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Loss and Loss Adjustment Expense Reserves | 9 Months Ended
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Sep. 30, 2018
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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 of the 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 petitio ns 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 entiti es 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 indicate that an ultimate loss will occur. Refer to “Note 1: Business Development and Risk and Uncertainties”, for further information on the Company’s Puerto Rico exposures. International and Structured Finance Insurance T he international and structur ed finance insurance segment’s case basis reserves and insurance loss recoveries recorded in accordance with GAAP do not include estimates for a polic y insuring a credit derivative or on financial guarantee VIEs that are eliminated in consolidation. The p o lic y insuring a credit derivative contract is accounted for as a derivative and is carried at fair value in the Company’s consolidated financial statements under GAAP. The fair value of an insured credit derivative contract is 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 an insured credit derivative contract or the early t ermination of such contract at a loss, the cumulative unrealize d losses recorded from this contract should reverse before or at the maturity of the contract. As the Company’s insured credit derivative has similar terms, conditions, risks, and economic prof iles to its financial guarantee insurance policies, the Company evaluates it for impairment, under statutory accounting principles, 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 September 30, 2018 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, 2017, for additional information regarding the Company’s Roll Rate Methodology for its RMBS 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 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. RMBS Recoveries The Company primar ily 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 se curitization 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 insu red 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 borro wer 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 also includes subsequent recoveries on previously charged-off loans associated with 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-b ack claims relating to the inclusion of ineligible loans in securitizations it insured. Only its claims against Credit Suisse remain outstanding. Credit Suisse has challenged the Company’s assessment of the ineligibility of individual mortgage loans and th e dispute is the subject of litigation for which there is no assurance that the Company will prevail. The Company’s settlement amounts on its prior put-back claims have been consistent with the put-back recoveries that had been included in the Company’s fi nancial statements at the times preceding the settlements. Based on the Company’s assessment 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 mon olines’ 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. 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, 2017, and “Note 13: Commitments and Contingencies” for further information about the Company’s litigation with Credit Suisse. CDO Reserves and Recoveries The Company also has lo ss and LAE reserves on certain transactions within its collateralized debt obligations (“CDO”) portfolio, primarily its multi-sector CDO asset class that was insured in the form of financial guarantee policies. MBIA’s insured multi-s ector 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). Zohar Recoveries MBIA Corp. will seek to recover the payment s it made (plus interest and expenses) with respect to Zohar I and Zohar II. MBIA Corp. anticipates that the primary source of the recover ies w ill come from the monetization of the Zohar A ssets as anticipated in the Zohar Bankrup tcy Settlement. Since the second quarter of 2018, th e Company no longer consolidates the Zohar funds as VIEs and estimated recoveries from Zohar I and Zohar II are included in “Insurance loss recoverable” on the Company’s consolidated balance sheets. As of M a r c h 3 1, 2 0 1 8 a n d December 31, 2017, the fair value of the assets of Zohar I and Zohar II are included in “Loans receivable at fair value” under “Assets of consolidated variable interest entities” on the Company’s consolidated balance sheets. Refer to “N ote 1: Business Developments and Risks and Uncertainties” for additional information about the estimated Zohar recoveries. Notwithstanding the procedures agreed to in the Zohar Bankruptcy Settlement, there can be no assurance that the value of the Zohar Assets will be sufficient to permit MBIA Corp. to recover all or substantially all of the payments it made on Zohar I and Zohar II. Failure to recover a substantial amount of such payments could impede MBIA Corp.’s 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 Corpo ration 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. Summary of Loss and LAE Reserves and Recoveries The Company’s loss and LAE reserves and recoveries before consolidated VIE eliminations, along with a mounts that were eliminated as a result of consolidat ed VIEs, which are included in the Company’s consolidated balance sheets as of September 30, 2018 and December 31, 2017 are presented in the following table:
|  |  | As of September 30, 2018 |  |  | As of December 31, 2017 |
In millions | Balance Sheet Line Item |  |  | Balance Sheet Line Item |
|  |  | Insurance loss recoverable |  | Loss and LAE reserves |  |  | Insurance loss recoverable |  | Loss and LAE reserves |
U.S. Public Finance Insurance | $ | 554 |  | $ | 634 |  |  | $ | 333 |  | $ | 512 |
International and Structured Finance Insurance: |  |  |  |  |  |  |  |  |  |  |
| Before VIE eliminations(1) |  | 1,457 |  |  | 628 |  |  |  | 1,478 |  |  | 710 |
| VIE eliminations(1) |  | (469) |  |  | (229) |  |  |  | (1,300) |  |  | (243) |
|  | Total international and structured finance insurance |  | 988 |  |  | 399 |  |  |  | 178 |  |  | 467 |
| Total | $ | 1,542 |  | $ | 1,033 |  |  | $ | 511 |  | $ | 979 |
|  | _________________ |  |  |  |  |  |  |  |  |  |  |  |  |
|  | (1) - Includes loan repurchase commitments of $415 million and $407 million as of September 30, 2018 and December 31, 2017, respectively. |
Changes in Loss and LAE Reserves The Company’s recoveries are based on either salvage rights, the rights conferred to MBIA through the transactional documents (inclusive of the insurance agreements), or subrogation rights embedded within financial guarantee insurance policies. Expected salvage and subrogation recoveries, as well as recoveries from other remediation efforts, r educe 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, the right to recovery is recorded as a salv age 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 recoveries may exceed the remaining amount of the claim liability for a given policy. The gross claim lia bility and gross potential recoveries reflect the elimination of claim liabilities and potential recoveries related to VIEs consolidated by the Company. The following table present s changes in the Company’s loss and LAE reserves for the nine months ended September 30, 2018. Changes in loss reserves attributable to the accretion 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 reserv es are recorded in “Losses and loss adjustment” expenses in the Company’s consolidated statements of operations. As of September 30, 2018, the weighted average risk-free rate used to discount the Company’s loss reserves (claim liability) was 3.03%. LAE reserves are generally expected to be settled within a one-year period and are not discounted. As of September 30, 2018 and December 31, 2017, the Company’s gross loss and LAE reserves included $74 million and $66 million, respectively, related to LAE.
In millions |  | Changes in Loss and LAE Reserves for the Nine Months Ended September 30, 2018 |  |  |
Gross Loss |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Gross Loss
and LAE |  |  |  | Accretion |  |  |  |  |  |  |  | Changes in |  |  |  |  |  |  |  | and LAE
Reserves as of |  |  |  | of Claim |  | Changes in |  |  |  | Unearned |  | Changes in |  |  |  |  | Reserves as of
December 31, |  | Loss |  | Liability |  | Discount |  | Changes in |  | Premium |  | LAE |  |  |  |  | September 30,
2017 |  | Payments |  | Discount |  | Rates |  | Assumptions |  | Revenue |  | Reserves |  | Other(1) |  | 2018
$ | 979 |  | $ | (344) |  | $ | 18 |  | $ | 25 |  | $ | 336 |  | $ | 12 |  | $ | 8 |  | $ | (1) |  | $ | 1,033
____________
(1) - Primarily changes in amount and timing of payments.
The increase in the Company’s gross loss and LAE reserves during the nine months ended September 30, 2018 was primarily related to certain Puerto Rico exposures and changes in the interest rate environment, partially offset by decrease s in insured RMBS and other insured financial guarantee transactions. 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 nine months ended September 30, 2018. 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 s tatements of operations.
|  |  |  |  |  | Changes in Insurance Loss Recoverable and Recoveries on Unpaid Losses |  |  |
|  |  |  |  |  | for the Nine Months Ended September 30, 2018 |  |  |
|  |  | Gross |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Gross
|  |  | Reserve |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Reserve
|  |  | as of |  |  |  | Accretion |  | Changes in |  |  |  | Changes in |  |  |  | as of
|  |  | December 31, |  | Collections |  | of |  | Discount |  | Changes in |  | LAE |  |  |  | September 30,
In millions |  | 2017 |  | for Cases |  | Recoveries |  | Rates |  | Assumptions |  | Recoveries |  | Other(1) |  | 2018
Insurance loss recoverable |  | $ | 511 |  | $ | (42) |  | $ | 14 |  | $ | (29) |  | $ | 1,084 | (2) | $ | - |  | $ | 4 |  | $ | 1,542
Recoveries on unpaid losses (3) |  |  | 35 |  |  | - |  |  | 1 |  |  | (1) |  |  | (8) |  |  | (6) |  |  | - |  |  | 21
Total |  | $ | 546 |  | $ | (42) |  | $ | 15 |  | $ | (30) |  | $ | 1,076 |  | $ | (6) |  | $ | 4 |  | $ | 1,563
____________
(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 September 30, 2018 and December 31, 2017, excludes Puerto Rico recoveries which have been netted against reserves.
