EX-13 15 y46810ex13.txt ANNUAL REPORT TO SHAREHOLDERS 1 EXHIBIT 13 SELECTED FINANCIAL AND STATISTICAL DATA MBIA Inc. and Subsidiaries
Dollars in millions except per share amounts 2000 1999 1998 1997 1996 1995 1994 1993 ------------------------------------------------------------------------------------------------------------------------------ GAAP SUMMARY INCOME STATEMENT DATA: Insurance: Gross premiums written $ 687 $ 625 $ 677 $ 654 $ 535 $ 406 $ 405 $ 504 Premiums earned 446 443 425 351 294 244 241 249 Net investment income 394 359 332 302 265 233 204 189 Total insurance expenses 170 315 140 141 117 100 89 86 Insurance income 698 515 643 530 453 385 360 353 Investment management services income (loss) 56 41 29 17 18 11 5 (1) Income before income taxes 715 388 565 525 448 375 347 339 NET INCOME 529 321 433 406 348 290 270 268 NET INCOME PER COMMON SHARE BASIC 5.37 3.22 4.37 4.18 3.68 3.21 3.00 3.00 DILUTED 5.33 3.19 4.32 4.12 3.62 3.15 2.96 2.95 ------------------------------------------------------------------------------------------------------------------------------ GAAP SUMMARY BALANCE SHEET DATA: Total investments 12,233 10,694 10,080 8,908 8,008 6,937 5,069 3,735 Total assets 13,894 12,264 11,826 10,387 9,033 7,671 5,712 4,320 Deferred premium revenue 2,398 2,311 2,251 2,090 1,854 1,662 1,538 1,413 Loss and LAE reserves 499 467 300 105 72 50 47 37 Municipal investment and repurchase agreements 4,789 4,513 3,485 3,151 3,259 2,642 1,526 493 Long-term debt 795 689 689 489 389 389 314 314 Shareholders' equity 4,223 3,513 3,792 3,362 2,761 2,497 1,881 1,761 Book value per share 42.89 35.34 38.15 34.09 28.98 27.02 20.92 19.77 Dividends declared per common share 0.820 0.805 0.790 0.770 0.725 0.655 0.570 0.470 ------------------------------------------------------------------------------------------------------------------------------ STATUTORY DATA: Net income 544 522 510 404 335 287 229 263 Capital and surplus 2,382 2,413 2,290 1,952 1,661 1,469 1,250 1,124 Contingency reserve 2,123 1,739 1,451 1,188 959 788 652 561 ------------------------------------------------------------------------------------------------------------------------------ Capital base 4,505 4,152 3,741 3,140 2,620 2,257 1,902 1,685 Unearned premium reserve 2,465 2,376 2,324 2,193 1,971 1,768 1,640 1,484 Loss and LAE reserves 209 204 188 15 10 7 22 8 ------------------------------------------------------------------------------------------------------------------------------ Policyholders' reserves 7,179 6,732 6,253 5,348 4,601 4,032 3,564 3,177 Present value of installment premiums 886 732 644 537 443 347 249 234 Standby line of credit / stop-loss 1,075 1,075 900 900 775 700 650 625 ------------------------------------------------------------------------------------------------------------------------------ TOTAL CLAIMS-PAYING RESOURCES 9,140 8,539 7,797 6,785 5,819 5,079 4,463 4,036 ------------------------------------------------------------------------------------------------------------------------------ FINANCIAL RATIOS: GAAP Loss and LAE reserves 11.5% 44.8% 8.2% 9.1% 6.9% 5.6% 3.9% 3.5% Underwriting expense ratio 26.7 26.4 24.7 31.0 32.9 35.2 32.9 31.2 Combined ratio 38.2 71.2 32.9 40.1 39.8 40.8 36.8 34.7 Statutory Loss and LAE reserves 6.2 12.3 8.0 1.2 1.7 0.4 8.7 (3.3) Underwriting expense ratio 22.1 23.6 16.8 21.2 22.8 27.2 28.3 22.0 Combined ratio 28.3 35.9 24.8 22.4 24.5 27.6 37.0 18.7 NET DEBT SERVICE OUTSTANDING $680,878 $635,883 $595,895 $513,736 $434,417 $359,175 $315,340 $273,630 NET PAR AMOUNT OUTSTANDING $418,443 $384,459 $359,472 $303,803 $252,896 $201,326 $173,760 $147,326 --------------------------------------------------------------------------------------------------------------------------- Dollars in millions except per share amounts 1992 1991 ------------------------------------------------------- GAAP SUMMARY INCOME STATEMENT DATA: Insurance: Gross premiums written $ 377 $ 269 Premiums earned 169 132 Net investment income 155 132 Total insurance expenses 65 59 Insurance income 260 207 Investment management services income (loss) (1) (2) Income before income taxes 249 190 NET INCOME 193 145 NET INCOME PER COMMON SHARE BASIC 2.24 1.89 DILUTED 2.20 1.87 ------------------------------------------------------- GAAP SUMMARY BALANCE SHEET DATA: Total investments 2,701 1,961 Total assets 3,234 2,438 Deferred premium revenue 1,202 1,019 Loss and LAE reserves 28 21 Municipal investment and repurchase agreements -- -- Long-term debt 314 199 Shareholders' equity 1,533 1,063 Book value per share 17.19 13.79 Dividends declared per common share 0.380 0.310 ------------------------------------------------------- STATUTORY DATA: Net income 194 149 Capital and surplus 1,044 647 Contingency reserve 419 316 ------------------------------------------------------- Capital base 1,463 963 Unearned premium reserve 1,248 1,044 Loss and LAE reserves 14 12 ------------------------------------------------------- Policyholders' reserves 2,725 2,019 Present value of installment premiums 211 151 Standby line of credit / stop-loss 550 500 ------------------------------------------------------- TOTAL CLAIMS-PAYING RESOURCES 3,486 2,670 ------------------------------------------------------- FINANCIAL RATIOS: GAAP Loss and LAE ratio 3.6% 13.0% Underwriting expense ratio 34.6 30.1 Combined ratio 38.2 43.1 Statutory Loss and LAE ratio 2.3 12.7 Underwriting expense ratio 20.7 20.4 Combined ratio 23.0 33.1 NET DEBT SERVICE OUTSTANDING $225,220 $ 184,604 NET PAR AMOUNT OUTSTANDING $114,317 $ 90,043 -------------------------------------------------------
(34 & 35) 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MBIA Inc. and Subsidiaries OVERVIEW -------- MBIA Inc. (MBIA or the company) is engaged in providing financial guarantee insurance, investment management services and municipal services to public finance clients and financial institutions on a global basis. The company turned in a solid year as we continue to focus on our Triple-A ratings, no-loss underwriting standards and building shareholder value. Our insurance operations showed strong growth in the structured finance and international businesses, which helped offset reduced activity in the domestic public finance market. Our investment management operations had a record year in assets under management and operating earnings. Looking forward, the company is well positioned to take advantage of very favorable growth prospects domestically and internationally across all of our business lines. FORWARD-LOOKING AND CAUTIONARY STATEMENTS ----------------------------------------- Statements included in this annual report 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 to their respective dates. The following are some of the factors that could affect our financial performance or could cause actual results to differ materially from estimates contained in or underlying the company's forward-looking statements: * fluctuations in the economic, credit or interest rate environment in the United States and abroad; * the level of activity within the national and international credit markets; * competitive conditions and pricing levels; * legislative and regulatory developments; * technological developments; * changes in tax laws; * the effects of mergers, acquisitions and divestitures; and, * uncertainties that have not been identified at this time. The company undertakes no obligation to publicly correct or update any forward-looking statement if we later become aware that such results are not likely to be achieved. NEW ACCOUNTING PRONOUNCEMENT ---------------------------- In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 133, "Accounting for Derivative Instruments and Hedging Activities" which is effective for the company as of January 1, 2001. SFAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives will be recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge, and if so, the use and type of the hedge. The company has entered into derivative transactions that do not qualify for the financial guarantee scope exception under SFAS 133 and, therefore, must be stated at fair value. The Insurance segment, which represents the majority of the company's derivative exposure and mark-to-market as of January 1, 2001, has insured derivatives primarily consisting of credit default swaps. The Investment Management Services segment has entered into primarily forward delivery agreements, interest rate and credit default swaps. The Corporate segment has entered into derivatives to hedge foreign exchange and interest rate risks related to the issuance of certain MBIA long-term debt issues. Adoption of SFAS 133 on January 1, 2001 will result in cumulative after-tax reductions in net income of approximately $12 million and other comprehensive income of approximately $4 million. In addition, the company will increase its assets by approximately $50 million and liabilities by approximately $66 million on an after-tax basis. RESULTS OF OPERATIONS --------------------- SUMMARY The company uses various measures of profitability and intrinsic value, namely, "core earnings", "operating earnings", "adjusted gross premiums" and "adjusted book value" which are not in accordance with accounting principles generally accepted in the United States of America. We view these measures as the most meaningful measures of our performance and the intrinsic value of the company. The following chart presents highlights of our consolidated financial results for 2000, 1999 and 1998. Percent Change -------------- 2000 1999 vs. vs. 2000 1999 1998 1999 1998 -------------------------------------------------------------------------------- Net income (in millions): As reported $529 $321 $433 65% (26)% Excluding one- time charges $529 $490 $482 8% 2% -------------------------------------------------------------------------------- Per share data:* Net income: As reported $5.33 $3.19 $4.32 67% (26)% Excluding one- time charges $5.33 $4.88 $4.81 9% 1% Operating earnings $5.12 $4.72 $4.58 8% 3% Core earnings $4.91 $4.34 $4.19 13% 4% Book value $42.89 $35.34 $38.15 21% (7)% Adjusted book value $60.40 $52.51 $53.28 15% (1)% -------------------------------------------------------------------------------- *All earnings per share calculations are diluted. Core earnings, which exclude the effects of refundings and calls on our insured issues, realized gains and losses on our investment portfolio and one-time charges, provide the most meaningful measure of our underlying profit. Core earnings per share at $4.91 for 2000 grew by 13% over 1999, following a 4% increase in 1999. The 2000 growth in core earnings per share was the result of a 42% increase in investment management services over 1999 and the elimination of losses in our municipal services segment. Insurance operations had growth in core earnings per share of 9% in 2000 compared with growth of 4% in 1999, although higher levels of reinsurance cessions continue to depress the growth in insurance operations income. (36) 3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MBIA Inc. and Subsidiaries Our 2000 net income increased by 8%, excluding one-time charges in 1999, or by 9% on a per share basis. In 1999 net income increased by 2% over 1998, excluding the one-time charges, which resulted in a 1% per share increase. Compared with core earnings per share, these results were lower due to the low level of refunding activity in 2000, with premiums earned from refundings down 47% compared with 1999. Net income as reported increased by 65% in 2000 over 1999, compared with a 26% decrease in 1999 over 1998. These variances are due to the one-time charges incurred in 1999. Operating earnings per share, which include refundings but exclude the impact of realized gains and losses and one-time charges, increased by 8% and 3% for 2000 and 1999, respectively. The increases in operating earnings per share were consistent throughout the year and highlight the predictable earnings pattern of the company. Our book value at year-end 2000 was $42.89 per share, up 21% from $35.34 at year-end 1999. The increase was caused primarily by a 150% increase in the unrealized appreciation of our investment portfolio and an 18% increase in retained earnings, partially offset by the increase in treasury stock from share repurchases. A more appropriate measure of a financial guarantee company's intrinsic value is its adjusted book value. Adjusted book value is defined as book value plus the after-tax effects of net deferred premium revenue net of deferred acquisition costs, the present value of unrecorded future installment premiums, and the unrealized gains or losses on investment contract liabilities. Our adjusted book value per share was $60.40 at year-end 2000, a 15% increase from year-end 1999 following a 1% decline in the preceding year. The 2000 increase reflects the same factors that impacted book value, but is reduced by lower growth in net deferred premium revenue and a reduction in unrealized gains on investment contract liabilities. The following table presents the components of our adjusted book value per share: Percent Change -------------- 2000 1999 vs. vs. 2000 1999 1998 1999 1998 -------------------------------------------------------------------------------- Book value $42.89 $35.34 $38.15 21% (7)% After-tax value of: Net deferred premium revenue, net of deferred acquisition costs 11.09 10.83 10.91 2% (1)% Present value of future installment premiums* 5.85 4.78 4.21 22% 14% Unrealized gain on investment contract liabilities 0.57 1.56 0.01 (63)% n/m -------------------------------------------------------------------------------- Adjusted book value $60.40 $52.51 $53.28 15% (1)% -------------------------------------------------------------------------------- * The discount rate used to present value future installment premiums was 9%. FINANCIAL GUARANTEE INSURANCE MBIA's production in terms of adjusted gross premiums (AGP), gross premiums written (GPW) and par insured for the last three years is presented in the following table: Percent Change -------------- 2000 1999 vs. vs. 2000 1999 1998 1999 1998 -------------------------------------------------------------------------------- Premiums written (in millions): AGP $803 $724 $832 11% (13)% GPW $687 $625 $677 10% (8)% Par insured (in billions): $ 99 $ 92 $119 7% (23)% -------------------------------------------------------------------------------- In 2000, our top line results continue to reflect a more profitable relationship between AGP and par insured for the period. AGP is composed of our upfront premiums as well as the estimated present value of current and future premiums from installment-based insurance policies issued in the period. AGP was up 11%, while total par insured was up 7% which translates into more premiums for each dollar of par value insured. This continues to be indicative of price improvements across our whole book of business and is consistent with our strategy to improve profitability on the business written. Furthermore, we did not sacrifice credit quality to capture higher prices as 75% of the business written in 2000 was rated A or above. The average credit rating on new business in each of our insurance divisions continued to improve. As an industry leader, MBIA maintained a conservative 9% discount rate when calculating AGP, and still continued to lead the market in terms of AGP market share at 40% for 2000, 37% for 1999 and 46% for 1998. We estimate the present value of our total future installment premium stream on outstanding policies to be $885 million at year-end 2000, compared with $732 million at year-end 1999 and $644 million at year-end 1998. The 21% growth in 2000 is due to the increase in structured finance and international installment insured policies. GPW, as reported in our financial statements, primarily reflects cash receipts and does not include the value of future premium receipts expected from installment policies originated in the period. GPW increased 10% in 2000 following an 8% decline in 1999 as both structured finance and international had significant growth over the prior year, partially offset by a modest decline in public finance. PUBLIC FINANCE MARKET > Domestic new issue public finance market information and MBIA's par and premium writings in both the new issue and secondary domestic public finance markets are shown in the following table: Percent Change -------------- 2000 1999 Domestic vs. vs. Public Finance 2000 1999 1998 1999 1998 -------------------------------------------------------------------------------- Total new issue market:* Par value (in billions) $168 $199 $257 (16)% (22)% Insured penetration 47% 52% 55% MBIA market share 28% 26% 36% MBIA insured: Par insured (in billions) $ 33 $ 36 $ 60 (11)% (39)% Premiums (in millions): AGP $361 $378 $435 (5)% (13)% GPW $332 $349 $431 (5)% (19)% -------------------------------------------------------------------------------- * Market data are reported on a sale date basis while MBIA's insured data are based on closing date information. Typically, there can be a one to four week delay between the sale date and closing date of an insured issue. (37) 4 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MBIA Inc. and Subsidiaries Although MBIA's public finance par insured for 2000 was down 11% compared with last year, the insured market was down 25%, indicative of our better than market performance. AGP declined 5% in 2000 compared with a 13% decrease in 1999. The greater decline in par insured compared with AGP once again exemplifies the positive effects of our pricing discipline. This relationship between par insured and AGP was exhibited in most sectors within the public finance business. Issues rated A and above remained over 80% for the third year in a row and the Standard & Poor's (S&P) capital charges, which are intended to represent the likelihood of default as well as the magnitude of losses under default, were the lowest they have been for many years. MBIA continued to lead the industry in terms of market share for both AGP and par insured, as we recorded a market share of 43% for AGP and 28% for par insured. STRUCTURED FINANCE MARKET > The details regarding the asset-backed market and MBIA's par and premium writings in both the domestic new issue and secondary domestic structured finance markets are shown in the table below: Percent Change -------------- 2000 1999 Domestic vs. vs. Structured Finance 2000 1999 1998 1999 1998 -------------------------------------------------------------------------------- Total asset-backed market:* Par value (in billions) $230 $191 $167 20% 14% MBIA insured: Par insured (in billions) $48 $48 $48 -- -- Premiums (in millions): AGP $278 $229 $208 22% 10% GPW $188 $159 $134 18% 18% -------------------------------------------------------------------------------- * Market data exclude mortgage-backed securities and private placements. For the year AGP was up 22% after an increase of 10% in 1999. For 2000, par insured was $48 billion, which is consistent with the last two years. Here too, the relationship of AGP to par insured was positive and is indicative of our pricing discipline. In 2000, 63% of the business written was rated A or better compared with 54% in 1999, with a substantial portion rated Triple-A before our guarantee. During 2000 and 1999 we saw a decline in mortgage related business, however, this was more than offset by an increase in other asset-backed business. Despite the fact that we use a higher discount rate (9%) than others in the industry, we continue to lead in terms of AGP market share at 37% for 2000, 32% for 1999, and 44% for 1998. INTERNATIONAL MARKET > Our company's international business volume in the new issue and secondary markets for the last three years is illustrated as follows: Percent Change -------------- 2000 1999 vs. vs. International 2000 1999 1998 1999 1998 -------------------------------------------------------------------------------- Par insured (in billions) $18 $8 $11 144% (29)% Premiums (in millions): AGP $164 $117 $189 40% (38)% GPW $167 $117 $112 43% 4% -------------------------------------------------------------------------------- International business tends to be less predictable and results will vary from year to year. Par insured was up 144% in 2000 after being down 29% in 1999, while AGP was up 40% after being down 38% in 1999. Almost 90% of business written in 2000 was rated A or better, substantially more than the 60% rated A or better written in 1999. This accounts for the weakening of the AGP to par insured ratio. Our share of international AGP in 2000 was approximately 37%, despite using a higher discount