EX-99.2 7 d231779dex992.htm MBIA INSURANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS

Exhibit 99.2

MBIA INSURANCE CORPORATION AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

As of September 30, 2011 and December 31, 2010

and for the periods ended September 30, 2011 and 2010

MBIA INSURANCE CORPORATION AND SUBSIDIARIES

INDEX

|  | PAGE |
Consolidated Balance Sheets – September 30, 2011 and December 31, 2010 (Unaudited) |  |  | 1 |
Consolidated Statements of Operations – Three and nine months ended September 30, 2011 and 2010 (Unaudited) |  |  | 2 |
Consolidated Statement of Changes in Shareholders’ Equity – Nine months ended September 30, 2011 (Unaudited) |  |  | 3 |
Consolidated Statements of Cash Flows – Nine months ended September 30, 2011 and 2010 (Unaudited) |  |  | 4 |
Notes to Consolidated Financial Statements (Unaudited) |  |  | 5-61 |

MBIA INSURANCE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (Unaudited)

(In thousands except share and per share amounts)

|  | September 30, 2011 |  |  | December 31, 2010 |
Assets |  |  |  |  |  |  |  |
Investments: |  |  |  |  |  |  |  |
Fixed-maturity securities held as available-for-sale, at fair value (amortized cost $995,570 and $1,497,527) |  | $ | 971,908 |  |  | $ | 1,503,356 |
Investments carried at fair value (amortized cost of $0 and $822) |  |  | - |  |  |  | 822 |
Short-term investments, at fair value (amortized cost $376,953 and $672,601) |  |  | 377,345 |  |  |  | 674,460 |
Other investments (includes investments at fair value of $8,231 and $9,803) |  |  | 15,403 |  |  |  | 11,030 |
Total |  |  | 1,364,656 |  |  |  | 2,189,668 |
Cash and cash equivalents |  |  | 425,664 |  |  |  | 229,062 |
Secured loan |  |  | 600,000 |  |  |  | 975,000 |
Accrued investment income |  |  | 14,491 |  |  |  | 21,193 |
Premiums receivable |  |  | 1,399,313 |  |  |  | 1,588,999 |
Deferred acquisition costs |  |  | 653,697 |  |  |  | 764,272 |
Prepaid reinsurance premiums |  |  | 1,774,154 |  |  |  | 1,988,771 |
Insurance loss recoverable |  |  | 2,770,096 |  |  |  | 2,531,494 |
Reinsurance recoverable on paid and unpaid losses |  |  | 200,615 |  |  |  | 229,764 |
Property and equipment, at cost (less accumulated depreciation of $58,279 and $59,917) |  |  | 2,729 |  |  |  | 4,479 |
Receivable for investments sold |  |  | 8,969 |  |  |  | 1,627 |
Derivative assets |  |  | 7,964 |  |  |  | 9,632 |
Deferred income taxes, net |  |  | 1,387,032 |  |  |  | 871,131 |
Other assets |  |  | 137,240 |  |  |  | 149,772 |
Assets of consolidated variable interest entities: |  |  |  |  |  |  |  |
Cash |  |  | 580,292 |  |  |  | 763,780 |
Investments held-to-maturity, at amortized cost (fair value $2,456,074 and $2,635,957) |  |  | 2,840,000 |  |  |  | 2,840,000 |
Fixed-maturity securities at fair value |  |  | 3,273,592 |  |  |  | 5,113,227 |
Loans receivable at fair value |  |  | 2,218,403 |  |  |  | 2,183,365 |
Loan repurchase commitments |  |  | 938,195 |  |  |  | 835,047 |
Derivative assets |  |  | 983,504 |  |  |  | 829,319 |
Other assets |  |  | - |  |  |  | 1,581 |
Total assets |  | $ | 21,580,606 |  |  | $ | 24,121,183 |
Liabilities and Equity |  |  |  |  |  |  |  |
Liabilities: |  |  |  |  |  |  |  |
Unearned premium revenue |  | $ | 3,056,377 |  |  | $ | 3,470,192 |
Loss and loss adjustment expense reserves |  |  | 931,804 |  |  |  | 1,129,358 |
Reinsurance premiums payable |  |  | 365,683 |  |  |  | 389,749 |
Long-term debt |  |  | 952,655 |  |  |  | 952,655 |
Deferred fee revenue |  |  | 538,423 |  |  |  | 610,393 |
Payable for investments purchased |  |  | 34 |  |  |  | 82 |
Derivative liabilities |  |  | 5,171,512 |  |  |  | 4,501,234 |
Current income taxes |  |  | 27,208 |  |  |  | 3,530 |
Other liabilities |  |  | 265,752 |  |  |  | 173,792 |
Liabilities of consolidated variable interest entities: |  |  |  |  |  |  |  |
Variable interest entity notes (includes financial instruments carried at fair value $5,159,819 and $6,704,107) |  |  | 7,966,856 |  |  |  | 9,511,143 |
Derivative liabilities |  |  | 1,887,938 |  |  |  | 2,104,242 |
Total liabilities |  |  | 21,164,242 |  |  |  | 22,846,370 |
Commitments and contingencies (See Note 12) |  |  |  |  |  |  |  |
Equity: |  |  |  |  |  |  |  |
Series A non-cumulative perpetual preferred stock, par value $1,000 per share, liquidation value $100,000 per share, authorized - 4,000, issued and outstanding - 2,759 |  |  | 27,598 |  |  |  | 27,598 |
Common stock, par value $220.80 per share; authorized, issued and outstanding - 67,936 shares |  |  | 15,000 |  |  |  | 15,000 |
Additional paid-in capital |  |  | 985,458 |  |  |  | 983,795 |
Retained earnings |  |  | (611,681) |  |  |  | 230,143 |
Accumulated other comprehensive income (loss), net of deferred income tax of $13,246 and $130 |  |  | (11) |  |  |  | 18,277 |
Total equity |  |  | 416,364 |  |  |  | 1,274,813 |
Total liabilities and equity |  | $ | 21,580,606 |  |  | $ | 24,121,183 |

The accompanying notes are an integral part of the consolidated financial statements.

1

MBIA INSURANCE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(In thousands)

|  | Three Months Ended September 30, |  |  | Nine Months Ended September 30, |
|  | 2011 |  |  | 2010 |  |  | 2011 |  |  | 2010 |
Revenues: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Premiums earned: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Scheduled premiums earned |  | $ | 56,615 |  |  | $ | 59,358 |  |  | $ | 178,988 |  |  | $ | 191,618 |
Refunding premiums earned |  |  | 17,609 |  |  |  | 2,113 |  |  |  | 28,852 |  |  |  | 14,156 |
Premiums earned (net of ceded premiums of $70,364, $56,444, $187,867 and $201,319) |  |  | 74,224 |  |  |  | 61,471 |  |  |  | 207,840 |  |  |  | 205,774 |
Net investment income |  |  | 16,773 |  |  |  | 29,871 |  |  |  | 62,672 |  |  |  | 84,413 |
Fees and reimbursements |  |  | 25,681 |  |  |  | 17,119 |  |  |  | 73,373 |  |  |  | 165,456 |
Change in fair value of insured derivatives: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Realized gains (losses) and other settlements on insured derivatives |  |  | (53,598) |  |  |  | 552,320 |  |  |  | (600,352) |  |  |  | 454,211 |
Unrealized gains (losses) on insured derivatives |  |  | 831,585 |  |  |  | (1,058,747) |  |  |  | (675,124) |  |  |  | (1,769,294) |
Net change in fair value of insured derivatives |  |  | 777,987 |  |  |  | (506,427) |  |  |  | (1,275,476) |  |  |  | (1,315,083) |
Net gains (losses) on financial instruments at fair value and foreign exchange |  |  | (12,026) |  |  |  | 144,807 |  |  |  | 21,256 |  |  |  | 130,616 |
Other net realized gains (losses) |  |  | 675 |  |  |  | (1,049) |  |  |  | 1,136 |  |  |  | 18,525 |
Revenues of consolidated variable interest entities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Net investment income |  |  | 12,719 |  |  |  | 11,116 |  |  |  | 39,084 |  |  |  | 31,888 |
Net gains (losses) on financial instruments at fair value and foreign exchange |  |  | 30,379 |  |  |  | (54,044) |  |  |  | 102,543 |  |  |  | 361,805 |
Other net realized gains (losses) |  |  | 6 |  |  |  | - |  |  |  | 6 |  |  |  | (74,248) |
Total revenues |  |  | 926,418 |  |  |  | (297,136) |  |  |  | (767,566) |  |  |  | (390,854) |
Expenses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Losses and loss adjustment |  |  | 180,319 |  |  |  | (25,097) |  |  |  | 199,684 |  |  |  | 80,604 |
Amortization of deferred acquisition costs |  |  | 31,286 |  |  |  | 24,605 |  |  |  | 104,381 |  |  |  | 108,459 |
Operating |  |  | 31,848 |  |  |  | 32,854 |  |  |  | 96,668 |  |  |  | 89,112 |
Interest |  |  | 33,524 |  |  |  | 33,831 |  |  |  | 100,576 |  |  |  | 102,413 |
Expenses of consolidated variable interest entities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Operating |  |  | 8,304 |  |  |  | 4,542 |  |  |  | 26,387 |  |  |  | 14,617 |
Interest |  |  | 10,011 |  |  |  | 11,047 |  |  |  | 31,055 |  |  |  | 31,702 |
Total expenses |  |  | 295,292 |  |  |  | 81,782 |  |  |  | 558,751 |  |  |  | 426,907 |
Income (loss) before income taxes |  |  | 631,126 |  |  |  | (378,918) |  |  |  | (1,326,317) |  |  |  | (817,761) |
Provision (benefit) for income taxes |  |  | 216,718 |  |  |  | (61,654) |  |  |  | (484,493) |  |  |  | (275,441) |
Equity in net income (loss) of affiliates |  |  | 11 |  |  |  | 93 |  |  |  | - |  |  |  | 177 |
Net income (loss) |  | $ | 414,419 |  |  | $ | (317,171) |  |  | $ | (841,824) |  |  | $ | (542,143) |

The accompanying notes are an integral part of the consolidated financial statements.

2

MBIA INSURANCE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

For The Nine Months Ended September 30, 2011

(In thousands except share amounts)

|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Accumulated |  |  | Total |
|  |  |  |  |  |  |  |  |  |  |  |  |  | Additional |  |  |  |  |  | Other |  |  | Shareholders’ |
|  | Preferred Stock |  |  | Common Stock |  |  | Paid-in |  |  | Retained |  |  | Comprehensive |  |  | Equity |
|  | Shares |  |  | Amount |  |  | Shares |  |  | Amount |  |  | Capital |  |  | Earnings |  |  | Income (Loss) |  |  | of MBIA Inc. |
Balance, December 31, 2010 |  |  | 2,759 |  |  | $ | 27,598 |  |  |  | 67,936 |  |  | $ | 15,000 |  |  | $ | 983,795 |  |  | $ | 230,143 |  |  | $ | 18,277 |  |  | $ | 1,274,813 |
Comprehensive income: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Net income (loss): |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (841,824 | ) |  |  | - |  |  |  | (841,824 | )
Other comprehensive income (loss): |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Change in unrealized appreciation of investments, net of deferred tax benefit of $14,746 |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 11,882 |  |  |  | 11,882 |
Change in foreign currency translation, net of deferred tax provision of $1,369 |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (30,170 | ) |  |  | (30,170 | )
Other comprehensive (loss) income |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | (18,288 | )
Total comprehensive (loss) income |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | (860,112 | )
Capital contribution in connection with the sale of investments |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 3,620 |  |  |  | - |  |  |  | - |  |  |  | 3,620 |
Share-based compensation, net of deferred tax provision of $3,077 |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (1,957 | ) |  |  | - |  |  |  | - |  |  |  | (1,957 | )
Balance, September 30, 2011 |  |  | 2,759 |  |  | $ | 27,598 |  |  |  | 67,936 |  |  | $ | 15,000 |  |  | $ | 985,458 |  |  | $ | (611,681 | ) |  | $ | (11 | ) |  | $ | 416,364 |

|  | 2011 |
Disclosure of reclassification amount: |  |  |  |
Change in unrealized gains and losses on investments arising during the period, net of taxes |  | $ | 56,867 |
Reclassification adjustment, net of taxes |  |  | (44,985 | )
Change in net unrealized gains and losses, net of taxes |  | $ | 11,882 |

The accompanying notes are an integral part of the consolidated financial statements.

3

MBIA INSURANCE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands)

|  | Nine Months Ended September 30, |
|  | 2011 |  |  | 2010 |
Cash flows from operating activities: |  |  |  |  |  |  |  |
Net (loss) income |  | $ | (841,824) |  |  | $ | (542,143) |
Adjustments to reconcile net (loss) income to net cash used by operating activities: |  |  |  |  |  |  |  |
Change in: |  |  |  |  |  |  |  |
Accrued investment income |  |  | 6,702 |  |  |  | (2,611) |
Premiums receivable |  |  | 175,719 |  |  |  | 175,341 |
Deferred acquisition costs |  |  | 100,532 |  |  |  | 134,569 |
Unearned premium revenue |  |  | (386,429) |  |  |  | (383,530) |
Prepaid reinsurance premiums |  |  | 185,805 |  |  |  | 173,381 |
Reinsurance premiums payable |  |  | (24,066) |  |  |  | (54,968) |
Loss and loss adjustment expense reserves |  |  | (197,554) |  |  |  | (272,948) |
Reinsurance recoverable on paid and unpaid losses |  |  | 28,897 |  |  |  | (64,985) |
Insurance loss recoverable |  |  | (236,946) |  |  |  | (438,758) |
Receivable from affiliates |  |  | 23,812 |  |  |  | 3,703 |
Payable to reinsurers on recoverables |  |  | 80,407 |  |  |  | 43,221 |
Accounts receivable |  |  | 158 |  |  |  | 520 |
Accrued expenses |  |  | (1,422) |  |  |  | (132,412) |
Deferred fee revenue |  |  | (63,935) |  |  |  | (60,285) |
Current income taxes |  |  | 23,678 |  |  |  | 320,889 |
Amortization of bond premiums, net |  |  | (16,003) |  |  |  | (19,949) |
Depreciation |  |  | 1,962 |  |  |  | 3,465 |
Net realized losses on variable interest entities |  |  | - |  |  |  | 74,248 |
Other net realized (gains) losses |  |  | (1,142) |  |  |  | (18,525) |
Realized gains and other settlements on insured derivatives |  |  | - |  |  |  | (606,898) |
Unrealized losses on insured derivatives |  |  | 675,124 |  |  |  | 1,769,294 |
Net gains on financial instruments at fair value and foreign exchange |  |  | (123,799) |  |  |  | (492,421) |
Deferred income tax benefit |  |  | (500,078) |  |  |  | (321,756) |
Share-based compensation |  |  | 1,120 |  |  |  | 753 |
Other operating |  |  | (40,650) |  |  |  | 82,984 |
Total adjustments to net income (loss) |  |  | (288,108) |  |  |  | (87,678) |
Net cash used by operating activities |  |  | (1,129,932) |  |  |  | (629,821) |
Cash flows from investing activities: |  |  |  |  |  |  |  |
Purchase of fixed-maturity securities |  |  | (281,224) |  |  |  | (199,684) |
Purchase of controlling interest in an affliate, net of cash received |  |  | - |  |  |  | (26,693) |
Sale of fixed-maturity securities |  |  | 654,985 |  |  |  | 593,662 |
Decrease in loans receivable |  |  | 222,989 |  |  |  | 777,983 |
Repayments for secured loan |  |  | 375,000 |  |  |  | 500,000 |
Redemptions of fixed-maturity securities |  |  | 382,540 |  |  |  | 475,729 |
Purchase of short-term investments, net |  |  | 464,550 |  |  |  | 70,318 |
Sale of other investments, net |  |  | (4,308) |  |  |  | 1,161 |
Sale of a business to an affiliate |  |  | 147,079 |  |  |  | - |
Consolidation and deconsolidation of variable interest entities |  |  | (10,666) |  |  |  | 512,011 |
Capital expenditures |  |  | (651) |  |  |  | (1,742) |
Disposals of fixed assets |  |  | 428 |  |  |  | 65,319 |
Net cash provided by investing activities |  |  | 1,950,722 |  |  |  | 2,768,064 |
Cash flows from financing activities: |  |  |  |  |  |  |  |
Principal paydown of variable interest entity notes |  |  | (807,676) |  |  |  | (1,233,882) |
Repayment of long-term debt |  |  | - |  |  |  | (276,572) |
Redemption of preferred shares |  |  | - |  |  |  | (26,010) |
Dividends paid |  |  | - |  |  |  | (1,005) |
Net cash used by financing activities |  |  | (807,676) |  |  |  | (1,537,469) |
Net increase in cash and cash equivalents |  |  | 13,114 |  |  |  | 600,774 |
Cash and cash equivalents - beginning of year |  |  | 992,842 |  |  |  | 613,356 |
Cash and cash equivalents - end of period |  | $ | 1,005,956 |  |  | $ | 1,214,130 |
Supplemental cash flow disclosures: |  |  |  |  |  |  |  |
Income taxes refunded, net |  | $ | (8,304) |  |  | $ | (282,766) |
Interest paid: |  |  |  |  |  |  |  |
Long-term debt |  | $ | 133,372 |  |  | $ | 135,462 |
Variable interest entity notes |  |  | 180,878 |  |  |  | 222,878 |
Non cash items: |  |  |  |  |  |  |  |
Share-based compensation |  | $ | 1,120 |  |  | $ | 753 |

The accompanying notes are an integral part of the consolidated financial statements.

4

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 1: Businesses, Developments, Risks and Uncertainties

Summary

MBIA Insurance Corporation is a wholly owned subsidiary of MBIA Inc. (“MBIA”). The guarantees of MBIA Insurance Corporation and its subsidiaries, (“MBIA Corp.”) 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 United States (“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 and sub-sovereign issuers. Structured finance and asset-backed securities (“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.

Business Developments

MBIA Corp. 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 its credit ratings. As of September 30, 2011, MBIA Insurance Corporation was rated B with a negative outlook by Standard & Poor’s Financial Services LLC (“S&P”) and B3 with a negative outlook by Moody’s Investors Service, Inc. (“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 MBIA Corp. by November 30, 2011, after its review of MBIA Corp.’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 MBIA Corp.’s ratings is uncertain. The absence of S&P’s highest ratings could adversely impact MBIA Corp.’s ability to write new insurance business and the premiums it can charge, and could diminish the future acceptance of its financial guarantee insurance products.

During the third quarter of 2011, MBIA Corp. continued to seek to reduce both the absolute amount and the volatility of its liabilities and insured exposure through commutations of insurance policies. Additionally, during 2011, MBIA Corp. undertook actions to mitigate declines in liquidity. MBIA Corp. had statutory capital of $2.6 billion and $2.7 billion as of September 30, 2011 and December 31, 2010, respectively. MBIA Corp. 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 MBIA Corp. during the nine months ended September 30, 2011, even though during the third quarter of 2011, MBIA Corp. experienced deterioration in the market value 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 the end of the third quarter of 2011, MBIA Corp. agreed to commute transactions with additional counterparties. The transactions, comprising primarily commercial real estate (“CRE”), totaled $10.6 billion in gross insured exposure. The total amount MBIA Corp. 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, MBIA Corp. 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

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

5

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 1: Business, Developments, Risks and Uncertainties (continued)

| • |  | 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 Corp. could incur substantial additional losses in that sector. As of September 30, 2011, MBIA Corp. had CMBS pool and 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 6: Loss and Loss Adjustment Expense Reserves” for information about MBIA Corp.’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 MBIA Corp.’s current estimated loss reserves. Refer to “Note 6: Loss and Loss Adjustment Expense Reserves” for information about MBIA Corp.’s RMBS loss reserves.

| • |  | While MBIA Corp. has settled a substantial portion of its insured ABS CDO exposure at levels within its statutory loss reserves related to those exposures, further economic stress might cause increases in its loss estimates. As of September 30, 2011, MBIA Corp.’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 consolidated 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 6: Loss and Loss Adjustment Expense Reserves” for information about MBIA Corp.’s second-lien RMBS loss recoveries.

| • |  | MBIA Corp.’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 MBIA Corp. to record allowances against some or all of its deferred tax assets. Refer to “Note 11: Income Taxes” for information about MBIA Corp.’s deferred tax assets.

| • |  | In the event the economy and the markets to which MBIA Corp. is exposed do not improve, or decline, the unrealized losses on insured credit derivatives could increase, causing additional stress in MBIA Corp.’s reported financial results. In addition, volatility in the relationship between MBIA Corp.’s credit spreads and those on underlying collateral assets of insured credit derivatives can create significant unrealized gains and losses in MBIA Corp.’s reported results of operations. Refer to “Note 7: Fair Value of Financial Instruments” for information about MBIA Corp.’s valuation of insured credit derivatives.

While MBIA Corp. 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 MBIA Corp.’s insurance regulators in its operations and constitute an event of default under certain of MBIA Corp.’s contracts, thereby materially and adversely affecting MBIA Corp.’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 reserve.

Liquidity

As a financial services company, MBIA Corp. 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 ineligible loans in securitizations MBIA Corp. has insured, have created substantial liquidity risk for MBIA Corp. MBIA Corp. continues to satisfy all of its payment obligations and it 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, MBIA Corp. 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. MBIA Corp.’s liquidity risk management framework seeks to monitor its cash and liquid asset resources using stress-scenario testing. Members of MBIA Corp.’s senior management meet regularly to review liquidity metrics, discuss contingency plans and establish target liquidity cushions on an enterprise-wide basis.

6

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note1: Business, Developments, Risks and Uncertainties (continued)

As part of its liquidity risk management framework, MBIA Corp. seeks to evaluate and manage liquidity. There are legal, regulatory and other limitations on MBIA Corp.’s ability to utilize the liquidity resources within the overall enterprise. Unexpected loss payments arising from ineligible mortgage loans in securitizations that MBIA Corp. 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 of MBIA Corp. MBIA Corp. 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) MBIA Corp. 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 MBIA Corp.’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) MBIA Corp. 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, (v) or MBIA Corp. 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.

The reference herein to “ineligible” mortgage loans refers to those mortgage loans that MBIA Corp. 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 MBIA Corp.’s assessment, which included information provided by third-party review firms, of such mortgage loans’ compliance with such representations and warranties. MBIA Corp.’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 MBIA Corp.’s determinations will prevail.

Note 2: Revision of Prior Periods’ Consolidated Financial Statements

During the three months ended September 30, 2011, MBIA Corp. discovered errors in the recognition of refunded premiums earned related to refunding activities prior to July 1, 2011 on U.S. public finance financial guarantees reinsured by its affiliate, National Public Finance Guarantee Corporation (“National”) under a reinsurance agreement. Certain financial guarantee policies ceded by MBIA Corp. and assumed by National were subsequently found to have been refunded by the issuers of the insured obligations prior to the date of the reinsurance agreement, which was January 1, 2009, and which related premiums should have been returned to and earned by MBIA Corp. These errors affected MBIA Corp.’s previously issued consolidated financial statements for the years ended December 31, 2009, and 2010 and for each of the previously issued quarters of 2010 and 2011. The cumulative effect of the errors related to prior periods was an increase in MBIA Corp.’s net income of $57 million.

MBIA Corp. assessed the materiality of the above errors in accordance with Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 99, Materiality and determined the errors were not material to the consolidated financial statements for the years ended December 31, 2009, and 2010 and for each of the previously issued quarters of 2010 and 2011. However, the cumulative effect of the errors was determined to be material if the corrections were recorded in the consolidated financial statements as of and for the three months ended September 30, 2011. In accordance with SEC SAB No. 108, Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements, the consolidated balance sheets as of December 31, 2010, March 31 and June 30 of 2011, and the consolidated statements of operations for the three months ended March 31, 2011, the three and six months ended June 30, 2011, the three and nine months ended September 30, 2010 and the years ended December 31 of 2010 and 2009 have been revised in the accompanying financial statements to these footnotes. Additionally, the consolidated financial statements as of and for the years ended December 31, 2009, and 2010, as well as the quarters ended March 31 and June 30 of 2011 will be revised in MBIA Corp.’s consolidated financial statements issued in the future to reflect the correction of the errors on those periods. MBIA Corp. also revised prior periods for certain unrelated errors of an immaterial nature. The cumulative effect of these unrelated errors on prior periods was a decrease in MBIA Corp.’s net income of $18 million.

7

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 2: Revision of Prior Periods’ Consolidated Financial Statements (continued)

The following tables summarize the correction of the errors on the consolidated statements of operations for the three and six months ended June 30, 2011:

|  | Three Months Ended June 30, 2011 |  |  | Six Months Ended June 30, 2011 |
In thousands |  | Balance as Reported |  |  | Correction of Errors |  |  | Balance as Revised |  |  | Balance as Reported |  |  | Correction of Errors |  |  | Balance as Revised |
Revenues: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Scheduled premiums earned |  | $ | 54,921 |  |  | $ | 135 |  |  | $ | 55,056 |  |  | $ | 122,081 |  |  | $ | 292 |  |  | $ | 122,373 |
Refunding premiums earned |  |  | 8,047 |  |  |  | 2,444 |  |  |  | 10,491 |  |  |  | 8,109 |  |  |  | 3,134 |  |  |  | 11,243 |
Fees, reimbursements and other |  |  | 26,504 |  |  |  | (645 | ) |  |  | 25,859 |  |  |  | 48,543 |  |  |  | (851 | ) |  |  | 47,692 |
Unrealized gains (losses) on insured derivatives |  |  | - | (1) |  |  | - | (1) |  |  | - | (1) |  |  | (1,502,965 | ) |  |  | (3,744 | ) |  |  | (1,506,709 | )
Revenues of consolidated variable interest entities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Net gains (losses) on financial instruments at fair value and foreign exchange |  |  | - | (1) |  |  | - | (1) |  |  | - | (1) |  |  | 82,230 |  |  |  | (10,065 | ) |  |  | 72,165 |
Total revenues |  |  | 58,515 |  |  |  | 1,934 |  |  |  | 60,449 |  |  |  | (1,682,749 | ) |  |  | (11,234 | ) |  |  | (1,693,983 | )
Amortization of deferred acquisition costs |  |  | 40,474 |  |  |  | (353 | ) |  |  | 40,121 |  |  |  | 73,538 |  |  |  | (442 | ) |  |  | 73,096 |
Total expenses |  |  | 181,331 |  |  |  | (353 | ) |  |  | 180,978 |  |  |  | 263,902 |  |  |  | (442 | ) |  |  | 263,460 |
Income (loss) before income taxes |  |  | (122,816 | ) |  |  | 2,287 |  |  |  | (120,529 | ) |  |  | (1,946,651 | ) |  |  | (10,792 | ) |  |  | (1,957,443 | )
Provision (benefit) for income taxes |  |  | (70,031 | ) |  |  | 19,291 |  |  |  | (50,740 | ) |  |  | (715,925 | ) |  |  | 14,714 |  |  |  | (701,211 | )
Net income (loss) |  |  | (52,796 | ) |  |  | (17,004 | ) |  |  | (69,800 | ) |  |  | (1,230,737 | ) |  |  | (25,506 | ) |  |  | (1,256,243 | )

(1) - There were no correction of errors for this line item in the period reported.

