113 King Street
Company Perspectives:
Through MBIA Insurance Corp. and its subsidiaries, the company provides financial guarantees to help public- and private-sector entities access the capital they need to ensure their growth and prosperity.
MBIA Inc. is a financial guarantee company, primarily insuring municipal bonds, infrastructure finance issues, asset- and mortgage-based securities. In essence the company bestows its own Triple-A rating (issued by Moody's, Standard & Poor's, Fitch and Rating and Investment Information) on the insured issue, making an unconditional and irrevocable guarantee that all financial obligations of the bond will be met. By obtaining insurance the bond issuer is able to negotiate lower interest rates and better market the bonds to buyers who are confident of their investments. MBIA also offers asset management and revenue enhancement services to state and local governments, academic institutions, and other public- and private-sector clients. In addition to its Armonk, New York headquarters, MBIA maintains offices in Denver, San Francisco, Paris, London, Madrid, Milan, Sydney, and Tokyo. MBIA is a public company listed on the New York Stock Exchange.
Introduction of Bond Insurance: Early 1970s
Many cities issue bonds to raise money to build necessary infrastructure. These general obligation bonds (GOs) are backed by an issuing agency, which has the power of taxation to make sure the bonds are paid off. Over the years revenue bonds also became popular. Their financial obligations are met by the revenue generated by the project itself, such as tolls charged to cross a bridge or use a highway. To give investors a sense of the quality of a bond issue, securities are rated, for a fee, by independent rating agencies such as Standard & Poor's and Moody's. The highest rating is Triple-A, the gold standard for bonds, reassuring investors and lenders alike in a project. Because some bond issues receive less than a Triple-A rating, a market developed for insurance, to back the bond with the Triple-A rating of the insurer.
In the early 1970s two bond insurers formed around the same time: American Municipal Bond Assurance Corporation (Ambac), a subsidiary of MGIC Investment Corporation of Milwaukee, and MBIA's predecessor, the Municipal Bond Insurance Association (MBIA), which was managed by Municipal Issuers Service Corporation (MISC). MISC was founded in 1971 after John R. Butler approached William O. Bailey, a senior executive at Aetna Casualty and Surety Company, with the concept of insuring municipal bonds. Bailey then recruited Aetna, St. Paul Fire and Marine Insurance Company, Connecticut General, and United States Fire Insurance Company to form MBIA in 1973. A year later MBIA became the first municipal bond guarantor to receive Standard & Poor's Triple-A rating, giving it a competitive edge over Ambac, which was awarded a Double-A rating. (In 1971 Ambac had become the first company to guarantee a municipal bond, the $650,000 issue for the Greater Juneau (Alaska) Borough Medical Arts Building.) With Bailey serving as its first president while continuing to work at Aetna, MBIA set up shop in White Plains, north of New York City. Initially business was slow, since GO bonds remained the dominant type of municipal bonds and had the power of taxation to back them up. But as taxpayers became increasingly upset about mounting property taxes, local government turned to revenue bonds, which by the end of the 1970s accounted for about two-thirds of all municipal bonds. Revenue bonds were a somewhat riskier investment, and issuers were more inclined to purchase insurance to gain the security of a Triple-A rating. It was not until May 21, 1974, that MBIA guaranteed its first bond, an $8.65 million water and sewer revenue bond issued by Carbondale, Illinois. The company guaranteed 11 more issues by the end of the year, for a total of $82 million worth of par value insured.
When New York City, running a massive deficit, came close to defaulting on its municipal bonds in 1975, the need for bond insurance gained traction, and business picked up for MBIA. Within two years the company had guaranteed 500 new bonds with a par value of $2.3 billion, as rising interest rates prompted many municipalities to insure their bonds in order to lower their interest costs. In 1980 that amount would reach $5 billion, and a year later MBIA insured its 1,000th issue. By 1983 the company held the distinction of having guaranteed bonds in all 50 states. During the early 1980s MBIA insured its first private university bond issue, began insuring healthcare financing bonds as well as bonds issued by housing agencies, and became the first bond insurer to guarantee the municipal bonds contained in unit investment trusts. With its higher rating than Ambac, MBIA dominated the market. Until Ambac was able to earn a Triple-A, it had only insured 115 bond issues, but seeing the profits that MBIA was enjoying, Ambac stepped up efforts in its new issue insurance program. Moreover, new competition arrived in 1983 in the form of Financial Guaranty Insurance Company (FGIC), followed by Bond Investors Guaranty Insurance Co. (BIG) in 1984 and Financial Security Assurance Inc. (FSA) in 1985.
