Loss and Loss Adjustment Expense Reserves

12 Months Ended

Dec. 31, 2014

Text Block [Abstract]

Loss and Loss Adjustment Expense Reserves

Note 6: Loss and Loss Adjustment Expense Reserves

Loss and Loss Adjustment Expense Process

The Company’s insured portfolio management groups within its U.S. public finance insurance and international and structured finance insurance businesses (collectively, “IPM”) monitor MBIA’s outstanding insured obligations with the objective of minimizing losses. IPM meets this objective by identifying issuers that, because of deterioration in credit quality or changes in the economic, regulatory or political environment, are at a heightened risk of defaulting on debt service of obligations insured by MBIA. In such cases, IPM works with the issuer, trustee, bond counsel, servicer, underwriter and other interested parties in an attempt to alleviate or remedy the problem and avoid defaults on debt service payments. Once an obligation is insured, MBIA typically requires the issuer, servicer (if applicable) and the trustee to furnish periodic financial and asset-related information, including audited financial statements, to IPM for review. IPM also monitors publicly available information related to insured obligations. Potential problems uncovered through this review, such as poor financial results, low fund balances, covenant or trigger violations and trustee or servicer problems, or other events that could have an adverse impact on the insured obligation, could result in an immediate surveillance review and an evaluation of possible remedial actions. IPM also monitors and evaluates the impact on issuers of general economic conditions, current and proposed legislation and regulations, as well as sovereign, state and municipal finances and budget developments.

The frequency and extent of IPM’s monitoring is based on the criteria and categories described below. Insured obligations that are judged to merit more frequent and extensive monitoring or remediation activities due to a deterioration in the underlying credit quality of the insured obligation or the occurrence of adverse events related to the underlying credit of the issuer are assigned to a surveillance category (“Caution List—Low,” “Caution List—Medium,” “Caution List—High” or “Classified List”) depending on the extent of credit deterioration or the nature of the adverse events. IPM monitors insured obligations assigned to a surveillance category more frequently and, if needed, develops a remediation plan to address any credit deterioration.

Remediationactionsmayinvolve,among otherthings,waiversorrenegotiationsoffinancial covenantsortriggers, waiversofcontractualprovisions,the granting ofconsents,transferofservicing,consideration ofrestructuring plans, acceleration,securityorcollateral enforcement,actionsin bankruptcyorreceivership,litigation and similaractions.The typesofremedial actionspursuedare basedon the insured obligation’srisktypeandthe nature and scopeofthe event givingrise tothe remediation.Aspartofanysuch remedial actions,MBIAseekstoimprove itssecurityposition and to obtain concessionsfromthe issuerofthe insured obligation.Fromtimeto time,the issuerofan MBIA-insured obligation may,withthe consentofMBIA,restructurethe insured obligation byextending the term,increasing ordecreasing thepar amountordecreasingthe related interestrate,with MBIAinsuringthe restructured obligation.

The Company does not establish any case basis reserves for insured obligations that are assigned to “Caution List—Low,” “Caution List—Medium” or “Caution List—High.” In the event MBIA expects to pay a claim with respect to an insured transaction, it places the insured transaction on its “Classified List” and establishes a case basis reserve. When there are no remaining expected future claim payments, the insured transaction is removed from the “Classified List.” The following provides a description of each surveillance category:

“Caution List—Low” —Includes issuers where debt service protection is adequate under current and anticipated circumstances. However, debt service protection and other measures of credit support and stability may have declined since the transaction was underwritten and the issuer is less able to withstand further adverse events. Transactions in this category generally require more frequent monitoring than transactions that do not appear within a surveillance category. IPM subjects issuers in this category to heightened scrutiny.

“Caution List—Medium” —Includes issuers where debt service protection is adequate under current and anticipated circumstances, although adverse trends have developed and are more pronounced than for “Caution List – Low.” Issuers in this category may have breached one or more covenants or triggers. These issuers are more closely monitored by IPM but generally take remedial action on their own.

“Caution List—High” —Includes issuers where more proactive remedial action is needed but where no defaults on debt service payments are expected. Issuers in this category exhibit more significant weaknesses, such as low debt service coverage, reduced or insufficient collateral protection or inadequate liquidity, which could lead to debt service defaults in the future. Issuers in this category may have breached one or more covenants or triggers and have not taken conclusive remedial action. Therefore, IPM adopts a remediation plan and takes more proactive remedial actions.

