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 March 31, 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 April 30, 1998 there were outstanding 97,618,497 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 - March 31, 1998
and December 31, 1997 3
Consolidated Statements of Income - Three months
ended March 31, 1998 and 1997 4
Consolidated Statement of Changes in Shareholders' Equity
- Three months ended March 31, 1998 5
Consolidated Statements of Cash Flows
- Three months ended March 31, 1998 and 1997 6
Notes to Consolidated Financial Statements 7 - 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9 - 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 (Unaudited)
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
-------------------- --------------------
ASSETS
<S> <C> <C>
Investments:
Fixed-maturity securities held as available-for-sale
at fair value (amortized cost $5,088,306 and $4,936,822) $ 5,350,713 $ 5,211,311
Short-term investments, at amortized cost
(which approximates fair value) 304,045 303,898
Other investments 51,682 51,693
-------------- --------------
5,706,440 5,566,902
Municipal investment agreement portfolio held as available-for-sale
at fair value (amortized cost $3,548,474 and $3,241,703) 3,641,358 3,341,394
-------------- --------------
TOTAL INVESTMENTS 9,347,798 8,908,296
Cash and cash equivalents 28,749 24,716
Securities borrowed or purchased under agreements to resell 643,963 472,963
Accrued investment income 114,628 121,070
Deferred acquisition costs 222,026 216,165
Prepaid reinsurance premiums 288,174 289,508
Goodwill (less accumulated amortization of $51,260 and $49,486) 127,095 120,326
Property and equipment, at cost (less accumulated depreciation
of $28,082 and $26,523) 61,901 60,238
Receivable for investments sold 8,605 13,435
Other assets 163,401 150,922
-------------- --------------
TOTAL ASSETS $11,006,340 $10,377,639
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deferred premium revenue $ 2,096,303 $ 2,090,460
Loss and loss adjustment expense reserves 107,808 103,061
Municipal investment agreements 2,370,312 1,974,165
Municipal repurchase agreements 1,091,042 1,177,022
Long-term debt 488,908 488,878
Short-term debt 20,000 20,000
Securities loaned or sold under agreements to repurchase 716,263 606,263
Deferred income taxes 294,690 298,498
Deferred fee revenue 45,781 48,126
Payable for investments purchased 152,934 44,007
Other liabilities 194,412 171,989
-------------- --------------
TOTAL LIABILITIES 7,578,453 7,022,469
-------------- --------------
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-- 97,721,404 and 97,563,326 97,721 97,563
Additional paid-in capital 1,135,797 1,128,799
Retained earnings 1,982,479 1,901,608
Accumulated other comprehensive income, net of
deferred income tax provision of $125,331 and $132,026 221,309 236,095
Unallocated ESOP shares (4,083) (4,083)
Unearned compensation--restricted stock (5,336) (4,812)
-------------- --------------
TOTAL SHAREHOLDERS' EQUITY 3,427,887 3,355,170
-------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $11,006,340 $10,377,639
============== ==============
</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
March 31
------------------------------------
1998 1997
---------------- ----------------
<S> <C> <C>
Revenues
Insurance:
Gross premiums written $120,878 $108,807
Ceded premiums (14,333) (10,328)
---------------- ----------------
Net premiums written 106,545 98,479
Increase in deferred premium revenue (7,412) (15,099)
---------------- ----------------
Premiums earned (net of ceded premiums of
$15,667 and $14,460) 99,133 83,380
Net investment income 82,268 71,788
Net realized gains 6,090 2,659
Advisory fees 6,216 4,016
Investment management services:
Income 7,467 7,190
Net realized gains 6,446 1,609
Other 10,851 2,993
---------------- ----------------
Total revenues 218,471 173,635
---------------- ----------------
Expenses
Insurance:
Losses and loss adjustment 5,241 4,978
Policy acquisition costs, net 9,440 9,647
Operating 19,127 18,773
Investment management services 4,313 4,037
Interest 10,420 8,858
Other 41,684 4,597
---------------- ----------------
Total expenses 90,225 50,890
---------------- ----------------
Income before income taxes 128,246 122,745
Provision for income taxes 27,973 25,884
---------------- ----------------
NET INCOME $100,273 $ 96,861
================ ================
NET INCOME PER COMMON SHARE:
BASIC $ 1.03 $ 1.03
DILUTED $ 1.01 $ 1.01
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING:
BASIC 97,498,541 94,162,912
DILUTED 98,864,747 95,897,960
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
(4)
<PAGE>
MBIA INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)
For the three months ended March 31, 1998
(In thousands except per share amounts)
<TABLE>
<CAPTION>
Unearned Accumulated
Common Stock Additional Unallocated Compensation Other Total
--------------- Paid-in Retained ESOP Restricted Comprehensive Shareholders'
Shares Amount Capital Earnings Shares Stock Income Equity
------ ------- ---------- ---------- ---------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998 97,563 $97,563 $1,128,799 $1,901,608 $(4,083) $(4,812) $236,095 $3,355,170
