SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 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 November 9, 1999 there were outstanding 99,577,545 shares of Common Stock,
par value $1 per share, of the registrant.
<PAGE>
INDEX
-----
PAGE
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
MBIA Inc. and Subsidiaries
Consolidated Balance Sheets - September 30, 1999
and December 31, 1998 3
Consolidated Statements of Income - Three months and
nine months ended September 30, 1999 and 1998 4
Consolidated Statement of Changes in Shareholders' Equity
- Nine months ended September 30, 1999 5
Consolidated Statements of Cash Flows
- Nine months ended September 30, 1999 and 1998 6
Notes to Consolidated Financial Statements 7 - 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9 - 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>
September 30, 1999 December 31, 1998
------------------ -----------------
<S> <C> <C>
ASSETS
Investments:
Fixed-maturity securities held as available-for-sale
at fair value (amortized cost $5,938,614 and $5,565,060) $ 5,850,897 $ 5,884,053
Short-term investments, at amortized cost
(which approximates fair value) 275,166 423,194
Other investments 77,259 94,975
----------- -----------
6,203,322 6,402,222
Municipal investment agreement portfolio held as available-for-sale
at fair value (amortized cost $4,043,919 and $3,542,077) 4,004,513 3,678,229
----------- -----------
TOTAL INVESTMENTS 10,207,835 10,080,451
Cash and cash equivalents 74,019 20,757
Securities borrowed or purchased under agreements to resell 364,671 538,281
Accrued investment income 122,471 126,990
Deferred acquisition costs 244,947 230,085
Prepaid reinsurance premiums 392,212 352,699
Goodwill (less accumulated amortization of $66,714 and $62,423) 111,698 120,681
Property and equipment, at cost (less accumulated depreciation
of $47,310 and $39,934) 104,621 81,457
Receivable for investments sold 48,555 49,497
Other assets 103,728 195,666
----------- -----------
TOTAL ASSETS $11,774,757 $11,796,564
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deferred premium revenue $ 2,286,690 $ 2,251,211
Loss and loss adjustment expense reserves 442,364 270,114
Municipal investment agreements 3,123,745 2,587,339
Municipal repurchase agreements 894,688 897,718
Long-term debt 689,085 688,996
Securities loaned or sold under agreements to repurchase 387,471 573,352
Deferred income taxes 47,265 343,896
Deferred fee revenue 40,110 42,964
Payable for investments purchased 108,431 95,598
Other liabilities 213,152 253,159
----------- -----------
TOTAL LIABILITIES 8,233,001 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 -- 99,931,975 and 99,569,625 99,932 99,570
Additional paid-in capital 1,185,187 1,169,192
Retained earnings 2,379,974 2,246,221
Accumulated other comprehensive income (loss), net of
deferred income tax provision (benefit) of $(46,089) and $157,410 (94,851) 288,915
Unallocated ESOP shares (4,497) (4,044)
Unearned compensation--restricted stock (5,967) (6,807)
Treasury stock, at cost; 364,618 and 21,717 shares (18,022) (830)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 3,541,756 3,792,217
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $11,774,757 $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 Nine months ended
September 30 September 30
-------------------------- -----------------------
1999 1998 1999 1998
------------- ----------- --------- -----------
<S> <C> <C> <C> <C>
INSURANCE
Revenues:
Gross premiums written $ 152,749 $ 167,872 $ 454,476 $ 488,299
Ceded premiums (33,029) (27,498) (128,381) (69,111)
------------- ----------- --------- -----------
Net premiums written 119,720 140,374 326,095 419,188
(Increase) decrease in deferred premium revenue (9,581) (34,214) 3,372 (108,773)
------------- ----------- --------- -----------
Premiums earned (net of ceded premiums of
$30,681, $30,027, $88,868 and $63,444) 110,139 106,160 329,467 310,415
Net investment income 90,722 83,707 267,348 246,711
Net realized gains 6,914 9,089 21,997 22,981
Advisory fees 7,353 4,696 18,868 18,135
------------- ----------- --------- -----------
Total insurance revenues 215,128 203,652 637,680 598,242
Expenses:
Losses and loss adjustment 14,629 9,028 186,798 24,613
Policy acquisition costs, net 9,192 6,869 27,616 25,324
Operating 19,567 16,562 57,780 50,460
------------- ----------- --------- -----------
Total insurance expenses 43,388 32,459 272,194 100,397
------------- ----------- --------- -----------
Insurance income 171,740 171,193 365,486 497,845
------------- ----------- --------- -----------
INVESTMENT MANAGEMENT SERVICES
Revenues 22,436 17,192 62,079 47,184
Expenses 11,754 8,833 32,483 26,477
------------- ----------- --------- -----------
Operating income 10,682 8,359 29,596 20,707
Net realized gains (losses) (542) 4,787 1,330 11,879
------------- ----------- --------- -----------
Investment management services income 10,140 13,146 30,926 32,586
------------- ----------- --------- -----------
MUNICIPAL AND FINANCIAL SERVICES
Revenues 6,486 9,630 16,475 27,024
Expenses 8,166 10,329 28,549 30,194
------------- ----------- --------- -----------
Municipal and financial services loss (1,680) (699) (12,074) (3,170)
------------- ----------- --------- -----------
CORPORATE
Interest expense 13,446 10,610 40,439 31,403
Other expenses 6,576 3,450 13,386 7,638
One-time corporate charges --- 26,000 105,023 55,500
------------- ----------- --------- -----------
Corporate expenses (20,022) (40,060) (158,848) (94,541)
------------- ----------- --------- -----------
Income before income taxes 160,178 143,580 225,490 432,720
Income tax provision 32,768 35,337 31,867 103,343
