-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UcK9Gm48MN1BJ7CU7V/Q0Or8fW9ct1Z/ZjVhszzf6o+pHnQnHigjsh+Vy/NcQHdw UZhxfgGmN278Zi9j2kG4gg== 0000814585-96-000001.txt : 19960401 0000814585-96-000001.hdr.sgml : 19960401 ACCESSION NUMBER: 0000814585-96-000001 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960329 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MBIA INC CENTRAL INDEX KEY: 0000814585 STANDARD INDUSTRIAL CLASSIFICATION: SURETY INSURANCE [6351] IRS NUMBER: 061185706 STATE OF INCORPORATION: CT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-09583 FILM NUMBER: 96540955 BUSINESS ADDRESS: STREET 1: 113 KING ST CITY: ARMONK STATE: NY ZIP: 10504 BUSINESS PHONE: 9142734545 MAIL ADDRESS: STREET 1: 113 KING ST CITY: ARMONK STATE: NY ZIP: 10504 10-K 1 1995 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X ] Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 1995. Commission file number 1-9583 MBIA INC. (Exact name of registrant as specified in its charter) Connecticut 06-1185706 (State of Incorporation) (I.R.S. Employer Identification No.) 113 King Street, Armonk, New York 10504 (Address of principal executive offices) (Zip Code) (914) 273-4545 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class NAME OF EACH EXCHANGE ON WHICH REGISTERED - ------------------- Common Stock, par value $1 per share New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No___. The aggregate market value of the voting stock held by non-affiliates of the Registrant as of March 22, 1996 was $ 3,294,392,871.00. As of March 22, 1996, 42,853,891 shares of Common Stock, par value $1 per share, were outstanding. Documents incorporated by reference. Portions of Registrant's Annual Report to Shareholders for the fiscal year ended December 31, 1995 are incorporated by reference into Parts I and II. Portions of the Definitive Proxy Statement of the Registrant, dated March 25, 1996 are incorporated by reference into Parts I and III. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (SS 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] PART I Item 1. Business MBIA Inc. (the "Company") insures municipal bonds, asset-backed securities and other non-municipal obligations through its wholly-owned subsidiary, MBIA Insurance Corporation ("MBIA Corp."). MBIA Corp. is the successor to the business of the Municipal Bond Insurance Association (the "Association"), a consortium of five multi-line insurers, which began writing municipal bond insurance in 1974. Four of the five members of the Association, together with certain of their affiliates, participated in the formation of the Company in December 1986. (See "Certain Relationships and Related Transactions--Organization of the Company" in the Company's Proxy Statement dated March 25, 1996 which is incorporated herein by reference.) Effective as of December 31, 1989, the Company purchased Bond Investors Guaranty Insurance Company ("BIG Ins."), another municipal bond insurance company, through the acquisition of all of the common stock of its parent company, Bond Investors Group, Inc. ("BIG"). Subsequently, MBIA Corp. reinsured the net exposure on the municipal bond insurance policies previously issued by BIG Ins. and the Company contributed the common stock of BIG to MBIA Corp. (See "Business--Reinsurance" below). On August 21, 1990, the Company changed the name of BIG Ins. to MBIA Insurance Corp. of Illinois ("MBIA Illinois"). Subsequently, BIG was merged into MBIA Illinois. In 1990, the Company formed a French company, MBIA Assurance S.A. ("MBIA Assurance"), to write financial guarantee insurance in the countries of the European community. MBIA Assurance, which is a subsidiary of MBIA Corp., writes policies insuring public infrastructure financings, asset-backed transactions and certain obligations of financial institutions. By the end of 1995, MBIA Corp. and MBIA Assurance had collectively insured 58 international transactions. In September 1995, MBIA Corp. entered into a joint venture agreement with AMBAC Indemnity Corporation for the purpose of jointly marketing financial guarantee insurance within the European Community. Over the last five years, the Company has undertaken the development of investment management services which capitalize on its capabilities, reputation and marketplace relationships. The Company is delivering these services through a group of subsidiary companies. As of December 31, 1995, in the aggregate, these investment management ventures contributed $19.9 million in operating revenues. Generally, throughout the text references to MBIA Corp. include the activities of its subsidiaries, MBIA Illinois and MBIA Assurance. Financial guarantee insurance provides an unconditional and irrevocable guarantee of the payment of the principal of and interest on insured obligations when due. MBIA Corp.'s primary business is insuring obligations issued by states, municipalities and other governmental authorities, instrumentalities and agencies. Such obligations are secured by the issuer's taxing power in the case of general obligation or special tax supported bonds, or by the issuer's ability to impose and collect fees and charges for public services or specific projects in the case of most revenue bonds. MBIA Corp. also provides financial guarantees for structured finance transactions (principally morgage-backed and asset-backed securities), investor-owned utility debt and obligations of high-quality financial institutions. MBIA Corp.'s substantial capital base permits it to support a large portfolio of insured obligations and to write new business. MBIA Corp. primarily insures obligations which are sold in the new issue and secondary markets, or which are held in unit investment trusts ("UIT") and by mutual funds. It also provides surety bonds for debt service reserve funds. The Association was the first issuer of financial guarantees to receive both the AAA claims-paying rating from Standard and Poor's Corporation ("S&P"), which it received in 1974, and the Aaa claims-paying rating from Moody's Investors Service, Inc. ("Moody's"), which it received in 1984. Both rating agencies have continuously issued Triple-A claims-paying ratings for MBIA Corp. and Triple-A ratings to obligations guaranteed by MBIA Corp. Both rating agencies have also continued the Triple-A rating on MBIA Illinois guaranteed bond issues which have been reinsured by MBIA Corp. In addition, in 1995 MBIA Corp. received a Triple-A claims paying rating from Fitch Investors Services, L.P. ("Fitch"). The principal economic value of financial guarantee insurance to the entity offering the obligations is the saving in interest costs resulting from the difference in the market yield between an insured obligation and the same obligation on an uninsured basis. In addition, for complex financings and for obligations of issuers that are not well-known by investors, insured obligations receive greater market acceptance than uninsured obligations. The financial guarantee industry is subject to the direct and indirect effects of governmental regulation, including changes in tax laws affecting the municipal and asset-backed debt markets. No assurance can be given that future legislative or regulatory changes might not adversely affect the results of operations and financial conditions of the Company. MBIA CORP. INSURED PORTFOLIO At December 31, 1995, the net par amount outstanding on MBIA Corp.'s insured obligations (including insured obligations of MBIA Illinois and MBIA Assurance but excluding the guarantee of $2.7 billion of obligations of MBIA Investment Management Corp. ("IMC") (see "Operations--Miscellaneous")) was $188.6 billion, comprised of $163.0 billion in new issues and $25.6 billion in secondary market issues. Net insurance in force was $344.0 billion. MBIA Corp. guarantees to the holder of the underlying obligation the timely payment of the principal of and interest on such obligation in accordance with its original payment schedule. Accordingly, in the case of a default on an insured obligation, payments under the insurance policy cannot be accelerated by the holder. MBIA Corp. will be required to pay principal and interest only as originally scheduled payments come due. MBIA Corp. seeks to maintain a diversified insured portfolio designed to spread risk based on a variety of criteria including revenue source, issue size, type of bond and geographic area. As of December 31, 1995, MBIA Corp. had 30,778 policies outstanding. These policies are diversified among 7,161 "credits," which MBIA Corp. defines as any group of issues supported by the same revenue source. The table below sets forth information with respect to the original par amount written per issue in MBIA Corp.'s portfolio as of December 31, 1995: MBIA Corp. Original Par Amount Per Issue as of December 31, 1995 % of Total Number of Number of Net Par % of Net Original Par Amount Issues Issues Amount Par Amount Written per Issue Outstanding Outstanding Outstanding Outstanding - ----------------- ----------- ----------- ----------- ----------- (In billions) Less than $10 million ..... 26,227 85.2 $ 36.3 19.3% $10-25 million ........... 2,259 7.3 27.8 14.8 $25-50 million ............ 1,133 3.7 29.7 15.7 $50-100 million ........... 699 2.3 34.6 18.3 Greater than $100 million . 460 1.5 60.2 31.9 ------ ----- ---- ---- Total ..................... 30,778 100.0 188.6 100.0 ====== ===== ===== ===== MBIA Corp. underwrites financial guarantee insurance on the assumption that the insurance will remain in force until maturity of the insured obligations. MBIA Corp. estimates that the average life (as opposed to the stated maturity) of its insurance policies in force at December 31, 1995 was 11.6 years. The average life was determined by applying a weighted average calculation, using the remaining years to maturity of each insured obligation, and weighting them on the basis of the remaining debt service insured. No assumptions were made for any future refundings of insured issues. Average annual debt service on the portfolio at December 31, 1995 was $17.6 billion. -2- The table below shows the diversification of MBIA Corp.'s insured portfolio by bond type: MBIA CORP. INSURED PORTFOLIO BY BOND TYPE AS OF DECEMBER 31, 1995 (1) NUMBER OF NET PAR % OF NET ISSUES AMOUNT PAR AMOUNT BOND TYPE OUTSTANDING OUTSTANDING OUTSTANDING - --------- ----------- ----------- ----------- (In billions) Municipal General obligation ....... 11,445 $ 54.3 28.8% Utilities ................ 4,931 31.7 16.8 Health care .............. 2,458 27.0 14.3 Special revenue .......... 1,445 13.2 7.0 Transportation ........... 1,562 13.2 7.0 Higher education ......... 1,261 8.4 4.4 Housing .................. 2,671 6.8 3.6 Industrial development and pollution control revenue 924 6.3 3.4 Other .................... 134 3.6 1.9 ------ -------- ------- Total Municipal ......... 26,831 164.5 87.2 ------ ------- ------- Non-Municipal Asset/mortgage-backed .... 256 15.4 8.1 International 53 3.5 1.9 Investor-owned utilities . 3,559 2.2 1.2 Other .................... 79 3.0 1.6 ------ ------- ------- Total Non-Municipal ..... 3,947 24.1 12.8 ------ ------- ------- 30,778 $ 188.6 100.0% ====== ======= ===== _____________________________ (1) Excludes IMC's $2.7 billion relating to municipal investment agreements guaranteed by MBIA Corp. As illustrated by the table above, approximately 46% of the net par amount outstanding of the MBIA Corp. insured portfolio consists of general obligation bonds, which are supported by the full faith and credit and taxing power of state and local governmental issuers, and water, sewer and electric revenue bonds, which are secured by a pledge of revenues imposed and collected by state and local public entities for the provision of essential services. MBIA Corp. seeks to avoid bond issues which entail excessive single project risk, over-capacity or customer contract disputes. To date, MBIA Corp. has engaged primarily in insuring municipal bonds. As of December 31, 1995, of the $188.6 billion outstanding net par amount of obligations insured, $164.5 billion, or 87%, consisted of municipal bonds and $24.1 billion, or approximately 13%, consisted primarily of asset/mortgage-backed transactions, investor-owned utility obligations and transactions done in the European market. -3- The table below shows the diversification by type of insurance written by MBIA Corp. in each of the last five years: MBIA Corp. Net Par Amount Insured by Bond Type (1) BOND TYPE 1991 1992 1993 1994 1995 - --------- ---- ---- ---- ---- ---- (In millions) MUNICIPAL General obligation ..... $ 6,629 $ 8,951 $ 11,952 $ 11,086 $10,127 Utilities .............. 2,903 5,975 9,293 4,858 5,018 Health care ............ 3,715 4,401 6,342 3,655 2,913 Special Revenue ........ 1,475 2,776 3,246 1,888 1,935 Transportation ......... 1,202 2,283 3,419 1,747 2,624 Higher Education ....... 1,052 1,532 2,126 1,346 1,264 Housing ................ 744 592 469 876 1,962 Other .................. 839 966 1,532 2,061 2,395 --- --- ----- ----- ----- TOTAL MUNICIPAL ....... 18,559 27,476 8,379 27,517 28,238 ------- ------- ------- ------- ------- NON-MUNICIPAL Asset/mortgage-backed .. 443 2,842 3,581 4,832 7,766 International -- -- 190 1,948 1,514 Investor-owned utilities 418 476 642 643 412 Other .................. -- 693 907 712 877 ------- ------- ------- ------- ------- Total Non-Municipal ... 861 4,011 5,320 8,135 10,569 ------- ------- ------- ------- ------- $ 19,420 $ 31,487 $ 43,699 $ 35,652 $38,807 ======== ======== ======== ======== ======== - ---------- (1) Par amount insured each year, net of reinsurance. -4- MBIA Corp. is licensed to write business in all 50 states, the District of Columbia, France, Guam, the Northern Mariana Islands, the U.S. Virgin Islands and Puerto Rico. MBIA Illinois is licensed to write business in 48 states, the District of Columbia and Puerto Rico. MBIA Assurance is licensed to write business in France. The following table sets forth by state those states in which MBIA Corp. has at least 2% of its total net par amount outstanding: MBIA Corp. Insured Portfolio By State as of December 31, 1995 (1) Number of Net Par % of Net Issues Amount Par Amount Outstanding Outstanding Outstanding ----------- ----------- ----------- (In billions) State California 3,122 $ 25.6 13.6% New York 4,679 15.2 8.0 Florida 1,684 14.6 7.8 Pennsylvania 2,143 10.5 5.6 Texas 2,031 10.4 5.5 New Jersey 1,730 8.7 4.6 Illinois 1,090 8.1 4.3 Ohio 1,017 5.3 2.8 Massachusetts 1,070 5.1 2.7 Michigan 1,012 4.1 2.2 All other states 11,147 77.5 41.0 ------ ----- ----- Total United States 30,725 185.1 98.1% ------ ----- ---- International 53 3.5 1.9 -- --- --- Total 30,778 $188.6 100.0% ====== ====== ===== - ---------- (1) Excludes IMC's $2.7 billion relating to municipal investment agreements guaranteed by MBIA Corp. -5- MBIA Corp. has underwriting guidelines that limit the net insurance in force for any one insured credit. MBIA Corp. has not exceeded any applicable regulatory single-risk limit with respect to any bond issue insured by it. As of December 31, 1995, MBIA Corp.'s net par amount outstanding for its ten largest insured credits totalled $9.1 billion, representing 4.9% of MBIA Corp.'s total net par amount outstanding, and was as follows: MBIA Corp.'s Ten Largest Insured Credits as of December 31, 1995 Net Par Amount Outstanding ----------- (In millions) Puerto Rico Unlimited General Obligations $1,085 Louisiana State Unlimited General Obligations 1,036 City of New York Unlimited General Obligations 979 New Jersey Single Family Mortgage Revenue Obligations 957 District of Columbia Unlimited General Obligations 926 Massachusetts Unlimited General Obligations 878 Los Angeles City Waste Water 829 Sacramento Municipal Utilities District, Electric Revenue 825 New York Municipal Water Finance Authority 806 Ohio Public Building Authority Lease 777 MBIA CORP. INSURANCE PROGRAMS MBIA Corp. offers financial guarantee insurance in both the new issue and secondary markets. At present, no new financial guarantee insurance is being offered by MBIA Illinois, but it is possible that MBIA Illinois will insure transactions in the future. MBIA Corp. and MBIA Assurance offer financial guarantee insurance in Europe and other areas outside the United States. Set forth below are the different types of programs through which insurance presently is offered. NEW ISSUE PROGRAMS: DIRECT PURCHASE PROGRAM. Under the Direct Purchase Program, an issuer or underwriter purchases a policy directly from MBIA Corp. and pays the premium itself. Substantially all MBIA Corp. insured issues that are sold through a negotiated offering utilize this program. Of those issues which sell through competitive bidding, some use this program but the majority use the Optional Bidding Program described below. The critical elements in the Direct Purchase Program are that the issuer or underwriter determines to use insurance well before the sale date and then works closely with MBIA Corp. in developing documentation and legal structure. OPTIONAL BIDDING PROGRAM. Under the Optional Bidding Program, MBIA Corp. offers insurance as an option to the underwriters bidding on an issue. It is used only for issues sold through competitive bidding. Under this program, the MBIA Corp. policy is purchased and the premium paid by the successful underwriter who chooses to use MBIA Corp. insurance. The flexibility of this program, where insurance may be chosen or rejected until sale time, makes adjustment to current market conditions easy for underwriters. In addition, this program eliminates any need for the issuer to budget for or allocate bond proceeds to pay the premium. SECONDARY MARKET PROGRAMS: Unit Investment Trusts. MBIA Corp. offers insurance to the UIT market through ongoing arrangements with investment banking and financial service companies which are UIT sponsors. MBIA Corp. insurance covers all of the bond issues in each of the insured unit trusts through one of two programs. Under one program, each issue in a trust is insured until maturity and, under the other program, each issue is insured only while it is held in the UIT. -6- Mutual Funds. MBIA Corp. offers insurance in the mutual fund sector through ongoing arrangements with fund sponsors, which are investment advisers to individual mutual funds or families of mutual funds. All premiums for insuring bond issues in mutual funds are paid on the "while-in-trust" basis and consist of monthly charges. Under certain of these policies, MBIA Corp. is committed to offer insurance to maturity to the sponsor on issues sold out of the fund for an additional premium payable at the time of sale. Other Secondary Market Insurance. MBIA Corp. provides insurance on whole and partial maturities for bond issues which are being traded in the secondary market in response to requests from bond traders and institutions. MBIA Corp. charges the purchaser of this insurance a single premium payable upon issuance of the policy for insuring the designated bonds to maturity. The following table indicates the percentage of net par outstanding with respect to each type of insured program: MBIA CORP. TYPES OF INSURED PROGRAMS AS OF DECEMBER 31, 1995 NET PAR AMOUNT % OF NET TYPE OF PROGRAM OUTSTANDING PAR AMOUNT (IN BILLIONS) OUTSTANDING New issue $163.0 86.4% Secondary market issues Unit investment trusts ................. 5.7 3.0 Mutual funds ........................... 0.3 0.2 Other secondary market issues .......... 19.6 10.4 ------ ----- Total ................................. $188.6 100.0% ====== ===== OPERATIONS The operations of MBIA Corp. are conducted primarily through two divisions: the Underwriting, Policy and Review Division and the Insurance Operations Division. The Insurance Operations Division includes the Public Finance and the Secondary Market Groups, the Structured Finance and the International Departments, and the Insured Portfolio Management Group. The functions of each are more fully described below. The Public Finance Group, the Secondary Market Group and the Structured Finance Department each have underwriting authority with respect to certain categories of business and with respect to credits up to a certain par amount per category. As a result, they are responsible for analyzing and approving approximately 80% of the number of issues insured (representing 47% of the gross par value insured), although their underwriting decisions are monitored by the Underwriting Policy and Review Division which is responsible for ascertaining that MBIA Corp.'s underwriting guidelines and procedures are being followed. With respect to larger, complex or unique credits, as well as all asset/mortgage-backed transactions and international transactions, MBIA Corp.'s review and approval procedure has two stages. The first stage consists of transaction screening and in-depth credit review and structuring by the appropriate department within the Insurance Operations Division. The second stage, final review and approval of credit and structure, is performed by the Underwriting, Policy and Review Division. Pricing, in all cases, is carried out by the Market Research Group in the Insurance Operations Division, and the continuing review of insured issues is administered by the Insured Portfolio Management Group. -7- MARKETING AND CREDIT REVIEW: MBIA Corp.'s marketing activities and initial credit review functions for municipal transactions are carried out primarily by the Public Finance Group and the Secondary Market Group. They are also involved in structuring credits on negotiated new issue business and in insuring secondary market issues. These groups employ municipal research analysts who have extensive experience in the municipal bond industry and who develop business within established credit analysis criteria. Market intelligence and client contact related to identifying, screening and developing candidates for insurance are handled by the individual departments within the Insurance Operations Division. The primary factors in issue screening are credit quality, legal security and transaction structure, as well as evaluation of the potential for interest cost savings through the use of insurance. In the area of asset/mortgage-backed transactions, functions similar to these are performed by the Structured Finance Department. The International Department performs similar tasks with respect to financings done outside the United States. Premium rates are determined by the Market Research Group, MBIA Corp.'s pricing and syndicate unit, which focuses on the type of business and credit strength of the bond issue, the maturity and structure of the issue, and other credit and market factors. Premium rates are based upon established premium ranges, which take into account capital charges, rating agency models and degrees of perceived risk. The Market Research Group also conducts extensive consultation with analysts on the issue and considers updated market intelligence developed from daily contact with syndicate managers and traders to help form the most accurate view of the value of MBIA Corp.'s guarantee on each issue. Minimum pricing standards are established at levels that management believes should generate an appropriate level of return on capital. The Company recognizes that adherence to its pricing and quality standards may result in the loss of business to other insurers offering insurance at rates or on terms that the Company does not believe to be appropriate. The Company gives primary emphasis to maintaining its pricing and quality standards and secondary emphasis to market share. UNDERWRITING REVIEW: The Underwriting, Policy and Review Division is responsible for adherence to MBIA Corp.'s underwriting guidelines and procedures, which are designed to maintain an insured portfolio with low risk characteristics. MBIA Corp. maintains underwriting guidelines based on those aspects of credit quality that it deems important for each category of obligation considered for insurance. These include economic and social trends, debt management, financial management, adequacy of anticipated cash flow, satisfactory legal structure and other security provisions, viable tax and economic bases, adequacy of loss coverage and project feasibility, including a satisfactory consulting engineer's report, if applicable. Such guidelines are subject to periodic review. An inter-divisional committee, the Credit Policy Committee, is responsible for establishing and maintaining underwriting standards and criteria for all insurance products. In order to ensure that the existing guidelines are followed, the Underwriting, Policy and Review Division monitors and periodically reviews underwriting decisions made by the Insurance Operations Division. In addition, on large, unique or complex transactions and on all asset/mortgage-backed transactions and international transactions (estimated to be about 20% of the number of issues or 53% of the gross par value insured by MBIA Corp.), the final underwriting decisions are made by the Underwriting Policy and Review Division. The Financial Institution Analysis Department of the Underwriting, Policy and Review Division underwrites and monitors MBIA Corp.'s direct and indirect exposure to financial institutions with respect to investment contracts, letters of credit and liquidity facilities supporting MBIA-insured issues, and recommends limits on such exposures. The department provides in-depth financial analyses of financial institutions for which there is existing or proposed exposure and gives advice on related contract terms, transfers of these instruments to new institutions and renewal dates and procedures. -8- INSURED PORTFOLIO MANAGEMENT: The Insured Portfolio Management Group is responsible for monitoring outstanding issues insured by MBIA Corp. This group's first function is to detect any deterioration in credit quality or changes in the economic or political environment which could interrupt the timely payment of debt service on an insured issue. Once a problem is detected, the group then works with the issuer, trustee, bond counsel, underwriters and other interested parties to deal with the concern before it develops into a default. Although MBIA Corp. has to date had only eight insured issues requiring claim payments for which it has not been fully reimbursed, there are seven additional insured issues for which case loss reserves have been established (see "Losses and Reserves" below). Other potential losses have been avoided through the early detection of problems and subsequent negotiations with the issuer and other parties involved. In a limited number of instances, the solution involved the restructuring of insured issues or underlying security arrangements. More often, MBIA Corp. utilizes a variety of other techniques to resolve problems, such as enforcement of covenants, assistance in resolving management problems and working with the issuer to develop potential political solutions. Issuers are under no obligation to restructure insured issues or underlying security arrangements in order to prevent losses. Moreover, MBIA Corp. is obligated to pay amounts equal to defaulted interest and principal payments on insured bonds on their respective due dates even if the issuer or other parties involved refuse to restructure or renegotiate the terms of the insured bonds or related security arrangements. The Company believes that early detection and continued involvement by the Insured Portfolio Management Group are crucial in avoiding or minimizing claims on insurance policies. Once an obligation is insured, the issuer and the trustee are asked, or in some cases required, to furnish financial information, including audited financial statements, annually to the Insured Portfolio Management Group for review. Potential problems uncovered through this review, such as low operating fund balances, covenant violations, trustee or servicer problems, tax certiorari proceedings or excessive litigation, could result in an immediate surveillance review and an evaluation of possible remedial actions. The Insured Portfolio Management Group also monitors state finances and budget developments and evaluates their impact on local issuers. The Company's computerized credit surveillance system records situations where follow-up is needed, such as letter of credit renewal, construction status and the receipt of additional data after the closing of a transaction. Further, issues that experience financial difficulties, deteriorating economic conditions, excessive litigation or covenant violations are placed on the appropriate review list and are subject to surveillance reviews at intervals commensurate to the problem which has been detected. There are two departments within the Insured Portfolio Management Group: the Public Finance Portfolio Management Department handles the more traditional types of issues such as general obligation, utility, special revenue and health care bonds; and the Structured Finance Portfolio Management Department is responsible for housing and asset-backed issues. The Public Finance Portfolio Management Department reviews and reports on the major credit quality factors of risks insured by the Company, evaluates the impact of new developments on insured weaker credits and carries out remedial activity. In addition, it performs analysis of financial statements and key operating data on a large scale basis and maintains various databases for research purposes. It responds to consent and waiver requests and monitors pool programs. This department is responsible for preparing special reports which include analyses of regional economic trends, proposed tax limitations, the impact of employment trends on local economies or legal developments affecting bond security. The Structured Finance Portfolio Management Department monitors insured structured finance programs, focusing on the adequacy of reserve balances and investment of earnings, the status of mortgage or loan delinquencies and underlying insurance coverage and the performance of the trustee for insured issues. Monitoring of issues typically involves review of records and statements, review of transaction documents with regard to compliance, analysis of cash flow adequacy and communication with trustees. Review of servicer performance is also conducted through review of servicer financial statements, review of servicer reports where available and contacts with program administrators and trustees. The department also carries out remedial activity on weaker credits. -9- INVESTMENT MANAGEMENT SERVICES Over the last five years, the Company has undertaken the development of investment management services which capitalize on its capabilities, reputation and marketplace relationships. The Company is delivering these services through a group of subsidiary companies. In 1995, in the aggregate, these new ventures contributed $19.9 million in operating revenues. MBIA Municipal Investors Service Corporation ("MBIA/MISC"), was formed as a subsidiary of the Company to provide cash management services for local governments, school districts and similar authorities. As of December 31, 1995, MBIA/MISC, a registered investment advisor, had approximately 1,250 clients and over $2.5 billion of client assets under management. In addition, MBIA/MISC provides fund administration services to over 230 clients with invested assets of $154 million. MBIA/MISC is operating in nine states and the Commonwealth of Puerto Rico and plans to continue its expansion into additional states in the near term. In 1993, the Company formed a wholly-owned subsidiary, MBIA Investment Management Corp. ("IMC"), to provide an investment vehicle in the form of investment agreements guaranteed as to principal and interest, for states, municipalities and municipal authorities. IMC's agreements are structured with individual terms and draw schedules and the length of the agreements ranges from one month to forty years. At year-end, IMC had outstanding investment agreements of $2.6 billion. In 1994, the Company formed a wholly-owned subsidiary, MBIA Securities Corp. ("SECO"), to perform investment management services for the Company, MBIA Corp., MBIA/MISC and IMC. SECO performs internal fixed-income trading and portfolio management offering the Company greater control over its investment management activities. At year-end, SECO was managing more than $5 billion of assets for MBIA Corp., IMC and MBIA/MISC. COMPETITION The financial guarantee insurance business is highly competitive. In 1995 MBIA Corp. was the largest insurer of new issue long-term municipal bonds, accounting for 42% of the par amount of such insured bonds. The other principal insurers in 1995 were AMBAC Indemnity Corporation, Financial Guaranty Insurance Company, Financial Security Assurance Inc. and Capital Guaranty Insurance Co., all of which, like MBIA Corp., have Aaa and AAA claims-paying ratings from Moody's and S&P, respectively. According to Asset Sales Report, in 1995 MBIA Corp. was the leading insurer of new issue asset/mortgage-backed securities. The three principal competitors in this area in 1995 were Capital Markets Assurance Corp., Financial Security Assurance and Financial Guaranty Insurance Company. Financial guarantee insurance also competes with other forms of credit enhancement, including over-collateralization, letters of credit and guarantees (for example, mortgage guarantees where pools of mortgages secure debt service payments) provided by banks and other financial institutions, some of which are governmental agencies or have been assigned the highest credit ratings awarded by one or more of the major rating agencies. Letters of credit are most often issued for periods of less than 10 years, although there is no legal restriction on the issuance of letters of credit having longer terms. Thus, financial institutions and banks issuing letters of credit compete directly with MBIA Corp. to guarantee short-term notes and bonds with a maturity of less than 10 years. To the extent that banks providing credit enhancement may begin to issue letters of credit with commitments longer than 10 years, the competitive position of financial guarantee insurers, such as MBIA Corp., could be adversely affected. Letters of credit also are frequently used to assure the liquidity of a short-term put option for a long-term bond issue. This assurance of liquidity effectively confers on such issues, for the short term, the credit standing of the financial institution providing the facility, thereby competing with MBIA Corp. and other financial guarantee insurers in providing interest cost savings on such issues. Financial guarantee insurance and other forms of credit enhancement also compete in nearly all instances with the issuer's alternative of foregoing credit enhancement and paying a higher interest rate. If the interest savings from insurance or another form of credit enhancement are not greater than the cost of such credit enhancement, the issuer will generally choose to issue bonds without enhancement. MBIA Assurance also competes in the international market with composite (multi-line) insurers. -10- There are minimum capital requirements imposed on a financial guarantee insurer by Moody's and S&P to obtain Triple-A claims-paying ratings. Also, under a New York law, multiline insurers are prohibited from writing financial guarantee insurance in New York State, except during a transitional period which, subject to certain specific conditions, will expire in May 1997. See "Business--Regulation." However, there can be no assurance that major multiline insurers or other financial institutions will not participate in financial guarantee insurance in the future, either directly or through monoline subsidiaries. REINSURANCE State insurance laws and regulations, as well as Moody's and S&P, impose minimum capital requirements on financial guarantee companies, limiting the aggregate amount of insurance which may be written and the maximum size of any single risk exposure which may be assumed. MBIA Corp. increases its capacity to write new business by using treaty and facultative reinsurance to reduce its gross liabilities on an aggregate and single risk basis. From its reorganization in December 1986 through December 1987, MBIA Corp. reinsured a portion of each policy through quota and surplus share reinsurance treaties. Each treaty provides reinsurance protection with respect to policies written by MBIA Corp. during the term of the treaty, for the full term of the policy. Under its quota share treaty MBIA Corp. ceded a fixed percentage of each policy insured. Since 1988, MBIA Corp. has entered into only surplus share treaties under which a variable percentage of risk over a minimum size is ceded, subject to a maximum percentage specified in the treaty. Reinsurance ceded under the treaties is for the full term of the underlying policy. MBIA Corp. also enters into facultative reinsurance arrangements from time to time primarily in connection with issues which, because of their size, require additional capacity beyond MBIA Corp.'s retention and treaty limits. Under these facultative arrangements, portions of MBIA Corp.'s liabilities are ceded on an issue-by-issue basis. MBIA Corp. utilizes facultative arrangements as a means of managing its exposure to single issuers to comply with regulatory and rating agency requirements, as well as internal underwriting and portfolio management criteria. As a primary insurer, MBIA Corp. is required to honor its obligations to its policyholders whether or not its reinsurers perform their obligations to MBIA Corp. The financial position of all reinsurers is monitored by MBIA Corp. on a regular basis. As of December 31, 1995, MBIA Corp. retained approximately 87% of the gross debt service outstanding of all municipal bonds insured by it, MBIA Assurance and MBIA Illinois, and ceded approximately 13% to treaty and facultative reinsurers. MBIA Corp.'s and MBIA Illinois' principal reinsurers are Enhance Reinsurance Company, Capital Re Management Corporation, Asset Guaranty Reinsurance Co. and Capital Mortgage Reinsurance Company The first two of these reinsurers, whose claims paying ability is rated Triple-A by S&P and Moody's, reinsured approximately 67% of the total ceded insurance in force at December 31, 1995. The other principal reinsurers are rated AA by S&P. All other reinsurers reinsured less than 5% of the total ceded insurance in force at December 31, 1995 and are diversified geographically and by lines of insurance written. MBIA Corp.'s net retention on the policies it writes varies from time to time depending on its own business needs and the capacity available in the reinsurance market. The amounts of reinsurance ceded at December 31, 1995 and 1994 by bond type and by state are set forth in Note 12 to the Consolidated Financial Statements of MBIA Inc. and Subsidiaries. In connection with the BIG acquisition, MBIA Corp. and MBIA Illinois entered into a reinsurance agreement under which MBIA Corp. agreed to reinsure 100% of all business written by MBIA Illinois, net of cessions by MBIA Illinois to third party reinsurers, in exchange for MBIA Illinois' transfer of the assets underlying the related unearned premium and contingency reserves. Pursuant to such reinsurance agreement with MBIA Illinois, MBIA Corp. reinsured all of the net exposure of $30.9 billion, or approximately 68% of the gross debt service outstanding, of the municipal bond insurance portfolio of MBIA Illinois, the remaining 32% having been previously ceded to treaty and facultative reinsurers of MBIA Illinois (see preceding paragraph). MBIA Corp. retroceded 3% and 1% of this portfolio to its treaty and facultative reinsurers in 1990 and 1991, respectively; additionally, in 1990, 10% of this portfolio was ceded back to MBIA Illinois to comply with regulatory requirements. MBIA Corp. and MBIA Assurance have both a reinsurance agreement and a net worth maintenance agreement. -11- INVESTMENTS AND INVESTMENT POLICY The Finance Committee of the Board of Directors of the Company approves the general investment objectives and policies of the Company, and also reviews more specific investment guidelines. The Company has investment management and advisory agreements with an affiliate of a principal shareholder, which provides for payment of fees on assets under management. These agreements were terminated on January 1, 1996 at which time SECO commenced management of all of MBIA Corp.'s consolidated investment portfolios. Certain investments of the Company and MBIA Assurance related to non-U.S. insurance operations are managed by independent managers in France. To continue to provide strong capital resources and claims-paying capabilities for its insurance operations, the investment objectives and policies for insurance operations set quality and preservation of capital as the primary objective subject to an appropriate degree of liquidity. Maximization of after-tax investment income and investment returns are an important but secondary objective. Investment objectives, polices and guidelines related to the Company's municipal investment agreement business are also subject to review and approval by the Finance Committee of the Board of Directors. The primary investment objectives are to preserve capital, to achieve an investment duration that closely approximates the expected duration of related liabilities, and to maintain appropriate liquidity. The investment agreement assets are managed by SECO subject to an investment management agreement between IMC and SECO. For 1995, approximately 72% of the Company's net income was derived from after-tax earnings on its investment portfolio (excluding the amounts earned on investment agreement assets which are recorded as a component of investment management services revenues). The following table sets forth investment income and related data for the years ended December 31, 1993, 1994 and 1995: Investment Income of the Company (1) Years Ended December 31, 1993 1994 1995 ---- ---- ---- (In thousands) Investment income before expenses (2) $181,598 $196,662 $222,704 Investment expenses 2,714 2,809 2,846 -------- -------- -------- Net investment income before income taxes 178,884 193,853 219,858 Net realized gains 9,727 10,335 11,312 -------- -------- -------- Total investment income before income taxes $188,611 $204,188 $231,170 ======== ======== ======== Total investment income after income taxes $159,844 $175,007 $196,269 ======== ======== ======== - ---------- (1) Excludes investment income and realized gains and losses from investment management services subsidiaries. (2) Includes taxable and tax-exempt interest income. -12- The tables below set forth the composition of the Company's investment portfolios. The weighted average yields in the tables reflect the nominal yield on book value as of December 31, 1995, 1994 and 1993. Investment Portfolio by Security Type as of December 31, 1995
Investment Insurance Management Services ------------------------------- ----------------------------------- Investment Category ............ Fair Value Weighted Fair Value Weighted (in thousands) Average Yield(1) (in thousands) Average Yield (1) -------------- ----------------- ----------------------------------- Fixed income investments: Long-term Bonds: Taxable Bonds: U.S. Treasury & Agency Obligations .................. $ 265,209 6.82% $ 1,028,805 5.90% GNMAs......................... 58,853 7.07 141,957 7.01 Other Mortgage & Asset Backed Securities ............ 137,542 6.71 702,144 5.58 Corporate Obligations .......... 366,076 6.12 520,236 6.29 Foreign Obligations (2) ........ 98,620 6.08 122,692 6.86 --------- -------- Total.......................... 926,300 6.46 2,515,834 6.00 Tax-exempt Bonds: State & Municipal .............. 2,726,321 7.76 -- -- --------- ---------- Total long-term investments .... 3,652,621 7.44 2,515,834 6.00 Short-term investments (3) ........ 198,035 6.49 226,792 5.48 --------- --------- Total fixed income investments . 3,850,656 7.39% 2,742,626 5.96% Other investments (4) .............. 14,064 -- -- -- --------- --------- Total investments ............. $3,864,720 -- $2,742,626 -- ========== ==========
(1) Prospective market yields as of December 31, 1995. Yield on tax-exempt bonds is presented on a taxable equivalent basis using a 35% federal income tax rate. (2) Consists of U.S. demoninated foreign governments and corporate securities. (3) Taxable and tax-exempt investments, including bonds with a remaining maturity of less than one year. (4) Consists of equity investments and other fixed income investments; yield information not meaningful. -13- Investment Portfolio by Security Type as of December 31, 1994
Investment Insurance Management Services ------------------------------- ----------------------------------- Investment Category ............ Fair Value Weighted Fair Value Weighted (in thousands) Average Yield(1) (in thousands) Average Yield (1) -------------- ----------------- ----------------------------------- Fixed income investments: Long-term Bonds: Taxable Bonds: U.S. Treasury & Agency Obligations .................. $ 180,405 8.52% $ 477,530 7.15% GNMAs ........................ 70,476 8.76 102,903 8.38 Other Mortgage & Asset Backed Securities .............. 111,611 8.69 680,530 7.27 Corporate Obligations .......... 235,839 8.44 208,371 8.70 Foreign Obligations (2) ........ 98,558 8.46 53,916 8.70 ------ --------- Total.......................... 696,889 8.54 1,523,250 7.55 Tax-exempt Bonds: State & Municipal .............. 2,355,017 9.46 -- -- ---------- ---------- Total long-term investments .... 3,051,906 9.25 1,523,250 7.55 Short-term investments (3) ........ 121,384 5.56 152,685 6.48 --------- --------- Total fixed income investments . 3,173,290 9.11% 1,675,935 7.46% Other investments (4) .............. 17,550 -- -- -- --------- --------- Total investments .............. $3,190,840 -- $1,675,935 -- ========== ==========
(1) Prospective market yields as of December 31, 1994. Yield on tax-exempt bonds is presented on a taxable equivalent basis using a 35% federal income tax rate. (2) Includes direct obligations of foreign governments and foreign corporations. (3) Taxable and tax-exempt investments, including bonds with a remaining maturity of less than one year. (4) Consists of marketable equity securities and interests in limited partnerships; yield information not meaningful -14- Investment Portfolio by Security Type as of December 31, 1993
Investment Insurance Management Services ------------------------------- ----------------------------------- Investment Category ............ Amortized Cost Weighted Amortized Cost Weighted (in thousands) Average Yield(1) (in thousands) Average Yield (1) -------------------------------- ----------------------------------- Fixed income investments: Long-term Bonds: Taxable Bonds: U.S. Treasury & Agency Obligations .................. $ 256,388 7.74% $ 107,358 5.10% GNMAs ......................... 73,880 8.18 -- -- Other Mortgage & Asset Backed Securities .............. 49,862 6.68 274,423 4.57 Corporate Obligations .......... 227,495 7.31 19,191 6.68 Foreign Obligations (2) ........ 135,489 7.31 15,420 6.94 --------- - ------ Total.......................... 743,114 7.51 416,392 4.89 Tax-exempt Bonds: State & Municipal .............. 2,053,585 9.46 -- -- --------- ---------- Total long-term investments .... 2,796,699 8.94 416,392 4.89 Short-term investments (3) ........ 104,205 4.69 122,359 3.26 --------- --------- Total fixed income investments 2,900,904 8.79% 538,751 4.52% Other investments (4) .............. 104,681 -- -- -- --------- --------- Total investments .............. $3,005,585 -- $ 538,751 -- ========== ==========
(1) Prospective yields at amortized cost as of December 31, 1993. Yield on tax-exempt bonds is presented on a taxable equivalent basis using a 35% federal income tax rate. (2) Includes direct obligations of foreign governments and foreign corporations. (3) Taxable and tax-exempt investments, including bonds with a remaining maturity of less than one year. (4) Consists of marketable equity securities and interests in limited partnerships; yield information not meaningful. -15- The average maturity of the insurance fixed income portfolio excluding short-term investments as of December 31, 1995 was 10.1 years. After allowing for estimated principal pre-payments on mortgage pass-through securities, the duration of the portfolio was 6.8 years. The table below sets forth the distribution by maturity of the Company's consolidated fixed income investments: Distribution of Fixed Income Investments of the Company by Maturity as of December 31, 1995 INVESTMENT INSURANCE MANAGEMENT SERVICES MATURITY FAIR VALUE % OF TOTAL FAIR VALUE % OF TOTAL (IN THOUSANDS) FIXED INCOME (IN THOUSANDS) FIXED INCOME INVESTMENTS INVESTMENTS Within 1 year ..................... $ 198,035 5.1% $ 226,793 8.3% Beyond 1 year but within 5 years ... 567,809 14.8 870,410 31.7 Beyond 5 years but within 10 years 1,340,550 34.8 331,193 12.1 Beyond 10 years but within 15 years 902,002 23.4 364,393 13.3 Beyond 15 years but within 20 years 790,008 20.5 302,659 11.0 Beyond 20 years ................... 52,252 1.4 647,178 23.6 ---------- ----- ---------- ---- Total fixed income investments .... $3,850,656 100.0% $2,742,626 100.0% ========== ===== ========== =====
The quality distribution of the Company's fixed income investments based on ratings of S&P was as shown in the table below: Fixed Income Investments by Quality Rating (1) as of December 31, 1995
INVESTMENT INSURANCE MANAGEMENT SERVICES QUALITY RATING FAIR VALUE % OF TOTAL FAIR VALUE % OF TOTAL (IN THOUSANDS) FIXED INCOME (IN THOUSANDS) FIXED INCOME INVESTMENTS INVESTMENTS AAA .... $1,392,241 37.0% $1,911,117 73.6% AA ..... 1,404,999 37.4 136,757 5.3 A ...... 860,645 22.9 547,739 21.1 BBB... 103,023 2.7 -- -- BB ..... -- -- -- -- ---------- ----- ---------- ----- Total $3,760,908 100.0% $2,595,613 100.0% ========== ===== ========== =====