Comprehensive income:
Net income --- --- --- 100,273 --- --- --- 100,273
Other comprehensive income:
Change in unrealized
appreciation of investments
net of change in deferred
income taxes of $6,695 --- --- --- --- --- --- (12,494) (12,494)
Change in foreign currency
translation --- --- --- --- --- --- (2,292) (2,292)
----------
Other comprehensive income (14,786)
----------
Comprehensive income 85,487
----------
Exercise of stock options 123 123 4,752 --- --- --- --- 4,875
Unearned compensation-
restricted stock 35 35 2,246 --- --- (524) --- 1,757
Dividends (declared and paid per
common share $0.195) --- --- --- (19,402) --- --- --- (19,402)
------ ------- ---------- ---------- -------- ------- ------------- ----------
Balance, March 31, 1998 97,721 $97,721 $1,135,797 $1,982,479 $(4,083) $(5,336) $221,309 $3,427,887
======= ======= ========== ========== ======== ======= ============= ==========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
Disclosure of reclassification amount:
Unrealized depreciation of
investments arising
during the period $ (3,720)
Reclassification of adjustment,
net of taxes
(8,774)
----------------
Net unrealized depreciation,
net of taxes $(12,494)
================
(5)
<PAGE>
MBIA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three months ended
March 31
----------------------------------
1998 1997
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $100,273 $ 96,861
Adjustments to reconcile net income to net cash
provided by operating activities:
Decrease in accrued investment income 6,442 2,911
Increase in deferred acquisition costs (5,861) (6,262)
Decrease in prepaid reinsurance premiums 1,334 4,132
Increase in deferred premium revenue 6,078 10,967
Increase in loss and loss adjustment expense reserves 4,747 4,531
Depreciation 1,569 1,232
Amortization of goodwill 1,774 1,569
Amortization of bond discount, net (5,728) (4,776)
Net realized gains on sale of investments (12,536) (4,268)
Deferred income taxes 2,954 4,853
Other, net 7,063 7
------------- -------------
Total adjustments to net income 7,836 14,896
------------- -------------
Net cash provided by operating activities 108,109 111,757
------------- -------------
Cash flows from investing activities:
Purchase of fixed-maturity securities, net
of payable for investments purchased (411,075) (484,985)
Sale of fixed-maturity securities, net of
receivable for investments sold 257,854 363,431
Redemption of fixed-maturity securities, net of
receivable for investments redeemed 62,178 55,660
Sale (purchase) of short-term investments, net 6,500 (12,243)
Sale (purchase) of other investments, net 435 (1,063)
Purchases for municipal investment agreement
portfolio, net of payable for investments purchased (757,704) (199,780)
Sales from municipal investment agreement
portfolio, net of receivable for investments sold 515,136 250,403
Capital expenditures, net of disposals (3,232) (2,104)
Other, net (8,537) (15,453)
------------- -------------
Net cash used by investing activities (338,445) (46,134)
------------- -------------
Cash flows from financing activities:
Net proceeds from issuance of short-term debt --- 10,900
Dividends paid (17,796) (16,783)
Proceeds from issuance of municipal investment
and repurchase agreements 809,843 264,274
Payments for drawdowns of municipal investment
and repurchase agreements (501,553) (385,280)
Securities loaned or sold under agreements to repurchase (61,000) 81,700
Exercise of stock options 4,875 3,071
------------- -------------
Net cash provided (used) by financing activities 234,369 (42,118)
------------- -------------
Net increase in cash and cash equivalents 4,033 23,505
Cash and cash equivalents - beginning of period 24,716 8,322
------------- -------------
Cash and cash equivalents - end of period $ 28,749 $ 31,827
============= =============
Supplemental cash flow disclosures:
Income taxes paid $ 1,938 $ 5,289
Interest paid:
Municipal investment and repurchase agreements $ 48,943 $ 49,955
Long-term debt 12,723 9,188
Short-term debt 372 518
</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 three months ended March 31, 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 merger with
CapMAC Holdings Inc. (CapMAC) all prior period consolidated financial statements
presented have been restated to include the combined results of operations,
financial position and cash flows of CapMAC as though it had been a part of
MBIA.
2. CapMAC Merger
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, for
a total of 8,102,255 newly issued shares of MBIA Inc. common stock, the value of
which was $536 million.
(7)
<PAGE>
MBIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. Dividends Declared
Dividends declared by the company during the three months ended March 31, 1998
were $19.4 million.
4. 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 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.
5. Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board 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's future segment presentation has not yet been determined.
(8)
<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.
