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Loss and Loss Adjustment Expense Reserves | 6 Months Ended
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Jun. 30, 2014
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Loss and Loss Adjustment Expense Reserves | Note 5: Loss and Loss Adjustment Expense Reserves Loss and Loss Adjustment Expense Process 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 u s ing 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. As of June 30, 2014 and December 31, 2013, the Company established loss and loss adjustment expense (“LAE”) reserves totaling $70 million and $87 million, respectively, and insurance loss recoverable of $14 million and $13 million, respectively, related to U.S. public finance issues. For the six months ended June 30, 2014, losses and LAE incurred of $3 million primarily related to Puerto Rico exposures, partially offset by decreases in reserves from certain general obligation bonds. Certain local governments remain under financial and budgetary stress and a few 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 and the filing for protection under the United States Bankruptcy Code or entering state statutory proceedings does not result in a default or indicate that an ultimate loss will occur. As of June 30, 2014 and December 31, 2013, the Company had $113.2 billion and $124.9 billion, respectively, of gross par outstanding on general obligations, of which $154 million and $161 million, respectively, w ere 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 June 30, 2014, 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 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 Corp oration'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 June 30, 2014. MBIA UK used a rate of 2.50% to discount its expected future claim payments and statutory loss reserves. 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 6: 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 June 30, 2014 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 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. Second-lien RMBS Reserves The Company's second-lien RMBS case basis reserves as of June 30, 2014 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 May 31, 2014 to estimate future losses from loans that are delinquent as of the current reporting period. Roll Rates for loans that are current as of May 31, 2014 (“Current Roll to Loss”) are also calculated on a transaction-specific basis. A proportion of loans reported current as of May 31, 2014 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 May 31, 2014. 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 June 2014 to November 201 4). After that six-month period, the Company further reduces the Current Roll to Loss to 0% by early 201 5 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. F or HELOCs and transactions secured by fixed-rate CES, the Company uses historical average voluntary prepayment rates to model its loss reserves. For HELOCs, p rojected cash 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 June 30, 2014 and December 31, 2013, the Company established loss and LAE reserves totaling $118 million and $126 million, respectively, related to second-lien RMBS issues after the elimination of $18 million and $43 million, respectively, as a result of consolidating VIEs. For the six months ended June 30, 2014, the Company incurred $72 million of losses and LAE recorded in earnings related to second-lien RMBS issues after the elimination of a $1 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 $60 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. Excess Spread As of June 30, 2014 and December 31, 2013, the Company recorded estimated recoveries of $577 million and $681 million, respectively, for the reimbursement of past and future expected claims through excess spread in insured second-lien RMBS transactions after the elimination of $173 million and $190 million, respectively, as a result of consolidating VIEs. As of June 30, 2014, $569 million and $8 million were included in “Insurance loss recoverable” and “Loss and loss adjustment expense reserves” on the Company's consolidated balance sheets, respectively, after the elimination of $168 million and $5 million, respectively, as a result of consolidating VIEs. As of December 31, 2013, $647 million and $34 million w ere included in “Insurance loss recoverable” and “Loss and loss adjustment expense reserves” on the Company's consolidated balance sheets, respectively, after the elimination of $183 million and $7 million, respectively, as a result of consolidating VIEs. Excess spread is generated by performing loans within insured second-lien 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 loss trends (which include future delinquency trends, average time to charge-off delinquent loans, and the availability of pool mortgage insurance), the future spread between prime and LIBOR interest rates; and borrower refinancing behavior which results in voluntary prepayments. Minor deviations in loss trends and voluntary prepayments may substantially impact the amounts collected from excess spread and caused the reduction in estimated recoveries during the first six months of 2014. 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. Additional information on the status of the litigation against Credit Suisse can be found within “Note 13: 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 June 30, 2014 and December 31, 2013, the Company recorded estimated recoveries of $363 m illion and $359 million, respectively, 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. 