In the fourth quarter of 2011, the Company estimated $782 million of incremental economic losses on certain insured transactions backed by pools of CMBS. The majority of the increase reflects the cost of commutations during the quarter. The balance was due to revised expectations for the cost of commuting similar transactions in the future as well as deterioration within some insured transactions during the quarter.
Portions of the $309 million of total economic losses are on policies subject to insurance accounting while other amounts relate to losses on insured VIEs or insured credit derivatives for which GAAP specifies different accounting. The following is a summary of fourth quarter economic losses based on those categories:
|4Q 2011 Economic Losses (Benefit)|
|$ in millions|
|Change in Expected Payments||($21||)|
|Change in Insurance Recoveries||(263||)|
|Loss & LAE Expense on Policies Subject to Insurance Accounting||($284||)|
|Credit Impairments on Insured VIEs||($136||)|
|Credit Impairments on Insured Credit Derivatives||$727|
|LAE on Insured Credit Derivatives||2|
|Credit Impairments and LAE on Insured Credit Derivatives||$729|
|Total Economic Losses (Benefit)||$309|
Claims activity on second-lien RMBS exposures consisted of the following:
|$ in millions||Q4 2011||Q3 2011||Q4 2010|
|Collections on Paid Claims||(93||)||(9||)||(11||)|
|Paid LAE (net of collections)||43||37||26|
The trend toward lower loss payments on insured second-lien RMBS exposures continued in the fourth quarter of 2011 as claims payments declined to $146 million from $167 million in the third quarter and $259 million in the fourth quarter of 2010. However, loss adjustment expenses increased due to the cost of collecting “put-back” receivables. Collections of $93 million in the fourth quarter were substantially higher than in prior quarters as a result of a legal settlement.
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