MBIA (MBI)

MBIA Illinois Portfolio

Through its reinsurance of U.S. public finance financial guarantees from MBIA Corp. and FGIC, MBIA Illinois’ insurance portfolio consists of municipal bonds, including tax-exempt and taxable indebtedness of Unites States political subdivisions, as well as utility districts, airports, health care institutions, higher educational facilities, student loan issuers, housing authorities and other similar agencies and obligations issued by private entities that finance projects that serve a substantial public purpose. Municipal bonds and privately issued bonds used for the financing of public purpose projects are generally supported by taxes, assessments, fees or tariffs related to the use of these projects, lease payments or other similar types of revenue streams.

FGIC Transaction

In the third quarter of 2008, MBIA Corp. closed the FGIC Transaction, in which MBIA Corp. assumed a significant portion of FGIC’s U.S. public finance insurance portfolio. As of the closing date, the reinsured portfolio consisted exclusively of investment grade credits, primarily in the general obligation, water and sewer, tax-backed and transportation sectors, and did not contain any credit default swap contracts, below investment grade credits or other credits that were inconsistent with our credit underwriting standards. The reinsurance was provided on a “cut-through” basis, which enabled FGIC’s policyholders to receive the benefit of MBIA Corp.’s reinsurance by allowing them to present claims directly to MBIA Corp. The FGIC reinsurance agreement is included as Exhibit 10.11 to this Form 10-K and any description of it in this Form 10-K is qualified in its entirety by the agreement.

Under the FGIC Transaction, MBIA Corp. assumed a total net par of approximately $181 billion and received upfront unearned premiums, net of a ceding commission paid to FGIC, of approximately $717 million. As required by the New York State Insurance Department in connection with its approval of the reinsurance transaction, the funds were placed in a trust and will be released to MBIA Corp. upon the earlier of its removal from ratings review with its current ratings or June 30, 2009. Additionally, under the terms of the trust, the funds are released to MBIA Corp. as the premiums are earned and can be used to pay claims on policies assumed under the reinsurance agreement. On December 1, 2008, MBIA Corp. entered into an Administrative Services Agreement with FGIC allowing MBIA Corp. to administer and remediate credits in the portfolio.

MBIA Corp. subsequently assigned its rights, interests, and obligations under the FGIC reinsurance agreement to MBIA Illinois as part of the MBIA Illinois Transformation discussed below. In addition, MBIA Corp. assigned all of its rights and interests in the trust to MBIA Illinois as payment to MBIA Illinois of the amount of the net unearned premium reserve (net of ceding commission) associated with the FGIC policies.

MBIA Illinois Transformation

Under the MBIA Illinois Transformation, the Company executed a series of transactions to establish MBIA Illinois as a U.S. public finance-only financial guarantee company. The stock of MBIA Illinois, a financial guarantee

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insurance company domiciled in Illinois that was acquired by the Company in 1989 and was a direct subsidiary of MBIA Corp., was transferred by MBIA Corp. to the Company, then contributed by the Company to a newly established intermediate holding company, National Public Finance Guarantee Holdings, Inc., which is itself a wholly-owned subsidiary of the Company. MBIA Illinois is expected to be renamed National Public Finance Guarantee Corporation.

In addition, on February 17, 2009, MBIA Corp. ceded all of its U.S. public finance business to MBIA Illinois by entering into a Quota Share Reinsurance Agreement with MBIA Illinois, effective January 1, 2009 (the “MBIA Corp. Reinsurance Agreement”), and by assigning to MBIA Illinois pursuant to a separate assignment agreement its rights, interests and obligations with respect to the U.S. public finance business of FGIC that was reinsured by MBIA Corp. pursuant to a reinsurance agreement with FGIC (the “FGIC Reinsurance Agreement”). The MBIA Corp. Reinsurance Agreement is included as Exhibit 99.2 to this Form 10-K and any description of it in this Form 10-K is qualified in its entirety by the agreement. The portfolio transferred to MBIA Illinois by reinsurance or through the assignment of the FGIC Reinsurance Agreement consists entirely of U.S. public finance business with total net par outstanding of approximately $554 billion, based on data current as of December 31, 2008. The reinsurance and assignment transactions between MBIA Corp. and MBIA Illinois, which became effective as of January 1, 2009, enable covered policyholders and certain ceding insurers to present claims for payment directly to MBIA Illinois in accordance with the terms of the cut-through provisions of the MBIA Corp. Reinsurance Agreement and the FGIC Reinsurance Agreement. Under the terms of the cut-through provision in each of those agreements, the covered policyholders and ceding insurers are granted a third party beneficiary right under the agreement with respect to the applicable cut-through provision only.

