Note 13: Insurance in Force

MBIA guarantees the payment of principal of, and interest or other amounts owing on, municipal, asset-backed, mortgage-backed and other non-municipal securities. Additionally, MBIA Corp. has insured CDS primarily on pools of collateral, which it previously considered part of its core financial guarantee business. The pools of collateral are made up of corporate obligations, but also include commercial and RMBS-related assets. MBIA’s insurance in force represents the aggregate amount of the insured principal of, and interest or other amounts owing on, insured obligations. MBIA’s ultimate exposure to credit loss in the event of nonperformance by the issuer of the insured obligation is represented by the insurance in force in the tables that follow.

The financial guarantees issued by MBIA provide unconditional and irrevocable guarantees of the payment of the principal of, and interest or other amounts owing on, insured obligations when due. The obligations are generally not subject to acceleration, except that MBIA may have the right, at its discretion, to accelerate insured obligations upon default or otherwise. Certain guaranteed investment contracts written by MBIA Inc. and guaranteed by MBIA Corp. are terminable based upon the credit ratings downgrades of MBIA Corp. and if MBIA Inc. were to have insufficient assets to pay the termination payments, MBIA Corp.’s insurance coverage would be drawn on to make such payments. These amounts have been excluded in the tables that follow.

The creditworthiness of each insured obligation is evaluated prior to the issuance of insurance, and each insured obligation must comply with National’s or MBIA Corp.’s underwriting guidelines. Further, the payments to be made by the issuer on the bonds or notes may be backed by a pledge of revenues, reserve funds, letters of credit, investment contracts or collateral in the form of mortgages or other assets. The right to such funds or collateral would typically become National’s or MBIA Corp.’s upon the payment of a claim by either National or MBIA Corp.

National and MBIA Corp. maintain underwriting guidelines based on those aspects of credit quality that it deems important for each category of obligation considered for insurance.

As of December 31, 2012, insurance in force, which represents principal and interest or other amounts owing on insured obligations, had an expected maturity range of 1 to 45 years. The distribution of MBIA Corp.’s and National’s combined insurance in force by geographic location, excluding $3.4 billion and $4.4 billion relating to transactions guaranteed by MBIA Corp. on behalf of various investment management services affiliated companies as of December 31, 2012 and 2011, respectively, is presented in the following table:


	As of December 31,
In billions	2012				2011
			% of				% of
	Insurance		Insurance		Insurance		Insurance
Geographic Location	in Force		in Force		in Force		in Force
California	$	104.7		15.4%	$	125.0		14.9%
New York		48.7		7.2%		62.3		7.4%
Florida		36.8		5.4%		47.9		5.7%
Texas		33.9		5.0%		41.7		5.0%
Illinois		33.3		4.9%		41.2		4.9%
New Jersey		24.1		3.6%		30.3		3.6%
Michigan		17.6		2.6%		21.1		2.5%
Washington		15.9		2.3%		22.8		2.7%
Pennsylvania		14.5		2.1%		18.5		2.2%
Colorado		11.1		1.6%		13.5		1.6%

Subtotal		340.6		50.1%		424.3		50.5%
Nationally diversified		80.0		11.8%		102.4		12.2%
Other states		183.7		27.1%		225.8		26.9%

Total United States		604.3		89.0%		752.5		89.6%

Internationally diversified		18.9		2.8%		28.9		3.4%
Country specific		55.9		8.2%		58.7		7.0%

Total non-United States		74.8		11.0%		87.6		10.4%

Total	$	679.1		100.0%	$	840.1		100.0%

The insurance in force by type of bond, excluding transactions guaranteed by MBIA Corp. on behalf of various investment management services affiliated companies, is presented in the following table:


	As of December 31,
In billions	2012				2011
			% of				% of
	Insurance		Insurance		Insurance		Insurance
Bond type	in Force		in Force		in Force		in Force
Global public finance—United States:
General obligation	$	187.5		27.6%	$	234.3		27.9%
General obligation—lease		41.7		6.1%		51.7		6.2%
Municipal utilities		97.1		14.3%		117.0		13.9%
Tax-backed		71.9		10.6%		86.3		10.3%
Transportation		52.1		7.7%		68.3		8.1%
Higher education		30.3		4.5%		36.9		4.4%
Health care		12.1		1.8%		16.9		2.0%
Military housing		19.0		2.8%		19.4		2.3%
Investor-owned utilities ⁽¹⁾		8.7		1.3%		11.5		1.4%
Municipal housing		7.2		1.0%		9.4		1.1%
Student loans		0.7		0.1%		2.1		0.3%
Other ⁽²⁾		2.6		0.4%		2.8		0.3%