rate (9%) than the rest of the industry. On March 21, 2000 the company and Ambac Financial Group, Inc. (Ambac) announced the restructuring of the international joint marketing and reinsurance arrangements that have been in place since 1995 with the formation of the MBIA-AMBAC International joint venture. The company and Ambac will continue having certain reciprocal reinsurance arrangements for international business in 2001 but will market and originate international business independently. Additionally, during the third quarter of 2000 the company and Ambac dissolved a four-way joint venture in Japan. REINSURANCE > Premiums ceded to reinsurers from all insurance operations were $189 million, $171 million, and $156 million in 2000, 1999 and 1998, respectively. Cessions as a percentage of GPW increased to 28% in 2000 from 27% in 1999 and 23% in 1998. The increase in our cession rate since 1998 reflects increased cessions across all business lines, especially in public finance and international. Reinsurance is a cost effective capital substitute for MBIA. In addition to treaty reinsurance, the decision of whether to reinsure any particular policy on a facultative basis is based on portfolio, single risk and other factors related to that policy. These reinsurance activities continue to have a positive impact and are consistent with our emphasis on a strong balance sheet. In fact, the ratio of insured net debt service outstanding to our statutory capital base at year-end was 151:1, down from 153:1 at the end of 1999. At year-end 2000, 98% of our outstanding ceded exposure is with reinsurers who are rated Double-A or higher by S&P, or Single-A or higher by A. M. Best Co. Although we remain liable for all reinsured risks, we are confident that we will recover the reinsured portion of any losses, should they occur. PREMIUMS EARNED > The composition of MBIA's premiums earned in terms of its scheduled and refunded components is illustrated as follows: (38) 5 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MBIA Inc. and Subsidiaries Percent Change -------------- 2000 1999 vs. vs. In millions 2000 1999 1998 1999 1998 -------------------------------------------------------------------------------- Premiums earned: Scheduled $412 $379 $357 9% 6% Refunded 34 64 68 (47)% (6)% -------------------------------------------------------------------------------- Total $446 $443 $425 1% 4% -------------------------------------------------------------------------------- Upfront premiums are recognized over the life of the bonds we insure. The extended premium recognition coupled with compounding investment income from investing our premiums and capital form a solid foundation for consistent revenue growth. In 2000, premiums earned from scheduled amortization increased by 9%, augmented by the disciplined pricing strategy established in early 1999. In 1999 scheduled premiums earned grew only 6% because of the increased usage of reinsurance. Refunded premiums earned declined significantly in 2000 after a slight decrease in 1999, primarily reflecting the higher interest rate environment. When an MBIA-insured bond issue is refunded or retired early, the related deferred premium revenue is earned immediately. The amount of bond refundings and calls is influenced by a variety of factors such as prevailing interest rates, the coupon rates of the bond issue, the issuer's desire or ability to modify bond covenants and applicable regulations under the Internal Revenue Code. NET INVESTMENT INCOME > Our insurance-related investment income (exclusive of net realized gains) was $394 million, up from $359 million in 1999 and $332 million in 1998. These increases were primarily due to the growth of cash flow available for investment and a shift in the investment portfolio from tax-exempt to taxable investments. Our cash flows were generated from operations, the compounding of previously earned and reinvested investment income and the addition of funds from financing activities. ADVISORY FEES > The company collects fee revenues in conjunction with certain insured transactions. In addition, the company earns advisory fees in connection with its administration of certain third-party-owned conduits. Fees are generally deferred and earned over the life of the related transactions. Certain fees, however, are earned in the quarter they are due and include administrative fees for transactions where the fee is collected on a periodic installment basis, and fees for transactions that terminate prior to the expected maturity date. Advisory fee revenues increased 3% in 2000. This modest increase was due to a 13% increase in the recognition of previously deferred fees partially offset by a reduction in non-deferrable fees. LOSSES AND LOSS ADJUSTMENT EXPENSES (LAE) > We maintain a loss and LAE reserve based on our estimate of unidentified losses from our insured obligations. The total reserve is calculated by applying a risk factor based on a study of issuer defaults to net debt service written. To the extent that we identify a specific insured issue with respect to which we anticipate a loss, the present value of our expected payment, net of expected reinsurance and recoveries, is allocated within the total loss and LAE reserve as a case-specific reserve. We periodically evaluate our estimates for losses and LAE and any resulting adjustments are reflected in current earnings. We believe that our reserving methodology and the resulting reserves are adequate to cover the ultimate net cost of claims. However, the reserves are based on estimates, and there can be no assurance that any ultimate liability will not exceed such estimates. In 2000 and 1999 we reviewed our loss reserving methodology. Each review included an analysis of loss-reserve factors based on the latest available industry data, an analysis of historical default and recovery experience for the relevant sectors of the fixed-income market, and consideration for the changing mix of our book of business. For the 2000 review, there were no adjustments to the company's loss and LAE reserves. For 1999, the review resulted in an increase in our company's current loss and LAE reserving factors and a one-time charge of $153 million. The following table shows the case-specific, reinsurance recoverable and unallocated components of our total loss and LAE reserves at the end of the last three years, as well as our loss provision for the last three years: Percent Change -------------- 2000 1999 vs. vs. In millions 2000 1999 1998 1999 1998 -------------------------------------------------------------------------------- Case-specific: Gross $240 $235 $219 2% 8% Reinsurance recoverable on unpaid losses 31 31 30 -- 3% -------------------------------------------------------------------------------- Net case reserves $209 $204 $189 2% 8% Unallocated reserves 259 232 81 12% 185% -------------------------------------------------------------------------------- Net loss and LAE reserves $468 $436 $270 7% 62% -------------------------------------------------------------------------------- Provision $ 51 $198 $ 35 (74)% 472% -------------------------------------------------------------------------------- POLICY ACQUISITION COSTS AND OPERATING EXPENSES > Expenses related to the production of our insurance business (policy acquisition costs) are deferred and recognized over the period in which the related premiums are earned. Our company's policy acquisition costs, operating expenses and total insurance operating expenses, as well as related expense ratios, are shown below: Percent Change -------------- 2000 1999 vs. vs. In millions 2000 1999 1998 1999 1998 -------------------------------------------------------------------------------- Policy acquisition costs, net $ 36 $ 37 $ 35 (2)% 6% Operating expenses 83 80 70 4% 14% -------------------------------------------------------------------------------- Total insurance operating expenses $119 $117 $105 2% 11% Expense ratio: GAAP 26.7% 26.4% 24.7% Statutory 22.1% 23.6% 16.8% -------------------------------------------------------------------------------- (39) 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MBIA Inc. and Subsidiaries For 2000, policy acquisition costs, net of deferrals, decreased slightly to $36 million, or 2% below 1999's $37 million. This compares with $35 million in 1998. The decrease in 2000 is attributable to the company's increased focus on expense management and overall effort to control expense growth. The ratio of policy acquisition costs, net of deferrals, to earned premiums has remained steady at 8% in 2000, 1999 and 1998. Operating expenses increased by 4% in 2000 following an increase of 14% in 1999. The increase in 2000 was due to the company's increased building and equipment related costs associated with its expanded Armonk, New York headquarters. The increase in 1999 was the result of expanded international operations. Financial guarantee insurance companies also calculate a statutory expense ratio (insurance operating expenses before deferrals as a function of net premiums written) as a measure of expense management. The decrease in our statutory expense ratio for 2000 reflects increased net premium written and attentive expense control. The increase in 1999 was related to a decline in premium volume for the year. INSURANCE INCOME > In 2000 MBIA's insurance income increased to $698 million or 36% from the $515 million recorded in 1999. This increase reflects the one-time addition to the loss and LAE reserves mentioned previously, which reduced 1999's insurance income by $153 million. Excluding this factor insurance income increased by 5%. In 1999 insurance income, adjusted for the one-time loss and LAE reserve addition, increased 4% over 1998, reflecting revenue growth in the structured finance and international businesses. INVESTMENT MANAGEMENT SERVICES In 1998, after our merger with 1838 Investment Advisors, Inc. (1838), we formed a holding company, MBIA Asset Management Corporation, to consolidate the resources and capabilities of our four investment management services. The success of our merger with 1838 showed immediate operating benefits and all of our investment management franchises experienced record performances in 1999. Continuing in this vein, operating income in 2000 increased by 38% and we ended the year with over $36 billion in assets under management, a record, up 22% from a year ago. Gains in assets under management were across the board, with all units showing strong growth. The table below summarizes our consolidated investment management results over the last three years: Percent Change -------------- 2000 1999 vs. vs. In millions 2000 1999 1998 1999 1998 -------------------------------------------------------------------------------- Revenues $119 $ 87 $65 37% 33% Expenses 63 46 36 36% 28% -------------------------------------------------------------------------------- Operating income $ 56 $ 41 $29 38% 40% -------------------------------------------------------------------------------- MBIA Asset Management Corporation is comprised of 1838, MBIA Municipal Investors Services Corporation (MBIA-MISC), MBIA Investment Management Corp. (IMC) and MBIA Capital Management Corp. (CMC). The following provides a summary of each of these businesses: 1838 > is a full-service asset management firm with a strong institutional focus. It manages over $14 billion in equity, fixed-income and balanced portfolios for a client base comprised of municipalities, endowments, foundations, corporate employee benefit plans and high-net-worth individuals. In 2000, assets under management were up 27% compared with 57% growth in 1999. MBIA-MISC > provides cash management, investment fund administration and fixed-rate investment placement services directly to local governments and school districts. In late 1996, MBIA-MISC acquired American Money Management Associates, Inc. (AMMA), which provides investment and treasury management consulting services for municipal and quasi-public-sector clients. In May 2000, MBIA-MISC merged with AMMA and combined the investment expertise into a consolidated investment management business. MBIA-MISC is a Securities and Exchange Commission (SEC)-registered investment adviser and at year-end had $7.9 billion in assets under management, up 20% over 1999's $6.6 billion. IMC > provides state and local governments with tailored investment agreements for bond proceeds and other public funds, such as construction, loan origination, capitalized interest and debt service reserve 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. At amortized cost, the assets supporting IMC's investment agreements were $4.9 billion and $4.6 billion at year-end 2000 and 1999, respectively. These assets are comprised of high-quality securities with an average credit quality rating of Double-A. CMC > is an SEC-registered investment adviser and National Association of Securities Dealers member firm. CMC specializes in fixed-income management for institutional funds and provides investment management services for IMC's investment agreements, MBIA-MISC's municipal cash management programs and MBIA's insurance related portfolios. At year-end 2000, CMC's third party assets under management increased by 27% over year-end 1999. MUNICIPAL SERVICES MBIA MuniServices Company (MBIA MuniServices) was established in 1996 as part of the company's strategy to broaden its product offerings to its core clients, leveraging its relationships and presence as a leading provider of products and services to the public sector. During 1999, the company completed a reorganization of the operations of two subsidiaries, Municipal Tax Bureau (MTB) and Municipal Resource Consultants (MRC). (40) 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MBIA Inc. and Subsidiaries With the reorganization complete, this business, operating as MBIA MuniServices, is now focused on delivering revenue enhancement services and products to public-sector clients nationwide, consisting of discovery, audit, collections/recovery, enforcement and information (data) services. The Municipal Services segment also includes Capital Asset Holdings GP, Inc. and certain affiliated entities (Capital Asset), a servicer of delinquent tax certificates. In 2000, Municipal Services had operating income of $600 thousand compared with a loss of $12 million in 1999 and a loss of $11 million in 1998. This turnaround was due to operating income from MRC and a breakeven result for Capital Asset. Both subsidiaries recorded operating losses in 1999 and 1998. The company is a majority owner of Capital Asset which 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 the company's founder. In 1999, the company recorded a $102 million pre-tax charge related to its investment in Capital Asset. MBIA Insurance Corp. continues to insure three securitizations of tax liens that were originated and continue to be serviced by Capital Asset. 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 portfolios supporting the securitizations. As of December 31, 2000, the aggregate gross insured amounts in connection with these securitizations was approximately $318 million, and there can be no assurance that MBIA Corp. will not incur losses under such policies. In addition, Capital Asset and its subsidiaries have other contingent liabilities, including potential liabilities in connection with pending lawsuits, including class action lawsuits, in which it is involved. The claims giving rise to these lawsuits arose as a result of Capital Asset's business activities that took place primarily before the company obtained its majority ownership of Capital Asset. Capital Asset is defending these lawsuits. During the second quarter of 1999, MBIA MuniServices Company sold its wholly owned subsidiary MBIA Muni-Financial, recognizing a $3 million pre-tax loss on disposition, which is recorded in one-time charges. During 1998, the company recorded reorganization-related pre-tax charges totaling $20 million consisting of the write-off of goodwill and other asset impairments, which is also recorded in one-time charges. CORPORATE NET REALIZED GAINS > In 2000, net realized gains increased 31% to $33 million from $25 million in 1999, which decreased 28% from $35 million in 1998. These gains were generated as a result of ongoing management of the investment portfolio. INTEREST EXPENSE > In 2000, 1999 and 1998, respectively, we incurred $54 million, $54 million and $45 million of interest expense. The increase in 1999 in interest expense reflects our long-term debt financings of $50 million in November 1998 and $150 million in September 1998. OTHER EXPENSES > Other expenses are composed primarily of general corporate expenses. In 2000, other expenses were $19 million compared with $21 million in 1999 and $11 million in 1998. The 1999 increase was due primarily to legal expenses, expenses incurred for year 2000 computer contingencies and reorganization expenses. ONE-TIME CHARGES > As discussed above, one-time charges for 1999 includes a $102 million pre-tax charge which reflects the write-down of the carrying value of MBIA's investment in Capital Asset and the value of the loans provided by MBIA to Capital Asset. Also included in one-time charges for 1999 is the $3 million pre-tax loss on the sale of MuniFinancial. In 1998, one-time charges includes $55 million of pre-tax charges related to our mergers with CapMAC and 1838, and a $20 million pre-tax charge related to the reorganization of our municipal services business. TAXES Our tax policy is to optimize our after-tax income by maintaining the appropriate mix of taxable and tax-exempt investments. However, our tax rate fluctuates from time-to-time as we manage our investment portfolio on a total return basis. Our effective tax rate for 2000 increased to 26.1% from 17.4% in 1999 and 23.4% in 1998. For 1999, our tax provision is net of the benefit resulting from the one-time charges discussed previously, as well as the benefit from the one-time increase to the loss reserve. Excluding these benefits our effective tax rate increased over 1999 as a result of a shift from tax-exempt investments to taxable investments to maximize long-term after-tax income. CAPITAL RESOURCES ----------------- We carefully manage our capital resources to optimize our cost of capital while maintaining appropriate claims-paying resources to sustain our Triple-A claims-paying ratings. At year-end 2000, our total shareholders' equity was $4.2 billion, with total long-term borrowings of $795 million. We use debt financing to lower our overall cost of capital, thereby increasing our return on shareholders' equity. We maintain debt at levels we consider to be prudent based on our cash flow and total capital. The following table shows our long-term debt and the ratio we use to measure it: 2000 1999 1998 -------------------------------------------------------------------------------- Long-term debt (in millions) $795 $689 $689 Long-term debt to total capital 16% 16% 15% -------------------------------------------------------------------------------- In addition, MBIA Insurance Corporation (MBIA Corp.) has a $900 million irrevocable standby line of credit facility with a group of major Triple-A rated banks to provide funds for the payment of claims in the event of severe losses. The agreement is for a seven-year term, which expires on October 31, 2007, and, subject to approval by the banks, may be renewed annually to extend the term to seven years beyond the renewal date. MBIA Corp. and its subsidiaries also maintain stop-loss reinsurance coverage of $175 million in excess of incurred losses of $762 million. From time to time we access the capital markets to support the growth of our businesses. In December 2000 we issued 175 million Swiss Francs 10-year bonds (converted to approximately $99 million) and $100 million of 40-year notes. (41) 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MBIA Inc. and Subsidiaries In November 1998 we issued $50 million of 40-year notes and in September 1998 we issued $150 million of 30-year debentures. As of year-end 2000, total claims-paying resources for MBIA Corp. stood at $9.1 billion, a 7% increase over 1999. LIQUIDITY --------- Cash flow needs at our parent company level are primarily for dividends to our shareholders and principal and interest payments on our debt. These requirements have historically been met by upstreaming dividend payments from MBIA Corp., which generates substantial cash flow from premium writings and investment income. In 2000, operating cash flow was $640 million. Under New York State insurance law, without prior approval of the