<PAGE> 1
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, 1999.
Commission file number 1-9583
MBIA INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
Connecticut 06-1185706
(State of Incorporation) (I.R.S. Employer Identification No.)
113 King Street, Armonk, New York 10504
(Address of principal executive offices) (Zip Code)
</TABLE>
(914) 273-4545
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Title of each class Name of each exchange on which registered
- ------------------- -----------------------------------------
<S> <C>
Common Stock, par value $1 per share New York Stock Exchange
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __.
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of March 16, 2000 was $4,926,021,985.00
As of March 16, 2000, 98,891,282 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, 1999 are incorporated by
reference into Parts I and II. Portions of the Definitive Proxy Statement of the
Registrant, dated March 30, 2000 are incorporated by reference into Parts I and
III.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (SS 229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
<PAGE> 2
PART I
ITEM 1. BUSINESS
MBIA Inc. (the "Company") is engaged in providing financial guarantee
insurance and investment management and financial services to public finance
clients and financial institutions on a global basis. Financial guarantees for
municipal bonds, asset-backed and mortgage-backed securities, investor-owned
utility bonds, and collateralized obligations of sovereigns, corporations and
financial institutions, both in the new issue and secondary markets, are
provided through the Company's 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. In 1990, the Company
formed a French insurance company, MBIA Assurance S.A. ("MBIA Assurance"), to
write financial guarantee insurance in the countries of the European community.
MBIA Assurance, which is also a wholly-owned subsidiary of MBIA Corp., writes
policies insuring sovereign risk, public infrastructure financings, asset-backed
transactions and certain collateralized obligations of corporations and
financial institutions. Generally, throughout the text, references to MBIA Corp.
include the activities of its subsidiaries, MBIA Illinois, MBIA Assurance and
CapMAC. In September 1995, MBIA Corp. entered into a joint venture agreement
with Ambac Assurance Corporation for the purpose of jointly marketing financial
guarantee insurance outside the United States. On March 21, 2000, the two
companies restructured the joint venture. Under the restructuring, the companies
agreed to begin marketing and originating financial guarantee insurance outside
the United States independently, and also to continue to maintain certain
reciprocal reinsurance arrangements for international business until at least
the end of 2001. The Company believes that the restructuring of the joint
venture with Ambac will not result in any reduction in premiums written from
international business, although no assurances can be given that such a
reduction will not occur. Additionally, the companies have agreed, until at
least the end of this year, to continue to operate as a joint venture in Japan
with their strategic partners Mitsui Marine and Fire Insurance Co. Ltd. and The
Yasuda Fire and Marine Insurance Co. Ltd.
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. MBIA Corp. primarily insures obligations
which are sold in the new issue and secondary markets, or which are held in unit
investment trusts ("UIT") and by mutual funds. It also provides surety bonds for
debt service reserve funds. The principal economic value of financial guarantee
insurance to the entity offering the obligations is the savings in interest
costs resulting from the difference in the market yield 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. 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
or 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. These include
residential and commercial mortgages, a variety of consumer loans, corporate
loans and bonds and equipment and real property leases. The transactions insured
by the joint venture include sovereign and sub-sovereign debt, as well as
structured finance transactions.
MBIA Corp. has a Triple-A claims-paying 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 IBCA, Inc. ("Fitch"),
which it received in 1995; and from Japan Rating and Investment Information,
Inc. ("JRII"), 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
Illinois and CapMAC guaranteed bond issues. The Triple-A ratings are important
to the operation of the Company's business and any reduction in these ratings
could have a material adverse effect on MBIA Corp.'s ability to compete and
could have a material adverse effect on the business, operations and financial
results of the Company.
The Company also provides investment management products and financial
services through a group of subsidiary companies. These services include cash
management, municipal investment agreements, discretionary asset management,
purchase and administrative services, and municipal revenue enhancement
services. MBIA Municipal Investors Service Corporation ("MBIA-MISC") provides
cash management services and investment placement services to local governments
and school districts, and provides those clients with fund administration
services. American Money Management Associates, Inc. ("AMMA") offers investment
and treasury management consulting services to municipal and quasi-municipal
clients. MBIA Investment Management Corp. ("IMC") offers guaranteed investment
agreements primarily for bond proceeds to states and municipalities. MBIA
Capital Management Corp. ("CMC") performs investment management services for the
Company, MBIA-MISC, IMC and selected external clients. In 1998, the
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Company acquired 1838 Investment Advisors, Inc. ("1838"), a provider of asset
management services. In 1999, the Company formed a holding company, MBIA Asset
Management Corporation, to consolidate the resources and capabilities of these
four entities.
MBIA MuniServices Company ("MuniServices") provides revenue enhancement
services and products (discovery, audit, collections and information services)
to state and local governments. In 1997, MuniServices acquired the Municipal Tax
Bureau entities ("MTB"), which provide tax revenue compliance and collection
services to the public sector. In 1998, MuniServices acquired Municipal Resource
Consultants which specialized in providing revenue enhancement and information
services to municipalities, and MuniFinancial which provided consulting services
regarding tax delinquencies and tax levies to municipalities. In 1999, as part
of its strategic evaluation of its municipal services businesses, the Company
sold MuniFinancial, consolidated the remaining assets into a single national
enterprise and decided to exit the tax lien business which had been operated
through its 86%-owned subsidiary Capital Asset Holdings.
Statements included in this Form 10-K which are not historical or
current facts are "forward-looking statements" made pursuant to the safe harbor
provisions of the private Securities Litigation Reform Act of 1998. The words
"believe," "anticipate," "project," "plan," "expect," "intend," "will likely
result," or "will continue," and similar expressions identify forward-looking
statements. These statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from historical earnings and
those presently anticipated or projected. We wish to caution readers not to
place undue reliance on any such forward-looking statements, which speak only as
of their respective dates. The following are some of the factors that could
cause actual results to differ materially from estimates contained in or
underlying the Company's forward-looking statements: (1) fluctuations in the
economic, credit or interest rate environment in the United States or abroad;
(2) level of activity within the national and international credit markets; (3)
competitive conditions and pricing levels; (4) legislative or regulatory
developments; (5) technological developments; (6) changes in tax laws; (7) the
effects of mergers, acquisitions and divestitures; and (8) uncertainties that
have not been identified at this time. The Company undertakes no obligation to
publicly correct or update any forward-looking statement if it later becomes
aware that such result is not likely to be achieved.
MBIA CORP. INSURED PORTFOLIO
At December 31, 1999, 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 $4.5 billion of obligations
of IMC (see "Operations-Miscellaneous")) was $384.5 billion, comprised of $329.3
billion in new issues and $55.2 billion in secondary market issues. Net
insurance in force was $635.9 billion.
Since 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, 1999, MBIA Corp. had 34,114 policies
outstanding. These policies are diversified among 9,664 "credits," which MBIA
Corp. defines as any group of issues supported by the same revenue source.
2
<PAGE> 4
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, 1999:
MBIA CORP. ORIGINAL PAR AMOUNT PER ISSUE
AS OF DECEMBER 31, 1999 (1)
<TABLE>
<CAPTION>
% OF TOTAL
NUMBER OF NUMBER OF NET PAR % OF NET
ORIGINAL PAR AMOUNT ISSUES ISSUES AMOUNT PAR AMOUNT
WRITTEN PER ISSUE OUTSTANDING OUTSTANDING OUTSTANDING OUTSTANDING
(IN BILLIONS)
<S> <C> <C> <C> <C>
Less than $10 million 26,675 78.2% $ 47.6 12.4%
$10-25 million 3,144 9.2 41.1 10.7
$25-50 million 1,824 5.3 48.7 12.6
$50-100 million 1,224 3.6 58.8 15.3
Greater than $100 million 1,247 3.7 188.3 49.0
------ ------ ------ ------
Total 34,114 100.0% $384.5 100.0%
====== ====== ====== ======
</TABLE>
- --------------------
(1) Excludes IMC's $4.5 billion relating to municipal investment agreements
guaranteed by MBIA Corp.
3
<PAGE> 5
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, 1999 was
11.0 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, 1999 was $46.3 billion.
MBIA Corp. had, until the early-1990's, written only financial
guarantees for municipal issuers in the United States. Municipal bonds consist
of both taxable and tax-exempt bonds and notes that are issued by states,
cities, political subdivisions, utility districts, airports, health care
institutions, higher educational facilities, housing authorities and other
similar agencies. These types of obligations are supported by taxes,
assessments, fees related to use of projects, lease payments, etc. By the
mid-1990's, MBIA Corp. had begun to write guarantees for the structured finance
and asset-backed market. In general, structured finance and asset-backed
obligations are secured by or payable from a specific pool of assets having an
ascertainable cash flow. These obligations are either "pass-through"
obligations, which represent interests in the related assets, or "pay-through"
obligations, which generally are debt obligations collateralized by the related
assets. Both 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 two forms of risks: asset risk,
which relates to the amount and quality of asset coverage; and structural risk,
which relates to the extent to which the transaction structure protects the
interests of the investors. In general, the asset risk is addressed by sizing
the asset pool based on the historical performance of the assets. The ability of
the servicer (the entity who is responsible for collecting the cash flow from
the asset pool) to properly service and collect on the underlying assets is also
a factor in determining future asset performance. Structural risks include
bankruptcy and tax risks. Structured and asset-backed securities are usually
designed to protect the investors from the bankruptcy or insolvency of the
entity that originated the underlying assets as well as from the bankruptcy or
insolvency of the servicer. These issues concern whether the sale of the assets
by the originator to the issuer would be upheld in the event of the bankruptcy
or insolvency of the originator and whether the servicer of the assets may be
required to delay the remittance of any cash collections held by it or received
by it after the time it becomes subject to bankruptcy or insolvency proceedings.
In addition, servicer risk, the risk that problems at the servicer level could
result in a decline in the collection of cash payments, may also be present in
the transaction. These issues are addressed through MBIA Corp.'s underwriting
guidelines and procedures.
Outside of the United States, sovereign and sub-sovereign, structured
and asset-backed, utilities and other issuers are increasingly using financial
guarantee insurance. Ongoing privatization efforts have shifted the burden from
the government to public and private capital markets, where investors may seek
the security of financial guarantee insurance. There is also growing interest in
asset-backed securitization. While the principles of securitization have been
increasingly applied in overseas markets, development in particular countries
has varied due to the sophistication of the local capital markets and the impact
of financial regulatory requirements, accounting standards and legal systems. It
is expected that securitization will continue to expand internationally, at
varying rates in each country. MBIA Corp. insures both asset-backed and
structured transactions, sovereign and sub-sovereign debt issues, utilities, and
other obligations in selected international markets. MBIA Corp. believes that
the risk profile of the international business it insures is generally the same
as in the United States, but recognizes that there are particular risks related
to each country and region. These risks include the legal and political
situation, the capital markets and currency exchange risks. MBIA Corp.
monitors these risks carefully.
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The table below shows the diversification of MBIA Corp.'s insured
portfolio by bond type:
MBIA CORP. INSURED PORTFOLIO BY BOND TYPE
AS OF DECEMBER 31, 1999 (1)
BOND TYPE
<TABLE>
<CAPTION>
NUMBER NET PAR % OF NET
OF ISSUES AMOUNT PAR AMOUNT
Domestic OUTSTANDING OUTSTANDING OUTSTANDING
Municipal (IN BILLIONS)
<S> <C> <C> <C>
General obligation 13,309 $ 87.7 22.8%
Utilities 4,438 44.1 11.5
Health care 2,074 38.7 10.1
Special Revenue 1,865 28.9 7.5
Transportation 1,382 23.4 6.1
Higher Education 1,501 15.4 4.0
Housing 1,785 11.5 3.0
ID & PCR 929 7.7 2.0
Other 21 0.4 0.1
------ ------ ------
Total Municipal 27,304 257.8 67.1
------ ------ ------
Structured Finance
Mortgage Backed:
Home Equity 437 34.6 9.0
Other 111 12.5 3.2
First Mortgage 174 9.5 2.5
Asset Backed:
Other 97 14.2 3.7
Auto 98 7.7 2.0
Leasing 54 5.4 1.4
Pooled Corp. Obligations & Other 77 6.2 1.6
------ ------ ------
Total Structured Finance 1,048 90.1 23.4
------ ------ ------
Other 5,310 11.9 3.1
------ ------ ------
Total Domestic 33,662 359.8 93.6
------ ------ ------
International
Structured Finance* 161 18.0 4.6
Infrastructure 209 4.2 1.1
Other 82 2.5 0.7
------ ------ ------
Total International 452 24.7 6.4
------ ------ ------
TOTAL 34,114 $384.5 100.0%
====== ====== ======
</TABLE>
*Asset/mortgage-backed
- -----------
(1) Excludes IMC's $4.5 billion relating to municipal investment agreements
guaranteed by MBIA Corp.
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As of December 31, 1999, of the $384.5 billion outstanding net par
amount of obligations insured, $257.8 billion, or 67%, consisted of municipal
bonds, $102.0 billion, or approximately 27%, consisted primarily of
asset/mortgage-backed transactions and investor-owned utility obligations and
$24.7 billion or approximately 6% consisted of transactions done in the
international 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)
<TABLE>
<CAPTION>
BOND TYPE 1995 1996 1997 1998 1999
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Domestic
Municipal
General obligation $10,226 $13,036 $13,798 $15,424 $ 9,835
Special Revenue 1,952 3,787 3,110 6,374 4,605
Health care 2,913 4,310 7,414 8,174 3,537
Utilities 5,098 6,749 6,877 6,458 2,360
Housing 1,962 1,802 1,791 2,093 1,861
Higher Education 1,312 2,132 2,517 4,217 1,496
Transportation 2,624 3,153 6,059 4,175 859
Industrial Development &
Pollution Control Revenue 1,155 693 781 237 452
Other 1,240 401 1,301 1,077 17
------- ------- ------- ------- -------
Total Municipal 28,482 36,063 43,648 48,229 25,022
------- ------- ------- ------- -------
Structured Finance
Mortgage Backed:
Home Equity 7,153 14,182 17,910 16,817 10,218
Other 871 489 977 2,147 9,723
First Mortgage 2,628 3,912 2,605 2,505 5,205
Asset Backed:
Auto 731 1,956 3,256 2,863 5,880
Other 1,405 2,690 3,582 5,009 4,206
Leasing 436 978 3,907 1,073 1,548
Pooled Corp. Obligations & Other 829 244 326 5,367 3,589
------- ------- ------- ------- -------
Total Structured Finance 14,053 24,451 32,563 35,781 40,369
------- ------- ------- ------- -------
Other 1,562 4,740 4,438 3,525 2,214
------- ------- ------- ------- -------
Total Domestic $44,097 $65,254 $80,649 $87,535 $67,605
------- ------- ------- ------- -------
International
Structured Finance* 7,003 4,039 2,586 6,267 4,799
Infrastructure 626 839 1,080 778 908
Other 884 1,341 1,209 701 46
------- ------- ------- ------- -------
Total International 8,513 6,219 4,875 7,746 5,753
------- ------- ------- ------- -------
TOTAL $52,610 $71,473 $85,524 $95,281 $73,358
======= ======= ======= ======= =======
</TABLE>
* Asset/mortgage-backed
- ----------
(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 and the Republic of France. MBIA Assurance is
licensed to write business in France. The following table sets forth by
geographic location the areas in which MBIA Corp. has at least 2% of its total
net par amount outstanding:
MBIA CORP. INSURED PORTFOLIO BY STATE
AS OF DECEMBER 31, 1999 (1)
<TABLE>
<CAPTION>
NUMBER OF NET PAR % OF NET
ISSUES AMOUNT PAR AMOUNT
OUTSTANDING OUTSTANDING OUTSTANDING
STATE (IN BILLIONS)
<S> <C> <C> <C>
New York 5,484 $ 45.4 11.8%
California 3,707 40.8 10.6
Florida 1,498 20.0 5.2
Pennsylvania 2,113 14.7 3.8
Texas 1,990 14.2 3.7
New Jersey 1,841 13.0 3.4
Illinois 1,176 11.9 3.1
Massachusetts 1,075 10.9 2.9
Michigan 1,085 8.3 2.2
Ohio 1,049 7.7 2.0
------ ------ ------
Sub-Total 21,018 186.9 48.7
All Other States 11,692 99.3 25.8
Nationally Diversified 952 73.6 19.1
------ ------ ------
Total United States 33,662 359.8 93.6
INTERNATIONAL
Country Specific 372 13.8 3.6
Internationally Diversified 80 10.9 2.8
------ ------ ------
Total International 452 24.7 6.4
------ ------ ------
Total 34,114 $384.5 100.0%
====== ====== ======
</TABLE>
- ----------
(1) Excludes IMC's $4.5 billion relating to municipal investment agreements
guaranteed by MBIA Corp.
MBIA Corp. has underwriting guidelines that limit the net insurance in
force for any one insured credit and is subject to both rating agency and
regulatory single-risk limits with respect to any bond issue insured by it. As
of December 31, 1999, MBIA Corp.'s net par amount outstanding for its ten
largest insured municipal credits totaled $16.9 billion, representing 4.4% 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 $16.8 billion, also 4.4% of the total.
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<PAGE> 9
MBIA CORP. INSURANCE PROGRAMS
MBIA Corp. offers financial guarantee insurance in both the new issue
and secondary markets. At present, no new financial guarantee insurance is being
offered by MBIA Illinois or CapMAC, but it is possible that either of those
entities may insure transactions in the future. MBIA Corp. and MBIA Assurance
offer financial guarantee insurance in Europe, Asia, Latin America and other
areas outside the United States. In September 1995, MBIA Corp. entered into a
joint venture agreement with Ambac Assurance Corporation for the purpose of
jointly marketing financial guarantee insurance outside the United States. On
March 21, 2000, the two companies restructured the joint venture. Under the
restructuring, the companies agreed to begin marketing and originating financial
guarantee insurance outside the United States independently, and also to
continue to maintain certain reciprocal reinsurance arrangements for
international business until at least the end of 2001. The Company believes that
the restructuring of the joint venture with Ambac will not result in any
reduction in premiums written from international business, although no
assurances can be given that such a reduction will not occur. Additionally, the
companies have agreed, until at least the end of this year, to continue to
operate as a joint venture in Japan with their strategic partners Mitsui Marine
and Fire Insurance Co. Ltd. and The Yasuda Fire and Marine Insurance Co. Ltd.
Transactions in the new issue market are sold either through negotiated
offerings or competitive bidding. In the first case, either the issuer or the
underwriter purchases the insurance policy directly from MBIA Corp. For
municipal bond issues involving competitive bidding, the insurance is offered as
an option to the underwriters bidding on the transaction. The successful bidder
would then have the option to purchase the insurance.
In the secondary market, MBIA Corp. provides insurance on whole and
partial maturities in response to requests from bond traders and institutions
who trade in the secondary market. 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.
The following table indicates the percentage of net par outstanding
with respect to each type of insured program:
MBIA CORP. TYPES OF INSURED PROGRAMS
AS OF DECEMBER 31, 1999 (1)
<TABLE>
<CAPTION>
NET PAR AMOUNT % OF NET PAR
TYPE OF PROGRAM OUTSTANDING AMOUNT OUTSTANDING
(IN BILLIONS)
<S> <C> <C>
New Issue $329.3 85.6%
Secondary market issues
Unit investment trusts 17.6 4.6
Mutual funds 0.2 0.1
Other secondary market issues 37.4 9.7
------ ------
Total $384.5 100.0%
====== ======
</TABLE>
- ----------
(1) Excludes IMC's $4.5 billion relating to municipal investment agreements
guaranteed by MBIA Corp.
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<PAGE> 10
OPERATIONS
The insurance operations of MBIA Corp. are conducted through the Public
Finance Division, the Structured Finance Division, the joint venture with Ambac
(for all international transactions) and the Risk Management Group. Due to the
restructuring of the joint venture with Ambac, effective March 21, 2000, all
marketing and origination of international transactions will be conducted
through MBIA Corp.'s International Division, with the help of the other
Divisions. The 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
Public Finance Division. With respect to larger, complex, or unique
transactions, underwriting is performed by a committee consisting of senior
representatives of Public Finance, Risk Management, Insured Portfolio
Management, and the Company's Finance Department. For all transactions done by
the Structured Finance Division or for International deals, MBIA Corp.'s review
and approval procedure has two stages. The first stage consists of screening,
credit review and structuring by the appropriate business unit, in consultation
with Risk Management officers. The second stage, consisting of the final review
and approval of credit and structure, is performed by a committee consisting of
the head of the applicable business unit, one officer from Risk Management and a
third officer from either Risk Management or Insured Portfolio Management.
Certain transactions, based on size, complexity, or other factors, must also be
approved by a division-level committee consisting of senior representatives of
Structured Finance or the joint venture (through March 21, 2000), Risk
Management and Insured Portfolio Management. Premium rates for all groups within
the insurance operations enterprise are established by a Pricing Committee with
representation from the Business Analysis Group (pricing and quantitative
analysis) and the relevant insurance operations group.
Risk Management
The Risk Management Group is responsible for adherence to MBIA
Corp.'s underwriting guidelines and procedures which are designed to maintain an
insured portfolio with low risk characteristics. MBIA Corp. maintains
underwriting guidelines based on those aspects of credit quality that it deems
important for each category of obligation considered for insurance. For Public
Finance and international infrastructure and public finance transactions, these
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 Structured Finance and international structured finance
transactions, MBIA Corp's underwriting guidelines, analysis and due diligence
focus primarily on seller/servicer credit and operational quality, the quality
and historical and projected performance of the asset pool, and the strength of
the structure, including legal segregation of the assets, cash flow analysis,
the size and source of first loss protection, and asset performance triggers and
financial covenants. 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 financial institution and corporate analysis group within
Risk Management underwrites and monitors MBIA Corp.'s direct and indirect
exposure to financial institutions and other corporate entities with respect to
seller/servicer exposure, investment contracts, letters of credit, swaps,
liquidity and other facilities supporting MBIA-insured issues, and recommends
limits on such exposures. The department provides in-depth financial analyses of
financial institutions for which there is existing or proposed exposure.
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, underwriters and other interested parties to deal
with the concern before it develops into a default. The Insured Portfolio
Management Group works closely with Risk Management and New Business
Departments to provide feedback on insured issue performance and credit risk
parameters.
To-date, MBIA Corp. has had 22 insured issues requiring claim
payments for which it has not been fully reimbursed. There are currently 8
additional insured issues for which case loss reserves have been established
(see "Losses and Reserves" below). Other potential losses have been avoided
through the early detection of problems and subsequent negotiations with the
issuer and other parties involved. In a limited number of instances, the
solution involved the restructuring of insured issues or underlying security
arrangements. More often, MBIA Corp. utilizes a variety of other techniques to
resolve problems, such as enforcement of covenants, assistance in resolving
management problems and working with the issuer to develop potential political
solutions. Issuers are under no obligation to restructure insured issues or
underlying security arrangements in order to prevent losses. Moreover, MBIA
Corp. is obligated to pay amounts equal to defaulted interest and principal
payments on insured bonds on their respective due dates even if the
9
<PAGE> 11
issuer or other parties involved refuse to restructure or renegotiate the terms
of the insured bonds or related security arrangements. The Company's experience
is that early detection and continued involvement by the Insured Portfolio
Management Group are crucial in avoiding or minimizing claims on insurance
policies. There can be no assurance, however, that there will be no material
losses in the future in respect of any issues guaranteed by MBIA Corp., MBIA
Illinois or CapMAC.
Once an obligation is insured, the issuer and the trustee are
typically required to furnish financial information, including audited financial
statements, periodically to the Insured Portfolio Management Group for review.
Potential problems uncovered through this review, such as poor financial
results, low fund balances, covenant violations, trustee or servicer problems,
or excessive litigation, could result in an immediate surveillance review and an
evaluation of possible remedial actions. The Insured Portfolio Management Group
also monitors state finances and budget developments and evaluates their impact
on local issuers.
At underwriting, issues are given an internal credit rating.
All credits are monitored according to a frequency of review schedule that is
based on risk type and credit quality. Issues that experience financial
difficulties, deteriorating economic conditions, excessive litigation or
covenant violations are placed on the appropriate review list and are subject to
surveillance reviews at intervals commensurate to the problem which has been
detected.
There are three departments in the Insured Portfolio
Management Group. The Public Finance Portfolio Management Department handles the
traditional types of domestic municipal issues such as general obligation,
utility, special revenue and health care bonds. The Structured Finance Portfolio
Management Department is responsible for asset backed and other structured
transactions. The International Portfolio Management Department is responsible
for all international transactions.
The Public Finance Portfolio Management Department 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. It responds to consent and waiver requests and monitors
pool programs. 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 Structured Finance Portfolio Management Department
monitors insured structured finance programs, focusing on the adequacy of
reserve balances and investment of earnings, the status of mortgage or loan
delinquencies and underlying insurance coverage and the performance of the
trustee for insured issues. Monitoring of issues typically involves review of
records and statements, review of transaction documents with regard to
compliance, analysis of cash flow adequacy and communication with trustees.
Review of servicer performance is also conducted through site visits with
management, review of servicer financial statements, review of servicer reports
where available and contacts with program administrators and trustees. The
department also carries out remedial activity on weaker credits.
The International Portfolio Management Department monitors
insured international programs. They monitor all credit types, including
sovereign, sub-sovereign issuers, single risk and structured finance
transactions. The department applies similar policies and procedures as the
Public Finance and Structured Finance Portfolio Management Departments, and is
responsible for remedial activities on weaker credits.
INVESTMENT MANAGEMENT SERVICES
Over the last eight years, the Company's investment management
businesses have expanded their services to the public sector and added new
revenue sources. MBIA Asset Management Corporation is the holding company under
which the resources and capabilities of our four investment management
subsidiaries have been consolidated.
MBIA-MISC provides cooperative cash management services directly to
local governments and school districts. In addition, MBIA-MISC performs
investment fund administration services for clients, which provide an additional
source of revenue. AMMA provides investment and treasury management consulting
services for municipal and quasi-public sector clients. Both MBIA-MISC and AMMA
are Securities and Exchange Commission registered investment advisers.
MBIA-MISC/AMMA operates in 20 states and the Commonwealth of Puerto Rico.
10
<PAGE> 12
IMC provides customized guaranteed investment agreements and flexible
repurchase agreements for bond proceeds and other public funds. At year-end
1999, principal and accrued interest outstanding on investment agreements was
$4.5 billion compared with $3.5 billion at year-end 1998. IMC may use derivative
contracts in the course of providing its investment agreements, as a protection
against interest rate risks. While these derivatives are designed to help manage
interest rate risk, they may involve amounts at risk in excess of those
reflected in the financial statements.
In 1998, the Company acquired 1838, a full-service asset management
firm with a strong institutional focus. 1838 currently has over $12.0 billion in
equity, fixed income and balanced portfolios.
CMC provides investment management services for IMC's investment
agreements, MBIA-MISC's municipal cash management programs and MBIA Corp.'s
insurance related fixed-income investment portfolios, as well as third-party
accounts. CMC assumed full management for MBIA Corp.'s insurance related
fixed-income investment portfolios in 1996. CMC is an NASD member and both CMC
and 1838 are registered investment advisers.
FINANCIAL AND CONSULTING SERVICES
MuniServices provides revenue enhancement services and products
(discovery, audit, collections 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.
Through its interest in Capital Asset Holdings GP, Inc. and its
affiliates (collectively, "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, in order to
implement its decision to exit the tax lien business, the Company became a
majority owner of Capital Asset. The Company was unsuccessful in its attempts to
sell Capital Asset and in the second quarter of 1999, the Company ceased these
efforts and decided to limit the activities of Capital Asset primarily to the
servicing of the portfolios then being serviced by Capital Asset. In the second
quarter of 1999, the Company completed a valuation of Capital Asset's tax lien
portfolio, 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
portfolios supporting the securitizations.
In the third quarter of 1999, Capital Asset also completed the
refinancing of substantially all of its remaining tax liens. These liens were
originally financed through a commercial paper warehouse facility that matured
at the end of the third quarter, and which was guaranteed by the Company. The
refinancing was accomplished through a securitization transaction in which the
tax liens were sold to a 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. MBIA Corp. has insured all of the notes issued by
these securitizations. The first transaction, done in 1997, had an original net
par insured of $328 million and at year-end had $121 million net par insured
outstanding; the second transaction, executed in 1998, had an original net par
insured of $132 million, with the year-end net par insured outstanding at $65
million; the 1999 transaction was issued at $196 million net par insured
outstanding (these net par insured outstanding amounts give no effect to the
value of collateral). As the Company is winding down the operations of Capital
Asset, several contingent liabilities, including litigation matters, are
outstanding. While there can be no assurance of the outcome of these matters,
the Company does not expect any of these contingencies to be material.
COMPETITION
The financial guarantee insurance business is highly competitive. In
1999 MBIA Corp. was the largest insurer of new issue long-term municipal bonds,
accounting for 36% of the par amount of such insured bonds. The other principal
insurers in 1999 were Ambac Assurance Corporation, Financial Guaranty Insurance
Company and Financial Security Assurance Inc., all of which, like MBIA Corp.,
have Aaa and AAA claims-paying ratings from Moody's and S&P, respectively.
According to Asset Sales Report, in 1999 MBIA Corp. was the leading insurer of
new issue asset/mortgage-backed securities. The two principal competitors in
this area in 1999 were Financial Security Assurance and Ambac Assurance
Corporation.
Financial guarantee insurance also competes with other forms of credit
enhancement, including senior-subordinated structures, over-collateralization,
letters of credit and guarantees (for example, mortgage guarantees where pools
of mortgages secure
11
<PAGE> 13
debt service payments) provided by banks and other financial institutions, some
of which are governmental agencies or have been assigned the highest credit
ratings awarded by one or more of the major rating agencies. Letters of credit
are most often issued for periods of less than 10 years, although there is no
legal restriction on the issuance of letters of credit having longer terms.
Thus, financial institutions and banks issuing letters of credit compete
directly with MBIA Corp. to guarantee short-term notes and bonds with a maturity
of less than 10 years. To the extent that banks providing credit enhancement may
begin to issue letters of credit with commitments longer than 10 years, the
competitive position of financial guarantee insurers, such as MBIA Corp., could
be adversely affected. Letters of credit also are frequently used to assure the
liquidity of a short-term put option for a long-term bond issue. This assurance
of liquidity effectively confers on such issues, for the short term, the credit
standing of the financial institution providing the facility, thereby competing
with MBIA Corp. and other financial guarantee insurers in providing interest
cost savings on such issues. Financial guarantee insurance and other forms of
credit enhancement also compete in nearly all instances with the issuer's
alternative of foregoing credit enhancement and paying a higher interest rate.
If the interest savings from insurance or another form of credit enhancement are
not greater than the cost of such credit enhancement, the issuer will generally
choose to issue bonds without enhancement. MBIA Corp. also competes in the
international market with composite (multi-line) insurers.
There are minimum capital requirements imposed on a financial guarantee
insurer by Moody's and S&P to obtain Triple-A claims-paying ratings. Also, under
a New York law, multi-line insurers are prohibited from writing financial
guarantee insurance in New York State. See "Business-Regulation." However, there
can be no assurance that major multi-line insurers or other financial
institutions will not participate in financial guarantee insurance in the
future, either directly or through monoline subsidiaries.
REINSURANCE
State insurance laws and regulations, as well as Moody's and S&P,
impose minimum capital requirements on financial guarantee companies, limiting
the aggregate amount of insurance which may be written and the maximum size of
any single risk exposure which may be assumed. 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.
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, 1999, MBIA Corp. retained approximately 83% of the
gross debt service outstanding of all transactions insured by it, MBIA Assurance
and MBIA Illinois, and ceded approximately 17% to treaty and facultative
reinsurers. The principal reinsurers of MBIA Corp., CapMAC and MBIA Illinois are
Capital Reinsurance Company, Enhance Reinsurance Company, AXA Re Finance, Munich
Reinsurance Corp., and Ambac Assurance Corporation. These reinsurers, whose
claims-paying ability is rated Triple-A by S&P, reinsured approximately 75% of
the total ceded insurance in force at December 31, 1999. All of the other
reinsurers reinsured approximately 25% of the total ceded insurance in force at
December 31, 1999 and are diversified geographically and by lines of insurance
written. MBIA Corp.'s net retention on the policies it writes varies from time
to time depending on its own business needs and the capacity available in the
reinsurance market. The amounts of reinsurance ceded at December 31, 1999 and
1998 by bond type and by geographic location are set forth in Note 19 to the
Consolidated Financial Statements of MBIA Inc. and Subsidiaries. The downgrade
or default of one or more of the Company's reinsurers could have an adverse
impact on the Company's results of operations.
12
<PAGE> 14
MBIA Corp. and MBIA Assurance have entered into a reinsurance agreement
providing for MBIA Corp.'s reimbursement of the risks of MBIA Assurance and a
net worth maintenance agreement in which MBIA Corp. agrees to maintain the net
worth of MBIA Assurance, to remain its sole shareholder and not to pledge its
shares. Under the reinsurance agreement MBIA Corp. agrees to reimburse MBIA
Assurance on an excess of loss basis for losses incurred in each calendar year
for net retained insurance liability, subject to certain contract limitations.
Under the net worth maintenance agreement, MBIA Corp. agrees to maintain a
minimum capital and surplus position in accordance with French and New York
legal requirements.
MBIA Corp. and MBIA Illinois entered into a reinsurance agreement under
which MBIA Corp. reinsured 100% of all business written by MBIA Illinois, net of
cessions by MBIA Illinois to third party reinsurers, in exchange for MBIA
Illinois' transfer of the assets underlying the related unearned premium and
contingency reserves. Pursuant to such reinsurance agreement, MBIA Corp.
reinsured all of the net exposure of $30.9 billion, or approximately 68% of the
gross debt service outstanding, of the municipal bond insurance portfolio of
MBIA Illinois, the remaining 32% having been previously ceded to treaty and
facultative reinsurers of MBIA Illinois. In 1990, 10% of this portfolio was
ceded back to MBIA Illinois to comply with regulatory requirements. Effective
January 1, 1999, MBIA Corp. and MBIA Illinois entered into a replacement
reinsurance agreement whereby MBIA Corp. agreed to accept as reinsurance from
MBIA Illinois 100 % of the net liabilities and other obligations of MBIA
Illinois, for losses paid on or after that date, thereby eliminating the 10%
retrocession arrangement previously in place.
MBIA Corp. and CapMAC have entered into a reinsurance agreement,
effective April 1, 1998, under which MBIA Corp. agreed to reinsure 100% of the
net liability and other obligations of CapMAC in exchange for CapMAC's payment
of a premium equal to the ceded reserves and contingency reserves. Pursuant to
such reinsurance agreement with CapMAC, MBIA Corp. reinsured all of the net
exposure of $31.6 billion, or approximately 78% of the gross debt service
outstanding, the remaining 22% having been previously ceded to treaty and
facultative reinsurers of CapMAC.
INVESTMENTS AND INVESTMENT POLICY
The Finance Committee of the Board of Directors of the Company approves
the general investment objectives and policies of the Company, and also reviews
more specific investment guidelines. On January 1, 1996 CMC assumed full
management of all of MBIA Corp.'s consolidated investment portfolios. Certain
investments of the Company and MBIA Assurance related to non-U.S. insurance
operations are managed by independent managers.
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 are an important but
secondary objective.
Investment objectives, policies and guidelines related to the Company's
municipal investment agreement business are also subject to review and approval
by the Finance Committee of the Board of Directors. The primary investment
objectives are to preserve capital, to achieve an investment duration that
closely approximates the expected duration of related liabilities, and to
maintain appropriate liquidity. The investment agreement assets are managed by
CMC subject to an investment management agreement between IMC and CMC.
13
<PAGE> 15
For 1999, approximately 64% of the Company's net income, excluding
one-time charges, was derived from after-tax earnings on its investment
portfolio (excluding the amounts earned on investment agreement assets which are
recorded as a component of investment management services revenues). The
following table sets forth investment income and related data for the years
ended December 31, 1997, 1998 and 1999:
INVESTMENT INCOME OF THE COMPANY (1)
<TABLE>
<CAPTION>
1997 1998 1999
(IN THOUSANDS)
<S> <C> <C> <C>
Investment income before expenses (2) $305,569 $337,565 $365,823
Investment expenses 3,571 5,763 6,367
-------- -------- --------
Net investment income before income taxes 301,998 331,802 359,456
Net realized gains 16,903 29,962 24,040
-------- -------- --------
Total investment income before income taxes $318,901 $361,764 $383,496
======== ======== ========
Total investment income after income taxes $263,071 $296,232 $311,471
======== ======== ========
</TABLE>
- ----------
(l) Excludes investment income and realized gains and losses from
investment management services and municipal services segments.
(2) Includes taxable and tax-exempt interest income.
14
<PAGE> 16
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, 1999, 1998 and 1997.
INVESTMENT PORTFOLIO BY SECURITY TYPE
AS OF DECEMBER 31, 1999
<TABLE>
<CAPTION>
INVESTMENT
INSURANCE MANAGEMENT SERVICES
WEIGHTED WEIGHTED
FAIR VALUE AVERAGE FAIR VALUE AVERAGE
INVESTMENT CATEGORY (IN THOUSANDS) YIELD (1) (IN THOUSANDS) YIELD (1)
<S> <C> <C> <C> <C>
Fixed income investments:
Long-term bonds:
Taxable bonds:
U.S. Treasury & Agency obligations $ 600,350 7.45 % $1,237,005 6.67 %
GNMAs 146,976 7.68 67,950 7.16
Other mortgage & asset backed securities 267,531 7.94 1,880,944 6.94
Corporate obligations 1,148,565 7.50 766,180 7.61
Foreign obligations (2) 158,938 7.21 317,755 7.66
---------- ----- ---------- ----
Total 2,322,360 7.53 4,269,834 7.04
Tax-exempt bonds:
State & municipal 3,461,619 8.72 --- --
---------- ----- ---------- ----
Total long-term investments 5,783,979 8.24 4,269,834 7.04
Short-term investments (3) 274,022 5.92 219,717 6.17
---------- ----- ---------- ----
Total fixed income investments 6,058,001 8.14 % 4,489,551 7.00 %
Other investments (4) 146,038 -- --- --
---------- ----------
Total investments $6,204,039 -- $4,489,551 --
========== ==========
</TABLE>
- ----------
(1) Prospective market yields as of December 31, 1999. Yield on tax-exempt
bonds is presented on a taxable bond equivalent basis using a 35%
federal income tax rate.
(2) Consists of U.S. denominated foreign government and corporate
securities.