Bond Default in the 1980s Causing Demand
A major factor in the rise of competition, however, was an increasing market for bond insurance, a tide that floated all boats in the industry including MBIA, which continued to grow and prosper during the 1980s. Also contributing to greater demand for insurance was another prominent bond default. In 1983 the Washington Public Power Supply System, known as WHOOPS in a case of unintended irony, defaulted on $2.25 billion worth of bonds after Washington taxpayers balked at backing some of its contracts. Ambac had insured a small portion of the bonds, the holders of which were repaid on time. Investors holding the uninsured bonds, on the other hand, received delayed, reduced payments. The incident proved to be a watershed moment in the bond insurance industry. Later in the 1980s another event took place that further stimulated business. The Tax Reform Act of 1986 eliminated tax-exemptions on private-purpose and non-governmental bonds issued after 1985. As a result, municipalities rushed to issue bonds before the new regulations went into effect, leading to a surge in bond insurance.
In 1985 Ryder System, Inc. acquired MBIA's managing agent, MISC, but Ryder sold the business less than 18 months later. At this point MBIA was reorganized, transforming itself from a consortium of five insurers (now including Travelers Corp.), all of which carried their share of the bond insurance on their own books. While Travelers opted out, the four founding insurers pooled $427 million in an initial investment to create a new entity, MBIA Inc., incorporated in Connecticut in November 1986. A month later it became MBIA's successor. It also acquired MISC from Ryder and reinsured all of the municipal bond insurance portfolios of the shareholding insurance companies.
In 1987 Bailey retired from Aetna and took over as the first chief executive officer and chairman of the new MBIA. Later in the year, in July, the company went public, selling 5.5 million shares priced at $23.50 per share in an initial public offering. The company was subsequently listed on the New York Stock Exchange. A stock market crash in October 1987--the notorious Black Monday--put a severe dent in the price of MBIA shares, but the company soon recovered. It was healthy enough by the end of the 1980s to acquire another municipal bond insurance company, BIG, which in 1990 adopted the name MBIA Insurance Corp. of Illinois. MBIA was also taking steps to begin doing business in Europe. In December 1989 it forged an alliance with Credit Local de France, a major French financial institution, which bought a 5 percent stake in MBIA from Continental Corp. In return, MBIA agreed to provide technical assistance to Credit Local de France, essentially teaching the French financing techniques that might be transferred to Europe, where a market for municipal bonds had not yet emerged. Instead, municipalities relied on banks and other lending institutions to finance projects. MBIA was also hopeful that the alliance with a powerful financial institution would give it a leg up on future business in Europe. In 1991 the company established a French subsidiary to help lay the groundwork for the financial guarantee business in Europe and a year later opened its first international office in Paris.
MBIA entered the 1990s never having paid a claim in its history. The company continued to broaden its services in the early 1990s, launching its Cooperative Liquid Assets Securities System (CLASS) to provide investment management services to school districts and municipalities, and the ASSURETY program that guaranteed a bank's obligations to municipal depositors. In 1993 MBIA established MBIA Investment Management Corp., which served municipal insurers, guaranteeing investment agreements for the proceeds from their municipal bonds. MBIA also experienced a change in leadership. In 1992 David H. Elliott was named CEO, and following Bailey's retirement in 1994 was named chairman as well.
Another seminal moment in the history of the bond insurance industry occurred in 1994 when Orange County, one of the nation's wealthiest areas, possessing a Double-A credit rating, went bankrupt. MBIA was a direct beneficiary, subsequently insuring $900 million worth of recovery bonds issued by Orange County and receiving nearly $30 million in fees. Moreover, as had been the case in 1975 with New York City and 1983 with Washington Public Power Supply defaults, the demand for bond insurance surged, as investors were no longer satisfied with the reputation of a municipality when buying bonds. In short, if Orange County could default, than anyone could. Within a year about 40 percent of newly issued municipal bonds would be insured, and a year later nearly half would be insured.
Mid-1990s Brings Expansion
The company's prominent role in guaranteeing Orange County's recovery bonds also rekindled investor interest in MBIA. In December 1995 the company completed a $75 million public offering, followed a month later by a stock sale that raised $55 million. Flush with cash, MBIA expanded in the second half of the 1990s on a number of fronts, both internally and by way of acquisitions. MBIA Securities Corp. was established in 1995 to offer internal fixed-income trading and portfolio management. In that same year, the company launched a joint venture with Ambac, MBIA-Ambac International, to sell financial guarantee insurance around the world. MBIA & Associates Consulting was formed in 1997 to provide management consulting services to state and local governments, colleges and universities, as well as real estate entities and international concerns. Acquisitions included Municipal Tax Bureau, a Philadelphia-based provider of tax discovery, compliance, and administration services that became the backbone of a new subsidiary, MBIA MuniServices. In addition the new unit acquired MuniFinancial, a California company that offered a slate of bond administration services. Also in 1997 MBIA acquired Municipal Resource Consultants, another California company, provider of revenue enhancement audits and other services, and American Money Management Associates, Inc., which offered a variety of investment services to municipalities and other public sector entities.
