-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BGbLLM6bmQEYCcmEQynhSZmWxfm66fVq1H5y4GRaUGC9uo1JDgJ7rJQYEd1VCJw5 lBTHyqHT+3g/X3WUDms2ZA== 0000814585-98-000006.txt : 19981118 0000814585-98-000006.hdr.sgml : 19981118 ACCESSION NUMBER: 0000814585-98-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MBIA INC CENTRAL INDEX KEY: 0000814585 STANDARD INDUSTRIAL CLASSIFICATION: SURETY INSURANCE [6351] IRS NUMBER: 061185706 STATE OF INCORPORATION: CT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-09583 FILM NUMBER: 98752344 BUSINESS ADDRESS: STREET 1: 113 KING ST CITY: ARMONK STATE: NY ZIP: 10504 BUSINESS PHONE: 9142734545 MAIL ADDRESS: STREET 1: 113 KING ST CITY: ARMONK STATE: NY ZIP: 10504 10-Q 1 3RD QTR 98 10Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (X) QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended September 30, 1998 OR ( ) TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from __________ to __________ Commission File No. 1-9583 I.R.S. Employer Identification No. 06-1185706 MBIA INC. A Connecticut Corporation 113 King Street, Armonk, N. Y. 10504 (914) 273-4545 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes __X__ NO _____ As of November 10,1998 there were outstanding 99,351,231 shares of Common Stock, par value $1 per share, of the registrant. INDEX PAGE PART I FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) MBIA Inc. and Subsidiaries Consolidated Balance Sheets - September 30, 1998 and December 31, 1997 3 Consolidated Statements of Income - Three months and nine months ended September 30, 1998 and 1997 4 Consolidated Statement of Changes in Shareholders' Equity - Nine months ended September 30, 1998 5 Consolidated Statements of Cash Flows - Nine months ended September 30, 1998 and 1997 6 Notes to Consolidated Financial Statements 7-9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-25 PART II OTHER INFORMATION, AS APPLICABLE Item 6. Exhibits and Reports on Form 8-K 26 SIGNATURES 27 (2) MBIA INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) (Dollars in thousands except per share amounts)
September 30, 1998 December 31, 1997 ----------------------- ------------------------- ASSETS Investments: Fixed-maturity securities held as available-for-sale at fair value (amortized cost $5,454,390 and $4,936,760) $ 5,842,968 $ 5,211,311 Short-term investments, at amortized cost (which approximates fair value) 318,335 303,898 Other investments 67,468 51,693 ------------------ ------------------- 6,228,771 5,566,902 Municipal investment agreement portfolio held as available-for-sale at fair value (amortized cost $3,400,764 and $3,241,703) 3,572,835 3,341,394 ------------------ ------------------- TOTAL INVESTMENTS 9,801,606 8,908,296 Cash and cash equivalents 35,330 26,296 Securities borrowed or purchased under agreements to resell 561,763 472,963 Accrued investment income 114,094 121,090 Deferred acquisition costs 236,768 216,165 Prepaid reinsurance premiums 295,175 289,508 Reinsurance recoverable on unpaid losses 170,000 --- Goodwill (less accumulated amortization of $62,604 and $55,788) 135,478 121,642 Property and equipment, at cost (less accumulated depreciation of $38,697 and $31,882) 73,565 66,709 Receivable for investments sold 23,961 13,435 Other assets 218,887 148,887 ------------------ ------------------- TOTAL ASSETS $11,666,627 $10,384,991 ================== =================== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Deferred premium revenue $ 2,205,690 $ 2,090,460 Loss and loss adjustment expense reserves 282,044 103,061 Municipal investment agreements 2,412,500 1,974,165 Municipal repurchase agreements 991,519 1,177,022 Long-term debt 638,967 488,878 Short-term debt --- 20,000 Securities loaned or sold under agreements to repurchase 579,363 606,263 Deferred income taxes 376,091 298,498 Deferred fee revenue 45,558 48,126 Payable for investments purchased 126,514 44,007 Other liabilities 234,563 172,999 ------------------ ------------------- TOTAL LIABILITIES 7,892,809 7,023,479 ------------------ ------------------- Shareholders' Equity: Preferred stock, par value $1 per share; authorized shares-- 10,000,000; issued and outstanding--none --- --- Common stock, par value $1 per share; authorized shares-- 200,000,000; issued shares-- 99,323,511 and 98,754,523 99,324 98,754 Additional paid-in capital 1,159,024 1,133,950 Retained earnings 2,162,768 1,901,608 Accumulated other comprehensive income, net of deferred income tax provision of $196,632 and $132,026 362,015 236,095 Unallocated ESOP shares (4,083) (4,083) Unearned compensation--restricted stock (4,595) (4,812) Treasury stock, at cost; shares 18,800 in 1998 (635) --- ------------------ ------------------- TOTAL SHAREHOLDERS' EQUITY 3,773,818 3,361,512 ------------------ ------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $11,666,627 $10,384,991 ================== ===================
The accompanying notes are an integral part of the consolidated financial statements. (3) MBIA INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Dollars in thousands except per share amounts)
Three months ended Nine months ended September 30 September 30 ------------------------------ ------------------------------ 1998 1997 1998 1997 ----------- ---------- ----------- ---------- Revenues Insurance: Gross premiums written $167,355 $146,941 $486,745 $439,791 Ceded premiums (27,498) (23,632) (69,111) (63,066) ----------- ---------- ----------- ---------- Net premiums written 139,857 123,309 417,634 376,725 Increase in deferred premium revenue (34,214) (35,622) (108,773) (120,206) ----------- ---------- ----------- ---------- Premiums earned (net of ceded premiums of $30,027, $14,906, $63,444 and $44,494) 105,643 87,687 308,861 256,519 Net investment income 84,067 77,027 247,195 221,421 Net realized gains 9,089 6,119 22,981 11,776 Advisory fees 4,696 4,411 18,135 12,640 Investment management services: Income 16,047 11,619 44,332 34,954 Net realized gains 4,787 391 11,879 2,043 Other 11,657 8,063 31,602 14,432 ----------- ---------- ----------- ---------- Total revenues 235,986 195,317 684,985 553,785 ----------- ---------- ----------- ---------- Expenses Insurance: Losses and loss adjustment 9,028 6,420 24,613 17,554 Policy acquisition costs, net 6,869 8,377 25,324 26,205 Operating 20,762 19,508 54,223 56,398 Investment management services 8,614 7,234 25,401 21,494 Interest 10,974 10,303 31,959 28,216 Other 36,159 6,281 90,745 16,142 ----------- ---------- ----------- ---------- Total expenses 92,406 58,123 252,265 166,009 ----------- ---------- ----------- ---------- Income before income taxes 143,580 137,194 432,720 387,776 Provision for income taxes 35,337 30,642 103,343 84,575 ----------- ---------- ----------- ---------- Net income $108,243 $106,552 $329,377 $303,201 =========== ========== =========== ========== Net income per common share Basic $ 1.09 $ 1.09 $ 3.33 $ 3.15 Diluted $ 1.08 $ 1.07 $ 3.29 $ 3.10 Weighted average number of common shares outstanding Basic 99,098,611 98,008,870 98,882,373 96,398,516 Diluted 100,230,622 99,329,666 100,171,148 97,839,020
The accompanying notes are an integral part of the consolidated financial statements. (4) MBIA INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited) For the nine months ended September 30, 1998 (In thousands except per share amounts)
Unearned Common Stock Additional Unallocated Compensation- ---------------- Paid-in Retained ESOP Restricted Shares Amount Capital Earnings Shares Stock ------ ------- ---------- ---------- ----------- ------------- Balance, January 1, 1998 98,754 $98,754 $1,133,950 $1,901,608 $(4,083) $(4,812) Comprehensive income: Net income --- --- --- 329,377 --- --- Other comprehensive income: Change in unrealized appreciation of investments net of change in deferred income taxes of $(64,606) --- --- --- --- --- --- Change in foreign currency translation --- --- --- --- --- --- Other comprehensive income Comprehensive income Treasury shares acquired --- --- 635 --- --- --- Exercise of stock options 535 535 22,242 --- --- --- Unearned compensation- restricted stock 35 35 2,197 --- --- 217 Dividends (declared per common share $0.590, paid per common share $0.585) --- --- --- (68,217) --- --- ------ ------- ---------- ---------- ----------- ------------- Balance, September 30, 1998 99,324 $99,324 $1,159,024 $2,162,768 $(4,083) $(4,595) ====== ======= ========== ========== =========== ============= Accumulated Other Treasury Stock Total Comprehensive -------------- Shareholders' Income Shares Amount Equity ------------- ------ ------ ------------- Balance, January 1, 1998 $236,095 --- --- $3,361,512 Comprehensive income: Net income --- --- --- 329,377 Other comprehensive income: Change in unrealized appreciation of investments net of change in deferred income taxes of $(64,606) 120,717 --- --- 120,717 Change in foreign currency translation 5,203 --- --- 5,203 ----------- Other comprehensive income 125,920 ----------- Comprehensive income 455,297 ----------- Treasury shares acquired --- 19 (635) --- Exercise of stock options --- --- --- 22,777 Unearned compensation- restricted stock --- --- --- 2,449 Dividends (declared per common share $0.590, paid per common share $0.585) --- --- --- (68,217) ------------- ------ ------ ------------- Balance, September 30, 1998 $362,015 19 $(635) $3,773,818 ============= ====== ====== =============
