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Article by DailyStocks_admin    (04-29-08 06:43 AM)

MBIA Inc. CEO JOSEPH W BROWN bought 62,714 shares on 4-24-2008 at $8.45.

BUSINESS OVERVIEW

MBIA Inc. (“MBIA” or the “Company”) was incorporated as a business corporation under the laws of the state of Connecticut in 1986. The Company provides financial guarantee insurance and other forms of credit protection as well as investment management services to public finance and structured finance issuers, investors and capital market participants on a global basis. The Company’s financial guarantee insurance provides an unconditional and irrevocable guarantee of the payment of the principal of, and interest or other amounts owing on, insured obligations when due or, in the event that the Company has the right, at its discretion, to accelerate insured obligations upon default or otherwise, upon such acceleration by the Company. The Company conducts its financial guarantee business through its wholly owned subsidiary MBIA Insurance Corporation (“MBIA Corp.”) and provides investment management products and financial services through its wholly owned subsidiary MBIA Asset Management, LLC (“MBIA Asset Management”).

MBIA Corp. is the successor to the business of the Municipal Bond Insurance Association (the “Association”), which began writing financial guarantees for municipal bonds in 1974. MBIA Corp. is the parent of MBIA Insurance Corp. of Illinois (“MBIA Illinois”) and Capital Markets Assurance Corporation (“CapMAC”), both financial guarantee insurance companies that were acquired by MBIA Corp. At present, no new financial guarantee insurance is being offered by MBIA Illinois or CapMAC, but it is possible that either of those entities may insure transactions in the future. MBIA Corp. also owns MBIA Assurance S.A. (“MBIA Assurance”), a French insurance company, and MBIA UK Insurance Limited (“MBIA UK”), a financial guarantee insurance company licensed in the United Kingdom. On December 28, 2007, MBIA Assurance was restructured with MBIA UK (by way of dissolution or winding-up without liquidation) and governed by the terms of article 1844-5 of the French Civil Code. The restructuring involved (i) the transfer of all of MBIA Assurance’s assets and liabilities to MBIA UK; (ii) the simultaneous transfer of the portfolio of MBIA Assurance’s financial guarantees to MBIA UK; and (iii) the dissolution without liquidation of MBIA Assurance. Consequently, all previously insured MBIA Assurance policies are now insured by MBIA UK. MBIA UK writes financial guarantee insurance in the member countries of the European Union and other regions outside the United States. In February 2007, MBIA Corp. incorporated a new subsidiary, MBIA México, S.A. de C.V. (“MBIA Mexico”), through which it writes financial guarantee insurance in Mexico. Generally, throughout the text, references to MBIA Corp. include the activities of its subsidiaries, MBIA UK, MBIA Mexico, MBIA Illinois and CapMAC.

MBIA Corp . primarily insures financial obligations which are sold in the new issue and secondary markets. It also provides financial guarantees for debt service reserve funds. As a result of the triple-A ratings assigned to insured obligations, the principal economic value of financial guarantee insurance is the lower interest cost of an insured obligation relative to the same obligation on an uninsured basis. We receive insurance premiums as compensation for issuing our insurance policies. In addition, for complex financings and for obligations of issuers that are not well-known by investors, insured obligations generally receive greater market acceptance than uninsured obligations.

MBIA Corp. guarantees:




Municipal bonds, which consist of both taxable and tax-exempt bonds and notes that are issued by United States cities, counties, states, political subdivisions, utility districts, airports, health care institutions, higher educational facilities, housing authorities and other similar agencies;


Structured finance and asset-backed obligations, including obligations collateralized by diverse pools of corporate loans or secured by or payable from a specific pool of assets having an ascertainable future cash flow;


Payments due under credit and other derivatives, including termination payments that may become due upon the occurrence of certain events at the Company’s discretion;


Privately issued bonds used for the financing of public purpose projects, which are primarily located overseas and that include toll roads, bridges, airports, public transportation facilities and other types of infrastructure projects serving a substantial public purpose; and


Obligations of sovereign and sub-sovereign issuers.

MBIA Corp. has triple-A financial strength ratings from Standard and Poor’s Corporation (“S&P”), which the Association received in 1974; from Moody’s Investors Service, Inc. (“Moody’s”), which the Association received in 1984; from Fitch, Inc. (“Fitch”), which MBIA Corp. received in 1995; and from Rating and Investment Information, Inc. (“RII”), which MBIA Corp. received in 1998. Both MBIA Mexico and MBIA UK have triple-A financial strength ratings from S&P, Moody’s and Fitch. Obligations which are guaranteed by MBIA Corp., MBIA Mexico and MBIA UK are rated triple-A primarily based on these financial strength ratings. Both S&P and Moody’s have also continued the triple-A rating on MBIA Illinois and CapMAC guaranteed bond issues. On January 17, 2008, Moody’s placed the Aaa insurance financial strength ratings of MBIA Corp. and its insurance affiliates on watch list negative. On January 31, 2008, S&P placed the AAA insurance financial strength ratings of MBIA Corp. and its insurance affiliates on CreditWatch negative. On February 5, 2008, Fitch placed the AAA insurer financial strength ratings of MBIA Corp. and its insurance affiliates on rating watch negative. On February 25, 2008, S&P affirmed the AAA insurance financial strength ratings of MBIA Corp. and its insurance affiliates, the AA- rating of MBIA Inc.’s senior debt and the AA ratings of MBIA Corp.’s North Castle Custodial Trusts I-VIII, with a negative outlook. On February 26, 2008, Moody’s affirmed the Aaa insurance financial strength ratings of MBIA Corp. and its insurance affiliates, the Aa2 ratings of MBIA Corp.’s Surplus Notes and the Aa3 ratings of the junior obligations of MBIA Corp. and the senior debt of MBIA Inc., with a negative rating outlook. MBIA Corp.’s ability to attract new business and to compete with other financial guarantors has been adversely affected by these rating agency actions. MBIA Corp’s ability to attract new business and to compete with other triple-A rated financial guarantors and its results of operations and financial condition would be materially adversely affected by any actual reduction, or additional suggested possibility of a reduction, in its ratings.

MBIA Asset Management provides an array of products and services to the public, not-for-profit and corporate sectors. These products and services are provided primarily through wholly owned subsidiaries of MBIA Asset Management and include cash management, discretionary asset management and fund administration services and investment agreement, medium-term note and commercial paper programs related to funding assets for third-party clients and for investment purposes. The investment management services operations are comprised of three operating segments:




asset/liability products, which include investment agreements and medium-term notes (“MTNs”) not related to the conduit segment;


advisory services, which consist of third-party and related-party fee-based asset management; and


conduits.

The asset/liability products segment raises funds for investment management through the issuance of investment agreements, which are issued by MBIA Investment Management Corp. (“IMC”) and the Company. These investment agreements are guaranteed by MBIA Corp. They are issued to public and corporate entities and as part of asset-backed or structured finance transactions for the purpose of investing bond proceeds and other funds. This segment also raises funds through the issuance of MTNs which are issued by MBIA Global Funding, LLC (“GFL”) and guaranteed by MBIA Corp. MBIA Asset Management invests the proceeds of the investment agreements and MTNs in high quality eligible investments both in the United States and abroad. Because the yields on invested assets are generally in excess of our funding costs, we earn a spread from this business.

The advisory services segment of MBIA Asset Management offers cash management, customized asset management and investment consulting services to local governments, school districts and other institutional clients on a fee for services basis. It offers fixed-income asset management services for the investment portfolios of the Company, MBIA Corp. and other affiliates and also for third-party clients and investment structures. MBIA Asset Management offers these services through MBIA Municipal Investors Service Corporation (“MBIA-MISC”), MBIA Capital Management Corp. (“CMC”) and MBIA Asset Management UK Limited (“AM-UK”).

