-----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, Tvopb9Tm7G5yBdVG6OPYOWL1O4VCYqkfdMZvbnT1/vTuvPInLOe0rZa6xnWXW8Cv BgzKvK76uCGgn2Q604pZlA== 0000814585-99-000010.txt : 19990816 0000814585-99-000010.hdr.sgml : 19990816 ACCESSION NUMBER: 0000814585-99-000010 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990813 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: 99687272 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 2Q99 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 June 30, 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 August 9, 1999 there were outstanding 99,916,143 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 - June 30, 1999 and December 31, 1998 3 Consolidated Statements of Income - Three months and six months ended June 30, 1999 and 1998 4 Consolidated Statement of Changes in Shareholders' Equity - Six months ended June 30, 1999 5 Consolidated Statements of Cash Flows - Six months ended June 30, 1999 and 1998 6 Notes to Consolidated Financial Statements 7 - 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 - 22 PART II OTHER INFORMATION, AS APPLICABLE Item 6. Exhibits and Reports on Form 8-K 23 SIGNATURES 24 (2) MBIA INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) (Dollars in thousands except per share amounts)
June 30,1999 December 31, 1998 -------------- ------------------ Assets Investments: Fixed-maturity securities held as available-for-sale at fair value (amortized cost $5,881,907 and $5,565,060) $5,917,570 $5,884,053 Short-term investments, at amortized cost (which approximates fair value) 198,570 423,194 Other investments 79,816 94,975 -------------- -------------- 6,195,956 6,402,222 Municipal investment agreement portfolio held as available-for-sale at fair value (amortized cost $3,977,683 and $3,542,077) 3,969,767 3,678,229 -------------- -------------- TOTAL INVESTMENTS 10,165,723 10,080,451 Cash and cash equivalents 66,029 20,757 Securities borrowed or purchased under agreements to resell 424,881 538,281 Accrued investment income 127,985 126,990 Deferred acquisition costs 234,685 230,085 Prepaid reinsurance premiums 389,864 352,699 Goodwill (less accumulated amortization of $65,974 and $62,423) 119,640 120,681 Property and equipment, at cost (less accumulated depreciation of $44,759 and $39,934) 92,497 81,457 Receivable for investments sold 72,359 49,497 Other assets 115,713 195,666 -------------- -------------- TOTAL ASSETS $11,809,376 $11,796,564 ============== ============== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Deferred premium revenue $2,273,196 $2,251,211 Loss and loss adjustment expense reserves 428,745 270,114 Municipal investment agreements 2,953,179 2,587,339 Municipal repurchase agreements 990,207 897,718 Long-term debt 689,055 688,996 Securities loaned or sold under agreements to repurchase 424,881 573,352 Deferred income taxes 103,080 343,896 Deferred fee revenue 41,362 42,964 Payable for investments purchased 158,539 95,598 Other liabilities 199,973 253,159 -------------- -------------- TOTAL LIABILITIES 8,262,217 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 -- 99,919,916 and 99,569,625 99,920 99,570 Additional paid-in capital 1,184,310 1,169,192 Retained earnings 2,272,511 2,246,221 Accumulated other comprehensive income, net of deferred income tax provision of $8,129 and $157,410 2,196 288,915 Unallocated ESOP shares (4,687) (4,044) Unearned compensation--restricted stock (6,723) (6,807) Treasury stock, at cost; 8,320 and 21,717 shares (368) (830) -------------- -------------- TOTAL SHAREHOLDERS' EQUITY 3,547,159 3,792,217 -------------- -------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $11,809,376 $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 Six months ended June 30 June 30 ---------------------------- ---------------------------- 1999 1998 1999 1998 ------------- ------------- ------------- ------------- INSURANCE Revenues: Gross premiums written $146,817 $199,040 $301,727 $320,427 Ceded premiums (35,356) (27,280) (95,352) (41,613) ------------- ------------- ------------- ------------- Net premiums written 111,461 171,760 206,375 278,814 (Increase) decrease in deferred premium revenue (4,244) (67,147) 12,953 (74,559) ------------- ------------- ------------- ------------- Premiums earned (net of ceded premiums of $27,738, $17,750, $58,187, and $33,417) 107,217 104,613 219,328 204,255 Net investment income 88,861 80,598 176,626 163,004 Net realized gains 6,148 7,802 15,083 13,892 Advisory fees 6,550 7,223 11,515 13,439 ------------- ------------- ------------- ------------- Total insurance revenues 208,776 200,236 422,552 394,590 Expenses: Losses and loss adjustment 10,239 10,344 172,169 15,585 Policy acquisition costs, net 9,231 9,015 18,424 18,455 Operating 20,115 15,934 38,213 33,898 ------------- ------------- ------------- ------------- Total insurance expenses 39,585 35,293 228,806 67,938 ------------- ------------- ------------- ------------- Insurance income 169,191 164,943 193,746 326,652 ------------- ------------- ------------- ------------- INVESTMENT MANAGEMENT SERVICES Revenues 20,301 15,956 39,643 29,992 Expenses 10,762 9,046 20,729 17,644 ------------- ------------- ------------- ------------- Operating income 9,539 6,910 18,914 12,348 Net realized gains 1,143 646 1,872 7,092 ------------- ------------- ------------- ------------- Investment management services income 10,682 7,556 20,786 19,440 ------------- ------------- ------------- ------------- MUNICIPAL AND FINANCIAL SERVICES Revenues 6,310 7,781 9,989 17,394 Expenses 9,417 9,998 20,383 19,865 ------------- ------------- ------------- ------------- Municipal