UNITED STATES
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 March 31,June 30, 2005
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. Yesx No¨
Indicate by check mark whether the Registrant is an accelerated filer (as specified in Rule 12 b-2 of the Act). Yesx No¨
As of AprilJuly 29, 2005 there were outstanding 135,408,786134,044,311 shares of Common Stock, par value $1 per share, of the registrant.
PAGE | ||||
PART I | FINANCIAL INFORMATION | |||
Item 1. | Financial Statements (Unaudited) | |||
Consolidated Balance Sheets – | 3 | |||
4 | ||||
5 | ||||
6 | ||||
7 - | ||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |||
Item 3. | ||||
Item 4. | ||||
PART II | OTHER INFORMATION, AS APPLICABLE | |||
Item 1. | ||||
Item 2. | ||||
Item 4. | ||||
Item 6. | 44 | |||
45 |
(2)
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands except per share amounts)
March 31, 2005 | December 31, 2004 | |||||||
Assets | ||||||||
Investments: | ||||||||
Fixed-maturity securities held as available-for-sale, at fair value (amortized cost $20,476,640 and $18,802,894) | $ | 21,134,588 | $ | 19,679,905 | ||||
Investments held-to-maturity, at amortized cost (fair value $7,120,369 and $7,535,787) | 7,140,265 | 7,540,218 | ||||||
Investment agreement portfolio pledged as collateral, at fair value (amortized cost $744,071 and $713,704) | 768,196 | 730,870 | ||||||
Short-term investments, at amortized cost (which approximates fair value) | 1,859,417 | 2,405,192 | ||||||
Other investments | 258,949 | 261,865 | ||||||
Total investments | 31,161,415 | 30,618,050 | ||||||
Cash and cash equivalents | 544,484 | 366,236 | ||||||
Accrued investment income | 336,904 | 312,208 | ||||||
Deferred acquisition costs | 371,932 | 360,496 | ||||||
Prepaid reinsurance premiums | 462,390 | 471,375 | ||||||
Reinsurance recoverable on unpaid losses | 33,202 | 33,734 | ||||||
Goodwill | 79,406 | 79,406 | ||||||
Property and equipment, at cost (less accumulated depreciation of $112,416 and $108,848) | 113,124 | 114,692 | ||||||
Receivable for investments sold | 100,865 | 67,205 | ||||||
Derivative assets | 270,648 | 288,811 | ||||||
Other assets | 282,295 | 315,197 | ||||||
Total assets | $ | 33,756,665 | $ | 33,027,410 | ||||
Liabilities and Shareholders’ Equity | ||||||||
Liabilities: | ||||||||
Deferred premium revenue | $ | 3,238,851 | $ | 3,211,181 | ||||
Loss and loss adjustment expense reserves | 755,563 | 726,617 | ||||||
Investment agreements | 9,316,470 | 8,678,036 | ||||||
Commercial paper | 2,302,859 | 2,598,655 | ||||||
Medium-term notes | 7,414,651 | 6,943,840 | ||||||
Variable interest entity floating rate notes | 600,670 | 600,505 | ||||||
Securities sold under agreements to repurchase | 686,131 | 647,104 | ||||||
Short-term debt | 58,745 | 58,745 | ||||||
Long-term debt | 1,325,460 | 1,332,540 | ||||||
Current income taxes | 12,126 | — | ||||||
Deferred income taxes, net | 573,849 | 610,545 | ||||||
Deferred fee revenue | 24,355 | 26,780 | ||||||
Payable for investments purchased | 201,138 | 94,609 | ||||||
Derivative liabilities | 428,360 | 528,562 | ||||||
Other liabilities | 381,426 | 390,620 | ||||||
Total liabilities | 27,320,654 | 26,448,339 | ||||||
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—400,000,000; issued shares — 156,241,947 and 155,607,737 | 156,242 | 155,608 | ||||||
Additional paid-in capital | 1,449,944 | 1,410,799 | ||||||
Retained earnings | 5,377,327 | 5,215,191 | ||||||
Accumulated other comprehensive income, net of deferred income tax of $268,807 and $317,563 | 500,516 | 611,173 | ||||||
Unearned compensation — restricted stock | (56,206 | ) | (34,686 | ) | ||||
Treasury stock, at cost — 19,829,450 and 16,216,405 shares | (991,812 | ) | (779,014 | ) | ||||
Total shareholders’ equity | 6,436,011 | 6,579,071 | ||||||
Total liabilities and shareholders’ equity | $ | 33,756,665 | $ | 33,027,410 | ||||
June 30, 2005 | December 31, 2004 | |||||||
Assets | ||||||||
Investments: | ||||||||
Fixed-maturity securities held as available-for-sale, at fair value (amortized cost $21,898,408 and $18,802,894) | $ | 22,919,879 | $ | 19,679,905 | ||||
Investments held-to-maturity, at amortized cost (fair value $6,551,271 and $7,535,787) | 6,572,895 | 7,540,218 | ||||||
Investment agreement portfolio pledged as collateral, at fair value (amortized cost $885,502 and $713,704) | 937,760 | 730,870 | ||||||
Short-term investments, at amortized cost (which approximates fair value) | 1,548,726 | 2,405,192 | ||||||
Other investments | 274,076 | 261,865 | ||||||
Total investments | 32,253,336 | 30,618,050 | ||||||
Cash and cash equivalents | 512,341 | 366,236 | ||||||
Accrued investment income | 348,573 | 312,208 | ||||||
Deferred acquisition costs | 383,006 | 360,496 | ||||||
Prepaid reinsurance premiums | 451,113 | 471,375 | ||||||
Reinsurance recoverable on unpaid losses | 42,869 | 33,734 | ||||||
Goodwill | 79,406 | 79,406 | ||||||
Property and equipment, at cost (less accumulated depreciation of $115,831 and $108,848) | 110,817 | 114,692 | ||||||
Receivable for investments sold | 96,654 | 67,205 | ||||||
Derivative assets | 252,637 | 288,811 | ||||||
Other assets | 253,843 | 315,197 | ||||||
Total assets | $ | 34,784,595 | $ | 33,027,410 | ||||
Liabilities and Shareholders’ Equity | ||||||||
Liabilities: | ||||||||
Deferred premium revenue | $ | 3,228,018 | $ | 3,211,181 | ||||
Loss and loss adjustment expense reserves | 667,570 | 726,617 | ||||||
Investment agreements | 10,005,780 | 8,678,036 | ||||||
Commercial paper | 1,859,764 | 2,598,655 | ||||||
Medium-term notes | 7,688,290 | 6,943,840 | ||||||
Variable interest entity floating rate notes | 801,038 | 600,505 | ||||||
Securities sold under agreements to repurchase | 835,359 | 647,104 | ||||||
Short-term debt | 58,745 | 58,745 | ||||||
Long-term debt | 1,314,238 | 1,332,540 | ||||||
Deferred income taxes, net | 661,184 | 610,545 | ||||||
Deferred fee revenue | 22,498 | 26,780 | ||||||
Payable for investments purchased | 173,175 | 94,609 | ||||||
Derivative liabilities | 484,842 | 528,562 | ||||||
Other liabilities | 396,596 | 390,620 | ||||||
Total liabilities | 28,197,097 | 26,448,339 | ||||||
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—400,000,000; issued shares - 156,412,476 and 155,607,737 | 156,412 | 155,608 | ||||||
Additional paid-in capital | 1,462,914 | 1,410,799 | ||||||
Retained earnings | 5,527,063 | 5,215,191 | ||||||
Accumulated other comprehensive income, net of deferred income tax of $357,249 and $317,563 | 630,628 | 611,173 | ||||||
Unearned compensation—restricted stock | (53,169 | ) | (34,686 | ) | ||||
Treasury stock, at cost—22,377,436 and 16,216,405 shares | (1,136,350 | ) | (779,014 | ) | ||||
Total shareholders’ equity | 6,587,498 | 6,579,071 | ||||||
Total liabilities and shareholders’ equity | $ | 34,784,595 | $ | 33,027,410 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
(3)
3
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In thousands except per share amounts)
Three months ended March 31 | Three months ended June 30 | Six months ended June 30 | ||||||||||||||||||||||
2005 | 2004 | 2005 | 2004 | 2005 | 2004 | |||||||||||||||||||
Restated | Restated | Restated | ||||||||||||||||||||||
Insurance | ||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||
Gross premiums written | $ | 282,619 | $ | 204,693 | $ | 248,965 | $ | 372,909 | $ | 531,584 | $ | 577,602 | ||||||||||||
Ceded premiums | (35,688 | ) | (30,732 | ) | (33,641 | ) | (45,059 | ) | (69,329 | ) | (75,791 | ) | ||||||||||||
Net premiums written | 246,931 | 173,961 | 215,324 | 327,850 | 462,255 | 501,811 | ||||||||||||||||||
Scheduled premiums earned | 169,873 | 161,994 | 177,207 | 171,956 | 347,080 | 333,950 | ||||||||||||||||||
Refunding premiums earned | 36,365 | 39,876 | 31,726 | 38,826 | 68,091 | 78,702 | ||||||||||||||||||
Premiums earned (net of ceded premiums of $45,415 and $44,918) | 206,238 | 201,870 | ||||||||||||||||||||||
Premiums earned (net of ceded premiums of $42,549, $48,434, $87,965 and $93,352) | 208,933 | 210,782 | 415,171 | 412,652 | ||||||||||||||||||||
Net investment income | 119,146 | 121,841 | 121,002 | 114,856 | 240,148 | 236,697 | ||||||||||||||||||
Advisory fees | 6,425 | 5,865 | 4,214 | 17,190 | 10,639 | 23,055 | ||||||||||||||||||
Net realized gains | 211 | 46,293 | ||||||||||||||||||||||
Net realized gains (losses) | 996 | 16,935 | 1,207 | 63,228 | ||||||||||||||||||||
Net gains (losses) on derivative instruments and foreign exchange | (6,075 | ) | 1,070 | 4,119 | 210 | (1,956 | ) | 1,280 | ||||||||||||||||
Total insurance revenues | 325,945 | 376,939 | 339,264 | 359,973 | 665,209 | 736,912 | ||||||||||||||||||
Expenses: | ||||||||||||||||||||||||
Losses and loss adjustment | 20,385 | 19,439 | 21,265 | 20,635 | 41,650 | 40,074 | ||||||||||||||||||
Amortization of deferred acquisition costs | 16,293 | 15,586 | 16,506 | 16,493 | 32,799 | 32,079 | ||||||||||||||||||
Operating | 29,166 | 27,526 | 32,268 | 29,155 | 61,434 | 56,681 | ||||||||||||||||||
Total insurance expenses | 65,844 | 62,551 | 70,039 | 66,283 | 135,883 | 128,834 | ||||||||||||||||||
Insurance income | 260,101 | 314,388 | 269,225 | 293,690 | 529,326 | 608,078 | ||||||||||||||||||
Investment management services | ||||||||||||||||||||||||
Revenues | 186,235 | 121,460 | 206,543 | 126,256 | 392,778 | 247,716 | ||||||||||||||||||
Net realized gains (losses) | 3,194 | (1,817 | ) | (1,478 | ) | (1,126 | ) | 1,716 | (2,943 | ) | ||||||||||||||
Net gains (losses) on derivative instruments and foreign exchange | 11,178 | (11,733 | ) | (3,439 | ) | 11,737 | 7,739 | 4 | ||||||||||||||||
Total investment management services revenues | 200,607 | 107,910 | 201,626 | 136,867 | 402,233 | 244,777 | ||||||||||||||||||
Interest expense | 149,418 | 91,035 | 167,164 | 92,438 | 316,582 | 183,473 | ||||||||||||||||||
Expenses | 14,377 | 18,587 | 19,090 | 18,757 | 33,467 | 37,344 | ||||||||||||||||||
Total investment management services expenses | 163,795 | 109,622 | 186,254 | 111,195 | 350,049 | 220,817 | ||||||||||||||||||
Investment management services income | 36,812 | (1,712 | ) | 15,372 | 25,672 | 52,184 | 23,960 | |||||||||||||||||
Municipal services | ||||||||||||||||||||||||
Revenues | 5,536 | 5,959 | 5,398 | 5,752 | 10,934 | 11,711 | ||||||||||||||||||
Net realized losses | (85 | ) | (5 | ) | ||||||||||||||||||||
Net realized gains (losses) | — | (37 | ) | (85 | ) | (42 | ) | |||||||||||||||||
Net gains on derivative instruments and foreign exchange | 130 | — | 6 | — | 136 | — | ||||||||||||||||||
Total municipal services revenues | 5,581 | 5,954 | 5,404 | 5,715 | 10,985 | 11,669 | ||||||||||||||||||
Expenses | 5,405 | 5,854 | 5,108 | 5,526 | 10,513 | 11,380 | ||||||||||||||||||
Municipal services income | 176 | 100 | 296 | 189 | 472 | 289 | ||||||||||||||||||
Corporate | ||||||||||||||||||||||||
Net investment income | 7,927 | 2,120 | 5,776 | 2,457 | 13,703 | 4,577 | ||||||||||||||||||
Net realized losses | (1,608 | ) | (220 | ) | ||||||||||||||||||||
Net realized gains (losses) | 81 | (356 | ) | (1,527 | ) | (576 | ) | |||||||||||||||||
Interest expense | 22,021 | 17,774 | 22,040 | 17,771 | 44,061 | 35,545 | ||||||||||||||||||
Corporate expenses | 3,681 | 5,890 | 7,398 | 4,070 | 11,079 | 9,960 | ||||||||||||||||||
Corporate loss | (19,383 | ) | (21,764 | ) | (23,581 | ) | (19,740 | ) | (42,964 | ) | (41,504 | ) | ||||||||||||
Income from continuing operations before income taxes | 277,706 | 291,012 | 261,312 | 299,811 | 539,018 | 590,823 | ||||||||||||||||||
Provision for income taxes | 77,202 | 82,424 | 73,722 | 84,096 | 150,924 | 166,520 | ||||||||||||||||||
Income from continuing operations | 200,504 | 208,588 | 187,590 | 215,715 | 388,094 | 424,303 | ||||||||||||||||||
Income from discontinued operations, net of tax | — | 29 | ||||||||||||||||||||||
Loss from discontinued operations, net of tax | — | (510 | ) | — | (481 | ) | ||||||||||||||||||
Gain on sale of discontinued operations, net of tax | — | 3,178 | — | 3,178 | ||||||||||||||||||||
Income from discontinued operations | — | 2,668 | — | 2,697 | ||||||||||||||||||||
Net income | $ | 200,504 | $ | 208,617 | $ | 187,590 | $ | 218,383 | $ | 388,094 | $ | 427,000 | ||||||||||||
Income from continuing operations per common share: | ||||||||||||||||||||||||
Basic | $ | 1.46 | $ | 1.45 | $ | 1.40 | $ | 1.50 | $ | 2.86 | $ | 2.96 | ||||||||||||
Diluted | $ | 1.43 | $ | 1.42 | $ | 1.37 | $ | 1.47 | $ | 2.80 | $ | 2.89 | ||||||||||||
Net income per common share: | ||||||||||||||||||||||||
Basic | $ | 1.46 | $ | 1.45 | $ | 1.40 | $ | 1.52 | $ | 2.86 | $ | 2.97 | ||||||||||||
Diluted | $ | 1.43 | $ | 1.42 | $ | 1.37 | $ | 1.49 | $ | 2.80 | $ | 2.91 | ||||||||||||
Weighted-average number of common shares outstanding: | ||||||||||||||||||||||||
Basic | 137,258,739 | 143,608,056 | 133,938,175 | 143,454,174 | 135,589,284 | 143,530,690 | ||||||||||||||||||
Diluted | 140,442,217 | 146,647,142 | 136,886,153 | 146,289,467 | 138,680,637 | 146,600,213 | ||||||||||||||||||
Gross revenues from continuing operations | 538,452 | 492,703 | 552,151 | 504,656 | 1,090,603 | 997,359 | ||||||||||||||||||
Gross expenses from continuing operations | 260,746 | 201,691 | 290,839 | 204,845 | 551,585 | 406,536 |
The accompanying notes are an integral part of the consolidated financial statements.
(4)
4
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)
For the threesix months ended March 31,June 30, 2005
(In thousands except per share amounts)
Common Stock | Additional Capital | Retained Earnings | Accumulated Other Comprehensive Income | Unearned Compensation- Restricted Stock | Treasury Stock | Total Equity | Common Stock | Additional Paid-in | Retained Earnings | Accumulated Other | Unearned Compensation- Restricted | Treasury Stock | Total Shareholders’ Equity | ||||||||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance, January 1, 2005 | 155,608 | $ | 155,608 | $ | 1,410,799 | $ | 5,215,191 | $ | 611,173 | $ | (34,686 | ) | (16,216 | ) | $ | (779,014 | ) | $ | 6,579,071 | 155,608 | $ | 155,608 | $ | 1,410,799 | $ | 5,215,191 | $611,173 | $(34,686 | ) | (16,216 | ) | $ | (779,014 | ) | $ | 6,579,071 | |||||||||||||||||||||||||
Comprehensive income: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | 200,504 | — | — | — | — | 200,504 | — | — | — | 388,094 | — | — | — | — | 388,094 | |||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income (loss): | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Change in unrealized appreciation of investments net of change in deferred income taxes of $(74,077) | — | — | — | — | (135,724 | ) | — | — | — | (135,724 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Change in fair value of derivative instruments net of change in deferred income taxes of $20,476 | — | — | — | — | 38,027 | — | — | — | 38,027 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Change in foreign currency translation net of change in deferred income taxes of $4,845 | — | — | — | — | (12,960 | ) | — | — | — | (12,960 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Change in unrealized appreciation of investments net of change in deferred income taxes of $60,722 | — | — | — | — | 92,511 | — | — | — | 92,511 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Change in fair value of derivative instruments net of change in deferred income taxes of $(23,347) | — | — | — | — | (43,359 | ) | — | — | — | (43,359 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Change in foreign currency translation net of change in deferred income taxes of $2,311 | — | — | — | — | (29,697 | ) | — | — | — | (29,697 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income (loss) | (110,657 | ) | 19,455 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Comprehensive income | 89,847 | 407,549 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Treasury shares acquired, net | — | — | — | — | — | — | (3,613 | ) | (212,798 | ) | (212,798 | ) | — | — | — | — | — | — | (6,161 | ) | (357,336 | ) | (357,336 | ) | |||||||||||||||||||||||||||||||||||||
Stock-based compensation | 634 | 634 | 39,938 | — | — | (21,520 | ) | — | — | 19,052 | 804 | 804 | 52,115 | — | — | (18,483 | ) | — | — | 34,436 | |||||||||||||||||||||||||||||||||||||||||
Capital issuance costs | — | — | (793 | ) | — | — | — | — | — | (793 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends (declared per common share $0.560, paid per common share $0.520) | — | — | — | (76,222 | ) | — | — | — | — | (76,222 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends (declared per common share $0.280, paid per common share $0.240) | — | — | — | (38,368 | ) | — | — | — | — | (38,368 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Balance, June 30, 2005 | 156,412 | $ | 156,412 | $ | 1,462,914 | $ | 5,527,063 | $630,628 | $(53,169 | ) | (22,377 | ) | $ | (1,136,350 | ) | $ | 6,587,498 | ||||||||||||||||||||||||||||||||||||||||||||
Balance, March 31, 2005 | 156,242 | $ | 156,242 | $ | 1,449,944 | $ | 5,377,327 | $ | 500,516 | $ | (56,206 | ) | (19,829 | ) | $ | (991,812 | ) | $ | 6,436,011 | ||||||||||||||||||||||||||||||||||||||||||
2005 | 2005 | |||||||
Disclosure of reclassification amount: | ||||||||
Unrealized appreciation of investments arising during the period, net of taxes | $ | (134,478 | ) | $ | 98,559 | |||
Reclassification adjustment, net of taxes | (1,246 | ) | (6,048 | ) | ||||
Net unrealized appreciation, net of taxes | $ | (135,724 | ) | $ | 92,511 | |||
The accompanying notes are an integral part of the consolidated financial statements.
