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Fair Value Of Financial Instruments

12 Months Ended

Dec. 31, 2017

Text Block [Abstract]

Fair Value Measurement

Note 7: Fair Value of Financial Instruments

Fair Value Measurement

Financial Assets

Financial 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, along with its third-party portfolio manager, 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 and its third-party portfolio manager believe 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, its third-party portfolio manager will obtain a price from another third-party provider 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 December 31, 2017 or 2016. 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.

Financial Liabilities (excluding derivative liabilities)

Financial liabilities, excluding derivative liabilities, issued by the Company primarily consist of debt issued for general corporate purposes within its corporate segment, MTNs, investment agreements, debt issued by consolidated VIEs and warrants. 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 interest rate swaps and an insured credit derivative. The Company’s insured credit derivative contract is a non-traded structured credit derivative transaction and since they are highly customized and there is generally no observable market for this derivative. The Company estimates its fair value in a hypothetical market based on an internal model that incorporates market or estimated prices of similar securities that are obtained for all collateral within a transaction, the present value of the 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.

Internal Review Process

All significant financial assets and liabilities are reviewed by the valuation committee to ensure compliance with the Company’s policies and risk procedures in the development of fair values of financial assets and liabilities. The valuation committee reviews, 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 committee also reviews any significant impairment or improvements in fair values of the financial instruments from prior periods. The committee is comprised of senior finance team members with relevant experience in the financial instruments their committee is responsible for. The committee documents its agreement with the fair value measurements reported in the Company’s consolidated 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, MBS, asset-backed securities (“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 investment in the fixed-income fund was measured at fair value by applying the net asset value per share practical expedient. The investment in the fixed-income fund may be redeemed on a quarterly basis with prior redemption notification of ninety days subject to withdrawal limitations. The investment is required to be held for a minimum of twelve months, and any subsequent quarterly redemption is limited to 25% of the investment or a complete redemption over four consecutive quarters in the amounts of 25%, 33%, 50%, and 100% of the remaining investment balance as of the first, second, third and fourth consecutive quarters, respectively.

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, 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.

Cash and Cash Equivalents

The carrying amounts of cash and cash equivalents approximate fair value due to the short-term nature and credit worthiness of these instruments and are categorized in Level 1 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 residential mortgage and corporate loans. 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. The fair values of the financial guarantees consider expected claim payments, net of recoveries, under MBIA Corp.’s policies. Fair values of corporate loans, which are to privately held companies, are based on methodologies that generally use comparable EBITDA multiples and the most current available EBITDAs. Loans receivable at fair value are categorized in Level 3 of the fair value hierarchy.

Loan Repurchase Commitments

Loan repurchase commitments are obligations owed by the sellers/servicers of mortgage loans to MBIA as reimbursement of paid claims. 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. Fair values of loan repurchase commitments are determined using discounted cash flow techniques and are categorized in Level 3 of the fair value hierarchy.

Other Assets

VIEs consolidated by the Company have entered into derivative instruments consisting of cross currency swaps. Cross currency swaps are entered into to manage the variability in cash flows resulting from fluctuations in foreign currency rates. The fair value of VIE derivatives 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.

Other assets also include receivables representing the right to receive reimbursement payments on claim payments expected to be made on certain insured VIE liabilities due to risk mitigating transactions with third parties executed to effectively defease, or, in-substance commute the Company’s exposure on its financial guarantee policies. The right to receive reimbursement payments is based on the value of the Company’s financial guarantee determined using the cash flow model. The fair value of the financial guarantee primarily contains unobservable inputs and is categorized in Level 3 of the fair value hierarchy.

Long-term Debt

The fair value of 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 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 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. The 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 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 in 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.

Derivatives

The corporate segment has entered into derivative transactions primarily consisting of interest rate swaps. Fair values of over-the-counter derivatives are determined using valuation models based on observable inputs, nonperformance risk of the Company 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.

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 based on observable inputs and considering nonperformance risk of the Company. Negotiated settlements are also considered to validate the valuation models and to reflect assumptions the Company believes market participants would use.

