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Businesses, Developments, Risks And Uncertainties | 6 Months Ended
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Jun. 30, 2011
Businesses, Developments, Risks And Uncertainties |
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 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. Revision of Consolidated Financial Statements for the Quarter Ended March 31, 2011 During the three months ended June 30, 2011, the Company identified a model input error related to the measurement of fair value and associated unrealized losses on certain insured derivatives. This error related to the quarter ended March 31, 2011 and had understated pre-tax mark-to-market loss by $207 million. The Company assessed the materiality of the error in accordance with Securities and Exchange Commission ("SEC") Staff Accounting Bulletin No. 99, Materiality, and concluded that this error was not material to the consolidated financial statements as of and for the three months ended March 31, 2011 and did not affect any prior consolidated financial statements. However, the cumulative effect of the error was determined to be material if the correction was recorded in the consolidated financial statements as of and for the three months ended June 30, 2011. In accordance with SEC Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements, the consolidated financial statements as of and for the three months ended March 31, 2011 have been revised in this filing and will be revised in the Company's Form 10-Q for the period ending March 31, 2012. The following tables summarize the correction of the error on the Company's consolidated statement of operations for the three months ended March 31, 2011 and on the Company's consolidated balance sheet as of March 31, 2011.
|  | Three Months Ended March 31, 2011 |
In millions |  | Balance as Reported |  |  | Correction of Error |  |  | Balance as Revised |
Revenues: |  |  |  |  |  |  |  |  |  |  |  |
Unrealized gains (losses) on insured derivatives |  | $ | (1,323 | ) |  | $ | (99 | ) |  | $ | (1,422 | )
Net change in fair value of insured derivatives |  |  | (1,677 | ) |  |  | (99 | ) |  |  | (1,776 | )
Revenues of consolidated VIEs: |  |  |  |  |  |  |  |  |  |  |  |
Net gains (losses) on financial instruments at fair value and foreign exchange |  |  | 1 |  |  |  | (108 | ) |  |  | (107 | )
Total revenues |  |  | (1,400 | ) |  |  | (207 | ) |  |  | (1,607 | )
Income (loss) before income taxes |  |  | (1,556 | ) |  |  | (207 | ) |  |  | (1,763 | )
Provision (benefit) for income taxes |  |  | (419 | ) |  |  | (70 | ) |  |  | (489 | )
Net income (loss) |  |  | (1,137 | ) |  |  | (137 | ) |  |  | (1,274 | )
Net income (loss) per common share: |  |  |  |  |  |  |  |  |  |  |  |
Basic |  | $ | (5.68 | ) |  | $ | (0.69 | ) |  | $ | (6.37 | )
Diluted |  | $ | (5.68 | ) |  | $ | (0.69 | ) |  | $ | (6.37 | )
|  | As of March 31, 2011 |
In millions |  | Balance as Reported |  |  | Correction of Error |  |  | Balance as Revised |
Assets: |  |  |  |  |  |  |  |  |  |  |  |
Deferred income taxes, net |  | $ | 1,293 |  |  | $ | 70 |  |  | $ | 1,363 |
Total assets |  |  | 32,173 |  |  |  | 70 |  |  |  | 32,243 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |
Derivative liabilities |  |  | 5,927 |  |  |  | 99 |  |  |  | 6,026 |
Liabilities of consolidated VIEs: |  |  |  |  |  |  |  |  |  |  |  |
Derivative liabilities |  |  | 1,910 |  |  |  | 108 |  |  |  | 2,018 |
Total liabilities |  |  | 30,400 |  |  |  | 207 |  |  |  | 30,607 |
Equity: |  |  |  |  |  |  |  |  |  |  |  |
Retained earnings |  |  | 987 |  |  |  | (137 | ) |  |  | 850 |
Total shareholders' equity of MBIA Inc. |  |  | 1,759 |  |  |  | (137 | ) |  |  | 1,622 |
Total equity |  |  | 1,773 |  |  |  | (137 | ) |  |  | 1,636 |
Total liabilities and equity |  |  | 32,173 |  |  |  | 70 |  |  |  | 32,243 |
The correction of the error had no impact on the Company's cash flows. 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 June 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 June 30, 2011, MBIA Insurance Corporation was rated B with a negative outlook by S&P and B3 with a negative outlook by Moody's. During the second quarter of 2011, the Company continued to seek to reduce both the absolute amount and the volatility of its liabilities and potential liabilities through repurchases of securities 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. The impact of these actions has been to mitigate erosion and reduce volatility in statutory capital and preserve liquidity in those two businesses. MBIA Insurance Corporation had statutory capital of $2.9 billion and $2.7 billion as of June 30, 2011 and December 31, 2010, respectively. MBIA Insurance Corporation ended the second quarter of 2011 with $1.1 billion in 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 increase in troubled real estate sectors and improvements in asset values have also contributed to the preservation and stabilization of capital and liquidity in these businesses during the second quarter of 2011. In the first six months of 2011, MBIA Corp. commuted $3.7 billion of gross insured exposure comprising commercial mortgage-backed securities ("CMBS") pools, investment grade corporate collateralized debt obligations ("CDOs"), a government supported entity, and a municipal gas facility. In the second quarter of 2011, MBIA