(3) Taxable and tax-exempt investments, including bonds with a remaining
maturity of less than one year.
(4) Consists of equity investments and other fixed income investments;
yield information not meaningful.
15
<PAGE> 17
INVESTMENT PORTFOLIO BY SECURITY TYPE
AS OF DECEMBER 31, 1998
<TABLE>
<CAPTION>
INVESTMENT
INSURANCE MANAGEMENT SERVICES
WEIGHTED WEIGHTED
FAIR VALUE AVERAGE FAIR VALUE AVERAGE
INVESTMENT CATEGORY (IN THOUSANDS) YIELD (1) (IN THOUSANDS) YIELD (1)
<S> <C> <C> <C> <C>
Fixed income investments:
Long-term bonds:
Taxable bonds:
U.S. Treasury & Agency obligations $ 487,132 6.15 % $1,404,668 5.54 %
GNMAs 154,088 6.58 100,033 6.42
Other mortgage & asset backed securities 206,171 6.25 849,922 5.33
Corporate obligations 1,026,847 5.85 842,330 6.05
Foreign obligations (2) 136,416 5.45 292,979 6.46
---------- ---- ---------- ----
Total 2,010,654 5.99 3,489,932 5.71
Tax-exempt bonds:
State & municipal 3,873,399 7.15 --- --
---------- ---- ---------- ----
Total long-term investments 5,884,053 6.76 3,489,932 5.71
Short-term investments (3) 423,194 4.94 188,297 5.03
---------- ---- ---------- ----
Total fixed income investments 6,307,247 6.63 % 3,678,229 5.68 %
Other investments (4) 94,975 -- --- --
---------- ----------
Total investments $6,402,222 -- $3,678,229 --
========== ==========
</TABLE>
- ----------
(1) Prospective market yields as of December 31, 1998. Yield on tax-exempt
bonds is presented on a taxable bond equivalent basis using a 35%
federal income tax rate.
(2) Consists of U.S. denominated foreign government and corporate
securities.
(3) Taxable and tax-exempt investments, including bonds with a remaining
maturity of less than one year.
(4) Consists of equity investments and other fixed income investments;
yield information not meaningful.
16
<PAGE> 18
INVESTMENT PORTFOLIO BY SECURITY TYPE
AS OF DECEMBER 31, 1997
<TABLE>
<CAPTION>
INVESTMENT
INSURANCE MANAGEMENT SERVICES
WEIGHTED WEIGHTED
FAIR VALUE AVERAGE FAIR VALUE AVERAGE
INVESTMENT CATEGORY (IN THOUSANDS) YIELD (1) (IN THOUSANDS) YIELD (1)
<S> <C> <C> <C> <C>
Fixed income investments:
Long-term bonds:
Taxable bonds:
U.S. Treasury & Agency obligations $ 472,100 6.87 % $1,106,396 6.08 %
GNMAs 148,065 7.15 105,865 6.91
Other mortgage & asset backed securities 189,904 6.60 726,126 6.03
Corporate obligations 836,334 6.38 691,252 6.49
Foreign obligations (2) 165,506 6.27 300,232 6.73
---------- ---- ---------- ----
Total 1,811,909 6.58 2,929,871 6.26
Tax-exempt bonds:
State & municipal 3,399,402 7.36 --- --
---------- ---- ---------- ----
Total long-term investments 5,211,311 7.09 2,929,871 6.26
Short-term investments (3) 303,898 5.19 411,523 5.73
---------- ---- ---------- ----
Total fixed income investments 5,515,209 6.99 % 3,341,394 6.19 %
Other investments (4) 51,693 -- --- --
---------- ----------
Total investments $5,566,902 -- $3,341,394 --
========== ==========
</TABLE>
- ----------
(1) Prospective market yields as of December 31, 1997. Yield on tax-exempt
bonds is presented on a taxable bond equivalent basis using a 35%
federal income tax rate.
(2) Consists of U.S. denominated foreign government and corporate
securities.
(3) Taxable and tax-exempt investments, including bonds with a remaining
maturity of less than one year.
(4) Consists of equity investments and other fixed income investments;
yield information not meaningful.
17
<PAGE> 19
The average maturity of the insurance fixed income portfolio excluding
short-term investments as of December 31, 1999 was 12.1 years. After allowing
for estimated principal pre-payments on mortgage pass-through securities, the
duration of the portfolio was 7.3 years.
The table below sets forth the distribution by maturity of the
Company's consolidated fixed income investments:
FIXED INCOME INVESTMENTS BY MATURITY
AS OF DECEMBER 31, 1999
<TABLE>
<CAPTION>
INVESTMENT
INSURANCE MANAGEMENT SERVICES
FAIR VALUE % OF TOTAL FAIR VALUE % OF TOTAL
(IN THOUSANDS) FIXED INCOME (IN THOUSANDS) FIXED INCOME
MATURITY INVESTMENTS INVESTMENTS
<S> <C> <C> <C> <C>
Within 1 year $ 274,022 4.5% $ 219,717 4.9%
Beyond 1 year but within 5 years 937,393 15.5 1,806,221 40.2
Beyond 5 years but within 10 years 1,621,211 26.8 906,886 20.2
Beyond 10 years but within 15 years 1,057,194 17.5 335,170 7.5
Beyond 15 years but within 20 years 1,070,227 17.7 536,642 12.0
Beyond 20 years 1,097,954 18.0 684,915 15.2
---------- ----- ------------ -----
Total fixed income investments $6,058,001 100.0% $ 4,489,551 100.0%
========== ===== ============ =====
</TABLE>
The quality distribution of the Company's fixed income investments
based on ratings of Moody's was as shown in the table below:
FIXED INCOME INVESTMENTS BY QUALITY RATING (1)
AS OF DECEMBER 31, 1999
<TABLE>
<CAPTION>
INVESTMENT
INSURANCE MANAGEMENT SERVICES
FAIR VALUE % OF TOTAL FAIR VALUE % OF TOTAL
(IN THOUSANDS) FIXED INCOME (IN THOUSANDS) FIXED INCOME
QUALITY RATING INVESTMENTS INVESTMENTS
<S> <C> <C> <C> <C>
Aaa $3,796,716 64.2% $3,645,135 81.2%
Aa 1,187,735 20.1 196,221 4.4
A 898,043 15.2 648,195 14.4
Baa 27,065 0.5 -- --
---------- ----- ---------- -----
$5,909,559 100.0% $4,489,551 100.0%
========== ===== ========== =====
</TABLE>
- ----------
(1) Excludes short-term investments with an original maturity of less than
one year, but includes bonds having a remaining maturity of less than
one year.
18
<PAGE> 20
REGULATION
MBIA Corp. is licensed to do insurance business in, and is subject to
insurance regulation and supervision by, the State of New York (its state of
incorporation), the 49 other states, the District of Columbia, Guam, the
Northern Mariana Islands, the U.S. Virgin Islands, Puerto Rico, the Kingdom of
Spain and the Republic of France. MBIA Assurance is licensed to do insurance
business in France and is subject to regulation under the corporation and
insurance laws of the Republic of France. The extent of state insurance
regulation and supervision in the United States varies by jurisdiction but New
York, Illinois and most other jurisdictions have laws and regulations
prescribing minimum standards of solvency, including minimum capital
requirements, and business conduct which must be maintained by insurance
companies. These laws prescribe permitted classes and concentrations of
investments. In addition, some state laws and regulations require the approval
or filing of policy forms and rates. MBIA Corp. is required to file detailed
annual financial statements with the New York Insurance Department and similar
supervisory agencies in each of the other jurisdictions in which it is licensed.
The operations and accounts of MBIA Corp. are subject to examination by these
regulatory agencies at regular intervals. The Company is subject to the direct
and indirect effects of governmental regulation, including changes in tax laws
affecting the municipal and asset-backed debt markets. No assurance can be given
that future legislative or regulatory changes might not adversely affect the
results of operations and financial conditions of the Company.
MBIA Corp. is licensed to provide financial guarantee insurance under
Article 69 of the New York Insurance Law. Article 69 defines financial guarantee
insurance to include any guarantee under which loss is payable upon proof of
occurrence of financial loss to an insured as a result of certain events. These
events include the failure of any obligor on or any issuer of any debt
instrument or other monetary obligation to pay principal, interest, premium,
dividend or purchase price of or on such instrument or obligation, when due.
Under Article 69, MBIA Corp. is licensed to transact financial guarantee
insurance, surety insurance and credit insurance and such other kinds of
business to the extent necessarily or properly incidental to the kinds of
insurance which MBIA Corp. is authorized to transact. In addition, MBIA Corp. is
empowered to assume or reinsure the kinds of insurance described above.
As a financial guarantee insurer, MBIA Corp. is required by the laws of
New York, California, Connecticut, Florida, Illinois, Iowa, New Jersey and
Wisconsin to maintain contingency reserves on its municipal bond and other
financial guarantee liabilities. Under New Jersey, Illinois and Wisconsin
regulations, contributions by such an insurer to its contingency reserves are
required to equal 50% of earned premiums on its municipal bond business. Under
New York law, such an insurer is required to contribute to contingency reserves
50% of premiums as they are earned on policies written prior to July 1, 1989
(net of reinsurance) and, with respect to policies written on and after July 1,
1989, must make contributions over a period of 15 or 20 years (based on issue
type), or until the contingency reserve for such insured issues equals the
greater of 50% of premiums written for the relevant category of insurance or a
percentage of the principal guaranteed, varying from 0.55% to 2.5%, depending
upon the type of obligation guaranteed (net of reinsurance, refunding,
refinancings and certain insured securities). California, Connecticut, Iowa and
Florida law impose a generally similar requirement. In each of these states,
MBIA Corp. may apply for release of portions of the contingency reserves in
certain circumstances.
The laws and regulations of these states also limit both the aggregate
and individual municipal bond risks that MBIA Corp. may insure on a net basis.
California, Connecticut, Florida, Illinois and New York, among other things,
limit insured average annual debt service on insured municipal bonds with
respect to a single entity and backed by a single revenue source (net of
qualifying collateral and reinsurance) to 10% of policyholders' surplus and
contingency reserves. In New Jersey, Virginia and Wisconsin, the average annual
debt service on any single issue of municipal bonds (net of reinsurance) is
limited to 10% of policyholders' surplus. Other states that do not explicitly
regulate financial guarantee or municipal bond insurance do impose single risk
limits which are similar in effect to the foregoing. California, Connecticut,
Florida, Illinois and New York also limit the net insured unpaid principal
issued by a single entity and backed by a single revenue source to 75% of
policyholders' surplus and contingency reserves.
Under New York, California, Connecticut, Florida, Illinois, New Jersey
and Wisconsin law, aggregate insured unpaid principal and interest under
policies insuring municipal bonds (in the case of New York, California,
Connecticut, Florida and Illinois, net of reinsurance) are limited to certain
multiples of policyholders' surplus and contingency reserves. New York,
California, Connecticut, Florida, Illinois and other states impose a 300:1 limit
for insured municipal bonds, although more restrictive limits on bonds of other
types do exist. For example, New York, California, Connecticut and Florida
impose a 100:1 limit for certain types of non-municipal bonds.
19
<PAGE> 21
The Company, MBIA Corp., MBIA Illinois and CapMAC are subject to
regulation under the insurance holding company statutes of New York, Illinois
and other jurisdictions in which MBIA Corp., MBIA Illinois and CapMAC are
licensed to write insurance. The requirements of holding company statutes vary
from jurisdiction to jurisdiction but generally require insurance holding
companies, such as the Company, and their insurance subsidiaries, to register
and file certain reports describing, among other information, their capital
structure, ownership and financial condition. The holding company statutes also
generally require prior approval of changes in control, of certain dividends and
other intercorporate transfers of assets, and of transactions between insurance
companies, their parents and affiliates. The holding company statutes impose
standards on certain transactions with related companies, which include, among
other requirements, that all transactions be fair and reasonable and that those
exceeding specified limits receive prior regulatory approval.
Prior approval by the New York Insurance Department is required for any
entity seeking to acquire "control" of the Company, MBIA Corp or CapMAC. Prior
approval by the Illinois Department of Insurance is required for any entity
seeking to acquire "control" of the Company, MBIA Corp. or MBIA Illinois. In
many states, including New York and Illinois, "control" is presumed to exist if
10% or more of the voting securities of the insurer are directly or indirectly
owned or controlled by an entity, although the supervisory agency may find that
"control" in fact does or does not exist when an entity owns or controls either
a lesser or greater amount of securities.
The laws of New York regulate the payment of dividends by MBIA Corp.
and provide that a New York domestic stock property/casualty insurance company
(such as MBIA Corp.) may not declare or distribute dividends except out of
statutory earned surplus. New York law provides that the sum of (i) the amount
of dividends declared or distributed during the preceding 12-month period and
(ii) the dividend to be declared may not exceed the lesser of (a) 10% of
policyholders' surplus, as shown by the most recent statutory financial
statement on file with the New York Insurance Department, or (b) 100% of
adjusted net investment income for such 12-month period (the net investment
income for such 12-month period plus the excess, if any, of net investment
income over dividends declared or distributed during the two-year period
preceding such 12-month period), unless the New York Superintendent of Insurance
approves a greater dividend distribution based upon a finding that the insurer
will retain sufficient surplus to support its obligations and writings. See Note
15 to the Consolidated Financial Statements of MBIA Inc. and Subsidiaries.
The foregoing dividend limitations are determined in accordance with
Statutory Accounting Practices ("SAP"), which generally produce statutory
earnings in amounts less than earnings computed in accordance with Generally
Accepted Accounting Principles ("GAAP"). Similarly, policyholders' surplus,
computed on a SAP basis, will normally be less than net worth computed on a GAAP
basis. See Note 7 to the Consolidated Financial Statements of MBIA Inc. and
Subsidiaries.
MBIA Corp., MBIA Illinois and CapMAC are exempt from assessments by the
insurance guarantee funds in the majority of the states in which they do
business. Guarantee fund laws in most states require insurers transacting
business in the state to participate in guarantee associations which pay claims
of policyholders and third-party claimants against impaired or insolvent
insurance companies doing business in the state. In most states, insurers
licensed to write only municipal bond insurance, financial guarantee insurance
and other forms of surety insurance are exempt from assessment by these funds
and their policyholders are prohibited from making claims on these funds.
LOSSES AND RESERVES
The Company's policy is to provide (I) specific, identified loss
reserves to cover estimated losses on policies for which the Company has
determined that it is likely to incur losses ("case basis reserves"), and (II)
general, unallocated loss reserves to cover losses that may be reasonably
estimated to occur on its insured obligations over the lives of such
obligations. The aggregate loss reserves, at any financial statement date, are
the Company's best estimate of the reserves needed to cover both types of
losses, including expected costs of settlement.
To the extent that specific insured issues are identified as currently
or likely to be in default, the present value of the expected payments,
including costs of settlement, net of expected recoveries, is allocated within
the total loss reserve as a case basis reserve. The total reserve is calculated
by applying a loss factor, determined based on an independent rating agency
study of bond defaults, to net debt service written. At December 31, 1999,
$204.5 million of the $436.5 million reserve for loss and loss adjustment
expense represents case basis reserves, of which $159.6 million and $20.4
million are attributable to two health care facilities in Pennsylvania. The
remaining case basis reserves represent various housing financings and
structured finance transactions, the largest of which is $12.5 million. Both
MBIA Illinois and CapMAC are currently inactive and their insurance business is
in run-off. MBIA Corp. has
20
<PAGE> 22
reinsured their respective net liabilities on financial guarantee insurance
business and maintains required reserves in connection therewith.
The reserves for losses and loss adjustment expenses are based on
estimates, and there can be no assurance that the ultimate liability will not
exceed such estimates. To the extent that actual case losses for any period are
less than the unallocated portion of the total loss reserve, there will be no
impact on the Company's earnings for that period other than an addition to the
reserve which results from applying the loss rate factor to new debt service
insured. To the extent that case losses, for any period, exceed the unallocated
portion of the total loss reserve, the excess will be charged against the
Company's earnings for that period. In 1999, the Company completed an update of
its loss reserving methodology. This included an analysis of loss-reserve
factors and the historical default and recovery experience of certain sectors of
the fixed-income market. The study resulted in an increase in the Company's loss
reserve factors.
SAP RATIOS
The financial statements in this Form 10-K are prepared on the basis of
GAAP. For reporting to state regulatory authorities, SAP is used. See Note 7 to
the Consolidated Financial Statements of MBIA Inc. and Subsidiaries.
The SAP combined ratio is a traditional measure of underwriting
profitability for insurance companies. The SAP loss ratio (which is losses
incurred divided by premiums earned), SAP expense ratio (which is underwriting
expenses divided by net premiums written) and SAP combined ratio (which is the
sum of the loss and expense ratios) for MBIA Corp. and for the financial
guarantee industry, which includes the monoline primary insurers (including MBIA
Corp.) and monoline reinsurers, are shown in the table below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1996 1997 1998 1999
<S> <C> <C> <C> <C>
MBIA Corp.
Loss ratio 1.7% 1.2% 8.0% 12.3%
Expense ratio 22.8 21.2 16.8 23.6
Combined ratio 24.5 22.4 24.8 35.9
Financial guarantee industry (1)
Loss ratio 4.9% 8.3% 22.8% *
Expense ratio 31.6 28.1 23.5 *
Combined ratio 36.5 36.4 46.3 *
</TABLE>
- ----------
(1) Industry statistics were taken from the 1998 Annual Report of the
Association of Financial Guaranty Insurors.
* Not Available.
21
<PAGE> 23
The SAP loss ratio differs from the GAAP loss ratio because the GAAP
ratio recognizes a provision for unidentified losses. The SAP expense ratio
varies from the GAAP expense ratio because the GAAP ratio recognizes the
deferral of policy acquisition costs and includes the amortization of purchase
accounting adjustments, principally goodwill. In addition, the SAP expense ratio
is calculated using premiums written while the GAAP expense ratio uses premiums
earned.
Net insurance in force, qualified statutory capital (which is comprised
of policyholders' surplus and the contingency reserve), and policyholders'
leverage ratios for MBIA Corp. and for the financial guarantee industry are
shown in the table below:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
1996 1997 1998 1999
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
MBIA Corp.
Net insurance in force $434,417 $513,736 $595,895 $635,883
Qualified statutory capital 2,620 3,140 3,741 4,152
Policyholders' leverage ratio 166:1 164:1 159:1 153:1
Financial guarantee industry (1)
Net insurance in force $1,076,821 $1,262,697 $1,416,433 *
Qualified statutory capital 7,350 8,851 9,833 *
Policyholders' leverage ratio 147:1 143:1 144:1 *
</TABLE>
- ----------
(1) Industry statistics were taken from the 1998 Annual Report of the
Association of Financial Guaranty Insurors.
* Not Available.
The policyholders' leverage ratio is the ratio of net insurance in
force to qualified statutory capital. This test is sometimes focused on as a
measure of a company's claims-paying capacity. The Company believes that the
leverage ratio has significant limitations since it compares the total debt
service (undiscounted) coming due over the next 30 years or so to a company's
current capital base. It thereby fails to recognize future capital that will be
generated during the period of risk being measured, arising from unearned
premium reserve and future installment premium commitments. Further, the
leverage ratio does not consider the underlying quality of the issuers whose
debt service is insured and thereby does not differentiate among the risk
characteristics of a financial guarantor's insured portfolio, nor does it give
any benefit for third-party commitments such as standby lines of credit.
MBIA CORP. INSURANCE POLICIES
The insurance policies issued by MBIA Corp. provide an unconditional
and irrevocable guarantee of the payment to a designated paying agent for the
holders of the insured obligations of an amount equal to the principal of and
interest or other amounts due on the insured obligations that have not been
paid. In the event of a default in payment of principal, interest or other
insured amounts by an issuer, MBIA Corp. promises to make funds available in the
amount of the default on the next business day following notification. MBIA
Corp. has a Fiscal Agency Agreement with State Street Bank and Trust Company,
N.A. which provides for this payment upon receipt of proof of ownership of the
obligations due, as well as upon receipt of instruments appointing MBIA Corp. as
agent for the holders and evidencing the assignment of the rights of the holders
with respect to the payments made by MBIA Corp. Even if the holders are
permitted by the terms of the insured obligations to have the full amount of
principal, accrued interest or other amounts due declared due and payable
immediately in the event of a default, MBIA Corp. is required to pay only the
amounts scheduled to be paid, but not in fact paid, on each originally scheduled
payment date.
MBIA Assurance writes policies that are substantially similar in
coverage and manner of payment to the MBIA Corp. policies. The MBIA Illinois
insurance policies provide for payments on default in substantially the same
manner as the MBIA Corp. policies. Financial guaranty insurance written by
CapMAC generally guarantees to the holder of the guaranteed obligation the
timely payment of principal and interest in accordance with the obligation's
original payment schedule. In the case of a default on the insured obligation,
payment under the insurance policy generally may not be accelerated by the
holder without the consent of CapMAC, even though the underlying obligation may
be accelerated.
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<PAGE> 24
RATING AGENCIES
Moody's, S&P, Fitch and JRII perform periodic reviews of MBIA Corp. and
other companies providing financial guarantee insurance. Their reviews focus on
the insurer's underwriting policies and procedures and on the issues insured.
Additionally, each rating agency has certain criteria as to exposure limits and
capital requirements for financial guarantors.
The rating agencies have reaffirmed their Triple-A claims-paying
ratings assigned to MBIA Corp., CapMAC, MBIA Illinois and to MBIA Assurance. The
ratings for MBIA Illinois and CapMAC are based in significant part on
reinsurance agreements between MBIA Corp. and MBIA Illinois and MBIA Corp. and
CapMAC, respectively. The rating of MBIA Assurance is based in significant part
on the reinsurance agreement between MBIA Corp. and MBIA Assurance and the net
worth maintenance agreement between the two parties. See "Business-Reinsurance."
Although MBIA Corp. intends to comply with the requirements of the
rating agencies, no assurance can be given that these requirements will not
change or that, even if MBIA Corp. complies with these requirements, one or more
rating agencies will not reduce or withdraw their rating. MBIA Corp.'s ability
to attract new business and to compete with other financial guarantors, and its
results of operations and financial condition would be materially adversely
affected by any reduction in its ratings.
CREDIT AGREEMENT
MBIA Corp. entered into a Credit Agreement, dated as of December 29,
1989, which has been amended from time to time (the "Credit Agreement"), to
provide MBIA Corp. with an unconditional, irrevocable line of credit. The line
of credit is available to be drawn upon by MBIA Corp., in an amount up to $900
million, after MBIA Corp. has incurred, during the period commencing October
29,1999 and ending October 31, 2006, cumulative losses (net of any recoveries)
in excess of $900 million or 4.00% of average annual debt service. The
obligation to repay loans made under the Credit Agreement is a limited recourse
obligation of MBIA Corp. payable solely from, and secured by a pledge of,
recoveries realized on defaulted insured obligations, from certain pledged
installment premiums and other collateral. Borrowings under the Credit Agreement
are repayable on the expiration date of the Credit Agreement. The current
expiration date of the Credit Agreement is October 31, 2006, subject to annual
extensions under certain circumstances. The Credit Agreement contains covenants
that, among other things, restrict MBIA Corp.'s ability to encumber assets or
merge or consolidate with another entity.
EMPLOYEES
As of March 16, 2000, the Company had 775 employees. No employee is
covered by a collective bargaining agreement. The Company considers its employee
relations to be satisfactory.
EXECUTIVE OFFICERS
The executive officers of the Company and their present ages and
positions with the Company are set forth below.
<TABLE>
<CAPTION>
NAME AGE POSITION AND TERM OF OFFICE
---- --- ---------------------------
<S> <C> <C>
Joseph W. Brown, Jr. 51 Chairman and Chief Executive Officer (officer since January 1999)
Richard L. Weill 57 Vice President (officer since 1989)
Neil G. Budnick 45 Chief Financial Officer and Treasurer (officer since 1992)
John B. Caouette 55 Vice President (officer since February, 1998)
Gary C. Dunton 44 President (officer since January, 1998)
Ram D. Wertheim 45 General Counsel (officer since January, 2000)
Kevin D. Silva 46 Vice President (officer since 1995)
Ruth M. Whaley 44 Chief Risk Officer (officer since 1999)
</TABLE>
23
<PAGE> 25
Joseph W. Brown, Jr. is Chairman and Chief Executive Officer of the
Company (effective January 7, 1999) and a director of MBIA Corp. Prior to
joining the Company in January 1999, Mr. Brown was Chairman of the Board of
Talegen Holdings, Inc.
Richard L. Weill is Vice President of the Company and a director of
MBIA Corp. From 1989 through 1991, Mr. Weill was General Counsel and Corporate
Secretary of the Company. Mr. Weill was previously a partner with the law firm
of Kutak Rock, with which he had been associated from 1969 to 1989.
Kevin D. Silva is Vice President of the Company and a director of MBIA
Corp. He has been in charge of the Management Services Division of MBIA Corp.
since joining the Company in late 1995.
Neil G. Budnick is Chief Financial Officer and a director of MBIA Corp.
Mr. Budnick has been primarily involved in the insurance operations area of MBIA
Corp. since joining the Company in 1983.
John B. Caouette is Vice President of the Company and a director of
MBIA Corp. Mr. Caouette was, until February of 1998, the Chairman and Chief
Executive Officer of CapMAC Holdings Inc.
Gary C. Dunton is President of the Company and a director of MBIA Corp.
Mr. Dunton was, prior to joining the Company as an officer, a director of the
Company and President of the Family and Business Insurance Group, USF&G
Insurance.
Ram D. Wertheim is General Counsel of the Company and a director of
MBIA Corp. From February of 1998 until January, 2000, he served in various
capacities in the Company's Structured Finance Division. Mr. Wertheim was, until
February of 1998, the General Counsel of CapMAC Holdings Inc
Ruth M. Whaley is the Chief Risk Officer of the Company and a director
of MBIA Corp.. She was, until February of 1998, the Chief Underwriting Officer
of CapMAC Holdings Inc.
ITEM 2. PROPERTIES
MBIA Corp. owns the 157,500 square foot office building on
approximately 15.5 acres of property in Armonk, New York, in which the Company
and MBIA Corp. have their headquarters. The Company is completing the
construction of a 105,000 square foot addition to the Armonk property at an
estimated cost of $35.0 million. The Company also has rental space in New York,
New York, San Francisco, California, Paris, France, Madrid, Spain and Sydney,
Australia. The Company believes that these facilities are adequate and suitable
for its current needs.
ITEM 3. LEGAL PROCEEDINGS
In the normal course of operating its businesses, the Company may be
involved in various legal proceedings. There are no material lawsuits pending
or, to the knowledge of the Company, threatened, to which the Company or any of
its subsidiaries is a party.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
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<PAGE> 26
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The information concerning the market for the Company's Common Stock
and certain information concerning dividends appears under the heading
"Shareholder Information" on the inside back cover of the Company's 1999 Annual
Report to Shareholders and is incorporated herein by reference. As of March 16,
2000, there were 955 shareholders of record of the Company's Common Stock. The
information concerning dividends on the Company's Common Stock is under
"Business - Regulation" in this report.
ITEM 6. SELECTED FINANCIAL DATA
The information under the heading "Selected Financial and Statistical
Data" as set forth on pages 32-33 of the Company's 1999 Annual Report to
Shareholders is incorporated by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information under the heading "Management's Discussion and Analysis
of Financial Condition and Results of Operations" as set forth on pages 34-41 of
the Company's 1999 Annual Report to Shareholders is incorporated by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
See the information under the heading "Market Risk" in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" as set
forth on page 41 of the Company's 1999 Annual Report to Shareholders which is
incorporated by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company, the Report of
Independent Accountants thereon by PricewaterhouseCoopers LLP and the unaudited
"Quarterly Financial Information" are set forth on pages 42-62 of the Company's
1999 Annual Report to Shareholders and are incorporated by reference.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors is set forth under "Election of
Directors" in the Company's Proxy Statement, dated March 30, 2000, which is
incorporated by reference.
Information regarding executive officers is set forth under Item 1,
"Business - Executive Officers," in this report.
25
<PAGE> 27
ITEM 11. EXECUTIVE COMPENSATION
Information regarding compensation of the Company's executive officers
is set forth under "Compensation of Executive Officers" in the Company's Proxy
Statement, dated March 30, 2000, which is incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners
and management is set forth under "Election of Directors" and "Security
Ownership of Certain Beneficial Owners" in the Company's Proxy Statement, dated
March 30, 2000, which is incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding relationships and related transactions is set
forth under "Certain Relationships and Related Transactions" in the Company's
Proxy Statement dated March 30, 2000, which is incorporated by reference.
PART IV
ITEM 14.
(a) Financial Statements and Financial Statement Schedules and
Exhibits.
1. Financial Statements
MBIA Inc. has incorporated by reference from the 1999 Annual Report to
Shareholders the following consolidated financial statements of the Company:
<TABLE>
<CAPTION>
Annual Report to Shareholders
Page(s)
<S> <C>
MBIA INC. AND SUBSIDIARIES
Report of independent accountants. 42
Consolidated balance sheets as of December 31, 1999 and 43
1998.
Consolidated statements of income for the years ended 44
December 31, 1999, 1998 and 1997.
Consolidated statements of changes in shareholders' 45
equity for the years ended December 31, 1999, 1998 and
1997.
Consolidated statements of cash flows for the years 46
ended December 31, 1999, 1998 and 1997.
Notes to consolidated financial statements. 47-62
</TABLE>
2. Financial Statement Schedules
The following financial statement schedules are filed as part of
this report.
<TABLE>
<CAPTION>
Schedule Title
-------- -----
<S> <C>
I Summary of investments, other than investments in related parties, as of December 31,
1999.
II Condensed financial information of Registrant for December 31, 1999, 1998 and 1997.
IV Reinsurance for the years ended December 31, 1999, 1998 and 1997.
</TABLE>
26
<PAGE> 28
The report of the Registrant's independent accountants with
respect to the above listed financial statement schedules is included with the
schedules.
All other schedules are omitted because they are not applicable
or the required information is shown in the consolidated financial statements or
notes thereto.
3. Exhibits
(An exhibit index immediately preceding the Exhibits indicates
the page number where each exhibit filed as part of this report can be
found.)
3. Articles of Incorporation and By-Laws.
3.1. Restated Certificate of Incorporation, dated August 17,
1990, incorporated by reference to Exhibit 3.1 of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1990 (Comm. File 1-9583) (the
"1990 10-K").
3.2. By-Laws as Amended as of March 19, 1998, incorporated by
reference to Exhibit 3.2 of the 1998 10-K.
10. Material Contracts
10.06. Amended and Restated Tax Allocation Agreement, dated as
of January 1, 1990, between the Company and MBIA Corp., incorporated by
reference to Exhibit 10.66 to the 1989 10-K, as supplemented by the Amended and
Restated Tax Allocation Agreement Supplement No. 1, dated as of August 31, 1999.
10.09. Rights Agreement, dated as of December 12, 1991,
between the Company and Mellon Bank, N.A., incorporated by reference to the
Company's Current Report on Form 8-K, filed on December 31, 1991, incorporated
by reference to Exhibit 10.62 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1993 (Comm. File No. 1-9583) (the "1993
10-K"), as amended by Amendment to Rights Agreement, dated as of October 24,
1994, incorporated by reference to Exhibit 10.49 to the 1994 10-K.
10.10. Trust Agreement, dated as of December 31, 1991, between
MBIA Corp. and Fidelity Management Trust Company, incorporated by reference to
Exhibit 10.64 to the 1992 10-K, as amended by the Amendment to Trust Agreement,
dated as of April 1, 1993, incorporated by reference to Exhibit 10.64 to the
1993 10-K, as amended by First Amendment to Trust Agreement, dated as of January
21, 1992, as further amended by Second Amendment to Trust Agreement, dated as of
March 5, 1992, as further amended by Third Amendment to Trust Agreement, dated
as of April 1, 1993, as further amended by the Fourth Amendment to Trust
Agreement, dated as of July 1, 1995, incorporated by reference to Exhibit 10.47
to the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1995 (Comm. File No. 1-9583) (the "1995 10-K"), as amended by Fifth
Amendment to Trust Agreement, dated as of November 1, 1995, as further amended
by Sixth Amendment to Trust Agreement, dated as of January 1, 1996, incorporated
by reference to Exhibit 10.46 to the 1996 10-K, further amended by Seventh
Amendment to Trust Agreement, dated as of October 15, 1997, incorporated by
reference to Exhibit 10.36 of the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997 (Comm. File No. 1-9583) (the "1997 10-K") as
further amended by the Eighth Amendment to Trust Agreement, dated as of January
1, 1998 and by the Ninth Amendment to Trust Agreement, dated as of March 1,
1999, incorporated by reference to Exhibit 10.10 to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1998 (Comm. File No. 1-9583)
(the "1998 10-K").
10.12. Indenture, dated as of August 1, 1990, between MBIA
Inc. and The First National Bank of Chicago, Trustee, incorporated by reference
to Exhibit 10.72 to the 1992 10-K.
10.13. First Restated Credit Agreement, dated as of October 1,
1993, among MBIA Corp., Credit Suisse, New York Branch, as Agent, Credit Suisse,
New York Branch, Caisse Des Depots Et Consignations, Deutsche Bank AG,
Bayerische Landesbank Girozentrale and Landesbank Hessen-Thuringen Girozentrale,
as amended by an Assignment and Assumption Agreement, dated as of December 31,
1993, among MBIA Corp., Credit Suisse, New York Branch, as Agent and Assignor
and Deutsche Bank AG, New York Branch, as further amended by a Modification
Agreement, dated as of January 1, 1994, among Deutsche Bank, AG, New York
Branch, MBIA Corp. and Credit Suisse, New York Branch, as Agent, as amended by a
Joinder Agreement, dated December 31,
27
<PAGE> 29
1993, among Credit Suisse, New York Branch, as Agent, Sudwestdeutsche Landesbank
Girozentrale and MBIA Corp., incorporated by reference to Exhibit 10.78 to the
1993 10-K, as amended by the First Amendment to First Restated Credit Agreement,
dated as of September 23, 1994, incorporated by reference to Exhibit 10.63 to
the 1994 10-K, as further amended by the Second Amendment to the First Restated
Credit Agreement, dated as of January 1, 1996, and as further amended by the
Third Amendment to the First Restated Credit Agreement, dated as of October 1,
1996, incorporated by reference to Exhibit 10.57 to the 1996 10-K, as further
amended and restated by the Second Amended and Restated Credit Agreement, dated
as of October 1, 1997, incorporated by reference to Exhibit 10.46 to the 1997
10-K, as further amended by the First Amendment to Second Amended and Restated
Credit Agreement, dated as of October 1, 1998, incorporated by reference to
Exhibit 10.13 to the 1998 10-K, as further amended and restated by the Second
Amendment to the Second Amended and Restated Credit Agreement, dated as of
October 29, 1999.
10.14. Net Worth Maintenance Agreement, dated as of November
1, 1991, between MBIA Corp. and MBIA Assurance S.A., as amended by Amendment to
Net Worth Agreement, dated as of November 1, 1991, incorporated by reference to
Exhibit 10.79 to 1993 10-K.
10.15. Reinsurance Agreement, dated as of January 1, 1993,
between MBIA Assurance S.A. and MBIA Corp., incorporated by reference to Exhibit
10.80 to the 1993 10-K.
10.17. Investment Services Agreement, effective as of April
28, 1995, between MBIA Insurance Corporation and MBIA Securities Corp., as
amended by Amendment No. 1, dated as of December 29, 1995, incorporated by
reference to Exhibit 10.65 to the 1995 10-K, as further amended by Amendment No.
2 to Investment Services Agreement, dated January 14, 1997, incorporated by
reference to Exhibit 10.53 to the 1997 10-K.
10.18. Investment Services Agreement, effective January 2,
1996, between MBIA Insurance Corp. of Illinois and MBIA Securities Corp.,
incorporated by reference to Exhibit 10.66 to the 1995 10-K.
10.21. Agreement and Plan of Merger among the Company, CMA
Acquisition Corporation and CapMAC Holdings Inc. ("CapMAC"), dated as of
November 13, 1997, incorporated by reference to the Company's Form S-4 (Reg. No.
333-41633) filed on December 5, 1997.
10.22. Amendment No. 1 to Agreement and Plan of Merger among
the Company, CMA Acquisition Corporation and CapMAC Holdings Inc. ("CapMAC"),
dated January 16, 1998, incorporated by reference to the Company's Post
Effective Amendment No. 1 to Form S-4 (Reg. No. 333-41633) filed on January 21,
1998.
10.30. Reinsurance Agreement, dated as of April 1, 1998,
between CapMAC and MBIA Corp., incorporated by reference to Exhibit 10.30 to the
1998 10-K.
10.31. Reinsurance Agreement, dated as of January 1, 1999,
between MBIA Illinois and MBIA Corp., incorporated by reference to Exhibit 10.31
to the 1998 10-K.
10.32. Agreement and Plan of Merger by and among the Company,
MBIA Acquisition, Inc. and 1838 Investment Advisors, Inc., dated as of June 19,
1998, incorporated by reference to Exhibit 10.32 to the 1998 10-K.
10.33. Credit Agreement (364 day agreement) among the Company,
MBIA Corp., various designated borrowers, various lending institutions, Deutsche
Bank AG, New York Branch, as Administrative Agent, The First National Bank of
Chicago, as Syndication Agent and Fleet National Bank, as Documentation Agent,
dated as of August 28, 1998, incorporated by reference to Exhibit 10.33 to the
1998 10-K.
10.34. Credit Agreement (5 year agreement) among the Company,
MBIA Corp., various designated borrowers, various lending institutions, Deutsche
Bank AG, New York Branch, as Administrative Agent, The First National Bank of
Chicago, as Syndication Agent and Fleet National Bank, as Documentation Agent,
dated as of August 28, 1998, incorporated by reference to Exhibit 10.34 to the
1998 10-K.
10.48. Ambac Assurance Corporation, AMBAC Insurance UK
Limited, MBIA Insurance Corporation, and MBIA Assurance S.A. Agreement Regarding
A Global Joint Venture, effective as of January 15, 1999, incorporated by
reference to Exhibit 10.48 to the 1998 10-K.
28
<PAGE> 30
10.49. Special Excess Of Loss Reinsurance Agreement, between
MBIA Insurance Corporation and/or MBIA Assurance S.A. and/or any other insurance
or reinsurance company subsidiaries of MBIA Inc. listed in Exhibit No. 1 and
Muenchener Rueckversicherungs-Gesellshaft, effective September 1, 1998,
incorporated by reference to Exhibit 10.49 to the 1998 10-K.
