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, 1997
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, 1997 there were outstanding 89,366,104 shares of Common Stock,
par value $1 per share, of the registrant.
<PAGE>
INDEX
PAGE
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
MBIA Inc. and Subsidiaries
Consolidated Balance Sheets - September 30, 1997
and December 31, 1996 3
Consolidated Statements of Income - Three months and
nine months ended September 30, 1997 and 1996 4
Consolidated Statement of Changes in Shareholders' Equity
- Nine months ended September 30, 1997 5
Consolidated Statements of Cash Flows
- Nine months ended September 30, 1997 and 1996 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8 - 20
PART II OTHER INFORMATION, AS APPLICABLE
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
(2)
<PAGE>
MBIA INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
------------------ ------------------
(Unaudited) (Audited)
ASSETS
<S> <C> <C>
Investments:
Fixed-maturity securities held as available-for-sale
at fair value (amortized cost $4,513,710 and $4,001,562) $4,725,555 $4,149,700
Short-term investments, at amortized cost
(which approximates fair value) 212,656 176,088
Other investments 16,209 14,851
------------ ------------
4,954,420 4,340,639
Municipal investment agreement portfolio held as available-for-sale
at fair value (amortized cost $3,149,589 and $3,263,211) 3,213,175 3,293,298
------------ ------------
TOTAL INVESTMENTS 8,167,595 7,633,937
Cash and cash equivalents 8,416 7,356
Securities borrowed or purchased under agreements to resell 369,401 217,000
Accrued investment income 107,655 104,725
Deferred acquisition costs 153,487 147,750
Prepaid reinsurance premiums 230,559 216,846
Goodwill (less accumulated amortization of $47,807 and $43,050) 121,955 105,138
Property and equipment, at cost (less accumulated depreciation
of $25,228 and $21,642) 57,542 50,923
Receivable for investments sold 54,023 980
Other assets 113,200 77,360
------------ ------------
TOTAL ASSETS $9,383,833 $8,562,015
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deferred premium revenue $1,913,605 $1,785,875
Loss and loss adjustment expense reserves 73,246 59,314
Municipal investment agreements 1,937,162 2,290,609
Municipal repurchase agreements 1,119,528 968,671
Long-term debt 473,849 374,010
Short-term debt 20,000 29,100
Securities loaned or sold under agreements to repurchase 502,301 217,000
Deferred income taxes 255,454 206,492
Payable for investments purchased 70,361 52,029
Other liabilities 111,101 99,218
------------ ------------
TOTAL LIABILITIES 6,476,607 6,082,318
------------ ------------
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-- 44,678,485 and 43,294,243 44,678 43,294
Additional paid-in capital 948,252 803,078
Retained earnings 1,745,131 1,518,994
Cumulative translation adjustment (7,723) (1,042)
Unrealized appreciation of investments, net of
deferred income tax provision of $97,362 and $62,706 180,638 116,424
Unearned compensation--restricted stock (3,750) (1,051)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 2,907,226 2,479,697
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $9,383,833 $8,562,015
============ ============
</TABLE>
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
-------------------------- --------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues
Insurance:
Gross premiums written $124,371 $ 79,910 $381,125 $334,510
Ceded premiums (16,204) (9,036) (45,017) (35,665)
Net premiums written 108,167 70,874 336,108 298,845
Increase in deferred premium revenue (33,959) (6,336) (117,303) (111,889)
----------- ----------- ----------- -----------
Premiums earned (net of ceded
premiums of $10,039, $10,285,
$31,304 and $29,187) 74,208 64,538 218,805 186,956
Net investment income 71,848 62,992 205,832 183,563
Net realized gains 6,119 3,115 12,974 9,702
Investment management services:
Income 6,273 6,819 20,112 19,543
Net realized gains 390 1,529 2,042 2,463
Other 7,849 1,031 13,794 3,019
----------- ----------- ----------- -----------
Total revenues 166,687 140,024 473,559 405,246
----------- ----------- ----------- -----------
Expenses
Insurance:
Losses and loss adjustment 4,892 2,888 13,150 10,354
Policy acquisition costs, net 7,037 6,404 20,612 18,294
Operating 12,977 12,551 36,766 34,625
Investment management services 4,041 3,379 12,084 10,339
Interest 10,003 8,605 27,314 24,983
Other 5,784 939 14,315 1,989
----------- ----------- ----------- -----------
Total expenses 44,734 34,766 124,241 100,584
----------- ----------- ----------- -----------
Income before income taxes 121,953 105,258 349,318 304,662
Provision for income taxes 25,388 21,937 72,794 63,979
----------- ----------- ----------- -----------
NET INCOME $ 96,565 $ 83,321 $276,524 $240,683
=========== =========== =========== ===========
NET INCOME PER COMMON SHARE $ 2.15 $ 1.92 $ 6.27 $ 5.57
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES AND COMMON
STOCK EQUIVALENTS OUTSTANDING 44,866,646 43,447,213 44,113,080 43,231,575
=========== =========== =========== ===========
</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, 1997
(In thousands except per share amounts)
<TABLE>
<CAPTION>
Unearned
Common Stock Additional Cumulative Unrealized Compensation-
---------------- Paid-in Retained Translation Appreciation Restricted
Shares Amount Capital Earnings Adjustment of Investments Stock
------ ------ ------- ---------- ----------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 43,294 $43,294 $803,078 $1,518,994 $(1,042) $116,424 $(1,051)
Net proceeds from issuance
of shares 1,210 1,210 132,246 --- --- --- ---
Unearned compensation-
restricted stock 33 33 3,762 --- --- --- (2,699)
Exercise of stock options 141 141 9,166 --- --- --- ---
Net income --- --- --- 276,524 --- --- ---
Change in foreign currency
translation --- --- --- --- (6,681) --- ---
Change in unrealized
appreciation of investments
net of change in deferred
income taxes of ($34,656) --- --- --- --- --- 64,214 ---
