UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (X) QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended March 31, 2001 OR ( ) TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from __________ to __________ Commission File No. 1-9583 I.R.S. Employer Identification No. 06-1185706 MBIA INC. A Connecticut Corporation 113 King Street, Armonk, N. Y. 10504 (914) 273-4545 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 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 ----- ----- As of May 4, 2001 there were outstanding 148,246,846 shares of Common Stock, par value $1 per share, of the registrant.
INDEX ----- <TABLE> <CAPTION> PART I FINANCIAL INFORMATION PAGE ---- <S> <C> Item 1. Financial Statements (Unaudited) MBIA Inc. and Subsidiaries Consolidated Balance Sheets - March 31, 2001 and December 31, 2000 3 Consolidated Statements of Income - Three months ended March 31, 2001 and 2000 4 Consolidated Statement of Changes in Shareholders' Equity - Three months ended March 31, 2001 5 Consolidated Statements of Cash Flows - Three months ended March 31, 2001 and 2000 6 Notes to Consolidated Financial Statements 7 - 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 - 22 PART II OTHER INFORMATION, AS APPLICABLE Item 6. Exhibits and Reports on Form 8-K 23 SIGNATURES 24 </TABLE> (2)
MBIA INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) (Dollars in thousands except per share amounts) <TABLE> <CAPTION> March 31, 2001 December 31, 2000 -------------------------- --------------------------- Assets Investments: <S> <C> <C> Fixed-maturity securities held as available-for-sale at fair value (amortized cost $6,720,248 and $6,612,498) $6,919,540 $6,740,127 Short-term investments, at amortized cost (which approximates fair value) 364,398 376,604 Other investments 130,942 119,591 ----------------- ------------------ 7,414,880 7,236,322 Municipal investment agreement portfolio held as available-for-sale at fair value (amortized cost $4,878,094 and $4,947,653) 4,996,697 4,996,608 ----------------- ------------------ Total investments 12,411,577 12,232,930 Cash and cash equivalents 95,262 93,962 Securities borrowed or purchased under agreements to resell 282,804 314,624 Accrued investment income 145,627 152,043 Deferred acquisition costs 274,472 274,355 Prepaid reinsurance premiums 456,737 442,622 Reinsurance recoverable on unpaid losses 32,047 31,414 Goodwill (less accumulated amortization of $69,111 and $67,472) 102,683 104,322 Property and equipment, at cost (less accumulated depreciation of $65,481 and $62,026) 130,813 133,514 Receivable for investments sold 40,644 13,772 Other assets 166,362 100,780 ----------------- ------------------ Total assets $14,139,028 $13,894,338 ================= ================== Liabilities and Shareholders' Equity Liabilities: Deferred premium revenue $2,416,378 $2,397,578 Loss and loss adjustment expense reserves 509,052 499,279 Municipal investment agreements 3,671,966 3,821,652 Municipal repurchase agreements 1,047,504 967,803 Long-term debt 802,673 795,102 Short-term debt 52,751 144,243 Securities loaned or sold under agreements to repurchase 384,504 489,624 Current income taxes 38,293 --- Deferred income taxes 289,117 252,463 Deferred fee revenue 32,155 32,694 Payable for investments purchased 127,227 7,899 Other liabilities 363,151 262,588 ----------------- ------------------ Total liabilities 9,734,771 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--200,000,000; issued shares -- 151,494,159 and 100,773,295 151,494 100,773 Additional paid-in capital 1,180,535 1,219,587 Retained earnings 3,028,524 2,934,608 Accumulated other comprehensive income, net of deferred income tax provision of $102,111 and $57,141 163,061 85,707 Unallocated ESOP shares (2,650) (2,950) Unearned compensation--restricted stock (12,987) (10,659) Treasury stock -- 3,315,503 shares in 2001 and 2,209,358 shares in 2000 (103,720) (103,653) ----------------- ------------------ Total shareholders' equity 4,404,257 4,223,413 ----------------- ------------------ Total liabilities and shareholders' equity $14,139,028 $13,894,338 ================= ================== </TABLE> The accompanying notes are an integral part of the consolidated financial statements. (3)
MBIA INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Dollars in thousands except per share amounts) <TABLE> <CAPTION> Three months ended March 31 ---------------------------------------- 2001 2000 ---------------- --------------- <S> <C> <C> Insurance Revenues: Gross premiums written $ 184,905 $ 148,837 Ceded premiums (55,149) (42,966) ---------------- --------------- Net premiums written 129,756 105,871 Scheduled premiums earned 109,793 101,646 Refunding premiums earned 10,342 3,058 ---------------- --------------- Premiums earned (net of ceded premiums of $38,316 and $38,379) 120,135 104,704 Net investment income 101,882 95,370 Advisory fees 6,947 7,975 ---------------- --------------- Total insurance revenues 228,964 208,049 Expenses: Losses and LAE incurred 14,222 8,587 Policy acquisition costs 9,611 8,586 Operating 18,535 19,394 ---------------- --------------- Total insurance expenses 42,368 36,567 ---------------- --------------- Insurance income 186,596 171,482 ---------------- --------------- Investment management services Revenues 31,894 26,878 Expenses 16,451 13,596 ---------------- --------------- Investment management services income 15,443 13,282 ---------------- --------------- Municipal services Revenues 5,930 7,622 Expenses 6,756 8,051 ---------------- --------------- Municipal services loss (826) (429) ---------------- --------------- Corporate Net investment income 1,776 --- Interest expense 15,743 13,496 Other expenses 4,620 3,647 ---------------- --------------- Corporate loss (18,587) (17,143) ---------------- --------------- Gains and losses Net realized gains (losses) (2,116) 11,885 Change in fair value of derivative instruments (5,924) --- ---------------- --------------- Net gains and losses (8,040) 11,885 ---------------- --------------- Income before income taxes 174,586 179,077 Provision for income taxes 45,392 46,757 ---------------- --------------- Income before cumulative effect of accounting change 129,194 132,320 Cumulative effect of accounting change (13,067) --- ---------------- --------------- Net income $ 116,127 $ 132,320 ================ =============== Net income per common share: Basic $ 0.79 $ 0.89 Diluted $ 0.78 $ 0.89 Weighted average number of common shares outstanding: Basic 147,925,834 148,650,650 Diluted 149,021,855 149,514,064 </TABLE> The accompanying notes are an integral part of the consolidated financial statements. (4)