Expansion continued in the late 1990s. After reaching an agreement in 1997, MBIA and CapMAC Holdings Inc. merged in a stock swap valued at more than $500 million. The addition of CapMAC's expertise in structured financial solutions and credit risk management strengthened MBIA's ability to serve the structured finance marketplace, which was enjoying fast growth worldwide. Also in 1998 MBIA acquired another Philadelphia company, 1838 Investment Advisors, an equity management firm that became a major component in newly formed MBIA Asset Management LLC. But the year would also be marked by the largest claim in the history of MBIA. In 1998 Allegheny Health, Education and Research Foundation, a nonprofit hospital chain known as AHERF, filed for bankruptcy, putting $256 million in securities insured by MBIA into default. MBIA subsequently arranged for $170 million of reinsurance from three Triple-A reinsurers, paying a $3.85 million premium. However, these reinsurance agreements would prove troublesome several years later.
In the meantime, Elliott retired as CEO and chairman in 1999, replaced in both posts by Joseph (Jay) W. Brown, Jr. MBIA opened a London office in 2000 and a year later topped the $1 billion mark in adjusted direct premiums. The AHERF episode began to resurface in December 2002 when New York City Hedge fund Gotham Partners issued a white paper that claimed MBIA's reserves were inadequate and that an investment in the firm was risky. MBIA struck back quickly, accusing Gotham Partners of attempting to drive down the price of MBIA shares in order to profit from Gotham's short position on the company. MBIA's protestations were loud enough, in fact, to prompt an investigation of Gotham by the Securities & Exchange Commission and the New York State Attorney General's office.
In May 2004, Gary Dunton, president of MBIA, was named CEO and Jay Brown became executive chairman. During Jay Brown's tenure at the helm of MBIA, he strengthened MBIA's operations, including pricing, risk management, loss reserving, and human resources.
In November 2004 the company received subpoenas from the Securities and Exchange Commission (SEC) and the New York Attorney General's (NYAG) office requesting information that covered the AHERF reinsurance transactions MBIA had entered into in 1998. In March 2005, MBIA restated its financial results for the previous seven years due to improper accounting related to a 1998 agreement with Converium Re, previously known as Zurich Reinsurance Centre. Later that month, MBIA received a subpoena from the U.S. Attorney's Office for the Southern District of New York seeking information about the reinsurance agreements. Supplemental requests from the NYAG and the SEC sought documents relating to the company's accounting treatment of advisory fees, its methodology for determining loss reserves and case reserves, instances of purchase of credit default protection on itself, and documents relating to Channel Reinsurance Ltd., a reinsurance company of which MBIA was part owner. MBIA began to cooperate fully with these investigations.
The rating agencies supported MBIA throughout this period. Moody's stated, "The relatively contained nature of the additional request for information, both as to its scope and apparent materiality, suggest a limited impact on MBIA's financial profile. While most questions relate to MBIA specific issues, the accounting for loss and case reserves is a financial guaranty industry issue recently referred by the SEC to the FASB for further guidance." S&P stated that, "they have received no information that would cause them to change the rating or outlook of MBIA Inc. (AA/Stable) and MBIA Insurance Corp. (AAA/Stable)."
Analysts also remained positive throughout, and Rob Ryan of Merrill Lynch reiterated his buy rating on MBIA in April 2005 stating, "The current perception of regulatory risk for MBIA and the industry is excessive." After the March subpoenas, Geoffrey Dunn of Keefe Bruyette & Woods thought the stock presented a positive opportunity. "We believe that this will prove to be a positive buying opportunity for longer-term investors," Dunn said. "We reiterate our Outperform rating."
How the investigations and the lawsuits would play out was uncertain. During this time, MBIA stock continued to perform well, and the company maintained a strong market share.
Principal Subsidiaries: MBIA Insurance Corporation; MBIA Asset Managements, LLC; MBIA Municipal Investors Service Corporation; MBIA Investment Management Corp.; MBIA Capital Management Corp.; MBIA Services Company; MBIA MuniServices Company; CapMac Financial Services, Inc.
Principal Competitors: AMBAC Financial Group, Inc.; Financial Guaranty Insurance Company; Financial Security Assurance Holdings Ltd.
Comment about this article, ask questions, or add new information about this topic: