United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

Annual report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 2002.

Commission file number 1-9583

MBIA INC.
(Exact name of registrant as specified in its charter)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (SS 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10 -K.  o

Indicate by check mark whether the Registrant is an accelerated filer (as specified in Rule 12 b-2 of the Act).

The aggregate market value of the voting stock held by non-affiliates of the Registrant as of June 30, 2002 was $8,323,800,834.00.

As of March 20, 2003, 144,210,109 shares of Common Stock, par value $1 per share, were outstanding.

Documents incorporated by reference. Portions of Registrant’s Annual Report to Shareholders for the fiscal year ended December 31, 2002 are incorporated by reference into Parts I and II. Portions of the Definitive Proxy Statement of the Registrant, which will be filed on or before March 31, 2003, are incorporated by reference into Parts I and III.

PART I

Item 1.   Business

          MBIA Inc. (the “Company”) was incorporated as a business corporation under the laws of the state of Connecticut in 1986. The Company is engaged in providing financial guarantee insurance, investment management services and municipal services to public finance clients and financial institutions on a global basis. Financial guarantee insurance provides an unconditional and irrevocable guarantee of the payment of the principal of, and interest or other amounts owing on, insured obligations when due. The Company conducts its financial guarantee business through its wholly-owned subsidiary, MBIA Insurance Corporation (“MBIA Corp.”). MBIA Corp. is the successor to the business of the Municipal Bond Insurance Association (the “Association”) which began writing financial guarantees for municipal bonds in 1974.  MBIA Corp. is the parent of MBIA Insurance Corp. of Illinois (“MBIA Illinois”) and Capital Markets Assurance Corporation (“CapMAC”), both financial guarantee companies that were acquired by MBIA Corp. MBIA Corp. also owns MBIA Assurance S.A. (“MBIA Assurance), a French insurance company, which writes financial guarantee insurance in the countries of the European Community. Generally, throughout the text, references to MBIA Corp. include the activities of its subsidiaries, MBIA Illinois, MBIA Assurance and CapMAC.

          MBIACorp. primarily insures obligations which are sold in the new issue and secondary markets, or which are held in unit investment trusts (“UIT”) and by mutual funds. It also provides financial guarantees for debt service reserve funds. As a result of the Triple-A ratings assigned to insured obligations, the principal economic value of financial guarantee insurance to the entity issuing the obligations is the savings in interest costs between an insured obligation and the same obligation on an uninsured basis. In addition, for complex financings and for obligations of issuers that are not well-known by investors, insured obligations receive greater market acceptance than uninsured obligations.

          MBIA Corp. issues financial guarantees for municipal bonds, asset-backed and mortgage-backed securities, investor-owned utility bonds, bonds backed by publicly funded public purpose projects, bonds issued by highly-rated sovereign and sub-sovereign entities and obligations collateralized by corporate loans, credit default swaps, and corporate and asset-backed bonds, both in the new issue and secondary markets. The municipal obligations that MBIA Corp. insures include tax-exempt and taxable indebtedness of states, counties, cities, utility districts and other political subdivisions, as well as airports, higher education and health care facilities and similar authorities. The asset-backed and structured finance obligations insured by MBIA Corp. typically consist of securities that are payable from or which are tied to the performance of a specified pool of assets that have a defined cash flow, such as residential and commercial mortgages, a variety of consumer loans, corporate loans and bonds, trade and export receivables, equipment and real property leases, and infrastructure projects.

          MBIA Corp. has a Triple-A financial strength rating from Standard and Poor’s Corporation (“S&P”), which it received in 1974; from Moody’s Investors Service, Inc. (“Moody’s”), which it received in 1984; from Fitch, Inc. (“Fitch”), which it received in 1995; and from Rating and Investment Information, Inc. (“RII”), which it received in 1998. Obligations which are guaranteed by MBIA Corp. are rated Triple-A primarily based on these claims-paying ratings of MBIA Corp. Both S&P and Moody’s have also continued the Triple-A rating on MBIA Assurance, MBIA Illinois and CapMAC guaranteed bond issues. The Triple-A ratings are important to the operation of the Company’s business and any reduction in these ratings could have a material adverse effect on MBIA Corp.’s ability to compete and could also have a material adverse effect on the business, operations and financial results of the Company.

          The Company also provides investment management products and financial services through a group of subsidiary companies, all of which are owned by our wholly-owned subsidiary, MBIA Asset Management, LLC. These services include cash management, the issuance of investment agreements, the issuance of medium term notes, discretionary asset management, purchase and administrative services, and municipal revenue enhancement services. MBIA Municipal Investors Service Corporation (“MBIA-MISC”) provides cash management, customized asset management and investment consulting services to local governments, school districts and other institutional clients, providing those clients with fund administration services. MBIA Investment Management Corp. (“IMC”) offers guaranteed investment agreements primarily for bond proceeds to states and municipalities. MBIA Capital Management Corp. (“CMC”) performs fixed-income investment management services for the investment portfolios of the Company, MBIA Corp., MBIA-MISC, IMC and selected external clients. In 1998, the Company acquired what is now 1838 Investment Advisors, LLC (“1838”), an investment advisor to equity mutual funds and third-party clients. MBIA Global Funding , LLC (“GFL”) which was formed in 2002, raises funds through the issuance of medium term notes, with the proceeds invested in high quality eligible investments.

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          MBIA MuniServices Company (“MuniServices”) provides revenue enhancement services and products (discovery, audit, collections/recovery, enforcement and information services) to state and local governments. The Company continues to own a majority interest in Capital Asset Holdings GP, Inc. and certain affiliated entities (collectively, “Capital Asset”). Capital Asset was in the business of acquiring and servicing tax liens. The Company became a majority owner in December, 1998, when it acquired the interest of Capital Asset’s founder. In 1999, the Company announced that it was exiting the tax lien business. Capital Asset’s primary activity today is servicing the three securitizations of tax liens that are insured by MBIA Corp.