superintendent of the state insurance department, financial guarantee insurance companies can pay dividends from earned surplus subject to retaining a minimum capital requirement. In our case, dividends in any 12-month period cannot be greater than 10% of policyholders' surplus. During 2000, MBIA Corp. declared and paid $197 million of dividends and at year-end 2000 had dividend capacity in excess of $40 million without special regulatory approval. Our company has significant liquidity supporting its businesses. At year-end 2000, cash equivalents and short-term investments totaled $471 million. Should significant cash flow reductions occur in any of our businesses, for any combination of reasons, we have additional alternatives for meeting ongoing cash requirements. They include, among other things, selling or pledging our fixed-income investments from our investment portfolio, tapping existing liquidity facilities and new borrowings. Our company has substantial external borrowing capacity. We maintain two short-term bank lines totaling $650 million with a group of worldwide banks. At year-end 2000, there were no balances outstanding under these lines. Our investment portfolio provides a high degree of liquidity since it is comprised of readily marketable high-quality fixed-income securities and short-term investments. At year-end 2000, the fair value of our consolidated investment portfolio increased 14% to $12.2 billion, as shown below: Percent Change -------------- In millions 2000 1999 2000 vs. 1999 -------------------------------------------------------------------------------- Insurance operations: Amortized cost $ 7,108 $ 6,427 11% Unrealized gain(loss) 128 (223) 157% -------------------------------------------------------------------------------- Fair value $ 7,236 $ 6,204 17% -------------------------------------------------------------------------------- Municipal investment agreements: Amortized cost $ 4,948 $ 4,584 8% Unrealized gain(loss) 49 (94) 152% -------------------------------------------------------------------------------- Fair value $ 4,997 $ 4,490 11% -------------------------------------------------------------------------------- Total portfolio at fair value $12,233 $10,694 14% -------------------------------------------------------------------------------- The growth of our insurance-related investments in 2000 was the result of positive cash flows. The fair value of investments related to our municipal investment agreement business increased 11% to $5.0 billion at year-end 2000, reflecting positive operations. Our investment portfolios are considered to be available-for-sale, and the differences between their fair value and amortized cost, net of applicable taxes, are reflected as an adjustment to shareholders' equity. Differences between fair value and amortized cost arise primarily as a result of changes in interest rates occurring after a fixed-income security is purchased, although other factors influence fair value, including credit-related actions, supply and demand forces and other market factors. The weighted-average credit quality of our fixed-income portfolios has been maintained at Double-A since our inception. Since we generally intend to hold most of our investments to maturity as part of our risk management strategy, we expect to realize a value substantially equal to amortized cost. MARKET RISK ----------- The fair values of some of our company's reported financial instruments are subject to change as a result of potential interest rate movements. This interest rate sensitivity can be estimated by projecting a hypothetical increase in interest rates of 1.0%. Based on asset maturities and interest rates as of year-end 2000, this hypothetical increase in interest rates would result in an after-tax decrease in net fair value of our company's financial instruments of $241 million. This projected change in fair value is primarily a result of our company's "fixed-maturity securities" asset portfolio, which loses value with increases in interest rates. Since our company is able and primarily expects to hold the securities to maturity, it does not expect to recognize any adverse impact to income or cash flows under the above scenario. Our company's investment portfolio holdings are primarily U.S. dollar-denominated fixed-income securities including municipal bonds, U.S. government bonds, mortgage-backed securities, collateralized mortgage obligations, corporate bonds and asset-backed securities. In modeling sensitivity to interest rates for the taxable securities, U.S. treasury rates are changed by 1.0%. Tax-exempt securities are subjected to a change in the Municipal Triple-A General Obligation curve that would be equivalent to a 1.0% taxable interest rate change based on year-end taxable/tax-exempt ratios. Simulation for tax-exempt securities is performed treating securities on a duration-to-worst-case basis. For the liabilities evaluation, where appropriate, the assumed discount rates used to estimate the present value of future cash flows are increased by 1.0%. (42) 9 REPORT ON MANAGEMENT'S RESPONSIBILITY AND REPORT OF INDEPENDENT ACCOUNTANTS MBIA Inc. and Subsidiaries REPORT ON MANAGEMENT'S RESPONSIBILITY ------------------------------------- Management is responsible for the preparation, integrity and objectivity of the consolidated financial statements and other financial information presented in this annual report. The accompanying consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America, applying certain estimates and judgments as required. MBIA's internal controls are designed to provide reasonable assurance as to the integrity and reliability of the financial statements and to adequately safeguard, verify and maintain accountability of assets. Such controls are based on established written policies and procedures and are implemented by trained, skilled personnel with an appropriate segregation of duties. These policies and procedures prescribe that MBIA and all its employees are to maintain the highest ethical standards and that its business practices are to be conducted in a manner that is above reproach. PricewaterhouseCoopers LLP, independent accountants, is retained to audit the company's financial statements. Their accompanying report is based on audits conducted in accordance with auditing standards generally accepted in the United States of America, which include the consideration of the company's internal controls to establish a basis for reliance thereon in determining the nature, timing and extent of audit tests to be applied. The board of directors exercises its responsibility for these financial statements through its Audit Committee, which consists entirely of independent non-management board members. The Audit Committee meets periodically with the independent accountants, both privately and with management present, to review accounting, auditing, internal controls and financial reporting matters. /s/Joseph W. Brown ----------------------- Joseph W. Brown Chairman and Chief Executive Officer /s/ Neil G. Budnick ------------------- Neil G. Budnick Chief Financial Officer REPORT ON INDEPENDANT ACCOUNTANTS --------------------------------- To the Board of Directors and Shareholders of MBIA Inc.: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income and changes in shareholders' equity and cash flows present fairly, in all material respects, the financial position of MBIA Inc. and its subsidiaries at December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. /s/ PricewaterhouseCoopers LLP ------------------------------ New York, New York February 2, 2001 (43) 10 CONSOLIDATED BALANCE SHEETS MBIA Inc. and Subsidiaries
Dollars in thousands except per share amounts December 31, 2000 December 31, 1999 --------------------------------------------------------------------------------------------------------------------------------- ASSETS Investments: Fixed-maturity securities held as available-for-sale at fair value (amortized cost $6,612,498 and $6,006,506) $ 6,740,127 $ 5,783,979 Short-term investments, at amortized cost (which approximates fair value) 376,604 274,022 Other investments 119,591 146,038 ---------------------------------------------------------------------------------------------------------------------------------- 7,236,322 6,204,039 Municipal investment agreement portfolio held as available-for-sale at fair value (amortized cost $4,947,653 and $4,583,920) 4,996,608 4,489,551 ---------------------------------------------------------------------------------------------------------------------------------- TOTAL INVESTMENTS 12,232,930 10,693,590 ---------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents 93,962 93,559 Securities borrowed or purchased under agreements to resell 314,624 261,171 Accrued investment income 152,043 135,344 Deferred acquisition costs 274,355 251,922 Prepaid reinsurance premiums 442,622 403,210 Reinsurance recoverable on unpaid losses 31,414 30,819 Goodwill (less accumulated amortization of $67,472 and $68,388) 104,322 110,023 Property and equipment, at cost (less accumulated depreciation of $62,026 and $50,469) 133,514 128,733 Receivable for investments sold 13,772 24,922 Other assets 100,780 130,606 ---------------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $13,894,338 $12,263,899 ---------------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Deferred premium revenue $ 2,397,578 $ 2,310,758 Loss and loss adjustment expense reserves 499,279 467,279 Municipal investment agreements 3,821,652 3,483,911 Municipal repurchase agreements 967,803 1,028,921 Long-term debt 795,102 689,204 Short-term debt 144,243 68,751 Securities loaned or sold under agreements to repurchase 489,624 288,750 Deferred income taxes 252,463 32,805 Deferred fee revenue 32,694 36,536 Payable for investments purchased 7,899 102,666 Other liabilities 262,588 241,217 ---------------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 9,670,925 8,750,798 ---------------------------------------------------------------------------------------------------------------------------------- Shareholders' Equity: Preferred stock, par value $1 per share; authorized shares - 10,000,000; issued and outstanding - 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 shares 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 $13,894,338 $12,263,899 ----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements. (44) 11 CONSOLIDATED STATEMENTS OF INCOME MBIA Inc. and Subsidiaries
Years ended December 31 ------------------------------------------------ Dollars in thousands except per share amounts 2000 1999 1998 ----------------------------------------------------------------------------------------------------------------------- INSURANCE Revenues: Gross premiums written $687,408 $624,871 $677,050 Ceded premiums (189,316) (171,256) (156,064) ----------------------------------------------------------------------------------------------------------------------- Net premiums written 498,092 453,615 520,986 Increase in deferred premium revenue (51,739) (10,819) (96,436) Premiums earned (net of ceded premiums of $147,249, $119,879 and $92,802) 446,353 442,796 424,550 Net investment income 393,985 359,456 331,802 Advisory fees 28,284 27,486 26,130 ----------------------------------------------------------------------------------------------------------------------- Total insurance revenues 868,622 829,738 782,482 Expenses: Losses and loss adjustment 51,291 198,454 34,683 Policy acquisition costs, net 35,976 36,700 34,613 Operating 83,066 80,082 70,330 ----------------------------------------------------------------------------------------------------------------------- Total insurance expenses 170,333 315,236 139,626 ----------------------------------------------------------------------------------------------------------------------- Insurance income 698,289 514,502 642,856 ----------------------------------------------------------------------------------------------------------------------- INVESTMENT MANAGEMENT SERVICES Revenues 118,859 86,600 65,032 Expenses 62,535 45,920 36,012 ----------------------------------------------------------------------------------------------------------------------- Investment management services income 56,324 40,680 29,020 ----------------------------------------------------------------------------------------------------------------------- MUNICIPAL SERVICES Revenues 37,089 22,923 29,392 Expenses 36,479 35,372 40,682 ----------------------------------------------------------------------------------------------------------------------- Municipal services income (loss) 610 (12,449) (11,290) ----------------------------------------------------------------------------------------------------------------------- CORPORATE Net realized gains 32,884 25,160 34,976 Interest expense 53,756 53,935 44,620 Other expenses 19,494 21,052 10,701 One-time charges -- 105,023 75,203 ----------------------------------------------------------------------------------------------------------------------- Corporate loss (40,366) (154,850) (95,548) Income before income taxes 714,857 387,883 565,038 ----------------------------------------------------------------------------------------------------------------------- Provision for income taxes 186,220 67,353 132,310 ----------------------------------------------------------------------------------------------------------------------- NET INCOME $528,637 $320,530 $432,728 ----------------------------------------------------------------------------------------------------------------------- NET INCOME PER COMMON SHARE: BASIC $5.37 $3.22 $4.37 DILUTED $5.33 $3.19 $4.32 ----------------------------------------------------------------------------------------------------------------------- Weighted average number of common shares outstanding: Basic 98,476,442 99,590,870 98,978,641 Diluted 99,112,629 100,402,339 100,163,014 -----------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements. (45) 12 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY MBIA Inc. and Subsidiaries
For the years ended December 31, 2000, 1999 and 1998 -------------------------------------------------------------------------------------------------------------------------- Accumulated Common Stock Additional Other --------------------- Paid-in Retained Comprehensive In thousands except per share amounts Shares Amount Capital Earnings Income (Loss) -------------------------------------------------------------------------------------------------------------------------- BALANCE, JANUARY 1, 1998 98,754 $98,754 $1,133,950 $1,901,608 $236,095 -------------------------------------------------------------------------------------------------------------------------- Comprehensive income: Net income -- -- -- 432,728 -- Other comprehensive income: Change in unrealized appreciation of investments net of change in deferred income taxes of $(25,384) -- -- -- -- 48,042 Change in foreign currency translation -- -- -- -- 4,778 Other comprehensive income Total comprehensive income Treasury shares acquired -- -- 830 -- -- Unallocated ESOP shares -- -- -- -- -- Unearned compensation - restricted stock 71 71 4,449 -- -- Exercise of stock options 745 745 29,963 -- -- Dividends (declared per common share $0.790, paid per common share $0.785) -- -- -- (88,115) -- -------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1998 99,570 99,570 1,169,192 2,246,221 288,915 -------------------------------------------------------------------------------------------------------------------------- Comprehensive income (loss): Net income -- -- -- 320,530 -- Other comprehensive income (loss): Change in unrealized appreciation of investments net of change in deferred income taxes of $270,330 -- -- -- -- (502,996) Change in foreign currency translation -- -- -- -- (10,430) Other comprehensive loss Total comprehensive loss Treasury shares acquired -- -- -- -- -- Unallocated ESOP shares -- -- 391 -- -- Unearned compensation - restricted stock 99 99 4,883 -- -- Stock issued for acquisition 38 38 2,392 -- -- Exercise of stock options 366 366 14,250 -- -- Dividends (declared per common share $0.805, paid per common share $0.800) -- -- -- (80,273) -- -------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1999 100,073 100,073 1,191,108 2,486,478 (224,511) -------------------------------------------------------------------------------------------------------------------------- Comprehensive income: Net income -- -- -- 528,637 -- Other comprehensive income (loss): Change in unrealized depreciation of investments net of change in deferred income taxes of $(170,061) -- -- -- -- 316,010 Change in foreign currency translation -- -- -- -- (5,792) Other comprehensive loss Total comprehensive loss Treasury shares acquired -- -- -- -- -- Unallocated ESOP shares -- -- (43) -- -- Unearned compensation - restricted stock 76 76 5,463 -- -- Exercise of stock options 624 624 23,059 -- -- Dividends (declared and paid per common share $0.820) -- -- -- (80,507) -- -------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 2000 100,773 $100,773 $1,219,587 $2,934,608 $ 85,707 -------------------------------------------------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Con't) For the years ended December 31, 2000, 1999 and 1998 --------------------------------------------------------------------------------------------------------------------------------- Unearned Unallocated Compensation Treasury Stock Total ESOP -Restricted --------------------- Shareholders' In thousands except per share amounts Shares Stock Shares Amount Equity --------------------------------------------------------------------------------------------------------------------------------- BALANCE, JANUARY 1, 1998 $(4,083) $ (4,812) -- -- $3,361,512 --------------------------------------------------------------------------------------------------------------------------------- Comprehensive income: Net income -- -- -- -- 432,728 Other comprehensive income: Change in unrealized appreciation of investments net of change in deferred income taxes of $(25,384) -- -- -- -- 48,042 Change in foreign currency translation -- -- -- -- 4,778 ------------ Other comprehensive income 52,820 ------------ Total comprehensive income 485,548 ------------ Treasury shares acquired -- -- (22) (830) -- Unallocated ESOP shares 39 -- -- -- 39 Unearned compensation - restricted stock -- (1,995) -- -- 2,525 Exercise of stock options -- -- -- -- 30,708 Dividends (declared per common share $0.790, paid per common share $0.785) -- -- -- -- (88,115) --------------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1998 (4,044) (6,807) (22) (830) 3,792,217 --------------------------------------------------------------------------------------------------------------------------------- Comprehensive income (loss): Net income -- -- -- -- 320,530 Other comprehensive income (loss): Change in unrealized appreciation of investments net of change in deferred income taxes of $270,330 -- -- -- -- (502,996) Change in foreign currency translation -- -- -- -- (10,430) ------------ Other comprehensive loss (513,426) ------------ Total comprehensive loss (192,896) ------------ Treasury shares acquired -- -- (500) (24,698) (24,698) Unallocated ESOP shares (319) -- 13 462 534 Unearned compensation - restricted stock -- (3,179) (12) (632) 1,171 Stock issued for acquisition -- -- -- -- 2,430 Exercise of stock options -- -- -- -- 14,616 Dividends (declared per common share $0.805, paid per common share $0.800) -- -- -- -- (80,273) --------------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1999 (4,363) (9,986) (521) (25,698) 3,513,101 --------------------------------------------------------------------------------------------------------------------------------- Comprehensive income: Net income -- -- -- -- 528,637 Other comprehensive income (loss): Change in unrealized depreciation of investments net of change in deferred income taxes of $(170,061) -- -- -- -- 316,010 Change in foreign currency translation -- -- -- -- (5,792) ------------ Other comprehensive loss 310,218 ------------ Total comprehensive loss 838,855 ------------ Treasury shares acquired -- -- (1,680) (77,717) (77,955) Unallocated ESOP shares 1,413 -- -- -- 1,370 Unearned compensation - restricted stock -- (673) (8) (238) 4,866 Exercise of stock options -- -- -- -- 23,683 Dividends (declared and paid per common share $0.820) -- -- -- -- (80,507) -------------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 2000 $(2,950) $(10,659) (2,209) $(103,653) $4,223,413 --------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements.
