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Fair Value Of Financial Instruments
 9 Months Ended
Sep. 30, 2014
Text Block [Abstract]  
Fair Value Measurement

Note 6: Fair Value of Financial Instruments

Fair Value Measurement

Fair value is a market-based measure considered from the perspective of a market participant. Therefore, even when market assumptions are not readily available, the Company’s own assumptions are set to reflect those which it believes market participants would use in pricing an asset or liability at the measurement date. The fair value measurement of financial instruments held or issued by the Company are determined through the use of observable market data when available. Market data is obtained from a variety of third-party sources, including dealer quotes. If dealer quotes are not available for an instrument that is infrequently traded, the Company uses alternate valuation methods, including either dealer quotes for similar instruments or modeling using market data inputs. The use of alternate valuation methods generally requires considerable judgment in the application of estimates and assumptions and changes to such estimates and assumptions may produce materially different fair values.

The accounting guidance for fair value measurement establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available and reliable. Observable inputs are those the Company believes that market participants would use in pricing an asset or liability based on available market data. Unobservable inputs are those that reflect the Company’s beliefs about the assumptions market participants would use in pricing an asset or liability based on available information. The fair value hierarchy is categorized into three levels based on the observability and reliability of inputs, as follows:

  • Level 1—Valuations based on quoted prices in active markets for identical assets or liabilities that the Company can access. Valuations are based on quoted prices that are readily and regularly available in an active market, with significant trading volumes.
  • Level 2—Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly. Level 2 assets include debt securities with quoted prices that are traded less frequently than exchange-traded instruments, securities which are priced using observable inputs and derivative contracts whose values are determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data.
  • Level 3—Valuations based on inputs that are unobservable and supported by little or no market activity and that are significant to the overall fair value measurement. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques where significant inputs are unobservable, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

The availability of observable inputs can vary from product to product and period to period and is affected by a wide variety of factors, including, for example, the type of product, whether the product is new and not yet established in the marketplace, and other characteristics particular to the product. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the Company assigns the level in the fair value hierarchy for which the fair value measurement in its entirety falls, based on the least observable input that is significant to the fair value measurement.

Financial Assets (excluding derivative assets)

Financial assets, excluding derivative assets, held by the Company primarily consist of investments in debt securities. Substantially all of the Company’s investments are priced by independent third parties, including pricing services and brokers. Typically, the Company receives one pricing service value or broker quote for each instrument, which represents a non-binding indication of value. The Company reviews the assumptions, inputs and methodologies used by pricing services and brokers to obtain reasonable assurance that the prices used in its valuations reflect fair value. When the Company believes a third-party quotation differs significantly from its internally developed expectation of fair value, whether higher or lower, the Company reviews its data or assumptions with the provider. This review includes comparing significant assumptions such as prepayment speeds, default ratios, forward yield curves, credit spreads and other significant quantitative inputs to internal assumptions, and working with the price provider to reconcile the differences. The price provider may subsequently provide an updated price. In the event that the price provider does not update its price, and the Company still does not agree with the price provided, the Company will obtain a price from another third-party provider, such as a broker, or use an internally developed price which it believes represents the fair value of the investment. The fair values of investments for which internal prices were used were not significant to the aggregate fair value of the Company’s investment portfolio as of September 30, 2014 or December 31, 2013. All challenges to third-party prices are reviewed by staff of the Company with relevant expertise to ensure reasonableness of assumptions.

Financial Liabilities (excluding derivative liabilities)

Financial liabilities, excluding derivative liabilities, issued by the Company primarily consist of investment agreements and Medium-term notes (“MTNs”) within its wind-down operations, debt issued for general corporate purposes, debt in VIEs and warrants. Investment agreements, MTNs, and corporate debt are typically recorded at face value adjusted for premiums or discounts. 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.

Derivative Liabilities

The Company’s derivative liabilities are primarily insured credit derivatives that reference structured pools of cash securities and CDSs. The Company generally insured the most senior liabilities of such transactions, and at the inception of transactions its exposure generally had more subordination than needed to achieve triple-A ratings from credit rating agencies. The types of collateral underlying its insured derivatives consist of cash securities and CDSs referencing primarily corporate obligations, ABS, RMBS, CMBS, CRE loans, and CDOs.

The Company’s insured credit derivative contracts are non-traded structured credit derivative transactions. Since insured derivatives are highly customized and there is generally no observable market for these derivatives, the Company estimates their fair values in a hypothetical market based on internal and third-party models simulating what a similar company would charge to assume the Company’s position in the transaction at the measurement date. This pricing would be based on the expected loss of the exposure. 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. If live market spreads or securities prices are observable for similar transactions, those spreads are an integral part of the analysis. New insured transactions that resemble existing (previously insured) transactions, if any, would be considered, as well as negotiated settlements of existing transactions.

The Company may from time to time make changes in its valuation techniques if the change results in a measurement that it believes is equally or more representative of fair value under current circumstances.

Internal Review Process

All significant financial assets and liabilities are reviewed by committees created by the Company to ensure compliance with the Company’s policies and risk procedures in the development of fair values of financial assets and liabilities. These valuation committees review, among other things, key assumptions used for internally developed prices, significant changes in sources and uses of inputs, including changes in model approaches, and any adjustments from third-party inputs or prices to internally developed inputs or prices. The committees also review any significant impairment or improvements in fair values of the financial instruments from prior periods. From time to time, these committees will consult with the Company’s valuation experts to better understand key methods and assumptions used for the determination of fair value, including understanding significant changes in fair values. These committees are comprised of senior finance team members with the relevant experience in the financial instruments their committee is responsible for. For each quarter, these committees document their agreement with the fair values developed by management of the Company as reported in the quarterly and annual financial statements.

Valuation Techniques

Valuation techniques for financial instruments measured at fair value or disclosed at fair value are described below.

Fixed-Maturity Securities (including short-term investments) Held as Available-For-Sale, Investments Carried at Fair Value, Investments Pledged as Collateral, Investments Held-to-Maturity, and Other Investments

These investments include investments in U.S. Treasury and government agencies, state and municipal bonds, foreign governments, corporate obligations, mortgage-backed securities (“MBS”), ABS, money market securities, and perpetual debt and equity securities.

These investments are generally valued based on recently executed transaction prices or quoted market prices. When quoted market prices are not available, fair value is generally determined using quoted prices of similar investments or a valuation model based on observable and unobservable inputs. Inputs vary depending on the type of investment. Observable inputs include contractual cash flows, interest rate yield curves, CDS spreads, prepayment and volatility scores, diversity scores, cross-currency basis index spreads, and credit spreads for structures similar to the financial instrument in terms of issuer, maturity and seniority. Unobservable inputs include cash flow projections and the value of any credit enhancement.