(5)
5
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
Three months ended March 31 | Six months ended June 30 | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
(Restated) | Restated | |||||||||||||||
Cash flows from operating activities of continuing operations: | ||||||||||||||||
Net income | $ | 200,504 | $ | 208,617 | $ | 388,094 | $ | 427,000 | ||||||||
Income from discontinued operations, net of tax | — | (29 | ) | |||||||||||||
Loss from discontinued operations, net of tax | — | 481 | ||||||||||||||
Gain on sale of discontinued operations, net of tax | — | (3,178 | ) | |||||||||||||
Net income from continuing operations | 200,504 | 208,588 | ||||||||||||||
Income from continuing operations | 388,094 | 424,303 | ||||||||||||||
Adjustments to reconcile net income from continuing operations to net cash provided by operating activities of continuing operations: | ||||||||||||||||
(Increase) decrease in accrued investment income | (24,696 | ) | 6,765 | |||||||||||||
Adjustments to reconcile income from continuing operations to net cash provided by operating activities of continuing operations: | ||||||||||||||||
Increase in accrued investment income | (36,365 | ) | (4,102 | ) | ||||||||||||
Increase in deferred acquisition costs | (11,436 | ) | (20,203 | ) | (22,510 | ) | (20,193 | ) | ||||||||
Decrease in prepaid reinsurance premiums | 8,985 | 14,186 | ||||||||||||||
Increase (decrease) in deferred premium revenue | 27,670 | (42,095 | ) | |||||||||||||
Increase in loss and loss adjustment expense reserves | 28,946 | 70,058 | ||||||||||||||
Decrease in reinsurance recoverable on unpaid losses | 532 | 18,631 | ||||||||||||||
Decrease (increase) in prepaid reinsurance premiums | 20,262 | (12,672 | ) | |||||||||||||
Increase in deferred premium revenue | 16,837 | 71,599 | ||||||||||||||
Decrease in loss and loss adjustment expense reserves | (59,047 | ) | (33,065 | ) | ||||||||||||
(Increase) decrease in reinsurance recoverable on unpaid losses | (9,135 | ) | 33,783 | |||||||||||||
Depreciation | 3,568 | 3,218 | 6,983 | 6,669 | ||||||||||||
Amortization of discount on bonds, net | 15,955 | 12,307 | 30,565 | 33,172 | ||||||||||||
Amortization of premium on medium-term notes and commercial paper | (4,552 | ) | (4,676 | ) | (10,166 | ) | (9,679 | ) | ||||||||
Net realized gains on sale of investments | (1,712 | ) | (44,251 | ) | (1,311 | ) | (59,667 | ) | ||||||||
Current income tax provision | 12,126 | 50,768 | ||||||||||||||
Current income tax benefit | — | (9,627 | ) | |||||||||||||
Deferred income tax provision | 12,220 | 14,594 | 12,840 | 32,699 | ||||||||||||
Net (gains) losses on derivative instruments and foreign exchange | (5,233 | ) | 10,663 | |||||||||||||
Net gains on derivative instruments and foreign exchange | (5,919 | ) | (1,284 | ) | ||||||||||||
Stock option compensation | 4,917 | 5,007 | 10,179 | 12,419 | ||||||||||||
Other, net | 7,146 | (86,352 | ) | 72,110 | (60,114 | ) | ||||||||||
Total adjustments to net income | 74,436 | 8,620 | ||||||||||||||
Total adjustments to income from continuing operations | 25,323 | (20,062 | ) | |||||||||||||
Net cash provided by operating activities of continuing operations | 274,940 | 217,208 | 413,417 | 404,241 | ||||||||||||
Cash flows from investing activities of continuing operations: | ||||||||||||||||
Purchases of fixed-maturity securities, net of payable for investments purchased | (2,597,593 | ) | (2,374,625 | ) | (5,192,581 | ) | (3,846,716 | ) | ||||||||
Sale of fixed-maturity securities, net of receivable for investments sold | 2,263,137 | 1,863,574 | 4,685,447 | 3,211,576 | ||||||||||||
Redemption of fixed-maturity securities, net of receivable for investments redeemed | 83,857 | 202,993 | 300,785 | 433,525 | ||||||||||||
Purchases for investment agreement and medium-term note portfolios, net of payable for investments purchased | (996,116 | ) | (588,833 | ) | (3,017,881 | ) | (2,672,688 | ) | ||||||||
Sales for investment agreement and medium-term note portfolios, net of receivable for investments sold | 13,470 | 219,840 | 527,664 | 1,280,903 | ||||||||||||
Purchases of held-to-maturity investments | (31,145 | ) | (29,520 | ) | (259,277 | ) | (60,601 | ) | ||||||||
Proceeds from principal paydown of held-to-maturity investments | 426,031 | 703,123 | 1,208,809 | 2,200,403 | ||||||||||||
Sale of short-term investments | 114,689 | 108,175 | ||||||||||||||
Sale of other investments | 3,401 | 14,968 | ||||||||||||||
Sale (purchase) of short-term investments | 244,799 | (58,979 | ) | |||||||||||||
(Purchase) sale of other investments | (11,619 | ) | 61,558 | |||||||||||||
Capital expenditures | (2,138 | ) | (2,480 | ) | (3,553 | ) | (4,543 | ) | ||||||||
Disposals of capital assets | — | 38 | — | 2,248 | ||||||||||||
Net cash provided (used) by investing activities of continuing operations | (722,407 | ) | 117,253 | |||||||||||||
Net cash (used) provided by investing activities of continuing operations | (1,517,407 | ) | 546,686 | |||||||||||||
Cash flows from financing activities of continuing operations: | ||||||||||||||||
Proceeds from issuance of investment agreements | 1,413,495 | 840,175 | 4,153,151 | 2,385,122 | ||||||||||||
Payments for drawdowns of investment agreements | (757,409 | ) | (881,626 | ) | (2,875,081 | ) | (1,671,505 | ) | ||||||||
Decrease in commercial paper, net | (296,034 | ) | (166,976 | ) | (738,305 | ) | (257,084 | ) | ||||||||
Issuance of medium-term notes | 587,714 | 382,175 | 1,085,007 | 873,923 | ||||||||||||
Issuance of variable interest entity floating rate notes | 200,000 | — | ||||||||||||||
Principal paydown of medium-term notes | (121,412 | ) | (636,642 | ) | (344,957 | ) | (2,124,087 | ) | ||||||||
Securities sold under agreements to repurchase, net | 39,027 | 241,847 | 188,255 | 21,829 | ||||||||||||
Dividends paid | (71,795 | ) | (63,538 | ) | ||||||||||||
Net proceeds from issuance of short-term debt | — | 1,408 | — | 1,408 | ||||||||||||
Dividends paid | (33,494 | ) | (28,814 | ) | ||||||||||||
Capital issuance costs | (793 | ) | (531 | ) | (1,658 | ) | (1,051 | ) | ||||||||
Other borrowings | — | (3,879 | ) | — | (7,886 | ) | ||||||||||
Purchase of treasury stock | (212,798 | ) | (20,377 | ) | (357,336 | ) | (91,350 | ) | ||||||||
Exercise of stock options | 7,419 | 30,760 | 12,814 | 37,597 | ||||||||||||
Net cash provided (used) by financing activities of continuing operations | 625,715 | (242,480 | ) | 1,250,095 | (896,622 | ) | ||||||||||
Discontinued operations: | ||||||||||||||||
Net cash used by discontinued operations | — | (512 | ) | |||||||||||||
Net cash provided by discontinued operations | — | 14,717 | ||||||||||||||
Net increase in cash and cash equivalents | 178,248 | 91,469 | 146,105 | 69,022 | ||||||||||||
Cash and cash equivalents - beginning of period | 366,236 | 227,544 | 366,236 | 227,544 | ||||||||||||
Cash and cash equivalents - end of period | $ | 544,484 | $ | 319,013 | $ | 512,341 | $ | 296,566 | ||||||||
Supplemental cash flow disclosures: | ||||||||||||||||
Income taxes paid | $ | 3,450 | $ | 13,527 | $ | 92,810 | $ | 149,406 | ||||||||
Interest paid: | ||||||||||||||||
Investment agreements | $ | 69,192 | $ | 60,307 | $ | 163,100 | $ | 124,534 | ||||||||
Commercial paper | 15,984 | 6,902 | 30,019 | 14,008 | ||||||||||||
Medium-term notes | 44,925 | 35,268 | 103,559 | 66,919 | ||||||||||||
Variable interest entity floating rate notes | 4,304 | 1,806 | 9,415 | 3,425 | ||||||||||||
Securities sold under agreements to repurchase | 3,794 | 2,999 | 7,679 | 5,799 | ||||||||||||
Long-term debt | 15,291 | 16,033 | 39,290 | 35,098 | ||||||||||||
Other borrowings | — | 354 | — | 578 | ||||||||||||
Non cash items: | ||||||||||||||||
Stock compensation | $ | 4,917 | $ | 5,007 | $ | 10,179 | $ | 12,419 | ||||||||
Dividends declared but not paid | 38,363 | 34,733 | 37,916 | 34,617 |
The accompanying notes are an integral part of the consolidated financial statements.
(6)6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MBIA Inc. and Subsidiaries
NOTE 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 accounting principles generally accepted in the United States of America (GAAP). 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, 2004 for MBIA Inc. and Subsidiaries (MBIA or the Company). The accompanying consolidated financial statements have not been audited by an independent registered public accounting firm in accordance with the standards of the Public Company Accounting Oversight Board (United States), but in the opinion of management such financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the Company’s financial position and results of operations. The results of operations for the threesix months ended March 31,June 30, 2005 may not be indicative of the results that may be expected for the year ending December 31, 2005. The December 31, 2004 balance sheet was derived from audited financial statements, but does not include all disclosures required by GAAP. The consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries and other entities required by GAAP. All significant intercompany balances have been eliminated. Business segment results are presented net of all material intersegment transactions. Certain amounts have been reclassified in the financial statements prior to December 31, 2004 to conform to the current presentation. This includes the reclassification of conduit and variable interest entity (VIE) assets and liabilities, which had no effect on net income, total assets, total liabilities or shareholders’ equity as previously reported. Additionally, this includes the reclassification of salvage and subrogation from “Loss and loss adjustment expense reserves” to “Other assets.”
NOTE 2: Restatement of Consolidated Financial Statements
As reported in the Company’s Form 10-K for the year ended December 31, 2004, the Company restated its previously issued consolidated financial statements for 1998 and subsequent years to correct the accounting treatment for two reinsurance agreements entered into in 1998. The following table presents the effects of the restatement on the consolidated financial statements of the Company for the second quarter and six months ended March 31,June 30, 2004.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MBIA Inc. and Subsidiaries
In thousands except per share information | As of and For the Quarter Ended March 31, 2004 | |||||||||||||||||
As of and for the three months ended June 30, 2004 | As of and for the six months ended June 30, 2004 | |||||||||||||||||
In thousands except per share information | Previously Reported | Restated | Previously Reported | Restated | Previously Reported | Restated | ||||||||||||
Net premiums written | $ | 169,729 | $ | 173,961 | $ | 323,618 | $ | 327,850 | $ | 493,347 | $ | 501,811 | ||||||
Scheduled premiums earned | 160,280 | 161,994 | 169,991 | 171,956 | 330,271 | 333,950 | ||||||||||||
Refunding premiums earned | 39,542 | 39,876 | 38,309 | 38,826 | 77,851 | 78,702 | ||||||||||||
Premiums earned | 199,822 | 201,870 | 208,300 | 210,782 | 408,122 | 412,652 | ||||||||||||
Insurance revenues | 374,891 | 376,939 | 357,491 | 359,973 | 732,382 | 736,912 | ||||||||||||
Losses and loss adjustment expenses | 19,234 | 19,439 | 20,399 | 20,635 | 39,633 | 40,074 | ||||||||||||
Operating expenses | 27,172 | 27,526 | 28,931 | 29,155 | 56,103 | 56,681 | ||||||||||||
Insurance income | 312,899 | 314,388 | 291,668 | 293,690 | 604,567 | 608,078 | ||||||||||||
Income from continuing operations before income taxes | 289,523 | 291,012 | 297,789 | 299,811 | 587,312 | 590,823 | ||||||||||||
Provision for income taxes | 81,903 | 82,424 | 83,388 | 84,096 | 165,291 | 166,520 | ||||||||||||
Income from continuing operations | 207,620 | 208,588 | 214,401 | 215,715 | 422,021 | 424,303 | ||||||||||||
Net income | $ | 207,649 | $ | 208,617 | $ | 217,069 | $ | 218,383 | $ | 424,718 | $ | 427,000 | ||||||
Basic EPS: | ||||||||||||||||||
Income from continuing operations | $ | 1.45 | $ | 1.45 | $ | 1.49 | $ | 1.50 | $ | 2.94 | $ | 2.96 | ||||||
Net income | $ | 1.45 | $ | 1.45 | $ | 1.51 | $ | 1.52 | $ | 2.96 | $ | 2.97 | ||||||
Diluted EPS: | ||||||||||||||||||
Income from continuing operations | $ | 1.42 | $ | 1.42 | $ | 1.47 | $ | 1.47 | $ | 2.88 | $ | 2.89 | ||||||
Net income | $ | 1.42 | $ | 1.42 | $ | 1.48 | $ | 1.49 | $ | 2.90 | $ | 2.91 | ||||||
Consolidated Balance Sheet Data: | ||||||||||||||||||
Prepaid reinsurance premiums | $ | 523,726 | $ | 452,576 | $ | 552,334 | $ | 479,434 | $ | 552,334 | $ | 479,434 | ||||||
Total assets | 30,940,671 | 30,869,521 | 30,047,666 | 29,984,421 | 30,047,666 | 29,984,421 | ||||||||||||
Loss and loss adjustment expense reserves | 754,848 | 761,539 | 651,489 | 658,416 | 651,489 | 658,416 | ||||||||||||
Current income taxes | 71,046 | 60,395 | 6,498 | 0 | 6,498 | 0 | ||||||||||||
Deferred income taxes, net | 605,367 | 585,922 | 424,153 | 410,918 | 424,153 | 410,918 | ||||||||||||
Other liabilities | 364,069 | 372,218 | 393,248 | 397,389 | 393,248 | 397,389 | ||||||||||||
Total liabilities | 24,387,237 | 24,371,981 | 23,749,298 | 23,740,633 | 23,749,298 | 23,740,633 | ||||||||||||
Retained earnings | 4,766,412 | 4,710,518 | 4,948,873 | 4,894,293 | 4,948,873 | 4,894,293 | ||||||||||||
Shareholders’ equity | $ | 6,553,434 | $ | 6,497,540 | $ | 6,298,368 | $ | 6,243,788 | $ | 6,298,368 | $ | 6,243,788 |
Information presented in the Notes to Consolidated Financial Statements gives effect to the restatement, as applicable.
NOTE 3: Dividends Declared
Dividends declared by the Company during the threesix months ended March 31,June 30, 2005 were $38.4$76.2 million.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MBIA Inc. and Subsidiaries
NOTE 4: Earnings Per Share (Restated)
Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share shows the dilutive effect of all stock options and other items outstanding during the period that could
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MBIA Inc. and Subsidiaries
potentially result in the issuance of common stock. For the three and six months ended March 31,June 30, 2005 there were 3,109,473 and 2,808,176 stock options outstanding, respectively, and for the three and six months ended June 30, 2004, there were 2,627,9382,294,163 and 1,797,4962,087,690 stock options outstanding, respectively, that were not included in the diluted earnings per share calculation because they were antidilutive.
The following table sets forth the computation of basic and diluted earnings per share for the threesecond quarter and six months ended March 31,June 30, 2005 and 2004:
March 31, | 2nd Quarter | Year-to-date | ||||||||||||||||
In thousands except per share amounts | 2005 | Restated 2004 | ||||||||||||||||
In millions except per share amounts | 2005 | Restated 2004 | 2005 | Restated 2004 | ||||||||||||||
Income from continuing operations, net of tax | $ | 200,504 | $ | 208,588 | $ | 188 | $ | 215 | $ | 388 | $ | 424 | ||||||
Income from discontinued operations, net of tax | — | 29 | — | 3 | — | 3 | ||||||||||||
Net income | $ | 200,504 | $ | 208,617 | $ | 188 | $ | 218 | $ | 388 | $ | 427 | ||||||
Basic weighted average shares | 137,258,739 | 143,608,056 | ||||||||||||||||
Effect of stock options | 3,183,478 | 3,039,086 | ||||||||||||||||
Diluted weighted average shares (in thousands): | ||||||||||||||||||
Basic weighted average shares outstanding | 133,938 | 143,454 | 135,589 | 143,530 | ||||||||||||||
Effect of stock based compensation | 2,948 | 2,835 | 3,092 | 3,070 | ||||||||||||||
Diluted weighted average shares | 140,442,217 | 146,647,142 | 136,886 | 146,289 | 138,681 | 146,600 | ||||||||||||
Basic EPS: | ||||||||||||||||||
Income from continuing operations | $ | 1.46 | $ | 1.45 | $ | 1.40 | $ | 1.50 | $ | 2.86 | $ | 2.96 | ||||||
Income from discontinued operations | 0.00 | 0.00 | — | 0.02 | — | 0.02 | ||||||||||||
Net income | $ | 1.46 | $ | 1.45 | ||||||||||||||
Net income * | $ | 1.40 | $ | 1.52 | $ | 2.86 | $ | 2.97 | ||||||||||
Diluted EPS: | ||||||||||||||||||
Income from continuing operations | $ | 1.43 | $ | 1.42 | $ | 1.37 | $ | 1.47 | $ | 2.80 | $ | 2.89 | ||||||
Income from discontinued operations | 0.00 | 0.00 | — | 0.02 | — | 0.02 | ||||||||||||
Net income | $ | 1.43 | $ | 1.42 | ||||||||||||||
Net income * | $ | 1.37 | $ | 1.49 | $ | 2.80 | $ | 2.91 | ||||||||||
* | May not add due to rounding. |
NOTE 5: Business Segments (Restated)
MBIA Inc., through its subsidiaries, is a leading provider of financial guarantee products and specialized financial services. MBIA provides innovative and cost-effective products and services that meet the credit enhancement, financial and investment needs of its public- and private-sector clients worldwide. MBIA manages its activities primarily through three principal business operations: insurance, investment management services and municipal services. The Company’s reportable segments within its business operations are determined based on the way management assesses the performance and resource requirements of such operations.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MBIA Inc. and Subsidiaries
The insurance operations provide an unconditional and irrevocable guarantee of the payment of principal and interest on insured obligations when due. MBIA issues financial guarantees for municipal bonds, asset-backed and mortgage-backed securities, investor-owned utility bonds, bonds backed by publicly or privately funded public-purpose projects, bonds issued by sovereign and sub-sovereign entities, obligations collateralized by diverse pools of corporate loans and credit default swaps and pools of corporate and asset-backed bonds, both in
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MBIA Inc. and Subsidiaries
the new issue and secondary markets. The Company views its insurance operations as a reportable segment. This segment includes all activities related to global credit enhancement services provided principally by MBIA Insurance Corporation and its subsidiaries (MBIA Corp.).
The Company’s investment management services operations provide an array of products and services to the public, not-for-profit and corporate sectors. Such products and services are provided primarily through wholly owned subsidiaries of MBIA Asset Management, LLC (MBIA-AML) and include cash management, discretionary asset management and fund administration services and investment agreement, medium-term note and commercial paper programs related to the origination of assets for investment purposes. The investment management services operations’ reportable segments are comprised of asset/liability products, which include investment agreements and medium-term notes (MTNs) not related to the conduit programs, advisory services and conduits. During the second quarter of 2004, the Company completed the sale of the assets of 1838 Investment Advisors, LLC, (1838), the Company’s equity advisory services segment. This segment is reported as a discontinued operation for the quarter ended March 31,June 30, 2004.
The Company’s municipal services operations provide revenue enhancement services and products to public-sector clients nationwide consisting of discovery, audit, collections/recovery and information services through MBIA MuniServices and its wholly owned subsidiaries. Additionally, the municipal services operations include Capital Asset Holdings GP, Inc. and certain affiliated entities, a servicer of delinquent tax certificates. The Company views its municipal services operations as a reportable segment.
