10-Q 1 d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

United States

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended June 30, 2009

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File Number 1-9583

 

 

MBIA INC.

(Exact name of registrant as specified in its charter)

 

 

 

Connecticut   06-1185706
(State of incorporation)  

(I.R.S. Employer

Identification No.)

 

113 King Street, Armonk, New York   10504
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code: (914) 273-4545

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  x            Accelerated filer  ¨            Non-accelerated filer  ¨            Smaller reporting company  ¨

Indicate by check mark whether the Registrant is shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

As of July 31, 2009, 207,994,886 shares of Common Stock, par value $1 per share, were outstanding.

 

 

 


Table of Contents

INDEX

 

          PAGE
PART I FINANCIAL INFORMATION   

Item 1.

   Financial Statements (Unaudited) MBIA Inc. and Subsidiaries   
   Consolidated Balance Sheets—June 30, 2009 and December 31, 2008    1
   Consolidated Statements of Operations—Three and six months ended June 30, 2009 and 2008    2
   Consolidated Statement of Changes in Shareholders’ Equity—Six months ended June 30, 2009    3
   Consolidated Statements of Cash Flows—Six months ended June 30, 2009 and 2008    4
   Notes to Consolidated Financial Statements    5-76

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    77-150

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk    151

Item 4.

   Controls and Procedures    151
PART II OTHER INFORMATION   

Item 1.

   Legal Proceedings    152-154

Item 1A.

   Risk Factors    155

Item 1B.

   Unresolved Staff Comments    155

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds    155

Item 3.

   Defaults Upon Senior Securities    155

Item 4.

   Submission of Matters to a Vote of Security Holders    155

Item 5.

   Other Information    155

Item 6.

   Exhibits    156
SIGNATURES   


Table of Contents

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

MBIA INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (Unaudited)

(In thousands except per share amounts)

 

     June 30, 2009     December 31, 2008  

Assets

    

Investments:

    

Fixed-maturity securities held as available-for-sale, at fair value (amortized cost $11,907,958 and $13,245,574) (includes hybrid financial instruments at fair value $29,428 and $25,498)

   $ 9,797,192      $ 11,223,716   

Investments held-to-maturity, at amortized cost (fair value $2,295,828 and $3,109,248)

     2,843,238        3,156,969   

Investments pledged as collateral, at fair value (amortized cost $848,303 and $1,101,929)

     736,615        845,887   

Short-term investments held as available for sale, at fair value (amortized cost $3,403,448 and $4,728,090)

     3,365,229        4,693,283   

Short-term investments held-to-maturity, at amortized cost (fair value $1,113,431 and $485,857)

     1,114,288        498,865   

Other investments

     417,248        220,412   
                

Total investments

     18,273,810        20,639,132   

Cash and cash equivalents

     899,599        2,279,783   

Accrued investment income

     119,982        201,688   

Premiums receivable

     2,130,976        7,744   

Deferred acquisition costs

     514,194        560,632   

Prepaid reinsurance premiums

     450,667        216,609   

Receivable for insurance loss recoveries

     1,745,144        458,512   

Reinsurance recoverable on paid and unpaid losses

     52,100        173,548   

Goodwill

     76,938        76,938   

Property and equipment, at cost (less accumulated depreciation of $146,275 and $141,295)

     103,942        105,364   

Receivable for investments sold

     304,118        77,464   

Derivative assets

     754,890        911,188   

Current income taxes

     64,194        240,871   

Deferred income taxes, net

     1,274,821        2,374,164   

Other assets

     531,092        706,812   
                

Total assets

   $ 27,296,467      $ 29,030,449   
                

Liabilities and Equity

    

Liabilities:

    

Unearned premium revenue

   $ 5,336,856      $ 3,424,402   

Loss and loss adjustment expense reserves

     1,260,652        1,557,884   

Reinsurance premiums payable

     297,153        8,672   

Investment agreements

     3,026,784        4,666,944   

Medium-term notes (includes financial instruments carried at fair value $122,006 and $176,261)

     4,135,921        6,339,527   

Variable interest entity notes

     2,637,031        1,791,597   

Securities sold under agreements to repurchase

     690,661        802,938   

Long-term debt

     2,516,725        2,396,059   

Deferred fee revenue

     86,523        44,989   

Payable for investments purchased

     36,671        239   

Derivative liabilities

     4,189,241        6,470,874   

Other liabilities

     300,311        504,306   
                

Total liabilities

     24,514,529        28,008,431   
                

Commitments and contingencies (See Note 16)

    

Equity:

    

Preferred stock, par value $1 per share; authorized shares—10,000,000; issued and outstanding—none

     —          —     

Common stock, par value $1 per share; authorized shares—400,000,000; issued shares—274,855,122 and 273,199,801

     274,885        273,200   

Additional paid-in capital

     3,054,045        3,050,506   

Retained earnings

     3,361,494        1,629,187   

Accumulated other comprehensive loss, net of deferred income tax of $779,363 and $946,759

     (1,741,199     (1,775,954

Treasury stock, at cost—66,900,302 and 65,278,904 shares

     (2,184,065     (2,182,519
                

Total shareholders’ equity of MBIA Inc.

     2,765,160        994,420   

Preferred stock of subsidiary

     16,778        27,598   
                

Total equity

     2,781,938        1,022,018   
                

Total liabilities and equity

   $ 27,296,467      $ 29,030,449   
                

The accompanying notes are an integral part of the consolidated financial statements.

 

1


Table of Contents

MBIA INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(In thousands except per share amounts)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2009     2008     2009     2008  

Revenues:

        

Scheduled premiums earned

   $ 153,126      $ 145,636      $ 348,101      $ 293,156   

Refunding premiums earned

     24,822        87,757        58,516        95,552   
                                

Premiums earned (net of ceded premiums of $12,718, $36,811, $48,619 and $62,233)

     177,948        233,393        406,617        388,708   

Net investment income

     179,288        417,346        368,190        932,410   

Fees and reimbursements

     21,806        12,556        41,026        19,848   

Realized gains and other settlements on insured derivatives

     32,036        34,304        63,818        68,062   

Unrealized gains (losses) on insured derivatives

     423,786        3,324,313        2,032,950        (252,790
                                

Net change in fair value of insured derivatives

     455,822        3,358,617        2,096,768        (184,728

Net gains (losses) on financial instruments at fair value and foreign exchange

     124,379        86,785        161,758        163,347   

Net realized gains (losses)

     30,222        (383,297     64,411        (326,691

Investment losses—other than temporary impairments

     (357,418     (436,164     (587,407     (659,779

Non-credit related losses on investments not expected to be sold (recognized in accumulated other comprehensive loss)

     243,752        —          243,752        —     
                                

Net investment losses—other than temporary impairments

     (113,666     (436,164     (343,655     (659,779

Net gains on extinguishment of debt

     116,303        65,676        126,401        79,217   
                                

Total revenues

     992,102        3,354,912        2,921,516        412,332   

Expenses:

        

Losses and loss adjustment

     (729,311     22,344        (35,586     309,952   

Amortization of deferred acquisition costs

     26,067        22,977        46,767        38,529   

Operating

     79,951        66,322        172,490        129,779   

Interest

     112,474        307,915        249,753        698,556   
                                

Total expenses

     (510,819     419,558        433,424        1,176,816   
                                

Income (loss) before income taxes

     1,502,921        2,935,354        2,488,092        (764,484

Provision (benefit) for income taxes

     604,907        1,234,994        889,430        (58,111
                                

Net income (loss)

     898,014        1,700,360        1,598,662        (706,373

Preferred stock dividends of subsidiary

     3,271        —          7,213        —     
                                

Net income (loss) available to common shareholders

   $ 894,743      $ 1,700,360      $ 1,591,449      $ (706,373
                                

Net income (loss) per common share:

        

Basic

   $ 4.30      $ 7.14      $ 7.64      $ (3.33

Diluted

   $ 4.30      $ 7.14      $ 7.64      $ (3.33

Weighted-average number of common shares outstanding:

        

Basic

     208,097,729        238,152,768        208,287,929        212,242,994   

Diluted

     208,097,729        238,152,768        208,287,929        212,242,994   

The accompanying notes are an integral part of the consolidated financial statements.

 

2


Table of Contents

MBIA INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

For the Six Months Ended June 30, 2009

(In thousands except per share amounts)

 

    Common Stock   Additional
Paid-in
Capital
  Retained
Earnings
    Accumulated
Other
Comprehensive
Income (Loss)
    Treasury Stock     Total
Shareholders’
Equity

of MBIA Inc.
    Preferred Stock
of Subsidiary
 
    Shares   Amount         Shares     Amount       Shares     Amount  

Balance, January 1, 2009

  273,200   $ 273,200   $ 3,050,506   $ 1,629,187      $ (1,775,954   (65,279   $ (2,182,519   $ 994,420      2,759      $ 27,598   

SFAS 163 transition adjustment net of deferred income taxes of $27,170

  —       —       —       55,346        —        —          —          55,346      —          —     

FSP FAS 115-2 transition adjustment net of deferred income taxes of $29,930

  —       —       —       85,512        (55,582   —          —          29,930      —          —     

Comprehensive income:

                   

Net income

  —       —       —       1,598,662        —        —          —          1,598,662      —          —     

Other comprehensive loss:

                   

Change in unrealized depreciation of investments net of deferred income taxes of $188,810

  —       —       —       —          260,748      —          —          260,748      —          —     

Portion of other-than-temporary impairment losses recognized in other comprehensive loss, net of deferred income taxes of $55,435

  —       —       —       —          (188,317   —          —          (188,317   —          —     

Change in fair value of derivative instruments net of deferred income taxes of $29,593

  —       —       —       —          54,959      —          —          54,959      —          —     

Change in foreign currency translation net of deferred income taxes of $34,357

  —       —       —       —          (37,053   —          —          (37,053   —          —     
                         

Other comprehensive loss

                  90,337       
                         

Total comprehensive income

                  1,688,999       
                         

Treasury shares acquired under share repurchase program

  —       —       —       —          —        (1,690     (4,196     (4,196   —          —     

Share-based compensation net of income taxes of $1,733

  1,685     1,685     3,539     —          —        69        2,650        7,874      —          —     

Preferred stock of subsidiary acquired

  —       —       —       —          —        —          —          —        (1,082     (10,820

Preferred stock dividends of subsidiary

  —       —       —       (7,213     —        —          —          (7,213   —          —     
                                                                   

Balance, June 30, 2009

  274,885   $ 274,885   $ 3,054,045   $ 3,361,494      $ (1,741,199   (66,900   $ (2,184,065   $ 2,765,160      1,677      $ 16,778   
                                                                   
            2009             
                         

Disclosure of reclassification amount:

                   

Change in unrealized depreciation of investments arising during the period, net of taxes

          $ 456,540             

Reclassification adjustment, net of taxes

            (384,109          
                         

Change in net unrealized depreciation, net of taxes

          $ 72,431             
                         

The accompanying notes are an integral part of the consolidated financial statements.

 

3


Table of Contents

MBIA INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands)

 

     Six Months Ended June 30,  
     2009     2008  

Cash flows from operating activities:

    

Net income (loss)

   $ 1,598,662      $ (706,373

Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities:

    

Amortization of bond discounts (premiums), net

     (43,102     (22,889

Decrease in accrued investment income

     81,177        107,525   

Decrease (increase) in premiums receivable

     244,927        (3,789

Decrease in deferred acquisition costs

     54,809        63,547   

Decrease in unearned premium revenue

     (413,251     (203,452

Decrease in prepaid reinsurance premiums

     79,602        23,677   

Decrease in reinsurance premiums payable

     (35,781     (22,346

Decrease in loss and loss adjustment expense reserves

     (123,012     (15,470

Decrease in reinsurance recoverable on paid and unpaid losses

     126,011        9,485   

Increase in receivable for insurance loss recoveries

     (1,286,632     (114,965

(Decrease) increase in payable to reinsurers on recoveries

     15,608        960   

Depreciation

     4,242        4,875   

Decrease in accrued interest payable

     (99,419     (104,473

Decrease in accounts receivable

     22,399        5,664   

Decrease in accrued expenses

     (99,631     (6,426

Increase in deferred fee revenue

     41,534        1,602   

Amortization of medium-term notes and commercial paper (premiums) discounts, net

     (6,988     (8,444

Net realized (gains) losses on sale of investments

     (64,411     326,691   

Investment losses on other than temporarily impaired investments

     343,655        659,779   

Unrealized (gains) losses on insured derivatives

     (2,032,950     252,790   

Net gains on financial instruments at fair value and foreign exchange

     (161,758     (163,347

Current income tax provision

     176,677        204,604   

Deferred income tax (benefit) provision

     931,657        (43,372

Gains on extinguishment of debt

     (126,401     (79,515

Share-based compensation

     3,215        (33,358

Other, operating

     (36,111     308,413   
                

Total adjustments to net income (loss)

     (2,403,934     1,147,766   
                

Net cash provided (used) by operating activities

     (805,272     441,393   
                

Cash flows from investing activities:

    

Purchase of fixed-maturity securities

     (4,585,015     (10,108,272

Increase in payable for investments purchased

     36,428        766,494   

Sale and redemption of fixed-maturity securities

     6,185,517        15,416,977   

Increase in receivable for investments sold

     (226,878     (1,905,362

Purchase of held-to-maturity investments

     (200,027     (868,472

Redemptions of held-to-maturity investments

     557,716        2,168,891   

(Purchase) sale of short-term investments, net

     1,398,037        (2,989,219

Sale (purchase) of other investments, net

     (248,421     51,779   

Capital expenditures

     (3,320     (2,652

Disposals of capital assets

     508        —     
                

Net cash provided by investing activities

     2,914,545        2,530,164   
                

Cash flows from financing activities:

    

Proceeds from issuance of investment agreements

     296,157        1,845,817   

Payments for drawdowns of investment agreements

     (1,899,933     (2,536,634

Decrease in commercial paper

     —          (518,453

Issuance of medium-term notes

     169,211        2,109,430   

Principal paydown of medium-term notes

     (2,031,992     (5,259,019

Principal paydown of variable interest entity floating rate notes

     (50,972     (28,778

Securities sold under agreements to repurchase, net

     (112,277     (156,333

Dividends paid

     (6,511     (42,640

Gross proceeds from issuance of common stock

     —          1,628,405   

Capital issuance costs

     —          (75,157

Net proceeds from issuance of warrants

     —          21,467   

Net proceeds from issuance of long-term debt

     131,612        981,153   

Repayment for retirement of short-term debt

     —          (6,225

Proceeds (payments) from derivative settlements

     48,873        (57,479

Purchase of treasury stock

     (4,196     —     

Purchase of subsidiary preferred stock

     (10,820     —     

Restricted stock awards settlements

     1,521        967   

Excess tax benefit on share-based payment

     (1,733     (14,993

Collateral from reverse repurchase agreement counterparties

     25,000        —     

Collateral (to) from swap counterparty

     (43,397     188,060   

Other, financing

     —          812   
                

Net cash used by financing activities

     (3,489,457     (1,919,600
                

Net increase (decrease) in cash and cash equivalents

     (1,380,184     1,051,957   

Cash and cash equivalents—beginning of period

     2,279,783        263,732   
                

Cash and cash equivalents—end of period

   $ 899,599      $ 1,315,689   
                

Supplemental cash flow disclosures:

    

Income taxes (refunded) paid

   $ (210,617   $ (209,269

Interest paid:

    

Investment agreements

   $ 78,382      $ 365,123   

Commercial paper

     —          13,674   

Medium-term notes

     75,353        243,641   

Variable interest entity floating rate notes

     41,871        27,834   

Securities sold under agreements to repurchase

     41,644        21,347   

Liquidity loans

     2,754        —     

Other borrowings and deposits

     —          1,697   

Long-term debt

     79,635        39,080   

Non cash items:

    

Share-based compensation

   $ 3,215      $ (33,358

Dividends declared but not paid

     702        —     

The accompanying notes are an integral part of the consolidated financial statements.

