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, 1999
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 May 11, 1999 there were outstanding 99,791,476 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, 1999
and December 31, 1998 3
Consolidated Statements of Income - Three months
ended March 31, 1999 and 1998 4
Consolidated Statement of Changes in Shareholders' Equity
- Three months ended March 31, 1999 5
Consolidated Statements of Cash Flows
- Three months ended March 31, 1999 and 1998 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8 - 20
PART II OTHER INFORMATION, AS APPLICABLE
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
(2)
<PAGE>
MBIA INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
------------------ ---------------------
ASSETS
<S> <C> <C>
Investments:
Fixed-maturity securities held as available-for-sale
at fair value (amortized cost $5,815,966 and $5,565,060) $ 6,067,124 $ 5,884,053
Short-term investments, at amortized cost
(which approximates fair value) 283,650 423,194
Other investments 84,261 94,975
-------------- --------------
6,435,035 6,402,222
Municipal investment agreement portfolio held as available-for-sale
at fair value (amortized cost $3,604,738 and $3,542,077) 3,675,110 3,678,229
-------------- --------------
TOTAL INVESTMENTS 10,110,145 10,080,451
Cash and cash equivalents 34,527 20,757
Securities borrowed or purchased under agreements to resell 487,281 538,281
Accrued investment income 118,440 126,990
Deferred acquisition costs 230,583 230,085
Prepaid reinsurance premiums 382,246 352,699
Goodwill (less accumulated amortization of $64,178 and $62,423) 121,456 120,681
Property and equipment, at cost (less accumulated depreciation
of $42,339 and $39,934) 85,629 81,457
Receivable for investments sold 21,985 49,497
Other assets 210,488 195,666
-------------- --------------
TOTAL ASSETS $11,802,780 $11,796,564
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deferred premium revenue $ 2,262,137 $ 2,251,211
Loss and loss adjustment expense reserves 428,831 270,114
Municipal investment agreements 2,770,374 2,587,339
Municipal repurchase agreements 841,452 897,718
Long-term debt 689,026 688,996
Securities loaned or sold under agreements to repurchase 487,281 573,352
Deferred income taxes 249,198 343,896
Deferred fee revenue 42,826 42,964
Payable for investments purchased 90,819 95,598
Other liabilities 244,835 253,159
-------------- --------------
TOTAL LIABILITIES 8,106,779 8,004,347
-------------- --------------
Shareholders' Equity:
Preferred stock, par value $1 per share; authorized shares--10,000,000;
issued and outstanding -- none --- ---
Common stock, par value $1 per share; authorized shares--200,000,000;
issued shares -- 99,749,901 and 99,569,625 99,750 99,570
Additional paid-in capital 1,177,516 1,169,192
Retained earnings 2,235,695 2,246,221
Accumulated other comprehensive income, net of
deferred income tax provision of $109,958 and $157,410 194,205 288,915
Unallocated ESOP shares (4,043) (4,044)
Unearned compensation--restricted stock (6,292) (6,807)
Treasury stock -- 21,717 shares (830) (830)
-------------- --------------
TOTAL SHAREHOLDERS' EQUITY 3,696,001 3,792,217
-------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $11,802,780 $11,796,564
============== ==============
</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
-----------------------------
1999 1998
------------ ----------
<S> <C> <C>
Insurance
Revenues:
Gross premiums written $154,910 $121,387
Ceded premiums (59,996) (14,333)
------------ ----------
Net premiums written 94,914 107,054
Decrease (increase) in deferred premium revenue 17,197 (7,412)
------------ ----------
Premiums earned (net of ceded premiums of
$30,449 and $15,667) 112,111 99,642
Net investment income 87,765 82,406
Net realized gains 8,935 6,090
Advisory fees 4,965 6,216
------------ ----------
Total insurance revenues 213,776 194,354
Expenses:
Losses and loss adjustment 161,930 5,241
Policy acquisition costs, net 9,193 9,440
Operating 18,098 17,964
------------ ----------
Total insurance expenses 189,221 32,645
------------ ----------
Insurance income 24,555 161,709
------------ ----------
Investment management services
Revenues 19,342 14,036
Expenses 9,967 8,598
------------ ----------
Operating income 9,375 5,438
Net realized gains 729 6,446
------------ ----------
Investment management services income 10,104 11,884
------------ ----------
Municipal and financial services
Revenues 3,679 9,613
Expenses 10,966 9,867
------------ ----------
Municipal and financial services loss (7,287) (254)
------------ ----------
Corporate
Interest expense 13,496 10,433
Other expenses 1,922 32,828
------------ ----------
Corporate expenses (15,418) (43,261)
------------ ----------
Income before income taxes 11,954 130,078
Provision for income taxes 2,534 27,973
------------ ----------
Net income $ 9,420 $102,105
============ ==========
Net income per common share:
Basic $ 0.09 $ 1.03
Diluted $ 0.09 $ 1.02
Weighted average number of common shares outstanding:
Basic 99,547,368 98,689,738
Diluted 100,465,119 100,055,944
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
(4)
<PAGE>
MBIA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)
For the three months ended March 31, 1999
(In thousands except per share amounts)
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other
------------------------------- Paid-in Retained Comprehensive
Shares Amount Capital Earnings Income
--------------- --------------- ---------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1999 99,570 $99,570 $1,169,192 $2,246,221 $288,915
Comprehensive income:
Net income --- --- --- 9,420 ---
Other comprehensive income:
Change in unrealized
appreciation of investments
