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, 1998
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 November 10,1998 there were outstanding 99,351,231 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, 1998
and December 31, 1997 3
Consolidated Statements of Income - Three months and
nine months ended September 30, 1998 and 1997 4
Consolidated Statement of Changes in Shareholders' Equity
- Nine months ended September 30, 1998 5
Consolidated Statements of Cash Flows
- Nine months ended September 30, 1998 and 1997 6
Notes to Consolidated Financial Statements 7-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-25
PART II OTHER INFORMATION, AS APPLICABLE
Item 6. Exhibits and Reports on Form 8-K 26
SIGNATURES 27
(2)
<PAGE>
MBIA INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
----------------------- -------------------------
ASSETS
<S> <C> <C>
Investments:
Fixed-maturity securities held as available-for-sale
at fair value (amortized cost $5,454,390 and $4,936,760) $ 5,842,968 $ 5,211,311
Short-term investments, at amortized cost
(which approximates fair value) 318,335 303,898
Other investments 67,468 51,693
------------------ -------------------
6,228,771 5,566,902
Municipal investment agreement portfolio
held as available-for-sale at fair value (amortized
cost $3,400,764 and $3,241,703) 3,572,835 3,341,394
------------------ -------------------
TOTAL INVESTMENTS 9,801,606 8,908,296
Cash and cash equivalents 35,330 26,296
Securities borrowed or purchased under agreements to resell 561,763 472,963
Accrued investment income 114,094 121,090
Deferred acquisition costs 236,768 216,165
Prepaid reinsurance premiums 295,175 289,508
Reinsurance recoverable on unpaid losses 170,000 ---
Goodwill (less accumulated amortization of $62,604 and $55,788) 135,478 121,642
Property and equipment, at cost (less accumulated depreciation
of $38,697 and $31,882) 73,565 66,709
Receivable for investments sold 23,961 13,435
Other assets 218,887 148,887
------------------ -------------------
TOTAL ASSETS $11,666,627 $10,384,991
================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deferred premium revenue $ 2,205,690 $ 2,090,460
Loss and loss adjustment expense reserves 282,044 103,061
Municipal investment agreements 2,412,500 1,974,165
Municipal repurchase agreements 991,519 1,177,022
Long-term debt 638,967 488,878
Short-term debt --- 20,000
Securities loaned or sold under agreements to repurchase 579,363 606,263
Deferred income taxes 376,091 298,498
Deferred fee revenue 45,558 48,126
Payable for investments purchased 126,514 44,007
Other liabilities 234,563 172,999
------------------ -------------------
TOTAL LIABILITIES 7,892,809 7,023,479
------------------ -------------------
Shareholders' Equity:
Preferred stock, par value $1 per share; authorized shares--
10,000,000; issued and outstanding--none --- ---
Common stock, par value $1 per share; authorized shares--
200,000,000; issued shares-- 99,323,511 and 98,754,523 99,324 98,754
Additional paid-in capital 1,159,024 1,133,950
Retained earnings 2,162,768 1,901,608
Accumulated other comprehensive income, net of
deferred income tax provision of $196,632 and $132,026 362,015 236,095
Unallocated ESOP shares (4,083) (4,083)
Unearned compensation--restricted stock (4,595) (4,812)
Treasury stock, at cost; shares 18,800 in 1998 (635) ---
------------------ -------------------
TOTAL SHAREHOLDERS' EQUITY 3,773,818 3,361,512
------------------ -------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $11,666,627 $10,384,991
================== ===================
</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
------------------------------ ------------------------------
1998 1997 1998 1997
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues
Insurance:
Gross premiums written $167,355 $146,941 $486,745 $439,791
Ceded premiums (27,498) (23,632) (69,111) (63,066)
----------- ---------- ----------- ----------
Net premiums written 139,857 123,309 417,634 376,725
Increase in deferred premium revenue (34,214) (35,622) (108,773) (120,206)
----------- ---------- ----------- ----------
Premiums earned (net of ceded
premiums of $30,027, $14,906,
$63,444 and $44,494) 105,643 87,687 308,861 256,519
Net investment income 84,067 77,027 247,195 221,421
Net realized gains 9,089 6,119 22,981 11,776
Advisory fees 4,696 4,411 18,135 12,640
Investment management services:
Income 16,047 11,619 44,332 34,954
Net realized gains 4,787 391 11,879 2,043
Other 11,657 8,063 31,602 14,432
----------- ---------- ----------- ----------
Total revenues 235,986 195,317 684,985 553,785
----------- ---------- ----------- ----------
Expenses
Insurance:
Losses and loss adjustment 9,028 6,420 24,613 17,554
Policy acquisition costs, net 6,869 8,377 25,324 26,205
Operating 20,762 19,508 54,223 56,398
Investment management services 8,614 7,234 25,401 21,494
Interest 10,974 10,303 31,959 28,216
Other 36,159 6,281 90,745 16,142
----------- ---------- ----------- ----------
Total expenses 92,406 58,123 252,265 166,009
----------- ---------- ----------- ----------
Income before income taxes 143,580 137,194 432,720 387,776
Provision for income taxes 35,337 30,642 103,343 84,575
----------- ---------- ----------- ----------
Net income $108,243 $106,552 $329,377 $303,201
=========== ========== =========== ==========
Net income per common share
Basic $ 1.09 $ 1.09 $ 3.33 $ 3.15
Diluted $ 1.08 $ 1.07 $ 3.29 $ 3.10
Weighted average number of
common shares outstanding
Basic 99,098,611 98,008,870 98,882,373 96,398,516
Diluted 100,230,622 99,329,666 100,171,148 97,839,020
</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, 1998
(In thousands except per share amounts)
<TABLE>
<CAPTION>
Unearned
Common Stock Additional Unallocated Compensation-
---------------- Paid-in Retained ESOP Restricted
Shares Amount Capital Earnings Shares Stock
------ ------- ---------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998 98,754 $98,754 $1,133,950 $1,901,608 $(4,083) $(4,812)
Comprehensive income:
