Businesses, Developments, Risks And Uncertainties

9 Months Ended

Sep. 30, 2011

Businesses, Developments, Risks And Uncertainties [Abstract]

Businesses, Developments, Risks And Uncertainties

Note 1: Businesses, Developments, Risks and Uncertainties

Summary

MBIA Inc., together with its consolidated subsidiaries, (collectively, "MBIA" or the "Company") operates the largest financial guarantee insurance business in the industry and is a provider of asset management advisory services. These activities are managed through three business segments: United States ("U.S.") public finance insurance, structured finance and international insurance, and advisory services. The Company's U.S. public finance insurance business is primarily operated through National Public Finance Guarantee Corporation and subsidiaries ("National"), its structured finance and international insurance business is primarily operated through MBIA Insurance Corporation and its subsidiaries ("MBIA Corp."), and its asset management advisory services business is primarily operated through Cutwater Holdings, LLC and its subsidiaries ("Cutwater"). MBIA also manages certain business activities through its corporate, asset/liability products, and conduit segments. The corporate segment includes revenues and expenses that arise from general corporate activities. Funding programs managed through the asset/liability products and conduit segments are in wind-down. Refer to "Note 11: Business Segments" for further information about the Company's business segments.

Business Developments

The Company 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 the credit ratings of its insurance subsidiaries. As of September 30, 2011, National was rated BBB with a developing outlook by Standard & Poor's Financial Services LLC ("S&P") and Baa1 with a developing outlook by Moody's Investors Service, Inc. ("Moody's"). As of September 30, 2011, MBIA Insurance Corporation was rated B with a negative outlook by S&P and B3 with a negative outlook by Moody's.

In August 2011, S&P issued new guidelines that reflect significant changes to its rating methodology for financial guarantee insurers. These new guidelines are effective immediately. S&P expects to publish any changes to the ratings of the Company's insurance subsidiaries by November 30, 2011, after its review of the Company's third quarter 2011 financial statements. The changes to S&P's rating methodology substantially increase the amount of capital required to achieve its highest ratings, implement a new Largest Obligors Test, which is punitive in the rating assessment, and incorporate additional qualitative considerations into the ratings process. However, the effect on the ratings of the Company's insurance subsidiaries is uncertain. The absence of S&P's highest ratings could adversely impact the Company's ability to write new insurance business and the premiums the Company can charge, and could diminish the future acceptance of its financial guarantee insurance products.

During the third quarter of 2011, the Company continued to seek to reduce both the absolute amount and the volatility of its liabilities and potential liabilities through purchases of securities issued and commutations of insurance policies. Additionally, during 2011, the Company undertook actions to mitigate declines in the liquidity of MBIA Insurance Corporation and the asset/liability products segment through inter-company lending arrangements and the monetization of illiquid assets. MBIA Insurance Corporation had statutory capital of $2.6 billion and $2.7 billion as of September 30, 2011 and December 31, 2010, respectively. MBIA Insurance Corporation ended the third quarter of 2011 with $824 million in cash and highly liquid assets, after claim payments and commutations of insured derivatives, compared with $1.2 billion as of December 31, 2010. A decline in the pace at which delinquencies increased in troubled real estate sectors and improvements in asset values have also benefited capital and liquidity in these businesses during the nine months ended September 30, 2011, even though during the third quarter of 2011, the asset/liability products segment experienced deterioration in the market values of its assets as a result of market disruption due to S&P's downgrade of the U.S. triple-A rating, fears surrounding the Eurozone debt crisis and the risk of a "double dip" recession in the U.S., as described further below.

In the first nine months of 2011, MBIA Corp. commuted $12.2 billion of gross insured exposure comprising commercial mortgage-backed securities ("CMBS") pools, investment grade corporate collateralized debt obligations ("CDOs"), asset-backed collateralized debt obligations ("ABS CDOs"), a government supported entity, and a municipal gas facility. Subsequent to September 30, 2011, MBIA Corp. agreed to commute transactions with additional counterparties. These transactions, comprising primarily commercial real estate, totaled $10.6 billion in gross insured exposure. The total amount the Company agreed to pay to commute the above transactions was within its aggregate statutory loss reserves for such transactions. In consideration for the commutation of insured transactions, including the transactions described above, the Company has made and may in the future make payments to the counterparties the amounts of which, if any, may be less than or greater than any statutory loss reserves established for the respective transactions.

