UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 2000
OR
( ) TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from __________ to __________
Commission File No. 1-9583 I.R.S. Employer Identification No. 06-1185706
MBIA INC.
A Connecticut Corporation
113 King Street, Armonk, N. Y. 10504
(914) 273-4545
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes __X__ NO _____
As of November 3, 2000 there were outstanding 98,348,769 shares of Common Stock,
par value $1 per share, of the registrant.
<PAGE>
INDEX
-----
PAGE
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
MBIA Inc. and Subsidiaries
Consolidated Balance Sheets - September 30, 2000
and December 31, 1999 3
Consolidated Statements of Income - Three months and
nine months ended September 30, 2000 and 1999 4
Consolidated Statement of Changes in Shareholders' Equity
- Nine months ended September 30, 2000 5
Consolidated Statements of Cash Flows
- Nine months ended September 30, 2000 and 1999 6
Notes to Consolidated Financial Statements 7 - 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10 - 25
PART II OTHER INFORMATION, AS APPLICABLE
Item 6. Exhibits and Reports on Form 8-K 26
SIGNATURES 27
(2)
<PAGE>
MBIA INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------- ------------------
<S> <C> <C>
ASSETS
Investments:
Fixed-maturity securities held as available-for-sale
at fair value (amortized cost $6,313,513 and $6,006,506) $ 6,227,701 $ 5,783,979
Short-term investments, at amortized cost
(which approximates fair value) 365,760 274,022
Other investments 117,107 146,038
------------ ------------
6,710,568 6,204,039
Municipal investment agreement portfolio held as available-for-sale
at fair value (amortized cost $4,995,661 and $4,583,920) 4,952,547 4,489,551
------------ ------------
TOTAL INVESTMENTS 11,663,115 10,693,590
Cash and cash equivalents 80,716 93,559
Securities borrowed or purchased under agreements to resell 202,624 261,171
Accrued investment income 139,475 135,344
Deferred acquisition costs 262,664 251,922
Prepaid reinsurance premiums 442,484 403,210
Reinsurance recoverable on unpaid losses 27,572 30,819
Goodwill (less accumulated amortization of $65,797 and $68,388) 104,997 110,023
Property and equipment, at cost (less accumulated depreciation
of $58,344 and $50,469) 132,004 128,733
Receivable for investments sold 63,073 24,922
Other assets 101,759 130,606
------------ ------------
TOTAL ASSETS $13,220,483 $12,263,899
============ ============
Liabilities and Shareholders' Equity
Liabilities:
Deferred premium revenue $ 2,373,173 $ 2,310,758
Loss and loss adjustment expense reserves 455,747 467,279
Municipal investment agreements 3,728,247 3,483,911
Municipal repurchase agreements 909,733 1,028,921
Long-term debt 589,277 689,204
Short-term debt 145,426 68,751
Securities loaned or sold under agreements to repurchase 202,624 288,750
Deferred income taxes 135,796 32,805
Deferred fee revenue 34,079 36,536
Payable for investments purchased 467,881 102,666
Other liabilities 284,734 241,217
------------ ------------
TOTAL LIABILITIES 9,326,717 8,750,798
------------ ------------
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 -- 100,518,040 and 100,072,846 100,518 100,073
Additional paid-in capital 1,206,786 1,191,108
Retained earnings 2,818,471 2,486,478
Accumulated other comprehensive loss, net of
deferred income tax benefit of $(49,084) and $(112,920) (117,655) (224,511)
Unallocated ESOP shares (3,297) (4,363)
Unearned compensation--restricted stock (7,642) (9,986)
Treasury stock -- 2,200,922 shares in 2000 and 520,722 shares in 1999 (103,415) (25,698)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 3,893,766 3,513,101
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $13,220,483 $12,263,899
============ ============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
(3)
<PAGE>
MBIA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
---------------------------------------------------------------
2000 1999 2000 1999
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Insurance
Revenues:
Gross premiums written $172,010 $152,749 $510,142 $454,476
Ceded premiums (49,221) (33,029) (153,997) (128,381)
------------ ------------- ------------ ------------
Net premiums written 122,789 119,720 356,145 326,095
(Increase) decrease in deferred premium revenue (9,636) (9,581) (29,136) 3,372
------------ ------------- ------------ ------------
Premiums earned (net of ceded premiums of
$42,720, $30,681, $114,723, and $88,868) 113,153 110,139 327,009 329,467
Net investment income 99,746 90,722 294,588 267,348
Advisory fees 6,562 7,353 20,756 18,868
------------ ------------- ------------ ------------
Total insurance revenues 219,461 208,214 642,353 615,683
Expenses:
Losses and loss adjustment 13,873 14,629 36,195 186,798
Policy acquisition costs, net 9,166 9,192 26,488 27,616
Operating 20,591 19,567 61,266 57,780
------------ ------------- ------------ ------------
Total insurance expenses 43,630 43,388 123,949 272,194
------------ ------------- ------------ ------------
Insurance income 175,831 164,826 518,404 343,489
------------ ------------- ------------ ------------
Investment management services
Revenues 31,303 22,436 87,124 62,079
Expenses 16,300 11,754 45,070 32,483
------------ ------------- ------------ ------------
Investment management services income 15,003 10,682 42,054 29,596
------------ ------------- ------------ ------------
Municipal services
Revenues 9,729 6,486 28,664 16,475
Expenses 9,601 8,166 29,030 28,549
------------ ------------- ------------ ------------
Municipal services income (loss) 128 (1,680) (366) (12,074)
------------ ------------- ------------ ------------
Corporate
Net realized gains 5,728 6,372 25,038 23,327
Interest expense 13,426 13,446 40,277 40,439
Other expenses 5,771 6,576 14,172 13,386
One-time corporate charges --- --- --- 105,023
------------ ------------- ------------ ------------
Corporate loss (13,469) (13,650) (29,411) (135,521)
------------ ------------- ------------ ------------
Income before income taxes 177,493 160,178 530,681 225,490
Income tax provision 46,779 32,768 138,254 31,867
------------ ------------- ------------ ------------
Net income $130,714 $127,410 $392,427 $193,623
============ ============= ============ ============
Net income per common share:
Basic $ 1.33 $ 1.28 $ 3.98 $ 1.94
Diluted $ 1.32 $ 1.27 $ 3.96 $ 1.93
Weighted average number of common shares
outstanding:
Basic 98,177,222 99,728,806 98,532,263 99,649,465
Diluted 98,869,034 100,485,382 99,153,582 100,511,701
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
(4)
<PAGE>
MBIA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(In thousands except per share amounts)
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other
---------------------- Paid-in Retained Comprehensive
Shares Amount Capital Earnings Loss
