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 June 30, 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 August 6, 2001 there were outstanding 148,448,526 shares of Common Stock, par value $1 per share, of the registrant.
INDEX ----- <TABLE> <CAPTION> PAGE ---- <S> <C> PART I FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) MBIA Inc. and Subsidiaries Consolidated Balance Sheets - June 30, 2001 and December 31, 2000 3 Consolidated Statements of Income - Three months and six months ended June 30, 2001 and 2000 4 Consolidated Statement of Changes in Shareholders' Equity - Six months ended June 30, 2001 5 Consolidated Statements of Cash Flows - Six months ended June 30, 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 - 23 PART II OTHER INFORMATION, AS APPLICABLE Item 4. Submission of Matters to a Vote of Security Holders 24 Item 6. Exhibits and Reports on Form 8-K 24 SIGNATURES 25 </TABLE> (2)
MBIA INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) (Dollars in thousands except per share amounts) <TABLE> <CAPTION> June 30, 2001 December 31, 2000 ----------------- ------------------- <S> <C> <C> Assets Investments: Fixed-maturity securities held as available-for-sale at fair value (amortized cost $6,880,441 and $6,612,498) $ 7,004,018 $ 6,740,127 Short-term investments, at amortized cost (which approximates fair value) 363,204 376,604 Other investments 136,657 119,591 -------------- --------------- 7,503,879 7,236,322 Municipal investment agreement portfolio held as available-for-sale at fair value (amortized cost $5,320,328 and $4,736,439) 5,396,838 4,785,168 Municipal investment agreement portfolio pledged as collateral at fair value (amortized cost $255,068 and $211,214) 258,838 211,440 -------------- --------------- Total investments 13,159,555 12,232,930 Cash and cash equivalents 71,633 93,962 Securities purchased under agreements to resell or borrowed --- 314,624 Accrued investment income 165,124 152,043 Deferred acquisition costs 280,511 274,355 Prepaid reinsurance premiums 457,894 442,622 Reinsurance recoverable on unpaid losses 31,065 31,414 Goodwill (less accumulated amortization of $70,748 and $67,472) 101,046 104,322 Property and equipment, at cost (less accumulated depreciation of $69,461 and $62,026) 128,763 133,514 Receivable for investments sold 185,417 13,772 Other assets 171,854 100,780 -------------- --------------- Total assets $ 14,752,862 $ 13,894,338 ============== =============== Liabilities and Shareholders' Equity Liabilities: Deferred premium revenue $ 2,453,450 $ 2,397,578 Loss and loss adjustment expense reserves 508,725 499,279 Municipal investment agreements 4,191,529 3,821,652 Municipal repurchase agreements 1,016,895 967,803 Long-term debt 795,295 795,102 Short-term debt 55,151 144,243 Securities sold under agreements to repurchase or loaned 212,477 489,624 Deferred income taxes 251,210 252,463 Deferred fee revenue 30,025 32,694 Payable for investments purchased 408,045 7,899 Other liabilities 368,224 262,588 -------------- --------------- Total liabilities 10,291,026 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 -- 151,737,541 and 151,159,943 151,738 151,160 Additional paid-in capital 1,188,197 1,169,200 Retained earnings 3,149,041 2,934,608 Accumulated other comprehensive income, net of deferred income tax provision of $63,646 and $57,141 91,052 85,707 Unallocated ESOP shares (2,402) (2,950) Unearned compensation -- restricted stock (11,394) (10,659) Treasury stock -- 3,329,405 shares in 2001 and 3,314,037 shares in 2000 (104,396) (103,653) -------------- --------------- Total shareholders' equity 4,461,836 4,223,413 -------------- --------------- Total liabilities and shareholders' equity $ 14,752,862 $ 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 Six months ended June 30 June 30 --------------------------------- ------------------------------ 2001 2000 2001 2000 --------------- --------------- -------------- ------------- <S> <C> <C> <C> <C> Insurance Revenues: Gross premiums written $ 206,559 $ 189,295 $ 391,464 $ 338,132 Ceded premiums (42,996) (61,810) (98,145) (104,776) ------------ ------------ ------------ ------------ Net premiums written 163,563 127,485 293,319 233,356 Scheduled premiums earned 115,402 99,937 225,195 201,583 Refunding premiums earned 12,837 9,215 23,179 12,273 ------------ ------------ ------------ ------------ Premiums earned (net of ceded premiums of $41,937, $32,813, $80,253 and $70,344) 128,239 109,152 248,374 213,856 Net investment income 102,235 99,472 204,117 194,842 Advisory fees 13,903 6,219 20,850 14,194 ------------ ------------ ------------ ------------ Total insurance revenues 244,377 214,843 473,341 422,892 Expenses: Losses and LAE incurred 16,819 13,735 31,041 22,322 Amortization of deferred acquisition costs 10,259 8,736 19,870 17,322 Operating 20,347 21,281 38,882 40,675 ------------ ------------ ------------ ------------ Total insurance expenses 47,425 43,752 89,793 80,319 ------------ ------------ ------------ ------------ Insurance income 196,952 171,091 383,548 342,573 ------------ ------------ ------------ ------------ Investment management services Revenues 31,824 28,943 63,718 55,821 Expenses 15,909 15,174 32,360 28,770 ------------ ------------ ------------ ------------ Investment management services income 15,915 13,769 31,358 27,051 ------------ ------------ ------------ ------------ Municipal services Revenues 7,998 11,313 13,928 18,935 Expenses 8,776 11,378 15,532 19,429 ------------ ------------ ------------ ------------ Municipal