The Company’s corporate operations include investment income, interest expense and general expenses that relate to general corporate activities and not to one of the Company’s three principal business operations. The Company views its corporate operations as a reportable segment.
Reportable segment results are presented net of material intersegment transactions. Transactions between the Company’s segments are executed at an arm’s length basis, as established by management. The following table summarizes the Company’s operations for the three and six months ended June 30, 2005 and 2004:
Three months ended June 30, 2005 | ||||||||||||||||||
In thousands | Insurance | Investment Management Services | Municipal Services | Corporate | Total | |||||||||||||
Revenues(a) | $ | 334,149 | $ | 206,543 | $ | 5,398 | $ | 5,776 | $ | 551,866 | ||||||||
Net realized gains (losses) | 996 | (1,478 | ) | — | 81 | (401 | ) | |||||||||||
Net gains (losses) on derivative instruments and foreign exchange | 4,119 | (3,439 | ) | 6 | — | 686 | ||||||||||||
Total revenues | 339,264 | 201,626 | 5,404 | 5,857 | 552,151 | |||||||||||||
Interest expense | — | 167,164 | — | 22,040 | 189,204 | |||||||||||||
Operating expenses | 70,039 | 19,090 | 5,108 | 7,398 | 101,635 | |||||||||||||
Total expenses | 70,039 | 186,254 | 5,108 | 29,438 | 290,839 | |||||||||||||
Income (loss) before taxes | $ | 269,225 | $ | 15,372 | $ | 296 | $ | (23,581 | ) | $ | 261,312 | |||||||
Identifiable assets(b) | $ | 12,441,915 | $ | 21,871,096 | $ | 23,323 | $ | 448,261 | $ | 34,784,595 | ||||||||
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MBIA Inc. and Subsidiaries
established by management. The following table summarizes the Company’s operations for the three months ended March 31, 2005 and 2004:
Three months ended March 31, 2005 | ||||||||||||||||||||
In thousands | Insurance | Investment Management Services | Municipal Services | Corporate | Total | |||||||||||||||
Revenues(a) | $ | 331,809 | $ | 186,235 | $ | 5,536 | $ | 7,927 | $ | 531,507 | ||||||||||
Net realized gains (losses) | 211 | 3,194 | (85 | ) | (1,608 | ) | 1,712 | |||||||||||||
Net gains (losses) on derivative instruments and foreign exchange | (6,075 | ) | 11,178 | 130 | — | 5,233 | ||||||||||||||
Total revenues | 325,945 | 200,607 | 5,581 | 6,319 | 538,452 | |||||||||||||||
Interest expense | — | 149,418 | — | 22,021 | 171,439 | |||||||||||||||
Operating expenses | 65,844 | 14,377 | 5,405 | 3,681 | 89,307 | |||||||||||||||
Total expenses | 65,844 | 163,795 | 5,405 | 25,702 | 260,746 | |||||||||||||||
Net income (loss) before taxes | $ | 260,101 | $ | 36,812 | $ | 176 | $ | (19,383 | ) | $ | 277,706 | |||||||||
Identifiable assets(b) | $ | 12,383,851 | $ | 21,043,648 | $ | 23,370 | $ | 305,796 | $ | 33,756,665 | ||||||||||
Restated | ||||||||||||||||||||
Three months ended March 31, 2004 | ||||||||||||||||||||
In thousands | Insurance | Investment Management Services | Municipal Services | Corporate | Total | |||||||||||||||
Revenues(a) | $ | 329,576 | $ | 121,460 | $ | 5,959 | $ | 2,120 | $ | 459,115 | ||||||||||
Net realized gains (losses) | 46,293 | (1,817 | ) | (5 | ) | (220 | ) | 44,251 | ||||||||||||
Net gains (losses) on derivative instruments and foreign exchange | 1,070 | (11,733 | ) | — | — | (10,663 | ) | |||||||||||||
Total revenues | 376,939 | 107,910 | 5,954 | 1,900 | 492,703 | |||||||||||||||
Interest expense | — | 91,035 | — | 17,774 | 108,809 | |||||||||||||||
Operating expenses | 62,551 | 18,587 | 5,854 | 5,890 | 92,882 | |||||||||||||||
Total expenses | 62,551 | 109,622 | 5,854 | 23,664 | 201,691 | |||||||||||||||
Net income (loss) before taxes | �� | $ | 314,388 | $ | (1,712 | ) | $ | 100 | $ | (21,764 | ) | $ | 291,012 | |||||||
Identifiable assets(b) | $ | 13,463,614 | $ | 16,798,965 | $ | 24,264 | $ | 558,124 | $ | 30,844,967 | ||||||||||
Restated | |||||||||||||||||||
Three months ended June 30, 2004 | |||||||||||||||||||
In thousands | Insurance | Investment Management Services | Municipal Services | Corporate | Total | ||||||||||||||
Revenues(a) | $ | 342,828 | $ | 126,256 | $ | 5,752 | $ | 2,457 | $ | 477,293 | |||||||||
Net realized gains (losses) | 16,935 | (1,126 | ) | (37 | ) | (356 | ) | 15,416 | |||||||||||
Net gains (losses) on derivative instruments and foreign exchange | 210 | 11,737 | — | — | 11,947 | ||||||||||||||
Total revenues | 359,973 | 136,867 | 5,715 | 2,101 | 504,656 | ||||||||||||||
Interest expense | — | 92,438 | — | 17,771 | 110,209 | ||||||||||||||
Operating expenses | 66,283 | 18,757 | 5,526 | 4,070 | 94,636 | ||||||||||||||
Total expenses | 66,283 | 111,195 | 5,526 | 21,841 | 204,845 | ||||||||||||||
Income (loss) before taxes | $ | 293,690 | $ | 25,672 | $ | 189 | $ | (19,740 | ) | $ | 299,811 | ||||||||
Identifiable assets(b) | $ | 11,999,716 | $ | 17,439,421 | $ | 25,133 | $ | 520,151 | $ | 29,984,421 | |||||||||
Six months ended June 30, 2005 | |||||||||||||||||||
In thousands | Insurance | Investment Management Services | Municipal Services | Corporate | Total | ||||||||||||||
Revenues(a) | $ | 665,958 | $ | 392,778 | $ | 10,934 | $ | 13,703 | $ | 1,083,373 | |||||||||
Net realized gains (losses) | 1,207 | 1,716 | (85 | ) | (1,527 | ) | 1,311 | ||||||||||||
Net gains (losses) on derivative instruments and foreign exchange | (1,956 | ) | 7,739 | 136 | — | 5,919 | |||||||||||||
Total revenues | 665,209 | 402,233 | 10,985 | 12,176 | 1,090,603 | ||||||||||||||
Interest expense | — | 316,582 | — | 44,061 | 360,643 | ||||||||||||||
Operating expenses | 135,883 | 33,467 | 10,513 | 11,079 | 190,942 | ||||||||||||||
Total expenses | 135,883 | 350,049 | 10,513 | 55,140 | 551,585 | ||||||||||||||
Income (loss) before taxes | $ | 529,326 | $ | 52,184 | $ | 472 | $ | (42,964 | ) | $ | 539,018 | ||||||||
Identifiable assets(b) | $ | 12,441,915 | $ | 21,871,096 | $ | 23,323 | $ | 448,261 | $ | 34,784,595 | |||||||||
Restated | |||||||||||||||||||
Six months ended June 30, 2004 | |||||||||||||||||||
In thousands | Insurance | Investment Management Services | Municipal Services | Corporate | Total | ||||||||||||||
Revenues(a) | $ | 672,404 | $ | 247,716 | $ | 11,711 | $ | 4,577 | $ | 936,408 | |||||||||
Net realized gains (losses) | 63,228 | (2,943 | ) | (42 | ) | (576 | ) | 59,667 | |||||||||||
Net gains (losses) on derivative instruments and foreign exchange | 1,280 | 4 | — | — | 1,284 | ||||||||||||||
Total revenues | 736,912 | 244,777 | 11,669 | 4,001 | 997,359 | ||||||||||||||
Interest expense | — | 183,473 | — | 35,545 | 219,018 | ||||||||||||||
Operating expenses | 128,834 | 37,344 | 11,380 | 9,960 | 187,518 | ||||||||||||||
Total expenses | 128,834 | 220,817 | 11,380 | 45,505 | 406,536 | ||||||||||||||
Income (loss) before taxes | $ | 608,078 | $ | 23,960 | $ | 289 | $ | (41,504 | ) | $ | 590,823 | ||||||||
Identifiable assets(b) | $ | 11,999,716 | $ | 17,439,421 | $ | 25,133 | $ | 520,151 | $ | 29,984,421 | |||||||||
(a) | Represents the sum of net premiums earned, net investment income, advisory fees, investment management fees and other fees. |
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MBIA Inc. and Subsidiaries
(b) | At |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MBIA Inc.Included in insurance segment revenues for the three months ended June 30, 2005 and Subsidiaries2004 are revenues of $5 million and $2 million, respectively, and expenses of $5 million and $2 million, respectively, related to a consolidated third-party VIE. Additionally, included in insurance segment revenues for the six months ended June 30, 2005 and 2004 are revenues of $10 million and $4 million, respectively, and expenses of $10 million and $4 million, respectively, related to a consolidated third-party VIE.
The following table summarizes the segments within the investment management services operations for the three and six months ended March 31,June 30, 2005 and 2004:
Three months ended March 31, 2005 | Three months ended June 30, 2005 | |||||||||||||||||||||||||||||||||||||||
In thousands | Asset/ Liability Products | Advisory Services | Conduits | Eliminations | Total Investment Management Services | Asset/ Liability Products | Advisory Services | Conduits | Eliminations | Total Investment Management Services | ||||||||||||||||||||||||||||||
Revenues(a) | $ | 130,654 | $ | 12,975 | $ | 46,458 | $ | (3,852 | ) | $ | 186,235 | $ | 146,705 | $ | 14,310 | $ | 49,699 | $ | (4,171 | ) | $ | 206,543 | ||||||||||||||||||
Net realized gains (losses) | 3,197 | (3 | ) | — | — | 3,194 | (1,485 | ) | 7 | — | — | (1,478 | ) | |||||||||||||||||||||||||||
Net gains (losses) on derivative instruments and foreign exchange | (3,403 | ) | (9 | ) | 14,590 | — | 11,178 | 1,014 | (55 | ) | (4,398 | ) | — | (3,439 | ) | |||||||||||||||||||||||||
Total revenues | 130,448 | 12,963 | 61,048 | (3,852 | ) | 200,607 | 146,234 | 14,262 | 45,301 | (4,171 | ) | 201,626 | ||||||||||||||||||||||||||||
Interest expense | 109,008 | 267 | 40,143 | — | 149,418 | 124,729 | — | 42,435 | — | 167,164 | ||||||||||||||||||||||||||||||
Operating expenses | 6,892 | 7,602 | 3,700 | (3,817 | ) | 14,377 | 10,189 | 8,936 | 4,100 | (4,135 | ) | 19,090 | ||||||||||||||||||||||||||||
Total expenses | 115,900 | 7,869 | 43,843 | (3,817 | ) | 163,795 | 134,918 | 8,936 | 46,535 | (4,135 | ) | 186,254 | ||||||||||||||||||||||||||||
Net income (loss) before taxes | $ | 14,548 | $ | 5,094 | $ | 17,205 | $ | (35 | ) | $ | 36,812 | |||||||||||||||||||||||||||||
Income (loss) before taxes | $ | 11,316 | $ | 5,326 | $ | (1,234 | ) | $ | (36 | ) | $ | 15,372 | ||||||||||||||||||||||||||||
Identifiable assets | $ | 14,669,279 | $ | 56,772 | $ | 6,697,527 | $ | (379,930 | ) | $ | 21,043,648 | $ | 16,085,055 | $ | 59,588 | $ | 6,098,239 | $ | (371,786 | ) | $ | 21,871,096 | ||||||||||||||||||
Three months ended March 31, 2004 | Three months ended June 30, 2004 | |||||||||||||||||||||||||||||||||||||||
In thousands | Asset/ Liability Products | Advisory Services | Conduits | Eliminations | Total Investment Management Services | Asset/ Liability Products | Advisory Services | Conduits | Eliminations | Total Investment Management Services | ||||||||||||||||||||||||||||||
Revenues(a) | $ | 90,713 | $ | 12,199 | $ | 22,005 | $ | (3,457 | ) | $ | 121,460 | $ | 94,026 | $ | 12,700 | $ | 23,121 | $ | (3,591 | ) | $ | 126,256 | ||||||||||||||||||
Net realized gains (losses) | (1,460 | ) | (357 | ) | — | — | (1,817 | ) | (1,109 | ) | (17 | ) | — | — | (1,126 | ) | ||||||||||||||||||||||||
Net gains (losses) on derivative instruments and foreign exchange | (3,562 | ) | 36 | (8,207 | ) | — | (11,733 | ) | (5,020 | ) | (45 | ) | 16,802 | — | 11,737 | |||||||||||||||||||||||||
Total revenues | 85,691 | 11,878 | 13,798 | (3,457 | ) | 107,910 | 87,897 | 12,638 | 39,923 | (3,591 | ) | 136,867 | ||||||||||||||||||||||||||||
Interest expense | 73,688 | — | 17,347 | — | 91,035 | 76,255 | — | 16,183 | — | 92,438 | ||||||||||||||||||||||||||||||
Operating expenses | 8,521 | 8,456 | 4,679 | (3,069 | ) | 18,587 | 8,636 | 8,397 | 4,941 | (3,217 | ) | 18,757 | ||||||||||||||||||||||||||||
Total expenses | 82,209 | 8,456 | 22,026 | (3,069 | ) | 109,622 | 84,891 | 8,397 | 21,124 | (3,217 | ) | 111,195 | ||||||||||||||||||||||||||||
Net income (loss) before taxes | $ | 3,482 | $ | 3,422 | $ | (8,228 | ) | $ | (388 | ) | $ | (1,712 | ) | |||||||||||||||||||||||||||
Income (loss) before taxes | $ | 3,006 | $ | 4,241 | $ | 18,799 | $ | (374 | ) | $ | 25,672 | |||||||||||||||||||||||||||||
Identifiable assets | $ | 10,746,178 | $ | 31,030 | $ | 6,310,001 | $ | (288,244 | ) | $ | 16,798,965 | $ | 11,462,320 | $ | 58,556 | $ | 6,146,780 | $ | (228,235 | ) | $ | 17,439,421 | ||||||||||||||||||
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MBIA Inc. and Subsidiaries
Six months ended June 30, 2005 | |||||||||||||||||||
In thousands | Asset/ Liability Products | Advisory Services | Conduits | Eliminations | Total Investment Management Services | ||||||||||||||
Revenues(a) | $ | 277,358 | $ | 27,285 | $ | 96,157 | $ | (8,022 | ) | $ | 392,778 | ||||||||
Net realized gains (losses) | 1,713 | 3 | — | — | 1,716 | ||||||||||||||
Net gains (losses) on derivative instruments and foreign exchange | (2,389 | ) | (64 | ) | 10,192 | — | 7,739 | ||||||||||||
Total revenues | 276,682 | 27,224 | 106,349 | (8,022 | ) | 402,233 | |||||||||||||
Interest expense | 233,737 | 267 | 82,578 | — | 316,582 | ||||||||||||||
Operating expenses | 17,080 | 16,536 | 7,800 | (7,949 | ) | 33,467 | |||||||||||||
Total expenses | 250,817 | 16,803 | 90,378 | (7,949 | ) | 350,049 | |||||||||||||
Income (loss) before taxes | $ | 25,865 | $ | 10,421 | $ | 15,971 | $ | (73 | ) | $ | 52,184 | ||||||||
Identifiable assets | $ | 16,085,055 | $ | 59,588 | $ | 6,098,239 | $ | (371,786 | ) | $ | 21,871,096 | ||||||||
Six months ended June 30, 2004 | |||||||||||||||||||
In thousands | Asset/ Liability Products | Advisory Services | Conduits | Eliminations | Total Investment Management Services | ||||||||||||||
Revenues(a) | $ | 184,739 | $ | 25,198 | $ | 45,126 | $ | (7,347 | ) | $ | 247,716 | ||||||||
Net realized gains (losses) | (2,569 | ) | (374 | ) | — | — | (2,943 | ) | |||||||||||
Net gains (losses) on derivative instruments and foreign exchange | (8,581 | ) | (9 | ) | 8,594 | — | 4 | ||||||||||||
Total revenues | 173,589 | 24,815 | 53,720 | (7,347 | ) | 244,777 | |||||||||||||
Interest expense | 149,943 | — | 33,530 | — | 183,473 | ||||||||||||||
Operating expenses | 17,157 | 17,151 | 9,620 | (6,584 | ) | 37,344 | |||||||||||||
Total expenses | 167,100 | 17,151 | 43,150 | (6,584 | ) | 220,817 | |||||||||||||
Income (loss) before taxes | $ | 6,489 | $ | 7,664 | $ | 10,570 | $ | (763 | ) | $ | 23,960 | ||||||||
Identifiable assets | $ | 11,462,320 | $ | 58,556 | $ | 6,146,780 | $ | (228,235 | ) | $ | 17,439,421 | ||||||||
(a) | Represents the sum of interest income, investment management services fees and other fees. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MBIA Inc. and Subsidiaries
An increasingly significant portion of premiums reported within the insurance segment is generated outside the United States. The following table summarizes net premiums earned by geographic location of risk for the three and six months ended March 31,June 30, 2005 and 2004:
March 31, | 2nd Quarter | Year-to-date | ||||||||||||||||
In thousands | 2005 | Restated 2004 | 2005 | Restated 2004 | 2005 | Restated 2004 | ||||||||||||
Total premiums earned: | ||||||||||||||||||
Net premiums earned: | ||||||||||||||||||
United States | $ | 155,441 | $ | 156,795 | $ | 152,481 | $ | 160,851 | $ | 307,922 | $ | 317,646 | ||||||
Non-United States | 50,797 | 45,075 | 56,452 | 49,931 | 107,249 | 95,006 | ||||||||||||
Total | $ | 206,238 | $ | 201,870 | $ | 208,933 | $ | 210,782 | $ | 415,171 | $ | 412,652 | ||||||
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MBIA Inc. and Subsidiaries
NOTE 6: LOSS AND LOSS ADJUSTMENT EXPENSE RESERVESLoss and Loss Adjustment Expense (LAE) Reserves
Loss and LAE reserves are established in an amount equal to the Company’s estimate of unallocated losses, identified or case basis reserves and costs of settlement and other loss mitigation expenses on obligations it has insured. A summary of the unallocated and case basis activity and the components of the liability for loss and LAE reserves for the first quarterand second quarters of 2005 are shown in the following table:
In thousands | 2005 | |||
Case basis loss and LAE reserves: | ||||
Balance at January 1 | $ | 434,924 | ||
Less: reinsurance recoverable | 33,734 | |||
Net balance at January 1 | 401,190 | |||
Case basis transfers from unallocated loss reserve related to: | ||||
Current year | 2,569 | |||
Prior years | 16,935 | |||
Total | 19,504 | |||
Paid (recovered) related to: | ||||
Current year | (4,231 | ) | ||
Prior years | (5,034 | ) | ||
Total paid (recovered) | (9,265 | ) | ||
Net balance at March 31 | 429,959 | |||
Plus: reinsurance recoverable | 33,202 | |||
Case basis reserve balance at March 31 | 463,161 | |||
Unallocated loss reserve: | ||||
Balance at January 1 | 291,693 | |||
Losses and LAE incurred(1) | 20,385 | |||
Channel Re elimination(2) | (172 | ) | ||
Transfers to case basis and LAE reserves | (19,504 | ) | ||
Unallocated loss reserve balance at March 31 | 292,402 | |||
Total | $ | 755,563 | ||
In thousands | 2Q 2005 | 1Q 2005 | ||||||
Case basis loss and LAE reserves: | ||||||||
Beginning balance | $ | 463,161 | $ | 434,924 | ||||
Less: reinsurance recoverable | 33,202 | 33,734 | ||||||
Net beginning balance | 429,959 | 401,190 | ||||||
Case basis transfers from unallocated loss reserve related to: | ||||||||
Current year | 23 | — | ||||||
Prior years | 18,126 | 19,504 | ||||||
Total | 18,149 | 19,504 | ||||||
Paid (recovered) related to: | ||||||||
Current year | (1 | ) | (4,231 | ) | ||||
Prior years | 118,640 | (5,034 | ) | |||||
Total paid (recovered) | 118,639 | (9,265 | ) | |||||
Net ending balance | 329,469 | 429,959 | ||||||
Plus: reinsurance recoverable | 42,869 | 33,202 | ||||||
Case basis loss and LAE reserve ending balance | 372,338 | 463,161 | ||||||
Unallocated loss reserve: | ||||||||
Beginning balance | 292,402 | 291,693 | ||||||
Losses and LAE incurred(1) | 21,265 | 20,385 | ||||||
Channel Re elimination(2) | (286 | ) | (172 | ) | ||||
Transfers to case basis and LAE reserves | (18,149 | ) | (19,504 | ) | ||||
Unallocated loss reserve ending balance | 295,232 | 292,402 | ||||||
Total | $ | 667,570 | $ | 755,563 | ||||
(1) | Represents the Company’s provision for losses calculated as 12% of scheduled net earned premium. |
(2) | Represents the amount of losses and LAE incurred that have been eliminated in proportion to MBIA’s ownership interest in Channel Reinsurance Ltd. (Channel Re), which is carried on an equity method accounting basis. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MBIA Inc. and Subsidiaries
Case basis activity transferred from the Company’s unallocated loss reserve was approximately $19$38 million in the first quartersix months of 2005 and primarily consisted of additional loss reserves for MBIA’s guaranteed tax lien portfolios, insured obligations issued by Fort Worth Osteopathic Hospital, a mortgage-backed credit and Allegheny Health, Education and Research Foundation (AHERF). Total paid and recovery activity of $109 million for the first six months of 2005 primarily consisted of payments related to Fort Worth Osteopathic Hospital and estimated recoveries for AHERF reclassified from “Other assets,” both of which reduced the respective case basis loss reserve. Unallocated loss reserves approximated $293$295 million at March 31,June 30, 2005, which represent the Company’s estimate of losses associated with credit deterioration that has occurred in the Company’s insured portfolio and
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MBIA Inc. and Subsidiaries
are available for future case-specific activity. The Company recorded $20incurred $42 million inof loss and loss adjustment expenses in the first quartersix months of 2005 based on 12% of scheduled net earned premium. See “Note 3: Significant Accounting Policies” in the Notes to Consolidated Financial Statements included in the Company’s Form 10-K for the year ended December 31, 2004 for a description of the Company’s loss reserving policy.