“Classified List” —Includes all insured obligations where MBIA has paid a claim or where a claim payment is expected. It also includes insured obligations where a significant LAE payment has been made, or is expected to be made, to mitigate a claim payment. This may include property improvements, bond purchases and commutation payments. Generally, IPM is actively remediating these credits where possible, including restructurings through legal proceedings, usually with the assistance of specialist counsel and advisors.

In establishing case basis loss reserves, the Company calculates the present value of probability-weighted estimated loss payments, net of estimated recoveries, using a discount rate equal to the risk-free rate applicable to the currency and the weighted average remaining life of the insurance contract as required by accounting principles for financial guarantee contracts. Yields on U.S. Treasury offerings are used to discount loss reserves denominated in U.S. dollars, which represent the majority of the loss reserves. Similarly, yields on foreign government offerings are used to discount loss reserves denominated in currencies other than the U.S. dollar. If the Company were to apply different discount rates, its case basis reserves may have been higher or lower than those established as of December 31, 2014. For example, a higher discount rate applied to expected future payments would have decreased the amount of a case basis reserve established by the Company and a lower rate would have increased the amount of a reserve established by the Company. Similarly, a higher discount rate applied to the potential future recoveries would have decreased the amount of a loss recoverable established by the Company and a lower rate would have increased the amount of a loss recoverable established by the Company.

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 utility districts, 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 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 of December 31,2014 and 2013, the Company established loss and LAE reserves totaling $45 million and $87 million, respectively, and insurance loss recoverable of $4 million and $13 million, respectively, related to U.S. public finance issues. For the year endedDecember 31,2014, losses and LAE incurred was a benefit of $10 million, primarily related to decreases in reserves for certain general obligation bonds, partially offset by increases in reserves for Puerto Rico exposures.

Certain local governments remain under financial and budgetary stress and a few have filed for protection under the United States Bankruptcy Code, or have entered into state statutory proceedings established to assist municipalities in managing through periods of severe fiscal stress. This could lead to an increase in defaults by such entities on the payment of their obligations and losses or impairments on a greater number of the Company’s insured transactions. The Company monitors and analyzes these situations closely, however, the overall extent and duration of such events are uncertain and the filing for protection under the United States Bankruptcy Code or entering state statutory proceedings does not result in a default or indicate that an ultimate loss will occur. As of December 31,2014 and 2013, the Company had $98.9 billion and $124.9 billion, respectively, of gross par outstanding on general obligations, of which $152 million and $161 million, respectively, were reflected on the Company’s “Classified List.”Capital appreciation bonds are reported at the par amount at the time of issuance of the insurance policy.

International and Structured Finance Insurance

As of December 31,2014, the majority of the international and structured finance insurance segment’s case basis reserves and insurance loss recoveries recorded in accordance with GAAP were related to insured second and first-lien RMBS transactions. These reserves and recoveries do not include estimates for policies insuring credit derivatives or losses and recoveries on financial guarantee VIEs that are eliminated in consolidation. Policies insuring credit derivative contracts are accounted for as derivatives and carried at fair value under GAAP. The fair values of insured derivative contracts are 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 insured derivative contracts or the early termination of such contracts at a loss, the cumulative unrealized losses recorded from these contracts should reverse before or at the maturity of the contracts.

Notwithstanding the difference in accounting under GAAP for financial guarantee policies and the Company’s insured derivatives, insured derivatives have similar terms, conditions, risks, and economic profiles to financial guarantee insurance policies, and therefore, are evaluated by the Company for loss (referred to as credit impairment herein) and LAE periodically in a manner similar to the way that loss and LAE reserves are estimated for financial guarantee insurance policies. Credit impairments represent actual payments and collections plus the present value of estimated expected future claim payments, net of recoveries. MBIA Corp.’s, exclusive of MBIA UK, expected future claim payments for insured derivatives were discounted using a rate of 5.17%, the same rate it used to calculate its statutory loss reserves as of December 31,2014. MBIA UK used a rate of 2.20% to discount its expected future claim payments and statutory loss reserves. These credit impairments, calculated in accordance with statutory accounting principles (“U.S. STAT”) differ from the fair values recorded in the Company’s consolidated financial statements. The Company considers its credit impairment estimates as critical information for investors as it provides information about loss payments the Company expects to make on insured derivative contracts. As a result, the following loss and LAE process discussion includes information about loss and LAE activity recorded in accordance with GAAP for financial guarantee insurance policies and credit impairments estimated in accordance with U.S. STAT for insured derivative contracts. Refer to “Note 7: Fair Value of Financial Instruments” included herein for additional information about the Company’s insured credit derivative contracts.