Net income --- --- --- 329,377 --- ---
Other comprehensive income:
Change in unrealized
appreciation of investments
net of change in deferred
income taxes of $(64,606) --- --- --- --- --- ---
Change in foreign currency
translation --- --- --- --- --- ---
Other comprehensive income
Comprehensive income
Treasury shares acquired --- --- 635 --- --- ---
Exercise of stock options 535 535 22,242 --- --- ---
Unearned compensation-
restricted stock 35 35 2,197 --- --- 217
Dividends (declared per common
share $0.590, paid per
common share $0.585) --- --- --- (68,217) --- ---
------ ------- ---------- ---------- ----------- -------------
Balance, September 30, 1998 99,324 $99,324 $1,159,024 $2,162,768 $(4,083) $(4,595)
====== ======= ========== ========== =========== =============
<CAPTION>
Accumulated
Other Treasury Stock Total
Comprehensive -------------- Shareholders'
Income Shares Amount Equity
------------- ------ ------ -------------
Balance, January 1, 1998 $236,095 --- --- $3,361,512
Comprehensive income:
Net income --- --- --- 329,377
Other comprehensive income:
Change in unrealized
appreciation of investments
net of change in deferred
income taxes of $(64,606) 120,717 --- --- 120,717
Change in foreign currency
translation 5,203 --- --- 5,203
-----------
Other comprehensive income 125,920
-----------
Comprehensive income 455,297
-----------
Treasury shares acquired --- 19 (635) ---
Exercise of stock options --- --- --- 22,777
Unearned compensation-
restricted stock --- --- --- 2,449
Dividends (declared per common
share $0.590, paid per
common share $0.585) --- --- --- (68,217)
------------- ------ ------ -------------
Balance, September 30, 1998 $362,015 19 $(635) $3,773,818
============= ====== ====== =============
</TABLE>
Disclosure of reclassification amount:
Unrealized appreciation of
investments arising
during the period $143,287
Reclassification of adjustment,
net of taxes (22,570)
--------
Net unrealized appreciation,
net of taxes $120,717
========
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
-----------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 329,377 $ 303,201
Adjustments to reconcile net income to net cash
provided by operating activities:
Decrease (increase) in accrued investment income 6,996 (3,163)
Increase in deferred acquisition costs (20,603) (13,326)
Increase in prepaid reinsurance premiums (5,667) (18,572)
Increase in deferred premium revenue 114,440 138,778
Increase in loss and loss adjustment expense reserves 8,983 18,336
Depreciation 6,138 4,440
Amortization of goodwill 6,816 5,743
Amortization of bond discount, net (17,304) (15,123)
Net realized gains on sale of investments (34,860) (13,818)
Deferred income taxes 12,927 16,158
Other, net (205) (24,514)
-------------- --------------
Total adjustments to net income 77,661 94,939
-------------- --------------
Net cash provided by operating activities 407,038 398,140
-------------- --------------
Cash flows from investing activities:
Purchase of fixed-maturity securities, net
of payable for investments purchased (1,700,367) (1,762,303)
Sale of fixed-maturity securities, net of
receivable for investments sold 710,806 992,447
Redemption of fixed-maturity securities, net of
receivable for investments redeemed 616,881 176,036
(Purchase) sale of short-term investments, net (52,346) 9,209
Purchase of other investments, net (16,172) (636)
Purchases for municipal investment agreement
portfolio, net of payable for investments purchased (1,652,516) (903,505)
Sales from municipal investment agreement
portfolio, net of receivable for investments sold 1,509,878 1,016,269
Capital expenditures, net of disposals (12,986) (10,759)
Other, net (20,658) (17,173)
-------------- --------------
Net cash used by investing activities (617,480) (500,415)
-------------- --------------
Cash flows from financing activities:
Net proceeds from issuance of common stock --- 126,456
Net proceeds from issuance of long-term debt 148,688 100,000
Net repayment from retirement of short-term debt (20,000) (9,100)
Dividends paid (65,805) (53,573)
Proceeds from issuance of municipal investment
and repurchase agreements 1,772,672 1,232,522
Payments for drawdowns of municipal investment
and repurchase agreements (1,523,156) (1,433,288)
Securities (purchased) sold under agreements to
(resell) repurchase (115,700) 132,900
Exercise of stock options 22,777 12,865
-------------- --------------
Net cash provided (used) by financing activities 219,476 108,782
-------------- --------------
Net increase in cash and cash equivalents 9,034 6,507
Cash and cash equivalents - beginning of period 26,296 10,266
-------------- --------------
Cash and cash equivalents - end of period $ 35,330 $ 16,773
============== ==============
Supplemental cash flow disclosures:
Income taxes paid $ 90,584 $ 72,990
Interest paid:
Municipal investment and repurchase agreements $ 147,340 $ 151,150
Long-term debt 32,774 25,664
Short-term debt 956 1,805
</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, 1997 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, 1998 may not be indicative of the
results that may be expected for the year ending December 31, 1998. The
December 31, 1997 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.
Due to the mergers with CapMAC Holdings Inc. (CapMAC) and 1838 Investment
Advisors, Inc. (1838) all prior period consolidated financial statements
presented have been restated to include the combined results of operations,
financial position and cash flows of CapMAC and 1838 as though they had
been a part of MBIA.
2. CapMAC and 1838 Mergers
On February 17, 1998, MBIA Inc. and CapMAC consummated a merger accounted
for as a pooling of interests. Under the terms of the merger, CapMAC
shareholders received 0.4675 of a share of MBIA Inc. common stock for each
CapMAC share.
On July 31, 1998, the company completed a merger of its investment
business with 1838. Each share of 1838 was exchanged for 2.134 shares of
the company's common stock. This merger was also accounted for as a pooling
of interests.