NOTE 7: Contingencies
In November 2004 the Company received identical document subpoenas from the Securities and Exchange Commission (SEC) and the New York Attorney General’s Office (NYAG) requesting information with respect to non-traditional or loss mitigation insurance products developed, offered or sold by the Company to third parties from January 1, 1998 to the present. While the subpoenas did not identify any specific transaction, subsequent conversations with the SEC and the NYAG revealed that the investigation included the reinsurance arrangements entered into by MBIA Corp. in 1998 in connection with the bankruptcy of the Delaware Valley Obligated Group, an entity that is part of the Pittsburgh-based Allegheny Health, Education and Research Foundation (AHERF).
On March 9, 2005, the Company received a subpoena from the U.S. Attorney’s Office for the Southern District of New York (U.S. Attorney) seeking information related to the reinsurance agreements it entered into in connection with the AHERF loss. On March 30, 2005,Thereafter, the Company has received additional subpoenas, substantively identical to each other, and additional informal requests, from the Securities and Exchange Commission (SEC)SEC and the New York Attorney General’s office (NYAG) that supplement the subpoenas it received in late 2004. The requests seekNYAG for documents relating to the Company’s accounting treatment of advisory fees, its methodology for determining loss reserves and case reserves, instances of purchases of credit default protection on itself and documents relating to Channel Re, a reinsurance company of which the Company is part owner. The requests cover the period January 1, 2000 to the present. other information.
The Company has been cooperating, and is cooperatingcontinuing to cooperate fully with the requests frominvestigations by the SEC, the NYAG and the U.S. Attorney.Attorney, and it is currently attempting to explore ways to resolve the issues under investigation. The investigations are, however, ongoing and the Company is unable to predict their outcome or whether efforts to resolve these issues will be successful.
Several class action lawsuits have been filed in the United States District Court for the Southern District of New York against the Company and certain of its officers. On July 25, 2005, the presiding judge issued an order consolidating these lawsuits into one action and named a lead plaintiff and lead counsel for the class. The Company expectsanticipates that additional lawsuits mayit will be filed. No time currently is set forreceiving an amended complaint in respect of the Company to respond to the complaints filed with respect to such lawsuits.consolidated action in September 2005.
15
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
This quarterly report of MBIA Inc. (MBIA or the Company) includes statements that are not historical or current facts and are “forward-looking statements” made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The words “believe,” “anticipate,” “project,” “plan,” “expect,” “intend,” “will likely result,” “looking forward” or “will continue,” and similar expressions identify forward-looking statements. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. MBIA cautions readers not to place undue reliance on any such forward-looking statements, which speak only to their respective dates. The following are some of the factors that could affect financial performance or could cause actual results to differ materially from estimates contained in or underlying the Company’s forward-looking statements:
The Company undertakes no obligation to publicly correct or update any forward-looking statement if it later becomes aware that such results are not likely to be achieved.
OVERVIEW
MBIA Inc., through its subsidiaries, is a leading provider of financial guarantee products and specialized financial services. MBIA provides innovative and cost-effective products and services that meet the credit enhancement, financial and investment needs of its public- and private-sector clients worldwide. MBIA manages these activities through three principal business operations:
MBIA Inc. and Subsidiaries
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
insurance, investment management services and municipal services. The Company’s corporate operations include revenues and expenses that arise from general corporate activities and not from one of the Company’s three principal business operations. Results of operations included herein are presented in accordance with accounting principles generally accepted in the United States of America (GAAP).
16
MBIA Inc. and Subsidiaries
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS
As reported in the Company’s Form 10-K for the year ended December 31, 2004, the Company restated its previously issued consolidated financial statements for 1998 and subsequent years to correct the accounting treatment for two reinsurance agreements entered into in 1998. The following table presents the effects of the restatement on the consolidated financial statements of the Company for the quarterthree and six months ended March 31,June 30, 2004.
As of and For the Quarter Ended March 31, 2004 | As of and For the Three Months Ended June 30, 2004 | As of and For the Six Months Ended June 30, 2004 | ||||||||||||||||
In thousands except per share information | Previously Reported | Restated | Previously Reported | Restated | Previously Reported | Restated | ||||||||||||
Consolidated Statement of Income Data: | ||||||||||||||||||
Net premiums written | $ | 169,729 | $ | 173,961 | $ | 323,618 | $ | 327,850 | $ | 493,347 | $ | 501,811 | ||||||
Scheduled premiums earned | 160,280 | 161,994 | 169,991 | 171,956 | 330,271 | 333,950 | ||||||||||||
Refunding premiums earned | 39,542 | 39,876 | 38,309 | 38,826 | 77,851 | 78,702 | ||||||||||||
Premiums earned | 199,822 | 201,870 | 208,300 | 210,782 | 408,122 | 412,652 | ||||||||||||
Insurance revenues | 374,891 | 376,939 | 357,491 | 359,973 | 732,382 | 736,912 | ||||||||||||
Losses and loss adjustment expenses | 19,234 | 19,439 | 20,399 | 20,635 | 39,633 | 40,074 | ||||||||||||
Operating expenses | 27,172 | 27,526 | 28,931 | 29,155 | 56,103 | 56,681 | ||||||||||||
Insurance income | 312,899 | 314,388 | 291,668 | 293,690 | 604,567 | 608,078 | ||||||||||||
Income from continuing operations before income taxes | 289,523 | 291,012 | 297,789 | 299,811 | 587,312 | 590,823 | ||||||||||||
Provision for income taxes | 81,903 | 82,424 | 83,388 | 84,096 | 165,291 | 166,520 | ||||||||||||
Income from continuing operations | 207,620 | 208,588 | 214,401 | 215,715 | 422,021 | 424,303 | ||||||||||||
Net income | $ | 207,649 | $ | 208,617 | $ | 217,069 | $ | 218,383 | $ | 424,718 | $ | 427,000 | ||||||
Basic EPS: | ||||||||||||||||||
Income from continuing operations | $ | 1.45 | $ | 1.45 | $ | 1.49 | $ | 1.50 | $ | 2.94 | $ | 2.96 | ||||||
Net income | $ | 1.45 | $ | 1.45 | $ | 1.51 | $ | 1.52 | $ | 2.96 | $ | 2.97 | ||||||
Diluted EPS: | ||||||||||||||||||
Income from continuing operations | $ | 1.42 | $ | 1.42 | $ | 1.47 | $ | 1.47 | $ | 2.88 | $ | 2.89 | ||||||
Net income | $ | 1.42 | $ | 1.42 | $ | 1.48 | $ | 1.49 | $ | 2.90 | $ | 2.91 | ||||||
Consolidated Balance Sheet Data: | ||||||||||||||||||
Prepaid reinsurance premiums | $ | 523,726 | $ | 452,576 | $ | 552,334 | $ | 479,434 | $ | 552,334 | $ | 479,434 | ||||||
Total assets | 30,940,671 | 30,869,521 | 30,047,666 | 29,984,421 | 30,047,666 | 29,984,421 | ||||||||||||
Loss and loss adjustment expense reserves | 754,848 | 761,539 | 651,489 | 658,416 | 651,489 | 658,416 | ||||||||||||
Current income taxes | 71,046 | 60,395 | 6,498 | 0 | 6,498 | 0 | ||||||||||||
Deferred income taxes, net | 605,367 | 585,922 | 424,153 | 410,918 | 424,153 | 410,918 | ||||||||||||
Other liabilities | 364,069 | 372,218 | 393,248 | 397,389 | 393,248 | 397,389 | ||||||||||||
Total liabilities | 24,387,237 | 24,371,981 | 23,749,298 | 23,740,633 | 23,749,298 | 23,740,633 | ||||||||||||
Retained earnings | 4,766,412 | 4,710,518 | 4,948,873 | 4,894,293 | 4,948,873 | 4,894,293 | ||||||||||||
Shareholders’ equity | $ | 6,553,434 | $ | 6,497,540 | $ | 6,298,368 | $ | 6,243,788 | $ | 6,298,368 | $ | 6,243,788 |
The following information presented in Management’s Discussion and Analysis of Financial Condition and Results of Operations gives effect to the restatement.
17
MBIA Inc. and Subsidiaries
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
RESULTS OF OPERATIONS
SUMMARY OF CONSOLIDATED RESULTS
The following table presents highlights of the Company’s consolidated financial results for the first three and six months ofended June 30, 2005 and 2004. Items listed under “Other per share information (effect on net income)” are items that management commonly identifies for the readers of its financial statements because they are the result of changes in accounting standards, a by-product of the Company’s operations or due to general market conditions beyond the control of the Company.
1st Quarter | |||||||
In millions except per share amounts | 2005 | Restated 2004 | |||||
Revenues: | |||||||
Insurance | $ | 326 | $ | 377 | |||
Investment management services | 201 | 108 | |||||
Municipal services | 6 | 6 | |||||
Corporate | 6 | 2 | |||||
Revenues from continuing operations | 539 | 493 | |||||
Expenses: | |||||||
Insurance | 66 | 63 | |||||
Investment management services | 164 | 110 | |||||
Municipal services | 5 | 6 | |||||
Corporate | 26 | 23 | |||||
Expenses from continuing operations | 261 | 202 | |||||
Provision for income taxes | 77 | 82 | |||||
Income from continuing operations, net of tax | 201 | 209 | |||||
Income from discontinued operations, net of tax | 0 | 0 | |||||
Net income | $ | 201 | $ | 209 | |||
Net income per share information:* | |||||||
Net income | $ | 1.43 | $ | 1.42 | |||
Other per share information (effect on net income): | |||||||
Accelerated premium earned from refunded issues | $ | 0.16 | $ | 0.16 | |||
Net realized gains | $ | 0.01 | $ | 0.20 | |||
Net gains (losses) on derivative instruments and foreign exchange | $ | 0.02 | $ | (0.05 | ) |
2nd Quarter | Year-to-Date | |||||||||||
In millions except per share amounts | 2005 | Restated 2004 | 2005 | Restated 2004 | ||||||||
Revenues: | ||||||||||||
Insurance | $ | 339 | $ | 360 | $ | 666 | $ | 737 | ||||
Investment management services | 202 | 137 | 402 | 245 | ||||||||
Municipal services | 5 | 6 | 11 | 11 | ||||||||
Corporate | 6 | 2 | 12 | 4 | ||||||||
Revenues from continuing operations | 552 | 505 | 1,091 | 997 | ||||||||
Expenses: | ||||||||||||
Insurance | 70 | 66 | 136 | 129 | ||||||||
Investment management services | 186 | 111 | 350 | 221 | ||||||||
Municipal services | 5 | 6 | 11 | 11 | ||||||||
Corporate | 30 | 22 | 55 | 46 | ||||||||
Expenses from continuing operations | 291 | 205 | 552 | 407 | ||||||||
Provision for income taxes | 73 | 85 | 151 | 166 | ||||||||
Income from continuing operations, net of tax | 188 | 215 | 388 | 424 | ||||||||
Income from discontinued operations, net of tax | — | 3 | — | 3 | ||||||||
Net income | $ | 188 | $ | 218 | $ | 388 | $ | 427 | ||||
Net income per share information:* | ||||||||||||
Net income | $ | 1.37 | $ | 1.49 | $ | 2.80 | $ | 2.91 | ||||
Other per share information (effect on net income): | ||||||||||||
Accelerated premium earned from refunded issues | $ | 0.14 | $ | 0.16 | $ | 0.29 | $ | 0.32 | ||||
Net realized gains (losses) | $ | 0.00 | $ | 0.07 | $ | 0.01 | $ | 0.26 | ||||
Net gains (losses) on derivative instruments and foreign exchange | $ | 0.00 | $ | 0.05 | $ | 0.03 | $ | 0.01 |
* | All per share calculations are diluted. |
In the second quarter of 2005, consolidated revenues increased 9% to $552 million from $505 million in the second quarter of 2004. The growth in consolidated revenues was primarily due to a substantial increase in investment management services’ interest income. However, insurance revenues decreased 6% as a result of a decline in realized gains from sales of investment securities and advisory fee income. Consolidated expenses for the second quarter of 2005 increased 42% to $291 million from $205 million in the second quarter of 2004. This increase was principally due to an increase in investment management services’ interest expense, which was
18
MBIA Inc. and Subsidiaries
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
commensurate with the increase in interest income. Net income for the second quarter of 2005 of $188 million was down 14% from $218 million in the second quarter of 2004. Net income per share was 8% below the second quarter of 2004 as the decrease in net income was somewhat offset by a decrease in diluted weighted average shares outstanding resulting mainly from share repurchases made by the Company.
Consolidated revenues for the first threesix months ofended June 30, 2005 were $539increased 9% to $1,091 million compared to $493from $997 million in 2004, a 9% increase.the first half of 2004. The growth in consolidated revenues was primarily due to ana substantial increase in investment management services’ interest income and unrealized gains on derivative instruments. Offsetting the increase in investment management services’ revenues was a 14%10% decrease in insurance revenues as a result of substantially lesslower advisory fee income and realized gains from sales of investment securities. Consolidated expenses for the first threesix months of 2005 were $261increased 36% to $552 million compared with $202from $407 million in 2004, a 29% increase.the first half of 2004. This increase was principally due to an increase in investment management services’ interest expense, which was commensurate with the increase in interest income.income for the period. Net income for the first quarter ofsix months ended June 30, 2005 of $201$388 million was down 4%9% from $209$427 million in the first half of 2004. However, netNet income per share was 1% above4% below the first quarterhalf of 2004 due toas the decrease in net income was somewhat offset by a decrease in diluted weighted average shares outstanding resulting from share repurchases made by the Company.
The Company’s book value at March 31,June 30, 2005 was $47.18$49.15 per share, down slightlyup from $47.20 at December 31, 2004. Book value remained relatively unchanged asincreased principally due to the effect of income from operations wassomewhat offset by the effect of repurchasing shares into treasury stock at prices above the Company’s book value per share and a decrease in the unrealized appreciation of investments.share.
INSURANCE OPERATIONS
The Company’s insurance operations are principally comprised of the activities of MBIA Insurance Corporation and its subsidiaries (MBIA Corp.). MBIA Corp. issues financial guarantees for municipal bonds, asset-backed and mortgage-backed securities, investor-owned utility bonds, bonds backed by publicly or privately funded public purpose projects, bonds issued by sovereign and sub-sovereign entities, obligations collateralized by diverse pools of corporate loans and credit default swaps and pools of corporate and asset-backed bonds, both in the new issue and secondary markets.
The municipal obligations that MBIA Corp. insures include tax-exempt and taxable indebtedness of states, counties, cities, utility districts and other political subdivisions, as well as airports, higher education and healthcare facilities and similar authorities and obligations issued by private entities that finance projects thatwhich serve a substantial public purpose. The asset-backed and structured finance obligations insured by MBIA Corp. typically consist of securities that are
MBIA Inc. and Subsidiaries
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
payable from or which are tied to the performance of a specified pool of assets that, in most cases, have a defined cash flow. Securities of this type include residential and commercial mortgages, a variety of consumer loans, corporate loans and bonds, trade and export receivables, aircraft, equipment and real property leases, and infrastructure projects.
Revenues19
MBIA Inc. and Subsidiaries
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
Second quarter 2005 revenues from the Company’s insurance operations decreased 14%were $339 million compared with $360 million in the firstsecond quarter of 2004, a 6% decrease. The decline in insurance operations’ revenues was primarily the result of a $13 million decrease in advisory fee income and a $16 million decrease in net gains from sales of investment securities. Insurance expenses, which consist of loss and loss adjustment expenses, the amortization of deferred acquisition costs and operating expenses, increased 6% in the second quarter of 2005. Gross insurance expenses (expenses before the deferral or amortization of acquisition costs) increased 1% in the second quarter of 2005 to $326compared with the second quarter of 2004.
The Company’s insurance operations revenues for the six months ended June 30, 2005 were $666 million from $377compared with $737 million in the first quarterhalf of 2004. The decline in insurance operations’ revenues was primarily the result of a $46$62 million decrease in net gains from sales of investment securities. Additionally, the Company reported $6securities and a $12 million of net losses on derivative instruments and foreign exchangedecrease in 2005 versus a net gain of $1 million in 2004.advisory fee income. Insurance expenses, which consist of loss and loss adjustment expenses, amortization of deferred acquisition costs and operating expenses increased 5% infor the first quarter ofsix months ended June 30, 2005 compared with the same period in 2004. Loss and loss adjustment expenses and the amortization of deferred acquisition costs both increased 5% and operating expenses increased 6%. Grosswhile gross insurance expenses (expenses before the deferral or amortization of acquisition costs) increased 4% in3% for the first quarter ofsix months ended June 30, 2005 compared with the first quartersame period of 2004.
