Exhibit 99.2

MBIA INSURANCE CORPORATION

AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

As of September 30, 2012 and December 31, 2011

and for the periods ended September 30, 2012 and 2011

MBIA INSURANCE CORPORATION AND SUBSIDIARIES

INDEX

	PAGE
Consolidated Balance Sheets as of September 30, 2012 and December 31, 2011 (Unaudited)		1
Consolidated Statements of Operations for the three and nine months ended September 30, 2012 and 2011 (Unaudited)		2
Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2012 and 2011 (Unaudited)		3
Consolidated Statement of Changes in Shareholders’ Equity (Deficit) for the nine months ended September 30, 2012 (Unaudited)		4
Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and 2011 (Unaudited)		5
Notes to Consolidated Financial Statements (Unaudited)		6

MBIA INSURANCE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (Unaudited)

(In thousands except share and per share amounts)

	September 30, 2012		December 31, 2011
Assets
Investments:
Fixed-maturity securities held as available-for-sale, at fair value (amortized cost $621,981 and $1,110,605)	$	657,317	$	1,108,645
Investments carried at fair value		4,868		-
Short-term investments held as available-for-sale, at fair value (amortized cost $631,272 and $219,449)		631,193		219,526
Other investments (includes investments at fair value of $0 and $7,721)		27,401		35,546
Total investments		1,320,779		1,363,717
Cash and cash equivalents		59,646		136,361
Secured loan to Parent		-		300,000
Accrued investment income		9,250		12,501
Premiums receivable		1,280,202		1,359,568
Deferred acquisition costs		539,407		623,127
Prepaid reinsurance premiums		1,456,857		1,698,740
Insurance loss recoverable		3,316,397		3,045,987
Reinsurance recoverable on paid and unpaid losses		170,319		178,044
Property and equipment, at cost (less accumulated depreciation of $59,883 and $58,755)		1,901		2,510
Receivable for investments sold		304		15,820
Derivative assets		7,481		7,861
Deferred income taxes, net		1,498,346		1,711,442
Other assets		21,435		23,495
Assets of consolidated variable interest entities:
Cash		142,541		160,123
Investments held-to-maturity, at amortized cost (fair value of $2,684,518 and $2,469,285)		2,832,800		2,840,000
Fixed-maturity securities at fair value		1,753,519		2,884,265
Loans receivable at fair value		1,892,424		2,045,608
Loan repurchase commitments		1,050,927		1,076,765
Derivative assets		268		449,740
Total assets	$	17,354,803	$	19,935,674
Liabilities and Shareholders’ Equity (Deficit)
Liabilities:
Unearned premium revenue	$	2,627,403	$	2,953,389
Loss and loss adjustment expense reserves		938,049		836,331
Reinsurance premiums payable		331,669		351,732
Long-term debt		2,575,431		2,082,655
Deferred fee revenue		436,631		514,139
Payable for investments purchased		-		34
Derivative liabilities		3,331,043		4,807,647
Current income taxes		21,807		26,060
Other liabilities		377,893		276,695
Liabilities of consolidated variable interest entities:
Variable interest entity notes (includes financial instruments carried at fair value of $3,642,796 and $4,786,570)		6,475,596		7,626,570
Derivative liabilities		179,783		824,819
Total liabilities		17,295,305		20,300,071
Commitments and contingencies (See Note 11)
Shareholders’ equity (deficit):
Series A non-cumulative perpetual preferred stock, par value $1,000 per share, liquidation value $100,000 per share, authorized - 4,000, issued and outstanding - 2,759		27,598		27,598
Common stock, par value $220.80 per share; authorized, issued and outstanding - 67,936 shares		15,000		15,000
Additional paid-in capital		981,477		985,835
Retained earnings (deficit)		(1,001,615)		(1,396,905)
Accumulated other comprehensive income (loss), net of tax of $1,477 and $8,599		37,038		4,075
Total shareholders’ equity (deficit)		59,498		(364,397)
Total liabilities and shareholders’ equity (deficit)	$	17,354,803	$	19,935,674

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

1

MBIA INSURANCE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(In thousands)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
Revenues:
Premiums earned:
Scheduled premiums earned	$	39,071	$	56,615	$	146,215	$	178,988
Refunding premiums earned		2,769		17,609		12,408		28,852
Premiums earned (net of ceded premiums of $80,175, $70,364, $226,526 and $187,867)		41,840		74,224		158,623		207,840
Net investment income		5,755		16,773		15,786		62,672
Fees and reimbursements		42,407		25,681		104,169		73,373
Change in fair value of insured derivatives:
Realized gains (losses) and other settlements on insured derivatives		11,549		(53,598)		(420,432)		(600,352)
Unrealized gains (losses) on insured derivatives		(32,823)		831,585		1,473,161		(675,124)
Net change in fair value of insured derivatives		(21,274)		777,987		1,052,729		(1,275,476)
Net gains (losses) on financial instruments at fair value and foreign exchange		15,200		(12,026)		20,809		21,256
Investment losses related to other-than-temporary impairments:
Investment losses related to other-than-temporary impairments		(2,625)		-		(5,830)		-
Other-than-temporary impairments recognized in accumulated other comprehensive income (loss)		-		-		(37,086)		-
Net investment losses related to other-than-temporary impairments		(2,625)		-		(42,916)		-
Other net realized gains (losses)		244		675		975		1,136
Revenues of consolidated variable interest entities:
Net investment income		13,091		12,719		40,208		39,084
Net gains (losses) on financial instruments at fair value and foreign exchange		42,278		30,379		(25,305)		102,543
Other net realized gains (losses)		-		6		-		6
Total revenues		136,916		926,418		1,325,078		(767,566)
Expenses:
Losses and loss adjustment		167,184		180,319		314,888		199,684
Amortization of deferred acquisition costs		23,611		31,286		81,571		104,381
Operating		28,426		31,848		109,213		96,668
Interest		62,153		33,524		174,797		100,576
Expenses of consolidated variable interest entities:
Operating		4,780		8,304		15,808		26,387
Interest		10,416		10,011		32,221		31,055
Total expenses		296,570		295,292		728,498		558,751
Income (loss) before income taxes		(159,654)		631,126		596,580		(1,326,317)
Provision (benefit) for income taxes		(79,811)		216,718		201,290		(484,493)
Equity in net income (loss) of affiliates		-		11		-		-
Net income (loss)	$	(79,843)	$	414,419	$	395,290	$	(841,824)

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

2

MBIA INSURANCE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(In thousands)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
Net income (loss)	$	(79,843)	$	414,419	$	395,290	$	(841,824)
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on available-for-sale securities:
Unrealized holding gains (losses) arising during the period, net of tax of $713, $3,765, $220 and $9,477		22,582		1,884		34,089		56,867
Less: Reclassification adjustments for (gains) losses included in net income, net of tax of $35, $15,065, $2,663 and $24,223		64		(27,978)		(4,946)		(44,985)
Unrealized gains (losses) on available-for-sale securities, net		22,646		(26,094)		29,143		11,882
Other-than-temporary impairments on available-for-sale securities:
Other-than-temporary impairments arising during the period, net of tax of $0, $0, $0 and $0		-		-		-		-
Less: Reclassification adjustments for other-than-temporary impairments included in net income, net of tax of $0, $0, $12,980 and $0		-		-		24,106		-
Other-than-temporary impairments on available-for-sale securities, net		-		-		24,106		-
Foreign currency translation, net of tax of $3,715, $2,081, $2,975 and $1,369		(8,640)		4,074		(20,286)		(30,170)
Total other comprehensive income (loss), net of tax		14,006		(22,020)		32,963		(18,288)
Comprehensive income (loss)	$	(65,837)	$	392,399	$	428,253	$	(860,112)

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

3

MBIA INSURANCE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT) (Unaudited)

For The Nine Months Ended September 30, 2012

(In thousands except share amounts)

													Accumulated		Total
									Additional		Retained		Other		Shareholders’
	Preferred Stock				Common Stock				Paid-in		Earnings		Comprehensive		Equity
	Shares		Amount		Shares		Amount		Capital		(Deficit)		Income (Loss)		(Deficit)
Balance, December 31, 2011		2,759	$	27,598		67,936	$	15,000	$	985,835	$	(1,396,905)	$	4,075	$	(364,397)
Net Income (loss)		-		-		-		-		-		395,290		-		395,290
Other comprehensive income (loss)		-		-		-		-		-		-		32,963		32,963
Share-based compensation net of tax of $5,482		-		-		-		-		(4,358)		-		-		(4,358)
Balance, September 30, 2012		2,759	$	27,598		67,936	$	15,000	$	981,477	$	(1,001,615)	$	37,038	$	59,498

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

4

MBIA INSURANCE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands)

	Nine Months Ended September 30,
	2012		2011
Cash flows from operating activities:
Premiums, fees and reimbursements received	$	203,721	$	238,387
Investment income received		275,139		247,644
Insured derivative losses and commutations paid		(463,652)		(682,966)
Financial guarantee losses and loss adjustment expenses paid		(518,000)		(666,859)
Proceeds from reinsurance and recoveries		123,863		142,199
Operating and employee related expenses paid		(91,282)		(102,391)
Interest paid		(264,169)		(314,250)
Income taxes (paid) received		(6,493)		8,304
Net cash used by operating activities		(740,873)		(1,129,932)
Cash flows from investing activities:
Purchase of fixed-maturity securities		(170,134)		(281,224)
Sale and redemption of fixed-maturity securities		819,324		1,037,525
Proceeds from paydowns on variable interest entity loans		202,726		222,989
Proceeds from paydowns on secured loan to Parent		300,000		375,000
(Purchase) sale of short-term investments, net		(158,871)		464,550
Sale (purchase) of other investments, net		8,995		(4,308)
Sale of an entity to an affiliate		-		147,079
(Payments) proceeds for derivative settlements		(66,483)		-
Consolidation/deconsolidation of variable interest entities, net		(50,901)		(10,666)
Capital expenditures		(520)		(651)
Disposal of fixed assets		-		428
Net cash provided by investing activities		884,136		1,950,722
Cash flows from financing activities:
Principal paydowns of variable interest entity notes		(680,560)		(807,676)
Proceeds from issuances of secured loans by an affiliate		443,000		-
Net cash used by financing activities		(237,560)		(807,676)
Net increase (decrease) in cash and cash equivalents		(94,297)		13,114
Cash and cash equivalents - beginning of period		296,484		992,842
Cash and cash equivalents - end of period	$	202,187	$	1,005,956
Reconciliation of net income (loss) to net cash used by operating activities:
Net income (loss)	$	395,290	$	(841,824)
Changes in:
Accrued investment income		3,251		6,702
Premiums receivable		99,843		175,719
Deferred acquisition costs		83,720		100,532
Unearned premium revenue		(346,336)		(386,429)
Prepaid reinsurance premiums		241,883		185,805
Reinsurance premiums payable		(20,063)		(24,066)
Loss and loss adjustment expense reserves		101,718		(197,554)
Reinsurance recoverable on paid and unpaid losses		8,700		28,897
Insurance loss recoverable		(270,606)		(236,946)
Receivable from affiliates		6,406		23,812
Payable to reinsurers on recoverables		81,501		80,407
Accrued interest payable		40,890		-
Accounts receivable		47		158
Accrued expenses		17,371		(1,422)
Deferred fee revenue		(77,509)		(63,935)
Current income taxes		(4,253)		23,678
Amortization (accretion) of bond premiums (discounts), net		5,902		(16,003)
Depreciation		383		1,962
Other net realized (gains) losses		(975)		(1,142)
Investment losses on other-than-temporary impaired investments		42,916		-
Unrealized (gains) losses on insured derivatives		(1,473,161)		675,124
Net (gains) losses on financial instruments at fair value and foreign exchange		4,496		(123,799)
Deferred income tax provision (benefit)		198,955		(500,078)
Share-based compensation		1,124		1,120
Other operating		117,634		(40,650)
Total adjustments to net income (loss)		(1,136,163)		(288,108)
Net cash used by operating activities	$	(740,873)	$	(1,129,932)

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

5

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 1: Business Developments, Risks and Uncertainties, and Liquidity

Summary

MBIA Insurance Corporation is a wholly-owned subsidiary of MBIA Inc. (the “Parent” or “MBIA”). The guarantees of MBIA Insurance Corporation and its subsidiaries, (“MBIA Corp.”) 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 United States (“U.S.”) and that include toll roads, bridges, airports, public transportation facilities, utilities 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 (“ABS”) 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.

Business Developments

As a result of insured losses during the period from 2007 through September 30, 2012, MBIA Corp. has seen ratings downgrades, a near cessation of new insurance business written by MBIA Corp. and increasing liquidity pressure. MBIA Corp. has been unable to write meaningful amounts of new insurance business since 2008 and does not expect to write significant new insurance business prior to an upgrade of its credit ratings. As of September 30, 2012, MBIA Insurance Corporation was rated B with a negative outlook by Standard & Poor’s Financial Services LLC (“S&P”) and B3 with a review for a possible downgrade by Moody’s Investors Service, Inc. (“Moody’s”).

During the nine months ended September 30, 2012, MBIA Corp. continued to seek to reduce both the absolute amount and the volatility of its obligations and potential future claim payments through the execution of commutations of insurance policies. The combination of payments to reduce liabilities, claims payments and the failure of certain mortgage originators to honor contractual obligations to repurchase ineligible mortgage loans from securitizations MBIA Corp. insured has increased liquidity pressure on MBIA Corp. As of September 30, 2012 and December 31, 2011, cash and liquid assets were $386 million and $534 million, respectively. MBIA Corp. believes this liquidity position provides it with sufficient funds to cover expected obligations at least through the next twelve months.

During the nine months ended September 30, 2012, MBIA Corp. made $1.0 billion in gross claim payments, and commuted $13.0 billion of gross insured exposure primarily comprising structured commercial mortgage-backed securities (“CMBS”) pools, commercial real estate (“CRE”) collateralized debt obligations (“CDOs”), investment grade corporate CDOs, ABS CDOs, and subprime residential mortgage-backed securities (“RMBS”) transactions, of which $12.8 billion was previously disclosed in “Note 1: Business Developments, Risks and Uncertainties, and Liquidity” in the Notes to Consolidated Financial Statements included in Exhibit 99.3 to MBIA Inc.’s Annual Report on Form 10-K for the year ended December 31, 2011. Claims payments primarily resulted from the failure of certain mortgage-backed securities (“MBS”) sponsors to honor contractual obligations to repurchase ineligible mortgage loans. MBIA Corp.’s ability to commute insured transactions may be limited by available liquidity as determined based on management’s assessment. MBIA Corp. currently evaluates different methodologies to mitigate liquidity stress, including lending arrangements between affiliates.

The reference herein to “ineligible” mortgage loans refers to those mortgage loans that MBIA Corp. believes failed to comply with the representations and warranties made by the sellers/servicers of the securitizations to which those mortgage loans were sold (including mortgage loans that failed to comply with the related underwriting criteria), based on MBIA Corp.’s assessment of such mortgage loans’ compliance with such representations and warranties, which included information provided by third-party review firms. MBIA Corp.’s assessment of the ineligibility of individual mortgage loans could be challenged by the sellers/servicers of the securitizations in litigation and there is no assurance that MBIA Corp.’s determinations will prevail.

Risks and Uncertainties

MBIA Corp.’s consolidated financial statements include estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. The outcome of certain significant risks and uncertainties could cause MBIA Corp. to revise its estimates and assumptions or could cause actual results to differ from MBIA Corp.’s estimates. While MBIA Corp. believes it continues to have sufficient capital and liquidity to meet all of its expected obligations, if one or more possible adverse outcomes were to be realized, its statutory capital, financial position, results of operations and cash flows could be materially and adversely affected.

6

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 1: Business Developments, Risks and Uncertainties, and Liquidity (continued)

Significant risks and uncertainties that could affect amounts reported in MBIA Corp.’s financial statements in future periods include, but are not limited to, the following:

• MBIA Corp.’s efforts to recover losses from the second-lien securitization originators could be delayed, settled at amounts below its contractual claims or potentially settled at amounts below those recorded on its balance sheets prepared under accounting principles generally accepted in the United States of America (“GAAP”) and statutory accounting principles (“U.S. STAT”). As of September 30, 2012 and December 31, 2011, MBIA Corp.’s estimated recoveries after income taxes calculated at the federal statutory rate of 35%, were $2.1 billion and $2.0 billion, respectively, which was 3,547% and negative 556% of the consolidated total shareholders’ equity and deficit, respectively. As of September 30, 2012 and December 31, 2011, the related measures calculated under U.S. STAT were 144% and 89%, respectively, of the statutory capital of MBIA Corp. In addition, contractual claims could become subject to bankruptcy proceedings of the originators. On May 14, 2012, Residential Capital, LLC (“ResCap”), and its wholly-owned subsidiary companies, Residential Funding Company, LLC (“RFC”) and GMAC Mortgage LLC (“GMAC”) each filed for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code. MBIA Corp. has recorded put-back claims associated with RFC and GMAC. Accordingly, MBIA Corp.’s put-back claims are now subject to the ResCap bankruptcy proceeding. Additional contractual claims not related to ResCap could become subject to bankruptcy proceedings of the originators. Refer to “Note 5: Loss and Loss Adjustment Expense Reserves” for information about MBIA Corp.’s second-lien RMBS loss recoveries.

• While MBIA Corp. has commuted most of its higher risk CMBS pool exposures, a single counterparty—Bank of America and its subsidiary Merrill Lynch—holds a significant amount of MBIA Corp.’s remaining CMBS pool exposures, including a substantial majority of MBIA Corp.’s CMBS pools originally insured in 2006 and 2007 primarily referencing BBB and lower rated collateral. MBIA Corp. has also recorded its largest put-back asset against Bank of America and certain of its subsidiaries including Countrywide Home Loans, Inc. (“Countrywide”). While MBIA Corp. has estimated credit impairments or recorded loss reserves for the CMBS exposures, no material claims have been made to date. Bank of America/Merrill Lynch is also one of the two remaining plaintiffs in the litigation challenging the establishment of National Public Finance Guarantee Corporation (“Transformation Litigation”) (for a discussion of the Transformation Litigation, see “Note 11: Commitments and Contingencies”). As a result, the amount MBIA Corp. may ultimately collect from Bank of America/Countrywide on their put-back obligations in any litigation settlement could be impacted by potential commutation payments on these CMBS exposures and developments in the Transformation Litigation. Likewise, MBIA Corp.’s ability to commute these CMBS exposures may be impacted by developments in the put-back litigation with these entities and the Transformation Litigation. There can be no assurance that any such settlement or commutation will occur or that any such settlement or commutation, if it occurred, would be consummated within the estimates of expected recoveries or loss payments associated with these exposures that are recorded in MBIA Corp.’s consolidated financial statements. In addition, due to the deterioration in MBIA Corp.’s CMBS exposures, primarily in those exposures held by Bank of America/Merrill Lynch, there is an increased likelihood that MBIA Corp. will experience claims on those exposures, which claims could be substantial. Depending on the amount of such claims and the amounts of claims on other policies issued by MBIA Corp., MBIA Corp. may not have sufficient liquid assets to pay such claims in the absence of a settlement with Bank of America/Merrill Lynch and the commutation of the CMBS exposures held by Bank of America/Merrill Lynch or in the absence of the collection of other substantial put-back recoverables.

• If commercial real estate servicer behavior does not continue to mitigate potential or actual credit losses in line with current trends, MBIA Corp. could incur substantial losses in that sector, primarily on the Bank of America/Merrill Lynch CMBS exposures described above. As of September 30, 2012, MBIA Corp. had CMBS pool and CRE CDO insured par exposure of approximately $15.7 billion and $2.2 billion, respectively, excluding approximately $2.8 billion of CRE loan pools, primarily comprising European assets. Since the end of 2007 through September 30, 2012, MBIA Corp.’s CMBS pool and CRE CDO gross par exposure has decreased by approximately $36.1 billion, of which $33.1 billion resulted from negotiated commutations and early settlements. Refer to “Note 5: Loss and Loss Adjustment Expense Reserves” for information about MBIA Corp.’s estimate of CMBS credit impairments.

• Incurred losses from insured RMBS have declined from their peaks. However, due to the large percentage of ineligible mortgage loans included within MBIA Corp.’s insured second-lien portfolio, performance remains difficult to predict and losses could ultimately be in excess of MBIA Corp.’s current estimated loss reserves. Refer to “Note 5: Loss and Loss Adjustment Expense Reserves” for information about MBIA Corp.’s RMBS loss reserves.

• While MBIA Corp. has settled a substantial portion of its insured ABS CDO exposure at levels, on average, within its previously established statutory loss reserves related to those exposures, further economic stress might cause increases in MBIA Corp.’s loss estimates on its remaining exposure. As of September 30, 2012, MBIA Corp.’s ABS CDO gross par outstanding was approximately $4.4 billion, and had decreased approximately $32.9 billion since 2007.

7

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 1: Business Developments, Risks and Uncertainties, and Liquidity (continued)

• In recent years, key components of MBIA Corp.’s strategy have included commuting volatile insured exposures, purchasing instruments issued or guaranteed by MBIA Corp. in order to reduce future expected economic losses and managing its liquidity requirements and risk. In order to implement this strategy, MBIA Inc. put in place agreements that allocate liquidity resources between MBIA Corp. and its affiliates in order to fund commutations and provide liquidity, where needed. The agreements with affiliates have required the approval of the New York State Department of Financial Services (“NYSDFS”). MBIA Corp.’s ability to continue to draw on affiliate financing, obtain permission for contingency reserve releases, and its ability to pay dividends to MBIA Inc. will in most cases require further approvals from the NYSDFS, and there can be no assurance that MBIA Corp. will be able to obtain such approvals. In addition, in connection with providing such approvals, the NYSDFS may require MBIA Corp. to agree to take, or refrain from taking, certain actions.

• MBIA Corp.’s recent financial results have been volatile, which has impacted management’s ability to accurately project future taxable income. Insurance losses incurred beyond those currently projected may cause MBIA Corp. to record additional allowances against a portion or all of its deferred tax assets. Refer to “Note 10: Income Taxes” for information about MBIA Corp.’s deferred tax assets.

• The sovereign debt crisis in the Eurozone could have an adverse impact on insured European exposures and/or cause a global slowdown in growth, thereby adversely affecting U.S. insured exposures.

• In the event the economy and the markets to which MBIA Corp. is exposed do not improve, or decline, the unrealized losses on insured credit derivatives could increase, causing additional stress in MBIA Corp.’s reported financial results. In addition, volatility in the relationship between MBIA Corp.’s credit spreads and those on underlying collateral assets of insured credit derivatives can create significant unrealized gains and losses in MBIA Corp.’s reported results of operations. Refer to “Note 6: Fair Value of Financial Instruments” for information about MBIA Corp.’s valuation of insured credit derivatives.