The results of operations for the separate companies and the merged
amounts presented in the consolidated financial statements follow:
(7)
<PAGE>
MBIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED
(IN THOUSANDS) SEPTEMBER 30, 1997
Revenues:
MBIA Inc. $473,559
CapMAC Holdings, Inc. 65,382
1838 Investment Advisors 14,844
---------------------------
Merged $553,785
===========================
Net Income:
MBIA Inc. $276,524
CapMAC Holdings, Inc. 21,244
1838 Investment Advisors 5,433
---------------------------
Merged $303,201
===========================
3. Dividends Declared
Dividends declared by the company during the nine months ended September
30, 1998 were $68.2 million.
4. Philadelphia Hospital Group Claim
In the second quarter we announced a possible claim with respect to a
Philadelphia hospital group which filed for bankruptcy. MBIA's gross and
net par outstanding is $299 million and $86 million, respectively. At this
time a loss is probable. We have recorded an estimated gross loss reserve
of $198 million to cover all anticipated losses arising from this group. We
have also recorded $198 million of reinsurance recoverables.
5. Shelf Registration Statement and Subsequent Draw Down for Debt
In July 1998, the company filed a shelf registration with the U.S.
Securities and Exchange Commission of up to $350 million in debt
securities, preferred stock and/or common stock. Any proceeds from the
proposed offering will be used to provide additional capital and for
general corporate purposes.
In September 1998, MBIA drew down on the shelf registration by selling
a $150 million issue of 30-year debentures. Proceeds of the debt offering
will be used to fund additional growth for the company's businesses.
(8)
<PAGE>
MBIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. Comprehensive Income
As of January 1, 1998, the company adopted Statement of Financial
Accounting Standards (SFAS) 130, "Reporting Comprehensive Income." SFAS 130
establishes new rules for the reporting and display of comprehensive income
and its components; however, the adoption of this Statement had no impact
on the company's net income or shareholders' equity. The company's
comprehensive income consists of unrealized gains or losses on
available-for-sale securities and foreign currency translation adjustments,
which are presented net of deferred taxes. Prior to adoption of SFAS 130,
these accounts were reported separately in shareholders' equity.
7. Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
133, "Accounting for Derivative Instruments and Hedging Activities." The
statement requires companies to recognize all derivatives as either assets
or liabilities, with the instruments measured at fair value. The accounting
for changes in fair value, gains or losses, depends on the intended use of
the derivative and its resulting designation. The statement is effective
for fiscal years beginning after June 15, 1999. The Company will adopt SFAS
133 by January 1, 2000. Adoption of SFAS 133 is not expected to have a
material impact on the consolidated financial statements.
In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of
an Enterprise and Related Information," effective for fiscal years
beginning after December 15, 1997. This statement establishes standards for
reporting information about operating segments in annual financial
statements, and requires selected information about operating segments in
interim financial reports issued to shareholders. It also establishes
standards for related disclosures about products and services, geographical
areas and major customers. Under SFAS 131, operating segments are to be
determined consistent with the way that management organizes and evaluates
financial information internally for making operating decisions and
assessing performance. The company will adopt this statement in the fourth
quarter of 1998.
8. Subsequent Events
On November 4, 1998 the company announced that it had sold $50 million of
40-year debentures. Proceeds of the debt offering will be used to fund
additional growth for the company's businesses.
(9)
<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 purposes. 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.
In February 1998, we merged with CapMAC Holdings Inc., a leading
company insuring structured finance transactions. This merger will strengthen
MBIA's position as the leading financial guarantor and expand our capabilities
in the rapidly growing structured finance market.
MBIA also provides investment management products, as well as municipal
and consulting services to the public sector. In July 1998, we merged our
investment business with 1838 Investment Advisors, Inc. (1838). MBIA also formed
a holding company, MBIA Asset Management to consolidate all of our investment
operations.
RESULTS OF OPERATION
- --------------------
Summary
- -------
The following chart presents highlights of our consolidated financial results
for the third quarter and first nine months of 1998 and 1997. The results have
been restated to reflect the mergers, which have been accounted for as "pooling
of interests." In addition, all per share results have been retroactively
adjusted to include the effect of a two-for-one stock split effective October 1,
1997:
(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 September 30 1998 1998
----------------- ------------------ vs. vs.
1998 1997 1998 1997 1997 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income (in millions) $108.2 $106.6 $329.4 $303.2 2% 9%
Per share data:
Net income* $ 1.08 $ 1.07 $ 3.29 $ 3.10 1% 6%
Operating earnings* $ 1.16 $ 1.03 $ 3.42 $ 3.01 13% 14%
Core earnings* $ 1.07 $ 0.96 $ 3.14 $ 2.78 11% 13%
Book value $38.06 $32.68 16%
Adjusted book value $52.71 $46.53 13%
- -----------------------------------------------------------------------------------------------
</TABLE>
*Diluted
We believe that core earnings per share, which exclude the effects of
refundings and calls of our insured issues, realized capital gains and losses on
our investment portfolio and the nonrecurring merger-related charges, provide
the most indicative measure of our underlying profit trend. In 1998, core
earnings per share increased by 11% for the third quarter and 13% for the first
nine months over the comparable periods in 1997. The consistent double-digit
increases in quarterly year-to-year core earnings over the past 25 quarters are
due primarily to growth in premiums earned and net investment income generated
by our insurance operations, as well as the contributions of operating earnings
from our investment management services businesses.
Our 1998 third quarter net income rose 17%, excluding a $16.9 million
after tax charge for merger-related expenses for 1838, the remaining costs of
other merger-related activities and reorganization expenses to streamline
operations and reduce future operating costs. Including the charge, third
quarter net income increased 2% to $108.2 million from $106.6 million in last
year's third quarter.
Excluding after-tax merger-related charges of $36.1 million, or $0.36
per share, net income increased 21% to $365.5 million and diluted earnings per
share rose 18% to $3.65 for the first nine months of 1998. Including the
charges, net income increased 9% to $329.4 million and diluted earnings per
share grew 6% to $3.29 for the same period.
(11)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Operating earnings per share, which exclude the impact of realized
capital gains and losses and the merger-related charges, increased to $1.16 and
$3.42 for the third quarter and nine months, representing a 13% and 14% increase
for each period, respectively.
Our book value at third quarter-end 1998 was $38.06 per share, up from
$32.68 at third quarter-end 1997. 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, plus the unrealized
gain or loss on investment contract liabilities. The following table presents
the components of our adjusted book value per share:
<TABLE>
<CAPTION>
September 30, September 30, Percent Change
1998 1997 1998 vs. 1997
----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Book value $38.06 $32.68 16%
After-tax value of:
Net deferred premium
revenue, net of deferred
acquisition costs 10.97 10.07 9%
Present value of future
installment premiums* 4.09 3.52 16%
Unrealized (loss) gain on
investment contract
liabilities** (0.41) 0.26 (258%)
----------------------------------------------------------------------------------------------
Adjusted book value $52.71 $46.53 13%
----------------------------------------------------------------------------------------------
</TABLE>
* The discount rate used to present value future installment premiums
was 9%.
** The unrealized (loss) or gain on investment contract liabilities is
offset by a corresponding gain or (loss) on the market value of the
assets.
Our adjusted book value per share was $52.71 at September 30, 1998, a
13% increase from September 30, 1997. The increase was due to our strong
operating results, growth from new business, and, with lower interest rates, the
increase in the fair value of our fixed-income investment portfolios.
(12)
<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 1998 total gross premiums written (GPW) increased
by 11% to $486.7 million from $439.8 million in 1997. 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 1998 and 1997 is
presented in the following table:
<TABLE>
<CAPTION>
Percent Change
-------------------------
3rd Quarter Year-to-date
----------- ------------
3rd Quarter Year-to-date 1998 1998
----------------- ------------------ vs. vs.
In millions 1998 1997 1998 1997 1997 1997
- ----------------------- -------- ------- -------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Premiums written:
GPW $167.4 $146.9 $486.7 $439.8 14% 11%
AGP $203.4 $185.5 $587.5 $510.8 10% 15%
</TABLE>
We estimate the present value of our total future installment premium stream on
outstanding policies to be $624.0 million at third quarter-end 1998, compared
with $533.8 million at third quarter-end 1997.
MUNICIPAL MARKET New issuance in the municipal market was $57.3 billion for the
third quarter of 1998, up 10% from $52.4 billion in the third quarter of 1997.
The insured portion of this market was a record 62% up from 55% for last year's
third quarter. With a 40% market share, we continued our market leadership in
the new issue insured municipal market. At the same time, we remained
appropriately selective, emphasized quality and charged premiums commensurate
with the significant value of our guarantee in today's market.
(13)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The overall domestic municipal market new issuance statistics and
MBIA's par and premium writings in both the new issue and secondary domestic
municipal finance markets are shown in the following table:
<TABLE>
<CAPTION>
Percent Change
-------------------------
3rd Quarter Year-to-date
----------- ------------
3rd Quarter Year-to-date 1998 1998
----------------- ------------------ vs. vs.
Domestic Municipal 1998 1997 1998 1997 1997 1997
-------- ------- -------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Total new issue market:*
Par value (in billions) $ 57.3 $ 52.4 $195.4 $137.9 10% 42%
Insured penetration 62% 55% 56% 56%
MBIA market share 40% 50% 37% 48%
MBIA insured:
Par value: (in billions) $ 16.4 $ 11.8 $ 45.0 $ 34.8 40% 29%
Premiums: (in millions)
GPW $106.4 $102.1 $310.8 $317.0 4% (2%)
AGP $116.9 $103.4 $324.9 $324.9 13% ---
</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) decreased 30% in the third quarter and 4% on a
year-to-date basis.
For the third quarter of 1998, MBIA insured $13.4 billion of par value
of asset-backed securities (including mortgage-backed securities) compared with
$11.9 billion in the comparable period last year. GPW for the quarter increased
by 16% to $30.3 million from $26.2 million for the same period last year while
AGP decreased by 8% to $40.4 million from $44.1 million. On a year-to-date
basis, MBIA's domestic structured finance volume rose 39% to $34.6 billion of
par value compared with $25.0 billion in the first nine months of 1997, and GPW
and AGP increased 26% and 6%, respectively. Details regarding the asset-backed
market and MBIA's par and premium writings in both the domestic new issue and
secondary structured
(14)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 1998 1998
Domestic ----------------- ------------------ vs. vs.
Structured Finance 1998 1997 1998 1997 1997 1997
-------- ------- -------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Total asset-backed market:*
Par value (in billions) $40.0 $57.0 $122.6 $127.1 (30%) (4%)
MBIA insured:
Par value: (in billions) $13.4 $11.9 $ 34.6 $ 25.0 13% 39%
Premiums: (in millions)
GPW $30.3 $26.2 $ 91.4 $ 72.5 16% 26%
AGP $40.4 $44.1 $120.1 $113.6 (8%) 6%
- -----------------------------------------------------------------------------------------------
</TABLE>
* Market data exclude mortgage-backed securities and private placements.
INTERNATIONAL MARKET In late 1995, we formed a joint venture with AMBAC
Assurance Corporation (another leading Triple-A rated financial guarantee
insurer) to market financial guarantee insurance internationally. This
initiative has contributed to a substantial expansion of our international
business. For the first nine months, par value written increased by 94%. AGP
increased by 107% while GPW increased by 59% reflecting a growing proportion of
installment based policies written in the international market. Our
international municipal and structured finance business volume in the new issue
and secondary markets for the third quarters and first nine months of 1998 and
1997 is illustrated in the following table:
<TABLE>
<CAPTION>
Percent Change
-------------------------
3rd Quarter Year-to-date
----------- ------------
3rd Quarter Year-to-date 1998 1998
----------------- ------------------ vs. vs.
International 1998 1997 1998 1997 1997 1997
-------- ------- -------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Par value (in billions) $ 1.5 $ 2.4 $ 8.3 $ 4.3 (36%) 94%
Premiums: (in millions)
GPW $18.0 $14.5 $ 58.4 $36.8 24% 59%
AGP $30.8 $32.0 $112.1 $54.2 (4%) 107%
</TABLE>
(15)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 premiums) 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 $69.1
million and $27.5 million in the first nine months and third quarter of 1998,
respectively. For the first nine months, cessions as a function of GPW were 14%
in both 1998 and 1997. 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.
