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Loss and Loss Adjustment Expense Reserves | 9 Months Ended
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Sep. 30, 2019
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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 insured 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 cash 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 outstanding for capital 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 petitions for covered instrumentalities under Title III of 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 in 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. In February of 2019, the COFINA Plan of Adjustment was confirmed by the District Court and in September of 2019, National agreed to join the RSA with PREPA, other monoline insurers, a group of uninsured PREPA bondholders, Puerto Rico, and the Financial Oversight and Management Board for Puerto Rico. 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 The international and structured finance insurance segment’s case basis reserves and insurance loss recoveries recorded in accordance with GAAP do not include estimates for a policy insuring a credit derivative or on financial guarantee VIEs that are eliminated in consolidation. The policy 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. 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 financial 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, 2019 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 databases of loan level information, proprietary internal cash flow models, and commercially available models 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, 2018, for additional information on 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, roll rates, and prepayment rates (including voluntary and involuntary). However, loan performance remains difficult to predict and losses may exceed expectations. In the event of a material deviation in actual performance from projected performance, the Company would increase or decrease the case basis reserves accordingly. RMBS Recoveries The Company primarily 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 securitization 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 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 its put-back 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 a trial concerning the dispute was held in July and August of 2019. While 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 financial statements at the times preceding the settlements, there can be no assurance that the Company will prevail in its litigation against Credit Suisse. However, 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 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 plus contractual interest due. The Company consolidates the RMBS securitization originated by Credit Suisse as a VIE. The uncertainty remaining with respect to the ultimate outcome of the litigation with Credit Suisse is contemplated in the probability-weighted scenario based-modeling the Company uses. The Credit Suisse recovery scenarios are based on certain probabilities of ultimate resolution of the dispute with Credit Suisse and are discounted using the current risk-free discount rates based on the weighted average life of the transaction. The Company continues to consider relevant facts and circumstances in developing its assumptions on expected cash inflows, probability of potential recoveries (including the timing and outcome of the litigation) and recovery period. 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 that 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 required estimation process for accounting purposes which are based, in part, on judgments and other information that are not easily corroborated by historical data or other relevant benchmarks. Refer to “Note 14: Commitments and Contingencies” for further information about the Company’s litigation with Credit Suisse. CDO Reserves and Recoveries The Company also has loss 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-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). 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, 2018, for additional information on the Company’s process for estimating reserves on these policies. Zohar Recoveries MBIA Corp. is seeking to recover the payments it made (plus interest and expenses) with respect to Zohar I and Zohar II. MBIA Corp. anticipates that the primary source of the recoveries will come from the monetization of the Zohar Assets as anticipated in the Zohar Bankruptcy Settlement. Refer to “Note 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 and confirmed by the Cou r t , 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 Corporation into a rehabilitation or liquidation proceeding under Article 74 of the NYIL 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 amounts that were eliminated as a result of consolidating VIEs, which are included in the Company’s consolidated balance sheets as of September 30, 2019 and December 31, 2018, are presented in the following table:
|  | As of September 30, 2019 |  | As of December 31, 2018
In millions |  | Balance Sheet Line Item |  | Balance Sheet Line Item
|  | Insurance loss recoverable |  | Loss and LAE reserves (2) |  | Insurance loss recoverable |  | Loss and LAE reserves (2) |
U.S. Public Finance Insurance |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Before VIE eliminations |  | $ | 945 |  |  | $ | 438 |  |  | $ | 571 |  |  | $ | 551 |
VIE eliminations |  |  | - |  |  |  | (64 | ) |  |  | - |  |  |  | - |
Total U.S. public finance insurance |  |  | 945 |  |  |  | 374 |  |  |  | 571 |  |  |  | 551 |
International and Structured Finance Insurance: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Before VIE eliminations (1) |  |  | 1,389 |  |  |  | 797 |  |  |  | 1,461 |  |  |  | 668 |
VIE eliminations (1) |  |  | (491 | ) |  |  | (312 | ) |  |  | (437 | ) |  |  | (254 | )
Total international and structured finance insurance |  |  | 898 |  |  |  | 485 |  |  |  | 1,024 |  |  |  | 414 |
Total |  | $ | 1,843 |  |  | $ | 859 |  |  | $ | 1,595 |  |  | $ | 965 |
(1) - | Includes loan repurchase commitments of $478 million and $418 million as of September 30, 2019 and December 31, 2018, respectively.