The fair value of the held-to-maturity (“HTM”) investments is determined using discounted cash flow models. Key inputs include unobservable cash flows projected over the expected term of the investment discounted using observable interest rate yield curves of similar securities.

Investments based on quoted market prices of identical investments in active markets are classified as Level 1 of the fair value hierarchy. Level 1 investments generally consist of U.S. Treasury and government agency, foreign government and money market investments. 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.

Cash and Cash Equivalents, Receivable for Investments Sold, Net Cash Collateral Pledged to Swap Counterparties, Payable for Investments Purchased, Payable for Loans Purchased and Accrued Investment Income

The carrying amounts of cash and cash equivalents, receivable for investments sold, net cash collateral pledged to swap counterparties, payable for investments purchased, payable for loans purchased, and accrued investment income approximate fair values due to the short-term nature and credit worthiness of these instruments. These items are categorized in Level 1 or Level 2 of the fair value hierarchy.

Loans Receivable at Fair Value

Loans receivable at fair value are comprised of loans held by consolidated VIEs consisting of corporate and residential mortgage loans. Fair values of commercial loans are obtained from a pricing service and determined using actively quoted prices obtained from multiple market participants. Fair values of residential mortgage loans are determined using quoted prices for MBS issued by the respective VIE and adjustments for the fair values of the financial guarantees provided by MBIA Corp. on the related MBS. Loans receivable at fair value are categorized in Level 2 or Level 3 of the fair value hierarchy based on the input that is significant to the fair value measurement in its entirety.

Loan Repurchase Commitments

Loan repurchase commitments are obligations owed by the sellers/servicers of mortgage loans to either MBIA as reimbursement of paid claims or to the RMBS trusts as defined in the transaction documents. Loan repurchase commitments are assets of the consolidated VIEs. This asset represents 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. Loan repurchase commitments at fair value are categorized in Level 3 of the fair value hierarchy. Fair values of loan repurchase commitments are determined using discounted cash flow techniques based on inputs including:

• breach rates representing the rate at which the sellers/servicers failed to comply with stated representations and warranties;

• recovery rates representing the estimates of future cash flows for the asset, including estimates about possible variations in the amount of cash flows expected to be collected;

• expectations about possible variations in the timing of collections of the cash flows; and

• time value of money, represented by the rate on risk-free monetary assets.

Investment Agreements

The 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 as Level 3 of the fair value hierarchy.

Medium-Term Notes

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 based on the quoted market prices received and the MTNs’ stated maturity and interest rate to determine fair value. Nonperformance risk is included in the quoted market prices and the matrix pricing grid. The Company has elected to record these MTNs at fair value as they contain embedded derivatives which cannot accurately be separated from the host debt instrument and fair valued separately, therefore, these MTNs are carried at fair value with changes in fair value reflected in earnings. The remaining MTNs, which are not carried at fair value, do not contain embedded derivatives. As these MTNs are illiquid and the prices reflect significant unobservable inputs, they are categorized as Level 3 of the fair value hierarchy.

Variable Interest Entity Notes

The fair values of VIE notes are determined based on recently executed transaction prices or quoted prices where observable. When position-specific quoted prices are not observable, fair values are based on quoted prices of similar securities. Fair values based on quoted prices of similar securities may be adjusted for factors unique to the securities, including any credit enhancement. 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.

Variable Interest Entity Derivatives

The VIEs have entered into derivative transactions consisting of cross currency swaps and interest rate caps. Fair values of over-the-counter (“OTC”) derivatives are determined using valuation models based on observable and/or unobservable inputs. These observable and market-based inputs include interest rates and volatilities. These derivatives are categorized in Level 2 or Level 3 of the fair value hierarchy based on the input that is significant to the fair value measurement in its entirety.

Long-term Debt

Long-term debt consists of notes, debentures, surplus notes and accrued interest on this debt. The fair value of long-term notes, debentures and surplus notes are estimated based on quoted prices for the identical or similar securities. The fair value of the accrued interest expense on the surplus notes due in 2033 is determined based on the scheduled interest payments discounted by the market’s perception of the credit risk related to the repayment of the surplus notes. The credit risk related to the repayment of the surplus notes is based on recent trades of the surplus notes. The deferred interest payment will be due on the first business day on or after which the Company obtains approval to make such payment.

The carrying amounts of accrued interest expense on all other long-term debt approximate fair value due to the short-term nature of these instruments. Long-term debt is categorized as Level 2 of the fair value hierarchy.

Derivatives—Asset/Liability Products

The asset/liability products business has entered into derivative transactions primarily consisting of interest rate swaps. Fair values of OTC derivatives are determined using valuation models based on observable inputs, nonperformance risk of the Company’s own credit and nonperformance risk of the counterparties. Observable and market-based inputs include interest rate yields, credit spreads and volatilities. These derivatives 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.

The Company has policies and procedures in place regarding counterparties, including review and approval of the counterparty and the Company’s exposure limit, collateral posting requirements, collateral monitoring and margin calls on collateral. The Company manages counterparty credit risk on an individual counterparty basis through master netting arrangements covering derivative transactions in the asset/liability products segment as of September 30, 2014. These agreements allow the Company to contractually net amounts due from a counterparty with those amounts due to such counterparty when certain triggering events occur. The Company only executes swaps under master netting agreements, which typically contain mutual credit downgrade provisions that generally provide the ability to require assignment or termination in the event either the Company or the counterparty is downgraded below a specified credit rating. The netting agreements minimize the potential for losses related to credit exposure and thus serve to mitigate the Company’s nonperformance risk under these derivatives.

In certain cases, the Company also manages credit risk through collateral agreements that give the Company the right to hold or the obligation to provide collateral when the current market value of derivative contracts exceeds an exposure threshold. Under these arrangements, the Company may provide U.S. Treasury and other highly rated securities or cash to secure the derivative. The delivery of high-quality collateral can minimize credit exposure and mitigate the potential for nonperformance risk impacting the fair values of the derivatives.

Derivatives—Insurance

The derivative contracts insured by the Company cannot be legally traded and generally do not have observable market prices. The Company determines the fair values of insured credit derivatives using valuation models. The valuation models are consistently applied from period to period, with refinements to the fair value estimation approach being applied as and when the information becomes available. Negotiated settlements are also considered when determining fair value to provide the best estimate of how another market participant would evaluate fair value.