MBIA INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited) For the three months ended March 31, 2001 (In thousands except per share amounts) <TABLE> <CAPTION> Accumulated Common Stock Additional Other ------------------------- Paid-in Retained Comprehensive Shares Amount Capital Earnings Income (Loss) ------------ ------------ -------------- -------------- -------------------- <S> <C> <C> <C> <C> <C> <C> Balance, January 1, 2001 100,773 $100,773 $1,219,587 $2,934,608 $85,707 Comprehensive income: Net income --- --- --- 116,127 --- Other comprehensive income: Change in unrealized appreciation of investments net of change in deferred income taxes of $50,462 --- --- --- --- 93,826 Change in fair value of derivative instruments net change in deferred income taxes of $(5,492) --- --- --- --- (10,200) Change in foreign currency translation --- --- --- --- (6,272) Other comprehensive income Comprehensive income Treasury shares acquired --- --- --- --- --- Exercise of stock options 186 186 8,572 --- --- Allocation of ESOP shares --- --- 7 --- --- Unearned compensation- restricted stock 37 37 2,867 --- --- Issuance of common stock for stock split 50,498 50,498 (50,498) --- --- Dividends (declared per common share $0.150, paid per common share $0.137) --- --- --- (22,211) --- ------------ ------------ -------------- -------------- -------------------- Balance, March 31, 2001 151,494 $151,494 $1,180,535 $3,028,524 $163,061 ============ ============ ============== ============== ==================== <CAPTION> Unearned Unallocated Compensation- Treasury Stock Total ESOP Restricted ------------------------- Shareholders' Shares Stock Shares Amount Equity ------------------ ------------------ --------- -------------- ----------------- <S> <C> <C> <C> <C> <C> Balance, January 1, 2001 $(2,950) $(10,659) (2,209) $(103,653) $4,223,413 Comprehensive income: Net income --- --- --- --- 116,127 Other comprehensive income: Change in unrealized appreciation of investments net of change in deferred income taxes of $50,462 --- --- --- --- 93,826 Change in fair value of derivative instruments net change in deferred income taxes of $(5,492) --- --- --- --- (10,200) Change in foreign currency translation --- --- --- --- (6,272) ----------------- Other comprehensive income 77,354 ----------------- Comprehensive income 193,481 ----------------- Treasury shares acquired --- --- (1) (67) (67) Exercise of stock options --- --- --- --- 8,758 Allocation of ESOP shares 300 --- --- --- 307 Unearned compensation- restricted stock --- (2,328) --- --- 576 Issuance of common stock for stock split --- --- (1,105) --- - Dividends (declared per common share $0.150, paid per common share $0.137) --- --- --- --- (22,211) ------------------ ------------------ --------- -------------- ----------------- Balance, March 31, 2001 $(2,650) $(12,987) (3,315) $(103,720) $4,404,257 ================== ================== ========= ============== ================= </TABLE> The accompanying notes are an integral part of the consolidated financial statements. 2001 ------------ Disclosure of reclassification amount: Unrealized appreciation of investments arising during the period, net of taxes $91,980 Reclassification of adjustment, net of taxes 1,846 ------------ Net unrealized appreciation, net of taxes $93,826 ============ (5)
MBIA INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands) <TABLE> <CAPTION> Three months ended March 31 -------------------------------------- 2001 2000 ------------------- ---------------- <S> <C> <C> Cash flows from operating activities: Net income $ 116,127 $ 132,320 Adjustments to reconcile net income to net cash provided by operating activities: Decrease in accrued investment income 6,416 8,591 Increase in deferred acquisition costs (117) (3,894) Increase in prepaid reinsurance premiums (14,115) (4,587) Increase in deferred premium revenue 23,736 5,754 Increase in loss and loss adjustment expense reserves, net 9,140 7,163 Depreciation 3,454 3,274 Amortization of goodwill 1,639 1,675 Amortization of bond discount, net (3,359) (6,911) Net realized (gains) losses on sale of investments 2,116 (11,885) Current income tax provision 38,293 --- Deferred income tax provision (benefit) (8,228) 4,085 Fair value of derivative instruments 26,028 --- Other, net (12,112) 39,365 ------------------- ---------------- Total adjustments to net income 72,891 42,630 ------------------- ---------------- Net cash provided by operating activities 189,018 174,950 ------------------- ---------------- Cash flows from investing activities: Purchase of fixed-maturity securities, net of payable for investments purchased (4,616,898) (1,581,886) Sale of fixed-maturity securities, net of receivable for investments sold 4,407,082 1,344,599 Redemption of fixed-maturity securities, net of receivable for investments redeemed 123,625 76,984 Sale of short-term investments, net 18,975 5,820 Purchases of other investments, net (13,307) (1,712) Purchases for municipal investment agreement portfolio, net of payable for investments purchased (1,905,563) (545,242) Sales from municipal investment agreement portfolio, net of receivable for investments sold 2,045,426 516,382 Capital expenditures, net of disposals (793) (4,413) Other, net 499 8,376 ------------------- ---------------- Net cash provided (used) by investing activities 59,046 (181,092) ------------------- ---------------- Cash flows from financing activities: Net repayment of short-term debt (91,492) --- Dividends paid (22,412) (20,406) Purchase of treasury stock (67) (30,908) Proceeds from issuance of municipal investment and repurchase agreements 744,264 523,515 Payments for drawdowns of municipal investment and repurchase agreements (812,515) (591,818) Securities loaned or sold under agreements to repurchase, net (73,300) 86,321 Exercise of stock options 8,758 2,332 ------------------- ---------------- Net cash used by financing activities (246,764) (30,964) ------------------- ---------------- Net increase (decrease) in cash and cash equivalents 1,300 (37,106) Cash and cash equivalents - beginning of period 93,962 93,559 ------------------- ---------------- Cash and cash equivalents - end of period $95,262 $56,453 =================== ================ Supplemental cash flow disclosures: Income taxes paid (refunded) ($ 153) $ 1,168 Interest paid: Municipal investment and repurchase agreements $73,682 $61,637 Long-term debt 15,876 13,631 </TABLE> The accompanying notes are an integral part of the consolidated financial statements. (6)
MBIA Inc. and Subsidiaries Notes to Consolidated Financial Statements 1. Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, accordingly, do not include all of the information and disclosures required by generally accepted accounting principles. These statements should be read in conjunction with the consolidated financial statements and notes thereto included in Form 10-K for the year ended December 31, 2000 for MBIA Inc. and Subsidiaries (the company). The accompanying consolidated financial statements have not been audited by independent accountants in accordance with generally accepted auditing standards but in the opinion of management such financial statements include all adjustments, consisting only of normal recurring adjustments, necessary to summarize fairly the company's financial position and results of operations. The results of operations for the three months ended March 31, 2001 may not be indicative of the results that may be expected for the year ending December 31, 2001. The December 31, 2000 balance sheet was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. The consolidated financial statements include the accounts of the company. All significant intercompany balances have been eliminated. Business segment results are presented gross of intersegment transactions, which are not material to each segment. 2. Dividends Declared Dividends declared by the company during the three months ended March 31, 2001 were $22 million. 3. Recent Accounting Pronouncement In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 133, "Accounting for Derivative Instruments and Hedging Activities" which is effective for the company as of January 1, 2001. SFAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Change in the fair value of derivatives will be recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge, and if so, the use and type of the hedge. The company has entered into derivative transactions that do not qualify for the financial guarantee scope exception under SFAS 133 and, therefore, must be stated at fair value. The Insurance segment, which represents the majority of the company's derivative exposure and mark-to-market as of January 1, 2001, has insured derivatives primarily consisting of credit default swaps. The Investment Management Services segment has entered into primarily forward delivery agreements, interest rate and credit default swaps. The Corporate segment has entered into derivatives to hedge foreign exchange and interest rate risks related to the issuance of certain MBIA long-term debt issues. The revenues and expenses in the Insurance, Investment Management and Corporate segments include revenues and expenses related to derivative activity in those segments. The related change in fair value of those derivative instruments is included in gains and losses. Adoption of SFAS 133 on January 1, 2001 resulted in cumulative after-tax reductions in net income of $13 million and other comprehensive income of $4 (7)
MBIA Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) million. In addition, the company increased its assets by $41 million and liabilities by $59 million. (8)
MBIA Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations Overview - -------- MBIA Inc. (MBIA or the company) posted strong financial and operating results for the quarter as we continued to focus on our triple-A ratings, no-loss underwriting standards, and building of shareholder value. Our disciplined approach to pricing and risk selection enabled the company to post another quarter of strong growth in our insurance operations, especially in the structured finance and international sectors. Our asset management business posted strong results for the quarter as operating income rose 16%. The company is well positioned to capitalize on strong long-term growth prospects in our insurance and investment business units, particularly in our international financial guarantee sector. Forward-Looking and Cautionary Statements - ----------------------------------------- Statements included in this discussion 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 affect our financial performance or could cause actual results to differ materially from estimates contained in or underlying our company's forward-looking statements: . fluctuations in the economic, credit or interest rate environment in the United States and abroad; . 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. Our 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. (9)
