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 June 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 August 10, 1998 there were outstanding 99,261,453 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 - June 30, 1998
and December 31, 1997 3
Consolidated Statements of Income - Three months and
six months ended June 30, 1998 and 1997 4
Consolidated Statement of Changes in Shareholders' Equity
- Six months ended June 30, 1998 5
Consolidated Statements of Cash Flows
- Six months ended June 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 - 22
PART II OTHER INFORMATION, AS APPLICABLE
Item 6. Exhibits and Reports on Form 8-K 23
SIGNATURES 24
(2)
<PAGE>
MBIA INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
---------------- -----------------
ASSETS
<S> <C> <C>
Investments:
Fixed-maturity securities held as available-for-sale
at fair value (amortized cost $5,224,932 and $4,936,822) $ 5,498,035 $ 5,211,311
Short-term investments, at amortized cost
(which approximates fair value) 256,702 303,898
Other investments 52,093 51,693
---------------- ----------------
5,806,830 5,566,902
Municipal investment agreement portfolio
held as available-for-sale at fair value (amortized cost
$3,475,844 and $3,241,703) 3,603,731 3,341,394
---------------- ----------------
TOTAL INVESTMENTS 9,410,561 8,908,296
Cash and cash equivalents 44,094 24,716
Securities borrowed or purchased under agreements to resell 613,263 472,963
Accrued investment income 121,972 121,070
Deferred acquisition costs 226,880 216,165
Prepaid reinsurance premiums 297,704 289,508
Goodwill (less accumulated amortization of $53,043 and $49,486) 122,827 120,326
Property and equipment, at cost (less accumulated depreciation
of $34,914 and $26,523) 70,520 65,939
Receivable for investments sold 9,077 13,435
Other assets 206,203 145,221
---------------- ----------------
TOTAL ASSETS $11,123,101 $10,377,639
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deferred premium revenue $ 2,172,994 $ 2,090,460
Loss and loss adjustment expense reserves 115,540 103,061
Municipal investment agreements 2,348,330 1,974,165
Municipal repurchase agreements 952,490 1,177,022
Long-term debt 488,937 488,878
Short-term debt 20,000 20,000
Securities loaned or sold under agreements to repurchase 778,363 606,263
Deferred income taxes 318,493 298,498
Deferred fee revenue 48,169 48,126
Payable for investments purchased 111,744 44,007
Other liabilities 199,537 171,989
---------------- ----------------
TOTAL LIABILITIES 7,554,597 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--
97,984,228 and 97,563,326 97,984 97,563
Additional paid-in capital 1,147,861 1,128,799
Retained earnings 2,079,612 1,901,608
Accumulated other comprehensive income, net of
deferred income tax provision of $141,364 and $132,026 252,460 236,095
Unallocated ESOP shares (4,083) (4,083)
Unearned compensation--restricted stock (5,010) (4,812)
Treasury stock, at cost; shares 8,961 in 1998 (320) ---
---------------- ----------------
TOTAL SHAREHOLDERS' EQUITY 3,568,504 3,355,170
---------------- ----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $11,123,101 $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 Six months ended
June 30 June 30
----------------------------------- ------------------------------------
1998 1997 1998 1997
----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Revenues
Insurance:
Gross premiums written $198,512 $184,043 $319,390 $292,850
Ceded premiums (27,280) (29,106) (41,613) (39,434)
----------------- ---------------- ----------------- ----------------
Net premiums written 171,232 154,937 277,777 253,416
Increase in deferred premium revenue (67,147) (69,485) (74,559) (84,584)
----------------- ---------------- ----------------- ----------------
Premiums earned (net of ceded
premiums of $17,750, $15,128,
$33,417 and $29,588) 104,085 85,452 203,218 168,832
Net investment income 80,860 72,606 163,128 144,394
Net realized gains 7,802 2,998 13,892 5,657
Advisory fees 7,223 4,213 13,439 8,229
Investment management services:
Income 8,261 6,649 15,728 13,839
Net realized gains 646 43 7,092 1,652
Other 9,094 3,376 19,945 6,369
----------------- ---------------- ----------------- ----------------
Total revenues 217,971 175,337 436,442 348,972
----------------- ---------------- ----------------- ----------------
Expenses
Insurance:
Losses and loss adjustment 10,344 6,156 15,585 11,134
Policy acquisition costs, net 9,015 8,181 18,455 17,828
Operating 14,334 18,117 33,461 36,890
Investment management services 4,545 4,006 8,858 8,043
Interest 10,565 9,055 20,985 17,913
Other 12,902 5,264 54,586 9,861
----------------- ---------------- ----------------- ----------------
Total expenses 61,705 50,779 151,930 101,669
----------------- ---------------- ----------------- ----------------
Income before income taxes 156,266 124,558 284,512 247,303
Provision for income taxes 40,033 28,049 68,006 53,933