------------- ----------- --------- -----------
NET INCOME $ 127,410 $ 108,243 $ 193,623 $ 329,377
============= =========== ========= ===========
NET INCOME PER COMMON SHARE:
BASIC $ 1.28 $ 1.09 $ 1.94 $ 3.33
DILUTED $ 1.27 $ 1.08 $ 1.93 $ 3.29
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING:
BASIC 99,728,806 99,098,611 99,649,465 98,882,373
DILUTED 100,485,382 100,230,622 100,511,701 100,171,148
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements
(4)
<PAGE>
MBIA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 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 (loss):
Net income --- --- --- 193,623 ---
Other comprehensive income (loss):
Change in unrealized
appreciation of investments
net of change in deferred
income taxes of $203,499 --- --- --- --- (378,854)
Change in foreign currency
translation --- --- --- --- (4,912)
Other comprehensive loss
Total comprehensive loss
Treasury shares acquired --- --- --- --- ---
Exercise of stock options 309 309 12,062 --- ---
Stock issued for acquistion 38 38 2,492 --- ---
Unallocated ESOP shares --- --- 397 --- ---
Unearned compensation-
restricted stock 15 15 1,044 --- ---
Dividends (declared and paid per
common share $0.60) --- --- --- (59,870) ---
---------- --------- ------------ ---------- -------------
Balance, September 30, 1999 99,932 $99,932 $1,185,187 $2,379,974 $(94,851)
========== ========= ============ ========== =============
<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 (loss):
Net income --- --- --- --- 193,623
Other comprehensive income (loss):
Change in unrealized
appreciation of investments
net of change in deferred
income taxes of $203,499 --- --- --- --- (378,854)
Change in foreign currency
translation --- --- --- --- (4,912)
------------
Other comprehensive loss (383,766)
------------
Total comprehensive loss (190,143)
------------
Treasury shares acquired --- --- (350) (17,325) (17,325)
Exercise of stock options --- --- --- --- 12,371
Stock issued for acquistion --- --- --- --- 2,530
Unallocated ESOP shares (453) --- 13 462 406
Unearned compensation-
restricted stock --- 840 (6) (329) 1,570
Dividends (declared and paid per
common share $0.60) --- --- --- --- (59,870)
-------------- -------------- --------- --------- -------------
Balance, September 30, 1999 $(4,497) $(5,967) (365) $(18,022) $3,541,756
============== ============== ========= ========= =============
</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, net of taxes $(344,978)
Reclassification of adjustment,
net of taxes (33,876)
----------
Net unrealized depreciation,
net of taxes $(378,854)
==========
(5)
<PAGE>
MBIA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Nine months ended
September 30
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 193,623 $ 329,377
Adjustments to reconcile net income to net cash
provided by operating activities:
Decrease in accrued investment income 4,519 6,996
Increase in deferred acquisition costs (14,862) (20,603)
Increase in prepaid reinsurance premiums (39,513) (5,667)
Increase in deferred premium revenue 36,141 114,440
Increase in loss and loss adjustment expense reserves 172,250 8,983
Depreciation 8,128 6,138
Amortization of goodwill 5,308 6,816
Amortization of bond discount, net (17,036) (17,304)
Net realized gains on sale of investments (23,327) (34,860)
Deferred income taxes (92,910) 12,927
Other, net 56,730 (205)
------------ ------------
Total adjustments to net income 95,428 77,661
------------ ------------
Net cash provided by operating activities 289,051 407,038
------------ ------------
Cash flows from investing activities:
Purchase of fixed-maturity securities, net
of payable for investments purchased (5,176,721) (1,700,367)
Sale of fixed-maturity securities, net of
receivable for investments sold 4,703,037 710,806
Redemption of fixed-maturity securities, net of
receivable for investments redeemed 230,353 616,881
Sale (purchase) of short-term investments, net 96,774 (52,346)
Sale (purchase) of other investments, net 19,372 (16,172)
Purchases for municipal investment agreement
portfolio, net of payable for investments purchased (1,698,886) (1,652,516)
Sales from municipal investment agreement
portfolio, net of receivable for investments sold 1,170,459 1,509,878
Capital expenditures, net of disposals (31,293) (12,986)
Other, net 3,547 (20,658)
------------ ------------
Net cash used by investing activities (683,358) (617,480)
------------ ------------
Cash flows from financing activities:
Net proceeds from issuance of long-term debt --- 148,688
Net repayment from retirement of short-term debt --- (20,000)
Dividends paid (59,820) (65,805)
Purchase of treasury stock (17,325) ---
Proceeds from issuance of municipal investment
and repurchase agreements 1,801,514 1,772,672
Payments for drawdowns of municipal investment
and repurchase agreements (1,276,900) (1,523,156)
Securities loaned or sold under agreements to repurchase, net (12,271) (115,700)
Exercise of stock options 12,371 22,777
------------ ------------
Net cash provided by financing activities 447,569 219,476
------------ ------------
Net increase in cash and cash equivalents 53,262 9,034
Cash and cash equivalents - beginning of period 20,757 26,296
------------ ------------
Cash and cash equivalents - end of period $ 74,019 $ 35,330
============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Income taxes paid $ 131,491 $ 90,584
Interest paid:
Municipal investment and repurchase agreements $ 151,379 $ 147,340
Long-term debt 40,339 32,774
Short-term debt --- 956
</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 nine months ended September 30, 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.