Dividends (declared per common
share $1.150, paid per
common share $1.140) --- --- --- (50,387) --- --- ---
-------- -------- --------- ---------- --------- --------- ---------
Balance, September 30, 1997 44,678 $44,678 $948,252 $1,745,131 $(7,723) $180,638 $(3,750)
======== ======== ========= ========== ========= ========= =========
</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
---------------------------
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 276,524 $ 240,683
Adjustments to reconcile net income to net cash
provided by operating activities:
Increase in accrued investment income (2,930) (10,575)
Increase in deferred acquisition costs (5,737) (4,589)
Increase in prepaid reinsurance premiums (13,713) (6,478)
Increase in deferred premium revenue 131,016 118,367
Increase in loss and loss adjustment expense reserves 13,932 9,136
Depreciation 3,834 3,219
Amortization of goodwill 4,757 3,784
Amortization of bond discount, net (15,123) (16,559)
Net realized gains on sale of investments (15,016) (12,165)
Deferred income taxes 14,313 9,231
Other, net (35,893) (42,046)
----------- -----------
Total adjustments to net income 79,440 51,325
----------- -----------
Net cash provided by operating activities 355,964 292,008
----------- -----------
Cash flows from investing activities:
Purchase of fixed-maturity securities, net
of payable for investments purchased (1,606,108) (1,047,429)
Sale of fixed-maturity securities, net of
receivable for investments sold 917,679 589,812
Redemption of fixed-maturity securities, net of
receivable for investments redeemed 126,478 106,439
Sale (purchase) of short-term investments, net 9,244 (23,293)
Sale of other investments, net 565 361
Purchases for municipal investment agreement
portfolio, net of payable for investments purchased (903,505) (1,454,325)
Sales from municipal investment agreement
portfolio, net of receivable for investments sold 1,016,269 1,120,804
Capital expenditures, net of disposals (7,858) (4,095)
Other, net (17,049) ---
----------- -----------
Net cash used by investing activities (464,285) (711,726)
----------- -----------
Cash flows from financing activities:
Net proceeds from issuance of common stock 126,456 55,233
Net proceeds from issuance of long-term debt 100,000 ---
Net (repayments) proceeds from (retirement) issuance
of short-term debt (9,100) 24,400
Dividends paid (49,416) (44,112)
Proceeds from issuance of municipal investment
and repurchase agreements 1,232,522 1,600,735
Payments for drawdowns of municipal investment
and repurchase agreements (1,433,288) (1,311,689)
Securities loaned or sold under agreements to repurchase, net 132,900 61,000
Exercise of stock options 9,307 20,028
----------- -----------
Net cash provided by financing activities 109,381 405,595
----------- -----------
Net increase (decrease) in cash and cash equivalents 1,060 (14,123)
Cash and cash equivalents - beginning of period 7,356 23,258
----------- -----------
Cash and cash equivalents - end of period $ 8,416 $ 9,135
=========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Income taxes paid $ 59,904 $ 53,760
Interest paid:
Municipal investment and repurchase agreements $ 147,814 $ 131,254
Long-term debt 25,100 24,997
Short-term debt 1,805 541
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
(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, 1996 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, 1997 may not be
indicative of the results that may be expected for the year ending December 31,
1997. The December 31, 1996 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. Certain amounts have
been reclassified in prior years' financial statements to conform to the current
presentation.
2. Dividends Declared
Dividends declared by the company during the nine months ended September 30,
1997 were $50.4 million.
3. Recent Accounting Pronouncement
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 128 (SFAS 128), "Earnings per Share," effective
for periods ending after December 15, 1997. SFAS 128 requires the calculation
and presentation on the face of the income statement of "basic" earnings per
share and, if applicable, "diluted" earnings per share. Basic earnings per share
are calculated based on the weighted average common shares outstanding. In
calculating diluted earnings per share, the number of shares is increased to
include all potentially dilutive common shares, including stock options. The
adoption of SFAS 128 is not expected to have a material effect on reported
earnings per share.
(7)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
- ------------
MBIA Inc. (our company or MBIA) is the world's premier financial guarantee
company and a leading provider of investment management products and services.
Through MBIA Insurance Corp. and its subsidiaries (our insurance company), we
provide financial guarantees to municipalities and other bond issuers. Our
primary business is insuring municipal bonds issued by governmental units to
finance essential public services. We also guarantee structured asset-backed and
mortgage-backed transactions, selected corporate bonds, including investor-owned
utility debt, and obligations of high-quality financial institutions. We provide
these products in both the new issue and secondary markets -- internationally as
well as domestically.
MBIA also provides investment management products and services to the public
sector. These include cash management, municipal investment agreements,
discretionary asset management and administrative services. In addition, we have
expanded the range of municipal services that we offer to state and local
governments.
RESULTS OF OPERATIONS
- ---------------------
SUMMARY
The following chart presents highlights of our consolidated financial results
for the third quarter and first nine months of 1997 and 1996:
<TABLE>
<CAPTION>
Percent Change
--------------------------
3rd Quarter Year-to-date
------------ ------------
3rd Quarter September 30 1997 1997
-------------- -------------- vs. vs.
