Note 11: Business Segments

MBIA manages its activities through three principal business operations: U.S. public finance insurance, structured finance and international insurance, and advisory services. The Company’s U.S. public finance insurance business is operated through National, its structured finance and international insurance business is operated through MBIA Corp., and its advisory services business is operated through Cutwater. MBIA Inc. and certain of its subsidiaries also manage certain other business activities, the results of which are reported in its corporate, asset/liability products, and conduit segments. The corporate segment includes revenues and expenses that arise from general corporate activities. While the asset/liability products and conduit businesses represent separate business segments, they may be referred to collectively as “wind-down operations” as the funding programs managed through those businesses are in wind-down.

The following sections provide a description of each of the Company’s reportable operating segments:

U.S. Public Finance Insurance

The Company’s U.S. public finance insurance segment is principally conducted through National. The financial guarantees issued by National provide unconditional and irrevocable guarantees of the payment of principal of, and interest or other amounts owing on, U.S. public finance insured obligations when due. The obligations are generally not subject to acceleration, except that National may have the right, at its discretion, to accelerate insured obligations upon default or otherwise. National issues financial guarantees for municipal bonds, including tax-exempt and taxable indebtedness of U.S. political subdivisions, as well as utility districts, airports, health care institutions, higher educational facilities, student loan issuers, housing authorities and other similar agencies and obligations issued by private entities that finance projects that serve a substantial public purpose. Municipal bonds and privately issued bonds used for the financing of public purpose projects are generally supported by taxes, assessments, fees or tariffs related to the use of these projects, lease payments or other similar types of revenue streams. National has not written any meaningful amount of business since its formation in 2009.

Structured Finance and International Insurance

The Company’s structured finance and international insurance segment is principally conducted through MBIA Corp. The financial guarantees issued by MBIA Corp. generally provide unconditional and irrevocable guarantees of the payment of principal of, and interest or other amounts owing on, global structured finance and non-U.S. public finance insured obligations when due, or in the event MBIA Corp. has the right, at its discretion, to accelerate insured obligations upon default or otherwise, upon MBIA Corp.’s acceleration. Certain guaranteed investment contracts written by MBIA Inc. are insured by MBIA Corp., and if MBIA Inc. were to have insufficient assets to pay amounts due upon maturity or termination, MBIA Corp. would make such payments. MBIA Corp. also insures debt obligations of the following affiliates:

•

MBIA Inc.;

•

GFL;

•

Meridian Funding Company, LLC;

•

LaCrosse Financial Products, LLC (“LaCrosse”), a wholly-owned affiliate, in which MBIA Corp. has written insurance policies guaranteeing the obligations under CDS, including termination payments that may become due upon certain events including the insolvency or payment default by MBIA Corp. or LaCrosse.

MBIA Corp.’s guarantees insure structured finance and asset-backed obligations, privately issued bonds used for the financing of public purpose projects, which are primarily located outside of the U.S. and that include toll roads, bridges, airports, public transportation facilities, utilities and other types of infrastructure projects serving a substantial public purpose, and obligations of sovereign-related and sub-sovereign issuers. Structured finance and 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. The Company is no longer insuring new credit derivative contracts except for transactions related to the reduction of existing derivative exposure. MBIA Corp. has not written any meaningful amount of business since 2008.

Advisory Services

The advisory services segment primarily consists of the operations of Cutwater Investor Services Corp. (“Cutwater-ISC”), Cutwater Asset Management Corp. (“Cutwater-AMC”), and Cutwater Asset Management U.K. Limited (“Cutwater-UK”). Cutwater-ISC and Cutwater-AMC offers advisory services, including cash management, discretionary asset management and structured products on a fee-for-service basis. The Company offers these services to public, not-for-profit, corporate and financial services clients, including the Company and its subsidiaries, as well as portfolio accounting and reporting services. Cutwater-ISC and Cutwater-AMC are SEC registered investment advisers. Cutwater-AMC is also a Financial Industry Regulatory Authority member firm. Cutwater-UK provides fee-based asset management services to the Company’s foreign insurance affiliate and to third-party institutional clients and investment structures. Cutwater-UK is registered with the Financial Services Authority in the U.K.