---------- --------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 2000 100,073 $100,073 $1,191,108 $2,486,478 $(224,511)
Comprehensive income:
Net income --- --- --- 392,427 ---
Other comprehensive income:
Change in unrealized
depreciation of investments
net of change in deferred
income taxes of $(63,836) --- --- --- --- 118,230
Change in foreign currency
translation --- --- --- --- (11,374)
Other comprehensive income
Total comprehensive income
Treasury shares acquired --- --- --- --- ---
Exercise of stock options 443 443 15,722 --- ---
Unallocated ESOP shares --- --- (43) --- ---
Unearned compensation-
restricted stock 2 2 (1) --- ---
Dividends (declared and paid per
common share $0.615) --- --- --- (60,434) ---
---------- --------- ------------ ----------- -------------
Balance, September 30, 2000 100,518 $100,518 $1,206,786 $2,818,471 $(117,655)
========== ========= ============ =========== =============
<PAGE>
Unearned
Unallocated Compensation- Treasury Stock Total
ESOP Restricted --------------------- Shareholders'
Shares Stock Shares Amount Equity
-------------- -------------- --------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 2000 $(4,363) $(9,986) (521) $ (25,698) $3,513,101
Comprehensive income:
Net income --- --- --- --- 392,427
Other comprehensive income:
Change in unrealized
depreciation of investments
net of change in deferred
income taxes of $(63,836) --- --- --- --- 118,230
Change in foreign currency
translation --- --- --- --- (11,374)
------------
Other comprehensive income 106,856
------------
Total comprehensive income 499,283
------------
Treasury shares acquired --- --- (1,680) (77,717) (77,717)
Exercise of stock options --- --- --- --- 16,165
Unallocated ESOP shares 1,066 --- --- --- 1,023
Unearned compensation-
restricted stock --- 2,344 --- --- 2,345
Dividends (declared and paid per
common share $0.615) --- --- --- --- (60,434)
-------------- -------------- --------- ---------- -------------
Balance, September 30, 2000 $(3,297) $(7,642) (2,201) $(103,415) $3,893,766
============== ============== ========= ========== =============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
2000
-----------
Disclosure of reclassification amount:
Unrealized appreciation of
investments arising
during the period, net of taxes $123,210
Reclassification of adjustment,
net of taxes (4,980)
-----------
Net unrealized appreciation,
net of taxes $118,230
===========
(5)
<PAGE>
MBIA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
--------------------------
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $392,427 $193,623
Adjustments to reconcile net income to net cash
provided by operating activities:
(Increase) decrease in accrued investment income (4,131) 4,519
Increase in deferred acquisition costs (10,742) (14,862)
Increase in prepaid reinsurance premiums (39,274) (39,513)
Increase in deferred premium revenue 68,410 36,141
(Decrease) increase in loss and loss adjustment
expense reserves, net (8,285) 172,250
Depreciation 7,875 8,128
Amortization of goodwill 5,026 5,308
Amortization of bond discount, net (23,395) (17,036)
Net realized gains on sale of investments (25,038) (23,327)
Deferred income tax provision (benefit) 39,244 (92,910)
Other, net 64,889 56,730
----------- -----------
Total adjustments to net income 74,579 95,428
----------- -----------
Net cash provided by operating activities 467,006 289,051
----------- -----------
Cash flows from investing activities:
Purchase of fixed-maturity securities, net
of payable for investments purchased (5,315,817) (5,176,721)
Sale of fixed-maturity securities, net of
receivable for investments sold 4,812,997 4,703,037
Redemption of fixed-maturity securities, net of
receivable for investments redeemed 201,665 230,353
(Purchase) sale of short-term investments, net (53,879) 96,774
Sale of other investments, net 24,262 19,372
Purchases for municipal investment agreement
portfolio, net of payable for investments purchased (3,977,524) (1,698,886)
Sales from municipal investment agreement
portfolio, net of receivable for investments sold 3,887,185 1,170,459
Capital expenditures, net of disposals (11,185) (31,293)
Other, net 9,149 3,547
----------- -----------
Net cash used by investing activities (423,147) (683,358)
----------- -----------
Cash flows from financing activities:
Net repayment from retirement of short-term debt (23,300) --
Dividends paid (60,680) (59,820)
Purchase of treasury stock (77,717) (17,325)
Proceeds from issuance of municipal investment
and repurchase agreements 1,797,249 1,801,514
Payments for drawdowns of municipal investment
and repurchase agreements (1,680,840) (1,276,900)
Securities loaned or sold under agreements to repurchase, net (27,579) (12,271)
Exercise of stock options 16,165 12,371
----------- -----------
Net cash (used) provided by financing activities (56,702) 447,569
----------- -----------
Net (decrease) increase in cash and cash equivalents (12,843) 53,262
Cash and cash equivalents - beginning of period 93,559 20,757
----------- -----------
Cash and cash equivalents - end of period $ 80,716 $ 74,019
=========== ===========
Supplemental cash flow disclosures:
Income taxes paid $ 70,616 $131,491
Interest paid:
Municipal investment and repurchase agreements $190,208 $151,379
Long-term debt 39,825 40,339
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
(6)
<PAGE>
MBIA Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Basis of Presentation
---------------------
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and, accordingly,
do not include all of the information and disclosures required by generally
accepted accounting principles. These statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in Form 10-K for the year ended December 31, 1999 for MBIA Inc.
and Subsidiaries (the company). The accompanying consolidated financial
statements have not been audited by independent accountants in accordance
with generally accepted auditing standards but in the opinion of management
such financial statements include all adjustments, consisting only of
normal recurring adjustments, necessary to summarize fairly the company's
financial position and results of operations. The results of operations for
the nine months ended September 30, 2000 may not be indicative of the
results that may be expected for the year ending December 31, 2000. The
December 31, 1999 balance sheet was derived from audited financial
statements, but does not include all disclosures required by generally
accepted accounting principles. The consolidated financial statements
include the accounts of the company and its wholly owned subsidiaries. All
significant intercompany balances have been eliminated. Business segment
results are presented gross of intersegment transactions, which are not
material to each segment.