 

4


Table of Contents

MBIA Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

Note 1: Business and Organization

MBIA Inc., together with its consolidated subsidiaries, (collectively, “MBIA” or the “Company”) operates the largest financial guarantee insurance business in the industry and is a provider of asset management advisory services. The Company also manages asset/liability products and conduit programs, which are in wind-down. Beginning in 2009, the Company’s business activities are managed through three principal operations: United States (“U.S.”) public finance insurance, structured finance and international insurance, and investment management services. Corporate operations include revenues and expenses that arise from general corporate activities.

MBIA’s financial guarantee business is currently operated through two subsidiaries, National Public Finance Guarantee Corporation (“National”) and MBIA Insurance Corporation and its subsidiaries (“MBIA Corp.”). In February 2009, after receiving the required regulatory approvals, MBIA established and capitalized National as a U.S. public finance-only financial guarantor. In connection with the establishment of National, MBIA Insurance Corporation paid dividends and returned capital to MBIA Inc. and entered into a reinsurance agreement and an assignment agreement with National, the latter of which was with respect to financial guarantee insurance policies that had been reinsured from Financial Guaranty Insurance Company (“FGIC”). As a result, the Company established its U.S. public finance insurance business as a separate operating segment.

Refer to MBIA Inc.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008 for further information about these changes to the Company’s operating and legal entity structure.

MBIA’s insurance and certain investment management services programs have historically relied upon triple-A credit ratings. The loss of those ratings in the second quarter of 2008 resulted in a dramatic reduction in the Company’s business activities. As of June 30, 2009, National was rated A with a developing outlook by Standard & Poor’s Corporation (“S&P”) and Baa1 with a developing outlook by Moody’s Investors Service, Inc. (“Moody’s”). As of June 30, 2009, MBIA Insurance Corporation was rated BBB with a negative outlook by S&P and B3 with a negative outlook by Moody’s.

U.S. Public Finance Insurance Operations

As described above, since February 2009, MBIA’s U.S. public finance insurance business has been conducted through National. The financial guarantees issued by National provide unconditional and irrevocable guarantees of the payment of the principal of, and interest or other amounts owing on, insured obligations when due or, in the event National has the right at its discretion to accelerate insured obligations upon default or otherwise, upon National’s acceleration. National’s guarantees insure municipal bonds, including tax-exempt and taxable indebtedness of U.S. political subdivisions, as well as utility districts, 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. Municipal bonds and privately issued bonds used for the financing of public purpose projects are generally supported by taxes, assessments, fees or tariffs related to the use of these projects, lease payments or other similar types of revenue streams.

National’s insurance portfolio principally comprises exposure assumed by National under the previously disclosed quota share reinsurance agreement it entered into with MBIA Insurance Corporation effective January 1, 2009 pursuant to which MBIA Insurance Corporation ceded all of its U.S. public finance exposure to National and under the assignment by MBIA Insurance Corporation of its rights and obligations with respect to the U.S. public finance business that MBIA Insurance Corporation assumed from FGIC.

Structured Finance and International Insurance Operations

MBIA’s structured finance and international insurance operations have been conducted through MBIA Corp. The financial guarantees issued by MBIA Corp. provide unconditional and irrevocable guarantees of the payment of the principal of, and interest or other amounts owing on, insured obligations when due, or in the event MBIA Corp. has the right at its discretion to accelerate insured obligations upon default or otherwise, upon MBIA Corp.’s acceleration. Certain investment agreement contracts written by MBIA Inc. are insured by MBIA Corp. and if MBIA Inc. were to have insufficient assets to pay amounts due upon maturity or termination, MBIA Corp. would make such payments. Additionally, insurance policies include payments due under credit and other derivatives, including termination payments that may become due upon certain events including the insolvency or payment default of MBIA Corp.

MBIA Corp.’s guarantees insure structured finance and asset-backed obligations, privately issued bonds used for the financing of public purpose projects, which are primarily located outside of the U.S. and that include toll roads, bridges, airports, public transportation facilities and other types of infrastructure projects serving a substantial public purpose, and obligations of sovereign and sub-sovereign issuers. Structured finance and asset-backed securities (“ABSs”) typically are securities repayable from expected cash flows generated by a specified pool of assets, such as residential and commercial mortgages, insurance policies, consumer loans, corporate loans and bonds, trade and export receivables, leases for equipment, aircraft and real property, and infrastructure projects.

 

5


Table of Contents

MBIA Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

The Company is no longer insuring new credit derivative contracts except in transactions related to the reduction of existing derivative exposure. Currently, the global structured finance market is generating very little new business, and it is uncertain how or when the Company may re-engage this market.

Investment Management Services Operations

MBIA’s investment management services operations consist of an asset management advisory business, which provides cash management, discretionary asset management and structured products to the public, not-for-profit, corporate and financial sectors. The Company also has an asset/liability products business, in which it has issued debt and investment agreements, which are insured by MBIA Corp., to capital markets and municipal investors and then initially purchased assets that largely matched the duration of those liabilities, and a conduit business in which the Company has funded MBIA-insured transactions by issuing debt, which is insured by MBIA Corp. The ratings downgrades of MBIA Corp. have resulted in the termination and collateralization of certain investment agreements and, together with the rising cost and declining availability of funding and illiquidity of many asset classes, have caused the Company to begin winding down its asset/liability products and conduit businesses.

Liquidity

As a financial services company, MBIA is materially affected by conditions in global financial markets. Current conditions and events in these markets have created substantial liquidity risk for the Company.

The Company has instituted a liquidity risk management framework to evaluate its enterprise-wide liquidity position. The primary objective of this risk management system is to monitor potential liquidity constraints and guide the proactive management of liquidity resources to ensure adequate protection against liquidity risk. MBIA’s liquidity risk management framework monitors the Company’s cash and liquid asset resources using stress-scenario testing. Members of MBIA’s senior management meet frequently to review liquidity metrics, discuss contingency plans and establish target liquidity cushions on an enterprise-wide basis.

As part of MBIA’s liquidity risk management framework, the Company also evaluates and manages liquidity on both a legal entity basis and a segment basis. Segment liquidity is an important consideration for the Company as it conducts the operations of its corporate segment and certain activities within the asset/liability products segment of the Company’s investment management services operations from MBIA Inc. Dislocation in the global financial markets, the overall economic downturn in the U.S., and the loss of MBIA Corp.’s triple-A insurance financial strength ratings in 2008 have significantly increased the liquidity needs and decreased the financial flexibility in the Company’s segments. However, MBIA continued to satisfy all of its payment obligations and the Company believes that it has adequate resources to meet its ongoing liquidity needs in both the short-term and the long-term. However, if the current market dislocation and economic conditions persist or worsen, the Company’s liquidity resources will experience further stress.

U.S. Public Finance Insurance Liquidity

Liquidity risk arises in the Company’s U.S. public finance insurance segment when claims on insured exposures result in payment obligations, when operating cash inflows fall due to depressed new business writings, lower investment income, or unanticipated expenses, or when invested assets experience credit defaults or significant declines in fair value.

The Company’s U.S. public finance insurance business’s financial guarantee contracts cannot be accelerated, thereby mitigating liquidity risk. However, defaults, credit impairments and adverse capital markets conditions such as the Company is currently experiencing, can create payment requirements as the Company has made irrevocable pledges to pay principal and interest, or other amounts owing on insured obligations, when due. Additionally, the Company’s U.S. public finance insurance segment requires cash for the payment of operating expenses. Finally, National also provides liquid assets to the Company’s asset/liability products segment through matched repurchase and reverse repurchase agreements to support its business operations and liquidity position, as described below.

Structured Finance and International Insurance Liquidity

Liquidity risk arises in the Company’s structured finance and international insurance segment when claims on insured exposures result in payment obligations, when operating cash inflows fall due to depressed new business writings, lower investment income, or unanticipated expenses, or when invested assets experience credit defaults or significant declines in fair value.

 

6


Table of Contents

MBIA Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

In general, the Company’s structured finance and international business’s financial guarantee contracts and credit default swap (“CDS”) contracts cannot be accelerated, thereby mitigating liquidity risk. (Under the terms of the Company’s insured CDS contract, the insured counterparty may have a right to terminate the CDS contract upon an insolvency or payment default of MBIA Corp.) However, defaults, credit impairments and adverse capital markets conditions such as the Company is currently experiencing, can create payment requirements as the Company has made irrevocable pledges to pay principal and interest, or other amounts owing on insured obligations, when due. Additionally, the Company’s structured finance and international insurance segment requires cash for the payment of operating expenses, as well as principal and interest related to its surplus notes and preferred stock issuance. MBIA Corp. also provides guarantees to the holders of our asset/liability products debt obligations. If the Company’s asset/liability products segment were to be unable to service the principal and interest payments on its debt and investment agreements, the holders of the insured liabilities would make a claim under the MBIA Corp. insurance policies. MBIA Corp. has lent $2.0 billion to the asset/liability products segment on a secured basis for the purpose of minimizing the risk that such claim would be made. The loan matures in the fourth quarter of 2011. The timing of the repayment may be affected by the performance of assets in the asset/liability product’s investment portfolio.

Since the fourth quarter of 2007, MBIA Corp. made $3.7 billion of cash payments, before reinsurance, associated with insured second-lien RMBS securitizations, as well as settlement payments relating to CDS contracts referencing CDO-squared and multi-sector CDOs. Among MBIA Corp.’s outstanding insured portfolio, these types of insured exposures have exhibited the highest degree of payment volatility and continue to pose material liquidity risk to the Company’s structured finance and international insurance segment. As a result of the current economic stress, MBIA could incur additional payment obligations beyond these mortgage-related exposures, which may be substantial, increasing the stress on MBIA Corp.’s liquidity.

In order to monitor liquidity risk and maintain appropriate liquidity resources for payments associated with our residential mortgage related exposures, MBIA employs a stress scenario-based liquidity model using the same “Roll Rate Default Methodology” as it uses in its loss reserving. Using this methodology, the Company estimates the level of payments that would be required to be made under low probability stress-level default assumptions of the underlying collateral taking into account MBIA’s obligation to cover such defaults under our insurance policies. These estimated payments, together with all other significant operating, financing and investing cash flows are forecasted over the next 24-month period on a monthly basis and then annually thereafter to the final maturity of the longest dated outstanding insured obligation. The stress-loss scenarios and cash flow forecasts are frequently updated to account for changes in risk factors and to reconcile differences between forecasted and actual payments.

In addition to MBIA’s residential mortgage stress scenario, it also monitors liquidity risk using a Monte Carlo estimation of potential stress-level claims for all insured principal and interest payments due in the next 12-month period. These probabilistically determined payments are then compared to the Company’s invested assets. This theoretic liquidity model supplements the scenario-based liquidity model described above providing the Company with a robust set of liquidity metrics with which to monitor its risk position.

The Company manages the investment portfolios of its insurance segments in a conservative manner to maintain cash and liquid securities in an amount in excess of all stress scenario payment requirements. To the extent the Company’s liquidity resources fall short of its target liquidity cushions under the stress-loss scenario testing, the Company will seek to increase its cash holdings position, primarily through the sale of high-quality bonds held in its investment portfolio.

Investment Management Services Liquidity

Within MBIA’s investment management services operations, the asset/liability products segment has material liquidity risk. In addition to the payment of operating expenses, cash needs in the asset/liability products segment are primarily for the payment of principal and interest on investment agreements and medium-term notes, and for posting collateral under repurchase agreements, derivatives and investment agreements. The primary sources of cash within the asset/liability products segment used to meet its liquidity needs include scheduled principal and interest on assets held in the segment’s investment portfolio and dedicated capital held within the investment management services operations. If needed, assets held within the segment can be sold or used in secured repurchase agreement borrowings to raise cash. However, the Company’s ability to sell assets or borrow against non-U.S. government securities in the fixed-income markets decreased dramatically and the cost of such transactions increased dramatically over the last year due to the impact of the credit crisis on the willingness of investors to purchase or lend against even very high-quality assets. In addition, negative net interest spread between asset and liability positions resulted from the need to hold cash as collateral against terminable investment agreement contracts and reduced the cash flow historically provided by net investment income.

The asset/liability products segment, through MBIA Inc., maintained simultaneous repurchase and reverse repurchase agreements with National for the purpose of borrowing government securities to pledge under collateralized investment agreements and repurchase agreements. As a result of increased liquidity needs within the asset/liability products segment, the asset/liability products segment, through MBIA Inc., maintained a repurchase agreement with MBIA Insurance Corporation under which MBIA Inc. may transfer securities in its portfolio in exchange for up to $2.0 billion in cash. Additionally, $600 million was transferred to the asset/liability products segment from the Company’s corporate segment in the fourth quarter of 2008.

In order to monitor liquidity risk and maintain appropriate liquidity resources for near-term cash and collateral requirements within MBIA’s asset/liability products segment, the Company calculates monthly forecasts of asset and liability maturities, as well as collateral posting requirements. Cash availability at the low point of the Company’s 12-month forecasted cash flows is measured against liquidity needs using stress-scenario testing of each of the potential liquidity needs described above. To the extent there is a shortfall in MBIA’s liquidity coverage, the Company proactively manages its cash position and liquidity resources to maintain an adequate cushion to the stress scenario. These resources include the sale of unpledged assets, the use of free cash at the holding company, and potentially increased securities borrowings from National.

Corporate Liquidity

Liquidity needs in MBIA’s corporate segment are highly predictable and comprise principal and interest payments on corporate debt, operating expenses and dividends to MBIA Inc. shareholders. Liquidity risk is associated primarily with the dividend capacity of National and MBIA Corp., the distributable earnings of the investment management services operations conducted by MBIA Inc., dividends from asset management subsidiaries, investment income and the Company’s ability to issue equity and debt. Additionally, the corporate segment maintains excess cash and investments to ensure it is able to meet its ongoing cash requirements over a multi-year period in the event that cash becomes unavailable from one or more sources.

In addition to MBIA Inc.’s corporate liquidity needs described above, it issued investment agreements reported within the Company’s asset/liability products segment, all of which are currently collateralized by high-quality liquid investments. The Company’s corporate debt and investment agreements can be accelerated by the holders of such instruments upon the occurrence of certain events, including a breach of covenant or representation, a bankruptcy of MBIA Inc. and the filing of an insolvency proceeding in respect of MBIA Corp. In the event of any such acceleration, the Company may not have sufficient liquid resources to pay amounts due with respect to its corporate debt obligations.