The reinsurance and assignment agreements between MBIA Corp. and MBIA Illinois (including the right to present claims for payment directly to MBIA Illinois described in the previous paragraph) can be terminated upon the mutual agreement of MBIA Corp. and MBIA Illinois, which termination is subject to the receipt of insurance regulatory approvals. In addition, the MBIA Reinsurance Agreement may not be terminated if, after giving effect to the termination, the ratings assigned to the underlying securities or bonds would be downgraded or withdrawn. MBIA Illinois may also assign the MBIA Reinsurance Agreement under certain circumstances to a reinsurer rated at least as highly as MBIA Illinois, which assignment is subject to the receipt of insurance regulatory approvals. In connection with the MBIA Illinois Transformation, MBIA Corp. commuted an existing reinsurance agreement with MBIA Illinois pursuant to which MBIA Corp. reinsured 100% of all of the policies of MBIA Illinois. The commutation is effective as of January 1, 2009. No penalties were incurred in connection with the commutation.

To provide additional protection for its municipal bond policyholders, MBIA Illinois has also issued a second-to-pay policy for the benefit of the policyholders covered by the FGIC Reinsurance Agreement (the “FGIC Second-to-Pay Policy”) and a second-to-pay policy for the benefit of the policyholders and ceding insurers covered by the MBIA Corp. Reinsurance Agreement (the “MBIA Corp. Second-to-Pay Policy”). The second-to-pay policies, which are direct obligations of MBIA Illinois, will be held by The Bank of New York Mellon as insurance trustee. These policies provide that if MBIA Corp. or FGIC, as applicable, does not pay valid claims to these policyholders and ceding insurers under the relevant underlying policies or assumed reinsurance agreements, as applicable, these policyholders and ceding insurers will then be able to make a claim for payment directly against MBIA Illinois under the applicable second-to-pay policy.

The MBIA Corp. Second-to-Pay Policy (including the right to make claims for payment directly against MBIA Illinois) will be deemed cancelled immediately and automatically, without any further action on the part of MBIA Illinois, in the event that the MBIA Corp. Reinsurance Agreement is terminated. In addition, coverage under the MBIA Corp. Second-to-Pay Policy shall be deemed cancelled in the event that the MBIA Corp. Reinsurance Agreement is assigned in accordance with its terms and, after giving effect to such assignment, the ratings on the underlying securities will not be downgraded or withdrawn. The FGIC Second-to-Pay Policy (including the right to make claims for payment directly against MBIA Illinois) will be deemed cancelled immediately and automatically, without any further action on the part of MBIA Illinois, in the event that the assignment agreement or the underlying FGIC Reinsurance Agreement is terminated. In addition, coverage under the FGIC Second-to-Pay Policy shall be deemed cancelled in the event that MBIA Illinois’ obligations under the assignment agreement are assigned and, after giving effect to such assignment, the ratings on the underlying securities will not be downgraded or withdrawn.

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In connection with the reinsurance and assignment transactions, MBIA Corp. paid to MBIA Illinois approximately $2.9 billion (which is equal to the net unearned premium and loss and loss adjustment expense reserves, net of the ceding commission) as a premium to reinsure the policies covered by the reinsurance and assignment agreements. MBIA Corp. received a 22 percent ceding commission on the unearned premium reserve. In addition to the $2.9 billion, MBIA Illinois has been further capitalized with $2.1 billion from funds distributed by MBIA Corp. to the Company, as a dividend and return of capital, which MBIA Inc. in turn contributed through National Public Finance Guarantee Holdings, Inc., an intermediate holding company, to MBIA Illinois. In addition to a transfer of public finance and other staff to MBIA Illinois from MBIA Corp., MBIA Illinois has entered into services agreements with MBIA Corp. in order for them to provide to each other certain administrative and other support services.