services loss (778) (65) (1,604) (494) ------------ ------------ ------------ ------------ Corporate Net investment income 1,568 --- 3,344 --- Interest expense 14,151 13,355 29,894 26,851 Corporate expenses 6,952 4,754 11,572 8,401 ------------ ------------ ------------ ------------ Corporate loss (19,535) (18,109) (38,122) (35,252) ------------ ------------ ------------ ------------ Gains and losses Net realized gains 3,058 7,425 942 19,310 Change in fair value of derivative instruments (1,113) --- (7,037) --- ------------ ------------ ------------ ------------ Net gains and losses 1,945 7,425 (6,095) 19,310 ------------ ------------ ------------ ------------ Income before income taxes 194,499 174,111 369,085 353,188 Provision for income taxes 51,493 44,718 96,885 91,475 ------------ ------------ ------------ ------------ Income before cumulative effect of accounting change 143,006 129,393 272,200 261,713 Cumulative effect of accounting change --- --- (13,067) --- ------------ ------------ ------------ ------------ Net income $ 143,006 $ 129,393 $ 259,133 $ 261,713 ============ ============ ============ ============ Net income per common share: Basic $ 0.97 $ 0.88 $ 1.75 $ 1.77 Diluted $ 0.96 $ 0.87 $ 1.74 $ 1.76 Weighted average number of common shares outstanding: Basic 148,160,339 147,484,556 148,043,734 148,067,603 Diluted 149,297,865 148,398,587 149,162,308 148,954,461 </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 six months ended June 30, 2001 (In thousands except per share amounts) <TABLE> <CAPTION> Accumulated Unearned Common Stock Additional Other Unallocated Compensation- ------------------ Paid-in Retained Comprehensive ESOP Restricted Shares Amount Capital Earnings Income (Loss) Shares Stock -------- -------- ---------- ---------- ------------- ----------- ------------- <S> <C> <C> <C> <C> <C> <C> <C> Balance, January 1, 2001 151,160 $151,160 $1,169,200 $2,934,608 $ 85,707 $ (2,950) $ (10,659) Comprehensive income: Net income --- --- --- 259,133 --- --- --- Other comprehensive income: Change in unrealized appreciation of investments net of change in deferred income taxes of $10,594 --- --- --- --- 19,726 --- --- Change in fair value of derivative instruments net of change in deferred income taxes of $(4,089) --- --- --- --- (7,594) --- --- Change in foreign currency translation --- --- --- --- (6,787) --- --- Other comprehensive income Comprehensive income Treasury shares acquired --- --- --- --- --- --- --- Exercise of stock options 536 536 16,738 --- --- --- --- Allocation of ESOP shares --- --- 16 --- --- 548 --- Unearned compensation- restricted stock 42 42 2,243 --- --- --- (735) Dividends (declared per common share $0.300, paid per common share $0.287) --- --- --- (44,700) --- --- --- -------- -------- ---------- ---------- ------------ ---------- ------------ Balance, June 30, 2001 151,738 $151,738 $1,188,197 $3,149,041 $ 91,052 $ (2,402) $ (11,394) ======== ======== ========== ========== ============ ========== ============ <CAPTION> Treasury Stock ----------------------- Shareholders' Shares Amount Equity ---------- ----------- ------------- <S> <C> <C> <C> Balance, January 1, 2001 (3,314) $ (103,653) $ 4,223,413 Comprehensive income: Net income --- --- 259,133 Other comprehensive income: Change in unrealized appreciation of investments net of change in deferred income taxes of $10,594 --- --- 19,726 Change in fair value of derivative instruments net of change in deferred income taxes of $(4,089) --- --- (7,594) Change in foreign currency translation --- --- (6,787) ------------ Other comprehensive income 5,345 ------------ Comprehensive income 264,478 ------------ Treasury shares acquired (15) (743) (743) Exercise of stock options --- --- 17,274 Allocation of ESOP shares --- --- 564 Unearned compensation- restricted stock --- --- 1,550 Dividends (declared per common share $0.300, paid per common share $0.287) --- --- (44,700) --------- ----------- ------------ Balance, June 30, 2001 (3,329) $ (104,396) $ 4,461,836 ========= =========== ============ </TABLE> 2001 -------- Disclosure of reclassification amount: Unrealized appreciation of investments arising during the period, net of taxes $ 19,026 Reclassification of adjustment, net of taxes 700 -------- Net unrealized appreciation, net of taxes $ 19,726 ======== The accompanying notes are an integral part of the consolidated financial statements. (5)
MBIA INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands) <TABLE> <CAPTION> Six months ended June 30 -------------------------------------- 2001 2000 ---------------- --------------- <S> <C> <C> Cash flows from operating activities: Net income $ 259,133 $ 261,713 Adjustments to reconcile net income to net cash provided by operating activities: Increase in accrued investment income (13,081) (8,084) Increase in deferred acquisition costs (6,156) (5,735) Increase in prepaid reinsurance premiums (15,272) (32,773) Increase in deferred premium revenue 60,217 52,273 Increase (decrease) in loss and loss adjustment expense reserves, net 9,795 (20,016) Depreciation 7,434 6,834 Amortization of goodwill 3,276 3,350 Amortization of bond discount, net (6,580) (15,351) Net realized gains on sale of investments (942) (19,310) Deferred income tax (benefit) provision (7,670) 25,097 Fair value of derivative instruments 27,048 --- Other, net (17,322) 28,253 ------------- ------------ Total adjustments to net income 40,747 14,538 ------------- ------------ Net cash provided by operating activities 299,880 276,251 ------------- ------------ Cash flows from investing activities: Purchase of fixed-maturity securities, net of payable for investments purchased (9,219,543) (3,399,501) Sale of fixed-maturity securities, net of receivable for investments sold 8,829,300 3,061,188 Redemption of fixed-maturity securities, net of receivable for investments redeemed 190,752 133,480 Sale (purchase) of short-term investments, net 16,617 (2,407) (Purchase) sale of other investments, net (19,331) 5,316 Purchases for municipal investment agreement portfolio, net of payable for investments purchased (4,297,884) (1,069,705) Sales from municipal investment agreement portfolio, net of receivable for investments sold 3,840,925 1,045,166 Capital expenditures, net of disposals (2,731) (9,739) Other, net 499 8,385 ------------- ------------ Net cash used by investing activities (661,396) (227,817) ------------- ------------ Cash flows from financing activities: Net repayment from retirement of short-term debt (91,492) (8,500) Dividends paid (42,646) (40,516) Purchase of treasury stock (743) (71,523) Proceeds from issuance of municipal investment and repurchase agreements 1,835,047 1,036,880 Payments for drawdowns of municipal investment and repurchase agreements (1,415,735) (1,078,684) Securities loaned or sold under agreements to repurchase, net 37,477 81,021 Exercise of stock options 17,279 9,511 ------------- ------------ Net cash provided (used) by financing activities 339,187 (71,811) ------------- ------------ Net decrease in cash and cash equivalents (22,329) (23,377) Cash and cash equivalents - beginning of period 93,962 93,559 ------------- ------------ Cash and cash equivalents - end of period $ 71,633 $ 70,182 ============= ============ Supplemental cash flow disclosures: Income taxes paid $ 91,377 $ 37,686 Interest paid: Municipal investment and repurchase agreements $ 145,584 $ 128,044 Long-term debt 33,604 26,194 </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 accounting principles generally accepted in the United States of America. 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 and in Form 10-Q for the period ended March 31, 2001 for MBIA Inc. and Subsidiaries (the "Company"). The accompanying consolidated financial statements have not been audited by independent accountants in accordance with auditing standards generally accepted in the United States of America 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 six months ended June 30, 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 accounting principles generally accepted in the United States of America. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. 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 six months ended June 30, 2001 were $45 million. 3. Recent Accounting Pronouncements -------------------------------- 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 was effective for the Company as of January 1, 2001. SFAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives will be recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge, and if so, the type of 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 calculation as of January 1, 2001, has insured derivatives primarily consisting of credit default swaps. The Investment Management Services segment has entered into (7)
MBIA INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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. 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 June 30, 2001 was $285 million. The contract value and fair value of collateral received for securities borrowed in the financial statements at December 31, 2000 was $315 million and $332 million, respectively. All of the securities borrowed have been repledged for all periods presented. As of June 30, 2001, the Company had financial assets reflected on the balance sheet with a fair value of $304 million that were not required to be reclassified as a separate line item. 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 June 30, 2001, the Company had $259 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. In June 2001, the FASB issued SFAS 142, "Goodwill and Other Intangible Assets," which is effective for fiscal years beginning after December 15, 2001. SFAS 142 requires that goodwill no longer be amortized, but instead be reviewed for impairment. The Company will adopt SFAS 142 effective January 1, 2002 and is currently evaluating the impact that the adoption will have on its earnings and statement of financial position. (8)
MBIA Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations Overview - -------- MBIA Inc. and Subsidiaries (the "Company") turned in a solid quarter as we continue 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 segment, especially in the structured finance and international sectors. Our asset management business also 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 Management Services segments. 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 Pronouncements - -------------------------------- 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 was effective for the Company as of January 1, 2001. SFAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives will be recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge, and if so, the type of 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 calculation as of January 1, 2001, has insured derivatives primarily consisting of credit default swaps. The Investment Management Services segment has entered into 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 derivatives 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. 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 June 30, 2001 was $285 million. The contract value and fair value of collateral received for securities borrowed in the financial statements at December 31, 2000 was $315 million and $332 million, respectively. All of the securities borrowed have been repledged for all periods presented. As of June 30, 2001, the Company had financial assets reflected on the balance sheet with a fair value of $304 million that were not required to be reclassified as a separate line item. (10)
