EX-99.1 4 dex991.txt MBIA INSURANCE CORP. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS Exhibit 99.1 MBIA INSURANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 2002 AND DECEMBER 31, 2001 AND FOR THE PERIODS ENDED JUNE 30, 2002 AND 2001 MBIA INSURANCE CORPORATION AND SUBSIDIARIES I N D E X PAGE ---- Consolidated Balance Sheets - June 30, 2002 and December 31, 2001 (Unaudited) 3 Consolidated Statements of Income - Six months ended June 30, 2002 and 2001 (Unaudited) 4 Consolidated Statement of Changes in Shareholder's Equity - Six months ended June 30, 2002 (Unaudited) 5 Consolidated Statements of Cash Flows - Six months ended June 30, 2002 and 2001 (Unaudited) 6 Notes to Consolidated Financial Statements (Unaudited) 7-10 -2- MBIA INSURANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (dollars in thousands except per share amounts)
June 30, 2002 December 31, 2001 ------------- ----------------- Assets Investments: Fixed-maturity securities held as available-for-sale at fair value (amortized cost $6,698,530 and $6,707,183) $6,966,527 $6,839,389 Fixed-maturity securities pledged as collateral at fair value (amortized cost $452,712 and $465,670) 473,827 479,938 Short-term investments, at amortized cost (which approximates fair value) 416,743 284,321 Other investments 28,876 28,756 ---------- ---------- Total investments 7,885,973 7,632,404 Cash and cash equivalents 19,777 24,404 Securities purchased under agreements to resell 482,111 559,751 Accrued investment income 115,994 110,264 Deferred acquisition costs 287,209 277,699 Prepaid reinsurance premiums 510,343 507,079 Reinsurance recoverable on unpaid losses 39,927 35,090 Goodwill 76,938 76,538 Property and equipment, at cost (less accumulated depreciation of $58,841 and $53,618) 112,029 113,176 Receivable for investments sold 34,423 23,599 Other assets 166,405 100,284 ---------- ---------- Total assets $9,731,129 $9,460,288 ========== ========== Liabilities and Shareholder's Equity Liabilities: Deferred premium revenue $2,601,985 $2,565,096 Loss and loss adjustment expense reserves 530,775 518,389 Securities sold under agreements to repurchase 482,111 559,751 Deferred income taxes 303,001 249,169 Current income taxes -- 4,508 Deferred fee revenue 22,018 23,987 Payable for investments purchased 25,492 50,239 Other liabilities 222,092 263,260 ---------- ---------- Total liabilities 4,187,474 4,234,399 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 1,583,932 1,567,478 Retained earnings 3,772,302 3,572,397 Accumulated other comprehensive income, net of deferred income tax provision of $101,112 and $51,300) 172,421 71,014 ---------- ---------- Total shareholder's equity 5,543,655 5,225,889 Total liabilities and shareholder's equity $9,731,129 $9,460,288 ========== ==========
The accompanying notes are an integral part of the consolidated financial statements. -3- MBIA INSURANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (dollars in thousands)
Three months ended Six months ended June 30 June 30 ------------------- ------------------- 2002 2001 2002 2001 -------- -------- -------- -------- Revenues: Gross premiums written $205,812 $206,559 $392,584 $391,464 Ceded premiums (36,155) (42,996) (88,470) (98,145) -------- -------- -------- -------- Net premiums written 169,657 163,563 304,114 293,319 Increase in deferred premium revenue (31,888) (35,324) (27,307) (44,945) -------- -------- -------- -------- Premiums earned (net of ceded premiums of $43,093, $41,937, $85,961 and $80,253) 137,769 128,239 276,807 248,374 Net investment income 107,482 101,778 213,621 204,150 Net realized gains 2,391 486 1,383 5,045 Change in fair value of derivative instruments (8,268) (3,339) 4,636 (7,106) Advisory fees 11,525 12,194 17,812 18,186 Other 251 193 333 387 -------- -------- -------- -------- Total revenues 251,150 239,551 514,592 469,036 -------- -------- -------- -------- Expenses: Losses and loss adjustment 14,950 16,819 29,888 31,041 Amortization of deferred acquisition costs 11,022 10,259 22,145 19,870 Operating 20,736 19,675 38,509 37,730 -------- -------- -------- -------- Total expenses 46,708 46,753 90,542 88,641 -------- -------- -------- -------- Income before income taxes 204,442 192,798 424,050 380,395 Provision for income taxes 51,780 51,723 109,545 97,704 -------- -------- -------- -------- Income before cumulative effect of accounting change 152,662 141,075 314,505 282,691 Cumulative effect of accounting change -- -- -- (11,082) -------- -------- -------- -------- Net income $152,662 $141,075 $314,505 $271,609 ======== ======== ======== ========
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, 2002 (Dollars in thousands except per share amounts)
