Loss and Loss Adjustment Expense Reserves

6 Months Ended

Jun. 30, 2015

Text Block [Abstract]

Loss and Loss Adjustment Expense Reserves

Note 5: Loss and Loss Adjustment Expense Reserves

Loss and Loss Adjustment Expense Process

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 June 30,2015 and December 31, 2014, the Company established loss and loss adjustment expense (“LAE”) reserves totaling $42 million and $45 million, respectively, and insurance loss recoverable of $1 million and $4 million, respectively, related to U.S. public finance issues.

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 June 30,2015 and December 31, 2014, the Company had $84.7 billion and $98.9 billion, respectively, of gross par outstanding on general obligations, of which $82 million and $152 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. Refer to “Note 6: Loss and Loss Adjustment Expense Reserves” in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, for additional information on the Company’s surveillance categories.

International and Structured Finance Insurance

The international and structured finance insurance segment’s case basis reserves and insurance loss recoveries recorded in accordance with GAAP do not include estimates for 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.

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 June 30,2015 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 second-lien loans that are expected to be charged-off (deemed uncollectible by servicers of the transactions) or first-lien loans liquidated in the future. Refer to “Note 6: Loss and Loss Adjustment Expense Reserves” in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, for additional information on the Company’s second and first-lien Roll Rate Methodology.

Second-lien RMBS Reserves

The Company’s second-lien RMBS case basis reserves as of June 30,2015 relate to RMBS backed by home equity lines of credit (“HELOC”) and closed-end second mortgages (“CES”).As of June 30,2015 and December 31, 2014, the Company established loss and LAE reserves totaling $72 million and $70 million, respectively, related to second-lien RMBS issues after the elimination of $24 million and $21 million, respectively, 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 $29 million.

Second-lien RMBS Recoveries

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

Excess Spread

As of June 30,2015 and December 31, 2014, the Company recorded estimated recoveries of$451 million and $523 million, respectively, for the reimbursement of past and future expected claims through excess spread in insured second-lien RMBS transactions after the elimination of $108 million and $137 million, respectively, as a result of consolidating VIEs. As of June 30,2015, $445 million and $6 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 $108 million in “Insurance loss recoverable”, 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, 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 London Interbank Offered Rate 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.

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 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.

As of June 30,2015 and December 31, 2014, the Company recorded estimated recoveriesof $388 million and $379 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.

Based on the Company’s assessment of the strength of its contractual put-back rights against Credit Suisse, which it is pursuing through litigation claims, as well as on its prior settlements with other sellers/servicers and success of other monolines in litigation against other sellers/servicers, the Company believes it will prevail in enforcing its contractual rights and that it is entitled to collect the full amount of its incurred losses, which totaled $422 million through June 30,2015. 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 June 30,2015, which primarily relate to RMBS backed by alternative A-paper and subprime mortgage loans, were determined using the Roll Rate Methodology. As of June 30,2015 and December 31,2014, the Company’s loss and LAE reserves were $235 million and $263 million, respectively, related to first-lien RMBS issues.

CDOs

The Company has established loss and LAE reserves on certain transactions within its collateralized debt obligation (“CDO”) portfolio, including its multi-sector CDO, commercial mortgage-backed securities (“CMBS”), and high-yield corporate CDO asset classes. MBIA’s insured multi-sector CDOs are transactions that include a variety of collateral ranging from corporate bonds to structured finance assets (which includes but are not limited to RMBS-related collateral, multi-sector and corporate CDOs). 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 CMBS transactions comprise structured CMBS pools andcommercial real estate (“CRE”) CDOs. 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 8: 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 losses 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 ofJune 30,2015 and December 31, 2014, the Company’s loss and LAE reserves were $145 million and $111 million, respectively, related tothe total CDO financial guarantee insurance portfolio after the elimination of $212 million and $225 million, respectively, as a result of consolidating VIEs. For the three and six months endedJune 30,2015, the Company incurred $33 million and $35 million, respectively, of losses and LAE recorded in earnings related to the total CDO financial guarantee insurance portfolio after the elimination of $21 million and $13 million, respectively, of benefit as a result of consolidating VIEs. In the event of further deteriorating performance of the collateral referenced or held in thetotal CDO portfolio, the amount of losses estimated by the Company could increase substantially.

Loss and LAE Activity

Financial Guarantee Insurance Losses (Excluding Derivative and Consolidated VIEs)

The Company’s financial guarantee insurance losses and LAE, net of reinsurance for the three and six months endedJune 30,2015 and 2014 are presented in the following table:

		Three Months Ended June 30,				Six Months Ended June 30,
In millions		2015		2014		2015		2014
U.S. Public Finance Insurance Segment		$	8	$	17	$	2	$	3
International and Structured Finance Insurance Segment:
	Second-lien RMBS		36		47		29		72
	First-lien RMBS		(26)		(3)		(16)		27
	Other(1)		28		(49)		25		(40)
Losses and LAE expense (benefit)		$	46	$	12	$	40	$	62
________________
(1) - Includes CDOs, non-U.S. public finance and other issues.