----------------- ---------------- ----------------- ----------------
NET INCOME $116,233 $ 96,509 $216,506 $193,370
================= ================ ================= ================
NET INCOME PER COMMON SHARE
BASIC $ 1.19 $ 1.02 $ 2.22 $ 2.05
DILUTED $ 1.17 $ 1.01 $ 2.19 $ 2.02
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING
BASIC 97,665,197 94,625,245 97,581,869 94,394,078
DILUTED 99,021,888 95,903,882 98,941,650 95,895,986
</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 SIX MONTHS ENDED JUNE 30, 1998
(In thousands except per share amounts)
<TABLE>
<CAPTION>
Common Stock Additional
--------------- Paid-in Retained
Shares Amount Capital Earnings
------ ------- ---------- ----------
<S> <C> <C> <C> <C>
Balance, January 1, 1998 97,563 $97,563 $1,128,799 $1,901,608
Comprehensive income:
Net income --- --- --- 216,506
Other comprehensive income:
Change in unrealized
appreciation of investments
net of change in deferred
income taxes of $(9,338) --- --- --- ---
Change in foreign currency
translation --- --- --- ---
Other comprehensive income
Comprehensive income
Treasury shares acquired --- --- 320 ---
Exercise of stock options 386 386 16,496 ---
Unearned compensation-
restricted stock 35 35 2,246 ---
Dividends (declared and
paid per common share $0.39) --- --- --- (38,502)
------ ------- ---------- ----------
Balance, June 30, 1998 97,984 $97,984 $1,147,861 $2,079,612
====== ======= ========== ==========
<CAPTION>
Unearned Accumulated
Unallocated Compensation- Other Treasury Stock Total
ESOP Restricted Comprehensive --------------- Shareholders'
Shares Stock Income Shares Amount Equity
----------- ------------- ------------- ------- ------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998 $(4,083) $(4,812) $236,095 --- --- $3,355,170
Comprehensive income:
Net income --- --- --- --- --- 216,506
Other comprehensive income:
Change in unrealized
appreciation of investments
net of change in deferred
income taxes of $(9,338) --- --- 17,420 --- --- 17,420
Change in foreign currency
translation --- --- (1,055) --- --- (1,055)
-------------
Other comprehensive income 16,365
-------------
Comprehensive income 232,871
-------------
Treasury shares acquired --- --- --- (9) (320) ---
Exercise of stock options --- --- --- --- --- 16,882
Unearned compensation-
restricted stock --- (198) --- --- --- 2,083
Dividends (declared and
paid per common share $0.39) --- --- --- --- --- (38,502)
----------- ------------- ------------- ------- ------ -------------
Balance, June 30, 1998 $(4,083) $(5,010) $252,460 (9) $(320) $3,568,504
=========== ============= ============= ======= ====== =============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
Disclosure of reclassification amount:
Unrealized appreciation of
investments arising
during the period $31,025
Reclassification of adjustment,
net of taxes (13,605)
-------
Net unrealized appreciation,
net of taxes $17,420
=======
(5)
<PAGE>
MBIA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
Six months ended
June 30
-----------------------------
1998 1997
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 216,506 $ 193,370
Adjustments to reconcile net income to net cash
provided by operating activities:
Increase in accrued investment income (902) (2,766)
Increase in deferred acquisition costs (10,715) (9,747)
Increase in prepaid reinsurance premiums (8,196) (9,846)
Increase in deferred premium revenue 82,755 94,430
Increase in loss and loss adjustment expense reserves 12,479 11,676
Depreciation 3,797 2,746
Amortization of goodwill 3,557 3,118
Amortization of bond discount, net (10,813) (9,148)
Net realized gains on sale of investments (20,984) (7,309)
Deferred income taxes 10,691 8,598
Other, net (37,044) (30,353)
------------- -------------
Total adjustments to net income 24,625 51,399
------------- -------------
Net cash provided by operating activities 241,131 244,769
------------- -------------
Cash flows from investing activities:
Purchase of fixed-maturity securities, net
of payable for investments purchased (1,146,307) (1,026,147)
Sale of fixed-maturity securities, net of
receivable for investments sold 532,468 688,137
Redemption of fixed-maturity securities, net of
receivable for investments redeemed 415,571 114,310
Sale of short-term investments, net 27,758 13,024
Sale (purchase) of other investments, net 286 (844)
Purchases for municipal investment agreement
portfolio, net of payable for investments purchased (1,216,038) (550,696)
Sales from municipal investment agreement
portfolio, net of receivable for investments sold 1,014,644 595,636
Capital expenditures, net of disposals (8,381) (8,510)
Other, net (6,055) (16,458)
------------- -------------
Net cash used by investing activities (386,054) (191,548)
------------- -------------
Cash flows from financing activities:
Net proceeds from issuance of short-term debt --- 30,900
Dividends paid (36,851) (33,595)
Proceeds from issuance of municipal investment