10.50. Second Special Per Occurrence Excess Of Loss
Reinsurance Agreement, between MBIA Insurance Corporation and/or MBIA Assurance
S.A. and/or any other insurance or reinsurance company subsidiaries of MBIA Inc.
listed in Exhibit No. 1 and AXA Re Finance S.A., effective September 1, 1998,
incorporated by reference to Exhibit 10.50 to the 1998 10-K.
Executive Compensation Plans and Arrangements
The following Exhibits identify all existing executive compensation
plans and arrangements:
10.01. MBIA Inc. 1987 Stock Option Plan, incorporated by
reference to Exhibit 10.13 to the 1987 S-1, as amended by the First Amendment to
the MBIA Inc. 1987 Stock Option Plan, effective June 1, 1995, as further amended
by the Second Amendment to the MBIA Inc. 1987 Stock Option Plan, effective as of
January 7, 1999, incorporated by reference to Exhibit 10.01 to the 1998 10-K.
10.02. MBIA Inc. Deferred Compensation and Excess Benefit
Plan, incorporated by reference to Exhibit 10.16 to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1988 (Comm. File No. 1-9583)
(the "1988 10-K"), as amended as of July 22, 1992, incorporated by reference to
Exhibit 10.15 to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1992 (Comm. File No. 1-9583) (the "1992 10-K").
10.03. MBIA Inc. Employees Pension Plan, amended and restated
effective January 1, 1987, incorporated by reference to Exhibit 10.28 of the
Company's Amendment No. 1 to the 1987 S-1, as further amended and restated as of
December 12, 1991, incorporated by reference to Exhibit 10.18 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1991 (Comm.
File No. 1-9583) (the "1991 10-K"), as further amended and restated effective
January 1, 1994, incorporated by reference to Exhibit 10.16 of the Company's
Annual Report on Form 10-K for fiscal year ended December 31, 1994 (Comm. File
No. 1-9583) (the "1994 10-K").
10.04. MBIA Inc. Employees Profit Sharing Plan, as amended and
restated effective January 1, 1987, incorporated by reference to Exhibit 10.29
to Amendment No. 1 to the 1987 S-1, as further amended by Amendment dated
December 8, 1988, incorporated by reference to Exhibit 10.21 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1989 (Comm.
File No. 1-9583) (the "1989 10-K"), as further amended and restated as of
December 12, 1991, incorporated by reference to Exhibit 10.19 to the 1991 10-K,
as further amended and restated as of May 7, 1992, incorporated by reference to
Exhibit 10.17 to the 1992 10K, as further amended and restated effective January
1, 1994, incorporated by reference to Exhibit 10.17 to the 1994 10-K.
10.05. MBIA Corp. Split Dollar Life Insurance Plan, dated as
of February 9, 1988, issued by Aetna Life Insurance and Annuity Company,
incorporated by reference to Exhibit 10.23 to the 1989 10-K.
10.11. MBIA Inc. Employees Change of Control Benefits Plan,
effective as of January 1, 1992, incorporated by reference to Exhibit 10.65 to
the 1992 10-K.
10.19. MBIA Inc. 1996 Incentive Plan, effective as of January
1, 1996, incorporated by reference to Exhibit 10.70 to the 1995 10-K.
10.20. MBIA Inc. 1996 Directors Stock Unit Plan, effective as
of December 4, 1996, incorporated by reference to Exhibit 10.70 to the 1996
10-K.
10.23. Employment Agreement, dated as of June 25, 1992,
between CapMAC Acquisition Corp. and John B. Caouette, incorporated by reference
to Exhibit 10.7 of CapMAC's Registration Statement on Form S-1 (Reg.
No. 33-982554), filed in 1992, as amended (the "CapMAC Form S-1").
29
<PAGE> 31
10.24. CapMAC Employee Stock Ownership Plan, incorporated by
reference to Exhibit 10.18 to the CapMAC Form S-1.
10.25. CapMAC Employee Stock Ownership Plan Trust Agreement,
incorporated by reference to Exhibit 10.19 to the CapMAC Form S-1, as amended by
Amendment No. 2 to the CapMAC Employee Stock Ownership Plan, executed December
22, 1998, incorporated by reference to Exhibit 10.25 to the 1998 10-K.
10.26. ESOP Loan Agreement by and between CapMAC and the ESOP
Trust dated as of June 25, 1992, incorporated by reference to Exhibit 10.20 to
the CapMAC Form S-1.
10.27. Deferred Compensation and Restricted Stock Agreement,
dated as of December 7, 1995, between John B. Caouette and CapMAC, incorporated
by reference to Exhibit 10.28 of the CapMAC Annual Report on Form 10-K for the
year ended December 31, 1995 (the "CapMAC 1995 10-K").
10.28. Deferred Compensation and Restricted Stock Agreement,
dated as of December 7, 1995, between Joyce S. Richardson and CapMAC,
incorporated by reference to Exhibit 10.35 of the CapMAC 1995 10-K.
10.29. Deferred Compensation and Restricted Stock Agreement,
dated as of December 7, 1995, between Ram D. Wertheim and CapMAC, incorporated
by reference to Exhibit 10.35 of the CapMAC 1995 10-K.
10.35. Retirement and Consulting Agreement, between the
Company and David H. Elliott, dated as of January 7, 1999 and Summary Retirement
and Consulting Agreement, between the Company and David H. Elliott, dated as of
January 7, 1999, incorporated by reference to Exhibit 10.35 to the 1998 10-K.
10.36. Terms of Employment letter between MBIA and Joseph W.
Brown, Jr., dated January 7, 1999, incorporated by reference to Exhibit 10.36 to
the 1998 10-K.
10.37. Stock Option Agreement between MBIA Inc. and Joseph W.
Brown, Jr., dated January 7, 1999, incorporated by reference to Exhibit 10.37 to
the 1998 10-K.
10.38. Key Employee Employment Protection Agreement between
MBIA Inc. and Joseph W. Brown, Jr., dated January 20, 1999, incorporated by
reference to Exhibit 10.38 to the 1998 10-K.
10.39. Key Employee Employment Protection Agreement between
MBIA Inc. and Neil G. Budnick, dated January 25, 1999, incorporated by reference
to Exhibit 10.39 to the 1998 10-K.
10.40. Key Employee Employment Protection Agreement between
MBIA Inc. and W. Thacher Brown, dated January 25, 1999, incorporated by
reference to Exhibit 10.40 to the 1998 10-K.
10.41. Key Employee Employment Protection Agreement between
MBIA Inc. and John B. Caouette, dated January 25, 1999, incorporated by
reference to Exhibit 10.41 to the 1998 10-K.
10.42. Key Employee Employment Protection Agreement between
MBIA Inc. and Gary C. Dunton, dated January 25, 1999, incorporated by reference
to Exhibit 10.42 to the 1998 10-K.
10.43. Key Employee Employment Protection Agreement between
MBIA Inc. and Louis G. Lenzi, dated January 25, 1999, incorporated by reference
to Exhibit 10.43 to the 1998 10-K.
10.44. Key Employee Employment Protection Agreement between
MBIA Inc. and Kevin D. Silva , dated January 25, 1999, incorporated by reference
to Exhibit 10.44 to the 1998 10-K.
10.45. Key Employee Employment Protection Agreement between
MBIA Inc. and Richard L. Weill, dated January 25, 1999, incorporated by
reference to Exhibit 10.45 to the 1998 10-K.
30
<PAGE> 32
10.46. Key Employee Employment Protection Agreement between
MBIA Inc. and Ruth M. Whaley, dated January 25, 1999, incorporated by
reference to Exhibit 10.46 to the 1998 10-K.
10.47. Key Employee Employment Protection Agreement between
MBIA Inc. and Michael J. Maguire, dated March 19, 1999, incorporated by
reference to Exhibit 10.47 to the 1998 10-K.
13. Annual Report to Shareholders of MBIA Inc. for fiscal year
ended December 31, 1999. Such report is furnished for the information of the
Commission only and, except for those portions thereof which are expressly
incorporated by reference in this Annual Report on Form 10-K, is not to be
deemed filed as part of this report.
21. List of Subsidiaries
23. Consent of PricewaterhouseCoopers LLP
27. Financial Data Schedule
99. Additional Exhibits - MBIA Corp. GAAP Financial Statements
(b) Reports on Form 8-K: The Company filed no report on Form
8-K in the fourth quarter of 1999.
31
<PAGE> 33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
MBIA Inc.
(Registrant)
/s/ Joseph W. Brown, Jr.
Dated: March 29, 2000 By ________________________________
Name: Joseph W. Brown, Jr.
Title: Chairman
Pursuant to the requirements of Instruction D to Form 10-K under the
Securities Exchange Act of 1934, this Report has been signed below by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Joseph W. Brown, Jr.
__________________________________________ Chairman and Director March 29, 2000
Joseph W. Brown, Jr.
/s/ Elizabeth B. Sullivan
__________________________________________ Vice President and March 29, 2000
Elizabeth B. Sullivan Controller
/s/ David H. Elliott
__________________________________________ Director March 29, 2000
David H. Elliott
/s/ David C. Clapp
__________________________________________ Director March 29, 2000
David C. Clapp
/s/ Gary C. Dunton
__________________________________________ Director March 29, 2000
Gary C. Dunton
/s/ Claire L. Gaudiani
__________________________________________ Director March 29, 2000
Claire L. Gaudiani
</TABLE>
32
<PAGE> 34
<TABLE>
<S> <C> <C>
/s/ William H. Gray, III
__________________________________________ Director March 29, 2000
William H. Gray, III
/s/ Freda S. Johnson
__________________________________________ Director March 29, 2000
Freda S. Johnson
/s/ Daniel P. Kearney
__________________________________________ Director March 29, 2000
Daniel P. Kearney
/s/ James A. Lebenthal
__________________________________________ Director March 29, 2000
James A. Lebenthal
/s/ John A. Rolls
__________________________________________ Director March 29, 2000
John A. Rolls
/s/ Richard L. Weill
__________________________________________ Director March 29, 2000
Richard L. Weill
</TABLE>
33
<PAGE> 35
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES
TO THE BOARD OF DIRECTORS MBIA INC.:
Our audits of the consolidated financial statements referred to in our report
dated February 3, 2000 appearing in the 1999 Annual Report to Shareholders of
MBIA Inc. (which report and consolidated financial statements are incorporated
by reference in this Annual Report on Form 10-K) also included an audit of the
financial statement schedules listed in Item 14(a)(2) of this Form 10-K. In our
opinion, these financial statement schedules present fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
-------------------------------
PricewaterhouseCoopers LLP
New York, New York
February 3, 2000
<PAGE> 36
SCHEDULE I
MBIA INC. AND SUBSIDIARIES
SUMMARY OF INVESTMENTS, OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1999
(In thousands)
- --------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D
AMOUNT AT WHICH
FAIR SHOWN IN THE
TYPE OF INVESTMENT COST VALUE BALANCE SHEET
- --------------------------------------------------------------------------------
FIXED-MATURITIES
Bonds:
United States Treasury
and Government
agency obligations $ 478,651 $ 474,274 $ 474,274
State and municipal
obligations 3,586,328 3,461,619 3,461,619
Corporate and other
obligations 4,664,721 4,500,549 4,500,549
Mortgage-backed 1,641,009 1,617,371 1,617,371
------------- ------------ ---------------
Total fixed-maturities 10,370,709 10,053,813 10,053,813
SHORT-TERM INVESTMENTS 493,739 XXXXXXX 493,739
OTHER INVESTMENTS 151,761 XXXXXXX 146,038
------------- ------------ ---------------
Total investments $11,016,209 XXXXXXX $10,693,590
============= ============ ===============
<PAGE> 37
SCHEDULE II
MBIA INC. (PARENT COMPANY)
CONDENSED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
------------------ ------------------
ASSETS
<S> <C> <C>
Investments:
Municipal investment agreement portfolio
held as available-for-sale at fair value
(amortized cost $3,917,335 and $2,685,882) $3,832,370 $2,737,874
------------------ ------------------
Total investments 3,832,370 2,737,874
Cash and cash equivalents 21,289 5,177
Securities borrowed or purchased under
agreements to resell 385,171 648,281
Investment in and amounts due from
wholly-owned subsidiaries 4,284,732 4,542,945
Accrued investment income 33,514 24,900
Receivables for investments sold 21,915 15,439
Other assets 41,819 9,774
------------------ ------------------
Total assets $8,620,810 $7,984,390
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Municipal investment agreements $3,063,050 $2,055,225
Municipal repurchase agreements 811,288 632,409
Long-term debt 674,114 673,996
Securities loaned or sold under
agreements to repurchase 412,749 683,352
Deferred income taxes --- 18,818
Payable for investments purchased 83,602 65,757
Dividends payable 20,406 19,897
Other liabilities 42,500 42,719
------------------ ------------------
Total liabilities 5,107,709 4,192,173
------------------ ------------------
Shareholders' Equity:
Preferred stock, par value $1 per share;
authorized shares - 10,000,000;
issued and outstanding shares - none --- ---
Common stock, par value $1 per share;
authorized shares - 200,000,000;
issued shares - 100,072,846 and 99,569,625 100,073 99,570
Additional paid-in capital 1,191,108 1,169,192
Retained earnings 2,486,478 2,246,221
Accumulated other comprehensive income (loss),
net of deferred income tax provision (benefit)
of $(112,920) and $157,410 (224,511) 288,915
Unallocated ESOP shares (4,363) (4,044)
Unearned compensation - restricted stock (9,986) (6,807)
Treasury stock - 520,722 shares in 1999 and
21,717 shares in 1998 (25,698) (830)
------------------ -----------------
Total shareholders' equity 3,513,101 3,792,217
------------------ -----------------
Total liabilities and shareholders' equity $8,620,810 $7,984,390
================== =================
</TABLE>
THE CONDENSED FINANCIAL STATEMENTS SHOULD BE READ IN
CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
THERETO AND THE ACCOMPANYING NOTES.
<PAGE> 38
SCHEDULE II
MBIA INC. (PARENT COMPANY)
CONDENSED STATEMENTS OF INCOME
(In thousands)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------------------------
1999 1998 1997
------------- ------------- --------------
<S> <C> <C> <C>
Revenues:
Net investment income $188,826 $ (178) $ (909)
Net realized losses (8,639) --- ---
Investment management
services income 12,733 4,553 4,469
Investment management
services realized gains 1,185 4,253 202
------------- ------------- --------------
Total revenues 194,105 8,628 3,762
------------- ------------- --------------
Expenses:
Interest expense 52,857 38,875 34,762
Operating expenses 135,737 67,252 4,304
------------- ------------- --------------
Total expenses 188,594 106,127 39,066
------------- ------------- --------------
Gain (loss) before income taxes
and equity in earnings
of subsidiaries 5,511 (97,499) (35,304)
Benefit for income taxes (17,617) (13,888) (12,444)
------------- ------------- --------------
Gain (loss) before equity in
earnings of subsidiaries 23,128 (83,611) (22,860)
Equity in earnings of subsidiaries 297,402 516,339 428,470
------------- ------------- --------------
Net income $320,530 $432,728 $405,610
============= ============= ==============
</TABLE>
THE CONDENSED FINANCIAL STATEMENTS SHOULD BE READ IN
CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
THERETO AND THE ACCOMPANYING NOTES.
<PAGE> 39
SCHEDULE II
MBIA INC. (PARENT COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 320,530 $ 432,728 $ 405,610
Adjustments to reconcile net income
to net cash provided by
operating activities:
Equity in undistributed
earnings of subsidiaries (297,402) (516,339) (387,970)
Net realized (gains) losses on
sales of investments 7,454 (4,253) (202)
Benefit for deferred income taxes (52) (30) ---
Other, net 1,364 27,823 297
----------- ----------- -----------
Total adjustments to net income (288,636) (492,799) (387,875)
----------- ----------- -----------
Net cash provided (used) by
operating activities 31,894 (60,071) 17,735
----------- ----------- -----------
Cash flows from investing activities:
Purchase of fixed-maturity
securities (4,776,543) --- ---
Sale of fixed-maturity securities 4,767,905 --- ---
Sale of short-term investments --- 2,300 3,898
Purchases for municipal investment
agreement portfolio, net of payable
for investments purchased (2,541,312) (2,351,385) (1,264,882)
Sales from municipal investment
agreement portfolio, net of receivable
for investments sold 1,324,531 1,707,407 845,365
Contributions to subsidiaries (3,178) (17,616) (93,666)
Advances to subsidiaries, net 135,690 (62,085) (96,597)
----------- ----------- -----------
Net cash used by investing activities (1,092,907) (721,379) (605,882)
----------- ----------- -----------
Cash flows from financing activities:
Net proceeds from issuance of
common stock --- --- 127,775
Net proceeds from issuance
of long-term debt --- 197,113 98,880
Net repayment from retirement of
short-term debt --- (20,000) (9,100)
Dividends paid (79,764) (85,667) (76,743)
Purchase of treasury stock (24,698) --- ---
Proceeds from issuance of municipal
investment and repurchase agreements 2,547,714 2,065,200 1,499,080
Payments for drawdowns of
municipal investment agreements (1,373,250) (1,306,389) (1,195,939)
Securities loaned or sold under
agreements to repurchase, net (7,493) (98,229) 133,300
Exercise of stock options 14,616 30,708 14,372
----------- ----------- -----------
Net cash provided by financing activities 1,077,125 782,736 591,625
----------- ----------- -----------
Net increase in cash and
cash equivalents 16,112 1,286 3,478
Cash and cash equivalents
-beginning of year 5,177 3,891 413
----------- ----------- -----------
Cash and cash equivalents
-end of year $ 21,289 $ 5,177 $ 3,891
=========== =========== ===========
Supplemental cash flow disclosures:
Income taxes paid $ 149 $ 618 $ 1,568
Interest paid:
Long-term debt 52,338 39,499 32,953
Short-term debt --- 1,057 2,017
</TABLE>
THE CONDENSED FINANCIAL STATEMENTS SHOULD BE READ IN CONJUNCTION WITH
THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO AND THE
ACCOMPANYING NOTES.
<PAGE> 40
SCHEDULE II
MBIA INC. (PARENT COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. CONDENSED FINANCIAL STATEMENTS
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these
condensed financial statements be read in conjunction with the Company's
consolidated financial statements and the notes thereto.
2. SIGNIFICANT ACCOUNTING POLICIES
The Parent company carries its investments in subsidiaries under the equity
method.
3. DIVIDENDS FROM SUBSIDIARIES
In 1999, MBIA Corp. declared and paid dividends of $180,000,000 to MBIA
Inc. Also in 1999, MBIA Asset Management Corp. declared and paid dividends
of $9,000,000 to MBIA Inc. No dividends were paid by MBIA Corp. to MBIA
Inc. in 1998 and 1997. In 1997 MBIA Investment Management Corp. declared
and paid dividends of $40,500,000 to MBIA Inc.
4. OBLIGATIONS UNDER MUNICIPAL INVESTMENT AND REPURCHASE AGREEMENTS
The municipal investment and repurchase agreement business, as described in
footnotes 2 and 17 to the consolidated financial statements of MBIA Inc.
and Subsidiaries (which are incorporated by reference in the 10-K), is
conducted by both the Registrant and its wholly owned subsidiary, MBIA
Investment Management Corp.
<PAGE> 41
SCHEDULE IV
MBIA INC. AND SUBSIDIARIES
REINSURANCE
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND
1997 (In thousands)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
PERCENTAGE
INSURANCE GROSS CEDED TO OTHER ASSUMED FROM OF AMOUNT
PREMIUMS WRITTEN AMOUNT VALUE OTHER COMPANIES NET AMOUNT ASSUMED TO NET
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1999 $590,597 $171,256 $34,274 $453,615 7.6%
---- -------- -------- ------- -------- ----
1998 $664,269 $156,064 $12,781 $520,986 2.5%
---- -------- -------- ------- -------- ----
1997 $635,660 $116,526 $18,188 $537,322 3.4%
---- -------- -------- ------- -------- ----
</TABLE>
<PAGE> 42
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS
TO
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
COMMISSION FILE NO. 1-9583
MBIA INC.
<PAGE> 43
EXHIBIT INDEX
10.06. Amended and Restated Tax Allocation Agreement, dated as
of January 1, 1990, between the Company and MBIA Corp., incorporated by
reference to Exhibit 10.66 to the 1989 10-K, as supplemented by the Amended and
Restated Tax Allocation Agreement Supplement No. 1, dated as of August 31, 1999.
10.13. First Restated Credit Agreement, dated as of October 1,
1993, among MBIA Corp., Credit Suisse, New York Branch, as Agent, Credit Suisse,
New York Branch, Caisse Des Depots Et Consignations, Deutsche Bank AG,
Bayerische Landesbank Girozentrale and Landesbank Hessen-Thuringen Girozentrale,
as amended by an Assignment and Assumption Agreement, dated as of December 31,
1993, among MBIA Corp., Credit Suisse, New York Branch, as Agent and Assignor
and Deutsche Bank AG, New York Branch, as further amended by a Modification
Agreement, dated as of January 1, 1994, among Deutsche Bank, AG, New York
Branch, MBIA Corp. and Credit Suisse, New York Branch, as Agent, as amended by a
Joinder Agreement, dated December 31, 1993, among Credit Suisse, New York
Branch, as Agent, Sudwestdeutsche Landesbank Girozentrale and MBIA Corp.,
incorporated by reference to Exhibit 10.78 to the 1993 10-K, as amended by the
First Amendment to First Restated Credit Agreement, dated as of September 23,
1994, incorporated by reference to Exhibit 10.63 to the 1994 10-K, as further
amended by the Second Amendment to the First Restated Credit Agreement, dated as
of January 1, 1996, and as further amended by the Third Amendment to the First
Restated Credit Agreement, dated as of October 1, 1996, incorporated by
reference to Exhibit 10.57 to the 1996 10-K, as further amended and restated by
the Second Amended and Restated Credit Agreement, dated as of October 1, 1997,
incorporated by reference to Exhibit 10.46 to the 1997 10-K, as further amended
by the First Amendment to Second Amended and Restated Credit Agreement, dated as
of October 1, 1998, incorporated by reference to Exhibit 10.13 to the 1998 10-K,
as further amended and restated by the Second Amendment to the Second Amended
and Restated Credit Agreement, dated as of October 29, 1999.
13. Annual Report to Shareholders of MBIA Inc. for fiscal year
ended December 31, 1999. Such report is furnished for the information of the
Commission only and, except for those portions thereof which are expressly
incorporated by reference in this Annual Report on Form 10-K, is not to be
deemed filed as part of this report.
21. List of Subsidiaries
23. Consent of PricewaterhouseCoopers LLP
27. Financial Data Schedule
99. Additional Exhibits - MBIA Corp. GAAP Financial Statements
<PAGE> 1
EXHIBIT 10.6
AMENDED AND RESTATED
TAX" ALLOCATION AGREEMENT
SUPPLEMENT NO. I
This Supplement, dated as of the 31st day of August, 1999, is by and among MBIA
Inc., a Connecticut stock insurance company ("P"), MBIA Insurance Corporation
("Corp."), a New York corporation, and a subsidiary of Corp., MBIA Insurance
Corp, of Illinois ("MBIA Illinois"), an Illinois corporation.
WITNESSETH:
WHEREAS, P and Corp. originally entered into a Tax Allocation Agreement (the
"Agreement") dated as of January 1, 1987, subsequently amended and restated as
of January 1, 1990, attached hereto as Exhibit A; and
WHEREAS, the fourth WHEREAS clause in the Agreement extends the Agreement to
Corp.'s present and future subsidiaries; and
WHEREAS, MBIA Illinois is a wholly-owned subsidiary of Corp.; and
WHEREAS, MBIA Illinois is required to be in compliance with all applicable
Illinois laws and regulations and therefore must add certain provisions to the
Agreement;
NOW, THEREFORE, IT IS AGREED AS FOLLOWS:
1. Pursuant to 50 Ill. Adm. Code 942, and only with respect to MBIA Illinois:
Settlements will be no later than thirty (30) days after the filing of the
return, unless a refund is due from a taxing authority, in which case the
settlement may be thirty (30) days after receipt of the refund from the taxing
authority.
2. Pursuant to 50 Ill. Adm. Code 942. and only with respect to MBIA Illinois:
All settlements must be in the form of cash or securities eligible for
investment under the Illinois Insurance Code.
IN WITNESS WHEREOF, the parties have caused this Supplement to be executed by
their duly authorized officers, effective as of August 31st 1999.
MBIA INC.
By: Gary C. Dunton President
MBIA INSURANCE CORPORATION
By: Gary c. Dunton, President
MBIA INSURANCE CORP. OF ILLINOIS
By: Richard L. Weill, President
<PAGE> 1
SECOND AMENDMENT
to
SECOND AMENDED AND RESTATED CREDIT AGREEMENT
among
MBIA INSURANCE CORPORATION
(MBIA)
THE BANKS SIGNATORY HERETO
RABOBANK NEDERLAND
New York Branch
as Administrative Agent
and
DEUTSCHE BANK AG
New York Branch
as Documentation Agent
Dated as of October 29, 1999
<PAGE> 2
SECOND AMENDMENT
THIS SECOND AMENDMENT, dated as of October 29,1999 (this "Amendment"), between
MBIA INSURANCE CORPORATION, a New York stock insurance corporation ("MBIA"), the
financial institutions which have executed this Amendment below as Banks (as
defined below), COOPERATIEVE CENTRALE RAIFFEISEN-BOERENLEENBANK B.A. "RABOBANK
NEDERLAND", New York Branch ("Rabobank"), as Administrative Agent for the Banks
(in such capacity, the "Administrative Agent") and individually as a Bank, and
DEUTSCHE BANK AG, New York Branch, as Documentation Agent for the Banks (in such
capacity, together with the Administrative Agent, the "Agents") and individually
as a Bank;
WHEREAS, the parties hereto are parties to the Second Amended and Restated
Credit Agreement, dated as of October 1, 1997, as amended by the First Amendment
thereto dated as of October 1, 1998 and as further modified by certain
Assignment and Assumption Agreements (as defined therein) (as so amended and
modified, the "Credit Agreement"); and
WHEREAS, the parties hereto desire, upon the terms and subject to the conditions
hereinafter set forth, to extend the Expiration Date (as defined below) and to
otherwise modify the Credit Agreement in certain respects;
NOW, THEREFORE, in consideration of the mutual promises contained herein and
other valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto, intending to be legally bound hereby, agree as
follows:
ARTICLE I
MODIFICATIONS TO LOAN DOCUMENTS
Section 1. 1. Defined Terms. Except as otherwise specified herein, terms used in
this Amendment and defined in Exhibit A of the Credit Agreement shall have the
meanings provided in such Exhibit A.
Section 1.2. Amendment. (a) The definition of the term "Expiration Date"
contained in Exhibit A to the Credit Agreement is hereby amended and restated to
read in its entirety as follows:
"'Expiration Date' shall mean the date on which the right to obtain Loans
terminates, initially October 31, 2006, as such date may be extended pursuant to
Section 3.3."
(b) The definition of the term "Loan Commencement Event" contained in Exhibit A
to the Credit Agreement is hereby amended and restated to read in its entirety
as follows:
"'Loan Commencement Event' shall mean the time at which Cumulative Losses for
the current Commitment Period first exceed the aggregate Pledged Recoveries
received by MBIA during the current Commitment Period by an amount equal to the
greater of (a) the highest Maximum Commitment at any time during the such
Commitment Period and (b) four percent (4%) of Average Annual Debt Service on
the Covered Portfolio."
Section 1.3 Commitments. The aggregate Commitments of the Banks are hereby
increased pursuant to Section 10.8(d) of the Credit Agreement and further
amended so that, from and after October 29, 1999 until the termination or
further modification thereof as provided in the Credit Agreement, such
Commitments shall be as set forth on Schedule I to this Amendment.
Section 1.4 Amendment to Security Agreement Each Bank and the Administrative
Agent hereby consent to an amendment to the Security Agreement which will
provide that the definition of the term "Special Event of Default" contained
therein be amended and restated to read in its entirety as follows:
"'Special Event of Default' means any of (i) any Event of Default described in
clause (i) of paragraph (a) of Section 7.1 of the Credit Agreement in respect of
principal of or interest on the Loans or the Notes, (ii) any MBIA Event of
Insolvency, or (iii) if MBIA shall have incurred Cumulative Losses during the
current Commitment Period of more than the greater of (A) 50% of the highest
Maximum Commitment at any time during the current Commitment Period (or, if the
last Commitment Period has expired, at any time during such Commitment Period),
and (B) 2% of Average Annual Debt Service on the Covered Portfolio, any failure
of MBIA to perform or observe the covenant contained in Section 6.8 of the
Credit Agreement."
ARTICLE 2
CONDITIONS PRECEDENT
.Section 2.1. Conditions Precedent to Amendment Effective Date. The provisions
of Article I hereof shall become effective as of October 29, 1999 when this
Amendment shall have been executed and delivered by MBIA, each Agent and
consented to by each Bank and when the following conditions have been fulfilled
to the reasonable satisfaction of the Agents. If such conditions shall not have
been satisfied on or prior to November 19, 1999, the provisions of Article I
shall not be given effect unless otherwise consented to by the Agents and the
Majority Banks, but otherwise this Amendment shall remain in full force and
effect.
(a) There shall exist no Default or Event of Default, and all representations
and warranties made by MBIA herein or in any of the Loan Documents shall be true
and correct with the same effect as though such representations and warranties
had been made at and as of such time.
(b) The Administrative Agent shall have received each of the following, in form
and substance satisfactory to the Administrative Agent:
<PAGE> 3
(i) a certificate of any two of the President, Vice Chairman, Managing Director,
any Vice President or the Treasurer of MBIA to the effect that the conditions
set forth in Section 2. 1 (a) hereof have been satisfied and that no
governmental filings, consents and approvals are necessary to be secured by MBIA
in order to permit the borrowing under the Credit Agreement, as modified hereby,
the grant of the Lien under the Security Agreement and the execution, delivery
and performance in accordance with their respective terms of this Amendment and
the other Loan Documents and the consummation of the transactions contemplated
hereby and thereby, each of which shall be in full force and effect;
(ii) copies of the duly adopted resolutions of the Board of Directors of MBIA,
or an authorized committee thereof, authorizing the execution, delivery and
performance in accordance with their respective terms of this Amendment and the
other documents to be executed and delivered by MBIA described herein
(collectively, the "Amendment Documents"), accompanied by a certificate of the
Secretary or an Assistant Secretary of MBIA stating as to (A) the effect that
such resolutions are in full force and effect, (B) the incumbency and signatures
of the officers signing the Amendment Documents on behalf of MBIA, and (C) the
effect that, from and after October 1, 1998, there has been no amendment,
modification or revocation of the articles of incorporation or by-laws of MBIA;
(iii) opinions of the General Counsel of MBIA and Kutak Rock, MBIA's counsel,
each dated October 29, 1999, which are substantially to the effect set forth in
the forms attached hereto as, respectively, Exhibits A and B; and
(iv) such other documents, instruments, approvals (and, if reasonably requested
by the Administrative Agent or the Majority Banks, duplicates or executed copies
thereof certified by an appropriate governmental official or an authorized
officer of MBIA) or opinions as the Administrative Agent or the Majority Banks
may reasonably request.
(c) The Administrative Agent shall have received reasonably satisfactory
evidence that long-term obligations insured by MBIA are publicly assigned a
rating of Aaa by Moody's and AAA by S&P by reason of such insurance.
(d) The Bank Fee Letter shall have been modified in a manner satisfactory to
MBIA and the Agents and consented to by all of the Banks.
(e) Each Bank which is becoming a party to the Credit Agreement or which is
increasing its Commitment shall have received a Note or an additional Note dated
as of October 29, 1999, in a principal amount equal to the amount of its
Commitment or of the increase in its Commitment, as applicable.
(f) The Security Agreement shall have been amended as contemplated by Section
1.4 hereof.
(g) The currently effective Fronting Bank Supplements and related Fronting Bank
Notes and fee letters shall have been modified in a manner satisfactory to MBIA,
the Administrative Agent and each Fronting Bank affected by such modifications.
(h) All corporate and legal proceedings and all instruments in connection with
the transactions contemplated by this Amendment and the Loan Documents shall be
satisfactory in form and substance to the Administrative Agent and its counsel.
Section 2.2. Certificate as to Effective Date. A certificate of the Agents
delivered to MBIA stating that the provisions of Article I shall have become
effective shall be conclusive evidence thereof and shall be binding on MBIA,
each Agent and each Bank. In delivering such certificate, and without limiting
the general application of Section 8.8 or other provisions of Article 8 of the
Credit Agreement to the actions of the Agents hereunder, the Agents shall be
entitled to rely conclusively on the certificate of officers of MBIA delivered
pursuant to Section 2.1(b)(i) as to the satisfaction of the conditions set forth
in Section 2.1(a).
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
In order to induce the Agents and the Banks to enter into this Amendment and
proceed with the transaction contemplated hereby, MBIA makes the following
representations and warranties to the Agents and the Banks, which shall survive
the execution and delivery of this Amendment and the making of any Loans:
<PAGE> 4
Section 3.1. Due Authorization, Etc. The execution, delivery and performance by
MBIA of the Amendment Documents and the Loan Documents as amended thereby are
within its corporate powers, have been duly authorized by all necessary
corporate action and do not and will not (i) violate any provision of any law,
rule, regulation (including, without limitation, the New York Insurance Law, the
Investment Company Act of 1940, as amended, or Regulations T, U or X of the
Board of Governors of the Federal Reserve System), order, writ, judgment,
injunction, decree, determination or award presently in effect having
applicability to MBIA or of the corporate charter or by-laws of MBIA, (ii)
result in a breach of or constitute a default under any indenture or loan or
credit agreement or any other agreement, lease or instrument to which MBIA is a
party or by which it or its properties may be bound or affected, or (iii) result
in, or require, the creation or imposition of any Lien upon or with respect to
any of the properties now owned or hereafter acquired by MBIA (other than as
contemplated by the Loan Documents), other than, in the case of clauses (ii) and
(iii), breaches, defaults or Liens which could not materially and adversely
affect the business, assets, operations or financial condition of MBIA or the
ability of MBIA to perform its obligations under any Loan Document.
Section 3.2. Approvals. No consent, approval or other action by, or any notice
to or filing with any court or administrative or governmental body is or will be
necessary for the valid execution, delivery or performance by MBIA of the
Amendment Documents or the Loan Documents as amended thereby.
Section 3.3. Enforceability. Each Amendment Document and each Loan Document as
amended thereby constitutes a legal, valid and binding obligation of MBIA,
enforceable against MBIA in accordance with their respective terms, except as
such enforceability may be limited by bankruptcy, insolvency, moratorium or
other similar laws affecting the enforcement of creditors' rights generally and
the availability of equitable remedies, whether such matter is heard in a court
of law or a court of equity.
Section 3.4. Financial Statements, etc. (a) MBIA has heretofore furnished to the
Agents (1) the audited consolidated and unaudited consolidating balance sheets
of MBIA Inc. and its subsidiaries at December 31, 1998, the related audited
consolidated statements of income, changes in stockholders' equity and financial
position or cash flows, as the case may be, and unaudited consolidating
statements of income for the year ended December 31, 1998, and (ii) the
unaudited consolidated and consolidating balance sheets of MBIA Inc. and its
subsidiaries as of March 31 and June 30, 1999, and the related consolidated
statements of income, changes in stockholders' equity and cash flows for the
three months ended March 31, 1999, the six months ended June 30, 1999. Such
financial statements were prepared in accordance with generally accepted
accounting principles consistently applied and present fairly the consolidated
financial position and consolidated results of operations and cash flows of MBIA
Inc. and its subsidiaries and the financial position and results of operations
and cash flows of MBIA at the dates and for the periods indicated therein. There
has been no material adverse change in the consolidated financial position or
consolidated results of operations or cash flows of MBIA Inc. and its
subsidiaries taken as a whole or of MBIA since June 30, 1999.
(b) MBIA has heretofore furnished to the Agents its annual statements and its
financial statements as filed with the Department for the year ended December
31, 1998 and its quarterly statements and financial statements as filed with the
Department for the periods ended March 31, 1999 and June 30, 1999. Such annual
and quarterly statements and financial statements were prepared in accordance
with the statutory accounting principles set forth in the New York Insurance
Law, all of the assets described therein were the absolute property of MBIA at
the dates set forth therein, free and clear of any liens or claims thereon,
except as therein stated, and each such Annual Statement is a full and true
statement of all the assets and liabilities and of the condition and affairs of
MBIA as of such dates and of its income and deductions therefrom for the year or
quarter ended on such dates.
(c) MBIA has heretofore furnished to the Agents a copy of the annual report on
Form 10-K of MBIA Inc. for the fiscal year ended December 31, 1998, its
quarterly reports on Form 10-Q of MBIA Inc. for each of the quarters ended March
31, 1999 and June 30, 1999 and each current report on Form 8-K filed by MBIA
Inc. on or after January 1, 1999, each as filed with the Securities and Exchange
Commission. Such annual, quarterly and current reports were prepared in
accordance with the Securities Exchange Act of 1934, as amended, and the rules
and regulations promulgated thereunder.
Section 3.5. Covered Portfolio. Substantially all of the Insured Obligations in
the ,Covered Portfolio are insured by MBIA under Insurance Contracts in the form
or forms heretofore supplied to the Agents in accordance with MBIA's
underwriting criteria as heretofore disclosed to the Agents, and in MBIA's
reasonable judgment such Insured Obligations represent an overall risk of loss
(based on all factors including without limitation investment quality and
geographical and market diversification) which is not materially greater than
the risk of loss represented by all of MBIA's Insured Obligations as of the date
hereof.
Section 3.6. Confirmation of Representations and Warranties. MBIA hereby
confirms that its representations and warranties set forth in the Credit
Agreement (including without limitation those set forth in Article 5 of the
Restated Credit Agreement) are true and correct as of the date hereof.
Section 3.7. Disclosure. There is no fact known to MBIA which materially
adversely affects the business, assets, operations or financial condition of
MBIA or the ability of MBIA to perform its obligations under any Amendment
Document or any Loan Document as amended thereby which has not been set forth in
this Amendment, in the financial statements or reports required to be delivered
pursuant to Section 3.4 hereof
ARTICLE 4
MISCELLANEOUS
Section 4.1. Credit Agreement. Except as expressly modified as contemplated
hereby, the Credit Agreement and the other Loan Documents are hereby confirmed
to be in full force and effect in accordance with their respective terms. This
Amendment is intended by the parties to constitute an amendment and modification
to, and otherwise to constitute a continuation of, the Credit Agreement and the
Loan Documents, and is not intended by any party and shall not be construed to
constitute a novation thereof or of any Debt of MBIA hereunder.