and financial services loss (3,107) (2,217) (10,394) (2,471) ------------- ------------- ------------- ------------- CORPORATE Interest expense 13,497 10,360 26,993 20,793 Other expenses 4,888 860 6,810 4,188 One-time corporate charges 105,023 --- 105,023 29,500 ------------- ------------- ------------- ------------- Corporate expenses (123,408) (11,220) (138,826) (54,481) ------------- ------------- ------------- ------------- Income before income taxes 53,358 159,062 65,312 289,140 Income tax provision (benefit) (3,435) 40,033 (901) 68,006 ------------- ------------- ------------- ------------- NET INCOME $ 56,793 $119,029 $ 66,213 $221,134 ============= ============= ============= ============= NET INCOME PER COMMON SHARE: BASIC $ 0.57 $ 1.20 $ 0.66 $ 2.24 DILUTED $ 0.56 $ 1.19 $ 0.66 $ 2.21 WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING: BASIC 99,671,350 98,856,394 99,609,359 98,773,066 DILUTED 100,592,588 100,213,085 100,532,884 100,132,847
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 six months ended June 30, 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 --- --- --- 66,213 --- Other comprehensive income: Change in unrealized appreciation of investments net of change in deferred income taxes of $149,281 --- --- --- --- (277,875) Change in foreign currency translation --- --- --- --- (8,844) Other comprehensive income Total comprehensive income Exercise of stock options 284 284 11,187 --- --- Stock issued for acquistion 38 38 2,492 --- --- Unallocated ESOP shares 13 13 392 --- --- Unearned compensation- restricted stock 15 15 1,047 --- --- Dividends (declared and paid per common share $0.40) --- --- --- (39,923) --- ------------ ----------- ------------ ----------- ------------ Balance, June 30, 1999 99,920 $99,920 $1,184,310 $2,272,511 $ 2,196 ============ =========== ============ =========== ============ 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 --- --- --- --- 66,213 Other comprehensive income: Change in unrealized appreciation of investments net of change in deferred income taxes of $149,281 --- --- --- --- (277,875) Change in foreign currency translation --- --- --- --- (8,844) ------------- Other comprehensive income (286,719) ------------- Total comprehensive income (220,506) ------------- Exercise of stock options --- --- --- --- 11,471 Stock issued for acquistion --- --- --- --- 2,530 Unallocated ESOP shares (643) --- 14 462 224 Unearned compensation- restricted stock --- 84 --- --- 1,146 Dividends (declared and paid per common share $0.40) --- --- --- --- (39,923) --------- ----------- ----------- -------- ------------- Balance, June 30, 1999 $(4,687) $(6,723) (8) ($368) $3,547,159 ========= =========== =========== ======== ============= 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, net of taxes $(261,416) Reclassification of adjustment, net of taxes (16,459) ------------ Net unrealized depreciation, net of taxes $(277,875) ============
(5) MBIA INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands)
Six months ended June 30 -------------------------------------- 1999 1998 --------------- --------------- Cash flows from operating activities: Net income $ 66,213 $ 221,134 Adjustments to reconcile net income to net cash provided by operating activities: Increase in accrued investment income (995) (882) Increase in deferred acquisition costs (4,600) (10,715) Increase in prepaid reinsurance premiums (37,165) (8,196) Increase in deferred premium revenue 24,212 82,755 Increase in loss and loss adjustment expense reserves 158,631 12,479 Depreciation 4,923 3,737 Amortization of goodwill 3,552 4,215 Amortization of bond discount, net (10,092) (10,813) Net realized gains on sale of investments (16,955) (20,984) Deferred income taxes (91,287) 10,691 Other, net 19,198 (36,670) --------------- --------------- Total adjustments to net income 49,422 25,617 --------------- --------------- Net cash provided by operating activities 115,635 246,751 --------------- --------------- Cash flows from investing activities: Purchase of fixed-maturity securities, net of payable for investments purchased (3,512,961) (1,146,307) Sale of fixed-maturity securities, net of receivable for investments sold 3,145,933 532,468 Redemption of fixed-maturity securities, net of receivable for investments redeemed 161,559 415,571 Sale of short-term investments, net 168,968 27,758 Sale of other investments, net 17,613 286 Purchases for municipal investment agreement portfolio, net of payable for investments purchased (1,275,646) (1,216,038) Sales from municipal investment agreement portfolio, net of receivable for investments sold 849,215 1,014,644 Capital expenditures, net of disposals (15,964) (8,381) Other, net (2,173) (20,235) --------------- --------------- Net cash used by investing activities (463,456) (400,234) --------------- --------------- Cash flows from financing activities: Net proceeds from issuance of short-term debt --- 9,500 Dividends paid (39,874) (36,851) Proceeds from issuance of municipal investment and repurchase agreements 1,258,565 1,186,896 Payments for drawdowns of municipal investment and repurchase agreements (801,998) (1,034,426) Securities loaned or sold under agreements to repurchase (35,071) 31,800 Exercise of stock options 11,471 16,882 --------------- --------------- Net cash provided by financing activities 393,093 173,801 --------------- --------------- Net increase in cash and cash equivalents 45,272 20,318 Cash and cash equivalents - beginning of period 20,757 26,296 --------------- --------------- Cash and cash equivalents - end of period $ 66,029 $ 46,614 =============== =============== Supplemental cash flow disclosures: Income taxes paid $ 88,999 $ 62,684 Interest paid: Municipal investment and repurchase agreements $ 102,293 $ 104,171 Long-term debt 26,144 20,012 Short-term debt --- 567
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 six months ended June 30, 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 six months ended June 30, 1999 were $39.9 million. 3. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board 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 all fiscal quarters of all fiscal years beginning after June 15, 2000. The company will adopt SFAS 133 by July 1, 2000. Adoption of SFAS 133 is not expected to have a material impact on the consolidated financial statements. (7) MBIA INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. Capital Asset Write-off During the second quarter of 1999 the company incurred a pre-tax charge of $102.0 million consisting of a substantial write-down of the carrying value of MBIA's investment in Capital Asset and the value of the loans provided by MBIA to Capital Asset. Since December of 1998, MBIA has been seeking purchasers for all or a portion of its interest in Capital Asset, which purchases and services delinquent tax liens. This charge reflects management's best estimate of its cost of exiting this business. 5. Subsequent Event In July 1999, MBIA's Board of Directors authorized the repurchase of up to 7.5 million of outstanding common shares. The company will only repurchase shares under this program when it is economically attractive and within the constraints of the company's Triple-A claims-paying ratings. (8) MBIA INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION - ------------ MBIA Inc. (the company) continued to take actions which position it for long-term profitable growth during this foundation building year. As a result of strengthening our loss reserves and an increased utilization of reinsurance during the first half of the year, we have solidified our financial position. Our insurance premiums were written at higher margins with better returns, achieved by maintaining our disciplined approach to pricing and risk selection. In addition to the solid results achieved in our insurance operations, we are pleased with the strong performance of our investment management operations. We are disappointed in our municipal and financial services results and have taken the decisive action needed to reduce our financial exposure to these businesses. We believe these actions, coupled with the active management of our capital position and our strong business prospects, will enable us to continue to build significant shareholder value over the long-term. RESULTS OF OPERATIONS - --------------------- SUMMARY As we discussed in the first quarter, our financial results continue to be adversely impacted by the increase in our loss reserving factor, heavier use of reinsurance and losses in our municipal and financial services segment. This has resulted in growth rates well below our targeted levels for all of the financial measures shown in the following chart. 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 --------------------------- 2nd Quarter Year-to-date ----------- ------------ 2nd Quarter June 30 1999 1999 ----------- ------------ vs. vs. 1999 1998 1999 1998 1998 1998 -------------------------------------------------------------------------------------------------- Net income (in millions): As reported $ 57 $119 $ 66 $221 (52)% (70)% Excluding one-time charges $122 $119 $246 $240 2 % 2 % Per share data: Net income *: As reported $0.56 $1.19 $ 0.66 $ 2.21 (53)% (70)% Excluding one-time charges $1.21 $1.19 $ 2.45 $ 2.40 2 % 2 % Operating earnings $1.16 $1.14 $ 2.34 $ 2.26 2 % 4 % Core earnings $1.07 $1.04 $ 2.11 $ 2.08 3 % 1 % Book value $35.56 $36.13 (2)% Adjusted book value $51.52 $50.67 2 % --------------------------------------------------------------------------------------------------
*Diluted (9) MBIA INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Core earnings, which exclude the effects of refundings and calls on our insured issues, realized capital gains and losses from our investment portfolio and nonrecurring charges, provide the most indicative measure of our underlying profit. For the second quarter and first half of 1999, core earnings per share were up by 3% and 1%, respectively. Our second quarter and first half 1999 earnings per share increased by 2% excluding one-time charges. Including the one-time charges, earnings per share decreased by 53% and 70% over second quarter and first half 1998. Operating earnings per share, which exclude the impact of realized gains and losses and one-time charges, increased by 2% and 4% over second quarter and first half 1998. Our book value at June 30, 1999 was $35.56 per share, down slightly from $36.13 at June 30, 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 June 30, June 30, -------------- 1999 1998 1999 vs. 1998 - ------------------------------------------------------------------------ Book value $35.56 $36.13 ( 2)% After-tax value of: Net deferred premium revenue, net of deferred acquisition costs 10.74 10.82 ( 1)% Present value of future installment premiums* 4.33 3.77 15 % Unrealized gain on investment contract liabilities** 0.89 (0.05) n/m - ------------------------------------------------------------------------ Adjusted book value $51.52 $50.67 2 % - ------------------------------------------------------------------------ * 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 $51.52 at June 30, 1999, a 2% increase from June 30, 1998. (10) MBIA INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) FINANCIAL GUARANTEE INSURANCE For the first half of 1999 our top line results reflect an overall decline in new issuance in most market sectors, pricing discipline and tightened underwriting standards, and the volatility of writings in our international business line. Adjusted gross premiums written (AGP) were down 15% and 42% for the first six months and the second quarter of 1999, respectively. While writings were down, par insured was down even more - 25% for the first half and 48% for the quarter. This favorable premium to par relationship results in more premium for each dollar of risk insured and is consistent with our strategy to improve profitability on the business we write. Furthermore, comparison is made difficult due to last year's exceptionally strong second quarter writings. 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 second quarters and first six months of 1999 and 1998 is presented in the following table: Percent Change -------------------------- 2nd Quarter Year-to-date ---------- ------------ 2nd Quarter June 30 1999 1999 ----------- ------------ vs. vs. 1999 1998 1999 1998 1998 1998 ----------------------------------------------------------------------------- Premiums written: GPW $147 $199 $302 $320 (26)% ( 6)% AGP $144 $246 $326 $384 (42)% (15)% We estimate the present value of our total future installment premium stream on outstanding policies to be $664 million at June 1999, compared to $575 million at June 1998. MUNICIPAL MARKET For the first half, pricing remained well above last year's level, up over 30% year to date across the portfolio. With respect to credit quality, for the first six months of this year our capital charge, which is an indicator of the risk profile of the mix as well as the quality of the business we are putting on the books, is the lowest it has been for many years. We are pleased to see a modest rebound in our market share to 28.0% for the quarter, up from 21.5% for the first quarter of this year. This brings our market share to (11) MBIA INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 24.4% for the first half. We experienced a decline of 40% in our AGP in the second quarter compared to the same period last year; however, par insured was down even more sharply, by 56%, highlighting the success of our strategy to write more profitable business. A more relevant measure is year to date AGP, which is off by only 16% compared to our insured par decline of 40% and the total new issue market decline of 29%. Overall, MBIA had a strong performance in a quiet market. 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:
Percent Change -------------------------- 2nd Quarter Year-to-date ---------- ------------ 2nd Quarter June 30 1999 1999 ----------- ------------ vs. vs. Domestic Municipal 1999 1998 1999 1998 1998 1998 ------------------------------------------------------------------------------------------------- Total new issue market:* Par value (in billions) $46 $ 72 $ 99 $138 (36)% (29)% Insured penetration 54% 55% 56% 53% MBIA insured: Par value (in billions) $ 8 $ 19 $ 17 $ 29 (56)% (40)% Premiums: (in millions) GPW $80 $137 $168 $204 (41)% (18)% AGP $84 $140 $174 $208 (40)% (16)% -------------------------------------------------------------------------------------------------
* 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 In our structured finance division we continued to extend the pricing discipline begun in the first quarter and we also steadily increased the overall credit quality of our book of business. While AGP was down 21% for the quarter, par insured was down even more, at 31%. This relationship partially reflects not only a shift in the business mix to higher priced asset types, but also is an indication of pricing discipline. 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: (12) MBIA INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Percent Change -------------------------- 2nd Quarter Year-to-date ---------- ------------ 2nd Quarter June 30 1999 1999 Domestic ----------- ------------ vs. vs. Structured Finance 1999 1998 1999 1998 1998 1998 - --------------------------------------------------------------------------------------------------- Total asset-backed market:* Par value (in billions) $50 $46 $99 $83 8 % 20 % MBIA insured: Par value (in billions) $ 9 $12 $20 $21 (31)% (5)% Premiums: (in millions) GPW $32 $31 $69 $61 3 % 13 % AGP $41 $52 $80 $80 (21)% --- --------------------------------------------------------------------------------------------------
* Market data exclude mortgage-backed securities and private placements. INTERNATIONAL MARKET The MBIA/AMBAC Joint Venture's business can be volatile since a relatively small number of international deals close in any quarter, and a single international deal often commands a significant amount of AGP. The result is that writings can vary sharply from period to period. Our company's municipal and structured finance international business volume in the new issue and secondary markets is illustrated as follows:
Percent Change -------------------------- 2nd Quarter Year-to-date ---------- ------------ 2nd Quarter June 30 1999 1999 ----------- ------------ vs. vs. International 1999 1998 1999 1998 1998 1998 ------------------------------------------------------------------------------------------------- Par value (in billions) $ 2 $ 4 $ 5 $ 7 (54)% (31)% Premiums: (in millions) GPW $27 $21 $49 $40 27 % 22 % AGP $12 $42 $55 $81 (71)% (32)% -------------------------------------------------------------------------------------------------