At year-end 1997 we announced a merger with CapMAC Holdings Inc., a leading
company insuring structured finance transactions. The merger, which was
consummated in February 1998, 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.
RESULTS OF OPERATIONS
- ---------------------
SUMMARY
The following chart presents highlights of our consolidated financial results
for the first quarters of 1998 and 1997. The 1997 results have been restated to
reflect the merger, which has been accounted for as a "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:
March 31, March 31, Percent Change
1998 1997 1998 vs. 1997
---------------------------------------------------------------------
Net income (in millions) $ 100.3 $ 96.9 4%
Per share data:
Net income* $ 1.01 $ 1.01 ---
Operating earnings* $ 1.12 $ 0.98 14%
Core earnings* $ 1.03 $ 0.90 14%
Book value $ 35.13 $29.19 20%
Adjusted book value $ 49.43 $43.21 14%
--------------------------------------------------------------------
* Diluted
(9)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
We believe that core earnings, 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 charge, provides the most
indicative measure of our underlying profit trend. Core earnings per share of
$1.03 for the first quarter of 1998 grew by 14% over the comparable period in
1997. The consistent increases in core earnings were due primarily to growth in
premiums earned and net investment income generated by our insurance operations.
Our 1998 first quarter net income rose 23%, excluding a $19.2 million
after-tax charge for CapMAC merger-related expenses, over the comparable period
in 1997. Including the merger-related charge, first quarter net income increased
4% to $100.3 million. On a per share basis, net income, including merger-related
expenses, remained even with last year's first quarter. Excluding the $0.19 per
share merger-related charge, first quarter earnings per share increased 19%. The
difference between the growth rate of core earnings and net income is related to
the net income effects of refunded issues, realized capital gains and losses
and the merger related expenses. Operating earnings per share, which also
exclude merger-related expenses and capital gains, increased 14%.
Our book value at first quarter-end 1998 was $35.13 per share, up from
$29.19 at first quarter-end 1997. Book value was impacted positively by lower
interest rates which increased the fair value of our investment portfolio. 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 on investment contract
liabilities. The following table presents the components of our adjusted book
value per share:
March 31, March 31, Percent Change
1998 1997 1998 vs. 1997
- ------------------------------------------------------------------------
Book value $35.13 $29.19 20%
After-tax value of:
Net deferred premium
revenue, net of deferred
acquisition costs 10.56 9.85 7%
Present value of future
installment premiums* 3.59 3.34 7%
Unrealized gain on
investment contract
liabilities 0.15 0.83 (82%)
- ------------------------------------------------------------------------
Adjusted book value $49.43 $43.21 14%
- ------------------------------------------------------------------------
* The discount rate used to present value future installment premiums was 9%.
(10)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Our adjusted book value per share was $49.43 at first-quarter-end 1998, a
14% increase from first quarter-end 1997. The increase was due to our strong
operating results, growth in new business written, the July 1997 offering of
common stock and the impact of lower interest rates on the fair value of our
fixed-income investment portfolios.
FINANCIAL GUARANTEE INSURANCE
For the first quarter of 1998 total gross premiums written (GPW) increased to
$120.9 million from $108.8 million in 1997. GPW, as reported in 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 first
quarters of 1998 and 1997 is presented in the following table:
March 31, March 31, Percent Change
In millions 1998 1997 1998 vs. 1997
- ----------------------------------------------------------------
Premiums written:
GPW $ 120.9 $ 108.8 11%
AGP $ 138.4 $ 127.5 9%
We estimate the present value of our total future installment premium
stream on outstanding policies to be $539.1 million at first quarter-end 1998,
compared with $484.1 million at first quarter-end 1997.
MUNICIPAL MARKET New issuance in the municipal market was $65.1 billion for the
first quarter of 1998, up 84% from $35.3 billion in the first quarter of 1997.
The insured portion declined to 51% from 56% in the first quarter of 1997. We
maintained our market leadership in the new issue insured municipal market.
