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Loss and Loss Adjustment Expense Reserves | 12 Months Ended
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Dec. 31, 2017
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Loss and Loss Adjustment Expense Reserves | Note 6: Loss and Loss Adjustment Expense Reserves The Company’s insured portfolio management groups within its U.S. public finance insurance and international and structured finance 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 de bt 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 als o 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, political developments, 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 obligati ons 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 issu er 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. 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. 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. When there are no remaining expected future claim payments, the insured transaction is removed from the “Classified List.” 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 transact ions 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 ad verse 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 le gal 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 disco unt 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, 2017. 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 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 filing for protection under the Bankruptcy Code or entering state statutory proceedings does not necessarily result in a default or ind icate that an ultimate loss will occur. On September 20, 2017, Hurricane Maria made landfall in Puerto Rico as a Category 4 hurricane resulting in catastrophic damage to much of the island’s basic infrastructure, including its electrical transmission an d distribution grid, telecommunications network, housing, roads, bridges, water and sewer systems. On September 21, 2017, the President of the United States approved a Major Disaster Declaration for Puerto Rico and the FEMA made federal disaster assistance available to Puerto Rico to supplement its recovery efforts. Hurricane Maria’s impact on Puerto Rico will likely also impact its ability to both repay its legacy indebtedness and participate in ongoing debt restructuring negotiations. The physical damage and resultant lost economic activity may exceed the collective aid Puerto Rico receives from private insurance, relief from FEMA and other federal agencies and programs. Economic activity in Puerto Rico may not return to pre-hurricane levels and Puerto Ric o’s recovery could be more shallow and protracted than that experienced by other similarly affected governments, given Puerto Rico’s prior constrained liquidity and economic activity. While the federal government has made aid available to Puerto Rico, ther e can be no assurance that such aid will continue in the amounts necessary to offset the adverse impacts from Hurricane Maria in their entirety. In addition, the necessary and greater involvement of the federal government, through its actions to deliver di saster relief and other support services, in addition to the evolving role of the Oversight Board and the role of Puerto Rico in its own recovery, heightens political risk in connection with the restructuring of legacy debt. This risk could lead the Oversi ght Board, Puerto Rico or the federal government to seek to extract greater concessions from creditors based on the uncertainty of Puerto Rico’s long term recovery prospects. In this event, losses at National on select Puerto Rico exposures could increase materially. T he Company monitor s and analyze s these situations closely, however, the overall extent and duration of such events are uncertain. International and Structured Finance Insurance T he international and structured 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. Policies insuring credit derivative c ontracts 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 fac tors 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 early termination of such contracts at a loss, the cumulative unrealize d 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 economic profiles to its financial guarantee insurance policies, the Co mpany evaluates them for impairment, under Statutory accounting, in the same way that it estimates loss and LAE for its financial guarantee policies. Refer to “Note 9: Derivative Instruments” for a further discussion of the Company’s use of d erivatives 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 financial guarantee insurance policies, excluding those on consolidated VI Es. 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 December 31, 2017 for both first and second-lien RMBS transactions using a process called the “Roll Rate Methodology.” The Roll Rate Methodology is a multi-step process using datab ase 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. “Roll Rate” is defined as the probability that current loans become delinquent and subseq uently default and loans in the delinquent pipeline are charged-off or liquidated. Generally, Roll Rates are calculated for the previous twelve months and averaged. The loss reserve estimates are based on a probability-weighted average of three scenarios o f loan losses. Additional data used for both second and first-liens include historic averages of deal specific voluntary prepayment rates, forward projections of the London Interbank Offered Rate (“LIBOR”) interest rates, and historic averages of deal-spec ific loss severities. In addition, for second-lien RMBS backed by home equity lines of credit, the Company assumes a constant basis spread between Prime and LIBOR interest rates. In calculating ultimate cumulative losses for RMBS, the Company estimates the amount of second-lien loans that are expected to be charged-off (deemed uncollectible by servicers of the transactions) or first-lien loans liquidated in the future. 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. For all transactions, cash flow models consider allocations and other structural aspects and claims against MBIA Cor p.’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 n ot on an accelerated basis. 