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Loss and Loss Adjustment Expense Reserves | 12 Months Ended
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Dec. 31, 2013
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Loss and Loss Adjustment Expense Reserves | Note 6: Loss and Loss Adjustment Expense Reserves Loss and Loss Adj ustment Expense Process The Company's insured portfolio management groups within its U.S. public finance insurance and structured finance and international insurance businesses (collectively, “IPM”) monitor MBIA's outstanding insured obligations with the objective of minimizing losses. IPM meets this objective by identifying issuers that, because of deterioration in credit quality or changes in the economic, regulatory or political environment, are at a heightened risk of defaulting on debt service of obligations insured by MBIA. In such cases, IPM works with the issuer, trustee, bond counsel, servicer, underwriter and other interested parties in an attempt to alleviate or remedy the problem and avoid defaults on debt service payments. Once an obligation is insured, MBIA typically requires the issuer, servicer (if applicable) and the trustee to furnish periodic financial and asset-related information, including audited financial statements, to IPM for review. IPM also monitors publicly available information related to insured obligations. Potential problems uncovered through this review, such as poor financial results, low fund balances, covenant or trigger violations and trustee or servicer problems, or other events that could have an adverse impact on the insured obligation, could result in an immediate surveillance review and an evaluation of possible remedial actions. IPM also monitors and evaluates the impact on issuers of general economic conditions, current and proposed legislation and regulations, as well as sovereign, state and municipal finances and budget developments. The frequency and extent of IPM's monitoring is based on the criteria and categories described below. Insured obligations that are judged to merit more frequent and extensive monitoring or remediation activities due to a deterioration in the underlying credit quality of the insured obligation or the occurrence of adverse events related to the underlying credit of the issuer are assigned to a surveillance category (“Caution List—Low,” “Caution List—Medium,” “Caution List—High” or “Classified List”) depending on the extent of credit deterioration or the nature of the adverse events. IPM monitors insured obligations assigned to a surveillance category more frequently and, if needed, develops a remediation plan to address any credit deterioration. The Company does not establish any case basis reserves for insured obligations that are assigned to “Caution List—Low,” “Caution List—Medium” or “Caution List—High.” In the event MBIA expects to pay a claim with respect to an insured transaction, it places the insured transaction on its “Classified List” and establishes a case basis reserve. The following provides a description of each surveillance category: “Caution List—Low” —Includes issuers where debt service protection is adequate under current and anticipated circumstances. However, debt service protection and other measures of credit support and stability may have declined since the transaction was underwritten and the issuer is less able to withstand further adverse events. Transactions in this category generally require more frequent monitoring than transactions that do not appear within a surveillance category. IPM subjects issuers in this category to heightened scrutiny. “Caution List—Medium” —Includes issuers where debt service protection is adequate under current and anticipated circumstances, although adverse trends have developed and are more pronounced than for “Caution List – Low.” Issuers in this category may have breached one or more covenants or triggers. These issuers are more closely monitored by IPM but generally take remedial action on their own. “Caution List—High” —Includes issuers where more proactive remedial action is needed but where no defaults on debt service payments are expected. Issuers in this category exhibit more significant weaknesses, such as low debt service coverage, reduced or insufficient collateral protection or inadequate liquidity, which could lead to debt service defaults in the future. Issuers in this category may have breached one or more covenants or triggers and have not taken conclusive remedial action. Therefore, IPM adopts a remediation plan and takes more proactive remedial actions. “Classified List” —Includes all insured obligations where MBIA has paid a claim or where a claim payment is expected. It also includes insured obligations where a significant LAE payment has been made, or is expected to be made, to mitigate a claim payment. This may include property improvements, bond purchases and commutation payments. Generally, IPM is actively remediating these credits where possible, including restructurings through legal proceedings, usually with the assistance of specialist counsel and advisors. In establishing case basis loss reserves, the Company calculates the present value of probability-weighted estimated loss payments, net of estimated recoveries, using a discount rate equal to the risk-free rate applicable to the currency and the weighted average remaining life of the insurance contract as required by accounting principles for financial guarantee contracts. Yields on U.S. Treasury offerings are used to discount loss reserves denominated in U.S. dollars, which represent the majority of the loss reserves. Similarly, yields on foreign government offerings are used to discount loss reserves denominated in currencies other than the U.S. dollar. If the Company were to apply different discount rates, its case basis reserves may have been higher or lower than those established as of December 31, 2013. For example, a higher discount rate applied to expected future payments would have decreased the amount of a case basis reserve established by the Company and a lower rate would have increased the amount of a reserve established by the Company. Similarly, a higher discount rate applied to the potential future recoveries would have decreased the amount of a loss recoverable established by the Company and a lower rate would have increased the amount of a loss recoverable established by the Company. U.S. Public Finance U.S. public finance insur ed transactions consist of municipal bonds, including tax-exempt and taxable indebtedness of U.S. political subdivisions, as well as utility districts, airports, health care institutions, higher educational facilities, student loan issuers, housing authorities and other similar agencies and obligations issued by private entities that finance projects that serve a substantial public purpose. The Company estimates future losses by utilizing probability-weighted scenarios that are customized to each insured transaction. Future loss estimates consider debt service due for each insured transaction, which includes par outstanding and interest due. The Company has established loss and LAE reserves and an insurance loss recoverable of $87 million and $13 million, respectively, as of December 31, 2013. For the year ended December 31, 2013, losses and LAE incurred was $105 million, primarily related to certain general obligation bonds and the loss related to the difference in the value of the salvage receivable previously recorded and the fair market value of the marketable securities received in connection with the restructuring of a gaming revenue transaction. Certain local governments remain under extreme financial and budgetary stress and s ome have filed for protection under the United States Bankruptcy Code, or have entered into state statutory proceedings established to assist municipalities in managing through periods of severe fiscal stress. This could lead to an increase in defaults by such entities on the payment of their obligations and losses or impairments on a greater number of the Company's insured transactions. The Company monitor s and analyze s these situations closely, however, the overall extent and duration of such events are uncertain. As of December 31, 2013, the Company had $124.9 billion of gross par outstanding on general obligations, of which $161 million was reflected on the Company's “Classified List.” Capital appreciation bonds are reported at the par amount at the time of issuance of