(1) Excludes short-term investments with an original maturity of less than one year, but includes bonds having a remaining maturity of less than one year. -16- REGULATION MBIA Corp. is licensed to do insurance business in, and is subject to insurance regulation and supervision by, the State of New York (its state of incorporation), the 49 other states, the District of Columbia, France, Guam, the Northern Mariana Islands, the U.S. Virgin Islands and Puerto Rico and the Republic of France. MBIA Illinois is licensed in, and is subject to insurance regulation and supervision by, the State of Illinois (its state of incorporation), 47 other states, the District of Columbia and Puerto Rico. MBIA Assurance is licensed to do insurance business in France and is subject to regulation under the corporation and insurance laws of the Republic of France. The extent of state insurance regulation and supervision varies by jurisdiction, but New York, Illinois and most other jurisdictions have laws and regulations prescribing minimum standards of solvency, including minimum capital requirements, and business conduct which must be maintained by insurance companies. These laws prescribe permitted classes and concentrations of investments. In addition, some state laws and regulations require the approval or filing of policy forms and rates. MBIA Corp. is required to file detailed annual financial statements with the New York Insurance Department and similar supervisory agencies in each of the other jurisdictions in which it is licensed. MBIA Illinois is required to file detailed annual financial statements with the Illinois Department of Insurance and similar supervisory agencies in each of the other jurisdictions in which it is licensed. The operations and accounts of both MBIA Corp. and MBIA Illinois are subject to examination by these regulatory agencies at regular intervals. MBIA Corp. is licensed to provide financial guarantee insurance under Article 69 of the New York Insurance Law. Article 69 defines financial guarantee insurance to include any guarantee under which loss is payable upon proof of occurrence of financial loss to an insured as a result of certain events. These events include the failure of any obligor on any debt instrument or other monetary obligation to pay principal, interest, premium, dividend or purchase price of or on such instrument or obligation, when due. Under Article 69, MBIA Corp. is licensed to transact financial guarantee insurance, residual value insurance, surety insurance and credit insurance and such other kinds of business to the extent necessarily or properly incidental to the kinds of insurance which MBIA Corp. is authorized to transact. In addition, MBIA Corp. is empowered to assume or reinsure the kinds of insurance described above. MBIA Illinois is licensed to provide fidelity and surety and other miscellaneous lines of insurance under Section 4 of the Illinois Insurance Code. Section 4 defines fidelity and surety insurance to include becoming surety or guarantor for any person, co-partnership or corporation in any position or place of trust or as custodian of money or property, public or private; or becoming a surety or guarantor for the performance of any person, co-partnership or corporation of any lawful obligation, undertaking, agreement or contract of any kind, except contracts or policies of insurance; and underwriting blanket bonds. Under Section 9, MBIA Illinois is licensed to transact any business activity reasonably complementary or supplementary to its insurance business. In addition, MBIA Illinois is empowered to assume or reinsure the kinds of insurance described above. As financial guarantee insurers, MBIA Corp. and MBIA Illinois are required by the laws of New York, California, Connecticut, Florida, Illinois, lowa, New Jersey and Wisconsin to maintain contingency reserves on their municipal bond and other financial guarantee liabilities. Under New Jersey, Illinois and Wisconsin regulations, contributions by such an insurer to its contingency reserves are required to equal 50% of earned premiums on its municipal bond business. Under New York law, such an insurer is required to contribute to contingency reserves 50% of premiums as they are earned on policies written prior to July 1, 1989 and, with respect to policies written on and after July 1, 1989, must make contributions over a period of 15 or 20 years (based on issue type), or until the contingency reserve for such insured issues equals the greater of 50% of premiums written for the relevant category of insurance or a percentage of the principal guaranteed, varying from 0.55% to 2.5%, depending upon the type of obligation guaranteed. California, Connecticut, Iowa and Florida law impose a generally similar requirement. In each of these states, MBIA Corp. and MBIA Illinois may apply for release of portions of the contingency reserves in certain circumstances. The laws and regulations of these states also limit both the aggregate and individual municipal bond risks that MBIA Corp. and MBIA Illinois may insure on a net basis. California, Connecticut, Florida, Illinois and New York, among other things, limit insured average annual debt service on insured municipal bonds with respect to a single entity and backed by a single revenue source (net of qualifying collateral and reinsurance) to 10% of policyholders' surplus and contingency reserves. In New Jersey, Virginia and Wisconsin, the average annual debt service on any single issue of municipal bonds (net of reinsurance) is limited to 10% of policyholders' surplus. Other states that do not explicitly regulate financial guarantee or municipal bond insurance do impose single risk limits which are similar in effect to the foregoing. California, Connecticut, Florida, Illinois and New York also limit the net insured unpaid principal issued by a single entity and backed by a single revenue source to 75% of policyholders' surplus and contingency reserves. -17- Under New York, California, Connecticut, Florida, Illinois, New Jersey and Wisconsin law, aggregate insured unpaid principal and interest under policies insuring municipal bonds (in the case of New York, California, Connecticut, Florida and Illinois, net of reinsurance) are limited to certain multiples of policyholders' surplus and contingency reserves. New York, California, Connecticut, Florida, Illinois and other states impose a 300:1 limit for insured municipal bonds, although more restrictive limits on bonds of other types do exist. For example, New York, California and Florida impose a 100:1 limit for certain types of non-municipal bonds. The Company, MBIA Corp. and MBIA Illinois are also subject to regulation under insurance holding company statutes of New York, Illinois and other jurisdictions in which MBIA Corp. and MBIA Illinois are licensed to write insurance. The requirements of holding company statutes vary from jurisdiction to jurisdiction but generally require insurance holding companies, such as the Company, and their insurance subsidiaries, to register and file certain reports describing, among other information, their capital structure, ownership and financial condition. The holding company statutes also require prior approval of changes in control, of certain dividends and other intercorporate transfers of assets, and of transactions between insurance companies, their parents and affiliates. The holding company statutes impose standards on certain transactions with related companies, which include, among other requirements, that all transactions be fair and reasonable and that those exceeding specified limits receive prior regulatory approval. Prior approval by the New York Insurance Department is required for any entity seeking to acquire "control" of the Company or MBIA Corp. Prior approval by the Illinois Department of Insurance is required for any entity seeking to acquire "control" of the Company, MBIA Corp. or MBIA Illinois. In many states, including New York and Illinois, "control" is presumed to exist if 10% or more of the voting securities of the insurer are owned or controlled by an entity, although the supervisory agency may find that "control" in fact does or does not exist when an entity owns or controls either a lesser or greater amount of securities. In 1986, the New York Superintendent of Insurance determined that none of the shareholders of the Company "controlled" the Company since, among other factors, pursuant to the Shareholders' Agreement, none of them could individually control the Board of Directors of the Company. This determination was conditioned upon the Company's giving notice to the New York Superintendent of Insurance of any changes in the Founding Shareholders' ownership of the Company's stock or in the Shareholders' Agreement. The Company has given notice of such stock ownership changes, and in late 1991, the Company notified the New York Superintendent of the termination of the Shareholders' Agreement, other than its registration rights provisions. In connection with the acquisition of MBIA Illinois, the shareholders received a similar determination regarding control from the Illinois Department of Insurance. The laws of New York and Illinois regulate the payment of dividends by MBIA Corp. and MBIA Illinois, respectively, and provide that a New York domestic stock property/casualty insurance company (such as MBIA Corp.) or an Illinois domestic stock insurance company (such as MBIA Illinois) may not declare or distribute dividends except out of statutory earned surplus. In the case of MBIA Corp., New York law provides that the sum of (i) the amount of dividends declared or distributed during the preceding 12-month period and (ii) the dividend to be declared may not exceed the lesser of (a) 10% of policyholders' surplus, as shown by the most recent statutory financial statement on file with the New York Insurance Department, and (b) 100% of adjusted net investment income for such 12-month period (the net investment income for such 12-month period plus the excess, if any, of net investment income over dividends declared or distributed during the two-year period preceding such 12-month period), unless the New York Superintendent of Insurance approves a greater dividend distribution based upon a finding that the insurer will retain sufficient surplus to support its obligations and writings. See Note 8 to the Consolidated Financial Statements of MBIA Inc. and Subsidiaries. In the case of MBIA Illinois, Illinois law provides that the fair market value of the dividend to be declared, together with other dividends declared or distributed during the preceding 12-month period, may not exceed the greater of (a) 10% of policyholders' surplus as of the previous December 31, and (b) net income during the previous calendar year (which includes net realized capital gains in an amount not to exceed 20% of net unrealized capital gains) without the approval of the Illinois Director of Insurance. The foregoing restrictions are currently the most restrictive limitations on the ability of MBIA Corp. and MBIA Illinois to declare and pay dividends. The foregoing dividend limitations are determined in accordance with Statutory Accounting Practices ("SAP"), which generally produce statutory earnings in amounts less than earnings computed in accordance with Generally Accepted Accounting Principles ("GAAP"). Similarly, policyholders' surplus, computed on a SAP basis, will normally be less than net worth computed on a GAAP basis. See Note 3 to the Consolidated Financial Statements of MBIA Inc. and Subsidiaries. -18- MBIA Corp. and MBIA Illinois are exempt from assessments by the insurance guarantee funds in the majority of the states in which they do business. Guarantee fund laws in most states require insurers transacting business in the state to participate in guarantee associations which pay claims of policyholders and third-party claimants against impaired or insolvent insurance companies doing business in the state. In most states, insurers licensed to write only municipal bond insurance, financial guarantee insurance and other forms of surety insurance are exempt from assessment by these funds and their policyholders are prohibited from making claims on these funds. LOSSES AND RESERVES The Company's policy is to provide for loss reserves to cover losses that may be reasonably estimated on its insured obligations over the lives of such obligations. The loss reserve, at any financial statement date, is the Company's estimate of the identified and unidentified losses on the obligations it has insured, including expected costs of settlement. To the extent that specific insured issues are identified as currently or likely to be in default, the present value of the expected payments, including costs of settlement, net of expected recoveries, is allocated within the total loss reserve as a case basis reserve. At December 31, 1995, $14.5 million of the $42.5 million reserve for loss and loss adjustment expense represents case basis reserves, of which $12.4 million is attributable to a health care financing in Pennsylvania, $2.4 million is attributable to various housing financings in Texas and $(0.3)million is attributable to salvage accrued on a structured finance issue. The Company believes that the reserves for losses and loss adjustment expenses are adequate to cover the ultimate net cost of claims. Such reserves are based on estimates, and there can be no assurance that the ultimate liability will not exceed such estimates. To the extent that actual case losses for any period are less than the unallocated portion of total loss reserve, there will be no impact on the Company's earnings for that period other than an addition to the reserve which results from applying the loss rate factor to new debt service insurance. To the extent that case losses, for any period, exceed the unallocated portion of the total loss reserve, the excess will be charged against the Company's earnings for that period. The Company periodically evaluates the appropriateness of the loss rate factor based on actual case loss experience. SAP RATIOS The financial statements in this Form 10-K are prepared on the basis of GAAP. For reporting to state regulatory authorities, SAP is used. See Note 3 to the Consolidated Financial Statements of MBIA Inc. and Subsidiaries. The SAP combined ratio is a traditional measure of underwriting profitability for insurance companies. The SAP loss ratio (which is losses incurred divided by premiums earned), SAP expense ratio (which is underwriting expenses divided by net premiums written) and SAP combined ratio (which is the sum of the loss and expense ratios) for MBIA Corp. and for the financial guarantee industry, which includes the monoline primary insurers (including MBIA Corp.) and monoline reinsurers, are shown in the table below: Years Ended December 31, 1992 1993 1994 1995 MBIA Corp. ..................... Loss ratio .................... 2.4% (3.5)% 9.8% 0.4% Expense ratio ................. 18.3 17.6 22.9 20.8 Combined ratio 20.7 14.1 32.7 21.2 Financial guarantee industry (1) Loss ratio .................... 13.8% 0.7% 11.3% * Expense ratio ................. 24.8 23.8 36.3 * Combined ratio ................ 38.6 4.5 47.6 * - ---------------------- (1) Industry statistics were taken from the 1994 Annual Report of the Association of Financial Guaranty Insurors. * Not Available. -19 The SAP loss ratio differs from the GAAP loss ratio because the GAAP ratio recognizes a provision for unidentified losses. The SAP expense ratio varies from the GAAP expense ratio because the GAAP ratio recognizes the deferral of policy acquisition costs and includes the amortization of purchase accounting adjustments, principally goodwill. In addition, the SAP expense ratio is calculated using premiums written while the GAAP expense ratio uses premiums earned. Net insurance in force, qualified statutory capital (which is comprised of policyholders' surplus and the contingency reserve), and policyholders' leverage ratios for MBIA Corp. and for the financial guarantee industry are shown in the table below: AS OF DECEMBER 31, 1992 1993 1994 1995 (DOLLARS IN MILLIONS) MBIA Corp. ............ Net insurance in force ........ $223,056 $266,784 $304,502 $344,037 Qualified statutory capital .... 1,300 1,517 1,731 2,018 Policyholders' leverage ratio .. 172:1 176:1 176:1 171:1 Financial guarantee industry (1) Net insurance in force ...... $586,579 $704,569 $785,126 * Qualified statutory capital 4,392 5,195 5,807 * Policyholders' leverage ratio 134:1 136:1 135:1 * - ------------------------ (1) Industry statistics were taken from the 1994 Annual Report of the Association of Financial Guaranty Insurors. * Not Available. The policyholders' leverage ratio is the ratio of net insurance in force to qualified statutory capital. This test is sometimes focused on as a measure of a company's claims-paying capacity. The Company believes that the leverage ratio has significant limitations since it compares the total debt service (undiscounted) coming due over the next 30 years or so to a company's current capital base. It thereby fails to recognize future capital that will be generated during the period of risk being measured, arising from unearned premium reserve and future installment premium commitments. Further, the leverage ratio does not consider the underlying quality of the issuers whose debt service is insured and thereby does not differentiate among the risk characteristics of a financial quarantor's insured portfolio, nor does it give any benefit for third-party commitments such as standby lines of credit. To assist state insurance departments in overseeing the financial condition of the insurance companies in their respective states, the National Association of Insurance Commissioners (the "NAIC") has developed a system intended to provide an early warning of impending financial trouble, the Insurance Regulatory Information System ("IRIS"). IRIS identifies eleven financial ratios and specifies "usual values" for each ratio. These are derived from financial statements prepared on a SAP basis. For each of the years 1987 to 1992, MBIA Corp. had financial ratio values within the usual values established by the NAIC for all of the applicable financial ratio tests with the exception of the test that measures the change in net premiums written. For the year ended December 31, 1992 the growth in net premiums written exceeded NAIC test range values of -33% to +33% due to an extremely favorable business environment marked by a surge in municipal financings and strong demand for insurance. MBIA Corp. also had values outside of the normal range for premiums written for the years ended December 31, 1987, 1990 and 1991. These were due to the assumption by MBIA Corp. of most of the book of net insured obligations of its predecessor, the Association, in 1986, and upon the assumption of the entire book of net insured obligations of MBIA Illinois in 1990 following its acquisition by the Company. -20- In 1993, MBIA Corp. had financial ratio values within the NAIC test ranges for all ratios except loss-related ratios. MBIA Corp. fell below the NAIC test range values of 0% to +25% for the three loss reserve development ratios due to the reduction in expected losses related to the Aurora salvage. In 1994 and 1995, MBIA Corp. had financial ratio values within the NAIC test ranges for all ratios. MBIA CORP. INSURANCE POLICIES The insurance policies issued by MBIA Corp. provide an unconditional and irrevocable guarantee of the payment to a designated paying agent for the bondholders of an amount equal to the principal of and interest on insured bonds not paid when due. In the event of a default in payment of principal or interest by an issuer, MBIA Corp. promises to make funds available in the amount of the default on the next business day following notification. MBIA Corp. has a Fiscal Agency Agreement with State Street Bank and Trust Company, N.A. to provide for this payment upon receipt of proof of ownership of the bonds, as well as upon receipt of instruments appointing MBIA Corp. as agent for the bondholders and evidencing the assignment of bondholder rights with respect to the debt service payments made by MBIA Corp. Even if bondholders are permitted by the indenture securing the bonds to have the full amount of principal of the bonds, together with accrued interest, declared due and payable immediately in the event of a default, MBIA Corp. is required to pay only the principal and interest scheduled to be paid, but not in fact paid, on each original principal and interest payment date. The MBIA Illinois insurance policies provide for payments on default in substantially the same manner as the MBIA Corp. policies. The paying agent on MBIA Illinois policies is Bankers Trust Company. MBIA Assurance writes policies that are substantially similar in coverage and manner of payment to the MBIA Corp. policies. RATING AGENCIES Moody's, S&P and Fitch perform periodic reviews of MBIA Corp. and other companies providing financial guarantee insurance. Their reviews focus on the insurer's underwriting policies and procedures and on the issues insured. Additionally, each rating agency has certain criteria as to exposure limits and capital requirements for financial guarantors. The rating agencies have reaffirmed their Triple-A claims-paying ratings assigned to MBIA Corp., MBIA Illinois and to MBIA Assurance. The rating for MBIA Illinois is based in significant part on the reinsurance agreement between MBIA Corp. and MBIA Illinois. The rating of MBIA Assurance is based in significant part on the reinsurance agreement between MBIA Corp. and MBIA Assurance and the net worth maintenance agreement between the two parties. See "Business--Reinsurance." Although MBIA Corp. intends to comply with the requirements of the rating agencies, no assurance can be given that these requirements will not change or that, even if MBIA Corp. complies with these requirements, one or both rating agencies will not reduce or withdraw their rating. MBIA Corp.'s ability to attract new business and to compete with other financial guarantors, and its results of operations and financial condition would be materially adversely affected by any reduction in its ratings. -21- CREDIT AGREEMENT MBIA Corp. entered into a Credit Agreement, dated as of December 29, 1989, which has been amended from time to time (the "Credit Agreement") with Credit Suisse, New York Branch ("Credit Suisse") to provide MBIA Corp. with an unconditional, irrevocable line of credit. The Credit Agreement was amended and restated by the First Restated Credit Agreement, dated as of October 1, 1993 as amended by the First Amendment, dated as of September 23, 1994 among MBIA Corp., Credit Suisse, as Agent and a consortium of highly rated banks, including Credit Suisse. The line of credit is available to be drawn upon by MBIA Corp., in an amount up to $650 million, after MBIA Corp. has incurred, during the period commencing October 1, 1995 and ending September 30, 2002, cumulative losses (net of any recoveries) in excess of the greater of $500 million or 6.25% of average annual debt service. The obligation to repay loans made under the Credit Agreement is a limited recourse obligation of MBIA Corp. payable solely from, and secured by a pledge of, recoveries realized on defaulted insured obligations, from certain pledged installment premiums and other collateral. Borrowings under the Credit Agreement are repayable on the expiration date of the Credit Agreement. The current expiration date of the Credit Agreement is September 30, 2002, subject to annual extensions under certain circumstances. The Credit Agreement contains covenants that, among other things, restrict MBIA Corp.'s ability to encumber assets or merge or consolidate with another entity. EMPLOYEES As of March 22, 1996, the Company had 366 employees. No employee is covered by a collective bargaining agreement. The Company considers its employee relations to be satisfactory. EXECUTIVE OFFICERS The executive officers of the Company and their present ages and positions with the Company are set forth below. NAME AGE POSITION AND TERM OF OFFICE David H. Elliott 54 Chairman and Chief Executive Officer (officer since 1986) Richard L. Weill 53 President (officer since 1989) James E. Malling 54 Executive Vice President (officer since 1991) Hilda H. Boas* 64 Senior Vice President (officer since 1992) Janis S. Christensen 46 Senior Vice President (officer since 1992) Louis G. Lenzi 47 General Counsel and Secretary (officer since 1986) Kevin D. Silva 42 Senior Vice President Julliette S. Tehrani 49 Senior Vice President and Chief Financial Officer(officer since 1987) Christopher W. Tilley 40 Senior Vice President and Treasurer (officer since 1994) Arthur M. Warren* 61 Senior Vice President and Chief Financial Officer (officer since 1987) *Retired on January 2, 1996 David H. Elliott is the Chairman and Chief Executive Officer of the Company and of MBIA Corp. From 1986 to 1991, he served as the President and Chief Operating Officer of the Company and MBIA Corp He is a director of MBIA Corp. and was the President of the Association from 1976 to 1980 and from 1982 through 1986. Richard L. Weill is President of the Company and of MBIA Corp., in charge of the Insurance Operations Division of MBIA Corp., and a director of MBIA Corp. From 1989 through 1991, Mr. Weill was General Counsel and Corporate Secretary of the Company. Mr. Weill was previously a partner with the law firm of Kutak Rock, with which he had been associated from 1969 to 1989. James E. Malling is an Executive Vice President of the Company and the head of the Corporate Marketing, Corporate Development and Management Services Division, as well as a director of MBIA Corp. Mr. Malling was the President of the International Finance Division of CIGNA Corporation from 1984 to 1990 and also served as a director of the Company from December of 1986 to December 31, 1990. Kevin D. Silva is Senior Vice President of the Company and MBIA Corp. and a director of MBIA Corp. He has been in charge of the Management Services Division of MBIA Corp. since joining the Company in late 1995. Janis S. Christensen is Senior Vice President of the Company and MBIA Corp., head of the Underwriting Policy and Review Division and a director of MBIA Corp. Ms. Christensen has been responsible for the underwriting function at MBIA Corp. since joining the Company in 1987. -22- Louis G. Lenzi is General Counsel of the Company and MBIA Corp. He is also a director of MBIA Corp. Mr.Lenzi has held various legal positions within MBIA Corp. (and MISC) since July of 1984. Julliette S. Tehrani is Senior Vice President and Chief Financial Officer of the Company and a director of MBIA Corp. From 1986 to 1995, Ms. Tehrani held the position of Senior Vice President and Controller. Ms. Tehrani has held various positions in the Company's and MlSC's Finance Division since 1978, including the offices of Vice President and Treasurer of MISC from 1982 through 1985. Christopher W. Tilley is Senior Vice President and Treasurer of the Company and a director of MBIA Corp. He has held various positions in the Finance Division of the Company since 1989. ITEM 2. PROPERTIES MBIA Corp. owns the 157,500 square foot office building on approximately 15.5 acres of property in Armonk, New York, in which the Company and MBIA Corp. have their offices. The Company believes that this office building is adequate and suitable for its current needs. ITEM 3. LEGAL PROCEEDINGS There are no material lawsuits pending or, to the knowledge of the Company, threatened to which the Company or any of its subsidiaries is a party. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information concerning the market for the Company's Common Stock and certain information concerning dividends appears under the heading "Shareholder Information" on the inside back cover of the Company's 1995 Annual Report to Shareholders and is incorporated herein by reference. As of March 22, 1996, there were 446 shareholders of record of the Company's Common Stock. The information concerning dividends on the Company's Common Stock is under "Business--Regulation" in this report. ITEM 6. SELECTED FINANCIAL DATA The information under the heading "Selected Financial and Statistical Data" as set forth on pages 18-19 of the Company's 1995 Annual Report to Shareholders is incorporated by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" as set forth on pages 20-24 of the Company's 1995 Annual Report to Shareholders is incorporated by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements of the Company, the Report of Independent Accountants thereon by Coopers & Lybrand L.L.P. and the unaudited "Quarterly Financial Information" are set forth on pages 25-43 of the Company's 1995 Annual Report to Shareholders and are incorporated by reference. ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. -23- PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANt Information regarding directors is set forth under "Election of Directors" in the Company's Proxy Statement, dated March 25, 1996, which is incorporated by reference. Information regarding executive officers is set forth under Item 1, "Business--Executive Officers," in this report. ITEM 11. EXECUTIVE COMPENSATION Information regarding compensation of the Company's executive officers is set forth under "Compensation of Executive Officers" in the Company's Proxy Statement, dated March 25, 1996, which is incorporated by reference. ITEM 12. Security Ownership of Certain Beneficial Owners and Management Information regarding security ownership of certain beneficial owners and management is set forth under "Election of Directors" and "Security Ownership of Certain Beneficial Owners" in the Company's Proxy Statement, dated March 25, 1996, which is incorporated by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information regarding relationships and related transactions is set forth under "Certain Relationships and Related Transactions" in the Company's Proxy Statement dated March 25, 1996, which is incorporated by reference. PART IV ITEM 14. (a) Financial Statements and Financial Statement Schedules and Exhibits. 1. FINANCIAL STATEMENTS MBIA Inc. has incorporated by reference from the 1995 Annual Report to Shareholders the following consolidated financial statements of the Company: Annual Report to Shareholders Page(s) MBIA INC. AND SUBSIDIARIES Report of independent accountants. 25 Consolidated statements of income for the years ended 26 December 31, 1995, 1994 and 1993. Consolidated balance sheets at December 31, 1995 and 27 1994. Consolidated statements of changes in shareholders' 28 equity for the years ended December 31, 1995, 1994 and 1993. Consolidated statements of cash flows for the years 29 ended December 31, 1995, 1994 and 1993. Notes to consolidated financial statements 30-43 -24- 2. FINANCIAL STATEMENT SCHEDULES The following financial statement schedules are filed as part of this report. Schedule Title I Summary of investments, other than investments in related parties, at December 31, 1995. III Condensed financial information of Registrant for December 31, 1995, 1994 and 1993. VI Reinsurance for the years ended December 31, 1995, 1994 and 1993. The report of the Registrant's independent accountants with respect to the above listed financial statement schedules is set forth on page 36 of this Form 10-K. All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto. 3. Exhibits (An exhibit index immediately preceding the Exhibits indicates the page number where each exhibit filed as part of this report can be found.) -25- 3. Articles of Incorporation and By-Laws. 3.1. Restated Certificate of Incorporation, dated August 17, 1990, incorporated by reference to Exhibit 3.1 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1990 (Comm. File 1-9583) (the "1990 10-K"). 3.2. By-Laws as Amended as of May 7, 1992, incorporated by reference to Exhibit 3.2 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992 (Comm. File 1-9583) (the "1992 10-K"). 10. Material Contracts 10.02. Reinsurance Agreements, each dated as of December 30, 1986, between the Company and each of The Aetna Casualty and Surety Company, Fireman's Fund Insurance Company, Aetna Insurance Company and The Continental Insurance Company, incorporated by reference to Exhibit 10.09 to the 1987 S-1. 10.03. Reinsurance Assumption Agreements, each dated as of December 30, 1986, among the Company, Municipal Bond Investors Assurance Corporation ("MBIA Corp.") and each of The Aetna Casualty and Surety Company, Fireman's Fund Insurance Company, Aetna Insurance Company and The Continental Insurance Company, incorporated by reference to Exhibit 10.10 to the 1987 S- 1. 10.04. Endorsement No. 1 to the December 30, 1986 Reinsurance Agreements, dated as of July 1, 1987, between MBIA Corp. and each of The Aetna Casualty and Surety Company, Fireman's Fund Insurance Company, Aetna Insurance Company and The Continental Insurance Company, incorporated by reference to Exhibit 10.34 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1987(Comm. File No. 1-9583) (the "1987 10-K"). 10.05. Endorsement No. 2 to the December 30, 1986 Reinsurance Agreements, dated as of October 1, 1987, between MBIA Corp. and each of The Aetna Casualty and Surety Company, Fireman's Fund Insurance Company, Aetna Insurance Company and The Continental Insurance Company, incorporated by reference to Exhibit 10.35 to the 1987 10-K. 10.06. Endorsement No. 3 to the December 30, 1986 Reinsurance Agreements, dated as of December 31, 1987, between MBIA Corp. and each of The Aetna Casualty and Surety Company, Fireman's Fund Insurance Company, CIGNA Property and Casualty Company (formerly Aetna Insurance Company) and The Continental Insurance Company, incorporated by reference to Exhibit 10.06 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1989 (Comm. File No. 1-9583) (the "1989 10K") 10.07. Endorsement No. 4 to the December 30, 1986 Reinsurance Agreements, dated as of January 1, 1988, between MBIA Corp. and each of The Aetna Casualty and Surety Company, Fireman's Fund Insurance Company, CIGNA Property and Casualty Company (formerly Aetna Insurance Company) and The Continental Insurance Company, incorporated by reference to Exhibit 10.07 to the 1989 10-K. 10.08. Endorsement No. 5 to the December 30, 1986 Reinsurance Agreements, dated as of January 1, 1988, between MBIA Corp. and each of The Aetna Casualty and Surety Company, Fireman's Fund Insurance Company, CIGNA Property and Casualty Company (formerly Aetna Insurance Company) and The Continental Insurance Company, incorporated by reference to Exhibit 10.08 to the 1989 10-K. 10.09. Endorsement No. 6 to the December 30, 1986 Reinsurance Agreements, dated as of January 1, 1988, between MBIA Corp. and each of The Aetna Casualty and Surety Company, Fireman's Fund Insurance Company, CIGNA Property and Casualty Company (formerly Aetna Insurance Company) and The Continental Insurance Company, incorporated by reference to Exhibit 10.09 to the 1989 10-K. 10.10. Endorsement No. 7 to the December 30, 1986 Reinsurance Agreements, effective September 30, 1989, between MBIA Corp. and each of The Aetna Casualty and Surety Company, Fireman's Fund Insurance Company, CIGNA Property and Casualty Company (formerly Aetna Insurance Company) and The Continental Insurance Company, incorporated by reference to Exhibit 10.10 to the 1989 10-K. -26- 10.11. First Amended and Restated Investment Management Agreement, dated as of December 30, 1986, between Aetna Financial Services, Inc. and MBIA Corp., incorporated by reference to Exhibit 10.11 to the 1989 10-K, as amended by Amendment No. 2 to the First Amended and Restated Investment Management Agreement, dated as of October 1, 1994, as modified by a Consent, effective February 28, 1994, incorporated by reference to Exhibit 10.11 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 (Comm.File No. 1-9583) (the "1994 10-K"). 10.12. Restated Management Agreement, dated as of January 5, 1987, between MISC and Municipal Bond Insurance Association (the "Association"), as further amended by Supplement to the Restated Management Agreement, dated September 30, 1989, incorporated by reference to Exhibit 10.16 to the 1989 10-K. as amended by Second Amendment and Restatement of Management Agreement, dated as of August 31, 1993, incorporated by reference to Exhibit 10.12 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993 (Comm. File No. 1-9583) (the "1993 10-K"). 10.13. License Agreement, dated as of December 30, 1986, between the Company and the Association, incorporated by reference to Exhibit 10.15 to the 1987 S-l. 10.14. MBIA Inc. 1987 Stock Option Plan, incorporated by reference to Exhibit 10.13 to the 1987 S-1. 10.15. MBIA Inc. Deferred Compensation and Excess Benefit Plan, incorporated by reference to Exhibit 10.16 to the 1988 10-K, as amended as of July 22, 1992, incorporated by reference to Exhibit 10.15 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992 (Comm. File No. 1-9583) (the "1992 10-K"). 10.16. MBIA Inc. Employees Pension Plan, amended and restated effective January 1, 1987, incorporated by reference to Exhibit 10.28 of the Company's Amendment No. 1 to the 1987 S-1, as further amended and restated as of December 12, 1991, incorporated by reference to Exhibit 10.18 to the 1991 10-K, as further amended and restated effective January 1, 1994, incorporated by reference to Exhibit 10.16 to the 1994 10-K. 10.17. MBIA Inc. Employees Profit Sharing Plan, as amended and restated effective January 1, 1987, incorporated by reference to Exhibit 10.29 to Amendment No. 1 to the 1987 S-1, as further amended by Amendment dated December 8, 1988, incorporated by reference to Exhibit 10.21 to the 1989 10-K, as further amended and restated as of December 12, 1991, incorporated by reference to Exhibit 10.19 to the 1991 10-K, as further amended and restated as of May 7, 1992, incorporated by reference to Exhibit 10.17 to the 1992 10K, as further amended and restated effective January 1, 1994, incorporated by reference to Exhibit 10.17 to the 1994 10-K. 10.18. MBIA Corp. Split Dollar Life Insurance Plan, dated as of February 9, 1988, issued by Aetna Life Insurance and Annuity Company, incorporated by reference to Exhibit 10.23 to the 1989 10-K. 10.19. Stock Option Agreement, dated as of January 1, 1987, between the Company and William O. Bailey, incorporated by reference to Exhibit 10.31 to Amendment No. 1 to the 1987 S-1. 10.20. Stock Option Agreement, dated as of March 27, 1987, between the Company and David H. Elliott, incorporated by reference to Exhibit 10.32 to Amendment No. 1 to the 1987 S-1. 10.21. Indemnification Agreement, dated as of January 5, 1987, among MISC, The Aetna Casualty and Surety Company, Fireman's Fund Insurance Company, The Travelers Indemnity Company, Aetna Insurance Company, The Continental Insurance Company and the Company, incorporated by reference to Exhibit 10.33 to Amendment No. 1 to the 1987 S-l. 10.22. Amended and Restated Shareholders' Agreement, dated as of May 21, 1987, among the Company, Aetna Life and Casualty Company, The Aetna Casualty and Surety Company, Fireman's Fund Insurance Company, CIGNA Guaranty Holdings, Inc., Aetna Insurance Company, The Continental Insurance Company and The Fidelity and Casualty Company of New York, incorporated by reference to Exhibit 10.30 to Amendment No. I to the 1987 S-1, as amended by Amendment No. 1 to the Amended and Restated Shareholders' Agreement, dated as of April 1, 1989, as amended by Amendment No. 2 to the Amended and Restated Shareholders' Agreement, dated November 21, 1989, incorporated by reference to Exhibit 10.41 to the 1989 10-K, as amended by Amendment No. 3 to the Amended and Restated Shareholders' Agreement, dated as of November 30, 1990, incorporated by reference to Exhibit 10.28 to the 1990 10-K and as amended by Amendment No. 4 to the Amended and Restated Shareholders' Agreement, dated as of September 30, 1991, incorporated by reference to Exhibit 10.28 to the 1991 10-K. 10.23. Assignment of Warranties, dated April 7, 1989, from Trafalgar House Real Estate, Inc. to MBIA Corp., incorporated by reference to Exhibit 10.48 to the 1989 10-K. 10.24. Stock Purchase Agreement, dated as of October 27, 1989, among Government Employees Insurance Company, Bankers Trust New York Corporation, Xerox Credit Corporation, American International Group, Inc., Salomon Inc and the Company, as amended by Letter Agreement dated as of January 5, 1990, incorporated by reference to Exhibit 10.53 to the 1989 10-K. -27- 10.25. Trust Agreement, effective as of December 31, 1989, among BIG Ins., MBIA Corp. and Morgan Guaranty Trust Company of New York, incorporated by reference to Exhibit 10.55 to the 1989 10-K, as amended by Amendment to Trust Agreement, dated as of February 28, 1995. 10.26. Investment Management Agreement, dated as of January 5, 1990, between Aetna Financial Services, Inc. and BIG Ins., incorporated by reference to Exhibit 10.57 to the 1989 10-K, as modified by a Consent, effective February 28, 1994, incorporated by reference to Exhibit 10.27 to the 1994 10-K. 10.27. Surety Bond, dated December 28, 1989, issued by MBIA Corp. to Citibank, N.A. with regard to the payment obligations of Continental Insurance Company (the "Continental Surety Bond"), incorporated by reference to Exhibit 10.62 to the 1989 10-K. 10.28. The Fiscal Agency Agreement, dated December 27, 1989, between MBIA Corp. and Citibank, N.A., with regard to the Continental Surety Bond, incorporated by reference to Exhibit 10.63 to the 1989 10-K. 10.29. Surety Bond, dated December 28, 1989, issued by MBIA Corp. to Citibank, N.A. with regard to the payment obligations of CIGNA Property and Casualty Insurance Company (the "CIGNA Surety Bond"), incorporated by reference to Exhibit 10.64 to the 1989 10-K. 10.30. Fiscal Agency Agreement, dated December 27, 1989, between MBIA Corp. and Citibank, N.A., with regard to the CIGNA Surety Bond, incorporated by reference to Exhibit 10.65 to the 1989 10-K. 10.31. Amended and Restated Tax Allocation Agreement, dated as of January 1, 1990, between the Company and MBIA Corp., incorporated by reference to Exhibit 10.66 to the 1989 10-K. 10.32. Endorsement No. 8 to the December 30, 1986 Reinsurance Agreements, effective June 30, 1988, between MBIA Corp. and each of The Aetna Casualty and Surety Company, Fireman's Fund Insurance Company, CIGNA Property and Casualty Insurance Company (formerly Aetna Insurance Company) and The Continental Insurance Company, incorporated by reference to Exhibit 10.51 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1990 (Comm. File No. 1-9583) (the "1990 10 K") 10.33. Endorsement No. 9 to the December 30, 1986 Reinsurance Agreements, effective December 31, 1988, between MBIA Corp. and each of The Aetna Casualty and Surety Company, Fireman's Fund Insurance Company, CIGNA Property and Casualty Insurance Company (formerly Aetna Insurance Company) and The Continental Insurance Company, incorporated by reference to Exhibit 10.52 to the 1990 10-K. 10.34. Endorsement No. 10 to the December 30, 1986 Reinsurance Agreements, effective January 1, 1990, between MBIA Corp. and each of The Aetna Casualty and Surety Company, Fireman's Fund Insurance Company, CIGNA Property and Casualty Insurance Company (formerly Aetna Insurance Company) and The Continental Insurance Company, incorporated by reference to Exhibit 10.53 to the 1990 10-K. 10.35. Reinsurance Agreement, dated as of December 31, 1990, between MBIA Corp. and Bond Investors Guaranty Insurance Company, incorporated by reference to Exhibit 10.54 to the 1990 10-K. 10.36. Surety Bond, dated August 24, 1990, issued by MBIA Corp. to Citibank, N.A. with regard to the payment obligations of The Travelers Indemnity Company (the "Travelers Surety Bond"), incorporated by reference to Exhibit 10.59 to the 1990 10-K. 10.37. Insurer Fiscal Agency Agreement, dated August 24, 1990, between MBIA Corp. and Citibank, N.A. with regard to the Travelers Surety Bond, incorporated by reference to Exhibit 10.60 to the 1990 10-K. 10.38. Custody Agreement, dated as of December 30, 1986, between MBIA Corp. and Morgan Guaranty Trust Company of New York, as amended by the First Amendment to Custody Agreement, dated as of December 1, 1989, incorporated by reference to Exhibit 10.62 to the 1990 10-K. 10.39. Closing Agreement, dated September 28, 1990, between Trafalgar House Property, Inc. and MBIA Corp., incorporated by reference to Exhibit 10.64 to the 1990 10-K. 10.40. Guaranty of Trafalgar House Holdings, Inc., dated as of September 28, 1990, between Trafalgar House Holdings, Inc. and MBIA Corp., incorporated by reference to Exhibit 10.67 to the 1990 10-K. 10.41. Land-Banked Parking Agreement, dated September 28, 1990, between MBIA Corp. and the Town of North Castle, incorporated by reference to Exhibit 10.69 to the 1990 10-K. -28- 10.42. Surety Bond, dated April 5, 1991, issued by MBIA Corp. to Citibank, N.A. with regard to the payment obligations of The Aetna Casualty and Surety Company (the "Aetna Surety Bond"), incorporated by reference to Exhibit 10.73 to the 1991 10-K. 10.43. The Fiscal Agency Agreement, dated April 5, 1991, between MBIA Corp. and Citibank, N.A. with regard to the Aetna Surety Bond, incorporated by reference to Exhibit 10.74 to the 1991 10-K. 10.44. Revolving Credit Agreement, dated as of February 15, 1991, between the Company and Credit Suisse, New York Branch, incorporated by reference to Exhibit 10.76 to the 1991 10-K, as amended by the First Amendment to Revolving Credit Agreement, dated as of September 30, 1992, incorporated by reference to Exhibit 10.61 to the 1992 10-K, as further amended by the Second Amendment to Revolving Credit Agreement, dated as of September 30, 1994, incorporated by reference to Exhibit 10.48 to the 1994 10-K 10.45. Rights Agreement, dated as of December 12, 1991, between the Company and Mellon Bank, N.A., incorporated by reference to the Company's Current Report on Form 8-K, filed on December 31, 1991, incorporated by reference to Exhibit 10.62 to the 1993 10-K, as amended by Amendment to Rights Agreement, dated as of October 24, 1994, incorporated by reference to Exhibit 10.49 to the 1994 10-K. 10.46. Owner/Contractor Agreement, dated as of June 1, 1991, between MBIA Corp. and Trafalgar House Construction Management, Inc., incorporated by reference to Exhibit 10.77 to the 1991 10-K. 10.47. Trust Agreement, dated as of December 31, 1991, between MBIA Corp. and Fidelity Management Trust Company, incorporated by reference to Exhibit 10.64 to the 1992 10-K, as amended by the Amendment to Trust Agreement, dated as of April 1, 1993, incorporated by reference to Exhibit 10.64 to the 1993 10-K, as amended by First Amendment to Trust Agreement, dated as of January 21, 1992, as further amended by Second Amendment to Trust Agreement, dated as of March 5, 1992, as further amended by Third Amendment to Trust Agreement, dated as of April 1, 1993, as further amended by the Fourth Amendment to Trust Agreement, dated as of July 1, 1995. 10.48. MBIA Inc. Employees Change of Control Benefits Plan, effective as of January 1, 1992, incorporated by reference to Exhibit 10.65 to the 1992 10-K. 10.49. Investment Management Agreement, dated as of October 8, 1992, between Aetna Financial Services, Inc. and the Company, incorporated by reference to Exhibit 10.66 to the 1992 10-K, as modified by a Consent, effective February 28, 1994, incorporated by reference to Exhibit 10.53 to the 1994 10-K. 10.50. Endorsements to the December 30, 1986 Reinsurance Agreements (i) Nos. 11 and 12, both effective June 30, 1992; (ii) No. 14, effective November 30, 1990; and (iii) No. 16, effective September 30, 1992, each, between the Company (except with respect to No. 14 which was subsequently assumed by MBIA Corp.) and each of The Aetna Casualty and Surety Company, Fireman's Fund Insurance Company, CIGNA Property and Casualty Insurance Company (formerly Aetna Insurance Company), the Continental Insurance Company, incorporated by reference to Exhibit 10.69 to the 1992 10-K. 10.51. Surety Bond, dated October 15, 1992, issued by MBIA Corp. to Citibank, N.A. with regard to the payment obligations of Fireman's Fund Insurance Company (the "Fireman's Surety Bond"), incorporated by reference to Exhibit 10.70 to the 1992 10-K. 10.52. Fiscal Agency Agreement, dated October 15, 1992, between MBIA Corp. and Citibank, N.A. with regard to the Fireman's Surety Bond, incorporated by reference to Exhibit 10.71 to the 1992 10-K. 10.53. Indenture, dated as of August 1, 1990, between MBIA Inc. and The First National Bank of Chicago, Trustee, incorporated by reference to Exhibit 10.72 to the 1992 10-K. 10.54. Reinsurance Agreement. dated as of August 31, 1993, between The Travelers Indemnity Company and MBIA Corp., incorporated by reference to Exhibit 10.73 to the 1993 10-K. 10.55. Endorsement No. 15 to the December 30, 1986 Reinsurance Agreements, effective January 1, 1992, between MBIA Corp. and each of The Aetna Casualty and Surety Company, Fireman's Fund Insurance Company, CIGNA Property and Casualty Insurance Company (formerly Aetna Insurance Company) and The Continental Insurance Company, incorporated by reference to Exhibit 10.74 to the 1993 10-K. 10.56. Endorsement No. 17 to the December 30, 1986 Reinsurance Agreements, effective January 1, 1993, between MBIA Corp. and each of The Aetna Casualty and Surety Company, Fireman's Fund Insurance Company, CIGNA Property and Casualty Insurance Company (formerly Aetna Insurance Company) and The Continental Insurance Company, incorporated by reference to Exhibit 10.75 to the 1993 10-K. -29 10.57. Endorsement No. 18 to the December 30, 1986 Reinsurance Agreements, effective April 1, 1993, between MBIA Corp. and each of The Aetna Casualty and Surety Company, Fireman's Fund Insurance Company, CIGNA Property and Casualty Insurance Company (formerly Aetna Insurance Company) and The Continental Insurance Company, incorporated by reference to Exhibit 10.76 to the 1993 10-K. 10.58. First Restated Credit Agreement, dated as of October 1, 1993, among MBIA Corp., Credit Suisse, New York Branch, as Agent, Credit Suisse, New York Branch, Caisse Des Depots Et Consignations, Deutsche Bank AG, Bayerische Landesbank Girozentrale and Landesbank Hessen-Thuringen Girozentrale, as amended by an Assignment and Assumption Agreement, dated as of December 31, 1993, among MBIA Corp., Credit Suisse, New York Branch, as Agent and Assignor and Deutsche Bank AG, New York Branch, as further amended by a Modification Agreement, dated as of January 1, 1994, among Deutsche Bank, AG, New York Branch, MBIA Corp. and Credit Suisse, New York Branch, as Agent, as amended by a Joinder Agreement, dated December 31, 1993, among Credit Suisse, New York Branch, as Agent, Sudwestdeutsche Landesbank Girozentrale and MBIA Corp., incorporated by reference to Exhibit 10.78 to the 1993 10-K, as amended by the First Amendment to First Restated Credit Agreement, dated as of September 23, 1994, incorporated by reference to Exhibit 10.63 to the 1994 10-K. 10.59. Net Worth Maintenance Agreement, dated as of November 1, 1991, between MBIA Corp. and MBIA Assurance S.A., as amended by Amendment to Net Worth Agreement, dated as of November 1, 1991, incorporated by reference to Exhibit 10.79 to the 1993 10-K. 10.60. Reinsurance Agreement, dated as of January 1, 1993, between MBIA Assurance S.A. and MBIA Corp., incorporated by reference to Exhibit 10.80 to the 1993 10-K. 10.61. Credit Agreement, dated as of August 31, 1994, among Municipal Bond Investors Assurance Corporation, the Company, Wachovia Bank of Georgia, N.A., Banco Santander, The Sumitomo Bank, Ltd., New York Branch, The Chase Manhattan Bank, N.A., Commerzbank Aktiengesellschaft, The Industrial Bank of Japan, Limited New York Branch and NBD Bank, N.A., and as further amended by the First Amendment to Credit Agreement, dated as of October 14, 1994, incorporated by reference to Exhibit 10.66 to the 1994 10-K, as amended by the Second Amendment to Credit Agreement, dated as of October 31, 1995. 10.62. Endorsement No. 13 to the December 30, 1986 Reinsurance Agreements, effective December 1, 1990, between MBIA Corp. and each of The Aetna Casualty and Surety Company, Fireman's Fund Insurance Company, CIGNA Property and Casualty Insurance Company (formerly Aetna Insurance Company) and The Continental Insurance Company, dated as of March, 1993, incorporated by reference to Exhibit 10.67 to the 1994 10-K. 10.63. Endorsement No. 16 to the December 30, 1986 Reinsurance Agreements, effective September 30, 1992, between MBIA Corp. and each of The Aetna Casualty and Surety Company, Fireman's Fund Insurance Company, CIGNA Property and Casualty Insurance Company (formerly Aetna Insurance Company) and The Continental Insurance Company, dated as of February 28, 1993, incorporated by reference to Exhibit 10.68 to the 1994 10-K. 10.64. Endorsement No. 19 to the December 30, 1986 Reinsurance Agreements, effective October 1, 1993, between MBIA Corp. and each of The Aetna Casualty and Surety Company, Fireman's Fund Insurance Company, CIGNA Property and Casualty Insurance Company (formerly Aetna Insurance Company) and The Continental Insurance Company, dated as of June 30, 1994, incorporated by reference to Exhibit 10.69 to the 1994 10-K. 10.65. Investment Services Agreement, effective as of April 28, 1995, between MBIA Insurance Corporation and MBIA Securities Corp., as amended by Amendment No. 1, dated as of December 29, 1995. 10.66. Investment Services Agreement, effective January 2, 1996, between MBIA Insurance Corp. of Illinois and MBIA Securities Corp. 10.67. Custody Agreement, as of March 1, 1995, between MBIA Corp. and The Chase Manhattan Bank, N.A. 10.68. Custody Agreement, as of March 1, 1995, between MBIA Corp. and The Chase Manhattan Bank, N.A. 10.69. Custody Agreement, as of March 1, 1995, between MBIA Inc. and The Chase Manhattan Bank, N.A. 10.70. MBIA Inc. 1996 Incentive Plan, effective as of January 1, 1996. -30- Executive Compensation Plans and Arrangements The following Exhibits identify all existing executive compensation plans and arrangements: 10.14. MBIA Inc. 1987 Stock Option Plan, incorporated by reference to Exhibit 10.13 to the 1987 S-1. 10.15. MBIA Inc. Deferred Compensation and Excess Benefit Plan, incorporated by reference to Exhibit 10.16 to the 1988 10-K, as amended as of July 22, 1992, incorporated by reference to Exhibit 10.15 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992 (Comm. File No. 1-9583) (the " 1992 10-K"). 10.16. MBIA Inc. Employees Pension Plan, amended and restated effective January 1, 1987, incorporated by reference to Exhibit 10.28 of the Company's Amendment No. 1 to the 1987 S-1, as further amended and restated as of December 12, 1991, incorporated by reference to Exhibit 10.18 to the 1991 10-K. 10.17. MBIA Inc. Employees Profit Sharing Plan, as amended and restated effective January 1, 1987, incorporated by reference to Exhibit 10.29 to Amendment No. 1 to the 1987 S-1, as further amended by Amendment dated December 8, 1988, incorporated by reference to Exhibit 10.21 to the 1989 10-K, as further amended and restated as of December 12, 1991, incorporated by reference to Exhibit 10.19 to the 1991 10-K, as further amended and restated as of May 7, 1992, incorporated by reference to Exhibit 10.17 to the 1992 10-K. 10.19. MBIA Corp. Split Dollar Life Insurance Plan, dated as of February 9, 1988, issued by Aetna Life Insurance and Annuity Company, incorporated by reference to Exhibit 10.23 to the 1989 10-K. 10.22. Stock Option Agreement, dated as of January 1, 1987, between the Company and William O. Bailey, incorporated by reference to Exhibit 10.31 to Amendment No. 1 to the 1987 S-1. 10.23. Stock Option Agreement, dated as of March 27, 1987, between the Company and David H. Elliott, incorporated by reference to Exhibit 10.32 to Amendment No. 1 to the 1987 S-1. 10.65. MBIA Inc. Employees Change of Control Benefits Plan, effective as of January 1, 1992, incorporated by reference to Exhibit 10.65 to the 1992 10-K. 10.70. MBIA Inc. 1996 Incentive Plan, effective as of January 1, 1996. 11. Statement Re Computation of Per Share Earnings. 13. Annual Report to Shareholders of MBIA Inc. for fiscal year ended December 31, 1995. Such report is furnished for the information of the Commission only and, except for those portions thereof which are expressly incorporated by reference in this Annual Report on Form 10-K, is not to be deemed filed as part of this report. 