RMBS Case Basis Reserves and Recoveries (Financial Guarantees)

The Company’s RMBS reserves and recoveries relate to financial guarantee insurance policies. The Company calculated RMBS case basis reserves as of December 31,2014 for both second and first-lien RMBS transactions using a process called the “Roll Rate Methodology.” The Roll Rate Methodology is a multi-step process using a database of loan level information, a proprietary internal cash flow model, and a commercially available model to estimate potential losses and recoveries on insured bonds. “Roll Rate” is defined as the probability that current loans become delinquent and that loans in the delinquent pipeline are charged-off or liquidated. Generally, Roll Rates are calculated for the previous three months and averaged. The loss reserve estimates are based on a probability-weighted average of three scenarios of loan losses (base case, stress case, and an additional stress case).

In calculating ultimate cumulative losses for RMBS, the Company estimates the amount of loans that are expected to be charged-off (deemed uncollectible by servicers of the transactions) or liquidated in the future.

Second-lien RMBS Reserves

The Company’s second-lien RMBS case basis reserves as of December 31,2014 relate to RMBS backed by home equity lines of credit (“HELOC”) and closed-end second mortgages (“CES”).

The Roll Rates for 30-59 day delinquent loans and 60-89 day delinquent loans are calculated on a transaction-specific basis. The Company assumes that the Roll Rate for 90+ day delinquent loans, excluding foreclosures and Real Estate Owned (“REO”) is 95%. The Roll Rates are applied to the amounts in the respective delinquency buckets based on delinquencies as of November 30,2014 to estimate future losses from loans that are delinquent as of the current reporting period.

Roll Rates for loans that are current as of November 30,2014 (“Current Roll to Loss”) are also calculated on a transaction-specific basis. A proportion of loans reported current as of November 30,2014 is assumed to become delinquent every month, at a Current Roll to Loss rate that persists at current levels for a time and subsequently starts to decline. A key assumption in the model is the period of time in which the Company projects current levels of Current Roll to Loss to persist. The three different scenarios, base, stress and additional stress, differ in the period of time for which the current levels of Current Roll to Loss rates persist. Loss reserves are calculated by using a weightedaverage of these three scenarios, with the majority of the probability assigned to the stress and additional stress scenarios where the current levels of Current Roll to Loss rates persist for six or eighteen months before reverting to historic levels.

In the base case scenario, the Company assumes that the Current Roll to Loss begins to decline immediately and continues to decline over the next six months to 25% of their levels as of November 30,2014. For example, if the amount of current loans which become 30-59 days delinquent were10%, and recent performance were to suggest that 30% of those loans will be charged-off, the Current Roll to Loss for the transaction is 3%. In the base case,the Current Roll to Loss will then reduce linearly to 25% of its original value over the next six months (i.e., 3% will linearly reduce to 0.75% over the six months from December 2014 to May 2015). After that six-month period in the base case scenario, the Company further reduces the loss to 0% by late 2015 with the expectation that the performing seasoned loans will eventually result in loan performance reverting to lower levels of default consistent with history. In the stress and additional stress case scenarios, the Current Roll to Loss trends persist for six months and eighteen months, respectively, before reverting to historic trends.

In addition, the Company considers borrower draw rates, voluntary prepayment rates and pool mortgage insurance, that primarily affect the excess spread generated by current loans, which offsets losses and results in reimbursements to the Company. The Company uses the twelve-month average voluntary prepayment rates and the six-month average loss severities to model its loss reserves. For HELOCs, the current three-month average draw rate is generally used to project future draws on the line. Projected cash flows are also based on an assumed constant basis spread between floating rate assets and floating rate insured debt obligations (the difference between Prime and London Interbank Offered Rate (“LIBOR”) interest rates, minus any applicable fees). For all transactions, cash flow models consider allocations and other structural aspects, including managed amortization periods, rapid amortization periods 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 above assumptions represent MBIA’s probability-weighted estimates of how transactions will perform over time.

As of December 31,2014 and 2013, the Company established loss and LAE reserves totaling $70 million and $126 million, respectively, related to second-lien RMBS issues after the elimination of $21 million and $43 million, respectively, as a result of consolidating VIEs. For the year endedDecember 31,2014, the Company incurred $70 million of losses and LAE recorded in earnings related to second-lien RMBS issues after the elimination of a $20 million expense as a result of consolidating VIEs.

