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. [ ]
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 1
3 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
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
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. 4
6 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. 5
7 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. 6
8 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. 7
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. 8
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
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
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
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
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
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
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
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
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
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
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
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
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
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. 22
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
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. 24
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
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
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
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
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
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
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
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
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
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
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 ============= ============ ===============
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.
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.
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.
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.
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>
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.
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