21. List of Subsidiaries 23. Consent of Coopers & Lybrand L.L.P. 24. Power of Attorney 27. Financial Data Schedule 99. Additional Exhibits - MBIA Corp. GAAP Financial Statements (b) Reports on Form 8-K: No reports on Form 8-K were filed by the Company in 1995 -31- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. MBIA Inc. (Registrant) Dated: March 25, 1996 By/s/David H. Elliott --------------------- Name: David H. Elliott Title: Chairman Pursuant to the requirements of Instruction D to Form 10-K under the Securities Exchange Act of 1934, this Report has been signed below by the following persons in the capacities and on the dates indicated. SIGNATURE TITLE DATE /s/David H. Elliott Chairman and Director March 25, 1996 - ------------------------------- David H. Elliott /s/ Julliette S. Tehrani Senior Vice President March 25, 1996 - ------------------------------- and Julliette S. Tehrani Chief Financial Officer /s/ Elizabeth B. Sullivan Vice President and March 25, 1996 - ------------------------------- Controller Elizabeth B. Sullivan Director March 25, 1996 - ------------------------------- William O. Bailey /s/Joseph W. Brown * Director March 25, 1996 - ------------------------------ Joseph W. Brown, Jr. /s/David C. Clapp. * Director March 25, 1996 - ------------------------------ David C. Clapp. -32- Signature Title Date /s/Claire L. Gaudiani * Director March 25, 1996 - ------------------------------ Claire L. Gaudiani Director March 25, 1996 - ------------------------------ William H. Gray, III /s/Freda S. Johnson * Director March 25, 1996 - ------------------------------- Freda S. Johnson /s/Daniel P. Kearney * Director March 25, 1996 - ------------------------------- Daniel P. Kearney /s/James A. Lebenthal * Director March 25, 1996 - ------------------------------------- James A. Lebenthal /s/Robert B. Nicholas * Director March 25, 1996 - ------------------------------------- Robert B. Nicholas /s/Pierre-Henri Richard * Director March 25, 1996 - ------------------------------------- Pierre-Henri Richard /s/John A. Rolls * Director March 25, 1996 - ------------------------------------- John A. Rolls - ------------------------------------- Director March 25, 1996 Richard L. Weill *By/s/Louis G. Lenzi Louis G. Lenzi Attorney-in Fact -33- REPORT OF INDEPENDENT ACCOUNTANTS --------------------------------- To the Board of Directors and Shareholders of MBIA Inc.: Our report on the consolidated financial statements of MBIA Inc. and Subsidiaries has been incorporated by reference in this Form 10-K from page 25 of the 1995 Annual Report to Shareholders of MBIA Inc. and Subsidiaries. In connection with our audits of such financial statements, we have also audited the related financial statement schedules listed in the index on Page 25 of this Form 10-K. In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein. \s\ COOPERS & LYBRAND L.L.P. New York, New York January 22, 1996 -34 SCHEDULE I MBIA INC. AND SUBSIDIARIES SUMMARY OF INVESTMENTS, OTHER THAN INVESTMENTS IN RELATED PARTIES December 31, 1995 (In thousands) Column A Column B Column C Column D Amount at which shown in the Type of investment Cost Value balance sheet - ------------------ --------- ---------- --------------- Fixed-maturities Bonds: United States Treasury and Government agency obligations $ 256,613 $ 287,206 $ 287,206 State and municipal obligations 2,553,835 2,726,321 2,726,321 Corporate and other obligations 1,790,309 1,863,326 1,863,326 Mortgage-backed 1,247,265 1,291,602 1,291,602 ---------- ---------- ---------- Total fixed-maturities 5,848,022 6,168,455 6,168,455 Short-term Investments 424,827 XXXXXXX 424,827 Other Investments 13,930 XXXXXXX 14,064 Total investments $6,286,779 XXXXXXX $6,607,346 ========== ========== -35- SCHEDULE III MBIA INC. (PARENT COMPANY) CONDENSED BALANCE SHEETS (Dollars in thousands, except per share amounts) December 31, 1995 December 31, 1994 ------------------ ----------------- ASSETS Investments: Municipal investment agreement portfolio held as available-for-sale at fair value (amortized cost $837,791) $ 851,328 $ --- Other investments --- 5,580 ---------- ---------- Total investments 851,328 5,580 Cash and cash equivalents 14,106 4,991 Investment in and amounts due from wholly-owned subsidiaries 2,670,383 2,052,540 Accrued investment income 8,379 --- Other assets 4,001 3,209 ---------- ---------- Total assets $3,548,197 $2,066,320 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Dividends payable $ 14,492 $ 12,901 Municipal investment agreements 892,326 --- Long-term debt 373,900 298,790 Short-term debt 18,000 17,000 Deferred income taxes 4,688 896 Amounts due to wholly-owned subsidiaries --- 21,934 Other liabilities 10,525 10,083 ---------- --------- Total liabilities 1,313,931 361,604 ---------- --------- Shareholders' Equity: Preferred stock, par value $1 per share; authorized shares - 10,000,000; issued and outstanding shares - none --- --- Common stock, par value $1 per share; authorized shares - 200,000,000; issued shares - 42,077,387 42,077 42,077 Additional paid-in capital 725,153 719,750 Retained earnings 1,261,051 1,057,092 Cumulative translation adjustment 2,849 503 Unrealized appreciation (depreciation) of investments, net of deferred income tax provision (benefit) of $112,252 and $(46,292) 207,648 (86,560) Unearned compensation - restricted stock (426) --- Treasury stock, at cost - 73,676 shares in 1995 and 461,763 shares in 1994 (4,086) (28,146) ---------- ---------- Total shareholders' equity 2,234,266 1,704,716 ---------- ---------- Total liabilities and shareholders' equity $3,548,197 $2,066,320 ========== ========== The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto and the accompanying notes. -36- SCHEDULE III MBIA INC. (PARENT COMPANY) CONDENSED STATEMENTS OF INCOME (In thousands) Years Ended December 31 ------------------------------------ 1995 1994 1993 -------- -------- ---------- Revenues: Net investment income $ 646 $ 786 $ 3,555 Net realized gains 3,535 --- 786 Investment management services income 2,929 --- --- Investment management services realized losses (5,735) --- --- Other income --- 1,801 401 -------- -------- ---------- Total revenues 1,375 2,587 4,742 -------- -------- ---------- Expenses: Interest expense 27,786 27,036 26,900 Operating expenses 2,749 2,202 1,273 -------- -------- ---------- Total expenses 30,535 29,238 28,173 -------- -------- ---------- Loss before income taxes, equity in earnings of subsidiaries and cumulative effect of accounting changes (29,160) (26,651) (23,431) Benefit for income taxes (9,604) (9,240) (8,963) -------- -------- ---------- Loss before equity in earnings of subsidiaries and cumulative effect of accounting changes (19,556) (17,411) (14,468) Equity in earnings of subsidiaries 290,975 277,620 260,578 -------- -------- ---------- Net income before cumulative effect of accounting changes 271,419 260,209 246,110 Cumulative effect of accounting changes --- --- 12,923 -------- -------- ---------- Net income $271,419 $260,209 $259,033 ======== ======== ========== The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto and the accompanying notes. -37- SCHEDULE III MBIA INC. (PARENT COMPANY) CONDENSED STATEMENTS OF CASH FLOWS (In thousands) Years Ended December 31 ------------------------------- 1995 1994 1993 --------- --------- ---------- Cash flows from operating activities: Net income $ 271,419 $ 260,209 $ 259,033 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed earnings of subsidiaries (208,075) (239,620) (223,501) Net realized losses (gains) on sales of investments 2,200 --- (786) (Benefit) provision for deferred income taxes (50) (28) 28 Other, net (2,556) 18,088 (1,512) --------- --------- ---------- Total adjustments to net income (208,481) (221,560) (225,771) --------- --------- ---------- Net cash provided by operating activities 62,938 38,649 33,262 --------- --------- ---------- Cash flows from investing activities: Purchase of fixed-maturity securities (252,125) --- (30,041) Sale of fixed-maturity securities 246,171 42,728 36,369 Sale of other investments 6,552 --- --- Purchase for municipal investment agreement portfolio, net of payable for investments purchased (940,871) --- --- Sales from municipal investment agreement portfolio, net of receivable for investments sold 106,678 --- --- Contributions to subsidiaries (52,800) (23,010) (5,010) Advances (to) from subsidiaries, net (89,550) 3,017 2,119 --------- --------- ---------- Net cash (used) provided by investing activities (975,945) 22,735 3,437 --------- --------- ---------- Cash flows from financing activities: Net proceeds from issuance of long-term debt 74,344 --- --- Dividends paid (53,179) (45,513) (37,342) Purchase of treasury stock --- (14,411) (15,255) Proceeds from issuance of municipal investment agreements 1,182,298 --- --- Payments for drawdowns of municipal investment agreements (297,679) --- --- Exercise of stock options 16,338 1,986 7,109 --------- --------- --------- Net cash provided (used) by financing activities 922,122 (57,938) (45,488) --------- --------- ---------- Net increase (decrease) in cash and cash equivalents 9,115 3,446 (8,789) Cash and cash equivalents - beginning of year 4,991 1,545 10,334 --------- --------- --------- Cash and cash equivalents - end of year $ 14,106 $ 4,991 $ 1,545 ========= ========= ========= Supplemental cash flow disclosures: Income taxes paid $ 443 $ 251 $ 392 Interest paid: Long-term debt 26,575 26,575 26,416 Short-term debt 1,228 56 --- The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto and the accompanying notes. -38- SCHEDULE III MBIA INC. (PARENT COMPANY) NOTES TO CONDENSED FINANCIAL STATEMENTS 1. CONDENSED FINANCIAL STATEMENTS Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these condensed financial statements be read in conjunction with the Company's consolidated financial statements and the notes thereto. 2. SIGNIFICANT ACCOUNTING POLICIES The Parent company carries its investments in subsidiaries under the equity method. 3. DIVIDENDS FROM SUBSIDIARY Cash dividends paid to MBIA Inc. from the Company's consolidated subsidiary, MBIA Corp., were $82,900,000, $38,000,000 and $50,000,000 in 1995, 1994 and 1993, respectively. 4. OBLIGATIONS UNDER MUNICIPAL INVESTMENT AGREEMENTS The municipal investment agreement business, as described in footnotes 2 and 10 to the consolidated financial statements of MBIA Inc. and Subsidiaries (which are incorporated by reference in the 10-K), is conducted by both the Registrant and its wholly owned subsidiary, MBIA Investment Management Corp. -39- SCHEDULE VI MBIA INC. AND SUBSIDIARIES REINSURANCE for the Years Ended December 31, 1995, 1994 and 1993 (In thousands) Column A Column B Column C Column D Column E Column F - -------- -------- -------- -------- ----------- ------------- Insurance Ceded Assumed Percentage Premiums Gross to Other from Other of Amount Written Amount Value Companies Net Amount Assumed to Net - -------- -------- -------- ---------- ---------- -------------- 1995 $336,768 $45,050 $11,719 $303,437 3.9% 1994 $354,534 $49,281 $6,302 $311,555 2.0% 1993 $458,979 $47,552 $20,368 $431,795 4.7% -40- Securities and Exchange Commission Washington, D.C. 20549 =============================================================================== Exhibits to Form 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1995 Commission File No. 1-9583 ================================================================================ -41- MBIA Inc. Exhibit Index 10.25. Trust Agreement, effective as of December 31, 1989, among BIG Ins., MBIA Corp. and Morgan Guaranty Trust Company of New York, incorporated by reference to Exhibit 10.55 to the 1989 10-K, as amended by Amendment to Trust Agreement, dated as of February 28, 1995. 10.47. Trust Agreement, dated as of December 31, 1991, between MBIA Corp. and Fidelity Management Trust Company, incorporated by reference to Exhibit 10.64 to the 1992 10-K, as amended by the Amendment to Trust Agreement, dated as of April 1, 1993, incorporated by reference to Exhibit 10.64 to the 1993 10-K, as amended by First Amendment to Trust Agreement, dated as of January 21, 1992, as further amended by Second Amendment to Trust Agreement, dated as of March 5, 1992, as further amended by Third Amendment to Trust Agreement, dated as of April 1, 1993, as further amended by the Fourth Amendment to Trust Agreement, dated as of July 1, 1995. 10.61. Credit Agreement, dated as of August 31, 1994, among Municipal Bond Investors Assurance Corporation, the Company, Wachovia Bank of Georgia, N.A., Banco Santander, The Sumitomo Bank, Ltd., New York Branch, The Chase Manhattan Bank, N.A., Commerzbank Aktiengesellschaft, The Industrial Bank of Japan, Limited New York Branch and NBD Bank, N.A., and as further amended by the First Amendment to Credit Agreement, dated as of October 14, 1994, incorporated by reference to Exhibit 10.66 to the 1994 10-K, as amended by the Second Amendment to Credit Agreement, dated as of October 31, 1995. 10.65. Investment Services Agreement, effective as of April 28, 1995, between MBIA Insurance Corporation and MBIA Securities Corp., as amended by Amendment No. 1, dated as of December 29, 1995. 10.66. Investment Services Agreement, effective January 2, 1996, between MBIA Insurance Corp. of Illinois and MBIA Securities Corp. 10.67. Custody Agreement, as of March 1, 1995, between MBIA Corp. and The Chase Manhattan Bank, N.A. 10.68. Custody Agreement, as of March 1, 1995, between MBIA Corp. and The Chase Manhattan Bank, N.A. 10.69. Custody Agreement, as of March 1, 1995, between MBIA Inc. and The Chase Manhattan Bank, N.A. 10.70. MBIA Inc. 1996 Incentive Plan, effective as of January 1, 1996. 11. Statement Re Computation of Per Share Earnings. 13. Annual Report to Shareholders of MBIA Inc. for fiscal year ended December 31, 1995. Such report is furnished for the information of the Commission only and, except for those portions thereof which are expressly incorporated by reference in this Annual Report on Form 10-K, is not to be deemed filed as part of this report. 21. List of Subsidiaries 23. Consent of Coopers & Lybrand L.L.P. 24. Power of Attorney 27. Financial Data Schedule 99. Additional Exhibits - MBIA Corp. GAAP Financial Statements (b) Reports on Form 8-K: No reports on Form 8-K were filed by the Company in 1995 -42- EX-10 2 10.25, 10.47, 10.61, 10.65-70 EXHIBIT 10.25 Amendment to Trust Agreement THIS AMENDMENT TO TRUST AGREEMENT is made and entered into as of February 28 1995, between Municipal Bond Investors Assurance Corporation ("MBIA Corp."), MBIA Insurance Corp. of Illinois ("MBIA Illinois"), Chase Manhattan Bank, N.A. ("Chase") and Morgan Guaranty Trust Company ("Morgan"). Section 1. Trust Agreement, dated as of December 31, 1989, by and among MBIA Corp., Chase, MBIA Illinois and Morgan (the "Agreement"), is hereby amended to replace Morgan, the existing Trustee thereunder, with Chase Manhattan Bank, N.A., such change to become effective on March 1, 1995. Section 2. Section 2 of the Agreement is hereby amended in its entirety to read as follows: "2. Place of Deposit. ---------------- The assets shall be held by the Trustee at Chase Manhattan Bank, N.A., or, if appropriate, in book entry form at the Federal Reserve Bank of New York or in depositories such as the Depository Trust Company." Section 3. Section 20 of the Agreement is hereby amended to change the notice address of the Trustee to: Chase Manhattan Bank, N.A. 4 Chase MetroTech Center Brooklyn, NY 11245 Attn: Laureen Young IN WITNESS WHEREOF, the parties have hereunto executed this agreement this 28 day of February, 1995. Morgan Guaranty Trust Company Municipal Bond Investors Assurance Corp. By: ___________________________ By:______________________________ Associate Title: Treasurer Chase Manhattan Bank, N.A. MBIA Illinois Insurance Corp. By: ___________________________ By:______________________________ Second Vice President Title: Treasurer EXHIBIT 10.47 FIRST AMENDMENT TO TRUST AGREEMENT BETWEEN FIDELITY MANAGEMENT TRUST COMPANY AND MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION THIS FIRST AMENDMENT, dated as of the twenty-first day of January, 1992, by and between Fidelity Management Trust Company (the "Trustee") and Municipal Bond Investors Assurance Corporation (the "Sponsor"); WITNESSETH: WHEREAS, the Trustee and the Sponsor heretofore entered into trust agreements dated December 31, 1991, with regard to the MBIA Inc. Master Plan (the "Plan"); and WHEREAS, the Trustee and the Sponsor now desire to amend said trust agreements as provided for in Section 13 thereof; NOW THEREFORE, in consideration of the above premises the Trustee and the Sponsor hereby amend the trust agreement by adding Section 4(e)(iii)(C) as follows: (C) Purchases and Sales from or to Sponsor. The Trustee may purchase or -------------------------------------- sell Sponsor Stock from or to the Sponsor if the purchase or sale is for adequate consideration (within the meaning of section 3(18) of ERISA) and no commission is charged. If Plan participant or Sponsor contributions under the Plan are to be invested in Sponsor Stock, the Sponsor may transfer Sponsor Stock in lieu of cash to the Trust. In this case the number of shares transferred shall be determined by dividing the amount of the contribution by the closing price of the Sponsor Stock on any national securities exchange on the trading day immediately preceding the date as of which the contribution is made. IN WITNESS WHEREOF, the Trustee and the Sponsor have caused this First Amendment to be executed by their duly authorized officers effective as of the day and year first above written. MBIA INC. FIDELITY MANAGEMENT TRUST COMPANY By /s/ Hilda H. Boas Jan 22, 1992 By /s/ 2/11/92 -------------------------------- ------------------------------------ Senior Vice President Date Senior Vice President Date SECOND AMENDMENT TO TRUST AGREEMENT BETWEEN FIDELITY MANAGEMENT TRUST COMPANY AND MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION THIS SECOND AMENDMENT, dated as of the fifth day of March, 1992, by and between Fidelity Management Trust Company (the "Trustee") and Municipal Bond Investors Assurance Corporation (the "Sponsor"); WITNESSETH: WHEREAS, the Trustee and the Sponsor heretofore entered into trust agreements dated December 31, 1991, with regard to the MBIA Inc. Master Plan (the "Plan"); and WHEREAS, the Trustee and the Sponsor now desire to amend said trust agreements as provided for in Section 13 thereof; NOW THEREFORE, in consideration of the above premises the Trustee and the Sponsor hereby amend the trust agreement by: . Revising Schedule "G" (Telephone Exchange Guidelines) as attached. . Adding a sentence to the end of Section 4(c) (Participant Direction) to read as follows: The Administrator may, in its discretion and via facsimile, override a Plan participant direction involving Sponsor Stock. IN WITNESS WHEREOF, the Trustee and the Sponsor have caused this Second Amendment to be executed by their duly authorized officers effective as of the day and year first above written. MBIA INC. FIDELITY MANAGEMENT TRUST COMPANY By By /s/ Hilda H. Boas April 6, 1992 -------------------------------- ------------------------------------ Date Senior Vice President Date SCHEDULE "G" TELEPHONE EXCHANGE PROCEDURES ----------------------------- The following telephone exchange procedures are currently employed by Fidelity Investments Retirement Services Company (FIRSCO). Telephone exchange hours are 8:30 a.m. (EST) to 8:00 P.M. (EST) on each business day. A "business day" is any day on which the New York Stock Exchange is open. FIRSCO reserves the right to change these telephone exchange procedures at its discretion. MUTUAL FUNDS ------------ EXCHANGES BETWEEN MUTUAL FUNDS ------------------------------ Participants may call on any business day to exchange between the mutual funds. If the request is received before 4:00 p.m. (EST), it will receive that day's trade date. Calls received after 4:00 P.M. (EST) will be processed on a next day basis. COMPANY STOCK ------------- I. EXCHANGES FROM MUTUAL FUNDS TO COMPANY STOCK -------------------------------------------- Company Stock exchanges are processed on a monthly cycle. Participants who wish to exchange out of a mutual fund into Company Stock may call between the 1st and the 13th of the month. No calls will be accepted after 4:00 p.m. (ET) on the 13th (or previous business day if the 13th is not a business day). Mutual fund shares are sold on the 15th of the month (or the previous business day if the 15th is not a business day) and the Company Stock is purchased within two (2) business days after the date on which the mutual fund shares are sold. II. EXCHANGES FROM COMPANY STOCK TO MUTUAL FUNDS -------------------------------------------- Participants who wish to exchange out of Company Stock into mutual funds may call between the 1st and the 13th of the month. No calls will be accepted after 4:00 P.M. (ET) on the 13th (or previous business day if the 13th is not a business day). The Company Stock is sold on the 16th (or the next business day if the 16th is not a business day) and the subsequent purchase into mutual funds will take place five (5) business days later. This allows for settlement of the stock trade at the custodian and the corresponding transfer to Fidelity. Orders for sales of Company Stock must be share specific. GIC OPEN-END PORTFOLIO ---------------------- I. EXCHANGES BETWEEN MUTUAL FUNDS AND GIC OPEN-END PORTFOLIO --------------------------------------------------------- Participants who wish to exchange out of a mutual fund into the GIC Open-End Portfolio of the Fidelity Group Trust for Employee Benefit Plans (the "Group Trust") may call on any business day. If the request is received before 4:00 p.m. (EST), it will receive that day's trade date. Calls received after 4:00 p.m. (EST) will be processed on a next day basis. II. EXCHANGES FROM GIC OPEN-END PORTFOLIO TO COMPANY STOCK ------------------------------------------------------ Participants who wish to exchange out of the GIC Open-End Portfolio into Company Stock may call between the 1st and the 13th of the month. No calls will be accepted after 4:00 p.m. (ET) on the 13th (or previous business day if the 13th is not a business day). GIC Open-End Portfolio shares are sold on the 15th of the month (or the previous business day if the 15th is not a business day) and the Company Stock is purchased within two (2) business days after the date on which the Open-End Portfolio shares are sold. III. EXCHANGES FROM COMPANY STOCK TO GIC OPEN-END PORTFOLIO ------------------------------------------------------ Participants who wish to exchange out of Company Stock into the GIC Open-End Portfolio may call between the 1st and the 13th of the month. No calls will be accepted after 4:00 p.m. (ET) on the 13th (or previous business day if the 13th is not a business day). The Company Stock is sold on the 16th (or the next business day if the 16th is not a business day) and the subsequent purchase into the Open-End Portfolio will take place five (5) business days later. This allows for settlement of the stock trade at the custodian and the corresponding transfer to Fidelity. Orders for sales of Company Stock must be share specific. MBIA INC. By /s/ Hilda H. Boas April 6, 1992 ---------------------------------- Date THIRD AMENDMENT TO TRUST AGREEMENT BETWEEN FIDELITY MANAGEMENT TRUST COMPANY AND MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION THIS THIRD AMENDMENT, dated as of April 1, 1993, by and between Fidelity Management Trust Company (the "Trustee") and Municipal Bond Investors Assurance Corporation (the "Sponsor"); and WITNESSETH: WHEREAS, the Trustee and the Sponsor heretofore entered into a trust agreement dated December 31, 1991, with regard to the MBIA, Inc. Master Plan (the "Plan"); and WHEREAS, the Trustee and the Sponsor now desire to amend said trust agreement as provided for in Section 13 thereof; NOW THEREFORE, in consideration of the above premises the Trustee and the Sponsor hereby amend the trust agreement by: . Amending Section 4 by replacing Section 4(f) with the following: Notes. The Administrator shall act as the Trustee's agent for the ----- purpose of holding all trust investments in participant loan notes and related documentation and as such shall (i) hold physical custody of and keep safe the notes and other loan documents, (ii) collect and remit all principal and interest payments to the Trustee, (iii) keep the proceeds of such loans separate from the other assets of the Administrator and clearly identify such assets as Plan assets and (iv) cancel and surrender the notes and other loan documentation when a loan has been paid in full. To originate a participant loan, the Plan participant shall notify the Trustee of the request by use of the Telephone Exchange System. The Trustee shall determine, based on the current value of the Plan participant's account, the amount available for the loan. The Plan participant shall then direct the Trustee regarding the amount to be borrowed and the term or period for repayment. Based on the most recent interest rate supplied by the Sponsor in accordance with the terms of the Plan, the Trustee shall advise the Plan participant of such interest rate, as well as the installment payment amounts. The Trustee shall forward the loan document to the Plan participant for execution and submission for approval to the Administrator. The Administrator shall have the responsibility for approving the loan, via remote access, and instructing the Trustee of such approval. The Trustee shall send the loan proceeds to the Administrator or to the Plan participant in accordance with the directions from the Administrator. In all cases, such approval by the Administrator shall be made within 30 days of the Plan participant's initial request (the origination date). . Amending Schedule "B" to reflect the Loan Fee as follows: Loan Fees Establishment fee $35.00 per loan account; annual fee of $15.00 per loan account. IN WITNESS WHEREOF, the Trustee and the Sponsor have caused this Third Amendment to be executed by their duly authorized officers effective as of the day and year first above written. MUNICIPAL BOND INVESTORS FIDELITY MANAGEMENT TRUST COMPANY ASSURANCE CORPORATION By By ------------------------------ ------------------------------------- Date Senior Vice President Date FOURTH AMENDMENT TO TRUST AGREEMENT BETWEEN FIDELITY MANAGEMENT TRUST COMPANY AND MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION THIS FOURTH AMENDMENT, dated as of the first day of July, 1995 by and between Fidelity Management Trust Company (the "Trustee") and Municipal Bond Investors Assurance Corporation (the "Sponsor"); WITNESSETH: WHEREAS, the Trustee and the Sponsor heretofore entered into a trust agreement dated December 31, 1991, with regard to the MBIA Inc. Employees Pension Plan and the MBIA Inc. Employees Profit Sharing and 401(k) Salary Deferral Plan (collectively and individually, the "Plan"); and WHEREAS, the Trustee and the Sponsor now desire to amend said trust agreement as provided for in Section 13 thereof; NOW THEREFORE, in consideration of the above premises the Trustee and the Sponsor hereby amend the trust agreement by: (1) Amending and adding the following mutual funds to the "investment options" portions of Schedules "A" and "C", as follows: Fidelity Overseas Fund Fidelity Puritan Fund (2) Amending and adding the following money classification to Schedule "A", as follows: Employer Profit Sharing IN WITNESS WHEREOF, the Trustee and the Sponsor have caused this Fourth Amendment to be executed by their duly authorized officers effective as of the day and year first above written. MBIA INC. FIDELITY MANAGEMENT TRUST COMPANY By /s/ Hilda H. Boas 6-12-95 By -------------------------------- ------------------------------------ Date Senior Vice President Date EXHIBIT 10.61 SECOND AMENDMENT TO CREDIT AGREEMENT THIS SECOND AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is made as of the 31st day of October, 1995, among MBIA INSURANCE CORPORATION and MBIA Inc. (collectively, the "Borrowers"), WACHOVIA BANK OF GEORGIA, N.A. as Agent and a Bank, BANCO SANTANDER, THE SUMITOMO BANK, LTD., NEW YORK BRANCH, THE CHASE MANHATTAN BANK, N.A., COMMERZBANK AKTIENGESELLSCHAFT, THE INDUSTRIAL BANK OF JAPAN, LIMITED, NEW YORK BRANCH and NBD BANK (formerly known as NBD BANK, N.A.) (together with their respective successors and assigns the "Existing Banks") and BANCA MONTE DEI PASCHI DI SIENA S.P.A. Background: ---------- The Borrowers, the Existing Banks and the Agent have entered into a certain Credit Agreement, dated as of August 31, 1994 (the "Credit Agreement"), as amended by that certain First Amendment to Credit Agreement dated October 14, 1994. The Borrowers, the Existing Banks and the Agent wish to amend the Credit Agreement in certain respects, as hereinafter provided, and to add Banca Monte dei Paschi di Siena S.p.A. as a Bank party to the Credit Agreement (as defined in the Credit Agreement). NOW, THEREFORE, the parties hereto agree as follows: SECTION 1. Definitions. Capitalized terms used herein which are not ----------- otherwise defined herein shall have the respective meanings assigned to them in the Credit Agreement. SECTION 2. Amendments. The Credit Agreement is hereby amended as set forth ---------- in this Section 2. --------- 2.1 Amendments to Section 1.01. The definition of Termination Date -------------------------- contained in Section 1.01 of the Credit Agreement is hereby amended and restated in its entirety to read as follows: "Termination Date" means August 30, 1998, and any extensions thereof made pursuant to Section 2.05(b) hereof. 2.2 Amendment Increasing Aggregate Commitments. The Credit ------------------------------------------ Agreement shall be amended by increasing the total amount of the Commitments to $250,000,000. The Commitments of the respective Existing Banks shall not be modified by this Second Amendment to Credit Agreement. The cover page of the Credit Agreement shall be amended by deleting the amount $225,000,000 and inserting in place thereof the amount $250,000,000. The Agent shall deliver replacement Money Market Notes, executed by the Borrower, to the Existing Banks in the amount of the total Commitments (as increased hereby) in exchange for the Money Market Notes currently outstanding. The Money Market Notes currently outstanding will be returned to the Borrowers for cancellation. 2.3 Addition of Banca Monte del Paschi di Siena S.p.A. as a Bank. ------------------------------------------------------------ The Credit Agreement shall be amended by adding Banca Monte del Paschi di Siena S.p.A. as a Bank (as defined in the Credit Agreement) party thereto. Banca Monte del Paschi di Siena S.p.A. shall have all of the rights and obligations of a Bank under the Credit Agreement. The lending office and the Commitment of Banca Monte dei Paschi di Siena S.p.A. shall be as set forth on the signature pages hereof. The Agent shall deliver to Banca Monte del Paschi di Siena S.p.A. a Syndicated Note, executed by the Borrowers, in the amount of its Commitment, and a Money Market Note, executed by the Borrowers in the amount of the total Commitments (as increased by this Second Amendment to Credit Agreement). SECTION 3. No Other Amendment. Except for the amendments set forth ------------------ above, the text of the Credit Agreement shall remain unchanged and in full force and effect. This Amendment is not intended to effect, nor shall it be construed as, a novation. The Credit Agreement and this Amendment shall be construed together as a single instrument. SECTION 4. Representations and Warranties. The Borrowers hereby ------------------------------ represent and warrant in favor of the Agent and the Banks (including, without limitation, Banca Monte del Paschi di Siena S.p.A.) as follows: (a) No Default or Event of Default under the Credit Agreement has occurred and is continuing on the date hereof, (b) The Borrowers have the corporate power and authority to enter into this Amendment and to do all acts and things as are required or contemplated hereunder to be done, observed and performed by them; (c) This Amendment has been duly authorized, validly executed and delivered by one or more authorized officers of each of the Borrowers and this Amendment constitutes the legal, valid and binding obligation of the Borrowers enforceable against each of them in accordance with its terms; provided, that the enforceability of this Amendment is subject to general principles of equity and to bankruptcy, insolvency and similar laws affecting the enforcement of creditor's rights generally; and (d) The execution and delivery of this Amendment and the Borrowers' performance hereunder do not and will not require the consent or approval of any regulatory authority or governmental authority or agency having jurisdiction over the Borrowers other than those which have already been obtained or given, nor be in contravention of or in conflict with the respective Articles of 91 Incorporation or Bylaws of the Borrowers, or the provision of any statute, or any judgment, order or indenture, instrument, agreement or undertaking, to which the Borrowers are a party or by which the Borrowers' assets or properties are or may become bound. SECTION 5. Counterparts. This Amendment may be executed in multiple ------------ counterparts, each of which shall be deemed to be an original and all of which, taken together, shall constitute one and the same agreement. SECTION 6. Governing Law. This Amendment shall be deemed to be made ------------- pursuant to the laws of the State of Georgia with respect to agreements made and to be performed wholly in the State of Georgia and shall be construed, interpreted, performed and enforced in accordance therewith. SECTION 7. Effective Date. This Amendment shall become effective as of -------------- October 31, 1995. 2 IN WITNESS WHEREOF. the parties hereto have caused this Amendment to be duly executed by their respective authorized officers as of the day and year first above written. MBIA INC. By: /s/ Christopher W. Tully (SEAL) ---------------------------------- Title: Treasurer MBIA INSURANCE CORPORATION By: /s/ Christopher W. Tully (SEAL) ---------------------------------- Title: SVP [Remainder of this page intentionally left blank] 3 WACHOVIA BANK OF GEORGIA, N.A., as Agent and as a Bank By: /s/ FC Childer ------------------------------ Title: SVP [Remainder of this page intentionally left blank] 4 BANCO SANTANDER By: /s/ Robert E. Schlegel (SEAL) ------------------------------- Title: VICE PRESIDENT MANAGER-CORPORATE BANKING BANCO SANTANDER /s/ Dom J. Rodriguez DOM J. RODRIGUEZ VICE PRESIDENT BANCO SANTANDER [Remainder of this page intentionally left blank] 5 THE SUMITOMO BANK, LTD., NEW YORK BRANCH By: /s/ Yoshinori Kawamura (SEAL) ------------------------------- Yoshinori Kawamura Title: Joint General Manager [Remainder of this page intentionally left blank] 6 THE CHASE MANHATTAN BANK, N.A. By: /s/ J. David Parker, Jr. (SEAL) ------------------------------- J. DAVID PARKER, Jr. Title: Vice President [Remainder of this page intentionally left blank] 7 COMMERZBANK AKTIENGESELLSCHAFT By: /s/ ??????????????? (SEAL) ------------------------------- Title: [Remainder of this page intentionally left blank] 8 THE INDUSTRIAL BANK OF JAPAN, LIMITED NEW YORK BRANCH By: /s/ Robert Ramage, Jr. (SEAL) ------------------------------- ROBERT RAMAGE, JR. Title: SENIOR VICE PRESIDENT [Remainder of this page intentionally, left blank] 9 NBD BANK (formerly known as NBD BANK, N.A.) By: /s/ Anna R. Hoffman (SEAL) ------------------------------- ANNA R. HOFFMAN Title: VICE PRESIDENT [Remainder of this page intentionally left blank] 10 $25,000,000 BANCA MONTE DEI PASCHI DI SIENA S.P.A. By: /s/ ????????????? (SEAL) ------------------------------- Title: By: /s/ Brian R. Landy (SEAL) ------------------------------- Brian R. Landy Title: Vice President Lending Office -------------- Banca Monte dei Paschi di Siena S.p.A. 245 Park Avenue New York, New York 10167-0036 Telecopy number: (212) 557-8039 Telephone number: (212) 557-8111 11 MBIA INC. SECRETARY'S CERTIFICATE ---------------------------------- Wachovia Bank of Georgia, N.A., as Agent 191 Peachtree Street, N.E. Atlanta, GA 30303 Ladies and Gentlemen: Reference is made to the Second Amendment to Credit Agreement, dated as of October 31, 1995 (the "Second Amendment") to the Credit Agreement, dated as of August 31, 1994, as heretofore amended (collectively, the "Credit Agreement") by and among MBIA Inc. ("MBIA"), MBIA Insurance Corporation, Wachovia Bank of Georgia, N.A., as Agent and as Bank, and the other Banks signatory thereto. All capitalized terms used herein and not otherwise defined shall have the meanings assigned to them in the Credit Agreement The undersigned, Louis G. Lenzi, Secretary of MBIA, hereby certifies that he has been duly elected, qualified and is acting in such capacity and that, as such, he is familiar with the facts herein certified and is duly authorized to certify the same, and hereby further certifies, in connection with the Credit Agreement that: 1. From August 31, 1994 to and including the date hereof, there has been no amendment, modification or revocation of the Amended and Restated Certificate of Incorporation or By-Laws and both are in full force and effect on the date hereof. 2. Attached hereto as Exhibit C is a complete and correct copy of the resolution duly adopted by the Board of Directors of MBIA on July 14, 1994 approving, and authorizing the execution and delivery of, the Credit Agreement and the Notes. Such resolution has not been repealed or amended and is in full force and effect, and no other resolutions or consents have been adopted by the Board of Directors of MBIA in connection therewith. 3. Christopher W. Tilley, who as Treasurer of MBIA signed the Second Amendment and the Notes, was duly elected, qualified and acting as such at the time he signed the Second Amendment and the Notes, and his signature appearing on the Second Amendment and the Notes is his genuine signature. IN WITNESS WHEREOF, the undersigned has hereunto set his hand as of the 31st day of October, 1995. By: /s/ Louis G. Lenzi ------------------------------ Louis G. Lenzi Secretary -2- EXHIBIT A --------- RESOLVED, that the Company is authorized to enter into lines of credit with various financial institutions, for an aggregate amount up to $275 million for the purpose of drawings by the Company for all general corporate purposes and the Chairman, President and Chief Executive Officer or any Executive Vice President or the Senior Vice President and Chief Financial Officer or the Senior Vice President and Controller or the Treasurer or the Secretary or any Assistant Secretary of the Company be and each hereby is authorized, directed and empowered to execute and deliver the credit agreements for and on behalf of the Company, including necessary counterparts, on the material terms described herein, but with such changes, modifications, additions or deletions as shall to the signatory deem necessary, desirable or appropriate, such execution thereof to constitute conclusive evidence of approval of any and all changes, modifications or additions, and that from and after the execution of such credit agreements, the Chairman, President and Chief Executive Officer or any Executive Vice President or any Senior Vice President or the Secretary or any Assistant Secretary are hereby authorized, empowered and directed to enter into and execute any amendments to the credit agreements and do all such acts and things and to execute all such documents, including but not limited to any notes, as may be necessary to carry out and comply with the provisions of such credit agreements as executed, as well as the intent and purposes of this resolution. MBIA INSURANCE CORPORATION -------------------------- SECRETARY'S CERTIFICATE ----------------------- Wachovia Bank of Georgia, N.A., as Agent 191 Peachtree Street, N.E. Atlanta, GA 30303 Ladies and Gentlemen: Reference is made to the Second Amendment to Credit Agreement, dated as of October 31, 1995 (the "Second Amendment") to the Credit Agreement, dated as of August 31, 1994, as heretofore amended (collectively, the "Credit Agreement") by and among MBIA Inc., MBIA Insurance Corporation ("MBIA Corp."), Wachovia Bank of Georgia, N.A., as Agent and as Bank, and the other Banks signatory thereto. All capitalized terms used herein and not otherwise defined shall have the meanings assigned to them in the Credit Agreement. The undersigned, Louis G. Lenzi, Secretary of MBIA Corp., hereby certifies that he has been duly elected, qualified and is acting in such capacity and that, as such, he is familiar with the facts herein certified and is duly authorized to certify the same, and hereby further certifies, in connection with the Credit Agreement that: 1. From August 31, 1994 to and including the date hereof, there has been no amendment, modification or revocation of the Restated Charter or By-Laws of MBIA Corp. except to reflect MBIA Corp.'s name change. Both the Restated Charter and the By-Laws are in full force and effect on the date hereof. 2. Attached hereto as Exhibit A is a complete and correct copy of the resolution duly adopted by the Board of Directors of MBIA Corp. on August 12, 1994 approving, and authorizing the execution and delivery of, the Credit Agreement and the Notes. Such resolution has not been repealed or amended and is in full force and effect, and no other resolutions or consents have been adopted by the Board of Directors of MBIA Corp. in connection therewith. 3. Christopher W. Tilley, who as Treasurer of MBIA Corp. signed the Second Amendment and the Notes, was duly elected, qualified and acting as such at the time he signed the Second Amendment and the Notes, and his signature appearing on the Second Amendment and the Notes is his genuine signature. IN WITNESS WHEREOF, the undersigned has hereunto set his hand as of the 31st day of October, 1995. By: /s/ Louis G. Lenzi ------------------------- Louis G. Lenzi Secretary -2- EXHIBIT A --------- RESOLVED, that the Corporation is authorized to enter into lines of credit with various financial institutions, for an aggregate amount up to $275 million for the purpose of drawings by the Corporation for all general corporate purposes and the Chairman, President and Chief Executive Officer or any Executive Vice President or the Senior Vice President and Chief Financial Officer or the Senior Vice President and Controller or the Treasurer or the Secretary or any Assistant Secretary of the Corporation be and each hereby is authorized, directed and empowered to execute and deliver the credit agreements for and on behalf of the Corporation, including necessary counterparts, on the material terms described herein, but with such changes, modifications, additions or deletions as shall to the signatory deem necessary, desirable or appropriate, such execution thereof to constitute conclusive evidence of approval of any and all changes, modifications or additions, and that from and after the execution of such credit agreements, the Chairman, President and Chief Executive Officer or any Executive Vice President or any Senior Vice President or the Secretary or any Assistant Secretary are hereby authorized, empowered and directed to enter into and execute any amendments to the credit agreements and do all such acts and things and to execute all such documents, including but not limited to any notes, as may be necessary to carry out and comply with the provisions of such credit agreements as executed, as well as the intent and purposes of this resolution. [LETTERHEAD OF MBIA INSURANCE CORPORATION] October 31, 1995 To the Banks and the Agent Referred to Below c/o Wachovia Bank of Georgia, N.A., As Agent 191 Peachtree Street, N.E. Atlanta, Georgia 30303 Re: Credit Agreement, dated as of August 31, 1994, among MBIA Insurance Corporation, MBIA Inc., Wachovia Bank of Georgia, N.A., as Agent and the other Banks signatory thereto, as amended Ladies and Gentlemen: I am General Counsel of MBIA Inc., a Connecticut corporation ("MBIA") and NMIA Insurance Corporation (formerly known as Municipal Bond Investors Assurance Corporation), a New York stock insurance corporation ("MBIA Corp."). This opinion is being given in connection with the Credit Agreement, dated as of August 31, 1994, among MBIA Corp., MBIA, Wachovia Bank of Georgia, N.A., as Agent (the "Agent") and the other Banks signatory thereto, as amended by the First Amendment to Credit Agreement, dated as of October 14, 1994 and the Second Amendment to Credit Agreement, dated as of October 31, 1995 (collectively, the "Credit Agreement"). All capitalized terms used herein and not otherwise defined shall have the respective meanings assigned thereto in the Credit Agreement, In this connection, I have examined the Credit Agreement, the Notes and such certificates of public officials, such certificates of officers of MBIA and MBIA Corp., and copies certified to my satisfaction of such corporate documents and records of MBIA and MBIA Corp. and of such other papers as I have deemed relevant and necessary or appropriate for the opinions set forth below. I have relied upon certificates of public officials and of officers of MBIA and MBIA Corp. with respect to the accuracy of factual matters contained therein which were not independently established. I have also assumed (i) the due execution and delivery, pursuant to due authorization, of the Credit Agreement by the Agent and the Banks, (ii) the authenticity of all such documents Page 2 submitted to me as originals, (iii) the genuineness of all signatures, and (iv) the conformity of all such documents submitted to me as copies. Based upon the foregoing, it is my opinion that: (1) MBIA is a corporation duly organized and validly existing and in good standing under the laws of the State of Connecticut, MBIA Corp. is a stock insurance corporation duly incorporated and validly existing in good standing under the laws of the State of New York and each has the corporate power required to carry on their businesses as now being conducted. (2) The execution, delivery and performance by MBIA and MBIA Corp. of the Credit Agreement and the Notes (i) are within the corporate powers of MBIA and MBIA Corp., (ii) have been duly authorized by all necessary corporate action, (iii) require no action by or in respect of, or filing with, any governmental body, agency or official, (iv) do not (A) contravene, or constitute a default under, any provision of applicable law or regulation or of any agreement, judgment, injunction, order, decree or other instrument which to my knowledge is binding upon MBIA and MBIA Corp., or (B) in the case of MBIA, violate any provision of its Amended and Restated Certificate of Incorporation or By-Laws, and in the case of MBIA Corp., violate any provision of its Restated Charter or By-Laws, and (v) to the best of my knowledge, except as provided in the Credit Agreement, do not result in the creation or imposition of any Lien on any asset of MBIA, MBIA Corp. or any of their Subsidiaries. (3) The Credit Agreement and the Notes are valid and binding obligations of MBIA and MBIA Corp., enforceable in accordance with their respective terms, except that such enforceability may be limited by laws relating to bankruptcy, insolvency, reorganization, moratorium, receivership and other similar laws affecting creditors rights generally and by general principals of equity, and the enforceability as to rights to indemnity thereunder may be subject to limitations of public policy. (4) To the best of my knowledge, there is no action, suit or proceeding before or by any court, arbitrator or any governmental body, agency or official pending or threatened against MBIA or MBIA Corp. or their Consolidated Subsidiaries wherein an adverse decision, ruling or finding would (i) materially and adversely affect the business, consolidated financial position or consolidated results of operations of MBIA, MBIA Corp. and their Consolidated Subsidiaries, considered as a whole, or (ii) affect the validity or enforceability of the Credit Agreement or any Note. (5) Each Subsidiary of MBIA and MBIA Corp. is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, and has all corporate powers and all material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. Page 3 (6) Neither MBIA nor MBIA Corp. is an "investment company" within the meaning of the Investment Company Act of 1940, as amended. (7) Neither MBIA, MBIA Corp. nor any of their Subsidiaries is a "holding company", or a "subsidiary company" of a "holding company", or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company", as such terms are defined in the Public Utility Holding Company Act of 1935, as amended. (8) The choice of law provisions in the Credit Agreement and Notes designating the law of the State of Georgia as the governing law are enforceable under the laws of the State of New York. In the event that the choice of law provisions in the Credit Agreement and Notes designating the law of the State of Georgia as the governing law are not enforceable, however, and the laws of the State of New York are applied, the Credit Agreement and Notes constitute valid and legally binding obligations of MBIA and MBIA Corp. enforceable against MBIA and MBIA Corp. in accordance with their respective terms under the laws of the State of New York. This opinion is delivered to you in connection with the transaction referenced above and may only be relied upon by you or any Assignee or Participant under the Credit Agreement, and may not be circulated, quoted or otherwise referred to without my prior written consent. Very truly yours, /s/ Louis G. Lenzi Louis G. Lenzi General Counsel PMK:lp EXHIBIT 10.65 AMENDMENT NO. 1 TO INVESTMENT SERVICES AGREEMENT WHEREAS, MBIA Insurance Corporation and MBIA Securities Corp. have entered into an Investment Services Agreement (the "Agreement"); and WHEREAS, the parties have agreed to amend said Agreement. NOW, THEREFORE, the Agreement is hereby amended as follows effective January 2, 1996: 1. Exhibits B and C of the Agreement are replaced in their entirety by the substitute Exhibits B and C attached hereto. 2. All other provisions of the Agreement shall remain unchanged. IN WITNESS WHEREOF, the parties have caused the signatures of their duly authorized officers to be hereto affixed this 29th day of December, 1995. MBIA INSURANCE CORPORATION MBIA SECURITIES CORP. By: /s/ By: /s/ --------------------------- -------------------------- Title: Chief Financial Officer Title: President Section II. GUIDELINES ---------- The following shall constitute the Investment Guidelines for MBIA Corp., acting through its duly authorized officers and/or through its outside investment advisors: A. Investments shall be made and maintained in compliance with all applicable provisions of Article 14 of the New York Insurance Laws, as amended. B. Fixed Income Policy (1) Quality: For fixed-income securities (over 1 year when purchased) -------- average quality will be AA to AA-, with minimum purchase quality, BBB. For short-term investments (less than 1 year), only investments rated Al/P1 (or equivalent rating) or better may be purchased. (2) Maturity: The average duration target is a maximum of 7.5 years; --------- minimum duration is 6.0 years. (3) Maturity Distribution: Diversification in maturity to minimize ---------------------- reinvestment risk is an objective. Although this objective is not quantified, a reasonably well-laddered portfolio over a wide range of maturities is to be achieved. (4) Insured Obligations: MBIA Corp. may purchase or hold obligations -------------------- insured by MBIA Corp. or its competitors, subject to an aggregate limit of 20% of the total investment portfolio. (5) Other: Securities may be purchased in both public and private ----- markets, subject to the maintenance of an appropriate level of overall portfolio liquidity and to all other objectives/guidelines. C. Equity Policy MBIA Corp. holds interests in certain equity-oriented investments in limited amounts. It is MBIA Corp.'s current policy not to purchase equity oriented securities. D. Further Restrictions (1) At the time of purchase, no investment may be in default as to principal or interest payments and all shall be rated "investment grade" by at least one nationally-recognized domestic rating agency. (2) Only U.S. dollar denominated securities may be purchased, except those required for MBIA Corp.'s foreign operations. (3) No investment shall be made in futures or options on futures. (4) All investments shall be held by a third-party custodian (or via book entry at the Depository Trust Company or a similarly qualified clearing corporation), as prescribed in approved custody agreements, or in other customary forms of safekeeping. 2 E. Fixed income investments are further limited to the following types and amounts (with the term "assets" defined by the New York statutes):
Type of Obligation Limitation Basis ------------------ ---------- ----- (i) Backed by full faith and credit Unlimited In Aggregate of the United States, including Unlimited Per Issuer or Government National Mortgage Association Mortgage Pool direct obligations and guaranteed mortgage-backed securities. (ii) Federal National Mortgage Association 10% of Assets In Aggregate direct obligations and guaranteed 2% of Assets Per Mortgage Pool mortgage-backed securities. (iii) Federal Home Loan Mortgage 10% of Assets In Aggregate Corporation direct obligations and 2% of Assets Per Mortgage Pool guaranteed mortgage-backed securities. (iv) Bonds which have been fully 2% of Assets Per Issuer collateralized by direct U.S. government obligations (i.e., prerefunded or escrowed-to-maturity) and upgraded to triple-A by at least one nationally- recognized domestic rating agency. (v) Obligations not included in Section (iv) above and backed by full faith and credit of: (a) Any state government. 5% of Assets Per State (b) Any political subdivision of a State 2% of Assets Per Issuer or any municipality within the United States. (vi) Obligations not included in Section (iv) 2% of Assets Per Issuer above and backed by revenue or other income sources of a single facility or system. (vii) Pools of assets rated AAA by at least 5% of Assets In Aggregate one nationally recognized domestic 0.5% of Assets Per Single Issue rating agency (excluding assets otherwise permitted under this agreement).