1997 1996 1997 1996 1996 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income (in millions) $ 96.6 $ 83.3 $276.5 $240.7 16% 15%
Per share data:
Net income $ 2.15 $ 1.92 $ 6.27 $ 5.57 12% 13%
Operating earnings $ 2.06 $ 1.85 $ 6.05 $ 5.39 11% 12%
Core earnings $ 1.90 $ 1.69 $ 5.54 $ 4.91 12% 13%
Book value $65.07 $54.69 19%
Adjusted book value $92.37 $79.56 16%
</TABLE>
(8)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
We believe core earnings, which exclude the effects of refundings and calls of
our insured issues, realized capital gains and losses, accounting changes and
other non-recurring items, provide the most indicative measure of our underlying
profit trend. In 1997, core earnings per share increased by 12% for the third
quarter and 13% for the first nine months over the comparable periods in 1996.
The consistent double-digit increases in quarterly year-to-year core earnings
over the past 21 quarters are due primarily to growth in premiums earned and net
investment income generated by our insurance operations.
Any difference between the growth rate of core earnings and net income is
related to the net income effects of refunded issues and realized capital gains
and losses.
Operating earnings per share, which excludes the impact of realized capital
gains and losses, increased by 11% for the third quarter and 12% for the first
nine months, over the comparable periods last year.
Our book value at the end of the first nine months of 1997 was $65.07 per share,
up from $54.69 for the first nine months of 1996. As with core earnings, we
believe that a more appropriate measure of a financial guarantee company's
intrinsic value is its adjusted book value. It is defined as book value plus the
after-tax effects of our net deferred premium revenue (net of deferred
acquisition costs) plus the present value of unrecorded future installment
premiums. The following table presents the components of our adjusted book value
per share:
September 30, September 30, Percent Change
------------- ------------- --------------
1997 1996 1997 vs. 1996
- ----------------------------------------------------------------------------
Book value $65.07 $54.69 19%
After-tax value of:
Net deferred premium
revenue, net of deferred
acquisition costs 22.25 20.79 7%
Present value of future
installment premiums* 5.05 4.08 24%
- ----------------------------------------------------------------------------
Adjusted book value $92.37 $79.56 16%
- ----------------------------------------------------------------------------
* The discount rate used to present value future installment premiums was 9% in
1997 and 1996.
Our adjusted book value per share was $92.37 at September 30, 1997, a 16%
increase from September 30, 1996. The increase was due to our strong operating
results, growth from new business written, and, with lower interest rates, the
increase in the fair value of our fixed-income investment portfolios.
(9)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
FINANCIAL GUARANTEE INSURANCE
For the first nine months of 1997 total gross premiums written (GPW) increased
by 14% to $381.1 million from $334.5 million in 1996. GPW, as reported on our
financial statements, reflects cash receipts only and does not include the value
of future premium receipts expected for installment-based insurance policies
originated in the period. To provide additional information regarding
year-to-year changes in new business premium production, we discuss our adjusted
gross premiums (AGP), which include our upfront premiums as well as the
estimated present value of current and future premiums from installment-based
insurance policies issued in the period. MBIA's premium production in terms of
GPW and AGP for the third quarters and first nine months of 1997 and 1996 is
presented in the following table:
<TABLE>
<CAPTION>
Percent Change
--------------------------
3rd Quarter Year-to-date
------------ ------------
3rd Quarter Year-to-date 1997 1997
-------------- -------------- vs. vs.
In millions 1997 1996 1997 1996 1996 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Premiums written:
GPW $124.4 $79.9 $381.1 $334.5 56% 14%
AGP $142.6 $94.9 $433.7 $379.6 50% 14%
</TABLE>
We estimate the present value of our total future installment premium stream on
outstanding policies to be $346.8 million at third quarter-end 1997, compared
with $270.9 million at third quarter-end 1996.
MUNICIPAL MARKET New issuance in the municipal market was $51.1 billion for the
third quarter of 1997, up 51% from $33.8 billion in the third quarter of 1996.
The insured portion of this market rose to a record 57% from 55% in the third
quarter of 1996. With a 50% market share, we continued our market leadership in
the new issue insured municipal market.
For the third quarter, MBIA insured $11.8 billion of par value in the domestic
new issue and secondary municipal markets, an 81% increase from $6.5 billion
insured in the 1996 third quarter. For the first nine months, we insured $34.7
billion of municipal bonds in these markets, a 29% increase from the $26.9
billion of a year ago.
Municipal market domestic new issuance information and MBIA's par and premium
writings in both the new issue and secondary domestic municipal finance markets
are shown in the following table:
(10)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
Percent Change
--------------------------
3rd Quarter Year-to-date
------------ ------------
3rd Quarter Year-to-date 1997 1997
-------------- -------------- vs. vs.
Domestic Municipal 1997 1996 1997 1996 1996 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total new issue market:*
Par value (in billions) $ 51.1 $33.8 $135.8 $114.5 51% 19%
Insured penetration 57% 55% 57% 53%
MBIA market share 50% 33% 48% 39%
MBIA insured:
Par value: (in billions) $ 11.8 $ 6.5 $ 34.7 $ 26.9 81% 29%
Premiums: (in millions)
GPW $102.2 $52.3 $315.7 $257.9 96% 22%
AGP $103.4 $51.0 $320.9 $252.8 103% 27%
- -------------------------------------------------------------------------------------------
</TABLE>
* Market data are reported on a sale date basis while MBIA's insured data are
based on closing date information. Typically, there can be a one- to
four-week delay between the sale date and closing date of an insured issue.
STRUCTURED FINANCE MARKET The par value issuance in the asset-backed securities
market (excluding private placements and mortgage-backed securities, for which
market data are unavailable) increased 74% in the third quarter and 16% in the
first nine months of 1997.