<PAGE> 5
Section 4.2. Survival. All covenants, agreements, representations and warranties
made herein or in any Loan Document or in any certificate, document or
instrument delivered pursuant hereto or thereto shall survive the effective date
hereof, the making of any Loan and the occurrence of the Expiration Date and
shall continue in full force and effect so long as principal of or interest on
any Loan, Note or Fronting Bank Note remains outstanding or unpaid, any other
amount payable by MBIA under the Credit Agreement as amended hereby, any Note,
Fronting Bank Note or any other Loan Document remains unpaid or any other
obligation of MBIA to perform any other act hereunder or under the Credit
Agreement as amended hereby, any Note, Fronting Bank Note or any other Loan
Document remains unsatisfied or the Banks have any obligation to make a Loan or
any other advance of moneys to MBIA under the Credit Agreement as amended
hereby.
Section 4.3. Severability Any provision of this Amendment which is prohibited,
unenforceable or not authorized in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition, unenforceability
or nonauthorization without invalidating the remaining provisions hereof or
affecting the validity, enforceability or legality of such provision in any
other jurisdiction.
Section 4.4. Successors and Assigns. This Amendment is a continuing obligation
and binds, and the benefits hereof shall inure to, the parties hereto and their
respective successors and assigns; provided that MBIA may not transfer or assign
any or all of its rights or obligations hereunder except as permitted by Section
10.8 of the Credit Agreement.
Section 4.5. Amendments. No provision of this Amendment shall be waived, amended
or supplemented except as provided in Section 10.12 of the Credit Agreement.
Section 4.6. Governing Law. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED
IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
Section 4.7. Headings. Section headings in this Amendment are included herein
for convenience or reference only and shall not constitute a part of this
Amendment for any other purpose.
Section 4.8. Counterparts. This Amendment may be executed in several
counterparts, each of which shall be regarded as the original and all of which
shall constitute one and the same Amendment.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly
executed and delivered by their respective officers thereunto duly authorized as
of the date first above written.
MBIA INSURANCE CORPORATION
By
Name: Neil G. Budnick
Title: Vice Chairman and
Chief Financial Officer
<PAGE> 6
COOPERATIEVE CENTRALE RAIFFEISEN-BOERENLEENBANK B.A. "RABOBANK NEDERLAND", New
York Branch, as Administrative Agent and as a Bank
By
Name: Angela R. Reilly
Title: Vice President
By
Name: Robert S. Bucklin
Title: Chief Corporate Banking Officer
DEUTSCHE BANK AG, New York Branch, as Documentation Agent and as a Bank
By
Name: John S. McGill
Title: Director
By
Name: Clinton M. Johnson
Title: Managing Director
<PAGE> 7
SCHEDULE I
TO SECOND AMENDMENT
BANKS. ADDRESSES AND COMMITMENTS
<TABLE>
<CAPTION>
Name and Notice Address of Bank Commitment
<S> <C>
Banco Santander Central Hispano S.A., $ 20,000,000
New York Branch
45 East 53rd Street
New York, NY 10022
Attn: Shailesh Deshpande
Bank of America, NA $ 65,000,000
231 South LaSalle Street
Chicago, IL 60697
Attn: Joan D'Amico
The Bank of New York $ 40,000,000
Insurance Division
1 Wall Street, 17th Floor
New York, NY 10286
Attn: Louis DiFranco
The Bank of Nova Scotia $ 25,000,000
One Liberty Plaza
New York, NY 10006
Attn: Brian Allen
Bayerische Landesbank Girozentrale, $ 50,000,000
New York Branch
560 Lexington Avenue, 17th Floor
New York, NY 10022
Attn: Scott Allison
CDC Financial Products, Inc. 50,000,000
9 West 57th Street - 36th Floor
New York, NY 10019
Attn: David L. Askren, Senior VP
The Chase Manhattan Bank $ 25,000,000
270 Park Avenue, 20th Floor
New York, NY 10017
Attn: Robert Foster
Commonwealth Bank of Australia, $ 25,000,000
New York Branch
599 Lexington Avenue
New York, NY 10022
Attn: Patrick Hildreth
Credit Local de France, New York Agency $ 10,000,000
450 Park Avenue, 3rd Floor
New York, NY 10022
Attn: James Beck
Credit Suisse First Boston, New York Branch $100,000,000
Eleven Madison Avenue
New York, NY 10010-3629
Attn: James Lee
Deutsche Bank AG, New York Branch $100,000,000
Deutsche Bank Securities Inc.
31 West 52nd Street
New York, NY 10019
Attn: John McGill
DGZoDekaBank Deutsche Kommunalbank $ 25,000,000
International Finance Department
Taunusanlage 10
D-60329 Frankfurt am Main
GERMANY
Attn: Stephan Wagner
</TABLE>
<PAGE> 8
<TABLE>
<CAPTION>
Name and Notice Address of Bank Commitment
<S> <C>
Bank One, NA $ 10,000,000
153 West 51st Street
New York, NY 10019
Attn: Timothy Stambaugh
Fleet National Bank $ 40,000,000
777 Main Street, CT-MO 0250
Hartford, CT 06115
Attn: Elizabeth Shelley, VP
KBC Bank, N.V. $ 20,000,000
125 West 55th Street
New York, NY 100 19
Attn: Patrick Owens
Landesbank Hessen-Thuringen Girozentrale, $ 50,000,000
New York Branch
420 Fifth Avenue, 24th Floor
New York, NY 10018
Attn: John Sarno
Lloyds TSB Bank Plc $ 50,000,000
575 Fifth Avenue, 18th Floor
New York, NY 10017
Attn: Peter Kemick
Norddeutsche Landesbank Girozentrale, $ 20,000,000
New York Branch
1270 Avenue of the Americas, 14th Floor
New York, NY 10020
Attn: Stephanie Finneran
Westdeutsche Landesbank Girozentrale $ 50,000,000
New York Branch
1211 Avenue of the Americas
New York, NY 10036
Attn: Lillian Tung Lum, VP
Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A. $125,000,000
"Rabobank Nederland", New York Branch
245 Park Avenue, 37th Floor
New York, NY 10167
Attn: Angela R. Reilly
TOTAL $900,000,000
</TABLE>
<PAGE> 1
EXHIBIT 13
SELECTED FINANCIAL AND STATISTICAL DATA
MBIA Inc. and Subsidiaries
<TABLE>
<CAPTION>
Dollars in millions
except per share amounts 1999 1998 1997 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
GAAP SUMMARY
INCOME STATEMENT DATA:
Insurance:
Gross premiums written $ 625 $ 677 $ 654 $ 535 $ 406 $ 405 $ 504 $ 377
Premiums earned 443 425 351 294 244 241 249 169
Advisory fees 27 26 17 11 7 5 1 1
Net investment income 359 332 302 265 233 204 189 155
Net realized gains 24 30 17 10 13 10 11 10
Insurance operating income 515 643 530 453 385 360 353 260
Investment management
operating income (loss) 41 29 17 18 11 5 (1) (1)
Income before income taxes 388 565 525 448 375 347 339 249
NET INCOME 321 433 406 348 290 270 268 193
NET INCOME PER COMMON SHARE
BASIC 3.22 4.37 4.18 3.68 3.21 3.00 3.00 2.24
DILUTED 3.19 4.32 4.12 3.62 3.15 2.96 2.95 2.20
- ---------------------------------------------------------------------------------------------------------------------------
GAAP SUMMARY
BALANCE SHEET DATA:
Investments 10,694 10,080 8,908 8,008 6,937 5,069 3,735 2,701
Total assets 12,264 11,826 10,387 9,033 7,671 5,712 4,320 3,234
Deferred premium revenue 2,311 2,251 2,090 1,854 1,662 1,538 1,413 1,202
Loss reserves 467 300 105 72 50 47 37 28
Municipal investment and
repurchase agreements 4,513 3,485 3,151 3,259 2,642 1,526 493 --
Long-term debt 689 689 489 389 389 314 314 314
Shareholders' equity 3,513 3,792 3,362 2,761 2,497 1,881 1,761 1,533
Book value per share 35.34 38.15 34.09 28.98 27.02 20.92 19.77 17.19
Dividends declared per
common share 0.805 0.790 0.770 0.725 0.655 0.570 0.470 0.380
- ---------------------------------------------------------------------------------------------------------------------------
STATUTORY DATA:
Net income 522 510 404 335 287 229 263 194
Capital and surplus 2,413 2,290 1,952 1,661 1,469 1,250 1,124 1,044
Contingency reserve 1,739 1,451 1,188 959 788 652 561 419
- ---------------------------------------------------------------------------------------------------------------------------
Qualified statutory capital 4,152 3,741 3,140 2,620 2,257 1,902 1,685 1,463
Unearned premium reserve 2,376 2,324 2,193 1,971 1,768 1,640 1,484 1,248
Loss reserves 204 188 15 10 7 22 8 14
- ---------------------------------------------------------------------------------------------------------------------------
Total policyholders'
reserves 6,732 6,253 5,348 4,601 4,032 3,564 3,177 2,725
Present value of installment
premiums 732 644 537 443 347 249 234 211
Standby line of credit &
stop loss 1,075 900 900 775 700 650 625 550
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL CLAIMS-PAYING RESOURCES 8,539 7,797 6,785 5,819 5,079 4,463 4,036 3,486
- ---------------------------------------------------------------------------------------------------------------------------
FINANCIAL RATIOS:
GAAP
Loss ratio 44.8% 8.2% 9.1% 6.9% 5.6% 3.9% 3.5% 3.6%
Underwriting expense ratio 26.4 24.7 31.0 32.9 35.2 32.9 31.2 34.6
Combined ratio 71.2 32.9 40.1 39.8 40.8 36.8 34.7 38.2
Statutory
Loss ratio 12.3 8.0 1.2 1.7 0.4 8.7 (3.3) 2.3
Underwriting expense ratio 23.6 16.8 21.2 22.8 27.2 28.3 22.0 20.7
Combined ratio 35.9 24.8 22.4 24.5 27.6 37.0 18.7 23.0
NET DEBT SERVICE OUTSTANDING $635,883 $595,895 $513,736 $434,417 $359,175 $315,340 $273,630 $225,220
NET PAR AMOUNT OUTSTANDING $384,459 $359,472 $303,803 $252,896 $201,326 $173,760 $147,326 $114,317
- ---------------------------------------------------------------------------------------------------------------------------
Dollars in millions
except per share amounts 1991 1990
- -------------------------------------------------------
GAAP SUMMARY
INCOME STATEMENT DATA:
Insurance:
Gross premiums written $ 269 $ 211
Premiums earned 132 107
Advisory fees -- --
Net investment income 132 115
Net realized gains 3 --
Insurance operating income 207 181
Investment management
operating income (loss) (2) --
Income before income taxes 190 165
NET INCOME 145 127
NET INCOME PER COMMON SHARE
BASIC 1.89 1.68
DILUTED 1.87 1.66
- -------------------------------------------------------
GAAP SUMMARY
BALANCE SHEET DATA:
Investments 1,961 1,724
Total assets 2,438 2,159
Deferred premium revenue 1,019 902
Loss reserves 21 5
Municipal investment and
repurchase agreements -- --
Long-term debt 199 200
Shareholders' equity 1,063 932
Book value per share 13.79 12.17
Dividends declared per
common share 0.310 0.240
- -------------------------------------------------------
STATUTORY DATA:
Net income 149 127
Capital and surplus 647 579
Contingency reserve 316 261
- -------------------------------------------------------
Qualified statutory capital 963 840
Unearned premium reserve 1,044 926
Loss reserves 12 --
- -------------------------------------------------------
Total policyholders'
reserves 2,019 1,766
Present value of installment
premiums 151 134
Standby line of credit &
stop loss 500 500
- -------------------------------------------------------
TOTAL CLAIMS-PAYING RESOURCES 2,670 2,400
- -------------------------------------------------------
FINANCIAL RATIOS:
GAAP
Loss ratio 13.0% 4.7%
Underwriting expense ratio 30.1 33.7
Combined ratio 43.1 38.4
Statutory
Loss ratio 12.7 0.0
Underwriting expense ratio 20.4 23.4
Combined ratio 33.1 23.4
NET DEBT SERVICE OUTSTANDING $184,604 $ 157,707
NET PAR AMOUNT OUTSTANDING $ 90,043 $ 75,979
- -------------------------------------------------------
</TABLE>
(32 & 33)
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
MBIA Inc. and Subsidiaries
OVERVIEW
- --------
During 1999 we took decisive action to better position MBIA for long-term
profitable growth. These actions place us in a very strong position for the
future but they penalized our short-term financial results, a heavy but
necessary price for maintaining our leadership in the financial guarantee
industry. We instituted a more disciplined approach to pricing and risk
selection, strengthened our balance sheet, and more effectively managed our
capital position. We posted strong results in our insurance operations by
continuing to write high quality business with high margins and excellent
returns. We were very pleased by our investment management operations which had
a record year as assets under management grew to over $30 billion and operating
earnings grew 40 percent. Our long-term growth prospects across all of our
business lines, coupled with the significant actions taken in 1999 to build
shareholder value, will enable the company to return to its historical earnings
growth patterns. We expect to continue to maintain the leadership we established
in the financial guarantee business over the last 25 years.
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
- -----------------------------------------
Statements included in this Annual Report which are not historical or current
facts are "forward looking statements" made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1998. The words
"believe," "anticipate," "project," "plan," "expect," "intend," "will likely
result," or "will continue," and similiar 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;
* activity levels 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.
RESULTS OF OPERATIONS
- ---------------------
SUMMARY
Throughout 1999 our reported results were significantly affected by three
factors: an increase in our loss reserving factor; our increased use of
reinsurance for portfolio shaping; and, municipal services operating losses and
restructuring expenses. Although these factors resulted in growth rates well
below our targeted levels for all of our current year financial measures,
management does not believe these factors will depress our earnings growth rates
in 2000. The following chart presents highlights of our consolidated financial
results for 1999, 1998 and 1997. All of the amounts shown below and all of the
data contained in this report have been restated to reflect the 1998 mergers
with CapMAC Holdings, Inc. (CapMAC) and 1838 Investment Advisors, Inc. (1838),
which have been accounted for as "poolings of interests."
Percent Change
--------------
1999 1998
vs. vs.
1999 1998 1997 1998 1997
- ----------------------------------------------------------------------------
Net income (in millions):
As reported $321 $433 $406 (26)% 7%
Excluding one-
time charges $490 $482 $406 2% 19%
- ----------------------------------------------------------------------------
Per share data:*
Net income:
As reported $3.19 $4.32 $4.12 (26)% 5%
Excluding one-
time charges $4.88 $4.81 $4.12 1% 17%
Operating earnings $4.72 $4.58 $3.99 3% 15%
Core earnings $4.34 $4.19 $3.69 4% 14%
Book value $35.34 $38.15 $34.09 (7)% 12%
Adjusted book value $52.51 $53.28 $48.19 (1)% 11%
- ----------------------------------------------------------------------------
* All earnings per share calculations are diluted.
Core earnings, which exclude the effects of refundings and calls on our
insured issues, realized capital gains and losses on our investment portfolio
and nonrecurring charges, provide the most indicative measure of our underlying
profit. Core earnings per share at $4.34 for 1999 grew by only 4% over 1998,
following a 14% increase in 1998. Insurance operations, depressed by the
increase in the loss reserving factor and reinsurance activities, reported core
earnings growth of only 5% in 1999 compared to 19% last year. Core earnings
growth for 1999 was
(34)
<PAGE> 3
also depressed by operating losses related to our municipal services segment. On
the positive side our investment management services continued to contribute
significantly to core earnings growth with increases of 40% and 70% over 1998
and 1997, respectively.
Our 1999 net income increased by 2% excluding one-time charges, or by 1% on
a per share basis. In 1998 net income increased by 19% excluding one-time
charges, which translated to a 17% per share increase. Net income as reported
declined by 26% in 1999 over 1998, compared to a 7% increase in 1998 over 1997.
Operating earnings per share, which exclude the impact of realized gains
and losses and one-time charges, increased by 3% and 15% for 1999 and 1998,
respectively.
Our book value at year-end 1999 was $35.34 per share, down 7% from $38.15
at year-end 1998. The 7% decrease was primarily the result of a decline in the
fair value of our fixed-income portfolios resulting from rising interest rates,
the increase in our loss reserving factor, increased use of reinsurance for
portfolio shaping and the municipal services operating losses and restructuring
costs. A more appropriate measure of a financial guarantee company's intrinsic
value is its adjusted book value. It is defined as book value plus the after-tax
effects of net deferred premium revenue, net of deferred acquisition costs, the
present value of unrecorded future installment premiums, and the unrealized
gains or losses on investment contract liabilities. The following table presents
the components of our adjusted book value per share:
Percent Change
--------------
1999 1998
vs. vs.
1999 1998 1997 1998 1997
- -----------------------------------------------------------------------------
Book value $35.34 $38.15 $34.09 (7)% 12%
After-tax value of:
Net deferred premium
revenue, net of deferred
acquisition costs 10.83 10.91 10.45 (1)% 4%
Present value of future
installment premiums* 4.78 4.21 3.54 14% 19%
Unrealized gain on
investment contract
liabilities 1.56 0.01 0.11 n/m (91)%
- -----------------------------------------------------------------------------
Adjusted book value $52.51 $53.28 $48.19 (1)% 11%
- -----------------------------------------------------------------------------
* The discount rate used to present value future installment premiums was 9%.
Our adjusted book value per share was $52.51 at year-end 1999, a 1% decline
from year-end 1998 following 11% growth in the preceding year. The 1999 decline
reflected the same factors that impacted book value, as discussed above, but was
mitigated by the 14% growth in the present value of future installment premiums.
FINANCIAL GUARANTEE INSURANCE
In 1999 our top line results reflected a more profitable relationship between
adjusted gross premiums (AGP) and par value written for the period. AGP is
composed of our upfront premiums as well as the estimated present value of
current and future premiums from installment-based insurance policies issued in
the period. AGP was down 13%, while total par written was down 23%. This means
that we received more premium for insuring less par value. This is indicative of
price improvements across our whole book and is consistent with our strategy to
improve profitability on the business written. Furthermore, we did not sacrifice
credit quality to capture high prices. The average credit rating on new business
in each of our insurance divisions continued to improve. Our highlights this
year included increased profitability, as measured by higher returns on new
business written and greater economic value added to the business. As industry
leader, MBIA maintained a conservative 9% discount rate when calculating AGP,
and still continued to lead in terms of AGP market share at 37% for 1999, 46%
for 1998 and 52% for 1997. Gross premiums written (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. MBIA's production in terms of AGP, GPW and par written for the
last three years is presented in the following table:
Percent Change
--------------
1999 1998
vs. vs.
1999 1998 1997 1998 1997
- ------------------------------------------------------------------------------
Premiums written: (In millions)
AGP $724 $832 $741 (13)% 12%
GPW $625 $677 $654 (8)% 4%
Par written (In billions): $92 $119 $96 (23)% 24%
- ------------------------------------------------------------------------------
We estimate the present value of our total future installment premium stream on
outstanding policies to be $732 million at year-end 1999, compared with $644
million at year-end 1998 and $537 million at year-end 1997.
(35)
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
MUNICIPAL MARKET Although AGP for 1999 was down 13% compared with the same
period last year, the insured market was down 27%, indicative of our better than
market performance. Par value written declined 38% in 1999 compared with a 21%
increase in 1998. The greater decline in par written compared with the AGP once
again exemplifies the positive effects of our pricing discipline. Records were
set in 1999 on overall expected portfolio return as well as on the net present
value of business added. Issues rated A and above remained over 80% for the
second year in a row and the capital charge was the lowest it has been for many
years. MBIA continued to lead the industry in terms of market share for both AGP
and insured par. Domestic new issue municipal market information and MBIA's par
and premium writings in both the new issue and secondary domestic municipal
markets are shown in the following table:
Percent Change
--------------
1999 1998
vs. vs.
Domestic Municipal 1999 1998 1997 1998 1997
- -----------------------------------------------------------------------------
Total new issue market:*
Par value (in billions) $196 $255 $194 (23)% 32%
Insured penetration 53% 55% 54%
MBIA market share 26% 36% 42%
MBIA insured:
Par written (in billions) $36 $58 $48 (38)% 21%
Premiums (in millions):
AGP $362 $416 $440 (13)% (5)%
GPW $338 $405 $435 (17)% (7)%
- -----------------------------------------------------------------------------
* 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.
STRUCTURED FINANCE MARKET For the year AGP was up 9% after a record increase of
15% in 1998. For 1999 par value written was $46 billion, which is comparable
with last year. Once again the increase in AGP while par written remained flat
is indicative of our increased pricing discipline. In 1999, 55% of the business
written was rated A or better with a substantial portion rated Triple-A before
our guarantee. During 1999 we offset the reduction in mortgage related business
with increased business from other asset classes such as auto, manufactured
housing, and lease transactions. During the year, as in the domestic municipal
sector, we set records for both the internal rate of return on new business
written and the amount of net present value generated by this business. Despite
the fact that we used a higher discount rate (9%) than others in the industry,
we continued to lead in terms of AGP market share at 32% for 1999, 44% for 1998
and 49% for 1997.
The details regarding the asset-backed market and MBIA's par and premium
writings in both the domestic new issue and secondary structured finance markets
are shown in the table below:
Percent Change
--------------
1999 1998
Domestic vs. vs.
Structured Finance 1999 1998 1997 1998 1997
- -----------------------------------------------------------------------------
Total asset-backed market:*
Par value (in billions) $191 $167 $175 14% (5)%
MBIA insured:
Par written (in billions) $46 $46 $38 -- 21%
Premiums (in millions):
AGP $209 $191 $166 9% 15%
GPW $143 $126 $102 14% 24%
- -----------------------------------------------------------------------------
*Market data exclude mortgage-backed securities and private placements.
INTERNATIONAL MARKET The MBIA-AMBAC International joint venture just completed
its fifth year of operation and boasted a scorecard of impressive results. The
joint venture has the largest, most accomplished group of global credit analysts
in the industry, and since 1995, its AGP compound annual growth rate has
exceeded 71%. Many emerging market countries in the Asia-Pacific region remained
volatile in 1999, dampening our risk appetite for new business in these areas.
Instead, we focused on Australia and New Zealand, where stable socio-political
environments and strong sovereign ratings provided a good platform for Triple-A
guarantees. Potential for future business within Japan remains significant, and
we continued to invest the resources necessary to handle what we expect will be
a stable flow of business. To that end, in 1998, MBIA and Ambac formed a
four-way joint venture with Tokyo-based Yasuda Fire and Marine and Mitsui Marine
and Fire. To date, this alliance has yielded a growing pipeline of business as
we continue to lay the groundwork for the future. Also, in 1999 deals were done
in seven European countries.
AGP was down by 38% for the year against an extraordinary result in 1998.
International business is volatile and results will vary from year to year. Par
written was down 29% for the year. Almost 60% of international business insured
in 1999 was rated A or better, substantially stronger than the book we insured
in 1998. This, rather than pricing, accounts for the weakening of the AGP to par
insured ratio. Our share of international AGP was approximately 32% for the
year, despite using a higher discount rate than the industry. Future flow deals
were by far the biggest asset class in 1999, accounting for over 40% of the AGP
written by the joint venture. Collateralized bond/loan obligations volume was
also strong, followed by credit derivatives, which were new to
(36)
<PAGE> 5
MBIA Inc. and Subsidaries
the joint venture this year, and utilities. Our company's municipal and
structured finance international business volume in the new issue and secondary
markets for the last three years is illustrated as follows:
Percent Change
--------------
1999 1998
vs. vs.
International 1999 1998 1997 1998 1997
- -----------------------------------------------------------------------------
Par written (in billions) $8 $11 $5 (29)% 120%
Premiums (in millions):
AGP $117 $189 $105 (38)% 79%
GPW $117 $112 $91 4% 23%
- -----------------------------------------------------------------------------
REINSURANCE Premiums ceded to reinsurers from all insurance operations were $171
million, $156 million and $117 million in 1999, 1998 and 1997, respectively.
Cessions as a percentage of GPW increased to 27% in 1999 from 23% in 1998, and
18% for 1997. The increase in our cession rate was largely driven by portfolio
shaping, as we focused on reducing large single risks. These reinsurance
activities have had a positive impact and are consistent with our emphasis on a
strong balance sheet. The ratio of insured debt service outstanding to our
statutory capital base ended the year at 153:1, the lowest level in our history.
In addition, we were freeing up capacity to write additional business in the
mortgage/home equity sector. Going forward we expect our cession rate to return
to a rate between 17% and 20% of new writings.
At year-end 1999, 98% of our outstanding ceded exposure is with reinsurers
who are rated Double-A or higher by S&P, or Single-A or higher by A. M. Best Co.
Although we remain liable for all reinsured risks, we are confident that we will
recover the reinsured portion of any losses, should they occur.
PREMIUMS EARNED 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 1999 premiums earned from scheduled amortization increased by
only 6% because of the increased usage of reinsurance. In 1998 premiums earned
grew by 19%, primarily due to strong growth in new premiums written from
international and structured finance installment business.
Refunded premiums earned declined slightly in 1999 after a large increase
in 1998, reflecting the increases in the interest rate environment. We expect
the level of refundings for the industry and MBIA to be significantly less in
2000 than 1999 due to the 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. The composition of
MBIA's premiums earned in terms of its scheduled and refunded components is
illustrated below:
Percent Change
--------------
1999 1998
vs. vs.
In millions 1999 1998 1997 1998 1997
- -----------------------------------------------------------------------------
Premiums earned:
Scheduled $379 $357 $300 6% 19%
Refunded 64 68 51 (6)% 33%
- -----------------------------------------------------------------------------
Total $443 $425 $351 4% 21%
- -----------------------------------------------------------------------------
INVESTMENT INCOME Our insurance-related investment income (exclusive of capital
gains) increased to $359 million in 1999, up from $332 million in 1998 and $302
million in 1997. These increases were primarily due to the growth of cash flow
available for investment. Our cash flows were generated from operations, the
compounding of previously earned and reinvested investment income and the
addition of funds from financing activities. Insurance-related net realized
capital gains were $24 million in 1999, $30 million in 1998 and $17 million in
1997. These realized gains were generated as a result of ongoing management of
the investment portfolio.
ADVISORY FEES The company collects fee revenues in conjunction with certain
structured finance transactions. Certain fees are deferred and earned over the
life of the related transactions. In 1999 advisory fee revenues increased by 5%
reflecting an increase in non-deferred fee revenue. The large 53% increase in
1998 fee revenue reflected the high volume of both our structured finance and
international deals.
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 necessarily based on estimates, and
there can be no assurance that any ultimate liability will not exceed such
estimates.
(37)
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
In 1999 we completed an update of our loss reserving methodology. The
update included an analysis of loss-reserve factors based on the latest
available industry data. We included the analysis of historical default and
recovery experience for the relevant sectors of the fixed-income market. Also
factored in was the changing mix of our book of business. The study resulted in
an increase in our company's current loss reserving factors and a one-time
charge of $153 million to incorporate the new factors on the existing insured
portfolio. This key action clearly demonstrated our continued total commitment
to strengthening our balance sheet and Triple-A franchise.
The following table shows the case-specific, reinsurance recoverable and
unallocated components of our total loss and LAE reserves at the end of the last
three years, as well as our loss provision for the last three years:
Percent Change
--------------
1999 1998
vs. vs.
In millions 1999 1998 1997 1998 1997
- -----------------------------------------------------------------------------
Case-specific:
Gross $235 $219 $27 8% 690%
Reinsurance recoverable
on unpaid losses 31 30 2 3% n/m
- -----------------------------------------------------------------------------
Total case reserves $204 $189 $25 8% 648%
Unallocated 232 81 78 185% 5%
- -----------------------------------------------------------------------------
Net loss and LAE reserves $436 $270 $103 62% 162%
Provision $198 $35 $32 472% 9%
- -----------------------------------------------------------------------------
OPERATING EXPENSES Expenses related to the production of our insurance business
(policy acquisition costs) are deferred and recognized over the period in which
the related premiums are earned. Our company's policy acquisition costs, general
operating expenses and total insurance operating expenses, as well as related
expense ratios, are shown below:
Percent Change
--------------
1999 1998
vs. vs.
In millions 1999 1998 1997 1998 1997
- -----------------------------------------------------------------------------
Policy acquisition costs, net $37 $35 $35 6% --
Operating 80 70 74 14% (5)%
- -----------------------------------------------------------------------------
Total insurance
operating expenses $117 $105 $109 11% (4)%
Expense ratio:
GAAP 26.4% 24.7% 31.0%
Statutory 23.6% 16.8% 21.2%
- -----------------------------------------------------------------------------
For 1999, policy acquisition costs, net of deferrals, increased slightly to $37
million, or 6% over 1998. This compared with $35 million in 1998 and 1997. The
ratio of policy acquisition costs, net of deferrals, to earned premiums has
remained steady at 8% in 1999 and 1998, compared with 10% in 1997. This
improvement in the ratio can be attributed to combining the portfolios of MBIA
and CapMAC, as it relates to the amortization of expense deferrals. Going
forward we expect the ratio to remain in the 8% range.
Operating expenses increased by 14% in 1999 following a decrease of 5% in
1998. The increase in 1999 was the result of expanded international operations.
Financial guarantee insurance companies also use the statutory expense
ratio (expenses before deferrals as a function of net premiums written) as a
measure of expense management. The increase in our statutory expense ratio for
1999 primarily reflects the decline in premium volume for the year.
INSURANCE INCOME In 1999 MBIA's insurance income declined to $539 million or 20%
from $673 million in 1998. This decline reflects the increased loss provision
mentioned previously, and the increased use of reinsurance. Excluding these
factors insurance income increased by 8%. In 1998 insurance income increased 23%
over 1997, reflecting strong revenue growth in the structured and international
businesses.
INVESTMENT MANAGEMENT SERVICES
In 1998 after our merger with 1838, we formed a holding company, MBIA Asset
Management Corporation, to consolidate the resources and capabilities of our
four investment management services. The success of our merger with 1838 showed
immediate operating benefits, and all of our investment management franchises
experienced record performances in 1998. Continuing in this vein, in 1999
operating income increased by 40% and gains in assets under management were
across the board, with all units showing strong growth. We ended the year with
over $30 billion in assets under management, a record, up 24% from a year ago.
The table below summarizes our consolidated investment management results over
the last three years:
Percent Change
--------------
1999 1998
vs. vs.
In millions 1999 1998 1997 1998 1997
- -----------------------------------------------------------------------------
Revenues $87 $65 $50 33% 30%
Expenses 46 36 33 28% 9%
- -----------------------------------------------------------------------------
Operating income 41 29 17 40% 70%
Realized gains 1 14 3 (92)% 315%
- -----------------------------------------------------------------------------
Income $42 $43 $20 (3)% 111%
- -----------------------------------------------------------------------------
(38)
<PAGE> 7
MBIA Inc. and Subsidiaries
MBIA Asset Management Corporation is comprised of 1838, MBIA Municipal Investors
Service Corporation (MBIA-MISC), MBIA Investment Management Corp. (IMC) and MBIA
Capital Management Corp. (CMC). The following provides a summary of each of
these businesses:
1838 is a full-service asset management firm with a strong institutional focus.
It manages over $11 billion in equity, fixed-income and balanced portfolios for
a client base comprised of municipalities, endowments, foundations, corporate
employee benefit plans and high-net-worth individuals. In 1999 assets under
management were up 57% compared with 32% growth in 1998. 1838 recorded superior
performance during the year in its large-cap equity product, which was 660 basis
points ahead of the market at year-end, and its international results were 1445
basis points ahead of the EAFE index. With these performance records, we are
expecting strong growth in 2000.
MBIA-MISC provides cash management, investment fund administration and
fixed-rate investment placement services directly to local governments and
school districts. In late 1996, MBIA-MISC acquired American Money Management
Associates, Inc. (AMMA), which provides investment and treasury management
consulting services for municipal and quasi-public-sector clients. Both
MBIA-MISC and AMMA are Securities and Exchange Commission (SEC)-registered
investment advisers and at year-end had $6.6 billion in assets under management,
up 7% over 1998's $6.2 billion.
IMC provides state and local governments with tailored investment agreements for
bond proceeds and other public funds, such as construction, loan origination,
capitalized interest and debt service reserve funds. At year-end 1999, principal
and accrued interest outstanding on investment and repurchasing agreements was
$4.5 billion, compared with $3.5 billion at year-end 1998. At amortized cost,
the assets supporting IMC's investment agreements were at $4.6 billion and $3.5
billion at year-end 1999 and 1998, 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 year-end 1999, our exposure to derivative financial instruments was
not material.
CMC is an SEC-registered investment adviser and National Association of
Securities Dealers member firm. CMC specializes in fixed-income management for
institutional funds and provides investment management services for IMC's
investment agreements, MBIA-MISC's municipal cash management programs and MBIA's
insurance related portfolios. By year-end 1999, CMC's third party assets under
management increased by 79% over year-end 1998.
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 undertook a strategic review of this business
segment, and as a result, took decisive actions to strengthen the balance sheet,
to reorganize and streamline continuing operations, and to dispose of
non-strategic operations.
As part of this review, the company performed an evaluation of its
investment in Capital Asset Holdings, Ltd. (Capital Asset). Included in one-time
corporate charges for 1999 is a $102 million pretax charge which reflects a
second-quarter write-down of the carrying value of MBIA's investment in Capital
Asset and the value of the loans provided by MBIA to Capital Asset. During the
third quarter of 1999, Capital Asset executed a securitization transaction
whereby it sold substantially all of its remaining tax liens. Proceeds from this
transaction were used to extinguish an existing warehouse financing facility,
which had been guaranteed by the company. This securitization was the third in a
series of such securitizations, and the notes issued in connection therewith
have been insured by MBIA Insurance Corp. As of December 31, 1999, the aggregate
net par outstanding under these insurance policies is $383 million. During the
fourth quarter of 1999, the company engaged a specialty servicing concern to
oversee the management of Capital Asset, whose activities are now primarily
focused on the administration and servicing of portfolios of delinquent tax
liens and related assets.
During the third quarter of 1999, MBIA MuniServices Company sold its wholly
owned subsidiary MBIA MuniFinancial, recognizing a $3 million pretax loss on
disposition, which is recorded in one-time corporate charges.
The company also completed its reorganization of the operations of the two
remaining subsidiaries, Municipal Tax Bureau (MTB) and Municipal Resource
Consultants (MRC). With this reorganization largely 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,
(39)
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
collections/recovery, enforcement and information (data) services. During 1998,
the company recorded reorganization-related charges totaling $26 million
consisting of the write-off of goodwill and other asset impairments (such as
accounts receivable).
CORPORATE
INTEREST EXPENSE In 1999, 1998 and 1997, respectively, we incurred $54 million,
$45 million and $39 million of interest expense. The increases in interest
expense reflect our long-term debt financings of $50 million in November 1998,
$150 million in September 1998 and $100 million in July 1997.
OTHER EXPENSES Other expenses are composed primarily of non-insurance goodwill
amortization and corporate expenses. In 1999 other expenses were $21 million
compared with $11 million in 1998 and $8 million in 1997. The 1999 increase was
due primarily to corporate expenses incurred during the reorganization of our
municipal services businesses.
In 1998 and 1997, other expenses also included the breakeven activities of
MBIA & Associates Consulting, Inc., which was established in 1997 to provide
assistance to state and local governments, colleges and universities, and
international public- and private-sector clients seeking to strengthen their
strategic financial planning and management capabilities.
ONE-TIME CORPORATE CHARGES As discussed above, one-time corporate charges for
1999 include a $102 million charge which reflects the write-down of the carrying
value of MBIA's investment in Capital Asset and the value of the loans provided
by MBIA to Capital Asset. Also included in one-time corporate charges for 1999
is a $3 million pretax loss on the sale of MuniFinancial. In 1998, one-time
corporate charges included $49 million related to our mergers with CapMAC and
1838, and $26 million related to the reorganization of our municipal services
business.
TAXES
Our tax policy is to optimize our after-tax income by maintaining the
appropriate mix of taxable and tax-exempt investments. However, we will see our
tax rate fluctuate from time-to-time as we manage our investment portfolio on a
total return basis. Our effective tax rate for 1999 has decreased to 17.4% from
23.4% in 1998 and 22.8% in 1997. For 1999 our tax provision is net of the
benefit resulting from the one-time corporate charges discussed previously, as
well as the benefit from the one-time increase to the loss reserve. Excluding
these benefits our effective tax rate has declined marginally over 1998.
CAPITAL RESOURCES
- -----------------
We carefully manage our capital resources to optimize our cost of capital while
maintaining appropriate claims-paying resources to sustain our Triple-A
claims-paying ratings. At year-end 1999, our total shareholders' equity was $3.5
billion, with total long-term borrowings at $689 million. We use debt financing
to lower our overall cost of capital, thereby increasing our return on
shareholders' equity. We maintain debt at levels we consider to be prudent based
on our cash flow and total capital. The following table shows our long-term debt
and the ratio we use to measure it:
1999 1998 1997
- -------------------------------------------------------------------
Long-term debt (in millions) $689 $689 $489
Long-term debt to total capital 16% 15% 13%
- -------------------------------------------------------------------
In addition, our insurance company has a $900 million irrevocable standby line
of credit facility with a group of major Triple-A Rated banks to provide funds
for the payment of claims in the event that severe losses should occur. The
agreement is for a seven-year term, which expires on October 31, 2006, and,
subject to approval by the banks, may be renewed annually to extend the term to
seven years beyond the renewal date. Our insurance company also maintains
stop-loss reinsurance coverage of $175 million in excess of incurred losses of
$700 million.
From time to time we access the capital markets to support the growth of
our businesses. In November 1998 we issued $50 million of 40-year notes, in
September 1998 we issued $150 million of 30-year debentures and in July 1997 we
raised $126 million of equity and issued $100 million of 30-year debentures.
As of year-end 1999, total claims-paying resources for our insurance
company stood at $8.5 billion, a 10% increase over 1998.
LIQUIDITY
- ---------
Cash flow needs at our 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 our insurance
company, which generates substantial cash flow from premium writings and
investment income. In 1999, operating cash flow was $443 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
(40)
<PAGE> 9
MBIA Inc. and Subsidiaries
policyholders' surplus. In 1999 our insurance company declared and paid $180
million of dividends and at year-end 1999 had dividend capacity in excess of $61
million without special regulatory approval.
