SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (X) QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended June 30, 1996 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 July 31, 1996 there were outstanding 43,007,274 shares of Common Stock, par value $1 per share, of the registrant. Page 1 of 17
INDEX PAGE ---- PART I FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) MBIA Inc. and Subsidiaries Consolidated Balance Sheets - June 30, 1996 and December 31, 1995 3 Consolidated Statements of Income - Three months and six months ended June 30, 1996 and 1995 4 Consolidated Statement of Changes in Shareholders' Equity - Six months ended June 30, 1996 5 Consolidated Statements of Cash Flows - Six months ended June 30, 1996 and 1995 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 - 15 PART II OTHER INFORMATION, AS APPLICABLE Item 6. Exhibits and Reports on Form 8-K 16 SIGNATURES 17 (2)
MBIA INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands except per share amounts) <TABLE> <CAPTION> June 30, 1996 December 31, 1995 ------------------------ -------------------- (Unaudited) (Audited) ASSETS <S> <C> <C> Investments: Fixed-maturity securities held as available-for-sale at fair value (amortized cost $3,735,457 and $3,428,986) $3,813,749 $3,652,621 Short-term investments, at amortized cost (which approximates fair value) 228,445 198,035 Other investments 29,127 14,064 --------------- ------------- 4,071,321 3,864,720 Municipal investment agreement portfolio held as available-for-sale at fair value (amortized cost $3,102,712 and $2,645,828) 3,105,928 2,742,626 --------------- ------------- TOTAL INVESTMENTS 7,177,249 6,607,346 Cash and cash equivalents 11,652 23,258 Accrued investment income 98,676 87,016 Deferred acquisition costs 143,536 140,348 Prepaid reinsurance premiums 208,614 200,887 Goodwill (less accumulated amortization of $40,510 and $41,298) 104,045 106,569 Property and equipment, at cost (less accumulated depreciation of $19,718 and $17,625) 47,064 46,030 Receivable for investments sold 10,212 6,100 Other assets 68,284 49,896 --------------- ------------- TOTAL ASSETS $7,869,332 $7,267,450 =============== ============= LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Deferred premium revenue $1,728,845 $1,616,315 Loss and loss adjustment expense reserves 50,437 42,505 Municipal investment agreements 2,280,598 2,026,709 Municipal repurchase agreements 766,065 615,776 Long-term debt 373,955 373,900 Short-term debt 38,600 18,000 Deferred income taxes 170,038 246,736 Payable for investments purchased 98,724 10,695 Other liabilities 92,704 82,548 --------------- ------------- TOTAL LIABILITIES 5,599,966 5,033,184 --------------- ------------- 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--43,005,024 and 42,077,387 43,005 42,077 Additional paid-in capital 787,970 725,153 Retained earnings 1,387,035 1,261,051 Cumulative translation adjustment (964) 2,849 Unrealized appreciation of investments, net of deferred income tax provision of $28,668 and $112,252 52,673 207,648 Unearned compensation--restricted stock (353) (426) Treasury stock, at cost; shares--73,676 in 1995 --- (4,086) --------------- ------------- TOTAL SHAREHOLDERS' EQUITY 2,269,366 2,234,266 --------------- ------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $7,869,332 $7,267,450 =============== ============= </TABLE> The accompanying notes are an integral part of the consolidated financial statements. (3)
MBIA INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Dollars in thousands except per share amounts) <TABLE> <CAPTION> Three months ended Six months ended June 30 June 30 ---------------------- -------------------- 1996 1995 1996 1995 ---------- ---------- --------- --------- <S> <C> <C> <C> <C> Revenues Insurance: Gross premiums written $134,001 $106,343 $254,600 $ 177,177 Ceded premiums (11,914) (12,049) (26,629) (19,129) ---------- ---------- --------- ---------- Net premiums written 122,087 94,294 227,971 158,048 Increase in deferred premium revenue (60,021) (40,406) (105,553) (53,086) ---------- ---------- --------- ---------- Premiums earned (net of ceded premiums of $9,682, $6,814, $18,902 and $14,652) 62,066 53,888 122,418 104,962 Net investment income 61,473 53,991 120,571 106,828 Net realized gains 3,895 1,698 6,587 3,422 Investment management services: Income 6,631 4,339 12,724 8,541 Net realized gains (losses) (34) (207) 934 (174) Other 994 224 1,988 1,134 ---------- ---------- --------- ---------- Total revenues 135,025 113,933 265,222 224,713 ---------- ---------- --------- ---------- Expenses Insurance: Losses and loss adjustment 4,288 2,710 7,466 4,743 Policy acquisition costs, net 5,990 5,130 11,890 10,270 Operating 11,525 9,245 22,074 18,992 Investment management services 3,549 3,419 6,960 6,290 Interest 8,241 7,109 16,378 14,159 Other 602 554 1,050 971 ---------- ---------- --------- ---------- Total expenses 34,195 28,167 65,818 55,425 ---------- ---------- --------- ---------- Income before income taxes 100,830 85,766 199,404 169,288 Provision for income taxes 21,093 18,459 42,042 35,975 ---------- ---------- --------- ---------- NET INCOME $ 79,737 $ 67,307 $ 157,362 $ 133,313 ========== ========== ========= ========== NET INCOME PER COMMON SHARE $ 1.84 $ 1.60 $ 3.65 $ 3.17 ========== ========== ========= ========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND COMMON STOCK EQUIVALENTS OUTSTANDING 43,304,435 42,160,506 43,121,218 42,110,048 ========== ========== ========== ========== </TABLE> The accompanying notes are an integral part of the consolidated financial statements. (4)