MBIA insured a record $10.4 billion of par value in the third quarter, an
increase of 121% from the $4.7 billion insured in the same period last year. For
the first nine months of 1997, our structured finance volume rose 46% to $19.1
billion compared to $13.1 billion in the first nine months of 1996. Details
regarding the asset-backed market and MBIA's par and premium writings in both
the domestic new issue and secondary structured finance markets (which includes
mortgaged-backed as well as asset-backed securities) are shown in the following
table:
<TABLE>
<CAPTION>
Percent Change
--------------------------
3rd Quarter Year-to-date
------------ ------------
3rd Quarter Year-to-date 1997 1997
Domestic -------------- -------------- vs. vs.
Structured Finance 1997 1996 1997 1996 1996 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total asset-backed
market:*
Par value (in billions) $57.0 $32.8 $125.8 $108.8 74% 16%
MBIA insured:
Par value: (in billions) $10.4 $ 4.7 $ 19.1 $ 13.1 121% 46%
Premiums: (in millions)
GPW $15.0 $12.9 $ 40.0 $ 40.7 15% (2%)
AGP $29.8 $23.1 $ 76.0 $ 75.6 29% 1%
- --------------------------------------------------------------------------------------------
</TABLE>
* Market data exclude mortgage-backed securities and private placements.
(11)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
INTERNATIONAL MARKET In late 1995, we formed a joint venture with AMBAC
Assurance Corporation "AMBAC" (another leading Triple-A rated financial
guarantee insurer) to market financial guarantee insurance internationally. 1997
par value and premium data are showing decreases from 1996 due to the timing in
the assumption of business written by AMBAC in the third quarter. While
retaining the right to act individually, AMBAC and MBIA have the opportunity to
reinsure up to 50% of the financial guarantee business written by the other
company internationally as part of the joint venture. Customer preference,
licensing and market considerations will determine which company will insure a
particular transaction. Our international municipal and structured finance
business volume in the new issue and secondary markets for the first nine months
and the third quarters of 1997 and 1996 is illustrated in the following table.
<TABLE>
<CAPTION>
Percent Change
--------------------------
3rd Quarter Year-to-date
------------ ------------
3rd Quarter Year-to-date 1997 1997
-------------- -------------- vs. vs.
International 1997 1996 1997 1996 1996 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Par value (in billions) $1.0 $ 1.4 $ 2.3 $ 2.5 (32%) (9%)
Premiums: (in millions)
GPW $3.6 $ 6.5 $13.5 $20.3 (41%) (33%)
AGP $4.6 $10.9 $22.4 $27.3 (58%) (18%)
</TABLE>
CEDED PREMIUMS Reinsurance allows an insurance company to transfer portions of
its insured business to a reinsurance company. In exchange for insuring a
portion of our risk, the reinsurance company receives a part of our premium
(ceded premium) for which we, in turn, receive a ceding commission. We use
reinsurance to increase our capacity to write new business when we are subject
to certain single risk limitations and to manage the overall risk profile of our
insurance portfolio.
Premiums ceded to reinsurers from all insurance operations were $16.2 million
and $45.0 million in the third quarter and first nine months of 1997,
respectively. For the first nine months, cessions as a function of GPW were 12%
in 1997 and 11% in 1996. Any variance in the level of cessions generally
reflects the higher or lower utilization of treaty or facultative reinsurance
required to comply with regulatory constraints or our own single risk limits.
Most of our reinsurers are rated Double-A or higher by Standard & Poor's
Corporation or Single-A or higher by A. M. Best Co. Although we remain liable
for all reinsured risks, we believe we will recover the reinsured portion of any
losses that may occur.
(12)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
REVENUES Our insurance revenues are primarily comprised of premiums earned and
investment income. Premiums are recognized over the life of the bonds we insure.
The slow premium recognition coupled with compounding investment income from
investing our premiums and capital form a solid foundation for consistent
revenue growth.
PREMIUMS EARNED For approximately 80% of our insurance writings, we receive
premiums upfront and earn them pro rata over the period of risk of the bond
issue. Accordingly, the portion of net premiums earned on each policy in any
given year represents a relatively small percentage of the total net upfront
premium received. The balance represents deferred premium revenue to be earned
over the remaining life of the insured bond issue.
For 20% of our business writings - primarily our structured finance business --
we collect installment premiums. Installment premiums are credited to the
deferred premium revenue account when received, and are recognized as revenue
over each installment period - generally one year or less.
When an MBIA-insured bond issue is refunded or retired early the related
deferred premium revenue is earned immediately, except for any portion that may
be applied as a credit towards insuring the refunding bond issue. The amount of
bond refundings and calls is influenced by a variety of factors such as
prevailing interest rates, the coupon rates of the bond issue, the issuer's
desire or ability to modify bond covenants and applicable regulations under the
Internal Revenue Code. The composition of MBIA's premiums earned in terms of its
scheduled and refunded components is illustrated in the following table:
<TABLE>
<CAPTION>
Percent Change
--------------------------
3rd Quarter Year-to-date
------------ ------------
3rd Quarter Year-to-date 1997 1997
-------------- -------------- vs. vs.
In millions 1997 1996 1997 1996 1996 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Premiums earned:
Scheduled $61.7 $52.7 $180.5 $151.6 17% 19%
Refunded 12.5 11.8 38.3 35.4 5% 8%
- --------------------------------------------------------------------------------------------
Total $74.2 $64.5 $218.8 $187.0 15% 17%
</TABLE>
The year-to-year increase in premiums earned from scheduled amortization
reflects the additive effect of new business written, including the expanding
installment premium activity from the structured finance and international
sectors.