REINSURANCE Premiums ceded to reinsurers from all insurance operations were $95 million and $42 million in the first halves of 1999 and 1998, respectively. Cessions as a percentage of GPW increased to 32% in 1999 from 13% 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 and we are freeing up capacity to write additional business. (13) MBIA INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 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 5% and 6% over second quarter and first half 1998. Refunded premiums increased in the first half 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 -------------------------- 2nd Quarter Year-to-date ---------- ------------ 2nd Quarter June 30 1999 1999 ----------- ------------ vs. vs. In millions 1999 1998 1999 1998 1998 1998 - ------------------------------------------------------------------------------------------------- Premiums earned: Scheduled $ 92 $ 88 $181 $171 5 % 6% Refunded 15 17 38 33 (9)% 16% - ------------------------------------------------------------------------------------------------- Total $107 $105 $219 $204 2 % 7% - -------------------------------------------------------------------------------------------------
INVESTMENT INCOME Our insurance-related investment income (exclusive of capital gains) increased to $177 million in the first half of 1999, up 8% from $163 million in the first half of 1998. For the quarter investment income was up 10% over the same period in 1998. These increases were 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 $15 million and $6 million for the first half and second quarter of 1999, compared to $14 million and $8 million in the comparable periods 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. For the first half of 1999, advisory fee revenues decreased by 14%, 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. (14) MBIA INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) LOSSES AND LOSS ADJUSTMENT EXPENSES (LAE) We maintain an unallocated 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, are 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. In the first quarter of 1999 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 first quarter one-time charge of $153 million to incorporate the new factors on the existing insured portfolio. The following table shows the case-specific and unallocated components of our total loss and LAE reserves at the end of the second quarters of 1999 and 1998: Percent Change June 30, June 30, -------------- In millions 1999 1998 1999 vs. 1998 - ------------------------------------------------------------------------ Reserves: Case-specific $187 $ 38 399% Unallocated 242 78 210% - ------------------------------------------------------------------------ Total $429 $116 271% Provision $172 $ 16 1,005% - ------------------------------------------------------------------------ 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: (15) MBIA INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Percent Change -------------------------- 2nd Quarter Year-to-date ---------- ------------ 2nd Quarter June 30 1999 1999 ----------- ------------ vs. vs. In millions 1999 1998 1999 1998 1998 1998 - ------------------------------------------------------------------------------------------------- Policy acquisition costs, net $ 9 $ 9 $18 $18 --- --- Operating 20 16 39 34 26% 13% ------------------------------------------------------------------------------------------------ Total insurance operating expenses $29 $25 $57 $52 18% 8% Expense ratio: GAAP 27.4% 23.8% 25.8% 25.6% Statutory 24.4% 14.4% 22.8% 18.2% ------------------------------------------------------------------------------------------------
For the first half of 1999, policy acquisition costs net of deferrals remained even with the first half of 1998. The ratio of policy acquisition costs net of deferrals to earned premiums has declined from 9.0% for the first half of 1998 to 8.4% for the first half of 1999. This decline reflects the positive impact of increases in both installment premium revenues and ceding commission income. Operating expenses were up by 13% for the first half of 1999 over 1998 due in part to expanded international operations. 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. Although our insurance operating expenses were up only 8% on a GAAP basis and in fact declined by 10% on a statutory basis, our first half 1999 expense ratios are not showing improvement over 1998. This is due to the decline in premium volume from period to period. INSURANCE INCOME MBIA's insurance income was $169 million for the second quarter of 1999, 3% higher than the second quarter of 1998. Excluding the one-time loss provision increase, insurance income for the first half of 1999 grew by 6% over the first half of 1998. 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 for this segment increased by 38% and 53% for the second quarter and first half of 1999 over the same periods in 1998. The table below summarizes our consolidated investment management results: (16) MBIA INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Percent Change -------------------------- 2nd Quarter Year-to-date ---------- ------------ 2nd Quarter June 30 1999 1999 ----------- ------------ vs. vs. In millions 1999 1998 1999 1998 1998 1998 - ----------------------------------------------------------------------------- Revenues $20 $16 $40 $30 27% 32 % Expenses 10 9 21 18 19% 17 % - ----------------------------------------------------------------------------- Operating income 10 7 19 12 38% 53 % Realized gains 1 1 2 7 --- (74)% - ----------------------------------------------------------------------------- Income $11 $ 8 $21 $19 41% 7 % - ----------------------------------------------------------------------------- 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 $9.4 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 June 30, 1999 had $6.7 billion in assets under management, up 21% over June 30, 1998's $5.5 billion. 