-----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, GDsroAblzeua65ZDWNNVmDSLDl1VyuffmQue7ulFcoFWYAvgI01XtdxwzTrLW/Q/ +/w0vlIZ2KSJXWTOMUZPRw== 0000814585-99-000006.txt : 19990517 0000814585-99-000006.hdr.sgml : 19990517 ACCESSION NUMBER: 0000814585-99-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990514 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: 99622197 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 1Q99 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 March 31, 1999 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 May 11, 1999 there were outstanding 99,791,476 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 - March 31, 1999 and December 31, 1998 3 Consolidated Statements of Income - Three months ended March 31, 1999 and 1998 4 Consolidated Statement of Changes in Shareholders' Equity - Three months ended March 31, 1999 5 Consolidated Statements of Cash Flows - Three months ended March 31, 1999 and 1998 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 - 20 PART II OTHER INFORMATION, AS APPLICABLE Item 6. Exhibits and Reports on Form 8-K 21 SIGNATURES 22 (2) MBIA INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) (Dollars in thousands except per share amounts)
March 31, 1999 December 31, 1998 ------------------ --------------------- ASSETS Investments: Fixed-maturity securities held as available-for-sale at fair value (amortized cost $5,815,966 and $5,565,060) $ 6,067,124 $ 5,884,053 Short-term investments, at amortized cost (which approximates fair value) 283,650 423,194 Other investments 84,261 94,975 -------------- -------------- 6,435,035 6,402,222 Municipal investment agreement portfolio held as available-for-sale at fair value (amortized cost $3,604,738 and $3,542,077) 3,675,110 3,678,229 -------------- -------------- TOTAL INVESTMENTS 10,110,145 10,080,451 Cash and cash equivalents 34,527 20,757 Securities borrowed or purchased under agreements to resell 487,281 538,281 Accrued investment income 118,440 126,990 Deferred acquisition costs 230,583 230,085 Prepaid reinsurance premiums 382,246 352,699 Goodwill (less accumulated amortization of $64,178 and $62,423) 121,456 120,681 Property and equipment, at cost (less accumulated depreciation of $42,339 and $39,934) 85,629 81,457 Receivable for investments sold 21,985 49,497 Other assets 210,488 195,666 -------------- -------------- TOTAL ASSETS $11,802,780 $11,796,564 ============== ============== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Deferred premium revenue $ 2,262,137 $ 2,251,211 Loss and loss adjustment expense reserves 428,831 270,114 Municipal investment agreements 2,770,374 2,587,339 Municipal repurchase agreements 841,452 897,718 Long-term debt 689,026 688,996 Securities loaned or sold under agreements to repurchase 487,281 573,352 Deferred income taxes 249,198 343,896 Deferred fee revenue 42,826 42,964 Payable for investments purchased 90,819 95,598 Other liabilities 244,835 253,159 -------------- -------------- TOTAL LIABILITIES 8,106,779 8,004,347 -------------- -------------- 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 -- 99,749,901 and 99,569,625 99,750 99,570 Additional paid-in capital 1,177,516 1,169,192 Retained earnings 2,235,695 2,246,221 Accumulated other comprehensive income, net of deferred income tax provision of $109,958 and $157,410 194,205 288,915 Unallocated ESOP shares (4,043) (4,044) Unearned compensation--restricted stock (6,292) (6,807) Treasury stock -- 21,717 shares (830) (830) -------------- -------------- TOTAL SHAREHOLDERS' EQUITY 3,696,001 3,792,217 -------------- -------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $11,802,780 $11,796,564 ============== ==============
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 March 31 ----------------------------- 1999 1998 ------------ ---------- Insurance Revenues: Gross premiums written $154,910 $121,387 Ceded premiums (59,996) (14,333) ------------ ---------- Net premiums written 94,914 107,054 Decrease (increase) in deferred premium revenue 17,197 (7,412) ------------ ---------- Premiums earned (net of ceded premiums of $30,449 and $15,667) 112,111 99,642 Net investment income 87,765 82,406 Net realized gains 8,935 6,090 Advisory fees 4,965 6,216 ------------ ---------- Total insurance revenues 213,776 194,354 Expenses: Losses and loss adjustment 161,930 5,241 Policy acquisition costs, net 9,193 9,440 Operating 18,098 17,964 ------------ ---------- Total insurance expenses 189,221 32,645 ------------ ---------- Insurance income 24,555 161,709 ------------ ---------- Investment management services Revenues 19,342 14,036 Expenses 9,967 8,598 ------------ ---------- Operating income 9,375 5,438 Net realized gains 729 6,446 ------------ ---------- Investment management services income 10,104 11,884 ------------ ---------- Municipal and financial services Revenues 3,679 9,613 Expenses 10,966 9,867 ------------ ---------- Municipal and financial services loss (7,287) (254) ------------ ---------- Corporate Interest expense 13,496 10,433 Other expenses 1,922 32,828 ------------ ---------- Corporate expenses (15,418) (43,261) ------------ ---------- Income before income taxes 11,954 130,078 Provision for income taxes 2,534 27,973 ------------ ---------- Net income $ 9,420 $102,105 ============ ========== Net income per common share: Basic $ 0.09 $ 1.03 Diluted $ 0.09 $ 1.02 Weighted average number of common shares outstanding: Basic 99,547,368 98,689,738 Diluted 100,465,119 100,055,944
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 three months ended March 31, 1999 (In thousands except per share amounts)