the insurance policy. Structured Finance and International As of December 31, 2013, the majority of the structured finance and international insurance segment's case basis reserves and insurance loss recoveries recorded in accordance with GAAP were related to insured second and first-lien RMBS transactions. These reserves and recoveries do not include estimates for policies insuring credit derivatives or losses and recoveries on financial guarantee VIEs that are eliminated in consolidation. Policies insuring credit derivative contracts are accounted for as derivatives and carried at fair value under GAAP. The fair values of insured derivative contracts are influenced by a variety of market and transaction-specific factors that may be unrelated to potential future claim payments under the Company's insurance policies. In the absence of credit impairments on insured derivative contracts or the early termination of such contracts at a loss, the cumulative unrealized losses recorded from fair valuing these contracts should reverse before or at the maturity of the contracts. Notwithstanding the difference in accounting under GAAP for financial guarantee policies and the Company's insured derivatives, insured derivatives have similar terms, conditions, risks, and economic profiles to financial guarantee insurance policies, and therefore, are evaluated by the Company for loss (referred to as credit impairment herein) and LAE periodically in a manner similar to the way that loss and LAE reserves are estimated for financial guarantee insurance policies. Credit impairments represent actual payments and collections plus the present value of estimated expected future claim payments, net of recoveries. MBIA Insurance Corporation's expected future claim payments for insured derivatives were discounted using a rate of 5.09%, the same rate it used to calculate its statutory loss reserves as of December 31, 2013. These credit impairments, calculated in accordance with statutory accounting principles (“U.S. STAT”) differ from the fair values recorded in the Company's consolidated financial statements. The Company considers its credit impairment estimates as critical information for investors as it provides information about loss payments the Company expects to make on insured derivative contracts. As a result, the following loss and LAE process discussion includes information about loss and LAE activity recorded in accordance with GAAP for financial guarantee insurance policies and credit impairments estimated in accordance with U.S. STAT for insured derivative contracts. Refer to “Note 7: Fair Value of Financial Instruments” included herein for additional information about the Company's insured credit derivative contracts. RMBS Case Basis Reserves and Recoveries (Financial Guarantees) The Company's RMBS reserves and recoveries relate to financial guarantee insurance policies. The Company calculated RMBS case basis reserves as of December 31, 2013 for both second and first-lien RMBS transactions using a process called the “Roll Rate Methodology.” The Roll Rate Methodology is a multi-step process using a database of loan level information, a proprietary internal cash flow model, and a commercially available model to estimate expected ultimate cumulative losses on insured bonds. “Roll Rate” is defined as the probability that current loans become delinquent and that loans in the delinquent pipeline are charged-off or liquidated. Generally, Roll Rates are calculated for the previous three months and averaged. The loss reserve estimates are based on a probability-weighted average of three scenarios of loan losses (base case, stress case, and an additional stress case). In calculating ultimate cumulative losses for RMBS, the Company estimates the amount of loans that are expected to be charged-off (deemed uncollectible by servicers of the transactions) or liquidated in the future. The Company assumes that charged-off loans have zero recovery values. Second-lien RMBS Reserves The Company's second-lien RMBS case basis reserves as of December 31, 2013 relate to RMBS backed by home e quity lines of credit (“HELOC”) and closed-end second mortgages (“CES”). The Roll Rates for 30-59 day delinquent loans and 60-89 day delinquent loans are calculated on a transaction-specific basis. The Company assumes that the Roll Rate for 90+ day delinquent loans, excluding foreclosures and Real Estate Owned (“REO”) is 95%. The Roll Rates are applied to the amounts in the respective delinquency buckets based on delinquencies as of November 30, 2013 to estimate future losses from loans that are delinquent as of the current reporting period. Roll Rates for loans that are current as of November 30, 2013 (“Current Roll to Loss”) are also calculated on a transaction-specific basis. A proportion of loans reported current as of November 30, 2013 is assumed to become delinquent every month, at a Current Roll to Loss rate that persists at a high level for a time and subsequently starts to decline. A key assumption in the model is the period of time in which the Company projects high levels of Current Roll to Loss to persist. The Company runs multiple scenarios, each with varying periods of time, for which the high levels of Current Roll to Loss rates persist. Loss reserves are calculated by using a weighted average of these scenarios, with the majority of the probability assigned to stressful scenarios where the high levels of Current Roll to Loss rates persist for six or twenty four months before reverting to historic levels. For example, i n the base case scenario, the Company assumes that the Current Roll to Loss begins to decline immediately and continues to decline over the next six months to 25% of their levels as of November 30, 2013. I f the amount of current loans which become 30-59 days delinquent is 10%, and recent performance suggests that 30% of those loans will be charged-off, the Current Roll to Loss for the transaction is 3%. In the base case, the Current Roll to Loss will then reduce linearly to 25% of its original value over the next six months (i.e., 3% will linearly reduce to 0.75% over the six months from December 2013 to May 201 4). After that six-month period, the Company further reduces the Current Roll to Loss to 0% by mid-2014 with the expectation that the performing seasoned loans will eventually result in loan performance reverting to low er levels of default consistent with history. I n developing multiple loss scenarios, stress is applied by elongating the Current Roll to Loss rate for various periods, simulating a slower improvement in the transaction performance. In addition, in the Company's loss reserve models for transactions secured by HELOCs, the Company considers borrower draw and prepayment rates and factors that could affect the excess spread generated by current loans, which offsets losses and reduces payments. For HELOCs, the current three-month average draw rate is generally used to project future draws on the line. Prior to the second quarter of 2013, f or HELOCs and transactions secured by fixed-rate CES, the three-month average conditional prepayment rate was generally used to start the projection for trends in voluntary principal prepayments. Beginning in the second quarter of 2013, i n order to capture the effects of rising interest rates, which impact voluntary prepayments, the Company began using historical average voluntary prepayment rates to model its loss reserves. For HELOCs, p rojected cas h flows are also based on an assumed constant basis spread between floating rate assets and floating rate insured debt obligations (the difference between p rime and London Interbank Offered Rate (“LIBOR”) interest rates, minus any applicable fees). For all transactions, cash flow models consider allocations and other structural aspects, including managed amortization periods, rapid amortization periods and claims against MBIA Corp.'s insurance policy consistent with such policy's terms and conditions. The estimated net claims from the procedure above are then discounted using a risk-free rate to a net present value reflecting MBIA's general obligation to pay claims over time and not on an accelerated basis. The above assumptions represent MBIA's probability-weighted estimates of how transactions will perform over time. As of December 31, 2013, the Company established loss and LAE reserves totaling $126 million related to second-lien RMBS issues after the elimination of $43 million as a result of consolidating