2. Dividends Declared
------------------
Dividends declared by the company during the nine months ended September
30, 2000 were $60.4 million.
3. Recent Accounting Pronouncements
--------------------------------
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards 133 "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133 is effective for
all quarters of all fiscal years beginning after June 15, 2000 (January 1,
2001 for the company). SFAS 133 requires that all derivative instruments be
recorded on the balance sheet at their fair value. Changes in the fair
value of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as
part of a hedge transaction and, if it is, the type of hedge transaction.
For transactions in which the company is hedging fair value, changes in
assets and liabilities will be offset in the income statement by changes in
the hedged item's fair value. For cash-flow hedge transactions, in which
the company is hedging the variability of cash flows related to a
variable-rate asset, liability, or a forecasted transaction, changes in the
fair value of the derivative instrument will be reported in other
comprehensive income to the extent that the hedges are effective as defined
by the risk management strategies. The ineffective portion of all hedges
will be recognized in current-period earnings.
The company initiated a project to implement SFAS 133 and ensure compliance
with the standard. The goal of the project is to complete an
(7)
<PAGE>
MBIA Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
inventory of all existing derivatives, review valuation methodologies by
type of derivative, review risk management hedging strategies, and
implement the appropriate procedures and systems.
Various entities within the company have entered into derivative
transactions. In relation to the insurance subsidiaries, certain insurance
policies were issued that did not qualify for the Financial Guaranty
exclusion. The derivatives insured by the insurance subsidiaries consist
primarily of credit default swaps, total return swaps and credit linked
notes. Additionally, certain investment management subsidiaries have
entered into interest rate swaps and credit default swaps for economic
hedging and other purposes. MBIA Inc. has also entered into an interest
rate swap for cashflow hedging purposes. All such derivatives are in
accordance with the company's risk management guidelines.
The company is in the process of evaluating the impact the adoption of SFAS
133 on the company's earnings and statement of financial position. The
company is also currently in the process of evaluating hedging strategies
and valuation methods, which is scheduled to be completed by December 31,
2000.
4. Unallocated Loss Reserve Methodology Update
-------------------------------------------
The company completed an update of its unallocated loss reserving
methodology in the first quarter of 1999. The update included an analysis
of loss-reserve factors based on the latest available industry data. The
company 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 the company's book of business. The study resulted in
an increase in the company's quarterly loss provision and a one-time charge
in the first quarter of 1999 of $153 million to incorporate the new factors
on the existing insured portfolio.
5. Capital Asset Write-down
------------------------
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.
6. Stock Repurchase Plan
---------------------
In the third quarter of 1999, the company began acquiring shares of its
common stock in connection with its stock repurchase plan announced in
August 1999. The plan authorizes the company to repurchase up to 7.5
million of outstanding common shares. For the first nine months of 2000 and
1999, the company purchased 1.7 million and 0.4 million shares of common
(8)
<PAGE>
MBIA Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
stock at an aggregate cost of $77.7 million and $17.3 million,
respectively. The company will only repurchase shares under this program
when it is economically attractive and within the constraints of the
company's Triple-A claims-paying ratings.
7. Subsequent Event
----------------
On November 13, 2000, the company sold 175 million Swiss Franc notes that
will mature on June 15, 2010. The issue, which carries a coupon of 4.5%,
will be swapped into a U.S. dollar obligation of approximately $100
million. Proceeds of the issue will be used for general corporate purposes
and for the repayment of the company's $100 million 9% notes maturing
February 15, 2001. The issue was rated Aa2 by Moody's Investors Service, AA
by Standard & Poor's Ratings Services and AA by Fitch. The lead underwriter
for the debt offering was Deutsche Bank AG.
(9)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
--------
MBIA Inc.(the "company") is engaged in providing financial guarantee insurance
and investment management and municipal services to public finance clients and
financial institutions on a global basis. The company turned in a solid quarter
as we continue to focus on our triple-A ratings, no-loss underwriting standards,
and building of shareholder value.
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
-----------------------------------------
Statements included in this discussion which are not historical or current facts
are "forward-looking statements" made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1998. The words "believe,"
"anticipate," "project," "plan," "expect," "intend," "will likely result," or
"will continue," and similar expressions identify forward-looking statements.
These statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from historical earnings and those presently
anticipated or projected. We wish to caution readers not to place undue reliance
on any such forward-looking statements, which speak only as of their respective
dates. The following are some of the factors that could affect our financial
performance or could cause actual results to differ materially from estimates
contained in or underlying our company's forward-looking statements:
o fluctuations in the economic, credit or interest rate environment in the
United States and abroad;
o level of activity within the national and international credit markets;
o competitive conditions and pricing levels;
o legislative and regulatory developments;
o technological developments;
o changes in tax laws;
o the effects of mergers, acquisitions and divestitures; and
o 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.
(10)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS
---------------------
SUMMARY
The following chart presents highlights of our consolidated financial results
for the third quarter and first nine months of 2000 and 1999.
<TABLE>
<CAPTION>
Percent Change
--------------------------
3rd Quarter Year-to-date
----------- ------------
3rd Quarter September 30, 2000 2000
---------------- ------------------ vs. vs.
2000 1999 2000 1999 1999 1999
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income (in millions):
As reported $ 131 $ 127 $ 392 $ 194 3% 103%
Excluding one-time charges $ 131 $ 122 $ 392 $ 368 7% 7%
Per share data: *
Net income:
As reported $1.32 $1.27 $ 3.96 $ 1.93 4% 105%
Excluding one-time charges $1.32 $1.22 $ 3.96 $ 3.67 8% 8%
Operating earnings $1.28 $1.18 $ 3.79 $ 3.51 8% 8%
Core earnings $1.22 $1.09 $ 3.66 $ 3.20 12% 14%
Book value $39.65 $35.62 11%
Adjusted book value $57.51 $52.12 10%
---------------------------------------------------------------------------------------------------------
*All earnings per share calculations are diluted.