As of September 30, 2012, MBIA Corp. had $1.5 billion of statutory capital. Statutory capital, defined as policyholders’ surplus and contingency reserves, is a key measure of an insurance company’s financial condition under insurance laws and regulations. Failure to maintain adequate levels of statutory surplus and total statutory capital could lead to intervention by MBIA Corp.’s insurance regulators in its operations and constitute an event of default under certain of MBIA Corp.’s contracts, thereby materially and adversely affecting MBIA Corp.’s financial condition and results of operations. Pursuant to approval granted by the NYSDFS in accordance with New York Insurance Law (“NYIL”), as of September 30, 2012, MBIA Corp. released to surplus an aggregate of $196 million of excessive contingency reserves. As of September 30, 2012, MBIA Corp. had a deficit of $97 million of qualifying assets required to support its contingency reserves. The deficit was caused by MBIA Corp.’s sale of liquid assets in order to make claim payments and the failure of certain mortgage originators, particularly Bank of America, to honor their contractual obligations to repurchase ineligible mortgage loans from securitizations MBIA Corp. insured. The deficit is expected to grow as additional commutation and claim payments are made in the future. MBIA Corp. has reported the deficit to the NYSDFS. MBIA Corp. has requested approval from the NYSDFS to release $97 million of contingency reserves as of September 30, 2012, but to date has not received approval. For risks associated with MBIA Corp.’s failure to meet its contingency reserve requirement, see Item 1A. “Risk Factors—Liquidity and Market Related Risk Factors—If the Company’s insurance subsidiaries fail to meet regulatory capital requirements they may become subject to regulatory action” in MBIA Inc.’s annual report on Form 10-K for the year ended December 31, 2011.

As of September 30, 2012, MBIA Corp. exceeded its aggregate risk limits under the NYIL by $47 million. MBIA Corp. will notify the NYSDFS of the overage and will submit a plan to achieve compliance with the limits in accordance with the NYIL. If MBIA Corp. is not in compliance with its aggregate risk limits, the NYSDFS may prevent MBIA Corp. from transacting any new financial guarantee insurance business until it no longer exceeds the limitations.

8

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 1: Business Developments, Risks and Uncertainties, and Liquidity (continued)

Key Lending Agreements with Affiliates

MBIA Corp. has entered into agreements with affiliates as follows:

National Secured Loan

National Public Finance Guarantee Corporation provided a $1.1 billion secured loan to MBIA Insurance Corporation (“National Secured Loan”) in order to enable MBIA Insurance Corporation to fund settlements and commutations of its insurance policies. This loan was approved by the NYSDFS as well as by the boards of directors of MBIA Inc., MBIA Insurance Corporation and National Public Finance Guarantee Corporation. The National Secured Loan has a fixed annual interest rate of 7% and a maturity date of December 2016. MBIA Insurance Corporation has the option to defer payments of interest when due by capitalizing interest amounts to the loan balance, subject to the collateral value exceeding certain thresholds. MBIA Insurance Corporation has elected to defer the interest payments due under the loan. MBIA Insurance Corporation’s obligation to repay the loan is secured by a pledge of collateral having an estimated value in excess of the notional amount of the loan as of September 30, 2012, which collateral comprised the following future receivables of MBIA Corp.: (i) its right to receive put-back recoveries related to ineligible mortgage loans included in its insured second-lien RMBS transactions; (ii) future recoveries on defaulted insured second-lien RMBS transactions resulting from expected excess spread generated by performing loans in such transactions; and (iii) future installment premiums. During the nine months ended September 30, 2012, MBIA Insurance Corporation borrowed an additional $443 million under the National Secured Loan with the approval of the NYSDFS at the same terms as the original loan to fund additional commutations of its insurance policies. As of September 30, 2012, the outstanding principal amount under this loan was $1.6 billion. MBIA Insurance Corporation may seek to borrow additional amounts under the loan in the future. Any such increase or other amendment to the terms of the loan would be subject to regulatory approval by the NYSDFS.

MBIA Corp. Secured Loan

MBIA Corp., as lender, maintained a master repurchase agreement with MBIA Inc. (“MBIA Corp. Secured Loan”) for the benefit of MBIA Inc.’s asset/liability products business, which totaled $2.0 billion at inception and was scheduled to mature in May 2012, as amended. This loan was repaid in May 2012 and there have been no further draws. During 2012, the average interest rate on the MBIA Corp. Secured Loan was 2.51% through the repayment in May 2012. Also in May 2012, the NYSDFS approved the maturity extension of the MBIA Corp. Secured Loan to May 2013 with a maximum outstanding amount of $450 million, subject to MBIA Corp. obtaining prior regulatory approval from the NYSDFS for any draws under the facility.

Liquidity

As a financial services company, MBIA Corp. has been materially adversely affected by conditions in global financial markets. Current conditions and events in these markets, in addition to the failure by the originators of RMBS to repurchase the ineligible loans in securitizations MBIA Corp. has insured, have put substantial stress on MBIA Corp.’s liquidity resources.

MBIA Corp. utilizes a liquidity risk management framework, the primary objectives of which are to monitor liquidity positions and projections in its businesses and guide the matching of liquidity resources to needs. MBIA Corp. monitors its cash and liquid asset resources using stress-scenario testing. Members of MBIA Inc.’s and MBIA Corp.’s senior management meet regularly to review liquidity metrics, discuss contingency plans and establish target liquidity cushions on an enterprise-wide basis. As part of MBIA Corp.’s liquidity risk management framework, MBIA Corp. evaluates and manages liquidity on a legal entity basis to take into account the legal, regulatory and other limitations on available liquidity resources within MBIA Corp.

MBIA Corp.’s liquidity resources are subject to: an increased likelihood that MBIA Corp. will experience claims on its CMBS exposures, primarily in those exposures held by Bank of America/Merrill Lynch, due to the deterioration in such exposures; delays in the collection of recoveries related to ineligible mortgage loans in certain insured RMBS transactions; payments to counterparties in consideration for the commutation of insured transactions, and payments on insured exposures that in some cases may be large bullet payments. MBIA Corp. is currently subject to negative cash flow as a result of these payments and delays in collecting recoveries.

Liquidity available to MBIA Corp. is affected by its ability to collect on recoverables associated with loss payments, the payment of claims on insured exposures, payments made to commute insured exposures, the repayment of the National Secured Loan, a reduction in investment income, any unanticipated expenses, and the impairment or a significant decline in the fair value of invested assets. MBIA Corp. may also experience liquidity constraints as a result of NYIL requirements that MBIA Corp. maintain specified, high quality assets to back its reserves and surplus.

9

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 1: Business Developments, Risks and Uncertainties, and Liquidity (continued)

MBIA Corp. believes its current liquidity position is adequate to make expected future claims payments and it expects to settle its insured CMBS exposures with no cash payments. However, its liquidity position has been stressed due to the failure of the sellers/servicers of RMBS transactions insured by MBIA Corp. to repurchase ineligible mortgage loans in certain insured transactions and payments to counterparties in consideration for the commutation of insured transactions, which have resulted in a substantial reduction of exposure and potential loss volatility. While MBIA Corp. has made and may in the future make payments to counterparties in consideration for the commutation of insured transactions, MBIA Corp.’s ability to commute insured transactions will depend on management’s assessment of available liquidity. In addition, due to the deterioration in MBIA Corp.’s CMBS exposures, primarily in those exposures held by Bank of America/Merrill Lynch, there is an increased likelihood that MBIA Corp. will experience claims on those exposures, which claims could be substantial. Depending on the amount of such claims and the amounts of claims on other policies issued by MBIA Corp., MBIA Corp. may not have sufficient liquid assets to pay such claims in the absence of a settlement with Bank of America/Merrill Lynch and the commutation of the CMBS exposures held by Bank of America/Merrill Lynch or in the absence of the collection of other substantial put-back recoverables.

Payment requirements for MBIA Corp.’s financial guarantee contracts fall into three categories: (i) timely interest and ultimate principal; (ii) ultimate principal only at final maturity; and (iii) payments upon settlement of individual collateral losses as they occur after any deductible or subordination has been exhausted, which payments are unscheduled and therefore more difficult to predict, and which category applies to most of the transactions on which MBIA Corp. has recorded loss reserves. Insured transactions that require payment in full of the principal insured at maturity could present liquidity risks for MBIA Corp. since payment of the principal is due at maturity but any salvage could be recovered over time after payment of the principal amount. MBIA Corp. is generally required to satisfy claims within one to three business days, and as a result seeks to identify potential claims in advance through MBIA Corp.’s monitoring process. While MBIA Corp.’s financial guarantee policies generally cannot be accelerated, thereby mitigating liquidity risk, the insurance of credit default swap (“CDS”) contracts may, in certain events, including the insolvency or payment default of the insurer or the issuer of the CDS, be subject to termination by the counterparty, triggering a claim for the fair value of the contract. In order to monitor liquidity risk and maintain appropriate liquidity resources, MBIA Corp. uses the same methodology as it uses to monitor credit quality and losses within its insured portfolio, including stress scenarios. Refer to “Note 5: Loss and Loss Adjustment Expense Reserves” in the Notes to Consolidated Financial Statements for a discussion of MBIA Corp.’s loss and loss adjustment expense (“LAE”) process.

MBIA Corp. also requires cash for the payment of operating expenses, as well as principal and interest related to its surplus notes. Pursuant to Section 1307 of the NYIL and the Fiscal Agency Agreement governing MBIA Corp.’s surplus notes, any payment on the notes may be made only with the prior approval of the Superintendent of the NYSDFS “whenever, in his judgment, the financial condition of [MBIA Corp.] warrants” and payment may be made only out of MBIA Corp.’s “free and divisible surplus”. If these conditions are not met, MBIA Corp. would not be obligated to make any applicable interest payment and no default or event of default would occur under the Fiscal Agency Agreement or any of MBIA Corp.’s other agreements. While the NYSDFS has approved the note interest payments in the past, its approval of the most recent note interest payment on July 16, 2012 was not received until after the date on which the Fiscal Agency Agreement required MBIA Corp. to notify the registered holders of the notes and the Fiscal Agent of the failure to obtain such approval, as MBIA Inc. disclosed on a Form 8-K filed on July 10, 2012. There can be no assurance that the NYSDFS will approve the next scheduled note interest payment on January 15, 2013 or any subsequent payments, or that it will approve any payment by the scheduled interest payment date or by the date on which the notice is required to be delivered to the registered holders and the Fiscal Agent, nor can there be any assurance that the NYSDFS will approve any optional redemption payment that MBIA Corp. may seek to make on or after January 15, 2013.

Since the fourth quarter of 2007 through September 30, 2012, MBIA Corp. has made $11.6 billion of cash payments, before reinsurance and collections and, excluding LAE, including payments made to debt holders of consolidated variable interest entities (“VIEs,”) associated with second-lien RMBS securitizations and with commutations and claim payments relating to CDS contracts. These cash payments include loss payments of $893 million made on behalf of MBIA Corp.’s consolidated VIEs. Of the $11.6 billion, MBIA Corp. has paid $6.6 billion of gross claims (before reinsurance and collections and, excluding LAE) on policies insuring second-lien RMBS securitizations, driven primarily by an extensive number of ineligible mortgage loans being placed in the securitizations in breach of the representations and warranties of the sellers/servicers. In addition, MBIA Corp. has paid $5.0 billion of gross settlement and claim payments (before reinsurance and collections and excluding LAE) on insured credit derivatives. In addition, since the fourth quarter of 2007 through September 30, 2012, MBIA Corp. has collected $185 million on excess spread before reinsurance.

10

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 1: Business Developments, Risks and Uncertainties, and Liquidity (continued)

MBIA Corp. is seeking to enforce its rights to have mortgage sellers/servicers cure, replace or repurchase ineligible mortgage loans from securitizations and has recorded a total of $3.2 billion of related expected recoveries on its consolidated balance sheet as of September 30, 2012, including expected recoveries recorded in MBIA Corp.’s consolidated VIEs. MBIA Corp.’s put-back claims have been disputed by the loan sellers/servicers and are the subject of certain litigations discussed more fully in “Note 11: Commitments and Contingencies.” On May 14, 2012, ResCap and its wholly-owned subsidiary companies, RFC and GMAC each filed for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code. Additionally, there is some risk that the sellers/servicers or other responsible parties might not be able to fully satisfy any judgment MBIA Corp. secures in litigation and ResCap’s bankruptcy filing. Further, there can be no assurance that MBIA Corp. will be successful or that it will not be delayed in realizing these recoveries. Such risks are contemplated in the scenarios MBIA Corp. utilizes to calculate these recoveries, which are recognized on MBIA Corp.’s consolidated balance sheets. MBIA Corp. believes that it has adequate liquidity resources to provide for anticipated cash outflows; however, if MBIA Corp. does not realize or is delayed in realizing these expected recoveries, MBIA Corp. may not have adequate liquidity to fully execute its strategy to reduce future potential economic losses by commuting policies and purchasing instruments issued or guaranteed by MBIA Corp., or to repay any affiliate borrowings.

A portion of the commutation payments made since the fourth quarter of 2011 were financed through the National Secured Loan. MBIA Insurance Corporation’s ability to repay the loan and any accrued interest will be primarily predicated on its ability to collect on its recoveries in the future, including its ability to successfully enforce its rights to have mortgage sellers/servicers cure, replace or repurchase ineligible mortgage loans from insured securitizations.

MBIA Corp. also insures third-party holders of MBIA Inc.’s obligations. If MBIA Inc. was unable to meet payment or collateral requirements associated with these obligations, the holders thereof could make claims under the MBIA Corp. insurance policies.

As of September 30, 2012, MBIA Corp. held cash and available-for-sale investments of $1.4 billion, of which $386 million comprised cash and highly liquid assets. As of December 31, 2011, MBIA Corp. held cash and available-for-sale investments of $1.5 billion, of which $534 million comprised cash and highly liquid assets. MBIA Corp. believes that its liquidity resources, including expected cash inflows, will adequately provide for anticipated cash outflows. In the event of unexpected liquidity requirements, MBIA Corp. may have insufficient resources to meet its obligations or insufficient qualifying assets to support its surplus and reserves, and may seek to increase its cash holdings position by selling or financing assets, or raising external capital, and there can be no assurance that MBIA Corp. will be able to draw on these additional sources of liquidity.

Note 2: Significant Accounting Policies

MBIA Corp. has disclosed its significant accounting policies in “Note 2: Significant Accounting Policies” in the Notes to Consolidated Financial Statements included in Exhibit 99.3 to MBIA Inc.’s Annual Report on Form 10-K for the year ended December 31, 2011. The following significant accounting policies provide an update to those included under the same captions in Exhibit 99.3 to MBIA Inc.’s Annual Report on Form 10-K.

Basis of Presentation

The accompanying unaudited interim consolidated financial statements do not include all of the information and disclosures required by GAAP for annual periods. These statements should be read in conjunction with MBIA Corp.’s consolidated financial statements and notes thereto included in Exhibit 99.3 to MBIA Inc.’s Annual Report on Form 10-K for the year ended December 31, 2011. 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 (U.S.), but in the opinion of management such financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for the fair statement of MBIA Corp.’s consolidated financial position and results of operations. All material intercompany balances and transactions have been eliminated.

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. Actual results could differ from those estimates. As additional information becomes available or actual amounts become determinable, the recorded estimates are revised and reflected in operating results.

The results of operations for the three and nine months ended September 30, 2012 may not be indicative of the results that may be expected for the year ending December 31, 2012. The December 31, 2011 consolidated balance sheet was derived from audited financial statements, but does not include all disclosures required by GAAP for annual periods. Certain amounts have been reclassified in prior years’ financial statements to conform to the current presentation. Such reclassifications had no impact on total revenues, expenses, assets, liabilities, or shareholders’ equity for all periods presented.

11

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 2: Significant Accounting Policies (continued)

Consolidation

The consolidated financial statements include the accounts of MBIA Insurance Corp., its wholly-owned subsidiaries and all other entities in which MBIA Corp. has a controlling financial interest. All material intercompany balances and transactions have been eliminated.

Statements of Cash Flows

Previously, MBIA Corp. has reported its consolidated statements of cash flows using the indirect method. The indirect method uses accrual accounting information to present the cash flows from operations. Effective January 1, 2012, MBIA Corp. has elected to present the consolidated statements of cash flows using the direct method. The direct method uses actual cash flow information from MBIA Corp.’s operations, rather than using accrual accounting values. Using either the direct or indirect method, total cash flows from operations remain the same. In addition, the presentation of cash flows from investing and financing activities using either the direct or indirect method are also the same. The change to the direct method of calculating and presenting cash flows from operations was implemented retroactively for all statements of cash flows presented herein. Use of the direct method requires a reconciliation of net income to cash flows from operations. This reconciliation is provided as a supplement directly beneath the consolidated statements of cash flows.

Subsequent Events

MBIA Corp. has evaluated all subsequent events as of November 7, 2012, the date of issuance of the consolidated financial statements, for inclusion in MBIA Corp.’s consolidated financial statements and/or accompanying notes.

Note 3: Recent Accounting Pronouncements

Recently Adopted Accounting Standards

Presentation of Comprehensive Income (ASU 2011-05)

In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-05, “Comprehensive Income (Topic 220)—Presentation of Comprehensive Income.” This amendment eliminates the current option to report other comprehensive income (loss) and its components solely in the statements of changes in equity except for the presentation of reclassification adjustments for which compliance has been deferred by the FASB. The amendment does not change what currently constitutes net income and other comprehensive income (loss). The new guidance is effective for MBIA Corp. beginning January 1, 2012. In December 2011, the FASB issued ASU 2011-12 “Comprehensive Income (Topic 220)—Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05,” which defers certain aspects of ASU 2011-05 related to the presentation of reclassification adjustments. MBIA Corp. adopted this standard in the first quarter of 2012. The standard only affected MBIA Corp.’s presentation of comprehensive income, and did not affect MBIA Corp.’s consolidated balance sheets, results of operations, or cash flows. Refer to “Consolidated Statements of Comprehensive Income” and “Consolidated Statement of Changes in Shareholders’ Equity” for presentation of comprehensive income under the new standard.

Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (ASU 2011-04)

In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820)—Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” This amendment results in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between GAAP and International Financial Reporting Standards (“IFRSs”). MBIA Corp. adopted this standard in the first quarter of 2012. This standard only affected MBIA Corp.’s disclosures related to fair value; therefore, the adoption of this standard did not affect MBIA Corp.’s consolidated balance sheets, results of operations, or cash flows. Refer to “Note 6: Fair Value of Financial Instruments” for these disclosures.

12

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 3: Recent Accounting Pronouncements (continued)

Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts (ASU 2010-26)

In October 2010, the FASB issued ASU 2010-26, “Financial Services – Insurance (Topic 944)—Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts.” This amendment specifies which costs incurred in the acquisition of new and renewal insurance contracts should be capitalized. MBIA Corp. adopted this standard on a prospective basis effective January 1, 2012. As MBIA Corp. is currently not writing any significant new business, the adoption of this standard did not have a material effect on MBIA Corp.’s consolidated balance sheets, results of operations, or cash flows. The difference between the amount of acquisition costs capitalized during the first nine months of 2012 compared with the amount of acquisition costs that would have been capitalized during the period if MBIA Corp.’s previous policy had been applied during that period is not material because MBIA Corp. did not write any significant new insurance business during the first nine months of 2012.

Recent Accounting Developments

Disclosures about Offsetting Assets and Liabilities (ASU 2011-11)

In December 2011, the FASB issued ASU 2011-11, “Balance Sheet (Topic 210)—Disclosures about Offsetting Assets and Liabilities.” ASU 2011-11 creates new disclosure requirements about the nature of MBIA Corp.’s rights of setoff and related arrangements associated with its financial instruments and derivative instruments. This amendment does not change the existing offsetting eligibility criteria or the permitted balance sheet presentation for those instruments that meet the eligibility criteria. The disclosure requirements are effective for MBIA Corp. beginning in the first quarter of 2013. This standard will only affect MBIA Corp.’s disclosures and will not affect MBIA Corp.’s consolidated balance sheets, results of operations, or cash flows.

Refer to the Notes to Consolidated Financial Statements of MBIA Corp. included in Exhibit 99.3 to MBIA Inc.’s Annual Report on Form 10-K for the year ended December 31, 2011 for further information regarding the effects of recently adopted accounting standards on prior year financial statements.

Note 4: Variable Interest Entities

MBIA Corp. provides credit protection to issuers of obligations that may involve issuer-sponsored special purpose entities (“SPEs”). An SPE may be considered a VIE to the extent the SPE’s total equity at risk is not sufficient to permit the SPE to finance its activities without additional subordinated financial support or its equity investors lack any one of the following characteristics: (i) the power to direct the activities of the SPE that most significantly impact the entity’s economic performance or (ii) the obligation to absorb the expected losses of the entity or the right to receive the expected residual returns of the entity. A holder of a variable interest or interests in a VIE is required to assess whether it has a controlling financial interest, and thus is required to consolidate the entity as primary beneficiary. An assessment of a controlling financial interest identifies the primary beneficiary as the variable interest holder that has both of the following characteristics: (i) the power to direct the activities of the VIE that most significantly impact the entity’s economic performance and (ii) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. The primary beneficiary is required to consolidate the VIE. An ongoing reassessment of controlling financial interest is required to be performed based on any substantive changes in facts and circumstances involving the VIE and its variable interests.

MBIA Corp. evaluates issuer-sponsored special purpose entities initially to determine if an entity is a VIE, and is required to reconsider its initial determination if certain events occur. For all entities determined to be VIEs, MBIA Corp. performs an ongoing reassessment to determine whether its guarantee to provide credit protection on obligations issued by VIEs provides MBIA Corp. with a controlling financial interest. Based on its ongoing reassessment of controlling financial interest, MBIA Corp. determines whether a VIE is required to be consolidated or deconsolidated.

MBIA Corp. makes its determination for consolidation based on a qualitative assessment of the purpose and design of a VIE, the terms and characteristics of variable interests of an entity, and the risks a VIE is designed to create and pass through to holders of variable interests. MBIA Corp. generally provides credit protection on obligations issued by VIEs, and holds certain contractual rights according to the purpose and design of a VIE. MBIA Corp. may have the ability to direct certain activities of a VIE depending on facts and circumstances, including the occurrence of certain contingent events, and these activities may be considered the activities of a VIE that most significantly impact the entity’s economic performance. MBIA Corp. generally considers its guarantee of principal and interest payments of insured obligations, given nonperformance by a VIE, to be an obligation to absorb losses of the entity that could potentially be significant to the VIE. At the time MBIA Corp. determines it has the ability to direct the activities of a VIE that most significantly impact the economic performance of the entity based on facts and circumstances, MBIA Corp. is deemed to have a controlling financial interest in the VIE and is required to consolidate the entity as primary beneficiary. MBIA Corp. performs an ongoing reassessment of controlling financial interest that may result in consolidation or deconsolidation of any VIE.