INVESTMENT INCOME For the quarter, net investment income was $71.8 million, a
14% increase over the same period last year. Our insurance related investment
income (exclusive of realized capital gains) increased by 12% to $205.8 million
in the first nine months of 1997 from $183.6 million in 1996. The 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), financing activities in February 1996 and July
1997 and from the equity offering in July 1997.
(13)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Insurance related net realized capital gains were $13.0 million in the first
nine months of 1997 and $9.7 million in 1996. These realized gains were
generated as a result of ongoing management of the investment portfolio.
LOSSES AND LOSS ADJUSTMENT EXPENSES (LAE) We maintain a general loss reserve
based on our estimate of unidentified losses from our insured obligations. To
the extent that we identify specific insured issues as currently or likely to be
in default, the present value of our expected payments, net of expected
reinsurance and collateral recoveries, is allocated within the total loss
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.
The following table shows the case-specific and unallocated components of our
total loss and LAE reserves for the first nine months of 1997 and 1996:
September 30, September 30, Percent Change
------------- ------------- --------------
In millions 1997 1996 1997 vs. 1996
- ----------------------------------------------------------------------------
Reserves:
Case-specific $20.5 $16.8 22%
Unallocated 52.7 34.8 51%
- ----------------------------------------------------------------------------
Total $73.2 $51.6 42%
Provision $13.2 $10.4 27%
Our provision for losses and LAE increased in tandem with new business writings
in accordance with our loss reserving methodology. The changes in the
case-specific reserve had no impact on our net income since they were offset by
corresponding changes in the unallocated portion of the total reserve.
OPERATING EXPENSES Those expenses related to the production of our insurance
business (policy acquisition costs) are deferred and recognized over the period
in which the related premiums are earned. Our company's policy acquisition
costs, general operating expenses and total operating expenses are shown in the
following table:
(14)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
Percent Change
--------------------------
3rd Quarter Year-to-date
------------ ------------
3rd Quarter Year-to-date 1997 1997
-------------- -------------- vs. vs.
In millions 1997 1996 1997 1996 1996 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Policy acquisition
costs, net $ 7.0 $ 6.4 $20.6 $18.3 10% 13%
Operating 13.0 12.6 36.8 34.6 3% 6%
- -------------------------------------------------------------------------------------------
Total insurance
operating expenses $20.0 $19.0 $57.4 $52.9 6% 8%
</TABLE>
For the third quarter and first nine months of 1997, policy acquisition costs
net of deferrals increased 10% and 13%, respectively. The ratio of policy
acquisition costs net of deferrals to earned premiums has remained relatively
constant in the 9% range for the third quarters and first nine months of 1997
and 1996. Operating expenses increased by 3% for the third quarter and 6% for
the first nine months over the prior year's comparable periods.
INVESTMENT MANAGEMENT SERVICES
Our investment management businesses have expanded the services we provide to
the public sector and added new revenue sources. Average assets under management
for these businesses have increased from $6.1 billion during third quarter 1996
to $7.7 billion during third quarter 1997. These assets include our municipal
investment agreements, pooled public funds and third-party accounts. The 25%
increase in average assets in the third quarter of 1997 is primarily
attributable to our acquisition of American Money Management Associates, Inc.
(AMMA) in late 1996. For the nine months, the 13% decline in pretax operating
results compared with the same period last year is due to a shift in the mix of
assets under management. Pretax financial results for the third quarters and
first nine months of 1997 and 1996 are summarized on the following table:
<TABLE>
<CAPTION>
Percent Change
--------------------------
3rd Quarter Year-to-date
------------ ------------
3rd Quarter Year-to-date 1997 1997
-------------- -------------- vs. vs.
In millions 1997 1996 1997 1996 1996 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $6.2 $6.8 $20.1 $19.5 (8%) 3%
Expenses $4.0 $3.4 $12.1 $10.3 20% 17%
- --------------------------------------------------------------------------------------------
Pretax operating
income $2.2 $3.4 $ 8.0 $ 9.2 (35%) (13%)
Net realized gains $0.4 $1.5 $ 2.0 $ 2.5 (74%) (17%)
</TABLE>
(15)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The following provides a summary of each of our primary investment management
businesses:
MBIA MUNICIPAL INVESTORS SERVICE CORPORATION (MBIA-MISC) provides cash
management services and fixed-rate investment placement services directly to
local governments and school districts. In addition, MBIA-MISC performs
investment fund administration services for clients, which provide an additional
source of revenue to our company at little added cost. In late 1996, MBIA-MISC
acquired AMMA, which provides investment and treasury management consulting
services for municipal and quasi-public sector clients. Both MBIA-MISC and AMMA
are Securities and Exchange Commission (SEC) -- registered investment advisers.
At third quarter-end 1997, MBIA-MISC had $4.3 billion of client assets under
management compared with $3.0 billion at third quarter-end 1996, reflecting
primarily the addition of assets under management from the acquisition of AMMA
in late 1996.
MBIA INVESTMENT MANAGEMENT CORP. (IMC) provides guaranteed investment agreements
for bond proceeds of states and municipalities. At third quarter-end 1997,
principal and accrued interest outstanding on investment agreements was $3.1
billion compared with $2.9 billion at third quarter-end 1996. At amortized cost,
the assets supporting IMC's investment agreement liabilities were $3.1 billion
and $3.0 billion at September 30, 1997 and 1996, respectively. These assets are
comprised of high-quality securities with an average credit quality rating of
Double-A.
IMC, from time to time, uses derivative financial instruments to manage interest
rate risk. We have established policies limiting the amount, type and
concentration of such instruments. By matter of policy, derivative positions can
only be used to hedge interest rate exposures and not for speculative trading
purposes. At third quarter-end 1997, our exposure to derivative financial
instruments was not significant.
