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Loss and Loss Adjustment Expense Reserves | 9 Months Ended
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Sep. 30, 2022
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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, 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. Puerto Rico In formulating loss reserves for its Puerto Rico exposures, the Company considers the following: environmental and political impacts on the island; litigation and ongoing discussions with creditors on the Title III proceedings; timing and amount of debt service payments and future recoveries; existing proposed restructuring plans or agreements; and deviations from these proposals in its probability-weighted scenarios. For recoveries on paid Puerto Rico losses, the estimates include assumptions related to the following: economic conditions and trends; political developments; the Company’s ability to enforce contractual rights through litigation and otherwise; discussions with other creditors and the obligors, any existing proposals; and the remediation strategy for an insured obligation that has defaulted or is expected to default. Refer to “Note 1: Business Developments and Risks and Uncertainties” for further information on the Company’s Puerto Rico exposures and “Note 13: Commitments and Contingencies” for information on the Company’s Puerto Rico litigation. 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 reserves and recoveries on consolidated VIEs, since they are eliminated in consolidation. RMBS Case Basis Reserves (Financial Guarantees) The Company’s RMBS case basis reserves primarily relate to RMBS backed by alternative A-paper and subprime mortgage loans. The Company calculated RMBS case basis reserves as of September 30, 2022 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 first and second-lien loans include historic averages of deal specific voluntary prepayment rates, forward projections of the LIBOR interest rates, and historic averages of deal-specific loss severities. 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 first-lien loans that are expected to be liquidated in the future through foreclosure or short sale, and estimates, the amount of second-lien loans that are expected to be charged-off (deemed uncollectible by servicers of the transactions). 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 relate to structural features within the trust structures that allow for the Company to be reimbursed for prior claims paid. These reimbursements for specific trusts include recoveries that are generated from the excess spread of the transactions. Excess spread within insured RMBS securitizations is the difference between interest inflows on mortgage loan collateral and interest outflows on the insured RMBS notes. CDO Reserves and Recoveries The Company also has loss and loss adjustment expense (“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”), asset-backed securities (“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. Prior to the effective date of the plan of liquidation, salvage and subrogation recoveries related to Zohar I and Zohar II were reported within “Insurance loss recoverable” on the Company’s consolidated balance sheet. The Company’s estimate of those insurance loss recoverables for Zohar I and Zohar II primarily included probability-weighted scenarios of the ultimate monetized recovery from the Zohar Collateral. On the effective date of the plan of liquidation, MBIA Corp.’s insurance loss recoverable was replaced by the value of interests in certain asset recovery entities. Refer to “Note 1: Business Developments and Risks and Uncertainties” for further information on the plan of liquidation and the Company’s accounting for the interests acquired. 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 September 30, 2022 and December 31, 2021 are presented in the following table:
|  | As of September 30, 2022 |  | As of December 31, 2021
In millions - |  | Balance Sheet Line Item |  | Balance Sheet Line Item
|  | Insurance loss recoverable |  | Loss and LAE reserves (1) |  | Insurance loss recoverable |  | Loss and LAE reserves (1)
U.S. Public Finance Insurance |  | $ | 242 |  |  | $ | 688 |  |  | $ | 1,054 |  |  | $ | 425 |
International and Structured Finance Insurance: |  |  |  |  |  |  |  |  |  |  |  |  |
Before VIE eliminations |  |  | 33 |  |  |  | 568 |  |  |  | 244 |  |  |  | 687 |
VIE eliminations |  |  | (2 | ) |  |  | (209 | ) |  |  | (2 | ) |  |  | (218 | )
Total international and structured finance insurance |  |  | 31 |  |  |  | 359 |  |  |  | 242 |  |  |  | 469 |
Total |  | $ | 273 |  |  | $ | 1,047 |  |  | $ | 1,296 |  |  | $ | 894 |
(1) - Amounts are net of estimated recoveries of expected future claims. Changes in Loss and LAE Reserves Loss and LAE reserves represent the Company’s estimate of future claims and LAE payments, net of any future recoveries of such payments. The following table presents changes in the Company’s loss and LAE reserves for the nine months ended September 30, 2022. 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 September 30, 2022, the weighted average risk-free rate used to discount the Company’s loss reserves (claim liability) was 3.90%. LAE reserves are generally expected to be settled within a one-year period and are not discounted. As of September 30, 2022 and December 31, 2021, the Company’s gross loss and LAE reserves included $18 million and $38 million, respectively, related to LAE.