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 June 30, 1999, principal and accrued interest outstanding on investment and repurchasing agreements was $3.9 billion, compared to $3.3 billion at June 30, 1998. At amortized cost, the assets supporting IMC's investment agreement were at $4.0 billion and $3.5 billion at June 30, 1999 and 1998, 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 second quarter-end 1999, our exposure to derivative financial instruments was not material. (17) MBIA INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 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 June 30, 1999, CMC's third party assets under management were $1.6 billion compared to $0.9 billion at June 30, 1998. MUNICIPAL AND FINANCIAL SERVICES MBIA MUNISERVICES COMPANY (MBIA MuniServices) 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, and Municipal Resource Consultants (MRC), a revenue audit and information services firm. MuniServices' second quarter $3 million loss on the sale of MuniFinancial has been included in one-time corporate charges. MBIA's Municipal and Financial Services also includes an equity interest in Capital Asset Holdings, Inc. (Capital Asset), a purchaser and servicer of delinquent tax certificates. Included in one-time corporate charges is a substantial write-off of our investment in Capital Asset. In the second quarter and first half of 1999 the municipal and financial services operations lost $3 million and $10 million, respectively. These operations will continue to be under strategic review throughout the remainder of 1999. CORPORATE OTHER EXPENSES Other expenses are composed primarily of non-insurance goodwill amortization and general corporate overhead. In the first half of 1999 other expenses were $7 million compared to $4 million in the first half of 1998. INTEREST EXPENSE In the first half of 1999, we incurred $27 million of interest expense compared to $21 million in the first half 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. ONE-TIME CORPORATE CHARGES Included in one-time corporate charges for the second quarter and first half of 1999 is a $102 million charge which reflects a write-down of the carrying value of MBIA's investment in Capital Asset and the value of the loans provided by MBIA to Capital Asset. This charge represents management's best estimate of our cost to exit this business. Also included in one-time corporate charges for 1999 is a $3 million loss on the sale of MuniFinancial. MBIA expects to complete the sale of MuniFinancial in the third quarter of 1999. The one-time charge of $30 million in 1998 was related to the CapMAC merger. (18) MBIA INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) TAXES Our tax policy is to optimize our after-tax income by maintaining the appropriate mix of taxable and tax-exempt investments. However, we will see our tax rate fluctuate from time-to-time as we manage our investment portfolio on a total return basis. For both the second quarter and first half of 1999 our tax provision is net of the benefit resulting from the one-time corporate charges just discussed. Excluding this benefit our effective tax rates for both the second quarter and first half have declined marginally over 1998. 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 June 30, 1999, our total shareholders' equity was $3.5 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: June 30, December 31, 1999 1998 - --------------------------------------------------------------- Long-term debt (in millions) $689 $689 Long-term debt to total capital 16% 15% In addition, MBIA Insurance Corporation (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. 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 $8.1 billion, a 13% increase over second quarter end 1998. In July 1999, MBIA's Board of Directors authorized the repurchase of up to 7.5 million of outstanding common shares. The company will only repurchase shares under this program when it is economically attractive and within the constraints of the company's Triple-A claims-paying ratings. MBIA had approximately 100 million shares outstanding as of June 30, 1999. (19) 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 half of 1999, operating cash flow totaled $116 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 second quarter our insurance company paid dividends of $60 million and at June 30, 1999 had dividend capacity in excess of $173 million without special regulatory approval. Our company has significant liquidity supporting its businesses. At the end of second quarter of 1999, cash equivalents and short-term investments totaled $265 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 June 30, 1999, there were no balances outstanding under these lines. 