Accumulated Common Stock Additional Other ------------------------------- Paid-in Retained Comprehensive Shares Amount Capital Earnings Income --------------- --------------- ---------------- -------------- --------------- Balance, January 1, 1999 99,570 $99,570 $1,169,192 $2,246,221 $288,915 Comprehensive income: Net income --- --- --- 9,420 --- Other comprehensive income: Change in unrealized appreciation of investments net of change in deferred income taxes of $47,452 --- --- --- --- (88,508) Change in foreign currency translation --- --- --- --- (6,202) Other comprehensive income Total comprehensive income Exercise of stock options 139 139 5,626 --- --- Stock issued for acquistion 38 38 2,492 --- --- Allocation of ESOP shares --- --- --- --- --- Unearned compensation- restricted stock 3 3 206 --- --- Dividends (declared and paid per common share $0.20) --- --- --- (19,946) --- --------------- --------------- ---------------- -------------- --------------- Balance, March 31, 1999 99,750 $99,750 $1,177,516 $2,235,695 $194,205 =============== =============== ================ ============== =============== Unearned Unallocated Compensation- Treasury Stock Total ESOP Restricted ------------------------------ Shareholders' Shares Stock Shares Amount Equity ----------- --------------- --------------- -------------- ------------------ Balance, January 1, 1999 $(4,044) $(6,807) (22) ($830) $3,792,217 Comprehensive income: Net income --- --- --- --- 9,420 Other comprehensive income: Change in unrealized appreciation of investments net of change in deferred income taxes of $47,452 --- --- --- --- (88,508) Change in foreign currency translation --- --- --- --- (6,202) ------------------ Other comprehensive income (94,710) ------------------ Total comprehensive income (85,290) ------------------ Exercise of stock options --- --- --- --- 5,765 Stock issued for acquistion --- --- --- --- 2,530 Allocation of ESOP shares 1 --- --- --- 1 Unearned compensation- restricted stock --- 515 --- --- 724 Dividends (declared and paid per common share $0.20) --- --- --- --- (19,946) ----------- --------------- --------------- -------------- ------------------ Balance, March 31, 1999 $(4,043) $(6,292) (22) ($830) $3,696,001 =========== =============== =============== ============== ==================
The accompanying notes are an integral part of the consolidated financial statements. 1999 ------------ Disclosure of reclassification amount: Unrealized depreciation of investments arising during the period $ (80,764) Reclassification of adjustment, net of taxes (7,744) ------------ Net unrealized depreciation, net of taxes $(88,508) ============ (5) MBIA INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands)
Three months ended March 31 ------------------------------------ 1999 1998 --------------- ------------- Cash flows from operating activities: Net income $ 9,420 $ 102,105 Adjustments to reconcile net income to net cash provided by operating activities: Decrease in accrued investment income 8,550 6,462 Increase in deferred acquisition costs (498) (5,861) (Increase) decrease in prepaid reinsurance premiums (29,547) 1,334 Increase in deferred premium revenue 12,353 6,078 Increase in loss and loss adjustment expense reserves 158,717 4,747 Depreciation 2,417 1,534 Amortization of goodwill 1,754 2,103 Amortization of bond discount, net (4,915) (5,728) Net realized gains on sale of investments (9,664) (12,536) Deferred income taxes (47,165) 2,954 Other, net (22,634) 7,931 --------------- ------------- Total adjustments to net income 69,368 9,018 --------------- ------------- Net cash provided by operating activities 78,788 111,123 --------------- ------------- Cash flows from investing activities: Purchase of fixed-maturity securities, net of payable for investments purchased (1,966,627) (411,075) Sale of fixed-maturity securities, net of receivable for investments sold 1,724,242 257,854 Redemption of fixed-maturity securities, net of receivable for investments redeemed 100,133 62,178 Sale of short-term investments, net 100,988 6,500 Sale of other investments, net 8,395 435 Purchases for municipal investment agreement portfolio, net of payable for investments purchased (495,169) (757,704) Sales from municipal investment agreement portfolio, net of receivable for investments sold 399,684 515,136 Capital expenditures, net of disposals (6,589) (3,232) Other, net (2,517) (8,537) --------------- ------------- Net cash used by investing activities (137,460) (338,445) --------------- ------------- Cash flows from financing activities: Dividends paid (19,897) (17,796) Proceeds from issuance of municipal investment and repurchase agreements 507,152 809,843 Payments for drawdowns of municipal investment and repurchase agreements (385,507) (501,553) Securities loaned or sold under agreements to repurchase (35,071) (61,000) Exercise of stock options 5,765 4,875 --------------- ------------- Net cash provided by financing activities 72,442 234,369 --------------- ------------- Net increase in cash and cash equivalents 13,770 7,047 Cash and cash equivalents - beginning of period 20,757 26,296 --------------- ------------- Cash and cash equivalents - end of period $ 34,527 $ 33,343 =============== ============= Supplemental cash flow disclosures: Income taxes paid $2,518 $5,289 Interest paid: Municipal investment and repurchase agreements $45,841 $49,955 Long-term debt 13,554 9,188 Short-term debt --- 518
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, 1998 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 three months ended March 31, 1999 may not be indicative of the results that may be expected for the year ending December 31, 1999. The December 31, 1998 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. Business segment results are presented gross of intersegment transactions, which are not material to each segment. 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. Dividends Declared - ---------------------- Dividends declared by the company during the three months ended March 31, 1999 were $19.9 million. 3. 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. (7) MBIA INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION - ------------ MBIA recorded mixed business results in the first quarter of 1999, yet we still met our three main goals. We continued to write business to meet our no loss underwriting standard, worked to strengthen our triple-A ratings and we continued to build long term shareholder value. We recorded strong top line results in insurance operations as adjusted gross premiums rose sharply, and expected margins improved. Our Investment Management Services Division also posted extremely strong gains. The operating losses in our Municipal and Financial Services Division were expected, but unacceptable, and these operations will continue to be under strategic review during 1999. During the quarter, we strengthened our financial foundation by bolstering our unallocated loss reserve and continued our strategic use of reinsurance to better position our company for long term profitable growth. RESULTS OF OPERATIONS - --------------------- SUMMARY - ------- The following chart presents highlights of our consolidated financial results for the first quarters of 1999 and 1998. All of the numbers shown below and all of the data contained in this report have been restated to reflect our 1998 mergers with CapMAC Holdings Inc. (CapMAC) and 1838 Investment Advisors, Inc. (1838), which