2. Dividends Declared
Dividends declared by the company during the nine months ended September
30, 1999 were $59.9 million.
3. Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board 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 all fiscal quarters of all fiscal years beginning after June 15, 2000.
The company will adopt SFAS 133 by July 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. Capital Asset Write-off
During the second quarter of 1999 the company incurred a pre-tax charge of
$102.0 million consisting of a substantial write-down of the carrying value
of MBIA's investment in Capital Asset and the value of the loans provided
by MBIA to Capital Asset. Since December of 1998, MBIA has been seeking
purchasers for all or a portion of its interest in Capital Asset, which
purchases and services delinquent tax liens. This charge reflects
management's best estimate of its cost of exiting this business.
5. Stock Repurchase Plan
In the third quarter of 1999, the company began acquiring shares of its
common stock in connection with its stock repurchase plan announced in
August 1999. The plan authorizes the company to repurchase up to 7.5
million of outstanding common shares. The company purchased 350 thousand
shares of common stock during the third quarter of 1999 at an aggregate
cost of $17.3 million. The company will only repurchase shares under this
program when it is economically attractive and within the constraints of
the company's Triple-A claims-paying ratings.
(8)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
- ------------
MBIA had a solid operational performance in the third quarter. Our disciplined
approach to risk selection and pricing continues to allow us to deploy our
capital at acceptable margins in all three of our insurance business units. In
addition, our investment management operations added another strong quarter to a
superb year-to-date performance. These underlying economic factors are
accelerating our move to return to a reported 15% on equity. Equally important,
we continue to see strong prospects for business growth across all of our
insurance and investment business units, with particularly strong prospects in
our domestic structured and international sectors.
RESULTS OF OPERATIONS
- ---------------------
SUMMARY
As we discussed in the first and second quarters, our financial results continue
to be adversely impacted by the increase in our loss reserving factor, heavier
use of reinsurance and losses in our municipal and financial services segment.
This has resulted in growth rates well below our targeted levels for all of the
financial measures shown in the following chart.
<TABLE>
<CAPTION>
Percent Change
------------------
3rd Year-to-
Quarter date
------- ---------
3rd Quarter September 30 1999 1999
------------------ ------------------- vs. vs.
1999 1998 1999 1998 1998 1998
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income (in millions):
As reported $ 127 $ 108 $ 194 $ 329 18% (41)%
Excluding one-time charges $ 122 $ 125 $ 368 $ 365 (2)% 1%
Per share data:
Net income *:
As reported $ 1.27 $ 1.08 $ 1.93 $ 3.29 18% (41)%
Excluding one-time charges $ 1.22 $ 1.25 $ 3.67 $ 3.65 (2)% 1%
Operating earnings $ 1.18 $ 1.16 $ 3.51 $ 3.42 2% 3%
Core earnings $ 1.09 $ 1.07 $ 3.20 $ 3.14 2% 2%
Book value $ 35.62 $ 38.06 (6)%
Adjusted book value $ 52.12 $ 52.71 (1)%
- -----------------------------------------------------------------------------------------
</TABLE>
*DILUTED
Core earnings, which exclude the effects of refundings and calls on our
insured issues, realized capital gains and losses from our investment portfolio
and nonrecurring charges, provide the most indicative measure of our underlying
profit. For the third quarter and first nine months of 1999, core earnings per
share were up by 2%.
Third quarter diluted earnings per share increased 18 percent over the
year-ago period. Excluding one-time charges diluted earnings per share decreased
(9)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
2% from third quarter 1998. Third quarter earnings include a $5.0 million tax
benefit, while last year's period included a $16.9 million after-tax charge for
merger - and reorganization - related expenses.
First nine months' net income decreased 41% from the same period in 1998.
Excluding one-time charges, first nine months' net income increased 1% over a
year ago. One-time charges in the 1999 period total $174.5 million comprising a
net after-tax charge of $104.2 million to increase our company's unallocated
loss reserve and a $70.3 million after-tax charge for investments in municipal
and financial services. In the same period last year, our company took a $36.1
million after-tax charge for merger- and reorganization-related expenses.
Operating earnings per share, which exclude the impact of realized capital
gains and losses and one-time charges, increased by 2% and 3% over third quarter
and the first nine months of 1998.