DISCLOSURE OF RECLASSIFICATION AMOUNT: 1998 1999 2000 --------------------------------------------------------------------------------------------------- Unrealized appreciation (depreciation) of investments arising during the period, net of taxes $78,142 $(448,686) $317,092 Reclassification of adjustment, net of taxes (30,100) (54,310) (1,082) --------------------------------------------------------------------------------------------------- Net unrealized appreciation (depreciation), net of taxes $48,042 $(502,996) $316,010 ---------------------------------------------------------------------------------------------------
(46) 13 CONSOLIDATED STATEMENTS OF CASH FLOWS MBIA Inc. and Subsidiaries
Years ended December 31 -------------------------------------------------- Dollars in thousands 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: Increase in accrued investment income (16,699) (8,354) (5,900) Increase in deferred acquisition costs (22,433) (21,837) (13,920) Increase in prepaid reinsurance premiums (39,412) (50,511) (63,191) Increase in deferred premium revenue 91,151 61,329 159,627 Increase in loss and loss adjustment expense reserves, net 31,405 166,346 167,053 Depreciation 11,557 11,368 8,174 Amortization of goodwill 6,701 6,983 9,051 Amortization of bond discount, net (31,379) (25,338) (22,699) Net realized gains on sale of investments (32,884) (25,160) (34,976) Deferred income tax provision (benefit) 49,575 (40,505) 19,943 Other, net 64,124 48,400 26,155 ----------------------------------------------------------------------------------------------------------------------- Total adjustments to net income 111,706 122,721 249,317 ----------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 640,343 443,251 682,045 ----------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of fixed-maturity securities, net of payable for investments purchased (7,417,426) (6,778,179) (2,479,245) Sale of fixed-maturity securities, net of receivable for investments sold 6,543,563 6,144,650 1,102,460 Redemption of fixed-maturity securities, net of receivable for investments redeemed 282,540 288,710 745,515 (Purchase) sale of short-term investments (93,552) 113,896 (97,177) Purchase of other investments (24,697) (84,018) (51,769) Sale of other investments 43,235 33,402 1,785 Purchases for municipal investment agreement portfolio, net of payable for investments purchased (5,418,222) (2,672,918) (2,456,265) Sales from municipal investment agreement portfolio, net of receivable for investments sold 5,002,639 1,650,111 2,218,342 Capital expenditures, net of disposals (16,363) (58,650) (22,909) Other, net 8,297 11,146 (8,098) ----------------------------------------------------------------------------------------------------------------------- Net cash used by investing activities (1,089,986) (1,351,850) (1,047,361) ----------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds (repayment) from issuance (retirement) of long-term debt 192,363 (3,750) 197,113 Net (repayment) proceeds from (retirement) issuance of short-term debt (24,500) 65,001 (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 2,674,379 2,787,906 2,352,908 Payments for drawdowns of municipal investment and repurchase agreements (2,404,637) (1,770,418) (2,017,056) Securities loaned or sold under agreements to repurchase, net 147,421 (7,492) (98,229) Exercise of stock options 23,683 14,616 30,708 ----------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 450,046 981,401 359,777 ----------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 403 72,802 (5,539) Cash and cash equivalents - beginning of year 93,559 20,757 26,296 ----------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents - end of year $93,962 $93,559 $20,757 ----------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL CASH FLOW DISCLOSURES: Income taxes paid $96,395 $136,877 $108,297 Interest paid: Municipal investment and repurchase agreements $265,988 $210,495 $202,502 Long-term debt 53,234 53,466 39,499 Short-term debt -- -- 1,057 -----------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements. (47) 14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries NOTE 1: BUSINESS AND ORGANIZATION --------------------------------- MBIA Inc. (MBIA or the company) was incorporated in Connecticut on November 12, 1986 as a licensed insurer and, through a series of transactions during December 1986, became the successor to the business of the Municipal Bond Insurance Association (the Association), a voluntary unincorporated association of insurers writing municipal bond and note insurance as agent for the member insurance companies. The company operates its insurance business primarily through its wholly owned subsidiary, MBIA Insurance Corporation (MBIA Corp.). Effective December 31, 1989, the company acquired for $288 million all of the outstanding stock of Bond Investors Group, Inc. (BIG), the parent company of Bond Investors Guaranty Insurance Company, which was subsequently renamed MBIA Insurance Corp. of Illinois (MBIA Illinois). The acquisition of BIG has been accounted for as a purchase, and the price was allocated to the net assets of the acquired company based on the fair value of such assets and liabilities at the date of acquisition. In 1990, the company formed MBIA Assurance, S.A. (MBIA Assurance), a wholly owned French subsidiary, to write financial guarantee insurance in the international community. MBIA Assurance provides insurance for public infrastructure financings, structured finance transactions and certain obligations of financial institutions. The stock of MBIA Assurance was contributed to MBIA Corp. in 1991 and, pursuant to a reinsurance agreement with MBIA Corp., a portion of the risks insured by MBIA Assurance is reinsured by MBIA Corp. At the end of 1990, MBIA Municipal Investors Services Corporation (MBIA-MISC) was formed as a wholly owned subsidiary of the company. MBIA-MISC operates cooperative cash management programs for school districts and municipalities. In 1993, the company formed a wholly owned subsidiary, MBIA Investment Management Corp. (IMC). IMC provides guaranteed investment agreements to states, municipalities and municipal authorities that are guaranteed as to principal and interest. In 1994, the company formed a wholly owned subsidiary, MBIA Securities Corp., which was subsequently renamed MBIA Capital Management Corp. (CMC). CMC provides fixed-income investment management services for the company and its affiliates and third party institutional clients. In 1996, MBIA-MISC acquired American Money Management Associates, Inc. (AMMA), which provides investment and treasury management consulting services for municipal and quasi-public-sector clients. In May 2000, MBIA-MISC merged with AMMA and combined the investment expertise into a consolidated investment management business. In 1996, the company formed a wholly owned subsidiary, Strategic Services, Inc., which was subsequently renamed MBIA MuniServices Company (MBIA MuniServices). Also in 1996, MBIA MuniServices acquired an interest in Capital Asset Holdings, Inc. (Capital Asset), a limited partnership that buys, services and manages delinquent municipal tax liens. In December 1998, MBIA MuniServices acquired Capital Asset's founder's equity interest. In January 1997, MBIA MuniServices acquired a 95 percent interest in the Municipal Tax Bureau (MTB) of Philadelphia, a provider of tax compliance services to state and local governments. In July 1997, MBIA MuniServices acquired MuniFinancial, a public finance consulting firm specializing in municipal debt administration. In September 1999, MBIA MuniServices sold MuniFinancial. In January 1998, Municipal Resource Consultants (MRC), a revenue audit and information services firm, was acquired. On February 17, 1998, MBIA consummated a merger with CapMAC Holdings Inc. (CapMAC). CapMAC operated its insurance business primarily through its wholly owned subsidiary, Capital Markets Assurance Corporation (CMAC). On July 31, 1998, MBIA completed a merger of its investment management business with 1838 Investment Advisors, Inc. (1838). Effective December 31, 2000, 1838 was converted into a limited liability corporation. See Note 3 for details on these two mergers. In June 1998, MBIA Asset Management Corporation (MBIA-AMC) was formed as a wholly owned subsidiary of the company to consolidate the resources and capabilities of the company's investment management services. In July 1998, the company contributed the common stock of MBIA-MISC, IMC, CMC and 1838 to MBIA-AMC. Effective December 31, 2000, MBIA-AMC was converted into a limited liability corporation. TRS Funding Corporation (TRS) was formed to provide clients with innovative structured financing solutions. NOTE 2: SIGNIFICANT ACCOUNTING POLICIES --------------------------------------- The consolidated financial statements have been prepared on the basis of generally accepted accounting principles (GAAP). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant accounting policies are as follows: CONSOLIDATION > The consolidated financial statements include the accounts of the company, its significant subsidiaries and entities under its control. All significant intercompany balances have been eliminated. Certain amounts have been reclassified in prior years' financial statements to conform to the current presentation. INVESTMENTS > The company's entire investment portfolio is considered available-for-sale and is reported in the financial statements at fair value, with unrealized gains and losses, net of deferred taxes, reflected as a separate component of shareholders' equity. Bond discounts and premiums are amortized using the effective-yield method over the remaining term of the securities. For pre-refunded bonds, the remaining term is determined based on the contractual refunding date. Short-term investments are carried at amortized cost, which approximates fair value, and include all fixed-maturity securities--other than those held in the municipal investment agreement portfolio--with a remaining effective term to maturity of less than one year. Investment income is recorded as earned. Realized gains or losses on the sale of investments are determined by specific identification and are included as a separate component of revenues. Investment income from the municipal investment agreement portfolio is recorded as a component of investment management services revenues. Municipal investment agreement portfolio accrued interest income, receivables for investments sold and payables for investments purchased are included in the respective consolidated accounts. Other investments include the company's interest in equity-oriented and equity-method investments. The company records its share of the unrealized gains and losses on equity-oriented investments, net of applicable deferred income taxes, as a separate component of shareholders' equity. CASH AND CASH EQUIVALENTS > Cash and cash equivalents include cash on hand and demand deposits with banks. (48) 15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries SECURITIES BORROWED OR PURCHASED UNDER AGREEMENTS TO RESELL AND SECURITIES LOANED OR SOLD UNDER AGREEMENTS TO REPURCHASE > Securities borrowed or purchased under agreements to resell and securities loaned or sold under agreements to repurchase are accounted for as collateralized transactions and are recorded at principal or contract value. It is the company's policy to take possession of securities borrowed or purchased under agreements to resell. These contracts are primarily entered into to obtain securities that are repledged as part of MBIA's collateralized municipal investment and repurchase agreement activity and are only transacted with high-quality dealer firms. The company minimizes the credit risk that counterparties to transactions might be unable to fulfill their contractual obligations by monitoring customer credit exposure and collateral value and requiring additional collateral to be deposited with the company when deemed necessary. POLICY ACQUISITION COSTS > Policy acquisition costs include only those expenses that relate primarily to, and vary with, premium production. For business produced directly by MBIA Corp., such costs include compensation of employees involved in underwriting and policy issuance functions, certain rating agency fees, state premium taxes and certain other underwriting expenses, reduced by ceding commission income on premiums ceded to reinsurers. Policy acquisition costs are deferred and amortized over the period in which the related premiums are earned. PREMIUM REVENUE RECOGNITION > Upfront premiums are earned pro rata over the period of risk. Premiums are allocated to each maturity based on par amount and are earned on a straight-line basis over the term of each maturity. Installment premiums are earned over each installment period--generally one year or less. When an insured issue is retired early, is called by the issuer, or is in substance paid in advance through a refunding accomplished by placing U.S. Government securities in escrow, the remaining deferred premium revenue is earned at that time, since there is no longer risk to the company. Accordingly, deferred premium revenue represents the portion of premiums written that is applicable to the unexpired risk of insured bonds and notes. ADVISORY FEE REVENUE RECOGNITION > The company collects advisory fees for services rendered in connection with advising clients as to the most appropriate structure to use for a given insured transaction. In addition, the company earns advisory fees in connection with its administration of certain third-party-owned conduits. Most fees are deferred and earned pro-rata over the life of the underlying transactions. Certain fees, however, are earned in the quarter they are collected and include administrative fees for transactions where the fee is collected on a periodic installment basis and fees for transactions which terminate prior to the expected maturity date. GOODWILL > Goodwill represents the excess of the cost of acquisitions over the tangible net assets acquired. Goodwill attributed to the acquisition of MBIA Corp. is amortized by the straight-line method over 25 years. Goodwill attributed to the acquisition of MBIA Illinois is amortized according to the recognition of future profits from its deferred premium revenue and installment premiums, except for a minor portion attributed to state licenses, which is amortized by the straight-line method over 25 years. Goodwill attributed to the acquisition of all other subsidiaries is amortized by the straight-line method over 15 years. PROPERTY AND EQUIPMENT > Property and equipment consist of the company's headquarters, furniture, fixtures and equipment, which are recorded at cost and are depreciated using the straight-line method over their estimated service lives ranging from 3 to 31 years. Maintenance and repairs are charged to expense as incurred. LOSSES AND LOSS ADJUSTMENT EXPENSES > Loss and loss adjustment expenses (LAE) reserves are established in an amount equal to the company's estimate of identified or case basis reserves and unallocated losses, including costs of settlement, on the obligations it has insured. Case basis reserves are established when specific insured issues are identified as currently or likely to be in default. Such a reserve is based on the present value of the expected loss and LAE payments, net of recoveries under salvage and subrogation rights, based on a discounted rate of 6.12%. The total reserve is calculated by applying a loss factor, determined based on an independent rating agency study of issuer defaults, to net debt service written. When a case basis reserve is recorded, a corresponding reduction is made to the unallocated reserve. Management of the company periodically reevaluates its estimates for losses and LAE, and any resulting adjustments are reflected in current earnings. Management believes that the reserves are adequate to cover the ultimate net cost of claims; however, because the reserves are based on estimates, there can be no assurance that the ultimate liability will not exceed such estimates. In 2000 and 1999 the company reviewed its loss reserving methodology. The reviews included an analysis of loss reserve factors based on the latest available industry data. They included the analysis of historical default and recovery experience for the relevant sectors of the fixed-income market. Also factored in was the changing mix of our book of business. The 1999 review resulted in an increase in the company's current loss reserving factors. MUNICIPAL INVESTMENT AGREEMENTS AND MUNICIPAL REPURCHASE AGREEMENTS > Municipal investment agreements and municipal repurchase agreements are recorded as liabilities on the balance sheet at the time such agreements are executed. The liabilities for municipal investment and repurchase agreements are carried at the face value of the agreement plus accrued interest, whereas the related assets are recorded at fair value. Investment management services revenues include investment income on the assets underlying the municipal investment agreement portfolio, net of interest expense at rates specified in the agreements, computed daily based upon the outstanding balances. DERIVATIVES > The company's policies with respect to the use of derivative financial instruments include limitations with respect to the amount, type and concentration of such instruments. The company uses interest rate swaps and foreign currency swaps for hedging purposes as part of its overall risk management strategy. Currently, gains and losses on the derivative financial instruments that qualify as accounting hedges of existing assets and liabilities are included with the carrying amounts and amortized over the remaining lives of the assets and liabilities as an adjustment to interest income or expense. When a hedged asset is sold or liability extinguished, the unamortized gain or loss on the related hedge is recognized in income. Gains and losses on derivative financial instruments that do not qualify as accounting hedges are recognized in income when realized. (49) 16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries Effective January 1, 2001 the company will adopt Statement of Financial Accounting Standards (SFAS) 133, "Accounting for Derivative Instruments and Hedging Activities." See footnote 4 for an explanation of the impact the adoption of this statement will have on