Loss and Loss Adjustment Expense Reserves

9 Months Ended

Sep. 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, as well as recoveries for such payments, if any. Gross par outstanding for capital appreciation bonds represents the par amount at the time of issuance of the insurance policy.

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.

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 (Financial Guarantees)

The Company’s RMBS reserves and recoveries relate to financial guarantee insurance policies. The Company’s first-lien RMBS case basis reserves primarily relate to RMBS backed by alternative A-paper and subprime mortgage loans. The Company’s second-lien RMBS case basis reserves relate to RMBS backed by home equity lines of credit and closed-end second mortgages. The Company calculated RMBS case basis reserves as of September 30,2016 for both first and second-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. 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 first and second-lien mortgage loan Roll Rate Methodology.

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 its second-lien case basis reserveswould be approximately $26 million.

RMBS Recoveries

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

Excess Spread

Excess spread is generated by performing loans within insured 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/liquidate delinquent loans, and the availability of pool mortgage insurance), the future spread between Prime and LIBOR interest rates, and borrower refinancing behavior (which may be affected by a continued low interest rate environment) that 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.

Second-lien 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.

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 $432 million through September 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 from its contract claims against Credit Suisse, the ultimate amount recovered may be materially different from that 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.

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.

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 loss reserving process including risk-management activities.

Summary of Loss and LAE Reserves and Recoveries

The Company’s loss and LAE reserves and recoveries, along with amounts that were eliminated as a result of consolidating VIEs, as of September 30,2016 and December 31,2015, are presented in the following table:

			As of		As of
In millions			September 30, 2016		December 31, 2015
U.S. Public Finance Insurance Segment:
	Loss and LAE reserves		$	72	$	45
	Insurance loss recoverable			174		4
International and Structured Finance Insurance Segment:
	Second-lien RMBS:
		Loss and LAE reserves after VIE elimination		33		51
		Loss and LAE reserves VIE elimination		15		16
		Excess Spread after VIE elimination(1)		318		406
		Excess Spread VIE elimination(2)		63		93
		Put-Back Claims(3)		404		396
	First-lien RMBS:
		Loss and LAE reserves after VIE elimination		322		277
		Loss and LAE reserves VIE elimination		17		5
		Excess Spread after VIE elimination(4)		77		80
		Excess Spread VIE elimination(5)		21		8
	CDOs:
		Loss and LAE reserves after VIE elimination		77		133
		Loss and LAE reserves VIE elimination		191		190
		Insurance Loss Recoverable after VIE elimination		-		148
		Insurance Loss Recoverable VIE elimination		147		-
	Other:
		Loss and LAE reserves after VIE elimination		9		10
		Loss and LAE reserves VIE elimination		28		-
		Insurance Loss Recoverable		5		9
________________
(1) -As of September 30, 2016 and December 31, 2015, $309 million and $382 million were included in “Insurance loss recoverable” and $9 million and $24 million were included in “Loss and loss adjustment expense reserves” on the Company’s consolidated balance sheets, respectively.
(2) -As of September 30, 2016 and December 31, 2015, $62 million and $87 million were eliminated from "Insurance loss recoverable” and $1 million and $6 million were eliminated from “Loss and loss adjustment expense reserves” on the Company’s consolidated balance sheets, respectively.
(3) - Reflected in “Loan repurchase commitments” presented under the heading “Assets of consolidated variable interest entities” on the Company’s consolidated balance sheets.
(4) -As of September 30, 2016 and December 31, 2015, $40 million and $34 million were included in “Insurance loss recoverable” and $37 million and $46 million were included in “Loss and loss adjustment expense reserves” on the Company’s consolidated balance sheets, respectively.
(5) -As of September 30, 2016 and December 31, 2015, $16 million and $8 million were eliminated from “Insurance loss recoverable.” As of September 30, 2016, $5 million was eliminated from “Loss and loss adjustment expense reserves” on the Company’s consolidated balance sheets.

Changes in Loss and LAE Reserves

The following table presents changes in the Company’s loss and LAE reserves for the nine months endedSeptember 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 September 30,2016, the weighted average risk-free rate used to discount the Company’s loss reserves (claim liability) was 1.31%. LAE reserves are generally expected to be settled within a one-year period and are not discounted. As of September 30,2016 and December 31,2015, the Company’s gross loss and LAE reserves included $54 million and $46 million, respectively, related to LAE.