          Statements included in this Form 10-K which are not historical or current facts are “forward-looking statements” made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The words “believe,” “anticipate,” “project,” “plan,” “expect,” “intend,” “will likely result,” or “will continue,” and similar expressions identify forward-looking statements. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. We wish to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of their respective dates. The following are some of the factors that could cause actual results to differ materially from estimates contained in or underlying the Company’s forward-looking statements: (1) fluctuations in the economic, credit or interest rate environment in the United States or abroad; (2) level of activity within the national and international credit markets; (3) competitive conditions and pricing levels; (4) legislative or regulatory developments; (5) technological developments; (6) changes in tax laws; (7) the effects of mergers, acquisitions and divestitures; and (8) uncertainties that have not been identified at this time. The Company undertakes no obligation to publicly correct or update any forward-looking statement if it later becomes aware that such result is not likely to be achieved.

MBIA Corp. Insured Portfolio

          At December 31, 2002, the net par amount outstanding on MBIA Corp.’s insured obligations (including insured obligations of MBIA Illinois, MBIA Assurance and CapMAC, but excluding the guarantee of $8.0 billion of investment management transactions for IMC and GFL) was $497.3 billion. Net insurance in force was $781.6 billion.

          Since generally MBIA Corp. guarantees to the holder of the underlying obligation the timely payment of amounts due on such obligation in accordance with its original payment schedule, in the case of a default on an insured obligation, payments under the insurance policy cannot be accelerated unless MBIA Corp. consents to the acceleration. Otherwise, MBIA Corp. is required to pay principal, interest or other amounts only as originally scheduled payments come due.

          MBIA Corp. seeks to maintain a diversified insured portfolio designed to manage and diversify risk based on a variety of criteria including revenue source, issue size, type of asset, industry concentrations, type of bond and geographic area. As of December 31, 2002, MBIA Corp. had 32,588 policies outstanding (excluding 654 policies relating to investment management transactions guaranteed by MBIA Corp.). These policies are diversified among 10,590 “credits,” which MBIA Corp. defines as any group of issues supported by the same revenue source.

          The table below sets forth information with respect to the original par amount written per issue in MBIA Corp.’s portfolio as of December 31, 2002:

MBIA Corp. Original Par Amount Per Issue as of December 31, 2002 (1)

(1)  Excludes $8.0 billion relating to investment management transactions guaranteed by MBIA Corp.

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          MBIA Corp. underwrites financial guarantee insurance on the assumption that the insurance will remain in force until maturity of the insured obligations. MBIA Corp. estimates that the average life (as opposed to the stated maturity) of its insurance policies in force at December 31, 2002 was 10.5 years. The average life was determined by applying a weighted-average calculation, using the remaining years to maturity of each insured obligation, and weighting them on the basis of the remaining debt service insured. No assumptions were made for any future refundings of insured issues. Average annual debt service on the portfolio at December 31, 2002 was $61.8 billion.

          MBIA Corp. had, until the early-1990’s, written only financial guarantees for municipal issuers in the United States. Municipal bonds consist of both taxable and tax-exempt bonds and notes that are issued by states, cities, political subdivisions, utility districts, airports, health care institutions, higher educational facilities, housing authorities and other similar agencies. These types of obligations are supported by taxes, assessments, fees related to use of projects, lease payment or other similar types of revenue streams. By the mid-1990’s, MBIA Corp. had begun to write guarantees for the structured finance and asset-backed market. This portion of MBIA Corp.’s business grew with the acquisition of CapMAC and its book of primarily structured finance and asset-backed business. In general, structured finance and asset-backed obligations are secured by or payable from a specific pool of assets having an ascertainable future cash flow. These obligations are either “pass-through” obligations, which represent interests in the related assets, or “pay-through” obligations, which generally are debt obligations collateralized by the related assets. MBIA Corp. also insures payments due under credit and other derivatives, including termination payments, that may become due upon the occurrence of certain events. These types of obligations also generally have the benefit of over-collateralization, excess cash flow or one or more forms of credit enhancement to cover credit risks associated with the related assets. Structured finance and asset-backed obligations contain certain risks: asset risk, which relates to the amount and quality of asset coverage; and structural risk, which relates to the extent to which the transaction structure protects the interests of the investors. In general, the asset risk is addressed by sizing the asset pool based on the historical and expected future performance of the assets. Structural risks include bankruptcy and tax risks. Structured and asset-backed securities are usually designed to protect the investors from the bankruptcy or insolvency of the entity that originated the underlying assets as well as from the bankruptcy or insolvency of the servicer (the entity which is responsible for collecting the cash flow from the asset pool). These structural issues concern whether the sale of the assets by the originator to the issuer would be upheld in the event of the bankruptcy or insolvency of the originator and whether the servicer of the assets may be required to delay the remittance of any cash collections held by it or received by it after the time it becomes subject to bankruptcy or insolvency proceedings. In addition, servicer risk, the risk that problems at the servicer level could result in a decline in the collection of cash payments with respect to the underlying assets, may also be present in the transaction. The ability of the servicer to properly service and collect on the underlying assets is also a factor in determining future asset performance. These issues are addressed through MBIA Corp.’s underwriting guidelines and procedures.

          Outside of the United States, sovereign and sub-sovereign issuers, structured and asset-backed issuers, utilities and other issuers are increasingly using financial guarantee insurance. Ongoing privatization efforts have shifted the burden of financing new projects from the government to public and private capital markets, where investors may seek the security of financial guarantee insurance. There is also growing interest in asset-backed securitization. While the principles of securitization have been increasingly applied in overseas markets, the rate of development in particular countries has varied due to the sophistication of the local capital markets and the impact of financial regulatory requirements, accounting standards and legal systems. It is expected that securitization will continue to expand internationally, at varying rates in each country. MBIA Corp. insures both asset-backed and structured transactions, sovereign and sub-sovereign debt issues, utilities, project financings and other obligations in selected international markets. MBIA Corp. believes that the risk profile of the international business it insures is generally the same as in the United States, but recognizes that there are particular risks related to each country and region. These risks include the legal, economic and political situation, the capital markets and currency exchange risks. MBIA Corp. monitors these risks carefully.

