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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 2000.
Commission file number 1-9583
MBIA INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Connecticut 06-1185706
(State of Incorporation) I.R.S. Employer Identification No.)
113 King Street, Armonk, New York 10504
(Address of principal executive offices) (Zip Code)
(914) 273-4545
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, par value $1 per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of March 15, 2001 was $7,595,925,423.00.
As of March 15, 2001, 98,815,213 shares of Common Stock, par value $1
per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE. Portions of Registrant's Annual Report to
Shareholders for the fiscal year ended December 31, 2000 are incorporated by
reference into Parts I and II. Portions of the Definitive Proxy Statement of the
Registrant, which will be filed on or before April 9, 2001 are incorporated by
reference into Parts I and III.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (SS 229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
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PART I
ITEM 1. BUSINESS
MBIA Inc. (the "Company") is engaged in providing financial guarantee
insurance and investment management and financial services to public finance
clients and financial institutions on a global basis. 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. The Company conducts its financial guarantee business through its
wholly-owned subsidiary, MBIA Insurance Corporation ("MBIA Corp."). 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 companies that were acquired by MBIA Corp. MBIA Corp. also owns MBIA
Assurance S.A. ("MBIA Assurance"), a French insurance company, which writes
financial guarantee insurance in the countries of the European Community.
Generally, throughout the text, references to MBIA Corp. include the activities
of its subsidiaries, MBIA Illinois, MBIA Assurance and CapMAC. In September
1995, MBIA Corp. entered into a joint venture agreement with Ambac Assurance
Corporation for the purpose of jointly marketing financial guarantee insurance
outside the United States. On March 21, 2000, the two companies restructured the
joint venture. Under the restructuring, the companies agreed to begin marketing
and originating financial guarantee insurance outside the United States
independently, and also to continue to maintain certain reciprocal reinsurance
arrangements for international business until at least the end of 2001. The
Company believes that the restructuring of the joint venture with Ambac will not
result in any reduction in premiums written from international business,
although no assurances can be given that such a reduction will not occur.
Additionally, during the third quarter of 2000, the Company and Ambac dissolved
the four-way joint venture in Japan with Mitsui Marine and Fire Insurance Co
Ltd. and the Yasuda Fire and Marine Insurance Co. Ltd.
MBIA Corp. primarily insures obligations which are sold in the new
issue and secondary markets, or which are held in unit investment trusts ("UIT")
and by mutual funds. 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 to
the entity issuing the obligations is the savings in interest costs between an
insured obligation and the same obligation on an uninsured basis. In addition,
for complex financings and for obligations of issuers that are not well-known by
investors, insured obligations receive greater market acceptance than uninsured
obligations.
MBIA Corp. issues financial guarantees for municipal bonds,
asset-backed and mortgage-backed securities, investor-owned utility bonds, bonds
issued by highly rated sovereign and sub-sovereign entities and collateralized
obligations of corporations and financial institutions, both in the new issue
and secondary markets 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 health care facilities and similar authorities. The asset-backed
or 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 a defined cash flow, such as residential and
commercial mortgages, a variety of consumer loans, corporate loans and bonds,
trade and export receivables, equipment and real property leases and
infrastructure projects.
MBIA Corp. has a Triple-A financial strength rating from Standard and
Poor's Corporation ("S&P"), which it received in 1974; from Moody's Investors
Service, Inc. ("Moody's"), which it received in 1984; from Fitch IBCA, Duff &
Phelps ("Fitch"), which it received in 1995; and from Rating and Investment
Information, Inc. ("RII"), which it received in 1998. Obligations which are
guaranteed by MBIA Corp. are rated Triple-A primarily based on these
claims-paying ratings of MBIA Corp. Both S&P and Moody's have also continued the
Triple-A rating on MBIA Assurance, MBIA Illinois and CapMAC guaranteed bond
issues. 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 have a material adverse effect on
the business, operations and financial results of the Company.
The Company also provides investment management products and financial
services through a group of subsidiary companies, all of which are owned by our
wholly-owned subsidiary, MBIA Asset Management Corporation. These services
include cash management, the issuance of municipal investment agreements,
discretionary asset management, purchase and administrative services, and
municipal revenue enhancement services. MBIA Municipal Investors Service
Corporation ("MBIA-MISC") provides cash management and investment placement
services to local governments, school districts and other institutional clients,
providing those clients with fund administration services. MBIA Investment
Management Corp. ("IMC") offers guaranteed investment agreements primarily for
bond proceeds to states and municipalities. MBIA Capital Management Corp.
("CMC") performs fixed income investment management services for the investment
portfolios of the Company, MBIA Corp., MBIA-MISC, IMC and selected
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external clients. In 1998, the Company acquired what is now 1838 Investment
Advisors, LLC ("1838"), an investment advisor to equity mutual funds and to
third party clients.
MBIA MuniServices Company ("MuniServices") provides revenue enhancement
services and products (discovery, audit, collections/recovery, enforcement and
information services) to state and local governments. The Company continues to
own a majority interest in Capital Asset Holdings GP and certain affiliated
entities (collectively, "Capital Asset"). Capital Asset was in the business of
acquiring and servicing tax liens. The Company became a majority owner in
December, 1998 when it acquired the interest of Capital Asset's founder. In
1999, the Company announced that it was exiting the tax lien business. Capital
Asset's primary activity today is servicing the three securitizations of tax
liens that are insured by MBIA Corp.
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 1998. 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) fluctuations in the
economic, credit or interest rate environment in the United States or abroad;
(2) level of activity within the national and international credit markets; (3)
competitive conditions and pricing levels; (4) legislative or regulatory
developments; (5) technological developments; (6) changes in tax laws; (7) the
effects of mergers, acquisitions and divestitures; and (8) 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.
MBIA CORP. INSURED PORTFOLIO
At December 31, 2000, the net par amount outstanding on MBIA Corp.'s
insured obligations (including insured obligations of MBIA Illinois, MBIA
Assurance and CapMAC, but excluding the guarantee of $5.3 billion of investment
management transactions) was $418.4 billion, comprised of $349.8 billion in new
issues and $68.6 billion in secondary market issues. Net insurance in force was
$680.9 billion.
Since generally MBIA Corp. 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 unless
MBIA Corp. consents to the acceleration. Otherwise, MBIA Corp. is required to
pay principal, interest or other amounts only as originally scheduled payments
come due.
MBIA Corp. seeks to maintain a diversified insured portfolio designed
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, 2000, MBIA Corp. had 35,154 policies
outstanding. These policies are diversified among 10,105 "credits," which MBIA
Corp. defines as any group of issues supported by the same revenue source.
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The table below sets forth information with respect to the original par
amount written per issue in MBIA Corp.'s portfolio as of December 31, 2000:
MBIA CORP. ORIGINAL PAR AMOUNT PER ISSUE
AS OF DECEMBER 31, 2000 (1)
% OF TOTAL
NUMBER OF NUMBER OF NET PAR % OF NET
ORIGINAL PAR AMOUNT ISSUES ISSUES AMOUNT PAR AMOUNT
WRITTEN PER ISSUE OUTSTANDING OUTSTANDING OUTSTANDING OUTSTANDING
(IN BILLIONS)
Less than $10 million 27,193 77.4% $50.8 12.2%
$10-25 million 3,299 9.4 42.8 10.2
$25-50 million 1,938 5.5 51.0 12.2
$50-100 million 1,334 3.8 64.5 15.4
Greater than $100 million 1,390 3.9 209.3 50.0
----------------- ----------------- -------------- ---------------
Total 35,154 100.0% $418.4 100.0%
================= ================= ============== ===============
- ------------------------------
(1) Excludes $5.3 billion relating to investment management transactions
guaranteed by MBIA Corp.
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MBIA Corp. underwrites financial guarantee insurance on the assumption
that the insurance will remain in force until maturity of the insured
obligations. MBIA Corp. estimates that the average life (as opposed to the
stated maturity) of its insurance policies in force at December 31, 2000 was
11.0 years. The average life was determined by applying a weighted-average
calculation, using the remaining years to maturity of each insured obligation,
and weighting them on the basis of the remaining debt service insured. No
assumptions were made for any future refundings of insured issues. Average
annual debt service on the portfolio at December 31, 2000 was $51.7 billion.
MBIA Corp. had, until the early-1990's, written only financial
guarantees for municipal issuers in the United States. Municipal bonds consist
of both taxable and tax-exempt bonds and notes that are issued by states,
cities, political subdivisions, utility districts, airports, health care
institutions, higher educational facilities, housing authorities and other
similar agencies. These types of obligations are supported by taxes,
assessments, fees related to use of projects, lease payments, etc. By the
mid-1990's, MBIA Corp. had begun to write guarantees for the structured finance
and asset-backed market. In general, structured finance and asset-backed
obligations are secured by or payable from a specific pool of assets having an
ascertainable cash flow. These obligations are either "pass-through"
obligations, which represent interests in the related assets, or "pay-through"
obligations, which generally are debt obligations collateralized by the related
assets. MBIA Corp. also insures payments due under credit derivatives, including
termination payments, that may become due upon the occurrence of certain events.
These types of obligations also generally have the benefit of
over-collateralization, excess cash flow or one or more forms of credit
enhancement to cover credit risks associated with the related assets. Structured
finance and asset-backed obligations contain certain risks: asset risk, which
relates to the amount and quality of asset coverage; and structural risk, which
relates to the extent to which the transaction structure protects the interests
of the investors. In general, the asset risk is addressed by sizing the asset
pool based on the historical performance of the assets. The ability of the
servicer (the entity which is responsible for collecting the cash flow from the
asset pool) to properly service and collect on the underlying assets is also a
factor in determining future asset performance. Structural risks include
bankruptcy and tax risks. Structured and asset-backed securities are usually
designed to protect 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. These issues concern 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.
In addition, servicer risk, the risk that problems at the servicer level could
result in a decline in the collection of cash payments, may also be present in
the transaction. These issues are addressed through MBIA Corp.'s underwriting
guidelines and procedures.
Outside of the United States, sovereign and sub-sovereign, structured
and asset-backed, utilities and other issuers are increasingly using financial
guarantee insurance. Ongoing privatization efforts have shifted the burden from
the government to public and private capital markets, where investors may seek
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, 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. It
is expected that securitization will continue to expand internationally, at
varying rates in each country. MBIA Corp. insures both asset-backed and
structured transactions, sovereign and sub-sovereign debt issues, utilities,
project financings and other obligations in selected international markets. MBIA
Corp. believes that the risk profile of the international business it insures is
generally the same as in the United States, but recognizes that there are
particular risks related to each country and region. These risks include the
legal and political situation, the capital markets and currency exchange risks.
MBIA Corp. monitors these risks carefully.
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MBIA CORP. INSURED PORTFOLIO BY BOND TYPE
AS OF DECEMBER 31, 2000
(IN BILLIONS)
BOND TYPE NET PAR % OF NET
AMOUNT PAR AMOUNT
OUTSTANDING OUTSTANDING
Domestic
Public Finance
General Obligation $ 91.6 21.9%
Utilities 44.6 10.6
Health Care 37.9 9.1
Special Revenue 33.2 7.9
Transportation 25.0 6.0
Higher Education 16.0 3.8
Investor Owned Utilities 15.4 3.7
Housing 12.3 2.9
----------------------------------
Total Public Finance 276.0 65.9
----------------------------------
Structured Finance
Mortgage Backed:
Home Equity 28.4 6.8
Other 14.2 3.4
First Mortgage 8.8 2.1
Asset Backed:
Other 18.2 4.4
Auto 13.2 3.1
Leasing 4.5 1.1
Pooled Corp. Obligations & Other 12.6 3.0
Financial Risk 5.1 1.2
----------------------------------
Total Structured Finance 105.0 25.1
----------------------------------
----------------------------------
Total Domestic 381.0 91.0
----------------------------------
International
Structured Finance* 31.9 7.7
Infrastructure 5.5 1.3
----------------------------------
Total International 37.4 9.0
----------------------------------
TOTAL $418.4 100.0%
==================================
*Asset/mortgage-backed, Pooled Corporate Obligations and Financial Risk
- -----------------------------
(1) Excludes $5.3 billion relating to investment management transactions
guaranteed by MBIA Corp.
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As of December 31, 2000, of the $418.4 billion outstanding net par
amount of obligations insured, $276.0 billion, or 66%, consisted of municipal
bonds, $105.0 billion, or approximately 25%, consisted primarily of
asset/mortgage-backed transactions and investor-owned utility obligations and
$37.4 billion or approximately 9% consisted of transactions done in the
international market.
The table below shows the diversification by type of insurance written
by MBIA Corp. in each of the last five years:
MBIA CORP. NET PAR AMOUNT BY BOND TYPE (1)
BOND TYPE 1996 1997 1998 1999 2000
(IN MILLIONS)
Domestic
Public Finance
General Obligation $12,010 $14,068 $15,468 $ 9,981 $ 9,829
Special Revenue 4,140 4,384 7,369 4,627 5,746
Utilities 6,535 6,944 6,475 2,440 2,747
Transportation 3,040 6,097 4,174 709 2,637
Investor Owned Utilities 1,655 1,548 1,477 1,340 2,523
Higher Education 2,017 2,537 4,072 1,434 1,645
Housing 1,743 1,817 2,093 1,872 1,294
Health Care 4,235 7,523 8,174 3,529 1,276
------------ ------------ ------------ ----------- ------------
Total Public Finance 35,375 44,918 49,302 25,932 27,697
Structured Finance
Asset Backed:
Other 2,952 3,493 5,639 3,993 10,676
Auto 2,158 3,452 3,424 5,872 10,400
Leasing 929 3,883 1,044 1,726 1,408
Mortgage Backed:
Home Equity 14,319 17,895 16,041 10,191 4,656
First Mortgage 4,009 2,536 2,434 5,205 2,171
Other 1,196 911 2,145 10,098 1,893
Pooled Corp. Obligations & Other 331 223 5,065 3,179 7,593
Financial Risk 3,985 3,338 2,441 1,409 1,905
------------ ------------ ------------ ----------- ------------
Total Structured Finance 29,879 35,731 38,233 41,673 40,702
Total Domestic 65,254 80,649 87,535 67,605 68,399
------------ ------------ ------------ ----------- ------------
International
Structured Finance* 5,189 3,852 6,708 5,061 15,424
Infrastructure 1,030 1,023 1,038 692 1,437
------------ ------------ ------------ ----------- ------------
Total International 6,219 4,875 7,746 5,753 16,861
------------ ------------ ------------ ----------- ------------
TOTAL $71,473 $85,524 $95,281 $73,358 $85,260
============ ============ ============ =========== ============
*Asset/mortgage-backed, Pooled Corporate Obligations and Financial Risk
- -----------------------------
(1) Par amount insured by year, net of reinsurance.
