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, 1997 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 October 31, 1997 there were outstanding 89,366,104 shares of Common Stock, par value $1 per share, of the registrant.
INDEX PAGE ---- PART I FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) MBIA Inc. and Subsidiaries Consolidated Balance Sheets - September 30, 1997 and December 31, 1996 3 Consolidated Statements of Income - Three months and nine months ended September 30, 1997 and 1996 4 Consolidated Statement of Changes in Shareholders' Equity - Nine months ended September 30, 1997 5 Consolidated Statements of Cash Flows - Nine months ended September 30, 1997 and 1996 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 - 20 PART II OTHER INFORMATION, AS APPLICABLE Item 6. Exhibits and Reports on Form 8-K 21 SIGNATURES 22 (2)
MBIA INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands except per share amounts) <TABLE> <CAPTION> September 30, 1997 December 31, 1996 ------------------ ------------------ (Unaudited) (Audited) ASSETS <S> <C> <C> Investments: Fixed-maturity securities held as available-for-sale at fair value (amortized cost $4,513,710 and $4,001,562) $4,725,555 $4,149,700 Short-term investments, at amortized cost (which approximates fair value) 212,656 176,088 Other investments 16,209 14,851 ------------ ------------ 4,954,420 4,340,639 Municipal investment agreement portfolio held as available-for-sale at fair value (amortized cost $3,149,589 and $3,263,211) 3,213,175 3,293,298 ------------ ------------ TOTAL INVESTMENTS 8,167,595 7,633,937 Cash and cash equivalents 8,416 7,356 Securities borrowed or purchased under agreements to resell 369,401 217,000 Accrued investment income 107,655 104,725 Deferred acquisition costs 153,487 147,750 Prepaid reinsurance premiums 230,559 216,846 Goodwill (less accumulated amortization of $47,807 and $43,050) 121,955 105,138 Property and equipment, at cost (less accumulated depreciation of $25,228 and $21,642) 57,542 50,923 Receivable for investments sold 54,023 980 Other assets 113,200 77,360 ------------ ------------ TOTAL ASSETS $9,383,833 $8,562,015 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Deferred premium revenue $1,913,605 $1,785,875 Loss and loss adjustment expense reserves 73,246 59,314 Municipal investment agreements 1,937,162 2,290,609 Municipal repurchase agreements 1,119,528 968,671 Long-term debt 473,849 374,010 Short-term debt 20,000 29,100 Securities loaned or sold under agreements to repurchase 502,301 217,000 Deferred income taxes 255,454 206,492 Payable for investments purchased 70,361 52,029 Other liabilities 111,101 99,218 ------------ ------------ TOTAL LIABILITIES 6,476,607 6,082,318 ------------ ------------ 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-- 44,678,485 and 43,294,243 44,678 43,294 Additional paid-in capital 948,252 803,078 Retained earnings 1,745,131 1,518,994 Cumulative translation adjustment (7,723) (1,042) Unrealized appreciation of investments, net of deferred income tax provision of $97,362 and $62,706 180,638 116,424 Unearned compensation--restricted stock (3,750) (1,051) ------------ ------------ TOTAL SHAREHOLDERS' EQUITY 2,907,226 2,479,697 ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $9,383,833 $8,562,015 ============ ============ </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 Nine months ended September 30 September 30 -------------------------- -------------------------- 1997 1996 1997 1996 ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> Revenues Insurance: Gross premiums written $124,371 $ 79,910 $381,125 $334,510 Ceded premiums (16,204) (9,036) (45,017) (35,665) Net premiums written 108,167 70,874 336,108 298,845 Increase in deferred premium revenue (33,959) (6,336) (117,303) (111,889) ----------- ----------- ----------- ----------- Premiums earned (net of ceded premiums of $10,039, $10,285, $31,304 and $29,187) 74,208 64,538 218,805 186,956 Net investment income 71,848 62,992 205,832 183,563 Net realized gains 6,119 3,115 12,974 9,702 Investment management services: Income 6,273 6,819 20,112 19,543 Net realized gains 390 1,529 2,042 2,463 Other 7,849 1,031 13,794 3,019 ----------- ----------- ----------- ----------- Total revenues 166,687 140,024 473,559 405,246 ----------- ----------- ----------- ----------- Expenses Insurance: Losses and loss adjustment 4,892 2,888 13,150 10,354 Policy acquisition costs, net 7,037 6,404 20,612 18,294 Operating 12,977 12,551 36,766 34,625 Investment management services 4,041 3,379 12,084 10,339 Interest 10,003 8,605 27,314 24,983 Other 5,784 939 14,315 1,989 ----------- ----------- ----------- ----------- Total expenses 44,734 34,766 124,241 100,584 ----------- ----------- ----------- ----------- Income before income taxes 121,953 105,258 349,318 304,662 Provision for income taxes 25,388 21,937 72,794 63,979 ----------- ----------- ----------- ----------- NET INCOME $ 96,565 $ 83,321 $276,524 $240,683 =========== =========== =========== =========== NET INCOME PER COMMON SHARE $ 2.15 $ 1.92 $ 6.27 $ 5.57 =========== =========== =========== =========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND COMMON STOCK EQUIVALENTS OUTSTANDING 44,866,646 43,447,213 44,113,080 43,231,575 =========== =========== =========== =========== </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 nine months ended September 30, 1997 (In thousands except per share amounts) <TABLE> <CAPTION> Unearned Common Stock Additional Cumulative Unrealized Compensation- ---------------- Paid-in Retained Translation Appreciation Restricted Shares Amount Capital Earnings Adjustment of Investments Stock ------ ------ ------- ---------- ----------- -------------- ------------ <S> <C> <C> <C> <C> <C> <C> <C> Balance, January 1, 1997 43,294 $43,294 $803,078 $1,518,994 $(1,042) $116,424 $(1,051) Net proceeds from issuance of shares 1,210 1,210 132,246 --- --- --- --- Unearned compensation- restricted stock 33 33 3,762 --- --- --- (2,699) Exercise of stock options 141 141 9,166 --- --- --- --- Net income --- --- --- 276,524 --- --- --- Change in foreign currency translation --- --- --- --- (6,681) --- --- Change in unrealized appreciation of investments net of change in deferred income taxes of ($34,656) --- --- --- --- --- 64,214 --- Dividends (declared per common share $1.150, paid per common share $1.140) --- --- --- (50,387) --- --- --- -------- -------- --------- ---------- --------- --------- --------- Balance, September 30, 1997 44,678 $44,678 $948,252 $1,745,131 $(7,723) $180,638 $(3,750) ======== ======== ========= ========== ========= ========= ========= </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> Nine months ended September 30 --------------------------- 1997 1996 ----------- ----------- <S> <C> <C> Cash flows from operating activities: Net income $ 276,524 $ 240,683 Adjustments to reconcile net income to net cash provided by operating activities: Increase in accrued investment income (2,930) (10,575) Increase in deferred acquisition costs (5,737) (4,589) Increase in prepaid reinsurance premiums (13,713) (6,478) Increase in deferred premium revenue 131,016 118,367 Increase in loss and loss adjustment expense reserves 13,932 9,136 Depreciation 3,834 3,219 Amortization of goodwill 4,757 3,784 Amortization of bond discount, net (15,123) (16,559) Net realized gains on sale of investments (15,016) (12,165) Deferred income taxes 14,313 9,231 Other, net (35,893) (42,046) ----------- ----------- Total adjustments to net income 79,440 51,325 ----------- ----------- Net cash provided by operating activities 355,964 292,008 ----------- ----------- Cash flows from investing activities: Purchase of fixed-maturity securities, net of payable for investments purchased (1,606,108) (1,047,429) Sale of fixed-maturity securities, net of receivable for investments sold 917,679 589,812 Redemption of fixed-maturity securities, net of receivable for investments redeemed 126,478 106,439 Sale (purchase) of short-term investments, net 9,244 (23,293) Sale of other investments, net 565 361 Purchases for municipal investment agreement portfolio, net of payable for investments purchased (903,505) (1,454,325) Sales from municipal investment agreement portfolio, net of receivable for investments sold 1,016,269 1,120,804 Capital expenditures, net of disposals (7,858) (4,095) Other, net (17,049) --- ----------- ----------- Net cash used by investing activities (464,285) (711,726) ----------- ----------- Cash flows from financing activities: Net proceeds from issuance of common stock 126,456 55,233 Net proceeds from issuance of long-term debt 100,000 --- Net (repayments) proceeds from (retirement) issuance of short-term debt (9,100) 24,400 Dividends paid (49,416) (44,112) Proceeds from issuance of municipal investment and repurchase agreements 1,232,522 1,600,735 Payments for drawdowns of municipal investment and repurchase agreements (1,433,288) (1,311,689) Securities loaned or sold under agreements to repurchase, net 132,900 61,000 Exercise of stock options 9,307 20,028 ----------- ----------- Net cash provided by financing activities 109,381 405,595 ----------- ----------- Net increase (decrease) in cash and cash equivalents 1,060 (14,123) Cash and cash equivalents - beginning of period 7,356 23,258 ----------- ----------- Cash and cash equivalents - end of period $ 8,416 $ 9,135 =========== =========== SUPPLEMENTAL CASH FLOW DISCLOSURES: Income taxes paid $ 59,904 $ 53,760 Interest paid: Municipal investment and repurchase agreements $ 147,814 $ 131,254 Long-term debt 25,100 24,997 Short-term debt 1,805 541 </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, 1996 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, 1997 may not be indicative of the results that may be expected for the year ending December 31, 1997. The December 31, 1996 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. Certain amounts have been reclassified in prior years' financial statements to conform to the current presentation. 