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. If actual performance were to remain at the current levels for six additional months compared to the probability-weightedoutcome currently used by the Company, the addition to the case basis reserveswould be approximately $45 million.

Second-lien RMBS Recoveries

The Company primarily records two types of recoveries related to insured second-lien RMBS exposures: “put-back” claims related to those mortgage loans whose inclusion in insured securitizations failed to comply with representations and warranties (“ineligible loans”) and excess spread that is generated from performing loans in the insured transactions.

Excess Spread

As of December 31,2014 and 2013, the Company recorded estimated recoveries of$523 million and $681 million, respectively, for the reimbursement of past and future expected claims through excess spread in insured second-lien RMBS transactions after the elimination of $137 million and $190 million, respectively, as a result of consolidating VIEs. As of December 31,2014, $496 million and $27 million were included in “Insurance loss recoverable” and “Loss and loss adjustment expense reserves” on the Company’s consolidated balance sheets, respectively, after the elimination of $132 million and $5 million in “Insurance loss recoverable” and in “Loss and loss adjustment expense reserves”, respectively, as a result of consolidating VIEs. As of December 31,2013, $647 million and $34 million were included in “Insurance loss recoverable” and “Loss and loss adjustment expense reserves” on the Company’s consolidated balance sheets, respectively, after the elimination of $183 million and $7 million, respectively, as a result of consolidating VIEs.

Excess spread is generated by performing loans within insured second-lien RMBS securitizations and is the difference between interest inflows on mortgage loan collateral and interest outflows on insured beneficial interests. The amount of excess spread depends on the future loss trends (which include future delinquency trends, average time to charge-off delinquent loans, and the availability of pool mortgage insurance), the future spread between Prime and LIBOR interest rates; and borrower refinancing behavior which results in voluntary prepayments. Minor deviations in loss trends and voluntary prepayments may substantially impact the amounts collected from excess spread. Voluntary prepayment rates generally increased for the year endedDecember 31,2014. The use of these average voluntary prepayment rates in the loss projections resulted in a reduction in estimated recoveries.

Ineligible Mortgage Loans

To date, MBIA has settled the majority of the Company’s put-back claims. Only its claims against Credit Suisse remain outstanding. Settlement amounts have been consistent with the put-back recoveries previously included in the Company’s financial statements.

The contract claim remaining with Credit Suisse is related to the inclusion of ineligible mortgage loans in the 2007-2 Home Equity Mortgage Trust (“HEMT”) securitization. Credit Suisse has challenged the Company’s assessment of the ineligibility of individual mortgage loans and the dispute is the subject of litigation for which there is no assurance that the Company will prevail. Refer to “Note 21: Commitments and Contingencies” for additional information about the litigation against Credit Suisse.

As of December 31,2014 and 2013, the Company recorded estimated recoveriesof $379 million and $359 million, respectively, related to its Credit Suisse put-back claims, reflected in “Loan repurchase commitments” presented under the heading “Assets of consolidated variable interest entities” on the Company’s consolidated balance sheets.

The Company believes that it will prevail in enforcing its contractual put-back rights against Credit Suisse. Based on the Company’s assessment of the strength of these claims, its prior settlements with other sellers/servicers, and success of other monolines in litigation against other sellers/servicers, the Company believes it is entitled to collect the full amount of its incurred losses, which totaled $417 million through December 31,2014. The Company is also entitled to collect interest on amounts paid; it believes that in context of its put-back litigation, the appropriate rate should be the New York State statutory rate. However, the Company currently calculates its put-back recoveries using the contractual interest rate, which is lower than the New York State statutory rate.

Notwithstanding the foregoing, uncertainty remains with respect to the ultimate outcome of the litigation with Credit Suisse, which is contemplated in the scenario based-modeling the Company uses. The Credit Suisse recovery scenarios are based on the amount of incurred losses measured against certain probabilities of ultimate resolution of the dispute with Credit Suisse. Most of the probability weight is assigned to partial recovery scenarios and are discounted using the current risk-free discount rates associated with the underlying transaction’s cash flows.

The Company continues to consider all relevant facts and circumstancesin developing its assumptions on expected cash inflows, probability of potential recoveries (including the outcome of litigation) and recovery period. The estimated amount and likelihood of potential recoveries are expected to be revised and supplemented to the extent there are developments in the pending litigation and/or changes to the financial condition of Credit Suisse. While the Company believes it will be successful in realizing its recoveries from its contract claims against Credit Suisse, the ultimate amounts recovered may be materially different from those recorded by the Company given the inherent uncertainty of the manner of resolving the claims (e.g., litigation) 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.