13

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 4: Variable Interest Entities (continued)

Nonconsolidated VIEs

The following tables present the total assets of nonconsolidated VIEs in which MBIA Corp. holds a variable interest as of September 30, 2012 and December 31, 2011. The following tables also present MBIA Corp.’s maximum exposure to loss for nonconsolidated VIEs and carrying values of the assets and liabilities for its interests in these VIEs as of September 30, 2012 and December 31, 2011. MBIA Corp. has aggregated nonconsolidated VIEs based on the underlying credit exposure of the insured obligation. The nature of MBIA Corp.’s variable interests in nonconsolidated VIEs is related to financial guarantees, insured CDS contracts and any investments in obligations issued by nonconsolidated VIEs.

	September 30, 2012
					Carrying Value of Assets						Carrying Value of Liabilities
In millions	VIE Assets		Maximum Exposure to Loss		Investments(1)		Premiums Receivable(2)		Insurance  Loss Recoverable(3)		Unearned Premium Revenue(4)		Loss and Loss Adjustment Expense Reserves(5)		Derivative Liabilities(6)
Insurance:
Global structured finance:
Collateralized debt obligations	$	17,552	$	11,053	$	-	$	67	$	3	$	59	$	78	$	85
Mortgage-backed residential		36,464		13,578		9		75		2,967		73		485		4
Mortgage-backed commercial		4,751		2,456		-		2		-		2		-		-
Consumer asset-backed		6,372		3,390		11		20		-		20		16		-
Corporate asset-backed		22,006		11,261		-		144		21		159		-		1
Total global structured finance		87,145		41,738		20		308		2,991		313		579		90
Global public finance		46,795		21,578		-		216		-		268		-		-
Total insurance	$	133,940	$	63,316	$	20	$	524	$	2,991	$	581	$	579	$	90

(1) - Reported within “Investments” on MBIA Corp.’s consolidated balance sheets.

(2) - Reported within “Premiums receivable” on MBIA Corp.’s consolidated balance sheets.

(3) - Reported within “Insurance loss recoverable” on MBIA Corp.’s consolidated balance sheets.

(4) - Reported within “Unearned premium revenue” on MBIA Corp.’s consolidated balance sheets.

(5) - Reported within “Loss and loss adjustment expense reserves” on MBIA Corp.’s consolidated balance sheets.

(6) - Reported within “Derivative liabilities” on MBIA Corp.’s consolidated balance sheets.

	December 31, 2011
					Carrying Value of Assets						Carrying Value of Liabilities
In millions	VIE Assets		Maximum Exposure to Loss		Investments(1)		Premiums Receivable(2)		Insurance  Loss Recoverable(3)		Unearned Premium Revenue(4)		Loss and Loss Adjustment Expense Reserves(5)		Derivative Liabilities(6)
Insurance:
Global structured finance:
Collateralized debt obligations	$	26,507	$	15,466	$	42	$	67	$	-	$	58	$	3	$	113
Mortgage-backed residential		47,669		16,379		25		87		2,773		86		428		5
Mortgage-backed commercial		5,001		2,644		-		2		-		2		-		-
Consumer asset-backed		8,015		4,563		16		26		-		25		23		-
Corporate asset-backed		29,855		15,577		241		192		22		205		-		1
Total global structured finance		117,047		54,629		324		374		2,795		376		454		119
Global public finance		42,106		21,774		-		215		-		270		-		-
Total insurance	$	159,153	$	76,403	$	324	$	589	$	2,795	$	646	$	454	$	119

(1) - Reported within “Investments” on MBIA Corp.’s consolidated balance sheets.

(2) - Reported within “Premiums receivable” on MBIA Corp.’s consolidated balance sheets.

(3) - Reported within “Insurance loss recoverable” on MBIA Corp.’s consolidated balance sheets.

(4) - Reported within “Unearned premium revenue” on MBIA Corp.’s consolidated balance sheets.

(5) - Reported within “Loss and loss adjustment expense reserves” on MBIA Corp.’s consolidated balance sheets.

(6) - Reported within “Derivative liabilities” on MBIA Corp.’s consolidated balance sheets.

The maximum exposure to loss as a result of MBIA Corp.’s variable interests in VIEs is represented by insurance in force. Insurance in force is the maximum future payments of principal and interest, net of cessions to reinsurers, which may be required under commitments to make payments on insured obligations issued by nonconsolidated VIEs.

14

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 4: Variable Interest Entities (continued)

Consolidated VIEs

The carrying amounts of assets and liabilities of consolidated VIEs were $7.7 billion and $6.7 billion, respectively, as of September 30, 2012, and $9.5 billion and $8.5 billion, respectively, as of December 31, 2011. The carrying amounts of assets and liabilities are presented separately in “Assets of consolidated variable interest entities” and “Liabilities of consolidated variable interest entities” on MBIA Corp.’s consolidated balance sheets. Additional VIEs are consolidated or deconsolidated based on an ongoing reassessment of controlling financial interest, when events occur or circumstances arise, and whether the ability to exercise rights that constitute power to direct activities of any VIEs are present according to the design and characteristics of these entities. No additional VIEs were consolidated during the nine months ended September 30, 2012 and 2011. No gains or losses were recognized on the VIEs that were deconsolidated during the nine months ended September 30, 2012 and net realized gains related to the deconsolidation of VIEs were immaterial for the nine months ended September 30, 2011.

Holders of insured obligations of issuer-sponsored VIEs related to MBIA Corp. do not have recourse to the general assets of MBIA Corp. except to the extent of the insurance provided. In the event of nonpayment of an insured obligation issued by a consolidated VIE, MBIA Corp. is obligated to pay principal and interest, when due, on the respective insured obligation only. MBIA Corp.’s exposure to consolidated VIEs is limited to the credit protection provided on insured obligations and any additional variable interests held by MBIA Corp.

Note 5: Loss and Loss Adjustment Expense Reserves

Loss and Loss Adjustment Expense Process

As of September 30, 2012, the majority of MBIA Corp.’s case basis reserves and insurance loss recoveries recorded in accordance with GAAP were related to insured second-lien and first-lien RMBS transactions. These reserves and recoveries do not include estimates for policies insuring credit derivatives. Policies insuring credit derivative contracts are accounted for as derivatives and carried at fair value under GAAP. The fair values of insured derivative contracts are influenced by a variety of market and transaction-specific factors that may be unrelated to potential future claim payments under MBIA Corp.’s insurance policies. In the absence of credit impairments on insured derivative contracts or the early termination of such contracts at a loss, the cumulative unrealized losses recorded from fair valuing these contracts should reverse before or at the maturity of the contracts.

Notwithstanding the difference in accounting under GAAP for financial guarantee policies and MBIA Corp.’s insured derivatives, insured derivatives have similar terms, conditions, risks, and economic profiles to financial guarantee insurance policies, and, therefore, are evaluated by MBIA Corp. for loss (referred to as credit impairment herein) and LAE periodically in a manner similar to the way that loss and LAE reserves are estimated for financial guarantee insurance policies. Credit impairments represent actual payments and collections plus the present value of estimated expected future claim payments, net of recoveries. MBIA Corp.’s expected future claim payments for insured derivatives were discounted using a rate of 5.59%, the same rate it used to calculate its statutory loss reserves as of September 30, 2012. These credit impairments, calculated in accordance with U.S. STAT, differ from the fair values recorded in MBIA Corp.’s consolidated financial statements. MBIA Corp. considers its credit impairment estimates as critical information for investors as it provides information about loss payments MBIA Corp. expects to make on insured derivative contracts. As a result, the following loss and LAE process discussion includes information about loss and LAE activity recorded in accordance with GAAP for financial guarantee insurance policies and credit impairments estimated in accordance with U.S. STAT for insured derivative contracts. Refer to “Note 6: Loss and Loss Adjustment Expense Reserves” in the Notes to Consolidated Financial Statements included in Exhibit 99.3 of MBIA Inc.’s Annual Report on Form 10-K for the year ended December 31, 2011 for information about MBIA Corp.’s monitoring of outstanding insured obligations and for additional information about its loss reserving process. Refer to “Note 6: Fair Value of Financial Instruments” included herein for additional information about MBIA Corp.’s insured credit derivative contracts.

RMBS Case Basis Reserves and Recoveries (Financial Guarantees)

MBIA Corp.’s RMBS reserves and recoveries relate to financial guarantee insurance policies. MBIA Corp. calculated RMBS case basis reserves as of September 30, 2012 for both second-lien and first-lien RMBS transactions using a process called the “Roll Rate Methodology.” The Roll Rate Methodology is a multi-step process using a database of loan level information, a proprietary internal cash flow model, and a commercially available model to estimate expected ultimate cumulative losses on insured bonds. “Roll Rate” is defined as the probability that current loans become delinquent and that loans in the delinquent pipeline are charged-off or liquidated. Generally, Roll Rates are calculated for the previous three months and averaged. The loss reserve estimates are based on a probability-weighted average of three scenarios of loan losses (base case, stress case, and an additional stress case).

15

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 5: Loss and Loss Adjustment Expense Reserves (continued)

In calculating ultimate cumulative losses for RMBS, MBIA Corp. estimates the amount of loans that are expected to be charged-off (deemed uncollectible by servicers of the transactions) or liquidated in the future. MBIA Corp. assumes that charged-off loans have zero recovery values.

Second-lien RMBS Reserves

MBIA Corp.’s second-lien RMBS case basis reserves as of September 30, 2012 relate to RMBS backed by home equity lines of credit (“HELOC”) and closed-end second mortgages (“CES”).

The Roll Rates for 30-59 day delinquent loans and 60-89 day delinquent loans are calculated on a transaction-specific basis. MBIA Corp. assumes that the Roll Rate for 90+ day delinquent loans, excluding foreclosures, Real Estate Owned (“REO”) and bankruptcies, is 95%. The Roll Rates are applied to the amounts in the respective delinquency buckets based on delinquencies as of August 31, 2012 to estimate future losses from loans that are delinquent as of the current reporting period.

Roll Rates for loans that are current as of August 31, 2012 (“Current Roll to Loss”) are calculated on a transaction-specific basis. A proportion of loans reported current as of August 31, 2012 is assumed to become delinquent every month, at a Current Roll to Loss rate that persists at a high level for a time and subsequently starts to decline. A key assumption in the model is the period of time in which MBIA Corp. projects high levels of Current Roll to Loss to persist. In the base case, MBIA Corp. assumes that the Current Roll to Loss begins to decline immediately and continues to decline over the next six months to 25% of their levels as of August 31, 2012. In the stress case, the period of elevated delinquency and loss is extended by six months. In the additional stress case, MBIA Corp. assumes that the current trends in losses will remain through late 2013, after which time they will revert to the base case. For example, in the base case, as of August 31, 2012, if the amount of current loans which become 30-59 days delinquent is 10%, and recent performance suggests that 30% of those loans will be charged-off, the Current Roll to Loss for the transaction is 3%. In the base case, it is then assumed that the Current Roll to Loss will reduce linearly to 25% of its original value over the next six months (i.e., 3% will linearly reduce to 0.75% over the six months from September 2012 to February 2013). After that six-month period, MBIA Corp. further reduces the Current Roll to Loss to 0% by early 2014 with the expectation that the performing seasoned loans will eventually result in loan performance reverting to historically low levels of default. In the model, MBIA Corp. assumes that all current loans that are projected to become delinquent are charged-off.

In addition, in MBIA Corp.’s loss reserve models for transactions secured by HELOCs, MBIA Corp. considers borrower draw and prepayment rates, and factors that could affect the excess spread generated by current loans which offsets losses and reduces payments. For HELOCs, the current three-month average draw rate is generally used to project future draws on the line. For HELOCs and transactions secured by fixed-rate CES, the three-month average conditional prepayment rate is generally used to start the projection for trends in voluntary principal prepayments. Projected cash flows are also based on an assumed constant basis spread between floating rate assets and floating rate insured debt obligations (the difference between Prime and London Interbank Offered Rate (“LIBOR”) interest rates, minus any applicable fees). For all transactions, cash flow models consider allocations and other structural aspects of the transactions, including managed amortization periods, rapid amortization periods and claims against MBIA Corp.’s insurance policy consistent with such policy’s terms and conditions. In developing multiple loss scenarios, stress is applied by elongating the Current Roll to Loss rate for various periods, simulating a slower improvement in the transaction performance. The estimated net claims from the procedure above are then discounted using a risk-free rate to a net present value reflecting MBIA Corp.’s general obligation to pay claims over time and not on an accelerated basis. The above assumptions represent MBIA Corp.’s best estimates of how transactions will perform over time.

MBIA Corp. monitors portfolio performance on a monthly basis against projected performance, reviewing delinquencies, Roll Rates, and prepayment rates (including voluntary and involuntary). However, given the large percentage of mortgage loans that were not underwritten by the sellers/servicers in accordance with applicable underwriting guidelines, performance remains difficult to predict and losses may exceed expectations. In the event of a material deviation in actual performance from projected performance, MBIA Corp. would increase or decrease the case basis reserves accordingly. If actual performance were to remain at the peak levels MBIA Corp. is modeling for six months longer than in the probability-weighted outcome, the addition to MBIA Corp.’s second-lien RMBS case basis reserves before considering potential recoveries would be approximately $125 million.

16

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 5: Loss and Loss Adjustment Expense Reserves (continued)

Second-lien RMBS Recoveries

As of September 30, 2012, MBIA Corp. recorded estimated recoveries of $3.2 billion, gross of income taxes, related to second-lien RMBS put-back claims on ineligible mortgage loans, consisting of $2.1 billion included in “Insurance loss recoverable” and $1.1 billion included in “Loan repurchase commitments” presented under the heading “Assets of consolidated variable interest entities” on MBIA Corp.’s consolidated balance sheets. As of September 30, 2012 and December 31, 2011, MBIA Corp.’s estimated recoveries after income taxes calculated at the federal statutory rate of 35%, were $2.1 billion and $2.0 billion, respectively, which was 3,547% and negative 556% of the consolidated total shareholders’ equity and deficit, respectively. The negative percentage as of December 31, 2011 was a result of shareholders’ deficit of $364 million recorded on MBIA Corp.’s consolidated balance sheets. These estimated recoveries relate to MBIA Corp.’s put-back claims of ineligible mortgage loans, which have been disputed by the loan sellers/servicers and are currently subject to litigation initiated by MBIA Corp. to pursue recoveries. While MBIA Corp. believes that it will prevail in enforcing its contractual rights, there is uncertainty with respect to the ultimate outcome. Furthermore, there is a risk that sellers/servicers or other responsible parties might not be able to satisfy their put-back obligations. Such risks are contemplated in the scenarios MBIA Corp. utilizes to calculate recoveries.

MBIA Corp. assesses the financial abilities of the sellers/servicers using external credit ratings and other factors. The impact of such factors on cash flows related to expected recoveries is incorporated into MBIA Corp.’s probability-weighted scenarios. Accordingly, MBIA Corp. has not recognized any recoveries related to its IndyMac Bank, F.S.B. insured exposures and has, subsequent to the ResCap bankruptcy filing, reviewed the indicative scenarios and related probabilities assigned to each scenario to develop a distribution of possible outcomes. MBIA Corp.’s expected recoveries may be discounted in the future based on additional reviews of the creditworthiness of other sellers/servicers.

On May 14, 2012, ResCap, and its wholly-owned subsidiary companies, RFC and GMAC, each filed for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code. MBIA Corp. believes that the claims against RFC and GMAC are stronger and better defined than most other unsecured creditor claims due to the following reasons:

• the direct contractual relationship between MBIA Corp., GMAC and RFC related to MBIA Corp.’s second-lien RMBS put-back claims on ineligible mortgage loans that were improperly included in the MBIA Corp.-insured transactions;

• MBIA Corp.’s legal claims against RFC and GMAC based on breach of contract and fraud have withstood motions to dismiss; and

• expert reports submitted in the RFC litigation which established a substantial breach rate in MBIA Corp.’s insured securitizations, and MBIA Corp.’s damages as a result thereof.

MBIA Corp. has modeled scenario-based recoveries which are founded upon the strength of these claims as well as a range of estimated assets available to unsecured creditors of the ResCap companies. These outcomes are based upon information that was available to MBIA Corp. as of the filing date.

MBIA Corp. continues to maintain the same probability-weighted scenarios for its non-GMAC and non-RFC exposures (non-ResCap exposures), which are primarily based on the percentage of incurred losses MBIA Corp. would collect. The non-ResCap recovery estimates incorporate five scenarios that include full recovery of its incurred losses and limited/reduced recoveries due to litigation delays and risks and/or potential financial distress of the sellers/servicers. Probabilities were assigned across these scenarios, with most of the probability weight on partial recovery scenarios. The sum of the probabilities assigned to all scenarios is 100%. Expected cash inflows from recoveries are discounted using the current risk-free discount rates associated with the underlying transaction’s cash flows, which ranged from 0.7% to 1.6%, depending upon the transaction’s expected average life. However, based on MBIA Corp.’s assessment of the strength of its contract claims, MBIA Corp. believes it is entitled to collect and/or assert a claim for the full amount of its incurred losses on these transactions, which totaled $5.0 billion through September 30, 2012.

MBIA Corp.’s potential recoveries are typically based on either salvage rights, the rights conferred to MBIA Corp. through the transactional documents (inclusive of the insurance agreement), or subrogation rights embedded within financial guarantee insurance policies. The second-lien RMBS transactions with respect to which MBIA Corp. has estimated put-back recoveries provide MBIA Corp. with such rights. Expected salvage and subrogation recoveries, as well as recoveries from other remediation efforts, reduce MBIA Corp.’s claim liability. Once a claim payment has been made, the claim liability has been satisfied and MBIA Corp.’s right to recovery is no longer considered an offset to future expected claim payments, but is recorded as a salvage asset. The amount of recoveries recorded by MBIA Corp. is limited to paid claims plus the present value of projected future claim payments. As claim payments are made, the recorded amount of potential recoveries may exceed the remaining amount of the claim liability for a given policy.

17

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 5: Loss and Loss Adjustment Expense Reserves (continued)

To date, sellers/servicers have not substituted loans which MBIA Corp. has put-back, and the amount of loans repurchased has been insignificant. The unsatisfactory resolution of these put-backs led MBIA Corp. to initiate litigation against five of the sellers/servicers to enforce their obligations. MBIA Corp. has alleged several causes of action in its complaints, including breach of contract, fraudulent inducement and indemnification. MBIA Corp.’s aggregate $3.2 billion of estimated potential recoveries do not include damages from causes of action other than breach of contract. Irrespective of amounts recorded in its financial statements, MBIA Corp. is seeking to recover and/or assert claims for the full amount of its incurred losses and other damages on these transactions. MBIA Corp. has not collected any material amounts of cash related to these recoveries. Additional information on the status of these litigations can be found in the “Recovery Litigation” discussion within “Note 11: Commitments and Contingencies.”

MBIA Corp. has received five decisions with regard to the respective defendants’ motions to dismiss MBIA Corp.’s claims. In each instance, the respective court denied the motion, allowing MBIA Corp. to proceed on, at minimum, its fraud and breach of contract claims. In December 2011, MBIA Corp. reached an agreement with one of the five sellers/servicers with whom it had initiated litigation and that litigation has been dismissed.

MBIA Corp.’s assessment of the recovery outlook for insured second-lien RMBS issues is principally based on the following factors:

1. the strength of MBIA Corp.’s existing contract claims related to ineligible mortgage loan substitution/repurchase obligations;

2. the settlement of Assured Guaranty’s and Syncora’s put-back related claims with Bank of America;

3. the improvement in the financial strength of certain sellers/servicers due to mergers and acquisitions and/or government assistance, which should facilitate the ability of these sellers/servicers and their successors to comply with required loan repurchase/substitution obligations. MBIA Corp. is not aware of any provisions that explicitly preclude or limit successors’ obligations to honor the obligations of original sellers/servicers. MBIA Corp.’s assessment of any credit risk associated with sellers/servicers (or their successors) is reflected in MBIA Corp.’s probability-weighted potential recovery scenarios;

4. evidence of ineligible mortgage loan repurchase/substitution by sellers/servicers for put-back requests made by other harmed parties; this factor is further enhanced by (i) Bank of America’s disclosure that it has resolved $8.0 billion of repurchase requests in the fourth quarter of 2010; (ii) the Fannie Mae settlements with Ally Bank announced on December 23, 2010 and with Bank of America (which also involved Freddie Mac) announced on December 31, 2010, and (iii) MBIA Corp.’s settlement agreements entered into on July 16, 2010 and December 13, 2011 respectively, between MBIA Corp. and sponsors of certain MBIA Corp.-insured mortgage loan securitizations in which MBIA Corp. received consideration in exchange for a release relating to its representation and warranty claims against the sponsors. These settlements resolved all of MBIA Corp.’s representation and warranty claims against the sponsors on mutually beneficial terms and in aggregate were slightly more than the recoveries previously recorded by MBIA Corp. related to these exposures;

5. the defendants’ failure to win dismissals of MBIA Corp.’s put-back litigations discussed above, allowing MBIA Corp. to continue to pursue its contract and fraud claims;

6. Countrywide’s unsuccessful appeal of its failure to win dismissal of MBIA Corp.’s fraud claims in the Countrywide litigation, allowing MBIA Corp. to pursue its fraud claims;

7. MBIA Corp.’s successful motion in the Countrywide litigation allowing MBIA Corp. to present evidence of liability and damages through the introduction of statistically valid random samples of loans rather than on a loan-by-loan basis and subsequent decisions consistent with that ruling;

8. Bank of America’s failure to win dismissal of MBIA Corp.’s claims for successor liability in the Countrywide litigation, as well as on the completion of discovery relating to its successor liability claims against Bank of America;

9. MBIA Corp.’s successful motion regarding causation and the right to rescissory damages in the Countrywide litigation. This provides that MBIA Corp. is not required to establish a direct causal link between Countrywide’s misrepresentations and MBIA Corp.’s claims payments made pursuant to the insurance policies at issue, and that MBIA Corp. may seek damages equal to the amount that it has been and will be required to pay under the relevant policies, less premiums received;

10. Syncora’s and Assured’s successful motions regarding causation in their Federal court put-back litigations with J.P. Morgan Chase and Flagstar Bank, respectively, which support the ruling on causation in MBIA Corp.’s litigation against Countrywide; and

11. other loan repurchase reserves and/or settlements which have been publicly disclosed by certain sellers/servicers.