2. Dividends Declared Dividends declared by the company during the nine months ended September 30, 1997 were $50.4 million. 3. Recent Accounting Pronouncement In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards 128 (SFAS 128), "Earnings per Share," effective for periods ending after December 15, 1997. SFAS 128 requires the calculation and presentation on the face of the income statement of "basic" earnings per share and, if applicable, "diluted" earnings per share. Basic earnings per share are calculated based on the weighted average common shares outstanding. In calculating diluted earnings per share, the number of shares is increased to include all potentially dilutive common shares, including stock options. The adoption of SFAS 128 is not expected to have a material effect on reported earnings per share. (7)
MBIA INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION - ------------ MBIA Inc. (our company or MBIA) is the world's premier financial guarantee company and a leading provider of investment management products and services. Through MBIA Insurance Corp. and its subsidiaries (our insurance company), we provide financial guarantees to municipalities and other bond issuers. Our primary business is insuring municipal bonds issued by governmental units to finance essential public services. We also guarantee structured asset-backed and mortgage-backed transactions, selected corporate bonds, including investor-owned utility debt, and obligations of high-quality financial institutions. We provide these products in both the new issue and secondary markets -- internationally as well as domestically. MBIA also provides investment management products and services to the public sector. These include cash management, municipal investment agreements, discretionary asset management and administrative services. In addition, we have expanded the range of municipal services that we offer to state and local governments. RESULTS OF OPERATIONS - --------------------- SUMMARY The following chart presents highlights of our consolidated financial results for the third quarter and first nine months of 1997 and 1996: <TABLE> <CAPTION> Percent Change -------------------------- 3rd Quarter Year-to-date ------------ ------------ 3rd Quarter September 30 1997 1997 -------------- -------------- vs. vs. 1997 1996 1997 1996 1996 1996 - ------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> Net income (in millions) $ 96.6 $ 83.3 $276.5 $240.7 16% 15% Per share data: Net income $ 2.15 $ 1.92 $ 6.27 $ 5.57 12% 13% Operating earnings $ 2.06 $ 1.85 $ 6.05 $ 5.39 11% 12% Core earnings $ 1.90 $ 1.69 $ 5.54 $ 4.91 12% 13% Book value $65.07 $54.69 19% Adjusted book value $92.37 $79.56 16% </TABLE> (8)
MBIA INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) We believe core earnings, which exclude the effects of refundings and calls of our insured issues, realized capital gains and losses, accounting changes and other non-recurring items, provide the most indicative measure of our underlying profit trend. In 1997, core earnings per share increased by 12% for the third quarter and 13% for the first nine months over the comparable periods in 1996. The consistent double-digit increases in quarterly year-to-year core earnings over the past 21 quarters are due primarily to growth in premiums earned and net investment income generated by our insurance operations. Any difference between the growth rate of core earnings and net income is related to the net income effects of refunded issues and realized capital gains and losses. Operating earnings per share, which excludes the impact of realized capital gains and losses, increased by 11% for the third quarter and 12% for the first nine months, over the comparable periods last year. Our book value at the end of the first nine months of 1997 was $65.07 per share, up from $54.69 for the first nine months of 1996. As with core earnings, we believe that 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 our net deferred premium revenue (net of deferred acquisition costs) plus the present value of unrecorded future installment premiums. The following table presents the components of our adjusted book value per share: September 30, September 30, Percent Change ------------- ------------- -------------- 1997 1996 1997 vs. 1996 - ---------------------------------------------------------------------------- Book value $65.07 $54.69 19% After-tax value of: Net deferred premium revenue, net of deferred acquisition costs 22.25 20.79 7% Present value of future installment premiums* 5.05 4.08 24% - ---------------------------------------------------------------------------- Adjusted book value $92.37 $79.56 16% - ---------------------------------------------------------------------------- * The discount rate used to present value future installment premiums was 9% in 1997 and 1996. Our adjusted book value per share was $92.37 at September 30, 1997, a 16% increase from September 30, 1996. The increase was due to our strong operating results, growth from new business written, and, with lower interest rates, the increase in the fair value of our fixed-income investment portfolios. (9)
