SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarter Ended September 30, 1996
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 October 31, 1996 there were outstanding 43,228,136 shares of Common
Stock, par value $1 per share, of the registrant.
<PAGE>
INDEX
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PAGE
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
MBIA Inc. and Subsidiaries
Consolidated Balance Sheets - September 30, 1996
and December 31, 1995 3
Consolidated Statements of Income - Three months and
nine months ended September 30, 1996 and 1995 4
Consolidated Statement of Changes in Shareholders' Equity
- Nine months ended September 30, 1996 5
Consolidated Statements of Cash Flows
- Nine months ended September 30, 1996 and 1995 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-17
PART II OTHER INFORMATION, AS APPLICABLE
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
(2)
<PAGE>
MBIA INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except per share amounts)
September 30, 1996 December 31, 1995
------------------ -----------------
(Unaudited) (Audited)
ASSETS
Investments:
Fixed-maturity securities held as
available-for-sale at fair value
(amortized cost $3,861,248 and
$3,428,986) $3,964,913 $3,652,621
Short-term investments, at amortized cost
(which approximates fair value) 193,482 198,035
Other investments 28,906 14,064
---------- ----------
4,187,301 3,864,720
Municipal investment agreement portfolio
held as available-for-sale at fair
value (amortized cost $3,010,340
and $2,645,828) 3,013,486 2,742,626
---------- ----------
Total investments 7,200,787 6,607,346
Cash and cash equivalents 9,135 23,258
Securities purchased under agreements to resell 49,000 ---
Accrued investment income 97,591 87,016
Deferred acquisition costs 144,937 140,348
Prepaid reinsurance premiums 207,365 200,887
Goodwill (less accumulated amortization
of $41,770 and $41,298) 102,785 106,569
Property and equipment, at cost (less
accumulated depreciation of $20,801 and $17,625) 46,896 46,030
Receivable for investments sold 2,840 6,100
Other assets 80,642 49,896
---------- ----------
TOTAL ASSETS $7,941,978 $7,267,450
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deferred premium revenue $1,733,887 $1,616,315
Loss and loss adjustment expense reserves 51,641 42,505
Municipal investment agreements 2,119,861 2,026,709
Municipal repurchase agreements 807,945 615,776
Long-term debt 373,982 373,900
Short-term debt 42,400 18,000
Deferred income taxes 181,313 246,736
Payable for investments purchased 62,550 10,695
Securities sold under agreements to repurchase 110,000 ---
Other liabilities 96,228 82,548
--------- ---------
TOTAL LIABILITIES 5,579,807 5,033,184
--------- ---------
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--43,188,571 and 42,077,387 43,189 42,077
Additional paid-in capital 796,973 725,153
Retained earnings 1,453,968 1,261,051
Cumulative translation adjustment (1,177) 2,849
Unrealized appreciation of investments, net
of deferred income tax provision of
$37,598 and $112,252 69,535 207,648
Unearned compensation--restricted stock (317) (426)
Treasury stock, at cost; shares--73,676 in 1995 --- (4,086)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 2,362,171 2,234,266
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $7,941,978 $7,267,450
========== ==========
The accompanying notes are an integral part of the
consolidated financial statements.
(3)
<PAGE>
MBIA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
----------------------------------- -----------------------------------
1996 1995 1996 1995
----------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Revenues
Insurance:
Gross premiums written $ 79,910 $ 92,022 $ 334,510 $ 269,199
Ceded premiums (9,036) (13,077) (35,665) (32,206)
----------------- ---------------- ---------------- ----------------
Net premiums written 70,874 78,945 298,845 236,993
Increase in deferred premium revenue (6,336) (23,336) (111,889) (76,422)
----------------- ---------------- ---------------- ----------------
Premiums earned (net of ceded
premiums of $10,285 and $8,900,
$29,187 and $23,552) 64,538 55,609 186,956 160,571
Net investment income 62,992 56,057 183,563 162,885
Net realized gains 3,115 4,665 9,702 8,087
Investment management services:
Income 6,819 5,164 19,543 13,705
Net realized gains (losses) 1,529 (3,186) 2,463 (3,360)
Other 1,031 421 3,019 1,555
----------------- ---------------- ---------------- ----------------
Total revenues 140,024 118,730 405,246 343,443
----------------- ---------------- ---------------- ----------------
Expenses
Insurance:
Losses and loss adjustment 2,888 3,211 10,354 7,954
Policy acquisition costs, net 6,404 5,511 18,294 15,781
Operating 12,551 10,554 34,625 29,546
Investment management services 3,379 3,049 10,339 9,339
Interest 8,605 7,112 24,983 21,271
Other 939 285 1,989 1,256
----------------- ---------------- ---------------- ----------------
Total expenses 34,766 29,722 100,584 85,147
----------------- ---------------- ---------------- ----------------
Income before income taxes 105,258 89,008 304,662 258,296
Provision for income taxes 21,937 19,174 63,979 55,149