          The table below shows the diversification of MBIA Corp.’s insured portfolio by bond type:

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MBIA Corp. Insured Portfolio by Bond Type
as of December 31, 2002 (1)
(In billions)

(1)  Excludes $8.0 billion relating to investment management transactions guaranteed by MBIA Corp.

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          As of December 31, 2002, of the $497.3 billion outstanding net par amount of obligations insured, $325.7 billion, or 65%, were insured in the global public finance market and $171.6 billion, or 35%, were insured in the global structured finance market.

          The table below shows the diversification by type of insurance written by MBIA Corp. in each of the last five years:

MBIA Corp. Net Par Amount by Bond Type (1)
(In millions)

(1)  Par amount insured by year, net of reinsurance.

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          MBIA Corp. is licensed to write business in all 50 states, the District of Columbia, Guam, the Northern Mariana Islands, the U.S. Virgin Islands, Puerto Rico, the Kingdom of Spain, the Republic of Singapore and the Republic of France. MBIA Assurance is licensed to write business in France. The Company is in the process of establishing a subsidiary in the United Kingdom, which will be licensed to write all European-based business. The following table sets forth the geographic distribution of MBIA Corp.’s net par outstanding including the ten largest states:

MBIA Corp. Insured Portfolio by State
As of December 31, 2002(1)

(1)  Excludes $8.0 billion relating to investment management transactions guaranteed by MBIA Corp.

          MBIA Corp. has various underwriting guidelines that limit the net insurance in force for any one insured credit and is subject to both rating agency and regulatory single-risk limits with respect to any bond issue insured by it. As of December 31, 2002, MBIA Corp.’s net par amount outstanding for its ten largest insured public finance credits totaled $23.2 billion, representing 4.7% of MBIA Corp.’s total net par amount outstanding, and for its ten largest structured finance credits (without aggregating common issuers), the net par outstanding was $18.5 billion, representing 3.7% of the total.

MBIA Corp. Insurance Programs

          MBIA Corp. offers financial guarantee insurance in both the new issue and secondary markets on a global basis. At present, no new financial guarantee insurance is being offered by MBIA Illinois or CapMAC, but it is possible that either of those entities may insure transactions in the future. MBIA Corp. and MBIA Assurance offer financial guarantee insurance in Europe, Asia, Latin America and other areas outside the United States. In the first quarter of 2001, the Company entered into a memorandum of understanding with Mitsui Marine and Fire Insurance Co. Ltd. relating to financial guarantee insurance in Japan, including certain reciprocal reinsurance agreements.

          Transactions in the new issue market are sold either through negotiated offerings or competitive bidding. In the first case, either the issuer or the underwriter purchases the insurance policy directly from MBIA Corp. For municipal bond issues involving competitive bidding, the insurance is offered as an option to the underwriters bidding on the transaction. The successful bidder would then have the option to purchase the insurance.

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          In the secondary market, MBIA Corp. provides insurance on whole and partial maturities in response to requests from bond traders and institutional investors. MBIA Corp. also offers insurance to the unit investment trust market through ongoing arrangements with investment banks and financial service companies. Each issue in the trust is insured, in some cases until maturity, in others only while it is held in the trust. Lastly, insurance is offered in the mutual fund sector through ongoing arrangements with the fund sponsors. All fund issues are insured on a “while-in-trust” basis, but in some cases, MBIA Corp. is committed to offer insurance to maturity to the sponsor for an additional premium.

Operations

          The worldwide insurance operations of MBIA Corp. are conducted through the Global Public Finance Division, the Global Structured Finance Division, the Risk Management Group and the Insured Portfolio Management Group. The Global Public Finance Division has underwriting authority with respect to certain categories of business up to pre-determined par amounts based on a risk-ranking system. In order to ensure that the guidelines are followed, Risk Management monitors and periodically reviews underwriting decisions made by the Global Public Finance Division. With respect to larger, complex, or unique transactions, underwriting is performed by a division-level committee consisting of senior representatives of Global Public Finance, Risk Management, Insured Portfolio Management, and the Company’s Finance Department. For all transactions done by the Global Structured Finance Division, MBIA Corp.’s review and approval procedure has two stages. The first stage consists of screening, credit review and structuring by the appropriate business unit, in consultation with Risk Management officers. The second stage, consisting of the final review and approval of credit and structure, is performed by a committee consisting of the head of the applicable business unit, one officer from Risk Management and a third officer from either Risk Management or Insured Portfolio Management. Certain transactions, based on size, complexity, or other factors, must also be approved by a division-level committee consisting of senior representatives drawn from Global Structured Finance, Risk Management, Insured Portfolio Management, Legal and the Company’s Finance Department. Premium rates for all groups within the insurance operations enterprise are established by a Pricing Committee with representation from the Business Analysis Group (pricing and quantitative analysis) and the relevant insurance operations group. Select public and structured finance transactions may alternatively be approved at MBIA Corp.’s most senior level, the Executive Risk Committee, which consists of the Chief Executive Officer, the Chief Operating Officer, the Chief  Risk Officer, the Chief Financial Officer and the heads of each of the operations divisions and the Insured Portfolio Management group.