and repurchase agreements 1,186,896 732,821
Payments for drawdowns of municipal investment
and repurchase agreements (1,034,426) (816,133)
Securities sold under agreements to repurchase 31,800 54,900
Exercise of stock options 16,882 9,794
------------- -------------
Net cash provided (used) by financing activities 164,301 (21,313)
------------- -------------
Net increase in cash and cash equivalents 19,378 31,908
Cash and cash equivalents - beginning of period 24,716 8,322
------------- -------------
Cash and cash equivalents - end of period $ 44,094 $ 40,230
============= =============
Supplemental cash flow disclosures:
Income taxes paid $ 62,684 $ 44,514
Interest paid:
Municipal investment and repurchase agreements $ 104,171 $ 98,441
Long-term debt 20,012 16,477
Short-term debt 567 1,149
</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 six months ended June 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 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. The results of
operations for the separate companies and the merged amounts presented in
the consolidated financial statements follow:
Six Months Ended
(In thousands) June 30, 1997
----------------
Revenues:
MBIA Inc. $306,872
CapMAC Holdings, Inc. 42,100
---------
Merged $348,972
=========
Net Income:
MBIA Inc. $179,959
CapMAC Holdings, Inc. 13,411
---------
Merged $193,370
=========
(7)
<PAGE>
MBIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. Dividends Declared
Dividends declared by the company during the six months ended June 30, 1998
30, 1998 were $38.5 million.
4. 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.
5. 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's future segment presentation has not yet been
determined.
(8)
<PAGE>
MBIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. Subsequent Events
On July 21, 1998, MBIA Inc. announced that it expects that the company's
unallocated loss reserve will be sufficient to meet anticipated losses
arising from the bankruptcy filing of Delaware Valley Obligated Group
(DVOG). As a result, the company does not expect losses from this insured
credit to affect its earnings. MBIA has insured $256 million of net par
outstanding of DVOG, an entity comprising five hospitals and a medical
university in the Philadelphia area that is part of Allegheny Health,
Education and Research Foundation (AHERF) based in Pittsburgh, Pa. AHERF
has announced that DVOG will be part of a bankruptcy reorganization filing.
As of June 30, 1998, the company's unallocated case reserve was $78
million.
On July 28, 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.
On July 31, 1998, the company announced that it had completed the merger of
its investment business with 1838 Investment Advisors (1838). Located in
Radnor, Pa., 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. 1838 will
be part of a newly formed holding company, MBIA Asset Management
Corporation, which consolidates MBIA's investment management operations.
The transaction is structured as a tax-free exchange and accounted for as a
"pooling of interests." MBIA expects the acquisition to be non-dilutive to
1998 earnings per share, excluding merger-related costs, and accretive
thereafter.
(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. MBIA also formed a holding company, MBIA
Asset Management to consolidate all of our investment operations.
RESULTS OF OPERATIONS
- ---------------------
SUMMARY
The following chart presents highlights of our consolidated financial results
for the second quarter and first half 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:
(10)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Percent Change
--------------------------
2nd Quarter Year-to-date
----------- ------------
2nd Quarter June 30 1998 1998
-------------- -------------- vs. vs.
1998 1997 1998 1997 1997 1997
- -----------------------------------------------------------------------------
Net income
(in millions) $116.2 $96.5 $216.5 $193.4 20% 12%
Per share data:
Net income* $ 1.17 $1.01 $ 2.19 $ 2.02 16% 8%
Operating
earnings* $ 1.13 $0.99 $ 2.24 $ 1.97 14% 14%
Core earnings* $ 1.03 $0.91 $ 2.05 $ 1.81 13% 13%
Book value $36.47 $30.75 19%
Adjusted book
value $51.19 $45.02 14%
- -----------------------------------------------------------------------------
*Diluted
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. In 1998, core earnings per
share increased by 13% for both the second quarter and first six months over the
comparable periods in 1997. The consistent double-digit increases in quarterly
year-to-year core earnings over the past 24 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 second quarter net income rose 20% over the comparable period in
1997. On a per share basis, net income increased 16% over last year's second
quarter. For the first six months of 1998, net income and net income per share
increased 12% and 8%, respectively, over the comparable periods of 1997.
