Loss and Loss Adjustment Expense Reserves

6 Months Ended

Jun. 30, 2016

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 utilities, 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 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 and includes recoveries for such payments, if any.

As of June 30,2016 and December 31, 2015, the Company’s U.S. public finance loss and loss adjustment expense (“LAE”) reserves were $58 million and $45 million, respectively. As of June 30,2016 and December 31, 2015, the Company’s insurance loss recoverable related to U.S. public finance issues was $2 million and $4 million, respectively.

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 in greater amountson the Company’s insured transactions. The Company monitors and analyzes these situations closely, however, the overall extent and duration of such events are uncertain. Also, the filing for protection under the United States Bankruptcy Code or entering state statutory proceedings does not necessarily result in a default or indicate that an ultimate loss will occur. As of June 30,2016 and December 31, 2015, the Company had $59.9 billion and $70.0 billion, respectively, of gross par outstanding on general obligations, of which $1.1 billion and $79 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

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 on financial guarantee VIEs that are eliminated in consolidation. Policies insuring credit derivative contracts are accounted for as derivatives and are carried at fair value in the Company’s consolidated financial statements under GAAP. The fair values of insured credit 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 credit 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. As 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, under Statutory accounting, in the same way that it estimates loss and LAE for its financial guarantee policies. 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.

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 30,2016 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 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 that various percentages of delinquent loans are eventually charged-off(deemed uncollectible by servicers of the transactions) 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). Additional data used for both second and first-lien RMBS includes historic average of deal specific voluntary prepayment rates and loss severities and forward projections of the London Interbank Offered Rate (“LIBOR”) interest rates. Prospective loss severity assumptions are reduced over time to account for reductions in the amount of foreclosure inventory, anticipated future increases in home prices, principal amortizations of the loans and modification programs.

In calculating ultimate cumulative losses for RMBS, the Company estimates the amount of second-lien mortgage loans that are expected to be charged-off 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, 2015, for additional information on the Company’s second and first-lien mortgage loan Roll Rate Methodology.

Second-lien RMBS Reserves

The Company’s second-lien RMBS case basis reserves as of June 30,2016 relate to RMBS backed by home equity lines of credit and closed-end second mortgages.As of June 30,2016 and December 31,2015, the Company established loss and LAE reserves totaling $47 million and $51 million, respectively, related to second-lien RMBS issues after the elimination of $16 million, as a result of consolidated 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 $26 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 the trust structures 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 30,2016 and December 31,2015, the Company estimated recoveries of$408 million and $499 million, respectively, for the reimbursement of past and future expected claims through excess spread in insured second-lien RMBS transactions, of which $76 million and $93 million, respectively, are eliminated as a result of consolidated VIEs. As of June 30,2016, $319 million and $13 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 $75 million and $1 million, respectively, as a result of consolidated VIEs. As of December 31,2015, $382 million and $24 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 $87 million and $6 million, respectively, as a result of consolidated 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 the insured RMBS notes. 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. Excess spread may also include estimated recoverables from mortgage insurance contracts and subsequent recoveries on charged-off loans associated with the insured RMBS securitizations.

Put-Back Claims Related to 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. To date, settlement amounts have been consistent with the put-back recoveries that had been included in the Company’s financial statements at the time preceding the settlement.

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 30,2016 and December 31,2015, the Company recorded estimated recoveriesof $401 million and $396 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’ put-back settlements, 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 $430million through June 30,2016. The Company is also entitled to collect interest on amounts paid; it believes that in context of its put-back litigation, the appropriate interest 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 probability-weighted cash flow 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 against 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 fromits 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 (i.e., litigation and/or negotiated out-of-court settlement) 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 30,2016, which primarily relate to RMBS backed by alternative A-paper and subprime mortgage loans, were determined using the Roll Rate Methodology. As of June 30,2016 and December 31,2015, the Company’s loss and LAE reserves were $327 million and $277 million, respectively, related to first-lien RMBS issues after the elimination of $18 million and $5 million, respectively, as a result of consolidated VIEs.

