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Loss and Loss Adjustment Expense Reserves | 6 Months Ended
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Jun. 30, 2021
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Loss and Loss Adjustment Expense Reserves | Note 5: Loss and Loss Adjustment Expense Reserves (continued) 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 June 30, 2021 for both first and second-lien RMBS transactions using a process called the Roll Rate Methodology (“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. Roll Rate is defined as the probability that current loans become delinquent and subsequently default and loans in the delinquent pipeline are charged-off or liquidated. The loss reserve estimates are based on a probability-weighted average of potential scenarios of loan losses. Additional data used for both second and first-liens include historic averages of deal specific voluntary prepayment rates, forward projections of the LIBOR interest rates, and historic averages of deal-specific 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. Where applicable, the Company factors in termination scenarios when clean up calls are imminent. 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) and, for first-lien RMBS, the Company estimates the amount of loans that are expected to be liquidated in the future through foreclosure or short sale. The time to liquidation for a defaulted loan is specific to the loan’s delinquency bucket. For all RMBS transactions, cash flow models consider allocations and other structural aspects and claims against MBIA Corp.’s insurance policy consistent with such policy’s terms and conditions. The estimated net claims from the procedure above are then discounted using a risk-free rate to a net present value reflecting MBIA’s general obligation to pay claims over time and not on an accelerated basis. The Company monitors RMBS 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 and re-evaluate its assumptions. RMBS Recoveries The Company’s RMBS recoveries primarily relate to 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”). The Company had settled all of its put-back claims relating to the inclusion of ineligible loans in securitizations it insured. See “Second-lien Put-Back Claims Related to Ineligible Loans” below. 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. 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 During the first quarter of 2021, the Company entered into a settlement agreement with Credit Suisse related to its put-back claims. In the litigation brought to pursue these claims, Credit Suisse had challenged the Company’s assessment of the ineligibility of individual mortgage loans. In November of 2020, following a trial and post-trial briefing, the Court overseeing the litigation issued a decision declaring that MBIA Corp. had succeeded in establishing that a majority of the loans in the transaction were ineligible. In January of 2021, the Court issued an order declaring that Credit Suisse was liable to MBIA for approximately $604 million in damages. In February of 2021, the parties to the litigation entered into a settlement agreement pursuant to which Credit Suisse paid MBIA Corp. $600 million, and the Court entered an order dismissing the case. Refer to “Note 13: Commitments and Contingencies” for further information about the Company’s litigation with Credit Suisse. As of December 31, 2020, the Company consolidated the RMBS securitization originated by Credit Suisse as a VIE and, therefore, eliminates its estimate of recoveries from its insurance accounting and reflects such recoveries in its accounting for the loan repurchase commitments asset of the VIE using a fair value measurement. CDO Reserves and Recoveries The Company also has loss and LAE reserves on certain transactions within its 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, commercial mortgage-backed securities (“CMBS”), ABS and CDO collateral). The Company’s process for estimating reserves and credit impairments on these policies is 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. A range of loss scenarios is considered under different default and severity rates for each transaction’s collateral. Additionally, each transaction is evaluated for its commutation potential. Zohar Recoveries MBIA Corp. is seeking to recover the payments it made (plus interest and expenses) with respect to Zohar I and Zohar II. In March of 2018, the then-director of Zohar I and Zohar II placed those funds into voluntary bankruptcy proceedings in federal bankruptcy court in the District of Delaware (the “Zohar Funds Bankruptcy Cases”). Salvage and subrogation recoveries related to