Note 10: 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 primarily 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.

As defined by segment reporting, an operating segment is a component of a company (i) that engages in business activities from which it earns revenue and incurs expenses, (ii) whose operating results are regularly reviewed by the Chief Operating Decision Maker to assess the performance of the segment and to make decisions about the allocation of resources to the segment and, (iii) for which discrete financial information is available. 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.;

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GFL;

•

Meridian;

•

LaCrosse Financial Products, LLC, 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 of the financial guarantor or the CDS issuer.

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 estate 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 Trifinium Advisors (UK) Limited (“Trifinium”). Cutwater-ISC and Cutwater-AMC provide advisory services, including cash management, discretionary asset management and structured products on a fee-for-service basis. Cutwater offers these services to public, not-for-profit, corporate and financial services clients, including MBIA Inc. and its subsidiaries, as well as portfolio accounting and reporting services. Cutwater-ISC and Cutwater-AMC are Securities and Exchange Commission registered investment advisers. Cutwater-AMC is also a Financial Industry Regulatory Authority member firm. Trifinium provides fee-based asset management and advisory services to the Company’s foreign insurance affiliate and to third-party clients and investment structures. Trifinium 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. In the first quarter of 2010, MBIA established a service company, Optinuity Alliance Resources Corporation, which provides general support services to the corporate segment and other operating businesses. Employees of the service company provide various support services including management, legal, accounting, treasury, information technology, and insurance portfolio surveillance, among others, on a fee-for-service basis. The service company’s revenues and expenses are included in the results of the corporate segment.

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”) and GFL. 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 also provided customized products for funds that are invested as part of asset-backed or structured product transactions. GFL raised funds through the issuance of MTNs with varying maturities, which were, in turn, guaranteed by MBIA Corp. GFL lent the proceeds of these MTN issuances to MBIA Inc. (“GFL Loans”). MBIA Inc. invested the proceeds of investment agreements and GFL Loans in eligible investments, which consisted of investment grade securities rated investment grade at the time of purchase and maintained a minimum average double-A credit quality rating at the time of purchase. MBIA Inc. primarily purchases domestic securities, which are pledged to MBIA Corp. as security for its guarantees on investment agreements and MTNs.

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 March 31, 2013 and 2012:


	Three Months Ended March 31, 2013
			Structured
	U.S. Public		Finance and
	Finance		International		Advisory				Wind-down
In millions	Insurance		Insurance		Services		Corporate		Operations		Eliminations			Consolidated
Revenues⁽¹⁾	$	108	$	42	$	4	$	1	$	9	$	-		$	164
Net change in fair value of insured derivatives		-		(61)		-		-		-		-			(61)
Net gains (losses) on financial instruments at fair value and foreign exchange		32		22		-		6		3		-			63
Net gains (losses) on extinguishment of debt		-		-		-		-		4		-			4
Revenues of consolidated VIEs		-		47		-		-		2		-			49
Inter-segment revenues⁽²⁾		46		20		7		26		(2)		(97)			-

Total revenues		186		70		11		33		16		(97)			219
Losses and loss adjustment		4		(198)		-		-		-		-			(194)
Operating		14		34		10		64		-		-			122
Interest		-		28		-		12		20		-			60
Expenses of consolidated VIEs		-		14		-		-		2		-			16
Inter-segment expenses⁽²⁾		26		56		2		3		13		(100)			-

Total expenses		44		(66)		12		79		35		(100)			4

Income (loss) before income taxes	$	142	$	136	$	(1)	$	(46)	$	(19)	$	3		$	215

Identifiable assets	$	6,874	$	17,149	$	34	$	861	$	2,484	$	(5,810)	⁽³⁾	$	21,592

(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 March 31, 2012
In millions	U.S. Public Finance Insurance		Structured Finance and International Insurance		Advisory Services		Corporate		Wind-down Operations		Eliminations			Consolidated
Revenues⁽¹⁾	$	125	$	55	$	6	$	1	$	19	$	-		$	206
Net change in fair value of insured derivatives		-		299		-		-		-		-			299
Net gains (losses) on financial instruments at fair value and foreign exchange		10		46		-		5		(80)		-			(19)
Net investment losses related to other-than-temporary impairments		-		(40)		-		-		(54)		-			(94)
Other net realized gains (losses)		-		1		-		-		-		-			1
Revenues of consolidated VIEs		-		(14)		-		-		4		-			(10)
Inter-segment revenues⁽²⁾		36		(7)		7		23		3		(62)			-

Total revenues		171		340		13		29		(108)		(62)			383
Losses and loss adjustment		14		83		-		-		-		-			97
Operating		75		59		15		21		1		-			171
Interest		-		33		-		14		26		-			73
Expenses of consolidated VIEs		-		17		-		-		4		-			21
Inter-segment expenses⁽²⁾		27		46		2		4		8		(87)			-

Total expenses		116		238		17		39		39		(87)			362

Income (loss) before income taxes	$	55	$	102	$	(4)	$	(10)	$	(147)	$	25		$	21

Identifiable assets	$	7,534	$	19,632	$	46	$	670	$	4,732	$	(6,488)	⁽³⁾	$	26,126

(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 months ended March 31, 2013 and 2012:


	Three Months Ended March 31,
In millions	2013		2012
Total premiums earned:
United States	$	106	$	119
United Kingdom		8		8
Europe (excluding United Kingdom)		3		5
Internationally diversified		3		5
Central and South America		8		11
Asia		1		1
Other		2		3

Total	$	131	$	152

The following tables provide the results of the segments within the wind-down operations for the three months ended March 31, 2013 and 2012:


	Three Months Ended March 31, 2013
	Asset /						Total Wind-
	Liability						down
In millions	Products		Conduits		Eliminations		Operations
Revenues⁽¹⁾	$	9	$	-	$	-	$	9
Net gains (losses) on financial instruments at fair value and foreign exchange		3		-		-		3
Net gains (losses) on extinguishment of debt		4		-		-		4
Revenues of consolidated VIEs		-		2		-		2
Inter-segment revenues⁽²⁾		(2)		-		-		(2)

Total revenues		14		2		-		16
Interest		20		-		-		20
Expenses of consolidated VIEs		-		2		-		2
Inter-segment expenses⁽²⁾		2		11		-		13

Total expenses		22		13		-		35

Income (loss) before income taxes	$	(8)	$	(11)	$	-	$	(19)

Identifiable assets	$	1,822	$	692	$	(30)	$	2,484

(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 March 31, 2012
	Asset /						Total Wind-
	Liability						down
In millions	Products		Conduits		Eliminations		Operations
Revenues⁽¹⁾	$	19	$	-	$	-	$	19
Net gains (losses) on financial instruments at fair value and foreign exchange		(80)		-		-		(80)
Net investment losses related to other-than-temporary impairments		(54)		-		-		(54)
Revenues of consolidated VIEs		-		4		-		4
Inter-segment revenues⁽²⁾		4		(1)		-		3

Total revenues		(111)		3		-		(108)
Operating		1		-		-		1
Interest		26		-		-		26
Expenses of consolidated VIEs		-		4		-		4
Inter-segment expenses⁽²⁾		8		-		-		8

Total expenses		35		4		-		39

Income (loss) before income taxes	$	(146)	$	(1)	$	-	$	(147)

Identifiable assets	$	3,610	$	1,177	$	(55)	$	4,732

(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.