The following table summarizes the correction of the errors on the consolidated statement of operations for the three months ended March 31, 2011. The table also presents separately the effect of a previous revision for the quarter ended March 31, 2011 related to insured credit derivatives. Refer to the Notes to Consolidated Financial Statements of MBIA Corp. included in Exhibit 99.2 of MBIA Inc.’s Form 10-Q for quarter ended June 30, 2011 for further information regarding the effect of this previous revision.

|  | Three Months Ended March 31, 2011 |
In thousands |  | Balance as Published |  |  | Previous Correction of Error |  |  | Previously Reported |  |  | Current Correction of Errors |  |  | Balance as Currently Revised |
Revenues: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Scheduled premiums earned |  | $ | 67,160 |  |  | $ | - |  |  | $ | 67,160 |  |  | $ | 157 |  |  | $ | 67,317 |
Refunding premiums earned |  |  | 62 |  |  |  | - |  |  |  | 62 |  |  |  | 690 |  |  |  | 752 |
Fees, reimbursements and other |  |  | 22,039 |  |  |  | - |  |  |  | 22,039 |  |  |  | (206 | ) |  |  | 21,833 |
Unrealized gains (losses) on insured derivatives |  |  | (1,383,440 | ) |  |  | (207,474 | ) |  |  | (1,590,914 | ) |  |  | (3,744 | ) |  |  | (1,594,658 | )
Revenues of consolidated variable interest entities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Net gains (losses) on financial instruments at fair value and foreign exchange |  |  | 37,757 |  |  |  | - |  |  |  | 37,757 |  |  |  | (10,065 | ) |  |  | 27,692 |
Total revenues |  |  | (1,533,791 | ) |  |  | (207,474 | ) |  |  | (1,741,265 | ) |  |  | (13,168 | ) |  |  | (1,754,433 | )
Amortization of deferred acquisition costs |  |  | 33,063 |  |  |  | - |  |  |  | 33,063 |  |  |  | (89 | ) |  |  | 32,974 |
Total expenses |  |  | 82,570 |  |  |  | - |  |  |  | 82,570 |  |  |  | (89 | ) |  |  | 82,481 |
Income (loss) before income taxes |  |  | (1,616,361 | ) |  |  | (207,474 | ) |  |  | (1,823,835 | ) |  |  | (13,079 | ) |  |  | (1,836,914 | )
Provision (benefit) for income taxes |  |  | (573,284 | ) |  |  | (72,610 | ) |  |  | (645,894 | ) |  |  | (4,577 | ) |  |  | (650,471 | )
Net income (loss) |  |  | (1,043,077 | ) |  |  | (134,864 | ) |  |  | (1,177,941 | ) |  |  | (8,502 | ) |  |  | (1,186,443 | )

8

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 2: Revision of Prior Periods’ Consolidated Financial Statements (continued)

The following table summarizes the correction of the aforementioned errors on MBIA Corp.’s consolidated statements of operations for the three and nine months ended September 30, 2010:

|  | Three Months Ended September 30, 2010 |  |  | Nine Months Ended September 30, 2010 |
In thousands |  | Balance as Reported |  |  | Correction of Errors |  |  | Balance as Revised |  |  | Balance as Reported |  |  | Correction of Errors |  |  | Balance as Revised |
Revenues: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Scheduled premiums earned |  | $ | 59,029 |  |  | $ | 329 |  |  | $ | 59,358 |  |  | $ | 190,365 |  |  | $ | 1,253 |  |  | $ | 191,618 |
Refunding premiums earned |  |  | (454 | ) |  |  | 2,567 |  |  |  | 2,113 |  |  |  | 3,887 |  |  |  | 10,269 |  |  |  | 14,156 |
Fees, reimbursements and other |  |  | 17,877 |  |  |  | (758 | ) |  |  | 17,119 |  |  |  | 168,769 |  |  |  | (3,313 | ) |  |  | 165,456 |
Unrealized gains (losses) on insured derivatives |  |  | - | (1) |  |  | - | (1) |  |  | - | (1) |  |  | (1,744,378 | ) |  |  | (24,916 | ) |  |  | (1,769,294 | )
Total revenues |  |  | (299,274 | ) |  |  | 2,138 |  |  |  | (297,136 | ) |  |  | (374,147 | ) |  |  | (16,707 | ) |  |  | (390,854 | )
Amortization of deferred acquisition costs |  |  | 25,155 |  |  |  | (550 | ) |  |  | 24,605 |  |  |  | 111,996 |  |  |  | (3,537 | ) |  |  | 108,459 |
Total expenses |  |  | 82,332 |  |  |  | (550 | ) |  |  | 81,782 |  |  |  | 430,444 |  |  |  | (3,537 | ) |  |  | 426,907 |
Income (loss) before income taxes |  |  | (381,606 | ) |  |  | 2,688 |  |  |  | (378,918 | ) |  |  | (804,591 | ) |  |  | (13,170 | ) |  |  | (817,761 | )
Provision (benefit) for income taxes |  |  | (62,595 | ) |  |  | 941 |  |  |  | (61,654 | ) |  |  | (270,831 | ) |  |  | (4,610 | ) |  |  | (275,441 | )
Net income (loss) |  |  | (318,918 | ) |  |  | 1,747 |  |  |  | (317,171 | ) |  |  | (533,583 | ) |  |  | (8,560 | ) |  |  | (542,143 | )

(1) - There were no correction of errors for this line item in the period reported.

The following table summarizes the correction of the errors on the consolidated statements of operations for the years ended December 31, 2010 and 2009:

|  | Year ended December 31, 2010 |  |  | Year ended December 31, 2009 |
In thousands |  | Balance as Reported |  |  | Correction of Errors |  |  | Balance as Revised |  |  | Balance as Reported |  |  | Correction of Errors |  |  | Balance as Revised |
Revenues: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Scheduled premiums earned |  | $ | 247,123 |  |  | $ | 1,487 |  |  | $ | 248,610 |  |  | $ | 322,554 |  |  | $ | (482 | ) |  | $ | 322,072 |
Refunding premiums earned |  |  | 4,300 |  |  |  | 15,421 |  |  |  | 19,721 |  |  |  | 10,369 |  |  |  | 70,782 |  |  |  | 81,151 |
Fees, reimbursements and other |  |  | 198,714 |  |  |  | (4,574 | ) |  |  | 194,140 |  |  |  | 227,281 |  |  |  | (19,189 | ) |  |  | 208,092 |
Unrealized gains (losses) on insured derivatives |  |  | (679,101 | ) |  |  | (21,172 | ) |  |  | (700,273 | ) |  |  | 1,650,588 |  |  |  | 24,916 |  |  |  | 1,675,504 |
Revenues of consolidated variable interest entities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Net investment income |  |  | - | (1) |  |  | - | (1) |  |  | - | (1) |  |  | 96,352 |  |  |  | (75,657 | ) |  |  | 20,695 |
Net gains (losses) on financial instruments at fair value and foreign exchange |  |  | 340,836 |  |  |  | 10,065 |  |  |  | 350,901 |  |  |  | 9,459 |  |  |  | (15,116 | ) |  |  | (5,657 | )
Total revenues |  |  | 207,587 |  |  |  | 1,227 |  |  |  | 208,814 |  |  |  | 2,211,863 |  |  |  | (14,746 | ) |  |  | 2,197,117 |
Amortization of deferred acquisition costs |  |  | 149,822 |  |  |  | (3,885 | ) |  |  | 145,937 |  |  |  | 216,477 |  |  |  | (11,332 | ) |  |  | 205,145 |
Total expenses |  |  | 642,094 |  |  |  | (3,885 | ) |  |  | 638,209 |  |  |  | 1,389,137 |  |  |  | (11,332 | ) |  |  | 1,377,805 |
Income (loss) before income taxes |  |  | (434,507 | ) |  |  | 5,112 |  |  |  | (429,395 | ) |  |  | 822,726 |  |  |  | (3,414 | ) |  |  | 819,312 |
Provision (benefit) for income taxes |  |  | (149,978 | ) |  |  | 1,789 |  |  |  | (148,189 | ) |  |  | 312,008 |  |  |  | (1,195 | ) |  |  | 310,813 |
Net income (loss) |  |  | (284,193 | ) |  |  | 3,323 |  |  |  | (280,870 | ) |  |  | 511,204 |  |  |  | (2,219 | ) |  |  | 508,985 |

(1) - There were no correction of errors for this line item in the period reported.

The following table summarizes the correction of the errors on the consolidated balance sheet as of June 30, 2011:

|  | As of June 30, 2011 |
In thousands |  | Balance as Reported |  |  | Correction of Errors |  |  | Balance as Revised |
Assets: |  |  |  |  |  |  |  |  |  |  |  |
Current income taxes |  | $ | 6,062 |  |  | $ | (6,062 | ) |  | $ | - |
Deferred income taxes |  |  | 1,603,332 |  |  |  | (25,116 | ) |  |  | 1,578,216 |
Other assets |  |  | 29,642 |  |  |  | 87,271 |  |  |  | 116,913 |
Total assets |  |  | 23,884,019 |  |  |  | 56,093 |  |  |  | 23,940,112 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |
Current income taxes |  |  | - |  |  |  | 17,750 |  |  |  | 17,750 |
Total liabilities |  |  | 23,899,048 |  |  |  | 17,750 |  |  |  | 23,916,798 |
Equity: |  |  |  |  |  |  |  |  |  |  |  |
Retained (deficit) earnings |  |  | (1,064,336 | ) |  |  | 38,236 |  |  |  | (1,026,100 | )
Accumulated other comprehensive income (loss) |  |  | 22,009 |  |  |  | 107 |  |  |  | 22,116 |
Total equity |  |  | (15,029 | ) |  |  | 38,343 |  |  |  | 23,314 |
Total liabilities and equity |  |  | 23,884,019 |  |  |  | 56,093 |  |  |  | 23,940,112 |

9

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 2: Revision of Prior Periods’ Consolidated Financial Statements (continued)

The following table summarizes the correction of the errors on the consolidated balance sheet as of March 31, 2011. The table also presents separately the effect of the previous revision for certain insured credit derivatives for the quarter ended March 31, 2011. Refer to notes to Consolidated Financial Statements of MBIA Corp. included in Exhibit 99.2 of MBIA Inc.’s Form 10-Q for quarter ended June 30, 2011 for further information regarding the effect of the previous revision for the quarter ended March 31, 2011.

|  | As of March 31, 2011 |
In thousands |  | Balance as Reported |  |  | First Quarter Correction |  |  | Balance Previously Revised |  |  | Current Period Error Correction |  |  | Balance Currently Revised |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Current income taxes |  | $ | 21,088 |  |  | $ | - |  |  | $ | 21,088 |  |  | $ | (21,088 | ) |  | $ | - |
Deferred income taxes |  |  | 1,459,321 |  |  |  | 72,610 |  |  |  | 1,531,931 |  |  |  | (5,932 | ) |  |  | 1,525,999 |
Other assets |  |  | 52,721 |  |  |  | - |  |  |  | 52,721 |  |  |  | 84,984 |  |  |  | 137,705 |
Assets of consolidated variable interest entities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Derivative assets |  |  | 715,301 |  |  |  | 107,741 |  |  |  | 823,042 |  |  |  | - |  |  |  | 823,042 |
Total assets |  |  | 24,255,970 |  |  |  | 180,351 |  |  |  | 24,436,321 |  |  |  | 57,964 |  |  |  | 24,494,285 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Derivative liabilities |  |  | 5,886,623 |  |  |  | 207,474 |  |  |  | 6,094,097 |  |  |  | - |  |  |  | 6,094,097 |
Current income taxes |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 2,724 |  |  |  | 2,724 |
Liabilities of consolidated variable interest entities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Derivative liabilities |  |  | 1,910,065 |  |  |  | 107,741 |  |  |  | 2,017,806 |  |  |  | - |  |  |  | 2,017,806 |
Total liabilities |  |  | 24,094,252 |  |  |  | 315,215 |  |  |  | 24,409,467 |  |  |  | 2,724 |  |  |  | 24,412,191 |
Equity: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Retained (deficit) earnings |  |  | (876,676 | ) |  |  | (134,864 | ) |  |  | (1,011,540 | ) |  |  | 55,240 |  |  |  | (956,300 | )
Total equity |  |  | 161,718 |  |  |  | (134,864 | ) |  |  | 26,854 |  |  |  | 55,240 |  |  |  | 82,094 |
Total liabilities and equity |  |  | 24,255,970 |  |  |  | 180,351 |  |  |  | 24,436,321 |  |  |  | 57,964 |  |  |  | 24,494,285 |

The following table summarizes the correction of the errors on the consolidated balance sheet as of December 31, 2010:

|  | As of December 31, 2010 |
In thousands |  | Balance as Reported |  |  | Correction of Errors |  |  | Balance as Revised |
Assets: |  |  |  |  |  |  |  |  |  |  |  |
Current income taxes |  | $ | 20,282 |  |  | $ | (20,282 | ) |  | $ | - |
Deferred income taxes |  |  | 881,640 |  |  |  | (10,509 | ) |  |  | 871,131 |
Other assets |  |  | 65,518 |  |  |  | 84,254 |  |  |  | 149,772 |
Total assets |  |  | 24,067,720 |  |  |  | 53,463 |  |  |  | 24,121,183 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |
Derivative liabilities |  |  | 4,504,978 |  |  |  | (3,744 | ) |  |  | 4,501,234 |
Current income taxes |  |  | - |  |  |  | 3,530 |  |  |  | 3,530 |
Liabilities of consolidated variable interest entities: |  |  |  |  |  |  |  |  |  |  |  |
Variable interest entity notes |  |  | 9,521,208 |  |  |  | (10,065 | ) |  |  | 9,511,143 |
Total liabilities |  |  | 22,856,649 |  |  |  | (10,279 | ) |  |  | 22,846,370 |
Equity: |  |  |  |  |  |  |  |  |  |  |  |
Retained earnings |  |  | 166,401 |  |  |  | 63,742 |  |  |  | 230,143 |
Total equity |  |  | 1,211,071 |  |  |  | 63,742 |  |  |  | 1,274,813 |
Total liabilities and equity |  |  | 24,067,720 |  |  |  | 53,463 |  |  |  | 24,121,183 |

10

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 3: Significant Accounting Policies

MBIA Corp. has disclosed its significant accounting policies in “Note 2: Significant Accounting Policies” in the Notes to Consolidated Financial Statements included in Exhibit 99.3 to MBIA Inc.’s Annual Report on Form 10-K for the year ended December 31, 2010. The following significant accounting policies provide an update to those included under the same captions in Exhibit 99.3 to MBIA Inc.’s Annual Report on Form 10-K.

Basis of Presentation

The accompanying unaudited interim consolidated financial statements do not include all of the information and disclosures required by GAAP for annual periods. These statements should be read in conjunction with MBIA Corp.’s consolidated financial statements and notes thereto included in Exhibit 99.3 to MBIA Inc.’s Annual Report on Form 10-K for the year ended December 31, 2010. The accompanying consolidated financial statements have not been audited by an independent registered public accounting firm in accordance with the standards of the Public Company Accounting Oversight Board (U.S.), but in the opinion of management such financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for the fair statement of MBIA Corp.’s consolidated financial position and results of operations.

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. As additional information becomes available or actual amounts become determinable, the recorded estimates are revised and reflected in operating results.

The results of operations for the three and nine months ended September 30, 2011 may not be indicative of the results that may be expected for the year ending December 31, 2011. The December 31, 2010 balance sheet was derived from audited financial statements, but does not include all disclosures required by GAAP for annual periods. Certain amounts have been reclassified in prior years’ financial statements to conform to the current presentation. Such reclassifications had no impact on total revenues, expenses, assets, liabilities, or shareholders’ equity for all periods presented.

In addition, MBIA Corp. has evaluated all subsequent events as of November 9, 2011, the date of issuance of the consolidated financial statements, for inclusion in MBIA Corp.’s consolidated financial statements and/or accompanying notes.

Note 4: Recent Accounting Pronouncements

Recently Adopted Accounting Standards

Improving Disclosures about Fair Value Measurements (Accounting Standards Update 2010-06)

In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements,” to require additional disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements. The standard also clarifies existing disclosures about the level of disaggregation, valuation techniques and inputs to fair value measurements. MBIA Corp. adopted this standard as of the first quarter of 2010 except for the requirement to provide the Level 3 activity of purchases, sales, issuances and settlements on a gross basis, which was adopted in the first quarter of 2011. As this standard only affects disclosures related to fair value, the adoption of this standard did not affect MBIA Corp.’s consolidated balance sheets, results of operations, or cash flows. Refer to “Note 7: Fair Value of Financial Instruments” for these disclosures.

Refer to the Notes to Consolidated Financial Statements included in Exhibit 99.3 to MBIA Inc.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010 for further information regarding the effects of recently adopted accounting standards on prior year financials.

11

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 4: Recent Accounting Pronouncements (continued)

Recent Accounting Developments

Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts (ASU 2010-26)

In October 2010, the FASB issued ASU 2010-26, “Financial Services – Insurance (Topic 944): Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts.” This amendment specifies which costs incurred in the acquisition of new and renewal insurance contracts should be capitalized. The new guidance is effective for MBIA Corp. beginning January 1, 2012 with early adoption as of January 1, 2011 permitted. MBIA Corp. did not early adopt the guidance as of January 1, 2011. The adoption of this standard will not have a material effect on MBIA Corp.’s consolidated balance sheet, results of operations, or cash flows.

Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (ASU 2011-04)

In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” This amendment results in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between GAAP and International Financial Reporting Standards. The new guidance is effective for MBIA Corp. beginning January 1, 2012. This standard is expected to only affect MBIA Corp.’s disclosures related to fair value; therefore, the adoption of this standard is not expected to affect MBIA Corp.’s consolidated balance sheets, results of operations, or cash flows.

Presentation of Comprehensive Income (ASU 2011-05)

In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income.” This amendment eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. The amendment does not change what currently constitutes net income and other comprehensive income. The new guidance is effective for MBIA Corp. beginning January 1, 2012. This standard will only affect MBIA Corp.’s presentation of comprehensive income and will not affect MBIA Corp.’s consolidated balance sheets, results of operations, or cash flows.

Note 5: Variable Interest Entities

An assessment of a controlling financial interest identifies the primary beneficiary as the variable interest holder that has both of the following characteristics (i) the power to direct the activities of the variable interest entity (“VIE”) that most significantly impact the entity’s economic performance, and (ii) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. The primary beneficiary is required to consolidate the VIE. An ongoing reassessment of controlling financial interest is required to be performed based on any substantive changes in facts and circumstances involving the VIE and its variable interests. MBIA Corp. evaluates issuer-sponsored special purpose entities initially to determine if an entity is a VIE, and is required to reconsider its initial determination if certain events occur. For all entities determined to be VIEs, MBIA Corp. performs an ongoing reassessment to determine whether its guarantee to provide credit protection on obligations issued by VIEs provides MBIA Corp. with a controlling financial interest. Based on its ongoing reassessment of controlling financial interest, MBIA Corp. determines whether a VIE is required to be consolidated or deconsolidated.

MBIA Corp. makes its determination for consolidation based on a qualitative assessment of the purpose and design of a VIE, the terms and characteristics of variable interests of an entity, and the risks a VIE is designed to create and pass through to holders of variable interests. MBIA Corp. generally provides credit protection on obligations issued by VIEs, and holds certain contractual rights according to the purpose and design of a VIE. MBIA Corp. may have the ability to direct certain activities of a VIE depending on facts and circumstances, including the occurrence of certain contingent events, and these activities may be considered the activities of a VIE that most significantly impact the entity’s economic performance. MBIA Corp. generally considers its guarantee of principal and interest payments of insured obligations, given nonperformance by a VIE, to be an obligation to absorb losses of the entity that could potentially be significant to the VIE. At the time MBIA Corp. determines it has the ability to direct the activities of a VIE that most significantly impact the economic performance of the entity based on facts and circumstances, MBIA Corp. is deemed to have a controlling financial interest in the VIE and is required to consolidate the entity as primary beneficiary. MBIA Corp. performs an ongoing reassessment of controlling financial interest that may result in consolidation or deconsolidation of any VIE.

12

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 5: Variable Interest Entities (continued)

Nonconsolidated VIEs

The following tables present the total assets of nonconsolidated VIEs in which MBIA Corp. holds a variable interest as of September 30, 2011 and December 31, 2010. The following tables present MBIA Corp.’s maximum exposure to loss for nonconsolidated VIEs as well as the value of the assets and liabilities MBIA Corp. has recorded for its interest in these VIEs as of September 30, 2011 and December 31, 2010. MBIA Corp. has aggregated nonconsolidated VIEs based on the underlying credit exposure of the insured obligation. The nature of MBIA Corp.’s variable interests in nonconsolidated VIEs is related to financial guarantees, insured credit default swaps (“CDSs”) and any investments in obligations issued by nonconsolidated VIEs.

The following table presents information related to nonconsolidated VIEs as of September 30, 2011:

|  | September 30, 2011 |
|  |  |  |  |  |  |  | Carrying Value of Assets |  |  | Carrying Value of Liabilities |
In millions |  | VIE Assets |  |  | Maximum Exposure to Loss |  |  | Investments (1) |  |  | Premiums Receivable (2) |  |  | Insurance Loss Recoverable (3) |  |  | Unearned Premium Revenue (4) |  |  | Loss and Loss Adjustment Expense Reserves (5) |  |  | Derivative Liabilities (6) |
Insurance: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Global structured finance: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Collateralized debt obligations |  | $ | 27,830 |  |  | $ | 15,690 |  |  | $ | 61 |  |  | $ | 66 |  |  | $ | - |  |  | $ | 57 |  |  | $ | - |  |  | $ | 122 |
Mortgage-backed residential |  |  | 49,725 |  |  |  | 16,537 |  |  |  | 63 |  |  |  | 88 |  |  |  | 2,505 |  |  |  | 87 |  |  |  | 469 |  |  |  | 4 |
Mortgage-backed commercial |  |  | 5,293 |  |  |  | 2,906 |  |  |  | - |  |  |  | 2 |  |  |  | - |  |  |  | 2 |  |  |  | - |  |  |  | - |
Consumer asset-backed |  |  | 8,396 |  |  |  | 4,854 |  |  |  | 17 |  |  |  | 27 |  |  |  | - |  |  |  | 26 |  |  |  | 30 |  |  |  | - |
Corporate asset-backed |  |  | 30,640 |  |  |  | 16,235 |  |  |  | 245 |  |  |  | 209 |  |  |  | 27 |  |  |  | 224 |  |  |  | - |  |  |  | 1 |
Total global structured finance |  | $ | 121,884 |  |  | $ | 56,222 |  |  | $ | 386 |  |  | $ | 392 |  |  | $ | 2,532 |  |  | $ | 396 |  |  | $ | 499 |  |  | $ | 127 |
Global public finance |  |  | 41,272 |  |  |  | 21,879 |  |  |  | - |  |  |  | 211 |  |  |  | - |  |  |  | 265 |  |  |  | - |  |  |  | - |
Total insurance |  | $ | 163,156 |  |  | $ | 78,101 |  |  | $ | 386 |  |  | $ | 603 |  |  | $ | 2,532 |  |  | $ | 661 |  |  | $ | 499 |  |  | $ | 127 |

(1) - Reported within “Investments” on MBIA Corp.’s consolidated balance sheets.

(2) - Reported within “Premiums receivable” on MBIA Corp.’s consolidated balance sheets.

(3) - Reported within “Insurance loss recoverable” on MBIA Corp.’s consolidated balance sheets.

(4) - Reported within “Unearned premium revenue” on MBIA Corp.’s consolidated balance sheets.

(5) - Reported within “Loss and loss adjustment expense reserves” on MBIA Corp.’s consolidated balance sheets.

(6) - Reported within “Derivative liabilities” on MBIA Corp.’s consolidated balance sheets.

The following table presents information related to nonconsolidated VIEs as of December 31, 2010:

|  | December 31, 2010 |
|  |  |  |  |  |  |  | Carrying Value of Assets |  |  | Carrying Value of Liabilities |
In millions |  | VIE Assets |  |  | Maximum Exposure to Loss |  |  | Investments (1) |  |  | Premiums Receivable (2) |  |  | Insurance Loss Recoverable (3) |  |  | Unearned Premium Revenue (4) |  |  | Loss and Loss Adjustment Expense Reserves (5) |  |  | Derivative Liabilities (6) |
Insurance: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Global structured finance: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Collateralized debt obligations |  | $ | 30,628 |  |  | $ | 18,068 |  |  | $ | 126 |  |  | $ | 78 |  |  | $ | - |  |  | $ | 68 |  |  | $ | - |  |  | $ | 360 |
Mortgage-backed residential |  |  | 56,828 |  |  |  | 18,494 |  |  |  | 71 |  |  |  | 95 |  |  |  | 2,270 |  |  |  | 93 |  |  |  | 598 |  |  |  | 3 |
Mortgage-backed commercial |  |  | 5,547 |  |  |  | 3,138 |  |  |  | - |  |  |  | 2 |  |  |  | - |  |  |  | 2 |  |  |  | - |  |  |  | - |
Consumer asset-backed |  |  | 11,709 |  |  |  | 6,780 |  |  |  | 19 |  |  |  | 30 |  |  |  | - |  |  |  | 29 |  |  |  | - |  |  |  | - |
Corporate asset-backed |  |  | 42,380 |  |  |  | 22,468 |  |  |  | 246 |  |  |  | 325 |  |  |  | 5 |  |  |  | 340 |  |  |  | - |  |  |  | - |
Total global structured finance |  | $ | 147,092 |  |  | $ | 68,948 |  |  | $ | 462 |  |  | $ | 530 |  |  | $ | 2,275 |  |  | $ | 532 |  |  | $ | 598 |  |  | $ | 363 |
Global public finance |  |  | 42,370 |  |  |  | 21,201 |  |  |  | - |  |  |  | 225 |  |  |  | - |  |  |  | 280 |  |  |  | - |  |  |  | - |
Total insurance |  | $ | 189,462 |  |  | $ | 90,149 |  |  | $ | 462 |  |  | $ | 755 |  |  | $ | 2,275 |  |  | $ | 812 |  |  | $ | 598 |  |  | $ | 363 |

(1) - Reported within “Investments” on MBIA Corp.’s consolidated balance sheets.

(2) - Reported within “Premiums receivable” on MBIA Corp.’s consolidated balance sheets.

(3) - Reported within “Insurance loss recoverable” on MBIA Corp.’s consolidated balance sheets.

(4) - Reported within “Unearned premium revenue” on MBIA Corp.’s consolidated balance sheets.

(5) - Reported within “Loss and loss adjustment expense reserves” on MBIA Corp.’s consolidated balance sheets.

(6) - Reported within “Derivative liabilities” on MBIA Corp.’s consolidated balance sheets.

13

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 5: Variable Interest Entities (continued)

The maximum exposure to losses as a result of MBIA Corp.’s variable interest in the VIE is represented by insurance in force. Insurance in force is the maximum future payments of principal and interest, net of cessions to reinsurers, which may be required under commitments to make payments on insured obligations issued by nonconsolidated VIEs.

Consolidated VIEs

The carrying amounts of assets and liabilities of consolidated VIEs were $10.8 billion and $9.9 billion, respectively, as of September 30, 2011 and were $12.6 billion and $11.6 billion, respectively, as of December 31, 2010. The carrying amounts of assets and liabilities are presented separately in “Assets of consolidated variable interest entities” and “Liabilities of consolidated variable interest entities.” Additional VIEs are consolidated or deconsolidated based on an ongoing reassessment of controlling financial interest, when events occur or circumstances arise, and whether the ability to exercise rights that constitute power to direct activities of any VIEs are present according to the design and characteristics of these entities. No realized gains or losses were recognized upon initial consolidation of additional VIEs during the three and the nine months ended September 30, 2011. No realized gains or losses were recognized on initial consolidation of additional VIEs during the three months ended September 30, 2010, and net realized losses of $74 million were recognized on initial consolidation of additional VIEs during the nine months ended September 30, 2010. Immaterial gains were recognized related to the deconsolidation of VIEs for the three and nine months ended September 30, 2011, and no gains or losses were recognized related to the deconsolidation of VIEs for the three and nine months ended September 30, 2010.

Holders of insured obligations of issuer-sponsored VIEs related to MBIA Corp. do not have recourse to the general assets of MBIA Corp. In the event of nonpayment of an insured obligation issued by a consolidated VIE, MBIA Corp. is obligated to pay principal and interest, when due, on the respective insured obligation only. MBIA Corp.’s exposure to consolidated VIEs is limited to the credit protection provided on insured obligations and any additional variable interests held by MBIA Corp.

Note 6: Loss and Loss Adjustment Expense Reserves

As of September 30, 2011, the majority of MBIA Corp.’s case basis reserves and insurance loss recoveries recorded in accordance with GAAP were related to insured first and second-lien RMBS transactions. These reserves and recoveries do not include estimates for policies insuring credit derivatives. Policies insuring credit derivative contracts are accounted for as derivatives and carried at fair value under GAAP. The fair values of insured derivative contracts are influenced by a variety of market and transaction-specific factors that may be unrelated to potential future claim payments under MBIA Corp.’s insurance policies. In the absence of credit impairments on insured derivative contracts, or the termination of such contracts, the cumulative unrealized losses recorded from fair valuing these contracts should reverse before or at the maturity of the contracts.