The inc rease in the Company’s insurance loss recoverable reflected in the preceding table was primarily due to the re-establishment of recoveries for Zohar I and Zohar II upon deconsolidation during the second quarter of 2018 and to a lesser extent, amounts related to the anticipated recovery of claims paid to certain Puerto Rico credits. Loss and LAE Activity For the three months ended September 30, 2018, losses and LAE incurred primarily related to increases in actual and expected payments on Puerto Rico exposures. For the nine months ended September 30, 2018, losses and LAE incurred primarily related to increases in actual and expected payments on Puerto Rico exposures, partially offset by a decrease on actual and expected payments on insured RMBS transactions. For the three months ended September 30, 2017, losses and LAE incurred primarily related to in creases in actual and expected payments on certain Puerto Rico exposures and decreases in projected collections from mortgage insurance included in the Company’s excess spread within its second-lien RMBS transactions from the settle ment of litigation regarding insurance coverage involving Old Republic Insura nce Corporation, Bank of America, N.A. and the Bank of New York Mellon. For the nine months ended September 30, 2017, incurred loss and LAE activity related to increa ses in actual and expected payments on certain Puerto Rico exposures and insured first-lien RMBS securitizations and a decrease in actual and projected collection s 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. Costs associated with remediating insured obligations assigned to the Company’s surveillance categories are recorded as LAE and are included in “Losses and loss adjustment” expenses on the Company’s consolidated statements of operations. For the three months ended September 30, 2018 and 2017, gross LAE related to remediating insured obligati ons were $6 million. For the nine months ended September 30, 2018 and 2017, gross LAE related to remediating insured obligations were $28 million and $33 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 September 30, 2018:
|  |  |  |  | Surveillance Categories
|  |  |  |  | Caution |  | Caution |  | Caution |  |  |  |  |  |
|  |  |  |  | List |  | List |  | List |  | Classified |  |  |
$ in millions |  | Low |  | Medium |  | High |  | List |  | Total
Number of policies |  |  | 56 |  |  | 20 |  |  | - |  |  | 243 |  |  | 319
Number of issues (1) |  |  | 16 |  |  | 6 |  |  | - |  |  | 109 |  |  | 131
Remaining weighted average contract |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| period (in years) |  |  | 7.2 |  |  | 8.0 |  |  | - |  |  | 9.7 |  |  | 9.0
Gross insured contractual payments |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| outstanding: (2) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  | Principal |  | $ | 1,933 |  | $ | 262 |  | $ | - |  | $ | 5,465 |  | $ | 7,660
|  | Interest |  |  | 2,314 |  |  | 131 |  |  | - |  |  | 5,443 |  |  | 7,888
|  |  | Total |  | $ | 4,247 |  | $ | 393 |  | $ | - |  | $ | 10,908 |  | $ | 15,548
Gross Claim Liability (3) |  | $ | - |  | $ | - |  | $ | - |  | $ | 1,076 |  | $ | 1,076
Less: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Gross Potential Recoveries (4) |  |  | - |  |  | - |  |  | - |  |  | 2,058 |  |  | 2,058
| Discount, net (5) |  |  | - |  |  | - |  |  | - |  |  | (483) |  |  | (483)
Net claim liability (recoverable) |  | $ | - |  | $ | - |  | $ | - |  | $ | (499) |  | $ | (499)
Unearned premium revenue |  | $ | 6 |  | $ | 4 |  | $ | - |  | $ | 65 |  | $ | 75
Reinsurance recoverable on paid and unpaid losses (6) |  |  |  |  |  |  |  |  |  |  |  |  |  | $ | 23
__________ |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
(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.
(6) - Included in "Other assets" on the Company's consolidated balance sheets.
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
Reinsurance recoverable on paid and unpaid losses (6) |  |  |  |  |  |  |  |  |  |  |  |  |  | $ | 17
__________
(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.
(6) - Included in "Other assets" on the Company's consolidated balance sheets.
The change from a net claim liability as of December 31, 2017 to a net claim recoverable as of September 30, 2018 is due to the fact that the Company no longer consolidates the Zohar funds as VIEs and estimated recoveries from Zohar I and Zohar II are included in “Insurance loss recoverable” on the Company’s consolidated balance sheet. As of March 31, 2018 and December 31, 2017, gross potential recoveries exclude the recoveries of Zohar I a nd 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.

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