Accumulated Common Stock Additional Other Total ------------------ Paid-in Retained Comprehensive Shareholder's Shares Amount Capital Earnings Income Equity -------- ------- ---------- ---------- ------------- ------------- Balance, January 1, 2002 100,000 $15,000 $1,567,478 $3,572,397 $ 71,014 $5,225,889 Comprehensive income: Net income -- -- -- 314,505 -- 314,505 Other comprehensive income: Change in unrealized appreciation of investments net of change in deferred income taxes of $49,812 -- -- -- -- 92,494 92,494 Change in foreign currency translation -- -- -- -- 8,913 8,913 ---------- Other comprehensive income 101,407 ---------- Comprehensive income 415,912 Dividends declared (per common share $1,146.00) -- -- -- (114,600) -- (114,600) Fair value of stock options - FAS 123 -- -- 2,050 -- -- 2,050 Tax reduction related to tax sharing agreement with MBIA Inc. -- -- 14,404 -- -- 14,404 -------- ------- ---------- ---------- -------- ---------- Balance, June 30, 2002 100,000 $15,000 $1,583,932 $3,772,302 $172,421 $5,543,655 ======== ======= ========== ========== ======== ========== Disclosure of reclassification amount: Unrealized appreciation of investments arising during the period, net of taxes $ 96,431 Reclassification adjustment, net of taxes (3,937) -------- Net unrealized appreciation, net of taxes $ 92,494 ========
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 ------------------------- 2002 2001 ----------- ----------- Cash flows from operating activities: Net income $ 314,505 $ 271,609 Adjustments to reconcile net income to net cash provided by operating activities: Increase in accrued investment income (5,730) (2,367) Increase in deferred acquisition costs (9,510) (6,156) Increase in prepaid reinsurance premiums (3,265) (15,272) Increase in deferred premium revenue 30,572 60,217 Increase in loss and loss adjustment expense reserves, net 7,549 9,795 Depreciation 5,223 5,307 Goodwill -- 2,329 Amortization of bond discount, net (1,878) (1,878) Net realized gains on sale of investments (1,383) (5,044) Current income tax benefit (58,625) -- Deferred income tax provision (benefit) 3,784 (5,913) Fair value of derivative instruments (4,636) 7,106 Cumulative effect of acounting change, net -- 11,082 Other, net (18,767) 40,982 ----------- ----------- Total adjustments to net income (56,666) 100,188 ----------- ----------- Net cash provided by operating activities 257,839 371,797 ----------- ----------- Cash flows from investing activities: Purchase of fixed-maturity securities, net of payable for investments purchased (1,620,354) (1,832,800) Sale of fixed-maturity securities, net of receivable for investments sold 1,375,915 1,442,865 Redemption of fixed-maturity securities, net of receivable for investments redeemed 233,651 190,752 Purchase of short-term investments, net (132,422) (73,665) Purchase of other investments, net (362) (18,991) Capital expenditures, net of disposals (4,294) (2,237) ----------- ----------- Net cash used by investing activities (147,866) (294,076) ----------- ----------- Cash flows from financing activities: Dividends paid (114,600) (85,900) ----------- ----------- Net cash used by financing activities (114,600) (85,900) ----------- ----------- Net decrease in cash and cash equivalents (4,627) (8,179) Cash and cash equivalents - beginning of period 24,404 12,541 ----------- ----------- Cash and cash equivalents - end of period $ 19,777 $ 4,362 =========== =========== Supplemental cash flow disclosures: Income taxes paid $ 152,923 $ 88,485
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 accounting principles generally accepted in the United States of America. These statements should be read in conjunction with the Company's consolidated financial statements and notes thereto for the year ended December 31, 2001. The accompanying consolidated financial statements have not been audited by independent accountants in accordance with auditing standards generally accepted in the United States of America, 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, 2002 may not be indicative of the results that may be expected for the year ending December 31, 2002. The December 31, 2001 balance sheet was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. 2. Dividends Declared Dividends declared and paid by the Company during the six months ended June 30, 2002 were $114.6 million. 3. Recent Accounting Pronouncements Effective January 1, 2002 the Company adopted Statement of Financial Accounting Standards (SFAS) 141, "Business Combinations" and SFAS 142, "Goodwill and Other Intangible Assets." SFAS 141, which supercedes Accounting Principles Board Opinion (APB) 16, "Business Combinations," requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 and provides specific criteria for initial recognition of intangible assets apart from goodwill. SFAS 142 supercedes APB 17, "Intangible Assets," and requires that goodwill and intangible assets with indefinite lives no longer be amortized but be subject to annual impairment tests in accordance with the Statement. The Statement includes a two-step process aimed at determining the amount, if any, by which the carrying value of a reporting unit exceeds its fair value. Other intangible assets are to be amortized over their useful lives. The following table contains a reconciliation of reported net income to net income adjusted for the effect of goodwill amortization for the six months ended June 30, 2001: -7- MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2nd Quarter June 30 ----------- ----------- 2002 2001 2002 2001 -------------------------------------------------------------------------------- Net income (in millions): As reported $153 $141 $315 $272 Amortization of goodwill $ -- $ 1 $ -- $ 2 ------------------------- Adjusted net income $153 $142 $315 $274 -------------------------------------------------------------------------------- The