In millions |  |  | Changes in Loss and LAE Reserves for the Nine Months Ended September 30, 2022 |  |  |  |
Gross Loss and LAE Reserves as of December 31, 2021 |  |  | Net Loss and LAE Payments (1) |  |  | Accretion of Claim Liability Discount |  |  | Changes in Discount Rates |  |  | Changes in Assumptions (2) |  |  | Changes in Unearned Premium Revenue |  |  | Gross Loss and LAE Reserves as of September 30, 2022 |
| $894 |  |  |  | $(332) |  |  |  | $15 |  |  |  | $(88) |  |  |  | $555 |  |  |  | $3 |  |  |  | $1,047 |
(1) - Amount is net of recoveries received on claims not yet paid. (2) - Includes changes in amount and timing of estimated payments and recoveries. The Company’s loss and LAE reserves increased from December 31, 2021, primarily due to a decrease in expected PREPA recoveries on claims not yet paid, which are netted in loss and LAE reserves, as well as higher expected claim payments, to reflect the current status of a remediation. This was partially offset by claim payments made on Puerto Rico exposure for the nine months ended September 30, 2022, an increase in recoveries related to HTA, which are netted in loss and LAE reserves, and a decline in net reserves on RMBS exposure as a result of an increase in the risk-free rates used to present value loss reserves. Changes in Insurance Loss Recoverable Insurance loss recoverable represents the Company’s estimate of expected 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 nine months ended September 30, 2022. 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 Nine Months Ended September 30, 2022 |  |
In millions |  | Gross Recoverable as of December 31, 2021 |  | Collections for Cases |  | Accretion of Recoveries |  | Changes in Discount Rates |  | Changes in Assumptions |  | Gross Recoverable as of September 30, 2022
Insurance loss recoverable |  | $ | 1,296 |  |  | $ | (1,438 | ) |  | $ | 5 |  |  | $ | (22 | ) |  | $ | 432 |  |  | $ | 273 |
The decrease in the Company’s insurance loss recoverable reflected in the preceding table was primarily due to the receipt of recoveries from the GO PSA, HTA CVI and from the sale of PREPA bankruptcy claims. In addition, the decrease was due to the receipt of the remaining collateral in the Zohar CDOs to MBIA Corp. As a result of this distribution, the insurance loss recoverable was replaced with the fair values of MBIA Corp.’s interests in entities comprising the collateral. Refer to “Note 1: Business Developments and Risks and Uncertainties” for further information on the Company’s accounting for these interests. These decreases were partially offset by changes in assumptions related to the value of the remaining PREPA recoveries on paid claims due to changes in scenario assumptions to reflect the current status of a PREPA remediation. Loss and LAE Activity For the three months ended September 30, 2022, the loss and LAE benefit primarily related to an increase in risk-free rates, which decreased the present value of net case reserves on first-lien RMBS transactions. This was partially offset by changes in assumptions used to estimate the fair value of the new HTA bonds that National expects to receive. For the nine months ended September 30, 2022, loss and LAE incurred primarily related to changes in the Company’s estimate of expected recoveries on National’s PREPA exposure to reflect the current status of a PREPA remediation. PREPA loss reserves and recoveries include certain assumptions about the timing and amount of claims payments and recoveries, including assumptions about the values of recoveries on the date the Company expects to receive reimbursement under a remediation. During the nine months ended September 30, 2022, the Company updated assumptions used to estimate the value of recoveries and the timing and amount of claim payments to reflect the current status of remediation. These assumption changes resulted in a decrease in the Company’s estimated present value of expected PREPA recoveries. This was partially offset by loss benefits related to HTA and GO recoveries. During the nine months ended September 30, 2022, the Company’s HTA recoveries increased based on updated information related to the fair value of the HTA CVI that National received in July of 2022 and its estimated value of the HTA bonds National expects to receive. In addition, the Company recorded a loss benefit on its GO recoveries to reflect the fair values of the consideration received as of the acquisition date, which was higher than its previous estimate. Additionally, an increase in risk-free rates during the first nine months of 2022, resulted in a decrease in the present value of net case reserves on first-lien RMBS. For the three months ended September 30, 2021, loss and LAE incurred primarily related to changes in loss scenario assumptions on the Puerto Rico GO and PREPA credits, as well as a decline in expected salvage collections related to CDOs. In the third quarter of 2021, National modified its GO scenario assumptions to incorporate the final terms of