MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2000 AND DECEMBER 31, 1999
AND FOR THE PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
I N D E X
---------
PAGE
----
Consolidated Balance Sheets -
September 30, 2000 and December 31, 1999 (Unaudited) 3
Consolidated Statements of Income -
Three months and nine months ended September 30, 2000
and 1999 (Unaudited) 4
Consolidated Statement of Changes in Shareholder's Equity -
Nine months ended September 30, 2000 (Unaudited) 5
Consolidated Statements of Cash Flows -
Nine months ended September 30, 2000 and 1999 (Unaudited) 6
Notes to Consolidated Financial Statements (Unaudited) 7-8
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<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 DECEMBER 31, 1999
-------------------- ------------------
<S> <C> <C>
ASSETS
Investments:
Fixed-maturity securities held as available-for-sale
at fair value (amortized cost $6,313,513 and $6,006,506) $6,227,701 $5,783,979
Short-term investments, at amortized cost
(which approximates fair value) 365,222 273,816
Other investments 10,004 8,425
------------- ------------
TOTAL INVESTMENTS 6,602,927 6,066,220
Cash and cash equivalents 23,730 33,702
Securities purchased under agreements to resell 295,000 205,000
Accrued investment income 97,968 93,512
Deferred acquisition costs 262,664 251,922
Prepaid reinsurance premiums 442,484 403,210
Reinsurance recoverable on unpaid losses 27,572 30,819
Goodwill (less accumulated amortization of
$60,565 and $56,906) 82,416 86,075
Property and equipment, at cost (less accumulated
depreciation of $35,783 and $31,104) 115,160 111,549
Receivable for investments sold 29,646 2,882
Other assets 144,739 161,082
------------- ------------
TOTAL ASSETS $8,124,306 $7,445,973
============= ============
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Deferred premium revenue $2,373,173 $2,310,758
Loss and loss adjustment expense reserves 455,747 467,279
Securities sold under agreements to repurchase 295,000 205,000
Deferred income taxes 160,505 79,895
Deferred fee revenue 27,216 28,478
Payable for investments purchased 74,684 18,948
Other liabilities 144,950 107,988
------------- ------------
TOTAL LIABILITIES 3,531,275 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 1,532,540 1,514,014
Retained earnings 3,127,918 2,858,210
Accumulated other comprehensive loss,
net of deferred income tax benefit
of $(30,045) and $(77,942) (82,427) (159,597)
------------- ------------
TOTAL SHAREHOLDER'S EQUITY 4,593,031 4,227,627
------------- ------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $8,124,306 $7,445,973
============= ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS.
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<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
---------------------- ---------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Gross premiums written $172,010 $152,749 $510,142 $454,476
Ceded premiums (49,221) (33,029) (153,997) (128,381)
--------- --------- --------- ---------
Net premiums written 122,789 119,720 356,145 326,095
(Increase) decrease in deferred premium revenue (9,636) (9,582) (29,136) 3,371
--------- --------- --------- ---------
Premiums earned (net of ceded premiums of
$42,720, $30,681, $114,723, and $88,868) 113,153 110,138 327,009 329,466
Net investment income 99,308 90,443 292,754 266,980
Net realized gains 6,599 8,907 18,317 26,671
Advisory fees 5,358 6,103 16,904 15,118
Other 206 (6) 206 ---
--------- --------- --------- ---------
Total revenues 224,624 215,585 655,190 638,235
--------- --------- --------- ---------
Expenses:
Losses and loss adjustment 13,873 14,629 36,195 186,798
Policy acquisition costs, net 9,166 9,192 26,488 27,616
Operating 19,724 18,964 58,757 55,849
--------- --------- --------- ---------
Total expenses 42,763 42,785 121,440 270,263
--------- --------- --------- ---------
Income before income taxes 181,861 172,800 533,750 367,972
Provision for income taxes 46,165 34,118 137,242 69,298
--------- --------- --------- ---------
Net income $135,696 $138,682 $396,508 $298,674
========= ========= ========= =========
</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, 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> <C>
Balance, January 1, 2000 100,000 $15,000 $1,514,014 $2,858,210 $(159,597) $ 4,227,627
Comprehensive income:
Net income --- --- --- 396,508 --- 396,508
Other comprehensive income:
Change in unrealized
depreciation of investments
net of change in deferred
income taxes of $(47,897) --- --- --- --- 88,629 88,629
Change in foreign