 

7


Table of Contents

MBIA Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

Note 2: Significant Accounting Policies

The Company has disclosed its significant accounting policies in “Note 2: Significant Accounting Policies” in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008. The following significant accounting policies provide an update to those included under the same captions in the Company’s Annual Report on Form 10-K.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X and, accordingly, do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) for annual periods. These statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2008. The accompanying consolidated financial statements have not been audited by an independent registered public accounting firm in accordance with the standards of the Public Company Accounting Oversight Board (United States), but in the opinion of management such financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for the fair statement of the Company’s financial position and results of operations.

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. As additional information becomes available or actual amounts become determinable, the recorded estimates are revised and reflected in operating results. Actual results could differ from those estimates.

The results of operations for the three and six months ended June 30, 2009 may not be indicative of the results that may be expected for the year ending December 31, 2009. The December 31, 2008 balance sheet was derived from audited financial statements, but does not include all disclosures required by GAAP for annual periods. The consolidated financial statements include the accounts of MBIA Inc., its wholly owned subsidiaries and all other entities in which the Company has a controlling financial interest. All material intercompany revenues and expenses have been eliminated. Certain amounts have been reclassified in prior years’ financial statements to conform to the current presentation.

In addition, the Company evaluated all events subsequent to June 30, 2009 through August 5, 2009 for inclusion in the Company’s consolidated financial statements and/or accompanying notes.

Financial Guarantee Insurance Premiums

Unearned Premium Revenue and Receivable for Future Premiums

The Company records financial guarantee insurance premiums in accordance with the guidance provided in Statement of Financial Accounting Standards No. (“SFAS”) 163, “Accounting for Financial Guarantee Insurance Contracts.” SFAS 163 requires the Company to recognize a liability for unearned premium revenue at the inception of financial guarantee insurance and reinsurance contracts on a contract-by-contract basis. Unearned premium revenue recognized at inception of a contract is measured at the present value of the premium due. For most financial guarantee insurance contracts, the Company receives the entire premium due at the inception of the contract, and recognizes unearned premium revenue liability at that time. For certain other financial guarantee contracts, the Company receives premiums in installments over the term of the contract. Unearned premium revenue and a receivable for future premiums is recognized at the inception of an installment contract, and measured at the present value of premiums expected to be collected over the contract period or expected period using a risk-free discount rate as required by SFAS 163. SFAS 163 only allows the expected period to be used in the present value determination of unearned premium revenue and receivable for future premiums for contracts where (a) the insured obligation is contractually prepayable, (b) prepayments are probable, (c) the amount and timing of prepayments are reasonably estimable, and (d) a homogenous pool of assets is the underlying collateral for the insured obligation. The Company has determined that substantially all of its installment contracts meet the conditions required by SFAS 163 to be treated as expected period contracts. The receivable for future premiums is reduced as installment premiums are collected. The Company reports the accretion of the discount on installment premiums receivable as premium revenue and discloses the amount recognized in “Note 4: Insurance Premiums.” The Company assesses the receivable for future premiums for collectability each reporting period, adjusts the receivable for uncollectible amounts and recognizes any write-off as operating expense and discloses the amount recognized in “Note 4: Insurance Premiums.” As premium revenue is recognized, the unearned premium revenue liability is reduced.

 

8


Table of Contents

MBIA Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

Premium Revenue Recognition

SFAS 163 requires financial guarantee insurance and reinsurance contracts issued by insurance enterprises to recognize and measure premium revenue based on the amount of insurance protection provided to the period in which the insurance protection is provided. Premium revenue is measured by applying a constant rate to the insured principal amount outstanding in a given period to recognize a proportionate share of the premium received or expected to be received on a financial guarantee insurance contract. A constant rate for each respective financial guarantee insurance contract is determined as the ratio of (a) the present value of premium received or expected to be received over the period of the contract to (b) the sum of all insured principal amounts outstanding during each period over the term of the contract. As premium revenue is recognized, unearned premium revenue liability is reduced.

An issuer of an insured financial obligation may retire the obligation prior to its scheduled maturity through legal defeasance in satisfaction of the obligation according to its indenture, which results in the Company’s obligation being extinguished under the financial guarantee contract. The Company recognizes any remaining unearned premium revenue on the insured obligation as premium revenue in the period the contract is extinguished to the extent the unearned premium revenue has been collected.

Non-refundable commitment fees are considered insurance premiums and are initially recorded under unearned premium revenue in the consolidated balance sheets when received. Once the related financial guarantee insurance policy is issued, the commitment fees are recognized as premium written and earned using the constant rate method. If the commitment agreement expires before the related financial guarantee is issued, the non-refundable commitment fee is immediately recognized as premium written and earned at that time.

Loss and Loss Adjustment Expenses

SFAS 163 requires a claim liability (loss reserve) to be recognized on a contract-by-contract basis when the present value of expected net cash outflows to be paid under the contract using a risk-free rate as of the measurement date exceeds the unearned premium revenue. A claim liability is subsequently remeasured each reporting period for expected increases or decreases due to changes in the likelihood of default and potential recoveries. Subsequent changes to the measurement of claim liability are recognized as claim expense in the period of change. Measurement and recognition of claim liability is reported gross of any reinsurance. The Company estimates the likelihood of possible claims payments and possible recoveries using probability-weighted expected cash flows based on information available as of the measurement date, including market information. Accretion of the discount on a claim liability is included in claim expense. The Company’s claim liability and accruals for loss adjustment expenses incurred are disclosed in “Note 10: Loss and Loss Adjustment Expense Reserves.”

Other-Than-Temporary Impairments on Investment Securities

The Company’s consolidated statement of operations reflects the full impairment (the difference between a security’s amortized cost basis and fair value) on debt securities that the Company intends to sell or would more likely than not be required to sell before the expected recovery of the amortized cost basis. For available-for-sale and held-to-maturity debt securities that management has no intent to sell and believes that it is more likely than not will not be required to be sold prior to recovery, only the credit loss component of the impairment is recognized in earnings, while the rest of the fair value loss is recognized in accumulated other comprehensive income. The credit loss component recognized in earnings is identified as the amount of cash flows not expected to be received over the remaining term of the security as projected using the Company’s discounted cash flow projections.

Fee and Reimbursement Revenue Recognition

The Company collects insurance related fees for services performed in connection with certain transactions. In addition, the Company may be entitled to reimbursement of third-party insurance expenses that it incurs in connection with certain transactions. Depending upon the type of fee received and whether it is related to an insurance policy, the fee is either earned when it is received or deferred and earned over the life of the related transaction. Work, waiver and consent, termination, administrative and management fees are earned when the related services are completed and the fee is received. Structuring fees are earned on a straight-line basis over the life of the related insurance policy. Expense reimbursements are recognized when received.

Fees related to investment management services are recognized in earnings over the period that the related services are provided. Asset management fees are typically based on the net asset values of assets under management.

Cash and Other Collateral

Under certain non-insurance derivative contracts entered into by the Company, collateral postings are required by either MBIA or the counterparty when the aggregate market value of derivative contracts entered into with the same counterparty exceeds a predefined threshold. Cash or securities may be posted as collateral at the option of the party posting the collateral. Refer to “Note 8: Derivative Instruments” for further information on these collateral arrangements.

 

9


Table of Contents

MBIA Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

The Company has entered into reverse repurchase agreements that require MBIA to post collateral at a predetermined multiple of the contract amount. Cash or securities may be posted by MBIA under these agreements. As of June 30, 2009, the Company had cash collateral of $6 million posted to counterparties under these term reverse repurchase agreements.

The Company reports cash received or posted in its Consolidated Statements of Cash Flows as either operating, investing or financing consistent with the classification of the asset or liability that created the posting requirement.

Offsetting of Fair Value Amounts Related to Derivative Instruments

In the second quarter of 2009, the Company re-evaluated its election regarding offsetting the fair value amounts recognized for derivative contracts executed with the same counterparty under a master netting agreement under FIN 39. As a result, the Company decided to begin netting the fair value amounts recognized for derivative contracts executed with the same counterparty. The implementation of the counterparty netting resulted in a decrease in the Company’s derivative assets and derivative liabilities of $225 million and $509 million as of June 30, 2009 and December 31, 2008, respectively. Additionally, counterparty netting resulted in a decrease in accrued investment income and other liabilities of $33 million and $52 million as of June 30, 2009 and December 31, 2008, respectively.

Note 3: Recent Accounting Pronouncements

Recently Adopted Accounting Standards

In May 2009, the Financial Accounting Standards Board (“FASB”) issued SFAS 165, “Subsequent Events,” which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before the financial statements are issued. SFAS 165 is effective for the Company in the interim and annual periods ending after June 15, 2009 and should be applied prospectively. The Company adopted this standard as of the second quarter of 2009.

In April 2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly,” which supersedes SFAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active,” to provide additional guidance to highlight and expand on the factors that should be considered when there has been a significant decrease in market activity for a financial asset or financial liability being measured. The FSP also provides additional factors that entities should consider to determine whether events or circumstances indicate that a transaction is or is not orderly (i.e., distressed). FSP FAS 157-4 is effective for the Company in the interim and annual periods ending after June 15, 2009. The Company adopted this standard as of the second quarter of 2009. The adoption of this standard did not have a material effect on the Company’s consolidated balance sheets, results of operations or cash flows.

In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments,” which amends SFAS 115 and SFAS 124, “Accounting for Certain Investments Held by Not-for-Profit Organizations,” to amend the recognition criteria for other-than-temporary impairment guidance and to improve the presentation of other-than-temporary impairments in the financial statements. This FSP replaces the existing requirement that the entity’s management assert it has both the ability and intent to hold an impaired security until recovery with a requirement that management assert (a) it does not have the intent to sell the security and (b) it is more likely than not it would not have to sell the security before recovery of its cost basis. When these two criteria are met, the entity will recognize only the credit component of an other-than-temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income. The Company adopted this standard as of the second quarter of 2009. Upon adoption and implementation of the standard, the Company recorded a cumulative-effect adjustment to reclassify the non-credit component of a previously recognized other-than-temporary impairment from retained earnings to accumulated other comprehensive income. The cumulative-effect adjustment resulted in an increase in retained earnings of $86 million and an increase in accumulated other comprehensive loss of $56 million, net of deferred taxes of $30 million. Refer to “Note 7: Investment Income and Gains and Losses” for further information on the Company’s investment securities and other-than-temporary impairments.

In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments,” which amends SFAS 107, “Disclosures about Fair Value of Financial Instruments,” to require disclosures about fair value of financial instruments within the scope of SFAS 107 in interim and annual financial statements, and the method(s) and significant assumptions used to estimate the fair value of those financial instruments. This FSP also amends APB Opinion No. 28, “Interim Financial Reporting,” to require those disclosures in all interim financial statements. The Company adopted the FSP in the second quarter of 2009. As the standard requires only additional disclosures, the adoption of FSP FAS 107-1 and APB 28-1 did not have an impact on the Company’s consolidated balance sheets, results of operations or cash flows. Refer to “Note 5: Fair Value of Financial Instruments” for further information.

 

10


Table of Contents

MBIA Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

In May 2008, the FASB issued SFAS 163, effective prospectively as of January 1, 2009. SFAS 163 amends SFAS 60, “Accounting and Reporting by Insurance Enterprises” to clarify that financial guarantee insurance contracts issued by insurance enterprises are included within the scope of SFAS 60 as amended by SFAS 163. SFAS 163 amends the recognition and measurement of premium revenue, and claim liabilities on financial guarantee insurance and reinsurance contracts, and expands disclosure requirements. Recognition and measurement of unearned premium revenue and receivable for future premiums are also amended by SFAS 163. SFAS 163 does not apply to financial guarantee insurance contracts that are derivative instruments included within the scope of SFAS 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended. SFAS 163 nullifies the guidance for financial guarantee insurance contracts included in Emerging Issues Task Force Issue No. (“EITF”) 85-20, “Recognition of Fees for Guaranteeing a Loan.” Refer to “Note 4: Insurance Premiums” for disclosures related to premiums and “Note 10: Loss and Loss Adjustment Expense Reserves” for disclosures related to loss reserves.

Upon the adoption and implementation of SFAS 163, the Company recorded a cumulative transition adjustment of $55 million net of tax, $83 million pre-tax, as an increase to its beginning retained earnings balance as of January 1, 2009. The cumulative transition adjustment represents the recognized changes in assets and liabilities resulting from the adoption of SFAS 163. The following table summarizes the adjustments made to the Company’s consolidated assets and liabilities as of January 1, 2009 on a pre-tax basis:

 

In thousands

   Increase/
      (Decrease)      
 

Assets:

  

Deferred acquisition costs

     $ 8,731   

Prepaid reinsurance premiums

     313,660   

Reinsurance recoverable on paid and unpaid losses

     4,563   

Premiums receivable

     2,287,451   

Deferred income taxes, net

     (27,170

Liabilities:

  

Unearned premium revenue

     $ 2,381,487   

Loss and LAE reserves

     (174,220

Reinsurance premiums payable

     324,262   

In December 2008, the FASB issued FSP FAS 140-4 and FASB Interpretation No. (“FIN”) 46(R)-8, “Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities,” which requires enhanced disclosures about transfers of financial assets and involvement with variable interest entities (“VIEs”). The Company adopted FSP FAS 140-4 and FIN 46(R)-8 for financial statements prepared as of December 31, 2008 and is effective for interim reporting periods until the adoption of SFAS 167, “Amendments to FASB Interpretation No. 46(R).” Refer to “Recent Accounting Developments” for discussion of SFAS 167. Since FSP FAS 140-4 and FIN 46(R)-8 only requires additional disclosures concerning transfers of financial assets and interests in VIEs, adoption of FSP FAS 140-4 and FIN 46(R)-8 did not affect the Company’s consolidated balance sheets, results of operations or cash flows. Refer to “Note 9: Variable Interest Entities” for disclosures required by FSP FAS 140-4 and FIN 46(R)-8.

In June 2008, the FASB issued FSP No. EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities,” effective January 1, 2009 with retrospective application. The FSP requires companies to consider unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents as participating securities, which shall be included in the calculation of basic and diluted earnings per share. The Company’s restricted and deferred share awards meet the definition of participating securities. The Company adopted the FSP on January 1, 2009, which resulted in an $0.04 reduction in its previously reported loss per common share for the six months ended June 30, 2008. The previously reported amounts for basic earnings per share for the three and six months ended June 30, 2008 were income of $7.25 and a loss of $3.37, respectively. The previously reported amounts for diluted earnings per share for the three and six months ended June 30, 2008 were income of $7.14 and a loss of $3.37, respectively.

In March 2008, the FASB issued SFAS 161, “Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133.” SFAS 161 expands the disclosure requirements about an entity’s derivative instruments and hedging activities. The disclosure provisions of SFAS 161 apply to all entities with derivative instruments subject to SFAS 133 and its related interpretations. The provisions also apply to related hedged items, bifurcated derivatives, and non-derivative instruments that are designated and qualify as hedging instruments. The Company adopted the disclosure provisions of SFAS 161 on January 1, 2009. Since SFAS 161 requires only additional disclosures concerning derivatives and hedging activities, adoption of SFAS 161 did not affect the Company’s consolidated balance sheets, results of operations or cash flows. Refer to “Note 8: Derivative Instruments” for disclosures required by SFAS 161.