MBIA CAPITAL MANAGEMENT CORP. (CMC) provides investment management services for
IMC's investment agreements, MBIA-MISC's municipal cash management programs and
MBIA's insurance related portfolios, as well as third-party accounts. CMC
assumed full management for MBIA's insurance related fixed-income investment
portfolio in 1996, which was previously managed externally.
MUNICIPAL SERVICES
MBIA MUNISERVICES COMPANY (formerly known as Strategic Services, Inc.) was
established in 1996 to provide bond administration, revenue enhancement and
other services to state and local governments. In May 1996, MBIA MuniServices
Company acquired an equity interest in Capital Asset Holdings (Capital Asset), a
purchaser and servicer of delinquent tax certificates. It also provides a series
of services to assist taxing authorities in the preparation, analysis, packaging
and completion of delinquent tax obligation sales.
(16)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
In January 1997, MBIA MuniServices Company acquired a 95% interest in Municipal
Tax Bureau (MTB), a provider of tax revenue compliance and collection services
to public entities. In July 1997, MBIA MuniServices Company acquired
MuniFinancial, a public finance consulting firm specializing in municipal debt
administration.
MBIA & ASSOCIATES CONSULTING, INC. was established in 1997 to provide assistance
to state and local governments, colleges and universities, and international
public and private sector clients seeking to strengthen their strategic
financial planning and management capabilities.
INTEREST EXPENSE
Interest expense in the third quarter and first nine months of 1997, was $10.0
million and $27.3 million, respectively compared with $8.6 million and $25.0
million in the same periods last year. The increase in interest expense was due
to the $100 million addition to MBIA's long-term debt in July 1997 and to
short-term bank borrowings.
TAXES
Our tax policy is to optimize our after-tax income by maintaining the
appropriate mix of taxable and tax-exempt investments. Our effective tax rate
has remained unchanged, at 21% for the first nine months of 1997 and 1996.
OTHER CORPORATE DEVELOPMENTS
- ----------------------------
On July 15, MBIA announced that it completed the sale of 1,150,000 shares of
common stock at $114 per share and of $100 million of 30-year debentures. The
company received $225 million in net proceeds to support future growth and for
general corporate purposes.
On September 18, MBIA announced that its board of directors had approved a
2-for-1 stock split. The 2-for-1 stock split was accomplished through a 100
percent stock dividend payable October 29 to shareholders of record as of
October 1.
On November 14, MBIA and CapMAC Holdings Inc. jointly announced the signing of a
definitive agreement to merge in a stock transaction. Under the agreement,
CapMAC shareholders will receive MBIA stock equal to $35 for each share of
CapMAC stock. If MBIA stock price falls below $53 per share, CapMAC shareholders
will receive a fixed exchange ratio of 0.6604 shares of MBIA stock for each
share of CapMAC stock, and if MBIA's stock price rises above $70 per share,
CapMAC shareholders will receive a fixed exchange ratio of 0.5000 shares of MBIA
stock for each CapMAC share. The fixed exchange ratio will be determined by the
average closing price of MBIA's stock for 15 consecutive days, ending three days
prior to the closing of the transaction.
It is anticipated that the merger will be structured as a tax-free exchange and
accounted for as a "pooling of interests." The transaction, which is subject to
regulatory approvals, approval by CapMAC Holdings Inc. shareholders and other
customary conditions, is expected to be completed by the end of the first
quarter of 1998.
(17)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CAPITAL RESOURCES
- -----------------
We carefully manage our capital resources to optimize our cost of capital, while
maintaining appropriate claims-paying resources to sustain our Triple-A
claims-paying ratings. At the end of the third quarter, our total capital was
$2.9 billion with total long-term borrowings at $474 million. We use debt
financing to lower our overall cost of capital, thereby increasing our return on
shareholders' equity. We maintain debt at levels we consider to be prudent based
on our cash flow and total capital. The following table shows our long-term debt
and ratios we use to measure it:
September 30, December 31,
1997 1996
- -----------------------------------------------------------------
Long-term debt (in millions) $474 $374
Long-term debt to total capital 14% 13%
Ratio of earnings to fixed charges 13.8x 13.2x
In addition, our insurance company has a $825 million irrevocable standby line
of credit with a group of Triple-A banks to provide funds for the payment of
claims in the event that severe losses should occur. The agreement is for a
seven-year term which expires on September 30, 2004 and, subject to approval by
the banks, may be renewed annually to extend the term to seven years beyond the
renewal date.
From time to time MBIA accesses the capital markets to support the growth of our
businesses. In October 1996, to provide us with flexibility to access the
capital markets when market and business conditions are favorable, we filed a
registration statement with the SEC to allow us to offer and sell a combination
of up to $250 million of debt securities, common stock and/or preferred stock.
In July 1997, MBIA completed the sale of 1.15 million shares of common stock at
$114 per share and sold $100 million of 30-year debentures. The $225 million of
net proceeds will be used to support the company's future growth.
As of September 30, 1997, total claims-paying resources for our insurance
company stood at $6.0 billion, a 16% increase over September 30, 1996.
LIQUIDITY
- ---------
Cash flow needs at the parent company level are primarily for dividends to our
shareholders and interest payments on our debt. These requirements have
historically been met by upstreaming dividend payments from our insurance
company which generates substantial cash flow from premium writings and
investment income. In the first nine months of 1997, operating cash flow from
our insurance company was $481 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.
(18)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
In our case, dividends in any 12-month period cannot be greater than 10% of
policyholders' surplus. In the first nine months of 1997 our insurance company
paid no dividends and at September 30, 1997 had dividend capacity in excess of
$154 million without special regulatory approval.
Our company has significant liquidity supporting its businesses. At the end of
the third quarter, cash equivalents and short-term investments totaled $221
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 $300 million with a group of worldwide banks. At
third quarter-end 1997, $20 million was outstanding under these facilities to
fund interim cash requirements.
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 the end of the third quarter 1997, the fair value of
our consolidated investment portfolio increased to $8.2 billion, as shown in the
following table:
September 30, December 31, Percent Change
------------- ------------- --------------
In millions 1997 1996 1997 vs. 1996
- ----------------------------------------------------------------------------
Insurance operations:
Amortized cost $4,742 $4,193 13%
Unrealized gain 212 148 43%
- ----------------------------------------------------------------------------
Fair value $4,954 $4,341 14%
- ----------------------------------------------------------------------------
Municipal investment
agreements:
Amortized cost $3,150 $3,263 (3%)
Unrealized gain 63 30 111%
- ----------------------------------------------------------------------------
Fair value $3,213 $3,293 (2%)
- ----------------------------------------------------------------------------
Total portfolio at fair value $8,168 $7,634 7%
The increase in the fair value of our insurance related investments for the
period was a result of the increase in the amortized cost of our invested assets
due to positive cash flows combined with an increase in unrealized gains. The
fair value of investments related to our municipal investment agreement business
declined slightly to $3.2 billion at September 30, 1997 from $3.3 billion at
December 31, 1996.
(19)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Our investment portfolios are considered to be available-for-sale and the
differences between their fair value and amortized cost, net of applicable
taxes, are reflected as an adjustment to shareholders' equity. Differences
between fair value and amortized cost arise primarily as a result of changes in
interest rates occurring after a fixed-income security is purchased, although
other factors influence fair value, including credit-related actions, supply and
demand forces and other market factors. The weighted-average credit quality of
our fixed-income portfolios has been maintained at Double-A since our inception
in 1986, and since we generally intend to hold most of our investments to
maturity as part of our risk-management strategy, we expect to realize a value
substantially equal to amortized cost.
(20)
<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:
1. The Company filed a report on Form 8-K on July 10, 1997
announcing its plans for primary offerings of one million
common shares and $100 million of debentures. A press
release was filed making such announcement.
2. The Company filed a report of Form 8-K on September 18,
1997 in which the Company's Board of Directors approved a
2-for-1 stock split by means of a stock dividend. A press
release was filed making such announcement.
(21)
<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, 1997 /s/ JULLIETTE S. TEHRANI
------------------ --------------------------
Julliette S. Tehrani
Executive Vice President,
Chief Financial Officer
and Treasurer
Date: November 14, 1997 /s/ ELIZABETH B. SULLIVAN
------------------ ---------------------------
Elizabeth B. Sullivan
Vice President,
Controller
(Principal Accounting Officer)
(22)
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
------------------------- -------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income $96,565 $83,321 $276,524 $240,683
========== ========== ========== ==========
Fully diluted shares:
Average number of common
shares outstanding 44,440 43,064 43,707 42,819
Assumed exercise of dilutive
stock options 448 425 471 481
---------- ---------- ---------- ----------
44,888 43,489 44,178 43,300
========== ========== ========== ==========
Earnings per share assuming
full dilution $2.15 $1.92 $6.26 $5.56
========== ========== ========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<CIK> 0000814585
<NAME> MBIA Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<DEBT-HELD-FOR-SALE> 4,725,555
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 8,167,595
<CASH> 8,416
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 153,487
<TOTAL-ASSETS> 9,383,833
<POLICY-LOSSES> 73,246
<UNEARNED-PREMIUMS> 1,913,605
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 493,849
<COMMON> 44,678
0
0
<OTHER-SE> 2,862,548
<TOTAL-LIABILITY-AND-EQUITY> 9,383,833
218,805
<INVESTMENT-INCOME> 205,832
<INVESTMENT-GAINS> 12,974
<OTHER-INCOME> 35,948
<BENEFITS> 13,150
<UNDERWRITING-AMORTIZATION> 20,612
<UNDERWRITING-OTHER> 36,766
<INCOME-PRETAX> 349,318
<INCOME-TAX> 72,794
<INCOME-CONTINUING> 276,524
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 276,524
<EPS-PRIMARY> 6.27
<EPS-DILUTED> 6.26
<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, 1997 AND DECEMBER 31, 1996
AND FOR THE PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
I N D E X
---------
PAGE
----
Consolidated Balance Sheets -
September 30, 1997 (Unaudited) and December 31, 1996 (Audited) 3
Consolidated Statements of Income -
Three months and nine months ended September 30, 1997
and 1996 (Unaudited) 4
Consolidated Statement of Changes in Shareholder's Equity -
Nine months ended September 30, 1997 (Unaudited) 5
Consolidated Statements of Cash Flows -
Nine months ended September 30, 1997 and 1996 (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, 1997 December 31, 1996
------------------ -----------------
(Unaudited) (Audited)
ASSETS
<S> <C> <C>
Investments:
Fixed-maturity securities held as available-for-sale
at fair value (amortized cost $4,513,710 and $4,001,562) $4,725,555 $4,149,700
Short-term investments, at amortized cost
(which approximates fair value) 207,356 169,889
Other investments 16,209 14,851
------------ ------------
TOTAL INVESTMENTS 4,949,120 4,334,440
Cash and cash equivalents 3,962 3,288
Securities purchased under agreements to resell 168,120 108,900