MBIA INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited) For the six months ended June 30, 1996 (In thousands except per share amounts) <TABLE> <CAPTION> Unearned Common Stock Additional Cumulative Unrealized Compensation- Treasury Stock ---------------- Paid-in Retained Translation Appreciation Restricted ---------------- Shares Amount Capital Earnings Adjustment of Investments Stock Shares Amount ------- ------- ---------- ---------- ----------- -------------- ------------- ------ ------- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Balance, January 1, 1996 42,077 $42,077 $725,153 $1,261,051 $2,849 $207,648 $ (426) 74 $4,086 Net proceeds from issuance of shares 770 770 54,463 --- --- --- --- --- --- Unearned compensation- restricted stock --- --- --- --- --- --- 73 --- --- Exercise of stock options 158 158 8,354 (1,757) --- --- --- (74) (4,086) Net income --- --- --- 157,362 --- --- --- --- --- Change in foreign currency translation --- --- --- --- (3,813) --- --- --- --- Change in unrealized appreciation of investments net of change in deferred income taxes of $83,584 --- --- --- --- --- (154,975) --- --- --- Dividends (declared and paid per common share $.69) --- --- --- (29,621) --- --- --- --- --- ------ ------- -------- ---------- ----------- ------------ ------------ ------- -------- Balance, June 30, 1996 43,005 $43,005 $787,970 $1,387,035 $ (964) $ 52,673 $ (353) --- $ --- ====== ======= ======== ========== =========== ============ ============ ======= ======== </TABLE> The accompanying notes are an integral part of the consolidated financial statements. (5)
MBIA INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands) <TABLE> <CAPTION> Six months ended June 30 -------------------------- 1996 1995 ------------ ------------ <S> <C> <C> Cash flows from operating activities: Net income .................................................... $ 157,362 $ 133,313 Adjustments to reconcile net income to net cash provided by operating activities: Increase in accrued investment income ....................... (11,660) (10,236) Increase in deferred acquisition costs ...................... (3,188) (4,081) Increase in prepaid reinsurance premiums .................... (7,727) (4,477) Increase in deferred premium revenue ........................ 113,280 57,563 Increase in loss and loss adjustment expense reserves ....... 7,932 3,872 Depreciation ................................................ 2,135 1,881 Amortization of goodwill .................................... 2,524 2,560 Amortization of bond discount, net .......................... (9,471) (620) Net realized gains on sale of investments ................... (7,521) (3,248) Deferred income taxes ....................................... 6,886 6,092 Other, net .................................................. (11,616) 12,702 --------- --------- Total adjustments to net income ............................. 81,574 62,008 --------- --------- Net cash provided by operating activities ................... 238,936 195,321 --------- --------- Cash flows from investing activities: Purchase of fixed-maturity securities, net of payable for investments purchased ........................ (698,356) (381,824) Sale of fixed-maturity securities, net of receivable for investments sold ............................. 334,469 237,019 Redemption of fixed-maturity securities, net of receivable for investments redeemed ......................... 75,960 31,546 Purchase of short-term investments, net ....................... (15,264) (60,631) Purchase of other investments, net ............................ (14,945) (807) Purchases for municipal investment agreement portfolio, net of payable for investments purchased ......... (970,773) (1,325,209) Sales from municipal investment agreement portfolio, net of receivable for investments sold ........... 580,883 673,343 Capital expenditures, net of disposals ........................ (3,180) (2,784) --------- --------- Net cash used by investing activities ....................... (711,206) (829,347) --------- --------- Cash flows from financing activities: Net proceeds from issuance of common stock .................... 55,233 --- Net proceeds from issuance of short-term debt ................. 20,600 90,700 Dividends paid ................................................ (29,276) (25,811) Proceeds from issuance of municipal investment agreements and municipal repurchase agreements .............. 