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MBIA Corp. is licensed to write business in all 50 states, the District
of Columbia, Guam, the Northern Mariana Islands, the U.S. Virgin Islands, Puerto
Rico, the Kingdom of Spain and the Republic of France. MBIA Assurance is
licensed to write business in France. The following table sets forth by
geographic location the areas in which MBIA Corp. has at least 2% of its total
net par amount outstanding:
MBIA CORP. INSURED PORTFOLIO BY LOCATION
AS OF DECEMBER 31, 2000 (1)
NET PAR % OF NET
AMOUNT PAR AMOUNT
OUTSTANDING OUTSTANDING
(IN BILLIONS)
DOMESTIC
New York $44.7 10.7%
California 43.2 10.3
Florida 19.9 4.7
Texas 14.4 3.4
New Jersey 14.2 3.4
Pennsylvania 14.0 3.3
Illinois 12.2 2.9
Massachusetts 11.6 2.8
Michigan 8.2 2.0
Ohio 8.0 1.9
------------- -------------
Sub-Total 190.4 45.4
All Other States 102.0 24.4
Nationally Diversified 88.6 21.2
------------- -------------
Total United States 381.0 91.0
INTERNATIONAL
Regional Specific 19.3 4.7
Internationally Diversified 18.1 4.3
------------- -------------
Total International 37.4 9.0
------------- -------------
Total $418.4 100.0%
============= =============
- -----------------------------
(1) Excludes $5.3 billion relating to investment management transactions
guaranteed by MBIA Corp.
MBIA Corp. has underwriting guidelines that limit the net insurance in
force for any one insured credit and is subject to both rating agency and
regulatory single-risk limits with respect to any bond issue insured by it. As
of December 31, 2000, MBIA Corp.'s net par amount outstanding for its ten
largest insured municipal credits totaled $19.0 billion, representing 4.6% of
MBIA Corp.'s total net par amount outstanding, and for its ten largest
structured finance credits (without aggregating common issuers), the net par
outstanding was $18.3 billion, representing 4.4% of the total.
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MBIA CORP. INSURANCE PROGRAMS
MBIA Corp. offers financial guarantee insurance in both the new issue
and secondary markets. 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. and MBIA Assurance
offer financial guarantee insurance in Europe, Asia, Latin America and other
areas outside the United States. In September 1995, MBIA Corp. entered into a
joint venture agreement with Ambac Assurance Corporation for the purpose of
jointly marketing financial guarantee insurance outside the United States. On
March 21, 2000, the two companies restructured the joint venture. Under the
restructuring, the companies agreed to begin marketing and originating financial
guarantee insurance outside the United States independently, and also to
continue to maintain certain reciprocal reinsurance arrangements for
international business until at least the end of 2001. The Company believes that
the restructuring of the joint venture with Ambac will not result in any
reduction in premiums written from international business, although no
assurances can be given that such a reduction will not occur. Late in 2000, the
companies dissolved a four-way joint venture in Japan. In the first quarter of
2001, the Company entered into a memorandum of understanding with Mitsui Marine
and Fire Insurance Co. Ltd. relating to financial guarantee insurance in Japan,
including certain reciprocal reinsurance arrangements.
Transactions in the new issue market are sold either through negotiated
offerings or competitive bidding. In the first case, 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.
In the secondary market, MBIA Corp. provides insurance on whole and
partial maturities in response to requests from bond traders and institutions
who trade in the secondary market. MBIA Corp. also offers insurance to the unit
investment trust market through ongoing arrangements with investment banks and
financial service companies. Each issue in the trust is insured, in some cases
until maturity, in others only while it is held in the trust. Lastly, insurance
is offered in the mutual fund sector through ongoing arrangements with the fund
sponsors. All fund issues are insured on a "while-in-trust" basis, but in some
cases, MBIA Corp. is committed to offer insurance to maturity to the sponsor for
an additional premium.
The following table indicates the percentage of net par outstanding
with respect to each type of insured program:
MBIA CORP. TYPES OF INSURED PROGRAMS
AS OF DECEMBER 31, 2000 (1)
NET PAR AMOUNT % OF NET PAR
TYPE OF PROGRAM OUTSTANDING AMOUNT OUTSTANDING
(IN BILLIONS)
New Issue $349.8 83.6%
Secondary market issues
Unit investment trusts 28.1 6.7
Other secondary market issues 40.5 9.7
--------------- -----------------
Total $418.4 100.0%
=============== =================
- -----------------------------
(1) Excludes $5.3 billion relating to investment management transactions
guaranteed by MBIA Corp.
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OPERATIONS
The insurance operations of MBIA Corp. are conducted through the Public
Finance Division, the Structured Finance Division, the International Division,
and the Risk Management Group. Due to the restructuring of the joint venture
with Ambac, effective March 21, 2000, all marketing and origination of
international transactions will be conducted through MBIA Corp.'s International
Division, with the help of the other Divisions. The Public Finance Division has
underwriting authority with respect to certain categories of business up to
pre-determined par amounts based on a risk-ranking system. In order to ensure
that the guidelines are followed, Risk Management monitors and periodically
reviews underwriting decisions made by the Public Finance Division. With respect
to larger, complex, or unique transactions, underwriting is performed by a
committee consisting of senior representatives of Public Finance, Risk
Management, Insured Portfolio Management, and the Company's Finance Department.
For all transactions done by the Structured Finance Division or for
International deals, MBIA Corp.'s review and approval procedure has two stages.
The first stage consists of screening, credit review and structuring by the
appropriate business unit, in consultation with Risk Management officers. The
second stage, consisting of the final review and approval of credit and
structure, is performed by a committee consisting of the head of the applicable
business unit, one officer from Risk Management and a third officer from either
Risk Management or Insured Portfolio Management. Certain transactions, based on
size, complexity, or other factors, must also be approved by a division-level
committee consisting of senior representatives of Structured Finance, Risk
Management, Insured Portfolio Management, Legal and the Company's Finance
Department. Premium rates for all groups within the insurance operations
enterprise are established by a Pricing Committee with representation from the
Business Analysis Group (pricing and quantitative analysis) and the relevant
insurance operations group.
Risk Management
The Risk Management Group is responsible for adherence to MBIA Corp.'s
underwriting guidelines and procedures which are designed to maintain an insured
portfolio with low risk characteristics. MBIA Corp. maintains underwriting
guidelines based on those aspects of credit quality that it deems important for
each category of obligation considered for insurance. For public finance,
structural finance and international finance transactions, these include
economic and social trends, debt management, financial management, adequacy of
anticipated cash flow, satisfactory legal structure and other security
provisions, viable tax and economic bases, adequacy of loss coverage and project
feasibility, including a satisfactory consulting engineer's report, if
applicable. For structured finance and international structured finance
transactions, MBIA Corp's underwriting guidelines, analysis and due diligence
focus primarily on seller/servicer credit and operational quality, the quality
and historical and projected performance of the asset pool, and the strength of
the structure, including legal segregation of the assets, cash flow analysis,
the size and source of first loss protection, and asset performance triggers and
financial covenants. Such guidelines are subject to periodic review by senior
committees which are responsible for establishing and maintaining underwriting
standards and criteria for all insurance products.
The Financial Institution and Corporate Analysis Group within Risk
Management underwrites and monitors MBIA Corp.'s direct and indirect exposure to
financial institutions and other corporate entities with respect to
seller/servicer exposure, investment contracts, letters of credit, swaps,
liquidity and other facilities supporting MBIA-insured issues, and recommends
limits on such exposures. The department provides in-depth financial analyses of
financial institutions for which there is existing or proposed direct or
indirect exposure.
Insured Portfolio Management:
The Insured Portfolio Management Group is responsible for monitoring
outstanding issues insured by MBIA Corp. This group's first function is to
detect any deterioration in credit quality or changes in the economic or
political environment which could interrupt the timely payment of debt service
on an insured issue. Once a problem is detected, the group then works with the
issuer, trustee, bond counsel, servicers, underwriters, and other interested
parties to deal with the concern in order to try to avoid a default. The Insured
Portfolio Management Group works closely with Risk Management and New Business
Departments to provide feedback on insured issue performance and credit risk
parameters.
To-date, MBIA Corp. has had 31 insured issues requiring claim payments.
There are currently 5 additional insured issues for which case loss reserves
have been established but claims have not yet been paid (see "Losses and
Reserves" below). Other potential losses have been avoided through the early
detection of problems and subsequent negotiations with the issuer and other
parties involved. In a limited number of instances, the solution involved the
restructuring of insured issues or underlying security arrangements. More often,
MBIA Corp. utilizes a variety of other techniques to resolve problems, such as
enforcement of covenants, assistance in resolving management problems and
working with the issuer to develop potential political solutions. Issuers are
under no obligation to restructure insured issues or underlying security
arrangements in order to prevent losses. Moreover, MBIA Corp. is obligated to
pay amounts equal to defaulted payments on insured obligations on their
respective due dates even if the issuer or other parties involved
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refuse to restructure or renegotiate the terms of the insured bonds or
related security arrangements. The Company's experience is that early detection
and continued involvement by the Insured Portfolio Management Group are crucial
in avoiding or minimizing claims on insurance policies. There can be no
assurance, however, that there will be no material losses in the future in
respect of any issues guaranteed by MBIA Corp., MBIA Illinois or CapMAC.
Once an obligation is insured, the issuer and the trustee are typically
required to furnish financial and asset related information, including audited
financial statements, periodically to the Insured Portfolio Management Group for
review. Potential problems uncovered through this review, such as poor financial
results, low fund balances, covenant violations, trustee or servicer problems,
or excessive litigation, could result in an immediate surveillance review and an
evaluation of possible remedial actions. The Insured Portfolio Management Group
also monitors state finances and budget developments and evaluates their impact
on local issuers.
During the underwriting process, issues are given an internal credit
rating. All credits are monitored according to a frequency of review schedule
that is based on risk type and credit quality. Issues that experience financial
difficulties, deteriorating economic conditions, excessive litigation or
covenant violations are placed on the appropriate review list and are subject to
surveillance reviews at intervals commensurate to the problem which has been
detected.
There are three departments in the Insured Portfolio Management Group.
The Global Public Finance Group handles all types of domestic and international
municipal issues such as general obligation, utility and special revenue bonds.
It also follows project financings, future flow and collateralized debt
obligation issues. The Global Structured Finance Group is responsible for
domestic and international asset backed and other structured transactions. The
Enterprise Group is responsible for all health care, housing and student loan
transactions. Each of the three groups is responsible for processing waiver and
consent requests and other deal modifications within their areas.
The Global Public Finance Group reviews and reports on the major credit
quality factors of risks insured by the Company, evaluates the impact of new
developments on insured weaker credits and carries out remedial activity. In
addition, it performs analysis of financial statements and key operating data on
a large-scale basis and maintains various databases for research purposes. This
department is responsible for preparing special reports which include analyses
of regional economic trends, proposed tax limitations, the impact of employment
trends on local economies or legal developments affecting bond security.
The Global Structured Finance Group monitors insured structured finance
programs, focusing on the adequacy of reserve balances and investment of
earnings, the status of mortgage or loan delinquencies and underlying insurance
coverage and the performance of the trustee for insured issues. Monitoring of
issues typically involves review of records and statements, review of
transaction documents with regard to compliance, analysis of cash flow adequacy
and communication with trustees. Review of servicer performance is also
conducted through site visits with management, review of servicer financial
statements, review of servicer reports where available and contacts with program
administrators and trustees. The department also carries out remedial activity
on weaker credits.
The Enterprise Group, which monitors insured health care, student loan
and single and multi-family housing transactions as well as all pool programs,
performs similar functions to, and applies the same policies and procedures as,
the Global Public Finance and Global Structured Finance Groups. In addition, it
is responsible for remedial activities on weaker credits.
INVESTMENT MANAGEMENT SERVICES
Over the last nine years, the Company's investment management
businesses have expanded their services to the public sector and added new
revenue sources. MBIA Asset Management, LLC is the holding company under which
the resources and capabilities of our four investment management subsidiaries
have been consolidated.
MBIA-MISC provides cooperative cash management services directly to
local governments and school districts. It also provides investment and treasury
management consulting services for municipal and quasi-public sector clients. In
addition, MBIA-MISC performs investment fund administration services for
clients, which provide an additional source of revenue. MBIA-MISC is a
Securities and Exchange Commission registered investment adviser. MBIA-MISC
operates in 20 states and the Commonwealth of Puerto Rico.
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IMC provides customized guaranteed investment agreements and flexible
repurchase agreements for bond proceeds and other public funds. At year-end
2000, principal and accrued interest outstanding on investment and repurchase
agreements was $4.8 billion compared with $4.5 billion at year-end 1999. IMC may
use derivative contracts in the course of providing its investment agreements as
a protection against interest rate risks. While these derivatives are designed
to help manage interest rate risk, they may involve amounts at risk in excess of
those reflected in the financial statements.
In 1998, the Company acquired 1838, a full-service asset management
firm with a strong institutional focus. 1838 currently has over $14.3 billion in
equity, fixed income and balanced portfolios.
CMC provides investment management services for IMC's investment
agreements, MBIA-MISC's municipal cash management programs and MBIA Corp.'s
insurance related fixed-income investment portfolios, as well as third-party
accounts. CMC assumed full management for MBIA Corp.'s insurance related
fixed-income investment portfolios in 1996. CMC is an NASD member and both CMC
and 1838 are registered investment advisers.
MUNICIPAL FINANCIAL SERVICES
MuniServices
MuniServices provides revenue enhancement services and products
(discovery, audit, collections/recovery, enforcement and information services)
to municipal clients through a single national enterprise. MuniServices uses a
consultative marketing strategy to focus clients on its unique capability to
identify and recover revenues across the full range of tax sources under
performance-based, self-funding business contracts.
Capital Asset
Through its interest in Capital Asset Holdings GP, Inc.
and its affiliates (collectively, "Capital Asset"), between May, 1996 and
December 1998, the Company was involved in the business of acquiring and
servicing delinquent real estate tax liens from municipalities. In December,
1998, the Company became a majority owner of Capital Asset. During the first two
quarters of 1999, the company attempted to sell its interest in Capital Asset.