          Risk Management

          The Risk Management Group is responsible for the development and implementation of MBIA Corp.’s underwriting guidelines and procedures which are designed to ensure an insured portfolio with low risk characteristics. MBIA Corp. establishes underwriting guidelines based on those aspects of credit quality that it deems important for each category of obligation considered for insurance. For public finance and structured finance transactions, these aspects may include economic and social trends, debt management, financial management, adequacy of anticipated cash flow, satisfactory legal structure and other security provisions, viable tax and economic bases, adequacy of loss coverage and project feasibility, including a satisfactory consulting engineer’s report, if applicable. For global structured finance transactions, MBIA Corp.’s underwriting guidelines, analysis and due diligence focus on seller/servicer credit and operational quality, the historical and projected performance of the asset pool, and the strength of the structure, including legal segregation of the assets, cash flow analysis, the size and source of first loss protection, and asset performance triggers and financial covenants. All non-U.S. transactions also include an assessment of country risk. Such guidelines are subject to periodic review by senior committees which are responsible for establishing and maintaining underwriting standards and criteria for all insurance products.

          The Credit Analysis Group within Risk Management analyzes and monitors MBIA Corp.’s embedded exposure to financial institutions and corporate entities with respect to seller/servicer exposure, investment contracts, letters of credit, swaps, liquidity and other facilities supporting MBIA-insured issues, and recommends terms and conditions, as well as capacity guidelines for such exposures. The Portfolio Management Group within Risk Management analyzes the insured portfolio by various quantitative tools to test for diversity and credit quality, as well as to recommend guidelines for risk concentrations.

          Insured Portfolio Management

          The Insured Portfolio Management Group is responsible for monitoring outstanding issues insured by MBIA Corp. This group’s first function is to detect any deterioration in credit quality or changes in the economic or political environment which could interrupt the timely payment of debt service on an insured issue. Once a problem is detected, the group then works with the issuer, trustee, bond counsel, servicers, underwriters, and other interested parties to deal with the concern in order to minimize potential defaults. The Insured Portfolio Management Group works closely with the Risk Management and New Business Departments to provide feedback on insured issue performance and credit risk parameters.

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          To date, MBIA Corp. has had 53 insured issues requiring claim payments. There are currently 5 additional insured issues for which case loss reserves have been established but for which claims have not yet been paid (see “Losses and Reserves” below). MBIA Corp. utilizes a variety of techniques to resolve problems, such as enforcement of covenants and triggers, assistance in resolving management problems and transfer of servicing.  The Company’s experience is that early detection and continued involvement by the Insured Portfolio Management Group are crucial in avoiding or minimizing claims on insurance policies. There can be no assurance, however, that there will be no material losses in the future in respect of any issues guaranteed by MBIA Corp., MBIA Illinois, MBIA Assurance or CapMAC.

          Once an obligation is insured, the issuer and the trustee are typically required to furnish periodically financial and asset related information, including audited financial statements, to the Insured Portfolio Management Group for review. Potential problems uncovered through this review, such as poor financial results, low fund balances, covenant or trigger violations, trustee or servicer problems, or excessive litigation, could result in an immediate surveillance review and an evaluation of possible remedial actions. The Insured Portfolio Management Group also monitors state and municipal finances and budget developments and evaluates their impact on issuers.

          During the underwriting process, issues are given an internal credit rating. Credits are monitored according to a frequency of review schedule that is based on risk type and credit quality. Issues that experience financial difficulties, deteriorating economic conditions, excessive litigation or covenant or trigger violations are placed on the appropriate review list and are subject to surveillance reviews at intervals commensurate to the problem which has been detected.

          There are three areas in the Insured Portfolio Management Group. The Global Public Finance Group handles all types of domestic and international municipal issues such as general obligation, utility and special revenue bonds, as well as project finance transactions. The units within the Global Structured Finance Group are responsible for domestic and international asset-backed, and other structured transactions, including future flow transactions and collateralized debt obligations. The Enterprise Group is responsible for all health care, housing and student loan transactions. Each of the three groups is responsible for processing waiver and consent requests and other deal modifications within their areas.

          The Global Public Finance Group reviews and reports on the major credit quality factors of risks insured by the Company, evaluates the impact of new developments on insured weaker credits and carries out remedial activity. In addition, it performs analysis of financial statements and key operating data on a large-scale basis and maintains various databases for research purposes. This department is responsible for preparing special reports which include analyses of regional economic trends, proposed tax limitations, the impact of employment trends on local economies or legal developments affecting bond security.

          The units within the Global Structured Finance Group monitor insured structured finance issues, focusing on asset and servicer performance and the cash flows of the deals. Monitoring of insured issues typically involves review of monthly trustee, servicer and portfolio manager statements, compliance reviews with transaction documents and analysis of cash flow adequacy. Review of issuer and/or servicer performance can include site visits, forensic audits, management meetings and financial statement reviews. For the very few credits that are in remediation, the units in this Group also perform specialized cash flow analyses, conduct best practices reviews with servicers and facilitate loss mitigation strategies.

          The Enterprise Group, which monitors insured health care, student loan and single and multi-family housing transactions as well as all pool programs, performs similar functions to, and applies the same policies and procedures as, the Global Public Finance and Global Structured Finance Groups. In addition, it is responsible for remedial activities on weaker credits.

          There are several sectors in the insured portfolio that are currently or may become subject to stress as a result of economic conditions. Both the investor owned utility sector and the airline sector are undergoing significant stress. In addition, in the event of an economic recession the consumer sector may also become subject to additional stress and loss and delinquency rates could increase. In accordance with the Company’s underwriting criteria, transactions insured by the Company are structured to endure significant stress under various stress assumptions, including an assumed economic recession. The Company has assessed each of its related portfolio exposures and, based on the transaction structures and on the Company’s evaluation of the likely effects and impact of these events, the Company believes at this time that it will not incur any material losses. There can be no assurance, however, that the Company will not incur material losses due to these exposures if the economic stress caused by these events in certain sectors is more severe than the Company currently foresees and had assumed in underwriting its exposures.