Disclosure of reclassification amount: Unrealized appreciation of investments arising during the period $143,287 Reclassification of adjustment, net of taxes (22,570) -------- Net unrealized appreciation, net of taxes $120,717 ======== The accompanying notes are an integral part of the consolidated financial statements. (5) MBIA INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands)
Nine Months ended September 30 ----------------------------------- 1998 1997 -------------- -------------- Cash flows from operating activities: Net income $ 329,377 $ 303,201 Adjustments to reconcile net income to net cash provided by operating activities: Decrease (increase) in accrued investment income 6,996 (3,163) Increase in deferred acquisition costs (20,603) (13,326) Increase in prepaid reinsurance premiums (5,667) (18,572) Increase in deferred premium revenue 114,440 138,778 Increase in loss and loss adjustment expense reserves 8,983 18,336 Depreciation 6,138 4,440 Amortization of goodwill 6,816 5,743 Amortization of bond discount, net (17,304) (15,123) Net realized gains on sale of investments (34,860) (13,818) Deferred income taxes 12,927 16,158 Other, net (205) (24,514) -------------- -------------- Total adjustments to net income 77,661 94,939 -------------- -------------- Net cash provided by operating activities 407,038 398,140 -------------- -------------- Cash flows from investing activities: Purchase of fixed-maturity securities, net of payable for investments purchased (1,700,367) (1,762,303) Sale of fixed-maturity securities, net of receivable for investments sold 710,806 992,447 Redemption of fixed-maturity securities, net of receivable for investments redeemed 616,881 176,036 (Purchase) sale of short-term investments, net (52,346) 9,209 Purchase of other investments, net (16,172) (636) Purchases for municipal investment agreement portfolio, net of payable for investments purchased (1,652,516) (903,505) Sales from municipal investment agreement portfolio, net of receivable for investments sold 1,509,878 1,016,269 Capital expenditures, net of disposals (12,986) (10,759) Other, net (20,658) (17,173) -------------- -------------- Net cash used by investing activities (617,480) (500,415) -------------- -------------- Cash flows from financing activities: Net proceeds from issuance of common stock --- 126,456 Net proceeds from issuance of long-term debt 148,688 100,000 Net repayment from retirement of short-term debt (20,000) (9,100) Dividends paid (65,805) (53,573) Proceeds from issuance of municipal investment and repurchase agreements 1,772,672 1,232,522 Payments for drawdowns of municipal investment and repurchase agreements (1,523,156) (1,433,288) Securities (purchased) sold under agreements to (resell) repurchase (115,700) 132,900 Exercise of stock options 22,777 12,865 -------------- -------------- Net cash provided (used) by financing activities 219,476 108,782 -------------- -------------- Net increase in cash and cash equivalents 9,034 6,507 Cash and cash equivalents - beginning of period 26,296 10,266 -------------- -------------- Cash and cash equivalents - end of period $ 35,330 $ 16,773 ============== ============== Supplemental cash flow disclosures: Income taxes paid $ 90,584 $ 72,990 Interest paid: Municipal investment and repurchase agreements $ 147,340 $ 151,150 Long-term debt 32,774 25,664 Short-term debt 956 1,805
The accompanying notes are an integral part of the consolidated financial statements. (6) MBIA INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, accordingly, do not include all of the information and disclosures required by generally accepted accounting principles. These statements should be read in conjunction with the consolidated financial statements and notes thereto included in Form 10-K for the year ended December 31, 1997 for MBIA Inc. and Subsidiaries (the company). The accompanying consolidated financial statements have not been audited by independent accountants in accordance with generally accepted auditing standards but in the opinion of management such financial statements include all adjustments, consisting only of normal recurring adjustments, necessary to summarize fairly the company's financial position and results of operations. The results of operations for the nine months ended September 30, 1998 may not be indicative of the results that may be expected for the year ending December 31, 1998. The December 31, 1997 condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. The consolidated financial statements include the accounts of the company and its wholly owned subsidiaries. All significant intercompany balances have been eliminated. Due to the mergers with CapMAC Holdings Inc. (CapMAC) and 1838 Investment Advisors, Inc. (1838) all prior period consolidated financial statements presented have been restated to include the combined results of operations, financial position and cash flows of CapMAC and 1838 as though they had been a part of MBIA. 2. CapMAC and 1838 Mergers On February 17, 1998, MBIA Inc. and CapMAC consummated a merger accounted for as a pooling of interests. Under the terms of the merger, CapMAC shareholders received 0.4675 of a share of MBIA Inc. common stock for each CapMAC share. On July 31, 1998, the company completed a merger of its investment business with 1838. Each share of 1838 was exchanged for 2.134 shares of the company's common stock. This merger was also accounted for as a pooling of interests. The results of operations for the separate companies and the merged amounts presented in the consolidated financial statements follow: (7) MBIA INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NINE MONTHS ENDED (IN THOUSANDS) SEPTEMBER 30, 1997 Revenues: MBIA Inc. $473,559 CapMAC Holdings, Inc. 65,382 1838 Investment Advisors 14,844 --------------------------- Merged $553,785 =========================== Net Income: MBIA Inc. $276,524 CapMAC Holdings, Inc. 21,244 1838 Investment Advisors 5,433 --------------------------- Merged $303,201 =========================== 3. Dividends Declared Dividends declared by the company during the nine months ended September 30, 1998 were $68.2 million. 4. Philadelphia Hospital Group Claim In the second quarter we announced a possible claim with respect to a Philadelphia hospital group which filed for bankruptcy. MBIA's gross and net par outstanding is $299 million and $86 million, respectively. At this time a loss is probable. We have recorded an estimated gross loss reserve of $198 million to cover all anticipated losses arising from this group. We have also recorded $198 million of reinsurance recoverables. 5. Shelf Registration Statement and Subsequent Draw Down for Debt In July 1998, the company filed a shelf registration with the U.S. Securities and Exchange Commission of up to $350 million in debt securities, preferred stock and/or common stock. Any proceeds from the proposed offering will be used to provide additional capital and for general corporate purposes. In September 1998, MBIA drew down on the shelf registration by selling a $150 million issue of 30-year debentures. Proceeds of the debt offering will be used to fund additional growth for the company's businesses. (8) MBIA INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. Comprehensive Income As of January 1, 1998, the company adopted Statement of Financial Accounting Standards (SFAS) 130, "Reporting Comprehensive Income." SFAS 130 establishes new rules for the reporting and display of comprehensive income and its components; however, the adoption of this Statement had no impact on the company's net income or shareholders' equity. The company's comprehensive income consists of unrealized gains or losses on available-for-sale securities and foreign currency translation adjustments, which are presented net of deferred taxes. Prior to adoption of SFAS 130, these accounts were reported separately in shareholders' equity. 7. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." The statement requires companies to recognize all derivatives as either assets or liabilities, with the instruments measured at fair value. The accounting for changes in fair value, gains or losses, depends on the intended use of the derivative and its resulting designation. The statement is effective for fiscal years beginning after June 15, 1999. The Company will adopt SFAS 133 by January 1, 2000. Adoption of SFAS 133 is not expected to have a material impact on the consolidated financial statements. In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of an Enterprise and Related Information," effective for fiscal years beginning after December 15, 1997. This statement establishes standards for reporting information about operating segments in annual financial statements, and requires selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographical areas and major customers. Under SFAS 131, operating segments are to be determined consistent with the way that management organizes and evaluates financial information internally for making operating decisions and assessing performance. The company will adopt this statement in the fourth quarter of 1998. 8. Subsequent Events On November 4, 1998 the company announced that it had sold $50 million of 40-year debentures. Proceeds of the debt offering will be used to fund additional growth for the company's businesses. (9) MBIA INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION - ------------ MBIA Inc. (our company or MBIA) is the world's premier financial guarantee company and a leading provider of investment management products and services. Through MBIA Insurance Corp. and its subsidiaries (our insurance company), we provide financial guarantees to municipalities and other bond issuers. Our primary business is insuring municipal bonds issued by governmental units to finance essential public purposes. We also guarantee structured asset-backed and mortgage-backed transactions; selected corporate bonds, including investor-owned utility debt, and obligations of high-quality financial institutions. We provide these products in both the new issue and secondary markets -- internationally as well as domestically. In February 1998, we merged with CapMAC Holdings Inc., a leading company insuring structured finance transactions. This merger will strengthen MBIA's position as the leading financial guarantor and expand our capabilities in the rapidly growing structured finance market. MBIA also provides investment management products, as well as municipal and consulting services to the public sector. In July 1998, we merged our investment business with 1838 Investment Advisors, Inc. (1838). MBIA also formed a holding company, MBIA Asset Management to consolidate all of our investment operations. RESULTS OF OPERATION - -------------------- Summary - ------- The following chart presents highlights of our consolidated financial results for the third quarter and first nine months of 1998 and 1997. The results have been restated to reflect the mergers, which have been accounted for as "pooling of interests." In addition, all per share results have been retroactively adjusted to include the effect of a two-for-one stock split effective October 1, 1997: (10) MBIA INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Percent Change ------------------------- 3rd Quarter Year-to-date ----------- ------------ 3rd Quarter September 30 1998 1998 ----------------- ------------------ vs. vs. 1998 1997 1998 1997 1997 1997 - ----------------------------------------------------------------------------------------------- Net income (in millions) $108.2 $106.6 $329.4 $303.2 2% 9% Per share data: Net income* $ 1.08 $ 1.07 $ 3.29 $ 3.10 1% 6% Operating earnings* $ 1.16 $ 1.03 $ 3.42 $ 3.01 13% 14% Core earnings* $ 1.07 $ 0.96 $ 3.14 $ 2.78 11% 13% Book value $38.06 $32.68 16% Adjusted book value $52.71 $46.53 13% - -----------------------------------------------------------------------------------------------
*Diluted We believe that core earnings per share, which exclude the effects of refundings and calls of our insured issues, realized capital gains and losses on our investment portfolio and the nonrecurring merger-related charges, provide the most indicative measure of our underlying profit trend. In 1998, core earnings per share increased by 11% for the third quarter and 13% for the first nine months over the comparable periods in 1997. The consistent double-digit increases in quarterly year-to-year core earnings over the past 25 quarters are due primarily to growth in premiums earned and net investment income generated by our insurance operations, as well as the contributions of operating earnings from our investment management services businesses. Our 1998 third quarter net income rose 17%, excluding a $16.9 million after tax charge for merger-related expenses for 1838, the remaining costs of other merger-related activities and reorganization expenses to streamline operations and reduce future operating costs. Including the charge, third quarter net income increased 2% to $108.2 million from $106.6 million in last year's third quarter. Excluding after-tax merger-related charges of $36.1 million, or $0.36 per share, net income increased 21% to $365.5 million and diluted earnings per share rose 18% to $3.65 for the first nine months of 1998. Including the charges, net income increased 9% to $329.4 million and diluted earnings per share grew 6% to $3.29 for the same period. (11) MBIA INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Operating earnings per share, which exclude the impact of realized capital gains and losses and the merger-related charges, increased to $1.16 and $3.42 for the third quarter and nine months, representing a 13% and 14% increase for each period, respectively. Our book value at third quarter-end 1998 was $38.06 per share, up from $32.68 at third quarter-end 1997. As with core earnings, we believe that a more appropriate measure of a financial guarantee company's intrinsic value is its adjusted book value. It is defined as book value plus the after-tax effects of our net deferred premium revenue, net of deferred acquisition costs, plus the present value of unrecorded future installment premiums, plus the unrealized gain or loss on investment contract liabilities. The following table presents the components of our adjusted book value per share:
September 30, September 30, Percent Change 1998 1997 1998 vs. 1997 ---------------------------------------------------------------------------------------------- Book value $38.06 $32.68 16% After-tax value of: Net deferred premium revenue, net of deferred acquisition costs 10.97 10.07 9% Present value of future installment premiums* 4.09 3.52 16% Unrealized (loss) gain on investment contract liabilities** (0.41) 0.26 (258%) ---------------------------------------------------------------------------------------------- Adjusted book value $52.71 $46.53 13% ----------------------------------------------------------------------------------------------
* The discount rate used to present value future installment premiums was 9%. ** The unrealized (loss) or gain on investment contract liabilities is offset by a corresponding gain or (loss) on the market value of the assets. Our adjusted book value per share was $52.71 at September 30, 1998, a 13% increase from September 30, 1997. The increase was due to our strong operating results, growth from new business, and, with lower interest rates, the increase in the fair value of our fixed-income investment portfolios. (12) MBIA INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Financial Guarantee Insurance - ----------------------------- For the first nine months of 1998 total gross premiums written (GPW) increased by 11% to $486.7 million from $439.8 million in 1997. GPW, as reported on our financial statements, reflects cash receipts only and does not include the value of future premium receipts expected for installment-based insurance policies originated in the period. To provide additional information regarding year-to-year changes in new business premium production, we discuss our adjusted gross premiums (AGP), which include our upfront premiums as well as the estimated present value of current and future premiums from installment-based insurance policies issued in the period. MBIA's premium production in terms of GPW and AGP for the third quarters and first nine months of 1998 and 1997 is presented in the following table:
Percent Change ------------------------- 3rd Quarter Year-to-date ----------- ------------ 3rd Quarter Year-to-date 1998 1998 ----------------- ------------------ vs. vs. In millions 1998 1997 1998 1997 1997 1997 - ----------------------- -------- ------- -------- -------- ----------- ------------ Premiums written: GPW $167.4 $146.9 $486.7 $439.8 14% 11% AGP $203.4 $185.5 $587.5 $510.8 10% 15%
We estimate the present value of our total future installment premium stream on outstanding policies to be $624.0 million at third quarter-end 1998, compared with $533.8 million at third quarter-end 1997. MUNICIPAL MARKET New issuance in the municipal market was $57.3 billion for the third quarter of 1998, up 10% from $52.4 billion in the third quarter of 1997. The insured portion of this market was a record 62% up from 55% for last year's third quarter. With a 40% market share, we continued our market leadership in the new issue insured municipal market. At the same time, we remained appropriately selective, emphasized quality and charged premiums commensurate with the significant value of our guarantee in today's market. (13) MBIA INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The overall domestic municipal market new issuance statistics and MBIA's par and premium writings in both the new issue and secondary domestic municipal finance markets are shown in the following table:
Percent Change ------------------------- 3rd Quarter Year-to-date ----------- ------------ 3rd Quarter Year-to-date 1998 1998 ----------------- ------------------ vs. vs. Domestic Municipal 1998 1997 1998 1997 1997 1997 -------- ------- -------- -------- ----------- ------------ Total new issue market:* Par value (in billions) $ 57.3 $ 52.4 $195.4 $137.9 10% 42% Insured penetration 62% 55% 56% 56% MBIA market share 40% 50% 37% 48% MBIA insured: Par value: (in billions) $ 16.4 $ 11.8 $ 45.0 $ 34.8 40% 29% Premiums: (in millions) GPW $106.4 $102.1 $310.8 $317.0 4% (2%) AGP $116.9 $103.4 $324.9 $324.9 13% ---
* Market data are reported on a sale date basis while MBIA's insured data are based on closing date information. Typically, there can be a one- to four-week delay between the sale date and closing date of an insured issue. STRUCTURED FINANCE MARKET The par value issuance in the asset-backed securities market (excluding private placements and mortgage-backed securities, for which market data are unavailable) decreased 30% in the third quarter and 4% on a year-to-date basis. For the third quarter of 1998, MBIA insured $13.4 billion of par value of asset-backed securities (including mortgage-backed securities) compared with $11.9 billion in the comparable period last year. GPW for the quarter increased by 16% to $30.3 million from $26.2 million for the same period last year while AGP decreased by 8% to $40.4 million from $44.1 million. On a year-to-date basis, MBIA's domestic structured finance volume rose 39% to $34.6 billion of par value compared with $25.0 billion in the first nine months of 1997, and GPW and AGP increased 26% and 6%, respectively. Details regarding the asset-backed market and MBIA's par and premium writings in both the domestic new issue and secondary structured (14) MBIA INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) finance markets (which includes mortgaged-backed as well as asset-backed securities) are shown in the following table:
Percent Change ------------------------- 3rd Quarter Year-to-date ----------- ------------ 3rd Quarter Year-to-date 1998 1998 Domestic ----------------- ------------------ vs. vs. Structured Finance 1998 1997 1998 1997 1997 1997 -------- ------- -------- -------- ----------- ------------ Total asset-backed market:* Par value (in billions) $40.0 $57.0 $122.6 $127.1 (30%) (4%) MBIA insured: Par value: (in billions) $13.4 $11.9 $ 34.6 $ 25.0 13% 39% Premiums: (in millions) GPW $30.3 $26.2 $ 91.4 $ 72.5 16% 26% AGP $40.4 $44.1 $120.1 $113.6 (8%) 6% - -----------------------------------------------------------------------------------------------
* Market data exclude mortgage-backed securities and private placements. INTERNATIONAL MARKET In late 1995, we formed a joint venture with AMBAC Assurance Corporation (another leading Triple-A rated financial guarantee insurer) to market financial guarantee insurance internationally. This initiative has contributed to a substantial expansion of our international business. For the first nine months, par value written increased by 94%. AGP increased by 107% while GPW increased by 59% reflecting a growing proportion of installment based policies written in the international market. Our international municipal and structured finance business volume in the new issue and secondary markets for the third quarters and first nine months of 1998 and 1997 is illustrated in the following table:
Percent Change ------------------------- 3rd Quarter Year-to-date ----------- ------------ 3rd Quarter Year-to-date 1998 1998 ----------------- ------------------ vs. vs. International 1998 1997 1998 1997 1997 1997 -------- ------- -------- -------- ----------- ------------ Par value (in billions) $ 1.5 $ 2.4 $ 8.3 $ 4.3 (36%) 94% Premiums: (in millions) GPW $18.0 $14.5 $ 58.4 $36.8 24% 59% AGP $30.8 $32.0 $112.1 $54.2 (4%) 107%
(15) MBIA INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) CEDED PREMIUMS Reinsurance allows an insurance company to transfer portions of its insured business to a reinsurance company. In exchange for insuring a portion of our risk, the reinsurance company receives a part of our premium (ceded premiums) for which we, in turn, receive a ceding commission. We use reinsurance to increase our capacity to write new business when we are subject to certain single risk limitations and to manage the overall risk profile of our insurance portfolio. Premiums ceded to reinsurers from all insurance operations were $69.1 million and $27.5 million in the first nine months and third quarter of 1998, respectively. For the first nine months, cessions as a function of GPW were 14% in both 1998 and 1997. Any variance in the level of cessions generally reflects the higher or lower utilization of treaty or facultative reinsurance required to comply with regulatory constraints or our own single risk limits. Most of our reinsurers are rated Double-A or higher by Standard & Poor's Corporation or Single-A or higher by A. M. Best Co. Although we remain liable for all reinsured risks, we believe we will recover the reinsured portion of any losses that may occur. REVENUES Our insurance revenues are primarily comprised of premiums earned and investment income. Premiums are recognized over the life of the bonds we insure. The slow premium recognition coupled with compounding investment income from investing our premiums and capital form a solid foundation for consistent revenue growth. PREMIUMS EARNED For approximately 70% of our insurance writings, we receive premiums upfront and earn them pro rata over the period of risk of the bond issue. Accordingly, the portion of net premiums earned on each policy in any given year represents a relatively small percentage of the total net upfront premium received. The balance represents deferred premium revenue to be earned over the remaining life of the insured bond issue. For 30% of our business writings - primarily our structured finance business - we collect installment premiums. Installment premiums are credited to the deferred premium revenue account when received, and are recognized as revenue over each installment period - generally one year or less. (16) MBIA INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) When an MBIA-insured bond issue is refunded or retired early the related deferred premium revenue is earned immediately, except for any portion that may be applied as a credit towards insuring the refunding bond issue. The amount of bond refundings and calls is influenced by a variety of factors such as prevailing interest rates, the coupon rates of the bond issue, the issuer's desire or ability to modify bond covenants and applicable regulations under the Internal Revenue Code. The composition of MBIA's premiums earned in terms of its scheduled and refunded components is illustrated in the following table:
Percent Change ------------------------- 3rd Quarter Year-to-date ----------- ------------ 3rd Quarter Year-to-date 1998 1998 ----------------- ------------------ vs. vs. In millions 1998 1997 1998 1997 1997 1997 -------- ------- -------- -------- ----------- ------------ Premiums earned: Scheduled $ 89.3 $75.2 $260.0 $218.2 19% 19% Refunded 16.3 12.5 48.9 38.3 31% 28% - ----------------------------------------------------------------------------------------------- Total $105.6 $87.7 $308.9 $256.5 20% 20%
The year-to-year increase in premiums earned from scheduled amortization reflects the additive effect of new business written, including the expanding installment premium activity from the structured finance and international sectors. INVESTMENT INCOME Our insurance related investment income (exclusive of realized capital gains) increased by 12% to $247.2 million in the first nine months of 1998 from $221.4 million in 1997. For the quarter, net investment income was $84.1 million, a 9% increase over the same period last year. The increases were primarily due to the growth of cash flow available for investment. Our cash flows were generated from operations and the compounding of previously earned and reinvested investment income. Insurance related net realized capital gains were $23.0 million in the first nine months of 1998 and $11.8 million in 1997. These realized gains were generated as a result of ongoing management of the investment portfolio. ADVISORY FEES In the third quarter of 1998, fee revenues recognized rose 6% to $4.7 million from $4.4 million. For the first nine months fee revenues recognized rose 43% to $18.1 million in 1998 from $12.6 million in 1997. Certain fees are deferred and earned over the life of the transactions. LOSSES AND LOSS ADJUSTMENT EXPENSES (LAE) We maintain a general loss reserve based on our estimate of unidentified losses from our insured obligations. To the extent that we identify specific insured issues as currently or likely to be in default, the present value of our expected payments, net of expected reinsurance and collateral recoveries, is allocated within the total loss (17) MBIA INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) reserve as case-specific reserves. For financial statement presentation, we do not reduce our total loss reserve for significant case-specific reinsurance or collateral recoveries rather we show these items as assets as required by GAAP. We periodically evaluate our estimates for losses and LAE and any resulting adjustments are reflected in current earnings. We believe that our reserving methodology and the resulting reserves are adequate to cover the ultimate net cost of claims. However, the reserves are necessarily based on estimates, and there can be no assurance that any ultimate liability will not exceed such estimates. The following table shows the case-specific and unallocated components of our total loss and LAE reserves at the first nine months of 1998 and 1997: Percent Change September 30, September 30, -------------- In millions 1998 1997 1998 vs. 1997 - ----------------------------------------------------------------- Reserves: Case-specific $198.4 * $20.8 853% Unallocated 83.6 67.8 23% - ----------------- ---------------------------- ------------------ Total $282.0 $88.6 218% Provision $ 24.6 $17.6 40% * Case reserves, net of $170 million excess reinsurance recoverable, equal $28.4 million. In the second quarter we announced a possible claim with respect to a Philadelphia hospital group which filed for bankruptcy. MBIA's gross and net par outstanding is $299 million and $86 million, respectively. At this time a loss is probable. We have recorded an estimated gross loss reserve of $198 million to cover all anticipated losses arising from this group. We have also recorded $198 million of reinsurance recoverables. Our provision for losses and LAE increased in tandem with new business writings in accordance with our loss reserving methodology. The changes in the case-specific reserve had no impact on our net income since they were offset by corresponding changes in the unallocated portion of the total reserve. OPERATING EXPENSES Those expenses related to the production of our insurance business (policy acquisition costs) are deferred and recognized over the period (18) MBIA INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) in which the related premiums are earned. Our company's policy acquisition costs, general operating expenses and total operating expenses are shown in the following table:
Percent Change ------------------------- 3rd Quarter Year-to-date ----------- ------------ 3rd Quarter Year-to-date 1998 1998 --------------- ------------------ vs. vs. In millions 1998 1997 1998 1997 1997 1997 - ------------------------------------------------------------------------------------- Policy acquisition Costs, net $ 6.9 $ 8.4 $25.3 $26.2 (18%) (3%) Operating 20.7 19.5 54.2 56.4 6% (4%) - ------------------------------------------------------------------------------------- Total insurance Operating Expenses $27.6 $27.9 $79.5 $82.6 (1%) (4%) - -------------------------------------------------------------------------------------
For first nine months and third quarter of 1998, policy acquisition costs net of deferrals decreased 3% and 18%, respectively. The ratio of policy acquisition costs net of deferrals to earned premiums has declined from 10% in the first nine months of 1997 to 8% first nine months of 1998. The third quarter ratio has declined to 7% in 1998 from 10% in 1997. These declines reflect the positive impact of increases in our installment premium revenues. Operating expenses decreased by 4% for the first nine months, resulting from the synergies of the CapMAC merger. OTHER EXPENSES Included in other expenses for the first nine months are merger related expenses of $55.5 for CapMAC, 1838 and other merger related activities and reorganization expenses. These are composed primarily of investment banking and legal fees and severance expense recorded in the first and third quarters. Investment Management and Municipal Services - -------------------------------------------- In late 1997, MBIA's investment management and municipal services businesses were brought together under one umbrella: the Investment Management and Financial Services Division. This new organization will enable us to more effectively expand our franchise in the public sector and make the most of cross-marketing opportunities among our various businesses. In the third quarter MBIA formed a holding company, MBIA Asset Management Corporation, to consolidate our investment management operations. (19) MBIA INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The following provides a summary of each of these businesses: MBIA ASSET MANAGEMENT CORPORATION: MBIA MUNICIPAL INVESTORS SERVICE CORPORATION (MBIA-MISC) provides cash management, investment fund administration and fixed-rate investment placement services directly to local governments and school districts. In late 1996, MBIA-MISC acquired American Money Management Associates, Inc. (AMMA), which provides investment and treasury management consulting services for municipal and quasi-public sector clients. Both MBIA-MISC and AMMA are Securities and Exchange Commission (SEC) -- registered investment advisers. MBIA INVESTMENT MANAGEMENT CORP. (IMC) provides customized guaranteed investment agreements and flexible repurchase agreements for bond proceeds and other public funds. At third quarter-end 1998, principal and accrued interest outstanding on investment and repurchase agreements was $3.4 billion compared with $3.1 billion at third quarter-end 1997. At amortized cost, the assets supporting IMC's investment agreement liabilities were $3.4 billion and $3.1 billion at September 30, 1998 and 1997, respectively. These assets are comprised of high-quality securities with an average credit quality rating of Double-A. IMC, from time to time, uses derivative financial instruments to manage interest rate risk. We have established policies limiting the amount, type and concentration of such instruments. By matter of policy, derivative positions can only be used to hedge interest rate exposures and not for speculative trading purposes. At third quarter-end 1998, our exposure to derivative financial instruments was not material. MBIA CAPITAL MANAGEMENT CORP. (CMC), an SEC-registered investment adviser, provides investment management services for IMC's investment agreements, MBIA-MISC's municipal cash management programs and MBIA's insurance related portfolios, as well as third-party accounts. 