Our book value at September 30, 1999 was $35.62 per share, down 6% from
$38.06 at September 30, 1998. This decline was primarily the result of a decline
in the fair value of our fixed income portfolios resulting from rising interest
rates. 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:
September 30, Percent Change
------------------------ --------------
1999 1998 1999 vs. 1998
-----------------------------------------------------------------------
Book value $35.62 $38.06 (6)%
After-tax value of:
Net deferred premium
revenue, net of deferred
acquisition costs 10.78 10.97 (2)%
Present value of future
installment premiums* 4.58 4.09 12%
Unrealized gain (loss) on
investment contract
liabilities** 1.14 (0.41) n/m
-----------------------------------------------------------------------
Adjusted book value $52.12 $52.71 (1)%
-----------------------------------------------------------------------
* The discount rate used to present value future installment premiums
was 9%.
** The unrealized gain (loss) on investment contract liabilities is
offset by a corresponding gain (loss) on the market value of the
assets.
Our adjusted book value per share was $52.12 at September 30, 1999, a 1%
decline from September 30, 1998.
(10)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
FINANCIAL GUARANTEE INSURANCE
For the third quarter our top line results continue to reflect a positive
relationship between adjusted gross premiums (AGP) and par. Third quarter AGP
was up 5% while total par was down 21%. Year to date AGP was down 8%, and total
par was down 24%. This is indicative of price improvements across our whole book
and is consistent with our strategy to improve profitability on the business we
write. Furthermore, we are not sacrificing credit quality to capture high
prices. The average credit rating on new business in each of our insurance
divisions continues to improve. All in all, our highlights this quarter include
increased profitability, as measured by higher returns on new business written
and greater economic value added to the business.
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 production in terms of Par, AGP and GPW for the third quarters and first
nine months of 1999 and 1998 is presented in the following table:
Percent Change
------------------
3rd Year-to-
Quarter date
------------------
3rd Quarter September 30 1999 1999
----------------- ----------------- vs. vs.
1999 1998 1999 1998 1998 1998
-------------------------------------------------------------------------------
Par value (in billions) $ 26 $ 33 $ 70 $ 91 (21)% (24)%
Premiums written:
(in millions)
GPW $ 153 $ 168 $ 454 $ 488 (9)% (7)%
AGP $ 213 $ 203 $ 538 $ 588 5% (8)%
We estimate the present value of our total future installment premium
stream on outstanding policies to be $700 million at September 30, 1999,
compared with $624 million at September 30, 1998.
MUNICIPAL MARKET AGP for the third quarter of 1999 was down 18% and was down 17%
for the first nine months of 1999 against the same periods last year. These
declines compare to insured market declines of 26% and 25% for the same
respective periods. MBIA's par insured was down 42% for the quarter and down 40%
year-to-date illustrating again that pricing held firm. For the first nine
months, pricing remained well above last year's level, up over 30% year-to-date
across the portfolio. As a result, we increased our expected overall returns for
the third quarter and nine months meaningfully compared to any of the last
several years. With respect to credit quality, for the first nine months of this
year our capital charge, which is an indicator of the risk profile of the mix as
well as the quality of the business we are putting on the books, is the lowest
(11)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
its been for many years. We are pleased to see a modest rebound in our market
share to 28.6% for the quarter, up from 26.6% for the second quarter and 21.6%
for the first quarter of this year. This brings our market share to 25.4% for
the first nine months.
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:
<TABLE>
<CAPTION>
Percent Change
--------------------
3rd Year-to-
Quarter date
--------- ----------
3rd Quarter September 30 1999 1999
------------------ --------------------- vs. vs.
Domestic Municipal 1999 1998 1999 1998 1998 1998
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total new issue market:*
Par value (in billions) $ 52 $ 58 $ 153 $ 196 (10)% (22)%
Insured penetration 51% 61% 53% 56%
MBIA insured:
Par value (in billions) $ 10 $ 16 $ 27 $ 45 (42)% (40)%
Premiums: (in millions)
GPW $ 86 $ 106 $ 254 $ 311 (19)% (18)%
AGP $ 96 $ 117 $ 270 $ 325 (18)% (17)%
------------------------------------------------------------------------------------------
</TABLE>
* Market data are reported on a sale date basis while MBIA's insured data
are based on closing date information. Typically, there can be a one- to
four-week delay between the sale date and closing date of an insured
issue.
STRUCTURED FINANCE MARKET For the quarter and nine months AGP increased 95% and
32%, respectively, over the same periods last year. Par was up 14% for the
quarter and only 2% year-to-date. Again, pricing continued to strengthen and we
continued to increase overall expected returns. GPW was up 19% and 15% for the
third quarter and the first nine months of 1999, reflecting an increase in the
receipt of subsequent installment premiums for business written in prior
periods. MBIA also maintained the credit quality of the business written. For
the first nine months of 1999 53% of the business we insured was rated A and
above.
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:
(12)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
Percent Change
-------------------
3rd Year-to-
Quarter date
-------------------
3rd Quarter September 30 1999 1999
Domestic ------------------ -------------------- vs. vs.
Structured Finance 1999 1998 1999 1998 1998 1998
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total asset-backed market:*
Par value (in billions) $63 $40 $ 162 $ 123 58% 32%
MBIA insured:
Par value (in billions) $15 $13 $ 35 $ 35 14% 2%
Premiums: (in millions)
GPW $35 $30 $ 104 $ 91 19% 15%
AGP $79 $40 $ 159 $ 120 95% 32%
- ------------------------------------------------------------------------------------------
</TABLE>
*Market data exclude mortgage-backed securities and private placements.