MBIA Asset Management also owns and administers two conduit financing vehicles, Triple-A One Funding Corp. and Meridian Funding Company, LLC (together, the “Conduits”). A third conduit, Polaris Funding Company, LLC, ceased operations in 2007 after its only remaining transaction matured. The Conduits provide funding for multiple customers through special purpose vehicles that issue primarily commercial paper and MTNs. The Company is compensated with administrative fees for this service.

On February 25, 2008, the Company announced a plan to implement several initiatives in connection with the restructuring of MBIA’s business over the next few years. A significant aspect of the plan will be the creation of separate legal operating entities for MBIA’s public, structured and asset management businesses. This is intended to be accomplished as soon as feasible, with a goal of within five years. The objective behind this initiative is to retain the highest ratings possible for both the public finance and structured finance businesses. The implementation of this initiative is subject to various contingencies, including regulatory approval. There are also a number of other initiatives that are effective immediately, including: (i) the suspension of writing new structured finance business for an estimated six month period in order to both increase capital safety margins and to evaluate and revise the credit and risk management criteria and policies; (ii) the ceasing of issuing insurance policies for new credit derivative transactions except in transactions related to the reduction of existing derivative exposure; and (iii) the elimination of the current MBIA dividend to provide an additional $174 million of capital flexibility per year. In addition, the Company will now declare dividends on an annual basis rather than a quarterly basis.

Statements included in this Form 10-K which are not historical or current facts are “forward-looking statements” made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The words “believe,” “anticipate,” “project,” “plan,” “expect,” “intend,” “will likely result,” or “will continue,” and similar expressions identify forward-looking statements. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. We wish to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of their respective dates. The following are some of the factors that could cause actual results to differ materially from estimates contained in or underlying the Company’s forward-looking statements: (1) changes in the Company’s credit ratings; (2) the possibility that the Company will experience severe losses due to the continued deterioration in the performance of residential mortgage-backed securities and collateralized debt obligations; (3) fluctuations in the economic, credit, interest rate or foreign currency environment in the United States or abroad; (4) level of activity within the national and international credit markets; (5) competitive conditions and pricing levels; (6) legislative or regulatory developments; (7) technological developments; (8) changes in tax laws; (9) the effects of mergers, acquisitions and divestitures; and (10) uncertainties that have not been identified at this time. The Company undertakes no obligation to publicly correct or update any forward-looking statement if it later becomes aware that such result is not likely to be achieved.

INSURANCE OPERATIONS

MBIA Corp. offers financial guarantee insurance and other forms of credit protection in the United States, Europe, Asia, Latin America and other regions outside the United States. We are compensated for our policies from insurance premium payments made up-front or on an installment basis by the insured.

Municipal Obligations

The municipal obligations that MBIA Corp. insures include tax-exempt and taxable indebtedness of Unites States political subdivisions, as well as utility districts, airports, health care institutions, higher educational facilities, housing authorities and other similar agencies and obligations issued by private entities that finance projects that serve a substantial public purpose. Municipal bonds and privately issued bonds used for the financing of public purpose projects are generally supported by taxes, assessments, fees or tariffs related to use of projects, lease payments or other similar types of revenue streams. The financing of public purpose projects through privately issued bonds primarily occurs overseas, and these projects include toll roads, bridges, airports, public transportation facilities and other types of infrastructure projects that serve a substantial public purpose. While in the United States projects of this nature are financed through the issuance of tax-exempt bonds by special purpose, government sponsored tax-exempt entities, the general absence of tax-advantaged financing overseas, among other reasons, has led to the operation of many such public purpose projects being transferred to the private sector. Generally, the private entities operate under a concession agreement with the sponsoring government agency, which maintains a level of regulatory oversight and control over the project.

Structured Finance and Asset-Backed Obligations

The asset-backed and structured finance obligations insured by MBIA Corp. typically consist of securities that are payable from or which are tied to the performance of a specified pool of assets that have an expected cash flow, such as residential and commercial mortgages, insurance policies, a variety of consumer loans, corporate loans and bonds, trade and export receivables, equipment, aircraft and real property leases, and infrastructure projects. Structured finance obligations are either undivided interests in the related assets or debt obligations collateralized by the related assets. In addition, the Company insures payments due under credit and other derivatives, including termination payments that may become due upon the occurrence of certain events at the Company’s discretion.

Structured finance transactions are often structured such that the insured obligations benefit from some form of credit enhancements such as over-collateralization, subordination, excess cash flow or first loss protection, to cover credit risks. Structured finance obligations contain risks including asset risk, which relates to the amount and quality of asset coverage, structural risk, which relates to the extent to which the transaction structure protects the interests of the investors from the bankruptcy of the originator of the underlying assets or the issuer of the securities, and servicer risk, which relates to problems with the transaction servicer (the entity which is responsible for collecting the cash flow from the asset pool) that could affect the servicing of the underlying assets.

In general, the asset risk is addressed by sizing the asset pool and its associated protection level based on the historical and expected future performance of the assets. Structural risks primarily involve bankruptcy risks, such as whether the sale of the assets by the originator to the issuer would be upheld in the event of the bankruptcy or insolvency of the originator and whether the servicer of the assets may be required to delay the remittance of any cash collections held by it or received by it after the time it becomes subject to bankruptcy or insolvency proceedings. Structured finance transactions are usually structured to reduce the risk to the investors from the bankruptcy or insolvency of the entity that originated the underlying assets, as well as from the bankruptcy or insolvency of the servicer, and to minimize the likelihood of the bankruptcy or insolvency of the issuer of the obligation. The ability of the servicer to properly service and collect on the underlying assets is also a factor in determining future asset performance. MBIA Corp. addresses servicer risk through its servicer due diligence and underwriting guidelines, its formal credit review and approval process and its post-closing servicing review and monitoring.

On February 25, 2008, the Company announced that it has suspended the writing of all new structured finance business for approximately six months.

International Obligations

Outside of the United States, sovereign and sub-sovereign issuers, structured finance issuers, utilities and other issuers, including private issuers who are financing projects with a substantial public purpose, also use financial guarantee insurance to guarantee their public finance and structured finance obligations. As noted above, on February 25, 2008, the Company announced that it has suspended the writing of all new structured finance business for approximately six months. Ongoing privatization efforts have shifted the burden of financing new projects from the government to the capital markets, where investors can benefit from the security of financial guarantee insurance. There is also growing interest in asset-backed securitization. While the principles of securitization have been increasingly applied in overseas markets, the rate of development in particular countries has varied due to the sophistication of the local capital markets and the impact of financial regulatory requirements, accounting standards and legal systems. MBIA expects that securitization volume will decline in the near-term and then gradually increase over time at varying rates in each country. MBIA Corp. insures both structured finance and public finance obligations in selected international markets. MBIA Corp. believes that the risk profile of the international business it insures is similar to that in the United States, but recognizes that there are particular risks related to each country and region. These risks include the legal, economic and political situation, the varying levels of sophistication of the local capital markets and currency exchange risks. MBIA Corp. evaluates and monitors these risks carefully.

Primary and Secondary Markets

MBIA Corp. offers financial guarantee insurance in both the new issue and secondary markets on a global basis. Transactions in the new issue market are sold either through negotiated offerings or competitive bidding. In negotiated transactions, either the issuer or the underwriter purchases the insurance policy directly from MBIA Corp. For municipal bond issues involving competitive bidding, the insurance is offered as an option to the underwriters bidding on the transaction. The successful bidder would then have the option to purchase the insurance, or at times the issuer can purchase the insurance.