Our company has significant liquidity supporting its businesses. At
year-end 1999, cash equivalents and short-term investments totaled $368 million.
Should significant cash flow reductions occur in any of our businesses, for any
combination of reasons, we have additional alternatives for meeting ongoing cash
requirements. They include, among other things, selling or pledging our
fixed-income investments from our investment portfolio, tapping existing
liquidity facilities and new borrowings.
Our company has substantial external borrowing capacity. We maintain two
short-term bank lines totaling $650 million with a group of worldwide banks. At
year-end 1999, there were no balances outstanding under these lines.
Our investment portfolio provides a high degree of liquidity since it is
comprised of readily marketable high-quality fixed-income securities and
short-term investments. At year-end 1999, the fair value of our consolidated
investment portfolio increased 6% to $10.7 billion, as shown below:
In millions 1999 1998 1999 vs. 1998
- ----------------------------------------------------------------
Insurance operations:
Amortized cost $6,427 $6,083 6%
Unrealized (loss) gain (223) 319 (170)%
- ----------------------------------------------------------------
Fair value $6,204 $6,402 3%
- ----------------------------------------------------------------
Municipal investment
agreements:
Amortized cost $4,584 $3,542 29%
Unrealized (loss) gain (94) 136 (169)%
- ----------------------------------------------------------------
Fair value $4,490 $3,678 22%
- ----------------------------------------------------------------
Total portfolio at
fair value $10,694 $10,080 6%
- ----------------------------------------------------------------
The growth of our insurance-related investments in 1999 was the result of
positive cash flows. The fair value of investments related to our municipal
investment agreement business increased 22% to $4.5 billion at year-end 1999
reflecting positive operations.
Our investment portfolios are considered to be available-for-sale, and the
differences between their fair value and amortized cost, net of applicable
taxes, are reflected as an adjustment to shareholders' equity. Differences
between fair value and amortized cost arise primarily as a result of changes in
interest rates occurring after a fixed-income security is purchased, although
other factors influence fair value, including credit-related actions, supply and
demand forces and other market factors. The weighted-average credit quality of
our fixed-income portfolios has been maintained at Double-A since our inception.
Since we generally intend to hold most of our investments to maturity as part of
our risk management strategy, we expect to realize a value substantially equal
to amortized cost.
MARKET RISK
- -----------
The fair values of some of our company's reported financial instruments are
subject to change as a result of potential interest rate movements. This
interest rate sensitivity can be estimated by projecting a hypothetical increase
in interest rates of 1.0%. Based on asset maturities and interest rates as of
year-end 1999, this hypothetical increase in interest rates would result in an
after-tax decrease in net fair value of our company's financial instruments of
$211 million. This projected change in fair value is primarily a result of our
company's "fixed-maturity securities" asset portfolio, which loses value with
increases in interest rates. Since our company is able and primarily expects to
hold the securities to maturity, it does not expect to recognize any adverse
impact to income or cash flows under the above scenario.
Our company's investment portfolio holdings are primarily U.S.
dollar-denominated fixed-income securities including municipal bonds, U.S.
government bonds, mortgage-backed securities, collateralized mortgage
obligations, corporate bonds and asset-backed securities. In modeling
sensitivity to interest rates for the taxable securities, U.S. treasury rates
are changed instantaneously by 1.0%. Tax-exempt securities are subjected to a
change in the Municipal Triple-A General Obligation curve that would be
equivalent to a 1.0% taxable interest rate change based on year-end
taxable/tax-exempt ratios. Simulation for tax-exempt securities is performed
treating securities on a duration-to-worst-case basis. For the liabilities
evaluation, where appropriate, the assumed discount rates used to estimate the
present value of future cash flows are increased by 1.0%.
YEAR 2000
- ---------
MBIA began the new year with no adverse effects related to Y2K computer issues.
Our company had completed the installation or re-engineering of three internally
designed "mission-critical" computer systems prior to the turn of the century;
so there was a strong degree of certainty that these systems would continue to
function appropriately. In addition, the readiness of certain ancillary computer
systems were brought into compliance as part of the Y2K initiative. In total, we
invested $2.0 million ($1.7 million in 1999) to assure the company's Y2K
readiness. This investment will enable us to leverage off the technical
knowledge gained.
(41)
<PAGE> 10
REPORT ON MANAGEMENT'S RESPONSIBILITY AND REPORT OF INDEPENDENT ACCOUNTANTS
MBIA Inc. and Subsidiaries
REPORT ON MANAGEMENT'S RESPONSIBILITY
- -------------------------------------
Management is responsible for the preparation, integrity and objectivity of the
consolidated financial statements and other financial information presented in
this annual report. The accompanying consolidated financial statements were
prepared in accordance with generally accepted accounting principles, applying
certain estimates and judgments as required.
MBIA's internal controls are designed to provide reasonable assurance as to
the integrity and reliability of the financial statements and to adequately
safeguard, verify and maintain accountability of assets. Such controls are based
on established written policies and procedures and are implemented by trained,
skilled personnel with an appropriate segregation of duties. These policies and
procedures prescribe that MBIA and all its employees are to maintain the highest
ethical standards and that its business practices are to be conducted in a
manner that is above reproach.
PricewaterhouseCoopers LLP, independent accountants, is retained to audit
the company's financial statements. Their accompanying report is based on audits
conducted in accordance with generally accepted auditing standards, which
include the consideration of the company's internal controls to establish a
basis for reliance thereon in determining the nature, timing and extent of audit
tests to be applied.
The board of directors exercises its responsibility for these financial
statements through its Audit Committee, which consists entirely of independent
non-management board members. The Audit Committee meets periodically with the
independent accountants, both privately and with management present, to review
accounting, auditing, internal controls and financial reporting matters.
/s/Joseph W. Brown, Jr.
- -----------------------
Joseph W. Brown, Jr.
Chairman and Chief Executive Officer
/s/ Neil G. Budnick
- -------------------
Neil G. Budnick
Chief Financial Officer
REPORT ON INDEPENDANT ACCOUNTANTS
- ---------------------------------
To the Board of Directors and Shareholders of MBIA Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income and changes in shareholders' equity and cash
flows present fairly, in all material respects, the financial position of MBIA
Inc. and Subsidiaries at December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
New York, New York
February 3, 2000
(42)
<PAGE> 11
CONSOLIDATED BALANCE SHEETS
MBIA Inc. and Subsidiaries
<TABLE>
<CAPTION>
Dollars in thousands except per share amounts December 31,1999 December 31, 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments:
Fixed-maturity securities held as available-for-sale
at fair value (amortized cost $6,006,506 and $5,565,060) $ 5,783,979 $ 5,884,053
Short-term investments, at amortized cost
(which approximates fair value) 274,022 423,194
Other investments 146,038 94,975
- --------------------------------------------------------------------------------------------------------------------------------
6,204,039 6,402,222
Municipal investment agreement portfolio held as available-for-sale
at fair value (amortized cost $4,583,920 and $3,542,077) 4,489,551 3,678,229
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS 10,693,590 10,080,451
Cash and cash equivalents 93,559 20,757
Securities borrowed or purchased under agreements to resell 261,171 538,281
Accrued investment income 135,344 126,990
Deferred acquisition costs 251,922 230,085
Prepaid reinsurance premiums 403,210 352,699
Reinsurance recoverable on unpaid losses 30,819 29,891
Goodwill (less accumulated amortization of $68,388 and $62,423) 110,023 120,681
Property and equipment, at cost (less accumulated depreciation
of $50,469 and $39,934) 128,733 81,457
Receivable for investments sold 24,922 49,497
Other assets 130,606 195,666
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $12,263,899 $11,826,455
- --------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deferred premium revenue $ 2,310,758 $ 2,251,211
Loss and loss adjustment expense reserves 467,279 300,005
Municipal investment agreements 3,483,911 2,587,339
Municipal repurchase agreements 1,028,921 897,718
Long-term debt 689,204 688,996
Short-term debt 68,751 --
Securities loaned or sold under agreements to repurchase 288,750 573,352
Deferred income taxes 32,805 343,896
Deferred fee revenue 36,536 42,964
Payable for investments purchased 102,666 95,598
Other liabilities 241,217 253,159
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 8,750,798 8,034,238
- --------------------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
Shareholders' Equity:
Preferred stock, par value $1 per share; authorized shares--
10,000,000;issued and outstanding--none -- --
Common stock, par value $1 per share; authorized shares--
200,000,000;issued shares-- 100,072,846 and 99,569,625 100,073 99,570
Additional paid-in capital 1,191,108 1,169,192
Retained earnings 2,486,478 2,246,221
Accumulated other comprehensive income (loss), net of deferred income
tax provision (benefit) of $(112,920) and $157,410 (224,511) 288,915
Unallocated ESOP shares (4,363) (4,044)
Unearned compensation-- restricted stock (9,986) (6,807)
Treasury stock-- 520,722 shares in 1999 and 21,717 shares in 1998 (25,698) (830)
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 3,513,101 3,792,217
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $12,263,899 $11,826,455
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
(43)
<PAGE> 12
CONSOLIDATED STATEMENTS OF INCOME
MBIA Inc. and Subsidiaries
<TABLE>
<CAPTION>
Years ended December 31
------------------------------------------------
Dollars in thousands except per share amounts 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INSURANCE
Revenues:
Gross premiums written $624,871 $677,050 $653,848
Ceded premiums (171,256) (156,064) (116,526)
- -----------------------------------------------------------------------------------------------------------------------
Net premiums written 453,615 520,986 537,322
Increase in deferred premium revenue (10,819) (96,436) (185,827)
- -----------------------------------------------------------------------------------------------------------------------
Premiums earned (net of ceded premiums
of $120,745, $92,873, and $62,353) 442,796 424,550 351,495
Net investment income 359,456 331,802 301,998
Net realized gains 24,040 29,962 16,903
Advisory fees 27,486 26,130 17,110
- -----------------------------------------------------------------------------------------------------------------------
Total insurance revenues 853,778 812,444 687,506
Expenses:
Losses and loss adjustment 198,454 34,683 31,877
Policy acquisition costs, net 36,700 34,613 34,897
Operating 80,082 70,330 74,075
- -----------------------------------------------------------------------------------------------------------------------
Total insurance expenses 315,236 139,626 140,849
- -----------------------------------------------------------------------------------------------------------------------
Insurance income 538,542 672,818 546,657
- -----------------------------------------------------------------------------------------------------------------------
INVESTMENT MANAGEMENT SERVICES
Revenues 86,600 65,032 49,999
Expenses 45,920 36,012 32,958
- -----------------------------------------------------------------------------------------------------------------------
Operating income 40,680 29,020 17,041
Net realized gains 1,120 14,179 3,416
- -----------------------------------------------------------------------------------------------------------------------
Investment management services income 41,800 43,199 20,457
- -----------------------------------------------------------------------------------------------------------------------
MUNICIPAL SERVICES
Revenues 22,923 29,392 25,189
Expenses 35,372 40,682 20,694
- -----------------------------------------------------------------------------------------------------------------------
Operating (loss) income (12,449) (11,290) 4,495
Net realized losses -- (9,165) --
- -----------------------------------------------------------------------------------------------------------------------
Municipal services (loss) income (12,449) (20,455) 4,495
- -----------------------------------------------------------------------------------------------------------------------
CORPORATE
Interest expense 53,935 44,620 38,645
Other expenses 21,052 10,701 7,712
One-time corporate charges 105,023 75,203 --
- -----------------------------------------------------------------------------------------------------------------------
Corporate expenses (180,010) (130,524) (46,357)
- -----------------------------------------------------------------------------------------------------------------------
Income before income taxes 387,883 565,038 525,252
Provision for income taxes 67,353 132,310 119,642
- -----------------------------------------------------------------------------------------------------------------------
NET INCOME $320,530 $432,728 $405,610
- -----------------------------------------------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE:
BASIC $3.22 $4.37 $4.18
DILUTED $3.19 $4.32 $4.12
- -----------------------------------------------------------------------------------------------------------------------
Weighted average number of common shares outstanding:
Basic 99,590,870 98,978,641 96,937,314
Diluted 100,402,339 100,163,014 98,344,163
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
(44)
<PAGE> 13
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
MBIA Inc. and Subsidiaries
<TABLE>
<CAPTION>
For the years ended December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------------------------------------------------
Accumulated
Common Stock Additional Other
--------------------- Paid-in Retained Comprehensive
In thousands except per share amounts Shares Amount Capital Earnings Income (Loss)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1997 95,458 $95,458 $984,303 $1,572,646 $115,297
- --------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income -- -- -- 405,610 --
Other comprehensive income:
Change in unrealized appreciation of
investments net of change in deferred
income taxes of $(69,337) -- -- -- -- 128,782
Change in foreign currency translation -- -- -- -- (7,984)
Other comprehensive income
Total comprehensive income
Net proceeds from issuance of shares 2,679 2,679 125,096 -- --
Unallocated ESOP shares -- -- -- -- --
Unearned compensation - restricted stock 67 67 3,729 -- --
Stock issued for acquisition 120 120 6,880 -- --
Exercise of stock options 430 430 13,942 -- --
Dividends (declared per common share
$0.770, paid per common share $0.765) -- -- -- (76,648) --
- --------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 98,754 98,754 1,133,950 1,901,608 236,095
- --------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income -- -- -- 432,728 --
Other comprehensive income:
Change in unrealized appreciation of
investments net of change in deferred
income taxes of $(25,384) -- -- -- -- 48,042
Change in foreign currency translation -- -- -- -- 4,778
Other comprehensive income
Total comprehensive income
Treasury shares acquired -- -- 830 -- --
Unallocated ESOP shares -- -- -- -- --
Unearned compensation - restricted stock 71 71 4,449 -- --
Exercise of stock options 745 745 29,963 -- --
Dividends (declared per common share
$0.790, paid per common share $0.785) -- -- -- (88,115) --
- --------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 99,570 99,570 1,169,192 2,246,221 288,915
- --------------------------------------------------------------------------------------------------------------------------
Comprehensive income (loss):
Net income -- -- -- 320,530 --
Other comprehensive income (loss):
Change in unrealized appreciation of
investments net of change in deferred
income taxes of $270,330 -- -- -- -- (502,996)
Change in foreign currency translation -- -- -- -- (10,430)
Other comprehensive loss
Total comprehensive loss
Treasury shares acquired -- -- -- -- --
Unallocated ESOP shares -- -- 391 -- --
Unearned compensation - restricted stock 99 99 4,883 -- --
Stock issued for acquisition 38 38 2,392 -- --
Exercise of stock options 366 366 14,250 -- --
Dividends (declared per common share
$0.805, paid per common share $0.800) -- -- -- (80,273) --
- --------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 100,073 $100,073 $1,191,108 $2,486,478 $(224,511)
- --------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Con't)
For the years ended December 31, 1999, 1998 and 1997
- ---------------------------------------------------------------------------------------------------------------------------------
Unearned
Unallocated Compensation Treasury Stock Total
ESOP -Restricted --------------------- Shareholders'
In thousands except per share amounts Shares Stock Shares Amount Equity
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 31, 1997 $(5,430) $(1,051) -- -- $2,761,223
- ---------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income -- -- -- -- 405,610
Other comprehensive income:
Change in unrealized appreciation of
investments net of change in deferred
income taxes of $(69,337) -- -- -- -- 128,782
Change in foreign currency translation -- -- -- -- (7,984)
------------
Other comprehensive income 120,798
------------
Total comprehensive income 526,408
------------
Net proceeds from issuance of shares -- -- -- -- 127,775
Unallocated ESOP shares 1,347 -- -- -- 1,347
Unearned compensation - restricted stock -- (3,761) -- -- 35
Stock issued for acquisition -- -- -- -- 7,000
Exercise of stock options -- -- -- -- 14,372
Dividends (declared per common share
$0.770, paid per common share $0.765) -- -- -- -- (76,648)
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 (4,083) (4,812) -- -- 3,361,512
- ---------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income -- -- -- -- 432,728
Other comprehensive income:
Change in unrealized appreciation of
investments net of change in deferred
income taxes of $(25,384) -- -- -- -- 48,042
Change in foreign currency translation -- -- -- -- 4,778
------------
Other comprehensive income 52,820
------------
Total comprehensive income 485,548
------------
Treasury shares acquired -- -- (22) (830) --
Unallocated ESOP shares 39 -- -- -- 39
Unearned compensation - restricted stock -- (1,995) -- -- 2,525
Exercise of stock options -- -- -- -- 30,708
Dividends (declared per common share
$0.790, paid per common share $0.785) -- -- -- -- (88,115)
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 (4,044) (6,807) (22) (830) 3,792,217
- ---------------------------------------------------------------------------------------------------------------------------------
Comprehensive income (loss):
Net income -- -- -- -- 320,530
Other comprehensive income (loss):
Change in unrealized appreciation of
investments net of change in deferred
income taxes of $270,330 -- -- -- -- (502,996)
Change in foreign currency translation -- -- -- -- (10,430)
------------
Other comprehensive loss (513,426)
------------
Total comprehensive loss (192,896)
------------
Treasury shares acquired -- -- (500) (24,698) (24,698)
Unallocated ESOP shares (319) -- 13 462 534
Unearned compensation - restricted stock -- (3,179) (12) (632) 1,171
Stock issued for acquisition -- -- -- -- 2,430
Exercise of stock options -- -- -- -- 14,616
Dividends (declared per common share
$0.805, paid per common share $0.800) -- -- -- -- (80,273)
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 $(4,363) $(9,986) (521) $(25,698) $3,513,101
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<TABLE>
<CAPTION>
DISCLOSURE OF RECLASSIFICATION AMOUNT: 1997 1998 1999
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized appreciation (depreciation) of investments
arising during the period, net of taxes $141,747 $78,142 $(448,686)
Reclassification of adjustment, net of taxes (12,965) (30,100) (54,310)
- ---------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation), net of taxes $128,782 $48,042 $(502,996)
- ---------------------------------------------------------------------------------------------------
</TABLE>
(45)
<PAGE> 14
CONSOLIDATED STATEMENTS OF CASH FLOWS
MBIA Inc. and Subsidiaries
<TABLE>
<CAPTION>
Years ended December 31
--------------------------------------------------
Dollars in thousands 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 320,530 $ 432,728 $ 405,610
Adjustments to reconcile net income to net cash
provided by operating activities:
Increase in accrued investment income (8,354) (5,900) (12,501)
Increase in deferred acquisition costs (21,837) (13,920) (19,276)
Increase in prepaid reinsurance premiums (50,511) (63,191) (54,173)
Increase in deferred premium revenue 61,329 159,627 240,000
Increase in loss and loss adjustment expense reserves, net 166,346 167,053 32,762
Depreciation 11,368 8,174 6,284
Amortization of goodwill 6,983 9,051 7,751
Amortization of bond discount, net (25,338) (22,699) (20,191)
Net realized gains on sale of investments (25,160) (34,976) (20,319)
Deferred income tax provision (benefit) (40,505) 19,943 13,191
Other, net 48,400 26,155 (30,606)
- -----------------------------------------------------------------------------------------------------------------------
Total adjustments to net income 122,721 249,317 142,922
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 443,251 682,045 548,532
- -----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed-maturity securities, net of
payable for investments purchased (6,778,179) (2,479,245) (2,296,490)
Sale of fixed-maturity securities, net of
receivable for investments sold 6,144,650 1,102,460 1,336,458
Redemption of fixed-maturity securities, net of
receivable for investments redeemed 288,710 745,515 251,793
Sale (purchase) of short-term investments 113,896 (97,177) (15,022)
Purchase of other investments (84,018) (51,769) (559)
Sale of other investments 33,402 1,785 1,223
Purchases for municipal investment agreement
portfolio, net of payable for investments purchased (2,672,918) (2,456,265) (1,447,004)
Sales from municipal investment agreement
portfolio, net of receivable for investments sold 1,650,111 2,218,342 1,487,437
Capital expenditures, net of disposals (58,650) (22,909) (17,369)
Other, net 11,146 (8,098) (14,554)
- -----------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (1,351,850) (1,047,361) (714,087)
- -----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock -- -- 127,775
Net (repayment) proceeds from (retirement) issuance of
long-term debt (3,750) 197,113 98,880
Net proceeds (repayment) from issuance (retirement)
of short-term debt 65,001 (20,000) (9,100)
Dividends paid (79,764) (85,667) (76,743)
Purchase of treasury stock (24,698) -- --
Proceeds from issuance of municipal investment
and repurchase agreements 2,787,906 2,352,908 1,823,422
Payments for drawdowns of municipal investment
and repurchase agreements (1,770,418) (2,017,056) (1,930,321)
Securities loaned or sold under agreements
to repurchase, net (7,492) (98,229) 133,300
Exercise of stock options 14,616 30,708 14,372
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 981,401 359,777 181,585
- -----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 72,802 (5,539) 16,030
Cash and cash equivalents--beginning of year 20,757 26,296 10,266
- -----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents--end of year $ 93,559 $ 20,757 $ 26,296
- -----------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Income taxes paid $ 136,877 $ 108,297 $ 103,065
Interest paid:
Municipal investment and repurchase agreements $ 210,495 $ 202,502 $ 195,344
Long-term debt 53,466 39,499 32,953
Short-term debt -- 1,057 2,017
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
(46)
<PAGE> 15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MBIA Inc. and Subsidiaries
NOTE 1: BUSINESS AND ORGANIZATION
- ---------------------------------
MBIA Inc. (the company) was incorporated in Connecticut on November 12, 1986 as
a licensed insurer and, through a series of transactions during December 1986,
became the successor to the business of the Municipal Bond Insurance Association
(the Association), a voluntary unincorporated association of insurers writing
municipal bond and note insurance as agent for the member insurance companies.
The company operates its insurance business primarily through its wholly owned
subsidiary, MBIA Insurance Corporation (MBIA Corp.).
Effective December 31, 1989, the company acquired for $288 million all of
the outstanding stock of Bond Investors Group, Inc. (BIG), the parent company of
Bond Investors Guaranty Insurance Company, which was subsequently renamed MBIA
Insurance Corp. of Illinois (MBIA Illinois). The acquisition of BIG has been
accounted for as a purchase, and the price was allocated to the net assets of
the acquired company based on the fair value of such assets and liabilities at
the date of acquisition.
In 1990, the company formed MBIA Assurance, S.A. (MBIA Assurance), a wholly
owned French subsidiary, to write financial guarantee insurance in the
international community. MBIA Assurance provides insurance for public
infrastructure financings, structured finance transactions and certain
obligations of financial institutions. The stock of MBIA Assurance was
contributed to MBIA Corp. in 1991 and, pursuant to a reinsurance agreement with
MBIA Corp., a substantial amount of the risks insured by MBIA Assurance is
reinsured by MBIA Corp.
At the end of 1990, MBIA Municipal Investors Services Corporation
(MBIA-MISC) was formed as a wholly owned subsidiary of the company. MBIA-MISC
operates cooperative cash management programs for school districts and
municipalities.
In 1993, the company formed a wholly owned subsidiary, MBIA Investment
Management Corp. (IMC). IMC provides guaranteed investment agreements to states,
municipalities and municipal authorities that are guaranteed as to principal and
interest.
In 1994, the company formed a wholly owned subsidiary, MBIA Securities
Corp., which was subsequently renamed MBIA Capital Management Corp. (CMC). CMC
provides fixed-income investment management services for the company and its
affiliates and third-party institutional clients.
In 1996, MBIA-MISC acquired American Money Management Associates, Inc.
(AMMA), which provides investment and treasury management consulting services
for municipal and quasi-public-sector clients.
In 1996, the company formed a wholly owned subsidiary, Strategic Services,
Inc., which was subsequently renamed MBIA MuniServices Company (MBIA
MuniServices). Also in 1996, MBIA MuniServices acquired an interest in Capital
Asset Holdings, Inc. (Capital Asset), a limited partnership that buys, services
and manages delinquent municipal tax liens. In December 1998, MBIA MuniServices
acquired Capital Asset's founder's equity interest. In January 1997, MBIA
MuniServices acquired a 95 percent interest in the Municipal Tax Bureau (MTB) of
Philadelphia, a provider of tax compliance services to state and local
governments. In July 1997, MBIA MuniServices acquired MuniFinancial, a public
finance consulting firm specializing in municipal debt administration. In
September 1999, MBIA MuniServices sold MuniFinancial. In January 1998, Municipal
Resource Consultants (MRC), a revenue audit and information services firm, was
acquired.
On February 17, 1998, MBIA Inc. consummated a merger with CapMAC Holdings,
Inc. (CapMAC). CapMAC operated its insurance business primarily through its
wholly owned subsidiary, Capital Markets Assurance Corporation (CMAC). On July
31, 1998, MBIA Inc. completed a merger of its investment management business
with 1838 Investment Advisors, Inc. (1838). See Note 3 for details on these two
mergers.
In June 1998, MBIA Asset Management Corporation (MBIA-AMC) was formed as a
wholly owned subsidiary of the company to consolidate the resources and
capabilities of the company's investment management services. In July 1998, the
company contributed the common stock of MBIA-MISC, IMC, CMC and 1838 to
MBIA-AMC.
TRS Funding Corporation (TRS) was formed to provide clients with innovative
structured financing solutions.
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------
The consolidated financial statements have been prepared on the basis of
generally accepted accounting principles (GAAP). The preparation of financial
statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Significant
accounting policies are as follows:
CONSOLIDATION The consolidated financial statements include the accounts of the
company, its significant subsidiaries and entities under its control. All
significant intercompany balances have been eliminated. Certain amounts have
been reclassified in prior years' financial statements to conform to the current
presentation.
INVESTMENTS The company's entire investment portfolio is considered
available-for-sale and is reported in the financial statements at fair value,
with unrealized gains and losses, net of deferred taxes, reflected as a separate
(47)
<PAGE> 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
component of shareholders' equity.
Bond discounts and premiums are amortized using the effective-yield method
over the remaining term of the securities. For pre-refunded bonds, the remaining
term is determined based on the contractual refunding date. Short-term
investments are carried at amortized cost, which approximates fair value, and
include all fixed-maturity securities--other than those held in the municipal
investment agreement portfolio--with a remaining effective term to maturity of
less than one year. Investment income is recorded as earned. Realized gains or
losses on the sale of investments are determined by specific identification and
are included as a separate component of revenues.
Investment income from the municipal investment agreement portfolio is
recorded as a component of investment management services revenues. Municipal
investment agreement portfolio accrued interest income, receivables for
investments sold, and payables for investments purchased are included in the
respective consolidated accounts.
Other investments include the company's interest in equity-oriented and
equity-method investments. The company records its share of the unrealized gains
and losses on equity-oriented investments, net of applicable deferred income
taxes, as a separate component of shareholders' equity.
CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash on hand and
demand deposits with banks.
SECURITIES BORROWED OR PURCHASED UNDER AGREEMENTS TO RESELL AND SECURITIES
LOANED OR SOLD UNDER AGREEMENTS TO REPURCHASE Securities borrowed or purchased
under agreements to resell and securities loaned or sold under agreements to
repurchase are accounted for as collateralized transactions and are recorded at
principal or contract value. It is the company's policy to take possession of
securities borrowed or purchased under agreements to resell.
The company minimizes the credit risk that counterparties to transactions
might be unable to fulfill their contractual obligations by monitoring customer
credit exposure and collateral value and requiring additional collateral to be
deposited with the company when deemed necessary.
POLICY ACQUISITION COSTS Policy acquisition costs include only those expenses
that relate primarily to, and vary with, premium production. For business
produced directly by MBIA Corp., such costs include compensation of employees
involved in underwriting and policy issuance functions, certain rating agency
fees, state premium taxes and certain other underwriting expenses, reduced by
ceding commission income on premiums ceded to reinsurers. Policy acquisition
costs are deferred and amortized over the period in which the related premiums
are earned.
PREMIUM REVENUE RECOGNITION Upfront premiums are earned pro rata over the period
of risk. Premiums are allocated to each bond maturity based on par amount and
are earned on a straight-line basis over the term of each maturity. Installment
premiums are earned over each installment period--generally one year or less.
When an insured issue is retired early, is called by the issuer, or is in
substance paid in advance through a refunding or defeasance accomplished by
placing U.S. Government securities in escrow, the remaining deferred premium
revenue is earned at that time, since there is no longer risk to the company.
Accordingly, deferred premium revenue represents the portion of premiums written
that is applicable to the unexpired risk of insured bonds and notes.
ADVISORY FEE REVENUE RECOGNITION The company collects certain advisory fees for
services rendered in connection with advising clients as to the most appropriate
structure to use for a given structured finance transaction. Certain advisory
fees are deferred and earned pro-rata over the life of the underlying
transaction.
GOODWILL Goodwill represents the excess of the cost of acquisitions over the
tangible net assets acquired. Goodwill attributed to the acquisition of MBIA
Corp. is amortized by the straight-line method over 25 years. Goodwill
attributed to the acquisition of MBIA Illinois is amortized according to the
recognition of future profits from its deferred premium revenue and installment
premiums, except for a minor portion attributed to state licenses, which is
amortized by the straight-line method over 25 years. Goodwill attributed to the
acquisition of all other subsidiaries is amortized by the straight-line method
over 15 years.
PROPERTY AND EQUIPMENT Property and equipment consist of the company's
headquarters, furniture, fixtures and equipment, which are recorded at cost and
are depreciated by the straight-line method over their estimated service lives
ranging from 3 to 31 years. Maintenance and repairs are charged to expense as
incurred.
LOSSES AND LOSS ADJUSTMENT EXPENSES Loss and loss adjustment expenses (LAE)
reserves are established in an amount equal to the company's estimate of
identified or case basis reserves and unallocated losses, including costs of
settlement, on the obligations it has insured.
Case basis reserves are established when specific insured issues are
identified as currently or likely to be in default. Such a reserve is based on
the present value of the expected loss and LAE payments, net of recoveries under
salvage and subrogation rights, based on a discount rate of 6.04%. The total
reserve is calculated by applying a loss factor, determined based on an
independent rating agency study of bond defaults, to net debt service written.
When a case basis reserve is recorded, a corresponding reduction is made to the
unallocated reserve.
Management of the company periodically reevaluates its estimates for losses
and LAE, and any resulting adjustments
(48)
<PAGE> 17
MBIA Inc. and Subsidiaries
are reflected in current earnings. Management believes that the reserves
are adequate to cover the ultimate net cost of claims; however, because the
reserves are based on estimates, there can be no assurance that the ultimate
liability will not exceed such estimates.
In 1999 the company completed an update of the general loss reserving
methodology. The update included an analysis of loss-reserve factors based on
the latest available industry data. It included the analysis of historical
default and recovery experience for the relevant sectors of the fixed-income
market. Also factored in was the changing mix of our book of business. The study
resulted in an increase in the company's current loss reserving factors.
MUNICIPAL INVESTMENT AGREEMENTS AND MUNICIPAL REPURCHASE AGREEMENTS Municipal
investment agreements and municipal repurchase agreements are recorded as
liabilities on the balance sheet at the time such agreements are executed. The
liabilities for municipal investment and repurchase agreements are carried at
the face value of the agreement plus accrued interest, whereas the related
assets are recorded at fair value. Investment management services revenues
include investment income on the assets underlying the municipal investment
agreement portfolio, net of interest expense at rates specified in the
agreements, computed daily based upon the outstanding balances.
DERIVATIVES The company's policies with respect to the use of derivative
financial instruments include limitations with respect to the amount, type and
concentration of such instruments. The company uses interest rate swaps for
hedging purposes as part of its overall risk management strategy. Gains and
losses on the derivative financial instruments that qualify as accounting hedges
of existing assets and liabilities are included with the carrying amounts and
amortized over the remaining lives of the assets and liabilities as an
adjustment to interest income or expense. When a hedged asset is sold or
liability extinguished, the unamortized gain or loss on the related hedge is
recognized in income. Gains and losses on derivative financial instruments that
do not qualify as accounting hedges are recognized in income when realized. At
year-end 1999, the company's exposure to derivative financial instruments was
not material.
INVESTMENT MANAGEMENT SERVICES OPERATIONS Investment management services results
are comprised of the net investment income, operating revenues and expenses of
MBIA-MISC, IMC, CMC and 1838.
MUNICIPAL SERVICES OPERATIONS Municipal services results are comprised of the
net investment income, operating revenues and expenses of MTB, MuniFinancial,
MRC and Capital Asset.
CORPORATE EXPENSES Corporate expenses consist of interest expenses,
non-insurance goodwill amortization, general corporate overhead expenses and
non-recurring charges.
INCOME TAXES Deferred income taxes are provided with respect to the temporary
differences between the tax bases of assets and liabilities and the reported
amounts in the financial statements that will result in deductible or taxable
amounts in future years when the reported amount of the asset or liability is
recovered or settled. Such temporary differences relate principally to premium
revenue recognition, deferred acquisition costs, unrealized appreciation
(depreciation) of investments and the contingency reserve.
The Internal Revenue Code permits companies writing financial guarantee
insurance to deduct from taxable income amounts added to the statutory
contingency reserve, subject to certain limitations. The tax benefits obtained
from such deductions must be invested in non-interest-bearing U.S. Government
tax and loss bonds. The company records purchases of tax and loss bonds as
payments of federal income taxes. The amounts deducted must be restored to
taxable income when the contingency reserve is released, at which time the
company may present the tax and loss bonds for redemption to satisfy the
additional tax liability.
FOREIGN CURRENCY TRANSLATION Assets and liabilities denominated in foreign
currencies are translated at year-end exchange rates. Operating results are
translated at average rates of exchange prevailing during the year. Unrealized
gains or losses resulting from translation are included as a separate component
of shareholders' equity. Gains and losses resulting from transactions in foreign
currencies are recorded in current income.
NOTE 3: MERGERS WITH CAPMAC AND 1838
- ------------------------------------
On February 17, 1998, the company consummated a merger with CapMAC by exchanging
8.1 million shares of its common stock for all of the common stock of CapMAC.
Each share of CapMAC was exchanged for 0.4675 of one share of MBIA Inc. common
stock. On July 31, 1998, the company completed a merger of its investment
management business with 1838 through the issuance of 1.1 million shares of
common stock. Each share of 1838 was exchanged for 2.134 shares of MBIA Inc.
The mergers constituted tax-free reorganizations and have been accounted
for as pooling of interests under Accounting Principles Board (APB) Opinion No.
16. Accordingly, all prior period consolidated financial statements presented
have been restated to include the combined results of operations, financial
position and cash flows of CapMAC and 1838 as though they had always been a part
of MBIA Inc.
There were no material transactions between MBIA Inc., CapMAC and/or 1838
prior to the combinations, and immaterial adjustments were recorded to conform
(49)
<PAGE> 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CapMAC's and 1838's accounting policies. Certain reclassifications were made to
the CapMAC and 1838 financial statements to conform to the company's
presentations.
The results of operations for the separate companies and the combined
amounts for 1997 presented in the consolidated financial statements follow:
Year ended December 31
- ----------------------------------------------------
In thousands 1997
- ----------------------------------------------------
Premiums earned
MBIA $299,335
CapMAC 52,160
- ----------------------------------------------------
Combined $351,495
- ----------------------------------------------------
Net income
MBIA $374,176
CapMAC 23,989
1838 7,445
- ----------------------------------------------------
Combined $405,610
- ----------------------------------------------------
For the six-month period ended June 30, 1998, 1838's revenues and net income
were $12.6 million and $4.6 million, respectively.
Effective April 1, 1998, CMAC ceded its portfolio of net insured
obligations in exchange for cash and investments equal to its statutory unearned
premium and contingency reserves of $176 million to MBIA Corp. Subsequent to
this cession, the company contributed the common stock of CMAC to MBIA Corp.
NOTE 4: RECENT ACCOUNTING PRONOUNCEMENTS
- ----------------------------------------
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard (SFAS) 133, "Accounting for Derivative
Instruments and Hedging Activities." The statement requires companies to
recognize all derivatives as either assets or liabilities, with the instruments
measured at fair value. The accounting for changes in fair value, gains or
losses, depends on the intended use of the derivative and its resulting
designation. SFAS 133 is effective for the year commencing January 1, 2001. The
company is currently evaluating the impact of the adoption of SFAS 133 on the
consolidated financial statements.
NOTE 5: ASSET IMPAIRMENT
- ------------------------
Early in 1999, the company concluded that its investment in Capital Asset was
not consistent with its strategic objectives and took steps to restructure it
for divestiture. As part of this process, the company evaluated the
recoverability of its investment in Capital Asset. Through a detailed valuation
exercise, management estimated the total pretax impairment to be $102 million
and, accordingly, a write-down for that amount was recorded in the consolidated
statement of income as a one-time corporate charge during the second quarter of
1999.
NOTE 6: SECURITIZATION OF FINANCIAL ASSETS
- ------------------------------------------
In September 1999, Capital Asset sold substantially all of its remaining tax
lien portfolio through a securitization. This securitization was the third in a
series of such securitizations. Proceeds from this transaction were used to
extinguish an existing warehouse financing facility that had been guaranteed by
the company. The notes issued in connection with the securitizations, have been
insured by MBIA Corp. In connection therewith, the company recorded a servicing
liability of $11.6 million as of December 31, 1999, which represents the fair
value of such liability based upon the present value of projected servicing
costs in excess of servicing revenues, discounted at 11%. The servicing
liability will be amortized in proportion to and over the period of the
estimated net servicing loss. None of the liability was amortized into income
during 1999. During the fourth quarter of 1999, a specialty servicing concern
was engaged to oversee the management of Capital Asset whose activities now
primarily consist of the administering and servicing of the securitizations and
other delinquent tax liens and related assets.
NOTE 7: STATUTORY ACCOUNTING PRACTICES
- ----------------------------------------
The financial statements have been prepared on the basis of GAAP, which differs
in certain respects from the statutory accounting practices prescribed or
permitted by the insurance regulatory authorities. Statutory accounting
practices differ from GAAP in the following respects:
* acquisition costs are charged to operations as incurred rather than
deferred and amortized as the related premiums are earned;
* a contingency reserve is computed on the basis of statutory requirements,
and reserves for losses and LAE are established at present value for
specific insured issues that are identified as currently or likely to be in
default. Under GAAP, reserves are established based on the company's
reasonable estimate of the identified and unallocated losses and LAE on the
insured obligations it has written;
* federal income taxes are only provided on taxable income for which income
taxes are currently payable, while under GAAP, deferred income taxes are
provided with respect to temporary differences;
* fixed-maturity securities are reported at amortized cost rather than fair
value;
* tax and loss bonds purchased are reflected as admitted assets as well as
payments of income taxes; and
* certain assets designated as "non-admitted assets" are charged directly
against surplus but are reflected as assets under GAAP.