INTERNATIONAL MARKET MBIA's third quarter 1999 AGP increased by 16% over 1998's
third quarter although year-to-date AGP declined by 19%. MBIA's 1999 third
quarter and nine month par insured declined 29% and 30% over the comparable
periods in 1998. Again, the relationships between AGP and par indicate strong
pricing discipline. GPW was up strongly for both the third quarter and first
nine months of 1999 over the same periods in 1998, reflecting an increase in the
receipt of subsequent installment premiums for business written in prior
periods.
Our company's municipal and structured finance international business volume in
the new issue and secondary markets is illustrated as follows:
<TABLE>
<CAPTION>
Percent Change
----------------------
3rd Year-to-
Quarter date
----------------------
3rd Quarter September 30 1999 1999
------------------ -------------------- vs. vs.
International 1999 1998 1999 1998 1998 1998
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Par value (in billions) $ 1 $ 2 $ 6 $ 8 (29)% (30)%
Premiums: (in millions)
GPW $ 26 $ 19 $ 76 $ 59 43% 29%
AGP $ 36 $ 31 $ 91 $ 112 16% (19)%
- -------------------------------------------------------------------------------------------------
</TABLE>
REINSURANCE Premiums ceded to reinsurers from all insurance operations were $128
million and $69 million in the first nine months of 1999 and 1998, respectively.
Cessions as a percentage of GPW increased to 28% in 1999 from 14% 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
(13)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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
6% over third quarter and first nine months 1998.
Refunded premiums also generated high revenues in the first nine months 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
-----------------------
3rd Year-to-
Quarter date
---------- ----------
3rd Quarter September 30 1999 1999
---------------- ---------------- vs. vs.
In millions 1999 1998 1999 1998 1998 1998
- ---------------------------------------------------------------------------
Premiums earned:
Scheduled $ 96 $ 90 $ 277 $ 261 6% 6%
Refunded 14 16 52 49 (11)% 7%
- ---------------------------------------------------------------------------
Total $ 110 $ 106 $ 329 $ 310 4% 6%
- ---------------------------------------------------------------------------
INVESTMENT INCOME Our insurance-related investment income (exclusive of capital
gains) increased to $267 million in the first nine months of 1999, up 8% from
$247 million in the first nine months of 1998. For the quarter investment income
was also up 8% over the same period in 1998. These increases were primarily due
to the growth of cash flow available for investment. Our cash flows were
generated from operations, the compounding of previously earned, and reinvested
investment income and the addition of funds from financing activities.
Insurance-related net realized capital gains were $22 million and $7 million for
the first nine months and third quarter of 1999, compared to $23 million and $9
million in the comparable periods 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. For the first nine months of 1999, advisory fee
(14)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
revenues increased by 4%, as the increase in the cash collection of
non-deferrable fees more than offset the decline in the amortization of
previously deferred fee revenue.
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.
In the first quarter of 1999 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 first quarter one-time charge of $153 million to incorporate the
new factors on the existing insured portfolio.
The following table shows the case-specific and unallocated components of
our total loss and LAE reserves at September 30, 1999 and 1998:
Percent Change
September 30, September 30, ----------------------
In millions 1999 1998 1999 vs. 1998
- --------------------------------------------------------------------------------
Reserves:
Case-specific $209 $198* 6%
Unallocated 233 84 179%
- --------------------------------------------------------------------------------
Total $442 $282 57%
Provision $187 $ 25 659%
*Case reserves, net of $170 million excess reinsurance recoverable, equal $28
million.
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
(15)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
costs, general operating expenses and total insurance operating expenses, as
well as related expense measures, are shown below:
<TABLE>
<CAPTION>
Percent Change
------------------
3rd Year-to-
Quarter date
------------------
3rd Quarter September 30 1999 1999
------------------- -------------------- vs. vs.
In millions 1999 1998 1999 1998 1998 1998
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Policy acquisition costs, net $ 9 $ 7 $ 27 $ 25 34% 9%
Operating 20 16 58 51 18% 15%
-----------------------------------------------------------
Total insurance
operating expenses $ 29 $ 23 $ 85 $ 76 23% 13%
Expense ratio:
GAAP 26.1% 22.1% 25.9% 24.4%
Statutory 25.5% 21.7% 23.8% 19.4%
- ------------------------------------------------------------------------------------------
</TABLE>
For the first nine months of 1999, policy acquisition costs net of
deferrals increased 9% over the first nine months of 1999, primarily reflecting
increase in premiums earned. The ratio of policy acquisition costs to earned
premiums remained in the 8% range for both periods.
Operating expenses were up by 15% for the first nine months of 1999 over
1998 due in part to expanded international operations.
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. The increases in our statutory expense ratios for
both the quarter and year to date periods primarily reflect the decline in
premium volume over the same periods.
INSURANCE INCOME MBIA's insurance income was $172 million for the third quarter
of 1999, relatively even with the third quarter of 1998. Excluding the one-time
loss provision increase, insurance income for the first nine months of 1999 grew
by 4% over the first nine months of 1998.
