-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DcV/8zxiEqlup+93IGQaWARhlOhpgSr3gZnlstq36bzuo9stKzq1L+vbz8eUGh5b pVZLZegIPjdOt1E6pUEXmQ== 0000950130-02-002262.txt : 20020415 0000950130-02-002262.hdr.sgml : 20020415 ACCESSION NUMBER: 0000950130-02-002262 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MBIA INC CENTRAL INDEX KEY: 0000814585 STANDARD INDUSTRIAL CLASSIFICATION: SURETY INSURANCE [6351] IRS NUMBER: 061185706 STATE OF INCORPORATION: CT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-09583 FILM NUMBER: 02594931 BUSINESS ADDRESS: STREET 1: 113 KING ST CITY: ARMONK STATE: NY ZIP: 10504 BUSINESS PHONE: 9142734545 MAIL ADDRESS: STREET 1: 113 KING ST CITY: ARMONK STATE: NY ZIP: 10504 10-K 1 d10k.txt ANNUAL REPORT SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2001. Commission file number 1-9583 MBIA INC. (Exact name of registrant as specified in its charter) Connecticut 06-1185706 (State of Incorporation) (I.R.S. Employer Identification No.) 113 King Street, Armonk, New York 10504 (Address of principal executive offices) (Zip Code) (914) 273-4545 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered - ------------------- ----------------------------------------- Common Stock, par value $1 per share New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __. - The aggregate market value of the voting stock held by non-affiliates of the Registrant as of March 21, 2002 was $8,032,111,440.00. As of March 21, 2002, 148,166,601 shares of Common Stock, par value $1 per share, were outstanding. Documents incorporated by reference. Portions of Registrant's Annual Report to Shareholders for the fiscal year ended December 31, 2001 are incorporated by reference into Parts I and II. Portions of the Definitive Proxy Statement of the Registrant, dated which will be filed on or before April 3, 2002, are incorporated by reference into Parts I and III. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (SS 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10 -K. [_] PART I ------ Item 1. Business MBIA Inc. (the "Company") is engaged in providing financial guarantee insurance and investment management and financial services to public finance clients and financial institutions on a global basis. Financial guarantee insurance provides an unconditional and irrevocable guarantee of the payment of the principal of, and interest or other amounts owing on, insured obligations when due. The Company conducts its financial guarantee business through its wholly-owned subsidiary, MBIA Insurance Corporation ("MBIA Corp."). MBIA Corp. is the successor to the business of the Municipal Bond Insurance Association (the "Association") which began writing financial guarantees for municipal bonds in 1974. MBIA Corp. is the parent of MBIA Insurance Corp. of Illinois ("MBIA Illinois") and Capital Markets Assurance Corporation ("CapMAC"), both financial guarantee companies that were acquired by MBIA Corp. MBIA Corp. also owns MBIA Assurance S.A. ("MBIA Assurance"), a French insurance company, which writes financial guarantee insurance in the countries of the European Community. Generally, throughout the text, references to MBIA Corp. include the activities of its subsidiaries, MBIA Illinois, MBIA Assurance and CapMAC. In September 1995, MBIA Corp. entered into a joint venture agreement with Ambac Assurance Corporation for the purpose of jointly marketing financial guarantee insurance outside the United States. On March 21, 2000, the two companies restructured the joint venture and agreed to begin marketing and originating financial guarantee insurance outside the United States independently, and also to continue to maintain certain reciprocal reinsurance arrangements for international business until the end of 2001. MBIA Corp. primarily insures obligations which are sold in the new issue and secondary markets, or which are held in unit investment trusts ("UIT") and by mutual funds. It also provides financial guarantees for debt service reserve funds. As a result of the triple-A ratings assigned to insured obligations, the principal economic value of financial guarantee insurance to the entity issuing the obligations is the savings in interest costs between an insured obligation and the same obligation on an uninsured basis. In addition, for complex financings and for obligations of issuers that are not well-known by investors, insured obligations receive greater market acceptance than uninsured obligations. MBIA Corp. issues financial guarantees for municipal bonds, asset-backed and mortgage-backed securities, investor-owned utility bonds, bonds issued by highly rated sovereign and sub-sovereign entities and collateralized obligations of corporations and financial institutions, both in the new issue and secondary markets. The municipal obligations that MBIA Corp. insures include tax-exempt and taxable indebtedness of states, counties, cities, utility districts and other political subdivisions, as well as airports, higher education and health care facilities and similar authorities. The asset-backed and structured finance obligations insured by MBIA Corp. typically consist of securities that are payable from or which are tied to the performance of a specified pool of assets that have a defined cash flow, such as residential and commercial mortgages, a variety of consumer loans, corporate loans and bonds, trade and export receivables, equipment and real property leases and infrastructure projects. MBIA Corp. has a Triple-A financial strength rating from Standard and Poor's Corporation ("S&P"), which it received in 1974; from Moody's Investors Service, Inc. ("Moody's"), which it received in 1984; from Fitch, Inc. ("Fitch"), which it received in 1995; and from Rating and Investment Information, Inc. ("RII"), which it received in 1998. Obligations which are guaranteed by MBIA Corp. are rated Triple-A primarily based on these claims-paying ratings of MBIA Corp. Both S&P and Moody's have also continued the Triple-A rating on MBIA Assurance, MBIA Illinois and CapMAC guaranteed bond issues. The Triple-A ratings are important to the operation of the Company's business and any reduction in these ratings could have a material adverse effect on MBIA Corp.'s ability to compete and could have a material adverse effect on the business, operations and financial results of the Company. The Company also provides investment management products and financial services through a group of subsidiary companies, all of which are owned by our wholly-owned subsidiary, MBIA Asset Management, LLC. These services include cash management, the issuance of municipal investment agreements, discretionary asset management, purchase and administrative services, and municipal revenue enhancement services. MBIA Municipal Investors Service Corporation ("MBIA-MISC") provides cash management and investment placement services to local governments, school districts and other institutional clients, providing those clients with fund administration services. MBIA Investment Management Corp. ("IMC") offers guaranteed investment agreements primarily for bond proceeds to states and municipalities. MBIA Capital Management Corp. ("CMC") performs fixed income investment management services for the investment portfolios of the Company, MBIA Corp., MBIA-MISC, IMC and selected external clients. In 1998, the Company acquired what is now 1838 Investment Advisors, LLC ("1838"), an investment advisor to equity mutual funds and to third party clients. MBIA MuniServices Company ("MuniServices") provides revenue enhancement services and products (discovery, audit, collections/recovery, enforcement and information services) to state and local governments. The Company continues to own a majority interest in Capital Asset Holdings GP, Inc. and certain affiliated entities (collectively, "Capital Asset"). Capital Asset was in the business of acquiring and servicing tax liens. The Company became a majority owner in December, 1998, when it acquired the interest of Capital Asset's founder. In 1999, the Company announced that it was exiting the tax lien business. Capital Asset's primary activity today is servicing the three securitizations of tax liens that are insured by MBIA Corp. Statements included in this Form 10-K which are not historical or current facts are "forward-looking statements" made pursuant to the safe harbor provisions of the private Securities Litigation Reform Act of 1998. The words "believe," "anticipate," "project," "plan," "expect," "intend," "will likely result," or "will continue," and similar expressions identify forward-looking statements. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. We wish to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of their respective dates. The following are some of the factors that could cause actual results to differ materially from estimates contained in or underlying the Company's forward-looking statements: (1) fluctuations in the economic, credit or interest rate environment in the United States or abroad; (2) level of activity within the national and international credit markets; (3) competitive conditions and pricing levels; (4) legislative or regulatory developments; (5) technological developments; (6) changes in tax laws; (7) the effects of mergers, acquisitions and divestitures; and (8) uncertainties that have not been identified at this time. The Company undertakes no obligation to publicly correct or update any forward-looking statement if it later becomes aware that such result is not likely to be achieved. MBIA Corp. Insured Portfolio At December 31, 2001, the net par amount outstanding on MBIA Corp.'s insured obligations (including insured obligations of MBIA Illinois, MBIA Assurance and CapMAC, but excluding the guarantee of $6.7 billion of intercompany investment management transactions) was $452.4 billion. Net insurance in force was $722.4 billion. Since generally MBIA Corp. guarantees to the holder of the underlying obligation the timely payment of amounts due on such obligation in accordance with its original payment schedule, in the case of a default on an insured obligation, payments under the insurance policy cannot be accelerated unless MBIA Corp. consents to the acceleration. Otherwise, MBIA Corp. is required to pay principal, interest or other amounts only as originally scheduled payments come due. MBIA Corp. seeks to maintain a diversified insured portfolio designed to manage and diversify risk based on a variety of criteria including revenue source, issue size, type of asset, industry concentrations, type of bond and geographic area. As of December 31, 2001, MBIA Corp. had 34,315 policies outstanding (excluding 566 policies relating to investment management transactions guaranteed by MBIA Corp.). These policies are diversified among 10,524 "credits," which MBIA Corp. defines as any group of issues supported by the same revenue source. 2 The table below sets forth information with respect to the original par amount written per issue in MBIA Corp.'s portfolio as of December 31, 2001: MBIA Corp. Original Par Amount Per Issue as of December 31, 2001 (1)
% of Total Number of Number of Net Par % of Net Original Par Amount Issues Issues Amount Par Amount Written Per Issue Outstanding Outstanding Outstanding Outstanding (In billions) Less than $10 million 25,736 75.0% $52.2 11.5% $10-25 million 3,500 10.2 45.8 10.1 $25-50 million 2,104 6.1 55.3 12.2 $50-100 million 1,434 4.2 69.5 15.4 Greater than $100 million 1,541 4.5 229.6 50.8 --------------- -------------- --------------- --------------- Total 34,315 100.0% $452.4 100.0% =============== ============== =============== ===============
- ------------------------ (1) Excludes $6.7 billion relating to investment management transactions guaranteed by MBIA Corp. 3 MBIA Corp. underwrites financial guarantee insurance on the assumption that the insurance will remain in force until maturity of the insured obligations. MBIA Corp. estimates that the average life (as opposed to the stated maturity) of its insurance policies in force at December 31, 2001 was 10.5 years. The average life was determined by applying a weighted-average calculation, using the remaining years to maturity of each insured obligation, and weighting them on the basis of the remaining debt service insured. No assumptions were made for any future refundings of insured issues. Average annual debt service on the portfolio at December 31, 2001 was $58.3 billion. MBIA Corp. had, until the early-1990's, written only financial guarantees for municipal issuers in the United States. Municipal bonds consist of both taxable and tax-exempt bonds and notes that are issued by states, cities, political subdivisions, utility districts, airports, health care institutions, higher educational facilities, housing authorities and other similar agencies. These types of obligations are supported by taxes, assessments, fees related to use of projects, lease payments, etc. By the mid-1990's, MBIA Corp. had begun to write guarantees for the structured finance and asset-backed market. In general, structured finance and asset-backed obligations are secured by or payable from a specific pool of assets having an ascertainable cash flow. These obligations are either "pass-through" obligations, which represent interests in the related assets, or "pay-through" obligations, which generally are debt obligations collateralized by the related assets. MBIA Corp. also insures payments due under credit derivatives, including termination payments, that may become due upon the occurrence of certain events. These types of obligations also generally have the benefit of over-collateralization, excess cash flow or one or more forms of credit enhancement to cover credit risks associated with the related assets. Structured finance and asset-backed obligations contain certain risks: asset risk, which relates to the amount and quality of asset coverage; and structural risk, which relates to the extent to which the transaction structure protects the interests of the investors. In general, the asset risk is addressed by sizing the asset pool based on the historical performance of the assets. Structural risks include bankruptcy and tax risks. Structured and asset-backed securities are usually designed to protect the investors from the bankruptcy or insolvency of the entity that originated the underlying assets as well as from the bankruptcy or insolvency of the servicer. These issues concern whether the sale of the assets by the originator to the issuer would be upheld in the event of the bankruptcy or insolvency of the originator and whether the servicer of the assets may be required to delay the remittance of any cash collections held by it or received by it after the time it becomes subject to bankruptcy or insolvency proceedings. In addition, servicer risk, the risk that problems at the servicer level could result in a decline in the collection of cash payments, may also be present in the transaction. The ability of the servicer (the entity which is responsible for collecting the cash flow from the asset pool) to properly service and collect on the underlying assets is also a factor in determining future asset performance. These issues are addressed through MBIA Corp.'s underwriting guidelines and procedures. Outside of the United States, sovereign and sub-sovereign, structured and asset-backed, utilities and other issuers are increasingly using financial guarantee insurance. Ongoing privatization efforts have shifted the burden from the government to public and private capital markets, where investors may seek the security of financial guarantee insurance. There is also growing interest in asset-backed securitization. While the principles of securitization have been increasingly applied in overseas markets, development in particular countries has varied due to the sophistication of the local capital markets and the impact of financial regulatory requirements, accounting standards and legal systems. It is expected that securitization will continue to expand internationally, at varying rates in each country. MBIA Corp. insures both asset-backed and structured transactions, sovereign and sub-sovereign debt issues, utilities, project financings and other obligations in selected international markets. MBIA Corp. believes that the risk profile of the international business it insures is generally the same as in the United States, but recognizes that there are particular risks related to each country and region. These risks include the legal and political situation, the capital markets and currency exchange risks. MBIA Corp. monitors these risks carefully. 4 MBIA Corp. Insured Portfolio by Bond Type as of December 31, 2001 (1) (In billions) Bond Type Net Par % of Net Amount Par Amount Global Public Finance Outstanding Outstanding United States - ------------- General Obligation $ 99.7 22.0% Utilities 48.2 10.7 Special Revenue 36.4 8.0 Health Care 36.3 8.0 Transportation 24.8 5.5 Higher Education 17.1 3.8 Investor-Owned Utilities 15.8 3.5 Housing 14.2 3.1 -------------------------------- Total United States 292.5 64.6 -------------------------------- Non-United States - ----------------- Investor-Owned Utilities 2.2 0.5 Sovereign 1.6 0.4 Utilities 1.5 0.3 Transportation 1.4 0.3 Sub-Sovereign 0.8 0.2 Health Care 0.4 0.1 Housing 0.2 0.0 -------------------------------- Total Non-United States 8.1 1.8 -------------------------------- Total Global Public Finance 300.6 66.4 -------------------------------- 5 Net Par % of Net Amount Par Amount Global Structured Finance Outstanding Outstanding United States - ------------- Asset-Backed: Auto 16.7 3.7 Credit Cards 15.8 3.5 Leasing 6.3 1.4 Other 5.4 1.2 Mortgage-Backed: Home Equity 24.9 5.5 Other 9.2 2.0 First Mortgage 6.7 1.5 Corporate Debt Obligations 16.6 3.7 Pooled Corp. Obligations & Other 9.3 2.0 Financial Risk 3.9 0.9 ----------------------------- Total United States 114.8 25.4 ----------------------------- Non-United States - ----------------- Corporate Debt Obligations 21.1 4.7 Pooled Corp. Obligations & Other 8.1 1.8 Mortgage-Backed: First Mortgage 4.0 0.9 Other 0.7 0.1 Home Equity 0.4 0.1 Asset-Backed 1.3 0.3 Financial Risk 1.4 0.3 ----------------------------- Total Non-United States 37.0 8.2 ----------------------------- Total Global Structured Finance 151.8 33.6 ----------------------------- Total $452.4 100.0% ============================= - ------------------------ (1) Excludes $6.7 billion relating to investment management transactions guaranteed by MBIA Corp. 6 As of December 31, 2001, of the $452.4 billion outstanding net par amount of obligations insured, $300.6 billion, or 66%, were insured in the global public finance market and $151.8 billion, or 34%, were insured in the global structured finance market. The table below shows the diversification by type of insurance written by MBIA Corp. in each of the last five years: MBIA Corp. Net Par Amount by Bond Type (1) (In millions)
Bond Type 1997 1998 1999 2000 2001 Global Public Finance United States - ------------- General Obligation $ 14,068 $ 15,468 $ 9,981 $ 9,829 $ 15,848 Utilities 6,944 6,475 2,440 2,747 6,350 Special Revenue 4,384 7,369 4,627 5,746 5,567 Housing 1,817 2,093 1,872 1,294 2,723 Higher Education 2,537 4,072 1,434 1,645 2,110 Investor Owned Utilities 1,548 1,477 1,340 2,523 1,652 Health Care 7,523 8,174 3,529 1,276 1,244 Transportation 6,097 4,174 709 2,637 1,098 ----------- -------------- ------------- ------------ ------------ Total United States 44,918 49,302 25,932 27,697 36,592 ----------- -------------- ------------- ------------ ------------ Total Non-United States 1,023 1,038 692 1,437 2,923 ----------- -------------- ------------- ------------ ------------ Total Global Public Finance 45,941 50,340 26,624 29,134 39,515 ----------- -------------- ------------- ------------ ------------ Global Structured Finance United States - ------------- Asset Backed: Auto 3,452 3,424 5,872 10,400 14,443 Credit Cards 1,782 4,077 1,844 9,100 8,418 Leasing 3,883 1,044 1,726 1,408 2,307 Other 1,711 1,562 2,149 1,576 1,958 Mortgage Backed: Home Equity 17,895 16,041 10,191 4,656 7,206 First Mortgage 2,536 2,434 5,205 2,171 2,561 Other 911 2,145 10,098 1,893 2,234 Corporate Debt Obligations 202 980 1,462 5,287 10,492 Pooled Corp. Obligations & Other 21 4,085 1,717 2,306 3,282 Financial Risk 3,338 2,441 1,409 1,905 149 ----------- -------------- ------------- ------------ ------------ Total United States 35,731 38,233 41,673 40,702 53,050 ----------- -------------- ------------- ------------ ------------ Total Non-United States 3,852 6,708 5,061 15,424 11,114 ----------- -------------- ------------- ------------ ------------ Total Global Structured Finance 39,583 44,941 46,734 56,126 64,164 ----------- -------------- ------------- ------------ ------------ Total $ 85,524 $ 95,281 $ 73,358 $ 85,260 $ 103,679 =========== ============== ============= ============ ============
_____________________________________ (1) Par amount insured by year, net of reinsurance. 7 MBIA Corp. is licensed to write business in all 50 states, the District of Columbia, Guam, the Northern Mariana Islands, the U.S. Virgin Islands, Puerto Rico, the Kingdom of Spain, the Republic of Singapore and the Republic of France. MBIA Assurance is licensed to write business in France. The following table sets forth the geographic distribution of MBIA Corp.'s net par outstanding including the ten largest states: MBIA Corp. Insured Portfolio by State As of December 31, 2001 (1)
Net Par % of Net Amount Par Amount Outstanding Outstanding (In billions) Domestic California $ 46.8 10.4% New York 42.2 9.3 Florida 20.4 4.5 Texas 15.9 3.5 New Jersey 15.0 3.3 Pennsylvania 13.4 2.9 Illinois 13.1 2.9 Massachusetts 12.7 2.8 Michigan 8.9 2.0 Ohio 8.2 1.8 --------------- --------------- Sub-Total 196.6 43.4 All Other States 107.9 23.9 Nationally Diversified 102.8 22.7 --------------- --------------- Total United States 407.3 90.0 International Regional Specific 20.1 4.4 Internationally Diversified 22.0 4.9 Other 3.0 0.7 --------------- --------------- Total International 45.1 10.0 --------------- --------------- Total $ 452.4 100.0% =============== ===============
________________________ (1) Excludes $6.7 billion relating to investment management transactions guaranteed by MBIA Corp. MBIA Corp. has underwriting guidelines that limit the net insurance in force for any one insured credit and is subject to both rating agency and regulatory single-risk limits with respect to any bond issue insured by it. As of December 31, 2001, MBIA Corp.'s net par amount outstanding for its ten largest insured public finance credits totaled $21.3 billion, representing 4.7% of MBIA Corp.'s total net par amount outstanding, and for its ten largest structured finance credits (without aggregating common issuers), the net par outstanding was $15.3 billion, representing 3.4% of the total. 8 MBIA Corp. Insurance Programs MBIA Corp. offers financial guarantee insurance in both the new issue and secondary markets. At present, no new financial guarantee insurance is being offered by MBIA Illinois or CapMAC, but it is possible that either of those entities may insure transactions in the future. MBIA Corp. and MBIA Assurance offer financial guarantee insurance in Europe, Asia, Latin America and other areas outside the United States. In September 1995, MBIA Corp. entered into a joint venture agreement with Ambac Assurance Corporation for the purpose of jointly marketing financial guarantee insurance outside the United States. On March 21, 2000, the two companies restructured the joint venture. Under the restructuring, the companies agreed to begin marketing and originating financial guarantee insurance outside the United States independently, and also to continue to maintain certain reciprocal reinsurance arrangements for international business until at least the end of 2001. After the end of 2001, there are no such reciprocal reinsurance arrangements in place. In the first quarter of 2001, the Company entered into a memorandum of understanding with Mitsui Marine and Fire Insurance Co. Ltd. relating to financial guarantee insurance in Japan, including certain reciprocal reinsurance agreements. Transactions in the new issue market are sold either through negotiated offerings or competitive bidding. In the first case, either the issuer or the underwriter purchases the insurance policy directly from MBIA Corp. For municipal bond issues involving competitive bidding, the insurance is offered as an option to the underwriters bidding on the transaction. The successful bidder would then have the option to purchase the insurance. In the secondary market, MBIA Corp. provides insurance on whole and partial maturities in response to requests from bond traders and institutions. MBIA Corp. also offers insurance to the unit investment trust market through ongoing arrangements with investment banks and financial service companies. Each issue in the trust is insured, in some cases until maturity, in others only while it is held in the trust. Lastly, insurance is offered in the mutual fund sector through ongoing arrangements with the fund sponsors. All fund issues are insured on a "while-in-trust" basis, but in some cases, MBIA Corp. is committed to offer insurance to maturity to the sponsor for an additional premium. Operations The worldwide insurance operations of MBIA Corp. are conducted through the Global Public Finance Division, the Global Structured Finance Division, the Risk Management Group and the Insured Portfolio Management Group. The Global Public Finance Division has underwriting authority with respect to certain categories of business up to pre-determined par amounts based on a risk-ranking system. In order to ensure that the guidelines are followed, Risk Management monitors and periodically reviews underwriting decisions made by the Global Public Finance Division. With respect to larger, complex, or unique transactions, underwriting is performed by a committee consisting of senior representatives of Global Public Finance, Risk Management, Insured Portfolio Management, and the Company's Finance Department. For all transactions done by the Global Structured Finance Division and for international deals, MBIA Corp.'s review and approval procedure has two stages. The first stage consists of screening, credit review and structuring by the appropriate business unit, in consultation with Risk Management officers. The second stage, consisting of the final review and approval of credit and structure, is performed by a committee consisting of the head of the applicable business unit, one officer from Risk Management and a third officer from either Risk Management or Insured Portfolio Management. Certain transactions, based on size, complexity, or other factors, must also be approved by a division-level committee consisting of senior representatives of Global Structured Finance, Risk Management, Insured Portfolio Management, Legal and the Company's Finance Department. Premium rates for all groups within the insurance operations enterprise are established by a Pricing Committee with representation from the Business Analysis Group (pricing and quantitative analysis) and the relevant insurance operations group. Risk Management --------------- The Risk Management Group is responsible for adherence to MBIA Corp.'s underwriting guidelines and procedures which are designed to maintain an insured portfolio with low risk characteristics. MBIA Corp. maintains underwriting guidelines based on those aspects of credit quality that it deems important for each category of obligation considered for insurance. For public finance and structured finance transactions, these include economic and social trends, debt management, financial management, adequacy of anticipated cash flow, satisfactory legal 9 structure and other security provisions, viable tax and economic bases, adequacy of loss coverage and project feasibility, including a satisfactory consulting engineer's report, if applicable. For global structured finance transactions, MBIA Corp.'s underwriting guidelines, analysis and due diligence focus on seller/servicer credit and operational quality, the quality and historical and projected performance of the asset pool, and the strength of the structure, including legal segregation of the assets, cash flow analysis, the size and source of first loss protection, and asset performance triggers and financial covenants. All non-U.S. transactions also include an assessment of country risk. Such guidelines are subject to periodic review by senior committees which are responsible for establishing and maintaining underwriting standards and criteria for all insurance products. The Credit Analysis Group within Risk Management analyzes and monitors MBIA Corp.'s direct and indirect exposure to financial institutions and corporate entities with respect to seller/servicer exposure, investment contracts, letters of credit, swaps, liquidity and other facilities supporting MBIA-insured issues, and recommends terms and conditions, as well as capacity guidelines for such exposures. The Portfolio Management Group within Risk Management analyzes the insured portfolio by various quantitative tools to test for diversity and credit quality, as well as to recommend guidelines for risk concentrations. Insured Portfolio Management ---------------------------- The Insured Portfolio Management Group is responsible for monitoring outstanding issues insured by MBIA Corp. This group's first function is to detect any deterioration in credit quality or changes in the economic or political environment which could interrupt the timely payment of debt service on an insured issue. Once a problem is detected, the group then works with the issuer, trustee, bond counsel, servicers, underwriters, and other interested parties to deal with the concern in order to try to avoid a default. The Insured Portfolio Management Group works closely with the Risk Management and New Business Departments to provide feedback on insured issue performance and credit risk parameters. To date, MBIA Corp. has had 40 insured issues requiring claim payments. There are currently 8 additional insured issues for which case loss reserves have been established but claims have not yet been paid (see "Losses and Reserves" below). Other potential losses have been avoided through the early detection of problems and subsequent negotiations with the issuer and other parties involved. In a limited number of instances, the solution involved the restructuring of insured issues or underlying security arrangements. More often, MBIA Corp. utilizes a variety of other techniques to resolve problems, such as enforcement of covenants and triggers, assistance in resolving management problems, transfer of servicing and working with the issuer to develop potential political solutions. In most cases, issuers are under no obligation to restructure insured issues or underlying security arrangements in order to prevent losses. Moreover, MBIA Corp. is obligated to pay amounts equal to defaulted payments on insured obligations on their respective due dates even if the issuer or other parties involved refuse to restructure or renegotiate the terms of the insured bonds or related security arrangements. The Company's experience is that early detection and continued involvement by the Insured Portfolio Management Group are crucial in avoiding or minimizing claims on insurance policies. There can be no assurance, however, that there will be no material losses in the future in respect of any issues guaranteed by MBIA Corp., MBIA Illinois, MBIA Assurance or CapMAC. Once an obligation is insured, the issuer and the trustee are typically required to furnish financial and asset related information, including audited financial statements, periodically to the Insured Portfolio Management Group for review. Potential problems uncovered through this review, such as poor financial results, low fund balances, covenant or trigger violations, trustee or servicer problems, or excessive litigation, could result in an immediate surveillance review and an evaluation of possible remedial actions. The Insured Portfolio Management Group also monitors state finances and budget developments and evaluates their impact on local issuers. During the underwriting process, issues are given an internal credit rating. All credits are monitored according to a frequency of review schedule that is based on risk type and credit quality. Issues that experience financial difficulties, deteriorating economic conditions, excessive litigation or covenant or trigger violations are placed on the appropriate review list and are subject to surveillance reviews at intervals commensurate to the problem which has been detected. There are three departments in the Insured Portfolio Management Group. The Global Public Finance Group handles all types of domestic and international municipal issues such as general obligation, utility and special revenue 10 bonds. It also follows project financings, future flow transactions and collateralized debt obligation issues. The units within the Global Structured Finance Group are responsible for domestic and international asset-backed and other structured transactions. The Enterprise Group is responsible for all health care, housing and student loan transactions. Each of the three groups is responsible for processing waiver and consent requests and other deal modifications within their areas. The Global Public Finance Group reviews and reports on the major credit quality factors of risks insured by the Company, evaluates the impact of new developments on insured weaker credits and carries out remedial activity. In addition, it performs analysis of financial statements and key operating data on a large-scale basis and maintains various databases for research purposes. This department is responsible for preparing special reports which include analyses of regional economic trends, proposed tax limitations, the impact of employment trends on local economies or legal developments affecting bond security. The units within the Global Structured Finance Group monitor insured structured finance programs, focusing on the adequacy of reserve balances and investment of earnings, the status of mortgage or loan delinquencies and underlying insurance coverage and the performance of the trustee for insured issues. Monitoring of issues typically involves review of records and statements, review of transaction documents with regard to compliance, analysis of cash flow adequacy and communication with trustees. Review of servicer performance is also conducted through site visits with management, review of servicer financial statements, review of servicer reports where available and contacts with program administrators and trustees. The department also carries out remedial activity on weaker credits. The Enterprise Group, which monitors insured health care, student loan and single and multi-family housing transactions as well as all pool programs, performs similar functions to, and applies the same policies and procedures as, the Global Public Finance and Global Structured Finance Groups. In addition, it is responsible for remedial activities on weaker credits. Investment Management Services Over the last ten years, the Company's investment management businesses have expanded their services to the public sector and added new revenue sources. MBIA Asset Management, LLC is the holding company under which the resources and capabilities of our four investment management subsidiaries have been consolidated. MBIA-MISC provides cooperative cash management services directly to local governments and school districts. It also provides customized asset management and treasury management consulting services for municipal and quasi-public sector clients. In addition, MBIA-MISC performs investment fund administration services for clients, which provide an additional source of revenue. MBIA-MISC is a Securities and Exchange Commission registered investment adviser. MBIA-MISC operates in 20 states and the Commonwealth of Puerto Rico. IMC provides customized guaranteed investment agreements and flexible repurchase agreements for bond proceeds and other public funds. At year-end 2001, principal and accrued interest outstanding on investment and repurchase agreements was $6.1 billion compared with $4.8 billion at year-end 2000. IMC may use derivative contracts in the course of providing its investment agreements as a protection against interest rate risks. While these derivatives are designed to help manage interest rate risk, they may involve amounts in excess of those reflected in the financial statements. In 1998, the Company acquired 1838, a full-service asset management firm with a strong institutional focus. 1838 currently has approximately $11.9 billion in equity, fixed income and balanced portfolios. CMC provides investment management services for IMC's investment agreements, MBIA-MISC's municipal cash management programs and MBIA Corp.'s insurance related fixed-income investment portfolios, as well as third-party accounts. CMC assumed full management for MBIA Corp.'s insurance related fixed-income investment portfolios in 1996 and now manages substantially all of the Company's investment portfolio. CMC is an NASD member and both CMC and 1838 are registered investment advisers. 11 Municipal Services MuniServices MuniServices provides revenue enhancement services and products (discovery, audit, collections/recovery, enforcement and information services) to municipal clients through a single national enterprise. MuniServices uses a consultative marketing strategy to focus clients on its unique capability to identify and recover revenues across the full range of tax sources under performance-based, self-funding business contracts. Capital Asset Through its interest in Capital Asset, between May, 1996 and December, 1998, the Company was involved in the business of acquiring and servicing delinquent real estate tax liens from municipalities. In December, 1998, the Company became a majority owner of Capital Asset. During the first two quarters of 1999, the Company attempted to sell its interest in Capital Asset. At the end of the second quarter of 1999, the Company ceased these efforts and decided to limit the activities of Capital Asset primarily to the servicing of the portfolios then being serviced by Capital Asset. In the second quarter of 1999, the Company completed an internal evaluation of Capital Asset's tax lien portfolio, as a result of which the Company determined that it was necessary to write down its investment in Capital Asset by $102 million. In the third quarter of 1999, Capital Asset engaged a specialty servicer of residential mortgages to help manage its business and operations and to assist in administering the tax lien portfolios serviced by Capital Asset. In the third quarter of 1999, Capital Asset also completed the refinancing of substantially all of its remaining tax liens. These liens were originally financed through a commercial paper warehouse facility that matured at the end of the third quarter, and which was guaranteed by the Company. The refinancing was accomplished through a securitization transaction in which the tax liens were sold to a qualifying special purpose vehicle which in turn issued notes secured by those liens. The proceeds of the securitization were used primarily to extinguish the warehouse facility. This was Capital Asset's third securitization of tax liens and MBIA Corp. has insured all of the notes issued by these securitizations. These securitizations were structured through the sale by Capital Asset of substantially all of its tax liens to off-balance sheet qualifying special purpose vehicles that were established in connection with these securitizations. These vehicles are not included in the consolidation of the MBIA group. The first transaction, done in 1997, had an original net par insured of $328 million and at year-end 2001 had $67 million net par insured outstanding; the second transaction, executed in 1998, had an original net par insured of $132 million, with the year-end 2001 net par insured outstanding at $24 million; the 1999 transaction was issued at $196 million net par insured outstanding and at year-end 2001 had $136 million net par insured outstanding (these net par insured outstanding amounts give no effect to the value of collateral). MBIA Corp. has established case basis loss reserves related to these policies (from which approximately $6.9 million in claims have been paid to date), but there can be no assurance that such reserves will be sufficient to cover future potential losses, if any, under such policies. Capital Asset continues to have certain contingent liabilities outstanding, including various individual and class action lawsuits. The claims giving rise to these lawsuits are a result of Capital Asset's business activities that took place primarily before the Company assumed majority ownership and Capital Asset is defending these lawsuits. The Company has no reason to believe that it has financial liability for these lawsuits. Plaintiffs in one of the class action lawsuits have filed a lawsuit against MBIA Corp. and certain affiliates claiming that the securitization completed by Capital Asset in 1999 was a fraudulent transfer under state law because the tax liens sold to the special purpose vehicle were sold at less than their fair value and because the transaction allegedly was done to avoid the effect of an adverse legal ruling against Capital Asset on certain issues. Although there are inherent risks in any litigation, the Company believes that it has substantial defenses on the merits of those claims and intends to defend against the claims vigorously. 12 Competition The financial guarantee insurance business is highly competitive: there are four other monolines that write financial guarantee insurance and another in the process of becoming licensed in the United States. The other principal insurers in 2001 in public finance were Ambac Assurance Corporation, Financial Guaranty Insurance Company and Financial Security Assurance Inc., all of which, like MBIA Corp., have Aaa and AAA claims-paying ratings from Moody's and S&P, respectively. The two principal competitors in the new issue structured finance securities market in 2001 were Financial Security Assurance and Ambac Assurance Corporation. Financial guarantee insurance also competes with other forms of credit enhancement, including senior-subordinated structures, over-collateralization, letters of credit and guarantees (for example, mortgage guarantees where pools of mortgages secure debt service payments) provided by banks and other financial institutions, some of which are governmental agencies or have been assigned the highest credit ratings awarded by one or more of the major rating agencies. Letters of credit are most often issued for periods of less than 10 years, although there is no legal restriction on the issuance of letters of credit having longer terms. Thus, financial institutions and banks issuing letters of credit compete directly with MBIA Corp. to guarantee short-term notes and bonds with a maturity of less than 10 years. To the extent that banks providing credit enhancement may begin to issue letters of credit with commitments longer than 10 years, the competitive position of financial guarantee insurers, such as MBIA Corp., could be adversely affected. Letters of credit also are frequently used to assure the liquidity of a short-term put option for a long-term bond issue. This assurance of liquidity effectively confers on such issues, for the short term, the credit standing of the financial institution providing the facility, thereby competing with MBIA Corp. and other financial guarantee insurers in providing interest cost savings on such issues. Financial guarantee insurance and other forms of credit enhancement also compete in nearly all instances with the issuer's alternative of foregoing credit enhancement and paying a higher interest rate. If the interest savings from insurance or another form of credit enhancement are not greater than the cost of such credit enhancement, the issuer will generally choose to issue bonds without enhancement. MBIA Corp. also competes in the international market with composite (multi-line) insurers. There are minimum capital requirements imposed on a financial guarantee insurer by Moody's and S&P to obtain Triple-A claims-paying ratings. Also, under a New York law, multi-line insurers are prohibited from writing financial guarantee insurance in New York State. See "Business-Regulation." However, there can be no assurance that major multi-line insurers or other financial institutions will not participate in financial guarantee insurance in the future, either directly or through monoline subsidiaries. Reinsurance State insurance laws and regulations, as well as Moody's and S&P, impose minimum capital requirements on financial guarantee companies, limiting the aggregate amount of insurance and the maximum size of any single risk exposure which may be written. MBIA Corp. increases its capacity to write new business by using treaty and facultative reinsurance to reduce its gross liabilities on an aggregate and single risk basis. From its reorganization in December 1986 through December 1987, MBIA Corp. reinsured a portion of each policy through quota and surplus share reinsurance treaties. Each treaty provides reinsurance protection with respect to policies written by MBIA Corp. during the term of the treaty, for the full term of the policy. Under its quota share treaty MBIA Corp. ceded a fixed percentage of each policy insured. Since 1988, MBIA Corp. has entered into primarily surplus share treaties under which a variable percentage of risk over a minimum size is ceded, subject to a maximum percentage specified in the treaty. Reinsurance ceded under the treaties is for the full term of the underlying policy. MBIA Corp. also enters into facultative reinsurance arrangements from time to time primarily in connection with issues which, because of their size, require additional capacity beyond MBIA Corp.'s retention and treaty limits. Under these facultative arrangements, portions of MBIA Corp.'s liabilities are ceded on an issue-by-issue basis. MBIA Corp. utilizes facultative arrangements as a means of managing its exposure to single issuers to comply with regulatory and rating agency requirements, as well as internal underwriting and portfolio management criteria. 13 As a primary insurer, MBIA Corp. is required to honor its obligations to its policyholders whether or not its reinsurers perform their obligations to MBIA Corp. The financial position of all reinsurers is monitored by MBIA Corp. on a regular basis. As of December 31, 2001, MBIA Corp. retained approximately 82% of the gross debt service outstanding of all transactions insured by it, MBIA Assurance, CapMAC and MBIA Illinois, and ceded approximately 18% to treaty and facultative reinsurers. The principal reinsurers of MBIA Corp., MBIA Assurance, CapMAC and MBIA Illinois are ACE Guaranty Re Inc., Radian Reinsurance, Inc., AXA Re Finance, Munich Reinsurance Corp. and Ambac Assurance Corporation. These reinsurers, whose claims-paying ability is rated Triple-A by S&P, reinsured approximately 76% of the total ceded insurance in force at December 31, 2001. All of the other reinsurers reinsured approximately 24% of the total ceded insurance in force at December 31, 2001 and are diversified geographically and by lines of insurance written. MBIA Corp.'s net retention on the policies it writes varies from time to time depending on its own business needs and the capacity available in the reinsurance market. The amounts of reinsurance ceded at December 31, 2001 and 2000 by bond type and by geographic location are set forth in Note 21 to the Consolidated Financial Statements of MBIA Inc. and Subsidiaries. The downgrade or default of one or more of the Company's reinsurers could have an adverse impact on the Company's results of operations. MBIA Corp. and MBIA Assurance have entered into a reinsurance agreement providing for MBIA Corp.'s reimbursement of the risks of MBIA Assurance and a net worth maintenance agreement in which MBIA Corp. agrees to maintain the net worth of MBIA Assurance, to remain its sole shareholder and not to pledge its shares. Under the reinsurance agreement MBIA Corp. agrees to reimburse MBIA Assurance on an excess of loss basis for losses incurred in each calendar year for net retained insurance liability, subject to certain contract limitations. Under the net worth maintenance agreement, MBIA Corp. agrees to maintain a minimum capital and surplus position in accordance with French and New York State legal requirements. MBIA Corp. and MBIA Illinois entered into a reinsurance agreement under which MBIA Corp. reinsured 100% of all business written by MBIA Illinois, net of cessions by MBIA Illinois to third party reinsurers, in exchange for MBIA Illinois' transfer of the assets underlying the related unearned premium and contingency reserves. Pursuant to such reinsurance agreement, MBIA Corp. reinsured all of the net exposure of $30.9 billion, or approximately 68% of the gross debt service outstanding, of the municipal bond insurance portfolio of MBIA Illinois, the remaining 32% having been previously ceded to treaty and facultative reinsurers of MBIA Illinois. In 1990, 10% of this portfolio was ceded back to MBIA Illinois to comply with regulatory requirements. Effective January 1, 1999, MBIA Corp. and MBIA Illinois entered into a replacement reinsurance agreement whereby MBIA Corp. agreed to accept as reinsurance from MBIA Illinois 100% of the net liabilities and other obligations of MBIA Illinois, for losses paid on or after that date, thereby eliminating the 10% retrocession arrangement previously in place. MBIA Corp. and CapMAC have entered into a reinsurance agreement, effective April 1, 1998, under which MBIA Corp. agreed to reinsure 100% of the net liability and other obligations of CapMAC in exchange for CapMAC's payment of a premium equal to the ceded reserves and contingency reserves. Pursuant to such reinsurance agreement with CapMAC, MBIA Corp. reinsured all of the net exposure of $31.6 billion, or approximately 78% of the gross debt service outstanding, the remaining 22% having been previously ceded to treaty and facultative reinsurers of CapMAC. Investments and Investment Policy The Finance Committee of the Board of Directors of the Company approves the general investment objectives and policies of the Company, and also reviews more specific investment guidelines. On January 1, 1996 CMC assumed full management of all of MBIA Corp.'s consolidated investment portfolios and currently manages substantially all of the Company's investment portfolio. To continue to provide strong capital resources and claims-paying capabilities for its insurance operations, the investment objectives and policies for insurance operations set quality and preservation of capital as the primary objective, subject to an appropriate degree of liquidity. Maximization of after-tax investment income and investment returns is an important but secondary objective. 14 Investment objectives, policies and guidelines related to the Company's municipal investment agreement business are also subject to review and approval by the Finance Committee of the Board of Directors. The primary investment objectives are to preserve capital, to achieve an investment duration that closely approximates the expected duration of related liabilities, and to maintain appropriate liquidity. The investment agreement assets are managed by CMC subject to an investment management agreement between IMC and CMC. For 2001, approximately 60% of the Company's net income, was derived from after-tax earnings on its investment portfolio (excluding the amounts on investment agreement assets which are recorded as a component of investment management services revenues). The following table sets forth investment income and related data for the years ended December 31, 1999, 2000 and 2001. Investment Income of the Company (1)
1999 2000 2001 (In thousands) Investment income before expenses (2) $365,823 $400,754 $427,262 Investment expenses 6,367 6,769 7,600 -------- -------- -------- Net investment income before income taxes 359,456 393,985 419,662 Net realized gains 25,160 32,884 8,896 -------- -------- -------- Total investment income before income taxes $384,616 $426,869 428,558 ======== ======== ======== Total investment income after income taxes $312,200 $335,435 $343,788 ======== ======== ========
______________________________ (l) Excludes investment income from investment management services and municipal services segments. (2) Includes taxable and tax-exempt interest income. 15 The tables below set forth the composition of the Company's investment portfolios. The weighted average yields in the tables reflect the nominal yield on market value as of December 31, 2001, 2000 and 1999. Investment Portfolio by Security Type as of December 31, 2001
Investment Insurance Management Services Weighted Weighted Fair Value Average Fair Value Average Investment Category (in thousands) Yield (1) (in thousands) Yield (1) Fixed-income investments: Long-term bonds: Taxable bonds: U.S. Treasury & Agency obligations $ 859,450 3.85 % $ 813,146 4.69 % GNMAs 116,119 6.24 191,115 3.54 Other mortgage & asset-backed securities 423,942 5.50 2,580,908 3.12 Corporate obligations 1,430,425 5.96 2,106,481 5.17 Foreign obligations (2) 260,132 5.27 561,463 6.02 ----------------- ----------- ----------------- --------- Total 3,090,068 5.26 6,253,113 4.67 Tax-exempt bonds: State & municipal 4,330,956 4.98 - - ----------------- ----------- ----------------- ---------- Total long-term investments 7,421,023 5.10 6,253,113 4.67 Short-term investments (3) 293,791 5.36 412,868 2.61 ----------------- ----------- ----------------- --------- Total fixed-income investments 7,714,814 5.11 % 6,665,981 4.54 % Other investments (4) 135,376 - - - ----------------- ----------------- Total investments $7,850,190 - $6,665,981 - ================= =================
_________________________ (1) Prospective market yields as of December 31, 2001. Yield on tax-exempt bonds is presented on a taxable bond equivalent basis using a 35% federal income tax rate. (2) Consists of U.S. denominated foreign government and corporate securities. (3) Taxable and tax-exempt investments, including bonds with a remaining maturity of less than one year. (4) Consists of equity investments and other fixed income investments; yield information not meaningful. 16 Investment Portfolio by Security Type as of December 31, 2000
Investment Insurance Management Services Weighted Weighted Fair Value Average Fair Value Average Investment Category (in thousands) Yield (1) (in thousands) Yield (1) Fixed-income investments: Long-term bonds: Taxable bonds: U.S. Treasury & Agency obligations $ 841,683 6.34 % $ 443,581 6.09 % GNMAs 156,284 7.04 149,989 6.49 Other mortgage & asset-backed securities 317,964 6.64 2,954,242 6.20 Corporate obligations 1,388,535 6.87 919,547 7.15 Foreign obligations (2) 235,378 6.28 282,278 7.07 ----------------- ----------- ----------------- --------- Total 2,939,844 6.66 4,749,637 6.43 Tax-exempt bonds: State & municipal 3,800,283 7.62 - - ----------------- ----------- ----------------- --------- Total long-term investments 6,740,127 7.20 4,749,637 6.43 Short-term investments (3) 376,604 6.57 246,971 6.05 ----------------- ----------- ----------------- --------- Total fixed-income investments 7,116,731 7.17 % 4,996,608 6.42 % Other investments (4) 119,591 - - - ----------------- ----------------- Total investments $7,236,322 - $4,996,608 - ================= =================
_____________________________ (1) Prospective market yields as of December 31, 2000 . Yield on tax-exempt bonds is presented on a taxable bond equivalent basis using a 35% federal income tax rate. (2) Consists of U.S. denominated foreign government and corporate securities. (3) Taxable and tax-exempt investments, including bonds with a remaining maturity of less than one year. (4) Consists of equity investments and other fixed income investments; yield information not meaningful. 17 Investment Portfolio by Security Type as of December 31, 1999
Investment Insurance Management Services Weighted Weighted Fair Value Average Fair Value Average Investment Category (in thousands) Yield (1) (in thousands) Yield (1) Fixed-income investments: Long-term bonds: Taxable bonds: U.S. Treasury & Agency obligations $ 600,350 7.45 % $1,237,005 6.67 % GNMAs 146,976 7.68 67,950 7.16 Other mortgage & asset-backed securities 267,531 7.94 1,880,944 6.94 Corporate obligations 1,148,565 7.50 766,180 7.61 Foreign obligations (2) 158,938 7.21 317,755 7.66 ----------------- ----------- ----------------- --------- Total 2,322,360 7.53 4,269,834 7.04 Tax-exempt bonds: State & municipal 3,461,619 8.72 - - ----------------- ------------ ----------------- --------- Total long-term investments 5,783,979 8.24 4,269,834 7.04 Short-term investments (3) 274,022 5.92 219,717 6.17 ----------------- ------------ ----------------- --------- Total fixed-income investments 6,058,001 8.14 % 4,489,551 7.00 % Other investments (4) 146,038 - - - ----------------- ----------------- Total investments $6,204,039 - $4,489,551 - ================= =================
____________________________ (1) Prospective market yields as of December 31, 1999. Yield on tax-exempt bonds is presented on a taxable bond equivalent basis using a 35% federal income tax rate. (2) Consists of U.S. denominated foreign government and corporate securities. (3) Taxable and tax-exempt investments, including bonds with a remaining maturity of less than one year. (4) Consists of equity investments and other fixed income investments; yield information not meaningful. 18 The average maturity of the insurance fixed-income portfolio excluding short-term investments as of December 31, 2001 was 13.1 years. After allowing for estimated principal pre-payments on mortgage pass-through securities, the duration of the portfolio was 7.5 years. The table below sets forth the distribution by maturity of the Company's consolidated fixed-income investments: Fixed-Income Investments by Maturity as of December 31, 2001
Investment Insurance Management Services Fair Value % of Total Fair Value % of Total (In thousands) Fixed-Income (In thousands) Fixed-Income Maturity Investments Investments Within 1 year $ 293,791 3.8% $ 412,868 6.2% Beyond 1 year but within 5 years 1,271,864 16.5 2,305,455 34.6 Beyond 5 years but within 10 years 1,506,518 19.5 1,420,403 21.3 Beyond 10 years but within 15 years 1,455,672 18.9 695,400 10.4 Beyond 15 years but within 20 years 1,240,611 16.1 620,927 9.3 Beyond 20 years 1,946,358 25.2 1,210,928 18.2 ---------- ------- ---------- ------- Total fixed-income investments $7,714,814 100.0% $6,665,981 100.0% ========== ======= ========== =======
The quality distribution of the Company's fixed-income investments based on ratings of Moody's was as shown in the table below: Fixed-Income Investments by Quality Rating as of December 31, 2001 (1)
Investment Insurance Management Services Fair Value % of Total Fair Value % of Total (In thousands) Fixed-Income (In thousands) Fixed-Income Quality Rating Investments Investments Aaa $4,925,659 65.0% $4,703,968 70.6% Aa 1,604,104 21.2 843,046 12.6 A 968,297 12.8 1,075,732 16.1 Baa 75,068 1.0 43,235 0.7 ---------- ------- ---------- ------- $7,573,128 100.0% $6,665,981 100.0% ========== ======= ========== =======
_________________________ (1) Excludes short-term investments with an original maturity of less than one year, but includes bonds having a remaining maturity of less than one year. 19 Regulation MBIA Corp. is licensed to do insurance business in, and is subject to insurance regulation and supervision by, the State of New York (its state of incorporation), the 49 other states, the District of Columbia, Guam, the Northern Mariana Islands, the U.S. Virgin Islands, Puerto Rico, the Kingdom of Spain, the Republic of Singapore and the Republic of France. MBIA Assurance is licensed to do insurance business in France and is subject to regulation under the corporation and insurance laws of the Republic of France. MBIA Assurance has used the provisions of the Third Non-life Insurance Directive to operate in the United Kingdom both on a services and branch basis and is, to a limited extent, subject to supervision by the Financial Services Authority. The extent of state insurance regulation and supervision varies by jurisdiction, but New York, Illinois and most other jurisdictions have laws and regulations prescribing minimum standards of solvency, including minimum capital requirements, and business conduct which must be maintained by insurance companies. These laws prescribe permitted classes and concentrations of investments. In addition, some state laws and regulations require the approval or filing of policy forms and rates. MBIA Corp. is required to file detailed annual financial statements with the New York Insurance Department and similar supervisory agencies in each of the other jurisdictions in which it is licensed. The operations and accounts of MBIA Corp. are subject to examination by these regulatory agencies at regular intervals. MBIA Corp. is licensed to provide financial guarantee insurance under Article 69 of the New York Insurance Law. Article 69 defines financial guarantee insurance to include any guarantee under which loss is payable upon proof of occurrence of financial loss to an insured as a result of certain events. These events include the failure of any obligor on or any issuer of any debt instrument or other monetary obligation to pay principal, interest, premium, dividend or purchase price of or on such instrument or obligation when due. Under Article 69, MBIA Corp. is licensed to transact financial guarantee insurance, surety insurance and credit insurance and such other kinds of business to the extent necessarily or properly incidental to the kinds of insurance which MBIA Corp. is authorized to transact. In addition, MBIA Corp. is empowered to assume or reinsure the kinds of insurance described above. As a financial guarantee insurer, MBIA Corp. is required by the laws of New York, California, Connecticut, Florida, Illinois, Iowa, New Jersey and Wisconsin to maintain contingency reserves on its municipal bond, asset-backed securities and other financial guarantee liabilities. Under New Jersey, Illinois and Wisconsin regulations, contributions by such an insurer to its contingency reserves are required to equal 50% of earned premiums on its municipal bond business. Under New York law, such an insurer is required to contribute to contingency reserves 50% of premiums as they are earned on policies written prior to July 1, 1989 (net of reinsurance), and, with respect to policies written on and after July 1, 1989, must make contributions over a period of 15 or 20 years (based on issue type), or until the contingency reserve for such insured issues equals the greater of 50% of premiums written for the relevant category of insurance or a percentage of the principal guaranteed, varying from 0.55% to 2.5%, depending upon the type of obligation guaranteed (net of reinsurance, refunding, refinancings and certain insured securities). California, Connecticut, Iowa and Florida laws impose a generally similar requirement. In each of these states, MBIA Corp. may apply for release of portions of the contingency reserves in certain circumstances. The laws and regulations of these states also limit both the aggregate and individual municipal bond and asset-backed securities risks that MBIA Corp. may insure on a net basis. California, Connecticut, Florida, Illinois and New York, among other things, limit insured average annual debt service on insured municipal bonds with respect to a single entity and backed by a single revenue source (net of qualifying collateral and reinsurance) to 10% of policyholders' surplus and contingency reserves. California, Connecticut, Florida, Illinois and New York also limit the net insured unpaid principal on a municipal bond issued by a single entity and backed by a single revenue source to 75% of policyholders' surplus and contingency reserves. California, Connecticut, and New York, among other things, require that the lesser of the insured average debt service and the insured unpaid principal (reduced by the extent to which unpaid principal of the supporting assets exceeds the insured unpaid principal), divided by nine, on each issue of asset-backed securities issued by a single entity shall not exceed 10% of policyholders' surplus and contingency reserves, while Florida limits insured unpaid principal for any one risk to 10% of policyholders' surplus and contingency reserves. In New Jersey, Virginia and Wisconsin, the average annual debt service on any single issue of municipal bonds (net of reinsurance) is limited to 10% of policyholders' surplus. Other states that do not explicitly regulate financial guarantee or municipal bond insurance do impose single risk limits which are similar in effect to the foregoing. 20 Under New York, California, Connecticut, Florida, Illinois, New Jersey and Wisconsin law, aggregate insured unpaid principal and interest under policies insuring municipal bonds (in the case of New York, California, Connecticut, Florida and Illinois, net of reinsurance) are limited to certain multiples of policyholders' surplus and contingency reserves. New York, California, Connecticut, Florida, Illinois and other states impose a 300:1 limit for insured municipal bonds, although more restrictive limits on bonds of other types do exist. For example, New York, California, Connecticut and Florida impose a 100:1 limit for certain types of non-municipal bonds. Under New York, California, Connecticut, Florida, and New Jersey law, aggregate insured unpaid principal and interest under policies insuring asset-backed securities (again, in the case of New York, California, Connecticut, and Florida, net of reinsurance) are limited to certain multiples of policyholders' surplus and contingency reserves. New York, California, Connecticut, and other states impose a 150:1 limit for insured investment grade asset-backed securities, although more restrictive limits on asset-backed securities of other types exist. For example, New York, California, Connecticut, and Florida impose a 50:1 limit for non-investment grade asset-backed securities. The Company, MBIA Corp., MBIA Illinois, and CapMAC also are subject to regulation under insurance holding company statutes of New York, Illinois and other jurisdictions in which MBIA Corp., MBIA Illinois, and CapMAC are licensed to write insurance. The requirements of holding company statutes vary from jurisdiction to jurisdiction but generally require insurance holding companies, such as the Company, and their insurance subsidiaries, to register and file certain reports describing, among other information, their capital structure, ownership and financial condition. The holding company statutes also generally require prior approval of changes in control, of certain dividends and other inter-corporate transfers of assets, and of transactions between insurance companies, their parents and affiliates. The holding company statutes impose standards on certain transactions with related companies, which include, among other requirements, that all transactions be fair and reasonable and that those exceeding specified limits receive prior regulatory approval. Prior approval by the New York Insurance Department is required for any entity seeking to acquire "control" of the Company, MBIA Corp., or CapMAC. Prior approval by the Illinois Department of Insurance is required for any entity seeking to acquire "control" of the Company, MBIA Corp., MBIA Illinois, or CapMAC. In many states, including New York and Illinois, "control" is presumed to exist if 10% or more of the voting securities of the insurer are owned or controlled by an entity, although the supervisory agency may find that "control" in fact does or does not exist when an entity owns or controls either a lesser or greater amount of securities. The laws of New York regulate the payment of dividends by MBIA Corp. and provide that a New York domestic stock property/casualty insurance company (such as MBIA Corp.) may not declare or distribute dividends except out of statutory earned surplus. New York law provides that the sum of (i) the amount of dividends declared or distributed during the preceding 12-month period and (ii) the dividend to be declared may not exceed the lesser of (a) 10% of policyholders' surplus, as shown by the most recent statutory financial statement on file with the New York Insurance Department, or (b) 100% of adjusted net investment income for such 12-month period (the net investment income for such 12-month period plus the excess, if any, of net investment income over dividends declared or distributed during the two-year period preceding such 12-month period), unless the New York Superintendent of Insurance approves a greater dividend distribution based upon a finding that the insurer will retain sufficient surplus to support its obligations and writings. See Note 16 to the Consolidated Financial Statements of MBIA Inc. and Subsidiaries. The foregoing dividend limitations are determined in accordance with Statutory Accounting Practices ("SAP"), which generally produce statutory earnings in amounts less than earnings computed in accordance with Generally Accepted Accounting Principles ("GAAP"). Similarly, policyholders' surplus, computed on a SAP basis, will normally be less than net worth computed on a GAAP basis. See Note 9 to the Consolidated Financial Statements of MBIA Inc. and Subsidiaries. MBIA Corp., MBIA Illinois, and CapMAC are exempt from assessments by the insurance guarantee funds in the majority of the states in which they do business. Guarantee fund laws in most states require insurers transacting business in the state to participate in guarantee associations, which pay claims of policyholders and third-party claimants against impaired or insolvent insurance companies doing business in the state. In most states, insurers licensed to write only municipal bond insurance, financial guarantee insurance and other forms of surety insurance are exempt from assessment by these funds and their policyholders are prohibited from making claims on these funds. 21 Losses and Reserves The Company's policy is to provide (I) specific, identified loss reserves to cover estimated losses on policies for which the Company has determined that it is likely to incur losses ("case basis reserves"), and (II) general, unallocated loss reserves to cover losses that may be reasonably estimated to occur on its insured obligations over the lives of such obligations. The aggregate loss reserves, at any financial statement date, are the Company's best estimate of the reserves needed to cover both types of losses, including expected costs of settlement. To the extent that specific insured issues are identified as currently or likely to be in default, the present value of the expected payments, including costs of settlement, net of expected recoveries, is allocated within the total loss reserve as a case basis reserve. For the past three years, the total reserve has been calculated by applying a loss factor, determined based on an independent research agency study of bond defaults, to net incurred debt service written. Beginning with 2002, to more accurately match the recognition of incurred losses with the related premium revenue, the formula has been altered so that the Company will begin to reserve based upon a percentage of earned premiums instead of a percentage of net debt service written. The formula will be reviewed on a regular basis. At December 31, 2001, $210.9 million (which reflects anticipated recoveries) of the $483.3 million reserve for loss and loss adjustment expenses represents case basis reserves, and, of the case basis reserves, $215.0 million is attributable to a health care facility in Pennsylvania and four tax lien transactions (on which no recoveries are expected). The remaining case basis reserves represent various housing financings and structured finance transactions, the largest of which is $5.6 million. Both MBIA Illinois and CapMAC are currently inactive and their insurance business is in run-off. MBIA Corp. has reinsured their respective net liabilities on financial guarantee insurance business and maintains required reserves in connection therewith. The reserves for losses and loss adjustment expenses are based on estimates, and there can be no assurance that the ultimate liability will not exceed such estimates. To the extent that actual case losses for any period are less than the unallocated portion of the total loss reserve, there will be no impact on the Company's earnings for that period other than an addition to the reserve which results from applying the formula discussed above. To the extent that case losses, for any period, exceed the unallocated portion of the total loss reserve, the excess will be charged against the Company's earnings for that period. SAP Ratios The financial statements in this Form 10-K are prepared on the basis of GAAP. For reporting to state regulatory authorities, SAP is used. See Note 9 to the Consolidated Financial Statements of MBIA Inc. and Subsidiaries. The SAP combined ratio is a traditional measure of underwriting profitability for insurance companies. The SAP loss ratio (which is losses incurred divided by premiums earned), SAP expense ratio (which is underwriting expenses divided by net premiums written) and SAP combined ratio (which is the sum of the loss and expense ratios) for MBIA Corp. and for the financial guarantee industry, which includes the monoline primary insurers (including MBIA Corp.) and monoline reinsurers, are shown in the table below:
Years Ended December 31, 1997 1998 1999 2000 2001 MBIA Corp. Loss ratio 1.2% 8.0% 12.3% 6.2% 9.3% Expense ratio 21.2 16.8 23.6 22.1 13.4 Combined ratio 22.4 24.8 35.9 28.3 22.7 Financial guarantee industry (1) Loss ratio 8.3% 22.8% 4.2% 4.0 * Expense ratio 28.1 22.7 24.1 27.9 * Combined ratio 36.4 45.5 28.3 31.9 *
__________________________ (1) Industry statistics were taken from the 2000 Industry Financial Results of the Association of Financial Guaranty Insurors. 22 * Not available. 23 The SAP loss ratio differs from the GAAP loss ratio because the GAAP ratio recognizes a provision for unidentified losses. The SAP expense ratio varies from the GAAP expense ratio because the GAAP ratio recognizes the deferral of policy acquisition costs and includes the amortization of purchase accounting adjustments, principally goodwill. In addition, the SAP expense ratio is calculated using premiums written while the GAAP expense ratio uses premiums earned. Net insurance in force, qualified statutory capital (which is comprised of policyholders' surplus and the contingency reserve), and policyholders' leverage ratios for MBIA Corp. and for the financial guarantee industry are shown in the table below:
As of December 31, 1997 1998 1999 2000 2001 (Dollars in millions) MBIA Corp. Net insurance in force $ 513,736 $ 595,895 $ 635,883 $ 680,878 $722,408 Qualified statutory capital 3,140 3,741 4,152 4,505 4,940 Policyholders' leverage ratio 164:1 159:1 153:1 151:1 146:1 Financial guarantee industry (1) Net insurance in force $1,262,697 $1,416,433 $1,616,226 1,639,829 * Qualified statutory capital 8,851 9,833 11,139 11,845 * Policyholders' leverage ratio 143:1 144:1 145:1 138:1 *
___________________________ (1) Industry statistics were taken from the 2000 Industry Financial Results of the Association of Financial Guaranty Insurors. * Not available. The policyholders' leverage ratio is the ratio of net insurance in force to qualified statutory capital. This test is sometimes focused on as a measure of a company's claims-paying capacity. The Company believes that the leverage ratio has significant limitations since it compares the total debt service (undiscounted) coming due over the next 30 years or so to a company's current capital base. It thereby fails to recognize future capital that will be generated during the period of risk being measured, arising from unearned premium reserve and future installment premium commitments. Further, the leverage ratio does not consider the underlying quality of the issuers whose debt service is insured and thereby does not differentiate among the risk characteristics of a financial guarantor's insured portfolio, nor does it give any benefit for third-party commitments such as standby lines of credit. MBIA Corp. Insurance Policies Virtually all of the insurance policies issued by MBIA Corp., MBIA Assurance, MBIA Illinois and CapMAC provide an unconditional and irrevocable guarantee of the payment to a designated paying agent for the holders of the insured obligations of an amount equal to the principal of and interest or other amounts due on the insured obligations that have not been paid. In the event of a default in payment of principal, interest or other insured amounts by an issuer, the insurance company promises to make funds available in the amount of the default on the next business day following notification. Each insurance company has a Fiscal Agency Agreement with a bank which provides for this payment upon receipt of proof of ownership of the obligations due, as well as upon receipt of instruments appointing the insurer as agent for the holders and evidencing the assignment of the rights of the holders with respect to the payments made by the insurer. Even if the holders are permitted by the terms of the insured obligations to have the full amount of principal, accrued interest or other amounts due, declared due and payable immediately in the event of a default, the insurer is required to pay only the amounts scheduled to be paid, but not in fact paid, on each originally scheduled payment date. 24 Rating Agencies Moody's, S&P, Fitch and RII perform periodic reviews of MBIA Corp. and other companies providing financial guarantee insurance. Their reviews focus on the insurer's operations, financial conditions, underwriting policies and procedures and on the issues insured. Additionally, each rating agency has certain criteria as to exposure limits and capital requirements for financial guarantors. The rating agencies have confirmed their Triple-A claims-paying ratings assigned to MBIA Corp., CapMAC, MBIA Illinois and to MBIA Assurance in every year since those ratings were granted. The ratings for MBIA Illinois and CapMAC are based in significant part on reinsurance agreements between MBIA Corp. and MBIA Illinois and MBIA Corp. and CapMAC, respectively. The rating of MBIA Assurance is based in significant part on the reinsurance agreement between MBIA Corp. and MBIA Assurance and the net worth maintenance agreement between the two parties. See "Business-Reinsurance." Although MBIA Corp. intends to comply with the requirements of the rating agencies, no assurance can be given that these requirements will not change or that, even if MBIA Corp. complies with these requirements, one or more rating agencies will not reduce or withdraw their rating. MBIA Corp.'s ability to attract new business and to compete with other financial guarantors, and its results of operations and financial condition would be materially adversely affected by any reduction in its ratings. Investment Considerations Claims-Paying Ability Rating ---------------------------- MBIA Corp.'s ability to attract new business and to compete with other triple-A rated financial guarantors is largely dependent on the Triple-A claims paying ratings assigned to it by the major rating agencies. Although MBIA Corp. intends to comply with the requirements of the rating agencies to maintain such ratings, no assurance can be given that these requirements will not change or that, even if MBIA Corp. complies with these requirements, one or more of such rating agencies will not reduce or withdraw their claims-paying ability ratings of MBIA Corp. in the future. MBIA Corp.'s ability to attract new business and to compete with other triple-A rated financial guarantors, and its results of operations and financial condition, would be materially adversely affected by any reduction in its ratings. See "Business - Rating Agencies". Competition ----------- The businesses engaged in by MBIA Corp. are highly competitive. MBIA Corp. faces competition from other financial guarantee insurance companies, other providers of third-party credit enhancement, such as multi-line insurance companies and banks, and alternative executions which do not employ third-party credit enhancement. To the extent that there is no increase in the dollar volume of obligations that require guaranties, increased competition, either in terms of price or new providers of credit enhancement, would likely have an adverse effect on MBIA Corp.'s business. See "Business - Competition". Effect of September 11 ---------------------- In addition to the tragic loss of life, the terrorist attacks in New York City and Washington, D.C. on September 11, 2001 disrupted and are expected to continue to disrupt commerce worldwide. These events have had a direct material adverse impact on certain industries and on general economic activity. The Company has exposure in certain sectors that will suffer increased stress as a direct result of these events. The Company's exposure to New York City and New York State and their respective agencies, to domestic airports and to domestic enhanced equipment trust certificate aircraft securitizations has experienced increased stress as a result of these events, including a downgrading of the ratings of some of the underlying issuers. Other exposures that depend on revenues from business and personal travel, such as bonds backed by hotel taxes and car rental fleet securitizations, are also likely to see direct increased stress as a result of these events. In addition, certain other sectors in which the Company has insured exposure such as consumer loan securitizations (e.g., home equity, auto 25 loan and credit card transactions) and certain collateralized debt obligations backed by high yield bonds have seen increased delinquencies and defaults in the underlying pools of loans. In accordance with the Company's underwriting criteria, transactions insured by the Company are structured to endure significant stress under various stress assumptions, including an assumed economic recession. The Company has assessed each of its related portfolio exposures and, based on the transaction structures and on the Company's evaluation of the likely effects and impact of these events, the Company believes at this time that it will not incur any material losses due to these events. There can be no assurance, however, that the Company will not incur material losses due to these exposures if the economic stress caused by these events in certain sectors is more severe than the Company currently foresees and had assumed in underwriting its exposures. Market and Other Factors ------------------------ The demand for financial guarantee insurance depends upon many factors, some of which are beyond the control of MBIA Corp. While all the major financial guarantee insurers have triple-A claims-paying ability ratings from the major rating agencies, investors may from time to time distinguish among financial guarantors on the basis of various factors, including size, insured portfolio concentration and financial performance. These distinctions may result in differentials in trading levels for securities insured by particular financial guarantors which, in turn, may provide a competitive advantage to those financial guarantors with better trading characteristics. Conversely, various investors may, due to regulatory or internal guidelines, lack additional capacity to purchase securities insured by certain financial guarantors, which may provide a competitive advantage to guarantors with fewer insured obligations outstanding. Prevailing interest rate levels affect demand for financial guarantee insurance to the extent that lower interest rates are accompanied by narrower spreads between insured and uninsured obligations. The purchase of insurance during periods of relatively narrower interest rate spreads will generally provide lower cost savings to the issuer than during periods of relatively wider spreads. These lower cost savings could be accompanied by a corresponding decrease in demand for financial guarantee insurance. However, historically, the level of refundings during lower interest rate periods has increased the demand for insurance. The perceived financial strength of financial guarantee insurers also affects demand for financial guarantee insurance. Should a major financial guarantee insurer, or the industry generally, have its claims-paying ability rating lowered, or suffer for some other reason deterioration in investors' confidence, demand for financial guarantee insurance may be reduced significantly. Premium rates are affected by factors such as the insurer's appraisal of the insured credit, the spread between interest rates prevailing on insured and uninsured obligations and capital charges associated with these exposures as determined by the rating agencies and regulators, as well as competition for such business among financial guarantee insurance providers and other forms of credit enhancement. Lower interest rates generally result in lower premium amounts to the extent that premium amounts are based on the total dollar amount of principal interest and other amounts insured. Regulation ---------- The financial guarantee insurance industry has historically been and will continue to be subject to the direct and indirect effects of governmental regulation, including changes in tax laws and legal precedents affecting asset-backed and municipal obligations. No assurance can be given that future legislative regulatory or judicial changes will not adversely affect MBIA Corp.'s business. See "Business - Regulation" for a description of current insurance regulations affecting MBIA Corp. Adequacy of Loss Reserves ------------------------- The financial guarantees issued by MBIA Corp. insure the financial performance of the obligations guaranteed over an extended period of time, in some cases over 30 years, under policies that MBIA Corp. cannot cancel. As a result of the lack of statistical loss data due to the low level of losses in MBIA Corp.'s financial guarantee business and in the financial guarantee industry in general, particularly in the structured asset-backed area, MBIA Corp. does not use traditional actuarial approaches to determine its loss reserves. Instead, a general loss 26 reserve is established in an amount deemed adequate to cover the expected levels of losses and loss adjustment expense on MBIA's overall portfolio. The size of the general loss reserve is determined by a formula, the components of which are reviewed regularly. Management believes that the current level of general loss reserves is adequate to cover the estimated liability for claims and the related adjustment expenses with respect to financial guarantees issued by MBIA Corp. The establishment of the appropriate level of loss reserves is an inherently uncertain process involving numerous estimates and subjective judgments by management, and therefore there can be no assurance that losses in MBIA Corp.'s insured portfolio will not exceed the loss reserves. Losses from future defaults, depending on their magnitude, could have a material adverse effect on the results of operations and financial condition of MBIA Corp. See "Business - Losses and Reserves". Realization of Installment Premiums ----------------------------------- Due to the annuity nature of a significant percentage of its premium income, MBIA Corp. has an embedded future revenue stream. The amount of installment premiums actually realized by MBIA Corp. could be reduced in the future due to factors such as early termination of insurance contracts or accelerated prepayments of underlying obligations. Although increases in installment premium due to renewals of existing insurance contracts historically have been greater than reductions, there can be no assurance that future circumstances might not cause a net reduction overall, resulting in lower revenues. Reinsurance ----------- MBIA Corp.'s ability to maintain reinsurance capacity is important to its business. In order to comply with regulatory, rating agency or internal single risk retention limits for transactions of significant size, MBIA Corp. needs access to sufficient reinsurance capacity to underwrite large transactions. If MBIA Corp. were to become unable to obtain sufficient reinsurance, this could have an adverse impact on its ability to issue policies for large transactions. See "Business - Reinsurance". MBIA Corp. remains liable for insurance ceded to reinsurers to the extent such reinsurers are unable to meet their obligations. Anti-Takeover Provisions ------------------------ The Company's Charter and Bylaws contain special notice and other provisions the effect of which could be to discourage non-negotiated takeover attempts, which takeovers some stockholders might otherwise deem to be in their interests. Given the importance of MBIA Corp.'s triple-A ratings to the Company's business, as a practical matter, a change of control would require confirmation in advance from the rating agencies that such transaction would not result in a downgrading of the claims-paying ability rating assigned to MBIA Corp. The Company's Rights Plan originally adopted to deter non-negotiated takeovers, expired in December 2001. The Board elected not to renew the Rights Plan. The insurance laws of New York provide that no person, other than an authorized insurer, may acquire control of the Company and thus indirect control of MBIA Corp., or any other New York-domiciled insurance subsidiary of the Company, unless it has given prior written notice to MBIA Corp. and any such subsidiary and received the prior approval of the Superintendent of Insurance of the State of New York. Furthermore, any purchaser of 10% or more of the outstanding shares of the Company's Common Stock would be presumed to have acquired such control unless the Superintendent of Insurance determined otherwise. Therefore, any takeover of the Company effectively requires regulatory approval. This regulatory restriction may effectively reduce the probability of a takeover without the cooperation of management. Investment Management Services Businesses ----------------------------------------- The Company's Investment Management Services businesses have grown as a proportion of its overall business (see "Investment Management Businesses"). As their contribution continues to grow, events that negatively affect the performance of the Investment Management Services businesses could affect the overall performance of the Company. 27 Capital Facilities MBIA Corp. is party to a Credit Agreement, dated as of December 29, 1989 (the "Credit Agreement"), with various highly rated banks to provide MBIA Corp. with an unconditional, irrevocable line of credit to cover losses in excess of a specified amount with respect to its public finance policies. The line of credit is available to be drawn upon by MBIA Corp., in an amount up to $900 million, after MBIA Corp. has incurred, during the period commencing October 27, 2001 and ending October 31, 2008, cumulative losses (net of any recoveries) in excess of $900 million or 5.6% of average annual debt service in respect of MBIA Corp.'s public finance policies. The obligation to repay loans made under the Credit Agreement is a limited recourse obligation of MBIA Corp. payable solely from, and secured by a pledge of, recoveries realized on defaulted insured public finance obligations, from certain pledged installment premiums and other collateral. Borrowings under the Credit Agreement are repayable on the expiration date of the Credit Agreement. The current expiration date of the Credit Agreement is October 31, 2008, subject to annual extensions under certain circumstances. The Credit Agreement contains covenants that, among other things, restrict MBIA Corp.'s ability to encumber assets or merge or consolidate with another entity. In 2001, the Company also entered into a $150 million soft capital facility with certain highly rated reinsurers. Under this facility, the Company has the right to issue, and the reinsurers have the obligation to purchase (subject to certain conditions), preferred stock or variable rate subordinated notes in a par amount that is equal to the amount by which losses incurred by MBIA Corp. during the term of the facility with respect to substantially all of its insured book exceed a certain specified level (the "Attachment Point"), up to $150 million in the aggregate,. The facility has an initial term of ten years and is expected to be extended annually. The Attachment Point is reset annually as of December 31 as a percentage of MBIA Corp.'s insured portfolio. As of December 31, 2001, the Attachment Point was $1.65 billion. In 2001, MBIA Corp. also entered into a $211 million excess of loss reinsurance facility with certain highly rated reinsurers. Under this facility, the reinsurers have agreed to reimburse MBIA Corp. for all losses, up to $211 million in the aggregate, incurred by MBIA Corp. during the term of the reinsurance agreement with respect to its structured finance policies in excess of a certain specified level (the "Stop Loss Attachment Point"). The facility has an initial term of seven years and is expected to be extended annually. The Stop Loss Attachment Point is reset annually as of December 31 as a percentage of MBIA Corp.'s insured portfolio. As of December 31, 2001, the Stop Loss Attachment point was $900 million, increasing to $1.01 billion in January, 2002. Employees As of March 21, 2002, the Company had 601 employees. No employee is covered by a collective bargaining agreement. The Company considers its employee relations to be satisfactory. Executive Officers The executive officers of the Company and their present ages and positions with the Company are set forth below.