the Plan of Adjustment. This included a commutation of 27% of National’s outstanding insured bonds and an acceleration of National’s remaining insured bonds. In addition, National updated its GO loss reserve scenarios to include certain assumptions about recovery valuation on the date it expects to receive cash, bonds and a CVI. These assumption changes decreased expected GO recoveries. Also in the third quarter of 2021, National modified its PREPA scenario assumptions to reflect the market insight gained from the anticipated sale of a portion of the recoverable on PREPA bankruptcy claims that had been fully satisfied by National’s insurance claim payments, which decreased its expected PREPA recoveries, partially offset by additional expected recoveries under the previous PREPA RSA. For the nine months ended September 30, 2021, loss and LAE incurred primarily related to the changes in loss reserve scenario assumptions on the PREPA credit discussed above, and to changes in loss reserve scenario assumptions on HTA exposure to reflect the confirmed Plan of Adjustment. In addition, an increase in the risk-free rates used to discount the value of long-dated future recoveries on Puerto Rico exposures contributed to loss and LAE incurred. Loss and LAE incurred also reflects a decrease in expected salvage collections related to CDOs. This was partially offset primarily by a decrease in the present value of loss reserves related to first-lien RMBS transactions as a result of the increase in risk-free discount rates. 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, 2022 and 2021, gross LAE related to remediating insured obligations were a benefit of $1 million and an expense of $4 million, respectively. For the nine months ended September 30, 2022 and 2021, gross LAE expense related to remediating insured obligations were $4 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 September 30, 2022:
|  | Surveillance Categories
$ in millions |  | Caution List Low |  | Caution List Medium |  | Caution List High |  | Classified List |  | Total
Number of policies |  |  | 58 |  |  |  | 3 |  |  |  | - |  |  |  | 165 |  |  |  | 226 |
Number of issues (1) |  |  | 18 |  |  |  | 2 |  |  |  | - |  |  |  | 85 |  |  |  | 105 |
Remaining weighted average contract period (in years) |  |  | 5.7 |  |  |  | 1.9 |  |  |  | - |  |  |  | 8.6 |  |  |  | 7.3 |
Gross insured contractual payments outstanding: (2) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Principal |  | $ | 1,800 |  |  | $ | 5 |  |  | $ | - |  |  | $ | 2,166 |  |  | $ | 3,971 |
Interest |  |  | 1,997 |  |  |  | 1 |  |  |  | - |  |  |  | 991 |  |  |  | 2,989 |
Total |  | $ | 3,797 |  |  | $ | 6 |  |  | $ | - |  |  | $ | 3,157 |  |  | $ | 6,960 |
Gross Claim Liability (3) |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | 1,338 |  |  | $ | 1,338 |
Less: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Gross Potential Recoveries (4) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 335 |  |  |  | 335 |
Discount, net (5) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 224 |  |  |  | 224 |
Net claim liability (recoverable) |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | 779 |  |  | $ | 779 |
Unearned premium revenue |  | $ | 12 |  |  | $ | - |  |  | $ | - |  |  | $ | 23 |  |  | $ | 35 |
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, 2021:
|  | Surveillance Categories
$ in millions |  | Caution List Low |  | Caution List Medium |  | Caution List High |  | Classified List |  | Total
Number of policies |  |  | 55 |  |  |  | 3 |  |  |  | - |  |  |  | 202 |  |  |  | 260 |
Number of issues (1) |  |  | 16 |  |  |  | 2 |  |  |  | - |  |  |  | 88 |  |  |  | 106 |
Remaining weighted average contract period (in years) |  |  | 6.1 |  |  |  | 2.6 |  |  |  | - |  |  |  | 8.1 |  |  |  | 7.4 |
Gross insured contractual payments outstanding: (2) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Principal |  | $ | 1,366 |  |  | $ | 6 |  |  | $ | - |  |  | $ | 2,719 |  |  | $ | 4,091 |
Interest |  |  | 1,867 |  |  |  | 1 |  |  |  | - |  |  |  | 1,214 |  |  |  | 3,082 |
Total |  | $ | 3,233 |  |  | $ | 7 |  |  | $ | - |  |  | $ | 3,933 |  |  | $ | 7,173 |
Gross Claim Liability (3) |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | 1,051 |  |  | $ | 1,051 |
Less: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Gross Potential Recoveries (4) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 1,498 |  |  |  | 1,498 |
Discount, net (5) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (32 | ) |  |  | (32 | )
Net claim liability (recoverable) |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | (415 | ) |  | $ | (415 | )
Unearned premium revenue |  | $ | 8 |  |  | $ | - |  |  | $ | - |  |  | $ | 29 |  |  | $ | 37 |
Reinsurance recoverable on paid and unpaid losses (6) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | $ | 7 |
(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 https://asc.fasb.org/subtopic&trid=2560295 + Details
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