VIEs. For the year ended December 31, 2013, the Company had a $2 million benefit of loss and LAE recorded in earnings related to second-lien RMBS issues after the elimination of a $50 million benefit as a result of consolidating VIEs. The Company monitors portfolio performance on a monthly basis against projected performance, reviewing delinquencies, Roll Rates, and prepayment rates (including voluntary and involuntary). However, loan performance remains difficult to predict and losses may exceed expectations. In the event of a material deviation in actual performance from projected performance, the Company would increase or decrease the case basis reserves accordingly. If actual performance were to remain at the peak levels for six additional month s compared to the pro bability-weighted outcome currently used by the Company, t he addition to the case basis reserves would be approximately $70 million. Second-lien RMBS Recoveries The Company primarily records two types of recoveries related to insured second-lien RMBS exposures: “put-back” claims related to those mortgage loans whose inclusion in insured securitizations failed to comply with representations and warranties (“ineligible loans”), and excess spread that is generated from performing loans in the insured transactions. Ineligible Mortgage Loans To date, MBIA has settled the majority of the Company's put-back claims, with its claims against only Credit Suisse remaining as outstanding. The settlement amounts have been consistent with the put-back recoveries previously included in the Company's financial statements. Refer to “Note 1: Business Developments and Risks and Uncertainties” included herein for a description of the BofA Settlement Agreement and the Residential Capital LLC Agreement. Additional information on the status of the litigation against Credit Suisse can be found within “Note 21: Commitments and Contingencies.” The contract claim remaining with Credit Suisse is related to the inclusion of ineligible mortgage loans in the 2007-2 Home Equity Mortgage Trust (“HEMT”) securitization. Credit Suisse has challenged the Company's assessment of the ineligibility of individual mortgage loans and the dispute is the subject of litigation for which there is no assurance that the Company will prevail. As of December 31, 2013, the Company recorded estimated recoveries, gross of income taxes, of $359 m illion related to second-lien RMBS put-back claims on ineligible mortgage loans, reflected in “Loan repurchase commitments” presented under the heading “Assets of consolidated variable interest entities” on the Company's consolidated balance sheets. As of December 31, 2012, the Company recorded estimated recoveries, gross of income taxes, of $3.6 b illion related to second-lien RMBS put-back claims on ineligible mortgage loans, of which, $2.5 billion was included in “Insurance loss recoverable” and $1.1 billion was included in “Loan repurchase commitments” presented under the heading “Assets of consolidated variable interest entities” on the Company's consolidated balance sheets. As of December 31, 2013 and 2012, the Company's estimated recoveries after income taxes calculated at the federal statutory rate of 35%, were $233 m illion and $2.3 billion, respectively, which was 7% and 73% of the consolidated total shareholders' equity of MBIA, excluding preferred stock of subsidiaries and noncontrolling interests, respectively. The Company believes that it will prevail in enforcing its contractual put-back rights against Credit Suisse. Based on the Company's assessment of the strength of these claims, the Company believes it is entitled to collect the full amount of its incurred losses, and interest on amounts paid. However, u ncertainty remains with respect to the ultimate outcome of the litigation with Credit Suisse, which is contemplated in the scenario based-modeling the Company utilizes. The Credit Suisse recovery scenarios are based on the amount of incurred losses measured against certain probabilities of ultimate resolution of the dispute with Credit Suisse over the inclusion of ineligible mortgage loans in the HEMT securitization. Most of the probability weight is assigned to partial recovery scenarios and a re discounted using the current risk-free discount rates associated with the underlying transaction's cash flows. The Company frequent ly reviews the approach and assumptions it applies to calculate put-back recoveries. The same transactional documents that provide the Company with its put-back rights against Credit Suisse also provide that the Company is entitled to reimbursement of interest on paid claims at a prescribed interest rate. F ollowing Judge Jed Rakoff's decision on February 7, 2013 in the Assured Guaranty v. Flagstar case (Assured Guaranty Municipal Corp. v. Flagstar Bank, 11-cv-02375, U.S. District Court, Southern District of New York (Manhattan)), in which he confirmed Assured Guaranty's analogous right to recover contractual interest in addition to claims paid, the Company refined its put-back recovery assumptions against Credit Suisse to increase the probability that it will be reimbursed for contractual interest owed on paid claims. Consistent with the Company's probability based put-back recovery calculation s, it determined the interest owed contemplating litigation risk and repayment risk, as well as the potential value in the context of a settlement. T he Company continues to maintain that in the context of its put-back litigation, the Company is entitled to receive interest at the New York State statutory rate. However, the Company currently calculates its put-back recoveries using the contractual interest rate, which is lower than the New York State statutory rate. The Company's assessment of the remaining unsettled recover ies related to insured Credit Suisse second-lien RMBS is principally based on the following factors: the settlement of the majority of the Company's put-back claims with sellers/servicers, including those with Bank of America and Flagstar Bank in May of 2013; Assured Guaranty's favorable court ruling in its put-back litigation against Flagstar Bank, awarding it the vast majority of the claims paid on the relevant transactions plus interest, fees and expenses, as well as their subsequent settlement with Flagstar Bank, which resolved Assured Guaranty's put-back claims; and the court rulings in MBIA's put-back litigations. The Company continues to consider all relevant facts and circumstances, including the factors described above, in developing its assumptions on expected cash inflows, probability of potential recoveries (including the outco me of litigation) and recovery period. The estimated amount and likelihood of potential recoveries are expected to be revised and supplemented to the extent there are developments in the pending litigation and/or changes to the financial condition of Credit Suisse. While the Company believes it will be successful in realizing recoveries from contractual claims, the ultimate amounts recovered may be materially different from those recorded by the Company given the inherent uncertainty of the manner of resolving the claims (e.g., litigation) and the assumptions used in the required estimation process for accounting purposes which are based, in part, on judgments and other information that are not easily corroborated by historical data or other relevant benchmarks. As of December 31, 2012, the Company utilized five probability-weighted scenarios for its non-GMAC and non-RFC exposures based on the percentage of incurred losses the Company would collect, including full recovery and limited/reduced recoveries due to litigation delays and risks and/or potential financial distress of the sellers/service r s. Probabilities were assigned across these scenarios, with most of the probability weight on partial recovery scenarios. In addition, the Company's recoveries related to the ResCap exposures were determined by scenario-based recoveries founded upon the strength of claims and ra n ge of estimated assets available to unsecured creditors for the ResCap companies. All of the Company's policies insuring second-lien RMBS for which litigation has been initiated against sellers/servicers are in the form of financial guarantee insurance contracts. In accordance with GAAP, the Company has not recorded a gain contingency with respect to pending litigation. Excess Spread As of December 31, 2013 and 2012, the Company recorded estimated recoveries of $681 million and $906 