MBIA Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) 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 June 30, 2001, the Company had $259 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 fulfil their contractural obligations by monitoring customer credit exposure and collateral value and requring additional collateral to be deposited with the Company when deemed necessary. In June 2001, the FASB issued SFAS 142, "Goodwill and Other Intangible Assets," which is effective for fiscal years beginning after December 15, 2001. SFAS 142 requires that goodwill no longer be amortized to earnings, but instead be reviewed for impairment. The Company will adopt SFAS 142 effective January 1, 2002 and is currently evaluating the impact that the adoption will have on its earnings and statement of financial position. 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 way to measure our performance and the intrinsic value of the Company. All common 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 second quarter and first six months of 2001 and 2000. (11)
MBIA Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) <TABLE> <CAPTION> Percent Change ------------------------------- 2nd Quarter Year-to-date ------------------------------- 2nd Quarter June 30 2001 2001 ----------------- ------------------- vs. vs. 2001 2000 2001 2000 2000 2000 - -------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Net income (in millions): As reported $ 143 $ 129 $ 259 $ 262 11% (1)% Excluding accounting change $ 143 $ 129 $ 272 $ 262 11% 4% Per share data: * Net income: As reported $ .96 $ .87 $ 1.74 $ 1.76 10% (1)% Excluding accounting change $ .96 $ .87 $ 1.82 $ 1.76 10% 3% Operating earnings $ .95 $ .84 $ 1.85 $ 1.67 13% 11% Core earnings $ .90 $ .80 $ 1.76 $ 1.62 13% 9% Book value $30.09 $25.25 19% Adjusted book value $42.23 $37.05 14% - -------------------------------------------------------------------------------------------------------------------------- </TABLE> *All earnings per share calculations are diluted. Our second quarter net income and earnings per share increased 11% and 10%, respectively. These increases were the result of a 15% growth in pre-tax insurance income partially offset by a small loss in our Municipal Services segment, lower realized gains and an increase in expenses from our Corporate segment. For the first six months of 2001, net income and earnings per share, excluding the accounting change, increased 4% and 3%, respectively, due to lower realized gains this year compared with last year. Operating earnings per share, which exclude the impact of realized gains and losses, changes in fair value of derivatives and accounting changes, increased by 13% and 11%, respectively, over the second quarter and first half of 2000. This growth was the result of strong premium earnings this year compared with last year as well as a 16% growth in operating income from our Investment Management Services segment. Core earnings, which exclude the effects of refundings and calls on our insured issues, realized gains and losses, changes in the fair value of derivatives and accounting changes, provide the most indicative measure of our underlying profit. For the second quarter and first six months of 2001, core earnings per share increased 13% and 9%, respectively, over the second quarter and first six months of 2000, reflecting strong results in our Insurance and Investment Management Services segments. Our book value at June 30, 2001 was $30.09 per share, up 19% from $25.25 at June 30, 2000. The increase was due primarily to income from operations and the increase in the market value of our investment portfolio. 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 (12)
MBIA Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) unrealized gains or losses on investment contract liabilities. Our adjusted book value per share was $42.23 at June 30, 2001, a 14% increase from second quarter- 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: <TABLE> <CAPTION> Percent Change June 30, June 30, ------------------------ 2001 2000 2001 vs. 2000 - --------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Book value per share $30.09 $25.25 19% After-tax value of: Net deferred premium revenue, net of deferred acquisition costs 7.51 7.36 2% Present value of future installment premiums* 4.26 3.52 21% Unrealized gain on investment contract liabilities .37 .92 (60)% - --------------------------------------------------------------------------------------------------------------- Adjusted book value per share $42.23 $37.05 14% - --------------------------------------------------------------------------------------------------------------- </TABLE> *The discount rate used to present value future installment premiums was 9% for both periods. Insurance Operations The Company's adjusted direct premiums (ADP), gross premiums written (GPW) and par written for the second quarter and first six months of 2001 and 2000 are presented in the following table: <TABLE> <CAPTION> Percent Change ------------------------------ 2nd Quarter Year-to-date -------------- -------------- 2nd Quarter June 30 2001 2001 ------------------ -------------------- vs. vs. 2001 2000 2001 2000 2000 2000 - ------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Premiums written: (in millions) ADP $ 307 $ 206 $ 539 $ 376 49% 43% GPW $ 207 $ 189 $ 391 $ 338 9% 16% Par written (in billions) $ 36 $ 27 $ 65 $ 42 36% 55% </TABLE> In the second quarter of 2001, bond issuance was up significantly from 2000 levels and we maintained our pricing. As a result, ADP was up by 49% compared with the second quarter of 2000, while par insured was up by only 36%. 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 (13)