have been accounted for as "pooling of interests." Percent Change March 31, March 31, -------------- 1999 1998 1999 vs. 1998 -------------------------------------------------------------------- Net income (in millions): As reported $ 9 $ 102 (91)% Excluding one-time charges $ 124 $ 121 2 % Per share data: Net income: As reported $ 0.09 $ 1.02 (91)% Excluding one-time charges $ 1.23 $ 1.21 2 % Operating earnings $ 1.17 $ 1.12 4 % Core earnings $ 1.04 $ 1.03 1 % Book value $37.11 $34.79 7 % Adjusted book value $52.57 $48.92 7 % -------------------------------------------------------------------- Core earnings, which exclude the effects of refundings and calls on our insured issues, realized capital gains and losses on our investment portfolio and nonrecurring charges, provide the most indicative measure of our underlying profit. For the first quarter of 1999, core earnings per share reflected strong top line results. However, these were offset by operating losses in our municipal and financial services line, heavier use of reinsurance, and the increase in our loss reserving provision. The result was that diluted core earnings per share were $1.04, up an unacceptable 1% over first quarter 1998. (8) MBIA INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Our first quarter 1999 net income and earnings per share grew 2% excluding one-time charges. Including the one-time charges, net income decreased by 91% for 1999 over 1998. Operating earnings per share, which exclude the impact of realized gains and losses and one-time charges, increased by 4% over first quarter 1998. Our book value at March 31, 1999 was $37.11 per share, up from $34.79 at March 31, 1998. As with core earnings, a more appropriate measure of a financial guarantee company's intrinsic value is its adjusted book value. It is defined as book value plus the after-tax effects of net deferred premium revenue, net of deferred acquisition costs, the present value of unrecorded future installment premiums, and the unrealized gains or losses on investment contract liabilities. The following table presents the components of our adjusted book value per share: Percent Change March 31, March 31, -------------- 1999 1998 1999 vs. 1998 - -------------------------------------------------------------------- Book value $37.11 $34.79 7% After-tax value of: Net deferred premium revenue, net of deferred acquisition costs 10.77 10.43 3% Present value of future installment premiums* 4.31 3.55 21% Unrealized gain on investment contract liabilities** 0.38 0.15 153% - -------------------------------------------------------------------- Adjusted book value $52.57 $48.92 7% - -------------------------------------------------------------------- * The discount rate used to present value future installment premiums was 9%. ** The unrealized gain on investment contract liabilities is offset by a corresponding gain on the market value of the assets. Our adjusted book value per share was $52.57 at March 31, 1999, a 7% increase from first quarter-end 1998. (9) MBIA INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) FINANCIAL GUARANTEE INSURANCE - ----------------------------- In the first quarter of 1999, the market offered us the opportunity to be both more selective and to write a significantly greater volume than in the first quarter of 1998. As a result, our top line results were extremely strong. Adjusted gross premiums written (AGP) were up by 32% compared to the first quarter of 1998, while par insured was up only 17%, meaning that we received more premium for every dollar of risk insured. AGP includes our upfront premiums as well as the estimated present value of current and future premiums from installment-based insurance policies issued in the period. Gross premiums written (GPW), as reported in our financial statements, reflects cash receipts only and does not include the value of future premium receipts expected for installment policies originated in the period. MBIA's premium production in terms of AGP and GPW for the first quarters of 1999 and 1998 is presented in the following table: Percent Change March 31, March 31, -------------- In millions 1999 1998 1999 vs. 1998 - ------------------------------------------------------------------------ Premiums written: GPW $155 $121 28% AGP $182 $138 32% - ------------------------------------------------------------------------ We estimate the present value of our total future installment premium stream on outstanding policies to be $660 million at March 1999, compared with $539 million at March 1998. MUNICIPAL MARKET New issuance in the municipal market was $52.9 billion for the first quarter of 1999, down 20% from $66.2 billion in the first quarter of 1998. The insured portion increased to 57% from 51% in the first quarter of 1998. MBIA's domestic municipal AGP was up by 33% over 1998's first quarter while par insured declined by 8%. The significant increase in AGP combined with a decline in par insured is the result of a value added pricing discipline which we have brought down to the individual deal level to ensure that we realize not just adequate, but attractive returns on each deal we insure. Domestic new issue municipal market information and MBIA's par and premium writings in both the new issue and secondary domestic municipal finance markets are shown in the following table: (10) MBIA INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Percent Change March 31, March 31, -------------- Domestic Municipal 1999 1998 1999 vs. 1998 - -------------------------------------------------------------------------------- Total new issue market:* Par value (in billions) $ 53 $ 66 (20)% Insured penetration 57% 51% MBIA insured: Par value (in billions) $ 9 $ 10 (8)% Premiums: (in millions) GPW $ 87 $ 68 30 % AGP $ 91 $ 68 33 % - -------------------------------------------------------------------------------- * 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 We also recorded strong results in structured finance for the quarter. AGP was up a healthy 41% while par insured was up only 30%. This was despite a sharp increase in the percentage of structured business written which was rated A and above, from 19% last year to 42% this year. Pricing remained strong and expected returns were up sharply compared to the same period last year. Details regarding the public asset-backed market and MBIA's par and premium writings in both the domestic new issue and secondary structured finance markets are shown in the table below: Percent Change Domestic March 31, March 