1838 INVESTMENT ADVISORS, INC. (1838), is a full-service asset management firm with a strong institutional focus. The company manages over $6 billion in equity, fixed-income and balanced portfolios for a client base comprised of high-net-worth individuals, municipalities, endowments, foundations and corporate employee-benefits plans. 1838 acts as investment advisor to 1838 Investment Advisors Funds and 1838 Bond Debenture Trading Fund. (20) MBIA INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) MBIA MUNISERVICES COMPANY (MuniServices) (formerly known as Strategic Services, Inc.) was established in 1996 to provide bond administration, revenue enhancement and other services to state and local governments. In 1996, MuniServices acquired an equity interest in Capital Asset Holdings (Capital Asset), a purchaser and servicer of delinquent tax certificates. Capital Asset also provides a series of services to assist taxing authorities in the preparation, analysis, packaging and completion of delinquent tax obligation sales. In January 1997, MuniServices acquired a 95% interest in Municipal Tax Bureau (MTB), a provider of tax revenue compliance and collection services to public entities. In July 1997, MuniServices acquired MuniFinancial, a public finance consulting firm specializing in municipal debt administration. In January 1998, Muni Resources, a revenue audit and information services firm, was also acquired. MBIA & ASSOCIATES CONSULTING, INC. was established in 1997 to provide assistance to state and local governments, colleges and universities, and international public and private sector clients seeking to strengthen their strategic financial planning and management capabilities. Interest Expense - ---------------- Interest expense in the first nine months and third quarter of 1998, was $32.0 million and $11.0 million, respectively, compared with $28.2 million and $10.3 million in the same periods last year. The increase in interest expense was due to the $100 million addition to MBIA's long-term debt in late July 1997. Taxes - ----- In general, our tax policy is to optimize our after-tax income by maintaining the appropriate mix of taxable and tax-exempt investments. However, we will see our tax rate fluctuate from time to time as we manage our investment portfolio on a total return basis. Our effective tax rate increased to 24% for the first nine months of 1998 from 22% for the comparable period in 1997, as we shifted to holding a higher proportion of taxable securities. (21) MBIA INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) CAPITAL RESOURCES - ----------------- We carefully manage our capital resources to optimize our cost of capital, while maintaining appropriate claims-paying resources to sustain our Triple-A claims-paying ratings. At the end of the third quarter, our shareholders' equity was $3.8 billion with total long-term borrowings at $639 million. We use debt financing to lower our overall cost of capital, thereby increasing our return on shareholders' equity. We maintain debt at levels we consider to be prudent based on our cash flow and total capital. The following table shows our long-term debt and ratios we use to measure it: September 30, December 31, 1998 1997 - ------------------------------------------------------------------------- Long-term debt (in millions) $639 $489 Long-term debt to total capital 14% 13% Ratio of earnings to fixed charges 14.3x 14.2x In addition, our insurance company has an $825 million irrevocable standby line of credit with a group of major Triple-A rated banks to provide funds for the payment of claims in the event that severe losses should occur. The agreement is for a seven-year term which expires on September 30, 2004 and, subject to approval by the banks, may be renewed annually to extend the term to seven years beyond the renewal date. MBIA also has available stop-loss reinsurance coverage of $75 million in excess of certain incurred losses of $150 million. From time to time MBIA accesses the capital markets to support the growth of our businesses. In July 1997, to provide us with additional capital for growth, we raised $126 million of equity and issued $100 million of 30-year debentures. In July 1998, to provide us with flexibility to access the capital markets when market and business conditions are favorable, we filed a registration statement with the SEC to allow us to offer and sell a combination of up to $350 million of debt securities, common stock and/or preferred stock. In late September 1998, MBIA issued $150 million of 30-year debentures and in November 1998, MBIA sold $50 million of 40-year debentures. As of September 30, 1998, total claims-paying resources for our insurance company stood at $7.5 billion, a 13% increase over 1997. (22) MBIA INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) LIQUIDITY - --------- Cash flow needs at the parent company level are primarily for dividends to our shareholders and interest payments on our debt. These requirements have historically been met by upstreaming dividend payments from our insurance company, which generates substantial cash flow from premium writings and investment income. In the first nine months of 1998, operating cash flow was $407 million. Under New York state insurance law, without prior approval of the superintendent of the state insurance department, financial guarantee insurance companies can pay dividends from earned surplus subject to retaining a minimum capital requirement. In our case, dividends in any 12-month period cannot be greater than 10% of policyholders' surplus. In the first nine months of 1998 our insurance company paid no dividends and at September 30, 1998 had dividend capacity of $220 million without special regulatory approval. Our company has significant liquidity supporting its businesses. At the end of the third quarter, cash equivalents and short-term investments totaled $354 million. Should significant cash flow reductions occur in any of our businesses, for any combination of reasons, we have additional alternatives for meeting ongoing cash requirements. They include, among other things, selling or pledging our fixed-income investments from our investment portfolio, tapping existing liquidity facilities and new borrowings. Our company has substantial external borrowing capacity. We maintain two bank lines totaling $650 million with a group of worldwide banks. At third quarter-end 1998, there were no borrowings under these agreements. Our investment portfolio provides a high degree of liquidity since it is comprised of readily marketable high-quality fixed-income securities and short- (23) MBIA INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) term investments. At the end of the third quarter 1998, the fair value of our consolidated investment portfolio increased to $9.8 billion, as shown below: Percent Change September 30, December 31, -------------- In millions 1998 1997 1998 vs. 1997 - ------------------------------------------------------------------------- Insurance operations: Amortized cost $5,840 $5,292 10% Unrealized gain 389 275 42% - ------------------------------------------------------------------------- Fair value $6,229 $5,567 12% - ------------------------------------------------------------------------- Municipal investment agreements: Amortized cost $3,401 $3,242 5% Unrealized gain 172 99 73% - ------------------------------------------------------------------------- Fair value $3,573 $3,341 7% - ------------------------------------------------------------------------- Total portfolio at fair value $9,802 $8,908 10% The increase in the fair value of our insurance related investments for the period was a result of the increase in our invested assets from positive cash flows partially offset by a nominal decrease in unrealized gains. The fair value of investments related to our municipal investment agreement business increased to $3.57 billion at September 30, 1998 from $3.34 billion at December 31, 1997, reflecting the growth of new business volume in the third quarter. Our investment portfolios are considered to be available-for-sale and the differences between their fair value and amortized cost, net of applicable taxes, are reflected as an adjustment to shareholders' equity. Differences between fair value and amortized cost arise primarily