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Type of Obligation Limitation Basis ------------------ ---------- ----- (viii) Securities backed by pools of assets 3% of Assets In Aggregate rated double-A by at least one 0.5% of Assets Per Single Issue nationally recognized domestic rating agency (examples may include, but are not limited to, commercial or residential mortgages, automobile loans). (ix) Investments in any entity, obligations 1% of Assets Per Issuer of which are insured by MBIA Corp., (and which are identified on a list furnished BY MBIA Corp. to its advisors from time-to-time) with the exception of United States municipalities rated AA or better by at least on nationally-recognized domestic rating agency. (x) Backed by full faith and credit of a 2% of Assets Per Issuer non-public corporate entity, whether foreign or domestic. (xi) Backed by full faith and credit of 10% of Assets In Aggregate Canada, its Provinces and other 10% of Assets For Federal Govt. political subdivisions. 2% of Assets Per all Other Issuers (xii) Backed by full faith and credit of 10% of Assets In Aggregate OECD foreign governments other than 1% of Assets Per Country in Canada. (xiii) Repurchase agreements with a bank 2% of Assets In Aggregate or registered broker-deal, provided 1% of Assets Per Bank or that all securities underlying such Broker-Dealer agreements: (a) Would be eligible investments under these Guidelines; and. (b) Have maturities of one year or less (unless the agreement is fully collateralized and marked to market daily.
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Type of Obligation Limitation Basis ------------------ ---------- ----- (xiv) investments of one year or 10% of Assets In Aggregate less in term which are either 1% of Assets Per Bank direct obligations of or supported by letters of credit from banks rated in the highest short-term category by at least one nationally- recognized domestic rating agency (or judged to be of equivalent quality). (xv) Mutual funds or other such 2% of Assets In Aggregate investment conduits registered with the SEC under the Investment Company Act of 1940, as amended (provided that all investments within each fund would be eligible under the Guidelines). (xvi) Equity-linked debt instruments $100 million In Aggregate rated A or better by at least $ 10 million Per Issue one nationally recognized domestic rating agency with a maturity no greater than 10 years. Equity index must be nationally recognized, such as the S&P 500. *************************
This Statement of investment Objective & Guidelines shall remain in effect until revised or amended by action of the MBIA Corp. Board of Directors, in accordance with its by-laws. 5 January 1996 ------------ Section III. SPECIFIC INSTRUCTIONS FOR TAXABLE FIXED-INCOME INVESTMENTS ---------------------------------------------------------- In the context of Sections I. and II. above as applicable, the following shall constitute the specific instructions for taxable fixed-term investments made by MBIA Corp., acting through MBIA Securities Corp., its investment advisor, it being understood that these instructions set forth in this Section III. are to be adhered to notwithstanding any less restrictive provisions in Sections I. and II. A. Maturity -------- The maximum allowable average duration is 7.5 years; minimum duration is 5.0 years. B. Quality -------- Minimum average quality of total portfolio, "A." Minimum purchase quality, "BBB+." Maximum of investments held rated less than "A-," 4 percent. Minimum holding quality, "BBB-." 6 January 1996 ------------ SECTION IV. SPECIFIC INSTRUCTIONS FOR TAX-EXEMPT FIXED-INCOME INVESTMENTS ------------------------------------------------------------- In the context of Sections I. and II. above as applicable, the following shall constitute the specific instructions for tax-exempt fixed-term investments made by MBIA Corp., acting through MBIA Securities Corp., its investment advisor, it being understood that the instructions set forth in this Section IV. are to be adhered to notwithstanding any less restrictive provisions in Sections I. and II. A. Maturity -------- The maximum allowable average duration is 7.5 years; minimum duration is 6.25 years. B. Quality ------- Minimum average quality for the tax-exempt portfolio is "AA." Minimum purchase quality for the tax-exempt portfolio is "BBB." Minimum holding quality for the taxable portfolio is investment grade, unless specific waiver of this limit is obtained from MBIA Corp. Maximum of investments held rated less than A-, 4 percent, unless specific waiver of this limit is obtained from MBIA Corp. 7 EXHIBIT C SCHEDULE OF FEES MANAGEMENT FEES PER ANNUM ASSETS UNDER MANAGEMENT IN BASIS POINTS TIMES ASSETS AT MARKET VALUE ($ MILLIONS) UNDER MANAGEMENT ---------------------------- ---------------------------- All Assets 7.0 bp Management fees shall be paid quarterly, in arrears, 30 days following the end of each quarter, based upon the average market value of the assets under management during such quarter. "Market Value" shall be determined in accordance with Section 9 of this Agreement. 11 INVESTMENT SERVICES AGREEMENT ----------------------------- This INVESTMENT SERVICES AGREEMENT (the "Agreement") is made as of the 28th day of April 1995, by and between MBIA Insurance Corporation, a New York insurance corporation (the "Client"), and MBIA Securities Corp., a Delaware Corporation (the "Advisor"). RECITALS -------- WHEREAS, Client seeks investment advisory services in connection with certain assets owned by it; and WHEREAS, Advisor is an affiliate of Client and in the business of providing investment advisory services; and WHEREAS, Client desires to retain Advisor to render advice and services to Client pursuant to the terms and conditions of this Agreement and Advisor is willing to furnish such advice and services. NOW THEREFORE, in consideration of the covenants and the mutual promises hereinafter set forth, the parties hereto mutually agree as follows: 1. Authority of the Advisor. (a) Advisor shall have full power to ------------------------ manage and direct the investments of and for Client's account (the "Account"), without prior consultation with Client, subject, however, to the limitations referred to in clause (b) of this paragraph 1 and paragraph 5 hereof. This discretionary authority makes the Advisor agent and attorney-in-fact with full power and authority on behalf of the Account (i) to buy, sell, exchange, convert and otherwise trade in any and all stocks, bonds and other securities as the Advisor may select; and (ii) to establish and deal through accounts with one or more securities brokerage firms, dealers or banks as Advisor may select; provided, however, that none of such firms, dealers or banks shall be a person or entity that controls, or is controlled by, or is under common control with, Advisor. This discretionary authority shall remain in full force and effect for the duration of this Agreement or until the Advisor receives written notice from Client of its termination in accordance with the terms of this Agreement. (b) Notwithstanding any other provision of this Agreement, it is understood and acknowledged by the parties hereto that Client shall at all times have ultimate control of and responsibility with respect to the functions which Client is delegating to Advisor Pursuant to the terms of this Agreement. In furtherance of the foregoing, Advisor shall follow the instructions of Client's Chief Financial Officer in connection with the management and investment of Account. 2. Custody of Assets. Client has appointed The Chase Manhattan Bank, ----------------- N.A., as its custodian (the "Custodian") to act under the Custody Agreement, dated March 1, 1995. The Custodian will take and have possession of the assets of the Account. Advisor shall not act as custodian for Client's Account or take or have possession of any of the assets thereof, but may issue instructions to the Custodian of such assets as required in connection with the settlement of transactions effected by Advisor hereunder. Accounts and records maintained by Advisor in connection with this Agreement shall be the property of the Client. Notwithstanding the foregoing, or any other provisions of this Agreement to the contrary, Client and Advisor acknowledge and agree that Advisor shall at all times own and have custody of its own general corporate accounts and records. 3. Brokerage. To the extent permitted in paragraph I of this Agreement, --------- Advisor may place orders for the execution of transactions for the Account with or through such brokers, dealers, or banks as Advisor may select and, complying with Section 28(e) of the Securities Exchange Act of 1934, may select brokers- dealers charging a commission in excess of the commission another broker-dealer would have charged. The Advisor and other clients advised by the Advisor may benefit from any information received from broker-dealers selected in connection with Client's Account. 4. Administrative Services. The Client hereby engages the Advisor to provide ----------------------- those administrative and securities management services described in Exhibit A attached hereto. 5. Sub-Advisors and Consultants. Advisor may, at its own expense, employ ---------------------------- other persons to furnish to Advisor statistical and other factual information, advice regarding economic factors and trends, information with respect to technical and scientific developments, and such other information, advice and assistance as Advisor may desire; provided, however, that such subadvisors and consultants shall not have authority to make investment decisions for Client's Account. 6. Investment Objectives and Guidelines. Client has provided Advisor ------------------------------------ with a written Statement of Investment Objectives & Guidelines (the "Guidelines") in the form attached hereto as Exhibit B and incorporated herein by reference. Advisor agrees to follow the Guidelines when making investments for Client's Account. Client shall give Advisor prompt written notice of any investments made for Client's Account which Client believes to have been made outside the Guidelines. Likewise, Advisor shall give Client prompt written notice of any investments made for Client's Account which Advisor believes to have been made outside the Guidelines. Client may change or modify the Guidelines from time to time by providing the Advisor written notice of such change or modification. Neither Advisor's acceptance of the Guidelines, nor any other provision of this Agreement shall be considered a guaranty that any specific result will be achieved. 7. Allocation of Charges and Expenses. (a) Advisor shall furnish at its ---------------------------------- own expense executive, supervisory and other personnel services, office space, equipment, utilities and telephone services in connection with supplying the investment management, advisory, statistical, analytical and research services contemplated by this Agreement. (b) Custodian fees, transfer agent fees and brokerage costs, fees and commissions will be charged to Client's Account. 2 (c) For all expenses not otherwise covered in subsections (a) and (b) above, it is understood that Client will pay or reimburse Advisor for such expenses, including, without limitation, governmental fees, interest charges, taxes, fees and expenses of independent auditors, legal fees and other expenses connected with the execution of security transactions or the performance by Advisor of any other duties under this Agreement or any actions taken by Advisor at the request of Client. Except for taxes, governmental fees and any other expenses outside of Advisor's control, Advisor will notify Client not less than five (5) business days prior to incurring any individual expense under this subsection (c) and Client shall have five (5) business days from receipt of such notice within which to notify Advisor of its disapproval of any such expense. Failure of Client to so notify Advisor of its disapproval within five (5) business days shall be deemed Client's approval of such expense. (d) Advisor shall provide Client, no later than thirty (30) days following the end of each calendar month, with a summary of the investment transactions for that month, together with a statement of any fees and expenses chargeable to Client pursuant to subsections (b) and (c) above. Any undisputed amounts shall be paid by Client within fifteen (15) days of receipt of said statement. 8. Compensation of Advisor. The compensation of Advisor for its services ----------------------- under the Agreement shall be calculated and paid in accordance with the Schedule of Fees attached hereto as Exhibit C and incorporated herein by reference. It is intended by the parties hereto that the compensation rate set forth in that Schedule of Fees, or any sub sequent amendment thereto, shall reflect Advisor's costs in providing services to Client, pursuant to this Agreement. The Schedule of Fees will be reviewed annually and adjusted to reflect any changes in the Advisor's costs. 9. Valuation. In computing the market value of any security held in the --------- custody account: (a) Each security listed on any national securities exchange, for which recent market quotations are readily available, shall be valued at the last reported sale price on the principal exchange on which such security is traded, or, if there has been no recently reported sale, at the last reported bid price; (b) Unlisted securities shall be valued at the then current bid price, if market quotations are readily available; (c) Futures contracts will be valued based on closing settlement prices as reported on regulated futures exchanges, in accordance with accepted practices and applicable law and regulations; and (d) Any other security or asset shall be valued in a manner determined in good faith by Advisor to reflect its fair market value and such valuation shall be determinative. 3 10. Records. Advisor shall maintain accurate and detailed records of all ------- transactions in connection with the Account, which shall be subject to inspection by Client upon reasonable notice during Advisor's regular business hours. It is understood and acknowledged that such records are the property of the Company and shall be returned to the Company upon termination of this Agreement. On request, representatives of Advisor shall meet With the Client's officers and directors and the officers and directors of the Client's parent company to discuss investment performance and other matters relating to Advisor's obligations under this Agreement. 11. Duration and Termination. (a) Subject to the provisions of paragraph 13 ------------------------ hereof, this Agreement shall commence as of the date set forth above and shall continue until terminated (i) by mutual consent of Advisor and Client or (ii) as hereinafter provided. Fees will be prorated to the date of termination and any unearned portion of repaid fees will be refunded to Client. (b) Either party may terminate this Agreement without cause upon at least thirty (30) days prior written notice. (c) At its discretion, Client may immediately terminate this Agreement by written notice to Advisor upon the occurrence of any one of the following events: (i) The insolvency of Advisor, the inability of Advisor to pay debts as they mature, the making of an assignment by Advisor for the benefit of creditors, the dissolution of Advisor, the appointment of a receiver or liquidator for Advisor or for a substantial part of Advisor's property, or the institution of bankruptcy, reorganization, arrangement, insolvency or similar proceedings by or against Advisor under the laws of any jurisdiction; or (ii) The default under or any violation of the terms of this Agreement by Advisor which is not cured by Advisor within fifteen (15) days after receipt by Advisor of notice of such default from Client of the failure of Advisor to perform satisfactorily its duties as set forth in this Agreement. (d) At its discretion, Advisor may immediately terminate this Agreement by written notice to Client upon the occurrence of any one of the following events: (i) The insolvency of Client, the inability of Client to pay debts as they mature, the making of an assignment by Client for the benefit of creditors or the dissolution of Client. (ii) The default under or any violation of the terms of this Agreement by Client which is not cured by Client within fifteen (15) days after receipt by Client of notice of such default from Advisor of the failure of Client to perform satisfactorily its duties as set forth in this Agreement; or (iii)The commencement of a delinquency proceeding against Client pursuant to Article 74 of the New York Insurance Law. 4 (e) Upon termination of this Agreement, if Client so elects and for a period not exceeding the earlier of two (2) months or the date on which Client appoints a successor to Advisor, Advisor shall be obligated to perform those investment services which are necessary to ensure the proper management of Client's Account. Termination of this Agreement shall not relieve either party of liability for the performance of obligations imposed upon such party during the effective period of this Agreement which have not been performed at the time of termination thereof. It is specifically agreed to and acknowledged that Advisor shall be entitled to fees referred to in paragraph 8 for services rendered pursuant to this subparagraph (e). 12. Non-Exclusive Contract. The services of the Advisor to Client are not to ---------------------- be deemed to be exclusive. Advisor is free to render service to others. Client agrees that Advisor may give advice and take action with respect to any of its other clients which may differ from advice given or the timing or nature of action taken with respect to Client's Account. Nothing in this Agreement shall be deemed to impose upon the Advisor any obligation to purchase or sell or to recommend for purchase or sale by or for Client any security or other property which Advisor, its officers, employees or affiliates may purchase or sell for their own accounts or which the Advisor may purchase or sell for the account of any other client. Client recognizes that transactions in a specific security may not be accomplished for all or any other clients at the same time or at the same price. 13. Representations. (a) The Advisor represents and warrants that it is --------------- registered as an investment advisor with the Securities and Exchange Commission pursuant to the Investment Advisers Act of 1940 as amended. (b) Advisor represents and warrants that this Agreement has been duly authorized in accordance with Advisor's governing documents and when executed and delivered will be binding upon Advisor in accordance with its terms. (c) Advisor represents and warrants that it will maintain records in connection with the Account in accordance with the applicable requirements of Section 325 of the New York Insurance Law or any successor statute thereto. (d) Client represents and warrants that this Agreement has been duly authorized by Client's Board of Directors in accordance with Client's governing documents and when executed and delivered will be binding upon Client in accordance with its terms. 14. Department of Insurance Approval. This Agreement is executed by the -------------------------------- parties with the understanding that it is contingent upon final approval by the New York Department of Insurance. In the event such approval is not obtained, the Client shall have the unqualified right to terminate this Agreement without penalty, provided, however, that any investment action taken by Advisor on behalf of Client prior to the effective date of such termination shall be at Client's risk. 15. Applicable Laws. Advisor shall comply with all securities laws and other --------------- laws applicable to investment managers, including, without limitation, the Investment Advisers Act of 5 1940, as amended. Advisor shall comply with the Guidelines in providing its services hereunder, and, except for monitoring compliance with the provisions of law referred to in the Guidelines, shall have no independent duty or responsibility to assure that investments permitted by Client's Guidelines qualify as permitted investments under applicable insurance laws. 16. Voting Rights. Decisions on voting of proxies will be made by Client. ------------- 17. Liability of Advisor. In providing Client with investment advice and other -------------------- services as herein provided, neither Advisor nor any officer, director, employee or agent thereof shall be held liable to Client, its creditors or its stockholder(s) for errors of judgment or for anything except willful malfeasance, bad faith or negligence in the performance of its duties or reckless disregard of its obligations and duties under the terms of this Agreement. It is further understood and agreed that Advisor may rely upon information furnished to it reasonably believed to be accurate and reliable. Nothing herein shall constitute a waiver or limitation of any rights which the Client may have under any federal securities laws. 18. Confidential Relationship. The terms and conditions of this Agreement, all ------------------------- information and advice furnished by either party under this Agreement and any records generated by this Agreement are confidential and shall not be disclosed to third parties, except as required by law. 19. Notices. All notices and other communications hereunder shall be in ------- writing and shall be delivered by hand, telecopier, or mailed by registered or certified mail (return receipt requested) to the parties at the following addresses and shall be deemed given on the date on which such notice is received: To Client at: Attention: General Counsel Or by telecopier at: With a copy to: Attention: Chief Financial Officer Or by telecopier at: To Advisor at: Attention: President 6 Or by telecopier at: Either party may change its address or telecopier number for purposes of this paragraph by giving the other party written notice of the new address or telecopier number in the manner set forth below. 20. Waiver. Waiver by either party of any obligation of the other party does ------ not constitute a waiver of any further or other obligation of the other party. 21. Amendment. This Agreement may be modified or amended only by an instrument --------- in writing signed by duly authorized representatives of both Advisor and Client. 22. Agreement not Assignable. This Agreement is not assignable by either Client ------------------------ or Advisor. 23. Cumulative. All rights, powers and privileges conferred hereunder upon the ---------- parties shall be cumulative and shall not restrict those given by law. 24. Counterparts. This Agreement may be executed in counterparts, each of which ------------ so executed shall be deemed to be an original and such counterparts together shall constitute but one and the same contract, which shall be sufficiently evidenced by any such original counterpart. 25. Construction. The captions used in this Agreement are for convenience only, ------------ and shall not affect the construction or interpretation of any of its provisions. Each of the provisions of this Agreement is severable, and invalidity or inapplicability of one or more provisions, in whole or in part, shall not affect any other provision. This Agreement shall be construed in accordance with the laws of the State of New York, and is subject to the provisions of the Investment Advisers Act of 1940, as amended, and the rules and regulations of the Securities and Exchange Commission. 26. Disclosure Statement. Client acknowledges receipt of Advisor's disclosure -------------------- statement, as required by Rule 204-3 under the Investment Advisers Act of 1940, not less than 48 hours prior to the date of execution of this Agreement. 27. Dispute Resolution. Any disputes arising under this Agreement shall be ------------------ settled by arbitration in New York City in accordance with the American Arbitration Association rules then in effect, any award rendered thereon shall be enforceable in any court of competent jurisdiction. 28. Entirety of Agreement. This Agreement contains the entire agreement between --------------------- the parties with respect to the subject matter hereof and supersedes and cancels any prior understandings and agreements between the parties. 7 IN WITNESS WHEREOF, the parties have caused the signatures of their duly authorized offices to be hereto affixed. By: By: ------------------------- ----------------------------- Title: Senior Vice President Title: President, MBIA Securities Corp. ----------------------- -------------------------------- "Client" "Advisor" 8 EXHIBIT A ADMINISTRATIVE SERVICES Advisor will provide the following securities support functions: - - Settlement/Custody Control -------------------------- Daily coordination of any securities purchased or sold with investment manager, brokers and clearance bank. Confirmation of funds movement upon receipt/delivery of securities. Reconciliation of asset position between custody bank and investment operations. - - Transaction Processing ---------------------- Daily recording of individual security transactions on trade date. - - Income Collection ----------------- Daily collection and recording principal (maturity/redemption) and interest payments. Follow up on overdue payments. - - Bank Reconciliation ------------------- Monthly reconciliation of all cash transactions in demand deposit accounts. - - Market Valuation of Assets -------------------------- Assets priced monthly by an outside service. - - Investment Accounting Staff Support ----------------------------------- Staff support will be provided to assist the Client in responding to audit, tax or other regulatory interrogatories related to investment transactions as reported. Independent administrative services which are not provided by Advisor under this Agreement include: -- Custody services provided by The Chase Manhattan Bank, N.A. of New York. -- Outside audit services. 9 The following reports will be provided to the Client and will include transaction reports and investment management reports prepared monthly or quarterly, as the case may be: (a) Transaction Reporting: --------------------- (i) Quarterly detail reports on new commitments. (ii) Quarterly detail reports on all transactions including purchases, sales, investment income and return of principal. (iii) Transactional information on investments, as needed, to support tax return preparation. (b) Portfolio Review: ---------------- Quarterly summary and detail on the Client's holdings will be provided. This report will include market values, overall quality ratings, portfolio yield and a summary review of market conditions and portfolio strategy. (c) Performance Reporting: --------------------- Included as part of the portfolio review will be performance results on both yields on new commitments and total return for the portfolio. Performance will be measured against agreed upon indices. 10 EXHIBIT B April 1995 ---------- MBIA INSURANCE CORPORATION STATEMENT OF INVESTMENT OBJECTIVES & GUIDELINES ----------------------------------------------- SECTION I. OBJECTIVES: ---------- A. Preservation of Capital in the context of maintaining triple-A ----------------------- ratings for MBIA Insurance Corporation ("MBIA Corp.") and supporting recognition of MBIA Corp.'s financial stability and strength by insured bond investors, municipal market intermediaries, and other municipal bond market constituencies. B. Subject to A. above, optimization of after-tax investment income ---------------------------------------------------------------- to support the predictability and consistency of company earnings and cash flow. C. Subject to A. and B. above, optimization of long-term total returns. ------------------------------------------------------------------- D. Maintenance of reasonable liquidity after taking into account the ----------------------------------- company's other sources of liquidity (including bank credit facilities and cash flow) for potential claims-paying and other corporate needs. Overall, these objectives call for maintenance of high quality investments, avoidance of undue volatility in both income and returns and generally minimal amounts of short-term investments and/or U.S. Treasury obligations for immediate liquidity. MBIA Corp.'s investment selections will be made with a bias to hold for the long-term, and to avoid sales or swaps in the absence of compelling circumstances of tax credit, structural or other economic reasons, and not to rely on short-term trading or market timing to achieve performance. The mix of taxable and tax-exempt investments will vary from time to time with both market conditions and company tax circumstances. In seeking to achieve these objectives, MBIA Corp. will monitor, evaluate and report on the performance of its investment managers and the portfolio, using appropriate market-related benchmarks. In addition, MBIA Corp. will maintain an awareness of and periodically report on the investment practices and results of key competitors and comply with the constraints or limitations related to internal guidelines and regulatory or rating agency considerations. SECTION II. GUIDELINES: ---------- The following shall constitute the Investment Guidelines for MBIA Corp., acting through its duly authorized officers and/or through its outside investment advisors: A. Investments shall be made and maintained in compliance with all applicable provisions of Article 14 of the New York Insurance Laws, as amended. B. Fixed Income Policy (1) Quality: For fixed-income securities (over 1 year when purchased) ------- average quality will be AA to AA-, with minimum purchase quality, BBB. For short-term investments (less than 1 year), only investments rated A1/P1 (or equivalent rating) or better may be purchased. (2) Maturity: The average duration target is a maximum of 7.5 years; -------- minimum duration is 6.0 years. (3) Maturity Distribution: Diversification in maturity to minimize --------------------- reinvestment risk is an objective. Although this objective is not quantified, a reasonably well-laddered portfolio over a wide range of maturities is to be achieved. (4) Insured Obligations: MBIA Corp. may purchase or hold obligations ------------------- insured BY MBIA Corp. or its competitors, subject to an aggregate limit of 20% of the total investment portfolio. (5) Other: Securities may be purchased in both public and private ------ markets, subject to the maintenance of an appropriate level of overall portfolio liquidity and to all other objectives/guidelines. C. Equity Policy MBIA Corp. holds interests in certain equity-oriented investments in limited amounts. It is MBIA Corp.'s current policy not to purchase equity oriented securities. D. Further Restrictions (1) At the time of purchase, no investment may be in default as to principal or interest payments and all shall be rated "investment grade" by at least one nationally-recognized domestic rating agency. (2) Only U.S. dollar denominated securities may be purchased, except those required for MBIA Corp.'s foreign operations. (3) No investment shall be made in futures or options on futures. (4) All investments shall be held by a third-party custodian (or via book entry at the Depository Trust Company or a similarly qualified clearing corporation), as prescribed in approved custody agreements, or in other customary forms of safekeeping. 2 E. Fixed income investments are further limited to the following types and amounts (with the term "assets" defined by the New York statutes):
Type of Obligation Limitation Basis ------------------ ---------- ----- (i) Backed by full faith and credit Unlimited In Aggregate of the United States, including Unlimited Per Issuer or Government National Mortgage Association Mortgage Pool direct obligations and guaranteed mortgage-backed securities. (ii) Federal National Mortgage Association 10% of Assets In Aggregate direct obligations and guaranteed 2% of Assets Per Mortgage mortgage-backed securities. Pool (iii) Federal Home Loan Mortgage 10% of Assets In Aggregate Corporation direct obligations and 2% of Assets Per Mortgage guaranteed mortgage-backed Pool securities. (iv) Bonds which have been fully 2% of Assets Per Issuer collateralized by direct U.S. government obligations (i.e. pre-refunded or escrowed-to-maturity) and upgraded to triple-A by at least one nationally- recognized domestic rating agency. (v) Obligations not included in Section (iv) above and backed by full faith and credit of: (a) Any state government. 5% of Assets Per State (b) Any political subdivision of a State 2% of Assets Per Issuer or any municipality within the United States. (vi) Obligations not included in Section (iv) 2% of Assets Per Issuer above and backed by revenue or other income sources of a single facility or system. (vii) Pools of assets rated AAA by at least 5% of Assets In Aggregate one nationally recognized domestic 0.5% of Assets Per Single Issue rating agency (excluding assets otherwise permitted under this agreement).
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Type of Obligation Limitation Basis ------------------ ---------- ----- (viii) Securities backed by pools of assets 3% of Assets In Aggregate rated double-A by at least one 0.5% of Assets Per Single Issue nationally recognized domestic rating agency (examples may include, but are not limited to, commercial or residential mortgages, automobile loans). (ix) Investments in any entity, obligations 1% of Assets Per Issuer of which are insured by MBIA Corp., (and which are identified on a list furnished by MBIA Corp. to its advisors from time-to-time) with the exception of United States municipalities rated AA or better by at least on nationally-recognized domestic rating agency. (x) Backed by full faith and credit of a 2% of Assets Per Issuer non-public corporate entity, whether foreign or domestic. (xi) Backed by full faith and credit of 10% of Assets In Aggregate Canada, its Provinces and other 10% of Assets For Federal Govt. political subdivisions. 2% of Assets Per All Other Issuers (xii) Backed by full faith and credit of 10% of Assets In Aggregate OECD foreign governments other than 1% of Assets Per Country in Canada. (xiii) Repurchase agreements with a bank 2% of Assets In Aggregate or registered broker-dealer, provided 1% of Assets Per Bank or that all securities underlying such Broker-Dealer agreements: (a) would be eligible investments under these Guidelines; and (b) have maturities of one year or less (unless the agreement is fully collateralized and marked to market daily).
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Type of Obligation Limitation Basis ------------------ ---------- ----- (xiv) Investments of one year or 10% of Assets In Aggregate less in term which are either 1% of Assets Per Bank direct obligations of or supported by letters of credit from banks rated in the highest short-term category by at least one nationally- recognized domestic rating agency (or judged to be of equivalent quality). (xv) Mutual funds or other such 2% of Assets In Aggregate investment conduits registered with the SEC under the Investment Company Act of 1940, as amended (provided that all investments within each fund would be eligible under the Guidelines). (xvi) Equity-linked debt instruments $100 million In Aggregate rated A or better by at least $ 10 million Per Issue one nationally recognized domestic rating agency with a maturity no greater than 10 years. Equity index must be nationally recognized, such as the S&P 500. * * * * * * * * * * *
THIS STATEMENT OF INVESTMENT OBJECTIVES & GUIDELINES SHALL REMAIN IN EFFECT UNTIL REVISED OR AMENDED BY ACTION OF THE MBIA CORP. BOARD OF DIRECTORS, IN ACCORDANCE WITH ITS BY-LAWS. 5 May 1995 -------- SECTION III. SPECIFIC INSTRUCTIONS FOR FIXED-INCOME INVESTMENTS MANAGED BY ------------------------------------------------------------- MBIA SECURITIES CORP. --------------------- In the context of Sections I. and II. above as applicable, the following shall constitute the specific instructions for fixed-term investments made by MBIA Corp., acting through MBIA Securities Corp. ("MBIA SECO"), its investment advisor; it being understood that these instructions set forth in this Section III. are to be adhered to notwithstanding any less restrictive provisions in Sections I. and II. A. Permitted Investments --------------------- MBIA SECO may invest only in the following categories of fixed income investments as set forth in Section II of the Guidelines: Section Type ------- ---- (i) Full faith and credit of the United States (x) Non-public corporates (xi) Canadian obligations (xii) OECD governments (xiii) Repurchase agreements (xiv) Short-term investments B. Maturity -------- The maximum allowable average duration is 7.5 years; minimum duration is 5.0 years. C. Quality ------- Minimum average quality of total portfolio, "A." Minimum purchase quality, "BBB+." Maximum of investments held rated less than "A-," 4 percent. Minimum holding quality, "BBB-." 6 EXHIBIT C MANAGEMENT FEES PER ANNUM ASSETS UNDER MANAGEMENT IN BASIS POINTS TIMES ASSETS AT MARKET VALUE ($ MILLIONS) UNDER MANAGEMENT ---------------------------- ---------------------------- First $1,000 7.0 bp Next $1,000 6.0 bp In excess of $2,000 5.0 bp Management fees shall be paid quarterly, in arrears, 30 days following the end of each quarter, based upon the average market value of the assets under management during such quarter. "Market Value" shall be determined in accordance with Section 9 of this Agreement. 11 [LOGO] MBIA INSURANCE CORPORATION 113 King Street Armonk, NY 10504 914 273 4545 May 31, 1995 Mr. Kenneth Gingrass Associate Insurance Examiner Property/Casualty Bureau State of New York Insurance Department 160 West Broadway New York, NY 10013 RE: MBIA Insurance Corporation Proposed Investment Services Agreement (the "Agreement") with MBIA Securities Corp. Dear Mr. Gingrass: Enclosed please find an executed copy of the Agreement. At your request, Section 8 on Compensation of Advisor has been revised to state that the Schedule of Fees (Exhibit C) will be reviewed annually and adjusted to reflect any changes in MBIA Securities Corp. ("SECO") costs. In addition, as required by your letter dated May 17, 1995, MBIA Insurance Corporation ("MBIA") commits to notify the Department when its assets under management by SECO exceeds 20% of the total admitted assets of MBIA. If I can be of any further assistance, please call me at (914) 765-3923. Very truly yours, /s/ Wendy E. Mrosek Wendy E. Mrosek Assistant General Counsel cc: Jeremiah Sheehan EXHIBIT B --------- January 1996 ------------ MBIA INSURANCE CORPORATION STATEMENT OF INVESTMENT OBJECTIVES & GUIDELINES ----------------------------------------------- SECTION I. OBJECTIVES ---------- A. Preservation of Capital in the context of maintaining triple-A ratings ----------------------- for MBIA Insurance Corporation ("MBIA Corp.") and supporting recognition of MBIA Corp.'s financial stability and strength by insured bond investors, municipal market intermediaries, and other municipal bond market constituencies. B. Subject to A. above, optimization of after-tax investment income to ---------------------------------------------------------------- support the predictability and consistency of company earnings and cash flow. C. Subject to A. and B. above, optimization of long-term total returns. ------------------------------------------------------------------- D. Maintenance of reasonable liquidity after taking into account the ----------------------------------- company's other sources of liquidity (including bank credit facilities and cash flow) for potential claims paying and other corporate needs. Overall, these objectives call for maintenance of high quality investments, avoidance of undue volatility in both income and returns and generally minimal amounts of short-term investments and/or U.S. Treasury obligations for immediate liquidity. MBIA Corp.'s investment selections will be made with a bias to hold for the long-term, and to avoid sales or swaps in the absence of compelling circumstances of tax credit, structural or other economic reasons, and not to rely on short-term trading or market timing to achieve performance. The mix of taxable and tax-exempt investments will vary from time to time with both market conditions and company tax circumstances. In seeking to achieve these objectives, MBIA Corp. will monitor, evaluate and report on the performance of its investment managers and the portfolio, using appropriate market-related benchmarks. In addition, MBIA Corp. will maintain an awareness of and periodically report on the investment practices and results of key competitors and comply with the constraints or limitations related to guidelines and regulatory or rating agency considerations. EXHIBIT 10.65 AMENDMENT NO. 1 TO INVESTMENT SERVICES AGREEMENT WHEREAS, MBIA Insurance Corporation and MBIA Securities Corp. have entered into an Investment Services Agreement (the "Agreement"); and WHEREAS, the parties have agreed to amend said Agreement. NOW, THEREFORE, the Agreement is hereby amended as follows effective January 2, 1996: 1. Exhibits B and C of the Agreement are replaced in their entirety by the substitute Exhibits B and C attached hereto. 2. All other provisions of the Agreement shall remain unchanged. IN WITNESS WHEREOF, the parties have caused the signatures of their duly authorized officers to be hereto affixed this 29th day of December, 1995. MBIA INSURANCE CORPORATION MBIA SECURITIES CORP. By: /s/ By: /s/ --------------------------- -------------------------- Title: Chief Financial Officer Title: President Section II. GUIDELINES ---------- The following shall constitute the Investment Guidelines for MBIA Corp., acting through its duly authorized officers and/or through its outside investment advisors: A. Investments shall be made and maintained in compliance with all applicable provisions of Article 14 of the New York Insurance Laws, as amended. B. Fixed Income Policy (1) Quality: For fixed-income securities (over 1 year when purchased) -------- average quality will be AA to AA-, with minimum purchase quality, BBB. For short-term investments (less than 1 year), only investments rated Al/P1 (or equivalent rating) or better may be purchased. (2) Maturity: The average duration target is a maximum of 7.5 years; --------- minimum duration is 6.0 years. (3) Maturity Distribution: Diversification in maturity to minimize ---------------------- reinvestment risk is an objective. Although this objective is not quantified, a reasonably well-laddered portfolio over a wide range of maturities is to be achieved. (4) Insured Obligations: MBIA Corp. may purchase or hold obligations -------------------- insured by MBIA Corp. or its competitors, subject to an aggregate limit of 20% of the total investment portfolio. (5) Other: Securities may be purchased in both public and private ----- markets, subject to the maintenance of an appropriate level of overall portfolio liquidity and to all other objectives/guidelines. C. Equity Policy MBIA Corp. holds interests in certain equity-oriented investments in limited amounts. It is MBIA Corp.'s current policy not to purchase equity oriented securities. D. Further Restrictions (1) At the time of purchase, no investment may be in default as to principal or interest payments and all shall be rated "investment grade" by at least one nationally-recognized domestic rating agency. (2) Only U.S. dollar denominated securities may be purchased, except those required for MBIA Corp.'s foreign operations. (3) No investment shall be made in futures or options on futures. (4) All investments shall be held by a third-party custodian (or via book entry at the Depository Trust Company or a similarly qualified clearing corporation), as prescribed in approved custody agreements, or in other customary forms of safekeeping. 2 E. Fixed income investments are further limited to the following types and amounts (with the term "assets" defined by the New York statutes):
Type of Obligation Limitation Basis ------------------ ---------- ----- (i) Backed by full faith and credit Unlimited In Aggregate of the United States, including Unlimited Per Issuer or Government National Mortgage Association Mortgage Pool direct obligations and guaranteed mortgage-backed securities. (ii) Federal National Mortgage Association 10% of Assets In Aggregate direct obligations and guaranteed 2% of Assets Per Mortgage Pool mortgage-backed securities. (iii) Federal Home Loan Mortgage 10% of Assets In Aggregate Corporation direct obligations and 2% of Assets Per Mortgage Pool guaranteed mortgage-backed securities. (iv) Bonds which have been fully 2% of Assets Per Issuer collateralized by direct U.S. government obligations (i.e., prerefunded or escrowed-to-maturity) and upgraded to triple-A by at least one nationally- recognized domestic rating agency. (v) Obligations not included in Section (iv) above and backed by full faith and credit of: (a) Any state government. 5% of Assets Per State (b) Any political subdivision of a State 2% of Assets Per Issuer or any municipality within the United States. (vi) Obligations not included in Section (iv) 2% of Assets Per Issuer above and backed by revenue or other income sources of a single facility or system. (vii) Pools of assets rated AAA by at least 5% of Assets In Aggregate one nationally recognized domestic 0.5% of Assets Per Single Issue rating agency (excluding assets otherwise permitted under this agreement).