18

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 5: Loss and Loss Adjustment Expense Reserves (continued)

MBIA Corp. continues to consider all relevant facts and circumstances, including the factors described above, in developing its assumptions on expected cash inflows, probability of potential recoveries (including the outcome of litigation) and recovery period. The estimated amount and likelihood of potential recoveries are expected to be revised and supplemented to the extent there are developments in the pending litigation, new litigation is initiated and/or changes to the financial condition of sellers/servicers occur. While MBIA Corp. believes it will be successful in realizing recoveries from contractual and other claims, the ultimate amounts recovered may be materially different from those recorded by MBIA Corp. given the inherent uncertainty of the manner of resolving the claims (e.g., litigation) and the assumptions used in the required estimation process for accounting purposes which are based, in part, on judgments and other information that are not easily corroborated by historical data or other relevant benchmarks.

All of MBIA Corp.’s policies insuring second-lien RMBS for which litigation has been initiated against sellers/servicers are in the form of financial guarantee insurance contracts. In accordance with U.S. GAAP, MBIA Corp. has not recorded a gain contingency with respect to pending litigation.

First-lien RMBS Reserves

MBIA Corp.’s first-lien RMBS case basis reserves as of September 30, 2012, which primarily relate to RMBS backed by alternative A-paper (“Alt-A”) and subprime mortgage loans were determined using the Roll Rate Methodology. MBIA Corp. assumes that the Roll Rate for loans in foreclosure, REO and bankruptcy are 90%, 90% and 75%, respectively. Roll Rates for current, 30-59 day delinquent loans, 60-89 day delinquent loans and 90+ day delinquent loans are calculated on a transaction-specific basis. The Current Roll to Loss stay at the August 31, 2012 level for two months before declining to 25% of this level over a 24-month period. Additionally, MBIA Corp. runs scenarios where the 90+ day roll rate to loss is set at 90%. The Roll Rates are applied to the amounts in the respective delinquency buckets based on delinquencies as of August 31, 2012 to estimate future losses from loans that are delinquent as of the current reporting period.

In calculating ultimate cumulative losses for first-lien RMBS, MBIA Corp. estimates the amount of loans that are expected to be liquidated through foreclosure or short sale. The time to liquidation for a defaulted loan is specific to the loan’s delinquency bucket with the latest three-month average loss severities generally used to calculate losses at loan liquidation. The loss severities are reduced over time to account for reduction in the amount of foreclosure inventory, anticipated future increases in home prices, principal amortization of the loan and government foreclosure moratoriums.

ABS CDOs (Financial Guarantees and Insured Derivatives)

MBIA Corp.’s insured ABS CDOs are transactions that include a variety of collateral ranging from corporate bonds to structured finance assets (which includes but are not limited to RMBS related collateral, ABS CDOs, corporate CDOs and collateralized loan obligations). These transactions were insured as either financial guarantee insurance policies or credit derivatives with the majority insured in the form of credit derivatives. Since the fourth quarter of 2007, MBIA Corp.’s insured par exposure within the ABS CDO portfolio has been substantially reduced through a combination of terminations and commutations. Accordingly, as of September 30, 2012, the insured par exposure of the ABS CDO financial guarantee insurance policies and credit derivatives portfolio has declined by approximately 88% of the insured amount as of December 31, 2007.

MBIA Corp.’s ABS CDOs originally benefited from two sources of credit enhancement. First, the subordination in the underlying securities collateralizing the transaction must be fully eroded and second, the subordination below the insured tranche in the CDO transaction must be fully eroded before the insured tranche is subject to a claim. MBIA Corp.’s payment obligations after a default vary by transaction and by insurance type.

The primary factor in estimating reserves on insured ABS CDO policies written as financial guarantee insurance policies and in estimating impairments on insured ABS CDO credit derivatives is the losses associated with the underlying collateral in the transactions. MBIA Corp.’s approach to establishing reserves or impairments in this portfolio employs a methodology which is similar to other structured finance asset classes insured by MBIA Corp. MBIA Corp. uses a total of four probability-weighted scenarios in order to estimate its reserves or impairments for ABS CDOs.

As of September 30, 2012, MBIA Corp. had loss and LAE reserves totaling $171 million related to ABS CDO financial guarantee insurance policies after the elimination of $242 million as a result of consolidating VIEs. For the nine months ended September 30, 2012, MBIA Corp. incurred $6 million of losses and LAE recorded in earnings related to ABS CDO financial guarantee insurance policies after the elimination of an $18 million benefit as a result of consolidating VIEs. In the event of further deteriorating performance of the collateral referenced or held in ABS CDO transactions, the amount of losses estimated by MBIA Corp. could increase materially.

19

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 5: Loss and Loss Adjustment Expense Reserves (continued)

Credit Impairments Related to Structured CMBS Pools, CRE CDOs and CRE Loan Pools (Financial Guarantees and Insured Derivatives)

Most of the structured CMBS pools, CRE CDOs and CRE loan pools insured by MBIA Corp. are accounted for as insured credit derivatives and are carried at fair value in MBIA Corp.’s consolidated financial statements. Since MBIA Corp.’s insured credit derivatives have similar terms, conditions, risks, and economic profiles to its financial guarantee insurance policies, MBIA Corp. evaluates them for impairment in the same way that it estimates loss and LAE for its financial guarantee policies. The following discussion provides information about MBIA Corp.’s process for estimating credit impairments on these contracts using its statutory loss reserve methodology, determined as the present value of the probability-weighted potential future losses, net of estimated recoveries, across multiple scenarios, plus actual payments and collections.

MBIA Corp. has developed multiple scenarios to consider the range of potential outcomes in the CRE market and their impact on MBIA Corp. The approaches require substantial judgments about the future performance of the underlying loans, and include the following:

• The first approach considers the range of commutation agreements achieved and agreed to since 2010, which included 66 structured CMBS pools, CRE CDOs and CRE loan pool policies totaling $33.1 billion of gross insured exposure. MBIA Corp. considers the range of commutations achieved over the past several years with multiple counterparties. This approach results in an estimated price to commute the remaining policies with price estimates, based on this experience. It is customized by counterparty and is dependent on the level of dialogue with the counterparty and the credit quality and payment profile of the underlying exposure.

• The second approach considers current delinquency rates and uses current and projected net operating income (“NOI”) and capitalization rates (“Cap Rates”) to project losses under two scenarios. Loans are stratified by size with larger loans being valued utilizing lower Cap Rates than for smaller loans. These scenarios also assume that Cap Rates and NOIs remain flat for the near term and then begin to improve gradually. Additionally, in these scenarios, any loan with a balance greater than $75 million with a debt service coverage ratio (“DSCR”) less than 1.0x or that was reported as being in any stage of delinquency, was reviewed individually so that performance and loss severity could be more accurately determined. Specific loan level assumptions for this large loan subset were then incorporated into these scenarios, as well as specific assumptions regarding certain smaller loans when there appeared to be a material change in the asset’s financial or delinquency performance over the preceding six months. As MBIA Corp. continues to increase the level of granularity in its individual loan assessments, it analyzes and adjusts assumptions for loans with certain mitigating attributes, such as no lifetime delinquency, recent appraisals indicating sufficient value and large capital reserve levels. These scenarios project different levels of additional defaults with respect to loans that are current. This approach makes use of the most recent financial statements available at the property level.

• The third approach stratifies loans into buckets based on delinquency status (including a “current” bucket) and utilizes recent Roll Rates actually experienced within each of the commercial mortgage-backed index (“CMBX”) series in order to formulate an assumption to predict future delinquencies. Ultimately, this generates losses over a projected time horizon based on the assumption that loss severities will begin to decline from the high levels seen over the past two years. MBIA Corp. further examines those loans referenced in the CMBX indices which were categorized as 90+ days delinquent or in the process of foreclosure and determined the average monthly balance of such loans which were cured. MBIA Corp. then applies the most recent rolling six-month average balance of all such cured loans to all underperforming loans in the 90+ day delinquent bucket or in the foreclosure process (and those projected to roll into late stage delinquency from the current and lesser stage levels of delinquency) and assumes all other loans are liquidated. MBIA Corp. assumes all loans in the REO category liquidate over the next twelve months.

• The fourth approach is based on a proprietary model developed by reviewing performance data on over 80,000 securitized CRE loans originated between 1992 and 2011. The time period covered during the performance review includes the years 2006 through 2011. MBIA Corp. believes that these five years represent an appropriate time period in which to conduct a performance review because they encompass a period of extreme stress in the economy and the CRE market.

Based on a review of the data, MBIA Corp. found property type and the DSCR to be the most significant determinants of a loan’s default probability with other credit characteristics less influential. As a result, MBIA Corp. developed a model in which the loans were divided into 168 representative cohorts based on their DSCR and property type. For each of these cohorts, MBIA Corp. calculated the average annual probability of default, and then ran Monte Carlo simulations to estimate the timing of defaults. In addition, the model incorporated the following logic:

• NOI and Cap Rates were assumed to remain at current levels for loans in MBIA Corp.’s classified portfolio, resulting in no modifications or extensions under the model, other than as described in the next bullet point, to reflect the possibility that the U.S. economy and CRE market could experience no growth for the foreseeable future.

• Any valuation estimates obtained by special servicers since a loan’s origination as well as MBIA Corp.’s individual large loan level analysis for loans with balances greater than $75 million were incorporated as described in the second approach. However, in the fourth approach no adjustments were made for smaller loans lower than $75 million regardless of any mitigating factors.

20

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 5: Loss and Loss Adjustment Expense Reserves (continued)

The loss severities projected by these scenarios vary widely, from moderate to substantial losses, with the majority of projected losses relating to a subset of transactions with a single counterparty. MBIA Corp. previously incorporated an additional actuarial based approach, which has been eliminated as it did not reflect the best current market observations. Actual losses will be a function of the proportion of loans in the pools that are foreclosed and liquidated and the loss severities associated with those liquidations. If the deductibles in MBIA Corp.’s insured transactions and underlying referenced CMBS transactions are fully eroded, additional property level losses upon foreclosures and liquidations could result in substantial losses for MBIA Corp. Since foreclosures and liquidations have only begun to take place during this economic cycle, particularly for larger properties, ultimate loss rates remain uncertain. Whether CMBS collateral is included in a structured pool or in a CRE CDO, MBIA Corp. believes the modeling related to the underlying bond should be the same. However, adjustments may be needed for structural or legal reasons. MBIA Corp. assigns a wide range of probabilities to these scenarios, with lower severity scenarios being weighted more heavily than higher severity scenarios. This reflects the view that liquidations will continue to be mitigated by loan extensions and modifications, and that property values and NOIs have bottomed for many sectors and markets in the U.S. The weightings are customized to each counterparty. If macroeconomic stress were to increase or the U.S. goes into a recession, higher delinquencies, liquidations and/or higher severities of loss upon liquidation may result and MBIA Corp. may incur substantial additional losses. The foreclosure and REO pipelines are still relatively robust, with several restructurings and liquidations yet to occur, so the range of possible outcomes is wider than those for MBIA Corp.’s exposures to ABS CDOs and second-lien RMBS.

In the CRE CDO portfolio, transaction-specific structures require managers to report reduced enhancement according to certain guidelines which often include downgrades even when the bond is still performing. As a result, as well as additional collateral defaults, reported enhancement has been reduced significantly in some CRE CDOs. Moreover, many of the CRE CDO positions are amortizing more quickly than originally expected as most or all interest proceeds that would have been allocated to more junior classes within the CDO have been diverted and redirected to pay down the senior most classes insured by MBIA Corp.

For the nine months ended September 30, 2012, MBIA Corp. incurred $87 million of losses and LAE recorded in earnings related to CRE CDO financial guarantee insurance policies. For the nine months ended September 30, 2012, additional credit impairments and LAE on structured CMBS pools, CRE CDOs and CRE loan pools were estimated to be $502 million as a result of additional delinquencies and loan level liquidations, as well as continued refinements of MBIA Corp.’s assessment of various commutation possibilities. The majority of the increase relates to a subset of transactions with a single counterparty. The cumulative credit impairments and LAE on structured CMBS pools, CRE CDOs and CRE loan pools were estimated to be $3.3 billion through September 30, 2012. Although the pace of increases in the delinquency rate has slowed and many loans are being modified, liquidations have taken place. Some loans were liquidated with minimal losses of 1% to 2%, others experienced near complete losses, and in some cases severities exceeded 100%. These liquidations have led to losses in the CMBS market, and in many cases, have resulted in reductions of enhancement to the individual CMBS bonds referenced by the insured structured CMBS pools. In certain insured transactions, these losses have resulted in deductible erosion. Bond level enhancement and pool level deductibles are structural features intended to mitigate losses to MBIA Corp. However, some of the transactions reference similar rated subordinate tranches of CMBS bonds. When there are broad-based declines in property performance, this leverage can result in rapid deterioration in pool performance.

21

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 5: Loss and Loss Adjustment Expense Reserves (continued)

Loss and LAE Activity

Financial Guarantee Insurance Losses (Non-Derivative)

MBIA Corp.’s financial guarantee insurance losses and LAE for the nine months ended September 30, 2012 are presented in the following table:

Losses and LAE	Nine Months Ended September 30, 2012
	Second-lien
In millions	RMBS		Other(1)		Total
Losses and LAE related to actual and expected payments	$	180	$	254	$	434
Recoveries of actual and expected payments		(74)		(38)		(112)
Gross losses incurred		106		216		322
Reinsurance		-		(7)		(7)
Losses and LAE	$	106	$	209	$	315

(1) - Primarily first-lien RMBS and financial guarantee CMBS.

The second-lien RMBS losses and LAE related to actual and expected payments included in the preceding table comprise net increases of previously established reserves. The second-lien RMBS recoveries of actual and expected payments comprise $154 million in recoveries resulting from ineligible mortgage loans included in insured exposures that are subject to contractual obligations by sellers/servicers to repurchase or replace such mortgages, offset by an $80 million reduction in excess spread. Other losses and LAE expense primarily resulted from credit deterioration within first-lien RMBS and CMBS transactions.

The following table provides information about the financial guarantees and related claim liability included in each of MBIA Corp.’s surveillance categories as of September 30, 2012:

	Surveillance Categories
	Caution List		Caution List		Caution List		Classified
$ in millions	Low		Medium		High		List		Total
Number of policies		44		24		9		207		284
Number of issues(1)		25		14		8		136		183
Remaining weighted average contract period (in years)		8.8		4.6		6.1		9.4		8.7
Gross insured contractual payments outstanding:(2)
Principal	$	3,623	$	1,409	$	293	$	9,626	$	14,951
Interest		2,658		334		64		5,354		8,410
Total	$	6,281	$	1,743	$	357	$	14,980	$	23,361
Gross claim liability	$	-		-	$	-	$	1,651	$	1,651
Less:
Gross potential recoveries		-		-		-		3,825		3,825
Discount, net		-		-		-		182		182
Net claim liability (recoverable)	$	-	$	-	$	-	$	(2,356)	$	(2,356)
Unearned premium revenue	$	130	$	17	$	3	$	118	$	268

(1) - An “issue” represents the aggregate of financial guarantee policies that share the same revenue source for purposes of making debt service payments.

(2) - Represents contractual principal and interest payments due by the issuer of the obligations insured by MBIA Corp.

22

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 5: Loss and Loss Adjustment Expense Reserves (continued)

The following table provides information about the financial guarantees and related claim liability included in each of MBIA Corp.’s surveillance categories as of December 31, 2011:

	Surveillance Categories
	Caution List		Caution List		Caution List		Classified
$ in millions	Low		Medium		High		List		Total
Number of policies		46		26		14		200		286
Number of issues(1)		28		16		11		130		185
Remaining weighted average contract period (in years)		8.0		5.5		6.0		9.6		8.7
Gross insured contractual payments outstanding:(2)
Principal	$	4,203	$	1,190	$	561	$	10,420	$	16,374
Interest		2,570		338		144		5,836		8,888
Total	$	6,773	$	1,528	$	705	$	16,256	$	25,262
Gross claim liability	$	-	$	-	$	-	$	1,812	$	1,812
Less:
Gross potential recoveries		-		-		-		3,813		3,813
Discount, net		-		-		-		177		177
Net claim liability (recoverable)	$	-	$	-	$	-	$	(2,178)	$	(2,178)
Unearned premium revenue	$	154	$	16	$	3	$	134	$	307

(1) - An “issue” represents the aggregate of financial guarantee policies that share the same revenue source for purposes of making debt service payments.

(2) - Represents contractual principal and interest payments due by the issuer of the obligations insured by MBIA Corp.

The gross claim liability as of September 30, 2012 and December 31, 2011 in the preceding tables represents MBIA Corp.’s estimate of undiscounted probability-weighted future claim payments, which principally relate to insured first-lien and second-lien RMBS transactions and U.S. public finance transactions. The gross potential recoveries represent MBIA Corp.’s estimate of undiscounted probability-weighted recoveries of actual claim payments and recoveries of estimated future claim payments, and principally relate to insured second-lien RMBS transactions. Both amounts reflect the elimination of claim liabilities and potential recoveries related to VIEs consolidated by MBIA Corp.

The following table presents the components of MBIA Corp.’s loss and LAE reserves and insurance loss recoverable as reported on MBIA Corp.’s consolidated balance sheets as of September 30, 2012 and December 31, 2011 for insured obligations within MBIA Corp.’s “Classified List.” The loss reserves (claim liability) and insurance claim loss recoverable included in the following table represent the present value of the probability-weighted future claim payments and recoveries reported in the preceding tables.

	As of September 30,		As of December 31,
In millions	2012		2011
Loss reserves (claim liability)	$	859	$	781
LAE reserves		79		55
Loss and LAE reserves	$	938	$	836
Insurance claim loss recoverable	$	(3,281)	$	(3,032)
LAE insurance loss recoverable		(35)		(14)
Insurance loss recoverable	$	(3,316)	$	(3,046)
Reinsurance recoverable on unpaid losses	$	164	$	174
Reinsurance recoverable on LAE reserves		4		3
Reinsurance recoverable on paid losses		2		1
Reinsurance recoverable on paid and unpaid losses	$	170	$	178

23

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 5: Loss and Loss Adjustment Expense Reserves (continued)

As of September 30, 2012, loss and LAE reserves include $1.3 billion of reserves for expected future payments offset by expected recoveries of such future payments of $384 million. As of December 31, 2011, loss and LAE reserves included $1.4 billion of reserves for expected future payments offset by expected recoveries of such future payments of $562 million. As of September 30, 2012 and December 31, 2011, the insurance loss recoverable primarily related to estimated recoveries of payments made by MBIA Corp. resulting from ineligible mortgage loans in certain insured second-lien residential mortgage loan securitizations that are subject to a contractual obligation by the sellers/servicers to repurchase or replace the ineligible mortgage loans and expected future recoveries on second-lien RMBS transactions resulting from expected excess spread generated by performing loans in such transactions. MBIA Corp. expects to be reimbursed for the majority of its potential recoveries related to ineligible mortgage loans by the second quarter of 2013.

Total paid losses and LAE, net of reinsurance and collections, for the nine months ended September 30, 2012 was $394 million, including $330 million related to insured second-lien RMBS transactions. For the nine months ended September 30, 2012, the increase in insurance loss recoverable related to paid losses totaled $270 million, and primarily related to insured second-lien RMBS transactions.

The following table presents MBIA Corp.’s second-lien RMBS exposure, gross undiscounted claim liability and potential recoveries for amounts excluding consolidated VIEs and amounts related to consolidated VIEs, as of September 30, 2012. All insured transactions reviewed with potential recoveries are included within the “Classified List.”

Second-lien RMBS Exposure			Outstanding				Gross Undiscounted
			Gross		Gross		Claim		Potential
$ in billions	Issues		Principal		Interest		Liability		Recoveries
Excluding Consolidated VIEs:
Insured issues designated as “Classified List”		22	$	4.2	$	1.7	$	0.3	$	3.2
Insured issues reviewed with potential recoveries		15	$	3.9	$	1.6	$	0.2	$	3.1
Consolidated VIEs:
Insured issues designated as “Classified List”		12	$	2.3	$	0.9	$	0.1	$	1.4
Insured issues reviewed with potential recoveries		11	$	2.2	$	0.8	$	0.1	$	1.4

MBIA Corp. has performed reviews on 29 of the 34 total insured issues designated as “Classified List” and recorded potential recoveries on 26 of those 29 issues, primarily related to four issuers (Countrywide, RFC, GMAC and Credit Suisse). In addition, MBIA Corp. has received consideration on two transactions, including one Alt-A transaction, which have been excluded in the preceding table.

The following table presents changes in MBIA Corp.’s loss and LAE reserves for the nine months ended September 30, 2012. Changes in the loss and LAE reserves attributable to the accretion of the claim liability discount, changes in discount rates, changes in the timing and amounts of estimated payments and recoveries, changes in assumptions and changes in LAE reserves are recorded in “Losses and loss adjustment” expenses in MBIA Corp.’s consolidated statements of operations. As of September 30, 2012, the weighted average risk-free rate used to discount MBIA Corp.’s loss reserves (claim liability) was 1.25%. LAE reserves are expected to be settled within a one-year period and are not discounted.

In millions		Changes in Loss and LAE Reserves for the Nine Months Ended September 30, 2012
Gross Loss and LAE Reserves as of December 31, 2011		Loss Payments for Cases with Reserves		Accretion of Claim Liability Discount		Changes in Discount Rates		Changes in Timing of Payments		Changes in Amount of Net Payments		Changes in Assumptions		Changes in Unearned Premium Revenue		Changes  in LAE Reserves		Gross Loss and LAE Reserves as of September 30, 2012
$	836	$	(283)	$	9	$	26	$	52	$	3	$	264	$	7	$	24	$	938

The increase in MBIA Corp.’s gross loss and LAE reserves reflected in the preceding table was primarily due to changes in assumptions, timing of payments, and changes in LAE reserves, offset by decreases in reserves related to loss payments, on insured first-lien and second-lien RMBS issues outstanding as of December 31, 2011.

Current period changes in MBIA Corp.’s estimate of potential recoveries may be recorded as an insurance loss recoverable asset, netted against the gross loss and LAE reserve liability, or both. The following table presents changes in MBIA Corp.’s insurance loss recoverable and changes in recoveries on unpaid losses reported within MBIA Corp.’s claim liability for the nine months ended September 30, 2012. Changes in insurance loss recoverable attributable to the accretion of the discount on the recoverable, changes in discount rates, changes in the timing and amounts of estimated collections, changes in assumptions and changes in LAE recoveries are recorded in “Losses and loss adjustment” expenses in MBIA Corp.’s consolidated statements of operations.