Operating earnings per share, which exclude the impact of realized capital
gains and losses and the one time merger-related charge, increased to $1.13 and
$2.24 for the second quarter and six months, respectively, representing a 14%
increase for both periods. In the first quarter we recorded a one-time
merger-related charge of $0.19 per share.
(11)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Our book value at second quarter-end 1998 was $36.47 per share, up from
$30.75 at second 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:
June 30, June 30, Percent Change
1998 1997 1998 vs. 1997
---------------------------- ------------- --------- ----------------
Book value $36.47 $30.75 19%
After-tax value of:
Net deferred premium
revenue, net of
deferred acquisition
costs 10.95 10.25 7%
Present value of future
installment premiums* 3.82 3.42 12%
Unrealized (loss) gain
on investment contract
liabilities (0.05) 0.60 (108%)
---------------------------- ------------- --------- ----------------
Adjusted book value $51.19 $45.02 14%
---------------------------- ------------- --------- ----------------
* The discount rate used to present value future installment premiums was 9%.
Our adjusted book value per share was $51.19 at June 30, 1998, a 14%
increase from June 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.
FINANCIAL GUARANTEE INSURANCE
For the first six months of 1998 total gross premiums written (GPW) increased by
9% to $319.4 million from $292.9 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 second quarters and first half of 1998 and 1997 is presented
in the following table:
(12)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Percent Change
--------------------------
2nd Quarter Year-to-date
----------- ------------
2nd Quarter Year-to-date 1998 1998
-------------- -------------- vs. vs.
In millions 1998 1997 1998 1997 1997 1997
- -----------------------------------------------------------------------------
Premiums written:
GPW $198.5 $184.0 $319.4 $292.9 8% 9%
AGP $245.7 $197.8 $384.1 $325.3 24% 18%
We estimate the present value of our total future installment premium stream on
outstanding policies to be $574.8 million at second quarter-end 1998, compared
with $498.6 million at second quarter-end 1997.
MUNICIPAL MARKET New issuance in the municipal market was $71.3 billion for the
second quarter of 1998, up 41% from $50.5 billion in the second quarter of 1997.
The insured portion of this market was 56%, the same as last year's second
quarter. With a 39% market share, we continued our market leadership in the new
issue insured municipal market.
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:
Percent Change
--------------------------
2nd Quarter Year-to-date
----------- ------------
2nd Quarter Year-to-date 1998 1998
Domestic -------------- -------------- vs. vs.
Municipal 1998 1997 1998 1997 1997 1997
- -----------------------------------------------------------------------------
Total new issue
market:*
Par value
(in billions) $ 71.3 $ 50.5 $136.9 $ 85.8 41% 59%
Insured
penetration 56% 56% 54% 56%
MBIA market
share 39% 50% 36% 47%
MBIA insured:
Par value:
(in billions) $ 18.5 $ 14.5 $ 28.5 $ 23.0 28% 24%
Premiums:
(in millions)
GPW $136.9 $139.1 $204.4 $214.9 ( 2%) ( 5%)
AGP $140.1 $143.8 $208.0 $221.5 ( 3%) ( 6%)
- -----------------------------------------------------------------------------
* Market data are reported on a sale date basis while MBIA's insured data are
based on closing date information. Typically, there can be a one- to
four-week delay between the sale date and closing date of an insured issue.
STRUCTURED FINANCE MARKET The par value issuance in the asset-backed securities
market (excluding private placements and mortgage-backed securities, for which
market data are unavailable) increased 32% in the second quarter and 18% on a
year-to-date basis.
(13)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
For the second quarter of 1998, MBIA insured $12.4 billion of par value of
asset-backed securities (including mortgage-backed securities) compared with
$5.2 billion in the comparable period last year. GPW for the quarter increased
by 29% to $30.8 million from $23.9 million for the same period last year while
AGP increased 73% to $51.7 million from $29.8 million. On a year-to-date basis,
MBIA's domestic structured finance volume rose 62% to $21.2 billion of par value
compared with $13.1 billion in the first six months of 1997, and GPW and AGP
increased 32% and 15%, respectively. Details regarding the asset-backed market
and MBIA's par and premium writings in both the domestic new issue and secondary
structured finance markets (which includes mortgaged-backed as well as
asset-backed securities) are shown in the following table:
Percent Change
--------------------------
2nd Quarter Year-to-date
----------- ------------
2nd Quarter Year-to-date 1998 1998
Domestic ------------- -------------- vs. vs.