</TABLE>
Core earnings, which exclude the effects of refundings and calls on our
insured issues, realized gains and losses on our investment portfolio and
nonrecurring charges, provide the most indicative measure of our underlying
profit. For the third quarter and first nine months of 2000, core earnings per
share increased 12% and 14%, respectively, over the third quarter and first nine
months of 1999, reflecting strong results in our investment management services
segment and a near breakeven result in our municipal services segment.
Our third quarter and first nine months of 2000 net income and earnings per
share, excluding one-time charges in 1999, grew 7% and 8%, respectively.
Compared with core earnings per share, these results were lower due to the low
level of refunding activity in 2000 compared with 1999. Including the one-time
charges, third quarter net income increased by 3% over 1999 and our first nine
months net income increased 103% over 1999.
Operating earnings per share, which include refundings but exclude the
impact of realized gains and losses and one-time charges, increased by 8% over
the third quarter and first nine months of 1999.
(11)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Our book value at September 30, 2000 was $39.65 per share, up 11% from
$35.62 at September 30, 1999. The increase in book value per share was caused
primarily by an 18% increase in retained earnings partially offset by the
increase in treasury stock from our share buyback program. A more appropriate
measure of a financial guarantee company's intrinsic value is its adjusted book
value. Adjusted book value is defined as book value plus the after-tax effects
of net deferred premium revenue net of deferred acquisition costs, the present
value of unrecorded future installment premiums, and the unrealized gains or
losses on investment contract liabilities. Our adjusted book value per share was
$57.51 at September 30, 2000, a 10% increase from third quarter-end 1999.
The following table presents the components of our adjusted book value per
share:
September 30, Percent Change
--------------------- ----------------
2000 1999 2000 vs. 1999
------------------------------------------------------------------------------
Book value $39.65 $35.62 11%
After-tax value of:
Net deferred premium
revenue, net of deferred 11.04 10.78 2%
acquisition costs
Present value of future
installment premiums* 5.54 4.58 21%
Unrealized gain on
investment contract
liabilities 1.28 1.14 12%
------------------------------------------------------------------------------
Adjusted book value $57.51 $52.12 10%
------------------------------------------------------------------------------
*The discount rate used to present value future installment premiums was 9% for
both periods.
The present value of future installment premium growth is being offset by the
lower growth in the net deferred premium revenue, which accounts for the
slightly reduced growth in adjusted book value per share compared with book
value per share growth.
INSURANCE
The company's production in terms of adjusted gross premiums (AGP), gross
premiums written (GPW) and par insured for the third quarter and first nine
months of 2000 and 1999 is presented in the following table:
<TABLE>
<CAPTION>
Percent Change
----------------------------
3rd Quarter Year-to-date
----------------------------
3rd Quarter September 30, 2000 2000
---------------- ----------------- vs. vs.
2000 1999 2000 1999 1999 1999
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Premiums written:
(in millions)
AGP $218 $213 $599 $538 2% 11%
GPW $172 $153 $510 $454 13% 12%
Par insured (in billions) $ 24 $ 26 $ 66 $ 70 (7)% (5)%
</TABLE>
(12)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
In the third quarter of 2000, bond issuance was down significantly from
1999 levels. However, due to our ability to maintain our pricing levels AGP was
up by 2% compared with the third quarter of 1999, while par insured was down by
7%. AGP includes our upfront premiums as well as the estimated present value of
current and future premiums from installment-based insurance policies issued
during the period. GPW, as reported in our financial statements, primarily
reflects premiums paid upfront plus cash receipts in respect of installment
premiums and does not include the value of future premium receipts expected from
installment policies originated in the period. GPW was $172 million, up 13% over
the third quarter of 1999. Our strong international GPW growth was partially
offset by the weaker public finance GPW growth.
For the first nine months of 2000 AGP was up by 11% compared with the same
period a year ago, while par insured was down by 5%. This trend of a positive
AGP variance with a decline in par insured has been consistent throughout 2000
and is the result primarily of strong pricing levels, especially in our
structured finance and international markets. GPW was $510 million for the first
nine months of 2000, up 12% over the first nine months of 1999. Our
international GPW grew by 56% that was partially offset by a decline in public
finance GPW of 2%.
We estimate the present value of our total future installment premium
stream on outstanding policies to be $838 million at September 30, 2000,
compared with $700 million at September 30, 1999, a 20% increase due to the
increase in structured finance and international installment policies insured.
PUBLIC FINANCE MARKET
Domestic new issue public finance market information and MBIA's par and
premium writings in both the new issue and secondary domestic markets are
shown in the following table:
<TABLE>
<CAPTION>
Percent Change
----------------------------
3rd Quarter Year-to-date
----------------------------
3rd Quarter September 30, 2000 2000
---------------- ----------------- vs. vs.
Domestic Public Finance 2000 1999 2000 1999 1999 1999
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total new issue market:*
Par value (in billions) $ 40 $ 51 $ 124 $ 153 (22)% (19)%
Insured penetration 51% 52% 46% 54%
MBIA market share 29% 28% 29% 25%
MBIA insured:
Par insured (in billions) $ 8 $ 10 $ 24 $ 28 (15)% (14)%
Premiums (in millions):
AGP $ 99 $ 114 $ 275 $ 300 (13)% (8)%
GPW $ 89 $ 88 $ 259 $ 263 2% (2)%
------------------------------------------------------------------------------------------------------
</TABLE>
* Market data are reported on a sale date basis while MBIA's insured data
are based on closing date information. Typically, there can be a one- to
four-week delay between the sale date and closing date of an insured
issue.
(13)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
New issuance was significantly lower in the public finance market,
decreasing by 22% to $40 billion for the third quarter of 2000, compared
with $51 billion in the third quarter of 1999. The insured penetration also
decreased in the third quarter to 51% in 2000 from 52% in the third quarter
of 1999. MBIA's market share of insured par was 29% for the quarter
compared with 28% in last year's third quarter. For the first nine months
of 2000, new issuance in the municipal market was down 19% to $124 billion
and insured penetration was 46%, down from 54% last year. MBIA captured 29%
of the insured public finance market this year compared with 25% in the
first nine months of 1999.