MBIA Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Recent Accounting Pronouncement - ------------------------------- In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 133, "Accounting for Derivative Instruments and Hedging Activities" which is effective for the company as of January 1, 2001. SFAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Change in the fair value of derivatives will be recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge, and if so, the use and type of the hedge. The company has entered into derivative transactions that do not qualify for the financial guarantee scope exception under SFAS 133 and, therefore, must be stated at fair value. The Insurance segment, which represents the majority of the company's derivative exposure and mark-to-market as of January 1, 2001, has insured derivatives primarily consisting of credit default swaps. The Investment Management Services segment has entered into primarily forward delivery agreements, interest rate and credit default swaps. The Corporate segment has entered into derivatives to hedge foreign exchange and interest rate risks related to the issuance of certain MBIA long-term debt issues. The revenues and expenses in the Insurance, Investment Management and Corporate segments include revenues and expenses related to derivative activity in those segments. The related change in fair value of those derivative instruments is included in gains and losses. Adoption of SFAS 133 on January 1, 2001 resulted in cumulative after-tax reductions in net income of $13 million and other comprehensive income of $4 million. In addition, the company increased its assets by $41 million and liabilities by $59 million. Results of Operations - --------------------- Summary The company uses various measures of profitability and intrinsic value, namely, "core earnings", "operating earnings", "adjusted direct premiums" and "adjusted book value" which are not in accordance with accounting principles generally accepted in the United States of America. We view these measures as the most meaningful measures of our performance and the intrinsic value of the company. All per share data have been adjusted to reflect the three-for-two stock split effective April 20, 2001. The following chart presents highlights of our consolidated financial results for the first quarters of 2001 and 2000: (10)
MBIA Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) <TABLE> <CAPTION> March 31, March 31, Percent Change -------------- 2001 2000 2001 vs. 2000 - ---------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Net income (in millions): As reported $ 116 $ 132 (12)% Excluding accounting changes $ 129 $ 132 (2)% Per share data:* Net income: As reported $ 0.78 $ 0.89 (12)% Excluding accounting changes $ 0.87 $ 0.89 (2)% Operating earnings $ 0.90 $ 0.83 8% Core earnings $ 0.86 $ 0.82 5% Book value $29.75 $24.76 20% Adjusted book value $41.28 $36.21 14% - ---------------------------------------------------------------------------------------------------------------------- </TABLE> *All earnings per share calculations are diluted. Our first quarter 2001 net income and earnings per share, excluding accounting changes, decreased 2% due to realized losses of $2 million in the investment portfolio compared with realized gains of $12 million last year. Including the accounting changes, net income decreased by 12% for 2001 over 2000. Operating earnings per share, which exclude the impact of realized gains and losses, changes in fair value of derivatives and accounting changes, increased by 8% over the first quarter of 2000. This increase was the result of a 238% increase in refunding earned premium, which contributed $0.04 per share in 2001 compared with $0.01 per share in 2000. Core earnings, which exclude the effects of refundings and calls on our insured issues, realized capital gains and losses on our investment portfolio, changes in fair value of derivatives, and accounting changes, provide the most indicative measure of our underlying profit. For the first quarter of 2001, core earnings per share grew 5%, reflecting strong insurance and investment management results partially offset by losses in our municipal services sector and higher interest expenses from additional debt issued in the fourth quarter of 2000. Our book value at March 31, 2001 was $29.75 per share, up 20% from $24.76 at March 31, 2000. The increase was caused primarily by a more than 200% increase in the unrealized value of our investment portfolio and a 17% increase in retained earnings, partially offset by the increase in treasury shares from stock repurchases. A more appropriate measure of a financial guarantee company's intrinsic value is its adjusted book value. It is defined as book value plus the after-tax effects of net deferred premium revenue, net of deferred acquisition costs, the present value of unrecorded future installment premiums, and the unrealized gains or losses on investment contract liabilities. Our adjusted book value per share was $41.28 at March 31, 2001, a 14% increase from first quarter- end 2000, reflecting the same (11)
MBIA Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) factors that impacted book value reduced by a reduction in unrealized gains on investment contract liabilities. The following table presents the components of our adjusted book value per share: <TABLE> <CAPTION> Percent Change March 31, March 31, -------------- 2001 2000 2001 vs. 2000 - ----------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Book value $29.75 $24.76 20% After-tax value of: Net deferred premium revenue, net of deferred acquisition costs 7.40 7.25 2% Present value of future installment premiums* 4.03 3.37 20% Unrealized gain on investment contract liabilities 0.10 0.83 (88)% - ----------------------------------------------------------------------------------------------------------------- Adjusted book value $41.28 $36.21 14% - ----------------------------------------------------------------------------------------------------------------- *The discount rate used to present value future installment premiums was 9%. </TABLE> Financial Guarantee Insurance The company's production in terms of adjusted direct premiums (ADP), gross premiums written (GPW) and par written for the first quarters of 2001 and 2000 is presented in the following table: <TABLE> <CAPTION> Percent Change March 31, March 31, -------------- 2001 2000 2001 vs. 2000 - ----------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Premiums written (in millions): ADP $ 232 $ 169 37% GPW $ 185 $ 149 24% Par written (in billions) $ 28 $ 15 88% </TABLE> In the first quarter of 2001, bond issuance was up significantly compared with the first quarter of 2000. We continued to write business levels of A and above for the period. As a result, ADP was up 37% compared to the first quarter of 2000, while par insured was up by 88%. The larger increase in par compared with ADP is the result of a higher level of business rated AAA compared with the first quarter of 2000. 