MBIA Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) 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 $207 million, up 9% over the second quarter of 2000. For the first six months of 2001 ADP was up by 43% compared with the same period a year ago, while par insured was up 55%. GPW was $391 million for the first half of 2001, up 16% over the first half of 2000. These growth rates reflect strong international business as well as an increase in our domestic structured finance sector. We estimate the present value of our total future installment premium stream on outstanding policies to be $972 million at June 30, 2001, compared with $799 million at June 30, 2000. 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 markets are shown in the following table: <TABLE> <CAPTION> Percent Change ----------------------------- 2nd Quarter Year-to-date ------------- ------------- 2nd Quarter June 30 2001 2001 ------------- ------------ vs. vs. Domestic Public Finance 2001 2000 2001 2000 2000 2000 ------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Total new issue market:* Par value (in billions) $ 67 $ 48 $ 120 $ 84 40% 42% Insured penetration 57% 42% 53% 44% MBIA market share 26% 34% 23% 28% MBIA insured: Par written (in billions) $ 12 $ 10 $ 18 $ 16 13% 17% Premiums (in millions): ADP $ 113 $ 103 $ 177 $ 175 10% 1% GPW $ 99 $ 95 $ 162 $ 170 4% (5)% ------------------------------------------------------------------------------------------------- </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 higher in the public finance market, increasing by 40% to $67 billion for the second quarter of 2001, compared with $48 billion in the second quarter of 2000. The insured penetration also increased in the second quarter to 57% in 2001 from 42% in the second quarter of 2000. MBIA's market share of insured par was 26% for the quarter compared with 34% in last year's second quarter. For the first six months of 2001, new issuance in the municipal market was up 42% to $120 billion and insured penetration was 53%, up from 44% last year. MBIA captured 23% of the insured public finance market this year compared with 28% in the first six months of 2000. (14)
MBIA Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) MBIA's domestic public finance ADP increased by 10% over 2000's second quarter while par insured increased by 13%. On a year-to-date basis, par insured was up 17% while ADP was up only 1%, significantly less than the increase in par insured and the market in general. Both ADP and par insured results were driven largely by a change in business mix toward higher quality, lower capital charge business rather than the market in general. STRUCTURED FINANCE Market Details regarding the public 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 following table: <TABLE> <CAPTION> Percent Change ----------------------------- 2nd Quarter Year-to-date ------------- -------------- 2nd Quarter June 30 2001 2001 Domestic ----------------- ------------------ vs. vs. Structured Finance 2001 2000 2001 2000 2000 2000 ------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> Total asset-backed market:* Par value (in billions) $ 67 $ 59 $ 145 $ 113 13% 29% MBIA insured: Par written (in billions) $ 16 $ 11 $ 35 $ 17 48% 106% Premiums (in millions): ADP $ 67 $ 58 $ 149 $ 96 15% 54% GPW $ 56 $ 42 $ 113 $ 88 34% 28% ------------------------------------------------------------------------------------------------------------------ </TABLE> * Market data exclude mortgage-backed securities and private placements. Issuance in the asset backed market increased 13% over the second quarter of 2000. For the six month period, issuance is up 29%. MBIA insured $16 billion of par value in the second quarter, up 48% compared with the second quarter of last year. ADP was up 15% for the quarter, again due to our pricing discipline. For the first six months par insured was up 106% while ADP was up 54%. The relationship between par insured and ADP primarily reflects the mix of business and a sharp improvement in the credit quality of the business we wrote. Business rated A and above was 76% in the first half of 2001, up sharply from 45% in last year's first half, and 67% of insured volume during the first half was rated AAA prior to our insurance. INTERNATIONAL MARKET The international results were up sharply over the second quarter of 2000. The quarterly mix of business included several very large deals, and a good diversification by bond type and by country. During the first half of the year, 92% of international business insured was rated A or above. Our infrastructure and structured (15)