In the secondary market, MBIA Corp. provides credit enhancement for both municipal and structured products. MBIA Corp. guarantees the payment of principal and interest on municipal obligations which trade in the secondary market upon the request of an existing holder of uninsured bonds. The premium is generally paid by the owner of the obligation. The “RAPSS” program (“Rapid Asset Protection for Secondary Securities”) guarantees the payment of principal and interest on an individual structured finance security or class of such securities traded in the secondary market in response to requests from bond traders and investors. Securities insured in the RAPSS program have the benefit of MBIA Corp.’s guarantee until maturity. The “Portfolio Insurance” program enables an investor to insure a specific portfolio of structured finance bonds and is offered as an ongoing program with investment banks, financial service companies and conduit sponsors. For each insured portfolio, MBIA Corp. establishes specific underwriting criteria for the inclusion of new assets in the program portfolio. The Portfolio Insurance program is a “while-in-trust” program which provides the benefits of an MBIA Corp. guarantee to securities only during the time they are held in a particular insured portfolio, although in some cases, MBIA Corp. may offer insurance to maturity for an additional premium.

Currently, as a result of the existing market volatility caused by the deterioration in the subprime mortgage market, the tightening of available liquidity, and the recent rating agency actions described herein, the demand for our product is the lowest it has been and we are writing very little new business. At the same time, our exposure to the existing credits in our insured portfolio continues to decline as such obligations mature, thereby increasing our available capital.

MBIA Corp. Insured Portfolio

MBIA Corp. seeks to maintain a diversified insured portfolio and has designed the insured portfolio to manage and diversify risk based on a variety of criteria including revenue source, issue size, type of asset, industry concentrations, type of bond and geographic area. As of December 31, 2007, MBIA Corp. had 26,997 policies outstanding. In addition, MBIA Corp. has issued 1,077 policies relating to MBIA Asset Management transactions. These policies are diversified among 10,934 “credits,” which MBIA Corp. defines as any group of issues supported by the same revenue source.

Virtually all of the insurance policies issued by MBIA Corp. provide an unconditional and irrevocable guarantee of the payment to a designated paying agent for the holders of the insured obligations of an amount equal to the payment of the principal of, and interest or other amounts owing on, insured obligations when due or, in the event that the Company has the right, at its discretion, to accelerate insured obligations upon default or otherwise, upon such acceleration by the Company. In addition, certain of MBIA Corp.’s insurance policies guarantee payments due under credit or other derivatives, including termination payments that may become due upon the occurrence of certain events. On February 25, 2008, the Company announced that it ceased insuring new credit derivative contracts within its insurance operations except in transactions related to the reduction of existing derivative exposure. In the event of a default in payment of principal, interest or other insured amounts by an issuer, MBIA Corp. promises to make funds available in the insured amount generally on the next business day following notification. MBIA Corp. generally has an agreement with a bank which provides for this payment upon receipt of proof of ownership of the obligations due, as well as upon receipt of instruments appointing the insurer as agent for the holders and evidencing the assignment of the rights of the holders with respect to the payments made by the insurer.

Because MBIA Corp. generally guarantees to the holder of the underlying obligation the timely payment of amounts due on such obligation in accordance with its original payment schedule, in the case of a default on an insured obligation, payments under the insurance policy cannot be accelerated against MBIA Corp., except in certain limited circumstances, unless MBIA Corp. consents to the acceleration. In the event of a default, however, MBIA Corp. may have the right, in its sole discretion, to accelerate the obligations and pay them in full. Otherwise, MBIA Corp. is required to pay principal, interest or other amounts only as originally scheduled payments come due. Typically, even if the holders are permitted by the terms of the insured obligations to have the full amount of principal, accrued interest or other amounts due, declared due and payable immediately in the event of a default, MBIA Corp. is required to pay only the amounts scheduled to be paid, but not in fact paid, on each originally scheduled payment date. MBIA Corp.’s payment obligations after a default vary by deal and by insurance type. There are three primary types of policy payment requirements: i) timely interest and ultimate principal; ii) ultimate principal only at final maturity; and iii) payments upon settlement of individual collateral losses as they occur upon erosion of deal deductibles.

At December 31, 2007, the net par amount outstanding on MBIA Corp.’s insured obligations (including insured obligations of MBIA Illinois, MBIA UK, MBIA Mexico and CapMAC, but excluding $25.5 billion of MBIA insured investment agreements and MTNs for MBIA Asset Management) was $678.7 billion. Net insurance in force, which includes all insured debt service, at December 31, 2007 was $1,022 billion. Net insurance in force, which is net of cessions to reinsurers, is also net of other reimbursement agreements that relate to certain contracts under which MBIA Corp. is entitled to reimbursement of losses on its insured portfolio but which do not qualify as reinsurance under accounting principles generally accepted in the United States of America (“GAAP”).

MBIA Corp. underwriting guidelines limit the net insurance in force for any one insured credit. In addition, MBIA Corp. is subject to both rating agency and regulatory single-risk limits with respect to any insured bond issue. As of December 31, 2007, MBIA Corp.’s net par amount outstanding for its ten largest insured public finance credits totaled $23.2 billion, representing 3.4% of MBIA Corp.’s total net par amount outstanding, and the net par outstanding for its ten largest structured finance credits (without aggregating common issuers), was $24.2 billion, representing 3.6% of the total.

CEO BACKGROUND

Mr. Brown rejoined the Company in February 2008 as Chairman and Chief Executive Officer. He became Executive Chairman on May 6, 2004 and retired from that position on May 3, 2007. Until May 2004, he had served as Chairman and Chief Executive Officer. He originally joined the Company as Chief Executive Officer in January 1999, having been a director since 1986 and became Chairman in May 1999. Prior to joining the Company, Mr. Brown was Chairman of the Board of Talegen Holdings, Inc. from 1992 through 1998. Prior to joining Talegen, Mr. Brown had been with Fireman’s Fund Insurance Companies as President and Chief Executive Officer. Mr. Brown is also Non-Executive Chairman and a director of Safeco Corporation and will step down from that chairmanship in May 2008. Age 59.

Mr. Coulter was elected to the Board of Directors in January 2008. Mr. Coulter joined Warburg Pincus in 2005 as a Managing Director and Senior Advisor and focuses on the firm’s financial services investment activities. From 2000 through 2005, Mr. Coulter held a series of senior positions at JPMorgan Chase and was a member of the Office of the Chairman. He also held senior executive positions at The Beacon Group and served as Chairman and C.E.O. of BankAmerica Corporation. He is also a director of PG&E Corporation, Strayer Education Inc., The Irvine Company, Aeolus Re Ltd. and Metavante Technologies. Mr. Coulter received a B.S. and M.S. from Carnegie Mellon University. Age 60.

Dr. Gaudiani has served as a Director of the Company since 1992. Dr. Gaudiani has been a Professor at New York University since 2004. From 2000 to 2004, she was a Senior Research Scholar at the Yale Law School. From 1988 until June 2001, Dr. Gaudiani was President of Connecticut College. Dr. Gaudiani has also been President and CEO of the New London Development Corporation from 1997 to 2004. She also serves as a director of the Worcester Polytechnic Institute and the Henry Luce Foundation Inc. Age 63.

Mr. Kearney has served as a Director of the Company since 1992 and will serve as Lead Director effective May 2008. Mr. Kearney is currently a Financial Consultant and retired as Executive Vice President of Aetna Inc. (insurance company) in February 1998. Prior to joining Aetna in 1991, he served as President and Chief Executive Officer of the Resolution Trust Corporation Oversight Board from 1989 to 1991. From 1988 to 1989, Mr. Kearney was a Principal at Aldrich, Eastman & Waltch, Inc., a pension fund advisor.

Mr. Kearney was a Managing Director at Salomon Brothers Inc. (investment bank) in charge of the Mortgage Finance and Real Estate Finance departments from 1977 to 1988. He serves as a Director of Fiserv, Inc., MGIC Investment Corporation and the Joyce Foundation and Prudential Bank. Mr. Kearney served as Chair of the Compensation Committee of Fiserv, Inc. until November 2005, before Mr. Yabuki, a director of the Company, became President and Chief Executive Officer of Fiserv, Inc. in December 2005. Age 68.