In February 2008, the FASB issued FSP FAS 157-2, “Effective Date of FASB Statement No. 157,” which delayed the effective date of SFAS 157, “Fair Value Measurements,” to fiscal years beginning after November 15, 2008, for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The adoption of FSP FAS 157-2 on January 1, 2009 did not have a material impact on the Company’s consolidated balance sheets, results of operations or cash flows.

 

11


Table of Contents

MBIA Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

In December 2007, the FASB issued SFAS 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB 51.” SFAS 160 requires reporting entities to present noncontrolling (minority) interest as equity (as opposed to liability or mezzanine equity) and provides guidance on the accounting for transactions between an entity and noncontrolling interests. The presentation and disclosure requirements are to be applied retrospectively. The Company adopted SFAS 160 on January 1, 2009 and resulted in preferred stock issued by a subsidiary to be reclassified from minority interest to a separate component of equity. The adoption of SFAS 160 did not have a material impact on the Company’s consolidated balance sheets, results of operations or cash flows.

Recent Accounting Developments

In June 2009, the FASB issued SFAS 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162.” The FASB Accounting Standards Codification (“Codification”) will become the single source of authoritative GAAP to be applied by nongovernmental entities. On the effective date of SFAS 168, the Codification will supersede all then-existing non-SEC accounting and reporting standards. SFAS 168 will be effective for the Company for financial statements issued for interim and annual periods ending after September 15, 2009. The Company will adopt this standard as of the third quarter of 2009. The Codification is not intended to change GAAP but rather reorganize divergent accounting literature into an accessible and user-friendly system which will materially impact cited references of GAAP in the Company’s Notes to Consolidated Financial Statements.

In June 2009, the FASB issued SFAS 167 which amends FIN 46(R) to include qualifying special purpose entities (“QSPEs”) in its scope and to require the holder of a variable interest or variable interests in a VIE to determine whether it holds a controlling financial interest in a VIE. A holder of a variable interest (or combination of variable interests) that provides a controlling financial interest in a VIE is considered the primary beneficiary and is required to consolidate the VIE. SFAS 167 amends FIN 46(R) to deem controlling financial interest as both a) the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and b) the obligation to absorb losses or the rights to receive benefits of the VIE that could potentially be significant to the VIE. SFAS 167 amends FIN 46(R) to eliminate the quantitative approach for determining the primary beneficiary of a VIE. SFAS 167 requires an ongoing reassessment of whether a holder of a variable interest is the primary beneficiary of a VIE, which amends the guidance in FIN 46(R) that requires reconsideration of whether a holder of a variable interest is the primary beneficiary only when specific events occurred. SFAS 167 nullifies FSP FAS 140-4 and FIN 46(R)-8 and amends FIN 46(R) to require enhanced disclosures for a holder of a variable interest in a VIE that are generally consistent with the disclosures required by FSP FAS 140-4 and FIN 46(R)-8. SFAS 167 is effective for the Company as of January 1, 2010 and earlier application is prohibited. The Company is currently evaluating the potential impact of adopting this standard.

In June 2009, the FASB issued SFAS 166, “Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140,” to remove the concept of a QSPE. It also clarifies whether a transferor has surrendered control over transferred financial assets and meets the conditions to derecognize transferred financial assets or a portion of an entire financial asset that meets the definition of a participating interest. SFAS 166 amends SFAS 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” to require enhanced disclosures about transfers of financial assets and a transferor’s continuing involvement with transferred financial assets. SFAS 166 is effective for the Company as of January 1, 2010 and earlier application is prohibited. The Company is currently evaluating the potential impact of adopting this standard.

Note 4: Insurance Premiums

The Company recognizes and measures premiums related to financial guarantee (non-derivative) insurance and reinsurance contracts in accordance with SFAS 163. Refer to “Note 2: Significant Accounting Policies” and “Note 3: Recent Accounting Pronouncements” for a description of the Company’s accounting policy for insurance premiums and the impact of the adoption of SFAS 163 on the Company’s financial statements.

As of June 30, 2009, the Company reported premiums receivable of $2.1 billion primarily related to installment policies for which premiums will be collected over the estimated term of the contracts. Premiums receivable for an installment policy is initially measured at the present value of premiums expected to be collected over the expected period or contract period of the policy using a risk-free discount rate. Premiums receivable for policies that use the expected period of risk due to expected prepayments are adjusted in subsequent measurement periods when prepayment assumptions change using the risk-free discount rate as of remeasurement date. The weighted average risk-free rate used to discount future installment premiums was 2.92% and the weighted average expected collection term of the premiums receivable was 9.16 years. For the three and six months ended June 30, 2009, the accretion of the premiums receivable was $15 million and $28 million, respectively, and is reported in “Scheduled premiums earned” on the Company’s Consolidated Statements of Operations.

As of June 30, 2009, the Company reported reinsurance premiums payable of $297 million, which represents the portion of the Company’s premiums receivable that is due to reinsurers. The reinsurance premiums payable is accreted and paid to reinsurers as premiums due to MBIA are accreted and collected.

 

12


Table of Contents

MBIA Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

The following table presents a roll forward of the Company’s premiums receivable for the six months ended June 30, 2009:

 

In millions    Six Months Ended June 30, 2009
    

 

Adjustments

          

Premiums
Receivable as of

December 31,
2008

   SFAS 163
Transition
  Adjustment  
      Premium   
Payments
Received
       Premiums   
from New
Business
Written
      Changes in   
Expected
Term of
Policies
       Accretion of  
Premiums
Receivable
Discount
         Other           Premiums
   Receivable as   
of June 30,

2009
     Reinsurance  
Premiums

Payable as of
June 30, 2009
  $ 8      $ 2,288      $ (167     $ -      $ (20     $ 28      $ (6     $ 2,131      $ 297
                                                              

The following table presents the undiscounted future amount of premiums expected to be collected and the period in which those collections are expected to occur:

 

In millions

   Expected
      Collection of      
Premiums

Three months ended:

  

September 30, 2009

     $ 76

December 31, 2009

     80

Twelve months ended:

  

December 31, 2010

     279

December 31, 2011

     248

December 31, 2012

     218

December 31, 2013

     176

Five years ended:

  

December 31, 2018

     640

December 31, 2023

     408

December 31, 2028 and thereafter

     618
      

Total

     $ 2,743
      

For the three and six months ended June 30, 2009, the Company reported premiums earned of $178 million and $407 million, respectively, which includes $153 million and $348 million of scheduled premiums earned and $25 million and $59 million of refunding premiums earned, respectively. Refunding premiums earned represent premiums earned on policies for which the underlying insured obligations have been refunded, called, or terminated and for which MBIA’s obligation has been extinguished.

The following table presents the expected unearned premium revenue balance and the future expected premiums earned revenue as of and for the periods presented:

 

13


Table of Contents

MBIA Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

          

    Future Expected Premium    

Earnings

         

In millions

         Unearned      
Premium
Revenue
       Upfront            Installments            Accretion        Total Future
    Expected Premium    
Earnings

Three months ended:

              

June 30, 2009

     $ 5,337            

September 30, 2009

     5,186      $ 78      $ 73      $ 15      $ 166

December 31, 2009

     5,039      77      70      14      161

Twelve months ended:

              

December 31, 2010

     4,488      293      258      54      605

December 31, 2011

     3,992      269      227      50      546

December 31, 2012

     3,555      248      189      46      483

December 31, 2013

     3,176      230      149      42      421

Five years ended:

              

December 31, 2018

     1,756      892      528      162      1,582

December 31, 2023

     892      543      321      103      967

December 31, 2028 and thereafter

     -      511      381      126      1,018
                              

Total

        $ 3,141      $ 2,196      $ 612      $ 5,949
                              

Note 5: Fair Value of Financial Instruments

Financial Instruments

The following table presents the carrying value and fair value of financial instruments reported on the Company’s consolidated balance sheets as of June 30, 2009 and December 31, 2008:

 

     June 30, 2009    December 31, 2008

In millions

       Carrying Value            Estimated Fair    
Value
       Carrying Value            Estimated Fair    
Value

Assets:

           

Fixed-maturity securities and short-term investments, held as available-for-sale, at fair value

   $ 13,899    $ 13,899    $ 16,763    $ 16,763

Investments held-to-maturity, at amortized cost

     3,958      3,408      3,656      3,595

Other investments

     417      417      220      220

Cash and cash equivalents

     900      900      2,280      2,280

Receivable for investments sold

     304      304      77      77

Derivative assets

     755      755      911      911

Note Receivable

     470      470      423      423

Liabilities:

           

Investment agreements

     3,027      2,972      4,667      5,182

Medium-term notes

     4,136      2,037      6,340      4,773

Variable interest entity notes

     2,637      2,419      1,792      1,792

Securities sold under agreements to repurchase

     691      657      803      758

Long-term debt

     2,517      1,276      2,396      1,367

Payable for investments purchased

     37      37      -      -

Derivative liabilities

     4,189      4,189      6,471      6,471

Warrants

     29      29      22      22

Financial Guarantees:

           

Gross

     6,598      6,592      4,982      6,078

Ceded

     503      432      390      407

 

14


Table of Contents

MBIA Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

Valuation Techniques

The valuation techniques for fair valuing financial instruments included in the preceding table are described below. The Company’s assets and liabilities recorded at fair value have been categorized according to the fair value hierarchy prescribed by SFAS 157 within the following “Fair Value Measurements” section.

Fixed-Maturity Securities Held As Available-for-Sale

U.S. Treasury and government agency—U.S. Treasury securities are liquid and have quoted market prices. Fair value of U.S. Treasuries is based on live trading feeds. U.S. Treasury securities are categorized in Level 1 of the fair value hierarchy. Government agency securities include debentures and other agency mortgage pass-through certificates as well as to-be-announced (“TBA”) securities. TBA securities are liquid and have quoted market prices based on live data feeds. Fair value of mortgage pass-through certificates is obtained via a simulation model, which considers different rate scenarios and historical activity to calculate a spread to the comparable TBA security. Government agency securities use market-based and observable inputs. As such, these securities are classified as Level 2 of the fair value hierarchy.

Foreign governments—The fair value of foreign government obligations is generally based on observable inputs in active markets. When quoted prices are not available, fair value is determined based on a valuation model that has as inputs interest rate yield curves, cross-currency basis index spreads, and country credit spreads for structures similar to the bond in terms of issuer, maturity and seniority. These bonds are generally categorized in Level 2 of the fair value hierarchy. Bonds that contain significant inputs that are not observable are categorized as Level 3 while bonds that have quoted prices in an active market are classified as Level 1.

Corporate obligations—The fair value of corporate bonds is obtained using recently executed transactions or market price quotations where observable. When observable price quotations are not available, fair value is determined based on cash flow models with yield curves, bond or single name CDS spreads and diversity scores as key inputs. Corporate bonds are generally categorized in Level 2 of the fair value hierarchy; in instances where significant inputs are unobservable, they are categorized in Level 3 of the hierarchy. Corporate obligations may be classified as Level 1 if quoted prices in an active market are available.

Mortgage-backed securities and asset-backed securities—Mortgage-backed securities (“MBSs”) and ABSs are valued based on recently executed prices. When position-specific external price data is not observable, the valuation is based on prices of comparable securities. In the absence of market prices, MBSs and ABSs are valued as a function of cash flow models with observable market-based inputs (e.g. yield curves, spreads, prepayments and volatilities). MBSs and ABSs are categorized in Level 3 if significant inputs are unobservable, otherwise they are categorized in Level 2 of the fair value hierarchy.

The Company records under the fair value provisions of SFAS 155 certain structured investments, which are included in available-for-sale securities. Fair value is derived using quoted market prices or cash flow models. As these securities are not actively traded, certain significant inputs are unobservable. These investments are categorized as Level 3 of the fair value hierarchy.

State and municipal bonds—The fair value of state and municipal bonds is estimated using recently executed transactions, market price quotations and pricing models that factor in, where applicable, interest rates, bond or CDS spreads and volatility. These bonds are generally categorized in Level 2 of the fair value hierarchy; in instances where significant inputs are unobservable, they are categorized in Level 3.

Investments Held-To-Maturity

The fair value of investments held-to-maturity is obtained using recently executed transactions or market price quotations where observable. When position-specific external price data is not observable, the valuation is based on prices of comparable securities. When observable price quotations are not available, fair value is determined based on internal cash flow models with yield curves and bond spreads of comparable entities as key inputs.

Other Investments

Other investments include the Company’s interest in equity securities (including exchange-traded closed-end funds), money market mutual funds and perpetual securities. Fair value of other investments is determined by using quoted prices, live trades, or valuation models that use market-based and observable inputs. Other investments are categorized in Level 1, Level 2 or Level 3 of the fair value hierarchy.

Other investments also include premium tax credit investments that are carried at amortized cost. The carrying value of these investments approximates fair value.

 

15


Table of Contents

MBIA Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

Cash and Cash Equivalents, Receivable for Investments Sold and Payable for Investments Purchased

The carrying amounts of cash and cash equivalents, receivable for investments sold and payable for investments purchased approximate their fair values as they are short-term in nature.

Note Receivable

The note receivable represents a non-recourse loan secured by collateral pledged by the counterparty to the note receivable. The fair value of the note receivable is calculated as the most recent appraised value of the underlying collateral pledged against the note receivable. The appraisal was performed by an independent third party during the current year.

Investment Agreements

The fair values of investment agreements are estimated using discounted cash flow calculations based upon interest rates currently being offered for similar agreements with maturities consistent with those remaining for the investment agreements being valued. These agreements contain collateralization and termination agreements that sufficiently mitigate the nonperformance risk of the Company.

Medium-Term Notes

The fair values of medium-term notes recorded at amortized cost are estimated using discounted cash flow calculations based upon interest rates currently being offered for similar notes with maturities consistent with those remaining for the medium-term notes being valued. Nonperformance risk of the Company is incorporated into the valuation by using the Company’s own credit spreads.

The Company has elected to record at fair value under the provisions of SFAS 155 four medium-term notes. Fair value of such notes is derived using quoted market prices or an internal cash flow model. Significant inputs into the valuation include yield curves and spreads to the swap curve. As these notes are not actively traded, certain significant inputs (e.g. spreads to the swap curve) are unobservable. These notes are categorized as Level 3 of the fair value hierarchy.

Variable Interest Entity Notes

The fair value of variable interest entity notes is obtained using recently executed transactions or market price quotations where observable. When position-specific external price data is not observable, the valuation is based on prices of comparable securities. When observable price quotations are not available, fair value is determined based on internal cash flow models of the underlying collateral with yield curves and bond spreads of comparable entities as key inputs.

Securities Sold Under Agreements to Repurchase

The fair value is estimated using discounted cash flow calculations based upon interest rates currently being offered for similar agreements. Securities sold under agreements to repurchase include term reverse repurchase agreements that contain credit enhancement provisions via over-collateralization agreements to sufficiently mitigate the nonperformance risk of the Company.

Long-term Debt

Long-term debt consists of long-term notes, debentures, surplus notes and floating rate liquidity loans. The fair value of long-term notes, debentures and surplus notes are estimated based on quoted market prices for the same or similar securities. For floating rate liquidity loans in Triple-A One Funding Corporation (“Triple-A One”), as these loans are non-recourse and fully backed by a pool of underlying assets, the fair values are estimated using discounted cash flow calculations based upon the underlying collateral pledged to the specific loans.