The Company’s gross premiums written (GPW), net premiums written (NPW) and net premiums earned for the second quarter and first quartersix months of 2005 and 2004 are presented in the following table:
2nd Quarter | Year-to-date | Percent Change | ||||||||||||||||||||
1st Quarter | Percent Change | 2nd Quarter | Year-to-date | |||||||||||||||||||
Restated | 2005 vs. 2004 | 2005 vs. 2004 | ||||||||||||||||||||
In millions | 2005 | 2004 | 2005 vs. 2004 | 2005 | Restated 2004 | 2005 | Restated 2004 | |||||||||||||||
Gross premiums written: | ||||||||||||||||||||||
U.S. | $ | 214 | $132 | 63 | % | $175 | $261 | $389 | $393 | (33 | )% | (1 | )% | |||||||||
Non-U.S. | 69 | 73 | (6 | )% | 74 | 112 | 143 | 185 | (33 | )% | (23 | )% | ||||||||||
Total | $ | 283 | $205 | 38 | % | $249 | $373 | $532 | $578 | (33 | )% | (8 | )% | |||||||||
Net premiums written: | ||||||||||||||||||||||
U.S. | $ | 201 | $116 | 73 | % | $158 | $253 | $360 | $369 | (37 | )% | (2 | )% | |||||||||
Non-U.S. | 46 | 58 | (21 | )% | 57 | 75 | 102 | 133 | (24 | )% | (23 | )% | ||||||||||
Total | $ | 247 | $174 | 42 | % | $215 | $328 | $462 | $502 | (34 | )% | (8 | )% | |||||||||
Net premiums earned: | ||||||||||||||||||||||
U.S. | $ | 155 | $157 | (1 | )% | $153 | $161 | $308 | $318 | (5 | )% | (3 | )% | |||||||||
Non-U.S. | 51 | 45 | 13 | % | 56 | 50 | 107 | 95 | 13 | % | 13 | % | ||||||||||
Total | $ | 206 | $202 | 2 | % | $209 | $211 | $415 | $413 | (1 | )% | 1 | % |
20
MBIA Inc. and Subsidiaries
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
GPW reflects premiums received and accrued for in the period and does not include the present value of future cash receipts expected from installment premium policies originated
MBIA Inc. and Subsidiaries
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
during the period. GPW was $283$249 million in the firstsecond quarter of 2005, up 38%down 33% from the firstsecond quarter of 2004, reflecting a decline in business written both in and reflectsoutside the U.S. For the six months ended June 30, 2005, GPW decreased 8% due to a 63% increase23% decline in U.S. business written.written outside the U.S.
NPW of $247$215 million, which represents gross premiums written net of premiums ceded to reinsurers, increased 42%decreased 34% in the second quarter of 2005 compared to the second quarter of 2004. For the first six months of 2005, NPW of $462 million was 8% below the first six months of 2004. The decline in the second quarter and first six months of 2005 was consistent with the decline in GPW. Premiums ceded to reinsurers were $34 million or 14% in the second quarter of 2005 compared with $45 million or 12% in the firstsecond quarter of 2004. The larger increase in NPW relative to GPW reflects a decline inFor the percent ofsix months ended June 30, 2005, premiums ceded to reinsurers. Premiums ceded to reinsurers totaled $36were $69 million or 13% and $31compared with $76 million or 15%13% in the first quarterhalf of 2005 and 2004, respectively.2004. Reinsurance enables the Company to cede exposure and comply with its single risk and credit guidelines, although the Company continues to be primarily liable on the insurance policies it underwrites.
Net premiums earned include scheduled premium earnings as well as premium earnings from refunded issues. Net premiums earned in the firstsecond quarter of 2005 of $206$209 million increased 2% overdecreased 1% from the firstsecond quarter of 2004 due to an 18% decrease in refunded premiums earned offset by a 5%3% increase in scheduled premiums earned. In the six months ended June 30, 2005, net premiums earned were $415 million, a 1% increase over the first half of 2004 resulting from a 4% increase in scheduled premiums earned partly offset by a 9%13% decrease in refunded premiums earned. The increase in scheduled premiums earned was a result of growth in new business written in past years, as well asand a decline in the Company’s use of reinsurance.reinsurance over the past several years. The decrease in refunded premiums earned resulted from a slow down in refinancing activity in the municipal market.
MBIA evaluates the premium rates it receives for insurance guarantees through the use of internal and external rating agency quantitative models. These models assess the Company’s premium rates and return on capital results on a risk adjusted basis. In addition, market research data is used to evaluate pricing levels across the financial guarantee industry for comparable risks. The Company’s pricing levels indicate continued acceptable trends in overall portfolio profitability under all models, and the Company believes the pricing charged for its insurance products produces results that meet its long-term return on capital targets.
When an MBIA-insured obligation is refunded or retired early, the related remaining deferred premium revenue is earned at that time. The level of bond refundings and calls is influenced by a variety of factors such as prevailing interest rates, the coupon rate of the bond issue, the issuer’s desire or ability to modify bond covenants and applicable regulations under the Internal Revenue Code.
21
MBIA Inc. and Subsidiaries
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
CREDIT QUALITY Financial guarantee insurance companies use a variety of approaches to assess the underlying credit risk profile of their insured portfolios. MBIA uses both an internally developed credit rating system as well as third-party rating sources in the analysis of credit quality measures of its insured portfolio. In evaluating credit risk, the Company obtains, when available, the underlying rating of each insured obligation before the benefit of its insurance policy from
MBIA Inc. and Subsidiaries
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
nationally recognized rating agencies (Moody’s Investors Service (Moody’s), Standard and Poor’s (S&P) and Fitch Ratings). All references to insured credit quality distributions contained herein reflect the underlying rating levels from these third-party sources. Other companies within the financial guarantee industry may report credit quality information based upon internal ratings that would not be comparable to MBIA’s presentation.
The credit quality of business insured during the first quarter of 2005 remained relatively high as 79%80% of total insured credits were rated A or above before giving effect to MBIA’s guarantee, compared to 80% in75% for the first quartersame period of 2004. At March 31,June 30, 2005, 81% of the Company’s outstanding book of business was rated A or above before giving effect to MBIA’s guarantee, up from 78%79% at March 31,June 30, 2004.
GLOBAL PUBLIC FINANCE MARKET MBIA’s premium writings and premium earnings in both the new issue and secondary global public finance markets are shown in the following table:
2nd Quarter | Year-to-date | Percent Change | ||||||||||||||||||||||
2nd Quarter | Year-to-date | |||||||||||||||||||||||
1st Quarter | Percent Change | 2005 vs. 2004 | 2005 vs. 2004 | |||||||||||||||||||||
Global Public Finance In millions | 2005 | Restated 2004 | 2005 vs. 2004 | 2005 | Restated 2004 | 2005 | Restated 2004 | |||||||||||||||||
Gross premiums written: | ||||||||||||||||||||||||
U.S. | $ | 149 | $ 57 | 160 | % | $ | 112 | $191 | $ | 261 | $248 | (42 | )% | 5 | % | |||||||||
Non-U.S. | 30 | 30 | 0 | % | 30 | 61 | 60 | 90 | (50 | )% | (33 | )% | ||||||||||||
Total | $ | 179 | $ 87 | 106 | % | $ | 142 | $252 | $ | 321 | $338 | (44 | )% | (5 | )% | |||||||||
Net premiums written: | ||||||||||||||||||||||||
U.S. | $ | 146 | $ 53 | 178 | % | $ | 105 | $193 | $ | 251 | $246 | (46 | )% | 2 | % | |||||||||
Non-U.S. | 19 | 26 | (28 | )% | 25 | 34 | 44 | 60 | (26 | )% | (27 | )% | ||||||||||||
Total | $ | 165 | $ 79 | 110 | % | $ | 130 | $227 | $ | 295 | $306 | (43 | )% | (4 | )% | |||||||||
Net premiums earned: | ||||||||||||||||||||||||
U.S. | $ | 101 | $104 | (2 | )% | $ | 98 | $100 | $ | 199 | $204 | (2 | )% | (2 | )% | |||||||||
Non-U.S. | 23 | 18 | 29 | % | 26 | 21 | 49 | 38 | 27 | % | 28 | % | ||||||||||||
Total | $ | 124 | $122 | 2 | % | $ | 124 | $121 | $ | 248 | $242 | 3 | % | 2 | % |
Global public finance GPW increased 106%decreased 44% to $179$142 million in the firstsecond quarter of 2005 from $87$252 million in the firstsecond quarter of 2004. This increase isdecrease was due to strong growtha decline in U.S. business written primarily withinboth in and outside the transportation sector. NPW increased 110% to $165 million as a result of the increase in U.S. GPW and the effect of ceding less premiums to reinsurers. In the first quarter of 2005, global public finance net premiums earned increased 2% to $124 million from $122 million in the first quarter of 2004. This growth reflects earnings generated from
22
MBIA Inc. and Subsidiaries
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
NPW decreased 43% to $130 million as a result of the decrease in GPW. In the second quarter of 2005, global public finance net premiums earned of $124 million were 3% above the second quarter of 2004 as a 14% increase in scheduled premiums earned was offset by a 22% decrease in refunded premiums earned primarily on U.S. business.
For the six months ended June 30, 2005, global public finance GPW decreased 5% over the first six months ended June 30, 2004. This decrease was due to a weak second quarter in both U.S. and non-U.S. business written mostly offset by strong growth in U.S. business written, primarily within the transportation sector, in the first quarter of 2005. NPW decreased 4% to $295 million in the first half of 2005 as a result of the decrease in GPW. In the first half of 2005, global public finance net premiums earned increased 2% to $248 million from $242 million in the first half of 2004. This growth reflects earnings generated from increased levels of non-U.S. business written over the last several years and a declining cession rate, offset by a 9%15% decrease in refunded premiums earned primarily from U.S. business.
The credit quality of global public finance business written by the Company in the first quarter of 2005 remained high. Insured credits rated A or above before the Company’s guarantee represented 92%91% of global public finance business written in 2005, compared with 97%89% in the first three monthshalf of 2004. At March 31,June 30, 2005, 82%83% of the outstanding global public finance book of business was rated A or above before the Company’s guarantee, up from 81% at March 31,June 30, 2004.
GLOBAL STRUCTURED FINANCE MARKET MBIA’s premium writings and premium earnings in both the new issue and secondary global structured finance markets are shown in the following table:
2nd Quarter | Year-to-date | Percent Change | ||||||||||||||||||||||
2nd Quarter | Year-to-date | |||||||||||||||||||||||
1st Quarter | Percent Change | 2005 vs. 2004 | 2005 vs. 2004 | |||||||||||||||||||||
Global Structured Finance In millions | 2005 | Restated 2004 | 2005 vs. 2004 | 2005 | Restated 2004 | 2005 | Restated 2004 | |||||||||||||||||
Gross premiums written: | ||||||||||||||||||||||||
U.S. | $ | 65 | $ 75 | (12 | )% | $ | 63 | $ 70 | $ | 128 | $144 | (10 | )% | (11 | )% | |||||||||
Non-U.S. | 39 | 43 | (11 | )% | 44 | 51 | 83 | 95 | (14 | )% | (12 | )% | ||||||||||||
Total | $ | 104 | $118 | (12 | )% | $ | 107 | $121 | $ | 211 | $239 | (12 | )% | (12 | )% | |||||||||
Net premiums written: | ||||||||||||||||||||||||
U.S. | $ | 55 | $ 63 | (13 | )% | $ | 53 | $ 59 | $ | 108 | $123 | (10 | )% | (12 | )% | |||||||||
Non-U.S. | 27 | 32 | (15 | )% | 32 | 41 | 59 | 73 | (23 | )% | (20 | )% | ||||||||||||
Total | $ | 82 | $ 95 | (14 | )% | $ | 85 | $100 | $ | 167 | $196 | (15 | )% | (15 | )% | |||||||||
Net premiums earned: | ||||||||||||||||||||||||
U.S. | $ | 54 | $ 53 | 2 | % | $ | 54 | $ 61 | $ | 109 | $114 | (10 | )% | (4 | )% | |||||||||
Non-U.S. | 28 | 27 | 2 | % | 31 | 29 | 58 | 56 | 3 | % | 3 | % | ||||||||||||
Total | $ | 82 | $ 80 | 2 | % | $ | 85 | $ 90 | $ | 167 | $170 | (6 | )% | (2 | )% |
23
MBIA Inc. and Subsidiaries
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
In the second quarter of 2005, global structured finance GPW decreased 12% to $107 million from $121 million in the second quarter of 2004 as a result of decreases in U.S. and non-U.S. business written. Similarly, NPW decreased 15% due to the decrease in GPW and slightly higher cession rates on non-U.S. business written. In the second quarter of 2005, global structured finance net premiums earned of $85 million decreased 6% compared with the second quarter of 2004. U.S. net premiums earned decreased 10% as a result of prepayments and maturities of insured issues offset by a 3% increase in non-U.S. business driven by higher levels of new business written over the last several years and a declining cession rate.
Global structured finance GPW decreased 12% in the first quartersix months of 2005 to $104$211 million from $118$239 million in the first quartersix months of 2004, as a result ofresulting from decreases in U.S. and non-U.S. business written. The global structured finance sector continues to be adversely impacted by increased competition, tight spreads and greater investor demand for uninsured transactions. Similarly, NPW for the first six months of 2005 decreased 14%15% due to the decrease in GPW and slightly higher cession rates on U.S. and non-U.S. business written. In the first quartersix months of 2005, global structured finance net premiums earned of $82$167 million increasedwere 2% overbelow the first quartersix months of 2004. This increaseA decrease in U.S. net premiums earned as a result of prepayments and maturities of insured issues was
MBIA Inc. and Subsidiaries
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
driven offset by higher levels of non-U.S. new business written over the last twoseveral years and a declining cession rate.
The credit quality of MBIA’s global structured finance insured business written rated A or above before giving effect to the Company’s guarantee was 64% in the first quarterhalf of 2005, up from 56%55% in the first quarterhalf of 2004. At March 31,June 30, 2005, 77%76% of the outstanding global structured finance book of business was rated A or above before giving effect to the Company’s guarantee, up from 73%74% at March 31,June 30, 2004.
INVESTMENT INCOME The Company’s insurance-related net investment income and ending asset balances at amortized cost for the second quarter and first threesix months of 2005 and 2004 are presented in the following table:
2nd Quarter | Year-to-date | Percent Change | |||||||||||||||||||||||||
2nd Quarter | Year-to-date | ||||||||||||||||||||||||||
2005 vs. 2004 | 2005 vs. 2004 | ||||||||||||||||||||||||||
Percent Change | |||||||||||||||||||||||||||
In millions | 2005 | 2004 | 2005 vs. 2004 | 2005 | 2004 | 2005 | 2004 | ||||||||||||||||||||
Pre-tax income | $ | 119 | $ | 122 | (2 | )% | $ | 121 | $ | 115 | $ | 240 | $ | 237 | 5 | % | 1 | % | |||||||||
After-tax income | $ | 95 | $ | 95 | (1 | )% | $ | 96 | $ | 91 | $ | 191 | $ | 186 | 6 | % | 2 | % | |||||||||
Ending asset balances at amortized cost | $ | 9,360 | $ | 9,229 | 1 | % | $ | 9,687 | $ | 9,479 | 2 | % |
The Company’s insurance-related net investment income, excluding net realized gains decreased 2%and losses, increased 5% to $119$121 million in the firstsecond quarter of 2005 from $122$115 million in the firstsecond quarter of 2004. After-tax net
24
MBIA Inc. and Subsidiaries
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
investment income increased 6% compared with the second quarter of 2004. For the six months ended June 30, 2005, net investment income increased 1% to $240 million from $237 million for the six months ended June 30, 2004. After-tax net investment income decreased 1% compared with 2004.increased 2% for the first six months of 2005. The marginally higher increase in after-tax investment income is a result of a slightly higher concentration of tax-exempt investments. Growth in investment income has been unfavorably affected by the low interest rate environment and a substantial increase in dividends paid by MBIA Corp. to MBIA Inc. during 2004, which resulted in only a 1%2% increase in the insurance portfolio’s ending asset balance at amortized cost from March 31,June 30, 2004 to March 31,June 30, 2005.
ADVISORY FEES The Company collects advisory fees in connection with certain transactions. Depending upon the type of fee received and whether it is related to an insurance policy, the fee is either earned when it is due or deferred and earned over the life of the related transaction. Work, waiver and consent, termination, administrative and management fees are earned when the related services are completed. Structuring fees are earned on a straight-line basis over the life of the related insurance policy and commitment fees are earned on a straight-line basis over the commitment period.
In the firstsecond quarter of 2005, advisory fee revenues increased 10%decreased 75% to $6.4$4 million from $5.9$17 million in the first quarter of 2004. The increase in advisory fees was primarily due to the
MBIA Inc. and Subsidiaries
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
amortization of a commitment fee received in the second quarter of 2004. Advisory fee revenues for the first half of 2005 decreased 54% from the first half of 2004 partially offset by lower managementto $11 million. The decrease in advisory fees during the second quarter and terminationfirst six months was primarily due to a decline in work fees receivedreflecting fewer large complex transactions requiring advisory services, as well as a decline in waiver and earned in 2005.consent and commitment fees. Due to the transaction-specific nature inherent in advisory fees, fee income can vary significantly from period to period.
NET GAINS AND LOSSES Net realized gains from investment securities in the insurance operations were $0.2$1 million in the firstsecond quarter of 2005 compared to $46$17 million in the firstsecond quarter of 2004. For the first six months of 2005, net realized gains from investment securities were $1 million compared to $63 million for the first six months of 2004. The decrease wasdecreases for the quarter and year were largely due to a $33 million and $44 million realized gain, respectively, resulting from the sale of a common stock investment in the first quarter of 2004 held by MBIA Corp.
Net gains (losses) on derivative instruments and foreign exchange from the insurance operations were net gains of $4 million in the second quarter of 2005 compared with net gains of $210 thousand in the second quarter of 2004. The change was largely due to $7 million of foreign currency gains recorded in the second quarter of 2005 related to non-U.S. dollar holdings. For the first six months of 2005, net gains (losses) on derivative instruments and foreign exchange from the insurance operations were net losses of $6$2 million in the first quarter of 2005 compared towith net gains of $1 million infor the first quartersix months of 2004. The change was largely due to $8 million
25
MBIA Inc. and Subsidiaries
Management’s Discussion and Analysis
of foreign currency losses recorded in 2005 related to non-U.S. dollar holdingsFinancial Condition and securities sales.Results of Operations
LOSSES AND LOSS ADJUSTMENT EXPENSES (LAE) The following table shows the case-specific, reinsurance recoverable and unallocated components of the Company’s total loss and LAE reserves at the end of the firstsecond quarter of 2005 and 2004, as well as its loss provision and loss ratio for the first quartersix months of 2005 and 2004.
March 31, | Percent Change | |||||||||
In millions | 2005 | Restated 2004 | 2005 vs. 2004 | |||||||
Case-specific: | ||||||||||
Gross | $ | 463 | $420 | 10 | % | |||||
Reinsurance recoverable on unpaid losses | 33 | 42 | (22 | )% | ||||||
Net case reserves | $ | 430 | $378 | 14 | % | |||||
Unallocated | 293 | 342 | (15 | )% | ||||||
Net loss and LAE reserves | $ | 723 | $720 | 0 | % | |||||
Gross loss and LAE reserves | $ | 756 | $762 | (1 | )% | |||||
Losses and LAE(1) | $ | 20 | $ 19 | 5 | % | |||||
Loss ratio(2) | 9.9 | % | 9.6 | % | ||||||
June 30, | Percent Change | ||||||||
In millions | 2005 | Restated 2004 | 2005 vs. 2004 | ||||||
Case-specific: | |||||||||
Gross | $373 | $327 | 14 | % | |||||
Reinsurance recoverable on unpaid losses | 43 | 27 | 57 | % | |||||
Net case basis reserves | $330 | $300 | 10 | % | |||||
Unallocated | 295 | 331 | (11 | )% | |||||
Net loss and LAE reserves | $625 | $631 | (1 | )% | |||||
Gross loss and LAE reserves | $668 | $658 | 1 | % | |||||
Losses and LAE(1) | $ 42 | $ 40 | 4 | % | |||||
Loss ratio(2) | 10.0 | % | 9.7 | % | |||||
(1) | Calculated as 12% of scheduled net earned premium. |
(2) | Calculated as losses and LAE divided by total net earned premium. This ratio differs from the Company’s loss factor of 12% as total net earned premium includes premium earnings that have been accelerated as a result of the refunding or defeasance of insured obligations, while the loss factor is applied only to scheduled net earned premium. |
The Company recorded $20$42 million in loss and loss adjustment expenses in the first quarterhalf of 2005, a 5%4% increase compared to $19$40 million in the first quarterhalf of 2004. This increase was a
MBIA Inc. and Subsidiaries
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
direct result of growth in scheduled net earned premium, as scheduled net earned premium is the base upon which the Company’s 12% loss factor is applied. At March 31,June 30, 2005, the Company had $293$295 million in unallocated loss reserves, which represent the Company’s estimate of losses associated with credit deterioration that has occurred in the Company’s insured portfolio and are available for future case-specific activity. Total case basis activity transferred from the Company’s unallocated loss reserve was $19$38 million and $14$45 million in the first quarterhalf of 2005 and 2004, respectively. Case basis activity during the first quarterhalf of 2005 primarily consisted of additional loss reserves for MBIA’s guaranteed tax lien portfolios, insured obligations issued by Fort Worth Osteopathic Hospital, a mortgage-backed credit and Allegheny Health, Education and Research Foundation. During the second quarter of 2005, the Company paid $59 million related to its guarantee of the obligations issued by Fort Worth Osteopathic Hospital, which was charged against the case basis reserve established for these obligations.
