swain’s decision on jurisdictional grounds and remanding the motion. On October 3, 2018, National, together with Assured Guaranty Corp., Assured Guaranty Municipal Corp., and Syncora Guarantee Inc. (collectively, “Movants”) filed an updated motion for relief from the automatic stay to allow Movants to exercise their statutory right to have a receiver appointed at PREPA (the “Receiver Motion”). Discovery in connection with the Receiver Motion is ongoing. The Court approved a number of requests to extend the deadline for the Oversight Board to respond to the motion. The Receiver Motion has been stayed until the Court rules on motions currently scheduled to be heard on October 3, 2019 seeking to approve the Definitive Restructuring Support Agreement (the “RSA”) and the Motion to Dismiss the Receiver Motion., filed (“Assured”) (together, the “RSA Parties”) entered into the RSA.complaint againsttransaction pursuant to which, upon the effective date of a plan of adjustment, PREPA’s legacy bonds will be exchanged for new securitization bonds to be issued in two tranches (the “Securitization Bonds”). In addition, beginning on August 30, 2019, holders of bonds that are subject to the RSA will receive monthly settlement payments funded by a settlement charge to be included on customer bills (the “Settlement Payments”) until the effective date of a plan of adjustment for PREPA. The Settlement Payments are subject to increase if a plan of adjustment is not confirmed before March 31, 2021. The RSA provides that supporting parties will receive an administrative claim equal to interest accrued on certain of the securitization bonds, less the amount of any Settlement Payments made on account of such bonds, which administrative claim shall survive termination of the RSA. Additionally, pursuant to the RSA, supporting creditors will also receive certain fees and expense reimbursements. The RSA contemplates the filing of a plan of adjustment for PREPA by March 31, 2020.its chairmanfiled a 9019 motion with the Title III court in May 2019 seeking approval of the RSA (the “Settlement Motion”) and certaina Motion to Dismiss the Receiver Motion (together, the “Motions”). The RSA requires the Ad Hoc Group to support, and Assured not to oppose, the Motion to Dismiss. The RSA further states that the hearing for approval of its members seeking declaratory, injunctive and mandamus relief requiringthe Settlement Motion is contingent on receiving no later than two business days prior to such hearing the support of holders or insurers representing a minimum of 60% in aggregate principal amount of all legacy bonds. Approximately 72% of PREPA’s bondholders have already joined the deal. That number will reach over 74% if Syncora Guarantee Inc., who has agreed in principal to join the RSA, formally signs on. The Title III Court denied the expedited treatment sought by the Oversight Board and has scheduled a hearing on the Motions for October 3, 2019. The Receiver Motion has also been stayed until the Court rules on the Motions.comply with certain of its obligations under PROMESA. On July 17, 2017,the RSA. National again joined by Assured Guaranty Corp. and Assured Guaranty Municipal Corp., filedexpects to object to both Motions, unless an amended complaint against the Oversight Board, its chairman, and certain of its members in their official and individual capacities, seeking declaratory relief under PROMESA and asserting a claim for nominal damages against the individual defendants for tortious interferenceagreement is reached with the PREPA Restructuring Support Agreement. By orderRSA Parties on an amendment to the RSA pursuant to which National would join the RSA.National Public Finance Guarantee Corp. et al. v. The FinancialMgmt. Bd. et al., Case No. 17BK-04780 (D.P.R. August 7, 2017)On August 7, 2017, National, together with Assured Guaranty Corp. , Assured Guaranty Municipal Corp., f/k/a Financial Security Assurance Inc., National Public Finance Guarantee Corporation, the Ad Hoc Group of PREPA Bondholders, and Syncora Guarantee Inc.AAFAF also filed an adversary complaint against the Trustee for the PREPA Bonds, challenging the validity of the liens arising under the Trust Agreement that secure insured obligations of National. The adversary proceeding is stayed until the earlier of (a) 60 days after the Court denies the 9019 Motion, (b) consummation of a Plan, (c) 60 days after the filing by the Oversight Board and AAFAF of a Litigation Notice, or (d) further order of the Court.PROMESA against PREPA, Financial OversightAdjustment for COFINAManagement BoardCOFINA Agents agreed in principle to settle the Commonwealth-COFINA Dispute regarding the pledge of sales and use taxes and related issues under the Agents’ mediation authority. The Title III Court held a hearing to approve the settlement agreement, as amended by the parties, and confirm a plan of adjustment in the COFINA case incorporating the settlement on January 16 and 17, 2019 (the “Confirmation Hearing”). On February 4, 2019, the District Court for the District of Puerto Rico Puerto Rico Fiscal Agency and Financial Advisory Authority,et al to enforce Plaintiffs’ contractual interest and constitutional right to revenues that PREPA pledged to bondholders but has thus far refused to turn over. Plaintiffs seek a declaration that Defendants have violated sections 922(d) and 928(a)entered the order confirming the Third Amended Title III Plan of the Bankruptcy Code, and that efforts to compel Defendants to apply such revenues to payAdjustment for debt service on the Bonds are not stayed as provided under section 922(d) of the Bankruptcy Code. Plaintiffs also seek a declaration that, pursuant to sections 922(d) and 928 of the Bankruptcy Code as incorporated into PROMESA, PREPA is only authorized to use Revenues to pay for current operating expenses in the current time period, not for future expenses that may be deferred to or payable at a later date. In addition to declaratory relief, Plaintiffs also seek injunctive relief prohibiting Defendants from taking or causing to be taken any action that would further violate sections 922(d) and 928(a) of the Bankruptcy Code and ordering Defendants to remit Revenues for the uninterrupted and timely payment of debt service on the Bonds in accordance with sections 922(d) and 928(a) of the Bankruptcy Code. On October 13, 2017, National, together with the other plaintiffs in the filing, voluntarily dismissed without prejudice the above referenced adversary complaint.California.California, as well as office equipment. The Purchase, New York initial lease term expires in 2030 with the option to terminate the lease in 2025 upon the payment of a termination amount. This lease agreement included an incentive amount to fund certain leasehold improvements, renewal options, escalation clauses and a free rent period. This lease agreement has been classified as an operating lease, and operating rent expense has beenis recognized on a straight-line basis sincebasis. The following table provides information about the second quarterCompany’s leases as of 2014. As of SeptemberJune 30, 2017, total future minimum lease payments remaining on this lease were $37 million. $ $ % $ SeptemberJune 30, 2017.20162018 and the consolidated financial statements and notes thereto included in this Form10-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 “Forward-Looking Statements” and “Risk Factors” in Part I, Item 1A of MBIA Inc.’s Annual Report on Form10-K for the year ended December 31, 20162018 for a further discussion of risks and uncertainties.one ofwithin the largest financial guarantee insurance businesses in the 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 businessportfolio is primarily operatedmanaged through National Public Finance Guarantee Corporation (“National”), our corporate segment is operatedmanaged 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 operatedmanaged through MBIA Insurance Corporation and its subsidiaries (“MBIA Corp.”). Effective on January 10, 2017, MBIA Corp.’s wholly-owned subsidiary, MBIA UK (Holdings) Limited (“MBIA UK Holdings”), sold its operating subsidiary, MBIA UK Insurance Limited (“MBIA UK”), to Assured Guaranty Corp. (“Assured”), a subsidiary of Assured Guaranty Ltd. References to MBIA Inc. generally refer to activities within our corporate segment and, unless otherwise indicated orsegment.context otherwise requires, references to “MBIA Corp.” are (i) for any references relating to the period ended January 10, 2017, to MBIA Insurance Corporation, together withperformance of its subsidiaries, MBIA UK, and MBIA Mexico S.A. de C.V (“MBIA Mexico”) and (ii) for any references relating to the period after January 10, 2017, to MBIA Insurance Corporation together with MBIA Mexico.On June 26, 2017, Standard & Poor’s Financial Services LLC (“S&P”) downgraded the rating of National fromAA- with a stable outlook to A with a stable outlook. National’s ability to write new business and to compete with other financial guarantors is largely dependent on the financial strength ratings assigned to National by major rating agencies. At the current S&P rating it is difficult for National to compete with higher-rated competitors, therefore, at this time, we have ceased our efforts to actively pursue writing new financial guarantee business in our U.S. public finance insurance segment. National continues to focus on maximizing the economics of our existing insured portfolio through effective surveillance and remediation.remediation activity and effectively manage its investment portfolio. Our corporate segment consists of general corporate activities, including providing general support services to MBIA’s other operating businessessubsidiaries and asset and capital management. MBIA Corp.’s primary objectives are to satisfy all claims ofby its policyholders and to maximize future recoveries, if any, for its senior lending and other surplus note holders, and thereafter,then its preferred stock holders. MBIA Corp. is executing this strategy by, reducing and mitigating potential losses on its insurance exposures andamong other things, pursuing various actions focused on maximizing the collection of recoveries.recoveries and reducing and mitigating potential losses on its insurance exposures. We do not expect National or MBIA Corp. to write meaningful new business in our international and structured finance insurance segment.On August 10, 2017, the Company’s Board of Directors elected William C. Fallon to the position of Chief Executive Officer (“CEO”) of MBIA Inc., effective September 15, 2017, bringing to conclusion MBIA Inc.’s long term succession plan, which has been implemented over the past two years. MBIA Inc.’s previous CEO, Jay Brown, stepped down as CEO effective September 15, 2017. Mr. Brown plans to conclude his service on the MBIA Inc. Board of Directors as of the 2018 Annual Shareholder meeting in May of 2018. Three Months Ended September 30, Nine Months Ended September 30, 2017 2016 2017 2016 $ (267) $ 31 $ (1,568) $ (73) $ (2.17) $ 0.23 $ (12.38) $ (0.55) $ (113) $ 5 $ (243) $ 36 $ (0.91) $ 0.04 $ (1.93) $ 0.28 $ 25 $ - $ 100 $ 105 Net income (loss) $ (170) $ (146) $ (187) $ (244) Net income (loss) per diluted share $ (2.02) $ (1.64) $ (2.20) $ (2.75) $ (76) $ (51) $ (37) $ (112) $ (0.90) $ (0.58) $ (0.44) $ (1.27) Cost of shares repurchased $ 50 $ - $ 54 $ 14 (1) - Combined operatingAdjusted net income (loss) and combined operatingadjusted net income (loss) per diluted share arenon-GAAP measures. Refer to the following “Results of Operations” section for a discussion of operatingadjusted net income (loss) and operatingadjusted net income (loss) per diluted share and a reconciliation of GAAP net income (loss) to operatingadjusted net income (loss) and GAAP net income (loss) per diluted share to operatingadjusted net income (loss) per diluted share. As of
September 30, 2017 As of
December 31, 2016 $ 1,708 $ 3,227 13.88 23.87 24.81 31.88 (1) -Adjusted book value per share is anon-GAAP measure. Refer to the following “Results of Operations” section for a discussion of adjusted book value and a reconciliation of GAAP book value per share to adjusted book value per share.Nine Months Ended September 30, 2017 Key EventsOn June 26, 2017, S&P downgradedfinancial strength ratingPlan of Adjustment for the Puerto Rico Sales Tax Financing Corporation (“COFINA”) was implemented. National insured bondholders were given the option of commuting their insurance policy and receiving uninsured COFINA bonds or placing their new uninsured COFINA bonds into National Custodial Trusts (the “Trusts”) and continue to benefit fromAA- with a stable outlook to A with a stable outlook.National insurance policy. As a result, seven Trusts were formed and consolidated as variable interest entities (“VIEs”) by the Company. National tendered and commuted $182 million market value of this downgrade, at this time,National insured COFINA bonds it owned for new uninsured COFINA bonds, which in conjunction with other tendered and commuted bonds, resulted in a reduction to National’s insured exposure to COFINA. Since the closing date and initial distribution of cash and bonds, National has ceased its effortselected to actively pursue writingsell some of the new uninsured bonds held in the Trusts during the second quarter of 2019. The sale of bonds held in the Trusts results in a further reduction to National’s exposure to COFINA. Since this transaction was implemented through June 30, 2019, National’s COFINA gross par outstanding, gross par outstanding plus capital appreciation bonds (“CABs”) accreted interest and debt service outstanding declined by approximately $279 million, $472 million and $1.7 billion, respectively. In addition, National sold all of the new taxable uninsured bonds held in the Trusts, which further reduced National’s COFINA gross par outstanding, gross par outstanding plus CABs accreted interest and debt service outstanding by approximately $100 million, $179 million and $618 million, respectively, in July of 2019.and initiated cost savings measures by reducing our headcount by approximately 20%. Operating expenses for(the “MBIA Corp. Policies”) insuring the nine months ended September 30, 2017 include $8 million of costs associated with the headcount reduction.Refinanced Facility. Refer to the “U.S. Public Finance Insurance”“Liquidity” section for additional information on the U.S. public finance insurance business.Refinanced Facility.During the nine months ended September 30, 2017, we recorded a tax expense of $1.2 billion to establish a full valuation allowance against our net deferred tax asset. The full valuation allowance resulted from our conclusion that, at this time, we do not have sufficient positive evidence required by accounting principles generally accepted in the United States of America (“GAAP”) to support our ability to use our net deferred tax asset before it expires. Refer to the following “Taxes” section and “Note 10: Income Taxes” in the Notes to Consolidated Financial Statements for further information about this valuation allowance on our net deferred tax asset. Notwithstanding the establishment of the valuation allowance on our net deferred tax asset, the Company believes that it will still be able to derive economic benefit overtime from its net deferred tax asset before the expirations associated with that asset based upon expected earnings at National and potential future sources of taxable income to be identified by the Company. There is no assurance that the Company will reverse any of its valuation allowance on its net deferred tax asset in the future.Completed the sale of MBIA UK and secured financing which enabled MBIA Corp. to satisfy a claim of $770 million on an insurance policy insuring certain notes issued by Zohar II2005-1, Limited (“Zohar II”). Refer to the following “Results of Operations” and “Liquidity” sections for a further discussion of the sale of MBIA UK and the financing facility.On January 1, 2017 and July 1, 2017, the Commonwealth of Puerto Rico and certain of its instrumentalities (“Puerto Rico”) defaulted on scheduled debt service for certain National insured bonds and National paid gross claims in the aggregate of $242 million as a result. As of September 30, 2017, National had $3.4 billion of gross insured par outstanding ($3.9 billion of gross insured par outstanding when including accreted interest on insured capital appreciation bonds (“CABs”)) related to Puerto Rico. Refer to the “U.S. Public Finance Insurance Puerto Rico Exposures” section for additional information on our Puerto Rico exposures.On September 28, 2017, MBIA Inc., on behalf of its subsidiaries, National and MBIA Corp., provided notice to Moody’s Investors Services (“Moody’s”) terminating the agreement by which Moody’s agreed to provide financial strength ratings to MBIA Inc., National and MBIA Corp. Also on September 28, 2017, National provided notice to Kroll Bond Rating Agency (“Kroll”) terminating the agreement by which Kroll agreed to provide a financial strength rating to National. These termination notices were effective in October of 2017.continued to improveremained healthy during the thirdsecond quarter of 2017. The2019 due to a strong labor market strengthened and economiclow inflation. Economic activity has seen moderate gains due to an increase in household spending from earlier in the year, however, fixed investment in the business sector has been increasing moderately.tepid. In addition, increases in U.S. home prices across the country have maintained a positive trajectory over the past twelve months and there has been an increase in business investment. While gross domestic product increased during the quarter, it was tempered by the effects of the hurricanes.decided to maintain its target forlowered the federal funds rate in September and November of 2017, however, there is an expectation of a rate increase in December of 2017.by 25 basis points at its July 2019 meeting while citing potential global developments impacting the economic outlook along with reduced inflationary pressures. The FOMC stated that it will continue to monitorassess various economic conditionsfactors including labor market developments, inflation stresses and domestic and international environments relative to its objectives of maximum employment and 2% inflation as they workinflation. In addition, the FOMC emphasized patience with respect to a path towards a relatively gradual normalization of rates. Congress is turning their focusfuture adjustments to tax reform. Congress will also maintain an emphasisthe federal funds target rate based on a reduction in regulationglobal economic and an increase in infrastructure spending throughout the remainder of 2017.Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)EXECUTIVE OVERVIEW (continued)MBIA’s business outlook and itsthe Company’s financial results. Many states and municipalities have experienced growing tax collections that resulted from increased economic activity and higher assessed property valuations. The economicEconomic 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. A decrease in oil prices could have a positive impact on certain sales taxes to the extent consumer spending increases as a result. However, some states and municipalities will experience a decrease in revenues where their economies are reliant on the oil and gas industries.GAAP,accounting principles generally accepted in the United States of America (“GAAP”), which requires the use of estimates and assumptions. Management has discussed and reviewed the development, selection, and disclosure of critical accounting estimates with the Company’s Audit Committee. Our most critical accounting estimates include loss and loss adjustment expense (“LAE”) reserves and valuation of financial instruments, and income taxes, since these estimates require significant judgment. Any modifications in these estimates could materially impact our financial results.2016.2018. In addition, refer to “Note 5: Loss and Loss Adjustment Expense Reserves”, and “Note 6: Fair Value of Financial Instruments” and “Note 10: Income Taxes” in the Notes to Consolidated Financial Statements for a current description of estimates used in our insurance loss reserving process and information about our financial assets and liabilities that are accounted for at fair value, including valuation techniques and significant inputs and estimates involving income taxes.ninesix months ended SeptemberJune 30, 20172019 and 2016: Three Months Ended September 30, Nine Months Ended September 30, 2017 2016 2017 2016 $ 33 $ 203 $ 182 $ 353 306 148 785 454 (273) 55 (603) (101) (6) 24 965 (28) $ (267) $ 31 $ (1,568) $ (73) $ (2.17) $ 0.23 $ (12.38) $ (0.55) $ (2.17) $ 0.23 $ (12.38) $ (0.55) 122,967,924 131,633,411 126,643,642 133,368,752 122,967,924 132,042,067 126,643,642 133,368,752 Total revenues $ 30 $ 12 $ 80 $ 85 Total expenses 237 158 306 327 Income (loss) before income taxes (207) (146) (226) (242) Provision (benefit) for income taxes (37) - (39) 2 Net income (loss) $ (170) $ (146) $ (187) $ (244) Net income (loss) per common share: Basic $ (2.02) $ (1.64) $ (2.20) $ (2.75) Diluted $ (2.02) $ (1.64) $ (2.20) $ (2.75) Weighted average number of common shares outstanding: Basic 84.3 89.1 84.9 88.9 Diluted 84.3 89.1 84.9 88.9 SeptemberJune 30, 20172019 vs. Three Months Ended SeptemberJune 30, 2016The2018wasdecreased for the six months ended June 30, 2019 compared with the same period of 2018 primarily due to an increase in net investment losses related to other-than-temporary impairments (“OTTI”), a decrease in net gains on the sales of investments, and lower net premiums earned due to higher refunding activity in 2016 andrun-off of the portfolio and foreign exchangepremiums. Net investment losses on Euro denominated liabilities due to the weakening of the U.S. dollar. The increase in OTTI related to severalOTTI primarily related to an impaired securitiessecurity for which a loss was recognized as the difference between theirthe amortized cost and their fair values.threesix months ended SeptemberJune 30, 20172019 and 20162018 included $205$102 million and $50$131 million, respectively, of net insurance losses and LAE. The decrease in loss and LAE. This increaseLAE for the six months ended June 30, 2019 compared with the same period of 2018 was principallyprimarily due to a decrease in losses incurred on certain Puerto Rico exposures, and decreases in projected collections from mortgage insurance included in the Company’s excess spread within its second-lien residential mortgage-backed securities (“RMBS”) transactions from the settlement of litigation regarding insurance coverage involving Old Republic Insurance Corporation, Bank of America, N.A. and The Bank of New York Mellon.Nine Months Ended September 30, 2017 vs. Nine Months Ended September 30, 2016The decrease in consolidated total revenues was primarily due topartially offset by an increase in net investment losses related to OTTI, lower net premiums earned due to higher refunding activity in 2016 andrun-off of the portfolio and a decrease in net gains on the sales of investment, partially offset by a realized gain related to the settlement of litigation and a gain from the consolidation of a variable interest entity (“VIE”).Consolidated total expenses for the nine months ended September 30, 2017 and 2016 included $469 million and $149 million, respectively, of net insurance loss and LAE. This increase was principally due to losses incurred on certain Puerto Rico exposures and insured first-lien RMBS.Provision (benefit) for income taxesThe provision (benefit) for income taxes increased for the nine months ended September 30, 2017 compared with the same period Operating Adjusted Net Income (Loss)operatingadjusted net income (loss), and operatingadjusted net income (loss) per diluted common share, bothnon-GAAP measures. Since operatingadjusted net income (loss) is used by management to assess performance and make business decisions, we consider operatingadjusted net income (loss) and operatingadjusted net income (loss) per diluted common share fundamental measures of periodic financial performance which are useful in understanding our results. OperatingAdjusted net income (loss) and operatingadjusted 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 operatingadjusted net income (loss) and operatingadjusted net income (loss) per diluted common share may differ from those used by other companies.Operatingoperatingadjusted net income (loss) per diluted common share include the combinedafter-tax results of our U.S. public finance insurance and corporate segmentsthe Company and remove theafter-tax results of our international and structured finance insurance segment, comprising the results of MBIA Corp. which isgiven its capital structure and business prospects, we do not part of our ongoing business strategy.In additionexpect its financial performance to removing our international and structured finance insurance segment, operating income (loss) is adjusted forhave a material impact on MBIA Inc., as well as the following:Elimination ofElimination ofoperatingadjusted net income (loss).EliminationEliminationthe expense from the establishment ofmaintaining a full valuation allowance against the Company’s net deferred tax asset. The Company applies a zero effective tax rate for federal income tax purposes to its pre-tax adjustments.combined operatingadjusted net income (loss) and operatingadjusted net income (loss) per diluted common share and provides a reconciliation of GAAP net income (loss) to operatingadjusted net income (loss) for the three and ninesix months ended SeptemberJune 30, 20172019 and 2016: Three Months Ended September 30, Nine Months Ended September 30, 2017 2016 2017 2016 $ (267) $ 31 $ (1,568) $ (73) (83) 12 (268) (136) 13 10 29 (50) (18) (6) (57) (24) (1) 32 14 51 (71) - (84) (1) 1 - 9 5 (1) (2) (3) (4) 6 (20) (965) 50 $ (113) $ 5 $ (243) $ 36 (0.91) (3) 0.04 (3) (1.93) (3) 0.28 (4) $ $ $ $ $ $ $ $ $ $ $ $ (1) - Gross amounts are reportedReported within “Net gains (losses) on financial instruments at fair value and foreign exchange” on the Company’s consolidated statements of operations.(2) - Reported within “Provision (benefit) for income taxes” on the Company’s consolidated statements of operations. (3) - OperatingAdjusted net income (loss) per diluted common share is calculated by taking operating income (loss) divided by the GAAP weighted average number of diluted common shares outstanding.(4) -Operating income (loss) per diluted common share is calculated by taking operating income (loss) divided by the weighted average number of diluted common shares outstanding, which includes GAAP diluted weighted average number of common shares of 133,368,752 and the dilutive effect of common stock equivalents of 482,112 shares.Adjusted wefor internal purposes management also analyzeanalyzes adjusted book value (“ABV”) per share, anon-GAAP measure. Wewhich we consider ABV a measure of fundamental value of the Company and the changevalue; we also view changes in ABVthis measure an important measureindicator of financial performance. ABV is used by management in certain components of management’s compensation. Previously and through our Form 10-K for the fiscal year ended December 31, 2018, for the benefit of investors and analysts, management presented non-GAAP ABV together with a reconciliation from GAAP book value per share in its periodic GAAP reporting. Beginning with the first quarter of 2019, however, based on the SEC’s continued and evolving interpretations of its guidance on non-GAAP financial measures, the Company is no longer publicly disclosing its internal ABV measurement. However, since many of the Company’s investors and analysts may continue to use ABV to evaluate MBIA’s share price and as the basis for their investment decisions, going forward we will continue to present GAAP book value per share as well as the individual adjustments used by management to calculate its internal ABV metric.legal entity book value of MBIA Corp., but includes all deferred taxes available to the Company. As of September 30, 2017, the Company established a full valuation allowance against its net deferred tax asset which reduced its book value per share. In addition, ABV adjusts and for certain items which the Company believes will reverse from GAAP book value through GAAP earnings and other 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 tohave presented ABVremove 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 allow investorsits policyholders, surplus note holders and analystspreferred stock holders with respect to evaluate the Company using the same measure that MBIA’s management regularly uses to measure financial performancedistribution of assets, and value. ABVits legal structure, it is not and will not likely be in a substitute forposition to upstream any economic benefit to MBIA Inc. Further, MBIA Inc. does not face any material financial liability arising from MBIA Corp.should not be viewedlosses on AFS securities recorded in isolation ofaccumulated other comprehensive income since they will reverse from GAAP book value when such securities mature. Gains and losses from sales and OTTI of AFS securities are recorded in book value through earnings.definition of ABV mayexpected losses. The Company’s net unearned premium revenue will be recognized in GAAP book value in future periods, however, actual amounts could differ from that usedestimated amounts due to such factors as credit defaults and policy terminations, among others.other companies.Item 2. Management’s Discussion and AnalysisNational. GAAP requires the Company to consolidate certain VIEs as a result of Financial Condition and Resultsthe Company’s insurance policies. However, since the Company does not own such VIEs, management uses certain measures adjusted to remove the impact of Operations (continued)RESULTS OF OPERATIONS (continued)As of September 30, 2017, ABV per share was $24.81, a decrease from $31.88 as of December 31, 2016. The decreaseVIE consolidations for National in ABV per share was primarily driven byorder to reflect financial exposure limited to its financial guarantee contracts.establishment ofCompany has a full valuation allowance on the Company’sagainst its net deferred tax asset, and losses incurred on certain Puerto Rico exposures, partially offsetthe book value per share adjustments to ABV were adjusted by applying a decrease in common shares outstanding from the share repurchases made by the Company during the nine months ended September 30, 2017. zero effective tax rate.a reconciliation of consolidatedthe Company’s GAAP book value per share and management’s adjustments to consolidated ABVbook value per share: As of
September 30, 2017 As of
December 31, 2016 $ 1,708 $ 3,227 123,109,464 135,200,831 $ 13.88 $ 23.87 7.21 5.07 21.09 28.94 (0.16) 0.24 3.88 4.31 - (1.61) 3.72 2.94 $ 24.81 $ 31.88 (1) -The book value of the MBIA Corp. legal entity does not provide significant economic or shareholder value to MBIA Inc.(2) -Consists of financial guarantee premiums, net of deferred acquisition costs. The discount rate on financial guarantee installment premiums was the risk-free rate as defined by the accounting principles for financial guarantee insurance contracts.(3) -As of September 30, 2017, ABV per share was adjusted by applying a zero effective tax rate to the book value adjustments. Total shareholders’ equity of MBIA Inc. $ 1,040 $ 1,119 Common shares outstanding 84,800,996 89,821,713 GAAP book value per share $ 12.26 $ 12.46 Management’s adjustments described above: Remove negative book value per share of MBIA Corp. (13.07) (10.93) Remove net unrealized gains (losses) on available-for-sale securities included in other comprehensive income (loss) 1.43 (0.46) Include net unearned premium revenue in excess of expected losses 3.46 3.53 Remove gain (loss) related to National VIE consolidations (0.24) - businessportfolio is primarily conductedmanaged 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, includingtax-exempt and taxable indebtedness of U.S. political subdivisions, as well as utility districts, airports, healthcare institutions, higher educational facilities, student loan issuers, 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 SeptemberJune 30, 2017,2019, National had total insured gross par outstanding of $82.1$54.6 billion.National’s ability to write new business and to compete with other financial guarantors is largely dependent on the financial strength ratings assigned to National by Kroll, S&P and Moody’s. On June 26, 2017, S&P downgraded the ratingsurveilmonitor and remediate its existing insured portfolio and will proactively seek opportunities to enhance shareholder value using its strongsubstantial financial resources, while protecting the interests of all of our policyholders. Overall our U.S. public finance insured portfolio continues to perform satisfactorily against a backdrop of relatively stable domestic economic activity. While a stable or growing economy will generally benefit the tax revenuesCertain state and fees charged for essential municipal services which secure the credits in our insured bond portfolio, some state, local governments and territory obligors we insure remain underthat National insures are experiencing financial and budgetary stress. This could lead to an increase in defaults by such entities on the payment of their obligations and insurance losses or claim paymentsimpairments on a greater number of ourthe Company’s insured transactions. In particular, Puerto Rico is experiencing significant fiscal stress and constrained liquidity due to, among other things, Puerto Rico’s structural budget imbalance, limitedthe lack of access to the capital markets, a stagnating local economy, net migration of people out of Puerto Rico and a high debt burden. Although Puerto Rico has tried to address its challenges through various fiscal policies, it continues to experience significant fiscal stress. On September 20, 2017, Hurricane Maria made landfall in Puerto Rico as a Category 4 hurricane resulting in catastrophic damage to much of the island’s basic infrastructure, including its electrical transmission and distribution grid, telecommunications network, housing, roads, bridges, water and sewer systems. On September 21, 2017, the President of the United States approved a Major Disaster Declaration for Puerto Rico and the Federal Emergency Management Agency (“FEMA”) made federal disaster assistance available to Puerto Rico to supplement its recovery efforts. 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 this stress isaffecting our insured credits remains uncertain.ninesix months ended SeptemberJune 30, 20172019 and 2016: Three Months Ended