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 d ifficult 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 primaril y records 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 secu ritization 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 RMBS 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, the future spread between Prime and the LIBOR 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 c ollected from excess spread. Excess spread also includes subsequent recoveries on previously charged-off loans associated with the insured second-lien RMBS securitizations. Second-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 Trust 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 assessment of the strength of its contractual put-back rights against Cre dit 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 o f its incurred losses, which totaled $436 million through December 31, 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 Yo rk 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. Notwithstanding the foregoing, u ncertainty remains with respect to the ul timate 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 scenarios are based on the amount of incurred losses measured against cert ain 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 current 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 a nd 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 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., litig ation and/or negotiated out-of-court settlement) 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 r elevant benchmarks. Refer to “Note 20: Commitments and Contingencies” for further information about the Company’s litigation with Credit Suisse. CDO Reserves The Company also has loss and LAE reserves on certain transactions within its CDO por tfolio, primarily including its multi-sector CDO asset class that w as insured in the form of financial guarantee policies. MBIA’s insured multi-sector 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, multi-sector and corporate CDOs). The following discussion provides information about the Company’s process for estimating reserves and credit impairments on these policies, determined as the present value of the probability-weighted potential future losses, net of estimated recoveries, across multiple scenarios. The Company considers several factors when developing the range of potential outcomes and their impact on MBIA. The following approaches require substantial judgments about the future performance of each transaction: Each transaction is evaluated for its commutation potential, which is customized by counterparty and considers historical commutation prices, the level o f dialogue with the counterparty and the credit quality and payment profile of the underlying exposure. A range of loss scenarios is considered under different default and severity rates for each transaction’s collateral. 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”). I n connection with the exercise of its rights and remedies, MBIA Corp. 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 Zo har 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 December 31, 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, th at 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. Failure 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 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 I nsurance Corporation’s policyholders. The determination to commence such a proceeding or take other such actions is within the exclusive control of the NYSDFS. Summary of Loss and LAE Reserves and Recoveries The Company’s loss and LAE reserves and recov eries before consolidated VIE eliminations, along with amounts that were eliminated as a result of consolidat ed VIEs, which are included in the Company’s consolidated balance sheets as of December 31, 2017 and 2016 are presented in the following tabl e:
|  |  |  | As of December 31, 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 |  | $ | 333 |  |  | $ | - |  | $ | 512 |  |  | $ | 174 |  |  | $ | - |  | $ | 97 |
International and Structured Finance Insurance: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Before VIE eliminations |  |  | 1,478 |  |  |  | 407 |  |  | 710 |  |  |  | 551 |  |  |  | 404 |  |  | 650 |
| VIE eliminations |  |  | (1,300) |  |  |  | - |  |  | (243) |  |  |  | (221) |  |  |  | - |  |  | (206) |
|  | Total international and structured finance insurance |  |  | 178 |  |  |  | 407 |  |  | 467 |  |  |  | 330 |  |  |  | 404 |  |  | 444 |
| Total |  | $ | 511 |  |  | $ | 407 |  | $ | 979 |  |  | $ | 504 |  |  | $ | 404 |  | $ | 541 |
Changes in Loss and LAE Reserves The following table s present changes in the Company’s loss and LAE reserves for the years ended December 31, 2017 and 2016. 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 December 31, 2017 and 2016, the weighted average risk-free rate used to discount the Company’s loss reserves (claim liability) was 2.31% and 2.07%, respectively. LAE reserves are generally expecte d to be settled within a one-year period and are not discounted. As of December 31, 2017 and 2016, the Company’s gross loss and LAE reserves included $6 6 million and $60 million, respectively, related to LAE.
In millions |  | Changes in Loss and LAE Reserves for the Year Ended December 31, 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 |  |  |  | December 31,
2016 |  | Reserves(1) |  | Discount |  | Rates |  | Assumptions |  | Revenue |  | Reserves |  | Other(2) |  | 2017
$ | 541 |  | $ | (1,069) |  | $ | 12 |  | $ | 15 |  | $ | 661 |  | $ | (30) |  | $ | 6 |  | $ | 843 |  | $ | 979
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(1) - Includes payments made to satisfy the Zohar II Claim.
(2) - Primarily changes in the amount to satisfy the Zohar II Claim.
In millions |  | Changes in Loss and LAE Reserves for the Year Ended December 31, 2016 |  |  |
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,
2015 |  | Reserves |  | Discount |  | Rates |  | Assumptions |  | Revenue |  | Reserves |  | Other(1) |  | 2016
$ | 516 |  | $ | (128) |  | $ | 8 |  | $ | 5 |  | $ | 78 |  | $ | (15) |  | $ | 14 |  | $ | 63 |  | $ | 541
____________ |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
(1) - Primarily changes in amount and timing of payments.