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 for this segment increased by 28% and 43% for the third quarter and first
nine months of 1999 over same periods in 1998. The table below summarizes our
consolidated investment management results:
(16)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Percent Change
--------------------
3rd Year-to-
Quarter date
--------------------
3rd Quarter September 30 1999 1999
--------------- --------------- vs. vs.
In millions 1999 1998 1999 1998 1998 1998
- -----------------------------------------------------------------------------
Revenues $ 22 $ 17 $ 62 $ 47 31% 32%
Expenses 11 9 32 26 33% 23%
-------------------------------------------------------
Operating income 11 8 30 21 28% 43%
Realized gains (loss) (1) 5 1 12 (111)% (89)%
-------------------------------------------------------
Income $ 10 $ 13 $ 31 $ 33 (23)% (5)%
- -----------------------------------------------------------------------------
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 $9.6 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
September 30, 1999 had $7.2 billion in assets under management, up 19% over
September 30, 1998's $6.0 billion.
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 September 30, 1999,
principal and accrued interest outstanding on investment and repurchase
agreements was $4.0 billion, compared to $3.4 billion at September 30, 1998. At
amortized cost, the assets supporting IMC's investment agreement were $4.0
billion and $3.4 billion at September 30, 1999 and 1998, respectively. These
assets are comprised of high-quality securities with an average credit quality
rating of Double-A.
IMC from time-to-time uses derivative financial instruments to manage
interest rate risk. We have established policies limiting the amount, type and
concentration of such instruments. By matter of policy, derivative positions can
only be used to hedge interest rate exposures and not for speculative trading
purposes. At third quarter-end 1999, our exposure to derivative financial
instruments was not material.
(17)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 September 30, 1999, CMC's third party assets
under management were $1.7 billion compared to $1.0 billion at September 30,
1998.
MUNICIPAL AND FINANCIAL SERVICES
MBIA MUNISERVICES COMPANY (MBIA MuniServices) 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, and
Municipal Resource Consultants (MRC), a revenue audit and information services
firm.
In the third quarter and first nine months of 1999 the municipal and
financial services operations lost $2 million and $12 million, respectively.
These operations will continue to be under strategic review throughout the
remainder of 1999.
CORPORATE
OTHER EXPENSES Other expenses are composed primarily of non-insurance goodwill
amortization and general corporate overhead. In the first nine months of 1999
other expenses were $13 million compared to $8 million in the first nine months
of 1998.
INTEREST EXPENSE In the first nine months of 1999, we incurred $40 million of
interest expense compared to $31 million in the first nine months 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.
ONE-TIME CORPORATE CHARGES Included in one-time corporate charges for the first
nine months of 1999 is a $102 million charge which reflects a second quarter
write-down of the carrying value of MBIA's investment in Capital Asset Holdings,
Inc. (Capital Asset) and the value of the loans provided by MBIA to Capital
Asset. This charge represents management's best estimate of our cost to exit
this business. Also included in one-time corporate charges for 1999 is the $3
million loss on the sale of MuniFinancial. The one-time charge of $56 million in
1999 was related to the CapMAC merger and reorganization related expenses.
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. For the first nine months our tax provision is net of the
(18)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
benefit resulting from the one-time corporate charges just discussed as well as
the benefit from the one-time increase to the loss reserve. Excluding these
benefits our effective tax rate has declined marginally over 1998.
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 September 30, 1999, our total shareholders' equity was
$3.5 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:
September 30, 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.
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 $8.3 billion, an 11% increase over third 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 nine months of 1999, operating cash flow totaled
$289 million.
(19)
<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. During the first nine months of 1999
our insurance company paid dividends of $135 million and at September 30, 1999
had dividend capacity in excess of $100 million without special regulatory
approval.
Our company has significant liquidity supporting its businesses. At the end
of third quarter 1999, cash equivalents and short-term investments totaled $349
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
September 30, 1999, there were no balances outstanding under these lines.
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 September 30, 1999, the fair value of our
consolidated investment portfolio was $10.2 billion, as shown below:
September December Percent Change
30, 31, ----------------
In millions 1999 1998 1999 vs. 1998
------------------------------------------------------------------------
Insurance operations:
Amortized cost $ 6,291 $ 6,083 3%
Unrealized (loss) gain (88) 319 (127)%
------------------------------------------------------------------------
Fair value $ 6,203 $ 6,402 (3)%
------------------------------------------------------------------------
Municipal investment
agreements:
Amortized cost $ 4,044 $ 3,542 14%
Unrealized (loss) gain (39) 136 (129)%
------------------------------------------------------------------------
Fair value $ 4,005 $ 3,678 9%
------------------------------------------------------------------------
Total portfolio at fair value $10,208 $10,080 1%
The growth of our insurance-related investments at amortized cost in 1999
was the result of positive cash flows. The lower fair value is the result of the
decline in the unrealized gain caused by higher interest rates at September 30,
1999. The fair value of investments related to our municipal investment
agreement business increased to $4.0 billion primarily due to positive cash flow
from operations partially offset by a decrease in the fair value of these
investments.
(20)
<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.