Corporate

The Company’s corporate segment is a reportable segment and includes revenues and expenses that arise from general corporate activities, such as fees, net investment income, net gains and losses, interest expense on MBIA Inc. debt and general corporate expenses.

Wind-down Operations

The Company’s wind-down operations consist of the asset/liability products and conduit segments. The asset/liability products segment principally consists of the activities of MBIA Inc., MBIA Investment Management Corp. (“IMC”), GFL and Euro Asset Acquisition Limited (“EAAL”). IMC, along with MBIA Inc., provided customized investment agreements, guaranteed by MBIA Corp., for bond proceeds and other public funds for such purposes as construction, loan origination, escrow and debt service or other reserve fund requirements. It has also provided customized products for funds that are invested as part of asset-backed or structured product transactions. GFL raises funds through the issuance of MTNs with varying maturities, which are, in turn, guaranteed by MBIA Corp. GFL lends the proceeds of these MTN issuances to MBIA Inc. (“GFL Loans”). MBIA Inc. invests the proceeds of investment agreements and GFL Loans in eligible investments, which consisted of investment grade securities at the time of purchase with a minimum average double-A credit quality rating. MBIA Inc. primarily purchases domestic securities, which are pledged to MBIA Corp. as security for its guarantees on investment agreements and MTNs. Additionally, MBIA Inc. loans a portion of the proceeds from investment agreements and MTNs to EAAL. EAAL primarily purchases foreign assets as permitted under the Company’s investment guidelines.

The Company’s conduit segment administers one conduit through MBIA Asset Finance, LLC. Assets financed by this conduit are currently funded by MTNs.

The ratings downgrades of MBIA Corp. have resulted in a substantial reduction of funding activities and the termination and collateralization of certain investment agreements, as well as winding down of existing asset/liability products and conduit obligations.

Segments Results

The following tables provide the Company’s segment results for the three months ended June 30, 2012 and 2011:


	Three Months Ended June 30, 2012
In millions	U.S. Public Finance Insurance		Structured Finance and International Insurance		Advisory Services		Corporate		Wind-down Operations		Eliminations			Consolidated
Revenues⁽¹⁾	$	145	$	80	$	5	$	5	$	16	$	-		$	251
Realized gains and other settlements on insured derivatives		-		(428)		-		-		-		-			(428)
Unrealized gains (losses) on insured derivatives		-		1,203		-		-		-		-			1,203
Net gains (losses) on financial instruments at fair value and foreign exchange		11		20		-		3		(40)		-			(6)
Net investment losses related to other-than-temporary impairments		-		(1)		-		-		(2)		-			(3)
Other net realized gains (losses)		-		-		-		6		-		-			6
Revenues of consolidated VIEs		-		(20)		-		-		36		-			16
Inter-segment revenues⁽²⁾		43		(11)		11		56		(21)		(78)			-

Total revenues		199		843		16		70		(11)		(78)			1,039
Loss and loss adjustment expense		(3)		65		-		-		-		-			62
Operating expenses		23		32		11		24		3		-			93
Interest expense		-		33		-		15		23		-			71
Expenses of consolidated VIEs		-		14		-		-		4		-			18
Inter-segment expenses⁽²⁾		31		54		5		3		40		(133)			-

Total expenses		51		198		16		42		70		(133)			244

Income (loss) before income taxes	$	148	$	645	$	-	$	28	$	(81)	$	55		$	795

Identifiable assets	$	7,120	$	17,395	$	46	$	759	$	3,205	$	(6,230)	⁽³⁾	$	22,295

(1) -

Represents the sum of third-party financial guarantee net premiums earned, net investment income, insurance-related fees and reimbursements, investment management fees and other fees.

(2) -

Represents intercompany premium income and expense, intercompany asset management fees and expenses, and intercompany interest income and expense pertaining to intercompany receivables and payables.