Consolidated net income of MBIA Corp. determined in accordance with statutory
accounting practices for the years ended December 31, 1999, 1998 and 1997 was
$521.8 million, $509.9 million and $404.4 million, respectively.
The following is a reconciliation of consolidated shareholders' equity
presented on a GAAP basis for the company and its consolidated subsidiaries to
statutory capital and surplus for MBIA Corp. and its subsidiaries:
(50)
<PAGE> 19
MBIA Inc. and Subsidiaries
As of December 31
---------------------------
In thousands 1999 1998
- -------------------------------------------------------------------------
Company's GAAP shareholders' equity $3,513,101 $3,792,217
Contributions to MBIA Corp. 508,719 485,738
Premium revenue recognition (491,766) (448,250)
Deferral of acquisition costs (251,922) (230,085)
Unrealized (gains) losses 322,739 (450,587)
Contingency reserve (1,738,730) (1,450,413)
Loss and LAE reserves 232,004 81,489
Deferred income taxes 44,917 348,534
Tax and loss bonds 219,195 162,523
Goodwill (86,075) (90,950)
Other 141,185 89,753
- -------------------------------------------------------------------------
Statutory capital and surplus $2,413,367 $2,289,969
- -------------------------------------------------------------------------
NOTE 8: PREMIUMS EARNED FROM REFUNDED AND CALLED BONDS
- ------------------------------------------------------
Premiums earned include $64.2 million, $68.4 million and $50.9 million for 1999,
1998 and 1997, respectively, related to refunded and called bonds.
NOTE 9: INVESTMENTS
- -------------------
The company's investment objective is to optimize long-term, after-tax returns
while emphasizing the preservation of capital through maintenance of
high-quality investments with adequate liquidity. The company's investment
policies limit the amount of credit exposure to any one issuer. The
fixed-maturity portfolio is comprised of high-quality (average rating Double-A)
taxable and tax-exempt investments of diversified maturities.
The following tables set forth the amortized cost and fair value of the
fixed-maturities and short-term investments included in the consolidated
investment portfolio of the company, as of December 31, 1999 and 1998:
Gross Gross
Amortized Unrealized Unrealized Fair
In thousands Cost Gains Losses Value
- -------------------------------------------------------------------------------
December 31, 1999
Taxable bonds:
United States
Treasury and
Government Agency $ 559,204 $ 8,679 $ (13,056) $ 554,827
Corporate and
other obligations 5,000,814 6,843 (171,015) 4,836,642
Mortgage-backed 1,662,636 4,441 (28,079) 1,638,998
Tax-exempt bonds:
State and
municipal obligations 3,641,794 50,334 (175,043) 3,517,085
- -------------------------------------------------------------------------------
Total $10,864,448 $ 70,297 $(387,193) $10,547,552
- -------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
In thousands Cost Gains Losses Value
- -------------------------------------------------------------------------------
December 31, 1998
Taxable bonds:
United States
Treasury and
Government Agency $ 517,015 $ 47,637 $ (351) $ 564,301
Corporate and
other obligations 3,555,858 145,224 (3,875) 3,697,207
Mortgage-backed 1,684,081 27,918 (965) 1,711,034
Tax-exempt bonds:
State and
municipal obligations 3,773,377 241,200 (1,643) 4,012,934
- -------------------------------------------------------------------------------
Total $ 9,530,331 $461,979 $ (6,834) $ 9,985,476
- -------------------------------------------------------------------------------
Fixed-maturity investments carried at fair value of $11.6 million and $12.0
million as of December 31, 1999 and 1998, respectively, were on deposit with
various regulatory authorities to comply with insurance laws.
A portion of the obligations under municipal investment and repurchase
agreements require the company to pledge securities as collateral. As of
December 31, 1999 and 1998, the fair value of securities pledged as collateral
with respect to these obligations approximated $1.9 billion.
The following table sets forth the distribution by expected maturity of the
fixed-maturities and short-term investments at amortized cost and fair value at
December 31, 1999. Expected maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations.
Amortized Fair
In thousands Cost Value
- ------------------------------------------------------------------------
Within 1 year $ 472,112 $ 472,112
Beyond 1 yr but within 5 yrs 2,549,074 2,540,258
Beyond 5 yrs but within 10 yrs 1,798,412 1,759,599
Beyond 10 yrs but within 15 yrs 1,215,824 1,196,220
Beyond 15 yrs but within 20 yrs 1,463,090 1,393,898
Beyond 20 yrs 1,703,300 1,546,467
- ------------------------------------------------------------------------
9,201,812 8,908,554
Mortgage-backed 1,662,636 1,638,998
- ------------------------------------------------------------------------
Total fixed-maturities and
short-term investments $10,864,448 $10,547,552
- ------------------------------------------------------------------------
NOTE 10: INVESTMENT INCOME AND GAINS AND LOSSES
- -----------------------------------------------
Investment income consists of:
Years ended December 31
-----------------------------------
In thousands 1999 1998 1997
- ---------------------------------------------------------------------------
Fixed-maturities $358,127 $331,857 $299,069
Short-term investments 7,672 5,692 8,042
Other investments 24 16 (1,542)
- ---------------------------------------------------------------------------
Gross investment income 365,823 337,565 305,569
Investment expenses 6,367 5,763 3,571
- ---------------------------------------------------------------------------
Net investment income 359,456 331,802 301,998
- ---------------------------------------------------------------------------
Net realized gains (losses):
Fixed-maturities
Gains 55,721 32,211 25,963
Losses (22,901) (3,149) (5,877)
- ---------------------------------------------------------------------------
Net 32,820 29,062 20,086
- ---------------------------------------------------------------------------
Other investments
Gains 2,270 901 564
Losses (11,050) (1) (3,747)
- ---------------------------------------------------------------------------
Net (8,780) 900 (3,183)
- ---------------------------------------------------------------------------
Total net realized gains 24,040 29,962 16,903
- ---------------------------------------------------------------------------
Total investment income $383,496 $361,764 $318,901
- ---------------------------------------------------------------------------
(51)
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Total investment income excludes investment income and realized gains and losses
from our investment management and municipal services segments. Net unrealized
gains (losses) consist of:
As of December 31
-----------------------------
In thousands 1999 1998
- ---------------------------------------------------------------
Fixed-maturities:
Gains $ 70,297 $461,979
Losses (387,193) (6,834)
- ---------------------------------------------------------------
Net (316,896) 455,145
- ---------------------------------------------------------------
Other investments:
Gains 828 2,936
Losses (6,671) (7,494)
- ---------------------------------------------------------------
Net (5,843) (4,558)
- ---------------------------------------------------------------
Total (322,739) 450,587
Deferred income tax (benefit) (112,920) 157,410
- ---------------------------------------------------------------
Unrealized gains (losses), net $(209,819) $293,177
- ---------------------------------------------------------------
The deferred income tax (benefit) relates primarily to unrealized gains and
losses on the company's fixed-maturity investments, which are reflected in
shareholders' equity. The change in net unrealized gains (losses) consists of:
Years ended December 31
----------------------------------
In thousands 1999 1998 1997
- -------------------------------------------------------------------------
Fixed-maturities $(772,041) $80,903 $196,042
Other investments (1,285) (7,477) 2,077
- -------------------------------------------------------------------------
Total (773,326) 73,426 198,119
Deferred income tax (benefit) (270,330) 25,384 69,337
- -------------------------------------------------------------------------
Unrealized gains
(losses), net $(502,996) $48,042 $128,782
- -------------------------------------------------------------------------
NOTE 11: INCOME TAXES
- ---------------------
The company files a consolidated tax return that includes all of its U.S.
subsidiaries. The provision for income taxes is composed of:
Years ended December 31
--------------------------------------
In thousands 1999 1998 1997
- ------------------------------------------------------------------------
Current $107,858 $112,367 $106,452
Deferred (40,505) 19,943 13,190
- ------------------------------------------------------------------------
Total $ 67,353 $132,310 $119,642
- ------------------------------------------------------------------------
The provision for income taxes gives effect to permanent differences between
financial and taxable income. Accordingly, the company's effective income tax
rate differs from the statutory rate on ordinary income. The reasons for the
company's lower effective tax rates are as follows:
Years ended December 31
-------------------------
1999 1998 1997
- ---------------------------------------------------------------------------
Income taxes computed on pre-tax
financial income at statutory rates 35.0% 35.0% 35.0%
Increase (reduction) in taxes
resulting from:
Tax-exempt interest (16.1) (10.8) (10.6)
Amortization of goodwill 0.5 0.4 0.3
Other (2.0) (1.2) (1.9)
- ---------------------------------------------------------------------------
Provision for income taxes 17.4% 23.4% 22.8%
- ---------------------------------------------------------------------------
The company recognizes deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Deferred tax assets and liabilities are determined
based on the difference between the financial statement and tax bases of assets
and liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. The effect on tax assets and liabilities of
a change in tax rates is recognized in income in the period that includes the
enactment date.
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities at December 31, 1999 and 1998 are presented below:
In thousands 1999 1998
- ----------------------------------------------------------------------
Deferred tax assets:
Tax and loss bonds $206,999 $160,064
Unrealized losses 112,920 --
Alternative minimum
tax credit carry forward 65,404 54,722
Loss and loss adjustment
expense reserves 79,051 26,458
Other 64,456 53,745
- ----------------------------------------------------------------------
Total gross deferred tax assets 528,830 294,989
- ----------------------------------------------------------------------
Deferred tax liabilities:
Contingency reserve 330,125 280,203
Deferred premium revenue 110,785 106,555
Deferred acquisition costs 88,173 77,953
Unrealized gains -- 157,410
Contingent commissions 408 408
Other 32,144 16,356
- ----------------------------------------------------------------------
Total gross deferred tax liabilities 561,635 638,885
- ----------------------------------------------------------------------
Net deferred tax liability $32,805 $343,896
- ----------------------------------------------------------------------
The company believes that a valuation allowance is unnecessary in connection
with the deferred tax assets.
NOTE 12: NET INCOME PER COMMON SHARE
- ------------------------------------
In February 1997, the FASB issued SFAS 128, "Earnings per Share," effective for
financial statements issued for periods ending after December 15, 1997. SFAS 128
established standards for computing and presenting earnings per share (EPS).
Under the new standard, basic EPS is computed by dividing income applicable to
common stock by the weighted-average number of common shares outstanding for the
period. Diluted EPS reflects the additional dilution that could occur from
employee stock options and other items that could potentially result in the
issuance of common stock. The following table provides a reconciliation of the
denominator of the basic EPS computation to the denominator of the diluted EPS
computation:
(52)
<PAGE> 21
MBIA Inc. and Subsidiaries
Years ended December 31
---------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------
Net income (in thousands) $320,530 $432,728 $405,610
Basic weighted
average shares 99,590,870 98,978,641 96,937,314
Stock options 674,295 1,042,537 1,263,794
Unallocated ESOP shares 137,174 141,836 143,055
- ------------------------------------------------------------------------------
Diluted weighted
average shares 100,402,339 100,163,014 98,344,163
- ------------------------------------------------------------------------------
Basic EPS $3.22 $4.37 $4.18
Diluted EPS $3.19 $4.32 $4.12
- ------------------------------------------------------------------------------
Options to purchase 2,603,897, 621,244 and 292,100 shares of common stock during
1999, 1998 and 1997, respectively, were not included in the computation of
diluted EPS because the options exercise price was greater than the average
market price of common shares during the respective years.
NOTE 13: BUSINESS SEGMENTS
- --------------------------
MBIA Inc., through its subsidiaries, is a leading provider of financial
guarantee and specialized financial services. MBIA provides innovative and
cost-effective products and services that meet the credit enhancement, financial
and investment needs of its public- and private-sector clients, domestically and
internationally. MBIA Inc. has three principal businesses: financial guarantee,
investment management services, and municipal services. Each of these is a
business segment, with its respective financial performance detailed in this
report.
Financial guarantee business provides an unconditional and irrevocable
guarantee of the payment of principal and interest on insured obligations when
due.
Investment management services business provides an array of products and
services to the public- and not-for-profit sectors. These include local
government investment pools, investment agreements, and discretionary and
non-discretionary portfolio management services.
During 1999, the company completed its reorganization of the operations of
two recently acquired subsidiaries, MTB and MRC. With this reorganization
largely complete, this business, operating as MBIA MuniServices, is now focused
on delivering revenue enhancement services and products to public-sector clients
nationwide, consisting of discovery, audit, collections/recovery, enforcement
and information (data) services.
Business segment results are presented gross of intersegment transactions,
which are not material to each segment. The following provides each business
segment's revenues, operating income, income (loss) and assets:
Year ended December 31, 1999
- --------------------------------------------------------------------------------
Investment
Financial Management Municipal
In thousands Guarantee Services Services Total
- --------------------------------------------------------------------------------
Operating revenues $ 829,738 $ 86,600 $ 22,923 $ 939,261
Expenses (315,236) (45,920) (35,372) (396,528)
- --------------------------------------------------------------------------------
Operating income (loss) 514,502 40,680 (12,449) 542,733
Realized gains 24,040 1,120 -- 25,160
- --------------------------------------------------------------------------------
Income (loss) from segments $ 538,542 $ 41,800 $(12,449) 567,893
- --------------------------------------------------------------------------------
Corporate expenses (180,010)
- --------------------------------------------------------------------------------
Pretax income $ 387,883
- --------------------------------------------------------------------------------
Segment assets $7,108,122 $5,073,269 $ 82,508 $12,263,899
- --------------------------------------------------------------------------------
Year ended December 31, 1998
- --------------------------------------------------------------------------------
Investment
Financial Management Municipal
In thousands Guarantee Services Services Total
- --------------------------------------------------------------------------------
Operating revenues $ 782,482 $ 65,032 $ 29,392 $ 876,906
Expenses (139,626) (36,012) (40,682) (216,320)
- --------------------------------------------------------------------------------
Operating income (loss) 642,856 29,020 (11,290) 660,586
Realized gains (losses) 29,962 14,179 (9,165) 34,976
- --------------------------------------------------------------------------------
Income (loss) from segments $ 672,818 $ 43,199 $(20,455) 695,562
- --------------------------------------------------------------------------------
Corporate expenses (130,524)
- --------------------------------------------------------------------------------
Pretax income $ 565,038
- --------------------------------------------------------------------------------
Segment assets $7,163,316 $4,497,333 $165,806 $11,826,455
- --------------------------------------------------------------------------------
Year ended December 31, 1997
- --------------------------------------------------------------------------------
Investment
Financial Management Municipal
In thousands Guarantee Services Services Total
- --------------------------------------------------------------------------------
Operating revenues $ 670,603 $ 49,999 $ 25,189 $ 745,791
Expenses (140,849) (32,958) (20,694) (194,501)
- --------------------------------------------------------------------------------
Operating income 529,754 17,041 4,495 551,290
Realized gains 16,903 3,416 -- 20,319
- --------------------------------------------------------------------------------
Income from segments $ 546,657 $ 20,457 $ 4,495 571,609
- --------------------------------------------------------------------------------
Corporate expenses (46,357)
- --------------------------------------------------------------------------------
Pretax income $ 525,252
- --------------------------------------------------------------------------------
Segment assets $6,202,950 $4,082,446 $102,029 $10,387,425
- --------------------------------------------------------------------------------
(53)
<PAGE> 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For 1999, 1998 and 1997 domestic premiums earned are $391 million, $387 million
and $331 million, respectively. For 1999, 1998 and 1997 international premiums
earned are $52 million, $38 million and $20 million, respectively.
NOTE 14: STOCK SPLIT
- --------------------
On September 17, 1997, the board of directors approved a two-for-one stock
split, to be effected in the form of a 100% stock dividend payable on October
29, 1997 to shareholders of record as of October 1, 1997. An amount equal to the
par value of common shares issued was transferred from additional paid-in
capital account to the common stock account. This transfer has been reflected in
the Consolidated Statements of Changes in Shareholders' Equity at January 1,
1997.
NOTE 15: DIVIDENDS AND CAPITAL REQUIREMENTS
- -------------------------------------------
Under New York state insurance law, MBIA Corp. may pay dividends only from
earned surplus subject to the maintenance of a minimum capital requirement. The
dividends in any 12-month period may not exceed the lesser of 10% of its
policyholders' surplus as shown on its last filed statutory basis financial
statements or of adjusted net investment income, as defined, for such 12-month
period, without prior approval of the superintendent of the New York State
Insurance Department.
In accordance with such restrictions on the amount of dividends that can be
paid in any 12-month period, MBIA Corp. had in excess of $61 million available
for the payment of dividends to the company as of December 31, 1999. In 1999,
MBIA Corp. declared and paid dividends of $180 million to the company. No
dividends were paid in 1998 by MBIA Corp. because the company had sufficient
cash available from financing activities.
The insurance departments of New York state and certain other statutory
insurance regulatory authorities, and the agencies that rate the bonds insured
by MBIA Corp. and its subsidiaries, have various requirements relating to the
maintenance of certain minimum ratios of statutory capital and reserves to net
insurance in force. MBIA Corp. and its subsidiaries were in compliance with
these requirements as of December 31, 1999.
NOTE 16: LONG-TERM DEBT AND LINES OF CREDIT
- -------------------------------------------
Long-term debt consists of:
As of December 31
----------------------
In thousands 1999 1998
- -----------------------------------------------------
7.520% Notes due 2000-2002 $ 11,250 $ 15,000
9.000% Notes due 2001 100,000 100,000
6.880% Notes due 2008* 7,550 --
9.375% Notes due 2011 100,000 100,000
8.200% Debentures due 2022** 100,000 100,000
7.000% Debentures due 2025 75,000 75,000
7.150% Debentures due 2027 100,000 100,000
6.625% Debentures due 2028 150,000 150,000
6.950% Notes due 2038*** 50,000 50,000
- -----------------------------------------------------
693,800 690,000
Less current portion 3,750 --
Less unamortized discount 846 1,004
- -----------------------------------------------------
Total $689,204 $688,996
- -----------------------------------------------------
* Callable 3/2000 @ 100.00
** Callable 10/2002 @ 103.99
*** Callable 11/2003 @ 100.00
The company's long-term debt is subject to certain covenants, none of which
significantly restrict the company's operating activities or dividend-paying
ability.
MBIA Corp. has a standby line of credit commitment in the amount of $900
million with a group of major Triple-A-rated banks to provide loans to MBIA
Corp. if it incurs cumulative losses (net of any recoveries) from October 29,
1999 in excess of the greater of $900 million or 4.00% of average annual debt
service. The obligation to repay loans made under this agreement is a limited
recourse obligation payable solely from, and collateralized by, a pledge of
recoveries realized on defaulted insured obligations including certain
installment premiums and other collateral. This commitment has a seven-year term
expiring on October 31, 2006, and contains an annual renewal provision subject
to approval by the bank group. MBIA Corp. also maintains stop-loss reinsurance
coverage of $175 million in excess of incurred losses of $700 million.
The company and MBIA Corp. maintain bank liquidity facilities totaling $650
million. In 1999, there were no borrowings outstanding under these agreements.
From time to time TRS will access the capital markets for short-term asset-
backed financings through a A1/P1-rated commercial paper conduit under
conditions that the rating agencies agree will have no adverse impact on the
rating of such conduit. Proceeds are invested under various client programs,
which provide opportunities for MBIA Corp. to issue financial guaranty policies.
The company has outstanding letters of credit for MBIA-MISC that are
intended to support the net asset value of certain investment pools managed by
MBIA-MISC. These letters can be drawn upon in the event the liquidation of such
assets at below cost is required.
NOTE 17: OBLIGATIONS UNDER MUNICIPAL INVESTMENT AGREEMENTS AND MUNICIPAL
REPURCHASE AGREEMENTS
- --------------------------------------------------------------------------------
Obligations under municipal investment agreements and
(54)
<PAGE> 23
MBIA Inc. and Subsidiaries
municipal repurchase agreements are recorded as liabilities on the balance sheet
based upon proceeds received plus unpaid accrued interest from that date. Upon
the occurrence of certain contractually agreed-upon events, some of these funds
may be withdrawn at various times prior to maturity at the option of the
investor. As of December 31, 1999, the annual interest rates on these agreements
ranged from 2.5% to 8.08%.
Principal payments due under these investment agreements in each of the
next five years ending December 31 and thereafter, based upon expected
withdrawal dates, were as follows:
In thousands Principal Amount
- --------------------------------------------------------
Expected withdrawal date:
2000 $1,629,121
2001 1,041,076
2002 452,044
2003 143,494
2004 50,271
Thereafter 1,152,912
- --------------------------------------------------------
Total $4,468,918
- --------------------------------------------------------
IMC also provides agreements obligating it to purchase designated securities in
a bond reserve fund at par value upon the occurrence of certain contractually
agreed-upon events. The opportunities and risks in these agreements are
analogous to those of municipal investment agreements and municipal repurchase
agreements. The total par value of securities subject to these agreements was
$43 million at December 31, 1999.
NOTE 18: NET INSURANCE IN FORCE
- -------------------------------
MBIA Corp. guarantees the timely payment of principal and interest on municipal,
asset-/mortgage-backed and other non-municipal securities. MBIA Corp.'s ultimate
exposure to credit loss in the event of nonperformance by the insured is
represented by the insurance in force as set forth below.
The insurance policies issued by MBIA Corp. are unconditional commitments
to guarantee timely payment on the bonds and notes to bondholders. The
creditworthiness of each insured issue is evaluated prior to the issuance of
insurance, and each insured issue must comply with MBIA Corp.'s underwriting
guidelines. Further, the payments to be made by the issuer on the bonds or notes
may be backed by a pledge of revenues, reserve funds, letters of credit,
investment contracts or collateral in the form of mortgages or other assets. The
right to such money or collateral would typically become MBIA Corp.'s upon the
payment of a claim by MBIA Corp.
Under certain structured asset-backed transactions, a pool of assets
covering at least 100% of the principal amount guaranteed under its insurance
contract is sold or pledged to a special-purpose bankruptcy remote entity. MBIA
Corp.'s primary risk from such insurance contracts is the impairment of cash
flows due to delinquency or loss on the underlying assets. MBIA Corp. therefore
evaluates all the factors affecting past and future asset performance by
studying historical data on losses, delinquencies and recoveries of the
underlying assets. Each transaction is reviewed to ensure that an appropriate
legal structure is used to protect against the bankruptcy risk of the originator
of the assets. Along with the legal structure, an additional level of first-loss
protection is also created to protect against losses due to credit or dilution.
This first level of loss protection is usually available from reserve funds,
excess cash flows, overcollateralization or recourse to a third party. The level
of first-loss protection depends upon the historical losses and dilution of the
underlying assets, but is typically several times the normal historical loss
experience for the underlying type of assets.
As of December 31, 1999, insurance in force, net of cessions to reinsurers,
had a range of maturity of 1-50 years. The distribution of net insurance in
force by geographic location, excluding $4.5 billion and $3.5 billion relating
to IMC municipal investment agreements guaranteed by MBIA Corp. in 1999 and
1998, respectively, is set forth in the following table:
<TABLE>
<CAPTION>
As of December 31
- --------------------------------------------------------------------------------------------------------
1999 1998
- ---------------------------------------------------------------- -------------------------------------
Net Number % of Net Net Number % of Net
$ in billions Insurance of Issues Insurance Insurance of Issues Insurance
Geographic Location In Force Outstanding In Force In Force Outstanding In Force
- ---------------------------------------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Domestic:
California $ 76.6 3,707 12.0% $ 76.3 3,681 12.8%
New York 71.3 5,485 11.2 61.6 5,310 10.3
Florida 36.3 1,498 5.7 36.1 1,589 6.1
Texas 26.6 1,990 4.2 25.3 2,131 4.2
Pennsylvania 25.8 2,113 4.1 24.7 2,278 4.1
New Jersey 24.4 1,841 3.8 26.2 1,884 4.4
Illinois 22.1 1,176 3.5 23.7 1,275 4.0
Massachusetts 19.2 1,075 3.0 18.4 1,107 3.1
Michigan 15.0 1,085 2.4 14.6 1,066 2.5
Ohio 13.1 1,049 2.1 13.8 1,076 2.3
- ---------------------------------------------------------------- -------------------------------------
Subtotal 330.4 21,019 52.0 320.7 21,397 53.8
Nationally diversified 97.1 952 15.3 81.7 842 13.7
Other states 175.0 11,691 27.5 169.0 12,004 28.4
- ---------------------------------------------------------------- -------------------------------------
Total domestic 602.5 33,662 94.8 571.4 34,243 95.9
International 33.4 452 5.2 24.5 323 4.1
- ---------------------------------------------------------------- -------------------------------------
Total $635.9 34,114 100.0% $595.9 34,566 100.0%
- ---------------------------------------------------------------- -------------------------------------
</TABLE>
(55)
<PAGE> 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The distribution of net insurance in force by type of bond is set forth in the
table below:
<TABLE>
<CAPTION>
As of December 31
- ----------------------------------------------------------------------------------------------------------------
1999 1998
- ------------------------------------------------------------------------ -------------------------------------
Net Number % of Net Net Number % of Net
$ in billions Insurance of Issues Insurance Insurance of Issues Insurance
Type of Bond In Force Outstanding In Force In Force Outstanding In Force
- ------------------------------------------------------------------------ -------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Domestic:
Municipal:
General obligation $146.9 13,310 23.1% $140.7 12,694 23.6%
Utilities 78.0 4,438 12.3 80.9 4,895 13.6
Health care 70.6 2,074 11.1 70.9 2,241 11.9
Special revenue 52.0 1,864 8.2 42.8 1,787 7.2
Transportation 46.1 1,382 7.2 46.2 1,543 7.7
Higher education 27.7 1,501 4.3 26.7 1,498 4.5
Housing 23.2 1,785 3.7 22.3 2,161 3.7
Industrial development and
pollution control revenue 19.0 929 3.0 19.4 1,037 3.3
Other 0.6 20 0.1 5.6 75 0.9
- ------------------------------------------------------------------------ -------------------------------------
Total municipal 464.1 27,303 73.0 455.5 27,931 76.4
- ------------------------------------------------------------------------ -------------------------------------
Structured finance:
Mortgage-backed:
Home equity 43.7 437 6.9 49.7 376 8.3
Other 18.8 111 2.9 5.2 94 0.9
First mortgage 12.8 174 2.0 9.8 109 1.7
Asset-backed:
Other 17.2 97 2.7 12.6 140 2.1
Auto 8.7 98 1.4 6.5 59 1.1
Leasing 6.3 54 1.0 6.7 45 1.1
Other structured finance 10.3 77 1.6 6.6 27 1.1
- ------------------------------------------------------------------------ -------------------------------------
Total structured finance 117.8 1,048 18.5 97.1 850 16.3
- ------------------------------------------------------------------------ -------------------------------------
Other:
Investor-owned utilities 14.1 4,994 2.2 13.0 5,068 2.2
Financial institution 5.7 305 0.9 5.4 381 0.9
Corporate direct 0.8 12 0.2 0.4 13 0.1
- ------------------------------------------------------------------------ -------------------------------------
Total other 20.6 5,311 3.3 18.8 5,462 3.2
- ------------------------------------------------------------------------ -------------------------------------
Total domestic 602.5 33,662 94.8 571.4 34,243 95.9
- ------------------------------------------------------------------------ -------------------------------------
International
Infrastructure:
Sovereign 2.1 67 0.3 1.6 32 0.3
Utilities 1.7 79 0.3 0.4 4 0.1
Sub-sovereign 1.2 28 0.2 1.2 44 0.2
Transportation 1.1 19 0.2 1.4 12 0.2
Health care 0.7 8 0.1 0.4 6 0.1
Housing 0.6 3 0.1 0.6 3 0.1
Other municipal 0.3 2 -- -- -- --
Special revenue 0.1 1 -- -- -- --
Higher education 0.1 2 -- 0.9 13 0.1
- ------------------------------------------------------------------------ -------------------------------------
Total infrastructure 7.9 209 1.2 6.5 114 1.1
- ------------------------------------------------------------------------ -------------------------------------
Structured finance:
Other structured finance 17.1 108 2.7 9.6 32 1.6
Asset-backed 1.9 40 0.3 4.2 50 0.7
Mortgage-backed 1.7 13 0.2 1.0 20 0.2
- ----------------------------------------------------------------------- -------------------------------------
Total structured finance 20.7 161 3.2 14.8 102 2.5
- ------------------------------------------------------------------------ -------------------------------------
Other:
Financial institution 3.6 62 0.6 1.0 29 0.1
Investor-owned utilities 1.1 15 0.2 1.8 72 0.3
Corporate direct 0.1 5 -- 0.4 6 0.1
- ------------------------------------------------------------------------ -------------------------------------
Total other 4.8 82 0.8 3.2 107 0.5
- ------------------------------------------------------------------------ -------------------------------------
Total international 33.4 452 5.2 24.5 323 4.1
- ------------------------------------------------------------------------ -------------------------------------
Total $635.9 34,114 100.0% $595.9 34,566 100.0%
- ------------------------------------------------------------------------ -------------------------------------
</TABLE>
(56)
<PAGE> 25
MBIA Inc. and Subsidiaries
NOTE 19: REINSURANCE
- --------------------
MBIA Corp. reinsures exposure with other insurance companies under various
treaty and facultative reinsurance contracts, both on a pro rata and excess of
loss basis. In the event that any or all of the reinsurers were unable to meet
their obligations, MBIA Corp. would be liable for such defaulted amounts.
Amounts deducted from gross insurance in force for reinsurance ceded by
MBIA Corp. and its subsidiaries were $129.0 billion and $108.2 billion at
December 31, 1999 and 1998, respectively. The distribution of ceded insurance in
force by type of bond is set forth in the following table:
As of December 31
- -------------------------------------------------------------------------------
1999 1998
- ------------------------------------------------------ -----------------------
% of % of
Ceded Ceded Ceded Ceded
In billions Insurance Insurance Insurance Insurance
Type of Bond In Force In Force In Force In Force
- ------------------------------------------------------ -----------------------
Domestic:
Municipal:
General obligation $ 18.8 14.6% $ 15.3 14.2%
Utilities 17.2 13.3 15.5 14.3
Health care 15.7 12.2 13.4 12.4
Transportation 14.8 11.5 10.6 9.8
Special revenue 8.7 6.7 6.3 5.8
Industrial development and
pollution control revenue 3.8 2.9 3.8 3.5
Housing 2.7 2.1 2.3 2.1
Higher education 2.2 1.7 1.7 1.5
Other 0.3 0.3 0.8 0.7
- ------------------------------------------------------ -----------------------
Total municipal 84.2 65.3 69.7 64.3
- ------------------------------------------------------ -----------------------
Structured finance:
Mortgage-backed:
Home equity 8.8 6.8 11.3 10.5
First mortgage 2.0 1.6 2.1 2.0
Other 1.4 1.1 0.3 0.2
Asset-backed:
Other 2.5 1.9 1.5 1.4
Leasing 2.4 1.9 1.1 1.0
Auto 1.9 1.4 2.2 2.0
Other structured finance 2.2 1.7 1.0 0.9
- ------------------------------------------------------ -----------------------
Total structured finance 21.2 16.4 19.5 18.0
- ------------------------------------------------------ -----------------------
Other:
Investor-owned utilities 1.9 1.5 1.2 1.1
Financial institution 0.3 0.2 1.0 0.9
Corporate direct 0.1 0.1 0.1 0.1
- ------------------------------------------------------ -----------------------
Total other 2.3 1.8 2.3 2.1
- ------------------------------------------------------ -----------------------
Total domestic 107.7 83.5 91.5 84.4
- ------------------------------------------------------ -----------------------
International
Infrastructure:
Sovereign 1.4 1.1 0.7 0.6
Transportation 1.2 0.9 1.3 1.2
Sub-sovereign 0.9 0.7 0.5 0.5
Utilities 0.7 0.5 0.4 0.4
Health care 0.4 0.3 0.2 0.2
Other 0.3 0.3 1.1 1.0
- ------------------------------------------------------ -----------------------
Total infrastructure 4.9 3.8 4.2 3.9
- ------------------------------------------------------ -----------------------
Structured finance:
Other structured finance 9.0 7.0 4.0 3.7
Asset-backed 2.6 2.0 6.7 6.2
Mortgage-backed 1.2 0.9 0.4 0.4
- ------------------------------------------------------ -----------------------
Total structured finance 12.8 9.9 11.1 10.3
- ------------------------------------------------------ -----------------------
Other:
Financial institution 3.0 2.4 0.9 0.9
Investor-owned utilities 0.5 0.3 0.2 0.2
Corporate direct 0.1 0.1 0.3 0.3
- ------------------------------------------------------ -----------------------
Total other 3.6 2.8 1.4 1.4
- ------------------------------------------------------ -----------------------
Total international 21.3 16.5 16.7 15.6
- ------------------------------------------------------ -----------------------
Total $129.0 100.0% $108.2 100.0%
- ------------------------------------------------------ -----------------------
The distribution of ceded insurance in force by geographic location is set forth
in the following table:
As of December 31
- -------------------------------------------------------------------------------
1999 1998
- ------------------------------------------------------ -----------------------
% of % of
Ceded Ceded Ceded Ceded
In billions Insurance Insurance Insurance Insurance
Geographic Location In Force In Force In Force In Force
- ------------------------------------------------------ -----------------------
Domestic:
California $ 17.6 13.6% $ 12.4 11.5%
New York 14.0 10.9 10.7 9.9
New Jersey 5.5 4.3 5.4 5.0
Texas 5.5 4.2 5.3 4.9
Florida 5.0 3.9 3.2 3.0
Pennsylvania 4.6 3.5 3.8 3.5
Massachusetts 4.1 3.2 3.7 3.4
Illinois 3.4 2.6 3.4 3.1
Puerto Rico 3.2 2.5 3.1 2.9
Colorado 2.4 1.9 2.3 2.1
- ------------------------------------------------------ -----------------------
Subtotal 65.3 50.6 53.3 49.3
Nationally diversified 14.4 11.2 14.6 13.4
Other states 28.0 21.7 23.6 21.7
- ------------------------------------------------------ -----------------------
Total domestic 107.7 83.5 91.5 84.4
International 21.3 16.5 16.7 15.6
- ------------------------------------------------------ -----------------------
Total $129.0 100.0% $108.2 100.0%
- ------------------------------------------------------ -----------------------
As part of the company's portfolio shaping activity in 1998, the company entered
into facultative share reinsurance agreements with highly rated reinsurers that
obligate the company to cede future premiums to the reinsurers through January
1, 2005. Certain reinsurance contracts
(57)
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
in 1998 were accounted for on a retroactive basis in accordance with SFAS 113,
"Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration
Contracts".
Ceding commissions received from reinsurers before deferrals were $35.3
million, $37.2 million and $20.8 million in 1999, 1998 and 1997, respectively.
In 1998, $170.0 million was received in reinsurance recoveries related to the
bankruptcy of a Pennsylvania hospital group.
NOTE 20: PENSION AND PROFIT SHARING PLANS
- -----------------------------------------
The company has a non-contributory, defined contribution pension plan to which
the company contributes 10% of each eligible employee's annual total
compensation. Pension expense for the years ended December 31, 1999, 1998 and
1997 was $7.8 million, $7.3 million and $4.6 million, respectively. The company
also has a profit-sharing/401(k) plan that allows eligible employees to
contribute up to 10% of eligible compensation. The company matches employee
contributions up to the first 5% of eligible compensation. Company contributions
to the profit-sharing/401(k) plan aggregated $4.2 million, $2.9 million and $1.9
million for the years ended December 31, 1999, 1998 and 1997, respectively. The
profit-sharing/401(k) plan company match amounts are invested in common stock of
the company. Amounts relating to the above plans that exceed limitations
established by federal regulations are contributed to a non-qualified deferred
compensation plan. In 1999 and 1998 former CapMAC and 1838 employees were
covered under the company's pension and profit-sharing plans.
NOTE 21: LONG-TERM INCENTIVE PLANS
- ----------------------------------
On March 2, 1987, the company adopted a plan for key employees of the company
and its subsidiaries to enable those employees to acquire shares of common stock
of the company or to benefit from appreciation in the price of the common stock
of the company. Options granted will either be Incentive Stock Options (ISOs),
where they qualify under Section 422(a) of the Internal Revenue Code, or
Non-Qualified Stock Options (NQSOs).
ISOs and NQSOs may be granted at a price not less than 100% of the fair
value of the company's common stock as determined on the date granted. Options
will be exercisable as specified at the time of grant and expire ten years from
the date of grant (or shorter if specified or following termination of
employment).
The board of directors of the company has authorized a maximum of 9,311,122
shares of the company's common stock to be granted as options. As of December
31, 1999, 9,145,056 options had been granted, net of expirations and
cancellations, leaving the total number available for future grants at 166,066.
Options granted through 1990 are exercisable in equal annual installments on
each of the first three anniversaries of the grant at 100% of the market price
at the date of grant. The options granted from 1991 through 1994 are exercisable
in five equal annual installments commencing one year after the date of grant.
On all options granted from 1991 through 1994, accelerated vesting and
exercisability of those options is possible if the company's return on equity
for the year is at least equal to the threshold return on equity specified in
the annual financial plan and if earnings per share are at least 2.5% greater
than plan earnings per share.
In December 1995, the MBIA Inc. Board of Directors approved the "MBIA
Long-Term Incentive Program." The incentive program includes a stock option
program and adds a compensation component linked to the growth in adjusted book
value per share (ABV) of the company's stock. Awards under the long-term program
are divided equally between the two components, with 50% of the award given in
stock options and 50% of the award to be paid in cash or shares of company
stock.
Target levels for the option/incentive award are established as a
percentage of total salary and bonus, based upon the recipient's position.
Awards under the long-term program typically will be granted from the vice
president level up to and including the chairman and chief executive officer.
The ABV portion of the long-term incentive program may be awarded every
year. The 1999 award will cover growth in ABV from December 31, 1999 through
December 31, 2002; the 1998 award will cover growth in ABV from December 31,
1998 through December 31, 2001; and the 1997 award will cover growth in ABV from
December 31, 1997 through December 31, 2000, with a base line growth of 12% on
all awards. The amount to be paid in respect of such award will be adjusted
upward or downward based on the actual ABV growth, with a minimum growth of 8%
necessary to receive any payment and an 18% growth needed to receive the maximum
payment of 200% of the target levels. The amount, if any, to be paid under this
portion of the program will be paid in early 2003 for the 1999 award, in early
2002 for the 1998 award and early 2001 for the 1997 award in the form of cash or
shares of the company's common stock. Subsequent awards, if any, will be made
every year with concomitant payments occurring after the three-year cycle.