million, respectively, for the reimbursement of past and future expected claims through excess spread in insured second-lien RMBS transactions. As of December 31, 2013 and 2012, $647 million and $780 million respectively, was included in “Insurance loss recoverable” and $34 million and $126 million, respectively, was included in “Loss and loss adjustment expense reserves” on the Company's consolidated balance sheets. Excess spread is generated by performing loans within insured RMBS securitizations and is the difference between interest inflows on mortgage loan collateral and interest outflows on insured beneficial interests. The amount of excess spread depends on the future delinquency and loss trends, future prime and LIBOR interest rates and borrower refinancing behavior, which results in voluntary prepayments. First-lien RMBS Reserves The Company's first-lien RMBS case basis reserves as of December 31, 2013, which primarily relate to RMBS backed by Alternative A-paper and subprime mortgage loans, were determined using the Roll Rate Methodology. The Company assumes that the Roll Rate for loans in foreclosure, REO and bankruptcy are 90%, 90% and 75%, respectively. Roll Rates for current, 30-59 day delinquent loans, 60-89 day delinquent loans and 90+ day delinquent loans are calculated on a transaction-specific basis. The C urrent Roll to Loss rates stay at the November 30, 2013 level for one month before declining to 25% of this level over a 24-month period. The Company estimates future losses by utilizing three different probability-weighted scenarios: base; stress; and additional stress. The three scenarios differ in the roll rates to loss of 90+ day delinquent loans. In the base scenario, the Company uses deal-specific roll rates obtained from historic loan level roll rate data for 90+ day delinquent loans. In the stress scenario, the Company assumes a 90% roll rate for all 90+ day delinquent loans. In the additional stress scenario, the roll rates for each deal are an average of the deal-specific roll rate used in the base scenario and the 90% rate. The Roll Rates are applied to the amounts in each deal's respective 90+ delinquency bucket based on delinquencies as of November 30, 2013 in order to estimate future losses from loans that are delinquent as of December 31, 2013. In calculating ultimate cumulative losses for first-lien RMBS, the Company estimates the amount of loans that are expected to be liquidated through foreclosure or short sale. The time to liquidation for a defaulted loan is specific to the loan's delinquency bucket with the latest three-month average loss severities generally used to start the projection for trends in loss severities at loan liquidation. The loss severities are reduced over time to account for reduction in the amount of foreclosure inventory, anticipated future increases in home prices, principal amortization of the loan and government foreclosure moratoriums. As of December 31, 2013, the Company established loss and LAE reserves totaling $241 million related to first-lien RMBS issues after the elimination of $2 million as a result of consolidating VIEs. For the year ended December 31, 2013, the Company had a benefit of $70 million of loss and LAE recorded in earnings related to first-lien RMBS issues after the elimination of a $3 million expense as a result of consolidating VIEs. ABS CDOs (Financial Guarantees and Insured Derivatives) MBIA's insured ABS CDOs are transactions that include a variety of collateral ranging from corporate bonds to structured finance assets (which includes but are not limited to RMBS related collateral, ABS CDOs, corporate CDOs and collateralized loan obligations). These transactions were insured as either financial guarantee insurance policies or credit derivatives with the majority currently insured in the form of financial guarantees. Since the fourth quarter of 2007, MBIA's insured par exposure within the ABS CDO portfolio has been substantially reduced through a combination of terminations and commutations. Accordingly, as of December 31, 2013, the insured par exposure of the ABS CDO financial guarantee insurance policies and credit derivatives portfolio has declined by approximately 96% of the insured amount as of December 31, 2007. The Company's ABS CDOs originally benefited from two sources of credit enhancement. First, the subordination in the underlying securities collateralizing the transaction must be fully eroded and second, the subordination below the insured tranche in the CDO transaction must be fully eroded before the insured tranche is subject to a claim. The Company's payment obligations after a default are timely interest and ultimate principal. The primary factor in estimating reserves on insured ABS CDO policies written as financial guarantee insurance policies and in estimating impairments on insured ABS CDO credit derivatives is the losses associated with the underlying collateral in the transactions. MBIA's approach to establishing reserves or impairments in this portfolio employs a methodology which is similar to other structured finance asset classes insured by MBIA. The Company u tilizes up to a total of five probability-weighted scenarios in order to estimate its reserves or impairments for ABS CDOs. As of December 31, 2013, the Company established loss and LAE reserves totaling $115 million related to ABS CDO financial guarantee insurance policies after the elimination of $226 million as a result of consolidating VIEs. For the year ended December 31, 2013, the Company had a benefit of $24 million of losses and LAE recorded in earnings related to ABS CDO financial guarantee insurance policies after the elimination of a $9 million benefit as a result of consolidating VIEs. In the event of further deteriorating performance of the collateral referenced or held in ABS CDO transactions, the amount of losses estimated by the Company could increase substant ially. Credit Impairments Related to Structured CMBS Pools, CRE CDOs and CRE Loan Pools (Financial Guarantees and Insured Derivatives) Most of the structured CMBS pools, CRE CDOs and CRE loan pools insured by MBIA are accounted for as insured credit derivatives and are carried at fair value in the Company's consolidated financial statements. Refer to “Note 9: Derivative Instruments” for a further discussion of the Company's use of derivatives and their impact on the Company's consolidated financial statements. Since the Company's insured credit derivatives have similar terms, conditions, risks, and economic profiles to its financial guarantee insurance policies, the Company evaluates them for impairment in the same way that it estimates loss and LAE for its financial guarantee policies. The following discussion provides information about the Company's process for estimating credit impairments on these contracts using its statutory loss reserve methodology, determined as the present value of the probability-weighted potential future losses, net of estimated recoveries, across multiple scenarios, plus actual payments and collections. The Company has developed multiple scenarios to consider the range of potential outcomes in the CRE market and their impact on MBIA. The approaches require substantial judgments about the future performance of the underlying loans, and include the following: The first approach considers the range of commutation agreements achieved over the past several years with multiple counterparties and results in an estimated price to commute the remaining policies. I t is customized by counterparty and is dependent up on the level of dialogue with the counterparty and the credit quality and payment profile of the underlying exposure. The second approach considers current delinquency rates and uses current and projected net operating income (“NOI”) and capitalization rates (“Cap Rates”) to project losses under two scenarios. These scenarios assume that property performance remain s flat for the near term and then improve s gradually. Additionally, certain large loans are reviewed individually so that performance and loss severity c an be more accurately determine d. Other loans are reviewed for factors that may mitigate potential performance. This approach utilizes two scenarios which vary in the levels of expected future defaults. The last approach is based on a proprietary model developed by reviewing performance data on over 80,000 securitized CRE loans originated between 1992 and 2011. The time period covered during the performance review