----------------- ---------------- ---------------- ----------------
NET INCOME $ 83,321 $ 69,834 $ 240,683 $ 203,147
================= ================ ================ ================
NET INCOME PER COMMON SHARE $ 1.92 $ 1.65 $ 5.57 $ 4.82
================= ================ ================ ================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES AND COMMON
STOCK EQUIVALENTS OUTSTANDING 43,447,213 42,254,807 43,231,575 42,176,243
================= ================ ================ ================
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
(4)
<PAGE>
MBIA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)
For the nine months ended September 30, 1996
(In thousands except per share amounts)
<TABLE>
<CAPTION>
Unearned
Common Stock Additional Cumulative Unrealized Compensation- Treasury Stock
---------------- Paid-in Retained Translation Appreciation Restricted ----------------
Shares Amount Capital Earnings Adjustment of Investments Stock Shares Amount
------- ------- ---------- ---------- ----------- -------------- ------------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
January 1, 1996 42,077 $42,077 $725,153 $1,261,051 $ 2,849 $207,648 $ (426) 74 $4,086
Net proceeds
from issuance
of shares 770 770 54,463 --- --- --- --- --- ---
Unearned
compensation-
restricted stock --- --- --- --- --- --- 109 --- ---
Exercise of stock
options 342 342 17,357 (1,757) --- --- --- (74) (4,086)
Net income --- --- --- 240,683 --- --- --- --- ---
Change in foreign
currency
translation --- --- --- --- (4,026) --- --- --- ---
Change in
unrealized
appreciation of
investments net
of change in
deferred income
taxes of $74,654 --- --- --- --- --- (138,113) --- --- ---
Dividends
(declared per
common share $1.070,
paid per common
share $1.035) --- --- --- (46,009) --- --- --- --- ---
------ ------- -------- ---------- ----------- ------------ ------------ ------- --------
Balance,
September 30, 1996 43,189 $43,189 $796,973 $1,453,968 $(1,177) $ 69,535 $ (317) --- $ ---
====== ======= ======== ========== =========== ============ ============ ======= ========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
(5)
<PAGE>
MBIA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Nine months ended
September 30
-------------------------------------
1996 1995
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 240,683 $ 203,147
Adjustments to reconcile net income to net cash
provided by operating activities:
Increase in accrued investment income (10,575) (10,688)
Increase in deferred acquisition costs (4,589) (5,084)
Increase in prepaid reinsurance premiums (6,478) (8,654)
Increase in deferred premium revenue 118,367 85,076
Increase in loss and loss adjustment expense reserves 9,136 5,098
Depreciation 3,219 2,901
Amortization of goodwill 3,784 3,872
Amortization of bond discount, net (16,559) (13,529)
Net realized gains on sale of investments (12,165) (4,727)
Deferred income taxes 9,231 9,169
Other, net (27,421) 17,509
--------------- ---------------
Total adjustments to net income 65,950 80,943
--------------- ---------------
Net cash provided by operating activities 306,633 284,090
--------------- ---------------
Cash flows from investing activities:
Purchase of fixed-maturity securities, net
of payable for investments purchased (1,047,429) (815,057)
Sale of fixed-maturity securities, net of
receivable for investments sold 589,812 522,989
Redemption of fixed-maturity securities, net of
receivable for investments redeemed 106,439 63,390
Purchase of short-term investments, net (23,293) (17,035)
(Purchase) sale of other investments, net (14,264) 2,570
Purchases for municipal investment agreement
portfolio, net of payable for investments purchased (1,454,325) (1,756,447)
Sales from municipal investment agreement
portfolio, net of receivable for investments sold 1,120,804 904,313
Capital expenditures, net of disposals (4,095) (3,471)
--------------- ---------------
Net cash used by investing activities (726,351) (1,098,748)
--------------- ---------------
Cash flows from financing activities:
Net proceeds from issuance of common stock 55,233 ---
Net proceeds from issuance of short-term debt 24,400 ---
Dividends paid (44,112) (38,748)
Proceeds from issuance of municipal investment
agreements and municipal repurchase agreements 1,600,735 1,628,063
Payments for drawdowns of municipal investment
agreements and municipal repurchase agreements (1,311,689) (847,734)
Securities sold under agreements to repurchase, net 61,000 69,000
Exercise of stock options 20,028 8,958
--------------- ---------------
Net cash provided by financing activities 405,595 819,539
--------------- ---------------
Net (decrease) increase in cash and cash equivalents (14,123) 4,881
Cash and cash equivalents - beginning of period 23,258 7,940
--------------- ---------------
Cash and cash equivalents - end of period $ 9,135 $ 12,821
=============== ===============
Supplemental cash flow disclosures:
Income taxes paid $ 53,760 $ 41,910
Interest paid:
Municipal investment agreements and
municipal repurchase agreements $ 91,170 $ 81,892
Long-term debt 24,997 22,475
Short-term debt 541 835
The accompanying notes are an integral part of the
consolidated financial statements.