MBIA Corp. and MBIA Illinois received the required regulatory approvals from the New York and Illinois insurance departments prior to executing this restructuring. MBIA Corp. will continue to insure its remaining book of structured finance and international business, as well as the Guaranteed Investment Contracts and MTNs managed by MBIA Asset Management. MBIA Inc.’s other operations consist of the existing global structured finance, non-U.S. public finance and asset management businesses. The MBIA Illinois Transformation has limited the ability of MBIA Illinois and MBIA Corp. to pay dividends to MBIA Inc. for some time, which affects the Company’s liquidity. The impact of the MBIA Illinois Transformation on the Company’s liquidity is described further in “Note 28: Subsequent Events” in the Notes to Consolidated Financial Statements of MBIA Inc. and Subsidiaries in Part II, Item 8.

In general, references herein to MBIA Illinois-insured or issued policies include those policies reinsured from MBIA Corp. or under the FGIC Transaction, unless indicated otherwise.

Portfolio Profile

As of December 31, 2008, MBIA Corp. had 32,954 policies outstanding in the portion of its insurance portfolio that was ceded or assigned to MBIA Illinois effective January 1, 2009. Those are diversified among 12,213 “credits,” which MBIA Corp. defines as any group of issues supported by the same revenue source.

At December 31, 2008 the net par amount outstanding on MBIA Corp.’s insured U.S. public finance obligations (including obligations assumed from FGIC) was $554 billion. Net insurance in force, which includes all insured debt service, at December 31, 2008 was $908 billion.

The table below sets forth information with respect to the original par amount insured per issue in the MBIA Corp. portfolio as of December 31, 2008 that was assumed by MBIA Illinois effective January 1, 2009:

MBIA Illinois Portfolio

Through its reinsurance of U.S. public finance financial guarantees from MBIA Corp. and FGIC, MBIA Illinois’ insurance portfolio consists of municipal bonds, including tax-exempt and taxable indebtedness of Unites States political subdivisions, as well as utility districts, airports, health care institutions, higher educational facilities, student loan issuers, housing authorities and other similar agencies and obligations issued by private entities that finance projects that serve a substantial public purpose. Municipal bonds and privately issued bonds used for the financing of public purpose projects are generally supported by taxes, assessments, fees or tariffs related to the use of these projects, lease payments or other similar types of revenue streams.

FGIC Transaction

In the third quarter of 2008, MBIA Corp. closed the FGIC Transaction, in which MBIA Corp. assumed a significant portion of FGIC’s U.S. public finance insurance portfolio. As of the closing date, the reinsured portfolio consisted exclusively of investment grade credits, primarily in the general obligation, water and sewer, tax-backed and transportation sectors, and did not contain any credit default swap contracts, below investment grade credits or other credits that were inconsistent with our credit underwriting standards. The reinsurance was provided on a “cut-through” basis, which enabled FGIC’s policyholders to receive the benefit of MBIA Corp.’s reinsurance by allowing them to present claims directly to MBIA Corp. The FGIC reinsurance agreement is included as Exhibit 10.11 to this Form 10-K and any description of it in this Form 10-K is qualified in its entirety by the agreement.

Under the FGIC Transaction, MBIA Corp. assumed a total net par of approximately $181 billion and received upfront unearned premiums, net of a ceding commission paid to FGIC, of approximately $717 million. As required by the New York State Insurance Department in connection with its approval of the reinsurance transaction, the funds were placed in a trust and will be released to MBIA Corp. upon the earlier of its removal from ratings review with its current ratings or June 30, 2009. Additionally, under the terms of the trust, the funds are released to MBIA Corp. as the premiums are earned and can be used to pay claims on policies assumed under the reinsurance agreement. On December 1, 2008, MBIA Corp. entered into an Administrative Services Agreement with FGIC allowing MBIA Corp. to administer and remediate credits in the portfolio.