includes the years 2006 through 2011 because they encompass a period of extreme stress in the economy and the CRE markets. The Company found property type and the debt service coverage ratio to be the most significant determinants of a loan's average annual default probability, and developed a model based on these factors. The Company then ran Monte Carlo simulations to estimate the timing of defaults and losses at the property level by applying property type-based Cap Rates to estimate the property's NOI. The loss severities projected by these scenarios vary widely, from moderate to substantial losses. Actual losses will be a function of the proportion of loans in the pools that are foreclosed and liquidated and the loss severities associated with those liquidations. If the deductibles in the Company's insured transactions and underlying referenced CMBS transactions are fully eroded, additional property level losses upon foreclosures and liquidations could result in substantial losses for MBIA. U ltimate loss rates remain uncertain because many loans are still delinquent and have not yet been resolved, others have been modified and others do not mature for another three to four years at which time they will face the need to refinance. The Company assigns a wide range of probabilities to these scenarios and incorporates view s that liquidations will continue to be mitigated by loan extensions and modifications, and that property values and NOIs have bottomed for many sectors and markets in the U.S. The weightings are customized for each counterparty. If macroeconomic stress were to increase or the U.S. enters into a recession, higher delinquencies, liquidations and/or higher severities of loss upon liquidation may result and the Company may incur substantial additional losses. The foreclosure and REO pipelines are still relatively robust, with several restructurings and liquidations yet to occur, so the range of possible outcomes is wider than those for the Company's exposures to ABS CDOs and second-lien RMBS. Prior to June 30, 2013, the Company incorporated an additional approach based on recent Roll Rates experienced within each of the commercial mortgage-backed index series. This actuarial approach was eliminated as a result of more emphasis being placed on loan-specific scenarios. In the CRE CDO portfolio, transaction-specific structures require certain reporting and management protocols and often require the Company to incorporate these structural distinctions into its models. None of the CRE CDOs insured by the Company allow for reinvesting at this time, and many of the senior bonds have begun to amortize. For the year ended December 31, 2013, the Company had a benefit of $33 million of losses and LAE recorded in earnings related to CRE CDO financial guarantee insurance policies. For the year ended December 31, 2013, additional credit impairments and LAE for insured derivatives on structured CMBS pools, CRE CDOs and CRE loan pools were estimated to be $601 million as a result of additional delinquencies and loan level liquidations, as well as continued refinements of MBIA's assessment of various commutation possibilities. T he cumulative credit impairments and LAE on structured CMBS pools, CRE CDOs and CRE loan pools were estimated to be $4.2 billion through December 31, 2013. Though t he pace of increases in the delinquency rate has slowed, many loans are being modified and liquidations continue to take place. Loan level losses have ranged from 1% to 2%, to near complete losses, and in a few cases severities exceeded 100%. These liquidations led to bond level losses which reduced the level of enhancement to the individual CMBS bonds referenced by the insured structured CMBS pools and i n certain cases resulted in deductible erosion. Bond level enhancement and pool level deductibles are structural features intended to mitigate losses to the Company, h owever, some of the transactions reference similar rated subordinate tranches of CMBS bonds. When there are broad-based declines in property performance, this leverage can result in rapid deterioration in pool performance. Beginning in the second quarter of 2013, the Company paid claims on a CMBS pool transaction that experienced deterioration such that all remaining deductible was eliminated. Loss and LAE Activity Financial Guarantee Insurance Losses (Non-Derivative) The Company's financial guarantee insurance losses and LAE for the year ended December 31, 2013 are presented in the following table:
| Losses and LAE |  | Year Ended December 31, 2013 |
|  |  |  | Second-lien |  | First-lien |  |  |  |  |
| In millions |  | RMBS |  | RMBS |  | Other(1) |  | Total |
| Losses and LAE related to actual and expected payments |  | $ | 108 |  | $ | (60) |  | $ | 50 |  | $ | 98 |
| Recoveries of actual and expected payments |  |  | (110) |  |  | (10) |  |  | 140 |  |  | 20 |
| Gross losses incurred |  |  | (2) |  |  | (70) |  |  | 190 |  |  | 118 |
| Reinsurance |  |  | 0 |  |  | 0 |  |  | (1) |  |  | (1) |
| Losses and LAE |  | $ | (2) |  | $ | (70) |  | $ | 189 |  | $ | 117 |
| __________ |  |  |  |  |  |  |  |  |  |  |
| (1) - Includes ABS CDOs, CMBS, U.S. public finance and other issues.
The losses and LAE related to actual and expected payments in the preceding table primarily related to insured second-lien RMBS transactions and other issues, partially offset by a benefit in insured first-lien RMBS transactions related to previously established re serves. The second-lien RMBS losses and LAE related to actual and expected payments comprise net increases of previously established reserves. The $50 million in other issues primarily related to a n international road transaction and U.S. public finance transaction s, partially offset by decreases i n CMBS and ABS CDO transactions. The recoveries of actual and expected payments primarily related to other issues, partially offset by recoveries related to insured second-lien RMBS transactions. The decrease in other issue s of $1 40 million primarily resulted from the reversal of recoveries related to high yield corporate CDOs and U.S. public finance transactions. Partially offsetting these decreases were increases related to se c ond-l i en R M BS recoveries of $1 1 0 million, includ ing $317 m i ll i o n i n re c o ve r i e s primarily r e sul t in g f r o m i nel i g ib l e m o rt gag e lo a ns i n c l ude d i n i n su r e d e x pos u r e s, partially o ffs e t by a $207 mi l lion redu c tion in e xc e ss spre a d. T h e f ol l owin g t abl e p r o v ide s in f o rm a t i o n a bou t t h e f i nan c ia l gu a r a n t e e s an d r el a t e d c la i m li a bili t y i n c lude d i n ea ch of M B I A's s u rv e i llan ce c a t ego r ie s a s o f December 31, 2013
|  |  |  |  | Surveillance Categories
|  |  |  |  | Caution |  | Caution |  | Caution |  |  |  |  |  |
|  |  |  |  | List |  | List |  | List |  | Classified |  |  |
$ in millions |  | Low |  | Medium |  | High |  | List |  | Total
Number of policies |  |  | 83 |  |  | 19 |  |  | 5 |  |  | 192 |  |  | 299
Number of issues(1) |  |  | 26 |  |  | 14 |  |  | 4 |  |  | 136 |  |  | 180
Remaining weighted average contract |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| period (in years) |  |  | 11.0 |  |  | 4.9 |  |  | 11.5 |  |  | 9.5 |  |  | 9.7
Gross insured contractual payments |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| outstanding:(2) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  | Principal |  | $ | 5,290 |  | $ | 1,073 |  | $ | 40 |  | $ | 7,861 |  | $ | 14,264
|  | Interest |  |  | 3,829 |  |  | 253 |  |  | 24 |  |  | 4,526 |  |  | 8,632
|  |  | Total |  | $ | 9,119 |  | $ | 1,326 |  | $ | 64 |  | $ | 12,387 |  | $ | 22,896
Gross claim liability |  | $ | 0 |  | $ | 0 |  | $ | 0 |  | $ | 1,235 |  | $ | 1,235
Less: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Gross potential recoveries |  |  | 0 |  |  | 0 |  |  | 0 |  |  | 1,085 |  |  | 1,085
| Discount, net |  |  | 0 |  |  | 0 |  |  | 0 |  |  | 205 |  |  | 205
Net claim liability (recoverable) |  | $ | 0 |  | $ | 0 |  | $ | 0 |  | $ | (55) |  | $ | (55)
Unearned premium revenue |  | $ | 112 |  | $ | 19 |  | $ | 0 |  | $ | 96 |  | $ | 227
__________ |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
(1) - An “issue” represents the aggregate of financial guarantee policies that share the same revenue source for purposes of making debt service payments.
(2) - Represents contractual principal and interest payments due by the issuer of the obligations insured by MBIA.