</TABLE>
(6)
<PAGE>
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, 1995 for MBIA Inc. and Subsidiaries (the "Company").
The accompanying consolidated financial statements have not been audited by
independent accountants in accordance with generally accepted auditing standards
but in the opinion of management such financial statements include all
adjustments, consisting only of normal recurring adjustments, necessary to
summarize fairly the Company's financial position and results of operations. The
results of operations for the nine months ended September 30, 1996 may not be
indicative of the results that may be expected for the year ending December 31,
1996. The December 31, 1995 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 by the Company during the nine months ended September 30,
1996 were $46.0 million.
3. Subsequent Event
The company filed an S-3, shelf registration statement, on October 18, 1996 for
$250 million of securities. The shelf covers unsecured debt securities, common
and preferred stock and other securities. Proceeds from the sale of these
securities will be used to support growth in the company's businesses and for
general corporate purposes.
(7)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
1996 AND 1995 - THIRD QUARTER RESULTS
- -------------------------------------
MBIA Inc.'s (the "Company" or "MBIA") 1996 third quarter net income
increased by 19% to $83.3 million compared with $69.8 million for the third
quarter of 1995. Earnings per share rose 16% to $1.92 from $1.65 in the third
quarter of 1995.
Comparing 1996 with 1995, third quarter core earnings per share increased
by 13% to $1.69. Core earnings, which exclude the net income effects from
refundings and calls of insured issues, realized capital gains and losses,
accounting changes and other non-recurring items, are a more indicative measure
of MBIA's underlying profit trend. The increase in core earnings was primarily
due to the continued growth in core premiums earned and net investment income
generated by MBIA's insurance operations as well as from an increasing
contribution from the investment management services business.
Book value at September 30, 1996 was $54.69 per share, up from $53.19 per
share at year-end 1995. Financial guarantee insurance companies refer to
adjusted book value as a more appropriate measure of their company's intrinsic
value. Adjusted book value is calculated by adding to book value the after-tax
effects of (1) net deferred premiums less deferred acquisition costs and (2) the
present value of future installment premiums on outstanding insurance policies.
MBIA's adjusted book value per share increased to $79.56 at September 30, 1996
from $76.56 at year-end 1995, a 4% increase. The increase reflects the Company's
strong operating results, and significant growth in new business written, offset
partially by the impact of rising interest rates on the market value of the
Company's fixed-income investment portfolios.
Insurance Operations
MBIA's primary business is to guarantee principal and interest payments on
municipal bonds sold in the new issue and secondary markets. The Company also
provides financial guarantees for structured finance transactions,
investor-owned utility debt and obligations of high-quality financial
institutions. In addition, MBIA provides financial guarantees for similar
securities in the international markets. The Company is the leading provider of
financial guarantees in both domestic and international markets.
(8)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
The overall long-term new issue municipal bond volume was $33.4 billion for
the third quarter of 1996, a 5% increase from $31.9 billion in the third quarter
of last year. The insured portion of new issue volume increased to a record 55%.
Market data are reported on a sale date basis while MBIA's financial results are
computed from closing date information. Typically, there can be a one- to
four-week delay between the sale date and closing date of an insured issue.
For the third quarter of 1996, total par value insured by MBIA for domestic
new issue and secondary market municipal insurance decreased to $6.5 billion
from $10.0 billion in the same period last year. Over the same periods,
municipal GPW decreased 37% to $52.3 million from $83.1 million. Municipal AGP
decreased by 36% to $51.0 million from $79.6 million in the third quarter of
1995.
Gross premiums written ("GPW") as reported on the Company's income
statements reflect cash premium receipts during the period, which include both
upfront premiums received for business originated in the period and installment
premiums received for installment-based insurance policies issued in current and
prior periods. GPW does not include the present value of future premiums
receivable for installment-based insurance policies issued in the period.
Although most of MBIA's premiums are collected upfront at policy issuance, MBIA
is writing an increasing proportion of installment premium business, and
estimates the aggregate present value of its future stream of installment
premiums to be $270.9 million at September 30, 1996. To more accurately portray
year-to-year changes in new business production, the Company also discloses
adjusted gross premiums ("AGP"), which represent upfront premiums and the
estimated present value of current period and future installment premiums for
installment-based insurance policies issued in the period.
MBIA reported substantial gains in its domestic new issue and secondary
market structured finance business insuring $4.7 billion of par value in the
third quarter of 1996, a 27% increase over last year's third quarter. Structured
finance AGP at $23.1 million exceeded 1995's third quarter by 54%. Structured
finance GPW at $12.9 million more than doubled third quarter 1995.
MBIA's international operations also reported substantial gains insuring
$1.4 billion of new issue and secondary market par value in the third quarter of
1996 compared to $0.1 billion in last year's third quarter. GPW for
international business increased by a multiple of five to $6.5 million from $1.3
(9)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
million in the third quarter of 1995. International AGP at $10.9 million
exceeded 1995's third quarter by more than eight times.