Structured Finance 1998 1997 1998 1997 1997 1997
- -----------------------------------------------------------------------------
Total asset-backed
Market:*
Par value
(in billions) $46.2 $34.9 $82.6 $70.1 32% 18%
MBIA insured:
Par value:
(in billions) $12.4 $ 5.2 $21.2 $13.1 137% 62%
Premiums:
(in millions)
GPW $30.8 $23.9 $61.1 $46.3 29% 32%
AGP $51.7 $29.8 $79.7 $69.5 73% 15%
- ----------------------------------------------------------------------------
* 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 six months, par value written increased by 268%. AGP
increased by 266% while GPW increased by 81% 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 second quarters and first half of 1998 and 1997 is
illustrated in the following table:
Percent Change
--------------------------
2nd Quarter Year-to-date
----------- ------------
2nd Quarter Year-to-date 1998 1998
-------------- -------------- vs. vs.
International 1998 1997 1998 1997 1997 1997
- -----------------------------------------------------------------------------
Par value
(in billions) $ 4.3 $ 1.5 $ 6.7 $ 1.8 196% 268%
Premiums:
(in millions)
GPW $21.2 $16.0 $40.4 $22.3 33% 81%
AGP $41.7 $17.1 $81.3 $22.2 144% 266%
(14)
<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 $41.6
million and $27.3 million in the first six months and second quarter of 1998,
respectively. For the first six months, cessions as a function of GPW were 13%
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 80% of our insurance writings, we receive
premiums upfront and earn them pro rata over the period of risk of the bond
issue. Accordingly, the portion of net premiums earned on each policy in any
given year represents a relatively small percentage of the total net upfront
premium received. The balance represents deferred premium revenue to be earned
over the remaining life of the insured bond issue.
For 20% of our business writings - primarily our structured finance
business -- we collect installment premiums. Installment premiums are credited
to the deferred premium revenue account when received, and are recognized as
revenue over each installment period - generally one year or less.
When an MBIA-insured bond issue is refunded or retired early the related
deferred premium revenue is earned immediately, except for any portion that may
be applied as a credit towards insuring the refunding bond issue. The amount of
(15)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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:
Percent Change
--------------------------
2nd Quarter Year-to-date
----------- ------------
2nd Quarter Year-to-date 1998 1998
------------- ------------- vs. vs.
In millions 1998 1997 1998 1997 1997 1997
-----------------------------------------------------------------------------
Premiums earned:
Scheduled $ 87.3 $73.2 $170.6 $143.0 19% 19%
Refunded 16.8 12.3 32.6 25.8 37% 26%
---------------------------------------------------------------------------
Total $104.1 $85.5 $203.2 $168.8 22% 20%
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 13% to $163.1 million in the first six months of
1998 from $144.4 million in 1997. For the quarter, net investment income was
$80.9 million, an 11% 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, the compounding of previously earned and
reinvested investment income. Insurance related net realized capital gains were
$13.9 million in the first six months of 1998 and $5.7 million in 1997. These
realized gains were generated as a result of ongoing management of the
investment portfolio.
ADVISORY FEES As a result of the CapMAC merger, the company collects fee
revenues in conjunction with certain structured finance transactions. In the
second quarter of 1998, fee revenues recognized rose 71% to $7.2 million from
$4.2 million. For the first six months fee revenues recognized rose 63% to $13.4
million in 1998 from $8.2 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
reserve as case-specific reserves.
(16)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 half of 1998 and
1997:
June 30, June 30, Percent Change
In millions 1998 1997 1998 vs. 1997
- -----------------------------------------------------------------
Reserves:
Case-specific $ 37.5 $20.5 83%
Unallocated 78.0 61.5 27%
- -----------------------------------------------------------------
Total $115.5 $82.0 41%
Provision $ 15.6 $11.1 40%
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.
In the third quarter we announced a possible claim with respect to a
hospital transaction. At this time we do not anticipate losses to be larger than
MBIA's unallocated portion of the loss reserve.
OPERATING EXPENSES Those expenses related to the production of our insurance
business (policy acquisition costs) are deferred and recognized over the period
in which the related premiums are earned. Our company's policy acquisition
costs, general operating expenses and total operating expenses are shown in the
following table:
Percent Change
--------------------------
2nd Quarter Year-to-date
----------- ------------
2nd Quarter Year-to-date 1998 1998
-------------- ------------ vs. vs.