For the three and six months endedJune 30,2015, losses and LAE primarily related to decreases in projected collections from excess spread within the insured second-lien RMBS securitizations and increases in expected payments on CDOs, partially offset by decreases in expected payments on first-lien RMBS securitizations.

For the three months ended June 30,2014, losses and LAE primarily related to decreases in projected collections from excess spread, partially offset by decreases in expected payments of an international road transaction and CDOs.For the six months ended June 30,2014, losses and LAE primarily related to decreases in projected collections from excess spread and an increase in expected payments onfirst-lien RMBS securitizations, partially offset by a decrease in expected payments of an international road transaction.

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 three months endedJune 30,2015 and 2014, gross LAE related to remediating insured obligations were $7 million and $30 million, respectively. For the six months ended June 30,2015 and 2014, gross LAE related to remediating insured obligations were $5 million and $34 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 categoriesasofJune 30,2015:

				Surveillance Categories
				Caution		Caution		Caution
				List		List		List		Classified
$ in millions				Low		Medium		High		List		Total
Number of policies					58		103		7		168		336
Number of issues(1)					13		7		5		117		142
Remaining weighted average contract
	period (in years)				7.9		11.7		7.8		7.0		7.8
Gross insured contractual payments
	outstanding:(2)
		Principal		$	3,365	$	1,421	$	449	$	6,977	$	12,212
		Interest			3,082		840		166		2,704		6,792
			Total	$	6,447	$	2,261	$	615	$	9,681	$	19,004
Gross Claim Liability				$	-	$	-	$	-	$	913	$	913
Less:
	Gross Potential Recoveries				-		-		-		966		966
	Discount, net(3)				-		-		-		(75)		(75)
Net claim liability (recoverable)				$	-	$	-	$	-	$	22	$	22
Unearned premium revenue				$	61	$	18	$	11	$	63	$	153
__________
(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 31,2014:

				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.

The gross claim liability in the preceding tables represents the Company’s estimate of undiscounted probability-weighted future claim payments. As of June 30,2015, the gross claim liability primarily related to insured first and second-lien RMBS issues and CDOs. As of December 31,2014,the gross claim liability primarily related to insured first and second-lien RMBS issues, 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 June 30,2015 and December 31, 2014, 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 June 30,2015 and December 31, 2014 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		June 30, 2015		December 31, 2014
Loss reserves (claim liability)		$	463	$	464
LAE reserves			37		42
	Loss and LAE reserves	$	500	$	506
Insurance claim loss recoverable		$	(483)	$	(533)
LAE insurance loss recoverable			-		-
	Insurance loss recoverable	$	(483)	$	(533)
Reinsurance recoverable on unpaid losses		$	6	$	6
Reinsurance recoverable on unpaid LAE reserves			-		1
	Reinsurance recoverable on paid and unpaid losses	$	6	$	7

As of June 30,2015, loss and LAE reserves include $719million of reserves for expected future payments, partially offset by expected recoveries of such future payments of $219 million. 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 June 30,2015 and December 31, 2014, 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 actual collections from excess spread within insured second-lien RMBS securitizations.

The following table presents changes in the Company’s loss and LAE reserves for the six months endedJune 30,2015. Changes in loss and LAE reserves attributable to the accretion of the claim liability discount, changes in discount rates, changes in amount and timingof 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 June 30,2015, the weighted average risk-free rate used to discount the Company’s loss reserves (claim liability) was 1.89%. 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 Six Months Ended June 30, 2015

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

June 30,

2014

Reserves

Discount

Rates

Assumptions

Revenue

Reserves

Other(1)

2015

$

506

$

(21)

$

4

$

(22)

$

51

$

3

$

(5)

$

(16)

$

500

____________

(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 changes in the amount of net payments and loss payments associated with first and second-lien RMBS issues. These were partially offset by changes in assumptions onCDOs and insured first and second-lien RMBS issues.

CurrentperiodchangesintheCompany’sestimateofpotentialrecoveriesmayberecordedasaninsuranceloss recoverableasset,nettedagainstthegrosslossandLAEreserveliability,or both.The following table presents changes in the Company’s insurance loss recoverable and changes in recoveries on unpaid losses reported within the Company’s claim liability for the six months endedJune 30,2015. 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 Six Months Ended June 30, 2015
				Collections
		As of		for Cases		Accretion		Changes in				Changes in				As of
		December 31,		with		of		Discount		Changes in		LAE				June 30,
In millions		2014		Recoveries		Recoveries		Rates		Assumptions		Recoveries		Other(1)		2015
Insurance loss
	recoverable	$	533	$	(39)	$	4	$	(1)	$	2	$	-	$	(16)	$	483
Recoveries on unpaid
	losses		147		-		1		(2)		74		(1)		-		219
Total		$	680	$	(39)	$	5	$	(3)	$	76	$	(1)	$	(16)	$	702
____________
(1) Primarily changes in amount and timing of collections.

Theincrease in the Company’sinsuranceloss recoverableand recoveries on unpaid losses duringthe first six months of 2015was primarily duetochanges in assumptions on CDOs, partially offset by actual collections associated with first and second-lien RMBS issues, changes in assumptions on an international road transaction and first and second-lien RMBS issues and changes in the amount of expected collections on first and second-lien RMBS issues.