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Loss and Loss Adjustment Expense Reserves | 6 Months Ended
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Jun. 30, 2017
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Loss and Loss Adjustment Expense Reserves | Note 5: Loss and Loss Adjustment Expense Reserves U.S. Public Finance Insurance 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 utilities, airports, health care institutions, higher educational facilities, student loan issuers, housing authorities and other similar agencies and obligations issued by private entities that finance projects that serve a substantial public purpose. The Company estimates future losses by using probability-weighted cas h flow 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 well as recoveries for such payments, if any. Gross par outs tanding for c apital appreciation bonds represents the par amount at the time of issuance of the insurance policy. Certain local governments remain under financial and budgetary stress and a few have filed for protection under title 11, United States Code (the “Bankruptcy Code”), or have entered into state statutory proceedings established to assist municipalities in managing through periods of severe fiscal stress. In the case of Puerto Rico, certain credits that the Company insures have filed petitions for covered instrumentalities under Title III of the Puerto Rico Oversight, Management and Economic Stability Act (“PROMESA”), which incorporates by reference provisions from the Bankruptcy Code. This could lead to an increase in defaults by such entities on the payment of their obligations and losses or impairments i n greater amounts on 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. Also, th e filing for protection under the Bankruptcy Code or entering state statutory proceedings does not necessarily result in a default or indicate that an ultimate loss will occur. International and Structured Finance Insurance T he international and struc tured finance insurance segment’s case basis reserves and insurance loss recoveries recorded in accordance with GAAP do not include estimates for policies insuring credit derivatives or on financial guarantee VIEs that are eliminated in consolidation. Poli cies insuring credit derivative contracts are accounted for as derivatives and are carried at fair value in the Company’s consolidated financial statements under GAAP. The fair values of insured credit 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 credit derivative contracts or the earl y termination of such contracts at a loss, the cumulative unrealized losses recorded from these contracts should reverse before or at the maturity of the contracts. As the Company’s insured credit derivatives have similar terms, conditions, risks, and econ omic profiles to its financial guarantee insurance policies, the Company evaluates them for impairment, under Statutory accounting, in the same way that it estimates loss and loss adjustment expense (“LAE”) for its financial guarantee policies. Refer to “Note 8: Derivative Instruments” for a further discussion of the Company’s use of derivatives and their impact on the Company’s consolidated financial statements. RMBS Case Basis Reserves (Financial Guarantees) The Company’s RMBS reserves and recoveries relate to financi al guarantee insurance policies, excluding those on consolidated VIEs. The Company’s first-lien RMBS case basis reserves primarily relate to RMBS backed by alternative A-paper and subprime mortgage loans. The Company’s second-lien RMBS case basis reserves relate to RMBS backed by home equity lines of credit and closed-end second mortgages. The Company calculated RMBS case basis reserves as of June 30, 2017 for both first and second-lien RMBS transactions using a process called the “Roll Rate Methodol ogy.” The Roll Rate Methodology is a multi-step process using database s of loan level information, proprietary internal cash flow model s, and commercially available model s to estimate potential losses and recoveries on insured bonds. Refer to “Note 6: Loss and Loss Adjustment Expense Reserves” in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, for additional information on the Company’s Roll Rate Methodology for its RM BS case basis reserves. The Company monitors portfolio performance on a monthly basis against projected performance, reviewing delinquencies, r oll r ates, and prepayment rates (including voluntary and involuntary). However, loan performance remains diffic ult 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. RMBS Recoveries The Company primarily rec ords two types of recoveries related to insured RMBS exposures: excess spread that is generated from the trust structures in the insured transactions; and second-lien “put-back” claims related to those mortgage loans whose inclusion in an insured securitiz ation failed to comply with representations and warranties (“ineligible loans”). Excess Spread Excess spread within insured RMBS securitizations is the difference between interest inflows on mortgage loan collateral and interest outflows on the insured RMB S notes. The aggregate amount of excess spread depends on the future loss trends (which include future delinquency trends, average time to charge-off/liquidate delinquent loans, and the availability of pool mortgage insurance), the