Company completed its transitional impairment testing on its existing goodwill as of January 1, 2002 in accordance with the Statement. As of January 1, 2002, goodwill in the insurance segment totaled $76.9 million. SFAS 142 requires a two step approach in determining any impairment in goodwill. Step one entails evaluating whether the fair value of a reporting segment exceeds its carrying value. In performing this evaluation the Company determined that the best measure of the fair value of the insurance reporting segment is its book value adjusted for deferred premium revenue, prepaid reinsurance premiums, deferred acquisition costs and the present value of installments to arrive at adjusted book value. As of January 1, 2002, the insurance reporting segment's adjusted book value exceeded its carrying value, and thus there was no impairment of its existing goodwill. 4. Employee Stock Option Plans In the second quarter of 2002, the Company adopted the expense recognition provisions of SFAS 123, "Accounting for Stock-based Compensation," retroactive to January 1, 2002. In accordance with SFAS 123 the Company valued all stock options granted in 2002 using an option pricing model. The value is recognized as an expense over the period in which the options vest. The Company believes that recognizing the expense associated with stock option grants is preferable to the prior method of accounting for stock options under Accounting Principles Board Opinion 25, "Accounting for Stock Issued to Employees" because it produces a complete picture of compensation expenses within the Company's statement of income. The following table shows the effect on income and earnings per share of recognizing employee stock option expense: -8- MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2nd Quarter Year-to-Date ------------------- ------------------- 2002 2001 2002 2001 ---------------------------------------------------------------------------------------- Net income (in thousands): Net income before stock option expense $153,045 $141,075 $315,263 $271,609 After-tax stock option expense (383) -- (758) -- -------- -------- -------- -------- As reported $152,662 $141,075 $314,505 $271,609
1st Quarter 2002 --------------------------------------------- (in thousands) As Reported Stock Option Expense Restated -------------------------------------------------------------------------------- Insurance operating expense $ 18,363 $375 $ 18,738 Net income $162,218 $244 $161,974 -------------------------------------------------------------------------------- 5. Recent Litigation On July 15, 2002 MBIA Insurance Corporation and Subsidiaries ("MBIA Corp.") and Wells Fargo Bank Minnesota, N.A. ("Wells Fargo"), in its capacity as trustee, jointly filed suit in Delaware federal district court against Royal Indemnity Company ("Royal") to enforce insurance policies that Royal issued (the "Royal Policies") to guarantee vocational loans originated by Student Finance Corporation ("SFC"). MBIA Corp. insured eight securitizations, which had a total gross par outstanding of approximately $380 million as June 30, 2002, that were collateralized by the vocational student loans originated by SFC and guaranteed by Royal. The Royal Policies guarantee the payment of all the principal plus 90 days interest on all of the vocational loans in the securitizations insured by MBIA Corp. and state that "notwithstanding any other provision of (the) policy to the contrary, the right of the beneficiary to receive payment for loss under (the) policy after payment of the initial premium by the insured shall be absolute, irrevocable and unconditional." In their complaints, MBIA Corp. and Wells Fargo allege that Royal has committed anticipatory breaches of the Royal Policies. Previously, in June 2002, Royal brought suit against Well Fargo and other parties, not including MBIA Corp., seeking a declaration that it is not obligated to pay on the Royal Policies, and seeking rescission of the Royal Policies, on the grounds that SFC, its subsidiaries, and other related parties engaged in fraudulent behavior and/or made negligent misrepresentations regarding the collateralized loans. To date, claims in the amount of approximately $290 million have been made under the Royal Policies, and MBIA Corp. expects that there will be additional -9- MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) claims made under the Royal Policies. In the event that Royal does not honor claims under the Royal Policies during the pendency of the litigation, MBIA Corp. will be required to make payments under its policies in respect of scheduled interest and principal on the notes insured under the MBIA Corp. policies. MBIA Corp. expects ultimately to recover from Royal any payments it makes under its policies. MBIA Corp. believes that it will prevail in the litigation and will have no ultimate loss on these policies, although there can be no assurance that MBIA Corp. will prevail in the litigation. If MBIA Corp. does not prevail in the litigation and Royal does not make payments under the Royal Policies, MBIA Corp. expects to incur losses under its policies. MBIA Corp. does not believe, however, that any such losses will have a material adverse effect on its financial condition. -10-