At the end of the second quarter of 1999, the Company ceased these efforts and
decided to limit the activities of Capital Asset primarily to the servicing of
the portfolios then being serviced by Capital Asset. In the second quarter of
1999, the Company completed an internal evaluation of Capital Asset's tax lien
portfolio, as a result of which the Company determined that it was necessary to
write down its investment in Capital Asset by $102 million. In the third quarter
of 1999, Capital Asset engaged a specialty servicer of residential mortgages to
help manage its business and operations and to assist in administering the tax
lien portfolios serviced by Capital Asset.
In the third quarter of 1999, Capital Asset also completed the
refinancing of substantially all of its remaining tax liens. These liens were
originally financed through a commercial paper warehouse facility that matured
at the end of the third quarter, and which was guaranteed by the Company. The
refinancing was accomplished through a securitization transaction in which the
tax liens were sold to a special purpose vehicle which in turn issued notes
secured by those liens. The proceeds of the securitization were used primarily
to extinguish the warehouse facility. This was Capital Asset's third
securitization of tax liens. MBIA Corp. has insured all of the notes issued by
these securitizations. The first transaction, done in 1997, had an original net
par insured of $328 million and at year-end 2000 had $90 million net par insured
outstanding; the second transaction, executed in 1998, had an original net par
insured of $132 million, with the year-end 2000 net par insured outstanding at
$63 million; the 1999 transaction was issued at $196 million net par insured
outstanding and at year-end 2000 had $165 million net par insured outstanding
(these net par insured outstanding amounts give no effect to the value of
collateral). MBIA Corp. has established case basis loss reserves related to
these policies, but there can be no assurance that such reserves will be
sufficient to cover potential losses under such policies.
Capital Asset continues to have certain contingent liabilities
outstanding, including various individual and class action lawsuits. The claims
giving rise to these lawsuits are a result of Capital Asset's business
activities that took place primarily before the Company assumed majority
ownership and Capital Asset is defending these lawsuits. The Company has no
reason to believe that it has financial liability for these lawsuits.
COMPETITION
The financial guarantee insurance business is highly competitive. In
2000, MBIA Corp. was the largest insurer of new issue long-term municipal bonds,
accounting for 28% of the par amount of such insured bonds. The other principal
insurers in 2000 were Ambac Assurance Corporation, Financial Guaranty Insurance
Company and Financial Security Assurance Inc., all of which, like
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MBIA Corp., have Aaa and AAA claims-paying ratings from Moody's and S&P,
respectively. The two principal competitors in the new issue
asset/mortgage-backed securities market in 2000 were Financial Security
Assurance and Ambac Assurance Corporation.
Financial guarantee insurance also competes with other forms of credit
enhancement, including senior-subordinated structures, over-collateralization,
letters of credit and guarantees (for example, mortgage guarantees where pools
of mortgages secure debt service payments) provided by banks and other financial
institutions, some of which are governmental agencies or have been assigned the
highest credit ratings awarded by one or more of the major rating agencies.
Letters of credit are most often issued for periods of less than 10 years,
although there is no legal restriction on the issuance of letters of credit
having longer terms. Thus, financial institutions and banks issuing letters of
credit compete directly with MBIA Corp. to guarantee short-term notes and bonds
with a maturity of less than 10 years. To the extent that banks providing credit
enhancement may begin to issue letters of credit with commitments longer than 10
years, the competitive position of financial guarantee insurers, such as MBIA
Corp., could be adversely affected. Letters of credit also are frequently used
to assure the liquidity of a short-term put option for a long-term bond issue.
This assurance of liquidity effectively confers on such issues, for the short
term, the credit standing of the financial institution providing the facility,
thereby competing with MBIA Corp. and other financial guarantee insurers in
providing interest cost savings on such issues. Financial guarantee insurance
and other forms of credit enhancement also compete in nearly all instances with
the issuer's alternative of foregoing credit enhancement and paying a higher
interest rate. If the interest savings from insurance or another form of credit
enhancement are not greater than the cost of such credit enhancement, the issuer
will generally choose to issue bonds without enhancement. MBIA Corp. also
competes in the international market with composite (multi-line) insurers.
There are minimum capital requirements imposed on a financial guarantee
insurer by Moody's and S&P to obtain Triple-A claims-paying ratings. Also, under
a New York law, multi-line insurers are prohibited from writing financial
guarantee insurance in New York State. See "Business-Regulation." However, there
can be no assurance that major multi-line insurers or other financial
institutions will not participate in financial guarantee insurance in the
future, either directly or through monoline subsidiaries.
REINSURANCE
State insurance laws and regulations, as well as Moody's and S&P,
impose minimum capital requirements on financial guarantee companies, limiting
the aggregate amount of insurance and the maximum size of any single risk
exposure which may be written. MBIA Corp. increases its capacity to write new
business by using treaty and facultative reinsurance to reduce its gross
liabilities on an aggregate and single risk basis.
From its reorganization in December 1986 through December 1987, MBIA
Corp. reinsured a portion of each policy through quota and surplus share
reinsurance treaties. Each treaty provides reinsurance protection with respect
to policies written by MBIA Corp. during the term of the treaty, for the full
term of the policy. Under its quota share treaty MBIA Corp. ceded a fixed
percentage of each policy insured. Since 1988, MBIA Corp. has entered into
primarily surplus share treaties under which a variable percentage of risk over
a minimum size is ceded, subject to a maximum percentage specified in the
treaty. Reinsurance ceded under the treaties is for the full term of the
underlying policy.
MBIA Corp. also enters into facultative reinsurance arrangements from
time to time primarily in connection with issues which, because of their size,
require additional capacity beyond MBIA Corp.'s retention and treaty limits.
Under these facultative arrangements, portions of MBIA Corp.'s liabilities are
ceded on an issue-by-issue basis. MBIA Corp. utilizes facultative arrangements
as a means of managing its exposure to single issuers to comply with regulatory
and rating agency requirements, as well as internal underwriting and portfolio
management criteria.
As a primary insurer, MBIA Corp. is required to honor its obligations
to its policyholders whether or not its reinsurers perform their obligations to
MBIA Corp. The financial position of all reinsurers is monitored by MBIA Corp.
on a regular basis.
As of December 31, 2000, MBIA Corp. retained approximately 83% of the
gross debt service outstanding of all transactions insured by it, MBIA
Assurance, CapMAC and MBIA Illinois, and ceded approximately 17% to treaty and
facultative reinsurers. The principal reinsurers of MBIA Corp., MBIA Assurance,
CapMAC and MBIA Illinois are Enhance Reinsurance Company, ACE Guaranty Re
Incorporated, AXA Re Finance, Ambac Assurance Corporation and Munich Reinsurance
Corp. These reinsurers, whose claims-paying ability is rated Triple-A by S&P,
reinsured approximately 77% of the total ceded insurance in force at December
31, 2000. All of the other reinsurers reinsured approximately 23% of the total
ceded insurance in force at December 31, 2000 and are diversified geographically
and by lines of insurance written. MBIA Corp.'s net retention on the policies it
writes varies from time to
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time depending on its own business needs and the capacity available in the
reinsurance market. The amounts of reinsurance ceded at December 31, 2000 and
1999 by bond type and by geographic location are set forth in Note 19 to the
Consolidated Financial Statements of MBIA Inc. and Subsidiaries. The downgrade
or default of one or more of the Company's reinsurers could have an adverse
impact on the Company's results of operations. MBIA Corp. and MBIA Assurance
have entered into a reinsurance agreement providing for MBIA Corp.'s
reinsurance of policies issued by MBIA Assurance and a net worth maintenance
agreement in which MBIA Corp. agrees to maintain the net worth of MBIA
Assurance, to remain its sole shareholder and not to pledge its shares. Under
the reinsurance agreement MBIA Corp. agrees to reimburse MBIA Assurance on an
excess of loss basis for losses incurred in each calendar year for net retained
insurance liability, subject to certain contract limitations. Under the net
worth maintenance agreement, MBIA Corp. agrees to maintain a minimum capital and
surplus position in accordance with French and New York State legal
requirements.
MBIA Corp. and MBIA Illinois entered into a reinsurance agreement under
which MBIA Corp. reinsured 100% of all business written by MBIA Illinois, net of
cessions by MBIA Illinois to third party reinsurers, in exchange for MBIA
Illinois' transfer of the assets underlying the related unearned premium and
contingency reserves. Pursuant to such reinsurance agreement, MBIA Corp.
reinsured all of the net exposure of $30.9 billion, or approximately 68% of the
gross debt service outstanding, of the municipal bond insurance portfolio of
MBIA Illinois, the remaining 32% having been previously ceded to treaty and
facultative reinsurers of MBIA Illinois. In 1990, 10% of this portfolio was
ceded back to MBIA Illinois to comply with regulatory requirements. Effective
January 1, 1999, MBIA Corp. and MBIA Illinois entered into a replacement
reinsurance agreement whereby MBIA Corp. agreed to accept as reinsurance from
MBIA Illinois 100 % of the net liabilities and other obligations of MBIA
Illinois, for losses paid on or after that date, thereby eliminating the 10%
retrocession arrangement previously in place.
MBIA Corp. and CapMAC have entered into a reinsurance agreement,
effective April 1, 1998, under which MBIA Corp. agreed to reinsure 100% of the
net liability and other obligations of CapMAC in exchange for CapMAC's payment
of a premium equal to the ceded reserves and contingency reserves. Pursuant to
such reinsurance agreement with CapMAC, MBIA Corp. reinsured all of the net
exposure of $31.6 billion, or approximately 78% of the gross debt service
outstanding, the remaining 22% having been previously ceded to treaty and
facultative reinsurers of CapMAC.
INVESTMENTS AND INVESTMENT POLICY
The Finance Committee of the Board of Directors of the Company approves
the general investment objectives and policies of the Company, and also reviews
more specific investment guidelines. On January 1, 1996, CMC assumed full
management of all of MBIA Corp.'s consolidated investment portfolios. Certain
investments of the Company and MBIA Assurance related to non-U.S. insurance
operations are managed by independent managers.
To continue to provide strong capital resources and claims-paying
capabilities for its insurance operations, the investment objectives and
policies for insurance operations set quality and preservation of capital as the
primary objective subject to an appropriate degree of liquidity. Maximization of
after-tax investment income and investment returns is an important but secondary
objective.
Investment objectives, policies and guidelines related to the Company's
municipal investment agreement business are also subject to review and approval
by the Finance Committee of the Board of Directors. The primary investment
objectives are to preserve capital, to achieve an investment duration that
closely approximates the expected duration of related liabilities, and to
maintain appropriate liquidity. The investment agreement assets are managed by
CMC subject to an investment management agreement between IMC and CMC.
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For 2000, approximately 64% of the Company's net income was derived from
after-tax earnings on its investment portfolio (excluding the amounts on
investment agreement assets which are recorded as a component of investment
management services revenues). The following table sets forth investment income
and related data for the years ended December 31, 1998, 1999, and 2000.
INVESTMENT INCOME OF THE COMPANY (1)
1998 1999 2000
(IN THOUSANDS)
Investment income before expenses (2) $337,565 $365,823 $400,754
Investment expenses 5,763 6,367 6,769
------------- ------------- ------------
Net investment income before income taxes 331,802 359,456 393,985
Net realized gains 34,976 25,160 32,884
------------- ------------- ------------
Total investment income before income taxes $366,778 $384,616 $426,869
============= ============= ============
Total investment income after income taxes $299,491 $312,200 $335,435
============= ============= ============
- -----------------------------
(l) Excludes investment income from investment management services and
municipal services segments.
(2) Includes taxable and tax-exempt interest income.
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The tables below set forth the composition of the Company's investment
portfolios. The weighted average yields in the tables reflect the nominal yield
on market value as of December 31, 2000, 1999 and 1998.
INVESTMENT PORTFOLIO BY SECURITY TYPE
AS OF DECEMBER 31, 2000
INVESTMENT
INSURANCE MANAGEMENT SERVICES
WEIGHTED WEIGHTED
FAIR VALUE AVERAGE FAIR VALUE AVERAGE
INVESTMENT CATEGORY (IN THOUSANDS) YIELD (1) (IN THOUSANDS) YIELD (1)
Fixed income investments:
Long-term bonds:
Taxable bonds:
U.S. Treasury & Agency obligations $ 841,683 6.34% $ 443,581 6.09%
GNMAs 156,284 7.04 149,989 6.49
Other mortgage & asset backed securities 317,964 6.64 2,954,242 6.20
Corporate obligations 1,388,535 6.87 919,547 7.15
Foreign obligations (2) 235,378 6.28 282,278 7.07
-------------- ------------ -------------- ----------
Total 2,939,844 6.66 4,749,637 6.43
Tax-exempt bonds:
State & municipal 3,800,283 7.62 -- --
-------------- ------------ -------------- ----------
Total long-term investments 6,740,127 7.20 4,749,637 6.43
Short-term investments (3) 376,604 6.57 246,971 6.05
-------------- ------------ -------------- ----------
Total fixed income investments 7,116,731 7.17% 4,996,608 6.42%
Other investments (4) 119,591 -- -- --
-------------- --------------
Total investments $7,236,322 -- $4,996,608 --
============== ==============
- -----------------------------
(1) Prospective market yields as of December 31, 2000. Yield on tax-exempt
bonds is presented on a taxable bond equivalent basis using a 35% federal
income tax rate.
(2) Consists of U.S. denominated foreign government and corporate securities.
(3) Taxable and tax-exempt investments, including bonds with a remaining
maturity of less than one year.
(4) Consists of equity investments and other fixed income investments; yield
information not meaningful.
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INVESTMENT PORTFOLIO BY SECURITY TYPE
AS OF DECEMBER 31, 1999
INVESTMENT
INSURANCE MANAGEMENT SERVICES
WEIGHTED WEIGHTED
FAIR VALUE AVERAGE FAIR VALUE AVERAGE
INVESTMENT CATEGORY (IN THOUSANDS) YIELD (1) (IN THOUSANDS) YIELD (1)
Fixed income investments:
Long-term bonds:
Taxable bonds:
U.S. Treasury & Agency obligations $ 600,350 7.45% $1,237,005 6.67%
GNMAs 146,976 7.68 67,950 7.16
Other mortgage & asset backed securities 267,531 7.94 1,880,944 6.94
Corporate obligations 1,148,565 7.50 766,180 7.61
Foreign obligations (2) 158,938 7.21 317,755 7.66
------------- ------------ ------------ --------
Total 2,322,360 7.53 4,269,834 7.04
Tax-exempt bonds:
State & municipal 3,461,619 8.72 -- --
------------- ------------ ------------ --------
Total long-term investments 5,783,979 8.24 4,269,834 7.04
Short-term investments (3) 274,022 5.92 219,717 6.17
------------- ------------ ------------ --------
Total fixed income investments 6,058,001 8.14% 4,489,551 7.00%
Other investments (4) 146,038 -- -- --
------------- ------------
Total investments $6,204,039 -- $4,489,551 --
============= ============
- -----------------------------
(1) Prospective market yields as of December 31, 1999. Yield on tax-exempt
bonds is presented on a taxable bond equivalent basis using a 35% federal
income tax rate.