net of change in deferred
income taxes of $47,452 --- --- --- --- (88,508)
Change in foreign currency
translation --- --- --- --- (6,202)
Other comprehensive income
Total comprehensive income
Exercise of stock options 139 139 5,626 --- ---
Stock issued for acquistion 38 38 2,492 --- ---
Allocation of ESOP shares --- --- --- --- ---
Unearned compensation-
restricted stock 3 3 206 --- ---
Dividends (declared and paid per
common share $0.20) --- --- --- (19,946) ---
--------------- --------------- ---------------- -------------- ---------------
Balance, March 31, 1999 99,750 $99,750 $1,177,516 $2,235,695 $194,205
=============== =============== ================ ============== ===============
<PAGE>
Unearned
Unallocated Compensation- Treasury Stock Total
ESOP Restricted ------------------------------ Shareholders'
Shares Stock Shares Amount Equity
----------- --------------- --------------- -------------- ------------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1999 $(4,044) $(6,807) (22) ($830) $3,792,217
Comprehensive income:
Net income --- --- --- --- 9,420
Other comprehensive income:
Change in unrealized
appreciation of investments
net of change in deferred
income taxes of $47,452 --- --- --- --- (88,508)
Change in foreign currency
translation --- --- --- --- (6,202)
------------------
Other comprehensive income (94,710)
------------------
Total comprehensive income (85,290)
------------------
Exercise of stock options --- --- --- --- 5,765
Stock issued for acquistion --- --- --- --- 2,530
Allocation of ESOP shares 1 --- --- --- 1
Unearned compensation-
restricted stock --- 515 --- --- 724
Dividends (declared and paid per
common share $0.20) --- --- --- --- (19,946)
----------- --------------- --------------- -------------- ------------------
Balance, March 31, 1999 $(4,043) $(6,292) (22) ($830) $3,696,001
=========== =============== =============== ============== ==================
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
1999
------------
Disclosure of reclassification amount:
Unrealized depreciation of
investments arising
during the period $ (80,764)
Reclassification of adjustment,
net of taxes (7,744)
------------
Net unrealized depreciation,
net of taxes $(88,508)
============
(5)
<PAGE>
MBIA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three months ended
March 31
------------------------------------
1999 1998
--------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 9,420 $ 102,105
Adjustments to reconcile net income to net cash
provided by operating activities:
Decrease in accrued investment income 8,550 6,462
Increase in deferred acquisition costs (498) (5,861)
(Increase) decrease in prepaid reinsurance premiums (29,547) 1,334
Increase in deferred premium revenue 12,353 6,078
Increase in loss and loss adjustment expense reserves 158,717 4,747
Depreciation 2,417 1,534
Amortization of goodwill 1,754 2,103
Amortization of bond discount, net (4,915) (5,728)
Net realized gains on sale of investments (9,664) (12,536)
Deferred income taxes (47,165) 2,954
Other, net (22,634) 7,931
--------------- -------------
Total adjustments to net income 69,368 9,018
--------------- -------------
Net cash provided by operating activities 78,788 111,123
--------------- -------------
Cash flows from investing activities:
Purchase of fixed-maturity securities, net
of payable for investments purchased (1,966,627) (411,075)
Sale of fixed-maturity securities, net of
receivable for investments sold 1,724,242 257,854
Redemption of fixed-maturity securities, net of
receivable for investments redeemed 100,133 62,178
Sale of short-term investments, net 100,988 6,500
Sale of other investments, net 8,395 435
Purchases for municipal investment agreement
portfolio, net of payable for investments purchased (495,169) (757,704)
Sales from municipal investment agreement
portfolio, net of receivable for investments sold 399,684 515,136
Capital expenditures, net of disposals (6,589) (3,232)
Other, net (2,517) (8,537)
--------------- -------------
Net cash used by investing activities (137,460) (338,445)
--------------- -------------
Cash flows from financing activities:
Dividends paid (19,897) (17,796)
Proceeds from issuance of municipal investment
and repurchase agreements 507,152 809,843
Payments for drawdowns of municipal investment
and repurchase agreements (385,507) (501,553)
Securities loaned or sold under agreements to repurchase (35,071) (61,000)
Exercise of stock options 5,765 4,875
--------------- -------------
Net cash provided by financing activities 72,442 234,369
--------------- -------------
Net increase in cash and cash equivalents 13,770 7,047
Cash and cash equivalents - beginning of period 20,757 26,296
--------------- -------------
Cash and cash equivalents - end of period $ 34,527 $ 33,343
=============== =============
Supplemental cash flow disclosures:
Income taxes paid $2,518 $5,289
Interest paid:
Municipal investment and repurchase agreements $45,841 $49,955
Long-term debt 13,554 9,188
Short-term debt --- 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, 1998 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, 1999 may not be
indicative of the results that may be expected for the year ending December 31,
1999. The December 31, 1998 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. Business segment results
are presented gross of intersegment transactions, which are not material to each
segment. Due to the mergers with CapMAC Holdings Inc. (CapMAC) and 1838
Investment Advisors, Inc. (1838) all prior period consolidated financial
statements presented have been restated to include the combined results of
operations, financial position and cash flows of CapMAC and 1838 as though they
had been a part of MBIA.
