MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2000 AND DECEMBER 31, 1999
AND FOR THE PERIODS ENDED JUNE 30, 2000 AND 1999
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
I N D E X
---------
PAGE
----
Consolidated Balance Sheets -
June 30, 2000 and December 31, 1999 (Unaudited) 3
Consolidated Statements of Income -
Three months and six months ended June 30, 2000
and 1999 (Unaudited) 4
Consolidated Statement of Changes in Shareholder's Equity -
Six months ended June 30, 2000 (Unaudited) 5
Consolidated Statements of Cash Flows -
Six months ended June 30, 2000 and 1999 (Unaudited) 6
Notes to Consolidated Financial Statements (Unaudited) 7-8
-2-
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31, 1999
------------- -----------------
<S> <C> <C>
ASSETS
Investments:
Fixed-maturity securities held as available-for-sale
at fair value (amortized cost $6,185,631 and $6,006,506) $6,023,633 $5,783,979
Short-term investments, at amortized cost
(which approximates fair value) 292,623 273,816
Other investments 16,008 8,425
----------- -----------
TOTAL INVESTMENTS 6,332,264 6,066,220
Cash and cash equivalents 18,173 33,702
Securities purchased under agreements to resell 265,000 205,000
Accrued investment income 102,060 93,512
Deferred acquisition costs 257,657 251,922
Prepaid reinsurance premiums 435,983 403,210
Reinsurance recoverable on unpaid losses 27,250 30,819
Goodwill (less accumulated amortization of
$59,345 and $56,906) 83,635 86,075
Property and equipment, at cost (less accumulated
depreciation of $35,792 and $31,104) 114,506 111,549
Receivable for investments sold 38,451 2,882
Other assets 183,208 161,082
----------- -----------
TOTAL ASSETS $7,858,187 $7,445,973
=========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Deferred premium revenue $2,360,138 $2,310,758
Loss and loss adjustment expense reserves 443,694 467,279
Securities sold under agreements to repurchase 265,000 205,000
Deferred income taxes 126,754 79,895
Deferred fee revenue 28,853 28,478
Payable for investments purchased 41,827 18,948
Other liabilities 117,477 107,988
----------- -----------
TOTAL LIABILITIES 3,383,743 3,218,346
----------- -----------
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 1,525,440 1,514,014
Retained earnings 3,058,022 2,858,210
Accumulated other comprehensive loss,
net of deferred income tax benefit
of $(56,294) and $(77,942) (124,018) (159,597)
----------- -----------
TOTAL SHAREHOLDER'S EQUITY 4,474,444 4,227,627
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $7,858,187 $7,445,973
=========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS.
-3-
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Dollars in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------------ ------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Gross premiums written $189,295 $146,817 $338,132 $301,727
Ceded premiums (61,810) (35,356) (104,776) (95,352)
--------- --------- --------- ---------
Net premiums written 127,485 111,461 233,356 206,375
(Increase) decrease in deferred premium revenue (18,333) (4,244) (19,500) 12,953
--------- --------- --------- ---------
Premiums earned (net of ceded premiums of
$33,624, $27,738, $72,003, and $58,187) 109,152 107,217 213,856 219,328
Net investment income 98,858 88,530 193,446 176,537
Net realized gains 5,143 10,005 11,718 17,764
Advisory fees 5,015 4,050 11,546 9,015
Other -- 6 -- 6
--------- --------- --------- ---------
Total revenues 218,168 209,808 430,566 422,650
--------- --------- --------- ---------
Expenses:
Losses and loss adjustment 13,735 10,239 22,322 172,169
Policy acquisition costs, net 8,736 9,231 17,322 18,424
Operating 20,271 18,787 39,033 36,885
--------- --------- --------- ---------
Total expenses 42,742 38,257 78,677 227,478
--------- --------- --------- ---------
Income before income taxes 175,426 171,551 351,889 195,172
Provision for income taxes 40,201 33,968 91,077 35,180
--------- --------- --------- ---------
Net income $135,225 $137,583 $260,812 $159,992
========= ========= ========= =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS.