(2) Consists of U.S. denominated foreign government and corporate securities.
(3) Taxable and tax-exempt investments, including bonds with a remaining
maturity of less than one year.
(4) Consists of equity investments and other fixed income investments; yield
information not meaningful.
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INVESTMENT PORTFOLIO BY SECURITY TYPE
AS OF DECEMBER 31, 1998
INVESTMENT
INSURANCE MANAGEMENT SERVICES
WEIGHTED WEIGHTED
FAIR VALUE AVERAGE FAIR VALUE AVERAGE
INVESTMENT CATEGORY (IN THOUSANDS) YIELD (1) (IN THOUSANDS) YIELD (1)
Fixed income investments:
Long-term bonds:
Taxable bonds:
U.S. Treasury & Agency obligations $ 487,132 6.15% $1,404,668 5.54%
GNMAs 154,088 6.58 100,033 6.42
Other mortgage & asset backed securities 206,171 6.25 849,922 5.33
Corporate obligations 1,026,847 5.85 842,330 6.05
Foreign obligations (2) 136,416 5.45 292,979 6.46
-------------- ----------- ------------ ----------
Total 2,010,654 5.99 3,489,932 5.71
Tax-exempt bonds:
State & municipal 3,873,399 7.15 -- --
-------------- ----------- ------------ ----------
Total long-term investments 5,884,053 6.76 3,489,932 5.71
Short-term investments (3) 423,194 4.94 188,297 5.03
-------------- ----------- ------------ ----------
Total fixed income investments 6,307,247 6.63% 3,678,229 5.68%
Other investments (4) 94,975 -- -- --
-------------- ------------
Total investments $6,402,222 -- $3,678,229 --
============== ============
- -----------------------------
(1) Prospective market yields as of December 31, 1998. Yield on tax-exempt
bonds is presented on a taxable bond equivalent basis using a 35% federal
income tax rate.
(2) Consists of U.S. denominated foreign government and corporate securities.
(3) Taxable and tax-exempt investments, including bonds with a remaining
maturity of less than one year.
(4) Consists of equity investments and other fixed income investments; yield
information not meaningful.
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The average maturity of the insurance fixed income portfolio excluding
short-term investments as of December 31, 2000 was 12.9 years. After allowing
for estimated principal pre-payments on mortgage pass-through securities, the
duration of the portfolio was 7.2 years.
The table below sets forth the distribution by maturity of the
Company's consolidated fixed income investments:
FIXED INCOME INVESTMENTS BY MATURITY
AS OF DECEMBER 31, 2000
INVESTMENT
INSURANCE MANAGEMENT SERVICES
FAIR VALUE % OF TOTAL FAIR VALUE % OF TOTAL
(IN FIXED INCOME (IN FIXED INCOME
MATURITY THOUSANDS) INVESTMENTS THOUSANDS) INVESTMENTS
Within 1 year $ 376,604 5.3% $ 246,971 4.9%
Beyond 1 year but within 5 years 1,042,342 14.7 1,872,702 37.5
Beyond 5 years but within 10 years 1,547,315 21.7 783,325 15.7
Beyond 10 years but within 15 years 1,203,493 16.9 448,697 9.0
Beyond 15 years but within 20 years 1,318,206 18.5 678,787 13.6
Beyond 20 years 1,628,771 22.9 966,126 19.3
----------- ------------ ------------ ----------
Total fixed income investments $7,116,731 100.0% $4,996,608 100.0%
=========== =========== ============ ==========
The quality distribution of the Company's fixed income investments
based on ratings of Moody's was as shown in the table below:
FIXED INCOME INVESTMENTS BY QUALITY RATING (1)
AS OF DECEMBER 31, 2000
INVESTMENT
INSURANCE MANAGEMENT SERVICES
FAIR VALUE % OF TOTAL FAIR VALUE % OF TOTAL
(IN THOUSANDS) FIXED INCOME (IN THOUSANDS) FIXED INCOME
QUALITY RATING INVESTMENTS INVESTMENTS
Aaa $4,469,758 65.0% $4,112,345 82.3%
Aa 1,481,489 21.5 325,652 6.5
A 892,398 13.0 547,704 11.0
Baa 31,092 0.5 10,907 0.2
-------------- --------------- -------------- ------------
$6,874,737 100.0% $4,996,608 100.0%
============== =============== ============== ============
- -----------------------------
(1) Excludes short-term investments with an original maturity of less than one
year, but includes bonds having a remaining maturity of less than one year.
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REGULATION
MBIA Corp. is licensed to do insurance business in, and is subject to
insurance regulation and supervision by, the State of New York (its state of
incorporation), the 49 other states, the District of Columbia, Guam, the
Northern Mariana Islands, the U.S. Virgin Islands, Puerto Rico, the Kingdom of
Spain and the Republic of France. MBIA Assurance is licensed to do insurance
business in France and is subject to regulation under the corporation and
insurance laws of the Republic of France. MBIA Assurance has used the provisions
of the Third Non-life Insurance Directive to operate in the United Kingdom both
on a services and branch basis and is to a limited extent subject to supervision
by the Financial Services Authority. The extent of state insurance regulation
and supervision varies by jurisdiction, but New York, Illinois and most other
jurisdictions have laws and regulations prescribing minimum standards of
solvency, including minimum capital requirements, and business conduct which
must be maintained by insurance companies. These laws prescribe permitted
classes and concentrations of investments. In addition, some state laws and
regulations require the approval or filing of policy forms and rates. MBIA Corp.
is required to file detailed annual financial statements with the New York
Insurance Department and similar supervisory agencies in each of the other
jurisdictions in which it is licensed. The operations and accounts of MBIA Corp.
are subject to examination by these regulatory agencies at regular intervals.
MBIA Corp. is licensed to provide financial guarantee insurance under
Article 69 of the New York Insurance Law. Article 69 defines financial guarantee
insurance to include any guarantee under which loss is payable upon proof of
occurrence of financial loss to an insured as a result of certain events. These
events include the failure of any obligor on or any issuer of any debt
instrument or other monetary obligation to pay principal, interest, premium,
dividend or purchase price of or on such instrument or obligation when due.
Under Article 69, MBIA Corp. is licensed to transact financial guarantee
insurance, surety insurance and credit insurance and such other kinds of
business to the extent necessarily or properly incidental to the kinds of
insurance which MBIA Corp. is authorized to transact. In addition, MBIA Corp. is
empowered to assume or reinsure the kinds of insurance described above.
As a financial guarantee insurer, MBIA Corp. is required by the laws of
New York, California, Connecticut, Florida, Illinois, Iowa, New Jersey and
Wisconsin to maintain contingency reserves on its municipal bond, asset-backed
securities and other financial guarantee liabilities. Under New Jersey, Illinois
and Wisconsin regulations, contributions by such an insurer to its contingency
reserves are required to equal 50% of earned premiums on its municipal bond
business. Under New York law, such an insurer is required to contribute to
contingency reserves 50% of premiums as they are earned on policies written
prior to July 1, 1989 (net of reinsurance), and, with respect to policies
written on and after July 1, 1989, must make contributions over a period of 15
or 20 years (based on issue type), or until the contingency reserve for such
insured issues equals the greater of 50% of premiums written for the relevant
category of insurance or a percentage of the principal guaranteed, varying from
0.55% to 2.5%, depending upon the type of obligation guaranteed (net of
reinsurance, refunding, refinancings and certain insured securities).
California, Connecticut, Iowa and Florida laws impose a generally similar
requirement. In each of these states, MBIA Corp. may apply for release of
portions of the contingency reserves in certain circumstances.
The laws and regulations of these states also limit both the aggregate
and single municipal bond and asset-backed securities risks that MBIA Corp. may
insure on a net basis. California, Connecticut, Florida, Illinois and New York,
among other things, limit insured average annual debt service on insured
municipal bonds with respect to a single entity and backed by a single revenue
source (net of qualifying collateral and reinsurance) to 10% of policyholders'
surplus and contingency reserves. California, Connecticut, Florida, Illinois and
New York also limit the net insured unpaid principal on a municipal bond issued
by a single entity and backed by a single revenue source to 75% of
policyholders' surplus and contingency reserves. California, Connecticut, and
New York, among other things, require for each issue of asset-backed securities
issued by a single entity and for each pool of consumer debt obligations, the
lesser of: (1) the insured average debt service or (2) the insured unpaid
principal (reduced by the extent to which unpaid principal of the supporting
assets exceeds the insured unpaid principal) divided by nine. Each issue of
asset-backed securities issued by a single entity and each pool of consumer debt
obligations shall not exceed 10% of the aggregate of the insurer's
policyholders' surplus and contingency reserves, provided that no asset in the
pool supporting the asset-backed securities exceeds single risk limits. Florida
limits insured unpaid principal for any one risk to 10% of policyholders'
surplus and contingency reserves. In New Jersey, Virginia and Wisconsin, the
average annual debt service on any single issue of municipal bonds (net of
reinsurance) is limited to 10% of policyholders' surplus. Other states that do
not explicitly regulate financial guarantee or municipal bond insurance do
impose single risk limits, which are similar in effect to the foregoing.
Under New York, California, Connecticut, Florida, Illinois, New Jersey
and Wisconsin law, aggregate insured unpaid principal and interest under
policies insuring municipal bonds (in the case of New York, California,
Connecticut, Florida and Illinois, net of reinsurance) are limited to certain
multiples of policyholders' surplus and contingency reserves. New York,
California, Connecticut, Florida, Illinois and other states impose a 300:1 limit
for insured municipal bonds, although more restrictive limits on bonds of other
types do exist. For example, New York, California, Connecticut and Florida
impose a 100:1 limit for certain types of non-municipal bonds. Under New York,
California, Connecticut, Florida, and New Jersey law, aggregate insured unpaid
principal and
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interest under policies insuring asset-backed securities (again,
in the case of New York, California, Connecticut, and Florida, net of
reinsurance) are limited to certain multiples of policyholders' surplus and
contingency reserves. New York, California, Connecticut, Florida, and other
states impose a 150:1 limit for insured investment grade asset-backed
securities, although more restrictive limits on asset-backed securities of other
types exist. For example, New York, California, Connecticut, and Florida impose
a 50:1 limit for non-investment grade asset-backed securities.
The Company, MBIA Corp., MBIA Illinois, and CapMAC also are subject to
regulation under insurance holding company statutes of New York, Illinois and
other jurisdictions in which MBIA Corp., MBIA Illinois, and CapMAC are licensed
to write insurance. The requirements of holding company statutes vary from
jurisdiction to jurisdiction but generally require insurance holding companies,
such as the Company, and their insurance subsidiaries, to register and file
certain reports describing, among other information, their capital structure,
ownership and financial condition. The holding company statutes also generally
require prior approval of changes in control, of certain dividends and other
inter-corporate transfers of assets, and of transactions between insurance
companies, their parents and affiliates. The holding company statutes impose
standards on certain transactions with related companies, which include, among
other requirements, that all transactions be fair and reasonable and that those
exceeding specified limits receive prior regulatory approval.
Prior approval by the New York Insurance Department is required for any
entity seeking to acquire "control" of the Company, MBIA Corp, or CapMAC. Prior
approval by the Illinois Department of Insurance is required for any entity
seeking to acquire "control" of the Company, MBIA Corp., MBIA Illinois, or
CapMAC. In many states, including New York and Illinois, "control" is presumed
to exist if 10% or more of the voting securities of the insurer are owned or
controlled by an entity, although the supervisory agency may find that "control"
in fact does or does not exist when an entity owns or controls either a lesser
or greater amount of securities.
The laws of New York regulate the payment of dividends by MBIA Corp.
and provide that a New York domestic stock property/casualty insurance company
(such as MBIA Corp.) may not declare or distribute dividends except out of
statutory earned surplus. New York law provides that the sum of (i) the amount
of dividends declared or distributed during the preceding 12-month period and
(ii) the dividend to be declared may not exceed the lesser of (a) 10% of
policyholders' surplus, as shown by the most recent statutory financial
statement on file with the New York Insurance Department, or (b) 100% of
adjusted net investment income for such 12-month period (the net investment
income for such 12-month period plus the excess, if any, of net investment
income over dividends declared or distributed during the two-year period
preceding such 12-month period), unless the New York Superintendent of Insurance
approves a greater dividend distribution based upon a finding that the insurer
will retain sufficient surplus to support its obligations and writings. See Note
to the Consolidated Financial Statements of MBIA Inc. and Subsidiaries.
The foregoing dividend limitations are determined in accordance with
Statutory Accounting Practices ("SAP"), which generally produce statutory
earnings in amounts less than earnings computed in accordance with Generally
Accepted Accounting Principles ("GAAP"). Similarly, policyholders' surplus,
computed on a SAP basis, will normally be less than net worth computed on a GAAP
basis. See Note to the Consolidated Financial Statements of MBIA Inc. and
Subsidiaries.
MBIA Corp., MBIA Illinois, and CapMAC are exempt from assessments by
the insurance guarantee funds in the majority of the states in which they do
business. Guarantee fund laws in most states require insurers transacting
business in the state to participate in guarantee associations, which pay claims
of policyholders and third-party claimants against impaired or insolvent
insurance companies doing business in the state. In most states, insurers
licensed to write only municipal bond insurance, financial guarantee insurance
and other forms of surety insurance are exempt from assessment by these funds
and their policyholders are prohibited from making claims on these funds.
LOSSES AND RESERVES
The Company's policy is to provide (I) specific, identified loss
reserves to cover estimated losses on policies for which the Company has
determined that it is likely to incur losses ("case basis reserves"), and (II)
general, unallocated loss reserves to cover losses that may be reasonably
estimated to occur on its insured obligations over the lives of such
obligations. The aggregate loss reserves, at any financial statement date, are
the Company's best estimate of the reserves needed to cover both types of
losses, including expected costs of settlement.
To the extent that specific insured issues are identified as currently
or likely to be in default, the present value of the expected payments,
including costs of settlement, net of expected recoveries, is allocated within
the total loss reserve as a case basis reserves.
