Note 5: Loss and Loss Adjustment Expense Reserves

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, 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.

Puerto Rico

In formulating loss reserves for its Puerto Rico exposures, the Company considers the following: environmental and political impacts on the island; litigation and ongoing discussions with creditors on the Title III proceedings; timing and amount of debt service payments and future recoveries; existing proposed restructuring plans or agreements; and deviations from these proposals in its probability-weighted scenarios

For recoveries on paid Puerto Rico losses, the estimates include assumptions related to the following: economic conditions and trends; political developments; the Company’s ability to enforce contractual rights through litigation and otherwise; discussions with other creditors and the obligors, any existing proposals; and the remediation strategy for an insured obligation that has defaulted or is expected to default.

As part of the GO PSA, in March of 2022, National received certain consideration including cash, bonds and CVI. During July of 2022, in accordance with the HTA PSA, National received cash and CVI related to HTA. In addition, National expects to receive additional cash and newly issued HTA bonds, or cash equal to the face amount of the newly issued HTA bonds, following the effective date of the HTA Plan. The ultimate recovery value to National will depend on the value of these assets upon issuance and over time. Refer to “Note 1: Business Developments and Risks and Uncertainties” for further information on the Company’s Puerto Rico exposures and “Note 13: Commitments and Contingencies” for information on the Company’s Puerto Rico litigation.

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 reserves and recoveries on consolidated VIEs, since they are eliminated in consolidation.

RMBS Case Basis Reserves (Financial Guarantees)

The Company’s RMBS case basis reserves primarily relate to RMBS backed by alternative

A-paper

and subprime mortgage loans. The Company calculated RMBS case basis reserves as of June 30, 2022 using a process called the Roll Rate Methodology (“Roll Rate Methodology”). The Roll Rate Methodology is a multi-step process using databases of loan level information, proprietary internal cash flow models, and commercially available models to estimate potential losses and recoveries on insured bonds. Roll Rate is defined as the probability that current loans become delinquent and subsequently default and loans in the delinquent pipeline are

charged-off

or liquidated. The loss reserve estimates are based on a probability-weighted average of potential scenarios of loan losses. Additional data used for both first and second-lien loans include historic averages of deal specific voluntary prepayment rates, forward projections of the LIBOR interest rates, and historic averages of deal-specific loss severities. Where applicable, the Company factors in termination scenarios when clean up calls are imminent.

In calculating ultimate cumulative losses for RMBS, the Company estimates the amount of first-lien loans that are expected to be liquidated in the future through foreclosure or short sale, and estimates, the amount of second-lien loans that are expected to be

charged-off

(deemed uncollectible by servicers of the transactions). The time to liquidation for a defaulted loan is specific to the loan’s delinquency bucket.

For all RMBS transactions, cash flow models consider allocations and other structural aspects and claims against MBIA Corp.’s insurance policy consistent with such policy’s terms and conditions. The estimated net claims from the procedure above are then discounted using a risk-free rate to a net present value reflecting MBIA’s general obligation to pay claims over time and not on an accelerated basis.

The Company monitors RMBS portfolio performance on a monthly basis against projected performance, reviewing delinquencies, roll rates, and prepayment rates (including voluntary and involuntary). However, loan performance remains difficult to predict and losses may exceed expectations. In the event of a material deviation in actual performance from projected performance, the Company would increase or decrease the case basis reserves accordingly and re-evaluate its assumptions.

RMBS Recoveries

The Company’s RMBS recoveries relate to structural features within the trust structures that allow for the Company to be reimbursed for prior claims paid. These reimbursements for specific trusts include recoveries that are generated from the excess spread of the transactions. Excess spread within insured RMBS securitizations is the difference between interest inflows on mortgage loan collateral and interest outflows on the insured RMBS notes.

CDO Reserves and Recoveries

The Company also has loss and loss adjustment expense (“LAE”) reserves on certain transactions within its CDO portfolio, primarily its multi-sector CDO asset class that was 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, commercial mortgage-backed securities (“CMBS”), asset-backed securities (“ABS”) and CDO collateral). The Company’s process for estimating reserves and credit impairments on these policies is 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. A range of loss scenarios is considered under different default and severity rates for each transaction’s collateral. Additionally, each transaction is evaluated for its commutation potential.

Zohar Recoveries

MBIA Corp. is seeking to recover the payments it made (plus interest and expenses) with respect to Zohar I and Zohar II. Salvage and subrogation recoveries related to Zohar I and Zohar II are reported within “Insurance loss recoverable” on the Company’s consolidated balance sheet. The Company’s estimate of the insurance loss recoverable for Zohar I and Zohar II primarily includes probability-weighted scenarios of the ultimate monetized recovery from the Zohar Collateral. Since March of 2018, MBIA Corp. has been pursuing those recoveries in a Delaware bankruptcy proceeding filed by the Zohar CDOs. Pursuant to a plan of liquidation confirmed in such bankruptcy proceeding regarding the Zohar CDOs and the remaining Zohar Collateral not previously monetized, which plan of liquidation became effective on August 2, 2022, MBIA Corp.’s rights to recoveries from any remaining Zohar Collateral were distributed to MBIA Corp. in the form of beneficial interests in certain asset recovery entities, which will be managed by a special manager subject to oversight by MBIA Corp. and another former Zohar creditor. There still remains significant uncertainty with respect to the realizable value of the remaining loans and equity interests that formerly constituted the Zohar Collateral and that comprise the assets of the asset recovery entities. Further, as the monetization of these assets unfolds in coordination with the special manager of the asset recovery entities and the directors and managers in place at the portfolio companies, and new information concerning the financial condition of the portfolio companies is disclosed, the Company will continue to revise its expectations for recoveries.