2. Dividends Declared
- ----------------------
Dividends declared by the company during the three months ended March 31, 1999
were $19.9 million.
3. 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.
(7)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
- ------------
MBIA recorded mixed business results in the first quarter of 1999, yet we still
met our three main goals. We continued to write business to meet our no loss
underwriting standard, worked to strengthen our triple-A ratings and we
continued to build long term shareholder value.
We recorded strong top line results in insurance operations as adjusted gross
premiums rose sharply, and expected margins improved. Our Investment Management
Services Division also posted extremely strong gains. The operating losses in
our Municipal and Financial Services Division were expected, but unacceptable,
and these operations will continue to be under strategic review during 1999.
During the quarter, we strengthened our financial foundation by bolstering our
unallocated loss reserve and continued our strategic use of reinsurance to
better position our company for long term profitable growth.
RESULTS OF OPERATIONS
- ---------------------
SUMMARY
- -------
The following chart presents highlights of our consolidated financial results
for the first quarters of 1999 and 1998. All of the numbers shown below and all
of the data contained in this report have been restated to reflect our 1998
mergers with CapMAC Holdings Inc. (CapMAC) and 1838 Investment Advisors, Inc.
(1838), which have been accounted for as "pooling of interests."
Percent Change
March 31, March 31, --------------
1999 1998 1999 vs. 1998
--------------------------------------------------------------------
Net income (in millions):
As reported $ 9 $ 102 (91)%
Excluding one-time charges $ 124 $ 121 2 %
Per share data:
Net income:
As reported $ 0.09 $ 1.02 (91)%
Excluding one-time charges $ 1.23 $ 1.21 2 %
Operating earnings $ 1.17 $ 1.12 4 %
Core earnings $ 1.04 $ 1.03 1 %
Book value $37.11 $34.79 7 %
Adjusted book value $52.57 $48.92 7 %
--------------------------------------------------------------------
Core earnings, which exclude the effects of refundings and calls on our
insured issues, realized capital gains and losses on our investment portfolio
and nonrecurring charges, provide the most indicative measure of our underlying
profit. For the first quarter of 1999, core earnings per share reflected strong
top line results. However, these were offset by operating losses in our
municipal and financial services line, heavier use of reinsurance, and the
increase in our loss reserving provision. The result was that diluted core
earnings per share were $1.04, up an unacceptable 1% over first quarter 1998.
(8)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Our first quarter 1999 net income and earnings per share grew 2% excluding
one-time charges. Including the one-time charges, net income decreased by 91%
for 1999 over 1998.
Operating earnings per share, which exclude the impact of realized gains
and losses and one-time charges, increased by 4% over first quarter 1998.
Our book value at March 31, 1999 was $37.11 per share, up from $34.79 at
March 31, 1998. As with core earnings, 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 net deferred premium revenue, net of
deferred acquisition costs, the present value of unrecorded future installment
premiums, and the unrealized gains or losses on investment contract liabilities.
The following table presents the components of our adjusted book value per
share:
Percent Change
March 31, March 31, --------------
1999 1998 1999 vs. 1998
- --------------------------------------------------------------------
Book value $37.11 $34.79 7%
After-tax value of:
Net deferred premium
revenue, net of deferred
acquisition costs 10.77 10.43 3%
Present value of future
installment premiums* 4.31 3.55 21%
Unrealized gain on
investment contract
liabilities** 0.38 0.15 153%
- --------------------------------------------------------------------
Adjusted book value $52.57 $48.92 7%
- --------------------------------------------------------------------
* The discount rate used to present value future installment premiums was 9%.
** The unrealized gain on investment contract liabilities is offset by a
corresponding gain on the market value of the assets.
Our adjusted book value per share was $52.57 at March 31, 1999, a 7%
increase from first quarter-end 1998.
(9)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
FINANCIAL GUARANTEE INSURANCE
- -----------------------------
In the first quarter of 1999, the market offered us the opportunity to be both
more selective and to write a significantly greater volume than in the first
quarter of 1998. As a result, our top line results were extremely strong.
Adjusted gross premiums written (AGP) were up by 32% compared to the first
quarter of 1998, while par insured was up only 17%, meaning that we received
more premium for every dollar of risk insured. AGP includes our upfront premiums
as well as the estimated present value of current and future premiums from
installment-based insurance policies issued in the period. Gross premiums
written (GPW), as reported in our financial statements, reflects cash receipts
only and does not include the value of future premium receipts expected for
installment policies originated in the period. MBIA's premium production in
terms of AGP and GPW for the first quarters of 1999 and 1998 is presented in the
following table:
Percent Change
March 31, March 31, --------------
In millions 1999 1998 1999 vs. 1998
- ------------------------------------------------------------------------
Premiums written:
GPW $155 $121 28%
AGP $182 $138 32%
- ------------------------------------------------------------------------
We estimate the present value of our total future installment premium stream on
outstanding policies to be $660 million at March 1999, compared with $539
million at March 1998.
MUNICIPAL MARKET New issuance in the municipal market was $52.9 billion for the
first quarter of 1999, down 20% from $66.2 billion in the first quarter of 1998.
The insured portion increased to 57% from 51% in the first quarter of 1998.