(3) -

Consists of intercompany reinsurance balances, repurchase agreements and loans.


	Three Months Ended June 30, 2011
In millions	U.S. Public Finance Insurance		Structured Finance and International Insurance		Advisory Services		Corporate		Wind-down Operations		Eliminations			Consolidated
Revenues⁽¹⁾	$	143	$	81	$	7	$	-	$	24	$	-		$	255
Realized gains and other settlements on insured derivatives		1		(192)		-		-		-		-			(191)
Unrealized gains (losses) on insured derivatives		-		116		-		-		-		-			116
Net gains (losses) on financial instruments at fair value and foreign exchange		14		-		-		16		(133)		-			(103)
Net investment losses related to other-than-temporary impairments		-		(2)		-		-		(18)		-			(20)
Revenues of consolidated VIEs		-		37		-		-		4		-			41
Inter-segment revenues⁽²⁾		19		19		10		22		(3)		(67)			-

Total revenues		177		59		17		38		(126)		(67)			98
Loss and loss adjustment expense		(9)		59		-		-		-		-			50
Operating expenses		14		45		18		21		-		-			98
Interest expense		-		33		-		14		28		-			75
Expenses of consolidated VIEs		-		17		-		-		5		-			22
Inter-segment expenses⁽²⁾		28		30		2		4		8		(72)			-

Total expenses		33		184		20		39		41		(72)			245

Income (loss) before income taxes	$	144	$	(125)	$	(3)	$	(1)	$	(167)	$	5		$	(147)

Identifiable assets	$	8,083	$	23,592	$	52	$	671	$	5,640	$	(6,370)	⁽³⁾	$	31,668

(1) -

Represents the sum of third-party financial guarantee net premiums earned, net investment income, insurance-related fees and reimbursements, investment management fees and other fees.

(2) -

Represents intercompany premium income and expense, intercompany asset management fees and expenses, and intercompany interest income and expense pertaining to intercompany receivables and payables.

(3) -

Consists of intercompany reinsurance balances, repurchase agreements and loans.

The following tables provide the Company’s segment results for the six months ended June 30, 2012 and 2011:


	Six Months Ended June 30, 2012
In millions	U.S. Public Finance Insurance		Structured Finance and International Insurance		Advisory Services		Corporate		Wind-down Operations		Eliminations			Consolidated
Revenues⁽¹⁾	$	270	$	135	$	11	$	7	$	35	$	-		$	458
Realized gains and other settlements on insured derivatives		-		(432)		-		-		-		-			(432)
Unrealized gains (losses) on insured derivatives		-		1,506		-		-		-		-			1,506
Net gains (losses) on financial instruments at fair value and foreign exchange		21		66		-		8		(120)		-			(25)
Net investment losses related to other-than-temporary impairments		-		(41)		-		-		(56)		-			(97)
Other net realized gains (losses)		-		1		-		5		-		-			6
Revenues of consolidated VIEs		-		(34)		-		-		40		-			6
Inter-segment revenues⁽²⁾		79		(19)		18		79		(19)		(138)			-

Total revenues		370		1,182		29		99		(120)		(138)			1,422
Loss and loss adjustment expense		11		148		-		-		-		-			159
Operating expenses		98		91		26		45		3		-			263
Interest expense		-		66		-		29		50		-			145
Expenses of consolidated VIEs		-		31		-		-		8		-			39
Inter-segment expenses⁽²⁾		59		100		7		7		47		(220)			-

Total expenses		168		436		33		81		108		(220)			606

Income (loss) before income taxes	$	202	$	746	$	(4)	$	18	$	(228)	$	82		$	816

Identifiable assets	$	7,120	$	17,395	$	46	$	759	$	3,205	$	(6,230)	⁽³⁾	$	22,295

(1) -

Represents the sum of third-party financial guarantee net premiums earned, net investment income, insurance-related fees and reimbursements, investment management fees and other fees.