September 30, Percent Nine Months Ended
September 30, Percent 2017 2016 Change 2017 2016 Change $ 46 $ 60 -23% $ 125 $ 174 -28% 27 29 -7% 87 90 -3% 1 1 -% 2 2 -% 2 31 -94% 20 65 -69% (71) - n/m (84) - n/m (1) - n/m (1) - n/m 4 121 -97% 149 331 -55% 141 28 n/m 310 46 n/m 10 12 -17% 28 36 -22% 14 15 -7% 53 45 18% 165 55 n/m 391 127 n/m (161) 66 n/m (242) 204 n/m (55) 22 n/m (86) 69 n/m $ (106) $ 44 n/m $ (156) $ 135 n/m
June 30,
June 30, $ $ $ $ $ $ $ $ SeptemberJune 30, 20172019 compared with the same period of 20162018 resulted from decreases in refunded premiums earned of $9$3 million, andpartially offset by an increase in scheduled premiums earned of $5$2 million. The decrease in net premiums earned for the ninesix months ended SeptemberJune 30, 20172019 compared with the same period of 20162018 resulted from decreases in refunded premiums earned of $32 million and scheduled premiums earned of $17$15 million. Scheduled premium earnings declined due to the refunding and maturity of insured issues in prior periods. Refunding activity over the past several years has accelerated premium earnings in prior periodsyears and reduced the amount of scheduled premiums that would have been earned in the current period.Item 2. Management’s Discussionyear. Net premiums earned during the three and Analysissix months ended June 30, 2019 includes the elimination of Financial Condition$1 million and Results$2 million, respectively, due to the consolidation of Operations (continued)RESULTS OF OPERATIONS (continued)unfavorable changefavorable changes in net gains (losses) on financial instruments at fair value and foreign exchange for the three and six months ended SeptemberJune 30, 20172019 compared with the same periodperiods of 2016 was2018 were principally due to decreases in net realized gains fromon the sales of securitiesCOFINA bonds owned by National as a result of favorable market conditions in 2016. The unfavorable change in net gains (losses) on financial instruments at fair value and foreignthe COFINA bond exchange, for the nine months ended September 30, 2017 compared with the same period of 2016 was due to decreases in net realized gains from the sales of investments and fair value gains on securities due to the impact of a decrease in order to generate liquidity forinterest rates during the expected payments on certain Puerto Rico exposures and from favorable market conditions in 2016.ninesix months ended SeptemberJune 30, 20172019 were primarily related to an impaired securitiessecurity for which losses werea loss was recognized as the difference between theirthe amortized cost and their fair values.net present value of projected cash flows. This OTTI resulted from liquidity concerns recent credit rating downgrades and other adverse financial conditions of the issuers.National’sOur U.S. public finance insured portfolio surveillancemanagement 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.ninesix months ended SeptemberJune 30, 20172019 and 2016: Three Months Ended
September 30, Percent Nine Months Ended
September 30, Percent 2017 2016 Change 2017 2016 Change $ 97 $ 38 n/m $ 263 $ 67 n/m 52 (10) n/m 58 (20) n/m 149 28 n/m 321 47 n/m (8) - n/m (11) (1) n/m $ 141 $ 28 n/m $ 310 $ 46 n/m
June 30,
June 30, $ $ $ $ (1) - Puerto Rico exposures are reflected netAs a result of expected recoveries on such payments.consolidation of VIEs, loss and loss adjustment expense for the three and six months ended June 30, 2019 include the elimination of a loss and LAE benefit of $27 million and $24 million, respectively. n/m - Percent change not meaningful.ninesix months ended SeptemberJune 30, 20172019 and 2016,2018, losses and LAE primarily related to increases in actual and expected payments on certain Puerto Rico exposures, partially offset by increases in recoveries of claims paid on certain Puerto Rico exposures.and recoverables as of SeptemberJune 30, 20172019 and December 31, 2016: September 30,
2017 December 31,
2016 Percent
Change $ 356 $ 174 105% - 1 -100% 368 118 n/m (20) (21) -5% $ 348 $ 97 n/m $ 13 $ 12 8%
2019
2018
Change $ $ $ $ (1) - Reported within “Other assets” on our consolidated balance sheets. (2) -Puerto Rico exposures are reflected net of expected recoveries on such reserves.(3) -Reported within “Other liabilities” on our consolidated balance sheets. n/m - Percent change not meaningful.n/m - Percent change not meaningful. Loss and LAE reserves as of September 30, 2017 increased compared with December 31, 2016 primarily as a result of increases in expected payments on certain Puerto Rico exposures. Insurance loss recoverable as of September 30, 2017 increased compared with December 31, 2016 primarily as a result of increases in expected recoveries related to claims paid on certain Puerto Rico exposures.Included in our U.S. public finance loss and LAE reserves are both reserves for insured obligations for estimated future claims payments, which includes insured credits where a payment default has occurred and National has already paid a claim and insured credits where a payment default has not yet occurred. As of September 30, 2017 and December 31, 2016, loss and LAE reserves comprised the following: Number of Issues(1) Loss and LAE Reserve Par Outstanding September 30,
2017 December 31,
2016 September 30,
2017 December 31,
2016 September 30,
2017 December 31,
2016 7 5 $ 327 $ 75 $ 2,657 $ 1,519 4 6 21 22 782 1,446 11 11 $ 348 $ 97 $ 3,439 $ 2,965 (1) -An “issue” represents the aggregate of financial guarantee policies that share the same revenue source for purposes of making debt service payments on the insured debt.ninesix months ended SeptemberJune 30, 20172019 and 20162018 are presented in the following table: Three Months Ended September 30, Percent
Change Nine Months Ended September 30, Percent
Change 2017 2016 2017 2016 $ 14 $ 15 -7% $ 54 $ 46 17% $ 10 $ 12 -17% $ 28 $ 36 -22% 14 15 -7% 53 45 18% $ 24 $ 27 -11% $ 81 $ 81 -% $ $ $ $ $ $ $ $ $ $ $ $ Gross expenses decreased for the three months ended September 30, 2017 compared with the same period of 2016 due to a decrease in compensation expense from the headcount reduction in the second quarter of 2017. Gross expenses increased for the nine months ended September 30, 2017 compared with the same period of 2016 primarily due to severance related expenses associated with the headcount reduction.three and ninesix months ended SeptemberJune 30, 20172019 compared with the same periodsperiod of 20162018 due to highera decrease in refunding activity in 2016.the current year. When an insured obligation refunds, we accelerate 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 the first nine monthshalf of 20172019 or 2016.Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)RESULTS OF OPERATIONS (continued)NON-GAAP OPERATING INCOME (LOSS) In addition to the above results, we also analyze the operating performance of our U.S. public finance insurance segment using operating income (loss), anon-GAAP measure. We believe operating income (loss), as used by management, is useful for an understanding of the results of operations of the Company. Operating income (loss) is not a substitute for net income (loss) determined in accordance with GAAP, and our definition of operating income (loss) may differ from that used by other companies.The following table presents a reconciliation of GAAP net income (loss) to operating income (loss) for the three and nine months ended September 30, 2017 and 2016: Three Months Ended September 30, Nine Months Ended September 30, 2017 2016 2017 2016 $ (106) $ 44 $ (156) $ 135 2 - 6 - - 31 14 61 (71) - (84) - 24 (11) 22 (21) $ (61) $ 24 $ (114) $ 95 (1) -Gross amounts are reported within “Net gains (losses) on financial instruments at fair value and foreign exchange” on the Company’s consolidated statements of operations.(2) -Reported within “Provision (benefit) for income taxes” on the Company’s consolidated statements of operations.ratingrating(s) of the insured obligation before the benefit of itsNational’s insurance policy from nationally recognized rating agencies, Moody’s Investor Services (“Moody’s”) and Standard & Poor’s Financial Services LLC (“S&P.&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.SeptemberJune 30, 20172019 and December 31, 2016.2018. 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 ratings.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 September 30, 2017 December 31, 2016 Amount % Amount % $ 3,615 4.4% $ 5,167 4.7% 33,140 40.3% 49,466 44.8% 27,854 33.9% 34,544 31.3% 11,431 14.0% 15,120 13.7% 6,105 7.4% 6,070 5.5% $ 82,145 100.0% $ 110,367 100.0% $ $ $ $ SeptemberJune 30, 2017. Gross Par
Outstanding Gross Par
Outstanding
Plus CAB
Accreted
Interest Debt
Service
Outstanding National
Internal
Rating $ 1,151 $ 1,151 $ 1,636 d 647 663 850 d 190 190 276 d 528 528 968 d 30 30 42 d 684 1,132 4,170 d 68 69 98 d 82 82 119 d 25 25 33 a3 $ 3,405 $ 3,870 $ 8,192
Outstanding
Outstanding
Plus CABs
Accreted
Interest
Service
Outstanding
Internal
Rating $ $ $ $ $ $ (1) - Includes CABs that reflect the gross par amount at the time of issuance of the insurance policy. (2) - Additionally secured by the guarantee of the Commonwealth of Puerto Rico. On September 20, 2017, Hurricane Maria made landfall in Puerto Rico as a Category 4 hurricane resulting in catastrophic damage to much of the island’s basic infrastructure, including its electrical transmission and distribution grid, telecommunications network, housing, roads, bridges, water and sewer systems. On September 21, 2017, the President of the United States approved a Major Disaster Declaration for Puerto Rico and FEMA made federal disaster assistance available to Puerto Rico to supplement its recovery efforts. Most residents of Puerto Rico continue to lack access to basic necessities such as clean water, food and health care. The lack of passable roads and compromised infrastructure has complicated recovery efforts. Given the significant physical barriers to assistance, the Department of Defense has taken over much of the initial search, rescue and restoration effort. The U.S. Army Corps of Engineers has taken the lead in the effort to rebuild the Island’s infrastructure, in cooperation with FEMA and Puerto Rico. Damage estimates vary widely, but a preliminary report from Moody’s Analytics places the upper bound of the range at $95 billion. This estimate includes lost economic activity and physical damage to infrastructure. Given the numerous estimates of physical damage and the extent of insurance coverage, uninsured damages are not reasonably estimable at this time. On October 12, 2017, the House of Representatives passed legislation providing $36.5 billion in emergency disaster assistance for areas of the U.S. impacted by recent hurricanes and wildfires including California, Texas, Louisiana, Florida, Puerto Rico and the U.S. Virgin Islands. This amount includes $4.9 billion in community disaster loans which will be, in part, made available to Puerto Rico. Under the Stafford Act, the legislation that directs federal emergency disaster response, that portion of the $4.9 billion made available to Puerto Rico may be directed to activities that directly mitigate the impacts of the disaster. The measure was approved by the U.S. Senate and has been signed by the President of the United States. Refer to the following “PREPA” section below for further information about Hurricane Maria’s impact to Puerto Rico.In February of 2017, the Governor of Puerto Rico submitted his long-term fiscal plan to the Oversight Board, which closed the baseline budget deficit from the prior administration’s plan by $11.5 billion. The Governor also outlined fiscal measures that were expected to reduce the financing gap by $32.7 billion, and create a 10 year cash flow surplus of $11.6 billion, excluding the benefit of additional Medicaid funding under the Affordable Care Act (“ACA”).Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)RESULTS OF OPERATIONS (continued)On March 13, 2017, the Oversight Board approved the Governor’s revised long-term fiscal plan, which decreased the 10 year cumulative cash flow by $3.85 billion from $11.6 billion to $7.8 billion(pre-ACA funding and debt service). The certified plan identified fiscal cliffs from an absence of ACA funding, the assumed loss of Act 154 excise taxes, and pension contributions under current law and both suggested similar solutions, including tax reform, improved tax compliance, centralized procurement, headcount reductions, and the extension of the Act 154 excise tax for a period of time. As part of Act3-2017 passed by the new administration, the Act 154 excise tax was extended until December 31, 2027. Additionally, on April 28, 2017, the Oversight Board certified four instrumentality fiscal plans, including fiscal plans for PREPA and PRHTA, subject to certain requested amendments. At its October 31, 2017 meeting, the Oversight Board granted Puerto Rico, covered under PROMESA, additional time to revise their financial recovery plans to account for the damage suffered in Hurricane Maria. Puerto Rico and PREPA must submit their updated fiscal plans to the Oversight Board by December 22, 2017. The University of Puerto Rico and PRHTA must submit their revised fiscal plans to the Oversight Board by February 9, 2018. The Oversight Board intends to certify or recommend additional changes to these revised fiscal plans during the first quarter of 2018. Following the filing of this petition by the Oversight Board, National, together with Assured and Assured Guaranty Municipal Corp., filed an adversary complaint in the Title III case alleging that the fiscal plan and the Fiscal Plan Compliance Act, as discussed below, violate PROMESA and the United States Constitution. Under a separate petition, the Oversight Board also commenced a Title III case for COFINA on May 5, 2017. Subsequently, the Oversight Board also certified and filed voluntary petitions under Title III of PROMESA for several other municipalities, including PRHTA and PREPA on May 21, 2017 and July 2, 2017, respectively.PursuantPROMESA,dismiss the Title III cases were filed inproceedings as unconstitutional. In its decision, the First Circuit agreed with appellants that the process PROMESA provides for the appointment of Board member is unconstitutional under the U.S. District CourtConstitution’s Appointments Clause. Notwithstanding that holding, the First Circuit affirmed Judge Swain’s denial of appellants’ motions to dismiss the Title III petitions, concluding that the Board’s constitutional infirmity did not alter or impair the validity of the Board’s past acts, and stayed its mandate for Puerto Rico,90 days to allow the President and the court hasSenate to validate the currently defective appointments or reconstitute the Board in accordance with the Appointments Clause. directingdenying the cases to be jointly administered for procedural purposes. The Oversight Board and creditors met forBoard’s request but extended the first time in court in Maystay of 2017 in San Juan before the judge presiding over the cases to begin addressing the nearly $70 billion of debt amassed by Puerto Rico and its instrumentalities. Given the unprecedented legal disputes and the complexity of the issues expected, the judge has designated five federal judges to act as mediators in all of the Title III cases and the University of Puerto Rico which, at this time, has indicated a desire to pursue a Title VI resolution. These judges will attempt to facilitate voluntary mediation discussions.As a result of prior defaults, various stays and Title III cases, National paid gross claims in the aggregate amount of $91 million, $24 million and $173 million against GO bonds, PBA bonds and PRHTA bonds, relating to debt service due onmandate 60 days until July 1, 2017, January 1, 2017 and July 1, 2016, respectively. In addition, National paid claims in the aggregate amount of $127 million against PREPA bonds relating to debt service due on July 1, 2017, following the expiration of the Restructuring Support Agreement (“RSA”), as further discussed below, on15, 2019. On June 29, 2017.In light of the impact of Hurricane Maria on Puerto Rico, and the resulting inevitable need for Puerto Rico and18, 2019, the Oversight Board to overhaul the Fiscal Plan, on October 6, 2017, National, Assured and Assured Guaranty Municipal Corp. filed a voluntary notice of dismissal, without prejudice, of their adversary complaint regarding the Fiscal Plan and Fiscal Plan Compliance Act. Also, on October 13, 2017, National, together with the other plaintiffs in the filing, voluntarily dismissed without prejudice the adversary complaint filed on August 7, 2017 which sought to compel PREPA to deposit revenues with the bond trustee as required by the terms of the PREPA Trust Agreements, PROMESA and the U.S. Constitution.COFINAIn October of 2016, a group of GO bondholders, which had previously initiated litigation against Puerto Rico in July of 2016, moved to amend its complaint to add a challenge to Puerto Rico’s putative diversion of funds to the Puerto Rico Sales Tax Financing Corporation (“COFINA”). The plaintiff group contends that the funds being used to pay bonds issued by COFINA constitute “available resources” within the meaning of article VI, section 8 of the Puerto Rico Constitution, and therefore must be devoted to payment of principal and interest