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 70% 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 30% 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.
(16)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 1998 1998
----------------- ------------------ vs. vs.
In millions 1998 1997 1998 1997 1997 1997
-------- ------- -------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Premiums earned:
Scheduled $ 89.3 $75.2 $260.0 $218.2 19% 19%
Refunded 16.3 12.5 48.9 38.3 31% 28%
- -----------------------------------------------------------------------------------------------
Total $105.6 $87.7 $308.9 $256.5 20% 20%
</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 Our insurance related investment income (exclusive of realized
capital gains) increased by 12% to $247.2 million in the first nine months of
1998 from $221.4 million in 1997. For the quarter, net investment income was
$84.1 million, a 9% increase over the same period last year. The increases were
primarily due to the growth of cash flow available for investment. Our cash
flows were generated from operations and the compounding of previously earned
and reinvested investment income. Insurance related net realized capital gains
were $23.0 million in the first nine months of 1998 and $11.8 million in 1997.
These realized gains were generated as a result of ongoing management of the
investment portfolio.
ADVISORY FEES In the third quarter of 1998, fee revenues recognized rose 6% to
$4.7 million from $4.4 million. For the first nine months fee revenues
recognized rose 43% to $18.1 million in 1998 from $12.6 million in 1997. Certain
fees are deferred and earned over the life of the transactions.
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
(17)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
reserve as case-specific reserves. For financial statement presentation, we do
not reduce our total loss reserve for significant case-specific reinsurance or
collateral recoveries rather we show these items as assets as required by GAAP.
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 at the first nine months of 1998
and 1997:
Percent Change
September 30, September 30, --------------
In millions 1998 1997 1998 vs. 1997
- -----------------------------------------------------------------
Reserves:
Case-specific $198.4 * $20.8 853%
Unallocated 83.6 67.8 23%
- ----------------- ---------------------------- ------------------
Total $282.0 $88.6 218%
Provision $ 24.6 $17.6 40%
* Case reserves, net of $170 million excess reinsurance recoverable, equal
$28.4 million.
In the second quarter we announced a possible claim with respect to a
Philadelphia hospital group which filed for bankruptcy. MBIA's gross and net par
outstanding is $299 million and $86 million, respectively. At this time a loss
is probable. We have recorded an estimated gross loss reserve of $198 million to
cover all anticipated losses arising from this group. We have also recorded $198
million of reinsurance recoverables.
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
(18)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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:
<TABLE>
<CAPTION>
Percent Change
-------------------------
3rd Quarter Year-to-date
----------- ------------
3rd Quarter Year-to-date 1998 1998
--------------- ------------------ vs. vs.
In millions 1998 1997 1998 1997 1997 1997
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Policy acquisition
Costs, net $ 6.9 $ 8.4 $25.3 $26.2 (18%) (3%)
Operating 20.7 19.5 54.2 56.4 6% (4%)
- -------------------------------------------------------------------------------------
Total insurance
Operating
Expenses $27.6 $27.9 $79.5 $82.6 (1%) (4%)
- -------------------------------------------------------------------------------------
</TABLE>
For first nine months and third quarter of 1998, policy acquisition costs
net of deferrals decreased 3% and 18%, respectively. The ratio of policy
acquisition costs net of deferrals to earned premiums has declined from 10% in
the first nine months of 1997 to 8% first nine months of 1998. The third quarter
ratio has declined to 7% in 1998 from 10% in 1997. These declines reflect the
positive impact of increases in our installment premium revenues. Operating
expenses decreased by 4% for the first nine months, resulting from the synergies
of the CapMAC merger.
OTHER EXPENSES Included in other expenses for the first nine months are merger
related expenses of $55.5 for CapMAC, 1838 and other merger related activities
and reorganization expenses. These are composed primarily of investment banking
and legal fees and severance expense recorded in the first and third quarters.
Investment Management and Municipal Services
- --------------------------------------------
In late 1997, MBIA's investment management and municipal services businesses
were brought together under one umbrella: the Investment Management and
Financial Services Division. This new organization will enable us to more
effectively expand our franchise in the public sector and make the most of
cross-marketing opportunities among our various businesses. In the third quarter
MBIA formed a holding company, MBIA Asset Management Corporation, to consolidate
our investment management operations.
(19)
<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 these businesses:
MBIA ASSET MANAGEMENT CORPORATION:
MBIA MUNICIPAL INVESTORS SERVICE CORPORATION (MBIA-MISC) provides cash
management, investment fund administration and fixed-rate investment
placement services directly to local governments and school districts. In
late 1996, MBIA-MISC acquired American Money Management Associates, Inc.
(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.
MBIA INVESTMENT MANAGEMENT CORP. (IMC) provides customized guaranteed
investment agreements and flexible repurchase agreements for bond proceeds
and other public funds. At third quarter-end 1998, principal and accrued
interest outstanding on investment and repurchase agreements was $3.4
billion compared with $3.1 billion at third quarter-end 1997. At amortized
cost, the assets supporting IMC's investment agreement liabilities were
$3.4 billion and $3.1 billion at September 30, 1998 and 1997, 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 1998, our
exposure to derivative financial instruments was not material.
MBIA CAPITAL MANAGEMENT CORP. (CMC), an SEC-registered investment adviser,
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.
1838 INVESTMENT ADVISORS, INC. (1838), is a full-service asset management
firm with a strong institutional focus. The company manages over $6 billion
in equity, fixed-income and balanced portfolios for a client base comprised
of high-net-worth individuals, municipalities, endowments, foundations and
corporate employee-benefits plans. 1838 acts as investment advisor to 1838
Investment Advisors Funds and 1838 Bond Debenture Trading Fund.