Zohar I and Zohar II are reported within “Insurance loss recoverable” on the Company’s consolidated balance sheet. The Company’s estimate of the insurance loss recoverable for Zohar I and Zohar II includes probability-weighted scenarios of the ultimate monetized recovery from the Zohar Assets. Notwithstanding the monetization procedures agreed to in the Zohar Funds Bankruptcy Cases and confirmed by the court, there can be no assurance that the monetization of the Zohar Assets will yield amounts sufficient to permit MBIA Corp. to recover a substantial portion of the payments it made on Zohar I and Zohar II. In particular, as the monetization process unfolds and new information concerning the financial condition of the portfolio companies is disclosed, the Company may revise its expectations for recoveries. For example, at a June 3, 2020 hearing, counsel for one of the portfolio companies announced that the monetization process for that company would be delayed as a consequence of having to investigate issues relating to the integrity of the company’s financial statements. Failure to recover a substantial portion of the payments made on Zohar I and Zohar II 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 for the international and structured finance insurance segment, which are included in the Company’s consolidated balance sheets as of June 30, 2021 and December 31, 2020 are presented in the following table:
|  | As of June 30, 2021 |  | As of December 31, 2020
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 |  | $ | 1,226 |  |  | $ | 484 |  |  | $ | 1,220 |  |  | $ | 469 |
International and Structured Finance Insurance: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Before VIE eliminations (1) |  |  | 354 |  |  |  | 697 |  |  |  | 1,082 |  |  |  | 780 |
VIE eliminations (1) |  |  | (19 | ) |  |  | (227 | ) |  |  | (625 | ) |  |  | (259 | )
Total international and structured finance insurance |  |  | 335 |  |  |  | 470 |  |  |  | 457 |  |  |  | 521 |
Total |  | $ | 1,561 |  |  | $ | 954 |  |  | $ | 1,677 |  |  | $ | 990 |
(1) - Includes loan repurchase commitments of $604 million as of December 31, 2020. (2) - Amounts are net of expected recoveries. Changes in Loss and LAE Reserves The following table presents changes in the Company’s loss and LAE reserves for the six months ended June 30, 2021. Changes in loss and LAE reserves, with the exception of loss and LAE payments and the impact of the revaluation of loss reserves denominated in amounts other than U.S. dollars, are recorded in “Losses and loss adjustment” expenses in the Company’s consolidated statements of operations. As of June 30, 2021, the weighted average risk-free rate used to discount the Company’s loss reserves (claim liability) was 1.49%. LAE reserves are generally expected to be settled within a one-year period and are not discounted. As of June 30, 2021 and December 31, 2020, the Company’s gross loss and LAE reserves included $35 million and $30 million, respectively, related to LAE.
In millions |  | Changes in Loss and LAE Reserves for the Six Months Ended June 30, 2021 |  |
Gross Loss and LAE Reserves as of December 31, 2020 (1) |  | Loss Payments |  | Accretion of Claim Liability Discount |  | Changes in Discount Rates |  | Changes in Assumptions |  | Changes in Unearned Premium Revenue |  | Other |  | Gross Loss and LAE Reserves as of June 30, 2021 (1)
$990 |  | $(66) |  | $7 |  | $(21) |  | $43 |  | $2 |  | $(1) |  | $954
(1) - Includes changes in amount and timing of estimated payments and recoveries. For the six months ended June 30, 2021, the Company’s loss and LAE reserves declined primarily due to payments made on certain Puerto Rico exposures and a decrease in expected payments related to certain insured first-lien RMBS transactions as a result of an increase in risk-free rates used to present value loss reserves during the period. This decline was partially offset by an increase in expected payments and unfavorable changes in future recoveries of unpaid losses due to the increase in risk-free discount rates on certain Puerto Rico exposures. Changes in Insurance Loss Recoverable Insurance loss recoverable represents the Company’s estimate of recoveries on paid claims and LAE. The Company recognizes potential recoveries on paid claims based on the probability-weighted net cash inflows present valued at applicable risk-free rates as of the measurement date. The following table presents changes in the Company’s insurance loss recoverable for the six months ended June 30, 2021. Changes in insurance loss recoverable with the exception of collections, are recorded in “Losses and loss adjustment” expenses in the Company’s consolidated statements of operations.