Summary of Loss and LAE Reserves and Recoveries

The Company’s loss and LAE reserves and recoveries before consolidated VIE eliminations, along with amounts that were eliminated as a result of consolidating VIEs for the international and structured finance insurance segment, which are included in the Company’s consolidated balance sheets as of June 30, 2022 and December 31, 2021 are presented in the following table:


	As of June 30, 2022						As of December 31, 2021
In millions -	Balance Sheet Line Item						Balance Sheet Line Item
	Insurance loss recoverable			Loss and LAE reserves (1)			Insurance loss recoverable			Loss and LAE reserves (1)

U.S. Public Finance Insurance	$	205		$	576		$	1,054		$	425
International and Structured Finance Insurance:
Before VIE eliminations		240			596			244			687
VIE eliminations		(2	)		(207	)		(2	)		(218	)

Total international and structured finance insurance		238			389			242			469

Total	$	443		$	965		$	1,296		$	894

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

Changes in Loss and LAE Reserves

Loss and LAE reserves represent the Company’s estimate of future claims and LAE payments, net of any future recoveries of such payments. The following table presents changes in the Company’s loss and LAE reserves for the six months ended June 30, 2022. Changes in loss and LAE reserves, with the exception of loss and LAE payments and the impact of the revaluation of loss reserves denominated in amounts other than U.S. dollars, are recorded in “Losses and loss adjustment” expenses in the Company’s consolidated statements of operations. As of June 30, 2022, the weighted average risk-free rate used to discount the Company’s loss reserves (claim liability) was 3.19%. LAE reserves are generally expected to be settled within a one-year period and are not discounted. As of June 30, 2022 and December 31, 2021, the Company’s gross loss and LAE reserves included $20 million and $38 million, respectively, related to LAE.


In millions	Changes in Loss and LAE Reserves for the Six Months Ended June 30, 2022
Gross Loss and LAE Reserves as of December 31, 2021 (1)	Loss and LAE Payments	Accretion of Claim Liability Discount	Changes in Discount Rates	Changes in Assumptions	Changes in Unearned Premium Revenue	Gross Loss and LAE Reserves as of June 30, 2022 (1)
$894	$(355)	$10	$(59)	$473	$ 2	$965

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

The Company’s loss and LAE reserves increased from December 31, 2021, primarily due to a decrease in expected PREPA recoveries on claims not yet paid, which are netted in loss and LAE reserves, as well as higher expected losses due to extending the timing of a settlement. This was partially offset by claim payments made on Puerto Rico exposure for the six months ended June 30, 2022, an increase in estimated expected recoveries related to HTA, which are netted in loss and LAE reserves, and a decline in net reserves on RMBS exposure, as a result of an increase in the risk-free rates used to present value loss reserves.

Changes in Insurance Loss Recoverable

Insurance loss recoverable represents the Company’s estimate of expected recoveries on paid claims and LAE. The Company recognizes potential recoveries on paid claims based on the probability-weighted net cash inflows present valued at applicable risk-free rates as of the measurement date. The following table presents changes in the Company’s insurance loss recoverable for the six months ended June 30, 2022. Changes in insurance loss recoverable with the exception of collections, are recorded in “Losses and loss adjustment” expenses in the Company’s consolidated statements of operations.


			Changes in Insurance Loss Recoverable
			for the Six Months Ended June 30, 2022
In millions	Gross Recoverable as of December 31, 2021		Collections for Cases			Accretion of Recoveries		Changes in Discount Rates			Changes in Assumptions		Gross Recoverable as of June 30, 2022

Insurance loss recoverable	$	1,296	$	(1,199	)	$	3	$	(20	)	$	363	$	443

The decrease in the Company’s insurance loss recoverable reflected in the preceding table was primarily due to the receipt of recoveries from the GO PSA. In addition, insurance loss recoverable declined due to the sale of PREPA bankruptcy claims. These decreases were partially offset by changes in assumptions related to the value of the remaining PREPA recoveries on paid claims.

Loss and LAE Activity

For the three months ended June 30, 2022, loss and LAE incurred primarily related to changes in assumptions used to estimate the fair value of HTA CVI that National received in July of 2022. This was partially offset by an increase in risk-free rates during the second quarter of 2022, which resulted in a decrease in the present value of net case reserves on first-lien RMBS.