Name Age Position and Term of Office ---- --- --------------------------- Joseph W. Brown 53 Chairman and Chief Executive Officer (officer since January, 1999) Gary C. Dunton 46 President (officer since January, 1998) Richard L. Weill 59 Vice President (officer since 1989) Neil G. Budnick 47 Vice President and Chief Financial Officer (officer since 1992) John B. Caouette 57 Vice President (officer since February, 1998) Ram D. Wertheim 47 Vice President and General Counsel (officer since January, 2000) Kevin D. Silva 48 Vice President and Chief Administrative Officer (officer since 1995) Ruth M. Whaley 46 Vice President and Chief Risk Officer (officer since 1999) Robert T. Wheeler 59 Vice President and Chief Technology Officer (officer since May, 2000) John S. Pizzarelli 46 Vice President (officer since November, 2000) Mark S. Zucker 53 Vice President (officer since November, 2000)
28 Joseph W. Brown is Chairman and Chief Executive Officer of the Company (effective January 7, 1999) and a director of the Company. Prior to joining the Company in January 1999, Mr. Brown was Chairman of the Board of Talegen Holdings, Inc. Gary C. Dunton is President and Chief Operating Officer of the Company and a director of the Company. Mr. Dunton was, prior to joining the Company as an officer, a director of the Company and President of the Family and Business Insurance Group, USF&G Insurance. Richard L. Weill is Vice President and Secretary of the Company. Mr. Weill joined the Company in 1989 and since that time has held a variety of positions. Neil G. Budnick is Vice President and Chief Financial Officer of the Company. Mr. Budnick has been primarily involved in the insurance operations area of MBIA Corp. since joining the Company in 1983. John B. Caouette is Vice President of the Company. Mr. Caouette was, until February of 1998, the Chairman and Chief Executive Officer of CapMAC Holdings Inc. Ram D. Wertheim is Vice President and General Counsel of the Company. From February of 1998 until January, 2000, he served in various capacities in the Structured Finance Division. Mr. Wertheim was, until February of 1998, the General Counsel of CapMAC Holdings Inc. Kevin D. Silva is Vice President and Chief Administrative Officer of the Company. He has been in charge of the Management Services Division of MBIA Corp. since joining the Company in late 1995. Ruth M. Whaley is Vice President and Chief Risk Officer of the Company. She was, until February of 1998, the Chief Underwriting Officer of CapMAC Holdings Inc. Robert T. Wheeler is Vice President and Chief Technology Officer of the Company. From 1985 until April of 2000, he was the Managing Director and Chief Information Officer of US Fire Insurance Company. John S. Pizzarelli is Vice President of the Company and head of the Public Finance Division. Since joining MBIA Corp. in 1985, he has been primarily involved in the public finance area. Mark D. Zucker is Vice President of the Company and head of the Structured Finance Division. Prior to joining the Company he was Chief Credit Officer - Investment Banking at Rabobank International. Item 2. Properties MBIA Corp. owns the 265,000 square foot office building on approximately 15.5 acres of property in Armonk, New York, in which the Company and MBIA Corp. have their headquarters. The Company also has rental space in New York, New York, San Francisco, California, Paris, France, Madrid, Spain, Sydney, Australia and London, England. The Company believes that these facilities are adequate and suitable for its current needs. Item 3. Legal Proceedings In the normal course of operating its businesses, the Company may be involved in various legal proceedings. Several class-action lawsuits have been filed naming securitization trusts insured by MBIA Corp. as defendants. Various allegations have been made against the originators of the mortgage loans which are the assets of these trusts including violations of state and federal truth in lending laws. Although the Company has not been named in these suits, as the insurer we are monitoring them and assisting in their defense. We do not expect there to be any material losses in the trusts as a result of these lawsuits, but no assurances can be given as to the potential outcome of these actions. There are no other material lawsuits pending or, to the knowledge of the Company, threatened, to which the Company or any of its subsidiaries is a party. See "Capital Asset" for a description of certain litigation against the Company and certain of its subsidiaries related to its investment in Capital Asset. 29 Item 4. Submission of Matters to a Vote of Security Holders Not Applicable. PART II ------- Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters The information concerning the market for the Company's Common Stock and certain information concerning dividends appears under the heading "Shareholder Information" on page 62 of the Company's 2001 Annual Report to Shareholders and is incorporated herein by reference. As of March 21, 2002, there were 851 shareholders of record of the Company's Common Stock. The information concerning dividends on the Company's Common Stock is under "Business - Regulation" in this report. Item 6. Selected Financial Data The information under the heading "Selected Financial and Statistical Data" as set forth on pages 26-27 of the Company's 2001 Annual Report to Shareholders is incorporated by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The information under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" as set forth on pages 28-37 of the Company's 2001 Annual Report to Shareholders is incorporated by reference. Item 7A. Quantitative and Qualitative Disclosure about Market Risk See the information under the heading "Market Risk" in "Management's Discussion and Analysis of Financial Condition and Results of Operations" as set forth on page 37 of the Company's 2001 Annual Report to Shareholders which is incorporated by reference. Item 8. Financial Statements and Supplementary Data The consolidated financial statements of the Company, the Report of Independent Accountants thereon by PricewaterhouseCoopers LLP and the unaudited "Quarterly Financial Information" are set forth on pages 38-60 of the Company's 2001 Annual Report to Shareholders and are incorporated by reference. Item 9. Disagreements on Accounting and Financial Disclosure None. PART III -------- Item 10. Directors and Executive Officers of the Registrant Information regarding directors is set forth under "Election of Directors" in the Company's Proxy Statement, dated April 3, 2002, which is incorporated by reference. 30 Information regarding executive officers is set forth under Item 1, "Business - Executive Officers," in this report. Item 11. Executive Compensation Information regarding compensation of the Company's executive officers is set forth in the "Report of the Compensation and Organization Committee on Executive Compensation" and in the five compensation tables in the Company's Proxy Statement, dated April 3, 2002, which is incorporated by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management Information regarding security ownership of certain beneficial owners and management is set forth under "Security Ownership of Certain Beneficial Owners" and "Security Ownership of Directors and Executive Officers" in the Company's Proxy Statement, dated April 3, 2002, which is incorporated by reference. Item 13. Certain Relationships and Related Transactions Information regarding relationships and related transactions is set forth under "Certain Relationships and Related Transactions" in the Company's Proxy Statement dated April 3, 2002, which is incorporated by reference. 31 PART IV ------- Item 14. (a) Financial Statements and Financial Statement Schedules and Exhibits. 1. Financial Statements -------------------- MBIA Inc. has incorporated by reference from the 2001 Annual Report to Shareholders the following consolidated financial statements of the Company:
Annual Report to Shareholders Page(s) MBIA INC. AND SUBSIDIARIES Report of independent accountants. 38 Consolidated balance sheets as of December 31, 2001 and 39 2000. Consolidated statements of income for the years ended 40 December 31, 2001, 2000 and 1999. Consolidated statements of changes in shareholders' 41 equity for the years ended December 31, 2001, 2000 and 1999. Consolidated statements of cash flows for the years 42 ended December 31, 2001, 2000 and 1999. Notes to consolidated financial statements. 43-60
2. Financial Statement Schedules ----------------------------- The following financial statement schedules are filed as part of this report. Schedule Title -------- ----- I. Summary of investments, other than investments in related parties, as of December 31, 2001. II Condensed financial information of Registrant for December 31, 2001, 2000 and 1999. IV. Reinsurance for the years ended December 31, 2001, 2000 and 1999. The report of the Registrant's independent accountants with respect to the above listed financial statement schedules is included with the schedules. All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto. 3. Exhibits -------- (An exhibit index immediately preceding the Exhibits indicates the page number where each exhibit filed as part of this report can be found.) 3. Articles of Incorporation and By-Laws. ------------------------------------- 3.1. Restated Certificate of Incorporation, dated August 17, 1990, incorporated by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1990 (Comm. File 1-9583) (the "1990 10-K"), as amended December 20, 1995, incorporated by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000 (Comm. File 1-9583) (the "2000 10-K"), as further amended September 5, 2001. 32 3.2. By-Laws as Amended as of March 19, 1998, incorporated by reference to Exhibit 3.2 of the 1998 10-K. 4. Instruments Defining the Rights of Security Holders, including -------------------------------------------------------------- Indentures. - ----------- 4.1 Indenture, dated as of August 1, 1990, between MBIA Inc. and The First National Bank of Chicago, Trustee, incorporated by reference to Exhibit 10.72 to the 1992 10-K. 4.2 Bond Purchase and Paying Agent Agreement between MBIA Inc. and various banks, entered into as of December 12, 2000 in connection with CHF 175,000,000 4.5% Bonds, due June 15, 2010, incorporated by reference to Exhibit 4.2 to the 2000 10-K. 10. Material Contracts ------------------ 10.01. Amended and Restated Tax Allocation Agreement, dated as of January 1, 1990, between the Company and MBIA Corp., incorporated by reference to Exhibit 10.66 to the 1989 10-K, as supplemented by the Amended and Restated Tax Allocation Agreement Supplement No. 1, dated as of August 31, 1999, incorporated by reference to Exhibit 10.06 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31,1999 (Comm. File No. 1-9583) (the "1999 10-K"). 10.02. Note Subscription Agreement and Preferred Shares Subscription Agreement, both dated as of December 27, 2001 between MBIA Inc. and certain reinsurers. 10.03. Trust Agreement, dated as of December 31, 1991, between MBIA Corp. and Fidelity Management Trust Company, incorporated by reference to Exhibit 10.64 to the 1992 10-K, as amended by the Amendment to Trust Agreement, dated as of April 1, 1993, incorporated by reference to Exhibit 10.64 to the 1993 10-K, as amended by First Amendment to Trust Agreement, dated as of January 21, 1992, as further amended by Second Amendment to Trust Agreement, dated as of March 5, 1992, as further amended by Third Amendment to Trust Agreement, dated as of April 1, 1993, as further amended by the Fourth Amendment to Trust Agreement, dated as of July 1, 1995, incorporated by reference to Exhibit 10.47 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995 (Comm. File No. 1-9583) (the "1995 10-K"), as amended by Fifth Amendment to Trust Agreement, dated as of November 1, 1995, as further amended by Sixth Amendment to Trust Agreement, dated as of January 1, 1996, incorporated by reference to Exhibit 10.46 to the 1996 10-K, further amended by Seventh Amendment to Trust Agreement, dated as of October 15, 1997, incorporated by reference to Exhibit 10.36 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (Comm. File No. 1-9583) (the "1997 10-K") as further amended by the Eighth Amendment to Trust Agreement, dated as of January 1, 1998 and by the Ninth Amendment to Trust Agreement, dated as of March 1, 1999, incorporated by reference to Exhibit 10.10 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998 (Comm. File No. 1-9583) (the "1998 10-K"). 10.04. First Restated Credit Agreement, dated as of October 1, 1993, among MBIA Corp., Credit Suisse, New York Branch, as Agent, Credit Suisse, New York Branch, Caisse Des Depots Et Consignations, Deutsche Bank AG, Bayerische Landesbank Girozentrale and Landesbank Hessen-Thuringen Girozentrale, as amended by an Assignment and Assumption Agreement, dated as of December 31, 1993, among MBIA Corp., Credit Suisse, New York Branch, as Agent and Assignor and Deutsche Bank AG, New York Branch, as further amended by a Modification Agreement, dated as of January 1, 1994, among Deutsche Bank, AG, New York Branch, MBIA Corp. and Credit Suisse, New York Branch, as Agent, as amended by a Joinder Agreement, dated December 31, 1993, among Credit Suisse, New York Branch, as Agent, Sudwestdeutsche Landesbank Girozentrale and MBIA Corp., incorporated by reference to Exhibit 10.78 to the 1993 10-K, as amended by the First Amendment to First Restated Credit Agreement, dated as of September 23, 1994, incorporated by reference to Exhibit 10.63 to the 1994 10-K, as further amended by the Second Amendment to the First Restated Credit Agreement, dated as of January 1, 1996, and as further amended by the Third Amendment to the First Restated Credit Agreement, dated as of October 1, 1996, incorporated by reference to Exhibit 10.57 to the 1996 10-K, as further amended and restated by the Second Amended and Restated Credit Agreement, dated as of October 1, 1997, incorporated by reference to Exhibit 10.46 to the 1997 10-K, as further amended by the First Amendment to Second Amended and Restated Credit Agreement, dated as of October 1, 1998, incorporated by reference to Exhibit 10.13 to the 1998 10-K, as further amended and restated by the Second Amendment to the Second Amended and Restated Credit Agreement, dated as of October 29, 1999, incorporated by reference to Exhibit 10.13 to the 1999 10-K, as further amended and 33 restated by the Third Amendment to the Second Amendment and Restated Credit Agreement, dated as of October 27, 2000, incorporated by reference to Exhibit 10.04 to the 2000 10-K, as further amended by the Fourth Amendment to the Second Amended and Restated Credit Agreement, dated as of October 31, 2001. 10.05. Net Worth Maintenance Agreement, dated as of November 1, 1991, between MBIA Corp. and MBIA Assurance S.A., as amended by Amendment to Net Worth Agreement, dated as of November 1, 1991, incorporated by reference to Exhibit 10.79 to 1993 10-K. 10.06. Reinsurance Agreement, dated as of January 1, 1993, between MBIA Assurance S.A. and MBIA Corp., incorporated by reference to Exhibit 10.80 to the 1993 10-K. 10.07. Investment Services Agreement, effective as of April 28, 1995, between MBIA Insurance Corporation and MBIA Securities Corp., as amended by Amendment No. 1, dated as of December 29, 1995, incorporated by reference to Exhibit 10.65 to the 1995 10-K, as further amended by Amendment No. 2 to Investment Services Agreement, dated January 14, 1997, incorporated by reference to Exhibit 10.53 to the 1997 10-K. 10.08. Investment Services Agreement, effective January 2, 1996, between MBIA Insurance Corp. of Illinois and MBIA Securities Corp., incorporated by reference to Exhibit 10.66 to the 1995 10-K. 10.09. Agreement and Plan of Merger among the Company, CMA Acquisition Corporation and CapMAC Holdings Inc. ("CapMAC"), dated as of November 13, 1997, incorporated by reference to the Company's Form S-4 (Reg. No. 333-41633) filed on December 5, 1997. 10.10. Amendment No. 1 to Agreement and Plan of Merger among the Company, CMA Acquisition Corporation and CapMAC Holdings Inc. ("CapMAC"), dated January 16, 1998, incorporated by reference to the Company's Post Effective Amendment No. 1 to Form S-4 (Reg. No. 333-41633) filed on January 21, 1998. 10.11. Reinsurance Agreement, dated as of April 1, 1998, between CapMAC and MBIA Corp., incorporated by reference to Exhibit 10.30 to the 1998 10-K. 10.12. Reinsurance Agreement, dated as of January 1, 1999, between MBIA Illinois and MBIA Corp., incorporated by reference to Exhibit 10.31 to the 1998 10-K. 10.13. Agreement and Plan of Merger by and among the Company, MBIA Acquisition, Inc. and 1838 Investment Advisors, Inc., dated as of June 19, 1998, incorporated by reference to Exhibit 10.32 to the 1998 10-K. 10.14. Credit Agreement (364 day agreement) among the Company, MBIA Corp., various designated borrowers, various lending institutions, Deutsche Bank AG, New York Branch, as Administrative Agent, The First National Bank of Chicago, as Syndication Agent and Fleet National Bank, as Documentation Agent, dated as of August 28, 1998, incorporated by reference to Exhibit 10.33 to the 1998 10-K, as amended by a Notice of Extension of Final Maturity Date, with various lending institutions, dated as of August 2000, incorporated by reference to Exhibit 10.14 to the 2000 10-K, as further amended by the First Amendment, dated as of February 9, 2001, the Second Amendment to the Credit Agreement, dated as of July 31, 2001, and the Third Amendment, dated as of December 7, 2001. 10.15. Credit Agreement (5 year agreement) among the Company, MBIA Corp., various designated borrowers, various lending institutions, Deutsche Bank AG, New York Branch, as Administrative Agent, The First National Bank of Chicago, as Syndication Agent and Fleet National Bank, as Documentation Agent, dated as of August 28, 1998, incorporated by reference to Exhibit 10.34 to the 1998 10-K, as amended by a Notice of Extension of Final Maturity Date, with various lending institutions, dated as of August 2000, incorporated by reference to Exhibit 10.15 to the 2000 10-K as further amended by the First Amendment, dated as of February 9, 34 2001, the Second Amendment to the Credit Agreement, dated as of July 31, 2001, and the Third Amendment, dated as of December 7, 2001. 10.16. Ambac Assurance Corporation, AMBAC Insurance UK Limited, MBIA Insurance Corporation, and MBIA Assurance S.A. Agreement Regarding A Global Joint Venture, effective as of January 15, 1999, incorporated by reference to Exhibit 10.48 to the 1998 10-K. 10.17. Special Excess Of Loss Reinsurance Agreement, between MBIA Insurance Corporation and/or MBIA Assurance S.A. and/or any other insurance or reinsurance company subsidiaries of MBIA Inc. listed in Exhibit No. 1 and Muenchener Rueckversicherungs-Gesellshaft, effective September 1, 1998, incorporated by reference to Exhibit 10.49 to the 1998 10-K. 10.18. Second Special Per Occurrence Excess Of Loss Reinsurance Agreement, between MBIA Insurance Corporation and/or MBIA Assurance S.A. and/or any other insurance or reinsurance company subsidiaries of MBIA Inc. listed in Exhibit No. 1 and AXA Re Finance S.A., effective September 1, 1998, incorporated by reference to Exhibit 10.50 to the 1998 10-K. 10.19. ISDA Master Agreement, dated May 2, 2000, between Deutsche Bank AG and MBIA Inc., as supplemented by the Schedule to the ISDA Master Agreement and the Credit Support Annex, incorporated by reference to Exhibit 10.19 to the 2000 10-K. Executive Compensation Plans and Arrangements The following Exhibits identify all existing executive compensation plans and arrangements: 10.20. MBIA Inc. 2000 Stock Option Plan, effective May 11, 2000, incorporated by reference to Exhibit 10.20 to the 2000 10-K. 10.21. MBIA Inc. Deferred Compensation and Excess Benefit Plan, incorporated by reference to Exhibit 10.16 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1988 (Comm. File No. 1-9583) (the "1988 10-K"), as amended as of July 22, 1992, incorporated by reference to Exhibit 10.15 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992 (Comm. File No. 1-9583) (the "1992 10-K"). 10.22. MBIA Inc. Employees Pension Plan, amended and restated effective January 1, 1987, incorporated by reference to Exhibit 10.28 of the Company's Amendment No. 1 to the 1987 S-1, as further amended and restated as of December 12, 1991, incorporated by reference to Exhibit 10.18 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991 (Comm. File No. 1-9583) (the "1991 10-K"), as further amended and restated effective January 1, 1994, incorporated by reference to Exhibit 10.16 of the Company's Annual Report on Form 10-K for fiscal year ended December 31, 1994 (Comm. File No. 1-9583) (the "1994 10-K")). 10.23. MBIA Inc. Employees Profit Sharing Plan, as amended and restated effective January 1, 1987, incorporated by reference to Exhibit 10.29 to Amendment No. 1 to the 1987 S-1, as further amended by Amendment dated December 8, 1988, incorporated by reference to Exhibit 10.21 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1989 (Comm. File No. 1-9583) (the "1989 10-K"), as further amended and restated as of December 12, 1991, incorporated by reference to Exhibit 10.19 to the 1991 10-K, as further amended and restated as of May 7, 1992, incorporated by reference to Exhibit 10.17 to the 1992 10K, as further amended and restated effective January 1, 1994, incorporated by reference to Exhibit 10.17 to the 1994 10-K. 10.24. MBIA Corp. Split Dollar Life Insurance Plan, dated as of February 9, 1988, issued by Aetna Life Insurance and Annuity Company, incorporated by reference to Exhibit 10.23 to the 1989 10-K. 10.25. MBIA Inc. Employees Change of Control Benefits Plan, effective as of January 1, 1992, incorporated by reference to Exhibit 10.65 to the 1992 10-K. 35 10.26. MBIA Inc. 1996 Incentive Plan, effective as of January 1, 1996, incorporated by reference to Exhibit 10.70 to the 1995 10-K. 10.27. MBIA Inc. 1996 Directors Stock Unit Plan, effective as of December 4, 1996, incorporated by reference to Exhibit 10.70 to the 1996 10-K. 10.28. CapMAC Employee Stock Ownership Plan, incorporated by reference to Exhibit 10.18 to the CapMAC Form S-1, as Amended and Restated, effective January 1, 1999, incorporated by reference to Exhibit 10.28 to the 2000 10-K. 10.29. CapMAC Employee Stock Ownership Plan Trust Agreement, incorporated by reference to Exhibit 10.19 to the CapMAC Form S-1, as amended by Amendment No. 2 to the CapMAC Employee Stock Ownership Plan, executed December 22, 1998, incorporated by reference to Exhibit 10.25 to the 1998 10-K. 10.30. ESOP Loan Agreement by and between MBIA Inc. and the CapMAC Employee Stock Ownership Plan Trust, dated June 30, 1999, incorporated by reference to Exhibit 10.30 to the 2000 10-K. 10.31. Deferred Compensation and Restricted Stock Agreement, dated as of December 7, 1995, between John B. Caouette and CapMAC, incorporated by reference to Exhibit 10.28 of the CapMAC Annual Report on Form 10-K for the year ended December 31, 1995 (the "CapMAC 1995 10-K"). 10.32. Deferred Compensation and Restricted Stock Agreement, dated as of December 7, 1995, between Ram D. Wertheim and CapMAC, incorporated by reference to Exhibit 10.35 of the CapMAC 1995 10-K. 10.33. Retirement and Consulting Agreement, between the Company and David H. Elliott, dated as of January 7, 1999 and Summary Retirement and Consulting Agreement, between the Company and David H. Elliott, dated as of January 7, 1999, incorporated by reference to Exhibit 10.35 to the 1998 10-K. 10.34. Terms of Employment letter between MBIA and Joseph W. Brown, Jr., dated January 7, 1999, incorporated by reference to Exhibit 10.36 to the 1998 10-K. 10.35. Stock Option Agreement between MBIA Inc. and Joseph W. Brown, Jr., dated January 7, 1999, incorporated by reference to Exhibit 10.37 to the 1998 10-K. 10.36. Key Employee Employment Protection Agreement between MBIA Inc. and Joseph W. Brown, Jr., dated January 20, 1999, incorporated by reference to Exhibit 10.38 to the 1998 10-K. 10.37. Key Employee Employment Protection Agreement between MBIA Inc. and Neil G. Budnick, dated January 25, 1999, incorporated by reference to Exhibit 10.39 to the 1998 10-K. 10.38. Key Employee Employment Protection Agreement between MBIA Inc. and W. Thacher Brown, dated January 25, 1999, incorporated by reference to Exhibit 10.40 to the 1998 10-K. 10.39. Key Employee Employment Protection Agreement between MBIA Inc. and John B. Caouette, dated January 25, 1999, incorporated by reference to Exhibit 10.41 to the 1998 10-K. 10.40. Key Employee Employment Protection Agreement between MBIA Inc. and Gary C. Dunton, dated January 25, 1999, incorporated by reference to Exhibit 10.42 to the 1998 10-K. 10.41. Key Employee Employment Protection Agreement between MBIA Inc. and Louis G. Lenzi, dated January 25, 1999, incorporated by reference to Exhibit 10.43 to the 1998 10-K. 10.42. Key Employee Employment Protection Agreement between MBIA Inc. and Kevin D. Silva , dated January 25, 1999, incorporated by reference to Exhibit 10.44 to the 1998 10-K. 36 10.43. Key Employee Employment Protection Agreement between MBIA Inc. and Richard L. Weill, dated January 25, 1999, incorporated by reference to Exhibit 10.45 to the 1998 10-K. 10.44. Key Employee Employment Protection Agreement between MBIA Inc. and Ruth M. Whaley, dated January 25, 1999, incorporated by reference to Exhibit 10.46 to the 1998 10-K. 10.45. Key Employee Employment Protection Agreement between MBIA Inc. and Michael J. Maguire, dated March 19, 1999, incorporated by reference to Exhibit 10.47 to the 1998 10-K. 10.46. Key Employee Employment Protection Agreement between MBIA Inc. and John S. Pizzarelli, dated March 14, 2000, incorporated by reference to Exhibit 10.46 to the 2000 10-K. 10.47. Key Employee Employment Protection Agreement between MBIA Inc. and Ram D. Wertheim, dated January 24, 2000, incorporated by reference to Exhibit 10.47 to the 2000 10-K. 10.48. Key Employee Employment Protection Agreement between MBIA Inc. and Robert T. Wheeler, dated April 17, 2000, incorporated by reference to Exhibit 10.48 to the 2000 10-K. 10.49. Key Employee Employment Protection Agreement between MBIA Inc. and Mark S. Zucker, dated March 14, 2000, incorporated by reference to Exhibit 10.49 to the 2000 10-K. 10.50 MBIA Inc. Restricted Stock Plan for Non-Employee Directors, effective as of March 21, 2002, incorporated by reference to the MBIA Inc. Form S-8 filed on March 14, 2002 (Reg. No. 333-84300) (the"2002 S-8"). 10.51 Amended and Restated Deferred Compensation and Stock Ownership Plan for Non-Employee Directors, effective as of March 21, 2002, incorporated by reference to the 2002 S-8. 13. Annual Report to Shareholders of MBIA Inc. for fiscal year ended December 31, 2001. Such report is furnished for the information of the Commission only and, except for those portions thereof which are expressly incorporated by reference in this Annual Report on Form 10-K, is not to be deemed filed as part of this report. 21. List of Subsidiaries 23. Consent of PricewaterhouseCoopers LLP 99. Additional Exhibits - MBIA Corp. GAAP Financial Statements (b) Reports on Form 8-K: The Company filed no report on Form 8-K in the fourth quarter of 2001. 37 SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. MBIA Inc. (Registrant) Dated: March 29, 2002 By /s/Joseph W. Brown -------------------------------------- Name: Joseph W. Brown Title: Chairman Pursuant to the requirements of Instruction D to Form 10-K under the Securities Exchange Act of 1934, this Report has been signed below by the following persons in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Joseph W. Brown Chairman and Director March 29, 2002 - ------------------------------------------ Joseph W. Brown /s/ Douglas C. Hamilton Vice President and March 29, 2002 - ------------------------------------------ Controller Douglas C. Hamilton /s/David H. Elliott Director March 29, 2002 - ------------------------------------------ David H. Elliott /s/David C. Clapp Director March 29, 2002 - ------------------------------------------ David C. Clapp /s/Gary C. Dunton Director March 29, 2002 - ------------------------------------------ Gary C. Dunton /s/Claire L. Gaudiani Director March 29, 2002 - ------------------------------------------ Claire L. Gaudiani
38 /s/William H. Gray, III Director March 29, 2002 - ------------------------------------------ William H. Gray, III /s/Freda S. Johnson Director March 29, 2002 - ------------------------------------------ Freda S. Johnson /s/Daniel P. Kearney Director March 29, 2002 - ------------------------------------------ Daniel P. Kearney /s/James A. Lebenthal Director March 29, 2002 - ------------------------------------------ James A. Lebenthal /s/John A. Rolls Director March 29, 2002 - ------------------------------------------ John A. Rolls
39 Report of Independent Accountants on Financial Statement Schedules To the Board of Directors of MBIA Inc.: Our audits of the consolidated financial statements referred to in our report dated February 1, 2002 appearing in the 2001 Annual Report to Shareholders of MBIA Inc. (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the financial statement schedules listed in Item 14(a)(2) of this Form 10-K. In our opinion, these financial statement schedules present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. February 1, 2002 SCHEDULE I MBIA INC. AND SUBSIDIARIES SUMMARY OF INVESTMENTS, OTHER THAN INVESTMENTS IN RELATED PARTIES December 31, 2001 (In thousands)
- ------------------------------------------------------------------------------------------------------ Column A Column B Column C Column D Amount at which Fair shown in the Type of investment Cost Value balance sheet - ------------------------------------------------------------------------------------------------------ Fixed-maturities Bonds: United States Treasury and Government agency obligations $ 1,178,078 $ 1,210,554 $ 1,210,554 State and municipal obligations 4,265,143 4,330,956 4,330,956 Corporate and other obligations 6,078,101 6,212,069 6,212,069 Mortgage-backed 1,875,537 1,920,557 1,920,557 ----------- ----------- ----------- Total fixed-maturities 13,396,859 13,674,136 13,674,136 Short-term investments 706,659 XXXXXXX 706,659 Other investments 135,376 XXXXXXX 135,376 ----------- ----------- ----------- Total investments $14,238,894 XXXXXXX $14,516,171 =========== =========== ===========
SCHEDULE II MBIA INC. (PARENT COMPANY) NOTES TO CONDENSED FINANCIAL STATEMENTS 1. Condensed Financial Statements Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. It is suggested that these condensed financial statements be read in conjunction with the Company's consolidated financial statements and the notes thereto. 2. Significant Accounting Policies The Parent company carries its investments in subsidiaries under the equity method. 3. Dividends from Subsidiaries During 2001 and 2000, MBIA Corp. declared and paid dividends of $212.4 million and $197.3 million to MBIA Inc. In 2001, MBIA Asset Management LLC made a distribution of $20.0 million to MBIA Inc. In 2000, MBIA Asset Management Corp. declared and paid dividends of $25.0 million to MBIA Inc. 4. Obligations under Municipal Investment and Repurchase Agreements The municipal investment and repurchase agreement business, as described in footnotes 2 and 19 to the consolidated financial statements of MBIA Inc. and subsidiaries (which are incorporated by reference in the 10-K), is conducted by both the Registrant and its wholly owned subsidiary, MBIA Investment Management Corp. SCHEDULE II MBIA INC. (PARENT COMPANY) CONDENSED BALANCE SHEETS (Dollars in thousands, except per share amounts)
December 31, 2001 December 31, 2000 ----------------- ----------------- ASSETS Investments: Municipal investment agreement portfolio held as available-for-sale at fair value (amortized cost $5,104,478 and $4,452,992) $ 5,605,181 $ 4,263,207 Municipal investment agreement portfolio pledged as collateral at fair value (amortized cost $577,790 and $211,214) 586,915 211,440 Fixed maturity securities held as available-for-sale at fair value (amortized cost $106,496 and $72,607) 106,197 74,594 Short-term investments, at amortized cost (which approximates fair value) 4,466 106,001 ------------ ------------ Total investments 6,302,759 4,655,242 Cash and cash equivalents 30,968 30,684 Securities purchased under agreements to resell or borrowed -- 559,624 Investment in and amounts due from wholly-owned subsidiaries 5,211,729 4,809,122 Accrued investment income 64,265 43,299 Receivable for investments sold 134,265 11,275 Other assets 34,417 26,776 ------------ ------------ Total assets $ 11,778,403 $ 10,136,022 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Municipal investment agreements $ 4,790,172 $ 3,461,095 Municipal repurchase agreements 699,577 757,643 Long-term debt 797,512 783,802 Short-term debt -- 99,992 Securities sold under agreeements to repurchase or loaned 557,818 734,624 Deferred income taxes 20,019 8,376 Payable for investments purchased 79,859 5,566 Dividends payable 22,274 20,205 Other liabilities 28,534 41,306 ------------ ------------ Total liabilities 6,995,765 5,912,609 ------------ ------------ Shareholders' Equity: Preferred stock, par value $1 per share; authorized shares - 10,000,000; issued and outstanding shares - none -- -- Common stock, par value $1 per share; authorized shares - 400,000,000 and 200,000,000; issued shares - 151,950,991 and 151,159,943 151,951 151,160 Additional paid-in capital 1,195,802 1,169,200 Retained earnings 3,415,517 2,934,608 Accumulated other comprehensive income, net of deferred income tax provision of $91,222 and $57,141 145,321 85,707 Unallocated ESOP shares (1,983) (2,950) Unearned compensation - restricted stock (11,335) (10,659) Treasury stock - 3,516,921 in 2001 and 3,314,037 shares in 2000 (112,635) (103,653) ------------ ------------ Total shareholders' equity 4,782,638 4,223,413 ------------ ------------ Total liabilities and shareholders' equity $ 11,778,403 $ 10,136,022 ============ ============
The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto and the accompanying notes. SCHEDULE II MBIA INC. (PARENT COMPANY) CONDENSED STATEMENTS OF INCOME (In thousands)
Years Ended December 31 --------------------------------------- 2001 2000 1999 --------- --------- --------- Revenues: Net investment income $ 236,837 $ 223,575 $ 188,826 Net realized gains (losses) 7,776 8,386 (8,639) Change in fair value of derivative instruments 476 -- -- Investment management services income 31,360 23,088 12,733 Investment management services realized gains (losses) 3,817 (1,820) 1,185 --------- --------- --------- Total revenues 280,266 253,229 194,105 --------- --------- --------- Expenses: Interest expense 68,021 54,460 52,857 Operating expenses 15,293 19,452 135,737 --------- --------- --------- Total expenses 83,314 73,912 188,594 --------- --------- --------- Gain before income taxes and equity in earnings of subsidiaries 196,952 179,317 5,511 Benefit for income taxes (26,620) (16,742) (17,617) --------- --------- --------- Gain before equity in earnings of subsidiaries 223,572 196,059 23,128 Equity in earnings of subsidiaries 349,062 332,578 297,402 --------- --------- --------- Income before cumulative effect of accounting change 572,634 528,637 320,530 Cumulative effect of accounting change (2,543) -- -- --------- --------- --------- Net income $ 570,091 $ 528,637 $ 320,530 ========= ========= =========
The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto and the accompanying notes. SCHEDULE II MBIA INC. (PARENT COMPANY) CONDENSED STATEMENTS OF CASH FLOWS (In thousands)
Years Ended December 31 ---------------------------------------------- 2001 2000 1999 ------------ ----------- ----------- Cash flows from operating activities: Net income $ 570,091 $ 528,637 $ 320,530 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed earnings of subsidiaries (349,062) (332,578) (297,402) Net realized (gains) losses on sales of investments (11,593) (6,566) 7,454 Benefit for deferred income taxes (8,625) (118) (52) Other, net (40,011) (11,421) 1,364 ------------ ----------- ----------- Total adjustments to net income (409,291) (350,683) (288,636) ------------ ----------- ----------- Net cash provided by operating activities 160,800 177,954 31,894 ------------ ----------- ----------- Cash flows from investing activities: Purchase of fixed-maturity securities (13,555,970) (4,433,020) (4,776,543) Sale of fixed-maturity securities 13,534,744 4,360,435 4,767,905 Sale (purchase) of short-term investments 102,388 (106,001) -- Purchases for municipal investment agreement portfolio, net of payable for investments purchased (9,374,432) (5,346,474) (2,541,312) Sales from municipal investment agreement portfolio, net of receivable for investments sold 7,684,881 4,754,985 1,324,531 Contributions to subsidiaries (3,003) (130) (3,178) Advances to subsidiaries, net (29,271) 56,310 135,690 ------------ ----------- ----------- Net cash used by investing activities (1,640,663) (713,895) (1,092,907) ------------ ----------- ----------- Cash flows from financing activities: Net (repayment) proceeds from (retirement) issuance of long-term debt (3,750) 196,108 -- Net repayment from retirement of short-term debt (99,992) -- -- Dividends paid (87,112) (80,708) (79,764) Purchase of treasury stock (8,982) (77,955) (24,698) Proceeds from issuance of municipal investment and repurchase agreements 3,857,293 2,478,519 2,547,714 Payments for drawdowns of municipal investment agreements (2,584,400) (2,141,733) (1,373,250) Securities loaned or sold under agreements to repurchase, net 382,817 147,422 (7,493) Exercise of stock options 24,273 23,683 14,616 ------------ ----------- ----------- Net cash provided by financing activities 1,480,147 545,336 1,077,125 ------------ ----------- ----------- Net increase in cash and cash equivalents 284 9,395 16,112 Cash and cash equivalents - beginning of year 30,684 21,289 5,177 ------------ ----------- ----------- Cash and cash equivalents - end of year $ 30,968 $ 30,684 $ 21,289 ============ =========== =========== Supplemental cash flow disclosures: Income taxes paid $ 2,151 $ 1,411 $ 149 Interest paid: Long-term debt 60,527 52,388 52,338
The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto and the accompanying notes. SCHEDULE IV MBIA INC. AND SUBSIDIARIES REINSURANCE for the Years Ended December 31, 2001, 2000 and 1999 (In thousands)
- ------------------------------------------------------------------------------------------------------- Column A Column B Column C Column D Column E Column F Percentage Insurance Gross Ceded to Other Assumed from of Amount Premiums Written Amount Value Other Companies Net Amount Assumed to Net - ------------------------------------------------------------------------------------------------------- 2001 $839,386 $235,362 $25,840 $629,864 4.1% ---- -------- -------- ------- -------- --- 2000 $641,452 $189,316 $45,956 $498,092 9.2% ---- -------- -------- ------- -------- --- 1999 $590,597 $171,256 $34,274 $453,615 7.6% ---- -------- -------- ------- -------- ---
Securities and Exchange Commission Washington, D.C. 20549 - -------------------------------------------------------------------------------- Exhibits to Form 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2001 Commission File No. 1-9583 - -------------------------------------------------------------------------------- MBIA Inc. Exhibit Index 3.1. Restated Certificate of Incorporation, dated August 17, 1990, incorporated by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1990 (Comm. File 1-9583) (the "1990 10-K"), as amended December 20, 1995, incorporated by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000 (Comm. File 1-9583) (the "2000 10-K"), as further amended September 5, 2001. 10.02. Note Subscription Agreement and Preferred Shares Subscription Agreement, both dated as of December 27, 2001 between MBIA Inc. and certain reinsurers. 10.04. First Restated Credit Agreement, dated as of October 1, 1993, among MBIA Corp., Credit Suisse, New York Branch, as Agent, Credit Suisse, New York Branch, Caisse Des Depots Et Consignations, Deutsche Bank AG, Bayerische Landesbank Girozentrale and Landesbank Hessen-Thuringen Girozentrale, as amended by an Assignment and Assumption Agreement, dated as of December 31, 1993, among MBIA Corp., Credit Suisse, New York Branch, as Agent and Assignor and Deutsche Bank AG, New York Branch, as further amended by a Modification Agreement, dated as of January 1, 1994, among Deutsche Bank, AG, New York Branch, MBIA Corp. and Credit Suisse, New York Branch, as Agent, as amended by a Joinder Agreement, dated December 31, 1993, among Credit Suisse, New York Branch, as Agent, Sudwestdeutsche Landesbank Girozentrale and MBIA Corp., incorporated by reference to Exhibit 10.78 to the 1993 10-K, as amended by the First Amendment to First Restated Credit Agreement, dated as of September 23, 1994, incorporated by reference to Exhibit 10.63 to the 1994 10-K, as further amended by the Second Amendment to the First Restated Credit Agreement, dated as of January 1, 1996, and as further amended by the Third Amendment to the First Restated Credit Agreement, dated as of October 1, 1996, incorporated by reference to Exhibit 10.57 to the 1996 10-K, as further amended and restated by the Second Amended and Restated Credit Agreement, dated as of October 1, 1997, incorporated by reference to Exhibit 10.46 to the 1997 10-K, as further amended by the First Amendment to Second Amended and Restated Credit Agreement, dated as of October 1, 1998, incorporated by reference to Exhibit 10.13 to the 1998 10-K, as further amended and restated by the Second Amendment to the Second Amended and Restated Credit Agreement, dated as of October 29, 1999, incorporated by reference to Exhibit 10.13 to the 1999 10-K, as further amended and restated by the Third Amendment to the Second Amendment and Restated Credit Agreement, dated as of October 27, 2000, incorporated by reference to Exhibit 10.04 to the 2000 10-K, as further amended by the Fourth Amendment to the Second Amended and Restated Credit Agreement, dated as of October 31, 2001. 10.14. Credit Agreement (364 day agreement) among the Company, MBIA Corp., various designated borrowers, various lending institutions, Deutsche Bank AG, New York Branch, as Administrative Agent, The First National Bank of Chicago, as Syndication Agent and Fleet National Bank, as Documentation Agent, dated as of August 28, 1998, incorporated by reference to Exhibit 10.33 to the 1998 10-K, as amended by a Notice of Extension of Final Maturity Date, with various lending institutions, dated as of August 2000, incorporated by reference to Exhibit 10.14 to the 2000 10-K, as further amended by the First Amendment, dated as of February 9, 2001, the Second Amendment to the Credit Agreement, dated as of July 31, 2001, and the Third Amendment, dated as of December 7, 2001. 10.15. Credit Agreement (5 year agreement) among the Company, MBIA Corp., various designated borrowers, various lending institutions, Deutsche Bank AG, New York Branch, as Administrative Agent, The First National Bank of Chicago, as Syndication Agent and Fleet National Bank, as Documentation Agent, dated as of August 28, 1998, incorporated by reference to Exhibit 10.34 to the 1998 10-K, as amended by a Notice of Extension of Final Maturity Date, with various lending institutions, dated as of August 2000, incorporated by reference to Exhibit 10.15 to the 2000 10-K as further amended by the First Amendment, dated as of February 9, 2001, the Second Amendment to the Credit Agreement, dated as of July 31, 2001, and the Third Amendment, dated as of December 7, 2001. 13. Annual Report to Shareholders of MBIA Inc. for fiscal year ended December 31, 2001. Such report is furnished for the information of the Commission only and, except for those portions thereof which are expressly incorporated by reference in this Annual Report on Form 10-K, is not to be deemed filed as part of this report. 21. List of Subsidiaries 23. Consent of PricewaterhouseCoopers LLP 99. Additional Exhibits - MBIA Corp. GAAP Financial Statements EX-3.1 3 dex31.txt RESTATED CERTIFICATE OF INCORPORATION EXHIBIT 3.1 MBIA INC. (Stock Corporation) AMENDED AND RESTATED -------------------- CERTIFICATE OF INCORPORATION ---------------------------- 1. The name of the Corporation is MBIA Inc. 2. The nature of the business to be transacted, or the purposes to be promoted or carried out by the corporation, are as follows: The Corporation shall have the power to engage in any lawful act or activity for which corporations may be formed under the Stock Corporation Act of the State of Connecticut. 3. The designation of each class of shares, the authorized number of shares of each such class, and the par value (if any) of each such share thereof, are as follows: The total number of shares of capital stock that the Corporation shall have authority to issue is Four Hundred Ten Million (410,000,000) shares, of which Four Hundred Million (400,000,000) shares shall be common stock, par value $1.00 per share, and of which Ten Million (10,000,000) shares shall be preferred stock, par value $1.00 per share. Immediately following the effectiveness of the Amended and Restated Certificate of Incorporation filed with the Secretary of the State of the State of Connecticut on May 21, 1987, there shall be a 736-for-1 stock split applicable to each share of common stock of the corporation issued and outstanding immediately prior to such time, so that each share of common stock of the Corporation issued and outstanding immediately prior to such time shall be changed into 736 shares of such common stock. 4. The terms, limitations and relative rights and preferences of each class of shares and series thereof (if any), or an express grant of authority to the Board of Directors pursuant to Section 33-341 of the Stock Corporation Act of the State of Connecticut, Connecticut General Statutes, are as follows: Each share of common stock shall have one vote on all matters on which shareholders are entitled to vote by this Amended and Restated Certificate of Incorporation, the By-Laws of the Corporation, or the statutes of Connecticut. Each share of common stock shall participate equally in any dividend distribution and upon liquidation or dissolution. 1 Authority is hereby expressly vested in the Board of Directors of the Corporation pursuant to the Stock Corporation Act of the State of Connecticut to adopt from time to time resolutions and amendments to this Amended and Restated Certificate of Incorporation providing for the issuance of the Corporation's authorized and unissued shares of preferred stock, fixing and determining the terms, limitations, and relative rights and preferences of the preferred stock, establishing series and fixing and. determining the variations as among particular series of the preferred stock. The resolution or resolutions providing for the issue of shares of a particular series shall fix, subject to applicable laws, the designation, rights, preferences and limitations of the shares of each such series. The authority of the Board of Directors with respect to each series shall include, but not be limited to, determination of the following: (a) the number of shares constituting such series, including the authority to increase or decrease such number, and the distinctive designation of such series; (b) the dividend rate of the shares of such series, whether the dividends shall be cumulative and, if so, the date from which they shall be cumulative, and the relative rights of priority, if any, of payment of dividends on shares of such series; (c) the right, if any, of the Corporation to redeem shares of such series and the terms and conditions of such redemption, including the redemption price; (d) the rights of the shares in case of a voluntary or involuntary liquidation, dissolution or winding up of the Corporation, and the relative rights of priority, if any, of payment of shares of such series; (e) the voting rights, if any, of the shares of such series and the terms and conditions under which such voting rights may be exercised; (f) the obligation, if any, of the Corporation to provide a retirement or sinking fund or funds of a similar nature and the terms and conditions of such obligation; (g) the terms and conditions, if any, upon which shares of such series shall be convertible into or exchangeable for shares of stock of any other class or classes or of any other series of preferred stock, including the price or prices or the rate or rates of conversion or exchange and the terms of adjustment, if any; and (h) any other terms, rights, preferences or limitations of the shares of such series as may be permitted by law. 2 The Board of Directors may not make any change in the designations, terms, limitations or relative rights or preferences of shares of preferred stock after their issuance, except upon compliance with any applicable provisions of the applicable law, of the By-Laws of the Corporation and of such designations, terms, limitations and relative rights and preferences. 5. The minimum amount of stated capital with which the Corporation shall commence business is Five Hundred Thousand Dollars ($500,000) and Five Hundred Thousand Dollars ($500,000) in capital surplus. 6. Upon the offering or sale by the Corporation of its shares or securities convertible into shares (including warrants, rights to subscribe and options to acquire shares), no shareholder shall have the preemptive right to purchase any such shares or securities. 7. The Corporation has expressly elected not to be governed by Sections 33-374a to 33-374c, inclusive, of the Stock Corporation Act of the State of Connecticut, Connecticut General Statutes, pursuant to the authority granted by Section 33-374c thereof. 8. The Board of Directors of the Corporation, when evaluating any offer of another party to (a) make a tender or exchange offer for any equity security of the Corporation, (b) merge or consolidate the Corporation into or with another corporation, or (c) purchase or otherwise acquire all or substantially all of the properties and assets of the Corporation, shall, in connection with the exercise of its judgment in determining what is in the best interests of the Corporation as a whole, be authorized to give due consideration to such factors as the Board of Directors determines to be relevant, including, without limitation: (i) the interests of the Corporation's shareholders; (ii) whether the proposed transaction might violate federal or state laws; (iii) the form and amount of consideration being offered in the proposed transaction, not only in relation to the then current market price for the outstanding capital stock of the Corporation, but also in relation to (1) the market price for the capital stock of the Corporation over a period of years, (2) the estimated price that might be achieved in a freely negotiated sale of the Corporation as a whole or in part or through orderly liquidation, (3) the premiums over market price paid for the securities of other corporations in similar transactions,(4) current political, economic and other factors bearing on securities prices, and (5) the Corporation's then current value (including its financial condition and the unrealized value of its properties and assets determined over a period of years), its long-term plans and its future prospects as an independent going concern; and 3 (iv) the social, legal, environmental and economic effects on (1) policy holders, employees, clients, suppliers and other affected persons, firms and corporations, (2) the communities and economic regions in which the Corporation and its subsidiaries operate or are located and (3) any of the businesses and properties of the Corporation or of any of its subsidiaries. In connection with such evaluation, the Board of Directors is authorized to conduct such investigations and to engage in such legal proceedings as the Board of Directors may determine. Notwithstanding anything to the contrary contained in this Amended and Restated Certificate of Incorporation, the By-Laws of the Corporation or otherwise (and notwithstanding the fact that a lesser percentage may be specified by law, this Amended and Restated Certificate of Incorporation or the By-Laws of the Corporation), the affirmative vote of the holders of at least 80% of the voting power of all of the shares of the Corporation then entitled to vote generally in the election of Directors shall be required to amend or repeal, or adopt any provision inconsistent with, this Section 8. 9. No person who is or was a director of the corporation shall be personally liable to the corporation or its shareholders for monetary damages for breach of duty as a director in an amount that exceeds the compensation received by the director for serving the Corporation during the year of the violation if such breach did not (a) involve a knowing and culpable violation of law by the director, (b) enable the director or an associate, as defined in subdivision (3) of Section 33-374d of the Connecticut Stock Corporation Act as in effect on the effective date hereof and as it may be amended from time to time, to receive an improper personal economic gain, (c) show a lack of good faith and a conscious disregard for the duty of the director to the Corporation under circumstances in which the director was aware that such conduct or omission created an unjustifiable risk of serious injury to the corporation, (d) constitute a sustained and unexcused pattern of inattention that amounted to an abdication of the director's duty to the Corporation, or (e) create liability under Section 33-321 of the Connecticut Stock Corporation Act as in effect on the effective date hereof and as it may be amended from time to time. This Section 9 shall not limit or preclude the liability of a person who is or was a director for any act or omission occurring prior to the effective date hereof. Any lawful repeal or modification of this Section 9 or the adoption of any provision inconsistent herewith by the Board of Directors and the shareholders of the Corporation shall not, with respect to a person who is or was a director, adversely affect any limitation of liability, right or protection of such person existing hereunder with respect to any breach of duty occurring prior to the effective date of such repeal, modification or adoption of a provision inconsistent herewith. 4 EX-10.02 4 dex1002.txt NOTE SUBSCRIPTION AGREEMENT EXHIBIT 10.02 NOTE SUBSCRIPTION AGREEMENT Up to $150,000,000 Aggregate Principal Amount of Variable Rate Subordinated Notes Due 15 Years from Original Issuance Date MBIA, INC. December 27, 2001 MBIA, Inc. 113 King Street Armonk, New York 10504 Ladies and Gentlemen: Swiss Re Financial Products Corporation, a Delaware corporation ("SRFPC"), and XXXXX, a Delaware corporation ("XXXXX"), and together with SRFPC, the "Providers"), and Swiss Re Capital Markets Corporation, a Delaware corporation, as agent for the Providers ("SRCMC"), hereby confirm their agreement with MBIA, Inc., a Connecticut corporation (the "Company"), with respect to the future issue and sale by the Company, and the commitments for purchase by the Providers, subject to the terms and conditions set forth herein, of up to $150,000,000 aggregate principal amount of Variable Rate Subordinated Notes Due 15 Years from Original Issuance Date (the "Notes") of the Company. Capitalized terms used herein shall have the meanings attributed thereto in Section 1 hereof. The Providers understand that on any day during the Commitment Period on which Incurred Losses exceed the Trigger Point (each such date, a "Trigger Date") but in no event more frequently than once every 30 days, subject to the terms and conditions stated herein, the Company shall have the right to require the Providers to purchase Notes in an aggregate principal amount equal to the amount by which Incurred Losses on such Trigger Date exceed the Trigger Point as of such Trigger Date, minus the aggregate principal amount of Notes sold to the Providers prior to such Trigger Date, but in no event exceeding the amount of the Available Commitment in effect at such time. No Provider shall be obligated to purchase more than its Pro Rata Share of the Notes. Incurred Losses shall be determined in respect of certain financial guaranty insurance policies issued by any of MBIA Insurance Corporation ("MBIA Corp."), MBIA Assurance, S.A., Capital Markets Assurance Corporation, MBIA Insurance Corp. of Illinois and any other financial guaranty company wholly owned by, or consolidated on the balance sheet of, MBIA Corp. or the Company (collectively, the "Insurers"), as described in greater detail herein. The Providers understand that the Company may agree to issue, from time to time, additional commitments for the purchase of Notes in excess of $150,000,000 aggregate principal amount to one or more subsequent providers (each, a "Subsequent Provider"), although SRFPC and XXXXX shall have no obligation to purchase such additional commitments. The Company acknowledges and agrees that the Providers may also request that all or a portion of the Commitments evidenced by this Agreement be assigned to Subsequent Providers; provided, however, that in no event shall the aggregate Commitments of SRFPC be less than $50,000,000. 1. Definitions. Except as otherwise defined herein and except where ----------- the context otherwise requires, the following terms shall have the following meanings: "AAA" has the meaning given to such term in Section 14. "Affiliate" shall mean any management employee or director of the Company or any Subsidiary, or holder of five percent (5%) or more of any class of capital stock of the Company, or any member of their respective immediate families or any corporation or other entity directly or indirectly controlled by one or more of such management employees, directors or 5% stockholders or members of their immediate families. "Agreement" means this Note Subscription Agreement. "Available Commitment" means, as of any date of determination during the Commitment Period, the amount of the Commitments, minus (i) the face amount of Notes sold to the Providers or with respect to which a Note Issuance Request has been given to the Providers and not rescinded before such date (it being understood that if for any reason one or more Providers defaults on its Commitments to purchase Notes on any Closing Date, such defaulting Provider's Pro Rata Share of the Available Commitment shall be increased by the aggregate principal amount of Notes such Provider failed to purchase), and (ii) any reduction of the Commitments by the Company as set forth in Section 2(c), plus the amount ---- of any Notes redeemed pursuant to Sections 2(g) or 3(c). "Average Investment Rating" means the weighted average of the issue credit ratings of the investments held in the investment portfolio by MBIA Corp. (measured by the then-current fair market value of such investments), as determined by S&P or Moody's (or if neither of S&P or Moody's is then providing such service, another NRSRO then providing such service), where (i) a debt rating of AAA or Aaa equals 1.0, AA or Aa equals 2.0, A or A equals 3.0, BBB or Baa equals 4.0 and any rating below BBB or Baa equals 7.0, respectively; (ii) a short term issue credit rating of A-1+ and P-1 equals 2.0, A-1 and P-1 equals 2.5, and A-2 and P-2 equals 4; (iii) a debt rating by the NAIC of NAIC 1 equals 2, NAIC 2 equals 4 and NAIC 3 equals 7, but only if any such NAIC-rated debt has not otherwise been rated by S&P or Moody's; (iv) any unrated money market mutual fund equals 3, and (v) any investment not rated as set forth in the foregoing clauses (i) through (iv) equals 10. In the event that S&P or Moody's do not have equivalent ratings within the investment class described in the foregoing clause (i), the lower of the two ratings shall apply, and in the event that only one NRSRO issues ratings within such investment class, such single rating shall apply. "Business Day" means any day, other than a Saturday or Sunday, that is neither a legal holiday nor a day on which banking institutions are authorized or required by law, 2 regulation or executive order to close in The City of New York, New York and that is also a London Banking Day. "Capital Lease Obligations" means, as to any Person, the obligations of such Person to pay rent or other amounts under any lease of (or other arrangement conveying the right to use) real or personal property, or a combination thereof, which obligations are required to be classified and accounted for as capital leases on a balance sheet of such Person under GAAP and, for the purposes of this Agreement, the amount of such obligations at any time shall be the capitalized amount thereof at such time determined in accordance with GAAP. "Case Basis Reserves" means the specific, identified loss reserves established by an Insurer to cover estimated losses on policies for which such Insurer has determined that it is likely to incur losses. "Change in Control" means, with respect to any Person, the acquisition by any other Person, or any two or more other Persons acting in concert, of beneficial ownership (within the meaning of Rule 13d-3 under the 1934 Act), directly or indirectly, of securities of such Person (or other securities convertible into such securities) representing 30% or more of the combined voting power of all securities of such Person entitled to vote in the election of directors, other than securities having such power only by reason of the happening of a contingency. "Claims Paying Ratio" means (i) the aggregate outstanding net debt service insured by the Reference Portfolio Insurers divided by (ii) the sum of (A) the aggregate statutory capital (including contingency reserves, if any) of the Reference Portfolio Insurers, (B) the aggregate unearned premium reserve (calculated on an after tax basis) of the Reference Portfolio Insurers, (C) the aggregate statutory loss and loss adjustment expense reserves of the Reference Portfolio Insurers, (D) the aggregate present value of future installment premiums (calculated on an after tax basis on the same basis as the Company calculates adjusted book value for external reporting purposes) of the Reference Portfolio Insurers, and (E) the aggregate face amount of soft capital facilities (including, without limitation, "stop loss" reinsurance facilities, bank facilities, letters of credit, the Commitments under this Agreement or similar facilities) available to the Company or any such Reference Portfolio Insurer which would make available to Company or any such Reference Portfolio Insurer funds to cover losses under any policies issued by any Reference Portfolio Insurer. "Closing Date" means each date scheduled for the delivery of, and payment for, Notes underlying the Commitments, pursuant to a Note Issuance Request properly delivered to the Providers. "Code" means the Internal Revenue Code of 1986, as amended. "Commission" has the meaning ascribed to such term in Section 5(a)(13). "Commitments" means the obligation of the Providers to purchase an aggregate principal amount of Notes from time to time during the Commitment Period not to 3 exceed the amount set forth on Schedule A, provided that the obligation of each Provider shall not exceed its Pro Rata Share of the Commitments. "Commitment Fee" means any commitment fee payable by the Company to a Provider pursuant to a Note Commitment Fee Agreement. "Commitment Period" means the period from and including the Effective Date to, but excluding, the Commitment Termination Date. "Commitment Termination Date" means the earliest to occur of (i) purchase by the Providers of an aggregate principal amount of Notes equal to the Commitments, (ii) the tenth anniversary of the date of this Agreement, and (iii) such other termination of the Commitments as provided herein. "Company" means MBIA, Inc., a Connecticut corporation. "Covenant Default" has the meaning ascribed to such term in Section 7(c). "Covenant Default Rate" has the meaning ascribed to such term in Section 7(c). "Debt to Capital Ratio" with respect to any Person means, as of the end of any fiscal quarter, the ratio, determined on a consolidated basis on such date, of (i) the aggregate outstanding Indebtedness of such Person on such date, to (ii) the aggregate outstanding Indebtedness of such Person on such date, plus Shareholders' Equity, plus, the accumulated ---- ---- amount, if any, by which Incurred Losses exceed earned premium plus investment income, as reported by the Reference Portfolio Insurers in their respective statutory financial statements, from the Effective Date to the end of such fiscal quarter. "Default Fee" has the meaning ascribed to such term in Section 7(c). "Default Rate" has the meaning ascribed to such term in Section 7(c). "Effective Date" means December 27, 2001. "Employee Benefit Plan" means any "employee benefit plan" as defined in Section 3(3) of ERISA which is or was maintained or contributed to by the Company, any of its Subsidiaries or any of their respective ERISA Affiliates. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "ERISA Affiliate" means, as applied to any Person, (i) any corporation which is a member of a controlled group of corporations within the meaning of Section 414(b) of the Code of which that Person is a member; (ii) any trade or business (whether or not incorporated) which is a member of a group of trades or businesses under common control within the meaning of Section 414(c) of the Code of which that Person is a member; and (iii) any member of an affiliated service group within the meaning of Section 414(m) or (o) of the Code of which that Person, any corporation described in 4 clause (i) above or any trade or business described in clause (ii) above is a member. Any former ERISA Affiliate of the Company or any of its Subsidiaries shall continue to be considered an ERISA Affiliate of the Company or such Subsidiary within the meaning of this definition with respect to the period such entity was an ERISA Affiliate of the Company or such Subsidiary and with respect to liabilities arising after such period for which the Company or such Subsidiary could be liable under the Code or ERISA. "ERISA Event" means (i) a "reportable event" within the meaning of Section 4043 of ERISA and the regulations issued thereunder with respect to any Pension Plan (excluding those for which the provision for 30-day notice to the PBGC has been waived by regulation); (ii) the failure to meet the minimum funding standard of Section 412 of the Code with respect to any Pension Plan (whether or not waived in accordance with Section 412(d) of the Code) or the failure to make by its due date a required installment under Section 412(m) of the Code with respect to any Pension Plan or the failure to make any required contribution to a Multiemployer Plan; (iii) the provision by the administrator of any Pension Plan pursuant to Section 4041(a)(2) of ERISA of a notice of intent to terminate such plan in a distress termination described in Section 4041(c) of ERISA; (iv) the withdrawal by the Company, any of its Subsidiaries or any of their respective ERISA Affiliates from any Pension Plan with two or more contributing sponsors or the termination of any such Pension Plan resulting in liability pursuant to Section 4063 or 4064 of ERISA; (v) the institution by the PBGC of proceedings to terminate any Pension Plan, or the occurrence of any event or condition which might constitute grounds under ERISA for the termination of, or the appointment of a trustee to administer, any Pension Plan; (vi) the imposition of liability on the Company, any of its Subsidiaries or any of their respective ERISA Affiliates pursuant to Section 4062(e) or 4069 of ERISA or by reason of the application of Section 4212(c) of ERISA; (vii) the withdrawal of the Company, any of its Subsidiaries or any of their respective ERISA Affiliates in a complete or partial withdrawal (within the meaning of Sections 4203 and 4205 of ERISA) from any Multiemployer Plan if there is any potential liability therefor, or the receipt by Company, any of its Subsidiaries or any of their respective ERISA Affiliates of notice from any Multiemployer Plan that it is in reorganization or insolvency pursuant to Section 4241 or 4245 of ERISA, or that it intends to terminate or has terminated under Section 4041A or 4042 of ERISA; (viii) the occurrence of an act or omission which could give rise to the imposition on the Company, any of its Subsidiaries or any of their respective ERISA Affiliates of material fines, penalties, taxes or related charges under Section 4975 of the Code or under Section 502(i) of ERISA in respect of any Employee Benefit Plan; (ix) the assertion of a material claim (other than routine claims for benefits) against any Employee Benefit Plan other than a Multiemployer Plan or the assets thereof, or against the Company, any of its Subsidiaries or any of their respective ERISA Affiliates in connection with any Employee Benefit Plan; (x) receipt from the Internal Revenue Service of notice of the failure of any Pension Plan (or any other Employee Benefit Plan intended to be qualified under Section 401(a) of the Code) to qualify under Section 401(a) of the Code, or the failure of any trust forming part of any Pension Plan to qualify for exemption from taxation under Section 501(a) of the Code; or (xi) the imposition of a Lien pursuant to Section 401(a)(29) or 412(n) of the Code or pursuant to ERISA with respect to any Pension Plan. 5 "Event of Default" has the meaning ascribed to such term in Section 10. "Event of Suspension" has the meaning ascribed to such term in Section 9. "Exercise Date" means any date on which the Company sends a Note Issuance Request to the Providers to purchase Notes. "GAAP" means generally accepted accounting principles in the United States, applied consistently. "Incurred Losses" means, as of any Exercise Date, the aggregate amount during the period commencing on the Effective Date to and including such Exercise Date of (i) claims on the Reference Portfolio paid by any of the Reference Portfolio Insurers, net of any Reinsurance with respect to any such claims, plus (ii) the change since the Effective Date in the ---- aggregate amount of Case Basis Reserves net of expected recoveries in effect with respect to the Reference Portfolio on such Exercise Date established by any of the Reference Portfolio Insurers in accordance with statutory accounting standards, net of any Reinsurance, plus (iii) loss ---- adjustment expense on the Reference Portfolio, minus (iv) recoveries by a ----- Reference Portfolio Insurer of any portion of amounts paid under the foregoing clauses (i) and (iii). "Indebtedness" of any Person as of any date shall mean (i) all indebtedness of such Person for borrowed money or for the deferred purchase price of property or services or which is evidenced by a note, bond, debenture or similar instrument, (ii) all Capital Lease Obligations of such Person, and (iii) all liabilities secured by any lien on any property owned by such Person, even though such Person has not assumed or otherwise become liable for the payment thereof; provided, however, that -------- ------- such term shall not include municipal investment agreements, municipal repurchase agreements or securities loaned or sold under agreements to repurchase. "Insurers" has the meaning ascribed to such term in the second introductory paragraph. "Licenses" has the meaning ascribed to such term in Section 5(a)(4). "LIBOR" has the meaning ascribed to such term in Exhibit 2(a)-1. "London Banking Day" means a day on which commercial banks are open for business (including dealings in United States dollars) in London. "Loss Adjustment Amount" has the meaning ascribed to such term in Section 2(g). "Material Adverse Effect" means (i) a material adverse change in, or a material adverse effect upon, the business, condition (financial or otherwise) or prospects of the Company and its Subsidiaries, taken as a whole, which results, or with the giving of notice or lapse of time would result, in a material impairment of the ability of the Company to perform under this Agreement or any related transaction documents, or (ii) a 6 material adverse effect upon the legality, validity, binding effect or enforceability against the Company of this Agreement or any related transaction documents. "MBIA Corp." has the meaning ascribed to such term in the second introductory paragraph. "Moody's" means Moody's Investors Service, Inc. or any successor thereto. "Multiemployer Plan" means any Employee Benefit Plan which is a "multiemployer plan" as defined in Section 3(37) of ERISA. "NAIC" means the ratings office of the National Association of Insurance Commissioners. "Net Insured Face Amount" means, with respect to any insured obligation, the notional par amount of such insured obligation, minus the ----- amount of such insured obligation subject to Reinsurance. As used herein, "Net Insured Face Amount" includes all notional amounts of insured credit derivatives but excludes all other insured derivatives. "1933 Act" means the Securities Act of 1933, as amended. "1934 Act" means the Securities Exchange Act of 1934, as amended. "1940 Act" means the Investment Company Act of 1940, as amended. "Note Commitment Fee Agreements" means any agreement between the Company and any Provider with respect to the payment of Commitment Fees. "Note Issuance Request" has the meaning ascribed to such term in Section 2(a). "Notes" shall have the meaning as defined in the first introductory paragraph. "NRSRO" means a nationally recognized statistical rating organization. "Original Issuance Date" means, with respect to any issuance of Notes, the date when any such Notes are issued and sold in accordance with this Agreement. "Parties" has the meaning given to such term in Section 14. "PBGC" means the Pension Benefit Guaranty Corporation or any successor thereto. "Pension Plan" means any Employee Benefit Plan, other than a Multiemployer Plan, which is subject to Section 412 of the Code or Section 302 of ERISA. "Person" means and includes natural persons, corporations, limited partnerships, general partnerships, limited liability companies, limited liability partnerships, joint stock companies, joint ventures, associations, companies, trusts, banks, trust companies, land 7 trusts, business trusts or other organizations, whether or not legal entities, and governments (whether federal, state or local, domestic or foreign, and including political subdivisions thereof) and agencies or other administrative or regulatory bodies thereof. "Portfolio Certificate" has the meaning ascribed to such term in Section 7(a)(6). "Pro Rata Share", with respect to each Provider, means the percentage set forth opposite such Provider on Schedule A. "Providers" has the meaning as defined in the first introductory paragraph. "Ratings Non-Compliance Period" means the period commencing on the date that the Company's senior unsecured debt ratings by S&P or Moody's are reduced to A+/A1 or lower, respectively, or the date that any Reference Portfolio Insurer's insurance financial strength ratings by S&P or Moody's are reduced to AA+/Aa1 or lower, respectively, and ending on the date that the ratings of the Company and the Reference Portfolio Insurers increase to AA-/Aa3 or higher and AAA/Aaa, respectively. "Redemption Amount" has the meaning ascribed to such term in Section 2(g). "Redemption Date" has the meaning ascribed to such term in Section 2(g). "Reference Portfolio" means all financial guaranty insurance policies issued by any of the Reference Portfolio Insurers or reinsurance assumed by any of such Reference Portfolio Insurers. Notwithstanding the foregoing, "Reference Portfolio" shall not include insurance or reinsurance of unsecured obligations of Southern California Edison Company and Pacific Gas and Electric Company, until such time, if any, as any such unsecured obligation is upgraded to a rating of Baa3/BBB- or better by Moody's and S&P, respectively, and such obligation maintains such ratings for a period of 6 months. "Reference Portfolio Insurer" means all Insurers other than those Insurers which the Company has advised the Providers in writing are "excluded Insurers" for purposes of determining the Reference Portfolio, provided that MBIA Corp. remains at all times a Reference Portfolio Insurer. "Reinsurance" means any reinsurance agreement or arrangement under which a third party reinsures any individual or related group of policies on a quota share or non-proportional basis, but excluding any reinsurance of the type customarily referred to as "stop loss." "Senior Indebtedness" means Indebtedness of the Company outstanding as of the Effective Date, or thereafter created, for all liabilities senior to or pari passu with money borrowed from banks, insurance companies and other financial institutions, unless the instrument creating or evidencing such Indebtedness provides that such Indebtedness is not senior to the Notes. "Shareholders' Equity" of any Person at any date means such number as calculated in accordance with GAAP as of such date. 8 "S&P" means Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc. or any successor thereto. "SRCMC" has the meaning as defined in the first introductory paragraph. "Structuring Fee" means the structuring fee payable by the Company to SRCMC pursuant to the Structuring Fee Agreement. "Structuring Fee Agreement" means the agreement of even date herewith between the Company and SRCMC, setting forth the Structuring Fee payable by the Company to SRCMC. "Subsequent Provider" has the meaning as defined in the third introductory paragraph. "Subsidiary" means any corporation or other entity with a GAAP net worth in excess of $10 million of which at least a majority of the securities or other ownership interest having ordinary voting power (absolutely or contingently) for the election of directors or other persons performing similar functions are at the time owned directly or indirectly by the Company or any of its other Subsidiaries. "Tangible Net Worth" means, as at any date for any Person, the sum of the following with respect to such Person and its Subsidiaries (determined on a consolidated basis without duplication in accordance with GAAP): (i) Shareholders' Equity; minus ----- (ii) the net present value of any liabilities due to the PBGC or to any Employee Benefit Plan under Section 412 of the Code, Section 302 of ERISA or Title IV of ERISA (to the extent not otherwise deducted in the calculation of Shareholders' Equity); minus ----- (iii) the book value of all intangible assets. "Termination Date" means December 27, 2011. "Trigger Date" has the meaning ascribed to such term in the second introductory paragraph. "Trigger Point" means, as of any date with respect to the Reference Portfolio, the sum of (i) 0.10% of the aggregate Net Insured Face Amount of the domestic public finance general obligation portfolio, plus (ii) ---- 0.30% of aggregate Net Insured Face Amount of the domestic public finance non-general obligation portfolio, plus (iii) 0.30% of the aggregate Net ---- Insured Face Amount of the portion of the international structured finance and domestic structured finance portfolios which are rated triple A (explicitly or via a "shadow" rating) by all (and in no event less than one) NRSROs which rate such obligations, plus (iv) 0.50% of the aggregate ---- Net Insured Face Amount of the portion of the domestic structured finance portfolio which is not rated triple A by all (and in no 9 event less than one) NRSROs, plus (v) 0.70% of the aggregate Net Insured ---- Face Amount of the domestic health care and domestic investor-owned utility portfolios, plus (vi) 0.80% of the aggregate Net Insured Face ---- Amount of the Reference Portfolio not included in (i) through (v) above, in each case determined as of the close of business on December 31 of the preceding calendar year. "US$" or "$" means United States Dollars. To the extent any losses, liabilities or other amounts described or referred to in this Agreement are stated or denominated in currencies other than United States Dollars, such losses, liabilities or amounts shall be stated, for purposes of this Agreement, in their respective United States Dollar equivalents as shown in the Company's financial statements. 