1,053,077 1,059,574 Payments for drawdowns of municipal investment agreements and municipal repurchase agreements .............. (649,811) (495,961) Exercise of stock options ..................................... 10,841 4,958 --------- --------- Net cash provided by financing activities ................... 460,664 633,460 --------- --------- Net decrease in cash and cash equivalents .......................... (11,606) (566) Cash and cash equivalents - beginning of period .................... 23,258 7,940 --------- --------- Cash and cash equivalents - end of period .......................... $ 11,652 $ 7,374 ========= ========= Supplemental cash flow disclosures: Income taxes paid ............................................. $ 33,116 $ 26,483 Interest paid: Municipal investment agreements and municipal repurchase agreements ........................... $ 56,785 $ 50,109 Long-term debt .............................................. 15,810 13,288 Short-term debt ............................................. 323 556 </TABLE> The accompanying notes are an integral part of the consolidated financial statements. (6)
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, 1995 for MBIA Inc. and Subsidiaries (the "Company"). The accompanying unaudited 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, 1996 may not be indicative of the results that may be expected for the year ending December 31, 1996. The December 31, 1995 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 by the Company during the six months ended June 30, 1996 were $29.6 million. (7)
MBIA INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS - --------------------- 1996 AND 1995 - SECOND QUARTER RESULTS - -------------------------------------- MBIA Inc.'s (the "Company" or "MBIA") 1996 second quarter net income increased by 18% to $79.7 million compared with $67.3 million in 1995. Earnings per share grew 15% to $1.84 from $1.60 in the second quarter of 1995. Comparing 1996 with 1995, second quarter core earnings per share increased by 12% to $1.62. Core earnings, which exclude the net income effects from refundings and calls of insured issues, realized capital gains and losses, accounting changes and other non-recurring items, are a more indicative measure of MBIA's underlying profit trend. The increase in core earnings was primarily due to the continued growth in core premiums earned and net investment income generated by MBIA's insurance operations as well as from an increasing contribution from investment management services business. Book value at June 30, 1996 was $52.77 per share, down slightly from $53.19 per share at year-end 1995. This decrease reflected the decline in unrealized gains generated by the Company's fixed-income portfolio resulting from the increase in interest rates, partially offset by the Company's strong operating results. Financial guarantee insurance companies refer to adjusted book value as a more appropriate measure of their company's intrinsic value. Adjusted book value is calculated by adding to book value the after-tax effects of (1) net deferred premiums less deferred acquisition costs and (2) the present value of future installment premiums on outstanding insurance policies. MBIA's adjusted book value per share increased to $77.48 at June 30, 1996 compared with $76.56 at year-end 1995. With respect to adjusted book value, strong operating results combined with new business written, offset the impact of the increase in interest rates on the market value of the fixed-income portfolio. Insurance Operations - -------------------- MBIA's primary business is to guarantee principal and interest payments on municipal bonds sold in the new issue and secondary markets. The Company also provides financial guarantees for structured finance transactions, investor-owned utility debt and obligations of high-quality financial institutions. In addition, MBIA provides financial guarantees for similar securities in the international markets. The Company is the leading provider of financial guarantees in both domestic and international markets. Gross premiums written ("GPW") as reported on the Company's income statements reflect cash premium receipts during the period, which includes both upfront premiums received for business originated in the period and installment premiums received for installment-based insurance policies issued in current and prior periods. GPW does not include the present value of future premiums receivable for installment-based insurance policies issued in the period. Although most of MBIA's premiums are collected upfront at policy issuance, MBIA is writing an increasing proportion of installment premium business, and estimates the aggregate present value of its future stream of installment (8)