on Puerto Rico’s public debt before they may be used for other purposes. By failing to redirect such funds to pay GO bondholders, the plaintiff group claims that Puerto Rico is improperly diverting funds to COFINA bondholders. After being granted leave to amend, the plaintiffs filed their Second Amended Complaint in November of 2016. In February of 2017, the District Court held that the COFINA-related claims were not stayed under PROMESA, and further allowed the Oversight Board and several COFINA creditors to intervene in the litigation. Several parties appealed, and on April 4, 2017,motion asking the First Circuit reversedto stay the district court, holding thatissuance of its mandate pending the COFINA-related claims were an attemptSupreme Court’s disposition of multiple certification petitions appealing the February 15 decision. On June 20, 2019, the Supreme Court granted the certification petitions. On July 2, 2019, the First Circuit granted the Oversight Board’s motion to exercise control over alleged Puerto Rico property and therefore stayed under PROMESA. This matter is subject tostay the court ordered mediation.Following alleged eventsdefault,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 $756 million relating to general obligation (“GO”) bonds, PBA bonds, PREPA bonds and PRHTA bonds through June 30, 2019. Subsequently, on July 1, 2019, Puerto Rico also defaulted on scheduled debt service for National insured bonds and National paid gross claims in the aggregate of $328 million. Inclusive of the July 1, 2019 claims and the commutation payment related to the COFINA Plan of Adjustment, National has paid total gross claims in the aggregate amount of approximately $1.1 billion related to Puerto Rico., executed the PSA, indicating that they will not support any plan of adjustment that impairs pensions for retirees. National insures onlythe Oversight Board provided COFINA’s Trustee, Bank of New York, with conflicting instructions regarding the application of funds held by the trustee. In addition, certain creditors have sued Bank of New York, for alleged breach of fiduciary duties in connection with the application of funds held by the trustee upon an event of default. As a result, Bank of New York filed an interpleader motion with the court overseeing COFINA’s Title III case, seeking relief from any potential liability brought by creditors and direction from the court as to control and application of approximately $760 million of funds held by the trustee as of October 1, 2017. National has intervened in this matter. Given the complexity of the issues, the judge granted Bank of New York’s interpleader request upon ordering a freeze on disbursements to all bondholders and temporarily setting aside the funds until the dispute can be resolved between the parties. Under a scheduling order, discovery is underway and motions for summary judgment and opening briefs were due on November 6, 2017.On August 10, 2017, the judge entered a stipulated order establishing procedures to govern resolution of certain disputes between Puerto Rico and COFINA (the “Commonwealth-COFINA Dispute”). In recognition of the fact that the Oversight Board acts for both Puerto Rico and COFINA, the Court appointed the official Unsecured Creditors Committee to serve as Puerto Rico’s representative to litigate and/or settle the Commonwealth-COFINA Dispute on behalf of Puerto Rico (the “Commonwealth Agent”) and a managing director of Alvarez & Marsal, LLC, to serve as the COFINA representative to litigate and/or settle the Commonwealth-COFINA Dispute on behalf of COFINA (the “COFINA Agent”). The Commonwealth Agent filed an adversary complaint on September 8, 2017. On September 15, 2017, the COFINA Agent filed an Answernot party to the Complaint and asserted eight counterclaims for declaratory judgment regarding the enforceabilityPSA.PREPA sustained heavy damageits infrastructuredisallow the PBA’s administrative rent claims against the Commonwealth. The PBA bonds are payable from the two Septemberrent the Commonwealth pays under its lease agreements with the PBA. The Oversight Board alleges that the Commonwealth has no obligation to make rent payments under section 365(d)(3) of the Bankruptcy Code and that the PBA is not entitled to a priority administrative expense claim under the leases. On April 16, 2019, Judge Swain entered an order setting a discovery schedule. In anticipation of a Plan Support Agreement in the Commonwealth Title III proceeding, the Oversight Board filed a motion to stay the PBA adversary proceeding on June 27, 2019. Judge Swain has stayed all pending deadlines in the PBA proceeding pending resolution of the Oversight Board’s motion.hurricanes and in particular from Hurricane Maria. ItsPREPA entered Title III restructuring on July 2, 2017.located along the coast sustained only minor damage but damage to theand concessionaire agreement for transmission and distribution infrastructureassets. Many important details remain under development. In October of 2018, the Commonwealth issued a request for qualifications seeking to identify qualified potential concessionaires. Four respondents were selected to participate in a confidential request for proposal process with a stated goal of selecting a preferred proposal by the end of 2019; the progress regarding the sale of generating assets is less clear. Separately the Puerto Rican Senate passed legislation in December 2018 to establish the regulatory and legislative framework to govern such an arrangement; that the Puerto Rican House approved the bill in March of 2019 and it was extensive; some estimates suggest more than 85%enacted into law in April 2019.needcontinue to harm, all of its stakeholders, including creditors and the people of Puerto Rico. Movants write that a Receiver is necessary to ensure that PREPA is managed in the best interests of all of its constituents.rebuilt. Powerissued in two tranches (the “Securitization Bonds”). In addition, beginning on August 30, 2019, holders of bonds that are subject to the RSA will receive monthly settlement payments funded by a settlement charge to be included on customer bills (the “Settlement Payments”) until the effective date of a plan of adjustment for PREPA. The Settlement Payments are subject to increase if a plan of adjustment is still out across muchnot confirmed before March 31, 2021. The RSA provides that supporting parties will receive an administrative claim equal to interest accrued on certain of the island, particularlysecuritization bonds, less the amount of any Settlement Payments made on account of such bonds, which administrative claim shall survive termination of the RSA. Additionally, pursuant to the RSA, supporting creditors will also receive certain fees and expense reimbursements. The RSA contemplates the filing of a plan of adjustment for PREPA by March 31, 2020.rural inland areas. LackTitle III Court that, if successful, would prevent National from prosecuting the Receiver Motion. Pursuant to the RSA, the Oversight Board filed a 9019 motion with the Title III court in May 2019 seeking approval of powerthe RSA (the “Settlement Motion”) and a Motion to Dismiss the Receiver Motion (together, the “Motions”). The RSA requires the Ad Hoc Group to support, and Assured not to oppose, the Motion to Dismiss. The RSA further states that the hearing for approval of the Settlement Motion is contingent on receiving no later than two business days prior to such hearing the support of holders or insurers representing a minimum of 60% in aggregate principal amount of all legacy bonds. Approximately 72% of PREPA’s bondholders have already joined the deal. That number will reach over 74% if Syncora Guarantee Inc., who has aknock-on effect of disabling telecommunication and water systems as well. Restoration efforts are being coordinatedagreed in principal to join the RSA, formally signs on. The Title III Court denied the expedited treatment sought by the U.S. Army CorpsOversight Board and has scheduled a hearing on the Motions for October 3, 2019. The Receiver Motion has also been stayed until the Court rules on the Motions.Engineersthe liens arising under contract with FEMA; monies from FEMA are expected to finance the reconstruction effort. upon the expiration of the PROMESA stay, the Oversight Board commenced a Title III case for PRHTA. On June 3, 2017, National, together with Assured and Assured Guaranty Municipal Corp., filed an adversary proceeding in the PRHTA’s Title III case. The complaint seeksseeking to enforce the special revenue protections of the Bankruptcy Code which are incorporated into PROMESA. These provisions ensure, among other things, that (i) current tax and toll revenues remain subject to liens and (ii) the automatic stay resulting from a filing of a Title III petition does not stay or limit application of these pledged special revenues to the repayment of PRHTA debt. PRHTA’sOn January 30, 2018, the court granted motions to dismiss the adversary proceeding. The plaintiffs appealed this decision to the United States Court of Appeals for the First Circuit and oral argument was held on November 5, 2018 in San Juan, Puerto Rico. On March 26, 2019, the First Circuit held that the special revenue provision of Chapter 9, incorporated into Title III, permit, but do not require, continued payment of special revenues by a debtor during the pendency of bankruptcy judge is set to hear creditors’ argumentsproceedings. The Court further held that consensual prepetition liens on these special revenue protections on November 21, 2017revenues will remain in San Juan.Additionally, on June 20, 2017, AAFAF informed Bankplace after the filing of New York, as fiscal agent forthe bankruptcy petition, but agreed with the district court that the provision “does not mandate the turnover of special revenues or require continuity of payments of the PRHTA bonds, that due toBonds during the pendency of the Title III case,proceeding.” Appellants have submitted a motion seeking review of this opinion by the funds infull First Circuit panel, and will determine within the debt service reserve account in AAFAF’s view were not property90 days of this decision whether to file a writ of certiorari for hearing before the United States Supreme Court. On July 31, 2019, the First Circuit denied the request for full panel review, which will permit the movants to file a writ of certiorari requesting a Supreme Court review of the bondholdersFirst Circuit’s ruling.that BankAnalysis of New York should not disburse these funds to bondholders forFinancial Condition and Results of Operations (continued)JulyOversight Board and the Committee filed a lien avoidance adversary complaint against fiscal agents, holders, and insurers of certain PRHTA bonds, including National. The complaint challenges the extent and enforceability of certain security interests in PRHTA’s revenues. The Court has stayed the proceedings until September 1, 2017. The parties agreed that such funds would be held2019. This adversary proceeding was subsequently stayed by order of the BankTitle II Court until November 30, 2019 pending the outcome of New York and disbursement of such funds would be addressed in the pending adversary proceeding.Inc.,Inc, S&P, Fitch Ratings and/or Moody’s have downgraded the ratings of all Puerto Rico issuers to below investment grade with a negative outlook due to narrowing liquidity, sluggishongoing economic growthpressures, which will weigh on Puerto Rico’s ability to meet debt and persistent structural deficits. Additionally, subsequentother funding obligations, potentially driving bondholder recovery rates lower as restructuring the island’s debt burden unfolds.declarationaccreditation agency. Subsequently, the Commission announced at its meeting on June 27, 2019, that it removed all 11 institutions of a state of emergencythe University from show cause and suspension of debt service payments byreaffirmed the then Governor of Puerto Rico, S&P revised its ratingUniversity’s accreditation following compliance with the Commission’s standards for Puerto Rico, its GO, PREPAaccreditation and PRHTA’s subordinated transportation revenue bonds, series 1998, state infrastructure bank, to “D” (default). On June 6, 2017, S&P further downgraded COFINA from “CC” to “D” based on court motions that directed the trustee to withhold scheduled monthly payments until property interest disputes have been resolved.Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)RESULTS OF OPERATIONS (continued)tablestable presents our scheduled gross debt service due on our Puerto Rico insured exposures for the threesix months ending December 31, 2017 and2019, for each of the subsequent four years ending December 31 and thereafter: Three Months
Ending
December 31,
2017 2018 2019 2020 2021 Thereafter Total $ - $ 120 $ 177 $ 115 $ 140 $ 1,084 $ 1,636 - 96 154 223 82 295 850 - 17 24 10 25 200 276 - 33 27 27 27 854 968 - 5 1 1 2 33 42 - - - - - 4,170 4,170 - 5 16 16 4 57 98 1 7 7 7 7 90 119 2 3 3 3 3 19 33 $ 3 $ 286 $ 409 $ 402 $ 290 $ 6,802 $ 8,192 Six Months
Ending
December 31,
2019 2020 2021 2022 2023 Thereafter Total Puerto Rico Electric Power Authority (PREPA) $ 150 $ 115 $ 140 $ 140 $ 137 $ 807 $ 1,489 Puerto Rico Commonwealth GO 137 223 82 19 14 262 737 Puerto Rico Public Buildings Authority (PBA) 20 10 24 9 26 163 252 Puerto Rico Highway and Transportation Authority Transportation Revenue (PRHTA) 13 26 27 27 36 793 922 Puerto Rico Highway and Transportation Authority - Subordinated Transportation Revenue (PRHTA) 1 1 1 9 1 24 37 Puerto Rico Sales Tax Financing Corporation (COFINA) - - - - - 2,493 2,493 Puerto Rico Highway and Transportation Authority Highway Revenue (PRHTA) 15 16 3 2 4 51 91 University of Puerto Rico System Revenue 4 7 7 6 12 73 109 Inter American University of Puerto Rico Inc. 2 3 3 3 3 14 28 Total $ 342 $ 401 $ 287 $ 215 $ 233 $ 4,680 $ 6,158 general support services to MBIA Inc.’s subsidiaries as well asand asset and capital management. General supportSupport services are provided by our service company, MBIA Services, and include, among others, management, legal, accounting, treasury, information technology, and insurance portfolio surveillance, on aGFLMBIA Global Funding, LLC (“GFL”) and MBIA Investment Management Corp. (“IMC”). MBIA Inc. issued debt to finance the operations of the MBIA group. GFL raised funds through the issuance of medium-term notes (“MTNs”) with varying maturities, which were in turn guaranteed by MBIA Corp. GFL lent the proceeds of these MTN issuances to MBIA Inc. IMC, along with 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 thesenew MTNs and investment agreements and the outstanding liability balances and corresponding asset balances have declined over time as liabilities mature, terminatematured, terminated or arewere called or repurchased. All of the debt within the corporate segment is managed collectively and is serviced by available liquidity.ninesix months ended SeptemberJune 30, 20172019 and 2016: Three Months Ended September 30, Percent Nine Months Ended September 30, Percent 2017 2016 Change 2017 2016 Change $ 9 $ 10 -10% $ 28 $ 25 12% 13 11 18% 41 35 17% (15) (2) n/m (54) (105) -49% - - -% - (1) -100% 1 - n/m 9 5 80% (1) (2) -50% (3) (4) -25% 7 17 -59% 21 (45) -147% 14 17 -18% 48 54 -11% 22 23 -4% 66 70 -6% 36 40 -10% 114 124 -8% (29) (23) 26% (93) (169) -45% (1) (8) -88% 1,069 (50) n/m $ (28) $ (15) 87% $ (1,162) $ (119) n/m $ $ $ $ $ $ $ $ Item 2. Management’s DiscussionAnalysissix months ended June 30, 2019 compared with the same periods of Financial Condition and Results2018 were due to increases in fees paid by our U.S. public finance segment as a result of Operations (continued)RESULTS OF OPERATIONS (continued)changechanges in net gains (losses) on financial instruments at fair value and foreign exchange for the three and six months ended SeptemberJune 30, 20172019 compared with the same periodperiods of 2016 was2018 were primarily due to fair value losses on our interest rate swaps. These fair value losses resulted from the impact of decreases in interest rates during the first half of 2019 on interest rate swaps for which we receive floating rates, compared with fair value gains due to increases in interest rates during the first half of 2018. In addition, during the second quarter of 2019, there were foreign exchange losses on Euro denominated liabilitiesEuro-denominated MTNs from the weakening of the U.S. dollar duringversus foreign exchange gains in the thirdsecond quarter of 2017 and a decrease in gains frommark-to-market changes of our interest rate swaps, partially offset by favorable changes in the fair value of the outstanding warrants issued on MBIA Inc. common stock. The changes in the fair value of outstanding warrants were primarily attributable to a decrease in the price of MBIA Inc.’s common stock and changes in volatility, which are used in the valuation of the warrants. The favorable change in net gains (losses) on financial instruments at fair value and foreign exchange for the nine months ended September 30, 2017 compared with the same period of 2016 was primarily due to gains frommark-to-market changes of our interest rate swaps and favorable changes in the fair value of the outstanding warrants issued on MBIA Inc. common stock due to a decrease in the price of MBIA Inc. common stock and changes in volatility, partially offset by higher foreign exchange losses on Euro denominated liabilities2018 from the weakeningstrengthening of the U.S. dollar during the first nine months of 2017.decreasedincreased for the three and ninesix months ended SeptemberJune 30, 20172019 compared with the same periods of 20162018 primarily due to decreasesincreases in compensation expense.PROVISION (BENEFIT) FOR INCOME TAXES The provision for income taxes forexpense as a result of the nine months ended September 30, 2017 was lower than the statutory ratetransfer of 35% primarily dueemployees from our U.S. public finance insurance segment and additional restricted stock expense. Higher operating expenses related to the establishmenttransfer of a full valuation allowance against the Company’s net deferred tax asset. Refer to the following “Taxes” section and “Note 10: Income Taxes”employees also resulted in the Notes to Consolidated Financial Statements for further information about this valuation allowance on our net deferred tax asset.NON-GAAP OPERATING INCOME (LOSS) In addition to the above results, we also analyze the operating performance ofhigher fees revenue in our corporate segment using operating income (loss), anon-GAAP measure. We believe operating income (loss), as used by management, is useful for an understanding of the results of operations of the Company. Operating income (loss) is not a substitute for net income (loss) determined in accordance with GAAP, andservices were recharged to our definition of operating income (loss) may differ from that used by other companies.The following table presents a reconciliation of GAAP net income (loss) to operating income (loss) for the three and nine months ended September 30, 2017 and 2016: Three Months Ended September 30, Nine Months Ended September 30, 2017 2016 2017 2016 $ (28) $ (15) $ (1,162) $ (119) 11 10 23 (50) (18) (6) (57) (24) (1) 1 - (10) - - - (1) 1 - 9 5 (1) (2) (3) (4) 1 1 (1,069) 24 $ (21) $ (19) $ (65) $ (59) (1) - Gross amounts are reported within “Net gains (losses) on financial instruments at fair value and foreign exchange” on the Company’s consolidated statements of operations.