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Type of Obligation Limitation Basis ------------------ ---------- ----- (viii) Securities backed by pools of assets 3% of Assets In Aggregate rated double-A by at least one 0.5% of Assets Per Single Issue nationally recognized domestic rating agency (examples may include, but are not limited to, commercial or residential mortgages, automobile loans). (ix) Investments in any entity, obligations 1% of Assets Per Issuer of which are insured by MBIA Corp., (and which are identified on a list furnished BY MBIA Corp. to its advisors from time-to-time) with the exception of United States municipalities rated AA or better by at least on nationally-recognized domestic rating agency. (x) Backed by full faith and credit of a 2% of Assets Per Issuer non-public corporate entity, whether foreign or domestic. (xi) Backed by full faith and credit of 10% of Assets In Aggregate Canada, its Provinces and other 10% of Assets For Federal Govt. political subdivisions. 2% of Assets Per all Other Issuers (xii) Backed by full faith and credit of 10% of Assets In Aggregate OECD foreign governments other than 1% of Assets Per Country in Canada. (xiii) Repurchase agreements with a bank 2% of Assets In Aggregate or registered broker-deal, provided 1% of Assets Per Bank or that all securities underlying such Broker-Dealer agreements: (a) Would be eligible investments under these Guidelines; and. (b) Have maturities of one year or less (unless the agreement is fully collateralized and marked to market daily.
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Type of Obligation Limitation Basis ------------------ ---------- ----- (xiv) investments of one year or 10% of Assets In Aggregate less in term which are either 1% of Assets Per Bank direct obligations of or supported by letters of credit from banks rated in the highest short-term category by at least one nationally- recognized domestic rating agency (or judged to be of equivalent quality). (xv) Mutual funds or other such 2% of Assets In Aggregate investment conduits registered with the SEC under the Investment Company Act of 1940, as amended (provided that all investments within each fund would be eligible under the Guidelines). (xvi) Equity-linked debt instruments $100 million In Aggregate rated A or better by at least $ 10 million Per Issue one nationally recognized domestic rating agency with a maturity no greater than 10 years. Equity index must be nationally recognized, such as the S&P 500. *************************
This Statement of investment Objective & Guidelines shall remain in effect until revised or amended by action of the MBIA Corp. Board of Directors, in accordance with its by-laws. 5 January 1996 ------------ Section III. SPECIFIC INSTRUCTIONS FOR TAXABLE FIXED-INCOME INVESTMENTS ---------------------------------------------------------- In the context of Sections I. and II. above as applicable, the following shall constitute the specific instructions for taxable fixed-term investments made by MBIA Corp., acting through MBIA Securities Corp., its investment advisor, it being understood that these instructions set forth in this Section III. are to be adhered to notwithstanding any less restrictive provisions in Sections I. and II. A. Maturity -------- The maximum allowable average duration is 7.5 years; minimum duration is 5.0 years. B. Quality -------- Minimum average quality of total portfolio, "A." Minimum purchase quality, "BBB+." Maximum of investments held rated less than "A-," 4 percent. Minimum holding quality, "BBB-." 6 January 1996 ------------ SECTION IV. SPECIFIC INSTRUCTIONS FOR TAX-EXEMPT FIXED-INCOME INVESTMENTS ------------------------------------------------------------- In the context of Sections I. and II. above as applicable, the following shall constitute the specific instructions for tax-exempt fixed-term investments made by MBIA Corp., acting through MBIA Securities Corp., its investment advisor, it being understood that the instructions set forth in this Section IV. are to be adhered to notwithstanding any less restrictive provisions in Sections I. and II. A. Maturity -------- The maximum allowable average duration is 7.5 years; minimum duration is 6.25 years. B. Quality ------- Minimum average quality for the tax-exempt portfolio is "AA." Minimum purchase quality for the tax-exempt portfolio is "BBB." Minimum holding quality for the taxable portfolio is investment grade, unless specific waiver of this limit is obtained from MBIA Corp. Maximum of investments held rated less than A-, 4 percent, unless specific waiver of this limit is obtained from MBIA Corp. 7 EXHIBIT C SCHEDULE OF FEES MANAGEMENT FEES PER ANNUM ASSETS UNDER MANAGEMENT IN BASIS POINTS TIMES ASSETS AT MARKET VALUE ($ MILLIONS) UNDER MANAGEMENT ---------------------------- ---------------------------- All Assets 7.0 bp Management fees shall be paid quarterly, in arrears, 30 days following the end of each quarter, based upon the average market value of the assets under management during such quarter. "Market Value" shall be determined in accordance with Section 9 of this Agreement. 11 INVESTMENT SERVICES AGREEMENT ----------------------------- This INVESTMENT SERVICES AGREEMENT (the "Agreement") is made as of the 28th day of April 1995, by and between MBIA Insurance Corporation, a New York insurance corporation (the "Client"), and MBIA Securities Corp., a Delaware Corporation (the "Advisor"). RECITALS -------- WHEREAS, Client seeks investment advisory services in connection with certain assets owned by it; and WHEREAS, Advisor is an affiliate of Client and in the business of providing investment advisory services; and WHEREAS, Client desires to retain Advisor to render advice and services to Client pursuant to the terms and conditions of this Agreement and Advisor is willing to furnish such advice and services. NOW THEREFORE, in consideration of the covenants and the mutual promises hereinafter set forth, the parties hereto mutually agree as follows: 1. Authority of the Advisor. (a) Advisor shall have full power to ------------------------ manage and direct the investments of and for Client's account (the "Account"), without prior consultation with Client, subject, however, to the limitations referred to in clause (b) of this paragraph 1 and paragraph 5 hereof. This discretionary authority makes the Advisor agent and attorney-in-fact with full power and authority on behalf of the Account (i) to buy, sell, exchange, convert and otherwise trade in any and all stocks, bonds and other securities as the Advisor may select; and (ii) to establish and deal through accounts with one or more securities brokerage firms, dealers or banks as Advisor may select; provided, however, that none of such firms, dealers or banks shall be a person or entity that controls, or is controlled by, or is under common control with, Advisor. This discretionary authority shall remain in full force and effect for the duration of this Agreement or until the Advisor receives written notice from Client of its termination in accordance with the terms of this Agreement. (b) Notwithstanding any other provision of this Agreement, it is understood and acknowledged by the parties hereto that Client shall at all times have ultimate control of and responsibility with respect to the functions which Client is delegating to Advisor Pursuant to the terms of this Agreement. In furtherance of the foregoing, Advisor shall follow the instructions of Client's Chief Financial Officer in connection with the management and investment of Account. 2. Custody of Assets. Client has appointed The Chase Manhattan Bank, ----------------- N.A., as its custodian (the "Custodian") to act under the Custody Agreement, dated March 1, 1995. The Custodian will take and have possession of the assets of the Account. Advisor shall not act as custodian for Client's Account or take or have possession of any of the assets thereof, but may issue instructions to the Custodian of such assets as required in connection with the settlement of transactions effected by Advisor hereunder. Accounts and records maintained by Advisor in connection with this Agreement shall be the property of the Client. Notwithstanding the foregoing, or any other provisions of this Agreement to the contrary, Client and Advisor acknowledge and agree that Advisor shall at all times own and have custody of its own general corporate accounts and records. 3. Brokerage. To the extent permitted in paragraph I of this Agreement, --------- Advisor may place orders for the execution of transactions for the Account with or through such brokers, dealers, or banks as Advisor may select and, complying with Section 28(e) of the Securities Exchange Act of 1934, may select brokers- dealers charging a commission in excess of the commission another broker-dealer would have charged. The Advisor and other clients advised by the Advisor may benefit from any information received from broker-dealers selected in connection with Client's Account. 4. Administrative Services. The Client hereby engages the Advisor to provide ----------------------- those administrative and securities management services described in Exhibit A attached hereto. 5. Sub-Advisors and Consultants. Advisor may, at its own expense, employ ---------------------------- other persons to furnish to Advisor statistical and other factual information, advice regarding economic factors and trends, information with respect to technical and scientific developments, and such other information, advice and assistance as Advisor may desire; provided, however, that such subadvisors and consultants shall not have authority to make investment decisions for Client's Account. 6. Investment Objectives and Guidelines. Client has provided Advisor ------------------------------------ with a written Statement of Investment Objectives & Guidelines (the "Guidelines") in the form attached hereto as Exhibit B and incorporated herein by reference. Advisor agrees to follow the Guidelines when making investments for Client's Account. Client shall give Advisor prompt written notice of any investments made for Client's Account which Client believes to have been made outside the Guidelines. Likewise, Advisor shall give Client prompt written notice of any investments made for Client's Account which Advisor believes to have been made outside the Guidelines. Client may change or modify the Guidelines from time to time by providing the Advisor written notice of such change or modification. Neither Advisor's acceptance of the Guidelines, nor any other provision of this Agreement shall be considered a guaranty that any specific result will be achieved. 7. Allocation of Charges and Expenses. (a) Advisor shall furnish at its ---------------------------------- own expense executive, supervisory and other personnel services, office space, equipment, utilities and telephone services in connection with supplying the investment management, advisory, statistical, analytical and research services contemplated by this Agreement. (b) Custodian fees, transfer agent fees and brokerage costs, fees and commissions will be charged to Client's Account. 2 (c) For all expenses not otherwise covered in subsections (a) and (b) above, it is understood that Client will pay or reimburse Advisor for such expenses, including, without limitation, governmental fees, interest charges, taxes, fees and expenses of independent auditors, legal fees and other expenses connected with the execution of security transactions or the performance by Advisor of any other duties under this Agreement or any actions taken by Advisor at the request of Client. Except for taxes, governmental fees and any other expenses outside of Advisor's control, Advisor will notify Client not less than five (5) business days prior to incurring any individual expense under this subsection (c) and Client shall have five (5) business days from receipt of such notice within which to notify Advisor of its disapproval of any such expense. Failure of Client to so notify Advisor of its disapproval within five (5) business days shall be deemed Client's approval of such expense. (d) Advisor shall provide Client, no later than thirty (30) days following the end of each calendar month, with a summary of the investment transactions for that month, together with a statement of any fees and expenses chargeable to Client pursuant to subsections (b) and (c) above. Any undisputed amounts shall be paid by Client within fifteen (15) days of receipt of said statement. 8. Compensation of Advisor. The compensation of Advisor for its services ----------------------- under the Agreement shall be calculated and paid in accordance with the Schedule of Fees attached hereto as Exhibit C and incorporated herein by reference. It is intended by the parties hereto that the compensation rate set forth in that Schedule of Fees, or any sub sequent amendment thereto, shall reflect Advisor's costs in providing services to Client, pursuant to this Agreement. The Schedule of Fees will be reviewed annually and adjusted to reflect any changes in the Advisor's costs. 9. Valuation. In computing the market value of any security held in the --------- custody account: (a) Each security listed on any national securities exchange, for which recent market quotations are readily available, shall be valued at the last reported sale price on the principal exchange on which such security is traded, or, if there has been no recently reported sale, at the last reported bid price; (b) Unlisted securities shall be valued at the then current bid price, if market quotations are readily available; (c) Futures contracts will be valued based on closing settlement prices as reported on regulated futures exchanges, in accordance with accepted practices and applicable law and regulations; and (d) Any other security or asset shall be valued in a manner determined in good faith by Advisor to reflect its fair market value and such valuation shall be determinative. 3 10. Records. Advisor shall maintain accurate and detailed records of all ------- transactions in connection with the Account, which shall be subject to inspection by Client upon reasonable notice during Advisor's regular business hours. It is understood and acknowledged that such records are the property of the Company and shall be returned to the Company upon termination of this Agreement. On request, representatives of Advisor shall meet With the Client's officers and directors and the officers and directors of the Client's parent company to discuss investment performance and other matters relating to Advisor's obligations under this Agreement. 11. Duration and Termination. (a) Subject to the provisions of paragraph 13 ------------------------ hereof, this Agreement shall commence as of the date set forth above and shall continue until terminated (i) by mutual consent of Advisor and Client or (ii) as hereinafter provided. Fees will be prorated to the date of termination and any unearned portion of repaid fees will be refunded to Client. (b) Either party may terminate this Agreement without cause upon at least thirty (30) days prior written notice. (c) At its discretion, Client may immediately terminate this Agreement by written notice to Advisor upon the occurrence of any one of the following events: (i) The insolvency of Advisor, the inability of Advisor to pay debts as they mature, the making of an assignment by Advisor for the benefit of creditors, the dissolution of Advisor, the appointment of a receiver or liquidator for Advisor or for a substantial part of Advisor's property, or the institution of bankruptcy, reorganization, arrangement, insolvency or similar proceedings by or against Advisor under the laws of any jurisdiction; or (ii) The default under or any violation of the terms of this Agreement by Advisor which is not cured by Advisor within fifteen (15) days after receipt by Advisor of notice of such default from Client of the failure of Advisor to perform satisfactorily its duties as set forth in this Agreement. (d) At its discretion, Advisor may immediately terminate this Agreement by written notice to Client upon the occurrence of any one of the following events: (i) The insolvency of Client, the inability of Client to pay debts as they mature, the making of an assignment by Client for the benefit of creditors or the dissolution of Client. (ii) The default under or any violation of the terms of this Agreement by Client which is not cured by Client within fifteen (15) days after receipt by Client of notice of such default from Advisor of the failure of Client to perform satisfactorily its duties as set forth in this Agreement; or (iii)The commencement of a delinquency proceeding against Client pursuant to Article 74 of the New York Insurance Law. 4 (e) Upon termination of this Agreement, if Client so elects and for a period not exceeding the earlier of two (2) months or the date on which Client appoints a successor to Advisor, Advisor shall be obligated to perform those investment services which are necessary to ensure the proper management of Client's Account. Termination of this Agreement shall not relieve either party of liability for the performance of obligations imposed upon such party during the effective period of this Agreement which have not been performed at the time of termination thereof. It is specifically agreed to and acknowledged that Advisor shall be entitled to fees referred to in paragraph 8 for services rendered pursuant to this subparagraph (e). 12. Non-Exclusive Contract. The services of the Advisor to Client are not to ---------------------- be deemed to be exclusive. Advisor is free to render service to others. Client agrees that Advisor may give advice and take action with respect to any of its other clients which may differ from advice given or the timing or nature of action taken with respect to Client's Account. Nothing in this Agreement shall be deemed to impose upon the Advisor any obligation to purchase or sell or to recommend for purchase or sale by or for Client any security or other property which Advisor, its officers, employees or affiliates may purchase or sell for their own accounts or which the Advisor may purchase or sell for the account of any other client. Client recognizes that transactions in a specific security may not be accomplished for all or any other clients at the same time or at the same price. 13. Representations. (a) The Advisor represents and warrants that it is --------------- registered as an investment advisor with the Securities and Exchange Commission pursuant to the Investment Advisers Act of 1940 as amended. (b) Advisor represents and warrants that this Agreement has been duly authorized in accordance with Advisor's governing documents and when executed and delivered will be binding upon Advisor in accordance with its terms. (c) Advisor represents and warrants that it will maintain records in connection with the Account in accordance with the applicable requirements of Section 325 of the New York Insurance Law or any successor statute thereto. (d) Client represents and warrants that this Agreement has been duly authorized by Client's Board of Directors in accordance with Client's governing documents and when executed and delivered will be binding upon Client in accordance with its terms. 14. Department of Insurance Approval. This Agreement is executed by the -------------------------------- parties with the understanding that it is contingent upon final approval by the New York Department of Insurance. In the event such approval is not obtained, the Client shall have the unqualified right to terminate this Agreement without penalty, provided, however, that any investment action taken by Advisor on behalf of Client prior to the effective date of such termination shall be at Client's risk. 15. Applicable Laws. Advisor shall comply with all securities laws and other --------------- laws applicable to investment managers, including, without limitation, the Investment Advisers Act of 5 1940, as amended. Advisor shall comply with the Guidelines in providing its services hereunder, and, except for monitoring compliance with the provisions of law referred to in the Guidelines, shall have no independent duty or responsibility to assure that investments permitted by Client's Guidelines qualify as permitted investments under applicable insurance laws. 16. Voting Rights. Decisions on voting of proxies will be made by Client. ------------- 17. Liability of Advisor. In providing Client with investment advice and other -------------------- services as herein provided, neither Advisor nor any officer, director, employee or agent thereof shall be held liable to Client, its creditors or its stockholder(s) for errors of judgment or for anything except willful malfeasance, bad faith or negligence in the performance of its duties or reckless disregard of its obligations and duties under the terms of this Agreement. It is further understood and agreed that Advisor may rely upon information furnished to it reasonably believed to be accurate and reliable. Nothing herein shall constitute a waiver or limitation of any rights which the Client may have under any federal securities laws. 18. Confidential Relationship. The terms and conditions of this Agreement, all ------------------------- information and advice furnished by either party under this Agreement and any records generated by this Agreement are confidential and shall not be disclosed to third parties, except as required by law. 19. Notices. All notices and other communications hereunder shall be in ------- writing and shall be delivered by hand, telecopier, or mailed by registered or certified mail (return receipt requested) to the parties at the following addresses and shall be deemed given on the date on which such notice is received: To Client at: Attention: General Counsel Or by telecopier at: With a copy to: Attention: Chief Financial Officer Or by telecopier at: To Advisor at: Attention: President 6 Or by telecopier at: Either party may change its address or telecopier number for purposes of this paragraph by giving the other party written notice of the new address or telecopier number in the manner set forth below. 20. Waiver. Waiver by either party of any obligation of the other party does ------ not constitute a waiver of any further or other obligation of the other party. 21. Amendment. This Agreement may be modified or amended only by an instrument --------- in writing signed by duly authorized representatives of both Advisor and Client. 22. Agreement not Assignable. This Agreement is not assignable by either Client ------------------------ or Advisor. 23. Cumulative. All rights, powers and privileges conferred hereunder upon the ---------- parties shall be cumulative and shall not restrict those given by law. 24. Counterparts. This Agreement may be executed in counterparts, each of which ------------ so executed shall be deemed to be an original and such counterparts together shall constitute but one and the same contract, which shall be sufficiently evidenced by any such original counterpart. 25. Construction. The captions used in this Agreement are for convenience only, ------------ and shall not affect the construction or interpretation of any of its provisions. Each of the provisions of this Agreement is severable, and invalidity or inapplicability of one or more provisions, in whole or in part, shall not affect any other provision. This Agreement shall be construed in accordance with the laws of the State of New York, and is subject to the provisions of the Investment Advisers Act of 1940, as amended, and the rules and regulations of the Securities and Exchange Commission. 26. Disclosure Statement. Client acknowledges receipt of Advisor's disclosure -------------------- statement, as required by Rule 204-3 under the Investment Advisers Act of 1940, not less than 48 hours prior to the date of execution of this Agreement. 27. Dispute Resolution. Any disputes arising under this Agreement shall be ------------------ settled by arbitration in New York City in accordance with the American Arbitration Association rules then in effect, any award rendered thereon shall be enforceable in any court of competent jurisdiction. 28. Entirety of Agreement. This Agreement contains the entire agreement between --------------------- the parties with respect to the subject matter hereof and supersedes and cancels any prior understandings and agreements between the parties. 7 IN WITNESS WHEREOF, the parties have caused the signatures of their duly authorized offices to be hereto affixed. By: By: ------------------------- ----------------------------- Title: Senior Vice President Title: President, MBIA Securities Corp. ----------------------- -------------------------------- "Client" "Advisor" 8 EXHIBIT A ADMINISTRATIVE SERVICES Advisor will provide the following securities support functions: - - Settlement/Custody Control -------------------------- Daily coordination of any securities purchased or sold with investment manager, brokers and clearance bank. Confirmation of funds movement upon receipt/delivery of securities. Reconciliation of asset position between custody bank and investment operations. - - Transaction Processing ---------------------- Daily recording of individual security transactions on trade date. - - Income Collection ----------------- Daily collection and recording principal (maturity/redemption) and interest payments. Follow up on overdue payments. - - Bank Reconciliation ------------------- Monthly reconciliation of all cash transactions in demand deposit accounts. - - Market Valuation of Assets -------------------------- Assets priced monthly by an outside service. - - Investment Accounting Staff Support ----------------------------------- Staff support will be provided to assist the Client in responding to audit, tax or other regulatory interrogatories related to investment transactions as reported. Independent administrative services which are not provided by Advisor under this Agreement include: -- Custody services provided by The Chase Manhattan Bank, N.A. of New York. -- Outside audit services. 9 The following reports will be provided to the Client and will include transaction reports and investment management reports prepared monthly or quarterly, as the case may be: (a) Transaction Reporting: --------------------- (i) Quarterly detail reports on new commitments. (ii) Quarterly detail reports on all transactions including purchases, sales, investment income and return of principal. (iii) Transactional information on investments, as needed, to support tax return preparation. (b) Portfolio Review: ---------------- Quarterly summary and detail on the Client's holdings will be provided. This report will include market values, overall quality ratings, portfolio yield and a summary review of market conditions and portfolio strategy. (c) Performance Reporting: --------------------- Included as part of the portfolio review will be performance results on both yields on new commitments and total return for the portfolio. Performance will be measured against agreed upon indices. 10 EXHIBIT B April 1995 ---------- MBIA INSURANCE CORPORATION STATEMENT OF INVESTMENT OBJECTIVES & GUIDELINES ----------------------------------------------- SECTION I. OBJECTIVES: ---------- A. Preservation of Capital in the context of maintaining triple-A ----------------------- ratings for MBIA Insurance Corporation ("MBIA Corp.") and supporting recognition of MBIA Corp.'s financial stability and strength by insured bond investors, municipal market intermediaries, and other municipal bond market constituencies. B. Subject to A. above, optimization of after-tax investment income ---------------------------------------------------------------- to support the predictability and consistency of company earnings and cash flow. C. Subject to A. and B. above, optimization of long-term total returns. ------------------------------------------------------------------- D. Maintenance of reasonable liquidity after taking into account the ----------------------------------- company's other sources of liquidity (including bank credit facilities and cash flow) for potential claims-paying and other corporate needs. Overall, these objectives call for maintenance of high quality investments, avoidance of undue volatility in both income and returns and generally minimal amounts of short-term investments and/or U.S. Treasury obligations for immediate liquidity. MBIA Corp.'s investment selections will be made with a bias to hold for the long-term, and to avoid sales or swaps in the absence of compelling circumstances of tax credit, structural or other economic reasons, and not to rely on short-term trading or market timing to achieve performance. The mix of taxable and tax-exempt investments will vary from time to time with both market conditions and company tax circumstances. In seeking to achieve these objectives, MBIA Corp. will monitor, evaluate and report on the performance of its investment managers and the portfolio, using appropriate market-related benchmarks. In addition, MBIA Corp. will maintain an awareness of and periodically report on the investment practices and results of key competitors and comply with the constraints or limitations related to internal guidelines and regulatory or rating agency considerations. SECTION II. GUIDELINES: ---------- The following shall constitute the Investment Guidelines for MBIA Corp., acting through its duly authorized officers and/or through its outside investment advisors: A. Investments shall be made and maintained in compliance with all applicable provisions of Article 14 of the New York Insurance Laws, as amended. B. Fixed Income Policy (1) Quality: For fixed-income securities (over 1 year when purchased) ------- average quality will be AA to AA-, with minimum purchase quality, BBB. For short-term investments (less than 1 year), only investments rated A1/P1 (or equivalent rating) or better may be purchased. (2) Maturity: The average duration target is a maximum of 7.5 years; -------- minimum duration is 6.0 years. (3) Maturity Distribution: Diversification in maturity to minimize --------------------- reinvestment risk is an objective. Although this objective is not quantified, a reasonably well-laddered portfolio over a wide range of maturities is to be achieved. (4) Insured Obligations: MBIA Corp. may purchase or hold obligations ------------------- insured BY MBIA Corp. or its competitors, subject to an aggregate limit of 20% of the total investment portfolio. (5) Other: Securities may be purchased in both public and private ------ markets, subject to the maintenance of an appropriate level of overall portfolio liquidity and to all other objectives/guidelines. C. Equity Policy MBIA Corp. holds interests in certain equity-oriented investments in limited amounts. It is MBIA Corp.'s current policy not to purchase equity oriented securities. D. Further Restrictions (1) At the time of purchase, no investment may be in default as to principal or interest payments and all shall be rated "investment grade" by at least one nationally-recognized domestic rating agency. (2) Only U.S. dollar denominated securities may be purchased, except those required for MBIA Corp.'s foreign operations. (3) No investment shall be made in futures or options on futures. (4) All investments shall be held by a third-party custodian (or via book entry at the Depository Trust Company or a similarly qualified clearing corporation), as prescribed in approved custody agreements, or in other customary forms of safekeeping. 2 E. Fixed income investments are further limited to the following types and amounts (with the term "assets" defined by the New York statutes):
Type of Obligation Limitation Basis ------------------ ---------- ----- (i) Backed by full faith and credit Unlimited In Aggregate of the United States, including Unlimited Per Issuer or Government National Mortgage Association Mortgage Pool direct obligations and guaranteed mortgage-backed securities. (ii) Federal National Mortgage Association 10% of Assets In Aggregate direct obligations and guaranteed 2% of Assets Per Mortgage mortgage-backed securities. Pool (iii) Federal Home Loan Mortgage 10% of Assets In Aggregate Corporation direct obligations and 2% of Assets Per Mortgage guaranteed mortgage-backed Pool securities. (iv) Bonds which have been fully 2% of Assets Per Issuer collateralized by direct U.S. government obligations (i.e. pre-refunded or escrowed-to-maturity) and upgraded to triple-A by at least one nationally- recognized domestic rating agency. (v) Obligations not included in Section (iv) above and backed by full faith and credit of: (a) Any state government. 5% of Assets Per State (b) Any political subdivision of a State 2% of Assets Per Issuer or any municipality within the United States. (vi) Obligations not included in Section (iv) 2% of Assets Per Issuer above and backed by revenue or other income sources of a single facility or system. (vii) Pools of assets rated AAA by at least 5% of Assets In Aggregate one nationally recognized domestic 0.5% of Assets Per Single Issue rating agency (excluding assets otherwise permitted under this agreement).
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Type of Obligation Limitation Basis ------------------ ---------- ----- (viii) Securities backed by pools of assets 3% of Assets In Aggregate rated double-A by at least one 0.5% of Assets Per Single Issue nationally recognized domestic rating agency (examples may include, but are not limited to, commercial or residential mortgages, automobile loans). (ix) Investments in any entity, obligations 1% of Assets Per Issuer of which are insured by MBIA Corp., (and which are identified on a list furnished by MBIA Corp. to its advisors from time-to-time) with the exception of United States municipalities rated AA or better by at least on nationally-recognized domestic rating agency. (x) Backed by full faith and credit of a 2% of Assets Per Issuer non-public corporate entity, whether foreign or domestic. (xi) Backed by full faith and credit of 10% of Assets In Aggregate Canada, its Provinces and other 10% of Assets For Federal Govt. political subdivisions. 2% of Assets Per All Other Issuers (xii) Backed by full faith and credit of 10% of Assets In Aggregate OECD foreign governments other than 1% of Assets Per Country in Canada. (xiii) Repurchase agreements with a bank 2% of Assets In Aggregate or registered broker-dealer, provided 1% of Assets Per Bank or that all securities underlying such Broker-Dealer agreements: (a) would be eligible investments under these Guidelines; and (b) have maturities of one year or less (unless the agreement is fully collateralized and marked to market daily).