as a result of changes in interest rates occurring after a fixed-income security is purchased, although other factors influence fair value, including credit-related actions, supply and demand forces and other market factors. The weighted-average credit quality of our fixed-income portfolios has been maintained at Double-A since our inception in 1986, and since we generally intend to hold most of our investments to maturity as part of our risk-management strategy, we expect to realize a value substantially equal to amortized cost. YEAR 2000 With the approach of the new millenium, MBIA has been actively managing a high priority Year 2000 program. In conjunction with this effort we have established an independent Year 2000 testing lab in our Armonk office. A committee has been (24) MBIA INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) established that includes the main business unit managers and which has a budget of $805 thousand for 1999 and 2000. To date we have incurred $325 thousand. We do not expect total costs to materially exceed these amounts. It should be noted that over the past few years, MBIA had embarked on a comprehensive system design and integration project. The completed system is Year 2000 compliant and costs related to its development are not included above. The initial phase of MBIA's plan has been completed and all of the functions that are critical to the financial guarantee business, both domestic and international, have been tested and are in the final validation phase and are expected to be certified by December 31, 1998. MBIA's subsidiary companies are actively managing their Year 2000 efforts and expect to meet their Year 2000 compliance dead line of April 30, 1999. However, it is not possible to determine at this time whether a subsidiary's Year 2000 failure would have a material impact on MBIA. An area of potential risk to MBIA's financial guarantee business would be the inability of an issuer or its trustee or paying agent to make payments on an MBIA-insured transaction because of their failure to be Year 2000 ready. To mitigate this risk, we have been surveying all trustees, all paying agents and selected high volume issuers to determine their state of readiness. While the survey is not complete, the results to date are that all respondents are either ready or planning to be ready by late 1999. If MBIA is asked to pay in those situations where the issuer's system fails, we will do so and would expect to recover any such payment in a fairly short time period. It is not possible at this time to evaluate the extent of such payments. We believe that MBIA has adequate sources of liquidity to cover these payments. Additionally, MBIA is in the process of reviewing all other ancillary support functions. Evaluation, testing and re-testing will continue through 1999 and into 2000. FORWARD-LOOKING STATEMENTS This filing contains forward-looking statements. Important factors such as general market conditions and the competitive environment could cause actual results to differ materially from those projected in these forward-looking statements. The company undertakes no obligation to revise or update any forward-looking statements to reflect changes in events or expectations or otherwise. (25) PART II - OTHER INFORMATION Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 11. Computation of Earnings Per Share Assuming Dilution 27. Financial Data Schedule 99. Additional Exhibits - MBIA Insurance Corporation and Subsidiaries Consolidated Financial Statements (b) Reports on Form 8-K - The company filed a report on Form 8-K on September 24, 1998 in which the 1997 audited financial statements were restated to reflect the mergers with CapMAC Holdings, Inc. and 1838 Investment Advisors. (26) SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MBIA INC. --------------------------- Registrant Date: November 12, 1998 /s/ JULLIETTE S. TEHRANI ------------------------ --------------------------- Julliette S. Tehrani Executive Vice President, Chief Financial Officer and Treasurer Date: November 12, 1998 /s/ ELIZABETH B. SULLIVAN ------------------------ --------------------------- Elizabeth B. Sullivan Vice President, Controller (Principal Accounting Officer) (27) EX-11 2 3RD QTR 98 EXHIBIT 11 MBIA INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE ASSUMING FULL DILUTION (In thousands except per share amounts)
Three months ended Nine months ended September 30 September 30 --------------------- ---------------------- 1998 1997 1998 1997 ---------- --------- ---------- ---------- Net income $108,243 $106,552 $329,377 $303,201 ========== ========= ========== ========== Diluted weighted average shares: Basic weighted average shares outstanding 99,099 98,009 98,882 96,399 Effect of stock options 1,132 1,321 1,289 1,440 ---------- --------- ---------- ---------- Diluted weighted average shares: 100,231 99,330 100,171 97,839 ========== ========= ========== ========== Basic EPS $ 1.09 $ 1.09 $ 3.33 $ 3.15 ========== ========= ========== ========== Diluted EPS $ 1.08 $ 1.07 $ 3.29 $ 3.10 ========== ========= ========== ==========
EX-27 3 3RD QTR 98 FDS SCHEDULE
7 0000814585 MBIA Inc. 1,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 5,842,968 0 0 0 0 0 5,842,968 35,330 0 236,768 11,666,627 282,044 2,205,690 0 0 638,967 99,324 0 0 3,674,494 11,666,627 308,861 247,195 22,981 105,948 24,613 25,324 54,223 432,720 103,343 329,377 0 0 0 329,377 3.33 3.29 0 0 0 0 0 0 0
EX-99 4 3RD QTR. 98 CORP GAAP MBIA INSURANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 1998 AND DECEMBER 31, 1997 AND FOR THE PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 MBIA INSURANCE CORPORATION AND SUBSIDIARIES I N D E X --------- PAGE ---- Consolidated Balance Sheets - September 30, 1998 and and December 31, 1997 (Unaudited) 3 Consolidated Statements of Income - Three months and nine months ended September 30, 1998 and 1997 (Unaudited) 4 Consolidated Statement of Changes in Shareholder's Equity - Nine months ended September 30, 1998 (Unaudited) 5 Consolidated Statements of Cash Flows - Nine months ended September 30, 1998 and 1997 (Unaudited) 6 Notes to Consolidated Financial Statements (Unaudited) 7 -2- MBIA INSURANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) (Dollars in thousands except per share amounts)
September 30, 1998 December 31, 1997 ----------------------- ------------------------ ASSETS Investments: Fixed-maturity securities held as available-for-sale at fair value (amortized cost $5,450,126 and $4,600,528) $5,838,488 $4,867,254 Short-term investments, at amortized cost (which approximates fair value) 316,213 242,730 Other investments 16,886 16,802 ---------------- ------------------- TOTAL INVESTMENTS 6,171,587 5,126,786 Cash and cash equivalents 16,241 3,983 Securities purchased under agreements to resell 201,000 182,820 Accrued investment income 83,311 78,601 Deferred acquisition costs 236,768 154,100 Prepaid reinsurance premiums 295,175 252,893 Reinsurance recoverable on unpaid losses 170,000 --- Goodwill (less accumulated amortization of $50,811 and $47,152) 92,169 95,829 Property and equipment, at cost (less accumulated depreciation of $22,315 and $18,256) 64,012 53,484 Receivable for investments sold 14,854 1,616 Other assets 94,275 37,437 ---------------- ------------------- TOTAL ASSETS $7,439,392 $5,987,549 ================ =================== LIABILITIES AND SHAREHOLDER'S EQUITY Liabilities: Deferred premium revenue $2,205,690 $1,984,104 Loss and loss adjustment expense reserves 282,044 78,872 Securities sold under agreements to repurchase 201,000 182,820 Deferred income taxes 320,313 251,134 Deferred fee revenue 34,892 --- Payable for investments purchased 109,420 23,020 Other liabilities 115,271 103,740 ---------------- ------------------- TOTAL LIABILITIES 3,268,630 2,623,690 ---------------- ------------------- Shareholder's Equity: Common stock, par value $150 per share; authorized, issued and outstanding - 100,000 shares 15,000 15,000 Additional paid-in capital 1,483,271 1,139,949 Retained earnings 2,422,642 2,042,323 Accumulated other comprehensive income, net of deferred income tax provision of $136,313 and $94,416 249,849 166,587 ---------------- ------------------- TOTAL SHAREHOLDER'S EQUITY 4,170,762 3,363,859 ---------------- ------------------- TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $7,439,392 $5,987,549 ================ ===================