2. Subscription. (a) General. Subject to the terms and conditions ------------ ------- contained herein, including, without limitation, Section 2(g) below, each Provider hereby irrevocably subscribes for and agrees to purchase Notes in an aggregate principal amount not to exceed its Pro Rata Share of the Commitments. Upon the occurrence of any Trigger Date occurring during the Commitment Period, the Company may request in writing (a "Note Issuance Request") that each Provider purchase its Pro Rata Share of the Notes in an aggregate principal amount which shall equal the amount by which Incurred Losses on such Trigger Date exceed the Trigger Point as of such Trigger Date, minus the aggregate ----- principal amount of Notes issued and sold to the Providers prior to such Trigger Date; provided that the principal amount of the Notes issued at any time during the Commitment Period shall not exceed the Available Commitment then in effect. The Company shall make each Note Issuance Request in the manner set forth in Section 3 of this Agreement. The Notes shall be issued in the form of, and upon the terms set forth in, the form of Note attached hereto as Exhibit 2(a)-1. Each Note issued pursuant to this Agreement shall have a maturity of 15 years from the Original Issuance Date applicable to such Note and shall bear interest at a rate of LIBOR plus the applicable Margin, as such terms are defined in Exhibit 2(a)-1. (b) Limitations. Each Note Issuance Request by the Company during the ----------- Commitment Period shall be in aggregate increments of $5,000,000 or integral multiples of $1,000,000 in excess thereof (or in the event that the Available Commitment at such time is less than such amounts, the amount of the Available Commitment). The Company shall not make more than one Note Issuance Request during any 30 calendar day period. (c) Reduction of Commitments. The Commitments may be permanently reduced ------------------------ (i) at the option of the Company, upon 10 Business Days' written notice to the Providers, in a minimum amount of $5,000,000 and integral multiples of $1,000,000 in excess thereof (or in the event that the Available Commitment at such time is less than such amounts, the amount of the Available Commitment). The Commitments of any Provider shall terminate on the earliest to occur of (i) upon the occurrence of an Event of Default referred to in Sections 10(e) and 10(f), (ii) at the option of such Provider, upon the occurrence of any other Event of Default, and (iii) on the Termination Date. In the case of clause (ii) above, such termination shall take effect upon the date of written notice from such Provider to the Company. The Available Commitment shall be permanently reduced on each Original Issuance Date in an amount equal to the purchase price of the Notes purchased on such date (subject to increase in accordance with the provisions of Section 2(g)). 10 (d) Payment of Structuring Fee. On the effective date of any commitments -------------------------- to purchase Notes, SRCMC shall be deemed to have earned, and the Company shall pay to SRCMC, the Structuring Fee. The Structuring Fee shall be incurred by the Company only once, on the applicable effective date. (e) Payment of Fees. On the Effective Date, and on each anniversary --------------- thereafter during the Commitment Period, each Provider shall be deemed to have earned, and the Company shall pay to such Provider, its Pro Rata Share of the Commitment Fee, as set forth in the Note Commitment Fee Agreements. (f) Ranking. The Notes will be subordinated in right of payment to all ------- Senior Indebtedness. The subordination of the Notes to Senior Indebtedness shall not affect the obligation of the Company to make, or prevent the Company from making, other than as provided in the Notes, payments at any time of principal of, premium, if any, or interest on the Notes. (g) Provider's Redemption Option. Following any Exercise Date, in the ---------------------------- event that there shall be a reduction (the "Loss Adjustment Amount") in the Incurred Losses as set forth in the Note Issuance Request applicable to such Exercise Date (as a result of the reduction of Case Basis Reserves, recoveries or other adjustments, whether determined upon review by the Company or by a Provider pursuant to Section 3(c) below), each Provider shall have the right to require the Company to redeem a principal amount of Notes equal to its Pro Rata Share of the Loss Adjustment Amount (the "Redemption Amount"). Such redemption shall be made on the form of notice attached to such Note and shall occur on the date (the "Redemption Date") stated therein, which shall be not less than 5 Business Days after the date of such notice. The Company shall redeem such portion of Notes in cash at a purchase price equal to 100% of the Redemption Amount plus accrued and unpaid interest on the Redemption Amount to, but excluding, the Redemption Date. If on any Redemption Date the Company does not have sufficient funds to pay the Redemption Amount to any Provider, the Notes underlying such payment obligation shall continue to accrue interest at the applicable rate plus the Default Rate provided by Section 7(c) of this Agreement, until such time as the Redemption Amount is paid in full. In such event, the Company's obligation to redeem the Notes shall be deferred until the first Business Day on which the Company shall have sufficient funds, at which time the Company shall pay the Redemption Amount immediately to the Providers. 3. Method of Exercise and Redemption. (a) Funding of Commitments will --------------------------------- generally be scheduled to occur on a specified date, as mutually agreed upon by the Company and the Providers, within 5 to 10 Business Days after the Providers receive a Note Issuance Request (as defined below). In no event, however, shall a Closing Date occur more than 20 Business Days after receipt of a Note Issuance Request unless all parties otherwise agree. (b) In the event that the Company desires to make a Note Issuance Request in connection with any Trigger Date occurring during the Commitment Period, the Company shall deliver such Note Issuance Request (in the form attached hereto as Exhibit 3) to the Providers, in accordance with the notice provisions of Section 13. Each Note Issuance Request shall specify (i) the aggregate purchase price for the Notes to be issued, (ii) the amount of the Incurred Losses and the Trigger Point as of the Exercise Date and (iii) the proposed Closing Date, which shall not 11 be less than 5 Business Days or more than 20 Business Days after the date of receipt of the Note Issuance Request. (c) Within 20 Business Days after any Closing Date, the Providers shall be permitted reasonable access to loss records of the Company and its applicable Subsidiaries relating to the Incurred Losses referred to in the applicable Note Issuance Request (including, without limitation, policy files, claim files, and loss and loss reserve files, or information and personnel, during normal business hours of the Company and its applicable Subsidiaries). If any Provider determines that any information or calculations contained in, or delivered with, the Note Issuance Request, or any of the representations and warranties made, or documents delivered, on the Closing Date in respect of such Note Issuance Request, were materially inaccurate or misleading, and such defect, if known, would have prevented the Closing Date from occurring, such Provider shall have the right, subject to the dispute resolution provisions contained in Section 14 hereof, to require the Company to redeem any such Notes pursuant to Section 2(g). (d) The Providers shall make available, on the applicable Closing Date (or the next following Business Day if such Closing Date is not a Business Day), by wire transfer of immediately available funds, in U.S. dollars, the aggregate purchase price specified in the Note Issuance Request (less any fees deducted as provided in the next sentence), against the delivery by the Company of the Notes. On any Closing Date, the purchase price payable to the Company with respect to the Notes to be issued on such date shall be reduced by the aggregate amount of any Structuring Fee, Commitment Fees, Default Fees or any other charges, fees or other costs hereunder which remain unpaid as of such Closing Date. 4. Closings. Delivery of and payment for the Notes which are required to -------- be delivered on any applicable Closing Date shall be made at the offices of the Providers set forth in Section 13 (or such other place as may be determined by agreement among the Company, the Providers and SRCMC), at 10:00 a.m., New York time, on such Closing Date. Delivery of such Notes shall be made against payment of the purchase price to the order of the Company in immediately available funds by transfer to an account designated by the Company or by such other means as shall be acceptable to the Company, the Providers and SRCMC. Payment for the Notes shall be subject to delivery on the Closing Date of a certificate (in the form of Exhibit 4 attached hereto) signed by the Chief Financial Officer, Treasurer or Controller of the Company, certifying compliance with the conditions set forth in Section 12(b). 5. Representations and Warranties of the Company and its Subsidiaries. ------------------------------------------------------------------ (a) The Company, on its behalf and on behalf of each of its Subsidiaries, represents and warrants to the Providers and SRCMC as of the date hereof that: (1) Existence and Qualification. The Company has been duly --------------------------- incorporated and is validly existing as a corporation in good standing under the laws of the State of Connecticut with full corporate power and authority to enter into and perform its obligations under this Agreement and to own its properties and conduct its business as currently being conducted. The Company is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except 12 where the failure to so qualify or be in good standing would not have a Material Adverse Effect. (2) Existence and Qualification of Reference Portfolio Insurers. ----------------------------------------------------------- Each Reference Portfolio Insurer has been duly organized and is validly existing and in good standing under the laws of the jurisdiction of its organization, has all requisite power and authority to own, lease and operate its properties and conduct its business as currently being conducted and is duly qualified to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure to so qualify or be in good standing would not have a Material Adverse Effect; all of the issued and outstanding shares of capital stock or other equity interests, as applicable, of each Reference Portfolio Insurer have been duly authorized and are validly issued, fully paid and non-assessable and, except for qualifying shares, are owned by the Company, directly or through subsidiaries, free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity; and none of the outstanding shares of capital stock of any Reference Portfolio Insurer was issued in violation of preemptive or other similar rights of any securityholder of such Reference Portfolio Insurer. (3) No Material Changes. Since the date of filing of the ------------------- Company's Annual Report on Form 10-K for the year ended December 31, 2000, except as otherwise stated therein or in any subsequently filed Quarterly Report on Form 10-Q, or as disclosed in any subsequently filed Current Report on Form 8-K filed prior to the date hereof, there has been no material adverse change in the condition, financial or otherwise, or in the earnings, operations, business affairs or business prospects of the Company and its Subsidiaries, considered as one enterprise, whether or not arising in the ordinary course of business. (4) Regulatory Matters. The Insurers have all requisite licenses, ------------------ permits and authority that are necessary for the conduct of their respective insurance businesses, except where the failure to obtain such licenses, permits or authorities would not have a Material Adverse Effect (collectively, "Licenses"), such Licenses are in full force and effect, and no proceeding is pending or, to the Company's knowledge, threatened to suspend, revoke or limit any such License. (5) Binding Obligations. The acceptance of the subscription ------------------- hereof by the Company, as evidenced by its signature on the signature page of this Agreement, and the execution, delivery and performance of this Agreement will have been duly authorized by all necessary action on behalf of the Company, and this Agreement, by virtue of such acceptance, will, upon approval hereof by the Company's Board of Directors, be a legal, valid and binding agreement of the Company, enforceable against the Company in accordance with its terms, except as enforcement thereof may be limited by bankruptcy, insolvency or other laws related to or affecting the enforcement of creditors' rights generally or by equitable principles. 13 (6) Options or Rights with Respect to Insurers. There are (i) no ------------------------------------------ outstanding subscriptions, warrants, options, calls or commitments of any character relating to or entitling any Person to purchase or otherwise acquire any stock of any Insurer and (ii) no obligations or securities convertible into or exchangeable for shares of any stock of any Insurer or any commitments of any character relating to or entitling any Person to purchase or otherwise acquire any such obligations or securities. (7) Absence of Litigation. There are no legal or governmental --------------------- proceedings pending to which the Company or any Insurer is a party or of which any property of the Company or any Insurer is the subject, and which, if determined adversely to the Company or any Insurer could reasonably be expected, individually or in the aggregate, to result in a Material Adverse Effect; and to the best of the Company's knowledge, no such proceedings are threatened nor has the Company been informed that it or an Insurer is the subject of an investigation by governmental authorities. There are no outstanding orders, judgments, injunctions or decrees of any governmental authority against the Company or any Insurer. (8) No Violation or Conflict. Neither the Company nor any Insurer ------------------------ has any knowledge that it is, or with the giving of notice or passage of time or both, would be, in breach or violation of any of the terms or provisions of or in default under (i) any statute, rule or regulation applicable to the Company or any Subsidiary, (ii) any indenture, contract, lease, mortgage, deed of trust, note or other agreement or instrument for over $25,000,000 to which the Company or any Subsidiary is a party or by which it may be bound, (iii) its certificate of incorporation, by-laws or other organizational documents, and (iv) any order, decree or judgment of any court or governmental agency or body having jurisdiction over the Company or any Subsidiary except, with respect to breaches, violations or defaults contemplated by clauses (i), (ii), (iii) or (iv), for such breaches, violations or defaults that could not, individually or in the aggregate, be reasonably expected to result in a Material Adverse Effect. The performance of this Agreement by the Company and the consummation of the transactions herein contemplated will not, with the giving of notice or passage of time or both, result in a breach or violation of any of the terms or provisions of or constitute a default under or accelerate obligations under (w) any material statute, rule or regulation applicable to the Company or any Subsidiary, (x) any indenture, contract, mortgage, lease, deed of trust, note or other agreement or instrument for over $25,000,000 to which the Company or any Subsidiary is a party or by which it is bound, (y) the Company's or any Subsidiary's certificate of incorporation or by-laws or (z) any order, decree or judgment of any court or governmental agency or body having jurisdiction over the Company or any Subsidiary or any of their properties; provided, however, that no breach of the foregoing representation and warranty shall be deemed to have occurred if such breach arises from a failure by the Company to satisfy a debt leverage test as a consequence of the issuance of the Notes. 14 (9) Compliance with 1940 Act. The Company is not an "investment ------------------------ company" or an entity "controlled" by an "investment company" as such terms are defined in the 1940 Act. (10) Compliance with 1933 Act. It is not necessary in connection ------------------------ with the offering of the Commitments or the underlying Notes, to register the Commitments or such Notes under the 1933 Act or to qualify and indenture under the Trust Indenture Act of 1939, as amended. No authorization, approval or consent of any court or governmental authority or agency is necessary in connection with the valid authorization, issuance, sale and delivery of the Commitments or the underlying Notes, except such as may be required under the Blue Sky laws or other securities or insurance securities laws of the various states, which the Company represents have been complied with, and any other requirements applicable to subscribers for Commitments, as to which the Company makes no representation. (11) No General Solicitation. None of the Company or any ----------------------- Affiliate or any Person acting on its behalf (other than SRCMC, as to which no representation is made) has (A) engaged, in connection with the offering of subscriptions for the Commitments, in any form of general solicitation or general advertising (as those terms are used within the meaning of Regulation D under the 1933 Act), or (B) solicited offers for, or offered or sold, subscriptions for the Commitments and the underlying Notes by means of any form of general solicitation or general advertising (as those terms are used in Regulation D under the 1933 Act) or in any manner involving a public offering within the meaning of Section 5 of the 1933 Act. (12) Employee Benefit Plans. ---------------------- (i) The Company and each of its Subsidiaries are in compliance with all applicable provisions and requirements of ERISA, the Code and the regulations and published interpretations thereunder with respect to each of their Employee Benefit Plans, and have performed all their obligations under each of their Employee Benefit Plans, except where the failure to comply or perform would not have a Material Adverse Effect. Each Employee Benefit Plan maintained by the Company and its Subsidiaries which is intended to qualify under Section 401(a) of the Code is so qualified. (ii) No ERISA Event has occurred or is reasonably expected to occur, except where such occurrence would not have a Material Adverse Effect. (13) 1934 Act Compliance. The Company's most recent Annual Report ------------------- filed on Form 10-K and its Quarterly Reports filed on Form 10-Q and any Current Reports filed on Form 8-K filed after the date of such Form 10-K, at the time they were filed with the U.S. Securities and Exchange Commission (the 15 "Commission") and as of the Effective Date, complied and comply in all material respects with the requirements of the 1934 Act and the rules and regulations of the Commission under the 1934 Act and, at the Effective Date, do not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. (b) The Company, on its behalf and on behalf of each of its Subsidiaries, shall be deemed to have represented to each Provider as of each Closing Date that: (1) Existence and Qualification. The Company has been duly --------------------------- incorporated and is validly existing as a corporation in good standing under the laws of the State of Connecticut with full corporate power and authority to enter into and perform its obligations under this Agreement including, without limitation, the issuance and sale of the Notes, and to own its properties and conduct its business as currently being conducted. The Company is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure to so qualify or be in good standing would not have a Material Adverse Effect. (2) Existence and Qualification of Reference Portfolio Insurers. ----------------------------------------------------------- Each Reference Portfolio Insurer has been duly organized and is validly existing and in good standing under the laws of the jurisdiction of its organization, has all requisite power and authority to own, lease and operate its properties and conduct its business as currently being conducted and is duly qualified to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure to so qualify or be in good standing would not have a Material Adverse Effect; all of the issued and outstanding shares of capital stock or other equity interests, as applicable, of each Reference Portfolio Insurer have been duly authorized and are validly issued, fully paid and non-assessable and, except for qualifying shares, are owned by the Company, directly or through subsidiaries, free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity; and none of the outstanding shares of capital stock of any Reference Portfolio Insurer was issued in violation of preemptive or other similar rights of any securityholder of such Reference Portfolio Insurer. (3) Binding Obligations. The acceptance of the subscription ------------------- hereof by the Company as evidenced by its signature on the signature page of this Agreement, the execution, delivery and performance of this Agreement and the issuance of the Notes, will have been duly authorized by all necessary action on behalf of the Company, and this Agreement, by virtue of such acceptance, and the Notes will be a legal, valid and binding agreement of the Company, enforceable against the Company in accordance with its terms, except as enforcement thereof may be limited by bankruptcy, insolvency or other laws related to or affecting the enforcement of creditors' rights generally or by equitable principles. 16 (4) Options or Rights with Respect to Insurers. There are (i) no ------------------------------------------ outstanding subscriptions, warrants, options, calls or commitments of any character relating to or entitling any Person to purchase or otherwise acquire any stock of any Insurer and (ii) no obligations or securities convertible into or exchangeable for shares of any stock of any Insurer or any commitments of any character relating to or entitling any Person to purchase or otherwise acquire any such obligations or securities. (5) Compliance with 1940 Act. The Company is not an "investment ------------------------ company" or an entity "controlled" by an "investment company" as such terms are defined in the 1940 Act. (6) Compliance with 1933 Act. Assuming the Notes are issued and ------------------------ sold in the manner provided for herein, it is not necessary in connection with the issuance and sale of the Notes underlying the Commitments, to register such underlying Notes under the 1933 Act or to qualify an indenture under the Trust Indenture Act of 1939, as amended. No authorization, approval or consent of any court or governmental authority or agency is necessary in connection with the valid authorization, issuance, sale and delivery of such underlying Notes, except such as may be required under the Blue Sky laws or other securities or insurance securities laws of the various states, which the Company represents have been complied with, and any other requirements applicable to purchasers of Notes, as to which the Company makes no representation. (7) No General Solicitation. None of the Company or any Affiliate ----------------------- or any Person acting on its behalf (other than SRCMC, as to which no representation is made) has (A) engaged, in connection with the offering of the underlying Notes, in any form of general solicitation or general advertising (as those terms are used within the meaning of Regulation D under the 1933 Act), or (B) solicited offers for, or offered or sold, the underlying Notes by means of any form of general solicitation or general advertising (as those terms are used in Regulation D under the 1933 Act) or in any manner involving a public offering within the meaning of Section 5 of the 1933 Act. (8) Employee Benefit Plans. ---------------------- (i) The Company and each of its Subsidiaries are in compliance with all applicable provisions and requirements of ERISA, the Code and the regulations and published interpretations thereunder with respect to each of their Employee Benefit Plans, and have performed all their obligations under each of their Employee Benefit Plans, except where the failure to comply or perform would not have a Material Adverse Effect. Each Employee Benefit Plan maintained by the Company and its Subsidiaries which is intended to qualify under Section 401(a) of the Code is so qualified. 17 (ii) No ERISA Event has occurred or is reasonably expected to occur, except where such occurrence would not have a Material Adverse Effect. 6. Representations and Warranties of Providers. Each Provider, severally ------------------------------------------- and not jointly, represents and warrants to the Company as of the date hereof, and as of each Closing Date (excluding the first clause in the first sentence in Section 6(b)), as follows: (a) Existence and Qualifications of Provider. The Provider is a ---------------------------------------- corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, and the Provider has the full corporate power and authority to execute and deliver this Agreement, and to perform its obligations under, and consummate the transactions contemplated by, this Agreement, including, without limitation, the purchase of the Notes pursuant to the making of a Note Issuance Request by the Company as described in this Agreement. (b) No Violation or Conflict. The execution and delivery of this Agreement ------------------------ by the Provider, and the performance of the Provider under this Agreement, do not violate or conflict with any applicable law, any provision of the Provider's organizational documents or any order or judgment of any court or other government agency applicable to the Provider, or any contractual restriction binding upon or affecting the Provider. (c) Consents. All governmental and other consents that are required to -------- have been obtained by the Provider with respect to the execution and delivery of this Agreement have been obtained by the Provider and are in full force and effect and all conditions of any such consents have been complied with. (d) Investment Representation. The Provider understands that the ------------------------- Commitments and the issuance of the underlying Notes upon the making by the Company of a Note Issuance Request under this Agreement have not been and will not be registered under the 1933 Act and the underlying Notes will be issued in reliance upon exemptions form the registration requirements of the 1933 Act. The Provider represents that (a) it is executing its Commitment and acquiring any underlying Notes solely for its own account, for investment purposes only, and not with a view to distribution, fractionalization or resale thereof, except as otherwise permitted under this Agreement, (b) it will not sell or otherwise dispose of its Commitment or any underlying Notes except in compliance with the registration requirements or exemption provisions of applicable securities laws including the 1933 Act, (c) it has not relied on the Company for any explanation of the application of the various U.S. state and federal securities laws with regard to the execution of its Commitment or the acquisition of the underlying Notes, (d) it has access to complete information regarding the business and finances of the Company, and has received, read and understood the contents of the Company's SEC filings, (e) it has such knowledge and experience in business and financial matters that it has been able to fully understand and completely evaluate the risks and merits of acquiring its Commitment and holding any underlying Notes, (f) it is able to bear the economic risk and limitation in liquidity of its Commitment and of an investment in the Notes, (g) it has reviewed all documents furnished to it in connection with the investment in the Commitments and the underlying Notes contemplated hereby, (h) it is an "accredited investor" as such term is defined in Regulation D, 18 as amended, under the 1933 Act, (i) it is not a broker-dealer subject to Regulation T of the United States Federal Reserve Board, (j) in making its decision to acquire the Commitments and the underlying Notes, it has relied upon independent investigations made by it and, to the extent believed by it to be appropriate, its representatives, in addition to the representations and warranties and agreements of the Company contained herein, and (k) it and its representatives have been given the opportunity to examine all documents and to ask questions of, and to receive answers from, the Company and its representatives concerning the terms and conditions of the purchase of the Commitments and the underlying Notes and to obtain any additional information which it or its representatives deem necessary. (e) Binding Obligations. The execution of this Agreement has been duly ------------------- authorized by all necessary corporate action of the Provider, and this Agreement (a) constitutes the legal, valid and binding obligation of the Provider, and (b) is enforceable against the Provider in accordance with its terms (subject to applicable bankruptcy, reorganization, insolvency, moratorium or similar laws affecting creditors' rights generally and subject, as to enforceability, to equitable principles of general application). 7. Covenants and Agreements of the Company. (a) The Company covenants and --------------------------------------- agrees with the Providers for the duration of the Commitment Period and for so long as any Notes remain outstanding that: (1) Audited Financial Statements of the Company. The Company shall ------------------------------------------- deliver to the Providers, within ten Business Days after the filing of its Form 10-K with the Commission, income statements for such fiscal year, balance sheets as of the end of such fiscal year and statements of cash flows for such fiscal year, together with such notes thereto as are appropriate, prepared in accordance with GAAP and setting forth in each case in comparative form the figures for the previous fiscal year, all in reasonable detail and certified by the independent public accountants of the Company. The parties hereto agree that delivery of the Company's Form 10-K will satisfy such information requirements, as long as the information required under this paragraph is contained in such Form 10-K. Notwithstanding the foregoing, in the event that the Company is no longer a publicly held company, the Company shall deliver the information required under this paragraph within 90 days of the end of such fiscal year. (2) Audited Financial Statements of MBIA Corp. The Company shall cause ----------------------------------------- MBIA Corp. to deliver to the Providers, within ten Business Days after the filing of any statutory financial statements, income statements for such fiscal year, balance sheets as of the end of such fiscal year and statements of cash flows for such fiscal year, together with such notes thereto as are appropriate, prepared in accordance with applicable statutory accounting principles consistently applied (except as noted in the audit comments thereto) and setting forth in each case in comparative form the figures for the previous fiscal year, all in reasonable detail and certified by the independent public accountants of MBIA Corp. The parties hereto agree that the delivery of MBIA Corp's statutory financial statements will satisfy such information requirements, as long as the information required under this paragraph is contained therein. Notwithstanding the foregoing, the Company 19 shall deliver the information required under this paragraph no later than 70 days after the end of such year. (3) Unaudited Financial Statements of the Company. The Company shall --------------------------------------------- deliver to the Providers, within ten Business Days after the filing of a Form 10-Q by the Company with the Commission, unaudited income statements for such quarter and the current fiscal year to date and unaudited balance sheets as of the end of such quarter, along with statements of profits and losses and cash flows for such quarter and the current fiscal year to date, prepared in accordance with GAAP (except for the omission of financial statement footnotes and subject to recurring year-end adjustments), certified by the Chief Financial Officer, Treasurer, or Controller of the Company. The parties hereto agree that the delivery of the Company's Form 10-Q will satisfy such information requirements, as long as the information required under this paragraph is contained in such Form 10-Q. (4) Unaudited Financial Statements of MBIA Corp. The Company shall ------------------------------------------- cause MBIA Corp. to deliver to the Providers, within ten Business Days after the filing of any statutory financial statements, unaudited income statements for such quarter and the current fiscal year to date and unaudited balance sheets as of the end of such quarter, along with statements of profits and losses and cash flows for such quarter and the current fiscal year to date, prepared in accordance with applicable statutory accounting principles consistently applied (except as noted in the audit comments thereto), certified by the Chief Financial Officer, Treasurer, or Controller of MBIA Corp. The parties hereto agree that the delivery of MBIA Corp.'s statutory financial statements will satisfy such information requirements, as long as the information required under this paragraph is contained therein. (5) Other Informational Filings. The Company shall deliver to the --------------------------- Providers, within ten Business Days after the filing of any Form 8-K (or any successor form) of the Company with the Commission, copies of such Form 8-K or successor form. (6) Certification; Officer's Certificates. The quarterly and annual ------------------------------------- reports described in Sections 7(a)(1) through 7(a)(4) shall be certified by the Chief Financial Officer, Treasurer, or Controller of the Company or MBIA Corp., as the case may be. Such certified financial information shall be submitted with a certificate of the Chief Financial Officer, Treasurer, or Controller of the Company (the "Portfolio Certificate") setting forth (i) (A) annually, the insured obligations comprising the Reference Portfolio, and (B) quarterly, any insured obligations added to the Reference Portfolio since the annual certification described in foregoing clause (A) most recently delivered to the Providers, and (ii) calculating in reasonable detail as of the date of the most recent financial statements described in Sections 7(a)(1) through 7(a)(4), (A) annually, the Trigger Point, (B) quarterly, to the extent published or otherwise provided by the Company, "Quarterly Operating Supplemental Statements" (as currently reflected on the Company's world wide web page), (C) quarterly, so long as the Commitments are outstanding, cumulative Incurred Losses, including Case Basis Reserves during 20 the Commitment Period (to the extent not otherwise required to be delivered hereunder), (D) quarterly, evidence of occurrence, amount of Case Basis Reserves (to the extent not otherwise required to be delivered hereunder), and (E) quarterly, a certification that no default of the nature contemplated in Section 7(a)(7) below or Event of Default has occurred, or if any such event has occurred, the nature and extent of such default or Event of Default. (7) Notice of Default. The Company shall deliver to the Providers ----------------- notice of an event of default or similar event as defined in any mortgage, indenture, instrument or agreement under which there may be issued, or by which there may be secured or evidenced, any Indebtedness of the Company or any of its Subsidiaries in an aggregate principal amount in excess of $25,000,000, whether such Indebtedness now exists or shall hereafter be created, promptly, but in any event within 3 Business Days after the Company's first knowledge of the occurrence thereof. (8) Compliance with ERISA. The Company shall, and shall cause all of --------------------- its Subsidiaries to, comply with all applicable laws, regulations and similar requirements of governmental authorities relating to ERISA, the Code and the PBGC, except where the necessity of such compliance is being contested in good faith through appropriate proceedings diligently pursued, or where failure to comply with any such laws would not, alone or in the aggregate, have a Material Adverse Effect. Any breach of this covenant shall be deemed to have been cured upon the delivery by the Company to the Providers of correspondence or other evidence from the Department of Labor, PBGC, Internal Revenue Service or other governmental authority having jurisdiction over such matter, establishing that any fines have been paid or such matter has otherwise been fully resolved. (9) Notice of ERISA Event. The Company shall deliver to the Providers --------------------- notice of an ERISA Event promptly, but in any event within 10 Business Days of the Company's first knowledge of the occurrence of such ERISA Event. (10) Books, Records and Inspections. The Company shall, and shall ------------------------------ cause each of its Subsidiaries to, permit any authorized representatives designated by SRCMC or the Providers to visit the offices of the Company or of any of its Subsidiaries, to inspect, copy and take extracts from its and their financial and accounting records, and to discuss its and their affairs, finances and accounts with its and their officers and independent public accountants (provided that Company may, if it so chooses, be present at or participate in any such discussion), all upon reasonable notice and at such reasonable times during normal business hours and as often as may reasonably be requested. (11) GAAP and Statutory Records. The Company shall maintain systems of -------------------------- accounting established and administered in accordance with sound business practices and sufficient in all respects to permit preparation of financial statements in conformity with GAAP. The Insurers shall maintain systems of accounting established and administered in accordance with sound business practices and sufficient in all respects to permit preparation of statutory financial 21 statements prepared in accordance with applicable statutory accounting principles consistently applied. Any breach of this covenant shall be deemed to have been cured upon the delivery by the Company to the Providers of a letter from the Company's independent auditors stating that the Company's or the relevant Insurer's accounting systems satisfy the requirements of this Section 7(a)(11). (12) Insurance. The Company shall, and shall cause each of its --------- Subsidiaries to, maintain or cause to be maintained, with financially sound and reputable insurers, such public liability insurance, third party property damage insurance, business interruption insurance and casualty insurance with respect to liabilities, losses or damage in respect of the assets, properties and businesses of the Company and its Subsidiaries as may customarily be carried or maintained under similar circumstances by corporations of established reputation engaged in similar businesses, in each case in such amounts (giving effect to self-insurance), with such deductibles, covering such risks and otherwise on such terms and conditions as shall be customary for corporations similarly situated in the industry, except where the failure to so maintain such insurance would not result in a Material Adverse Effect. (13) Corporate Franchises. The Company and each Insurer will at all -------------------- times preserve and keep in full force and effect its existence as a corporation, limited partnership or limited liability company, as the case may be, and all rights and franchises material to its business, including its qualification to do business in each state where it is required by law to so qualify. (14) Payment of Obligations. The Company and each of the Reference ---------------------- Portfolio Insurers shall perform, observe, comply and fulfill all of their respective payment obligations contained in any indenture, mortgage, deed of trust, contract, undertaking, agreement or other instrument to which it is a party or by which it or any of its properties is bound or to which it or any of its properties is subject, except where the failure to so perform, observe, comply and fulfill would not have a Material Adverse Effect. (15) Rating. The Company shall use its best efforts to obtain and ------ maintain a rating on the Notes from the Securities Valuation Office of the National Association of Insurance Commissioners. (16) Further Assurances. The Company and its Subsidiaries shall, from ------------------ time to time, execute and deliver such documents, agreements and reports, and perform such acts as SRCMC or the Providers at any time may reasonably request to carry out the purposes and otherwise implement the terms and provisions provided for in this Agreement. (b) Grace Periods. In the event that the Company defaults in the ------------- performance of the affirmative covenants described in Sections 7(a)(6)(ii)(E) and 7(a)(7), the Company shall be entitled to a grace period of 5 Business Days after the occurrence of such event. In the event that the Company defaults in the performance of any other affirmative covenants described in 22 Section 7(a), the Company shall be entitled to a grace period of 30 Business Days after the occurrence of such event. (c) In the event that the Company fails to observe or perform any covenant, condition or agreement to be observed under the affirmative covenants in Section 7(a) in any material respect and such failure to observe or perform such affirmative covenant continues uncured for a period beyond the applicable grace period described in Section (7)(b) (a "Covenant Default"), the Company shall pay to each Provider ((x) without notice from the Providers, in the case of Covenant Defaults relating to Sections 7(a)(7) through 7(a)(9) and 7(a)(11) through 7(a)(16), and (y) upon request of the Providers (such notice to be given in accordance with Section 13), in the case of Covenant Defaults relating to Sections 7(a)(1) through 7(a)(6) and 7(a)(10)), such Provider's Pro Rata Share of a fee (a "Default Fee") calculated from the initial date of the event causing the Covenant Default (the "Covenant Default Date") to the date such Covenant Default is cured, by multiplying the Available Commitment at such time by the applicable rate (a "Default Rate") multiplied by the number of days the Covenant Default is continuing during the applicability of such Default Rate divided by 365. The Default Rate upon the occurrence of a Covenant Default shall be 1% per annum. The Company shall pay the Default Fee to the Providers at the end of each calendar month (with respect to such month or any part thereof) following the Default Date and any remaining unpaid Default Fees upon the date such Covenant Default has been cured. Notwithstanding the foregoing, in the event that the Company has provided the quarterly information certificate required by Section 7(a)(6) to the Providers within the specified time period, and the Providers determine that such certificate or any required enclosures are incomplete, the Providers shall give notice thereof, describing in reasonable detail to the Company any deficiencies therein. In such event, the applicable Default Fee shall accrue from the date of the Providers' notice, rather than the Covenant Default Date, and shall be payable upon the Company's failure to provide such requested information in full within 15 Business Days after the date of the Providers' notice. 8. Commitment Fee Covenants. (a) The Company, on its behalf and on behalf ------------------------ of its Subsidiaries, covenants and agrees with the Providers that: (1) Investment Covenant. At all times during the Commitment Period, ------------------- the Company and its Subsidiaries, taken as a whole, shall maintain an Average Investment Rating of 2.25 or less. In calculating the Average Investment Rating, the Company may exclude (i) up to 5% of the aggregate fair market value, as determined in good faith by the Treasurer or the Chief Financial Officer of the Company, of the investments of the Company and its Subsidiaries, taken as a whole, and (ii) any investments determined in good faith by the Treasurer or the Chief Financial Officer of the Company to constitute "investment agreement portfolio assets". (2) Debt Covenant. At all times during the Commitment Period, the ------------- Company shall not permit its Debt to Capital Ratio, as determined at the end of any fiscal quarter, to be greater than 27.6%. 23 (3) Claims Paying Covenant. At all times during the Commitment Period, ---------------------- the Reference Portfolio Insurers shall maintain a Claims Paying Ratio of less than or equal to 100. (b) If during any Ratings Non-Compliance Period occurring during the Commitment Period, the Company and its Subsidiaries, taken as a whole, fail to meet any of the commitment fee covenants described in Section 8(a), then the Commitment Fees shall be increased by 0.25% per annum, accruing from the first day of such Ratings Non-Compliance Period until the earlier to occur of (i) the date such failure to meet the commitment fee covenants is cured and (ii) such Rating Non-Compliance Period ends. The Company shall pay the increased Commitment Fees to the Providers at the end of each calendar month (with respect to such month or any part thereof) and any remaining unpaid increased Commitment Fees upon the earlier to occur of (i) the date such failure to meet the commitment fee covenants is cured and (ii) the Ratings Non-Compliance Period ends. 9. Event of Suspension. Upon (a) a default in payment beyond any ------------------- applicable grace period with respect to (i) the Notes (including a default in payment of any Redemption Amount), or (ii) any Indebtedness (other than the Notes) of the Company or any of its Subsidiaries in excess of $25,000,000, or (b) the failure of the Company or MBIA Corp. to deliver to the Providers the quarterly and annual reports required under Sections 7(a) of this Agreement after receiving written notice from the Providers and after the lapse of any applicable grace period in respect thereof (each, an "Event of Suspension"), the Company's right to make a Note Issuance Request and the Providers' obligation to purchase Notes shall be suspended until such time, if any, as such Event of Suspension is cured or waived in its entirety by such Provider. Upon the cure or waiver in full of the Event of Suspension, the Company's right to make a Note Issuance Request and the Providers' obligation to purchase Notes shall be reinstated and exist as if no such Event of Suspension had occurred. Notwithstanding the foregoing, upon the occurrence of an Event of Suspension, the Default Fee shall continue to accrue and be payable to the Providers as set forth in Section 7(c). 10. Events of Default. Any of following conditions or events shall ----------------- constitute an event of default (each, an "Event of Default") under this Agreement: (a) Breach of Representations and Warranties. Any representation or ---------------------------------------- warranty contained in Section 5(a) shall not be true, complete and correct in any material respect on the date as of which made; (b) Failure to Pay Fees. Failure by Company to pay the Structuring Fee, ------------------- Commitment Fees (including such amount payable under Section 8(b)) or Default Fees after the later of (i) 5 Business Days after receipt of notice by registered U.S. mail, return receipt requested, properly given pursuant to Section 13, or (ii) 45 days after their due date; (c) Payment Default. Default in payment beyond any applicable grace period --------------- with respect to any Indebtedness of the Company or any of its Subsidiaries in excess of $25,000,000, whether such Indebtedness now exists or shall hereafter be created, which results in the obligation becoming due and payable prior to the date on which it would otherwise have become 24 due and payable or upon the basis of which the obligation is declared by the holders thereof to be due and payable prior to the date on which it would otherwise have become due and payable; (d) Non-Monetary Default. An event of default or like or similar event, -------------------- other than failure to pay as described in clause (c) above, as defined in any mortgage, indenture or instrument under which there may be issued, or by which there may be secured or evidenced, any Indebtedness of the Company or any of its Subsidiaries that is outstanding in an aggregate principal amount in excess of $25,000,000, whether such Indebtedness now exists or shall hereafter be created, shall happen and such Indebtedness shall upon such ground become or be declared due and payable prior to the date on which it would otherwise have become due and payable, and such acceleration shall not have been rescinded or annulled, or such Indebtedness shall not have been discharged; (e) Insolvency or Voluntary Bankruptcy. (i) The Company or any one or ---------------------------------- more of the Reference Portfolio Insurers shall have an order for relief entered with respect to it or commence a voluntary case under federal bankruptcy law or under any other applicable bankruptcy, insolvency or similar state or federal law now or hereafter in effect, or shall consent to the entry of an order for relief in an involuntary case, or to the conversion of an involuntary case to a voluntary case, under any such law, or shall consent to the appointment of or taking possession by a receiver, trustee or other custodian for all or a substantial part of its property; or the Company or any one or more of the Reference Portfolio Insurers shall make any assignment for the benefit of creditors, or (ii) the Company or any one or more of the Reference Portfolio Insurers shall be unable, or shall fail generally, or shall admit in writing its inability, to pay its debts as such debts become due, or (iii) the Board of Directors of the Company or any one or more of the Reference Portfolio Insurers (or any committee thereof) shall adopt any resolution or otherwise authorize any action to approve any of the actions referred to in clause (i) or (ii) above or in Section 10(f) below; (f) Involuntary Bankruptcy. The entry by a court having jurisdiction in ---------------------- the premises of (i) a decree or order for relief in respect of the Company or any one or more of the Reference Portfolio Insurers in an involuntary case or proceeding under federal bankruptcy law or any other applicable federal or state law, or (ii) a decree or order adjudging the Company or any one or more of the Reference Portfolio Insurers bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of or in respect of the Company or any one or more of the Reference Portfolio Insurers under federal bankruptcy or any other applicable federal or state law, or appointing a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or any one or more of the Reference Portfolio Insurers or of any substantial part of the property of any of them, or ordering the winding up or liquidation of any of their affairs or (iii) there shall be commenced against the Company or any one or more of the Reference Portfolio Insurers any case, proceeding or other action seeking issuance of a warrant, attachment, execution, discharge or similar process against all or any substantial part of its assets that results in the entry of an order for any such relief that shall not have been vacated, discharged, stayed or bonded pending appeal within 60 days from the entry thereof; (g) Failure to Maintain Tangible Net Worth. The Company shall fail to -------------------------------------- maintain a consolidated Tangible Net Worth in excess of $300,000,000; 25 (h) Consolidation, Merger, Sale of Assets. The Company or any of its ------------------------------------- Subsidiaries shall wind up, liquidate or dissolve its or their affairs, experience a Change in Control, enter into any transaction of merger or consolidation, or sell, convey, transfer or otherwise dispose of all or substantially all of its or any of their assets to any Person, or agree to do any of the foregoing at a future time during which this Agreement is in effect or any Notes are outstanding, which results in a default or Event of Default under this Agreement or results in a Ratings Non-Compliance Period which commences during the 180 days following such event. Notwithstanding the foregoing, the following shall not constitute an Event of Default under this clause (h): (1) sales or dispositions of assets by the Company or any of its Subsidiaries in the ordinary course of business; (2) sales or dispositions of assets by the Company or any of its Subsidiaries which singly or in the aggregate, in the case of insurance assets, have a GAAP book value on the date of disposition that constitute less than 15% of the sum of the Company's consolidated Shareholders' Equity, or in the case of non-insurance assets, in unlimited amounts at their fair market value, where fair market value has been determined by a nationally recognized investment banking or appraisal firm and set forth in a fairness opinion of such firm addressed to the Providers; (3) the merger or consolidation of the Company or any of its Subsidiaries with or into, or liquidation into, any other of its Subsidiaries or the Company, as the case may be, so long as such Subsidiary (in the case of a merger or consolidation not involving the Company) or the Company is the surviving Person; and (4) the delivery by the Company to the Providers, prior to the proposed action, of a written confirmation from S&P or Moody's confirming that the consummation of such proposed action would not result in a downgrade or withdrawal of the rating assigned to the Company by such NRSRO. (It is understood and agreed that upon any transfer of all or substantially all of the assets of the Company in accordance with the foregoing clauses (1) through (4), the successor Person formed by such transfer shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Agreement with the same effect as if such successor Person had been named as the Company herein.) 11. Conditions to the Company's Obligations. The obligations of the --------------------------------------- Company hereunder shall be subject to, at and as of the Effective Date, the satisfaction of the following conditions: (a) The Company shall have received an executed counterpart of this Agreement from each of the Providers. (b) The Company shall have received from Sidley Austin Brown & Wood LLP or in-house counsel of any Provider an opinion (or, if any Provider is a non-U.S. entity, an opinion of its in-house counsel or local counsel) dated the Effective Date and addressed to the Company, S&P and Moody's, substantially to the effect that this Agreement (i) constitutes the legal, valid and binding obligation of the Providers, and (ii) is enforceable against the Providers in 26 accordance with its terms (subject to applicable bankruptcy, reorganization, insolvency, moratorium or similar laws affecting creditors' rights generally and subject, as to enforceability, to equitable principles of general application). In rendering its opinion, Sidley Austin Brown & Wood LLP (or such other counsel) may rely upon the opinions of in-house counsel to the Providers as to the due authorization, execution and delivery by such Provider of this Agreement. 12. Conditions to the Providers' Commitments. (a) The several commitments ---------------------------------------- of the Providers hereunder shall be subject to the satisfaction of the following conditions (with the following conditions (1)-(4) to be satisfied at and as of the Effective Date and conditions (5) and (6) to be satisfied as promptly thereafter as possible): (1) The Company shall have accepted the subscription contained herein and the Providers shall have received an executed counterpart of this Agreement. (2) The Providers shall have received from the general counsel for the Company, an opinion, dated the Effective Date, substantially in the form of Exhibit 12(a)(2) hereto. (3) The Providers shall have received a certificate in the form of Exhibit 12(a)(3), dated the Effective Date, and certified by the Chief Financial Officer, Treasurer or Controller of the Company to the effect that: (i) The Company has complied with all agreements and satisfied all conditions on its part to be performed or satisfied at or before the Effective Date; and (ii) The representations and warranties of the Company contained in Section 5(a) herein are true, complete, and correct at and as of the Effective Date. (4) The Company shall have made all material filings required under applicable state and/or federal securities laws in connection with the transactions contemplated by this Agreement. The Company shall have received all other authorizations, consents, approvals, licenses, filings and registrations required in connection with the execution, delivery, performance, validity and enforceability of this Agreement. (5) The Providers shall have received a certificate (or equivalent customary documentation, with respect to non-U.S. entities) of the appropriate public official in the jurisdiction of organization of the Company and the Reference Portfolio Insurers as to the due organization and good standing of the Company and the Reference Portfolio Insurers together with a certified copy (or equivalent customary documentation, with respect to non-U.S. entities) of the organizational documents of the Company and the Reference Portfolio Insurers and shall have received certificates of appropriate public officials of each other jurisdiction in which the Company and each Reference Portfolio Insurer is required to qualify to do business as a foreign organization as to the due qualification and good standing of the Company and each Reference Portfolio Insurer. 27 (6) The Providers shall have received a copy, certified by the Secretary of the Company, of the actions of the Board of Directors of the Company, authorizing, ratifying and approving the Note Subscription Agreement in the form as executed on December 27, 2001, including the issuance of the Commitments and the underlying Notes. (b) The several commitments of the Providers, at and as of each Closing Date, shall be subject to the following conditions: (1) The Providers shall have received from the general counsel for the Company, an opinion, dated as of each Closing Date, substantially in the form of Exhibit 12(b)(1) hereto. (2) The Providers shall have received the Note Issuance Request from the Company. (3) The Providers shall have received a certificate in the form of Exhibit 4, dated such Closing Date, certified by the Chief Financial Officer, Treasurer or Controller of the Company to the effect that: (i) The Company has complied with all agreements and satisfied all conditions on its part to be performed or satisfied under this Section 12(b) on such Closing Date; and (ii) The representations and warranties of the Company contained in Section 5(b) hereof are true and correct at and as of such Closing Date. (4) At and as of such Closing Date, there shall not have occurred and been continuing an Event of Default or Event of Suspension. (5) The Company shall have made all material filings required under applicable state and/or federal securities laws in connection with the issuance of the Notes on such Closing Date. (6) The Providers shall have received a certificate of the appropriate public official in the jurisdiction of organization of the Company and the Reference Portfolio Insurers as to the due organization and good standing of the Company and the Reference Portfolio Insurers, together with a certified copy of any amendments to the organizational documents of the Company and the Reference Portfolio Insurers filed after any previous delivery of such documents to the Providers. (7) No action, suit or other third-party proceeding by or before any governmental authority shall have resulted in the issuance of an order or other similar action enjoining the issuance of the Notes. (8) The Providers shall have received their respective Notes. 28 13. Notices. Any notice or other communication required or ------- permitted under this Agreement shall be in writing and shall be deemed to have been given (a) on the date of delivery if delivered personally or by facsimile transmission, receipt confirmed, (b) twenty-four (24) hours after sending it by a nationally recognized overnight delivery service, or (c) five (5) Business Days after mailing, if sent by certified, registered or express mail, postage prepaid, if properly addressed or directed to such party at the appropriate address or facsimile number set forth below (or at such other address or facsimile number as such party may designate from time to time by notice duly given in accordance with the terms of this Section 13): If to the Company: MBIA, Inc. 113 King Street Armonk, New York 10504 Attn: Chief Financial Officer Telephone No.: 914-765-3490 Fax No.: 914-765-3080 with a copy to: MBIA, Inc. 113 King Street Armonk, New York 10504 Attn: General Counsel Telephone No.: 914-765-3945 Fax No.: 914-765-3919 If to Swiss Re Capital Markets Corporation: 55 East 52/nd/ Street New York, NY 10055 Attention: Treasurer Telephone No.: (212) 317-5400 Fax No.: (212) 317-5450 with a copy to: Swiss Re Capital Markets Corporation 55 East 52/nd/ Street New York, NY 10055 Attention: General Counsel Telephone No.: (212) 317-5400 Fax No.: (212) 317-5450 29 If to Swiss Re Financial Products Corporation: 55 East 52/nd/ Street New York, NY 10055 Attention: Treasurer Telephone No.: (212) 317-5400 Fax No.: (212) 317-5450 with a copy to: Swiss Re Financial Products Corporation 55 East 52/nd/ Street New York, NY 10055 Attention: General Counsel Telephone No.: (212) 317-5400 Fax No.: (212) 317-5450 If to XXXXX: XXXXXXXXXXXX XXXXXXXXXXXX XXXXXXXXXXXX XXXXXXXXXXXX XXXXXXXXXXXX XXXXXXXXXXXX 30 14. Dispute Resolution. Any disputes arising under or in ------------------ connection with this Agreement shall be resolved by a court of law having the appropriate jurisdiction over the parties and subject matter, subject to Section 17(b) of this Agreement. Notwithstanding the foregoing, any disputes arising out of Sections 2(g) and 3(c) in respect of the determination of the aggregate principal amount of Notes issued on any Closing Date (i.e., the calculation of Incurred Losses, Trigger Point, etc.) shall be resolved by binding arbitration, to be held in New York, New York in accordance with the rules and procedures of the American Arbitration Association (the "AAA"). The Company and each of the Providers (individually, a "Party", and together, the "Parties") will each select an arbitrator within 15 days after demand for arbitration is made by a Party. If an additional arbitrator is deemed necessary and the arbitrators selected by the Parties are unable to agree on an additional arbitrator within that period, then any Party may request that the AAA select such additional arbitrator. Each Party shall bear its own expenses incurred in connection with arbitration, and the fees and expenses of the arbitrators shall be shared equally by the Parties and advanced by them from time to time as required. Except as may otherwise be agreed in writing by the Parties or as ordered by the arbitrators upon substantial justification shown, the hearing for the dispute will be held within 60 days of submission of the dispute to arbitration. The arbitrators will render their final determination within 30 days following conclusion of the hearing and any required post-hearing briefing or other proceedings ordered by the arbitrators. The decision of the arbitrators will be final and binding and not subject to judicial review. 15. Transfers of Obligations or Notes. No Provider shall sell, --------------------------------- assign or otherwise transfer its rights or obligations under this Agreement (including, without limitation, the Commitments) (i) except pursuant to an exemption from the registration requirements of the 1933 Act, and (ii) to an investor having a rating at the time of such sale, assignment or transfer less than AAA/Aaa by S&P and Moody's, respectively, and which has not been previously approved in writing by the Company. The Company acknowledges and agrees that the Providers may transfer interests in issued and outstanding Notes without the prior consent of the Company in whole or in part only to one or more affiliates of the Providers (it being further understood that the Providers may not transfer the Commitments to any of their affiliates). The Company agrees to provide reasonable assistance to any Provider or SRCMC in connection with the documentation of any permitted transfer of the Notes or Commitments. 16. Indemnification for Broker's Fees. The Company agrees to --------------------------------- indemnify, defend and hold harmless SRCMC from any and all claims, costs and expenses (including reasonable attorney's fees and disbursements) in respect of the assertions of any broker, finder, agent or other person seeking compensation for the subscription for the Commitments or the underlying Notes or for other services rendered in connection with such transactions. 17. Miscellaneous. ------------- (a) The representations, warranties and agreements of the Providers and of the Company set forth herein are continuing in nature and shall survive the acceptance of the subscription contained herein and the closings with respect to the Notes. (b) This Agreement shall be governed by and construed in accordance with the laws of the State of New York. The parties hereby submit to the exclusive jurisdiction of the federal 31 and state courts located in New York County with respect to any dispute arising under this Agreement, the agreements and instruments entered into in connection herewith or the transactions contemplated hereby or thereby. THE PARTIES HEREBY WAIVE A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY ANY PARTY HERETO AGAINST ANY OTHER PARTY HERETO IN RESPECT OF ANY MATTER ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR THE COMMITMENTS. (c) The descriptive headings in this Agreement are for convenience of reference only and shall not be deemed to alter or affect the meaning or interpretation of any provision of this Agreement. (d) This Agreement contains the entire agreement of the parties with respect to the subject matter of this Agreement, and there are no representations, covenants or other agreements except as stated or referred to herein. This Agreement may be amended only by a writing executed by the party against whom such amendment is sought to be enforced. (e) This Agreement may be executed in one or more counterparts, all of which shall constitute one and the same instrument. (f) Except (i) as may be required by law (including the requirements for any filings made by the Company under the 1933 Act or 1934 Act, or pursuant to the order or ruling of any regulatory authority having jurisdiction over the Company or the Insurers), or (ii) as may be required by any rating agency in respect of its rating of the Company or any Insurer, the Company, SRFPC and SRCMC hereby agree not to disclose that XXXXX is a party to this Agreement or any of the agreements executed in connection herewith (including the disclosure of XXXXX's name or the name, if any, of its affiliates) or the nature or amount of its Commitments hereunder, except that XXXXX may be referred to in press releases as "a leading reinsurance company" and its ratings may be disclosed. In the event the disclosure of XXXXX's identity pursuant to clauses (i) or (ii) of the foregoing sentence is required, the Company, SRFPC and SRCMC agree to give advance notice to XXXXX of such disclosure. (g) This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and assigns and legal representatives, and any reference to a specific partyin this Agreement shall include such party's permitted successors or assigns. 32 If the foregoing is in accordance of our agreement, please sign and return a duplicate hereof, whereupon this Note Subscription Agreement and your acceptance will represent a binding agreement between SRCMC, the Providers and the Company. SWISS RE FINANCIAL PRODUCTS CORPORATION, a Delaware corporation By: -------------------------------------- Name: Title: SWISS RE CAPITAL MARKETS CORPORATION, a Delaware corporation By: -------------------------------------- Name: Title: XXXXX, a Delaware corporation By: -------------------------------------- Name: Title: ACCEPTED this 27/th/ day of December, 2001 By MBIA, INC., a Connecticut corporation By: ----------------------------------------- Name: Title: 33 Schedule A Commitments Amount Percentage ------ ---------- Swiss Re Financial Products Corporation $100,000,000 66 2/3% XXXXX $ 50,000,000 33 1/3% EXHIBIT 2(a)-1 FORM OF NOTE 2A-1 EXHIBIT 3 [FORM OF NOTE ISSUANCE REQUEST] NOTE ISSUANCE REQUEST Reference is made to that certain Note Subscription Agreement dated December 27, 2001, as amended, supplemented or otherwise modified to the date hereof (as so amended, supplemented or otherwise modified, the "Agreement"), by and among MBIA, Inc., a Connecticut corporation (the "Company"), Swiss Re Capital Markets Corporation, and Swiss Re Financial Products Corporation and XXXXX (the "Providers"). This is the Note Issuance Request referred to in the Agreement. Capitalized terms used but not defined in this Note Issuance Request shall have the meanings given to them in the Subscription Agreement. The aggregate purchase price for the Notes to be issued at this time under the Note Issuance Request is: $__________ The Closing Date with respect to such Notes will be: __________ The Trigger Date occurred on: __________ The aggregate purchase price with respect to such Notes has been computed pursuant to the terms of the Subscription Agreement based on the figures set forth below, which have been determined as of the Trigger Date. A. Incurred Losses on Reference Portfolio $__________ (i) Claims paid by Insurers (net of Reinsurance): $_____________ (ii) Case Basis Reserves (net of Reinsurance): + $_____________ (iii) Loss adjustment expense: + $_____________ $_____________ (iv) Recoveries of amounts paid under (i) and (iii) above: - $_____________ Total $========== B. Trigger Point Notional (i) Domestic public amount: $_____________ finance general Amount subject obligation portfolio to Reinsurance: - $_____________ $_____________ x0.10% $_____________
3A-1 Notional (ii) Domestic public amount: $_____________ finance non-general Amount subject obligation portfolio to Reinsurance: - $_____________ $_____________ x0.30% + $_____________ (iii) International Notional structured finance amount: and domestic $_____________ structured finance Amount subject rated AAA to Reinsurance: - $_____________ $_____________ x0.30% + $_____________ Notional (iv) Domestic structured amount: finance portfolio not $_____________ rated AAA Amount subject to Reinsurance: - $_____________ $_____________ x0.50% + $_____________ Notional (v) Domestic health care amount: and domestic $_____________ investor-owned Amount subject utility portfolios to Reinsurance: - $_____________ $_____________ x0.70% + $_____________ Notional (vi) Reference Portfolio amount: minus (i) through (v) $_____________ above. Amount subject to Reinsurance: - $_____________ $_____________ x0.80% + $_____________ - $_____________ C. Aggregate principal amount of previously issued and sold Notes: - $_____________ D. Aggregate purchase price: $ =============