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Type of Obligation Limitation Basis ------------------ ---------- ----- (xiv) Investments of one year or 10% of Assets In Aggregate less in term which are either 1% of Assets Per Bank direct obligations of or supported by letters of credit from banks rated in the highest short-term category by at least one nationally- recognized domestic rating agency (or judged to be of equivalent quality). (xv) Mutual funds or other such 2% of Assets In Aggregate investment conduits registered with the SEC under the Investment Company Act of 1940, as amended (provided that all investments within each fund would be eligible under the Guidelines). (xvi) Equity-linked debt instruments $100 million In Aggregate rated A or better by at least $ 10 million Per Issue one nationally recognized domestic rating agency with a maturity no greater than 10 years. Equity index must be nationally recognized, such as the S&P 500. * * * * * * * * * * *
THIS STATEMENT OF INVESTMENT OBJECTIVES & GUIDELINES SHALL REMAIN IN EFFECT UNTIL REVISED OR AMENDED BY ACTION OF THE MBIA CORP. BOARD OF DIRECTORS, IN ACCORDANCE WITH ITS BY-LAWS. 5 May 1995 -------- SECTION III. SPECIFIC INSTRUCTIONS FOR FIXED-INCOME INVESTMENTS MANAGED BY ------------------------------------------------------------- MBIA SECURITIES CORP. --------------------- In the context of Sections I. and II. above as applicable, the following shall constitute the specific instructions for fixed-term investments made by MBIA Corp., acting through MBIA Securities Corp. ("MBIA SECO"), its investment advisor; it being understood that these instructions set forth in this Section III. are to be adhered to notwithstanding any less restrictive provisions in Sections I. and II. A. Permitted Investments --------------------- MBIA SECO may invest only in the following categories of fixed income investments as set forth in Section II of the Guidelines: Section Type ------- ---- (i) Full faith and credit of the United States (x) Non-public corporates (xi) Canadian obligations (xii) OECD governments (xiii) Repurchase agreements (xiv) Short-term investments B. Maturity -------- The maximum allowable average duration is 7.5 years; minimum duration is 5.0 years. C. Quality ------- Minimum average quality of total portfolio, "A." Minimum purchase quality, "BBB+." Maximum of investments held rated less than "A-," 4 percent. Minimum holding quality, "BBB-." 6 EXHIBIT C MANAGEMENT FEES PER ANNUM ASSETS UNDER MANAGEMENT IN BASIS POINTS TIMES ASSETS AT MARKET VALUE ($ MILLIONS) UNDER MANAGEMENT ---------------------------- ---------------------------- First $1,000 7.0 bp Next $1,000 6.0 bp In excess of $2,000 5.0 bp Management fees shall be paid quarterly, in arrears, 30 days following the end of each quarter, based upon the average market value of the assets under management during such quarter. "Market Value" shall be determined in accordance with Section 9 of this Agreement. 11 [LOGO] MBIA INSURANCE CORPORATION 113 King Street Armonk, NY 10504 914 273 4545 May 31, 1995 Mr. Kenneth Gingrass Associate Insurance Examiner Property/Casualty Bureau State of New York Insurance Department 160 West Broadway New York, NY 10013 RE: MBIA Insurance Corporation Proposed Investment Services Agreement (the "Agreement") with MBIA Securities Corp. Dear Mr. Gingrass: Enclosed please find an executed copy of the Agreement. At your request, Section 8 on Compensation of Advisor has been revised to state that the Schedule of Fees (Exhibit C) will be reviewed annually and adjusted to reflect any changes in MBIA Securities Corp. ("SECO") costs. In addition, as required by your letter dated May 17, 1995, MBIA Insurance Corporation ("MBIA") commits to notify the Department when its assets under management by SECO exceeds 20% of the total admitted assets of MBIA. If I can be of any further assistance, please call me at (914) 765-3923. Very truly yours, /s/ Wendy E. Mrosek Wendy E. Mrosek Assistant General Counsel cc: Jeremiah Sheehan EXHIBIT B --------- January 1996 ------------ MBIA INSURANCE CORPORATION STATEMENT OF INVESTMENT OBJECTIVES & GUIDELINES ----------------------------------------------- SECTION I. OBJECTIVES ---------- A. Preservation of Capital in the context of maintaining triple-A ratings ----------------------- for MBIA Insurance Corporation ("MBIA Corp.") and supporting recognition of MBIA Corp.'s financial stability and strength by insured bond investors, municipal market intermediaries, and other municipal bond market constituencies. B. Subject to A. above, optimization of after-tax investment income to ---------------------------------------------------------------- support the predictability and consistency of company earnings and cash flow. C. Subject to A. and B. above, optimization of long-term total returns. ------------------------------------------------------------------- D. Maintenance of reasonable liquidity after taking into account the ----------------------------------- company's other sources of liquidity (including bank credit facilities and cash flow) for potential claims paying and other corporate needs. Overall, these objectives call for maintenance of high quality investments, avoidance of undue volatility in both income and returns and generally minimal amounts of short-term investments and/or U.S. Treasury obligations for immediate liquidity. MBIA Corp.'s investment selections will be made with a bias to hold for the long-term, and to avoid sales or swaps in the absence of compelling circumstances of tax credit, structural or other economic reasons, and not to rely on short-term trading or market timing to achieve performance. The mix of taxable and tax-exempt investments will vary from time to time with both market conditions and company tax circumstances. In seeking to achieve these objectives, MBIA Corp. will monitor, evaluate and report on the performance of its investment managers and the portfolio, using appropriate market-related benchmarks. In addition, MBIA Corp. will maintain an awareness of and periodically report on the investment practices and results of key competitors and comply with the constraints or limitations related to guidelines and regulatory or rating agency considerations. EXHIBIT 10.67 CUSTODY AGREEMENT To: THE CHASE MANHATTAN BANK, N.A. Worldwide Insurance Securities Services 3 Chase MetroTech Center, 6th Floor Brooklyn, New York 11245 Gentlemen: We hereby request you to open and to maintain a Custody Account in our name and to hold therein as our custodian, upon the following terms and conditions, all such securities and similar property as shall be received by and acceptable to you for the Custody Account. As used herein, the term Custody Account shall include all such Custody Accounts opened pursuant to this Custody Agreement. TRANSACTIONS. Unless you receive contrary written instructions from us, and subject to the provisions of this Agreement, you are authorized: (a) To receive all interest and dividends payable on such property and to credit such interest and dividends to the account or accounts of ours with you as are designated by us (hereinafter referred to as the "Cash Account"); (b) To credit all proceeds received from sales and redemptions of property to the Cash Account; (c) To debit the Cash Account for the cost of acquiring property for the Custody Account; (d) To present obligations (including coupons) for payment upon maturity, when called for redemption and when income payments are due; (e) To exchange securities for other securities where the exchange is purely ministerial as, for example, the exchange of securities in temporary form for securities in definitive form or the mandatory exchange of certificates; (f) To sell fractional interests resulting from a stock split or a stock dividend and to credit the Cash Account with the proceeds thereof; (g) To convert moneys received with respect to securities of foreign issue into United States dollars whenever it is practical to do so through customary banking channels. In effecting such conversion you may use any method or agency available to you, including the facilities of your own divisions, subsidiaries or affiliates. You shall incur no liability on account of any loss suffered or expense incurred as a result of such conversion, including, without limitation, losses arising from fluctuations in exchange rates affecting any such conversion; and (h) To execute in our name, whenever you deem it appropriate, such ownership and other certificates as may be required to obtain payments with respect to, or to effect the sale, transfer or other disposition of, property in our Custody Account and to guarantee as our signature the signature so affixed. INSTRUCTIONS. You are authorized to rely and act upon all further written instructions given or purported to be given by one or more officers, employees or agents of ours (i) authorized by or in accordance with a corporate resolution of ours delivered to you or (ii) described as authorized in a certificate delivered to you by our Secretary or an Assistant Secretary or similar officer of ours (each such officer, employee or agent or combination of officers, employees and agents authorized pursuant to clause (i) or described pursuant to clause (ii) of this paragraph is hereinafter referred to as an "Authorized Officer"). (The term "instructions" includes, without limitation, instructions to sell, assign, transfer, deliver, purchase or receive for the Custody Account, any and all stocks, bonds and other securities or to transfer funds in the Custody Account or Cash Account.) You may also rely and act upon instructions when bearing or purporting to bear the facsimile signature of any of the individuals designated by an Authorized Officer regardless of by whom or by what means the actual or purported facsimile signature or signatures thereon may have been affixed thereto if such facsimile signature or signatures resemble the facsimile specimen or specimens from time to time furnished to you by any of such Officers, our Secretary or an Assistant Secretary or similar officer of ours. In addition, you may rely and act upon instructions received by telephone, telex, TWX, facsimile transmission, bank wire or other teleprocess acceptable to you which you believe in good faith to have been given by an Authorized Officer or which are transmitted with proper testing or authentication pursuant to terms and conditions which you may specify. You may also rely and act upon instructions transmitted electronically through your TITAN Data Entry System or any similar electronic instruction system acceptable to you. You shall incur no liability to us or otherwise as a result of any act or omission by you in accordance with instructions on which you are authorized to rely pursuant to the provisions of this paragraph. Any instructions delivered to you by telephone shall promptly thereafter be confirmed in writing by an Authorized Officer, but you shall incur no liability for our failure to send such confirmation in writing, the failure of any such written confirmation to conform to the telephone instructions which you received, the failure of any such written confirmation to be signed or properly signed, or your failure to produce such confirmation at any subsequent time. You shall incur no liability for refraining from acting upon any instructions which for any reason you, in good faith, are unable to verify to your own satisfaction. With respect to instructions received hereunder to transfer funds from the Cash Account to any other account or party, we agree to implement any callback or other authentication method or procedure or security device required by you at any time or from time to time. Unless otherwise expressly provided, all authorizations and instructions shall continue in full force and effect until canceled or superseded by subsequent authorizations or instructions received by your safekeeping account administrator with reasonable opportunity to act thereon. Your - 2 - authorization to rely and act upon instructions pursuant to this paragraph shall be in addition to, and shall not limit, any other authorization which we may give you regarding our accounts with you. We agree that, if you require test arrangements, authentication methods or procedures or other security devices to be used with respect to instructions which we may give hereunder, thereafter instructions given by us shall be given and processed in accordance with terms and conditions for the use of such arrangements, methods or procedures or devices as you may put into effect and modify from time to time. We shall safeguard any testkeys, identification codes or other security devices which you make available to us and agree that we shall be responsible for any loss, liability or damage incurred by you or by us as a result of your acting in accordance with instructions from any unauthorized person using the proper security device. You may electronically record any instructions given by telephone, and any other telephone discussions with respect to the Custody Account or transactions pursuant to this Agreement. Except as may be provided otherwise herein, you are authorized to execute our instructions and take other actions pursuant to this Agreement in accordance with your customary processing practices for customers similar to us and, in accordance with such practices, you may retain agents, including subsidiaries or affiliates of yours, to perform certain of such functions. In acting upon instructions to deliver securities against payment, you are authorized, in accordance with customary securities processing practices, to deliver such securities to the purchaser thereof or dealer therefor (including to an agent for any such purchaser or dealer) against a receipt, with the expectation of collecting payment from the purchaser, dealer or agent to whom the securities were so delivered before the close of business on the same day. REGISTRATION. Unless you receive contrary instructions from us, you are authorized to keep securities in your own vaults registered in the name of your nominee or nominees or, where securities are eligible for deposit in a central depository, such as The Depository Trust Company, the Federal Reserve Bank of New York or the Participants Trust Company, you may use any such depository and permit the registration of registered securities in the name of its nominee or nominees, and we agree to hold you and the nominees harmless from any liability as holders of record. We shall accept the return or delivery of securities of the same class and denomination as those deposited with you by us or otherwise received by you for the Custody Account, and you need not retain the particular certificates so deposited or received. If any securities registered in the name of your nominee or held in a central depository and registered in the name of the depository's nominee are called for partial redemption by the issuer of such securities, you are authorized to allot the called - 3 - portion to the respective beneficial holders of the securities in any manner deemed to be fair and equitable by you in your sole discretion. STATEMENTS. You shall notify us of each securities transaction effected for our Custody Account and of income on and redemptions of the property in the Custody Account, as well as furnish us a listing of such property, at such times upon which you and we mutually agree. CORPORATE ACTIONS. You shall send us such proxies (signed in blank, if issued in the name of your nominee or a nominee of a central depository) and communications with respect to securities in our Custody Account as call for voting or relate to legal proceedings within a reasonable time after sufficient copies are received by you for forwarding to customers. In addition, you shall follow coupon payments, redemptions, exchanges or similar matters with respect to securities in our Custody Account and advise us of rights issued, tender offers or any other discretionary rights with respect to such securities, in each case, of which you receive notice from the issuer of the securities or as to which notice is published in publications routinely used by you for this purpose. CUSTODIAN RESPONSIBILITY. You shall be obligated to indemnify us for any loss of securities and other property in the Custody Account resulting from (i) your negligence or willful misconduct, (ii) the negligence or willful misconduct of your officers or employees, or (iii) the negligence or willful misconduct of any central depository or other agent retained by you to hold such securities or property. Except as otherwise provided herein, in no event shall you be liable or responsible other than for your own negligence or willful misconduct. In the event of a loss of securities in the Custody Account for which you are required to indemnify us pursuant to this Agreement, you shall promptly replace, at your option, such securities or the value thereof (determined as of the date of the discovery of such loss) and the value of any loss of rights or privileges resulting from the loss of such securities. Subject to your obligations set forth above, you shall be liable to us only to the extent of our general damages (determined based upon the market value of the property which is the subject of the loss at the date of discovery of such loss) suffered or incurred as a result of any act or omission of yours which is a breach of your duties pursuant to this Agreement and for which liability is legally imposed upon you, and in no event shall you be liable for special, consequential or punitive damages. General damages shall mean only those damages as directly and necessarily result from such act or omission without reference to any special conditions or circumstances of ours or of any transaction, whether or not you have been advised of any such special conditions or circumstances. All collection and receipt of funds or securities and all payment and delivery of funds or securities under this Agreement shall be made by you as our agent, at our risk with respect to our actions or omissions and those of persons other than you, including, without limitation, the risk associated with the securities processing - 4 - practice of delivering securities against a receipt and the risk that the counterparty in any transaction into which we enter will not transfer funds or securities or otherwise perform in accordance with our expectation of its obligations thereunder (including, without limitation, where, as a result of such nonperformance, a central depository reverses, or requires repayment of, any credit given in connection with the transfer of securities). In no event shall you be responsible or liable for any loss due to forces beyond your control, including, but not limited to, acts of God, flood, fire, nuclear fusion, fission or radiation, war (declared or undeclared), terrorism, insurrection, revolution, riot, strikes or work stoppages for any reason, embargo, government action, including any laws, ordinances, regulations or the like which restrict or prohibit the providing of the services contemplated by this Agreement, inability to obtain equipment or communications facilities, or the failure of equipment or interruption of communications facilities, and other causes whether or not of the same class or kind as specifically named above. In the event that you are unable substantially to perform for any of the reasons described in the immediately preceding sentence, you shall so notify us as soon as reasonably practicable. You shall be responsible for only those duties expressly stated in this Agreement or expressly contained in instructions to perform the services described herein given to you pursuant to the provisions of this Agreement and accepted by you (unless you and we otherwise agree in writing) and, without limiting the foregoing, you shall have no duty or responsibility: (a) to supervise the investment of, or make recommendations with respect to the purchase, retention or sale of, securities or other property relating to the Custody Account, or to maintain any insurance on property in the Custody Account for our benefit; (b) with regard to any security in the Custody Account as to which a default in the payment of principal or interest has occurred, to give notice of default, make demand for payment or take any other action with respect to such default; (c) except as otherwise specifically provided herein, for any act or omission, or for the solvency or insolvency, or notice to us of the solvency or insolvency, of any broker or agent (including any central depository) which is selected by you (in the absence of gross negligence or willful misconduct by you in such selection) or by us or any other person to effect any transaction for the Custody Account or to perform any service under this Agreement; (d) to evaluate, or report to us regarding, the financial condition of any person to which you deliver securities or funds pursuant to this Agreement; or - 5 - (e) for any loss occasioned by delay in the actual receipt of notice by you of any payment, redemption or other transaction in respect to which you are authorized to take some action pursuant to this Agreement. OVERDRAFTS. The amount by which payments made by you on our behalf with respect to property in, or to be received for, the Custody Account, or with respect to other transactions pursuant to this Agreement, exceed the available funds in the Cash Account shall be deemed a loan from you to us, payable on demand, bearing interest at the rate of interest customarily charged by you on similar loans, provided, however, that you shall have no duty to make any payment if such payment shall exceed the available funds in the Cash Account. REIMBURSEMENT. If you choose to credit the Cash Account or the Custody Account on the payable date, or at any time prior to actual collection or receipt, for interest, dividends or redemptions, we shall promptly return to you such amount or property credited, and you may debit the Cash Account or the Custody Account for such amount or property credited, upon your oral or written notification to us that you have been unable to collect such amount or property in the ordinary course of transactions for our account or that such amount or property was incorrectly credited. You shall have no duty to institute legal proceedings, file a claim or proof of claim in any insolvency proceeding or take any action beyond your ordinary collection procedures to collect such amounts or property, but this Agreement shall not limit or waive any rights which we may have against any other person obligated to us. RESPONSIBLE AS PRINCIPAL. We agree that we shall be responsible to you as a principal for all of our obligations to you arising under or in connection with this Agreement, notwithstanding that we may be acting on behalf of other persons, and we warrant our authority to deposit in the Custody Account and Cash Account any securities and funds which you or your agents receive therefor and to give instructions relative thereto. We further agree that you shall not be subject to, nor shall your rights and obligations with respect to this Agreement and the Custody Account be affected by, any agreement between us and any such person. CREDITING AND DEBITING PROCEDURES. With respect to all transactions for the Custody Account, including, without limitation, dividend and interest payments and sales and redemptions of securities, availability of funds credited to the Cash Account shall be based on the type of funds used in the trade settlement or payment, including, but not limited to, same day availability for federal or same day funds and next business day availability for clearing house or next day funds. Subject to the above, with respect to the purchase and sale of property for the Custody Account, the proceeds from the sale of securities shall be credited to the Cash Account on the date such proceeds are received by you and the cost of securities purchased shall be debited to the Cash Account on the date securities are received by you - 6 - TRANSFER TAXES. You are authorized and directed, unless otherwise instructed in particular transactions, to claim exemption from transfer taxes on all transfers and deliveries of securities held for our Custody Account. OTHER ACCOUNTS. From time to time we may instruct you to open and maintain more than one Custody Account for us. Unless we and you otherwise expressly agree, such accounts will be governed by the provisions of this Agreement. FEES, INDEMNIFICATION. We agree to pay you compensation for your ser vices pursuant to this Agreement at the fees of which you shall notify us from time to time. We also agree to hold you and your agents harmless from, and to indemnify and reimburse you and them for, all claims, liability, loss and expense (including out-of-pocket and incidental expenses and legal fees) incurred by you or them in connection with our Custody Account or your acting under this Agreement, provided that you or they, as the case may be, have not acted with negligence or willful misconduct with respect to the events resulting in such claims, liability, loss and expense. TERMINATION. Either party may terminate this Agreement at any time upon thirty days written notice. Our obligations pursuant to the paragraphs under the headings "Registration", "Overdrafts", "Reimbursement" and "Fees, Indemnification" shall survive the termination of this Agreement. NOTICES. Notices with respect to termination, specification of Authorized Officers and terms and conditions for instructions required hereunder shall be in writing, and shall be deemed to have been duly given if delivered personally, by courier service or by mail, postage prepaid, to the following addresses (or to such other address as either party hereto may from time to time designate by notice duly given in accordance with this paragraph): Mr. Antony Elkins Account Name: MBIA Corp. Custody To us at: MBIA Corp. (Aeltus) 113 King Street Armonk, NY 10504 To you, to the attention of the individual designated by you as the safekeeping account administrator for our account, at: The Chase Manhattan Bank, N.A. Worldwide Insurance Securities Services 3 Chase MetroTech Center, 6th Floor Brooklyn, New York 11245 GOVERNING LAW, SUCCESSORS AND ASSIGNS, HEADINGS. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, - 7 - EXHIBIT 10.68 CUSTODY AGREEMENT To: THE CHASE MANHATTAN BANK, N.A. Worldwide Insurance Securities Services 3 Chase MetroTech Center, 6th Floor Brooklyn, New York 11245 Gentlemen: We hereby request you to open and to maintain a Custody Account in our name and to hold therein as our custodian, upon the following terms and conditions, all such securities and similar property as shall be received by and acceptable to you for the Custody Account. As used herein, the term Custody Account shall include all such Custody Accounts opened pursuant to this Custody Agreement. TRANSACTIONS. Unless you receive contrary written instructions from us, and subject to the provisions of this Agreement. you are authorized: (a) To receive all interest and dividends payable on such property and to credit such interest and dividends to the account or accounts of ours with you as are designated by us (hereinafter referred to as the "Cash Account"); (b) To credit all proceeds received from sales and redemptions of property to the Cash Account; (c) To debit the Cash Account for the cost of acquiring property for the Custody Account; (d) To present obligations (including coupons) for payment upon maturity, when called for redemption and when income payments are due; (e) To exchange securities for other securities where the exchange is purely ministerial as, for example, the exchange of securities in temporary form for securities in definitive form or the mandatory exchange of certificates; (f) To sell fractional interests resulting from a stock split or a stock dividend and to credit the Cash Account with the proceeds thereof; (g) To convert moneys received with respect to securities of foreign issue into United States dollars whenever it is practical to do so through customary banking channels. In effecting such conversion you may use any method or agency available to you, including the facilities of your own divisions, subsidiaries or affiliates. You shall incur no liability on account of any loss suffered or expense incurred as a result of such conversion, including, without limitation, losses arising from fluctuations in exchange rates affecting any such conversion; and (h) To execute in our name, whenever you deem it appropriate, such ownership and other certificates as may be required to obtain payments with respect to, or to effect the sale, transfer or other disposition of, property in our Custody Account and to guarantee as our signature the signature so affixed. INSTRUCTIONS. You are authorized to rely and act upon all further written instructions given or purported to be given by one or more officers, employees or agents of ours (i) authorized by or in accordance with a corporate resolution of ours delivered to you or (ii) described as authorized in a certificate delivered to you by our Secretary or an Assistant Secretary or similar officer of ours leach such officer, employee or agent or combination of officers, employees and agents authorized pursuant to clause (i) or described pursuant to clause (ii) of this paragraph is hereinafter referred to as an "Authorized Officer"). (The term "instructions" includes, without limitation, instructions to sell, assign, transfer, deliver, purchase or receive for the Custody Account, any and all stocks, bonds and other securities or to transfer funds in the Custody Account or Cash Account.) You may also rely and act upon instructions when bearing or purporting to bear the facsimile signature of any of the individuals designated by an Authorized Officer regardless of by whom or by what means the actual or purported facsimile signature or signatures thereon may have been affixed thereto if such facsimile signature or signatures resemble the facsimile specimen or specimens from time to time furnished to you by any of such Officers, our Secretary or an Assistant Secretary or similar officer of ours. In addition, you may rely and act upon instructions received by telephone, telex, TWX, facsimile transmission, bank wire or other teleprocess acceptable to you which you believe in good faith to have been given by an Authorized Officer or which are transmitted with proper testing or authentication pursuant to terms and conditions which you may specify. You may also rely and act upon instructions transmitted electronically through your TITAN Data Entry System or any similar electronic instruction system acceptable to you. You shall incur no liability to us or otherwise as a result of any act or omission by you in accordance with instructions on which you are authorized to rely pursuant to the provisions of this paragraph. Any instructions delivered to you by telephone shall promptly thereafter be confirmed in writing by an Authorized Officer, but you shall incur no liability for our failure to send such confirmation in writing, the failure of any such written confirmation to conform to the telephone instructions which you received, the failure of any such written confirmation to be signed or properly signed, or your failure to produce such confirmation at any subsequent time. You shall incur no liability for refraining from acting upon any instructions which for any reason you, in good faith, are unable to verify to your own satisfaction. With respect to instructions received hereunder to transfer funds from the Cash Account to any other account or party, we agree to implement any callback or other authentication method or procedure or security device required by you at any time or from time to time. Unless otherwise expressly provided, all authorizations and instructions shall continue in full force and effect until canceled or superseded by subsequent authorizations or instructions received by your safekeeping account administrator with reasonable opportunity to act thereon. Your - 2 - authorization to rely and act upon instructions pursuant to this paragraph shall be in addition to, and shall not limit, any other authorization which we may give you regarding our accounts with you. We agree that, if you require test arrangements, authentication methods or procedures or other security devices to be used with respect to instructions which we may give hereunder, thereafter instructions given by us shall be given and processed in accordance with terms and conditions for the use of such arrangements, methods or procedures or devices as you may put into effect and modify from time to time. We shall safeguard any testkeys, identification codes or other security devices which you make available to us and agree that we shall be responsible for any loss, liability or damage incurred by you or by us as a result of your acting in accordance with instructions from any unauthorized person using the proper security device. You may electronically record any instructions given by telephone, and any other telephone discussions with respect to the Custody Account or transactions pursuant to this Agreement. Except as may be provided otherwise herein, you are authorized to execute our instructions and take other actions pursuant to this Agreement in accordance with your customary processing practices for customers similar to us and, in accordance with such practices, you may retain agents, including subsidiaries or affiliates of yours, to perform certain of such functions. In acting upon instructions to deliver securities against payment, you are authorized, in accordance with customary securities processing practices, to deliver such securities to the purchaser thereof or dealer therefor (including to an agent for any such purchaser or dealer) against a receipt, with the expectation of collecting payment from the purchaser, dealer or agent to whom the securities were so delivered before the close of business on the same day. REGISTRATION. Unless you receive contrary instructions from us, you are authorized to keep securities in your own vaults registered in the name of your nominee or nominees or, where securities are eligible for deposit in a central depository, such as The Depository Trust Company, the Federal Reserve Bank of New York or the Participants Trust Company, you may use any such depository and permit the registration of registered securities in the name of its nominee or nominees, and we agree to hold you and the nominees harmless from any liability as holders of record. We shall accept the return or delivery of securities of the same class and denomination as those deposited with you by us or otherwise received by you for the Custody Account, and you need not retain the particular certificates so deposited or received. If any securities registered in the name of your nominee or held in a central depository and registered in the name of the depository's nominee are called for partial redemption by the issuer of such securities, you are authorized to allot the called - 3 - portion to the respective beneficial holders of the securities in any manner deemed to be fair and equitable by you in your sole discretion. STATEMENTS. You shall notify us of each securities transaction effected for our Custody Account and of income on and redemptions of the property in the Custody Account, as well as furnish us a listing of such property, at such times upon which you and we mutually agree. CORPORATE ACTIONS. You shall send us such proxies (signed in blank, if issued in the name of your nominee or a nominee of a central depository) and communications with respect to securities in our Custody Account as call for voting or relate to legal proceedings within a reasonable time after sufficient copies are received by you for forwarding to customers. In addition, you shall follow coupon payments, redemptions, exchanges or similar matters with respect to securities in our Custody Account and advise us of rights issued, tender offers or any other discretionary rights with respect to such securities, in each case, of which you receive notice from the issuer of the securities or as to which notice is published in publications routinely used by you for this purpose. CUSTODIAN RESPONSIBILITY. You shall be obligated to indemnify us for any loss of securities and other property in the Custody Account resulting from (i) your negligence or willful misconduct, (ii) the negligence or willful misconduct of your officers or employees, or (iii) the negligence or willful misconduct of any central depository or other agent retained by you to hold such securities or property. Except as otherwise provided herein, in no event shall you be liable or responsible other than for your own negligence or willful misconduct. In the event of a loss of securities in the Custody Account for which you are required to indemnify us pursuant to this Agreement, you shall promptly replace, at your option, such securities or the value thereof (determined as of the date of the discovery of such loss) and the value of any loss of rights or privileges resulting from the loss of such securities. Subject to your obligations set forth above, you shall be liable to us only to the extent of our general damages (determined based upon the market value of the property which is the subject of the loss at the date of discovery of such loss) suffered or incurred as a result of any act or omission of yours which is a breach of your duties pursuant to this Agreement and for which liability is legally imposed upon you, and in no event shall you be liable for special, consequential or punitive damages. General damages shall mean only those damages as directly and necessarily result from such act or omission without reference to any special conditions or circumstances of ours or of any transaction, whether or not you have been advised of any such special conditions or circumstances. All collection and receipt of funds or securities and all payment and delivery of funds or securities under this Agreement shall be made by you as our agent, at our risk with respect to our actions or omissions and those of persons other than you, including, without limitation, the risk associated with the securities processing - 4 - practice of delivering securities against a receipt and the risk that the counterparty In any transaction into which we enter will not transfer funds or securities or otherwise perform in accordance with our expectation of its obligations thereunder (including, without limitation, where, as a result of such nonperformance, a central depository reverses, or requires repayment of, any credit given in connection with the transfer of securities). In no event shall you be responsible or liable for any loss due to forces beyond your control, including, but not limited to, acts of God, flood, fire, nuclear fusion, fission or radiation, war (declared or undeclared), terrorism, insurrection, revolution, riot, strikes or work stoppages for any reason, embargo, government action, including any laws, ordinances, regulations or the like which restrict or prohibit the providing of the services contemplated by this Agreement, inability to obtain equipment or communications facilities, or the failure of equipment or interruption of communications facilities, and other causes whether or not of the same class or kind as specifically named above. In the event that you are unable substantially to perform for any of the reasons described in the immediately preceding sentence, you shall so notify us as soon as reasonably practicable. You shall be responsible for only those duties expressly stated in this Agreement or expressly contained in instructions to perform the services described herein given to you pursuant to the provisions of this Agreement and accepted by you (unless you and we otherwise agree in writing) and, without limiting the foregoing, you shall have no duty or responsibility: (a) to supervise the investment of, or make recommendations with respect to the purchase, retention or sale of, securities or other property relating to the Custody Account, or to maintain any insurance on property in the Custody Account for our benefit; (b) with regard to any security in the Custody Account as to which a default in the payment of principal or interest has occurred, to give notice of default, make demand for payment or take any other action with respect to such default; (c) except as otherwise specifically provided herein, for any act or omission, or for the solvency or insolvency, or notice to us of the solvency or insolvency, of any broker or agent (including any central depository) which is selected by you (in the absence of gross negligence or willful misconduct by you in such selection) or by us or any other person to effect any transaction for the Custody Account or to perform any service under this Agreement; (d) to evaluate, or report to us regarding, the financial condition of any person to which you deliver securities or funds pursuant to this Agreement; or - 5 - (e) for any loss occasioned by delay in the actual receipt of notice by you of any payment, redemption or other transaction in respect to which you are authorized to take some action pursuant to this Agreement. OVERDRAFTS. The amount by which payments made by you on our behalf with respect to property in, or to be received for, the Custody Account, or with respect to other transactions pursuant to this Agreement, exceed the available funds in the Cash Account shall be deemed a loan from you to us, payable on demand, bearing interest at the rate of interest customarily charged by you on similar loans, provided, however, that you shall have no duty to make any payment if such payment shall exceed the available funds in the Cash Account. REIMBURSEMENT. If you choose to credit the Cash Account or the Custody Account on the payable date, or at any time prior to actual collection or receipt, for interest, dividends or redemptions, we shall promptly return to you such amount or property credited, and you may debit the Cash Account or the Custody Account for such amount or property credited, upon your oral or written notification to us that you have been unable to collect such amount or property in the ordinary course of transactions for our account or that such amount or property was incorrectly credited. You shall have no duty to institute legal proceedings, file a claim or proof of claim in any insolvency proceeding or take any action beyond your ordinary collection procedures to collect such amounts or property, but this Agreement shall not limit or waive any rights which we may have against any other person obligated to us. RESPONSIBLE AS PRINCIPAL. We agree that we shall be responsible to you as a principal for all of our obligations to you arising under or in connection with this Agreement, notwithstanding that we may be acting on behalf of other persons, and we warrant our authority to deposit in the Custody Account and Cash Account any securities and funds which you or your agents receive therefor and to give instructions relative thereto. We further agree that you shall not be subject to, nor shall your rights and obligations with respect to this Agreement and the Custody Account be affected by, any agreement between us and any such person. CREDITING AND DEBITING PROCEDURES. With respect to all transactions for the Custody Account, including, without limitation, dividend and interest payments and sales and redemptions of securities, availability of funds credited to the Cash Account shall be based on the type of funds used in the trade settlement or payment, including, but not limited to, same day availability for federal or same day funds and next business day availability for clearing house or next day funds. Subject to the above, with respect to the purchase and sale of property for the Custody Account, the proceeds from the sale of securities shall be credited to the Cash Account on the date such proceeds are received by you and the cost of securities purchased shall be debited to the Cash Account on the date securities are received by you. - 6 - TRANSFER TAXES. You are authorized and directed, unless otherwise instructed in particular transactions, to claim exemption from transfer taxes on all transfers and deliveries of securities held for our Custody Account. OTHER ACCOUNTS. From time to time we may instruct you to open and maintain more than one Custody Account for us. Unless we and you otherwise expressly agree, such accounts will be governed by the provisions of this Agreement. FEES, INDEMNIFICATION. We agree to pay you compensation for your services pursuant to this Agreement at the fees of which you shall notify us from time to time. We also agree to hold you and your agents harmless from, and to indemnify and reimburse you and them for, all claims, liability, loss and expense (including out-of-pocket and incidental expenses and legal fees) incurred by you or them in connection with our Custody Account or your acting under this Agreement, provided that you or they, as the case may be, have not acted with negligence or willful misconduct with respect to the events resulting in such claims, liability, loss and expense. TERMINATION. Either party may terminate this Agreement at any time upon thirty days written notice. Our obligations pursuant to the paragraphs under the headings "Registration", "Overdrafts", "Reimbursement" and "Fees, Indemnification" shall survive the termination of this Agreement. NOTICES. Notices with respect to termination, specification of Authorized Officers and terms and conditions for instructions required hereunder shall be in writing, and shall be deemed to have been duly given if delivered personally, by courier service or by mail, postage prepaid, to the following addresses (or to such other address as either party hereto may from time to time designate by notice duly given in accordance with this paragraph): MBIA Corp. To us at: Attn: Antony Elkins 113 King Street Armonk, NY 10504 Account Name: MBIA Corp. Custody To you, to the attention of the individual designated by you as the safekeeping account administrator for our account, at: The Chase Manhattan Bank, N.A. Worldwide Insurance Securities Services 3 Chase MetroTech Center, 6th Floor Brooklyn, New York 11245 GOVERNING LAW, SUCCESSORS AND ASSIGNS, HEADINGS. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, - 7 - without regard to laws as to conflicts of laws, and shall be binding on our and your respective successors and assigns. The headings of the paragraphs hereof are included for convenience of reference only and do not form a part of this Agreement. PRIOR PROPOSALS. This Agreement contains the complete agreement of the parties hereto with respect to the Custody Account (except as may be expressly provided to the contrary herein) and supersedes and replaces any previously made proposals, representations, warranties or agreements with respect thereto by either or both of the parties hereto. This Agreement shall become effective upon execution hereof by us and acceptance by you. SEPARABILITY. Any provisions of this Agreement which may be determined by competent authority to be prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. SPECIAL TERMS. The following additional terms and provisions, if any, are included in and constitute a part of this Agreement: Municipal Bond Investors Assurance Corporation ------------------------ By: /s/ Christopher W. Tully --------------------------- Title: Treasurer ------------------------ Accepted by: Date: March 1, 1995 ------------------------- THE CHASE MANHATTAN BANK, N.A. By: /s/ Lawrence W. Young ---------------------------- Title: Second Vice President ------------------------- Date: 2/21/95 ------------------------- - 8 - EXHIBIT 10.69 CUSTODY AGREEMENT To: THE CHASE MANHATTAN BANK, N.A. Worldwide Insurance Securities Services 3 Chase MetroTech Center, 6th Floor Brooklyn, New York 11245 Gentlemen: We hereby request you to open and to maintain a Custody Account in our name and to hold therein as our custodian, upon the following terms and conditions, all such securities and similar property as shall be received by and acceptable to you for the Custody Account. As used herein, the term Custody Account shall include all such Custody Accounts opened pursuant to this Custody Agreement. TRANSACTIONS. Unless you receive contrary written instructions from us, and subject to the provisions of this Agreement, you are authorized: (a) To receive all interest and dividends payable on such property and to credit such interest and dividends to the account or accounts of ours with you as are designated by us (hereinafter referred to as the "Cash Account"); (b) To credit all proceeds received from sales and redemptions of property to the Cash Account; (c) To debit the Cash Account for the cost of acquiring property for the Custody Account; (d) To present obligations (including coupons) for payment upon maturity, when called for redemption and when income payments are due; (e) To exchange securities for other securities where the exchange is purely ministerial as, for example, the exchange of securities in temporary form for securities in definitive form or the mandatory exchange of certificates; (f) To sell fractional interests resulting from a stock split or a stock dividend and to credit the Cash Account with the proceeds thereof; (g) To convert moneys received with respect to securities of foreign issue into United States dollars whenever it is practical to do so through customary banking channels. In effecting such conversion you may use any method or agency available to you, including the facilities of your own divisions, subsidiaries or affiliates. You shall incur no liability on account of any loss suffered or expense incurred as a result of such conversion, including, without limitation, losses arising from fluctuations in exchange rates affecting any such conversion; and (h) To execute in our name, whenever you deem it appropriate, such ownership and other certificates as may be required to obtain payments with respect to, or to effect the sale, transfer or other disposition of, property in our Custody Account and to guarantee as our signature the signature so affixed. INSTRUCTIONS. You are authorized to rely and act upon all further written instructions given or purported to be given by one or more officers, employees or agents of ours {i) authorized by or in accordance with a corporate resolution of ours delivered to you or (ii) described as authorized in a certificate delivered to you by our Secretary or an Assistant Secretary or similar officer of ours (each such officer, employee or agent or combination of officers, employees and agents authorized pursuant to clause (i) or described pursuant to clause (ii) of this paragraph is hereinafter referred to as an "Authorized Officer"). (The term "instructions" includes, without limitation, instructions to sell, assign, transfer, deliver, purchase or receive for the Custody Account, any and all stocks, bonds and other securities or to transfer funds in the Custody Account or Cash Account.) You may also rely and act upon instructions when bearing or purporting to bear the facsimile signature of any of the individuals designated by an Authorized Officer regardless of by whom or by what means the actual or purported facsimile signature or signatures thereon may have been affixed thereto if such facsimile signature or signatures resemble the facsimile specimen or specimens from time to time furnished to you by any of such Officers, our Secretary or an Assistant Secretary or similar officer of ours. In addition, you may rely and act upon instructions received by telephone, telex, TWX, facsimile transmission, bank wire or other teleprocess acceptable to you which you believe in good faith to have been given by an Authorized Officer or which are transmitted with proper testing or authentication pursuant to terms and conditions which you may specify. You may also rely and act upon instructions transmitted electronically through your TITAN Data Entry System or any similar electronic instruction system acceptable to you. You shall incur no liability to us or otherwise as a result of any act or omission by you in accordance with instructions on which you are authorized to rely pursuant to the provisions of this paragraph. Any instructions delivered to you by telephone shall promptly thereafter be confirmed in writing by an Authorized Officer, but you shall incur no liability for our failure to send such confirmation in writing, the failure of any such written confirmation to conform to the telephone instructions which you received, the failure of any such written confirmation to be signed or properly signed, or your failure to produce such confirmation at any subsequent time. You shall incur no liability for refraining from acting upon any instructions which for any reason you, in good faith, are unable to verify to your own satisfaction. With respect to instructions received hereunder to transfer funds from the Cash Account to any other account or party, we agree to implement any callback or other authentication method or procedure or security device required by you at any time or from time to time. Unless otherwise expressly provided, all authorizations and instructions shall continue in full force and effect until canceled or superseded by subsequent authorizations or instructions received by your safekeeping account administrator with reasonable opportunity to act thereon. Your - 2 - authorization to rely and act upon instructions pursuant to this paragraph shall be in addition to, and shall not limit, any other authorization which we may give you regarding our accounts with you. We agree that, if you require test arrangements, authentication methods or procedures or other security devices to be used with respect to instructions which we may give hereunder, thereafter instructions given by us shall be given and processed in accordance with terms and conditions for the use of such arrangements, methods or procedures or devices as you may put into effect and modify from time to time. We shall safeguard any testkeys, identification codes or other security devices which you make available to us and agree that we shall be responsible for any loss, liability or damage incurred by you or by us as a result of your acting in accordance with instructions from any unauthorized person using the proper security device. You may electronically record any instructions given by telephone, and any other telephone discussions with respect to the Custody Account or transactions pursuant to this Agreement. Except as may be provided otherwise herein, you are authorized to execute our instructions and take other actions pursuant to this Agreement in accordance with your customary processing practices for customers similar to us and, in accordance with such practices, you may retain agents, including subsidiaries or affiliates of yours, to perform certain of such functions. In acting upon instructions to deliver securities against payment, you are authorized, in accordance with customary securities processing practices, to deliver such securities to the purchaser thereof or dealer therefor (including to an agent for any such purchaser or dealer) against a receipt, with the expectation of collecting payment from the purchaser, dealer or agent to whom the securities were so delivered before the close of business on the same day. REGISTRATION. Unless you receive contrary instructions from us, you are authorized to keep securities in your own vaults registered in the name of your nominee or nominees or, where securities are eligible for deposit in a central depository, such as The Depository Trust Company, the Federal Reserve Bank of New York or the Participants Trust Company, you may use any such depository and permit the registration of registered securities in the name of its nominee or nominees, and we agree to hold you and the nominees harmless from any liability as holders of record. We shall accept the return or delivery of securities of the same class and denomination as those deposited with you by us or otherwise received by you for the Custody Account, and you need not retain the particular certificates so deposited or received. If any securities registered in the name of your nominee or held in a central depository and registered in the name of the depository's nominee are called for partial redemption by the issuer of such securities, you are authorized to allot the called - 3 - portion to the respective beneficial holders of the securities in any manner deemed to be fair and equitable by you in your sole discretion. STATEMENTS. You shall notify us of each securities transaction effected for our Custody Account and of income on and redemptions of the property in the Custody Account, as well as furnish us a listing of such property, at such times upon which you and we mutually agree. CORPORATE ACTIONS. You shall send us such proxies (signed in blank, if issued in the name of your nominee or a nominee of a central depository) and communications with respect to securities in our Custody Account as call for voting or relate to legal proceedings within a reasonable time after sufficient copies are received by you for forwarding to customers. In addition, you shall follow coupon payments, redemptions, exchanges or similar matters with respect to securities in our Custody Account and advise us of rights issued, tender offers or any other discretionary rights with respect to such securities, in each case, of which you receive notice from the issuer of the securities or as to which notice is published in publications routinely used by you for this purpose. CUSTODIAN RESPONSIBILITY. You shall be obligated to indemnify us for any loss of securities and other property in the Custody Account resulting from (i) your negligence or willful misconduct, (ii) the negligence or willful misconduct of your officers or employees, or (iii) the negligence or willful misconduct of any central depository or other agent retained by you to hold such securities or property. Except as otherwise provided herein, in no event shall you be liable or responsible other than for your own negligence or willful misconduct. In the event of a loss of securities in the Custody Account for which you are required to indemnify us pursuant to this Agreement, you shall promptly replace, at your option, such securities or the value thereof (determined as of the date of the discovery of such loss) and the value of any loss of rights or privileges resulting from the loss of such securities. Subject to your obligations set forth above, you shall be liable to us only to the extent of our general damages (determined based upon the market value of the property which is the subject of the loss at the date of discovery of such loss) suffered or incurred as a result of any act or omission of yours which is a breach of your duties pursuant to this Agreement and for which liability is legally imposed upon you, and in no event shall you be liable for special, consequential or punitive damages. General damages shall mean only those damages as directly and necessarily result from such act or omission without reference to any special conditions or circumstances of ours or of any transaction, whether or not you have been advised of any such special conditions or circumstances. All collection and receipt of funds or securities and all payment and delivery of funds or securities under this Agreement shall be made by you as our agent, at our risk with respect to our actions or omissions and those of persons other than you, including, without limitation, the risk associated with the securities processing - 4 - practice of delivering securities against a receipt and the risk that the counterparty in any transaction into which we enter will not transfer funds or securities or otherwise perform in accordance with our expectation of its obligations thereunder (including, without limitation, where, as a result of such nonperformance, a central depository reverses, or requires repayment of, any credit given in connection with the transfer of securities). In no event shall you be responsible or liable for any loss due to forces beyond your control, including, but not limited to, acts of God, flood, fire, nuclear fusion, fission or radiation, war (declared or undeclared), terrorism, insurrection, revolution, riot, strikes or work stoppages for any reason, embargo, government action, including any laws, ordinances, regulations or the like which restrict or prohibit the providing of the services contemplated by this Agreement, inability to obtain equipment or communications facilities, or the failure of equipment or interruption of communications facilities, and other causes whether or not of the same class or kind as specifically named above. In the event that you are unable substantially to perform for any of the reasons described in the immediately preceding sentence, you shall so notify us as soon as reasonably practicable. You shall be responsible for only those duties expressly stated in this Agreement or expressly contained in instructions to perform the services described herein given to you pursuant to the provisions of this Agreement and accepted by you (unless you and we otherwise agree in writing) and, without limiting the foregoing, you shall have no duty or responsibility: (a) to supervise the investment of, or make recommendations with respect to the purchase, retention or sale of, securities or other property relating to the Custody Account, or to maintain any insurance on property in the Custody Account for our benefit; (b) with regard to any security in the Custody Account as to which a default in the payment of principal or interest has occurred, to give notice of default, make demand for payment or take any other action with respect to such default: (c) except as otherwise specifically provided herein, for any act or omission, or for the solvency or insolvency, or notice to us of the solvency or insolvency, of any broker or agent (including any central depository) which is selected by you (in the absence of gross negligence or willful misconduct by you in such selection) or by us or any other person to effect any transaction for the Custody Account or to perform any service under this Agreement: (d) to evaluate, or report to us regarding, the financial condition of any person to which you deliver securities or funds pursuant to this Agreement; or - 5 - (e) for any loss occasioned by delay in the actual receipt of notice by you of any payment, redemption or other transaction in respect to which you are authorized to take some action pursuant to this Agreement. OVERDRAFTS. The amount by which payments made by you on our behalf with respect to property in, or to be received for, the Custody Account, or with respect to other transactions pursuant to this Agreement, exceed the available funds in the Cash Account shall be deemed a loan from you to us, payable on demand, bearing interest at the rate of interest customarily charged by you on similar loans, provided, however, that you shall have no duty to make any payment if such payment shall exceed the available funds in the Cash Account. REIMBURSEMENT. If you choose to credit the Cash Account or the Custody Account on the payable date, or at any time prior to actual collection or receipt, for interest, dividends or redemptions, we shall promptly return to you such amount or property credited, and you may debit the Cash Account or the Custody Account for such amount or property credited, upon your oral or written notification to us that you have been unable to collect such amount or property in the ordinary course of transactions for our account or that such amount or property was incorrectly credited. You shall have no duty to institute legal proceedings, file a claim or proof of claim in any insolvency proceeding or take any action beyond your ordinary collection procedures to collect such amounts or property, but this Agreement shall not limit or waive any rights which we may have against any other person obligated to us. RESPONSIBLE AS PRINCIPAL. We agree that we shall be responsible to you as a principal for all of our obligations to you arising under or in connection with this Agreement, notwithstanding that we may be acting on behalf of other persons, and we warrant our authority to deposit in the Custody Account and Cash Account any securities and funds which you or your agents receive therefor and to give instructions relative thereto. We further agree that you shall not be subject to, nor shall your rights and obligations with respect to this Agreement and the Custody Account be affected by, any agreement between us and any such person. CREDITING AND DEBITING PROCEDURES. With respect to all transactions for the Custody Account, including, without limitation, dividend and interest payments and sales and redemptions of securities, availability of funds credited to the Cash Account shall be based on the type of funds used in the trade settlement or payment, including, but not limited to, same day availability for federal or same day funds and next business day availability for clearing house or next day funds. Subject to the above, with respect to the purchase and sale of property for the Custody Account, the proceeds from the sale of securities shall be credited to the Cash Account on the date such proceeds are received by you and the cost of securities purchased shall be debited to the Cash Account on the date securities are received by you. - 6 - TRANSFER TAXES. You are authorized and directed, unless otherwise instructed in particular transactions, to claim exemption from transfer taxes on all transfers and deliveries of securities held for our Custody Account. OTHER ACCOUNTS. From time to time we may instruct you to open and maintain more than one Custody Account for us. Unless we and you otherwise expressly agree, such accounts will be governed by the provisions of this Agreement. FEES, INDEMNIFICATION. We agree to pay you compensation for your services pursuant to this Agreement at the fees of which you shall notify us from time to time. We also agree to hold you and your agents harmless from, and to indemnify and reimburse you and them for, all claims, liability, loss and expense (including out-of-pocket and incidental expenses and legal fees) incurred by you or them in connection with our Custody Account or your acting under this Agreement, provided that you or they, as the case may be, have not acted with negligence or willful misconduct with respect to the events resulting in such claims, liability, loss and expense. TERMINATION. Either party may terminate this Agreement at any time upon thirty days written notice. Our obligations pursuant to the paragraphs under the headings "Registration", "Overdrafts", "Reimbursement" and "Fees, Indemnification" shall survive the termination of this Agreement. NOTICES. Notices with respect to termination, specification of Authorized Officers and terms and conditions for instructions required hereunder shall be in writing, and shall be deemed to have been duly given if delivered personally, by courier service or by mail, postage prepaid, to the following addresses (or to such other address as either party hereto may from time to time designate by notice duly given in accordance with this paragraph): To us at: MBIA Inc. Account Name: MBIA Inc. Custody Attn: Antony Elkins 113 King Street Armonk, NY 10504 To you, to the attention of the individual designated by you as the safekeeping account administrator for our account, at: The Chase Manhattan Bank, N.A. Worldwide Insurance Securities Services 3 Chase MetroTech Center, 6th Floor Brooklyn, New York 11245 GOVERNING LAW, SUCCESSORS AND ASSIGNS, HEADINGS. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, - 7 - without regard to laws as to conflicts of laws, and shall be binding on our and your respective successors and assigns. The headings of the paragraphs hereof are included for convenience of reference only and do not form a part of this Agreement. PRIOR PROPOSALS. This Agreement contains the complete agreement of the parties hereto with respect to the Custody Account (except as may be expressly provided to the contrary herein) and supersedes and replaces any previously made proposals, representations, warranties or agreements with respect thereto by either or both of the parties hereto. This Agreement shall become effective upon execution hereof by us and acceptance by you. SEPARABILITY. Any provisions of this Agreement which may be determined by competent authority to be prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. SPECIAL TERMS. The following additional terms and provisions, if any, are included in and constitute a part of this Agreement: MBIA Inc. ----------------------------- By: /s/ Christopher W. Tully ----------------------------- Title: Treasurer -------------------------- Accepted by: Date: March 1, 1995 -------------------------- THE CHASE MANHATTAN BANK, N.A. By: /s/ Lawrence W. Young ----------------------------- Title: Second Vice President -------------------------- Date: 2/21/95 -------------------------- - 8 - EXHIBIT 10.70 EXHIBIT A MBIA INC. 1996 INCENTIVE PLAN (EFFECTIVE AS OF JANUARY 1, 1996) 1. PURPOSE. The purposes of the Plan are to enable the Company and its Subsidiaries to attract, retain, motivate and reward the best qualified executive officers and key employees by providing them with the opportunity to earn competitive compensation directly linked to the Company's performance. 2. DEFINITIONS. Unless the context requires otherwise, the following words as used in the Plan shall have the meanings ascribed to each below, it being understood that masculine, feminine and neuter pronouns are used interchangeably and that each comprehends the others. (a) "Board" shall mean the Board of Directors of the Company. (b) "Committee" shall mean the Compensation and Organization Committee of the Board (or such other committee of the Board that the Board shall designate from time to time) or any subcommittee thereof consisting of two or more directors each of whom is an "outside director" within the meaning of Section 162(m). (c) "Company" shall mean MBIA Inc. (d) "Covered Employee" shall have the meaning set forth in Section 162(m). (e) "Participant" shall mean (i) each executive officer of the Company and (ii) each other key employee of the Company or a Subsidiary whom the Committee designates as a participant under the Plan. (f) "Performance Period" shall mean each calendar year or multi-year cycle as determined by the Committee. (g) "Plan" shall mean the MBIA Inc. 1996 Incentive Plan, as set forth herein and as may be amended from time to time. (h) "Section 162(m)" shall mean Section 162(m) of the Internal Revenue Code of 1986, as amended, and any regulations promulgated thereunder (including any proposed regulations). (i) "Subsidiary" shall mean any corporation in which the Company owns, directly or indirectly, stock representing more than 50% of the voting power of all classes of stock entitled to vote. 3. ADMINISTRATION. The Committee shall administer and interpret the Plan, provided that, in no event, shall the Plan be interpreted in a manner which would cause any award intended to be qualified as performance-based compensation under Section 162(m) to fail to so qualify. The Committee shall establish the performance objectives for any calendar year in accordance with Section 4 and certify whether such performance objectives have been obtained. Any determination made by the Committee under the Plan shall be final and conclusive. The Committee may employ such legal counsel, consultants and agents (including counsel or agents who are employees of the Company or a Subsidiary) as it may deem desirable for the administration of the Plan and may rely upon any opinion received from any A-1 such counsel or consultant or agent and any computation received from such consultant or agent. All expenses incurred in the administration of the Plan, including, without limitation, for the engagement of any counsel, consultant or agent, shall be paid by the Company. No member or former member of the Board or the Committee shall be liable for any act, omission, interpretation, construction or determination made in connection with the Plan other than as a result of such individual's willful misconduct. 4. BONUSES. (a) Performance Criteria. Within 90 days after each Performance Period begins (or such other date as may be required or permitted under Section 162(m)), the Committee shall establish the performance objective or objectives that must be satisfied in order for a Participant to receive a bonus for such Performance Period. Unless the Committee determines at the time of grant not to qualify the award as performance-based compensation under Section 162(m), any such performance objectives will be based upon the relative or comparative achievement of one or more of the following criteria, as determined by the Committee: (i) consolidated earnings before income taxes; (ii) earnings per share; (iii) book value per share; (iv) return on shareholders equity; (v) the relative performance of peer group companies; (vi) expense management; (vii) return on investment; (viii) improvements in capital structure; (ix) profitability of an identifiable business unit or product; (x) maintenance or improvement of product margins; and (xi) ratio of claims to revenues. (b) Maximum Amount Payable. If the Committee certifies in writing that any of the performance objectives established for the relevant Performance Period under Section 4(a) has been satisfied, each Participant who is employed by the Company or one of its Subsidiaries on the last day of the Performance Period for which the bonus is payable shall be entitled to receive (i) an annual bonus in an amount not to exceed $1,000,000 and/or (ii) a long-term award in an amount not to exceed $3,000,000. If a Participant's employment terminates for any reason (including, without limitation, his death, disability or retirement under the terms of any retirement plan maintained by the Company or a Subsidiary) prior to the last day of the Performance Period for which the bonus is payable, such Participant shall receive a bonus equal to the maximum bonus payable to such Participant under the preceding sentence multiplied by a fraction, the numerator of which is the number of days that have elapsed during the Performance Period in which the termination occurs prior to and including the date of the Participant's termination of employment and the denominator of which is the total number of days in the Performance Period. (c) Negative Discretion. Notwithstanding anything else contained in Section 4(b) to the contrary, the Committee shall have the right, in its absolute discretion, (i) to reduce or eliminate the amount otherwise payable to any Participant under Section 4(b) based on individual performance or any other factors that the Committee, in its discretion, shall deem appropriate and (ii) to establish rules or procedures that have the effect of limiting the amount payable to each Participant to an amount that is less than the maximum amount otherwise authorized under Section 4(b). (d) Affirmative Discretion. Notwithstanding any other provision in the Plan to the contrary, (i) the Committee shall have the right, in its discretion, to pay to any Participant who is not a Covered Employee a bonus for the year in which the amount paid would ordinarily be deductible by the Company for federal income tax purposes in an amount up to the maximum bonus payable under Section 4(b), based on individual performance or any other criteria that the Committee deems appropriate and (ii) in connection with the hiring any person who is or becomes Covered Employee, the Committee may provide for a minimum bonus amount in any Performance Period, regardless of whether performance objectives are attained. 5. PAYMENT. Except as otherwise provided hereunder, payment of any bonus amount determined under Section 4 shall be made to each Participant as soon as practicable after the Committee certifies that A-2 one or more of the applicable performance objectives have been attained (or, in the case of any bonus payable under the provisions of Section 4(d), after the Committee determines the amount of any such bonus). 6. FORM OF PAYMENT. The Committee shall determine whether any bonus payable under the 1996 Plan is payable in cash, in shares of Common Stock or in any combination thereof. The Committee shall have the right to impose whatever conditions it deems appropriate with respect to the award of shares of Common Stock, including conditioning the vesting of such shares on the performance of additional service. The maximum number of shares available for issuance under the Plan shall be 1,500,000. 7. GENERAL PROVISIONS. (a) Effectiveness of the Plan. The Plan shall be effective with respect to calendar years beginning on or after January 1, 1996 and ending on or before December 31, 2000, unless the term hereof is extended by action of the Board. (b) Amendment and Termination. Notwithstanding Section 6(a), the Board or the Committee may at any time amend, suspend, discontinue or terminate the Plan; provided, however, that no such action shall be effective without approval by the shareholders of the Company to the extent necessary to continue to qualify the amounts payable hereunder to Covered Employees as performance-based compensation under Section 162(m). (c) Designation of Beneficiary. Each Participant may designate a beneficiary or beneficiaries (which beneficiary may be an entity other than a natural person) to receive any payments which may be made following the Participant's death. Such designation may be changed or canceled at any time without the consent of any such beneficiary. Any such designation, change or cancellation must be made in a form approved by the Committee and shall not be effective until received by the Committee. If no beneficiary has been named, or the designated beneficiary or beneficiaries shall have predeceased the Participant, the beneficiary shall be the Participant's spouse or, if no spouse survives the Participant, the Participant's estate. If a Participant designates more than one beneficiary, the rights of such beneficiaries shall be payable in equal shares, unless the Participant has designated otherwise. (d) No Right of Continued Employment. Nothing in this Plan shall be construed as conferring upon any Participant any right to continue in the employment of the Company or any of its Subsidiaries. (e) No Limitation on Corporate Actions. Nothing contained in the Plan shall be construed to prevent the Company or any Subsidiary from taking any corporate action which is deemed by it to be appropriate or in its best interest, whether or not such action would have an adverse effect on any awards made under the Plan. No employee, beneficiary or other person shall have any claim against the Company or any Subsidiary as a result of any such action. (f) Nonalienation of Benefits. Except as expressly provided herein, no Participant or beneficiary shall have the power or right to transfer, anticipate, or otherwise encumber the Participant's interest under the Plan. The Company's obligations under this Plan are not assignable or transferable except to (i) a corporation which acquires all or substantially all of the Company's assets or (ii) any corporation into which the Company may be merged or consolidated. The provisions of the Plan shall inure to the benefit of each Participant and the Participant's beneficiaries, heirs, executors, administrators or successors in interest. (g) Withholding. Any amount payable to a Participant or a beneficiary under this Plan shall be subject to any applicable Federal, state and local income and employment taxes and any other A-3 amounts that the Company or a Subsidiary is required at law to deduct and withhold from such payment. (h) Severability. If any provision of this Plan is held unenforceable, the remainder of the Plan shall continue in full force and effect without regard to such unenforceable provision and shall be applied as though the unenforceable provision were not contained in the Plan. (i) Governing Law. The Plan shall be construed in accordance with and governed by the laws of the State of New York, without reference to the principles of conflict of laws. (j) Headings. Headings are inserted in this Plan for convenience of reference only and are to be ignored in a construction of the provisions of the Plan. A-4 EX-11 3 COMPUTATION OF EPS EXHIBIT 11 MBIA INC. AND SUBSIDIARIES for the Years Ended December 31, 1995, 1994 and 1993 Computation of Earnings Per Share Assuming Full Dilution (In thousands except per share amounts) 1995 1994 1993 -------- -------- -------- Net Income $271,419 $260,209 $259,033 ======== ======== ======== Fully diluted shares: Average number of common shares outstanding 41,763 41,686 41,963 Assumed exercise of dilutive stock options 559 402 504 --------- --------- -------- 42,322 42,088 42,467 ======== ======== ======== Earnings per share assuming full dilution $ 6.41 $ 6.18 $ 6.10 ======== ======== ======== EX-13 4 MBIA INC. 96 A/R MBIA INC. 1995 ANNUAL REPORT FINANCIAL PRINCIPLES AND REVIEW TABLE OF CONTENTS 18 Selected Financial and Statistical Data 20 Management's Discussion and Analysis of Financial Condition and Results of Operations 25 Report of Independent Accountants 26 Consolidated Statements of Income 27 Consolidated Balance Sheets 28 Consolidated Statements of Changes in Shareholders' Equity 29 Consolidated Statements of Cash Flows 30 Notes to Consolidated Financial Statements MBIA's financial philosophy is an integral part of the operating structure of the company. This philosophy is rooted in the following principles, which provide a framework for decision making -- and have as their ultimate objective maximizing shareholder value. FINANCIAL CONSERVATISM MBIA conducts its financial activities based on a high degree of conservatism, which influences every aspect of our operations. This prudence is exemplified by MBIA's sound underwriting procedures, risk-based capital pricing, and a very high-quality investment portfolio. TRIPLE-A RATINGS MBIA is dedicated to maintaining its Triple-A claims-paying ratings. Preserving these top-level ratings requires us to maintain a strong financial position, highly dependable liquidity and solid operating cash flows. SHAREHOLDER RETURNS MBIA is committed to maximizing total cash returns over the long term. To work toward this goal, we select businesses with demonstrated ability or potential to earn attractive returns on capital and generate value. -17- MBIA INC. AND SUBSIDIARIES (1) YEARS ENDED DECEMBER 31 SELECTED FINANCIAL AND STATISTICAL DATA The selected financial information in the table below should be read in conjunction with the consolidated financial statements and notes that appear in the pages which follow.