Domestic new issue municipal market information and MBIA's par and
(11)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
premium writings in both the new issue and secondary domestic municipal finance
markets are shown in the following table:
March 31, March 31, Percent Change
Domestic Municipal 1998 1997 1998 vs. 1997
- ---------------------------------------------------------------------------
Total new issue market:*
Par value (in billions) $ 65.1 $ 35.3 84%
Insured penetration 51% 56%
MBIA market share 32% 43%
MBIA insured:
Par value (in billions) $ 10.0 $ 8.6 16%
Premiums: (in millions)
GPW $ 67.5 $ 75.8 (11%)
AGP $ 67.9 $ 77.7 (13%)
- ---------------------------------------------------------------------------
* 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 of issues in the asset-backed securities
market (excluding private placements and mortgage-backed securities, for which
market data are unavailable) increased 4% in the first quarter of 1998. MBIA
insured $8.8 billion of par value compared with $7.9 billion in last year's
first quarter. GPW for the first quarter of 1998 increased by 35%, while AGP
decreased by 29%. Details regarding the asset-backed market and MBIA's par and
premium writings in both the domestic new issue and secondary structured finance
markets are shown in the table below:
Domestic March 31, March 31, Percent Change
Structured Finance 1998 1997 1998 vs. 1997
- -------------------------------------------------------------------------
Total asset-backed market:*
Par value (in billions) $ 36.5 $ 35.2 4%
MBIA insured:
Par value (in billions) $ 8.8 $ 7.9 12%
Premiums: (in millions)
GPW $ 30.3 $ 22.4 35%
AGP $ 28.0 $ 39.7 (29%)
- -------------------------------------------------------------------------
* Market data exclude mortgage-backed securities and private placements.
(12)
<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 (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 as evidenced by the growth in premium writings over the past two years.
The joint venture has underwritten certain business in Southeast Asia. With the
turmoil in that region, particular emphasis has been placed on monitoring these
transactions and no losses are expected. Our company's municipal and structured
finance international business volume in the new issue and secondary markets for
the first quarters of 1998 and 1997 is illustrated below:
March 31, March 31, Percent Change
International 1998 1997 1998 vs. 1997
- -----------------------------------------------------------------------
Par value (in billions) $ 2.4 $ 0.4 561%
Premiums: (in millions)
GPW $19.2 $ 6.3 205%
AGP $39.6 $ 5.1 682%
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 $14.3
million and $10.3 million in the first quarters of 1998 and 1997, respectively.
Cessions as a percentage of GPW increased from 9% in 1997 to 12% in 1998. The
variances in the level of cessions generally reflect the higher 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 that we will recover the reinsured portion
of any losses which 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.
(13)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 new business writings (primarily our structured finance
business) we collect installment premiums. Installment premiums are credited to
the deferred premium revenue account when they are 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 which 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 below:
March 31, March 31, Percent Change
In millions 1998 1997 1998 vs. 1997
- -------------------------------------------------------------
Premiums earned:
Scheduled $83.3 $69.9 19%
Refunded 15.8 13.5 17%
- -------------------------------------------------------------
Total $99.1 $83.4 19%
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 increased by 15% to
$82.3 million in the first quarter of 1998 from $71.8 million in 1997. These
increases were primarily due to the growth of cash flow available for
investment. Our cash flows were generated from operations, the compounding of
previously earned and reinvested investment income and the addition of funds
from financing activities. Insurance related net realized capital gains were
$6.1 million in the first quarter of 1998 and $2.7 million in 1997. These
realized gains were generated as a result of ongoing management of the
investment portfolio.
(14)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
ADVISORY FEES As a result of the CapMAC merger, the company collects fee
revenues in conjunction with certain structured finance transactions. In the
first quarter of 1998, fee revenues recognized rose 55% to $6.2 million from
$4.0 million. 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. The
total reserve is calculated by applying a risk factor based on a study of bond
defaults to net debt service written. To the extent that we identify specific
insured issues as currently or likely to be in default, the present value of our
expected payments, net of expected reinsurance and collateral recoveries, is
allocated within the total loss reserve as case-specific reserves. A new case
reserve was established this quarter for $7.4 million.
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
quarter-end 1998 and 1997:
March 31, March 31, Percent Change
In millions 1998 1997 1998 vs. 1997
- ------------------------------------------------------------------
Reserves:
Case-specific $ 33.1 $ 19.2 72%
Unallocated 74.7 55.6 34%
- ------------------------------------------------------------------
Total $ 107.8 $ 74.8 44%
Provision $ 5.2 $ 5.0 5%
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 decreases in the unallocated portion of the total reserve.
(15)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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, as well as
related expense measures, are shown below:
March 31, March 31, Percent Change
In millions 1998 1997 1998 vs. 1997
-----------------------------------------------------------------------
Policy acquisition costs, net $ 9.5 $ 9.6 (2%)
Operating 19.1 18.8 2%
-----------------------------------------------------------------------
Total insurance
operating expenses $ 28.6 $ 28.4 1%
Expense ratio:
GAAP 28.8% 34.1%
Statutory 26.8% 30.8%
Operating expenses increased 2% over the prior year's comparable period.
Financial guarantee insurance companies also use the statutory expense ratio
(expenses before deferrals as a function of net premiums written) as a measure
of expense management. Our company's first quarter statutory and GAAP expense
ratios have improved over prior year's comparable period.
OTHER EXPENSES Included in other expenses is a $29.5 million one-time charge
related to the CapMAC merger, which includes investment banking and legal fees
and severance expense.
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.