In millions 1998 1997 1998 1997 1997 1997
- -----------------------------------------------------------------------------
Policy acquisition
costs, net $ 9.0 $ 8.2 $18.4 $17.8 10% 4%
Operating 14.3 18.1 33.5 36.9 (21%) (9%)
----------------------------------------------------------------------------
Total insurance
operating
expenses $23.3 $26.3 $51.9 $54.7 (11%) (5%)
- -----------------------------------------------------------------------------
(17)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
For first six months and second quarter of 1998, policy acquisition costs
net of deferrals increased 4% and 10%, respectively. The ratio of policy
acquisition costs net of deferrals to earned premiums has remained relatively
constant in the 9% range for the first six months and second quarters of 1998
and 1997. Operating expenses decreased by 9% for the first six months and 21%
for the second quarter over the prior year's comparable periods, resulting from
the synergies of the CapMAC acquisition.
OTHER EXPENSES Included in other expenses for the first half is a $29.5 million
one-time charge related to the CapMAC merger, which includes investment banking
and legal fees and severance expense, recorded in the first quarter.
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.
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 second quarter-end 1998, principal and accrued interest outstanding on
investment and repurchase agreements was $3.3 billion compared with $3.2 billion
at second quarter-end 1997. At amortized cost, the assets supporting IMC's
investment agreement liabilities were $3.5 billion and $3.3 billion at June 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 second quarter-end 1998, our exposure to derivative financial
instruments was not material.
(18)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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. 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 six months and second quarter of 1998, was $21.0
million and $10.6 million, respectively, compared with $17.9 million and $9.1
million in the same periods last year. The increase in interest expense was due
to the $100 million addition to MBIA's long-term debt in July 1997.
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
six months of 1998 from 22% for the comparable period in 1997, as we shifted to
holding a higher proportion of taxable securities.
(19)
<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 second quarter, our total capital was
$3.6 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:
June 30, 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 14.1x 14.0x
In addition, our insurance company has a $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.
As of June 30, 1998, total claims-paying resources for our insurance
company stood at $7.2 billion, a 16% 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 six months of 1998, operating cash flow was $241
million.
(20)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 six months of 1998 our
insurance company paid no dividends and at June 30, 1998 had dividend capacity
of $208 million without special regulatory approval.
Our company has significant liquidity supporting its businesses. At the end
of the second quarter, cash equivalents and short-term investments totaled $301
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
second quarter-end 1998, $20 million was outstanding under these facilities to
fund interim cash requirements.
Our investment portfolio provides a high degree of liquidity since it is
comprised of readily marketable high-quality fixed-income securities and
short-term investments. At the end of the second quarter 1998, the fair value of
our consolidated investment portfolio increased to $9.4 billion, as shown below:
June 30, December 31, Percent Change
In millions 1998 1997 1998 vs. 1997
- ----------------------- --------------- ----------------- -------------------
Insurance operations:
Amortized cost $5,534 $5,292 5%
Unrealized gain 273 275 (1%)
- ----------------------- --------------- ----------------- -------------------
Fair value $5,807 $5,567 4%
- ----------------------- --------------- ----------------- -------------------
Municipal investment
agreements:
Amortized cost $3,476 $3,242 7%
Unrealized gain 128 99 28%
- ----------------------- --------------- ----------------- -------------------
Fair value $3,604 $3,341 8%
- ----------------------- --------------- ----------------- -------------------
Total portfolio
at fair value $9,411 $8,908 6%
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 $3.60 billion at June 30, 1998 from $3.34 billion at December 31, 1997,
reflecting the growth of new business volume in the second quarter.
(21)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Our investment portfolios are considered to be available-for-sale and the
differences between their fair value and amortized cost, net of applicable
taxes, are reflected as an adjustment to shareholders' equity. Differences
between fair value and amortized cost arise primarily as a result of changes in
interest rates occurring after a fixed-income security is purchased, although
other factors influence fair value, including credit-related actions, supply and
demand forces and other market factors. The weighted-average credit quality of
our fixed-income portfolios has been maintained at Double-A since our inception
in 1986, and since we generally intend to hold most of our investments to
maturity as part of our risk-management strategy, we expect to realize a value
substantially equal to amortized cost.
YEAR 2000
With the approach of the new millenium, 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. We have instituted a corporate-wide
effort to address and resolve the system/application tasks associated with Year
2000 at subsidiary locations and expect them to be Year 2000 compliant. We do
not expect that other costs related to Year 2000 compliance activities will have
a material effect on net income, financial condition or cash flows.
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 material costs associated
with any Year 2000 disruption by our issuers.
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.
(22)
<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 -- No reports on Form 8-K were filed in this
quarter.