MBIA INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) FINANCIAL GUARANTEE INSURANCE For the first nine months of 1997 total gross premiums written (GPW) increased by 14% to $381.1 million from $334.5 million in 1996. GPW, as reported on our financial statements, reflects cash receipts only and does not include the value of future premium receipts expected for installment-based insurance policies originated in the period. To provide additional information regarding year-to-year changes in new business premium production, we discuss our adjusted gross premiums (AGP), which include our upfront premiums as well as the estimated present value of current and future premiums from installment-based insurance policies issued in the period. MBIA's premium production in terms of GPW and AGP for the third quarters and first nine months of 1997 and 1996 is presented in the following table: <TABLE> <CAPTION> Percent Change -------------------------- 3rd Quarter Year-to-date ------------ ------------ 3rd Quarter Year-to-date 1997 1997 -------------- -------------- vs. vs. In millions 1997 1996 1997 1996 1996 1996 - ------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> Premiums written: GPW $124.4 $79.9 $381.1 $334.5 56% 14% AGP $142.6 $94.9 $433.7 $379.6 50% 14% </TABLE> We estimate the present value of our total future installment premium stream on outstanding policies to be $346.8 million at third quarter-end 1997, compared with $270.9 million at third quarter-end 1996. MUNICIPAL MARKET New issuance in the municipal market was $51.1 billion for the third quarter of 1997, up 51% from $33.8 billion in the third quarter of 1996. The insured portion of this market rose to a record 57% from 55% in the third quarter of 1996. With a 50% market share, we continued our market leadership in the new issue insured municipal market. For the third quarter, MBIA insured $11.8 billion of par value in the domestic new issue and secondary municipal markets, an 81% increase from $6.5 billion insured in the 1996 third quarter. For the first nine months, we insured $34.7 billion of municipal bonds in these markets, a 29% increase from the $26.9 billion of a year ago. Municipal market domestic new issuance information and MBIA's par and premium writings in both the new issue and secondary domestic municipal finance markets are shown in the following table: (10)
MBIA INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) <TABLE> <CAPTION> Percent Change -------------------------- 3rd Quarter Year-to-date ------------ ------------ 3rd Quarter Year-to-date 1997 1997 -------------- -------------- vs. vs. Domestic Municipal 1997 1996 1997 1996 1996 1996 - ------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Total new issue market:* Par value (in billions) $ 51.1 $33.8 $135.8 $114.5 51% 19% Insured penetration 57% 55% 57% 53% MBIA market share 50% 33% 48% 39% MBIA insured: Par value: (in billions) $ 11.8 $ 6.5 $ 34.7 $ 26.9 81% 29% Premiums: (in millions) GPW $102.2 $52.3 $315.7 $257.9 96% 22% AGP $103.4 $51.0 $320.9 $252.8 103% 27% - ------------------------------------------------------------------------------------------- </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 The par value issuance in the asset-backed securities market (excluding private placements and mortgage-backed securities, for which market data are unavailable) increased 74% in the third quarter and 16% in the first nine months of 1997. MBIA insured a record $10.4 billion of par value in the third quarter, an increase of 121% from the $4.7 billion insured in the same period last year. For the first nine months of 1997, our structured finance volume rose 46% to $19.1 billion compared to $13.1 billion in the first nine months of 1996. Details regarding the asset-backed market and MBIA's par and premium writings in both the domestic new issue and secondary structured finance markets (which includes mortgaged-backed as well as asset-backed securities) are shown in the following table: <TABLE> <CAPTION> Percent Change -------------------------- 3rd Quarter Year-to-date ------------ ------------ 3rd Quarter Year-to-date 1997 1997 Domestic -------------- -------------- vs. vs. Structured Finance 1997 1996 1997 1996 1996 1996 - -------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Total asset-backed market:* Par value (in billions) $57.0 $32.8 $125.8 $108.8 74% 16% MBIA insured: Par value: (in billions) $10.4 $ 4.7 $ 19.1 $ 13.1 121% 46% Premiums: (in millions) GPW $15.0 $12.9 $ 40.0 $ 40.7 15% (2%) AGP $29.8 $23.1 $ 76.0 $ 75.6 29% 1% - -------------------------------------------------------------------------------------------- </TABLE> * Market data exclude mortgage-backed securities and private placements. (11)