future spread between Pr ime and the London Interbank Offered Rate interest rates, and borrower refinancing behavior (which may be affected by changes in the interest rate environment) that results in voluntary prepayments. Minor deviations in loss trends and voluntary prepayments may substantially impact the amounts collected from excess spread. Excess spread may also include estimated recoverables from mortgage insurance contracts and subsequent recoveries on charged-off loans associated with the insured RMBS securitizations. Sec ond-lien Put-Back Claims Related to Ineligible Loans The Company has settled the majority of the Company’s put-back claims. Only its claims against Credit Suisse remain outstanding. The Company’s settlement amounts have been consistent with the put-back recoveries that had been included in the Company’s financial statements at the times preceding the settlements. The put-back contract claim remaining with Credit Suisse is related to the inclusion of ineligible loans in the 2007-2 Home Equity Mortgage Tru st 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. Based on the Company’s a ssessment of the strength of its contractual put-back rights against Credit Suisse, as well as on its prior settlements with other sellers/servicers and success of other monolines’ put-back settlements, the Company believes it will prevail in enforcing its contractual rights and that it is entitled to collect the full amount of its incurred losses, which totaled $437 million through June 30, 2017. The Company is also entitled to collect interest on amounts paid; it believes that in the context of its put-back litigation, the appropriate interest rate should be 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. N otwithstanding the foregoing, u ncertainty remains with respect to the ultimate outcome of the litigation with Credit Suisse, which is contemplated in the probability-weighted cash flow scenario based-modeling the Company uses. The Credit Suisse recovery sc enarios are based on the amount of incurred losses measured against certain probabilities of ultimate resolution of the dispute with Credit Suisse. Most of the probability weight is assigned to partial recovery scenarios and a re discounted using the curren t risk-free discount rates associated against the underlying transaction’s cash flows. The Company continues to consider relevant facts and circumstances in developing its assumptions on expected cash inflows, probability of potential recoveries (including the outcome of litigation) and recovery period. The estimated amount and likelihood of potential recoveries are expected to be revised and supplemented t o 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 its recoveries from its put-back contract claims against Credit Suisse, the ultimate amount recovered may be materially different from th at recorded by the Company given the inherent uncertainty of the manner of resolving the claims (i.e., litigation and/or negotiated out-of-court settlement) and the assumptions used in the re quired 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. CDO Reserves The Company also has loss and LAE reserves on cert ain transactions within its collateralized debt obligation (“CDO”) portfolio, including its multi-sector CDO and high yield corporate CDO asset classes that were insured in the form of financial guarantee policies. MBIA’s insured multi-sector CDOs are tran sactions that include a variety of collateral ranging from corporate bonds to structured finance assets (which includes, but are not limited to, RMBS-related collateral, multi-sector and corporate CDOs). The Company’s high yield corporate CDO portfolio consists o f middle-market/special-opportunity corporate loan transaction s. Zohar Recoveries MBIA Corp. will seek to recover the payment s it made (plus interest and expenses) with respect to Zohar I and the Zohar II Claim. MBIA Corp. anticipates that the primary source of the recovery of the Zohar II Claim w ill come from the monetization of the assets of Zohar II, which include, among other things, loans made to, and equity interests in, companies purportedly controlled by the sponsor and former collateral manager of Zohar I and Zohar II (the “Zohar Sponsor”) (all the assets of Zohar II, the “Zohar II Assets”). In connection with the exercise of its rights and remedies, MBIA Corp. directed the trustee for Zohar I to commence an auction (the “Auction”) of all of th e assets of Zohar I, which occurred in 2016. MBIA Corp. was the winning bidder in the Auction, and in connection therewith, acquired the beneficial ownership of the Zohar I assets, which include loans made to, and equity interests in, companies purportedly controlled by the Zohar Sponsor (all the assets of Zohar I, the “Zohar I Assets”). Over time, MBIA Corp. expects to acquire the legal ownership of the Zohar I Assets and recover all or substantially all of the payment it made (plus interest and expenses) with regards to the Zohar I claim. As of June 30, 2017, the recoveries of Zohar I and Zohar II are included in “Loans receivable at fair value” which are presented in “Assets of consolidated variable interest entities” on the Company’s consolidated balance sheets. There can be no assurance, however, that the value of the Zohar II Assets and the Zohar I Assets will be sufficient to permit