MBIA’s Insured Portfolio Management (IPM) Division is responsible for monitoring MBIA insured issues. The level and frequency of MBIA’s monitoring of any insured issue depends on the type, size, rating and performance of the insured issue. If IPM identifies concerns with respect to the performance of an insured issue it
26
MBIA Inc. and Subsidiaries
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
may designate such insured issue as “Caution List-Low,” “Caution List-Medium” or “Caution List-High.” The designation of any insured issue as “Caution List-Medium” or “Caution List-High” is based on the nature and extent of these concerns and requires that an increased monitoring and, if needed, a remediation plan be implemented for the related insured issue.
In the event MBIA determines that it must pay a claim or that a claim is probable and estimable with respect to an insured issue, it places the issue on its “Classified List” and establishes a case basis reserve for that insured issue. As of March 31,June 30, 2005, MBIA had 3932 open case basis issues on its “Classified List” that had $430$330 million in aggregate case reserves, net of reinsurance. The Company does not establish any case basis reserves for issues that are listed as “Caution List-Low,” “Caution List-Medium” or “Caution List-High” until such issues are placed on the Company’s “Classified List.”
MBIA Inc. and Subsidiaries
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
Included in the Company’s case basis reserves are both loss reserves for insured obligations for which a payment default has occurred and MBIA has already paid a claim and also for which a payment default has not yet occurred but a claim is probable and estimable in the future. Such amounts as of March 31,June 30, 2005 are as follows:
Dollars in millions | Number of Case Basis Issues | Loss Reserve | Par Outstanding | Number of Case Basis Issues | Loss Reserve | Par Outstanding | ||||||
Gross of reinsurance: | ||||||||||||
Issues with defaults | 31 | $378 | $1,032 | 24 | $288 | $1,433 | ||||||
Issues without defaults | 8 | 85 | 1,955 | 8 | 85 | 1,839 | ||||||
Total gross | 39 | $463 | $2,987 | 32 | $373 | $3,272 | ||||||
Net of reinsurance: | ||||||||||||
Issues with defaults | 31 | $362 | $ 994 | 24 | $269 | $1,249 | ||||||
Issues without defaults | 8 | 68 | 1,746 | 8 | 61 | 1,605 | ||||||
Total net | 39 | $430 | $2,740 | 32 | $330 | $2,854 | ||||||
When MBIA becomes entitled to a reimbursement of a claim payment under salvage and subrogation rights, it records the amount that it estimates it will recover as salvage and subrogation as an asset. Such amounts are included in the Company’s balance sheet within “Other assets.” As of March 31,June 30, 2005 and December 31, 2004, the Company had recorded salvage and subrogation of $157$140 million and $139$154 million, respectively.
As a result of discussions in January and February 2005 between the Securities and Exchange Commission (SEC) staff and several financial guarantee industry participants, including MBIA, the Company understandsunderstood that the Financial Accounting Standards Board (FASB) staff is consideringwould consider whether additional guidance with respect to accounting for financial guarantee insurance should be provided. In June 2005, the FASB decided to add to its agenda a project to consider the accounting by insurers for financial guarantee insurance. As part of this project the FASB will consider several aspects of the insurance accounting model for financial guarantee insurers, including claims liability recognition, premium recognition and the related amortization of deferred policy acquisition costs. The Company cannot currently assess how the FASB’s and SEC staff’s ultimate resolution of
27
MBIA Inc. and Subsidiaries
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
this issue will impact its loss reserving policy or the effect it might have on recognizing premium revenue and policy acquisition costs. Until the issue is resolved, the Company intends to continue to apply its existing policy with respect to the establishment of both case basis and unallocated loss reserves.reserves and the recognition of premium revenue and policy acquisition costs. A further description of the Company’s loss reserving policy is included in “Note 3: Significant Accounting Policies” in the Notes to Consolidated Financial Statements included in the Company’s Form 10-K for the year ended December 31, 2004.
RISK MANAGEMENT In an effort to mitigate losses, MBIA is regularly involved in the ongoing remediation of credits that may involve, among other things, waivers or renegotiations of financial covenants or triggers, waivers of contractual provisions, the granting of consents, and the taking of various other remedial actions. The nature of any remedial action is based on the type of the insured issue and the nature and scope of the event giving rise to the remediation. In most cases, as part of any such remedial activity, MBIA is able to improve its security position and to obtain concessions from the issuer of the insured bonds. From time to time, the issuer of
MBIA Inc. and Subsidiaries
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
an MBIA-insured obligation may, with the consent of MBIA, restructure the insured obligation by extending the term, increasing or decreasing the par amount or decreasing the related interest rate with MBIA insuring the restructured obligation. If, as the result of the restructuring, MBIA estimates that it will suffer an ultimate loss on the restructured obligation, MBIA will record a case basis loss reserve for the restructured obligation or, if it has already recorded a case basis loss reserve, it will re-evaluate the impact of the restructuring on the recorded reserve and adjust the amount of the reserve accordingly.
REINSURANCE Reinsurance enables the Company to cede exposure for purposes of increasing its capacity to write new business while complying with its single risk and credit guidelines. The rating agencies continuously review reinsurers providing coverage to the financial guarantee industry. Many of MBIA’s reinsurers have been downgraded over the past several years, and others remain under review. When a reinsurer is downgraded, less capital credit is given to MBIA under rating agency models. Reduced capital credit associated with reinsurer downgrades has not and is not expected to have a material adverse effect on the Company. The Company generally retains the right to reassume the business ceded to reinsurers under certain circumstances, including the downgrade of the reinsurers. The Company remains liable on a primary basis for all reinsured risks, and although the Company believes that its reinsurers remain capable of meeting their obligations, there can be no assurance that the reinsurers will be able to meet these obligations.
As of March 31, 2005, the aggregate amount of insured par ceded by MBIA to reinsurers was $84.7 billion. The following table shows the percentage ceded to and reinsurance recoverable from reinsurers by S&P’s rating levels:
Reinsurers’ S&P Rating Range | Percent of Total Par Ceded | Reinsurance Recoverable (in thousands) | ||||
AAA | 76.67 | % | $ | 11,014 | ||
AA | 12.38 | % | 8,638 | |||
A | 10.86 | % | 13,226 | |||
Not Currently Rated | 0.08 | % | 324 | |||
Non-Investment Grade | 0.01 | % | — | |||
Total | 100 | % | $ | 33,202 | ||
The top two reinsurers within the AAA rating category represented approximately 55% of total par ceded by MBIA; the top two reinsurers within the AA rating category represented28
MBIA Inc. and Subsidiaries
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
As of June 30, 2005, the aggregate amount of insured par ceded by MBIA to reinsurers was $82.7 billion. The following table shows the percentage ceded to and reinsurance recoverable on unpaid losses from reinsurers by S&P’s rating levels:
Reinsurers’ S&P Rating Range | Percent of Total Par Ceded | Reinsurance Recoverable on Unpaid Losses (in thousands) | |||
AAA | 77.12 | % | $14,724 | ||
AA | 12.56 | % | 12,960 | ||
A | 10.23 | % | 14,890 | ||
Not Currently Rated | 0.08 | % | 295 | ||
Non-Investment Grade | 0.01 | % | — | ||
Total | 100 | % | $42,869 | ||
The top two reinsurers within the AAA rating category represented approximately 58% of total par ceded by MBIA; the top two reinsurers within the AA rating category represented approximately 8% of total par ceded by MBIA; and the top two reinsurers within the A rating category represented approximately 11%10% of total par ceded by MBIA. While Channel Reinsurance Ltd. (Channel Re) continues to be a Triple-A rated reinsurer of MBIA, S&P has revised their outlook on Channel Re from stable to negative. MBIA does not expect S&P’s revised outlook on Channel Re to have a material negative impact on the Company’s financial condition or results of operations.
POLICY ACQUISITION COSTS AND OPERATING EXPENSES Expenses that vary with and are primarily related to the production of the Company’s insurance business (policy acquisition costs) are deferred and recognized over the period in which the related premiums are earned. If an insured bond issue is refunded and the related premium is earned early, the associated acquisition costs previously deferred are also recognized early.
MBIA will recognize a premium deficiency if the sum of the expected loss and loss adjustment expenses, maintenance costs and unamortized policy acquisition costs exceed the related unearned premiums. If MBIA was to have a premium deficiency that is greater than unamortized acquisition costs, the unamortized acquisition costs would be reduced by a charge to expense and a liability would be established for any remaining deficiency. Although GAAP permits the inclusion of anticipated investment income when determining a premium deficiency, MBIA currently does not include this in making its determination.
29
MBIA Inc. and Subsidiaries
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
The Company’s policy acquisition costs, operating expenses and total insurance operating expenses, as well as its expense ratio, are shown in the following table:
2nd Quarter | Year-to-date | Percent Change | |||||||||||||||||||||||||||||||
2nd Quarter | Year-to-date | ||||||||||||||||||||||||||||||||
2005 vs. 2004 | 2005 vs. 2004 | ||||||||||||||||||||||||||||||||
1st Quarter | Percent Change | ||||||||||||||||||||||||||||||||
In millions | 2005 | Restated 2004 | 2005 vs. 2004 | 2005 | 2004 | 2005 | 2004 | ||||||||||||||||||||||||||
Gross expenses | $ | 63 | $ | 60 | 4 | % | $ | 67 | $ | 66 | $ | 129 | $ | 126 | 1 | % | 3 | % | |||||||||||||||
Amortization of deferred acquisition costs | $ | 16 | $ | 16 | 5 | % | $ | 17 | $ | 17 | $ | 33 | $ | 32 | 0 | % | 2 | % | |||||||||||||||
Operating expenses | 29 | 28 | 6 | % | |||||||||||||||||||||||||||||
Operating | 32 | 29 | 61 | 57 | 11 | % | 8 | % | |||||||||||||||||||||||||
Total insurance operating expenses | $ | 45 | $ | 44 | 5 | % | $ | 49 | $ | 46 | $ | 94 | $ | 89 | 7 | % | 6 | % | |||||||||||||||
Expense ratio | 22.0 | % | 21.4 | % | 23.3 | % | 21.7 | % | 22.7 | % | 21.5 | % | |||||||||||||||||||||
In the firstsecond quarter of 2005, the amortization of deferred acquisition costs remained relatively flat compared with the same period in 2004, which was consistent with the change in insurance premiums earned for the same periods. Operating expenses increased 5%11% over the firstsecond quarter of 2004 primarily due to costs associated with the Company’s Money Market Committed Preferred Custodial Trust securities (CPCT securities), approximately $2 million, and an increase in consulting services. Prior to 2005, the costs associated with the CPCT securities were recorded directly in “Total shareholders’ equity” on the Company’s consolidated balance sheet.
In the first six months of 2005, the amortization of deferred acquisition costs increased 2% over the same period of 2004, which was proportionately in line with the increase in the Company’s insurance premiums earned. The ratio of policy acquisition costs amortized to expense, net of deferrals, to earned premiums has remained steady at approximately 8% over the last several years. Operating expenses increased 6%8% from $28$57 million infor the first quarter ofsix months ended June 30, 2004 to $29$61 million infor the same period of 2005six months ended June 30, 2005. This increase is largely due to costs associated with the Company’s CPCT securities, higher premiums related to the renewal of directors and officers’ liability insurance, office maintenance and rent costsconsulting services and loss prevention costs.
MBIA Inc. and Subsidiaries
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
Financial guarantee insurance companies use the expense ratio (expenses divided by net premiums earned) as a measure of expense management. The Company’s expense ratio for the firstsecond quarter of 2005 was 22.0%23.3% compared to 21.4%21.7% in the firstsecond quarter of 2004. The increase in the ratio from 2004 to 2005 was the result of slower growth in premium earnings relative to the increase in expenses. For the six months ended June 30, 2005, the Company’s expense ratio of 22.7% increased from the ratio in the first half of 2004 of 21.5%.
VARIABLE INTEREST ENTITIES The Company provides structured funding and credit enhancement services to global finance clients through the use of certain MBIA-administered, bankruptcy-remote special purpose vehicles (SPVs) and through third-party SPVs. Third-party SPVs are used in a variety of structures guaranteed or
30
MBIA Inc. and Subsidiaries
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
managed by MBIA, whereby the Company has risks analogous to those of MBIA-administered SPVs. The Company has determined that such SPVs fall within the definition of a variable interest entity (VIE) under FASB Interpretation No. (FIN) 46(R), “Consolidation of Variable Interest Entities (Revised).” Under the provisions of FIN 46(R), MBIA must determine whether it has a variable interest in a VIE and if so, whether that variable interest would cause MBIA to be the primary beneficiary. The primary beneficiary is the entity that will absorb the majority of the expected losses, receive the majority of the expected residual returns, or both, of the VIE and is required to consolidate the VIE.
In the third quarter of 2004, the Company began consolidating two VIEs established in connection with the Capital Asset Research Funding Series 1997A and Series 1998A tax lien securitizations to which the Company provided financial guarantees. The assets of these entities, which are principally reported within “Other assets” on MBIA’s consolidated balance sheet, totaled $13.3$11 million at March 31,June 30, 2005 and $16.8$17 million at December 31, 2004. Liabilities of the securitizations substantially represented amounts due to MBIA, which were eliminated in consolidation. Additionally, the Company began consolidating a third-party VIE in 2003 as a result of providing a financial guarantee to this entity. The assets and liabilities of this VIE are primarily reported in “Investments held-to-maturity” and “Variable interest entity floating rate notes,” respectively, on the face of the Company’s balance sheet and each totaled approximately $801 million at June 30, 2005 and $600 million each at March 31, 2005 and December 31, 2004. Consolidation of such VIEs does not increase MBIA’s exposure above that already committed to in its insurance policies.
INVESTMENT MANAGEMENT SERVICES
The Company’s investment management services operations provide an array of products and services to the public, not-for-profit and corporate sectors. Such products and services are provided primarily through wholly owned subsidiaries of MBIA Asset Management, LLC
MBIA Inc. and Subsidiaries
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
(MBIA-AML) and include cash management, discretionary asset management and fund administration services and investment agreement, medium-term note and commercial paper programs related to the origination of assets for investment purposes. The investment management services operations are comprised of three operating segments: asset/liability products, which include investment agreements and medium-term notes (MTNs) not related to the conduit programs,programs; investment advisory services, which include third-party and related-party advisory services,services; and conduit programs. During the second quarter of 2004, the Company completed the sale of the assets of 1838 Investment Advisors, LLC, (1838), which comprised the Company’s equity advisory services segment. This segment ishas been reported as a discontinued operation forin the quarter ended March 31, 2004.Company’s financial statements.
Investment management services’ revenues for the firstsecond quarter of 2005 totaled $201$202 million, increasing 86%47% compared to the firstsecond quarter of 2004. Excluding net realized gains of $3 millionand losses from investment securities and gains and losses on derivative instruments and foreign exchange, of $11 million, total revenues increased $65$80 million or 53% 64%
31
MBIA Inc. and Subsidiaries
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
over the firstsecond quarter of 2004. For the first six months of 2005, total revenues of $402 million increased 64% over the same period in 2004. Excluding realized gains and losses from investment securities and gains and losses on derivative instruments and foreign exchange, revenues of $393 million increased 59% over 2004. This growth is primarily attributable to increased activity in the Company’s asset/liability products, particularly the investment agreements and conduit programs.MTNs. Advisory Services’services’ revenues were also favorable compared to the first quarter of 2004 due to an increasegrowth in new business.separate client account assets managed, partially offset by a decline in pooled account balances and fees. Total expenses in the firstsecond quarter of 2005 were $164$186 million, up 49%68% compared to the firstsecond quarter of 2004. For the six months ended June 30, 2005, total expenses increased 59% over the same period in 2004 to $350 million. This increase was primarily driven by higher interest expense from increased asset/liability products and conduit program activity, which was consistent with the growth in revenues, partially offset by a non-recurring reduction in compensation expenses.revenues.
Net realized gainslosses from investment securities in the investment management services operations were $3$2 million in the firstsecond quarter of 2005, compared to net realized losses of $2$1 million in the firstsecond quarter of 2004. For the six months ended June 30, 2005, net realized gains were $1 million compared to a loss of $3 million in the same period of 2004. Realized gains and losses were generated from the ongoing active total return management of the investment portfolios. Net gainslosses on derivative instruments and foreign exchange related to the investment management services operations were $11$3 million in the firstsecond quarter of 2005 compared to a net lossgain of $12 million in the firstsecond quarter of 2004. The net gainslosses in 2005 were primarily generated from an increasea decrease in U.S. dollar interest rates resulting in higherlower market values on pay fixed/receive floatfloating U.S. dollar interest rate swaps associated with the conduit programs. Similarly, the net lossesgains on derivative instruments and foreign exchange in 2004 were largely due to movements in interest rates on interest rate swaps associated with the conduit programs. For the first six months of 2005, net gains on derivative instruments and foreign exchange totaled $8 million compared to a net gain of $4 thousand in 2004. The increase in net gains was primarily attributable to changes in the value of interest rate swaps affected by overall higher interest rates for the first six months of 2005 versus the first six months of 2004. These interest rate swaps economically hedge against interest rate movements but do not qualify for hedge accounting treatment under Statement of Financial Accounting Standards (SFAS)133, “Accounting for Derivative Instruments and Hedging Activities.”
MBIA Inc. and Subsidiaries
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
Fixed-income ending assets under management as of March 31,June 30, 2005, which do not include conduit program assets, were $42$44 billion, 8%13% above the 2004 year-end level and 6%18% above the March 31,June 30, 2004 level. Conduit assets are held to their contractual maturity and are originated and managed differently from those held as available-for-sale by the Company or those managed for third parties. The following table summarizes the consolidated investment management services’ results and assets under management for the second quarter and first quartersix months of 2005 and 2004:
Percent Change | ||||||||||
In millions | 2005 | 2004 | 2005 vs. 2004 | |||||||
Interest and fees | $ | 187 | $ | 122 | 53 | % | ||||
Net realized gains (losses) | 3 | (2 | ) | 276 | % | |||||
Net gains (losses) on derivative instruments and foreign exchange | 11 | (12 | ) | 195 | % | |||||
Total revenues | 201 | 108 | 86 | % | ||||||
Interest expense | 150 | 91 | 64 | % | ||||||
Operating expenses | 14 | 19 | (23 | )% | ||||||
Total expenses | 164 | 110 | 49 | % | ||||||
Pre-tax income | $ | 37 | $ | (2 | ) | 2,250 | % | |||
Ending assets under management: | ||||||||||
Fixed-income | $ | 42,361 | $ | 39,841 | 6 | % | ||||
32
MBIA Inc. and Subsidiaries
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
2nd Quarter | Year-to-date | Percent Change | |||||||||||||||||||
In millions | 2005 | 2004 | 2005 | 2004 | 2nd Quarter | Year-to-date | |||||||||||||||
Interest and fees | $ | 206 | $ | 126 | $ | 393 | $ | 248 | 64 | % | 59 | % | |||||||||
Net realized gains (losses) | (2 | ) | (1 | ) | 1 | (3 | ) | (31 | )% | 158 | % | ||||||||||
Net gains (losses) on derivative instruments and foreign exchange | (3 | ) | 12 | 8 | 0 | (129 | )% | 100 | % | ||||||||||||
Total revenues | 201 | 137 | 402 | 245 | 47 | % | 64 | % | |||||||||||||
Interest expense | 167 | 92 | 317 | 184 | 81 | % | 73 | % | |||||||||||||
Operating expenses | 19 | 19 | 33 | 37 | 2 | % | (10 | )% | |||||||||||||
Total expenses | 186 | 111 | 350 | 221 | 68 | % | 59 | % | |||||||||||||
Pre-tax income | $ | 15 | $ | 26 | $ | 52 | $ | 24 | (40 | )% | 118 | % | |||||||||
Fixed-income ending assets under management | $ | 44,149 | $ | 37,440 | 18 | % | |||||||||||||||
The following provides a summary of the results of each of the investment management services businesses by segment.