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. GPW, as reported in our financial statements, primarily reflects cash receipts and does not include the value of future premium receipts expected from installment policies originated in the period. GPW was $185 million, up 24% from the first quarter of 2000, reflecting strong growth in our structured finance and international business, which offset a decline in public finance for the period. (12)
MBIA Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) We estimate the present value of our total future installment premium stream on outstanding policies to be $918 million at March 31, 2001, compared with $769 million at March 31, 2000, a growth rate of 19%. PUBLIC FINANCE MARKET Domestic new issue public finance market information and MBIA's par and premium writings in both the new issue and secondary domestic public finance markets are shown in the following table: <TABLE> <CAPTION> Percent Change March 31, March 31, -------------- Domestic Public Finance 2001 2000 2001 vs. 2000 - ---------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Total new issue market:* Par value (in billions) $ 58 $ 36 60% Insured penetration 44% 47% MBIA market share 18% 22% MBIA insured: Par written (in billions) $ 6 $ 5 24% Premiums (in millions): ADP $ 64 $ 72 (12)% GPW $ 63 $ 74 (15)% - ---------------------------------------------------------------------------------------------------------- </TABLE> * Market data are reported on a sale date basis while MBIA's insured data are based on closing date information. Typically, there can be a one to four week delay between the sale date and closing date of an insured issue. New issuance was strong in the public finance market, increasing 60% to $58 billion for the first quarter of 2001, compared with $36 billion in the first quarter of 2000. While new issue money was up 30%, refundings increased by almost 300%. The insured penetration decreased slightly to 44% in 2001 from 47% in 2000. MBIA's domestic public finance ADP decreased by 12% over 2000's first quarter while par written increased by 24%. The decrease in ADP when compared with the increase in par written is the result of the mix of business written, lower overall pricing and our refusal to price business below the cost of our capital. Looking ahead to the second quarter in the public finance market, we expect solid production in the face of increasing deal flow, somewhat offset by the continuing very competitive market conditions. We still expect to end the year with more domestic public finance business written than last year in terms of both par insured and ADP. (13)
MBIA Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) STRUCTURED FINANCE MARKET Details regarding the asset-backed market and MBIA's par and premium writings in both the domestic new issue and secondary structured finance markets are shown in the table below: <TABLE> <CAPTION> Percent Change Domestic March 31, March 31, -------------- Structured Finance 2001 2000 2001 vs. 2000 - ---------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Total asset-backed market:* Par value (in billions) $ 78 $ 54 46% MBIA insured: Par written (in billions) $ 19 $ 6 202% Premiums (in millions): ADP $ 82 $ 38 115% GPW $ 57 $ 48 20% - ---------------------------------------------------------------------------------------------------------------- </TABLE> *Market data exclude mortgage-backed securities and private placements. As with first quarter public finance issuance, overall public and private structured finance issuance was up significantly to a record $78 billion. Our par written was up over 200% from first quarter 2000, as ADP was up 115% for the quarter. The relationship between par insured and AGP primarily reflects the mix of business written and an improvement in the credit quality of the business we wrote as we maintained strong pricing discipline. Credit quality increased significantly during the quarter, with 77% of the business written rated A or better, and only 23% in the triple B category. This compares with the first quarter of 2000 with 42% written rated A or better and 58% in the triple B category. Looking ahead to the second quarter, the pipeline of structured finance deals is full and our business prospects look strong. INTERNATIONAL MARKET The international results were up compared with the first quarter of 2000. For the first time in our history, we wrote more ADP outside the United States than in either our domestic public finance or structured finance businesses. Our public and structured finance international business volume in the new issue and secondary markets for the first quarters of 2001 and 2000 are illustrated as follows: <TABLE> <CAPTION> Percent Change March 31, March 31, -------------- International 2001 2000 2001 vs. 2000 - --------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Par written (in billions) $ 3 $ 4 (17)% Premiums (in millions): ADP $ 86 $ 59 47% GPW $ 65 $ 27 141% </TABLE> (14)