(16)
<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 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 first quarter-end 1998, principal and accrued interest outstanding on
investment and repurchase agreements was $3.5 billion compared with $3.1 billion
at first quarter-end 1997. At amortized cost, the assets supporting IMC's
investment agreement liabilities were $3.5 billion and $3.2 billion at March 31,
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 first 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.
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.
(17)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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
In the first quarter of 1998 we incurred $10.4 million of interest expense
compared with $8.9 million in the same period last year. The increase in
interest expense was due to the $100 million addition to MBIA's long-term debt
in July 1997.
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
increased slightly to 22% in the first quarter of 1998 from 21% in the first
quarter of 1997.
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 first quarter, our total capital was
$3.4 billion with total long-term borrowings at $489 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:
March 31, December 31,
1998 1997
------------------------------------------------------ -----------------
Long-term debt (in millions) $489 $489
Long-term debt to total capital 12% 13%
Ratio of earnings to fixed charges 13.0x 14.0x
In addition, our insurance company has a $825 million irrevocable standby line
of credit facility with a group of major Triple-A rated banks to provide funds
for the payment of claims in the event that severe losses should occur. 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.
(18)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
From time to time we access 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.
As of the first quarter of 1998, total claims-paying resources for our
insurance company stood at $6.9 billion, a 15% increase over 1997.
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 quarter of 1998, operating cash flow was $108
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 quarter of 1998 our
insurance company paid no dividends and at March 31, 1998 had dividend capacity
of $181 million without special regulatory approval.
Our company has significant liquidity supporting its businesses. At the end
of the first quarter, cash equivalents and short-term investments totaled $333
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 three
short-term bank lines totaling $450 million with a group of worldwide banks. At
first quarter-end 1998, $20.0 million was outstanding under these facilities to
fund interim cash requirements.
(19)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 first quarter-end 1998, the fair value of our
consolidated investment portfolio increased 5% to $9.3 billion, as shown below:
March 31, December 31, Percent Change
In millions 1998 1997 1998 vs. 1997
- -----------------------------------------------------------------------------
Insurance operations:
Amortized cost $ 5,445 $ 5,292 3%
Unrealized gain 262 275 (4%)
- -----------------------------------------------------------------------------
Fair value $ 5,707 $ 5,567 3%
- -----------------------------------------------------------------------------
Municipal investment
agreements:
Amortized cost $ 3,548 $ 3,242 9%
Unrealized gain 93 99 (7%)
- -----------------------------------------------------------------------------
Fair value $ 3,641 $ 3,341 9%
- -----------------------------------------------------------------------------
Total portfolio at fair value $ 9,348 $ 8,908 5%
The growth of our insurance related investments for the first quarter of
1998 was the result of positive cash flows and proceeds from our financing
activities, partially offset by the decrease in unrealized gains caused by
higher interest rates at March 31, 1998. The fair value of investments related
to our municipal investment agreement business increased to $3.6 billion at
March 31, 1998.
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. 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 millennium, MBIA is actively managing the Year 2000
issue. This issue results from computer programs which use two digits, rather
than four digits to define a year. Our company has already reengineered our
significant internal business applications. The costs related to Year 2000
compliance activities did not have a material effect on net income, financial
condition or cash flows. We have instituted a corporate-wide effort to address
and resolve the system/application tasks associated with Year 2000 at certain
subsidiary locations and targeted December 31, 1998 for complete Year 2000
compliance.
MBIA is also in the process of reviewing our exposure to Year 2000 issues
resulting from our vendors and insureds' computer systems. Our company is in the
process of contacting vendors and insureds regarding the state of their
remediation activities for material Year 2000 issues. Management believes that
its activities, if any, necessitated by the response to these inquiries will be
substantially completed before the end of 1998. We do not expect that there will
be material disruptions to our company's business or an increase in our cost of
doing business.
(20)
<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 and
Capital Markets Assurance Corporation and Subsidiary
Consolidated Financial Statements
(b) Reports on Form 8-K:
1. The company filed a report on Form 8-K on January 16, 1998
announcing an amendment to the Agreement and Plan of Merger.