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, which totaled $42 4 million through June 30, 2014. The Company is entitled to collect 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 u s es. 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. Refer to “Note 6: Loss and Loss Adjustment Expense Reserves” in the Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2013, for the Company's assessment of the remaining unsettled recoveries related to insured Credit Suisse second-lien RMBS. First-lien RMBS Reserves The Company's first-lien RMBS case basis reserves as of June 30, 2014, which primarily relate to RMBS backed by a lternative 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 May 31, 2014 level for one month befo re declining to 25% of this level over a 24-month period. The Company estimates future losses by u s ing 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 May 31, 2014 in order to estimate future losses from loans that are delinquent as of June 30, 2014. 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 June 30, 2014, the Company established loss and LAE reserves totaling $237 million related to first-lien RMBS issues. 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 six months ended June 30, 2014, the Company incurred $27 million of losses and LAE recorded in earnings related to first-lien RMBS issues after the elimination of a $1 million benefit as a result of consolidating VIEs. ABS CDOs (Financial Guarantees and Insured Derivatives) MBIA's insured asset-backed securities (“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 June 30, 2014, the insured par exposure of the ABS CDO financial guarantee insurance policies and credit derivatives portfolio has declined by approximately 97% of the insured amount as of December 31, 2007. 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 ses up to a total of five probability-weighted scenarios in order to estimate its reserves or impairments for ABS CDOs. The Company's payment obligations after a default are timely interest and ultimate principal. As of June 30, 2014 and December 31, 2013, the Company established loss and LAE reserves totaling $92 million and $115 million, respectively, related to ABS CDO financial guarantee insurance policies after the elimination of $235 million and $226 million, respectively, as a result of consolidating VIEs. For the six months ended June 30, 2014, the Company had a benefit of $17 million of losses and LAE recorded in earnings related to ABS CDO financial guarantee insurance policies after the elimination of a $9 million expense 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) MBIA's insured CRE transactions comprise structured CMBS pools, CRE CDOs and CRE loan pools. The majority of this portfolio is a ccounted for as insured credit derivatives and carried at fair value in the Company's consolidated financial statements. Refer to “Note 8: Derivative Instruments” for a further discussion of the Company's use of derivatives and their impact on the Company's consolidated financial statements. 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 considers several factors when developing the range of potential outcomes in the CRE market and their impact on MBIA. The following approaches require substantial judgments about the future performance of the underlying loans: Each transaction is evaluated for its commutation potential, which is customized by counterparty and considers historical commutation prices, the level of dialogue with the counterparty and the credit quality and payment profile of the underlying exposure. D elinquency rates, net operating income (“NOI”) and capitalization rates (“Cap Rates”) are used to project losses under two scenarios. These scenarios assume that property performance remains flat for the near term and then improves gradually. Additionally, certain large loans are reviewed individually so that performance and loss severity can be more accurately determined, while other loans are also reviewed for factors that may impact potential performance. A proprietary model was developed by reviewing performance data on over 80,000 securitized CRE loans originated between 1992 and 2011. 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 approaches vary widely. 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. For the six months ended June 30, 2014, additional credit impairments and LAE for insured derivatives on structured CMBS pools, CRE CDOs and CRE loan pools were estimated to be $82 million as a result of additional delinquencies and loan level liquidations, as well as MBIA's continued assessment of various commutation possibilities. Since 2013, the Company has been paying claims on a CMBS pool transaction that had experienced deterioration such that all remaining deductible was eliminated. Loss and LAE Activity Financial Guarantee Insurance Losses (Non-Derivative and Non-Consolidated VIEs) The Company's financial guarantee insurance losses and LAE for the six months ended June 30, 2014 are presented in the following table:
|  |  | Six Months Ended June 30, 2014 |
|  |  |  | Second-lien |  | First-lien |  |  |  |  |
| In millions |  | RMBS |  | RMBS |  | Other(1) |  | Total |
| Losses and LAE related to expected payments |  | $ | 19 |  | $ | 33 |  | $ | (50) |  | $ | 2 |
| Recoveries of expected payments |  |  | 53 |  |  | (6) |  |  | 13 |  |  | 60 |
| Gross losses incurred |  |  | 72 |  |  | 27 |  |  | (37) |  |  | 62 |
| Reinsurance |  |  | 0 |  |  | 0 |  |  | 0 |  |  | 0 |
| Losses and LAE |  | $ | 72 |  | $ | 27 |  | $ | (37) |  | $ | 62 |
| __________ |  |  |  |  |  |  |  |  |  |  |
| (1) - Includes ABS CDOs, CMBS, U.S. public finance and other issues.