MBIA Corp. subsequently assigned its rights, interests, and obligations under the FGIC reinsurance agreement to MBIA Illinois as part of the MBIA Illinois Transformation discussed below. In addition, MBIA Corp. assigned all of its rights and interests in the trust to MBIA Illinois as payment to MBIA Illinois of the amount of the net unearned premium reserve (net of ceding commission) associated with the FGIC policies.

MBIA Illinois Transformation

Under the MBIA Illinois Transformation, the Company executed a series of transactions to establish MBIA Illinois as a U.S. public finance-only financial guarantee company. The stock of MBIA Illinois, a financial guarantee

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insurance company domiciled in Illinois that was acquired by the Company in 1989 and was a direct subsidiary of MBIA Corp., was transferred by MBIA Corp. to the Company, then contributed by the Company to a newly established intermediate holding company, National Public Finance Guarantee Holdings, Inc., which is itself a wholly-owned subsidiary of the Company. MBIA Illinois is expected to be renamed National Public Finance Guarantee Corporation.

In addition, on February 17, 2009, MBIA Corp. ceded all of its U.S. public finance business to MBIA Illinois by entering into a Quota Share Reinsurance Agreement with MBIA Illinois, effective January 1, 2009 (the “MBIA Corp. Reinsurance Agreement”), and by assigning to MBIA Illinois pursuant to a separate assignment agreement its rights, interests and obligations with respect to the U.S. public finance business of FGIC that was reinsured by MBIA Corp. pursuant to a reinsurance agreement with FGIC (the “FGIC Reinsurance Agreement”). The MBIA Corp. Reinsurance Agreement is included as Exhibit 99.2 to this Form 10-K and any description of it in this Form 10-K is qualified in its entirety by the agreement. The portfolio transferred to MBIA Illinois by reinsurance or through the assignment of the FGIC Reinsurance Agreement consists entirely of U.S. public finance business with total net par outstanding of approximately $554 billion, based on data current as of December 31, 2008. The reinsurance and assignment transactions between MBIA Corp. and MBIA Illinois, which became effective as of January 1, 2009, enable covered policyholders and certain ceding insurers to present claims for payment directly to MBIA Illinois in accordance with the terms of the cut-through provisions of the MBIA Corp. Reinsurance Agreement and the FGIC Reinsurance Agreement. Under the terms of the cut-through provision in each of those agreements, the covered policyholders and ceding insurers are granted a third party beneficiary right under the agreement with respect to the applicable cut-through provision only.

The reinsurance and assignment agreements between MBIA Corp. and MBIA Illinois (including the right to present claims for payment directly to MBIA Illinois described in the previous paragraph) can be terminated upon the mutual agreement of MBIA Corp. and MBIA Illinois, which termination is subject to the receipt of insurance regulatory approvals. In addition, the MBIA Reinsurance Agreement may not be terminated if, after giving effect to the termination, the ratings assigned to the underlying securities or bonds would be downgraded or withdrawn. MBIA Illinois may also assign the MBIA Reinsurance Agreement under certain circumstances to a reinsurer rated at least as highly as MBIA Illinois, which assignment is subject to the receipt of insurance regulatory approvals. In connection with the MBIA Illinois Transformation, MBIA Corp. commuted an existing reinsurance agreement with MBIA Illinois pursuant to which MBIA Corp. reinsured 100% of all of the policies of MBIA Illinois. The commutation is effective as of January 1, 2009. No penalties were incurred in connection with the commutation.

To provide additional protection for its municipal bond policyholders, MBIA Illinois has also issued a second-to-pay policy for the benefit of the policyholders covered by the FGIC Reinsurance Agreement (the “FGIC Second-to-Pay Policy”) and a second-to-pay policy for the benefit of the policyholders and ceding insurers covered by the MBIA Corp. Reinsurance Agreement (the “MBIA Corp. Second-to-Pay Policy”). The second-to-pay policies, which are direct obligations of MBIA Illinois, will be held by The Bank of New York Mellon as insurance trustee. These policies provide that if MBIA Corp. or FGIC, as applicable, does not pay valid claims to these policyholders and ceding insurers under the relevant underlying policies or assumed reinsurance agreements, as applicable, these policyholders and ceding insurers will then be able to make a claim for payment directly against MBIA Illinois under the applicable second-to-pay policy.

