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.

In formulating loss reserves and recoveries for its Puerto Rico exposures, estimates in the Company’s probability-weighted scenarios include assumptions related to the nature, value, and timing of net cash flows considering the following: environmental, economic, and political developments on the island; litigation and ongoing discussions with creditors and obligors on the Title III proceedings; contractual debt service payments; any existing settlement agreements or proposals and deviations from these proposals; the remediation strategy for insured obligations that have defaulted or are expected to default; and values of other obligations of the issuer. Refer to “Note 1: Business Developments and Risks and Uncertainties” for further information on the Company’s Puerto Rico exposures.

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.

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, 2023 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 secured overnight financing rate, 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.

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.

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, 2023 and December 31, 2022 are presented in the following table:


			As of September 30, 2023						As of December 31, 2022
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			$	150		$	228		$	107		$	154
International and Structured Finance Insurance:
	Before VIE eliminations			28			314			32			488
	VIE eliminations			(1	)		(92	)		(2	)		(203	)
		Total international and structured finance insurance		27			222			30			285
	Total		$	177		$	450		$	137		$	439

(1) - Amounts are net of estimated recoveries of expected future claims.

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, 2023. 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, 2023, the weighted average risk-free rate used to discount the Company’s loss reserves (claim liability) was 4.80%. LAE reserves are generally expected to be settled within a one-year period and are not discounted. As of September 30, 2023 and December 31, 2022, the Company’s gross loss and LAE reserves included $10 million and $12 million, respectively, related to LAE.


In millions		Changes in Loss and LAE Reserves for the Nine Months Ended September 30, 2023
Gross Loss														Gross Loss
and LAE					Accretion							Changes in		and LAE
Reserves as of		Loss			of Claim		Changes in					Unearned		Reserves as of
December 31,		and LAE			Liability		Discount			Changes in		Premium		September 30,
2022		Payments			Discount		Rates			Assumptions (1)		Revenue		2023
$	439	$	(210	)	$	9	$	(24	)	$	234	$	2	$	450

(1) - Includes changes in amount and timing of estimated payments and recoveries.

The increase in the Company’s loss and LAE reserves was primarily due to updated scenarios to reflect the Amended PSA with PREPA, partially offset by claims payments on PREPA and the termination of a first-lien RMBS insured transaction. In addition, an increase in risk-free rates during 2023, caused future liabilities, net of recoveries to decline primarily on our RMBS insured transactions.

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, 2023. 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, 2023
	Gross											Gross
	Recoverable											Recoverable
	as of					Accretion		Changes in				as of
	December 31,		Collections			of		Discount		Changes in		September 30,
In millions	2022		for Cases			Recoveries		Rates		Assumptions		2023
Insurance loss recoverable	$	137	$	(7	)	$	3	$	1	$	43	$	177

The increase in the Company’s insurance loss recoverable reflected in the preceding table was primarily due to the PREPA January and July debt services payments, and includes a change in scenarios to reflect the current status of a proposed settlement which is expected in 2024.

For the three and nine months ended September 30, 2023, the incurred loss primarily relates to updating PREPA scenarios to reflect the Amended PSA, which resulted in lower net expected recoveries. Changes in scenario assumptions also include extending the effective date of a settlement until 2024. This incurred loss was partially offset by an increase in risk-free rates, which caused future reserves, net of recoveries, to decline, primarily on the Company’s first-lien RMBS portfolio. In addition, for the nine months ended September 30, 2023, the incurred loss included the termination of a first-lien RMBS insured transaction.

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 Puerto Rico Highway and Transportation Authority (“HTA”) bonds that National expected 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 Puerto Rico Commonwealth GO (“GO”) Bonds 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 contingent value instrument that National received in July of 2022 and its estimated value of the HTA bonds National expected 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.

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, 2023 and 2022, gross LAE related to remediating insured obligations were $2 million and a benefit of $1 million, respectively. For the nine months ended September 30, 2023 and 2022, gross LAE related to remediating insured obligations was $7 million and $4 million, respectively.

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, 2023:


				Surveillance Categories
				Caution		Caution		Caution
				List		List		List		Classified
$ in millions				Low		Medium		High		List		Total
Number of policies					36		1		-		95		132
Number of issues (1)					13		1		-		78		92
Remaining weighted average contract period (in years)					5.6		0.3		-		7.0		6.3
Gross insured contractual payments outstanding: (2)
		Principal		$	1,411	$	2	$	-	$	1,255	$	2,668
		Interest			1,697		-		-		494		2,191
			Total	$	3,108	$	2	$	-	$	1,749	$	4,859
Gross Claim Liability (3)				$	-	$	-	$	-	$	653	$	653
Less:
	Gross Potential Recoveries (4)				-		-		-		235		235
	Discount, net (5)				-		-		-		147		147
Net claim liability (recoverable)				$	-	$	-	$	-	$	271	$	271
Unearned premium revenue				$	9	$	-	$	-	$	8	$	17
Reinsurance recoverable on paid and unpaid losses (6)												$	13

(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.