(20)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
MBIA MUNISERVICES COMPANY (MuniServices) (formerly known as Strategic Services,
Inc.) was established in 1996 to provide bond administration, revenue
enhancement and other services to state and local governments. In 1996,
MuniServices acquired an equity interest in Capital Asset Holdings (Capital
Asset), a purchaser and servicer of delinquent tax certificates. Capital Asset
also provides a series of services to assist taxing authorities in the
preparation, analysis, packaging and completion of delinquent tax obligation
sales.
In January 1997, MuniServices acquired a 95% interest in Municipal Tax
Bureau (MTB), a provider of tax revenue compliance and collection services to
public entities. In July 1997, MuniServices acquired MuniFinancial, a public
finance consulting firm specializing in municipal debt administration. In
January 1998, Muni Resources, a revenue audit and information services firm, was
also acquired.
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 first nine months and third quarter of 1998, was $32.0
million and $11.0 million, respectively, compared with $28.2 million and $10.3
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 late July 1997.
Taxes
- -----
In general, our tax policy is to optimize our after-tax income by maintaining
the appropriate mix of taxable and tax-exempt investments. However, we will see
our tax rate fluctuate from time to time as we manage our investment portfolio
on a total return basis. Our effective tax rate increased to 24% for the first
nine months of 1998 from 22% for the comparable period in 1997, as we shifted to
holding a higher proportion of taxable securities.
(21)
<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 shareholders' equity
was $3.8 billion with total long-term borrowings at $639 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,
1998 1997
- -------------------------------------------------------------------------
Long-term debt (in millions) $639 $489
Long-term debt to total capital 14% 13%
Ratio of earnings to fixed charges 14.3x 14.2x
In addition, our insurance company has an $825 million irrevocable standby
line of credit with a group of major Triple-A rated banks to provide funds for
the payment of claims in the event that severe losses should occur. 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. MBIA also has available stop-loss
reinsurance coverage of $75 million in excess of certain incurred losses of $150
million.
From time to time MBIA accesses the capital markets to support the growth
of our businesses. In July 1997, to provide us with additional capital for
growth, we raised $126 million of equity and issued $100 million of 30-year
debentures. In July 1998, 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 $350 million of debt securities, common stock and/or preferred stock.
In late September 1998, MBIA issued $150 million of 30-year debentures and in
November 1998, MBIA sold $50 million of 40-year debentures.
As of September 30, 1998, total claims-paying resources for our insurance
company stood at $7.5 billion, a 13% increase over 1997.
(22)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY
- ---------
Cash flow needs at the parent company level are primarily for dividends to our
shareholders and interest payments on our debt. These requirements have
historically been met by upstreaming dividend payments from our insurance
company, which generates substantial cash flow from premium writings and
investment income. In the first nine months of 1998, operating cash flow was
$407 million.
Under New York state insurance law, without prior approval of the
superintendent of the state insurance department, financial guarantee insurance
companies can pay dividends from earned surplus subject to retaining a minimum
capital requirement. In our case, dividends in any 12-month period cannot be
greater than 10% of policyholders' surplus. In the first nine months of 1998 our
insurance company paid no dividends and at September 30, 1998 had dividend
capacity of $220 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 $354
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
bank lines totaling $650 million with a group of worldwide banks. At third
quarter-end 1998, there were no borrowings under these agreements.
Our investment portfolio provides a high degree of liquidity since it is
comprised of readily marketable high-quality fixed-income securities and short-
(23)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
term investments. At the end of the third quarter 1998, the fair value of our
consolidated investment portfolio increased to $9.8 billion, as shown below:
Percent Change
September 30, December 31, --------------
In millions 1998 1997 1998 vs. 1997
- -------------------------------------------------------------------------
Insurance operations:
Amortized cost $5,840 $5,292 10%
Unrealized gain 389 275 42%
- -------------------------------------------------------------------------
Fair value $6,229 $5,567 12%
- -------------------------------------------------------------------------
Municipal investment
agreements:
Amortized cost $3,401 $3,242 5%
Unrealized gain 172 99 73%
- -------------------------------------------------------------------------
Fair value $3,573 $3,341 7%
- -------------------------------------------------------------------------
Total portfolio
at fair value $9,802 $8,908 10%
The increase in the fair value of our insurance related investments for the
period was a result of the increase in our invested assets from positive cash
flows partially offset by a nominal decrease in unrealized gains. The fair value
of investments related to our municipal investment agreement business increased
to $3.57 billion at September 30, 1998 from $3.34 billion at December 31, 1997,
reflecting the growth of new business volume in the third quarter.
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.
YEAR 2000
With the approach of the new millenium, MBIA has been actively managing a high
priority Year 2000 program. In conjunction with this effort we have established
an independent Year 2000 testing lab in our Armonk office. A committee has been
(24)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
established that includes the main business unit managers and which has a budget
of $805 thousand for 1999 and 2000. To date we have incurred $325 thousand. We
do not expect total costs to materially exceed these amounts. It should be noted
that over the past few years, MBIA had embarked on a comprehensive system design
and integration project. The completed system is Year 2000 compliant and costs
related to its development are not included above.
The initial phase of MBIA's plan has been completed and all of the
functions that are critical to the financial guarantee business, both domestic
and international, have been tested and are in the final validation phase and
are expected to be certified by December 31, 1998. MBIA's subsidiary companies
are actively managing their Year 2000 efforts and expect to meet their Year 2000
compliance dead line of April 30, 1999. However, it is not possible to determine
at this time whether a subsidiary's Year 2000 failure would have a material
impact on MBIA.
An area of potential risk to MBIA's financial guarantee business would be
the inability of an issuer or its trustee or paying agent to make payments on an
MBIA-insured transaction because of their failure to be Year 2000 ready. To
mitigate this risk, we have been surveying all trustees, all paying agents and
selected high volume issuers to determine their state of readiness. While the
survey is not complete, the results to date are that all respondents are either
ready or planning to be ready by late 1999. If MBIA is asked to pay in those
situations where the issuer's system fails, we will do so and would expect to
recover any such payment in a fairly short time period. It is not possible at
this time to evaluate the extent of such payments. We believe that MBIA has
adequate sources of liquidity to cover these payments.