(2) -

Represents intercompany premium income and expense, intercompany asset management fees and expenses, and intercompany interest income and expense pertaining to intercompany receivables and payables.

(3) -

Consists of intercompany reinsurance balances, repurchase agreements and loans.


	Six Months Ended June 30, 2011
In millions	U.S. Public Finance Insurance		Structured Finance and International Insurance		Advisory Services		Corporate		Wind-down Operations		Eliminations			Consolidated
Revenues⁽¹⁾	$	274	$	183	$	13	$	1	$	49	$	-		$	520
Realized gains and other settlements on insured derivatives		1		(547)		-		-		-		-			(546)
Unrealized gains (losses) on insured derivatives		-		(1,307)		-		-		-		-			(1,307)
Net gains (losses) on financial instruments at fair value and foreign exchange		17		33		-		39		(216)		-			(127)
Net investment losses related to other-than-temporary impairments		-		(4)		-		-		(29)		-			(33)
Net gains (losses) on extinguishment of debt		-		-		-		-		24		2			26
Other net realized gains (losses)		-		1		-		-		4		-			5
Revenues of consolidated VIEs		-		(67)		-		-		19		-			(48)
Inter-segment revenues⁽²⁾		37		29		19		44		(8)		(121)			-

Total revenues		329		(1,679)		32		84		(157)		(119)			(1,510)
Loss and loss adjustment expense		(5)		19		-		-		-		-			14
Operating expenses		26		86		33		43		1		-			189
Interest expense		-		66		-		30		54		-			150
Expenses of consolidated VIEs		-		37		-		-		10		-			47
Inter-segment expenses⁽²⁾		53		59		3		7		18		(140)			-

Total expenses		74		267		36		80		83		(140)			400

Income (loss) before income taxes	$	255	$	(1,946)	$	(4)	$	4	$	(240)	$	21		$	(1,910)

Identifiable assets	$	8,083	$	23,592	$	52	$	671	$	5,640	$	(6,370)	⁽³⁾	$	31,668

(1) -

Represents the sum of third-party financial guarantee net premiums earned, net investment income, insurance-related fees and reimbursements, investment management fees and other fees.

(2) -

Represents intercompany premium income and expense, intercompany asset management fees and expenses, and intercompany interest income and expense pertaining to intercompany receivables and payables.

(3) -

Consists of intercompany reinsurance balances, repurchase agreements and loans.

Premiums on financial guarantees and insured derivatives reported within the Company’s insurance segments are generated within and outside the U.S. The following table summarizes premiums earned on financial guarantees and insured derivatives by geographic location of risk for the three and six months ended June 30, 2012 and 2011:


	Three Months Ended June 30,				Six Months Ended June 30,
In millions	2012		2011		2012		2011
Total premiums earned:
United States	$	142	$	130	$	261	$	252
United Kingdom		10		10		18		17
Europe (excluding United Kingdom)		4		9		9		21
Internationally diversified		5		9		10		18
Central and South America		21		10		32		19
Asia		1		5		2		12
Other		3		3		6		6

Total	$	186	$	176	$	338	$	345

The following tables provide the results of the segments within the wind-down operations for the three months ended June 30, 2012 and 2011:


	Three Months Ended June 30, 2012
In millions	Asset / Liability Products		Conduits		Eliminations		Total Wind- down Operations
Revenues⁽¹⁾	$	16	$	-	$	-	$	16
Net gains (losses) on financial instruments at fair value and foreign exchange		(40)		-		-		(40)
Net investment losses related to other-than-temporary impairments		(2)		-		-		(2)
Revenues of consolidated VIEs		-		36		-		36
Inter-segment revenues⁽²⁾		(18)		(1)		(2)		(21)

Total revenues		(44)		35		(2)		(11)
Operating expenses		3		-		-		3
Interest expense		23		-		-		23
Expenses of consolidated VIEs		-		4		-		4
Inter-segment expenses⁽²⁾		6		34		-		40

Total expenses		32		38		-		70

Income (loss) before income taxes	$	(76)	$	(3)	$	(2)	$	(81)

Identifiable assets	$	2,439	$	819	$	(53)	$	3,205

(1) - Represents the sum of third-party interest income, investment management services fees and other fees.