Somewhat offsetting the lower new issue market was a strong secondary
market, as activity in this market is frequently counter-cyclical to
activity in the new issue market, and returns tend to be higher. By taking
advantage of our strong secondary operations and some unique opportunities,
we were able to improve our overall returns and maintain strong credit
quality in the business we wrote.
MBIA's domestic public finance AGP decreased by 13% over 1999's third
quarter while par insured decreased by 15%. On a year-to-date basis, par
insured was down 14% while AGP was down 8%, significantly less than the
reduction in par insured and the market in general.
Looking ahead to the fourth quarter in the public finance market, we
are expecting solid production with increased deal flow somewhat offset by
very competitive market conditions.
STRUCTURED FINANCE MARKET
Details regarding the asset-backed market and MBIA's par and premium
writings in both the domestic new issue and secondary structured finance
markets are shown in the table below:
<TABLE>
<CAPTION>
Percent Change
----------------------------
3rd Quarter Year-to-date
----------------------------
3rd Quarter September 30, 2000 2000
Domestic --------------- ---------------- vs. vs.
Structured Finance 2000 1999 2000 1999 1999 1999
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total asset-backed market:*
Par value (in billions) $59 $63 $170 $162 (7)% 5%
MBIA insured:
Par written (in billions) $12 $15 $ 29 $ 36 (24)% (21)%
Premiums (in millions):
AGP $87 $63 $184 $147 38% 25%
GPW $46 $39 $133 $116 18% 15%
---------------------------------------------------------------------------------------------------
</TABLE>
* Market data exclude mortgage-backed securities and private placements.
(14)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Issuance in the public asset-backed market decreased 7% from the third
quarter of 1999. For the nine month period ended September 30, 2000,
issuance is up 5%, still below what we expect for the full year. MBIA
insured $12 billion of par value in the third quarter, down 24% compared
with the third quarter of last year while AGP was up 38%. For the year par
insured was down 21% while AGP was up 25%. The relationship between par
insured and AGP reflects continued strong pricing and the continuing shift
in our portfolio mix toward higher priced business.
Credit quality improved during the quarter, with 57% of the business
written rated A or better. Looking ahead to the fourth quarter, volume has
been picking up and we have a favorable outlook for the remainder of the
year.
INTERNATIONAL MARKET
The international results were up sharply over the first nine months of
1999. The quarterly mix of business included several large deals, and a
good diversification by bond type and by country. During 2000 87% of
international business insured was rated A or above, up from 86% in the
second quarter of the year. Japanese business led in terms of AGP, followed
by global deals, and transactions in Australia. In terms of bond type
asset-backed saw significant strength, followed by CDO's, utility deals,
and public project finance deals. Our infrastructure and structured finance
international business volume in the new issue and secondary markets for
the third quarter and first nine months of 2000 and 1999 are illustrated as
follows:
<TABLE>
<CAPTION>
Percent Change
----------------------------
3rd Quarter Year-to-date
----------------------------
3rd Quarter September 30, 2000 2000
--------------- ---------------- vs. vs.
International 2000 1999 2000 1999 1999 1999
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Par insured (in billions) $ 4 $ 1 $ 13 $ 6 305% 134%
Premiums (in millions):
AGP $32 $36 $141 $91 (11)% 55%
GPW $37 $26 $118 $76 39% 56%
---------------------------------------------------------------------------------------------------
</TABLE>
International par insured was up 305% to $4 billion in the third quarter
and AGP was $32 million, down 11%. These results were driven by some high
notional amount credit derivative deals insured this year which were rated
Triple-A and some very high AGP to par future flow deals insured in the
third quarter of last year. Our returns for both types of deals were very
attractive. For the nine month period par and AGP were up 134% and 55%,
respectively, as we have reported more AGP in the first nine months of 2000
then we did for the entire year of 1999. The larger increase in par insured
relative to AGP reflects a large number of triple-A rated CLO transactions
completed.
On March 21, 2000 the company and Ambac Financial Group, Inc. (Ambac)
announced the restructuring of the international joint marketing and
reinsurance arrangements that have been in place since 1995 with the
formation of the MBIA-
(15)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
AMBAC International joint venture. The company and Ambac will continue
having certain reciprocal reinsurance arrangements for international
business in 2000 and 2001. The companies will market and originate
international financial guarantee insurance independently. Additionally,
during the third quarter of 2000 the company and Ambac dissolved the
four-way joint venture in Japan.
REINSURANCE
Premiums ceded to reinsurers from all insurance operations were $49 million and
$33 million in the third quarter of 2000 and 1999, respectively. This 49%
increase in ceded premiums reflects increased cessions across all business
lines, especially in public finance and international. In public finance we
ceded a high percentage of a large health care deal and in international the
increased cessions were the result of a 40% increase in direct writings.
Cessions as a percentage of GPW increased to 29% in the third quarter of 2000
from 22% in last year's third quarter. For the first nine months of 2000 we have
ceded 30% of GPW, slightly more than the 28% we ceded in last year's first nine
months as reinsurance usage has stabilized year to year.Reinsurance is a cost
effective capital substitute for MBIA. In addition to treaty reinsurance, the
decision of whether to reinsure any particular policy on a facultative basis is
based on portfolio, single risk and other factors related to that policy.
Most of our reinsurers are rated Double-A or higher by S&P, or Single-A or
higher by A. M. Best Co. Although we remain liable for all reinsured risks, due
to the financial strength of our reinsurers we believe, although there is no
assurance that all reinsurers will be able to pay under the reinsurance ceded to
them, we will recover the reinsured portion of any losses, should they occur.
PREMIUMS EARNED
The composition of MBIA's premiums earned in terms of its scheduled and refunded
components is illustrated below:
<TABLE>
<CAPTION>
Percent Change
----------------------------
3rd Quarter Year-to-date
----------------------------
3rd Quarter September 30, 2000 2000
---------------- ----------------- vs. vs.