MBIA's domestic municipal AGP was up by 33% over 1998's first quarter while par
insured declined by 8%. The significant increase in AGP combined with a decline
in par insured is the result of a value added pricing discipline which we have
brought down to the individual deal level to ensure that we realize not just
adequate, but attractive returns on each deal we insure. Domestic new issue
municipal market information and MBIA's par and premium writings in both the new
issue and secondary domestic municipal finance markets are shown in the
following table:
(10)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Percent Change
March 31, March 31, --------------
Domestic Municipal 1999 1998 1999 vs. 1998
- --------------------------------------------------------------------------------
Total new issue market:*
Par value (in billions) $ 53 $ 66 (20)%
Insured penetration 57% 51%
MBIA insured:
Par value (in billions) $ 9 $ 10 (8)%
Premiums: (in millions)
GPW $ 87 $ 68 30 %
AGP $ 91 $ 68 33 %
- --------------------------------------------------------------------------------
* 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 We also recorded strong results in structured finance
for the quarter. AGP was up a healthy 41% while par insured was up only 30%.
This was despite a sharp increase in the percentage of structured business
written which was rated A and above, from 19% last year to 42% this year.
Pricing remained strong and expected returns were up sharply compared to the
same period last year. Details regarding the public 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:
Percent Change
Domestic March 31, March 31, --------------
Structured Finance 1999 1998 1999 vs. 1998
- ------------------------------------------------------------------------------
Total asset-backed market:*
Par value (in billions) $49 $ 36 34%
MBIA insured:
Par value (in billions) $11 $ 9 30%
Premiums: (in millions)
GPW $37 $ 30 22%
AGP $40 $ 28 41%
- ------------------------------------------------------------------------------
* Market data exclude mortgage-backed securities and private placements.
(11)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
INTERNATIONAL MARKET The MBIA/AMBAC Joint Venture recorded strong results in the
first quarter compared to last year's first quarter. AGP is up 9%, about in line
with par insured and returns continue to be very attractive. Our company's
municipal and structured finance international business volume in the new issue
and secondary markets for the first quarter of 1999 and 1998 is illustrated as
follows:
Percent Change
March 31, March 31, --------------
International 1999 1998 1999 vs. 1998
- -------------------------------------------------------------------------------
Par value (in billions) $ 3 $ 2 12%
Premiums: (in millions)
GPW $22 $19 17%
AGP $43 $40 9%
- -------------------------------------------------------------------------------
REINSURANCE Premiums ceded to reinsurers from all insurance operations were $60
million and $14 million in 1999 and 1998, respectively. Cessions as a percentage
of GPW increased to 39% in 1999 from 12% in 1998. The increase in our cession
rate was largely driven by the strategic use of reinsurance to shape the
portfolio. Continuing the initiative begun in the fourth quarter of 1998 we
focused on reducing larger single risks across the portfolio. This is consistent
with our emphasis on a strong balance sheet. In addition, we are freeing up
capacity to write additional business.
Most of our reinsurers are rated Double-A or higher by S&P, or Single-A or
higher by A. M. Best Co. Although we remain liable for all reinsured risks, we
are confident that we will recover the reinsured portion of any losses, should
they occur.
PREMIUMS EARNED 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. In 1999 premiums earned from scheduled amortization increased by
7% over first quarter 1998.
Refunded premiums also generated high revenues in the first quarter of
1999. When an MBIA-insured bond issue is refunded or retired early, the related
deferred premium revenue is earned immediately. 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:
Percent Change
March 31, March 31, --------------
In millions 1999 1998 1999 vs. 1998
- ------------------------------------------------------------------------
Premiums earned:
Scheduled $ 89 $84 7%
Refunded 23 16 43%
- ------------------------------------------------------------------------
Total $112 $100 13%
- ------------------------------------------------------------------------
(12)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
INVESTMENT INCOME Our insurance-related investment income (exclusive of capital
gains) increased to $88 million in the first quarter of 1999, up from $82
million in the first quarter of 1998. This increase was 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 $9 million in the first quarter of 1999, and $6
million in the first quarter of 1998. These realized gains were generated as a
result of ongoing management of the investment portfolio.
ADVISORY FEES The company collects fee revenues in conjunction with certain
structured finance transactions. In the first quarter of 1999, advisory fee
revenues decreased by 20%, as the amortization of previously deferred fee
revenue declined from period to period. Certain fees are deferred and earned
over the life of the related transactions. Cash collection of advisory fees was
relatively constant from quarter to quarter.
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.
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.
We completed an update of our unallocated loss reserving methodology. The
update included an analysis of loss-reserve factors based on the latest
available industry data. We included the analysis of historical default and
recovery experience for the relevant sectors of the fixed-income market. Also
factored in was the changing mix of our book of business. The study resulted in
an increase in our company's quarterly loss provision and a one-time charge of
$153 million to incorporate the new factors on the existing insured portfolio.
(13)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The following table shows the case-specific and unallocated components of
our total loss and LAE reserves at the first quarter end of 1999 and 1998:
Percent Change
March 31, March 31, --------------
In millions 1999 1998 1999 vs. 1998
- -------------------------------------------------------------------
Reserves:
Case-specific $193 $ 33 483%
Unallocated 236 75 216%
- -------------------------------------------------------------------
Total $429 $108 298%
Provision $162 $ 5 2,990%
- -------------------------------------------------------------------
The changes in the case-specific reserve had no impact on our net income
since they were offset by corresponding changes in the unallocated portion of
the total reserve.