Notwithstanding the difference in accounting under GAAP for financial guarantee policies and MBIA Corp.’s insured derivatives, insured derivatives have similar terms, conditions, risks, and economic profiles to financial guarantee insurance policies, and, therefore, are evaluated by MBIA Corp. for loss (referred to as credit impairment herein) and loss adjustment expense (“LAE”) periodically in the same way that loss and LAE reserves are estimated for financial guarantee insurance policies. Credit impairments represent the present value of estimated expected future claim payments, net of recoveries, for such transactions using a discount rate of 5.93%, consistent with the calculation of MBIA Corp.’s statutory loss reserves. These credit impairments, calculated in accordance with U.S. STAT, differ from the fair values recorded in MBIA Corp.’s consolidated financial statements. MBIA Corp. regards its credit impairment estimates as critical information for investors as it provides information about loss payments MBIA Corp. expects to make on insured derivative contracts. As a result, the following loss and LAE process discussion includes information about loss and LAE activity recorded in accordance with GAAP for financial guarantee insurance policies and credit impairments estimated in accordance with U.S. STAT for insured derivative contracts.

14

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 6: Loss and Loss Adjustment Expense Reserves (continued)

Refer to “Note 6: Loss and Loss Adjustment Expense Reserves” in the Notes to Consolidated Financial Statements included in Exhibit 99.3 of MBIA Inc.’s Annual Report on Form 10-K for the year ended December 31, 2010 for information about MBIA Corp.’s monitoring of outstanding insured obligations and for a summary of its loss reserving process. Refer to “Note 7: Fair Value of Financial Instruments” for additional information about MBIA Corp.’s insured credit derivative contracts.

Loss and Loss Adjustment Expense Process

RMBS Case Basis Reserves and Recoveries

MBIA Corp.’s RMBS reserves and recoveries relate to financial guarantee insurance policies. MBIA Corp. calculated RMBS case basis reserves as of September 30, 2011 for both second-lien RMBS and first-lien RMBS transactions using a process called the “Roll Rate Methodology.” The Roll Rate Methodology is a multi-step process using a database of loan level information, a proprietary internal cash flow model, and a commercially available model to estimate expected ultimate cumulative losses on insured bonds. “Roll Rate” is defined as the probability that current loans become delinquent and that the loans in the delinquent pipeline are “charged-off” (deemed uncollectible by servicers of the transactions) or liquidated. Generally, Roll Rates are calculated for the previous three months and averaged. The loss reserve estimates are based on a probability-weighted average of three scenarios of loan losses (base case, stress case, and an additional stress case).

In calculating ultimate cumulative losses for RMBS, MBIA Corp. estimates the amount of loans that are expected to be charged-off or liquidated in the future. MBIA Corp. assumes that such charged-off loans have zero recovery values. In calculating ultimate cumulative losses for first-lien RMBS, MBIA Corp. estimates the amount of loans that are expected to be liquidated through foreclosure or short sale.

Second-lien RMBS Reserves

MBIA Corp.’s second-lien RMBS case basis reserves as of September 30, 2011, relate to RMBS backed by home equity lines of credit (“HELOCs”) and closed-end second mortgages (“CES”).

MBIA Corp. assumes that the Roll Rate for 90+ day delinquent loans is 100%. The Roll Rates for 30-59 day delinquent loans and 60-89 day delinquent loans are calculated on a transaction-specific basis. The Roll Rates are applied to the amounts in the respective delinquency buckets based on delinquencies as of August 31, 2011 to estimate future losses from loans that are delinquent as of the current reporting period.

Roll Rates for loans that are current as of August 31, 2011 (“Current Roll to Loss”) are calculated on a transaction-specific basis. A proportion of loans reported current as of August 31, 2011 is assumed to become delinquent every month, at a Current Roll to Loss rate that persists at a high level for a time and subsequently starts to decline. A key assumption in the model is the period of time in which MBIA Corp. projects high levels of Current Roll to Loss to persist. In MBIA Corp.’s base case, MBIA Corp. assumes that the Current Roll to Loss begins to decline immediately and continues to decline over the next six months to 25% of their levels as of August 31, 2011. In the stress case, the period of elevated delinquency and loss is extended by six months. In the additional stress case, MBIA Corp. assumes that the current trends in losses will remain through early 2013, after which time they will revert to the base case. For example, in the base case, as of August 31, 2011, if the amount of current loans which became 30-59 days delinquent is 10%, and recent performance suggests that 30% of those loans will be charged-off, the Current Roll to Loss for the transaction is 3%. In the base case, it is then assumed that the Current Roll to Loss will reduce linearly to 25% of its original value over the next six months (i.e., 3% will linearly reduce to 0.75% over the six months from September 2011 to March 2012). After that six-month period, MBIA Corp. further reduces the Current Roll to Loss to 0% by early 2014 with the expectation that the performing seasoned loans and an economic recovery will eventually result in loan performance reverting to historically low levels of default. In the model, MBIA Corp. assumes that all current loans that become delinquent are charged-off after six months of delinquency.

15

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 6: Loss and Loss Adjustment Expense Reserves (continued)

In addition, in MBIA Corp.’s loss reserve models for transactions secured by HELOCs, MBIA Corp. considers borrower draw and prepayment rates and factors that could reduce the excess spread generated by current loans which offset losses and reduce payments. For HELOCs, the current three-month average draw rate is generally used to project future draws on the line. For HELOCs and transactions secured by fixed-rate CES, the three-month average conditional prepayment rate is generally used to project voluntary principal prepayments. Projected cash flows are also based on an assumed constant basis spread between floating rate assets and floating rate insured debt obligations (the difference between Prime and London Interbank Offered Rate (“LIBOR”) interest rates, minus any applicable fees). For all transactions, cash flow models consider allocations and other structural aspects of the transactions, including managed amortization periods, rapid amortization periods and claims against MBIA Corp.’s insurance policy consistent with such policy’s terms and conditions. For loans that remain current (not delinquent) throughout the projection period, MBIA Corp. generally assumes that voluntary prepayments occur at the average rate experienced in the most recent three-month period. In developing multiple loss scenarios, stress is applied by elongating the Current Roll to Loss rate for various periods, simulating a slower improvement in the transaction performance. The estimated net claims from the procedure above are then discounted using a risk-free rate to a net present value reflecting MBIA Corp.’s general obligation to pay claims over time and not on an accelerated basis. The above assumptions represent MBIA Corp.’s best estimates of how transactions will perform over time.

MBIA Corp. monitors portfolio performance on a monthly basis against projected performance, reviewing delinquencies, Roll Rates, and prepayment rates (including voluntary and involuntary). However, given the large percentage of mortgage loans that were not underwritten by the sellers/servicers in accordance with applicable underwriting guidelines, performance remains difficult to predict and losses may exceed expectations. In the event of a material deviation in actual performance from projected performance, MBIA Corp. would increase or decrease the case basis reserves accordingly. If actual performance were to remain at the peak levels MBIA Corp. is modeling for six months longer than in the probability-weighted outcome, the addition to the case basis reserves before considering potential recoveries would be approximately $110 million.

Since the third quarter of 2009, paid claims in each month have been somewhat below that projected in MBIA Corp.’s model. MBIA Corp. has not modified its expectations to reflect this lower paid claims rate. The difference between actual and projected paid claims has not been significant.

First-lien RMBS Reserves

MBIA Corp.’s first-lien RMBS case basis reserves as of September 30, 2011, which relate to RMBS backed by alternative A-paper (“Alt-A”) and subprime transactions were also determined using Roll Rate Methodology. MBIA Corp. assumes that the Roll Rate for loans in foreclosure, Real Estate Owned (“REO”) and bankruptcy are 90%, 90% and 75%, respectively. Roll Rates for current, 30-59 day delinquent loans, 60-89 day delinquent loans and 90+ day delinquent loans are calculated on a transaction-specific basis. Current Roll to Loss stays at the August 31, 2011 level for three months before declining to 25% of this level over a 24-month period. Additionally, MBIA Corp. runs scenarios where the 90+ day roll rate to loss is set at 90%. The Roll Rates are applied to the amounts in the respective delinquency buckets based on delinquencies as of August 31, 2011 to estimate future losses from loans that are delinquent as of the current reporting period.

The timelines to liquidation for defaulted loans are specific to a loan’s delinquency bucket with the latest three-month average loss severities generally used to calculate losses at loan liquidation. The loss severities are reduced over time to account for reduction in the amount of foreclosure inventory, future increases in home prices, and principal amortization of the loans.

16

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 6: Loss and Loss Adjustment Expense Reserves (continued)

RMBS Recoveries

As of September 30, 2011, MBIA Corp. recorded estimated recoveries of $2.8 billion, gross of income taxes, related to second-lien RMBS put-back claims on ineligible loans, consisting of $1.9 billion included in “Insurance loss recoverable” and $938 million included in “Loan repurchase commitments” presented under the heading “Assets of consolidated variable interest entities” on MBIA Corp.’s consolidated balance sheets. As of September 30, 2011 and December 31, 2010, MBIA Corp.’s estimated recoveries after income taxes calculated at the federal statutory rate of 35%, were $1.8 billion and $1.6 billion, respectively, which was 440% and 128% of the consolidated total shareholders’ equity of MBIA Corp., respectively. The percentage increase of recoveries relative to shareholders’ equity was principally driven by realized losses on insured derivatives, unrealized losses on insured derivatives as a result of MBIA Corp.’s nonperformance risk on the derivative liabilities and an increase in recorded estimated recoveries related to put-back claims of ineligible loans. As of September 30, 2011 and December 31, 2010, the related statutory measures were 69% and 59%, respectively, of the statutory capital of MBIA Corp. These estimated recoveries relate to MBIA Corp.’s put-back claims of ineligible loans, which have been disputed by the loan sellers/servicers and are currently subject to litigation initiated by MBIA Corp. to pursue recovery. While MBIA Corp. believes that it will prevail in enforcing its contractual rights, there is uncertainty with respect to the ultimate outcome. Furthermore, there is a risk that sellers/servicers or other responsible parties might not be able to satisfy their put-back obligations. However, there can be no assurance that MBIA Corp. will successfully make recoveries on its contract claims.

Beginning in 2008, MBIA Corp. utilized loan level forensic review consultants to re-underwrite/review mortgage loan files underlying certain first and second-lien RMBS transactions insured by MBIA Corp. The consultants graded the individual mortgages that were sampled into an industry standard three level grading scale, defined as (i) Level 1—loans complied with specific underwriting guidelines, (ii) Level 2—loans contained some deviation from underwriting guidelines but also contained sufficient compensating factors and (iii) Level 3—loans contained material deviation from the underwriting guidelines without any compensating factors. MBIA Corp.’s forensic review consultants utilized the same underwriting guidelines that the originators were to have used to qualify borrowers when originally underwriting the loans and determined that more than 80% of the loans reviewed were considered to be ineligible mortgage loans. MBIA Corp. has developed estimates of breach rates primarily based upon loans with credit breaches or credit and compliance breaches because MBIA Corp. believes that loans with these types of breaches are not judgmental and cannot be cured. Breach rates were determined by dividing the number of loans that contained credit and/or credit and compliance breaches by the total number of loans reviewed for a particular transaction.

Recent legal decisions have led MBIA Corp. to conclude that the practice of reviewing individual loans for purpose of assessing put-back recoveries is no longer necessary. First, MBIA Corp. determined that a sufficient number of loans in each securitization have already been reviewed to demonstrate widespread breaches of the contractual provisions of the agreements with the sponsors. Second, MBIA Corp. received a favorable decision on its motion in limine addressing the use of sampling in the Countrywide litigation (MBIA Insurance Corp. v. Countrywide Home Loans, Inc., et al, Index No. 602825/08 (N.Y. Sup. Ct.)). That decision provided that MBIA Corp. can present representative samples of loans from each of the securitizations at issue in the case to establish its causes of action, including its breach-of-contract claims. Further, in May 2011, the court in MBIA Insurance Corp. v. Morgan Stanley, et al, Index No. 29951-10 (N.Y. Sup. Ct.) confirmed recent precedent and held that MBIA Corp. is not limited to a loan-by-loan put-back remedy and can seek a pool-wide remedy based on sampling and extrapolation.

Based upon the above-referenced developments, MBIA Corp. utilizes probability-based scenarios primarily based on the percentage of incurred losses MBIA Corp. expects to collect as opposed to recoveries based primarily on loan file reviews. MBIA Corp.’s recovery estimates are based on five scenarios that include full recovery of its incurred losses and limited/reduced recoveries due to litigation delays and risks and/or potential financial distress of the sellers/servicers. Probabilities were assigned across these scenarios, with most of the probability weight on partial recovery scenarios. However, based on MBIA Corp.’s assessment of the strength of its contract claims, MBIA Corp. believes it is entitled to collect the full amount of its incurred losses on these transactions, which totaled $4.6 billion through September 30, 2011.

MBIA Corp. has not recognized potential recoveries related to sellers/servicers that MBIA Corp. has determined did not have sufficient capital and resources to honor their obligations. MBIA Corp. assesses the financial abilities of the sellers/servicers using external credit ratings and other factors. The impact of such factors on cash flows related to expected recoveries is incorporated into MBIA Corp.’s probability-weighted scenarios. The indicative scenarios and related probabilities assigned to each scenario based on MBIA Corp.’s judgment about their relative likelihoods of being realized are used to develop a distribution of possible outcomes. The sum of the probabilities assigned to all scenarios is 100%. Expected cash inflows from recoveries are discounted using the current risk-free rate associated with the underlying transaction, which ranged from 0.75% to 2.06%, depending upon the transaction’s expected average life.

17

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 6: Loss and Loss Adjustment Expense Reserves (continued)

MBIA Corp.’s potential recoveries are typically based on either salvage rights, the rights conferred to MBIA Corp. through the transactional documents (inclusive of the insurance agreement), or subrogation rights embedded within financial guarantee insurance policies. The second-lien RMBS transactions with respect to which MBIA Corp. has estimated put-back recoveries provide MBIA Corp. with such rights. Expected salvage and subrogation recoveries, as well as recoveries from other remediation efforts, reduce MBIA Corp.’s claim liability. Once a claim payment has been made, the claim liability has been satisfied and MBIA Corp.’s right to recovery is no longer considered an offset to future expected claim payments, but is recorded as a salvage asset. The amount of recoveries recorded by MBIA Corp. is limited to paid claims plus the present value of projected future claim payments. As claim payments are made, the recorded amount of potential recoveries may exceed the remaining amount of claim liability for a given policy.

To date, sellers/servicers have not substituted loans which MBIA Corp. has put back, and the amount of loans repurchased has been insignificant. The unsatisfactory resolution of these put-backs has led MBIA Corp. to initiate litigation against five of the sellers/servicers to enforce their obligations. MBIA Corp. has alleged several causes of action in its complaints, including breach of contract, fraudulent inducement and indemnification. MBIA Corp.’s aggregate $2.8 billion of estimated potential recoveries do not include damages from causes of action other than breach of contract. Irrespective of amounts recorded in its financial statements, MBIA Corp. is seeking to recover the full amount of its incurred losses and other damages on these transactions. Currently, MBIA Corp. has received five decisions with regard to the motions to dismiss MBIA Corp.’s claims. On each motion, the respective New York State Supreme Court denied the defendants’ motions to dismiss, allowing each of the cases to proceed on, at minimum, the fraud and breach-of-contract claims. In one of those cases, MBIA Insurance Corp. v. Credit Suisse Securities et al., Index No. 603751/09E (N.Y. Sup. Ct.), the court had issued two previous inconsistent rulings on defendants’ motion to dismiss the fraud claim. On October 13, 2011, the Court confirmed that MBIA Corp. can proceed to litigate the fraud claims. Additional information on the status of these litigations can be found in the “Recovery Litigation” discussion within “Note 12: Commitments and Contingencies.”

MBIA Corp.’s assessment of the recovery outlook for insured second-lien RMBS issues is principally based on the following factors:

| 1. | the strength of MBIA Corp.’s existing contract claims related to ineligible loan substitution/repurchase obligations;

| 2. | the settlement for $1.1 billion of Assured Guaranty’s put-back related claims with Bank of America in April 2011;

| 3. | the improvement in the financial strength of the sellers/servicers due to mergers and acquisitions and/or government assistance, which should facilitate their ability to comply with required loan repurchase/substitution obligations. MBIA Corp. is not aware of any provisions that explicitly preclude or limit the successors’ obligations to honor the obligations of the original sponsor. MBIA Corp.’s assessment of any credit risk associated with these sponsors (or their successors) is reflected in MBIA Corp.’s probability-weighted potential recovery scenarios;

| 4. | evidence of loan repurchase/substitution compliance by sellers/servicers for put-back requests made by other harmed parties with respect to ineligible loans; this factor is further enhanced by (i) Bank of America’s disclosure that it has resolved $8.0 billion of repurchase requests in the fourth quarter of 2010; (ii) the Fannie Mae settlements with Ally Bank announced on December 23, 2010 and with Bank of America (which also involved Freddie Mac) announced on December 31, 2010, and (iii) MBIA Corp.’s settlement agreement entered into on July 16, 2010 between MBIA Corp. and the sponsor of several MBIA-insured mortgage loan securitizations in which MBIA Corp. received a payment in exchange for a release relating to its representation and warranty claims against the sponsor. This settlement also resolved all of MBIA Corp.’s representation and warranty claims against the sponsor on mutually beneficial terms and is substantially consistent with the recoveries previously recorded by MBIA Corp. related to these exposures;

| 5. | the favorable outcome for MBIA Corp. on defendants’ motions to dismiss in the actions captioned MBIA Insurance Corp. v. Countrywide Home Loans, Inc., et al, Index No. 602825/08 (N.Y. Sup. Ct.), MBIA Insurance Corp. v. Residential Funding Co., LLC, Index No. 603552/08 (N.Y. Sup. Ct.), MBIA v. GMAC Mortgage LLC, Index No. 600837/10E (N.Y. Sup. Ct.), MBIA Insurance Corp. v. Credit Suisse Securities et al., Index No. 603751/09E (N.Y. Sup. Ct.) and MBIA Insurance Corp. v. Morgan Stanley, et al, Index No. 29951-10 (N.Y. Sup. Ct.), where the respective courts each allowed MBIA Corp.’s fraud claims against the Countrywide, RFC, GMAC, Credit Suisse and Morgan Stanley defendants to proceed;

| 6. | the favorable outcome for MBIA Corp. on its motion to present evidence of Countrywide’s liability and damages through the introduction of statistically valid random samples of loans rather than on a loan-by-loan basis;

| 7. | the unanimous ruling from the New York State Appellate Division, First Department in the Countrywide litigation allowing MBIA Corp. to pursue its fraud claims; and

| 8. | loan repurchase reserves and/or settlements which have been publicly disclosed by certain sellers/servicers to cover such obligations.

18

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 6: Loss and Loss Adjustment Expense Reserves (continued)

MBIA Corp. continues to consider all relevant facts and circumstances, including the factors described above, in developing its assumptions on expected cash inflows, probability of potential recoveries (including the outcome of litigation) and recovery period. The estimated amount and likelihood of potential recoveries are expected to be revised and supplemented as developments in the pending litigation proceedings occur or new litigation is initiated. While MBIA Corp. believes it will be successful in realizing recoveries from contractual and other claims, the ultimate amounts recovered may be materially different from those recorded by MBIA Corp. given the inherent uncertainty of the manner of resolving the claims (e.g., litigation) and the assumptions used in the required estimation process for accounting purposes which are based, in part, on judgments and other information that are not easily corroborated by historical data or other relevant benchmarks.

All of MBIA Corp.’s policies insuring second-lien RMBS for which litigation has been initiated against sellers/servicers are in the form of financial guarantee insurance contracts. MBIA Corp. has not recorded a gain contingency with respect to pending litigation.

Credit Impairments Related to Structured CMBS Pools and CRE CDOs Accounted for as Derivatives

Most of the structured CMBS pools and CRE CDOs insured by MBIA Corp. are accounted for as insured credit derivatives and are carried at fair value in MBIA Corp.’s consolidated financial statements. The following discussion provides information about MBIA Corp.’s process for estimating credit impairments on these contracts using its statutory reserve methodology. For the nine months ended September 30, 2011, additional credit impairments on structured CMBS pools and CRE CDO portfolios was estimated to be $858 million as a result of additional delinquencies and loan level liquidations, as well as continued refinements of MBIA Corp.’s assessment of various commutation possibilities. The aggregate credit impairment on structured CMBS pools and CRE CDO portfolios were estimated to be $2.0 billion through September 30, 2011. The impairment is estimated using MBIA Corp.’s statutory loss reserve methodology, determined as the present value of the probability-weighted potential future losses, net of estimated recoveries, across multiple scenarios as described below. Although the pace of increases in the delinquency rate has slowed and many loans are being modified, liquidations have taken place. Some loans were liquidated with minimal losses of 1% to 2% while others experienced near complete losses. These have led to losses in the CMBS market, and in many cases, have resulted in reductions of enhancement to the individual insured CMBS bonds secured by the structured CMBS pools. In certain insured transactions, these losses have resulted in deductible erosion. Bond level enhancement and pool level deductibles are structural features intended to mitigate losses to MBIA Corp. and as that protection erodes, impairments increase even in the absence of significant further collateral deterioration.

In the CRE CDO portfolio, transaction specific structures require managers to report reduced enhancement according to certain guidelines which often include downgrades even when the bond is still performing. As a result, as well as additional collateral defaults, reported enhancement has been reduced significantly in some CRE CDOs. Moreover, many of the CRE CDO positions are amortizing more quickly than originally expected as most or all interest that would have been allocated to more junior classes within the CDO have been diverted and redirected to pay down the senior most classes insured by MBIA Corp.

MBIA Corp. has developed multiple scenarios to consider the range of potential outcomes in the CRE market and their impact on MBIA Corp. The approaches require substantial judgments about the future performance of the underlying loans, and include the following:

| • |  | The first approach considers the range of commutations achieved in the course of 2010 and through the second quarter of 2011, which included commutations of 22 structured CMBS pools and CRE CDO policies totaling $10.3 billion of gross insured exposure. MBIA Corp. considers the range of commutations achieved over the past several years with multiple counterparties. This approach results in an estimated price to commute the remaining policies with price estimates, based on this experience. It is customized by counterparty and is dependent on the level of dialogue with the counterparty and the credit quality of the underlying exposure.

19

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 6: Loss and Loss Adjustment Expense Reserves (continued)

| • |  | The second approach considers current delinquency rates and uses current and projected net operating income (“NOI”) and capitalization rates (“Cap Rates”) to project losses under three scenarios. In the first scenario, NOI and Cap Rates remain flat with no improvement over the remaining life of the loans (often five to six more years). In the second and third scenarios, loans are stratified by size with larger loans being valued utilizing lower Cap Rates than for smaller loans. These scenarios also assume that Cap Rates and NOIs remain flat for the near term and then begin to improve slowly. Additionally, in these scenarios, any loan with a balance greater than $75 million with a debt service coverage ratio less than 1.0x or that was reported as being in any stage of delinquency, was reviewed individually so that performance and loss severity could be more accurately determined. Specific loan level assumptions for this large loan subset were then incorporated into this scenario, as well as certain smaller loans when there appeared to be a material change in the asset’s financial or delinquency performance over the preceding three months. The second and third scenarios project different levels of additional defaults with respect to loans that are current. This approach relies heavily on year-end financial statements at the property level. In modeling these scenarios, MBIA Corp. has received financial statements for year-end 2010 for 80% of the properties in the pools.

| • |  | The third approach stratifies loans into debt service coverage buckets and projects defaults by using probabilities implied by a third-party default study for each bucket and relies on year-end financial statements at the property level. The implied defaults are converted into losses using a loss severity assumption. As MBIA Corp. continues to see more current market performance statistics regarding modifications and liquidations in this cycle, MBIA Corp. will continue to de-emphasize this more actuarial-based approach and focus more on those scenarios which best reflect current market observations.

| • |  | The fourth approach stratifies loans into buckets based on delinquency status (including a “current” bucket) and utilizes recent Roll Rates actually experienced within each of the commercial mortgage-backed index (“CMBX”) series in order to formulate an assumption to predict future delinquencies. Ultimately, this generates losses over a projected time horizon based on the assumption that loss severities will begin to decline from the high levels seen in 2010 and early 2011. MBIA Corp. further examines those loans referenced in the CMBX indices which were categorized as 90+ day delinquent or in the process of foreclosure and determined the monthly ratio of such loans which were cured versus those which were liquidated or still delinquent between December 2008 and August 2011. MBIA Corp. then applies the most recent rolling six-month average of this cure ratio to all loans in the 90+ day delinquent bucket or in the foreclosure process (and those projected to roll into late stage delinquency from the current and lesser stage levels of delinquency) and assumes all other loans are liquidated. MBIA Corp. assumes all loans in the REO category liquidate over the next twelve months.

The loss severities projected by these scenarios vary widely, from moderate to substantial losses. MBIA Corp. assigns a wide range of probabilities to these scenarios, with lower severity scenarios being weighted more heavily than higher severity scenarios. This reflects the view that liquidations will continue to be mitigated by loan extensions and modifications, and that property values and NOIs have bottomed for many sectors and markets in the U.S. Beginning with the first quarter of 2010 through September 30, 2011, the probability-weighted loss estimate was $2.0 billion, and is inclusive of any claim or settlement payments. As macroeconomic stress escalates, including the possibility of a “double dip” recession, higher delinquencies, higher levels of liquidations of delinquent loans and/or higher severities of loss upon liquidation, MBIA Corp. may incur substantial additional losses. MBIA Corp. believes the likelihood of a double dip recession has increased since the second quarter of 2011 and has weighted its highest severity more heavily than in prior quarters. The weighting of these scenarios are customized by counterparty.

Actual losses will be a function of the proportion of loans in the pools that are foreclosed and liquidated and the loss severities associated with those liquidations. If the deductibles in MBIA Corp.’s insured transactions and underlying referenced CMBS transactions are fully eroded, additional property level losses upon foreclosures and liquidations could result in substantial losses for MBIA Corp. Since foreclosures and liquidations have only begun to take place during this economic cycle, particularly for larger properties, ultimate loss rates remain uncertain. Whether CMBS collateral is included in a structured pool or in a CRE CDO, MBIA Corp. believes the modeling related to the underlying bond should be the same.

ABS CDOs

MBIA Corp.’s insured ABS CDOs are transactions that include a variety of collateral ranging from corporate bonds to structured finance assets (which includes but is not limited to RMBS related collateral, CDOs of ABS, corporate CDOs and collateralized loan obligations). These transactions were insured as either financial guarantee insurance policies or credit derivatives with the majority insured in the form of credit derivatives. Since the fourth quarter of 2007, MBIA Corp.’s insured par exposure within the ABS CDO portfolio has been substantially reduced through a combination of terminations and commutations. Accordingly, as of September 30, 2011, the insured par exposure of the ABS CDO portfolio has declined by approximately 80% of the insured amount as of December 31, 2007.

20

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 6: Loss and Loss Adjustment Expense Reserves (continued)

MBIA Corp.’s ABS CDOs originally benefited from two sources of credit enhancement. First, the subordination in the underlying securities collateralizing the transaction must be fully eroded and second, the subordination below the insured tranche in the CDO transaction must be fully eroded before the insured tranche is subject to a claim. MBIA Corp.’s payment obligations after a default vary by transaction and by insurance type.