Dollars in millions except per share amounts 1995 1994 1993 1992 1991 1990 1989 1988 1987 - ------------------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- GAAP SUMMARY INCOME STATEMENT DATA: Insurance: Gross premiums written .....$ 348 $ 361 $ 479 $ 369 $ 269 $ 211 $ 159 $ 156 $ 171 Net premiums written ....... 303 312 432 336 223 181 137 145 152 Premiums earned ............ 215 218 231 163 132 107 91 82 81 Net investment income ...... 220 194 179 150 132 115 80 67 54 Net realized gains ......... 11 10 10 10 3 -- -- 1 1 Investment management services: Income ..................... 20 16 5 2 1 -- -- -- -- Net realized losses ........ (6) (1) -- -- -- -- -- -- -- Income before income taxes ... 345 329 324 244 190 165 135 118 108 Net income ................... 271 260 259 189 145 127 102 92 74 Net income per common share ......... $ 6.43 $ 6.18 $ 6.10 $ 4.62 $ 3.74 $ 3.33 $ 2.74 $ 2.45 $ 1.98 ======== ======== ======== ======== ======== ======== ======== ======= ====== GAAP SUMMARY BALANCE SHEET DATA: Investments ..................$ 6,607 $ 4,867 $ 3,544 $ 2,529 $ 1,961 $ 1,724 $ 1,501 $ 1,104 $ 979 Total assets ................. 7,267 5,456 4,106 3,049 2,438 2,159 1,904 1,309 1,176 Deferred premium revenue ............ 1,616 1,512 1,403 1,196 1,019 902 811 520 449 Loss reserves ................ 43 40 34 26 21 5 -- -- -- Municipal investment and repurchase agreements ...... 2,642 1,526 493 -- -- -- -- -- -- Long-term debt ............... 374 299 299 299 199 200 195 -- -- Shareholders' equity ......... 2,234 1,705 1,596 1,382 1,063 932 777 705 620 Book value per share ......... 53.19 40.96 38.18 33.00 27.58 24.35 21.08 18.80 16.54 Dividends declared per common share 1.31 1.14 .94 .76 .62 .48 .41 .19 .12 ==== ==== === === === === === === === STATUTORY FINANCIAL HIGHLIGHTS Net premiums written .........$ 297 $ 310 $ 440 $ 339 $ 223 $ 355 $ 135 $ 150 $ 156 Net income ................... 278 225 258 190 149 127 84 71 42 Capital and surplus .......... 1,274 1,110 978 896 647 579 485 376 361 Contingency reserve .......... 744 621 539 404 316 261 216 154 112 -------- -------- -------- -------- -------- -------- -------- ------- ------ Qualified statutory capital ....... 2,018 1,731 1,517 1,300 963 840 701 530 473 Unearned premium reserve ..... 1,733 1,620 1,474 1,242 1,044 926 828 591 507 Loss reserves ................ 7 22 8 14 12 -- -- -- -- -------- -------- -------- -------- -------- -------- -------- ------- ------ Total policyholders' reserves .... 3,758 3,373 2,999 2,556 2,019 1,766 1,529 1,121 980 Present value of installment premiums 235 177 186 173 151 134 90 82 82 Standby line of credit ....... 650 600 575 500 500 500 325 -- -- -------- -------- -------- -------- -------- -------- -------- ------- ------ TOTAL CAPITAL RESOURCES .... 4,643 4,150 3,760 3,229 2,670 2,400 1,944 1,203 1,062 ===== ===== ===== ===== ===== ===== ===== ===== ===== FINANCIAL RATIOS: GAAP Loss ratio ................. 4.9% 3.7% 3.4% 3.4% 13.0% 4.7% 0.0% 0.0% 0.0% Underwriting expense ratio . 29.3 28.8 27.4 32.0 30.1 33.7 38.5 39.6 35.2 Combined ratio ............. 34.2 32.5 30.8 35.4 43.1 38.4 38.5 39.6 35.2 Statutory Loss ratio ................. 0.4 9.8 (3.5) 2.4 12.7 0.0 0.0 0.0 0.0 Underwriting expense ratio . 20.8 22.9 17.6 18.3 20.4 23.4 31.6 32.3 25.3 Combined ratio ............. 21.2 32.7 14.1 20.7 33.1 23.4 31.6 32.3 25.3 NET DEBT SERVICE OUTSTANDING ......$344,037 $304,502 $266,784 $223,056 $184,604 $157,707 $137,221 $90,343 $72,837 NET PAR AMOUNT OUTSTANDING ........$188,636 $164,318 $141,387 $112,483 $ 90,043 $ 75,979 $ 65,290 $42,917 $34,319 ======== ======== ======== ======== ======== ======== ======== ======= =======
(1) Balance sheet amounts as of December 31, 1, 1994, 1993, 1992, 1991, 1990, and 1989 and income statement amount for the years ended December 31, 1995, 1994, 1993, 1992, 1991 and 19include the accounts of MBIA Insurance Corp. of Illinois (formerly BIG Insurance Company) (See Note 1 to consolidated financial statements). -18 & 19- MBIA INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 MBIA Inc.'s (the "Company" or "MBIA") 1995 net income increased by 4% to $271.4 million or $6.43 per share compared with $260.2 million or $6.18 per share in 1994. Comparing 1995 with 1994, core earnings per share increased by 12% to $5.87. Core earnings, which exclude the net income effects from refundings and calls of insured issues, realized gains and losses, accounting changes and other non-recurring items, are a more indicative measure of MBIA's underlying profit trend. The increase in core earnings was primarily due to the continued combined growth in core premiums earned and net investment income. Book value at year-end 1995 was $53.19 per share, increasing 30% from $40.96 per share at year-end 1994, as a result of the growth of the Company's retained earnings and an increase in the fair value of MBIA's fixed-income investments. Financial guarantee insurance companies refer to adjusted book value as a more appropriate measure of their company's intrinsic value. Adjusted book value is calculated by adding to book value the after-tax effects of (1) net deferred premiums less deferred acquisition costs and (2) the present value of future installment premiums on outstanding insurance policies. MBIA's adjusted book value per share increased to $76.56 at year-end 1995 compared with $62.35 at year-end 1994. INSURANCE OPERATIONS MBIA's primary business is to guarantee principal and interest payments on municipal bonds sold in the new issue and secondary markets. The Company also provides financial guarantees for structured finance transactions, investor-owned utility debt and obligations of high-quality financial institutions. In addition, MBIA provides financial guarantees for similar securities in the international markets. The Company is the leading provider of financial guarantees in both domestic and international markets. Gross premiums written ("GPW") as reported on the Company's income statements reflect cash premium receipts during the period, which represents upfront premiums received for business originated in the period and installment premiums received for installment-based insurance policies issued in current and prior periods. GPW does not include the present value of future premiums receivable for installment-based insurance policies issued in the period. Although most of MBIA's premiums are collected upfront at policy issuance, MBIA is writing an increasing proportion of installment premium business. MBIA estimates the aggregate present value of its future stream of installment premiums to be $235.4 million at December 31, 1995. To more accurately portray year-to-year changes in new business production, the Company also discloses adjusted gross premiums ("AGP"), which represent upfront premiums and the estimated present value of current period and future installment premiums for installment-based insurance policies issued in the period. MBIA's total GPW for 1995 declined 3% to $348.5 million from $360.8 million in 1994. However, total AGP increased 2% to $370.2 million from $362.0 million in 1994, in part reflecting a greater proportion of installment-based business written. While the overall long-term new issue municipal bond market declined 9% in 1995 to $141.4 billion of par value, the insured portion of new issue volume rose to a record 47% from 40% in 1994. This resulted in a 6% increase in insured municipal volume in 1995, to $66.0 billion from $62.1 billion in 1994. In 1995, MBIA continued to lead the industry in market share, capturing 42% of the insured market and a record 20% of all new issue municipal par value. Market data are reported on a sale date basis while MBIA's financial results are computed from closing date information. Typically, there can be a one- to four-week delay between the sale date and closing date of an insured issue. Total par value insured by MBIA for new issue and secondary market municipal insurance increased by 4% to $33.8 billion from $32.5 billion in 1994. GPW for new issue and secondary market municipal insurance declined 7% to $301.3 million, from $324.4 million in 1994. Municipal AGP decreased by 6% to $298.6 million from $318.4 million in the previous year. The decrease in premium writings was due primarily to a lower ratio of debt service to par value (as a result of lower interest rates) and a larger percentage of higher credit quality and lower risk business written in 1995. MBIA reported substantial gains in its domestic new issue and secondary market structured finance business insuring a record $9.0 billion of par value in 1995, a 57% gain over 1994. GPW at $22.9 million reflects a 46% increase over 1994. Structured finance AGP totaled $46.8 million, up 93% over 1994. MBIA's international operations insured $2.2 billion of new issue and secondary market par value. GPW for international business increased by 9% to $21.3 million from $19.4 million in 1994. International AGP increased by 24% to $24.0 million from $19.3 million in 1994. In 1995, MBIA, jointly with AMBAC Indemnity Corporation (another leading U.S. Triple-A rated financial guarantee insurer), announced the formation of an international joint venture to market financial guarantee insurance in the European Union. The effect of the joint venture on the financial position and results of operations of the Company was not material in 1995. -20- MBIA INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CON'T) Ceded premiums to reinsurers from all insurance operations were $45.1 million in 1995, compared with $49.3 million in 1994, representing 13% and 14% of GPW in 1995 and 1994, respectively. Ceded premiums in 1995 were lower than in 1994, where ceded premiums were increased by cessions made on two unusually large international transactions. The Company monitors on a continual basis the creditworthiness of its reinsurers, most of which are rated AA or better by Standard & Poor's Corporation or A or better by A. M. Best Co. In 1995, the maximum amount reinsured by any one reinsurance company as a percent of the Company's GPW or debt service outstanding at December 31, 1995 was 4%. The Company remains liable for risks reinsured but believes that the likelihood of not recovering the reinsured portion of losses from any of its reinsurers is remote. Premiums received upfront are earned pro rata over the period of risk. Such premiums are allocated to each bond maturity based on par amount and are earned on a straight-line basis over the term of each maturity. Accordingly, the portion of net premiums earned on each policy in any given year represents a relatively small percentage of the total net upfront premium received. The balance represents deferred premium revenue to be earned over the remaining life of the insured bond issue. Installment premiums are credited to the deferred premium revenue account in the period in which such premiums are received, and they are recognized as revenue over each installment period -- generally one year or less. The revenue that the Company recognizes from the amortization of deferred premiums for each period, net of the amortization of prepaid reinsurance premiums, is its premiums earned for that period. Premiums earned decreased 1% to $215.1 million in 1995 from $218.3 million in 1994. Earned premiums from scheduled amortization increased by 10% over 1994 but were offset by the decline in earned premiums associated with refunded and called bonds during 1995, which were significantly lower than in the prior year. When an MBIA-insured bond issue is refunded or retired early, the outstanding liability associated with the refunded or called portion is extinguished and the related deferred premium revenue is earned immediately, except for any portion which may be applied as a credit towards insuring the refunding bond issue. Earned premiums generated by refunded and called bonds in 1995 declined to $34.0 million from $53.0 million in 1994. The amount of bond refundings and calls is influenced by a variety of factors such as prevailing interest rates relative to the coupon rates of the bond issue, the issuer's desire to modify bond covenants and applicable regulations under the Internal Revenue Code. The fair value of the Company's investment portfolio related to its insurance operations was $3.9 billion as of December 31, 1995. This portfolio generated net investment income of $219.9 million in 1995, a 13% increase over the $193.9 million generated in 1994. The increase was primarily the result of the growth of investments from continued positive operating cash flows and a modest lengthening of the portfolio's duration. Average invested assets for 1995 were $3.45 billion at amortized cost compared with $3.12 billion for 1994. Net realized capital gains in 1995 were $11.3 million, compared with $10.3 million in the prior year. The average credit quality rating of the fixed-income investments at year-end 1995 was Double-A. Tax-exempt securities represented 72% of the portfolio at December 31, 1995 compared with 75% at December 31, 1994. The provision for losses and loss adjustment expenses during 1995 was $10.6 million compared with $8.1 million in 1994, representing additions to the loss reserve consistent with the Company's loss reserving methodology. At December 31, 1995, $14.5 million of the $42.5 million loss and loss adjustment expense reserve was allocated on a case basis compared with $21.9 million of the $40.1 million reserve at year-end 1994. The reduction of the case basis reserves primarily reflects loss payments made in 1995. The decrease in case reserves had no impact on net income. At year-end 1995 the Company's unallocated general reserve was $28.0 million compared with $18.2 million at year-end 1994. In 1995, policy acquisition costs net of deferrals were $21.3 million, essentially unchanged from 1994. Policy acquisition costs are amortized over the period in which the related premiums are earned. Other insurance operating expenses increased modestly to $41.8 million in 1995 from $41.0 million in the prior year. In 1995, the Company incurred $28.4 million of interest expense compared with $27.2 million in 1994. The increase in 1995 primarily resulted from the utilization of short-term bank borrowings under existing lines of credit during the year. The Company's effective tax rate increased marginally in 1995 to 21.3% compared with 21.0% in 1994. -21- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CON'T) INVESTMENT MANAGEMENT SERVICES Over the last five years, MBIA has developed investment management services which capitalize on the Company's capabilities, reputation and marketplace relationships. MBIA Municipal Investors Service Corporation ("MBIA/MISC"), a wholly owned subsidiary of the Company, provides cash management services for local governments and school districts. As of December 31, 1995, MBIA/MISC had approximately 1,250 clients and over $2.5 billion of client assets under management compared with $1.7 billion at year-end 1994. In addition, MBIA/MISC provides fund administration services to over 230 clients with invested assets of $154 million. MBIA/MISC offers its services in nine states and the Commonwealth of Puerto Rico and plans to expand into additional states. Since 1993, MBIA Investment Management Corp. ("IMC"), another wholly owned subsidiary of the Company, has provided investment agreements, guaranteed as to principal and interest, for bond proceeds of states, municipalities and municipal authorities. At year-end 1995, aggregate principal and accrued interest outstanding on investment agreements was 2.6 billion compared with $1.5 billion at year-end 1994. The assets supporting IMC's investment agreement liabilities are high-quality securities with an average credit quality rating of Double-A and are recorded as a component of the Company's total investments. Municipal investment and repurchase agreements are recorded as balance sheet liabilities at the time such agreements are executed. The liability for a municipal investment or repurchase agreement is carried at the principal value of the obligation plus accrued interest. Interest expense on municipal investment and repurchase agreements is computed daily, based upon the outstanding liability at rates specified in the agreements, and deducted from the investment income arising from related investment agreement assets. The net amount of interest income less interest expense is recorded as a component of investment management services income. In conducting its business, IMC may, from time to time, use derivative financial instruments for hedging purposes as part of its overall management of interest rate risk exposure. The use of such instruments must comply with the Company's policies restricting their use to prescribed limits, non-speculative purposes, and exposure to a market or index that represents a class of investments approved as a direct investment under the Company's existing investment guidelines. At December 31, 1995, the Company's exposure to derivative financial instruments (interest rate contracts) was not significant. In 1994, MBIA Securities Corp. ("SECO"), a wholly owned subsidiary, was established to provide investment management services for MBIA's investment agreements, municipal cash management and public pension funds. In 1995, portfolio management for a portion of MBIA's insurance related investment portfolio was transferred to SECO; the management of the balance of this portfolio was transferred in January 1996. In 1995, the Company's investment management services business contributed $19.9 million in operating revenues, a 23% increase over 1994 which included $1.8 million of net proceeds from the sale of MBIA's 49% interest in a joint venture. Operating expenses increased by 21% to $12.9 million. Net realized capital losses for 1995 were $6.1 million compared with $0.7 million in 1994. RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993 MBIA's 1994 net income was $260.2 million compared with $259.0 million in 1993. Earnings per share grew 1% to $6.18 from $6.10 in 1993. The Company's 1993 results included an extraordinary net income benefit of $0.30 per share primarily relating to the adoption of Statement of Financial Accounting Standards ("SFAS") 109 "Accounting for Income Taxes." Excluding the effect of accounting changes, earnings per share for 1994 increased 7% over 1993. Core earnings per share increased 15% to $5.26 in 1994 compared with $4.56 in 1993. Book value at year-end 1994 was $40.96 per share, a 7% gain from $38.18 per share in 1993. This increase was due to growth of the Company's business and was reduced by the impact of SFAS 115 "Accounting for Certain Investments in Debt and Equity Securities," which was adopted by the Company in 1994. Under SFAS 115, fixed-income investments previously carried at amortized cost are now classified as available-for-sale and carried at fair value. Changes in the fair value of securities classified as available-for-sale have no income statement impact but are recorded, net of taxes, as a component of shareholders' equity. As of December 31, 1994, this component reduced book value by $2.10 per share. MBIA's adjusted book value per share at year-end 1994 was $62.35 compared with $58.36 in 1993. INSURANCE OPERATIONS Total long-term new issue municipal bond volume declined 45% to $154.7 billion of par value in 1994 from the record $280.2 billion in 1993. The 1994 decline was due to the unusually sharp rise in interest rates. The insured portion increased nominally to 40% from 39% in 1993. In 1994, MBIA once again led the industry in market share, guaranteeing 40% of insured long-term new issue municipal bond volume. Influenced significantly by this operating environment, the Company's total GPW declined 25% to $360.8 million from $479.3 million in 1993. Total AGP decreased by 23% to $362.0 million from $469.0 million in 1993. Par value insured by MBIA for new issue and secondary market municipal insurance declined by 27% to $32.5 billion from $44.8 billion in 1993. GPW for new issue and secondary market municipal insurance declined by 31% to $324.4 million from $467.1 million in 1993. In 1993, municipal GPW included $16.2 million of assumed premiums of which $10.8 million was related to a portfolio written by one of the five member companies of MBIA's predecessor, the Municipal Bond Insurance Association. Municipal AGP decreased by 28% to $318.4 million from $445.2 million in the prior year. The decrease in 1994 domestic municipal business was due to both the decline in the municipal bond market as well as to the 1993 portfolio reassumption. -22- MBIA INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CON'T) The Company reported an 18% increase in its domestic new issue and secondary market structured finance business, insuring $5.7 billion of par in 1994 compared with $4.8 billion in 1993. GPW at $15.8 million reflects a 59% increase over 1993. Structured finance AGP totaled $24.3 million, up 11% over 1993. MBIA's international operations insured $2.6 billion of new issue and secondary market par value, up substantially from the $0.2 billion insured in 1993. GPW for international business increased to $19.4 million compared with $1.3 million written in 1993. Premiums ceded to reinsurers from all insurance operations were $49.3 million in 1994 compared with $47.6 million in 1993. The increase in the proportionate level of cessions in 1994 was related to an increase in treaty reinsurance due to capacity constraints and to cessions made on two unusually large international transactions. Premiums earned decreased 6% to $218.3 million in 1994 from $231.3 million in 1993. The growth in deferred premium revenue from the addition of new business in 1993 was more than offset by the decline in earned premiums associated with refunded and called bonds during 1994, which were significantly lower than in 1993. Earned premiums generated by refunded and called bonds in 1994 declined to $53.0 million from 1993's $85.6 million. The fair value of the Company's investment portfolio related to its insurance operations was $3.2 billion as of December 31, 1994. This portfolio generated net investment income of $193.9 million in 1994, an 8% increase over the $178.9 million in 1993. This increase was primarily the result of the growth of investments from continued positive operating cash flow of $376.4 million. Average investments excluding investment agreement assets were $3.12 billion at amortized cost in 1994 compared with $2.75 billion in 1993. Tax-exempt securities represented 75% of the portfolio at December 31, 1994 compared with 70% at December 31, 1993. Net realized capital gains in 1994 were $10.3 million, compared with $9.7 million in 1993. The provision for losses and loss adjustment expenses during 1994 was $8.1 million compared with $7.8 million in 1993, representing additions to the loss reserve consistent with the Company's loss reserving methodology. At December 31, 1994, $21.9 million of the $40.1 million loss and loss adjustment expense reserve was allocated on a case basis compared with $7.5 million of the $33.7 million reserve at year-end 1993. In 1994, the Company increased its case reserve with respect to the default of a health care issue and potential future shortfalls in several single-family housing issues. In 1993, the Company recognized expected loss recoveries having a present value of approximately $10.0 million related to a previously established case reserve. Neither the increase in case reserves nor the recognition of recoveries had any impact on net income, since the change in the Company's case-specific reserve was offset by a corresponding change in the unallocated portion of its general loss reserve. In 1994, policy acquisition costs net of deferrals decreased $3.6 million to $21.8 million. Since policy acquisition costs are deferred and amortized over the period in which the related premiums are earned, this decrease was a function of the lower level of premiums earned caused by the 1994 decline in refunding activity. Other insurance operating expenses increased to $41.0 million in 1994 from $37.9 million in 1993. In 1994, the Company incurred $27.2 million of interest expense compared with $26.9 million in 1993. The increase in 1994 resulted from utilization of short-term bank borrowings under existing lines of credit during the year. The Company's effective tax rate decreased in 1994 to 21.0% compared with 24.0% in 1993. The decrease was due principally to a higher proportion of tax-exempt investment income in 1994 compared with 1993. INVESTMENT MANAGEMENT SERVICES In aggregate for 1994, the investment management services business contributed $16.2 million in operating revenue, a substantial increase over 1993's revenue of $4.7 million. Included in investment management services revenue for 1994 is $1.8 million of net proceeds from the sale of MBIA's 49% interest in a joint venture. Operating expenses increased to $10.6 million in 1994 from $5.4 million in 1993. The increase was due primarily to the expansion of MBIA/MISC into additional states, expanded operations of IMC and the costs associated with establishing an internal investment management capability. As of December 31, 1994, MBIA/MISC had almost 950 clients and over $1.7 billion of client assets under management compared with $1.5 billion at year-end 1993. MBIA/MISC also provides fund administration services to over 200 clients with invested assets of $103 million. MBIA/MISC offers its services in eight states and plans to continue its expansion into additional states. -23- MBIA INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CON'T) LIQUIDITY AND CAPITAL RESOURCES At year-end 1995, the fair value of the Company's consolidated investment portfolio was $6.6 billion, an increase of 36% from $4.9 billion at year-end 1994. The fair value of investments related to MBIA's insurance activities increased 21% from $3.2 billion at year-end 1994 to $3.9 billion at year-end 1995. The increase was a result of positive cash flows from MBIA Insurance Corporation's ("MBIA Corp.") insurance premiums and investment activities, a $294 million increase in the overall market value of the portfolio due to declining interest rates and the net proceeds of a $75 million public debt offering in December. The fair value of investments related to MBIA's municipal investment agreement business grew 64% to $2.7 billion from $1.7 billion at year-end 1994, primarily as a result of continued strong growth of this business. The Company's fixed-income investment portfolio has been classified as available-for-sale in accordance with SFAS 115. The difference between fair value and amortized cost is primarily related to changes in interest rates, and if the portfolio is held to maturity, the Company expects to realize an amount substantially equal to amortized cost. MBIA Corp.'s liquidity position remained strong, as net cash flow provided by its operations aggregated $408 million in 1995, an 11% increase from $367 million in 1994. The Company's liquidity is in part dependent upon MBIA Corp.'s ability to pay dividends to the Company. MBIA Corp.'s net income, consisting of premium earnings and investment income less losses and expenses, is a source of continuing additions to earned surplus and dividend-paying capability. Under New York state insurance law, without prior approval of the superintendent of the state insurance department, MBIA Corp. may pay a dividend only from earned surplus subject to the maintenance of a minimum capital requirement. The dividends in any 12-month period may not exceed the lesser of 10% of its policyholders' surplus as shown on its last filed statutory-basis financial statements or adjusted net investment income, as defined, for such 12-month period. In 1995, MBIA Corp. paid dividends of $83 million and at December 31, 1995 had approximately $44 million available for payment of further dividends to the Company without requiring prior approval. MBIA Corp. has an irrevocable standby line of credit with a group of major banks, which was increased to $650 million as of September 30, 1995, to provide funds for the payment of claims in the event that severe losses should occur. The agreement is for a seven-year term expiring on September 30, 2002 but, subject to approval by the banks, the agreement may be renewed annually to extend the term to seven years beyond the renewal date. For general corporate purposes or to further facilitate the immediate payment of claims, should they occur, the Company and MBIA Corp. maintain short-term liquidity facilities totaling $275 million with a group of major banks. At December 31, 1995, $18 million was outstanding under these facilities for general corporate purposes. MBIA Corp. also maintains a high degree of liquidity within its investment portfolio in the form of readily marketable high-quality fixed-income securities and short-term investments. In management's opinion, the capital resources of MBIA Corp. represented by the liquidity of its investment portfolio, its annual cash flows from operations and bank lines of credit are more than adequate to meet the Company's expected cash requirements. In February 1996, the Company completed a public offering of 3.9 million shares of the Company's common stock, of which 0.8 million shares were new shares offered by the Company. The Company realized $55 million in new capital from the offering. -24- MBIA INC. AND SUBSIDIARIES REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of MBIA Inc.: We have audited the accompanying consolidated balance sheets of MBIA Inc. and Subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of MBIA Inc. and Subsidiaries as of December 31, 1995 and 1994, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. As discussed in Note 7 to the consolidated financial statements, effective January 1, 1993 the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." As discussed in Note 2 to the consolidated financial statements, effective January 1, 1994 the Company adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." \s\ COOPERS & LYBRAND L.L.P. New York, New York January 22, 1996 -25- MBIA INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Years ended December 31 ---------------------------------------------- Dollars in thousands except per share amounts 1995 1994 1993 - ------------------------- ----------- ------------ ------------- REVENUES Insurance: Gross premiums written $ 348,487 $ 360,836 $ 479,347 Ceded premiums (45,050) (49,281) (47,552) ---------- ---------- ------------ Net premiums written 303,437 311,555 431,795 Increase in deferred premium revenue (88,365) (93,226) (200,519) ---------- ---------- ------------ Premiums earned (net of ceded premiums of $30,655, $33,340 and $41,409) 215,072 218,329 231,276 Net investment income 219,858 193,853 178,884 Net realized gains 11,312 10,335 9,727 Investment management services: Income 19,884 16,178 4,672 Net realized (losses) gains (6,092) (726) 58 Other 2,188 1,567 4,361 ---------- ----------- ------------ Total revenues 462,222 439,536 428,978 ---------- ----------- ------------ EXPENSES Insurance: Losses and loss adjustment 10,639 8,093 7,821 Policy acquisition costs, net 21,283 21,845 25,480 Operating 41,805 41,026 37,946 Investment management services 12,857 10,611 5,409 Interest 28,439 27,159 26,900 Other 2,169 1,380 1,387 ---------- ----------- ------------ Total expenses 117,192 110,114 104,943 ---------- ----------- ------------ Income before income taxes 345,030 329,422 324,035 Provision for income taxes 73,611 69,213 77,925 ----------- ------------ ------------ Income before cumulative effect of accounting changes 271,419 260,209 246,110 Cumulative effect of accounting changes --- --- 12,923 NET INCOME $ 271,419 $ 260,209 $ 259,033 ========== =========== ============ Income per common share before cumulative effect of accounting change $ 6.43 $ 6.18 $ 5.80 NET INCOME PER COMMON SHARE $ 6.43 $ 6.18 $ 6.10 ========== ========== ========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND COMMON STOCK EQUIVALENTS OUTSTANDING 42,240,011 42,085,943 42,465,980 ========== ========== ========== The accompanying notes are an integral part of the consolidated financial statements. -26- MBIA INC. and SUBSIDIARIES CONSOLIDATED BALANCE SHEETS Dollars in thousands except per share amounts December 31, 1995 December 31, 1994 - ------------------------ ----------------- ----------------- ASSETS Investments: Fixed-maturity securities held as available-for-sale at fair value (amortized cost $3,428,986 and $3,123,838)... $ 3,652,621 $ 3,051,906 Short-term investments, at amortized cost (which approximates fair value) ......... 198,035 121,384 Other investments ................... 14,064 17,550 ----------- ----------- 3,864,720 3,190,840 Municipal investment agreement portfolio held as available-for-sale at fair value (amortized cost $2,645,828 and $1,738,375) ....... 2,742,626 1,675,935 ----------- ----------- TOTAL INVESTMENTS ........... 6,607,346 4,866,775 Cash and cash equivalents ................ 23,258 7,940 Accrued investment income ................ 87,016 68,486 Deferred acquisition costs ............... 140,348 133,048 Prepaid reinsurance premiums ............. 200,887 186,492 Goodwill (less accumulated amortization of $41,298 and $36,115) .......................... 106,569 111,252 Property and equipment, at cost (less accumulated depreciation of $17,625 and $13,917) .......................... 46,030 45,069 Receivable for investments sold .......... 6,100 945 Other assets ............................. 49,896 36,432 ----------- ----------- TOTAL ASSETS ................ $ 7,267,450 $ 5,456,439 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Deferred premium revenue ............ $ 1,616,315 $ 1,512,211 Loss and loss adjustment expense reserves ................. 42,505 40,148 Municipal investment agreements ....................... 2,026,709 1,334,177 Municipal repurchase agreements ....................... 615,776 191,956 Long-term debt ...................... 373,900 298,790 Short-term debt ..................... 18,000 17,000 Deferred income taxes ............... 246,736 76,843 Payable for investments purchased ........................ 10,695 209,966 Other liabilities ................... 82,548 70,632 ----------- ----------- TOTAL LIABILITIES ........... 5,033,184 3,751,723 ----------- ----------- COMMITMENTS AND CONTINGENCIES Shareholders' Equity: Preferred stock, par value $1 per share; authorized shares --10,000,000;issued and outstanding--none ................ -- -- Common stock, par value $1 per share; authorized shares--200,000,000; issued shares -- 42,077,387 .................... 42,077 42,077 Additional paid-in capital .......... 725,153 719,750 Retained earnings ................... 1,261,051 1,057,092 Cumulative translation adjustment ....................... 2,849 503 Unrealized appreciation (depreciation) of investments, net of deferred income tax provision (benefit) of $112,252 and $(46,292) ........ 207,648 (86,560) Unearned compensation - restricted stock ............... (426) -- Treasury stock, at cost; 73,676 shares in 1995 and 461,763 shares in 1994 ....... (4,086) (28,146) ----------- ----------- TOTAL SHAREHOLDERS' EQUITY ..... 2,234,266 1,704,716 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ........ $ 7,267,450 $ 5,456,439 =========== =========== The accompanying notes are an integral part of the consolidated financial statements. -27- MBIA INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY For the years ended December 31, 1995, 1994 and 1993 ----------------------------------------------------
Unrealized Unearned Common Stock Additional Cumulative Appreciation Compensation- Treasury Stock In thousands except -------------- Paid-in Retained Translation (Depreciation) Restricted --------------- per share amounts Shares Amount Capital Earnings Adjustment of Investments Stock Shares Amount - ----------------- ------ ------ ------- --------- ----------- -------------- ---------- ------ ------- BALANCE, JANUARY 1, 1993 41,960 $41,960 $713,762 $ 625,216 $ (489) $ 3,556 -- 79 $ 1,875 ------ ------- -------- ---------- ------ -------- ------ ---- ------- Treasury shares acquired -- -- -- -- -- -- -- 238 15,255 Exercise of stock options 114 114 5,519 121 -- -- -- (57) (1,355) Net income -- -- -- 259,033 -- -- -- -- -- Change in foreign currency translation -- -- -- -- (729) -- -- -- -- Change in unrealized appreciation of investments net of change in deferred income taxes of $(1,981) -- -- -- -- -- 3,524 -- -- -- Dividends (declared per common share $.94, paid per common share $.89) -- -- -- (39,454) -- -- -- -- -- ------ ------- -------- ---------- ------ -------- ------ ---- ------- BALANCE, DECEMBER 31, 1993 42,074 42,074 $719,281 844,916 (1,218) 7,080 -- 260 15,775 ------ ------- -------- ---------- ------ -------- ------ ---- ------- Treasury shares acquired -- -- -- -- -- -- -- 246 14,411 Exercise of stock options 3 3 469 (526) -- -- -- (44) (2,040) Net income -- -- -- 260,209 -- -- -- -- -- Change in foreign currency translation -- -- -- -- 1,721 -- -- -- -- Change in unrealized depreciation of investments net of change in deferred income taxes of $50,105 -- -- -- -- -- (93,640) -- -- -- Dividends (declared per common share $1.14, paid per common share $1.09) -- -- -- (47,507) -- -- -- -- -- ------ ------- -------- ---------- ------ -------- ------ ---- ------- BALANCE, DECEMBER 31, 1994 42,077 42,077 719,750 1,057,092 503 (86,560) -- 462 28,146 ------ ------- -------- ---------- ------ -------- ------ ---- ------- Unearned compen- sation restrict- ed stock -- -- -- 116 -- -- (426) (6) (319) Exercise of stock options -- -- 5,403 (12,806) -- -- -- (382) (23,741) Net income -- -- -- 271,419 -- -- -- -- -- Change in foreign currency translation -- -- -- -- 2,346 -- -- -- -- Change in unrealized appreciation of investments net of change in deferred income taxes of $(158,544) -- -- -- -- -- 294,208 -- -- -- Dividends (declared per common share $1.31, paid per common share $1.275) -- -- -- (54,770) -- -- -- -- -- ------ ------- -------- ---------- ------ -------- ------ ---- ------- BALANCE, DECEMBER 31, 1995 42,077 $42,077 $725,153 $1,261,051 $2,849 $207,648 $(426) 74 $ 4,086 ====== ======= ======== ========== ====== ======== ====== ==== =======
The accompanying notes are an integral part of the consolidated financial statements. -28- MBIA INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31 ---------------------------------------- Dollars in thousands 1995 1994 1993 - --------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income ............................................. $ 271,419 $ 260,209 $ 259,033 Adjustments to reconcile net income to net cash provided by operating activities: Increase in accrued investment income ................ (18,530) (13,692) (7,238) Increase in deferred acquisition costs ............... (7,300) (12,564) (10,033) Increase in prepaid reinsurance premiums ............. (14,395) (15,941) (6,143) Increase in deferred premium revenue ................. 102,760 109,167 206,662 Increase in loss and loss adjustment expense reserves 2,357 6,413 8,225 Depreciation ......................................... 3,984 3,181 2,884 Amortization of goodwill ............................. 5,183 5,027 5,069 Amortization of bond discount, net ................... (18,468) 619 (702) Net realized gains on sale of investments ............ (5,222) (9,609) (9,727) Deferred income taxes ................................ 11,349 19,067 7,531 Other, net ........................................... 17,946 24,560 15,301 ----------- ----------- ----------- Total adjustments to net income ...................... 79,664 116,228 211,829 ----------- ----------- ----------- Net cash provided by operating activities ............ 351,083 376,437 470,862 ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of fixed-maturity securities, net of payable for investments purchased ................. (1,149,253) (1,017,306) (816,551) Sale of fixed-maturity securities, net of receivable for investments sold ...................... 719,523 515,548 241,711 Redemption of fixed-maturity securities, net of receivable for investments redeemed .................. 83,448 128,274 225,608 (Purchase) Sale of short-term investments .............. (32,281) 3,547 (40,461) Purchase of other investments .......................... (1,065) (7,864) (37,778) Sale of other investments .............................. 6,926 95,320 -- Purchases for municipal investment agreement portfolio, net of payable for investments purchased .. (2,210,571) (1,627,561) (561,187) Sales from municipal investment agreement portfolio, net of receivable for investments sold .... 1,115,239 585,648 70,456 Capital expenditures, net of disposals ................. (4,923) (4,075) (6,770) ----------- ----------- ----------- Net cash used by investing activities ................ (1,472,957) (1,328,469) (924,972) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuance of long-term debt ........... 74,344 -- -- Dividends paid ......................................... (53,179) (45,513) (37,342) Purchase of treasury stock ............................. -- (14,411) (15,255) Proceeds from issuance of municipal investment agreements and municipal repurchase agreements ....... 2,351,206 1,786,574 518,245 Payments for drawdowns of municipal investment agreements and municipal repurchase agreements ....... (1,251,517) (771,156) (27,381) Exercise of stock options .............................. 16,338 1,986 7,109 ----------- ----------- ----------- Net cash provided by financing activities ............ 1,137,192 957,480 445,376 ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents ........ 15,318 5,448 (8,734) Cash and cash equivalents - beginning of year ............... 7,940 2,492 11,226 ----------- ----------- ----------- Cash and cash equivalents - end of year ..................... $ 23,258 $ 7,940 $ 2,492 =========== =========== =========== SUPPLEMENTAL CASH FLOW DISCLOSURES: Income taxes paid ...................................... $ 52,410 $ 53,921 $ 53,597 Interest paid: Municipal investment agreements and municipal repurchase agreements .................... $ 104,301 $ 36,169 $ 358 Long-term debt ....................................... 26,575 26,575 26,416 Short-term debt ...................................... 1,228 56 --