MBIA Corp. to recover all or substantially all of the payments it made on the Zohar I and the Z ohar I I Claim s. Fail ure to recover a substantial amount of such payments could impede its ability to make payments when due on other policies. MBIA Corp. believes that if the New York State Department of Financial Services (“NYSDFS”) concludes at any time that MBIA Insurance Corporation will not be able to pay its policyholder claims, the NYSDFS would likely put MBIA Insurance Corporation into a rehabilitation or liquidation proceeding under Article 74 of the New York Insurance Law and/or take such other actions as the NYSDFS may deem necessary to protect the interests of MBIA Insurance Corporation’s policyholders. The determination to commence such a proceeding or take other such actions is within the exclusive control of the NYSDFS. Refer to “Note 6: Loss and Loss Adjustment Expense Reserves” in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, for additional information on the Company’s loss reserving process including risk-management act ivities. Summary of Loss and LAE Reserves and Recoveries The Company’s loss and LAE reserves and recoveries before consolidated VIE eliminations, along with amounts that were eliminated as a result of consolidat ed VIEs, which are included in the Compan y’s consolidated balance sheets as of June 30, 2017 and December 31, 2016 are presented in the following table:
|  |  |  | As of June 30, 2017 |  |  | As of December 31, 2016 |
In millions |  | Balance Sheet Line Item |  |  | Balance Sheet Line Item |
|  |  |  | Insurance loss recoverable |  |  | Loan repurchase commitments |  | Loss and LAE reserves |  |  | Insurance loss recoverable |  |  | Loan repurchase commitments |  | Loss and LAE reserves |
U.S. Public Finance Insurance |  | $ | 191 |  |  | $ | - |  | $ | 255 |  |  | $ | 174 |  |  | $ | - |  | $ | 97 |
International and Structured Finance Insurance: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Before VIE eliminations |  |  | 1,588 |  |  |  | 407 |  |  | 690 |  |  |  | 551 |  |  |  | 404 |  |  | 650 |
| VIE eliminations |  |  | (1,296) |  |  |  | - |  |  | (231) |  |  |  | (221) |  |  |  | - |  |  | (206) |
|  | Total international and structured finance insurance |  |  | 292 |  |  |  | 407 |  |  | 459 |  |  |  | 330 |  |  |  | 404 |  |  | 444 |
| Total |  | $ | 483 |  |  | $ | 407 |  | $ | 714 |  |  | $ | 504 |  |  | $ | 404 |  | $ | 541 |
Changes in Loss and LAE Reserves The following table present s changes in the Company’s loss and LAE reserves for the six months ended June 30, 2017. Changes in loss reserves attributable to the accreti on of the claim liability discount, changes in discount rates, changes in amount and timing of estimated claim 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, 2017, the weighted average risk-free rate used to discount the Company’s loss reserves (claim liability) was 2.07%. LAE reserves are generally expecte d to be settled within a one-year period and are not discounted. As of June 30, 2017 and December 31, 2016, the Company’s gross loss and LAE reserves included $7 2 million and $60 million, respectively, related to LAE.
In millions |  | Changes in Loss and LAE Reserves for the Six Months Ended June 30, 2017 |  |  |
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,
2016 |  | Reserves(1) |  | Discount |  | Rates |  | Assumptions |  | Revenue |  | Reserves |  | Other(2) |  | 2017
$ | 541 |  | $ | (820) |  | $ | 4 |  | $ | 2 |  | $ | 269 |  | $ | (27) |  | $ | 12 |  | $ | 733 |  | $ | 714
____________
(1) - Includes payments made to satisfy the Zohar II Claim.
(2) - Primarily changes in the amount to satisfy the Zohar II Claim.
The increase in the Company’s gross loss and LAE reserves reflected in the preceding table was primarily related to increases due to changes in assumptions on certain Puerto Rico exposures. Changes in Insurance Loss Recoverable and Recoveries on Unpaid Losses 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 present s 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, 2017. 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 rec orded 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, 2017 |  |  |
|  |  | Gross |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Gross
|  |  | Reserve |  | Collections |  |  |  |  |  |  |  |  |  |  | Reserve
|  |  | as of |  | for Cases |  | Accretion |  | Changes in |  |  |  |  | Changes in |  |  |  | as of
|  |  | December 31, |  | with |  | of |  | Discount |  | Changes in |  | LAE |  |  |  | June 30,
In millions |  | 2016 |  | Recoveries |  | Recoveries |  | Rates |  | Assumptions |  | Recoveries |  | Other(1) |  | 2017
Insurance loss |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| recoverable |  | $ | 504 |  | $ | (49) |  | $ | 5 |  | $ | 9 |  | $ | (6) |  | $ | - |  | $ | 20 |  | $ | 483
Recoveries on unpaid |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| losses (2) |  |  | 79 |  |  | - |  |  | 1 |  |  | 1 |  |  | (19) |  |  | (5) |  |  | - |  |  | 57
Total |  | $ | 583 |  | $ | (49) |  | $ | 6 |  | $ | 10 |  | $ | (25) |  | $ | (5) |  | $ | 20 |  | $ | 540
____________
(1) - Primarily changes in amount and timing of collections.
(2) - As of June 30, 2017 and December 31, 2016, excludes Puerto Rico recoveries, and as of December 31, 2016, the Zohar II recoveries, which have been netted against
reserves.