A press release was filed making such announcement
2. The company filed a report on Form 8-K on February 20, 1998,
in which the company and CapMAC completed the pending merger
in a stock transaction valued at $536 million. 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: May 15, 1998 /s/ JULLIETTE S. TEHRANI
------------- -------------------------
Julliette S. Tehrani
Executive Vice President,
Chief Financial Officer
and Treasurer
Date: May 15, 1998 /s/ ELIZABETH B. SULLIVAN
------------- -------------------------
Elizabeth B. Sullivan
Vice President,
Controller
(Principal Accounting Officer)
(22)
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0
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<TOTAL-ASSETS> 10,377,639
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<INVESTMENT-INCOME> 301,415
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<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<DEBT-HELD-FOR-SALE> 5,063,222
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<TOTAL-INVEST> 8,578,548
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<TOTAL-ASSETS> 9,903,344
<POLICY-LOSSES> 88,635
<UNEARNED-PREMIUMS> 1,989,628
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<NOTES-PAYABLE> 508,849
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<INVESTMENT-INCOME> 221,421
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<UNDERWRITING-OTHER> 58,316
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</TABLE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 1998 AND DECEMBER 31, 1997
AND FOR THE PERIODS ENDED MARCH 31, 1998 AND 1997
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
I N D E X
PAGE
-----
Consolidated Balance Sheets -
March 31, 1998 (Unaudited) and December 31, 1997 (Audited) 3
Consolidated Statements of Income -
Three months ended March 31, 1998 and 1997 (Unaudited) 4
Consolidated Statement of Changes in Shareholder's Equity -
Three months ended March 31, 1998 (Unaudited) 5
Consolidated Statements of Cash Flows -
Three months ended March 31, 1998 and 1997 (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)
March 31, 1998 December 31, 1997
-------------- -----------------
(Unaudited) (Audited)
Assets
Investments:
Fixed-maturity securities held
as available-for-sale at fair value
(amortized cost $4,738,452
and $4,600,528) $4,993,562 $4,867,254
Short-term investments, at amortized cost
(which approximates fair value) 284,348 242,730
Other investments 16,951 16,802
----------- ----------
Total investments 5,294,861 5,126,786
Cash and cash equivalents 9,357 3,983
Securities purchased under agreements to resell 208,420 182,820
Accrued investment income 75,233 78,601
Deferred acquisition costs 159,350 154,100
Prepaid reinsurance premiums 251,124 252,893
Goodwill (less accumulated amortization
of $48,372 and $47,152) 94,608 95,829
Property and equipment, at cost (less accumulated
depreciation of $19,456 and $18,256) 54,375 53,484
Receivable for investments sold 8,246 1,616
Other assets 40,397 37,437
----------- ----------
Total assets $6,195,971 $5,987,549
=========== ==========
Liabilities and Shareholder's Equity
Liabilities:
Deferred premium revenue $1,991,051 $1,984,104
Loss and loss adjustment expense reserves 82,622 78,872
Securities sold under agreements to repurchase 208,420 182,820
Deferred income taxes 257,556 251,134
Payable for investments purchased 87,770 23,020
Other liabilities 97,529 103,740
---------- ----------
Total liabilities 2,724,948 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 1,145,123 1,139,949
Retained earnings 2,154,131 2,042,323
Accumulated other comprehensive income, net
of deferred income tax provision
of $90,317 and $94,416 156,769 166,587
--------- ----------
Total shareholder's equity 3,471,023 3,363,859
--------- ----------
Total liabilities and
shareholder's equity $6,195,971 $5,987,549
========== ==========
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)
Three Months Ended
March 31
--------------------------
1998 1997
------------ -----------
Revenues:
Gross premiums written $ 101,641 $ 92,586
Ceded premiums (7,786) (5,979)
------------ -----------
Net premiums written 93,855 86,607
Increase in deferred premium revenue (8,956) (14,736)
------------ -----------
Premiums earned (net of ceded
premiums of $9,555 and $10,325) 84,899 71,871
Net investment income 76,967 66,477
Advisory fees 1,470 ---
Net realized gains 6,088 4,374
Other 42 324
------------ -----------
Total revenues 169,466 143,046
------------ -----------
Expenses:
Losses and loss adjustment 4,219 3,435
Policy acquisition costs, net 7,996 6,745
Operating 14,256 12,159
------------ -----------
Total expenses 26,471 22,339
------------ -----------
Income before income taxes 142,995 120,707
Provision for income taxes 31,187 25,380
------------ -----------
Net income $ 111,808 $ 95,327
============ ===========
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 three months ended March 31, 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 --- --- --- 111,808 --- 111,808
Other comprehensive income:
Change in unrealized
appreciation of investments
net of change in deferred
income taxes of $4,099 --- --- --- --- (7,868) (7,868)
Change in foreign
currency translation --- --- --- --- (1,950) (1,950)
---------
Other comprehensive income (9,818)
---------
Comprehensive income 101,990
Tax reduction related to tax
sharing agreement