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 June 30, 1999, the fair value of our consolidated investment portfolio was $10.2 billion, as shown below: Percent Change June 30, December 31, -------------- In millions 1999 1998 1999 vs. 1998 - ----------------------------------------------------------------------------- Insurance operations: Amortized cost $ 6,160 $ 6,083 1 % Unrealized gain 36 319 (89)% - ----------------------------------------------------------------------------- Fair value $ 6,196 $ 6,402 ( 3)% - ----------------------------------------------------------------------------- Municipal investment agreements: Amortized cost $ 3,978 $ 3,542 12 % Unrealized (loss) gain (8) 136 (106)% - ----------------------------------------------------------------------------- Fair value $ 3,970 $ 3,678 8 % - ----------------------------------------------------------------------------- Total portfolio at fair value $10,166 $10,080 1 % (20) MBIA INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The growth of our insurance-related investments at amortized cost in 1999 was the result of positive cash flows. The lower fair value is the result of the decline in the unrealized gain caused by higher interest rates at June 30, 1999. The fair value of investments related to our municipal investment agreement business increased to $4.0 billion primarily due to positive cash flow from operations partially offset by a decrease in the fair value of these investments. 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. As of June 30, 1999, the company has spent $752,000 on the project. A recent review of efforts at certain subsidiaries has indicated the need to spend an additional $1.03 million this year on remediation. As of June 30, 1999, the company has spent $176,000 of this additional amount. However, this increase will not have a material effect on MBIA's financial results. 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. (21) MBIA INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 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 in the second quarter of 1999; and contingency planning -- to be completed in the third 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 is being carried out 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. (22) 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 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. (23) 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: August 12, 1999 /s/ Neil G. Budnick -------------------------- ------------------------- Neil G. Budnick Chief Financial Officer and Treasurer Date: August 12, 1999 /s/ Elizabeth B. Sullivan -------------------------- -------------------------- Elizabeth B. Sullivan Managing Director, Controller (Principal Accounting Officer) (24) EX-11 2 2Q99 - EX-11 EXHIBIT 11 MBIA INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE ASSUMING DILUTION (In thousands except per share amounts)
SIX MONTHS ENDED JUNE 30 ------------------------------------------ 1999 1998 ----------------- ------------------ Net income $66,213 $221,134 ================= ================== Diluted weighted average shares: Basic weighted average shares outstanding 99,609 98,773 Effect of stock options 924 1,360 ----------------- ------------------ Diluted weighted average shares: 100,533 100,133 ================= ================== Basic EPS $ 0.66 $ 2.24 ================= ================== Diluted EPS $ 0.66 $ 2.21 ================= ==================
EX-27 3 FDS -- 2Q99
7 0000814585 MBIA Inc. 1,000 U.S. Dollars 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 1 5,917,570 0 0 0 0 0 10,165,723 66,029 0 234,685 11,809,376 428,745 2,273,196 0 0 689,055 0 0 99,920 3,447,239 11,809,376 219,328 176,626 15,083 63,019 172,169 18,424 38,213 65,312 (901) 66,213 0 0 0 66,213 0.66 0.66 0 0 0 0 0 0 0
EX-99 4 2QTR99 MBIA CORPGAAP MBIA INSURANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 1999 AND DECEMBER 31, 1998 AND FOR THE PERIODS ENDED JUNE 30, 1999 AND 1998 MBIA INSURANCE CORPORATION AND SUBSIDIARIES INDEX ----- PAGE ---- Consolidated Balance Sheets - June 30, 1999 and December 31, 1998 (Unaudited) 3 Consolidated Statements of Income - Three months and six months ended June 30, 1999 and 1998 (Unaudited) 4 Consolidated Statement of Changes in Shareholder's Equity - Six months ended June 30, 1999 (Unaudited) 5 Consolidated Statements of Cash Flows - Six months ended June 30, 1999 and 1998 (Unaudited) 6 Notes to Consolidated Financial Statements (Unaudited) 7 MBIA INSURANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) (Dollars in thousands except per share amounts)
JUNE 30, 1999 DECEMBER 31, 1998 ----------------- ------------------- ASSETS Investments: Fixed-maturity securities held as available-for-sale at fair value (amortized cost $5,867,422 and $5,565,060) $5,903,073 $5,884,053 Short-term investments, at amortized cost (which approximates fair value) 198,244 423,188 Other investments 8,699 17,850 -------------- ------------- TOTAL INVESTMENTS 6,110,016 6,325,091 Cash and cash equivalents 37,575 6,546 Securities purchased under agreements to resell 217,000 187,500 Accrued investment income 91,264 91,239 Deferred acquisition costs 234,685 230,085 Prepaid reinsurance premiums 389,864 352,699 Goodwill (less accumulated amortization of $54,468 and $52,031) 88,512 90,950 Property and equipment, at cost (less accumulated depreciation of $26,971 and $23,840) 83,396 71,952 Receivable for investments sold 16,636 33,880 Other assets 160,427 97,970 -------------- ------------- TOTAL ASSETS $7,429,375 $7,487,912 ============== ============= LIABILITIES AND SHAREHOLDER'S EQUITY Liabilities: Deferred premium revenue $2,273,196 $2,251,211 Loss and loss adjustment expense reserves 428,745 270,114 Securities sold under agreements to repurchase 217,000 187,500 Deferred income taxes 147,735 303,407 Deferred fee revenue 32,148 33,785 Payable for investments purchased 42,944 29,523 Other liabilities 92,234 135,027 -------------- ------------- TOTAL LIABILITIES 3,234,002 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 1,504,162 1,491,033 Retained earnings 2,666,214 2,566,222 Accumulated other comprehensive income, net of deferred income tax provision of $12,354 