MBIA's total GPW for third quarter 1996 decreased 13% to $79.9 million from
$92.0 million in the third quarter of 1995. Total AGP decreased 4% to $94.9
million from $99.4 million over the same period.
Ceded premiums to reinsurers from all insurance operations were $9.0
million in the third quarter of 1996, compared with $13.1 million in third
quarter 1995, representing 11% and 14% of GPW in the third quarters of 1996 and
1995, respectively. The rate of premium cessions in third quarter 1995 was
higher than in 1996, primarily due to higher utilization of treaty reinsurance
required due to regulatory single risk limits.
Premiums received upfront are earned pro rata over the period of risk. Such
premiums are allocated to each bond maturity based on par amount and are earned
on a straight-line basis over the term of each maturity. Accordingly, the
portion of premiums earned on each policy in any given year represents a
relatively small percentage of the total upfront premium received. The balance
represents deferred premium revenue to be earned over the remaining life of the
insured bond issue.
Installment premiums are credited to the deferred premium revenue account
in the period in which such premiums are received, and they are recognized as
revenue over each installment period -- generally one year or less. The revenue
that the Company recognizes from the amortization of deferred premiums for each
period, net of the amortization of prepaid reinsurance premiums, is its premiums
earned for that period.
Premiums earned increased 16% to $64.5 million in the third quarter of 1996
from $55.6 million in the third quarter of 1995. Earned premiums from scheduled
amortization increased by 15% to $52.7 million over last year's third quarter.
When an MBIA-insured bond issue is refunded or retired early, the
outstanding liability associated with the refunded or called portion is
extinguished and the related deferred premium revenue is earned immediately,
except for any portion which may be applied as a credit towards insuring the
refunding bond issue. Earned premiums generated by refunded and called bonds in
the third quarter of 1996 increased to $11.9 million from $9.6 million in the
third quarter of 1995. The amount of bond refundings and calls is influenced by
a variety of factors such as prevailing interest rates relative to the coupon
rates of the bond issue, the issuer's desire to modify bond covenants and
applicable regulations under the Internal Revenue Code.
(10)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
The fair value of the Company's investment portfolio related to its
insurance operations was $4.2 billion as of September 30, 1996. This portfolio
generated net investment income of $63.0 million in the third quarter of 1996, a
12% increase over the $56.1 million generated in the third quarter of 1995. The
increase was primarily the result of the growth of investments from continued
positive operating cash flows and the proceeds from the December, 1995 and
February, 1996 debt and equity offerings. Net realized capital gains in the
third quarter of 1996 were $3.1 million, compared with $4.7 million in the prior
year's third quarter.
The average credit quality rating of the fixed-income investments at
September 30, 1996 was Double-A. Tax-exempt securities remained at 72% of the
portfolio at September 30, 1996, unchanged from December 31, 1995.
The provision for losses and loss adjustment expenses during the third
quarter of 1996 was $2.9 million compared with $3.2 million in 1995's third
quarter, representing additions to the loss reserve consistent with the
Company's loss reserving methodology. At September 30, 1996, $16.8 million of
the $51.6 million loss and loss adjustment expense reserve was allocated on a
case basis compared with $14.5 million of the $42.5 million reserve at year-end
1995. During the third quarter of 1996 there were no new case reserves nor any
material adjustments to those reserves currently outstanding. At September 30,
1996 the Company's unallocated general reserve was $34.8 million compared with
$28.0 million at year-end 1995.
In the third quarter of 1996, policy acquisition costs net of deferrals
were $6.4 million. The 16% increase for the period over 1995's third quarter was
consistent with the overall increase in earned premiums, as the percentage of
policy acquisition costs net of deferrals to earned premiums remained at 10% for
both periods. Policy acquisition costs are amortized over the period in which
the related premiums are earned. Other insurance operating expenses increased to
$12.6 million in the third quarter of 1996 from $10.6 million in the prior
year's third quarter.
In the third quarter of 1996, the Company incurred $8.6 million of interest
expense compared with $7.1 million in the third quarter of 1995. The increase in
third quarter 1996 primarily resulted from the additional interest expense
related to the $75 million increase in MBIA's long-term debt in December, 1995.
The Company's effective tax rate decreased marginally in the third quarter
of 1996 to 20.8% compared with 21.5% in 1995.
(11)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Investment Management Services
Over the last six years, MBIA has developed investment management services
which capitalize on the Company's capabilities, reputation and marketplace
relationships.
MBIA Municipal Investors Service Corporation ("MBIA/MISC"), a wholly owned
subsidiary of the Company, provides cash management services for local
governments and school districts. As of September 30, 1996, MBIA/MISC had
approximately 1,430 clients and over $2.8 billion of client assets under
management compared with over $2.5 billion at year-end 1995. In addition,
MBIA/MISC provides fund administration services to 250 clients with invested
assets of $133 million. MBIA/MISC offers its services in thirteen states and the
Commonwealth of Puerto Rico and plans to continue to expand into additional
states.