Asset/liability products’ pre-tax income, excluding realized gains and losses from investment securities and gains and losses on derivative instruments and foreign currency losses,exchange, totaled $15$12 million in the firstsecond quarter of 2005 compared to $9 million in the firstsecond quarter of 2004, resulting in an increase of 73%29%. For the first six months of 2005, pre-tax income of $27 million, excluding realized gains and losses from investment securities and gains and losses on derivative instruments and foreign exchange, increased 50% over 2004. At March 31,June 30, 2005, principal and accrued interest outstanding on investment agreement and medium-term note obligations and securities sold under agreements to repurchase totaled $14$15 billion compared to $13 billion at December 31, 2004. Assets supporting these agreements had market values of $14$15 billion and $13 billion at March 31,June 30, 2005 and December 31, 2004, respectively. These assets are comprised of high quality securities with an average credit quality rating of Double-A.
Advisory services’ pre-tax income, excluding realized gains and losses from investment securities and gains and losses on derivative instruments and foreign currency losses,exchange, totaled $5 million in the firstsecond quarter of 2005 compared to $4 million in the firstsecond quarter of 2004. The increase is primarily due to new business volumeFor the first six months of 2005, pre-tax income of $10 million, excluding realized gains and losses from newinvestment securities and existing
MBIA Inc.gains and Subsidiaries
Management’s Discussionlosses on derivative instruments and Analysis
of Financial Condition and Results of Operations
clients.foreign exchange, increased 30% over 2004. Third-party ending assets under management were $18 billion and $16 billion at March 31,June 30, 2005 and December 31, 2004, respectively. The market values of assets related to the Company’s insurance and corporate investment portfolios managed by the investment management services operations at March 31,June 30, 2005 were $10 billion, consistent with the balance at December 31, 2004.
33
MBIA Inc. and Subsidiaries
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
Conduit program pre-tax income, excluding gains and losses on derivative instruments and foreign currency gains,exchange, totaled $3 million in the firstsecond quarter of 2005 compared to a break-even result$2 million in the firstsecond quarter of 2004. For the first six months of 2005, pre-tax income of $6 million, excluding gains and losses on derivative instruments and foreign exchange, increased $4 million over 2004. Certain of MBIA’s consolidated subsidiaries have invested in MBIA’s conduit debt obligations or have received compensation for services provided to MBIA’s conduits. As such, MBIA has eliminated intercompany transactions with its conduits from its balance sheet and income statement. After the elimination of such intercompany assets and liabilities, conduit investments and conduit debt obligations were $6.5$5.8 billion and $6.1$5.6 billion, respectively, at March 31,June 30, 2005. The difference between the investments and debt obligations is primarily the result of the elimination of conduit debt owned by other MBIA subsidiaries. The effect of the elimination on the Company’s consolidated balance sheet is a reduction of fixed-maturity investments with a corresponding reduction of medium-term notes.
Typically, conduit programs involve the use of rating agencies in assessing the quality of asset purchases and in assigning ratings to the various programs funded through the conduits. An underlying rating is the implied rating for the transaction without giving consideration to the MBIA guarantee. All transactions currently funded in the conduits had an underlying rating of at least investment grade by Moody’s and S&P prior to funding. The weighted average underlying rating for transactions currently funded in the conduits was A by S&P and A2 by Moody’s at the time such transactions were funded. MBIA estimates that the current weighted average underlying rating of all outstanding conduit transactions was A- by S&P and A2 by Moody’s as of March 31,June 30, 2005.
MUNICIPAL SERVICES
MBIA’s municipal services operations is consolidated under MuniServices Company (MBIA MuniServices) and provides revenue enhancement services and products to public-sector clients nationwide consisting of discovery, audit, collections/recovery and information (data) services. The municipal services operations also include Capital Asset Holdings GP, Inc. and certain affiliated entities (Capital Asset), a servicer of delinquent tax certificates.
In the second quarter of 2005, the municipal services operations reported pre-tax income of $0.3 million compared to pre-tax income of $0.2 million in the second quarter of 2004. Revenues decreased by 6% and expenses decreased by 8% due to a decline in the delinquent tax certificate portfolio serviced by Capital Asset as a result of tax certificate redemptions. For the six months ended June 30, 2005 and 2004, pre-tax income was $0.5 million and $0.3 million, respectively.
CORPORATE
The corporate operations consist of net investment income, net realized gains and losses on holding company investment assets, interest expense and corporate expenses. The corporate operations incurred a loss of $24
34
MBIA Inc. and Subsidiaries
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
Inmillion in the firstsecond quarter of 2005 the municipal services operations reported pre-tax income of $0.2 million compared to pre-tax incomea loss of $0.1$20 million in the first quartersame period of 2004. Revenues decreased by 6%For the six months ended June 30, 2005 and expenses decreased by 8%, which were largely impacted by a decline in2004, the delinquent tax certificate portfolio serviced by Capital Asset as a result of tax certificate redemptions.
CORPORATE
The corporate operations consist of net investment income, net realized gains and losses of holding company investment assets, interest expense and corporate expenses. The corporate operations incurred a loss of $19$43 million in the first quarter of 2005 compared to a $22and $42 million, loss in the same period of 2004.respectively.
Net investment income increased from $2$2.5 million in the firstsecond quarter of 2004 to $8$5.8 million in the firstsecond quarter of 2005. In the six months ended June 30, 2005, net investment income increased to $14 million from $5 million in the six months ended June 30, 2004. The increase was driven by substantially higher invested assets and a shift to longer term higher yielding investments. The increase in the invested assets resulted from additional debt issued by MBIA Inc. and dividends paid by MBIA Corp. to MBIA Inc. in the fourth quarter of 2004, somewhat offset by share repurchases of the Company’s common stock.
The corporate operations incurred $22 million of interest expense in the firstsecond quarter of 2005 compared to $18 million in the firstsecond quarter of 2004, a 24% increase. For the first six months of 2005 and 2004, the Company incurred interest expense of $44 million and $36 million, respectively. The increase in interest expense primarily resulted from the issuance of $350 million of debt, partially offset by the retirement of $50 million of debt, in the fourth quarter of 2004.
Corporate expenses were $7 million in the second quarter of 2005 compared to $4 million in the firstsecond quarter of 2004. For the six months of 2005, decreased 38%corporate expenses of $11 million increased from $6$10 million in the first quartersix months of 2004. The decrease isincrease in the second quarter of 2005 was principally due to legal costs associated with regulatory investigations. Information on these investigations is provided in “Note 7: Contingencies” in the Notes to Consolidated Financial Statements. The smaller increase for the first six months of 2005 was a result of an increase in legal and consulting costs recorded in 2005 offset by non-recurring costs incurred in the first quarter of 2004 associated with ASIA Ltd partly offset by additional legal and consulting costs incurred in the first quarter of 2005.a liquidated equity investment.
TAXES
MBIA’s tax policy is to optimize after-tax income by maintaining the appropriate mix of taxable and tax-exempt investments. However, the effective tax rate fluctuates from time to time as the Company manages its investment portfolio on an after-tax total return basis. The effective tax rate, including tax related to discontinued operations, for the firstsecond quarter of 2005 was 27.8%28.2%, downup from 28.3%28.1% for the firstsecond quarter of 2004. For the six months of 2005 and 2004 the effective tax rate was 28.0% and 28.2%, respectively, including tax related to discontinued operations.
MBIA Inc. and Subsidiaries
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
CAPITAL RESOURCES
The Company carefully manages its capital resources to minimize its cost of capital while maintaining appropriate claims-paying resources to sustain its Triple-A claims-paying ratings. Capital resources are defined by the Company as total shareholders’ equity, long-term debt issued for general corporate purposes and various soft
35
MBIA Inc. and Subsidiaries
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
capital credit facilities. Total shareholders’ equity at March 31,June 30, 2005 was $6.4$6.6 billion, with total long-term debt at $1.3 billion. The Company uses debt financing to lower its overall cost of capital. MBIA maintains debt at levels it considers to be prudent based on its cash flow and total capital.capital (shareholders’ equity plus long-term debt). The following table shows the Company’s long-term debt and the ratio used to measure it:
March 31, 2005 | December 31, 2004 | June 30, 2005 | December 31, 2004 | |||||||||||||
Long-term debt (in millions) | $ | 1,325 | $ | 1,333 | $ | 1,314 | $ | 1,333 | ||||||||
Long-term debt to total capital | 17 | % | 17 | % | 17 | % | 17 | % |
In August 1999, the Company announced that its board of directors had authorized the repurchase of 11.25 million shares of common stock of the Company, after adjusting for the 2001 stock split. The Company began the repurchase program in the fourth quarter of 1999. In July 2004, the Company completed the repurchase of all 11.25 million shares at an average price of $44.08 per share and received authorization from its board of directors to repurchase 1 million shares under a new repurchase program. On August 5, 2004, the Company’s board of directors authorized the repurchase of an additional 14 million shares of common stock in connection with the new repurchase program. As of March 31,June 30, 2005, the Company had repurchased a total of 7.610 million shares under the current plan at an average price of $57.43$57.25 per share, of which 3.55.9 million shares were repurchased in 2005 at an average price of $58.52$57.77 per share.
The Company has various soft capital credit facilities, such as lines of credit and equity-based facilities at its disposal, which further support its claims-paying resources. At March 31,June 30, 2005, MBIA Corp. maintained a $450 million limited recourse standby line of credit facility, reduced from $700 million at December 31, 2004, with a group of major Triple-A rated banks to provide funds for the payment of claims in excess of the greater of $500 million or 5% of average annual debt service with respect to public finance transactions. The agreement is for a ten-year term, amended from a seven-year term, which expires in March 2015.
MBIA Corp. has access to $400 million of Money Market Committed Preferred Custodial TrustCPCT securities (CPS securities) issued by eight trusts, which were created for the primary purpose of issuing CPSCPCT securities and investing the proceeds in high quality commercial paper or
MBIA Inc. and Subsidiaries
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
short-term U.S. Government obligations. MBIA Corp. has a put option to sell to the trusts the perpetual preferred stock of MBIA Corp. If MBIA Corp. exercises its put option, the trusts will transfer the proceeds to MBIA Corp. in exchange for the preferred stock that will be held by the trusts. The trusts are vehicles for providing MBIA Corp. the opportunity to access new capital at its sole discretion through the exercise of the put options. The trusts are rated AA and Aa2 by S&P and Moody’s, respectively. To date, MBIA Corp. has not exercised its put options under any of these arrangements.
From time to time, MBIA accesses the capital markets to support the growth of its businesses. As such, MBIA filed a $500 million registration statement on Form S-3 with the SEC utilizing a “shelf” registration process. In November 2004, the Company completed its $350 million debt issuance of senior notes and currently has in effect a shelf registration with the SEC for $150 million. This shelf registration permits the Company to issue various debt and equity securities described in the prospectus filed as part of the registration statement.
36
MBIA Inc. and Subsidiaries
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
LIQUIDITY
Cash flow needs at the parent company level are primarily for dividends to its shareholders and interest payments on its debt. Liquidity and operating cash requirements of the Company are met by its cash flows generated from operations, which were more than adequate in the first quarterhalf of 2005. Management of the Company believes that cash flows from operations will be sufficient to meet the Company’s liquidity and operating cash requirements for the foreseeable future.
Cash requirements have historically been met by upstreaming dividend payments from MBIA Corp., which generates substantial cash flow from premium writings and investment income. In the first quartersix months of 2005, the Company’s operating cash flow from continuing operations totaled $275.0$413 million compared to $217.2with $404 million in the first quartersix months of 2004. The majority of net cash provided by operating activities is generated from premium revenue and investment income in the Company’s insurance operations.
Under New York State insurance law, without prior approval of the superintendent of the state insurance department, financial guarantee insurance companies can pay dividends from earned surplus subject to retaining a minimum capital requirement. In MBIA Corp.’s case, dividends in any twelve-month period cannot be greater than 10% of policyholders’ surplus as shown on MBIA Corp.’s latest filed statutory financial statements.
MBIA Inc. and Subsidiaries
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
In addition to its regular dividends, in the fourth quarter of 2004 MBIA Corp. declared and paid a special dividend of $375 million to MBIA Inc., which was approved by the New York State Department of Insurance. As a result of the payment of the special dividend and under the formula applicable to the payment of dividends, MBIA Corp. may not pay any dividends without prior approval by the New York State Department of Insurance until the fourth quarter of 2005. In the first quarter of 2005, MBIA Corp. requested approval for the payment of additional special dividends as its capital position continues to exceed both the capital required by New York State Insurance Law and the rating agencies for purposes of maintaining its Triple-A ratings. Approval by the New York State Department of Insurance is still pending on this request.
The Company has significant liquidity supporting its businesses. At March 31,June 30, 2005, cash, cash equivalents and short-term investments totaled $2.4were approximately $2 billion. If, for any reason, significant cash flow reductions occur in any of its businesses, MBIA has alternatives for meeting ongoing cash requirements. They include selling or pledging its fixed-income investments in its investment portfolio, tapping existing liquidity facilities and new borrowings.
As part of MBIA’s external borrowing capacity, it maintained two bank lines totaling $500 million. These bank lines were maintained with a group of highly rated global banks and were comprised of a renewable $167 million facility with a term of 364 days and a $333 million facility with a five-year term maturing in April 2009. As of March 31, 2005, there were no balances outstanding under these agreements. In April 2005, the $167 million facility expired on its stated expiration date and the $333 million facility was increased to $500 million and the term was extended one year to April 2010. As of June 30, 2005, there were no balances outstanding under these agreements.
37
MBIA Inc. and Subsidiaries
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
The available-for-sale 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 March 31,June 30, 2005, the fair value of the consolidated available-for-sale investment portfolio was $24$26 billion, as shown in the following table:
March 31, 2005 | December 31, 2004 | Percent Change | June 30, 2005 | December 31, 2004 | Percent Change | ||||||||||||
In millions | 2005 vs. 2004 | 2005 vs. 2004 | |||||||||||||||
Available-for-sale investments: | |||||||||||||||||
Insurance operations: | |||||||||||||||||
Amortized cost | $ | 9,355 | $ 9,205 | 2 | % | $ | 9,632 | $ 9,205 | 5 | % | |||||||
Unrealized net gain (loss) | 371 | 531 | (30 | )% | 512 | 531 | (4 | )% | |||||||||
Fair value | $ | 9,726 | $ 9,736 | 0 | % | $ | 10,144 | $ 9,736 | 4 | % | |||||||
Investment management services operations: | |||||||||||||||||
Amortized cost | $ | 13,314 | $12,209 | 9 | % | $ | 14,639 | $12,209 | 20 | % | |||||||
Unrealized net gain (loss) | 322 | 398 | (19 | )% | 577 | 398 | 45 | % | |||||||||
Fair value | $ | 13,636 | $12,607 | 8 | % | $ | 15,216 | $12,607 | 21 | % | |||||||
Corporate operations: | |||||||||||||||||
Amortized cost | $ | 666 | $ 731 | (9 | )% | $ | 314 | $ 731 | (57 | )% | |||||||
Unrealized net gain (loss) | (7 | ) | 4 | (288 | )% | 7 | 4 | 104 | % | ||||||||
Fair value | $ | 659 | $ 735 | (10 | )% | $ | 321 | $ 735 | (56 | )% | |||||||
Total available-for-sale portfolio: | |||||||||||||||||
Amortized cost | $ | 23,335 | $22,145 | 5 | % | $ | 24,585 | $22,145 | 11 | % | |||||||
Unrealized net gain (loss) | 686 | 933 | (27 | )% | 1,096 | 933 | 18 | % | |||||||||
Fair value | $ | 24,021 | $23,078 | 4 | % | $ | 25,681 | $23,078 | 11 | % | |||||||
The increase in the amortized cost of insurance-related available-for-sale investments in 2005 was the result of positive cash flow from operations. However, this increase was offset by a decrease in unrealized gains largely due to a rise in interest rates from the fourth quarter of 2004. The increase in the amortized cost of available-for-sale investments in the investment management services operations was the result of growth in the Company’s asset/liability products program. Corporate investments decreased in the first quartersix months of 2005 due to increased share repurchase activity by the Company.
The fair value of the Company’s investments is based on quoted market prices, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. 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. When the Company holds its available-for-sale investments to maturity, unrealized gains or losses currently recorded in accumulated other comprehensive income in the shareholders’ equity section of the balance sheet will decrease over time as the investments approach maturity. As a result, the Company expects to realize a value substantially equal to amortized cost. However, when investments
38
MBIA Inc. and Subsidiaries
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
amortized cost. However, when investments are sold prior to maturity, the Company will realize any gains or losses in current net income. The conduit portfolios are considered held-to-maturity, as the Company has the ability and intent to hold these investments to their contractual maturity. Therefore, these portfolios are reported at amortized cost and are not adjusted to reflect unrealized changes in fair value.
The weighted average credit quality of the Company’s fixed-income investment portfolios has been maintained at Double-A since its inception. The quality distribution of the Company’s fixed-maturityfixed-income investment portfolios, excluding short-term investments, based on ratings from Moody’s as of March 31,June 30, 2005 is presented in the following table:
Insurance | Investment Management Services | Investments Held-to-Maturity | Total | Insurance | Investment Management Services | Investments Held-to- Maturity | Total | |||||||||||||||||||||||||||||||||||||||||
In millions | Fair Value | % of Fixed-Income | Fair Value | % of Fixed-Income | Fair Value | % of Fixed-Income | Fair Value | % of Fixed-Income | Fair Value | % of Fixed-Income | Fair Value | % of Fixed-Income | Fair Value | % of Fixed-Income | Fair Value | % of Fixed-Income | ||||||||||||||||||||||||||||||||
Aaa | $ | 6,285 | 67 | % | $ | 7,798 | 62 | % | $ | 6,520 | 92 | % | $ | 20,603 | 71 | % | $ | 6,452 | 68 | % | $ | 8,744 | 61 | % | $ | 5,751 | 88 | % | $ | 20,947 | 69 | % | ||||||||||||||||
Aa | 1,656 | 18 | % | 2,434 | 19 | % | — | — | 4,090 | 14 | % | 1,764 | 19 | % | 2,722 | 19 | % | — | — | 4,486 | 15 | % | ||||||||||||||||||||||||||
A | 1,271 | 14 | % | 1,958 | 15 | % | 600 | 8 | % | 3,829 | 13 | % | 1,175 | 12 | % | 2,665 | 19 | % | 800 | 12 | % | 4,640 | 15 | % | ||||||||||||||||||||||||
Baa | 88 | 1 | % | 82 | 1 | % | — | — | 170 | 1 | % | 93 | 1 | % | 161 | 1 | % | — | — | 254 | 1 | % | ||||||||||||||||||||||||||
Below investment grade | — | — | — | — | — | — | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||
Not rated | 5 | — | 326 | 3 | % | — | — | 331 | 1 | % | 2 | 0 | % | — | — | — | — | 2 | 0 | % | ||||||||||||||||||||||||||||
Total | $ | 9,305 | 100 | % | $ | 12,598 | 100 | % | $ | 7,120 | 100 | % | $ | 29,023 | 100 | % | $ | 9,486 | 100 | % | $ | 14,292 | 100 | % | $ | 6,551 | 100 | % | $ | 30,329 | 100 | % | ||||||||||||||||
MBIA’s consolidated investment portfolio includes investments that are insured by MBIA Corp. (MBIA Insured Investments). At March 31,June 30, 2005, MBIA Insured Investments, excluding conduit investments, at fair value represented $4.9$4.8 billion or 17%16% of the total fixed-income investment portfolio. Conduit investments represented $6.5$5.8 billion or 22%19% of the total fixed-income investment portfolio. Without giving effect to the MBIA guarantee of the MBIA Insured Investments in the consolidated investment portfolio, as of March 31,June 30, 2005, based on the actual or estimated underlying ratings (i) the weighted average rating of the investment portfolio would be in the Double-AAa range, (ii) the weighted average rating of just the MBIA Insured Investments in the investment portfolio would be in the Single-ABaa range and (iii) approximatelyless than 1% of the investment portfolio would be rated below investment grade.