Risks and Uncertainties

The Company's 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 the Company to revise its estimates and assumptions or could cause actual results to differ from the Company's estimates. Significant risks and uncertainties that could affect amounts reported in the Company's financial statements in future periods include, but are not limited to, the following:

• If the U.S. economy weakens, commercial real estate values decline and commercial real estate servicer behavior does not continue to mitigate potential or actual credit losses in line with current trends, MBIA could incur substantial additional losses in that sector. As of September 30, 2011, MBIA Corp. had CMBS pool and commercial real estate ("CRE") CDO insured par exposure of approximately $33.4 billion and $6.9 billion, respectively, excluding approximately $3.6 billion of CRE loan pools, primarily comprising European assets. Refer to "Note 5: Loss and Loss Adjustment Expense Reserves" for information about the Company's estimate of CMBS credit impairments.

• Incurred losses from insured residential mortgage-backed securities ("RMBS") have declined from their peaks. However, performance remains difficult to predict and losses could ultimately be in excess of the Company's current estimated loss reserves. Refer to "Note 5: Loss and Loss Adjustment Expense Reserves" for information about the Company's RMBS loss reserves.

• While the Company has settled a substantial portion of its insured ABS CDO exposure at levels within MBIA Corp.'s statutory loss reserves related to those exposures, further economic stress might cause increases in the Company's loss estimates. As of September 30, 2011, the Company's ABS CDO gross par outstanding was approximately $6.9 billion, and has decreased approximately $29.0 billion since 2007.

• 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 statutory accounting principles ("U.S. STAT") and accounting principles generally accepted in the United States of America ("GAAP"). Contractual claims could become subject to a bankruptcy proceeding of the originators. Refer to "Note 5: Loss and Loss Adjustment Expense Reserves" for information about the Company's second-lien RMBS loss recoveries.

• The Company's asset/liability products segment may not have sufficient liquidity to make all payments due on its liabilities and to meet other financial requirements, such as posting collateral, as a result of a deficit of invested assets at amortized cost to debt issued to third parties and affiliates at amortized cost. Furthermore, during the third quarter of 2011, the Company's asset/liability products segment experienced deterioration in the market values of its assets. If the segment is required to sell invested assets at their current market values in order to settle liabilities, the liquidity position of the segment will experience additional stress. Resolving the deficit will depend on the Company's ability to successfully implement strategies, such as raising capital and/or receiving further liquidity support from the corporate segment, and there can be no assurance that the Company will be successful in implementing these strategies or that such strategies will provide adequate liquidity. Refer to the following Liquidity section for additional information about the Company's asset/liability products segment's liquidity position.

• The Company'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 the Company to record allowances against some or all of its deferred tax assets. Refer to "Note 10: Income Taxes" for information about the Company's deferred tax assets.

• Litigation over the New York Department of Financial Services' ("NYDFS"), previously referred to as the New York State Insurance Department or NYSID, approval of National's creation or additional hurdles to achieving high stable ratings may impede National's ability to resume writing municipal bond insurance for some time, reducing its long-term ability to generate capital and cash from operations. Also, municipal and state fiscal distress could adversely affect the Company's operations if they result in larger-than-expected incurred insurance losses.

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

While the Company 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. Statutory capital, defined under U.S. STAT 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 the Company's insurance regulators in its operations and constitute an event of default under certain of the Company's contracts, thereby materially and adversely affecting the Company's financial condition and results of operations.

Under New York's financial guarantee statutes, MBIA Insurance Corporation is also required to establish a contingency reserve to provide protection to policyholders in the event of extreme losses in adverse economic events. The amount of the reserve is based on the percentage of principal insured or premiums earned, depending on the type of obligation (net of collateral, reinsurance, refunding, refinancings and certain insured securities). Under the New York Insurance Law, MBIA Insurance Corporation is required to invest its minimum surplus and contingency reserve, and 50% of its loss reserves and unearned premium reserves, in certain qualifying assets. Reductions in the contingency reserve may be recognized based on excess reserves and under certain stipulated conditions, subject to the approval of the Superintendent of the NYDFS. Pursuant to approval granted by the NYDFS in accordance with the New York Insurance Law, as of September 30, 2011, MBIA Insurance Corporation released to surplus an aggregate of $318 million of its contingency reserve. Absent this approval, MBIA Insurance Corporation would have had a short-fall of qualifying assets required to support its contingency reserves.

The reference herein to "ineligible" mortgage loans refers to those mortgage loans that the Company believes failed to comply with the representations and warranties made by the sellers/servicers of the securitizations to which those mortgage loans were sold with respect to such mortgage loans, including failure to comply with the related underwriting criteria, based on the Company's assessment, which included information provided by third-party review firms, of such mortgage loans' compliance with such representations and warranties. The Company'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 the Company's determinations will prevail.