Since 1993, MBIA Investment Management Corp. ("IMC"), another wholly owned
subsidiary of the Company, has provided investment agreements, guaranteed as to
principal and interest, for bond proceeds of states, municipalities and
municipal authorities. At September 30, 1996, aggregate principal and accrued
interest outstanding on investment agreements was $2.9 billion compared with
$2.6 billion at year-end 1995. The assets supporting IMC's investment agreement
liabilities are high-quality securities with an average credit quality rating of
Double-A and are recorded as a component of the Company's total investments.
In conducting its business, IMC may, from time to time, use derivative
financial instruments for hedging purposes as part of its overall management of
interest rate risk exposure. The use of such instruments must comply with the
Company's established risk management policies restricting their use to
prescribed limits, non-speculative purposes, and exposure to a market or index
that represents a class of investments approved as a direct investment under the
Company's existing investment guidelines. At September 30, 1996, the Company's
exposure to derivative financial instruments (interest rate contracts) was not
significant.
In 1994, MBIA Capital Management Corp.("CMC"), (formerly MBIA Securities
Corp.), a wholly owned subsidiary, was established to provide investment
management services for MBIA's investment agreements, municipal cash management
and public pension funds. In the first quarter of 1996, portfolio management for
the majority of MBIA's insurance related investment portfolio was transferred to
CMC; completing the transition which began in 1995.
(12)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
For the third quarter of 1996, the Company's investment management services
business contributed $6.8 million in operating revenues, a 32% increase over the
same period last year. Operating expenses increased by 11% to $3.4 million. Net
realized capital gains for the third quarter of 1996 were $3.1 million compared
to $4.7 million for the third quarter of 1995.
RESULTS OF OPERATIONS
1996 AND 1995 - FIRST NINE MONTHS RESULTS
- -----------------------------------------
For the first nine months of 1996, net income increased 18% to $240.7
million from $203.1 million in the same 1995 period. Earnings per share grew 16%
to $5.57 from $4.82. Core earnings per share increased by 12% in the first nine
months of 1996 to $4.91. The increase in core earnings was primarily due to the
continued combined growth in core premiums earned and net investment income
generated by MBIA's insurance operations as well as from an increasing
contribution from the investment management services business.
Insurance Operations
- --------------------
The overall long-term new issue municipal bond volume was $114.1 billion
for the first nine months of 1996, up 19% from $96.2 billion in the first nine
months of last year. The insured portion of the market rose sharply to 54% from
45% in the first nine months of 1995. MBIA lead the industry in market share,
capturing 39% of the insured market in the first nine months of 1996.
For the first nine months of 1996, total par value insured by MBIA for
domestic new issue and secondary market municipal insurance increased to $26.9
billion from $23.5 billion in the same period last year. Over the same periods,
municipal GPW increased 9% to $257.9 million from $236.7 million. Municipal AGP
also increased by 9% to $252.8 million from $230.9 million in the first nine
months of 1995.
MBIA reported substantial gains in its domestic new issue and secondary
market structured finance business insuring a record $13.1 billion of par value
in the first nine months of 1996, almost doubling last year's $6.8 billion for
its first nine months. Structured finance GPW at $40.7 million and AGP at $75.6
million both reflected 147% increases over the first nine months of 1995 which
were $16.5 million and $30.6 million, respectively. Structured finance GPW and
AGP included $15.9 million of assumed premiums related to an aggregate excess of
loss agreement covering $726 million par of first mortgage loans.
(13)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
MBIA's international operations insured $2.5 billion of new issue and
secondary market par value in the first nine months of 1996 up 76% from $1.4
billion in same period of 1995. GPW for international business increased
substantially by 88% to $20.3 million from $10.7 million in the first nine
months of 1995. International AGP more than doubled to $27.3 million from $12.2
million in the first nine months of 1995.
MBIA's total GPW for first nine months of 1996 increased 24% to $334.5
million from $269.2 million in the first nine months of 1995. Total AGP
increased 35% to $379.6 million from $280.8 million over the same period.
Ceded premiums to reinsurers from all insurance operations were $35.7
million in the first nine months of 1996, compared with $32.2 million in first
nine months of 1995. The percentage of premiums ceded remained relatively
constant at 11% and 12% of GPW for the first nine months of 1996 and 1995,
respectively.
Premiums earned increased 16% to $187.0 million in the first nine months of
1996 from $160.6 million in the first nine months of 1995. Earned premiums from
scheduled amortization increased by 13% to $151.6 million over last year's first
nine months. Earned premiums generated by refunded and called bonds in the first
nine months of 1996 increased to $35.4 million from $26.8 million in the same
period last year.
The Company's investment portfolio related to its insurance operations
generated net investment income of $183.6 million in the first nine months of
1996, a 13% increase over the $162.9 million generated in the first nine months
of 1995. The increase was primarily the result of the growth of investments from
continued positive operating cash flows and the proceeds from the December, 1995
and February, 1996 debt and equity offerings. Average invested assets for the
first nine months of 1996 were $3.84 billion at amortized cost compared with
$3.39 billion for the same period in 1995. Net realized capital gains in the
first nine months of 1996 were $9.7 million, compared with $8.1 million in the
prior year's first nine months.