         MBIA Corp. has purchased certain certificates that that it insured, which were issued by the U.S. Airways Repackaging Trust, in 1998 and which represented partial ownership interests in 21 Boeing aircraft for approximately $72 million ($39 of which came from reinsurance). This purchase was done in connection with MBIA’s restructuring of this transaction as a result of the bankruptcy of U.S. Airways in order to enable the execution of new leases for the 21 aircraft with US Airways. The junior debt issued by the Trust will be foreclosed on and new leases will be negotiated with U.S. Airways. MBIA Corp. does not expect to incur a material loss on this transaction.

         In 1998 MBIA Corp. issued three policies insuring $55 million principal amount of notes (the “Notes”) issued by a property casualty company (the “Issuer”). These policies were issued under MBIA Corp.’s secondary market program that included guarantees of certain insurance company and other corporate obligations. This program has been discontinued. The Notes mature on April 1, 2003. The Issuer has paid all interest due to date on the Notes. MBIA believes that the issuer will not be able to pay the principal due at maturity and expects to make such payment under its policies. The Issuer is continuing to negotiate the terms of a restructuring with its creditors, including with MBIA Corp. as insurer of the Notes. As part of a restructuring, the Notes may be restructured and/or refinanced and sold to a third party. If sold to a third party, MBIA Corp. will continue to insure the Notes (or any substitute notes issued to refinance the Notes). MBIA Corp. currently believes that it will ultimately recover some or all of the amounts that it expects to pay under its policies. To date MBIA Corp. has established an initial case reserve for these policies. MBIA Corp. will continue to evaluate and adjust such reserve as necessary.

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Conduits

          MBIA Corp. sponsors certain third party conduit financing vehicles that issue commercial paper and medium term notes. Conduits are used by banks and other financial institutions to raise funds for their customers in the capital markets. The conduits provide funding for multiple customers through a common special purpose vehicle that issues commercial paper/medium-term notes. The proceeds from the issuance of the commercial paper/notes are used to either make loans to customers which are secured by certain assets or to purchase the assets from the customers. All transactions insured in the MBIA Corp. sponsored conduits are subject to the standard underwriting process and must be rated at least investment grade by a rating agency before they can be put into the conduit. At December 31, 2002, there were $8.5 billion of assets in the MBIA conduits and $8.5 billion of liabilities issued through these conduits.

Investment Management Services

          MBIA Asset Management, LLC is the holding company under which the resources and capabilities of our investment management subsidiaries have been consolidated.

          MBIA-MISC provides cooperative cash management services directly to local governments and school districts. It also provides customized asset management and treasury management consulting services for municipal and quasi-public sector clients. In addition, MBIA-MISC performs investment fund administration services for clients, which provide an additional source of revenue, and portfolio accounting and reporting for all of the Company’s internal and external asset management portfolios. MBIA-MISC is a Securities and Exchange Commission registered investment adviser. MBIA-MISC operates in 20 states and the Commonwealth of Puerto Rico.

          IMC provides customized guaranteed investment agreements and flexible repurchase agreements for bond proceeds and other funds in the municipal and structured finance markets. At year-end 2002, principal and accrued interest outstanding on investment and repurchase agreements and securities sold under agreements to repurchase was $6.7 billion compared with $6.6 billion at year-end 2001. At market value, the assets supporting these agreements were $7.0 billion and $6.7 billion at year-end 2002 and 2001, respectively. These assets are comprised of high quality securities with an average credit quality rating of Double-A. IMC uses derivative financial instruments to manage interest rate risk and foreign currency risk. Credit default swaps are entered into as an extension of the group’s investment business. Forward delivery agreements are offered and periodically sold to clients. The Company has established policies limiting the amount, type and concentration of such instruments.

          The investment agreement assets are managed with the goal of matching the payment schedule of the invested assets, including hedges, to the payment schedules of the investment agreement liabilities in order to minimize market and liquidity risk. A source of liquidity risk related to this business, however, is the ability of some counterparties to withdraw moneys on dates other than those specified in the draw down schedule specified in the investment agreement. Liquidity risk is somewhat mitigated by provisions in certain of the investment agreements that limit an issuer’s ability to draw on the funds and by risk management procedures that require the regular re-evaluation and re-projection of draw down schedules. Investments are restricted to fixed income securities with a credit quality such that the overall minimum average portfolio credit quality is maintained at Aa/AA. CMC maintains funds invested in cash and cash equivalents to meet short-term liquidity needs.

          In 1998, the Company acquired 1838, a full-service asset management firm with a strong institutional focus. 1838 currently has approximately $5.4 billion in equity, fixed income and balanced portfolios under management.

          CMC provides investment management services for IMC’s investment agreements, MBIA-MISC’s municipal cash management programs and MBIA Corp.’s insurance related fixed-income investment portfolios, as well as third-party accounts. CMC assumed full management for MBIA Corp.’s insurance related fixed-income investment portfolios in 1996 and now manages substantially all of the Company’s investment portfolio. CMC is an NASD member and both CMC and 1838 are federally registered investment advisers. At year end, CMC had third-party assets under management of $2.6 billion. In addition, CMC had $8.4 billion of assets in the insurance related investment portfolio under management.

          GFL was formed in 2002 as an extension of the Company’s asset management business. GFL raises funds through the issuance of medium term notes with varying maturities (the “GFL MTN’s), which are in turn guaranteed by MBIA Corp. GFL lends the proceeds of these MTN issuances to the Company (“GFL Loans”). Under an agreement between the Company and MBIA Corp., the Company invests the proceeds of the GFL Loans in eligible investments, which consist of securities with a minimum double-A quality (the “GFL Investments”). These GFL Investments are pledged to MBIA Corp. The Company

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manages the program within a number of risk and liquidity parameters monitored by the rating agencies, and maintains backup liquidity in order to ensure that GFL has sufficient funds to make all payments due on the GFL MTN’s and to fund its operating expenses. In addition, the Company has made a capital investment in GFL, which is available to GFL at any time to fund its cash needs. As of December 31, 2002, the aggregate principal amount outstanding of GFL MTN’s and GFL Loans was approximately $1 billion and the aggregate market value of the GFL Investments was approximately $1.1billion. In the event that the value of the GFL Investments is insufficient to repay the GFL Loans when due, the Company may incur a loss.