OPERATING EXPENSES Those expenses related to the production of our insurance
business (policy acquisition costs) are deferred and recognized over the period
in which the related premiums are earned. Our company's policy acquisition
costs, general operating expenses and total insurance operating expenses, as
well as related expense measures, are shown below:
Percent Change
March 31, March 31, --------------
In millions 1999 1998 1999 vs. 1998
- --------------------------------------------------------------------------------
Policy acquisition costs, net $ 9 $ 9 ---
Operating 18 18 ---
- --------------------------------------------------------------------------------
Total insurance
operating expenses $27 $ 27 ---
Expense ratio:
GAAP 24.3% 27.5%
Statutory 20.9% 26.8%
- --------------------------------------------------------------------------------
For the first quarter of 1999, policy acquisition costs net of deferrals
remained even with the first quarter of 1998. The ratio of policy acquisition
costs net of deferrals to earned premiums has declined from 9.5% in 1998 to 8.2%
in 1999. This decline reflects the positive impact of increases in both
installment premium revenues and ceding commission income.
Operating expenses were also relatively unchanged from the prior year's
comparable period. Reflecting synergies with the CapMAC merger as well as our
commitment to hold the line on expenses.
(14)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 1999 statutory and
GAAP expense ratios have both improved over the first quarter of 1998 again
reflecting the success of the merger and our disciplined expense management.
INSURANCE INCOME MBIA's insurance income at $25 million for the first quarter of
1999 was significantly depressed by the increases to our loss provision.
Excluding the provision increases, insurance income grew by 12%.
INVESTMENT MANAGEMENT SERVICES
- ------------------------------
In 1998 after our merger with 1838, we formed a holding company, MBIA Asset
Management Corporation, to consolidate the resources and capabilities of our
four investment management services. The success of our merger with 1838 showed
immediate operating benefits, and all of our investment management franchises
had record performances in 1998. Continuing in this vein, consolidated operating
income increased by 72% for the first quarter of 1999 over same period in 1998.
Of special note was the 38% increase in operating revenues achieved while
investment management expenses held the line at only a 16% growth rate. The
table below summarizes our consolidated investment management results for the
first quarters of 1999 and 1998:
Percent Change
March 31, March 31, --------------
In millions 1999 1998 1999 vs. 1998
- --------------------------------------------------------------------
Revenues $19 $14 38 %
Expenses 10 9 16 %
- --------------------------------------------------------------------
Operating income 9 5 72 %
Realized gains 1 7 (89)%
- --------------------------------------------------------------------
Income $10 $12 (15)%
- --------------------------------------------------------------------
MBIA Asset Management Corporation is comprised of 1838, MBIA Municipal Investors
Services Corp. (MBIA-MISC), MBIA Investment Management Corp. (IMC) and MBIA
Capital Management Corp. (CMC). The following provides a summary of each of
these businesses:
1838 is a full-service asset management firm with a strong institutional focus.
It manages over $7.9 billion in equity, fixed-income and balanced portfolios for
a client base comprised of municipalities, endowments, foundations, corporate
employee benefit plans and high-net-worth individuals.
MBIA-MISC provides cash management, investment fund administration and
fixed-rate investment placement services directly to local governments and
school districts. Its subsidiary, American Money Management Associates, Inc.
(AMMA), 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 and at
March 31, 1999 had $6.8 billion in assets under management, up 25% over March
31, 1998's $5.4 billion.
(15)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
IMC provides state and local governments with tailored investment agreements for
bond proceeds and other public funds, such as construction, loan origination,
capitalized interest and debt service reserve funds. At March 31, 1999,
principal and accrued interest outstanding on investment and repurchasing
agreements was $3.6 billion, compared with $3.5 billion at March 31, 1998. At
amortized cost, the assets supporting IMC's investment agreement were also at
$3.6 billion and $3.5 billion at March 31, 1999 and 1998. 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 1999, our exposure to derivative financial
instruments was not material.
CMC is an SEC-registered investment adviser and National Association of
Securities Dealers member firm. CMC specializes in fixed-income management for
institutional funds and provides investment management services for IMC's
investment agreements, MBIA-MISC's municipal cash management programs and MBIA's
insurance related portfolios. At March 31, 1999, CMC's assets under management
were $1.1 billion compared to $0.6 billion at March 31, 1998.
MUNICIPAL AND FINANCIAL SERVICES
- --------------------------------
MBIA MUNISERVICES COMPANY (MBIA 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. MBIA MuniServices
includes Municipal Tax Bureau (MTB), a provider of tax revenue compliance and
collection services to public entities, MuniFinancial, a public finance
consulting firm specializing in municipal debt administration and Municipal
Resource Consultants (MRC), a revenue audit and information services firm. MBIA
MuniServices also includes an equity interest in Capital Asset Holdings, Inc.
(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.
(16)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
In the first quarter of 1999 the municipal and financial services
operations lost $7 million. The operating losses in our Municipal and Financial
Services Division were expected, but unacceptable. These operations will
continue to be under strategic review during 1999.