MBIA INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) premiums to be $258.0 million at June 30, 1996. To more accurately portray year-to-year changes in new business production, the Company also discloses adjusted gross premiums ("AGP"), which represent upfront premiums and the estimated present value of current period and future installment premiums for installment-based insurance policies issued in the period. MBIA's total GPW for the second quarter of 1996 increased 26% to $134.0 million from $106.3 million in the second quarter of 1995. Total AGP increased 45% to $155.0 million from $106.8 million over the same period. The overall long-term new issue municipal bond volume was $43.5 billion for the second quarter of 1996, up 14% from $38.0 billion in the second quarter of last year. The insured portion of new issue volume increased to a record 54% from 49% in the second quarter of 1995. MBIA continued to lead the industry in market share, capturing 39% of the insured market this quarter. Market data are reported on a sale date basis while MBIA's financial results are computed from closing date information. Typically, there can be a one- to four-week delay between the sale date and closing date of an insured issue. For the second quarter of 1996, total par value insured by MBIA for domestic new issue and secondary market municipal insurance increased to $11.3 billion from $8.3 billion in the same period last year. Over the same periods, municipal GPW increased 26% to $119.1 million from $94.9 million. Municipal AGP also increased by 26% to $117.1 million from $92.8 million in the second quarter of 1995. MBIA reported substantial gains in its domestic new issue and secondary market structured finance business insuring a record $4.7 billion of par value in the second quarter of 1996, more than four times last year's second quarter. Structured finance AGP at $24.2 million also exceeded 1995's second quarter by more than four times. Structured finance GPW at $8.5 million reflected a 74% increase over the second quarter of 1995. MBIA's international operations insured $0.4 billion of new issue and secondary market par value. GPW for international business decreased by 47% to $2.8 million from $5.2 million in the second quarter of 1995. International AGP decreased by 21% to $5.4 million from $6.8 million in the second quarter of 1995. These decreases were due to a large sovereign transaction insured in the second quarter of 1995. Ceded premiums to reinsurers from all insurance operations were $11.9 million in the second quarter of 1996, compared with $12.0 million in second quarter 1995, representing 9% and 11% of GPW in the second quarters of 1996 and 1995, respectively. The higher rate of premium cessions in 1995 was the result of two facultative reinsurance transactions. Premiums received upfront are earned pro rata over the period of risk. Such premiums are allocated to each bond maturity based on par amount and are earned on a straight-line basis over the term of each maturity. Accordingly, the portion of premiums earned on each policy in any given year represents a relatively small percentage of the total upfront premium received. The balance represents deferred premium revenue to be earned over the remaining life of the insured bond issue. (9)
MBIA INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Installment premiums are credited to the deferred premium revenue account in the period in which such premiums are received, and they are recognized as revenue over each installment period -- generally one year or less. The revenue that the Company recognizes from the amortization of deferred premiums for each period, net of the amortization of prepaid reinsurance premiums, is its premiums earned for that period. Premiums earned increased 15% to $62.1 million in the second quarter of 1996 from $53.9 million in the second quarter of 1995. Earned premiums from scheduled amortization increased by 12% to $50.1 million over last year's second quarter. When an MBIA-insured bond issue is refunded or retired early, the outstanding liability associated with the refunded or called portion is extinguished and the related deferred premium revenue is earned immediately, except for any portion which may be applied as a credit towards insuring the refunding bond issue. Earned premiums generated by refunded and called bonds in second quarter 1996 increased to $12.0 million from $9.1 million in the second quarter of 1995. The amount of bond refundings and calls is influenced by a variety of factors such as prevailing interest rates relative to the coupon rates of the bond issue, the issuer's desire to modify bond covenants and applicable regulations under the Internal Revenue Code. The fair value of the Company's investment portfolio related to its insurance operations was $4.0 billion as of June 30, 1996. This portfolio generated net investment income of $61.5 million in the second quarter of 1996, a 14% increase over the $54.0 million generated in the second quarter of 1995. The increase was primarily the result of the growth of investments from continued positive operating cash flows and the proceeds from the December, 1995 and February, 1996 debt and equity offerings. Net realized capital gains in second quarter 1996 were $3.9 million, compared with $1.7 million in the prior year's second quarter. The Company's investment portfolio is comprised of very high-quality fixed- income investments with an average credit quality rating of Double-A. The portfolio's tax-exempt securities increased marginally to 73% of the portfolio at June 30, 1996 compared with 72% at December 31, 1995. The provision for losses and loss adjustment expenses during the second quarter of 1996 was $4.3 million compared with $2.7 million in 1995's second quarter, representing additions to the loss reserve consistent with the Company's loss reserving methodology. The increase was due to the higher level of business written in the second quarter of 1996 compared to the prior year's second quarter. At June 30, 1996, $15.7 million of the $50.4 million loss and loss adjustment expense reserve was allocated on a case basis compared with $14.5 million of the $42.5 million reserve at year-end 1995. During the second quarter of 1996 there were no new case reserves nor any material adjustments to those reserves currently outstanding. At June 30, 1996 the Company's unallocated general reserve was $34.7 million compared with $28.0 million at year-end 1995. (10)
MBIA INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) In the second quarter of 1996, policy acquisition costs net of deferrals were $6.0 million. The 17% increase for the period over 1995's second quarter was consistent with the overall increase in earned premiums, as the percentage of policy acquisition costs net of deferrals to earned premiums remained at 10% for both periods. Policy acquisition costs are amortized over the period in which the related premiums are earned. Other insurance operating expenses increased to $11.5 million in the second quarter of 1996 from $9.2 million in the prior year's second quarter. In the second quarter of 1996, the Company incurred $8.2 million of interest expense compared with $7.1 million in the second quarter of 1995. The increase primarily resulted from the additional interest expense related to the $75 million increase in MBIA's long-term debt in December, 1995. The Company's effective tax rate decreased marginally in the second quarter of 1996 to 20.9% compared with 21.5% in 1995. Investment Management Services - ------------------------------ Over the last six years, MBIA has developed investment management services which capitalize on the Company's capabilities, reputation and marketplace relationships. MBIA Municipal Investors Service Corporation ("MBIA/MISC"), a wholly owned subsidiary of the Company, provides cash management services for local governments and school districts. As of June 30, 1996, MBIA/MISC had approximately 1,380 clients and over $2.6 billion of client assets under management compared with over $2.5 billion at year-end 1995. In addition, MBIA/MISC provides fund administration services to over 200 clients with invested assets of $107.6 million. MBIA/MISC offers its services in eleven states and the Commonwealth of Puerto Rico and plans to continue to expand into additional states. Since 1993, MBIA Investment Management Corp. ("IMC"), another wholly owned subsidiary of the Company, has provided investment agreements, guaranteed as to principal and interest, for bond proceeds of states, municipalities and municipal authorities. At June 30, 1996, aggregate principal and accrued interest outstanding on investment agreements was $3.0 billion compared with $2.6 billion at year-end 1995. The assets supporting IMC's investment agreement liabilities are high-quality securities with an average credit quality rating of Double-A and are recorded as a component of the Company's total investments. In conducting its business, IMC may, from time to time, use derivative financial instruments for hedging purposes as part of its overall management of interest rate risk exposure. The use of such instruments must comply with the Company's established risk management policies restricting their use to prescribed limits, non-speculative purposes, and exposure to a market or index that represents a class of investments approved as a direct investment under the Company's existing investment guidelines. At June 30, 1996, the Company's exposure to derivative financial instruments (interest rate contracts) was not significant. (11)