The purchase price for the Notes shall be remitted in immediately available funds to the account of the Company pursuant to the following wire transfer instructions: DATED:_____________________ MBIA, Inc. By: __________________________ Title: __________________________ 3A-2 EXHIBIT 4 [FORM OF OFFICER'S CERTIFICATE] OFFICER'S CERTIFICATE The undersigned officer of MBIA, Inc., a Connecticut corporation (the "Company"), does hereby deliver this certificate on behalf of the Company pursuant to Section 12(b)(3) of the Note Subscription Agreement dated December 27, 2001 (the "Agreement") between the Company, Swiss Re Financial Products Corporation, Swiss Re Capital Markets Corporation and XXXXX, and hereby certifies that: (A) The Company has complied with all agreements and satisfied all conditions on its part to be performed or satisfied under Section 12(b) of the Agreement on the date hereof; and (B) The representations and warranties of the Company contained in Section 5(b) of the Agreement are true and correct at and as of the date hereof. Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Agreement. Dated: _____________, 20_____ MBIA, Inc. ___________________________________ Name: Title: [Chief Financial Officer] [Treasurer] [Controller] 4-1 EXHIBIT 12(a)(2) OPINION OF COUNSEL EFFECTIVE DATE (i) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Connecticut. (ii) The Company has corporate power and authority to own, lease and operate its properties and to conduct its business as currently being conducted and to enter into and perform its obligations under the Note Subscription Agreement. (iii) The Company is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not result in a Material Adverse Effect. (iv) Each Insurer has been duly organized and is validly existing and in good standing under the laws of the jurisdiction of its organization, has all requisite power and authority to own, lease and operate its properties and conduct its business as currently being conducted and is duly qualified to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure to so qualify or be in good standing would not have a Material Adverse Effect; all of the issued and outstanding shares of capital stock or other equity interests, as applicable, of each Insurer have been duly authorized and are validly issued, fully paid and non-assessable and, except for qualifying shares, are owned by the Company, directly or through subsidiaries, free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity; and none of the outstanding shares of capital stock of any Insurer was issued in violation of preemptive or other similar rights of any securityholder of such Insurer. (v) Each Insurer has all requisite licenses, permits and authority that are necessary for the conduct of its insurance business, except where the failure to obtain such licenses, permits or authorities would not have a Material Adverse Effect (collectively, "Licenses"), such Licenses are in full force and effect, and no proceeding is pending or, to the best of my knowledge, threatened to suspend, revoke or limit any such License. (vi) There are (i) no outstanding subscriptions, warrants, options, calls or commitments of any character relating to or entitling any Person to purchase or otherwise acquire any stock of any Insurer and (ii) no obligations or securities convertible into or exchangeable for shares of any stock of any Insurer or any commitments of any character relating to or entitling any Person to purchase or otherwise acquire any such obligations or securities. (vii) The Note Subscription Agreement has been duly authorized, executed and delivered by the Company and (assuming the due authorization, execution and delivery thereof by the other parties thereto) constitutes a legal, valid and binding agreement of the Company, 12A2-1 enforceable against the Company in accordance with its terms, except as enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting enforcement of creditors' rights generally and except as enforcement thereof is subject to general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law). (viii) Upon the subscription for the Commitments and the subsequent issuance and delivery of the underlying Notes as provided in the Note Subscription Agreement, it will not be necessary in connection with the subscription for the Commitments or the issuance of the underlying Notes to register such Commitments or Notes under the 1933 Act or to qualify an indenture under the Trust Indenture Act of 1939, as amended. No authorization, approval or consent of any court or governmental authority or agency is necessary in connection with the valid issuance, sale and delivery of the Notes, except such as may be required under the Blue Sky laws or other securities or insurance securities laws of the various states, and any other requirements applicable to purchasers of Notes. (ix) To the best of my knowledge, there is no pending or threatened any action, suit, proceeding, inquiry or investigation, to which the Company or any Insurer is a party, or to which the property of the Company or any Insurer is subject, before or brought by any court or governmental agency or body, domestic or foreign, which may reasonably be expected to result, individually or in the aggregate, in a Material Adverse Effect, or which might reasonably be expected to materially and adversely affect the assets, properties or operations thereof, taken as a whole, or the consummation of the transactions contemplated in the Note Subscription Agreement or the performance by the Company of its obligations thereunder. (x) Neither the Company nor any Insurer is, or with the giving of notice or passage of time or both, would be, in breach or violation of any of the terms or provisions of or in default under (i) any statute, rule or regulation applicable to the Company or any Insurer, (ii) any indenture, contract, lease, mortgage, deed of trust, note or other agreement or instrument for over $25,000,000 to which the Company or any Insurer is a party or by which it may be bound, (iii) its certificate of incorporation, by-laws or other organizational documents, and (iv) any order, decree or judgment of any court or governmental agency or body having jurisdiction over the Company or any Insurer except, with respect to breaches, violations or defaults contemplated by clauses (i), (ii), (iii) or (iv), for such breaches, violations or defaults that could not, individually or in the aggregate, be reasonably expected to result in a Material Adverse Effect. The opinions stated in clauses (i), (ii) and (iv) are stated to the best of my knowledge. The performance of the Note Subscription Agreement by the Company and the consummation of the transactions therein contemplated will not, with the giving of notice or passage of time or both, result in a breach or violation of any of the terms or provisions of or constitute a default under or accelerate obligations under (w) any material statute, rule or regulation applicable to the Company or any Insurer, (x) any indenture, contract, mortgage, lease, deed of trust, note or other agreement or instrument for over $25,000,000 to which the Company or any Insurer is a party or by which it is bound, (y) the Company's or any Insurer's certificate of incorporation or by-laws or (z) any order, decree or judgment of any court or governmental agency or body having jurisdiction over the Company or any Insurer or any of their properties. 12A2-2 (xi) The Company is not an "investment company" or an entity "controlled" by an "investment company," as such terms are defined in the 1940 Act. 12A2-3 EXHIBIT 12(a)(3) [FORM OF OFFICER'S CERTIFICATE] OFFICER'S CERTIFICATE The undersigned officer of MBIA, Inc., a Connecticut corporation (the "Company"), does hereby deliver this certificate on behalf of the Company pursuant to Section 12(a)(3) of the Note Subscription Agreement dated December 27, 2001 (the "Agreement") between the Company, Swiss Re Financial Products Corporation, Swiss Re Capital Markets Corporation and XXXXX, and hereby certifies that: (A) The Company has complied with all agreements and satisfied all conditions on its part to be performed or satisfied at or before the date hereof; and (B) The representations and warranties of the Company contained in Section 5(a) of the Agreement are true, complete, and correct at and as of the date hereof. Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Agreement. Dated: December 27, 2001 MBIA, Inc. ____________________________________________ Name: Title: [Chief Financial Officer] [Treasurer] [Controller] 12A3 EXHIBIT 12(b)(1) OPINION OF COUNSEL CLOSING DATE (i) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Connecticut. (ii) The Company has corporate power and authority to own, lease and operate its properties and to conduct its business as currently being conducted and to enter into and perform its obligations under the Notes. (iii) The Notes, have been duly executed and delivered in the manner contemplated in the Note Subscription Agreement and constitute valid and legally binding obligations of the Company, enforceable against the Company in accordance with their terms, except as enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally or by general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law). (iv) It is not necessary in connection with the issuance of the Securities to register such Notes under the 1933 Act or to qualify an indenture under the Trust Indenture Act of 1939, as amended. No authorization, approval or consent of any court or governmental authority or agency is necessary in connection with the valid issuance, sale and delivery of the Notes, except such as may be required under the Blue Sky laws or other securities or insurance securities laws of the various states, and any other requirements applicable to purchasers of Notes. (v) The Company is not an "investment company" or an entity "controlled" by an "investment company," as such terms are defined in the 1940 Act. (vi) No Event of Default under the Note Subscription Agreement has occurred and is continuing. 12B PREFERRED SHARES SUBSCRIPTION AGREEMENT Up to 75,000 Shares Series A Preferred Stock Par Value $1.00 Per Share MBIA, INC. December 27, 2001 MBIA, Inc. 113 King Street Armonk, New York 10504 Ladies and Gentlemen: Swiss Re Financial Products Corporation, a Delaware corporation ("SRFPC"), and XXXXX, a Delaware corporation ("XXXXX"), and together with SRFPC, the "Providers"), and Swiss Re Capital Markets Corporation, a Delaware corporation, as agent for the Providers ("SRCMC"), hereby confirm their agreement with MBIA, Inc., a Connecticut corporation (the "Company"), with respect to the future issue and sale by the Company, and the commitments for purchase by the Providers, subject to the terms and conditions set forth herein, of an aggregate of up to 75,000 shares of Series A Preferred Stock, par value $1.00 per share (the "Preferred Shares"), having a liquidation preference (the "Liquidation Preference") of $2,000 per share. Capitalized terms used herein shall have the meanings attributed thereto in Section 1 hereof. Pursuant to the terms and conditions of a Note Subscription Agreement (the "Note Subscription Agreement") of even date herewith by and among the Company, the Providers and SRCMC, the Company has the right to require the Providers to purchase up to $150,000,000 aggregate principal amount of its Variable Rate Subordinated Notes Due 15 Years from Original Issuance Date (the "Notes"). The Providers understand that not less than 30 days but not more than 180 days after each issuance of Notes pursuant to the Note Subscription Agreement, the Company shall be vested with the right to require each Provider to acquire through the tender of outstanding Notes held by such Provider, or otherwise, such number of Preferred Shares as may be determined by dividing the aggregate principal amount of the Notes issued by 100% of the Liquidation Preference of the Preferred Shares, subject to the terms and conditions more fully described herein. The Providers understand that the Company may agree to issue, from time to time, additional commitments for the purchase of Preferred Shares in excess of 75,000 shares to one or more subsequent providers (each, a "Subsequent Provider"), although SRFPC and XXXXX shall have no obligation to purchase such additional commitments. The Company acknowledges and agrees that the Providers may also request that all or a portion of the Commitments evidenced by this Agreement be assigned to Subsequent Providers; provided, however, that in no event shall the aggregate Commitments of SRFPC be less than 25,000 shares. 1. Definitions. Except as otherwise defined herein and except ----------- where the context otherwise requires, the following terms shall have the following meanings: "Affiliate" shall mean any management employee or director of the Company or any Subsidiary, or holder of five percent (5%) or more of any class of capital stock of the Company, or any member of their respective immediate families or any corporation or other entity directly or indirectly controlled by one or more of such management employees, directors or 5% stockholders or members of their immediate families. "Agreement" means this Preferred Shares Subscription Agreement. "Available Commitment" means, as of any date of determination during the Commitment Period, the number of Preferred Shares representing the Commitments, minus (i) the number of Preferred Shares ----- sold to the Providers or with respect to which a Notice of Issuance has been given to the Providers and not rescinded before such date (it being understood that if for any reason one or more Providers defaults on its Commitments to purchase Preferred Shares on any Issuance Date, such defaulting Provider's Pro Rata Share of the Available Commitment shall be increased by the aggregate number of Preferred Shares such Provider failed to purchase), and (ii) any reduction of the Commitments by the Company as set forth in Section 2(c). "Business Day" means any day, other than a Saturday or Sunday, that is neither a legal holiday nor a day on which banking institutions are authorized or required by law, regulation or executive order to close in The City of New York, New York and that is also a London Banking Day. "Certificate of Amendment" means the Certification of Amendment of the Company's Restated Certificate of Incorporation, in the form attached as Exhibit 1, establishing pursuant to Section 33-666(d) of the Connecticut Business Corporation Act the designations, preferences, and rights related to the Preferred Shares. "Code" means the Internal Revenue Code of 1986, as amended. "Commission" has the meaning ascribed to such term in Section 5(n). "Commitments" means the obligation of the Providers to purchase an aggregate number of Preferred Shares from time to time during the Commitment Period not to exceed the number set forth on Schedule A, provided that the obligation of each Provider shall not exceed its Pro Rata Share of the Commitments. "Commitment Period" means the period from and including the Effective Date to, but excluding, the Commitment Termination Date. "Commitment Termination Date" means the earliest to occur of (i) purchase by the Providers of an aggregate number of Preferred Shares equal to the Commitments, (ii) 180 days after the tenth anniversary of the date of this Agreement, and (iii) such other termination of the Commitments as provided herein. 2 "Company" means MBIA, Inc., a Connecticut corporation. "Effective Date" means December 27, 2001, or such other date as may be agreed upon by and among the Company, the Providers and SRCMC. "Employee Benefit Plan" means any "employee benefit plan" as defined in Section 3(3) of ERISA which is or was maintained or contributed to by the Company, any of its Subsidiaries or any of their respective ERISA Affiliates. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "ERISA Affiliate" means, as applied to any Person, (i) any corporation which is a member of a controlled group of corporations within the meaning of Section 414(b) of the Code of which that Person is a member; (ii) any trade or business (whether or not incorporated) which is a member of a group of trades or businesses under common control within the meaning of Section 414(c) of the Code of which that Person is a member; and (iii) any member of an affiliated service group within the meaning of Section 414(m) or (o) of the Code of which that Person, any corporation described in clause (i) above or any trade or business described in clause (ii) above is a member. Any former ERISA Affiliate of the Company or any of its Subsidiaries shall continue to be considered an ERISA Affiliate of the Company or such Subsidiary within the meaning of this definition with respect to the period such entity was an ERISA Affiliate of the Company or such Subsidiary and with respect to liabilities arising after such period for which the Company or such Subsidiary could be liable under the Code or ERISA. "ERISA Event" means (i) a "reportable event" within the meaning of Section 4043 of ERISA and the regulations issued thereunder with respect to any Pension Plan (excluding those for which the provision for 30-day notice to the PBGC has been waived by regulation); (ii) the failure to meet the minimum funding standard of Section 412 of the Code with respect to any Pension Plan (whether or not waived in accordance with Section 412(d) of the Code) or the failure to make by its due date a required installment under Section 412(m) of the Code with respect to any Pension Plan or the failure to make any required contribution to a Multiemployer Plan; (iii) the provision by the administrator of any Pension Plan pursuant to Section 4041(a)(2) of ERISA of a notice of intent to terminate such plan in a distress termination described in Section 4041(c) of ERISA; (iv) the withdrawal by the Company, any of its Subsidiaries or any of their respective ERISA Affiliates from any Pension Plan with two or more contributing sponsors or the termination of any such Pension Plan resulting in liability pursuant to Section 4063 or 4064 of ERISA; (v) the institution by the PBGC of proceedings to terminate any Pension Plan, or the occurrence of any event or condition which might constitute grounds under ERISA for the termination of, or the appointment of a trustee to administer, any Pension Plan; (vi) the imposition of liability on the Company, any of its Subsidiaries or any of their respective ERISA Affiliates pursuant to Section 4062(e) or 4069 of ERISA or by reason of the application of Section 4212(c) of ERISA; (vii) the withdrawal of the Company, any of its Subsidiaries or any of their respective ERISA Affiliates in a complete or partial withdrawal (within the meaning of Sections 4203 and 4205 of 3 ERISA) from any Multiemployer Plan if there is any potential liability therefor, or the receipt by Company, any of its Subsidiaries or any of their respective ERISA Affiliates of notice from any Multiemployer Plan that it is in reorganization or insolvency pursuant to Section 4241 or 4245 of ERISA, or that it intends to terminate or has terminated under Section 4041A or 4042 of ERISA; (viii) the occurrence of an act or omission which could give rise to the imposition on the Company, any of its Subsidiaries or any of their respective ERISA Affiliates of material fines, penalties, taxes or related charges under Section 4975 of the Code or under Section 502(i) of ERISA in respect of any Employee Benefit Plan; (ix) the assertion of a material claim (other than routine claims for benefits) against any Employee Benefit Plan other than a Multiemployer Plan or the assets thereof, or against the Company, any of its Subsidiaries or any of their respective ERISA Affiliates in connection with any Employee Benefit Plan; (x) receipt from the Internal Revenue Service of notice of the failure of any Pension Plan (or any other Employee Benefit Plan intended to be qualified under Section 401(a) of the Code) to qualify under Section 401(a) of the Code, or the failure of any trust forming part of any Pension Plan to qualify for exemption from taxation under Section 501(a) of the Code; or (xi) the imposition of a Lien pursuant to Section 401(a)(29) or 412(n) of the Code or pursuant to ERISA with respect to any Pension Plan. "Exercise Date" means any date on which the Company sends a Notice of Issuance to the Providers to purchase Preferred Shares. "GAAP" means generally accepted accounting principles in the United States, applied consistently. "Incurred Losses" has the meaning given in the Note Subscription Agreement. "Insurers" means any of MBIA Corp., MBIA Assurance, S.A., Capital Markets Assurance Corporation, MBIA Insurance Corp. of Illinois and any other financial guaranty company wholly owned by, or consolidated on the balance sheet of, MBIA Corp. or MBIA, Inc. "Issuance Date" shall have the meaning ascribed to such term in Section 3(b). "Licenses" has the meaning ascribed to such term in Section 5(d). "LIBOR" has the meaning ascribed to such term in Exhibit 1. "Liquidation Preference" has the meaning ascribed to such term in the first introductory paragraph. "London Banking Day" means a day on which commercial banks are open for business (including dealings in United States dollars) in London. "Material Adverse Effect" means (i) a material adverse change in, or a material adverse effect upon, the business, condition (financial or otherwise) or prospects of the Company and its Subsidiaries, taken as a whole, which results, or with the giving of notice or lapse of time would result, in a material impairment of the ability of the 4 Company to perform under this Agreement or any related transaction documents, or (ii) a material adverse effect upon the legality, validity, binding effect or enforceability against the Company of this Agreement or any related transaction documents. "MBIA Corp." means MBIA Insurance Corporation. "Moody's" means Moody's Investors Service, Inc. or any successor thereto. "Multiemployer Plan" means any Employee Benefit Plan which is a "multiemployer plan" as defined in Section 3(37) of ERISA. "NAIC" means the ratings office of the National Association of Insurance Commissioners. "1933 Act" means the Securities Act of 1933, as amended. "1934 Act" means the Securities Exchange Act of 1934, as amended. "1940 Act" means the Investment Company Act of 1940, as amended. "Note Subscription Agreement" has the meaning ascribed to such term in the second introductory paragraph. "Notes" shall have the meaning as defined in the second introductory paragraph. "Notice of Issuance" means the notice attached hereto as Exhibit 3(b). "NRSRO" means a nationally recognized statistical rating organization. "Original Issuance Date" means, with respect to any issuance of Notes, the date when any such Notes are issued and sold in accordance with the Note Subscription Agreement. "PBGC" means the Pension Benefit Guaranty Corporation or any successor thereto. "Pension Plan" means any Employee Benefit Plan, other than a Multiemployer Plan, which is subject to Section 412 of the Code or Section 302 of ERISA. "Person" means and includes natural persons, corporations, limited partnerships, general partnerships, limited liability companies, limited liability partnerships, joint stock companies, joint ventures, associations, companies, trusts, banks, trust companies, land trusts, business trusts or other organizations, whether or not legal entities, and governments (whether federal, state or local, domestic or foreign, and including political subdivisions thereof) and agencies or other administrative or regulatory bodies thereof. "Preferred Shares" has the meaning given to such term in the first introductory paragraph, to be issued pursuant to the Certificate of Amendment attached hereto as Exhibit 1. 5 "Preferred Shares Commitment Fee" means any commitment fee payable by the Company to a Provider pursuant to a Preferred Shares Commitment Fee Agreement. "Preferred Shares Commitment Fee Agreement" means any agreement between the Company and the Providers with respect to the payment of Preferred Shares Commitment Fees. "Pro Rata Share", with respect to each Provider, means the percentage set forth opposite such Provider on Schedule A. "Providers" has the meaning as defined in the first introductory paragraph. "Reference Portfolio" means all financial guaranty insurance policies issued by any of the Reference Portfolio Insurers or reinsurance assumed by any of such Reference Portfolio Insurers. Notwithstanding the foregoing, "Reference Portfolio" shall not include insurance or reinsurance of unsecured obligations of Southern California Edison Company and Pacific Gas and Electric Company, until such time, if any, as any such unsecured obligation is upgraded to a rating of Baa3/BBB- or better by Moody's and S&P, respectively, and such obligation maintains such ratings for a period of 6 months. "Reference Portfolio Insurer" means all Insurers other than those Insurers which the Company has advised the Providers in writing are "excluded Insurers" for purposes of determining the Reference Portfolio, provided that MBIA Corp. remains at all times a Reference Portfolio Insurer. "Reinsurance" means any reinsurance agreement or arrangement under which a third party reinsures any individual or related group of policies on a quota share or non-proportional basis, but excluding any reinsurance of the type customarily referred to as "stop loss." "Shareholders' Equity" of any Person at any date means such number as calculated in accordance with GAAP as of such date. "S&P" means Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc. or any successor thereto. "SRCMC" has the meaning as defined in the first introductory paragraph. "Structuring Fee Agreement" means the agreement of even date herewith between the Company and SRCMC, setting forth the structuring fee payable by the Company to SRCMC. "Subsequent Provider" has the meaning as defined in the third introductory paragraph. "Subsidiary" means any corporation or other entity with a GAAP net worth in excess of $10 million of which at least a majority of the securities or other ownership interest having ordinary voting power (absolutely or contingently) for the election of 6 directors or other persons performing similar functions are at the time owned directly or indirectly by the Company or any of its other Subsidiaries. "Termination Date" means December 27, 2011. "Trigger Date" has the meaning ascribed to such term in the Note Subscription Agreement. "Trigger Point" has the meaning ascribed to such term in the Note Subscription Agreement. "US$" or "$" means United States Dollars. To the extent any losses, liabilities or other amounts described or referred to in this Agreement are stated or denominated in currencies other than United States Dollars, such losses, liabilities or amounts shall be stated, for purposes of this Agreement, in their respective United States Dollar equivalents as shown in the Company's financial statements. 2. Subscription. (a) General. Subject to the terms and conditions ------------ ------- contained herein, each Provider hereby irrevocably subscribes for and agrees to purchase an aggregate number of Preferred Shares not to exceed its Pro Rata Share of the Commitments. Such Preferred Shares shall be issued and sold pursuant to Section 3 of this Agreement. (b) Payment of Fees. On the Effective Date, and on each anniversary of the --------------- Effective Date thereafter during the Commitment Period, each Provider shall be deemed to have earned, and the Company shall pay to each Provider, the Preferred Shares Commitment Fee, as set forth in the Preferred Share Commitment Fee Agreement. (c) Reduction of Commitments. The Commitments may be permanently reduced ------------------------ (i) at the option of the Company, upon 10 Business Days' written notice to the Providers, in a minimum amount of 2,500 shares and integral multiples of 500 shares in excess thereof (or in the event that the Available Commitment at such time is less than such amounts, the amount of the Available Commitment). The Commitments of any Provider shall terminate on the earliest to occur of (i) upon the occurrence of an Event of Default referred to in Sections 10(e) and 10(f) of the Note Subscription Agreement, (ii) at the option of such Provider, upon the occurrence of any other Event of Default under the Note Subscription Agreement, and (iii) on the Termination Date. In the case of clause (ii) above, such termination shall take effect upon the date of written notice from such Provider to the Company. The Available Commitment shall be permanently reduced on each Issuance Date in an amount equal to the number of Preferred Shares purchased on such date. (d) No Obligation of SRCMC to Purchase Preferred Shares. SRCMC shall not --------------------------------------------------- have any obligation to purchase the Preferred Shares from the Company as principal. (e) No Redemption Upon Adjustment. The Providers' redemption rights ----------------------------- pursuant to Section 2(g) of the Note Subscription Agreement (pursuant to which the Providers may redeem such amount of Notes as were issued with respect to an amount of Incurred Losses subsequently adjusted), shall not apply to any issued and outstanding Preferred Shares. Notwithstanding the foregoing, had the Company not required the Provider to acquire Preferred Shares and all or a 7 portion of the related Notes would have been eligible for redemption under Section 2(g) of the Note Subscription Agreement, then the Company shall not issue another Note Issuance Request pursuant to the Note Subscription Agreement until such time as Incurred Losses on any subsequent Trigger Date exceed the sum of (i) the Trigger Point and (ii) the aggregate Liquidation Preference of all or such portion of such Preferred Shares. During the period when the Company is not permitted to issue a Note Issuance Request pursuant to this Section 2(e), the dividend rate on the Preferred Shares shall be increased by 2.0%. 3. Method of Exercise. (a) General. Not less than 30 days but not more ------------------ ------- than 180 days after any Original Issuance Date, the Company may require each Provider to purchase such number of Preferred Shares, having a Liquidation Preference of $2,000 per share, as is determined by dividing the aggregate principal amount of such Provider's Notes to be issued on such Original Issuance Date by the Liquidation Preference. (b) Method of Issuance. To effect an issuance and sale of Preferred Shares, ------------------ the Company shall complete and manually sign a notice of issuance ("Notice of Issuance") in the form attached hereto as Exhibit 3(b) and deliver the Notice of Issuance to the Providers in accordance with the procedures set forth below. The Notice of Issuance shall set forth a date, upon notice of no less than 15 but no more than 30 days (the "Issuance Date") on which such Providers shall purchase the Preferred Shares. The Company shall pay any transfer or similar tax, if required. (c) Payment. On the Issuance Date, each Provider shall have the option to ------- purchase the Preferred Shares either (i) by delivering such amount of Notes, duly endorsed, having an aggregate face amount equal to the Liquidation Preference of the Preferred Shares to be issued, (ii) in cash (in which case (A) such Provider's Notes shall remain outstanding, with all rights and benefits contained herein unaffected by the Notice of Issuance, and (B) such Provider's Available Commitment shall not be reduced by such number of Preferred Shares issued), or (iii) in any combination of the methods of payment set forth in clauses (i) or (ii). The payment election set forth in the preceding sentence shall be in the sole and absolute discretion of the Provider. (d) Fractional Shares. The Company shall not issue a fractional Preferred ----------------- Share upon any such issuance. Instead, the Company shall remit cash to the Provider in lieu of the fractional share, based on the Liquidation Preference, rounding to the nearest whole cent with one half cent being rounded upwards. (e) Validity. Any Preferred Shares issued pursuant to this Section shall be -------- (i) validly issued, fully paid and nonassessable, (ii) free of any preemptive rights, (iii) free and clear of any lien, encumbrance or other restriction, and (iv) issued in compliance with the requirements of federal and state securities laws. 4. Closings. Delivery of and payment for the Preferred Shares which are -------- required to be delivered on any applicable Issuance Date shall be made at the offices of the Providers set forth in Section 10 (or such other place as may be determined by agreement among the Company, the Providers and SRCMC), at 10:00 a.m., New York time, on such Issuance Date. Delivery of such Preferred Shares shall be made against payment of the purchase price to the 8 order of the Company by the tender of duly endorsed Notes, or if all or a portion of the purchase price is paid in cash, in immediately available funds by transfer to an account designated by the Company or by such other means as shall be acceptable to the Company, the Providers and SRCMC. Payment for the Preferred Shares shall be subject to delivery on the Issuance Date of a certificate (in the form of Exhibit 4 attached hereto) signed by the Chief Financial Officer, Treasurer or Controller of the Company, certifying compliance with the conditions set forth in Section 9(b). 5. Representations and Warranties of the Company and its Subsidiaries. The ------------------------------------------------------------------ Company, on its behalf and on behalf of each of its Subsidiaries, represents and warrants to the Providers and SRCMC as of the date hereof that: (a) Existence and Qualification. The Company has been duly incorporated and --------------------------- is validly existing as a corporation in good standing under the laws of the State of Connecticut with full corporate power and authority to enter into and perform its obligations under this Agreement and to own its properties and conduct its business as currently being conducted. Upon the filing of the Certificate of Amendment prior to the first Issuance Date, the Company will have the authority to issue and deliver the Preferred Shares. The Company is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure to so qualify or be in good standing would not have a Material Adverse Effect. (b) Existence and Qualification of Reference Portfolio Insurers. Each ----------------------------------------------------------- Reference Portfolio Insurer has been duly organized and is validly existing and in good standing under the laws of the jurisdiction of its organization, has all requisite power and authority to own, lease and operate its properties and conduct its business as currently being conducted and is duly qualified to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure to so qualify or be in good standing would not have a Material Adverse Effect; all of the issued and outstanding shares of capital stock or other equity interests, as applicable, of each Reference Portfolio Insurer have been duly authorized and are validly issued, fully paid and non-assessable and, except for qualifying shares, are owned by the Company, directly or through subsidiaries, free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity; and none of the outstanding shares of capital stock of any Reference Portfolio Insurer was issued in violation of preemptive or other similar rights of any securityholder of such Reference Portfolio Insurer. (c) No Material Changes. Since the date of filing of the Company's Annual ------------------- Report on Form 10-K for the year ended December 31, 2000, except as otherwise stated therein or in any subsequently filed Quarterly Report on Form 10-Q, or as disclosed in any subsequently filed Current Report on Form 8-K filed prior to the date hereof, there has been no material adverse change in the condition, financial or otherwise, or in the earnings, operations, business affairs or business prospects of the Company and its Subsidiaries, considered as one enterprise, whether or not arising in the ordinary course of business. (d) Regulatory Matters. The Insurers have all requisite licenses, permits ------------------ and authority that are necessary for the conduct of their respective insurance businesses, except 9 where the failure to obtain such licenses, permits or authorities would not have a Material Adverse Effect (collectively, "Licenses"), such Licenses are in full force and effect, and no proceeding is pending or, to the Company's knowledge, threatened to suspend, revoke or limit any such License. (e) Binding Obligations. The acceptance of the subscription hereof by the ------------------- Company as evidenced by its signature on the signature page of this Agreement, the execution, delivery and performance of this Agreement and, on or prior to the first issuance of Preferred Shares, the Certificate of Amendment, will have been duly authorized by all necessary action on behalf of the Company, and this Agreement, by virtue of such acceptance, will be the legal, valid and binding agreement of the Company, enforceable against the Company in accordance with its terms, except as enforcement thereof may be limited by bankruptcy, insolvency or other laws related to or affecting the enforcement of creditors' rights generally or by equitable principles. On or prior to the first issuance of Preferred Shares, the Certificate of Amendment will have been filed with the Secretary of State of the State of Connecticut. (f) Preferred Shares. On or prior to the initial Issuance Date, the ---------------- Preferred Shares shall have been duly authorized, validly issued, fully paid and nonassessable, and no securityholder of the Company shall have any preemptive rights with respect to any Preferred Shares. Upon issuance pursuant to this Agreement, the Preferred Shares shall be free and clear of any lien, encumbrance or other restriction, and upon delivery as provided in this Agreement, the Provider will acquire good title to the Preferred Shares, free and clear of any lien, encumbrance or other restriction, other than any such lien, encumbrance or other restriction arising from the actions of such Provider. On the date of filing of the Certificate of Amendment, the Company shall have reserved for issuance an aggregate of 100,000 Preferred Shares for issuance on one or more Issuance Dates pursuant to this Agreement. There are (i) no outstanding subscriptions, warrants, options, calls or commitments of any character relating to or entitling any Person to purchase or otherwise acquire Preferred Shares, (ii) no obligations or securities convertible into or exchangeable for Preferred Shares or any commitments of any character relating to or entitling any Person to purchase or otherwise acquire any such obligations or securities and (iii) no understandings or agreements with respect to the purchase or voting of any of Preferred Shares. (g) Absence of Litigation. There are no legal or governmental proceedings --------------------- pending to which the Company or any Insurer is a party or of which any property of the Company or any Insurer is the subject, and which, if determined adversely to the Company or any Insurer could reasonably be expected, individually or in the aggregate, to result in a Material Adverse Effect; and to the best of the Company's knowledge, no such proceedings are threatened nor has the Company been informed that it or an Insurer is the subject of an investigation by governmental authorities. There are no outstanding orders, judgments, injunctions or decrees of any governmental authority against the Company or any Insurer. (h) No Violation or Conflict. Neither the Company nor any Insurer has any ------------------------ knowledge that it is, or with the giving of notice or passage of time or both, would be, in breach or violation of any of the terms or provisions of or in default under (i) any statute, rule or regulation applicable to the Company or any Subsidiary, (ii) any indenture, contract, lease, mortgage, deed of trust, note or other agreement or instrument for over $25,000,000 to which the 10 Company or any Subsidiary is a party or by which it may be bound, (iii) its certificate of incorporation, by-laws or other organizational documents, and (iv) any order, decree or judgment of any court or governmental agency or body having jurisdiction over the Company or any Subsidiary except, with respect to breaches, violations or defaults contemplated by clauses (i), (ii), (iii) or (iv), for such breaches, violations or defaults that could not, individually or in the aggregate, be reasonably expected to result in a Material Adverse Effect. The performance of this Agreement by the Company and the consummation of the transactions herein contemplated will not, with the giving of notice or passage of time or both, result in a breach or violation of any of the terms or provisions of or constitute a default under or accelerate obligations under (w) any material statute, rule or regulation applicable to the Company or any Subsidiary, (x) any indenture, contract, mortgage, lease, deed of trust, note or other agreement or instrument for over $25,000,000 to which the Company or any Subsidiary is a party or by which it is bound, (y) the Company's or any Subsidiary's certificate of incorporation or by-laws or (z) any order, decree or judgment of any court or governmental agency or body having jurisdiction over the Company or any Subsidiary or any of their properties; provided, however, that no breach of the foregoing representation and warranty shall be deemed to have occurred if such breach arises from a failure by the Company to satisfy a debt leverage test as a consequence of the issuance of the Notes. (i) Options or Rights with Respect to Insurers. There are (i) no ------------------------------------------ outstanding subscriptions, warrants, options, calls or commitments of any character relating to or entitling any Person to purchase or otherwise acquire any stock of any Insurer and (ii) no obligations or securities convertible into or exchangeable for shares of any stock of any Insurer or any commitments of any character relating to or entitling any Person to purchase or otherwise acquire any such obligations or securities. (j) Compliance with 1940 Act. The Company is not an "investment company" or ------------------------ an entity "controlled" by an "investment company" as such terms are defined in the 1940 Act. (k) Compliance with 1933 Act. Assuming the Preferred Shares are issued and ------------------------ delivered as provided herein, it is not necessary in connection with the offering of the Commitments or the issuance of the Preferred Shares to register such Commitments or such Preferred Shares under the 1933 Act. No authorization, approval or consent of any court or governmental authority or agency is necessary in connection with the valid authorization, issuance, sale and delivery of the Commitments or the Preferred Shares, except such as may be required under the Blue Sky laws or other securities or insurance securities laws of the various states, which the Company represents have been complied with, and any other requirements applicable to subscribers for Commitments or to purchasers of Preferred Shares, as to which the Company makes no representation. (l) No General Solicitation. None of the Company or any Affiliate or any ----------------------- Person acting on its behalf (other than SRCMC) has (A) engaged, in connection with the offering of the Commitments or the Preferred Shares, in any form of general solicitation or general advertising (as those terms are used within the meaning of Regulation D under the 1933 Act), or (B) solicited offers for, or offered or sold, such Preferred Shares by means of any form of general solicitation or general advertising (as those terms are used in Regulation D under the 1933 Act) or in any manner involving a public offering within the meaning of Section 5 of the 1933 Act. 11 (m) Employee Benefit Plans. ---------------------- (1) The Company and each of its Subsidiaries are in compliance with all applicable provisions and requirements of ERISA, the Code and the regulations and published interpretations thereunder with respect to each of their Employee Benefit Plans, and have performed all their obligations under each of their Employee Benefit Plans, except where the failure to comply or perform would not have a Material Adverse Effect. Each Employee Benefit Plan maintained by the Company and its Subsidiaries which is intended to qualify under Section 401(a) of the Code is so qualified. (2) No ERISA Event has occurred or is reasonably expected to occur, except where such occurrence would not have a Material Adverse Effect. (n) 1934 Act Compliance. The Company's most recent Annual Report filed on ------------------- Form 10-K and its Quarterly Reports filed on Form 10-Q and any Current Reports filed on Form 8-K filed after the date of such Form 10-K, at the time they were filed with the U.S. Securities and Exchange Commission (the "Commission") and as of the Effective Date, complied and comply in all material respects with the requirements of the 1934 Act and the rules and regulations of the Commission under the 1934 Act and, at the Effective Date, do not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The representations and warranties set forth in Sections 5(a) (first sentence), (e), (f) and (j) through (l) shall be deemed repeated by the Company on each Issuance Date. 6. Representations and Warranties of Providers. Each Provider, severally ------------------------------------------- and not jointly, represents and warrants to the Company as of the date hereof, and as of each Issuance Date (excluding the first clause in the first sentence in Section 6(b)), as follows: (a) Existence and Qualifications of Provider. The Provider is a ---------------------------------------- corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, and the Provider has the full corporate power and authority to execute and deliver this Agreement, and to perform its obligations under, and consummate the transactions contemplated by, this Agreement, including, without limitation, the purchase of the Preferred Shares pursuant to the making of a Notice of Issuance by the Company as described in this Agreement. (b) No Violation or Conflict. The execution and delivery of this Agreement ------------------------ by the Provider, and the performance of the Provider under this Agreement, do not violate or conflict with any applicable law, any provision of the Provider's organizational documents or any order or judgment of any court or other government agency applicable to the Provider, or any contractual restriction binding upon or affecting the Provider. (c) Consents. All governmental and other consents that are required to -------- have been obtained by the Provider with respect to the execution and delivery of this Agreement have been obtained by the Provider and are in full force and effect and all conditions of any such consents have been complied with. 12 (d) Investment Representation. The Provider understands that the ------------------------- Commitments and the issuance of the underlying Preferred Shares upon the making by the Company of a Notice of Issuance under this Agreement have not been and will not be registered under the 1933 Act and the underlying Preferred Shares will be issued in reliance upon exemptions form the registration requirements of the 1933 Act. The Provider represents that (a) it is executing its Commitment and acquiring any Preferred Shares solely for its own account, for investment purposes only, and not with a view to distribution, fractionalization or resale thereof, except as otherwise permitted under this Agreement, (b) it will not sell or otherwise dispose of its Commitment or any Preferred Shares except in compliance with the registration requirements or exemption provisions of applicable securities laws including the 1933 Act, (c) it has not relied on the Company for any explanation of the application of the various U.S. state and federal securities laws with regard to the execution of its Commitment or the acquisition of the Preferred Shares, (d) it has access to complete information regarding the business and finances of the Company, and has received, read and understood the contents of the Company's SEC filings, (e) it has such knowledge and experience in business and financial matters that it has been able to fully understand and completely evaluate the risks and merits of acquiring its Commitment and holding any Preferred Shares, (f) it is able to bear the economic risk and limitation in liquidity of its Commitment and of an investment in the Preferred Shares, (g) it has reviewed all documents furnished to it in connection with the investment in the Commitments and the underlying Preferred Shares contemplated hereby, (h) it is an "accredited investor" as such term is defined in Regulation D, as amended, under the 1933 Act, (i) it is not a broker-dealer subject to Regulation T of the United States Federal Reserve Board, (j) in making its decision to acquire the Commitments and the underlying Preferred Shares, it has relied upon independent investigations made by it and, to the extent believed by it to be appropriate, its representatives, in addition to the representations and warranties and agreements of the Company contained herein, and (k) it and its representatives have been given the opportunity to examine all documents and to ask questions of, and to receive answers from, the Company and its representatives concerning the terms and conditions of the purchase of the Commitments and the underlying Preferred Shares and to obtain any addition information which it or its representatives deem necessary. (e) Binding Obligations. The execution of this Agreement has been duly ------------------- authorized by all necessary corporate action of the Provider, and this Agreement (a) constitutes the legal, valid and binding obligation of the Provider, and (b) is enforceable against the Provider in accordance with its terms (subject to applicable bankruptcy, reorganization, insolvency, moratorium or similar laws affecting creditors' rights generally and subject, as to enforceability, to equitable principles of general application). 7. Covenants and Agreements of the Company. The Company covenants and --------------------------------------- agrees with the Providers for the duration of the Commitment Period and for so long as any Preferred Shares remain outstanding that: (a) Audited Financial Statements of the Company. The Company shall deliver ------------------------------------------- to the Providers, within ten Business Days after the filing of its Form 10-K with the Commission, income statements for such fiscal year, balance sheets as of the end of such fiscal year and statements of cash flows for such fiscal year, together with such notes thereto as are appropriate, prepared in accordance with GAAP and setting forth in each case in comparative form the figures for the previous fiscal year, all in reasonable detail and certified by the independent 13 public accountants of the Company. The parties hereto agree that delivery of the Company's Form 10-K will satisfy such information requirements, as long as the information required under this paragraph is contained in such Form 10-K. Notwithstanding the foregoing, in the event that the Company is no longer a publicly held company, the Company shall deliver the information required under this paragraph within 90 days of the end of such fiscal year. (b) Audited Financial Statements of MBIA Corp. The Company shall cause MBIA ----------------------------------------- Corp. to deliver to the Providers, within ten Business Days after the filing of any statutory financial statements, income statements for such fiscal year, balance sheets as of the end of such fiscal year and statements of cash flows for such fiscal year, together with such notes thereto as are appropriate, prepared in accordance with applicable statutory accounting principles consistently applied (except as noted in the audit comments thereto) and setting forth in each case in comparative form the figures for the previous fiscal year, all in reasonable detail and certified by the independent public accountants of MBIA Corp. The parties hereto agree that the delivery of MBIA Corp's statutory financial statements will satisfy such information requirements, as long as the information required under this paragraph is contained therein. Notwithstanding the foregoing, the Company shall deliver the information required under this paragraph no later than 70 days after the end of such year. (c) Unaudited Financial Statements of the Company. The Company shall --------------------------------------------- deliver to the Providers, within ten Business Days after the filing of a Form 10-Q by the Company with the Commission, unaudited income statements for such quarter and the current fiscal year to date and unaudited balance sheets as of the end of such quarter, along with statements of profits and losses and cash flows for such quarter and the current fiscal year to date, prepared in accordance with GAAP (except for the omission of financial statement footnotes and subject to recurring year-end adjustments), certified by the Chief Financial Officer, Treasurer, or Controller of the Company. The parties hereto agree that the delivery of the Company's Form 10-Q will satisfy such information requirements, as long as the information required under this paragraph is contained in such Form 10-Q. (d) Unaudited Financial Statements of MBIA Corp. The Company shall cause ------------------------------------------- MBIA Corp. to deliver to the Providers, within ten Business Days after the filing of any statutory financial statements, unaudited income statements for such quarter and the current fiscal year to date and unaudited balance sheets as of the end of such quarter, along with statements of profits and losses and cash flows for such quarter and the current fiscal year to date, prepared in accordance with applicable statutory accounting principles consistently applied (except as noted in the audit comments thereto), certified by the Chief Financial Officer, Treasurer, or Controller of MBIA Corp. The parties hereto agree that the delivery of MBIA Corp.'s statutory financial statements will satisfy such information requirements, as long as the information required under this paragraph is contained therein. (e) Other Informational Filings. The Company shall deliver to the --------------------------- Providers, within ten Business Days after the filing of any Form 8-K (or any successor form) of the Company with the Commission, copies of such Form 8-K or successor form. 14 (f) Certification; Officer's Certificates. The quarterly and annual ------------------------------------- reports described in Sections 7(a)(1) through 7(a)(4) shall be certified by the Chief Financial Officer, Treasurer, or Controller of the Company or MBIA Corp., as the case may be. 8. Conditions to the Company's Obligations. The obligations of the --------------------------------------- Company hereunder shall be subject to, at and as of the Effective Date, the satisfaction of the following conditions: (a) The Company shall have received an executed counterpart of this Agreement from each of the Providers. (b) The Company shall have received from Sidley Austin Brown & Wood LLP or in-house counsel of any Provider an opinion (or, if any Provider is a non-U.S. entity, an opinion of its in-house counsel or local counsel) dated the Effective Date and addressed to the Company, S&P & Moody's, substantially to the effect that this Agreement (i) constitutes the legal, valid and binding obligation of the Providers, and (ii) is enforceable against the Providers in accordance with its terms (subject to applicable bankruptcy, reorganization, insolvency, moratorium or similar laws affecting creditors' rights generally and subject, as to enforceability, to equitable principles of general application). In rendering its opinion, Sidley Austin Brown & Wood LLP (or such other counsel) may rely upon the opinions of in-house counsel to the Provider as to the due authorization, execution and delivery by such Provider of this Agreement. 9. Conditions to the Providers' Commitments. (a) The several commitments ---------------------------------------- of the Providers hereunder shall be subject to the satisfaction of the following conditions (with the following conditions (1)-(4) and (6) to be satisfied at and as of the Effective Date and condition (5) to be satisfied as promptly thereafter as possible): (1) The Company shall have accepted the subscription contained herein and the Providers shall have received an executed counterpart of this Agreement. (2) The Providers shall have received from the general counsel for the Company, an opinion, dated the Effective Date, substantially in the form of Exhibit (9)(a)(2) hereto. (3) The Providers shall have received a certificate in the form of Exhibit 12(a)(3), dated the Effective Date, and certified by the Chief Financial Officer, Treasurer or Controller of the Company to the effect that: (i) The Company has complied with all agreements and satisfied all conditions on its part to be performed or satisfied at or before the Effective Date; and (ii) The representations and warranties of the Company contained in Section 5 herein are true, complete, and correct at and as of the Effective Date. (4) The Company shall have made all material filings required under applicable state and/or federal securities laws in connection with the transactions contemplated by this Agreement. The Company shall have received all other 15 authorizations, consents, approvals, licenses, filings and registrations required in connection with the execution, delivery, performance, validity and enforceability of this Agreement. (5) The Providers shall have received a certificate (or equivalent customary documentation, with respect to non-U.S. entities) of the appropriate public official in the jurisdiction of organization of the Company and the Reference Portfolio Insurers as to the due organization and good standing of the Company and the Reference Portfolio Insurers together with a certified copy (or equivalent customary documentation, with respect to non-U.S. entities) of the organizational documents of the Company and the Reference Portfolio Insurers and shall have received certificates of appropriate public officials of each other jurisdiction in which the Company and each Reference Portfolio Insurer is required to qualify to do business as a foreign organization as to the due qualification and good standing of the Company and each Reference Portfolio Insurer. (6) The Providers shall have received a copy, certified by the Secretary of the Company, of the actions of the Board of Directors of the Company authorizing, ratifying, and approving the Preferred Shares Subscription Agreement in the form as executed on December 27, 2001, including the issuance of the Commitments and the underlying Preferred Shares. (b) The several commitments of the Providers, at and as of each Issuance Date, shall be subject to the following conditions: (1) The Providers shall have received from the general counsel for the Company, an opinion, dated as of each Issuance Date, substantially in the form of Exhibit 9(b)(1) hereto. (2) The Providers shall have received the Notice of Issuance from the Company. (3) The Providers shall have received a certificate, dated such Issuance Date, certified by the Chief Financial Officer, Treasurer or Controller of the Company to the effect that: (i) The Company has complied with all agreements and satisfied all conditions on its part to be performed or satisfied under this Section 9(b) on such Issuance Date; and (ii) The representations and warranties of the Company required to be made on such Issuance Date are true and correct at and as of such Issuance Date. (4) At and as of such Issuance Date, there shall not have occurred and been continuing an Event of Default under the Note Subscription Agreement or any Notes. 16 (5) The Company shall have made all material filings required under applicable state and/or federal securities laws in connection with the issuance of the Preferred Shares on such Issuance Date. (6) No action, suit or other third-party proceeding by or before any governmental authority shall have resulted in the issuance of an order or other similar action enjoining the issuance of the Preferred Shares. (7) The Providers shall have received certificates representing their Preferred Shares. 10. Notices. Any notice or other communication required or permitted under ------- this Agreement shall be in writing and shall be deemed to have been given (a) on the date of delivery if delivered personally or by facsimile transmission, receipt confirmed, (b) twenty-four (24) hours after sending it by a nationally recognized overnight delivery service, or (c) five (5) Business Days after mailing, if sent by certified, registered or express mail, postage prepaid, if properly addressed or directed to such party at the appropriate address or facsimile number set forth below or at such other address or facsimile number as such party may designate from time to time by notice duly given in accordance with the terms of this Section 10: If to the Company: MBIA, Inc. 113 King Street Armonk, New York 10504 Attn: Chief Financial Officer Telephone No.: 914-765-3490 Fax No.: 914-765-3080 with a copy to: MBIA, Inc. 113 King Street Armonk, New York 10504 Attn: General Counsel Telephone No.: 914-765-3945 Fax No.: 914-765-3919 If to Swiss Re Capital Markets Corporation: 55 East 52/nd/ Street New York, NY 10055 Attention: Treasurer Telephone No.: (212) 317-5400 Fax No.: (212) 317-5450 17 with a copy to: Swiss Re Capital Markets Corporation 55 East 52/nd/ Street New York, NY 10055 Attention: General Counsel Telephone No.: (212) 317-5400 Fax No.: (212) 317-5450 If to Swiss Re Financial Products Corporation: 55 East 52/nd/ Street New York, NY 10055 Attention: Treasurer Telephone No.: (212) 317-5400 Fax No.: (212) 317-5450 with a copy to: Swiss Re Financial Products Corporation 55 East 52/nd/ Street New York, NY 10055 Attention: General Counsel Telephone No.: (212) 317-5400 Fax No.: (212) 317-5450 If to XXXXX: XXXXXXXXXXXX XXXXXXXXXXXX XXXXXXXXXXXX XXXXXXXXXXXX XXXXXXXXXXXX XXXXXXXXXXXX 11. Dispute Resolution. Any disputes arising under or in connection with ------------------ this Agreement shall be resolved by a court of law having the appropriate jurisdiction over the parties and subject matter, subject to Section 14(b) of this Agreement. 12. Transfers of Obligations or Preferred Shares. No Provider shall sell, -------------------------------------------- assign or otherwise transfer its rights or obligations under this Agreement (including, without limitation, the Commitments) (i) except pursuant to an exemption from the registration requirements of the 1933 Act, and (ii) to an investor having a rating at the time of such sale, assignment or transfer less than AAA/Aaa by S&P and Moody's, respectively, and which has not been previously approved in writing by the Company. The Company acknowledges and agrees that the Providers may transfer interests in issued and outstanding Preferred Shares without the prior consent of the Company in whole or in part only to one or more affiliates of the Providers (it being further understood that the Providers may not transfer the Commitments to any of their affiliates). The 18 Company agrees to provide reasonable assistance to any Provider or SRCMC in connection with the documentation of any permitted transfer of the Preferred Shares or Commitments. 13. Indemnification for Broker's Fees. The Company agrees to indemnify, --------------------------------- defend and hold harmless SRCMC from any and all claims, costs and expenses (including reasonable attorney's fees and disbursements) in respect of the assertions of any broker, finder, agent or other person seeking compensation for the subscription for the Commitments or the underlying Preferred Shares or for other services rendered in connection with such transactions. 14. Miscellaneous. ------------- (a) The representations, warranties and agreements of the Providers and of the Company set forth herein are continuing in nature and shall survive the acceptance of the subscription contained herein and the issuances with respect to the Preferred Shares. (b) This Agreement shall be governed by and construed in accordance with the laws of the State of New York. The parties hereby submit to the exclusive jurisdiction of the federal and state courts located in New York County with respect to any dispute arising under this Agreement, the agreements and instruments entered into in connection herewith or the transactions contemplated hereby or thereby. THE PARTIES HEREBY WAIVE A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY ANY PARTY HERETO AGAINST ANY OTHER PARTY HERETO IN RESPECT OF ANY MATTER ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR THE COMMITMENTS. (c) The descriptive headings in this Agreement are for convenience of reference only and shall not be deemed to alter or affect the meaning or interpretation of any provision of this Agreement. (d) This Agreement contains the entire agreement of the parties with respect to the subject matter of this Agreement, and there are no representations, covenants or other agreements except as stated or referred to herein. This Agreement may be amended only by a writing executed by the party against whom such amendment is sought to be enforced. (e) This Agreement may be executed in one or more counterparts, all of which shall constitute one and the same instrument. (f) Except (i) as may be required by law (including the requirements for any filings made by the Company under the 1933 Act or 1934 Act, or pursuant to the order or ruling of any regulatory authority having jurisdiction over the Company or the Insurers), or (ii) as may be required by any rating agency in respect of its rating of the Company or any Insurer, the Company, SRFPC and SRCMC hereby agree not to disclose that XXXXX is a party to this Agreement or any of the agreements executed in connection herewith (including the disclosure of XXXXX's name or the name, if any, of its affiliates) or the nature or amount of its Commitments hereunder, except that XXXXX may be referred to in press releases as "a leading reinsurance company" and its ratings may be disclosed. In the event the disclosure of XXXXX's identity pursuant to clauses (i) or (ii) of the foregoing sentence is required, the Company, SRFPC and SRCMC agree to give advance notice to XXXXX of such disclosure. 19 (g) This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and assigns and legal representatives, and any reference to a specific party in this Agreement shall include such party's permitted successors or assigns. 20 If the foregoing is in accordance of our agreement, please sign and return a duplicate hereof, whereupon this Preferred Shares Subscription Agreement and your acceptance will represent a binding agreement between SRCMC, the Providers and the Company. SWISS RE FINANCIAL PRODUCTS CORPORATION, a Delaware corporation By: __________________________________ Name: Title: SWISS RE CAPITAL MARKETS CORPORATION, a Delaware corporation By: __________________________________ Name: Title: XXXXX, a Delaware corporation By: __________________________________ Name: Title: ACCEPTED this 27/th/ day of December, 2001 By MBIA, INC., a Connecticut corporation By: __________________________________ Name: Title: 21 Schedule A Commitments Amount Percentage ------ ---------- Swiss Re Financial Products Corporation 50,000 shares 66 2/3% XXXXX 25,000 shares 33 1/3% A-1 EXHIBIT 1 Certificate of Amendment 1A-1 EXHIBIT 3(b) [FORM OF NOTICE OF ISSUANCE] NOTICE OF ISSUANCE [Provider] [Address] Attention: Dear Sir/Madam: Reference is hereby made to the Preferred Shares Subscription Agreement (the "Subscription Agreement") dated December 27, 2001 by and among MBIA, Inc., a Connecticut corporation (the "Company"), SRCMC and the Providers named therein. This Notice represents the Company's request that you purchase shares of the Company's Series A Preferred Stock, par value $1.00 per share (the "Preferred Shares"), having a liquidation preference of $2,000 per share (the "Liquidation Preference"). Capitalized terms used but not defined herein shall have the meanings given to such terms in the Subscription Agreement. The aggregate principal amount of the Notes subject to this Notice of Issuance is: $_________ The date of issuance with respect to such Preferred Shares will be: ____________, 20___ The number of Preferred Shares to be acquired by [Provider] in connection with such issuance has been computed pursuant to the terms of the Notes based on the figures set forth below: Aggregate principal amount of Notes: Liquidation Preference: Number of Preferred Shares: $________________ / $2,000 = ________________ Cash payment for fractional shares: $______________. 3B-1 [In the event that you elect to pay cash for the Preferred Shares in lieu of tendering the Notes as payment thereof, the purchase price for the Preferred Shares shall be remitted in immediately available funds to the account of the Company pursuant to the following wire transfer instructions:] MBIA, INC. By: _____________________________ Name:________________________ Title:_______________________ Dated: ____________, 20__ 9A2-2 EXHIBIT 4 [FORM OF OFFICER'S CERTIFICATE] OFFICER'S CERTIFICATE The undersigned officer of MBIA, Inc., a Connecticut corporation (the "Company"), does hereby deliver this certificate on behalf of the Company pursuant to Section 9(b)(3) of the Preferred Shares Subscription Agreement dated December 27, 2001 (the "Agreement") between the Company, Swiss Re Financial Products Corporation, Swiss Re Capital Markets Corporation and XXXXX, and hereby certifies that: (A) The Company has complied with all agreements and satisfied all conditions on its part to be performed or satisfied under Section 9(b) of the Agreement on the date hereof; and (B) The representations and warranties of the Company required to be made on the date hereof are true and correct at and as of the date hereof. Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Agreement. Dated: _____________, 20_____ MBIA, Inc. _____________________________________ Name: Title: [Chief Financial Officer] [Treasurer] [Controller] 3B-1 EXHIBIT 9(a)(2) OPINION OF COUNSEL EFFECTIVE DATE (i) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Connecticut. (ii) The Company has corporate power and authority to own, lease and operate its properties and to conduct its business as currently being conducted and to enter into and perform its obligations under the Certificate of Amendment. (iii) The Company is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not result in a Material Adverse Effect. (iv) Each Insurer has been duly organized and is validly existing and in good standing under the laws of the jurisdiction of its organization, has all requisite power and authority to own, lease and operate its properties and conduct its business as currently being conducted and is duly qualified to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure to so qualify or be in good standing would not have a Material Adverse Effect; all of the issued and outstanding shares of capital stock or other equity interests, as applicable, of each Insurer have been duly authorized and are validly issued, fully paid and non-assessable and, except for qualifying shares, are owned by the Company, directly or through subsidiaries, free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity; and none of the outstanding shares of capital stock of any Insurer was issued in violation of preemptive or other similar rights of any securityholder of such Insurer. (v) Each Insurer has all requisite licenses, permits and authority that are necessary for the conduct of its insurance business, except where the failure to obtain such licenses, permits or authorities would not have a Material Adverse Effect (collectively, "Licenses"), such Licenses are in full force and effect, and no proceeding is pending or, to the best of my knowledge, threatened to suspend, revoke or limit any such License. (vi) There are (i) no outstanding subscriptions, warrants, options, calls or commitments of any character relating to or entitling any Person to purchase or otherwise acquire any stock of any Insurer and (ii) no obligations or securities convertible into or exchangeable for shares of any stock of any Insurer or any commitments of any character relating to or entitling any Person to purchase or otherwise acquire any such obligations or securities. (vii) The Preferred Shares Subscription Agreement has been duly authorized, executed and delivered by the Company and (assuming the due authorization, execution and delivery 9A3-1 thereof by the other parties thereto) constitutes a legal, valid and binding agreement of the Company, enforceable against the Company in accordance with its terms, except as enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting enforcement of creditors' rights generally and except as enforcement thereof is subject to general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law). (viii) The Preferred Shares, when issued and delivered by the Company pursuant to the Preferred Shares Subscription Agreement against payment of the consideration set forth therein, will be validly issued and fully paid and non-assessable; and no holder of the Preferred Shares is or will be subject to personal liability by reason of being such a holder. There are (i) no outstanding subscriptions, warrants, options, calls or commitments of any character relating to or entitling any Person to purchase or otherwise acquire Preferred Shares, (ii) no obligations or securities convertible into or exchangeable for Preferred Shares or any commitments of any character relating to or entitling any Person to purchase or otherwise acquire any such obligations or securities and (iii) no understandings or agreements with respect to the purchase or voting of any of Preferred Shares. (ix) The issuance of the Preferred Shares is not subject to preemptive or other similar rights of any securityholder of the Company. (x) Upon the subscription for the Commitments and subsequent issuance and delivery of the underlying Preferred Shares as provided in the Preferred Shares Subscription Agreement, it is not necessary in connection with the subscription for the Commitments or the issuance of the underlying Preferred Shares to register such Commitments or Preferred Shares under the 1933 Act. No authorization, approval or consent of any court or governmental authority or agency is necessary in connection with the valid issuance, sale and delivery of the Preferred Shares, except such as may be required under the Blue Sky laws or other securities or insurance securities laws of the various states, and any other requirements applicable to purchasers of Preferred Shares. (xi) To the best of my knowledge, there is not pending or threatened any action, suit, proceeding, inquiry or investigation, to which the Company or any Insurer is a party, or to which the property of the Company or any Insurer is subject, before or brought by any court or governmental agency or body, domestic or foreign, which may reasonably be expected to result, individually or in the aggregate, in a Material Adverse Effect, or which might reasonably be expected to materially and adversely affect the assets, properties or operations thereof, taken as a whole, or the consummation of the transactions contemplated in the Preferred Shares Subscription Agreement or the performance by the Company of its obligations thereunder. (xii) Neither the Company nor any Insurer is, or with the giving of notice or passage of time or both, would be, in breach or violation of any of the terms or provisions of or in default under (i) any statute, rule or regulation applicable to the Company or any Insurer, (ii) any indenture, contract, lease, mortgage, deed of trust, note or other agreement or instrument for over $25,000,000 to which the Company or any Insurer is a party or by which it may be bound, (iii) its certificate of incorporation, by-laws or other organizational documents, and (iv) any 9A2-2 order, decree or judgment of any court or governmental agency or body having jurisdiction over the Company or any Insurer except, with respect to breaches, violations or defaults contemplated by clauses (i), (ii), (iii) or (iv), for such breaches, violations or defaults that could not, individually or in the aggregate, be reasonably expected to result in a Material Adverse Effect. The opinions stated in clauses (i), (ii) and (iv) are stated to the best of my knowledge. The performance of the Preferred Shares Subscription Agreement by the Company and the consummation of the transactions therein contemplated will not, with the giving of notice or passage of time or both, result in a breach or violation of any of the terms or provisions of or constitute a default under or accelerate obligations under (w) any material statute, rule or regulation applicable to the Company or any Insurer, (x) any indenture, contract, mortgage, lease, deed of trust, note or other agreement or instrument for over $25,000,000 to which the Company or any Insurer is a party or by which it is bound, (y) the Company's or any Insurer's certificate of incorporation or by-laws or (z) any order, decree or judgment of any court or governmental agency or body having jurisdiction over the Company or any Insurer or any of their properties. (xiii) The Company is not an "investment company" or an entity "controlled" by an "investment company," as such terms are defined in the 1940 Act. 1. 9A2-3 EXHIBIT 9(a)(3) [FORM OF OFFICER'S CERTIFICATE] OFFICER'S CERTIFICATE The undersigned officer of MBIA, Inc., a Connecticut corporation (the "Company"), does hereby deliver this certificate on behalf of the Company pursuant to Section 9(a)(3) of the Preferred Shares Subscription Agreement dated December 27, 2001 (the "Agreement") between the Company, Swiss Re Financial Products Corporation, Swiss Re Capital Markets Corporation and XXXXX, and hereby certifies that: (A) The Company has complied with all agreements and satisfied all conditions on its part to be performed or satisfied at or before the date hereof; and (B) The representations and warranties of the Company contained in Section 5 of the Agreement are true, complete, and correct at and as of the date hereof. Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Agreement. Dated: December 27, 2001 MBIA, Inc. ------------------------------ Name: Title: [Chief Financial Officer] [Treasurer] [Controller] 9A3-1 EXHIBIT 9(b)(1) OPINION OF COUNSEL ISSUANCE DATE (i) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Connecticut. (ii) The Company has corporate power and authority to own, lease and operate its properties and to perform its obligations under the Certificate of Amendment. (iii) The Preferred Shares have been validly issued and delivered by the Company pursuant to the Preferred Shares Subscription Agreement, are fully paid and non-assessable, and no holder of the Preferred Shares is or will be subject to personal liability by reason of being such a holder. There are (i) no outstanding subscriptions, warrants, options, calls or commitments of any character relating to or entitling any Person to purchase or otherwise acquire Preferred Shares, (ii) no obligations or securities convertible into or exchangeable for Preferred Shares or any commitments of any character relating to or entitling any Person to purchase or otherwise acquire any such obligations or securities and (iii) no understandings or agreements with respect to the purchase or voting of any of Preferred Shares. (iv) The issuance of the Preferred Shares is not subject to preemptive or other similar rights of any securityholder of the Company. (v) It is not necessary in connection with the issuance of the Preferred Shares to register such Preferred Shares under the 1933 Act. No authorization, approval or consent of any court or governmental authority or agency is necessary in connection with the valid issuance, sale and delivery of the Preferred Shares, except such as may be required under the Blue Sky laws or other securities or insurance securities laws of the various states, and any other requirements applicable to purchasers of Preferred Shares. (vi) No Event of Default under the Note Subscription Agreement or under any Notes has occurred and is continuing. 9B-1 EX-10.04 5 dex1004.txt FIRST RESTATED CREDIT AGREEMENT Exhibit 10.04 FOURTH AMENDMENT to SECOND AMENDED AND RESTATED CREDIT AGREEMENT among MBIA INSURANCE CORPORATION (MBIA) THE BANKS SIGNATORY HERETO RABOBANK NEDERLAND New York Branch as Administrative Agent and DEUTSCHE BANK AG New York Branch as Documentation Agent _____________ Dated as of October 31, 2001 _____________ FOURTH AMENDMENT THIS FOURTH AMENDMENT, dated as of October 31, 2001 (this "Amendment"), --------- between MBIA INSURANCE CORPORATION, a New York stock insurance corporation ("MBIA"), the financial institutions which have executed this Amendment below as ---- Banks (as defined below), COOPERATIEVE CENTRALE RAIFFEISEN-BOERENLEENBANK B.A. "RABOBANK NEDERLAND", New York Branch ("Rabobank"), as Administrative Agent for -------- the Banks (in such capacity, the "Administrative Agent") and individually as a -------------------- Bank, and DEUTSCHE BANK AG, New York Branch, as Documentation Agent for the Banks (in such capacity, together with the Administrative Agent, the "Agents") ------ and individually as a Bank; WHEREAS, the parties hereto are parties to the Second Amended and Restated Credit Agreement, dated as of October 1, 1997, as amended by the First Amendment thereto dated as of October 1, 1998, the Second Amendment thereto dated as of October 29, 1999, the Third Amendment thereto, dated as of October 27, 2000, and as further modified by certain Assignment and Assumption Agreements (as defined therein) (as so amended and modified, the "Credit ------ Agreement"); and - --------- WHEREAS, the parties hereto desire, upon the terms and subject to the conditions hereinafter set forth, to extend the Expiration Date (as defined below) and to otherwise modify the Credit Agreement in certain respects; NOW, THEREFORE, in consideration of the mutual promises contained herein and other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound hereby, agree as follows: ARTICLE 1. MODIFICATIONS TO LOAN DOCUMENTS Section 1.1. Defined Terms. Except as otherwise specified herein, terms ------------- used in this Amendment and defined in Exhibit A of the Credit Agreement shall have the meanings provided in such Exhibit A. Section 1.2. Amendment. The definition of the term "Expiration Date" --------- contained in Exhibit A to the Credit Agreement is hereby amended and restated to read in its entirety as follows: "`Expiration Date' shall mean the date on which the --------------- right to obtain Loans terminates, initially October 31, 2008, as such date may be extended pursuant to Section 3.3." Section 1.3. Commitments. The aggregate Commitments of the Banks are ----------- hereby amended so that, from and after October 31, 2001 until the termination or further modification thereof as provided in the Credit Agreement, such Commitments shall be as set forth on Schedule 1 to this Amendment. Section 1.4. Additional Bank. By its execution and delivery of this --------------- Amendment, Barclays Bank PLC, New York Branch (the "Additional Bank"), hereby --------------- agrees to be bound, and shall have the rights under the Credit Agreement and the Loan Documents, as a Bank having a Commitment equal to the amount specified in Schedule 1 to this Amendment, and the Agents and MBIA each hereby consent to the Additional Bank becoming a Bank. The Additional Bank acknowledges and agrees that the Agents (i) make no representation or warranty and assume no responsibility with respect to any statements, warranties and representations made in or in connection with the Credit Agreement or any of the Loan Documents or the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Credit Agreement or any of the Loan Documents or any other instrument or document furnished pursuant thereto; and (ii) make no representation or warranty and assumes no responsibility with respect to the financial condition of or the performance or observance by MBIA of any of their obligations under the Credit Agreement, any of the Loan Documents or any other instrument or document furnished pursuant thereto. The Additional Bank further (i) confirms that it has received a copy of the Credit Agreement, together with copies of the financial statements and SEC Reports referred to therein, and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into the Credit Agreement; (ii) agrees that it will, independently and without reliance upon the Agents and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Agreement; (iii) agrees to the provisions of Article 8 of the Credit Agreement and appoints and authorizes the Agents on its behalf to exercise such powers under the Credit Agreement and the other Loan Documents, as are delegated to the Agents by the terms thereof and hereof, together with such powers as are reasonably incidental thereto; and (iv) agrees that it will be bound by all of the terms and conditions of the Credit Agreement and the other Loan Documents and will perform in accordance with their terms all of the obligations which by the terms of the Credit Agreement and the other Loan Documents are required to be performed by it as a Bank. Section 1.5. Terminating Bank. The parties acknowledge that pursuant to ---------------- a separate instrument, Lloyds TSB Bank PLC (the "Terminating Bank"), MBIA and ---------------- the Agents have agreed that concurrently with the effectiveness of this Amendment, the Terminating Bank's entire Commitment and role as a Bank under the Credit Agreement is terminated and that the Terminating Bank shall have no further liabilities, obligations or rights under the Credit Agreement, except for those liabilities, obligations and rights which survive the termination of the Commitment of a Bank under the Credit Agreement. ARTICLE 2. CONDITIONS PRECEDENT -------------------- Section 2.1. Conditions Precedent to Amendment Effective Date. The ------------------------------------------------ provisions of Article 1 hereof shall become effective as of October 31, 2001 when this Amendment shall have been executed and delivered by MBIA, each Agent and consented to by each Bank and when the following conditions have been fulfilled to the reasonable satisfaction of the Agents. If such conditions shall not have been satisfied on or prior to November 16, 2001, the provisions of Article 1 shall not be given effect unless otherwise consented to by the Agents and the Majority Banks, but otherwise this Amendment shall remain in full force and effect. 2 (a) There shall exist no Default or Event of Default, and all representations and warranties made by MBIA herein or in any of the Loan Documents shall be true and correct with the same effect as though such representations and warranties had been made at and as of such time. (b) The Administrative Agent shall have received each of the following, in form and substance satisfactory to the Administrative Agent: (i) a certificate of any two of the President, Vice Chairman, Managing Director, any Vice President or the Treasurer of MBIA to the effect that the conditions set forth in Section 2.1(a) hereof have been satisfied and that no governmental filings, consents and approvals are necessary to be secured by MBIA in order to permit the borrowing under the Credit Agreement, as modified hereby, the grant of the Lien under the Security Agreement and the execution, delivery and performance in accordance with their respective terms of this Amendment and the other Loan Documents and the consummation of the transactions contemplated hereby and thereby, each of which shall be in full force and effect; (ii) copies of the duly adopted resolutions of the Board of Directors of MBIA, or an authorized committee thereof, authorizing the execution, delivery and performance in accordance with their respective terms of this Amendment and the other documents to be executed and delivered by MBIA described herein (collectively, the "Amendment --------- Documents"), accompanied by a certificate of the Secretary or an --------- Assistant Secretary of MBIA stating as to (A) the effect that such resolutions are in full force and effect, (B) the incumbency and signatures of the officers signing the Amendment Documents on behalf of MBIA, and (C) the effect that, from and after October 29, 1999, there has been no amendment, modification or revocation of the articles of incorporation or by-laws of MBIA; (iii) opinions of the General Counsel of MBIA and Kutak Rock, MBIA's counsel, each dated October 31, 2001, which are substantially to the effect set forth in the forms attached hereto as, respectively, Exhibits A and B; and (iv) such other documents, instruments, approvals (and, if reasonably requested by the Administrative Agent or the Majority Banks, duplicates or executed copies thereof certified by an appropriate governmental official or an authorized officer of MBIA) or opinions as the Administrative Agent or the Majority Banks may reasonably request. (c) The Administrative Agent shall have received reasonably satisfactory evidence that long-term obligations insured by MBIA are publicly assigned a rating of Aaa by Moody's and AAA by S&P by reason of such insurance. (d) Each Bank which is becoming a party to the Credit Agreement or which is increasing its Commitment shall have received a Note or an additional Note dated as of October 31, 2001, in a principal amount equal to the amount of its Commitment or of the increase in its Commitment, as applicable. 3 (e) The currently effective Fronting Bank Supplements and related Fronting Bank Notes and fee letters shall have been modified in a manner satisfactory to MBIA, the Administrative Agent and each Fronting Bank affected by such modifications. (f) All corporate and legal proceedings and all instruments in connection with the transactions contemplated by this Amendment and the Loan Documents shall be satisfactory in form and substance to the Administrative Agent and its counsel. Section 2.2. Certificate as to Effective Date. A certificate of the -------------------------------- Agents delivered to MBIA stating that the provisions of Article 1 shall have become effective shall be conclusive evidence thereof and shall be binding on MBIA, each Agent and each Bank. In delivering such certificate, and without limiting the general application of Section 8.8 or other provisions of Article 8 of the Credit Agreement to the actions of the Agents hereunder, the Agents shall be entitled to rely conclusively on the certificate of officers of MBIA delivered pursuant to Section 2.1(b)(i) as to the satisfaction of the conditions set forth in Section 2.1(a). ARTICLE 3. REPRESENTATIONS AND WARRANTIES ------------------------------ In order to induce the Agents and the Banks to enter into this Amendment and proceed with the transaction contemplated hereby, MBIA makes the following representations and warranties to the Agents and the Banks, which shall survive the execution and delivery of this Amendment and the making of any Loans: Section 3.1. Due Authorization, Etc. The execution, delivery and ---------------------- performance by MBIA of the Amendment Documents and the Loan Documents as amended thereby are within its corporate powers, have been duly authorized by all necessary corporate action and do not and will not (i) violate any provision of any law, rule, regulation (including, without limitation, the New York Insurance Law, the Investment Company Act of 1940, as amended, or Regulations T, U or X of the Board of Governors of the Federal Reserve System), order, writ, judgment, injunction, decree, determination or award presently in effect having applicability to MBIA or of the corporate charter or by-laws of MBIA, (ii) result in a breach of or constitute a default under any indenture or loan or credit agreement or any other agreement, lease or instrument to which MBIA is a party or by which it or its properties may be bound or affected, or (iii) result in, or require, the creation or imposition of any Lien upon or with respect to any of the properties now owned or hereafter acquired by MBIA (other than as contemplated by the Loan Documents), other than, in the case of clauses (ii) and (iii), breaches, defaults or Liens which could not materially and adversely affect the business, assets, operations or financial condition of MBIA or the ability of MBIA to perform its obligations under any Loan Document. Section 3.2. Approvals. No consent, approval or other action by, or any --------- notice to or filing with any court or administrative or governmental body is or will be necessary for the valid execution, delivery or performance by MBIA of the Amendment Documents or the Loan Documents as amended thereby. Section 3.3. Enforceability. Each Amendment Document and each Loan -------------- Document as amended thereby constitutes a legal, valid and binding obligation of MBIA, enforceable against 4 MBIA in accordance with their respective terms, except as such enforceability may be limited by bankruptcy, insolvency, moratorium or other similar laws affecting the enforcement of creditors' rights generally and the availability of equitable remedies, whether such matter is heard in a court of law or a court of equity. Section 3.4. Financial Statements, etc. ------------------------- (a) MBIA has heretofore furnished to the Agents (i) the audited consolidated and unaudited consolidating balance sheets of MBIA Inc. and its subsidiaries at December 31, 2000, the related audited consolidated statements of income, changes in stockholders' equity and financial position or cash flows, as the case may be, and unaudited consolidating statements of income for the year ended December 31, 2000, and (ii) the unaudited consolidated and consolidating balance sheets of MBIA Inc. and its subsidiaries as of March 31 and June 30, 2001, and the related consolidated statements of income, changes in stockholders' equity and cash flows for the three months ended March 31, 2001, the six months ended June 30, 2001. Such financial statements were prepared in accordance with generally accepted accounting principles consistently applied and present fairly the consolidated financial position and consolidated results of operations and cash flows of MBIA Inc. and its subsidiaries and the financial position and results of operations and cash flows of MBIA at the dates and for the periods indicated therein. There has been no material adverse change in the consolidated financial position or consolidated results of operations or cash flows of MBIA Inc. and its subsidiaries taken as a whole or of MBIA since June 30, 2001. (b) MBIA has heretofore furnished to the Agents its annual statements and its financial statements as filed with the Department for the year ended December 31, 2000 and its quarterly statements and financial statements as filed with the Department for the periods ended March 31, 2001 and June 30, 2001. Such annual and quarterly statements and financial statements were prepared in accordance with the statutory accounting principles set forth in the New York Insurance Law, all of the assets described therein were the absolute property of MBIA at the dates set forth therein, free and clear of any liens or claims thereon, except as therein stated, and each such Annual Statement is a full and true statement of all the assets and liabilities and of the condition and affairs of MBIA as of such dates and of its income and deductions therefrom for the year or quarter ended on such dates. (c) MBIA has heretofore furnished to the Agents a copy of the annual report on Form 10-K of MBIA Inc. for the fiscal year ended December 31, 2000, its quarterly reports on Form 10-Q of MBIA Inc. for each of the quarters ended March 31, 2001 and June 30, 2001 and each current report on Form 8-K filed by MBIA Inc. on or after January 1, 2001, each as filed with the Securities and Exchange Commission. Such annual, quarterly and current reports were prepared in accordance with the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. Section 3.5. Covered Portfolio. Substantially all of the Insured ----------------- Obligations in the Covered Portfolio are insured by MBIA under Insurance Contracts in the form or forms heretofore supplied to the Agents in accordance with MBIA's underwriting criteria as heretofore disclosed to the Agents, and in MBIA's reasonable judgment such Insured Obligations represent an overall risk of loss (based on all factors including without limitation investment quality and 5 geographical and market diversification) which is not materially greater than the risk of loss represented by all of MBIA's Insured Obligations as of the date hereof. Section 3.6. Confirmation of Representations and Warranties. MBIA ---------------------------------------------- hereby confirms that its representations and warranties set forth in the Credit Agreement are true and correct as of the date hereof. Section 3.7. Disclosure. There is no fact known to MBIA which ---------- materially adversely affects the business, assets, operations or financial condition of MBIA or the ability of MBIA to perform its obligations under any Amendment Document or any Loan Document as amended thereby which has not been set forth in this Amendment, in the financial statements or reports required to be delivered pursuant to Section 3.4 hereof. ARTICLE 4. MISCELLANEOUS ------------- Section 4.1. Credit Agreement. Except as expressly modified as ---------------- contemplated hereby, the Credit Agreement and the other Loan Documents are hereby confirmed to be in full force and effect in accordance with their respective terms. This Amendment is intended by the parties to constitute an amendment and modification to, and otherwise to constitute a continuation of, the Credit Agreement and the Loan Documents, and is not intended by any party and shall not be construed to constitute a novation thereof or of any Debt of MBIA hereunder. Section 4.2. Survival. All covenants, agreements, representations and -------- warranties made herein or in any Loan Document or in any certificate, document or instrument delivered pursuant hereto or thereto shall survive the effective date hereof, the making of any Loan and the occurrence of the Expiration Date and shall continue in full force and effect so long as principal of or interest on any Loan, Note or Fronting Bank Note remains outstanding or unpaid, any other amount payable by MBIA under the Credit Agreement as amended hereby, any Note, Fronting Bank Note or any other Loan Document remains unpaid or any other obligation of MBIA to perform any other act hereunder or under the Credit Agreement as amended hereby, any Note, Fronting Bank Note or any other Loan Document remains unsatisfied or the Banks have any obligation to make a Loan or any other advance of moneys to MBIA under the Credit Agreement as amended hereby. Section 4.3. Severability. Any provision of this Amendment which is ------------ prohibited, unenforceable or not authorized in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition, unenforceability or nonauthorization without invalidating the remaining provisions hereof or affecting the validity, enforceability or legality of such provision in any other jurisdiction. Section 4.4. Successors and Assigns. This Amendment is a continuing ---------------------- obligation and binds, and the benefits hereof shall inure to, the parties hereto and their respective successors and assigns; provided that MBIA may not transfer or assign any or all of its rights or obligations hereunder except as permitted by Section 10.8 of the Credit Agreement. 6 Section 4.5. Amendments. No provision of this Amendment shall be ---------- waived, amended or supplemented except as provided in Section 10.12 of the Credit Agreement. Section 4.6. Governing Law. THIS AMENDMENT SHALL BE GOVERNED BY, AND ------------- CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. Section 4.7. Headings. Section headings in this Amendment are included -------- herein for convenience or reference only and shall not constitute a part of this Amendment for any other purpose. Section 4.8. Counterparts. This Amendment may be executed in several ------------ counterparts, each of which shall be regarded as the original and all of which shall constitute one and the same Amendment. 7 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first above written. MBIA INSURANCE CORPORATION By _____________________________ Name: Title: S-1 COOPERATIEVE CENTRALE RAIFFEISEN- BOERENLEENBANK B.A. "RABOBANK NEDERLAND", New York Branch, as Administrative Agent and as a Bank By _____________________________ Name: Title: By _____________________________ Name: Title: S-2 DEUTSCHE BANK AG, New York Branch, as Documentation Agent and as a Bank By _____________________________ Name: Title: By _____________________________ Name: Title: S-3 BANKS: ------ LANDESBANK BADEN WURTTEMBERG, NEW YORK BRANCH, as a Bank By: _______________________________ Name: Title: By: _______________________________ Name: Title: S-4 CREDIT SUISSE FIRST BOSTON, NEW YORK BRANCH, as a Bank By: ___________________________ Name: Title: By: ___________________________ Name: Title: S-5 BANK OF AMERICA, NA, as a Bank By: ___________________________ Name: Title: S-6 BAYERISCHE LANDESBANK GIROZENTRALE, NEW YORK BRANCH, as a Bank By:____________________________ Name: Title: By:____________________________ Name: Title: S-7 LANDESBANK HESSEN-THURINGEN GIROZENTRALE, NEW YORK BRANCH, as a Bank By: ___________________________ Name: Title: By: ___________________________ Name: Title: S-8 WESTDEUTSCHE LANDESBANK GIROZENTRALE, NEW YORK BRANCH, as a Bank By: ______________________________ Name: Title: By: ______________________________ Name: Title: S-9 BAYERISCHE HYPO- UND VEREINSBANK AG, NEW YORK BRANCH, as a Bank By: ______________________________ Name: Title: By: ______________________________ Name: Title: S-10 THE BANK OF NEW YORK, as a Bank By: ______________________________ Name: Title: S-11 DGZ.ODEKABANK DEUTSCHE KOMMUNALBANK, as a Bank By: ______________________________ Name: Title: By: ______________________________ Name: Title: S-12 BARCLAYS BANK PLC, NEW YORK BRANCH, as a Bank By:________________________________ Name: Title: By:________________________________ Name: Title: S-13 COMMONWEALTH BANK OF AUSTRALIA, NEW YORK BRANCH, as a Bank By:________________________________ Name: Title: S-14 FLEET NATIONAL BANK, as a Bank By:________________________________ Name: Title: S-15 THE BANK OF NOVA SCOTIA, as a Bank By:________________________________ Name: Title: S-16 KBC BANK, N.V., as a Bank By:________________________________ Name: Title: By:________________________________ Name: Title: S-17 NORDDEUTSCHE LANDESBANK GIROZENTRALE, NEW YORK BRANCH, as a Bank By:____________________________ Name: Title: By:____________________________ Name: Title: S-18 BANCO SANTANDER CENTRAL HISPANO S.A., NEW YORK BRANCH, as a Bank By:________________________________ Name: Title: By:________________________________ Name: Title: S-19 THE CHASE MANHATTAN BANK, as a Bank By:_________________________ Name: Title: S-20 DEXIA CREDIT LOCAL, NEW YORK AGENCY, as a Bank By:________________________________ Name: Title: S-21 SCHEDULE 1 TO FOURTH AMENDMENT BANKS, ADDRESSES AND COMMITMENTS --------------------------------
Name and Notice Address of Bank Commitment - ------------------------------- ---------- - -------------------------------------------------------------------------------------------------------------- Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A. $ 150,000,000 "Rabobank Nederland", New York Branch 245 Park Avenue, 37/th/ Floor New York, NY 10167 Attn: Angela R. Reilly - -------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------- Landesbank Baden Wurttemberg, $ 100,000,000 New York Branch 535 Madison Avenue New York, NY 10022 Attn: Robert O'Brien - -------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------- Credit Suisse First Boston, $ 80,000,000 New York Branch Eleven Madison Avenue New York, NY 10010-3629 Attn: Jay Chall - -------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------- Deutsche Bank AG, New York Branch $ 70,000,000 Deutsche Bank Securities Inc. 31 West 52/nd/ Street New York, NY 10019 Attn: Clinton Johnson - -------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------- Bank of America, N.A. $ 53,750,000 901 Main Street, 66/th/ Floor Dallas, Texas 75202 Attn: Mehul Mehta - -------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------- Bayerische Landesbank Girozentrale, $ 50,000,000 New York Branch 560 Lexington Avenue, 17/th/ Floor New York, NY 10022 Attn: Robert Albano - -------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------
Name and Notice Address of Bank Commitment - ------------------------------- ---------- - -------------------------------------------------------------------------------------------------------------- Landesbank Hessen-Thuringen Girozentrale, $ 50,000,000 New York Branch 420 Fifth Avenue, 24/th/ Floor New York, NY 10018 Attn: John Sarno - -------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------- Westdeutsche Landesbank Girozentrale $ 50,000,000 New York Branch 1211 Avenue of the Americas New York, NY 10036 Attn: Lillian Tung Lum, VP - -------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------- Bayerische Hypo- und Vereinsbank AG, $ 46,491,229 New York Branch 150 East 42/nd/ Street New York, NY 10017-4679 Attn: Michael Davis - -------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------- The Bank of New York $ 40,000,000 Insurance Division 1 Wall Street, 17/th/ Floor New York, NY 10286 Attn: Louis DiFranco - -------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------- DGZ DekaBank Deutsche Kommunalbank $ 35,000,000 International Finance Department Taunusanlage 10 D-60329 Frankfurt am Main GERMANY Attn: Stephan Wagner - -------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------- Barclays Bank PLC, New York Branch $25,000,000 222 Broadway New York, NY 10038 (212) 412-7672 Attn: Alison McGuigan - -------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------- Commonwealth Bank of Australia, $ 25,000,000 New York Branch 599 Lexington Avenue New York, NY 10022 Attn: Randy Kase - -------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------- --------------------------------------
(ii)
Name and Notice Address of Bank Commitment - ------------------------------- ---------- - -------------------------------------------------------------------------------------------------------------- Fleet National Bank $ 25,000,000 777 Main Street, CT-MO 0250 Hartford, CT 06115 Attn: David Albanesi - -------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------- The Bank of Nova Scotia $ 23,245,614 One Liberty Plaza New York, NY 10006 Attn: David Schwartzbard - -------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------- KBC Bank, N.V. $ 20,000,000 125 West 55/th/ Street New York, NY 10019 Attn: Patrick Owens - -------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------- Norddeutsche Landesbank Girozentrale, $ 18,596,491 New York Branch 1114 Avenue of the Americas, 37/th/ Floor New York, NY 10036 Attn: Georg Peters - -------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------- Banco Santander Central Hispano S.A., $ 18,596,491 New York Branch 45 East 53/rd/ Street New York, NY 10022 Attn: Victoria Moreno - -------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------- The Chase Manhattan Bank $ 10,021,929 270 Park Avenue, 20/th/ Floor New York, NY 10017 Attn: Marybeth Mullen - -------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------- Dexia Credit Local, New York Agency $ 9,298,246 445 Park Avenue New York, NY 10022 Attn: James Beck - -------------------------------------------------------------------------------------------------------------- TOTAL $900,000,000 - --------------------------------------------------------------------------------------------------------------
(iii) EXHIBIT A TO FOURTH AMENDMENT Form of Opinion of General Counsel of MBIA ------------------------------------------ October 31, 2001 Each of the Banks which are parties to the Credit Agreement referred to herein c/o Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A. ("Rabobank Nederland"), New York Branch as Administrative Agent 245 Park Avenue New York, New York 10167-0062 Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A. ("Rabobank Nederland"), New York Branch, as Administrative Agent 245 Park Avenue New York, New York 10167-0062 Deutsche Bank AG, New York Branch, as Documentation Agent 31 West 52nd Street New York, NY 10019 Re: Fourth Amendment, dated as of October 31, 2001, to Second Amended and Restated Credit Agreement dated as of October 1, 1997, with MBIA Insurance Corporation Ladies and Gentlemen: I am General Counsel of MBIA Insurance Corporation, a New York stock insurance corporation ("MBIA"). This opinion is being given in connection with Fourth Amendment, dated as of October 31, 2001 (the "Amendment"), to the Second Amended and Restated Credit Agreement dated as of October 1, 1997, as heretofore amended (as amended by the Amendment, the "Credit Agreement") among MBIA, Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A. (Rabobank Nederland), New York Branch, as a Bank and as Administrative Agent, Deutsche Bank AG, New York Branch, as a Bank and as Documentation Agent, and the other Banks signatory thereto. All capitalized terms used herein and not otherwise defined shall have the respective meanings assigned thereto in the Credit Agreement. As General Counsel to MBIA, I am familiar with its Restated Charter and its By-Laws, as amended to date, and I have responsibility for supervision of MBIA's insurance regulatory compliance. I have examined such certificates of public officials, such certificates of officers of A-1 MBIA and copies certified to my satisfaction of such corporate documents and records of MBIA and of such other papers as I have deemed relevant and necessary for the opinions set forth below. In all such examinations, I have assumed the genuineness of all signatures, the authority to sign and the authenticity of all documents submitted to me as originals. I have also assumed the conformity with the originals of all documents submitted to me as copies. I have relied upon certificates of public officials and of officers of MBIA with respect to the accuracy of factual matters contained therein which were not independently established. Based upon the foregoing, it is my opinion that: 1. MBIA is a stock insurance corporation duly incorporated and validly existing in good standing under the laws of the State of New York and has the corporate power and all requisite licenses and franchises required to carry on its insurance and other business, as now being conducted in the State of New York and in each other jurisdiction where the nature of the business transacted by it makes such qualification necessary, except any jurisdiction other than the State of New York where failure to so qualify would not have a material adverse effect on the business, assets, operations or financial condition of MBIA or the ability of MBIA to perform its obligations under the Amendment, the Credit Agreement and the additional Notes dated October 31, 2001 being issued to certain parties (the "Transaction Documents"). 2. The execution, delivery and performance of the Transaction Documents are within the corporate powers of MBIA, have been duly authorized by all necessary corporate action and do not (i) violate any provision of the Restated Charter of By-Laws of MBIA, (ii) violate any provision of law, rule, regulation (including without limitation, the New York Insurance Law, the Investment Company Act of 1940, as amended, or Regulations T, U or X of the Board of Governors of the Federal Reserve System), order, writ, judgment, injunction, decree, determination or award presently in effect having applicability to MBIA the violation of which would affect the validity or enforceability of any of the Transaction Documents or the ability of MBIA to perform its obligations under the Transaction Documents, (iii) result in a breach of or constitute a default under any indenture or loan or credit agreement or any other agreement, lease or instrument to which MBIA is a party or by which it or its properties may be bound or affected or (iv) result in, or require, the creation or imposition of any Lien upon or with respect to any of the properties now owned or hereafter acquired by MBIA (other than as contemplated by the Loan Documents), other than, in the case of clauses (iii) and (iv), breaches, defaults or Liens which could not materially and adversely affect the business, assets, operations or financial condition of MBIA or the ability of MBIA to perform its obligations under the Transaction Documents. 3. To the best of my knowledge, no consent, approval or other action by, or any notice to or filing with, any court or administrative or governmental body is required in connection with the execution, delivery or performance by MBIA of the Transaction Documents. 4. To the best of my knowledge, there is no action, suit, proceeding or investigation before or by any court, arbitrator or administrative or governmental body pending or threatened against MBIA, wherein an adverse decision, ruling or finding would materially and adversely affect (i) the business, assets, operations or financial condition of MBIA, (ii) the transactions contemplated by the Credit Agreement or (iii) the validity or enforceability of the Transaction Documents. A-2 5. To the best of my knowledge, MBIA is not in violation of any provision of any law, rule, regulation, order, writ, judgment, injunction, decree, determination or award presently in effect having applicability to MBIA or of the Restated Charter or By-Laws of MBIA, or in default under any material indenture, agreement, lease or instrument to which it is a party or by which it or any of its properties may be subject or bound, where such violation or default may result in a material adverse effect on the business, assets, operations or financial condition of MBIA or on its ability to perform its obligations under the Transaction Documents. 6. To the best of my knowledge, MBIA is in compliance with the New York Insurance Law and the regulations of the Department thereunder and with all other applicable federal state and other laws, rules and regulations relating to its insurance and other business, except with respect to failures, if any, to comply which singly or in the aggregate do not have a material adverse effect on the business, assets, operations or financial condition of MBIA or the ability of MBIA to perform its obligations under any of the Transaction Documents. 7. All of the issued and outstanding capital stock of MBIA is owned beneficially and of record by MBIA Inc., subject to no Liens. There are no options or similar rights of any Person to acquire any such capital stock or any other capital stock of MBIA. This opinion is being furnished to you and your participants in connection with the execution of the Credit Agreement, and it is not to be used, circulated, quoted or otherwise referred to for any purpose without my express written consent. Very truly yours, [General Counsel] A-3 EXHIBIT B TO FOURTH AMENDMENT Form of Opinion of Kutak Rock ----------------------------- October 31, 2001 Each of the Banks which are parties to the Credit Agreement referred to herein c/o Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A. ("Rabobank Nederland"), New York Branch as Administrative Agent 245 Park Avenue New York, New York 10167-0062 Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A. ("Rabobank Nederland"), New York Branch, as Administrative Agent 245 Park Avenue New York, New York 10167-0062 Deutsche Bank AG, New York Branch, as Documentation Agent 31 West 52nd Street New York, NY 10019 Re: Fourth Amendment, dated as of October 31, 2001, to Second Amended and Restated Credit Agreement dated as of October 1, 1997, with MBIA Insurance Corporation Ladies and Gentlemen: This opinion is furnished to you in connection with the Fourth Amendment, dated as of October 31, 2001 (the "Amendment"), to the Second Amended and Restated Credit Agreement dated as of October 1, 1997, as heretofore amended (as amended by the Amendment, the "Credit Agreement") among MBIA, Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A. (Rabobank Nederland), New York Branch, as a Bank and as Administrative Agent, Deutsche Bank AG, New York Branch, as a Bank and as Documentation Agent, and the other Banks signatory thereto. All capitalized terms used herein and not otherwise defined have the meanings assigned thereto in the Credit Agreement. As used herein, "Transaction Documents" means the Amendment, the Credit Agreement and the additional Notes dated October 31, 2001 being issued to certain parties. B-1 We have acted as special counsel to MBIA in connection with the execution and delivery of the Transaction Documents. In this connection, we have examined the Transaction Documents and such certificates of public officials, such certificates of officers of MBIA, and copies certified to our satisfaction of such corporate documents and records of MBIA, and such other documents as we have deemed necessary or appropriate for the opinions set forth below. We have relied upon such certificates of public officials and of officers of MBIA with respect to the accuracy of factual matters contained therein which were not independently established. We have also assumed (i) the due execution and delivery, pursuant to due authorization, of each document referred to in the immediately preceding paragraph by all parties other than MBIA to such document, (ii) the authenticity of all such documents submitted to us as originals, (iii) the genuineness of all signatures and (iv) the conformity to the originals of all such documents submitted to us as copies. Based upon the foregoing and upon such investigation as we have deemed necessary, we are of the opinion that: 1. MBIA is a stock insurance corporation, duly incorporated and validly existing under the laws of the State of New York, and is licensed and authorized to carry on its business under the laws of the State of New York. 2. Each Transaction Document has been duly executed and is a valid and binding obligation of MBIA enforceable in accordance with its terms, except that such enforceability may be limited by laws relating to bankruptcy, insolvency, reorganization, moratorium, receivership and other similar laws affecting creditors' rights generally and by general principles of equity and the enforceability as to rights to indemnity thereunder as may be subject to limitations of public policy. 3. The execution, delivery and performance of the Transaction Documents do not (a) violate any provision of the Restated Charter or Bylaws of MBIA or (b) violate any provision of law (including without limitation the New York Insurance Law or the Investment Company Act of 1940, as amended) or, to the best of our knowledge, any rule or regulation (including without limitation Regulation T, U or X of the Board of Governors of the Federal Reserve System) presently in effect having applicability to MBIA the violation of which would (i) affect the validity or enforceability of any Transaction Document or the ability of MBIA to perform its obligations thereunder, (ii) adversely affect the Banks or their rights under any Transaction Document or (iii) materially adversely affect the business, assets, operations or financial condition of MBIA. 4. To the best of our knowledge, no consent, approval or other action by or any notice to or filing with any court or administrative or governmental body is required in connection with the execution, delivery or performance by MBIA of the Transaction Documents. No consent, approval or other action by or any notice to or filing with the Department is required in connection with the execution, delivery or performance by MBIA of the Transaction Documents. 5. Except with respect to MBIA's obligations to pay the principal of and interest on the Loans, the obligations of MBIA under the Transaction Documents will rank, under the New B-2 York Insurance Law, at least pari passu in priority of payment with all other unsecured obligations of MBIA, including without limitation MBIA's obligation to pay claims under Insurance Contracts under the New York Insurance Law, subject, however, to statutory priorities granted to certain claims under Sections 7426 and 7435 of the New York Insurance Law. 6. The effectiveness of the Transaction Documents does not adversely affect the opinions set forth in paragraphs 6 and 7 of our opinion dated October 1, 1997, delivered in connection with the Second Amended and Restated Credit Agreement, dated as of such date, with respect to the Security Interest (as defined in such opinion) and the collateral assignment of Collateral referred to therein. No filings under the UCC are required to perfect or to continue the perfection of the Security Interest (except for the financing statements described in our October 1, 1997 opinion and subject to the matters described in the paragraph following paragraph 7 of such opinion) in favor of the Collateral Agent for the benefit of the Banks in all of MBIA's right, title and interest in and to the Collateral, to the extent that the Security Interest can be perfected by the filing of financing statements under the UCC. In rendering the opinions expressed herein, we express no opinion as to the laws of any jurisdiction other than the State of New York and the federal laws of the United States of America. This opinion is being furnished to you and your participants solely in connection with the execution of the Amendment, and it is not to be used, circulated, quoted or otherwise referred to for any purpose without our express written consent. Very truly yours, B-3 EX-10.14 6 dex1014.txt CREDIT AGREEMENT (364 AGREEMENT) Exhibit 10.14 FIRST AMENDMENT --------------- FIRST AMENDMENT (the "Amendment"), dated as of February 9, 2001, among MBIA INC. ("Parent"), a Connecticut corporation, MBIA INSURANCE CORPORATION ("Corp.")' a New York stock insurance corporation, one or more Designated Borrowers from time to time party thereto, the lenders from time to time party thereto (each a "Lender" and, collectively, the "Lenders"), BANK ONE, NA (f/k/a The First National Bank of Chicago), as Syndication Agent (the "Syndication Agent"), FLEET NATIONAL BANK, as Documentation Agent (the "Documentation Agent"), and DEUTSCHE BANK AG, NEW YORK BRANCH, as Administrative Agent (the "Administrative Agent"). Unless otherwise defined herein, capitalized terms used herein and defined in the Credit Agreement referred to below are used herein as so defined. W I T N E S E T H: - - - - - - - - - WHEREAS, Parent, Corp., the Designated Borrowers, the Lenders, the Documentation Agent, the Syndication Agent and the Administrative Agent, are party to a Credit Agreement, dated as of August 28, 1998 whereby the Lenders have agreed to make Loans to the Borrowers of up to $200,000,000, which amount was subsequently increased to $217,000,000 (as the same has been amended, modified or supplemented to, but not including, the date hereof, the "Credit Agreement"); WHEREAS, subject to the terms and conditions set forth below, the parties hereto wish to amend the Credit Agreement as provided herein; NOW, THEREFORE, it is agreed; A. Amendment --------- Section 7.07 of the Credit Agreement is hereby amended to read in its entirety as follows: "Leverage Ratio. Parent and Corp. will not permit the ratio of -------------- Consolidated Total Debt to Consolidated Total Capitalization at any time to exceed 0.2762:1.00." B. Miscellaneous Provisions ------------------------ 1. In order to induce the Lenders to enter into this Amendment, each of Parent and Corp. hereby represents and warrants that (i) the representations and warranties of each of Parent and Corp. contained in the Credit Agreement are true and correct in all material respects on and as of the Amendment Effective Date (as defined below) (except with respect to any representations and warranties limited by their terms to a specific date, which shall be true and correct in all material respects as of such date), and (ii) there exists no Default or Event of Default under the Credit Agreement on the Amendment Effective Date, in each case after giving effect to this Amendment. 2. This Amendment is limited as specified and shall not constitute an amendment, modification, acceptance or waiver of any other provision of the Credit Agreement or any other Credit Document. 3. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE STATE OF NEW YORK. 4. This Amendment shall become effective on the date (the "Amendment Effective Date") when the Borrowers and the Required Lenders shall have signed a counterpart hereof (whether the same or different counterparts) and shall have delivered (including by way of telecopier) the same to the Administrative Agent. 5. From and after the Amendment Effective Date, all references in the Credit Agreement and in the other Credit Documents shall be deemed to be referenced to the Credit Agreement as modified hereby. * * * 2 IN WITNESS WHEREOF, the undersigned have caused this Amendment to be duly executed and delivered as of the date first above written. MBIA INC. By:____________________________ Title: MBIA INSURANCE CORPORATION By:____________________________ Title: DEUTSCHE BANK AG, NEW YORK BRANCH, Individually and as Administrative Agent By:_________________________________ Title: BANK ONE, NA, Individually and as Syndication Agent By:______________________________ Title: FLEET NATIONAL BANK, Individually and as Documentation Agent By _____________________________________ Title: BANCA MONTE DEI PASCHI DI SIENA S.p.A. By: __________________________________ Title: BANK OF MONTREAL By: ____________________________________ Title: THE CHASE MANHATTAN BANK By: ____________________________________ Title: BANK OF AMERICA NATIONAL TRUST & SAVINGS ASSOCIATION By:_____________________________ Title: FORTIS (USA) FINANCE LLC By:_____________________________ Title: BANCO SANTANDER CENTRAL HISPANO S.p.A., New York Branch By: ___________________________ Title: COMMERZBANK AG, NEW YORK BRANCH By: ___________________________ Title: NATIONAL AUSTRALIA BANK LIMITED, NEW YORK BRANCH By: ____________________________ Title: NORDDEUTSCHE LANDESBANK GIROZENTRALE, NEW YORK BRANCH AND/OR CAYMAN ISLANDS BRANCH By: ___________________________ Title: SECOND AMENDMENT TO THE CREDIT AGREEMENT ---------------------------------------- SECOND AMENDMENT (the "Amendment"), dated as of July 31, 2001, among MBIA INC. ("Parent"), a Connecticut corporation, MBIA INSURANCE CORPORATION ("Corp.")' a New York stock insurance corporation, one or more Designated Borrowers from time to time party thereto, the lenders from time to time party thereto (each a "Lender" and, collectively, the "Lenders"), BANK ONE, NA (f/k/a The First National Bank of Chicago), as Syndication Agent (the "Syndication Agent"), FLEET NATIONAL BANK, as Documentation Agent (the "Documentation Agent"), and DEUTSCHE BANK AG, NEW YORK BRANCH, as Administrative Agent (the "Administrative Agent"). Unless otherwise defined herein, capitalized terms used herein and defined in the Credit Agreement referred to below are used herein as so defined. W I T N E S S E T H: - - - - - - - - - - WHEREAS, Parent, Corp., the Designated Borrowers, the Lenders, the Documentation Agent, the Syndication Agent and the Administrative Agent, are party to a Credit Agreement, dated as of August 28, 1998 whereby the Lenders have agreed to make Loans to the Borrowers of up to $200,000,000, which amount was subsequently increased to $217,000,000 (as the same has been amended, modified or supplemented to, but not including, the date hereof, the "Credit Agreement"); WHEREAS, subject to the terms and conditions set forth below, the parties hereto wish to amend the Credit Agreement as provided herein; NOW, THEREFORE, it is agreed; A. Amendments ---------- 1. Section 7.01(v) of the Credit Agreement is hereby amended by deleting the text "and in no event for a period exceeding 90 days in each case" appearing in the last line thereof. 2. Section 7.07 of the Credit Agreement is hereby amended to read in its entirety as follows: "Leverage Ratio. Parent and Corp. will not permit the ratio of -------------- Consolidated Total Debt to Consolidated Total Capitalization at any time to exceed 0.30:1.00." 3. Section 8.01(h) is hereby amended by (i) deleting the term "Subsidiary" appearing in the first line thereof and (ii) inserting the term "Material Subsidiary" in lieu thereof. 4. Section 8.01(i) is hereby amended by (i) deleting the term "Subsidiary" appearing in the second line thereof and inserting the term "Material Subsidiary" in lieu thereof and (ii) deleting the term "Subsidiary" appearing in the penultimate line thereof and inserting the term "Material Subsidiary" in lieu thereof. 5. Section 8.01(k) of the Credit Agreement is hereby amended by (i) deleting the number "$10,000,000" appearing therein and (ii) inserting the number "$25,000,000" in lieu thereof. 6. The definition of the term "Debt" contained in Section 9 of the Credit Agreement is hereby amended by (i) inserting the following at the end of clause (ii) therein, "except for (I) the obligations referred to in the parenthetical in clause (x) below and (II) investment agreements entered into by Parent or any of its Subsidiaries in the ordinary course of business in connection with the asset management business of MBIA Asset Management and its Subsidiaries," (ii) deleting the word "and" appearing at the end of clause (viii) therein and (iii) inserting the following new clause (x) immediately after clause (ix) contained therein: "and (x) solely for the purpose of determining the ratio of Consolidated Total Debt to Consolidated Total Capitalization pursuant to Section 7.07, obligations under any repurchase agreements secured by Liens constituting a borrowing of funds for a period exceeding 90 days (other than obligations under such repurchase agreements entered into by Parent or any of its Subsidiaries in the ordinary course of business in connection with the asset management business of MBIA Asset Management and its Subsidiaries)," 7. Section 9 of the Credit Agreement is hereby further amended by adding the following new defined terms in the appropriate alphabetical order: "Material Subsidiary" shall mean any Subsidiary with a Net Worth greater than $5,000,000. "MBIA Asset Management" shall mean MBIA Asset Management, LLC, a limited liability company organized under the laws of Delaware. B. Miscellaneous Provisions ------------------------ 1. In order to induce the Lenders to enter into this Amendment, each of Parent and Corp. hereby represents and warrants that (i) the representations and warranties of each of Parent and Corp. contained in the Credit Agreement are true and correct in all material respects on and as of the Amendment Effective Date (as defined below) (except with respect to any representations and warranties limited by their terms to a specific date, which shall be true and correct in all material respects as of such date), and (ii) there exists no Default or Event of Default under the Credit Agreement on the Amendment Effective Date, in each case after giving effect to this Amendment. 2. This Amendment is limited as specified and shall not constitute an amendment, modification, acceptance or waiver of any other provision of the Credit Agreement or any other Credit Document. -2- 3. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE STATE OF NEW YORK. 4. This Amendment shall become effective on the date (the "Amendment Effective Date") when the Borrowers and the Required Lenders shall have signed a counterpart hereof (whether the same or different counterparts) and shall have delivered (including by way of telecopier) the same to the Administrative Agent. 5. From and after the Amendment Effective Date, all references in the Credit Agreement and in the other Credit Documents shall be deemed to be referenced to the Credit Agreement as modified hereby. * * * -3- IN WITNESS WHEREOF, the undersigned have caused this Amendment to be duly executed and delivered as of the date first above written. MBIA INC. By:______________________________ Title: MBIA INSURANCE CORPORATION By:______________________________ Title: DEUTSCHE BANK AG, NEW YORK BRANCH, Individually and as Administrative Agent By:___________________________________ Title: By:___________________________________ Title: BANK ONE, NA, Individually and as Syndication Agent By:___________________________________________ Title: FLEET NATIONAL BANK, Individually and as Documentation Agent By:__________________________________ Title: BANCA MONTE DEI PASCHI DI SIENA S.p.A. By:____________________________ Title BANK OF MONTREAL By:__________________________________ Title: THE CHASE MANHATTAN BANK By:_______________________________ Title: BANK OF AMERICA NATIONAL ASSOCIATION By:_______________________________ Title: FORTIS (USA) FINANCE LLC By:__________________________________ Title: BANCO SANTANDER CENTRAL HISPANO S.p.A., New York Branch By:__________________________________ Title: COMMERZBANK AG, NEW YORK BRANCH By:__________________________________ Title: NATIONAL AUSTRALIA BANK LIMITED, NEW YORK BRANCH By:__________________________________ Title: NORDDEUTSCHE LANDESBANK GIROZENTRALE, NEW YORK BRANCH AND/OR CAYMAN ISLANDS BRANCH By:__________________________________ Title: THIRD AMENDMENT --------------- THIRD AMENDMENT (this "Amendment"), dated as of December 7, 2001 among MBIA INC. ("Parent"), a Connecticut corporation, MBIA INSURANCE CORPORATION ("Corp."), a New York stock insurance corporation, one or more Designated Borrowers from time to time party thereto, the lenders from time to time party thereto (each a "Lender" and, collectively, the "Lenders"), BANK ONE, NA (f/k/a The First National Bank of Chicago), as Syndication Agent (the "Syndication Agent"), FLEET NATIONAL BANK, as Documentation Agent (the "Documentation Agent"), and DEUTSCHE BANK AG, NEW YORK BRANCH, as Administrative Agent (the "Administrative Agent"). Unless otherwise defined herein, capitalized terms used herein and defined in the Credit Agreement referred to below are used herein as so defined. W I T N E S S E T H : - - - - - - - - - - WHEREAS, Parent, Corp., the Designated Borrowers, the Lenders, the Syndication Agent, Documentation Agent and the Administrative Agent, are party to a Credit Agreement, dated as of August 28, 1998 whereby the Lenders have agreed to make Loans to the Borrowers of up to $400,000,000, which amount was subsequently increased to $433,000,000 (as the same has been amended, modified or supplemented to, but not including, the date hereof, the "Credit Agreement"); WHEREAS, subject to the terms and conditions set forth below, the parties hereto wish to amend the Credit Agreement as provided herein; NOW, THEREFORE, it is agreed; A. Amendments ---------- 1. Section 8.01(b) of the Credit Agreement is hereby amended by deleting the text ", 7.07" appearing therein. 2. Section 8.01(d) of the Credit Agreement is hereby amended by adding to the end of the text contained in the parenthetical appearing in the second line thereof the new text ", but including, without limitation, any covenant contained in Section 7.07". 3. The definition of the term "Agents" contained in Section 9 of the Credit Agreement is hereby amended by (i) deleting the text ", the Syndication Agent and the Documentation Agent" and (ii) inserting the text "and the Co-Syndication Agents" in lieu thereof. 4. Section 9 of the Credit Agreement is hereby amended by deleting the terms "Syndication Agent" and "Documentation Agent" in their entirety. 5. Section 9 of the Credit Agreement is hereby further amended by adding the following new defined term in the appropriate alphabetical order: "Co-Syndication Agent" shall mean each of The Bank of New York, Bank One, NA, Barclays Bank PLC and Fleet National Bank in their capacities as such. 6. Section 10.01 is hereby amended by (i) deleting the text ", The First National Bank of Chicago as Syndication Agent and Fleet National Bank as Documentation Agent" appearing in the first sentence thereof and (ii) inserting the text "and each of The Bank of New York, Bank One, NA, Barclays Bank PLC and Fleet National Bank as Co-Syndication Agents" in lieu thereof. 7. Section 10.09(d) is hereby amended by (i) deleting the text "Each of the Documentation Agent and the Syndication Agent" appearing in the first sentence thereof and (ii) inserting "Each of the Co-Syndication Agents" in lieu thereof. 8. Section 10.10 of the Credit Agreement is hereby amended by (i) deleting the text "Documentation Agent; Syndication Agent" appearing in the -------------------------------------- heading thereof and inserting the heading "Co-Syndication Agents" in lieu --------------------- thereof and (ii) deleting the text "the Documentation Agent or the Syndication Agent" appearing in the first sentence thereof and inserting the text "any of the Co-Syndication Agents" in lieu thereof. B. Miscellaneous Provisions ------------------------ 1. In order to induce the Lenders to enter into this Amendment, each of Parent and Corp. hereby represents and warrants that (i) the representations and warranties of each of Parent and Corp. contained in the Credit Agreement are true and correct in all material respects on and as of the Amendment Effective Date (as defined below) (except with respect to any representations and warranties limited by their terms to a specific date, which shall be true and correct in all material respects as of such date), and (ii) there exists no Default or Event of Default under the Credit Agreement on the Amendment Effective Date, in each case after giving effect to this Amendment. 2. This Amendment is limited as specified and shall not constitute an amendment, modification, acceptance or waiver of any other provision of the Credit Agreement or any other Credit Document. 3. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE STATE OF NEW YORK. -2- 4. This Amendment shall become effective on the date (the "Amendment Effective Date") when the Borrowers and the Required Lenders shall have signed a counterpart hereof (whether the same or different counterparts) and shall have delivered (including by way of telecopier) the same to the Administrative Agent. 5 . From and after the Amendment Effective Date, all references in the Credit Agreement and in the other Credit Documents shall be deemed to be referenced to the Credit Agreement as modified hereby. * * * -3- IN WITNESS WHEREOF, the undersigned have caused this Amendment to be duly executed and delivered as of the date first above written. MBIA INC. By:__________________________ Title: MBIA INSURANCE CORPORATION By:__________________________ Title: DEUTSCHE BANK AG, NEW YORK BRANCH, Individually and as Administrative Agent By:_______________________________________ Title: By:_______________________________________ Title: [SIGNATURE PAGE TO THE THIRD AMENDMENT TO THE MULTI-YEAR CREDIT AGREEMENT] BANK ONE, NA, Individually and as Co-Syndication Agent By:_______________________________________ Title: [SIGNATURE PAGE TO THE THIRD AMENDMENT TO THE MULTI-YEAR CREDIT AGREEMENT] THE BANK OF NEW YORK, Individually and as Co-Syndication Agent By:_______________________________________ Title: [SIGNATURE PAGE TO THE THIRD AMENDMENT TO THE MULTI-YEAR CREDIT AGREEMENT] BARCLAYS BANK PLC, Individually and as Co-Syndication Agent By:_______________________________________ Title: [SIGNATURE PAGE TO THE THIRD AMENDMENT TO THE MULTI-YEAR CREDIT AGREEMENT] FLEET NATIONAL BANK, Individually and as Co-Syndication Agent By:_______________________________________ Title: [SIGNATURE PAGE TO THE THIRD AMENDMENT TO THE MULTI-YEAR CREDIT AGREEMENT] BANK OF AMERICA, N.A By:_______________________________________ Title: [SIGNATURE PAGE TO THE THIRD AMENDMENT TO THE MULTI-YEAR CREDIT AGREEMENT] THE CHASE MANHATTAN BANK By:_______________________________________ Title: [SIGNATURE PAGE TO THE THIRD AMENDMENT TO THE MULTI-YEAR CREDIT AGREEMENT] BANK OF MONTREAL By:_______________________________________ Title: [SIGNATURE PAGE TO THE THIRD AMENDMENT TO THE MULTI-YEAR CREDIT AGREEMENT] BANCO SANTANDER CENTRAL HISPANO, S.p.A., New York Branch By:_____________________________ Title: [SIGNATURE PAGE TO THE THIRD AMENDMENT TO THE MULTI-YEAR CREDIT AGREEMENT] NATIONAL AUSTRALIA BANK LIMITED, NEW YORK BRANCH By:_____________________________ Title: [SIGNATURE PAGE TO THE THIRD AMENDMENT TO THE MULTI-YEAR CREDIT AGREEMENT] NORDDEUTSCHE LANDESBANK GIROZENTRALE, NEW YORK BRANCH AND/OR CAYMAN ISLANDS BRANCH By:___________________________________________ Title: [SIGNATURE PAGE TO THE THIRD AMENDMENT TO THE MULTI-YEAR CREDIT AGREEMENT] EX-10.15 7 dex1015.txt CREDIT AGREEMENT (5 YEAR AGREEMENT) Exhibit 10.15 FIRST AMENDMENT --------------- FIRST AMENDMENT (the "Amendment"), dated as of February 9, 2001, among MBIA INC. ("Parent"), a Connecticut corporation, MBIA INSURANCE CORPORATION ("Corp.")' a New York stock insurance corporation, one or more Designated Borrowers from time to time party thereto, the lenders from time to time party thereto (each a "Lender" and, collectively, the "Lenders"), BANK ONE, NA (f/k/a The First National Bank of Chicago), as Syndication Agent (the "Syndication Agent"), FLEET NATIONAL BANK, as Documentation Agent (the "Documentation Agent"), and DEUTSCHE BANK AG, NEW YORK BRANCH, as Administrative Agent (the "Administrative Agent"). Unless otherwise defined herein, capitalized terms used herein and defined in the Credit Agreement referred to below are used herein as so defined. W I T N E S E T H: - - - - - - - - - WHEREAS, Parent, Corp., the Designated Borrowers, the Lenders, the Documentation Agent, the Syndication Agent and the Administrative Agent, are party to a Credit Agreement, dated as of August 28, 1998 whereby the Lenders have agreed to make Loans to the Borrowers of up to $400,000,000, which amount was subsequently increased to $433,000,000 (as the same has been amended, modified or supplemented to, but not including, the date hereof, the "Credit Agreement"); WHEREAS, subject to the terms and conditions set forth below, the parties hereto wish to amend the Credit Agreement as provided herein; NOW, THEREFORE, it is agreed; A. Amendment --------- Section 7.07 of the Credit Agreement is hereby amended to read in its entirety as follows: "Leverage Ratio. Parent and Corp. will not permit the ratio of -------------- Consolidated Total Debt to Consolidated Total Capitalization at any time to exceed 0.2762:1.00." B. Miscellaneous Provisions ------------------------ 1. In order to induce the Lenders to enter into this Amendment, each of Parent and Corp. hereby represents and warrants that (i) the representations and warranties of each of Parent and Corp. contained in the Credit Agreement are true and correct in all material respects on and as of the Amendment Effective Date (as defined below) (except with respect to any representations and warranties limited by their terms to a specific date, which shall be true and correct in all material respects as of such date), and (ii) there exists no Default or Event of Default under the Credit Agreement on the Amendment Effective Date, in each case after giving effect to this Amendment. 2. This Amendment is limited as specified and shall not constitute an amendment, modification, acceptance or waiver of any other provision of the Credit Agreement or any other Credit Document. 3. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE STATE OF NEW YORK. 4. This Amendment shall become effective on the date (the "Amendment Effective Date") when the Borrowers and the Required Lenders shall have signed a counterpart hereof (whether the same or different counterparts) and shall have delivered (including by way of telecopier) the same to the Administrative Agent. 5. From and after the Amendment Effective Date, all references in the Credit Agreement and in the other Credit Documents shall be deemed to be referenced to the Credit Agreement as modified hereby. * * * 2 IN WITNESS WHEREOF, the undersigned have caused this Amendment to be duly executed and delivered as of the date first above written. MBIA INC. By:_________________________________ Title: MBIA INSURANCE CORPORATION By:_________________________________ Title: DEUTSCHE BANK AG, NEW YORK BRANCH, Individually and as Administrative Agent By:_______________________________________ Title: BANK ONE, NA, Individually and as Syndication Agent By:_________________________________________ Title: FLEET NATIONAL BANK, Individually and as Documentation Agent By:_____________________________________ Title: BANCA MONTE DEI PASCHI DI SIENA S.p.A. By:__________________________________ Title: BANK OF MONTREAL By:______________________________ Title: THE CHASE MANHATTAN BANK By:____________________________________ Title: BANK OF AMERICA NATIONAL TRUST & SAVINGS ASSOCIATION By:_________________________________ Title: FORTIS (USA) FINANCE LLC By:________________________________ Title: BANCO SANTANDER CENTRAL HISPANO, S.p.A., New York Branch By:_______________________________ Title: COMMERZBANK AG, NEW YORK BRANCH By:_____________________________ Title: NATIONAL AUSTRALIA BANK LIMITED, NEW YORK BRANCH By:______________________________ Title: NORDDEUTSCHE LANDESBANK GIROZENTRALE, NEW YORK BRANCH AND/OR CAYMAN ISLANDS BRANCH By:___________________________________ Title: SECOND AMENDMENT TO THE CREDIT AGREEMENT ---------------------------------------- SECOND AMENDMENT TO THE CREDIT AGREEMENT (the "Amendment"), dated as of July 31, 2001, among MBIA INC. ("Parent"), a Connecticut corporation, MBIA INSURANCE CORPORATION ("Corp."), a New York stock insurance corporation, one or more Designated Borrowers from time to time party thereto, the lenders from time to time party thereto (each a "Lender" and, collectively, the "Lenders"), BANK ONE, NA (f/k/a The First National Bank of Chicago), as Syndication Agent (the "Syndication Agent"), FLEET NATIONAL BANK, as Documentation Agent (the "Documentation Agent"), and DEUTSCHE BANK AG, NEW YORK BRANCH, as Administrative Agent (the "Administrative Agent"). Unless otherwise defined herein, capitalized terms used herein and defined in the Credit Agreement referred to below are used herein as so defined. W I T N E S S E T H: - - - - - - - - - - WHEREAS, Parent, Corp., the Designated Borrowers, the Lenders, the Documentation Agent, the Syndication Agent and the Administrative Agent, are party to a Credit Agreement, dated as of August 28, 1998 whereby the Lenders have agreed to make Loans to the Borrowers of up to $400,000,000, which amount was subsequently increased to $433,000,000 (as the same has been amended, modified or supplemented to, but not including, the date hereof, the "Credit Agreement"); WHEREAS, subject to the terms and conditions set forth below, the parties hereto wish to amend the Credit Agreement as provided herein; NOW, THEREFORE, it is agreed; A. Amendments ---------- 1. Section 7.01(v) of the Credit Agreement is hereby amended by deleting the text "and in no event for a period exceeding 90 days in each case" appearing in the last line thereof. 2. Section 7.07 of the Credit Agreement is hereby amended to read in its entirety as follows: "Leverage Ratio. Parent and Corp. will not permit the ratio of -------------- Consolidated Total Debt to Consolidated Total Capitalization at any time to exceed 0.30:1.00." 3. Section 8.01(h) is hereby amended by (i) deleting the term "Subsidiary" appearing in the first line thereof and (ii) inserting the term "Material Subsidiary" in lieu thereof. 4. Section 8.01(i) is hereby amended by (i) deleting the term "Subsidiary" appearing in the second line thereof and inserting the term "Material Subsidiary" in lieu thereof and (ii) deleting the term "Subsidiary" appearing in the penultimate line thereof and inserting the term "Material Subsidiary" in lieu thereof. 5. Section 8.01(k) of the Credit Agreement is hereby amended by (i) deleting the number "$10,000,000" appearing therein and (ii) inserting the number "$25,000,000" in lieu thereof. 6. The definition of the term "Debt" contained in Section 9 of the Credit Agreement is hereby amended by (i) inserting the following at the end of clause (ii) therein, "except for (I) the obligations referred to in the parenthetical in clause (x) below and (II) investment agreements entered into by Parent or any of its Subsidiaries in the ordinary course of business in connection with the asset management business of MBIA Asset Management and its Subsidiaries," (ii) deleting the word "and" appearing at the end of clause (viii) therein and (iii) inserting the following new clause (x) immediately after clause (ix) contained therein: "and (x) solely for the purpose of determining the ratio of Consolidated Total Debt to Consolidated Total Capitalization pursuant to Section 7.07, obligations under any repurchase agreements secured by Liens constituting a borrowing of funds for a period exceeding 90 days (other than obligations under such repurchase agreements entered into by Parent or any of its Subsidiaries in the ordinary course of business in connection with the asset management business of MBIA Asset Management and its Subsidiaries)," 7. Section 9 of the Credit Agreement is hereby further amended by adding the following new defined terms in the appropriate alphabetical order: "Material Subsidiary" shall mean any Subsidiary with a Net Worth greater than $5,000,000. "MBIA Asset Management" shall mean MBIA Asset Management, LLC, a limited liability company organized under the laws of Delaware. B. Miscellaneous Provisions ------------------------ 1. In order to induce the Lenders to enter into this Amendment, each of Parent and Corp. hereby represents and warrants that (i) the representations and warranties of each of Parent and Corp. contained in the Credit Agreement are true and correct in all material respects on and as of the Amendment Effective Date (as defined below) (except with respect to any representations and warranties limited by their terms to a specific date, which shall be true and correct in all material respects as of such date), and (ii) there exists no Default or Event of Default under the Credit Agreement on the Amendment Effective Date, in each case after giving effect to this Amendment. 2. This Amendment is limited as specified and shall not constitute an amendment, modification, acceptance or waiver of any other provision of the Credit Agreement or any other Credit Document. -2- 3. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE STATE OF NEW YORK. 4. This Amendment shall become effective on the date (the "Amendment Effective Date") when the Borrowers and the Required Lenders shall have signed a counterpart hereof (whether the same or different counterparts) and shall have delivered (including by way of telecopier) the same to the Administrative Agent. 5. From and after the Amendment Effective Date, all references in the Credit Agreement and in the other Credit Documents shall be deemed to be referenced to the Credit Agreement as modified hereby. * * * -3- IN WITNESS WHEREOF, the undersigned have caused this Amendment to be duly executed and delivered as of the date first above written. MBIA INC. By:____________________________ Title: MBIA INSURANCE CORPORATION By:____________________________ Title: DEUTSCHE BANK AG, NEW YORK BRANCH, Individually and as Administrative Agent By:____________________________ Title: By:____________________________ Title: BANK ONE, NA, Individually and as Syndication Agent By:_____________________________ Title: FLEET NATIONAL BANK, Individually and as Documentation Agent By:___________________________________ Title: BANCA MONTE DEI PASCHI DI SIENA S.p.A. By:____________________________ Title: BANK OF MONTREAL By:____________________________ Title: THE CHASE MANHATTAN BANK By:________________________________ Title: BANK OF AMERICA NATIONAL ASSOCIATION By:_______________________________ Title: FORTIS (USA) FINANCE LLC By:__________________________________ Title: BANCO SANTANDER CENTRAL HISPANO, S.p.A., New York Branch By:_____________________________ Title: COMMERZBANK AG, NEW YORK BRANCH By:_____________________________ Title: NATIONAL AUSTRALIA BANK LIMITED, NEW YORK BRANCH By:______________________________ Title: NORDDEUTSCHE LANDESBANK GIROZENTRALE, NEW YORK BRANCH AND/OR CAYMAN ISLANDS BRANCH By:___________________________ Title: THIRD AMENDMENT --------------- THIRD AMENDMENT (this "Amendment"), dated as of December 7, 2001 among MBIA INC. ("Parent"), a Connecticut corporation, MBIA INSURANCE CORPORATION ("Corp."), a New York stock insurance corporation, one or more Designated Borrowers from time to time party thereto, the lenders from time to time party thereto (each a "Lender" and, collectively, the "Lenders"), BANK ONE, NA (f/k/a The First National Bank of Chicago), as Syndication Agent (the "Syndication Agent"), FLEET NATIONAL BANK, as Documentation Agent (the "Documentation Agent"), and DEUTSCHE BANK AG, NEW YORK BRANCH, as Administrative Agent (the "Administrative Agent"). Unless otherwise defined herein, capitalized terms used herein and defined in the Credit Agreement referred to below are used herein as so defined. W I T N E S S E T H: - - - - - - - - - - WHEREAS, Parent, Corp., the Designated Borrowers, the Lenders, the Syndication Agent, Documentation Agent and the Administrative Agent, are party to a Credit Agreement, dated as of August 28, 1998 whereby the Lenders have agreed to make Loans to the Borrowers of up to $200,000,000, which amount was subsequently increased to $217,000,000 (as the same has been amended, modified or supplemented to, but not including, the date hereof, the "Credit Agreement"); WHEREAS, subject to the terms and conditions set forth below, the parties hereto wish to amend the Credit Agreement as provided herein; NOW, THEREFORE, it is agreed; A. Amendments ---------- 1. Section 8.01(b) of the Credit Agreement is hereby amended by deleting the text ",7.07" appearing therein. 2. Section 8.01(d) of the Credit Agreement is hereby amended by adding to the end of the text contained in the parenthetical appearing in the second line thereof the new text ", but including, without limitation, any covenant contained in Section 7.07". 3. The definition of the term "Agents" contained in Section 9 of the Credit Agreement is hereby amended by (i) deleting the text ", the Syndication Agent and the Documentation Agent" and (ii) inserting the text "and the Co-Syndication Agents" in lieu thereof. 4. Section 9 of the Credit Agreement is hereby amended by deleting the terms "Syndication Agent" and "Documentation Agent" in their entirety. 5. Section 9 of the Credit Agreement is hereby further amended by adding the following new defined term in the appropriate alphabetical order: "Co-Syndication Agent" shall mean each of The Bank of New York, Bank One, NA, Barclays Bank PLC and Fleet National Bank in their capacities as such. 6. Section 10.01 is hereby amended by (i) deleting the text ", The First National Bank of Chicago as Syndication Agent and Fleet National Bank as Documentation Agent" appearing in the first sentence thereof and (ii) inserting the text "and each of The Bank of New York, Bank One, NA, Barclays Bank PLC and Fleet National Bank as Co-Syndication Agents" in lieu thereof. 7. Section 10.09(d) is hereby amended by (i) deleting the text "Each of the Documentation Agent and the Syndication Agent" appearing in the first sentence thereof and (ii) inserting "Each of the Co-Syndication Agents" in lieu thereof. 8. Section 10.10 of the Credit Agreement is hereby amended by (i) deleting the text "Documentation Agent; Syndication Agent" appearing in the -------------------------------------- heading thereof and inserting the heading "Co-Syndication Agents" in lieu --------------------- thereof and (ii) deleting the text "the Documentation Agent or the Syndication Agent" appearing in the first sentence thereof and inserting the text "any of the Co-Syndication Agents" in lieu thereof. B. Miscellaneous Provisions ------------------------ 1. In order to induce the Lenders to enter into this Amendment, each of Parent and Corp. hereby represents and warrants that (i) the representations and warranties of each of Parent and Corp. contained in the Credit Agreement are true and correct in all material respects on and as of the Amendment Effective Date (as defined below) (except with respect to any representations and warranties limited by their terms to a specific date, which shall be true and correct in all material respects as of such date), and (ii) there exists no Default or Event of Default under the Credit Agreement on the Amendment Effective Date, in each case after giving effect to this Amendment. 2. This Amendment is limited as specified and shall not constitute an amendment, modification, acceptance or waiver of any other provision of the Credit Agreement or any other Credit Document. 3. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE STATE OF NEW YORK. -2- 4. This Amendment shall become effective on the date (the "Amendment Effective Date") when the Borrowers and the Required Lenders shall have signed a counterpart hereof (whether the same or different counterparts) and shall have delivered (including by way of telecopier) the same to the Administrative Agent. 5. From and after the Amendment Effective Date, all references in the Credit Agreement and in the other Credit Documents shall be deemed to be referenced to the Credit Agreement as modified hereby. * * * -3- IN WITNESS WHEREOF, the undersigned have caused this Amendment to be duly executed and delivered as of the date first above written. MBIA INC. By:__________________________ Title: MBIA INSURANCE CORPORATION By:___________________________ Title: [SIGNATURE PAGE TO THE THIRD AMENDMENT TO THE 364-DAY CREDIT AGREEMENT] DEUTSCHE BANK AG, NEW YORK BRANCH, Individually and as Administrative Agent By:_____________________________ Title: By:______________________________ Title: [SIGNATURE PAGE TO THE THIRD AMENDMENT TO THE 364-DAY CREDIT AGREEMENT] THE BANK OF NEW YORK, Individually and as Co-Syndication Agent By:________________________________ Title: [SIGNATURE PAGE TO THE THIRD AMENDMENT TO THE 364-DAY CREDIT AGREEMENT] BANK ONE, NA, Individually and as Co-Syndication Agent By:_____________________________ Title: [SIGNATURE PAGE TO THE THIRD AMENDMENT TO THE 364-DAY CREDIT AGREEMENT] BARCLAYS BANK PLC, Individually and as Co-Syndication Agent By:_______________________________________ Title: [SIGNATURE PAGE TO THE THIRD AMENDMENT TO THE 364-DAY CREDIT AGREEMENT] FLEET NATIONAL BANK, Individually and as Co-Syndication Agent By:_______________________________________ Title: [SIGNATURE PAGE TO THE THIRD AMENDMENT TO THE 364-DAY CREDIT AGREEMENT] BANK OF AMERICA, N.A By:_______________________________ Title: [SIGNATURE PAGE TO THE THIRD AMENDMENT TO THE 364-DAY CREDIT AGREEMENT] THE CHASE MANHATTAN BANK By:________________________________ Title: [SIGNATURE PAGE TO THE THIRD AMENDMENT TO THE 364-DAY CREDIT AGREEMENT] BANK OF MONTREAL By:_____________________________ Title: [SIGNATURE PAGE TO THE THIRD AMENDMENT TO THE 364-DAY CREDIT AGREEMENT] BANCO SANTANDER CENTRAL HISPANO, S.p.A., New York Branch By:______________________________ Title: [SIGNATURE PAGE TO THE THIRD AMENDMENT TO THE 364-DAY CREDIT AGREEMENT] NATIONAL AUSTRALIA BANK LIMITED, NEW YORK BRANCH By:______________________________ Title: [SIGNATURE PAGE TO THE THIRD AMENDMENT TO THE 364-DAY CREDIT AGREEMENT] NORDDEUTSCHE LANDESBANK GIROZENTRALE, NEW YORK BRANCH AND/OR CAYMAN ISLANDS BRANCH By:______________________________ Title: [SIGNATURE PAGE TO THE THIRD AMENDMENT TO THE 364-DAY CREDIT AGREEMENT] EX-13 8 dex13.txt ANNUAL REPORT TO SHAREHOLDERS MBIA Inc. & Subsidiaries - -------------------------------------------------------------------------------- SELECTED FINANCIAL AND STATISTICAL DATA
Dollars in millions except per share amounts 2001 2000 1999 - ---------------------------------------------------------------------------------------- GAAP SUMMARY INCOME STATEMENT DATA: Insurance: Gross premiums written $ 865 $ 687 $ 625 Premiums earned 524 446 443 Net investment income 413 394 359 Total insurance expenses 180 170 315 Insurance income 796 698 515 Investment management services income (loss) 63 56 41 Income before income taxes 791 715 388 Net income 570 529 321 Net income per common share: Basic 3.85 3.58 2.15 Diluted 3.82 3.56 2.13 - ---------------------------------------------------------------------------------------- GAAP SUMMARY BALANCE SHEET DATA: Total investments 14,516 12,233 10,694 Total assets 16,200 13,894 12,264 Deferred premium revenue 2,565 2,398 2,311 Loss and LAE reserves 518 499 467 Municipal investment and repurchase agreements 6,055 4,789 4,513 Long-term debt 805 795 689 Shareholders' equity 4,783 4,223 3,513 Book value per share 32.24 28.59 23.56 Dividends declared per common share 0.600 0.547 0.537 - ---------------------------------------------------------------------------------------- STATUTORY SUMMARY DATA: Net income 571 544 522 Capital and surplus 2,858 2,382 2,413 Contingency reserve 2,082 2,123 1,739 - ---------------------------------------------------------------------------------------- Capital base 4,940 4,505 4,152 Unearned premium reserve 2,607 2,465 2,376 Loss and LAE reserves 211 209 204 - ---------------------------------------------------------------------------------------- Total reserves 7,758 7,179 6,732 Present value of installment premiums 1,068 886 732 Standby line of credit / stop loss 1,261 1,075 1,075 - ---------------------------------------------------------------------------------------- Total claims-paying resources 10,087 9,140 8,539 - ---------------------------------------------------------------------------------------- FINANCIAL RATIOS: GAAP Loss and LAE ratio 10.8% 11.5% 44.8% Underwriting expense ratio 23.5 26.7 26.4 Combined ratio 34.3 38.2 71.2 Statutory Loss and LAE ratio 9.3 6.2 12.3 Underwriting expense ratio 13.4 22.1 23.6 Combined ratio 22.7 28.3 35.9 NET DEBT SERVICE OUTSTANDING $722,408 $680,878 $635,883 NET PAR AMOUNT OUTSTANDING $452,409 $418,443 $384,459 ========================================================================================
Dollars in millions except per share amounts 1998 1997 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------------------------------ GAAP SUMMARY INCOME STATEMENT DATA: Insurance: Gross premiums written $ 677 $ 654 $ 535 $ 406 $ 405 $ 504 $ 377 Premiums earned 425 351 294 244 241 249 169 Net investment income 332 302 265 233 204 189 155 Total insurance expenses 140 141 117 100 89 86 65 Insurance income 643 530 453 385 360 353 260 Investment management services income (loss) 29 17 18 11 5 (1) (1) Income before income taxes 565 525 448 375 347 339 249 Net income 433 406 348 290 270 268 193 Net income per common share: Basic 2.91 2.79 2.45 2.14 2.00 2.00 1.49 Diluted 2.88 2.75 2.41 2.10 1.97 1.97 1.47 - ------------------------------------------------------------------------------------------------------------------------------------ GAAP SUMMARY BALANCE SHEET DATA: Total investments 10,080 8,908 8,008 6,937 5,069 3,735 2,701 Total assets 11,826 10,387 9,033 7,671 5,712 4,320 3,234 Deferred premium revenue 2,251 2,090 1,854 1,662 1,538 1,413 1,202 Loss and LAE reserves 300 105 72 50 47 37 28 Municipal investment and repurchase agreements 3,485 3,151 3,259 2,642 1,526 493 -- Long-term debt 689 489 389 389 314 314 314 Shareholders' equity 3,792 3,362 2,761 2,497 1,881 1,761 1,533 Book value per share 25.43 22.73 19.32 18.01 13.95 13.18 11.46 Dividends declared per common share 0.527 0.513 0.483 0.437 0.380 0.313 0.253 - ------------------------------------------------------------------------------------------------------------------------------------ STATUTORY SUMMARY DATA: Net income 510 404 335 287 229 263 194 Capital and surplus 2,290 1,952 1,661 1,469 1,250 1,124 1,044 Contingency reserve 1,451 1,188 959 788 652 561 419 - ------------------------------------------------------------------------------------------------------------------------------------ Capital base 3,741 3,140 2,620 2,257 1,902 1,685 1,463 Unearned premium reserve 2,324 2,193 1,971 1,768 1,640 1,484 1,248 Loss and LAE reserves 188 15 10 7 22 8 14 - ------------------------------------------------------------------------------------------------------------------------------------ Total reserves 6,253 5,348 4,601 4,032 3,564 3,177 2,725 Present value of installment premiums 644 537 443 347 249 234 211 Standby line of credit / stop loss 900 900 775 700 650 625 550 - ------------------------------------------------------------------------------------------------------------------------------------ Total claims-paying resources 7,797 6,785 5,819 5,079 4,463 4,036 3,486 - ------------------------------------------------------------------------------------------------------------------------------------ FINANCIAL RATIOS: GAAP Loss and LAE ratio 8.2% 9.1% 6.9% 5.6% 3.9% 3.5% 3.6% Underwriting expense ratio 24.7 31.0 32.9 35.2 32.9 31.2 34.6 Combined ratio 32.9 40.1 39.8 40.8 36.8 34.7 38.2 Statutory Loss and LAE ratio 8.0 1.2 1.7 0.4 8.7 (3.3) 2.3 Underwriting expense ratio 16.8 21.2 22.8 27.2 28.3 22.0 20.7 Combined ratio 24.8 22.4 24.5 27.6 37.0 18.7 23.0 NET DEBT SERVICE OUTSTANDING $595,895 $513,736 $434,417 $359,175 $315,340 $273,630 $225,220 NET PAR AMOUNT OUTSTANDING $359,472 $303,803 $252,896 $201,326 $173,760 $147,326 $114,317 ====================================================================================================================================
MBIA ANNUAL REPORT 27 MBIA Inc. & Subsidiaries - -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 continued to focus on our Triple-A ratings, no-loss underwriting standards, and building of shareholder value. Our insurance operations posted strong par insured growth in both the global public finance and global structured finance markets, with especially strong growth in our non-United States public finance business. Our investment management operations had a record year in ending assets under management and operating earnings. Looking forward, the Company believes it is well positioned to take advantage of very favorable growth prospects both inside and outside of the United States (U.S.) 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," "looking forward" 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. CRITICAL ACCOUNTING POLICIES The following accounting policies are viewed by management to be critical accounting policies because they require significant judgement on the part of management. Financial results could be materially different if alternate methodologies were used. PREMIUM REVENUE RECOGNITION - Upfront premiums are earned in proportion to the expiration of the related risk. Therefore, premium earnings are greater in the earlier periods of an upfront transaction when there is a higher amount of exposure outstanding. The premiums are apportioned to individual sinking fund payments of a bond issue according to an amortization schedule. After the premiums are allocated to each scheduled sinking fund payment, they are earned on a straight-line basis over the period of that sinking fund payment. 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. Installment premiums are earned over each installment period, generally one year or less. The effect of the Company's policy is to recognize greater levels of upfront premium in the earlier years of each policy insured, thus matching revenue recognition with the underlying risk. Recognizing premium revenue on a straight-line basis over the life of each policy would materially affect the Company's financial results. Premium earnings would be more evenly recorded as revenue throughout the period of risk than under the current method. However, the Company does not believe that the straight-line method would appropriately match premiums earned to the underlying risk. Therefore, the Company believes its upfront premium earnings methodology is the most appropriate method to recognize its upfront premiums as revenue. LOSSES AND LOSS ADJUSTMENT EXPENSES - Loss and loss adjustment expense (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. The unallocated reserve is calculated by applying a loss factor to net debt service written. Management determines this factor based on an independent research agency study of bond defaults, which management feels is a reliable source of bond default data. 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 expected recoveries under salvage and subrogation rights and reinsurance, based on a discount rate of 5.86%. The discount rate is based on the estimated yield of our fixed-income investment portfolio. 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. Beginning in 2002, the Company has decided to change the methodology it uses to determine the amount of loss and loss adjustment expenses. The Company will start accruing loss and loss adjustment expenses based upon a percentage of earned premiums instead of a percentage of net debt service written. There are two reasons for the change in the methodology. First, the amount of net debt service written can significantly fluctuate from quarter to quarter while the related premium is earned more consistently over the life of the transaction. Second, during the quarter the premiums are written, the loss and loss adjustment charge is recognized in advance of the related earned premium because this revenue is essentially all deferred in the quarter that it is written. The intent of the change is to better match the recognition 28 MBIA ANNUAL REPORT MBIA Inc. & Subsidiaries - -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS of incurred losses with the related revenue. If the new methodology was applied in 2001, 2000 and 1999, excluding the loss reserve strengthening in 1999, the Company would have reserved essentially the same amount as it did under the current approach. RECENT ACCOUNTING PRONOUNCEMENTS SFAS 133 Effective January 1, 2001 the Company adopted Statement of Financial Accounting Standards (SFAS) 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 requires that all derivative instruments are recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as a hedge, and if so designated, the type of hedge. The Company will continue to enter into derivative transactions in the future that meet the underwriting, risk management and strategic objectives of the Company. For further information see Note 5 in the Notes to Consolidated Financial Statements. SFAS 140 In September 2000, the Financial Accounting Standards Board (FASB) issued SFAS 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," having certain requirements effective as of April 1, 2001. In accordance with SFAS 140, the Company no longer reflects on its balance sheet financial assets involving the borrowing of securities that meet specific criteria. See Note 6 in the Notes to Consolidated Financial Statements for further discussion of the impact of the adoption of this statement on the financial statements of the Company. SFAS 141 AND 142 In June 2001, the FASB issued SFAS 141, "Business Combinations" and SFAS 142, "Goodwill and Other Intangible Assets," which are effective for fiscal years beginning after December 15, 2001. SFAS 141, which supercedes Accounting Principles Board Opinion (APB) 16, "Business Combinations," requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 and provides specific criteria for initial recognition of intangible assets apart from goodwill. SFAS 142 supercedes APB 17, "Intangible Assets," and requires that goodwill and intangible assets with indefinite lives no longer be amortized but be subject to annual impairment tests in accordance with the Statement. The Statement includes a two-step process aimed at determining the amount, if any, by which the carrying value of a reporting unit exceeds its fair value. Other intangible assets will continue to be amortized over their useful lives. The Company will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002 and is making determinations as to what its reporting units are and what amounts of goodwill, intangible assets, other assets and liabilities should be allocated to those reporting units. As a result of the application of the nonamortization provision of the Statement, the Company will no longer incur approximately $6.5 million of annual goodwill amortization expense. During 2002 the Company will perform the first of the required impairment tests of goodwill and indefinite lived intangible assets as of January 1, 2002 and has not yet determined what the effect of these tests will be on earnings and the financial position of the Company. SPECIAL PURPOSE VEHICLES The Company provides structured funding and credit enhancement services to global structured finance clients through the use of MBIA-administered, bankruptcy-remote special purpose vehicles (SPVs). The purpose of these SPVs is to provide our clients with an efficient source of funding, which may offer MBIA the opportunity to issue financial guarantee insurance policies. The SPVs purchase various types of financial instruments, such as debt securities, loans, lease and trade receivables, and funds these purchases through the issuance of asset-backed short-term commercial paper or medium-term notes. The assets and liabilities within the medium-term note programs are managed primarily on a match-funded basis and may include the use of derivative hedges, such as interest rate and foreign currency swaps. By match-funding, the SPVs eliminate the risks associated with fluctuations in interest and foreign currency rates, indices and liquidity. Typically, programs involve the use of rating agencies in assessing the quality of asset purchases and in assigning ratings to the various programs. In general, asset purchases at the inception of a program are required to be at least investment grade by at least one major rating agency. The primary SPVs administered by MBIA are Triple-A One Funding Corporation (Triple-A), Hemispheres Funding Corporation (Hemispheres), Meridian Funding Company, LLC (Meridian), Polaris Funding Company, LLC (Polaris) and 885 Warehouse, LLC (885 Warehouse). Incorporated in September 1993, Triple-A is wholly owned by an unaffiliated party and was formed to provide secured loans to borrowers, purchase participations in pools of retail, trade and other receivables and purchase investment grade securities at the time of issuance or in the secondary market. Triple-A may fund its purchases of such assets through the issuance of commercial paper or other securities. For the years ending December 31, 2001 and 2000, assets funded by Triple-A primarily consisted of secured loans to qualified borrowers, participations in short-term and long-term interest and non-interest bearing receivable pools and investment grade asset-backed securities. Debt issued for the same periods substantially consisted of commercial paper. Triple-A enters into 364-day or shorter term credit facilities with multiple independent third-party credit support providers as a source of liquidity in the event of a commercial paper market disruption. Hemispheres was incorporated in January 1994 and is wholly owned by an unaffiliated party. Through its articles of incorporation, Hemispheres is permitted to issue medium-term notes in an unlimited number of series of undetermined amounts not to exceed an aggregate principal amount of $5 billion. Proceeds from the issuance of such notes are used to fund the purchase of permitted investments. For the years ending December 31, 2001 and 2000, such investments consisted of loans and lease receivables. Currently, these loans are denominated in a foreign currency and carry a variable interest rate linked to a foreign interest rate index. Hemispheres has entered into various foreign currency and interest rate swap agreements relating to such loans designed to hedge its exposures to foreign exchange and interest rate fluctuations. Hemispheres uses such derivative agreements for non-trading purposes. In addition to a nominal amount of common stock, Hemispheres has issued and outstanding 5,138 shares of mandatory redeemable cumulative preferred stock totaling $5.1 million for 2001 and 10,900 shares totaling $10.9 million for 2000. MBIA ANNUAL REPORT 29 MBIA Inc. & Subsidiaries - -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Meridian, formed in July 1997, is a limited liability company of which MBIA is a non-controlling 1% member. Meridian may issue medium-term notes in an unlimited number of series of undetermined amounts not to exceed an aggregate principal amount of $5 billion. Proceeds from the issuance of such notes are used to fund the purchase of permitted investments. For the years ending December 31, 2001 and 2000, such investments primarily consisted of asset-backed loans and securities issued by major global structured finance clients. Meridian may enter into various types of derivative agreements for non-trading purposes designed to hedge its exposure to interest rate and foreign currency fluctuations. Polaris, formed in November 1997, is a limited liability company of which MBIA is a non-controlling 1% member. Polaris may issue medium-term notes in an unlimited number of series of undetermined amounts not to exceed an aggregate principal amount of $5 billion. Proceeds from the issuance of such notes are used to fund the purchase of permitted investments. For the years ending December 31, 2001 and 2000, such investments primarily consisted of debt instruments and loans issued by major national and international corporations. Polaris may enter into various types of derivative agreements for non-trading purposes designed to hedge its exposure to interest rate and foreign currency fluctuations on its assets and liabilities. 885 Warehouse, incorporated in December 1997 and converted to a limited liability company in December 1998, is wholly owned by an unaffiliated party. 885 Warehouse was formed in connection with a single structured finance transaction and is not actively used as part of MBIA's ongoing structured funding programs. For the years ending December 31, 2001 and 2000, assets consisted solely of asset-backed structured notes funded through a loan agreement with an unaffiliated loan provider. The notes purchased and the loan payable are due to mature by January 2003. Pursuant to insurance policies issued by MBIA, all of the investments of Triple-A are unconditionally and irrevocably guaranteed as to principal and interest when due. In addition, full amounts due to liquidity providers under various agreements are unconditionally and irrevocably guaranteed. Pursuant to facility agreements between MBIA and the medium-term note SPVs, all series of notes are unconditionally and irrevocably guaranteed as to scheduled payments of principal, interest and other amounts payable with respect to such series. Since MBIA's exposure to these SPVs is primarily through the guarantee of the assets purchased and debt issued, such exposure is reported as part of MBIA's net insurance in force. The following table details amounts relating to MBIA's guarantee of SPV obligations for SPVs administered by MBIA: - --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------- Net Debt In millions Assets Liabilities Service Outstanding - -------------------------------------------------------------------------------------------------------------------------------- Special Purpose Vehicle Funding Type 2001 2000 2001 2000 2001 2000 - -------------------------------------------------------------------------------------------------------------------------------- Meridian Funding Company, LLC Medium-Term Notes $4,254 $3,603 $4,218 $3,603 $2,962 $3,108 Triple-A One Funding Corp. Commercial Paper 2,762 3,244 2,762 3,244 2,691 2,789 Hemispheres Funding Corp. Medium-Term Notes 391 875 384 862 146 327 Polaris Funding Company, LLC Medium-Term Notes 313 457 327 457 150 248 885 Warehouse, LLC Medium-Term Notes 59 59 59 58 4 4 - -------------------------------------------------------------------------------------------------------------------------------- Total $7,779 $8,238 $7,750 $8,224 $5,953 $6,476 - --------------------------------------------------------------------------------------------------------------------------------
MBIA, as administrative agent, provides administrative and operational services to the SPVs and receives administrative, structuring and advisory fees for such services. Premiums and fees received from SPV transactions are reported within the insurance segment of the Consolidated Statements of Income. The risks associated with SPV transactions are the same as those inherent in other structured asset-backed transactions, whereby the repayment of the SPV's debt is dependent on the performance of the assets funded. Therefore, all transactions are reviewed to ensure compliance with the Company's underwriting standards. Under current accounting guidelines, MBIA does not include the accounts of the SPVs in the consolidation of the MBIA group. When a SPV does not meet the formal definition of a qualifying special purpose vehicle under SFAS 140, the decision as to whether or not to consolidate depends on the applicable accounting principles for non-qualifying SPVs. Consideration is given to, for example, whether a third-party has made a substantive equity investment in the SPV; which party has voting rights, if any; who makes decisions about assets in the SPV; and who is at risk of loss. The SPVs would be consolidated if MBIA were to retain or acquire control over the risks and rewards of the assets in the SPVs. The Company is presently considering changes that would result in the consolidation of the SPVs in 2002. Consolidation of the SPVs into MBIA would require the Company to include gross assets and liabilities of the SPVs, primarily consisting of investments and debt, on its balance sheet. However, given the inconsequential level of residual profits of these entities, the consolidated net income of the Company would not materially change. EFFECT OF SEPTEMBER 11 In addition to the tragic loss of life, the terrorist attacks in New York City and Washington, D.C. on September 11, 2001 disrupted and are expected to continue to disrupt commerce worldwide. These events have had a direct material adverse impact on certain industries and on general economic activity. The Company has exposure in certain sectors that will suffer increased stress as a direct result of these events. The Company's exposure to New York City and New York State and their respective agencies, to domestic airports and to domestic enhanced equipment trust certificate aircraft securitizations have experienced increased 30 MBIA ANNUAL REPORT MBIA Inc. & Subsidiaries - -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS stress as a result of these events, including a downgrading of the ratings of some of the underlying issuers. Other exposures that depend on revenues from business and personal travel, such as bonds backed by hotel taxes and car rental fleet securitizations, are also likely to see direct increased stress as a result of these events. In addition, certain other sectors in which the Company has insured exposure such as consumer loan securitizations (e.g., home equity, auto loan and credit card transactions) and certain collateralized debt obligations (CDO) backed by high yield bonds have seen increased delinquencies and defaults in the underlying pools of loans. In accordance with the Company's underwriting criteria, transactions insured by the Company are structured to endure significant stress under various stress assumptions, including an assumed economic recession. The Company has assessed each of its related portfolio exposures and, based on the transaction structures and on the Company's evaluation of the likely effects and impact of these events, the Company believes at this time that it will not incur any material losses due to these events. There can be no assurance, however, that the Company will not incur material losses due to these exposures if the economic stress caused by these events in certain sectors are more severe than the Company currently foresees and had assumed in underwriting its exposures. RESULTS OF OPERATIONS SUMMARY The Company uses various measures of profitability and intrinsic value in addition to our reported net income and earnings per share, namely, "operating earnings," "core earnings," "adjusted book value" (ABV) and "adjusted direct premium" (ADP), which are not in accordance with accounting principles generally accepted in the United States of America. Operating earnings exclude the effect of realized gains and losses from activity in our investment portfolio, changes in fair value of derivative instruments and non-recurring charges by subtracting these items from our reported net income. Core earnings represent the stricter measurement of our business by stripping out all non-operating and non-recurring items. It is calculated by subtracting the net income effect of premiums earned from refundings from our operating earnings. ADP includes our upfront direct premiums as well as the estimated present value of current and future direct premiums from installment-based insurance policies issued during the period and does not include any premiums assumed or ceded. ABV 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. We view these measures as a meaningful way to assess our performance and the intrinsic value of the Company. The following chart presents highlights of our consolidated financial results for 2001, 2000 and 1999.
- --------------------------------------------------------------------------------- Percent Change - --------------------------------------------------------------------------------- 2001 2000 vs. vs. 2001 2000 1999 2000 1999 - --------------------------------------------------------------------------------- Net income (in millions): As reported $ 570 $ 529 $ 321 8% 65% Excluding one-time charges and accounting changes $ 583 $ 529 $ 490 10% 8% - --------------------------------------------------------------------------------- Per share data: * Net income: As reported $ 3.82 $ 3.56 $ 2.13 7% 67% Excluding one-time charges and accounting changes $ 3.91 $ 3.56 $ 3.26 10% 9% Operating earnings $ 3.88 $ 3.41 $ 3.15 14% 8% Core earnings $ 3.67 $ 3.28 $ 2.89 12% 13% Book value $32.24 $28.59 $23.56 13% 21% Adjusted book value $45.01 $40.27 $35.01 12% 15% - ---------------------------------------------------------------------------------
* All earnings per share calculations are diluted. Our 2001 reported net income increased by 8%, or by 7% on a per share basis. Excluding the effect of the accounting change for the adoption of SFAS 133, net income and earnings per share increased by 10% as a result of a 14% growth in pre-tax income from insurance operations and a 12% increase in pre-tax income from investment management services. These increases in pre-tax income were partially offset by the loss in our municipal services segment and a decrease in net realized gains. The effect of the 71% decrease in after-tax net realized gains can be seen in the 14% increase in our operating earnings. When we remove the effect of the 57% increase in refundings, we arrive at our core earnings per share, which increased 12% over 2000. In 2000 net income increased by 8% over 1999, excluding one-time charges in 1999, which resulted in a 9% per share increase. These increases were due primarily to the 38% increase in pre-tax income from our investment management services segment. Reported net income increased by 65% in 2000 over 1999, due to one-time charges incurred in 1999. The increases in operating earnings per share were consistent throughout 2001 and 2000, highlighting the predictable earnings pattern of the Company. Core earnings showed a 13% increase in 2000 over 1999. The 2000 growth in core earnings per share was also the result of the 38% increase in investment management services income. Our book value at year-end 2001 was $32.24 per share, up 13% from $28.59 at year-end 2000. The increase was due primarily to income from operations and the increase in the market value of our investment portfolio. Our adjusted book value per share was $45.01 at year-end 2001, a 12% increase from year-end 2000. The lower growth rate in adjusted book value per share was caused by a decrease in the unrealized gain on our investment contract liabilities. The following table presents the components of our adjusted book value per share: MBIA ANNUAL REPORT 31 MBIA Inc. & Subsidiaries - -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- Percent Change - -------------------------------------------------------------------------------- 2001 2000 vs. vs. 2001 2000 1999 2000 1999 - -------------------------------------------------------------------------------- Book value $32.24 $28.59 $23.56 13% 21% After-tax value of: Net deferred premium revenue, net of deferred acquisition costs 7.81 7.40 7.22 6% 2% Present value of future installment premiums* 4.68 3.90 3.19 20% 22% Unrealized gain on investment contract liabilities 0.28 0.38 1.04 (26)% (63)% - ------------------------------------------------------------------------------- Adjusted book value $45.01 $40.27 $35.01 12% 15% - ------------------------------------------------------------------------------- * A conservative discount rate of 9% was used to present value future installment premiums and provide consistency in the periods presented. INSURANCE OPERATIONS The Company's direct par insured, adjusted direct premiums (ADP), gross premiums written (GPW) and net premiums written (NPW) for the last three years are presented in the following table: - -------------------------------------------------------------------------------- Percent Change - -------------------------------------------------------------------------------- 2001 2000 vs. vs. 2001 2000 1999 2000 1999 - -------------------------------------------------------------------------------- Par insured (in billions) $ 121 $102 $ 93 19% 10% Premiums written (in millions): ADP $1,041 $829 $710 26% 17% GPW $ 865 $687 $625 26% 10% NPW $ 630 $498 $454 26% 10% - -------------------------------------------------------------------------------- Our insurance operating results in 2001 continue to reflect a more profitable relationship between ADP and par insured as ADP increased more than par insured. The overall 19% increase in par insured reflects a 40% growth in our global public finance volume and a smaller 9% increase in our global structured finance business. ADP was up by 26% compared with 2000, breaking the $1 billion mark for the first time in the Company's history. The same strong growth in global public finance was offset by a small decrease in our structured finance ADP. The credit quality of business insured increased again in 2001 as insured credits rated A and above was approximately 80% compared with 75% in 2000 and 67% in 1999. At year-end 2001, 75% of our outstanding book was rated A and above. As an industry leader, MBIA maintained a conservative 9% discount rate when calculating ADP, and still continued to lead the market in terms of ADP market share in 2001 at 37%. We estimate the present value of our total future installment premium stream on outstanding policies to be $1.1 billion at year-end 2001, compared with $885 million at year-end 2000 and $732 million at year-end 1999. The 21% increase in 2001 is primarily due to the increase in installment premiums for our global structured finance policies. GPW, as reported in our financial statements, primarily reflects premium cash receipts and does not include the value of future premium cash receipts expected from installment premiums originated in the period. GPW was $865 million in 2001, up 26% over 2000, reflecting strong growth in both public finance as well as structured finance. Upfront GPW growth was strong in 2001, increasing 33% compared with a 19% increase in GPW generated from installment-based policies. NPW, which is net of premiums ceded to reinsurers, was also up 26% as our cession rate remained fairly consistent from year to year. In 2000, par insured increased 10% over 1999 due to the 24% increase in global structured finance business partially offset by an 11% reduction in global public finance business. ADP increased 17% while both GPW and NPW grew 10% in 2000 due to the increase in structured finance business. Premiums ceded to reinsurers from all insurance operations were $235 million, $189 million and $171 million for 2001, 2000 and 1999, respectively. Reinsurance is an effective tool for MBIA as it enables us to write large, high quality, high return business, and stay within our single risk and credit guidelines. Most of our reinsurers 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. GLOBAL PUBLIC FINANCE MARKET - MBIA's par insured and premium writings in both the new issue and secondary global public finance markets are shown in the following table: - -------------------------------------------------------------------------------- Percent Change - -------------------------------------------------------------------------------- 2001 2000 Global vs. vs. Public Finance 2001 2000 1999 2000 1999 - -------------------------------------------------------------------------------- Par insured (in billions) $ 47 $ 34 $ 38 40% (11)% Premiums written (in millions): ADP $652 $399 $388 64% 3% GPW $513 $388 $401 32% (3)% NPW $385 $293 $301 31% (2)% - -------------------------------------------------------------------------------- New issuance was higher in 2001 in the U.S. public finance market, increasing by 47% to $253 billion compared with $172 billion in 2000. The insured portion of this market increased to 53% from 46% in 2000 resulting in a 68% increase in par insured. Robust refunding activity fueled this growth in the U.S. public finance market where refundings more than tripled over 2000, as lower interest rates prevailed throughout 2001 compared with 2000. The higher U.S. public finance activity was almost matched by the 43% growth in the non-U.S. public finance market. In 2001 MBIA's global public finance par insured increased by 40% over 2000 while ADP increased 64%. While U.S. par insured and ADP increased by 31% and 17%, respectively, growth in the non-U.S. sector was much more dramatic. Par insured outside the U.S. increased by 231% and ADP increased by almost five times. U.S. par insured and ADP still accounted for the majority of the total public finance business in 2001, though, as 90% of par insured and 64% of ADP originated in the U.S. The credit quality of global public finance business continued to improve. Insured credits rated A and above accounted for 85% of 2001 global public finance par insured compared with 84% last year and at year-end 2001 81% of the outstanding global public finance book was rated A and above. 32 MBIA ANNUAL REPORT MBIA Inc. & Subsidiaries - -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Global public finance GPW increased by 32% over 2000. This increase was driven by a 148% increase in business written outside the U.S., partially offset by a smaller 13% increase in U.S. public finance business. Ceded premiums as a percent of gross premiums increased slightly from 24% in 2000 to 25% in 2001, the result of higher cession rates on deals insured outside the U.S. NPW was up 31% representing increases in both U.S. and non-U.S. business. In 2000, global public finance par insured decreased 11% while ADP increased 3% over 1999, reflecting our increased pricing strategy. GPW and NPW decreased 3% and 2%, respectively. These results were driven by increased business volume outside the U.S offset by lower U.S. business. MBIA continued to lead the market in terms of global public finance ADP market share in 2001 at 43%, despite using an industry high 9% discount rate when calculating ADP. GLOBAL STRUCTURED FINANCE MARKET - Details regarding MBIA's par insured and premium writings in both the new issue and secondary global structured finance markets are shown in the following table: - -------------------------------------------------------------------------------- Percent Change - -------------------------------------------------------------------------------- 2001 2000 Global vs. vs. Structured Finance 2001 2000 1999 2000 1999 - -------------------------------------------------------------------------------- Par insured (in billions) $ 74 $ 68 $ 55 9% 24% Premiums written (in millions): ADP $389 $430 $322 (9)% 34% GPW $352 $299 $224 18% 34% NPW $245 $205 $153 20% 34% - ------------------------------------------------------------------------------- Issuance in the domestic public asset-backed market increased 26% over 2000. MBIA insured $74 billion of par in 2001, up 9% from $68 billion in 2000. ADP was down 9% in 2001 resulting from lower business written outside the U.S. The increase in the ratio of global structured finance par insured to ADP primarily reflects the sharp improvement in the credit quality of the business we wrote. We continue to be active in the high-quality secondary market and to insure a significant number of synthetic CDO deals at the Triple-A credit quality level. These transactions produce large amounts of par insured, and have smaller premiums on an absolute basis than lower rated credits, but are extremely profitable, high-quality transactions. Overall, global structured finance insured business rated A and above totaled 75% in 2001, up sharply from 67% last year. At year-end 2001, 63% of our global structured finance book was rated A and above, up from 59% at year-end 2000. Global structured finance GPW increased 18% in 2001, to $352 million from $299 million last year. In 2001, installments received from business written in prior periods remained very strong. Business within the U.S. increased by 25% while non-U.S. business increased by only 4%. The cession rate on global structured finance business decreased from 32% last year to 30% this year, resulting in an increase in NPW of 20%. This higher growth in NPW when compared with GPW reflects the decreased cession rate outside the U.S. In 2000, global structured finance par insured and ADP increased 24% and 34%, respectively, over 1999 due primarily to the increase in non-U.S. business. In 2000, both GPW and NPW increased 34% due to the strong subsequent installments collected during the year. PREMIUMS EARNED - The composition of MBIA's premiums earned in terms of its scheduled and refunded components is illustrated as follows: - -------------------------------------------------------------------------------- Percent Change - -------------------------------------------------------------------------------- 2001 2000 vs. vs. In millions 2001 2000 1999 2000 1999 - -------------------------------------------------------------------------------- Premiums earned: Scheduled $469 $412 $379 14% 9% Refunded 55 34 64 61% (47)% - -------------------------------------------------------------------------------- Total $524 $446 $443 17% 1% - -------------------------------------------------------------------------------- In 2001, premiums earned from scheduled amortization increased by 14%, after a 9% increase in 2000, indicating that the benefits of the increased pricing strategy established in early 1999 are producing solid growth in premium earnings. Global structured finance premiums earned drove this result, increasing 21% over 2000. Total premiums earned in 2000 grew by only 1% over 1999 due to the 47% decrease in refunding premiums earned. Refunded premiums earned increased significantly this year compared with last year, reflecting the lower interest rate environment. When an MBIA-insured bond issue is refunded or retired early, the related deferred premium revenue is earned immediately. The level 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. INVESTMENT INCOME - Our insurance-related investment income (exclusive of net realized gains) increased 5% to $413 million in 2001, up from $394 million in 2000. In 2000, investment income was up 10% over 1999. The lower growth in 2001 was primarily due to a continuing decline in interest rates as well as a shift in the investment portfolio from taxable to tax-exempt investments. ADVISORY FEES - The Company collects various advisory fees in connection with certain transactions. The Company also earns advisory fees in connection with its administration of certain third-party-owned special purpose vehicles. Depending upon the type of fee received, the fee is either earned when it is due or deferred and earned over the life of the related transaction. Work, waiver and consent, termination, administrative and management fees are earned when due. Structuring and commitment fees are earned on a straight-line basis over the life of the related insured transaction. In 2001, advisory fee revenues increased 39% to $39 million, up from $28 million in 2000 and $27 million in 1999. These increases were primarily due to one-time, non-deferrable fees recognized in 2001 and 2000. Due to the one-time nature of advisory fees, there can be no assurance that the level of advisory fees will stay the same and not decline. LOSSES AND LOSS ADJUSTMENT EXPENSES (LAE) - We maintain a loss and LAE reserve based on our estimate of identified and unallocated losses from our insured obligations. In 2001 and 2000, we reviewed our loss reserving methodology. Each review included an analysis of loss-reserve factors based on the latest available industry MBIA ANNUAL REPORT 33 MBIA Inc. & Subsidiaries - -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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. The reviews did not result in a change in our Company's loss reserving factors. 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 and loss ratio for the last three years: - -------------------------------------------------------------------------------- Percent Change - -------------------------------------------------------------------------------- 2001 2000 vs. vs. In millions 2001 2000 1999 2000 1999 - -------------------------------------------------------------------------------- Case-specific: Gross $246 $240 $235 3% 2% Reinsurance recoverable on unpaid losses 35 31 31 12% -- - -------------------------------------------------------------------------------- Net case reserves $211 $209 $204 1% 2% Unallocated reserves 272 259 232 5% 12% - -------------------------------------------------------------------------------- Net loss and LAE reserves $483 $468 $436 3% 7% - -------------------------------------------------------------------------------- Provision $ 57 $ 51 $198 10% (74)% - -------------------------------------------------------------------------------- Loss ratio: GAAP 10.8% 11.5% 44.8% Statutory 9.3% 6.2% 12.3% - -------------------------------------------------------------------------------- In 2001, the increase in the provision for losses and LAE was a direct result of the additional insurance business written in 2001. The 74% decrease in 2000 when compared with 1999 was due to the $153 million one-time increase in loss and LAE reserves in 1999. Excluding this one-time reserve strengthening, our 2000 provision increased by 12% over 1999. The GAAP loss ratio, which is calculated by dividing loss and loss adjustment expenses by net premiums earned, is one measurement of the Company's underwriting performance. The GAAP loss ratio differs from the statutory loss ratio because it includes the provision for unallocated losses. In 1999, the GAAP loss provision included significant loss reserve strengthening. Excluding this reserve strengthening, the 1999 GAAP loss ratio was 10.3%. 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. The Company's policy acquisition costs, operating expenses and total insurance operating expenses, as well as related expense ratios, are shown below: - -------------------------------------------------------------------------------- Percent Change - -------------------------------------------------------------------------------- 2001 2000 vs. vs. In millions 2001 2000 1999 2000 1999 - -------------------------------------------------------------------------------- Amortization of deferred acquisition costs $ 42 $ 36 $ 37 18% (2)% Operating expenses 81 83 80 (3)% 4% - -------------------------------------------------------------------------------- Total insurance operating expenses $123 $119 $117 3% 2% - -------------------------------------------------------------------------------- Expense ratio: GAAP 23.5% 26.7% 26.4% Statutory 13.4% 22.1% 23.6% - -------------------------------------------------------------------------------- In 2001, the amortization of deferred acquisition costs increased 18% over 2000, in line with the increase in insurance business earned. The amortization of deferred acquisition costs decreased 2% in 2000 compared with 1999. The ratio of policy acquisition costs, net of deferrals, to earned premiums has remained steady at 8% in 2001, 2000 and 1999. Operating expenses decreased 3% in 2001 from $83 million in 2000 to $81 million in 2001, reflecting the Company's continuing expense management program. The 4% increase in operating expenses in 2000 related to the costs associated with the expansion of the Company's Armonk, New York headquarters. Financial guarantee insurance companies use the statutory expense ratio (expenses before deferrals divided by net premiums written) as a measure of expense management. The Company's 2001 statutory expense ratio of 13.4% is significantly below the 2000 ratio of 22.1%, which was down slightly from 23.6% in 1999. The GAAP expense ratio of 23.5% also decreased compared with 2000. The improvement in expense ratios is a result of the increased emphasis on expense management as well as the growth in premium production. INSURANCE INCOME - The Company's insurance income of $796 million for 2001 increased 14% over 2000. This increase was due to strong earned premium growth of 17% and advisory fee revenue growth of 39%, as well as the 3% reduction in insurance operating expenses. INVESTMENT MANAGEMENT SERVICES Since 1998, the resources and capabilities of our four investment management companies have been consolidated under MBIA Asset Management, LLC. During this time we have experienced operating benefits as well as record performance. In 2001, we experienced another year of growth, although slowed by a weakening in the equity markets and a tightening of spreads in our municipal investment agreement portfolio. Consolidated revenues were up 6% over last year, while expenses were up only 1%. As a result, operating income increased 12% over 2000. In addition, we ended the year with over $39 billion in assets under management, up 7% from year-end 2000. The following table summarizes our consolidated investment management results over the last three years: 34 MBIA ANNUAL REPORT MBIA Inc. & Subsidiaries - -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- Percent Change - -------------------------------------------------------------------------------- 2001 2000 vs. vs. In millions 2001 2000 1999 2000 1999 - -------------------------------------------------------------------------------- Revenues $126 $119 $87 6% 37% Expenses 63 63 46 1% 36% - -------------------------------------------------------------------------------- Operating income $ 63 $ 56 $41 12% 38% - -------------------------------------------------------------------------------- MBIA Asset Management, LLC is comprised of 1838 Investment Advisors, LLC (1838), MBIA Municipal Investors Service Corp. (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 $12 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. MBIA-MISC provides cash management, investment fund administration and fixed-rate investment placement services directly to local governments and school districts. MBIA-MISC is a Securities and Exchange Commission (SEC)-registered investment adviser and at year-end 2001 had $11 billion in assets under management, up 34% over year-end 2000. 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 2001, principal and accrued interest outstanding on investment and repurchase agreements and securities sold under agreements to repurchase or loaned was $6.6 billion, compared with $5.3 billion at year-end 2000. At market value, assets supporting those agreements were $6.7 billion and $5.3 billion at year-end 2001 and 2000, respectively. These assets are comprised of high-quality securities with an average credit quality rating of Double-A. CMC is a 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 the Company's insurance related investment portfolios. At year-end 2001, CMC's third-party assets under management were $2.4 billion compared with $2.3 billion at year-end 2000. MUNICIPAL SERVICES MBIA MuniServices Company (MBIA MuniServices) delivers revenue enhancement services and products to public-sector clients nationwide, consisting of discovery, audit, collections/recovery, enforcement and information (data) services. During 1999, the Company completed a reorganization of the operations of two of its subsidiaries into one entity, MBIA MuniServices. The Municipal Services segment also includes Capital Asset Holdings GP, Inc. and certain affiliated entities (Capital Asset), a servicer of delinquent tax certificates. In 2001, the Municipal Services operations lost $3 million compared with operating income of $610 thousand during 2000. Total revenues decreased by 27% as a result of a reduction in municipal contracts, while total expenses decreased by 18% as a result of our reorganization efforts. The Company is the majority owner of Capital Asset, which was in the business of acquiring and servicing tax liens. The Company became the 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, which was recorded as a one-time charge. MBIA Insurance Corporation (MBIA Corp.) has insured three securitizations of tax liens that were originated and continue to be serviced by Capital Asset. These securitizations were structured through the sale by Capital Asset of substantially all of its tax liens to three off-balance sheet qualifying special purpose vehicles that were established in connection with these securitizations. The qualifying special purpose vehicles are not included in the consolidation of the MBIA group. 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 insured by MBIA Corp. As of December 31, 2001, the aggregate gross insured amount in connection with these securitizations was approximately $250 million. MBIA Corp. has established case reserves related to these policies, and there can be no assurance that such reserves will be sufficient to cover all losses under these policies. In addition, Capital Asset has other contingent liabilities, including potential liabilities in connection with pending litigation in which it is involved. During the second quarter of 1999, MBIA MuniServices sold its wholly owned subsidiary MBIA MuniFinancial, recognizing a $3 million pre-tax loss on disposition, which is recorded in one-time charges. CORPORATE NET INVESTMENT INCOME - Net investment income was $7 million in 2001, which was the result of assets invested at the holding company level from the debt proceeds received during the fourth quarter of 2000 and from dividends received from MBIA Corp. INTEREST EXPENSE - The Company incurred $56 million of interest expense compared with $54 million last year. The increase is the result of the additional $100 million of debt issued during the fourth quarter of 2000. CORPORATE EXPENSES - Corporate expenses are composed primarily of general corporate expenses. Corporate expenses have remained fairly consistent at $21 million, $19 million and $21 million in 2001, 2000 and 1999, respectively. ONE-TIME CHARGES - As previously discussed, one-time charges for 1999 included a $102 million pre-tax charge, which reflected 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 was the $3 million pre-tax loss on the sale of MuniFinancial. GAINS AND LOSSES NET REALIZED GAINS - Net realized gains were $9 million in 2001 compared with $33 million in 2000. Net realized gains were up 31% in 2000 from 1999's $25 million. These gains were generated as a result 35 MBIA ANNUAL REPORT MBIA Inc. & Subsidiaries - -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS of the ongoing management of the investment portfolio. CHANGE IN FAIR VALUE OF DERIVATIVE INSTRUMENTS - Net unrealized losses were $4 million in 2001 due to the change in the fair value of derivative instruments which was derived from market information and appropriate valuation methodologies. There are no comparative figures in 2000 or 1999. For further information see Note 5 in the Notes to Consolidated Financial Statements. 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 2001 increased slightly to 26.3% from 26.1% in 2000 and 17.4% in 1999. 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 and LAE reserves. CAPITAL RESOURCES We carefully manage our capital resources to minimize our cost of capital while maintaining appropriate claims-paying resources to sustain our Triple-A claims-paying ratings. At year-end 2001, our total shareholders' equity was $4.8 billion, with total long-term borrowings at $805 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: - -------------------------------------------------------------------------------- 2001 2000 1999 - -------------------------------------------------------------------------------- Long-term debt (in millions) $805 $795 $689 Long-term debt to total capital 14% 16% 16% - -------------------------------------------------------------------------------- In July of 1999, the board of directors authorized the repurchase of 11.25 million shares of common stock of the Company. The Company began the repurchase program in the fourth quarter of 1999. As of year-end 2001, the Company had repurchased a total of 3.4 million shares at an average price of $31.98 per share. 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 excess of the greater of $900 million or 5.6% of average annual debt service with respect to public finance transactions. The agreement is for a seven-year term, which expires on October 31, 2008, and, subject to approval by the banks, may be renewed annually to extend the term to seven years beyond the renewal date. MBIA Corp. also maintains stop-loss reinsurance coverage of $211 million on its global structured finance portfolio. The attachment point is calculated annually as a percentage of the global structured finance portfolio and was $900 million during 2001. The attachment point increased to $1,014 million on January 1, 2002. In addition, MBIA Inc. maintains an option to place $150 million of subordinated securities contingent upon MBIA Corp. and other insurance subsidiaries incurring losses in excess of $1.65 billion as of December 31, 2001. The attachment point is calculated annually as a percentage of the insured portfolio. From time to time we access the capital markets to support the growth of our businesses. In December 2000, we issued 175 million of Swiss Francs 10-year notes (converted to approximately $99 million) and $100 million of 40-year notes. At year-end 2001, total claims-paying resources for MBIA Corp. stood at $10.1 billion, a 10% increase over year-end 2000. LIQUIDITY Cash flow needs at the parent company level are primarily for dividends to our shareholders 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 2001, MBIA Corp.'s operating cash flow totaled $851 million compared with $695 million in 2000. 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 as shown on MBIA Corp.'s latest filed statutory financial statements. In 2001, MBIA Corp. declared and paid dividends of $212 million and based upon the filing of our 2001 statutory financial statements had dividend capacity of $73 million without special regulatory approval. The Company has significant liquidity supporting its businesses. At the end of 2001, cash equivalents and short-term investments totaled $409 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 selling or pledging our fixed-income investments in our investment portfolio, tapping existing liquidity facilities and new borrowings. The Company has substantial external borrowing capacity. We maintain two short-term bank lines totaling $650 million with a group of highly-rated worldwide banks, a $217 million facility with a term of 364 days and a $433 million facility with a 4-year term. At year-end 2001, there were no balances outstanding under these lines. The 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 2001, the fair value of our consolidated investment portfolio was $14.5 billion, as shown below: - -------------------------------------------------------------------------------- Percent Change - -------------------------------------------------------------------------------- In millions 2001 2000 2001 vs. 2000 - -------------------------------------------------------------------------------- Insurance operations: Amortized cost $ 7,704 $ 7,108 8% Unrealized gain 146 128 14% - -------------------------------------------------------------------------------- Fair value $ 7,850 $ 7,236 8% - -------------------------------------------------------------------------------- Municipal investment agreements: Amortized cost $ 6,535 $ 4,948 32% Unrealized gain 131 49 167% - -------------------------------------------------------------------------------- Fair value $ 6,666 $ 4,997 33% - -------------------------------------------------------------------------------- Total portfolio at fair value $14,516 $12,233 19% - -------------------------------------------------------------------------------- The growth of our insurance-related investments in 2001 was 36 MBIA ANNUAL REPORT MBIA Inc. & Subsidiaries - -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS the result of positive cash flows. The fair value of investments related to our municipal investment agreement business has increased to $6.7 billion from $5.0 billion at December 31, 2000. This increase was a result of growth in IMC's municipal investment and repurchase agreement program. The 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 in accumulated other comprehensive income in shareholders' equity. Fair value is based on quoted market prices, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. 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. The following table summarizes the Company's contractual obligations as of December 31, 2001. For information on the Company's financial guarantee exposure see Footnote 20 in the Notes to Consolidated Financial Statements. - --------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------- As of December 31, 2001 - ----------------------------------------------------------------------------------------------------- Less Than 1-3 4-5 After In thousands One Year Years Years 5 Years Total - ----------------------------------------------------------------------------------------------------- Long-term debt $ 3,750 -- -- $ 787,953 $ 791,703 Municipal investment and repurchase agreements* 2,101,563 1,921,411 156,939 1,826,240 6,006,153 Repurchase agreements* 144,773 410,723 -- -- 555,496 - ----------------------------------------------------------------------------------------------------- Total $2,250,086 $2,332,134 $156,939 $2,614,193 $7,353,352 - -----------------------------------------------------------------------------------------------------
* At December 31, 2001, the Company had assets supporting the investment and repurchase agreements totaling $6.7 billion at market value. The Company generates significant liquidity from its operations. Because of its risk management policies and procedures, diversification and reinsurance, the Company believes that the occurrence of an event that would significantly adversely affect liquidity is unlikely. MARKET RISK The fair values of some of the 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 $284 million. This projected change in fair value is primarily a result of the Company's fixed-maturity securities asset portfolio, which loses value with increases in interest rates. Since the 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. The 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%. MBIA ANNUAL REPORT 37 MBIA Inc. & Subsidiaries - -------------------------------------------------------------------------------- REPORT ON MANAGEMENT'S RESPONSIBILITY AND REPORT OF INDEPENDENT ACCOUNTANTS 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 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 OF INDEPENDENT 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, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, 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. As discussed in Note 5 to the financial statements, the Company changed its method of accounting for derivative instruments in 2001. /s/ PricewaterhouseCoopers LLP New York, New York February 1, 2002 38 MBIA ANNUAL REPORT MBIA Inc. & Subsidiaries - -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS
Dollars in thousands except per share amounts December 31, 2001 December 31, 2000 - ------------------------------------------------------------------------------------------------------------------------------ ASSETS Investments: Fixed-maturity securities held as available-for-sale at fair value (amortized cost $7,274,848 and $6,612,498) $ 7,421,023 $ 6,740,127 Short-term investments, at amortized cost (which approximates fair value) 293,791 376,604 Other investments 135,376 119,591 - ------------------------------------------------------------------------------------------------------------------------------ 7,850,190 7,236,322 Municipal investment agreement portfolio held as available-for-sale at fair value (amortized cost $5,957,089 and $4,736,439) 6,079,066 4,785,168 Municipal investment agreement portfolio pledged as collateral at fair value (amortized cost $577,790 and $211,214) 586,915 211,440 - ------------------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENTS 14,516,171 12,232,930 - ------------------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents 115,040 93,962 Securities purchased under agreements to resell or borrowed -- 314,624 Accrued investment income 181,984 152,043 Deferred acquisition costs 277,699 274,355 Prepaid reinsurance premiums 507,079 442,622 Reinsurance recoverable on unpaid losses 35,090 31,414 Goodwill (less accumulated amortization of $74,022 and $67,472) 97,772 104,322 Property and equipment, at cost (less accumulated depreciation of $72,088 and $62,026) 129,004 133,514 Receivable for investments sold 157,864 13,772 Other assets 181,982 100,780 - ------------------------------------------------------------------------------------------------------------------------------ TOTAL ASSETS $ 16,199,685 $ 13,894,338 - ------------------------------------------------------------------------------------------------------------------------------ LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Deferred premium revenue $ 2,565,096 $ 2,397,578 Loss and loss adjustment expense reserves 518,389 499,279 Municipal investment agreements 5,150,374 3,821,652 Municipal repurchase agreements 904,744 967,803 Long-term debt 805,062 795,102 Short-term debt 47,751 144,243 Securities sold under agreements to repurchase or loaned 555,496 489,624 Current income taxes 22,419 -- Deferred income taxes 272,665 252,463 Deferred fee revenue 27,629 32,694 Payable for investments purchased 130,098 7,899 Other liabilities 417,324 262,588 - ------------------------------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES 11,417,047 9,670,925 - ------------------------------------------------------------------------------------------------------------------------------ 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 -- 400,000,000 and 200,000,000; issued shares -- 151,950,991 and 151,159,943 151,951 151,160 Additional paid-in capital 1,195,802 1,169,200 Retained earnings 3,415,517 2,934,608 Accumulated other comprehensive income, net of deferred income tax provision of $91,222 and $57,141 145,321 85,707 Unallocated ESOP shares (1,983) (2,950) Unearned compensation -- restricted stock (11,335) (10,659) Treasury stock -- 3,516,921 shares in 2001 and 3,314,037 shares in 2000 (112,635) (103,653) - ------------------------------------------------------------------------------------------------------------------------------ TOTAL SHAREHOLDERS' EQUITY 4,782,638 4,223,413 - ------------------------------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 16,199,685 $ 13,894,338 ==============================================================================================================================
The accompanying notes are an integral part of the consolidated financial statements. MBIA ANNUAL REPORT 39 MBIA Inc. & Subsidiaries - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31 --------------------------------------------------------------- Dollars in thousands except per share amounts 2001 2000 1999 - ---------------------------------------------------------------------------------------------------------------------------- INSURANCE Revenues: Gross premiums written $ 865,226 $ 687,408 $ 624,871 Ceded premiums (235,362) (189,316) (171,256) - ---------------------------------------------------------------------------------------------------------------------------- Net premiums written 629,864 498,092 453,615 Increase in deferred premium revenue (105,994) (51,739) (10,819) - ---------------------------------------------------------------------------------------------------------------------------- Premiums earned (net of ceded premiums of $169,034, $147,249 and $119,879) 523,870 446,353 442,796 Net investment income 412,763 393,985 359,456 Advisory fees 39,287 28,284 27,486 - ---------------------------------------------------------------------------------------------------------------------------- Total insurance revenues 975,920 868,622 829,738 Expenses: Losses and loss adjustment 56,651 51,291 198,454 Amortization of deferred acquisition costs 42,433 35,976 36,700 Operating 80,498 83,066 80,082 - ---------------------------------------------------------------------------------------------------------------------------- Total insurance expenses 179,582 170,333 315,236 - ---------------------------------------------------------------------------------------------------------------------------- Insurance income 796,338 698,289 514,502 - ---------------------------------------------------------------------------------------------------------------------------- INVESTMENT MANAGEMENT SERVICES Revenues 125,929 118,859 86,600 Expenses 62,910 62,535 45,920 - ---------------------------------------------------------------------------------------------------------------------------- Investment management services income 63,019 56,324 40,680 - ---------------------------------------------------------------------------------------------------------------------------- MUNICIPAL SERVICES Revenues 27,037 37,089 22,923 Expenses 29,951 36,479 35,372 - ---------------------------------------------------------------------------------------------------------------------------- Municipal services income (loss) (2,914) 610 (12,449) - ---------------------------------------------------------------------------------------------------------------------------- CORPORATE Net investment income 6,899 -- -- Interest expense 56,445 53,756 53,935 Corporate expenses 20,874 19,494 21,052 One-time charges -- -- 105,023 - ---------------------------------------------------------------------------------------------------------------------------- Corporate loss (70,420) (73,250) (180,010) - ---------------------------------------------------------------------------------------------------------------------------- GAINS AND LOSSES Net realized gains 8,896 32,884 25,160 Change in fair value of derivative instruments (3,935) -- -- - ---------------------------------------------------------------------------------------------------------------------------- Net gains and losses 4,961 32,884 25,160 - ---------------------------------------------------------------------------------------------------------------------------- Income before income taxes 790,984 714,857 387,883 Provision for income taxes 207,826 186,220 67,353 - ---------------------------------------------------------------------------------------------------------------------------- Income before cumulative effect of accounting change 583,158 528,637 320,530 Cumulative effect of accounting change (13,067) -- -- - ---------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 570,091 $ 528,637 $ 320,530 ============================================================================================================================ NET INCOME PER COMMON SHARE: Basic $ 3.85 $ 3.58 $ 2.15 Diluted $ 3.82 $ 3.56 $ 2.13 - ---------------------------------------------------------------------------------------------------------------------------- Weighted-average number of common shares outstanding: Basic 148,190,890 147,714,663 149,386,305 Diluted 149,282,657 148,668,943 150,603,508 ============================================================================================================================
The accompanying notes are an integral part of the consolidated financial statements. 40 MBIA ANNUAL REPORT MBIA Inc. & Subsidiaries - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the years ended December 31, 2001, 2000 and 1999 Accumulated Common Stock Additional Other ------------------- Paid-in Retained Comprehensive In thousands except per share amounts Shares Amount Capital Earnings Income (Loss) - -------------------------------------------------------------------------------------------------------------------------- BALANCE, JANUARY 1, 1999 149,354 $ 149,354 $ 1,119,408 $ 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 149 149 4,833 -- -- Stock issued for acquisition 57 57 2,373 -- -- Exercise of stock options 549 549 14,067 -- -- Dividends (declared per common share $0.537, paid per common share $0.533) -- -- -- (80,273) -- - -------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1999 150,109 150,109 1,141,072 2,486,478 (224,511) - -------------------------------------------------------------------------------------------------------------------------- Comprehensive income: Net income -- -- -- 528,637 -- Other comprehensive income (loss): Change in unrealized appreciation of investments net of change in deferred income taxes of $(170,061) -- -- -- -- 316,010 Change in foreign currency translation -- -- -- -- (5,792) Other comprehensive income Total comprehensive income Treasury shares acquired -- -- -- -- -- Unallocated ESOP shares -- -- (43) -- -- Unearned compensation - restricted stock 114 114 5,425 -- -- Exercise of stock options 937 937 22,746 -- -- Dividends (declared and paid per common share $0.547) -- -- -- (80,507) -- - -------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 2000 151,160 151,160 1,169,200 2,934,608 85,707 - -------------------------------------------------------------------------------------------------------------------------- Comprehensive income: Net income -- -- -- 570,091 -- Other comprehensive income (loss): Change in unrealized appreciation of investments net of change in deferred income taxes of $39,867 -- -- -- -- 74,009 Change in fair value of derivative instruments net of change in deferred income taxes of $(5,786) -- -- -- -- (10,746) Change in foreign currency translation -- -- -- -- (3,649) Other comprehensive income Total comprehensive income Treasury shares acquired -- -- -- -- -- Unallocated ESOP shares -- -- 31 -- -- Unearned compensation - restricted stock 57 57 3,036 -- -- Exercise of stock options 738 738 23,535 -- -- Dividends (declared per common share $0.600, paid per common share $0.587) (4) (4) -- (89,182) -- - -------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 2001 151,951 $ 151,951 $ 1,195,802 $ 3,415,517 $ 145,321 - -------------------------------------------------------------------------------------------------------------------------- For the years ended December 31, 2001, 2000 and 1999 Unearned Unallocated Compensation Treasury Stock Total ESOP -Restricted ---------------------- Shareholders' Shares Stock Shares Amount Equity - ------------------------------------------------------------------------------------------------------------------------------- BALANCE, JANUARY 1, 1999 $ (4,044) $ (6,807) (33) $ (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 -- -- (750) (24,698) (24,698) Unallocated ESOP shares (319) -- 19 462 534 Unearned compensation - restricted stock -- (3,179) (18) (632) 1,171 Stock issued for acquisition -- -- -- -- 2,430 Exercise of stock options -- -- -- -- 14,616 Dividends (declared per common share $0.537, paid per common share $0.533) -- -- -- -- (80,273) - ------------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1999 (4,363) (9,986) (782) (25,698) 3,513,101 - ------------------------------------------------------------------------------------------------------------------------------- Comprehensive income: Net income -- -- -- -- 528,637 Other comprehensive income (loss): Change in unrealized appreciation of investments net of change in deferred income taxes of $(170,061) -- -- -- -- 316,010 Change in foreign currency translation -- -- -- -- (5,792) ----------- Other comprehensive income 310,218 ----------- Total comprehensive income 838,855 ----------- Treasury shares acquired -- -- (2,520) (77,717) (77,717) Unallocated ESOP shares 1,413 -- -- -- 1,370 Unearned compensation - restricted stock -- (673) (12) (238) 4,628 Exercise of stock options -- -- -- -- 23,683 Dividends (declared and paid per common share $0.547) -- -- -- -- (80,507) - ------------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 2000 (2,950) (10,659) (3,314) (103,653) 4,223,413 - ------------------------------------------------------------------------------------------------------------------------------- Comprehensive income: Net income -- -- -- -- 570,091 Other comprehensive income (loss): Change in unrealized appreciation of investments net of change in deferred income taxes of $39,867 -- -- -- -- 74,009 Change in fair value of derivative instruments net of change in deferred income taxes of $(5,786) -- -- -- -- (10,746) Change in foreign currency translation -- -- -- -- (3,649) ----------- Other comprehensive income 59,614 ----------- Total comprehensive income 629,705 ----------- Treasury shares acquired -- -- (203) (8,982) (8,982) Unallocated ESOP shares 967 -- -- -- 998 Unearned compensation - restricted stock -- (676) -- -- 2,417 Exercise of stock options -- -- -- -- 24,273 Dividends (declared per common share $0.600, paid per common share $0.587) -- -- -- -- (89,186) - ------------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 2001 $ (1,983) $(11,335) (3,517) $(112,635) $4,782,638 - -------------------------------------------------------------------------------------------------------------------------------
DISCLOSURE OF RECLASSIFICATION AMOUNT: 1999 2000 2001 - ------------------------------------------------------------------------------------------------------------------------------- Unrealized (depreciation) appreciation of investments arising during the period, net of taxes $(448,686) $ 317,092 $ 80,253 Reclassification adjustment, net of taxes (54,310) (1,082) (6,244) - ------------------------------------------------------------------------------------------------------------------------------- Net unrealized (depreciation) appreciation, net of taxes $(502,996) $ 316,010 $ 74,009 ===============================================================================================================================