CORPORATE
- ---------
INTEREST EXPENSE In the first quarter of 1999, we incurred $13 million of
interest expense compared to $10 million in the first quarter of 1998. The
increase in interest expense reflects our long-term debt financings of $150
million and $50 million in September and November 1998, respectively.
OTHER EXPENSES In the first quarter of 1999 other expenses were composed
primarily of non-insurance goodwill amortization and general corporate overhead.
In the first quarter of 1998 other expenses also included a $29.5 million
one-time charge related to the CapMAC merger, which included investment banking
and legal fees and severance expense.
TAXES
- -----
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 has declined marginally over last
year's first quarter.
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 March 31, 1999, our total shareholders' equity was
$3.7 billion, with total long-term borrowings at $689 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 the ratio we use to measure it:
March 31, December 31,
1999 1998
- ---------------------------------------------------------------------
Long-term debt (in millions) $689 $689
Long-term debt to total capital 16% 15%
- ---------------------------------------------------------------------
In addition, our insurance company has an $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.
(17)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Any loans made under this agreement would be repaid solely from recoveries
realized on defaulted insured obligations. The agreement is for a seven-year
term, which expires on October 31, 2005, and, subject to approval by the banks,
may be renewed annually to extend the term to seven years beyond the renewal
date. Our insurance company also maintains stop-loss reinsurance coverage of
$175 million in excess of incurred losses of $150 million.
From time to time we access the capital markets to support the growth of
our businesses. In September 1998, we issued $150 million of 30-year debentures,
and, in November 1998, we issued $50 million of 40-year notes.
At quarter end, total claims-paying resources for our insurance company
stood at $8.0 billion, a 16% increase over first quarter end 1998.
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 1999, operating cash flow totaled $79
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. During the first quarter our
insurance company paid no dividends and at March 31, 1999 had dividend capacity
in excess of $233 million without special regulatory approval.
Our company has significant liquidity supporting its businesses. At the end
of first quarter 1999, cash equivalents and short-term investments totaled $318
million. Should significant cash flow reductions occur in any of our businesses,
for any combination of reasons, we have additional alternatives for meeting
ongoing cash requirements. They include, among other things, selling or pledging
our fixed-income investments from our investment portfolio, tapping existing
liquidity facilities and new borrowings.
Our company has substantial external borrowing capacity. We maintain two
short-term bank lines totaling $650 million with a group of worldwide banks. At
March 31, 1999, there were no balances outstanding under these lines.
(18)
<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 March 31, 1999, the fair value of our consolidated
investment portfolio was $10.1 billion, as shown below:
Percent Change
March 31, December 31, --------------
In millions 1999 1998 1999 vs. 1998
-------------------------------------------------------------------------
Insurance operations:
Amortized cost $6,184 $ 6,083 2 %
Unrealized gain 251 319 (21)%
-------------------------------------------------------------------------
Fair value $6,435 $ 6,402 1 %
-------------------------------------------------------------------------
Municipal investment
agreements:
Amortized cost $3,605 $ 3,542 2 %
Unrealized gain 70 136 (48)%
-------------------------------------------------------------------------
Fair value $3,675 $ 3,678 ---
-------------------------------------------------------------------------
Total portfolio
at fair value $10,110 $10,080 ---
- --------------------------------------------------------------------------
The growth of our insurance-related investments in 1999 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,
1999. The fair value of investments related to our municipal investment
agreement business has remained constant at $3.7 billion primarily due to
offsetting effects between a decrease in unrealized gains and a positive cash
flow from operations.
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.
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 new millennium approaching, MBIA is actively managing a high-priority
Year 2000 (Y2K) program addressing the issue of whether its computer systems can
correctly distinguish between the years 1900 and 2000. The company has
established an independent Y2K testing lab in its Armonk office, with a
committee of business unit managers overseeing the project. MBIA has a budget of
$1.13 million for its 1998-2000 Y2K efforts. Expenditures are proceeding as
(19)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
anticipated, and we do not expect the project budget to materially exceed this
amount. As of March 31, 1999, we have spent $494 thousand on the project. Since
the mid-1990s, MBIA has completed the re-engineering or installation of three
internally designed "mission-critical" computer systems at a cost of
approximately $11 million. The three systems are: MBIA Information Deal Analysis
System (MIDAS), which provides analysis and accounting for MBIA's financial
guarantee business; Sales Trading and Accounting Records System (STARS), which
provides administrative and client support for MBIA's municipal pooled
investment business; and Municipal Agreement Record System (MARS), which
provides analytical and accounting support for MBIA's investment agreement
business. These systems were designed as Y2K-compliant. These expenditures are
not reflected in our Y2K budget.
MBIA has initiated a comprehensive Y2K plan which includes the following
phases: assessment -- completed in the second quarter of 1998; remediation --
completed in the fourth quarter of 1998; testing -- completed for STARS in the
third quarter of 1998, MARS in the fourth quarter of 1998 and MIDAS with the
initial phase completed in the fourth quarter of 1998 (final testing completion
expected by the end of the second quarter of 1999); and contingency planning --
to be completed in the second quarter of 1999. This plan covers
"mission-critical" internally developed systems, vendor software, hardware and
certain third-party entities through which we conduct our business. Testing to
date indicates that functions critical to the financial guarantee business, both
domestic and international (MIDAS), were Y2K-ready as of December 31, 1998.