with MBIA Inc. --- --- 5,174 --- --- 5,174
========== ========== =========== =========== ============= ============
Balance, March 31, 1998 100,000 $15,000 $1,145,123 $2,154,131 $156,769 $ 3,471,023
========== ========== =========== =========== ============= ============
</TABLE>
Disclosure of
reclassification amount:
Unrealized depreciation of
investments arising
during the period $(3,925)
Reclassification of adjustment,
net of taxes (3,943)
-----------
Net unrealized depreciation,
net of taxes $(7,868)
===========
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)
Three Months Ended
March 31
-------------------------------
1998 1997
--------------- ---------------
Cash flows from operating activities:
Net income $111,808 $ 95,327
Adjustments to reconcile net income to net
cash provided by operating activities:
Decrease (increase) in accrued
investment income 3,368 (2,266)
Increase in deferred acquisition costs (5,250) (3,521)
Decrease in prepaid reinsurance premiums 1,769 4,346
Increase in deferred premium revenue 7,182 10,390
Increase in loss and loss adjustment
expense reserves 3,750 2,988
Depreciation 1,150 888
Amortization of goodwill 1,221 1,222
Amortization of bond discount, net (4,308) (2,588)
Net realized gains on sale of investments (6,088) (4,374)
Deferred income taxes 10,572 5,485
Other, net (6,228) (28,760)
----------- -------------
Total adjustments to net income 7,138 (16,190)
----------- -------------
Net cash provided by operating activities 118,946 79,137
----------- -------------
Cash flows from investing activities:
Purchase of fixed-maturity securities, net
of payable for investments purchased (390,951) (393,049)
Sale of fixed-maturity securities, net of
receivable for investments sold 251,987 304,773
Redemption of fixed-maturity securities,
net of receivable for investments redeemed 62,178 25,921
Purchase of short-term investments, net (34,971) (11,628)
Sale of other investments, net 226 205
Capital expenditures, net of disposals (2,041) (1,734)
----------- -------------
Net cash used in investing activities (113,572) (75,512)
----------- -------------
Net increase in cash and cash equivalents 5,374 3,625
Cash and cash equivalents - beginning of period 3,983 3,288
----------- -------------
Cash and cash equivalents - end of period $ 9,357 $ 6,913
=========== =============
Supplemental cash flow disclosures:
Income taxes paid $ 1,565 $ 4,346
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
three months ended March 31, 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 three months ended March
31, 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. SUBSEQUENT EVENT
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. Subsequent to March 31, 1998, MBIA Inc. made a capital contribution to
MBIA Insurance Corporation of Capital Markets Assurance Corporation, a wholly
owned financial guarantee insurance subsidiary of CapMAC.
-7-
CAPITAL MARKETS ASSURANCE CORPORATION
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 1998 AND DECEMBER 31, 1997
AND FOR THE PERIODS ENDED MARCH 31, 1998 AND 1997
<PAGE>
CAPITAL MARKETS ASSURANCE CORPORATION
AND SUBSIDIARY
I N D E X
---------
PAGE
------
Consolidated Balance Sheets -
March 31, 1998 (Unaudited) and December 31, 1997 (Audited) 3
Consolidated Statements of Income -
Three months ended March 31, 1998 and 1997 (Unaudited) 4
Consolidated Statement of Changes in Shareholder's Equity -
Three months ended March 31, 1998 (Unaudited) 5
Consolidated Statements of Cash Flows -
Three months ended March 31, 1998 and 1997 (Unaudited) 6
Notes to Consolidated Financial Statements (Unaudited) 7
-2-
<PAGE>
CAPITAL MARKETS ASSURANCE CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
--------------- -----------------
(Unaudited) (Audited)
Assets
<S> <C> <C>
Investments:
Fixed-maturity securities held as available-for-sale
at fair value (amortized cost $333,206 and $319,451) $340,246 $327,148
Short-term investments, at amortized cost
(which approximates fair value) 7,082 42,014
Other investments 4,250 4,250
---------------- ----------------
Total investments 351,578 373,412
Cash and cash equivalents 421 899
Accrued investment income 4,318 4,759
Deferred acquisition costs 55,546 54,935
Prepaid reinsurance premiums 37,050 36,615
Premium receivable 8,994 7,245
Other assets 35,601 6,222
---------------- ----------------
Total assets $493,508 $484,087
================ ================
Liabilities and Shareholder's Equity
Liabilities:
Deferred premium revenue $ 105,252 $ 106,356
Loss and loss adjustment expense reserves 25,186 24,189
Ceded reinsurance 5,737 11,754
Deferred income taxes 14,870 16,416
Current income taxes 7,045 2,544
Other liabilities 6,674 5,176
---------------- ----------------
Total liabilities 164,764 166,435
---------------- ----------------
Shareholder's Equity:
Common stock, par value $1.00 per share; authorized,
issued and outstanding - 15,000,000 shares 15,000 15,000
Additional paid-in capital 208,475 208,475
Retained earnings 101,441 89,696
Accumulated other comprehensive income, net
of deferred income tax provision
of $2,398 and $2,672 3,828 4,481
---------------- ----------------
Total shareholder's equity 328,744 317,652
---------------- ----------------
Total liabilities and shareholder's equity $493,508 $484,087
================ ================
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
-3-
<PAGE>