|  |  |  | Changes in Insurance Loss Recoverable |  |
|  |  |  | for the Six Months Ended June 30, 2021 |  |
In millions |  | Gross Reserve as of December 31, 2020 |  | Collections for Cases |  | Accretion of Recoveries |  | Changes in Discount Rates |  | Changes in Assumptions (1) |  | Other (2) |  | Gross Reserve as of June 30, 2021
Insurance loss recoverable |  | $ | 1,677 |  |  | $ | (44 | ) |  | $ | 8 |  |  | $ | (63 | ) |  | $ | (18 | ) |  | $ | 1 |  |  | $ | 1,561 |
(1) - Includes amounts related to paid claims. (2) - Primarily changes in amount and timing of collections and LAE. The decrease in the Company’s insurance loss recoverable reflected in the preceding table was primarily due to a decrease in expected recovery assumptions on CDOs, an increase in risk-free rates, resulting in a decline in future recoveries on paid claims, as well as the collection of excess spread related to the termination of certain second-lien RMBS trusts. This decrease was partially offset by a change in expected recovery assumptions related to paid claims on certain Puerto Rico credits. Loss and LAE Activity For the three months ended June 30, 2021, loss and LAE incurred primarily related to a decline in expected salvage collections related to CDOs and to a lesser extent incurred losses on insured first-lien RMBS transactions due to a decline in the risk-free rates used to discount the present value of net loss reserves. This was partially offset by a decline in expected payments on certain Puerto Rico credits as a result of a decline in risk-free discount rates, which caused long-dated recoveries to increase and to a lesser extent accretion. For the six months ended June 30, 2021, loss and LAE incurred primarily related to a decrease in future recoveries on unpaid and paid losses due to an increase in risk-free discount rates and an increase in expected payments on certain Puerto Rico credits as well as a decrease in expected salvage collections related to CDOs. This was partially offset by a decrease in the present value of loss reserves, primarily related to first-lien RMBS transactions, as a result of the increase in risk-free discount rates. For the three months ended and six months ended June 30, 2020, loss and LAE incurred primarily related to a decrease in expected salvage collections related to CDOs, as well as declines in risk-free rates, which increased the present value of the loss reserves, primarily related to first-lien RMBS transactions. Losses incurred also related to an increase 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 June 30, 2021 and 2020, gross LAE related to remediating insured obligations were $1 million and $8 million, respectively. For the six months ended June 30, 2021 and 2020, gross LAE related to remediating insured obligations were $13 million and $17 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 June 30, 2021:
|  | Surveillance Categories |
$ in millions |  | Caution List Low |  |  | Caution List Medium |  |  | Caution List High |  |  | Classified List |  |  | Total |
Number of policies |  |  | 58 |  |  |  | 3 |  |  |  | - |  |  |  | 209 |  |  |  | 270 |
Number of issues (1) |  |  | 17 |  |  |  | 2 |  |  |  | - |  |  |  | 90 |  |  |  | 109 |
Remaining weighted average contract period (in years) |  |  | 6.1 |  |  |  | 2.4 |  |  |  | - |  |  |  | 8.0 |  |  |  | 7.4 |
Gross insured contractual payments outstanding: (2) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Principal |  | $ | 1,490 |  |  | $ | 7 |  |  | $ | - |  |  | $ | 2,948 |  |  | $ | 4,445 |
Interest |  |  | 1,968 |  |  |  | 1 |  |  |  | - |  |  |  | 1,314 |  |  |  | 3,283 |
Total |  | $ | 3,458 |  |  | $ | 8 |  |  | $ | - |  |  | $ | 4,262 |  |  | $ | 7,728 |
Gross Claim Liability (3) |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | 983 |  |  | $ | 983 |
Less: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Gross Potential Recoveries (4) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 2,002 |  |  |  | 2,002 |
Discount, net (5) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (405 | ) |  |  | (405 | )
Net claim liability (recoverable) |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | (614 | ) |  | $ | (614 | )
Unearned premium revenue |  | $ | 9 |  |  | $ | - |  |  | $ | - |  |  | $ | 31 |  |  | $ | 40 |
Reinsurance recoverable on paid and unpaid losses (6) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | $ | 11 |
(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, 2020:
|  | Surveillance Categories |
$ in millions |  | Caution List Low |  |  | Caution List Medium |  |  | Caution List High |  |  | Classified List |  |  | Total |
Number of policies |  |  | 46 |  |  |  | 16 |  |  |  | - |  |  |  | 219 |  |  |  | 281 |
Number of issues (1) |  |  | 16 |  |  |  | 3 |  |  |  | - |  |  |  | 100 |  |  |  | 119 |
Remaining weighted average contract period (in years) |  |  | 6.4 |  |  |  | 6.4 |  |  |  | - |  |  |  | 7.9 |  |  |  | 7.4 |
Gross insured contractual payments outstanding: (2) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Principal |  | $ | 1,422 |  |  | $ | 123 |  |  | $ | - |  |  | $ | 3,302 |  |  | $ | 4,847 |
Interest |  |  | 1,974 |  |  |  | 54 |  |  |  | - |  |  |  | 1,441 |  |  |  | 3,469 |
Total |  | $ | 3,396 |  |  | $ | 177 |  |  | $ | - |  |  | $ | 4,743 |  |  | $ | 8,316 |
Gross Claim Liability (3) |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | 1,088 |  |  | $ | 1,088 |
Less: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Gross Potential Recoveries (4) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 1,947 |  |  |  | 1,947 |
Discount, net (5) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (173 | ) |  |  | (173 | )
Net claim liability (recoverable) |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | (686 | ) |  | $ | (686 | )
Unearned premium revenue |  | $ | 10 |  |  | $ | - |  |  | $ | - |  |  | $ | 35 |  |  | $ | 45 |
Reinsurance recoverable on paid and unpaid losses (6) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | $ | 11 |
(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.

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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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