In millions

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

September 30,

2015

Reserves

Discount

Rates

Assumptions

Revenue

Reserves

Other(1)

2016

$

516

$

(113)

$

6

$

31

$

13

$

(8)

$

8

$

60

$

513

____________

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

Changes in Insurance Loss Recoverable and Recoveries on Unpaid Losses

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 nine months endedSeptember 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. As of September 30,2016 and December 31,2015, the Company’s insurance loss recoverable included $1 million and $6 million, respectively, related to LAE.

		Gross														Gross
		Reserve		Collections												Reserve
		as of		for Cases		Accretion		Changes in				Changes in				as of
		December 31,		with		of		Discount		Changes in		LAE				September 30,
In millions		2015		Recoveries		Recoveries		Rates		Assumptions		Recoveries		Other(1)		2016
Insurance loss
	recoverable	$	577	$	(60)	$	4	$	9	$	58	$	(5)	$	(55)	$	528
Recoveries on unpaid
	losses		100		-		1		8		(31)		5		-		83
Total		$	677	$	(60)	$	5	$	17	$	27	$	-	$	(55)	$	611
____________
(1) Primarily changes in amount and timing of collections.

The decrease in the Company’s insurance loss recoverable and recoveries on unpaid losses during 2016 was primarily due to a decrease in expected future recoveries on CDOs as the result of the consolidation and elimination of a VIE, partially offset by an increase in changes in assumptions on certain Puerto Rico exposures.

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 nine months endedSeptember 30,2016and 2015are presented in the following table:

		Three Months Ended September 30,				Nine Months Ended September 30,
In millions		2016		2015		2016		2015
U.S. Public Finance Insurance Segment		$	28	$	(7)	$	46	$	(5)
International and Structured Finance Insurance Segment:
	Second-lien RMBS		44		24		78		52
	First-lien RMBS		-		18		61		2
	CDOs		(23)		5		(46)		39
	Other(1)		1		(1)		10		(9)
Losses and LAE expense (benefit)		$	50	$	39	$	149	$	79
________________
(1) - Includes non-U.S. public finance and other issues.

For the three months endedSeptember 30,2016, losses and LAE primarily related to increases in actual and expected payments on certain Puerto Rico exposures and second-lien RMBS transactions. These were partially offset by increases in recoveries of expected payments on certain Puerto Rico exposures and decreases in expected payments on CDOs.

For the nine months endedSeptember 30,2016, losses and LAE primarily related to increases in actual and expected payments on certain Puerto Rico exposures and insured first and second-lien RMBS transactions and decreases in projected collections from excess spread within insured second-lien RMBS securitizations. These were partially offset by increases in recoveries of expected payments on certain Puerto Rico exposures and decreases in expected payments on CDOs.

For the three months endedSeptember 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 first-lien RMBS transactions.

For the nine months endedSeptember 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.

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 endedSeptember 30,2016 and 2015, gross LAE related to remediating insured obligations were $6 million and $5 million, respectively. For the nine months endedSeptember 30,2016 and 2015, gross LAE related to remediating insured obligations were $34 million and $10 million, respectively.

Surveillance Categories

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

				Surveillance Categories
				Caution		Caution		Caution
				List		List		List		Classified
$ in millions				Low		Medium		High		List		Total
Number of policies					82		7		5		327		421
Number of issues(1)					14		5		3		124		146
Remaining weighted average contract
	period (in years)				7.3		5.0		7.3		7.1		7.2
Gross insured contractual payments
	outstanding:(2)
		Principal		$	3,013	$	64	$	338	$	7,205	$	10,620
		Interest			2,843		17		117		2,840		5,817
			Total	$	5,856	$	81	$	455	$	10,045	$	16,437
Gross Claim Liability				$	-	$	-	$	-	$	670	$	670
Less:
	Gross Potential Recoveries				-		-		-		686		686
	Discount, net(3)				-		-		-		14		14
Net claim liability (recoverable)				$	-	$	-	$	-	$	(30)	$	(30)
Unearned premium revenue				$	9	$	1	$	8	$	70	$	88
__________
(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 September 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 September 30,2016, the gross potential recoveries principally related to insured second-lien RMBS and U.S. public finance transactions. As of December 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.As of September 30,2016 and December 31,2015, reinsurance recoverable on paid and unpaid losses was $7 million and $6 million, respectively, and were included in “Other assets” on the Company’s consolidated balance sheets.