International par written was down 17% while ADP was up 47% for the first quarter of 2001 compared with the first quarter of 2000. This year 84% of our international business written in the quarter was rated A or above, compared with 91% rated A or better we insured in the first quarter of 2000. The mix of business written, rather than the quality of the insured volume, accounts for the strong ADP to par insured ratio. The opportunities in our international sector are significant and we are well positioned to capitalize on these opportunities in the future. REINSURANCE Premiums ceded to reinsurers from all insurance operations were $55 million and $43 million in the first quarter of 2001 and 2000, respectively. Cessions as a percentage of GPW increased slightly to 30% in 2001 from 29% in 2000. Reinsurance continues to be a cost-effective capital substitute for MBIA. The increase in reinsurance over last year is the result of our strong results in the international book of business, where reinsurance cession rates are higher than cession rates on domestic business. 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. PREMIUMS EARNED The composition of MBIA's premiums earned in terms of its scheduled and refunded components is illustrated below: <TABLE> <CAPTION> Percent Change March 31, March 31, -------------- In millions 2001 2000 2001 vs. 2000 - ------------------------------------------------------------------------------------------------ <S> <C> <C> <C> Premiums earned: Scheduled $ 110 $ 102 8% Refunded 10 3 238% - ------------------------------------------------------------------------------------------------ Total $ 120 $ 105 15% </TABLE> Premiums are recognized over the life of the bonds we insure. The extended premium recognition coupled with compounding investment income from investing our premiums and capital form a solid foundation for consistent revenue growth. In 2001 premiums earned from scheduled amortization increased by 8% over the first quarter of 2000, indicating that the benefits of the increased pricing strategy established in early 1999 are beginning to emerge. Refunded premiums earned increased significantly this year compared with the first quarter of 2000, 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 amount of bond refundings and calls is influenced by a variety of factors such as prevailing interest rates, the coupon rates of the bond issue, the issuer's desire or ability to modify bond covenants and applicable regulations under the Internal Revenue Code. INVESTMENT INCOME Our insurance-related investment income (exclusive of realized gains and losses) increased 7% to $102 million in the first quarter of 2001, (15)
MBIA Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) up from $95 million in the first quarter of 2000. This increase was primarily due to the growth of the investment portfolio from cash flow available for investment. Our cash flows were generated from operations and the compounding of previously earned and reinvested investment income. ADVISORY FEES The company collects fee revenues in conjunction with certain insured transactions. In addition, the company earns advisory fees in connection with its administration of certain third-party-owned conduits. Fees are generally deferred and earned over the life of the related transactions. Certain fees, however, are earned in the quarter they are due and include administration fees for transactions where the fee is collected on a periodic basis, and fees for transactions that terminate prior to the expected maturity date. In the first quarter of 2001, advisory fee revenues decreased 13% to $7 million from $8 million. This decrease was primarily due to the "non- deferrable" type of fees recognized during the quarter. LOSSES AND LOSS ADJUSTMENT EXPENSES (LAE) We maintain a loss reserve based on our estimate of unidentified losses from our insured obligations. The total reserve is calculated by applying a risk factor based on a study of issuer defaults to net debt service written. To the extent that we identify a specific insured issue with respect to which we anticipate a loss, the present value of our expected payment, net of expected reinsurance and recoveries, is allocated within the total loss reserve as a case-specific reserve. We periodically evaluate our estimates for losses and LAE and any resulting adjustments are reflected in current earnings. We believe that our reserving methodology and the resulting reserves are adequate to cover the ultimate net cost of claims. However, the reserves are based on estimates, and there can be no assurance that any ultimate liability will not exceed such estimates. In 2000, we reviewed our loss reserving methodology. The review included an analysis of loss-reserve factors based on the latest available industry data, an analysis of historical default and recovery experience for the relevant sectors of the fixed-income market, and consideration for the changing mix of our book of business. The review did not result in an increase 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 first quarter of 2001 and 2000, as well as our loss provision for the first quarter of 2001 and 2000: (16)
MBIA Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) <TABLE> <CAPTION> Percent Change March 31, March 31, -------------- In millions 2001 2000 2001 vs. 2000 - ------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> Case-specific: Gross $ 246 $ 242 2% Reinsurance recoverable on unpaid losses 32 31 2% - ------------------------------------------------------------------------------------------------------------------ Total case reserves 214 211 2% Unallocated 263 233 13% - ------------------------------------------------------------------------------------------------------------------ Net loss and LAE reserves $ 477 $ 444 8% Provision $ 14 $ 9 66% </TABLE> OPERATING EXPENSES Expenses related to the production of our insurance business (policy acquisition costs) are deferred and recognized over the period in which the related premiums are earned. Our company's policy acquisition costs, general operating expenses and total insurance operating expenses, as well as related expense ratios, are shown below: <TABLE> <CAPTION> Percent Change March 31, March 31, -------------- In millions 2001 2000 2001 vs. 2000 - --------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Policy acquisition costs, net $ 10 $ 9 12% Operating 18 19 (4)% - --------------------------------------------------------------------------------------------------------- Total insurance operating expenses $ 28 $ 28 --- Expense ratio: GAAP 