First-lien RMBS Reserves

The Company’s first-lien RMBS case basis reserves as of December 31,2014, which primarily relate to RMBS backed by alternative A-paper and subprime mortgage loans, were determined using the Roll Rate Methodology. The Company assumes that the Roll Rate for loans in foreclosure, REOand bankruptcy are 90%, 90% and 75%, respectively. Roll Rates for current, 30-59 day delinquent loans, 60-89 day delinquent loans and 90+ day delinquent loans are calculated on a transaction-specific basis. The Current Roll to Loss rates stay at the November 30,2014 level for one month before declining to 25% of this level over a 24-month period.

The Company estimates future losses by using three different probability-weighted scenarios: base; stress; and additional stress. The three scenarios differ in the Roll Rates to loss of 90+ day delinquent loans. In the base scenario, the Company uses deal-specific Roll Rates obtained from historic loan level Roll Rate data for 90+ day delinquent loans. In the stress scenario, the Company assumes a 90% Roll Rate for all 90+ day delinquent loans. In the additional stress scenario, the Roll Rates for each deal are an average of the deal-specific Roll Rate used in the base scenario and the 90% rate. The Roll Rates are applied to the amounts in each deal’s respective 90+ delinquency bucket based on delinquencies as of November 30,2014in order to estimate future losses from loans that are delinquent as of December 31,2014.

In calculating ultimate cumulative losses for first-lien RMBS, the Company estimates the amount of loans that are expected to be liquidated through foreclosure or short sale. The time to liquidation for a defaulted loan is specific to the loan’s delinquency bucket, with the latest three-month average loss severities generally used to startthe projection for trends in loss severities at loan liquidation. The loss severities are reduced over time to account for reduction in the amount of foreclosure inventory, anticipated future increases in home prices, principal amortization of the loan and government foreclosure moratoriums.

As of December 31,2014, the Company established loss and LAE reserves totaling $263 million related to first-lien RMBS issues. As of December 31,2013, the Company established loss and LAE reserves totaling $241 million related to first-lien RMBS issues after the elimination of $2 million as a result of consolidating VIEs. For the year endedDecember 31,2014, the Company incurred $65 million of losses and LAE recorded in earnings related to first-lien RMBS issues after the elimination of a $2 million expense as a result of consolidating VIEs.

Multi-sector CDOs,CRE, and High Yield Corporate CDOs

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, ABS CDOs, corporate CDOs and collateralized loan obligations). These transactions were insured as either financial guarantee insurance policies or credit derivatives with the majority currently insured in the form of financial guarantees.

MBIA’s insured CRE transactions comprise structured CMBS pools, CRE CDOs and CRE loan pools. The majority of this portfolio is accounted for as insured credit derivatives and carried at fair value in the Company’s consolidated financial statements. Refer to “Note 9: Derivative Instruments” for a further discussion of the Company’s use of derivatives and their impact on the Company’s consolidated financial statements. Since the Company’s insured credit derivatives have similar terms, conditions, risks, and economic profiles to its financial guarantee insurance policies, the Company evaluates them for impairment in the same way that it estimates loss and LAE for its financial guarantee policies.

MBIA’s high yield corporate CDO portfolio comprises middle-market/special-opportunity corporate loan transactions. These transactions were insured as financial guarantee insurance policies.

The following discussion provides information about the Company’s process for estimating reserves and credit impairments on these policies, 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. The following approaches require substantial judgments about the future performance of each transaction:

• Each transaction is evaluated for its commutation potential, which is customized by counterparty and considers historical commutation prices, the level of dialogue with the counterparty and the credit quality and payment profile of the underlying exposure.
• A range of loss scenarios is considered under different default and severity rates for each transaction’s collateral.

The loss severities projected by these approaches vary widely. Actual losses will be a function of the proportion of collateral in the pools that default and the loss severities associated with those defaults.

As ofDecember 31,2014 and 2013, the Company established loss and LAE reserves totaling $111 million and $127 million, respectively, related tothe total CDO financial guarantee insurance portfolio after the elimination of $225 million and $226 million, respectively, as a result of consolidating VIEs. For the year ended December 31, 2014, the Company incurred $33 million of losses and LAE recorded in earnings related to the total CDO financial guarantee insurance portfolio after the elimination of a $1 million benefit as a result of consolidating VIEs. In the event of further deteriorating performance of the collateral referenced or held in total CDO portfolio, the amount of losses estimated by the Company could increase substantially.