Mr. Lee was elected to the Board of Directors in January 2008. Mr. Lee has served as a Member and Managing Director of Warburg Pincus LLC and a general partner of Warburg Pincus & Co. since January 1997. He has been employed at Warburg Pincus since 1992. He leads the firm’s leveraged buy-out and special situations efforts and focuses on the firm’s financial services investment activities. Prior to joining Warburg Pincus, Mr. Lee was a consultant at McKinsey & Company, Inc., a management consulting company, from 1990 to 1992. He is also a director of The Neiman Marcus Group, Inc., Arch Capital Group Ltd., Aramark Corporation and Knoll Inc. Age 42.

Dr. Meyer has served as a Director of the Company since 2004. Dr. Meyer is currently Vice Chairman of Macroeconomic Advisers, which he joined in 2002. He is also a distinguished scholar at the Center for Strategic and International Studies and a board member for the National Bureau of Economic Research. Dr. Meyer also serves as senior adviser to the G-7 Group and is a fellow of the National Association of Business Economists. He was a member of the Board of Governors of the Federal Reserve System from 1996 to 2002. From 1969 to 1996, Dr. Meyer was a professor of economics and a former Chairman of the Economics Department at Washington University in St. Louis. Age 63.

Mr. Moffett was elected to the Board of Directors in May 2007. Mr. Moffett is currently a Senior Advisor at The Carlyle Group. Until February 27, 2007, Mr. Moffett was Vice Chairman and Chief Financial Officer of U.S. Bancorp. Mr. Moffett had served in these positions since the merger of Firstar Corporation and U.S. Bancorp in February 2001. Mr. Moffett retired as Vice Chairman and Chief Financial Officer of U.S. Bancorp on February 27, 2007. Prior to the merger of Firstar Corporation and U.S. Bancorp, he was Vice Chairman and Chief Financial Officer of Firstar Corporation, and had served as Chief Financial Officer of Star Banc Corporation from 1993 until its merger with Firstar Corporation in 1998. Mr. Moffett is a member of the Board of Directors of eBay, Inc., E.W. Scripps Company and Building Materials Holding Corporation. Age 56.



Mr. Rolls has served as a Director of the Company since 1995. Mr. Rolls is currently a Managing Partner of Core Capital Group, LLC. He retired as President and Chief Executive Officer of Thermion Systems International in 2007, positions that he had held since 1996. From 1992 until 1996, he was President and Chief Executive Officer of Deutsche Bank North America. Prior to joining Deutsche Bank, he served as Executive Vice President and Chief Financial Officer of United Technologies from 1986 to 1992. He is a Director of Bowater, Inc. and FuelCell Energy, Inc. Age 66.

Mr. Vaughan was elected to the Board of Directors in August 2007. He served as Executive Vice President and Chief Financial Officer of Lincoln Financial Group from 1995 until his retirement in May 2005. He joined Lincoln in July 1990 as Senior Vice President and Chief Financial Officer of Lincoln National’s Employee Benefits Division. In June 1992, he was appointed Chief Financial Officer for the corporation. He was promoted to Executive Vice President in January 1995. He was previously employed with EQUICOR from September 1988 to July 1990, where he served as a Vice President in charge of public offerings and insurance accounting. Prior to that, Mr. Vaughan was a Partner at KPMG Peat Marwick in St. Louis, from July 1980 to September 1988. Mr. Vaughan is a member of the Board of Directors of DaVita Inc. and served on the Board of The Bank of New York Company, Inc. from 2005 to July 2007 when it merged with Mellon Financial Corp. Age 58.

Mr. Yabuki has served as a Director of the Company since August 2005. In December 2005, Mr. Yabuki was appointed President and Chief Executive Officer of Fiserv, Inc., a provider of information management systems and services. Prior to that, Mr. Yabuki served as Executive Vice President since 2001 and as Chief Operating Officer since 2002 for H&R Block, Inc., a financial services firm. From 1999 to 2002, Mr. Yabuki served as the President of H&R Block International. From 1987 to 1999, Mr. Yabuki held various executive positions with American Express Company, a financial services firm, including President and Chief Executive Officer of American Express Tax and Business Services, Inc. Mr. Yabuki also serves as a director of Fiserv, Inc. Age 47.

MANAGEMENT DISCUSSION FROM LATEST 10K

OVERVIEW

MBIA is a leading provider of financial guarantee products and specialized financial services. MBIA provides innovative and cost-effective products and services that meet the credit enhancement, financial and investment needs of its public- and private-sector clients worldwide. MBIA manages its activities primarily through two principal business operations: insurance and investment management services. The Company’s corporate operations include revenues and expenses that arise from general corporate activities.

Insurance Operations

MBIA’s insurance operations are principally conducted through MBIA Insurance Corporation and its subsidiaries (“MBIA Corp.”). MBIA Corp. issues financial guarantees for municipal bonds, asset-backed and mortgage-backed securities, investor-owned utility bonds, bonds backed by publicly or privately funded public-purpose projects, bonds issued by sovereign and sub-sovereign entities, obligations collateralized by diverse pools of corporate loans and pools of corporate and asset-backed bonds, and bonds backed by other revenue sources such as corporate franchise revenues, both in the new issue and secondary markets. Additionally, MBIA Corp. has insured credit default swaps primarily on pools of collateral, which it considered part of its core financial guarantee business. The financial guarantees issued by MBIA Corp. provide an unconditional and irrevocable guarantee of the payment of the principal of, and interest or other amounts owing on, insured obligations when due or, in the event that MBIA Corp. has the right, at its discretion, to accelerate insured obligations upon default or otherwise, upon such acceleration by MBIA Corp.

On February 25, 2008, the Company announced that it has ceased insuring new credit derivative contracts except in transactions related to the reduction of existing derivative exposure. In addition, the Company announced that it has suspended the writing of all new structured finance business for approximately six months.

Investment Management Services Operations

MBIA’s investment management services operations provide an array of products and services to the public, not-for-profit and corporate sectors. Such products and services are provided primarily through wholly owned subsidiaries of MBIA Asset Management, LLC (“MBIA Asset Management”) and include cash management, discretionary asset management and fund administration services and investment agreement, medium-term note and commercial paper programs related to funding assets for third-party clients and for investment purposes.

Discontinued Operations

In December 2006, MBIA completed the sale of Capital Asset Holdings GP, Inc. and certain affiliated entities (“Capital Asset”), a servicer of delinquent tax liens, to a third party company that is engaged in tax lien servicing and collection and that had been overseeing the servicing operations of Capital Asset since July 2006. The sale of Capital Asset also included three variable interest entities (“VIEs”) established in connection with MBIA-insured securitizations of Capital Asset tax liens, which were consolidated within the Company’s insurance operations in accordance with Financial Accounting Standards Board (“FASB”) Interpretation No. (“FIN”) 46(R), “Consolidation of Variable Interest Entities (Revised).”

In the third quarter of 2006, MBIA finalized a plan to sell MBIA MuniServices Company and certain of its wholly owned subsidiaries (“MuniServices”) to an investor group led by the management of MuniServices. MuniServices provides revenue enhancement services and products to public-sector clients nationwide consisting of discovery, audit, collections/recovery and information services. The Company completed the sale of MuniServices in December 2006.

MBIA’s municipal services operations consisted of the activities of MuniServices and Capital Asset. As a result of the sale of MuniServices and Capital Asset, the Company no longer reports municipal services operations and the assets, liabilities, revenues and expenses of these entities have been reported within discontinued operations for 2006 and 2005 in accordance with Statement of Financial Accounting Standards No. (“SFAS”) 144, “Accounting for the Impairment or Disposal of Long-lived Assets.” See “Note 15: Discontinued Operations” in the Notes to Consolidated Financial Statements for information relating to the Company’s discontinued operations.

The Company’s results of operations for the years ended December 31, 2007, 2006 and 2005 are discussed in the “Results of Operations” section included herein.

Financial Strength Credit Ratings

Prior to the fourth quarter of 2007, MBIA Corp. and its insurance subsidiaries had triple-A financial strength ratings with stable outlook from Standard and Poor’s Corporation (“S&P”), Moody’s Investors Service, Inc. (“Moody’s”), Fitch, Inc. (“Fitch”) and Rating and Investment Information, Inc. Following the recent stress in the collateralized debt obligations (“CDOs”) and mortgage sectors and the increased risk that more underlying credit ratings of transactions insured by MBIA will be downgraded by S&P, Moody’s and Fitch, the three major rating agencies took the following actions:

S&P

On November 26, 2007, S&P’s Global Bond Insurance Group announced that it was preparing a comment on bond insurers’ subprime exposure. S&P’s comments on this topic from August 2, 2007 included a stress scenario for the primary bond insurers that reflected an opinion that conservative theoretical deterioration of subprime residential mortgage-backed securities (“RMBS”) and CDOs with subprime collateral would not impair the bond insurer’s capital adequacy.

On December 19, 2007, S&P released ratings announcements concerning a number of financial guarantee insurers, including MBIA Corp., resulting from worsening expectations for the performance of insured subprime RMBS and CDOs of asset-backed securities. S&P affirmed MBIA Corp.’s insurance financial strength rating at “AAA” but changed its outlook for MBIA Corp. to “negative” from “stable”, while confirming the outlook of two of MBIA Corp.’s competitors as “stable.” S&P indicated in its announcement that its “research has led S&P to the conclusion that the potential for further mortgage market deterioration remains uncertain and will challenge the ability of the insurers to accurately gauge their ongoing additional capital needs in the near term. As a result, S&P is effectively adopting a negative outlook for those firms with significant exposure to domestic subprime mortgages and/or meaningful lower credit quality exposures. The assignment of a negative outlook also reflects Standard & Poor’s assessment with regard to the strength of a company’s capital position when weighted against projected stress case losses as well as the comprehensiveness and degree of completion of projected capitalization strengthening efforts underway.”

On January 15, 2008, S&P announced that it had revised its surveillance assumptions for U.S. RMBS, in particular that it increased the expected loss assumption for 2006 vintage subprime collateral to 19% from 14%. The change in assumptions was driven by negative trends in monthly performance data for subprime mortgages as well as certain macroeconomic factors driving U.S. home prices.

On January 17, 2008, S&P released updated results to its Bond Insurance Stress Test for financial guarantors in light of its revised assumptions for subprime-related exposures. In its report, S&P concluded that the increased stress losses resulting from the revised assumptions was not significant for MBIA in the context of its capital position and intended capital plan. As such, MBIA Corp.’s ratings and outlook, as well as those of all other financial guarantee companies, remained unchanged from their previous position announced by S&P on December 19, 2007.

On January 30, 2008, S&P announced that it placed on CreditWatch with negative implications or downgraded its ratings on 6,389 classes from U.S. RMBS transactions backed by U.S. first-lien subprime mortgage collateral rated between January 2006 and June 2007. At the same time, S&P placed on CreditWatch negative 1,953 ratings from 572 global CDO of asset-backed securities (“ABS”) and CDO of CDO transactions. The rating actions were primarily driven by S&P’s revised surveillance assumptions for subprime RMBS and their related impact on ABS CDOs and CDOs of CDOs, which had been announced on January 15, 2008.

On January 31, 2008, S&P placed the “AAA” insurance financial strength ratings of MBIA Corp. and its insurance affiliates, the “AA-” rating of MBIA Inc.’s senior debt and the “AA” ratings of MBIA Corp.’s North Castle Custodial Trusts I-VIII on CreditWatch with negative implications. This rating action by S&P was the result of S&P’s most recent review of MBIA’s capital plan. S&P stated in its announcement regarding the change that “Although MBIA succeeded in accessing $1.5 billion of additional capital, the magnitude of projected losses underscores our view that time is of the essence in the completion of capital-raising efforts.”

On February 25, 2008, S&P affirmed the AAA insurance financial strength ratings of MBIA Corp. and its insurance affiliates, the “AA-” rating of MBIA Inc.’s senior debt and the “AA” ratings of MBIA Corp.’s North Castle Custodial Trusts I-VIII, with a negative outlook. S&P stated in its announcement regarding the change that “MBIA’s success in accessing $2.6 billion of additional claims-paying resources is a strong statement of management’s ability to address the concerns relating to the capital adequacy of the Company.”

Moody’s

On December 5, 2007, Moody’s published a comment intended to update the market about Moody’s analytic work as well as to offer additional details about the methods and process underlying their assessment of the continuing deterioration in the RMBS market on their ratings of financial guarantee insurers, including MBIA Corp. In its comment, Moody’s indicated three factors that would largely determine whether Moody’s takes rating actions on those financial guarantee insurers most exposed to deterioration in the mortgage markets: (1) current capital adequacy—whether the guarantor meets Moody’s capital adequacy benchmarks for its rating: (2) prospective capital adequacy—whether the guarantor will meet Moody’s capital adequacy benchmark in the near and medium term, and (3) strength of the franchise and business model—whether the guarantor will be able to access, going forward, attractive business opportunities consistent with its rating level. Moody’s further indicated that, based on additional analysis of MBIA Corp.’s RMBS portfolio, Moody’s believed that MBIA Corp. was somewhat likely to exhibit a capital shortfall.

On December 14, 2007, Moody’s released ratings announcements concerning a number of financial guarantee insurers, including MBIA Corp., resulting from Moody’s reassessment of such insurer’s capital adequacy. Moody’s affirmed MBIA Corp.’s insurance financial strength at “Aaa” but changed its outlook for MBIA Corp. to “negative” from “stable” while confirming the outlook of three of MBIA Corp.’s competitors as “stable”. Moody’s indicated that this action reflected the stress to MBIA Corp. from its mortgage-related exposures, as well as the steps already taken, and likely to be taken, by MBIA Corp. to strengthen its capital position. Moody’s also indicated that MBIA Corp.’s current capitalization was below the target Aaa level, and would be close to the minimum Aaa level under Moody’s stress scenario. Moody’s further indicated that while it believed that the investment by Warburg Pincus, as described in the “Capital Resources—Capital Strengthening Plan” section under “Warburg Pincus Agreement,” would address MBIA Corp.’s estimated shortfall in hard capital, the negative outlook reflects uncertainty concerning the performance of MBIA Corp.’s insured portfolio and the ultimate resolution of its total capital plan. In addition, Moody’s stated that it will evaluate any changes in MBIA Corp.’s governance, strategy and risk management made in response to the material stress faced by MBIA Corp. on its mortgage-related exposures. Moody’s stated in its announcement that it expected to revise MBIA Corp.’s outlook to “stable” to the extent MBIA Corp. executed an overall capital plan that reestablished a robust capital position.

On January 17, 2008, Moody’s placed the Aaa insurance financial strength ratings of MBIA Corp. and its insurance affiliates, the Aa2 ratings of MBIA Corp.’s $1.0 billion of 14% fixed-to-floating rate surplus notes (“Surplus Notes”) issued on January 16, 2008, and the Aa3 ratings of the junior obligations of MBIA Corp. and the senior debt of MBIA Inc. on review for possible downgrade. Moody’s stated in its announcement that “the rating action reflects Moody’s growing concern about the potential volatility in ultimate performance of mortgage and mortgage-related CDO risks, and the corresponding implications for MBIA’s risk-adjusted capital adequacy.”

On January 31, 2008, Moody’s published its preliminary views about the financial guarantee insurance industry. It stated that its estimate of the capital needed to support the mortgage-related risk of some guarantors has risen significantly, and that some existing firms may be unable to restore financial strength to levels consistent with a Aaa rating, which could possibly lead them to pursue a more narrow business focus or enter into runoff. Moody’s indicated that a Aaa guarantor needs an adequate level of capital, a risk management and underwriting framework commensurate with that capital, and a viable business plan. Moody’s suggested that if any one of these characteristics were judged by it to be inadequate, it would expect to lower the guarantor’s rating. Moody’s added that the business orientation and underwriting guidelines of firms in this sector might require meaningful change in order to retain Aaa ratings.

On February 26, 2008, Moody’s affirmed the Aaa insurance financial strength ratings of MBIA Corp. and its insurance affiliates, the Aa2 ratings of MBIA Corp.’s Surplus Notes and the Aa3 ratings of the junior obligations of MBIA Corp. and the senior debt of MBIA Inc., with a negative rating outlook. Moody’s stated in its announcement regarding the change that “MBIA has completed transactions to raise $1.6 billion in equity and $1 billion in Surplus Notes, demonstrating a strong commitment to its policyholders.”

Fitch

On December 20, 2007, Fitch placed the AA ratings of MBIA Inc. and AAA ratings of MBIA Corp. and its subsidiaries on rating watch negative pending MBIA Inc.’s raising additional capital, while confirming the outlook of two of MBIA Corp.’s competitors as “stable.” In its press release, Fitch identified a shortfall of approximately $1 billion and stated that “If at any time during the next four-to-six weeks, MBIA is able to obtain capital commitments and/or put in place reinsurance or other risk mitigation measures, on top of the $1 billion capital commitment the company received from Warburg Pincus, that would help improve MBIA’s Matrix result at an ‘AAA’ rating stress, Fitch would anticipate affirming MBIA’s ratings with a Stable Rating Outlook.” Fitch also noted that if MBIA Inc. was unable to obtain capital commitments or put into place reinsurance or other risk mitigation measures to address its capital shortfall in the noted timeframe, Fitch would expect to downgrade MBIA Corp.’s insurer financial strength ratings by one notch to “AA+.”

In connection with the completion of MBIA Corp.’s Surplus Notes, as discussed in the “Capital Resources—Capital Strengthening Plan” section, on January 16, 2008, Fitch announced that it reaffirmed MBIA Corp.’s AAA ratings with a “Stable Outlook.”

Due to the continued deterioration in the performance of U.S. subprime mortgages, on February 1, 2008, Fitch announced that it placed on rating watch negative approximately $139 billion of 2,972 rated classes of 2006 and 2007 subprime RMBS. Fitch also increased its loss expectations for U.S. subprime RMBS backed predominantly by first-lien mortgages originated in 2006 and the first half of 2007, with average cumulative loss expectations as a percentage of the initial securitized balance of 21% and 26%, respectively.

On February 5, 2008, Fitch placed the AAA insurer financial strength ratings of MBIA Corp. and its insurance affiliates, the AA ratings of MBIA Corp.’s Surplus Notes and the AA long-term debt rating of MBIA Inc. on rating watch negative. Fitch announced that it was updating certain modeling assumptions in its ongoing analysis of the financial guaranty industry, specifically related to exposures to structured finance collateralized debt obligations (“SF CDOs”). Fitch expects that simulated capital model losses and expected losses will increase materially for MBIA Corp. due to its exposure to SF CDOs and that these losses may be inconsistent with its AAA rating standards for financial guarantors. Fitch noted that MBIA’s addition of $1.5 billion of new capital with a further $500 million equity investment through a rights offering backstopped from Warburg Pincus “may not be sufficient to address the necessary capital needed to maintain MBIA’s ‘AAA’ insurer financial strength rating.”

To enable the Company to maintain appropriate claims-paying resources in order to sustain the triple-A financial strength ratings assigned to MBIA Corp., a comprehensive capital strengthening plan was announced on January 9, 2008. See “Capital Resources—Capital Strengthening Plan” for additional information. We believe that the Company’s consolidated capital resources, inclusive of the capital strengthening actions taken through February 2008, are adequate to support our ongoing businesses, fund our growth and meet the rating agencies’ requirements for the triple-A claims-paying ratings of MBIA Corp. If required and subject to market conditions, we believe that MBIA could raise additional capital and/or take measures to preserve capital necessary to maintain its triple-A ratings. The triple-A ratings are important to the operation of the Company’s business and any reduction in these ratings could have a material adverse effect on MBIA Corp.’s ability to compete and could also have a material adverse effect on the business, operations and financial results of the Company.

In addition to its announced capital strengthening plan, on February 25, 2008, the Company announced its intention to reorganize its insurance operations in a manner that would provide public finance and structured finance insurance from separate operating entities. This reorganization is expected to be completed within the next five years. See “Note 29: Subsequent Events” in the Notes to Consolidated Financial Statements for a discussion of the reorganization of the insurance operations.

RESULTS OF OPERATIONS

Summary of Consolidated Results

The following table presents highlights of the Company’s consolidated financial results for 2007, 2006 and 2005. Items listed under “Other per share information (effect on net income)” are items that we commonly identify for the readers of our financial statements because they are a by-product of the Company’s operations or due to general market conditions beyond the control of the Company.

Consolidated revenues from continuing operations decreased to a loss of $283 million in 2007 compared with income of $2.7 billion in 2006. The decline in insurance revenues resulted from a $3.6 billion loss on financial instruments at fair value and foreign exchange which was primarily the result of adverse changes in the fair value of the Company’s insurance credit derivative portfolio and an adjustment to the Company’s carrying value of its investment in Channel Reinsurance Ltd. (“Channel Re”), partially offset by a mark-to-market gain on the Company’s Money Market Committed Preferred Custodial Trust (“CPCT”) securities facility. The investment management services operations’ revenues increased primarily due to an increase in interest income resulting from growth in the asset/liability products segment, higher fees in the advisory services segment due to growth in assets under management and an increase in gains on financial instruments at fair value and foreign exchange due to gains on total return swaps resulting from declines in underlying bond prices. Consolidated expenses from continuing operations increased 77% to $2.8 billion in 2007 from $1.6 billion in 2006. This increase was principally due to an increase in loss and LAE incurred in the insurance operations reflecting $614 million of specific case basis reserves and $200 million of non-specific unallocated reserves related to MBIA’s prime, second-lien RMBS exposure. In addition, investment management services’ interest expense increased due to growth in the asset/liability products segment, commensurate with the increase in interest income. The Company recorded a net loss for 2007 of $1.9 billion compared with net income of $819 million for 2006. Net loss per diluted share was $15.17 for 2007 compared with net income per diluted share of $5.99 for 2006.

In 2006, consolidated revenues from continuing operations increased 18% to $2.7 billion from $2.3 billion in 2005. Growth in insurance revenues resulted from an increase in net investment income and net realized gains from investment securities. An increase in investment management services’ interest income resulting from growth in the asset/liability products segment was partially offset by a decrease in investment management services’ net gains on derivative instruments and foreign exchange. Consolidated expenses from continuing operations increased 23% to $1.6 billion in 2006 from $1.3 billion in 2005. This increase was principally due to an increase in investment management services’ interest expense due to growth in the asset/liability products segment and insurance interest expense, both of which were commensurate with the increase in interest income. Offsetting the increase in consolidated expenses was a reduction in corporate expenses resulting from $75 million of estimated penalties and disgorgement recorded in the third quarter of 2005 in connection with the settlement of regulatory investigations of the Company. Net income for 2006 of $819 million was up 15% from $711 million for 2005. Net income per diluted share was $5.99 for 2006 compared with $5.18 per diluted share for 2005, a 16% increase. The slightly larger percent increase in net income per diluted share compared with net income resulted from an approximately 526,000 decrease in the average number of diluted shares outstanding as a result of share repurchases the Company made in the first half of 2005.

The Company’s book value at December 31, 2007 was $29.16 per share, down 45% from $53.43 per share at December 31, 2006. The decrease was principally driven by net losses from operations, an increase in treasury stock as a result of share repurchases by the Company, and unrealized losses recorded on the Company’s investment portfolio in 2007.

Insurance Operations

The Company’s insurance operations principally comprise the activities of MBIA Corp. MBIA Corp. issues financial guarantees for municipal bonds, asset-backed and mortgage-backed securities, investor-owned utility bonds, bonds backed by publicly or privately funded public purpose projects, bonds issued by sovereign and sub-sovereign entities, obligations collateralized by diverse pools of corporate loans and pools of corporate and asset-backed bonds, both in the new issue and secondary markets. Additionally, MBIA Corp. insures credit default swaps primarily on pools of collateral, which it considers part of its core financial guarantee business.

The municipal obligations that MBIA Corp. insures include tax-exempt and taxable indebtedness of states, counties, cities, utility districts and other political subdivisions, as well as airports, higher education and healthcare facilities and similar authorities and obligations issued by private entities that finance projects which serve a substantial public purpose. The asset-backed and structured finance obligations insured by MBIA Corp. typically consist of securities that are payable from or which are tied to the performance of a specified pool of assets that have an expected cash flow. Securities of this type include residential and commercial mortgages, a variety of consumer loans, corporate loans and bonds, trade and export receivables, aircraft, equipment and real property leases, and infrastructure projects.

In certain cases, the Company may be required to consolidate entities established as part of securitizations when it insures the assets or liabilities of those entities. These entities typically meet the definition of a VIE under FIN 46(R). We do not believe there is any difference in the risks and profitability of financial guarantees provided to VIEs compared with other financial guarantees written by the Company. Additional information relating to VIEs is contained in the “Variable Interest Entities” section included herein.

The following table presents the financial results of the insurance operations for 2007, 2006 and 2005. The results include revenues and expenses from transactions with the Company’s investment management services and corporate operations.

In 2007, total revenues from the Company’s insurance operations were a loss of $2.1 billion compared with income of $1.5 billion in 2006. The decrease in insurance operations’ revenues in 2007 compared with 2006 resulted from a $3.6 billion loss on financial instruments at fair value and foreign exchange, which was primarily the result of adverse changes in the fair value of the Company’s insurance credit derivative portfolio and a $85.7 million adjustment in the Company’s carrying value of its investment in Channel Re. The adjustment in the Company’s carrying value of its investment in Channel Re contributed to the loss on financial instruments at fair value and foreign exchange as a result of eliminations the Company was required to make under the equity method of accounting. These losses were partially offset by a $110 million mark-to-market gain on the Company’s CPCT facility. In addition, there was a decline in fees and reimbursements and net investment income in 2007 compared with 2006. Partially offsetting the impact of the decreases in insurance revenues were increases in net realized gains and premiums earned. Total insurance expenses increased 212% to $1.2 billion in 2007 from $379 million in 2006. The increase in insurance expenses was due to the $614 million of case basis reserves and $200 million of non-specific unallocated reserves related to MBIA’s prime, second-lien RMBS exposure. Partially offsetting the increase in losses and LAE was a decrease in operating expenses due to an increase in costs allocated from the insurance segment to other segments and a decline in loss prevention expenses. Gross operating expenses (expenses before ceding commission income and the deferral or amortization of acquisition costs) decreased 8% in 2007 compared with 2006 as a result of an increase in costs allocated to our investment management services and corporate operations and a decrease in loss prevention costs.

In 2006, total revenues from the Company’s insurance operations increased 7% to $1.5 billion from $1.4 billion in 2005. The increase in insurance operations’ revenues was primarily the result of an increase in VIE net investment income and, to a lesser extent, net realized gains from investment securities, net gains on financial instruments at fair value and foreign exchange and increased fee and reimbursement income. Total insurance expenses increased 19% to $379 million in 2006 from $318 million in 2005. The increase in insurance expenses was primarily the result of an increase in VIE interest expense, commensurate with the increase in net investment income, and an increase in operating expenses resulting from increased compensation costs. Gross operating expenses (expenses before ceding commission income and the deferral or amortization of acquisition costs) increased 2% in 2006 compared with 2005 as a result of an increase in compensation costs.

GPW reflects premiums received and accrued for in the period and does not include the present value of future cash receipts expected from installment premium policies originated during the period. GPW was $999 million in 2007, up 8% from 2006 due to increases in U.S. public finance and global structured finance business written, as discussed in the respective sections below.

NPW, which represents gross premiums written net of premiums ceded to reinsurers, increased 10% to $892 million in 2007 from $815 million in 2006. The increase in 2007 was a result of the increase in GPW and a reduction in premiums ceded to reinsurers. Premiums ceded to reinsurers from all insurance operations as a percentage of GPW were 11% and 12% for 2007 and 2006, respectively. Reinsurance enables the Company to cede exposure and comply with its single risk and other credit guidelines, although the Company continues to be primarily liable on the insurance policies it underwrites.

Net premiums earned include scheduled premium earnings as well as premium earnings from refunded issues. Net premiums earned in 2007 of $856 million was slightly higher versus 2006 due to a 6% increase in scheduled premiums earned, offset by a 25% decrease in refunded premiums earned. The increase in scheduled premiums earned resulted from an increase in business written and lower refunding activity in 2007.

In 2006, GPW decreased 9% compared with 2005, reflecting declines in U.S. public finance and global structured finance business written. NPW decreased 7% compared with 2005, resulting from the decline in GPW, slightly offset by a reduction in premiums ceded to reinsurers. Premiums ceded to reinsurers from all insurance operations for 2006 declined to 12% of GPW from 14% for 2005. Net premiums earned declined 1% in 2006 compared with 2005 due to a 5% decrease in scheduled premiums earned offset by a 15% increase in refunded premiums earned. The decrease in scheduled premiums earned resulted from declining business production since 2003 and the effects of heavy refunding activity over the same period.

MBIA evaluates the premium rates it charges for insurance guarantees through the use of internal and external rating agency quantitative models. These models assess the Company’s premium rates and return on capital results on a risk adjusted basis. In addition, market research data is used to evaluate pricing levels across the financial guarantee industry for comparable risks, when available. Since 2005, domestic municipal spreads contracted to tighter levels through mid-2007. Since mid-2007, in light of credit market volatility, we have also noticed spreads moving wider, in particular in the domestic municipal sectors. We expect that over time this may result in an increase in premium rates.

CREDIT QUALITY Financial guarantee insurance companies use a variety of approaches to assess the underlying credit risk profile of their insured portfolios. MBIA uses both an internally developed credit rating system as well as third-party rating sources in the analysis of credit quality measures of its insured portfolio. In evaluating credit risk, the Company obtains, when available, the underlying rating of the insured obligation before the benefit of its insurance policy from nationally recognized rating agencies (Moody’s, S&P and Fitch). All references to insured credit quality distributions contained herein reflect the underlying rating levels from these third-party sources. Other companies within the financial guarantee industry may report credit quality information based upon internal ratings that would not be comparable to MBIA’s presentation.

During 2007, total net par insured rated A or above, before giving effect to MBIA’s guarantee, was 82% compared with 77% during 2006 and 81% during 2005. These percentages reflect a change in the mix of business written during each year. At December 31, 2007, 83% of the Company’s outstanding net par insured was rated A or above before giving effect to MBIA’s guarantee compared with 81% at December 31, 2006. The following table presents the credit quality distribution of MBIA’s outstanding net par insured as of December 31, 2007 and 2006. All ratings are as of the period presented and represent S&P ratings. If transactions are not rated by S&P, a Moody’s equivalent rating is used. If transactions are not rated by either S&P or Moody’s, a MBIA equivalent rating is used.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

RESULTS OF OPERATIONS

SUMMARY OF CONSOLIDATED RESULTS

The following table presents highlights of the Company’s consolidated financial results for the three and nine month periods ended September 30, 2007 and 2006. Items listed under “Other per share information (effect on net income)” are items that we commonly identify for the readers of our financial statements because they are a by-product of the Company’s operations or due to general market conditions beyond the control of the Company.

Consolidated revenues in the third quarter of 2007 decreased 39% to $436 million from $711 million in the third quarter of 2006. The decline in consolidated revenues was primarily due to a $352 million net loss on financial instruments at fair value and foreign exchange in the third quarter of 2007, which was the result of changes in the fair value of the Company’s insurance credit derivative portfolio, compared with $1 million of net gains on financial instruments at fair value and foreign exchange in the third quarter of 2006. For a further discussion of net gains and losses on financial instruments at fair value and foreign exchange, see the following “Net Gains and Losses” section. Insurance revenues also declined due to a decrease in net investment income, fees and reimbursements and premiums earned. The increase in investment management services’ revenues was due to a substantial increase in investment management services’ interest income resulting from strong growth in asset/liability products, partially offset by net losses on financial instruments at fair value and foreign exchange and net realized losses. Corporate revenues decreased primarily due to a decline in net investment income. Consolidated expenses in the third quarter of 2007 increased 28% to $519 million from $404 million in the third quarter of 2006. This increase was principally due to an increase in investment management services’ interest expense, which was commensurate with the increase in interest income. The decrease in insurance expenses primarily resulted from a decrease in operating expenses and interest expense, partially offset by an increase in loss and loss adjustment expenses (LAE) incurred. The increase in corporate expenses primarily resulted from an increase in costs allocated from the insurance operations and intercompany interest expense, partially offset by a decrease in costs related to the retention of the Independent Consultant and other legal expenses associated with the regulatory investigations.

The Company recorded a net loss in the third quarter of 2007 of $37 million compared with net income of $218 million in the third quarter of 2006. The net loss per diluted share for the third quarter of 2007 was ($0.30) compared with net income per diluted share of $1.59 for the same period in 2006. The decrease in net income per diluted share was due to the decline in net income partially offset by a decline in the number of diluted shares outstanding as a result of share repurchases by the Company in prior quarters under the share repurchase program.

Consolidated revenues for the first nine months of 2007 declined 3% to $1,951 million from $2,014 million in the first nine months of 2006. The decline in consolidated revenues was primarily due to the net losses in the Company’s insurance credit derivatives portfolio recorded in the third quarter of 2007. Insurance revenues also declined due to a decrease in net investment income and fees and reimbursements, partially offset by an increase in net realized gains on sales of securities. Investment management services’ revenues increased due to a substantial increase in investment management services’ interest income resulting from strong growth in asset/liability products, partially offset by net losses on financial instruments at fair value and foreign exchange and net realized losses. The decline in corporate revenues resulted from net realized losses, partially offset by an increase in net investment income and insurance recoveries. Insurance recoveries represent the reimbursement of a portion of expenses incurred in connection with the regulatory investigations of the Company and related litigation. Consolidated expenses in the first nine months of 2007 increased 29% to $1,464 million from $1,131 million in the first nine months of 2006. This increase was principally due to an increase in investment management services’ interest expense, which was commensurate with the increase in interest income. The decrease in insurance expenses was due to a decline in operating expenses, partially offset by an increase in interest expense and loss and LAE incurred. The increase in corporate expenses primarily resulted from an increase in costs allocated from the insurance operations, costs related to the retention of the Independent Consultant and other legal expenses associated with the regulatory investigations.

Net income in the first nine months of 2007 of $374 million was 41% lower compared with the first nine months of 2006. Net income per diluted share for the first nine months of 2007 was $2.84 compared with $4.67 for the same period in 2006. The decrease in net income per diluted share was due to the decline in net income partially offset by a decline in the number of diluted shares outstanding as a result of the share repurchases by the Company.

The Company’s book value at September 30, 2007 was $52.09 per share, compared with $53.43 at December 31, 2006. The decrease was principally driven by an increase in treasury stock as a result of the share repurchases by the Company and a decline in the unrealized appreciation of the Company’s investment portfolio, partially offset by net income from operations and an increase in additional paid-in capital due to stock-based compensation activity.

INSURANCE OPERATIONS

The Company’s insurance operations principally comprise the activities of MBIA Corp. MBIA Corp. issues financial guarantees for municipal bonds, asset-backed and mortgage-backed securities, investor-owned utility bonds, bonds backed by publicly or privately funded public purpose projects, bonds issued by sovereign and sub-sovereign entities, obligations collateralized by diverse pools of corporate loans and pools of corporate and asset-backed bonds, both in the new issue and secondary markets. Additionally, MBIA Corp. insures credit default swaps primarily on pools of collateral, which it considers part of its core financial guarantee business.

The municipal obligations that MBIA Corp. insures include tax-exempt and taxable indebtedness of states, counties, cities, utility districts and other political subdivisions, as well as airports, higher education and healthcare facilities and similar authorities and obligations issued by private entities that finance projects which serve a substantial public purpose. The asset-backed and structured finance obligations insured by MBIA Corp. typically consist of securities that are payable from or which are tied to the performance of a specified pool of assets that have an expected cash flow. Securities of this type include residential and commercial mortgages, a variety of consumer loans, corporate loans and bonds, trade and export receivables, aircraft, equipment and real property leases and infrastructure projects. MBIA also provides guarantees on portfolios of credit default swaps, which are directly tied to the performance of underlying reference obligations. Underlying reference obligations typically include residential mortgage-backed, commercial mortgage-backed, asset-backed, and corporate securities.

In certain cases, the Company may be required to consolidate entities established as part of securitizations when it insures the assets or liabilities of those entities. These entities typically meet the definition of a VIE under FIN 46(R). We do not believe there is any difference in the risks and profitability of financial guarantees provided to VIEs compared with other financial guarantees written by the Company. Additional information relating to VIEs is contained in the “Variable Interest Entities” section included herein.

GPW reflects premiums received and accrued for in the period and does not include the present value of future cash receipts expected from installment premium policies originated during the period. GPW was $250 million in the third quarter of 2007, up 23% from the third quarter of 2006. The increase in GPW resulted primarily from an increase in the volume of U.S. public finance deals written in the third quarter of 2007 compared with 2006. In addition, both U.S. and non-U.S. structured finance GPW increased compared with the same period in 2006. These increases were partially offset by a decline in non-U.S. public finance GPW in the third quarter of 2007 compared with 2006. For the nine months ended September 30, 2007, GPW increased 14% due to an increase in the number of deals and the average deal size written compared with the same period of 2006.

NPW represents gross premiums written net of premiums ceded to reinsurers. Reinsurance enables the Company to cede exposure and comply with its single risk and credit guidelines, although the Company continues to be primarily liable on the reinsured policies. NPW increased 28% to $225 million in the third quarter of 2007 from $176 million in the third quarter of 2006. The increase in the third quarter of 2007 was a result of the increase in GPW as well as a decrease in premiums ceded to reinsurers. Premiums ceded to reinsurers from all insurance operations were $24 million or 10% of GPW in the third quarter of 2007 compared to $26 million or 13% of GPW in the third quarter of 2006. For the nine months ended September 30, 2007, NPW increased 17% as a result of the increase in GPW and a decrease in premiums ceded to reinsurers. Premiums ceded to reinsurers in the nine months ended September 30, 2007 were $72 million or 10% of GPW compared with $78 million or 12% of GPW in the first nine months of 2006.

Net premiums earned include scheduled premium earnings, as well as premium earnings from refunded issues. Net premiums earned in the third quarter of 2007 of $203 million decreased 4% from $212 million in the third quarter of 2006. The decrease in net premiums earned was due to a 57% decrease in refunded premiums earned, partially offset by a 9% increase in scheduled premiums earned. In the nine months ended September 30, 2007, net premiums earned were $634 million, a slight decrease compared with $635 million in the nine months ended September 30, 2006. The decrease in net premiums earned was due to a 19% decrease in refunded premiums earned partially offset by a 5% increase in scheduled premiums earned.

MBIA evaluates the premium rates it charges for insurance guarantees through the use of internal and external rating agency quantitative models. These models assess the Company’s premium rates and return on capital results on a risk adjusted basis. In addition, market research data is used to evaluate pricing levels across the financial guarantee industry for comparable risks, when available. Our pricing levels indicate continued acceptable trends in overall portfolio profitability under all models, and we believe the pricing charged for our insurance products produces results that meet our long-term return on capital targets.

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