MBIA Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) finance international business volume in the new issue and secondary markets for the second quarter and first six months of 2001 and 2000 are illustrated as follows: <TABLE> <CAPTION> Percent Change ----------------------------- 2nd Quarter Year-to-date ------------- -------------- 2nd Quarter June 30 2001 2001 ------------------ ------------------- vs. vs. International 2001 2000 2001 2000 2000 2000 ------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Par insured (in billions) $ 9 $ 6 $ 12 $ 10 55% 27% Premiums (in millions): ADP $ 127 $ 45 $ 214 $ 104 181% 105% GPW $ 52 $ 52 $ 116 $ 80 --- 45% ------------------------------------------------------------------------------------------------------------------- </TABLE> International par insured was up 55% to $9 billion in the second quarter and ADP was $127 million, up 181%. For the six month period par and ADP were up 27% and 105%, respectively, as we wrote more in the second quarter of this year than in the first six months of 2000. We believe that the opportunities in our international sector are significant and that we are well positioned to capitalize on these opportunities in the future. REINSURANCE Premiums ceded to reinsurers from all insurance operations were $43 million and $62 million in the second quarter of 2001 and 2000, respectively. Cessions as a percentage of GPW decreased to 21% in 2001 from 33% in 2000. For the first six months of 2001 we have ceded 25% of GPW, lower than the 31% we ceded in last year's first half. Reinsurance is a very effective tool for MBIA. It allows us to write better quality, better return business, and yet stay within our single risk and credit guidelines. We continued the initiative begun in the fourth quarter of 1998 as we focused on reducing larger single risks across the portfolio. 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 ----------------------------- 2nd Quarter Year-to-date ------------- -------------- 2nd Quarter June 30 2001 2001 ------------------ ------------------- vs. vs. In millions 2001 2000 2001 2000 2000 2000 - ------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> Premiums earned: Scheduled $ 115 $ 100 $ 225 $ 202 15% 12% Refunded 13 9 23 12 39% 89% - ------------------------------------------------------------------------------------------------------------------------ Total $ 128 $ 109 $ 248 $ 214 17% 16% - ------------------------------------------------------------------------------------------------------------------------ </TABLE> (16)
MBIA Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) 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 the second quarter and first six months of 2001 premiums earned from scheduled amortization increased by 15% and 12%, respectively, over the second quarter and first six months 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 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 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) increased 3% to $102 million in the second quarter of 2001, up from $99 million in the second quarter of 2000. In the first six months of 2001, investment income is up only 5% over 2000. This lower than normal increase was primarily due to a shift in the investment portfolio from taxable to tax-exempt investments, and the resulting lower growth of 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 as well as various administration and management fees. Fees are generally deferred and earned over the life of the related transactions although certain fees are earned in the quarter they are received. These would 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 second quarter of 2001, advisory fee revenues increased to $14 million from $6 million in the second quarter of 2000. This increase was primarily due to a one-time "non-deferrable" fee 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 bond defaults to net debt service written. To the extent that we identify specific insured issues as currently or likely to be in default, the present value of our expected payments, net of expected reinsurance and collateral recoveries, is allocated within the total loss reserve as case-specific reserves. 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. (17)
MBIA Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) 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 second quarter of 2001 and 2000, as well as our loss provision for the first half of 2001 and 2000: <TABLE> <CAPTION> Percent Change June 30, June 30, ------------------------------- In millions 2001 2000 2001 vs. 2000 - -------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Case-specific: Gross $ 240 $ 199 20% Reinsurance recoverable on unpaid losses 31 27 14% - -------------------------------------------------------------------------------------------------------------------------- Net case reserves 209 172 21% Unallocated 269 244 10% - -------------------------------------------------------------------------------------------------------------------------- Net loss and LAE reserves $ 478 $ 416 15% Provision $ 31 $ 22 39% </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 amortization of deferred acquisition costs, general operating expenses and total insurance operating expenses, as well as related expense ratios, are shown below: <TABLE> <CAPTION> Percent Change ----------------------------- 2nd Quarter Year-to-date ------------- -------------- 2nd Quarter June 30 2001 2001 ---------------------- ------------------- vs. vs. In millions 2001 2000 2001 2000 2000 2000 - ------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> Amortization of deferred acquisition costs $ 10 $ 9 $ 20 $ 17 17% 15% Operating 20 21 39 41 (4)% (4)% -------------------------------------------------------------------------------- Total insurance operating expenses $ 30 $ 30 $ 59 $ 58 --- 1% Expense ratio: GAAP 23.9% 27.5% 23.7% 27.1% Statutory 14.7% 19.7% 15.4% 20.3% - ------------------------------------------------------------------------------------------------------------------------ </TABLE> For the second quarter of 2001, the amortization of deferred acquisition costs increased 17% over the second quarter of 2000, reflecting the increase in insurance business written. For the first half of 2001, the amortization of deferred acquisition costs increased 15% to $20 million compared with $17 million in the first six months of 2000. (18)