For the six months ended June 30, 2022, loss and LAE incurred primarily related to changes in the Company’s estimate of expected recoveries on National’s PREPA exposure. PREPA loss reserves and recoveries include certain assumptions about the timing and amount of claims payments and recoveries, including assumptions about the values of recoveries on the date the Company expects to receive reimbursement under an implemented plan. During the six months ended June 30, 2022, the Company updated assumptions used to estimate the value of recoveries, the timing and amount of claim payments, as well as the timing of an implemented plan. These assumption changes resulted in a decrease in the Company’s estimated present value of expected PREPA recoveries. This was partially offset by loss benefits related to HTA and GO recoveries. During the six months ended June 30, 2022, the Company’s HTA recoveries increased, based on updates to the fair value of the HTA CVI that National received in July of 2022 and updated information relating to the values of the expected receipt of HTA bonds, including the consideration of the fair values of similar issued GO bonds. In addition, the Company recorded a loss benefit on its GO recoveries to reflect the fair values of the consideration received as of the acquisition date, which was higher than its previous estimate. Additionally, an increase in risk-free rates during the first six months of 2022, resulted in a decrease in the present value of net case reserves on first-lien RMBS.

For the three months ended June 30, 2021, loss and LAE incurred primarily related to a decline in expected salvage collections related to CDOs and to a lesser extent incurred losses on insured first-lien RMBS transaction due to a decline in the risk-free rates used to discount the present value of net loss reserves. This was partially offset by a decline in expected payments on certain Puerto Rico credits as a result of a decline in risk-free discount rates, which caused long-dated expected recoveries to increase and to a lesser extent accretion.

For the six months ended June 30, 2021, loss and LAE incurred primarily related to a decrease in expected future recoveries on unpaid and paid losses due to an increase in risk-free discount rates and an increase in expected payments on certain Puerto Rico credits as well as a decrease in expected salvage collections related to CDOs. This was partially offset by a decrease in the present value of loss reserves, primarily related to first-lien RMBS transactions, as a result of the increase in risk-free discount rates.

Costs associated with

remediating insured obligations assigned to the Company’s surveillance categories are recorded as LAE and are included in “Losses and loss adjustment” expenses on the Company’s consolidated statements of operations. For the three months ended June 30, 2022 and 2021, gross LAE related to remediating insured obligations were a benefit of $17 thousand and an expense of $1 million, respectively. For the six months ended June 30, 2022 and 2021, gross LAE related to remediating insured obligations were $5 million and $13 million, respectively

Surveillance Categories

The following table provides information about the financial guarantees and related claim liability included in each of MBIA’s surveillance categories as of June 30, 2022:


	Surveillance Categories
$ in millions	Caution List Low		Caution List Medium		Caution List High		Classified List		Total
Number of policies		55		3		-		170		228
Number of issues (1)		16		2		-		85		103
Remaining weighted average contract period (in years)		5.9		2.1		-		8.3		7.4
Gross insured contractual payments outstanding: (2)
Principal	$	1,309	$	6	$	-	$	2,292	$	3,607
Interest		1,812		1		-		1,036		2,849

Total	$	3,121	$	7	$	-	$	3,328	$	6,456

Gross Claim Liability (3)	$	-	$	-	$	-	$	1,246	$	1,246
Less:
Gross Potential Recoveries (4)		-		-		-		504		504
Discount, net (5)		-		-		-		217		217

Net claim liability (recoverable)	$	-	$	-	$	-	$	525	$	525

Unearned premium revenue	$	7	$	-	$	-	$	24	$	31
Reinsurance recoverable on paid and unpaid losses (6)									$	17

(1) -

An “issue” represents the aggregate of financial guarantee policies that share the same revenue source for purposes of making debt service payments on the insured debt.

(2) -

Represents contractual principal and interest payments due by the issuer of the obligations insured by MBIA.

(3) -

The gross claim liability with respect to Puerto Rico exposures are net of expected recoveries for policies in a net payable position.

(4) -

Gross potential recoveries with respect to certain Puerto Rico exposures are net of the claim liability for policies in a net recoverable position.

(5) -

Represents discount related to Gross Claim Liability and Gross Potential Recoveries.

(6) -

Included in “Other assets” on the Company’s consolidated balance sheets.

The following table provides information about the financial guarantees and related claim liability included in each of MBIA’s surveillance categories as of December 31, 2021:


	Surveillance Categories
$ in millions	Caution List Low		Caution List Medium		Caution List High		Classified List			Total
Number of policies		55		3		-		202			260
Number of issues (1)		16		2		-		88			106
Remaining weighted average contract period (in years)		6.1		2.6		-		8.1			7.4
Gross insured contractual payments outstanding: (2)
Principal	$	1,366	$	6	$	-	$	2,719		$	4,091
Interest		1,867		1		-		1,214			3,082

Total	$	3,233	$	7	$	-	$	3,933		$	7,173

Gross Claim Liability (3)	$	-	$	-	$	-	$	1,051		$	1,051
Less:
Gross Potential Recoveries (4)		-		-		-		1,498			1,498
Discount, net (5)		-		-		-		(32	)		(32	)

Net claim liability (recoverable)	$	-	$	-	$	-	$	(415	)	$	(415	)

Unearned premium revenue	$	8	$	-	$	-	$	29		$	37
Reinsurance recoverable on paid and unpaid losses (6)										$	7