The increase in the Company’s gross loss and LAE reserves during 2017 w as primarily related to increases due to changes in assumptions on certain Puerto Rico exposures. The increase in the Company’s gross loss and LAE reserves during 2016 w as primarily related to increases due to changes in assumptions on insured first and second-lien RMBS transactions and U.S. public finance transactions. These were partially offset by decreases in changes in assumptions on CDOs. 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 years ended December 31, 2017 and 2016. 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 Year Ended December 31, 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 |  |  |  | December 31,
In millions |  | 2016 |  | Recoveries |  | Recoveries |  | Rates |  | Assumptions |  |  | Recoveries |  | Other(1) |  | 2017
Insurance loss |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| recoverable |  | $ | 504 |  | $ | (124) |  | $ | 10 |  | $ | 2 |  | $ | 113 | (2) |  | $ | - |  | $ | 6 |  | $ | 511
Recoveries on unpaid |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| losses (3) |  |  | 79 |  |  | - |  |  | 1 |  |  | 1 |  |  | (45) |  |  |  | (1) |  |  | - |  |  | 35
Total |  | $ | 583 |  | $ | (124) |  | $ | 11 |  | $ | 3 |  | $ | 68 |  |  | $ | (1) |  | $ | 6 |  | $ | 546
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(1) - Primarily changes in amount and timing of collections.
(2) - Includes amounts which have been paid and are expected to be recovered in the future.
(3) - As of December 31, 2017 and 2016, excludes Puerto Rico recoveries, and as of December 31, 2016, the Zohar II recoveries, which have been netted against reserves.
|  |  |  |  |  |  | Changes in Insurance Loss Recoverable and Recoveries on Unpaid Losses |  |  |
|  |  |  |  |  |  | for the Year Ended December 31, 2016 |  |  |
|  |  | 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 |  | 2015 |  | Recoveries |  | Recoveries |  | Rates |  | Assumptions |  | Recoveries |  | Other(1) |  | 2016
Insurance loss |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| recoverable |  | $ | 577 |  | $ | (69) |  | $ | 5 |  | $ | (17) |  | $ | 86 |  | $ | (6) |  | $ | (72) |  | $ | 504
Recoveries on unpaid |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| losses (2) |  |  | 100 |  |  | - |  |  | 1 |  |  | 3 |  |  | (34) |  |  | 9 |  |  | - |  |  | 79
Total |  | $ | 677 |  | $ | (69) |  | $ | 6 |  | $ | (14) |  | $ | 52 |  | $ | 3 |  | $ | (72) |  | $ | 583
____________
(1) - Primarily changes in amount and timing of collections. |  |  |
(2) - Excludes Puerto Rico and Zohar II recoveries, which have been netted against reserves.
The in crease in the Company’s insurance loss recoverable during 2017 was primarily due to paid losses on certain Puerto Rico credits offset by a decrease in insured RMBS transactions. The de crease in the RMBS insurance loss reco verable was primarily related to the collection of m ortgage insurance from the settlement of litigation involving Old Republic Insurance Corporation and a decrease in expected recoveries from first-lien RMBS transactions. The decrease in the Company’s recoveries on unpaid losses is primarily related to insured R MBS transactions. The decrease in t h e C ompan y’s i n s uran ce l o ss re c overabl e and recoveries on unpaid losses durin g 2016 was pr i mar ily du e to a decrease in expected future recoveries on CDOs as the result of the consolidation of a VIE and related elimination of a VIE and a decrease in changes in the amount of expected collections on first and second-lien RMBS issues, partially offset by an increase related to changes in assumptions on certain Puerto Rico credits. Loss and LAE Activity The Company’s financial guarantee insurance losses and LAE (excluding insured credit derivative and consolidated VIEs), net of reinsurance for the years ended December 31, 201 7, 201 6 and 201 5 are presented in the following tabl e:
|  |  | Years Ended December 31, |
| In millions |  | 2017 |  | 2016 |  | 2015 |
| U.S. Public Finance Insurance Segment |  | $ | 499 |  | $ | 74 |  | $ | 5 |
| International and Structured Finance Insurance Segment: |  |  |  |  |  |  |  |  |  |
|  | Second-lien RMBS |  |  | 62 |  |  | 121 |  |  | 63 |
|  | First-lien RMBS |  |  | 92 |  |  | 41 |  |  | 34 |
|  | CDOs |  |  | 10 |  |  | (32) |  |  | 29 |
|  | Other(1) |  |  | 20 |  |  | 16 |  |  | (8) |
| Losses and LAE |  | $ | 683 |  | $ | 220 |  | $ | 123 |
| ________________ |  |  |  |  |  |  |
| (1) - Includes non-U.S. public finance and other issues. |  |  |  |  |  |  |