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The total reserve is calculated by applying a loss factor, determined based
on an independent rating agency study of bond defaults, to net debt service
written. At December 31, 2000, $209.2 million of the $467.9 million reserve for
loss and loss adjustment expenses represents case basis reserves, of which
$183.9 million is attributable to a health care facility in Pennsylvania. The
remaining case basis reserves represent various housing financings and
structured finance transactions, the largest of which is $9.9 million. Both MBIA
Illinois and CapMAC are currently inactive and their insurance business is in
run-off. MBIA Corp. has reinsured their respective net liabilities on financial
guarantee insurance business and maintains required reserves in connection
therewith.
The reserves for losses and loss adjustment expenses are based on
estimates, and there can be no assurance that the ultimate liability will not
exceed such estimates. To the extent that actual case losses for any period are
less than the unallocated portion of the total loss reserve, it is not likely
that there will be an impact on the Company's earnings for that period other
than an addition to the reserve which results from applying the loss rate factor
to new debt service insured or if the Company decides to make a one-time
adjustment to the reserves in the event of a loss that materially reduces the
unallocated portion of the reserve. To the extent that case losses, for any
period, exceed the unallocated portion of the total loss reserve, the excess
will be charged against the Company's earnings for that period. In 2000 and
1999, the Company reviewed its loss reserving methodology. The reviews included
an analysis of loss-reserve factors and the historical default and recovery
experience of certain sectors of the fixed-income market. The 1999 review
resulted in an increase in the Company's loss reserve factors.
SAP RATIOS
The financial statements in this Form 10-K are prepared on the basis of
GAAP. For reporting to state regulatory authorities, SAP is used. See Note 7 to
the Consolidated Financial Statements of MBIA Inc. and Subsidiaries.
The SAP combined ratio is a traditional measure of underwriting
profitability for insurance companies. The SAP loss ratio (which is losses
incurred divided by premiums earned), SAP expense ratio (which is underwriting
expenses divided by net premiums written) and SAP combined ratio (which is the
sum of the loss and expense ratios) for MBIA Corp. and for the financial
guarantee industry, which includes the monoline primary insurers (including MBIA
Corp.) and monoline reinsurers, are shown in the table below:
YEARS ENDED DECEMBER 31,
1996 1997 1998 1999 2000
MBIA Corp.
Loss ratio 1.7% 1.2% 8.0% 12.3% 6.2%
Expense ratio 22.8 21.2 16.8 23.6 22.1
Combined ratio 24.5 22.4 24.8 35.9 28.3
Financial guarantee industry (1)
Loss ratio 4.9% 8.3% 22.8% 4.2% *
Expense ratio 31.6 28.1 22.7 24.1 *
Combined ratio 36.5 36.4 45.5 28.3 *
- -----------------------------
(1) Industry statistics were taken from the 1999 Industry Financial Results of
the Association of Financial Guaranty Insurors.
* Not available.
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The SAP loss ratio differs from the GAAP loss ratio because the GAAP
ratio recognizes a provision for unidentified losses. The SAP expense ratio
varies from the GAAP expense ratio because the GAAP ratio recognizes the
deferral of policy acquisition costs and includes the amortization of purchase
accounting adjustments, principally goodwill. In addition, the SAP expense ratio
is calculated using premiums written while the GAAP expense ratio uses premiums
earned.
Net insurance in force, qualified statutory capital (which is comprised
of policyholders' surplus and the contingency reserve), and policyholders'
leverage ratios for MBIA Corp. and for the financial guarantee industry are
shown in the table below:
AS OF DECEMBER 31,
1996 1997 1998 1999 2000
(DOLLARS IN MILLIONS)
MBIA Corp.
Net insurance in force $ 434,417 $ 513,736 $ 595,895 $ 635,883 $680,878
Qualified statutory capital 2,620 3,140 3,741 4,152 4,505
Policyholders' leverage ratio 166:1 164:1 159:1 153:1 151:1
Financial guarantee industry (1)
Net insurance in force $1,076,821 $1,262,697 $1,416,433 $1,616,226 *
Qualified statutory capital 7,350 8,851 9,833 11,139 *
Policyholders' leverage ratio 147:1 143:1 144:1 145:1 *
- -----------------------------
(1) Industry statistics were taken from the 1999 Industry Financial Results of
the Association of Financial Guaranty Insurors. * Not available.
The policyholders' leverage ratio is the ratio of net insurance in
force to qualified statutory capital. This test is sometimes focused on as a
measure of a company's claims-paying capacity. The Company believes that the
leverage ratio has significant limitations since it compares the total debt
service (undiscounted) coming due over the next 30 years or so to a company's
current capital base. It thereby fails to recognize future capital that will be
generated during the period of risk being measured, arising from unearned
premium reserve and future installment premium commitments nor does it take into
account the Company's "soft" capital facilities (see "Business -- Credit
Agreement"). Further, the leverage ratio does not consider the underlying
quality of the issuers whose debt service is insured and thereby does not
differentiate among the risk characteristics of a financial guarantor's insured
portfolio, nor does it give any benefit for third-party commitments such as
standby lines of credit.
MBIA CORP. INSURANCE POLICIES
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
principal of and interest or other amounts due on the insured obligations that
have not been paid. 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 amount of the default on the next business day following
notification. MBIA Corp. has a Fiscal Agency Agreement with State Street Bank
and Trust Company, N.A. which provides for this payment upon receipt of proof of
ownership of the obligations due, as well as upon receipt of instruments
appointing MBIA Corp. as agent for the holders and evidencing the assignment of
the rights of the holders with respect to the payments made by MBIA Corp. 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 Assurance writes policies that are substantially similar in
coverage and manner of payment to the MBIA Corp. policies. The MBIA Illinois
insurance policies provide for payments on default in substantially the same
manner as the MBIA Corp. policies. Financial guaranty insurance written by
CapMAC generally guarantees to the holder of the guaranteed obligation the
timely payment of principal and interest in accordance with the obligation's
original payment schedule. In the case of a default on the insured obligation,
payment under the insurance policy generally may not be accelerated by the
holder without the consent of CapMAC, even though the underlying obligation may
be accelerated.
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RATING AGENCIES
Moody's, S&P, Fitch and RII perform periodic reviews of MBIA Corp. and
other companies providing financial guarantee insurance. Their reviews focus on
the insurer's operations, financial condition, underwriting policies and
procedures and on the issues insured. Additionally, each rating agency has
certain criteria as to exposure limits and capital requirements for financial
guarantors.
The rating agencies have reaffirmed their Triple-A claims-paying
ratings assigned to MBIA Corp., CapMAC, MBIA Illinois and to MBIA Assurance. The
ratings for MBIA Illinois and CapMAC are based in significant part on
reinsurance agreements between MBIA Corp. and MBIA Illinois and MBIA Corp. and
CapMAC, respectively. The rating of MBIA Assurance is based in significant part
on the reinsurance agreement between MBIA Corp. and MBIA Assurance and the net
worth maintenance agreement between the two parties. See "Business-Reinsurance."
Although MBIA Corp. intends to comply with the requirements of the
rating agencies, no assurance can be given that these requirements will not
change or that, even if MBIA Corp. complies with these requirements, one or more
rating agencies will not reduce or withdraw their rating. MBIA Corp.'s ability
to attract new business and to compete with other financial guarantors, and its
results of operations and financial condition would be materially adversely
affected by any reduction in its ratings.
INVESTMENT CONSIDERATIONS
Claims-Paying Ability Rating
----------------------------
MBIA Corp.'s ability to attract new business and to compete with other
triple-A rated financial guarantors is largely dependent on the Triple-A claims
paying ratings assigned to it by the major rating agencies. Although MBIA Corp.
intends to comply with the requirements of the rating agencies to maintain such
ratings, no assurance can be given that these requirements will not change or
that, even if MBIA Corp. complies with these requirements, one or more of such
rating agencies will not reduce or withdraw their claims-paying ability ratings
of MBIA Corp. in the future. 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 reduction in its ratings. See "Business - Rating Agencies".
Competition
-----------
The businesses engaged in by MBIA Corp. are highly competitive. MBIA
Corp. faces competition from other financial guaranty insurance companies, other
providers of third-party credit enhancement, such as multi line insurance
companies and banks, and alternative executions which do not employ third-party
credit enhancement. To the extent that there is no increase in the dollar volume
of obligations that require guaranties, increased competition, either in terms
of price or new providers of credit enhancement, would likely have an adverse
effect on MBIA Corp.'s business. See "Business - Competition".
Market and Other Factors
------------------------
The demand for financial guaranty insurance depends upon many factors,
some of which are beyond the control of MBIA Corp. While all the major financial
guaranty insurers have triple-A claims-paying ability ratings from the major
rating agencies, investors may from time to time distinguish among financial
guarantors on the basis of various factors, including size, insured portfolio
concentration and financial performance. These distinctions may result in
differentials in trading levels for securities insured by particular financial
guarantors which, in turn, may provide a competitive advantage to those
financial guarantors with better trading characteristics. Conversely, various
investors may, due to regulatory or internal guidelines, lack additional
capacity to purchase securities insured by certain financial guarantors, which
may provide a competitive advantage to guarantors with fewer insured obligations
outstanding.
Prevailing interest rate levels affect demand for financial guaranty
insurance to the extent that lower interest rates are accompanied by narrower
spreads between insured and uninsured obligations. The purchase of insurance
during periods of relatively
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narrower interest rate spreads will generally provide lower cost savings to the
issuer than during periods of relatively wider spreads. These lower cost savings
generally are accompanied by a corresponding decrease in demand for financial
guaranty insurance.
The perceived financial strength of financial guaranty insurers also
affects demand for financial guaranty insurance. Should a major financial
guaranty insurer, or the industry generally, have its claims-paying ability
rating lowered, or suffer for some other reason deterioration in investors'
confidence, demand for financial guaranty insurance may be reduced
significantly.
Premium rates are affected by factors such as the insurer's appraisal
of the insured credit, the spread between interest rates prevailing on insured
and uninsured obligations and capital charges associated with these exposures as
determined by the rating agencies and regulators, as well as competition for
such business among financial guaranty insurance providers and other forms of
credit enhancement. Lower interest rates generally result in lower premium
amounts to the extent that premium amounts are based on the total dollar amount
of principal interest and other amounts insured.
Regulation
----------
The financial guaranty insurance industry has historically been and
will continue to be subject to the direct and indirect effects of governmental
regulation, including changes in tax laws and legal precedents affecting
asset-backed and municipal obligations. No assurance can be given that future
legislative regulatory or judicial changes will not adversely affect MBIA
Corp.'s business. See "Business - Regulation" for a description of current
insurance regulations affecting MBIA Corp.
Adequacy of Loss Reserves
-------------------------
The financial guaranties issued by MBIA Corp. insure the financial
performance of the obligations guaranteed over an extended period of time, in
some cases over 30 years, under policies that MBIA Corp. cannot cancel. As a
result of the lack of statistical loss data due to the low level of losses in
MBIA Corp.'s financial guaranty business and in the financial guaranty industry
in general, particularly in the structured asset-backed area, MBIA Corp. does
not use traditional actuarial approaches to determine its loss reserves.
Instead, a general loss reserve is established in an amount deemed adequate to
cover the expected levels of losses and loss adjustment expense on MBIA's
overall portfolio. The size of the general loss reserve is determined by a
formula, the components of which are reviewed regularly. Management believes
that the current level of general loss reserves is adequate to cover the
estimated liability for claims and the related adjustment expenses with respect
to financial guaranties issued by MBIA Corp. The establishment of the
appropriate level of loss reserves is an inherently uncertain process involving
numerous estimates and subjective judgments by management, and therefore there
can be no assurance that losses in MBIA Corp.'s insured portfolio will not
exceed the loss reserves. Losses from future defaults, depending on their
magnitude, could have a material adverse effect on the results of operations and
financial condition of MBIA Corp. See "Business - Losses and Reserves".
Realization of Installment Premiums
-----------------------------------
Due to the annuity nature of a significant percentage of its premium
income, MBIA Corp. has an embedded future revenue stream. The amount of
installment premiums actually realized by MBIA Corp. could be reduced in the
future due to factors such as accelerated prepayments of underlying obligations.
Although increases in installment premium due to renewals of existing insurance
contracts historically have been greater than reductions, there can be no
assurance that future circumstances might not cause a net reduction overall,
resulting in lower revenues.
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Reinsurance
___________
MBIA Corp.'s ability to maintain reinsurance capacity is important to
its business. In order to comply with regulatory, rating agency or internal
single risk retention limits for transactions of significant size, MBIA Corp.
needs access to sufficient reinsurance capacity to underwrite large
transactions. If MBIA Corp. were to become unable to obtain sufficient
reinsurance, this could have an adverse impact on its ability to issue policies
for large transactions. See "Business - Reinsurance". MBIA Corp. remains liable
for insurance ceded to reinsurers to the extent such reinsurers are unable to
meet their obligations.
Anti-Takeover Provisions
________________________
The Company's Charter and Bylaws contain special notice and other
provisions the effect of which could be to discourage non-negotiated takeover
attempts, which takeovers some stockholders might otherwise deem to be in their
interests. In addition, the Company has a Rights Plan in place that would also
deter non-negotiated takeovers. Given the importance of MBIA Corp.'s triple-A
ratings to the Company's business, as a practical matter, a change of control
would require confirmation in advance from the rating agencies that such
transaction would not result in a downgrading of the claims-paying ability
rating assigned to MBIA Corp.
The insurance laws of New York provide that no person, other than an
authorized insurer, may acquire control of the Company and thus indirect control
of MBIA Corp., or any other New York-domiciled insurance subsidiary of the
Company, unless it has given prior written notice to MBIA Corp. and any such
subsidiary and received the prior approval of the Superintendent of Insurance of
the State of New York. Furthermore, any purchaser of 10% or more of the
outstanding shares of the Company's Common Stock would be presumed to have
acquired such control unless the Superintendent of Insurance determined
otherwise. Therefore, any takeover of the Company effectively requires
regulatory approval. This regulatory restriction may effectively reduce the
probability of a takeover without the cooperation of management.
Investment Management Services Businesses
_________________________________________
The Company's Investment Management Services businesses have grown as a
proportion of its overall business (see "Investment Management Businesses"). As
their contribution continues to grow, events that negatively affect the
performance of the Investment Management Services businesses could affect the
overall performance of the Company.
CREDIT AGREEMENT
MBIA Corp. entered into a Credit Agreement, dated as of December 29,
1989, which has been amended from time to time (the "Credit Agreement"), to
provide MBIA Corp. with an unconditional, irrevocable line of credit. The line
of credit is available to be drawn upon by MBIA Corp., in an amount up to $900
million, after MBIA Corp. has incurred, during the period commencing October 27,
2000 and ending October 31, 2007, cumulative losses (net of any recoveries) in
excess of $900 million or 5.6% of average annual debt service. The obligation to
repay loans made under the Credit Agreement is a limited recourse obligation of
MBIA Corp. payable solely from, and secured by a pledge of, recoveries realized
on defaulted insured obligations, from certain pledged installment premiums and
other collateral. Borrowings under the Credit Agreement are repayable on the
expiration date of the Credit Agreement. The current expiration date of the
Credit Agreement is October 31, 2007, subject to annual extensions under certain
circumstances. The Credit Agreement contains covenants that, among other things,
restrict MBIA Corp.'s ability to encumber assets or merge or consolidate with
another entity.
EMPLOYEES
As of March 15, 2001, the Company had 745 employees. No employee is
covered by a collective bargaining agreement. The Company considers its employee
relations to be satisfactory.
EXECUTIVE OFFICERS
The executive officers of the Company and their present ages and
positions with the Company are set forth below. All these individuals are also
directors of MBIA Corp.
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NAME AGE POSITION AND TERM OF OFFICE
---- --- ---------------------------
Joseph W. Brown 52 Chairman and Chief Executive Officer (officer since January 1999)
Gary C. Dunton 45 President and Chief Operating Officer (officer since January, 1998)
Richard L. Weill 58 Vice President and Secretary (officer since 1989)
Neil G. Budnick 46 Vice President and Chief Financial Officer (officer since 1992)
John B. Caouette 56 Vice President (officer since February, 1998)
Ram D. Wertheim 46 Vice President and General Counsel (officer since January, 2000)
Kevin D. Silva 47 Vice President and Chief Administrative Officer (officer since 1995)
Ruth M. Whaley 45 Vice President and Chief Risk Officer (officer since 1999)
Robert T. Wheeler 58 Vice President and Chief Technology Officer (officer since May, 2000)
John S. Pizzarelli 45 Vice President (officer since November, 2000)
Mark S. Zucker 52 Vice President (officer since November, 2000)
Joseph W. Brown is Chairman and Chief Executive Officer of the Company
(effective January 7, 1999) and a director of the Company. Prior to joining the
Company in January 1999, Mr. Brown was Chairman of the Board of Talegen
Holdings, Inc.
Gary C. Dunton is President and Chief Operating Officer of the Company
and a director of the Company. Mr. Dunton was, prior to joining the Company as
an officer, a director of the Company and President of the Family and Business
Insurance Group, USF&G Insurance.
Richard L. Weill is Vice President and Secretary of the Company. From
1989 through 1991, Mr. Weill was General Counsel and Corporate Secretary of the
Company.
Neil G. Budnick is Vice President and Chief Financial Officer of the
Company. Mr. Budnick has been primarily involved in the insurance operations
area of MBIA Corp. since joining the Company in 1983.
John B. Caouette is Vice President of the Company. Mr. Caouette was,
until February of 1998, the Chairman and Chief Executive Officer of CapMAC
Holdings Inc.
Ram D. Wertheim is Vice President and General Counsel of the Company.
From February of 1998 until January, 2000, he served in various capacities in
the Structured Finance Division. Mr. Wertheim was, until February of 1998, the
General Counsel of CapMAC Holdings Inc.
Kevin D. Silva is Vice President and Chief Administrative Officer of
the Company. He has been in charge of the Management Services Division of MBIA
Corp. since joining the Company in late 1995.
Ruth M. Whaley is Vice President and Chief Risk Officer of the Company.
She was, until February of 1998, the Chief Underwriting Officer of CapMAC
Holdings Inc.
Robert T. Wheeler is Vice President and Chief Technology Officer of the
Company. From 1985 until April of 2000, he was the Managing Director and Chief
Information Officer of US Fire Insurance Company.
John S. Pizzarelli is Vice President of the Company and head of the
Public Finance Division of MBIA Corp. Since joining MBIA Corp. in 1985, he has
been primarily involved in the public finance area.
Mark D. Zucker is Vice President of the Company and head of the
Structured Finance Division of MBIA Corp. Prior to joining the Company he was
Chief Credit Officer of Investment Banking for Rabobank International.
ITEM 2. PROPERTIES
MBIA Corp. owns the 265,000 square foot office building on
approximately 15.5 acres of property in Armonk, New York, in which the Company
and MBIA Corp. have their headquarters. The Company also has rental space in New
York, New York, San Francisco, California, Paris, France, Madrid, Spain, Sydney,
Australia and London, England. The Company believes that these facilities are
adequate and suitable for its current needs.
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ITEM 3. LEGAL PROCEEDINGS
In the normal course of operating its businesses, the Company may be
involved in various legal proceedings. There are no material lawsuits pending
or, to the knowledge of the Company, threatened, to which the Company or any of
its subsidiaries is a party; however, Capital Asset continues to have certain
contingent liabilities outstanding, including various individual and class
action lawsuits, which they are defending. The Company has no reason to believe
that it has financial liability for these lawsuits.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The information concerning the market for the Company's Common Stock
and certain information concerning dividends appears under the heading
"Shareholder Information" on page 65 of the Company's 2000 Annual Report to
Shareholders and is incorporated herein by reference. As of March 15, 2001,
there were 945 shareholders of record of the Company's Common Stock. The
information concerning dividends on the Company's Common Stock is under
"Business - Regulation" in this report.
ITEM 6. SELECTED FINANCIAL DATA
The information under the heading "Selected Financial and Statistical
Data" as set forth on pages 34-35 of the Company's 2000 Annual Report to
Shareholders is incorporated by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information under the heading "Management's Discussion and Analysis
of Financial Condition and Results of Operations" as set forth on pages 36-42 of
the Company's 2000 Annual Report to Shareholders is incorporated by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
See the information under the heading "Market Risk" in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" as set
forth on page 42 of the Company's 2000 Annual Report to Shareholders which is
incorporated by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company, the Report of
Independent Accountants thereon by PricewaterhouseCoopers LLP and the unaudited
"Quarterly Financial Information" are set forth on pages 43-62 of the Company's
2000 Annual Report to Shareholders and are incorporated by reference.
Subsequent Event - Stock Split (Unaudited)
On March 15, 2001 the Company's Board of Directors approved a 3 for 2
stock split by means of a stock dividend. The 3-for-2 stock split will be
accomplished through a stock dividend which will be distributed on April 20,
2001 to shareholders of record as of April 2, 2001. The pro-forma per share
amounts on a post-split basis for the years ended December 31, 2000, 1999 and
1998 would be as follows:
2000 1999 1998
Net income per common share:
Basic $ 3.58 $ 2.15 $ 2.91
Diluted $ 3.56 $ 2.13 $ 2.88
Book value per share $ 28.59 $ 23.56 $ 25.43
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors is set forth under "Election of
Directors" in the Company's Proxy Statement, which will be filed on or before
April 9, 2001, which is incorporated by reference.
Information regarding executive officers is set forth under Item 1,
"Business - Executive Officers," in this report.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding compensation of the Company's executive officers
is set forth under "Compensation of Executive Officers" in the Company's Proxy
Statement, which will be filed on or before April 9, 2001, which is incorporated
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners
and management is set forth under "Election of Directors" and "Security
Ownership of Certain Beneficial Owners" in the Company's Proxy Statement, which
will be filed on or before April 9, 2001, which is incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding relationships and related transactions is set
forth under "Certain Relationships and Related Transactions" in the Company's
Proxy Statement which will be filed on or before April 9, 2001, which is
incorporated by reference.
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PART IV
ITEM 14.
(a) Financial Statements and Financial Statement Schedules and
Exhibits.
1. Financial Statements
MBIA Inc. has incorporated by reference from the 2000 Annual Report to
Shareholders the following consolidated financial statements of the Company:
Annual Report to Shareholders
Page(s)
MBIA INC. AND SUBSIDIARIES
Report of independent accountants. 43
Consolidated balance sheets as of December 31, 2000 and 44
1999.
Consolidated statements of income for the years ended 45
December 31, 2000, 1999 and 1998.
Consolidated statements of changes in shareholders' 46
equity for the years ended December 31, 2000, 1999 and
1998.
Consolidated statements of cash flows for the years ended December
31, 2000, 1999 and 1998. 47
Notes to consolidated financial statements. 48-62
2. Financial Statement Schedules
The following financial statement schedules are filed as part of
this report.
Schedule Title
I Summary of investments, other than investments in
related parties, as of December 31, 2000.
II Condensed financial information of Registrant
for December 31, 2000, 1999 and 1998. IV Reinsurance for
the years ended December 31, 2000, 1999 and 1998.
The report of the Registrant's independent accountants with
respect to the above listed financial statement schedules is included with the
schedules.
All other schedules are omitted because they are not applicable
or the required information is shown in the consolidated financial statements or
notes thereto.
3. Exhibits
(An exhibit index immediately preceding the Exhibits indicates
the page number where each exhibit filed as part of this report can be
found.)
3. Articles of Incorporation and By-Laws.
3.1. Restated Certificate of Incorporation, dated August 17,
1990, incorporated by reference to Exhibit 3.1 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1990 (Comm. File 1-9583) (the
"1990 10-K"), as amended December 20, 1995.
3.2. By-Laws as Amended as of March 19, 1998, incorporated by
reference to Exhibit 3.2 of the 1998 10-K.
30
32
4. Instruments Defining the Rights of Security Holders, including
Indentures.
4.1 Indenture, dated as of August 1, 1990, between MBIA Inc. and
The First National Bank of Chicago, Trustee, incorporated by reference to
Exhibit 10.72 to the 1992 10-K.
4.2 Bond Purchase and Paying Agent Agreement between MBIA Inc.
and various banks, entered into as of December 12, 2000 in connection with CHF
175,000,000 4.5% Bonds, due June 15, 2010.
10. Material Contracts
10.01. Amended and Restated Tax Allocation Agreement, dated as of
January 1, 1990, between the Company and MBIA Corp., incorporated by reference
to Exhibit 10.66 to the 1989 10-K, as supplemented by the Amended and Restated
Tax Allocation Agreement Supplement No. 1, dated as of August 31, 1999,
incorporated by reference to Exhibit 10.06 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31,1999 (Comm. File No. 1-9583)
(the "1999 10-K").
10.02. Rights Agreement, dated as of December 12, 1991, between
the Company and Mellon Bank, N.A., incorporated by reference to the Company's
Current Report on Form 8-K, filed on December 31, 1991, incorporated by
reference to Exhibit 10.62 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993 (Comm. File No. 1-9583) (the "1993 10-K"),
as amended by Amendment to Rights Agreement, dated as of October 24, 1994,
incorporated by reference to Exhibit 10.49 to the 1994 10-K.
10.03. Trust Agreement, dated as of December 31, 1991, between
MBIA Corp. and Fidelity Management Trust Company, incorporated by reference to
Exhibit 10.64 to the 1992 10-K, as amended by the Amendment to Trust Agreement,
dated as of April 1, 1993, incorporated by reference to Exhibit 10.64 to the
1993 10-K, as amended by First Amendment to Trust Agreement, dated as of January
21, 1992, as further amended by Second Amendment to Trust Agreement, dated as of
March 5, 1992, as further amended by Third Amendment to Trust Agreement, dated
as of April 1, 1993, as further amended by the Fourth Amendment to Trust
Agreement, dated as of July 1, 1995, incorporated by reference to Exhibit 10.47
to the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1995 (Comm. File No. 1-9583) (the "1995 10-K"), as amended by Fifth
Amendment to Trust Agreement, dated as of November 1, 1995, as further amended
by Sixth Amendment to Trust Agreement, dated as of January 1, 1996, incorporated
by reference to Exhibit 10.46 to the 1996 10-K, further amended by Seventh
Amendment to Trust Agreement, dated as of October 15, 1997, incorporated by
reference to Exhibit 10.36 of the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997 (Comm. File No. 1-9583) (the "1997 10-K") as
further amended by the Eighth Amendment to Trust Agreement, dated as of January
1, 1998 and by the Ninth Amendment to Trust Agreement, dated as of March 1,
1999, incorporated by reference to Exhibit 10.10 to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1998 (Comm. File No. 1-9583)
(the "1998 10-K").
10.04. First Restated Credit Agreement, dated as of October 1,
1993, among MBIA Corp., Credit Suisse, New York Branch, as Agent, Credit Suisse,
New York Branch, Caisse Des Depots Et Consignations, Deutsche Bank AG,
Bayerische Landesbank Girozentrale and Landesbank Hessen-Thuringen Girozentrale,
as amended by an Assignment and Assumption Agreement, dated as of December 31,
1993, among MBIA Corp., Credit Suisse, New York Branch, as Agent and Assignor
and Deutsche Bank AG, New York Branch, as further amended by a Modification
Agreement, dated as of January 1, 1994, among Deutsche Bank, AG, New York
Branch, MBIA Corp. and Credit Suisse, New York Branch, as Agent, as amended by a
Joinder Agreement, dated December 31, 1993, among Credit Suisse, New York
Branch, as Agent, Sudwestdeutsche Landesbank Girozentrale and MBIA Corp.,
incorporated by reference to Exhibit 10.78 to the 1993 10-K, as amended by the
First Amendment to First Restated Credit Agreement, dated as of September 23,
1994, incorporated by reference to Exhibit 10.63 to the 1994 10-K, as further
amended by the Second Amendment to the First Restated Credit Agreement, dated as
of January 1, 1996, and as further amended by the Third Amendment to the First
Restated Credit Agreement, dated as of October 1, 1996, incorporated by
reference to Exhibit 10.57 to the 1996 10-K, as further amended and restated by
the Second Amended and Restated Credit Agreement, dated as of October 1, 1997,
incorporated by reference to Exhibit 10.46 to the 1997 10-K, as further amended
by the First Amendment to Second Amended and Restated Credit Agreement, dated as
of October 1, 1998, incorporated by reference to Exhibit 10.13 to the 1998 10-K,
as further amended and restated by the Second Amendment to the Second Amended
and Restated Credit Agreement, dated as of October 29, 1999, incorporated by
reference to Exhibit 10.13 to the 1999 10-K, as further amended and restated by
the Third Amendment to the Second Amendment and Restated Credit Agreement, dated
as of October 27, 2000.
31
33
10.05. Net Worth Maintenance Agreement, dated as of November 1,
1991, between MBIA Corp. and MBIA Assurance S.A., as amended by Amendment to Net
Worth Agreement, dated as of November 1, 1991, incorporated by reference to
Exhibit 10.79 to 1993 10-K.
10.06. Reinsurance Agreement, dated as of January 1, 1993,
between MBIA Assurance S.A. and MBIA Corp., incorporated by reference to Exhibit
10.80 to the 1993 10-K.
10.07. Investment Services Agreement, effective as of April 28,
1995, between MBIA Insurance Corporation and MBIA Securities Corp., as amended
by Amendment No. 1, dated as of December 29, 1995, incorporated by reference to
Exhibit 10.65 to the 1995 10-K, as further amended by Amendment No. 2 to
Investment Services Agreement, dated January 14, 1997, incorporated by reference
to Exhibit 10.53 to the 1997 10-K.
10.08. Investment Services Agreement, effective January 2, 1996,
between MBIA Insurance Corp. of Illinois and MBIA Securities Corp., incorporated
by reference to Exhibit 10.66 to the 1995 10-K.
10.09. Agreement and Plan of Merger among the Company, CMA
Acquisition Corporation and CapMAC Holdings Inc. ("CapMAC"), dated as of
November 13, 1997, incorporated by reference to the Company's Form S-4 (Reg. No.
333-41633) filed on December 5, 1997.
10.10. Amendment No. 1 to Agreement and Plan of Merger among the
Company, CMA Acquisition Corporation and CapMAC Holdings Inc. ("CapMAC"), dated
January 16, 1998, incorporated by reference to the Company's Post Effective
Amendment No. 1 to Form S-4 (Reg. No. 333-41633) filed on January 21, 1998.
10.11. Reinsurance Agreement, dated as of April 1, 1998, between
CapMAC and MBIA Corp., incorporated by reference to Exhibit 10.30 to the 1998
10-K.
10.12. Reinsurance Agreement, dated as of January 1, 1999,
between MBIA Illinois and MBIA Corp., incorporated by reference to Exhibit 10.31
to the 1998 10-K.
10.13. Agreement and Plan of Merger by and among the Company,
MBIA Acquisition, Inc. and 1838 Investment Advisors, Inc., dated as of June 19,
1998, incorporated by reference to Exhibit 10.32 to the 1998 10-K.
10.14. Credit Agreement (364 day agreement) among the Company,
MBIA Corp., various designated borrowers, various lending institutions, Deutsche
Bank AG, New York Branch, as Administrative Agent, The First National Bank of
Chicago, as Syndication Agent and Fleet National Bank, as Documentation Agent,
dated as of August 28, 1998, incorporated by reference to Exhibit 10.33 to the
1998 10-K, incorporated by reference to Exhibit 10.33 to the 1999 10-K, as
amended by a Notice of Extension of Final Maturity Date, with various lending
institutions, dated as of August 2000.
10.15. Credit Agreement (5 year agreement) among the Company,
MBIA Corp., various designated borrowers, various lending institutions, Deutsche
Bank AG, New York Branch, as Administrative Agent, The First National Bank of
Chicago, as Syndication Agent and Fleet National Bank, as Documentation Agent,
dated as of August 28, 1998, incorporated by reference to Exhibit 10.34 to the
1998 10-K, incorporated by reference to Exhibit 10.34 to the 1999 10-K, as
amended by a Notice of Extension of Final Maturity Date, with various lending
institutions, dated as of August 2000.
10.16. Ambac Assurance Corporation, AMBAC Insurance UK Limited,
MBIA Insurance Corporation, and MBIA Assurance S.A. Agreement Regarding A Global
Joint Venture, effective as of January 15, 1999, incorporated by reference to
Exhibit 10.48 to the 1998 10-K.
10.17. Special Excess Of Loss Reinsurance Agreement, between MBIA
Insurance Corporation and/or MBIA Assurance S.A. and/or any other insurance or
reinsurance company subsidiaries of MBIA Inc. listed in Exhibit No. 1 and
Muenchener Rueckversicherungs-Gesellshaft, effective September 1, 1998,
incorporated by reference to Exhibit 10.49 to the 1998 10-K.
10.18. Second Special Per Occurrence Excess Of Loss Reinsurance
Agreement, between MBIA Insurance Corporation and/or MBIA Assurance S.A. and/or
any other insurance or reinsurance company subsidiaries of MBIA Inc. listed in
Exhibit No. 1 and AXA Re Finance S.A., effective September 1, 1998, incorporated
by reference to Exhibit 10.50 to the 1998 10-K.
32
34
10.19. ISDA Master Agreement, dated May 2, 2000, between Deutsche
Bank AG and MBIA Inc., as supplemented by the Schedule to the ISDA Master
Agreement and the Credit Support Annex.
Executive Compensation Plans and Arrangements
The following Exhibits identify all existing executive compensation
plans and arrangements:
10.20. MBIA Inc. 2000 Stock Option Plan, effective May 11, 2000.
10.21. MBIA Inc. Deferred Compensation and Excess Benefit Plan,
incorporated by reference to Exhibit 10.16 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1988 (Comm. File No. 1-9583)
(the "1988 10-K"), as amended as of July 22, 1992, incorporated by reference to
Exhibit 10.15 to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1992 (Comm. File No. 1-9583) (the "1992 10-K").
10.22. MBIA Inc. Employees Pension Plan, amended and restated
effective January 1, 1987, incorporated by reference to Exhibit 10.28 of the
Company's Amendment No. 1 to the 1987 S-1, as further amended and restated as of
December 12, 1991, incorporated by reference to Exhibit 10.18 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1991 (Comm.
File No. 1-9583) (the "1991 10-K"), as further amended and restated effective
January 1, 1994, incorporated by reference to Exhibit 10.16 of the Company's
Annual Report on Form 10-K for fiscal year ended December 31, 1994 (Comm. File
No. 1-9583) (the "1994 10-K").
10.23. MBIA Inc. Employees Profit Sharing Plan, as amended and
restated effective January 1, 1987, incorporated by reference to Exhibit 10.29
to Amendment No. 1 to the 1987 S-1, as further amended by Amendment dated
December 8, 1988, incorporated by reference to Exhibit 10.21 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1989 (Comm.
File No. 1-9583) (the "1989 10-K"), as further amended and restated as of
December 12, 1991, incorporated by reference to Exhibit 10.19 to the 1991 10-K,
as further amended and restated as of May 7, 1992, incorporated by reference to
Exhibit 10.17 to the 1992 10K, as further amended and restated effective January
1, 1994, incorporated by reference to Exhibit 10.17 to the 1994 10-K.
10.24. MBIA Corp. Split Dollar Life Insurance Plan, dated as of
February 9, 1988, issued by Aetna Life Insurance and Annuity Company,
incorporated by reference to Exhibit 10.23 to the 1989 10-K.
10.25. MBIA Inc. Employees Change of Control Benefits Plan,
effective as of January 1, 1992, incorporated by reference to Exhibit 10.65 to
the 1992 10-K.
10.26. MBIA Inc. 1996 Incentive Plan, effective as of January 1,
1996, incorporated by reference to Exhibit 10.70 to the 1995 10-K.
10.27. MBIA Inc. 1996 Directors Stock Unit Plan, effective as of
December 4, 1996, incorporated by reference to Exhibit 10.70 to the 1996 10-K.
10.28. CapMAC Employee Stock Ownership Plan, incorporated by
reference to Exhibit 10.18 to the CapMAC Form S-1, as Amended and Restated,
effective January 1, 1999.
10.29. CapMAC Employee Stock Ownership Plan Trust Agreement,
incorporated by reference to Exhibit 10.19 to the CapMAC Form S-1, as amended by
Amendment No. 2 to the CapMAC Employee Stock Ownership Plan, executed December
22, 1998, incorporated by reference to Exhibit 10.25 to the 1998 10-K.
10.30. ESOP Loan Agreement by and between MBIA Inc. and the
CapMAC Employee Stock Ownership Plan Trust, dated June 30, 1999.
10.31. Deferred Compensation and Restricted Stock Agreement,
dated as of December 7, 1995, between John B. Caouette and CapMAC, incorporated
by reference to Exhibit 10.28 of the CapMAC Annual Report on Form 10-K for the
year ended December 31, 1995 (the "CapMAC 1995 10-K").
33
35
10.32. Deferred Compensation and Restricted Stock Agreement,
dated as of December 7, 1995, between Ram D. Wertheim and CapMAC, incorporated
by reference to Exhibit 10.35 of the CapMAC 1995 10-K.
10.33. Retirement and Consulting Agreement, between the Company
and David H. Elliott, dated as of January 7, 1999 and Summary Retirement and
Consulting Agreement, between the Company and David H. Elliott, dated as of
January 7, 1999, incorporated by reference to Exhibit 10.35 to the 1998 10-K.
10.34. Terms of Employment letter between MBIA and Joseph W.
Brown, Jr., dated January 7, 1999, incorporated by reference to Exhibit 10.36 to
the 1998 10-K.
10.35. Stock Option Agreement between MBIA Inc. and Joseph W.
Brown, Jr., dated January 7, 1999, incorporated by reference to Exhibit 10.37 to
the 1998 10-K.
10.36. Key Employee Employment Protection Agreement between MBIA
Inc. and Joseph W. Brown, Jr., dated January 20, 1999, incorporated by reference
to Exhibit 10.38 to the 1998 10-K.
10.37. Key Employee Employment Protection Agreement between MBIA
Inc. and Neil G. Budnick, dated January 25, 1999, incorporated by reference to
Exhibit 10.39 to the 1998 10-K.
10.38. Key Employee Employment Protection Agreement between MBIA
Inc. and W. Thacher Brown, dated January 25, 1999, incorporated by reference to
Exhibit 10.40 to the 1998 10-K.
10.39. Key Employee Employment Protection Agreement between MBIA
Inc. and John B. Caouette, dated January 25, 1999, incorporated by reference to
Exhibit 10.41 to the 1998 10-K.
10.40. Key Employee Employment Protection Agreement between MBIA
Inc. and Gary C. Dunton, dated January 25, 1999, incorporated by reference to
Exhibit 10.42 to the 1998 10-K.
10.41. Key Employee Employment Protection Agreement between MBIA
Inc. and Louis G. Lenzi, dated January 25, 1999, incorporated by reference to
Exhibit 10.43 to the 1998 10-K.
10.42. Key Employee Employment Protection Agreement between MBIA
Inc. and Kevin D. Silva , dated January 25, 1999, incorporated by reference to
Exhibit 10.44 to the 1998 10-K.
10.43. Key Employee Employment Protection Agreement between MBIA
Inc. and Richard L. Weill, dated January 25, 1999, incorporated by reference to
Exhibit 10.45 to the 1998 10-K.
10.44. Key Employee Employment Protection Agreement between MBIA
Inc. and Ruth M. Whaley, dated January 25, 1999, incorporated by reference to
Exhibit 10.46 to the 1998 10-K.
10.45. Key Employee Employment Protection Agreement between MBIA
Inc. and Michael J. Maguire, dated March 19, 1999, incorporated by reference to
Exhibit 10.47 to the 1998 10-K.
10.46. Key Employee Employment Protection Agreement between MBIA
Inc. and John S. Pizzarelli, dated March 14, 2000.
10.47. Key Employee Employment Protection Agreement between MBIA
Inc. and Ram D. Wertheim, dated January 24, 2000.
10.48. Key Employee Employment Protection Agreement between MBIA
Inc. and Robert T. Wheeler, dated April 17, 2000.
10.49. Key Employee Employment Protection Agreement between MBIA
Inc. and Mark S. Zucker, dated March 14, 2000.
34
36
13. Annual Report to Shareholders of MBIA Inc. for fiscal year
ended December 31, 2000. Such report is furnished for the information of the
Commission only and, except for those portions thereof which are expressly
incorporated by reference in this Annual Report on Form 10-K, is not to be
deemed filed as part of this report.
21. List of Subsidiaries
23. Consent of PricewaterhouseCoopers LLP
99. Additional Exhibits - MBIA Corp. GAAP Financial Statements
(b) Reports on Form 8-K: The Company filed no report on Form 8-K in the
fourth quarter of 2000.
35
37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
MBIA Inc.
(Registrant)
Dated: March 30, 2001 By /s/ Joseph W. Brown
------------------------------------
Name: Joseph W. Brown
Title: Chairman
Pursuant to the requirements of Instruction D to Form 10-K under the
Securities Exchange Act of 1934, this Report has been signed below by the
following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Joseph W. Brown Chairman and Director March 30, 2001
- ------------------------------------------
Joseph W. Brown
/s/ Douglas C. Hamilton Vice President and March 30, 2001
- ------------------------------------------ Controller
Douglas C. Hamilton
/s/ David H. Elliott Director March 30, 2001
- ------------------------------------------
David H. Elliott
/s/ David C. Clapp Director March 30, 2001
- ------------------------------------------
David C. Clapp
/s/ Gary C. Dunton Director March 30, 2001
- ------------------------------------------
Gary C. Dunton
/s/ Claire L. Gaudiani Director March 30, 2001
- ------------------------------------------
Claire L. Gaudiani
36
38
/s/ William H. Gray, III Director March 30, 2001
- ------------------------------------------
William H. Gray, III
/s/ Freda S. Johnson Director March 30, 2001
- ------------------------------------------
Freda S. Johnson
/s/ Daniel P. Kearney Director March 30, 2001
- ------------------------------------------
Daniel P. Kearney
/s/ James A. Lebenthal Director March 30, 2001
- ------------------------------------------
James A. Lebenthal
/s/ John A. Rolls Director March 30, 2001
- ------------------------------------------
John A. Rolls
37
39
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES
TO THE BOARD OF DIRECTORS OF MBIA INC.:
Our audits of the consolidated financial statements referred to in our report
dated February 2, 2001 appearing in the 2000 Annual Report to Shareholders of
MBIA Inc. (which report and consolidated financial statements are incorporated
by reference in this Annual Report on Form 10-K) also included an audit of the
financial statement schedules listed in Item 14 (a)(2) of this Form 10-K. In our
opinion, these financial statement schedules present fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
------------------------------
PricewaterhouseCoopers LLP
New York, New York
February 2, 2001
40
SCHEDULE I
MBIA INC. AND SUBSIDIARIES
SUMMARY OF INVESTMENTS, OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 2000
(In thousands)
- ------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D
AMOUNT AT WHICH
FAIR SHOWN IN THE
TYPE OF INVESTMENT COST VALUE BALANCE SHEET
- ------------------------------------------------------------------------------------------
FIXED-MATURITIES
Bonds:
United States Treasury
and Government
agency obligations $ 630,694 $ 664,713 $ 664,713
State and municipal
obligations 3,684,653 3,800,284 3,800,284
Corporate and other
obligations 5,126,890 5,131,748 5,131,748
Mortgage-backed 1,870,943 1,893,019 1,893,019
--------------- --------------- ----------------
Total fixed-maturities 11,313,180 11,489,764 11,489,764
SHORT-TERM INVESTMENTS 623,575 XXXXXXXXXX 623,575
OTHER INVESTMENTS 132,646 XXXXXXXXXX 119,591
--------------- --------------- ----------------
Total investments $12,069,401 XXXXXXXXXX $12,232,930
=============== =============== ================
41
SCHEDULE II
MBIA INC. (PARENT COMPANY)
CONDENSED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
DECEMBER 31, 2000 DECEMBER 31, 1999
----------------- -----------------
ASSETS
Investments:
Municipal investment agreement portfolio
held as available-for-sale at fair value
(amortized cost $4,452,992 and $3,917,335) $4,474,647 $3,832,370
Fixed maturity securities held as available-for-sale
at fair value (amortized cost $72,607) 74,594 ---
Short-term investments, at amortized cost
(which approximates fair value) 106,001 ---
---------------- ---------------
Total investments 4,655,242 3,832,370
Cash and cash equivalents 30,684 21,289
Securities borrowed or purchased under
agreements to resell 559,624 385,171
Investment in and amounts due from
wholly-owned subsidiaries 4,809,122 4,284,732
Accrued investment income 43,299 33,514
Receivables for investments sold 11,275 21,915
Other assets 26,776 41,819
---------------- ---------------
Total assets $10,136,022 $8,620,810
================ ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Municipal investment agreements $3,461,095 $3,063,050
Municipal repurchase agreements 757,643 811,288
Long-term debt 783,802 674,114
Short-term debt 99,992 ---
Securities loaned or sold under
agreements to repurchase 734,624 412,749
Deferred income taxes 8,376 ---
Payable for investments purchased 5,566 83,602
Dividends payable 20,205 20,406
Other liabilities 41,306 42,500
---------------- ---------------
Total liabilities 5,912,609 5,107,709
---------------- ---------------
Shareholders' Equity:
Preferred stock, par value $1 per share;
authorized shares - 10,000,000;
issued and outstanding shares - none --- ---
Common stock, par value $1 per share;
authorized shares - 200,000,000;
issued shares - 100,773,295 and 100,072,846 100,773 100,073
Additional paid-in capital 1,219,587 1,191,108
Retained earnings 2,934,608 2,486,478
Accumulated other comprehensive income (loss),
net of deferred income tax provision (benefit)
of $57,141 and $(112,920) 85,707 (224,511)
Unallocated ESOP shares (2,950) (4,363)
Unearned compensation - restricted stock (10,659) (9,986)
Treasury stock - 2,209,358 in 2000 and
520,722 shares in 1999 (103,653) (25,698)
---------------- ---------------
Total shareholders' equity 4,223,413 3,513,101
---------------- ---------------
Total liabilities and shareholders' equity $10,136,022 $8,620,810
================ ===============
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto and the accompanying notes.
42
SCHEDULE II
MBIA INC. (PARENT COMPANY)
CONDENSED STATEMENTS OF INCOME
(In thousands)
YEARS ENDED DECEMBER 31
---------------------------------------------------------------
2000 1999 1998
------------------ ----------------- -----------------
Revenues:
Net investment income $223,575 $188,826 $ (178)
Net realized gains (losses) 8,386 (8,639) ---
Investment management
services income 23,088 12,733 4,553
Investment management
services realized gains (loss) (1,820) 1,185 4,253
------------------ ----------------- -----------------
Total revenues 253,229 194,105 8,628
------------------ ----------------- -----------------
Expenses:
Interest expense 54,460 52,857 38,875
Operating expenses 19,452 135,737 67,252
------------------ ----------------- -----------------
Total expenses 73,912 188,594 106,127
------------------ ----------------- -----------------
Gain (loss) before income taxes
and equity in earnings
of subsidiaries 179,317 5,511 (97,499)
Benefit for income taxes (16,742) (17,617) (13,888)
------------------ ----------------- -----------------
Gain (loss) before equity in
earnings of subsidiaries 196,059 23,128 (83,611)
Equity in earnings of subsidiaries 332,578 297,402 516,339
------------------ ----------------- -----------------
Net income $528,637 $320,530 $432,728
================== ================= =================
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto and the accompanying notes.
43
SCHEDULE II
MBIA INC. (PARENT COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
YEARS ENDED DECEMBER 31
---------------------------------------------------
2000 1999 1998
-------------- --------------- ---------------
Cash flows from operating activities:
Net income $ 528,637 $ 320,530 $ 432,728
Adjustments to reconcile net income
to net cash provided by
operating activities:
Equity in undistributed
earnings of subsidiaries (332,578) (297,402) (516,339)
Net realized (gains) losses on
sales of investments (6,566) 7,454 (4,253)
Benefit for deferred income taxes (118) (52) (30)
Other, net (11,421) 1,364 27,823
-------------- --------------- ---------------
Total adjustments to net income (350,683) (288,636) (492,799)
-------------- --------------- ---------------
Net cash provided (used) by
operating activities 177,954 31,894 (60,071)
-------------- --------------- ---------------
Cash flows from investing activities:
Purchase of fixed-maturity
securities (4,433,020) (4,776,543) ---
Sale of fixed-maturity securities 4,360,435 4,767,905 ---
(Purchase) sale of short-term investments (106,001) --- 2,300
Purchases for municipal investment
agreement portfolio, net of payable
for investments purchased (5,346,474) (2,541,312) (2,351,385)
Sales from municipal investment
agreement portfolio, net of receivable
for investments sold 4,754,985 1,324,531 1,707,407
Contributions to subsidiaries (130) (3,178) (17,616)
Advances to subsidiaries, net 56,310 135,690 (62,085)
-------------- --------------- ---------------
Net cash used by investing activities (713,895) (1,092,907) (721,379)
-------------- --------------- ---------------
Cash flows from financing activities:
Net proceeds from issuance
of long-term debt 196,108 --- 197,113
Net repayment from retirement of
short-term debt --- --- (20,000)
Dividends paid (80,708) (79,764) (85,667)
Purchase of treasury stock (77,955) (24,698) ---
Proceeds from issuance of municipal
investment and repurchase agreements 2,478,519 2,547,714 2,065,200
Payments for drawdowns of
municipal investment agreements (2,141,733) (1,373,250) (1,306,389)
Securities loaned or sold under
agreements to repurchase, net 147,422 (7,493) (98,229)
Exercise of stock options 23,683 14,616 30,708
-------------- --------------- ---------------
Net cash provided by financing activities 545,336 1,077,125 782,736
-------------- --------------- ---------------
Net increase in cash and
cash equivalents 9,395 16,112 1,286
Cash and cash equivalents
- beginning of year 21,289 5,177 3,891
-------------- --------------- ---------------
Cash and cash equivalents
- end of year $ 30,684 $ 21,289 $ 5,177
============== =============== ===============
Supplemental cash flow disclosures:
Income taxes paid $ 1,411 $ 149 $ 618
Interest paid:
Long-term debt 52,388 52,338 39,499
Short-term debt --- --- 1,057
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto and the accompanying notes.
44
SCHEDULE II
MBIA INC. (PARENT COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. CONDENSED FINANCIAL STATEMENTS
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these
condensed financial statements be read in conjunction with the Company's
consolidated financial statements and the notes thereto.
2. SIGNIFICANT ACCOUNTING POLICIES
The Parent company carries its investments in subsidiaries under the equity
method.
3. DIVIDENDS FROM SUBSIDIARIES
During 2000 and 1999, MBIA Corp. declared and paid dividends of $197.3
million and $180.0 million to MBIA Inc. In addition, MBIA Asset Management
Corp. declared and paid dividends of $25.0 million and $9.0 million to MBIA
Inc. during 2000 and 1999, respectively. No dividends were paid by MBIA
Corp. to MBIA Inc. in 1998.
4. OBLIGATIONS UNDER MUNICIPAL INVESTMENT AND REPURCHASE AGREEMENTS
The municipal investment and repurchase agreement business, as described in
footnotes 2 and 17 to the consolidated financial statements of MBIA Inc.
and Subsidiaries (which are incorporated by reference in the 10-K), is
conducted by both the Registrant and its wholly owned subsidiary, MBIA
Investment Management Corp.
45
SCHEDULE IV
MBIA INC. AND SUBSIDIARIES
REINSURANCE
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(In thousands)
- -------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
PERCENTAGE
INSURANCE GROSS CEDED TO OTHER ASSUMED FROM OF AMOUNT
PREMIUMS WRITTEN AMOUNT VALUE OTHER COMPANIES NET AMOUNT ASSUMED TO NET
- -------------------------------------------------------------------------------------------------------------------
2000 $641,452 $189,316 $45,956 $498,092 9.2%
---- -------- -------- ------- -------- ----
1999 $590,597 $171,256 $34,274 $453,615 7.6%
---- -------- -------- ------- -------- ----
1998 $664,269 $156,064 $12,781 $520,986 2.5%
---- -------- -------- ------- -------- ----
46
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
- --------------------------------------------------------------------------------
EXHIBITS
TO
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
COMMISSION FILE NO. 1-9583
- --------------------------------------------------------------------------------
MBIA INC.
47
EXHIBIT INDEX
3.1. Restated Certificate of Incorporation, dated August 17, 1990,
incorporated by reference to Exhibit 3.1 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1990 (Comm. File 1-9583) (the "1990
10-K"), as amended December 20, 1995.
4.2 Bond Purchase and Paying Agent Agreement between MBIA Inc. and
various banks, entered into as of December 12, 2000 in connection with CHF
175,000,000 4.5% Bonds, due June 15, 2010.
10.04. First Restated Credit Agreement, dated as of October 1, 1993,
among MBIA Corp., Credit Suisse, New York Branch, as Agent, Credit Suisse, New
York Branch, Caisse Des Depots Et Consignations, Deutsche Bank AG, Bayerische
Landesbank Girozentrale and Landesbank Hessen-Thuringen Girozentrale, as amended
by an Assignment and Assumption Agreement, dated as of December 31, 1993, among
MBIA Corp., Credit Suisse, New York Branch, as Agent and Assignor and Deutsche
Bank AG, New York Branch, as further amended by a Modification Agreement, dated
as of January 1, 1994, among Deutsche Bank, AG, New York Branch, MBIA Corp. and
Credit Suisse, New York Branch, as Agent, as amended by a Joinder Agreement,
dated December 31, 1993, among Credit Suisse, New York Branch, as Agent,
Sudwestdeutsche Landesbank Girozentrale and MBIA Corp., incorporated by
reference to Exhibit 10.78 to the 1993 10-K, as amended by the First Amendment
to First Restated Credit Agreement, dated as of September 23, 1994, incorporated
by reference to Exhibit 10.63 to the 1994 10-K, as further amended by the Second
Amendment to the First Restated Credit Agreement, dated as of January 1, 1996,
and as further amended by the Third Amendment to the First Restated Credit
Agreement, dated as of October 1, 1996, incorporated by reference to Exhibit
10.57 to the 1996 10-K, as further amended and restated by the Second Amended
and Restated Credit Agreement, dated as of October 1, 1997, incorporated by
reference to Exhibit 10.46 to the 1997 10-K, as further amended by the First
Amendment to Second Amended and Restated Credit Agreement, dated as of October
1, 1998, incorporated by reference to Exhibit 10.13 to the 1998 10-K, as further
amended and restated by the Second Amendment to the Second Amended and Restated
Credit Agreement, dated as of October 29, 1999, incorporated by reference to
Exhibit 10.13 to the 1999 10-K, as further amended and restated by the Third
Amendment to the Second Amendment and Restated Credit Agreement, dated as of
October 27, 2000.
10.14. Credit Agreement (364 day agreement) among the Company, MBIA
Corp., various designated borrowers, various lending institutions, Deutsche Bank
AG, New York Branch, as Administrative Agent, The First National Bank of
Chicago, as Syndication Agent and Fleet National Bank, as Documentation Agent,
dated as of August 28, 1998, incorporated by reference to Exhibit 10.33 to the
1998 10-K, incorporated by reference to Exhibit 10.33 to the 1999 10-K, as
amended by a Notice of Extension of Final Maturity Date, with various lending
institutions, dated as of August 2000.
10.15. Credit Agreement (5 year agreement) among the Company, MBIA
Corp., various designated borrowers, various lending institutions, Deutsche Bank
AG, New York Branch, as Administrative Agent, The First National Bank of
Chicago, as Syndication Agent and Fleet National Bank, as Documentation Agent,
dated as of August 28, 1998, incorporated by reference to Exhibit 10.34 to the
1998 10-K, incorporated by reference to Exhibit 10.34 to the 1999 10-K, as
amended by a Notice of Extension of Final Maturity Date, with various lending
institutions, dated as of August 2000.
10.19. ISDA Master Agreement, dated May 2, 2000, between Deutsche Bank
AG and MBIA Inc., as supplemented by the Schedule to the ISDA Master Agreement
and the Credit Support Annex.
10.20. MBIA Inc. 2000 Stock Option Plan, effective May 11, 2000.
10.28. CapMAC Employee Stock Ownership Plan, incorporated by reference
to Exhibit 10.18 to the CapMAC Form S-1, as Amended and Restated, effective
January 1, 1999.
10.30. ESOP Loan Agreement by and between MBIA Inc. and the CapMAC
Employee Stock Ownership Plan Trust, dated June 30, 1999.
10.46. Key Employee Employment Protection Agreement between MBIA Inc.
and John S. Pizzarelli, dated March 14, 2000.
48
10.47. Key Employee Employment Protection Agreement between MBIA Inc.
and Ram D. Wertheim, dated January 24, 2000.
10.48. Key Employee Employment Protection Agreement between MBIA Inc.
and Robert T. Wheeler, dated April 17, 2000.
10.49. Key Employee Employment Protection Agreement between MBIA Inc.
and Mark S. Zucker, dated March 14, 2000.
13. Annual Report to Shareholders of MBIA Inc. for fiscal year ended
December 31, 2000. Such report is furnished for the information of the
Commission only and, except for those portions thereof which are expressly
incorporated by reference in this Annual Report on Form 10-K, is not to be
deemed filed as part of this report.
21. List of Subsidiaries
23. Consent of PricewaterhouseCoopers LLP
99. Additional Exhibits - MBIA Corp. GAAP Financial Statements