the company's financial statements. INVESTMENT MANAGEMENT SERVICES OPERATIONS > Investment management services results are comprised of the net investment income, operating revenues and expenses of MBIA-MISC, IMC, CMC and 1838. MUNICIPAL SERVICES OPERATIONS > Municipal services results are comprised of the net investment income, operating revenues and expenses of MTB, MRC and Capital Asset, and for 1999 and 1998 only, MuniFinancial. CORPORATE > Corporate consists of net realized gains, interest expenses, general corporate overhead expenses and one-time charges. INCOME TAXES > Deferred income taxes are provided with respect to the temporary differences between the tax bases of assets and liabilities and the reported amounts in the financial statements that will result in deductible or taxable amounts in future years when the reported amount of the asset or liability is recovered or settled. Such temporary differences relate principally to premium revenue recognition, deferred acquisition costs, unrealized appreciation or depreciation of investments and the contingency reserve. The Internal Revenue Code permits companies writing financial guarantee insurance to deduct from taxable income amounts added to the statutory contingency reserve, subject to certain limitations. The tax benefits obtained from such deductions must be invested in non-interest-bearing U.S. Government tax and loss bonds. The company records purchases of tax and loss bonds as payments of federal income taxes. The amounts deducted must be restored to taxable income when the contingency reserve is released, at which time the company may present the tax and loss bonds for redemption to satisfy the additional tax liability. FOREIGN CURRENCY TRANSLATION > Assets and liabilities denominated in foreign currencies are translated at year-end exchange rates. Operating results are translated at average rates of exchange prevailing during the year. Unrealized gains or losses resulting from translation are included as a separate component of shareholders' equity. Gains and losses resulting from transactions in foreign currencies are recorded in current income. NET INCOME PER COMMON SHARE > Basic earnings per share are based on the weighted average number of common shares outstanding during the year, whereas diluted earnings per share also gives effect to all dilutive potential common shares that were outstanding during the period. Dilutive potential common shares include stock options and other items that could potentially result in the issuance of common stock. NOTE 3: MERGERS WITH CAPMAC AND 1838 ------------------------------------ On February 17, 1998, the company consummated a merger with CapMAC by exchanging 8.1 million shares of its common stock for all of the common stock of CapMAC. Each share of CapMAC was exchanged for 0.4675 of one share of MBIA Inc. common stock. On July 31, 1998, the company completed a merger of its investment management business with 1838 through the issuance of 1.1 million shares of common stock. Each share of 1838 was exchanged for 2.134 shares of MBIA Inc. The mergers constituted tax-free reorganizations and have been accounted for as "pooling of interests" under Accounting Principles Board (APB) Opinion No. 16. Accordingly, all prior period consolidated financial statements presented have been restated to include the combined results of operations, financial position and cash flows of CapMAC and 1838 as though they had always been a part of MBIA Inc. There were no material transactions between MBIA Inc., CapMAC and/or 1838 prior to the combinations, and immaterial adjustments were recorded to conform CapMAC's and 1838's accounting policies. Certain reclassifications were made to the CapMAC and 1838 financial statements to conform to the company's presentations. Effective April 1, 1998, CMAC ceded its portfolio of net insured obligations in exchange for cash and investments equal to its statutory unearned premium and contingency reserves of $176 million to MBIA Corp. Subsequent to this cession, the company contributed the common stock of CMAC to MBIA Corp. NOTE 4: RECENT ACCOUNTING PRONOUNCEMENT --------------------------------------- In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities" which is effective for the company as of January 1, 2001. SFAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives will be recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge, and if so, the use and type of the hedge. The company has entered into derivative transactions that do not qualify for the financial guarantee scope exception under SFAS 133 and, therefore, must be stated at fair value. The Insurance segment, which represents the majority of the company's derivative exposure and mark-to-market as of January 1, 2001, has insured derivatives primarily consisting of credit default swaps. The Investment Management Services segment has entered into primarily forward delivery agreements, interest rate and credit default swaps. The Corporate segment has entered into derivatives to hedge foreign exchange and interest rate risks related to the issuance of certain MBIA long-term debt issues. Adoption of SFAS 133 on January 1, 2001 will result in cumulative after-tax reductions in net income of approximately $12 million and other comprehensive income of approximately $4 million. In addition, the company will increase its assets by approximately $50 million and liabilities by approximately $66 million on an after-tax basis. NOTE 5: ASSET IMPAIRMENT ------------------------ Early in 1999, the company concluded that its investment in Capital Asset was not consistent with its strategic objectives, and took steps to restructure it for divestiture. The company was unsuccessful in its attempts to sell Capital Asset and in 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 a valuation of Capital Asset's tax lien portfolio, and as a result the company determined that it was necessary to write down its investment in Capital Asset by $102 million. A one-time charge for that amount was recorded in the consolidated statement of income during the second quarter of 1999. (50) 17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries NOTE 6: SECURITIZATION OF FINANCIAL ASSETS ------------------------------------------ In September 1999, Capital Asset sold substantially all of its remaining tax lien portfolio through a securitization. This securitization was the third in a series of such securitizations. Proceeds from this transaction were used to extinguish an existing warehouse financing facility that had been guaranteed by the company. The notes issued in connection with the securitizations have been insured by MBIA Corp. In connection therewith, the company recorded a servicing liability which represents the fair value of such liability based upon the present value of projected servicing costs in excess of servicing revenues, discounted at 11%. The servicing liability will be amortized in proportion to and over the period of the estimated net servicing loss, and accordingly, $776 thousand was amortized during the year ended December 31, 2000. The balance of the servicing liability as of December 31, 2000 is $10.9 million. During the fourth quarter of 1999, a specialty servicing concern was engaged to oversee the management of Capital Asset, whose activities now primarily consist of the administering and servicing of the securitizations and other delinquent tax liens and related assets. NOTE 7: STATUTORY ACCOUNTING PRACTICES -------------------------------------- The financial statements have been prepared on the basis of GAAP, which differs in certain respects from the statutory accounting practices prescribed or permitted by the insurance regulatory authorities. Statutory accounting practices differ from GAAP in the following respects: * upfront premiums are earned only when the related risk has expired rather than over the period of the risk; * acquisition costs are charged to operations as incurred rather than deferred and amortized as the related premiums are earned; * a contingency reserve is computed on the basis of statutory requirements, and reserves for losses and LAE are established at present value for specific insured issues that are identified as currently or likely to be in default. Under GAAP, reserves are established based on the company's reasonable estimate of the identified and unallocated losses and LAE on the insured obligations it has written; * federal income taxes are only provided on taxable income for which income taxes are currently payable, while under GAAP, deferred income taxes are provided with respect to temporary differences; * fixed-maturity securities are reported at amortized cost rather than fair value; * tax and loss bonds purchased are reflected as admitted assets as well as payments of income taxes; and * certain assets designated as "non-admitted assets" are charged directly against surplus but are reflected as assets under GAAP. Consolidated net income of MBIA Corp. determined in accordance with statutory accounting practices for the years ended December 31, 2000, 1999 and 1998 was $543.9 million, $521.8 million and $509.9 million, respectively. The following is a reconciliation of consolidated shareholders' equity presented on a GAAP basis for the company and its consolidated subsidiaries to statutory capital and surplus for MBIA Corp. and its subsidiaries: As of December 31 -------------------------------------------------------------------------------- In thousands 2000 1999 -------------------------------------------------------------------------------- Company's GAAP shareholders' equity $4,223,413 $3,513,101 Contributions to MBIA Corp. 534,776 508,719 Premium revenue recognition (535,920) (491,766) Deferral of acquisition costs (274,355) (251,922) Unrealized (gains) losses (163,331) 322,739 Contingency reserve (2,123,403) (1,738,730) Loss and LAE reserves 258,706 232,004 Deferred income taxes 266,593 44,917 Tax and loss bonds 202,195 219,195 Goodwill (81,196) (86,075) Other 74,191 141,185 -------------------------------------------------------------------------------- Statutory capital and surplus $2,381,669 $2,413,367 -------------------------------------------------------------------------------- In 1998, The National Association of Insurance Commissioners (NAIC) adopted the Codification of Statutory Accounting Principles guidance, which replaces the current Accounting Practices and Procedures manuals as the NAIC's primary guidance on statutory accounting effective as of January 1, 2001. The Codification provides guidance for areas where statutory accounting has been silent and changes current statutory accounting in some areas; e.g. deferred income taxes are recorded. The New York State Insurance Department has adopted the Codification guidance, effective January 1, 2001. The New York State Insurance Department has not adopted the Codification rules on certain accounting issues, e.g. deferred taxes and goodwill. The effect of adoption on MBIA Corp's statutory surplus is expected to be immaterial to MBIA Corp. NOTE 8: PREMIUMS EARNED FROM REFUNDED AND CALLED BONDS ------------------------------------------------------ Premiums earned include $34.0 million, $64.2 million and $68.4 million for 2000, 1999 and 1998, respectively, related to refunded and called bonds. NOTE 9: INVESTMENTS ------------------- The company's investment objective is to optimize long-term, after-tax returns while emphasizing the preservation of capital through maintenance of high-quality investments with adequate liquidity. The company's investment policies limit the amount of credit exposure to any one issuer. The fixed-maturity portfolio is comprised of high-quality (average rating Double-A) taxable and tax-exempt investments of diversified maturities. (51) 18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries The following tables set forth the amortized cost and fair value of the fixed-maturities and short-term investments included in the consolidated investment portfolio of the company, as of December 31, 2000 and 1999. Gross Gross Amortized Unrealized Unrealized Fair In thousands Cost Gains Losses Value ------------------------------------------------------------------------------- December 31, 2000 Taxable bonds: United States Treasury and government agency $ 678,619 $ 35,292 $ (1,657) $ 712,254 Corporate and other obligations 5,546,960 73,564 (68,706) 5,551,818 Mortgage-backed 1,956,200 26,857 (4,396) 1,978,661 Tax-exempt bonds: State and municipal obligations 3,754,976 127,916 (12,286) 3,870,606 -------------------------------------------------------------------------------- Total $11,936,755 $263,629 $ (87,045) $12,113,339 -------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair In thousands Cost Gains Losses Value ------------------------------------------------------------------------------- December 31, 1999 Taxable bonds: United States Treasury and government agency $ 559,204 $ 8,679 $ (13,056) $ 554,827 Corporate and other obligations 5,000,814 6,843 (171,015) 4,836,642 Mortgage-backed 1,662,636 4,441 (28,079) 1,638,998 Tax-exempt bonds: State and municipal obligations 3,641,794 50,334 (175,043) 3,517,085 -------------------------------------------------------------------------------- Total $10,864,448 $ 70,297 $(387,193) $10,547,552 -------------------------------------------------------------------------------- Fixed-maturity investments carried at fair value of $11.7 million and $11.6 million as of December 31, 2000 and 1999, respectively, were on deposit with various regulatory authorities to comply with insurance laws. A portion of the obligations under municipal investment and repurchase agreements require the company to pledge securities as collateral. As of December 31, 2000 and 1999, the fair value of securities pledged as collateral with respect to these obligations approximated $2.3 billion and $1.9 billion, respectively. The following table sets forth the distribution by expected maturity of the fixed-maturities and short-term investments at amortized cost and fair value at December 31, 2000. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations. Amortized Fair In thousands Cost Value -------------------------------------------------------------------------------- Within 1 year $ 588,128 $ 588,128 Beyond 1 yr but within 5 yrs 2,623,722 2,642,267 Beyond 5 yrs but within 10 yrs 1,630,315 1,643,653 Beyond 10 yrs but within 15 yrs 1,432,345 1,483,471 Beyond 15 yrs but within 20 yrs 1,544,195 1,598,390 Beyond 20 yrs 2,161,850 2,178,769 -------------------------------------------------------------------------------- 9,980,555 10,134,678 Mortgage-backed 1,956,200 1,978,661 -------------------------------------------------------------------------------- Total fixed-maturities and short-term investments $11,936,755 $12,113,339 -------------------------------------------------------------------------------- NOTE 10: INVESTMENT INCOME AND GAINS AND LOSSES ----------------------------------------------- Investment income consists of: Years ended December 31 ------------------------------------------ In thousands 2000 1999 1998 -------------------------------------------------------------------------------- Fixed-maturities $389,159 $358,127 $331,857 Short-term investments 10,473 7,672 5,692 Other investments 1,122 24 16 -------------------------------------------------------------------------------- Gross investment income 400,754 365,823 337,565 Investment expenses 6,769 6,367 5,763 -------------------------------------------------------------------------------- Net investment income 393,985 359,456 331,802 -------------------------------------------------------------------------------- Net realized gains (losses): Fixed-maturities Gains 58,349 62,300 50,438 Losses (34,166) (28,360) (7,197) -------------------------------------------------------------------------------- Net 24,183 33,940 43,241 -------------------------------------------------------------------------------- Other investments Gains 12,110 2,270 901 Losses (3,409) (11,050) (9,166) -------------------------------------------------------------------------------- Net 8,701 (8,780) (8,265) -------------------------------------------------------------------------------- Total net realized gains 32,884 25,160 34,976 -------------------------------------------------------------------------------- Total investment income $426,869 $384,616 $366,778 -------------------------------------------------------------------------------- Net unrealized gains (losses) consist of: As of December 31 -------------------------------- In thousands 2000 1999 -------------------------------------------------------------------------------- Fixed-maturities: Gains $263,629 $ 70,297 Losses (87,045) (387,193) -------------------------------------------------------------------------------- Net 176,584 (316,896) -------------------------------------------------------------------------------- Other investments: Gains 279 828 Losses (13,531) (6,671) -------------------------------------------------------------------------------- Net (13,252) (5,843) -------------------------------------------------------------------------------- Total 163,332 (322,739) Deferred income tax (benefit) 57,141 (112,920) -------------------------------------------------------------------------------- Unrealized gains (losses), net $106,191 $(209,819) -------------------------------------------------------------------------------- The deferred income tax (benefit) relates primarily to unrealized gains and losses on the company's fixed-maturity investments, which are reflected in shareholders' equity. The change in net unrealized gains (losses) consists of: Years ended December 31 ----------------------------------------------- In thousands 2000 1999 1998 -------------------------------------------------------------------------------- Fixed-maturities $493,480 $(772,041) $80,903 Other investments (7,409) (1,285) (7,477) -------------------------------------------------------------------------------- Total 486,071 (773,326) 73,426 Deferred income tax (benefit) 170,061 (270,330) 25,384 -------------------------------------------------------------------------------- Unrealized gains (losses), net $316,010 $(502,996) $48,042 -------------------------------------------------------------------------------- NOTE 11: INCOME TAXES --------------------- The company files a consolidated tax return that includes