-4-
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(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 Loss Equity
----------- ----------- ----------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 2000 100,000 $15,000 $1,514,014 $2,858,210 $(159,597) $4,227,627
Comprehensive income:
Net income -- -- -- 260,812 -- 260,812
Other comprehensive income:
Change in unrealized
depreciation of investments
net of change in deferred
income taxes of $(21,648) -- -- -- -- 39,830 39,830
Change in foreign
currency translation -- -- -- -- (4,251) (4,251)
-----------
Other comprehensive income 35,579
-----------
Comprehensive income 296,391
-----------
Dividends declared (per common
share $610.00) -- -- -- (61,000) -- (61,000)
Tax reduction related to tax
sharing agreement
with MBIA Inc. -- -- 11,426 -- -- 11,426
----------- ----------- ----------- ----------- ----------- -----------
Balance, June 30, 2000 100,000 $15,000 $1,525,440 $3,058,022 $(124,018) $4,474,444
=========== =========== =========== =========== =========== ===========
</TABLE>
Disclosure of reclassification amount:
Unrealized appreciation of
investments arising
during the period, net of taxes $47,282
Reclassification of adjustment,
net of taxes (7,452)
----------
Net unrealized appreciation,
net of taxes $39,830
==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS.
- 5 -
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
---------------------------------
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $260,812 $159,992
Adjustments to reconcile net income to net
cash provided by operating activities:
Increase in accrued investment income (8,548) (25)
Increase in deferred acquisition costs (5,735) (4,600)
Increase in prepaid reinsurance premiums (32,773) (37,165)
Increase in deferred premium revenue 52,273 24,212
(Decrease) increase in loss and loss adjustment
expense reserves, net (20,016) 158,631
Depreciation 4,688 3,229
Amortization of goodwill 2,440 2,438
Amortization of bond discount, net (9,517) (7,281)
Net realized gains on sale of investments (11,718) (17,764)
Deferred income tax provision (benefit) 25,237 (55,632)
Other, net (7,956) (104,944)
----------- -----------
Total adjustments to net income (11,625) (38,901)
----------- -----------
Net cash provided by operating activities 249,187 121,091
----------- -----------
Cash flows from investing activities:
Purchase of fixed-maturity securities, net
of payable for investments purchased (1,247,988) (1,109,536)
Sale of fixed-maturity securities, net of
receivable for investments sold 926,972 754,752
Redemption of fixed-maturity securities,
net of receivable for investments redeemed 133,480 161,559
(Purchase) sale of short-term investments, net (1,852) 169,288
(Purchase) sale of other investments, net (6,648) 8,553
Capital expenditures, net of disposals (7,680) (14,678)
----------- -----------
Net cash used by investing activities (203,716) (30,062)
----------- -----------
Cash flows from financing activities:
Dividends paid (61,000) (60,000)
----------- -----------
Net cash used by financing activities (61,000) (60,000)
----------- -----------
Net (decrease) increase in cash and cash equivalents (15,529) 31,029
Cash and cash equivalents - beginning of period 33,702 6,546
----------- -----------
Cash and cash equivalents - end of period $ 18,173 $ 37,575
=========== ===========
Supplemental cash flow disclosures:
Income taxes paid $ 35,946 $ 87,978
</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, 1999. The accompanying consolidated
financial statements have not been audited by independent accountants in
accordance with generally accepted auditing standards but in the opinion of
management such financial statements include all adjustments, consisting only of
normal recurring adjustments, necessary to summarize fairly the company's
financial position and results of operations. The results of operations for the
six months ended June 30, 2000 may not be indicative of the results that may be
expected for the year ending December 31, 2000. The December 31, 1999 balance
sheet 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 six months ended June 30,
2000 were $61.0 million.
3. RECENT ACCOUNTING PRONOUNCEMENTS
--------------------------------
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards 133, "Accounting for Derivative Instruments
and Hedging Activities." (SFAS 133) SFAS 133 is effective for all quarters of
all fiscal years beginning after June 15, 2000 (January 1, 2001 for the
company). SFAS 133 requires that all derivative instruments be recorded on the
balance sheet at their fair value. Changes in the fair value of derivatives are
recorded each period in the current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge transaction
and, if it is, the type of hedge transaction. For fair value hedge transactions
in which the company is hedging changes in an asset's, liability's, or firm
commitment's fair value, changes in the fair value of the derivative instrument
will generally be offset in the income statement by changes in the hedged item's
fair value. For cash-flow hedge transactions in which the company is hedging the
variability of cash flows related to a variable-rate asset, liability, or a
forecasted transaction, changes in the fair value of the derivative instrument
will be reported in other comprehensive income. The gains and losses on the
derivative instrument that are reported in other comprehensive income will be
reclassified as earnings in the period in which earnings are impacted by the
variability of the cash flows of the hedged item. The ineffective portion of all
hedges will be
-7-
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
recognized in current-period earnings. The company is currently evaluating the
impact that the adoption of SFAS 133 will have on its earnings and statement of
financial position.
4. UNALLOCATED LOSS RESERVE METHODOLOGY UPDATE
-------------------------------------------
The company completed an update of its unallocated loss reserving methodology in
the first quarter of 1999. 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.
-8-