The provision for losses and loss adjustment expenses during the first nine
months of 1996 was $10.4 million compared with $8.0 million in 1995's first nine
months, representing additions to the loss reserve consistent with the Company's
loss reserving methodology. During the first nine months of 1996 there were no
new case reserves nor any material adjustments to those reserves currently
outstanding.
(14)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
In the first nine months of 1996, policy acquisition costs net of deferrals
were $18.3 million. The 16% increase for the period over 1995's first nine
months was consistent with the overall increase in earned premiums, as the
percentage of policy acquisition costs net of deferrals to earned premiums
remained at 10% for both periods. Policy acquisition costs are amortized over
the period in which the related premiums are earned. Other insurance operating
expenses increased by 17% to $34.6 million in the first nine months of 1996 from
$29.5 million in the prior year's first nine months.
In the first nine months of 1996, the Company incurred $25.0 million of
interest expense compared with $21.3 million in the first nine months of 1995.
The increase primarily resulted from the additional interest expense related to
the $75 million increase in MBIA's long-term debt in December 1995.
The Company's effective tax rate decreased marginally in the first nine
months of 1996 to 21.0% compared with 21.4% in 1995.
Investment Management Services
- ------------------------------
For the first nine months of 1996, the Company's investment management
services business contributed $19.5 million in operating revenues, a 43%
increase over the same period last year. Operating expenses increased by 11% to
$10.3 million. Net realized capital gains for the first nine months of 1996 were
$2.5 million compared to the first nine months of 1995 when there were $3.4
million of realized losses from the investment management services business.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At September 30, 1996, the fair value of the Company's consolidated
investment portfolio was $7.2 billion, an increase of 9% from $6.6 billion at
year-end 1995. The overall increase was generated by strong operating cash flows
and the $55 million of net proceeds from MBIA's public offering of common stock
in February, 1996, partially offset by the decrease in unrealized gains caused
by the rise in interest rates during the period.
The Company's fixed-income investment portfolio has been classified as
available-for-sale in accordance with SFAS 115. The difference between fair
(15)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
value and amortized cost is primarily related to changes in interest rates, and
if the portfolio is held to maturity, the Company expects to realize an amount
substantially equal to amortized cost.
MBIA Insurance Corporation's ("MBIA Corp.") liquidity position remained
strong, as net cash flow provided by its operations aggregated $381 million in
the first nine months of 1996, a 19% increase from $321 million in the first
nine months of 1995. The Company's liquidity is in part dependent upon MBIA
Corp.'s ability to pay dividends to the Company. MBIA Corp.'s net income,
consisting of premiums earned and investment income less losses and expenses, is
a source of continuing additions to earned surplus and dividend-paying
capability. Under New York state insurance law, without prior approval of the
superintendent of the state insurance department, MBIA Corp. may pay a dividend
only from earned surplus subject to the maintenance of a minimum capital
requirement. The dividends in any 12-month period may not exceed the lesser of
10% of its policyholders' surplus as shown on its last filed statutory-basis
financial statements or adjusted net investment income, as defined, for such
12-month period. In the first nine months of 1996, MBIA Corp. paid dividends of
$13.0 million and at September 30, 1996 had approximately $114 million
available for payment of future dividends to the Company without requiring prior
approval.
MBIA Corp. has an irrevocable standby line of credit with a group of major
banks in the amount of $725 million which provides funds for the payment of
claims in the event that severe losses should occur. The line of credit expires
on September 30, 2003 but may be renewed annually by the bank group for a period
to extend the term to seven years beyond the renewal date. For general corporate
purposes or to further facilitate the immediate payment of claims, should they
occur, the Company and MBIA Corp. maintain short-term liquidity facilities
totaling $300 million with a group of major banks. At September 30, 1996, there
was $42 million outstanding under these facilities.
MBIA Corp. also maintains a high degree of liquidity within its investment
portfolio in the form of readily marketable high-quality fixed-income securities
and short-term investments. In management's opinion, the capital resources of
MBIA Corp. represented by the liquidity of its investment portfolio, its annual
cash flows from operations and bank lines of credit are more than adequate to
meet the Company's expected cash requirements.
In February 1996, the Company completed a public offering of 3.9 million
shares of the Company's common stock, of which 0.8 million shares were new
(16)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
shares offered by the Company. The Company realized $55 million in new capital
from the offering.
In October 1996, the Company filed an S-3, shelf registration statement for
$250 million of securities. The shelf covers unsecured debt securities, common
and preferred stock. Proceeds from the sale of these securities will be used to
support growth in the Company's businesses and for general corporate purposes.