Total United States		530.9		78.2%		656.6		78.2%

Global public finance—non-United States:
International utilities		16.2		2.4%		16.2		1.9%
Sovereign-related and sub-sovereign ⁽³⁾		18.4		2.7%		18.6		2.2%
Transportation		14.2		2.1%		15.0		1.8%
Local governments ⁽⁴⁾		0.5		0.1%		0.5		0.1%
Health care		0.1		0.0%		0.1		0.0%
Tax-backed		0.2		0.0%		0.2		0.0%

Total non-United States		49.6		7.3%		50.6		6.0%

Total global public finance		580.5		85.5%		707.2		84.2%


Global structured finance:
Collateralized debt obligations ⁽⁵⁾		57.6		8.5%		78.7		9.4%
Mortgage-backed residential		17.1		2.5%		21.1		2.5%
Mortgage-backed commercial		3.8		0.6%		4.4		0.5%
Consumer asset-backed:
Auto loans		—		0.0%		0.7		0.1%
Student loans		1.2		0.2%		1.7		0.2%
Manufactured housing		2.0		0.3%		2.2		0.3%
Other consumer asset-backed		0.1		0.0%		0.2		0.0%
Corporate asset-backed:
Operating assets:
Aircraft portfolio lease securitizations		2.5		0.4%		3.2		0.4%
Secured airline equipment securitization		2.4		0.3%		3.2		0.3%
Other operating assets		0.5		0.1%		0.7		0.1%
Structured insurance securitizations		6.1		0.9%		7.5		0.9%
Franchise assets		0.9		0.1%		1.3		0.2%
Intellectual Property		—		0.0%		1.9		0.2%
Future flow		0.2		0.0%		0.4		0.0%
Other corporate asset-backed		4.2		0.6%		5.7		0.7%

Total global structured finance		98.6		14.5%		132.9		15.8%

Total	$	679.1		100.0%	$	840.1		100.0%

(1)—Includes investor owned utilities, industrial development and pollution control revenue bonds.

(2)—Includes certain non-profit enterprises and stadium related financing.

(3)—Includes regions, departments or their equivalent in each jurisdiction as well as sovereign owned entities that are supported by a sovereign state, region or department.

(4)—Includes municipal owned entities backed by sponsoring local government.

(5)—Includes transactions (represented by structured pools of primarily investment grade corporate credit risks or CRE assets) that do not include typical CDO structuring characteristics, such as tranched credit risk, cash flow waterfalls, or interest and over-collateralization coverage tests.

The insurance operations have entered into certain guarantees of derivative contracts, included in the preceding tables, which are accounted for as derivative instruments. MBIA generally guarantees the timely payment of principal and interest related to these derivatives upon the occurrence of a credit event with respect to a referenced obligation. The maximum amount of future payments that MBIA may be required to make under these guarantees is $51.9 billion. MBIA’s guarantees of derivative contracts have a legal maximum maturity range of 1 to 70 years. A small number of insured credit derivative contracts have long-dated maturities, which comprise the longest maturity dates of the underlying collateral. However, the expected maturities of such contracts are much shorter due to amortizations and prepayments in the underlying collateral pools. The fair values of these guarantees as of December 31, 2012 and 2011 are recorded on the consolidated balance sheets as derivative liabilities, representing gross losses, of $2.9 billion and $4.8 billion, respectively.

Investment agreement contracts and MTNs issued by the Company’s asset/liability products segment are insured by MBIA Corp. and are not included in the previous tables. If MBIA Inc. or these subsidiaries were to have insufficient assets to pay amounts due, MBIA Corp. would make such payments under its insurance policies. As of December 31, 2012, the maximum amount of future payments that MBIA Corp. could be required to make under these guarantees is $3.4 billion. These guarantees, which have a maximum maturity range of 1 to 33 years, were entered into on an arm’s length basis. MBIA Corp. has both direct recourse provisions and subrogation rights in these transactions. If MBIA Corp. is required to make a payment under any of these affiliate guarantees, it would have the right to seek reimbursement from such affiliate and to liquidate any collateral to recover amounts paid under the guarantee.

