PUBLIC FINANCE INSURANCE
Our U.S. public finance insurance business is conducted through National and
our structured finance and international insurance operations are conducted
through MBIA Corp. and its subsidiaries.
We are compensated for our insurance policies by insurance premiums paid upfront
and/or on an installment basis. Historically, our financial guarantee insurance
was offered in both the new issue and secondary markets on a global basis. Transactions
in the new issue market were sold either through negotiated offerings or competitive
bidding. In negotiated transactions, either the issuer or the underwriter purchases
the insurance policy directly from an insurer. 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 could purchase the insurance.
We also issue insurance policies to guarantee the payment of principal and interest
on municipal obligations being traded in the secondary market upon the request
of a broker or an existing holder of uninsured bonds. The premium is generally
paid by the owner of the obligation. In addition, we have provided financial
guarantees to debt service reserve funds. The primary risk in our insurance
operations is that of adverse credit performance in the insured portfolio.
STRUCTURED FINANCE
Structured finance obligations insured by MBIA Corp. typically are securities
repayable from expected cash flows generated by a specified pool of assets,
such as residential and commercial mortgage loans, insurance policies, consumer
loans, corporate loans and bonds, trade and export receivables, leases for equipment,
aircraft and real property, private sector student loans, and infrastructure
projects. Structured finance obligations are either secured by undivided interests
or collateralized by the related assets. Additional policies have included payments
due under CDS and other derivatives, including termination payments that may
become due upon the occurrence of certain events, such as the insolvency of
or a payment default by the financial guarantor or the CDS issuer.
Structured finance transactions are often structured such that the insured
obligations are intended to benefit from some form of credit enhancement such
as over-collateralization, subordination, excess cash flow or first loss protection,
to protect against the associated 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. Additionally, the
inclusion of a large number of ineligible mortgage loans in MBIA Corp.-insured
transactions has caused, and may continue to cause, material losses beyond any
stress analyses undertaken at origination. Currently, the structured finance
industry is generating very few credit enhancement opportunities for the Company,
and it is uncertain how or when the Company may re-engage this market.
ADVISORY SERVICES
In our asset management advisory services business our registered investment
advisors provide fixed-income asset management services for third parties and
the investment portfolios of the Company and its affiliates (including the wind-down
businesses) on a fee-for-service basis.