The decrease in the Company’s insurance loss recoverable and recoveries on unpaid losses reflected in the preceding table was primarily due to a decrease in changes in assumptions on insured RMBS transactions. Loss and LAE Activity The Company’s financial guarantee insurance losses and LAE (excluding insured credit derivatives and consolidated VIEs), net of reinsurance for the three and six months ended June 30, 2017 and 2016 are presented in the following table:
|  | Three Months Ended June 30, |  | Six Months Ended June 30,
In millions |  | 2017 |  | 2016 |  | 2017 |  | 2016
U.S. Public Finance Insurance Segment |  | $ | 158 |  | $ | 9 |  | $ | 169 |  | $ | 18
International and Structured Finance Insurance Segment: |  |  |  |  |  |  |  |  |  |  |  |
| Second-lien RMBS |  |  | (18) |  |  | 21 |  |  | 4 |  |  | 34
| First-lien RMBS |  |  | 18 |  |  | 35 |  |  | 75 |  |  | 61
| CDOs |  |  | 5 |  |  | 9 |  |  | 8 |  |  | (22)
| Other(1) |  |  | 7 |  |  | 3 |  |  | 8 |  |  | 8
Losses and loss adjustment expense |  | $ | 170 |  | $ | 77 |  | $ | 264 |  | $ | 99
________________ |  |  |
(1) - Includes non-U.S. public finance and other issues. |  |  |
For the three months ended June 30, 2017, losses and LAE primarily related to increases in expected payments on certain Puerto Rico exposures. For the six months ended June 30, 2017, losses and LAE primarily related to increases in expected payments on certain Puerto Rico exposures and insured RMBS transactions. For the three and six months ended June 30, 2016, losses and LAE primarily related to increases in expected payments on insured first-lien RMBS transactions and decreases in projected collections from excess spread within insured seco nd-lien RMBS securitizations. Costs associated with remediating insured obligations assigned to the Company’s surveillance categories are recorded as LAE and included in “Losses and loss adjustment” expenses on the Company’s consolidated statements of oper ations. For the three months ended June 30, 2017 and 2016, gross LAE related to remediating insured obligations were $1 5 million and $20 million, respectively. For the six months ended June 30, 2017 and 2016, gross LAE related to remediati ng insured obligations were $2 7 million and $28 million, respectively. Surveillance Categories 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, 2017:
|  |  |  |  | Surveillance Categories
|  |  |  |  | Caution |  | Caution |  | Caution |  |  |  |  |  |
|  |  |  |  | List |  | List |  | List |  | Classified |  |  |
$ in millions |  | Low |  | Medium |  | High |  | List |  | Total
Number of policies |  |  | 95 |  |  | 5 |  |  | 1 |  |  | 325 |  |  | 426
Number of issues (1) |  |  | 21 |  |  | 4 |  |  | 1 |  |  | 121 |  |  | 147
Remaining weighted average contract |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| period (in years) |  |  | 7.4 |  |  | 4.7 |  |  | 8.8 |  |  | 9.5 |  |  | 8.8
Gross insured contractual payments |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| outstanding: (2) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  | Principal |  | $ | 3,005 |  | $ | 14 |  | $ | 108 |  | $ | 6,505 |  | $ | 9,632
|  | Interest |  |  | 2,793 |  |  | 4 |  |  | 49 |  |  | 5,945 |  |  | 8,791
|  |  | Total |  | $ | 5,798 |  | $ | 18 |  | $ | 157 |  | $ | 12,450 |  | $ | 18,423
Gross Claim Liability (3) |  | $ | - |  | $ | - |  | $ | - |  | $ | 922 |  | $ | 922
Less: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Gross Potential Recoveries |  |  | - |  |  | - |  |  | - |  |  | 823 |  |  | 823
| Discount, net (4) |  |  | - |  |  | - |  |  | - |  |  | (133) |  |  | (133)
Net claim liability (recoverable) |  | $ | - |  | $ | - |  | $ | - |  | $ | 232 |  | $ | 232
Unearned premium revenue |  | $ | 10 |  | $ | - |  | $ | 4 |  | $ | 82 |  | $ | 96
__________ |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
(1) - An “issue” represents the aggregate of financial guarantee policies that share the same revenue source for purposes of making debt service payments on the insured debt.
(2) - Represents contractual principal and interest payments due by the issuer of the obligations insured by MBIA.
(3) - The gross claim liability with respect to Puerto Rico exposures are net of expected recoveries.