31, -------------- Structured Finance 1999 1998 1999 vs. 1998 - ------------------------------------------------------------------------------ Total asset-backed market:* Par value (in billions) $49 $ 36 34% MBIA insured: Par value (in billions) $11 $ 9 30% Premiums: (in millions) GPW $37 $ 30 22% AGP $40 $ 28 41% - ------------------------------------------------------------------------------ * Market data exclude mortgage-backed securities and private placements. (11) MBIA INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) INTERNATIONAL MARKET The MBIA/AMBAC Joint Venture recorded strong results in the first quarter compared to last year's first quarter. AGP is up 9%, about in line with par insured and returns continue to be very attractive. Our company's municipal and structured finance international business volume in the new issue and secondary markets for the first quarter of 1999 and 1998 is illustrated as follows: Percent Change March 31, March 31, -------------- International 1999 1998 1999 vs. 1998 - ------------------------------------------------------------------------------- Par value (in billions) $ 3 $ 2 12% Premiums: (in millions) GPW $22 $19 17% AGP $43 $40 9% - ------------------------------------------------------------------------------- REINSURANCE Premiums ceded to reinsurers from all insurance operations were $60 million and $14 million in 1999 and 1998, respectively. Cessions as a percentage of GPW increased to 39% in 1999 from 12% in 1998. The increase in our cession rate was largely driven by the strategic use of reinsurance to shape the portfolio. Continuing the initiative begun in the fourth quarter of 1998 we focused on reducing larger single risks across the portfolio. This is consistent with our emphasis on a strong balance sheet. In addition, we are freeing up capacity to write additional business. Most of our reinsurers are rated Double-A or higher by S&P, or Single-A or higher by A. M. Best Co. Although we remain liable for all reinsured risks, we are confident that we will recover the reinsured portion of any losses, should they occur. PREMIUMS EARNED Premiums are recognized over the life of the bonds we insure. The slow premium recognition coupled with compounding investment income from investing our premiums and capital form a solid foundation for consistent revenue growth. In 1999 premiums earned from scheduled amortization increased by 7% over first quarter 1998. Refunded premiums also generated high revenues in the first quarter of 1999. When an MBIA-insured bond issue is refunded or retired early, the related deferred premium revenue is earned immediately. The amount of bond refundings and calls is influenced by a variety of factors such as prevailing interest rates, the coupon rates of the bond issue, the issuer's desire or ability to modify bond covenants and applicable regulations under the Internal Revenue Code. The composition of MBIA's premiums earned in terms of its scheduled and refunded components is illustrated below: Percent Change March 31, March 31, -------------- In millions 1999 1998 1999 vs. 1998 - ------------------------------------------------------------------------ Premiums earned: Scheduled $ 89 $84 7% Refunded 23 16 43% - ------------------------------------------------------------------------ Total $112 $100 13% - ------------------------------------------------------------------------ (12) MBIA INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) INVESTMENT INCOME Our insurance-related investment income (exclusive of capital gains) increased to $88 million in the first quarter of 1999, up from $82 million in the first quarter of 1998. This increase was primarily due to the growth of cash flow available for investment. Our cash flows were generated from operations, the compounding of previously earned and reinvested investment income and the addition of funds from financing activities. Insurance-related net realized capital gains were $9 million in the first quarter of 1999, and $6 million in the first quarter of 1998. These realized gains were generated as a result of ongoing management of the investment portfolio. ADVISORY FEES The company collects fee revenues in conjunction with certain structured finance transactions. In the first quarter of 1999, advisory fee revenues decreased by 20%, as the amortization of previously deferred fee revenue declined from period to period. Certain fees are deferred and earned over the life of the related transactions. Cash collection of advisory fees was relatively constant from quarter to quarter. LOSSES AND LOSS ADJUSTMENT EXPENSES (LAE) We maintain a general loss reserve based on our estimate of unidentified losses from our insured obligations. The total reserve is calculated by applying a risk factor based on a study of bond defaults to net debt service written. To the extent that we identify specific insured issues as currently or likely to be in default, the present value of our expected payments, net of expected reinsurance and collateral recoveries, is allocated within the total loss reserve as case-specific reserves. We periodically evaluate our estimates for losses and LAE and any resulting adjustments are reflected in current earnings. We believe that our reserving methodology and the resulting reserves are adequate to cover the ultimate net cost of claims. However, the reserves are necessarily based on estimates, and there can be no assurance that any ultimate liability will not exceed such estimates. We completed an update of our unallocated loss reserving methodology. The update included an analysis of loss-reserve factors based on the latest available industry data. We included the analysis of historical default and recovery experience for the relevant sectors of the fixed-income market. Also factored in was the changing mix of our book of business. The study resulted in an increase in our company's quarterly loss provision and a one-time charge of $153 million to incorporate the new factors on the existing insured portfolio. (13) MBIA INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The following table shows the case-specific and unallocated components of our total loss and LAE reserves at the first quarter end of 1999 and 1998: Percent Change March 31, March 31, -------------- In millions 1999 1998 1999 vs. 1998 - ------------------------------------------------------------------- Reserves: Case-specific $193 $ 33 483% Unallocated 236 75 216% - ------------------------------------------------------------------- Total $429 $108 298% Provision $162 $ 5 2,990% - ------------------------------------------------------------------- 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 in which the related premiums are earned. Our company's policy acquisition costs, general operating expenses and total insurance operating expenses, as well as related expense measures, are shown below: Percent Change March 31, March 31, -------------- In millions 1999 1998 1999 vs. 1998 - -------------------------------------------------------------------------------- Policy acquisition costs, net $ 9 $ 9 --- Operating 18 18 --- - -------------------------------------------------------------------------------- Total insurance operating expenses $27 $ 27 --- Expense ratio: GAAP 24.3% 27.5% Statutory 20.9% 26.8% - -------------------------------------------------------------------------------- For the first quarter of 1999, policy acquisition costs net of deferrals remained even with the first quarter of 1998. The ratio of policy acquisition costs net of deferrals to earned premiums has declined from 9.5% in 1998 to 8.2% in 1999. This decline reflects the positive impact of increases in both installment premium revenues and ceding commission income. Operating expenses were also relatively unchanged from the prior year's comparable period. Reflecting synergies with the CapMAC merger as well as our commitment to hold the line on expenses. (14) MBIA INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Financial guarantee insurance companies also use the statutory expense ratio (expenses before deferrals as a function of net premiums written) as a measure of expense management. Our company's first quarter 1999 statutory and GAAP expense ratios have both improved over the first quarter of 1998 again reflecting the success of the merger and our disciplined expense management. INSURANCE INCOME MBIA's insurance income at $25 million for the first quarter of 1999 was significantly depressed by the increases to our loss provision. Excluding the provision increases, insurance income grew by 12%. INVESTMENT MANAGEMENT SERVICES - ------------------------------ In 1998 after our merger with 1838, we formed a holding company, MBIA Asset Management Corporation, to consolidate the resources and capabilities of our four investment management services. The success of our merger with 1838 showed immediate operating benefits, and all of our investment management franchises had record performances in 1998. Continuing in this vein, consolidated operating income increased by 72% for the first quarter of 1999 over same period in 1998. Of special note was the 38% increase in operating revenues achieved while investment management expenses held the line at only a 16% growth rate. The table below summarizes our consolidated investment management results for the first quarters of 1999 and 1998: Percent Change March 31, March 31, -------------- In millions 1999 1998 1999 vs. 1998 - -------------------------------------------------------------------- Revenues $19 $14 38 % Expenses 10 9 16 % - -------------------------------------------------------------------- Operating income 9 5 72 % Realized gains 1 7 (89)% - -------------------------------------------------------------------- Income $10 $12 (15)% - -------------------------------------------------------------------- MBIA Asset Management Corporation is comprised of 1838, MBIA Municipal Investors Services Corp. (MBIA-MISC), MBIA Investment Management Corp. (IMC) and MBIA Capital Management Corp. (CMC). The following provides a summary of each of these businesses: 1838 is a full-service asset management firm with a strong institutional focus. It manages over $7.9 billion in equity, fixed-income and balanced portfolios for a client base comprised of municipalities, endowments, foundations, corporate employee benefit plans and high-net-worth individuals. MBIA-MISC provides cash management, investment fund administration and fixed-rate investment placement services directly to local governments and school districts. Its subsidiary, American Money Management Associates, Inc. (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 (SEC)-registered investment advisers and at March 31, 1999 had $6.8 billion in assets under management, up 25% over March 31, 1998's $5.4 billion. (15) MBIA INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) IMC provides state and local governments with tailored investment agreements for bond proceeds and other public funds, such as construction, loan origination, capitalized interest and debt service reserve funds. At March 31, 1999, principal and accrued interest outstanding on investment and repurchasing agreements was $3.6 billion, compared with $3.5 billion at March 31, 1998. At amortized cost, the assets supporting IMC's investment agreement were also at $3.6 billion and $3.5 billion at March 31, 1999 and 1998. 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 first quarter-end 1999, our exposure to derivative financial instruments was not material. CMC is an SEC-registered investment adviser and National Association of Securities Dealers member firm. CMC specializes in fixed-income management for institutional funds and provides investment management services for IMC's investment agreements, MBIA-MISC's municipal cash management programs and MBIA's insurance related portfolios. At March 31, 1999, CMC's assets under management were $1.1 billion compared to $0.6 billion at March 31, 1998. MUNICIPAL AND FINANCIAL SERVICES - -------------------------------- MBIA MUNISERVICES COMPANY (MBIA 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. MBIA MuniServices includes Municipal Tax Bureau (MTB), a provider of tax revenue compliance and collection services to public entities, MuniFinancial, a public finance consulting firm specializing in municipal debt administration and Municipal Resource Consultants (MRC), a revenue audit and information services firm. MBIA MuniServices also includes an equity interest in Capital Asset Holdings, Inc. (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. (16) MBIA INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) In the first quarter of 1999 the municipal and financial services operations lost $7 million. The operating losses in our Municipal and Financial Services Division were expected, but unacceptable. These operations will continue to be under strategic review during 1999. CORPORATE - --------- INTEREST EXPENSE In the first quarter of 1999, we incurred $13 million of interest expense compared to $10 million in the first quarter of 1998. The increase in interest expense reflects our long-term debt financings of $150 million and $50 million in September and November 1998, respectively. OTHER EXPENSES In the first quarter of 1999 other expenses were composed primarily of non-insurance goodwill amortization and general corporate overhead. In the first quarter of 1998 other expenses also included a $29.5 million one-time charge related to the CapMAC merger, which included investment banking and legal fees and severance expense. TAXES - ----- Our tax policy is to optimize our after-tax income by maintaining the appropriate mix of taxable and tax-exempt investments. However, we will see our tax rate fluctuate from time-to-time as we manage our investment portfolio on a total return basis. Our effective tax rate has declined marginally over last year's first quarter. 