The MBIA Corp. Second-to-Pay Policy (including the right to make claims for payment directly against MBIA Illinois) will be deemed cancelled immediately and automatically, without any further action on the part of MBIA Illinois, in the event that the MBIA Corp. Reinsurance Agreement is terminated. In addition, coverage under the MBIA Corp. Second-to-Pay Policy shall be deemed cancelled in the event that the MBIA Corp. Reinsurance Agreement is assigned in accordance with its terms and, after giving effect to such assignment, the ratings on the underlying securities will not be downgraded or withdrawn. The FGIC Second-to-Pay Policy (including the right to make claims for payment directly against MBIA Illinois) will be deemed cancelled immediately and automatically, without any further action on the part of MBIA Illinois, in the event that the assignment agreement or the underlying FGIC Reinsurance Agreement is terminated. In addition, coverage under the FGIC Second-to-Pay Policy shall be deemed cancelled in the event that MBIA Illinois’ obligations under the assignment agreement are assigned and, after giving effect to such assignment, the ratings on the underlying securities will not be downgraded or withdrawn.

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Item 1. Business (Continued)

In connection with the reinsurance and assignment transactions, MBIA Corp. paid to MBIA Illinois approximately $2.9 billion (which is equal to the net unearned premium and loss and loss adjustment expense reserves, net of the ceding commission) as a premium to reinsure the policies covered by the reinsurance and assignment agreements. MBIA Corp. received a 22 percent ceding commission on the unearned premium reserve. In addition to the $2.9 billion, MBIA Illinois has been further capitalized with $2.1 billion from funds distributed by MBIA Corp. to the Company, as a dividend and return of capital, which MBIA Inc. in turn contributed through National Public Finance Guarantee Holdings, Inc., an intermediate holding company, to MBIA Illinois. In addition to a transfer of public finance and other staff to MBIA Illinois from MBIA Corp., MBIA Illinois has entered into services agreements with MBIA Corp. in order for them to provide to each other certain administrative and other support services.

MBIA Corp. and MBIA Illinois received the required regulatory approvals from the New York and Illinois insurance departments prior to executing this restructuring. MBIA Corp. will continue to insure its remaining book of structured finance and international business, as well as the Guaranteed Investment Contracts and MTNs managed by MBIA Asset Management. MBIA Inc.’s other operations consist of the existing global structured finance, non-U.S. public finance and asset management businesses. The MBIA Illinois Transformation has limited the ability of MBIA Illinois and MBIA Corp. to pay dividends to MBIA Inc. for some time, which affects the Company’s liquidity. The impact of the MBIA Illinois Transformation on the Company’s liquidity is described further in “Note 28: Subsequent Events” in the Notes to Consolidated Financial Statements of MBIA Inc. and Subsidiaries in Part II, Item 8.

In general, references herein to MBIA Illinois-insured or issued policies include those policies reinsured from MBIA Corp. or under the FGIC Transaction, unless indicated otherwise.

Portfolio Profile

As of December 31, 2008, MBIA Corp. had 32,954 policies outstanding in the portion of its insurance portfolio that was ceded or assigned to MBIA Illinois effective January 1, 2009. Those are diversified among 12,213 “credits,” which MBIA Corp. defines as any group of issues supported by the same revenue source.

At December 31, 2008 the net par amount outstanding on MBIA Corp.’s insured U.S. public finance obligations (including obligations assumed from FGIC) was $554 billion. Net insurance in force, which includes all insured debt service, at December 31, 2008 was $908 billion.

The table below sets forth information with respect to the original par amount insured per issue in the MBIA Corp. portfolio as of December 31, 2008 that was assumed by MBIA Illinois effective January 1, 2009:

MBIA Illinois Portfolio

Through its reinsurance of U.S. public finance financial guarantees from MBIA Corp. and FGIC, MBIA Illinois’ insurance portfolio consists of municipal bonds, including tax-exempt and taxable indebtedness of Unites States political subdivisions, as well as utility districts, airports, health care institutions, higher educational facilities, student loan issuers, housing authorities and other similar agencies and obligations issued by private entities that finance projects that serve a substantial public purpose. Municipal bonds and privately issued bonds used for the financing of public purpose projects are generally supported by taxes, assessments, fees or tariffs related to the use of these projects, lease payments or other similar types of revenue streams.