all of its U.S. subsidiaries. The provision for income taxes is composed of: Years ended December 31 -------------------------------------------------------------------------------- In thousands 2000 1999 1998 -------------------------------------------------------------------------------- Current $136,645 $107,858 $112,367 Deferred 49,575 (40,505) 19,943 -------------------------------------------------------------------------------- Total $186,220 $ 67,353 $132,310 -------------------------------------------------------------------------------- (52) 19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries The provision for income taxes gives effect to permanent differences between financial and taxable income. Accordingly, the company's effective income tax rate differs from the statutory rate on ordinary income. The reasons for the company's lower effective tax rates are as follows: Years ended December 31 -------------------------------------------- 2000 1999 1998 -------------------------------------------------------------------------------- Income taxes computed on pre-tax financial income at statutory rates 35.0% 35.0% 35.0% Increase (reduction) in taxes resulting from: Tax-exempt interest (8.6) (16.1) (10.8) Amortization of goodwill 0.3 0.5 0.4 Other (0.6) (2.0) (1.2) -------------------------------------------------------------------------------- Provision for income taxes 26.1% 17.4% 23.4% -------------------------------------------------------------------------------- The company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect on tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The tax effects of temporary differences that give rise to deferred tax assets and liabilities at December 31, 2000 and 1999 are presented below: In thousands 2000 1999 -------------------------------------------------------------------------------- Deferred tax assets: Tax and loss bonds $199,607 $206,999 Unrealized losses -- 112,920 Alternative minimum tax credit carryforward 11,381 65,404 Loss and loss adjustment expense reserves 88,396 79,051 Other 66,611 64,456 -------------------------------------------------------------------------------- Total gross deferred tax assets 365,995 528,830 -------------------------------------------------------------------------------- Deferred tax liabilities: Contingency reserve 317,631 330,125 Deferred premium revenue 113,524 110,785 Deferred acquisition costs 96,024 88,173 Unrealized gains 57,141 -- Contingent commissions 620 408 Other 33,518 32,144 -------------------------------------------------------------------------------- Total gross deferred tax liabilities 618,458 561,635 -------------------------------------------------------------------------------- Net deferred tax liability $252,463 $ 32,805 -------------------------------------------------------------------------------- The company believes that a valuation allowance is unnecessary in connection with the deferred tax assets. NOTE 12: NET INCOME PER COMMON SHARE ------------------------------------ The following table provides a reconciliation of the denominator of the basic earnings per share (EPS) computation to the denominator of the diluted EPS computation: Years ended December 31 ------------------------------------------------ 2000 1999 1998 -------------------------------------------------------------------------------- Net income (in thousands) $528,637 $320,530 $432,728 Basic weighted average shares 98,476,442 99,590,870 98,978,641 Stock options 543,437 674,295 1,042,537 Unallocated ESOP shares 92,750 137,174 141,836 -------------------------------------------------------------------------------- Diluted weighted average shares 99,112,629 100,402,339 100,163,014 -------------------------------------------------------------------------------- Basic EPS $5.37 $3.22 $4.37 Diluted EPS $5.33 $3.19 $4.32 -------------------------------------------------------------------------------- Options to purchase 3,329,028, 2,603,897 and 621,244 shares of common stock during 2000, 1999 and 1998, respectively, were not included in the computation of diluted EPS because the options exercise price was greater than the average market price of common shares during the respective years. NOTE 13: BUSINESS SEGMENTS -------------------------- MBIA Inc., through its subsidiaries, is a leading provider of financial guarantee and specialized financial services. MBIA provides innovative and cost-effective products and services that meet the credit enhancement, financial and investment needs of its public- and private-sector clients, domestically and internationally. MBIA Inc. has three principal businesses: financial guarantee, investment management services and municipal services. Each of these is a business segment, with its respective financial performance detailed in this report. The financial guarantee business provides an unconditional and irrevocable guarantee of the payment of principal and interest on insured obligations when due. The investment management services business provides an array of products and services to the public and not-for-profit sectors. These include local government investment pools, investment agreements, and discretionary and non-discretionary portfolio management services. The municipal services business provides revenue enhancement services and products to public-sector clients nationwide. During 1999, the company completed its reorganization of the operations of two subsidiaries, Municipal Tax Bureau (MTB) and Municipal Resource Consultants (MRC). With this reorganization complete, this business, operating as MBIA MuniServices, is now focused on delivering revenue enhancement services, consisting of discovery, audit, collections/recovery, enforcement and information (data) services. Business segment results are presented gross of intersegment transactions, which are not material to each segment. The following provides each business segment's revenues, operating income, income (loss) and assets: (53) 20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries Year ended December 31, 2000 --------------------------------------------------- INVESTMENT FINANCIAL MANAGEMENT MUNICIPAL In thousands GUARANTEE SERVICES SERVICES TOTAL -------------------------------------------------------------------------------- Operating revenues $ 868,622 $ 118,859 $ 37,089 $ 1,024,570 Expenses (170,333) (62,535) (36,479) (269,347) -------------------------------------------------------------------------------- Income from segments $ 698,289 $ 56,324 $ 610 $ 755,223 -------------------------------------------------------------------------------- Corporate loss (40,366) -------------------------------------------------------------------------------- Pre-tax income $ 714,857 -------------------------------------------------------------------------------- Segment assets $8,067,874 $5,768,793 $ 57,671 $13,894,338 ================================================================================ Year ended December 31, 1999 --------------------------------------------------- Investment Financial Management Municipal In thousands Guarantee Services Services Total -------------------------------------------------------------------------------- Operating revenues $ 829,738 $ 86,600 $ 22,923 $ 939,261 Expenses (315,236) (45,920) (35,372) (396,528) -------------------------------------------------------------------------------- Income (loss) from segments $ 514,502 $ 40,680 $(12,449) $ 542,733 -------------------------------------------------------------------------------- Corporate loss (154,850) -------------------------------------------------------------------------------- Pre-tax income $ 387,883 -------------------------------------------------------------------------------- Segment assets $7,108,122 $5,073,269 $ 82,508 $12,263,899 ================================================================================ Year ended December 31, 1998 --------------------------------------------------- Investment Financial Management Municipal In thousands Guarantee Services Services Total -------------------------------------------------------------------------------- Operating revenues $ 782,482 $ 65,032 $ 29,392 $ 876,906 Expenses (139,626) (36,012) (40,682) (216,320) -------------------------------------------------------------------------------- Income (loss) from segments $ 642,856 $ 29,020 $(11,290) $ 660,586 -------------------------------------------------------------------------------- Corporate loss (95,548) -------------------------------------------------------------------------------- Pre-tax income $ 565,038 -------------------------------------------------------------------------------- Segment assets $7,163,316 $4,497,333 $165,806 $11,826,455 ================================================================================ For 2000, 1999 and 1998 domestic premiums earned were $377 million, $391 million and $387 million, respectively. For 2000, 1999 and 1998 international premiums earned were $69 million, $52 million and $38 million, respectively. NOTE 14: DIVIDENDS AND CAPITAL REQUIREMENTS ------------------------------------------- Under New York state insurance law, MBIA Corp. may pay dividends only from earned surplus subject to the maintenance of a minimum capital requirement. The dividends in any 12-month period may not exceed the lesser of 10% of its policyholders' surplus as shown on its last filed statutory basis financial statements or of adjusted net investment income, as defined, for such 12-month period, without prior approval of the superintendent of the New York State Insurance Department. In accordance with such restrictions on the amount of dividends that can be paid in any 12-month period, MBIA Corp. had in excess of $40 million available for the payment of dividends to the company as of December 31, 2000. During 2000 and 1999, MBIA Corp. declared and paid dividends of $197 million and $180 million to the company. The insurance departments of New York State, certain other statutory insurance regulatory authorities, and the agencies that rate the bonds insured by MBIA Corp. and its subsidiaries, have various requirements relating to the maintenance of certain minimum ratios of statutory capital and reserves to net insurance in force. MBIA Corp. and its subsidiaries were in compliance with these requirements as of December 31, 2000. NOTE 15: STOCK REPURCHASE PLAN ------------------------------ In the third quarter of 1999, the company began acquiring shares of its common stock in connection with its stock repurchase plan announced in August 1999. The plan authorizes the company to repurchase up to 7.5 million outstanding common shares. During 2000 and 1999, the company purchased 1.7 million and 0.5 million shares of common stock at an aggregate cost of $77.7 million and $24.7 million, respectively. The company will only repurchase shares under this program when it is economically attractive and within the constraints of the company's Triple-A claims-paying ratings. NOTE 16: LONG-TERM DEBT AND LINES OF CREDIT ------------------------------------------- Long-term debt consists of: As of December 31 -------------------------------- In thousands 2000 1999 -------------------------------------------------------------------------------- 7.520% Notes due 2001-2002 $ 7,500 $ 11,250 9.000% Notes due 2001 100,000 100,000 6.880% Notes due 2008* 7,550 7,550 7.560% Notes due 2010 108,648 -- 9.375% Notes due 2011 100,000 100,000 8.200% Debentures due 2022** 100,000 100,000 7.000% Debentures due 2025 75,000 75,000 7.150% Debentures due 2027 100,000 100,000 6.625% Debentures due 2028 150,000 150,000 6.950% Notes due 2038*** 50,000 50,000 8.000% Notes due 2040**** 100,000 -- -------------------------------------------------------------------------------- 898,698 693,800 Less current portion 103,750 3,750 Less unamortized discount 760 846 Plus unamortized premium 914 -- -------------------------------------------------------------------------------- Total $795,102 $689,204 -------------------------------------------------------------------------------- * Callable 3/2000 @ 100.00 *** Callable 11/2003 @ 100.00 ** Callable 10/2002 @ 103.99 **** Callable 12/2005 @100.00 The company's long-term debt is subject to certain covenants, none of which significantly restrict the company's operating activities or dividend-paying ability. (54) 21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries In December 2000, MBIA issued unsecured bonds denominated in Swiss Francs. The principal amount of 175 million Swiss Francs is due June 15, 2010 and accrues interest at a rate of 4.50%, which is paid annually. These bonds are not redeemable prior to maturity, except in the event of certain changes involving taxation in the United States or the imposition of certain certification, identification or reporting requirements. Simultaneous with the issuance of this debt, MBIA entered into a swap transaction which effectively converted MBIA's net interest expense to a U.S. dollar liability with a rate of 7.56%, which requires the payment of proceeds at maturity of approximately $99.3 million in exchange for 175 million Swiss Francs and interest thereon. In December 2000, MBIA also issued $100 million of 40-year debentures with a coupon rate of 8.00% which is callable at MBIA's option after the fifth year. The proceeds of both debt offerings in 2000 will be used for general corporate purposes and for the repayment of MBIA's $100 million 9.00% notes maturing February 15, 2001. Aggregate maturities of long-term obligations for each of the next five years commencing in 2001 are: Years ended December 31 ------------------------------------------------------------------ After In thousands 2001 2002 2003 2004 2005 Total -------------------------------------------------------------------------------- $103,750 $3,750 -- -- $791,198 $898,698 -------------------------------------------------------------------------------- MBIA Corp. has a standby line of credit commitment in the amount of $900 million with a group of major Triple-A-rated banks to provide loans to MBIA Corp. if it incurs cumulative losses (net of any recoveries) from October 27, 2000 in excess of the greater of $900 million or 5.60% of average annual debt service. The obligation to repay loans made under this agreement is a limited recourse obligation payable solely from, and collateralized by, a pledge of recoveries realized on defaulted insured obligations including certain installment premiums and other collateral. This commitment has a seven-year term expiring on October 31, 2007, and contains an annual renewal provision subject to approval by the bank group. MBIA Corp. also maintains stop-loss reinsurance coverage of $175 million in excess of incurred losses of $762 million. The company and MBIA Corp. maintain bank liquidity facilities totaling $650 million. As of December 31, 2000, there were no borrowings outstanding under these agreements. From time to time TRS will access the capital markets for short-term asset-backed financings through a A1/P1-rated commercial paper conduit under conditions that the rating agencies agree will have no adverse impact on the rating of such conduit. Proceeds are invested under various client programs, which provide opportunities for MBIA Corp. to issue financial guarantee policies. The company has outstanding letters of credit for MBIA-MISC that are intended to support the net asset value of certain investment pools managed by MBIA-MISC. These letters can be drawn upon in the event the liquidation of such assets at below cost is required. NOTE 17: OBLIGATIONS UNDER MUNICIPAL INVESTMENT AGREEMENTS AND MUNICIPAL REPURCHASE AGREEMENTS -------------------------------------------------------------------------------- Obligations under municipal investment agreements and municipal repurchase agreements are recorded as liabilities on the balance sheet based upon proceeds received plus unpaid accrued interest from that date. Upon the occurrence of certain contractually agreed-upon events, some of these funds may be withdrawn at various times prior to maturity at the option of the investor. As of December 31, 2000, the annual interest rates on these agreements ranged from 2.5% to 8.08%. Principal payments due under these investment agreements in each of the next five years ending December 31 and thereafter, based upon expected withdrawal dates, are as follows: In thousands Principal Amount -------------------------------------------------------------------------------- Expected withdrawal date: 2001 $1,932,918 2002 948,024 2003 391,199 2004 86,869 2005 26,893 Thereafter 1,352,377 -------------------------------------------------------------------------------- Total $4,738,280 -------------------------------------------------------------------------------- IMC also provides agreements obligating it to purchase designated securities in a bond reserve fund at par value upon the occurrence of certain contractually agreed-upon events. The opportunities and risks in these agreements are analogous to those of municipal investment agreements and municipal repurchase agreements. The total par value of securities subject to these agreements was $25 million at December 31, 2000. NOTE 18: NET INSURANCE IN FORCE ------------------------------- MBIA Corp. guarantees the timely payment of principal and interest on municipal, asset-/mortgage-backed and other non-municipal securities. MBIA Corp.'s ultimate exposure to credit loss in the event of nonperformance by the insured is represented by the insurance in force as set forth in the tables that follow. The insurance policies issued by MBIA Corp. are unconditional commitments to guarantee timely payment on the bonds and notes to bondholders. The creditworthiness of each issuer is evaluated prior to the issuance of insurance, and each insured issue must comply with MBIA Corp.'s underwriting guidelines. Further, the payments to be made by the issuer on the bonds or notes may be backed by a pledge of revenues, reserve funds, letters of credit, investment contracts or collateral in the form of mortgages or other assets. The right to such money or collateral would typically become MBIA Corp.'s upon the payment of a claim by MBIA Corp. Under certain structured asset-backed transactions, a pool of assets covering at least 100% of the principal amount guaranteed under the insurance contract is sold or pledged to a special-purpose bankruptcy remote