MBIA Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Operating expenses decreased 4% from the second quarter and the first six months of 2000, reflecting the Company's continuing expense management program. Total insurance operating expenses in the second quarter were flat with the prior period and increased only 1% in the first half of 2001, again reflecting the Company's increased emphasis on expense management. 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 second quarter 2001 statutory expense ratio of 14.7% is significantly below the second quarter 2000 ratio of 19.7%. The GAAP expense ratio of 23.9% also decreased compared with the second quarter of 2000. For the first six months of 2001 the statutory expense ratio of 15.4% is also below the comparable 2000 period ratio of 20.3%. INSURANCE INCOME The Company's insurance income of $197 million for the second quarter of 2001 increased 15% over the second quarter of 2000. For the first half insurance income rose 12% to $384 million from $343 million a year ago due to the 89% increase in premiums earned from refundings as well as the 47% increase in advisory fees. Investment Management Services In 1998 after our merger with 1838 Investment Advisors, LLC. (1838), the Company formed a holding company, MBIA Asset Management Corporation, to consolidate the resources and capabilities of our four investment management services. The table below summarizes our consolidated investment management results for the second quarter and first six months of 2001 and 2000: <TABLE> <CAPTION> Percent Change ----------------------------- 2nd Quarter Year-to-date ------------- ------------ 2nd Quarter June 30 2001 2001 -------------------- ----------------------- vs. vs. In millions 2001 2000 2001 2000 2000 2000 - -------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Revenues $ 32 $ 29 $ 64 $ 56 10% 14% Expenses 16 15 33 29 5% 12% - -------------------------------------------------------------------------------------------------------------------------------- Income $ 16 $ 14 $ 31 $ 27 16% 16% </TABLE> The success of the merger with 1838 is reflected in the Investment Management Services operating results, with consolidated revenues up 10% over the second quarter of 2000, while expenses were up only 5%. As a result, operating income increased by 16% for the second quarter of 2001 over the same period in 2000. We ended the quarter with over $38 billion in assets under management, up 12% from June 30, 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: (19)
MBIA Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) 1838 is a full-service asset management firm with a strong institutional focus. It manages over $13 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 June 30, 2001 had $9.6 billion in assets under management, up 28% over June 30, 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 June 30, 2001, principal and accrued interest outstanding on investment and repurchasing agreements was $5.2 billion, compared with $4.5 billion at June 30, 2000. At amortized cost, the assets supporting IMC's investment agreements were $5.6 billion and $4.7 billion at June 30, 2001 and 2000, respectively. 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 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 second 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 the company's insurance related portfolios. At June 30, 2001, CMC's third party assets under management were $2.5 billion compared with $1.8 billion at June 30, 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 (20)
MBIA Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) information (data) services. The Municipal Services segment also includes Capital Asset Holdings, Inc. (Capital Asset), a servicer of delinquent tax certificates. In the second quarter of 2001 the Municipal Services operations lost $0.8 million compared with a loss of $0.1 million during the same period of 2000. For the first half of 2001, municipal services reported a $1.6 million loss compared with a loss of $0.5 million in the comparable 2000 period. Corporate NET INVESTMENT INCOME Net investment income was $1.6 million in the second 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. For the first six months of 2001, net investment income totaled $3.3 million. INTEREST EXPENSE In the second quarter of 2001, we incurred $14 million of interest expense compared with $13 million during the second quarter of 2000. The increase is the result of the additional $100 million of debt issued during the fourth quarter of 2000. CORPORATE EXPENSES Corporate expenses are comprised primarily of non-insurance goodwill amortization and general corporate overhead. Gains and Losses NET REALIZED GAINS Net realized gains were $3.1 million in the second quarter of 2001 compared with $7.4 million during the second quarter of 2000. For the first half of 2001, net realized gains were $0.9 million compared with $19.3 million in the comparable 2000 period. These gains were generated as a result of the ongoing management of the investment portfolio. CHANGE IN FAIR VALUE OF DERIVATIVE INSTRUMENTS In the second quarter of 2001, we incurred an unrealized loss of $1.1 million due to the change in the fair value of derivatives. Unrealized losses for the first six months of 2001 totaled $7.0 million. 