MBIA INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) In 1994, MBIA Capital Management Corp.("CMC"), (formerly MBIA Securities Corp.), a wholly owned subsidiary, was established to provide investment management services for MBIA's investment agreements, municipal cash management and public pension funds. In first quarter 1996, portfolio management for the majority of MBIA's insurance related investment portfolio was transferred to CMC; completing the transition which began in 1995. For the second quarter of 1996, the Company's investment management services business contributed $6.6 million in operating revenues, a 53% increase over the same period last year. Operating expenses increased by 4% to $3.5 million. Net realized capital losses for the second quarter of 1996 were $34 thousand compared to $207 thousand for the second quarter of 1995. RESULTS OF OPERATIONS - ----------------------- 1996 AND 1995 - FIRST SIX MONTHS RESULTS - ------------------------------------------ MBIA's 1996 first half net income increased by 18% to $157.4 million per share compared with $133.3 million in the first half of 1995. Earnings per share grew 15% to $3.65 from $3.17 in the first half of 1995. Core earnings per share increased by 12% in the first half of 1996 to $3.22. The increase in core earnings was primarily due to the continued combined growth in core premiums earned and net investment income. Insurance Operations - ---------------------- MBIA's total GPW for the first half of 1996 increased 44% to $254.6 million from $177.2 million in the first half of 1995. Total AGP increased 57% to $284.7 million from $181.4 million over the same period. The overall long-term new issue municipal bond volume was $80.6 billion for the first half of 1996, up 25% from $64.3 billion in the first half of last year. The insured portion of the market rose sharply to 53% from 42% in the first half of 1995. MBIA continued to lead the industry in market share, capturing 41% of the insured market in the first half of 1996. For the first half of 1996, total par value insured by MBIA for domestic new issue and secondary market municipal insurance increased to $20.4 billion from $13.5 billion in the same period last year. Over the same period, municipal GPW increased 34% to $205.9 million from $154.3 million. Municipal AGP increased by 33% to $201.8 million from $151.3 million in the first half of 1995. MBIA reported substantial gains in its domestic new issue and secondary market structured finance business insuring a record $8.4 billion of par value in the first half of 1996, a 175% gain over last year's first half. Structured finance GPW at $27.8 million reflected a 166% increase over first half 1995. Structured finance AGP totaled $52.5 million, up 239% over 1995's first half. Structured finance GPW and AGP included $12.1 million of assumed premiums related to an aggregate excess of loss agreement covering $190 million par of first mortgage loans. (12)
MBIA INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) MBIA's international operations insured $1.1 billion of new issue and secondary market par value in the first half of 1996. GPW for international business increased by 46% to $13.8 million from $9.3 million in the first half of 1995. International AGP increased by 48% to $16.4 million from $11.0 million in the first half of 1995. Ceded premiums to reinsurers from all insurance operations were $26.6 million in the first half of 1996, compared with $19.1 million in first half of 1995, representing approximately 11% of GPW in both periods. Premiums earned increased 17% to $122.4 million in the first half of 1996 from $105.0 million in the first half of 1995. Earned premiums from scheduled amortization increased by 13% to $98.9 million over last year's first half. Earned premiums generated by refunded and called bonds in the first half of 1996 increased to $23.5 million from $17.1 million in the first half of 1995. The Company's investment portfolio related to its insurance operations generated net investment income of $120.6 million in the first half 1996, a 13% increase over the $106.8 million generated in the first half of 1995. The increase was primarily the result of the growth of investments from continued positive operating cash flows and the proceeds from the December, 1995 and February, 1996 debt and equity offerings. Average invested assets for the first half of 1996 were $3.80 billion at amortized cost compared with $3.35 billion for the first half of 1995. Net realized capital gains in the first half of 1996 were $6.6 million, compared with $3.4 million in the prior year's first half. The provision for losses and loss adjustment expenses during the first half of 1996 was $7.5 million compared with $4.7 million in 1995's first half, representing additions to the loss reserve consistent with the Company's loss reserving methodology. The increase was due to the higher level of business written in the first half of 1996 compared to the same period last year. During the first half of 1996 there were no new case reserves nor any material adjustments to those reserves currently outstanding. In the first half of 1996, policy acquisition costs net of deferrals were $11.9 million. The 16% increase for the period over 1995's first half was consistent with the overall increase in earned premiums, as the percentage of policy acquisition costs net of deferrals to earned premiums remained at 10% for both periods. Policy acquisition costs are amortized over the period in which the related premiums are earned. Other insurance operating expenses increased by 16% to $22.1 million in the first half of 1996 from $19.0 million in the prior year's first half. In the first half of 1996, the Company incurred $16.4 million of interest expense compared with $14.2 million in the first half of 1995. The increase primarily resulted from the additional interest expense related to the $75 million increase in MBIA's long-term debt in December 1995. The Company's effective tax rate decreased marginally in the first half of 1996 to 21.1% compared with 21.3% in 1995. (13)