(2) - | Amounts are net of expected recoveries.
Beginning with the second quarter of 2019, the Company changed its presentation of its insurance loss recoverable and its loss and LAE reserves related to its insured first-lien RMBS exposure. Certain amounts have been reclassified in prior years’ financial statements to conform to the current presentation. Refer to “Note 2: Significant Accounting Policies” for additional information about this presentation change. Changes in Loss and LAE Reserves The following table presents changes in the Company’s loss and LAE reserves for the nine months ended September 30, 2019. 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 estimated recoveries on such claims, 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 September 30, 2019, the weighted average risk-free rate used to discount the Company’s loss reserves (claim liability) was 1.78%. LAE reserves are generally expected to be settled within a one-year period and are not discounted. As of September 30, 2019 and December 31, 2018, the Company’s gross loss and LAE reserves included $37 million and $60 million, respectively, related to LAE.
In millions |  | Changes in Loss and LAE Reserves for the Nine Months Ended September 30, 2019 |  |
Gross Loss and LAE Reserves as of December 31, 2018 (1) |  | Loss Payments |  | Accretion of Claim Liability Discount |  | Changes in Discount Rates |  | Changes in Assumptions |  | Changes in Unearned Premium Revenue |  | Changes in LAE Reserves |  | Other |  | Gross Loss and LAE Reserves as of September 30, 2019 (1)
$ | 965 |  |  | $ | (425 | ) |  | $ | 14 |  |  | $ | (59 | ) |  | $ | 369 |  |  | $ | 24 |  |  | $ | (23 | ) |  | $ | (6 | ) |  | $ | 859 |
(1) - | Amounts are net of expected recoveries of unpaid claims.
The decrease in the Company’s loss reserves primarily relates to payments made on certain Puerto Rico credits and the consolidation of credits with loss reserves as VIEs. This was partially offset by an increase in reserves related to certain Puerto Rico credits as well as first-lien RMBS transactions. Changes in Insurance Loss Recoverable Insurance loss recoverable represents the Company’s estimate of recoveries on paid claims and LAE. The following table presents changes in the Company’s insurance loss recoverable for the nine months ended September 30, 2019. 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 for the Nine Months Ended September 30, 2019 |  |
In millions |  | Gross Reserve as of December 31, 2018 |  | Collections for Cases |  | Accretion of Recoveries |  | Changes in Discount Rates |  | Changes in Assumptions (1) |  | Other (2) |  | Gross Reserve as of September 30, 2019
Insurance loss recoverable |  | $ | 1,595 |  |  | $ | (110 | ) |  | $ | 27 |  |  | $ | 87 |  |  | $ | 216 |  |  | $ | 28 |  |  | $ | 1,843 |
(1) - | Includes amounts related to paid claims and LAE that are expected to be recovered in the future.
(2) - | Primarily changes in amount and timing of collections.