Valuation Model Overview

For the year ended December 31, 2017, the Company used an internally developed Direct Price Model to value its insured credit derivative that incorporates market prices or estimated prices of similar securities that are obtained for all collateral within a transaction, the present value of the market-implied potential losses, and nonperformance risk. The valuation of the insured credit derivative includes the impact of its credit standing. The insured credit derivative 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.

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.

The Company also has other derivative liabilities as a result of a commutation occurring 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. As the significant inputs are unobservable, the derivative contract is categorized in Level 3 of the fair value hierarchy.

Other Liabilities

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 to 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 payable relates to 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 Sale

As of December 31, 2016, the Company estimated the fair value of the assets and liabilities of MBIA UK held for sale based on the fair value of the expected total consideration for the sale of MBIA UK. The fair value of the sale consideration is categorized in Level 2 of the fair value hierarchy. Refer to “Note 1: Business Developments and Risks and Uncertainties” for additional information about the sale of MBIA UK.

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 which reflect the expected nonperformance risk and recovery rates of the Company.

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 the Company’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”, net of gross salvage payable to reinsurers as reported within “Other liabilities” 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 December 31, 2017 and 2016.

			Fair Value
			as of							Range
			December 31,							(Weighted
In millions			2017			Valuation Techniques		Unobservable Input		Average)
Assets of consolidated VIEs:
	Loans receivable at fair value		$	1,679		Market prices adjusted for financial		Impact of financial guarantee(1)		-25% - 35% (-2%)
						guarantees provided to VIE obligations
						Multiples of EBITDA		Multiples(2)
	Loan repurchase commitments			407		Discounted cash flow		Recovery rates(3)
								Breach rates(3)
Liabilities of consolidated VIEs:
	Variable interest entity notes			406		Market prices of VIE assets adjusted for		Impact of financial guarantee		0% - 60% (36%)
						financial guarantees provided
Credit derivative liabilities, net:
	CMBS			63		Direct Price Model		Nonperformance risk		54% - 54% (54%)
Other derivative liabilities				4		Discounted cash flow		Cash flows		$0 - $49 ($25)(4)
____________
(1) - Negative percentage represents financial guarantee policies in a receivable position.
(2) - Unobservable inputs are primarily based on comparable companies' EBITDA multiples.
(3) - Recovery rates and breach rates include estimates about potential variations in the outcome of litigation with a counterparty.
(4) - Midpoint of cash flows are used for the weighted average.

			Fair Value
			as of							Range
			December 31,							(Weighted
In millions			2016			Valuation Techniques		Unobservable Input		Average)
Assets of consolidated VIEs:
	Loans receivable at fair value		$	916		Market prices adjusted for financial		Impact of financial guarantee		0% - 28% (3%)
						guarantees provided to VIE obligations
						Multiples of EBITDA		Multiples(1)
	Loan repurchase commitments			404		Discounted cash flow		Recovery rates(2)
								Breach rates(2)
Liabilities of consolidated VIEs:
	Variable interest entity notes			476		Market prices of VIE assets		Impact of financial guarantee		0% - 54% (24%)
						adjusted for financial guarantees provided
Credit derivative liabilities, net:
								Recovery rates		25% - 40% (33%)
	CMBS			62		BET Model		Nonperformance risk		10% - 32% (32%)
								Weighted average life (in years)		1.1 - 1.5 (1.3)
								CMBS spreads		25% - 35% (30%)
	Multi-sector CDO			2		Direct Price Model		Nonperformance risk		58% - 58% (58%)
Other derivative liabilities				20		Discounted cash flow		Cash flows		$0 - $83 ($42)(3)
	____________
	(1) - Unobservable inputs are primarily based on comparable companies' EBITDA multiples.
	(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.

Sensitivity of Significant Unobservable Inputs

The significant unobservable inputs used in the fair value measurement of the Company’s loans receivable at fair value of consolidated VIEs are the impact of the financial guarantee and multiples. The fair value of loans receivable are calculated by subtracting the value of the financial guarantee from the market value of VIE liabilities and methodologies using multiples of EBITDA. 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 the value of the financial guarantee provided by the Company under the insurance policy increases, 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. Multiples are external factors that are considered when determining the fair values of corporate loans. These loans are to privately held companies for which MBIA has limited information. Therefore, the Company uses multiples of EBITDA of comparable companies and any increase or decrease in these multiples would result in an increase or decrease in the fair values of the loans, respectively.