The underlying ratings of the MBIA Insured Investments as of March 31,June 30, 2005 are reflected in the following table. Amounts represent the fair value of such investments including the benefit of the MBIA guarantee. The ratings in the table below are the lower underlying rating assigned by S&P or Moody’s when an underlying rating exists from either rating service, or when an external underlying rating is not available, the underlying rating is based on the Company’s best estimate of the rating of such investment.
39
MBIA Inc. and Subsidiaries
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
Underlying Ratings Scale In thousands | Insurance Portfolio | Investment Management Services Portfolio | Held-to- Maturity Investment Portfolio | Total | Insurance Portfolio | Investment Management Services Portfolio | Held-to- Maturity Investment Portfolio | Total | ||||||||||||||||
Aaa | $ | 43,941 | $ | 510,140 | $ | 1,247,548 | $ | 1,801,629 | $ | 45,750 | $ | 384,986 | $ | 1,095,594 | $ | 1,526,330 | ||||||||
Aa | 281,002 | 73,618 | 419,906 | 774,526 | 276,699 | 125,493 | 423,453 | 825,645 | ||||||||||||||||
A | 775,602 | 852,116 | 724,818 | 2,352,536 | 779,988 | 794,832 | 1,109,492 | 2,684,312 | ||||||||||||||||
Baa | 416,508 | 1,795,603 | 4,084,549 | 6,296,660 | 291,402 | 1,828,384 | 3,122,732 | 5,242,518 | ||||||||||||||||
Below investment grade | 5,227 | 189,261 | 43,548 | 238,036 | 121,013 | 132,162 | — | 253,175 | ||||||||||||||||
Total | $ | 1,522,280 | $ | 3,420,738 | $ | 6,520,369 | $ | 11,463,387 | $ | 1,514,852 | $ | 3,265,857 | $ | 5,751,271 | $ | 10,531,980 | ||||||||
The Company generates significant liquidity from its operations. Because of its risk management policies and procedures, diversification and reinsurance, the Company believes that the occurrence of an event that would significantly adversely affect liquidity is unlikely.
40
PART I - FINANCIAL INFORMATION
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There has been no material changes in the Company’s market risk during the first threesix months ended March 31,June 30, 2005. For additional information on market risk, refer to page 37 of the Company’s 2004 Annual Report or Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the heading “Market Risk” of the Company’s Form 10-K for the year ended December 31, 2004.
Item 4. Controls and Procedures
As of the end of the period covered by this report, an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934) was performed under the supervision and with the participation of the Company’s senior management, including the Chief Executive Officer and the Chief Financial Officer. Based on that evaluation, the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report. In addition, there have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) during the fiscal quarter to which this report relates that have materially affected, or are likely to materially affect, the Company’s internal control over financial reporting.
In July 2002, MBIA Corp. filed suit against Royal Indemnity Company (Royal), in the United States District Court for the District of Delaware, to enforce insurance policies that Royal issued on certain vocational student loan transactions that MBIA Corp. insured. To date, claims in the amount of approximately $350 million have been made under the Royal policies with respect to loans that have defaulted. MBIA Corp. expects that there will be additional claims made under the policies with respect to student loans that may default in the future. Royal has filed an action seeking a declaration that it is not obligated to pay on its policies. If Royal does not honor its policies, MBIA Corp. will be required to make payment on the notes it insured, and will incur material losses under its policies. In October 2003, the court granted MBIA Corp.’s motion for summary judgment and ordered Royal to pay all claims under its policies. While Royal has appealed the order, MBIA expects that the order will be upheld on appeal. As part of the appeals process, Royal has pledged $382$384 million of investment grade collateral to MBIA Corp. to secure the entire amount of the judgment, with interest, and has agreed to post additional security for future claims and interest. The Federal District Court has ordered Royal to comply with the pledge agreement.
MBIA Corp. believes that it will prevail in the litigation with Royal and will have no ultimate loss on these policies, although there can be no assurance that MBIA Corp. will in fact prevail. If MBIA Corp. does not prevail in the litigation and Royal does not make payments on the Royal Policies, MBIA Corp. expects to incur material losses under its policies. MBIA Corp. does not believe, however, that any such losses will have a material adverse effect on its financial condition.
In November 2004 the Company received identical document subpoenas from the Securities and Exchange Commission (SEC) and the New York Attorney General’s Office (NYAG) requesting information with respect to non-traditional or loss mitigation insurance products developed, offered or
(40)
sold by the Company to third parties from January 1, 1998 to the present. While the subpoenas did not identify any specific transaction, subsequent conversations with the SEC and the NYAG revealed that the investigation will includeincluded the reinsurance arrangements entered into by MBIA Corp. in 1998 in connection with the bankruptcy of the Delaware Valley Obligated Group, an entity that is part of the Pittsburgh-based Allegheny Health, Education and Research Foundation (AHERF).
On March 9, 2005, the Company received a subpoena from the U.S. Attorney’s Office for the Southern District of New York (U.S. Attorney) seeking information related to the reinsurance agreements it entered into in connection with the AHERF loss. On March 30, 2005,Thereafter, the Company has received additional subpoenas, substantively identical to each other, and additional informal requests, from the SEC and the NYAG that supplement the subpoenas it received in late 2004. The requests seekfor documents relating to the Company’s accounting treatment of advisory fees; its methodology for determining loss reserves and case reserves; instances of purchases of credit default protection on itself; and documents relating to Channel Reinsurance Ltd., a reinsurance company of which the Company is part owner. The requests cover the period January 1, 2000 to the present. other information.
The Company has been cooperating, and is cooperatingcontinuing to cooperate fully with the requests frominvestigations by the SEC, the NYAG and the U.S. Attorney.Attorney, and it is currently attempting to explore ways to resolve the issues under investigation. The investigations are, however, ongoing and the Company is unable to predict their outcome or whether efforts to resolve these issues will be successful.
41
During the past five weeks, theThe Company has been named as a defendant in the following putative securities class action suits:Anthony Capone v. MBIA Inc., et al.; (Case No. 05 CV 3514; S.D.N.Y.) (filed April 4, 2005);Thomas Cassady v. MBIA Inc., et al.; (Case No. 05 CV 3730; S.D.N.Y.) (filed April 7, 2005);Todd Simon v. MBIA Inc., et al.; (Case No. 05 CV 3636; S.D.N.Y.) (filed April 8, 2005);Mariss Partners, LLP v. MBIA Inc., et al. (Case No. 05 CV 3709; S.D.N.Y) (filed April 11, 2005); andAlan D. Sadowsky and Barbara S. Katvin v. MBIA Inc., et al.; (Case No. 05 CV 4150; S.D.N.Y.) (filed April 26, 2005). Joseph W. Brown, the Company’s Chairman and former Chief Executive Officer, Gary C. Dunton, the Company’s Chief Executive Officer, Nicholas Ferreri, the Company’s Chief Financial Officer, Neil G. Budnick, a Vice President of the Company and the Company’s former Chief Financial Officer and Douglas C. Hamilton, the Company’s Controller were also named as defendants in each of these suits. The plaintiffs in these cases assert claims under Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), Rule 10b-5 promulgated thereunder, and Section 20(a) of the Exchange Act. The plaintiffs in these lawsuits seek to act as representatives for a putative class consisting of purchasers of the Company’s stock during the period from August 5, 2003 to March 30, 2005 (the “Class Period”). The Company expects that additional putative class action lawsuits may be filed.
Although the individual lawsuits vary, the allegations include, among other things, violations of the federal securities laws arising out of the Company’s allegedly false and misleading statements about its financial condition and the defendant’s failure “to disclose or indicate” the following alleged facts: “(1) that MBIA, during the Class Period, overleveraged itself, deeply under-reserved against possible credit defaults, and overly exposed to guaranteeing risky structured financings; (2) that MBIA accelerated its recognition of current income by classifying many of its upfront guarantee fees as advisory fees taken at closing, rather than accounted for over the life of the bonds insured; (3) that MBIA improperly booked a $70 million payment received from Converium Re (then called Zurich Reinsurance North America) in 1998, which at the time was depicted as a loss-reducing reinsurance recovery for MBIA, but was, in substance, a loan; (4) that as result, MBIA financial statements were materially overstated by $60 million; (5) that MBIA artificially inflated premium income and portfolio credit quality by insuring bonds in the secondary market that were attracting prices lower than their stale credit ratings would dictate; (6) that MBIA’s low loss ratios resulted from the Company’s practice to defer recognizing problems rather than providing layers of excess collateral, other underwriting protection, and its self-proclaimed prowess at restructurings; (7) that MBIA set forth an illegal scheme of covering the loss, from the failed Allegheny Health, Education and Research Foundation (“Aherf”) bond issuance, with a retroactive reinsurance policy, giving it a reinsurance recovery of $170 million to cover the present value of the future Aherf interest and principal payments, which resulted in MBIA showing a better than 40% jump in pretax income that year — $565 million over what the income figure would have been without resort to the reinsurance; (8) that MBIA was dumping on Channel Reinsurance Ltd., a Bermuda reinsurer where MBIA owns a 17.4% interest, performing but troubled policies from its existing portfolio, with the provison that it could make up any quality problems later so that MBIA could buy time by getting potential workout loans off its balance sheet in order to make its financial results appear better; and (9) that the Company lacked adequate internal controls and was therefore unable to ascertain the true financial condition of the Company.” The plaintiffs allege that, as a result of these misleading statements or omissions, the Company’s stock traded at artificially inflated prices. These lawsuits seek unspecified compensatory damages in connection with purchases by members of the putative class of the Company’s stock at such allegedly inflated prices during the Class Period.
On July 25, 2005, the presiding judge issued an order consolidating these five cases into one action under the captionIn re MBIA Securities Litigation(Case No. 05 CV 3514; S.D.N.Y.) and named a lead plaintiff and lead counsel for the class. The Company anticipates that it will be receiving an amended complaint in respect of the consolidated action in September 2005.
There are no other material lawsuits pending or, to the knowledge of the Company, threatened, to which the Company or any of its subsidiaries is a party.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
From time to time, the Company repurchases shares of its common stock when, in the opinion of management, it is economically advantageous to do. In August, 1999, the Company’s board of directors authorized the repurchase of up to 11.25 million shares of the Company’s common stock (after adjusting
(41)
for the 2001 stock split). In July 2004, the Company completed the repurchase of all 11.25 million shares and received authorization from its board of directors to repurchase 1 million shares under a new repurchase program. On August 5, 2004, MBIA’s board of directors authorized the repurchase of an additional 14 million shares of its common stock in connection with the new repurchase program. The Company will only repurchase shares of its common stock under the repurchase program when it feels that it is economically attractive to do so and in conformity with regulatory and rating agency guidelines.
42
The following table sets forth repurchases made by the Company in each month during the firstsecond quarter of 2005:
Month | Total Number of Shares Purchased(1) | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plan(2) | Maximum Number of Shares That May Yet Be Purchased Under the Plan | |||||
January | 283,701 | $ | 61.72 | 201,600 | 10,705,900 | ||||
February | 1,301,568 | 59.03 | 1,281,000 | 9,424,900 | |||||
March | 2,075,364 | 57.86 | 1,993,700 | 7,431,200 |
Month | Total Number of Shares Purchased(1) | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plan(2) | Maximum Number of Shares That May Yet Be Purchased Under the Plan | |||||
April | 1,007,958 | $ | 53.49 | 1,003,500 | 6,427,700 | ||||
May | 26,938 | 55.92 | 0 | 6,427,700 | |||||
June | 1,513,127 | 58.89 | 1,431,800 | 4,995,900 |
(1) |
(2) | Repurchased pursuant to stock repurchase plans authorized by the Company’s board of directors in 2004. |
Item 4. Submission Of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of the Company was held on May 5, 2005 (the “Annual Meeting”). Proxies for the Annual Meeting were solicited pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the “Act”), there was no solicitation in opposition to the nine nominees of the Board of Directors of the Company listed in the Company’s Proxy Statement, dated March 30, 2005, for the Annual Meeting (the “Proxy Statement”), filed with the Securities and Exchange Commission, and said nine nominees were elected.
(42)
The following matters were acted upon by Company shareholders at the Annual Meeting, at which 121,046,043 shares of the Common Stock, $1.00 par value, of the Company (the “Common Stock”), or approximately 87.95 percent of the 137,630,961 shares of Common Stock entitled to vote at the Annual Meeting, were present in person or by proxies:
1. Election of Directors. The proposal to elect the Company’s Board of Directors was adopted with the following number of votes per director:
Nominees | In Favor | Withheld | In Favor | Withheld | ||||
Joseph W. Brown | 112,990,926 | 8,055,117 | 112,990,926 | 8,055,117 | ||||
C. Edward Chaplin | 118,669,165 | 2,376,878 | 118,669,165 | 2,376,878 | ||||
David C. Clapp | 117,432,066 | 3,613,977 | 117,432,066 | 3,613,977 | ||||
Gary C. Dunton | 113,030,950 | 8,015,093 | 113,030,950 | 8,015,093 | ||||
Claire L. Gaudiani | 117,429,239 | 3,616,804 | 117,429,239 | 3,616,804 | ||||
Daniel P. Kearney | 116,988,798 | 4,057,245 | 116,988,798 | 4,057,245 | ||||
Laurence H. Meyer | 118,741,826 | 2,304,217 | 118,741,826 | 2,304,217 | ||||
Debra J. Perry | 118,742,322 | 2,303,721 | 118,742,322 | 2,303,721 | ||||
John A. Rolls | 114,057,677 | 6,988,366 | 114,057,677 | 6,988,366 |
2. Approval of Adoption of MBIA Inc. Annual Incentive Plan. A resolution proposed by the Board of Directors of the Company that the shareholders approve the MBIA Inc. Annual Incentive Plan (the “Annual Incentive Plan”) was submitted to, and voted upon by, the shareholders of the Company at the Annual Meeting. There were 106,524,611 votes cast in favor of, and 3,681,575 votes cast against, said resolution. The holders of 899,438 shares of Common Stock abstained and there were “broker non-votes” in respect of 9,940,419 shares of Common Stock. Accordingly, the resolution received the affirmative vote of the holders of a majority of the Common Stock outstanding and entitled to vote at the Annual Meeting and, therefore, the resolution was adopted and the Annual Incentive Plan was approved by the shareholders. The resolution and information relating to the Annual Incentive Plan are set forth at pages 35 through 37, inclusive, of the Proxy Statement. The Annual Incentive Plan is set forth in its entirety as Appendix C to the Proxy Statement.
3. Approval of Adoption of MBIA Inc. 2005 Omnibus Incentive Plan. A resolution proposed by the Board of Directors of the Company that the shareholders approve the MBIA Inc. 2005 Omnibus Incentive Plan (the “Omnibus Incentive Plan”) was submitted to, and voted upon by, the shareholders of the Company at the Annual Meeting. There were 95,503,472 votes cast in favor of, and 14,725,016 votes cast against, said resolution. The holders of 877,236 shares of Common Stock abstained and there were “broker non-votes” in respect of 9,940,319 shares of Common Stock. Accordingly, the resolution received the affirmative vote of the holders of a majority of the Common Stock outstanding and entitled to vote at the Annual Meeting and, therefore, the resolution was adopted and the Omnibus Incentive Plan was approved by the shareholders. The resolution and information relating to the Annual Incentive Plan are set forth at pages 38 through 44, inclusive, of the Proxy Statement. The Annual Incentive Plan is set forth in its entirety as Appendix D to the Proxy Statement.
4. Approval of Amendment to Section 8 of the Certificate of Incorporation. A resolution proposed by the Board of Directors of the Company that the shareholders approve an amendment to the Company’s Certificate of Incorporation to
43
reduce to a simple majority the percentage of votes required to amend or repeal Section 8 of the Certificate of Incorporation, which Section discusses the factors that the Board of Directors of the Company is authorized to consider in the event of a proposed tender offer, merger or acquisition of the Company was submitted to, and voted upon by, the shareholders of the Company at the Annual Meeting. There were 119,466,506 votes cast in favor of, and 724,511 votes cast against, said resolution. The holders of 855,026 shares of Common Stock abstained and there were no “broker non-votes”. Accordingly, the resolution received the affirmative vote of the holders of over 80% of the Common Stock outstanding and entitled to vote at the Annual Meeting and, therefore, the resolution was adopted and the amendment to the Company’s Certificate of Incorporation was approved by the shareholders. The resolution and information relating to the amendment are set forth at pages 45 through 46, inclusive, of the Proxy Statement.
(43)
5. Approval of Amendment to Section 4 of the Certificate of Incorporation. A resolution proposed by the Board of Directors of the Company that the shareholders approve an amendment to the Company’s Certificate of Incorporation to permit shareholders to act by majority written consent by amending Section 4 of the Certificate of Incorporation was submitted to, and voted upon by, the shareholders of the Company at the Annual Meeting. There were 107,027,004 votes cast in favor of, and 2,993,858 votes cast against, said resolution. The holders of 1,084,762 shares of Common Stock abstained and there were “broker non-votes” in respect of 9,940,419 shares of Common Stock. Accordingly, the resolution received the affirmative vote of the holders of a majority of the Common Stock outstanding and entitled to vote at the Annual Meeting and, therefore, the resolution was adopted and the amendment to the Company’s Certificate of Incorporation was approved by the shareholders. The resolution and information relating to the amendment are set forth at pages 46 through 47, inclusive, of the Proxy Statement.
6. Ratification of Appointment of Independent Registered Public Accounting Firm. A resolution that the shareholders ratify the action of the Audit Committee in selecting and appointing PricewaterhouseCoopers LLP as the independent registered public accounting firm for the Company for the year ending December 31, 2005 was submitted to, and voted upon by, the shareholders. There were 118,299,221 shares of Common Stock voted in favor of, and 1,906,525 shares of Common Stock voted against, said resolution. The holders of 840,297 shares of Common Stock abstained and there were no “broker non-votes”. The resolution, having received the affirmative vote of the holders of a majority of the shares of Common Stock outstanding and entitled to vote at the Annual Meeting, was adopted and the appointment of PricewaterhouseCoopers LLP as the independent registered public accounting firm for the Company for 2005 was ratified by the shareholders.
3.1 | Amended and Restated Certificate of Incorporation, dated May 5, 2005 | |
10.3 | MBIA Inc. Annual Incentive Plan, effective January 1, 2006, incorporated by reference to Appendix C to the Company’s definitive proxy statement filed on March 30, 2005 | |
10.4 | MBIA Inc. 2005 Omnibus Incentive Plan, effective May 5, 2005, incorporated by reference to Appendix D to the Company’s definitive proxy statement filed on March 30, 2005 | |
31.1 | Chief Executive Officer – Sarbanes-Oxley Act of 2002 Section 302 | |
31.2 | Chief Financial Officer – Sarbanes-Oxley Act of 2002 Section 302 | |
32.1 | Chief Executive Officer – Sarbanes-Oxley Act of 2002 Section 906 | |
32.2 | Chief Financial Officer – Sarbanes-Oxley Act of 2002 Section 906 | |
99.1 | Additional Exhibits - MBIA Insurance Corporation and Subsidiaries Consolidated Financial Statements |
(44)44
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: | /s/ NICHOLAS FERRERI | |||
Nicholas Ferreri | ||||
Chief Financial Officer | ||||
Date: | /s/ DOUGLAS C. HAMILTON | |||
Douglas C. Hamilton | ||||
Controller (Principal Accounting Officer) |
(45)45