24

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 5: Loss and Loss Adjustment Expense Reserves (continued)

			Changes in Insurance Loss Recoverable and Recoveries on Unpaid Losses for  the
			Nine Months Ended September 30, 2012
	Gross		Collections														Gross
	Reserve as of		for Cases		Accretion		Changes in		Changes in		Changes in				Changes in		Reserve as of
	December 31,		with		of		Discount		Timing of		Amount of		Changes in		LAE		September 30,
In millions	2011		Recoveries		Recoveries		Rates		Collections		Collections		Assumptions		Recoveries		2012
Insurance loss recoverable	$	3,046	$	(6)	$	30	$	8	$	-	$	(149)	$	366	$	21	$	3,316
Recoveries on unpaid losses		562		-		5		19		-		-		(196)		(7)		383
Total	$	3,608	$	(6)	$	35	$	27	$	-	$	(149)	$	170	$	14	$	3,699

MBIA Corp.’s insurance loss recoverable increased during 2012 primarily due to changes in assumptions associated with issues outstanding as of December 31, 2011, which related to increases in excess spread and ineligible mortgage loans included in insured second-lien residential mortgage securitization exposures that are subject to contractual obligations by sellers/servicers to repurchase or replace such mortgages, partially offset by changes in the amount of collections. Recoveries on unpaid losses decreased primarily due to changes in assumptions as a result of a reduction of excess spread related to first-lien and second-lien RMBS transactions offset by changes in discount rates.

The following table presents MBIA Corp.’s total estimated recoveries from ineligible mortgage loans included in certain insured second-lien mortgage loan securitizations as of September 30, 2012. The total estimated recoveries from ineligible mortgage loans of $3.2 billion include $2.1 billion recorded as “Insurance loss recoverable” and $1.1 billion recorded as “Loan repurchase commitments” presented under the heading “Assets of consolidated variable interest entities” on MBIA Corp.’s consolidated balance sheets.

In millions
Total Estimated Recoveries from Ineligible Mortgage Loans as of December 31, 2011		Accretion of Future Collections		Changes in Discount Rates		Recoveries (Collections)		Changes in Amount of Collections		Changes in Assumptions		Total Estimated Recoveries from Ineligible Mortgage Loans as of September 30, 2012
$	3,119	$	34	$	2	$	-	$	-	$	92	$	3,247

MBIA Corp.’s total estimated recoveries from ineligible mortgage loans in the preceding table increased primarily as a result of the probability-weighted scenarios as described within the preceding “Second-lien RMBS Recoveries” section.

Remediation actions may involve, among other things, waivers or renegotiations of financial covenants or triggers, waivers of contractual provisions, the granting of consents, transfer of servicing, consideration of restructuring plans, acceleration, security or collateral enforcement, actions in bankruptcy or receivership, litigation and similar actions. The types of remedial actions pursued are based on the insured obligation’s risk type and the nature and scope of the event giving rise to the remediation. As part of any such remedial actions, MBIA Corp. seeks to improve its security position and to obtain concessions from the issuer of the insured obligation. From time to time, the issuer of an MBIA Corp.-insured obligation may, with the consent of MBIA Corp., restructure the insured obligation by extending the term, increasing or decreasing the par amount or decreasing the related interest rate, with MBIA Corp. insuring the restructured obligation.

Costs associated with remediating insured obligations assigned to MBIA Corp.’s “Caution List—Low,” “Caution List—Medium,” “Caution List—High” and “Classified List” are recorded as LAE. LAE is primarily recorded as part of MBIA Corp.’s provision for its loss reserves and included in “Losses and loss adjustment” on MBIA Corp.’s consolidated statements of operations. The following table presents the gross expenses related to remedial actions for insured obligations:

	Nine Months Ended September 30,
In millions	2012		2011
Loss adjustment expense incurred, gross	$	108	$	76

25

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 6: Fair Value of Financial Instruments

Fair Value Measurement

Fair value is a market-based measure considered from the perspective of a market participant. Therefore, even when market assumptions are not readily available, MBIA Corp.’s own assumptions are set to reflect those which it believes market participants would use in pricing an asset or liability at the measurement date. The fair value measurements of financial instruments held or issued by MBIA Corp. are determined through the use of observable market data when available. Market data is obtained from a variety of third-party sources, including dealer quotes. If dealer quotes are not available for an instrument that is infrequently traded, MBIA Corp. uses alternate valuation methods, including either dealer quotes for similar instruments or modeling using market data inputs. The use of alternate valuation methods generally requires considerable judgment in the application of estimates and assumptions, and changes to such estimates and assumptions may produce materially different fair values.

The accounting guidance for fair value measurement establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available and reliable. Observable inputs are those that MBIA Corp. believes that market participants would use in pricing an asset or liability based on available market data. Unobservable inputs are those that reflect MBIA Corp.’s beliefs about the assumptions market participants would use in pricing an asset or liability based on the best information available. The fair value hierarchy is broken down into three levels based on the observability and reliability of inputs, as follows:

• Level 1—Valuations based on quoted prices in active markets for identical assets or liabilities that MBIA Corp. can access. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail any degree of judgment.

• Level 2—Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly. Level 2 assets include debt securities with quoted prices that are traded less frequently than exchange-traded instruments, securities which are priced using observable inputs and derivative contracts whose values are determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data.

• Level 3—Valuations based on inputs that are unobservable and supported by little or no market activity and that are significant to the overall fair value measurement. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques where significant inputs are unobservable, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

The availability of observable inputs can vary from product to product and period to period and is affected by a wide variety of factors, including, for example, the type of product, whether the product is new and not yet established in the marketplace, and other characteristics particular to the product. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, MBIA Corp. assigns the level in the fair value hierarchy for which the fair value measurement in its entirety falls, based on the least observable input that is significant to the fair value measurement.

1. Financial Assets (excluding derivative assets)

Financial assets, excluding derivative assets, held by MBIA Corp. primarily consist of investments in debt securities. Substantially all of MBIA Corp.’s investments are priced by independent third parties, including pricing services and brokers. Typically MBIA Corp. receives one pricing service value or broker quote for each instrument, which represents a non-binding indication of value. MBIA Corp. reviews the assumptions, inputs and methodologies used by pricing services to obtain reasonable assurance that the prices used in its valuations reflect fair value. When MBIA Corp. believes a third-party quotation differs significantly from its internally developed expectation of fair value, whether higher or lower, MBIA Corp. reviews its data or assumptions with the provider. This review includes comparing significant assumptions such as prepayment speeds, default ratios, forward yield curves, credit spreads and other significant quantitative inputs to internal assumptions, and working with the price provider to reconcile the differences. The price provider may subsequently provide an updated price. In the event that the price provider does not update their price, and MBIA Corp. still does not agree with the price provided, MBIA Corp. will try to obtain a price from another third-party provider, such as a broker, or use an internally developed price which it believes represents the fair value of the investment. The fair values of investments for which internal prices were used were not significant to the aggregate fair value of MBIA Corp.’s investment portfolio as of September 30, 2012 or December 31, 2011. All challenges to third-party prices are reviewed by staff of MBIA Corp. with relevant expertise to ensure reasonableness of assumptions.

26

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 6: Fair Value of Financial Instruments (continued)

In addition to challenging pricing assumptions, MBIA Corp. obtains reports from the independent accountants for significant third- party pricing services attesting to the effectiveness of the controls over data provided to MBIA Corp. These reports are obtained annually and are reviewed by MBIA Corp. to ensure key controls are applied by the pricing services, and that appropriate user controls are in place at MBIA Corp. to ensure proper measurement of the fair values of its investments. In the event that any controls in these reports are deemed ineffective by independent accountants, MBIA Corp. will take the necessary actions to ensure that internal user controls are in place to mitigate the control risks. No deficiencies were noted for significant third-party pricing services used.

2. Derivative Assets and Liabilities

MBIA Corp.’s derivative liabilities are primarily insured credit derivatives that reference structured pools of cash securities and CDSs. MBIA Corp. generally insured the most senior liabilities of such transactions, and at the inception of transactions its exposure generally had more subordination than needed to achieve triple-A ratings from credit rating agencies. The types of collateral underlying its insured derivatives consist of cash securities and CDSs referencing primarily corporate, asset-backed, residential mortgage-backed, commercial mortgage-backed, CRE loans, and CDO securities.

MBIA Corp.’s insured credit derivative contracts are non-traded structured credit derivative transactions. Since insured derivatives are highly customized and there is generally no observable market for these derivatives, MBIA Corp. estimates their fair values in a hypothetical market based on internal and third-party models simulating what a similar company would charge to assume MBIA Corp.’s position in the transaction at the measurement date. This pricing would be based on the expected loss of the exposure. MBIA Corp. reviews its valuation 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 or securities prices are observable for similar transactions, those spreads are an integral part of the analysis. New insured transactions that resemble existing (previously insured) transactions, if any, would be considered, as well as negotiated settlements of existing transactions.

MBIA Corp. may from time to time make changes in its valuation techniques if the change results in a measurement that it believes is equally or more representative of fair value under current circumstances.

3. Internal Review Process

All significant financial assets and liabilities, including derivative assets and liabilities, are reviewed by committees created by MBIA Corp. to ensure compliance with MBIA Corp. policies and risk procedures in the development of fair values of financial assets and liabilities. These valuation committees review, among other things, key assumptions used for internally developed prices, significant changes in sources and uses of inputs, including changes in model approaches, and any adjustments from third-party inputs or prices to internally developed inputs or prices. The committees also review any significant impairment or improvements in fair values of the financial instruments from prior periods. From time to time, these committees will reach out to MBIA Corp. valuation experts to better understand key methods and assumptions used for the determination of fair value, including understanding significant changes in fair values. These committees are comprised of senior finance team members with the relevant experience in the financial assets their committee is responsible for. Each quarter, these committees document their agreement with the fair values developed by management of MBIA Corp. as reported in the quarterly financial statements.

Valuation Techniques

Valuation techniques for financial instruments measured at fair value or disclosed at fair value and included in the tables that follow are described below.

Fixed-Maturity Securities (including short-term investments) Held as Available-For-Sale, Investments Carried at Fair Value, Other Investments, and Investments Held-to-Maturity, at Amortized Cost.

Fixed-maturity securities (including short-term investments) held as available-for-sale, investments carried at fair value, other investments, and investments held-to-maturity, at amortized cost include investments in U.S. Treasury and government agencies, foreign governments, corporate obligations, mortgage-backed and asset-backed securities (including CMBS and CDOs), state and municipal bonds, equity securities (including money market mutual funds), and loans receivable with an affiliate.

27

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 6: Fair Value of Financial Instruments (continued)

These investments are generally valued based on recently executed transaction prices or quoted market prices. When quoted market prices are not available, fair value is generally determined using quoted prices of similar investments or a valuation model based on observable and unobservable inputs. Inputs vary depending on the type of investment. Observable inputs include contractual cash flows, interest rate yield curves, CDS spreads, prepayment and volatility scores, diversity scores, cross-currency basis index spreads, and credit spreads for structures similar to the financial instrument in terms of issuer, maturity and seniority. Unobservable inputs include cash flow projections and the value of any credit enhancement.

The fair value of the investments held-to-maturity is determined using discounted cash flow models. Key inputs include unobservable cash flows projected over the expected term of the investment discounted using observable interest rate yield curves of similar securities.

Investments based on quoted market prices of identical investments in active markets are classified as Level 1 of the fair value hierarchy. Level 1 investments generally consist of U.S. Treasury and foreign government and agency investments. Quoted market prices of investments in less active markets, as well as investments which are valued based on other than quoted prices for which the inputs are observable, such as interest rate yield curves, are categorized in Level 2 of the fair value hierarchy. Investments that contain significant inputs that are not observable are categorized as Level 3.

Cash and Cash Equivalents, Receivable for Investments Sold, Accrued Investment Income and Payable for Investments Purchased

The carrying amounts of cash and cash equivalents, receivable for investments sold, accrued investment income and payable for investments purchased approximate fair values due to the short-term nature and credit worthiness of these instruments.

Secured Loan to Parent

The fair value of the secured loan to Parent is determined based on the underlying securities pledged as collateral. The underlying securities are generally corporate bonds. The fair value of these 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.

Loans Receivable at Fair Value

Loans receivable at fair value are comprised of loans held by consolidated VIEs consisting of residential mortgage loans, commercial mortgage loans and other whole business loans. Fair values of residential mortgage loans are determined using quoted prices for MBS with similar characteristics and adjustments for the fair values of the financial guarantees provided by MBIA Corp. on the related MBS. Fair values of commercial mortgage loans and other whole business loans are valued based on quoted prices of similar collateralized MBS. Loans receivable at fair value are categorized in Level 3 of the fair value hierarchy.

Loan Repurchase Commitments

Loan repurchase commitments are obligations owed by the sellers/servicers of mortgage loans to either MBIA Corp. as reimbursement of paid claims or to the RMBS trusts as defined in the transaction documents. Loan repurchase commitments are assets of the consolidated VIEs. This asset represents the rights of MBIA Corp. against the sellers/servicers for breaches of representations and warranties that the securitized residential mortgage loans sold to the trust to comply with stated underwriting guidelines and for the sellers/servicers to cure, replace, or repurchase mortgage loans. Fair value measurements of loan repurchase commitments represent the amounts owed by the sellers/servicers to either MBIA Corp. as reimbursement of paid claims or to the RMBS trusts as defined in the transaction documents. Loan repurchase commitments are not securities and no quoted prices or comparable market transaction information are observable or available. Loan repurchase commitments at fair value are categorized in Level 3 of the fair value hierarchy. Fair values of loan repurchase commitments are determined using discounted cash flow techniques based on inputs including:

• breach rates representing the rate at which the sellers/servicers failed to comply with stated representations and warranties;

• recovery rates representing the estimates of future cash flows for the asset, including estimates about possible variations in the amount of cash flows expected to be collected;

• expectations about possible variations in the timing of collections of the cash flows; and

• time value of money, represented by the rate on risk-free monetary assets.

28

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 6: Fair Value of Financial Instruments (continued)

Variable Interest Entity Notes

The fair values of VIE notes are determined based on recently executed transaction prices or quoted prices where observable. When position-specific quoted prices are not observable, fair values are based on quoted prices of similar securities. Fair values based on quoted prices of similar securities may be adjusted for factors unique to the securities, including any credit enhancement. When observable quoted prices are not available, fair value is determined based on discounted cash flow techniques of the underlying collateral using observable and unobservable inputs. Observable inputs include interest rate yield curves and bond spreads of similar securities. Unobservable inputs include the value of any credit enhancement. VIE notes are categorized in Level 2 or Level 3 of the fair value hierarchy based on the lowest level input that is significant to the fair value measurement in its entirety.

Long-term Debt

Long-term debt consists of surplus notes and a secured loan from an affiliate. The fair value of the surplus notes is estimated based on quoted market prices for identical or similar securities. The fair value of the secured loan is determined as the net present value of expected cash flows from the loan. The discount rate is the yield to maturity of a comparable corporate bond index. Long-term debt is categorized as Level 2 of the fair value hierarchy.

Insured Credit Derivatives

Derivative contracts of MBIA Corp. primarily consist of insured credit derivatives which cannot be legally traded and generally do not have observable market prices. MBIA Corp. determines the fair values of insured credit derivatives using valuation models.

Approximately 81% of the balance sheet fair value of insured credit derivatives as of September 30, 2012 was valued using the Binomial Expansion Technique (“BET”) Model. Approximately 19% of the balance sheet fair value of insured credit derivatives as of September 30, 2012 was valued using the internally developed Direct Price Model. An immaterial amount of insured credit derivatives were valued using the dual-default model. The valuation of insured derivatives includes the impact of its own credit standing. All of these derivatives are categorized as Level 3 of the fair value hierarchy as their fair value is derived using significant unobservable inputs.

A. Description of the BET Model

1. Valuation Model Overview

The BET Model estimates 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.

Inputs to the process of determining fair value for structured transactions using the BET Model include estimates of collateral loss, allocation of loss to separate tranches of the capital structure and calculation of the change in value.

• Estimates of aggregated collateral losses are calculated by reference to the following (described in further detail under “BET Model Inputs” below):

• credit spreads of underlying collateral based on actual spreads or spreads on similar collateral with similar ratings, or in some cases, are benchmarked; for collateral pools where the spread distribution is characterized by extremes, MBIA Corp. models each segment of the pool separately instead of using an overall pool average;

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

• recovery rate for all defaulted collateral.

• Allocation of losses to separate tranches of the capital structure according to priority of payments in a transaction.

• The inception-to-date 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 BET Model are:

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

• Frequencies of defaults are modeled evenly over time.

• Collateral assets are generally considered on an average basis rather than being modeled on an individual basis.

• Collateral asset correlation is modeled using a diversity score, which is calculated based on industry or sector concentrations. Recovery rates are based on historical averages and updated based on market evidence.

29

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 6: Fair Value of Financial Instruments (continued)

2. BET Model Inputs

a. Credit spreads

The average spread of collateral is a key input as MBIA Corp. 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 MBIA Corp.’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, MBIA Corp. benchmarks spreads for collateral against market spreads or prices. This data is reviewed on an ongoing basis for reasonableness and applicability to MBIA Corp.’s derivative portfolio. MBIA Corp. also calculates spreads based on quoted prices and on internal assumptions about expected life when pricing information is available and spread information is not.

MBIA Corp. 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.

Spread Hierarchy:

• Collateral-specific credit spreads when observable.

• Sector-specific spread tables by asset class and rating.

• Corporate spreads, including Bloomberg spread tables based on rating.

• Benchmark from most relevant market source when corporate spreads are not directly relevant.

There were some transactions where MBIA Corp. incorporated multiple levels within the hierarchy, including using actual collateral-specific credit spreads in combination with a calculated spread based on an assumed relationship. In those cases, MBIA Corp. classified the transaction as being benchmarked from the most relevant spread source even though the majority of the average spread was from actual collateral-specific spreads. As of September 30, 2012, sector-specific spreads were used in 9% of the transactions valued using the BET Model. Corporate spreads were used in 46% of the transactions and spreads benchmarked from the most relevant spread source were used for 45% of the transactions. The spread source can also be identified by whether or not it is based on collateral weighted average rating factor (“WARF”). No collateral-specific spreads are based on WARF, sector-specific and corporate spreads are based on WARF, and some benchmarked spreads are based on WARF. WARF-sourced and/or ratings-sourced credit spreads were used for 77% of the transactions.

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 MBIA Corp.’s objective to use more observable spread hierarchies defined above. However, MBIA Corp. may on occasion move to less observable spread inputs due to the discontinuation of data sources or due to MBIA Corp. considering certain spread inputs no longer representative of market spreads.

b. Diversity scores

Diversity scores are a means of estimating 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. While diversity score is a required input into the BET model, due to current high levels of default within the collateral of the structures, diversity score does not have a significant impact on valuation.

c. Recovery rate

Recovery rate represents the percentage of par expected to be recovered after an asset defaults, indicating the severity of a potential loss. MBIA Corp. 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 Corp.-insured transactions. MBIA Corp. may also adjust rating agency assumptions based on the performance of the collateral manager and on empirical market data.

30

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 6: Fair Value of Financial Instruments (continued)

d. Nonperformance risk

MBIA Corp.’s valuation methodology for insured credit derivative liabilities incorporates MBIA Corp.’s own nonperformance risk. MBIA Corp. calculates the fair value by discounting the market value loss estimated through the BET Model at discount rates which include MBIA Corp.’s CDS spreads as of September 30, 2012. The CDS spreads assigned to each deal are based on the weighted average life of the deal. MBIA Corp. limits the nonperformance impact so that the derivative liability could not be lower than MBIA Corp.’s recovery derivative price multiplied by the unadjusted derivative liability.

B. Description of Direct Price Model

1. Valuation Model Overview

The Direct Price Model uses quoted market prices of financial assets correlated to the underlying collateral of the pool of assets backing the liabilities guaranteed by certain insured derivative liabilities. These quoted market prices are adjusted to reflect the unique characteristics of the liabilities of the entities backed by the correlated assets and unique terms of the insured derivative contracts.

2. Model Inputs

• Collateral prices

Fair value of collateral is based on quoted prices when available. When quoted prices are not available, a matrix pricing grid is used based on security type and rating to determine fair value of collateral, which applies an average based on securities with the same rating and security type categories.

• Interest rates

The present value of the market-implied potential losses was calculated assuming that MBIA Corp. deferred all principal losses to the legal final maturity. This was done through a cash flow model that calculated potential interest payments in each period and the potential principal loss at the legal final maturity. These cash flows were discounted using the LIBOR flat swap curve.

• Nonperformance risk

The methodology for calculating MBIA Corp.’s nonperformance risk is the same as used for the BET Model. Due to the current level of MBIA Corp. CDS spread rates and the long tenure of these transactions, the derivative recovery rate was used to estimate nonperformance risk for all transactions marked by this model.

Overall Model Results

As of September 30, 2012 and December 31, 2011, MBIA Corp.’s net insured derivative liability was $3.3 billion and $4.8 billion, respectively, and was primarily related to the fair values of insured credit derivatives based on the results of the aforementioned pricing models. In the current environment the most significant driver of changes in fair value is nonperformance risk. In aggregate, the nonperformance calculation resulted in a pre-tax net insured derivative liability that was $4.4 billion and $5.7 billion lower than the net liability that would have been estimated if MBIA Corp. excluded nonperformance risk in its valuation as of September 30, 2012 and December 31, 2011, respectively. Nonperformance risk is a fair value concept and does not contradict MBIA Corp.’s internal view, based on fundamental credit analysis of MBIA Corp.’s economic condition, that MBIA Corp. will be able to pay all claims when due.

Financial Guarantees

Gross Financial Guarantees —The fair value of gross financial guarantees is determined using discounted cash flow techniques based on inputs that include (i) assumptions of expected losses on financial guarantee policies where loss reserves have not been recognized, (ii) amount of losses expected on financial guarantee policies where loss reserves have been established, net of expected recoveries, (iii) the cost of capital reserves required to support the financial guarantee liability, (iv) operating expenses, and (v) discount rates. MBIA Corp.’s CDS spread and recovery rate are used as its discount rate.

The carrying value of MBIA Corp.’s gross financial guarantees consists of unearned premium revenue and loss and LAE reserves, net of the insurance loss recoverable as reported on MBIA Corp.’s consolidated balance sheets.

Ceded Financial Guarantees —The fair value of ceded financial guarantees is determined by applying the percentage ceded to reinsurers to the related fair value of the gross financial guarantees. The carrying value of ceded financial guarantees consists of prepaid reinsurance premiums and reinsurance recoverable on paid and unpaid losses as reported on MBIA Corp.’s consolidated balance sheets.

31

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 6: Fair Value of Financial Instruments (continued)

Significant Unobservable Inputs

The following table provides quantitative information regarding the significant unobservable inputs used by MBIA Corp. for assets and liabilities measured at fair value on a recurring basis as of September 30, 2012. This table excludes inputs used to measure fair value that are not developed by MBIA Corp., such as broker prices and other third-party pricing service valuations.