Approximately 94% of the balance sheet fair value of insured credit derivatives as of September 30, 2014 was valued based on the Binomial Expansion Technique (“BET”) Model. Approximately 6% of the balance sheet fair value of insured credit derivatives as of September 30, 2014 was valued based on the internally developed Direct Price Model and the Dual Default model. The valuation of insured derivatives includes the impact of its credit standing. All of these derivatives are categorized as Level 3 of the fair value hierarchy as their fair value is derived using significant unobservable inputs.

The Company has also entered into a derivative contract as a result of a commutation. 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.

Description of the BET Model

1. Valuation Model Overview

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, and calculation of the change in value.

• Estimates of aggregated collateral losses are calculated by reference to the following (described in further detail under “BET Model Inputs” below):

• credit spreads of underlying collateral based on actual spreads or spreads on similar collateral with similar ratings, or in some cases, are benchmarked; for collateral pools where the spread distribution is characterized by extremes, each segment of the pool is modeled separately instead of using an overall pool average;

• diversity score of the collateral pool as an indication of correlation of collateral defaults; and

• recovery rate for all defaulted collateral.

• Allocation of losses to separate tranches of the capital structure according to priority of payments in a transaction.

• The inception-to-date unrealized gain or loss on a transaction is the difference between the original price of the risk (the original market-implied expected loss) and the current price of the risk based on the assumed market-implied expected losses derived from the model.

Additional structural assumptions of the BET Model are:

  • Default probabilities are determined by three factors: MBIA Corp.’s credit spread, MBIA Corp.’s recovery rate after default, and the time period under risk;
  • Frequencies of defaults are modeled evenly over time;
  • Collateral assets are generally considered on an average basis rather than being modeled on an individual basis; and
  • Collateral asset correlation is modeled using a diversity score which is calculated based on industry or sector concentrations. Recovery rates are based on historical averages and updated based on market evidence.

2. BET Model Inputs

a. Credit spreads

The average spread of collateral is a key input as the Company assumes credit spreads reflect the market’s assessment of default probability for each piece of collateral. Spreads are obtained from market data sources published by third parties (e.g., dealer spread tables for assets most closely resembling collateral within the Company’s transactions) as well as collateral-specific spreads on the underlying reference obligations provided by trustees or market sources. Also, when these sources are not available, the Company benchmarks spreads for collateral against market spreads or prices. This data is reviewed on an ongoing basis for reasonableness and applicability to the Company’s derivative portfolio. The Company also calculates spreads based on quoted prices and on internal assumptions about expected life, when pricing information is available and spread information is not.

The Company uses the spread hierarchy listed below in determining which source of spread information to use, with the rule being to use CDS spreads where available and cash security spreads as the next alternative.

Spread Hierarchy:

  • Collateral-specific credit spreads when observable;
  • Sector-specific spread tables by asset class and rating;
  • Corporate spreads, including Bloomberg spread tables based on rating; and
  • Benchmark from most relevant market source when corporate spreads are not directly relevant.

There were some transactions where the Company incorporated multiple levels within the hierarchy, including using actual collateral-specific credit spreads in combination with a calculated spread based on an assumed relationship. In those cases, MBIA classified the transaction as being benchmarked from the most relevant spread source even though the majority of the average spread was from actual collateral-specific spreads. As of September 30, 2014, sector-specific spreads were used in 6% of the transactions valued using the BET Model. Corporate spreads were used in 44% of the transactions and spreads benchmarked from the most relevant spread source were used for 50% of the transactions. The spread source can also be identified by whether or not it is based on collateral weighted average rating factor (“WARF”). No collateral-specific spreads are based on WARF. Sector-specific spreads, corporate spreads and some benchmarked spreads are based on WARF. WARF-sourced and/or ratings-sourced credit spreads were used for 76% of the transactions.

Over time, the data inputs change as new sources become available, existing sources are discontinued or are no longer considered to be reliable or the most appropriate. It is always the Company’s objective to use more observable spread inputs defined above. However, the Company may on occasion move to less observable spread inputs due to the discontinuation of data sources or due to the Company considering certain spread inputs no longer representative of market spreads.

b. Diversity Scores

Diversity scores are a means of estimating the diversification in a portfolio. The diversity score estimates the number of uncorrelated assets that are assumed to have the same loss distribution as the actual portfolio of correlated assets. While diversity score is a required input into the BET model, due to current high levels of default within the collateral of the structures, diversity score does not have a significant impact on valuation.

c. Recovery Rate

The recovery rate represents the percentage of par expected to be recovered after an asset defaults, indicating the severity of a potential loss. MBIA generally uses rating agency recovery assumptions which may be adjusted to account for differences between the characteristics and performance of the collateral used by the rating agencies and the actual collateral in MBIA-insured transactions. The Company may also adjust rating agency assumptions based on the performance of the collateral manager and on empirical market data.

d. Nonperformance Risk

The Company’s valuation methodology for insured credit derivative liabilities incorporates MBIA Corp.’s own nonperformance risk. The Company calculates the fair value by discounting the market value loss estimated through the BET Model at discount rates which include MBIA Corp.’s CDS spreads as of September 30, 2014. The CDS spreads assigned to each deal are based on the weighted average life of the deal. The Company limits the nonperformance impact so that the derivative liability could not be lower than MBIA Corp.’s recovery derivative price multiplied by the unadjusted derivative liability.

Overall Model Results

As of September 30, 2014 and December 31, 2013, the Company’s net insured CDS derivative liability was $284 million and $1.2 billion, respectively, based on the results of the aforementioned models. A significant driver of changes in fair value is MBIA Corp.’s nonperformance risk. In aggregate, the nonperformance calculation resulted in a pre-tax net insured derivative liability that was $94 million and $394 million lower than the net liability that would have been estimated if MBIA Corp. excluded nonperformance risk in its valuation as of September 30, 2014 and December 31, 2013, respectively. Nonperformance risk is a fair value concept and does not contradict MBIA Corp.’s internal view, based on fundamental credit analysis of MBIA Corp.’s economic condition, that MBIA Corp. will be able to pay all claims when due.

Warrants

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, 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.