The accompanying notes are an integral part of the consolidated financial statements. -3- MBIA INSURANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Dollars in thousands)
Three months ended Nine months ended September 30 September 30 -------------------------------------------------------------- 1998 1997 1998 1997 ------------- ------------- ------------- ------------- Revenues: Gross premiums written $167,872 $124,858 $536,518 $382,602 Ceded premiums (27,498) (16,204) (62,327) (45,017) ------------- ------------- ------------- ------------- Net premiums written 140,374 108,654 474,191 337,585 Increase in deferred premium revenue (34,214) (33,959) (178,519) (117,303) ------------- ------------- ------------- ------------- Premiums earned (net of ceded premiums of $30,027, $10,039, $57,095 and $31,304) 106,160 74,695 295,672 220,282 Net investment income 83,707 72,283 241,300 206,201 Net realized gains 9,089 6,119 22,981 12,974 Advisory fees 4,696 --- 15,969 --- Other 1 321 (19) 1,014 ------------- ------------- ------------- ------------- Total revenues 203,653 153,418 575,903 440,471 ------------- ------------- ------------- ------------- Expenses: Losses and loss adjustment 9,028 4,892 23,591 13,150 Policy acquisition costs, net 6,869 7,037 23,879 20,612 Operating 20,772 12,984 49,317 36,813 ------------- ------------- ------------- ------------- Total expenses 36,669 24,913 96,787 70,575 ------------- ------------- ------------- ------------- Income before income taxes 166,984 128,505 479,116 369,896 Provision for income taxes 33,838 27,183 98,797 77,798 ------------- ------------- ------------- ------------- Net income $133,146 $101,322 $380,319 $292,098 ============= ============= ============= =============
The accompanying notes are an integral part of the consolidated financial statements. -4- MBIA INSURANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY (Unaudited) For the nine months ended September 30, 1998 (Dollars in thousands except per share amounts)
Accumulated Common Stock Additional Other Total -------------------- Paid-in Retained Comprehensive Shareholder's Shares Amount Capital Earnings Adjustment Equity ---------- --------- --------------- -------------- ---------------- ----------------- Balance, January 1, 1998 100,000 $15,000 $1,139,949 $2,042,323 $166,587 $3,363,859 Comprehensive income: Net income --- --- --- 380,319 --- 380,319 Other comprehensive income: Change in unrealized appreciation of investments net of change in deferred income taxes of $(41,897) --- --- --- --- 78,545 78,545 Change in foreign currency translation --- --- --- --- 4,717 4,717 ------------ Other comprehensive income 83,262 ------------ Comprehensive income 463,581 ------------ Capital contribution from MBIA Inc. --- --- 324,915 --- --- 324,915 Tax reduction related to tax sharing agreement with MBIA Inc. --- --- 18,407 --- --- 18,407 ---------- ------------ --------------- -------------- ---------------- -------------- Balance, September 30, 1998 100,000 $15,000 $1,483,271 $2,422,642 $249,849 $4,170,762 ========== ============ =============== ============== ================ ============== Disclosure of reclassification amount: Unrealized appreciation of investments arising during the period $93,393 Reclassification of adjustment, net of taxes (14,848) -------- Net unrealized appreciation, net of taxes $78,545 ========
The accompanying notes are an integral part of the consolidated financial statements. -5- MBIA INSURANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands)
Nine months ended September 30 ----------------------------------- 1998 1997 --------------- --------------- Cash flows from operating activities: Net income $ 380,319 $ 292,098 Adjustments to reconcile net income to net cash provided by operating activities: Increase in accrued investment income (4,710) (8,421) Increase in deferred acquisition costs (82,668) (5,737) Increase in prepaid reinsurance premiums (42,282) (13,713) Increase in deferred premium revenue 220,801 131,016 Increase in loss and loss adjustment expense reserves 33,172 13,932 Depreciation 4,106 2,904 Amortization of goodwill 3,660 3,667 Amortization of bond discount, net (11,693) (7,391) Net realized gains on sale of investments (22,981) (12,974) Deferred income taxes 14,749 14,296 Other, net 20,820 70,962 --------------- --------------- Total adjustments to net income 132,974 188,541 --------------- --------------- Net cash provided by operating activities 513,293 480,639 --------------- --------------- Cash flows from investing activities: Purchase of fixed-maturity securities, net of payable for investments purchased (2,021,130) (1,606,108) Sale of fixed-maturity securities, net of receivable for investments sold 700,031 917,679 Redemption of fixed-maturity securities, net of receivable for investments redeemed 616,504 126,478 (Purchase) sale of short-term investments, net (111,392) 8,345 (Purchase) sale of other investments, net (529) 565 Capital expenditures, net of disposals (9,434) (6,924) --------------- --------------- Net cash used by investing activities (825,950) (559,965) --------------- --------------- Cash flow from financing activities: Capital contribution from MBIA Inc. 324,915 80,000 --------------- --------------- Net cash provided by financing activities 324,915 80,000 --------------- --------------- Net increase in cash and cash equivalents 12,258 674 Cash and cash equivalents - beginning of period 3,983 3,288 --------------- --------------- Cash and cash equivalents - end of period $ 16,241 $ 3,962 =============== =============== Supplemental cash flow disclosures: Income taxes paid $ 86,864 $ 58,968
The accompanying notes are an integral part of the consolidated financial statements. - 6 - MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION - ------------------------ The accompanying consolidated financial statements are unaudited and include the accounts of MBIA Insurance Corporation and its Subsidiaries (the "company"). The statements do not include all of the information and disclosures required by generally accepted accounting principles. These statements should be read in conjunction with the company's consolidated financial statements and notes thereto for the year ended December 31, 1997. The accompanying consolidated financial statements have not been audited by independent accountants in accordance with generally accepted auditing standards but in the opinion of management such financial statements include all adjustments, consisting only of normal recurring adjustments, necessary to summarize fairly the company's financial position and results of operations. The results of operations for the nine months ended September 30, 1998 may not be indicative of the results that may be expected for the year ending December 31, 1998. The December 31, 1997 condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. 2. DIVIDENDS DECLARED - --------------------- No dividends were declared by the company during the nine months ended September 30, 1998. 3. COMPREHENSIVE INCOME - ----------------------- As of January 1, 1998, the company adopted Statement of Financial Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive Income." SFAS 130 establishes new rules for the reporting and display of comprehensive income and its components; however, the adoption of this Statement had no impact on the company's net income or shareholder's equity. The company's comprehensive income consists of unrealized gains or losses on available-for-sale securities and foreign currency translation adjustments, which are presented net of deferred taxes. Prior to adoption these accounts were reported separately in shareholder's equity. 4. CAPMAC MERGER - ---------------- On February 17, 1998 MBIA Inc. and CapMAC Holdings Inc. (CapMAC) consummated a merger. Under the terms of the merger, CapMAC shareholders received 0.4675 of a share of MBIA Inc. common stock for each CapMAC share, for a total of 8,102,255 newly issued shares of MBIA Inc. common stock, the value of which is $536 million. On April 1, 1998, the company assumed the net insured obligations of Capital Markets Assurance Corporation (CapMAC Ins.) in exchange for investments equal to $176.1 million. The cession of the deferred premium revenue (net of prepaid reinsurance premiums) has been reflected as a component of gross premiums written in the second quarter of 1998. Subsequent to the cession MBIA Inc. contributed the common stock of CapMAC Ins. to the company resulting in additional paid-in capital of $324.9 million. -7- -----END PRIVACY-ENHANCED MESSAGE-----