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 have a material adverse impact on 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.

Effective in 2017, the Company changed its technique on valuing its commercial mortgage-backed securities (“CMBS”) credit derivative to the Direct Price Model from the BET Model. The significant unobservable input used in the fair value measurement was 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.

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 December 31, 2017 and 2016:

						Fair Value Measurements at Reporting Date Using
						Quoted Prices in			Significant
						Active Markets			Other			Significant				Counterparty
						for Identical			Observable			Unobservable				and Cash			Balance as of
						Assets			Inputs			Inputs				Collateral			December 31,
In millions						(Level 1)			(Level 2)			(Level 3)				Netting			2017
Assets:
Fixed-maturity investments:
	U.S. Treasury and government agency					$	1,256		$	96		$	-			$	-		$	1,352
	State and municipal bonds						-			858			-				-			858
	Foreign governments						-			10			-				-			10
	Corporate obligations						-			1,338			2	(1)			-			1,340
	Mortgage-backed securities:
		Residential mortgage-backed agency					-			368			-				-			368
		Residential mortgage-backed non-agency					-			32			-				-			32
		Commercial mortgage-backed					-			60			7	(1)			-			67
	Asset-backed securities:
		Collateralized debt obligations					-			118			-				-			118
		Other asset-backed					-			178			5	(1)			-			183
			Total fixed-maturity investments				1,256			3,058			14				-			4,328
Money market securities							180			-			-				-			180
Perpetual debt and equity securities							26			37			-				-			63
Fixed-income fund							-			-			-				-			82	(2)
Cash and cash equivalents							122			-			-				-			122
Derivative assets:
	Non-insured derivative assets:
		Interest rate derivatives					-			2			-				-			2
						Fair Value Measurements at Reporting Date Using
						Quoted Prices in			Significant
						Active Markets			Other			Significant				Counterparty
						for Identical			Observable			Unobservable				and Cash			Balance as of
						Assets			Inputs			Inputs				Collateral			December 31,
In millions						(Level 1)			(Level 2)			(Level 3)				Netting			2017
Assets of consolidated VIEs:
	Corporate obligations						-			19			-				-			19
	Mortgage-backed securities:
		Residential mortgage-backed non-agency					-			108			-				-			108
		Commercial mortgage-backed					-			30			6	(1)			-			36
	Asset-backed securities:
		Collateralized debt obligations					-			8			1	(1)			-			9
		Other asset-backed					-			10			-				-			10
	Cash						24			-			-				-			24
	Loans receivable at fair value:
		Residential loans receivable					-			-			759				-			759
		Corporate loans receivable					-			-			920				-			920
	Loan repurchase commitments						-			-			407				-			407
	Other assets:
		Currency derivatives					-			-			19	(1)			-			19
		Other					-			-			14	(1)			-			14
Total assets						$	1,608		$	3,272		$	2,140			$	-		$	7,102
Liabilities:
Medium-term notes						$	-		$	-		$	115	(1)		$	-		$	115
Derivative liabilities:
	Insured derivatives:
		Credit derivatives					-			2			63				-			65
	Non-insured derivatives:
		Interest rate derivatives					-			193			-				-			193
		Other					-			-			4				-			4
Other liabilities:
	Warrants						-			6			-				-			6
	Other payable						-			-			7	(1)			-			7
Liabilities of consolidated VIEs:
	Variable interest entity notes						-			663			406				-			1,069
Total liabilities						$	-		$	864		$	595			$	-		$	1,459
____________
(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.

						Fair Value Measurements at Reporting Date Using
						Quoted Prices in			Significant
						Active Markets			Other			Significant				Counterparty
						for Identical			Observable			Unobservable				and Cash			Balance as of
						Assets			Inputs			Inputs				Collateral			December 31,
In millions						(Level 1)			(Level 2)			(Level 3)				Netting			2016
Assets:
Fixed-maturity investments:
	U.S. Treasury and government agency					$	825		$	112		$	-			$	-		$	937
	State and municipal bonds						-			1,440			-				-			1,440
	Foreign governments						-			9			-				-			9
	Corporate obligations						-			1,332			2	(1)			-			1,334
	Mortgage-backed securities:
		Residential mortgage-backed agency					-			868			-				-			868
		Residential mortgage-backed non-agency					-			45			-				-			45
		Commercial mortgage-backed					-			43			-				-			43
	Asset-backed securities:
		Collateralized debt obligations					-			7			15	(1)			-			22
		Other asset-backed					-			257			44	(1)			-			301
			Total fixed-maturity investments				825			4,113			61				-			4,999
Money market securities							521			-			-				-			521
Perpetual debt and equity securities							26			9			-				-			35
Fixed-income fund							-			-			-				-			75	(2)
Cash and cash equivalents							163			-			-				-			163
Derivative assets:
	Non-insured derivative assets:
		Interest rate derivatives					-			3			-				-			3
						Fair Value Measurements at Reporting Date Using
						Quoted Prices in			Significant
						Active Markets			Other			Significant				Counterparty
						for Identical			Observable			Unobservable				and Cash			Balance as of
						Assets			Inputs			Inputs				Collateral			December 31,
In millions						(Level 1)			(Level 2)			(Level 3)				Netting			2016
Assets of consolidated VIEs:
	Corporate obligations						-			27			-				-			27
	Mortgage-backed securities:
		Residential mortgage-backed non-agency					-			149			-				-			149
		Commercial mortgage-backed					-			52			-				-			52
	Asset-backed securities:
		Collateralized debt obligations					-			7			1	(1)			-			8
		Other asset-backed					-			18			1	(1)			-			19
	Cash						24			-			-				-			24
	Loans receivable at fair value:
		Residential loans receivable					-			-			916				-			916
		Corporate loans receivable					-			-			150	(1)			-			150
	Loan repurchase commitments						-			-			404				-			404
	Derivative assets:
		Currency derivatives					-			-			19	(1)			-			19
Total assets						$	1,559		$	4,378		$	1,552			$	-		$	7,564
Liabilities:
Medium-term notes						$	-		$	-		$	101	(1)		$	-		$	101
Derivative liabilities:
	Insured derivatives:
		Credit derivatives					-			2			64				-			66
	Non-insured derivatives:
		Interest rate derivatives					-			213			-				-			213
		Other					-			-			20				-			20
Other liabilities:
	Warrants						-			33			-				-			33
Liabilities of consolidated VIEs:
	Variable interest entity notes						-			875			476				-			1,351
Total liabilities						$	-		$	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.

Level 3 assets at fair value as of December 31, 2017 and 2016 represented approximately 30% and 21%, respectively, of total assets measured at fair value. Level 3 liabilities at fair value as of December 31, 2017 and 2016 represented approximately 41% and 37%, 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 December 31, 2017 and 2016:

			Fair Value Measurements at Reporting Date Using
			Quoted Prices in			Significant			Significant			Fair Value			Carry Value
			Active Markets for			Other Observable			Unobservable			Balance as of			Balance as of
			Identical Assets			Inputs			Inputs			December 31,			December 31,
In millions			(Level 1)			(Level 2)			(Level 3)			2017			2017
Assets:
	Other investments		$	-		$	2		$	-		$	2		$	2
Assets of consolidated VIEs:
	Investments held-to-maturity			-			-			916			916			890
Total assets			$	-		$	2		$	916		$	918		$	892
Liabilities:
	Long-term debt		$	-		$	1,002		$	-		$	1,002		$	2,121
	Medium-term notes			-			-			406			406			650
	Investment agreements			-			-			433			433			337
Liabilities of consolidated VIEs:
	Variable interest entity notes			-			352			916			1,268			1,220
Total liabilities			$	-		$	1,354		$	1,755		$	3,109		$	4,328
Financial Guarantees:
	Gross		$	-		$	-		$	1,785		$	1,785		$	1,220
	Ceded			-			-			61			61			39

			Fair Value Measurements at Reporting Date Using
			Quoted Prices in			Significant			Significant			Fair Value			Carry Value
			Active Markets for			Other Observable			Unobservable			Balance as of			Balance as of
			Identical Assets			Inputs			Inputs			December 31,			December 31,
In millions			(Level 1)			(Level 2)			(Level 3)			2016			2016
Assets:
	Other investments		$	-		$	2		$	-		$	2		$	3
	Assets held for sale			-			306			-			306			306
Assets of consolidated VIEs:
	Investments held-to-maturity			-			-			876			876			890
Total assets			$	-		$	308		$	876		$	1,184		$	1,199
Liabilities:
	Long-term debt		$	-		$	1,030		$	-		$	1,030		$	1,986
	Medium-term notes			-			-			478			478			794
	Investment agreements			-			-			508			508			399
Liabilities of consolidated VIEs:
	Variable interest entity notes			-			-			882			882			890
Total liabilities			$	-		$	1,030		$	1,868		$	2,898		$	4,069
Financial Guarantees:
	Gross		$	-		$	-		$	2,638		$	2,638		$	995
	Ceded			-			-			18			18			43

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 years ended December 31, 2017 and 2016:

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Year Ended December 31, 2017
																																						Change in
																																						Unrealized
																																						Gains
																																						(Losses) for
																																						the Period
																																						Included in
								Unrealized																														Earnings for
								Gains /			Unrealized			Foreign																								Assets
								(Losses)			Gains /			Exchange																								still held
		Balance,			Realized			Included			(Losses)			Recognized															Transfers			Transfers						as of
		Beginning			Gains /			in			Included			in OCI or															into			out of			Ending			December 31,
In millions		of Year			(Losses)			Earnings			in OCI			Earnings			Purchases			Issuances			Settlements			Sales			Level 3(1)			Level 3(1)			Balance			2017
Assets:
Corporate obligations			2			-			-			-			-			1			-			-			-			-			(1)			2			-
Commercial
mortgage-backed			-			-			-			-			-			-			-			-			-			14			(7)			7			-
Collateralized debt
obligations			15			-			-			-			-			-			-			(7)			-			-			(8)			-			-
Other asset-backed			44			-			-			2			-			-			-			(41)			-			-			-			5			-
State and municipal
bonds			-			-			-			-			-			-			-			-			-			1			(1)			-			-
Assets of
consolidated VIEs:
Corporate obligations			-			-			-			-			-			-			-			(2)			-			6			(4)			-			-
Commercial
mortgage-backed			-			-			-			-			-			-			-			-			(3)			9			-			6			-
Collateralized debt
obligations			1			-			-			-			-			-			-			-			-			-			-			1			-
Other asset-backed			1			-			-			-			-			-			-			-			-			1			(2)			-			-
Loans receivable-
residential			916			-			79			-			-			-			-			(236)			-			-			-			759			79
Loans receivable-
corporate			150			-			89			-			-			719			-			(38)			-			-			-			920			89
Loan repurchase
commitments			404			-			3			-			-			-			-			-			-			-			-			407			3
Currency
derivatives, net			19			-			2			-			(2)			-			-			-			-			-			-			19			-
Other			-			-			(3)			-			-			17			-			-			-			-			-			14			(3)
Total assets		$	1,552		$	-		$	170		$	2		$	(2)		$	737		$	-		$	(324)		$	(3)		$	31		$	(23)		$	2,140		$	168

																																						Change in
																																						Unrealized
																																						(Gains)
																																						Losses for
																																						the Period
																																						Included in
								Unrealized																														Earnings for
								(Gains) /			Unrealized			Foreign																								Liabilities
								Losses			(Gains) /			Exchange																								still held
		Balance,			Realized			Included			Losses			Recognized															Transfers			Transfers						as of
		Beginning			(Gains) /			in			Included			in OCI or															into			out of			Ending			December 31,
In millions		of Year			Losses			Earnings			in OCI			Earnings			Purchases			Issuances			Settlements			Sales			Level 3(1)			Level 3(1)			Balance			2017
Liabilities:
Medium-term notes		$	101		$	-		$	(1)		$	-		$	15		$	-		$	-		$	-		$	-		$	-		$	-		$	115		$	14
Credit derivatives, net			64			51			(1)			-			-			-			-			(51)			-			-			-			63			1
Other derivatives, net			20			-			18			-			-			-			-			(34)			-			-			-			4			18
Other payable			-			-			-			-			-			7			-			-			-			-			-			7			-
Liabilities of
consolidated VIEs:
VIE notes			476			-			37			-			-			-			-			(56)			(51)			-			-			406			37
Total liabilities		$	661		$	51		$	53		$	-		$	15		$	7		$	-		$	(141)		$	(51)		$	-		$	-		$	595		$	70
_______________
(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 Year Ended December 31, 2016
																																						Change in
																																						Unrealized
																																						Gains
																																						(Losses) for
																																						the Period
																																						Included in
								Unrealized																														Earnings for
								Gains /			Unrealized			Foreign																								Assets
								(Losses)			Gains /			Exchange																								still held
		Balance,			Realized			Included			(Losses)			Recognized															Transfers			Transfers						as of
		Beginning			Gains /			in			Included			in OCI or															into			out of			Ending			December 31,
In millions		of Year			(Losses)			Earnings			in OCI			Earnings			Purchases			Issuances			Settlements			Sales			Level 3(1)			Level 3(1)			Balance			2016
Assets:
Foreign governments		$	2		$	-		$	-		$	-		$	(1)		$	10		$	-		$	(10)		$	-		$	-		$	(1)		$	-		$	-
Corporate obligations			7			-			-			-			-			-			-			-			-			2			(7)			2			-
Commercial
mortgage-backed			-			-			-			-			-			-			-			-			(1)			1			-			-			-
Collateralized debt
obligations			29			-			-			18			-			-			-			(32)			-			-			-			15			-
Other asset-backed			38			(1)			(1)			14			-			-			-			(3)			-			-			(3)			44			(1)
State and municipal
bonds			41			-			-			-			-			122			-			(39)			(1)			2			(125)			-			-
Assets of
consolidated VIEs:
Corporate obligations			11			-			(6)			-			-			-			-			(2)			-			2			(5)			-			-
Residential mortgage-
backed non-agency			-			-			(1)			-			-			-			-			-			-			1			-			-			-
Commercial
mortgage-backed			-			-			(4)			-			-			-			-			-			-			4			-			-			-
Collateralized debt
obligations			1			-			-			-			-			-			-			-			-			-			-			1			-
Other asset-backed			6			-			(7)			-			-			-			-			-			-			5			(3)			1			-
Loans receivable-
residential			1,185			-			(11)			-			-			-			-			(258)			-			-			-			916			(11)
Loans receivable-
corporate			107			-			4			-			-			146			-			-			(107)			-			-			150			4
Loan repurchase
commitments			396			-			8			-			-			-			-			-			-			-			-			404			8
Currency derivatives, net			11			-			2			-			6			-			-			-			-			-			-			19			8
Total assets		$	1,834		$	(1)		$	(16)		$	32		$	5		$	278		$	-		$	(344)		$	(109)		$	17		$	(144)		$	1,552		$	8

																																						Change in
																																						Unrealized
																																						(Gains)
																																						Losses for
																																						the Period
																																						Included in
								Unrealized																														Earnings for
								(Gains) /			Unrealized			Foreign																								Liabilities
								Losses			(Gains) /			Exchange																								still held
		Balance,			Realized			Included			Losses			Recognized															Transfers			Transfers						as of
		Beginning			(Gains) /			in			Included			in OCI or															into			out of			Ending			December 31,
In millions		of Year			Losses			Earnings			in OCI			Earnings			Purchases			Issuances			Settlements			Sales			Level 3 (1)			Level 3 (1)			Balance			2016
Liabilities:
Medium-term notes		$	161		$	-		$	(3)		$	-		$	(1)		$	-		$	-		$	(56)		$	-		$	-		$	-		$	101		$	(4)
Credit derivatives, net			85			43			(21)			-			-			-			-			(43)			-			-			-			64			(13)
Other derivatives, net			18			-			2			-			-			-			-			-			-			-			-			20			2
Liabilities of
consolidated VIEs:
VIE notes			1,267			-			(23)			-			-			9			-			(146)			(631)			-			-			476			(23)
Total liabilities		$	1,531		$	43		$	(45)		$	-		$	(1)		$	9		$	-		$	(245)		$	(631)		$	-		$	-		$	661		$	(38)
_______________
(1) - Transferred in and out at the end of the period.