The losses and LAE related to expected payments in the preceding table primarily related to increases in previously established reserves on insured first and second-lien RMBS transactions, partially offset by a decreas e in previously established reserves on an international road transaction and ABS CDOs. The recoveries of expected payments primarily related to decreases in projected collections from excess spread within the insured second-lien RMBS securitizations. 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 June 30, 2014
|  |  |  |  | Surveillance Categories
|  |  |  |  | Caution |  | Caution |  | Caution |  |  |  |  |  |
|  |  |  |  | List |  | List |  | List |  | Classified |  |  |
$ in millions |  | Low |  | Medium |  | High |  | List |  | Total
Number of policies |  |  | 81 |  |  | 110 |  |  | 5 |  |  | 201 |  |  | 397
Number of issues(1) |  |  | 24 |  |  | 12 |  |  | 4 |  |  | 131 |  |  | 171
Remaining weighted average contract |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| period (in years) |  |  | 10.9 |  |  | 10.9 |  |  | 8.3 |  |  | 8.8 |  |  | 9.7
Gross insured contractual payments |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| outstanding:(2) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  | Principal |  | $ | 5,025 |  | $ | 1,869 |  | $ | 43 |  | $ | 8,658 |  | $ | 15,595
|  | Interest |  |  | 3,642 |  |  | 1,018 |  |  | 21 |  |  | 4,592 |  |  | 9,273
|  |  | Total |  | $ | 8,667 |  | $ | 2,887 |  | $ | 64 |  | $ | 13,250 |  | $ | 24,868
Gross Claim Liability |  | $ | 0 |  | $ | 0 |  | $ | 0 |  | $ | 984 |  | $ | 984
Less: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Gross Potential Recoveries |  |  | 0 |  |  | 0 |  |  | 0 |  |  | 950 |  |  | 950
| Discount, net(3) |  |  | 0 |  |  | 0 |  |  | 0 |  |  | 122 |  |  | 122
Net claim liability (recoverable) |  | $ | 0 |  | $ | 0 |  | $ | 0 |  | $ | (88) |  | $ | (88)
Unearned premium revenue |  | $ | 99 |  | $ | 35 |  | $ | 0 |  | $ | 104 |  | $ | 238
__________ |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
(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.
(3) - Represents discount related to Gross Claim Liability and Gross Potential Recoveries.
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(3) |  |  | 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.
(3) - Represents discount related to Gross Claim Liability and Gross Potential Recoveries.
The gross claim liability in the preceding tables represents the Company's estimate of undiscounted probability-weighted future claim payments. A s of June 30, 2014 and December 31, 2013, the gross claim liability primarily related to insured first and second-lien RMBS issues, ABS CDOs and an international road transaction. The gross potential recoveries represent the Company's estimate of undiscounted probability-weighted recoveries of actual claim payments and recoveries of estimated future claim payments. As of June 30, 2014 and December 31, 2013, the gross potential recoveries 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 June 30, 2014 and December 31, 2013 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 |  | June 30, 2014 |  | December 31, 2013 |
| Loss reserves (claim liability) |  | $ | 482 |  | $ | 580 |
| LAE reserves |  |  | 72 |  |  | 61 |
|  | Loss and LAE reserves |  | $ | 554 |  | $ | 641 |
| Insurance claim loss recoverable |  | $ | (619) |  | $ | (694) |
| LAE insurance loss recoverable |  |  | (5) |  |  | 0 |
|  | Insurance loss recoverable |  | $ | (624) |  | $ | (694) |
| Reinsurance recoverable on unpaid losses |  | $ | 6 |  | $ | 7 |
| Reinsurance recoverable on unpaid LAE reserves |  |  | 1 |  |  | 1 |
|  | Reinsurance recoverable on paid and unpaid losses |  | $ | 7 |  | $ | 8 |