Financial Guarantees

Gross Financial Guarantees —The fair value of gross financial guarantees is determined using discounted cash flow techniques based on inputs that include (i) assumptions of expected losses on financial guarantee policies where loss reserves have not been recognized, (ii) amount of losses expected on financial guarantee policies where loss reserves have been established, net of expected recoveries, (iii) the cost of capital reserves required to support the financial guarantee liability, (iv) operating expenses, and (v) discount rates. The MBIA Corp. CDS spread and recovery rate are used as the discount rate for MBIA Corp., while the CDS spread and recovery rate of a similar municipal bond insurance company are used as the discount rate for National, as National does not have a published CDS spread and recovery rate.

The carrying value of the Company’s gross financial guarantees consists of unearned premium revenue and loss and LAE reserves, net of the insurance loss recoverable as reported on MBIA’s consolidated balance sheets.

Ceded Financial Guarantees —The fair value of ceded financial guarantees is determined by applying the percentage ceded to reinsurers to the related fair value of the gross financial guarantees. The carrying value of ceded financial guarantees consists of prepaid reinsurance premiums and reinsurance recoverable on paid and unpaid losses as reported within “Other assets” on the Company’s consolidated balance sheets.

Significant Unobservable Inputs

The following tables provide quantitative information regarding the significant unobservable inputs used by the Company for assets and liabilities measured at fair value on a recurring basis as of September 30, 2014 and December 31, 2013. These tables exclude inputs used to measure fair value that are not developed by the Company, such as broker prices and other third-party pricing service valuations.

Fair Value
as ofRange
September 30,(Weighted
In millions2014Valuation TechniquesUnobservable InputAverage)
Assets of consolidated VIEs:
Loans receivable at fair value$1,495Market prices adjusted for financialImpact of financial guarantee0% - 8% (2%)
guarantees provided to VIE obligations
Loan repurchase commitments365Discounted cash flowRecovery rates(1)
Breach rates(1)
Liabilities of consolidated VIEs:
Variable interest entity notes746Market prices of VIE assetsImpact of financial guarantee0% - 35% (16%)
adjusted for financial guarantees provided
Credit derivative liabilities, net:
CMBS263BET ModelRecovery rates25% - 90% (74%)
Nonperformance risk13% - 24% (22%)
Weighted average life (in years)1.6 - 3.1 (2.5)
CMBS spreads0% - 37% (11%)
Multi-sector CDO11Direct Price ModelNonperformance risk51% - 51% (51%)
Other10BET Model and Dual DefaultRecovery rates42% - 45% (45%)
Nonperformance risk40% - 50% (48%)
Weighted average life (in years)0.5 - 8.1 (1.4)
Other derivative liabilities 38Discounted cash flowCash flows$0 - $83 ($42)(2)
____________
(1) - Recovery rates and breach rates include estimates about potential variations in the outcome of litigation with a counterparty.
(2) - Midpoint of cash flows are used for the weighted average.
Fair Value
as ofRange
December 31,(Weighted
In millions2013Valuation TechniquesUnobservable InputAverage)
Assets of consolidated VIEs:
Loans receivable at fair value$1,612Market prices adjusted for financialImpact of financial guarantee0% - 17% (3%)
guarantees provided to VIE obligations
Loan repurchase commitments359Discounted cash flowRecovery rates(1)
Breach rates(1)
Liabilities of consolidated VIEs:
Variable interest entity notes940Market prices of VIE assetsImpact of financial guarantee0% - 25% (12%)
adjusted for financial guarantees provided
Credit derivative liabilities, net:
CMBS1,050BET ModelRecovery rates25% - 90% (60%)
Nonperformance risk8% - 57% (25%)
Weighted average life (in years)1.1-28.0 (3.3)
CMBS spreads1% - 29% (13%)
Multi-sector CDO12Direct Price ModelNonperformance risk57%-57% (57%)
Other85BET Model and Dual DefaultRecovery rates42%-90% (45%)
Nonperformance risk13% - 54% (25%)
Weighted average life (in years)0.2 - 8.7 (2.3)
____________
(1) - Recovery rates and breach rates include estimates about potential variations in the outcome of litigation with a counterparty.

Sensitivity of Significant Unobservable Inputs

The significant unobservable input used in the fair value measurement of the Company’s loans receivable at fair value of consolidated VIEs is the impact of the financial guarantee. The fair value of loans receivable is calculated by subtracting the value of the financial guarantee from the market value of VIE liabilities. The value of a financial guarantee is estimated by the Company as the present value of expected cash payments under the policy. As expected cash payments provided by the Company under the insurance policy increase, there is a lower expected cash flow on the underlying loans receivable of the VIE. This results in a lower fair value of the loans receivable in relation to the obligations of the VIE.

The significant unobservable inputs used in the fair value measurement of the Company’s loan repurchase commitments of consolidated VIEs are the recovery rates and breach rates. Recovery rates reflect the estimates of future cash flows reduced for litigation delays and risks and/or potential financial distress of the sellers/servicers. The estimated recoveries of the loan repurchase commitments may differ from the actual recoveries that may be received in the future. Breach rates represent the rate at which mortgages fail to comply with stated representations and warranties of the sellers/servicers. Significant increases or decreases in the recovery rates and the breach rates would result in significantly higher or lower fair values of the loan repurchase commitments, respectively. Additionally, changes in the legal environment and the ability of the counterparties to pay would impact the recovery rate assumptions, which could significantly impact the fair value measurement. Any significant challenges by the counterparties to the Company’s determination of breaches of representations and warranties could significantly adversely impact the fair value measurement. Recovery rates and breach rates are determined independently. Changes in one input will not necessarily have any impact on the other input.

The significant unobservable input used in the fair value measurement of the Company’s VIE notes of consolidated VIEs is the impact of the financial guarantee. The fair value of VIE notes is calculated by adding the value of the financial guarantee to the market value of VIE assets. The value of a financial guarantee is estimated by the Company as the present value of expected cash payments under the policy. As the value of the guarantee provided by the Company to the obligations issued by the VIE increases, the credit support adds value to the liabilities of the VIE. This results in an increase in the fair value of the liabilities of the VIE.

The significant unobservable inputs used in the fair value measurement of MBIA Corp.’s CMBS credit derivatives, which are valued using the BET Model, are 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.

The significant unobservable input used in the fair value measurement of MBIA Corp.’s multi-sector CDO credit derivatives, which are 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.

The significant unobservable inputs used in the fair value measurement of MBIA Corp.’s other credit derivatives, which are valued using the BET Model and Dual Default, are recovery rates, nonperformance risk and weighted average life. 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 MBIA Corp.’s estimate of when the principal of the underlying collateral will be repaid. 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. 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.