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. As of September 30, 1999, the
company has spent $949,000 on the project. A recent review of efforts at certain
subsidiaries has indicated the need to spend an additional $1.03 million this
year on remediation. As of September 30, 1999, the company has spent $568,000 of
this additional amount. However, this increase will not have a material effect
on MBIA's financial results.
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 in the second
quarter of 1999; and contingency planning - completed in the third quarter of
1999, subject to final approval by senior management and any need for revision
that might arise in the future. 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 is being
(21)
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
carried out 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.
(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: November 12, 1999 /s/ Neil G. Budnick
--------------------------- -----------------------------
Neil G. Budnick
Vice Chairman and
Chief Financial Officer
Date: November 12, 1999 /s/ Elizabeth B. Sullivan
--------------------------- -----------------------------
Elizabeth B. Sullivan
Managing Director,
Controller
(Principal Accounting Officer)
(24)
<TABLE>
<CAPTION>
EXHIBIT 11
MBIA INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE ASSUMING DILUTION
(In thousands except per share amounts)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
--------------------- ---------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income $127,410 $108,243 $193,623 $329,377
========= ========= ========= =========
Diluted weighted average shares:
Basic weighted average shares
outstanding 99,729 99,099 99,649 98,882
Effect of stock option
756 1,132 863 1,289
--------- --------- --------- ---------
Diluted weighted average shares: 100,485 100,231 100,512 100,171
========= ========= ========= =========
Basic EPS $ 1.28 $ 1.09 $ 1.94 $ 3.33
========= ========= ========= =========
Diluted EPS $ 1.27 $ 1.08 $ 1.93 $ 3.29
========= ========= ========= =========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<CIK> 0000814585
<NAME> MBIA Inc.
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 5,850,897
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 10,207,835
<CASH> 74,019
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 244,947
<TOTAL-ASSETS> 11,774,757
<POLICY-LOSSES> 442,364
<UNEARNED-PREMIUMS> 2,286,690
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 689,085
0
0
<COMMON> 99,932
<OTHER-SE> 3,441,824
<TOTAL-LIABILITY-AND-EQUITY> 11,774,757
329,467
<INVESTMENT-INCOME> 267,348
<INVESTMENT-GAINS> 21,997
<OTHER-INCOME> 98,752
<BENEFITS> 186,798
<UNDERWRITING-AMORTIZATION> 27,616
<UNDERWRITING-OTHER> 57,780
<INCOME-PRETAX> 225,490
<INCOME-TAX> 31,867
<INCOME-CONTINUING> 193,623
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 193,623
<EPS-BASIC> 1.94
<EPS-DILUTED> 1.93
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
AND FOR THE PERIODS ENDED SEPTEMBER 30, 1999 AND 1998
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
I N D E X
---------
PAGE
----
Consolidated Balance Sheets -
September 30, 1999 and December 31, 1998 (Unaudited) 3
Consolidated Statements of Income -
Three months and nine months ended September 30, 1999
and 1998 (Unaudited) 4
Consolidated Statement of Changes in Shareholder's Equity -
Nine months ended September 30, 1999 (Unaudited) 5
Consolidated Statements of Cash Flows -
Nine months ended September 30, 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>
September 30, 1999 December 31, 1998
------------------ -----------------
<S> <C> <C>
ASSETS
Investments:
Fixed-maturity securities held as available-for-sale
at fair value (amortized cost $5,938,614 and $5,565,060) $5,850,897 $5,884,053
Short-term investments, at amortized cost
(which approximates fair value) 274,112 423,188
Other investments 8,855 17,850
------------- -------------
TOTAL INVESTMENTS 6,133,864 6,325,091
Cash and cash equivalents 18,003 6,546
Securities purchased under agreements to resell 214,000 187,500
Accrued investment income 89,379 91,239
Deferred acquisition costs 244,947 230,085
Prepaid reinsurance premiums 392,212 352,699
Goodwill (less accumulated amortization of
$55,687 and $52,031) 87,293 90,950
Property and equipment, at cost (less accumulated
depreciation of $28,927 and $23,840) 93,290 71,952
Receivable for investments sold 12,622 33,880
Other assets 136,238 97,970
------------- -------------
TOTAL ASSETS $7,421,848 $7,487,912
============= =============
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Deferred premium revenue $2,286,690 $2,251,211
Loss and loss adjustment expense reserves 442,364 270,114
Securities sold under agreements to repurchase 214,000 187,500
Deferred income taxes 102,762 303,407
Deferred fee revenue 31,504 33,785
Payable for investments purchased 54,043 29,523
Other liabilities 102,985 135,027
------------- -------------
TOTAL LIABILITIES 3,234,348 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 1,509,053 1,491,033
Retained earnings 2,729,896 2,566,222
Accumulated other comprehensive income (loss), net
of deferred income tax provision (benefit)
of $(30,771) and $112,283 (66,449) 205,090
------------- -------------
TOTAL SHAREHOLDER'S EQUITY 4,187,500 4,277,345
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $7,421,848 $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)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
----------------------- ----------------------
1999 1998 1999 1998
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Gross premiums written $152,749 $167,872 $454,476 $536,518