MBIA INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) INTERNATIONAL MARKET In late 1995, we formed a joint venture with AMBAC Assurance Corporation "AMBAC" (another leading Triple-A rated financial guarantee insurer) to market financial guarantee insurance internationally. 1997 par value and premium data are showing decreases from 1996 due to the timing in the assumption of business written by AMBAC in the third quarter. While retaining the right to act individually, AMBAC and MBIA have the opportunity to reinsure up to 50% of the financial guarantee business written by the other company internationally as part of the joint venture. Customer preference, licensing and market considerations will determine which company will insure a particular transaction. Our international municipal and structured finance business volume in the new issue and secondary markets for the first nine months and the third quarters of 1997 and 1996 is illustrated in the following table. <TABLE> <CAPTION> Percent Change -------------------------- 3rd Quarter Year-to-date ------------ ------------ 3rd Quarter Year-to-date 1997 1997 -------------- -------------- vs. vs. International 1997 1996 1997 1996 1996 1996 - -------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Par value (in billions) $1.0 $ 1.4 $ 2.3 $ 2.5 (32%) (9%) Premiums: (in millions) GPW $3.6 $ 6.5 $13.5 $20.3 (41%) (33%) AGP $4.6 $10.9 $22.4 $27.3 (58%) (18%) </TABLE> CEDED PREMIUMS Reinsurance allows an insurance company to transfer portions of its insured business to a reinsurance company. In exchange for insuring a portion of our risk, the reinsurance company receives a part of our premium (ceded premium) for which we, in turn, receive a ceding commission. We use reinsurance to increase our capacity to write new business when we are subject to certain single risk limitations and to manage the overall risk profile of our insurance portfolio. Premiums ceded to reinsurers from all insurance operations were $16.2 million and $45.0 million in the third quarter and first nine months of 1997, respectively. For the first nine months, cessions as a function of GPW were 12% in 1997 and 11% in 1996. Any variance in the level of cessions generally reflects the higher or lower utilization of treaty or facultative reinsurance required to comply with regulatory constraints or our own single risk limits. Most of our reinsurers are rated Double-A or higher by Standard & Poor's Corporation or Single-A or higher by A. M. Best Co. Although we remain liable for all reinsured risks, we believe we will recover the reinsured portion of any losses that may occur. (12)
MBIA INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) REVENUES Our insurance revenues are primarily comprised of premiums earned and investment income. 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. PREMIUMS EARNED For approximately 80% of our insurance writings, we receive premiums upfront and earn them pro rata over the period of risk of the bond issue. Accordingly, the portion of net premiums earned on each policy in any given year represents a relatively small percentage of the total net upfront premium received. The balance represents deferred premium revenue to be earned over the remaining life of the insured bond issue. For 20% of our business writings - primarily our structured finance business -- we collect installment premiums. Installment premiums are credited to the deferred premium revenue account when received, and are recognized as revenue over each installment period - generally one year or less. When an MBIA-insured bond issue is refunded or retired early the related deferred premium revenue is earned immediately, except for any portion that may be applied as a credit towards insuring the refunding bond issue. 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 in the following table: <TABLE> <CAPTION> Percent Change -------------------------- 3rd Quarter Year-to-date ------------ ------------ 3rd Quarter Year-to-date 1997 1997 -------------- -------------- vs. vs. In millions 1997 1996 1997 1996 1996 1996 - -------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Premiums earned: Scheduled $61.7 $52.7 $180.5 $151.6 17% 19% Refunded 12.5 11.8 38.3 35.4 5% 8% - -------------------------------------------------------------------------------------------- Total $74.2 $64.5 $218.8 $187.0 15% 17% </TABLE> The year-to-year increase in premiums earned from scheduled amortization reflects the additive effect of new business written, including the expanding installment premium activity from the structured finance and international sectors. INVESTMENT INCOME For the quarter, net investment income was $71.8 million, a 14% increase over the same period last year. Our insurance related investment income (exclusive of realized capital gains) increased by 12% to $205.8 million in the first nine months of 1997 from $183.6 million in 1996. The 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), financing activities in February 1996 and July 1997 and from the equity offering in July 1997. (13)