For 2017, losses and LAE primarily related to increases in actual and expected payments on certain Puerto Rico exposures, insured first-lien RMBS transactions and a decrease in actual and projected collections from mortgage insurance included in the Company’s excess spread within its second-lien RMBS transactions from the settlement of litigation regarding insurance coverage involving Old Republic Insurance Corporation, Bank of America, N.A. and The Bank of New York Mellon. For 2016, losses and LAE primarily related to increases in actual and expected payments on certain Puerto Rico exposures and insured first and second-lien RMBS transactions and decreases in projected collections from excess spread within insured second-lien RMBS transactions. The se were partially offset by increases in recoveries of actual and expected payments on certain Puerto Rico exposures and decreases in actual and expected payments on CDOs. For 2015, losses and LAE primarily related to increases in expected payments on CDOs and insured first-lien RMBS transactions and decreases in projected collections from excess spread within insured second-lien RMBS securitizations. These were partially offset by increases in recoveries of expected payments related to CDOs and increas es in projected collections from excess spread within insured second-lien RMBS securitizations due to an anticipated sale of loans within certain securitizations that had been previously charged off by the servicer. Costs associated with remediating insure d 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 operations. For 2017, 2016 and 2015, gross LAE related to reme di ating insured obligations were $42 million, $48 million and $26 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 December 31, 2017:
|  |  |  |  | Surveillance Categories
|  |  |  |  | Caution |  | Caution |  | Caution |  |  |  |  |  |
|  |  |  |  | List |  | List |  | List |  | Classified |  |  |
$ in millions |  | Low |  | Medium |  | High |  | List |  | Total
Number of policies |  |  | 89 |  |  | 5 |  |  | 1 |  |  | 280 |  |  | 375
Number of issues (1) |  |  | 20 |  |  | 4 |  |  | 1 |  |  | 119 |  |  | 144
Remaining weighted average contract |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| period (in years) |  |  | 7.4 |  |  | 4.3 |  |  | 8.7 |  |  | 9.7 |  |  | 8.9
Gross insured contractual payments |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| outstanding: (2) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  | Principal |  | $ | 2,764 |  | $ | 13 |  | $ | 104 |  | $ | 6,083 |  | $ | 8,964
|  | Interest |  |  | 2,676 |  |  | 3 |  |  | 46 |  |  | 5,756 |  |  | 8,481
|  |  | Total |  | $ | 5,440 |  | $ | 16 |  | $ | 150 |  | $ | 11,839 |  | $ | 17,445
Gross Claim Liability (3) |  | $ | - |  | $ | - |  | $ | - |  | $ | 1,082 |  | $ | 1,082
Less: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Gross Potential Recoveries (4) |  |  | - |  |  | - |  |  | - |  |  | 782 |  |  | 782
| Discount, net (5) |  |  | - |  |  | - |  |  | - |  |  | (178) |  |  | (178)
Net claim liability (recoverable) |  | $ | - |  | $ | - |  | $ | - |  | $ | 478 |  | $ | 478
Unearned premium revenue |  | $ | 9 |  | $ | - |  | $ | 4 |  | $ | 77 |  | $ | 90
__________ |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
(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 for policies in a net payable position.
(4) - Gross potential recoveries with respect to certain Puerto Rico exposures are net of the claim liability for policies in a net recoverable position.
(5) - 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 (4) |  |  | - |  |  | - |  |  | - |  |  | 770 |  |  | 770
| Discount, net (5) |  |  | - |  |  | - |  |  | - |  |  | (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 for policies in a net payable position.
(4) - Gross potential recoveries with respect to certain Puerto Rico exposures are net of the claim liability for policies in a net recoverable position.
(5) - Represents discount related to Gross Claim Liability and Gross Potential Recoveries.
As of December 31, 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. As of December 31, 2017 and 2016, the gross potential recoveries principally related to certain Puerto Rico exposures and insured second-lien RMBS transactions. As of December 31, 2017, these potential recoveries exclude the recoveri es 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 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 pay ments, 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 amount of potential recoverie s 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. As of December 31, 2017 and 2016, reinsurance recoverable on paid and unpaid losses was $17 million and $6 million, respectively, and w as included in “Other assets” on the Company’s consolidated balance sheets.

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