The increase in the Company’s insurance loss recoverable reflected in the preceding table was primarily due to amounts related to the anticipated recovery of claims paid on certain Puerto Rico credits and additional recoveries on insured RMBS transactions partially offset by collections on insured RMBS transactions and a decline in expected recoveries on CDOs. Loss and LAE Activity For the three and nine months ended September 30, 2019, loss and LAE activity primarily related to an increase in losses incurred on first-lien RMBS and CDOs, partially offset by an incurred benefit related to certain Puerto Rico transactions as a result of a decline in risk-free interest rates. For the three and nine months ended September 30, 2018, losses and LAE primarily related to increases in actual and expected payments on Puerto Rico exposures. 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, 2019 and 2018, gross LAE related to remediating insured obligations was $ 16 million a nd $6 million , respectively . For the nine months ended September 30, 2019 and 2018, gross LAE related to remediating insured obligations were $26 million and $28 million, respectively. Surveillance Categories The following table provides information about the financial guarantees and related claim liability included in each of MBIA’s surveillance categories as of September 30, 2019:
|  | Surveillance Categories
$ in millions |  | Caution List Low |  | Caution List Medium |  | Caution List High |  | Classified List |  | Total
Number of policies |  |  | 46 |  |  |  | 19 |  |  |  | - |  |  |  | 216 |  |  |  | 281
Number of issues (1) |  |  | 13 |  |  |  | 5 |  |  |  | - |  |  |  | 97 |  |  |  | 115
Remaining weighted average contract period (in years) |  |  | 7.2 |  |  |  | 7.2 |  |  |  | - |  |  |  | 8.0 |  |  |  | 7.7
Gross insured contractual payments outstanding: (2) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Principal |  | $ | 1,625 |  |  | $ | 256 |  |  | $ | - |  |  | $ | 3,850 |  |  | $ | 5,731
Interest |  |  | 2,173 |  |  |  | 117 |  |  |  | - |  |  |  | 1,669 |  |  |  | 3,959
Total |  | $ | 3,798 |  |  | $ | 373 |  |  | $ | - |  |  | $ | 5,519 |  |  | $ | 9,690
Gross Claim Liability (3) |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | 944 |  |  | $ | 944
Less: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Gross Potential Recoveries (4) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 2,321 |  |  |  | 2,321
Discount, net (5) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (417 | ) |  |  | (417)
Net claim liability (recoverable) |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | (960 | ) |  | $ | (960)
Unearned premium revenue |  | $ | 7 |  |  | $ | 3 |  |  | $ | - |  |  | $ | 39 |  |  | $ | 49
Reinsurance recoverable on paid and unpaid losses (6) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | $ | 16
(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 following table provides information about the financial guarantees and related claim liability included in each of MBIA’s surveillance categories as of December 31, 2018:
|  | Surveillance Categories
$ in millions |  | Caution List Low |  | Caution List Medium |  | Caution List High |  | Classified List |  | Total
Number of policies |  |  | 50 |  |  |  | 18 |  |  |  | - |  |  |  | 233 |  |  |  | 301 |
Number of issues (1) |  |  | 16 |  |  |  | 4 |  |  |  | - |  |  |  | 102 |  |  |  | 122 |
Remaining weighted average contract period (in years) |  |  | 6.7 |  |  |  | 8.0 |  |  |  | - |  |  |  | 9.7 |  |  |  | 8.9 |
Gross insured contractual payments outstanding: (2) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Principal |  | $ | 1,604 |  |  | $ | 249 |  |  | $ | - |  |  | $ | 5,353 |  |  | $ | 7,206 |
Interest |  |  | 2,118 |  |  |  | 123 |  |  |  | - |  |  |  | 5,414 |  |  |  | 7,655 |
Total |  | $ | 3,722 |  |  | $ | 372 |  |  | $ | - |  |  | $ | 10,767 |  |  | $ | 14,861 |
Gross Claim Liability (3) |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | 1,085 |  |  | $ | 1,085 |
Less: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Gross Potential Recoveries (4) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 2,363 |  |  |  | 2,363 |
Discount, net (5) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (670) |  |  |  | (670) |
Net claim liability (recoverable) |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | (608) |  |  | $ | (608) |
Unearned premium revenue |  | $ | 5 |  |  | $ | 4 |  |  | $ | - |  |  | $ | 63 |  |  | $ | 72 |
Reinsurance recoverable on paid and unpaid losses (6) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | $ | 21 |
(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.
As a result of the Company changing its presentation of its insurance loss recoverable and its loss and LAE reserves related to its first-lien exposure as discussed above, the amounts in the preceding table related to gross claim liability and gross potential recoveries have both been increased by $108 million as of December 31, 2018 with no impact to the net claim liability (recoverable).

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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/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 944 -SubTopic 40 -URI http://asc.fasb.org/subtopic&trid=2560295 + Details
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