MBIA INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Insurance related net realized capital gains were $13.0 million in the first nine months of 1997 and $9.7 million in 1996. These realized gains were generated as a result of ongoing management of the investment portfolio. LOSSES AND LOSS ADJUSTMENT EXPENSES (LAE) We maintain a general loss reserve based on our estimate of unidentified losses from our insured obligations. 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. The following table shows the case-specific and unallocated components of our total loss and LAE reserves for the first nine months of 1997 and 1996: September 30, September 30, Percent Change ------------- ------------- -------------- In millions 1997 1996 1997 vs. 1996 - ---------------------------------------------------------------------------- Reserves: Case-specific $20.5 $16.8 22% Unallocated 52.7 34.8 51% - ---------------------------------------------------------------------------- Total $73.2 $51.6 42% Provision $13.2 $10.4 27% Our provision for losses and LAE increased in tandem with new business writings in accordance with our loss reserving methodology. The changes in the case-specific reserve had no impact on our net income since they were offset by corresponding changes in the unallocated portion of the total reserve. OPERATING EXPENSES Those expenses related to the production of our insurance business (policy acquisition costs) are deferred and recognized over the period in which the related premiums are earned. Our company's policy acquisition costs, general operating expenses and total operating expenses are shown in the following table: (14)
MBIA INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) <TABLE> <CAPTION> Percent Change -------------------------- 3rd Quarter Year-to-date ------------ ------------ 3rd Quarter Year-to-date 1997 1997 -------------- -------------- vs. vs. In millions 1997 1996 1997 1996 1996 1996 - -------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Policy acquisition costs, net $ 7.0 $ 6.4 $20.6 $18.3 10% 13% Operating 13.0 12.6 36.8 34.6 3% 6% - ------------------------------------------------------------------------------------------- Total insurance operating expenses $20.0 $19.0 $57.4 $52.9 6% 8% </TABLE> For the third quarter and first nine months of 1997, policy acquisition costs net of deferrals increased 10% and 13%, respectively. The ratio of policy acquisition costs net of deferrals to earned premiums has remained relatively constant in the 9% range for the third quarters and first nine months of 1997 and 1996. Operating expenses increased by 3% for the third quarter and 6% for the first nine months over the prior year's comparable periods. INVESTMENT MANAGEMENT SERVICES Our investment management businesses have expanded the services we provide to the public sector and added new revenue sources. Average assets under management for these businesses have increased from $6.1 billion during third quarter 1996 to $7.7 billion during third quarter 1997. These assets include our municipal investment agreements, pooled public funds and third-party accounts. The 25% increase in average assets in the third quarter of 1997 is primarily attributable to our acquisition of American Money Management Associates, Inc. (AMMA) in late 1996. For the nine months, the 13% decline in pretax operating results compared with the same period last year is due to a shift in the mix of assets under management. Pretax financial results for the third quarters and first nine months of 1997 and 1996 are summarized on the following table: <TABLE> <CAPTION> Percent Change -------------------------- 3rd Quarter Year-to-date ------------ ------------ 3rd Quarter Year-to-date 1997 1997 -------------- -------------- vs. vs. In millions 1997 1996 1997 1996 1996 1996 - -------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Revenues $6.2 $6.8 $20.1 $19.5 (8%) 3% Expenses $4.0 $3.4 $12.1 $10.3 20% 17% - -------------------------------------------------------------------------------------------- Pretax operating income $2.2 $3.4 $ 8.0 $ 9.2 (35%) (13%) Net realized gains $0.4 $1.5 $ 2.0 $ 2.5 (74%) (17%) </TABLE> (15)