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. 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 June 30, 2001, our total shareholders' equity was $4.5 billion, with total long-term borrowings at $795 million. We use debt financing to lower our overall cost of (21)
MBIA Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) 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: June 30, December 31, 2001 2000 - -------------------------------------------------------------------------------- Long-term debt (in millions) $ 795 $ 795 Long-term debt to total capital 15% 16% 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 June 30, 2001 the Company has repurchased a total of 3,270,300 shares at an average price of $31.32. In addition, MBIA Insurance Corporation 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 with respect to public finance transactions in the event that severe losses should occur. The agreement is for a seven-year term, which expires on October 31, 2006, and, subject to approval by the banks, may be renewed annually to extend the term to seven years beyond the renewal date. MBIA Insurance Corporation also maintains stop-loss reinsurance coverage of $175 million in excess of incurred losses of $762 million with respect to structured finance transactions. At quarter end, total claims-paying resources for MBIA Insurance Corporation stood at $9.5 billion, an 8% increase over second quarter-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 the insurance company, which generates substantial cash flow from premium writings and investment income. In the first half of 2001, operating cash flow totaled $300 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 second quarter of 2001 our MBIA Insurance Corporation paid dividends of $45.1 million and at June 30, 2001 had dividend capacity in excess of $13 million without special regulatory approval. The Company has significant liquidity supporting its businesses. At the end of the second quarter of 2001, cash equivalents and short-term investments totaled $435 million. Should significant cash flow reductions occur in any of our businesses, for any (22)
MBIA Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) 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 June 30, 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 June 30, 2001, the fair value of our consolidated investment portfolio was $13.2 billion, as shown below: <TABLE> <CAPTION> Percent Change June 30, December 31, -------------- In millions 2001 2000 2001 vs. 2000 - ---------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Insurance operations: Amortized cost $ 7,380 $ 7,108 4% Unrealized gain 124 128 (3)% - ---------------------------------------------------------------------------------------------------------------- Fair value $ 7,504 $ 7,236 4% - ---------------------------------------------------------------------------------------------------------------- Municipal investment agreements: Amortized cost $ 5,575 $ 4,948 13% Unrealized gain 81 49 64% - ---------------------------------------------------------------------------------------------------------------- Fair value $ 5,656 $ 4,997 13% - ---------------------------------------------------------------------------------------------------------------- Total portfolio at fair value $13,160 $12,233 8% </TABLE> 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 increased to $5.7 billion from $5.0 billion at December 31, 2000. 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. (23)
PART II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders The following matters were voted upon at the Annual Meeting of Shareholders of the company held on May 10, 2001, and received the votes set forth below: 1: The proposal to increase the Company's authorized shares of Common Stock from 200,000,000 to 400,000,000 shares, with 74,875,912 votes in favor, 10,711,307 votes against and 319,880 votes abstaining. 2: The proposal to ratify the appointment by the Board of Directors of PricewaterhouseCoopers LLP, certified public accountants, as independent auditors for the company for the year 2001 was adopted, with 83,372,883 votes in favor, 2,242,561 votes against and 291,655 votes abstaining. 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: The Company filed a report on Form 8-K on January 30, 2001 with regard to insurance policies issued to Southern California Edison Company and PG&E Corporation. The Company also filed a report on Form 8-K on March 15, 2001 announcing its 3-for-2 stock split by means of a stock dividend. (24)
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: August 13, 2001 /s/ Neil G. Budnick ----------------------- -------------------------------- Neil G. Budnick Chief Financial Officer Date: August 13, 2001 /s/ Douglas C. Hamilton ----------------------- -------------------------------- Douglas C. Hamilton Controller (Principal Accounting Officer) (25)