Additionally, MBIA is in the process of reviewing all other ancillary
support functions. Evaluation, testing and re-testing will continue through 1999
and into 2000.
FORWARD-LOOKING STATEMENTS
This filing contains forward-looking statements. Important factors such as
general market conditions and the competitive environment could cause actual
results to differ materially from those projected in these forward-looking
statements. The company undertakes no obligation to revise or update any
forward-looking statements to reflect changes in events or expectations or
otherwise.
(25)
<PAGE>
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11. Computation of Earnings Per Share Assuming Dilution
27. Financial Data Schedule
99. Additional Exhibits - MBIA Insurance Corporation and
Subsidiaries Consolidated Financial Statements
(b) Reports on Form 8-K - The company filed a report on Form 8-K
on September 24, 1998 in which the 1997 audited financial
statements were restated to reflect the mergers with CapMAC
Holdings, Inc. and 1838 Investment Advisors.
(26)
<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 12, 1998 /s/ JULLIETTE S. TEHRANI
------------------------ ---------------------------
Julliette S. Tehrani
Executive Vice President,
Chief Financial Officer
and Treasurer
Date: November 12, 1998 /s/ ELIZABETH B. SULLIVAN
------------------------ ---------------------------
Elizabeth B. Sullivan
Vice President, Controller
(Principal Accounting Officer)
(27)
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
--------------------- ----------------------
1998 1997 1998 1997
---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Net income $108,243 $106,552 $329,377 $303,201
========== ========= ========== ==========
Diluted weighted average shares:
Basic weighted average shares outstanding 99,099 98,009 98,882 96,399
Effect of stock options 1,132 1,321 1,289 1,440
---------- --------- ---------- ----------
Diluted weighted average shares: 100,231 99,330 100,171 97,839
========== ========= ========== ==========
Basic EPS $ 1.09 $ 1.09 $ 3.33 $ 3.15
========== ========= ========== ==========
Diluted EPS $ 1.08 $ 1.07 $ 3.29 $ 3.10
========== ========= ========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<CIK> 0000814585
<NAME> MBIA Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<DEBT-HELD-FOR-SALE> 5,842,968
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 5,842,968
<CASH> 35,330
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 236,768
<TOTAL-ASSETS> 11,666,627
<POLICY-LOSSES> 282,044
<UNEARNED-PREMIUMS> 2,205,690
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 638,967
<COMMON> 99,324
0
0
<OTHER-SE> 3,674,494
<TOTAL-LIABILITY-AND-EQUITY> 11,666,627
308,861
<INVESTMENT-INCOME> 247,195
<INVESTMENT-GAINS> 22,981
<OTHER-INCOME> 105,948
<BENEFITS> 24,613
<UNDERWRITING-AMORTIZATION> 25,324
<UNDERWRITING-OTHER> 54,223
<INCOME-PRETAX> 432,720
<INCOME-TAX> 103,343
<INCOME-CONTINUING> 329,377
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 329,377
<EPS-PRIMARY> 3.33
<EPS-DILUTED> 3.29
<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, 1998 AND DECEMBER 31, 1997
AND FOR THE PERIODS ENDED SEPTEMBER 30, 1998 AND 1997
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
I N D E X
---------
PAGE
----
Consolidated Balance Sheets -
September 30, 1998 and
and December 31, 1997 (Unaudited) 3
Consolidated Statements of Income -
Three months and nine months ended September 30, 1998
and 1997 (Unaudited) 4
Consolidated Statement of Changes in Shareholder's Equity -
Nine months ended September 30, 1998 (Unaudited) 5
Consolidated Statements of Cash Flows -
Nine months ended September 30, 1998 and 1997 (Unaudited) 6
Notes to Consolidated Financial Statements (Unaudited) 7
-2-
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
----------------------- ------------------------
<S> <C> <C>
ASSETS
Investments:
Fixed-maturity securities held as available-for-sale
at fair value (amortized cost $5,450,126 and $4,600,528) $5,838,488 $4,867,254
Short-term investments, at amortized cost
(which approximates fair value) 316,213 242,730
Other investments 16,886 16,802
---------------- -------------------
TOTAL INVESTMENTS 6,171,587 5,126,786
Cash and cash equivalents 16,241 3,983
Securities purchased under agreements to resell 201,000 182,820
Accrued investment income 83,311 78,601
Deferred acquisition costs 236,768 154,100
Prepaid reinsurance premiums 295,175 252,893
Reinsurance recoverable on unpaid losses 170,000 ---
Goodwill (less accumulated amortization
of $50,811 and $47,152) 92,169 95,829
Property and equipment, at cost (less accumulated
depreciation of $22,315 and $18,256) 64,012 53,484
Receivable for investments sold 14,854 1,616
Other assets 94,275 37,437
---------------- -------------------
TOTAL ASSETS $7,439,392 $5,987,549
================ ===================
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Deferred premium revenue $2,205,690 $1,984,104
Loss and loss adjustment expense reserves 282,044 78,872
Securities sold under agreements to repurchase 201,000 182,820
Deferred income taxes 320,313 251,134
Deferred fee revenue 34,892 ---
Payable for investments purchased 109,420 23,020
Other liabilities 115,271 103,740
---------------- -------------------
TOTAL LIABILITIES 3,268,630 2,623,690
---------------- -------------------
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 1,483,271 1,139,949
Retained earnings 2,422,642 2,042,323
Accumulated other comprehensive income, net
of deferred income tax provision
of $136,313 and $94,416 249,849 166,587
---------------- -------------------
TOTAL SHAREHOLDER'S EQUITY 4,170,762 3,363,859
---------------- -------------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $7,439,392 $5,987,549
================ ===================
</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
--------------------------------------------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Gross premiums written $167,872 $124,858 $536,518 $382,602
Ceded premiums (27,498) (16,204) (62,327) (45,017)
------------- ------------- ------------- -------------
Net premiums written 140,374 108,654 474,191 337,585
Increase in deferred premium revenue (34,214) (33,959) (178,519) (117,303)
------------- ------------- ------------- -------------
Premiums earned (net of ceded
premiums of $30,027, $10,039,
$57,095 and $31,304) 106,160 74,695 295,672 220,282
Net investment income 83,707 72,283 241,300 206,201