MBIA INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The following provides a summary of each of our primary investment management businesses: MBIA MUNICIPAL INVESTORS SERVICE CORPORATION (MBIA-MISC) provides cash management services and fixed-rate investment placement services directly to local governments and school districts. In addition, MBIA-MISC performs investment fund administration services for clients, which provide an additional source of revenue to our company at little added cost. In late 1996, MBIA-MISC acquired AMMA, which 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. At third quarter-end 1997, MBIA-MISC had $4.3 billion of client assets under management compared with $3.0 billion at third quarter-end 1996, reflecting primarily the addition of assets under management from the acquisition of AMMA in late 1996. MBIA INVESTMENT MANAGEMENT CORP. (IMC) provides guaranteed investment agreements for bond proceeds of states and municipalities. At third quarter-end 1997, principal and accrued interest outstanding on investment agreements was $3.1 billion compared with $2.9 billion at third quarter-end 1996. At amortized cost, the assets supporting IMC's investment agreement liabilities were $3.1 billion and $3.0 billion at September 30, 1997 and 1996, 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 1997, our exposure to derivative financial instruments was not significant. MBIA CAPITAL MANAGEMENT CORP. (CMC) provides investment management services for IMC's investment agreements, MBIA-MISC's municipal cash management programs and MBIA's insurance related portfolios, as well as third-party accounts. CMC assumed full management for MBIA's insurance related fixed-income investment portfolio in 1996, which was previously managed externally. MUNICIPAL SERVICES MBIA MUNISERVICES COMPANY (formerly known as Strategic Services, Inc.) was established in 1996 to provide bond administration, revenue enhancement and other services to state and local governments. In May 1996, MBIA MuniServices Company acquired an equity interest in Capital Asset Holdings (Capital Asset), a purchaser and servicer of delinquent tax certificates. It also provides a series of services to assist taxing authorities in the preparation, analysis, packaging and completion of delinquent tax obligation sales. (16)
MBIA INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) In January 1997, MBIA MuniServices Company acquired a 95% interest in Municipal Tax Bureau (MTB), a provider of tax revenue compliance and collection services to public entities. In July 1997, MBIA MuniServices Company acquired MuniFinancial, a public finance consulting firm specializing in municipal debt administration. MBIA & ASSOCIATES CONSULTING, INC. was established in 1997 to provide assistance to state and local governments, colleges and universities, and international public and private sector clients seeking to strengthen their strategic financial planning and management capabilities. INTEREST EXPENSE Interest expense in the third quarter and first nine months of 1997, was $10.0 million and $27.3 million, respectively compared with $8.6 million and $25.0 million in the same periods last year. The increase in interest expense was due to the $100 million addition to MBIA's long-term debt in July 1997 and to short-term bank borrowings. TAXES Our tax policy is to optimize our after-tax income by maintaining the appropriate mix of taxable and tax-exempt investments. Our effective tax rate has remained unchanged, at 21% for the first nine months of 1997 and 1996. OTHER CORPORATE DEVELOPMENTS - ---------------------------- On July 15, MBIA announced that it completed the sale of 1,150,000 shares of common stock at $114 per share and of $100 million of 30-year debentures. The company received $225 million in net proceeds to support future growth and for general corporate purposes. On September 18, MBIA announced that its board of directors had approved a 2-for-1 stock split. The 2-for-1 stock split was accomplished through a 100 percent stock dividend payable October 29 to shareholders of record as of October 1. On November 14, MBIA and CapMAC Holdings Inc. jointly announced the signing of a definitive agreement to merge in a stock transaction. Under the agreement, CapMAC shareholders will receive MBIA stock equal to $35 for each share of CapMAC stock. If MBIA stock price falls below $53 per share, CapMAC shareholders will receive a fixed exchange ratio of 0.6604 shares of MBIA stock for each share of CapMAC stock, and if MBIA's stock price rises above $70 per share, CapMAC shareholders will receive a fixed exchange ratio of 0.5000 shares of MBIA stock for each CapMAC share. The fixed exchange ratio will be determined by the average closing price of MBIA's stock for 15 consecutive days, ending three days prior to the closing of the transaction. It is anticipated that the merger will be structured as a tax-free exchange and accounted for as a "pooling of interests." The transaction, which is subject to regulatory approvals, approval by CapMAC Holdings Inc. shareholders and other customary conditions, is expected to be completed by the end of the first quarter of 1998. (17)