Derivatives—Investment Management Services

The investment management services operations have entered into derivative transactions primarily consisting of interest rate, cross currency, credit default and total return swaps and principal protection guarantees. These over-the-counter derivatives are valued using industry standard models developed by vendors. Observable and market-based inputs include interest rate yields, credit spreads and volatilities. These derivatives are categorized as Level 2 within the fair value hierarchy except with respect to certain complex derivatives where observable pricing inputs were not able to be obtained, which have been categorized as Level 3.

 

16


Table of Contents

MBIA Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

In compliance with requirements of SFAS 157, the Company considers its own credit risk and that of counterparties when valuing derivative assets and liabilities. The Company has policies and procedures in place regarding counterparties, including review and approval of the counterparty and the Company’s exposure limit, collateral posting requirements, collateral monitoring and margin calls on collateral. The Company manages counterparty credit risk on an individual counterparty basis through master netting arrangements covering derivative transactions in the Investment Management Services and Corporate operations. These agreements allow the Company to contractually net amounts due from a counterparty with those amounts due to such counterparty when certain triggering events occur. The Company only executes swaps under master netting agreements, which typically contain mutual credit downgrade provisions that generally provide the ability to require assignment or termination in the event either the Company or the counterparty is downgraded below a specified credit rating. The netting agreements minimize the potential for losses related to credit exposure and thus serve to mitigate the Company’s nonperformance risk under these derivatives.

In certain cases, the Company also manages credit risk through collateral agreements that give the Company the right to hold or the obligation to provide collateral when the current market value of derivative contracts exceeds an exposure threshold. Under these arrangements, the Company may receive or provide U.S. Treasury and other highly rated securities or cash to secure the derivative. The delivery of high-quality collateral can minimize credit exposure and mitigate the potential for nonperformance risk impacting the fair value of the derivatives.

Derivatives—Insurance

The derivative contracts that the Company insures cannot be legally traded and generally do not have observable market prices. In the cases with no active price quote, the Company uses a combination of internal and third-party models to estimate the fair value of these contracts. Most insured CDSs are valued using an enhanced Binomial Expansion Technique (“BET”) model (originally developed by Moody’s). Significant inputs include collateral spreads, diversity scores and recovery rates. For a limited number of other insured derivatives, the Company uses industry standard models as well as proprietary models such as Black-Scholes option models and dual-default models, depending on the type and structure of the contract. The valuation of these derivatives includes the impact of its own credit standing and the credit standing of its reinsurers. All of these derivatives are categorized as Level 3 of the fair value hierarchy as a significant percentage of their value is derived from unobservable inputs. For insured swaps (other than CDSs), the Company uses internally and vendor developed models with market-based inputs (e.g. interest rate, foreign exchange rate, spreads), and are classified as Level 2 within the fair value hierarchy.

Insured Derivatives

The majority of the Company’s derivative exposure is in the form of credit derivative instruments insured by MBIA Corp. Prior to 2008, MBIA Corp. insured CDSs entered into by LaCrosse Financial Products LLC (“LaCrosse”), an entity that is consolidated into MBIA’s financial statements under the FIN 46(R) criteria. In February 2008, the Company ceased insuring such derivative instruments except in transactions reducing its existing insured derivative exposure.

In most cases, the Company’s insured credit derivatives are measured at fair value as they do not qualify for the financial guarantee scope exception under SFAS 133. Because the Company’s insured derivatives are highly customized and there is generally no observable market for these derivatives, the Company estimates their value in a hypothetical market based on internal and third-party models simulating what a bond insurer would charge to guarantee the transaction at the measurement date. This pricing would be based on expected loss of the exposure calculated using the value of the underlying collateral within the transaction structure.

Description of MBIA’s Insured Credit Derivatives

The majority of MBIA’s insured credit derivatives reference structured pools of cash securities and CDSs. The Company generally insured the most senior liabilities of such transactions, and at transaction closing the Company’s exposure generally had more subordination than needed to achieve triple-A ratings from credit rating agencies (referred to as “Super Triple-A” exposure). The gross notional amount of such transactions totaled $133.6 billion as of June 30, 2009. The collateral backing the Company’s insured derivatives was cash securities and CDSs referencing primarily corporate, asset-backed, residential mortgage-backed, commercial mortgage-backed, commercial real estate (“CRE”) loans, and collateralized debt obligation (“CDO”) securities.

Most of MBIA’s insured CDS contracts require that MBIA make payments for losses of the principal outstanding under the contracts when losses on the underlying referenced collateral exceed a predetermined deductible. The total notional amount and MBIA’s maximum payment obligation under these contracts as of June 30, 2009 was $79.1 billion. The underlying referenced collateral for contracts executed in this manner largely consist of investment grade corporate debt, structured commercial mortgage-backed securities (“CMBS”) pools and, to a lesser extent, corporate and multi-sector CDOs (in CDO-squared transactions).

 

17


Table of Contents

MBIA Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

The Company also has guarantees under principal protection fund programs, which are also accounted for as derivatives. Under these programs the Company guaranteed the return of principal to investors and is protected by a daily portfolio rebalancing obligation that is designed to minimize the risk of loss to MBIA. As of June 30, 2009, the maximum amount of future payments that the Company would be required to make under these guarantees was $49 million, but the Company has not made any payments to date relating to these guarantees. The unrealized gains (losses) on these derivatives for the years ended 2007 and 2008 and the six months ended June 30, 2009 were $0, reflecting the extremely remote likelihood that MBIA will incur a loss.

Changes in fair value of the insured derivatives are recorded in “Net change in fair value of insured derivatives.” The net change in the fair value of the Company’s insured derivatives has two primary components; (i) realized gains (losses) and other settlements on insured derivatives and (ii) unrealized gains (losses) on insured derivatives. “Realized gains (losses) and other settlements on insured derivatives” include (i) net premiums received and receivable on written CDS contracts, (ii) net premiums paid and payable to reinsurers in respect of CDS contracts, (iii) net amounts received or paid on reinsurance commutations, (iv) losses paid and payable to CDS contract counterparties due to the occurrence of a credit event or settlement agreement, (v) losses recovered and recoverable on purchased CDS contracts due to the occurrence of a credit event or commutation agreement and (vi) fees relating to CDS contracts. The “Unrealized gains (losses) on insured derivatives” include all other changes in fair value of the derivative contracts.

Considerations Regarding an Observable Market for MBIA’s Insured Derivatives

In determining fair value, the Company’s valuation approach uses observable market prices if available and reliable. Market prices are generally available for traded securities and market standard CDSs but are less available or accurate for highly customized CDSs. Most of the derivative contracts the Company insures are the latter as they are non-traded structured credit derivative transactions. In contrast, typical market CDSs are standardized, liquid instruments that reference tradable securities such as corporate bonds that themselves have observable prices. These market standard CDSs also involve collateral posting, and upon a default of the underlying reference obligation, can be settled in cash.

MBIA’s insured CDS contracts do not contain typical CDS market standard features as they have been designed to replicate the Company’s financial guarantee insurance policies. At inception of the transactions, the Company’s insured CDS instruments provided protection on pools of securities or CDSs with either a stated deductible or subordination beneath the MBIA-insured tranche. The Company is not required to post collateral in any circumstances. Payment by MBIA under an insured CDS is due after the aggregate amount of defaults of the underlying reference obligations, based on fair value determination with respect to each defaulted reference obligation, exceed the deductible or subordination in the transaction. Once such defaults exceed the deductible or the subordination MBIA is obligated to pay the fair value, as determined under the ISDA contract, of any subsequent reference obligations that default. Some contracts also provide for further deferrals of payment at the Company’s option. In the event of MBIA Corp’s failure to pay a claim under the insured CDS or the insolvency of MBIA, the insured CDS contract provides that the counterparty can terminate the CDS and make a claim for the amount due, which would be based on the fair value of the insured CDS at such time. An additional difference between the Company’s CDS and typical market standard contracts is that the Company’s contract, like its financial guarantee contracts, cannot be accelerated by the counterparty in the ordinary course of business. Similar to the Company’s financial guarantee insurance, all insured CDS policies are unconditional and irrevocable and the Company’s obligations thereunder cannot be transferred unless the transferees are also licensed to write financial guarantee insurance policies. Note that since insured CDS contracts are accounted for as derivatives under SFAS 133, the Company did not defer the charges associated with underwriting the CDS policies and they were expensed at origination.

The Company’s payment obligations are structured to prevent large one-time claims upon an event of default of underlying reference obligations and to allow for payments over time (i.e. “pay-as-you-go” basis) or at final maturity. However, the size of payments will ultimately depend on the timing and magnitude of losses. There are three types of payment provisions:

 

  (i) timely interest and ultimate principal;

 

  (ii) ultimate principal only at final maturity; and

 

  (iii) payments upon settlement of individual referenced collateral losses in excess of policy-specific deductibles and subordination. The deductible or loss threshold is the amount of losses experienced with respect to the underlying or referenced collateral that would be required to occur before a claim against an MBIA insurance policy can be made.

MBIA had transferred some of the risk of loss on these contracts using reinsurance to other financial guarantee insurance and reinsurance companies. The fair value of the transfer under the reinsurance contract with the reinsurers is accounted for as a derivative asset. These derivative assets are valued consistently with the Company’s SFAS 157 valuation policies.

 

18


Table of Contents

MBIA Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

Valuation Modeling of MBIA-Insured Derivatives

As a result of the significant differences between market standard CDS contracts and the CDS contracts insured by MBIA, the Company believes there are no relevant third-party exit value market observations for its insured structured credit derivative contracts and, therefore, no principal market as described in SFAS 157. In the absence of a principal market, the Company values these insured credit derivatives in a hypothetical market where market participants are assumed to be other comparably-rated primary financial guarantors. Since there are no observable transactions in the financial guarantee market that could be used to value the Company’s transactions, the Company generally uses internal and third-party models, depending on the type and structure of the contract, to estimate the fair value of its insured derivatives.

The Company’s primary model for insured CDSs simulates what a bond insurer would charge to guarantee a transaction at the measurement date, based on the market-implied default risk of the underlying collateral and the remaining structural protection in a deductible or subordination. This approach assumes that bond insurers would be willing to accept these contracts from the Company at a price equal to what they could issue them for in the current market. While the premium charged by financial guarantors is not a direct input into the Company’s model, the model estimates such premium and this premium increases as the probability of loss increases, driven by various factors including rising credit spreads, negative credit migration, lower recovery rates, lower diversity score and erosion of deductible or subordination.

1. Valuation Model Overview

Approximately 99.3% of the balance sheet fair value of insured credit derivatives as of June 30, 2009 is valued using the BET model, which is a probabilistic approach to calculating expected loss on the Company’s exposure based on market variables for underlying referenced collateral. The BET was originally developed by Moody’s to estimate a probability distribution of losses on a diverse pool of assets. The Company has made modifications to this technique in an effort to incorporate more market information and provide more flexibility in handling pools of dissimilar assets: a) the Company uses market credit spreads to determine default probability instead of using historical loss experience, and b) for collateral pools where the spread distribution is characterized by extremes, the Company models each segment of the pool individually instead of using an overall pool average.

There are three steps within BET modeling to arrive at fair value for a structured transaction: pool loss estimation, loss allocation to separate tranches of the capital structure and calculation of the change in value.

 

   

The pool loss estimation is calculated by reference to the following (described in further detail under “Model Inputs” below):

 

   

credit spreads of the underlying collateral. This is based on actual spreads or spreads on similar collateral with similar ratings, or in some cases is benchmarked,

 

   

diversity score of the collateral pool as an indication of correlation of collateral defaults, and

 

   

recovery rate for all defaulted collateral.

 

   

Losses are allocated to specific tranches of the transaction according to their subordination level within the capital structure.

 

   

For example, if the expected total collateral pool loss is 4% and the transaction has an equity tranche and three progressively more senior C, B, and A tranches with corresponding underlying subordination levels of 0%, 3%, 5% and 10%, then the 4% loss will have the greatest impact on the equity tranche. It will have a lower, but significant impact on the C tranche and a lesser impact on the B tranche. MBIA usually insures the Super Triple-A tranche with lowest exposure to collateral losses due to the underlying subordination provided by all junior tranches.

 

   

At any point in time, the unrealized gain or loss on a transaction is the difference between the original price of the risk (the original market-implied expected loss) and the current price of the risk based on the assumed market-implied expected losses derived from the model.

Additional structural assumptions of the model worth noting are listed below:

 

   

Default probability is determined by three factors: credit spread, recovery rate after default and the time period under risk.

 

   

Defaults are modeled spaced out evenly over time.

 

   

Collateral is generally considered on an average basis rather than being modeled separately.

 

   

Correlation is modeled using a diversity score, which is calculated based on rules regarding industry or sector concentrations. Recovery rates are based on historical averages and updated based on market evidence.

 

19


Table of Contents

MBIA Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

The Company reviews the model results on a quarterly basis to assess the appropriateness of the assumptions and results in light of current market activity and conditions. This review is performed by internal staff with relevant expertise. If live market spreads are observable for similar transactions, those spreads are an integral part of the analysis. For example, new insured transactions that resemble existing (previously insured) transactions would be considered, as would negotiated settlements of existing transactions. However, this data has been scarce or non-existent in recent periods. As a result, the Company’s recent reviews have focused more on internal consistency and relativity, as well as the reasonableness of modeled results given current market conditions.

2. Model Strengths and Weaknesses

The primary strengths of this CDS valuation model are:

 

  1) The model takes account of transaction structure and key drivers of market value. The transaction structure includes par insured, weighted average life, level of deductible or subordination and composition of collateral.

 

  2) The model is a well-documented, consistent approach to marking positions that minimizes the level of subjectivity. Model structure, inputs and operation are well documented both by Moody’s and by MBIA’s internal controls, creating a strong controls process in execution of the model. The Company has also developed a hierarchy for usage of various market-based spread inputs that reduces the level of subjectivity, especially during periods of high illiquidity.

 

  3) The model uses market inputs with the most relevant being credit spreads for underlying referenced collateral, assumed recovery rates specific to the type and rating of referenced collateral, and the diversity score of the entire collateral pool. These are key parameters affecting the fair value of the transaction and all inputs are market-based whenever available and reliable.

The primary weaknesses of this CDS valuation model are:

 

  1) There is no longer a market in which to test and verify the fair values generated by the Company’s model, and at June 30, 2009, the model inputs were also either unobservable or highly illiquid, adversely impacting their reliability.

 

  2) There are diverse approaches to estimating fair value of such transactions among other financial guarantee insurance companies.

 

  3) Results may be affected by averaging of spreads and use of a single diversity factor, rather than using specific spreads for each piece of underlying collateral and collateral-specific correlation assumptions. While more specific data could improve the reliability of the results, it is not currently available and neither is a model that could produce more reliable results in the absence of that data.

3. Model Inputs

Specific detail regarding these model inputs are listed below:

a. Credit spreads

The average spread of collateral is a key input as the Company assumes credit spreads reflect the market’s assessment of default probability for each piece of collateral. Spreads are obtained from market data sources published by third parties (e.g. dealer spread tables for assets most closely resembling collateral within the Company’s transactions) as well as collateral-specific spreads on the underlying reference obligations provided by trustees or market sources. Also, when these sources are not available, the Company benchmarks spreads for collateral against market spreads, including in some cases, assumed relationships between the two spreads. This data is reviewed on an ongoing basis for reasonableness and applicability to the Company’s derivative portfolio. The Company also calculates spreads based on quoted prices and on internal assumptions about expected life, when pricing information is available and spread information is not.