Municipal Services

          MuniServices

          MuniServices provides revenue enhancement services and products (discovery, audit, collections/recovery, enforcement and information services) to municipal clients through a single national enterprise. MuniServices uses a consultative marketing strategy to focus clients on its unique capability to identify and recover revenues across the full range of tax sources under performance-based, self-funding business contracts.

          Capital Asset

          Through its interest in Capital Asset, between May 1996 and December 1998, the Company was involved in the business of acquiring and servicing delinquent real estate tax liens from municipalities. In December 1998, the Company became a majority owner of Capital Asset. During the first two quarters of 1999, the Company attempted to sell its interest in Capital Asset. At the end of the second quarter of 1999, the Company ceased these efforts and decided to limit the activities of Capital Asset primarily to the servicing of the portfolios then being serviced by Capital Asset. In the second quarter of 1999, the Company completed an internal evaluation of Capital Asset’s tax lien portfolio, as a result of which the Company determined that it was necessary to write down its investment in Capital Asset by $102 million. In the third quarter of 1999, Capital Asset engaged a specialty servicer of residential mortgages to help manage its business and operations and to assist in administering the tax lien portfolios serviced by Capital Asset and supporting the securitizations insured by MBIA Corp.

          In the third quarter of 1999, Capital Asset also completed the refinancing of substantially all of its remaining tax liens. These liens were originally financed through a commercial paper warehouse facility that matured at the end of the third quarter of 1999, and which was guaranteed by the Company. The refinancing was accomplished through a securitization transaction in which the tax liens were sold to a qualifying special purpose vehicle which in turn issued notes secured by those liens. The proceeds of the securitization were used primarily to extinguish the warehouse facility. This was Capital Asset’s third securitization of tax liens, and MBIA Corp. has insured all of the notes issued by these securitizations. These securitizations were structured through the sale by Capital Asset of substantially all of its tax liens to off-balance sheet qualifying special purpose vehicles that were established in connection with these securitizations. These vehicles are not included in the consolidation of the MBIA group. The first transaction, done in 1997, has a revolving bank line of credit, guaranteed by MBIA Corp., to purchase subsequent liens against already encumbered real estate if necessary to protect previous securitized lien positions. This first transaction had an original gross par insured of $285.4 million and an available credit line of $70.0 million. As of year-end 2002, gross par outstanding was $34.2 million in bonds and $18.4 million in borrowings against a reduced credit line of $30.0 million. The second transaction, done in 1998, also has a revolving bank line of credit, guaranteed by MBIA Corp., for the same purpose. This transaction had an original gross insured par of $175.6 million and an available credit line of $50.0 million. As of year-end 2002, the gross par outstanding was $23.6 million in bonds and $5.9 million in borrowings against a reduced credit line of $20.0 million. The final transaction, done in 1999, had an original gross par of $196.0 million outstanding, which has been reduced to $126.0 million as of year-end 2002, $7.6 million of which is included in long-term debt on the Company’s balance sheet. To date MBIA Corp. has established case reserves related to these policies based on the amount of redemptive balances of those tax liens underlying such policies that Capital Asset has decided to write-off for a variety of reasons. MBIA Corp. will continue to evaluate the performance of the tax lien portfolio and establish reserves as and when necessary based on the same methodology. Since it is difficult to estimate the ultimate collectibility of tax liens, there can be no assurance that the case reserves established to date will be sufficient to cover future claims under the policies.

          Capital Asset continues to have certain contingent liabilities outstanding, including various individual and class action lawsuits. The claims giving rise to these lawsuits are a result of Capital Asset’s business activities that took place primarily before the Company assumed majority ownership and Capital Asset is defending these lawsuits. The Company has no reason to believe that it has financial liability for these lawsuits. Plaintiffs in one of the class action lawsuits have filed a lawsuit against MBIA Corp. and certain affiliates claiming that the securitization completed by Capital Asset in 1999 was a fraudulent transfer under state law because the tax liens sold to the special purpose vehicle were sold at less than their fair value and because the transaction allegedly was done to avoid the effect of an adverse legal ruling against Capital Asset on certain issues. The parties in this litigation, which principally involves the legal rate of interest that Capital Asset could legally charge on tax and water and sewer liens in Pittsburgh, have signed a settlement agreement which is subject to preliminary and final court approvals. As part of the

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settlement, Capital Asset will have to refund a portion of the interest collected with respect to the Pittsburgh liens and write down a portion of the remaining accrued interest on the Pittsburgh liens. The amount of the refund or write down with respect to any lien will depend on a variety of factors. Capital Asset has established reserves in the amount it expects to be sufficient to cover the full amount of any refunds due. The Company does not expect the amount of the write down of any accrued interest on the Pittsburgh liens to be material.

Competition

          The financial guarantee insurance business is highly competitive: there are five other monolines that write financial guarantee insurance. The other insurers in 2002 in public finance were Ambac Assurance Corporation, Financial Guaranty Insurance Company, Financial Security Assurance Inc., XL Capital Assurance, Inc. and CDC IXIS Financial Guaranty North America, Inc., all of which, like MBIA Corp., have Aaa and AAA claims-paying ratings from Moody’s and S&P, respectively. The competitors in the new issue structured finance securities market in 2002 were Financial Security Assurance Inc., Ambac Assurance Corporation, XL Capital Assurance, Inc. and CDC IXIS Financial Guaranty North America, Inc.