entity. MBIA Corp.'s primary risk from such insurance contracts is the impairment of cash flows due to delinquency or loss on the underlying assets. MBIA Corp. therefore evaluates all the factors affecting past and future asset performance by studying historical data on losses, delinquencies and recoveries of the underlying assets. Each transaction is reviewed to ensure that an appropriate legal structure is used to protect against the bankruptcy risk of the originator of the assets. Along with the legal structure, an additional level of first-loss protection is also created to protect against losses due to credit or dilution. This first level of loss protection is usually available from reserve funds, excess cash flows, overcollateralization or recourse to a third party. The level of first-loss protection depends upon the historical losses and dilution of the underlying assets, but is typically several times the normal historical loss experience for the underlying type of assets. As of December 31, 2000, insurance in force, net of cessions to reinsurers, had a range of maturity of 1-49 years diversified among 35,154 outstanding policies. The distribution of net insurance in force by geographic location, excluding $5.4 billion and $4.5 billion relating to investment management transactions guaranteed by MBIA Corp. in 2000 and 1999, respectively, is set forth in the following table: (55) 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries As of December 31 ------------------------------------------------------- 2000 1999 -------------------------------------------------------------------------------- NET % OF NET Net % of Net $ in billions INSURANCE INSURANCE Insurance Insurance Geographic Location IN FORCE IN FORCE In Force In Force -------------------------------------------------------------------------------- Domestic: California $ 80.0 11.8% $ 76.6 12.0% New York 71.1 10.4 71.3 11.2 Florida 35.7 5.3 36.3 5.7 Texas 26.7 3.9 26.6 4.2 New Jersey 26.0 3.8 24.4 3.8 Pennsylvania 24.5 3.6 25.8 4.1 Illinois 22.6 3.3 22.1 3.5 Massachusetts 20.5 3.0 19.2 3.0 Michigan 14.8 2.2 15.0 2.4 Ohio 13.5 2.0 13.1 2.1 Subtotal 335.4 49.3 330.4 52.0 Nationally diversified 117.2 17.2 97.1 15.3 Other states 180.4 26.5 175.0 27.5 -------------------------------------------------------------------------------- Total Domestic 633.0 93.0 602.5 94.8 International 47.9 7.0 33.4 5.2 -------------------------------------------------------------------------------- Total $680.9 100.0% $635.9 100.0% -------------------------------------------------------------------------------- The distribution of net insurance in force by type of bond is set forth in the table below: As of December 31 ------------------------------------------------------- 2000 1999 -------------------------------------------------------------------------------- NET % OF NET Net % of Net $ in billions INSURANCE INSURANCE Insurance Insurance Type of Bond IN FORCE IN FORCE In Force In Force -------------------------------------------------------------------------------- Domestic: Public Finance: General obligation $152.7 22.4% $147.5 23.2% Utilities 77.9 11.4 78.1 12.3 Health care 68.3 10.0 70.6 11.1 Special revenue 61.4 9.0 52.5 8.3 Transportation 48.7 7.2 45.5 7.1 Investor owned utilities 37.2 5.5 33.0 5.2 Higher education 28.8 4.2 27.1 4.3 Housing 24.4 3.6 23.3 3.7 -------------------------------------------------------------------------------- Total Public Finance 499.4 73.3 477.6 75.2 -------------------------------------------------------------------------------- Structured Finance: Mortgage backed: Home equity 33.8 5.0 43.2 6.8 Other 20.5 3.0 19.8 3.0 First mortgage 11.3 1.7 13.1 2.1 Asset backed: Other 23.3 3.4 16.9 2.6 Auto 14.7 2.2 8.7 1.4 Leasing 5.3 0.8 6.3 1.0 Pooled corp. obligation & other 18.9 2.8 10.7 1.7 Financial risk 5.8 0.8 6.2 1.0 -------------------------------------------------------------------------------- Total Structured Finance 133.6 19.7 124.9 19.6 -------------------------------------------------------------------------------- Total Domestic 633.0 93.0 602.5 94.8 International: Infrastructure: Sovereign 2.7 0.4 2.1 0.3 Utilities 2.5 0.4 1.6 0.2 Transportation 1.6 0.2 1.1 0.2 Investor owned utilities 1.4 0.2 1.1 0.2 Sub-sovereign 1.0 0.1 1.2 0.2 Health care 0.6 0.1 0.7 0.1 Housing 0.5 0.1 0.6 0.1 Higher education 0.1 -- 0.1 -- -------------------------------------------------------------------------------- Total Infrastructure 10.4 1.5 8.5 1.3 -------------------------------------------------------------------------------- Structured Finance: Mortgage backed: First mortgage 3.9 0.6 1.5 0.2 Home equity 0.4 0.1 -- -- Other 0.2 -- 0.2 -- Asset backed: Other 1.7 0.2 1.8 0.3 Auto -- -- 0.1 -- Pooled corp. obligation & other 27.9 4.1 17.6 2.8 Financial risk 3.4 0.5 3.7 0.6 -------------------------------------------------------------------------------- Total Structured Finance 37.5 5.5 24.9 3.9 -------------------------------------------------------------------------------- Total International 47.9 7.0 33.4 5.2 -------------------------------------------------------------------------------- Total $680.9 100.0% $635.9 100.0% -------------------------------------------------------------------------------- (56) 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries NOTE 19: REINSURANCE -------------------- MBIA Corp. reinsures exposure with other insurance companies under various treaty and facultative reinsurance contracts, both on a pro rata and excess of loss basis. In the event that any or all of the reinsurers were unable to meet their obligations, MBIA Corp. would be liable for such defaulted amounts. Amounts deducted from gross insurance in force for reinsurance ceded by MBIA Corp. and its subsidiaries were $143.3 billion and $129.0 billion at December 31, 2000 and 1999, respectively. The distribution of ceded insurance in force by type of bond is set forth in the following table: As of December 31 ------------------------------------------------------- 2000 1999 -------------------------------------------------------------------------------- % OF % of CEDED CEDED Ceded Ceded In billions INSURANCE INSURANCE Insurance Insurance Type of Bond IN FORCE IN FORCE In Force In Force -------------------------------------------------------------------------------- Domestic: Public Finance: General obligation $19.8 13.9% $18.8 14.6% Transportation 18.4 12.8 14.7 11.4 Utilities 17.1 11.9 17.2 13.3 Health care 15.3 10.7 15.7 12.2 Special revenue 9.4 6.6 8.8 6.8 Investor owned utilities 6.1 4.2 5.7 4.5 Housing 2.8 1.9 2.7 2.1 Higher education 2.4 1.7 2.1 1.6 -------------------------------------------------------------------------------- Total Public Finance 91.3 63.7 85.7 66.5 -------------------------------------------------------------------------------- Structured Finance: Mortgage backed: Home equity 8.2 5.7 8.8 6.8 Other 2.0 1.4 1.5 1.2 First mortgage 1.6 1.1 2.1 1.6 Asset backed: Other 2.9 2.0 2.4 1.8 Auto 2.6 1.8 1.9 1.4 Leasing 2.1 1.5 2.4 1.9 Pool corp. obligation & other 4.7 3.3 2.3 1.8 Financial risk 0.6 0.4 0.6 0.5 -------------------------------------------------------------------------------- Total Structured Finance 24.7 17.2 22.0 17.0 -------------------------------------------------------------------------------- Total Domestic $116.0 80.9 $107.7 83.5 -------------------------------------------------------------------------------- (Continued) As of December 31 ------------------------------------------------------- 2000 1999 -------------------------------------------------------------------------------- % OF % of CEDED CEDED Ceded Ceded In billions INSURANCE INSURANCE Insurance Insurance Type of Bond IN FORCE IN FORCE In Force In Force -------------------------------------------------------------------------------- International: Infrastructure: Transportation $1.7 1.2 $1.2 0.9 Sovereign 1.6 1.1 1.4 1.1 Utilities 1.1 0.8 0.7 0.5 Sub-sovereign 0.8 0.6 0.9 0.7 Investor owned utilities 0.6 0.4 0.5 0.4 Health care 0.4 0.3 0.4 0.3 -------------------------------------------------------------------------------- Total infrastructure 6.2 4.4 5.1 3.9 -------------------------------------------------------------------------------- Structured Finance: Pooled corp.obligation & other 15.0 10.4 9.5 7.4 Financial risk 2.8 2.0 3.1 2.4 Asset backed 1.8 1.2 2.4 1.9 Mortgage backed 1.5 1.1 1.2 0.9 -------------------------------------------------------------------------------- Total Structured Finance 21.1 14.7 16.2 12.6 -------------------------------------------------------------------------------- Total International 27.3 19.1 21.3 16.5 -------------------------------------------------------------------------------- Total $143.3 100.0% $129.0 100.0% -------------------------------------------------------------------------------- The distribution of ceded insurance in force by geographic location is set forth in the following table: As of December 31 ------------------------------------------------------- 2000 1999 -------------------------------------------------------------------------------- % OF % of CEDED CEDED Ceded Ceded In billions INSURANCE INSURANCE Insurance Insurance Geographic Location IN FORCE IN FORCE In Force In Force -------------------------------------------------------------------------------- Domestic: California $ 17.9 12.5% $ 17.6 13.6% New York 13.7 9.5 14.0 10.9 New Jersey 6.9 4.8 5.5 4.3 Texas 5.3 3.7 5.5 4.2 Florida 4.7 3.3 5.0 3.9 Massachusetts 4.2 3.0 4.1 3.2 Pennsylvania 4.2 2.9 4.6 3.5 Colorado 3.8 2.7 2.4 1.9 Puerto Rico 3.7 2.6 3.2 2.5 Illinois 3.6 2.5 3.4 2.6 -------------------------------------------------------------------------------- Subtotal 68.0 47.5 65.3 50.6 Nationally Diversified 18.8 13.1 14.4 11.2 Other States 29.2 20.3 28.0 21.7 -------------------------------------------------------------------------------- Total Domestic 116.0 80.9 107.7 83.5 -------------------------------------------------------------------------------- International 27.3 19.1 21.3 16.5 -------------------------------------------------------------------------------- Total $143.3 100.0% $129.0 100.0% -------------------------------------------------------------------------------- As part of the company's portfolio shaping activity in 1998, the company entered into facultative reinsurance agreements with highly rated reinsurers that obligate the company to cede future premiums to the reinsurers through January 1, 2005. Certain reinsurance contracts in 1998 were accounted for on a (57) 24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries retroactive basis in accordance with SFAS 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts." Components of premiums written including reinsurance assumed from and ceded to other companies is set forth in the following table: Years ended December 31 ------------------------------------------------------- 2000 1999 1998 -------------------------------------------------------------------------------- Direct $641,452 $590,597 $664,269 Assumed 45,956 34,274 12,781 -------------------------------------------------------------------------------- Gross 687,408 624,871 677,050 Ceded (189,316) (171,256) (156,064) -------------------------------------------------------------------------------- Net $498,092 $453,615 $520,986 -------------------------------------------------------------------------------- Ceding commissions received from reinsurers before deferrals were $37.3 million, $35.3 million and $37.2 million in 2000, 1999 and 1998, respectively. In 1998, $170.0 million was received in reinsurance recoveries related to the bankruptcy of a Pennsylvania hospital group. NOTE 20: PENSION AND PROFIT-SHARING PLANS ----------------------------------------- The company has a non-contributory, defined contribution pension plan to which the company contributes 10% of each eligible employee's annual total compensation. Pension expense for the years ended December 31, 2000, 1999 and 1998 was $7.8 million, $7.8 million and $7.3 million, respectively. The company also has a profit-sharing/401(k) plan that allows eligible employees to contribute up to 10% of eligible compensation. The company matches employee contributions up to the first 5% of total compensation. Company contributions to the profit-sharing/401(k) plan aggregated $2.8 million, $4.2 million and $2.9 million for the years ended December 31, 2000, 1999 and 1998, respectively. The profit-sharing/401(k) plan company match amounts are invested in common stock of the company. Amounts relating to the above plans that exceed limitations established by federal regulations are contributed to a non-qualified deferred compensation plan. NOTE 21: LONG-TERM INCENTIVE PLANS ---------------------------------- On March 2, 1987, the company adopted a plan (the 1987 plan) for key employees of the company and its subsidiaries to enable those employees to acquire shares of common stock of the company or to benefit from appreciation in the price of the common stock of the company. Options granted will either be Incentive Stock Options (ISOs), where they qualify under Section 422(a) of the Internal Revenue Code, or Non-Qualified Stock Options (NQSOs). ISOs and NQSOs may be granted at a price not less than 100% of the fair value of the company's common stock as determined on the date granted. Options will be exercisable as specified at the time of grant and expire ten years from the date of grant (or shorter if specified or following termination of employment). The board of directors of the company has authorized a maximum of 9,311,122 shares of the company's common stock to be granted as options under the 1987 plan. As of May 11, 2000, 9,161,959 options had been granted, net of expirations and cancellations. On May 11, 2000, at the annual meeting of shareholders, the company adopted the 2000 Stock Option Plan (the 2000 plan). Upon adoption of the 2000 plan, the 149,163 shares available for grant as of that date under the 1987 plan were canceled and no longer available for awards. The number of shares authorized under the 2000 plan is 4,900,000. As of December 31, 2000, 456,228 options had been granted under the 2000 plan, net of expirations and cancellations, leaving the total available for future grants at 4,443,772. The stock option grants, which may continue to be awarded every year, provide the right to purchase shares of common stock at the fair value (closing price) of the stock on the date of the grant. In 2000, 586,938 options were awarded under the 1987 and 2000 plans. These options vest over four or five years depending on the level of the recipient. Prior option grants are not taken into account in determining the number of options granted in any year. In December 1995, the MBIA Inc. Board of Directors approved the "MBIA Long-Term Incentive Program." The incentive program includes a stock option program and adds a compensation component linked to the growth in adjusted book value per share (ABV) of the company's stock. Awards under the long-term program are divided equally between the two components, with 50% of the award given in stock options and 50% of the award to be paid in cash or shares of company stock. Target levels for the option/incentive award are established as a percentage of total salary and bonus, based upon the recipient's position. Awards under the long-term program typically will be granted from the vice president level up to and including the chairman and chief executive officer. The ABV portion of the long-term incentive program may be awarded every year. The 2000 award covers growth in ABV from December 31, 2000 through December 31, 2003, with a base line growth of 13.5%. The 1999 award covers growth in ABV from December 31, 1999 through December 31, 2002 and the 1998 award covers growth in ABV from December 31, 1998 through December 31, 2001, with a base line growth of 12% on both awards. The amount to be paid in respect of such award will be adjusted upward or downward based on the actual ABV growth, with a minimum growth of 8% necessary to receive any payment and an 18% growth needed to receive the maximum payment of 200% of the target levels. The amount, if any, to be paid under this portion of the program will be paid in early 2004 for the 2000 award, in early 2003 for the 1999 award and early 2002 for the 1998 award in the form of cash or shares of the company's common stock. Subsequent awards, if any, will be made every year with concomitant payments occurring after the three-year cycle. During 2000, 1999 and 1998, $13.6 million, $8.5 million and $5.5 million, respectively, were recorded as compensation expense related to ABV awards. In December 1995, the company adopted a restricted stock program whereby key executive officers are granted (58) 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries restricted shares of the company's stock. These stock awards may only be sold three to five years from the date of grant, at which time the awards fully vest. In 2000 and 1999, respectively, 76,512 and 96,968 restricted shares (net of canceled shares) of the company's stock were granted to certain officers of the company. The fair value of the shares awarded in 2000 and 1999 determined on the grant date was $6.1 million and $5.0 million, respectively, and has been recorded as "Unearned compensation-restricted stock" and is shown as a separate component of shareholders' equity. Unearned compensation is amortized to expense over the appropriate three- to five-year vesting period. Compensation expense related to the restricted stock was $4.2 million, $1.9 million and $1.3 million for the years ended December 31, 2000, 1999 and 1998, respectively. In 1992, CapMAC adopted an Employee Stock Ownership Plan (ESOP) to provide its employees the opportunity to obtain beneficial interests in the stock of CapMAC through a trust (the ESOP Trust). The ESOP Trust purchased 350,625 shares of the company's stock. The ESOP Trust financed its purchase of common stock with a loan from the company in the amount of $10 million. The ESOP loan is evidenced by a promissory note delivered to the company. An amount representing unearned employee compensation, equivalent in value to the unpaid balance of the ESOP loan, is recorded as "Unallocated ESOP shares" and is shown as a separate component of shareholders' equity. The company is required to make contributions to the ESOP Trust, which enables the ESOP Trust to service its loan to the company. Prior to 1999, the ESOP expense was