CDO Reserves

The Company also has loss and LAE reserves on certain transactions within its CDO portfolio, including its multi-sector CDO and highyield corporate CDO asset classes that were 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-related collateral, multi-sector and corporate CDOs). MBIA’s high yield corporate CDO portfolio comprises middle-market/special-opportunity corporate loan transactions.

As of June 30,2016 and December 31,2015, the Company’s loss and LAE reserves were $104 million and $133 million, respectively, related to the total CDO financial guarantee insurance portfolio after the elimination of $206 million and $190 million, respectively, as a result of consolidated VIEs. For the three and six months endedJune 30,2016, the Company incurred $9 million and had a benefit of $22 million in losses and LAE, respectively, recorded in earnings related to the total CDO financial guarantee insurance portfolio after the elimination of $8 million and $20 million, respectively, as a result of consolidated VIEs. In the event of further deteriorating performance of the collateral referenced or held in the total CDO portfolio, the amount of losses estimated by the Company could increase substantially.

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, 2015, for additional information on the Company’s process for estimating reserves on these policies. The methods and assumptions for estimating reserves require substantial judgement of the future performance of each transaction. Actual losses will be a function of the proportion of collateral in the pools that default and the loss severities associated with those defaults.

Loss and LAE Activity

Financial Guarantee Insurance Losses (Excluding Insured Credit Derivative and Consolidated VIEs)

The Company’s financial guarantee insurance losses and LAE, net of reinsurance for the three and six months endedJune 30,2016and 2015are presented in the following table:

		Three Months Ended June 30,				Six Months Ended June 30,
In millions		2016		2015		2016		2015
U.S. Public Finance Insurance Segment		$	9	$	8	$	18	$	2
International and Structured Finance Insurance Segment:
	Second-lien RMBS		21		36		34		29
	First-lien RMBS		35		(26)		61		(16)
	Other(1)		12		28		(14)		25
Losses and LAE expense (benefit)		$	77	$	46	$	99	$	40
________________
(1) - Includes CDOs, non-U.S. public finance and other issues.

For the three and six months endedJune 30,2016, losses and LAE primarily related to increases in expected payments on insured first-lien RMBS transactions and decreases in projected collections from excess spread within insured second-lien RMBS securitizations.

For the three and six months endedJune 30,2015, losses and LAE primarily related to decreases in projected collections from excess spread within insured second-lien RMBS securitizations and increases in expected payments on CDOs, partially offset by decreases in expected payments on first-lien RMBS 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 three months endedJune 30,2016 and 2015, gross LAE related to remediating insured obligations were $20 million and $7 million, respectively. For the six months endedJune 30,2016 and 2015, gross LAE related to remediating insured obligations were $28 million and $5 million, respectively.

Thefollowing table providesinformationaboutthe financial guaranteesand related claimliabilityincluded in each of MBIA’ssurveillance categoriesasofJune 30,2016:

				Surveillance Categories
				Caution		Caution		Caution
				List		List		List		Classified
$ in millions				Low		Medium		High		List		Total
Number of policies					56		7		5		344		412
Number of issues(1)					13		4		3		125		145
Remaining weighted average contract
	period (in years)				8.1		5.5		7.4		7.1		7.3
Gross insured contractual payments
	outstanding:(2)
		Principal		$	2,440	$	55	$	352	$	7,795	$	10,642
		Interest			2,679		16		121		3,173		5,989
			Total	$	5,119	$	71	$	473	$	10,968	$	16,631
Gross Claim Liability				$	-	$	-	$	-	$	738	$	738
Less:
	Gross Potential Recoveries				-		-		-		499		499
	Discount, net(3)				-		-		-		75		75
Net claim liability (recoverable)				$	-	$	-	$	-	$	164	$	164
Unearned premium revenue				$	7	$	1	$	9	$	75	$	92
__________
(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 31,2015:

				Surveillance Categories
				Caution		Caution		Caution
				List		List		List		Classified
$ in millions				Low		Medium		High		List		Total
Number of policies					57		18		171		165		411
Number of issues(1)					12		6		5		117		140
Remaining weighted average contract
	period (in years)				7.6		6.7		9.6		6.7		7.4
Gross insured contractual payments
	outstanding:(2)
		Principal		$	2,591	$	147	$	1,996	$	6,426	$	11,160
		Interest			2,733		57		1,038		2,419		6,247
			Total	$	5,324	$	204	$	3,034	$	8,845	$	17,407
Gross Claim Liability				$	-	$	-	$	-	$	797	$	797
Less:
	Gross Potential Recoveries				-		-		-		752		752
	Discount, net(3)				-		-		-		116		116
Net claim liability (recoverable)				$	-	$	-	$	-	$	(71)	$	(71)
Unearned premium revenue				$	8	$	2	$	33	$	55	$	98
__________
(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 increase in the Company’s number of policies on the classified list reflected in the preceding tables was primarily related to certain Puerto Rico policies. The gross claim liabilities in the preceding tables represent the Company’s estimate of undiscounted probability-weighted estimated future claim payments. As of June 30,2016 and December 31,2015, the gross claim liability primarily related to insured first-lien RMBS transactions.

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 30,2016 andDecember 31,2015, the gross potential recoveries principally related to insured second-lien RMBS. 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 estimated 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 30,2016 andDecember 31,2015 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 estimated future claim payments and recoveries reported in the preceding tables.

		As of		As of
In millions		June 30, 2016		December 31, 2015
Loss reserves (claim liability)		$	486	$	470
LAE reserves			60		46
	Loss and LAE reserves	$	546	$	516
Insurance claim loss recoverable		$	(363)	$	(571)
LAE insurance loss recoverable			(2)		(6)
	Insurance loss recoverable	$	(365)	$	(577)
Reinsurance recoverable on unpaid losses		$	6	$	6
Reinsurance recoverable on unpaid LAE reserves			1		-
	Reinsurance recoverable on paid and unpaid losses	$	7	$	6

As of June 30,2016, loss and LAE reserves include $637million of reserves for expected future payments, partially offset by $91 million of expected recoveries of such future payments. As of December 31,2015, loss and LAE reserves include $616million of reserves for expected future payments, partially offset by$100 million of expected recoveries of such future payments.

As of June 30,2016 and December 31,2015, 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 2016 was primarily due to adecrease in expected future recoveries on CDOs as the result of the consolidation and elimination of a VIE.

The following table presents changes in the Company’s loss and LAE reserves for the six months endedJune 30,2016. 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 claim 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 30,2016, the weighted average risk-free rate used to discount the Company’s loss reserves (claim liability) was 1.18%. 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, 2016

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,

2015

Reserves

Discount

Rates

Assumptions

Revenue

Reserves

Other(1)

2016

$

516

$

(47)

$

5

$

32

$

35

$

(12)

$

14

$

3

$

546

____________

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

The increase in the Company’s gross loss and LAE reserves reflected in the preceding table was primarily related to changes in discount rates and changes in assumptions on insured first and second-lien RMBS transactions. These were partially offset by changes in assumptions on CDOs.

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 30,2016. 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, 2016
		Gross														Gross
		Reserve		Collections												Reserve
		as of		for Cases		Accretion		Changes in				Changes in				as of
		December 31,		with		of		Discount		Changes in		LAE				June 30,
In millions		2015		Recoveries		Recoveries		Rates		Assumptions		Recoveries		Other(1)		2016
Insurance loss
	recoverable	$	577	$	(50)	$	3	$	10	$	(126)	$	(4)	$	(45)	$	365
Recoveries on unpaid
	losses		100		-		1		9		(24)		5		-		91
Total		$	677	$	(50)	$	4	$	19	$	(150)	$	1	$	(45)	$	456
____________
(1) Primarily changes in amount and timing of collections.

Thedecrease in the Company’sinsuranceloss recoverableand recoveries on unpaid losses during2016was primarily duetoa decrease in expected future recoveries on CDOs as the result of the consolidation and elimination of a VIE.