The significant unobservable input used in the fair value measurement of MBIA Corp.’s other derivatives, which are valued using a discounted cash flow model, is the estimates of future cash flows discounted using market rates and CDS spreads. Any significant increase or decrease in future cash flows would result in an increase or decrease in the fair value of the derivative liability, respectively.

Fair Value Measurements

The following tables present the fair value of the Company’s assets (including short-term investments) and liabilities measured and reported at fair value on a recurring basis as of September 30, 2014 and December 31, 2013:

Fair Value Measurements at Reporting Date Using
Quoted Prices inSignificant
Active MarketsOtherSignificantCounterparty
for IdenticalObservableUnobservableand CashBalance as of
AssetsInputsInputsCollateralSeptember 30,
In millions(Level 1)(Level 2)(Level 3)Netting2014
Assets:
Fixed-maturity investments:
U.S. Treasury and government agency$515$115$-$-$630
State and municipal bonds-1,66458 (1)-1,722
Foreign governments195786 (1)-279
Corporate obligations-2,10638 (1)-2,144
Mortgage-backed securities:
Residential mortgage-backed agency-1,156- -1,156
Residential mortgage-backed non-agency-55- -55
Commercial mortgage-backed-261 (1)-27
Asset-backed securities:
Collateralized debt obligations-892 (1)-100
Other asset-backed-13794 (1)-231
Total fixed-maturity investments7105,345289-6,344
Money market securities610---610
Perpetual debt and equity securities274013 (1)-80
Cash and cash equivalents550---550
Derivative assets:
Non-insured derivative assets:
Interest rate derivatives-69-(65)4
Fair Value Measurements at Reporting Date Using
Quoted Prices inSignificant
Active MarketsOtherSignificantCounterparty
for IdenticalObservableUnobservableand CashBalance as of
AssetsInputsInputsCollateralSeptember 30,
In millions(Level 1)(Level 2)(Level 3)Netting2014
Assets of consolidated VIEs:
Corporate obligations-2169 (1)-90
Mortgage-backed securities:
Residential mortgage-backed non-agency-2034 (1)-207
Commercial mortgage-backed-85- -85
Asset-backed securities:
Collateralized debt obligations-96 (1)-15
Other asset-backed-3539 (1)-74
Cash56---56
Loans receivable at fair value:
Residential loans receivable--1,495-1,495
Corporate loans receivable-407--407
Loan repurchase commitments--365-365
Total assets$1,953$6,214$2,280$(65)$10,382
Liabilities:
Medium-term notes$-$-$202 (1)$-$202
Derivative liabilities:
Insured derivatives:
Credit derivatives-4284-288
Non-insured derivatives:
Interest rate derivatives-211-(109)102
Other --38-38
Other liabilities:
Warrants-24--24
Liabilities of consolidated VIEs:
Variable interest entity notes-1,717746-2,463
Derivative liabilities:
Currency derivatives--7 (1)-7
Total liabilities$-$1,956$1,277$(109)$3,124
____________
(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.
Fair Value Measurements at Reporting Date Using
Quoted Prices inSignificant
Active MarketsOtherSignificantCounterparty
for IdenticalObservableUnobservableand CashBalance as of
AssetsInputsInputsCollateralDecember 31,
In millions(Level 1)(Level 2)(Level 3)Netting2013
Assets:
Fixed-maturity investments:
U.S. Treasury and government agency$397$156$-$-$553
State and municipal bonds-1,76519 (1)-1,784
Foreign governments1126512 (1)-189
Corporate obligations-1,77648 (1)-1,824
Mortgage-backed securities:
Residential mortgage-backed agency-1,173--1,173
Residential mortgage-backed non-agency-866 (1)-92
Commercial mortgage-backed-2514 (1)-39
Asset-backed securities:
Collateralized debt obligations-7282 (1)-154
Other asset-backed-13058 (1)-188
Total fixed-maturity investments5095,248239-5,996
Money market securities783---783
Perpetual debt and equity securities271311 (1)-51
Cash and cash equivalents1,161---1,161
Derivative assets:
Non-insured derivative assets:
Interest rate derivatives-46- (42)4
Fair Value Measurements at Reporting Date Using
Quoted Prices inSignificant
Active MarketsOtherSignificantCounterparty
for IdenticalObservableUnobservableand CashBalance as of
AssetsInputsInputsCollateralDecember 31,
In millions(Level 1)(Level 2)(Level 3)Netting2013
Assets of consolidated VIEs:
Corporate obligations-4148 (1)-89
Mortgage-backed securities:
Residential mortgage-backed non-agency-2554 (1)-259
Commercial mortgage-backed-1023 (1)-105
Asset-backed securities:
Collateralized debt obligations-1422 (1)-36
Other asset-backed-4454 (1)-98
Money market securities136---136
Cash97---97
Loans receivable at fair value--1,612-1,612
Loan repurchase commitments--359-359
Total assets$2,713$5,763$2,352$(42)$10,786
Liabilities:
Medium-term notes$-$-$203 (1)$-$203
Derivative liabilities:
Insured derivatives:
Credit derivatives-51,147-1,152
Non-insured derivatives:
Interest rate derivatives-165- (165)-
Other liabilities:
Warrants-59--59
Liabilities of consolidated VIEs:
Variable interest entity notes-1,416940-2,356
Derivative liabilities:
Currency derivatives--11 (1)-11
Total liabilities$-$1,645$2,301$(165)$3,781
____________
(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.

Level 3 assets at fair value as of September 30, 2014 and December 31, 2013 represented approximately 22% of total assets measured at fair value. Level 3 liabilities at fair value as of September 30, 2014 and December 31, 2013 represented approximately 41% and 61%, respectively, of total liabilities measured at fair value.