Additional testing will continue throughout 1999. In addition, MBIA's subsidiary
companies are actively managing their own Y2K efforts and are expected to meet
varying readiness deadlines before yearend. It is not possible at this time to
determine whether a subsidiary's Y2K failure would have a material impact on
MBIA. Additionally, MBIA is reviewing all ancillary support functions.
Evaluation, testing and re-testing will continue throughout 1999.
An area of risk to MBIA's financial guarantee business is the potential
inability of an issuer, or its trustee or paying agent, to make payments on an
MBIA-insured transaction because of failure to be Y2K-ready. To mitigate this
risk, we are surveying trustees, paying agents, custodians, fiscal agents,
servicers and selected high-volume issuers to determine their readiness. While
the survey is not complete, results to date indicate that all respondents are
either ready or planning to be ready by late 1999. If MBIA is asked to pay a
claim in situations where the issuer's system fails, we will do so and would
expect to recover such payment in a short time period. While it is not possible
to predict the extent of such payments, we believe that MBIA has adequate
sources of liquidity to cover these payments.
(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
(b) Reports on Form 8-K:
1. The company filed a report on Form 8-K on January 7,
1999 announcing a senior management succession plan.
2. The company filed a report on Form 8-K on April 7, 1999
announcing an increase to the quarterly loss provision
and a one time pre-tax charge of $152.7 million in the
first quarter to increase unallocated loss reserves.
(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 14, 1999 /s/ Neil G. Budnick
--------------------------- ----------------------------
Neil G. Budnick
Vice Chairman,
Chief Financial Officer
and Treasurer
Date: May 14, 1999 /s/ ELIZABETH B. SULLIVAN
--------------------------- ----------------------------
Elizabeth B. Sullivan
Managing Director,
Controller
(Principal Accounting Officer)
(22)
EXHIBIT 11
MBIA INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE ASSUMING DILUTION
(In thousands except per share amounts)
THREE MONTHS ENDED
MARCH 31
--------------------------
1999 1998
----------- -----------
Net income $ 9,420 $102,105
=========== ===========
Diluted weighted average shares:
Basic weighted average
shares outstanding 99,547 98,690
Effect of stock options 918 1,366
=========== ===========
Diluted weighted average shares: 100,465 100,056
=========== ===========
Basic EPS $ 0.09 $ 1.03
=========== ===========
Diluted EPS $ 0.09 $ 1.02
=========== ===========
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0000814585
<NAME> MBIA Inc.
<MULTIPLIER> 1,000
<CURRENCY> U.S.DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 6,067,124
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 10,110,145
<CASH> 34,527
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 230,583
<TOTAL-ASSETS> 11,802,780
<POLICY-LOSSES> 428,831
<UNEARNED-PREMIUMS> 2,262,137
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 689,026
0
0
<COMMON> 99,750
<OTHER-SE> 3,596,251
<TOTAL-LIABILITY-AND-EQUITY> 11,802,780
112,111
<INVESTMENT-INCOME> 87,765
<INVESTMENT-GAINS> 8,935
<OTHER-INCOME> 28,715
<BENEFITS> 161,930
<UNDERWRITING-AMORTIZATION> 9,193
<UNDERWRITING-OTHER> 18,098
<INCOME-PRETAX> 11,954
<INCOME-TAX> 2,534
<INCOME-CONTINUING> 9,420
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,420
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.09
<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 MARCH 31, 1999 AND DECEMBER 31, 1998
AND FOR THE PERIODS ENDED MARCH 31, 1999 AND 1998
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
I N D E X
Page
----
Consolidated Balance Sheets -
March 31, 1999 and December 31, 1998 (Unaudited) 3
Consolidated Statements of Income -
Three months ended March 31, 1999 and 1998 (Unaudited) 4
Consolidated Statement of Changes in Shareholder's Equity -
Three months ended March 31, 1999 (Unaudited) 5
Consolidated Statements of Cash Flows -
Three months ended March 31, 1999 and 1998 (Unaudited) 6
Notes to Consolidated Financial Statements (Unaudited) 7
-2-
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
--------------- -------------------
ASSETS
<S> <C> <C>
Investments:
Fixed-maturity securities held as available-for-sale
at fair value (amortized cost $5,815,966 and $5,565,060) $6,067,124 $5,884,053
Short-term investments, at amortized cost
(which approximates fair value) 283,643 423,188
Other investments 16,106 17,850
---------------- -----------------
TOTAL INVESTMENTS 6,366,873 6,325,091
Cash and cash equivalents 10,136 6,546
Securities purchased under agreements to resell 215,000 187,500
Accrued investment income 87,784 91,239
Deferred acquisition costs 230,583 230,085
Prepaid reinsurance premiums 382,246 352,699
Goodwill (less accumulated amortization of
$53,250 and $52,031) 89,731 90,950
Property and equipment, at cost (less accumulated
depreciation of $25,311 and $23,840) 76,581 71,952
Receivable for investments sold 6,189 33,880
Other assets 160,347 97,970
---------------- -----------------
TOTAL ASSETS $7,625,470 $7,487,912
================ =================
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Deferred premium revenue $ 2,262,137 $ 2,251,211
Loss and loss adjustment expense reserves 428,831 270,114
Securities sold under agreements to repurchase 215,000 187,500
Deferred income taxes 232,262 303,407
Deferred fee revenue 32,881 33,785
Payable for investments purchased 69,229 29,523
Other liabilities 130,054 135,027
---------------- -----------------
TOTAL LIABILITIES 3,370,394 3,210,567
---------------- -----------------