MBIA INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 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 the end of the third quarter, our total capital was $2.9 billion with total long-term borrowings at $474 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 ratios we use to measure it: September 30, December 31, 1997 1996 - ----------------------------------------------------------------- Long-term debt (in millions) $474 $374 Long-term debt to total capital 14% 13% Ratio of earnings to fixed charges 13.8x 13.2x In addition, our insurance company has a $825 million irrevocable standby line of credit with a group of Triple-A banks to provide funds for the payment of claims in the event that severe losses should occur. The agreement is for a seven-year term which expires on September 30, 2004 and, subject to approval by the banks, may be renewed annually to extend the term to seven years beyond the renewal date. From time to time MBIA accesses the capital markets to support the growth of our businesses. In October 1996, to provide us with flexibility to access the capital markets when market and business conditions are favorable, we filed a registration statement with the SEC to allow us to offer and sell a combination of up to $250 million of debt securities, common stock and/or preferred stock. In July 1997, MBIA completed the sale of 1.15 million shares of common stock at $114 per share and sold $100 million of 30-year debentures. The $225 million of net proceeds will be used to support the company's future growth. As of September 30, 1997, total claims-paying resources for our insurance company stood at $6.0 billion, a 16% increase over September 30, 1996. 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 1997, operating cash flow from our insurance company was $481 million. Under New York state insurance law, without prior approval of the superintendent of the state insurance department, financial guarantee insurance companies can pay dividends from earned surplus subject to retaining a minimum capital requirement. (18)
MBIA INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) In our case, dividends in any 12-month period cannot be greater than 10% of policyholders' surplus. In the first nine months of 1997 our insurance company paid no dividends and at September 30, 1997 had dividend capacity in excess of $154 million without special regulatory approval. Our company has significant liquidity supporting its businesses. At the end of the third quarter, cash equivalents and short-term investments totaled $221 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 $300 million with a group of worldwide banks. At third quarter-end 1997, $20 million was outstanding under these facilities to fund interim cash requirements. 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 the end of the third quarter 1997, the fair value of our consolidated investment portfolio increased to $8.2 billion, as shown in the following table: September 30, December 31, Percent Change ------------- ------------- -------------- In millions 1997 1996 1997 vs. 1996 - ---------------------------------------------------------------------------- Insurance operations: Amortized cost $4,742 $4,193 13% Unrealized gain 212 148 43% - ---------------------------------------------------------------------------- Fair value $4,954 $4,341 14% - ---------------------------------------------------------------------------- Municipal investment agreements: Amortized cost $3,150 $3,263 (3%) Unrealized gain 63 30 111% - ---------------------------------------------------------------------------- Fair value $3,213 $3,293 (2%) - ---------------------------------------------------------------------------- Total portfolio at fair value $8,168 $7,634 7% The increase in the fair value of our insurance related investments for the period was a result of the increase in the amortized cost of our invested assets due to positive cash flows combined with an increase in unrealized gains. The fair value of investments related to our municipal investment agreement business declined slightly to $3.2 billion at September 30, 1997 from $3.3 billion at December 31, 1996. (19)
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 in 1986, and 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. (20)
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: 1. The Company filed a report on Form 8-K on July 10, 1997 announcing its plans for primary offerings of one million common shares and $100 million of debentures. A press release was filed making such announcement. 2. The Company filed a report of Form 8-K on September 18, 1997 in which the Company's Board of Directors approved a 2-for-1 stock split by means of a stock dividend. A press release was filed making such announcement. (21)
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 14, 1997 /s/ JULLIETTE S. TEHRANI ------------------ -------------------------- Julliette S. Tehrani Executive Vice President, Chief Financial Officer and Treasurer Date: November 14, 1997 /s/ ELIZABETH B. SULLIVAN ------------------ --------------------------- Elizabeth B. Sullivan Vice President, Controller (Principal Accounting Officer) (22)