Corp. reached an agreement for the commutation of an additional $2.7 billion of gross insured exposure comprising asset-backed collateralized debt obligations ("ABS CDOs"), which settled in the third quarter of 2011. While MBIA Corp.'s financial results for the second quarter of 2011 reflect this commutation, the payment by MBIA Corp. of the settlement amount and the reduction of its gross insured exposure occurred in the third quarter of 2011. Additionally, in the third quarter of 2011, MBIA Corp. reached agreements in principle to commute $5.6 billion of gross insured exposure comprising ABS CDOs and investment grade corporate CDOs. The total amount the Company agreed to pay to commute the above transactions was within its aggregate statutory loss reserve for such transactions. With respect to the commutation transactions settling in the third quarter of 2011, the Company's statutory loss reserves and non-GAAP performance measures (adjusted pre-tax income and adjusted book value) have been positively impacted as of and for the three months ended June 30, 2011. 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 June 30, 2011, MBIA Corp. had CMBS pool and commercial real estate ("CRE") CDO insured par exposure of approximately $33.5 billion and $7.0 billion, respectively, excluding approximately $4.0 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, given the large percentage of mortgage loans, which were not underwritten in accordance with applicable underwriting guidelines, 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 part 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 June 30, 2011, the Company's ABS CDO gross par outstanding was approximately $11.2 billion, and has decreased approximately $24.7 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 and accounting principles generally accepted in the United States of America ("GAAP"). Refer to "Note 5: Loss and Loss Adjustment Expense Reserves" for information about the Company's RMBS loss recoveries.
| • |  | Currently, the Company's asset/liability products segment has a deficit of cash, investments and other liquid assets at amortized cost to debt issued to third parties and affiliates at amortized cost of approximately $486 million, but is expected to have positive cash flows through 2012. The Company expects to actively manage this business to reduce that deficit. Resolving this 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.
| • |  | 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 State Insurance Department's ("NYSID's") 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 statutory accounting principles 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. 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/disputed 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 have created substantial liquidity risk for the Company. 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. MBIA seeks to manage segment liquidity primarily between its corporate and asset/liability products segments as they relate to MBIA Inc. Unexpected loss payments arising from ineligible mortgage loans in securitizations that the Company has insured, dislocation in the global financial markets, the overall economic downturn in the U.S., and the loss of MBIA Corp.'s triple-A insurance financial strength ratings in 2008 significantly increased the liquidity needs and decreased the financial flexibility in the Company's legal entities and segments. MBIA continues to satisfy all of its payment obligations and the Company believes that it has adequate resources to meet its ongoing liquidity needs in both the short-term and the long-term. However, 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) loss payments on the Company's insured transactions were to rise significantly, including due to ineligible mortgage loans in securitizations that it has insured, (ii) market or adverse economic conditions persist for an extended period of time or worsen, (iii) 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, (iv) the Company experiences an unexpected acceleration of payments required to settle liabilities or (v) the Company is unable to collect or is delayed in collecting on its contract claim recoveries related to ineligible mortgage loans in securitizations. These pressures could arise from exposures beyond residential mortgage-related stress, which to date has been the main cause of stress. As of June 30, 2011, National paid $164 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 quarter 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.

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- Definition The entire disclosure for the nature of an entity's business, the major products or services it sells or provides and its principal markets, including the locations of those markets. If the entity operates in more than one business, the disclosure also indicates the relative importance of its operations in each business and the basis for the determination (for example, assets, revenues, or earnings). + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Name Statement of Position (SOP) -Publisher AICPA -Number 94-6 -Paragraph 10 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 275 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=6927468&loc=d3e6003-108592 + Details
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