As of June 30, 2014, loss and LAE reserves include $713 m illion of reserves for expected future payments offset by expected recoveries of such future payments of $159 million. As of December 31, 2013, loss and LAE reserves included $847 m illion of reserves for expected future payments offset by expected recoveries of such future payments of $206 million. As of June 30, 2014 and December 31, 2013, the insurance loss recoverable primarily related to expected future recoveries on second-lien RMBS transactions resulting from excess spread generated by performing loans in such transactions. The decrease in i ns u rance loss recoverable was primarily due to decreases in projected collections from excess spread within insured second-lien RMBS securitizations. The following table presents the 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 June 30, 2014:
Second-lien RMBS Exposure |  |  |  | Outstanding |  | Gross Undiscounted
|  |  |  |  | Gross |  | Gross |  | Claim |  | Potential
$ in billions |  | Issues |  | Principal |  | Interest |  | Liability |  | Recoveries
Non-consolidated VIEs |  | 24 |  | $ | 3.2 |  | $ | 1.1 |  | $ | 0.1 |  | $ | 0.6
Consolidated VIEs |  | 11 |  | $ | 1.6 |  | $ | 0.6 |  | $ | 0.0 |  | $ | 0.6
The following table presents changes in the Company's loss and LAE reserves for the six months ended June 30, 2014. Changes in the loss and LAE reserves attributable to the accretion of the claim liability discount, changes in discount rates, changes in amount and timing 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 June 30, 2014, the wei ghted average risk-free rate used to discount the Company's loss reserves (claim liability) was 2.01%. 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 Six Months Ended June 30, 2014 |  |  |
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 |  |  |  | June 30,
2013 |  | Reserves |  | Discount |  | Rates |  | Assumptions |  | Revenue |  | Reserves |  | Other(1) |  | 2014
$ | 641 |  | $ | (108) |  | $ | 8 |  | $ | 37 |  | $ | (37) |  | $ | 10 |  | $ | 11 |  | $ | (8) |  | $ | 554
____________ |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
(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 related to loss payments, partially offset by increases in reserves due to changes in discount rate on ABS CDOs and insured first and second-lien RMBS issues outstanding as of December 31, 2013. 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 six months ended June 30, 2014. Changes in insurance loss recoverable attributable to the accretion of the discount on the recoverable, changes in discount rates, changes in amount and timing of estimated collections, changes in assumptions and changes in LAE recoveries are recorded in “Losses and loss adjustment” expenses in the Company's consolidated statements of operations.
|  |  |  |  |  | Changes in Insurance Loss Recoverable and Recoveries on Unpaid Losses |  |  |
|  |  |  |  |  | for the Six Months Ended June 30, 2014 |  |  |
|  |  |  |  | Collections |  |  |  |  |  |  |  |  |  |  |
|  |  | As of |  | for Cases |  | Accretion |  | Changes in |  |  |  |  | Changes in |  |  |  | As of
|  |  | December 31, |  | with |  | of |  | Discount |  | Changes in |  | LAE |  |  |  | June 30,
In millions |  | 2013 |  | Recoveries |  | Recoveries |  | Rates |  | Assumptions |  | Recoveries |  | Other(1) |  | 2014
Insurance loss |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| recoverable |  | $ | 694 |  | $ | (55) |  | $ | 7 |  | $ | 10 |  | $ | (45) |  | $ | 5 |  | $ | 8 |  | $ | 624
Recoveries on unpaid |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| losses |  |  | 206 |  |  | 0 |  |  | 2 |  |  | 11 |  |  | (60) |  |  | 0 |  |  | 0 |  |  | 159
Total |  | $ | 900 |  | $ | (55) |  | $ | 9 |  | $ | 21 |  | $ | (105) |  | $ | 5 |  | $ | 8 |  | $ | 783
__________ |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
(1) Primarily changes in amount and timing of collections. |  |  |
Th e decrease in the C ompan y's i n s uran ce l o ss re c overabl e and recoveries on unpaid losses durin g 2014 was pr i mar ily du e to changes in assumptions a ss o ci ate d with insured first and second-lien RMBS and collections a ss o ci ate d with i ss ue s out s tandin g a s o f December 31, 2013. 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.
|  |  | Six Months Ended June 30, |
| In millions |  | 2014 |  | 2013 |
| Loss adjustment expense incurred, gross |  | $ | 34 |  | $ | 33 |

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