FGIC Transaction

In the third quarter of 2008, MBIA Corp. closed the FGIC Transaction, in which MBIA Corp. assumed a significant portion of FGIC’s U.S. public finance insurance portfolio. As of the closing date, the reinsured portfolio consisted exclusively of investment grade credits, primarily in the general obligation, water and sewer, tax-backed and transportation sectors, and did not contain any credit default swap contracts, below investment grade credits or other credits that were inconsistent with our credit underwriting standards. The reinsurance was provided on a “cut-through” basis, which enabled FGIC’s policyholders to receive the benefit of MBIA Corp.’s reinsurance by allowing them to present claims directly to MBIA Corp. The FGIC reinsurance agreement is included as Exhibit 10.11 to this Form 10-K and any description of it in this Form 10-K is qualified in its entirety by the agreement.

Under the FGIC Transaction, MBIA Corp. assumed a total net par of approximately $181 billion and received upfront unearned premiums, net of a ceding commission paid to FGIC, of approximately $717 million. As required by the New York State Insurance Department in connection with its approval of the reinsurance transaction, the funds were placed in a trust and will be released to MBIA Corp. upon the earlier of its removal from ratings review with its current ratings or June 30, 2009. Additionally, under the terms of the trust, the funds are released to MBIA Corp. as the premiums are earned and can be used to pay claims on policies assumed under the reinsurance agreement. On December 1, 2008, MBIA Corp. entered into an Administrative Services Agreement with FGIC allowing MBIA Corp. to administer and remediate credits in the portfolio.

MBIA Corp. subsequently assigned its rights, interests, and obligations under the FGIC reinsurance agreement to MBIA Illinois as part of the MBIA Illinois Transformation discussed below. In addition, MBIA Corp. assigned all of its rights and interests in the trust to MBIA Illinois as payment to MBIA Illinois of the amount of the net unearned premium reserve (net of ceding commission) associated with the FGIC policies.

MBIA Illinois Transformation

Under the MBIA Illinois Transformation, the Company executed a series of transactions to establish MBIA Illinois as a U.S. public finance-only financial guarantee company. The stock of MBIA Illinois, a financial guarantee

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Item 1. Business (Continued)

insurance company domiciled in Illinois that was acquired by the Company in 1989 and was a direct subsidiary of MBIA Corp., was transferred by MBIA Corp. to the Company, then contributed by the Company to a newly established intermediate holding company, National Public Finance Guarantee Holdings, Inc., which is itself a wholly-owned subsidiary of the Company. MBIA Illinois is expected to be renamed National Public Finance Guarantee Corporation.

In addition, on February 17, 2009, MBIA Corp. ceded all of its U.S. public finance business to MBIA Illinois by entering into a Quota Share Reinsurance Agreement with MBIA Illinois, effective January 1, 2009 (the “MBIA Corp. Reinsurance Agreement”), and by assigning to MBIA Illinois pursuant to a separate assignment agreement its rights, interests and obligations with respect to the U.S. public finance business of FGIC that was reinsured by MBIA Corp. pursuant to a reinsurance agreement with FGIC (the “FGIC Reinsurance Agreement”). The MBIA Corp. Reinsurance Agreement is included as Exhibit 99.2 to this Form 10-K and any description of it in this Form 10-K is qualified in its entirety by the agreement. The portfolio transferred to MBIA Illinois by reinsurance or through the assignment of the FGIC Reinsurance Agreement consists entirely of U.S. public finance business with total net par outstanding of approximately $554 billion, based on data current as of December 31, 2008. The reinsurance and assignment transactions between MBIA Corp. and MBIA Illinois, which became effective as of January 1, 2009, enable covered policyholders and certain ceding insurers to present claims for payment directly to MBIA Illinois in accordance with the terms of the cut-through provisions of the MBIA Corp. Reinsurance Agreement and the FGIC Reinsurance Agreement. Under the terms of the cut-through provision in each of those agreements, the covered policyholders and ceding insurers are granted a third party beneficiary right under the agreement with respect to the applicable cut-through provision only.