The primary factor in estimating reserves associated with insured ABS CDO policies written as financial guarantees or insured credit derivatives is the losses associated with the underlying collateral in the transactions. MBIA Corp.’s approach to establishing reserves in this portfolio employs a methodology which is similar to other structured finance asset classes insured by MBIA Corp. MBIA Corp. uses a total of five probability weighted scenarios (which range from a commutation based scenarios to a lengthened RMBS liquidation scenario) in order to estimate its reserves for ABS CDOs. As of September 30, 2011, MBIA Corp. had loss and LAE reserves totaling $179 million and insurance loss recoverables of $92 million related to financial guarantee insurance policies. In addition, MBIA Corp. estimated insured credit derivative impairments and LAE reserves, net of reinsurance and recoveries, totaling $511 million. For the nine months ended September 30, 2011, MBIA Corp. incurred $51 million of losses and LAE expense related to financial guarantee insurance policies after the elimination of $79 million as a result of consolidating VIEs. Estimated losses and LAE incurred related to insured credit derivative impairments was a benefit of $484 million for the nine months ended September 30, 2011, which was primarily due to commutations of credit derivative exposures at less than estimated reserves. In the event of further deteriorating performance of the collateral referenced or held in ABS CDO transactions, the amount of losses estimated by MBIA Corp. could increase materially.

Loss and LAE Activity

Financial Guarantee Insurance Losses (Non-Derivative)

MBIA Corp.’s financial guarantee insurance losses and LAE for the nine months ended September 30, 2011 are presented in the following table:

|  | Nine Months Ended September 30, 2011 |
Losses and LAE In millions |  | Second-lien RMBS |  |  | Other |  |  | Total |
Losses and LAE related to actual and expected payments |  | $ | 157 |  |  | $ | 98 |  |  | $ | 255 |
Recoveries of actual and expected payments |  |  | (122 | ) |  |  | 73 |  |  |  | (49 | )
Gross losses incurred |  |  | 35 |  |  |  | 171 |  |  |  | 206 |
Reinsurance |  |  | 0 |  |  |  | (6 | ) |  |  | (6 | )
Losses and LAE |  | $ | 35 |  |  | $ | 165 |  |  | $ | 200 |

The second-lien RMBS losses and LAE related to actual and expected payments included in the preceding table comprise net increases of previously established reserves. The second-lien RMBS recoveries of actual and expected payments comprise $198 million in recoveries resulting from ineligible mortgage loans included in insured exposures that are subject to contractual obligations by sellers/servicers to repurchase or replace such mortgages, offset by a $76 million reduction in excess interest cash flows from the securitizations. Other losses and LAE were primarily driven by first-lien RMBS mortgage and ABS CDO transactions as a result of continued credit deterioration within those sectors. Additionally, the reversal of loss and LAE reserves related to lower expected future claim payments from an insured tax-backed transaction were offset by the reversal of the corresponding recoveries of such payments.

Current period changes in MBIA Corp.’s estimate of potential recoveries may impact the amount recorded as an insurance loss recoverable asset, the amount of expected recoveries on unpaid losses netted against the gross loss and LAE reserve liability, or both. Total paid losses, net of reinsurance and collections, for the nine months ended September 30, 2011 was $525 million, including $463 million related to insured second-lien RMBS transactions. For the nine months ended September 30, 2011, the increase in insurance loss recoverable related to paid losses totaled $158 million, and primarily related to insured second-lien RMBS transactions.

21

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 6: Loss and Loss Adjustment Expense Reserves (continued)

The following table provides information about the financial guarantees and related claim liability included in each of MBIA Corp.’s surveillance categories as of September 30, 2011:

|  | Surveillance Categories |
$ in millions |  | Caution List Low |  |  | Caution List Medium |  |  | Caution List High |  |  | Classified List |  |  | Total |
Number of policies |  |  | 50 |  |  |  | 28 |  |  |  | 14 |  |  |  | 194 |  |  |  | 286 |
Number of issues(1) |  |  | 33 |  |  |  | 18 |  |  |  | 11 |  |  |  | 126 |  |  |  | 188 |
Remaining weighted average contract period (in years) |  |  | 7.9 |  |  |  | 6.1 |  |  |  | 6.0 |  |  |  | 8.8 |  |  |  | 8.3 |
Gross insured contractual payments outstanding (2): |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Principal |  | $ | 4,728 |  |  | $ | 974 |  |  | $ | 543 |  |  | $ | 10,753 |  |  | $ | 16,998 |
Interest |  |  | 2,743 |  |  |  | 334 |  |  |  | 139 |  |  |  | 5,509 |  |  |  | 8,725 |
Total |  | $ | 7,471 |  |  | $ | 1,308 |  |  | $ | 682 |  |  | $ | 16,262 |  |  | $ | 25,723 |
Gross claim liability |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | 1,988 |  |  | $ | 1,988 |
Less: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Gross potential recoveries |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 3,632 |  |  |  | 3,632 |
Discount, net |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 172 |  |  |  | 172 |
Net claim liability (recoverable) |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | (1,816 | ) |  | $ | (1,816 | )
Unearned premium revenue |  | $ | 161 |  |  | $ | 14 |  |  | $ | 3 |  |  | $ | 135 |  |  | $ | 313 |

(1) - An “issue” represents the aggregate of financial guarantee policies that share the same revenue source for purposes of making debt service payments.

(2) - Represents contractual principal and interest payments due by the issuer of the obligations insured by MBIA Corp.

The following table provides information about the financial guarantees and related claim liability included in each of MBIA Corp.’s surveillance categories as of December 31, 2010:

|  | Surveillance Categories |
$ in millions |  | Caution List Low |  |  | Caution List Medium |  |  | Caution List High |  |  | Classified List |  |  | Total |
Number of policies |  |  | 199 |  |  |  | 43 |  |  |  | 12 |  |  |  | 179 |  |  |  | 433 |
Number of issues(1) |  |  | 40 |  |  |  | 26 |  |  |  | 12 |  |  |  | 110 |  |  |  | 188 |
Remaining weighted average contract period (in years) |  |  | 9.4 |  |  |  | 6.9 |  |  |  | 9.1 |  |  |  | 9.4 |  |  |  | 9.2 |
Gross insured contractual payments outstanding (2): |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Principal |  | $ | 5,041 |  |  | $ | 1,419 |  |  | $ | 1,446 |  |  | $ | 11,190 |  |  | $ | 19,096 |
Interest |  |  | 3,439 |  |  |  | 536 |  |  |  | 746 |  |  |  | 6,132 |  |  |  | 10,853 |
Total |  | $ | 8,480 |  |  | $ | 1,955 |  |  | $ | 2,192 |  |  | $ | 17,322 |  |  | $ | 29,949 |
Gross claim liability |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | 2,692 |  |  | $ | 2,692 |
Less: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Gross potential recoveries |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 4,045 |  |  |  | 4,045 |
Discount, net |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 27 |  |  |  | 27 |
Net claim liability (recoverable) |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | (1,380 | ) |  | $ | (1,380 | )
Unearned premium revenue |  | $ | 148 |  |  | $ | 16 |  |  | $ | 72 |  |  | $ | 141 |  |  | $ | 377 |

(1) - An “issue” represents the aggregate of financial guarantee policies that share the same revenue source for purposes of making debt service payments.

(2) - Represents contractual principal and interest payments due by the issuer of the obligations insured by MBIA Corp.

22

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 6: Loss and Loss Adjustment Expense Reserves (continued)

The gross claim liability as of September 30, 2011 and December 31, 2010 in the preceding tables represents MBIA Corp.’s estimate of undiscounted probability-weighted future claim payments, which principally relate to insured first and second-lien RMBS transactions and U.S. public finance transactions. The gross potential recoveries principally relate to insured second-lien RMBS transactions. Both amounts reflect the elimination of claim liabilities and potential recoveries related to VIEs consolidated by MBIA Corp.

The following table presents the components of MBIA Corp.’s insurance loss reserves and recoverables for insured obligations within MBIA Corp.’s classified list as reported on MBIA Corp.’s consolidated balance sheets as of September 30, 2011 and December 31, 2010. The loss reserves (claim liability) and insurance claim loss recoverable included in the following table represent the present value of the probability-weighted future claim payments and recoveries reported in the preceding tables.

In millions |  | As of September 30, 2011 |  |  | As of December 31, 2010 |
Loss reserves (claim liability) |  | $ | 873 |  |  | $ | 1,059 |
LAE reserves |  |  | 59 |  |  |  | 70 |
Loss and LAE reserves |  | $ | 932 |  |  | $ | 1,129 |
Insurance claim loss recoverable |  | $ | (2,761 | ) |  | $ | (2,531 | )
LAE insurance loss recoverable |  |  | (9 | ) |  |  | - |
Insurance loss recoverable |  | $ | (2,770 | ) |  | $ | (2,531 | )
Reinsurance recoverable on unpaid losses |  | $ | 197 |  |  | $ | 224 |
Reinsurance recoverable on LAE reserves |  |  | 2 |  |  |  | 6 |
Reinsurance recoverable on paid losses |  |  | 2 |  |  |  | 0 |
Reinsurance recoverable on paid and unpaid losses |  | $ | 201 |  |  | $ | 230 |

As of September 30, 2011, loss and LAE reserves included $1.6 billion of reserves for expected future payments offset by expected recoveries of such future payments of $687 million. As of December 31, 2010, loss and LAE reserves included $2.0 billion of reserves for expected future payments offset by expected recoveries of such future payments of $896 million. As of September 30, 2011 and December 31, 2010, the insurance loss recoverable primarily related to estimated recoveries of payments made by MBIA Corp. resulting from ineligible mortgage loans in certain insured second-lien residential mortgage loan securitizations that are subject to a contractual obligation by the sellers/servicers to repurchase or replace the ineligible mortgage loans and expected future recoveries on second-lien RMBS transactions resulting from expected excess spread generated by performing loans in such transactions. MBIA Corp. expects to be reimbursed for the majority of its potential recoveries related to ineligible mortgage loans by year-end 2012.

The following table presents MBIA Corp.’s second-lien RMBS exposure, gross undiscounted claim liability and potential recoveries, before the elimination of amounts related to consolidated VIEs, as of September 30, 2011. All loan files reviewed with potential recoveries are included within the “Classified List.”

Second-lien RMBS Exposure |  |  |  |  | Outstanding |  |  | Gross Undiscounted |
|  |  |  |  | Gross |  |  | Gross |  |  | Claim |  |  | Potential |
$ in billions |  | Issues |  |  | Principal |  |  | Interest |  |  | Liability |  |  | Recoveries |
Insured issues designated as “Classified List” |  |  | 34 |  |  | $ | 7.9 |  |  | $ | 3.1 |  |  | $ | 0.7 |  |  | $ | 4.2 |
Loan files reviewed with potential recoveries |  |  | 27 |  |  | $ | 7.5 |  |  | $ | 3.0 |  |  | $ | 0.7 |  |  | $ | 4.2 |

MBIA Corp. has performed loan file reviews on 29 of the 34 issues and recorded recoveries on 27 of those 29 issues, primarily related to five issuers (Countrywide, RFC, GMAC, Morgan Stanley and Credit Suisse). The gross potential recoveries include estimated recoveries based on MBIA Corp.’s incurred loss to date. In addition, MBIA Corp. has recognized a recovery on one first-lien Alt-A transaction which has been excluded from the preceding table.

23

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 6: Loss and Loss Adjustment Expense Reserves (continued)

The following table presents changes in MBIA Corp.’s loss and LAE reserve for the nine months ended September 30, 2011. Changes in the loss and LAE reserve attributable to the accretion of the claim liability discount, changes in discount rates, changes in the timing and amounts of estimated payments and recoveries, changes in assumptions and changes in LAE reserves are recorded in “Losses and loss adjustment” expenses in MBIA Corp.’s consolidated statement of operations. As of September 30, 2011, the weighted average risk-free rate used to discount MBIA Corp.’s loss reserve (claim liability) was 1.51%. LAE reserves are expected to be settled within a one year period and are not discounted.

In millions |  |  | Changes in Loss and LAE Reserves for the Nine Months Ended September 30, 2011 |
Gross Loss and LAE Reserve as of December 31, 2010 |  |  | Loss Payments for Cases with Reserves |  |  | Accretion of Claim Liability Discount |  |  | Changes in Discount Rates |  |  | Changes in Timing of Payments |  |  | Changes in Amount of Net Payments |  |  | Changes in Assumptions |  |  | Changes in Unearned Premium Revenue |  |  | Change in LAE Reserves |  |  | Gross Loss and LAE Reserve as of September 30, 2011 |
$ | 1,129 |  |  | $ | (431 | ) |  | $ | 12 |  |  | $ | 9 |  |  | $ | 37 |  |  | $ | (2 | ) |  | $ | 168 |  |  | $ | 22 |  |  | $ | (12 | ) |  | $ | 932 |

The decrease in MBIA Corp.’s gross loss and LAE reserves reflected in the preceding table was primarily due to a decrease in reserves related to loss payments. Offsetting these decreases were changes in assumptions due to additional defaults and charge-offs of ineligible mortgage loans on insured second-lien RMBS issues outstanding as of December 31, 2010 and changes in the timing of payments.

The following table presents changes in MBIA Corp.’s insurance loss recoverable and changes in recoveries on unpaid losses reported within MBIA Corp.’s claim liability for the nine months ended September 30, 2011. Changes in insurance loss recoverable attributable to the accretion of the discount on the recoverable, changes in discount rates, changes in the timing and amounts of estimated collections, changes in assumptions and changes in LAE recoveries are recorded in “Losses and loss adjustment” expenses in MBIA Corp.’s consolidated statement of operations.

Changes in Insurance Loss Recoverable and Recoveries on Unpaid Losses for the Nine Months Ended September 30, 2011 |
In millions |  | Gross Reserve as of December 31, 2010 |  |  | Collections for Cases with Recoveries |  |  | Accretion of Recoveries |  |  | Changes in Discount Rates |  |  | Changes in Timing of Collections |  |  | Changes in Amount of Collections |  |  | Changes in Assumptions |  |  | Change in LAE Recoveries |  |  | Gross Reserve as of September 30, 2011 |
Insurance Loss Recoverable |  | $ | 2,531 |  |  | $ | (5) |  |  | $ | 48 |  |  | $ | 47 |  |  | $ | - |  |  | $ | (175) |  |  | $ | 315 |  |  | $ | 9 |  |  | $ | 2,770 |
Recoveries on Unpaid Losses |  |  | 896 |  |  |  | - |  |  |  | 13 |  |  |  | 60 |  |  |  | - |  |  |  | - |  |  |  | (297) |  |  |  | 15 |  |  |  | 687 |
Total |  | $ | 3,427 |  |  | $ | (5) |  |  | $ | 61 |  |  | $ | 107 |  |  | $ | - |  |  | $ | (175) |  |  | $ | 18 |  |  | $ | 24 |  |  | $ | 3,457 |

MBIA Corp.’s insurance loss recoverable increased primarily due to changes in assumptions and accretion as a result of estimates of potential recoveries on issues outstanding as of December 31, 2010 resulting from ineligible mortgage loans included in insured second-lien residential mortgage securitization exposures that are subject to contractual obligations by sellers/servicers to repurchase or replace such mortgages, partially offset by changes in the amount of collections. Recoveries on unpaid losses decreased primarily due to changes in assumptions as a result of reduced expectations of future claim payments on U.S. public finance transactions, which resulted in a corresponding reduction in future expected recoveries.

The following table presents MBIA Corp.’s total estimated recoveries from ineligible mortgage loans included in certain insured second-lien mortgage loan securitizations. The total estimated recoveries from ineligible loans of $2.8 billion as of September 30, 2011 include $1.9 billion recorded as “Insurance loss recoverable” and $938 million recorded as “Loan repurchase commitments” presented under the heading “Assets of consolidated variable interest entities” on MBIA Corp.’s consolidated balance sheet.

In millions |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Total Estimated Recoveries from Ineligible Second- lien Loans as of December 31, 2010 |  | Accretion of Future Collections |  |  | Changes in Discount Rates |  |  | Recoveries (Collections) |  |  | Changes in Assumptions |  |  | Total Estimated Recoveries from Ineligible Second- lien Loans as of September 30, 2011 |
$ 2,517 |  | $ | 55 |  |  | $ | 33 |  |  | $ | - |  |  | $ | 213 |  |  | $ | 2,818 |

24

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 6: Loss and Loss Adjustment Expense Reserves (continued)

MBIA Corp.’s total estimated recoveries from ineligible loans in the preceding table increased primarily as a result of the probability-weighted scenarios as described within the preceding “RMBS Recoveries” section.

Remediation actions may involve, among other things, waivers or renegotiations of financial covenants or triggers, waivers of contractual provisions, the granting of consents, transfer of servicing, consideration of restructuring plans, acceleration, security or collateral enforcement, actions in bankruptcy or receivership, litigation and similar actions. The types of remedial actions pursued are based on the insured obligation’s risk type and the nature and scope of the event giving rise to the remediation. As part of any such remedial actions, MBIA Corp. seeks to improve its security position and to obtain concessions from the issuer of the insured obligation. From time to time, the issuer of an MBIA-insured obligation may, with the consent of MBIA Corp., restructure the insured obligation by extending the term, increasing or decreasing the par amount or decreasing the related interest rate, with MBIA Corp. insuring the restructured obligation.

Costs associated with remediating insured obligations assigned to MBIA Corp.’s “Caution List—Low,” “Caution List—Medium,” “Caution List—High” and “Classified List” are recorded as LAE. LAE is primarily recorded as part of MBIA Corp.’s provision for its loss reserves and included in “Losses and loss adjustment” expense on MBIA Corp.’s consolidated statements of operations. The following table presents the expenses (gross and net of reinsurance) related to remedial actions for insured obligations:

|  | Three Months Ended September 30, |  |  | Nine Months Ended September 30, |
In millions |  | 2011 |  |  | 2010 |  |  | 2011 |  |  | 2010 |
Loss adjustment expense incurred, gross |  | $ | 31 |  |  | $ | 14 |  |  | $ | 76 |  |  | $ | 30 |
Loss adjustment expense incurred, net |  | $ | 29 |  |  | $ | 12 |  |  | $ | 74 |  |  | $ | 14 |

25

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 7: Fair Value of Financial Instruments

Financial Instruments

The following table presents the carrying value and fair value of financial instruments reported on MBIA Corp.’s consolidated balance sheets as of September 30, 2011 and December 31, 2010:

|  | As of September 30, 2011 |  |  | As of December 31, 2010 |
In millions |  | Carrying Value |  |  | Estimated Fair Value |  |  | Carrying Value |  |  | Estimated Fair Value |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed-maturity securities (including short-term investments) held as available-for-sale and investments carried at fair value |  | $ | 1,349 |  |  | $ | 1,349 |  |  | $ | 2,179 |  |  | $ | 2,179 |
Other investments |  |  | 15 |  |  |  | 15 |  |  |  | 11 |  |  |  | 11 |
Cash and cash equivalents |  |  | 426 |  |  |  | 426 |  |  |  | 229 |  |  |  | 229 |
Secured loan |  |  | 600 |  |  |  | 389 |  |  |  | 975 |  |  |  | 591 |
Receivable for investments sold |  |  | 9 |  |  |  | 9 |  |  |  | 2 |  |  |  | 2 |
Derivative assets |  |  | 8 |  |  |  | 8 |  |  |  | 10 |  |  |  | 10 |
Assets of consolidated VIEs: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash |  |  | 580 |  |  |  | 580 |  |  |  | 764 |  |  |  | 764 |
Investments held-to-maturity |  |  | 2,840 |  |  |  | 2,456 |  |  |  | 2,840 |  |  |  | 2,636 |
Fixed maturity securities at fair value |  |  | 3,274 |  |  |  | 3,274 |  |  |  | 5,113 |  |  |  | 5,113 |
Loans receivable |  |  | 2,218 |  |  |  | 2,218 |  |  |  | 2,183 |  |  |  | 2,183 |
Loan repurchase commitments |  |  | 938 |  |  |  | 938 |  |  |  | 835 |  |  |  | 835 |
Derivative assets |  |  | 984 |  |  |  | 984 |  |  |  | 829 |  |  |  | 829 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Long-term debt |  |  | 953 |  |  |  | 429 |  |  |  | 953 |  |  |  | 512 |
Payable for investments purchased |  |  | 34 |  |  |  | 34 |  |  |  | - |  |  |  | - |
Derivative liabilities |  |  | 5,172 |  |  |  | 5,172 |  |  |  | 4,501 |  |  |  | 4,501 |
Liabilities of consolidated VIEs: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Variable interest entity notes |  |  | 7,967 |  |  |  | 7,616 |  |  |  | 9,511 |  |  |  | 9,340 |
Derivative liabilities |  |  | 1,888 |  |  |  | 1,888 |  |  |  | 2,104 |  |  |  | 2,104 |
Financial Guarantees: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Gross |  |  | 3,988 |  |  |  | 3,599 |  |  |  | 4,600 |  |  |  | 3,906 |
Ceded |  |  | 1,975 |  |  |  | 1,969 |  |  |  | 2,219 |  |  |  | 2,509 |

Valuation Techniques

Valuation techniques for financial instruments measured at fair value and included in the preceding table are described below. MBIA Corp.’s assets and liabilities recorded at fair value have been categorized according to the fair value hierarchy based on the lowest level input that is significant to the fair value measurement in its entirety.

Fixed-Maturity Securities (including short-term investments) Held as Available-For-Sale, and Investments Carried at Fair Value

U.S. Treasury and government agency—U.S. Treasury securities are valued based on quoted market prices in active markets. Fair value of U.S. Treasuries is based on live trading feeds. U.S. Treasury securities are categorized in Level 1 of the fair value hierarchy. Government agency securities include debentures and other agency mortgage pass-through certificates as well as to-be-announced (“TBA”) securities. TBA securities are liquid and have quoted market prices based on live data feeds. Fair value of mortgage pass-through certificates is obtained via a simulation model, which considers different rate scenarios and historical activity to calculate a spread to the comparable TBA security. Government agency securities generally use market-based and observable inputs. As such, these securities are classified as Level 2 of the fair value hierarchy.

26

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 7: Fair Value of Financial Instruments (continued)

Foreign governments—Foreign government obligations are generally valued based on quoted market prices in active markets and are categorized in Level 1 of the fair value hierarchy. When quoted market prices are not available, fair value is determined using a valuation model based on observable inputs including interest rate yield curves, cross-currency basis index spreads, and country credit spreads for structures similar to the financial instrument in terms of issuer, maturity and seniority. These financial instruments are generally categorized in Level 2 of the fair value hierarchy. Bonds that contain significant inputs that are not observable are categorized as Level 3.

Corporate obligations—Corporate obligations are valued using recently executed transaction prices or quoted market prices where observable. When observable price quotations are not available, fair value is determined using a valuation model based on observable inputs including interest rate yield curves, CDS spreads for similar instruments, and diversity scores. Corporate obligations are generally categorized in Level 2 of the fair value hierarchy or categorized in Level 3 when significant inputs are unobservable. Corporate obligations are classified as Level 1 of the fair value hierarchy when quoted market prices in an active market for identical financial instruments are available.

Mortgage-backed securities and asset-backed securities—Mortgage-backed securities (“MBS”) and ABS are valued using recently executed transaction prices. When position-specific quoted prices are not available, MBS and ABS are valued based on quoted prices for similar securities. If quoted prices are not available, MBS and ABS are valued using a valuation model based on observable inputs including interest rate yield curves, spreads, prepayments and volatilities, and categorized in Level 2 of the fair value hierarchy. MBS and ABS are categorized in Level 3 of the fair value hierarchy when significant inputs are unobservable.

State and municipal bonds—State and municipal bonds are valued using recently executed transaction prices, quoted prices or valuation models based on observable inputs including interest rate yield curves, bond or CDS spreads and volatility. State and municipal bonds are generally categorized in Level 2 of the fair value hierarchy or categorized in Level 3 when significant inputs are unobservable.

Investments Held-To-Maturity

The fair values of investments held-to-maturity are determined using recently executed transaction prices or quoted prices when available. When position-specific quoted prices are not available, fair values of investments held-to-maturity are based on quoted prices of similar securities. When quoted prices for similar investments are not available, fair values are based on valuation models using observable inputs including interest rate yield curves and bond spreads of similar securities.

Other Investments

Other investments include MBIA Corp.’s interest in equity securities. Fair value of other investments is determined by using quoted prices, or valuation models that use market-based and observable inputs. Other investments are categorized in Level 1 or Level 2 of the fair value hierarchy.

Cash and Cash Equivalents, Receivable for Investments Sold and Payable for Investments Purchased

The carrying amounts of cash and cash equivalents, receivable for investments sold and payable for investments purchased approximate fair values due to the short maturities of these instruments.

Secured Loan

The fair value of the secured loan is determined based on the underlying securities pledged as collateral. The underlying securities are generally corporate bonds. The fair value of these corporate bonds is obtained using recently executed transactions or market price quotations where observable. When observable price quotations are not available, fair value is determined based on cash flow models with yield curves, bond or single name CDS spreads and diversity scores as key inputs.

Loans Receivable at Fair Value

Loans receivable at fair value comprise loans held by consolidated VIEs consisting of residential mortgage loans, commercial mortgage loans and other whole business loans. Fair values of residential mortgage loans are determined using quoted prices for MBS with similar characteristics and adjusted for the fair values of the financial guarantee obligations provided by MBIA Corp. on the related MBS. Fair values of commercial mortgage loans and other whole business loans are valued based on quoted prices of similar collateralized MBS. Loans receivable at fair value are categorized in Level 3 of the fair value hierarchy.

27

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 7: Fair Value of Financial Instruments (continued)

Loan Repurchase Commitments

Loan repurchase commitments are obligations owed by the sellers/servicers of mortgage loans to RMBS trusts consolidated under the amended accounting principles for the consolidation of VIEs. This asset represents the rights of the trusts against the sellers/servicers for representations and warranties that the securitized residential mortgage loans sold to the trust comply with stated underwriting guidelines and for the sellers/servicers to cure, replace, or repurchase mortgage loans that fail to comply. Fair value measurement of loan repurchase commitments represents the amounts owed by the sellers/servicers to the trusts. Loan repurchase commitments are not securities and no identical or comparable market transaction information is observable or available. Loan repurchase commitments at fair value are categorized in Level 3 of the fair value hierarchy. Fair values of loan repurchase commitments are determined using discounted cash flow techniques based on observable inputs including:

| • |  | estimates of future cash flows for the asset;

| • |  | expectations about possible variations in the amount and/or timing of the cash flows representing the uncertainty inherent in the cash flows;

| • |  | time value of money, represented by the rate on risk-free monetary assets;

| • |  | the price for bearing the uncertainty inherent in the cash flows (risk premium); and

| • |  | other case-specific factors that would be considered by market participants.

Refer to the discussion of “RMBS Recoveries” within “Note 6: Loss and Loss Adjustment Expense Reserves” for a further description of how these estimates of future cash flows for the assets are determined, as well as the additional risk margins and discounts applied.

Variable Interest Entity Notes

The fair values of VIE notes are determined based on recently executed transaction prices or quoted prices where observable. When position-specific quoted prices are not observable, fair values are based on quoted prices of similar securities. Fair values based on quoted prices of similar securities may be adjusted for factors unique to the securities, including any credit enhancement. When observable quoted prices are not available, fair value is determined based on discounted cash flow techniques of the underlying collateral using observable inputs including interest rate yield curves and bond spreads of similar securities. VIE notes are categorized in Level 2 or Level 3 of the fair value hierarchy based on the lowest level input that is significant to the fair value measurement in its entirety.

Long-term Debt

Long-term debt consists of surplus notes. The fair value of the surplus notes is estimated based on quoted market prices for the same or similar securities.

Insured Credit Derivatives

Derivative contracts of MBIA Corp. primarily consist of insured credit derivatives which cannot be legally traded and generally do not have observable market prices. MBIA Corp. determines the fair values of insured credit derivatives using valuation models. These models include the Binomial Expansion Technique (“BET”) model and an internally developed model referred to as the “Direct Price Model.” For a limited number of other insured credit derivatives, fair values are determined using a dual-default model. The valuation of insured derivatives includes the impact of MBIA Corp.’s own credit standing. All of these derivatives are categorized as Level 3 of the fair value hierarchy as their fair value is derived using significant unobservable inputs.