During 1999, 1998 and 1997, $8.5 million, $5.5 million and $3.7 million,
respectively, were recorded as a charge related to the 1999, 1998 and 1997 ABV
awards.
The stock option grants, which may continue to be awarded every year,
provide the right to purchase shares of common stock at the fair value (closing
price) of the stock on the date of the grant. Each option vests over five years
and has a ten-year term. Prior option grants are not taken into account in
determining the number of options granted in any year. In 1999, 2,373,540
options were awarded.
(58)
<PAGE> 27
MBIA Inc. and Subsidiaries
In December 1995, the company adopted a restricted stock program whereby key
executive officers are granted restricted shares of the company's stock. These
stock awards may only be sold three, four, or five years from the date of grant,
at which time the awards fully vest.
In 1999 and 1998, respectively, 96,968 and 51,412 restricted shares (net of
cancelled shares) of the company's stock were granted to certain officers of the
company. The fair value of the shares awarded in 1999 and 1998 determined on the
grant date was $5.0 million and $3.3 million, respectively, and has been
recorded as "Unearned compensation-restricted stock" and is shown as a separate
component of shareholders' equity. Unearned compensation is amortized to expense
over the appropriate three- to five-year vesting period. Compensation expense
related to the restricted stock was $1.9 million, $1.3 million and $0.9 million
for the years ended December 31, 1999, 1998 and 1997, respectively.
In 1992, CapMAC adopted an Employee Stock Ownership Plan (ESOP) to provide
its employees the opportunity to obtain beneficial interests in the stock of
CapMAC through a trust (the ESOP Trust). The ESOP Trust purchased 350,625 shares
of the company's stock. The ESOP Trust financed its purchase of common stock
with a loan from the company in the amount of $10 million. The ESOP loan is
evidenced by a promissory note delivered to the company. An amount representing
unearned employee compensation, equivalent in value to the unpaid balance of the
ESOP loan, is recorded as "Unallocated ESOP shares" and is shown as a separate
component of shareholders' equity.
The company is required to make contributions to the ESOP Trust, which
enables the ESOP Trust to service its loan to the company. Prior to 1999, the
ESOP expense was calculated using the shares allocated method. Shares were
released for allocation to the participants and held in trust for the employees
based upon the ratio of the current year's principal and interest payment to the
sum of principal and interest payments estimated over the life of the loan.
Compensation expense related to the ESOP was $1.3 million for the year ended
December 31, 1998. As of December 31, 1998, 208,789 shares were allocated to the
participants.
In July 1999, the company contributed 13,397 additional shares to the ESOP
plan. Subsequent to this contribution the ESOP plan was merged with the MBIA
Inc. Employees profit-sharing/401(k) plan. In conjunction with the merger of the
plans, the remaining ESOP shares are used to fund the profit-sharing/401(k)
company match obligations. In 1999, 10,190 shares were utilized for the profit-
sharing/401(k) company match. As of December 31, 1999, a total of 223,365 shares
have been allocated to participants.
In October 1995, the FASB issued SFAS 123, "Accounting for Stock-Based
Compensation," effective for financial statements for fiscal years beginning
after December 15, 1995. SFAS 123 required the company to adopt, at its
election, either 1) the provisions in SFAS 123 which require the recognition of
compensation expense for employee stock-based compensation plans, or 2) the
provisions in SFAS 123 which require the pro forma disclosure of net income and
earnings per share as if the recognition provisions of SFAS 123 had been
adopted. SFAS 123 explicitly provides that employers may continue to account for
their employee stock-based compensation plans using the accounting prescribed by
APB Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25). The
company adopted the disclosure requirements of SFAS 123 effective January 1,
1996 and continues to account for its employee stock-based compensation plans
under APB 25. Accordingly, the adoption of SFAS 123 had no impact on the
company's financial position or results of operations. As the table below shows,
had compensation cost for the company's stock option program been recognized
based on the fair value at the grant date, consistent with the recognition
provisions of SFAS 123, the impact on the company's net income and earnings per
share would not have been material. However, since the options vest over five
years and additional awards could be made in future years, the effects of
applying SFAS 123 in 1999 are not likely to be representative of the effects on
reported net income and earnings per share for future years.
Years ended December 31
----------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------
Net income (in thousands):
Reported $320,530 $432,728 $405,610
Pro forma 314,074 430,224 404,180
Basic earnings per share:
Reported $3.22 $4.37 $4.18
Pro forma 3.15 4.35 4.17
Diluted earnings per share:
Reported $3.19 $4.32 $4.12
Pro forma 3.13 4.30 4.11
- ---------------------------------------------------------------------------
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in December 1999, January 1999, December 1998 and
1997, respectively; exercise price of $48.8125, $67.1250, $63.8152 and $64.7661;
dividend yield of 1.680%, 1.190%, 1.254% and 1.220%; expected volatility of
.2512, .2392, .2392 and .2070; risk-free interest rate of 6.28%, 4.83%, 4.63%
and 5.80%; and expected option term of 6.05, 6.05, 5.86 and 5.72 years.
(59)
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the company's stock option plan as of December 31, 1999, 1998
and 1997, and changes during the years ending on those dates, is presented
below:
1999
- --------------------------------------------------------------------------
Weighted
Number Avg. Price
Options of Shares per Share
- --------------------------------------------------------------------------
Outstanding at beginning of year 3,679,414 $42.2591
Granted 2,373,540 61.1806
Exercised 365,816 64.0688
Expired or canceled 157,048 66.2718
- --------------------------------------------------------------------------
Outstanding at year end 5,530,090 $50.7047
- --------------------------------------------------------------------------
Exercisable at year end 2,092,322 $32.5158
- --------------------------------------------------------------------------
Weighted-average fair value
per share of options
granted during the year $21.4250
- --------------------------------------------------------------------------
1998
- --------------------------------------------------------------------------
Weighted
Number Avg. Price
Options of Shares per Share
- --------------------------------------------------------------------------
Outstanding at beginning of year 4,033,930 $37.0004
Granted 575,430 63.8152
Exercised 744,670 69.6068
Expired or canceled 185,276 61.2550
- --------------------------------------------------------------------------
Outstanding at year end 3,679,414 $42.2591
- --------------------------------------------------------------------------
Exercisable at year end 2,095,767 $29.3827
- --------------------------------------------------------------------------
Weighted-average fair value
per share of options
granted during the year $18.1565
- --------------------------------------------------------------------------
1997
- --------------------------------------------------------------------------
Weighted
Number Avg. Price
Options of Shares per Share
- --------------------------------------------------------------------------
Outstanding at beginning of year 4,049,879 $31.7892
Granted 449,274 64.7661
Exercised 430,314 57.3585
Expired or canceled 34,909 34.5547
- --------------------------------------------------------------------------
Outstanding at year end 4,033,930 $37.0004
- --------------------------------------------------------------------------
Exercisable at year end 2,450,080 $26.9218
- --------------------------------------------------------------------------
Weighted-average fair value
per share of options
granted during the year $18.3756
- --------------------------------------------------------------------------
The following table summarizes information about the plan's stock options at
December 31, 1999:
<TABLE>
<CAPTION>
Weighted-Average
Number Remaining Number
Outstanding Contractual Weighted-Average Exercisable Weighted-Average
Range of Average Exercise Price at 12/31/99 Life in Years Exercise Price 12/31/99 Exercise Price
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$16.6250-$29.8130 1,379,705 3.07 $25.4787 1,379,705 $25.4787
$30.0630-$52.4050 1,590,850 7.78 46.0557 578,009 41.0923
$56.9510-$72.7260 2,559,535 8.60 67.1921 134,608 67.8163
- ---------------------------------------------------------------------------------------------------------------------
Total 5,530,090 6.98 $50.7047 2,092,322 $32.5158
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 22: SHAREHOLDERS' RIGHTS PLAN
- ----------------------------------
In December 1991, the board of directors of the company declared a dividend
distribution of one preferred share purchase right (a Right) for each
outstanding share of the company's common stock. Each Right entitles its holder
to purchase from the company one one-hundredth of a share of the company's
Junior Participating Cumulative Preferred Shares at a price of $160, subject to
certain adjustments. Initially, the Rights are attached to the common stock and
will not be transferable separately nor become exercisable until the earlier to
occur of (i) ten business days following the date of the public announcement by
the company (the Shares Acquisition Date) that a person or group of persons has
acquired or obtained the right to acquire beneficial ownership of 10% or more of
the outstanding shares of the company's common stock and (ii) ten business days
(or later as may be determined by the board of directors) after the announcement
or commencement of a tender offer or exchange offer which, if successful, would
result in the bidder owning 10% or more of the outstanding shares of the
company's common stock. However, no person shall be deemed to have acquired or
obtained the right to acquire the beneficial ownership of 10% or more of the
outstanding shares of the company's common stock if the board of directors
determines that such acquisition is inadvertent, and such person promptly
divests itself of a sufficient number of shares to be below the 10% ownership
threshold.
If the acquiring person or group acquires beneficial ownership of 10% or
more of the company's common stock (except pursuant to a tender or exchange
offer for all outstanding common stock of the company, determined by the
company's independent directors to be at a fair price and in the best interests
of the company and its shareholders), each holder of a Right (other than the
acquirer) will be entitled to purchase, for $160, that number of shares of
common stock of the company having a fair value of $320.
Similarly, if after an acquiring person or group so acquires 10% or more of
the company's common stock, the company is acquired in a merger or other
business combination and is not the surviving entity, or its common stock is
changed or exchanged in whole or in part, or 50% or more of the company's
assets, cash flow or
(60)
<PAGE> 29
MBIA Inc. and Subsidiaries
earning power is sold, each holder of a Right (other than the acquirer) will
be entitled to purchase, for $160, that number of shares of common stock of the
acquiring company having a fair value of $320.
The board of directors may redeem the Rights in whole at $.01 per Right at
any time prior to ten business days following the Shares Acquisition Date.
Further, at any time after a person or group acquires 10% or more, but less than
50%, of the company's common stock, the board of directors of the company may
exchange the Rights (other than those held by the acquirer) in whole or in part,
at an exchange ratio of one share of common stock per Right. The board of
directors may also amend the Rights at any time prior to the Shares Acquisition
Date. The Rights will expire on December 12, 2001, unless earlier redeemed or
exchanged.
NOTE 23: RELATED PARTY TRANSACTIONS
- -----------------------------------
Since 1989, MBIA Corp. has executed five surety bonds to guarantee the payment
obligations of the members of the Association which had their S&P claims-paying
rating downgraded from Triple-A on their previously issued Association policies.
In the event that they do not meet their Association policy payment obligations,
MBIA Corp. will pay the required amounts directly to the paying agent. The
aggregate outstanding exposure on these surety bonds as of December 31, 1999 is
$340 million.
NOTE 24: FAIR VALUE OF FINANCIAL INSTRUMENTS
- --------------------------------------------
The estimated fair value amounts of financial instruments shown in the following
table have been determined by the company using available market information and
appropriate valuation methodologies. However, in certain cases considerable
judgment has been necessarily required to interpret market data to develop
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amount the company could realize in a current
market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
FIXED-MATURITY SECURITIES The fair value of fixed-maturity securities is based
upon quoted market prices, if available. If a quoted market price is not
available, fair value is estimated using quoted market prices for similar
securities.
SHORT-TERM INVESTMENTS Short-term investments are carried at amortized cost
which approximates fair value.
OTHER INVESTMENTS Other investments include the company's interest in equity
oriented and equity method investments. The fair value of the equity-oriented
investments is based on quoted market prices.
MUNICIPAL INVESTMENT AGREEMENT PORTFOLIO The municipal investment agreement
portfolio is comprised of fixed-maturity securities and short-term investments.
The fair value of the portfolio equals the quoted market prices, if available,
of its fixed-maturities plus the amortized cost of its short-term investments
which approximates fair value. If a quoted market price is not available for a
fixed-maturity security, fair value is estimated using quoted market prices for
similar securities.
CASH AND CASH EQUIVALENTS, RECEIVABLE FOR INVESTMENTS SOLD, SHORT-TERM DEBT, AND
PAYABLE FOR INVESTMENTS PURCHASED The carrying amounts of these items are a
reasonable estimate of their fair value.
SECURITIES BORROWED OR PURCHASED UNDER AGREEMENTS TO RESELL The fair value is
estimated based upon the quoted market prices of the transactions' underlying
collateral.
PREPAID REINSURANCE PREMIUMS The fair value of the company's prepaid reinsurance
premiums is based on the estimated cost of entering into an assumption of the
entire portfolio with third-party reinsurers under current market conditions.
DEFERRED PREMIUM REVENUE The fair value of the company's deferred premium
revenue is based on the estimated cost of entering into a cession of the entire
portfolio with third-party reinsurers under current market conditions.
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES The carrying amount is composed of the
present value of the expected cash flows for specifically identified claims
combined with an estimate for unidentified claims. Therefore, the carrying
amount is a reasonable estimate of the fair value of the reserve.
LONG-TERM DEBT The fair value is estimated based on the quoted market prices for
the same or similar securities.
MUNICIPAL INVESTMENT AGREEMENTS AND MUNICIPAL REPURCHASE AGREEMENTS The fair
values of municipal investment agreements and municipal repurchase agreements
are estimated using discounted cash flow calculations based upon interest rates
currently being offered for similar agreements with maturities consistent with
those remaining for the agreements being valued.
SECURITIES LOANED OR SOLD UNDER AGREEMENTS TO REPURCHASE The fair value is
estimated based upon the quoted market prices of the transactions' underlying
collateral.
INSTALLMENT PREMIUMS The fair value is derived by calculating the present value
of the estimated future cash flow stream discounted at 9%.
FORWARD INTEREST RATE SWAP The fair value reflects the estimated amounts that
the company would receive or pay to terminate the transaction at the reporting
date.
(61)
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
As of December 31, 1999 As of December 31, 1998
-----------------------------------------------------
Carrying Estimated Carrying Estimated
In thousands Amount Fair Value Amount Fair Value
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS:
Fixed-maturity securities $5,783,979 $5,783,979 $5,884,053 $5,884,053
Short-term investments 274,022 274,022 423,194 423,194
Other investments 146,038 146,038 94,975 94,975
Municipal investment agreement portfolio 4,489,551 4,489,551 3,678,229 3,678,229
Cash and cash equivalents 93,559 93,559 20,757 20,757
Securities borrowed or purchased under
agreements to resell 261,171 260,819 538,281 540,864
Reinsurance recoverable on unpaid losses 30,819 30,819 29,891 29,891
Prepaid reinsurance premiums 403,210 342,837 352,699 297,238
Receivable for investments sold 24,922 24,922 49,497 49,497
LIABILITIES:
Deferred premium revenue 2,310,758 2,022,357 2,251,211 1,939,971
Loss and loss adjustment expense reserves 467,279 467,279 300,005 300,005
Municipal investment agreements 3,483,911 3,413,014 2,587,339 2,665,069
Municipal repurchase agreements 1,028,921 1,023,823 897,718 939,860
Long-term debt 689,204 660,567 688,996 735,443
Short-term debt 68,751 68,751 -- --
Securities loaned or sold under agreements
to repurchase 288,750 289,469 573,352 585,872
Payable for investments purchased 102,666 102,666 95,598 95,598
OFF-BALANCE SHEET INSTRUMENTS:
Installment premiums -- 731,748 -- 644,132
Forward Interest Rate SWAP -- 9,617 -- (3,838)
</TABLE>
NOTE 25: QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
- --------------------------------------------------------
A summary of selected quarterly income statement information follows:
<TABLE>
<CAPTION>
In thousands except per share amounts
1999 First Second Third Fourth Year
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Gross premiums written $154,910 $146,817 $152,749 $170,395 $624,871
Net premiums written 94,914 111,461 119,720 127,520 453,615
Premiums earned 112,111 107,217 110,139 113,329 442,796
Investment income and
realized gains and losses 97,429 96,152 97,094 93,941 384,616
All other revenues 27,986 33,161 36,275 39,587 137,009
Income before income taxes 11,954 53,358 160,178 162,393 387,883
Net income $ 9,420 $ 56,793 $127,410 $126,907 $320,530
Net income per common share:*
Basic $ 0.09 $ 0.57 $ 1.28 $ 1.28 $ 3.22
Diluted $ 0.09 $ 0.56 $ 1.27 $ 1.27 $ 3.19
- --------------------------------------------------------------------------------------
1998 First Second Third Fourth Year
- --------------------------------------------------------------------------------------
Gross premiums written $121,387 $199,040 $167,872 $188,751 $677,050
Net premiums written 107,054 171,760 140,374 101,798 520,986
Premiums earned 99,642 104,613 106,159 114,136 424,550
Investment income and
realized gains and losses 94,942 89,046 97,583 85,207 366,778
All other revenues 29,849 30,959 31,518 28,228 120,554
Income before income taxes 130,078 159,062 143,580 132,318 565,038
Net income $102,105 $119,029 $108,243 $103,351 $432,728
Net income per common share:*
Basic $ 1.03 $ 1.20 $ 1.09 $ 1.04 $ 4.37
Diluted $ 1.02 $ 1.19 $ 1.08 $ 1.03 $ 4.32
- --------------------------------------------------------------------------------------
</TABLE>
*Due to the changes in the number of shares outstanding, quarterly per share
amounts may not add to the totals for the years.
The pretax one-time charge of $153 million relating to the increase in the
company's loss reserving factor is included in the first quarter of 1999
results. The pretax one-time charge of $102 million relating to the impairment
of the company's investment in Capital Asset is included in the second quarter
of 1999 results.
(62)
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF MBIA INC.
<TABLE>
<CAPTION>
NAME OF SUBSIDIARY STATE OF INCORPORATION
<S> <C>
MBIA Insurance Corporation New York
Municipal Issuers Service Corporation New York
MBIA Insurance Corp. of Illinois Illinois
MBIA Asset Management Corporation Delaware
MBIA Municipal Investors Service Corporation Delaware
American Money Management Associates, Inc. Colorado
Colorado Investor Services Corporation Colorado
MBIA Investment Management Corp. Delaware
MBIA Capital Management Corp. Delaware
1838 Investment Advisors, Inc. Delaware
1838 Delaware Holding, Inc. Delaware
MBIA & Associates Consulting, Inc. Delaware
Capital Advisors, Ltd. New York
MBIA Capital Corp. Delaware
MBIA-AMBAC International Marketing
Services, Pty. Limited Australia
MBIA Assurance S.A. France
MBIA Singapore Pte Ltd. Singapore
MBIA Services Company Delaware
MBIA MuniServices Company Delaware
Municipal Tax Collection Bureau, Inc. Pennsylvania
John T. Austin, Inc. California
Allen W. Charkow, Inc. California
Municipal Resource Consultants California
Muni Resources, LLC Delaware
Capital Asset Holdings GP, Inc. Florida
CapMAC Holdings Inc. Delaware
Capital Markets Assurance Corporation New York
CapMAC Investment Management, Inc. Delaware
CapMAC Financial Services, Inc. Delaware
CapMAC Financial Services (Europe) Ltd. United Kingdom
CapMAC Asia Ltd. Bermuda
</TABLE>
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent the incorporation by reference in the Registration Statements of MBIA
Inc. and Subsidiaries on the forms S-3 (No. 333-15003 and 333-60039 and
333-62961) and S-8 (Nos. 33-22441 and 33-46062 and 333-34101) of:
(1) Our report dated February 3, 2000, on our audits of the consolidated
financial statements of MBIA Inc. and Subsidiaries as of December 31, 1999
and 1998, and for each of the three years in the period ended December 31,
1999, which report is incorporated by reference in this Annual Report on
Form 10-K for the fiscal year ended December 31, 1999;
(2) Our report dated February 3, 2000 on our audits of the financial statement
schedules of MBIA Inc. and Subsidiaries, which report is included in this
Annual Report on Form 10-K for the fiscal year ended December 31, 1999; and
(3) Our report dated February 3, 2000 on our audits of the consolidated
financial statements of MBIA Insurance Corporation and Subsidiaries as of
December 31, 1999 and 1998, and for each of the three years in the period
ended December 31, 1999, which is included in Exhibit 99 to this Annual
Report on Form 10-K for the fiscal year ended December 31, 1999.
/s/ PricewaterhouseCoopers LLP
-------------------------------
PricewaterhouseCoopers LLP
New York, New York
March 29, 2000
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 5,783,979
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 10,693,590
<CASH> 93,559
<RECOVER-REINSURE> 30,819
<DEFERRED-ACQUISITION> 251,922
<TOTAL-ASSETS> 12,263,899
<POLICY-LOSSES> 467,279
<UNEARNED-PREMIUMS> 2,310,758
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 757,955
0
0
<COMMON> 100,073
<OTHER-SE> 3,413,028
<TOTAL-LIABILITY-AND-EQUITY> 12,263,899
442,796
<INVESTMENT-INCOME> 359,456
<INVESTMENT-GAINS> 24,040
<OTHER-INCOME> 138,219
<BENEFITS> 198,454
<UNDERWRITING-AMORTIZATION> 36,700
<UNDERWRITING-OTHER> 80,082
<INCOME-PRETAX> 387,883
<INCOME-TAX> 67,353
<INCOME-CONTINUING> 320,530
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 320,530
<EPS-BASIC> 3.22
<EPS-DILUTED> 3.19
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
<PAGE> 1
EXHIBIT 99
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 1999 and 1998
and for the years ended
December 31, 1999, 1998 and 1997
<PAGE> 2
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
TO THE BOARD OF DIRECTORS AND SHAREHOLDER OF
MBIA INSURANCE CORPORATION:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income and changes in shareholder's equity and cash
flows present fairly, in all material respects, the financial position of MBIA
Insurance Corporation and Subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits in accordance with auditing standards generally accepted in the United
States, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion expressed above.
/s/ PricewaterhouseCoopers LLP
------------------------------
PricewaterhouseCoopers LLP
New York, New York
February 3, 2000
<PAGE> 3
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
------------------- -------------------
ASSETS
<S> <C> <C>
Investments:
Fixed-maturity securities held as available-for-sale
at fair value (amortized cost $6,006,506 and $5,565,060) $5,783,979 $5,884,053
Short-term investments, at amortized cost
(which approximates fair value) 273,816 423,188
Other investments 8,425 17,850
------------- -------------
TOTAL INVESTMENTS 6,066,220 6,325,091
Cash and cash equivalents 33,702 6,546
Securities purchased under agreements to resell 205,000 187,500
Accrued investment income 93,512 91,239
Deferred acquisition costs 251,922 230,085
Prepaid reinsurance premiums 403,210 352,699
Reinsurance recoverable on unpaid losses 30,819 29,891
Goodwill (less accumulated amortization of
$56,906 and $52,031) 86,075 90,950
Property and equipment, at cost (less accumulated
depreciation of $31,104 and $23,840) 111,549 71,952
Receivable for investments sold 2,882 33,880
Other assets 161,082 97,970
------------- -------------
TOTAL ASSETS $7,445,973 $7,517,803
============= =============
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Deferred premium revenue $2,310,758 $2,251,211
Loss and loss adjustment expense reserves 467,279 300,005
Securities sold under agreements to repurchase 205,000 187,500
Deferred income taxes 79,895 303,407
Deferred fee revenue 28,478 33,785
Payable for investments purchased 18,948 29,523
Other liabilities 107,988 135,027
------------- -------------
TOTAL LIABILITIES 3,218,346 3,240,458
------------- -------------
Shareholder's Equity:
Common stock, par value $150 per share; authorized,
issued and outstanding - 100,000 shares 15,000 15,000
Additional paid-in capital 1,514,014 1,491,033
Retained earnings 2,858,210 2,566,222
Accumulated other comprehensive income (loss),
net of deferred income tax provision (benefit)
of $(77,942) and $112,283 (159,597) 205,090
------------- -------------
TOTAL SHAREHOLDER'S EQUITY 4,227,627 4,277,345
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $7,445,973 $7,517,803
============= =============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
-2-
<PAGE> 4
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands)
Years ended December 31
-----------------------------------
1999 1998 1997
---------- ----------- ----------
Revenues:
Gross premiums written $624,871 $725,269 $544,974
Ceded premiums (171,256) (149,280) (79,781)
---------- ----------- ----------
Net premiums written 453,615 575,989 465,193
Increase in deferred premium revenue (10,819) (166,182) (165,858)
---------- ----------- ----------
Premiums earned (net of ceded
premiums of $120,745
$49,474, and $43,734) 442,796 409,807 299,335
Net investment income 358,836 326,391 282,460
Net realized gains 32,680 29,891 17,478
Advisory fees 22,885 23,964 ---
Other --- 713 1,201
---------- ----------- ----------
Total revenues 857,197 790,766 600,474
---------- ----------- ----------
Expenses:
Losses and loss adjustment 198,454 33,661 18,673
Policy acquisition costs, net 36,700 33,168 27,873
Operating 76,599 65,445 50,016
---------- ---------- ---------
Total expenses 311,753 132,274 96,562
---------- ---------- ---------
Income before income taxes 545,444 658,492 503,912
Provision for income taxes 73,456 134,593 112,904
---------- ---------- ---------
Net income $471,988 $523,899 $391,008
========== ========== =========
The accompanying notes are an integral part of the
consolidated financial statements.
-3-
<PAGE> 5
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
For the years ended December 31, 1999, 1998 and 1997 (In
thousands except per share amounts)
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other Total
------------------ Paid-in Retained Comprehensive Shareholder's
Shares Amount Capital Earnings Income (Loss) Equity
-------- -------- ---------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 100,000 $15,000 $1,041,876 $1,651,315 $ 95,680 $2,803,871
Comprehensive income:
Net income --- --- --- 391,008 --- 391,008
Other comprehensive income:
Change in unrealized
appreciation of investments
net of change in deferred
income taxes of $(42,241) --- --- --- --- 78,418 78,418
Change in foreign
currency translation --- --- --- --- (7,511) (7,511)
-------------
Other comprehensive income 70,907
-------------
Total comprehensive income 461,915
-------------
Capital contribution from MBIA Inc. --- --- 80,000 --- --- 80,000
Tax reduction related to tax
sharing agreement with MBIA Inc. --- --- 18,073 --- --- 18,073
-------- -------- ---------- ----------- ------------- -------------
Balance, December 31, 1997 100,000 15,000 1,139,949 2,042,323 166,587 3,363,859
-------- -------- ---------- ----------- ------------- -------------
Comprehensive income:
Net income --- --- --- 523,899 --- 523,899
Other comprehensive income:
Change in unrealized
appreciation of investments
net of change in deferred
income taxes of $17,867 --- --- --- --- 34,084 34,084
Change in foreign
currency translation --- --- --- --- 4,419 4,419
-------------
Other comprehensive income 38,503
-------------
Comprehensive income 562,402
-------------
Capital contribution from MBIA Inc. --- --- 324,915 --- --- 324,915
Tax reduction related to tax
sharing agreement with MBIA Inc. --- --- 26,169 --- --- 26,169
-------- -------- ---------- ----------- ------------- -------------
Balance, December 31, 1998 100,000 15,000 1,491,033 2,566,222 205,090 4,277,345
-------- -------- ---------- ----------- ------------- -------------
Comprehensive income:
Net income --- --- --- 471,988 --- 471,988
Other comprehensive income (loss):
Change in unrealized
appreciation of investments
net of change in deferred
income taxes of $(190,225) --- --- --- --- (354,231) (354,231)
Change in foreign
currency translation --- --- --- --- (10,456) (10,456)
-------------
Other comprehensive income (loss) (364,687)
-------------
Comprehensive income 107,301
-------------
Dividends declared (per
common share $1,800.00) --- --- --- (180,000) --- (180,000)
Tax reduction related to tax
sharing agreement with MBIA Inc. --- --- 22,981 --- --- 22,981
-------- -------- ---------- ----------- ------------- -------------
Balance, December 31, 1999 100,000 $15,000 $1,514,014 $2,858,210 $(159,597) $4,227,627
======== ======== ========== =========== ============= =============
</TABLE>
1999 1998 1997
---------- --------- ---------
Disclosure of reclassification amount:
Unrealized (depreciation) appreciation of
investments arising during the period,
net of taxes $(304,809) $53,415 $89,536
Reclassification of adjustment, net of taxes (49,422) (19,331) (11,118)
---------- --------- ---------
Net unrealized appreciation, net of taxes $(354,231) $34,084 $78,418
========== ========= =========
The accompany notes are an integral part of the consolidated
financial statements.
-4-
<PAGE> 6
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Years ended December 31
-------------------------------------
1999 1998 1997
------------ ------------ ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 471,988 $ 523,899 $ 391,008
Adjustments to reconcile net income to net
cash provided by operating activities:
Increase in accrued investment income (2,273) (12,638) (13,407)
Increase in deferred acquisition costs (21,837) (75,985) (6,350)
Increase in prepaid reinsurance premiums (50,511) (99,806) (36,047)
Increase in deferred premium revenue 61,330 265,983 201,905
Increase in loss and loss adjustment
expense reserves, net 166,346 191,242 19,558
Depreciation 7,803 5,626 3,934
Amortization of goodwill 4,875 4,879 4,889
Amortization of bond discount, net (18,642) (15,831) (10,830)
Net realized gains on sale of investments (32,680) (29,891) (17,478)
Deferred income tax provision (benefit) (33,170) 21,856 13,382
Other, net (84,803) 43,593 50,258
------------ ------------ -----------
Total adjustments to net income (3,562) 299,028 209,814
------------ ------------ -----------
Net cash provided by operating activities 468,426 822,927 600,822
------------ ------------ -----------
Cash flows from investing activities:
Purchase of fixed-maturity securities, net
of payable for investments purchased (2,001,636) (2,800,008) (2,090,236)
Sale of fixed-maturity securities, net
of receivable for investments sold 1,376,747 1,086,973 1,247,860
Redemption of fixed-maturity securities, net
of receivable for investments redeemed 288,710 745,516 190,803
Sale (purchase) of short-term investments, net 114,096 (158,339) (18,922)
Sale (purchase) of other investments, net 8,222 (527) 664
Capital expenditures, net of disposals (47,409) (18,894) (10,296)
------------ ------------- -----------
Net cash used by investing activities (261,270) (1,145,279) (680,127)
------------ ------------- -----------
Cash flows from financing activities:
Capital contribution from MBIA Inc. --- 324,915 80,000
Dividends paid (180,000) --- ---
------------ ------------- -----------
Net cash (used) provided by financing activities (180,000) 324,915 80,000
------------ ------------- -----------
Net increase in cash and cash equivalents 27,156 2,563 695
Cash and cash equivalents - beginning of year 6,546 3,983 3,288
------------ ------------- -----------
Cash and cash equivalents - end of year $ 33,702 $ 6,546 $ 3,983
============ ============= ===========
Supplemental cash flow disclosures:
Income taxes paid $ 125,176 $ 105,451 $ 82,125
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
- 5 -
<PAGE> 7
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
- -----------------------------
MBIA Insurance Corporation (MBIA Corp.), formerly known as Municipal Bond
Investors Assurance Corporation, is a wholly owned subsidiary of MBIA Inc. MBIA
Inc. was incorporated in Connecticut on November 12, 1986 as a licensed insurer
and, through a series of transactions during December 1986, became the successor
to the business of the Municipal Bond Insurance Association (the Association), a
voluntary unincorporated association of insurers writing municipal bond and note
insurance as agent for the member insurance companies.
Effective December 31, 1989, MBIA Inc. acquired for $288 million all of the
outstanding stock of Bond Investors Group, Inc. (BIG), the parent company of
Bond Investors Guaranty Insurance Company (BIG Ins.), which was subsequently
renamed MBIA Insurance Corp. of Illinois (MBIA Illinois).
In January 1990, MBIA Illinois ceded its portfolio of net insured
obligations to MBIA Corp. in exchange for cash and investments equal to its
unearned premium reserve of $153 million. Subsequent to this cession, MBIA Inc.
contributed the common stock of BIG to MBIA Corp. resulting in additional
paid-in capital of $200 million. The insured portfolio acquired from BIG Ins.
consists of municipal obligations with risk characteristics similar to those
insured by MBIA Corp. On December 31, 1990, BIG was merged into MBIA Illinois.
Also in 1990, MBIA Inc. formed MBIA Assurance S.A. (MBIA Assurance), a
wholly owned French subsidiary, to write financial guarantee insurance in the
international community. MBIA Assurance provides insurance for public
infrastructure financings, structured finance transactions and certain
obligations of financial institutions. The stock of MBIA Assurance was
contributed to MBIA Corp. in 1991 resulting in additional paid-in capital of $6
million. Pursuant to a reinsurance agreement with MBIA Corp., a substantial
amount of the risks insured by MBIA Assurance is reinsured by MBIA Corp.
In 1993, MBIA Inc. formed a wholly owned subsidiary, MBIA Investment
Management Corp. (IMC). IMC provides guaranteed investment agreements to states,
municipalities and municipal authorities that are guaranteed as to principal and
interest. MBIA Corp. insures IMC's outstanding investment agreement liabilities.
In 1994, MBIA Inc. formed a wholly owned subsidiary, MBIA Securities Corp.,
which was subsequently renamed MBIA Capital
- 6 -
<PAGE> 8
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Management Corp. (CMC). CMC provides fixed-income investment management services
for MBIA Inc. and its affiliates and third party institutional clients. In 1995,
portfolio management for a portion of MBIA Corp.'s insurance related investment
portfolio was transferred to CMC; the management of the balance of this
portfolio was transferred in January 1996.
On February 17, 1998 MBIA Inc. and CapMAC Holdings Inc. (CapMAC)
consummated a merger. Under the terms of the merger, CapMAC shareholders
received 0.4675 of a share of MBIA Inc. common stock for each CapMAC share, for
a total of 8,102,255 newly issued shares of MBIA Inc. common stock, the value of
which was $536 million. On April 1, 1998, MBIA Corp. assumed the net insured
obligations of Capital Markets Assurance Corporation (CMAC) in exchange for
investments equal to $176.1 million. The cession of the deferred premium revenue
(net of prepaid reinsurance premiums) in the amount of $68.2 million has been
reflected as a component of gross premium written in the second quarter of 1998.
Subsequent to the cession MBIA Inc. contributed the common stock of CMAC to MBIA
Corp. resulting in additional paid-in capital of $324.9 million.
2. SIGNIFICANT ACCOUNTING POLICIES
- -----------------------------------
The consolidated financial statements have been prepared on the basis of
generally accepted accounting principles (GAAP). The preparation of financial
statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Significant
accounting policies are as follows:
CONSOLIDATION
The consolidated financial statements include the accounts of MBIA Corp. and its
wholly owned subsidiaries. All significant intercompany balances have been
eliminated. Certain amounts have been reclassified in prior years' financial
statements to conform to the current presentation.
INVESTMENTS
MBIA Corp.'s entire investment portfolio is considered available-for-sale and is
reported in the financial statements at fair value, with unrealized gains and
losses, net of deferred taxes, reflected as a separate component of
shareholder's equity.
- 7 -
<PAGE> 9
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Bond discounts and premiums are amortized using the effective-yield method
over the remaining term of the securities. For pre-refunded bonds the remaining
term is determined based on the contractual refunding date. Short-term
investments are carried at amortized cost, which approximates fair value, and
include all fixed-maturity securities with a remaining effective term to
maturity of less than one year. Investment income is recorded as earned.
Realized gains or losses on the sale of investments are determined by specific
identification and are included as a separate component of revenues.
Other investments include MBIA Corp.'s interest in equity oriented
investments. In addition, MBIA Corp. records its share of the unrealized gains
and losses on these investments, net of applicable deferred income taxes, as a
separate component of shareholder's equity.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and demand deposits with banks.
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL AND SECURITIES SOLD UNDER
AGREEMENTS TO REPURCHASE Securities purchased under agreements to resell and
securities sold under agreements to repurchase are accounted for as
collateralized transactions and are recorded at principal or contract value. It
is MBIA Corp.'s policy to take possession of securities purchased under
agreements to resell.
MBIA Corp. minimizes the credit risk that counterparties to transactions
might be unable to fulfill their contractual obligations by monitoring customer
credit exposure and collateral value and requiring additional collateral to be
deposited with MBIA Corp. when deemed necessary.
POLICY ACQUISITION COSTS
Policy acquisition costs include only those expenses that relate primarily to,
and vary with, premium production. For business produced directly by MBIA Corp.,
such costs include compensation of employees involved in underwriting and policy
issuance functions, certain rating agency fees, state premium taxes and certain
other underwriting expenses, reduced by ceding commission income on premiums
ceded to reinsurers. Policy acquisition costs are deferred and amortized over
the period in which the related premiums are earned.
- 8-
<PAGE> 10
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PREMIUM REVENUE RECOGNITION
Upfront premiums are earned pro rata over the period of risk. Premiums are
allocated to each bond maturity based on par amount and are earned on a
straight-line basis over the term of each maturity. Installment premiums are
earned over each installment period - generally one year or less. When an
insured issue is retired early, is called by the issuer, or is in substance paid
in advance through a refunding or defeasance accomplished by placing U.S.
Government securities in escrow, the remaining deferred premium revenue is
earned at that time, since there is no longer risk to MBIA Corp. Accordingly,
deferred premium revenue represents the portion of premiums written that is
applicable to the unexpired risk of insured bonds and notes.
ADVISORY FEE REVENUE RECOGNITION
MBIA Corp. collects certain advisory fees for services rendered in connection
with advising clients as to the most appropriate structure to use for a given
structured finance transaction. Certain advisory fees are deferred and earned
pro-rata over the life of the underlying transaction.
GOODWILL
Goodwill represents the excess of the cost of acquisitions over the tangible net
assets acquired. Goodwill attributed to the acquisition of MBIA Corp. is
amortized by the straight-line method over 25 years. Goodwill attributed to the
acquisition of MBIA Illinois is amortized according to the recognition of future
profits from its deferred premium revenue and installment premiums, except for a
minor portion attributed to state licenses, which is amortized by the
straight-line method over 25 years.
PROPERTY AND EQUIPMENT
Property and equipment consists of MBIA Corp.'s headquarters, furniture,
fixtures and equipment, which are recorded at cost and are depreciated on the
straight-line method over their estimated service lives ranging from 3 to 31
years. Maintenance and repairs are charged to expense as incurred.
LOSSES AND LOSS ADJUSTMENT EXPENSES
Loss and loss adjustment expense (LAE) reserves are established in an amount
equal to MBIA Corp.'s estimate of identified or case basis reserves and
unallocated losses, including costs of settlement, on the obligations it has
insured.
