In the second quarter, the Company increased its expectations of future payments on second-lien RMBS exposures by $25 million reflecting increases in the weightings of certain stress scenarios in the Company’s loss modeling due to slower than expected declines in early stage delinquencies within these transactions. Expected salvage increased by $68 million primarily reflecting changes to the Company’s assumptions regarding the timing and amount of future recoveries on contractual claims related to ineligible mortgage loans improperly included in the insured securitizations.

Second quarter economic losses on first-lien RMBS totaled $9 million as a result of higher than expected loan loss severities due to recoveries of servicer advances and decreased excess spread due to higher voluntary prepayments of the underlying mortgage loans.

Second quarter economic losses on multi-sector ABS CDO exposures were a benefit of $40 million driven by reserve reductions resulting from changes to certain interest rate assumptions in the Company’s loss modeling.

In the second quarter of 2013, the Company estimated $79 million of incremental economic losses on certain insured transactions backed by pools of CMBS. The increase primarily reflects additional deterioration within some insured transactions and adjustments to commutation price assumptions.

The Company also estimated $121 million in incremental economic losses related to other insured transactions, including a reversal of expected recoveries on certain transactions impacted by an unfavorable litigation ruling and reserves for an international toll road transaction.

Portions of the $126 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 second quarter economic losses based on those categories:

2Q 2013 Economic Losses (Benefit)
$ in millions

Change in Expected Payments
Change in Insurance Recoveries 20
Loss & LAE Expense on Policies Subject to Insurance Accounting $122
Credit Impairments on Insured VIEs $(100)
Credit Impairments on Insured Credit Derivatives $105
LAE on Insured Credit Derivatives (1)
Credit Impairments and LAE on Insured Credit Derivatives $104
Total Economic Losses (Benefit) $126

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