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 March 31, 1999, our total shareholders' equity was $3.7 billion, with total long-term borrowings at $689 million. We use debt financing to lower our overall cost of capital, thereby increasing our return on shareholders' equity. We maintain debt at levels we consider to be prudent based on our cash flow and total capital. The following table shows our long-term debt and the ratio we use to measure it: March 31, December 31, 1999 1998 - --------------------------------------------------------------------- Long-term debt (in millions) $689 $689 Long-term debt to total capital 16% 15% - --------------------------------------------------------------------- In addition, our insurance company has an $825 million irrevocable standby line of credit facility with a group of major Triple-A rated banks to provide funds for the payment of claims in the event that severe losses should occur. (17) MBIA INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Any loans made under this agreement would be repaid solely from recoveries realized on defaulted insured obligations. The agreement is for a seven-year term, which expires on October 31, 2005, and, subject to approval by the banks, may be renewed annually to extend the term to seven years beyond the renewal date. Our insurance company also maintains stop-loss reinsurance coverage of $175 million in excess of incurred losses of $150 million. From time to time we access the capital markets to support the growth of our businesses. In September 1998, we issued $150 million of 30-year debentures, and, in November 1998, we issued $50 million of 40-year notes. At quarter end, total claims-paying resources for our insurance company stood at $8.0 billion, a 16% increase over first quarter end 1998. 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 quarter of 1999, operating cash flow totaled $79 million. Under New York state insurance law, without prior approval of the superintendent of the state insurance department, financial guarantee insurance companies can pay dividends from earned surplus subject to retaining a minimum capital requirement. In our case, dividends in any 12-month period cannot be greater than 10% of policyholders' surplus. During the first quarter our insurance company paid no dividends and at March 31, 1999 had dividend capacity in excess of $233 million without special regulatory approval. Our company has significant liquidity supporting its businesses. At the end of first quarter 1999, cash equivalents and short-term investments totaled $318 million. Should significant cash flow reductions occur in any of our businesses, for any combination of reasons, we have additional alternatives for meeting ongoing cash requirements. They include, among other things, selling or pledging our fixed-income investments from our investment portfolio, tapping existing liquidity facilities and new borrowings. Our company has substantial external borrowing capacity. We maintain two short-term bank lines totaling $650 million with a group of worldwide banks. At March 31, 1999, there were no balances outstanding under these lines. (18) MBIA INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Our investment portfolio provides a high degree of liquidity since it is comprised of readily marketable high-quality fixed-income securities and short-term investments. At March 31, 1999, the fair value of our consolidated investment portfolio was $10.1 billion, as shown below: Percent Change March 31, December 31, -------------- In millions 1999 1998 1999 vs. 1998 ------------------------------------------------------------------------- Insurance operations: Amortized cost $6,184 $ 6,083 2 % Unrealized gain 251 319 (21)% ------------------------------------------------------------------------- Fair value $6,435 $ 6,402 1 % ------------------------------------------------------------------------- Municipal investment agreements: Amortized cost $3,605 $ 3,542 2 % Unrealized gain 70 136 (48)% ------------------------------------------------------------------------- Fair value $3,675 $ 3,678 --- ------------------------------------------------------------------------- Total portfolio at fair value $10,110 $10,080 --- - -------------------------------------------------------------------------- The growth of our insurance-related investments in 1999 was the result of positive cash flows and proceeds from our financing activities partially offset by the decrease in unrealized gains caused by higher interest rates at March 31, 1999. The fair value of investments related to our municipal investment agreement business has remained constant at $3.7 billion primarily due to offsetting effects between a decrease in unrealized gains and a positive cash flow from operations. Our investment portfolios are considered to be available-for-sale, and the differences between their fair value and amortized cost, net of applicable taxes, are reflected as an adjustment to shareholders' equity. Differences between fair value and amortized cost arise primarily as a result of changes in interest rates occurring after a fixed-income security is purchased, although other factors influence fair value, including credit-related actions, supply and demand forces and other market factors. The weighted-average credit quality of our fixed-income portfolios has been maintained at Double-A since our inception. Since we generally intend to hold most of our investments to maturity as part of our risk management strategy, we expect to realize a value substantially equal to amortized cost. YEAR 2000 - --------- With the new millennium