The reinsurance and assignment agreements between MBIA Corp. and MBIA Illinois (including the right to present claims for payment directly to MBIA Illinois described in the previous paragraph) can be terminated upon the mutual agreement of MBIA Corp. and MBIA Illinois, which termination is subject to the receipt of insurance regulatory approvals. In addition, the MBIA Reinsurance Agreement may not be terminated if, after giving effect to the termination, the ratings assigned to the underlying securities or bonds would be downgraded or withdrawn. MBIA Illinois may also assign the MBIA Reinsurance Agreement under certain circumstances to a reinsurer rated at least as highly as MBIA Illinois, which assignment is subject to the receipt of insurance regulatory approvals. In connection with the MBIA Illinois Transformation, MBIA Corp. commuted an existing reinsurance agreement with MBIA Illinois pursuant to which MBIA Corp. reinsured 100% of all of the policies of MBIA Illinois. The commutation is effective as of January 1, 2009. No penalties were incurred in connection with the commutation.

To provide additional protection for its municipal bond policyholders, MBIA Illinois has also issued a second-to-pay policy for the benefit of the policyholders covered by the FGIC Reinsurance Agreement (the “FGIC Second-to-Pay Policy”) and a second-to-pay policy for the benefit of the policyholders and ceding insurers covered by the MBIA Corp. Reinsurance Agreement (the “MBIA Corp. Second-to-Pay Policy”). The second-to-pay policies, which are direct obligations of MBIA Illinois, will be held by The Bank of New York Mellon as insurance trustee. These policies provide that if MBIA Corp. or FGIC, as applicable, does not pay valid claims to these policyholders and ceding insurers under the relevant underlying policies or assumed reinsurance agreements, as applicable, these policyholders and ceding insurers will then be able to make a claim for payment directly against MBIA Illinois under the applicable second-to-pay policy.

The MBIA Corp. Second-to-Pay Policy (including the right to make claims for payment directly against MBIA Illinois) will be deemed cancelled immediately and automatically, without any further action on the part of MBIA Illinois, in the event that the MBIA Corp. Reinsurance Agreement is terminated. In addition, coverage under the MBIA Corp. Second-to-Pay Policy shall be deemed cancelled in the event that the MBIA Corp. Reinsurance Agreement is assigned in accordance with its terms and, after giving effect to such assignment, the ratings on the underlying securities will not be downgraded or withdrawn. The FGIC Second-to-Pay Policy (including the right to make claims for payment directly against MBIA Illinois) will be deemed cancelled immediately and automatically, without any further action on the part of MBIA Illinois, in the event that the assignment agreement or the underlying FGIC Reinsurance Agreement is terminated. In addition, coverage under the FGIC Second-to-Pay Policy shall be deemed cancelled in the event that MBIA Illinois’ obligations under the assignment agreement are assigned and, after giving effect to such assignment, the ratings on the underlying securities will not be downgraded or withdrawn.

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Item 1. Business (Continued)

In connection with the reinsurance and assignment transactions, MBIA Corp. paid to MBIA Illinois approximately $2.9 billion (which is equal to the net unearned premium and loss and loss adjustment expense reserves, net of the ceding commission) as a premium to reinsure the policies covered by the reinsurance and assignment agreements. MBIA Corp. received a 22 percent ceding commission on the unearned premium reserve. In addition to the $2.9 billion, MBIA Illinois has been further capitalized with $2.1 billion from funds distributed by MBIA Corp. to the Company, as a dividend and return of capital, which MBIA Inc. in turn contributed through National Public Finance Guarantee Holdings, Inc., an intermediate holding company, to MBIA Illinois. In addition to a transfer of public finance and other staff to MBIA Illinois from MBIA Corp., MBIA Illinois has entered into services agreements with MBIA Corp. in order for them to provide to each other certain administrative and other support services.