(17)
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
11. Computation of Earnings Per Share Assuming Full Dilution
27. Financial Data Schedule
99. Additional Exhibits - MBIA Insurance Corporation and
Subsidiaries Consolidated Financial Statements
(b) Reports on Form 8-K - No reports on Form 8-K were filed in
this quarter.
(18)
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MBIA INC.
---------------------------------------------------
Registrant
Date: November 14, 1996 /s/ JULLIETTE S. TEHRANI
----------------- ------------------------
Julliette S. Tehrani
Senior Vice President,
Chief Financial Officer
Date: November 14, 1996 /s/ ELIZABETH B. SULLIVAN
----------------- -------------------------
Elizabeth B. Sullivan
Vice President,
Controller
(Principal Accounting Officer)
(19)
EXHIBIT 11
MBIA INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE ASSUMING FULL DILUTION
(In thousands except per share amounts)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
-------------------------------- --------------------------------
1996 1995 1996 1995
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net income $83,321 $69,834 $240,683 $203,147
============== ============== ============== ==============
Fully diluted shares:
Average number of common
shares outstanding 43,064 41,767 42,819 41,701
Assumed exercise of dilutive
stock options 425 516 481 541
-------------- -------------- -------------- --------------
43,489 42,283 43,300 42,242
============== ============== ============== ==============
Earnings per share assuming
full dilution $1.92 $1.65 $5.56 $4.81
============== ============== ============== ==============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<DEBT-HELD-FOR-SALE> 3,964,913
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 7,200,787
<CASH> 9,135
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 144,937
<TOTAL-ASSETS> 7,941,978
<POLICY-LOSSES> 51,641
<UNEARNED-PREMIUMS> 1,733,887
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 416,382
<COMMON> 43,189
0
0
<OTHER-SE> 2,318,982
<TOTAL-LIABILITY-AND-EQUITY> 7,941,978
186,956
<INVESTMENT-INCOME> 183,563
<INVESTMENT-GAINS> 9,702
<OTHER-INCOME> 25,025
<BENEFITS> 10,354
<UNDERWRITING-AMORTIZATION> 18,294
<UNDERWRITING-OTHER> 34,625
<INCOME-PRETAX> 304,662
<INCOME-TAX> 63,979
<INCOME-CONTINUING> 240,683
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 240,683
<EPS-PRIMARY> 5.57
<EPS-DILUTED> 5.56
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
AND FOR THE PERIODS ENDED SEPTEMBER 30, 1996 AND 1995
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
I N D E X
PAGE
----
Consolidated Balance Sheets - September 30, 1996 (Unaudited)
and December 31, 1995 (Audited) 3
Consolidated Statements of Income - Three months and
nine months ended September 30, 1996 and 1995 (Unaudited) 4
Consolidated Statement of Changes in Shareholder's
Equity - Nine months ended September 30, 1996 (Unaudited) 5
Consolidated Statements of Cash Flows
- Nine months ended September 30, 1996 and 1995 (Unaudited) 6
Notes to Consolidated Financial Statements (Unaudited) 7
- 2 -
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
----------------------------- --------------------------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Investments:
Fixed-maturity securities held as available-for-sale
at fair value (amortized cost $3,861,248 and $3,428,986) $3,964,913 $3,652,621
Short-term investments, at amortized cost
(which approximates fair value) 182,882 198,035
Other investments 14,281 14,064
--------------- ----------------
TOTAL INVESTMENTS 4,162,076 3,864,720
Cash and cash equivalents 2,698 2,135
Securities purchased under agreement to resell 80,500 ---
Accrued investment income 66,086 60,247
Deferred acquisition costs 144,937 140,348
Prepaid reinsurance premiums 207,365 200,887
Goodwill (less accumulated amortization of
$41,038 and $37,366) 101,942 105,614
Property and equipment, at cost (less accumulated
depreciation of $14,276 and $12,137) 42,831 41,169
Receivable for investments sold 2,840 5,729
Other assets 50,116 42,145
--------------- ----------------
TOTAL ASSETS $4,861,391 $4,462,994
=============== ================
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Deferred premium revenue $1,733,887 $1,616,315
Loss and loss adjustment expense reserves 51,641 42,505
Deferred income taxes 181,375 212,925
Payable for investments purchased 46,071 10,695
Securities sold under agreement to repurchase 80,500 ---
Other liabilities 68,132 54,682
--------------- ----------------
TOTAL LIABILITIES 2,161,606 1,937,122
--------------- ----------------
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 1,037,005 1,021,584
Retained earnings 1,581,612 1,341,855
Cumulative translation adjustment (1,322) 2,704
Unrealized appreciation of investments,
net of deferred income tax provision
of $36,497 and $78,372 67,490 144,729
--------------- ----------------
TOTAL SHAREHOLDER'S EQUITY 2,699,785 2,525,872
--------------- ----------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $4,861,391 $4,462,994
=============== ================
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
- 3 -
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Dollars in thousands)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
-------------------------------- --------------------------------
1996 1995 1996 1995
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues:
Gross premiums written $80,353 $92,362 $335,807 $270,139
Ceded premiums (9,036) (13,077) (35,665) (32,206)