calculated using the shares allocated method. Shares were released for allocation to the participants and held in trust for the employees based upon the ratio of the current year's principal and interest payment to the sum of principal and interest payments estimated over the life of the loan. Compensation expense related to the ESOP was $1.3 million for the year ended December 31, 1998. As of December 31, 1998, 208,789 shares were allocated to the participants. In July 1999, the company contributed 13,397 additional shares to the ESOP plan. Subsequent to this contribution the ESOP plan was merged with the MBIA Inc. Employees Profit Sharing and 401(k) plan. In conjunction with the merger of the plans, released ESOP shares are used to fund the 401(k) company match obligations. During 2000 and 1999, 44,424 and 10,190 shares, respectively, were utilized for the 401(k) company match. As of December 31, 2000 and 1999, respectively, a total of 267,789 and 223,365 shares have been allocated to the participants. In October 1995, the FASB issued SFAS 123, "Accounting for Stock-Based Compensation," effective for financial statements for fiscal years beginning after December 15, 1995. SFAS 123 required the company to adopt, at its election, either 1) the provisions in SFAS 123 which require the recognition of compensation expense for employee stock-based compensation plans, or 2) the provisions in SFAS 123 which require the pro-forma disclosure of net income and earnings per share as if the recognition provisions of SFAS 123 had been adopted. SFAS 123 explicitly provides that employers may continue to account for their employee stock-based compensation plans using the accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25). The company adopted the disclosure requirements of SFAS 123 effective January 1, 1996 and continues to account for its employee stock-based compensation plans under APB 25. Accordingly, the adoption of SFAS 123 had no impact on the company's financial position or results of operations. As the table below shows, had compensation cost for the company's stock option program been recognized based on the fair value at the grant date, consistent with the recognition provisions of SFAS 123, the impact on the company's net income and earnings per share would not have been material. However, since the options vest over five years and additional awards could be made in future years, the effects of applying SFAS 123 in 2000 are not likely to be representative of the effects on reported net income and earnings per share for future years. Years ended December 31 -------------------------------------------- 2000 1999 1998 -------------------------------------------------------------------------------- Net income (in thousands): Reported $528,637 $320,530 $432,728 Pro-forma 520,238 314,074 430,224 Basic earnings per share: Reported $5.37 $3.22 $4.37 Pro-forma 5.28 3.15 4.35 Diluted earnings per share: Reported $5.33 $3.19 $4.32 Pro-forma 5.25 3.13 4.30 -------------------------------------------------------------------------------- The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants: DECEMBER December January December 2000 1999 1999 1998 -------------------------------------------------------------------------------- Exercise price $72.8750 $48.8125 $67.1250 $63.8152 Dividend yield 1.130% 1.680% 1.190% 1.254% Expected volatility .2834 .2512 .2392 .2392 Risk-free interest rate 5.342% 6.28% 4.83% 4.63% Expected option term (in years) 6.18 6.05 6.05 5.86 -------------------------------------------------------------------------------- (59) 26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries A summary of the company's stock option plans as of December 31, 2000, 1999 and 1998, and changes during the years ending on those dates, is presented below: 2000 ------------------------------------- Weighted Number Avg. Price Options of Shares per Share -------------------------------------------------------------------------------- Outstanding at beginning of year 5,530,090 $50.7047 Granted 586,938 68.2659 Exercised 623,937 60.7741 Expired or canceled 205,629 60.7840 -------------------------------------------------------------------------------- Outstanding at year-end 5,287,462 $55.0067 -------------------------------------------------------------------------------- Exercisable at year-end 1,765,194 $39.5690 Weighted-average fair value per share of options granted during the year $23.6069 -------------------------------------------------------------------------------- 1999 ------------------------------------- Weighted Number Avg. Price Options of Shares per Share -------------------------------------------------------------------------------- Outstanding at beginning of year 3,679,414 $42.2591 Granted 2,373,540 61.1806 Exercised 365,816 64.0688 Expired or canceled 157,048 66.2718 -------------------------------------------------------------------------------- Outstanding at year-end 5,530,090 $50.6911 -------------------------------------------------------------------------------- Exercisable at year-end 2,092,322 $32.5158 Weighted-average fair value per share of options granted during the year $21.4250 -------------------------------------------------------------------------------- 1998 ------------------------------------- Weighted Number Avg. Price Options of Shares per Share -------------------------------------------------------------------------------- Outstanding at beginning of year 4,033,930 $37.0004 Granted 575,430 63.8152 Exercised 744,670 69.6068 Expired or canceled 185,276 61.2550 -------------------------------------------------------------------------------- Outstanding at year-end 3,679,414 $42.2591 -------------------------------------------------------------------------------- Exercisable at year-end 2,095,767 $29.3827 Weighted-average fair value per share of options granted during the year $18.1565 -------------------------------------------------------------------------------- The following table summarizes information about the plan's stock options at December 31, 2000:
Weighted-Average Number Remaining Number Range of Average Outstanding Contractual Weighted-Average Exercisable Weighted-Average Exercise Price at 12/31/00 Life in Years Exercise Price 12/31/00 Exercise Price --------------------------------------------------------------------------------------------------------------------- $17.5630-42.7800 1,207,297 2.85 $29.8921 1,187,297 $29.7255 $44.5630-57.5000 954,844 8.75 $49.1693 17,898 $53.7235 $57.9380-72.8750 3,125,321 7.81 $66.4918 559,999 $62.3175 --------------------------------------------------------------------------------------------------------------------- Total 5,287,462 6.85 $55.0067 1,765,194 $39.5690 ---------------------------------------------------------------------------------------------------------------------
NOTE 22: SHAREHOLDERS' RIGHTS PLAN ---------------------------------- In December 1991, the board of directors of the company declared a dividend distribution of one preferred share purchase right (a Right) for each outstanding share of the company's common stock. Each Right entitles its holder to purchase from the company one one-hundredth of a share of the company's Junior Participating Cumulative Preferred Shares at a price of $160, subject to certain adjustments. Initially, the Rights are attached to the common stock and will not be transferable separately nor become exercisable until the earlier to occur of (i) ten business days following the date of the public announcement by the company (the Shares Acquisition Date) that a person or group of persons has acquired or obtained the right to acquire beneficial ownership of 10% or more of the outstanding shares of the company's common stock and (ii) ten business days (or later as may be determined by the board of directors) after the announcement or commencement of a tender offer or exchange offer which, if successful, would result in the bidder owning 10% or more of the outstanding shares of the company's common stock. However, no person shall be deemed to have acquired or obtained the right to acquire the beneficial ownership of 10% or more of the outstanding shares of the company's common stock if the board of directors determines that such acquisition is inadvertent, and such person promptly divests itself of a sufficient number of shares to be below the 10% ownership threshold. If the acquiring person or group acquires beneficial ownership of 10% or more of the company's common stock (except pursuant to a tender or exchange offer for all outstanding common stock of the company, determined by the company's independent directors to be at a fair price and in the best interests of the company and its shareholders), each holder of a Right (other than the acquirer) will be entitled to purchase, for $160, that number of shares of common stock of the company having a fair value of $320. Similarly, if after an acquiring person or group so acquires 10% or more of the company's common stock, the company is acquired in a merger or other business combination and is not the surviving entity, or its common stock is changed or exchanged in whole or in part, or 50% or more of the company's assets, cash flow or earning power is sold, each holder of a Right (other than the acquirer) will be entitled to purchase, for $160, that number of shares of common stock of the acquiring company having a fair value of $320. The board of directors may redeem the Rights in whole at $.01 per Right at any time prior to ten business days following the Shares Acquisition Date. Further, at any time after a person or group acquires 10% or more, but less than 50%, of the company's common stock, the board of directors of the company may (60) 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries exchange the Rights (other than those held by the acquirer) in whole or in part, at an exchange ratio of one share of common stock per Right. The board of directors may also amend the Rights at any time prior to the Shares Acquisition Date. The Rights will expire on December 12, 2001, unless earlier redeemed or exchanged. NOTE 23: RELATED PARTY TRANSACTIONS ----------------------------------- Since 1989, MBIA Corp. has executed five surety bonds to guarantee the payment obligations of the members of the Association which had their S&P claims-paying rating downgraded from Triple-A on their previously issued Association policies. In the event that they do not meet their Association policy payment obligations, MBIA Corp. will pay the required amounts directly to the paying agent. The aggregate outstanding exposure on these surety bonds as of December 31, 2000 is $340 million. NOTE 24: FAIR VALUE OF FINANCIAL INSTRUMENTS -------------------------------------------- The estimated fair value amounts of financial instruments shown in the following table have been determined by the company using available market information and appropriate valuation methodologies. However, in certain cases considerable judgment has been necessarily required to interpret market data to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amount the company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. FIXED-MATURITY SECURITIES > The fair value of fixed-maturity securities is based upon quoted market prices, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. SHORT-TERM INVESTMENTS > Short-term investments are carried at amortized cost which approximates fair value. OTHER INVESTMENTS > Other investments include the company's interest in equity oriented and equity method investments. The fair value of these investments is based on quoted market prices. MUNICIPAL INVESTMENT AGREEMENT PORTFOLIO > The municipal investment agreement portfolio is comprised of fixed-maturity securities and short-term investments. Its fair value equals the quoted market prices, if available, of its fixed-maturities plus the amortized cost of its short-term investments which, because of their short duration, is a reasonable estimate of fair value. If a quoted market price is not available for a fixed-maturity security, fair value is estimated using quoted market prices for similar securities. CASH AND CASH EQUIVALENTS, RECEIVABLE FOR INVESTMENTS SOLD, SHORT-TERM DEBT AND PAYABLE FOR INVESTMENTS PURCHASED > The carrying amounts of these items are a reasonable estimate of their fair value. SECURITIES BORROWED OR PURCHASED UNDER AGREEMENTS TO RESELL > The fair value is estimated based upon the quoted market prices of the transactions' underlying collateral. PREPAID REINSURANCE PREMIUMS > The fair value of the company's prepaid reinsurance premiums is based on the estimated cost of entering into an assumption of the entire portfolio with third-party reinsurers under current market conditions. DEFERRED PREMIUM REVENUE > The fair value of the company's deferred premium revenue is based on the estimated cost of entering into a cession of the entire portfolio with third-party reinsurers under current market conditions. LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES > The carrying amount is composed of the present value of the expected cash flows for specifically identified claims combined with an estimate for unidentified claims. Therefore, the carrying amount is a reasonable estimate of the fair value of the reserve. LONG-TERM DEBT > The fair value is estimated based on the quoted market prices for the same or similar securities. MUNICIPAL INVESTMENT AGREEMENTS AND MUNICIPAL REPURCHASE AGREEMENTS > The fair values of municipal investment agreements and municipal repurchase agreements are estimated using discounted cash flow calculations based upon interest rates currently being offered for similar agreements with maturities consistent with those remaining for the agreements being valued. SECURITIES LOANED OR SOLD UNDER AGREEMENTS TO REPURCHASE > The fair value is estimated based upon the quoted market prices of the transactions' underlying collateral. INSTALLMENT PREMIUMS > The fair value is derived by calculating the present value of the estimated future cash flow stream discounted at 9%. DERIVATIVES > The fair value reflects the estimated amounts that the company would receive or pay to terminate the transaction at the reporting date. (61) 28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries
As of December 31, 2000 As of December 31, 1999 ----------------------------------------------------- CARRYING ESTIMATED Carrying Estimated In thousands AMOUNT FAIR VALUE Amount Fair Value ----------------------------------------------------------------------------------------------------- ASSETS: Fixed-maturity securities $6,740,127 $6,740,127 $5,783,979 $5,783,979 Short-term investments 376,604 376,604 274,022 274,022 Other investments 119,591 119,591 146,038 146,038 Municipal investment agreement portfolio 4,996,608 4,996,608 4,489,551 4,489,551 Cash and cash equivalents 93,962 93,962 93,559 93,559 Securities borrowed or purchased under agreements to resell 314,624 332,179 261,171 260,819 Reinsurance recoverable on unpaid losses 31,414 31,414 30,819 30,819 Prepaid reinsurance premiums 442,622 380,047 403,210 342,837 Receivable for investments sold 13,772 13,772 24,922 24,922 LIABILITIES: Deferred premium revenue 2,397,578 2,123,661 2,310,758 2,022,357 Loss and loss adjustment expense reserves 499,279 499,279 467,279 467,279 Municipal investment agreements 3,821,652 3,911,348 3,483,911 3,413,014 Municipal repurchase agreements 967,803 994,742 1,028,921 1,023,823 Long-term debt 795,102 799,345 689,204 660,567 Short-term debt 144,243 144,243 68,751 68,751 Securities loaned or sold under agreements to repurchase 489,624 504,739 288,750 289,469 Payable for investments purchased 7,899 7,899 102,666 102,666 OFF-BALANCE SHEET INSTRUMENTS: Installment premiums -- 885,477 -- 731,748 Derivatives* 9,386 25,603 -- 9,617 -----------------------------------------------------------------------------------------------------
*The estimated fair value for 2000 includes net derivative liabilities identified as part of the company's implementation of SFAS 133. NOTE 25: QUARTERLY FINANCIAL INFORMATION (UNAUDITED) -------------------------------------------------------- A summary of selected quarterly income statement information follows:
In thousands except per share amounts 2000 FIRST SECOND THIRD FOURTH YEAR -------------------------------------------------------------------------------------- Gross premiums written $148,837 $189,295 $172,010 $177,266 $687,408 Net premiums written 105,871 127,485 122,789 141,947 498,092 Premiums earned 104,704 109,152 113,153 119,344 446,353 Investment income and realized gains and losses 107,255 106,897 105,474 107,243 426,869 All other revenues 42,475 46,475 47,594 47,688 184,232 Income before income taxes 179,077 174,111 177,493 184,176 714,857 Net income $132,320 $129,393 $130,714 $136,210 $528,637 Net income per common share:* Basic $ 1.34 $ 1.32 $ 1.33 $ 1.39 $ 5.37 Diluted $ 1.33 $ 1.31 $ 1.32 $ 1.38 $ 5.33 -------------------------------------------------------------------------------------- 1999 First Second Third Fourth Year -------------------------------------------------------------------------------------- Gross premiums written $154,910 $146,817 $152,749 $170,395 $624,871 Net premiums written 94,914 111,461 119,720 127,520 453,615 Premiums earned 112,111 107,217 110,139 113,329 442,796 Investment income and realized gains and losses 97,429 96,152 97,094 93,941 384,616 All other revenues 27,986 33,161 36,275 39,587 137,009 Income before income taxes 11,954 53,358 160,178 162,393 387,883 Net income $ 9,420 $ 56,793 $127,410 $126,907 $320,530 Net income per common share:* Basic $ 0.09 $ 0.57 $ 1.28 $ 1.28 $ 3.22 Diluted $ 0.09 $ 0.56 $ 1.27 $ 1.27 $ 3.19 --------------------------------------------------------------------------------------
*Due to the changes in the number of shares outstanding, quarterly per share amounts may not add to the totals for the years. The pre-tax one-time charge of $153 million relating to the increase in the company's loss reserving factor is included in the first quarter of 1999 results. The pre-tax one-time charge of $102 million relating to the impairment of the company's investment in Capital Asset is included in the second quarter of 1999 results. (62) 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries NOTE 26: 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 -------------------------------------------------------------------------------- (63)