approaching, MBIA is actively managing a high-priority Year 2000 (Y2K) program addressing the issue of whether its computer systems can correctly distinguish between the years 1900 and 2000. The company has established an independent Y2K testing lab in its Armonk office, with a committee of business unit managers overseeing the project. MBIA has a budget of $1.13 million for its 1998-2000 Y2K efforts. Expenditures are proceeding as (19) MBIA INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) anticipated, and we do not expect the project budget to materially exceed this amount. As of March 31, 1999, we have spent $494 thousand on the project. Since the mid-1990s, MBIA has completed the re-engineering or installation of three internally designed "mission-critical" computer systems at a cost of approximately $11 million. The three systems are: MBIA Information Deal Analysis System (MIDAS), which provides analysis and accounting for MBIA's financial guarantee business; Sales Trading and Accounting Records System (STARS), which provides administrative and client support for MBIA's municipal pooled investment business; and Municipal Agreement Record System (MARS), which provides analytical and accounting support for MBIA's investment agreement business. These systems were designed as Y2K-compliant. These expenditures are not reflected in our Y2K budget. MBIA has initiated a comprehensive Y2K plan which includes the following phases: assessment -- completed in the second quarter of 1998; remediation -- completed in the fourth quarter of 1998; testing -- completed for STARS in the third quarter of 1998, MARS in the fourth quarter of 1998 and MIDAS with the initial phase completed in the fourth quarter of 1998 (final testing completion expected by the end of the second quarter of 1999); and contingency planning -- to be completed in the second quarter of 1999. This plan covers "mission-critical" internally developed systems, vendor software, hardware and certain third-party entities through which we conduct our business. Testing to date indicates that functions critical to the financial guarantee business, both domestic and international (MIDAS), were Y2K-ready as of December 31, 1998. Additional testing will continue throughout 1999. In addition, MBIA's subsidiary companies are actively managing their own Y2K efforts and are expected to meet varying readiness deadlines before yearend. It is not possible at this time to determine whether a subsidiary's Y2K failure would have a material impact on MBIA. Additionally, MBIA is reviewing all ancillary support functions. Evaluation, testing and re-testing will continue throughout 1999. An area of risk to MBIA's financial guarantee business is the potential inability of an issuer, or its trustee or paying agent, to make payments on an MBIA-insured transaction because of failure to be Y2K-ready. To mitigate this risk, we are surveying trustees, paying agents, custodians, fiscal agents, servicers and selected high-volume issuers to determine their readiness. While the survey is not complete, results to date indicate that all respondents are either ready or planning to be ready by late 1999. If MBIA is asked to pay a claim in situations where the issuer's system fails, we will do so and would expect to recover such payment in a short time period. While it is not possible to predict the extent of such payments, we believe that MBIA has adequate sources of liquidity to cover these payments. (20) 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: 1. The company filed a report on Form 8-K on January 7, 1999 announcing a senior management succession plan. 2. The company filed a report on Form 8-K on April 7, 1999 announcing an increase to the quarterly loss provision and a one time pre-tax charge of $152.7 million in the first quarter to increase unallocated loss reserves. (21) 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: May 14, 1999 /s/ Neil G. Budnick --------------------------- ---------------------------- Neil G. Budnick Vice Chairman, Chief Financial Officer and Treasurer Date: May 14, 1999 /s/ ELIZABETH B. SULLIVAN --------------------------- ---------------------------- Elizabeth B. Sullivan Managing Director, Controller (Principal Accounting Officer) (22) EX-11 2 1Q99 EXHIBIT 11 EXHIBIT 11 MBIA INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE ASSUMING DILUTION (In thousands except per share amounts) THREE MONTHS ENDED MARCH 31 -------------------------- 1999 1998 ----------- ----------- Net income $ 9,420 $102,105 =========== =========== Diluted weighted average shares: Basic weighted average shares outstanding 99,547 98,690 Effect of stock options 918 1,366 =========== =========== Diluted weighted average shares: 100,465 100,056 =========== =========== Basic EPS $ 0.09 $ 1.03 =========== =========== Diluted EPS $ 0.09 $ 1.02 =========== =========== EX-27 3 1Q99 FDS - ARTICLE 7
7 (Replace this text with the legend) 0000814585 MBIA Inc. 1,000 U.S.DOLLARS 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 1 6,067,124 0 0 0 0 0 10,110,145 34,527 0 230,583 11,802,780 428,831 2,262,137 0 0 689,026 0 0 99,750 3,596,251 11,802,780 112,111 87,765 8,935 28,715 161,930 9,193 18,098 11,954 2,534 9,420 0 0 0 9,420 0.09 0.09 0 0 0 0 0 0 0
EX-99 4 1Q 1999 MBIA CORP. GAAP MBIA INSURANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 1999 AND DECEMBER 31, 1998 AND FOR THE PERIODS ENDED MARCH 31, 1999 AND 1998 MBIA INSURANCE CORPORATION AND SUBSIDIARIES I N D E X Page ---- Consolidated Balance Sheets - March 31, 1999 and December 31, 1998 (Unaudited) 3 Consolidated Statements of Income - Three months ended March 31, 1999 and 1998 (Unaudited) 4 Consolidated Statement of Changes in Shareholder's Equity - Three months ended March 31, 1999 (Unaudited) 5 Consolidated Statements of Cash Flows - Three months ended March 31, 1999 and 1998 (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)