The actual calculation of pool average spread varies depending on whether the Company is able to use collateral-specific credit spreads or generic spreads as an input.

 

   

If collateral-specific spreads are available, the spread for each individual piece of collateral is identified and a weighted average is calculated by weighting each spread by the corresponding par exposure.

 

   

If collateral-specific credit spreads are not available, the Company uses generic spread tables based on asset class and average rating of the collateral pool. Average credit rating for the collateral is calculated from the weighted average rating factor (“WARF”) for the collateral portfolio and then mapped to an appropriate spread. WARF is based on a 10,000 point scale designed by Moody’s where lower numbers indicate better credit quality. Ratings are not spaced equally on this scale because the marginal difference in default probability at higher rating quality is much less than at lower rating levels. The Company obtains WARF from the most recent trustee’s report or the Company calculates it based on the collateral credit ratings. For a WARF calculation, the Company identifies the credit ratings of all collateral (using, in order of preference as available, Moody’s, S&P or Fitch ratings), then converts those credit ratings into a rating factor on the WARF scale, averages those factors (weighted by par) to create a portfolio WARF, and then maps the portfolio WARF back into an average credit rating for the pool. The Company then applies this pool rating to a market spread table or index

 

20


Table of Contents

MBIA Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

 

appropriate for the collateral type to determine the generic spread for the pool, which becomes the market-implied default input into the BET model.

 

   

If there is a high dispersion of ratings within a collateral pool, the collateral is segmented into different rating buckets and each bucket is used in calculating the overall average.

 

   

When spreads are not available on either a collateral-specific basis or ratings-based generic basis, MBIA uses its hierarchy of spread sources (see below) to identify the most appropriate spread for that asset class to be used in the model.

The Company uses the spread hierarchy listed below in determining which source of spread information to use, with the rule being to use CDS spreads where available and cash security spreads as the next alternative. Cash spreads reflect trading activity in funded fixed-income instruments while CDS spreads reflect trading levels for non-funded derivative instruments. While both markets are driven partly by an assessment of the credit quality of the referenced security, there are factors which create significant differences, such as CDS spreads can be driven by speculative activity since the CDS market facilitates both long and short positions without ownership of the underlying security, allowing for significant leverage.

Spread Hierarchy:

 

  1) Actual collateral-specific credit spreads. If up-to-date and reliable market-based spreads are available, they are used.

 

  2) Sector-specific spreads (JP Morgan and Banc of America Securities-Merrill Lynch (“BAS-ML”) spread tables by asset class and rating).

 

  3) Corporate spreads (Bloomberg and Risk Metrics spread tables based on rating).

 

  4) Benchmark from most relevant spread source (for example, if no specific spreads are available and corporate spreads are not directly relevant, an assumed relationship is used between corporate spreads or sector-specific spreads and collateral spreads). Benchmarking can also be based on a combination of market spread data and fundamental credit assumptions.

For example, if current market-based spreads are not available then the Company applies either sector-specific spreads from spread tables provided by dealers or corporate cash spread tables. The sector-specific spread applied depends on the nature of the underlying collateral. Transactions with corporate collateral use the corporate spread table. Transactions with asset-backed collateral use one or more of the dealer asset-backed tables. If there are no observable market spreads for the specific collateral, and sector-specific and corporate spread tables are not appropriate to estimate the spread for a specific type of collateral, the Company uses the fourth alternative in its hierarchy. An example is tranched corporate collateral, where the Company applies corporate spreads as an input with an adjustment for its tranched exposure.

As of June 30, 2009, actual collateral credit spreads were used in one transaction. Sector-specific spreads were used in 19% of the transactions. Corporate spreads were used in 29% of the transactions and spreads benchmarked from the most relevant spread source (number 4 above) were used for 52% of the transactions. When determining the percentages above, there were some transactions where MBIA incorporated multiple levels within the hierarchy. For example, for some transactions MBIA used actual collateral-specific credit spreads (number 1 above) in combination with a calculated spread based on an assumed relationship (number 4 above). In those cases, MBIA classified the transaction as being benchmarked from the most relevant spread source (number 4 above) even though the majority of the average spread was from actual collateral-specific spreads. The spread source can also be identified by whether or not it is based on collateral WARF. No Level 1 spreads are based on WARF, all Level 2 and 3 spreads are based on WARF and some Level 4 spreads are based on WARF. WARF-sourced and/or ratings-sourced credit spread was used for 94% of the transactions.

In the second quarter of 2009, a reliable source of current credit spreads for residential mortgage-backed securities (“RMBS”) and ABS CDO collateral was not identified as the previous sources stopped publishing this information. These spreads are primarily used as inputs for valuing the Company’s insured multi-sector CDO transactions. As a result, the Company used the spreads reported at the end of the first quarter of 2009 to calculate the estimated fair value of these transactions. The Company believes this is a reasonable estimate because credit trends and market conditions did not change significantly during the second quarter and the BET model is not very sensitive to changes in credit spreads for these transactions when spreads are at extreme levels. The Company is exploring alternative valuation models for these transactions that do not require a credit spread input, which may be used in future periods.

Over time the data inputs change as new sources become available, existing sources are discontinued or are no longer considered to be reliable or the most appropriate. It is always the Company’s objective to move to higher levels on the hierarchy, but the Company sometimes moves to lower priority inputs because of discontinued data sources or because the Company considers higher priority inputs no longer representative of market spreads. This occurs when transaction volume changes such that a previously used spread index is no longer viewed to reflect current market levels, as was the case for CMBS collateral in insured CDSs beginning in 2008. Refer to section “Input Adjustments for Insured CMBS Derivatives in the Current Market” below.

 

21


Table of Contents

MBIA Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

b. Diversity Scores

The diversity score is a measure to estimate the diversification in a portfolio. The diversity score estimates the number of uncorrelated assets that are assumed to have the same loss distribution as the actual portfolio of correlated assets. For example, if a portfolio of 100 assets had a diversity score of 50, this means that the 100 correlated assets are assumed to have the same loss distribution as 50 uncorrelated assets. A lower diversity score represents higher assumed correlation, increasing the chances of a large number of defaults, and thereby increasing the risk of loss in the senior tranche. A lower diversity score will generally have a negative impact on the valuation for the Company’s senior tranche. The calculation methodology for a diversity score includes the extent to which a portfolio is diversified by industry or asset class, which is either calculated internally or reported by the trustee on a regular basis. Diversity scores are calculated at transaction origination, and adjusted as the collateral pool changes over time. MBIA’s internal modeling of the diversity score is based on Moody’s methodology but uses MBIA’s internal assumptions on default correlation, including variables such as collateral rating and amount, asset type and remaining life.

c. Recovery Rate

The recovery rate represents the percentage of par expected to be recovered after an asset defaults, indicating the severity of a potential loss. MBIA generally uses rating agency recovery assumptions which may be adjusted to account for differences between the characteristics and performance of the collateral used by the rating agencies and the actual collateral in MBIA-insured transactions. The Company may also adjust rating agency assumptions based on the performance of the collateral manager and on empirical market data. In the first six months of 2009, the Company lowered recovery rates for CMBS collateral and certain RMBS collateral.

d. Input Adjustments for Insured CMBS Derivatives in the Current Market

Approximately $46.7 billion gross par of MBIA’s insured derivative transactions as of June 30, 2009 include substantial amounts of CMBS and commercial mortgage collateral. Prior to 2008 the Company had used spreads drawn from CMBX indices and CMBS spread tables as pricing input on the underlying referenced collateral in these transactions. In 2008, as the financial markets became illiquid, the Company saw a significant disconnect between cumulative loss expectations of market analysts on underlying commercial mortgages, which were based on the continuation of low default and loss rates, and loss expectations implied by the CMBX indices and CMBS spread tables. CMBS collateral in MBIA’s insured credit derivatives has performed in line with the market.

In addition, due to financial market uncertainty since last year, transaction volume in CMBS and trading activity in the CMBX were both dramatically lower than in prior periods. The Company also considered that the implied loss rates within the CMBX index were much higher than that forecast by fundamental researchers and MBIA’s internal analysis. As a result of these issues, the Company concluded that the CMBX indices and the CMBS spread tables were unreliable model inputs for the purpose of estimating fair value in the Company’s hypothetical market among monoline insurers.

In the first quarter of 2008, the Company modified the spread used for these transactions to reflect a combination of market spread pricing and third-party fundamental analysis of CMBS credit. The Company’s revised spread input is a CMBX index analog that combines expectations for CMBS credit performance (as forecasted by the average of three investment banks’ research departments) together with the illiquidity premium implied by the CMBX indices. The illiquidity premium the Company uses is the senior triple-A tranche spread of the CMBX index that matches the origination vintage of collateral in each transaction. For example, collateral originated in the second half of 2006 uses the triple-A tranche spread of the CMBX series 1 as the illiquidity premium. The sum of the illiquidity premium plus the derived credit spread based on the average cumulative net loss estimates of three investment bank’s research department is used as a CMBX analog index.

e. Nonperformance Risk

In compliance with the requirements of SFAS 157, the Company’s valuation methodology for insured credit derivative liabilities incorporates the Company’s own nonperformance risk and the nonperformance risk of its reinsurers. The Company calculates the fair value by discounting the market value loss estimated through the BET model at discount rates which include MBIA Corp.’s and the reinsurers’ CDS spreads at June 30, 2009. Prior to the second quarter of 2009, MBIA used the 5-year CDS spread on MBIA Corp. to calculate nonperformance risk. This assumption was compatible with the average life of the CDS portfolio, which was approximately 5 years. In the second quarter, the Company has refined this approach to include a full term structure for CDS spreads. Under the refined approach, the CDS spreads assigned to each deal is based on the weighted average life of the deal. This resulted in an increase of $333 million in the derivative liability compared to the amount that would have resulted if the Company had continued to use MBIA’s 5-year CDS spread for all transactions.

In light of recent developments in the CDS and recovery derivative markets for MBIA, in the first six months of 2009, the Company limited the effective spread on CDS on MBIA so that the derivative liability, after giving effect to nonperformance risk, could not be lower than MBIA’s recovery derivative price multiplied by the unadjusted derivative liability. In the second quarter of 2009, the

 

22


Table of Contents

MBIA Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

limitation caused by use of MBIA’s recovery rate increased the derivative liability by $1.0 billion, compared to the amount that would have resulted if no limitation had been applied for recovery rate.

In aggregate, the nonperformance calculation results in a pre-tax derivative liability which is $14.0 billion lower than the liability that would have been estimated if the discount rate were equal to the Libor swap rate. Nonperformance risk is a fair value concept and does not contradict the Company’s internal view, based on fundamental credit analysis of the Company’s economic condition, that the Company will be able to pay all claims when due.

The Company believes that it is important to consistently apply its valuation techniques. However, the Company may consider making changes in the valuation technique if the change results in a measurement that is equally or more representative of fair value under current circumstances.

Warrants

Stock warrants issued by the Company are recorded at fair value based on a modified Black-Scholes model. Inputs into the warrant valuation include interest rates, stock volatilities and dividends data. As all significant inputs are market-based and observable, warrants are categorized in Level 2 of the fair value hierarchy.

Financial Guarantees

Gross Financial Guarantees—The Company estimates the fair value of its gross financial guarantee liability using a discounted cash flow model with significant inputs that include (i) an assumption of expected loss on financial guarantee policies for which case basis reserves have not been established, (ii) the amount of loss expected on financial guarantee policies for which case basis reserves have been established, (iii) the cost of capital reserves required to support the financial guarantee liability, and (iv) the discount rate. The MBIA Corp. CDS spread and recovery rate are used as the discount rate for MBIA Corp, while the Assured Guaranty Corp. CDS spread and recovery rate are used as the discount rate for National. The discount rates incorporate the nonperformance risk of the Company. As the Company’s gross financial guarantee liability represents its obligation to pay claims under its insurance policies, the Company’s calculation of fair value does not consider future installment premium receipts or returns on invested upfront premiums as inputs.

The carrying value of the Company’s gross financial guarantee liability consists of deferred premium revenue and loss and LAE reserves as reported on the Company’s consolidated balance sheets.

Ceded Financial Guarantees—The Company estimates the fair value of its ceded financial guarantee liability by calculating the portion of the gross financial guarantee liability that has been ceded to reinsurers. The carrying value of ceded financial guarantee liability consists of prepaid reinsurance premiums and reinsurance recoverable on unpaid losses as reported on the Company’s consolidated balance sheets.

Fair Value Measurements

The following fair value hierarchy tables present information about the Company’s assets (including short-term investments) and liabilities measured at fair value on a recurring basis as of June 30, 2009 and December 31, 2008:

 

23


Table of Contents

MBIA Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

     Fair Value Measurements at Reporting Date Using      

In millions

   Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
   Significant Other
Observable Inputs
(Level 2)
   Significant
  Unobservable  
Inputs (Level 3)
       Counterparty    
and Cash
Collateral
Netting (1)
    Balance as of
    June 30, 2009    

Assets:

             

Investments:

             

Fixed-maturity investments:

             

Taxable bonds:

             

U.S. Treasury and government agency

     $ 708      $ 117      $ 6      $ -        $ 831

Foreign governments

     289      228      70      -        587

Corporate obligations

     -      2,801      371      -        3,172

Mortgage-backed securities

             

Residential mortgage-backed agency

     -      1,271      98      -        1,369

Residential mortgage-backed non-agency

     -      605      252      -        857

Commercial mortgage-backed

     -      2      37      -        39

Asset-backed securities

             

Collateralized debt obligations

     -      -      585      -        585

Other asset-backed

     -      479      389      -        868
                                   

Total

     997      5,503      1,808      -        8,308

State and municipal bonds

             

Tax exempt bonds

     -      2,675      74      -        2,749

Taxable bonds

     -      439      44      -        483
                                   

Total state and municipal bonds

     -      3,114      118      -        3,232

Total fixed-maturity investments

     997      8,617      1,926      -        11,540

Other investments:

             

Perpetual preferred securities

     -      274      44      -        318

Other investments

     5      141      25      -        171

Money market securities

     2,282      2      -      -        2,284
                                   

Total other investments

     2,287      417      69      -        2,773

Derivative assets

     -      234      746      (225     755
                                   

Total assets

     $ 3,284      $ 9,268      $ 2,741      $ (225     $ 15,068
                                   

Liabilities:

             

Medium-term notes

     $ -      $ -      $ 122      $ -        $ 122

Derivative liabilities

     -      413      4,137      (360     4,190

Other liabilities:

             

Warrants

     -      29      -      -        29
                                   

Total liabilities

     $ -      $ 442      $ 4,259      $ (360     $ 4,341
                                   

 

(1) - The net effect of cash and counterparty collateral netting is included in the column entitled “Counterparty and Cash Collateral Netting.” As of June 30, 2009, $135 million of cash collateral, which was previously recorded in “Other Assets,” was included in the derivative liability balance.