(23)
<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: August 13, 1998 /s/ JULLIETTE S. TEHRANI
------------------ ------------------------------
Julliette S. Tehrani
Executive Vice President,
Chief Financial Officer
and Treasurer
Date: August 13, 1998 /s/ ELIZABETH B. SULLIVAN
------------------ ------------------------------
Elizabeth B. Sullivan
Managing Director
Controller
(Principal Accounting Officer)
(24)
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 SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------- ------------------
1998 1997 1998 1997
---------- ------- -------- --------
<S> <C> <C> <C> <C>
Net income $116,233 $96,509 $216,506 $193,370
========== ======= ======== ========
Diluted weighted average shares:
Basic weighted average shares outstanding 97,665 94,625 97,582 94,394
Effect of stock options 1,357 1,279 1,360 1,502
---------- ------- -------- --------
Diluted weighted average shares: 99,022 95,904 98,942 95,896
========== ======= ======== ========
Basic EPS $ 1.19 $ 1.02 $ 2.22 $ 2.05
========== ======= ======== ========
Diluted EPS $ 1.17 $ 1.01 $ 2.19 $ 2.02
========== ======= ======== ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<CIK> 0000814585
<NAME> MBIA Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<DEBT-HELD-FOR-SALE> 5,498,035
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 9,410,561
<CASH> 44,094
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 226,880
<TOTAL-ASSETS> 11,123,101
<POLICY-LOSSES> 115,540
<UNEARNED-PREMIUMS> 2,172,994
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 508,937
<COMMON> 97,984
0
0
<OTHER-SE> 3,470,520
<TOTAL-LIABILITY-AND-EQUITY> 11,123,101
203,218
<INVESTMENT-INCOME> 163,128
<INVESTMENT-GAINS> 13,892
<OTHER-INCOME> 56,204
<BENEFITS> 15,585
<UNDERWRITING-AMORTIZATION> 18,455
<UNDERWRITING-OTHER> 33,461
<INCOME-PRETAX> 284,512
<INCOME-TAX> 68,006
<INCOME-CONTINUING> 216,506
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 216,506
<EPS-PRIMARY> 2.22
<EPS-DILUTED> 2.19
<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 JUNE 30, 1998 AND DECEMBER 31, 1997
AND FOR THE PERIODS ENDED JUNE 30, 1998 AND 1997
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
I N D E X
PAGE
Consolidated Balance Sheets -
June 30, 1998 (Unaudited) and December 31, 1997 (Audited) 3
Consolidated Statements of Income -
Three months and six months ended June 30, 1998
and 1997 (Unaudited) 4
Consolidated Statement of Changes in Shareholder's Equity -
Six months ended June 30, 1998 (Unaudited) 5
Consolidated Statements of Cash Flows -
Six months ended June 30, 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)
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
------------- -----------------
(Unaudited) (Audited)
ASSETS
<S> <C> <C>
Investments:
Fixed-maturity securities held as available-for-sale
at fair value (amortized cost $5,220,498 and $4,600,528) $5,493,390 $4,867,254
Short-term investments, at amortized cost
(which approximates fair value) 253,877 242,730
Other investments 17,376 16,802
-------------- ------------
TOTAL INVESTMENTS 5,764,643 5,126,786
Cash and cash equivalents 21,458 3,983
Securities purchased under agreements to resell 209,500 182,820
Accrued investment income 85,427 78,601
Deferred acquisition costs 226,880 154,100
Prepaid reinsurance premiums 297,704 252,893
Goodwill (less accumulated amortization
of $49,592 and $47,152) 93,389 95,829
Property and equipment, at cost (less accumulated
depreciation of $20,890 and $18,256) 62,232 53,484
Receivable for investments sold 1,394 1,616
Other assets 30,946 37,437
-------------- ------------
TOTAL ASSETS $6,793,573 $5,987,549
============== ============
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Deferred premium revenue $ 2,172,994 $ 1,984,104
Loss and loss adjustment expense reserves 115,540 78,872
Securities sold under agreements to repurchase 209,500 182,820
Deferred income taxes 278,081 251,134
Deferred fee revenue 37,815 ---
Payable for investments purchased 73,431 23,020
Other liabilities 89,236 103,740
-------------- ------------
TOTAL LIABILITIES 2,976,597 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 1,343,465 1,139,949
Retained earnings 2,289,496 2,042,323
Accumulated other comprehensive income, net
of deferred income tax provision
of $96,512 and $94,416 169,015 166,587
-------------- ------------
TOTAL SHAREHOLDER'S EQUITY 3,816,976 3,363,859
-------------- ------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $6,793,573 $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 Six months ended
June 30 June 30
----------------------------- -----------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Gross premiums written $267,005 $165,158 $368,646 $257,744