MBIA Corp. and MBIA Illinois received the required regulatory approvals from the New York and Illinois insurance departments prior to executing this restructuring. MBIA Corp. will continue to insure its remaining book of structured finance and international business, as well as the Guaranteed Investment Contracts and MTNs managed by MBIA Asset Management. MBIA Inc.’s other operations consist of the existing global structured finance, non-U.S. public finance and asset management businesses. The MBIA Illinois Transformation has limited the ability of MBIA Illinois and MBIA Corp. to pay dividends to MBIA Inc. for some time, which affects the Company’s liquidity. The impact of the MBIA Illinois Transformation on the Company’s liquidity is described further in “Note 28: Subsequent Events” in the Notes to Consolidated Financial Statements of MBIA Inc. and Subsidiaries in Part II, Item 8.

In general, references herein to MBIA Illinois-insured or issued policies include those policies reinsured from MBIA Corp. or under the FGIC Transaction, unless indicated otherwise.

Portfolio Profile

As of December 31, 2008, MBIA Corp. had 32,954 policies outstanding in the portion of its insurance portfolio that was ceded or assigned to MBIA Illinois effective January 1, 2009. Those are diversified among 12,213 “credits,” which MBIA Corp. defines as any group of issues supported by the same revenue source.

At December 31, 2008 the net par amount outstanding on MBIA Corp.’s insured U.S. public finance obligations (including obligations assumed from FGIC) was $554 billion. Net insurance in force, which includes all insured debt service, at December 31, 2008 was $908 billion.

The table below sets forth information with respect to the original par amount insured per issue in the MBIA Corp. portfolio as of December 31, 2008 that was assumed by MBIA Illinois effective January 1, 2009:

MBIA Illinois Portfolio

Through its reinsurance of U.S. public finance financial guarantees from MBIA Corp. and FGIC, MBIA Illinois’ insurance portfolio consists of municipal
bonds, including tax-exempt and taxable indebtedness of Unites States political subdivisions, as well as utility districts, airports, health care institutions, higher educational facilities, student loan issuers, housing authorities and other
similar agencies and obligations issued by private entities that finance projects that serve a substantial public purpose. Municipal bonds and privately issued bonds used for the financing of public purpose projects are generally supported by taxes,
assessments, fees or tariffs related to the use of these projects, lease payments or other similar types of revenue streams.

FGIC Transaction

MBIA Illinois Portfolio

Through its reinsurance of U.S. public finance financial guarantees from MBIA Corp. and FGIC, MBIA Illinois’ insurance portfolio consists of municipal
bonds, including tax-exempt and taxable indebtedness of Unites States political subdivisions, as well as utility districts, airports, health care institutions, higher educational facilities, student loan issuers, housing authorities and other
similar agencies and obligations issued by private entities that finance projects that serve a substantial public purpose. Municipal bonds and privately issued bonds used for the financing of public purpose projects are generally supported by taxes,
assessments, fees or tariffs related to the use of these projects, lease payments or other similar types of revenue streams.

FGIC Transaction

MBIA Illinois Portfolio

Through its reinsurance of U.S. public finance financial guarantees from MBIA Corp. and FGIC, MBIA Illinois’ insurance portfolio consists of municipal
bonds, including tax-exempt and taxable indebtedness of Unites States political subdivisions, as well as utility districts, airports, health care institutions, higher educational facilities, student loan issuers, housing authorities and other
similar agencies and obligations issued by private entities that finance projects that serve a substantial public purpose. Municipal bonds and privately issued bonds used for the financing of public purpose projects are generally supported by taxes,
assessments, fees or tariffs related to the use of these projects, lease payments or other similar types of revenue streams.

FGIC Transaction

MBIA Illinois Portfolio

Through its reinsurance of U.S. public finance financial guarantees from MBIA Corp. and FGIC, MBIA Illinois’ insurance portfolio consists of municipal
bonds, including tax-exempt and taxable indebtedness of Unites States political subdivisions, as well as utility districts, airports, health care institutions, higher educational facilities, student loan issuers, housing authorities and other
similar agencies and obligations issued by private entities that finance projects that serve a substantial public purpose. Municipal bonds and privately issued bonds used for the financing of public purpose projects are generally supported by taxes,
assessments, fees or tariffs related to the use of these projects, lease payments or other similar types of revenue streams.

FGIC Transaction