 

24


Table of Contents

MBIA Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

     Fair Value Measurements at Reporting Date Using      

In millions

    Quoted Prices in
  Active Markets for  
Identical Assets

(Level 1)
   Significant Other
  Observable Inputs  
(Level 2)
   Significant
 Unobservable 
  Inputs (Level 3)  
      Counterparty   
and Cash
Collateral
Netting (1)
    Balance as of
   December 31,   
2008

Assets:

             

Investments:

             

Fixed-maturity investments:

             

Taxable bonds:

             

U.S. Treasury and government agency

     $ 1,042      $ 194      $ 32      $ -        $ 1,268

Foreign governments

     369      336      130      -        835

Corporate obligations

     -      2,776      587      -        3,363

Mortgage-backed securities

             

Residential mortgage-backed agency

     -      1,218      156      -        1,374

Residential mortgage-backed non-agency

     -      627      397      -        1,024

Commercial mortgage-backed

     -      16      37      -        53

Asset-backed securities

             

Collateralized debt obligations

     -      -      918      -        918

Other asset-backed

     -      444      540      -        984
                                   

Total

     1,411      5,611      2,797      -        9,819

State and municipal bonds

             

Tax exempt bonds

     -      3,011      49      -        3,060

Taxable bonds

     -      379      46      -        425
                                   

Total state and municipal bonds

     -      3,390      95      -        3,485

Total fixed-maturity investments

     1,411      9,001      2,892      -        13,304

Other investments:

             

Perpetual preferred securities

     -      275      45      -        320

Other investments

     23      40      58      -        121

Money market securities

     3,235      -      -      -        3,235
                                   

Total other investments

     3,258      315      103      -        3,676

Derivative assets

     -      613      807      (509     911
                                   

Total assets

     $ 4,669      $ 9,929    $ 3,802      $ (509     $ 17,891
                                   

Liabilities:

             

Medium-term notes

     $ -      $ -      $ 176      $ -        $ 176

Derivative liabilities

     -      741      6,305      (575     6,471

Other liabilities:

             

Warrants

     -      22      -      -        22
                                   

Total liabilities

     $ -      $ 763      $ 6,481      $ (575     $ 6,669
                                   

 

(1) - The net effect of cash and counterparty collateral netting is included in the column entitled “Counterparty and Cash Collateral Netting.” As of December 31, 2008, $66 million of cash collateral, which was previously reported in “Other Assets”, was included in the derivative liability balance.

Level 3 Analysis

Level 3 assets were $2.7 billion and $3.8 billion as of June 30, 2009 and December 31, 2008, respectively, and represented approximately 18% and 21% of total assets measured at fair value, respectively. Level 3 liabilities were $4.3 billion and $6.5 billion as of June 30, 2009 and December 31, 2008, respectively, and represented approximately 98% and 97% of total liabilities measured at fair value, respectively. The following tables present information about changes in Level 3 assets (including short-term investments) and liabilities measured at fair value on a recurring basis for the three months ended June 30, 2009 and 2008:

 

25


Table of Contents

MBIA Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

In millions

   Balance,
Beginning
of Interim
Period
   Realized
Gains /
(Losses)
    Unrealized
Gains /
(Losses)
Included in
Earnings
    Unrealized
Gains /
(Losses)
Included in
OCI
    Foreign
Exchange
   Purchases,
Issuances and

Settlements,
net
    Transfers
in (out) of
Level 3,
net(1)
    Ending
Balance
   Change in
Unrealized

Gains (Losses)
for the Period
Included in
Earnings for

Assets still held
at June 30, 2009
 

Assets:

                     

U.S. Treasury and government agency

       $ 6        $ -          $ -          $ -          $ -        $ -          $ -          $ 6        $ -   

Foreign governments

     51      -        -        (3     2      1        19        70      -   

Corporate obligations

     432      -        -        (2     1      (19     (41     371      -   

Residential mortgage-backed agency

     154      -        -        2        -      (8     (50     98      -   

Residential mortgage-backed non-agency

     374      -        -        (58     1      (12     (53     252      -   

Commercial mortgage-backed

     33      -        -        6        1      (3     -        37      -   

Collateralized debt obligations

     775      (64     -        (103     1      (24     -        585      -   

Other asset-backed

     389      -        -        38        -      (25     (13     389      -   

State and municipal tax exempt bonds

     78      -        -        -        -      (4     -        74      -   

State and municipal taxable bonds

     46      -        -        (2     -      -        -        44      -   

Perpetual preferred securities

     35      -        -        9        -      -        -        44      -   

Other investments

     39      -        -        -        -      (14     -        25      -   
                                                                     

Total assets

       $ 2,412        $ (64       $ -          $ (113       $ 6        $ (108       $ (138       $  1,995        $ -   
                                                                     

In millions

   Balance,
Beginning

of Interim
Period
   Realized
(Gains) /
Losses
    Unrealized
(Gains) /
Losses
Included in
Earnings
    Unrealized
(Gains) /
Losses
Included in
OCI
    Foreign
Exchange
   Purchases,
Issuances and
Settlements,
net
    Transfers
in (out) of
Level 3,
net(1)
    Ending
Balance
   Change in
Unrealized

(Gains) Losses
for the Period
Included in
Earnings for
Liabilities still
held at
June 30, 2009
 

Liabilities:

                     

Medium-term notes

     $ 106      -        -        $ 9        $ 7      -        -        $ 122      -   

Derivative contracts, net

     3,848      (61     (400     -        8      (2     (2     3,391      (140
                                                                     

Total liabilities

     $ 3,954      $ (61     $ (400     $ 9        $ 15      $ (2     $ (2     $ 3,513      $ (140
                                                                     

 

(1) - Transferred in and out at the end of the period.

 

26


Table of Contents

MBIA Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

In millions

   Balance,
Beginning

of Interim
Period
   Realized
Gains /
(Losses)
    Unrealized
Gains /
(Losses)
Included in
Earnings
    Unrealized
Gains /
(Losses)
Included in
OCI
    Foreign
Exchange
    Purchases,
Issuances and
Settlements,
net
    Transfers
in (out) of
Level 3, net

(1)
    Ending
Balance
   Change in
Unrealized

Gains (Losses)
for the Period
Included in
Earnings for

Assets still held
at June 30, 2008
 

Assets:

                    

U.S. Treasury and government agency

     $ 117      $ -        $ -        $ (3     $ -        $ 42        $ 1        $ 157      $ -   

Foreign governments

     91      -        -        (4     -        13        -        100      -   

Corporate obligations

     1,554      (15     -        5        (1     (566     (21     956      -   

Residential mortgage-backed

agency

     209      -        -        1        -        (19     -        191      -   

Residential mortgage-backed non-

agency

     481      (6     -        (29     (4     (136     (5     301      -   

Commercial mortgage-backed

     284      (6     -        3        (1     (112     (76     92      -   

Collateralized debt obligations

     2,098      (329     -        193        (51     (395     (93     1,423      -   

Other asset-backed

     1,377      (14     -        (50     (3     (217     (28     1,065      -   

State and municipal taxable bonds

     48      -        -        (1     -        -        -        47      -   

Perpetual preferred securities

     85      -        -        (2     -        -        -        83      -   
                                                                      

Total assets

     $ 6,344      $ (370     $ -        $ 113        $ (60     $ (1,390     $ (222     $ 4,415      $ -   
                                                                      

In millions

   Balance,
Beginning

of Interim
Period
   Realized
(Gains)
/ Losses
    Unrealized
(Gains) /
Losses
Included in
Earnings
    Unrealized
(Gains) /
Losses
Included in
OCI
    Foreign
Exchange
    Purchases,
Issuances and
Settlements,
net
    Transfers
in (out) of
Level 3,
net(1)
    Ending
Balance
   Change in
Unrealized

(Gains) Losses
for the Period
Included in
Earnings for
Liabilities still
held at June 30,

2008
 

Liabilities:

                    

Medium-term notes

     $ 354      $ (6     $ (13     $ -        $ (2     $ (19     $ -        $ 314      $ -   

Derivative contracts, net

     6,921      (147     (3,150     -        (2     33        -        3,655      (3,150
                                                                      

Total liabilities

     $ 7,275      $ (153     $ (3,163     $ -        $ (4     $ 14        $ -        $ 3,969      $ (3,150
                                                                      

 

(1) - Transferred in and out at the end of the period.

Transfers into and out of Level 3 were $43 million and $179 million for the three months ended June 30, 2009, respectively. These transfers were principally for available-for-sale securities where inputs, which are significant to their valuation, became unobservable or observable during the quarter. These inputs included spreads, prepayment speeds, default speeds, default severities, yield curves observable at commonly quoted intervals, and market corroborated inputs. Residential mortgage-backed securities comprised the majority of the transferred instruments. For the three months ended June 30, 2009, the net unrealized gains related to the transfers into Level 3 was $0.1 million and the net unrealized gains related to the transfers out of Level 3 as of June 30, 2009 was $17 million.

Transfers into and out of Level 3 were $211 million and $433 million for the three months ended June 30, 2008, respectively. These transfers were principally for available-for-sale securities where inputs, which are significant to their valuation, became unobservable or observable during the year. These inputs included spreads, prepayment speeds, default speeds, default severities, yield curves observable at commonly quoted intervals, and market corroborated inputs. Commercial mortgage-backed securities, CDOs and other asset-backed securities comprised the majority of the transferred instruments. For the three months ended June 30, 2008, the net unrealized losses related to the transfers into Level 3 was $2 million and the net unrealized losses related to the transfers out of Level 3 was $10 million.

The following tables present information about changes in Level 3 assets (including short-term investments) and liabilities measured at fair value on a recurring basis for the six months ended June 30, 2009 and 2008:

 

27


Table of Contents

MBIA Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

In millions

   Balance,
Beginning
of Year
   Realized
Gains /
(Losses)
    Unrealized
Gains /
(Losses)
Included in
Earnings
    Unrealized
Gains /
(Losses)
Included in
OCI
    Foreign
Exchange
    Purchases,
Issuances and
Settlements,
net
    Transfers
in (out) of
Level 3,
net(1)
    Ending
Balance
   Change in
Unrealized

Gains (Losses)
for the Period
Included in
Earnings for
Assets still held

at June 30, 2009
 

Assets:

                    

U.S. Treasury and government agency

     $ 32      $ 1        $ -        $ (1     $ -        $ (26     $ -        $ 6      $ -   

Foreign governments

     129      -        -        (4     (2     (16     (37     70      -   

Corporate obligations

     586      -        -        (42     (3     (47     (123     371      -   

Residential mortgage-backed agency

     156      -        -        11        -        (19     (50     98      -   

Residential mortgage-backed

non-agency

     397      (27     -        (26     -        (24     (68     252      -   

Commercial mortgage-backed

     37      (1     -        5        -        (4     -        37      -   

Collateralized debt obligations

     921      (125     -        (144     -        (67     -        585      -   

Other asset-backed

     540      (9     -        (46     -        (88     (8     389      -   

State and municipal tax

exempt bonds

     49      -        -        (1     -        26        -        74      -   

State and municipal taxable bonds

     46      -        -        (2     -        -        -        44      -   

Perpetual preferred securities

     45      -        -        -        -        (1     -        44      -   

Other investments

     58      -        -        -        -        (33     -        25      -   
                                                                      

Total assets

     $ 2,996      $ (161     $ -        $ (250     $ (5     $ (299     $ (286     $ 1,995      $ -   
                                                                      

In millions

   Balance,
Beginning
of Year
   Realized
(Gains) /
Losses
    Unrealized
(Gains) /
Losses
Included in
Earnings
    Unrealized
(Gains) /
Losses
Included in
OCI
    Foreign
Exchange
    Purchases,
Issuances and
Settlements,
net
    Transfers
in (out) of
Level 3,
net(1)
    Ending
Balance
   Change in
Unrealized

(Gains) Losses
for the Period
Included in
Earnings for
Liabilities still
held at June 30,
2009
 

Liabilities:

                    

Medium-term notes

     $ 176      $ -        $ -        $ (52     $ (2     $ -        $ -        $ 122      $ -   

Derivative contracts, net

     5,498      (90     (2,018     2        (8     27        (20     3,391      (1,786
                                                                      

Total liabilities

     $ 5,674      $ (90     $ (2,018     $ (50     $ (10     $ 27        $ (20     $ 3,513      $ (1,786
                                                                      

 

(1) - Transferred in and out at the end of the period.

 

28


Table of Contents

MBIA Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

In millions

   Balance,
Beginning
of Year
   Realized
Gains /
(Losses)
    Unrealized
Gains /
(Losses)
Included in
Earnings
    Unrealized
Gains /
(Losses)
Included in
OCI
    Foreign
Exchange
    Purchases,
Issuances and
Settlements,
net
    Transfers
in (out) of
Level 3,
net(1)
    Ending
Balance
   Change in
Unrealized

Gains (Losses)
for the Period
Included in
Earnings for
Assets still held

at June 30, 2008

Assets:

                    

U.S. Treasury and government agency

     $ 124      $ 3        $ -        $ (2     $ -        $ 8        $ 24        $ 157      $ -

Foreign governments

     64      -        -        (1     1        18        18        100      -

Corporate obligations

     1,400      (22     -        (27     14        (601     192        956      -

Residential mortgage-backed

agency

     239      -        -        (5     -        (43     -        191      -

Residential mortgage-backed non-agency

     726      (6     -        (141     1        (174     (105     301      -

Commercial mortgage-backed

     273      (6     -        (5     8        (39     (139     92      -

Collateralized debt obligations

     2,458      (463     -        57        (45     (445     (139     1,423      -

Other asset-backed

     1,430      (22     -        (108     17        (313     61        1,065      -

State and municipal tax

exempt bonds

     -      -        -        -        -        -        -        -      -

State and municipal taxable bonds

     49      -        -        (2     -        -        -        47      -

Perpetual preferred securities

     104      -        -        (21     -        -        -        83      -

Other investments

     -      -        -        -        -        -        -        -      -
                                                                    

Total assets

     $ 6,867      $ (516     $ -        $ (255     $ (4     $ (1,589     $ (88     $ 4,415      $ -
                                                                    

In millions

   Balance,
Beginning
of Year
   Realized
(Gains) /
Losses
    Unrealized
(Gains) /
Losses
Included in
Earnings
    Unrealized
(Gains) /
Losses
Included in
OCI
    Foreign
Exchange
    Purchases,
Issuances and
Settlements,
net
    Transfers
in (out) of
Level 3,
net(1)
    Ending
Balance
   Change in
Unrealized

(Gains) Losses
for the Period
Included in
Earnings for
Liabilities still
held at June 30,

2008

Liabilities:

                    

Medium-term notes

     $ 399      $ (6     $ (13     $ (20     $ 22        $ (68     $ -        $ 314      $ -

Derivative contracts, net

     3,405      (185     379        -        (10     66        -        3,655      379
                                                                    

Total liabilities

     $ 3,804      $ (191     $ 366        $ (20     $ 12        $ (2     $ -        $ 3,969      $ 379
                                                                    

 

(1) - Transferred in and out at the end of the period.

Transfers into and out of Level 3 were $57 million and $323 million for the six months ended June 30, 2009, respectively. These transfers were principally for available-for-sale securities where inputs, which are significant to their valuation, became observable during the period. These inputs included spreads, yield curves observable at commonly quoted intervals, and market corroborated inputs. Foreign governments and corporate obligations comprised the majority of the transferred instruments. For the six months ended June 30, 2009, the net unrealized gains related to the transfers into Level 3 was $15 million and the net unrealized gains related to the transfers out of Level 3 was $31 million.