In millions	Fair Value as of September 30, 2012		Valuation Techniques	Unobservable Input	Range (Weighted Average)
Assets of consolidated VIEs:
Loans receivable at fair value	$	1,892	Quoted market prices adjusted for financial guarantees provided to VIE obligations	Impact of financial guarantee	0% - 22% (4%)
Loan repurchase commitments		1,051	Discounted cash flow	Recovery rates	9% - 96% (43%)
				Breach rates	65% - 94% (78%)
Liabilities of consolidated VIEs:
Variable interest entity notes		1,902	Quoted market prices of VIE assets adjusted for financial guarantees provided	Impact of financial guarantee	0% - 20% (6%)
Credit derivative liabilities, net:
CMBS		1,533	BET Model	Recovery rates	20% - 90% (51%)
				Nonperformance risk	8% - 62% (57%)
				Weighted average life (in years)	0.3 - 5.9 (4.6)
				CMBS spreads	1% - 22% (12%)
Multi-sector CDO		628	Direct Price Model	Nonperformance risk	63% - 63% (63%)
Other		1,156	BET Model	Recovery rates	42% - 75% (47%)
				Nonperformance risk	8% - 63% (50%)
				Weighted average life (in years)	0.2 - 19.0 (3.1)

Sensitivity of Significant Unobservable Inputs

The significant unobservable input used in the fair value measurement of MBIA Corp.’s loans receivable at fair value of consolidated VIEs is the impact of the financial guarantee. The fair value of loans receivable is calculated by subtracting the value of the financial guarantee from the market value of VIE liabilities. The value of a financial guarantee is estimated by MBIA Corp. as the present value of expected cash payments under the policy. As expected cash payments provided by MBIA Corp. under the insurance policy increase, there is a lower expected cash flow on the underlying loans receivable of the VIE. This results in a lower fair value of the loans receivable in relation to the obligations of the VIE.

The significant unobservable inputs used in the fair value measurement of MBIA Corp.’s loan repurchase commitments of consolidated VIEs are the recovery rates and the breach rates. Recovery rates reflect the estimates of future cash flows reduced for litigation delays and risks and/or potential financial distress of the sellers/services. The estimated recoveries of the loan repurchase commitments may differ from the actual recoveries that may be received in the future. Breach rates represent the rate at which the mortgages fail to comply with stated representations and warranties of the sellers/servicers. Significant increases or decreases in the recovery rates and the breach rates would result in significantly higher or lower fair values of the loan repurchase commitments, respectively. Additionally, changes in the legal environment and the ability of the counterparties to pay would impact the recovery rate assumptions, which could significantly impact the fair value measurement. Any significant challenges by the counterparties to MBIA Corp.’s determination of breaches of representations and warranties could significantly adversely impact the fair value measurement. Recovery rates and breach rates are determined independently. Changes in one input will not necessarily have any impact on the other input.

The significant unobservable input used in the fair value measurement of MBIA Corp.’s variable interest entity notes of consolidated VIEs is the impact of the financial guarantee. The fair value of VIE notes is calculated by adding the value of the financial guarantee to the market value of VIE assets. The value of a financial guarantee is estimated by MBIA Corp. as the present value of expected cash payments under the policy. As the value of the guarantee provided by MBIA Corp. to the obligations issued by the VIE increases, the credit support adds value to the liabilities of the VIE. This results in an increase in the fair value of the liabilities of the VIE.

32

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 6: Fair Value of Financial Instruments (continued)

The significant unobservable inputs used in the fair value measurement of MBIA Corp.’s CMBS credit derivatives, which are valued using the BET Model, are CMBS spreads, recovery rates, nonperformance risk and weighted average life. The CMBS spread is an indicator of credit risk of the collateral securities. The recovery rate represents the percentage of notional expected to be recovered after an asset defaults, indicating the severity of a potential loss. The nonperformance risk is an assumption of MBIA Corp.’s own ability to pay and whether MBIA Corp.’s will have the necessary resources to pay the obligations as they come due. Weighted average life is based on MBIA Corp.’s estimate of when the principal of the underlying collateral of the CMBS structure will be repaid. A significant increase or decrease in CMBS spreads or weighted average life would result in an increase or decrease in the fair value of the derivative liabilities, respectively. Any significant increase or decrease in recovery rates or MBIA Corp.’s nonperformance risk would result in a decrease or increase in the fair value of the derivative liabilities, respectively. CMBS spreads, recovery rates, nonperformance risk and weighted average lives are determined independently. Changes in one input will not necessarily have any impact on the other inputs.

The significant unobservable input used in the fair value measurement of MBIA Corp.’s multi-sector CDO credit derivatives, which are valued using the Direct Price Model, is nonperformance risk. The nonperformance risk is an assumption of MBIA Corp.’s own ability to pay and whether MBIA Corp.’s will have the necessary resources to pay the obligations as they come due. Any significant increase or decrease in MBIA Corp.’s nonperformance risk would result in a decrease or increase in the fair value of the derivative liabilities, respectively.

The significant unobservable inputs used in the fair value measurement of MBIA Corp.’s other credit derivatives, which are valued using the BET Model, are recovery rates, nonperformance risk and weighted average life. The recovery rate represents the percentage of notional expected to be recovered after an asset defaults, indicating the severity of a potential loss. The nonperformance risk is an assumption of MBIA Corp.’s own ability to pay and whether MBIA Corp. will have the necessary resources to pay the obligations as they come due. Weighted average life is based on MBIA Corp.’s estimate of when the principal of the underlying collateral will be repaid. Any significant increase or decrease in weighted average life would result in an increase or decrease in the fair value of the derivative liabilities, respectively. Any significant increase or decrease in recovery rates or MBIA Corp.’s nonperformance risk would result in a decrease or increase in the fair value of the derivative liabilities, respectively. Recovery rates, nonperformance risk and weighted average lives are determined independently. Changes in one input will not necessarily have any impact on the other inputs.

33

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 6: Fair Value of Financial Instruments (continued)

The following tables present the fair value of MBIA Corp.’s assets (including short-term investments) and liabilities measured and reported at fair value on a recurring basis as of September 30, 2012 and December 31, 2011:

	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)			Balance as of September 30, 2012
Assets:
Investments:
Fixed-maturity investments:
Taxable bonds:
U.S. Treasury and government agency	$	329	$	-	$	-		$	329
Foreign governments		257		70		12	(1)		339
Corporate obligations		-		414		2	(1)		416
Mortgage-backed securities:
Residential mortgage-backed agency		-		5		-			5
Residential mortgage-backed non-agency		-		29		3	(1)		32
Asset-backed securities:
Collateralized debt obligations		-		1		-			1
Other asset-backed		-		17		27	(1)		44
State and municipal bonds		-		22		-			22
Total fixed-maturity investments		586		558		44			1,188
Other investments:
Money market securities		100		-		-			100
Other		-		-		5	(1)		5
Total investments		686		558		49			1,293
Cash and cash equivalents		60		-		-			60
Derivative assets:
Credit derivatives		-		7		-			7
Total derivative assets		-		7		-			7

(1) - Unobservable inputs are either not developed by MBIA Corp. or do not significantly impact the overall fair values of the aggregate financial assets and liabilities.

34

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 6: Fair Value of Financial Instruments (continued)

	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)			Balance as of September 30, 2012
Assets of consolidated VIEs:
Cash		143		-		-			143
Fixed-maturity securities at fair value:
Corporate obligations		-		64		61	(1)		125
Mortgage-backed securities:
Residential mortgage-backed non-agency		-		765		8	(1)		773
Commercial mortgage-backed		-		409		13	(1)		422
Asset-backed securities:
Collateralized debt obligations		-		186		82	(1)		268
Other asset-backed		-		103		63	(1)		166
Total fixed-maturity securities at fair value		-		1,527		227			1,754
Loans receivable		-		-		1,892			1,892
Loan repurchase commitments		-		-		1,051			1,051
Total assets	$	889	$	2,092	$	3,219		$	6,200
Liabilities:
Derivative liabilities:
Credit derivatives	$	-	$	14	$	3,317		$	3,331
Total derivative liabilities		-		14		3,317			3,331
Liabilities of consolidated VIEs:
Variable interest entity notes		-		1,741		1,902			3,643
Derivative liabilities:
Interest rate derivatives		-		157		-			157
Currency rate derivatives		-		-		23	(1)		23
Total derivative liabilities		-		157		23			180
Total liabilities	$	-	$	1,912	$	5,242		$	7,154

(1) - Unobservable inputs are either not developed by MBIA Corp. or do not significantly impact the overall fair values of the aggregate financial assets and liabilities.

35

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 6: Fair Value of Financial Instruments (continued)

	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)		Balance as of December 31, 2011
Assets:
Investments:
Fixed-maturity investments:
Taxable bonds:
U.S. Treasury and government agency	$	485	$	-	$	-	$	485
Foreign governments		277		62		11		350
Corporate obligations		-		324		4		328
Mortgage-backed securities:
Residential mortgage-backed agency		-		6		-		6
Residential mortgage-backed non-agency		-		41		7		48
Commercial mortgage-backed		-		1		-		1
Asset-backed securities:
Collateralized debt obligations		-		2		-		2
Other asset-backed		-		17		42		59
State and municipal bonds		-		21		-		21
Total taxable bonds		762		474		64		1,300
Tax-exempt bonds:
State and municipal bonds		-		1		-		1
Total tax-exempt bonds		-		1		-		1
Total fixed-maturity investments		762		475		64		1,301
Other investments:
Money market securities		28		-		-		28
Other		7		-		-		7
Total investments		797		475		64		1,336
Cash and cash equivalents		136		-		-		136
Derivative assets:
Credit derivatives		-		8		-		8
Total derivative assets		-		8		-		8

36

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 6: Fair Value of Financial Instruments (continued)

	Fair Value Measurements at Reporting Date Using
In millions	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Other Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance as of December 31, 2011
Assets of consolidated VIEs:
Cash		160		-		-		160
Fixed-maturity securities at fair value:
Corporate obligations		-		170		67		237
Mortgage-backed securities:
Residential mortgage-backed agency		-		3		-		3
Residential mortgage-backed non-agency		-		1,344		21		1,365
Commercial mortgage-backed		-		559		22		581
Asset-backed securities:
Collateralized debt obligations		-		286		149		435
Other asset-backed		-		196		67		263
Total fixed-maturity securities at fair value		-		2,558		326		2,884
Loans receivable		-		-		2,046		2,046
Loan repurchase commitments		-		-		1,077		1,077
Derivative assets:
Credit derivatives		-		-		447		447
Interest rate derivatives		-		3		-		3
Total derivative assets		-		3		447		450
Total assets	$	1,093	$	3,044	$	3,960	$	8,097
Liabilities:
Derivative liabilities:
Credit derivatives	$	-	$	18	$	4,790	$	4,808
Total derivative liabilities		-		18		4,790		4,808
Liabilities of consolidated VIEs:
Variable interest entity notes		-		1,865		2,922		4,787
Derivative liabilities:
Credit derivatives		-		-		527		527
Interest rate derivatives		-		281		-		281
Currency rate derivatives		-		-		17		17
Total derivative liabilities		-		281		544		825
Total liabilities	$	-	$	2,164	$	8,256	$	10,420

Level 3 Analysis

Level 3 assets at fair value, as of September 30, 2012 and December 31, 2011 represented approximately 52% and 49%, respectively, of total assets measured at fair value. Level 3 liabilities at fair value, as of September 30, 2012 and December 31, 2011, represented approximately 73% and 79%, respectively, of total liabilities measured at fair value.

37

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 6: Fair Value of Financial Instruments (continued)

The following tables present the fair values and carrying values of MBIA Corp.’s assets and liabilities that are disclosed at fair value but not reported at fair value on MBIA Corp.’s consolidated balance sheets as of September 30, 2012 and December 31, 2011:

	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)		Fair Value Balance as of September 30, 2012		Carry Value Balance as of September 30, 2012
Assets:
Other investments	$	-	$	-	$	27	$	27	$	27
Accrued investment income		9		-		-		9		9
Assets of consolidated VIEs:
Investments held-to-maturity		-		-		2,685		2,685		2,833
Total assets		9		-		2,712		2,721		2,869
Liabilities:
Long-term debt		-		2,142		-		2,142		2,575
Liabilities of consolidated VIEs:
Variable interest entity notes		-		-		2,685		2,685		2,833
Total liabilities		-		2,142		2,685		4,827		5,408
Financial Guarantees:
Gross		-		-		866		866		249
Ceded		-		-		1,950		1,950		1,627

	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)		Fair Value Balance as of December 31, 2011		Carry Value Balance as of December 31, 2011
Assets:
Other investments	$	-	$	-	$	28	$	28	$	28
Secured loan to Parent		-		-		168		168		300
Accrued investment income		13		-		-		13		13
Receivable for investments sold		16		-		-		16		16
Assets of consolidated VIEs:
Investments held-to-maturity		-		-		2,469		2,469		2,840
Total assets		29		-		2,665		2,694		3,197
Liabilities:
Long-term debt		-		1,663		-		1,663		2,083
Liabilities of consolidated VIEs:
Variable interest entity notes		-		-		2,469		2,469		2,840
Total liabilities		-		1,663		2,469		4,132		4,923
Financial Guarantees:
Gross		-		-		1,451		1,451		744
Ceded		-		-		1,849		1,849		1,877

38

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 6: Fair Value of Financial Instruments (continued)

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 September 30, 2012 and 2011:

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Three Months Ended September 30, 2012
In millions	Balance, Beginning of Period		Realized Gains / (Losses)		Unrealized Gains / (Losses) Included in Earnings		Unrealized Gains / (Losses) Included in OCI		Foreign Exchange Recognized in OCI or Earnings		Purchases		Issuances		Settlements		Sales		Transfers into Level 3 (1)		Transfers out of Level 3 (1)		Ending Balance		Change in Unrealized Gains (Losses) for the Period Included in Earnings for Assets Still Held as of September 30, 2012
Assets:
Foreign governments	$	12	$	-	$	-	$	-	$	1	$	8	$	-	$	(9)	$	-	$	-	$	-	$	12	$	-
Corporate obligations		22		-		-		-		-		-		-		(12)		-		-		(8)		2		-
Residential mortgage-backed non-agency		4		-		-		-		-		-		-		(1)		-		-		-		3		-
Other asset-backed		31		(2)		-		-		-		-		-		(2)		-		-		-		27		-
Other investments		2		-		3		-		-		-		-		-		-		-		-		5		-
Assets of consolidated VIEs:
Corporate obligations		72		-		(10)		-		-		-		-		(1)		-		3		(3)		61		1
Residential mortgage-backed non-agency		10		-		-		-		-		-		-		(1)		-		2		(3)		8		-
Commercial mortgage-backed		12		-		1		-		-		-		-		-		-		-		-		13		1
Collateralized debt obligations		84		-		(5)		-		-		-		-		-		-		3		-		82		(2)
Other asset-backed		38		-		(1)		-		-		-		-		(4)		-		30		-		63		1
Loans receivable		1,903		-		61		-		-		-		-		(72)		-		-		-		1,892		61
Loan repurchase commitments		1,032		-		19		-		-		-		-		-		-		-		-		1,051		19
Total assets	$	3,222	$	(2)	$	68	$	-	$	1	$	8	$	-	$	(102)	$	-	$	38	$	(14)	$	3,219	$	81

In millions	Balance, Beginning of Period		Realized (Gains) / Losses		Unrealized (Gains) / Losses Included in Earnings		Unrealized (Gains) / Losses Included in OCI		Foreign Exchange Recognized in OCI or Earnings		Purchases		Issuances		Settlements		Sales		Transfers into Level 3  (1)		Transfers out of Level 3 (1)		Ending Balance		Change in Unrealized (Gains) Losses for the Period Included in Earnings for Assets Still Held as of September 30, 2012
Liabilities:
Credit derivative, net	$	3,285	$	-	$	32	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	3,317	$	33
Liabilities of consolidated VIEs:
VIE notes		1,883		-		128		-		-		-		-		(109)		-		-		-		1,902		128
Currency derivative, net		21		-		2		-		-		-		-		-		-		-		-		23		2
Total liabilities	$	5,189	$	-	$	162	$	-	$	-	$	-	$	-	$	(109)	$	-	$	-	$	-	$	5,242	$	163

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

39

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 6: Fair Value of Financial Instruments (continued)

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Three Months Ended September 30, 2011
In millions	Balance, Beginning of Period		Realized Gains / (Losses)		Unrealized Gains / (Losses) Included in Earnings		Unrealized Gains / (Losses) Included in OCI		Foreign Exchange Recognized in OCI or Earnings		Purchases		Issuances		Settlements		Sales		Transfers into Level 3  (1)		Transfers out of Level 3 (1)		Ending Balance		Change in Unrealized Gains (Losses) for the Period Included in Earnings for Assets Still Held as of September 30, 2011
Assets:
Foreign governments	$	13	$	-	$	-	$	-	$	(2)	$	3	$	-	$	(3)	$	-	$	-	$	-	$	11	$	-
Corporate obligations		67		(1)		-		(1)		(4)		-		-		(29)		-		115		-		147		-
Residential mortgage-backed non-agency		7		-		-		-		-		2		-		(1)		-		-		(1)		7		-
Other asset-backed		53		-		-		(21)		-		-		-		4		-		-		-		36		-
State and municipal taxable bonds		13		1		-		1		-		-		-		(15)		-		-		-		-		-
Assets of consolidated VIEs:
Corporate obligations		60		-		(5)		-		-		-		-		(1)		-		7		-		61		(2)
Residential mortgage-backed non-agency		17		-		3		-		-		-		-		(1)		(6)		2		-		15		1
Commercial mortgage-backed		27		-		(1)		-		-		-		-		-		(11)		2		-		17		(2)
Collateralized debt obligations		179		-		(17)		-		-		-		-		(1)		(21)		4		-		144		(14)
Other asset-backed		73		-		5		-		-		-		-		-		(6)		-		(1)		71		5
Loans receivable		2,320		-		(36)		-		-		-		-		(66)		-		-		-		2,218		(36)
Loan repurchase commitments		905		-		33		-		-		-		-		-		-		-		-		938		33
Total assets	$	3,734	$	-	$	(18)	$	(21)	$	(6)	$	5	$	-	$	(113)	$	(44)	$	130	$	(2)	$	3,665	$	(15)

In millions	Balance, Beginning of Period		Realized (Gains) / Losses		Unrealized (Gains) / Losses Included in Earnings		Unrealized (Gains) / Losses Beginning OCI		Foreign Exchange Recognized in OCI or Earnings		Purchases		Issuances		Settlements		Sales		Transfers into Level 3  (1)		Transfers out of Level 3 (1)		Ending Balance		Change in Unrealized (Gains) Losses for the Period Included in Earnings for Assets Still Held as of September 30, 2011
Liabilities:
Credit derivative, net	$	5,983	$	79	$	(832)	$	-	$	-	$	-	$	-	$	(79)	$	-	$	-		-	$	5,151	$	(443)
Liabilities of consolidated VIEs:
VIE notes		4,553		-		(197)		-		-		-		-		(207)		(981)		-		-		3,168		(197)
Credit derivative, net		593		-		(99)		-		-		-		-		-		-		-		-		494		(99)
Currency derivative, net		16		-		2		-		-		-		-		-		-		-		-		18		2
Total liabilities	$	11,145	$	79	$	(1,126)	$	-	$	-	$	-	$	-	$	(286)	$	(981)	$	-	$	-	$	8,831	$	(737)

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

Transfers into and out of Level 3 were $38 million and $14 million, respectively, for the three months ended September 30, 2012. Transfers into and out of Level 2 were $14 million and $38 million, respectively, for the three months ended September 30, 2012. Transfers into Level 3 were principally for other asset-backed securities where inputs, which are significant to their valuation, became unobservable. Transfers out of Level 3 were principally corporate obligations and residential mortgage-backed non-agency. There were no transfers into or out of Level 1.

40

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 6: Fair Value of Financial Instruments (continued)

Transfers into and out of Level 3 were $130 million and $2 million, respectively, for the three months ended September 30, 2011. Transfers into and out of Level 2 were $2 million and $130 million, respectively, for the three months ended September 30, 2011. Transfers into Level 3 were principally for corporate obligations where inputs, which are significant to their valuation, became unobservable during the quarter. Transfers out of Level 3 were principally for residential mortgage-backed non-agency and other asset-backed securities. These Level 2 inputs included spreads, prepayment speeds, default speeds, default severities, yield curves observable at commonly quoted intervals, and market corroborated inputs. There were no transfers into or out of Level 1.

All Level 1, 2 and 3 designations are made at the end of each accounting period.