(4) - 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, 2016:
|  |  |  |  | Surveillance Categories
|  |  |  |  | Caution |  | Caution |  | Caution |  |  |  |  |  |
|  |  |  |  | List |  | List |  | List |  | Classified |  |  |
$ in millions |  | Low |  | Medium |  | High |  | List |  | Total
Number of policies |  |  | 90 |  |  | 6 |  |  | 3 |  |  | 331 |  |  | 430
Number of issues (1) |  |  | 17 |  |  | 4 |  |  | 2 |  |  | 126 |  |  | 149
Remaining weighted average contract |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| period (in years) |  |  | 7.5 |  |  | 3.4 |  |  | 7.2 |  |  | 7.0 |  |  | 7.1
Gross insured contractual payments |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| outstanding: (2) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  | Principal |  | $ | 2,917 |  | $ | 17 |  | $ | 320 |  | $ | 7,031 |  | $ | 10,285
|  | Interest |  |  | 2,795 |  |  | 4 |  |  | 107 |  |  | 2,777 |  |  | 5,683
|  |  | Total |  | $ | 5,712 |  | $ | 21 |  | $ | 427 |  | $ | 9,808 |  | $ | 15,968
Gross Claim Liability (3) |  | $ | - |  | $ | - |  | $ | - |  | $ | 718 |  | $ | 718
Less: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Gross Potential Recoveries |  |  | - |  |  | - |  |  | - |  |  | 770 |  |  | 770
| Discount, net (4) |  |  | - |  |  | - |  |  | - |  |  | (75) |  |  | (75)
Net claim liability (recoverable) |  | $ | - |  | $ | - |  | $ | - |  | $ | 23 |  | $ | 23
Unearned premium revenue |  | $ | 9 |  | $ | - |  | $ | 8 |  | $ | 68 |  | $ | 85
__________
(1) - An “issue” represents the aggregate of financial guarantee policies that share the same revenue source for purposes of making debt service payments on the insured debt.
(2) - Represents contractual principal and interest payments due by the issuer of the obligations insured by MBIA.
(3) - The gross claim liability with respect to Puerto Rico and Zohar II exposures are net of expected recoveries.
(4) - Represents discount related to Gross Claim Liability and Gross Potential Recoveries.
The gross claim liabilities in the preceding tables represent the Company’s estimate of undiscounted probability-weighted estimated future claim payments. The gross claim liability with respect to Puerto Rico exposure as of June 30, 2017 and December 31, 2016, and the Zohar II exposure as of December 31, 2016, is net of expected recoveries. As of June 30, 2017, the gross claim liability primarily related to insured first-lien RMBS transactions as well as certain Puerto Rico exposures. As of December 31, 2016, the gross claim liability primarily related to insured first-lien RMBS transactions. The gross potential recoveries represent the Company’s estimate of undiscounted probability-weighted recoveries of actual claim payments and r ecoveries of estimated future claim payments. Gross potential recoveries exclude certain amounts related to Puerto Rico exposure as of June 30, 2017 and December 31, 2016, and the Zohar II exposure as of December 31, 2016 that ha ve been netted against the claim liability. As of June 30, 2017 and December 31, 2016, the gross potential recoveries principally related to certain Puerto Rico exposures and insured second-lien RMBS transactions. As of June 30, 2017, these potential re coveries exclude the recoveries of Zohar I and Zohar II that are included in “Loans receivable at fair value” which are presented in “Assets of consolidated variable interest entities” on the Company’s consolidated balance sheets. The Company’s recoveries have been, and remain based on either salvage rights, the rights conferred to MBIA through the transactional documents (inclusive of the insurance agreement), or subrogation rights embedded within financial guarantee insurance policies. Expected salvage an d 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 offs et to future expected claim payments, it is recorded as a salvage asset. The amount of recoveries recorded by the Company is limited to paid claims plus the present value of projected estimated future claim payments. As claim payments are made, the recorded a mount 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 consolid ated by the Company. As of June 30, 2017 and December 31, 2016, reinsurance recoverable on paid and unpaid losses was $8 million and $6 million, respectively, and w as included in “Other assets” on the Company’s consolidated balance sheets.

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- Definition The entire disclosure for liabilities related to future policy benefits and unpaid claims and claim adjustments. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 944 -SubTopic 40 -Section 50 -Paragraph 6 -URI http://asc.fasb.org/extlink&oid=6482852&loc=d3e14931-158439 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 944 -SubTopic 40 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=65670824&loc=d3e14754-158437 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 944 -SubTopic 210 -Section S99 -Paragraph 1 -Subparagraph (SX 210.7-03.13(a)(1),(b)) -URI http://asc.fasb.org/extlink&oid=6879938&loc=d3e572229-122910 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 944 -SubTopic 40 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=65670824&loc=d3e14764-158437 + Details
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