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 1,497,542 1,491,033
Retained earnings 2,588,631 2,566,222
Accumulated other comprehensive income,
net of deferred income tax provision of
of $88,280 and $112,283 153,903 205,090
---------------- -----------------
TOTAL SHAREHOLDER'S EQUITY 4,255,076 4,277,345
---------------- -----------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $7,625,470 $7,487,912
================ =================
</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)
Three Months Ended
March 31
------------------------
1999 1998
---------- ---------
Revenues:
Gross premiums written $154,910 $101,641
Ceded premiums (59,996) (7,786)
---------- ---------
Net premiums written 94,914 93,855
Decrease (increase) in deferred
premium revenue 17,197 (8,956)
---------- ---------
Premiums earned (net of ceded
premiums of $30,449 and $9,555) 112,111 84,899
Net investment income 88,007 76,967
Net realized gains 7,759 6,088
Advisory fees 4,965 1,470
Other --- 42
---------- ---------
Total revenues 212,842 169,466
---------- ---------
Expenses:
Losses and loss adjustment 161,930 4,219
Policy acquisition costs, net 9,193 7,996
Operating 18,098 14,256
---------- ---------
Total expenses 189,221 26,471
--------- ---------
Income before income taxes 23,621 142,995
Provision for income taxes 1,212 31,187
--------- ---------
Net income $22,409 $111,808
========= =========
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, 1999
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other Total
------------------- Paid-in Retained Comprehensive Shareholder's
Share Amount Capital Earnings Adjustment Equity
--------- -------- ---------- ---------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1999 100,000 $15,000 $1,491,033 $2,566,222 $205,090 $ 4,277,345
Comprehensive income:
Net income --- --- --- 22,409 --- 22,409
Other comprehensive income:
Change in unrealized
appreciation of investments
net of change in deferred
income taxes of $24,002 --- --- --- --- (44,960) (44,960)
Change in foreign
currency translation --- --- --- --- (6,227) (6,227)
----------------
Other comprehensive income (51,187)
----------------
Comprehensive income (28,778)
Tax reduction related to tax
sharing agreement
with MBIA Inc. --- --- 6,509 --- --- 6,509
========= ======== ============ ========== ============= ==============
Balance, March 31, 1999 100,000 $15,000 $1,497,542 $2,588,631 $153,903 $ 4,255,076
========= ======== ============ ========== ============= ==============
</TABLE>
Disclosure of reclassification amount:
Unrealized depreciation of
investments arising
during the period, net of taxes $(38,173)
Reclassification of adjustment,
net of taxes (6,787)
----------
Net unrealized depreciation,
net of taxes $(44,960)
==========
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>
Three Months Ended
March 31
------------------------
1999 1998
--------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 22,409 $ 111,808
Adjustments to reconcile net income to net
cash provided by operating activities:
Decrease in accrued investment income 3,455 3,368
Increase in deferred acquisition costs (498) (5,250)
(Increase) decrease in prepaid reinsurance premiums (29,547) 1,769
Increase in deferred premium revenue 12,350 7,182
Increase in loss and loss adjustment expense reserves 158,717 3,750
Depreciation 1,565 1,150
Amortization of goodwill 1,219 1,221
Amortization of bond discount, net (3,661) (4,308)
Net realized gains on sale of investments (7,759) (6,088)
Deferred income taxes (47,058) 10,572
Other, net (69,467) (6,228)
--------- ----------
Total adjustments to net income 19,316 7,138
--------- ----------
Net cash provided by operating activities 41,725 118,946
--------- ----------
Cash flows from investing activities:
Purchase of fixed-maturity securities, net
of payable for investments purchased (555,620) (390,951)
Sale of fixed-maturity securities, net of
receivable for investments sold 321,916 251,987
Redemption of fixed-maturity securities,
net of receivable for investments redeemed 100,133 62,178
Purchase of short-term investments, net 100,989 (34,971)
Sale of other investments, net 643 226
Capital expenditures, net of disposals (6,196) (2,041)
--------- ----------
Net cash used in investing activities (38,135) (113,572)
--------- ----------
Net increase in cash and cash equivalents 3,590 5,374
Cash and cash equivalents - beginning of period 6,546 3,983
--------- ----------
Cash and cash equivalents - end of period $ 10,136 $ 9,357
========= ==========
Supplemental cash flow disclosures:
Income taxes paid $ 1,523 $ 1,565
</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, 1998. 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, 1999 may not be indicative of the results that may
be expected for the year ending December 31, 1999. The December 31, 1998
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
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No dividends were declared by the company during the three months ended March
31, 1999.
3. Unallocated Loss Reserve Methodology Update
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The company completed an update of its unallocated loss reserving methodology.
The update included an analysis of loss-reserve factors based on the latest
available industry data. The company included the analysis of historical default
and recovery experience for the relevant sectors of the fixed-income market.
Also factored in was the changing mix of our book of business. The study
resulted in an increase in the company's quarterly loss provision and a one-time
charge of $153 million to incorporate the new factors on the existing insured
portfolio.
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