currency translation --- --- --- --- (11,459) (11,459)
---------------
Other comprehensive income 77,170
---------------
Comprehensive income 473,678
---------------
Dividends declared (per common
share $1,268) --- --- --- (126,800) --- (126,800)
Tax reduction related to tax
sharing agreement
with MBIA Inc. --- --- 18,526 --- --- 18,526
---------- ---------- ------------ ------------ ---------------- ---------------
Balance, September 30, 2000 100,000 $15,000 $1,532,540 $3,127,918 $ (82,427) $ 4,593,031
========== ========== ============ ============ ================ ===============
</TABLE>
Disclosure of reclassification amount:
Unrealized appreciation of
investments arising
during the period, net of taxes $94,209
Reclassification of adjustment,
net of taxes (5,580)
----------
Net unrealized appreciation,
net of taxes $88,629
==========
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
-----------------------------
2000 1999
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 396,508 $ 298,674
Adjustments to reconcile net income to net
cash provided by operating activities:
(Increase) decrease in accrued investment income (4,456) 1,860
Increase in deferred acquisition costs (10,742) (14,862)
Increase in prepaid reinsurance premiums (39,274) (39,513)
Increase in deferred premium revenue 68,410 36,142
(Decrease) increase in loss and loss adjustment
expense reserves, net (8,285) 172,250
Depreciation 4,679 5,563
Amortization of goodwill 3,659 3,657
Amortization of bond discount, net (12,997) (12,905)
Net realized gains on sale of investments (18,317) (26,671)
Deferred income tax provision (benefit) 32,807 (57,506)
Other, net 53,066 (60,240)
------------ -----------
Total adjustments to net income 68,550 7,775
------------ -----------
Net cash provided by operating activities 465,058 306,449
------------ -----------
Cash flows from investing activities:
Purchase of fixed-maturity securities, net
of payable for investments purchased (1,974,313) (1,498,678)
Sale of fixed-maturity securities, net of
receivable for investments sold 1,486,244 1,029,625
Redemption of fixed-maturity securities,
net of receivable for investments redeemed 201,665 230,353
(Purchase) sale of short-term investments, net (53,547) 97,822
Sale of other investments, net 42 7,791
Capital expenditures, net of disposals (8,321) (26,905)
------------ -----------
Net cash used by investing activities (348,230) (159,992)
------------ -----------
Cash flows from financing activities:
Dividends paid (126,800) (135,000)
------------ -----------
Net cash used by financing activities (126,800) (135,000)
------------ -----------
Net (decrease) increase in cash and cash equivalents (9,972) 11,457
Cash and cash equivalents - beginning of period 33,702 6,546
------------ -----------
Cash and cash equivalents - end of period $ 23,730 $ 18,003
============ ===========
Supplemental cash flow disclosures:
Income taxes paid $ 56,728 $ 129,853
</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
nine months ended September 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 nine months ended
September 30, 2000 were $126.8 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 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 transactions in which the company is hedging
fair value, changes in assets and liabilities will 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 to the extent that the hedges are effective as defined by
the risk management strategies. The ineffective portion of all hedges will be
recognized in current-period earnings.
-7-
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The company initiated a project to implement SFAS 133 and ensure compliance with
the standard. The goal of the project is to complete an inventory of all
existing derivatives, review valuation methodologies by type of derivative,
review risk management hedging strategies, and implement the appropriate
procedures and systems.
Certain insurance policies were issued that did not qualify for the Financial
Guaranty exclusion. The derivatives insured consist primarily of credit default
swaps, total return swaps and credit linked notes. All such derivatives are in
accordance the company's risk management guidelines.
The company is in the process of evaluating the impact the adoption of SFAS 133
on the company's earnings and statement of financial position. The company is
also currently in the process of evaluating hedging strategies and valuation
methods, which is scheduled to be completed by December 31, 2000.
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-