March 31, 1999 December 31, 1998 --------------- ------------------- ASSETS Investments: Fixed-maturity securities held as available-for-sale at fair value (amortized cost $5,815,966 and $5,565,060) $6,067,124 $5,884,053 Short-term investments, at amortized cost (which approximates fair value) 283,643 423,188 Other investments 16,106 17,850 ---------------- ----------------- TOTAL INVESTMENTS 6,366,873 6,325,091 Cash and cash equivalents 10,136 6,546 Securities purchased under agreements to resell 215,000 187,500 Accrued investment income 87,784 91,239 Deferred acquisition costs 230,583 230,085 Prepaid reinsurance premiums 382,246 352,699 Goodwill (less accumulated amortization of $53,250 and $52,031) 89,731 90,950 Property and equipment, at cost (less accumulated depreciation of $25,311 and $23,840) 76,581 71,952 Receivable for investments sold 6,189 33,880 Other assets 160,347 97,970 ---------------- ----------------- TOTAL ASSETS $7,625,470 $7,487,912 ================ ================= LIABILITIES AND SHAREHOLDER'S EQUITY Liabilities: Deferred premium revenue $ 2,262,137 $ 2,251,211 Loss and loss adjustment expense reserves 428,831 270,114 Securities sold under agreements to repurchase 215,000 187,500 Deferred income taxes 232,262 303,407 Deferred fee revenue 32,881 33,785 Payable for investments purchased 69,229 29,523 Other liabilities 130,054 135,027 ---------------- ----------------- TOTAL LIABILITIES 3,370,394 3,210,567 ---------------- ----------------- 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 1,497,542 1,491,033 Retained earnings 2,588,631 2,566,222 Accumulated other comprehensive income, net of deferred income tax provision of of $88,280 and $112,283 153,903 205,090 ---------------- ----------------- TOTAL SHAREHOLDER'S EQUITY 4,255,076 4,277,345 ---------------- ----------------- TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $7,625,470 $7,487,912 ================ =================
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 March 31 ------------------------ 1999 1998 ---------- --------- Revenues: Gross premiums written $154,910 $101,641 Ceded premiums (59,996) (7,786) ---------- --------- Net premiums written 94,914 93,855 Decrease (increase) in deferred premium revenue 17,197 (8,956) ---------- --------- Premiums earned (net of ceded premiums of $30,449 and $9,555) 112,111 84,899 Net investment income 88,007 76,967 Net realized gains 7,759 6,088 Advisory fees 4,965 1,470 Other --- 42 ---------- --------- Total revenues 212,842 169,466 ---------- --------- Expenses: Losses and loss adjustment 161,930 4,219 Policy acquisition costs, net 9,193 7,996 Operating 18,098 14,256 ---------- --------- Total expenses 189,221 26,471 --------- --------- Income before income taxes 23,621 142,995 Provision for income taxes 1,212 31,187 --------- --------- Net income $22,409 $111,808 ========= ========= 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 three months ended March 31, 1999 (Dollars in thousands except per share amounts)
Accumulated Common Stock Additional Other Total ------------------- Paid-in Retained Comprehensive Shareholder's Share Amount Capital Earnings Adjustment Equity --------- -------- ---------- ---------- -------------- -------------- Balance, January 1, 1999 100,000 $15,000 $1,491,033 $2,566,222 $205,090 $ 4,277,345 Comprehensive income: Net income --- --- --- 22,409 --- 22,409 Other comprehensive income: Change in unrealized appreciation of investments net of change in deferred income taxes of $24,002 --- --- --- --- (44,960) (44,960) Change in foreign currency translation --- --- --- --- (6,227) (6,227) ---------------- Other comprehensive income (51,187) ---------------- Comprehensive income (28,778) Tax reduction related to tax sharing agreement with MBIA Inc. --- --- 6,509 --- --- 6,509 ========= ======== ============ ========== ============= ============== Balance, March 31, 1999 100,000 $15,000 $1,497,542 $2,588,631 $153,903 $ 4,255,076 ========= ======== ============ ========== ============= ==============
Disclosure of reclassification amount: Unrealized depreciation of investments arising during the period, net of taxes $(38,173) Reclassification of adjustment, net of taxes (6,787) ---------- Net unrealized depreciation, net of taxes $(44,960) ========== 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)
Three Months Ended March 31 ------------------------ 1999 1998 --------- ---------- Cash flows from operating activities: Net income $ 22,409 $ 111,808 Adjustments to reconcile net income to net cash provided by operating activities: Decrease in accrued investment income 3,455 3,368 Increase in deferred acquisition costs (498) (5,250) (Increase) decrease in prepaid reinsurance premiums (29,547) 1,769 Increase in deferred premium revenue 12,350 7,182 Increase in loss and loss adjustment expense reserves 158,717 3,750 Depreciation 1,565 1,150 Amortization of goodwill 1,219 1,221 Amortization of bond discount, net (3,661) (4,308) Net realized gains on sale of investments (7,759) (6,088) Deferred income taxes (47,058) 10,572 Other, net (69,467) (6,228) --------- ---------- Total adjustments to net income 19,316 7,138 --------- ---------- Net cash provided by operating activities 41,725 118,946 --------- ---------- Cash flows from investing activities: Purchase of fixed-maturity securities, net of payable for investments purchased (555,620) (390,951) Sale of fixed-maturity securities, net of receivable for investments sold 321,916 251,987 Redemption of fixed-maturity securities, net of receivable for investments redeemed 100,133 62,178 Purchase of short-term investments, net 100,989 (34,971) Sale of other investments, net 643 226 Capital expenditures, net of disposals (6,196) (2,041) --------- ---------- Net cash used in investing activities (38,135) (113,572) --------- ---------- Net increase in cash and cash equivalents 3,590 5,374 Cash and cash equivalents - beginning of period 6,546 3,983 --------- ---------- Cash and cash equivalents - end of period $ 10,136 $ 9,357 ========= ========== Supplemental cash flow disclosures: Income taxes paid $ 1,523 $ 1,565
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, 1998. 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 three months ended March 31, 1999 may not be indicative of the results that may be expected for the year ending December 31, 1999. The December 31, 1998 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 three months ended March 31, 1999. 3. Unallocated Loss Reserve Methodology Update - ----------------------------------------------- The company completed an update of its unallocated loss reserving methodology. The update included an analysis of loss-reserve factors based on the latest available industry data. The company included the analysis of historical default and recovery experience for the relevant sectors of the fixed-income market. Also factored in was the changing mix of our book of business. The study resulted in an increase in the company's quarterly loss provision and a one-time charge of $153 million to incorporate the new factors on the existing insured portfolio. -7- -----END PRIVACY-ENHANCED MESSAGE-----