Accrued investment income 73,615 65,194
Deferred acquisition costs 153,487 147,750
Prepaid reinsurance premiums 230,559 216,846
Goodwill (less accumulated amortization
of $45,929 and $42,262) 97,051 100,718
Property and equipment, at cost (less accumulated
depreciation of $17,260 and $14,782) 51,173 47,176
Receivable for investments sold 45,948 975
Other assets 45,697 40,871
------------ ------------
TOTAL ASSETS $5,818,732 $5,066,158
============ ============
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Deferred premium revenue $1,913,605 $1,785,875
Loss and loss adjustment expense reserves 73,246 59,314
Securities sold under agreements to repurchase 168,120 108,900
Deferred income taxes 232,800 195,704
Payable for investments purchased 69,705 48,811
Other liabilities 136,693 63,683
------------ ------------
TOTAL LIABILITIES 2,594,169 2,262,287
------------ ------------
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 1,134,709 1,041,876
Retained earnings 1,943,413 1,651,315
Cumulative translation adjustment (7,866) (1,188)
Unrealized appreciation of investments,
net of deferred income tax provision
of $75,107 and $52,175 139,307 96,868
------------ ------------
TOTAL SHAREHOLDER'S EQUITY 3,224,563 2,803,871
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $5,818,732 $5,066,158
============ ============
</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
------------------------- -------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Gross premiums written $124,858 $ 80,353 $382,602 $335,807
Ceded premiums (16,204) (9,036) (45,017) (35,665)
----------- ----------- ----------- -----------
Net premiums written 108,654 71,317 337,585 300,142
Increase in deferred premium revenue (33,959) (6,336) (117,303) (111,889)
----------- ----------- ----------- -----------
Premiums earned (net of ceded
premiums of $10,039, $10,285,
$31,304 and $29,187) 74,695 64,981 220,282 188,253
Net investment income 72,283 62,935 206,201 183,339
Net realized gains 6,119 3,115 12,974 9,702
Other 321 724 1,014 2,047
----------- ----------- ----------- -----------
Total revenues 153,418 131,755 440,471 383,341
----------- ----------- ----------- -----------
Expenses:
Losses and loss adjustment 4,892 2,888 13,150 10,354
Policy acquisition costs, net 7,037 6,404 20,612 18,294
Operating 12,984 12,551 36,813 34,625
----------- ----------- ----------- -----------
Total expenses 24,913 21,843 70,575 63,273
----------- ----------- ----------- -----------
Income before income taxes 128,505 109,912 369,896 320,068
Provision for income taxes 27,183 22,026 77,798 67,311
----------- ----------- ----------- -----------
Net income $101,322 $ 87,886 $292,098 $252,757
=========== =========== =========== ===========
</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, 1997
(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, 1997 100,000 $15,000 $1,041,876 $1,651,315 ($1,188) $ 96,868
Net income --- --- --- 292,098 --- ---
Change in foreign
currency translation --- --- --- --- (6,678) ---
Change in unrealized
appreciation of investments
net of change in deferred
income taxes of ($22,932) --- --- --- --- --- 42,439
Capital contribution from
MBIA Inc. --- --- 80,000 --- --- ---
Tax reduction related to tax
sharing agreement
with MBIA Inc. --- --- 12,833 --- --- ---
-------- -------- ----------- ----------- ---------- -------------
Balance, September 30, 1997 100,000 $15,000 $1,134,709 $1,943,413 ($7,866) $139,307
======== ======== =========== =========== ========== =============
</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
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 292,098 $ 252,757
Adjustments to reconcile net income to net
cash provided by operating activities:
Increase in accrued investment income (8,421) (5,839)
Increase in deferred acquisition costs (5,737) (4,589)
Increase in prepaid reinsurance premiums (13,713) (6,478)
Increase in deferred premium revenue 131,016 118,367
Increase in loss and loss adjustment expense reserves 13,932 9,136
Depreciation 2,904 2,179
Amortization of goodwill 3,667 3,672
Amortization of bond discount, net (7,391) (5,510)
Net realized gains on sale of investments (12,974) (9,702)
Deferred income taxes 14,296 10,325
Other, net 70,962 16,606
------------ ------------
Total adjustments to net income 188,541 128,167
------------ ------------
Net cash provided by operating activities 480,639 380,924
------------ ------------
Cash flows from investing activities:
Purchase of fixed-maturity securities, net
of payable for investments purchased (1,606,108) (1,047,429)
Sale of fixed-maturity securities, net of
receivable for investments sold 917,679 589,812
Redemption of fixed-maturity securities,
net of receivable for investments redeemed 126,478 106,439
Sale (purchase) of short-term investments, net 8,345 (12,693)
Sale of other investments, net 565 361
Capital expenditures, net of disposals (6,924) (3,851)
------------ ------------
Net cash used by investing activities (559,965) (367,361)
------------ ------------
Cash flows from financing activities:
Capital contributions from MBIA Inc. 80,000 ---
Dividends paid --- (13,000)
------------ ------------
Net cash provided (used) by financing activities 80,000 (13,000)
------------ ------------
Net increase in cash and cash equivalents 674 563
Cash and cash equivalents - beginning of period 3,288 2,135
------------ ------------
Cash and cash equivalents - end of period $ 3,962 $ 2,698
============ ============
Supplemental cash flow disclosures:
Income taxes paid $ 58,968 $ 50,678
</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 Company's consolidated financial statements and notes
thereto for the year ended December 31, 1996. 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, 1997 may not be indicative of the results that
may be expected for the year ending December 31, 1997. The December 31, 1996
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. Certain amounts have been reclassified in prior years'
financial statements to conform to the current presentation.
2. Dividends Declared
- ----------------------
No dividends were declared by the Company during the nine months ended September
30, 1997.
(7)