Ceded premiums (33,029) (27,498) (128,381) (62,327)
----------- ---------- ----------- ----------
Net premiums written 119,720 140,374 326,095 474,191
(Increase) decrease in deferred premium
revenue (9,582) (34,214) 3,371 (178,519)
----------- ---------- ----------- ----------
Premiums earned (net of ceded
premiums of $30,681, $30,027,
$88,868 and $57,095) 110,138 106,160 329,466 295,672
Net investment income 90,443 83,707 266,980 241,300
Net realized gains 8,907 9,089 26,671 22,981
Advisory fees 6,103 4,696 15,118 15,969
Other (6) 1 --- (19)
----------- ---------- ----------- ----------
Total revenues 215,585 203,653 638,235 575,903
----------- ---------- ----------- ----------
Expenses:
Losses and loss adjustment 14,629 9,028 186,798 23,591
Policy acquisition costs, net 9,192 6,869 27,616 23,879
Operating 18,964 20,772 55,849 49,317
----------- ---------- ----------- ----------
Total expenses 42,785 36,669 270,263 96,787
----------- ---------- ----------- ----------
Income before income taxes 172,800 166,984 367,972 479,116
Provision for income taxes 34,118 33,838 69,298 98,797
----------- ---------- ----------- ----------
Net income $138,682 $133,146 $298,674 $380,319
=========== ========== =========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
-4-
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY (Unaudited)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(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, 1999 100,000 $15,000 $1,491,033 $2,566,222 $ 205,090 $4,277,345
Comprehensive income (loss):
Net income --- --- --- 298,674 --- 298,674
Other comprehensive loss:
Change in unrealized
appreciation of investments
net of change in deferred
income taxes of $143,054 --- --- --- --- (266,601) (266,601)
Change in foreign
currency translation --- --- --- --- (4,938) (4,938)
--------------
Other comprehensive loss (271,539)
--------------
Comprehensive income (loss) 27,135
--------------
Dividends declared
(per common share $1,350.00) --- --- --- (135,000) --- (135,000)
Tax reduction related to tax
sharing agreement
with MBIA Inc. --- --- 18,020 --- --- 18,020
--------- --------- ------------ ------------ -------------- --------------
Balance, September 30, 1999 100,000 $15,000 $1,509,053 $2,729,896 $ (66,449) $4,187,500
========= ========= ============ ============ ============== ==============
</TABLE>
Disclosure of reclassification amount:
Unrealized depreciation of
investments arising
during the period, net of taxes $(236,034)
Reclassification of adjustment,
net of taxes (30,567)
----------
Net unrealized depreciation,
net of taxes $(266,601)
==========
The accompanying notes are an integral part of the consolidated
financial statements.
-5-
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine months ended
September 30
-----------------------------
1999 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $298,674 $380,319
Adjustments to reconcile net income to net
cash provided by operating activities:
Decrease (increase) in accrued investment income 1,860 (4,710)
Increase in deferred acquisition costs (14,862) (82,668)
Increase in prepaid reinsurance premiums (39,513) (42,282)
Increase in deferred premium revenue 36,142 220,801
Increase in loss and loss adjustment expense reserves 172,250 33,172
Depreciation 5,563 4,106
Amortization of goodwill 3,657 3,660
Amortization of bond discount, net (12,905) (11,693)
Net realized gains on sale of investments (26,671) (22,981)
Deferred income taxes (57,506) 14,749
Other, net (60,240) 20,820
------------- -------------
Total adjustments to net income 7,775 132,974
------------- -------------
Net cash provided by operating activities 306,449 513,293
------------- -------------
Cash flows from investing activities:
Purchase of fixed-maturity securities, net
of payable for investments purchased (1,498,678) (2,021,130)
Sale of fixed-maturity securities, net of
receivable for investments sold 1,029,625 700,031
Redemption of fixed-maturity securities,
net of receivable for investments redeemed 230,353 616,504
Sale (purchase) of short-term investments, net 97,822 (111,392)
Sale (purchase) of other investments, net 7,791 (529)
Capital expenditures, net of disposals (26,905) (9,434)
------------- -------------
Net cash used by investing activities (159,992) (825,950)
------------- -------------
Cash flow from financing activities:
Dividends paid (135,000) ---
Capital contribution from MBIA Inc. --- 324,915
------------- -------------
Net cash (used) provided by financing activities (135,000) 324,915
------------- -------------
Net increase in cash and cash equivalents 11,457 12,258
------------- -------------
Cash and cash equivalents - beginning of period 6,546 3,983
------------- -------------
Cash and cash equivalents - end of period $ 18,003 $ 16,241
============= =============
Supplemental cash flow disclosures:
Income taxes paid $129,853 $ 86,864
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
- 6 -
<PAGE>
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
nine months ended September 30, 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
------------------
Dividends declared and paid by the company during the nine months ended
September 30, 1999 were $135.0 million.
3. UNALLOCATED LOSS RESERVE METHODOLOGY UPDATE
-------------------------------------------
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 the company's book of business. The
study resulted in an increase in the company's quarterly loss provision and a
one-time charge in the first quarter of 1999 of $153 million to incorporate the
new factors on the existing insured portfolio.
-7-