T h e f ol l owin g t abl e p r o v ide s in f o rm a t i o n a bou t t h e f i nan c ia l gu a r a n t e e s an d r el a t e d c la i m li a bili t y i n c lude d i n ea ch of M B I A's s u rv e i llan ce c a t ego r ie s a s o f December 31, 2012:
|  |  |  |  | Surveillance Categories
|  |  |  |  | Caution |  | Caution |  | Caution |  |  |  |  |  |
|  |  |  |  | List |  | List |  | List |  | Classified |  |  |
$ in millions |  | Low |  | Medium |  | High |  | List |  | Total
Number of policies |  |  | 54 |  |  | 25 |  |  | 10 |  |  | 206 |  |  | 295
Number of issues(1) |  |  | 29 |  |  | 15 |  |  | 10 |  |  | 136 |  |  | 190
Remaining weighted average contract |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| period (in years) |  |  | 8.1 |  |  | 4.0 |  |  | 7.6 |  |  | 9.5 |  |  | 8.7
Gross insured contractual payments |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| outstanding:(2) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  | Principal |  | $ | 4,250 |  | $ | 1,176 |  | $ | 373 |  | $ | 9,458 |  | $ | 15,257
|  | Interest |  |  | 2,721 |  |  | 256 |  |  | 120 |  |  | 5,264 |  |  | 8,361
|  |  | Total |  | $ | 6,971 |  | $ | 1,432 |  | $ | 493 |  | $ | 14,722 |  | $ | 23,618
Gross claim liability |  | $ | 0 |  | $ | 0 |  | $ | 0 |  | $ | 1,589 |  | $ | 1,589
Less: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Gross potential recoveries |  |  | 0 |  |  | 0 |  |  | 0 |  |  | 4,109 |  |  | 4,109
| Discount, net |  |  | 0 |  |  | 0 |  |  | 0 |  |  | 229 |  |  | 229
Net claim liability (recoverable) |  | $ | 0 |  | $ | 0 |  | $ | 0 |  | $ | (2,749) |  | $ | (2,749)
Unearned premium revenue |  | $ | 142 |  | $ | 11 |  | $ | 3 |  | $ | 122 |  | $ | 278
__________ |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
(1) - An “issue” represents the aggregate of financial guarantee policies that share the same revenue source for purposes of making debt service payments.
(2) - Represents contractual principal and interest payments due by the issuer of the obligations insured by MBIA.
The gross claim liability in the preceding tables represents the Company's estimate of undiscounted probability-weighted future claim payments. A s of December 31, 2013, the gross claim liability primarily relate d to insured first and second-lien RMBS issues, ABS CDOs and an international road transaction. As of December 31, 2012, the gross claim liability principally relate d to insured first and second-lien RMBS and U.S. public finance issues. The gross potential recoveries as of December 31, 2013 and 2012 represent the Company's estimate of undiscounted probability-weighted recoveries of actual claim payments and recoveries of estimated future claim payments, and principally relate d to insured second-lien RMBS and U.S. public finance issues. The Company's recoveries have been, and remain based on either salvage rights, the rights conferred to MBIA through the transactional documents (inclusive of the insurance agreement), or subrogation rights embedded within financial guarantee insurance policies. Expected salvage and subrogation recoveries, as well as recoveries from other remediation efforts, reduce the Company's claim liability. Once a claim payment has been made, the claim liability has been satisfied and MBIA's right to recovery is no longer considered an offset to future expected claim payments, it is recorded as a salvage asset. The amount of recoveries recorded by the Company is limited to paid claims plus the present value of projected future claim payments. As claim payments are made, the recorded amount of potential recoveries may exceed the remaining amount of the claim liability for a given policy. The gross claim liability and gross potential recoveries reflect the elimination of claim liabilities and potential recoveries related to VIEs consolidated by the Company. The following table presents the components of the Company's loss and LAE reserves and insurance loss recoverable as reported on the Company's consolidated balance sheets as of December 31, 2013 and 2012 for insured obligations within MBIA's “Classified List.” The loss reserves (claim liability) and insurance claim loss recoverable included in the following table represent the present value of the probability-weighted future claim payments and recoveries reported in the preceding tables.
|  |  |  | As of |  | As of |
| In millions |  | December 31, 2013 |  | December 31, 2012 |
| Loss reserves (claim liability) |  | $ | 580 |  | $ | 790 |
| LAE reserves |  |  | 61 |  |  | 63 |
|  | Loss and LAE reserves |  | $ | 641 |  | $ | 853 |
| Insurance claim loss recoverable |  | $ | (694) |  | $ | (3,610) |
| LAE insurance loss recoverable |  |  | 0 |  |  | (38) |
|  | Insurance loss recoverable |  | $ | (694) |  | $ | (3,648) |
| Reinsurance recoverable on unpaid losses |  | $ | 7 |  | $ | 14 |
| Reinsurance recoverable on unpaid LAE reserves |  |  | 1 |  |  | 0 |
| Reinsurance recoverable on paid losses |  |  | 0 |  |  | 1 |
|  | Reinsurance recoverable on paid and unpaid losses |  | $ | 8 |  | $ | 15 |
As of December 31, 2013, loss and LAE reserves include $847 m illion of reserves for expected future payments offset by expected recoveries of such future payments of $206 million. As of December 31, 2012, loss and LAE reserves included $1.2 billion of reserves for expected future payments offset by expected recoveries of such future payments of $332 million. As of December 31, 2013, the insurance loss recoverable principally related to expected future recoveries on second-lien RMBS transactions resulting from excess spread generated by performing loans in such transactions. As of December 31, 2012, the insurance loss recoverable principally related to estimated recoveries of payments made by the Company resulting from ineligible mortgage loans in certain insured second-lien residential mortgage loan securitizations that are subject to a contractual obligation by the sellers/servicers to repurchase or replace the ineligible mortgage loans and expected future recoveries on insured second-lien RMBS transactions resulting from expected excess spread generated by performing loans in such transactions. For the year ended December 31, 2013, the Company collected approximately $2.9 b i ll i on, net of reinsurance, of which $2.8 billion re l ated to i n sured second-l ien RMBS transact i ons. The Company made payments of $433 million, net of reinsurance, including $196 million re l ated to i n sured second-l ien RMBS transact i ons and $1 43 million related to U.S. public finance issues. For the year ended December 31, 2013, the decrease in i ns u rance loss recoverable rel a ted to paid losses tot a led $3.0 bil l ion, and primarily resulted from the collections of previously established recoveries relat e d to the settlement with Bank of America on the ineligible mortgage loans related to ins u red second-lien RMBS transactions. The following table presents t he amounts of the Company's second-lien RMBS exposure, gross undiscounted claim liability and potential recoveries related to non-consolidated VIEs and consolidated VIEs, included in the Company's “Classified List,” as of December 31, 2013:
Second-lien RMBS Exposure |  |  |  | Outstanding |  | Gross Undiscounted
|  |  |  |  | Gross |  | Gross |  | Claim |  | Potential
$ in billions |  | Issues |  | Principal |  | Interest |  | Liability |  | Recoveries
Excluding Consolidated VIEs: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Non-consolidated VIEs |  | 23 |  | $ | 3.4 |  | $ | 1.3 |  | $ | 0.2 |  | $ | 0.8
Consolidated VIEs: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consolidated VIEs |  | 11 |  | $ | 1.7 |  | $ | 0.6 |  | $ | 0.1 |  | $ | 0.6
The following table s present changes in the Company's loss and LAE reserves for the years ended December 31, 2013 and 2012. Changes in the loss and LAE reserves attributable to the accretion of the claim liability discount, changes in discount rates, changes in the timing and amounts of estimated payments and recoveries, changes in assumptions and changes in LAE reserves are recorded in “Losses and loss adjustment” expenses in the Company's consolidated statements of operations. As of December 31, 2013 and 2012, the weighted average risk-free rate used to discount the Company's loss reserves (claim liability) was 2.37% and 1.38%, respectively. LAE reserves are expected to be settled within a one-year period and are not discounted.