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 nine months ended September 30, 2012 and 2011:

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Nine Months Ended September 30, 2012
In millions	Balance, Beginning of Year		Realized Gains / (Losses)		Unrealized Gains / (Losses) Included in Earnings		Unrealized Gains / (Losses) Included in OCI		Foreign Exchange Recognized in OCI or Earnings		Purchases		Issuances		Settlements		Sales		Transfers into Level 3 (1)		Transfers out of Level 3 (1)		Ending Balance		Change in Unrealized Gains (Losses) for the Period Included in Earnings for Assets Still Held as of September 30, 2012
Assets:
Foreign governments	$	11	$	-	$	-	$	-	$	1	$	21	$	-	$	(18)	$	(3)	$	-	$	-	$	12	$	-
Corporate obligations		4		-		-		-		(1)		8		-		(14)		-		13		(8)		2		-
Residential mortgage-backed non-agency		7		-		-		-		-		-		-		(2)		-		-		(2)		3		-
Other asset-backed		42		(43)		-		38		-		-		-		(4)		(6)		-		-		27		-
Other investments		-		-		5		-		-		-		-		-		-		-		-		5		-
Assets of consolidated VIEs:
Corporate obligations		67		-		(15)		-		-		-		-		(3)		-		15		(3)		61		3
Residential mortgage-backed non-agency		21		-		6		-		-		-		-		(5)		(15)		5		(4)		8		3
Commercial mortgage-backed		22		-		3		-		-		-		-		(3)		(8)		5		(6)		13		2
Collateralized debt obligations		149		-		(5)		-		-		-		-		(1)		(74)		13		-		82		5
Other asset-backed		67		-		4		-		-		-		-		(7)		(35)		34		-		63		5
Loans receivable		2,046		-		52		-		-		-		-		(204)		(2)		-		-		1,892		52
Loan repurchase commitments		1,077		-		(26)		-		-		-		-		-		-		-		-		1,051		(26)
Total assets	$	3,513	$	(43)	$	24	$	38	$	-	$	29	$	-	$	(261)	$	(143)	$	85	$	(23)	$	3,219	$	44
In millions	Balance, Beginning of Year		Realized (Gains) / Losses		Unrealized (Gains) / Losses Included in Earnings		Unrealized (Gains) / Losses Included in OCI		Foreign Exchange Recognized in OCI or Earnings		Purchases		Issuances		Settlements		Sales		Transfers into Level 3 (1)		Transfers out of Level 3 (1)		Ending Balance		Change in Unrealized (Gains) Losses for the Period Included in Earnings for Assets Still Held as of September 30, 2012
Liabilities:
Credit derivative, net	$	4,790	$	463	$	(1,473)	$	-	$	-	$	-	$	-	$	(463)	$	-	$	-	$	-	$	3,317	$	(538)
Liabilities of consolidated VIEs:
VIE notes		2,922		-		332		-		-		-		-		(369)		(983)		-		-		1,902		293
Credit derivative, net		80		-		2		-		-		-		-		-		(82)		-		-		-		-
Currency derivative, net		17		-		6		-		-		-		-		-		-		-		-		23		6
Total liabilities	$	7,809	$	463	$	(1,133)	$	-	$	-	$	-	$	-	$	(832)	$	(1,065)	$	-	$	-	$	5,242	$	(239)

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

41

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 6: Fair Value of Financial Instruments (continued)

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Nine Months Ended September 30, 2011
In millions	Balance, Beginning of Year		Realized Gains / (Losses)		Unrealized Gains / (Losses) Included in Earnings		Unrealized Gains / (Losses) Included in OCI		Foreign Exchange Recognized in OCI or Earnings		Purchases		Issuances		Settlements		Sales		Transfers into Level  3 (1)		Transfers out of Level 3 (1)		Ending Balance		Change in Unrealized Gains (Losses) for the Period Included in Earnings for Assets Still Held as of September 30, 2011
Assets:
Foreign governments	$	11	$	-	$	-	$	-	$	(1)	$	9	$	-	$	(8)	$	-	$	7	$	(7)	$	11	$	-
Corporate obligations		4		(1)		-		(1)		(4)		12		-		(30)		(12)		179		-		147		-
Residential mortgage-backed non-agency		5		-		-		-		(1)		7		-		-		(4)		1		(1)		7		-
Commercial mortgage-backed		3		-		-		(1)		-		-		-		-		(1)		-		(1)		-		-
Collateralized debt obligations		13		1		-		(1)		-		2		-		(10)		(5)		1		(1)		-		-
Other asset-backed		70		-		-		(36)		-		-		-		10		(2)		-		(6)		36		-
State and municipal taxable bonds		14		1		-		-		-		-		-		(15)		-		-		-		-		-
State and municipal tax-exempt bonds		1		-		-		-		-		-		-		-		(1)		-		-		-		-
Assets of consolidated VIEs:
Corporate obligations		80		-		(18)		-		-		-		-		(5)		-		11		(7)		61		(2)
Residential mortgage-backed non-agency		22		-		2		-		-		-		-		(5)		(6)		2		-		15		2
Commercial mortgage-backed		23		-		6		-		-		-		-		(2)		(12)		2		-		17		3
Collateralized debt obligations		189		-		(27)		-		-		-		-		(4)		(21)		18		(11)		144		1
Other asset-backed		81		-		(3)		-		-		-		-		(2)		(6)		2		(1)		71		2
Loans receivable		2,183		-		260		-		-		-		-		(223)		(2)		-		-		2,218		260
Loan repurchase commitments		835		-		91		-		-		-		12		-		-		-		-		938		91
Total assets	$	3,534	$	1	$	311	$	(39)	$	(6)	$	30	$	12	$	(294)	$	(72)	$	223	$	(35)	$	3,665	$	357
In millions	Balance, Beginning of Year		Realized (Gains) / Losses		Unrealized (Gains) / Losses Included in Earnings		Unrealized (Gains) / Losses Beginning OCI		Foreign Exchange Recognized in OCI or Earnings		Purchases		Issuances		Settlements		Sales		Transfers into Level 3 (1)		Transfers out of Level 3 (1)		Ending Balance		Change in Unrealized (Gains) Losses for the Period Included in Earnings for Assets Still Held as of September 30, 2011
Liabilities:
Credit derivative, net	$	4,476	$	683	$	675	$	-	$	-	$	-	$	-	$	(683)	$	-	$	-		-	$	5,151	$	2,305
Liabilities of consolidated VIEs:
VIE notes		4,698		-		87		-		-		-		-		(456)		(1,161)		-		-		3,168		87
Credit derivative, net		638		-		(144)		-		-		-		-		-		-		-		-		494		(144)
Currency derivative, net		14		-		4		-		-		-		-		-		-		-		-		18		4
Total liabilities	$	9,826	$	683	$	622	$	-	$	-	$	-	$	-	$	(1,139)	$	(1,161)	$	-	$	-	$	8,831	$	2,252

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

42

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 6: Fair Value of Financial Instruments (continued)

Transfers into and out of Level 3 were $85 million and $23 million, respectively, for the nine months ended September 30, 2012. Transfers into and out of Level 2 were $23 million and $85 million, respectively, for the nine months ended September 30, 2012. Transfers into Level 3 were principally for other asset-backed securities, corporate obligations and CDOs where inputs, which are significant to their valuation, became unobservable. Transfers out of Level 3 were principally for corporate obligation, CMBS and residential mortgage-backed non-agency. These Level 2 inputs included spreads, prepayment speeds, default speeds, default severities, yield curves observable at commonly quoted intervals, and market corroborated inputs. There were no transfers into or out of Level 1.

Transfers into and out of Level 3 were $223 million and $35 million, respectively, for the nine months ended September 30, 2011. Transfers into and out of Level 2 were $35 million and $223 million, respectively, for the nine months ended September 30, 2011. Transfers into Level 3 were principally for corporate obligations and collateralized debt obligations where inputs, which are significant to their valuation, became unobservable during the quarter. Transfers out of Level 3 were principally for collateralized debt obligations, corporate obligations, foreign governments and other asset-backed securities. These Level 2 inputs included spreads, prepayment speeds, default speeds, default severities, yield curves observable at commonly quoted intervals, and market corroborated inputs. There were no transfers into or out of Level 1.

All Level 1, 2 and 3 designations are made at the end of each accounting period.

Gains and losses (realized and unrealized) included in earnings relating to Level 3 assets and liabilities for the three and nine months ended September 30, 2012 and 2011 are reported on MBIA Corp.’s consolidated statements of operations as follows:

	Three Months Ended September 30, 2012
							Consolidated VIEs
In millions	Unrealized Gains (Losses) on Insured Derivatives		Net Realized Gains (Losses)		Net Gains (Losses) on Financial Instruments at Fair Value and Foreign Exchange		Net Gains (Losses) on Financial Instruments at Fair Value and Foreign Exchange
Total gains (losses) included in earnings	$	(32)	$	(2)	$	3	$	(65)
Change in unrealized gains (losses) for the period included in earnings for assets and liabilities still held as of September 30, 2012	$	(33)	$	-	$	-	$	(49)
	Three Months Ended September 30, 2011
							Consolidated VIEs
In millions	Unrealized Gains (Losses) on Insured Derivatives		Net Realized Gains (Losses)		Net Gains (Losses) on Financial Instruments at Fair Value and Foreign Exchange		Net Gains (Losses) on Financial Instruments at Fair Value and Foreign Exchange
Total gains (losses) included in earnings	$	832	$	(79)	$	-	$	276
Change in unrealized gains (losses) for the period included in earnings for assets and liabilities still held as of September 30, 2011	$	443	$	-	$	-	$	279

43

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 6: Fair Value of Financial Instruments (continued)

	Nine Months Ended September 30, 2012
							Consolidated VIEs
In millions	Unrealized Gains (Losses) on Insured Derivatives		Net Realized Gains (Losses)		Net Gains (Losses) on Financial Instruments at Fair Value and Foreign Exchange		Net Gains (Losses) on Financial Instruments at Fair Value and Foreign Exchange
Total gains (losses) included in earnings	$	1,473	$	(506)	$	5	$	(321)
Change in unrealized gains (losses) for the period included in earnings for assets and liabilities still held as of September 30, 2012	$	538	$	-	$	-	$	(255)

	Nine Months Ended September 30, 2011
							Consolidated VIEs
In millions	Unrealized Gains (Losses) on Insured Derivatives		Net Realized Gains (Losses)		Net Gains (Losses) on Financial Instruments at Fair Value and Foreign Exchange		Net Gains (Losses) on Financial Instruments at Fair Value and Foreign Exchange
Total gains (losses) included in earnings	$	(675)	$	(683)	$	1	$	364
Change in unrealized gains (losses) for the period included in earnings for assets and liabilities still held as of September 30, 2011	$	(2,305)	$	-	$	-	$	410

Fair Value Option

MBIA Corp. elected to record at fair value certain financial instruments of VIEs that have been consolidated in connection with the adoption of the accounting guidance for consolidation of VIEs, among others.

The following table presents the changes in fair value included in MBIA Corp.’s consolidated statements of operations for the three and nine months ended September 30, 2012 and 2011, for all financial instruments for which the fair value option was elected:

	Net Gains (Losses) on Financial Instruments at Fair Value  and Foreign Exchange
	Three Months Ended September 30,				Nine Months Ended September 30,
In millions	2012		2011		2012		2011
Fixed-maturity securities held at fair value	$	21	$	(286)	$	(36)	$	(193)
Loans receivable at fair value:
Residential mortgage loans		(4)		(65)		(103)		65
Other loans		(7)		(37)		(48)		(30)
Loan repurchase commitments		19		33		62		103
Other assets		-		(162)		-		(184)
Long-term debt		12		425		140		335

44

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 6: Fair Value of Financial Instruments (continued)

The following table reflects the difference between the aggregate fair value and the aggregate remaining contractual principal balance outstanding as of September 30, 2012 and December 31, 2011, for loans and VIE notes for which the fair value option was elected:

	As of September 30, 2012						As of December 31, 2011
In millions	Contractual Principal Outstanding		Fair Value		Difference		Contractual Principal Outstanding		Fair Value		Difference
Loans receivable at fair value:
Residential mortgage loans	$	2,430	$	1,746	$	684	$	2,769	$	1,895	$	874
Residential mortgage loans (90 days or more past due)		241		46		195		259		-		259
Other loans		39		16		23		129		43		86
Other loans (90 days or more past due)		206		84		122		324		108		216
Total loans receivable at fair value	$	2,916	$	1,892	$	1,024	$	3,481	$	2,046	$	1,435
Variable interest entity notes	$	9,075	$	3,643	$	5,432	$	13,684	$	4,787	$	8,897

Substantially all gains and losses included in earnings during the periods ended September 30, 2012 and December 31, 2011 on loans receivable and VIE notes are attributable to credit risk. This is primarily due to the high rate of defaults on loans and the collateral supporting the VIE notes, resulting in depressed pricing of the financial instruments.

Note 7: Investments

MBIA Corp.’s fixed-maturity portfolio consists of high-quality (average rating Aa) taxable and tax-exempt investments of diversified maturities. Other investments primarily comprise equity investments and loans receivable due from an affiliate.

The following tables present the amortized cost, fair value and other-than-temporary impairments of fixed-maturity investments and other investments designated as available-for-sale in the consolidated investment portfolio of MBIA Corp. as of September 30, 2012 and December 31, 2011:

	September 30, 2012
In millions	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Fixed-maturity investments:
Taxable bonds:
U.S. Treasury and government agency	$	328	$	1	$	-	$	329
Foreign governments		318		22		-		340
Corporate obligations		406		10		-		416
Mortgage-backed securities:
Residential mortgage-backed agency		5		-		-		5
Residential mortgage-backed non-agency		32		1		(1)		32
Commercial mortgage-backed		1		-		(1)		-
Asset-backed securities:
Collateralized debt obligations		1		-		-		1
Other asset-backed		43		1		-		44
State and municipal		19		3		-		22
Total fixed-maturity investments		1,153		38		(2)		1,189
Other investments:
Money market securities		100		-		-		100
Total other investments		100		-		-		100
Total available-for-sale investments	$	1,253	$	38	$	(2)	$	1,289

45

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 7: Investments (continued)

	December 31, 2011
In millions	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Other-Than- Temporary Impairments(1)
Fixed-maturity investments:
Taxable bonds:
U.S. Treasury and government agency	$	484	$	1	$	-	$	485	$	-
Foreign governments		327		23		-		350		-
Corporate obligations		325		4		(1)		328		-
Mortgage-backed securities:
Residential mortgage-backed agency		6		-		-		6		-
Residential mortgage-backed non-agency		41		8		(1)		48		-
Commercial mortgage-backed		2		-		(1)		1		-
Asset-backed securities:
Collateralized debt obligations		2		-		-		2		-
Other asset-backed		97		-		(38)		59		(37)
State and municipal		19		2		-		21		-
Total taxable bonds		1,303		38		(41)		1,300		(37)
Tax-exempt bonds:
State and municipal		1		-		-		1		-
Total tax-exempt bonds		1		-		-		1		-
Total fixed-maturity investments		1,304		38		(41)		1,301		(37)
Other investments:
Other investments		6		1		-		7		-
Money market securities		28		-		-		28		-
Total other investments		34		1		-		35		-
Total available-for-sale investments	$	1,338	$	39	$	(41)	$	1,336	$	(37)

(1) - Represents the amount of other-than-temporary losses recognized in accumulated other comprehensive income (loss).

The fair value of securities on deposit with various regulatory authorities was $5 million as of September 30, 2012 and December 31, 2011. These deposits are required to comply with state insurance laws.

The following table presents the distribution by contractual maturity of available-for-sale fixed-maturity investments at amortized cost and fair value as of September 30, 2012. Contractual maturity may differ from expected maturity as borrowers may have the right to call or prepay obligations.

In millions	Amortized Cost		Fair Value
Due in one year or less	$	528	$	529
Due after one year through five years		433		451
Due after five years through ten years		87		99
Due after ten years through fifteen years		12		15
Due after fifteen years		11		13
Mortgage-backed		38		37
Asset-backed		44		45
Total fixed-maturity investments	$	1,153	$	1,189

Investments that are held-to-maturity are reported on MBIA Corp.’s consolidated balance sheets at amortized cost. These investments, which primarily relate to MBIA Corp.’s consolidated VIEs, primarily consist of ABS and other fixed-income debt obligations issued by major national and international corporations and other structured finance clients. As of September 30, 2012, unrecognized gross gains were $20 million and unrealized gross losses were $168 million. As of December 31, 2011, there were no unrecognized gross gains and unrealized gross losses were $371 million.

46

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 7: Investments (continued)

The following table presents the distribution of held-to-maturity investments by contractual maturity at amortized cost and fair value as of September 30, 2012:

					Consolidated VIEs
In millions	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	-	$	-	$	-	$	-
Due after one year through five years(1)		1		1		-		-
Due after five years through ten years		-		-		-		-
Due after ten years through fifteen years		-		-		-		-
Due after fifteen years		-		-		-		-
Mortgage-backed		-		-		-		-
Asset-backed		-		-		2,833		2,685
Total held-to-maturity investments	$	1	$	1	$	2,833	$	2,685

(1) - Relates to a tax credit investment reported in “Other investments” on MBIA Corp.’s consolidated balance sheets.

47

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 7: Investments (continued)

The following tables present the gross unrealized losses included in accumulated other comprehensive income (loss) as of September 30, 2012 and December 31, 2011 related to available-for-sale fixed-maturity and other investments. These 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.

	September 30, 2012
	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	$	100	$	-	$	-	$	-	$	100	$	-
Foreign governments		24		-		-		-		24		-
Corporate obligations		48		-		-		-		48		-
Mortgage-backed securities:
Residential mortgage-backed non-agency		-		-		10		(1)		10		(1)
Commercial mortgage-backed		-		-		-		(1)		-		(1)
Asset-backed securities:
Other asset-backed		-		-		11		-		11		-
Total	$	172	$	-	$	21	$	(2)	$	193	$	(2)

	December 31, 2011
	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:
Foreign governments	$	20	$	-	$	-	$	-	$	20	$	-
Corporate obligations		90		(1)		10		-		100		(1)
Mortgage-backed securities:
Residential mortgage-backed agency		1		-		-		-		1		-
Residential mortgage-backed non-agency		24		(1)		10		-		34		(1)
Commercial mortgage-backed		-		(1)		-		-		-		(1)
Asset-backed securities:
Other asset-backed		-		-		40		(38)		40		(38)
Total taxable bonds		135		(3)		60		(38)		195		(41)
Tax-exempt bonds:
State and municipal		1		-		-		-		1		-
Total tax-exempt bonds		1		-		-		-		1		-
Total	$	136	$	(3)	$	60	$	(38)	$	196	$	(41)

48

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 7: Investments (continued)

The following tables present the gross unrealized losses of held-to-maturity investments as of September 30, 2012 and December 31, 2011. Held-to-maturity investments are reported at amortized cost on MBIA Corp.’s consolidated balance sheets. These 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.

	September 30, 2012
	Less than 12 Months				12 Months or Longer				Total
In millions	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Assets of consolidated VIEs:
Other asset-backed	$	-	$	-	$	2,350	$	(168)	$	2,350	$	(168)
Total	$	-	$	-	$	2,350	$	(168)	$	2,350	$	(168)

	December 31, 2011
	Less than 12 Months				12 Months or Longer				Total
In millions	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Assets of consolidated VIEs:
Other asset-backed	$	284	$	(31)	$	2,185	$	(340)	$	2,469	$	(371)
Total	$	284	$	(31)	$	2,185	$	(340)	$	2,469	$	(371)

As of September 30, 2012 and December 31, 2011, MBIA Corp.’s available-for-sale fixed-maturity investment, other investment and held-to-maturity investment portfolios’ gross unrealized losses totaled $170 million and $412 million, respectively. The weighted average contractual maturity of securities in an unrealized loss position as of September 30, 2012 and December 31, 2011 was 23 and 26 years, respectively. As of September 30, 2012, there were 38 securities that were in an unrealized loss position for a continuous twelve-month period or longer with aggregate unrealized losses of $170 million. Within these securities, the book value of 8 securities exceeded market value by more than 5%. As of December 31, 2011, there were 43 securities that were in an unrealized loss position for a continuous twelve-month period or longer with aggregate unrealized losses of $378 million. Within these securities, the book value of 14 securities exceeded market value by more than 5%.

MBIA Corp. has evaluated on a security-by-security basis whether the unrealized losses in its investment portfolios were other-than- temporary considering duration and severity of unrealized losses, the circumstances that gave rise to the unrealized losses, and whether MBIA Corp. has the intent to sell the securities or more likely than not will be required to sell the securities before their anticipated recovery. Based on its evaluation, MBIA Corp. determined that the unrealized losses on the remaining securities were temporary in nature because its impairment analysis, including projected future cash flows, indicated that MBIA Corp. would be able to recover the amortized cost of impaired assets. MBIA Corp. also concluded that it does not have the intent to sell securities in an unrealized loss position and it is more likely than not that it will not have to sell these securities before recovery of their cost basis. In making this conclusion, MBIA Corp. examined the cash flow projections for its investment portfolios, the potential sources and uses of cash in its businesses, and the cash resources available to its business other than sales of securities. It also considered the existence of any risk management or other plans as of September 30, 2012 that would require the sale of impaired securities. On a quarterly basis, MBIA Corp. re-evaluates the unrealized losses in its investment portfolios to determine whether an impairment loss should be realized in current earnings. Impaired securities that MBIA Corp. intends to sell before the expected recovery of such securities’ fair values have been written down to their fair values.

Refer to “Note 8: Investment Income and Gains and Losses” for information on realized losses due to other-than-temporary impairments.

49

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 8: Investment Income and Gains and Losses

The following table includes MBIA Corp.’s total investment income:

	Three Months Ended September 30,				Nine Months Ended September 30,
In millions	2012		2011		2012		2011
Gross investment income:
Fixed-maturity	$	6	$	14	$	13	$	52
Short-term investments		1		1		4		5
Other investments		-		3		3		12
Consolidated VIEs		13		13		40		39
Gross investment income		20		31		60		108
Investment expenses		1		2		4		6
Net investment income		19		29		56		102
Realized gains and losses:
Fixed-maturity:
Gains		-		5		10		34
Losses		(3)		(1)		(44)		(6)
Net		(3)		4		(34)		28
Other investments:
Gains		-		-		1		-
Losses		(1)		-		(1)		-
Net		(1)		-		-		-
Total net realized gains (losses)(1)		(4)		4		(34)		28
Total investment income	$	15	$	33	$	22	$	130

(1) - These balances are included in the “Net gains (losses) on financial instruments at fair value and foreign exchange” and “Net investment losses related to other-than-temporary impairments” line items on MBIA Corp.’s consolidated statements of operations.

Net investment income is generated as a result of the ongoing management of all of MBIA Corp.’s investment portfolios in 2012 and 2011.

Net realized losses were $34 million for the nine months ended September 30, 2012, compared to net realized gains of $28 million for the same period of 2011, resulting in a decrease of $62 million. The decrease was primarily due to an other-than-temporary impairment loss recognized on a security impaired to fair value as a result of MBIA Corp.’s intent to sell the security, and lower gains on sales of investments.

The portion of certain other-than-temporary impairment losses on fixed-maturity securities that does not represent credit losses is recognized in accumulated other comprehensive income (loss). For these impairments, the net amount recognized in earnings represents the difference between the amortized cost of the security and the net present value of its projected future discounted cash flows prior to impairment. Any remaining difference between the fair value and amortized cost is recognized in accumulated other comprehensive income (loss).

The following table presents the amount of credit loss impairments recognized in earnings on fixed-maturity securities held by MBIA Corp. as of the dates indicated, for which a portion of the other-than-temporary impairment losses was recognized in accumulated other comprehensive income (loss), and the corresponding changes in such amounts. There were no other-than-temporary impairment losses for which a portion was recognized in accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2012 and 2011, respectively.

50

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 8: Investment Income and Gains and Losses (continued)

In millions	Nine Months Ended September 30,
Credit Losses Recognized in Earnings Related to Other-Than-Temporary Impairments	2012
Beginning balance	$	57
Reductions for credit loss impairments previously recognized on securities impaired to fair value during the period(1)		(57)
Ending balance	$	-

(1) - Represents circumstances where MBIA Corp. determined in the current period that it intends to sell the security or it is more likely than not that it will be required to sell the security before recovery of the security’s amortized cost.

Net unrealized gains (losses), including related deferred income taxes, reported in accumulated other comprehensive income (loss) within shareholders’ equity consisted of:

In millions	As of September 30, 2012		As of December 31, 2011
Fixed-maturity:
Gains	$	38	$	38
Losses		(2)		(41)
Foreign exchange		16		(9)
Net		52		(12)
Other investments:
Gains		-		1
Net		-		1
Total		52		(11)
Deferred income tax (benefit) provision		(3)		(13)
Unrealized gains (losses), net	$	55	$	2

The change in net unrealized gains (losses), including the portion of other-than-temporary impairments presented in the table above, consisted of:

In millions	As of September 30, 2012		As of December 31, 2011
Fixed-maturity	$	64	$	8
Other investments		(1)		-
Total		63		8
Deferred income tax charged (credited)		10		(8)
Change in unrealized gains (losses), net	$	53	$	16

Note 9: Derivative Instruments

MBIA Corp. accounts for derivative transactions in accordance with the accounting principles for derivative and hedging activities, which requires that all such transactions be recorded on MBIA Corp.’s consolidated balance sheets at fair value. Refer to “Note 6: Fair Value of Financial Instruments” for the definition of fair value of derivative instruments.