(2) - Reported within “Provision (benefit) for income taxes” on the Company’s consolidated statements of operations.business is principally operatedportfolios are 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. Effective on January 10, 2017, MBIA Corp.’s wholly-owned subsidiary, MBIA UK Holdings, sold MBIA UK to Assured.Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)RESULTS OF OPERATIONS (continued)We no longer insure new credit derivative contracts except for transactions related to the restructuring or reduction of existing derivative exposure. MBIA Insurance Corporation insures the investment contractsagreements written by MBIA Inc., and if MBIA Inc. or such subsidiaries 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 insured debt obligations of other affiliates, including GFL, IMC and IMC.MZMexico. On September 28, 2017, Mexico S.A. de C.V. (“MBIA Inc., on behalfMexico”).2017.we believeof MBIA Corp. does’s capital structure and business prospects, we do not provide significant economic or shareholder valueexpect its financial performance to have a material impact on MBIA Inc. and its shareholders.Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)RESULTS OF OPERATIONS (continued)ninesix months ended SeptemberJune 30, 20172019 and 2016: Three Months Ended September 30, Percent Nine Months Ended September 30, Percent 2017 2016 Change 2017 2016 Change $ 11 $ 23 -52% $ 33 $ 66 -50% 1 3 -67% 19 9 111% 9 34 -74% 33 57 -42% (7) (4) 75% (41) (20) 105% 6 20 -70% (10) - n/m (1) 16 -106% (51) (20) n/m 2 9 -78% (21) 23 n/m 1 - n/m 40 1 n/m 8 5 60% 20 25 -20% 21 8 n/m 2 - n/m - - -% 28 - n/m 52 98 -47% 103 161 -36% 64 22 n/m 159 103 54% 10 15 -33% 32 42 -24% 7 13 -46% 23 35 -34% 31 29 7% 90 86 5% 3 3 -% 8 10 -20% 20 4 n/m 59 20 n/m 135 86 57% 371 296 25% (83) 12 n/m (268) (135) 99% 1 7 -86% 1,143 (48) n/m $ (84) $ 5 n/m $ (1,411) $ (87) n/m n/m- Percent change not meaningful. Net premiums earned $ 6 $ 21 -71% $ 13 $ 31 -58% Net investment income 2 2 -% 4 3 33% Fees and reimbursements 5 4 25% 9 18 -50% Change in fair value of insured derivatives: Realized gains (losses) and other settlements on insured derivatives (1) (25) -96% (1) (44) -98% Unrealized gains (losses) on insured derivatives - 18 -100% 14 32 -56% Net change in fair value of insured derivatives (1) (7) -86% 13 (12) n/m Net gains (losses) on financial instruments at fair value and foreign exchange (10) 3 n/m (10) (4) 150% Other net realized gains (losses) 1 - n/m 2 1 100% Revenues of consolidated VIEs: Net investment income 10 8 25% 20 16 25% Net gains (losses) on financial instruments at fair value and foreign exchange (3) 13 -123% (13) 17 n/m Other net realized gains (losses) (16) (93) -83% (16) (93) -83% Total revenues (6) (49) -88% 22 (23) n/m Losses and loss adjustment 34 - n/m 46 (5) n/m Amortization of deferred acquisition costs 4 7 -43% 9 15 -40% Operating 6 6 -% 13 11 18% Interest 34 33 3% 67 64 5% Expenses of consolidated VIEs: Operating 1 3 -67% 4 5 -20% Interest 24 23 4% 48 44 9% Total expenses 103 72 43% 187 134 40% Income (loss) before income taxes $ (109) $ (121) -10% $ (165) $ (157) SeptemberJune 30, 2017,2019, MBIA Corp.’s total insured gross par outstanding was $16.7$10.8 billion. Since December 31, 2007, MBIA Corp.’s total insured gross par outstanding has decreased approximately 95% from $331.2 billion.On January 20, 2017, MBIA Corp. was presented with and fully satisfied a claim of $770 million (the “Zohar II Claim”) on an insurance policy it had written insuring certain notes issued by Zohar II. In order to satisfy the claim, MBIA Corp. used approximately $60 million from its own resources and executed the following two related transactions: 1) MBIA UK Holdings sold its operating subsidiary, MBIA UK, and made a cash payment of $23 million, to Assured, in exchange for the receipt by MBIA UK Holdings of certain Zohar II notes owned by Assured, which had an aggregate outstanding principal amount of $347 million as of January 10, 2017, which notes were distributed as a dividend to MBIA Corp. upon consummation of the sale of MBIA UK; and 2) MBIA Corp. consummated a financing facility (the “Facility”) with affiliates of certain holders of 14%Fixed-to-Floating Rate Surplus Notes of MBIA Corp. (collectively, the “Senior Lenders”), and with MBIA Inc., pursuant to which the Senior Lenders provided $325 million of senior financing and MBIA Inc. provided $38 million of subordinated financing to MZ Funding LLC (“MZ Funding”), a newly formed wholly-owned subsidiary of the Company, which in turn lent the proceeds of such financing to MBIA Corp. Refer to “Liquidity” for additional information on the Facility.Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)RESULTS OF OPERATIONS (continued)ninesix months ended SeptemberJune 30, 20172019 and 2016: Three Months Ended September 30, Percent Nine Months Ended September 30, Percent 2017 2016 Change 2017 2016 Change $ 3 $ 5 -40% $ 8 $ 12 -33% 8 18 -56% 25 54 -54% $ 11 $ 23 -52% $ 33 $ 66 -50% $ 2 $ 2 -% $ 6 $ 5 20% Net premiums earned: U.S. $ 1 $ 2 -50% $ 3 $ 5 -40% Non-U.S. 5 19 -74% 10 26 -62% Total net premiums earned $ 6 $ 21 -71% $ 13 $ 31 -58% VIEs (eliminated in consolidation) $ 2 $ 2 -% $ 3 $ 3 -% ninesix months ended SeptemberJune 30, 20172019 compared with the same periods of 20162018 primarily due to the acceleration of premium earnings in 2018 related to the termination of a policy and overall decreases in scheduled premiums earned due to the sale of MBIA UK on January 10, 2017 andpremium earnings in 2019 from the maturity and early settlements of other insured transactions with no writings of new insurance policies.NET INVESTMENT INCOME The increase in net investment income for the nine months ended September 30, 2017 compared with the same period of 2016 was primarily related to the accretion on certain Zohar II notes received in exchange for the sale of MBIA UK to Assured on January 10, 2017.FEES AND REIMBURSEMENTS The decreases in fees and reimbursements for the three and nine months ended September 30, 2017 compared with the same periods of 2016 were primarily due to decreases in termination and waiver and consent fees related to the ongoing management of our international and structured finance insurance business and ceding commission income as a result of lower refunding activity. Due to the transaction-specific nature inherent in fees and reimbursements, these revenues can vary significantly from period to period.scheduled amortizations.amortization. For the three and ninesix months ended SeptemberJune 30, 20172019 and 2016,2018, realized losses on insured derivatives primarily resulted from claim payments on a commercial mortgage-backed security (“CMBS”). securities exposure.threesix months ended SeptemberJune 30, 2017,2019, unrealized gains on insured derivatives were principally due to favorable changes in spreads/prices on the underlying collateral andreversal of unrealized losses resulting from gross par amortization, partially offset by unfavorable changes in the market’s perceptionestimated value of MBIA Corp.’s nonperformance risk on its derivative liabilities .the remaining underlying collateral. For the three and six months ended SeptemberJune 30, 2016,2018, unrealized gains on insured derivatives were principally the result of the reversal of unrealized losses from the termination of a CDS, improved spreads on our underlying collateral and unfavorable changes in the market’s perception of MBIA Corp.’s nonperformance risk on its derivative liabilities. For the nine months ended September 30, 2017, unrealized losses were principally the result ofpar amortization, partially offset by the effects of favorable changes in the market’s perception of MBIA Corp.’s nonperformance risk on its derivative liabilities partially offset by the reversal of unrealized losses from a termination of a CDS and favorable changes in spreads/prices on the underlying collateral. For the nine months ended September 30, 2016, unrealized losses were principally the result of the effects of favorable changes in the market’s perception of MBIA Corp.’s nonperformance risk on its derivative liabilities partially offset by improved spreads on our underlying collateral and shorter transaction life. liabilities.SeptemberJune 30, 20172019 and December 31, 2016,2018, the fair value of MBIA Corp.’s insured CDS liability was $74$18 million and $63$33 million, respectively. As of SeptemberJune 30, 2017,2019, MBIA Corp. had $252$52 million of gross par outstanding on an insured credit derivativesderivative compared with $588$70 million as of December 31, 2016.ninethree and six months ended SeptemberJune 30, 20172019 were primarily related to unfavorablemark-to-market fluctuations on financial instruments.derivatives. The net gains on financial instruments at fair value and foreign exchange for the ninethree months ended SeptemberJune 30, 20162018 were primarily related to gains from foreign currency revaluationrevaluations of loss reserves on Mexican denominated policies as a result of the strengthening of the U.S. dollar. The net losses on financial instruments and foreign exchange for the six months ended June 30, 2018 were primarily related to losses from foreign currency revaluations on Chilean Unidad de Fomento denominated premium receivables due to the strengthening of the U.S. dollar, partially offset by foreign exchange gains from the revaluation of loss reserves on Mexican and Euro denominated premium receivables.OTHER NET REALIZED GAINS (LOSSES) Other net realized gains (losses) forpolicies as a result of the nine months ended September 30, 2017 were primarily related tostrengthening of the settlement of litigation.Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)RESULTS OF OPERATIONS (continued)SeptemberJune 30, 2017,2019, total revenues of consolidated VIEs were $29losses of $9 million compared with $13losses of $72 million and $60 million for the same periodperiods of 2016. This increase was primarily due to an increase2018. The increases in certain collateral on consolidated VIEs andmark-to-market gains on RMBS from changes in credit spreads. For the nine months ended September 30, 2017, total revenues of consolidated VIEs were $50 million compared with $25 million for the same period of 2016. This increase was primarily due to a gain from the consolidation of a VIE and an increase in the value of certain collateral on consolidated VIEs, partially offset by an increase inmark-to-market losses on certain consolidated VIEs and a decrease in net investment income due to the deconsolidation of VIEs.two VIEs in the second quarter of 2018 from the Zohar Bankruptcy Settlement which resulted in a loss of $93 million. The loss resulted from the difference between the fair value of the VIE assets that were deconsolidated and our current estimate of salvage and subrogation recoveries from those VIEs under insurance accounting. We elected to record at fair value certain instruments that are consolidated under accounting guidance for consolidation of VIEs, and as such, changes in fair value are reflected in earnings.LOSSMBIA Corp.’sOur international and structured finance insured portfolio management group within our international and structured finance insurance business 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.ninesix months ended SeptemberJune 30, 20172019 and 2016: Three Months Ended September 30, Percent Nine Months Ended September 30, Percent 2017 2016 Change 2017 2016 Change $ 12 $ 19 -37% $ 106 $ 78 36% 52 3 n/m 54 26 108% 64 22 n/m 160 104 54% - - -% (1) (1) -% $ 64 $ 22 n/m $ 159 $ 103 54% $ 34 $ - 100% $ 46 $ (5) n/m (1) - For the three and nine months ended September 30, 2016, loss and LAE with respect to Zohar II are reflected net of expected recoveries on such payments.(2) - As a result of consolidation of VIEs, these amounts include the elimination of loss and LAE expense of $(18)$22 million and $25 milliona loss and LAE benefit of $11 for the three months ended SeptemberJune 30, 20172019 and 2016,2018, respectively, and $18loss and LAE expense of $36 million and $68a loss and LAE benefit of $19 million for the ninesix months ended SeptemberJune 30, 20172019 and 2016,2018, respectively.n/m -Percent change not meaningful.For the three and nine months ended September 30, 2017, losses and LAE primarily related to increases in expected payments on insured RMBS transactions and decreases in projected collections from mortgage insurance included in the Company’s excess spread within its second-lien RMBS transactions from the settlementSeptemberJune 30, 20172019 and December 31, 2016. September 30,
2017 December 31,
2016 Percent
Change $ 255 $ 330 -23% (1) 12 5 140% 485 503 -4% (15) (59) -75% (4) $ 470 $ 444 6%
2019
2018
Change Insurance loss recoverable $ 964 $ 1,024 -6% 6 5 20% Loss and LAE reserves 470 414 13% Net reserve (salvage) $ (500) $ (615) -19% (1) -The change was primarily due to a decrease in projected collections from mortgage insurance included in the Company’s excess spread within its second-lien RMBS transactions from the settlement of litigation regarding insurance coverage involving Old Republic Insurance Corporation, Bank of America, N.A. and The Bank of New York Mellon.(2)(1) -Reported within “Other assets” on our consolidated balance sheets. (3) -As of December 31, 2016, Zohar II is reflected net of expected recoveries on such reserves.(4) -The decrease was primarily related to first-lien RMBS transactions.a claimclaims totaling $919 million in November of 2015 and January of 2017 on MBIA Corp.’s policypolicies insuring the classA-1 andA-2certain notes issued by Zohar CDO2003-1, Limited (“Zohar I”)I and satisfying the Zohar II Claim entitles MBIA Corp. to reimbursement of such amounts plus interest and expenses and/or to exercise certain rights and remedies to seek recovery of such amounts. In connection with the exercise of its rights and remedies, MBIA Corp. directed the trustee for Zohar I to commence an auction (the “Auction”) of all of the assets of Zohar I, which occurred on December 21, 2016. MBIA Corp. was the winning bidder in the Auction, and in connection therewith, acquired the beneficial ownership of the Zohar I assets, which include loans made to, and equity interests in, companies purportedly controlled by the sponsor and former collateral manager of Zohar I and Zohar II. As of September 30, 2017, the recoveries of Zohar I and Zohar II are included in “Loans receivable at fair value” which are presented in “Assets of consolidated variable interest entities” on our consolidated balance sheets. Refer to “Note 5: Loss1: Business Developments and Loss Adjustment Expense Reserves”Risks and Uncertainties” in the Notes to Consolidated Financial Statements for a further discussion onadditional information regarding the estimated Zohar I and Zohar II recoveries.Included in MBIA Corp.’s loss and LAE reserves are estimated future claims payments for insured obligations for which a payment default has occurred and MBIA Corp. has already paid a claim and for insured obligations where a payment default has not yet occurred. The following table includes LAE reserves as of September 30, 2017 and December 31, 2016 for one issue that had no expected future claim payments or par outstanding, but for which MBIA Corp. was obligated to pay LAE incurred in prior periods. As of September 30, 2017 and December 31, 2016, loss and LAE reserves comprised the following: Number of Issues (1) Loss and LAE Reserve Par Outstanding September 30,