In millions |  | Changes in Loss and LAE Reserves for the Year Ended December 31, 2013 |  |  |
Gross Loss |  | Loss |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Gross Loss
and LAE |  | Payments |  | Accretion |  |  |  |  |  |  |  | Changes in |  |  |  |  |  |  |  | and LAE
Reserves as of |  | for Cases |  | of Claim |  | Changes in |  |  |  | Unearned |  | Changes in |  |  |  | Reserves as of
December 31, |  | with |  | Liability |  | Discount |  | Changes in |  | Premium |  | LAE |  |  |  | December 31,
2012 |  | Reserves |  | Discount |  | Rates |  | Assumptions |  | Revenue |  | Reserves |  | Other(1) |  | 2013
$ | 853 |  | $ | (337) |  | $ | 13 |  | $ | (92) |  | $ | 141 |  | $ | 12 |  | $ | (2) |  | $ | 53 |  | $ | 641
____________ |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
(1) - Primarily changes in amount and timing of payments.
The decrease in the Company's gross loss and LAE reserves reflected in the preceding table was primarily due to loss payments on insured first and second-lien RMBS and U.S. public finance issues, partially offset by changes in assumptions.
In millions |  | Changes in Loss and LAE Reserves for the Year Ended December 31, 2012 |  |  |
Gross Loss |  | Loss |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Gross Loss
and LAE |  | Payments |  | Accretion |  |  |  |  |  |  |  | Changes in |  |  |  |  |  |  | and LAE
Reserves as of |  | for Cases |  | of Claim |  | Changes in |  |  |  | Unearned |  | Changes in |  |  |  | Reserves as of
December 31, |  | with |  | Liability |  | Discount |  | Changes in |  | Premium |  | LAE |  |  |  | December 31,
2011 |  | Reserves |  | Discount |  | Rates |  | Assumptions |  | Revenue |  | Reserves |  | Other(1) |  | 2012
$ | 836 |  | $ | (395) |  | $ | 11 |  | $ | (26) |  | $ | 319 |  | $ | 2 |  | $ | 8 |  | $ | 98 |  | $ | 853
____________ |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
(1) - Primarily changes in amount and timing of payments.
The increase in the Company's gross loss and LAE reserves reflected in the preceding table was primarily due to changes in assumptions on insured first and second-lien RMBS issues and changes in amount and timing of payments. These were partially offset by decreases in reserves related to loss payments on insured first and second-lien RMBS issues outstanding as of December 31, 2011. C u rr en t pe r io d ch a nge s i n th e C o m pan y's est i mat e o f p o tent i a l r e c o v e r i e s ma y be r e c o r de d a s a n in s u r an c e l oss r e c ove r a bl e as s et, net t e d a g ain s t th e g r os s l o s s an d L A E r e se r v e l i abi l i t y, or bo t h. The following table s present changes in the Company's insurance loss recoverable and changes in recoveries on unpaid losses reported within the Company's claim liability for the years ended December 31, 2013 and 2012. Changes in insurance loss recoverable attributable to the accretion of the discount on the recoverable, changes in discount rates, changes in the timing and amounts of estimated collections, changes in assumptions and changes in LAE recoveries are recorded in “Losses and loss adjustment” expenses in the Company's consolidated statements of operations.
|  |  |  |  |  | Changes in Insurance Loss Recoverable and Recoveries on Unpaid Losses |  |  |
|  |  |  |  |  | for the Year Ended December 31, 2013 |  |  |
|  |  | Gross |  |  |  |  |  |  |  |  |  |  |  |  | Gross
|  |  | Reserve |  | Collections |  |  |  |  |  |  |  |  |  |  | Reserve
|  |  | as of |  | for Cases |  | Accretion |  | Changes in |  |  |  |  | Changes in |  |  |  | as of
|  |  | December 31, |  | with |  | of |  | Discount |  | Changes in |  | LAE |  |  |  | December 31,
In millions |  | 2012 |  | Recoveries |  | Recoveries |  | Rates |  | Assumptions |  | Recoveries |  | Other(1) |  | 2013
Insurance loss |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| recoverable |  | $ | 3,648 |  | $ | (3,011) |  | $ | 19 |  | $ | (33) |  | $ | 126 |  | $ | (38) |  | $ | (17) |  | $ | 694
Recoveries on unpaid |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| losses |  |  | 332 |  |  | 0 |  |  | 6 |  |  | (38) |  |  | (91) |  |  | (3) |  |  | 0 |  |  | 206
Total |  | $ | 3,980 |  | $ | (3,011) |  | $ | 25 |  | $ | (71) |  | $ | 35 |  | $ | (41) |  | $ | (17) |  | $ | 900
__________ |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
(1) Primarily changes in amount and timing of collections. |  |  |
Th e C ompan y's i n s uran ce l o ss re c overabl e decreased durin g 2013 pr i mar ily du e to recoveries associated with i ss ue s out s tandin g a s o f December 31, 2012, w hi ch relate d t o the settlement with Bank of America on the ineligible mortgage loans included in insured second-lien residential mortgage securitization exposures that were subject to contractual obligations by sellers/servicers to repurchase or replace such mortgages. R e c overie s o n unpai d los s e s de c rease d primaril y du e t o changes in a s sumption s as a result of the reduction of excess spread related to first and second-lien RMBS transactions and changes in discount rates.