Transfers into and out of Level 3 were $769 million and $857 million for the six months ended June 30, 2008, respectively. These transfers were principally for available-for-sale securities where inputs, which are significant to their valuation, became observable or unobservable during the year. These inputs included spreads, prepayment speeds, default speeds, default severities, yield curves observable at commonly quoted intervals, and market corroborated inputs. Corporate obligations, commercial mortgage-backed securities and CDOs comprised the majority of the transferred instruments. For the six months ended June 30, 2008, the net unrealized losses related to the transfers into Level 3 was $35 million and the net unrealized losses related to the transfers out of Level 3 was $43 million.

 

29


Table of Contents

MBIA Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

Gains and losses (realized and unrealized) included in earnings pertaining to Level 3 assets and liabilities for the three months ended June 30, 2009 and 2008 are reported on the consolidated statements of operations as follows:

 

 

In millions

     Unrealized
 Gains (Losses) 
on Insured
Derivatives
    Net Realized
 Gains (Losses) 
    Net Gains (Losses) on
 Financial Instruments at Fair 

Value and Foreign Exchange
 

Total gains (losses) included in earnings

       $ 424        $ (3     $ (11
                          

Change in unrealized gains (losses) for the period included in earnings for assets and liabilities still held at June 30, 2009

       $ 164        $ -        $ (32
                          

In millions

     Unrealized
Gains (Losses)
on Insured
Derivatives
    Net Realized
Gains (Losses)
    Net Gains (Losses) on
Financial Instruments at Fair
Value and Foreign Exchange
 

Total gains (losses) included in earnings

       $ 3,327        $ (215     $ (221
                          

Change in unrealized gains (losses) for the period included in earnings for assets and liabilities still held at June 30, 2008

       $ 3,327        $ -        $ -   
                          

 

Gains and losses (realized and unrealized) included in earnings pertaining to Level 3 assets and liabilities for the six months ended June 30, 2009 and 2008 are reported on the consolidated statements of operations as follows:

 

 

   

In millions

     Unrealized
Gains (Losses)
on Insured
Derivatives
    Net Realized
Gains (Losses)
    Net Gains (Losses) on
Financial Instruments at

Fair Value and Foreign
Exchange
 

Total gains (losses) included in earnings

       $ 2,052        $ (251     $ (21
                          

Change in unrealized gains (losses) for the period included in earnings for assets and liabilities still held at June 30, 2009

       $ 1,793        $ -        $ (6
                          

In millions

     Unrealized
Gains (Losses)
on Insured
Derivatives
    Net Realized
Gains (Losses)
    Net Gains (Losses) on
Financial Instruments at Fair
Value and Foreign Exchange
 

Total gains (losses) included in earnings

       $ (250     $ (323     $ (112
                          

Change in unrealized gains (losses) for the period included in earnings for assets and liabilities still held at June 30, 2008

       $ (250     $ -        $ -   
                          

Fair Value Option

The Company elected, under SFAS 155, “Accounting for Certain Hybrid Financial Instruments” to record at fair value certain financial assets and liabilities that contain embedded derivatives. Changes in fair value of these hybrid financial instruments are reflected in “Net gains (losses) on financial instruments at fair value and foreign exchange” on the Company’s consolidated statement of operations.

For the three and six months ended June 30, 2009, the fair value of hybrid financial assets increased $2 million and $4 million on a pre-tax basis and $1 million and $3 million on an after-tax basis. For the three months ended June 30, 2009, the fair value of hybrid financial liabilities, which related to four medium-term notes, increased $16 million on a pre-tax basis and $11 million on an after-tax basis. For the six months ended June 30, 2009, the fair value of hybrid financial liabilities, decreased $54 million on a pre-tax basis and $35 million on an after-tax basis.

For the three and six months ended June 30, 2008, the fair value of hybrid financial assets decreased $2 million and $4 million on a pre-tax basis and $2 million and $3 million on an after-tax basis and the fair value of hybrid financial liabilities, which related to five medium-term notes, decreased $15 million and $11 million on a pre-tax basis and $10 million and $7 million on an after-tax basis, respectively. Contractual interest coupon payments related to these medium-term notes are recorded within “Interest expense” on the Company’s consolidated statements of operations.

 

30


Table of Contents

MBIA Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

Note 6: Investments

The Company’s fixed-maturity portfolio consists of high-quality (average rating single-A) taxable and tax-exempt investments of diversified maturities. Other investments primarily comprise equity investments, including those accounted for under the equity method in accordance with APB 18 and highly rated perpetual securities that bear interest and are callable by the issuer. The following tables present the amortized cost and fair value of available-for-sale fixed-maturity and other investments included in the consolidated investment portfolio of the Company as of June 30, 2009 and December 31, 2008:

 

     June 30, 2009  

In millions

    Amortized Cost     Gross
 Unrealized 
Gains
   Gross
 Unrealized 
Losses
        Fair Value        Other-Than-
Temporary
 Impairments in 
OCI
 

Fixed-maturity investments:

             

Taxable bonds:

             

U.S. Treasury and government agency

     $ 822      $ 13      $ (4     $ 831      $ -   

Foreign governments

     569      26      (8     587      -   

Corporate obligations

     3,663      37      (528     3,172      -   

Mortgage-backed securities

             

Residential mortgage-backed agency

     1,334      41      (6     1,369      -   

Residential mortgage-backed non-agency

     1,502      13      (658     857      (216

Commercial mortgage-backed

     56      -      (17     39      (1

Asset-backed securities

             

Collateralized debt obligations

     1,280      -      (695     585      (112

Other asset-backed

     1,187      11      (330     868      (0
                                     

Total

     10,413      141      (2,246     8,308      (329

State and municipal bonds

             

Tax exempt bonds

     2,841      19      (111     2,749      -   

Taxable bonds

     533      7      (57     483      -   
                                     

Total state and municipal bonds

     3,374      26      (168     3,232      -   

Total fixed-maturity investments

     13,787      167      (2,414     11,540      (329

Other investments:

             

Perpetual preferred securities

     486      4      (172     318      -   

Other investments

     169      2      -        171      -   

Money market securities

     2,284      -      -        2,284      -   
                                     

Total other investments

     2,939      6      (172     2,773      -   
                                     

Total available-for-sale investments

     $ 16,726      $ 173      $ (2,586     $ 14,313      $ (329
                                     

 

31


Table of Contents

MBIA Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

 

     December 31, 2008

In millions

     Amortized Cost        Gross Unrealized  
Gains
     Gross Unrealized  
Losses
            Fair Value        

Fixed-maturity investments:

          

Taxable bonds:

          

U.S. Treasury and government agency

     $ 1,194      $ 74      $ -        $ 1,268

Foreign governments

     818      39      (22     835

Corporate obligations

     3,861      43      (541     3,363

Mortgage-backed securities

          

Residential mortgage-backed agency

     1,359      27      (12     1,374

Residential mortgage-backed non-agency

     1,664      9      (649     1,024

Commercial mortgage-backed

     72      -      (19     53

Asset-backed securities

          

Collateralized debt obligations

     1,467      3      (552     918

Other asset-backed

     1,298      4      (318     984
                            

Total

     11,733      199      (2,113     9,819

State and municipal bonds

          

Tax exempt bonds

     3,273      20      (233     3,060

Taxable bonds

     473      13      (61     425
                            

Total state and municipal bonds

     3,746      33      (294     3,485

Total fixed-maturity investments

     15,479      232      (2,407     13,304

Other investments:

          

Perpetual preferred securities

     635      -      (315     320

Other investments

     126      -      (5     121

Money market securities

     3,235      -      -        3,235
                            

Total other investments

     3,996      -      (320     3,676
                            

Total available-for-sale investments

     $ 19,475      $ 232      $ (2,727     $ 16,980
                            

Fixed-maturity investments carried at fair value of $13 million and $14 million as of June 30, 2009 and December 31, 2008, respectively, were on deposit with various regulatory authorities to comply with insurance laws.

A portion of the obligations under investment agreements require the Company to pledge securities as collateral. As of June 30, 2009 and December 31, 2008, the fair value of securities pledged as collateral with respect to these obligations approximated $2.7 billion. Additionally, the Company has pledged cash in the amount of $600 million.

The following table presents the distribution by contractual maturity of available-for-sale fixed-maturity investments at amortized cost and fair value as of June 30, 2009. Contractual maturity may differ from expected maturity because borrowers may have the right to call or prepay obligations.

 

In millions

     Amortized Cost            Fair Value      

Due in one year or less

       $ 1,141      $ 1,133

Due after one year through five years

     1,989      1,948

Due after five years through ten years

     1,283      1,154

Due after ten years through fifteen years

     610      556

Due after fifteen years

     3,405      3,031

Mortgage-backed

     2,892      2,265

Asset-backed

     2,467      1,453
             

Total fixed-maturity investments

       $ 13,787      $ 11,540
             

 

32


Table of Contents

MBIA Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

Investments that are held-to-maturity are reported on the Company’s balance sheet at amortized cost. These investments, which relate to the Company’s conduit segment and consolidated VIEs, primarily consist of ABS and loans issued by major national and international corporations and other structured finance clients. As of June 30, 2009, the amortized cost and fair value of held-to-maturity investments totaled $4.0 billion and $3.4 billion, respectively. Unrecognized gross gains were $5 million and unrecognized gross losses were $554 million. As of December 31, 2008, the amortized cost and fair value of held-to-maturity investments totaled $3.7 billion and $3.6 billion, respectively. Unrecognized gross gains were $1 million and unrecognized gross losses were $62 million. The following table presents the distribution of held-to-maturity investments by contractual maturity at amortized cost and fair value as of June 30, 2009:

 

In millions

       Amortized Cost                Fair Value        

Due in one year or less

       $ -      $ -

Due after one year through five years

     1      1

Due after five years through ten years

     1      1

Due after ten years through fifteen years

     -      -

Due after fifteen years

     1,100      949

Mortgage-backed

     102      102

Asset-backed

     2,756      2,358
             

Total held-to-maturity investments

       $ 3,960      $         3,411
             

Included in the preceding tables are investments that have been insured by MBIA Corp. and National (“MBIA-Insured Investments”). As of June 30, 2009, MBIA-Insured Investments at fair value represented $2.7 billion or 15% of the consolidated investment portfolio. Conduit segment investments represented $1.5 billion or 8% of the consolidated investment portfolio and were all insured by MBIA Corp. Without giving effect to the MBIA guarantee of the MBIA-Insured Investments, the underlying ratings (those given to an investment without the benefit of MBIA’s guarantee) of the MBIA-Insured Investments as of June 30, 2009 are reflected in the following table. Amounts represent the fair value of such investments including the benefit of MBIA Corp.’s and National’s guarantee. The ratings in the following table are based on ratings from Moody’s. Alternate rating sources, such as S&P, have been used for a small percentage of securities that are not rated by Moody’s. When an external underlying rating is not available, the underlying rating is based on the Company’s best estimate of the rating of such investment.

In millions

 

Underlying Ratings Scale

   U.S. Public
Finance Insurance
Available-for-Sale
   Structured Finance
and International
Insurance Available-
for-Sale
   Investment
Management

Services Available-
for-Sale
   Investments Held-
to- Maturity
   Total

Aaa

     $ -      $ 6      $ -      $ 142      $ 148

Aa

     64      -      58      62      184

A

     219      22      188      102      531

Baa

     71      62      281      1,078      1,492

Below investment grade

     2      196      70      74      342
                                  

Total

     $ 356      $ 286      $ 597      $ 1,458      $             2,697
                                  

It is MBIA’s policy to obtain an underlying rating from both Moody’s and S&P for each new transaction funded through the Company’s conduit segment prior to the execution of such transactions. All transactions currently funded in the conduit segment had an underlying rating of investment grade by Moody’s and S&P prior to funding. The weighted average underlying rating for transactions currently funded in the Company’s conduits was A- by S&P and A2 by Moody’s at the time such transactions were funded. MBIA estimates that the weighted average underlying rating of all outstanding conduit segment transactions was BBB by S&P and Baa1 by Moody’s as of June 30, 2009.

The following tables present the gross unrealized losses included in accumulated other comprehensive income (loss) as of June 30, 2009 and December 31, 2008 related to available-for-sale fixed-maturity and other investments. The tables segregate investments that have been in a continuous unrealized loss position for less than twelve months from those that have been in a continuous unrealized loss position for twelve months or longer.

 

33


Table of Contents

MBIA Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

 

     June 30, 2009  
     Less than 12 Months     12 Months or Longer     Total  

In millions

   Fair Value      Unrealized  
Losses
    Fair Value      Unrealized  
Losses
    Fair Value      Unrealized  
Losses
 

Fixed-maturity investments:

               

Taxable bonds:

               

U.S. Treasury and government agency

     $ 193      $ (4     $ -      $ -        $ 193      $ (4

Foreign governments

     29      (1     50      (7     79      (8

Corporate obligations

     646      (83     1,545      (445     2,191      (528

Mortgage-backed securities

               

Residential mortgage-backed agency

     107      (2     90      (4     197      (6

Residential mortgage-backed non-

agency

     245      (127     512      (531     757      (658

Commercial mortgage-backed

     2      (1     36      (16     38      (17

Asset-backed securities

               

Collateralized debt obligations

     332      (351     256      (339     588      (690

Other asset-backed

     62      (22     556      (308     618      (330
                                             

Total

     1,616      (591     3,045      (1,650     4,661      (2,241

State and municipal bonds

               

Tax exempt bonds

     498      (7     1,597      (104     2,095      (111

Taxable bonds

     112      (15     204      (42     316      (57
                                             

Total state and municipal bonds

     610      (22     1,801      (146     2,411      (168

Total fixed-maturity investments

     2,226      (613     4,846      (1,796     7,072      (2,409
                                             

Other investments:

               

Perpetual preferred securities

     80      (21     220      (151     300      (172

Other investments

     -      -        5      -        5      -   
                                             

Total other investments

     80      (21     225      (151     305      (172
                                             

Total

     $     2,306      $ (634     $     5,071      $ (1,947     $     7,377      $ (2,581
                                             

 

34


Table of Contents

MBIA Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

 

     December 31, 2008  
     Less than 12 Months     12 Months or Longer     Total  

In millions

     Fair Value        Unrealized  
Losses
      Fair Value        Unrealized  
Losses
      Fair Value        Unrealized  
Losses
 

Fixed-maturity investments:

               

Taxable bonds:

               

U.S. Treasury and government agency

     $ 5      $ -        $ 24      $ -        $ 29      $ -   

Foreign governments

     107      (10     24      (12     131      (22

Corporate obligations

     1,144      (123     1,243      (418     2,387      (541

Mortgage-backed securities

               

Residential mortgage-backed agency

     98      (5     206      (7     304      (12

Residential mortgage-backed non-agency

     82      (45     645      (604     727      (649

Commercial mortgage-backed

     9      (1     40      (18     49      (19

Asset-backed securities

               

Collateralized debt obligations

     165      (190     285      (351     450      (541

Other asset-backed

     419      (96     430      (222     849      (318
                                             

Total

     2,029      (470     2,897      (1,632     4,926      (2,102

State and municipal bonds

               

Tax exempt bonds

     2,034      (225     171      (8     2,205      (233

Taxable bonds

     188      (35     107      (26     295      (61
                                             

Total state and municipal bonds

     2,222      (260     278      (34     2,500      (294

Total fixed-maturity investments

     4,251      (730     3,175      (1,666