CAPITAL MARKETS ASSURANCE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31
--------------------------------------
1998 1997
--------------- --------------
<S> <C> <C>
Revenues:
Gross premiums written $ 19,983 $ 16,715
Ceded premiums (6,784) (4,349)
--------------- --------------
Net premiums written 13,199 12,366
Decrease (increase)
in deferred premium revenue 1,544 (363)
--------------- --------------
Premiums earned (net of ceded
premiums of $6,349 and $4,135) 14,743 12,003
Net investment income 5,411 4,702
Net realized gains --- 2,043
Advisory fees 2,166 ---
Other 58 43
--------------- --------------
Total revenues 22,378 18,791
--------------- --------------
Expenses:
Losses and loss adjustment 1,022 1,543
Policy acquisition costs, net 1,445 2,581
Operating 4,937 4,671
--------------- --------------
Total expenses 7,404 8,795
--------------- --------------
Income before income taxes 14,974 9,996
Provision for income taxes 3,229 2,792
--------------- --------------
Net income $ 11,745 $ 7,204
=============== ==============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
-4-
<PAGE>
CAPITAL MARKETS ASSURANCE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY (Unaudited)
For the three months ended March 31, 1998
(In thousands)
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other Total
--------------------- Paid-in Retained Comprehensive Shareholder's
Shares Amount Capital Earnings Income Equity
-------- ------- --------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998 15,000 $15,000 $208,475 $ 89,696 $4,481 $317,652
Comprehensive income:
Net income --- --- --- 11,745 --- 11,745
Other comprehensive income:
Change in unrealized
appreciation of investments
net of change in deferred
income taxes of $274 --- --- --- --- (311) (311)
Change in foreign
currency translation --- --- --- --- (342) (342)
----------
Other comprehensive income (653)
----------
Comprehensive income 11,092
-------- ------- -------- --------- ----------- ----------
Balance, March 31, 1998 15,000 $15,000 $208,475 $101,441 $3,828 $ 328,744
======== ======= ======== ========= =========== ==========
Disclosure of reclassification amount:
Unrealized depreciation of
investments arising
during the period $(311)
Reclassification of adjustment,
net of taxes ---
----------
Net unrealized depreciation,
net of taxes $(311)
==========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
-5-
<PAGE>
CAPITAL MARKETS ASSURANCE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31
-----------------------------
1998 1997
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 11,745 $ 7,204
Adjustments to reconcile net income to net
cash provided by operating activities:
Decrease in accrued investment income 441 737
Increase in deferred acquisition costs (611) (3,062)
Increase in prepaid reinsurance premiums (435) (214)
(Decrease) increase in deferred premium revenue (1,099) 576
Increase in loss and loss adjustment expense reserves 997 1,543
Net realized gains on sale of investments --- (2,043)
Deferred income tax (benefit) provision (1,272) 919
Other, net (31,077) 4,248
------------- -------------
Total adjustments to net income (33,056) 2,704
------------- -------------
Net cash (used) provided by operating activities (21,311) 9,908
------------- -------------
Cash flows from investing activities:
Purchase of investments (21,335) (74,308)
Proceeds from sales of investments --- 58,658
Proceeds from maturities of investments 42,168 14,770
------------- -------------
Net cash provided by (used in) investing activities 20,833 (880)
------------- -------------
Net (decrease) increase in cash and cash equivalents (478) 9,028
Cash and cash equivalents - beginning of period 899 371
------------- -------------
Cash and cash equivalents - end of period $ 421 $ 9,399
============= =============
Supplemental cash flow disclosures:
Income taxes paid $ 0 $ 1,250
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
-6-
<PAGE>
CAPITAL MARKETS ASSURANCE CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
- -------------------------
The accompanying consolidated financial statements are unaudited and include the
accounts of Capital Markets Assurance Corporation and its Subsidiary (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 three months ended March 31, 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 three months ended March
31, 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. SUBSEQUENT EVENT
- --------------------
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. Subsequent to March 31, 1998, MBIA Inc. made a capital contribution to
MBIA Insurance Corporation of Capital Markets Assurance Corporation, a wholly
owned financial guarantee insurance subsidiary of CapMAC.
-7-
EXHIBIT 11
MBIA INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE ASSUMING DILUTION
(In thousands except per share amounts)
Three months ended
March 31
------------------------------------
1998 1997
---------------- -----------------
Net income $100,273 $96,861
================ =================
Diluted weighted average shares:
Basic weighted average
shares outstanding 97,499 94,163
Effect of stock options 1,366 1,735
---------------- -----------------
Diluted weighted average shares: 98,865 95,898
================ =================
Basic EPS $ 1.03 $ 1.03
================ =================
Diluted EPS $ 1.01 $ 1.01
================ =================