In millions 2000 1999 2000 1999 1999 1999
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Premiums earned:
Scheduled $103 $ 96 $304 $277 8% 10%
Refunded 10 14 23 52 (29)% (57)%
-----------------------------------------------------------------------------------------------
Total $113 $110 $327 $329 3% (1)%
-----------------------------------------------------------------------------------------------
</TABLE>
Upfront premiums are recognized over the life of the bonds we insure. The
extended premium recognition coupled with compounding investment income from
investing our premiums and capital form a solid foundation for consistent
revenue growth. In the third
(16)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
quarter and first nine months of 2000 premiums earned from scheduled
amortization increased by 8% and 10%, respectively, over the third quarter and
first nine months of 1999, indicating that the benefits of the increased pricing
strategy established in early 1999 are beginning to flow to earned premiums.
Increases in structured finance and international scheduled premium earnings
were partially offset by flat public finance earnings.
Refunded premiums earned declined significantly this year compared with the
third quarter of 1999, reflecting the higher 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.
NET INVESTMENT INCOME
Our insurance-related investment income (exclusive of realized gains) increased
10% to $100 million in the third quarter of 2000, up from $91 million in the
third quarter of 1999. In the first nine months of 2000 investment income is up
10% over 1999. This increase was primarily due to a shift in the investment
portfolio from tax-exempt to taxable investments, and the growth of cash flow
available for investment. Our cash flows were generated from operations and the
compounding of previously earned and reinvested investment income.
ADVISORY FEES
The company collects fee revenues in conjunction with certain structured finance
transactions. In addition the company earns advisory fees in connection with its
administration of certain third party owned conduits. Fees are generally
deferred and earned over the life of the related transactions. Certain fees are
earned in the quarter they are collected. These fees include administrative fees
for transactions where the fee is collected and earned on a periodic installment
basis, and fees for transactions which terminate prior to the expected maturity
date. In the third quarter of 2000, advisory fee revenues decreased 11%. This
decrease was primarily due to the reduction in the non-deferrable type of fees
recognized during the quarter. Advisory fees are up 10% for the first nine
months of 2000 compared with the first nine months of 1999.
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 with respect to which we expect to have
a loss, the present value of our expected payments, net of expected reinsurance
and recoveries, is allocated within the total loss reserve as case-specific
reserves.
(17)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
We periodically evaluate our estimates for losses and LAE and any resulting
adjustments are reflected in current earnings. We believe that our reserving
methodology and the resulting reserves are adequate to cover the ultimate net
cost of claims. However, the reserves are based on estimates, and there can be
no assurance that any ultimate liability will not exceed such estimates.
In 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 loss reserving factors and a one-time charge of
$153 million in the first quarter of 1999, to incorporate the new factors on the
existing insured portfolio.
The following table shows the case-specific, reinsurance recoverable and
unallocated components of our total loss and LAE reserves at the end of the
third quarter of 2000 and 1999, as well as our loss provision for the third
quarter of 2000 and 1999:
<TABLE>
<CAPTION>
Percent Change
September 30, September 30, --------------
In millions 2000 1999 2000 vs. 1999
------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Case-specific:
Gross $207 $241 (14)%
Reinsurance recoverable on unpaid losses 28 32 (13)%
------------------------------------------------------------------------------------------------
Net case reserves 179 209 (15)%
Unallocated 249 233 7%
------------------------------------------------------------------------------------------------
Net loss and LAE reserves $428 $442 (3)%
Provision $ 14 $ 15 (5)%
</TABLE>
During the third quarter of 2000, adjustments made to case basis reserves were
due primarily to expenses incurred, not net claim payments. Expense and claim
payments were under $3 million for the quarter. In addition, during the third
quarter case basis reserves were established for expenses incurred in connection
with two additional policies.
(18)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
POLICY ACQUISITION COSTS AND NET OPERATING EXPENSES
Expenses related to the production of our insurance business (policy acquisition
costs) are deferred and recognized over the period in which the related premiums
are earned. Our company's policy acquisition costs, general operating expenses
and total insurance operating expenses, as well as related expense ratios, are
shown below:
<TABLE>
<CAPTION>
Percent Change
----------------------------
3rd Quarter Year-to-date
----------------------------
3rd Quarter September 30, 2000 2000
---------------- --------------- vs. vs.
In millions 2000 1999 2000 1999 1999 1999
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Policy acquisition costs, net $ 9 $ 9 $26 $27 --- (4)%
Operating 21 20 62 58 5% 6%
---------------------------------------------------------------
Total insurance
operating expenses $30 $29 $88 $85 3% 3%
Expense ratio:
GAAP 26.3% 26.1% 26.8% 25.9%
Statutory 22.8% 25.5% 21.2% 23.8%
--------------------------------------------------------------------------------------------------
</TABLE>
For the third quarter of 2000, policy acquisition costs net of deferrals
were $9 million, consistent with the third quarter of 1999. The ratio of policy
acquisition costs net of deferrals to earned premiums decreased to 8.1% for the
third quarter of 2000 compared with 8.3% for the comparable 1999 period due
primarily to the additional ceding commission income from the higher reinsurance
levels this year. For the first nine months of 2000, policy acquisition costs
net of deferrals decreased 4% to $26 million compared with the first nine months
of 1999, again due to the higher ceding commission income. The ratio of policy
acquisition costs net of deferrals to earned premiums decreased to 8.1% for the
first nine months of 2000 compared with 8.4% for the comparable 1999 period.
Operating expenses increased 5% and 6%, respectively, over the third
quarter and the first nine months of 1999. The increase in insurance operating
expenses was due primarily to higher compensation costs and increased building
and equipment related expenses related to the expansion of the company's Armonk
headquarters. Total insurance operating expenses increased modestly over the
third quarter and the first nine months of 1999, reflecting the company's
increased emphasis on expense management.
Financial guarantee insurance companies use the statutory expense ratio
(expenses before deferrals divided by net premiums written) as a measure of
expense management. Our company's third quarter 2000 statutory expense ratio of
22.8% is significantly below the third quarter 1999 ratio of 25.5%. The GAAP
expense ratio remained relatively flat with the third quarter of 1999. For the
first nine months of 2000 the statutory expense ratio of 21.2% is also below the
comparable 1999 period ratio of 23.8%. The decrease in the statutory expense
ratio is again indicative of the company's increased focus on managing its
expense growth.