The following tables present the fair values and carrying values of the Company’s assets and liabilities that are disclosed at fair value but not reported at fair value on the Company’s consolidated balance sheets as of September 30, 2014 and December 31, 2013:

Fair Value Measurements at Reporting Date Using
Quoted Prices inSignificantSignificant Fair ValueCarry Value
Active Markets forOther ObservableUnobservableBalance as of Balance as of
Identical AssetsInputsInputsSeptember 30,September 30,
In millions (Level 1) (Level 2) (Level 3)20142014
Assets:
Other investments$-$-$4$4$4
Accrued investment income(1)-48-4848
Receivable for investments sold(1)-58-5858
Assets of consolidated VIEs:
Investments held-to-maturity--2,7302,7302,772
Total assets$-$106$2,734$2,840$2,882
Liabilities:
Investment agreements$-$-$801$801$659
Medium-term notes--7997991,027
Long-term debt-1,462-1,4621,784
Payable for investments purchased(2)-49-4949
Liabilities of consolidated VIEs:
Variable interest entity notes--2,8372,8372,772
Payable for loans purchased-39-3939
Total liabilities$-$1,550$4,437$5,987$6,330
Financial Guarantees:
Gross$-$-$4,619$4,619$2,067
Ceded--11811868
__________
(1) - Reported within "Other assets" on MBIA's consolidated balance sheets.
(2) - Reported within "Other liabilities" on MBIA's consolidated balance sheets.
Fair Value Measurements at Reporting Date Using
Quoted Prices inSignificantSignificant Fair ValueCarry Value
Active Markets for Other ObservableUnobservableBalance as of Balance as of
Identical AssetsInputsInputsDecember 31,December 31,
In millions (Level 1) (Level 2) (Level 3)20132013
Assets:
Other investments$-$-$4$4$5
Accrued investment income(1)-52-5252
Receivable for investments sold(1)-22-2222
Net cash collateral pledged(1)24--2424
Assets of consolidated VIEs:
Investments held-to-maturity--2,6512,6512,801
Total assets$24$74$2,655$2,753$2,904
Liabilities:
Investment agreements$-$-$814$814$700
Medium-term notes--9279271,224
Long-term debt-1,412-1,4121,702
Payable for investments purchased(2)-31-3131
Liabilities of consolidated VIEs:
Variable interest entity notes--2,7512,7512,930
Total liabilities$-$1,443$4,492$5,935$6,587
Financial Guarantees:
Gross$-$-$2,843$2,843$2,388
Ceded--717176
__________
(1) - Reported within "Other assets" on MBIA's consolidated balance sheets.
(2) - Reported within "Other liabilities" on MBIA's consolidated balance sheets.

The following tables present information about changes in Level 3 assets (including short-term investments) and liabilities measured at fair value on a recurring basis for the three months ended September 30, 2014 and 2013:

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Three Months Ended September 30, 2014
Change in
Unrealized
Gains
(Losses) for
the Period
Included in
UnrealizedEarnings
Gains /UnrealizedForeignfor Assets
(Losses)Gains /Exchangestill held
Balance,RealizedIncluded(Losses)RecognizedTransfersTransfersas of
BeginningGains /inIncludedin OCI orintoout ofEndingSeptember 30,
In millionsof Period(Losses)Earningsin OCIEarningsPurchasesIssuancesSettlementsSalesLevel 3(1)Level 3(1)Balance2014
Assets:
Foreign governments$5$-$-$-$-$-$-$(6)$-$7$-$6$-
Corporate obligations34---(1)3-(1)(1)4-38-
Residential mortgage-
backed agency8------(8)-----
Commercial
mortgage-backed1----------1-
Collateralized debt
obligations95------(3)---92-
Other asset-backed82--(4)---(4)-21(1)94-
State and municipal
bonds57------(1)-2-58-
Perpetual debt and equity securities13----------13-
Assets of
consolidated VIEs:
Corporate obligations62--------7-69-
Residential mortgage-
backed non-agency4----------4-
Collateralized debt
obligations6----------6-
Other asset-backed26------(1)-14-39-
Loans receivable1,539-12----(56)---1,49512
Loan repurchase
commitments363-2--------3652
Total assets$2,295$-$14$(4)$(1)$3$-$(80)$(1)$55$(1)$2,280$14
Change in
Unrealized
(Gains)
Losses for
the Period
Included in
UnrealizedEarnings for
(Gains) /UnrealizedForeignLiabilities
Losses(Gains) /Exchangestill held
Balance,RealizedIncludedLossesRecognizedTransfersTransfersas of
Beginning(Gains) /inIncludedin OCI orintoout ofEndingSeptember 30,
In millionsof PeriodLossesEarningsin OCIEarningsPurchasesIssuancesSettlementsSalesLevel 3(1)Level 3(1)Balance2014
Liabilities:
Medium-term notes$217$-$2$-$(17)$-$-$-$-$-$-$202$(15)
Credit derivatives, net33224(48)----(24)---284(14)
Other
derivatives33-5--------385
Liabilities of
consolidated VIEs:
VIE notes802-4----(60)---7464
Currency
derivatives, net11-(3)-(1)------7(4)
Total liabilities$1,395$24$(40)$-$(18)$-$-$(84)$-$-$-$1,277$(24)
_______________
(1) - Transferred in and out at the end of the period.
Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Three Months Ended September 30, 2013
Change in
Unrealized
Gains
(Losses) for
the Period
Included in
UnrealizedEarnings for
Gains /UnrealizedForeignAssets
(Losses)Gains /Exchangestill held
Balance,RealizedIncluded(Losses)RecognizedTransfersTransfersas of
BeginningGains /inIncludedin OCI orintoout ofEndingSeptember 30,
In millionsof Period(Losses)Earningsin OCIEarningsPurchasesIssuancesSettlementsSalesLevel 3(1)Level 3(1)Balance2013
Assets:
Foreign governments$3$-$-$-$-$-$-$(3)$-$5$-$5$-
Corporate obligations63(7)172--(14)(6)1-471
Residential mortgage-
backed agency3--------17(3)17-
Residential mortgage-
backed non-agency1---------(1)--
Commercial
mortgage-backed13------(1)-2-14-
Collateralized debt
obligations85--7---(3)-10(11)88-
Other asset-backed64--(5)---(4)-3(1)57-
State and municipal
bonds63------(1)---62-
Perpetual debt and equity securities10---1------11-
Assets of
consolidated VIEs:
Corporate obligations48----------48-
Residential mortgage-
backed non-agency2--------2-4-
Commercial
mortgage-backed4-(1)----(1)---2-
Collateralized debt
obligations35-1----(4)--(12)20(1)
Other asset-backed63-(7)----(1)-1(6)50(1)
Loans receivable1,790-(12)----(74)---1,704(12)
Loan repurchase
commitments1,115-1--------1,1161
Total assets$3,362$(7)$(17)$9$3$-$-$(106)$(6)$41$(34)$3,245$(12)
Change in
Unrealized
(Gains)
Losses for
the Period
Included in
UnrealizedEarnings for
(Gains) /UnrealizedForeignLiabilities
Losses(Gains) /Exchangestill held
Balance,RealizedIncludedLossesRecognizedTransfersTransfersas of
Beginning(Gains) /inIncludedin OCI orintoout ofEndingSeptember 30,
In millionsof PeriodLossesEarningsin OCIEarningsPurchasesIssuancesSettlementsSalesLevel 3(1)Level 3(1)Balance2013
Liabilities:
Medium-term notes$188$-$9$-$7$-$-$-$-$-$-$204$17
Credit derivatives, net1,64828(285)----(28)---1,363(285)
Interest rate
derivatives, net------------(15)
Liabilities of
consolidated VIEs:
VIE notes824-(6)----(73)---745(6)
Currency derivatives,
net16---(1)------15(1)
Total liabilities$2,676$28$(282)$-$6$-$-$(101)$-$-$-$2,327$(290)
_______________
(1) - Transferred in and out at the end of the period.