and $112,283 9,997 205,090 -------------- ------------- TOTAL SHAREHOLDER'S EQUITY 4,195,373 4,277,345 -------------- ------------- TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $7,429,375 $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 Six Months Ended June 30 June 30 ------------------------------ -------------------------- 1999 1998 1999 1998 ---------------- ----------- ------------ ----------- Revenues: Gross premiums written $146,817 $267,005 $301,727 $368,646 Ceded premiums (35,356) (27,043) (95,352) (34,829) ---------------- ------------ ------------ ------------ Net premiums written 111,461 239,962 206,375 333,817 (Increase)decrease in deferred premium revenue (4,244) (135,349) 12,953 (144,305) ---------------- ------------ ------------ ------------ Premiums earned (net of ceded premiums of $27,738, $19,282 $58,187, and $27,068) 107,217 104,613 219,328 189,512 Net investment income 88,530 80,626 176,537 157,593 Net realized gains 10,005 7,804 17,764 13,892 Advisory fees 4,050 9,803 9,015 11,273 Other 6 (62) 6 (20) ---------------- ------------ ------------ ------------ Total revenues 209,808 202,784 422,650 372,250 ---------------- ------------ ------------ ------------ Expenses: Losses and loss adjustment 10,239 10,344 172,169 14,563 Policy acquisition costs, net 9,231 9,014 18,424 17,010 Operating 18,787 14,289 36,885 28,545 ---------------- ------------ ------------ ------------ Total expenses 38,257 33,647 227,478 60,118 ---------------- ------------ ------------ ------------ Income before income taxes 171,551 169,137 195,172 312,132 Provision for income taxes 33,968 33,772 35,180 64,959 ---------------- ------------ ------------ ------------ Net income $137,583 $135,365 $159,992 $247,173 ================ ============ ============ ============
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 six months ended June 30, 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 --- --- --- 159,992 --- 159,992 Other comprehensive income: Change in unrealized appreciation of investments net of change in deferred income taxes of $99,929 --- --- --- --- (186,222) (186,222) Change in foreign currency translation --- --- --- --- (8,871) (8,871) ------------- Other comprehensive income (195,093) ------------- Comprehensive income (35,101) Divedends declared (per common share $600) --- --- --- (60,000) --- (60,000) Tax reduction related to tax sharing agreement with MBIA Inc. --- --- 13,129 --- --- 13,129 -------- ------- ---------- ---------- ----------- ------------- Balance, June 30, 1999 100,000 $15,000 $1,504,162 $2,666,214 $9,997 $4,195,373 ======== ======= ========== ========== =========== ============= Disclosure of reclassification amount: Unrealized depreciation of investments arising during the period, net of taxes $(170,788) Reclassification of adjustment, net of taxes (15,434) --------- Net unrealized depreciation, net of taxes $(186,222) =========
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)
Six months ended June 30 ------------------------ 1999 1998 --------- --------- Cash flows from operating activities: Net income $159,992 $247,173 Adjustments to reconcile net income to net cash provided by operating activities: Increase in accrued investment income (25) (6,826) Increase in deferred acquisition costs (4,600) (72,780) Increase in prepaid reinsurance premiums (37,165) (44,811) Increase in deferred premium revenue 24,212 189,116 Increase in loss and loss adjustment expense reserves 158,631 36,668 Depreciation 3,229 2,600 Amortization of goodwill 2,438 2,440 Amortization of bond discount, net (7,281) (6,734) Net realized gains on sale of investments (17,764) (13,892) Deferred income taxes (55,632) 12,398 Other, net (104,944) 48,049 ----------- ----------- Total adjustments to net income (38,901) 146,228 ----------- ----------- Net cash provided by operating activities 121,091 393,401 ----------- ----------- Cash flows from investing activities: Purchase of fixed-maturity securities, net of payable for investments purchased (1,109,536) (1,467,070) Sale of fixed-maturity securities, net of receivable for investments sold 754,752 521,860 Redemption of fixed-maturity securities, net of receivable for investments redeemed 161,559 415,194 (Purchase) sale of short-term investments, net 169,288 (30,585) Sale of other investments, net 8,553 68 Capital expenditures, net of disposals (14,678) (6,157) ----------- ----------- Net cash used by investing activities (30,062) (566,690) ----------- ----------- Cash flow from financing activities: Dividends paid (60,000) --- Capital contribution from MBIA Inc. --- 190,764 ----------- ----------- Net cash (used) provided by financing activities (60,000) 190,764 ----------- ----------- Net increase in cash and cash equivalents 31,029 17,475 ----------- ----------- Cash and cash equivalents - beginning of period 6,546 3,983 ----------- ----------- Cash and cash equivalents - end of period $ 37,575 $ 21,458 =========== =========== Supplemental cash flow disclosures: Income taxes paid $ 87,978 $ 61,474
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 six months ended June 30, 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 - ----------------------- Dividends declared and paid by the company during the six months ended June 30, 1999 were $60.0 million. 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 the company's book of business. The study resulted in an increase in the company's quarterly loss provision and a one-time charge in the first quarter of 1999 of $153 million to incorporate the new factors on the existing insured portfolio. (7) -----END PRIVACY-ENHANCED MESSAGE-----