The accompanying notes are an integral part of the consolidated financial statements. MBIA ANNUAL REPORT 41 MBIA Inc. & Subsidiaries - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31 Dollars in thousands 2001 2000 1999 - --------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 570,091 $ 528,637 $ 320,530 Adjustments to reconcile net income to net cash provided by operating activities: Increase in accrued investment income (29,941) (16,699) (8,354) Increase in deferred acquisition costs (3,344) (22,433) (21,837) Increase in prepaid reinsurance premiums (64,457) (39,412) (50,511) Increase in deferred premium revenue 170,452 91,151 61,329 Increase in loss and loss adjustment expense reserves, net 15,434 31,405 166,346 Depreciation 10,062 11,557 11,368 Amortization of goodwill 6,550 6,701 6,983 Amortization of bond discount, net (8,416) (31,379) (25,338) Net realized gains on sale of investments (8,896) (32,884) (25,160) Deferred income tax (benefit) provision (13,788) 49,575 (40,505) Fair value of derivative instruments 24,119 -- -- Other, net 53,727 64,124 48,400 - --------------------------------------------------------------------------------------------------------------------------- Total adjustments to net income 151,502 111,706 122,721 - --------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 721,593 640,343 443,251 - --------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of fixed-maturity securities, net of payable for investments purchased (17,178,199) (7,417,426) (6,778,179) Sale of fixed-maturity securities, net of receivable for investments sold 16,125,642 6,543,563 6,144,650 Redemption of fixed-maturity securities, net of receivable for investments redeemed 431,275 282,540 288,710 Sale (purchase) of short-term investments 95,822 (93,552) 113,896 (Purchase) sale of other investments (14,386) 18,538 (50,616) Purchases for municipal investment agreement portfolio, net of payable for investments purchased (9,518,913) (5,418,222) (2,672,918) Sales from municipal investment agreement portfolio, net of receivable for investments sold 7,886,657 5,002,639 1,650,111 Capital expenditures, net of disposals (5,551) (16,363) (58,650) Other, net 499 8,297 11,146 - --------------------------------------------------------------------------------------------------------------------------- Net cash used by investing activities (2,177,154) (1,089,986) (1,351,850) - --------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds (repayment) from issuance (retirement) of long-term debt (3,750) 192,363 (3,750) Net (repayment) proceeds from (retirement) issuance of short-term debt (96,492) (24,500) 65,001 Dividends paid (87,112) (80,708) (79,764) Purchase of treasury stock (8,982) (77,955) (24,698) Proceeds from issuance of municipal investment and repurchase agreements 4,073,245 2,674,379 2,787,906 Payments for drawdowns of municipal investment and repurchase agreements (2,805,039) (2,404,637) (1,770,418) Securities sold under agreements to repurchase or loaned, net 380,496 147,421 (7,492) Exercise of stock options 24,273 23,683 14,616 - --------------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 1,476,639 450,046 981,401 - --------------------------------------------------------------------------------------------------------------------------- Net increase in cash and cash equivalents 21,078 403 72,802 Cash and cash equivalents - beginning of year 93,962 93,559 20,757 - --------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents - end of year $ 115,040 $ 93,962 $ 93,559 - --------------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL CASH FLOW DISCLOSURES: Income taxes paid $ 178,455 $ 96,395 $ 136,877 Interest paid: Municipal investment and repurchase agreements $ 304,528 $ 265,988 $ 210,495 Long-term debt $ 61,091 $ 53,234 $ 53,466 ==========================================================================================================================
The accompanying notes are an integral part of the consolidated financial statements. 42 MBIA ANNUAL REPORT MBIA Inc. & Subsidiaries - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: BUSINESS AND ORGANIZATION MBIA Inc. (MBIA or the Company) was incorporated in the state of 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.) and its wholly owned French subsidiary MBIA Assurance, S.A. (MBIA Assurance). MBIA Assurance writes financial guarantee insurance in the international market, and pursuant to a reinsurance agreement with MBIA Corp., a substantial amount of the risks insured by MBIA Assurance is reinsured by MBIA Corp. In addition, the Company manages books of business through two other subsidiaries, MBIA Insurance Corp. of Illinois (MBIA Illinois), acquired in December 1989, and Capital Markets Assurance Corporation (CMAC), acquired in February 1998 when the Company merged with CapMAC Holdings, Inc. (CapMAC). The net book of business of these two subsidiaries is 100% reinsured by MBIA Corp. The Company also provides investment services through several of its subsidiaries which are wholly owned by MBIA Asset Management, LLC (MBIA-AMC), which was formed in 1998 and converted to a limited liability corporation in December 2000. MBIA Municipal Investors Services Corporation (MBIA-MISC) operates cooperative cash management programs for school districts and municipalities. In May 2000, MBIA-MISC merged with another subsidiary, American Money Management Associates, Inc. (AMMA), which provided investment and treasury management consulting services to municipal and quasi public-sector clients. This merger combined the investment expertise into a consolidated investment management business. MBIA Investment Management Corp. (IMC) provides guaranteed investment agreements to states, municipalities and municipal authorities. MBIA Capital Management Corp. (CMC) provides fixed- income investment management services for the Company, its affiliates and third-party institutional clients. 1838 Investment Advisors, LLC (1838), a limited liability corporation, manages domestic and international equity, fixed-income and balanced portfolios for high-net-worth individuals, mutual funds, endowments, foundations and employee benefit plans. The Company also provides municipal services through its municipal services operations subsidiaries, which are wholly owned by MBIA MuniServices Company (MBIA MuniServices), formed in 1996. Municipal Tax Collection Bureau Inc. (MTB) is a provider of tax compliance services to state and local governments. Municipal Resources Consultants (MRC) is a revenue audit and information services firm. Capital Asset Holdings, Inc. (Capital Asset) services and manages delinquent municipal tax liens. In July 1997 the Company acquired MuniFinancial, a public finance consulting firm specializing in municipal debt administration, which it sold in September 1999. TRS Funding Corporation (TRS) was formed in September 1997 to provide clients with structured financing solutions involving the use of total return swaps and credit derivatives. While MBIA does not have a direct ownership interest in TRS, it is consolidated in the financial statements of the Company on the basis that substantially all rewards and risks are borne by MBIA. LaCrosse Financial Products, LLC (LaCrosse), formerly King Street Financial Products, LLC, was created in December 1999 to offer clients structured derivative products, such as credit default, interest rate and currency swaps. While MBIA does not have a direct ownership interest in LaCrosse, it is consolidated in the financial statements of the Company on the basis that substantially all rewards and risks are borne by MBIA. NOTE 2: SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements have been prepared on the basis of accounting principles generally accepted in the United States of America (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 disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. As additional information becomes available or actual amounts become determinable, the recorded estimates are revised and reflected in operating results. 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, entities under its control and entities for which the Company retains substantially all the risks and rewards. 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 in accumulated other comprehensive income in 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, in accumulated other comprehensive income in shareholders' equity. MBIA ANNUAL REPORT 43 MBIA Inc. & Subsidiaries - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CASH AND CASH EQUIVALENTS - Cash and cash equivalents include cash on hand and demand deposits with banks. SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL OR BORROWED AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE OR LOANED - Securities purchased under agreements to resell or borrowed and securities sold under agreements to repurchase or loaned 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. The Company periodically conducts a study to determine which operating costs vary with, and are primarily related to, the acquisition of new insurance business and qualify for deferral. 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 in proportion to the expiration of the related risk. Therefore, premium earnings are greater in the earlier periods of an upfront transaction when there is a higher amount of exposure outstanding. The premiums are apportioned to individual sinking fund payments of a bond issue according to an amortization schedule. After the premiums are allocated to each scheduled sinking fund payment, they are earned on a straight-line basis over the period of that sinking fund payment. 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. Installment premiums are earned over each installment period, generally one year or less. ADVISORY FEE REVENUE RECOGNITION - The Company collects various advisory fees in connection with certain transactions. The Company also earns advisory fees in connection with its administration of certain third-party-owned special purpose vehicles. Depending upon the type of fee received, the fee is either earned when it is due or deferred and earned over the life of the related transaction. Work, waiver and consent, termination, administrative and management fees are earned when due. Structuring and commitment fees are earned on a straight-line basis over the life of the related insured transaction. GOODWILL - Goodwill represents the excess of the cost of acquisitions over the fair value of the net assets acquired. Goodwill attributed to the acquisition of MBIA Corp. and MBIA-MISC 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. Effective January 1, 2002 the Company will adopt Statement of Financial Accounting Standards (SFAS) 142, "Goodwill and Other Intangible Assets." See Note 4 for an explanation of the impact the adoption of this Statement will have on the Company's financial statements. 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 current earnings as incurred. LOSS AND LOSS ADJUSTMENT EXPENSES - Loss and loss adjustment expense (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. The unallocated reserve is calculated by applying a loss factor to net debt service written. Management determines this factor based on an independent research agency study of bond defaults, which management feels is a reliable source of bond default data. 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 expected recoveries under salvage and subrogation rights and reinsurance, based on a discount rate of 5.86%. The discount rate is based on the estimated yield of our fixed-income investment portfolio. 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 2001 and 2000, the Company reviewed its loss reserving methodology. The reviews included an analysis of loss reserve factors based on the latest industry data. Historical bond default and recovery experience for the relevant sectors of the fixed-income market were included in the analysis as was the Company's changing mix of business. These reviews did not result in a change to the Company's loss and LAE reserving factor. 44 MBIA ANNUAL REPORT MBIA Inc. & Subsidiaries - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Beginning in 2002, the Company has decided to change the methodology it uses to determine the amount of loss and loss adjustment expenses. The Company will start accruing loss and loss adjustment expenses based upon a percentage of earned premiums instead of a percentage of net debt service written. There are two reasons for the change in the methodology. First, the amount of net debt service written can significantly fluctuate from quarter to quarter while the related premium is earned more consistently over the life of the transaction. Second, during the quarter the premiums are written, the loss and loss adjustment charge is recognized in advance of the related earned premium because this revenue is essentially all deferred in the quarter that it is written. The intent of the change is to better match the recognition of incurred losses with the related revenue. If the new methodology was used during 2001, 2000 and 1999, excluding the loss reserve strengthening in 1999, the Company would have reserved essentially the same amount as it did under the current approach. 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 agreements 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 Financial Accounting Standards Board (FASB) issued, then subsequently amended, SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," which became effective for the Company on January 1, 2001. Under SFAS 133, as amended, all derivative instruments are recognized on the balance sheet at their fair values and changes in fair value are recognized immediately in earnings, unless the derivatives qualify as hedges. If the derivatives qualify as hedges, depending on the nature of the hedge, changes in the fair value of the derivatives are either offset against the change in fair value of assets, liabilities, or firm commitments through earnings or recognized in accumulated other comprehensive income until the hedged item is recognized in earnings. Any ineffective portion of a derivative's change in fair value is recognized immediately in earnings. The nature of the Company's business activities requires the management of various financial and market risks, including those related to changes in interest rates and currency exchange rates. As discussed more fully in Note 5, the Company uses derivative financial instruments to mitigate or eliminate certain of those risks. See Note 5 for further discussion of the impact of the adoption of this statement on the financial statements. INVESTMENT MANAGEMENT SERVICES OPERATIONS - Investment management services results are comprised of the net investment income, operating revenues, and expenses of MBIA-AMC, MBIA-MISC, IMC, CMC and 1838. MUNICIPAL SERVICES OPERATIONS - Municipal services results are comprised of the net investment income, operating revenues and expenses of MBIA MuniServices, MTB, MRC and Capital Asset, and for 1999 only, MuniFinancial. CORPORATE - Corporate consists of net investment income, interest expense, general corporate expenses and one-time charges. GAINS AND LOSSES - Net realized gains and losses are generated as a result of the ongoing management of the investment portfolio. The change in fair value of derivative instruments is a result of the mark-to-market of derivative assets and liabilities reported on the balance sheet. 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 in accumulated other comprehensive income in 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 excludes dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share gives the dilutive effect of all stock options and other items outstanding during the period that could potentially result in the issuance of common stock. As of December 31, 2001, 2000 and 1999 there were 4,035,843, 4,993,542 and 3,905,846 stock options, respectively, that were not included in the diluted earnings per share calculation because they were antidilutive. A reconciliation of the denominators of the basic and MBIA ANNUAL REPORT 45 MBIA Inc. & Subsidiaries - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS diluted earnings per share for the years ended December 31, 2001, 2000 and 1999 is as follows: - -------------------------------------------------------------------------------- Years ended December 31 - -------------------------------------------------------------------------------- 2001 2000 1999 - -------------------------------------------------------------------------------- Net income (in thousands) $ 570,091 $ 528,637 $ 320,530 Basic weighted average shares 148,190,890 147,714,663 149,386,305 Stock options 998,253 815,155 1,011,442 Unallocated ESOP shares 93,514 139,125 205,761 - -------------------------------------------------------------------------------- Diluted weighted average shares 149,282,657 148,668,943 150,603,508 - -------------------------------------------------------------------------------- Basic EPS $ 3.85 $ 3.58 $ 2.15 Diluted EPS $ 3.82 $ 3.56 $ 2.13 - -------------------------------------------------------------------------------- NOTE 3: SPECIAL PURPOSE VEHICLES The Company provides structured funding and credit enhancement services to global structured finance clients through the use of MBIA-administered, bankruptcy-remote special purpose vehicles (SPVs). The purpose of these SPVs is to provide our clients with an efficient source of funding, which may offer MBIA the opportunity to issue financial guarantee insurance policies. The SPVs purchase various types of financial instruments, such as debt securities, loans, lease and trade receivables, and funds these purchases through the issuance of asset-backed short-term commercial paper or medium-term notes. The assets and liabilities within the medium-term note programs are managed primarily on a match-funded basis and may include the use of derivative hedges, such as interest rate and foreign currency swaps. By match-funding, the SPVs eliminate the risks associated with fluctuations in interest and foreign currency rates, indices and liquidity. Typically, programs involve the use of rating agencies in assessing the quality of asset purchases and in assigning ratings to the various programs. In general, asset purchases at the inception of the program are required to be at least investment grade by at least one major rating agency. The primary SPVs administered by MBIA are Triple-A One Funding Corporation (Triple-A), Hemispheres Funding Corporation (Hemispheres), Meridian Funding Company, LLC (Meridian), Polaris Funding Company, LLC (Polaris) and 885 Warehouse, LLC (885 Warehouse). Incorporated in September 1993, Triple-A is wholly owned by an unaffiliated party and was formed to provide secured loans to borrowers, purchase participations in pools of retail, trade and other receivables and purchase investment grade securities at the time of issuance or in the secondary market. Triple-A may fund its purchases of such assets through the issuance of commercial paper or other securities. For the years ending December 31, 2001 and 2000, assets funded by Triple-A primarily consisted of secured loans to qualified borrowers, participations in short-term and long-term interest and non-interest bearing receivable pools and investment grade asset-backed securities. Debt issued for the same periods substantially consisted of commercial paper. Triple-A enters into 364-day or shorter term credit facilities with multiple independent third-party credit support providers as a source of liquidity in the event of a commercial paper market disruption. Hemispheres was incorporated in January 1994 and is wholly owned by an unaffiliated party. Through its articles of incorporation, Hemispheres is permitted to issue medium-term notes in an unlimited number of series of undetermined amounts not to exceed an aggregate principal amount of $5 billion. Proceeds from the issuance of such notes are used to fund the purchase of permitted investments. For the years ending December 31, 2001 and 2000, such investments consisted of loans and lease receivables. Currently, these loans are denominated in a foreign currency and carry a variable interest rate linked to a foreign interest rate index. Hemispheres has entered into various foreign currency and interest rate swap agreements relating to such loans designed to hedge its exposures to foreign exchange and interest rate fluctuations. Hemispheres uses such derivative agreements for non-trading purposes. In addition to a nominal amount of common stock, Hemispheres has issued and outstanding 5,138 shares of mandatory redeemable cumulative preferred stock totaling $5.1 million for 2001 and 10,900 shares totaling $10.9 million for 2000. Meridian, formed in July 1997, is a limited liability company of which MBIA is a non-controlling 1% member. Meridian may issue medium-term notes in an unlimited number of series of undetermined amounts not to exceed an aggregate principal amount of $5 billion. Proceeds from the issuance of such notes are used to fund the purchase of permitted investments. For the years ending December 31, 2001 and 2000, such investments primarily consisted of asset-backed loans and securities issued by major global structured finance clients. Meridian may enter into various types of derivative agreements for non-trading purposes designed to hedge its exposure to interest rate and foreign currency fluctuations. Polaris, formed in November 1997, is a limited liability company of which MBIA is a non-controlling 1% member. Polaris may issue medium-term notes in an unlimited number of series of undetermined amounts not to exceed an aggregate principal amount of $5 billion. Proceeds from the issuance of such notes are used to fund the purchase of permitted investments. For the years ending December 31, 2001 and 2000, such investments primarily consisted of debt instruments and loans issued by major national and international corporations. Polaris may enter into various types of derivative agreements for non-trading purposes designed to hedge its exposure to interest rate and foreign currency fluctuations on its assets and liabilities. 885 Warehouse, incorporated in December 1997 and converted to a limited liability company in December 1998, is wholly owned by an unaffiliated party. 885 Warehouse was formed in connection with a single structured finance transaction and is not actively used as part of MBIA's ongoing structured funding programs. For the years ending December 31, 2001 and 2000, assets consisted solely of asset-backed structured notes funded through a loan agreement with an unaffiliated loan provider. The notes purchased and the loan payable are due to mature by January 2003. Pursuant to insurance policies issued by MBIA, all of the investments of Triple-A are unconditionally and irrevocably guaranteed as to principal and interest when due. In addition, full amounts due to liquidity providers under various agreements are unconditionally and irrevocably guaranteed. Pursuant to facility agreements between MBIA and the medium-term note SPVs, all series of notes are unconditionally and irrevocably guaranteed as to scheduled payments of principal, interest and other amounts payable with respect to such series. Since MBIA's exposure to these SPVs is primarily through the guarantee of the assets purchased and debt issued, such exposure is reported within MBIA's net insurance in force. The following table details amounts relating to MBIA's guarantee of SPV obligations for SPVs administered by MBIA: 46 MBIA ANNUAL REPORT MBIA Inc. & Subsidiaries - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------------------------------------------------ Net Debt In millions (unaudited) Assets Liabilities Service Outstanding - ------------------------------------------------------------------------------------------------------------------------ Special Purpose Vehicle Funding Type 2001 2000 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------------------------ Meridian Funding Company, LLC Medium-Term Notes $4,254 $3,603 $4,218 $3,603 $2,962 $3,108 Triple-A One Funding Corp. Commercial Paper 2,762 3,244 2,762 3,244 2,691 2,789 Hemispheres Funding Corp. Medium-Term Notes 391 875 384 862 146 327 Polaris Funding Company, LLC Medium-Term Notes 313 457 327 457 150 248 885 Warehouse, LLC Medium-Term Notes 59 59 59 58 4 4 - ------------------------------------------------------------------------------------------------------------------------ Total $7,779 $8,238 $7,750 $8,224 $5,953 $6,476 - ------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- MBIA, as administrative agent, provides administrative and operational services to the SPVs and receives administrative, structuring and advisory fees for such services. Premiums and fees received from SPV transactions are reported within the insurance segment of the Consolidated Statements of Income. The risks associated with SPV transactions are the same as those inherent in other structured asset-backed transactions, whereby the repayment of the SPV's debt is dependent on the performance of the assets funded. Therefore, all transactions are reviewed to ensure compliance with the Company's underwriting standards. Under current accounting guidelines, MBIA does not include the accounts of the SPVs in the consolidation of the MBIA group. When a SPV does not meet the formal definition of a qualifying special purpose vehicle under SFAS 140, the decision as to whether or not to consolidate depends on the applicable accounting principles for non-qualifying SPVs. Consideration is given to, for example, whether a third party has made a substantive equity investment in the SPV; which party has voting rights, if any; who makes decisions about assets in the SPV; and who is at risk of loss. The SPVs would be consolidated if MBIA were to retain or acquire control over the risks and rewards of the assets in the SPVs. The Company is presently considering changes that would result in the consolidation of the SPVs in 2002. Consolidation of the SPVs into MBIA would require the Company to include gross assets and liabilities of the SPVs, primarily consisting of investments and debt, on its balance sheet. However, given the inconsequential level of residual profits of these entities, the consolidated net income of the Company would not materially change. NOTE 4: RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the FASB issued SFAS 141, "Business Combinations" and SFAS 142, "Goodwill and Other Intangible Assets," which are effective for fiscal years beginning after December 15, 2001. SFAS 141, which supercedes Accounting Principles Board Opinion (APB) 16, "Business Combinations," requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 and provides specific criteria for initial recognition of intangible assets apart from goodwill. SFAS 142 supercedes APB 17, "Intangible Assets," and requires that goodwill and intangible assets with indefinite lives no longer be amortized but be subject to annual impairment tests in accordance with the Statement. The Statement includes a two-step process aimed at determining the amount, if any, by which the carrying value of a reporting unit exceeds its fair value. Other intangible assets will continue to be amortized over their useful lives. The Company will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002 and is making determinations as to what its reporting units are and what amounts of goodwill, intangible assets, other assets and liabilities should be allocated to those reporting units. As a result of the application of the nonamortization provision of the Statement, the Company will no longer incur approximately $6.5 million of annual goodwill amortization expense. During 2002 the Company will perform the first of the required impairment tests of goodwill and indefinite lived intangible assets as of January 1, 2002 and has not yet determined what the effect of these tests will be on earnings and the financial position of the Company. NOTE 5: DERIVATIVE INSTRUMENTS Effective January 1, 2001 the Company adopted SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 requires that all derivative instruments are recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or accumulated other comprehensive income, depending on whether a derivative is designated as a hedge, and if so designated, the type of hedge. INSURANCE - The Company has entered into derivative transactions that it views as an extension of its core financial guarantee business but which 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, has insured derivatives primarily consisting of credit default swaps, which the Company intends to hold for the entire term of the contract. Mark to market values for these transactions are recorded through the income statement as the change in fair value of derivative instruments. INVESTMENT MANAGEMENT SERVICES - The investment management services segment has entered into derivative transactions primarily consisting of interest rate, cross currency, credit default and total return swaps as well as forward delivery agreements. Interest rate swaps are entered into to hedge the risks associated with fluctuations in interest rates or fair values of certain contracts. A number of these interest rate swaps are treated as hedges for accounting purposes. Cross curren- MBIA ANNUAL REPORT 47 MBIA Inc. & Subsidiaries - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS cy swaps are entered into to hedge the variability in cash flows resulting from fluctuations in foreign currency rates. Credit default swaps are entered into as an extension of the Company's credit enhancement business and are consistent with the Company's risk objectives. Total return swaps are entered into to enable the Company to earn returns on certain obligations without directly owning the underlying obligations. Forward delivery agreements are offered to clients as an investment option and involve the periodic sale of securities to clients. Some of these derivatives qualify as cash flow hedges and fair value hedges. The cash flow hedges mitigate or offset fluctuations in cash flows arising from variable rate assets or liabilities. The fair value hedges are used to protect against changes in the value of the hedged assets or liabilities. The gains and losses relating to the cash flow hedges currently reported in accumulated other comprehensive income will be reclassified into earnings as interest revenue and expense are recognized on those assets and liabilities. All cash flow and fair value hedges are hedging existing assets and liabilities. During 2001, all cash flow and fair value hedges were 100% effective for accounting purposes, due to the application of the shortcut method or the matching of all critical terms. Therefore, the change in fair value of these derivative instruments is recorded in accumulated other comprehensive income or offset by corresponding changes in the fair value of the underlying hedged items in the income statement. Cash flow hedges of forecasted transactions for the IMS segment resulted in an aggregate balance of $2.1 million (net of taxes) remaining in accumulated other comprehensive income at December 31, 2001. The Company expects to transfer approximately $1.7 million during 2002 into earnings and the remaining amount over the term of the contract when the forecasted transactions actually occur. The Company has entered into one master netting agreement with a specific counterparty covering a number of derivative transactions with that counterparty. This agreement allows the Company to mitigate the credit risk of the counterparty, and, therefore, the Company has the ability to net all amounts due to and owed by the specified counterparty. For financial statement presentation purposes the Company has chosen not to net the receivable and payable balances pertaining to these derivative transactions in the balance sheet but instead report these amounts on a gross basis in assets and liabilities. CORPORATE - 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 in accordance with the Company's risk management policies. As of December 31, 2001 there were two interest rate swaps and one cross currency swap outstanding. The interest rate swaps have been designated as fair value hedges and hedge the change in the fair value of the debt arising from interest rate movements. During 2001, both fair value hedges were 100% effective. Therefore, the change in fair value of these derivative instruments in the income statement was offset by the change in the fair value of the hedged items. The cross currency swap has been designated as a cash flow hedge, and hedges the variability arising from currency exchange rate movements on the foreign denominated fixed-rate debt. The swap is marked to market through accumulated other comprehensive income. As the debt is revalued at the spot exchange rate in accordance with SFAS 52, an amount that will offset the related transaction gain or loss arising from the revaluation, will be reclassified each period from accumulated other comprehensive income to earnings. This cash flow hedge was 100% effective during 2001. Therefore, the change in fair value of this derivative instrument is recorded in accumulated other comprehensive income. The cross currency swap designated as a cash flow hedge resulted in an aggregate balance of $8.6 million (net of taxes) remaining in accumulated other comprehensive income at December 31, 2001. The Company expects to transfer approximately $0.6 million during 2002 into earnings and the remaining balance over the term of the contract when the forecasted transaction actually occurs. As of December 31, 2001, the notional values of the derivative instruments by segment are as follows: - -------------------------------------------------------------------------------- Investment Management In millions Insurance Services Corporate Total - -------------------------------------------------------------------------------- Credit default swaps $17,540 $ 610 -- $18,150 Interest rate swaps -- 1,386 150 1,536 Cross currency swaps -- 3 106 109 Total return swaps 96 614 -- 710 Forward delivery agreements -- 45 -- 45 All other 10 30 -- 40 - -------------------------------------------------------------------------------- Total $17,646 $2,688 $256 $20,590 - -------------------------------------------------------------------------------- FINANCIAL STATEMENT IMPACT - As of December 31, 2001 the Company held derivative assets of $92.4 million and derivative liabilities of $110.4 million, which are contained in other assets and other liabilities in the Consolidated Balance Sheet. The table set forth below displays the amount of the derivative assets and liabilities by segment. - -------------------------------------------------------------------------------- Year ended December 31, 2001 - -------------------------------------------------------------------------------- Investment Management In millions Insurance Services Corporate Total - -------------------------------------------------------------------------------- Derivative assets $ 65.9 $ 16.7 $ 9.8 $ 92.4 Derivative liabilities $ 85.4 $ 25.0 $ -- $110.4 - -------------------------------------------------------------------------------- The impact for all derivative transactions for the year ended December 31, 2001 was an after-tax reduction in net income of $9.9 million (including a $13.1 million cumulative reduction resulting from the adoption of SFAS 133). The following table displays the impact on the income statement by segment of all derivative transactions. The income statement impact of derivative activity is broken down into revenues, expenses, net realized gains (losses) and change in fair value of derivative instruments. The Company believes that this presentation more accurately reflects the impact of derivative activity on each of the individual segments. 48 MBIA ANNUAL REPORT MBIA Inc. & Subsidiaries - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 2001 - -------------------------------------------------------------------------------- Investment Management In millions Insurance Services Corporate Total - -------------------------------------------------------------------------------- Revenues* $10.9 $ 0.2 -- $11.1 Expenses* (2.9) -- 1.8 (1.1) - -------------------------------------------------------------------------------- Operating income 8.0 0.2 1.8 10.0 - -------------------------------------------------------------------------------- Gains and losses: Net realized gains (losses) (3.0) 1.8 -- (1.2) Change in fair value of derivative instruments (2.4) (1.5) -- (3.9) - -------------------------------------------------------------------------------- Income before income taxes 2.6 0.5 1.8 4.9 Tax provision (0.9) (0.2) (0.6) (1.7) - -------------------------------------------------------------------------------- Income before cumulative effect of accounting change 1.7 0.3 1.2 3.2 Cumulative effect of accounting change (11.1) (2.0) -- (13.1) - -------------------------------------------------------------------------------- Net income (loss) $(9.4) $(1.7) $ 1.2 $(9.9) - -------------------------------------------------------------------------------- * Includes premiums earned and formula provision for losses in the insurance segment and interest income and expenses in the IMS and corporate segments. The cash flow hedges previously mentioned resulted in a cumulative after-tax transition balance of $4.3 million in other comprehensive income. During 2001, a $9.0 million after-tax decrease in the fair value of the cash flow hedges was recorded in other comprehensive income while $2.6 million of after-tax expense was transferred to earnings as a result of scheduled debt payments and receipts on the cash flow hedges. This resulted in an ending balance in other comprehensive income of $10.7 million as of December 31, 2001. NOTE 6: TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES In September 2000, the FASB issued SFAS 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," having certain requirements effective as of April 1, 2001. In accordance with SFAS 140, the Company no longer reflects on its balance sheet financial assets involving the borrowing of securities that meet specific criteria. The fair value of securities received under security borrowing transactions not reflected on the balance sheet at year-end 2001 was $238 million. The contract value of securities borrowed in the financial statements at December 31, 2000 was $315 million and the corresponding fair value was $332 million. All of the securities borrowed have been repledged for all periods presented. As of year-end 2001, the Company owned financial assets reflected in total investments with a fair value of $206 million that were related to security borrowing transactions. These assets were not required to be reclassified as a separate line item on the balance sheet. SFAS 140 also requires the Company to reclassify financial assets pledged as collateral under certain agreements and to report those assets at fair value as a separate line item on the balance sheet. As of year-end 2001, the Company had $587 million in financial assets pledged as collateral. It is the Company's policy to take possession of securities borrowed or purchased under agreements to resell. These contracts are primarily for 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. NOTE 7: 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 existing 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 Statements of Income during the second quarter of 1999. NOTE 8: 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 6%. The balance of the servicing liability as of December 31, 2001 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 administration and servicing of the assets securitized and other delinquent tax liens and related assets. NOTE 9: 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; MBIA ANNUAL REPORT 49 MBIA Inc. & Subsidiaries - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS . 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, 2001, 2000 and 1999 was $571.0 million, $543.9 million and $521.8 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 2001 2000 - -------------------------------------------------------------------------------- Company's GAAP shareholders' equity $ 4,782,638 $ 4,223,413 Contributions to MBIA Corp. 562,074 534,776 Premium revenue recognition (574,047) (535,920) Deferral of acquisition costs (277,698) (274,355) Unrealized gains (260,675) (163,331) Contingency reserve (2,082,103) (2,123,403) Loss and LAE reserves 272,354 258,706 Deferred income taxes 295,909 266,593 Tax and loss bonds 254,695 202,195 Goodwill (76,538) (81,196) Other (39,170) 74,191 - -------------------------------------------------------------------------------- Statutory capital and surplus $ 2,857,439 $ 2,381,669 - -------------------------------------------------------------------------------- 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 in areas where statutory accounting has been silent and changes current statutory accounting in some areas. The New York State Insurance Department adopted the Codification guidance, effective January 1, 2001. The New York State Insurance Department has not adopted the Codification rules on certain accounting issues such as deferred taxes as of December 31, 2001. The effect of adoption on the statutory surplus of MBIA Corp. and its subsidiaries was not material. NOTE 10: PREMIUMS EARNED FROM REFUNDED AND CALLED BONDS Premiums earned include $54.6 million, $34.0 million and $64.2 million for 2001, 2000 and 1999, respectively, related to refunded and called bonds. NOTE 11: 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. The following tables set forth the amortized cost and fair value of the fixed-maturity and short-term investments included in the consolidated investment portfolio of the Company as of December 31, 2001 and 2000:
- ----------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair In thousands Cost Gains Losses Value - ----------------------------------------------------------------------------------- As of December 31, 2001 Taxable bonds: United States Treasury and government agency $ 1,205,532 $ 37,893 $ (5,419) $ 1,238,006 Corporate and other obligations 6,669,507 172,739 (38,770) 6,803,476 Mortgage-backed 1,889,138 46,339 (1,318) 1,934,159 Tax-exempt bonds: State and municipal obligations 4,339,341 102,702 (36,889) 4,405,154 - ----------------------------------------------------------------------------------- Total $14,103,518 $359,673 $(82,396) $14,380,795 - ----------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair In thousands Cost Gains Losses Value - ----------------------------------------------------------------------------------- As of 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 - -----------------------------------------------------------------------------------
Fixed-maturity investments carried at fair value of $12.7 million and $11.7 million as of December 31, 2001 and 2000, 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, 2001 and 2000, the fair value of securities pledged as collateral with respect to these obligations approximated $3.0 billion and $2.3 billion, respectively. The following table sets forth the distribution by expected maturity of the fixed-maturity and short-term investments at amortized cost and fair value at December 31, 2001. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations. 50 MBIA ANNUAL REPORT MBIA Inc. & Subsidiaries - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Amortized Fair In thousands Cost Value - -------------------------------------------------------------------------------- Within 1 year $ 726,631 $ 726,631 Beyond 1 yr but within 5 yrs 3,203,119 3,260,603 Beyond 5 yrs but within 10 yrs 2,245,819 2,299,419 Beyond 10 yrs but within 15 yrs 1,839,931 1,884,652 Beyond 15 yrs but within 20 yrs 1,474,186 1,504,177 Beyond 20 yrs 2,724,694 2,771,154 - -------------------------------------------------------------------------------- 12,214,380 12,446,636 Mortgage-backed 1,889,138 1,934,159 - -------------------------------------------------------------------------------- Total fixed-maturity and short-term investments $14,103,518 $14,380,795 - -------------------------------------------------------------------------------- NOTE 12: INVESTMENT INCOME AND GAINS AND LOSSES The following table includes investment income from the insurance and corporate segments. Realized gains are generated as a result of the ongoing management of all the Company's investment portfolios. - -------------------------------------------------------------------------------- Years ended December 31 - -------------------------------------------------------------------------------- In thousands 2001 2000 1999 - -------------------------------------------------------------------------------- Fixed-maturity $ 413,872 $ 389,159 $ 358,127 Short-term investments 12,672 10,473 7,672 Other investments 718 1,122 24 - -------------------------------------------------------------------------------- Gross investment income 427,262 400,754 365,823 Investment expenses 7,600 6,769 6,367 - -------------------------------------------------------------------------------- Net investment income 419,662 393,985 359,456 - -------------------------------------------------------------------------------- Net realized gains (losses): Fixed-maturity Gains 83,529 58,349 62,300 Losses (62,748) (34,166) (28,360) - -------------------------------------------------------------------------------- Net 20,781 24,183 33,940 - -------------------------------------------------------------------------------- Other investments Gains 67 12,110 2,270 Losses (11,952) (3,409) (11,050) - -------------------------------------------------------------------------------- Net (11,885) 8,701 (8,780) - -------------------------------------------------------------------------------- Total net realized gains 8,896 32,884 25,160 - -------------------------------------------------------------------------------- Total investment income $ 428,558 $ 426,869 $ 384,616 - -------------------------------------------------------------------------------- Net unrealized gains consist of: - -------------------------------------------------------------------------------- As of December 31 - -------------------------------------------------------------------------------- In thousands 2001 2000 - -------------------------------------------------------------------------------- Fixed-maturity: Gains $ 359,673 $ 263,629 Losses (82,396) (87,045) - -------------------------------------------------------------------------------- Net 277,277 176,584 - -------------------------------------------------------------------------------- Other investments: Gains 419 279 Losses (487) (13,531) - -------------------------------------------------------------------------------- Net (68) (13,252) - -------------------------------------------------------------------------------- Total 277,209 163,332 Deferred income taxes 97,009 57,141 - -------------------------------------------------------------------------------- Unrealized gains, net $ 180,200 $ 106,191 - -------------------------------------------------------------------------------- The deferred income tax relates primarily to unrealized gains and losses on the Company's fixed-maturity investments, which are reflected in other accumulated comprehensive income in shareholders' equity. The change in net unrealized gains (losses) consists of: - -------------------------------------------------------------------------------- Years ended December 31 - -------------------------------------------------------------------------------- In thousands 2001 2000 1999 - -------------------------------------------------------------------------------- Fixed-maturity $100,693 $ 493,480 $(772,041) Other investments 13,184 (7,409) (1,285) - -------------------------------------------------------------------------------- Total 113,877 486,071 (773,326) Deferred income tax (benefit) 39,868 170,061 (270,330) - -------------------------------------------------------------------------------- Unrealized gains (losses), net $ 74,009 $ 316,010 $(502,996) - -------------------------------------------------------------------------------- NOTE 13: INCOME TAXES The Company files a consolidated tax return that includes all of its U.S. subsidiaries. The provision for income taxes is comprised of: - -------------------------------------------------------------------------------- Years ended December 31 - -------------------------------------------------------------------------------- In thousands 2001 2000 1999 - -------------------------------------------------------------------------------- Current $214,578 $ 136,645 $ 107,858 Deferred (6,752) 49,575 (40,505) - -------------------------------------------------------------------------------- Provision for income taxes 207,826 186,220 67,353 Deferred SFAS 133 transition (7,036) -- -- - -------------------------------------------------------------------------------- Total $200,790 $ 186,220 $ 67,353 - -------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------- 2001 2000 1999 - -------------------------------------------------------------------------------- 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 (8.3) (8.6) (16.1) Amortization of goodwill 0.2 0.3 0.5 Other (0.6) (0.6) (2.0) - -------------------------------------------------------------------------------- Provision for income taxes 26.3% 26.1% 17.4% - -------------------------------------------------------------------------------- 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, 2001 and 2000 are presented in the following table: MBIA ANNUAL REPORT 51 MBIA Inc. & Subsidiaries - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- In thousands 2001 2000 - -------------------------------------------------------------------------------- Deferred tax assets: Tax and loss bonds $256,171 $199,607 Alternative minimum tax credit carryforward -- 11,381 Loss and loss adjustment expense reserves 93,173 88,396 Other 81,041 66,611 - -------------------------------------------------------------------------------- Total gross deferred tax assets 430,385 365,995 - -------------------------------------------------------------------------------- Deferred tax liabilities: Contingency reserve 357,598 317,631 Deferred premium revenue 117,561 113,524 Deferred acquisition costs 97,195 96,024 Unrealized gains 91,222 57,141 Contingent commissions 620 620 Other 38,854 33,518 - -------------------------------------------------------------------------------- Total gross deferred tax liabilities 703,050 618,458 - -------------------------------------------------------------------------------- Net deferred tax liability $272,665 $252,463 - -------------------------------------------------------------------------------- The Company believes that a valuation allowance is unnecessary in connection with the deferred tax assets. NOTE 14: 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. Business segment results are presented gross of intersegment transactions, which are not material to each segment. The following provides each business segment's revenues, expenses, operating income or loss, net gains or losses and assets for the last three years: - --------------------------------------------------------------------------------
Year ended December 31, 2001 - -------------------------------------------------------------------------------------------------------- Investment Financial Management Municipal In thousands Guarantee Services Services Total - -------------------------------------------------------------------------------------------------------- Revenues $ 975,920 $ 125,929 $ 27,037 $ 1,128,886 Expenses (179,582) (62,910) (29,951) (272,443) - -------------------------------------------------------------------------------------------------------- Operating income (loss) from segments $ 796,338 $ 63,019 $ (2,914) 856,443 - -------------------------------------------------------------------------------------------------------- Corporate loss (70,420) - -------------------------------------------------------------------------------------------------------- Net gains and losses 4,961 - -------------------------------------------------------------------------------------------------------- Pre-tax income $ 790,984 - -------------------------------------------------------------------------------------------------------- Segment assets $ 9,190,901 $ 6,958,727 $ 50,057 $ 16,199,685 ======================================================================================================== Year ended December 31, 2000 - -------------------------------------------------------------------------------------------------------- Revenues $ 868,622 $ 118,859 $ 37,089 $ 1,024,570 Expenses (170,333) (62,535) (36,479) (269,347) - -------------------------------------------------------------------------------------------------------- Operating income from segments $ 698,289 $ 56,324 $ 610 755,223 - -------------------------------------------------------------------------------------------------------- Corporate loss (73,250) - -------------------------------------------------------------------------------------------------------- Net gains and losses 32,884 - -------------------------------------------------------------------------------------------------------- Pre-tax income $ 714,857 - -------------------------------------------------------------------------------------------------------- Segment assets $ 8,067,874 $ 5,768,793 $ 57,671 $ 13,894,338 ======================================================================================================== Year ended December 31, 1999 - -------------------------------------------------------------------------------------------------------- Revenues $ 829,738 $ 86,600 $ 22,923 $ 939,261 Expenses (315,236) (45,920) (35,372) (396,528) - -------------------------------------------------------------------------------------------------------- Operating income (loss) from segments $ 514,502 $ 40,680 $(12,449) 542,733 - -------------------------------------------------------------------------------------------------------- Corporate loss (180,010) - -------------------------------------------------------------------------------------------------------- Net gains and losses 25,160 - -------------------------------------------------------------------------------------------------------- Pre-tax income $ 387,883 - -------------------------------------------------------------------------------------------------------- Segment assets $ 7,108,122 $ 5,073,269 $ 82,508 $ 12,263,899 ========================================================================================================
52 MBIA ANNUAL REPORT MBIA Inc. & Subsidiaries - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For 2001, 2000 and 1999 premiums earned in the United States were $443 million, $380 million and $391 million, respectively. For 2001, 2000, and 1999 premiums earned outside the United States were $81 million, $66 million, and $52 million, respectively. NOTE 15: STOCK SPLIT On March 15, 2001 the Company's board of directors approved a three-for-two stock split by means of a stock dividend. The three-for-two stock split was accomplished through a stock dividend distributed on April 20, 2001 to shareholders of record on April 2, 2001. All references to the number of common shares, except shares authorized, and to the per share information in the consolidated financial statements and related notes, have been adjusted to reflect the stock split on a retroactive basis. NOTE 16: DIVIDENDS AND CAPITAL REQUIREMENTS 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 the Company's case, dividends in any 12-month period cannot be greater than 10% of policyholders' surplus as shown on MBIA Corp.'s latest filed statutory financial statements. In 2001, MBIA Corp. declared and paid dividends of $212 million and based upon the filing of our 2001 statutory financial statements had dividend capacity of $73 million without special regulatory approval. The insurance departments of New York State and 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, 2001. NOTE 17: 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 11.25 million of its outstanding common shares. During 2001, 2000 and 1999, the Company purchased 0.2 million, 2.5 million and 0.7 million shares of common stock at an aggregate cost of $7.8 million, $77.7 million and $24.7 million, respectively. The Company will only repurchase shares under this program when it is economically attractive and within rating agency constraints, including the Triple-A claims-paying ratings of MBIA Corp. NOTE 18: LONG-TERM DEBT AND LINES OF CREDIT Long-term debt consists of: - -------------------------------------------------------------------------------- As of December 31 - -------------------------------------------------------------------------------- In thousands 2001 2000 - -------------------------------------------------------------------------------- 7.520% Notes due 2001-2002 $ 3,750 $ 7,500 9.000% Notes due 2001 -- 100,000 2.850% Notes due 2008* 7,550 7,550 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 7.560% Notes due 2010 105,403 108,648 8.000% Notes due 2040**** 100,000 100,000 - -------------------------------------------------------------------------------- 791,703 898,698 Less current portion 3,750 103,750 Less unamortized discount 707 760 Plus unamortized premium 913 914 Plus fair value adjustment 16,903 -- - -------------------------------------------------------------------------------- Total $805,062 $795,102 - -------------------------------------------------------------------------------- * These notes bear interest at three-month LIBOR plus a fixed spread. The current interest rate in effect is 2.850% ** Callable 10/2002 @ 103.99 *** Callable 11/2003 @ 100.00 **** Callable 12/2005 @100.00 The Company's long-term debt is subject to certain covenants, none of which significantly restricts the Company's operating activities or dividend-paying ability. 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 has met the criteria for cash flow hedge accounting and effectively converts the interest rate from the fixed Swiss Franc debt rate of 4.5 % to a fixed U.S. dollar rate of 7.56%, and converts the principal obligation to a U.S. dollar liability at maturity of approximately $99.3 million. In May 2000 MBIA entered into a swap transaction that is designated as a fair value hedge of its 8.2% Debentures due 2022. Through this transaction, MBIA effectively swapped fixed-rate debt to variable-rate debt. This transaction can be cancelled at the option of the counterparty on or after October 2002. In May of 2001 MBIA entered into a similar swap transaction that has been designated as a fair value hedge of its 6.95% Senior Quarterly Income Debt Securities (QUIDs) due 2038. This transaction can be cancelled at the option of the counterparty on or after November 2003. Aggregate maturities of long-term obligations as of December 31, 2001 for each of the next five years commencing in 2002 are: - -------------------------------------------------------------------------------- After In thousands 2002 2003 2004 2005 2006 Total - -------------------------------------------------------------------------------- $3,750 -- -- -- $787,953 $791,703 - -------------------------------------------------------------------------------- MBIA ANNUAL REPORT 53 MBIA Inc. & Subsidiaries - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. This facility can be drawn upon if MBIA Corp. incurs cumulative losses (net of any recoveries) on the covered portfolio (which is comprised of the Company's insured public finance obligations, with certain adjustments) from October 31, 2001 in excess of the greater of $900 million or 5.6% 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, 2008, and contains an annual renewal provision subject to approval by the bank group. MBIA Corp. also maintains $211 million of stop loss reinsurance coverage with a group of highly-rated reinsurers on its structured finance portfolio. This facility covers losses incurred within the global structured finance portfolio in excess of an attachment point calculated annually. The attachment point was $900 million during 2001, and increased to $1,014 million on January 1, 2002. This facility has a seven-year term. In addition, MBIA Inc. maintains a $150 million facility with a group of Triple-A-rated reinsurers that allows it to issue subordinated securities. This facility can be drawn upon if MBIA Corp. incurs cumulative losses (net of any recoveries) on the covered portfolio (which represents all insured obligations except certain excluded credits) in excess of the attachment point. The attachment point is calculated annually based on the composition of the covered portfolio and was $1.65 billion as of December 31, 2001. This facility has a ten-year term that expires on December 27, 2011. The Company and MBIA Corp. maintain bank liquidity facilities totaling $650 million. As of December 31, 2001, there were no borrowings outstanding under these agreements. As part of its structured financing program, TRS accesses the capital markets for short-term asset-backed funding through the use of Triple-A, a commercial paper special purpose vehicle. For the years ending 2001 and 2000, TRS had outstanding debt of $44 million and $41 million, respectively. The Company has $16.3 million of 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 that the liquidation of such assets is required and the proceeds are less than the cost. NOTE 19: 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, 2001, the annual interest rates on these agreements ranged from 1.67% 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: 2002 $2,101,563 2003 1,372,885 2004 548,526 2005 95,941 2006 60,998 Thereafter 1,826,240 - -------------------------------------------------------------------------------- Total $6,006,153 - -------------------------------------------------------------------------------- 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 $21.0 million at December 31, 2001. NOTE 20: 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 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 insured issue 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. MBIA Corp. maintains underwriting guidelines based on those aspects of credit quality that it deems important for each category of obligation considered for insurance. For global public finance transactions these include economic and social trends, debt and financial management, adequacy of anticipated cash flow, satisfactory legal structure and other security provisions, viable tax and economic bases, adequacy of loss coverage and project feasibility. For global structured finance transactions, MBIA Corp.'s underwriting guidelines, analysis, and due diligence focus on seller/servicer credit and operational quality. MBIA also analyzes the quality of the asset pool as well as its historical and projected performance. The strength of the structure, including legal segregation of the assets, cash flow analysis, the size and source of first loss protection, asset performance triggers and financial covenants is also reviewed. Such guidelines are subject to periodic review by management, who are responsible for establishing and maintaining underwriting standards and criteria for maintaining underwriting standards in our insurance operations. As of December 31, 2001, insurance in force, net of cessions to reinsurers, had a range of maturity of 1-48 years. The distribution of net 54 MBIA ANNUAL REPORT MBIA Inc. & Subsidiaries - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS insurance in force by geographic location, excluding $6.7 billion and $5.4 billion relating to IMC municipal investment agreements guaranteed by MBIA Corp. in 2001 and 2000, respectively, is set forth in the following table: - -------------------------------------------------------------------------------- As of December 31 - -------------------------------------------------------------------------------- 2001 2000 - -------------------------------------------------------------------------------- Net % of Net Net % of Net In billions Insurance Insurance Insurance Insurance Geographic Location In Force In Force In Force In Force - -------------------------------------------------------------------------------- California $ 86.0 11.9% $ 80.0 11.8% New York 68.6 9.5 71.1 10.4 Florida 36.1 5.0 35.7 5.3 Texas 30.1 4.2 26.7 3.9 New Jersey 26.9 3.7 26.0 3.8 Illinois 23.9 3.3 22.6 3.3 Pennsylvania 23.0 3.2 24.5 3.6 Massachusetts 21.8 3.0 20.5 3.0 Michigan 16.0 2.2 14.8 2.2 Ohio 13.9 1.9 13.5 2.0 - -------------------------------------------------------------------------------- Subtotal 346.3 47.9 335.4 49.3 Nationally diversified 128.2 17.8 117.2 17.2 Other states 190.1 26.3 180.4 26.5 - -------------------------------------------------------------------------------- Total United States 664.6 92.0 633.0 93.0 Internationally diversified 25.2 3.5 20.7 3.0 Country specific 32.6 4.5 27.2 4.0 - -------------------------------------------------------------------------------- Total Non-United States 57.8 8.0 47.9 7.0 - -------------------------------------------------------------------------------- Total $722.4 100.0% $680.9 100.0% - -------------------------------------------------------------------------------- The net insurance in force by type of bond is set forth in the table below. - -------------------------------------------------------------------------------- As of December 31 - -------------------------------------------------------------------------------- 2001 2000 - -------------------------------------------------------------------------------- Net % of Net Net % of Net In billions Insurance Insurance Insurance Insurance Bond Type In Force In Force In Force In Force - -------------------------------------------------------------------------------- Global Public Finance: United States General obligation 165.3 22.9% $152.5 22.4% Utilities 84.2 11.7 79.0 11.6 Special revenue 67.0 9.3 61.4 9.0 Health care 64.7 8.9 68.3 10.0 Transportation 47.4 6.6 48.7 7.2 Investor-owned utilities 36.9 5.1 36.1 5.3 Higher education 31.3 4.3 29.0 4.3 Housing 27.7 3.8 24.4 3.6 - -------------------------------------------------------------------------------- Total United States 524.5 72.6 499.4 73.4 - -------------------------------------------------------------------------------- Non-United States Investor-owned utilities 3.8 0.5 2.8 0.4 Utilities 3.5 0.5 1.1 0.2 Sovereign 3.1 0.4 2.7 0.4 Transportation 2.4 0.3 1.6 0.2 Sub-sovereign 1.1 0.2 1.0 0.1 Health care 0.8 0.1 0.6 0.1 Housing 0.6 0.1 0.7 0.1 Higher education 0.1 -- 0.1 -- - -------------------------------------------------------------------------------- Total Non-United States 15.4 2.1 10.6 1.5 - -------------------------------------------------------------------------------- Total Global Public Finance 539.9 74.7 510.0 74.9 - -------------------------------------------------------------------------------- (continued) - -------------------------------------------------------------------------------- As of December 31 - -------------------------------------------------------------------------------- 2001 2000 - -------------------------------------------------------------------------------- Net % of Net Net % of Net In billions Insurance Insurance Insurance Insurance Bond Type In Force In Force In Force In Force - -------------------------------------------------------------------------------- Global Structured Finance: United States Mortgage-backed: Home equity 29.6 4.1 37.3 5.5 Other 13.0 1.8 20.1 3.0 First mortgage 9.0 1.3 8.0 1.2 Asset-backed: Credit cards 18.7 2.6 17.3 2.5 Auto 18.1 2.5 14.5 2.1 Other 7.5 1.0 7.0 1.0 Leasing 7.0 1.0 5.5 0.8 Corporate debt obligations 21.1 2.9 11.8 1.7 Pooled Corp. obligations & other 11.6 1.6 8.5 1.3 Financial risk 4.5 0.6 5.0 0.7 - -------------------------------------------------------------------------------- Total United States 140.1 19.4 135.0 19.8 - -------------------------------------------------------------------------------- Non-United States Corporate debt obligations 22.9 3.2 20.7 3.0 Pooled Corp. obligations & other 9.1 1.3 5.7 0.8 Mortgage-backed: First mortgage 4.6 0.6 3.8 0.6 Other 0.7 0.1 0.2 -- Home equity 0.5 0.1 0.4 0.1 Financial risk 3.1 0.4 3.4 0.5 Asset-backed 1.5 0.2 1.7 0.3 - -------------------------------------------------------------------------------- Total Non-United States 42.4 5.9 35.9 5.3 - -------------------------------------------------------------------------------- Total Global Structured Finance 182.5 25.3 170.9 25.1 - -------------------------------------------------------------------------------- Total $722.4 100.0% $680.9 100.0% - -------------------------------------------------------------------------------- NOTE 21: REINSURANCE MBIA Corp. reinsures exposure to other insurance companies under various treaty and facultative reinsurance contracts, both on a pro rata and non-proportional 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 $153.9 billion and $143.3 billion at December 31, 2001 and 2000, respectively. The distribution of ceded insurance in force by geographic location and type of bond is set forth in the following tables: MBIA ANNUAL REPORT 55 MBIA Inc. & Subsidiaries - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- As of December 31 - -------------------------------------------------------------------------------- 2001 2000 - -------------------------------------------------------------------------------- % of % of Ceded Ceded Ceded Ceded In billions Insurance Insurance Insurance Insurance Geographic Location In Force In Force In Force In Force - -------------------------------------------------------------------------------- California $ 18.3 11.9% $ 17.9 12.5% New York 12.8 8.3 13.7 9.5 New Jersey 6.7 4.3 6.9 4.8 Texas 5.8 3.8 5.3 3.7 Florida 4.8 3.1 4.7 3.3 Massachusetts 4.8 3.1 4.2 3.0 Puerto Rico 4.2 2.7 3.7 2.6 Colorado 4.0 2.6 3.8 2.7 Illinois 4.0 2.6 3.6 2.5 Pennsylvania 3.8 2.5 4.2 2.9 - -------------------------------------------------------------------------------- Subtotal 69.2 44.9 68.0 47.5 Nationally diversified 26.0 16.9 18.8 13.1 Other states 30.4 19.8 29.2 20.3 - -------------------------------------------------------------------------------- Total United States 125.6 81.6 116.0 80.9 Internationally diversified 8.3 5.4 10.8 7.6 Country specific 20.0 13.0 16.5 11.5 - -------------------------------------------------------------------------------- Total Non-United States 28.3 18.4 27.3 19.1 - -------------------------------------------------------------------------------- Total $153.9 100.0% $143.3 100.0% - -------------------------------------------------------------------------------- The distribution of ceded insurance in force by type of bond is set forth in the following table: - -------------------------------------------------------------------------------- As of December 31 - -------------------------------------------------------------------------------- 2001 2000 - -------------------------------------------------------------------------------- % of % of Ceded Ceded Ceded Ceded In billions Insurance Insurance Insurance Insurance Bond Type In Force In Force In Force In Force - -------------------------------------------------------------------------------- Global Public Finance: United States General obligation $ 21.8 14.1% $ 19.8 13.9% Transportation 18.3 11.9 18.4 12.8 Utilities 17.9 11.7 17.1 11.9 Health care 15.1 9.8 15.3 10.7 Special revenue 9.4 6.1 9.4 6.6 Investor-owned utilities 6.0 3.9 6.1 4.2 Higher education 4.1 2.7 2.4 1.7 Housing 3.1 2.0 2.8 1.9 - -------------------------------------------------------------------------------- Total United States 95.7 62.2 91.3 63.7 - -------------------------------------------------------------------------------- Non-United States Transportation 3.0 1.9 1.7 1.2 Utilities 2.5 1.6 1.1 0.8 Investor-owned utilities 2.1 1.4 0.6 0.4 Sovereign 1.1 0.8 1.6 1.1 Sub-sovereign 0.9 0.6 0.8 0.6 Health care 0.4 0.2 0.4 0.3 Housing 0.1 0.0 0.0 0.0 - -------------------------------------------------------------------------------- Total Non-United States 10.1 6.5 6.2 4.4 - -------------------------------------------------------------------------------- Total Global Public Finance 105.8 68.7 97.5 68.1 - -------------------------------------------------------------------------------- (continued) - -------------------------------------------------------------------------------- As of December 31 - -------------------------------------------------------------------------------- 2001 2000 - -------------------------------------------------------------------------------- % of % of Ceded Ceded Ceded Ceded In billions Insurance Insurance Insurance Insurance Bond Type In Force In Force In Force In Force - -------------------------------------------------------------------------------- Global Structured Finance: United States Asset-backed: Auto 4.0 2.6 2.6 1.8 Credit cards 3.9 2.5 0.0 0.0 Leasing 3.0 2.0 2.1 1.5 Other 0.6 0.4 2.9 2.0 Mortgage-backed: Home equity 6.9 4.5 8.2 5.7 Other 2.3 1.5 2.0 1.4 First mortgage 1.0 0.6 1.6 1.1 Pooled Corp. obligation & other 5.5 3.5 4.7 3.3 Corporate debt obligations 2.3 1.5 0.0 0.0 Financial risk 0.4 0.3 0.6 0.4 - -------------------------------------------------------------------------------- Total United States 29.9 19.4 24.7 17.2 - -------------------------------------------------------------------------------- Non-United States Corporate debt obligations 6.6 4.3 0.0 0.0 Pooled Corp. obligations & other 5.6 3.6 15.0 10.4 Financial risk 2.7 1.8 2.8 2.0 Asset-backed 1.7 1.1 1.8 1.2 Mortgage-backed: First mortgage 1.0 0.7 1.0 0.8 Home equity 0.4 0.3 0.5 0.3 Other 0.2 0.1 0.0 0.0 - -------------------------------------------------------------------------------- Total Non-United States 18.2 11.9 21.1 14.7 - -------------------------------------------------------------------------------- Total Global Structured Finance 48.1 31.3 45.8 31.9 - -------------------------------------------------------------------------------- Total $153.9 100.0% $ 143.3 100.0% - -------------------------------------------------------------------------------- As part of the Company's portfolio shaping activity in 1998, the Company entered into reinsurance agreements with highly-rated reinsurers that obligate the Company to cede future premiums to the reinsurers through October 1, 2004. Components of premiums written including reinsurance assumed from and ceded to other companies is set forth in the following table: - -------------------------------------------------------------------------------- Years ended December 31 - -------------------------------------------------------------------------------- In thousands 2001 2000 1999 - -------------------------------------------------------------------------------- Direct $ 839,386 $ 641,452 $ 590,597 Assumed 25,840 45,956 34,274 - -------------------------------------------------------------------------------- Gross 865,226 687,408 624,871 Ceded (235,362) (189,316) (171,256) - -------------------------------------------------------------------------------- Net $ 629,864 $ 498,092 $ 453,615 - -------------------------------------------------------------------------------- Ceding commissions received from reinsurers before deferrals were $55.2 million, $37.3 million, and $35.3 million in 2001, 2000 and 1999, respectively. 56 MBIA ANNUAL REPORT MBIA Inc. & Subsidiaries - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 22: 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 contributions vest over a five-year period with 60% vesting after three years and 20% in years four and five. Pension expense for the years ended December 31, 2001, 2000 and 1999 was $7.4 million, $7.8 million and $7.8 million, respectively. The Company also has a profit-sharing/401(k) plan. The plan is a voluntary contributory plan that allows eligible employees to defer compensation for federal income tax purposes under Section 401(k) of the Internal Revenue Code of 1986, as amended. Employees may contribute through payroll deductions up to 10% of eligible compensation. The Company matches employee contributions up to the first 5% of total compensation with MBIA common stock. The Company's contributions vest over five years with 60% vesting after three years and then 20% in years four and five. Generally, a participating employee is entitled to distributions from the plan upon termination of employment, retirement, death or disability. Participants who qualify for distribution may receive a single lump sum, transfer the assets to another qualified plan or individual retirement account, or receive a series of specified installment payments. Company contributions to the profit-sharing/401(k) plan aggregated $3.1 million, $2.8 million and $4.2 million for the years ended December 31, 2001, 2000 and 1999, respectively. Amounts relating to the above plans that exceed limitations established by federal regulations are contributed to a non-qualified deferred compensation plan. These non-qualified contributions are included in the above stated pension and profit-sharing/401(k) match amounts and totaled $3.0 million, $2.6 million and $2.5 million for the pension plan, and $1.8 million, $1.5 million and $1.7 million for the profit-sharing/401(k) plan for the years ending December 31, 2001, 2000 and 1999, respectively. Starting in 1999 former CapMAC and 1838 employees were covered under the Company's pension and profit-sharing plans. NOTE 23: LONG-TERM INCENTIVE PLANS On May 11, 2000, the Company's shareholders approved the 2000 Stock Option Plan (the 2000 plan). The 2000 plan superceded the Company's 1987 plan, and shares available for grant under the 1987 plan were cancelled and are no longer available for grant. Options previously granted under the 1987 plan will remain outstanding in accordance with their terms and with the terms of the plan. The 2000 plan enables key employees of the Company and its subsidiaries 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 are granted at a price not less than 100% of the fair value, defined as closing price, of the Company's common stock as determined on the date granted. Options are 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 7,350,000 shares of the Company's common stock to be granted as options under the 2000 plan. As of December 31, 2001, 1,892,758 options had been granted under the 2000 plan, net of expirations and cancellations, leaving the total available for future grants at 5,457,242. 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 of the stock on the date of the grant. In 2001, 1,265,374 options were awarded under the 2000 plan. 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). The incentive program includes a stock option component and a compensation component linked to the growth in book value per share, including certain adjustments, of the Company's stock (modified book value) over a three-year period following the grant date. Target levels for the incentive program awards are established as a percentage of total salary and bonus, based upon the recipient's position. Awards under the incentive program typically are granted from the vice president level up to and including the Chairman and Chief Executive Officer. Actual amounts to be paid are adjusted upward or downward depending on the growth of modified book value versus a baseline target, with a minimum growth of 8% necessary to receive any payment and an 18% growth necessary to receive the maximum payment. Awards under the incentive program are divided equally between the two components, with 50% of the award to be given in stock options and 50% of the award to be paid in cash or shares of Company stock. Payments are made at the end of each three-year measurement period. During 2001, 2000 and 1999, $17.0 million, $13.6 million and $8.5 million, respectively, were recorded as a charge related to these awards. In December 1995, the Company adopted a restricted stock program whereby key executive officers are granted restricted shares of the Company's common stock. These stock awards may only be sold three, four or five years from the date of grant, at which time the awards fully vest. In 2001 and 2000, respectively, 57,410 and 114,768 restricted shares (net of canceled shares) of the Company's common stock were granted to certain officers of the Company. The fair value of the shares awarded (net of cancellations) in 2001 and 2000, determined on the grant date, was $3.1 million and $5.3 million, respectively, which 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 $2.9 million, $4.2 million, and $1.9 million for the years ended December 31, 2001, 2000 and 1999, 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 525,938 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. 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. MBIA ANNUAL REPORT 57 MBIA Inc. & Subsidiaries - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In July 1999, the Company contributed 20,096 additional shares to the ESOP plan. Subsequent to this contribution the ESOP plan was merged with the MBIA Inc. Employee Profit-Sharing/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 2001, 2000 and 1999, 45,611, 66,636 and 15,285 shares, respectively, were utilized for the 401(k) company match. As of December 31, 2001, 2000 and 1999, respectively, a total of 447,295, 401,684 and 335,048 shares have been allocated to the participants. The Company has elected to follow APB 25, "Accounting for Stock Issued to Employees" and related interpretations in accounting for its employee stock options. Pro-forma information regarding net income and earnings per share is required by SFAS 123 and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. For purposes of pro-forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro-forma information is as follows: - -------------------------------------------------------------------------------- Years ended December 31 - -------------------------------------------------------------------------------- 2001 2000 1999 - -------------------------------------------------------------------------------- Net income (in thousands): Reported $570,091 $528,637 $320,530 Pro-forma 561,107 520,238 314,074 Basic earnings per share: Reported $ 3.85 $ 3.58 $ 2.15 Pro-forma 3.79 3.52 2.10 Diluted earnings per share: Reported $ 3.82 $ 3.56 $ 2.13 Pro-forma 3.76 3.50 2.09 - -------------------------------------------------------------------------------- The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions: - -------------------------------------------------------------------------------- December December December January 2001 2000 1999 1999 - -------------------------------------------------------------------------------- Exercise price $44.6250 $48.5833 $32.5417 $44.7500 Dividend yield 1.120% 1.130% 1.680% 1.190% Expected volatility .2953 .2834 .2512 .2392 Risk-free interest rate 5.065% 5.342% 6.28% 4.83% Expected option term (in years) 6.25 6.18 6.05 6.05 - -------------------------------------------------------------------------------- The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. A summary of the Company's stock option plan as of December 31, 2001, 2000 and 1999, and changes during the years ending on those dates, is set forth in the following table: - -------------------------------------------------------------------------------- 2001 - -------------------------------------------------------------------------------- Weighted Number Avg. Price Options of Shares per Share - -------------------------------------------------------------------------------- Outstanding at beginning of year 7,931,193 $ 36.6711 Granted 1,265,374 45.9146 Exercised 738,022 52.4755 Expired or canceled 132,765 40.8684 - -------------------------------------------------------------------------------- Outstanding at year-end 8,325,780 $ 39.3329 - -------------------------------------------------------------------------------- Exercisable at year-end 2,824,744 $ 31.5127 Weighted-average fair value per share of options granted during the year $ 16.1118 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2000 - -------------------------------------------------------------------------------- Weighted Number Avg. Price Options of Shares per Share - -------------------------------------------------------------------------------- Outstanding at beginning of year 8,295,135 $ 33.8031 Granted 880,407 45.5106 Exercised 935,906 40.5161 Expired or canceled 308,443 40.5227 - -------------------------------------------------------------------------------- Outstanding at year-end 7,931,193 $ 36.6711 - -------------------------------------------------------------------------------- Exercisable at year-end 2,647,791 $ 26.3793 Weighted-average fair value per share of options granted during the year $ 15.7379 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1999 - -------------------------------------------------------------------------------- Weighted Number Avg. Price Options of Shares per Share - -------------------------------------------------------------------------------- Outstanding at beginning of year 5,519,121 $ 28.1727 Granted 3,560,310 40.7871 Exercised 548,724 42.7125 - -------------------------------------------------------------------------------- Expired or canceled 235,572 44.1812 - -------------------------------------------------------------------------------- Outstanding at year-end 8,295,135 $ 33.8031 - -------------------------------------------------------------------------------- Exercisable at year-end 3,138,483 $ 21.6772 Weighted-average fair value per share of options granted during the year $ 14.2833 - -------------------------------------------------------------------------------- The following table summarizes information about the plan's stock options at December 31, 2001:
Weighted-Average Number Remaining Number Range of Average Outstanding Contractual Weighted-Average Exercisable at Weighted-Average Exercise Price at 12/31/01 Life in Years Exercise Price 12/31/01 Exercise Price - ------------------------------------------------------------------------------------------------------------------------ $16.6670-29.7080 1,214,074 2.34 $20.5510 1,180,324 $20.3702 $32.5420-38.3330 1,659,899 7.20 $33.0040 713,039 $33.3347 $42.5000-44.6250 2,009,598 7.60 $43.6451 662,361 $42.6186 $45.2500-56.2200 3,442,209 7.38 $46.4916 269,020 $48.2267 - ------------------------------------------------------------------------------------------------------------------------ Total 8,325,780 6.66 $39.3329 2,824,744 $31.5127 - ------------------------------------------------------------------------------------------------------------------------
58 MBIA ANNUAL REPORT MBIA Inc. & Subsidiaries - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 24: 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 entitled 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 were attached to the common stock and were not transferable separately nor exercisable until the earlier 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. The Shareholders' Rights Plan expired on December 12, 2001 and was not renewed by the board. No Rights were exercised under the plan. NOTE 25: 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, 2001 is $340 million. NOTE 26: 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 judgement 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 available-for-sale 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-maturity securities 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 PURCHASED UNDER AGREEMENTS TO RESELL OR BORROWED - 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 SOLD UNDER AGREEMENTS TO REPURCHASE OR LOANED - 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 derived from market information and appropriate valuation methodologies reflects the estimated amounts that the Company would receive or pay to terminate the transaction at the reporting date. MBIA ANNUAL REPORT 59 MBIA Inc. & Subsidiaries - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------------------------------------------ As of December 31, 2001 As of December 31, 2000 Carrying Estimated Carrying Estimated In thousands Amount Fair Value Amount Fair Value - ------------------------------------------------------------------------------------------------------------------ ASSETS: Fixed-maturity securities $7,421,023 $7,421,023 $6,740,127 $6,740,127 Short-term investments 293,791 293,791 376,604 376,604 Other investments 135,376 135,376 119,591 119,591 Municipal investment agreement portfolio 6,665,981 6,665,981 4,996,608 4,996,608 Cash and cash equivalents 115,040 115,040 93,962 93,962 Securities purchased under agreements to resell or borrowed -- -- 314,624 332,179 Reinsurance recoverable on unpaid losses 35,090 35,090 31,414 31,414 Prepaid reinsurance premiums 507,079 435,947 442,622 380,047 Receivable for investments sold 157,864 157,864 13,772 13,772 Derivative assets 92,372 92,372 -- -- LIABILITIES: Deferred premium revenue 2,565,096 2,278,391 2,397,578 2,123,661 Loss and loss adjustment expense reserves 518,389 518,389 499,279 499,279 Municipal investment agreements 5,150,374 5,190,892 3,821,652 3,911,348 Municipal repurchase agreements 904,744 942,122 967,803 994,742 Long-term debt 805,062 827,665 795,102 799,345 Short-term debt 47,751 47,751 144,243 144,243 Securities sold under agreements to repurchase or loaned 555,496 555,518 489,624 504,739 Payable for investments purchased 130,098 130,098 7,899 7,899 Derivative liabilities 110,433 110,433 -- -- OFF-BALANCE SHEETS INSTRUMENTS: Installment premiums -- 1,068,391 -- 885,477 Derivatives -- -- 9,386 25,603
NOTE 27: QUARTERLY FINANCIAL INFORMATION (UNAUDITED) A summary of selected quarterly income statement information follows: In thousands except per share amounts
- ---------------------------------------------------------------------------------------------------------- 2001 First Second Third Fourth Year - ---------------------------------------------------------------------------------------------------------- Gross premiums written $184,905 $206,559 $218,722 $255,040 $865,226 Net premiums written 129,756 163,563 143,458 193,087 629,864 Premiums earned 120,135 128,239 134,450 141,046 523,870 Investment income and realized gains and losses 101,542 106,861 108,304 111,851 428,558 All other revenues 44,771 53,725 48,050 45,707 192,253 Income before income taxes 174,586 194,499 211,487 210,412 790,984 Net income $116,127 $143,006 $154,520 $156,438 $570,091 Net income per common share: Basic $ 0.79 $ 0.97 $ 1.04 $ 1.05 $ 3.85 Diluted $ 0.78 $ 0.96 $ 1.03 $ 1.05 $ 3.82 - ---------------------------------------------------------------------------------------------------------- 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 $ 0.89 $ 0.88 $ 0.89 $ 0.92 $ 3.58 Diluted $ 0.89 $ 0.87 $ 0.88 $ 0.92 $ 3.56 - ----------------------------------------------------------------------------------------------------------
60 MBIA ANNUAL REPORT EX-21 9 dex21.txt LIST OF SUBSIDIARIES Exhibit 21 SUBSIDIARIES OF MBIA INC. ========================= NAME OF SUBSIDIARY STATE OF INCORPORATION - ------------------ ---------------------- MBIA Insurance Corporation New York Municipal Issuers Service Corporation New York MBIA Insurance Corp. of Illinois Illinois MBIA Asset Management, LLC Delaware MBIA Municipal Investors Service Corporation Delaware Colorado Investor Services Corporation Colorado MBIA Investment Management Corp. Delaware MBIA Capital Management Corp. Delaware 1838 Investment Advisors, LLC Delaware 1838 Delaware Holding, LLC Delaware MBIA & Associates Consulting, Inc. Delaware MBIA Capital Corp. Delaware MBIA International Marketing Services, Pty. Limited Australia MBIA Assurance S.A. France MBIA Singapore Pte Ltd. Singapore MBIA Services Company Delaware MBIA MuniServices Company Delaware Municipal Tax Collection Bureau, Inc. Pennsylvania John T. Austin, Inc. California Allen W. Charkow, Inc. California Municipal Resource Consultants California Muni Resources, LLC Delaware Capital Asset Holdings GP, Inc. Florida CapMAC Holdings Inc. Delaware Capital Markets Assurance Corporation New York CapMAC Investment Management, Inc. Delaware CapMAC Financial Services, Inc. Delaware CapMAC Financial Services (Europe) Ltd. United Kingdom CapMAC Asia Ltd. Bermuda EX-23 10 dex23.txt CONSENT OF PRICEWATERHOUSECOOPERS LLP Exhibit 23 CONSENT OF INDEPENDENT ACCOUNTANTS We consent the incorporation by reference in the Registration Statements of MBIA Inc. and Subsidiaries on the forms S-3 (Nos. 333-85060, 333-15003, 333-60039 and 333-62961) and S-8 (Nos. 333-84300, 33-22441, 33-46062 and 333-34101) of: (1) Our report dated February 1, 2002, on our audits of the consolidated financial statements of MBIA Inc. and Subsidiaries as of December 31, 2001 and 2000, and for each of the three years in the period ended December 31, 2001, which report is incorporated by reference in this Annual Report on Form 10-K for the fiscal year ended December 31, 2001; (2) Our report dated February 1, 2002 on our audits of the financial statement schedules of MBIA Inc. and Subsidiaries, which report is included in this Annual Report on Form 10-K for the fiscal year ended December 31, 2001; and (3) Our report dated February 1, 2002 on our audits of the consolidated financial statements of MBIA Insurance Corporation and Subsidiaries as of December 31, 2001 and 2000, and for each of the three years in the period ended December 31, 2001, which is included in Exhibit 99 to this Annual Report on Form 10-K for the fiscal year ended December 31, 2001. March 29, 2002 EX-99 11 dex99.txt ADDITIONAL EXHIBITS-MBIA CORP. GAAP FINANCIAL STMT EXHIBIT 99 MBIA INSURANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 2001 and 2000 and for the years ended December 31, 2001, 2000 and 1999 Report of Independent Accountants To the Board of Directors and Shareholder of MBIA Insurance Corporation: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income and changes in shareholder's equity and cash flows present fairly, in all material respects, the financial position of MBIA Insurance Corporation and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, 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 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. As discussed in Note 4 to the financial statements, MBIA Corp. changed its method of accounting for derivative instruments in 2001. February 1, 2002 > MBIA INSURANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (dollars in thousands)
December 31, 2001 December 31, 2000 ----------------- ----------------- Assets Investments: Fixed-maturity securities held as available-for-sale at fair value (amortized cost $6,707,183 and $6,153,981) $6,839,389 $6,274,595 Fixed-maturity securities pledged as collateral at fair value (amortized cost $465,670 and $385,910) 479,938 390,938 Short-term investments, at amortized cost (which approximates fair value) 284,321 269,900 Other investments 28,756 9,663 ---------- ---------- Total investments 7,632,404 6,945,096 Cash and cash equivalents 24,404 12,541 Securities purchased under agreements to resell 559,751 330,000 Accrued investment income 110,264 106,822 Deferred acquisition costs 277,699 274,355 Prepaid reinsurance premiums 507,079 442,622 Reinsurance recoverable on unpaid losses 35,090 31,414 Goodwill (less accumulated amortization of $66,442 and $61,784) 76,538 81,196 Property and equipment, at cost (less accumulated depreciation of $48,849 and $38,309) 113,176 117,338 Receivable for investments sold 23,599 2,497 Other assets 100,284 105,846 ---------- ---------- Total assets $9,460,288 $8,449,727 ========== ========== Liabilities and Shareholder's Equity Liabilities: Deferred premium revenue $2,565,096 $2,397,578 Loss and loss adjustment expense reserves 518,389 499,279 Securities sold under agreements to repurchase 559,751 330,000 Deferred income taxes 249,169 253,363 Deferred fee revenue 23,987 26,138 Payable for investments purchased 50,239 2,334 Other liabilities 267,768 133,429 ---------- ---------- Total liabilities 4,234,399 3,642,121 ---------- ---------- Shareholder's Equity: Common stock, par value $150 per share; authorized, issued and outstanding - 100,000 shares 15,000 15,000 Additional paid-in capital 1,567,478 1,540,071 Retained earnings 3,572,397 3,191,536 Accumulated other comprehensive income, net of deferred income tax provision of $51,300 and $43,910) 71,014 60,999 ---------- ---------- Total shareholder's equity 5,225,889 4,807,606 ---------- ---------- Total liabilities and shareholder's equity $9,460,288 $8,449,727 ========== ==========
The accompanying notes are an integral part of the consolidated financial statements. - 2 - > MBIA INSURANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (dollars in thousands)
Years ended December 31 ------------------------------------- 2001 2000 1999 --------- --------- --------- Revenues: Gross premiums written $ 865,226 $ 687,408 $ 624,871 Ceded premiums (235,362) (189,316) (171,256) --------- --------- --------- Net premiums written 629,864 498,092 453,615 Increase in deferred premium revenue (105,994) (51,739) (10,819) --------- --------- --------- Premiums earned (net of ceded premiums of $169,034, $147,249 and $119,879) 523,870 446,353 442,796 Net investment income 412,756 392,078 358,836 Net realized gains 11,142 24,721 32,680 Change in fair value of derivative instruments (2,435) -- -- Advisory fees 35,468 24,027 22,885 Other 12,151 1,564 -- --------- --------- --------- Total revenues 992,952 888,743 857,197 --------- --------- --------- Expenses: Losses and loss adjustment 56,651 51,291 198,454 Amortization of deferred acquisition costs 42,433 35,976 36,700 Operating 78,574 80,376 76,599 --------- --------- --------- Total expenses 177,658 167,643 311,753 --------- --------- --------- Income before income taxes 815,294 721,100 545,444 Provision for income taxes 210,951 190,474 73,456 --------- --------- --------- Income before cumulative effect of accounting change 604,343 530,626 471,988 Cumulative effect of accounting change (11,082) -- -- --------- --------- --------- Net income $ 593,261 $ 530,626 $ 471,988 ========= ========= =========
The accompanying notes are an integral part of the consolidated financial statements. - 3 - > MBIA INSURANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY For the years ended December 31, 2001, 2000, and 1999 (in thousands except per share amounts)
Accumulated Common Stock Additional Other Total -------------------- Paid-in Retained Comprehensive Shareholder's Shares Amount Capital Earnings Income (Loss) Equity ------- --------- ----------- ----------- ------------- ------------- Balance, January 1, 1999 100,000 $ 15,000 $ 1,491,033 $ 2,566,222 $ 205,090 $ 4,277,345 Comprehensive income: Net income -- -- -- 471,988 -- 471,988 Other comprehensive income (loss): Change in unrealized appreciation of investments net of change in deferred income taxes of $(190,225) -- -- -- -- (354,231) (354,231) Change in foreign currency translation -- -- -- -- (10,456) (10,456) ----------- Other comprehensive loss (364,687) ----------- Comprehensive income 107,301 ----------- Dividends declared (per common share $1,800.00) -- -- -- (180,000) -- (180,000) Tax reduction related to tax sharing agreement with MBIA Inc. -- -- 22,981 -- -- 22,981 ------- --------- ----------- ----------- --------- ----------- Balance, December 31, 1999 100,000 15,000 1,514,014 2,858,210 (159,597) 4,227,627 ------- --------- ----------- ----------- --------- ----------- Comprehensive income: Net income -- -- -- 530,626 -- 530,626 Other comprehensive income (loss): Change in unrealized appreciation of investments net of change in deferred income taxes of $121,852 -- -- -- -- 226,480 226,480 Change in foreign currency translation -- -- -- -- (5,884) (5,884) ----------- Other comprehensive income 220,596 ----------- Comprehensive income 751,222 ----------- Dividends declared (per common share $1,973.00) -- -- -- (197,300) -- (197,300) Tax reduction related to tax sharing agreement with MBIA Inc. -- -- 26,057 -- -- 26,057 ------- --------- ----------- ----------- --------- ----------- Balance, December 31, 2000 100,000 15,000 1,540,071 3,191,536 60,999 4,807,606 ------- --------- ----------- ----------- --------- ----------- Comprehensive income: Net income -- -- -- 593,261 -- 593,261 Other comprehensive income (loss): Change in unrealized appreciation of investments net of change in deferred income taxes of $7,390 -- -- -- -- 13,694 13,694 Change in foreign currency translation -- -- -- -- (3,679) (3,679) ----------- Other comprehensive income 10,015 ----------- Comprehensive income 603,276 ----------- Dividends declared (per common share $2,124.00) -- -- -- (212,400) -- (212,400) Tax reduction related to tax sharing agreement with MBIA Inc. -- -- 27,407 -- -- 27,407 ------- --------- ----------- ----------- --------- ----------- Balance, December 31, 2001 100,000 $ 15,000 $ 1,567,478 $ 3,572,397 $ 71,014 $ 5,225,889 ======= ========= =========== =========== ========= ===========
2001 2000 1999 --------- --------- ----------- Disclosure of reclassification amount: Unrealized appreciation (depreciation) of investments arising during the period, net of taxes $ 23,290 $ 228,513 $ (304,809) Reclassification adjustment, net of taxes (9,596) (2,033) (49,422) --------- --------- ----------- Net unrealized appreciation, net of taxes $ 13,694 $ 226,480 $ (354,231) ========= ========= ===========
The accompany notes are an integral part of the consolidated financial statements. - 4 - > MBIA INSURANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands)
Years ended December 31 --------------------------------------------- 2001 2000 1999 ----------- ----------- ----------- Cash flows from operating activities: Net income $ 593,261 $ 530,626 $ 471,988 Adjustments to reconcile net income to net cash provided by operating activities: Increase in accrued investment income (3,442) (13,310) (2,273) Increase in deferred acquisition costs (3,344) (22,433) (21,837) Increase in prepaid reinsurance premiums (64,457) (39,412) (50,511) Increase in deferred premium revenue 170,452 91,151 61,330 Increase in loss and loss adjustment expense reserves, net 15,434 31,405 166,346 Depreciation 10,540 7,205 7,803 Amortization of goodwill 4,658 4,879 4,875 Amortization of bond discount, net (8,184) (16,756) (18,642) Net realized gains on sale of investments (11,142) (24,721) (32,680) Deferred income tax provision (benefit) (11,491) 51,597 (33,170) Fair value of derivative instruments 19,484 -- -- Other, net 139,116 94,282 (84,803) ----------- ----------- ----------- Total adjustments to net income 257,624 163,887 (3,562) ----------- ----------- ----------- Net cash provided by operating activities 850,885 694,513 468,426 ----------- ----------- ----------- Cash flows from investing activities: Purchase of fixed-maturity securities, net of payable for investments purchased (3,621,172) (2,984,404) (2,001,636) Sale of fixed-maturity securities, net of receivable for investments sold 2,602,967 2,183,222 1,376,747 Redemption of fixed-maturity securities, net of receivable for investments redeemed 431,275 282,541 288,710 (Purchase) sale of short-term investments, net (14,423) 12,947 114,096 (Purchase) sale of other investments, net (18,742) 331 8,222 Capital expenditures, net of disposals (6,527) (13,011) (47,409) ----------- ----------- ----------- Net cash used by investing activities (626,622) (518,374) (261,270) ----------- ----------- ----------- Cash flows from financing activities: Dividends paid (212,400) (197,300) (180,000) ----------- ----------- ----------- Net cash used by financing activities (212,400) (197,300) (180,000) ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents 11,863 (21,161) 27,156 Cash and cash equivalents - beginning of year 12,541 33,702 6,546 ----------- ----------- ----------- Cash and cash equivalents - end of year $ 24,404 $ 12,541 $ 33,702 =========== =========== =========== Supplemental cash flow disclosures: Income taxes paid $ 158,862 $ 83,020 $ 125,176
The accompanying notes are an integral part of the consolidated financial statements. - 5 - MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Business and Organization MBIA Insurance Corporation (MBIA Corp.) is a wholly owned subsidiary of MBIA Inc. MBIA Inc. 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. MBIA Corp. operates through one business segment, the financial guarantee insurance segment, which provides an unconditional and irrevocable guarantee of the payment of principal and interest on insured obligations when due. MBIA Corp. writes business both in the United States and outside of the United States. Business outside of the United States is generally written through MBIA Assurance, S.A. (MBIA Assurance), a wholly owned French subsidiary that provides insurance for public infrastructure financings, structured finance transactions and certain obligations of financial institutions. Pursuant to a reinsurance agreement with MBIA Corp., a substantial amount of the risks insured by MBIA Assurance is reinsured by MBIA Corp. MBIA Corp. also manages books of business through two other subsidiaries, MBIA Insurance Corp. of Illinois (MBIA Illinois), acquired in December 1989, and Capital Markets Assurance Corporation (CMAC), acquired in February 1998 when MBIA Inc. merged with CapMAC Holdings, Inc. (CapMAC). The net book of business of these two subsidiaries is 100% reinsured by MBIA Corp. In addition, MBIA Corp. insures outstanding investment agreement liabilities for MBIA Investment Management Corp. (IMC), a wholly owned subsidiary of MBIA Inc., which provides guaranteed investment agreements to states, municipalities and municipal authorities that are guaranteed as to principal and interest. MBIA Corp.'s investment portfolio is managed by MBIA Capital Management Corp. (CMC), a wholly owned subsidiary of MBIA, Inc., which provides fixed-income investment management services for MBIA Inc. and its affiliates and third party institutional clients. CMC charges a fee to MBIA Corp. based on the performance of its investment portfolio. -6- MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2. Significant Accounting Policies The consolidated financial statements have been prepared on the basis of accounting principles generally accepted in the United States of America (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. As additional information becomes available or actual amounts become determinable, the recorded estimates are revised and reflected in operating results. Actual results could differ from those estimates. Significant accounting policies are as follows: Consolidation The consolidated financial statements include the accounts of MBIA Corp. and its wholly owned subsidiaries. All significant intercompany balances have been eliminated. Certain amounts have been reclassified in prior years' financial statements to conform to the current presentation. Investments MBIA Corp.'s 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 in accumulated other comprehensive income in shareholder's 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 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. Other investments include MBIA Corp.'s interest in equity-oriented investments, and MBIA Corp. records its share of the unrealized gains and losses on these investments, net of applicable deferred income taxes, in accumulated other comprehensive income in shareholder's equity. Cash and Cash Equivalents -7- MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Cash and cash equivalents include cash on hand and demand deposits with banks. Securities Purchased Under Agreements to Resell and Securities Sold Under Agreements to Repurchase In 2000, securities purchased under agreements to resell and securities sold under agreements to repurchase were accounted for as collateralized transactions and were recorded at principal or contract value. In September 2000, the FASB issued SFAS 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," having certain requirements effective as of April 1, 2001. For 2001, these agreements are recorded on the balance sheet at fair value. SFAS 140 also requires the Company to reclassify financial assets pledged as collateral under certain agreements and to report those assets at fair value as a separate line item on the balance sheet with a corresponding adjustment to other comprehensive income. As of year-end 2001, the Company had $480 million in financial assets pledged as collateral. These transactions are entered into with IMC in connection with IMC's collateralized municipal investment and repurchase agreement activity. It is the Company's policy to take possession of securities used to collateralize such transactions. MBIA Corp. 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 MBIA Corp. when deemed necessary. Policy Acquisition Costs Policy acquisition costs include only those expenses that relate primarily to, and vary with, premium production. MBIA Corp. periodically conducts a study to determine which operating costs vary with and are primarily related to the acquisition of new insurance business and qualify for deferral. 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 -8- MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Upfront premiums are earned in proportion to the expiration of the related risk. Therefore, premium earnings are greater in the earlier periods of an upfront transaction when there is a higher amount of exposure outstanding. The premiums are apportioned to individual sinking fund payments of a bond issue according to an amortization schedule. After the premiums are allocated to each scheduled sinking fund payment, they are earned on a straight-line basis over the period of that sinking fund payment. 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 MBIA Corp. Accordingly, deferred premium revenue represents the portion of premiums written that is applicable to the unexpired risk of insured bonds and notes. Installment premiums are earned over each installment period, generally one year or less. Advisory Fee Revenue Recognition MBIA Corp. collects various advisory fees in connection with certain transactions and also earns advisory fees in connection with its administration of certain third-party-owned special purpose vehicles. Depending upon the type of fee received, the fee is either earned when it is due or deferred and earned over the life of the related transaction. Work, waiver and consent, termination, administrative and management fees are earned when due. Structuring and commitment fees are earned on a straight-line basis over the life of the related insured transaction. Goodwill Goodwill represents the excess of the cost of acquisitions over the fair value of the 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. Effective January 1, 2002 MBIA Corp. will adopt Statement of Financial Accounting Standards (SFAS) 142, "Goodwill and Other Intangible Assets." See Note 3 for an explanation of the impact the adoption of this Statement will have on MBIA Corp.'s financial statements. -9- MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Property and Equipment Property and equipment consists of MBIA Corp.'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 expense (LAE) reserves are established in an amount equal to MBIA Corp.'s estimate of identified or case basis reserves and unallocated losses, including costs of settlement, on the obligations it has insured. The unallocated reserve is calculated by applying a loss factor to net debt service written. Management determines this factor based on an independent research agency study of bond defaults, which management feels is a reliable source of bond default data. 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 expected recoveries under salvage and subrogation rights and reinsurance based on a discount rate of 5.86%. The discount rate is based on the estimated yield of our fixed-income investment portfolio. When a case basis reserve is recorded, a corresponding reduction is made to the unallocated reserve. Management 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 2001 and 2000, MBIA Corp. reviewed its loss reserving methodology. The reviews included an analysis of loss reserve factors based on the latest industry data. Historical bond default and recovery experience for the relevant sectors of the fixed-income market was included in the analysis as was MBIA Corp.'s changing mix of business. These reviews did not result in a change to MBIA's loss and LAE reserving factor. Beginning in 2002, MBIA Corp. has decided to change the methodology it uses to determine the amount of loss and loss adjustment expenses. MBIA Corp. will start accruing loss and loss -10- MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) adjustment expenses based upon a percentage of earned premiums instead of a percentage of net debt service written. There are two reasons for the change in the methodology. First, the amount of net debt service written can significantly fluctuate from quarter to quarter while the related premium is earned more consistently over the life of the transaction. Second, during the quarter the premiums are written, the loss and loss adjustment charge is recognized in advance of the related earned premium because this revenue is essentially all deferred in the quarter that it is written. The intent of the change is to better match the recognition of incurred losses with the related revenue. If the new methodology was applied during 2001, 2000 and 1999, excluding the loss reserve strengthening in 1999, MBIA Corp. would have reserved essentially the same amount as it did under the current approach. Derivatives The Financial Accounting Standards Board (FASB) issued, then subsequently amended, SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," which became effective for MBIA Corp. on January 1, 2001. Under SFAS 133, as amended, all derivative instruments are recognized on the balance sheet at their fair values and changes in fair value are recognized immediately in earnings, unless the derivatives qualify as hedges. If the derivatives qualify as hedges, depending on the nature of the hedge, changes in the fair value of the derivatives are either offset against the change in fair value of assets, liabilities, or firm commitments through earnings or recognized in accumulated other comprehensive income until the hedged item is recognized in earnings. Any ineffective portion of a derivative's change in fair value is recognized immediately in earnings. The nature of MBIA Corp.'s business activities requires the management of various financial and market risks, including those related to changes in interest rates and currency exchange rates. As discussed more fully in Note 4, MBIA Corp. uses derivative financial instruments to mitigate or eliminate certain of those risks. See Note 4 for further discussion of the impact of the adoption of this statement on the financial statements. Income Taxes MBIA Corp. is included in the consolidated tax return of MBIA Inc. The tax provision for MBIA Corp. for financial reporting purposes is determined on a stand-alone basis. Any benefit derived by MBIA Corp. as a result of the tax sharing agreement with MBIA Inc. and its -11- MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) subsidiaries is reflected directly in shareholder's equity for financial reporting purposes. 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. MBIA Corp. 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 MBIA Corp. 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 in accumulated other comprehensive income in shareholder's equity. Gains and losses resulting from transactions in foreign currencies are recorded in current income. 3. New Accounting Pronouncements In June 2001, the FASB issued SFAS 141, "Business Combinations" and SFAS 142, "Goodwill and Other Intangible Assets," which are effective for fiscal years beginning after December 15, 2001. SFAS 141, which supercedes Accounting Principles Board Opinion (APB) 16, "Business Combinations," requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 and provides specific criteria for initial recognition of intangible assets apart from goodwill. SFAS 142 supercedes APB 17, "Intangible Assets," and requires that goodwill and intangible assets with indefinite lives no longer be amortized but be subject to annual impairment tests in accordance with the Statement. The Statement -12- MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) includes a two-step process aimed at determining the amount, if any, by which the carrying value of a reporting unit exceeds its fair value. Other intangible assets will continue to be amortized over their useful lives. MBIA Corp. will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. MBIA Corp is making determinations as to what its reporting units are and what amounts of goodwill, intangible assets, other assets and liabilities should be allocated to those reporting units. As a result of the application of the nonamortization provision of the Statement, MBIA Corp. will no longer incur approximately $4.6 million of annual goodwill amortization expense. During 2002 MBIA Corp. will perform the first of the required impairment tests of goodwill and indefinite lived intangible assets as of January 1, 2002 and has not yet determined what the effect of these tests will be on its earnings and financial position. 4. Derivative Instruments Effective January 1, 2001 the MBIA Corp. adopted SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 requires that all derivative instruments are recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or accumulated other comprehensive income, depending on whether a derivative is designated as a hedge, and if so designated, the type of hedge. MBIA Corp. has entered into derivative transactions that it views as an extension of its core financial guarantee business but which do not qualify for the financial guarantee scope exception under SFAS 133 and, therefore, must be stated at fair value. MBIA Corp has insured derivatives primarily consisting of credit default swaps, which it intends to hold for the entire term of the contract. As such, these contracts are reflected in the financial statements primarily as insurance contracts. However, changes in the fair value of these contracts are recorded through the income statement as the change in fair value of derivative instruments. As of December 31, 2001, the notional values of the credit default swaps and total return swaps were $17.5 billion and $96.0 -13- MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) million, respectively. In addition, MBIA Corp. held other derivative instruments with notional values totaling $10.0 million. As of December 31, 2001 MBIA Corp. held derivative assets of $65.9 million and derivative liabilities of $85.4 million, which are contained in other assets and other liabilities in the Consolidated Balance Sheet. The impact for all derivative transactions for the year ended December 31, 2001 was an after-tax reduction in net income of $9.4 million, which included an $11.1 million cumulative reduction resulting from the adoption of SFAS 133. The following table displays the impact on the income statement for all derivative transactions related to MBIA Corp. The income statement impact of derivative activity is broken down into revenues, expenses, net realized gains (losses) and change in fair value of derivative instruments. MBIA Corp. believes that this presentation more accurately reflects the impact of the derivative activity. Year ended In millions December 31, 2001 - -------------------------------------------------------------------------------- Revenues* $10.9 Expenses* (2.9) - -------------------------------------------------------------------------------- Operating income 8.0 Gains and losses Net realized losses (3.0) Change in fair value of derivative instruments (2.4) - -------------------------------------------------------------------------------- Income before income taxes 2.6 Tax provision (0.9) - -------------------------------------------------------------------------------- Income before cumulative effect of accounting change 1.7 Cumulative effect of accounting change (11.1) - -------------------------------------------------------------------------------- Net loss $(9.4) - -------------------------------------------------------------------------------- * Includes premiums earned and formula provision for losses. 5. 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: -14- MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) . upfront premiums are earned on a basis proportionate to the scheduled periodic maturity of principal and payment of interest ("debt service") to the original total principal and interest insured; . 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 case basis 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 MBIA Corp.'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. The following is a reconciliation of consolidated shareholder's equity presented on a GAAP basis to statutory capital and surplus for MBIA Corp. and its subsidiaries: As of December 31 -------------------------------- In thousands 2001 2000 - -------------------------------------------------------------------------------- GAAP shareholder's equity $ 5,225,889 $ 4,807,606 Premium revenue recognition (574,047) (535,920) Deferral of acquisition costs (277,699) (274,354) Unrealized gains (146,612) (125,529) Contingency reserve (2,082,103) (2,123,403) Loss and loss adjustment expense reserves 272,354 258,706 Deferred income taxes 255,988 253,363 Tax and loss bonds 254,695 202,195 Goodwill (76,538) (81,196) Other 5,512 201 - -------------------------------------------------------------------------------- Statutory capital and surplus $ 2,857,439 $ 2,381,669 - -------------------------------------------------------------------------------- -15- MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Aggregate net income of MBIA Corp. and its subsidiaries determined in accordance with statutory accounting practices for the years ended December 31, 2001, 2000 and 1999 was $571.0 million, $543.9 million and $521.8 million, respectively. 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 in areas where statutory accounting has been silent and changes current statutory accounting in some areas. The New York State Insurance Department adopted the Codification guidance, effective January 1, 2001. The New York State Insurance Department has not adopted the Codification rules on certain accounting issues such as deferred income taxes as of December 31, 2001. The effect of adoption on the statutory surplus of MBIA Corp. and subsidiaries was not material. 6. Premiums Earned from Refunded and Called Bonds Premiums earned include $54.6 million, $34.0 million and $64.2 million for 2001, 2000 and 1999, respectively, related to refunded and called bonds. 7. Investments MBIA Corp.'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. MBIA Corp.'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. The following tables set forth the amortized cost and fair value of the fixed-maturity and short-term investments included in the consolidated investment portfolio of MBIA Corp. as of December 31, 2001 and 2000: -16- MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Gross Gross Amortized Unrealized Unrealized Fair In thousands Cost Gains Losses Value - ---------------------------------------------------------------------------------------------- As of December 31, 2001 Taxable bonds: United States Treasury and government agency $ 390,098 $ 4,065 $ (326) $ 393,837 Corporate and other obligations 2,045,662 66,837 (11,659) 2,100,840 Mortgage-backed 682,073 22,400 (657) 703,816 Tax-exempt bonds: State and municipal obligations 4,339,341 102,702 (36,888) 4,405,155 - ---------------------------------------------------------------------------------------------- Total $7,457,174 $196,004 $(49,530) $7,603,648 - ---------------------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair In thousands Cost Gains Losses Value - ---------------------------------------------------------------------------------------------- As of December 31, 2000 Taxable bonds: United States Treasury and government agency $ 148,911 $ 2,364 $ (690) $ 150,585 Corporate and other Obligations 2,126,124 32,188 (35,383) 2,122,929 Mortgage-backed 779,780 14,785 (3,252) 791,313 Tax-exempt bonds: State and municipal obligations 3,754,976 127,916 (12,286) 3,870,606 - ---------------------------------------------------------------------------------------------- Total $6,809,791 $177,253 $(51,611) $6,935,433 - ----------------------------------------------------------------------------------------------
Fixed-maturity investments carried at fair value of $12.7 million and $11.7 million as of December 31, 2001 and 2000, respectively, were on deposit with various regulatory authorities to comply with insurance laws. The following table sets forth the distribution by expected maturity of the fixed-maturity and short-term investments at amortized cost and fair value at December 31, 2001. 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 $ 314,717 $ 314,717 Beyond 1 year but within 5 years 986,459 1,018,319 Beyond 5 years but within 10 years 1,209,896 1,252,132 Beyond 10 years but within 15 years 1,398,251 1,426,628 Beyond 15 years but within 20 years 1,154,143 1,165,981 Beyond 20 years 1,711,635 1,722,055 - -------------------------------------------------------------------------------- 6,775,101 6,899,832 Mortgage-backed 682,073 703,816 - -------------------------------------------------------------------------------- Total fixed-maturity and short-term investments $7,457,174 $7,603,648 - -------------------------------------------------------------------------------- -17- MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 8. Investment Income and Gains and Losses Investment income consists of: Years ended December 31 ---------------------------------------- In thousands 2001 2000 1999 - -------------------------------------------------------------------------------- Fixed-maturity $ 408,981 $ 388,134 $ 357,702 Short-term investments 10,536 10,410 7,221 Other investments 715 (80) 24 - -------------------------------------------------------------------------------- Gross investment income 420,232 398,464 364,947 Investment expenses 7,476 6,386 6,111 - -------------------------------------------------------------------------------- Net investment income 412,756 392,078 358,836 - -------------------------------------------------------------------------------- Net realized gains (losses): Fixed-maturity: Gains 42,694 42,765 47,244 Losses (31,552) (19,516) (16,793) - -------------------------------------------------------------------------------- Net 11,142 23,249 30,451 - -------------------------------------------------------------------------------- Other investments: Gains -- 1,852 2,229 Losses -- (380) -- - -------------------------------------------------------------------------------- Net -- 1,472 2,229 - -------------------------------------------------------------------------------- Total net realized gains 11,142 24,721 32,680 - -------------------------------------------------------------------------------- Total investment income $ 423,898 $ 416,799 $ 391,516 - -------------------------------------------------------------------------------- Net unrealized gains consist of: As of December 31 - -------------------------------------------------------------------------------- In thousands 2001 2000 - -------------------------------------------------------------------------------- Fixed-maturity: Gains $ 196,004 $ 177,253 Losses (49,530) (51,611) - -------------------------------------------------------------------------------- Net 146,474 125,642 - -------------------------------------------------------------------------------- Other investments: Gains 139 -- Losses -- (113) - -------------------------------------------------------------------------------- Net 139 (113) - -------------------------------------------------------------------------------- Total 146,613 125,529 Deferred income tax provision 51,300 43,910 - -------------------------------------------------------------------------------- Unrealized gains, net $ 95,313 $ 81,619 - -------------------------------------------------------------------------------- -18- MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The deferred income tax provision relates primarily to unrealized gains and losses on MBIA Corp.'s fixed-maturity investments, which are reflected in other accumulated comprehensive income in shareholder's equity. The change in net unrealized gains (losses) consists of: Years ended December 31 - -------------------------------------------------------------------------------- In thousands 2001 2000 1999 - -------------------------------------------------------------------------------- Fixed-maturity $20,832 $348,169 $(541,520) Other investments 252 163 (2,936) - -------------------------------------------------------------------------------- Total 21,084 348,332 (544,456) Deferred income taxes 7,390 121,852 (190,225) - -------------------------------------------------------------------------------- Unrealized gains (losses), net $13,694 $226,480 $(354,231) - -------------------------------------------------------------------------------- 9. Income Taxes The provision for income taxes is composed of: Years ended December 31 - -------------------------------------------------------------------------------- In thousands 2001 2000 1999 - -------------------------------------------------------------------------------- Current $ 216,475 $138,877 $ 106,626 Deferred (5,524) 51,597 (33,170) - -------------------------------------------------------------------------------- Income tax provision 210,951 190,474 73,456 Deferred SFAS 133 transition (5,967) -- -- - -------------------------------------------------------------------------------- Total $ 204,984 $190,474 $ 73,456 - -------------------------------------------------------------------------------- The provision for income taxes gives effect to permanent differences between financial and taxable income. Accordingly, MBIA Corp.'s effective income tax rate differs from the statutory rate on ordinary income. The reasons for MBIA Corp.'s lower effective tax rates are as follows: ------------------------------ Years ended December 31 - -------------------------------------------------------------------------------- 2001 2000 1999 - -------------------------------------------------------------------------------- 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 (8.1) (8.5) (11.4) Amortization of goodwill 0.2 0.2 0.3 Other (1.2) (0.3) (10.4) - -------------------------------------------------------------------------------- Provision for income taxes 25.9% 26.4% 13.5% - -------------------------------------------------------------------------------- The 1999 effective tax rate includes a reduction of 10.4% pertaining to the loss reserve strengthening. -19- MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) MBIA Corp. 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, 2001 and 2000 are presented below: In thousands 2001 2000 - -------------------------------------------------------------------------------- Deferred tax assets: Tax and loss bonds $256,171 $199,607 Alternative minimum tax credit carryforward 11,286 11,381 Loss and loss adjustment expense reserves 93,173 88,396 Unrealized losses -- -- Other 47,781 36,319 - -------------------------------------------------------------------------------- Total gross deferred tax assets 408,411 335,703 - -------------------------------------------------------------------------------- Deferred tax liabilities: Contingency reserve 363,479 324,305 Deferred premium revenue 114,019 105,731 Deferred acquisition costs 97,195 96,024 Unrealized gains 78,372 43,910 Contingent commissions 620 620 Other 3,895 18,476 - -------------------------------------------------------------------------------- Total gross deferred tax liabilities 657,580 589,066 - -------------------------------------------------------------------------------- Net deferred tax liability $249,169 $253,363 - -------------------------------------------------------------------------------- MBIA Corp. believes that no valuation allowance is necessary in connection with the deferred tax assets. 10. Dividends and Capital Requirements 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 MBIA Corp. and CMAC's case, dividends in any 12-month period cannot be greater than 10% of policyholders' surplus as shown on MBIA Corp.'s latest filed statutory financial statements. In 2001, MBIA Corp. declared and paid dividends of $212 million and based upon the filing of the 2001 statutory financial statements had -20- MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) dividend capacity of $73 million without special regulatory approval. In 2001, CMAC did not declare or pay any dividends. CMAC had dividend capacity of $3.5 million as of December 31, 2001. In 2000, CMAC declared and paid dividends of $4.5 million to its parent MBIA Corp. Under Illinois Insurance Law, MBIA Illinois may pay a dividend from unassigned surplus, and the dividends in any 12-month period may not exceed the greater of 10% of policyholders' surplus (total capital and surplus) at the end of the preceding calendar year, or the net income of the preceding calendar year without the approval of the Illinois State Insurance Department. In accordance with such restrictions on the amount of dividends that can be paid in any 12-month period, MBIA Illinois had $17.2 million available for the payment of dividends as of December 31, 2001. In 2000, MBIA Illinois declared and paid dividends of $17.5 million to its parent MBIA Corp. The insurance departments of New York State and 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, 2001. 11. Lines of Credit 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. This facility can be drawn upon if MBIA Corp. incurs cumulative losses (net of any recoveries) on the covered portfolio (which is comprised of the MBIA Corp.'s insured public finance obligations, with certain adjustments) from October 31, 2001 in excess of the greater of $900 million or 5.6% 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, 2008, and contains an annual renewal provision subject to approval by the bank group. MBIA Corp. also maintains $211 million of stop loss reinsurance coverage with a group of highly rated reinsurers on its -21- MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) structured finance portfolio. This facility covers losses incurred within the global structured finance portfolio in excess of an attachment point calculated annually. The attachment point was $900 million during 2001 and increased to $1,014 million on January 1, 2002. This facility has a seven-year term. MBIA Corp. and MBIA Inc. maintain bank liquidity facilities totaling $650 million. As of December 31, 2001, there were no borrowings outstanding under these agreements. 12. 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 below. MBIA Corp. maintains underwriting guidelines based on those aspects of credit quality that it deems important for each category of obligation considered for insurance. For global public finance transactions these include economic and social trends, debt and financial management, adequacy of anticipated cash flow, satisfactory legal structure and other security provisions, viable tax and economic bases, adequacy of loss coverage and project feasibility. For global structured finance transactions, MBIA Corp.'s underwriting guidelines, analysis, and due diligence focus on seller/servicer credit and operational quality. MBIA also analyzes the quality of the asset pool as well as its historical and projected performance. The strength of the structure, including legal segregation of the assets, cash flow analysis, the size and source of first loss protection, asset performance triggers and financial covenants is also reviewed. Such guidelines are subject to periodic review by management, who are responsible for establishing and maintaining underwriting standards and criteria for maintaining underwriting standards in our insurance operations. As of December 31, 2001, insurance in force, net of cessions to reinsurers, had a range of maturity of 1-48 years among 34,881 outstanding policies. The distribution of net insurance in force by geographic location, including $6.7 billion and $5.3 billion relating to IMC municipal investment agreements guaranteed by MBIA Corp. in 2001 and 2000, respectively, is set forth in the following table: -22- MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
----------------------------------------------------- As of December 31 - ------------------------------------------------------------------------------------- In billions 2001 2000 - ------------------------------------------------------------------------------------- Net % of Net Net % of Net Geographic Insurance Insurance Insurance Insurance Location In Force In Force In Force In Force - ------------------------------------------------------------------------------------- California $ 86.0 11.8% $ 80.0 11.6% New York 75.3 10.3 76.4 11.1 Florida 36.1 5.0 35.7 5.2 Texas 30.1 4.1 26.7 3.9 New Jersey 26.9 3.7 26.0 3.8 Illinois 23.9 3.3 22.6 3.3 Pennsylvania 23.0 3.1 24.5 3.6 Massachusetts 21.8 3.0 20.5 3.0 Michigan 16.0 2.2 14.8 2.1 Ohio 13.9 1.9 13.5 2.0 - ------------------------------------------------------------------------------------- Subtotal 353.0 48.4 340.7 49.6 Nationally Diversified 128.2 17.6 117.2 17.1 Other states 190.1 26.1 180.4 26.3 - ------------------------------------------------------------------------------------- Total United States 671.3 92.1 638.3 93.0 Internationally diversified 25.2 3.4 20.7 3.0 Country specific 32.6 4.5 27.2 4.0 - ------------------------------------------------------------------------------------- Total Non-United States 57.8 7.9 47.9 7.0 - ------------------------------------------------------------------------------------- Total $729.1 100.0% $686.2 100.0% - -------------------------------------------------------------------------------------
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 insured issue 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. The distribution of net insurance in force by type of bond is set forth in the following table: -23- MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31 ----------------------------------------------------- In billions 2001 2000 - ----------------------------------------------------------------- ------------------------ Net % of Net Net % of Net Insurance Insurance Insurance Insurance Bond Type In Force In Force In Force In Force - ----------------------------------------------------------------- ------------------------ Global Public Finance: United States General obligation $165.3 22.7% $152.5 22.2% Utilities 84.2 11.5 79.0 11.5 Special revenue 67.0 9.2 61.4 8.9 Healthcare 64.7 8.9 68.3 10.0 Transportation 47.4 6.5 48.7 7.1 Investor-owned utilities 36.9 5.1 36.1 5.3 Higher education 31.3 4.3 29.0 4.2 Housing 27.7 3.8 24.4 3.6 - ----------------------------------------------------------------- ------------------------ Total United States 524.5 72.0 499.4 72.8 - ----------------------------------------------------------------- ------------------------ Non-United States Investor-owned utilities 3.8 0.5 2.8 0.4 Utilities 3.5 0.5 1.1 0.2 Sovereign 3.1 0.4 2.7 0.4 Transportation 2.4 0.3 1.6 0.2 Sub-sovereign 1.1 0.2 1.0 0.2 Healthcare 0.8 0.1 0.6 0.1 Housing 0.6 0.1 0.7 0.1 Higher education 0.1 -- 0.1 -- - ----------------------------------------------------------------- ------------------------ Total Non-United States 15.4 2.1 10.6 1.6 - ----------------------------------------------------------------- ------------------------ Total Global Public Finance 539.9 74.1 510.0 74.4 - ----------------------------------------------------------------- ------------------------ Global Structured Finance: United States Mortgage-backed: Home equity 29.6 4.1 37.3 5.5 Other 13.0 1.8 20.1 2.9 First Mortgage 9.0 1.2 8.0 1.2 Asset-backed: Credit cards 18.7 2.5 17.3 2.5 Auto 18.1 2.5 14.5 2.1 Other 7.5 1.0 7.0 1.0 Leasing 7.0 1.0 5.5 0.8 Corporate debt obligations 21.1 2.9 11.8 1.7 Pooled Corp. obligations & other 18.3 2.5 13.8 2.0 Financial risk 4.5 0.6 5.0 0.7 - ----------------------------------------------------------------- ------------------------ Total United States 146.8 20.1 140.3 20.4 - ----------------------------------------------------------------- ------------------------ Non-United States Corporate debt obligations 22.9 3.1 20.7 3.0 Pooled Corp. obligations & other 9.1 1.3 5.7 0.8 Mortgage-backed: First Mortgage 4.6 0.6 3.8 0.6 Other 0.7 0.1 0.2 -- Home equity 0.5 0.1 0.4 0.1 Financial risk 3.1 0.4 3.4 0.5 Asset-backed 1.5 0.2 1.7 0.2 - ----------------------------------------------------------------- ------------------------ Total Non-United States 42.4 5.8 35.9 5.2 Total Global Structured Finance 189.2 25.9 176.2 25.6 - ----------------------------------------------------------------- ------------------------ Total $729.1 100.0% $686.2 100.0% - ----------------------------------------------------------------- ------------------------
-24- MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 13. Reinsurance MBIA Corp. reinsures exposure with other insurance companies under various treaty and facultative reinsurance contracts, both on a pro rata and non-proportional 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 $153.9 billion and $143.3 billion, at December 31, 2001 and 2000, respectively. The distribution of ceded insurance in force by geographic location is set forth in the following table:
As of December 31 ----------------------------------------------------- 2001 2000 - -------------------------------------------------------- ------------------------ % of % of Ceded Ceded Ceded Ceded In billions Insurance Insurance Insurance Insurance Geographic Location In Force In Force In Force In Force - -------------------------------------------------------- ------------------------ California $ 18.3 11.9% $ 17.9 12.5% New York 12.8 8.3 13.7 9.5 New Jersey 6.7 4.3 6.9 4.8 Texas 5.8 3.8 5.3 3.7 Florida 4.8 3.1 4.7 3.3 Massachusetts 4.8 3.1 4.2 3.0 Puerto Rico 4.2 2.7 3.7 2.6 Colorado 4.0 2.6 3.8 2.7 Illinois 4.0 2.6 3.6 2.5 Pennsylvania 3.8 2.5 4.2 2.9 - -------------------------------------------------------- ------------------------ Subtotal 69.2 44.9 68.0 47.5 Nationally diversified 26.0 16.9 18.8 13.1 Other states 30.4 19.8 29.2 20.3 - -------------------------------------------------------- ------------------------ Total United States 125.6 81.6 116.0 80.9 Internationally diversified 8.3 5.4 10.8 7.6 Country specific 20.0 13.0 16.5 11.5 - -------------------------------------------------------- ------------------------ Total Non-United States 28.3 18.4 27.3 19.1 - -------------------------------------------------------- ------------------------ Total $153.9 100.0% $143.3 100.0% - -------------------------------------------------------- ------------------------
The distribution of ceded insurance in force by type of bond is set forth in the following table: -25- MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31 ----------------------------------------------------- 2001 2000 - ----------------------------------------------------------------- ------------------------ % of % of Ceded Ceded Ceded Ceded In billions Insurance Insurance Insurance Insurance Type of Bond In Force In Force In Force In Force - ----------------------------------------------------------------- ------------------------ Global Public Finance: United States General obligation $ 21.8 14.1% $ 19.8 13.9% Transportation 18.3 11.9 18.4 12.8 Utilities 17.9 11.7 17.1 11.9 Health care 15.1 9.8 15.3 10.7 Special revenue 9.4 6.1 9.4 6.6 Investor-owned utilities 6.0 3.9 6.1 4.2 Higher education 4.1 2.7 2.4 1.7 Housing 3.1 2.0 2.8 1.9 - ----------------------------------------------------------------- ------------------------ Total United States 95.7 62.2 91.3 63.7 - ----------------------------------------------------------------- ------------------------ Non-United States Transportation 3.0 1.9 1.7 1.2 Utilities 2.5 1.6 1.1 0.8 Investor-owned utilities 2.1 1.4 0.6 0.4 Sovereign 1.1 0.8 1.6 1.1 Sub-sovereign 0.9 0.6 0.8 0.6 Health care 0.4 0.2 0.4 0.3 Housing 0.1 -- -- -- - ----------------------------------------------------------------- ------------------------ Total Non-United States 10.1 6.5 6.2 4.4 - ----------------------------------------------------------------- ------------------------ Total Global Public Finance 105.8 68.7 97.5 68.1 - ----------------------------------------------------------------- ------------------------ Global Structured Finance: United States Asset-backed: Auto 4.0 2.6 2.6 1.8 Credit cards 3.9 2.5 -- -- Leasing 3.0 2.0 2.1 1.5 Other 0.6 0.4 2.9 2.0 Mortgage-backed: Home equity 6.9 4.5 8.2 5.7 Other 2.3 1.5 2.0 1.4 First mortgage 1.0 0.6 1.6 1.1 Pooled Corp. obligation & other 5.5 3.5 4.7 3.3 Corporate debt obligations 2.3 1.5 -- -- Financial risk 0.4 0.3 0.6 0.4 - ----------------------------------------------------------------- ------------------------ Total United States 29.9 19.4 24.7 17.2 - ----------------------------------------------------------------- ------------------------ Non-United States Corporate debt obligations 6.6 4.3 -- -- Pooled Corp. obligation & other 5.6 3.6 15.0 10.4 Financial risk 2.7 1.8 2.8 2.0 Asset-backed 1.7 1.1 1.8 1.2 Mortgage-backed First mortgage 1.0 0.7 1.0 0.8 Home equity 0.4 0.3 0.5 0.3 Other 0.2 0.1 -- -- - ----------------------------------------------------------------- ------------------------ Total Non-United States 18.2 11.9 21.1 14.7 - ----------------------------------------------------------------- ------------------------ Total Global Structured Finance 48.1 31.3 45.8 31.9 - ----------------------------------------------------------------- ------------------------ Total $153.9 100.0% $143.3 100.0% - ----------------------------------------------------------------- ------------------------
-26- MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) As part of MBIA Corp's reinsurance activity in 1998, MBIA Corp. entered into reinsurance agreements with highly-rated reinsurers that obligate it to cede future premiums to the reinsurers through October 1, 2004. Components of premiums written including reinsurance assumed from and ceded to other companies is set forth in the following table: Years ended December 31 ------------------------------------------------ 2001 2000 1999 - -------------------------------------------------------------------------------- Direct $ 839,386 $ 641,452 $ 590,597 Assumed 25,840 45,956 34,274 - -------------------------------------------------------------------------------- Gross 865,226 687,408 624,871 Ceded (235,362) (189,316) (171,256) - -------------------------------------------------------------------------------- Net $ 629,864 $ 498,092 $ 453,615 - -------------------------------------------------------------------------------- Ceding commissions received from reinsurers before deferrals were $55.2 million, $37.3 million, and $35.3 million in 2001, 2000 and 1999, respectively. 14. Employee Benefits MBIA Corp. participates in MBIA Inc.'s pension plan, which covers substantially all employees. The pension plan is a non-contributory, defined contribution pension plan to which MBIA Inc. contributes 10% of each eligible employee's annual total compensation. Pension contributions vest over a five-year period with 60% vesting after three years and 20% in years four and five. Pension expense for the years ended December 31, 2001, 2000 and 1999, was $4.9 million, $4.9 million and $6.7 million, respectively. MBIA Inc. also has a profit-sharing/401(k) plan in which MBIA Corp. participates. The plan is a voluntary contributory plan that allows eligible employees to defer compensation for federal income tax purposes under Section 401(k) of the Internal Revenue Code of 1986, as amended. Employees may contribute through payroll deductions up to 10% of eligible compensation. MBIA Corp. matches employee contributions up to the first 5% of total compensation with MBIA, Inc. common stock. MBIA Corp.'s contributions vest over five years with 60% vesting after three years and then 20% in years four and five. Generally, a participating employee is entitled to distributions from the plan upon termination of employment, retirement, death or disability. Participants who qualify for distribution may receive a single lump sum, transfer the assets to -27- MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) another qualified plan or individual retirement account, or receive a series of specified installment payments. MBIA Corp. contributions to the profit-sharing/401(k) plan aggregated $1.9 million, $1.9 million and $3.2 million for the years ended December 31, 2001, 2000 and 1999, respectively. Amounts relating to the above plans that exceed limitations established by federal regulations are contributed to a non-qualified deferred compensation plan. The non-qualified contributions included in the pension plan were $3.0 million, $2.6 million and $2.5 million for the years ending December 31, 2001, 2000 and 1999, respectively. The non-qualified contributions for the profit-sharing 401(k) plan were $1.0 million, $0.9 million and $1.7 million for the years ending December 31, 2001, 2000 and 1999, respectively. MBIA Corp. also participates in the "MBIA Long-Term Incentive Program" (the incentive program). The incentive program includes a stock option component and a compensation component linked to the growth in book value per share, including certain adjustments, of MBIA Inc.'s stock (modified book value) over a three-year period following the grant date. Target levels for the incentive program awards are established as a percentage of total salary and bonus, based upon the recipient's position. Awards under the incentive program typically are granted from the vice president level up to and including the Chairman and Chief Executive Officer. Actual amounts to be paid are adjusted upward or downward depending on the growth of modified book value versus a baseline target, with a minimum growth of 8% necessary to receive any payment and an 18% growth necessary to receive the maximum payment. Awards under the incentive program are divided equally between the two components, with 50% of the award to be given in stock options and 50% of the award to be paid in cash or shares of MBIA Inc. stock. Payments are made at the end of each three-year measurement period. During 2001, 2000 and 1999, $14.6 million, $11.6 million and $7.2 million, respectively, were recorded as a charge related to these awards. MBIA Corp. also participates in MBIA Inc.'s restricted stock program whereby key executive officers are granted restricted shares of MBIA Inc.'s common stock. These stock awards may only be sold three, four or five years from the date of grant, at which time the awards fully vest. Compensation expense related to the restricted stock was $3.3 million, $2.2 million, and $1.7 million for the years ended December 31, 2001, 2000 and 1999, respectively. -28- MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 15. Related Party Transactions Since 1989, MBIA Corp. has executed five surety bonds to guarantee the payment obligations of the members of the Association who had their Standard & Poor's Corporation 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, 2001 is $340 million. Included in other liabilities at December 31, 2001 were $0.3 million of net payables to MBIA Inc. and other subsidiaries. Included in other assets at December 31, 2000 were $48.6 million of net receivables from MBIA Inc. and other subsidiaries. MBIA Corp. entered into an agreement with MBIA Inc. and IMC whereby MBIA Corp. held securities subject to agreements to resell of $559.8 million and $330.0 million as of December 31, 2001 and 2000, respectively. MBIA Corp. also transferred securities subject to agreements to repurchase of $559.8 million and $330.0 million as of December 31, 2001 and 2000. These agreements have a term of less than one year. The interest expense relating to these agreements was $16.8 million and $17.4 million, respectively, for the years ended December 31, 2001 and 2000. The interest income relating to these agreements was $17.4 million and $18.0 million, respectively, for the years ended December 31, 2001 and 2000. 16. Fair Value of Financial Instruments The estimated fair value amounts of financial instruments shown in the following table have been determined by MBIA Corp. using available market information and appropriate valuation methodologies. However, in certain cases considerable judgment is necessarily required to interpret market data to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amount MBIA Corp. 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 available-for-sale is based upon quoted market price, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. -29- MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Short-term investments - Short-term investments are carried at amortized cost, which approximates fair value. Other investments - Other investments include MBIA Corp.'s interest in equity-oriented and equity-method investments. The fair value of these investments is based on quoted market prices. Cash and cash equivalents, receivable for investments sold and payable for investments purchased - The carrying amounts of these items are a reasonable estimate of their fair value. Securities 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 MBIA Corp.'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 MBIA Corp.'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. Securities 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 derived from market information and appropriate valuation methodologies reflects the estimated amounts that the MBIA Corp. would receive or pay to terminate the transaction at the reporting date. -30- MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31, 2001 As of December 31, 2000 ---------------------------- ---------------------------- Carrying Estimated Carrying Estimated In thousands Amount Fair Value Amount Fair Value - ------------------------------------------------------------------ ---------------------------- Assets: Fixed-maturity securities $7,319,327 $7,319,327 $6,665,533 $6,665,533 Short-term investments 284,321 284,321 269,900 269,900 Other investments 28,756 28,756 9,663 9,663 Cash and cash equivalents 24,404 24,404 12,541 12,541 Securities purchased under agreements to resell 559,751 559,751 330,000 396,951 Prepaid reinsurance premiums 507,079 435,947 442,622 380,047 Reinsurance recoverable on unpaid losses 35,090 35,090 31,414 31,414 Receivable for investments sold 23,599 23,599 2,497 2,497 Derivatives assets 65,897 65,897 -- -- Liabilities: Deferred premium revenue 2,565,096 2,278,391 2,397,578 2,123,661 Loss and loss adjustment expense reserves 518,389 518,389 499,279 499,279 Securities sold under agreements to repurchase 559,751 559,751 330,000 390,367 Payable for investments purchased 50,239 50,239 2,334 2,334 Derivatives liabilities 85,381 85,381 -- -- Off-balance sheet instruments: Installment premiums -- 1,068,391 -- 885,477 Derivatives -- -- -- 16,454
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