Transfers into and out of Level 3 were $55 million and $1 million, respectively, for the three months ended September 30, 2014. Transfers into and out of Level 2 were $1 million and $55 million, respectively, for the three months ended September 30, 2014. Transfers into Level 3 were principally related to other ABS, corporate obligations and foreign government securities, where inputs, which are significant to their valuation, became unobservable during the quarter. Other ABS, comprised the majority of the transferred instruments out of Level 3 where inputs, which are significant to their valuation, became observable during the quarter. 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.

Transfers into and out of Level 3 were $41 million and $34 million, respectively, for the three months ended September 30, 2013. Transfers into and out of Level 2 were $34 million and $41 million, respectively, for the three months ended September 30, 2013. Transfers into Level 3 were principally related to RMBS agency, CDOs and foreign governments, where inputs, which are significant to their valuation, became unobservable during the quarter. CDOs and other ABS, comprised the majority of the transferred instruments out of Level 3 where inputs, which are significant to their valuation, became observable during the quarter. 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.

All Level 1, 2 and 3 designations are made at the end of each accounting period.

The following tables present information about changes in Level 3 assets (including short-term investments) and liabilities measured at fair value on a recurring basis for the nine months ended September 30, 2014 and 2013:

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Nine Months Ended September 30, 2014
Change in
Unrealized
Gains
(Losses) for
the Period
Included in
UnrealizedEarnings for
Gains /UnrealizedForeignAssets
(Losses)Gains /Exchangestill held
Balance,RealizedIncluded(Losses)RecognizedTransfersTransfersas of
BeginningGains /inIncludedin OCI orintoout ofEndingSeptember 30,
In millionsof Year(Losses)Earningsin OCIEarningsPurchasesIssuancesSettlementsSalesLevel 3(1)Level 3(1)Balance2014
Assets:
Foreign governments$12$-$-$-$-$-$-$(15)$-$9$-$6$-
Corporate obligations4833(4)(1)9-(3)(23)7(1)382
Residential mortgage-
backed agency-------(8)-37(29)--
Residential mortgage-
backed non-agency6--(1)------(5)--
Commercial
mortgage-backed14------(14)-2(1)1-
Collateralized debt
obligations82(2)127-5-(9)(41)36(7)92-
Other asset-backed58--4-11-(8)(1)51(21)94-
State and municipal
bonds19--1---(3)(3)46(2)58-
Perpetual debt and equity
securities11-2------4(4)132
Assets of
consolidated VIEs:
Corporate obligations48------(4)-25-69-
Residential mortgage-
backed non-agency4-(1)----(1)-2-4-
Commercial
mortgage-backed3-(3)----------
Collateralized debt
obligations22-(10)----(4)-1(3)61
Other asset-backed54-(16)----(7)-18(10)39-
Loans receivable1,612-48----(165)---1,49548
Loan repurchase
commitments359-6--------3656
Total assets$2,352$1$30$27$(1)$25$-$(241)$(68)$238$(83)$2,280$59
Change in
Unrealized
(Gains)
Losses for
the Period
Included in
UnrealizedEarnings for
(Gains) /UnrealizedForeignLiabilities
Losses(Gains) /Exchangestill held
Balance,RealizedIncludedLossesRecognizedTransfersTransfersas of
Beginning(Gains) /inIncludedin OCI orintoout ofEndingSeptember 30,
In millionsof YearLossesEarningsin OCIEarningsPurchasesIssuancesSettlementsSalesLevel 3(1)Level 3(1)Balance2014
Liabilities:
Medium-term notes$203$-$17$-$(18)$-$-$-$-$-$-$202$(1)
Credit derivatives, net1,147388(863)----(388)---28420
Other
derivatives, net-308--------388
Liabilities of
consolidated VIEs:
VIE notes940-40---3(196)(41)--74637
Currency derivatives,
net11-(3)-(1)------7(4)
Total liabilities$2,301$418$(801)$-$(19)$-$3$(584)$(41)(2)$-$-$1,277$60
_______________
(1) - Transferred in and out at the end of the period.
(2) - Primarily relates to the deconsolidation of VIEs.
Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Nine Months Ended September 30, 2013
Change in
Unrealized
Gains
(Losses) for
the Period
Included in
UnrealizedEarnings for
Gains /UnrealizedForeignAssets
(Losses)Gains /Exchangestill held
Balance,RealizedIncluded(Losses)RecognizedTransfersTransfersas of
BeginningGains /inIncludedin OCI orintoout ofEndingSeptember 30,
In millionsof Year(Losses)Earningsin OCIEarningsPurchasesIssuancesSettlementsSalesLevel 3(1)Level 3(1)Balance2013
Assets:
Foreign governments$3$-$-$-$-$-$-$(11)$-$16$(3)$5$-
Corporate obligations76(5)611-1-(14)(29)1-476
Residential mortgage-
backed agency---------20(3)17-
Residential mortgage-
backed non-agency4------(3)--(1)--
Commercial
mortgage-backed28--4---(2)(18)3(1)14-
Collateralized debt
obligations31(2)-11-61-(14)(5)28(22)881
Other asset-backed26-(5)-3-(9)-47(5)57-
State and municipal
bonds1032-(1)---(4)(12)42(68)62-
Perpetual debt and equity
securities14---------(3)11-
Assets of
consolidated VIEs:
Corporate obligations78(4)(7)6---(3)(25)3-48-
Residential mortgage-
backed non-agency6-6----(7)-3(4)4-
Commercial
mortgage-backed7-(1)-----(24)20-21
Collateralized debt
obligations125-(8)5---(5)(84)1(14)202
Other asset-backed64-(7)----(10)(2)11(6)503
Loans receivable1,881-208----(211)(174)--1,704194
Loan repurchase
commitments1,086-140----(110)---1,116140
Total assets$3,532$(9)$337$31$-$65$-$(403)$(373)$195$(130)$3,245$347
Change in
Unrealized
(Gains)
Losses for
the Period
Included in
UnrealizedEarnings for
(Gains) /UnrealizedForeignLiabilities
Losses(Gains) /Exchangestill held
Balance,RealizedIncludedLossesRecognizedTransfersTransfersas of
Beginning(Gains) /inIncludedin OCI orintoout ofEndingSeptember 30,
In millionsof YearLossesEarningsin OCIEarningsPurchasesIssuancesSettlementsSalesLevel 3(1)Level 3(1)Balance2013
Liabilities:
Medium-term notes$165$-$34$-$5$-$-$-$$-$-$204$39
Credit derivatives, net2,9211,548(1,562)----(1,548)-4-1,363301
Interest rate
derivatives, net(1)-2-------(1)-(21)
Currency
derivatives, net1---------(1)--
Liabilities of
consolidated VIEs:
VIE notes1,932-140----(251)(1,076)--74553
Currency derivatives,
net21-(5)-(1)------15(6)
Total liabilities$5,039$1,548$(1,391)$-$4$-$-$(1,799)$(1,076)(2)$4$(2)$2,327$366
_______________
(1) - Transferred in and out at the end of the period.
(2) - Primarily relates to the deconsolidation of VIEs.