23.4% 26.7% Statutory 16.3% 20.9% </TABLE> For the first quarter of 2001, policy acquisition costs net of deferrals increased 12% over the 2000 level, reflecting the increased level of new business written during the quarter. The ratio of policy acquisition costs net of deferrals to earned premiums decreased slightly to 8.0% from 8.2% in the first quarter of 2000. Operating expenses decreased 4% from the first quarter of 2000, reflecting the company's continuing expense management program. Total insurance operating expenses were $28 million, the same as the first quarter of 2000. Financial guarantee insurance companies use the statutory expense ratio (expenses before deferrals divided by net premiums written) as a measure of expense management. Our company's first quarter 2001 statutory expense ratio decreased to 16.3%, one of the lowest levels in our history. The GAAP expense ratio also decreased from the first quarter of 2000 to 23.4% from 26.7%, reflecting the increase in the refunding earned premiums year over year. INSURANCE INCOME MBIA's insurance income of $187 million for the first quarter of 2001 increased 9% over the first quarter of 2000 due to the increase in premiums earned from refundings in 2001 as well as the decrease in operating expenses. (17)
MBIA Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Investment Management Services - ------------------------------ The table below summarizes our consolidated investment management results for the first quarters of 2001 and 2000: <TABLE> <CAPTION> Percent Change March 31, March 31, -------------- In millions 2001 2000 2001 vs. 2000 - --------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Revenues $ 32 $ 27 19% Expenses 17 14 21% - ---------------------------------------------------------------------------------------------------------- Income $ 15 $ 13 16% </TABLE> The success of the merger with 1838 Investment Advisors, Inc. (1838) is reflected in the investment management services operating results, with consolidated revenues up 19% over the first quarter of 2000, while expenses were up slightly more at 21%. As a result, operating income increased by 16% for the first quarter of 2001 over the same period in 2000. We ended the quarter with almost $37 billion in assets under management, up 11% from March 31, 2000. MBIA Asset Management Corporation is comprised of 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 over $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 and investment and treasury management consulting services for municipal and quasi-public-sector clients. MBIA-MISC is a Securities and Exchange Commission (SEC)-registered investment adviser and at March 31, 2001 had almost $10 billion in assets under management, up 29% over March 31, 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 March 31, 2001, principal and accrued interest outstanding on investment and repurchasing agreements was $4.7 billion, compared with $4.4 billion at March 31, 2000. At amortized cost, the assets supporting IMC's investment agreements were $4.9 billion and $4.5 billion at March 31, 2001 and 2000. These assets are comprised of high-quality securities with an average credit quality rating of Double-A. IMC from time-to-time uses derivative financial instruments to manage interest rate risk. We have established policies limiting the amount, type and concentration (18)
MBIA Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) of such instruments. By matter of policy, derivative positions can only be used to hedge interest rate exposures and not for speculative trading purposes. At first quarter-end 2001, our exposure to derivative financial instruments was not material. CMC is an SEC-registered investment adviser and National Association of Securities Dealers member firm. CMC specializes in fixed-income management for institutional funds and provides investment management services for IMC's investment agreements, MBIA-MISC's municipal cash management programs and MBIA's insurance related portfolios. At March 31, 2001, CMC's third-party assets under management were $2.5 billion compared to $1.8 billion at March 31, 2000. Municipal Services - ------------------ MBIA MuniServices Company (MBIA MuniServices)(formerly known as Strategic Services, Inc.) was established in 1996 as part of the company's strategy to broaden its product offerings to its core clients, leveraging its relationships and presence as a leading provider of products and services to the public sector. During 1999, the company completed a reorganization of the operations of two of its subsidiaries, Municipal Tax Bureau (MTB) and Municipal Resource Consultants (MRC). With the reorganization complete, this business, operating as MBIA MuniServices, is now focused on delivering revenue enhancement services and products to public-sector clients nationwide, consisting of discovery, audit, collections/recovery, enforcement and information (data) services. The Municipal Services segment also includes Capital Asset Holdings, Inc. (Capital Asset), a servicer of delinquent tax certificates. In the first quarter of 2001 the municipal services operations lost $0.8 million compared with a loss of $0.4 million during the same period of 2000. Corporate - --------- NET INVESTMENT INCOME Net investment income was $1.8 million in the first quarter of 2001, which was the result of assets invested at the holding company level from the debt proceeds received during the fourth quarter of 2000. INTEREST EXPENSE In the first quarter of 2001, we incurred $16 million of interest expense compared with $13 million during the first quarter of 2000. The increase is the result of the additional $100 million of debt issued during the fourth quarter of 2000. OTHER EXPENSES In the first quarter of 2001 other expenses were comprised primarily of non-insurance goodwill amortization and general corporate overhead. Gains and Losses - ---------------- NET REALIZED GAINS (LOSSES) Net realized losses were $2.1 million in the first quarter of 2001 compared with net realized gains of $11.9 million during the first quarter of 2000. (19)