(19)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
INSURANCE INCOME
The company's insurance income of $176 million for the third quarter of 2000
increased 7% over the third quarter of 1999 driven primarily by the 10% increase
in net investment income. For the first nine months, insurance income, excluding
the one-time pre-tax charge of $153 million in 1999 to increase loss reserves,
rose 4% to $518 million from $496 million a year ago, again due primarily to the
strong increase in net investment income.
INVESTMENT MANAGEMENT SERVICES
------------------------------
In 1998 after our merger with 1838 Investment Advisors, Inc. (1838), the company
formed a holding company, MBIA Asset Management Corporation, to consolidate our
four investment management services businesses. The table below summarizes our
consolidated investment management results for the third quarter and first nine
months of 2000 and 1999:
<TABLE>
<CAPTION>
Percent Change
----------------------------
3rd Quarter Year-to-date
----------------------------
3rd Quarter September 30, 2000 2000
---------------- --------------- vs. vs.
In millions 2000 1999 2000 1999 1999 1999
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $31 $22 $87 $62 40% 40%
Expenses 16 11 45 32 39% 39%
--------------------------------------------------------------------------------------------------
Income $15 $11 $42 $30 40% 42%
</TABLE>
Consolidated revenues for the investment management businesses were up 40%
over the third quarter of 1999, while expenses were up slightly less at 39%. As
a result, operating income increased by 40% for the third quarter of 2000 over
the same period in 1999. We ended the quarter with over $36 billion in assets
under management, up 27% from September 30, 1999.
MBIA Asset Management Corporation is comprised of 1838, MBIA Municipal
Investors Service Corp. (MBIA-MISC), MBIA Investment Management Corp. (IMC) and
MBIA Capital Management Corp. (CMC). The following provides a summary of each of
these businesses:
1838 is a full-service asset management firm with a strong institutional
focus. It manages over $14 billion in equity, fixed-income and balanced
portfolios for a client base comprised of municipalities, endowments,
foundations, corporate employee benefit plans and high-net-worth
individuals.
MBIA-MISC provides cash management, investment fund administration and
fixed-rate investment placement services directly to local governments and
school districts. MBIA-MISC is a Securities and Exchange Commission
(SEC)-registered investment adviser and at September 30, 2000 had $7.9
billion in assets under management, up 10% over September 30, 1999.
(20)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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
September 30, 2000, principal and accrued interest outstanding on
investment and repurchasing agreements was $4.6 billion, compared with $4.0
billion at September 30, 1999. At amortized cost, the assets supporting
IMC's investment agreements were $5.0 billion and $4.0 billion at September
30, 2000 and 1999, 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 third quarter-end 2000, our exposure to
derivative financial instruments was not material.
CMC is an SEC-registered investment adviser and National Association of
Securities Dealers member firm. CMC specializes in fixed-income management
for institutional funds and provides investment management services for
IMC's investment agreements, MBIA-MISC's municipal cash management programs
and the company's insurance related portfolios. At September 30, 2000,
CMC's third party assets under management were $2.3 billion compared with
$1.7 billion at September 30, 1999.
MUNICIPAL SERVICES
------------------
MBIA MuniServices Company (MBIA MuniServices)(formerly known as Strategic
Services, Inc.) was established in 1996 as part of the company's strategy to
broaden its product offerings to its core clients, leveraging its relationships
and presence as a leading provider of products and services to the public
sector. During 1999, the company completed a reorganization of the operations of
two of its subsidiaries, Municipal Tax Bureau (MTB) and Municipal Resource
Consultants (MRC). With the reorganization complete, this business, operating as
MBIA MuniServices, is now focused on delivering revenue enhancement services and
products to public-sector clients nationwide, consisting of discovery, audit,
collections/recovery, enforcement and information (data) services. The Municipal
Services segment also includes Capital Asset Holdings GP, Inc. and certain
affiliated entities (Capital Asset), a servicer of delinquent tax certificates.
In the third quarter of 2000 the municipal services operations had
operating income of $0.1 million compared with a loss of $1.7 million during the
same period of 1999. This turnaround was due primarily to a strong operating
income from MRC. For the first nine months of 2000, municipal services reported
a $0.4 million loss compared with a loss of $12.1 million in the comparable 1999
period due primarily to a breakeven result for
(21)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Capital Asset and an operating profit at MRC. These two subsidiaries
recorded substantial operating losses in the prior period.
CAPITAL ASSET The company is a majority owner of Capital Asset. Capital
Asset was in the business of acquiring and servicing tax liens. The company
became a majority owner in December 1998 when it acquired the interest of
the company's founder. In 1999, the company recorded a $102 million pre-tax
charge related to its investment in Capital Asset. MBIA Insurance Corp.
continues to insure three securitizations of tax liens that were originated
and continue to be serviced by Capital Asset. 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. As of September 30, 2000, the
aggregate gross insured amounts in connection with these securitizations
was approximately $359 million, and there can be no assurance that there
will be no losses under such policies. In addition, Capital Asset has other
contingent liabilities, including potential liabilities in connection with
pending litigation in which it is involved.
CORPORATE
---------
NET REALIZED GAINS
Net realized gains were $6 million in the third quarter of 2000, the same as in
the third quarter of 1999. For the first nine months of 2000, net realized gains
were $25 million compared with $23 million in the comparable 1999 period. These
gains were generated as a result of ongoing management of the investment
portfolio.
INTEREST EXPENSE
In the third quarter of 2000, we incurred $13 million of interest expense, the
same as in the third quarter of 1999. For the first nine months of 2000,
interest expense was $40 million, the same as in the first nine months of 1999.
OTHER EXPENSES
Other expenses were comprised primarily of non-insurance goodwill amortization
and general corporate overhead. In the third quarter of 2000 other expenses were
$6 million, down from $7 million in the comparable 1999 period. For the first
nine months of 2000, other expenses were $14 million, slightly higher than the
first nine months of 1999.