Case basis reserves are established when specific insured issues are
identified as currently or likely to be in default. Such a reserve is based on
the present value of the expected loss and LAE payments, net of recoveries,
- 9 -
<PAGE> 11
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
under salvage and subrogation rights, based on a discount rate of 6.04%. The
total reserve is calculated by applying a loss factor, determined based on an
independent rating agency study of bond defaults, to net debt service written.
When a case basis reserve is recorded, a corresponding reduction is made to the
unallocated reserve.
Management of MBIA Corp. periodically evaluates its estimates for losses
and LAE and any resulting adjustments are reflected in current earnings.
Management believes that the reserves are adequate to cover the ultimate net
cost of claims, but the reserves are necessarily based on estimates, and there
can be no assurance that the ultimate liability will not exceed such estimates.
In 1999 MBIA Corp. completed an update of its loss reserving methodology.
The update included an analysis of loss-reserve factors based on the latest
available industry data. It included the analysis of historical default and
recovery experience for the relevant sectors of the fixed-income market. Also
factored in was the changing mix of our book of business. The study resulted in
an increase in MBIA Corp.'s current loss reserving factors.
INCOME TAXES
MBIA Corp. is included in the consolidated tax return of MBIA Inc. The tax
provision for MBIA Corp. for financial reporting purposes is determined on a
stand alone basis. Any benefit derived by MBIA Corp. as a result of the tax
sharing agreement with MBIA Inc. and its subsidiaries is reflected directly in
shareholder's equity for financial reporting purposes.
Deferred income taxes are provided with respect to the temporary
differences between the tax bases of assets and liabilities and the reported
amounts in the financial statements that will result in deductible or taxable
amounts in future years when the reported amount of the asset or liability is
recovered or settled. Such temporary differences relate principally to premium
revenue recognition, deferred acquisition costs, unrealized appreciation
(depreciation) of investments, and the contingency reserve.
The Internal Revenue Code permits companies writing financial guarantee
insurance to deduct from taxable income amounts added to the statutory
contingency reserve, subject to certain limitations. The tax benefits obtained
from such deductions must be invested in non-interest-bearing U.S. Government
tax and loss bonds. MBIA Corp. records purchases of tax and loss bonds as
payments of federal income taxes. The amounts deducted must be restored to
taxable income when the contingency reserve is released, at
- 10 -
<PAGE> 12
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
which time MBIA Corp. may present the tax and loss bonds for redemption to
satisfy the additional tax liability.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities denominated in foreign currencies are translated at
year-end exchange rates. Operating results are translated at average rates of
exchange prevailing during the year. Unrealized gains or losses resulting from
translation are included as a separate component of shareholder's equity. Gains
and losses resulting from transactions in foreign currencies are recorded in
current income.
3. STATUTORY ACCOUNTING PRACTICES
- ----------------------------------
The financial statements have been prepared on the basis of GAAP, which differs
in certain respects from the statutory accounting practices prescribed or
permitted by the insurance regulatory authorities. Statutory accounting
practices differ from GAAP in the following respects:
* upfront premiums are earned only when the related risk has expired rather
than over the period of the risk;
* acquisition costs are charged to operations as incurred rather than
deferred and amortized as the related premiums are earned;
* a contingency reserve is computed on the basis of statutory requirements,
and reserves for case basis losses and LAE are established, at present
value, for specific insured issues that are identified as currently or
likely to be in default. Under GAAP, reserves are established based on MBIA
Corp.'s reasonable estimate of the identified and unallocated losses and
LAE on the insured obligations it has written;
* federal income taxes are only provided on taxable income for which income
taxes are currently payable, while under GAAP, deferred income taxes are
provided with respect to temporary differences;
* fixed-maturity securities are reported at amortized cost rather than fair
value;
* tax and loss bonds purchased are reflected as admitted assets as well as
payments of income taxes; and
* certain assets designated as "non-admitted assets" are charged directly
against surplus but are reflected as assets under GAAP.
- 11 -
<PAGE> 13
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following is a reconciliation of consolidated shareholder's equity
presented on a GAAP basis to statutory capital and surplus for MBIA Corp. and
its subsidiaries:
As of December 31
-----------------------------------------
In thousands 1999 1998
--------------------------------------------------------------------------
GAAP shareholder's equity $4,227,627 $4,277,345
Premium revenue recognition (491,766) (448,250)
Deferral of acquisition costs (251,922) (230,085)
Unrealized (gains) losses 222,803 (321,653)
Contingency reserve (1,738,730) (1,450,413)
Loss and loss adjustment
expense reserves 232,004 81,489
Deferred income taxes 79,895 303,407
Tax and loss bonds 219,195 162,523
Goodwill (86,075) (90,950)
Other 336 6,556
--------------------------------------------------------------------------
Statutory capital and surplus $2,413,367 $2,289,969
--------------------------------------------------------------------------
Aggregate net income of MBIA Corp. and its subsidiaries determined in
accordance with statutory accounting practices for the years ended December 31,
1999, 1998 and 1997 was $521.8 million, $498.2 million, and $377.1 million,
respectively.
4. PREMIUMS EARNED FROM REFUNDED AND CALLED BONDS
- --------------------------------------------------
Premiums earned include $64.2 million, $68.4 million, and $50.9 million for
1999, 1998 and 1997, respectively, related to refunded and called bonds.
5. INVESTMENTS
- ---------------
MBIA Corp.'s investment objective is to optimize long-term, after-tax returns
while emphasizing the preservation of capital through maintenance of
high-quality investments with adequate liquidity. MBIA Corp.'s investment
policies limit the amount of credit exposure to any one issuer. The
fixed-maturity portfolio is comprised of high-quality (average rating Double-A)
taxable and tax-exempt investments of diversified maturities.
- 12 -
<PAGE> 14
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following tables set forth the amortized cost and fair value of the
fixed-maturities and short-term investments included in the consolidated
investment portfolio of MBIA Corp. as of December 31, 1999 and 1998:
Gross Gross
Amortized Unrealized Unrealized Fair
In thousands Cost Gains Losses Value
- ------------------------------------------------------------------------------
December 31, 1999
Taxable bonds
United States Treasury
and Government Agency $ 29,913 $ 116 $ (2,926) $ 27,103
Corporate and other
obligations 1,817,867 2,227 (79,673) 1,740,421
Mortgage-backed 790,748 3,874 (21,436) 773,186
Tax-exempt bonds
State and municipal
obligations 3,641,794 50,334 (175,043) 3,517,085
- ------------------------------------------------------------------------------
Total $6,280,322 $ 56,551 $(279,078) $6,057,795
- ------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
In thousands Cost Gains Losses Value
- ------------------------------------------------------------------------------
December 31, 1998
Taxable bonds
United States Treasury
and Government Agency $ 38,984 $ 770 $ (174) $ 39,580
Corporate and other
obligations 1,543,654 60,867 (1,950) 1,602,571
Mortgage-backed 632,232 20,614 (690) 652,156
Tax-exempt bonds
State and municipal
obligations 3,773,378 241,200 (1,644) 4,012,934
- ------------------------------------------------------------------------------
Total $5,988,248 $323,451 $ (4,458) $6,307,241
- ------------------------------------------------------------------------------
Fixed-maturity investments carried at fair value of $11.6 million and $12.0
million as of December 31, 1999 and 1998, respectively, were on deposit with
various regulatory authorities to comply with insurance laws.
- 13 -
<PAGE> 15
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table sets forth the distribution by expected maturity of the
fixed-maturities and short-term investments at amortized cost and fair value at
December 31, 1999. Expected maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations.
Amortized Fair
In thousands Cost Value
----------------------------------------------------------------
Within 1 year $ 255,615 $ 255,615
Beyond 1 year but within 5 years 796,915 805,614
Beyond 5 years but within 10 years 1,260,022 1,233,516
Beyond 10 years but within 15 years 1,004,029 989,492
Beyond 15 years but within 20 years 1,075,963 1,019,531
Beyond 20 years 1,097,030 980,841
----------------------------------------------------------------
5,489,574 5,284,609
Mortgage-backed 790,748 773,186
----------------------------------------------------------------
Total fixed-maturities and
short-term investments $6,280,322 $6,057,795
----------------------------------------------------------------
6. INVESTMENT INCOME AND GAINS AND LOSSES
- ------------------------------------------
Investment income consists of:
Years ended December 31
---------------------------------------
In thousands 1999 1998 1997
- --------------------------------------------------------------------
Fixed-maturities $357,702 $326,820 $279,900
Short-term investments 7,221 5,311 5,676
Other investments 24 16 (4)
- --------------------------------------------------------------------
Gross investment income 364,947 332,147 285,572
Investment expenses 6,111 5,756 3,112
- --------------------------------------------------------------------
Net investment income 358,836 326,391 282,460
Net realized gains (losses):
Fixed-maturities:
Gains 47,244 32,211 22,791
Losses (16,793) (3,149) (5,877)
- --------------------------------------------------------------------
Net 30,451 29,062 16,914
- --------------------------------------------------------------------
Other investments:
Gains 2,229 829 564
Losses --- --- ---
- --------------------------------------------------------------------
Net 2,229 829 564
- --------------------------------------------------------------------
Total net realized gains 32,680 29,891 17,478
- --------------------------------------------------------------------
Total investment income $391,516 $356,282 $299,938
- --------------------------------------------------------------------
- 14 -
<PAGE> 16
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Net unrealized gains (losses) consist of:
As of December 31
----------------------------
In thousands 1999 1998
- --------------------------------------------------------------------
Fixed-maturities:
Gains $ 56,551 $323,451
Losses (279,078) (4,458)
- --------------------------------------------------------------------
Net (222,527) 318,993
- --------------------------------------------------------------------
Other investments:
Gains --- 2,660
Losses (276) ---
- --------------------------------------------------------------------
Net (276) 2,660
- --------------------------------------------------------------------
Total (222,803) 321,653
Deferred income tax provision (benefit) (77,942) 112,283
- --------------------------------------------------------------------
Unrealized gains (losses), net $(144,861) $209,370
- --------------------------------------------------------------------
The deferred income tax provision (benefit) relate primarily to unrealized
gains and losses on MBIA Corp.'s fixed-maturity investments, which are reflected
in shareholder's equity.
The change in net unrealized gains (losses) consists of:
Years ended December 31
----------------------------------------
In thousands 1999 1998 1997
- --------------------------------------------------------------------------
Fixed-maturities $(541,520) $52,267 $118,588
Other investments (2,936) (316) 2,071
- --------------------------------------------------------------------------
Total (544,456) 51,951 120,659
Deferred income taxes (190,225) 17,867 42,241
- --------------------------------------------------------------------------
Unrealized gains (losses), net $(354,231) $34,084 $ 78,418
- --------------------------------------------------------------------------
7. INCOME TAXES
- ----------------
The provision for income taxes is composed of:
Years ended December 31
------------------------------------
In thousands 1999 1998 1997
- --------------------------------------------------
Current $106,626 $112,737 $ 99,522
Deferred (33,170) 21,856 13,382
- --------------------------------------------------
Total $ 73,456 $134,593 $112,904
- --------------------------------------------------
The provision for income taxes gives effect to permanent differences
between financial and taxable income. Accordingly, MBIA Corp.'s effective income
tax rate differs from the statutory rate on ordinary income. The reasons for
MBIA Corp.'s lower effective tax rates are as follows:
- 15 -
<PAGE> 17
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years ended December 31
------------------------------
1999 1998 1997
- -------------------------------------------------------------------
Income taxes computed on pre-tax
financial income at statutory rates 35.0% 35.0% 35.0%
Increase (reduction) in taxes
resulting from:
Tax-exempt interest (11.4) (9.1) (10.6)
Amortization of goodwill 0.3 0.3 0.3
Other (10.4) (5.8) (2.3)
- -------------------------------------------------------------------
Provision for income taxes 13.5% 20.4% 22.4%
- -------------------------------------------------------------------
MBIA Corp. recognizes deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Deferred tax assets and liabilities are determined
based on the difference between the financial statement and tax bases of assets
and liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. The effect on tax assets and liabilities of
a change in tax rates is recognized in income in the period that includes the
enactment date.
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities at December 31, 1999 and 1998 are presented below:
In thousands 1999 1998
- --------------------------------------------------------------------------
Deferred tax assets
Tax and loss bonds $206,999 $160,064
Alternative minimum tax credit carryforward 65,404 54,722
Loss and loss adjustment expense reserves 79,051 26,458
Unrealized losses 77,942 ---
Other 45,668 46,516
- --------------------------------------------------------------------------
Total gross deferred tax assets 475,064 287,760
- --------------------------------------------------------------------------
Deferred tax liabilities
Contingency reserve 330,125 280,203
Deferred premium revenue 110,785 106,555
Deferred acquisition costs 88,173 77,753
Unrealized gains --- 112,283
Contingent commissions 408 408
Other 25,468 13,965
- --------------------------------------------------------------------------
Total gross deferred tax liabilities 554,959 591,167
- --------------------------------------------------------------------------
Net deferred tax liability $ 79,895 $303,407
- --------------------------------------------------------------------------
MBIA Corp. believes that no valuation allowance is necessary in connection
with the deferred tax assets.
- 16 -
<PAGE> 18
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. DIVIDENDS AND CAPITAL REQUIREMENTS
- --------------------------------------
Under New York state insurance law, MBIA Corp. and CMAC may pay dividends only
from earned surplus subject to the maintenance of a minimum capital requirement.
The dividends in any 12-month period may not exceed the lesser of 10% of its
policyholders' surplus (total capital and surplus) as shown on its last filed
statutory-basis financial statements, or of adjusted net investment income, as
defined, for such 12-month period, without prior approval of the superintendent
of the New York State Insurance Department.
In accordance with such restrictions on the amount of dividends which can
be paid in any 12-month period, MBIA Corp. had in excess of $61 million
available for the payment of dividends as of December 31, 1999. CMAC had in
excess of $3 million available for the payment of dividends as of December 31,
1999. In 1999, MBIA Corp. declared and paid dividends of $180 million to MBIA
Inc. No dividends were paid in 1998 by MBIA Corp. In 1999, CMAC declared and
paid dividends of $1 million to its parent MBIA Corp. No dividends were paid in
1998 by CMAC.
Under Illinois Insurance Law, MBIA Illinois may pay a dividend from
unassigned surplus, and the dividends in any 12-month period may not exceed the
greater of 10% of policyholders' surplus (total capital and surplus) at the end
of the preceding calendar year, or the net income of the preceding calendar year
without prior approval of the Illinois State Insurance Department.
In accordance with such restrictions on the amount of dividends which can
be paid in any 12-month period, MBIA Illinois had $14 million available for the
payment of dividends as of December 31, 1999. In 1999, MBIA Illinois declared
and paid dividends of $1 million to its parent MBIA Corp. No dividends were paid
in 1998 by MBIA Illinois.
The insurance departments of New York state and certain other statutory
insurance regulatory authorities and the agencies that rate the bonds insured by
MBIA Corp. and its subsidiaries have various requirements relating to the
maintenance of certain minimum ratios of statutory capital and reserves to net
insurance in force. MBIA Corp. and its subsidiaries were in compliance with
these requirements as of December 31, 1999.
9. LINES OF CREDIT
- -------------------
MBIA Corp. has a standby line of credit commitment in the amount of $900 million
with a group of major Triple-A-rated banks to provide loans to MBIA
- 17 -
<PAGE> 19
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Corp. if it incurs cumulative losses (net of any recoveries) from October 29,
1999 in excess of the greater of $900 million or 4.00% of average annual debt
service. The obligation to repay loans made under this agreement is a limited
recourse obligation payable solely from, and collateralized by, a pledge of
recoveries realized on defaulted insured obligations including certain
installment premiums and other collateral. This commitment has a seven-year term
expiring on October 31, 2006, and contains an annual renewal provision subject
to approval by the bank group. MBIA Corp. also maintains stop-loss reinsurance
coverage of $175 million in excess of incurred losses of $700 million.
MBIA Corp. and MBIA Inc. maintain bank liquidity facilities totaling $650
million. In 1999, there were no borrowings outstanding under these agreements.
10. NET INSURANCE IN FORCE
- ---------------------------
MBIA Corp. guarantees the timely payment of principal and interest on municipal,
asset-/mortgage-backed and other non-municipal securities. MBIA Corp.'s ultimate
exposure to credit loss in the event of nonperformance by the insured is
represented by the insurance in force as set forth below.
As of December 31, 1999, insurance in force, net of cessions to reinsurers,
had a range of maturity of 1-50 years. The distribution of net insurance in
force by geographic location, including $4.5 billion and $3.5 billion relating
to IMC's municipal investment agreements guaranteed by MBIA Corp. in 1999 and
1998, respectively, is set forth in the following table:
<TABLE>
<CAPTION>
As of December 31
-------------------------------------------------------------------------------------
$ in billions 1999 1998
- ----------------------------------------------------------- ----------------------------------------
Net Number % of Net Net Number % of Net
Geographic Insurance of Issues Insurance Insurance of Issues Insurance
Location In Force Outstanding In Force In Force Outstanding In Force
- ----------------------------------------------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Domestic
California $ 76.6 3,707 12.0% $ 76.3 3,681 12.7%
New York 75.8 5,964 11.8 65.1 5,684 10.9
Florida 36.3 1,498 5.7 36.1 1,589 6.0
Texas 26.6 1,990 4.1 25.3 2,131 4.2
Pennsylvania 25.8 2,113 4.0 24.7 2,278 4.1
New Jersey 24.4 1,841 3.8 26.2 1,884 4.4
Illinois 22.1 1,176 3.5 23.7 1,275 4.0
Massachusetts 19.2 1,075 3.0 18.4 1,107 3.1
Michigan 15.0 1,085 2.3 14.6 1,066 2.4
Ohio 13.1 1,049 2.1 13.8 1,076 2.3
- ----------------------------------------------------------- ----------------------------------------
Subtotal 334.9 21,498 52.3 324.2 21,771 54.1
Nationally
Diversified 97.1 952 15.2 81.7 842 13.6
Other states 175.0 11,691 27.3 169.0 12,004 28.2
- ----------------------------------------------------------- ----------------------------------------
Total domestic 607.0 34,141 94.8 574.9 34,617 95.9
International 33.4 452 5.2 24.5 323 4.1
- ----------------------------------------------------------- ----------------------------------------
Total $640.4 34,593 100.0% $599.4 34,940 100.0%
- ----------------------------------------------------------- ----------------------------------------
</TABLE>
- 18 -
<PAGE> 20
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The insurance policies issued by MBIA Corp. are unconditional commitments to
guarantee timely payment on the bonds and notes to bondholders. The
creditworthiness of each insured issue is evaluated prior to the issuance of
insurance and each insured issue must comply with MBIA Corp.'s underwriting
guidelines. Further, the payments to be made by the issuer on the bonds or notes
may be backed by a pledge of revenues, reserve funds, letters of credit,
investment contracts or collateral in the form of mortgages or other assets. The
right to such money or collateral would typically become MBIA Corp.'s upon the
payment of a claim by MBIA Corp.
Under certain structured asset-backed transactions, a pool of assets
covering at least 100% of the principal amount guaranteed under its insurance
contract is sold or pledged to a special-purpose bankruptcy remote entity. MBIA
Corp.'s primary risk from such insurance contracts is the impairment of cash
flows due to delinquency or loss on the underlying assets. MBIA Corp. therefore
evaluates all the factors affecting past and future asset performance by
studying historical data on losses, delinquencies and recoveries of the
underlying assets. Each transaction is reviewed to ensure that an appropriate
legal structure is used to protect against the bankruptcy risk of the originator
of the assets. Along with the legal structure, an additional level of first-loss
protection is also created to protect against losses due to credit or dilution.
This first level of loss protection is usually available from reserve funds,
excess cash flows, overcollateralization or recourse to a third party. The level
of first-loss protection depends upon the historical losses and dilution of the
underlying assets, but is typically several times the normal historical loss
experience for the underlying type of assets. The distribution of net insurance
in force by type of bond is set forth in the table below:
- 19 -
<PAGE> 21
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
As of December 31
--------------------------------------------------------------------------------
$ in billions 1999 1998
- ------------------------------------------------------------------- --------------------------------------
Net Number % of Net Net Number % of Net
Insurance of Issues Insurance Insurance Of Issues Insurance
Type of Bond In Force Outstanding In Force In Force Outstanding In Force
- ------------------------------------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Domestic
Municipal:
General obligation $146.9 13,310 22.9% $140.7 12,694 23.6%
Utilities 78.0 4,438 12.2 80.9 4,895 13.5
Health care 70.6 2,074 11.0 70.9 2,241 11.8
Special revenue 52.0 1,864 8.2 42.8 1,787 7.1
Transportation 46.1 1,382 7.2 46.2 1,543 7.7
Higher education 27.7 1,501 4.3 26.7 1,498 4.5
Housing 23.2 1,785 3.6 22.3 2,161 3.7
Industrial
Development and
pollution control
revenue 19.0 929 3.0 19.4 1,037 3.2
Other 0.6 20 0.1 5.6 75 0.9
- ------------------------------------------------------------------- --------------------------------------
Total municipal 464.1 27,303 72.5 455.5 27,931 76.0
- ------------------------------------------------------------------- --------------------------------------
Structured finance:
Mortgage-backed:
Home equity 43.7 437 6.8 49.7 376 8.3
Other 18.8 111 2.9 5.2 94 0.9
First mortgage 12.8 174 2.0 9.8 109 1.6
Asset-backed:
Other 17.2 97 2.7 12.6 140 2.1
Auto 8.7 98 1.4 6.5 59 1.1
Leasing 6.3 54 1.0 6.7 45 1.1
Other structured finance 10.3 77 1.6 6.6 27 1.1
- ------------------------------------------------------------------- --------------------------------------
Total structured finance 117.8 1,048 18.4 97.1 850 16.2
- ------------------------------------------------------------------- --------------------------------------
Other:
Investor-owned utilities 14.1 4,994 2.2 13.0 5,068 2.2
Financial institution 5.7 305 0.9 5.4 381 0.9
Corporate direct 5.3 491 0.8 3.9 387 0.6
- ------------------------------------------------------------------- --------------------------------------
Total other 25.1 5,790 3.9 22.3 5,836 3.7
- ------------------------------------------------------------------- --------------------------------------
Total domestic 607.0 34,141 94.8 574.9 34,617 95.9
- ------------------------------------------------------------------- --------------------------------------
International
Infrastructure:
Sovereign 2.1 67 0.3 1.6 32 0.3
Utilities 1.7 79 0.3 0.4 4 ---
Sub-sovereign 1.2 28 0.2 1.2 44 0.2
Transportation 1.1 19 0.2 1.4 12 0.2
Health care 0.7 8 0.1 0.4 6 0.1
Housing 0.6 3 0.1 0.6 3 0.1
Other municipal 0.3 2 --- --- --- ---
Special revenue 0.1 1 --- --- --- ---
Higher education 0.1 2 --- 0.9 13 0.1
- ------------------------------------------------------------------- --------------------------------------
Total infrastructure 7.9 209 1.2 6.5 114 1.0
- ------------------------------------------------------------------- --------------------------------------
Structured finance:
Other structured finance 17.1 108 2.7 9.6 32 1.6
Asset-backed 1.9 40 0.3 4.2 50 0.7
Mortgage-backed 1.7 13 0.2 1.0 20 0.2
- ------------------------------------------------------------------- --------------------------------------
Total structured finance 20.7 161 3.2 14.8 102 2.5
- ------------------------------------------------------------------- --------------------------------------
Other:
Financial institution 3.6 62 0.6 1.0 29 0.2
Investor-owned utilities 1.1 15 0.2 1.8 72 0.3
Corporate direct 0.1 5 --- 0.4 6 0.1
- ------------------------------------------------------------------- --------------------------------------
Total other 4.8 82 0.8 3.2 107 0.6
- ------------------------------------------------------------------- --------------------------------------
Total international 33.4 452 5.2 24.5 323 4.1
- ------------------------------------------------------------------- --------------------------------------
Total $640.4 34,593 100.0% $599.4 34,940 100.0%
- ------------------------------------------------------------------- --------------------------------------
</TABLE>
- 20 -
<PAGE> 22
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. REINSURANCE
- ----------------
MBIA Corp. reinsures exposure with other insurance companies under various
treaty and facultative reinsurance contracts, both on a pro rata and excess of
loss basis. In the event that any or all of the reinsurers were unable to meet
their obligations, MBIA Corp. would be liable for such defaulted amounts.
Amounts deducted from gross insurance in force for reinsurance ceded by
MBIA Corp. and its subsidiaries were $129.0 billion and $108.2 billion, at
December 31, 1999 and 1998, respectively. The distribution of ceded insurance in
force by geographic location is set forth in the following table:
As of December 31
--------------------------------------------------
In billions 1999 1998
- ----------------------------------------------------- -----------------------
% of % of
Ceded Ceded Ceded Ceded
Insurance Insurance Insurance Insurance
Geographic Location In Force In Force In Force In Force
- ----------------------------------------------------- -----------------------
Domestic
California $ 17.6 13.6% $ 12.4 11.5%
New York 14.0 10.9 10.7 9.9
New Jersey 5.5 4.3 5.4 5.0
Texas 5.5 4.2 5.3 4.9
Florida 5.0 3.9 3.2 3.0
Pennsylvania 4.6 3.5 3.8 3.5
Massachusetts 4.1 3.2 3.7 3.4
Illinois 3.4 2.6 3.4 3.1
Puerto Rico 3.2 2.5 3.1 2.9
Colorado 2.4 1.9 2.3 2.1
- ----------------------------------------------------- -----------------------
Subtotal 65.3 50.6 53.3 49.3
Nationally diversified 14.4 11.2 14.6 13.4
Other states 28.0 21.7 23.6 21.7
- ----------------------------------------------------- -----------------------
Total domestic 107.7 83.5 91.5 84.4
International 21.3 16.5 16.7 15.6
- ----------------------------------------------------- -----------------------
Total $129.0 100.0% $108.2 100.0%
- ----------------------------------------------------- -----------------------
- 21 -
<PAGE> 23
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The distribution of ceded insurance in force by type of bond is set forth in the
following table:
As of December 31
---------------------------------------------------
In billions 1999 1998
- --------------------------------------------------------------------------------
% of % of
Ceded Ceded Ceded Ceded
Insurance Insurance Insurance Insurance
Type of Bond In Force In Force In Force In Force
- ------------------------------------------------------ ----------------------
Domestic
Municipal:
General obligation $ 18.8 14.6% $ 15.3 14.2%
Utilities 17.2 13.3 15.5 14.3
Health care 15.7 12.2 13.4 12.4
Transportation 14.8 11.5 10.6 9.8
Special revenue 8.7 6.7 6.3 5.8
Industrial
development and
pollution control
revenue 3.8 2.9 3.8 3.5
Housing 2.7 2.1 2.3 2.1
Higher education 2.2 1.7 1.7 1.5
Other 0.3 0.3 0.8 0.7
- ------------------------------------------------------ ----------------------
Total municipal 84.2 65.3 69.7 64.3
- ------------------------------------------------------ ----------------------
Structured finance:
Mortgage-backed:
Home equity 8.8 6.8 11.3 10.5
First mortgage 2.0 1.6 2.1 2.0
Other 1.4 1.1 0.3 0.2
Asset-backed:
Other 2.5 1.9 1.5 1.4
Leasing 2.4 1.9 1.1 1.0
Auto 1.9 1.4 2.2 2.0
Other structured finance 2.2 1.7 1.0 0.9
- ------------------------------------------------------ ----------------------
Total structured finance 21.2 16.4 19.5 18.0
- ------------------------------------------------------ ----------------------
Other:
Investor-owned utilities 1.9 1.5 1.2 1.1
Financial institution 0.3 0.2 1.0 0.9
Corporate direct 0.1 0.1 0.1 0.1
- ------------------------------------------------------ ----------------------
Total other 2.3 1.8 2.3 2.1
- ------------------------------------------------------ ----------------------
Total domestic 107.7 83.5 91.5 84.4
- ------------------------------------------------------ ----------------------
International
Infrastructure:
Sovereign 1.4 1.1 0.7 0.6
Transportation 1.2 0.9 1.3 1.2
Sub-sovereign 0.9 0.7 0.5 0.5
Utilities 0.7 0.5 0.4 0.4
Health care 0.4 0.3 0.2 0.2
Other 0.3 0.3 1.1 1.0
- ------------------------------------------------------ ----------------------
Total infrastructure 4.9 3.8 4.2 3.9
- ------------------------------------------------------ ----------------------
Structured finance:
Other structured finance 9.0 7.0 4.0 3.7
Asset-backed 2.6 2.0 6.7 6.2
Mortgage-backed 1.2 0.9 0.4 0.4
- ------------------------------------------------------ ----------------------
Total structured finance 12.8 9.9 11.1 10.3
- ------------------------------------------------------ ----------------------
Other:
Financial institution 3.0 2.4 0.9 0.9
Investor-owned utilities 0.5 0.3 0.2 0.2
Corporate direct 0.1 0.1 0.3 0.3
- ------------------------------------------------------ ----------------------
Total other 3.6 2.8 1.4 1.4
- ------------------------------------------------------ ----------------------
Total international 21.3 16.5 16.7 15.6
- ------------------------------------------------------ ----------------------
Total $129.0 100.0% $108.2 100.0%
- ------------------------------------------------------ ----------------------
- 22 -
<PAGE> 24
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As part of MBIA Corp's reinsurance activity in 1998, MBIA Corp. entered into
facultative share reinsurance agreements with highly rated reinsurers that
obligate it to cede future premiums to the reinsurers through January 1, 2005.
Certain reinsurance contracts in 1998 were accounted for on a retroactive basis
in accordance with SFAS 113, "Accounting and Reporting for Reinsurance of
Short-Duration and Long-Duration Contracts".
Ceding commissions received from reinsurers before deferrals were $35.3
million, $37.2 million, and $20.8 million in 1999, 1998 and 1997, respectively.
12. EMPLOYEE BENEFITS
- ----------------------
MBIA Corp. participates in MBIA Inc.'s pension plan covering substantially all
employees. The pension plan is a defined contribution plan and MBIA Corp.
contributes 10% of each eligible employee's annual total compensation. Pension
expense for the years ended December 31, 1999, 1998 and 1997 was $6.7 million,
$5.9 million, and $3.9 million, respectively. MBIA Corp. also has a
profit-sharing/401(k) plan which allows eligible employees to contribute up to
10% of eligible compensation. MBIA Corp. matches employee contributions up to
the first 5% of eligible compensation. MBIA Corp. contributions to the
profit-sharing/401(k) plan aggregated $3.2 million, $2.6 million, and $1.6
million for the years ended December 31, 1999, 1998 and 1997, respectively. The
profit-sharing/401(k) plan match amounts are invested in common stock of MBIA
Inc. Amounts relating to the above plans that exceed limitations established by
federal regulations are contributed to a non-qualified deferred compensation
plan. In 1999 and 1998, former CMAC employees were covered under MBIA Inc.'s
pension and profit-sharing/401(k) plans.
MBIA Corp. also participates in the "MBIA Long-Term Incentive Program". The
incentive program includes a stock option program and adds a compensation
component linked to the growth in adjusted book value per share (ABV) of MBIA
Inc.'s stock. Awards under the long-term program are divided equally between the
two components, with 50% of the award given in stock options and 50% of the
award paid in cash or shares of MBIA Inc.'s stock.
Target levels for the option/incentive award are established as a
percentage of total salary and bonus, based upon the recipient's position.
Awards under the long-term program typically will be granted from the vice
president level up to and including the chairman and chief executive officer.
- 23 -
<PAGE> 25
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The ABV portion of the long-term incentive program may be awarded every
year. The 1999 award will cover growth in ABV from December 31, 1999 through
December 31, 2002; the 1998 award will cover growth in ABV from December 31,
1998 through December 31, 2001; the 1997 award will cover growth in ABV from
December 31, 1997 through December 31, 2000; with a base line growth of 12% on
all awards. The amount to be paid in respect of such award will be adjusted
upward or downward based on the actual ABV growth with a minimum growth of 8%
necessary to receive any payment and an 18% growth needed to receive the maximum
payment of 200% of the target levels. The amount, if any, to be paid under this
portion of the program will be paid in early 2003 for the 1999 award, in early
2002 for the 1998 award and in early 2001 for the 1997 award in the form of cash
or shares of MBIA Inc.'s common stock. Subsequent awards, if any, will be made
every year with concomitant payments occurring after the three-year cycle.
During 1999, 1998 and 1997, $7.2 million, $4.8 million, and $3.2 million,
respectively, were recorded as a charge related to the 1999, 1998 and 1997 ABV
awards.
MBIA Corp. also participates in MBIA Inc.'s restricted stock program,
adopted in December 1995, whereby key executive officers of MBIA Corp. are
granted restricted shares of MBIA Inc. common stock. These stock awards may only
be sold three, four, or five years from the date of grant, at which time the
awards fully vest. Compensation expense related to the restricted stock was $1.7
million, $0.9 million, and $0.5 million for the years ended December 31, 1999,
1998 and 1997.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) 123, "Accounting for Stock-Based
Compensation," effective for financial statements for fiscal years beginning
after December 15, 1995. SFAS 123 required MBIA Inc. to adopt, at its election,
either 1) the provisions in SFAS 123 which require the recognition of
compensation expense for employee stock-based compensation plans, or 2) the
provisions in SFAS 123 which require the pro forma disclosure of net income and
earnings per share as if the recognition provisions of SFAS 123 had been
adopted. MBIA Inc. adopted the disclosure requirements of SFAS 123 effective
January 1, 1996 and continues to account for its employee stock-based
compensation plans under Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees". Accordingly, the adoption of SFAS 123 had no
impact on MBIA Corp.'s financial position or results of operations. Had
compensation cost for the MBIA Inc. stock option program been recognized based
on the fair value at
- 24 -
<PAGE> 26
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the grant date consistent with the recognition provisions of SFAS 123, the
impact on MBIA Corp.'s net income would not have been material.
13. RELATED PARTY TRANSACTIONS
- -------------------------------
Since 1989, MBIA Corp. has executed five surety bonds to guarantee the payment
obligations of the members of the Association who had their Standard & Poor's
Corporation claims-paying rating downgraded from Triple-A on their previously
issued Association policies. In the event that they do not meet their
Association policy payment obligations, MBIA Corp. will pay the required amounts
directly to the paying agent. The aggregate outstanding exposure on these surety
bonds as of December 31, 1999 is $340 million.
Included in other assets at December 31, 1999 and 1998 were $64.2 million
and $45.4 million net receivables from MBIA Inc. and other subsidiaries.
MBIA Corp. entered into an agreement with MBIA Inc. and IMC whereby MBIA
Corp. held securities subject to agreements to resell of $205.0 million and
$187.5 million as of December 31, 1999 and 1998, respectively, and transferred
securities subject to agreements to repurchase of $205.0 million and $187.5
million as of December 31, 1999 and 1998. These agreements have a term of less
than one year. The interest expense relating to these agreements to resell was
$10.9 million and $11.1 million, respectively, for the years ended December 31,
1999 and 1998. The interest income relating to these agreements to repurchase
was $11.5 million and $11.6 million, respectively, for the years ended December
31, 1999 and 1998.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
- ----------------------------------------
The estimated fair value amounts of financial instruments shown in the following
table have been determined by MBIA Corp. using available market information and
appropriate valuation methodologies. However, in certain cases considerable
judgment is necessarily required to interpret market data to develop estimates
of fair value. Accordingly, the estimates presented herein are not necessarily
indicative of the amount MBIA Corp. could realize in a current market exchange.
The use of different market assumptions and/or estimation methodologies may have
a material effect on the estimated fair value amounts.
FIXED-MATURITY SECURITIES - The fair value of fixed-maturity securities is based
upon quoted market price, if available. If a quoted market price is not
- 25 -
<PAGE> 27
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
available, fair value is estimated using quoted market prices for similar
securities.
SHORT-TERM INVESTMENTS - Short-term investments are carried at amortized cost
which approximates fair value.
OTHER INVESTMENTS - Other investments include MBIA Corp.'s interest in equity
oriented investments. The fair value of these investments is based on quoted
market prices.
CASH AND CASH EQUIVALENTS, RECEIVABLE FOR INVESTMENTS SOLD AND PAYABLE FOR
INVESTMENTS PURCHASED - The carrying amounts of these items are a reasonable
estimate of their fair value.
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL - The fair value is estimated
based upon the quoted market prices of the transactions' underlying collateral.
PREPAID REINSURANCE PREMIUMS - The fair value of MBIA Corp.'s prepaid
reinsurance premiums is based on the estimated cost of entering into an
assumption of the entire portfolio with third party reinsurers under current
market conditions.
DEFERRED PREMIUM REVENUE - The fair value of MBIA Corp.'s deferred premium
revenue is based on the estimated cost of entering into a cession of the entire
portfolio with third party reinsurers under current market conditions.
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES - The carrying amount is composed of
the present value of the expected cash flows for specifically identified claims
combined with an estimate for unallocated claims. Therefore, the carrying amount
is a reasonable estimate of the fair value of the reserve.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE - The fair value is estimated
based upon the quoted market prices of the transactions' underlying collateral.
INSTALLMENT PREMIUMS - The fair value is derived by calculating the present
value of the estimated future cash flow stream discounted at 9%.
- 26 -
<PAGE> 28
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
As of December 31, 1999 As of December 31, 1998
----------------------------- -----------------------------
Carrying Estimated Carrying Estimated
In thousands Amount Fair Value Amount Fair Value
- ------------------------------------------------------------ -----------------------------
<S> <C> <C> <C> <C>
ASSETS:
Fixed-maturity securities $5,783,979 $5,783,979 $5,884,053 $5,884,053
Short-term investments 273,816 273,816 423,188 423,188
Other investments 8,425 8,425 17,850 17,850
Cash and cash equivalents 33,702 33,702 6,546 6,546
Securities purchased under
agreements to resell 205,000 267,881 187,500 299,412
Prepaid reinsurance
premiums 403,210 342,837 352,699 297,238
Reinsurance recoverable on
unpaid losses 30,819 30,819 29,891 29,891
Receivable for
investments sold 2,882 2,882 33,880 33,880
Liabilities:
Deferred premium
revenue 2,310,758 2,022,357 2,251,211 1,939,971
Loss and loss adjustment
expense reserves 467,279 467,279 300,005 300,005
Securities sold under
agreements to repurchase 205,000 209,894 187,500 194,491
Payable for investments
purchased 18,948 18,948 29,523 29,523
Off-balance sheet instruments:
Installment premiums --- 731,748 --- 644,132
</TABLE>
- 27 -