Net realized gains 9,089 6,119 22,981 12,974
Advisory fees 4,696 --- 15,969 ---
Other 1 321 (19) 1,014
------------- ------------- ------------- -------------
Total revenues 203,653 153,418 575,903 440,471
------------- ------------- ------------- -------------
Expenses:
Losses and loss adjustment 9,028 4,892 23,591 13,150
Policy acquisition costs, net 6,869 7,037 23,879 20,612
Operating 20,772 12,984 49,317 36,813
------------- ------------- ------------- -------------
Total expenses 36,669 24,913 96,787 70,575
------------- ------------- ------------- -------------
Income before income taxes 166,984 128,505 479,116 369,896
Provision for income taxes 33,838 27,183 98,797 77,798
------------- ------------- ------------- -------------
Net income $133,146 $101,322 $380,319 $292,098
============= ============= ============= =============
</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, 1998
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other Total
-------------------- Paid-in Retained Comprehensive Shareholder's
Shares Amount Capital Earnings Adjustment Equity
---------- --------- --------------- -------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998 100,000 $15,000 $1,139,949 $2,042,323 $166,587 $3,363,859
Comprehensive income:
Net income --- --- --- 380,319 --- 380,319
Other comprehensive income:
Change in unrealized
appreciation of investments
net of change in deferred
income taxes of $(41,897) --- --- --- --- 78,545 78,545
Change in foreign
currency translation --- --- --- --- 4,717 4,717
------------
Other comprehensive income 83,262
------------
Comprehensive income 463,581
------------
Capital contribution from MBIA Inc. --- --- 324,915 --- --- 324,915
Tax reduction related to tax
sharing agreement
with MBIA Inc. --- --- 18,407 --- --- 18,407
---------- ------------ --------------- -------------- ---------------- --------------
Balance, September 30, 1998 100,000 $15,000 $1,483,271 $2,422,642 $249,849 $4,170,762
========== ============ =============== ============== ================ ==============
Disclosure of reclassification
amount:
Unrealized appreciation of
investments arising
during the period $93,393
Reclassification of adjustment,
net of taxes (14,848)
--------
Net unrealized appreciation,
net of taxes $78,545
========
</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
-----------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 380,319 $ 292,098
Adjustments to reconcile net income to net
cash provided by operating activities:
Increase in accrued investment income (4,710) (8,421)
Increase in deferred acquisition costs (82,668) (5,737)
Increase in prepaid reinsurance premiums (42,282) (13,713)
Increase in deferred premium revenue 220,801 131,016
Increase in loss and loss adjustment expense reserves 33,172 13,932
Depreciation 4,106 2,904
Amortization of goodwill 3,660 3,667
Amortization of bond discount, net (11,693) (7,391)
Net realized gains on sale of investments (22,981) (12,974)
Deferred income taxes 14,749 14,296
Other, net 20,820 70,962
--------------- ---------------
Total adjustments to net income 132,974 188,541
--------------- ---------------
Net cash provided by operating activities 513,293 480,639
--------------- ---------------
Cash flows from investing activities:
Purchase of fixed-maturity securities, net
of payable for investments purchased (2,021,130) (1,606,108)
Sale of fixed-maturity securities, net of
receivable for investments sold 700,031 917,679
Redemption of fixed-maturity securities,
net of receivable for investments redeemed 616,504 126,478
(Purchase) sale of short-term investments, net (111,392) 8,345
(Purchase) sale of other investments, net (529) 565
Capital expenditures, net of disposals (9,434) (6,924)
--------------- ---------------
Net cash used by investing activities (825,950) (559,965)
--------------- ---------------
Cash flow from financing activities:
Capital contribution from MBIA Inc. 324,915 80,000
--------------- ---------------
Net cash provided by financing activities 324,915 80,000
--------------- ---------------
Net increase in cash and cash equivalents 12,258 674
Cash and cash equivalents - beginning of period 3,983 3,288
--------------- ---------------
Cash and cash equivalents - end of period $ 16,241 $ 3,962
=============== ===============
Supplemental cash flow disclosures:
Income taxes paid $ 86,864 $ 58,968
</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, 1997. 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, 1998 may not be indicative of the results that
may be expected for the year ending December 31, 1998. The December 31, 1997
condensed balance sheet data was derived from audited financial statements, but
does not include all disclosures required by generally accepted accounting
principles.
2. DIVIDENDS DECLARED
- ---------------------
No dividends were declared by the company during the nine months ended September
30, 1998.
3. COMPREHENSIVE INCOME
- -----------------------
As of January 1, 1998, the company adopted Statement of Financial Accounting
Standards No. 130 (SFAS 130), "Reporting Comprehensive Income." SFAS 130
establishes new rules for the reporting and display of comprehensive income and
its components; however, the adoption of this Statement had no impact on the
company's net income or shareholder's equity. The company's comprehensive income
consists of unrealized gains or losses on available-for-sale securities and
foreign currency translation adjustments, which are presented net of deferred
taxes. Prior to adoption these accounts were reported separately in
shareholder's equity.
4. CAPMAC MERGER
- ----------------
On February 17, 1998 MBIA Inc. and CapMAC Holdings Inc. (CapMAC) consummated a
merger. Under the terms of the merger, CapMAC shareholders received 0.4675 of a
share of MBIA Inc. common stock for each CapMAC share, for a total of 8,102,255
newly issued shares of MBIA Inc. common stock, the value of which is $536
million. On April 1, 1998, the company assumed the net insured obligations of
Capital Markets Assurance Corporation (CapMAC Ins.) in exchange for investments
equal to $176.1 million. The cession of the deferred premium revenue (net of
prepaid reinsurance premiums) has been reflected as a component of gross
premiums written in the second quarter of 1998. Subsequent to the cession MBIA
Inc. contributed the common stock of CapMAC Ins. to the company resulting in
additional paid-in capital of $324.9 million.
-7-