Loss and LAE Activity

Financial Guarantee Insurance Losses (Non-Derivative and Non-Consolidated VIEs)

The Company’s financial guarantee insurance losses and LAE, net of reinsurance for the years endedDecember 31,2014, 2013 and 2012 are presented in the following table:

	Year Ended December 31,
In millions	2014		2013		2012
Second-lien RMBS	$	70	$	(2)	$	(151)
First-lien RMBS		65		(70)		147
Other(1)		(2)		189		54
Losses and LAE expense (benefit)	$	133	$	117	$	50
________________
(1) - Includes ABS CDOs, CMBS, U.S. public finance and other issues.

For 2014, the increase in losses and LAE expense, in the preceding table, compared with 2013 primarily related to increases in losses and LAE related to expected payments on insured first-lien RMBS and high yield corporate CDOs and decreases in recoveries of expected payments as a result of lower projected collections from excess spread within insured second-lien RMBS securitizations. Partially offsetting this increase in Loss and LAE were benefits related to a decrease in reserves on an international road transaction, decreases in losses and LAE related to expected payments on ABS CDOs and increases in recoveries of expected payments within insured first-lien RMBS securitizations.

For 2013, the increase in losses and LAE expense, in the preceding table, compared with 2012, primarily related to increases in losses on other issues related to an international road transaction and U.S. public finance transactions and a decrease in recoveries on insured second-lien RMBS transactions, partially offset by a benefit in first-lien RMBS transactions related to previously established reserves and decreases in CMBS and ABS CDO transactions.

Costs associated with remediating insured obligations assigned to the Company’s surveillance categories are recorded as LAE and included in “Losses and loss adjustment” expenses on the Company’s consolidated statements of operations. For the years ended December 31, 2014, 2013 and 2012, gross LAE related to remediating insured obligations were $36 million, $57 million and $137 million, respectively. Decreases in LAE are due to lower litigation expenses as a result of settlements.

Thefollowing table providesinformationaboutthe financial guaranteesand related claimliabilityincluded in each of MBIA’ssurveillance categoriesasofDecember 31,2014:

				Surveillance Categories
				Caution		Caution		Caution
				List		List		List		Classified
$ in millions				Low		Medium		High		List		Total
Number of policies					38		98		4		175		315
Number of issues(1)					18		7		3		119		147
Remaining weighted average contract
	period (in years)				7.2		12.0		10.1		7.0		7.7
Gross insured contractual payments
	outstanding:(2)
		Principal		$	1,757	$	1,372	$	133	$	8,001	$	11,263
		Interest			696		819		68		3,037		4,620
			Total	$	2,453	$	2,191	$	201	$	11,038	$	15,883
Gross Claim Liability				$	-	$	-	$	-	$	850	$	850
Less:
	Gross Potential Recoveries				-		-		-		860		860
	Discount, net(3)				-		-		-		14		14
Net claim liability (recoverable)				$	-	$	-	$	-	$	(24)	$	(24)
Unearned premium revenue				$	63	$	19	$	5	$	80	$	167
__________
(1) - An “issue” represents the aggregate of financial guarantee policies that share the same revenue source for purposes of making debt service payments.
(2) - Represents contractual principal and interest payments due by the issuer of the obligations insured by MBIA.
(3) - Represents discount related to Gross Claim Liability and Gross Potential Recoveries.

Thefollowing table providesinformationaboutthe financial guaranteesand related claimliabilityincluded in each of MBIA’ssurveillance categoriesasofDecember 31,2013:

				Surveillance Categories
				Caution		Caution		Caution
				List		List		List		Classified
$ in millions				Low		Medium		High		List		Total
Number of policies					83		19		5		192		299
Number of issues(1)					26		14		4		136		180
Remaining weighted average contract
	period (in years)				11.0		4.9		11.5		9.5		9.7
Gross insured contractual payments
	outstanding:(2)
		Principal		$	5,290	$	1,073	$	40	$	7,861	$	14,264
		Interest			3,829		253		24		4,526		8,632
			Total	$	9,119	$	1,326	$	64	$	12,387	$	22,896
Gross Claim Liability				$	-	$	-	$	-	$	1,235	$	1,235
Less:
	Gross Potential Recoveries				-		-		-		1,085		1,085
	Discount, net(3)				-		-		-		205		205
Net claim liability (recoverable)				$	-	$	-	$	-	$	(55)	$	(55)
Unearned premium revenue				$	112	$	19	$	-	$	96	$	227
__________
(1) - An “issue” represents the aggregate of financial guarantee policies that share the same revenue source for purposes of making debt service payments.
(2) - Represents contractual principal and interest payments due by the issuer of the obligations insured by MBIA.
(3) - Represents discount related to Gross Claim Liability and Gross Potential Recoveries.