          Financial guarantee insurance also competes with other forms of credit enhancement, including senior-subordinated structures, over-collateralization, letters of credit and guarantees (for example, mortgage guarantees where pools of mortgages secure debt service payments) provided by banks and other financial institutions, some of which are governmental agencies or have been assigned the highest credit ratings awarded by one or more of the major rating agencies. Letters of credit are most often issued for periods of less than 10 years, although there is no legal restriction on the issuance of letters of credit having longer terms. Thus, financial institutions and banks issuing letters of credit compete directly with MBIA Corp. to guarantee short-term notes and bonds with a maturity of less than 10 years. To the extent that banks providing credit enhancement may begin to issue letters of credit with commitments longer than 10 years, the competitive position of financial guarantee insurers, such as MBIA Corp., could be adversely affected. Letters of credit also are frequently used to assure the liquidity of a short-term put option for a long-term bond issue. This assurance of liquidity effectively confers on such issues, for the short term, the credit standing of the financial institution providing the facility, thereby competing with MBIA Corp. and other financial guarantee insurers in providing interest cost savings on such issues. Recently, other highly rated institutions, including pension funds and government sponsored entities, have begun offering third party credit enhancement on asset-backed and municipal obligations. Financial guarantee insurance and other forms of credit enhancement also compete in nearly all instances with the issuer’s alternative of foregoing credit enhancement and paying a higher interest rate. If the interest savings from insurance or another form of credit enhancement are not greater than the cost of such credit enhancement, the issuer will generally choose to issue bonds without enhancement. MBIA Corp. also competes in the international market with composite (multi-line) insurers.

          There are minimum capital requirements imposed on a financial guarantee insurer by Moody’s and S&P to obtain Triple-A claims-paying ratings. Also, under New York law, multi-line insurers are prohibited from writing financial guarantee insurance in New York State. See “Item 1. Business-Regulation.” However, there can be no assurance that major multi-line insurers or other financial institutions will not participate in financial guarantee insurance in the future, either directly or through monoline subsidiaries.

Reinsurance

          State insurance laws and regulations, as well as Moody’s and S&P, impose minimum capital requirements on financial guarantee companies, limiting the aggregate amount of insurance and the maximum size of any single risk exposure which may be written. MBIA Corp. increases its capacity to write new business by using treaty and facultative reinsurance to reduce its gross liabilities on an aggregate and single risk basis.

          From its reorganization in December 1986 through December 1987, MBIA Corp. reinsured a portion of each policy through quota and surplus share reinsurance treaties. Each treaty provides reinsurance protection with respect to policies written by MBIA Corp. during the term of the treaty, for the full term of the policy. Under its quota share treaty MBIA Corp. ceded a fixed percentage of each policy insured. Since 1988, MBIA Corp. has entered into primarily surplus share treaties under which a variable percentage of risk over a minimum size is ceded, subject to a maximum percentage specified in the treaty. Reinsurance ceded under the treaties is for the full term of the underlying policy.

          MBIA Corp. also enters into facultative reinsurance arrangements from time to time primarily in connection with issues which, because of their size, require additional capacity beyond MBIA Corp.’s retention and treaty limits. Under these facultative arrangements, portions of MBIA Corp.’s liabilities are ceded on an issue-by-issue basis. MBIA Corp. utilizes facultative arrangements as a means of managing its exposure to single issuers to comply with regulatory and rating agency requirements, as well as internal underwriting and portfolio management criteria.

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          As a primary insurer, MBIA Corp. is required to honor its obligations to its policyholders whether or not its reinsurers perform their obligations to MBIA Corp. The financial position of all reinsurers is monitored by MBIA Corp. on a regular basis.

          As of December 31, 2002, MBIA Corp. has retained $497.3 billion or 82% of the gross par outstanding of all transactions insured by it, MBIA Assurance, CapMAC and MBIA Illinois, and ceded $109.1 billion or 18% to reinsurers. The principal reinsurers of MBIA Corp., MBIA Assurance, CapMAC and MBIA Illinois are ACE Guaranty Inc., Radian Reinsurance Company, The Munich Re Group (including American Re), AXA Re Finance, and AMBAC Assurance Corporation, all rated Double-A or better as of December 31, 2002. These reinsurers accounted for 81% of the total exposure reinsured by the Company as of December 31, 2002. In January 2003, as part of a larger restructuring, the financial guarantee reinsurance activities of AXA Re Finance were discontinued. In response to the restructuring, Fitch lowered the financial strength rating of AXA Re Finance to AA, Moody’s lowered the rating to A3 and the S&P rating was withdrawn. Subsequently, Fitch further downgraded AXA Re Finance to BBB and Moody’s further downgraded AXA Re Finance to Baa1.  The Moody’s rating was withdrawn. Exposure ceded by the Company to AXA Re Finance under various reinsurance contracts represented 2.6% of the Company’s gross par insured as of December 31, 2002. All of the other reinsurers reinsured approximately 19% of the total ceded insurance in force at December 31, 2002 and are diversified geographically and by lines of insurance written. MBIA Corp.’s net retention on the policies it writes varies from time to time depending on its own business needs and the capacity available in the reinsurance market. As a primary insurer, MBIA Corp. is required to honor its obligations to its policyholders, whether or not its reinsurers perform their obligations to MBIA Corp. The amounts of reinsurance ceded at December 31, 2002 and 2001 by bond type and by geographic location are set forth in Note 20 to the Consolidated Financial Statements of MBIA Inc. and Subsidiaries. The downgrade or default of one or more of the Company’s reinsurers is not expected to have a material adverse impact on the Company’s ratings, financial condition or results of operations.