(2) - Represents intercompany asset management fees and expenses plus intercompany interest income and expense pertaining to intercompany debt.


	Three Months Ended June 30, 2011
In millions	Asset / Liability Products		Conduits		Eliminations		Total Wind- down Operations
Revenues⁽¹⁾	$	23	$	1	$	-	$	24
Net gains (losses) on financial instruments at fair value and foreign exchange		(133)		-		-		(133)
Net investment losses related to other-than-temporary impairments		(18)		-		-		(18)
Revenues of consolidated VIEs		1		3		-		4
Inter-segment revenues⁽²⁾		(2)		(1)		-		(3)

Total revenues		(129)		3		-		(126)
Operating expenses		1		(1)		-		-
Interest expense		28		-		-		28
Expenses of consolidated VIEs		-		5		-		5
Inter-segment expenses⁽²⁾		8		-		-		8

Total expenses		37		4		-		41

Income (loss) before income taxes	$	(166)	$	(1)	$	-	$	(167)

Identifiable assets	$	4,481	$	1,564	$	(405)	$	5,640

(1) - Represents the sum of third-party interest income, investment management services fees and other fees.

(2) - Represents intercompany asset management fees and expenses plus intercompany interest income and expense pertaining to intercompany debt.

The following tables provide the results of the segments within the wind-down operations for the six months ended June 30, 2012 and 2011:


	Six Months Ended June 30, 2012
In millions	Asset / Liability Products		Conduits		Eliminations		Total Wind- down Operations
Revenues⁽¹⁾	$	35	$	-	$	-	$	35
Net gains (losses) on financial instruments at fair value and foreign exchange		(120)		-		-		(120)
Net investment losses related to other-than-temporary impairments		(56)		-		-		(56)
Revenues of consolidated VIEs		-		40		-		40
Inter-segment revenues⁽²⁾		(15)		(2)		(2)		(19)

Total revenues		(156)		38		(2)		(120)
Operating expenses		3		-		-		3
Interest expense		50		-		-		50
Expenses of consolidated VIEs		-		8		-		8
Inter-segment expenses⁽²⁾		12		35		-		47

Total expenses		65		43		-		108

Income (loss) before income taxes	$	(221)	$	(5)	$	(2)	$	(228)

Identifiable assets	$	2,439	$	819	$	(53)	$	3,205

(1) - Represents the sum of third-party interest income, investment management services fees and other fees.

(2) - Represents intercompany asset management fees and expenses plus intercompany interest income and expense pertaining to intercompany debt.


	Six Months Ended June 30, 2011
In millions	Asset / Liability Products		Conduits		Eliminations		Total Wind- down Operations
Revenues⁽¹⁾	$	47	$	2	$	-	$	49
Net gains (losses) on financial instruments at fair value and foreign exchange		(216)		-		-		(216)
Net investment losses related to other-than-temporary impairments		(29)		-		-		(29)
Net gains (losses) on extinguishment of debt		24		-		-		24
Other net realized gains (losses)		4		-		-		4
Revenues of consolidated VIEs		11		8		-		19
Inter-segment revenues⁽²⁾		(6)		(2)		-		(8)

Total revenues		(165)		8		-		(157)
Operating expenses		2		(1)		-		1
Interest expense		54		-		-		54
Expenses of consolidated VIEs		-		10		-		10
Inter-segment expenses⁽²⁾		17		1		-		18

Total expenses		73		10		-		83

Income (loss) before income taxes	$	(238)	$	(2)	$	-	$	(240)

Identifiable assets	$	4,481	$	1,564	$	(405)	$	5,640

(1) - Represents the sum of third-party interest income, investment management services fees and other fees.

(2) - Represents intercompany asset management fees and expenses plus intercompany interest income and expense pertaining to intercompany debt.

MBIA Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)