|  |  |  |  |  |  | Changes in Insurance Loss Recoverable and Recoveries on Unpaid Losses |  |  |
|  |  |  |  |  |  | for the Year Ended December 31, 2012 |  |  |
|  |  | Gross |  |  |  |  |  |  |  |  |  |  |  | Gross
|  |  | Reserve |  | Collections |  |  |  |  |  |  |  |  |  | Reserve
|  |  | as of |  | for Cases |  | Accretion |  | Changes in |  |  |  |  | Changes in |  |  |  | as of
|  |  | December 31, |  | with |  | of |  | Discount |  | Changes in |  | LAE |  |  |  | December 31,
In millions |  | 2011 |  | Recoveries |  | Recoveries |  | Rates |  | Assumptions |  | Recoveries |  | Other(1) |  | 2012
Insurance loss |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| recoverable |  | $ | 3,046 |  | $ | (13) |  | $ | 32 |  | $ | 4 |  | $ | 700 |  | $ | 24 |  | $ | (145) |  | $ | 3,648
Recoveries on unpaid |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| losses |  |  | 562 |  |  | 0 |  |  | 7 |  |  | 12 |  |  | (238) |  |  | (11) |  |  | 0 |  |  | 332
Total |  | $ | 3,608 |  | $ | (13) |  | $ | 39 |  | $ | 16 |  | $ | 462 |  | $ | 13 |  | $ | (145) |  | $ | 3,980
__________ |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
(1) Primarily changes in amount and timing of collections. |  |  |
Th e C ompan y's i n s uran ce l o ss re c overabl e i ncrea s e d durin g 2012 pr i mar ily du e to c hange s in a ss ump ti on s a ss o ci ate d with issues outstanding as of December 31, 2011, which r elate d to increases in excess spread and ineligible mortgage loans included i n in s ure d s e c ond-lie n re s identia l mortgag e s e c uriti z atio n e x po s ure s tha t were s ubje ct t o contra c tua l obligation s by s eller s/s er v icer s t o repur c has e o r repla ce s u ch mortgages, partiall y offse t b y change s i n th e amoun t and timing o f collections. R e c overie s o n unpai d los s e s de c rease d primaril y du e t o c hange s i n a s sumption s a s a resul t o f the reduction of excess spread related to first and second-lien RMBS transactions, partially offset by changes in discount rates. The following table presents the Company's total estimated recoveries from ineligible mortgage loans included in certain insured second-lien mortgage loan securitizations as of December 31, 2013. The total estimated recoveries from ineligible mortgage loans of $359 m illion are re corded as “Loan repurchase commitments” presented under the heading “Assets of consolidated variable interest entities” on the Company's consolidated balance sheets.
In millions |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Total Estimated |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Total Estimated
Recoveries from |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Recoveries from
Ineligible Mortgage |  | Accretion |  | Changes in |  |  |  |  |  |  |  |  |  | Ineligible Mortgage
Loans as of |  | of Future |  | Discount |  | Recoveries |  |  | Changes in |  |  |  | Loans as of
December 31, 2012 |  | Collections |  | Rates |  | (Collections) |  | Assumptions |  | Other(1) |  | December 31, 2013
$ | 3,583 |  | $ | 24 |  | $ | (9) |  | $ | (3,705) |  | $ | 443 |  | $ | 23 |  | $ | 359
__________ |  |  |  |  |  |  |  |  |  |  |  |  |  |
(1) Primarily changes in amount and timing of collections.
T he decrease in the Company's total estimated recoveries from ineligible mortgage loans in the preceding table primarily resulted from the collections of previously established recoveries related to the settlement with Bank of America, ResCap and Flagstar Bank on the ineligible mortgage loans related to insured second-lien RMBS securitizations. The following table presents the Company's total estimated recoveries from ineligible mortgage loans included in certain insured second-lien mortgage loan securiti za tions as of December 31, 2012. The total estimated recoveries from ineligible mortgage loans of $3.6 billion include $2.5 billion recorded as “Insurance loss recoverable” and $1.1 billion recorded as “Loan repurchase commitments” presented under the hea ding “Assets of consolidated variable interest entities” on the Company's consolidated balance sheets.
In millions |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Total Estimated |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Total Estimated
Recoveries from |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Recoveries from
Ineligible Mortgage |  | Accretion |  | Changes in |  |  |  |  |  |  |  |  |  | Ineligible Mortgage
Loans as of |  | of Future |  | Discount |  | Recoveries |  |  | Changes in |  |  |  | Loans as of
December 31, 2011 |  | Collections |  | Rates |  | (Collections) |  | Assumptions |  | Other |  | December 31, 2012
$ | 3,119 |  | $ | 36 |  | $ | 2 |  | $ | - |  | $ | 426 |  | $ | - |  | $ | 3,583
The increase in the Company's total estimated recoveries from ineligible mortgage loans in the preceding table primarily resulted from changes in assumptions related to the probability-weighted scenarios. Re m ed i a t i o n a c t io n s m a y i n v o l v e, a m on g o t he r t hi n g s, wai v e rs o r r en e go t i a t i on s o f f i nan c ia l c o v ena n t s o r t r igge rs, wai v e rs o f c on t r a c t u a l p r o v i s ion s, t h e g r an t in g o f c on s en t s, t r a n s f e r o f s e rv i c ing, c o n s i de r a t io n o f r e s t r u c t u r in g p l an s, a cc ele r a t io n, s e c u r i t y o r c o l la t e r a l en f o r c e m e n t, a c t io n s i n ban kr up t cy o r r e c ei v e rs hip, li t iga t io n an d s i m ila r a c t ion s. T he t y p e s o f r e m e d ia l a c t i on s p u r s u e d a r e b a s e d o n t h e in s u r e d obl i ga t ion's r i sk t y p e a n d t h e na t u re an d s c o p e o f t h e e v e n t gi v i n g r i s e t o t h e r e m edia t ion. A s pa rt o f a n y s u ch r e m edia l a c t ion s, MB I A s e e ks t o i m p r o ve i t s s e c u r i t y p o s i t i o n an d t o ob t ai n c on c e ss ion s f r o m t h e i ss ue r o f t h e in s u r e d obl i ga t ion. F r o m t i me t o t i m e, t h e i ss ue r o f a n M B I A-in s u r e d obl i ga t i on m a y, wi t h t h e c on s en t o f M B I A, r e s t r u c t u re t h e in s u r e d ob l iga t io n b y e x t en d in g t h e t e r m, in cr ea s in g o r de cr ea s in g t h e p a r a m oun t o r de cr ea s i n g t h e r ela t e d in t e r e st r a t e, wi t h M B I A in s u r i n g t h e r e s t r u c t u r e d obl i ga t i on. Co s t s a ss o c ia t e d wi t h r e m ed i a t i n g in s u r e d obl i ga t ion s a s s i gne d t o t h e Co m pan y's “C a u t i o n Li s t—Low,” “C a u t i o n L i s t—M ediu m,” “Cau t io n L i s t—High” an d “Cla ss i f ie d Li s t” a re r e c o r de d a s L A E. L AE i s p r i m a r i l y r e c o r de d a s pa rt o f t he Co m pan y's p r o v i s io n f o r i t s lo ss r e s e rv e s an d in c lud e d i n “L o s s e s an d lo ss adju s t m e n t” expenses o n t h e Co m pa n y's c on s ol i da t ed s t a t e m en t s o f ope r a t ion s. T h e f o l lowi n g t abl e p r e s en t s t h e gross e x pen s e s r el a t e d t o r e m ed i al a c t ion s f o r in s u r e d ob l iga t ion s. Gross expenses related to remediating insured obligations decreased for the year ended December 31, 2013 compared with 2012 due to lower litigation expenses as a result of settlements.
|  |  | Years Ended December 31, |
| In millions |  | 2013 |  | 2012 |  | 2011 |
| Loss adjustment expense incurred, gross |  | $ | 57 |  | $ | 137 |  | $ | 120 |

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