Description of MBIA Corp.’s Insured Credit Derivatives

As of September 30, 2011, MBIA Corp. had $91.0 billion of gross par outstanding on insured credit derivatives. The majority of MBIA Corp.’s derivatives are “credit derivatives” that reference structured pools of cash securities and CDS. MBIA Corp. generally insured the most senior liabilities of such transactions, and at transaction closing MBIA Corp.’s exposure generally had more subordination than needed to achieve triple-A ratings from credit rating agencies (referred to as “Super Triple-A” exposure). The collateral backing MBIA Corp.’s insured derivatives was cash securities and CDSs referencing primarily corporate, asset-backed, residential mortgage- backed, commercial mortgage-backed, CRE loans, and CDO securities. As of September 30, 2011, the gross par outstanding on MBIA Corp.’s insured credit derivatives totaled $85.1 billion. The remaining $5.9 billion of gross par outstanding on insured derivatives as of September 30, 2011 primarily related to insured “interest rate” and “inflation-linked” swaps for which MBIA Corp. has insured counterparty credit risk.

28

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 7: Fair Value of Financial Instruments (continued)

Most of MBIA Corp.’s insured CDS contracts require that MBIA Corp. make payments for losses of the principal outstanding under the contracts when losses on the underlying referenced collateral exceed a predetermined deductible. MBIA Corp.’s gross par outstanding and maximum payment obligation under these contracts as of September 30, 2011 was $65.5 billion. The underlying referenced collateral for contracts executed in this manner largely consists of investment grade corporate debt and structured CMBS pools and, to a lesser extent, corporate and multi-sector CDOs (in CDO-squared transactions). MBIA Corp.’s multi-sector CDOs are classified into CDOs of high-grade U.S. ABS, including on CDO-squared transaction, and CDOs of mezzanine U.S. ABS. As of September 30, 2011 gross par outstanding on MBIA Corp.-insured CDOs of high-grade U.S. ABS totaled 4.4 billion. The majority of the collateral contained within our ABS multi-sector CDOs comprised of RMBS. As of September 30, 2011, MBIA Corp. also had $19.6 billion gross par outstanding on insured CDS contracts that require MBIA Corp. to make timely interest and ultimate principal payments.

Valuation Models Used

Approximately 82% of the balance sheet fair value of insured credit derivatives as of September 30, 2011 was valued using the BET Model. Approximately 18% of the balance sheet fair value of insured credit derivatives as of September 30, 2011 was valued using the internally developed Direct Price Model. An immaterial amount of insured credit derivatives were valued using other methods, including a dual default model.

A. Description of the BET Model

1. Valuation Model Overview

The BET model estimates what a bond insurer would charge to guarantee a transaction at the measurement date, based on the market-implied default risk of the underlying collateral and the remaining structural protection in a deductible or subordination. This approach assumes that bond insurers would be willing to accept these contracts from MBIA Corp. at a price equal to what MBIA Corp. could issue them for in the current market. While the premium charged by financial guarantors is not a direct input into MBIA Corp.’s model, the model estimates such premium and this premium increases as the probability of loss increases, driven by various factors including rising credit spreads, negative credit migration, lower recovery rates, lower diversity score and erosion of deductible or subordination.

Inputs to the process of determining fair value for structured transactions using the BET model includes estimates of collateral loss, allocation of loss to separate tranches of the capital structure and calculation of the change in value.

| • |  | Estimates of aggregated collateral losses are calculated by reference to the following (described in further detail under “BET Model Inputs” below):

| • |  | credit spreads of the underlying collateral based on actual spreads or spreads on similar collateral with similar ratings, or in some cases is benchmarked; for collateral pools where the spread distribution is characterized by extremes, MBIA Corp. models each segment of the pool separately instead of using an overall pool average;

| • |  | diversity score of the collateral pool as an indication of correlation of collateral defaults; and

| • |  | recovery rate for all defaulted collateral.

| • |  | Allocation of losses to separate tranches of the capital structure according to priority of payments in a transaction.

| • |  | The unrealized gain or loss on a transaction inception to date is the difference between the original price of the risk (the original market-implied expected loss) and the current price of the risk based on the assumed market-implied expected losses derived from the model.

Additional structural assumptions of the BET model are:

| • |  | Default probabilities are determined by three factors: credit spread, recovery rate after default and the time period under risk.

| • |  | Frequencies of defaults are modeled evenly over time.

| • |  | Collateral assets are generally considered on an average basis rather than being modeled on an individual basis.

| • |  | Collateral asset correlation is modeled using a diversity score, which is calculated based on industry or sector concentrations. Recovery rates are based on historical averages and updated based on market evidence.

29

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 7: Fair Value of Financial Instruments (continued)

2. BET Model Inputs

a. Credit spreads

The average spread of collateral is a key input as MBIA Corp. assumes credit spreads reflect the market’s assessment of default probability for each piece of collateral. Spreads are obtained from market data sources published by third parties (e.g., dealer spread tables for assets most closely resembling collateral within MBIA Corp.’s transactions) as well as collateral-specific spreads on the underlying reference obligations provided by trustees or market sources. Also, when these sources are not available, MBIA Corp. benchmarks spreads for collateral against market spreads or prices. This data is reviewed on an ongoing basis for reasonableness and applicability to MBIA Corp.’s derivative portfolio. MBIA Corp. also calculates spreads based on quoted prices and on internal assumptions about expected life when pricing information is available and spread information is not.

MBIA Corp. uses the spread hierarchy listed below in determining which source of spread information to use, with the rule being to use CDS spreads where available and cash security spreads as the next alternative. Cash security spreads reflect trading activity in funded fixed-income instruments while CDS spreads reflect trading levels for non-funded derivative instruments. While both markets are driven in part by an assessment of the credit quality of the referenced security, there are factors which create significant differences. These factors include CDS spreads driven by speculative activity as the CDS market facilitates both long and short positions without ownership of the underlying security, allowing for significant leverage.

Spread Hierarchy:

| • |  | Collateral-specific credit spreads when observable.

| • |  | Sector-specific spread tables by asset class and rating.

| • |  | Corporate spreads, including Bloomberg and Risk Metrics spread tables based on rating.

| • |  | Benchmark from most relevant market source when corporate spreads are not directly relevant.

If current market-based spreads are not available, then MBIA Corp. applies either sector-specific spreads from spread tables provided by dealers or corporate spread tables. The sector-specific spread applied depends on the nature of the underlying collateral. Transactions with corporate collateral use the corporate spread table. Transactions with asset-backed collateral use one or more of the dealer asset-backed tables. If there are no observable market spreads for the specific collateral, and sector-specific and corporate spread tables are not appropriate to estimate the spread for a specific type of collateral, MBIA Corp. uses the fourth alternative in its hierarchy. This includes using tranched corporate collateral, where MBIA Corp. applies corporate spreads as an input with an adjustment for its tranched exposure.

As of September 30, 2011, sector-specific spreads were used in 7% of the transactions valued using the BET model. Corporate spreads were used in 47% of the transactions and spreads benchmarked from the most relevant spread source were used for 46% of the transactions. When determining the percentages above, there were some transactions where MBIA Corp. incorporated multiple levels within the hierarchy, including using actual collateral-specific credit spreads in combination with a calculated spread based on an assumed relationship. In these cases, MBIA Corp. classified the transaction as being benchmarked from the most relevant spread source even though the majority of the average spread was from actual collateral-specific spreads. The spread source can also be identified by whether or not it is based on collateral weighted average rating factor (“WARF”). No collateral-specific spreads are based on WARF, sector-specific spreads and corporate spreads are based on WARF and some benchmarked spreads are based on WARF. WARF-sourced and/or ratings-sourced credit spreads were used for 91% of the transactions.

Over time the data inputs change as new sources become available, existing sources are discontinued or are no longer considered to be reliable, or the most appropriate. It is always MBIA Corp.’s objective to move to higher levels on the spread hierarchy table defined above. However, MBIA Corp. may on occasion move to lower priority inputs due to the discontinuation of data sources or due to MBIA Corp. considering higher priority inputs no longer representative of market spreads.

30

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 7: Fair Value of Financial Instruments (continued)

b. Diversity Scores

Diversity scores are a means of estimating the diversification in a portfolio. The diversity score estimates the number of uncorrelated assets that are assumed to have the same loss distribution as the actual portfolio of correlated assets. A lower diversity score represents higher assumed correlation, increasing the chances of a large number of defaults, and thereby increasing the risk of loss in the senior tranche. A lower diversity score will generally have a negative impact on the valuation for MBIA Corp.’s senior tranche. The calculation methodology for a diversity score includes the extent to which a portfolio is diversified by industry or asset class, which is either calculated internally or reported by the trustee on a regular basis. Diversity scores are calculated at transaction origination, and adjusted as the collateral pool changes over time. MBIA Corp.’s internal modeling of the diversity score is based on Moody’s methodology.

c. Recovery Rate

Recovery rate represents the percentage of par expected to be recovered after an asset defaults, indicating the severity of a potential loss. MBIA Corp. generally uses rating agency recovery assumptions which may be adjusted to account for differences between the characteristics and performance of the collateral used by the rating agencies and the actual collateral in MBIA Corp.-insured transactions. MBIA Corp. may also adjust rating agency assumptions based on the performance of the collateral manager and on empirical market data.

d. Input Adjustments for Insured CMBS Derivatives in the Current Market

Approximately $36.3 billion gross par of MBIA Corp.’s insured derivative transactions as of September 30, 2011 include substantial amounts of CMBS and commercial mortgage collateral. Since the CMBX is now quoted in price terms and the BET model requires a spread input, it is necessary to convert CMBX prices to spreads. Through the third quarter of 2010, MBIA Corp. assumed that a portion of the CMBX price reflected market illiquidity. MBIA Corp. assumed this illiquidity component was the difference between par and the price of the highest priced CMBX triple-A series. MBIA Corp. assumed that the price of each CMBX index has two components: an illiquidity component and a loss component. The market implied losses were assumed to be the difference of par less the liquidity adjusted price. These loss estimates were converted to spreads using an internal estimate of duration. Beginning in the fourth quarter of 2010, MBIA Corp. determined that it would not be appropriate to continue to use a CMBS illiquidity component in the models due to the increased liquidity in the marketplace.

e. Nonperformance Risk

MBIA Corp.’s valuation methodology for insured credit derivative liabilities incorporates MBIA Corp.’s own nonperformance risk. MBIA Corp. calculates the fair value by discounting the market value loss estimated through the BET model at discount rates which include MBIA Corp.’s CDS spreads as of September 30, 2011. The CDS spreads assigned to each deal are based on the weighted average life of the deal. MBIA Corp. limits the nonperformance impact so that the derivative liability could not be lower than MBIA Corp.’s recovery derivative price multiplied by the unadjusted derivative liability.

B. Description of Direct Price Model

1. Valuation Model Overview

There are three significant model inputs used in determining fair value using the direct pricing model. Significant inputs include market prices obtained or estimated for all collateral within a transaction, the present value of the market-implied potential losses calculated for the transaction, and the impact of nonperformance risk.

2. Model Inputs

| • |  | Collateral prices

Fair value of collateral is based on quoted prices when available. When quoted prices are not available, a matrix pricing grid is used based on security type and rating to determine the fair value of collateral, which applies an average based on securities with the same rating and security type categories.

| • |  | Interest rates

31

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 7: Fair Value of Financial Instruments (continued)

The present value of the market-implied potential losses was calculated assuming that MBIA Corp. deferred all principal losses to the legal final maturity. This was done through a cash flow model that calculates potential interest payments in each period and the potential principal loss at the legal final maturity date. These cash flows were discounted using the LIBOR flat swap curve.

| • |  | Nonperformance risk

The methodology for calculating MBIA Corp.’s nonperformance risk is the same as used for the BET model. Due to the current level of MBIA Corp. CDS spread rates and the long tenure of these transactions, the derivative recovery rate was used to estimate nonperformance risk for all transactions marked by this model.

Overall Model Results

As of September 30, 2011, MBIA Corp.’s net insured derivative liability of $5.2 billion comprised the fair values of insured derivatives included in “Derivative assets” and “Derivative liabilities” on MBIA Corp.’s consolidated balance sheets of $8 million and $5.2 billion, respectively, based on the results of the aforementioned pricing models. In the current environment the most significant driver of changes in fair value is nonperformance risk. In aggregate, the nonperformance calculation results in a pre-tax net insured derivative liability which is $10.1 billion and $12.1 billion lower than the net liability that would have been estimated if MBIA Corp. excluded nonperformance risk in its valuation as of September 30, 2011 and December 31, 2010, respectively. Nonperformance risk is a fair value concept and does not contradict MBIA Corp.’s internal view, based on fundamental credit analysis of MBIA Corp.’s economic condition, that MBIA Corp. will be able to pay all claims when due.

MBIA Corp. reviews the model results on a quarterly basis to assess the appropriateness of the assumptions and results in light of current market activity and conditions. This review is performed by internal staff with relevant expertise. If live market spreads are observable for similar transactions, those spreads are an integral part of the analysis. For example, new insured transactions that resemble existing (previously insured) transactions are considered, as well as negotiated settlements of existing transactions. This data is rare or non-existent in recent periods. MBIA Corp. negotiated settlements of insured CDS transactions during the nine months ended September 30, 2011 and 2010. In assessing the reasonableness of the fair value estimate for insured CDS, MBIA Corp. considered the executed prices for those transactions as well as a review of internal consistency with its methodology.

Financial Guarantees

Gross Financial Guarantees—The fair value of gross financial guarantees is determined using discounted cash flow techniques based on inputs that include (i) assumptions of expected losses on financial guarantee policies where loss reserves have not been recognized, (ii) amount of losses expected on financial guarantee policies where loss reserves have been established, (iii) the cost of capital reserves required to support the financial guarantee liability, and (iv) discount rates. MBIA Corp.’s CDS spread and recovery rate are used as its discount rate. MBIA Corp.’s discount rates are adjusted to reflect its nonperformance risk. Fair value of gross financial guarantees does not consider future installment premium receipts or returns on invested upfront premiums as inputs.

The carrying value of MBIA Corp.’s gross financial guarantees consists of unearned premium revenue and loss and LAE reserves as reported on MBIA Corp.’s consolidated balance sheets.

Ceded Financial Guarantees—The fair value of ceded financial guarantees is determined by applying the percentage ceded to reinsurers to the related fair value of the gross financial guarantees. The carrying value of ceded financial guarantees consists of prepaid reinsurance premiums and reinsurance recoverable on paid losses as reported on MBIA Corp.’s consolidated balance sheets.

32

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 7: Fair Value of Financial Instruments (continued)

Fair Value Measurements

The following fair value hierarchy tables present information about MBIA Corp.’s assets (including short-term investments) and liabilities measured at fair value on a recurring basis as of September 30, 2011 and December 31, 2010:

|  | Fair Value Measurements at Reporting Date Using |  |  |  |
In millions |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |  |  | Balance as of September 30, 2011 |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Investments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed-maturity investments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Taxable bonds: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury and government agency |  | $ | 341 |  |  | $ | 9 |  |  | $ | - |  |  | $ | 350 |
Foreign governments |  |  | 295 |  |  |  | 70 |  |  |  | 11 |  |  |  | 376 |
Corporate obligations |  |  | - |  |  |  | 228 |  |  |  | 147 |  |  |  | 375 |
Mortgage-backed securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage-backed agency |  |  | - |  |  |  | 7 |  |  |  | - |  |  |  | 7 |
Residential mortgage-backed non-agency |  |  | - |  |  |  | 90 |  |  |  | 5 |  |  |  | 95 |
Commercial mortgage-backed |  |  | - |  |  |  | 2 |  |  |  | - |  |  |  | 2 |
Asset-backed securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Collateralized debt obligations |  |  | - |  |  |  | 2 |  |  |  | - |  |  |  | 2 |
Other asset-backed |  |  | - |  |  |  | 25 |  |  |  | 38 |  |  |  | 63 |
State and municipal bonds |  |  | - |  |  |  | 20 |  |  |  | - |  |  |  | 20 |
Total fixed-maturity investments |  |  | 636 |  |  |  | 453 |  |  |  | 201 |  |  |  | 1,290 |
Money market securities |  |  | 59 |  |  |  | - |  |  |  | - |  |  |  | 59 |
Other |  |  | 8 |  |  |  | - |  |  |  | - |  |  |  | 8 |
Total investments |  |  | 703 |  |  |  | 453 |  |  |  | 201 |  |  |  | 1,357 |
Derivative assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Credit derivatives |  |  | - |  |  |  | 8 |  |  |  | - |  |  |  | 8 |
Total derivative assets |  |  | - |  |  |  | 8 |  |  |  | - |  |  |  | 8 |
Assets of consolidated VIEs: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Corporate obligations |  |  | - |  |  |  | 205 |  |  |  | 61 |  |  |  | 266 |
Mortgage-backed securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage-backed agency |  |  | - |  |  |  | 4 |  |  |  | - |  |  |  | 4 |
Residential mortgage-backed non-agency |  |  | - |  |  |  | 1,606 |  |  |  | 15 |  |  |  | 1,621 |
Commercial mortgage-backed |  |  | - |  |  |  | 595 |  |  |  | 17 |  |  |  | 612 |
Asset-backed securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Collateralized debt obligations |  |  | - |  |  |  | 326 |  |  |  | 144 |  |  |  | 470 |
Other asset-backed |  |  | - |  |  |  | 230 |  |  |  | 71 |  |  |  | 301 |
Total fixed maturity securities held at fair value |  |  | - |  |  |  | 2,966 |  |  |  | 308 |  |  |  | 3,274 |
Loans receivable |  |  | - |  |  |  | - |  |  |  | 2,218 |  |  |  | 2,218 |
Loan repurchase commitments |  |  | - |  |  |  | - |  |  |  | 938 |  |  |  | 938 |
Derivative assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Credit derivatives |  |  | - |  |  |  | - |  |  |  | 979 |  |  |  | 979 |
Interest rate derivatives |  |  | - |  |  |  | 5 |  |  |  | - |  |  |  | 5 |
Total derivative assets |  |  | - |  |  |  | 5 |  |  |  | 979 |  |  |  | 984 |
Total assets |  | $ | 703 |  |  | $ | 3,432 |  |  | $ | 4,644 |  |  | $ | 8,779 |

33

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 7: Fair Value of Financial Instruments (continued)

|  | Fair Value Measurements at Reporting Date Using |  |  |  |
In millions |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |  |  | Balance as of September 30, 2011 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Derivative liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Credit derivatives |  | $ | - |  |  | $ | 21 |  |  | $ | 5,151 |  |  | $ | 5,172 |
Total derivative liabilities |  |  | - |  |  |  | 21 |  |  |  | 5,151 |  |  |  | 5,172 |
Liabilities of consolidated VIEs: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Variable interest entity notes |  |  | - |  |  |  | 1,992 |  |  |  | 3,168 |  |  |  | 5,160 |
Derivative liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Credit derivatives |  |  | - |  |  |  | - |  |  |  | 1,473 |  |  |  | 1,473 |
Interest rate derivatives |  |  | - |  |  |  | 397 |  |  |  | - |  |  |  | 397 |
Currency rate derivatives |  |  | - |  |  |  | - |  |  |  | 18 |  |  |  | 18 |
Total derivative liabilities |  |  | - |  |  |  | 397 |  |  |  | 1,491 |  |  |  | 1,888 |
Total liabilities |  | $ | - |  |  | $ | 2,410 |  |  | $ | 9,810 |  |  | $ | 12,220 |

34

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 7: Fair Value of Financial Instruments (continued)

|  | Fair Value Measurements at Reporting Date Using |  |  |  |
In millions |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |  |  | Balance as of December 31, 2010 |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Investments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed-maturity investments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Taxable bonds: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury and government agency |  | $ | 425 |  |  | $ | 25 |  |  | $ | - |  |  | $ | 450 |
Foreign governments |  |  | 409 |  |  |  | 48 |  |  |  | 11 |  |  |  | 468 |
Corporate obligations |  |  | - |  |  |  | 732 |  |  |  | 4 |  |  |  | 736 |
Mortgage-backed securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage-backed agency |  |  | - |  |  |  | 84 |  |  |  | - |  |  |  | 84 |
Residential mortgage-backed non-agency |  |  | - |  |  |  | 97 |  |  |  | 5 |  |  |  | 102 |
Commercial mortgage-backed |  |  | - |  |  |  | 105 |  |  |  | 3 |  |  |  | 108 |
Asset-backed securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Collateralized debt obligations |  |  | - |  |  |  | 2 |  |  |  | 13 |  |  |  | 15 |
Other asset-backed |  |  | - |  |  |  | 21 |  |  |  | 70 |  |  |  | 91 |
State and municipal bonds |  |  | - |  |  |  | 17 |  |  |  | 14 |  |  |  | 31 |
Total taxable bonds |  |  | 834 |  |  |  | 1,131 |  |  |  | 120 |  |  |  | 2,085 |
Tax-exempt bonds: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
State and municipal bonds |  |  | - |  |  |  | 44 |  |  |  | 1 |  |  |  | 45 |
Total fixed maturity investments |  |  | 834 |  |  |  | 1,175 |  |  |  | 121 |  |  |  | 2,130 |
Money market securities |  |  | 49 |  |  |  | - |  |  |  | - |  |  |  | 49 |
Other |  |  | 8 |  |  |  | 2 |  |  |  | - |  |  |  | 10 |
Total investments |  |  | 891 |  |  |  | 1,177 |  |  |  | 121 |  |  |  | 2,189 |
Derivative assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Credit derivatives |  |  | - |  |  |  | 10 |  |  |  | - |  |  |  | 10 |
Assets of consolidated VIEs: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury and government agency |  |  | 4 |  |  |  | - |  |  |  | - |  |  |  | 4 |
Corporate obligations |  |  | 7 |  |  |  | 360 |  |  |  | 80 |  |  |  | 447 |
Mortgage-backed securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage-backed agency |  |  | - |  |  |  | 37 |  |  |  | - |  |  |  | 37 |
Residential mortgage-backed non-agency |  |  | - |  |  |  | 2,600 |  |  |  | 22 |  |  |  | 2,622 |
Commercial mortgage-backed |  |  | - |  |  |  | 904 |  |  |  | 23 |  |  |  | 927 |
Asset-backed securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Collateralized debt obligations |  |  | - |  |  |  | 548 |  |  |  | 189 |  |  |  | 737 |
Other asset-backed |  |  | - |  |  |  | 254 |  |  |  | 81 |  |  |  | 335 |
State and municipal taxable and tax-exempt bonds |  |  | - |  |  |  | 4 |  |  |  | - |  |  |  | 4 |
Total fixed maturity securities held at fair value |  |  | 11 |  |  |  | 4,707 |  |  |  | 395 |  |  |  | 5,113 |
Loans receivable |  |  | - |  |  |  | - |  |  |  | 2,183 |  |  |  | 2,183 |
Loan repurchase commitments |  |  | - |  |  |  | - |  |  |  | 835 |  |  |  | 835 |
Derivative assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Credit derivatives |  |  | - |  |  |  | - |  |  |  | 817 |  |  |  | 817 |
Interest rate derivatives |  |  | - |  |  |  | 12 |  |  |  | - |  |  |  | 12 |
Total derivative assets |  |  | - |  |  |  | 12 |  |  |  | 817 |  |  |  | 829 |
Total assets |  | $ | 902 |  |  | $ | 5,906 |  |  | $ | 4,351 |  |  | $ | 11,159 |

35

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 7: Fair Value of Financial Instruments (continued)

|  | Fair Value Measurements at Reporting Date Using |  |  |  |
In millions |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |  |  | Balance as of December 31, 2010 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Derivative liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Credit derivatives |  | $ | - |  |  | $ | 25 |  |  | $ | 4,476 |  |  | $ | 4,501 |
Total derivative assets |  |  | - |  |  |  | 25 |  |  |  | 4,476 |  |  |  | 4,501 |
Liabilities of consolidated VIEs: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Variable interest entity notes |  |  | - |  |  |  | 2,006 |  |  |  | 4,698 |  |  |  | 6,704 |
Derivative liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Credit derivatives |  |  | - |  |  |  | - |  |  |  | 1,455 |  |  |  | 1,455 |
Interest rate derivatives |  |  | - |  |  |  | 635 |  |  |  | - |  |  |  | 635 |
Currency rate derivatives |  |  | - |  |  |  | - |  |  |  | 14 |  |  |  | 14 |
Total derivative liabilities |  |  | - |  |  |  | 635 |  |  |  | 1,469 |  |  |  | 2,104 |
Total liabilities |  | $ | - |  |  | $ | 2,666 |  |  | $ | 10,643 |  |  | $ | 13,309 |

Level 3 Analysis

Level 3 assets were $4.6 billion and $4.4 billion as of September 30, 2011 and December 31, 2010, respectively, and represented approximately 53% and 39%, of total assets measured at fair value, respectively. Level 3 liabilities were $9.8 billion and $10.6 billion as of September 30, 2011 and December 31, 2010, respectively, and represented approximately 80% of total liabilities measured at fair value.

The following tables present information about changes in Level 3 assets (including short-term investments) and liabilities measured at fair value on a recurring basis for the three months ended September 30, 2011 and 2010:

36

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 7: Fair Value of Financial Instruments (continued)

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Three Months Ended September 30, 2011

In millions |  | Balance, Beginning of Period |  |  | Realized Gains / (Losses) |  |  | Unrealized Gains / (Losses) Included in Earnings |  |  | Unrealized Gains / (Losses) Included in OCI |  |  | Foreign Exchange Recognized in OCI or Earnings |  |  | Purchases |  |  | Issuances |  |  | Settlements |  |  | Sales |  |  | Transfers into Level 3 (1) |  |  | Transfers out of Level 3 (1) |  |  | Ending Balance |  |  | Change in Unrealized Gains (Losses) for the Period Included in Earnings for Assets Still Held as of September 30, 2011 |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign governments |  | $ | 13 |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | (8 | ) |  | $ | 3 |  |  | $ | - |  |  | $ | 3 |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | 11 |  |  | $ | - |
Corporate obligations |  |  | 67 |  |  |  | (1 | ) |  |  | - |  |  |  | (1 | ) |  |  | (4 | ) |  |  | - |  |  |  | - |  |  |  | (29 | ) |  |  | - |  |  |  | 115 |  |  |  | - |  |  |  | 147 |  |  |  | - |
Residential mortgage-backed non-agency |  |  | 7 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (1 | ) |  |  | - |  |  |  | - |  |  |  | (1 | ) |  |  | 5 |  |  |  | - |
Commercial mortgage-backed |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Collateralized debt obligations |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Other asset-backed |  |  | 53 |  |  |  | - |  |  |  | - |  |  |  | (21 | ) |  |  | - |  |  |  | 2 |  |  |  | - |  |  |  | 4 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 38 |  |  |  | - |
State and municipal taxable bonds |  |  | 13 |  |  |  | 1 |  |  |  | - |  |  |  | 1 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (15 | ) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
State and municipal tax-exempt bonds |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Assets of consolidated VIEs: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Corporate obligations |  |  | 60 |  |  |  | - |  |  |  | (5 | ) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (1 | ) |  |  | - |  |  |  | 7 |  |  |  | - |  |  |  | 61 |  |  |  | (2 | )
Residential mortgage-backed non-agency |  |  | 17 |  |  |  | - |  |  |  | 3 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (1 | ) |  |  | (6 | ) |  |  | 2 |  |  |  | - |  |  |  | 15 |  |  |  | 1 |
Commercial mortgage-backed |  |  | 27 |  |  |  | - |  |  |  | (1 | ) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  |  |  |  |  | (11 | ) |  |  | 2 |  |  |  | - |  |  |  | 17 |  |  |  | (2 | )
Collateralized debt obligations |  |  | 179 |  |  |  | - |  |  |  | (17 | ) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (1 | ) |  |  | (21 | ) |  |  | 4 |  |  |  | - |  |  |  | 144 |  |  |  | (14 | )
Other asset-backed |  |  | 73 |  |  |  | - |  |  |  | 5 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (6 | ) |  |  | - |  |  |  | (1 | ) |  |  | 71 |  |  |  | 5 |
Loans receivable |  |  | 2,320 |  |  |  | - |  |  |  | (36 | ) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (66 | ) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 2,218 |  |  |  | (36 | )
Loan repurchase commitments |  |  | 905 |  |  |  | - |  |  |  | 33 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 938 |  |  |  | 33 |
Total assets |  | $ | 3,734 |  |  | $ | - |  |  | $ | (18 | ) |  | $ | (21 | ) |  | $ | (12 | ) |  | $ | 5 |  |  | $ | - |  |  | $ | (107 | ) |  | $ | (44 | ) |  | $ | 130 |  |  | $ | (2 | ) |  | $ | 3,665 |  |  | $ | (15 | )

37

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 7: Fair Value of Financial Instruments (continued)

In millions |  | Balance, Beginning of Period |  |  | Realized (Gains) / Losses |  |  | Unrealized (Gains) / Losses Included in Earnings |  |  | Unrealized (Gains) / Losses Included in OCI |  |  | Foreign Exchange Recognized in OCI or Earnings |  |  | Purchases |  |  | Issuances |  |  | Settlements |  |  | Sales |  |  | Transfers into Level 3 (1) |  |  | Transfers out of Level 3 (1) |  |  | Ending Balance |  |  | Change in Unrealized (Gains) Losses for the Period Included in Earnings for Liabilities Still Held as of September 30, 2011 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Credit derivative, net |  | $ | 5,983 |  |  | $ | 79 |  |  | $ | (832 | ) |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | (79 | ) |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | 5,151 |  |  | $ | (443 | )
Liabilities of consolidated VIEs: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
VIE notes |  |  | 4,553 |  |  |  | - |  |  |  | (197 | ) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (207 | ) |  |  | (981 | ) |  |  | - |  |  |  | - |  |  |  | 3,168 |  |  |  | (197 | )
Credit derivative, net |  |  | 593 |  |  |  | - |  |  |  | (99 | ) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 494 |  |  |  | (99 | )
Currency derivative, net |  |  | 16 |  |  |  | - |  |  |  | 2 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 18 |  |  |  | 2 |
Total liabilities |  | $ | 11,145 |  |  | $ | 79 |  |  | $ | (1,126 | ) |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | (286 | ) |  | $ | (981 | ) |  | $ | - |  |  | $ | - |  |  | $ | 8,831 |  |  | $ | (737 | )

(1) - Transferred in and out at the end of the period.

38

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 7: Fair Value of Financial Instruments (continued)

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Three Months Ended September 30, 2010

In millions |  | Balance, Beginning of Period |  |  | Realized Gains / (Losses) |  |  | Unrealized Gains / (Losses) Included in Earnings |  |  | Unrealized Gains / (Losses) Included in OCI |  |  | Foreign Exchange Recognized in OCI or Earnings |  |  | Purchases, Issuances and Settlements, net |  |  | Transfers into Level 3 (1) |  |  | Transfers out of Level 3 (1) |  |  | Ending Balance |  |  | Change in Unrealized Gains (Losses) for the Period Included in Earnings for Assets Still Held as of September 30, 2010 |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign governments |  | $ | 12 |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | 1 |  |  | $ | 6 |  |  | $ | - |  |  | $ | - |  |  | $ | 19 |  |  | $ | - |
Corporate obligations |  |  | 63 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (60 | ) |  |  | 3 |  |  |  | - |
Commercial mortgage-backed |  |  | 1 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (1 | ) |  |  | - |  |  |  | - |
Collateralized debt obligations |  |  | 11 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 11 |  |  |  | - |
Other asset-backed |  |  | 87 |  |  |  | - |  |  |  | - |  |  |  | (10 | ) |  |  | - |  |  |  | (3 | ) |  |  | 4 |  |  |  | - |  |  |  | 78 |  |  |  | - |
State and municipal tax-exempt bonds |  |  | 38 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (2 | ) |  |  | - |  |  |  | - |  |  |  | 36 |  |  |  | - |
Assets of consolidated VIEs: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Corporate obligations |  |  | 129 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 7 |  |  |  | 13 |  |  |  | - |  |  |  | 149 |  |  |  | - |
Residential mortgage-backed non-agency |  |  | 49 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (5 | ) |  |  | 24 |  |  |  | - |  |  |  | 68 |  |  |  | - |
Commercial mortgage-backed |  |  | 216 |  |  |  | - |  |  |  | 3 |  |  |  | - |  |  |  | - |  |  |  | (20 | ) |  |  | 17 |  |  |  | - |  |  |  | 216 |  |  |  | - |
Collateralized debt obligations |  |  | 327 |  |  |  | - |  |  |  | (53 | ) |  |  | - |  |  |  | - |  |  |  | (21 | ) |  |  | 34 |  |  |  | - |  |  |  | 287 |  |  |  | - |
Other asset-backed |  |  | 153 |  |  |  | - |  |  |  | (19 | ) |  |  | - |  |  |  | - |  |  |  | (6 | ) |  |  | 16 |  |  |  | (26 | ) |  |  | 118 |  |  |  | - |
Loans receivable |  |  | 2,608 |  |  |  | - |  |  |  | (167 | ) |  |  | - |  |  |  | 42 |  |  |  | (540 | ) |  |  | - |  |  |  | - |  |  |  | 1,943 |  |  |  | - |
Loan repurchase commitments |  |  | 792 |  |  |  | - |  |  |  | 2 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 794 |  |  |  | 2 |
Total assets |  | $ | 4,486 |  |  | $ | - |  |  | $ | (234 | ) |  | $ | (10 | ) |  | $ | 43 |  |  | $ | (584 | ) |  | $ | 108 |  |  | $ | (87 | ) |  | $ | 3,722 |  |  | $ | 2 |

In millions |  | Balance, Beginning of Period |  |  | Realized (Gains) / Losses |  |  | Unrealized (Gains) / Losses Included in Earnings |  |  | Unrealized (Gains) / Losses Included in OCI |  |  | Foreign Exchange Recognized in OCI or Earnings |  |  | Purchases, Issuances and Settlements, net |  |  | Transfers into Level 3 |  |  | Transfers out of Level 3 |  |  | Ending Balance |  |  | Change in Unrealized (Gains) Losses for the Period Included in Earnings for Liabilities still held as of September 30, 2010 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Credit derivative, net |  | $ | 4,484 |  |  | $ | (519 | ) |  | $ | 1,061 |  |  | $ | - |  |  | $ | - |  |  | $ | 519 |  |  | $ | - |  |  | $ | - |  |  | $ | 5,545 |  |  | $ | 546 |
Interest derivative, net |  |  | 5 |  |  |  | - |  |  |  | (5 | ) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Liabilities of consolidated VIEs: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
VIE notes |  |  | 5,074 |  |  |  | - |  |  |  | 235 |  |  |  | - |  |  |  | 45 |  |  |  | (540 | ) |  |  | - |  |  |  | - |  |  |  | 4,814 |  |  |  | - |
Credit Derivative, net |  |  | 267 |  |  |  | - |  |  |  | 35 |  |  |  | - |  |  |  | - |  |  |  | 155 |  |  |  | - |  |  |  | - |  |  |  | 457 |  |  |  | 35 |
Total liabilities |  | $ | 9,830 |  |  | $ | (519 | ) |  | $ | 1,326 |  |  | $ | - |  |  | $ | 45 |  |  | $ | 134 |  |  | $ | - |  |  | $ | - |  |  | $ | 10,816 |  |  | $ | 581 |

(1) - Transferred in and out at the end of the period.

39

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 7: Fair Value of Financial Instruments (continued)

Transfers into and out of Level 3 were $130 million and $2 million, respectively, for the three months ended September 30, 2011. Transfers into and out of Level 2 were $2 million and $130 million, respectively, for the three months ended September 30, 2011. Transfers into Level 3 were principally for corporate obligations where inputs, which are significant to their valuation, became unobservable during the quarter. Transfers out of Level 3 were principally for residential mortgage-backed non-agency and other asset-backed securities. These Level 2 inputs included spreads, prepayment speeds, default speeds, default severities, yield curves observable at commonly quoted intervals, and market corroborated inputs. There were no transfers into or out of Level 1. For the three months ended September 30, 2011, net unrealized losses related to transfers into Level 3 were $4 million and net unrealized losses related to transfers out of Level 3 were not significant.

Transfers into and out of Level 3 were $108 million and $87 million, respectively, for the three months ended September 30, 2010. Transfers into and out of Level 2 were $87 million and $108 million, respectively, for the three months ended September 30, 2010. Transfers into Level 3 were principally for collateralized debt obligations and residential mortgage-backed non-agency securities where inputs, which are significant to their valuation, became unobservable during the quarter. Transfers out of Level 3 were principally for corporate obligations and other asset-backed securities. These Level 2 inputs included spreads, prepayment speeds, default speeds, default severities, yield curves observable at commonly quoted intervals, and market corroborated inputs. There were no transfers into or out of Level 1. For the three months ended September 30, 2010, net unrealized gains related to transfers into Level 3 were not significant and net unrealized losses related to transfers out of Level 3 were $3 million.

All Level 1, 2 and 3 designations are made at the end of each accounting period.

The following tables present information about changes in Level 3 assets (including short-term investments) and liabilities measured at fair value on a recurring basis for the nine months ended September 30, 2011 and 2010:

40

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 7: Fair Value of Financial Instruments (continued)

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Nine Months Ended September 30, 2011

In millions |  | Balance, Beginning of Period |  |  | Realized Gains / (Losses) |  |  | Unrealized Gains / (Losses) Included in Earnings |  |  | Unrealized Gains / (Losses) Included in OCI |  |  | Foreign Exchange Recognized in OCI or Earnings |  |  | Purchases |  |  | Issuances |  |  | Settlements |  |  | Sales |  |  | Transfers into Level 3 (1) |  |  | Transfers out of Level 3 (1) |  |  | Ending Balance |  |  | Change in Unrealized Gains (Losses) for the Period Included in Earnings for Assets Still Held as of September 30, 2011 |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign governments |  | $ | 11 |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | (7 | ) |  | $ | 9 |  |  | $ | - |  |  | $ | (2 | ) |  | $ | - |  |  | $ | 7 |  |  | $ | (7 | ) |  | $ | 11 |  |  | $ | - |
Corporate obligations |  |  | 4 |  |  |  | (1 | ) |  |  | - |  |  |  | (1 | ) |  |  | (4 | ) |  |  | 12 |  |  |  | - |  |  |  | (30 | ) |  |  | (12 | ) |  |  | 179 |  |  |  | - |  |  |  | 147 |  |  |  | - |
Residential mortgage-backed non-agency |  |  | 5 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (1 | ) |  |  | 5 |  |  |  | - |  |  |  | - |  |  |  | (4 | ) |  |  | 1 |  |  |  | (1 | ) |  |  | 5 |  |  |  | - |
Commercial mortgage-backed |  |  | 3 |  |  |  | - |  |  |  | - |  |  |  | (1 | ) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (1 | ) |  |  | - |  |  |  | (1 | ) |  |  | - |  |  |  | - |
Collateralized debt obligations |  |  | 13 |  |  |  | 1 |  |  |  | - |  |  |  | (1 | ) |  |  | - |  |  |  | 2 |  |  |  | - |  |  |  | (10 | ) |  |  | (5 | ) |  |  | 1 |  |  |  | (1 | ) |  |  | - |  |  |  | - |
Other asset-backed |  |  | 70 |  |  |  | - |  |  |  | - |  |  |  | (36 | ) |  |  | - |  |  |  | 2 |  |  |  | - |  |  |  | 10 |  |  |  | (2 | ) |  |  | - |  |  |  | (6 | ) |  |  | 38 |  |  |  | - |
State and municipal taxable bonds |  |  | 14 |  |  |  | 1 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (15 | ) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
State and municipal tax-exempt bonds |  |  | 1 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (1 | ) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Assets of consolidated VIEs: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Corporate obligations |  |  | 80 |  |  |  | - |  |  |  | (18 | ) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (5 | ) |  |  | - |  |  |  | 11 |  |  |  | (7 | ) |  |  | 61 |  |  |  | (2 | )
Residential mortgage-backed non-agency |  |  | 22 |  |  |  | - |  |  |  | 2 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (5 | ) |  |  | (6 | ) |  |  | 2 |  |  |  | - |  |  |  | 15 |  |  |  | 2 |
Commercial mortgage-backed |  |  | 23 |  |  |  | - |  |  |  | 6 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (2 | ) |  |  | (12 | ) |  |  | 2 |  |  |  | - |  |  |  | 17 |  |  |  | 3 |
Collateralized debt obligations |  |  | 189 |  |  |  | - |  |  |  | (27 | ) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (4 | ) |  |  | (21 | ) |  |  | 18 |  |  |  | (11 | ) |  |  | 144 |  |  |  | 1 |
Other asset-backed |  |  | 81 |  |  |  | - |  |  |  | (3 | ) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (2 | ) |  |  | (6 | ) |  |  | 2 |  |  |  | (1 | ) |  |  | 71 |  |  |  | 2 |
Loans receivable |  |  | 2,183 |  |  |  | - |  |  |  | 260 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (223 | ) |  |  | (2 | ) |  |  | - |  |  |  | - |  |  |  | 2,218 |  |  |  | 260 |
Loan repurchase commitments |  |  | 835 |  |  |  | - |  |  |  | 91 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 12 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 938 |  |  |  | 91 |
Total assets |  | $ | 3,534 |  |  | $ | 1 |  |  | $ | 311 |  |  | $ | (39 | ) |  | $ | (12 | ) |  | $ | 30 |  |  | $ | 12 |  |  | $ | (288 | ) |  | $ | (72 | ) |  | $ | 223 |  |  | $ | (35 | ) |  | $ | 3,665 |  |  | $ | 357 |

41

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 7: Fair Value of Financial Instruments (continued)

In millions |  | Balance, Beginning of Period |  |  | Realized (Gains) / Losses |  |  | Unrealized (Gains) / Losses Included in Earnings |  |  | Unrealized (Gains) / Losses Included in OCI |  |  | Foreign Exchange Recognized in OCI or Earnings |  |  | Purchases |  |  | Issuances |  |  | Settlements |  |  | Sales |  |  | Transfers into Level 3 (1) |  |  | Transfers out of Level 3 (1) |  |  | Ending Balance |  |  | Change in Unrealized (Gains) Losses for the Period Included in Earnings for Liabilities Still Held as of September 30, 2011 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Credit derivative, net |  | $ | 4,476 |  |  | $ | 683 |  |  | $ | 675 |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | (683 | ) |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | 5,151 |  |  | $ | 2,305 |
Liabilities of consolidated VIEs: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
VIE notes |  |  | 4,698 |  |  |  | - |  |  |  | 87 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (456 | ) |  |  | (1,161 | ) |  |  | - |  |  |  | - |  |  |  | 3,168 |  |  |  | 87 |
Credit derivative, net |  |  | 638 |  |  |  | - |  |  |  | (144 | ) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 494 |  |  |  | (144 | )
Currency derivative, net |  |  | 14 |  |  |  | - |  |  |  | 4 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 18 |  |  |  | 4 |
Total liabilities |  | $ | 9,826 |  |  | $ | 683 |  |  | $ | 622 |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | (1,139 | ) |  | $ | (1,161 | ) |  | $ | - |  |  | $ | - |  |  | $ | 8,831 |  |  | $ | 2,252 |

(1) - Transferred in and out at the end of the period.

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Nine Months Ended September 30, 2010

In millions |  | Balance, Beginning of Period |  |  | Realized Gains / (Losses) |  |  | Unrealized Gains / (Losses) Included in Earnings |  |  | Unrealized Gains / (Losses) Included in OCI |  |  | Foreign Exchange Recognized in OCI or Earnings |  |  | Purchases, Issuances and Settlements, net |  |  | Transfers into Level 3 (1) |  |  | Transfers out of Level 3 (1) |  |  | Ending Balance |  |  | Change in Unrealized Gains (Losses) for the Period Included in Earnings for Assets Still Held as of September 30, 2010 |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign governments |  | $ | 12 |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | 1 |  |  | $ | 6 |  |  | $ | - |  |  | $ | - |  |  | $ | 19 |  |  | $ | - |
Corporate obligations |  |  | 70 |  |  |  | (1 | ) |  |  | - |  |  |  | 6 |  |  |  | (2 | ) |  |  | 9 |  |  |  |  |  |  |  | (79 | ) |  |  | 3 |  |  |  | - |
Commercial mortgage-backed |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 1 |  |  |  | - |  |  |  | (1 | ) |  |  | - |  |  |  | - |
Collateralized debt obligations |  |  | 14 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (3 | ) |  |  | - |  |  |  | - |  |  |  | 11 |  |  |  | - |
Other asset-backed |  |  | 34 |  |  |  | - |  |  |  | - |  |  |  | (51 | ) |  |  | - |  |  |  | 89 |  |  |  | 12 |  |  |  | (6 | ) |  |  | 78 |  |  |  | - |
State and municipal tax-exempt bonds |  |  | 50 |  |  |  | 1 |  |  |  | - |  |  |  | 1 |  |  |  | - |  |  |  | (16 | ) |  |  | - |  |  |  | - |  |  |  | 36 |  |  |  | - |
Assets of consolidated VIEs: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Corporate obligations |  |  | - |  |  |  | - |  |  |  | 76 |  |  |  | - |  |  |  | - |  |  |  | 68 |  |  |  | 13 |  |  |  | (8 | ) |  |  | 149 |  |  |  | - |
Residential mortgage-backed non-agency |  |  | 151 |  |  |  | - |  |  |  | (253 | ) |  |  | - |  |  |  | - |  |  |  | (93 | ) |  |  | 297 |  |  |  | (34 | ) |  |  | 68 |  |  |  | - |
Commercial mortgage-backed |  |  | 3 |  |  |  | - |  |  |  | 221 |  |  |  | - |  |  |  | - |  |  |  | 33 |  |  |  | 18 |  |  |  | (59 | ) |  |  | 216 |  |  |  | - |
Collateralized debt obligations |  |  | 42 |  |  |  | - |  |  |  | (80 | ) |  |  | - |  |  |  | - |  |  |  | 263 |  |  |  | 74 |  |  |  | (12 | ) |  |  | 287 |  |  |  | - |
Other asset-backed |  |  | 193 |  |  |  | - |  |  |  | (11 | ) |  |  | - |  |  |  | - |  |  |  | (53 | ) |  |  | 18 |  |  |  | (29 | ) |  |  | 118 |  |  |  | - |
Loans receivable |  |  | - |  |  |  | - |  |  |  | 28 |  |  |  | - |  |  |  | 21 |  |  |  | 1,894 |  |  |  | - |  |  |  | - |  |  |  | 1,943 |  |  |  | - |
Loan repurchase commitments |  |  | - |  |  |  | - |  |  |  | 79 |  |  |  | - |  |  |  | - |  |  |  | 715 |  |  |  | - |  |  |  | - |  |  |  | 794 |  |  |  | - |
Total assets |  | $ | 569 |  |  | $ | - |  |  | $ | 60 |  |  | $ | (44 | ) |  | $ | 20 |  |  | $ | 2,913 |  |  | $ | 432 |  |  | $ | (228 | ) |  | $ | 3,722 |  |  | $ | - |

42

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 7: Fair Value of Financial Instruments (continued)

In millions |  | Balance, Beginning of Period |  |  | Realized (Gains) / Losses |  |  | Unrealized (Gains) / Losses Included in Earnings |  |  | Unrealized (Gains) / Losses Included in OCI |  |  | Foreign Exchange Recognized in OCI or Earnings |  |  | Purchases, Issuances and Settlements, net |  |  | Transfers into Level 3 |  |  | Transfers out of Level 3 |  |  | Ending Balance |  |  | Change in Unrealized (Gains) Losses for the Period Included in Earnings for Liabilities still held as of September 30, 2010 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Credit derivative, net |  | $ | 3,773 |  |  | $ | (366 | ) |  | $ | 1,772 |  |  | $ | - |  |  | $ | - |  |  | $ | 366 |  |  | $ | - |  |  | $ | - |  |  | $ | 5,545 |  |  | $ | 1,274 |
Liabilities of consolidated VIEs: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
VIE notes |  |  | - |  |  |  | - |  |  |  | 367 |  |  |  | - |  |  |  | 39 |  |  |  | 4,408 |  |  |  | - |  |  |  | - |  |  |  | 4,814 |  |  |  | - |
Derivative contracts, net |  |  | - |  |  |  | - |  |  |  | (6 | ) |  |  | - |  |  |  | - |  |  |  | 463 |  |  |  | - |  |  |  | - |  |  |  | 457 |  |  |  | (6 | )
Total liabilities |  | $ | 3,773 |  |  | $ | (366 | ) |  | $ | 2,133 |  |  | $ | - |  |  | $ | 39 |  |  | $ | 5,237 |  |  | $ | - |  |  | $ | - |  |  | $ | 10,816 |  |  | $ | 1,268 |

(1) - Transferred in and out at the end of the period.

Transfers into and out of Level 3 were $223 million and $35 million, respectively, for the nine months ended September 30, 2011. Transfers into and out of Level 2 were $35 million and $223 million, respectively, for the nine months ended September 30, 2011. Transfers into Level 3 were principally for corporate obligations and collateralized debt obligations where inputs, which are significant to their valuation, became unobservable during the quarter. Transfers out of Level 3 were principally for collateralized debt obligations, corporate obligations and foreign governments. These Level 2 inputs included spreads, prepayment speeds, default speeds, default severities, yield curves observable at commonly quoted intervals, and market corroborated inputs. There were no transfers into or out of Level 1. For the nine months ended September 30, 2011, net unrealized losses related to transfers into Level 3 were $5 million and net unrealized losses related to transfers out of Level 3 were not significant.

Transfers into and out of Level 3 were $432 million and $228 million, respectively, for the nine months ended September 30, 2010. Transfers into and out of Level 2 were $228 million and $432 million, respectively, for the nine months ended September 30, 2010. Transfers into Level 3 were principally for residential mortgage-backed non-agency securities and collateralized debt obligations where inputs, which are significant to their valuation, became unobservable during the quarter. Transfers out of Level 3 were principally for corporate obligations, residential mortgage-backed non-agency and commercial mortgaged-backed securities. These Level 2 inputs included spreads, prepayment speeds, default speeds, defaulted severities, yield curves observable at commonly quoted intervals, and market corroborated inputs. There were no transfers into or out of Level 1. For the nine months ended September 30, 2010, net unrealized losses related to transfers into Level 3 were not significant and net unrealized losses related to transfers out of Level 3 were $3 million.

All Level 1, 2 and 3 designations are made at the end of each accounting period.

43

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 7: Fair Value of Financial Instruments (continued)

Gains and losses (realized and unrealized) included in earnings pertaining to Level 3 assets and liabilities for the three months ended September 30, 2011 and 2010 are reported on the consolidated statements of operations as follows:

|  | Three months ended September 30, 2011 |
|  |  |  |  |  |  |  |  |  |  | Consolidated VIEs |
In millions |  | Unrealized Gains (Losses) on Insured Derivatives |  |  | Net Realized Gains (Losses) |  |  | Net Gains (Losses) on Financial Instruments at Fair Value and Foreign Exchange |  |  | Net Realized Gains (Losses) |  |  | Net Gains (Losses) on Financial Instruments at Fair Value and Foreign Exchange |
Total gains (losses) included in earnings |  | $ | 832 |  |  | $ | (79 | ) |  | $ | - |  |  | $ | - |  |  | $ | 276 |
Change in unrealized gains (losses) for the period included in earnings for assets and liabilities still held as of September 30, 2011 |  | $ | 443 |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | 279 |

|  | Three months ended September 30, 2010 |
|  |  |  |  |  |  |  |  |  |  | Consolidated VIEs |
In millions |  | Unrealized Gains (Losses) on Insured Derivatives |  |  | Net Realized Gains (Losses) |  |  | Net Gains (Losses) on Financial Instruments at Fair Value and Foreign Exchange |  |  | Net Realized Gains (Losses) |  |  | Net Gains (Losses) on Financial Instruments at Fair Value and Foreign Exchange |
Total gains (losses) included in earnings |  | $ | (1,061 | ) |  | $ | 519 |  |  | $ | 5 |  |  | $ | - |  |  | $ | (504 | )
Change in unrealized gains (losses) for the period included in earnings for assets and liabilities still held as of September 30, 2010 |  | $ | (546 | ) |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | (33 | )

44

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 7: Fair Value of Financial Instruments (continued)

Gains and losses (realized and unrealized) included in earnings pertaining to Level 3 assets and liabilities for the nine months ended September 30, 2011 and 2010 are reported on the consolidated statements of operations as follows:

|  | Nine months ended September 30, 2011 |
|  |  |  |  |  |  |  |  |  |  | Consolidated VIEs |
In millions |  | Unrealized Gains (Losses) on Insured Derivatives |  |  | Net Realized Gains (Losses) |  |  | Net Gains (Losses) on Financial Instruments at Fair Value and Foreign Exchange |  |  | Net Realized Gains (Losses) |  |  | Net Gains (Losses) on Financial Instruments at Fair Value and Foreign Exchange |
Total gains (losses) included in earnings |  | $ | (675 | ) |  | $ | (683 | ) |  | $ | 1 |  |  | $ | - |  |  | $ | 364 |
Change in unrealized gains (losses) for the period included in earnings for assets and liabilities still held as of September 30, 2011 |  | $ | (2,305 | ) |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | 410 |

|  | Nine months ended September 30, 2010 |
|  |  |  |  |  |  |  |  |  |  | Consolidated VIEs |
In millions |  | Unrealized Gains (Losses) on Insured Derivatives |  |  | Net Realized Gains (Losses) |  |  | Net Gains (Losses) on Financial Instruments at Fair Value and Foreign Exchange |  |  | Net Realized Gains (Losses) |  |  | Net Gains (Losses) on Financial Instruments at Fair Value and Foreign Exchange |
Total gains (losses) included in earnings |  | $ | (1,772 | ) |  | $ | 366 |  |  | $ | - |  |  | $ | - |  |  | $ | (301 | )
Change in unrealized gains (losses) for the period included in earnings for assets and liabilities still held as of September 30, 2010 |  | $ | (1,274 | ) |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | 85 |

Fair Value Option

MBIA Corp. elected to record at fair value certain financial instruments of the VIEs that have been consolidated in connection with the adoption of the accounting guidance for consolidation of VIEs, among others.

The following tables presents the changes in fair value included in MBIA Corp.’s consolidated statement of operations for the three months ended September 30, 2011 and 2010, for all financial instruments for which the fair value option was elected:

|  | Three Months Ended September 30, 2011 |  |  | Three Months Ended September 30, 2010 |
In millions |  | Net Gains (Losses) on Financial Instruments at Fair Value and Foreign Exchange |  |  | Net Realized Gains (Losses) |  |  | Total Changes in Fair Value |  |  | Net Gains (Losses) on Financial Instruments at Fair Value and Foreign Exchange |  |  | Net Realized Gains (Losses) |  |  | Total Changes in Fair Value |
Fixed-maturity securities held at fair value |  | $ | (286 | ) |  | $ | - |  |  | $ | (286 | ) |  | $ | 89 |  |  | $ | - |  |  | $ | 89 |
Loans receivable at fair value: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage loans |  |  | (65 | ) |  |  | - |  |  |  | (65 | ) |  |  | (164 | ) |  |  | - |  |  |  | (164 | )
Other loans |  |  | (37 | ) |  |  | - |  |  |  | (37 | ) |  |  | 38 |  |  |  | - |  |  |  | 38 |
Loan repurchase commitments |  |  | 33 |  |  |  | - |  |  |  | 33 |  |  |  | 2 |  |  |  | - |  |  |  | 2 |
Other assets |  |  | (162 | ) |  |  | - |  |  |  | (162 | ) |  |  | (1 | ) |  |  | - |  |  |  | (1 | )
Long-term debt |  |  | 425 |  |  |  | - |  |  |  | 425 |  |  |  | 123 |  |  |  | - |  |  |  | 123 |

45

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 7: Fair Value of Financial Instruments (continued)

The following tables presents the changes in fair value included in MBIA Corp.’s consolidated statement of operations for the nine months ended September 30, 2011 and 2010, for all financial instruments for which the fair value option was elected:

|  | Nine Months Ended September 30, 2011 |  |  | Nine Months Ended September 30, 2010 |
In millions |  | Net Gains (Losses) on Financial Instruments at Fair Value and Foreign Exchange |  |  | Net Realized Gains (Losses) |  |  | Total Changes in Fair Value |  |  | Net Gains (Losses) on Financial Instruments at Fair Value and Foreign Exchange |  |  | Net Realized Gains (Losses) |  |  | Total Changes in Fair Value |
Fixed-maturity securities held at fair value |  | $ | (193 | ) |  | $ | - |  |  | $ | (193 | ) |  | $ | 335 |  |  | $ | 21 |  |  | $ | 356 |
Loans receivable at fair value: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage loans |  |  | 65 |  |  |  | - |  |  |  | 65 |  |  |  | 204 |  |  |  | 220 |  |  |  | 424 |
Other loans |  |  | (30 | ) |  |  | - |  |  |  | (30 | ) |  |  | 56 |  |  |  | - |  |  |  | 56 |
Loan repurchase commitments |  |  | 103 |  |  |  | - |  |  |  | 103 |  |  |  | 296 |  |  |  | 63 |  |  |  | 359 |
Other assets |  |  | (184 | ) |  |  | - |  |  |  | (184 | ) |  |  | (3 | ) |  |  | 159 |  |  |  | 156 |
Long-term debt |  |  | 335 |  |  |  | - |  |  |  | 335 |  |  |  | (302 | ) |  |  | (333 | ) |  |  | (635 | )

The following table reflects the difference between the aggregate fair value and the aggregate remaining contractual principal balance outstanding as of September 30, 2011 and December 31, 2010, for loans and long-term debt for which the fair value option has been elected.

|  | As of September 30, 2011 |  |  | As of December 31, 2010 |
In millions |  | Contractual Outstanding Principal |  |  | Fair Value |  |  | Difference |  |  | Contractual Outstanding Principal |  |  | Fair Value |  |  | Difference |
Loans receivable at fair value: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage loans |  | $ | 2,842 |  |  | $ | 2,079 |  |  | $ | 763 |  |  | $ | 3,334 |  |  | $ | 2,014 |  |  | $ | 1,320 |
Residential mortgage loans (90 days or more past due) |  |  | 238 |  |  |  | - |  |  |  | 238 |  |  |  | 243 |  |  |  | - |  |  |  | 243 |
Other loans |  |  | 299 |  |  |  | 92 |  |  |  | 207 |  |  |  | 412 |  |  |  | 124 |  |  |  | 288 |
Other loans (90 days or more past due) |  |  | 154 |  |  |  | 47 |  |  |  | 107 |  |  |  | 149 |  |  |  | 45 |  |  |  | 104 |
Total loans receivable at fair value |  | $ | 3,533 |  |  | $ | 2,218 |  |  | $ | 1,315 |  |  | $ | 4,138 |  |  | $ | 2,183 |  |  | $ | 1,955 |
Long-term debt |  | $ | 17,464 |  |  | $ | 5,160 |  |  | $ | 12,304 |  |  | $ | 17,619 |  |  | $ | 6,714 |  |  | $ | 10,905 |

Substantially all gains and losses included in earnings during the periods ended September 30, 2011 and December 31, 2010 on loans receivable and long-term debt are attributable to credit risk. This is primarily due to the high rate of defaults on loans and the collateral supporting the long-term debt, resulting in depressed pricing of the financial instruments.

Note 8: Investments

MBIA Corp.’s fixed-maturity portfolio consists of high-quality (average rating Aa) taxable and tax-exempt investments of diversified maturities. Other investments are primarily comprised of equity investments and loan receivable to an affiliate. The following tables present the amortized cost, fair value of available-for-sale fixed-maturity and other investments included in the consolidated investment portfolio of MBIA Corp. as of September 30, 2011 and December 31, 2010:

46

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 8: Investments (continued)

|  | September 30, 2011 |
In millions |  | Amortized Cost |  |  | Gross Unrealized Gains |  |  | Gross Unrealized Losses |  |  | Fair Value |
Fixed-maturity investments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Taxable bonds: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury and government agency |  | $ | 330 |  |  | $ | 20 |  |  | $ | - |  |  | $ | 350 |
Foreign governments |  |  | 354 |  |  |  | 22 |  |  |  | - |  |  |  | 376 |
Corporate obligations |  |  | 376 |  |  |  | 4 |  |  |  | (5 | ) |  |  | 375 |
Mortgage-backed securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage-backed agency |  |  | 7 |  |  |  | - |  |  |  | - |  |  |  | 7 |
Residential mortgage-backed non-agency |  |  | 63 |  |  |  | 33 |  |  |  | (1 | ) |  |  | 95 |
Commercial mortgage-backed |  |  | 2 |  |  |  | 1 |  |  |  | (1 | ) |  |  | 2 |
Asset-backed securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Collateralized debt obligations |  |  | 2 |  |  |  | - |  |  |  | - |  |  |  | 2 |
Other asset-backed |  |  | 161 |  |  |  | 1 |  |  |  | (99 | ) |  |  | 63 |
State and municipal bonds |  |  | 18 |  |  |  | 2 |  |  |  | - |  |  |  | 20 |
Total fixed-maturity investments |  |  | 1,313 |  |  |  | 83 |  |  |  | (106 | ) |  |  | 1,290 |
Other investments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Other investments |  |  | 7 |  |  |  | 1 |  |  |  | - |  |  |  | 8 |
Money market securities |  |  | 59 |  |  |  | - |  |  |  | - |  |  |  | 59 |
Total other investments |  |  | 66 |  |  |  | 1 |  |  |  | - |  |  |  | 67 |
Total available-for-sale investments |  | $ | 1,379 |  |  | $ | 84 |  |  | $ | (106 | ) |  | $ | 1,357 |

47

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 8: Investments (continued)

|  | December 31, 2010 |
In millions |  | Amortized Cost |  |  | Gross Unrealized Gains |  |  | Gross Unrealized Losses |  |  | Fair Value |
Fixed-maturity investments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Taxable bonds: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury and government agency |  | $ | 452 |  |  | $ | 1 |  |  | $ | (3 | ) |  | $ | 450 |
Foreign governments |  |  | 450 |  |  |  | 18 |  |  |  | - |  |  |  | 468 |
Corporate obligations |  |  | 737 |  |  |  | 3 |  |  |  | (4 | ) |  |  | 736 |
Mortgage-backed securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage-backed agency |  |  | 84 |  |  |  | - |  |  |  | - |  |  |  | 84 |
Residential mortgage-backed non-agency |  |  | 74 |  |  |  | 30 |  |  |  | (2 | ) |  |  | 102 |
Commercial mortgage-backed |  |  | 84 |  |  |  | 24 |  |  |  | - |  |  |  | 108 |
Asset-backed securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Collateralized debt obligations |  |  | 13 |  |  |  | 1 |  |  |  | - |  |  |  | 14 |
Other asset-backed |  |  | 153 |  |  |  | 1 |  |  |  | (63 | ) |  |  | 91 |
State and municipal |  |  | 31 |  |  |  | - |  |  |  | - |  |  |  | 31 |
Total taxable bonds |  |  | 2,078 |  |  |  | 78 |  |  |  | (72 | ) |  |  | 2,084 |
Tax-exempt bonds: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
State and municipal |  |  | 43 |  |  |  | 2 |  |  |  | - |  |  |  | 45 |
Total tax-exempt bonds |  |  | 43 |  |  |  | 2 |  |  |  | - |  |  |  | 45 |
Total fixed-maturity investments |  |  | 2,121 |  |  |  | 80 |  |  |  | (72 | ) |  |  | 2,129 |
Other investments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Other investments |  |  | 9 |  |  |  | 1 |  |  |  | - |  |  |  | 10 |
Money market securities |  |  | 49 |  |  |  | - |  |  |  | - |  |  |  | 49 |
Total other investments |  |  | 58 |  |  |  | 1 |  |  |  | - |  |  |  | 59 |
Total available-for-sale investments |  | $ | 2,179 |  |  | $ | 81 |  |  | $ | (72 | ) |  | $ | 2,188 |

Fixed-maturity investments carried at fair value of $6 million and $5 million as of September 30, 2011 and December 31, 2010, were on deposit with various regulatory authorities to comply with state insurance laws.

The following table presents the distribution by contractual maturity of available-for-sale fixed-maturity investments at amortized cost and fair value as of September 30, 2011. Contractual maturity may differ from expected maturity because borrowers may have the right to call or prepay obligations.

In millions |  | Amortized Cost |  |  | Fair Value |
Due in one year or less |  | $ | 317 |  |  | $ | 317 |
Due after one year through five years |  |  | 407 |  |  |  | 428 |
Due after five years through ten years |  |  | 311 |  |  |  | 332 |
Due after ten years through fifteen years |  |  | 17 |  |  |  | 19 |
Due after fifteen years |  |  | 26 |  |  |  | 25 |
Mortgage-backed |  |  | 72 |  |  |  | 104 |
Asset-backed |  |  | 163 |  |  |  | 65 |
Total fixed-maturity investments |  | $ | 1,313 |  |  | $ | 1,290 |

48

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 8: Investments (continued)

Investments that are held-to-maturity are reported on MBIA Corp.’s consolidated balance sheets at amortized cost. These investments, which primarily relate to MBIA Corp.’s consolidated VIEs, primarily consist of ABS and loans issued by major national and international corporations and other structured finance clients. There were no unrecognized gross gains and unrecognized gross losses were $384 million as of September 30, 2011. There were no unrecognized gross gains and unrecognized gross losses were $204 million as of December 31, 2010.

The following table presents the distribution of held-to-maturity investments by contractual maturity at amortized cost and fair value as of September 30, 2011:

|  |  |  |  |  |  |  | Consolidated VIEs |
In millions |  | Amortized Cost |  |  | Fair Value |  |  | Amortized Cost |  |  | Fair Value |
Due in one year or less |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |
Due after one year through five years (1) |  |  | 1 |  |  |  | 1 |  |  |  | - |  |  |  | - |
Due after five years through ten years |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Due after ten years through fifteen years |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Due after fifteen years |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Mortgage-backed |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Asset-backed |  |  | - |  |  |  | - |  |  |  | 2,840 |  |  |  | 2,456 |
Total held-to-maturity investments |  | $ | 1 |  |  | $ | 1 |  |  | $ | 2,840 |  |  | $ | 2,456 |
(1) - Relates to tax credit investments reported in “Other investments” on the consolidated balance sheet. |

The following tables present the gross unrealized losses included in accumulated other comprehensive income (loss) as of September 30, 2011 and December 31, 2010 related to available-for-sale fixed-maturity and other investments. These tables segregate investments that have been in a continuous unrealized loss position for less than twelve months from those that have been in a continuous unrealized loss position for twelve months or longer.

|  | September 30, 2011 |
|  | Less than 12 Months |  |  | 12 Months or Longer |  |  | Total |
In millions |  | Fair Value |  |  | Unrealized Losses |  |  | Fair Value |  |  | Unrealized Losses |  |  | Fair Value |  |  | Unrealized Losses |
Fixed-maturity investments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Taxable bonds: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign governments |  | $ | 31 |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | 31 |  |  | $ | - |
Corporate obligations |  |  | 139 |  |  |  | (2 | ) |  |  | 17 |  |  |  | (3 | ) |  |  | 156 |  |  |  | (5 | )
Mortgage-backed securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage-backed non-agency |  |  | 22 |  |  |  | (1 | ) |  |  | 9 |  |  |  | - |  |  |  | 31 |  |  |  | (1 | )
Commercial mortgage-backed |  |  | 0 |  |  |  | (1 | ) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (1 | )
Asset-backed securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Collateralized debt obligations |  |  | 1 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 1 |  |  |  | - |
Other asset-backed |  |  | 24 |  |  |  | (6 | ) |  |  | 27 |  |  |  | (93 | ) |  |  | 51 |  |  |  | (99 | )
Total fixed-maturity investments |  | $ | 217 |  |  | $ | (10 | ) |  | $ | 53 |  |  | $ | (96 | ) |  | $ | 270 |  |  | $ | (106 | )

49

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 8: Investments (continued)

|  | December 31, 2010 |
|  | Less than 12 Months |  |  | 12 Months or Longer |  |  | Total |
In millions |  | Fair Value |  |  | Unrealized Losses |  |  | Fair Value |  |  | Unrealized Losses |  |  | Fair Value |  |  | Unrealized Losses |
Fixed-maturity investments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Taxable bonds: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury and government agency |  | $ | 330 |  |  | $ | (3 | ) |  | $ | - |  |  | $ | - |  |  | $ | 330 |  |  | $ | (3 | )
Foreign governments |  |  | 32 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 32 |  |  |  | - |
Corporate obligations |  |  | 250 |  |  |  | (1 | ) |  |  | 7 |  |  |  | (3 | ) |  |  | 257 |  |  |  | (4 | )
Mortgage-backed securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage-backed agency |  |  | 60 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 60 |  |  |  | - |
Residential mortgage-backed non-agency |  |  | 16 |  |  |  | (1 | ) |  |  | 8 |  |  |  | (1 | ) |  |  | 24 |  |  |  | (2 | )
Commercial mortgage-backed |  |  | 7 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 7 |  |  |  | - |
Asset-backed securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Collateralized debt obligations |  |  | 2 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 2 |  |  |  | - |
Other asset-backed |  |  | 16 |  |  |  | (1 | ) |  |  | 48 |  |  |  | (62 | ) |  |  | 64 |  |  |  | (63 | )
State and municipal |  |  | 21 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 21 |  |  |  | - |
Total taxable bonds |  |  | 734 |  |  |  | (6 | ) |  |  | 63 |  |  |  | (66 | ) |  |  | 797 |  |  |  | (72 | )
Tax-exempt bonds: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
State and municipal |  |  | 5 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 5 |  |  |  | - |
Total tax-exempt bonds |  |  | 5 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 5 |  |  |  | - |
Total |  | $ | 739 |  |  | $ | (6 | ) |  | $ | 63 |  |  | $ | (66 | ) |  | $ | 802 |  |  | $ | (72 | )

The following table presents the gross unrealized losses of held-to-maturity investments as of September 30, 2011 and December 31, 2010. Held-to-maturity investments are reported at amortized cost on MBIA Corp.’s consolidated balance sheets. The table segregates investments that have been in a continuous unrealized loss position for less than twelve months from those that have been in a continuous unrealized loss position for twelve months or longer.

|  |  | "00000000" |  |  |  | "00000000" |  |  |  | "00000000" |  |  |  | "00000000" |  |  |  | "00000000" |  |  |  | "00000000" |
|  | September 30, 2011 |
|  | Less than 12 Months |  |  | 12 Months or Longer |  |  | Total |
In millions |  | Fair Value |  |  | Unrealized Losses |  |  | Fair Value |  |  | Unrealized Losses |  |  | Fair Value |  |  | Unrealized Losses |
Assets of Consolidated VIEs: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Other asset-backed |  | $ | 284 |  |  | $ | (31 | ) |  | $ | 2,172 |  |  | $ | (353 | ) |  | $ | 2,456 |  |  | $ | (384 | )
Total |  | $ | 284 |  |  | $ | (31 | ) |  | $ | 2,172 |  |  | $ | (353 | ) |  | $ | 2,456 |  |  | $ | (384 | )
|  | December 31, 2010 |
|  | Less than 12 Months |  |  | 12 Months or Longer |  |  | Total |
In millions |  | Fair Value |  |  | Unrealized Losses |  |  | Fair Value |  |  | Unrealized Losses |  |  | Fair Value |  |  | Unrealized Losses |
Assets of Consolidated VIEs: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Other asset-backed |  | $ | - |  |  | $ | - |  |  | $ | 2,635 |  |  | $ | (204 | ) |  | $ | 2,635 |  |  | $ | (204 | )
Total |  | $ | - |  |  | $ | - |  |  | $ | 2,635 |  |  | $ | (204 | ) |  | $ | 2,635 |  |  | $ | (204 | )

50

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 8: Investments (continued)

As of September 30, 2011 and December 31, 2010, MBIA Corp.’s available-for-sale fixed-maturity investment, other investment and held-to-maturity investment portfolios’ gross unrealized losses totaled $490 million and $276 million, respectively. The weighted average contractual maturity of securities in an unrealized loss position as of September 30, 2011 and December 31, 2010 was 26 and 24 years, respectively. As of September 30, 2011, there were 39 securities that were in an unrealized loss position for a continuous twelve-month period or longer with aggregate unrealized losses of $449 million. Within these securities, the book value of 11 securities exceeded market value by more than 5%. As of December 31, 2010, there were 34 securities that were in an unrealized loss position for a continuous twelve-month period or longer with aggregate unrealized losses of $270 million. Within these securities, the book value of 31 securities exceeded market value by more than 5%.

MBIA Corp. has evaluated on a security-by-security basis whether the unrealized losses in its investment portfolios were other-than-temporary considering duration and severity of unrealized losses, the circumstances that gave rise to the unrealized losses, and whether MBIA Corp. has the intent to sell the securities or more likely than not will be required to sell the securities before their anticipated recovery. Based on its evaluation, MBIA Corp. determined that the unrealized losses on the remaining securities were temporary in nature because its impairment analysis, including projected future cash flows, indicated that MBIA Corp. would be able to recover the amortized cost of impaired assets. MBIA Corp. also concluded that it does not have the intent to sell securities in an unrealized loss position and it is more likely than not that it will not have to sell these securities before recovery of their cost basis. In making this conclusion, MBIA Corp. examined the cash flow projections for its investment portfolios, the potential sources and uses of cash in its businesses, and the cash resources available to its business other than sales of securities. It also considered the existence of any risk management or other plans as of September 30, 2011 that would require the sale of impaired securities. On a quarterly basis, MBIA Corp. re-evaluates the unrealized losses in its investment portfolios to determine whether an impairment loss should be realized in current earnings. Refer to “Note 9: Investment Income and Gains and Losses” for information on realized losses due to other-than-temporary impairments.

Note 9: Investment Income and Gains and Losses

The following table includes MBIA Corp.’s total investment income:

|  | Three Months Ended September 30, |  |  | Nine Months Ended September 30, |
In millions |  | 2011 |  |  | 2010 |  |  | 2011 |  |  | 2010 |
Gross investment income |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed-maturity |  | $ | 14 |  |  | $ | 25 |  |  | $ | 52 |  |  | $ | 65 |
Short-term investments |  |  | 1 |  |  |  | 1 |  |  |  | 5 |  |  |  | 3 |
Other investments |  |  | 3 |  |  |  | 7 |  |  |  | 12 |  |  |  | 23 |
Consolidated VIEs |  |  | 13 |  |  |  | 11 |  |  |  | 39 |  |  |  | 32 |
Gross investment income |  |  | 31 |  |  |  | 44 |  |  |  | 108 |  |  |  | 123 |
Investment expenses |  |  | 2 |  |  |  | 3 |  |  |  | 6 |  |  |  | 7 |
Net investment income |  |  | 29 |  |  |  | 41 |  |  |  | 102 |  |  |  | 116 |
Realized gains and losses |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed-maturity: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Gains |  |  | 5 |  |  |  | 2 |  |  |  | 34 |  |  |  | 7 |
Losses |  |  | (1 | ) |  |  | - |  |  |  | (6 | ) |  |  | (1 | )
Net |  |  | 4 |  |  |  | 2 |  |  |  | 28 |  |  |  | 6 |
Total net realized gains (losses)(1) |  |  | 4 |  |  |  | 2 |  |  |  | 28 |  |  |  | 6 |
Total investment income |  | $ | 33 |  |  | $ | 43 |  |  | $ | 130 |  |  | $ | 122 |

| (1) - | These balances are included in the “Net gains (losses) on financial instruments at fair value and foreign exchange” line item on MBIA Corp.’s consolidated statements of operations.

Net realized gains (losses) from fixed-maturity investments in 2011 and 2010 were generated as a result of the ongoing management of all of MBIA Corp.’s investment portfolios. The increase in net realized gains was primarily driven by asset sales to finance commutation payments and continue to grow MBIA Corp.’s liquidity position.

51

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 9: Investment Income and Gains and Losses (continued)

The portion of other-than-temporary impairment losses on fixed-maturity securities that does not represent credit losses is recognized in accumulated other comprehensive income (loss). The following table presents the amount of credit loss impairments recognized in earnings on fixed-maturity securities held by MBIA Corp. for the three and nine months ended September 30, 2010, for which a portion of the other-than-temporary impairment losses was recognized in accumulated other comprehensive income (loss), and the corresponding changes in such amounts. There were no other-than-temporary impairments in 2011.

In millions |  | Three Months Ended September 30, |  |  | Nine Months Ended September 30, |
Credit Losses Recognized in Earnings Related to Other-Than-Temporary Impairments |  | 2010 |  |  | 2010 |
Beginning balance |  | $ | - |  |  | $ | 93 |
Accounting transition adjustment(1) |  |  | - |  |  |  | (93 | )
Ending balance |  | $ | - |  |  | $ | - |

(1) - | Reflects the adoption of the accounting principles for the consolidation of VIEs.

Net unrealized gains (losses), including related deferred income taxes, reported in accumulated other comprehensive income (loss) within shareholders’ equity consisted of:

In millions |  | As of September 30, 2011 |  |  | As of December 31, 2010 |
Fixed-maturity: |  |  |  |  |  |  |  |
Gains |  | $ | 83 |  |  | $ | 80 |
Losses |  |  | (106 | ) |  |  | (72 | )
Foreign exchange |  |  | - |  |  |  | (28 | )
Net |  |  | (23 | ) |  |  | (20 | )
Other investments: |  |  |  |  |  |  |  |
Gains |  |  | 1 |  |  |  | 1 |
Net |  |  | 1 |  |  |  | 1 |
Total |  |  | (22 | ) |  |  | (19 | )
Deferred income taxes (benefit) provision |  |  | (19 | ) |  |  | (5 | )
Unrealized gains (losses), net |  | $ | (3 | ) |  | $ | (14 | )

The change in net unrealized gains (losses), including the portion of other-than-temporary impairments included in accumulated other comprehensive loss, consisted of:

In millions |  | As of September 30, 2011 |  |  | As of December 31, 2010 |
Fixed-maturity(1) |  | $ | (3 | ) |  | $ | 160 |
Other investments |  |  | - |  |  |  | 1 |
Total |  |  | (3 | ) |  |  | 161 |
Deferred income tax (credited) charged |  |  | (14 | ) |  |  | (10 | )
Change in unrealized gains (losses), net |  | $ | 11 |  |  | $ | 171 |
(1) - The 12 month change as of December 31, 2010 included $134 million of net unrealized gains due to the transition adjustment for the adoption of the accounting principles for consolidation of VIEs. |

Note 10: Derivative Instruments

MBIA Corp. accounts for derivative transactions in accordance with the accounting principles for derivative and hedging activities, as amended, which requires that all such transactions be recorded on MBIA Corp.’s consolidated balance sheets at fair value. Refer to “Note 7: Fair Value of Financial Instruments” for the definition of fair value of derivative instruments.

52

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 10: Derivative Instruments (continued)

Changes in the fair value of derivatives, excluding insured derivatives, are recorded each period in current earnings within “Net gains (losses) on financial instruments at fair value and foreign exchange.” Changes in the fair value of insured derivatives are recorded each period in current earnings within “Net change in fair value of insured derivatives.” The net change in the fair value of MBIA Corp.’s insured derivatives has two primary components: (i) realized gains (losses) and other settlements on insured derivatives and (ii) unrealized gains (losses) on insured derivatives. “Realized gains (losses) and other settlements on insured derivatives” include (i) premiums received and receivable on written CDS contracts, (ii) premiums paid and payable to reinsurers in respect of CDS contracts, (iii) net amounts received or paid on reinsurance commutations, (iv) losses paid and payable to CDS contract counterparties due to the occurrence of a credit event or settlement agreement, (v) losses recovered and recoverable on purchased CDS contracts due to the occurrence of a credit event or settlement agreement and (vi) fees relating to CDS contracts. The “Unrealized gains (losses) on insured derivatives” include all other changes in fair value of the insured derivative contracts.

MBIA Corp. has entered into derivative transactions that it viewed as an extension of its core financial guarantee business but which do not qualify for the financial guarantee scope exception and, therefore, must be recorded at fair value in MBIA Corp.’s consolidated balance sheets. MBIA Corp. reduces risks embedded in its insured portfolio through the use of reinsurance. This includes cessions of insured derivatives under reinsurance agreements, in which MBIA Corp. economically hedges a portion of the credit and market risk associated with its insured credit derivative portfolio. Such arrangements are also accounted for as derivatives and recorded in MBIA Corp.’s consolidated financial statements at fair value. As of September 30, 2011 and December 31, 2010, the amount of these arrangements was immaterial.

Variable Interest Entities

The consolidated variable interest entities have entered into derivative transactions primarily consisting of interest rate swaps and CDS contracts. Interest rate swaps are entered into to hedge the risks associated with fluctuations in interest rates or fair values of certain contracts. CDS contracts are entered into to hedge credit risk or to replicate investments in cash assets.

Credit Derivatives Sold

The following table presents information about credit derivatives sold (insured) by MBIA Corp. that were outstanding as of September 30, 2011. Credit ratings represent the lower of underlying ratings currently assigned by Moody’s, S&P or MBIA.

In millions |  | Weighted Average Remaining Expected Maturity |  |  | Notional Value |
Credit Derivatives Sold |  |  | AAA |  |  | AA |  |  | A |  |  | BBB |  |  | Below BBB |  |  | Total Notional |  |  | Fair Value Asset (Liability) |
Insured credit default swaps |  |  | 6.0 Years |  |  | $ | 16,132 |  |  | $ | 16,023 |  |  | $ | 7,000 |  |  | $ | 16,791 |  |  | $ | 28,984 |  |  | $ | 84,930 |  |  | $ | (5,109 | )
Non-insured credit default swaps-VIE |  |  | 4.1 Years |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 2,477 |  |  |  | 2,477 |  |  |  | (1,473 | )
Insured swaps |  |  | 21.1 Years |  |  |  | - |  |  |  | 250 |  |  |  | 3,165 |  |  |  | 2,302 |  |  |  | 142 |  |  |  | 5,859 |  |  |  | (9 | )
All others |  |  | 3.1 Years |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 195 |  |  |  | 195 |  |  |  | (54 | )
Total notional |  |  |  |  |  | $ | 16,132 |  |  | $ | 16,273 |  |  | $ | 10,165 |  |  | $ | 19,093 |  |  | $ | 31,798 |  |  | $ | 93,461 |  |  |  |  |
Total fair value |  |  |  |  |  | $ | (147 | ) |  | $ | (114 | ) |  | $ | (147 | ) |  | $ | (1,052 | ) |  | $ | (5,185 | ) |  |  |  |  |  | $ | (6,645 | )

53

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 10: Derivative Instruments (continued)

The following table presents information about credit derivatives sold (insured) by MBIA Corp. that were outstanding as of December 31, 2010. Credit ratings represent the lower of underlying ratings currently assigned by Moody’s, S&P or MBIA.

In millions |  | Weighted Average Remaining Expected Maturity |  |  | Notional Value |
Credit Derivatives Sold |  |  | AAA |  |  | AA |  |  | A |  |  | BBB |  |  | Below BBB |  |  | Total Notional |  |  | Fair Value Asset (Liability) |
Insured credit default swaps |  |  | 7.5 Years |  |  | $ | 20,721 |  |  | $ | 18,530 |  |  | $ | 11,323 |  |  | $ | 15,356 |  |  | $ | 34,341 |  |  | $ | 100,271 |  |  | $ | (4,453 | )
Non-insured credit default swaps-VIE |  |  | 4.8 Years |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 2,612 |  |  |  | 2,612 |  |  |  | (1,455 | )
Insured swaps |  |  | 16.4 Years |  |  |  | - |  |  |  | 290 |  |  |  | 3,403 |  |  |  | 4,372 |  |  |  | 676 |  |  |  | 8,741 |  |  |  | (11 | )
All others |  |  | 8.5 Years |  |  |  | - |  |  |  | - |  |  |  | 113 |  |  |  | - |  |  |  | 195 |  |  |  | 308 |  |  |  | (37 | )
Total notional |  |  |  |  |  | $ | 20,721 |  |  | $ | 18,820 |  |  | $ | 14,839 |  |  | $ | 19,728 |  |  | $ | 37,824 |  |  | $ | 111,932 |  |  |  |  |
Total fair value |  |  |  |  |  | $ | (33 | ) |  | $ | (82 | ) |  | $ | (307 | ) |  | $ | (545 | ) |  | $ | (4,989 | ) |  |  |  |  |  | $ | (5,956 | )

Referenced credit ratings assigned by MBIA Corp. to insured credit derivatives are derived by MBIA Corp.’s surveillance group. In assigning an internal rating, current status reports from issuers and trustees, as well as publicly available transaction-specific information, are reviewed. Also, where appropriate, cash flow analyses and collateral valuations are considered. The maximum potential amount of future payments (undiscounted) on CDS contracts are estimated as the notional value plus any additional debt service costs, such as interest or other amounts owing on CDS contracts. The maximum amount of future payments that MBIA Corp. may be required to make under these guarantees is $94.0 billion. This amount is net of $177 million of insured derivatives ceded under reinsurance agreements in which MBIA Corp. economically hedges a portion of the credit and market risk associated with its insured derivatives. The maximum potential amount of future payments (undiscounted) on insured swaps are estimated as the notional value of such contracts.