ONE-TIME CORPORATE CHARGES
In the first nine months of 1999 one-time corporate charges were comprised of a
$102 million charge for the write-down of the carrying value of the company's
investment in Capital Asset and the value of the loans provided by the company
to Capital Asset, as well as a $3 million loss on the sale of MuniFinancial.
(22)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
TAXES
-----
Our tax policy is to optimize our after-tax income by maintaining the
appropriate mix of taxable and tax-exempt investments. However, we will see our
tax rate fluctuate from time-to-time as we manage our investment portfolio on a
total return basis. Our effective tax rate has increased over last year's third
quarter primarily due to a shift from tax-exempt investments into taxable
investments.
CAPITAL RESOURCES
-----------------
We carefully manage our capital resources to optimize our cost of capital while
maintaining appropriate claims-paying resources to sustain our Triple-A
claims-paying ratings. At September 30, 2000, our total shareholders' equity was
$3.9 billion, with total long-term borrowings at $589 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 ratings, cash flow and total capital. The following table shows our
long-term debt and the ratio we use to measure it:
September 30, December 31,
2000 1999
--------------------------------------------------------------------------------
Long-term debt (in millions) $589 $689
Long-term debt to total capital 13% 16%
In July 1999, the Board of Directors authorized the repurchase of 7.5
million shares of common stock of the company. The company began the repurchase
program in the third quarter of 1999. As of September 30, 2000 the company has
repurchased a total of 2,180,200 shares at an average price of $46.97.
In addition, MBIA Insurance Corp. has a $900 million irrevocable standby
line of credit facility with a group of major Triple-A rated banks to provide
funds for the payment of claims in the event that severe losses should occur.
The agreement only applies to losses with respect to our U.S. public finance
book of business. The agreement currently has an attachment point of $1.3
billion and is for a seven-year term, which expires on October 31, 2007, and,
subject to approval by the banks, may be renewed annually to extend the term to
seven years beyond the renewal date. MBIA Insurance Corp. also maintains
stop-loss reinsurance coverage of $175 million in excess of incurred losses of
$760 million on our world-wide structured finance book of business.
At quarter end, total claims-paying resources for MBIA Insurance Corp.,
which consists of our capital base, unearned premium reserve, loss and LAE
reserves, present value of our future installment premiums, and our standby line
of credit and stop loss reinsurance coverage, stood at $8.9 billion, an 8%
increase over third quarter-end 1999. This increase was due to a 10% increase in
MBIA Insurance Corp's capital base and a 20% increase in the present value of
our future installment premiums.
(23)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY
---------
Cash flow needs at the parent company level are primarily for dividends to our
shareholders and interest payments on our debt. These requirements have
historically been met by dividend payments by MBIA Insurance Corp., which
generates substantial cash flow from premium writings and investment income. In
the first nine months of 2000, MBIA Insurance Corp.'s operating cash flow
totaled $465 million.
Under New York state insurance law, without prior approval of the
superintendent of the state insurance department, financial guarantee insurance
companies can pay dividends from earned surplus subject to retaining a minimum
capital requirement. In our case, dividends in any 12-month period cannot be
greater than 10% of policyholders' surplus. During the third quarter of 2000
MBIA Insurance Corp. paid dividends of $66 million and at September 30, 2000 had
dividend capacity in excess of $75 million without special regulatory approval.
The company has significant liquidity supporting its businesses. At the end
of the third quarter of 2000, cash equivalents and short-term investments
totaled $446 million. Should significant cash flow reductions occur in any of
our businesses, for any combination of reasons, we have additional alternatives
for meeting ongoing cash requirements. They include selling or pledging our
fixed-income investments from our investment portfolio, tapping existing
liquidity facilities and new borrowings.
The company has substantial external borrowing capacity. We maintain two
short-term bank lines totaling $650 million with a group of international banks.
At September 30, 2000, there were no balances outstanding under these lines.
The investment portfolio provides a high degree of liquidity since it is
comprised of readily marketable high-quality fixed-income securities and
short-term investments. At September 30, 2000, the fair value of our
consolidated investment portfolio was $11.7 billion, as shown in the following
table:
<TABLE>
<CAPTION>
Percent Change
September 30, December 31, --------------
In millions 2000 1999 2000 vs. 1999
------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Insurance operations:
Amortized cost $ 6,796 $ 6,427 6%
Unrealized loss (86) (223) (61)%
------------------------------------------------------------------------------------------
Fair value $ 6,710 $ 6,204 8%
------------------------------------------------------------------------------------------
Municipal investment
Agreements:
Amortized cost $ 4,996 $ 4,584 9%
Unrealized loss (43) (94) (54)%
------------------------------------------------------------------------------------------
Fair value $ 4,953 $ 4,490 10%
------------------------------------------------------------------------------------------
Total portfolio at fair value $11,663 $10,694 9%
</TABLE>
(24)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The growth of our insurance-related investments in 2000 was the result of
positive cash flows. The fair value of investments related to our municipal
investment agreement business has increased to $5.0 billion from $4.5 billion at
December 31, 1999.
The investment portfolios are considered to be available-for-sale, and the
differences between their fair value and amortized cost, net of applicable
taxes, are reflected as an adjustment to shareholders' equity. Differences
between fair value and amortized cost arise primarily as a result of changes in
interest rates occurring after a fixed-income security is purchased, although
other factors influence fair value, including credit-related actions, supply and
demand forces and other market factors. The weighted-average credit quality of
our fixed-income portfolios has been maintained at Double-A since our inception.
Since we generally intend to hold most of our investments to maturity as part of
our risk management strategy, we expect to realize a value substantially equal
to amortized cost.
(25)
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
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(a) Exhibits
11. Computation of Earnings Per Share Assuming Dilution
27. Financial Data Schedule
99. Additional Exhibits - MBIA Insurance Corporation and
Subsidiaries Consolidated Financial Statements
(b) Reports on Form 8-K: No Reports on Form 8-K were filed in this
quarter.
(26)
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MBIA INC.
-----------------------------
Registrant
Date: November 14, 2000 /s/ Neil G. Budnick
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Neil G. Budnick
Chief Financial Officer
Date: November 14, 2000 /s/ Douglas C. Hamilton
------------------- ------------------------------
Douglas C. Hamilton
Controller
(Principal Accounting Officer)
(27)