Changes in the fair value of derivatives, excluding insured derivatives, are recorded each period in current earnings within “Net gains (losses) on financial instruments at fair value and foreign exchange.” Changes in the fair value of insured derivatives are recorded each period in current earnings within “Net change in fair value of insured derivatives.” The net change in the fair value of MBIA Corp.’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) premiums received and receivable on written CDS contracts, (ii) premiums paid and payable to reinsurers in respect to 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 settlement agreement and (vi) fees relating to CDS contracts. The “Unrealized gains (losses) on insured derivatives” include all other changes in fair value of the insured derivative contracts.

51

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 9: Derivative Instruments (continued)

MBIA Corp. has entered into derivative transactions that it viewed as an extension of its core financial guarantee business but which do not qualify for the financial guarantee scope exception and, therefore, must be recorded at fair value in MBIA Corp.’s consolidated balance sheets. MBIA Corp. insures CDS contracts, primarily referencing corporate, asset-backed, residential mortgage-backed, commercial mortgage-backed, CRE loans, and CDO securities that MBIA Corp. intends to hold for the entire term of the contract absent a negotiated settlement with the counterparty.

Variable Interest Entities

VIEs consolidated by MBIA Corp. have entered into derivative transactions primarily consisting of interest rate swaps. Interest rate swaps are entered into to hedge the risks associated with fluctuations in interest rates or fair values of certain contracts.

Credit Derivatives Sold

The following table presents information about credit derivatives sold by MBIA Corp. that were outstanding as of September 30, 2012. Credit ratings represent the lower of underlying ratings currently assigned by Moody’s, S&P or MBIA.

In millions			Notional Value
Credit Derivatives Sold	Weighted Average Remaining Expected Maturity		AAA		AA		A		BBB		Below Investment Grade		Total Notional		Fair Value Asset (Liability)
Insured credit default swaps		5.3 Years	$	10,456	$	7,519	$	5,196	$	11,811	$	13,870	$	48,852	$	(3,243)
Insured swaps		21.2 Years		-		156		2,650		1,642		71		4,519		(8)
All others		2.1 Years		-		-		-		-		195		195		(80)
Total notional			$	10,456	$	7,675	$	7,846	$	13,453	$	14,136	$	53,566
Total fair value			$	(16)	$	(81)	$	(148)	$	(1,001)	$	(2,085)			$	(3,331)

The following table presents information about credit derivatives sold by MBIA Corp. that were outstanding as of December 31, 2011. Credit ratings represent the lower of underlying ratings currently assigned by Moody’s, S&P or MBIA.

In millions			Notional Value
Credit Derivatives Sold	Weighted Average Remaining Expected Maturity		AAA		AA		A		BBB		Below Investment Grade		Total Notional		Fair Value Asset (Liability)
Insured credit default swaps		5.6 Years	$	15,475	$	12,065	$	6,336	$	14,042	$	17,639	$	65,557	$	(4,716)
Non-insured credit default swaps-VIE		3.6 Years		-		-		-		-		643		643		(527)
Insured swaps		20.6 Years		-		133		3,140		2,227		133		5,633		(9)
All others		2.8 Years		-		-		-		-		195		195		(91)
Total notional			$	15,475	$	12,198	$	9,476	$	16,269	$	18,610	$	72,028
Total fair value			$	(114)	$	(116)	$	(205)	$	(1,355)	$	(3,553)			$	(5,343)

Referenced credit ratings assigned by MBIA Corp. to insured credit derivatives are derived by MBIA Corp.’s surveillance group. In assigning an internal rating, current status reports from issuers and trustees, as well as publicly available transaction-specific information, are reviewed. Also, where appropriate, cash flow analyses and collateral valuations are considered. The maximum potential amount of future payments (undiscounted) on CDS contracts are estimated as the notional value plus any additional debt service costs, such as interest or other amounts owed on CDS contracts. The maximum amount of future payments that MBIA Corp. may be required to make under these guarantees is $53.1 billion. This amount is net of $393 million of insured derivatives ceded under reinsurance agreements in which MBIA Corp. economically hedges a portion of the credit and market risk associated with its insured derivatives and offsetting agreements with a counterparty. The maximum potential amount of future payments (undiscounted) on insured swaps are estimated as the notional value of such contracts.

52

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 9: Derivative Instruments (continued)

MBIA Corp. may hold recourse provisions with third parties in derivative transactions through both reinsurance and subrogation rights. MBIA Corp.’s reinsurance arrangements provide that in the event MBIA Corp. pays a claim under a guarantee of a derivative contract, MBIA Corp. has the right to collect amounts from any reinsurers that have reinsured the guarantee on either a proportional or non-proportional basis, depending upon the underlying reinsurance agreement. MBIA Corp. may also have recourse through subrogation rights whereby if MBIA Corp. makes a claim payment, it is entitled to any rights of the insured counterparty, including the right to any assets held as collateral.

Financial Statement Impact

As of September 30, 2012 and December 31, 2011, MBIA Corp. reported derivative assets of $7 million and $458 million, respectively, and derivative liabilities of $3.5 billion and $5.6 billion, respectively, which are shown separately on the consolidated balance sheets. The following table presents the total fair value of MBIA Corp.’s derivative assets and liabilities by instrument and balance sheet location as of September 30, 2012:

In millions	Notional Amount		Derivative Assets			Derivative Liabilities
Derivative Instruments	Outstanding		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Not designated as hedging instruments:
Insured credit default swaps	$	49,171	Derivative assets	$	-	Derivative liabilities	$	(3,243)
Insured swaps		8,223	Derivative assets		7	Derivative liabilities		(8)
Interest rate swaps -VIE		2,992	Derivative assets-VIE		-	Derivative liabilities-VIE		(157)
Cross currency swaps -VIE		113	Derivative assets-VIE		-	Derivative liabilities-VIE		(23)
All other		195	Derivative assets		-	Derivative liabilities		(80)
All other-VIE		280	Derivative assets-VIE		-	Derivative liabilities-VIE		-
Total derivatives	$	60,974		$	7		$	(3,511)

The following table presents the total fair value of MBIA Corp.’s derivative assets and liabilities by instrument and balance sheet location as of December 31, 2011:

In millions	Notional Amount		Derivative Assets			Derivative Liabilities
Derivative Instruments	Outstanding		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Not designated as hedging instruments:
Insured credit default swaps	$	66,851	Derivative assets	$	-	Derivative liabilities	$	(4,708)
Non-insured credit default swaps-VIE		1,272	Derivative assets-VIE		447	Derivative liabilities-VIE		(527)
Insured swaps		9,811	Derivative assets		8	Derivative liabilities		(9)
Interest rate swaps -VIE		4,878	Derivative assets-VIE		-	Derivative liabilities-VIE		(281)
Cross currency swaps -VIE		123	Derivative assets-VIE		-	Derivative liabilities-VIE		(17)
All other		195	Derivative assets		-	Derivative liabilities		(91)
All other-VIE		472	Derivative assets-VIE		3	Derivative liabilities-VIE		-
Total derivatives	$	83,602		$	458		$	(5,633)

53

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 9: Derivative Instruments (continued)

The following table shows the effect of derivative instruments on the consolidated statements of operations for the three months ended September 30, 2012:

In millions		Net Gain (Loss) Recognized in Income
Derivatives Not Designated as Hedging Instruments
	Location of Gain (Loss) Recognized in Income on Derivative
Insured credit default swaps	Unrealized gains (losses) on insured derivatives	$	(40)
Insured credit default swaps	Realized gains (losses) and other settlements on insured derivatives		12
Interest rate swaps-VIE	Net gains (losses) on financial instruments at fair value and foreign  exchange-VIE		8
Currency swaps-VIE	Net gains (losses) on financial instruments at fair value and foreign  exchange-VIE		(2)
All other	Unrealized gains (losses) on insured derivatives		7
Total		$	(15)

The following table shows the effect of derivative instruments on the consolidated statements of operations for the three months ended September 30, 2011:

In millions		Net Gain (Loss) Recognized in Income
Derivatives Not Designated as Hedging Instruments
	Location of Gain (Loss) Recognized in Income on Derivative
Insured credit default swaps	Unrealized gains (losses) on insured derivatives	$	812
Insured credit default swaps	Realized gains (losses) and other settlements on insured derivatives		(54)
Non-insured credit default swaps-VIE	Net gains (losses) on financial instruments at fair value and foreign  exchange-VIE		98
Interest rate swaps-VIE	Net gains (losses) on financial instruments at fair value and foreign  exchange-VIE		(25)
Currency swaps-VIE	Net gains (losses) on financial instruments at fair value and foreign  exchange-VIE		(2)
All other	Unrealized gains (losses) on insured derivatives		20
All other-VIE	Net gains (losses) on financial instruments at fair value and foreign  exchange-VIE		(5)
Total		$	844

54

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 9: Derivative Instruments (continued)

The following table shows the effect of derivative instruments on the consolidated statements of operations for the nine months ended September 30, 2012:

In millions		Net Gain (Loss) Recognized in Income
Derivatives Not Designated as Hedging Instruments
	Location of Gain (Loss) Recognized in Income on Derivative
Insured credit default swaps	Unrealized gains (losses) on insured derivatives	$	1,463
Insured credit default swaps	Realized gains (losses) and other settlements on insured derivatives		(420)
Non-insured credit default swaps-VIE	Net gains (losses) on financial instruments at fair value and foreign exchange-VIE		(1)
Interest rate swaps-VIE	Net gains (losses) on financial instruments at fair value and foreign exchange-VIE		39
Currency swaps-VIE	Net gains (losses) on financial instruments at fair value and foreign exchange-VIE		(6)
All other	Unrealized gains (losses) on insured derivatives		10
All other-VIE	Net gains (losses) on financial instruments at fair value and foreign exchange-VIE		(2)
Total		$	1,083

The following table shows the effect of derivative instruments on the consolidated statements of operations for the nine months ended September 30, 2011:

In millions		Net Gain (Loss) Recognized in Income
Derivatives Not Designated as Hedging Instruments
	Location of Gain (Loss) Recognized in Income on Derivative
Insured credit default swaps	Unrealized gains (losses) on insured derivatives	$	(658)
Insured credit default swaps	Realized gains (losses) and other settlements on insured derivatives		(601)
Non-insured credit default swaps-VIE	Net gains (losses) on financial instruments at fair value and foreign exchange-VIE		144
Interest rate swaps-VIE	Net gains (losses) on financial instruments at fair value and foreign exchange-VIE		23
Currency swaps-VIE	Net gains (losses) on financial instruments at fair value and foreign exchange-VIE		(4)
All other	Unrealized gains (losses) on insured derivatives		(17)
All other-VIE	Net gains (losses) on financial instruments at fair value and foreign exchange-VIE		(6)
Total		$	(1,119)

Note 10: Income Taxes

MBIA Corp.’s income taxes and the related effective tax rates for the three and nine months ended September 30, 2012 and 2011 are as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
In millions	2012			2011			2012			2011
Income (loss) before income taxes	$	(160)		$	631		$	597		$	(1,326)
Provision (benefit) for income taxes	$	(80)	50.0%	$	217	34.4%	$	201	33.7%	$	(484)	36.5%

For the nine months ended September 30, 2012, MBIA Corp.’s effective tax rate applied to its income before income taxes was lower than the U.S. statutory tax rate primarily as a result of a decrease in the valuation allowance. MBIA Corp.’s effective tax rate on its pre-tax loss for the nine months ended September 30, 2011 was higher than the U.S. statutory tax rate primarily due to tax-exempt interest income from investments, income earned in non-U.S. jurisdictions, which is being taxed at less than 35%, and a reduction in the valuation allowance.

MBIA Corp. adjusts annual forecasted pre-tax income for mark-to-market income, fair value adjustments, capital gains/losses, and other tax adjustments when projecting its full year 2012 effective tax rate. MBIA Corp. accounted for the discrete items at the federal applicable tax rate after applying the projected full year effective tax rate to its actual nine-month results excluding discrete items.

55

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 10: Income Taxes (continued)

Deferred Tax Asset, Net of Valuation Allowance

MBIA Corp. recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax assets and liabilities are determined based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on tax assets and liabilities is recognized in income in the period that includes the enactment date.

MBIA Corp. establishes a valuation allowance against its deferred tax asset when it is more likely than not that all or a portion of the deferred tax asset will not be realized. All evidence, both positive and negative, needs to be identified and considered in making the determination. Future realization of the existing deferred tax asset ultimately depends, in part, on the existence of sufficient taxable income of appropriate character (for example, ordinary income versus capital gains) within the carryforward period available under the tax law.

As of September 30, 2012, MBIA Corp. reported a net deferred tax asset of $1.5 billion. The $1.5 billion deferred tax asset is net of a $46 million valuation allowance. As of September 30, 2012, MBIA Corp. has a valuation allowance against a portion of the deferred tax asset related to losses from asset impairments as these losses are considered capital losses, have a five-year carryforward period once recognized, and can only be used to offset capital gain income.

MBIA Corp. has concluded that it is more likely than not that its net deferred tax asset will be realized. In its conclusion, MBIA Corp. relied on the assurance by its parent, MBIA Inc., that it was MBIA Inc.’s intention that no net operating loss generated by MBIA Corp., to the extent used in consolidation, would be allowed to expire without compensation.

Accounting for Uncertainty in Income Taxes

It is MBIA Corp.’s policy to record and disclose any change in unrecognized tax benefits (“UTB”) and related interest and penalties to income tax in the consolidated statements of operations.

In millions
Unrecognized tax benefit as of December 31, 2011	$	1
The gross amount of the increases (decreases) in the UTB as a result of tax positions taken during prior year		-
Decrease in the UTB related to settlements with taxing authorities		(1)
Unrecognized tax benefit as of September 30, 2012	$	-

In the first nine months of 2012, the total amount of UTB decreased as a result of settling the 2004-2009 Internal Revenue Service (“IRS”) examination.

MBIA Corp.’s significant major tax jurisdictions include the U.S. and the United Kingdom (“U.K.”).

MBIA and its U.S. subsidiaries file a U.S. consolidated federal income tax return. The IRS has concluded its field work with respect to the examination of tax years 2004 through 2009 and on January 12, 2012, the Joint Committee on Taxation notified MBIA that the results of the IRS field examination were reviewed and accepted.

The U.K. tax authorities are currently auditing tax years 2005 through 2009.

Tax Sharing Arrangement

MBIA Corp. files its U.S. Corporation Income Tax Return as a member of the MBIA Inc. consolidated group and participates in a tax sharing agreement between MBIA Corp. and MBIA Inc. under which MBIA Corp. is allocated its share of consolidated tax liability or tax benefit as determined on a standalone basis under the tax sharing agreement.

As of September 30, 2012, MBIA Corp. has not made tax payments under this tax sharing agreement for 2012 and 2011. If tax payments had been made, all funds would be placed in escrow by MBIA Inc. and would remain in escrow until the expiration of a two-year carryback period which would allow MBIA Corp. to carryback a separate company tax loss and recover all or a portion of the escrowed funds.

56

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 10: Income Taxes (continued)

As of September 30, 2012, MBIA Corp. has not received any payment with respect to tax losses contributed to the consolidated group. MBIA Corp. will receive benefits of its losses as it is able to earn out those losses in the future. However, it is MBIA Inc.’s intention not to allow any loss generated by MBIA Corp., to the extent used in consolidation, to expire without compensation.

Note 11: Commitments and Contingencies

The following commitments and contingencies provide an update to those discussed in “Note 19: Commitments and Contingencies” in the Notes to Consolidated Financial Statements included in Exhibit 99.3 of MBIA Inc.’s Annual Report on Form 10-K for the year ended December 31, 2011 as filed with the Securities and Exchange Commission on February 29, 2012, and should be read in conjunction with the complete descriptions provided in the aforementioned note included in Exhibit 99.3 of Form 10-K. In the normal course of operating its business, MBIA Corp. may be involved in various legal proceedings. Additionally, MBIA may be involved in various legal proceedings that directly or indirectly impact MBIA Corp.

Corporate Litigation

Ambac Bond Insurance Coverage Cases, Coordinated Proceeding Case No. JCCP 4555 (Super. Ct. of Cal., County of San Francisco)

On May 1, 2012, the court ruled in favor of the monoline defendants on their special motion to strike pursuant to California’s Anti-SLAPP statute. The parties will complete the briefing relating to Stage 2 of the Anti-SLAPP motion on February 22, 2013 and a hearing is scheduled for March 5, 2013.

Tri-City Healthcare District v. Citibank.et al.; Case No. 30-2010-00359692 (Super. Ct. of Cal., County of Orange)

On July 20, 2012, the court granted the plaintiff’s motion to further amend its complaint. Briefing on the defendants’ motion to strike portions of the Fifth Amended Complaint was completed on October 19, 2012. MBIA’s portion of the motion has been resolved per stipulation.

City of Phoenix v. AMBAC et al., Case No. 2:10-cv-00555-TMB (D. Ariz.)

On October 5, 2012, the court granted the plaintiff’s motion to substitute its expert with certain limitations.

Recovery Litigation

MBIA Insurance Corp. v. Countrywide Home Loans, Inc., et al.; Index No. 602825/08 (N.Y. Sup. Ct., N.Y. County)

Expert discovery was completed as of September 20, 2012. On September 19, 2012, MBIA and Countrywide filed respective motions for summary judgment regarding Countrywide’s primary liability. Argument is scheduled for December 5 to 6, 2012. On September 28, 2012, MBIA and Bank of America filed motions for summary judgment regarding Bank of America’s successor liability. Argument is scheduled for December 12 to 13, 2012. The Appellate Division of the New York State Supreme Court, First Department (the “Appellate Division”), has ordered Countrywide to file its opening appellate brief with respect to the trial court’s decision on partial summary judgment regarding causation by November 5, 2012. The appeal is scheduled for the January 2013 term of the Appellate Division.

MBIA Insurance Corp. v. Residential Funding Company, LLC; Index No. 603552/2008 (N.Y. Sup. Ct., N.Y. County)

The case is currently stayed as a result of the Chapter 11 filing of ResCap on May 14, 2012 in the United States Bankruptcy Court for the Southern District of New York.

MBIA Insurance Corp. v. GMAC Mortgage, LLC (f/k/a GMAC Mortgage Corporation); Index No. 600837/2010 (N.Y. Sup. Ct., N.Y. County)

The case is currently stayed as a result of the Chapter 11 filing of ResCap on May 14, 2012 in the United States Bankruptcy Court for the Southern District of New York.

MBIA Insurance Corp. v. Federal Deposit Insurance Corporation (in its corporate capacity and as conservator and receiver for IndyMac Federal Bank, F.S.B.); Civil Action No. 09-01011 (ABJ) (D.C. Dist.)

On September 12, 2012, the briefing before the Court of Appeals for the District of Columbia was completed. Oral argument is scheduled for November 14, 2012.

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MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 11: Commitments and Contingencies (continued)

MBIA Insurance Corp. v. J.P. Morgan Securities LLC (f/k/a Bear, Stearns & Co. Inc); Index No. 64676/2012 (N.Y. Sup. Ct., County of Westchester)

On September 14, 2012, MBIA Insurance Corporation filed a complaint alleging fraud against J.P. Morgan Securities LLC (f/k/a Bear, Stearns & Co. Inc) relating to Bear, Stearns & Co. Inc.’s role as lead securities underwriter on the GMAC Mortgage Corporation Home Equity Loan Trust 2006-HE4. On October 18, 2012, the defendant filed its motion to dismiss.

MBIA Insurance Corp. v. Ally Financial Inc. (f/k/a GMAC, LLC) et al., 12-cv-02563 SRN/TNL (D. Minn.)

On September 17, 2012, MBIA Insurance Corporation filed a complaint in Minnesota state court for aiding and abetting fraud and breach of contract against certain Ally Bank companies relating to seven MBIA-insured mortgage-backed securitizations sponsored by Residential Funding Company LLC and GMAC Mortgage LLC during 2006-2007. The defendants removed to the United States District Court for the District of Minnesota on October 5, 2012, and filed a notice of motion to dismiss on October 12, 2012.

Transformation Litigation

Aurelius Capital Master, Ltd. et al. v. MBIA Inc. et al.; 09-cv-2242 (R.S.) (S.D.N.Y.)

On April 11, 2012, the Aurelius plaintiffs and MBIA filed a Stipulation of Dismissal resolving the litigation and the case has been closed on the court’s docket.

ABN AMRO Bank N.V. et al. v. Eric Dinallo et al.; Index no. 601846/09 (N.Y. Sup. Ct., N.Y. County)

The Article 78 hearing concluded on June 7, 2012. A decision is pending.

CQS ABS Master Fund Ltd., CQS Select ABS Master Fund Ltd., and CQS ABS Alpha Master Fund Ltd. v. MBIA Inc. et al; Civil Action No. 12-cv-6840 (R.S.) (S.D.N.Y.)

On September 10, 2012, CQS ABS Master Fund Ltd., CQS Select ABS Master Fund Ltd., and CQS ABS Alpha Master Fund Ltd. as holders of MBIA-insured residential mortgage-backed bonds filed suit against MBIA Inc., MBIA Insurance Corporation and National Public Finance Guarantee Corp. The complaint alleges that certain of the terms of the transactions entered into by MBIA Insurance Corporation, which were approved by the New York State Department of Insurance, constituted fraudulent conveyances under § 273, 274, 276 and 279(c) of New York Debtor and Creditor Law and a breach of the implied covenant of good faith and fair dealing under New York common law. MBIA answered on October 19, 2012.

MBIA and MBIA Corp. are defending against the aforementioned actions in which they are a defendant and expect ultimately to prevail on the merits. There is no assurance, however, that they will prevail in these actions. Adverse rulings in these actions could have a material adverse effect on MBIA Corp.’s ability to implement its strategy and on its business, results of operations, cash flows and financial condition. At this stage of the various litigations, there has not been a determination as to the amount, if any, of damages. Accordingly, MBIA Corp. is not able to estimate any amount of loss or range of loss.

There are no other material lawsuits pending or, to the knowledge of MBIA Corp., threatened, to which MBIA Corp. or any of its subsidiaries is a party.

Note 12: Subsequent Events

Refer to “Note 11: Commitments and Contingencies” for information about legal proceedings that developed after September 30, 2012.

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