Ceded premiums (27,043) (22,834) (34,829) (28,813)
------------- ------------- ------------- -------------
Net premiums written 239,962 142,324 333,817 228,931
Increase in deferred premium revenue (135,349) (68,608) (144,305) (83,344)
------------- ------------- ------------- -------------
Premiums earned (net of ceded
premiums of $19,282, $10,940
$27,068 and $21,265) 104,613 73,716 189,512 145,587
Net investment income 80,626 67,441 157,593 133,918
Net realized gains 7,804 2,481 13,892 6,855
Advisory fees 9,803 --- 11,273 ---
Other (62) 369 (20) 693
------------- ------------- ------------- -------------
Total revenues 202,784 144,007 372,250 287,053
------------- ------------- ------------- -------------
Expenses:
Losses and loss adjustment 10,344 4,823 14,563 8,258
Policy acquisition costs, net 9,014 6,830 17,010 13,575
Operating 14,289 11,670 28,545 23,829
------------- ------------- ------------- -------------
Total expenses 33,647 23,323 60,118 45,662
------------- ------------- ------------- -------------
Income before income taxes 169,137 120,684 312,132 241,391
Provision for income taxes 33,772 25,235 64,959 50,615
------------- ------------- ------------- -------------
Net income $135,365 $ 95,449 $247,173 $190,776
============= ============= ============= =============
</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 six months ended June 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 --- --- --- 247,173 --- 247,173
Other comprehensive income:
Change in unrealized
appreciation of investments
net of change in deferred
income taxes of $(2,096) --- --- --- --- 3,973 3,973
Change in foreign
currency translation --- --- --- --- (1,545) (1,545)
-----------------
Other comprehensive income 2,428
-----------------
Comprehensive income 249,601
-----------------
Capital contribution from MBIA Inc. --- --- 190,764 --- --- 190,764
Tax reduction related to tax
sharing agreement
with MBIA Inc. --- --- 12,752 --- --- 12,752
-------- ------------ --------------- -------------- ---------------- -----------------
Balance, June 30, 1998 100,000 $15,000 $1,343,465 $2,289,496 $169,015 $ 3,816,976
======== ============ =============== ============== ================ =================
</TABLE>
Disclosure of reclassification amount:
Unrealized appreciation of
investments arising
during the period $12,968
Reclassification of adjustment,
net of taxes (8,995)
----------
Net unrealized appreciation,
net of taxes $ 3,973
==========
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>
Six months ended
June 30
-----------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 247,173 $ 190,776
Adjustments to reconcile net income to net
cash provided by operating activities:
Increase in accrued investment income (6,826) (4,890)
Increase in deferred acquisition costs (72,780) (4,000)
Increase in prepaid reinsurance premiums (44,811) (7,548)
Increase in deferred premium revenue 189,116 90,892
Increase in loss and loss adjustment expense reserves 36,668 8,800
Depreciation 2,600 1,821
Amortization of goodwill 2,440 2,445
Amortization of bond discount, net (6,734) (4,289)
Net realized gains on sale of investments (13,892) (6,855)
Deferred income taxes 12,398 9,053
Other, net 48,049 (67,656)
-------------- ---------------
Total adjustments to net income 146,228 17,773
-------------- ---------------
Net cash provided by operating activities 393,401 208,549
-------------- ---------------
Cash flows from investing activities:
Purchase of fixed-maturity securities, net
of payable for investments purchased (1,467,070) (889,051)
Sale of fixed-maturity securities, net of
receivable for investments sold 521,860 613,369
Redemption of fixed-maturity securities,
net of receivable for investments redeemed 415,194 69,313
(Purchase) sale of short-term investments, net (30,585) 14,992
Sale of other investments, net 68 523
Capital expenditures, net of disposals (6,157) (5,718)
-------------- ---------------
Net cash used by investing activities (566,690) (196,572)
-------------- ---------------
Cash flow from financing activities:
Capital contribution from MBIA Inc. 190,764 ---
-------------- ---------------
Net cash provided by financing activities 190,764 ---
-------------- ---------------
Net increase in cash and cash equivalents 17,475 11,977
Cash and cash equivalents - beginning of period 3,983 3,288
-------------- ---------------
Cash and cash equivalents - end of period $ 21,458 $ 15,265
============== ===============
Supplemental cash flow disclosures:
Income taxes paid $ 61,474 $ 39,500
</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
six months ended June 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 six months ended June 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 $190.8 million.
-7-