Transfers into and out of Level 3 were $238 million and $83 million, respectively, for the nine months ended September 30, 2014. Transfers into and out of Level 2 were $83 million and $238 million, respectively, for the nine months ended September 30, 2014. Transfers into Level 3 were principally related to other ABS, state and municipal bonds, RMBS agency, CDO’s, and corporate obligations, where inputs, which are significant to their valuation, became unobservable during the period. RMBS agency and other ABS comprised the majority of the transferred instruments 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.

Transfers into and out of Level 3 were $199 million and $132 million, respectively, for the nine months ended September 30, 2013. Transfers into and out of Level 2 were $132 million and $199 million, respectively, for the nine months ended September 30, 2013. Transfers into Level 3 were principally related to other ABS, state and municipal bonds, CDOs, RMBS agency and CMBS where inputs, which are significant to their valuation, became unobservable during the period. State and municipal bonds and CDOs comprised the majority of the transferred instruments 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.

All Level 1, 2 and 3 designations are made at the end of each accounting period.

Gains and losses (realized and unrealized) included in earnings related to Level 3 assets and liabilities for the three months ended September 30, 2014 and 2013 are reported on the Company’s consolidated statements of operations as follows:

Three Months Ended September 30, 2014Three Months Ended September 30, 2013
Change in Change in
UnrealizedUnrealized
Gains (Losses)Gains (Losses)
for the for the
Period IncludedPeriod Included
in Earnings in Earnings
for Assetsfor Assets
and and
Total GainsLiabilities still Total GainsLiabilities still
(Losses)held as of (Losses)held as of
IncludedSeptember 30,IncludedSeptember 30,
In millionsin Earnings2014in Earnings2013
Revenues:
Unrealized gains (losses) on
insured derivatives$48$14$285$285
Realized gains (losses) and other
settlements on insured derivatives(24)-(28)-
Net gains (losses) on financial instruments
at fair value and foreign exchange910(24)(1)
Revenues of consolidated VIEs:
Net gains (losses) on financial instruments
at fair value and foreign exchange1414(11)(6)
Total$47$38$222$278

Gains and losses (realized and unrealized) included in earnings relating to Level 3 assets and liabilities for the nine months ended September 30, 2014 and 2013 are reported on the Company’s consolidated statements of operations as follows:

Nine Months Ended September 30, 2014Nine Months Ended September 30, 2013
Change in Change in
UnrealizedUnrealized
Gains (Losses)Gains (Losses)
for the for the
Period IncludedPeriod Included
in Earnings in Earnings
for Assetsfor Assets
and and
Total GainsLiabilities still Total GainsLiabilities still
(Losses)held as of (Losses)held as of
IncludedSeptember 30,IncludedSeptember 30,
In millionsin Earnings2014in Earnings2013
Revenues:
Unrealized gains (losses) on
insured derivatives$863$(20)$1,562$(301)
Realized gains (losses) and other
settlements on insured derivatives(418)-(1,548)-
Net gains (losses) on financial instruments
at fair value and foreign exchange(1)(3)(39)(11)
Revenues of consolidated VIEs:
Net gains (losses) on financial instruments
at fair value and foreign exchange(12)22193293
Total$432$(1)$168$(19)

Fair Value Option

The Company elected to record at fair value certain financial instruments that have been consolidated in connection with the adoption of the accounting guidance for consolidation of VIEs, among others.

The following table presents the changes in fair value included in the Company’s consolidated statements of operations for the three and nine months ended September 30, 2014 and 2013 for financial instruments for which the fair value option was elected:

Three Months Ended September 30,Nine Months Ended September 30,
In millions2014201320142013
Investments carried at fair value(1)$ -$ 1$ 2$ 7
Fixed-maturity securities held at fair value-VIE(2) (3) (37) (71) (35)
Loans receivable at fair value:
Residential mortgage loans(2) (45) (87) (118) (16)
Other loans(2) (2) - (2) 13
Loan repurchase commitments(2) 1 1 6 140
Medium-term notes(1) 15 (17) 1 (39)
Variable interest entity notes (2) 87 16425685
___________
(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 foreign exchange-VIE" on MBIA's consolidated statements of operations.

The following table reflects the difference between the aggregate fair value and the aggregate remaining contractual principal balance outstanding as of September 30, 2014 and December 31, 2013 for loans and notes for which the fair value option was elected:

As of September 30, 2014As of December 31, 2013
ContractualContractual
OutstandingFairOutstandingFair
In millionsPrincipalValueDifferencePrincipalValueDifference
Loans receivable at fair value:
Residential mortgage loans$1,636$1,447$189$1,846$1,562$284
Residential mortgage loans (90 days or more past due)2364818823150181
Other loans4094072---
Total loans receivable at fair value$2,281$1,902$379$2,077$1,612$465
Variable interest entity notes$3,704$2,463$1,241$3,787$2,356$1,431
Medium-term notes$253$202$51$276$203$73

Substantially all gains and losses included in earnings during the periods ended September 30, 2014 and 2013 on loans receivable and VIE notes reported in the preceding table are attributable to credit risk. This is primarily due to the high rate of defaults on loans and the collateral supporting the VIE notes, resulting in depressed pricing of the financial instruments.