2017 December 31,
2016 September 30,
2017 December 31,
2016 September 30,
2017 December 31,
2016 111 113 $ 465 $ 366 $ 2,769 $ 3,228 1 4 5 78 9 838 112 117 $ 470 $ 444 $ 2,778 $ 4,066 (1) -An “issue” represents the aggregate of financial guarantee policies that share the same revenue source for purposes of making debt service payments on the insured debt.ninesix months ended SeptemberJune 30, 20172019 and 20162018 are presented in the following table: Three Months Ended September 30, Percent
Change Nine Months Ended September 30, Percent
Change 2017 2016 2017 2016 $ 7 $ 13 -46% $ 24 $ 36 -33% $ 10 $ 15 -33% $ 32 $ 42 -24% 7 13 -46% 23 35 -34% $ 17 $ 28 -39% $ 55 $ 77 -29% Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)RESULTS OF OPERATIONS (continued) Gross expenses $ 6 $ 6 -% $ 13 $ 11 18% Amortization of deferred acquisition costs $ 4 $ 7 -43% $ 9 $ 15 -40% Operating 6 6 -% 13 11 18% Total insurance operating expenses $ 10 $ 13 -23% $ 22 $ 26 -15% Gross expenses decreased for the three and nine months ended September 30, 2017 compared with the same periods of 2016 primarily due to decreases in compensation expense and consulting fees. Operating expenses decreased for the three and nine months ended September 30, 2017 compared with the same periods of 2016 due to decreases in gross expenses.three and ninesix months ended SeptemberJune 30, 20172019 compared with the same periodsperiod of 2016 were2018 was due to higherlower refunding activity in 2016.the current year. We did not defer a material amount of policy acquisition costs during the first nine monthshalf of 20172019 or 2016.2018. Policy acquisition costs in these periods were primarily related to ceding commissions and premium taxes on installment policies written in prior periods.INTEREST EXPENSECONSOLIDATED VIEs For the threeOPERATIONS (continued)nine months ended September 30, 2017, total interest expense of consolidated VIEs increased compared with the same periods of 2016 primarily due to interest expense from the Facility. Refer to “Liquidity” for additional information on the Facility.PROVISION (BENEFIT) FOR INCOME TAXES The provision for income taxes for the nine months ended September 30, 2017 was lower than the statutory rate of 35% primarily due to the establishment of a full valuation allowance against the Company’s net deferred tax asset. Refer to the following “Taxes” section and “Note 10: Income Taxes” in the Notes to Consolidated Financial Statements for further information about this valuation allowance on our net deferred tax asset.INSURED PORTFOLIO EXPOSURE Structured Finance Insurance Portfolio ExposuresSeptemberJune 30, 20172019 and December 31, 2016, 32%2018, 29% and 25%31%, 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.International and Structured Finance Insurance theour residential mortgage insured portfolio of our international and structured finance insurance segment. ManyIn addition, as of these sectors areJune 30, 2019, MBIA Corp. insured $338 million of CDOs and have been considered volatile over the past several years.related instruments. We may experience considerable incurred losses and future expected payments in certain of these sectors. There can be no assurance that the loss reserves described belowrecorded 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.Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)RESULTS OF OPERATIONS (continued)SeptemberJune 30, 20172019 and December 31, 2016.2018. Amounts include the gross par outstanding related to transactions that the Company consolidates under accounting guidance for VIEs. Gross Par Outstanding as of September 30,
2017 December 31,
2016 Percent
Change $ 1,056 $ 1,368 -23% 1,110 1,373 -19% 1,111 1,318 -16% 544 606 -10% 21 56 -63% $ 3,842 $ 4,721 -19% (1) - Includes international exposure of $258 million and $349 million as of September 30, 2017 and December 31, 2016, respectively.Collateralized Debt Obligations and Related InstrumentsAs part of our international and structured finance insurance activities, MBIA Corp. typically provided guarantees on senior and, in a limited number of cases, mezzanine tranches of CDOs, as well as protection on structured CMBS pools and corporate securities, and CDS referencing such securities. The following discussion, including reported amounts and percentages, includes insured CDO transactions consolidated by the Company as VIEs.As of September 30, 2017 and December 31, 2016, MBIA Corp.’s CDO portfolio represented 5% and 8%, respectively, of its total insured gross par outstanding. In addition to the below table, MBIA Corp. insures approximately $328 million in commercial real estate (“CRE”) loan pools, comprising both European and domestic assets. The distribution of our insured CDO and related instruments portfolio by collateral type is presented in the following table: Gross Par Outstanding as of September 30,
2017 December 31,
2016 Percent
Change $ 327 $ 401 -18% 369 1,635 -77% 136 188 -28% - 326 -100% $ 832 $ 2,550 -67% (1) - Excludes $41 million and $44 million as of September 30, 2017 and December 31, 2016, respectively, of gross par outstanding where MBIA’s insured exposure has been fully offset by way of loss remediation transactions.Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)RESULTS OF OPERATIONS (continued)
2019
2018
Change HELOC Second-lien $ 441 $ 511 -14% CES Second-lien 153 591 -74% 941 983 -4% Subprime First-lien 390 439 -11% Prime First-lien 13 15 -13% Total $ 1,938 $ 2,539 -24% (1) - Includes international exposure of $245 million as of June 30, 2019 and December 31, 2018. When a reinsurer is downgraded by one or more of the rating agencies, less capital credit is given to MBIA under rating agency models and the overall value of the reinsurance to MBIA is reduced. 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. The following table presents information aboutCurrently, we do not intend to use reinsurance to decrease the insured exposure in our reinsurance agreements as of September 30, 2017 for our U.S. public finance and international and structured finance insurance operations: Standard & Poor’s
Rating (Status) Moody’s Rating
(Status) Ceded Par
Outstanding Letters of
Credit/Trust
Accounts Reinsurance
Recoverable(1) AA
(Stable Outlook)
WR(2) $ 1,479 $ 27 $ 3 AA
(Stable Outlook)
A3
(Stable Outlook)
1,119 - 12 AA+ Aaa 275 - - (Stable Outlook) (Stable Outlook) A- or above A2 or above 95 3 - $ 2,968 $ 30 $ 15 (1) -Total reinsurance recoverable is primarily recoverables on unpaid losses.(2) -Represents a withdrawal of ratings.MBIA requires certain unauthorized reinsurers to maintain bank letters of credit or establish trust accounts to cover liabilities ceded to such reinsurers under reinsurance contracts. The Company remains liable on a primary basis for all reinsured risk. Based on MBIA’s assessment of the credit risk of its reinsurers and expected claims under the reinsurance agreements, MBIA believes that its reinsurers remain capable of meeting their obligations, although there can be no assurance of such in the future.SeptemberJune 30, 2017,2019, the aggregate amount of insured par outstanding ceded by MBIA to reinsurers under reinsurance agreements was $3.0$2.0 billion compared with $4.2$2.2 billion as of December 31, 2016. As of September 30, 2017, $2.4 billion of the ceded par outstanding was ceded from our U.S. public finance insurance segment and $604 million was ceded from our international and structured finance insurance segment.2018. 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.ninesix months ended SeptemberJune 30, 20172019 and 20162018 are presented in the following table: Three Months Ended September 30, Nine Months Ended September 30, 2017 2016 2017 2016 $ (273) $ 55 $ (603) $ (101) $ (6) $ 24 $ 965 $ (28) 2.2% 43.6% -160.0% 27.7% Income (loss) before income taxes $ (207) $ (146) $ (226) $ (242) Provision (benefit) for income taxes $ (37) $ - $ (39) $ 2 Effective tax rate 17.9% -% 17.3% -0.8% ninesix months ended SeptemberJune 30, 2017,2019, our effective tax rate applied to our income (loss)loss before income taxes was lower than the U.S. statutory tax rate of 35% primarily21% due to the establishment of a full valuation allowance against itson the changes in our net deferred tax asset.Item 2. Management’s Discussionasset and Analysisthe application of Financial Condition and Resultsintraperiod tax accounting. There is an offsetting expense recorded to other comprehensive income for the change in the valuation allowance.Operations (continued)RESULTS OF OPERATIONS (continued)In June of 2017, S&P downgraded the financial strength rating of National, which led the Company to cease its efforts to actively pursue writing new financial guarantee business. In addition to National’s cessation of new business activity, there was an increase in loss and LAE21% due to the full valuation allowance on the changes in assumptions on certain Puerto Rico credits. As a result of the increase in loss and LAE, the Company has a three-year cumulative loss, which is considered significant negative evidence in the assessment of its ability to use itsour net deferred tax assets. In addition,asset. Company considered all available positive and negative evidence as required by GAAP, to estimate if sufficient taxable income will be generated to use its deferred tax assets. After considering all positive and negative evidence, including the Company’s inability to objectively identify and forecast future sources of taxable income, the Company concluded that it does not have sufficient positive evidence to support its ability to use its deferred tax assets before they expire. Accordingly, the Company recorded a full valuation allowance against its net deferred tax asset of $1.2 billion in the nine months ended September 30, 2017.establishment of thefull valuation allowance on its net deferred tax asset, the Company believes that it may be able to use most or allsome of its net deferred tax asset before the expirations associated with that asset based upon expected earnings at National and potential future sources of taxable income to be identified by the Company. Accordingly, the Company will continue tore-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.For the nine months ended September 30, 2016, our effective tax rate applied to our income (loss) before income taxes was lower than the U.S. statutory rate of 35% primarily due to a foreign tax credit adjustment, partially offset by the fluctuation of the value of nontaxable warrants issued by the Company.issued by MZ Funding.(the “Facility”). Total capital resources were $3.5 billion and $4.7was $2.9 billion as of SeptemberJune 30, 20172019 and $3.0 billion as of December 31, 2016, respectively. MBIA Inc. uses its capital resources to support the business activities of its subsidiaries. As of September 30, 2017, MBIA Inc.’s investments in subsidiaries totaled $3.4 billion.WeMBIA Inc. or National may also repurchase outstanding MBIA Inc. common shares when we deem it beneficial to our shareholders. MBIA Inc. also supports the MTN and investment agreement obligations issued by the Company. We seek to maintain sufficient liquidity and capital resources to meet the Company’s general corporate needs and debt service. Based on MBIA Inc.’s debt service requirements and expected operating expenses, we expect that MBIA Inc. will have sufficient cashresources to satisfy its debt obligations and its general corporate needs over time from distributions from its operating subsidiaries; however, there can be no assurance that MBIA Inc. will have sufficient cash in the event of unanticipated payments.resources to do so. In addition, the Company may also consider raising third-party capital. For further information, referRefer to “Strategic Plan“Capital, Liquidity and Market Related and Other Risk Factors” in Part I, Item 1A of Form10-K for the year ended December 31, 20162018 and the “Liquidity—MBIA Inc.Corporate Liquidity” section included herein for additional information about MBIA Inc.’s liquidity.its subsidiariesNational may repurchase or redeem outstanding common shares of MBIA Inc. and outstanding debt obligations at prices thatwhen we deem beneficial to be economically advantageous.The Companyits subsidiaries’National’s share repurchases that were authorized under share repurchase programs for the ninesix months ended SeptemberJune 30, 20172019 and 2018 are presented in the following table: Total Number of
Shares Purchased Average Price Paid
Per Share 4.8 $ 8.31 4.2 8.30 2.7 9.48 11.7 8.58 On Number of shares repurchased 5.9 2.0 Average price paid per share $ 9.10 $ 7.25 Remaining authorization as of June 30 $ 148 $ 236 27, 2017, the Company’s Board of Directors approved a new share repurchase authorization for30, 2019, the Company or National to repurchase up to $250 milliondirected the trustee of the Company’s outstanding common shares. This new program replaced6.400% Senior Notes due 2022 to provide notice to the approximately $13 million remaining under the Board’s February 23, 2016 authorization.Subsequent to September 30, 2017 through November 3, 2017,holders that the Company repurchased an additional 31.3 million common shares of MBIA Inc. at an average share price of $7.17 and exhausted this share repurchase authorization. On November 3, 2017, the Company’s Board of Directors approved a new share repurchase authorization for the Company or Nationalintends to repurchase up to $250redeem $150 million of the Company’s outstanding common shares.Debt securitiesDuring the nine months ended September 30, 2017, we repurchased $42 millionnotes at par value outstandingin the third quarter of GFL MTNs issued by our corporate segment at a weighted average cost of approximately 82% of par value.theNew York State Department of New York.Financial Services (“NYSDFS”). MBIA Mexico is regulated by the Comisión Nacional de Seguros y Fianzas in Mexico. MBIA Corp.’s Spanish Branch is subject to local regulation in Spain. National and MBIA Insurance Corporation each are required to file detailed annual financial statements, as well as interim financial statements, with the New York State Department of Financial Services (“NYSDFS”)NYSDFS and similar supervisory agencies in each of the other jurisdictions in which it is licensed. These financial statements are prepared in accordance with New York State and the National Association of Insurance Commissioners’ statements of U.S. STAT and assist our regulators in evaluating minimum standards of solvency, including minimum capital requirements, and business conduct.reported totalhad statutory capital of $3.2$2.4 billion as of SeptemberJune 30, 2017,2019, compared with $3.5$2.5 billion as of December 31, 2016.2018. As of SeptemberJune 30, 2017,2019, statutory capital comprised $2.6$1.9 billion of policyholders’ surplus and $641$511 million of contingency reserves. For the six months ended June 30, 2019, National had a statutory net loss of $226 million for the nine months ended September 30, 2017.$52 million. As of SeptemberJune 30, 2017,2019, National’s unassigned surplus was $2.0$1.3 billion. Refer to the following “MBIA Insurance Corporation—Capital and Surplus” section for additional information about contingency reserves under .NYIL regulates the payment of dividends by financial guarantee insurance companies and provides that such companies may not declare or distribute dividends except out of statutory earned surplus. Under NYIL, the sum of (i) the amount of dividends declared or distributed during the preceding12-month period and (ii) the dividend to be declared may not exceed the lesser of (a) 10% of policyholders’ surplus, as reported in the latest statutory financial statements or (b) 100% of adjusted net investment income for such12-month period (the net investment income for such12-month period plus the excess, if any, of net investment income over dividends declared or distributed during thetwo-year period preceding such12-month period), unless the Superintendent of the NYSDFS approves a greater dividend distribution based upon a finding that the insurer will retain sufficient surplus to support its obligations.Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)CAPITAL RESOURCES (continued)SeptemberJune 30, 2017,2019, from which provides National with dividend capacity. Subsequentit may pay dividends, subject to September 30, 2017, National declared and paid a dividend of $118 million to its ultimate parent, MBIA Inc.the limitations described above. We expect theas-of-right declared and paid dividend amounts from National to be limited to prior year net investment income.SeptemberJune 30, 20172019 and December 31, 20162018 are presented in the following table: As of September 30, As of December 31, 2017 2016 $ 2,575 $ 2,731 641 745 3,216 3,476 643 786 171 187 814 973 61 (98) 407 256 468 158 $ 4,498 $ 4,607
2019