For the year ended December 31, 2017, 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, corporate obligations and other asset-backed 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 year ended December 31, 2016, transfers into Level 3 and out of Level 2 were principally related to other asset-backed, CMBS, 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, corporate obligations and other asset-backed 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.

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 relating to Level 3 assets and liabilities for the years ended December 31, 2017, 2016 and 2015 are reported on the Company’s consolidated statements of operations as follows:

												Change in Unrealized Gains (Losses)
												for the Period Included in Earnings
			Total Gains (Losses)									for Assets and Liabilities still
In millions			Included in Earnings									held as of December 31,
			2017			2016			2015			2017			2016			2015
Revenues:
	Unrealized gains (losses) on
	insured derivatives		$	1		$	21		$	159		$	(1)		$	13		$	145
	Realized gains (losses) and other
	settlements on insured derivatives			(51)			(43)			(28)			-			-			-
	Net gains (losses) on financial instruments
	at fair value and foreign exchange			(32)			1			39			(32)			1			42
	Net investment losses related to
	other-than-temporary impairments			-			(1)			-			-			-			-
	Revenues of consolidated VIEs:
	Net gains (losses) on financial instruments
	at fair value and foreign exchange			131			14			23			131			32			19
Total			$	49		$	(8)		$	193		$	98		$	46		$	206

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 years ended December 31, 2017, 2016 and 2015 for financial instruments for which the fair value option was elected:

				Years Ended December 31,
	In millions			2017			2016			2015
	Investments carried at fair value(1)			$	8		$	7		$	(3)
	Fixed-maturity securities held at fair value-VIE(2)				(22)			(124)			(146)
	Loans receivable at fair value:
		Residential mortgage loans(2)			(158)			(268)			(246)
		Other loans(2)			52			-			-
	Loan repurchase commitments(2)				3			8			17
	Other(2)				(3)			-			-
	Medium-term notes(1)				(14)			4			36
	Variable interest entity notes (2)				230			383			381
	___________
	(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 December 31, 2017 and 2016 for loans and notes for which the fair value option was elected:

			As of December 31, 2017										As of December 31, 2016
			Contractual									Contractual
			Outstanding			Fair						Outstanding			Fair
In millions			Principal			Value			Difference			Principal			Value			Difference
Loans receivable at fair value:
	Residential mortgage loans		$	732		$	727		$	5		$	965		$	894		$	71
	Residential mortgage loans (90 days or more past due)			170			32			138			143			22			121
	Corporate loans (90 days or more past due)			1,394			920			474			150			150			-
Total loans receivable at fair value				2,296			1,679			617			1,258			1,066			192
Variable interest entity notes				1,882			1,069			813			2,449			1,351			1,098
Medium-term notes				180			115			65			158			101			57

The difference between the contractual outstanding principal and the fair values on loans receivable, VIE notes and MTNs, in the preceding table, are primarily attributable to credit risk. This is due to the high rate of defaults on loans and the collateral supporting the VIE notes and the nonperformance risk of the Company on its MTNs, which resulted in depressed pricing of the financial instruments.

X

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References

Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 820
-SubTopic 10
-Section 50
-Paragraph 2
-URI http://asc.fasb.org/extlink&oid=66048111&loc=d3e19207-110258

Reference 2: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 825
-SubTopic 10
-Section 50
-Paragraph 30
-URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14172-108612

Reference 3: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 825
-SubTopic 10
-Section 50
-Paragraph 28
-URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14064-108612

Reference 4: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 825
-SubTopic 10
-Section 50
-Paragraph 21
-URI http://asc.fasb.org/extlink&oid=73719730&loc=d3e13537-108611

Reference 5: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 825
-SubTopic 10
-Section 50
-Paragraph 16
-URI http://asc.fasb.org/extlink&oid=73719730&loc=d3e13504-108611

Reference 6: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 825
-SubTopic 10
-Section 50
-Paragraph 10
-URI http://asc.fasb.org/extlink&oid=73719730&loc=d3e13433-108611

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