Reinsured Exposure

Reinsurance enables the Company to cede exposure for purposes of syndicating risk and increasing its capacity to write new business while complying with its single risk and credit guidelines. When a reinsurer is downgraded by one or more of the rating agencies, less capital credit is given to MBIA under rating agency models and the overall value of the reinsurance to MBIA is reduced. The Company generally retains the right to reassume the business ceded to reinsurers under certain circumstances, including a reinsurer’s rating downgrade below specified thresholds. As of December 31, 2012, the use of reinsurance was immaterial to the insurance operations business and the Company expects that it will continue to be immaterial in the future.

MBIA requires certain unauthorized reinsurers to maintain bank letters of credit or establish trust accounts to cover liabilities ceded to such reinsurers under reinsurance contracts. As of December 31, 2012, the total amount available under these letters of credit and trust arrangements was $8 million. The Company remains liable on a primary basis for all reinsured risk, and although MBIA believes that its reinsurers remain capable of meeting their obligations, there can be no assurance of such in the future.

The aggregate amount of insurance in force ceded by MBIA to reinsurers was $6.0 billion and $7.5 billion as of December 31, 2012 and 2011, respectively. For Financial Guaranty Insurance Company (“FGIC”) policies assigned to National from MBIA, National maintains the right to receive third-party reinsurance totaling $4.4 billion and $9.1 billion of insured par outstanding as of December 31, 2012 and 2011, respectively. The aggregate amount of insurance in force for FGIC policies is $7.8 billion and $16.1 billion as of December 31, 2012 and 2011, respectively.

As of December 31, 2012, the aggregate amount of insured par outstanding ceded by MBIA to reinsurers under reinsurance agreements was $3.4 billion compared with $4.3 billion as of December 31, 2011. The following table presents information about the Company’s reinsurance agreements as of December 31, 2012 for its U.S. public finance and structured finance and international insurance operations.


In millions
Reinsurers	Standard & Poor’s Rating (Status)	Moody’s Rating (Status)	Ceded Par Outstanding		Letters of Credit/Trust Accounts		Reinsurance Recoverable⁽¹⁾
Assured Guaranty Corp.	AA- (Stable Outlook)	Aa3 (Ratings Under Review)	$	2,437	$	—	$	14
Assured Guaranty Re Ltd.	AA- (Stable Outlook)	A1 (Ratings Under Review)		506		5		—
Overseas Private Investment Corporation	AA+ (Negative Outlook)	Aaa (Negative Outlook)		353		—		—
Export Development Canada	AAA (Stable Outlook)	Aaa (Stable Outlook)		59		1		—
Others	A+ or above	A2 or above		65		2		—

Total			$	3,420	$	8	$	14

(1)—Total reinsurance recoverable of $14 million comprised recoverables on paid and unpaid losses of $1 million and $13 million, respectively.

Since December 2007 through December 31, 2012, several of the Company’s financial guarantee reinsurers, including Assured Guaranty Corp., Assured Guaranty Re Ltd., and Old Republic Insurance Co. have had their credit ratings either downgraded or put on negative watch by one or more of the major rating agencies. Subsequent to December 31, 2012, Moody’s downgraded the credit ratings of Assured Guaranty Corp. to A3 (Stable Outlook) and Assured Guaranty Re Ltd. to Baa1 (Stable Outlook). Although there was no material impact on the Company for any of these rating agency actions relating to these reinsurers, a further deterioration in the financial condition of one or more of these reinsurers could require the establishment of reserves against any receivables due from the reinsurers.

Premium Summary

The components of financial guarantee net premiums earned, including premiums assumed from and ceded to other companies, are presented in the following table:


	Years ended December 31,
In millions	2012		2011		2010
Net premiums earned:
Direct	$	489	$	505	$	516
Assumed		130		112		106

Gross		619		617		622
Ceded		(14)		(12)		(28)

Net	$	605	$	605	$	594

For the years ended December 31, 2012, 2011 and 2010, recoveries received on claims for financial guarantee policies under reinsurance contracts totaled $4 million, $10 million and $21 million, respectively. Ceding commissions from reinsurance, before deferrals and net of returned ceding commissions, were revenue of $3 million, $3 million and $7 million for the years ended December 31, 2012, 2011, and 2010, respectively.