2018 Policyholders’ surplus $ 1,934 $ 1,998 Contingency reserves 511 522 Statutory capital 2,445 2,520 Unearned premiums 459 496 147 150 606 646 170 71 626 607 Gross loss and LAE reserves 796 678 Total claims-paying resources $ 3,847 $ 3,844 3.18%3.67% as of SeptemberJune 30, 20172019 and December 31, 2016.reported totalhad statutory capital of $473$499 million as of SeptemberJune 30, 20172019 compared with $492$555 million as of December 31, 2016.2018. As of SeptemberJune 30, 2017,2019, statutory capital comprised $252$301 million of policyholders’ surplus and $221 million of contingency reserves. As of December 31, 2016, statutory capital comprised $238 million of policyholders’ surplus and $254$198 million of contingency reserves. For the ninesix months ended SeptemberJune 30, 2017,2019, MBIA Insurance Corporation had a statutory net incomeloss of $129$42 million. MBIA Insurance Corporation’s policyholders’ surplus included negative unassigned surplus of $1.8$1.7 billion as of SeptemberJune 30, 2017 and December 31, 2016.2019. MBIA Insurance Corporation’s policyholders’ surplus may be further negatively impacted if future additional insured losses are incurred.December 31, 2016, MBIA Insurance Corporation’s policyholders’ surplus was negatively impacted by $112 million, as it was not permitted to treat the portion of its investment in subsidiaries in excess of 60% of net admitted assets less the par value of common and preferred stock and liabilities as an admitted asset, as required under NYIL.The $112 million reduction to policyholders’ surplus was reversed in 2017 to reflect the sale of MBIA UK. In addition, in 2017, MBIA Insurance Corporation released contingency reserves of approximately $20 million related to the maturity of the Zohar II notes, as well as, recorded income of $20 million related to the appreciation to the par value of certain Zohar II notes received as consideration. Therefore, in 2017, MBIA Insurance Corporation’s policyholders’ surplus increased approximately $152 million as a result of these transactions.Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)CAPITAL RESOURCES (continued)As of SeptemberJune 30, 2017,2019, MBIA Insurance Corporation recognized estimated recoveries of $407 million, net of reinsurance on a statutory basis related toput-backs of ineligible mortgage loans in its insured transactions and $288 million related to put-back claims against Credit Suisse, excess spread recoveries on RMBS net of reinsurance. These excess spread recoveries represented 61% of MBIA Insurance Corporation’s statutory capital as of September 30, 2017. In addition, MBIA Insurance Corporation has recordedand recoveries related to CDOs. There can be no assurance that we will be successful or that we will not be delayed in realizing these recoveries. Refer to “Note 5: Loss and Loss Adjustment Expense Reserves” in the Notes to Consolidated Financial Statements for additional information about these recoveries. also required to establish a contingency reserve to provide protection to policyholders in the event of extreme losses in adverse economic events. The amount of the reserve is based on the percentage of principal insured or premiums earned, depending on the type of obligation (net of collateral, reinsurance, refunding, refinancings and certain insured securities). Reductions in the contingency reserve may be recognized based on excess reserves and under certain stipulated conditions, subject to the approval of the Superintendent of the NYSDFS. As a result of regulatory approved reductions, MBIA Insurance Corporation’s contingency reserves of $221$198 million as of SeptemberJune 30, 20172019 represented reserves on 3226 of the 262197 outstanding credits insured by MBIA Insurance Corporation.SeptemberJune 30, 2017,2019, MBIA Corp. met the required minimum surplus of $65 million.requirement. Under NYIL, MBIA Insurance Corporation is required to invest its minimum surplus and contingency reserves and 50% of its loss reserves and unearned premium reserves in certain qualifying assets. As of SeptemberJune 30, 2017,2019, MBIA Insurance Corporation maintained its minimum requirement of policyholders’ surplus but did not have enough qualifying assets to support its contingency reserves and 50% of its loss reserves and unearned premium reserves. As of SeptemberJune 30, 2017,2019, MBIA Insurance Corporation was in compliance with its aggregate risk limits under the NYIL, but was not in compliance with certain of its single risk limits. Under NYIL, MBIA Insurance Corporation is required to maintain admitted assets greater than the aggregate amount of liabilities and outstanding capital stock. As of September 30, 2017, MBIA Insurance Corporation’s admitted assets did not exceed the aggregate amount of its liabilities and outstanding capital stock. If MBIA Insurance Corporation isdoes not in compliancecomply with the above mentioned requirements, the NYSDFS may prevent MBIA Insurance Corporation from transacting any new financial guarantee insurance business until it no longer exceeds the limitations.negative earned surplus deficit, MBIA Insurance Corporation has not had the statutory capacity to pay dividends since December 31, 2009. Based on estimated future income, MBIA Insurance Corporation is not expected to have any statutory capacity to pay any dividends.OctoberJuly 15, 2017,2019, the most recent scheduled interest payment date, there was $600$824 million of unpaid interest on the par amount outstanding of $953 million of the Surplus Notes. Under Section 1307 of the NYIL and the Fiscal Agency Agreement governing the surplus notes, Surplus Note payments may be made only with the prior approval by the NYSDFS and if MBIA Insurance Corporation has sufficient “Eligible Surplus”, or as we believe, “free and divisible surplus” as an appropriate calculation of “Eligible Surplus.” As of SeptemberJune 30, 2017,2019, MBIA Insurance Corporation had negative “free and divisible surplus,”surplus” of $38$283 million. There is no assurance the NYSDFS will approve Surplus Note payments, notwithstanding the sufficiency of MBIA Insurance Corporation’s liquidity and financial condition. The unpaid interest on the Surplus Notes will become due on the first business day on or after which MBIA Insurance Corporation obtains approval to pay some or all of such unpaid interest. No interest has been accrued or will accrue on the deferred interest. For additional information of the Company’s Surplus Notes, refer to “Capital Resources- MBIA Insurance Corporation” in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the Company’s Annual Report on Form10-K for the year ended December 31, 2016.Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)CAPITAL RESOURCES (continued)SeptemberJune 30, 20172019 and December 31, 20162018 are presented in the following table: As of September 30, As of December 31, 2017 2016 $ 252 $ 238 221 254 473 492 213 319 201 424 414 743 (864) (207) 1,498 917 634 710 $ 1,521 $ 1,945
2019
2018 Policyholders’ surplus $ 301 $ 356 Contingency reserves 198 199 Statutory capital 499 555 Unearned premiums 105 109 127 139 232 248 (778) (865) 1,370 1,402 Gross loss and LAE reserves 592 537 Total claims-paying resources $ 1,323 $ 1,340 5.15%5.17% as of SeptemberJune 30, 20172019 and December 31, 2016.put-backs and CDOs. daily 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. The following is a discussion of our liquidity resources and requirements for our holding company and our insurance subsidiaries.portfolio;portfolio, including proceeds from the sale of assets;funding shareinvestment portfolio asset purchases;SeptemberJune 30, 20172019 and December 31, 2016,2018, National held cash and investments of $3.9$3.3 billion and $4.2$3.2 billion, respectively, of which $426$834 million and $366$488 million, respectively, were highly liquidcash and cash equivalents or short-term investments comprised of highly rated commercial paper, money market funds and municipal, U.S. agency and corporate bonds.fact that the U.S. public finance insurance segment’s financial guarantee contracts generally cannot be accelerated by a party other than the insurer which helps to mitigate liquidity risk in this segment.subsidiaries;National;releasesagreement, which are funded by subsidiaries;agreement;principal and interest receipts on assets held in its investment portfolio; andaccess to capital markets.The primary uses of cash by MBIA Inc. are:servicing outstanding unsecured corporate debt obligations and MTNs;meeting collateral requirements under investment agreements and derivative arrangements;payments related to interest rate swaps;payments of operating expenses; andfunding share repurchases and debt buybacks.As of September 30, 2017 and December 31, 2016, the liquidity positions of MBIA Inc. comprising cash and liquid assets for general corporate purposes, excluding the amounts held in escrow under its tax sharing agreement, were $294 million and $403 million, respectively.ninesix months ended SeptemberJune 30, 2017, $942019, $91 million was released from the Tax Escrow Account to MBIA Inc. under the MBIA group tax sharing agreement and, of which $56 million was in cash, related tax escrow account (“Tax Escrow Account”), representing National’s liability under the tax sharing agreementto deposits made by National for the 20142016 tax year. Also, $5 million was returned to National as a result of capital losses incurred in 2018 that can be carried back to prior years. The release wasreleases were pursuant to the terms of the tax sharing agreement following the expiration of National’stwo-year NOL carry-back period under U.S. tax rules. AsIn addition to releases or returns following the expiration of September 30, 2017, $259 million had been deposited for the 2015 through 2017 tax years. UpNational’s two-year NOL carry-back period, from time to $130 million may be releasedtime, MBIA Inc. is permitted to withdraw assets from the Tax Escrow Account related toif the 2015 tax yearaggregate market value of all assets held in 2018, subject to the terms and provisions of the Company’s tax sharing agreement. National’s 2017 financial results will determine how much, if any, of its $130 million 2015 tax payment will be refunded to National. For the nine months ended September 30, 2017, National recorded an income tax benefit of $62 million, on a statutory accounting basis. Included in the $259 million Tax Escrow Account balance is $22 million that National paid for its estimated 2017 income taxes. This amount was refunded to National inexceeds the fourth quarter of 2017 as a result of National’s 2017 estimated financial results.required minimum balance. There can be no assurance that any future payments under the Tax Escrow Account from subsidiaries will be released to MBIA Inc. due to deductible or creditable tax attributes of those subsidiaries and/or the market value performance of the assets supporting the Tax Escrow Account.dividends and tax sharing agreement payments to MBIA Inc. Subsequent to September 30, 2017, National declared and paid a dividend of $118 million to its ultimate parent, MBIA Inc. There can be no assurance as to the amount and timing of any such future dividends or payments from the tax escrow account under the tax sharing agreement. Also, absent a special dividend subject to the approval of the NYSDFS, we expect the declared and paid dividend amounts from National to be limited to the prior yeartwelve months of net investment income.income as reported in its most recent statutory filing. Refer to the “Capital Resources – Insurance Statutory Capital” section for additional information on payments of dividends. We do not expect MBIA Inc. to receive distributions from MBIA Corp.On November 1, 2017, National purchased $129 million par value of MBIA Inc.’s 5.700% Senior Notes due 2034 atcost of approximately 99% of par value plus accrued interest. These notes had been previously repurchased by MBIA Inc. and had not been retired. This transaction increased MBIA Inc.’s liquidity position by a total of $130 million and had no impact to the Company’s consolidated outstanding debt obligations.Currently, the majoritysignificant portion of the cash and securities ofheld by MBIA Inc. is pledged against investment agreement liabilities, the Asset Swap (simultaneous repurchase and reverse repurchase agreements)agreement) and derivatives, which limits its ability to raise liquidity through asset sales. IfAs the market value or rating eligibility of the assets which are pledged against MBIA Inc.’s obligations were to decline,declines, we would beare required to pledge additional eligible assets in order to meet minimum required collateral amounts against these liabilities. To mitigate these risks, we seek to maintain cash and liquidity resources that we believe will be sufficient to make all payments due on our obligations and to meet other financial requirements, such as posting collateral. Contingent liquidity resources include: (1) sales of invested assets exposed to credit spread stress risk, which may occur at losses; (2) termination and settlement of interest rate swap agreements; and (3) accessing the capital markets. These actions, if taken, are expected to result in either additional liquidity or reduced exposure to adverse credit spread movements. There can be no assurance that these actions will be sufficient to fully mitigate this risk.recoveries associated with loss payments; andportfolio.portfolio, including the proceeds from the sale of assets.Item 2. Management’s DiscussionAnalysis of Financial Condition and Results of Operations (continued)LIQUIDITY (continued)lossLAE or commutation payments on insured transactions;expenses; andexpenses.payment of principal and interest related to its surplus notes, if and to the extent approved by the NYSDFS. Refer to “Capital Resources–Insurance Statutory Capital” for a discussion on thenon-approval of requests to the NYSDFS to pay interest on its surplus notes.SeptemberJune 30, 20172019 and December 31, 2016,2018, MBIA Corp. held cash and investments of $217$239 million and $328$242 million, respectively, of which $93$135 million and $201$145 million, respectively, comprisedwere cash and highlycash equivalents or liquid assetsinvestments comprised of money market funds and municipal, U.S. agency and corporate bonds that were immediately available to MBIA Insurance Corporation.While our financial guarantee policies generally cannot be accelerated, thereby helping to mitigate liquidity risk, insurance of CDS and certain other derivative contracts may, in certain circumstances, including the occurrence of certain insolvency or payment defaults, be subject to termination by the counterparty, triggering a claim for the fair value of the contract. In order to monitor liquidity risk and maintain appropriate liquidity resources, we use the same methodology as we use to monitor credit quality and losses within our insured portfolio, including stress scenarios. Refer to “Note 5: Loss and Loss Adjustment Expense Reserves” in the Notes to Consolidated Financial Statements for a discussion of our loss process. recorded expected excess spread recoveries of $319$178 million, as of September 30, 2017 associated with insured RMBS issues, including recoveries related to consolidated VIEs. MBIA Corp. has also recorded expected recoveriesrecovery amounts related to its claims against Credit Suisse for ineligible mortgage loans included in an MBIA Corp. insured RMBS transaction. In addition, MBIA Insurance Corporation has recordedand recoveries related to CDOs. There can be no assurance that itwe will be successful or not be delayed in realizing these recoveries.ninesix months ended SeptemberJune 30, 2017,2019, MBIA Corp. collectedrequested and was granted permission by the NYSDFS to prepay approximately $74 million of excess spread recoveries related to insured RMBS issues.2017,$278 million. In addition, MBIA Inc. received amended subordinated notes issued by MZ Funding (the “Insured Subordinated Notes” and together with the Insured Senior Notes, the “New MZ Funding Notes”) with an aggregate principal amount of $54 million (with the New MZ Funding Notes replacing the Original MZ Funding Notes). The New MZ Funding Notes mature on January 20, 2022 and bear interest at 12% per annum, payable quarterly in arrears. Interest on the New MZ Funding Notes are payable in cash, but may be payable in kind at the option of MBIA Corp.; however, proceeds of, or recoveries on, the collateral and the cash sweep amount (referred to below) must be used to pay interest or principal in cash.Facility, withloans thereunder, the Senior Lenders, and with MBIA Inc.“MBIA Loans”), pursuant to which the Senior Lenders provided $325 million of senior financing and MBIA Inc. provided $38 million of subordinated financing to MZ Funding which in turn lent the proceeds of such financingthe New MZ Funding Notes to MBIA Corp. MBIA Inc. also committed to provide an additional $50 million subordinated financing torefinance the Original Credit Agreement. The maturity date of the New Credit Agreement and the New MZ Funding Notes is January 20, 2022. The MBIA Corp. Policies unconditionally and irrevocably guarantee the timely payment of all principal and interest payments under certain circumstances, whichthe New MZ Funding would then lendNotes, which obligations are pari passu with the other insurance policy obligations of MBIA Corp., replacing the policies that had been issued on the Original MZ Funding Notes. The MBIA Corp. Policies are held for the benefit of all holders of the New MZ Funding Notes, the benefit of which is automatically transferred without any restriction to any new holder when such New MZ Funding Notes are transferred. For a further discussion7, “Management’s2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the Company’s Annual Report on Form10-K for the year ended December 31, 2016.ninesix months ended SeptemberJune 30, 20172019 and 2016: Nine Months Ended September 30, Percent