Liquidity

As a financial services company, MBIA has been materially adversely affected by conditions in global financial markets. Current conditions and events in these markets, in addition to losses incurred due to ineligble loans in securitizations the Company has insured, have created substantial liquidity risk for the Company. MBIA continues to satisfy all of its payment obligations and the Company believes that it has adequate resources to meet its expected liquidity needs in both the short-term and the long-term.

In order to manage liquidity risk, the Company maintains a liquidity risk management framework with the primary objective of monitoring potential liquidity constraints in its asset and liability portfolios and guiding the proactive matching of liquidity resources to needs. The Company's liquidity risk management framework seeks to monitor the Company's cash and liquid asset resources using stress-scenario testing. Members of MBIA'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's liquidity risk management framework, the Company seeks to evaluate and manage liquidity on both a legal entity basis and a segment basis. Legal entity liquidity is an important consideration as there are legal, regulatory and other limitations on the Company's ability to utilize the liquidity resources within the overall enterprise. Unexpected loss payments arising from ineligible mortgage loans in securitizations that the Company has insured, dislocation in the global financial markets, the loss of MBIA Corp.'s triple-A insurance financial strength ratings in 2008, the overall economic downturn in the U.S. and credit spreads widening during the third quarter of 2011 significantly increased the liquidity needs and decreased the financial flexibility in the Company's legal entities and segments. The Company could face additional liquidity pressure in all of its operations and businesses through increased liquidity demands or a decrease in its liquidity supply if (i) the Company is unable to collect or is delayed in collecting on its contract claim recoveries related to ineligible mortgage loans in securitizations, (ii) loss payments on the Company's insured transactions were to rise significantly, including due to ineligible mortgage loans in securitizations that it has insured, (iii) adverse market or economic conditions persist for an extended period of time or worsen, (iv) the value of the assets in the asset/liability products segment portfolio decline due to market conditions similar to those experienced in 2009, which will increase the collateralization requirements for that portfolio, (v) the Company is unable to sell assets at values necessary to satisfy payment obligations or is unable to access new capital through the issuance of equity or debt, or (vi) the Company experiences an unexpected acceleration of payments required to settle liabilities, including as a result of payment or other defaults. These pressures could arise from exposures beyond residential mortgage-related stress, which to date has been the main cause of stress.

As of September 30, 2011, National paid $194 million to MBIA Inc. related to its 2010 tax liability and 2011 estimated tax liability pursuant to the Company's tax sharing agreement. Consistent with the tax sharing agreement, these funds were placed in an escrow account in the second and third quarters of 2011 and will remain in escrow until the expiration of National's two-year net operating loss ("NOL") carry-back period under U.S. tax rules. At the expiration of National's carry-back period, any funds remaining after any reimbursement to National in respect of any NOL carry-backs will be available for general corporate purposes, including to satisfy any other obligations under the tax sharing agreement.

As of September 30, 2011, the Company's asset/liability products segment had a deficit of invested assets at amortized cost to debt issued to third parties and affiliates at amortized cost of $610 million. Additionally, during the third quarter of 2011, the asset/liability products segment experienced deterioration in the market values of its assets, resulting in increased collateral requirements, as a consequence of market volatility caused by S&P's downgrade of the U.S. triple-A rating, fears surrounding the Eurozone debt crisis and the risk of a "double dip" recession in the U.S. As a result, subsequent to the third quarter of 2011, the Company received approval from the NYDFS to extend the maturity of an intercompany secured loan from November 2011 to May 2012 for a maximum outstanding amount of $450 million. The outstanding principal balance on the loan was $600 million as of September 30, 2011. Also subsequent to the third quarter of 2011, the Company's corporate segment contributed $50 million of capital to the asset/liability products segment.

To the extent the Company's asset/liability products segment experiences further asset impairments, asset or liability cash flow variability or reductions in the market value or rating eligibility of assets pledged as collateral, among other factors, it may have insufficient resources to meet its payment obligations and any increase in collateral margin requirements. In such events, the Company may sell invested assets, potentially with substantial losses, or use free cash within the asset/liability products segment or the corporate segment. There can be no assurance that the asset/liability products segment will be able to draw on these additional sources of liquidity or that its resources will be adequate to meet its obligations. In the event that the asset/liability products segment's additional liquidity resources are insufficient to make all payments on obligations as they come due, MBIA Corp., as guarantor of the investment agreements and MBIA Global Funding, LLC ("GFL") medium-term notes ("MTNs"), may be called upon to satisfy those obligations.