-------------- -------------- -------------- --------------
Net premiums written 71,317 79,285 300,142 237,933
Increase in deferred premium revenue (6,336) (23,336) (111,889) (76,422)
-------------- -------------- -------------- --------------
Premiums earned (net of ceded
premiums of $10,285, $8,900,
$29,187 and $23,552) 64,981 55,949 188,253 161,511
Net investment income 63,723 55,988 184,379 162,836
Net realized gains 3,115 2,902 9,702 6,324
Other income 724 421 2,047 1,553
-------------- -------------- -------------- --------------
Total revenues 132,543 115,260 384,381 332,224
-------------- -------------- -------------- --------------
Expenses:
Losses and loss adjustment 2,888 3,211 10,354 7,954
Policy acquisition costs, net 6,404 5,511 18,294 15,781
Underwriting and operating 12,551 10,554 34,625 29,553
Interest expense 788 --- 1,040 ---
-------------- -------------- -------------- --------------
Total expenses 22,631 19,276 64,313 53,288
-------------- -------------- -------------- --------------
Income Before Income Taxes 109,912 95,984 320,068 278,936
Provision for income taxes 22,026 20,811 67,311 60,891
-------------- -------------- -------------- --------------
Net income $ 87,886 $ 75,173 $252,757 $218,045
============== ============== ============== ==============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
- 4 -
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY (Unaudited)
For the nine months ended September 30, 1996
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
Common Stock Additional Cumulative Unrealized
------------------------- Paid-In Retained Translation Appreciation
Shares Amount Capital Earnings Adjustment of Investments
---------- ---------- ---------- ---------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 ............... 100,000 $15,000 $1,021,584 $1,341,855 $ 2,704 $144,729
Exercise of stock options .............. -- -- 6,854 -- -- --
Net income ............................. -- -- -- 252,757 -- --
Change in foreign
currency translation ................ -- -- -- -- (4,026) --
Change in unrealized
appreciation of
investments net of change
in deferred income taxes
of $41,875 ........................... -- -- -- -- -- (77,239)
Dividends declared
(per common share $130) -- -- -- (13,000) -- --
Tax reduction related to
tax sharing agreement
with MBIA Inc. ....................... -- -- 8,567 -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Balance, September 30, 1996 ............ 100,000 $15,000 $1,037,005 $1,581,612 $(1,322) $ 67,490
========== ========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
-5-
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine months ended
September 30
--------------------------
1996 1995
------------ ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 252,757 $ 218,045
Adjustments to reconcile net income to net
cash provided by operating activities:
Increase in accrued investment income (5,839) (1,745)
Increase in deferred acquisition costs (4,589) (5,084)
Increase in prepaid reinsurance premiums (6,478) (8,654)
Increase in deferred premium revenue 118,367 85,076
Increase in loss and loss adjustment expense reserves 9,136 5,098
Depreciation 2,179 1,975
Amortization of goodwill 3,672 3,697
Amortization of bond discount, net (5,510) (1,389)
Net realized gains on sale of investments (9,702) (6,324)
Deferred income taxes 10,325 9,105
Other, net 16,606 21,247
------------ ----------
Total adjustments to net income 128,167 103,002
------------ ----------
Net cash provided by operating activities 380,924 321,047
------------ ----------
Cash flows from investing activities:
Purchase of fixed-maturity securities, net
of payable for investments purchased (1,047,429) (664,949)
Sale of fixed-maturity securities, net of
receivable for investments sold 589,812 376,589
Redemption of fixed-maturity securities,
net of receivable for investments redeemed 106,439 55,513
Purchase of short-term investments, net (12,693) (17,035)
Sale (purchase) of other investments, net 361 (664)
Capital expenditures, net of disposals (3,851) (3,131)
------------ ----------
Net cash used in investing activities (367,361) (253,677)
------------ ----------
Cash flows from financing activities:
Dividends paid (13,000) (66,500)
------------ ----------
Net cash used by financing activities (13,000) (66,500)
------------ ----------
Net increase in cash and cash equivalents 563 870
Cash and cash equivalents - beginning of period 2,135 1,332
------------ ----------
Cash and cash equivalents - end of period $ 2,698 $ 2,202
============ ==========
Supplemental cash flow disclosures:
Income taxes paid $ 50,678 $ 40,290
Interest expense --- ---
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
- 6 -
<PAGE>
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 consolidated financial statements and notes thereto
for the year ended December 31, 1995. The accompanying consolidated financial
statements have not been audited by independent accountants in accordance with
generally accepted auditing standards but in the opinion of management such
financial statements include all adjustments, consisting only of normal
recurring adjustments, necessary to summarize fairly the Company's financial
position and results of operations. The results of operations for the nine
months ended September 30, 1996 may not be indicative of the results that may be
expected for the year ending December 31, 1996. The December 31, 1995 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 by the Company during the nine months ended September
30, 1996 were $13.0 million.
-7-