MBIA Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) CHANGE IN FAIR VALUE OF DERIVATIVES In the first quarter of 2001, we incurred an unrealized loss of $6 million due to the change in the fair value of derivatives. Taxes - ----- Our tax policy is to optimize our after-tax income by maintaining the appropriate mix of taxable and tax-exempt investments. However, we will see our tax rate fluctuate from time-to-time as we manage our investment portfolio on a total return basis. Our effective tax rate has increased over last year's first quarter primarily due to a shift from tax-exempt investments into taxable investments. Capital Resources - ----------------- We carefully manage our capital resources to optimize our cost of capital while maintaining appropriate claims-paying resources to sustain our Triple-A claims- paying ratings. At March 31, 2001, our total shareholders' equity was $4.4 billion, with total long-term borrowings at $803 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: <TABLE> <CAPTION> March 31, December 31, 2001 2000 - ------------------------------------------------------------------------------------------------------------ <S> <C> <C> Long-term debt (in millions) $ 803 $ 795 Long-term debt to total capital 15% 16% </TABLE> In July 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 March 31, 2001 the company has repurchased a total of 3,270,300 shares at an average price of $31.31. In addition, our insurance company has a $900 million irrevocable standby line of credit facility with a group of major Triple-A Rated banks to provide funds for the payment of claims in the event that severe losses should occur. The agreement is for a seven-year term, which expires on October 31, 2007, and, subject to approval by the banks, may be renewed annually to extend the term to seven years beyond the renewal date. Our insurance company also maintains stop- loss reinsurance coverage of $175 million in excess of incurred losses of $762 million. At quarter-end, total claims-paying resources for our insurance company stood at $9.3 billion, a 7% increase over first quarter-end 2000. (20)
MBIA Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) 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 the insurance company, which generates substantial cash flow from premium writings and investment income. In the first quarter of 2001, operating cash flow totaled $189 million. Under New York state insurance law, without prior approval of the superintendent of the state insurance department, financial guarantee insurance companies can pay dividends from earned surplus subject to retaining a minimum capital requirement. In our case, dividends in any 12-month period cannot be greater than 10% of policyholders' surplus. During the first three months of 2001 our insurance company paid dividends of $41 million and at March 31, 2001 had dividend capacity in excess of $45 million without special regulatory approval. The company has significant liquidity supporting its businesses. At the end of the first quarter of 2001, cash equivalents and short-term investments totaled $460 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 from 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 worldwide banks. At March 31, 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 March 31, 2001, the fair value of our consolidated investment portfolio was $12.4 billion, as shown below: <TABLE> <CAPTION> Percent Change March 31, December 31, -------------- In millions 2001 2000 2001 vs. 2000 - ------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> Insurance operations: Amortized cost $ 7,216 $ 7,108 2% Unrealized gain 199 128 56% - ------------------------------------------------------------------------------------------------------------ Fair value $ 7,415 $ 7,236 2% - ------------------------------------------------------------------------------------------------------------ Municipal investment Agreements: Amortized cost $ 4,878 $ 4,948 (1%) Unrealized gain 119 49 142% - ------------------------------------------------------------------------------------------------------------ Fair value $ 4,997 $ 4,997 --- - ------------------------------------------------------------------------------------------------------------ Total portfolio at fair value $12,412 $12,233 1% </TABLE> (21)
MBIA Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) The growth of our insurance-related investments in 2001 was the result of positive cash flows. The fair value of investments related to our municipal investment agreement business has remained constant at $5.0 billion. 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 as an adjustment to shareholders' equity. Differences between fair value and amortized cost arise primarily as a result of changes in interest rates occurring after a fixed-income security is purchased, although other factors influence fair value, including credit-related actions, supply and demand forces and other market factors. The weighted-average credit quality of our fixed-income portfolios has been maintained at Double-A since our inception. Since we generally intend to hold most of our investments to maturity as part of our risk management strategy, we expect to realize a value substantially equal to amortized cost. (22)
PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits 11. Computation of Earnings Per Share Assuming Dilution 99. Additional Exhibits - MBIA Insurance Corporation and Subsidiaries Consolidated Financial Statements (b) Reports on Form 8-K: No Reports on Form 8-K were filed in this quarter. (23)
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MBIA INC. ----------------------- Registrant Date: May 15, 2001 /s/ Neil G. Budnick -------------------------- ----------------------------------- Neil G. Budnick Chief Financial Officer Date: May 15, 2001 /s/ Douglas C. Hamilton -------------------------- ----------------------------------- Douglas C. Hamilton Controller (Principal Accounting Officer) (24)