Change 2017 2016 $ (673) $ (128) n/m 826 2,236 -63% (204) (2,413) -92% - (1) -100% 187 522 -64% $ 136 $ 216 -37% n/m -Percent change not meaningful.Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)LIQUIDITY (continued)
Change Statement of cash flow data: Net cash provided (used) by: Operating activities $ (57) $ (126) -55% Investing activities 683 351 95% Financing activities (428) (174) 146% Cash and cash equivalents—beginning of period 280 146 92% Cash and cash equivalents—end of period $ 478 $ 197 143% increaseddecreased for the ninesix months ended SeptemberJune 30, 20172019 compared with the same period of 20162018 primarily due to an increase in lossesproceeds from recoveries and LAEreinsurance of $59 million and a decrease in insured derivative commutations and losses paid of $420$43 million, andpartially offset by a decrease in investment income received of $56$21 million.decreasedincreased for the ninesix months ended SeptemberJune 30, 20172019 compared with the same period of 20162018 primarily due to a decreaseincreases in net proceeds from sales paydowns and maturities ofheld-to-maturity AFS securities of $617 million and sales of investments at fair value of $131 million, partially offset by increases in purchases of AFS securities of $252 million and short-term investments of consolidated VIEs of $1.8 billion.decreasedincreased for the ninesix months ended SeptemberJune 30, 20172019 compared with the same period of 20162018 primarily due to a decreaseincreases in the principal paydowns of consolidated VIE notes of $1.8 billion related to the deconsolidation$201 million and in purchases of VIEs in 2016 and proceeds received from the Facility in 2017.available-for-sale (“AFS”) AFS investments comprise high-quality fixed-income securities and short-term investments. Refer to “Note 7: Investments” in the Notes to Consolidated Financial Statements for detailed discussion about our investments.SeptemberJune 30, 20172019 and December 31, 2016. As of December 31, 2016, AFS investments with a fair value of $466 million reported under “Assets held for sale” within our international and structured finance segment are excluded due to the sale of MBIA UK in January of 2017. As of September 30,
2017 As of December 31,
2016 Percent Change $ 3,646 $ 3,975 -8% (28) (63) -56% 3,618 3,912 -8% 968 1,218 -21% 53 39 36% 1,021 1,257 -19% 160 257 -38% 8 5 60% 168 262 -36% 4,774 5,450 -12% 33 (19) n/m 4,807 5,431 -11% 138 120 15% 79 79 -% 217 199 9% 2 3 -33% $ 5,026 $ 5,633 -11% U.S. public finance insurance: Amortized cost $ 2,273 $ 2,704 -16% Unrealized net gain (loss) 63 (64) n/m Fair value 2,336 2,640 -12% Corporate: Amortized cost 844 921 -8% Unrealized net gain (loss) 60 24 150% Fair value 904 945 -4% International and structured finance insurance: Amortized cost 209 192 9% Unrealized net gain (loss) 10 4 150% Fair value 219 196 12% Total available-for-sale investments: Amortized cost 3,326 3,817 -13% Unrealized net gain (loss) 133 (36) n/m Total available-for-sale investments at fair value 3,459 3,781 -9% U.S. public finance insurance 299 198 51% Corporate 66 73 -10% International and structured finance insurance - 19 -100% Total investments carried at fair value 365 290 26% Other investments at amortized cost: U.S. public finance insurance - 1 -100% Corporate 1 - n/m Total other investments at amortized cost 1 1 -% Consolidated investments at carrying value $ 3,825 $ 4,072 -6% (1) - Unrealized gains and losses, net of applicable deferred income taxes, are reflected in AOCIaccumulated other comprehensive income in shareholders’ equity.(2) - Changes in fair value and realized gains and losses from the sale of these investments are reflected in net income. n/m - Percent change not meaningful. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)LIQUIDITY (continued)SeptemberJune 30, 2017,2019, the weighted average credit quality ratings and percentage of investment grade of the Company’s AFS fixed-maturity investment portfolios, excluding short-term investments, are presented in the following table: U.S. Public
Finance
Insurance Corporate International
and Structured
Finance
Insurance Total Aa Aa Aa Aa 95% 98% 89% 96% Weighted average credit quality ratings Aa Aa Aa Aa Investment grade percentage 90% 100% 91% 93% SeptemberJune 30, 2017,2019, Insured Investments at fair value represented $473$201 million or 9%5% of consolidated investments, of which $321$177 million or 6%5% of consolidated investments were Company-Insured Investments. As of SeptemberJune 30, 2017,2019, based on the actual or estimated underlying ratings of our consolidated investment portfolio, without giving effect to financial guarantees, the weighted average rating of only the Insured Investments in the investment portfolio would be in the Baa range. Without giving effect to the National and MBIA Corp. guarantees of the Company-Insured Investments in the consolidated investment portfolio, as of SeptemberJune 30, 2017,2019, based on actual or estimated underlying ratings, the weighted average rating of the consolidated investment portfolio was in the Aa range. The weighted average rating of only the Company-Insured Investments was in the below investment gradeBaa range, and investments rated below investment grade in the Company-Insured Investments were 5%3% of the total consolidated investment portfolio.Item 2. Management’s Discussion and AnalysisFinancial Condition and Results of Operations (continued)LIQUIDITY (continued)Contractual ObligationsThe followingthe Company’s contractual obligations, discussion provides an update and should be read in conjunctionrefer to the contractual obligations described under “Liquidity-Contractual Obligations” in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the Company’s Annual Report on Form10-K for the year ended December 31, 2016.JanuaryJuly of 2017,2019, MBIA Corp. consummated the Facility with the Senior Lenders and with MBIA Inc., pursuant to which the Senior Lenders have provided $325 million of senior financing and MBIA Inc. has provided $38 million of subordinated financing to MZ Funding, which in turn lent the proceeds of such financing to MBIA Corp. The loans to MBIA Corp. under the Facility mature on January 20, 2020 and bear interest at 14% per annum.Refinanced Facility. Refer to the previous “Liquidity-MBIA“MBIA Corp. Liquidity” section above for additional information abouton the Refinanced Facility. The following table provides the Company’s future estimated cash payments relating to the Facility for the three months endingThere were no other material changes in contractual obligations since December 31, 2017 and each2018.liabilities and certain derivative instruments.liabilities. The Company’s investments are primarily U.S. dollar-denominated fixed-income securities including municipal bonds, U.S. government bonds, corporate bonds, MBS and asset-backed securities. In periods of rising and/or volatile interest rates, foreign exchange rates and credit spreads, profitability could be adversely affected should the Company have to liquidate these securities. MBIAThe Company minimizes its exposure to interest rate risk, foreign exchange risk and credit spread movement through active portfolio management to ensure a proper mix of the types of securities held and to stagger the maturities of its fixed-income securities. The following tables present updates in our market risk relating to interest rates and credit spreads. There were no material changes in market risk since December 31, 2018 related to foreign exchange rates. For a discussion of our quantitative and qualitative disclosures about market risk related to foreign exchange rates, refer to Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” included in the Company’s Annual Report on Form10-K for the year ended December 31, 2016. There were no material2018. Estimated change in fair value $ 186 $ 104 $ 44 $ (33) $ (57) $ (75) market risk since December 31, 2016. Estimated change in fair value $ 14 $ (15) $ (59) management, including the Chief Executive Officer and the Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were not effective because of a material weakness in internal control over financial reporting related to the process used to estimate its loss reserves and recoveries for residential mortgage-backed securities insured by MBIA Insurance Corporation that was disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. Management did not identify a material misstatement within its consolidated financial statements in this or any prior filed Quarterly Report on Form 10-Q or Annual Report on Form 10-K as a result of the material weakness.period covered by this report. In addition,remediation described above, there have not been anywere no changes in the Company’s internal control over financial reporting (as such term is defined in Rules13a-15(f) and15d-15(f) under the Securities Exchange Act of 1934) during the fiscal quarter to which this report relates that have materially affected, or are likely to materiallymaterial affect, the Company’s internal control over financial reporting.2016.On May 21, 2017, upon the expiration of the PROMESA stay,Subsequently, the Oversight Board commenced aalso certified and filed voluntary petitions under Title III proceedingof PROMESA for several municipalities, including the Puerto Rico Highway and Transportation Authority (“PRHTA”). On July 2, 2017, the Oversight Board commenced a Title III proceeding for and the Puerto Rico Electric Power Authority (“PREPA”). While National has entered into a consensual mediation process with the Oversight Board on May 21, 2017 and Puerto Rico at the request ofJuly 2, 2017, respectively. On February 4, 2019, the District Court there can be no assurance that National will be able to avoid anon-consensual outcome which could result in unanticipated losses to National which could be material.Thewhich made landfall in Puerto Rico on September 20, 2017, will likely also impact its ability to both repay its legacy indebtedness and participateaided in ongoing debt restructuring negotiations. The physical damage and resultant lost economic activity may exceed the collective aid Puerto Rico receives from private insurance, relief from thepart by Federal Emergency Management Agency and other federal agenciesagencies. The extent and programs. Economic activity in Puerto Rico may not return to pre-hurricane levels and Puerto Rico’s recovery could be more shallow and protracted than that experienced by other similarly affected governments given, Puerto Rico’s prior constrained liquidity and economic activity. While the federal government has made aid available to Puerto Rico, there can be no assurance thatduration of such aid will continue in the amounts necessary to offset the adverse impacts from Hurricane Maria in their entirety. In addition,is inherently uncertain, and the necessary and greater involvement of the federal government, through its actions to deliver disaster relief and other support services, in addition to the evolving role of the Oversight Board and the role of Puerto Rico in its own recovery, heightens political risk in connection with the restructuring of legacy debt. This risk could lead the Oversight Board, Puerto Rico or the federal government to seek to extract greater concessions from creditors based on the uncertainty of Puerto Rico’s long term recovery prospects. In this event, losses at National on select Puerto Rico exposures could increase materially. Refer to “U.S. Public Finance Insurance Puerto Rico Exposures” in Management’s Discussion and Analysis of Financial Condition and Results of Operations for further information on Hurricane Maria’s impact on Puerto Rico.SeptemberJune 30, 2017,2019, National had $3.4$3.0 billion of gross insured par outstanding ($3.93.3 billion of gross insured par outstanding when including accreted interest on insured capital appreciation bonds) related to Puerto Rico. Puerto Rico may be unable or unwilling to pay their obligations as and when due, in which case National would be required to pay claims of unpaid principal and interest when due under its insurance policies, which could be material. On January 1, 20172019 and July 1, 2017,2019, Puerto Rico defaulted on scheduled debt service for certain National insured bonds and National paid gross claims in the aggregate of $242$393 million as a result. While National will seek to recover any claim payments it makes under its guarantees, there is no assurance that it will be able to recover such payments. To the extent that its claims payments are ultimately substantially greater than its claims recoveries, National would experience losses on those obligations, which could materially and adversely affect our business, financial condition and results of operations.Strategic Plan Related and Other Risk FactorsThe Company is dependent on key executives and the loss of any of these executives, or its inability to retain other key personnel, could adversely affect its business.The Company’s success substantially depends upon its ability to attract and retain qualified employees and upon the ability of its senior management and other key employees to implement its business strategy. The Company believes there are only a limited number of available qualified executives in the business lines in which the Company competes. The Company relies substantially upon the services of William C. Fallon, Chief Executive Officer, and other senior executives. There is no assurance that the Company will be able to retain the services of key executives. While the Company has a succession plan for key executives and does not expect the departure of any key executives to have a material adverse effect on its operations, there can be no assurance that the loss of the services of any of these individuals or other key members of the Company’s management team would not adversely affect the implementation of its business strategy.February 23, 2016, the Company’s Board of Directors authorized the repurchase by the Company and its subsidiaries of up to $100 million of its outstanding shares under a new share repurchase authorization. During the nine months ended September 30, 2017, we repurchased 9 million common shares of MBIA Inc. at an average share price of $8.31 under the February 23, 2016 repurchase program.On June 27,November 3, 2017, the Company’s Board of Directors authorized the repurchase by the Company or National of up to $250 million of its outstanding common shares. Thisshares under a new program replaced the approximately $13 million remaining under the Board’s February 23, 2016share repurchase authorization. Any repurchases by National under the new repurchase authorization will be subject to any required approvals. During the ninesix months ended SeptemberJune 30, 2017, the Company2019, we repurchased 2.75.9 million common shares of MBIA Inc. at an average share price of $9.48$9.10 under the June 27, 2017 share repurchase authorization.Item 2. Unregistered Sales of Equity Securities and Use of Proceeds (continued)Subsequent to September 30, 2017 through November 3, 2017 the Company repurchased an additional 31.3 million common shares of MBIA Inc. at an average share price of $7.17 and exhausted this share repurchase authorization. On November 3, 2017, the Company’s Board of Directors approved a new share repurchase authorization for the Company or National to repurchase up to $250 million of the Company’s outstanding common shares. program.thirdsecond quarter of 2017: Total
Number of
Shares
Purchased (1) Average
Price
Paid Per
Share Total Number
of Shares
Purchased as
Part of Publicly
Announced Plan Maximum
Amount That May
Be Purchased
Under the Plan
(in millions) 100,109 $ 9.79 - $ 250 498,351 9.98 466,097 245 2,210,895 9.38 2,210,170 225 2,809,355 $ 9.50 2,676,267 $ 225 $ $ $ $ (1) - 131,084117 shares in April, 124 shares in May and 121 shares in June were repurchased by the Company in open market transactions for settling awards under the Company’s long-term incentive plans and 2,004 shares were purchased in open market transactions as investments in the Company’s31.1. 31.2. 32.1. 32.2. 101. SeptemberJune 30, 20172019 and December 31, 2016,2018; (ii) the Consolidated Statements of Operations for the three and ninesix months ended SeptemberJune 30, 20172019 and 2016,2018; (iii) the Consolidated Statements of Comprehensive Income (Loss) for the three and ninesix months ended SeptemberJune 30, 20172019 and 2016,2018; (iv) the Consolidated Statements of Changes in Shareholders’ Equity for the ninethree and six months ended SeptemberJune 30, 2017,2019 and 2018; (v) the Consolidated Statements of Cash Flows for the ninesix months ended SeptemberJune 30, 20172019 and 20162018 and (vi) the Notes to Consolidated Financial Statements.* Incorporated by reference to MBIA Inc.’s Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on July 10, 2019. ** Filed herewith. *** Furnished herewith. Date: November 7, 2017August 6, 2019 Anthony McKiernan Chief Financial Officer Date: November 7, 2017August 6, 2019 Joseph R. Schachinger Controller (Principal(Chief Accounting Officer)94