          In addition, MBIA Corp. also maintains $211 million of stop loss reinsurance coverage with a group of highly rated reinsurers. This facility covers losses, relating to the global structured finance portfolio in force as of December 31, 2002, that are incurred during the seven-year period beginning January 1, 2002 and are in excess of an annually recalculated attachment point ($1.01 billion for 2002 and $1.15 billion for 2003). The Company also maintains two ten-year facilities maturing in 2011 and 2012 for $100 million and $50 million, respectively. These facilities, with two highly rated reinsurers, allow it to issue subordinated securities and can be drawn upon if the Company incurs cumulative losses (net of any recoveries) above an annually adjusted attachment point. The attachment point was $1.65 billion in 2002 and will be $1.76 billion in 2003. In 2002, the rating on one of the reinsurers providing one of the facilities was downgraded, which decreases the attractiveness of the reinsurance coverage to MBIA Corp. As a result, MBIA Corp. may elect to terminate the coverage when the facility comes up for renewal.

          MBIA Corp. and MBIA Assurance have entered into a reinsurance agreement providing for MBIA Corp.’s reimbursement of the losses incurred by MBIA Assurance in excess of a specified threshold and a net worth maintenance agreement in which MBIA Corp. agrees to maintain the net worth of MBIA Assurance, to remain its sole shareholder and not to pledge its shares. Under the reinsurance agreement MBIA Corp. agrees to reimburse MBIA Assurance on an excess of loss basis for losses incurred in each calendar year for net retained insurance liability, subject to certain contract limitations. Under the net worth maintenance agreement, MBIA Corp. agrees to maintain a minimum capital and surplus position in accordance with French and New York State legal requirements.

          MBIA Corp. and MBIA Illinois have entered into a reinsurance agreement under which MBIA Corp. reinsured 100% of all business written by MBIA Illinois, net of cessions by MBIA Illinois to third party reinsurers, in exchange for MBIA Illinois’ transfer of the assets underlying the related unearned premium and contingency reserves. Pursuant to such reinsurance agreement, MBIA Corp. reinsured all of the net exposure of $30.9 billion, or approximately 68% of the gross debt service outstanding, of the municipal bond insurance portfolio of MBIA Illinois, the remaining 32% having been previously ceded to treaty and facultative reinsurers of MBIA Illinois. In 1990, 10% of this portfolio was ceded back to MBIA Illinois to comply with regulatory requirements. Effective January 1, 1999, MBIA Corp. and MBIA Illinois entered into a replacement reinsurance agreement whereby MBIA Corp. agreed to accept as reinsurance from MBIA Illinois 100% of the net liabilities and other obligations of MBIA Illinois, for losses paid on or after that date, thereby eliminating the 10% retrocession arrangement previously in place.

          MBIA Corp. and CapMAC have entered into a reinsurance agreement, effective April 1, 1998, under which MBIA Corp. has agreed to reinsure 100% of the net liability and other obligations of CapMAC in exchange for CapMAC’s payment of a premium equal to the ceded reserves and contingency reserves. Pursuant to such reinsurance agreement with CapMAC, MBIA Corp. reinsured all of the net exposure of $31.6 billion, or approximately 78% of the gross debt service outstanding, the remaining 22% having been previously ceded to treaty and facultative reinsurers of CapMAC.

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          During 2002, the financial strength ratings of certain of MBIA Corp.’s reinsurers were downgraded below AAA. While these reinsurers continue to remain at risk for potential losses, the value of the reinsurance to the Company is decreased due to the increased amounts of capital that MBIA Corp. is required to hold with respect to the ceded risks as a result of the reinsurers downgrade. Generally, MBIA Corp. has the right to terminate a reinsurance agreement when the reinsurer is downgraded and we may elect to take back ceded business and reinsure with a different reinsurer so as to limit our capital requirements. However, there can be no assurance that alternative reinsurance capacity will be available or that MBIA Corp. will be able to secure reinsurance on favorable terms. In the event that we are unable to obtain reinsurance with a highly rated reinsurer the amount of capital required to maintain our Triple-A rating would increase.

Investments and Investment Policy

          The Finance Committee of the Board of Directors of the Company approves the general investment objectives and policies of the Company, and also reviews more specific investment guidelines. On January 1, 1996 CMC assumed full management of all of MBIA Corp.’s consolidated investment portfolios and currently manages substantially all of the Company’s investment portfolios.

          To continue to provide strong capital resources and claims-paying capabilities for its insurance operations, the investment objectives and policies for insurance operations set quality and preservation of capital as the primary objective, subject to an appropriate degree of liquidity. Maximization of after-tax investment income and investment returns is an important but secondary objective. The insurance operations assets are managed by CMC subject to an agreement between CMC and MBIA Corp. and its subsidiaries.

          Investment objectives, policies and guidelines related to the Company’s investment agreement business are also subject to review and approval by the Finance Committee of the Board of Directors. The primary investment objectives are to preserve capital, to achieve an investment duration that closely approximates the expected duration of related liabilities, and to maintain appropriate liquidity. The investment agreement assets are managed by CMC subject to an investment management agreement between IMC and CMC.

          For the year ended 2002, approximately 64% of the Company’s net income was derived from after-tax earnings on its investment portfolio (excluding the amounts on investment agreement assets that are recorded as a component of investment management services revenues). The following table sets forth investment income and related data for the years ended December 31, 2000, 2001 and 2002.

Investment Income of the Company (1)

(l)  Excludes investment income from investment management services and municipal services segments.
(2)  Includes taxable and tax-exempt interest income.

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          The tables below set forth the composition of the Company’s investment portfolios. The weighted average yields in the tables reflect the nominal yield on market value as of December 31, 2002, 2001 and 2000.

Investment Portfolio by Security Type
as of December 31, 2002

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Investment Portfolio by Security Type
as of December 31, 2001

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Investment Portfolio by Security Type
as of December 31, 2000