The gross claim liability in the preceding tables represents the Company’s estimate of undiscounted probability-weighted future claim payments. As of December 31,2014,the gross claim liability primarily related to insured first and second-lien RMBS issues, high yield corporate CDOs and an international road transaction. As of December 31,2013,the gross claim liability primarily related to insured first and second-lien RMBS issues, ABS CDOs and an international road transaction.

The gross potential recoveriesrepresent the Company’s estimate of undiscounted probability-weighted recoveries of actual claim payments and recoveries of estimated future claim payments. As of December 31,2014 and 2013, the gross potential recoveries principally related to insured second-lien RMBS and U.S. public finance issues. The Company’s recoveries have been, and remain based on either salvage rights, the rights conferred to MBIA through the transactional documents (inclusive of the insurance agreement), or subrogation rights embedded within financial guarantee insurance policies. Expected salvage and subrogation recoveries, as well as recoveries from other remediation efforts, reduce 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, it is recorded as a salvage asset. The amount of recoveries recorded by the Company is limited to paid claims plus the present value of projected 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 liability and gross potential recoveries reflect the elimination of claim liabilities and potential recoveries related to VIEs consolidated by the Company.

The following table presents the components of the Company’s loss and LAE reserves and insurance loss recoverable as reported on the Company’s consolidated balance sheets as of December 31,2014 and2013 for insured obligations within MBIA’s “Classified List.” The loss reserves (claim liability) and insurance claim loss recoverable included in the following table represent the present value of the probability-weighted future claim payments and recoveries reported in the preceding tables.

		As of		As of
In millions		December 31, 2014		December 31, 2013
Loss reserves (claim liability)		$	464	$	580
LAE reserves			42		61
	Loss and LAE reserves	$	506	$	641
Insurance claim loss recoverable		$	(533)	$	(694)
LAE insurance loss recoverable			-		-
	Insurance loss recoverable	$	(533)	$	(694)
Reinsurance recoverable on unpaid losses		$	6	$	7
Reinsurance recoverable on unpaid LAE reserves			1		1
	Reinsurance recoverable on paid and unpaid losses	$	7	$	8

As of December 31,2014, loss and LAE reserves include $653million of reserves for expected future payments, partially offset by expected recoveries of such future payments of $147 million. As of December 31,2013, loss and LAE reserves included $847million of reserves for expected future payments, partially offset by expected recoveries of such future payments of $206 million.

As of December 31,2014 and 2013, the insurance loss recoverable primarily related to expected future recoveries on second-lien RMBS transactions resulting from excess spread generated by performing loans in such transactions. The decrease in insurance loss recoverable wasprimarily due to decreases in projected collections from excess spread within insured second-lien RMBS securitizations.

The following table presents the amounts of the Company’s second-lien RMBS exposure, gross undiscounted claim liability and potential recoveries related to non-consolidated VIEs and consolidated VIEs, included in the Company’s “Classified List,” as of December 31,2014:

Second-lien RMBS Exposure	Outstanding				Gross Undiscounted
	Gross		Gross		Claim		Potential
In billions	Principal		Interest		Liability		Recoveries
Non-consolidated VIEs	$	2.9	$	0.9	$	0.1	$	0.6
Consolidated VIEs	$	1.5	$	0.4	$	-	$	0.5

The following tables present changes in the Company’s loss and LAE reserves for the years endedDecember 31,2014 and 2013. Changes in the loss reserves attributable to the accretion of the claim liability discount, changes in discount rates, changes in the timing and amounts of estimated payments and recoveries, 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 December 31,2014 and 2013, the weighted average risk-free rate used to discount the Company’s loss reserves (claim liability) was 1.72% and 2.37%, respectively. LAE reserves are generally expected to be settled within a one-year period and are not discounted.

In millions

Changes in Loss and LAE Reserves for the Year Ended December 31, 2014

Gross Loss

Loss

Gross Loss

and LAE

Payments

Accretion

Changes in

and LAE

Reserves as of

for Cases

of Claim

Changes in

Unearned

Changes in

Reserves as of

December 31,

with

Liability

Discount

Changes in

Premium

LAE

December 31,

2013

Reserves

Discount

Rates

Assumptions

Revenue

Reserves

Other(1)

2014

$

641

$

(157)

$

14

$

79

$

(35)

$

14

$

(19)

$

(31)

$

506

____________

(1) - Primarily changes in amount and timing of payments.

The decrease in the Company’s gross loss and LAE reserves reflected in the preceding table was primarilyrelated to loss payments and changes in assumptions on ABS CDOs and an international road transaction. These were partially offset by increases in reserves due to changes in discount rates, primarilyon ABS CDOs and insured first and second-lien RMBS issues outstanding as of December 31, 2013, and changes in assumptions related to high yield corporate CDOs.

In millions

Changes in Loss and LAE Reserves for the Year Ended December 31, 2013

Gross Loss

Loss

Gross Loss

and LAE

Payments

Accretion

Changes in

and LAE

Reserves as of

for Cases

of Claim

Changes in

Unearned

Changes in

Reserves as of

December 31,

with

Liability

Discount

Changes in

Premium

LAE

December 31,

2012

Reserves

Discount

Rates

Assumptions

Revenue

Reserves

Other(1)

2013

$

853

$

(337)

$

13

$

(92)

$

141

$

12

$

(2)

$

53

$

641

____________

(1) - Primarily changes in amount and timing of payments.

The decrease in the Company’s gross loss and LAE reserves reflected in the preceding table was primarily related to loss payments on insured first and second-lien RMBS and U.S. public finance issues, partially offset by changes in assumptions.

CurrentperiodchangesintheCompany’sestimateofpotentialrecoveriesmayberecordedasaninsuranceloss recoverableasset,nettedagainstthegrosslossandLAEreserveliability,or both.The following tables present changes in the Company’s insurance loss recoverable and changes in recoveries on unpaid losses reported within the Company’s claim liability for the years endedDecember 31,2014 and 2013. Changes in insurance loss recoverable attributable to the accretion of the discount on the recoverable, changes in discount rates, changes in amount and timingof 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 and Recoveries on Unpaid Losses
				for the Year Ended December 31, 2014
				Collections
		As of		for Cases		Accretion		Changes in				Changes in				As of
		December 31,		with		of		Discount		Changes in		LAE				December 31,
In millions		2013		Recoveries		Recoveries		Rates		Assumptions		Recoveries		Other(1)		2014
Insurance loss
	recoverable	$	694	$	(108)	$	13	$	18	$	(77)	$	-	$	(7)	$	533
Recoveries on unpaid
	losses		206		-		4		15		(79)		1		-		147
Total		$	900	$	(108)	$	17	$	33	$	(156)	$	1	$	(7)	$	680
____________
(1) Primarily changes in amount and timing of collections.

Thedecrease in theCompany’s insurance loss recoverable and recoveries on unpaid lossesduring2014was primarily dueto collections associated with issues outstanding as ofDecember 31,2013, changes in assumptionsdue to lower LIBOR forward rates on second-lien RMBS issues and changes in assumptions on an international road transaction and U.S. public finance issues.

					Changes in Insurance Loss Recoverable and Recoveries on Unpaid Losses
					for the Year Ended December 31, 2013
		Gross														Gross
		Reserve		Collections												Reserve
		as of		for Cases		Accretion		Changes in				Changes in				as of
		December 31,		with		of		Discount		Changes in		LAE				December 31,
In millions		2012		Recoveries		Recoveries		Rates		Assumptions		Recoveries		Other(1)		2013
Insurance loss
	recoverable	$	3,648	$	(3,011)	$	19	$	(33)	$	126	$	(38)	$	(17)	$	694
Recoveries on unpaid
	losses		332		-		6		(38)		(91)		(3)		-		206
Total		$	3,980	$	(3,011)	$	25	$	(71)	$	35	$	(41)	$	(17)	$	900
__________
(1) Primarily changes in amount and timing of collections.

TheCompany’sinsuranceloss recoverabledecreased during2013 primarily duetorecoveries associated with issues outstanding as of December 31,2012,which related to a settlement on the ineligible mortgage loans included in insuredsecond-lien residential mortgagesecuritization exposures thatweresubject to contractual obligations by sellers/servicers to repurchase or replacesuch mortgages. Recoveries on unpaid losses decreased primarily due tochanges in assumptions asa result of thereduction of excess spread related to first and second-lien RMBS transactions and changes in discount rates.