MBIA INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Investment Management Services - ------------------------------ For the first half of 1996, the Company's investment management services business contributed $12.7 million in operating revenues, a 49% increase over the same period last year. Operating expenses increased by 11% to $7.0 million. Net realized capital gains for the first half of 1996 were $0.9 million compared to the first half of 1995 when there were $174 thousand of realized losses for the investment management services business. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- At June 30, 1996, the fair value of the Company's consolidated investment portfolio was $7.2 billion, an increase of 9% from $6.6 billion at year-end 1995. The overall increase was caused by strong operating cash flows and the $55 million of net proceeds from MBIA's public offering of common stock in February, 1996, partially offset by the decrease in unrealized gains caused by the rise in interest rates during the period. The Company's fixed-income investment portfolio has been classified as available-for-sale in accordance with SFAS 115. The difference between fair value and amortized cost is primarily related to changes in interest rates, and if the portfolio is held to maturity, the Company expects to realize an amount substantially equal to amortized cost. MBIA Corp.'s liquidity position remained strong, as net cash flow provided by its operations aggregated $300 million in the first half of 1996, a 36% increase from $221 million generated in the first half of 1995. The Company's liquidity is in part dependent upon MBIA Corp.'s ability to pay dividends to the Company. MBIA Corp.'s net income, consisting of premiums earned and investment income less losses and expenses, is a source of continuing additions to earned surplus and dividend-paying capability. Under New York state insurance law, without prior approval of the superintendent of the state insurance department, MBIA Corp. may pay a dividend only from earned surplus subject to the maintenance of a minimum capital requirement. The dividends in any 12-month period may not exceed the lesser of 10% of its policyholders' surplus as shown on its last filed statutory-basis financial statements or adjusted net investment income, as defined, for such 12-month period. In the first half of 1996, MBIA Corp. paid no dividends and at June 30, 1996 had approximately $98 million available for payment of future dividends to the Company without requiring prior approval. MBIA Corp. has an irrevocable standby line of credit with a group of major banks in the amount of $650 million which provides funds for the payment of claims in the event that severe losses should occur. The line of credit expires on September 30, 2002 but may be renewed annually by the bank group for a period to extend the term to seven years beyond its annual renewal date. For general corporate purposes or to further facilitate the immediate payment of claims, should they occur, the Company and MBIA Corp. maintain short-term liquidity facilities totaling $300 million with a group of major banks. At June 30, 1996, there were $39 million outstanding under these facilities. (14)
MBIA INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) MBIA Corp. also maintains a high degree of liquidity within its investment portfolio in the form of readily marketable high-quality fixed-income securities and short-term investments. In management's opinion, the capital resources of MBIA Corp. represented by the liquidity of its investment portfolio, its annual cash flows from operations and bank lines of credit are more than adequate to meet the Company's expected cash requirements. In February 1996, the Company completed a public offering of 3.9 million shares of the Company's common stock, of which 0.8 million shares were new shares offered by the Company. The Company realized $55 million in new capital from the offering. (15)
PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits 11. Computation of Earnings Per Share Assuming Full 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. (16)
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MBIA INC. ---------------------------- Registrant Date: August 14, 1996 /s/ Julliette S. Tehrani - ------------------------------ ----------------------------- Julliette S. Tehrani Senior Vice President, Chief Financial Officer Date: August 14, 1996 /s/ Elizabeth B. Sullivan - ------------------------------ ----------------------------- Elizabeth B. Sullivan Vice President, Controller (Principal Accounting Officer) (17)