MBIA Corp. may hold recourse provisions with third parties in derivative transactions through both reinsurance and subrogation rights. MBIA Corp.’s reinsurance arrangements provide that should MBIA Corp. pay a claim under a guarantee of a derivative contract, then MBIA Corp. could collect amounts from any reinsurers that have reinsured the guarantee on either a proportional or non-proportional basis, depending upon the underlying reinsurance agreement. MBIA Corp. may also have recourse through subrogation rights whereby if MBIA Corp. makes a claim payment, it is entitled to any rights of the insured counterparty, including the right to any assets held as collateral.

Financial Statement Impact

As of September 30, 2011 and December 31, 2010, MBIA Corp. reported derivative assets of $992 million and $839 million, respectively, and derivative liabilities of $7.1 billion and $6.6 billion, respectively, which are shown separately on the consolidated balance sheets. The following table presents the amount of derivative assets and liabilities by instrument as of September 30, 2011:

In millions |  | Notional Amount Outstanding |  |  | Derivative Assets |  |  | Derivative Liabilities |
Derivative Instruments |  |  | Balance Sheet Location |  | Fair Value |  |  | Balance Sheet Location |  | Fair Value |
Not designated as hedging instruments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Insured credit default swaps |  | $ | 84,930 |  |  | Derivative assets |  | $ | - |  |  | Derivative liabilities |  | $ | (5,109 | )
Non-insured credit default swaps-VIE |  |  | 4,563 |  |  | Derivative assets-VIE |  |  | 980 |  |  | Derivative liabilities-VIE |  |  | (1,473 | )
Insured swaps |  |  | 10,230 |  |  | Derivative assets |  |  | 8 |  |  | Derivative liabilities |  |  | (9 | )
Interest rate swaps -VIE |  |  | 8,060 |  |  | Derivative assets-VIE |  |  | - |  |  | Derivative liabilities-VIE |  |  | (397 | )
Cross Currency Swaps -VIE |  |  | 126 |  |  | Derivative assets-VIE |  |  | - |  |  | Derivative liabilities-VIE |  |  | (18 | )
All other |  |  | 195 |  |  | Derivative assets |  |  | - |  |  | Derivative liabilities |  |  | (54 | )
All other-VIE |  |  | 465 |  |  | Derivative assets-VIE |  |  | 4 |  |  | Derivative liabilities-VIE |  |  | - |
Total derivatives |  | $ | 108,569 |  |  |  |  | $ | 992 |  |  |  |  | $ | (7,060 | )

54

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 10: Derivative Instruments (continued)

The following table presents the amount of derivative assets and liabilities by instrument as of December 31, 2010:

In millions |  |  |  |  |  |  |  |  |  |  |  |  |
|  | Notional Amount Outstanding |  |  | Derivative Assets |  |  | Derivative Liabilities |
Derivative Instruments |  |  | Balance Sheet Location |  | Fair Value |  |  | Balance Sheet Location |  | Fair Value |
Not designated as hedging instruments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Insured credit default swaps |  | $ | 100,296 |  |  | Derivative assets |  | $ | - |  |  | Derivative liabilities |  | $ | (4,453 | )
Non-insured credit default swaps-VIE |  |  | 3,973 |  |  | Derivative assets-VIE |  |  | 817 |  |  | Derivative liabilities-VIE |  |  | (1,455 | )
Insured swaps |  |  | 13,501 |  |  | Derivative assets |  |  | 10 |  |  | Derivative liabilities |  |  | (11 | )
Interest rate swaps -VIE |  |  | 14,054 |  |  | Derivative assets-VIE |  |  | 2 |  |  | Derivative liabilities-VIE |  |  | (635 | )
Cross Currency Swaps -VIE |  |  | 137 |  |  | Derivative assets-VIE |  |  | - |  |  | Derivative liabilities-VIE |  |  | (14 | )
All other |  |  | 420 |  |  | Derivative assets |  |  | - |  |  | Derivative liabilities |  |  | (37 | )
All other-VIE |  |  | 592 |  |  | Derivative assets-VIE |  |  | 10 |  |  | Derivative liabilities-VIE |  |  | - |
Total derivatives |  | $ | 132,973 |  |  |  |  | $ | 839 |  |  |  |  | $ | (6,605 | )

The following table shows the effect of derivative instruments on the consolidated statements of operations for the three months ended September 30, 2011:

In millions |  |  |  |  |
Derivatives Not Designated as Hedging Instruments |  | Location of Gain (Loss) Recognized in Income on Derivative |  | Net Gain (Loss) Recognized in Income |
Insured credit default swaps |  | Unrealized gains (losses) on insured derivatives |  | $ | 812 |
Insured credit default swaps |  | Realized gains (losses) and other settlements on insured derivatives |  |  | (54 | )
Non-insured credit default swaps-VIE |  | Net gains (losses) on financial instruments at fair value and foreign exchange-VIE |  |  | 98 |
Interest rate swaps-VIE |  | Net gains (losses) on financial instruments at fair value and foreign exchange-VIE |  |  | (25 | )
Currency swap-VIE |  | Net gains (losses) on financial instruments at fair value and foreign exchange-VIE |  |  | (2 | )
All other |  | Unrealized gains (losses) on insured derivatives |  |  | 20 |
All other-VIE |  | Net gains (losses) on financial instruments at fair value and foreign exchange-VIE |  |  | (5 | )
Total |  |  |  | $ | 844 |

55

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 10: Derivative Instruments (continued)

The following table shows the effect of derivative instruments on the consolidated statements of operations for the three months ended September 30, 2010:

In millions |  |  |  |  |
Derivatives Not Designated as Hedging Instruments |  | Location of Gain (Loss) Recognized in Income on Derivative |  | Net Gain (Loss) Recognized in Income |
Insured credit default swaps |  | Unrealized gains (losses) on insured derivatives |  | $ | (1,057 | )
Insured credit default swaps |  | Realized gains (losses) and other settlements on insured derivatives |  |  | 552 |
Non-insured credit default swaps-VIE |  | Net gains (losses) on financial instruments at fair value and foreign exchange-VIE |  |  | (35 | )
Insured swaps |  | Unrealized gains (losses) on insured derivatives |  |  | 2 |
Interest rate swaps-VIE |  | Net gains (losses) on financial instruments at fair value and foreign exchange-VIE |  |  | (57 | )
All other |  | Unrealized gains (losses) on insured derivatives |  |  | (4 | )
All other |  | Net gains (losses) on financial instruments at fair value and foreign exchange |  |  | (4 | )
All other-VIE |  | Net gains (losses) on financial instruments at fair value and foreign exchange-VIE |  |  | (2 | )
Total |  |  |  | $ | (605 | )

The following table shows the effect of derivative instruments on the consolidated statements of operations for the nine months ended September 30, 2011:

In millions |  |  |  |  |
Derivatives Not Designated as Hedging Instruments |  | Location of Gain (Loss) Recognized in Income on Derivative |  | Net Gain (Loss) Recognized in Income |
Insured credit default swaps |  | Unrealized gains (losses) on insured derivatives |  | $ | (658 | )
Insured credit default swaps |  | Realized gains (losses) and other settlements on insured derivatives |  |  | (601 | )
Non-insured credit default swaps-VIE |  | Net gains (losses) on financial instruments at fair value and foreign exchange-VIE |  |  | 144 |
Interest rate swaps-VIE |  | Net gains (losses) on financial instruments at fair value and foreign exchange-VIE |  |  | 23 |
Currency swap-VIE |  | Net gains (losses) on financial instruments at fair value and foreign exchange-VIE |  |  | (4 | )
All other |  | Unrealized gains (losses) on insured derivatives |  |  | (17 | )
All other-VIE |  | Net gains (losses) on financial instruments at fair value and foreign exchange-VIE |  |  | (6 | )
Total |  |  |  | $ | (1,119 | )

56

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 10: Derivative Instruments (continued)

The following table shows the effect of derivative instruments on the consolidated statements of operations for the nine months ended September 30, 2010:

In millions |  |  |  |  |
Derivatives Not Designated as Hedging Instruments |  | Location of Gain (Loss) Recognized in Income on Derivative |  | Net Gain (Loss) Recognized in Income |
Insured credit default swaps |  | Unrealized gains (losses) on insured derivatives |  | $ | (1,759 | )
Insured credit default swaps |  | Realized gains (losses) and other settlements on insured derivatives |  |  | 454 |
Non-insured credit default swaps-VIE |  | Net gains (losses) on financial instruments at fair value and foreign exchange-VIE |  |  | 8 |
Insured swaps |  | Unrealized gains (losses) on insured derivatives |  |  | 2 |
Interest rate swaps-VIE |  | Net gains (losses) on financial instruments at fair value and foreign exchange-VIE |  |  | (153 | )
All other |  | Unrealized gains (losses) on insured derivatives |  |  | (12 | )
All other |  | Net gains (losses) on financial instruments at fair value and foreign exchange |  |  | (10 | )
All other-VIE |  | Net gains (losses) on financial instruments at fair value and foreign exchange-VIE |  |  | (11 | )
Total |  |  |  | $ | (1,481 | )

Note 11: Income Taxes

MBIA Corp.’s income taxes and the related effective tax rates for the three and nine months ended September 30, 2011 and 2010 are as follows:

|  | Three Months Ended September 30, |  |  | Nine Months Ended September 30, |
In millions |  | 2011 |  |  | 2010 |  |  | 2011 |  |  | 2010 |
Pre-tax income (loss) |  | $ | 631 |  |  |  |  |  |  | $ | (379 | ) |  |  |  |  |  | $ | (1,326 | ) |  |  |  |  |  | $ | (818 | ) |  |  |  |
Provision (benefit) for income taxes |  | $ | 217 |  |  |  | 34.4 | % |  | $ | (62 | ) |  |  | 16.4 | % |  | $ | (484 | ) |  |  | 36.5 | % |  | $ | (275 | ) |  |  | 33.6 | %

Embedded in the effective tax rate for the nine months ended September 30, 2011 are the tax effects of the MBIA Corp.’s expected operating activities, such as scheduled premium earnings, fees, net investment income, and operating expenses, for the full year of 2011. For the nine months ended September 30, 2011, MBIA Corp.’s effective tax rate applied to its pre-tax loss was higher than the U.S. statutory tax rate as a result of MBIA Corp.’s tax-exempt interest income from investments, income earned in non-U.S. jurisdictions, which is being taxed at less than 35%, and a reduction in the valuation allowance. MBIA Corp.’s effective tax rate related to the pre-tax loss for the nine months ended September 30, 2010 was lower than the U.S. statutory rate primarily due to net unrealized loss recorded on MBIA Corp.’s derivatives portfolio, and foreign taxes offset by tax-exempt interest from investments, and a decrease in the valuation allowance.

For interim reporting purposes, MBIA Corp. has calculated its effective tax rate for the full year of 2011 by treating the net unrealized loss on its insured derivative portfolio as a discrete item. As such, this amount is not included when projecting MBIA Corp.’s full year effective tax rate but rather is accounted for at the federal statutory rate of 35% after applying the projected full year effective tax rate to actual nine-month results before the discrete item. Given MBIA Corp.’s inability to estimate this item for the full year of 2011, MBIA Corp. believes that it is appropriate to treat net unrealized gains and losses on its derivative portfolio as a discrete item for purposes of calculating its effective tax rate for the year.

57

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 11: Income Taxes (continued)

Deferred Tax Asset, Net of Valuation Allowance

MBIA Corp. establishes a valuation allowance against its deferred tax asset when it is more likely than not that all or a portion of the deferred tax asset will not be realized. All evidence, both positive and negative, needs to be identified and considered in making the determination. Future realization of the existing deferred tax asset ultimately depends, in part, on the existence of sufficient taxable income of appropriate character (for example, ordinary income versus capital gains) within the carryforward period available under the tax law.

As of September 30, 2011, MBIA Corp. reported a net deferred tax asset of $1.4 billion, with no valuation allowance.

MBIA Corp. has concluded that it is more likely than not that the remaining deferred tax assets will be realized. In its conclusion, MBIA Corp. considered the following evidence (both positive and negative):

| • |  | Due to the long-tail nature of the financial guarantee business, it is important to note that MBIA Corp., without regard to any new business, will have a steady stream of scheduled premium earnings with respect to the existing insured portfolio. MBIA Corp.’s announcement in February 2008 of a temporary suspension in writing new structured finance transactions and a permanent cessation with respect to insuring new CDS contracts, except in transactions related to the reduction of existing derivative exposure, would not have an impact on the expected earnings related to the existing insured portfolio. Although MBIA Corp. expects a significant portion of the unrealized losses to reverse over time, MBIA Corp. performed taxable income projections over a fifteen and twenty year period to determine whether it will have sufficient income to offset its deferred tax asset that will generate future ordinary deductions. In this analysis, MBIA Corp. concluded that premium earnings, even without regard to any new business, combined with investment income, less deductible expenses, will be sufficient to recover its net deferred tax asset.

| • |  | MBIA Corp.’s taxable income projections used to assess the recoverability of its deferred tax asset include an estimate of future loss and LAE equal to the present value discount of loss reserves already recognized on MBIA Corp.’s consolidated balance sheets and an estimate of LAE which is generally insignificant. MBIA Corp. does not assume additional losses, with the exception of the accretion of its existing present value loss reserves, because MBIA Corp. establishes case basis reserves on a present value basis based on an estimate of probable losses on specifically identified credits that have defaulted or are expected to default.

| • |  | As of September 30, 2011, MBIA Corp. had a deferred tax asset of $22 million related to unrealized gains and losses on investments. MBIA Corp. intends to hold these investments until maturity or until such time as the value recovers. As such, MBIA Corp. expects that the related deferred tax assets will reverse over the life of the securities.

| • |  | Approximately $1.7 billion of the net deferred tax asset relates to losses on insured credit derivatives of approximately $4.8 billion. MBIA Corp. believes that such deferred tax asset “will more likely than not” be realized as MBIA Corp. expects the unrealized losses and its related deferred tax asset to substantially reverse over time as contracts mature or are commuted.

| • |  | MBIA Corp. files its U.S. Corporation Income Tax Return as a member of the MBIA Inc. consolidated group and participates in the MBIA Tax Sharing Agreement under which MBIA Corp. is allocated its share of consolidated tax liability or tax benefit as determined under the tax sharing agreement.

| • |  | While the ratings downgrades by the rating agencies have significantly adversely impacted MBIA Corp.’s ability to write new business, the downgrades did not have a material impact on earnings from the existing insured portfolio, which MBIA Corp. believes will be sufficient to absorb losses in the event that the cumulative unrealized losses become fully impaired.

| • |  | With respect to installment policies, MBIA Corp. generally does not have an automatic cancellation provision solely in connection with ratings downgrades. For purposes of projecting future taxable income, MBIA Corp. has applied a haircut to adjust for the possible cancellation of future installment premiums based on recent data. With regard to upfront policies, to the extent that the issuer chooses to terminate a policy, any unearned premium reserve with respect to that policy will be accelerated into earnings (i.e. refundings).

| • |  | With respect to insured CDS contracts, in the event that there are defaults for which MBIA Corp. is required to pay claims, MBIA Corp. believes that the losses should be characterized as ordinary losses for tax purposes and, as such, the actual and expected payments will be recorded as losses incurred for statutory accounting purposes. However, because the federal income tax treatment of CDS contracts is an unsettled area of tax law, in the event that the Internal Revenue Service (“IRS”) has a different view and considers the losses as capital losses, MBIA Corp. may be required to establish a valuation allowance against substantially all of the deferred tax asset related to these losses, until such time as it has sufficient capital gains to offset the losses. The establishment of this valuation allowance would have a material adverse effect on MBIA Corp.’s financial condition at the time of its establishment.

58

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 11: Income Taxes (continued)

After reviewing all of the evidence available, both positive and negative, MBIA Corp. believes that it has appropriately valued the recoverability of its deferred tax assets, net of the valuation allowance, as of September 30, 2011. MBIA Corp. continues to assess the adequacy of its valuation allowance as additional evidence becomes available. MBIA Corp.’s recent financial results have been volatile which has impacted management’s ability to project accurately future taxable income. Continued volatility or losses beyond those projected may cause MBIA Corp. to conclude at a future date that certain of the deferred tax assets within the $1.4 billion as of September 30, 2011 may not be realizable.

Ownership Change under Section 382 of the Internal Revenue Code

Section 382 of the Internal Revenue Code of 1986, as amended, imposes annual limitations on the utilization of net operating loss carryforwards, other tax carryforwards, and certain built-in losses upon an ownership change as defined under that section. In general terms, an ownership change may result from transactions that increase the aggregate ownership of certain shareholders in MBIA Inc.’s by more than fifty percentage points over a three year testing period (“Section 382 Ownership Change”).

During the first nine months of 2011, the cumulative ownership shift decreased to approximately 28.6%. This was due to the expiration in the first quarter of the three-year testing window with respect to Section 382 changes in ownership:

| • |  | The Warburg Pincus acquisition of MBIA Inc.’s stock in a secondary offering on January 30, 2008.

| • |  | The equity issuance which took place on February 13, 2008.

Although the cumulative ownership shift as of September 30, 2011 is significantly less than the 50% threshold, MBIA Inc. continues to monitor any changes in its ownership for new 5% owners, certain dispositions by 5% owners, future equity issuances and redemptions and repurchases of shares.

Treatment of Undistributed Earnings of Certain Foreign Subsidiaries—”Accounting for Income Taxes – Special Areas”

No U.S. deferred income taxes have been provided on the undistributed earnings of MBIA UK Insurance Limited and MBIA Mexico, S.A. de C.V., because of MBIA Corp.’s practice and intent to permanently reinvest its earnings. The cumulative amounts of such untaxed earnings were $22 million and $114 million as of September 30, 2011 and December 31, 2010, respectively.

Accounting for Uncertainty in Income Taxes

It is MBIA Corp.’s policy to record any change in unrecognized tax benefits (“UTBs”) and related interest and penalties to income taxes as a component of income tax expense in the statement of operations. As of September 30, 2011 and December 31, 2010, there were no material changes in UTBs, interest, or penalties.

MBIA Corp.’s significant major tax jurisdictions include the U.S. and the United Kingdom (“U.K.”).

MBIA and its U.S. subsidiaries file a U.S. consolidated federal income tax return. The IRS has concluded its field work with respect to the examination of tax years 2004 through 2009 and the results are subject to review by the Joint Committee on Taxation.

The U.K. tax authorities are currently auditing tax years 2005 through 2008. MBIA Corp. expects the examinations to be concluded before December 31, 2011. French tax matters have been concluded through 2007 including the settlement.

It is reasonably possible that the total amount of unrecognized tax benefit will significantly increase or decrease within the next 12 months due to the possibility of finalizing adjustments and concluding all significant tax examinations. The range of this possible change to the amount of the uncertain tax benefit cannot be estimated at this time.

Note 12: Commitments and Contingencies

In the normal course of operating its business, MBIA Corp. may be involved in various legal proceedings. Additionally, MBIA Inc. may be involved in various legal proceedings that directly or indirectly impact MBIA Corp.

The following commitments and contingencies provide an update to those discussed in “Note 19: Commitments and Contingencies” in the Notes to Consolidated Financial Statements included in Exhibit 99.3 of MBIA Inc.’s Annual Report on Form 10-K for year ended December 31, 2010 as filed with the SEC on March 1, 2011 and should be read in conjunction with the complete descriptions provided in the aforementioned note included in Exhibit 99.3 to Form 10-K.

59

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 12: Commitments and Contingencies (continued)

Corporate Litigation

Ambac Bond Insurance Coverage Cases, Coordinated Proceeding Case No. JCCP 4555 (Super. Ct. of Cal., County of San Francisco)

On August 8, 2011, plaintiffs filed amended versions of their respective complaints. These amended complaints name as defendants, among others, MBIA Inc., MBIA Corp., National, and renew claims alleging breach of contract, fraud, unfair business practices and violation of California’s Cartwright Act. On October 20, 2011, the court overruled MBIA’s demurrers to plaintiffs’ fraud claims and Cartwright Act claims.

In re Municipal Derivatives Antitrust Litigation, M.D.L. No. 1950 (S.D.N.Y.)

As of May 31, 2011, MBIA has answered all of the existing complaints.

Tri-City Healthcare District v. Citibank. et al.; Case No. 30-2010-00359692 (Super. Ct. of Cal., County of Orange)

On June 13, 2011, Tri-City Healthcare District filed its Fourth Amended Complaint against MBIA Inc., MBIA Corp. and National, which purports to state seven causes of action against MBIA for fraud in the inducement, concealment, negligent misrepresentation, negligence, breach of contract, duress, and breach of the covenant of good faith arising from Tri-City Healthcare District’s investment in auction rate securities. On September 8, 2011, the court granted in part and denied in part MBIA’s demurrer to Tri-City’s Fourth Amended Complaint. On October 4, 2011, MBIA filed its answer to the remaining causes of action.

Recovery Litigation

MBIA Insurance Corp. v. Countrywide Home Loans, Inc., et al.; Index No. 602825/08 (N.Y. Sup. Ct., N.Y. County)

On June 30, 2011, the Appellate Division of the New York State Supreme Court affirmed the lower court’s denial of Countrywide’s motion to dismiss MBIA Corp.’s fraud claim. On October 5, 2011, a hearing was held on MBIA Corp.’s motion for partial summary judgment regarding proof of causation and Bank of America’s motion to consolidate and/or sever the successor liability claims in four separate actions by monoline insurers. On October 31, 2011, the court denied Bank of America’s motion to consolidate and/or sever the successor liability claims (allowing deposition and expert discovery on the successor liability claim to proceed but reserving decision on whether to sever and consolidate the successor liability claim). On November 3, 2011, Bank of America filed a Notice of Appeal of the court’s October 31 decision. A decision on MBIA Corp.’s motion for partial summary judgment regarding proof of causation is pending.

MBIA Insurance Corp. v. Bank of America, et al.; Case No. BC417572 (Super. Ct Cal., County of Los Angeles)

On July 14, 2011, the court lifted the discovery stay in order for the parties to negotiate depositions and coordinate same with the New York Countrywide action. On October 3, 2011, the case was reassigned to Judge John Shepard Wiley.

MBIA Insurance Corp. v. Credit Suisse Securities (USA) LLC, et al.; Index No. 603751/09E (N.Y. Sup. Ct., N.Y. County)

On June 1, 2011, the court reversed its prior ruling issued on August 9, 2010, and dismissed MBIA Corp.’s fraudulent inducement cause of action. On October 13, 2011, the court granted MBIA Corp.’s motion to renew consideration of the court’s June 1 revised opinion and reinstated MBIA Corp.’s claim for fraudulent inducement but struck its demand for a jury trial. On November 4, 2011, Credit Suisse filed a Notice of Appeal of the court’s ruling granting MBIA Corp’s motion to renew.

MBIA Insurance Corp. v. Federal Deposit Insurance Corporation (in its corporate capacity and as conservator and receiver for IndyMac Federal Bank, F.S.B.); Civil Action No. 09-01011 (ABJ) (D.C. Dist.)

On October 6, 2011, the court issued a ruling granting the FDIC’s motion to dismiss. On November 4, 2011, MBIA Corp. filed a Notice of Appeal.

MBIA Insurance Corp. v. Morgan Stanley; Index No. 29951-10 (N.Y. Sup. Ct., Westchester County)

On May 26, 2011, the court denied Morgan Stanley’s motion to dismiss allowing MBIA Corp. to proceed on its fraud and breach of contract claims. On June 20, 2011, Morgan Stanley filed its answer to the complaint. On June 26, 2011, Morgan Stanley filed a Notice of Appeal with respect to denial of its motion to dismiss MBIA Corp.’s fraud claim.

MBIA Insurance Corp. et al. v. Merrill Lynch, Pierce, Fenner, & Smith Inc. et al.; Index No. 601324/09E (N.Y. Sup. Ct., New York County)

On July 12, 2011, the parties filed a joint stipulation voluntarily dismissing the case with prejudice.

MBIA Insurance Corp. et al. v. Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A.; Case No. 09 Civ. 10093 (S.D.N.Y.)

On August 17, 2011, the parties filed a joint stipulation voluntarily dismissing the case with prejudice.

60

MBIA Insurance Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 12: Commitments and Contingencies (continued)

Transformation Litigation

Aurelius Capital Master, Ltd. et al. v. MBIA Inc. et al., 09-cv-2242 (S.D.N.Y.)

In light of the June 28, 2011 Court of Appeals decision referenced below, on July 27, 2011, the court entered an amended case management plan and scheduling order setting a discovery cut-off of November 9, 2012. On August 8, 2011, Fir Tree Value Master Fund, L.P., Fir Tree Capital Opportunity Master Fund, L.P., and Fir Tree Mortgage Opportunity Master Fund, L.P. voluntarily dismissed all claims against defendants without prejudice.

Third Ave Trust et al. v. MBIA Inc. et al.; Index No. 650756/2009 (N.Y. Sup. Ct., N.Y. County)

On October 20, 2011, the parties filed a stipulation of discontinuance dismissing the litigation without prejudice.

ABN AMRO Bank N.V. et al. v. MBIA Inc. et al.; Index No. 601475/09 (N.Y. Sup. Ct., N.Y. County)

On June 28, 2011, the New York State Court of Appeals reversed the Appellate Division’s decision and allowed all of the plaintiffs’ claims to proceed, with the exception of plaintiffs’ claim for unjust enrichment. Ten of the original twenty plaintiffs have dismissed their claims, several of which dismissals were related to the commutation of certain of their MBIA-insured exposures. On August 15, 2011, the court entered a scheduling order coordinating discovery in the plenary action with the Aurelius case in federal court and setting a discovery cut-off of November 9, 2012. On September 6 and 12, 2011 and on October 31, 2011, respectively, KBC Investments Cayman Islands V Ltd., Credit Agricole Corporate and Investment Bank and Wells Fargo Bank, N.A. (f/k/a Wachovia Bank, N.A.) withdrew from the litigation.

ABN AMRO Bank N.V. et al. v. Eric Dinallo et al.; Index no. 601846/09 (N.Y. Sup. Ct., N.Y. County)

On September 6 and 12, 2011 and on October 31, 2011, respectively, KBC Investments Cayman Islands V Ltd., Credit Agricole Corporate and Investment Bank and Wells Fargo Bank, N.A. (f/k/a Wachovia Bank, N.A.) withdrew from the litigation. On October 28, 2011, MBIA sought and obtained an extension of time on the submission of its sur-reply papers until November 16, 2011, in part to address certain errors it discovered in the record relating to Transformation. The NYDFS obtained an extension as well and will submit its sur-reply papers on November 23, 2011. Submission of all papers relating to the original petition is scheduled to be completed by February 2012. A trial is scheduled for February 27—March 23, 2012.

Barclays Bank PLC., et al. v. Wrynn et al.; Index No. 651811/2010 (N.Y. Sup. Ct., N.Y. County)

This proceeding is currently stayed.

MBIA and MBIA Corp. are defending against the aforementioned actions in which they are a defendant and expect ultimately to prevail on the merits. There is no assurance, however, that they will prevail in these actions. Adverse rulings in these actions could have a material adverse effect on MBIA Corp.’s ability to implement its strategy and on its business, results of operations and financial condition.

Note 13: Subsequent Events

Refer to “Note 12: Commitments and Contingencies” for information about legal proceedings that commenced or developed after September 30, 2011.

61