The accompanying notes are an integral part of the consolidated financial statements. -29- MBIA INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BUSINESS AND ORGANIZATION MBIA Inc. (the "Company") was incorporated in Connecticut on November 12, 1986 as a licensed insurer and, through the following series of transactions during December 1986, became the successor to the business of the Municipal Bond Insurance Association (the "Association"), a voluntary unincorporated association of insurers writing municipal bond and note insurance as agent for the member insurance companies: -The Company acquired for $17 million all of the outstanding common stock of a New York domiciled insurance company and changed the name of the insurance company to Municipal Bond Investors Assurance Corporation. In April 1995, the name was again changed to MBIA Insurance Corporation ("MBIA Corp."). Prior to the acquisition, all of the obligations of this company were reinsured and/or indemnified by the former owner. -Four of the five member companies of the Association, together with their affiliates, purchased all of the outstanding common stock of the Company and entered into reinsurance agreements whereby they ceded to the Company substantially all of the net unearned premiums on existing and future Association business and the interest in, or obligation for, contingent commissions resulting from their participation in the Association. The Company's reinsurance obligations were then assumed by MBIA Corp. The participation of these four members aggregated approximately 89% of the net insurance in force of the Association. The net assets transferred from the predecessor included the cash transferred in connection with the reinsurance agreements, the related deferred acquisition costs and contingent commissions receivable, net of the related unearned premiums and contingent commissions payable. The deferred income taxes inherent in these assets and liabilities were recorded by the Company. Contingent commissions receivable (payable) with respect to premiums earned prior to the effective date of the reinsurance agreements by the Association in accordance with statutory accounting practices, remained as assets (liabilities) of the member companies. -The Company acquired from an unrelated company for $68 million all of the outstanding common stock of Municipal Issuers Service Corporation ("MISC") and certain related companies. MISC had been the managing general agency of the Association. Effective December 31, 1989, the Company acquired for $288 million all of the outstanding stock of Bond Investors Group, Inc. ("BIG"), the parent company of Bond Investors Guaranty Insurance Company ("BIG Ins."), which was subsequently renamed MBIA Insurance Corp. of Illinois ("MBIA Illinois"). The acquisition of BIG has been accounted for as a purchase and the price was allocated to the net assets of the acquired company based on the fair value of such assets and liabilities at the date of acquisition. In January 1990, MBIA Illinois ceded its portfolio of net insured obligations to MBIA Corp. in exchange for cash and investments equal to its unearned premium reserve of $153 million. Subsequent to this cession, MBIA Inc. contributed the common stock of BIG to MBIA Corp. The insured portfolio acquired from BIG Ins. consists of municipal obligations with risk characteristics similar to those insured by MBIA Corp. On December 31, 1990, BIG was merged into MBIA Illinois. Also in 1990, the Company formed MBIA Assurance S.A. ("MBIA Assurance"), a wholly owned French subsidiary, to write financial guarantee insurance in the international community. MBIA Assurance provides insurance for public infrastructure financings, structured finance transactions and certain obligations of financial institutions. The stock of MBIA Assurance was contributed to MBIA Corp. in 1991 and, pursuant to a reinsurance agreement with MBIA Corp., a substantial amount of the risks insured by MBIA Assurance is reinsured by MBIA Corp. At the end of 1990, MBIA Municipal Investors Service Corporation ("MBIA/MISC") was formed as a subsidiary of the Company. MBIA/MISC operates cooperative cash management programs for school districts and municipalities. At the end of 1992, the Company and Caisse des Depots et Consignations ("Caisse des Depots") established a jointly owned company, MBIA Investors Capital Corp. ("MICC"), to offer a tender option bond program named TOPSTAR SM. MICC purchased long-term, high-quality municipal bonds, attached a tender option agreement and resold the securities as synthetic short-term instruments. MICC was managed by the Company and CDC Capital Inc., a subsidiary of Caisse des Depots in New York. In August 1994, the Company sold its 49% ownership interest. In 1993, the Company formed a wholly owned subsidiary, MBIA Investment Management Corp. ("IMC"). IMC, which commenced operations in August 1993, principally provides guaranteed investment agreements to states, municipalities and municipal authorities which are guaranteed as to principal and interest. Also in 1993, MBIA Corp. assumed the remaining business from the fifth member of the Association. In 1994, the Company formed a wholly owned subsidiary, MBIA Securities Corp. ("SECO"), which provides fixed-income investment management services for the Company, its municipal cash management service businesses and public pension funds. -30- MBIA INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T) 2. SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements have been prepared on the basis of generally accepted accounting principles ("GAAP"). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant accounting policies are as follows: CONSOLIDATION The consolidated financial statements include the accounts of the Company, MBIA Corp., MBIA Illinois, MBIA Assurance, SECO, MISC, MBIA/MISC, IMC and BIG Services, Inc. The investment in MICC was accounted for on the equity method. All significant intercompany balances have been eliminated. Certain amounts have been reclassified in prior years' financial statements to conform to the current presentation. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash on hand and demand deposits with banks. INVESTMENTS Effective January 1, 1994, the Company adopted Statement of Financial Accounting Standards ("SFAS") 115 "Accounting for Certain Investments in Debt and Equity Securities." In accordance with SFAS 115, the Company reclassified its entire investment portfolio (including "fixed-maturity securities" and its "municipal investment agreement portfolio") as "available-for-sale." Pursuant to SFAS 115, securities classified as available-for-sale are required to be reported in the financial statements at fair value, with unrealized gains and losses, net of deferred taxes, reflected as a separate component of shareholders' equity. The cumulative effect of the Company's adoption of SFAS 115 was a decrease in shareholders' equity at December 31, 1994 of $87.3 million, net of taxes. The adoption of SFAS 115 had no effect on the Company's earnings. Bond discounts and premiums are amortized using the effective-yield method over the remaining term of the securities. For pre-refunded bonds the remaining term is determined based on the contractual refunding date. Short-term investments are carried at amortized cost, which approximates fair value and include all fixed-maturity securities, other than those held in the municipal investment agreement portfolio, with a remaining term to maturity of less than one year. Investment income is recorded as earned. Realized gains or losses on the sale of investments are determined by specific identification and are included as a separate component of revenues. The municipal investment agreement portfolio is comprised of fixed-maturity securities and short-term investments which are subject to the accounting policies discussed above. Investment income from the municipal investment agreement portfolio is recorded as a component of investment management services income as earned. Municipal investment agreement portfolio accrued interest income, receivables for investments sold and payables for investments purchased are included in the respective consolidated accounts. Other investments consist primarily of the Company's interest in limited partnerships and a mutual fund which invests principally in marketable equity securities. In 1994, other investments also contain an investment in marketable equity securities. The Company records dividends from its investment in marketable equity securities and its share of limited partnerships and mutual funds as a component of investment income. In addition, the Company records its share of the unrealized gains and losses on these investments, net of applicable deferred income taxes, as a separate component of shareholders' equity. PREMIUM REVENUE RECOGNITION Premiums are earned pro rata over the period of risk. Premiums are allocated to each bond maturity based on par amount and are earned on a straight-line basis over the term of each maturity. When an insured issue is retired early, is called by the issuer, or is in substance paid in advance through a refunding or defeasance accomplished by placing U.S. Government securities in escrow, the remaining deferred premium revenue, net of the portion which is credited to a new policy in those cases where the Company insures the refunding issue, is earned at that time, since there is no longer risk to the Company. Accordingly, deferred premium revenue represents the portion of premiums written that is applicable to the unexpired risk of insured bonds and notes. POLICY ACQUISITION COSTS Policy acquisition costs include only those expenses that relate primarily to, and vary with, premium production. For business produced directly by MBIA Corp., such costs include compensation of employees involved in marketing, underwriting and policy issuance functions, certain rating agency fees, state premium taxes and certain other underwriting expenses, reduced by ceding commission income on premiums ceded to reinsurers. For business assumed from the Association, such costs were comprised of management fees, certain rating agency fees and marketing and legal costs, reduced by ceding commissions received by the Association on premiums ceded to reinsurers. Policy acquisition costs are deferred and amortized over the period in which the related premiums are earned. -31- MBIA INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T) LOSSES AND LOSS ADJUSTMENT EXPENSES Reserves for losses and loss adjustment expenses ("LAE") are established in an amount equal to the Company's estimate of the identified and unidentified losses, including costs of settlement on the obligations it has insured. To the extent that specific insured issues are identified as currently or likely to be in default, the present value of expected payments, including loss and LAE associated with these issues, net of expected recoveries, is allocated within the total loss reserve as case basis reserves. Management of the Company periodically evaluates its estimates for losses and LAE and any resulting adjustments are reflected in current earnings. Management believes that the reserves are adequate to cover the ultimate net cost of claims, but the reserves are necessarily based on estimates, and there can be no assurance that the ultimate liability will not exceed such estimates. MUNICIPAL INVESTMENT AGREEMENTS AND MUNICIPAL REPURCHASE AGREEMENTS Municipal investment agreements and municipal repurchase agreements are recorded as liabilities on the balance sheet at the time such agreements are executed. The liabilities for municipal investment and repurchase agreements are carried at the face value of the agreement plus accrued interest, whereas the related assets are recorded at fair value. Investment management services income reflects investment income on the assets underlying the municipal investment agreement portfolio, net of interest expense at rates specified in the agreements, computed daily based upon the outstanding balances. DERIVATIVES The Company's policies with respect to the use of derivative financial instruments include limitations with respect to the amount, type and concentration of such instruments. The Company uses derivative financial instruments for hedging purposes as part of its overall risk management. Gains and losses on the derivative financial instruments that qualify as accounting hedges of existing assets and liabilities are included in the carrying amounts and amortized over the remaining lives of the assets and liabilities as an adjustment to interest income or expense. When the hedged asset is sold, the unamortized gain or loss on the related hedge is recognized in income. Gains and losses on derivative financial instruments that do not qualify as accounting hedges are recognized in current period income. CONTINGENT COMMISSIONS Contingent commissions may be receivable from the Company's and the Association's reinsurers under various reinsurance treaties and are accrued as the related premiums are earned. INVESTMENT MANAGEMENT SERVICES OPERATIONS For the year ended December 31, 1995, investment management services income is comprised of the net investment income and operating revenues of MBIA/MISC, IMC and SECO. Prior to 1995, investment management services income also included the Company's equity in the earnings of MICC. In 1994, the Company sold its interest in MICC and included the net proceeds from the sale in investment management services income. The operating expenses of MBIA/MISC, IMC and SECO are reported in investment management services expenses. INCOME TAXES Deferred income taxes are provided in respect of temporary differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The Internal Revenue Code permits financial guarantee insurance companies to deduct from taxable income additions to the statutory contingency reserve, subject to certain limitations. The tax benefits obtained from such deductions must be invested in non-interest bearing U.S. Government tax and loss bonds. The Company records purchases of tax and loss bonds as payments of Federal income taxes. The amounts deducted must be restored to taxable income when the contingency reserve is released, at which time the Company may present the tax and loss bonds for redemption to satisfy the additional tax liability. PROPERTY AND EQUIPMENT Property and equipment consists of the Company's headquarters, furniture, fixtures and equipment, which are recorded at cost and, exclusive of land, are depreciated on the straight-line method over their estimated service lives ranging from 3 to 31 years. Maintenance and repairs are charged to expenses as incurred. GOODWILL Goodwill represents the excess of the cost of the acquisitions of MBIA Corp., MISC and MBIA Illinois over the tangible net assets acquired. Goodwill attributed to the acquisition of MBIA Corp. and MISC is amortized by the straight-line method over 25 years. Goodwill attributed to the acquisition of MBIA Illinois is amortized according to the recognition of future profits from its deferred premium revenue and installment premiums, except for a minor portion attributed to state licenses, which is amortized by the straight-line method over 25 years. EARNINGS PER SHARE Earnings per share are computed based on the weighted average number of shares, including common stock equivalents, outstanding during each period. -32- MBIA INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T) FOREIGN CURRENCY TRANSLATION Assets and liabilities denominated in foreign currencies are translated at year-end exchange rates. Operating results are translated at average rates of exchange prevailing during the year. Unrealized gains or losses resulting from translation are included as a separate component of shareholders' equity. NEW ACCOUNTING STANDARDS In October 1995, the Financial Accounting Standards Board issued SFAS 123, "Accounting for Stock-Based Compensation," effective for financial statements for fiscal years beginning after December 15, 1995. SFAS 123 will require the Company to adopt, at its election, either 1) the provisions in SFAS 123 which require the recognition of compensation expense for employee stock-based compensation plans, or 2) the provisions in SFAS 123 which require the pro forma disclosure of net income and earnings per share as if the recognition provisions of SFAS 123 had been adopted. SFAS 123 explicitly provides that employers may continue to account for their employee stock-based compensation plans using the accounting prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). The Company plans to adopt the disclosure requirements of SFAS 123 in 1996 and continue to account for its employee stock-based compensation plans under APB 25. Accordingly, the adoption of SFAS 123 will not have any impact on the Company's financial position or results of operations. 3. STATUTORY ACCOUNTING PRACTICES The financial statements have been prepared on the basis of GAAP, which differs in certain respects from the statutory accounting practices prescribed or permitted by the insurance regulatory authorities. Statutory accounting practices differ from GAAP in the following respects: -premiums are earned only when the related risk has expired rather than over the period of the risk; -acquisition costs are charged to operations as incurred rather than as the related premiums are earned; -a contingency reserve is computed on the basis of statutory requirements, and reserves for losses and LAE are established, at present value, for specific insured issues which are identified as currently or likely to be in default. Under GAAP, reserves are established based on the Company's reasonable estimate of the identified and unidentified losses and LAE on the insured obligations it has written; -Federal income taxes are only provided on taxable income for which income taxes are currently payable, while under GAAP, deferred income taxes are provided with respect to temporary differences; -fixed-maturity securities are reported at amortized cost rather than fair value; -tax and loss bonds purchased are reflected as admitted assets as well as payments of income taxes; and -certain assets designated as "non-admitted assets" are charged directly against surplus but are reflected as assets under GAAP. The following is a reconciliation of consolidated shareholders' equity presented on a GAAP basis for the Company and its consolidated subsidiaries to statutory capital and surplus for MBIA Corp. and its subsidiaries, MBIA Illinois and MBIA Assurance: As of December 31 ----------------------------------------- In thousands 1995 1994 1993 - ------------ ---------- ---------- ---------- Company's GAAP shareholders' equity $2,234,266 $1,704,716 $1,596,358 Contributions to MBIA Corp. 341,202 273,273 263,411 Premium revenue recognition (328,450) (296,524) (242,577) Deferral of acquisition costs (140,348) (133,048) (120,484) Unrealized (gains) losses (319,900) 132,852 (3,447) Contingency reserve (743,510) (620,988) (539,103) Loss and loss adjustment expense reserves 28,024 18,181 26,262 Deferred income taxes 239,304 69,371 100,393 Tax and loss bonds 70,771 50,471 25,771 Goodwill (105,614) (110,543) (115,503) Other (1,607) 22,277 (13,345) ---------- ---------- ---------- Statutory capital and surplus $1,274,138 $1,110,038 $ 977,736 ========== ========== ========== Consolidated net income of MBIA Corp., determined in accordance with statutory accounting practices for the years ended December 31, 1995, 1994 and 1993 was $278.3 million, $224.9 million and $258.4 million, respectively. 4. PREMIUMS EARNED FROM REFUNDED AND CALLED BONDS Premiums earned include $34.0 million, $53.0 million and $85.6 million for 1995, 1994 and 1993, respectively, related to refunded and called bonds. 5. INVESTMENTS The Company's investment objective for its core financial guarantee insurance portfolios is to optimize long-term, after-tax returns while emphasizing the preservation of capital and claims-paying capability through maintenance of high-quality investments with adequate liquidity. The Company's investment policies limit the amount of credit exposure to any one issuer. The fixed-maturity portfolio is comprised of high-quality (average rating Double-A) taxable and tax-exempt investments of diversified maturities. The following tables set forth the amortized cost and fair value of the fixed-maturities and short-term investments included in the consolidated investment portfolio of the Company, as of December 31, 1995 and 1994. Included in the 1995 and 1994 balances are the fixed-maturities and short-term investments held in the municipal investment agreement portfolio, which had an amortized cost of $2.6 billion and $1.7 billion, respectively. -33- MBIA INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T) Gross Gross Amortized Unrealized Unrealized Fair In thousands Cost Gains Losses Value - ------------ ---------- ---------- ---------- --------- December 31, 1995 Taxable bonds United States Treasury and Government Agency $ 334,289 $ 30,594 $ (1) $ 364,882 Corporate and other obligations 2,029,269 74,620 (1,603) 2,102,286 Mortgage-backed 1,271,559 46,180 (1,843) 1,315,896 Tax-exempt bonds State and municipal obligations 2,637,732 175,081 (2,595) 2,810,218 ---------- -------- ------- ---------- Total fixed-maturities $6,272,849 $326,475 $(6,042) $6,593,282 ========== ======== ======= ========== Gross Gross Amortized Unrealized Unrealized Fair In thousands Cost Gains Losses Value - ------------ ---------- ---------- ---------- --------- December 31, 1994 Taxable bonds United States Treasury and Government Agency $ 160,514 $ - $ (2,630) $ 157,884 Corporate and other obligations 1,562,947 2,407 (73,027) 1,492,327 Mortgage-backed 809,208 3,095 (22,850) 789,453 Tax-exempt bonds State and municipal obligations 2,450,928 36,631 (77,998) 2,409,561 ---------- ------- --------- ---------- Total fixed-maturities $4,983,597 $42,133 $(176,505) $4,849,225 ========== ======= ========= ========== Fixed-maturity investments carried at fair value of $8.2 million and $7.4 million as of December 31, 1995 and 1994, respectively, were on deposit with various regulatory authorities to comply with insurance laws. A portion of the obligations under municipal investment and repurchase agreements require the Company to pledge securities as collateral. As of December 31, 1995, the fair value of securities pledged as collateral with respect to these obligations approximated $1.2 billion. The table below sets forth the distribution by expected maturity of the fixed-maturities and short-term investments at amortized cost and fair value at December 31, 1995. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations. In thousands Amortized Cost Fair Value - ------------ -------------- ---------- Maturity Within 1 year $ 400,605 $ 400,533 Beyond 1 year but within 5 years 1,215,919 1,254,408 Beyond 5 years but within 10 years 1,347,840 1,436,025 Beyond 10 years but within 15 years 785,469 848,747 Beyond 15 years but within 20 years 813,460 867,376 Beyond 20 years 437,997 470,297 -- ------- ------- 5,001,290 5,277,386 Mortgage-backed 1,271,559 1,315,896 ---------- ---------- Total fixed-maturities and short-term investments $6,272,849 $6,593,282 ========== ========== 6. INVESTMENT INCOME AND GAINS AND LOSSES Investment income consists of: Years ended December 31 ------------------------------------ In thousands 1995 1994 1993 - ------------ -------- -------- -------- Fixed-maturities $216,653 $194,163 $176,344 Short-term investments 5,834 2,332 3,048 Other investments 217 167 2,206 -------- -------- -------- Gross investment income 222,704 196,662 181,598 Investment expenses 2,846 2,809 2,714 -------- -------- -------- Net investment income 219,858 193,853 178,884 Net realized gains (losses): Fixed-maturities Gains 9,941 9,635 10,167 Losses (2,537) (8,851) (1,055) -------- -------- -------- Net 7,404 784 9,112 -------- -------- -------- Other investments Gains 3,917 9,551 615 Losses (9) - - -------- -------- -------- Net 3,908 9,551 615 -------- -------- -------- Total net realized gains 11,312 10,335 9,727 -------- -------- -------- Total investment income $231,170 $204,188 $188,611 ======== ======== ======== Total investment income excludes investment income and realized gains and losses from MBIA/MISC, IMC and SECO, which are reported in investment management services revenues. Unrealized gains (losses) consist of: As of December 31 ----------------------- In thousands 1995 1994 - ------------ -------- ---------- Fixed-maturities: Gains $326,475 $ 42,133 Losses (6,042) (176,505) -------- --------- Net 320,433 (134,372) Other investments: Gains 287 2,563 Losses (820) (1,043) -------- --------- Net (533) 1,520 -------- --------- Total 319,900 (132,852) Deferred income taxes 112,252 (46,292) -------- --------- Unrealized gains (losses), net $207,648 $ (86,560) ======== ========= The deferred income taxes in 1995 and 1994 relate primarily to unrealized gains and losses on the Company's fixed-maturity investments, which are reflected in shareholders' equity in 1995 and 1994, in accordance with the Company's adoption of SFAS 115. -34- MBIA INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T) The change in net unrealized gains (losses) consists of: As of December 31 -------------------------------------- In thousands 1995 1994 1993 - ------------ --------- --------- --------- Fixed-maturities $ 454,805 $(351,040) $100,413 Other investments (2,053) (9,373) 5,505 --------- --------- -------- Total 452,752 (360,413) 105,918 Deferred income taxes 158,544 (50,105) 1,981 --------- --------- -------- Unrealized gains (losses)- net $ 294,208 $(310,308) $103,937 ========= ========= ======== 7. INCOME TAXES Effective January 1, 1993, the Company changed its method of accounting for income taxes from the income statement-based deferred method to the balance sheet-based liability method required by SFAS 109 "Accounting for Income Taxes." The Company adopted the new pronouncement on the cumulative catch-up basis and recorded a cumulative adjustment, which increased net income and reduced the deferred tax liability by $13.0 million. The cumulative effect represents the impact of adjusting the deferred tax liability to reflect the January 1, 1993 tax rate of 34% as opposed to the higher tax rates in effect when certain of the deferred taxes originated. SFAS 109 requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect on tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The tax effects of temporary differences that give rise to deferred tax assets and liabilities at December 31, 1995 and 1994 are presented below: In thousands 1995 1994 - ------------ -------- --------- Deferred tax assets Tax and loss bonds $ 71,183 $ 50,332 Unrealized losses - 46,292 Alternative minimum tax credit carryforward 36,871 22,391 Loss and loss adjustment expense reserves 9,808 6,363 Other 4,459 4,008 -------- -------- Total gross deferred tax assets 122,321 129,386 -------- -------- Deferred tax liabilities Contingency reserve 127,361 91,439 Deferred premium revenue 65,155 54,523 Deferred acquisition costs 51,455 48,900 Unrealized gains 112,252 - Contingent commissions 4,672 4,746 Other 8,162 6,621 -------- -------- Total gross deferred tax liabilities 369,057 206,229 -------- -------- Net deferred tax liability $246,736 $ 76,843 ======== ======== Under SFAS 109, a change in the statutory tax rate requires a restatement of deferred tax assets and liabilities. Accordingly, the restatement for the change in the 1993 Federal tax rate resulted in a $5.5 million or $0.13 per share increase in the 1993 tax provision, of which $3.2 million or $0.08 per share resulted from the recalculation of deferred taxes at the new Federal rate. The provision for income taxes is composed of: Years ended December 31 --------------------------------- In thousands 1995 1994 1993 - ------------ ------- ------- ------- Current $62,262 $50,146 $57,299 Deferred 11,349 19,067 20,626 ------- ------- ------- Total $73,611 $69,213 $77,925 ======= ======= ======= The provision for income taxes gives effect to permanent differences between financial and taxable income. Accordingly, the Company's effective income tax rate differs from the statutory rate on ordinary income. The reasons for the Company's lower effective tax rates are as follows: Years ended December 31 --------------------------------- In thousands 1995 1994 1993 - ------------ ------- ------- ------- Income taxes computed on pre-tax financial income at statutory rates 35.0% 35.0% 35.0% Increase (reduction) in taxes resulting from: Tax-exempt interest (13.4) (12.9) (11.4) Amortization of goodwill 0.5 0.5 0.6 Other (0.8) (1.6) (0.2) ---- ----- ---- Provision for income taxes 21.3% 21.0% 24.0% ===== ===== ===== 8. DIVIDENDS AND CAPITAL REQUIREMENTS Under New York state insurance law, MBIA Corp. may pay a dividend only from earned surplus subject to the maintenance of a minimum capital requirement. The dividends in any 12-month period may not exceed the lesser of 10% of its policyholders' surplus as shown on its last filed statutory-basis financial statements or of adjusted net investment income, as defined, for such 12-month period, without prior approval of the superintendent of the New York State Insurance Department. In accordance with such restrictions on the amount of dividends which can be paid in any 12-month period, MBIA Corp. had approximately $44 million available for the payment of dividends to the Company as of December 31, 1995. In 1995, 1994 and 1993, MBIA Corp. declared and paid dividends of $83 million, $38 million and $50 million, respectively, to the Company. -35- MBIA INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T) The insurance departments of New York state and certain other statutory insurance regulatory authorities and the agencies which rate the bonds insured by MBIA Corp. and MBIA Assurance have various requirements relating to the maintenance of certain minimum ratios of statutory capital and reserves to net insurance in force. MBIA Corp. and MBIA Assurance were in compliance with these requirements as of December 31, 1995. 9. LONG-TERM DEBT AND LINES OF CREDIT Long-term debt consists of: As of December 31 ---------------------- In thousands 1995 1994 - ------------ -------- -------- 9.000% Notes due 2001 $100,000 $100,000 9.375% Notes due 2011 100,000 100,000 8.200% Debentures due 2022 100,000 100,000 7.000% Debentures due 2025 75,000 - -------- -------- 375,000 300,000 Less unamortized discount 1,100 1,210 -------- -------- $373,900 $298,790 ======== ======== The Company's long-term debt is subject to certain covenants, none of which significantly restrict the Company's operating activities or dividend-paying ability. MBIA Corp. has a standby line of credit commitment in the amount of $650 million with a group of major banks to provide loans to MBIA Corp. after it has incurred cumulative losses (net of any recoveries) from September 30, 1995 in excess of the greater of $500 million and 6.25% of average annual debt service. The obligation to repay loans made under this agreement is a limited recourse obligation payable solely from, and collateralized by, a pledge of recoveries realized on defaulted insured obligations including certain installment premiums and other collateral. This commitment has a seven-year term expiring on September 30, 2002, and contains an annual renewal provision subject to the approval by the bank group. The Company and MBIA Corp. maintain bank liquidity facilities aggregating $275 million. At December 31, 1995, $18 million was outstanding under these facilities. The Company has outstanding letters of credit for MBIA/MISC that are intended to support the net asset value of certain investment pools managed by MBIA/MISC. These letters can be drawn upon in the event the liquidation of such assets at below cost is required. 10. OBLIGATIONS UNDER MUNICIPAL INVESTMENT AGREEMENTS AND MUNICIPAL REPURCHASE AGREEMENTS Obligations under municipal investment agreements and municipal repurchase agreements are recorded as liabilities on the balance sheet based upon proceeds received at the time such agreements are executed plus unpaid accrued interest from that date. Upon the occurrence of certain contractually agreed upon events, some of these funds may be withdrawn at various times prior to maturity at the option of the investor. As of December 31, 1995, the interest rates on these agreements ranged from 3.6% to 8.5%. Principal payments due under these investment agreements in each of the next five years ending December 31, and thereafter, based upon expected withdrawal dates, were as follows: In thousands Principal Amount - ------------------------------------------ Expected Withdrawal Date 1996 $ 936,169 1997 572,535 1998 272,709 1999 93,774 2000 93,644 Thereafter 637,037 ---------- $2,605,868 ========== IMC also provides agreements obligating it to purchase designated securities in a bond reserve fund at par value upon the occurrence of certain contractually agreed upon events. The opportunities and risks in these agreements are analogous to those of municipal investment agreements and municipal repurchase agreements. The total par value of securities subject to these agreements was $43 million at December 31, 1995. 11. NET INSURANCE IN FORCE MBIA Corp. guarantees the timely payment of principal and interest on municipal, asset-/mortgage-backed and other non-municipal securities. MBIA Corp.'s ultimate exposure to credit loss in the event of nonperformance by the insured is represented by the insurance in force as set forth below. The insurance policies issued by MBIA Corp. are unconditional commitments to guarantee timely payment on the bonds and notes to bondholders. The creditworthiness of each insured issue is evaluated prior to the issuance of insurance and each insured issue must comply with MBIA Corp.'s underwriting guidelines. Further, the payments to be made by the issuer on the bonds or notes may be backed by a pledge of revenues, reserve funds, letters of credit, investment contracts or collateral in the form of mortgages or other assets. The right to such money or collateral would typically become MBIA Corp.'s upon the payment of a claim by MBIA Corp. -36- MBIA INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T) As of December 31, 1995, insurance in force, net of cessions to reinsurers, has a range of maturity of 1-43 years. The distribution of net insurance in force by geographic location and type of bond, excluding $2.7 billion and $1.5 billion relating to municipal investment agreements guaranteed by MBIA Corp. in 1995 and 1994, respectively, is set forth in the tables below:
As of December 31 ------------------------------------------------------------------------------------------------ $in billions 1995 1994 - ------------ ---------------------------------------------- ----------------------------------------------- Number % of Net Number % of Net Net Insurance of Issues Insurance Net Insurance of Issues Insurance Geographic Location In Force Outstanding In Force In Force Outstanding In Force - ------------------- ---------------------------------------------- ----------------------------------------------- California $ 51.2 3,122 14.9% $ 43.9 2,832 14.9% New York 27.4 4,679 8.0 23.5 4,360 7.7 Florida 26.9 1,684 7.8 25.4 1,805 8.4 Texas 20.4 2,031 5.9 18.6 2,102 6.1 Pennsylvania 19.7 2,143 5.7 19.5 2,108 6.4 New Jersey 16.4 1,730 4.8 15.0 1,590 4.9 Illinois 15.0 1,090 4.4 14.7 1,139 4.8 Massachusetts 9.3 1,070 2.7 8.6 1,064 2.8 Ohio 9.1 1,017 2.6 8.3 996 2.7 Michigan 7.9 1,012 2.3 5.7 972 1.9 ------ ---------- ---------- --------- ---------- ---------- Subtotal 203.3 19,578 59.1 183.2 18,968 60.1 Other 135.6 11,147 39.4 118.8 10,711 39.1 ------ ---------- ---------- -------- --------- ----------- Total U. S. 338.9 30,725 98.5 302.0 29,679 99.2 International 5.1 53 1.5 2.5 18 0.8 --- -- --- --- -- --- $344.0 30,778 100.0% $304.5 29,697 100.0% ====== ====== ===== ====== ====== =====
As of December 31 ------------------------------------------------------------------------------------------------ $ in billions 1995 1994 - ------------- ---------------------------------------------- ----------------------------------------------- Number % of Net Number % of Net Net Insurance of Issues Insurance Net Insurance of Issues Insurance Type of Bond In Force Outstanding In Force In Force Outstanding In Force - ------------ ---------------------------------------------- ----------------------------------------------- General obligation $ 91.6 11,445 26.6% $ 84.2 11,029 27.7% Utilities 60.3 4,931 17.5 56.0 5,087 18.4 Health care 51.9 2,458 15.1 50.6 2,670 16.6 Transportation 25.5 1,562 7.4 21.3 1,486 7.0 Special revenue 24.4 1,445 7.1 22.7 1,291 7.4 Industrial development and pollution control revenue 17.2 924 5.0 15.1 1,016 5.0 Housing 15.8 2,671 4.6 13.6 2,663 4.5 Higher education 15.2 1,261 4.5 14.0 1,208 4.6 Other 7.3 134 2.1 3.8 124 1.2 ------------ ---------- ------------ ------------ ---------- ------------ 309.2 26,831 89.9 281.3 26,574 92.4 ------------ ---------- ------------ ------------ ---------- ------------ Non-municipal Asset-/mortgage-backed 20.2 256 5.8 12.8 151 4.2 Investor-owned utilities 6.4 3,559 1.9 5.7 2,918 1.9 International 5.1 53 1.5 2.5 18 0.8 Other 3.1 79 0.9 2.2 36 0.7 ------------ ---------- ------------ ----------- ---------- ----------- 34.8 3,947 10.1 23.2 3,123 7.6 ------------ ---------- ------------ ----------- ---------- ----------- $344.0 30,778 100.0% $304.5 29,697 100.0% ============ ========== ============ =========== ========== ===========
-37- MBIA INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T) 12. REINSURANCE MBIA Corp. reinsures portions of its risks with other insurance companies through various quota and surplus share reinsurance treaties and facultative agreements. In the event that any or all of the reinsurers were unable to meet their obligations, MBIA Corp. would be liable for such defaulted amounts. Amounts deducted from gross insurance in force for reinsurance ceded by MBIA Corp., MBIA Assurance and MBIA Illinois were $50.1 billion and $42.6 billion, at December 31, 1995 and 1994, respectively. The distribution of ceded insurance in force by geographic location and type of bond is set forth in the tables below: As of December 31 --------------------------------------------- In billions 1995 1994 ------------------- ---------------------- % of % of Ceded Ceded Ceded Ceded Geographic Insurance Insurance Insurance Insurance Location In Force In Force In Force In Force --------- --------- --------- --------- California $ 8.8 17.5% $ 7.5 17.6% New York 5.7 11.4 4.9 11.5 New Jersey 3.1 6.1 2.0 4.7 Texas 2.8 5.6 2.5 5.9 Pennsylvania 2.7 5.4 2.6 6.1 Florida 2.3 4.6 2.1 4.9 Illinois 2.2 4.5 2.3 5.4 District of Columbia 1.5 3.0 1.6 3.8 Washington 1.4 2.7 1.2 2.8 Puerto Rico 1.3 2.6 1.1 2.6 Massachusetts 1.1 2.1 0.9 2.1 Ohio 1.0 2.0 0.9 2.1 ----- ----- ----- ----- Subtotal 33.9 67.5 29.6 69.5 Other 14.4 28.8 12.3 28.9 ----- ----- ----- ----- Total U. S. 48.3 96.3 41.9 98.4 International 1.8 3.7 0.7 1.6 ----- ----- ----- ----- $50.1 100.0% $42.6 100.0% ===== ===== ===== ===== As of December 31 --------------------------------------------- In billions 1995 1994 ------------------- ---------------------- % of % of Ceded Ceded Ceded Ceded Geographic Insurance Insurance Insurance Insurance Location In Force In Force In Force In Force --------- --------- --------- --------- Municipal General obligation $11.7 23.3% $ 9.7 22.8% Utilities 9.0 18.0 8.5 20.0 Health care 6.6 13.1 6.5 15.3 Transportation 5.5 11.0 4.5 10.6 Special revenue 3.2 6.4 2.7 6.3 Industrial development and pollution control revenue 3.0 6.0 2.9 6.8 Housing 1.4 2.8 1.0 2.3 Higher education 1.2 2.4 1.2 2.8 Other 2.4 4.8 1.5 3.5 ----- ----- ----- ----- 44.0 87.8 38.5 90.4 ----- ----- ----- ----- Non-municipal Asset-/mortgage- backed 3.6 7.2 2.7 6.3 International 1.8 3.7 0.7 1.6 Other 0.7 1.3 0.7 1.7 6.1 12.2 4.1 9.6 ----- ----- ----- ----- $50.1 100.0% $42.6 100.0% ===== ===== ===== ===== Gross premiums written include $0.2 million in 1994 and $5.4 million in 1993 related to the reassumption by MBIA Corp. of reinsurance previously ceded by the Association. Also included in gross premiums in 1993 is $10.8 million of premiums assumed from a member of the Association. Ceded premiums written are net of $0.2 million in 1995, $1.6 million in 1994 and $2.5 million in 1993 related to the reassumption of reinsurance previously ceded by MBIA Corp. or MBIA Illinois. -38- MBIA INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T) 13. PENSION AND PROFIT SHARING PLANS The Company has a pension plan covering eligible employees. The pension plan is a defined contribution plan and the Company contributes 10% of each eligible employee's annual total compensation. Pension expense for the years ended December 31, 1995, 1994 and 1993 was $3.6 million, $3.3 million and $3.3 million, respectively. The Company also has a profit sharing/401(k) plan which allows eligible employees to contribute up to 10% of eligible compensation. The Company matches employee contributions up to the first 5% of total compensation. Company contributions to the profit sharing plan aggregated $1.5 million, $1.4 million and $1.4 million for the years ended December 31, 1995, 1994 and 1993, respectively. The 401(k) plan company match amounts are invested in common stock of the Company. Amounts relating to the above plans that exceed limitations established by Federal regulations are contributed to a non-qualified deferred compensation plan. Of the above amounts for the pension and profit sharing plans, $2.7 million, $2.6 million and $2.6 million for the years ended December 31, 1995, 1994 and 1993, respectively, are included in policy acquisition costs. Effective January 1, 1993, the Company adopted SFAS 106 "Employers' Accounting for Postretirement Benefits Other than Pensions." Under SFAS 106, companies are required to accrue the cost of employee post-retirement benefits other than pensions during the years that employees render service. Prior to January 1, 1993, the Company had accounted for these post-retirement benefits on a cash basis. In 1993, the Company adopted the new pronouncement on the cumulative catch-up basis and recorded a cumulative effect adjustment which decreased net income and increased their liabilities by $0.1 million. As of January 1, 1994, the Company eliminated these post-retirement benefits. 14. LONG-TERM INCENTIVE PLANS On March 2, 1987, the Company adopted a plan for key employees of the Company and its subsidiaries to enable those employees to acquire shares of common stock of the Company or to benefit from appreciation in the price of the common stock of the Company. Options granted will either be Incentive Stock Options ("ISOs"), where they qualify under Section 422(a) of the Internal Revenue Code, or Non-Qualified Stock Options ("NQSOs"). ISOs and NQSOs may be granted at a price not less than 100% of the fair value of the Company's common stock as determined on the date granted. Options will be exercisable as specified at the time of grant and expire ten years from the date of grant (or shorter if specified or following termination of employment). The Board of Directors of the Company has authorized a maximum of 4,753,011 shares of the Company's common stock to be granted as options. As of December 31, 1995, 3,315,777 options had been granted net of expirations and cancellations, leaving the total number available for future grants at 1,437,234. Options granted through 1990 are exercisable in equal annual installments on each of the first three anniversaries of the grant at 100% of the market price at date of grant. The options granted from 1991 through 1994 are exercisable in five equal annual installments commencing one year after the date of grant. On all options granted from 1991 through 1994, accelerated vesting and exercisability of those options is possible if the Company's return on equity for the year is at least equal to the threshold return on equity specified in the annual financial plan and if earnings per share are at least 2.5% greater than plan earnings per share. In December 1995, the MBIA Inc. Board of Directors approved the "MBIA Long-Term Incentive Program." The incentive program includes a stock option program and adds a compensation component linked to the growth in adjusted book value per share ("ABV") of the Company's stock. Awards under the long-term program will be divided equally between the two components, with 50% of the award given in stock options and 50% of the award (multiplied by a 1.5 conversion factor) to be paid in cash or shares of Company stock. Target levels for the option/incentive award are established as a percentage of total salary and bonus, based upon the recipient's position. The awards under the long-term program typically will be granted from the Vice President level up to and including the Chairman and Chief Executive Officer. -39- MBIA INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T) The ABV portion of the long-term incentive program may be awarded every other year. The December 1995 award will cover growth in ABV from December 31, 1995 through December 31, 1998, with a base line growth of 12%. The amount to be paid in respect of such award will be adjusted upward or downward based on the actual ABV growth with a minimum growth of 8% necessary to receive any payment and an 18% growth needed to receive the maximum payment of 200% of the target levels. The amount, if any, to be paid under this portion of the program will be paid in early 1999 in the form of cash or shares of the Company's common stock. Subsequent awards, if any, will be made every other year with concomitant payments occurring after the three-year cycle. During 1995, $0.2 million was recorded as expense related to the December 1995 ABV award. The stock option grants, which may continue to be awarded every year, provide the right to purchase shares of common stock at the fair market value (closing price) of the stock on the date of the grant. Each option vests over five years and has a ten-year term. Prior option grants are not taken into account in determining the number of options granted in any year. In December 1995, 97,300 options were awarded. In December 1995, the Company adopted a restricted stock program whereby key executive officers were granted restricted shares of the Company's stock. Shares were awarded in the name of the employee, who has all rights of a shareholder, subject to certain restrictions or forfeitures. This stock award may only be sold after three years from the date of grant, at which time the award fully vests. For the year ended 1995, a total of 5,640 restricted shares of the Company's stock were granted. The fair value of the shares awarded, determined on the grant date, is $0.4 million and has been recorded as "Unearned compensation - restricted stock" and is shown as a separate component of shareholders' equity. Unearned compensation is amortized to expense over the three-year vesting period. Additional information with respect to stock options is summarized below: 1995 ----------------------------- Number Option Price Options of Shares Per Share - ------- ---------- ---------------- Outstanding at beginning of year 2,091,087 $16.500 - 69.00 Granted 97,300 - 77.125 Exercised 382,447 16.500 - 69.00 Expired or canceled 33,460 50.125 - 69.00 ---------- ---------------- Outstanding at year-end 1,772,480 $16.500 - 77.125 ---------- ---------------- Exercisable at year-end 1,177,100 $16.500 - 69.00 ========== ================ 1994 ----------------------------- Number Option Price Options of Shares Per Share - ------- ---------- ---------------- Outstanding at beginning of year 1,591,487 $16.500 - 69.00 Granted 552,700 50.125 - 60.125 Exercised 47,080 23.500 - 50.00 Expired or canceled 6,020 35.125 - 69.00 ---------- ---------------- Outstanding at year-end 2,091,087 $16.500 - 69.00 ---------- ---------------- Exercisable at year-end 1,376,847 $16.500 - 69.00 ========== ================ 1993 ----------------------------- Number Option Price Options of Shares Per Share - ------- ---------- ---------------- Outstanding at beginning of year 1,559,675 $16.500 - 50.00 Granted 208,400 - 69.00 Exercised 170,588 16.500 - 50.00 Expired or canceled 6,000 35.125 - 69.00 ---------- ---------------- Outstanding at year-end 1,591,487 $16.500 - 69.00 ---------- ---------------- Exercisable at year-end 1,141,301 $16.500 - 50.00 ========== ================ 15. Shareholders' Rights Plan In December 1991, the Board of Directors of the Company declared a dividend distribution of one preferred share purchase right (a "Right") for each outstanding share of the Company's common stock. Each Right entitles its holder to purchase from the Company one one-hundredth of a share of the Company's Junior Participating Cumulative Preferred Shares at a price of $160, subject to certain adjustments. Initially, the Rights are attached to the common stock and will not be transferable separately nor become exercisable until the earlier to occur of (i) ten business days following the date of the public announcement by the Company (the "Shares Acquisition Date") that a person or group of persons has acquired or obtained the right to acquire beneficial ownership of 10% or more of the outstanding shares of the Company's common stock and (ii) ten business days (or later as may be determined by the Board of Directors) after the announcement or commencement of a tender offer or exchange offer which, if successful, would result in the bidder owning 10% or more of the outstanding -40- MBIA INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T) shares of the Company's common stock. However, no person shall be deemed to have acquired or obtained the right to acquire the beneficial ownership of 10% or more of the outstanding shares of the Company's common stock, if the Board of Directors determines that such acquisition is inadvertent, and such person promptly divests itself of a sufficient number of shares to be below the 10% ownership threshold. If the acquiring person or group acquires beneficial ownership of 10% or more of the Company's common stock (except pursuant to a tender or exchange offer for all outstanding common stock of the Company, determined by the Company's independent directors to be at a fair price and in the best interests of the Company and its shareholders), each holder of a Right (other than the acquirer) will be entitled to purchase, for $160, that number of shares of common stock of the Company having a fair value of $320. Similarly, if after an acquiring person or group so acquires 10% or more of the Company's common stock, the Company is acquired in a merger or other business combination and is not the surviving entity, or its common stock is changed or exchanged in whole or in part, or 50% or more of the Company's assets, cash flow or earning power is sold, each holder of a Right (other than the acquirer) will be entitled to purchase, for $160, that number of shares of common stock of the acquiring company having a fair value of $320. The Board of Directors may redeem the Rights in whole at $.01 per Right at any time prior to ten business days following the Shares Acquisition Date. Further, at any time after a person or group acquires 10% or more, but less than 50%, of the Company's common stock, the Board of Directors of the Company may exchange the Rights (other than those held by the acquirer) in whole or in part, at an exchange ratio of one share of common stock per Right. The Board of Directors may also amend the Rights at any time prior to the Shares Acquisition Date. The Rights will expire on December 12, 2001, unless earlier redeemed or exchanged. 16. RELATED PARTY TRANSACTIONS The business assumed from the Association, relating to insurance on unit investment trusts sponsored by two members of the Association, includes deferred premium revenue of $1.6 million and $1.9 million at December 31, 1995 and 1994, respectively. Since 1989, MBIA Corp. has executed five surety bonds to guarantee the payment obligations of the members of the Association, one of which is a principal shareholder, which had their Standard & Poor's Corporation claims-paying rating downgraded from Triple-A on their previously issued Association policies. In the event that they do not meet their Association policy payment obligations, MBIA Corp. will pay the required amounts directly to the paying agent instead of to the former Association member as was previously required. The aggregate outstanding exposure on these surety bonds as of December 31, 1995 is $340 million. Included in other investments at December 31, 1994 are 78,000 shares of common stock of Credit Local de France, a major shareholder. In 1995, the Company sold these shares, and realized gains from the sale of $3.5 million. The Company has investment management and advisory agreements with an affiliate of a principal shareholder, which provides for payment of fees on assets under management. Total related expenses for the years ended December 31, 1995, 1994 and 1993 amounted to $2.5 million, $2.6 million and $2.5 million, respectively. These agreements were terminated on January 1, 1996 at which time SECO commenced management of MBIA Corp.'s consolidated investment portfolios. The Company has various insurance coverages provided by a principal shareholder, the cost of which totaled $1.9 million, $1.9 million and $2.0 million, respectively, for the years ended December 31, 1995, 1994 and 1993. 17. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair value amounts of financial instruments shown in the following table have been determined by the Company using available market information and appropriate valuation methodologies. However, in certain cases considerable judgment is necessarily required to interpret market data to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amount the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. FIXED-MATURITY SECURITIES - The fair value of fixed-maturity securities equals quoted market price, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. SHORT-TERM INVESTMENTS - Short-term investments are carried at amortized cost which, because of their short duration, is a reasonable estimate of fair value. -41- MBIA INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T) OTHER INVESTMENTS - Other investments consist principally of marketable equity securities as well as the Company's interest in limited partnerships and a mutual fund, both of which invest primarily in marketable equity securities. The fair value of other investments is based on quoted market prices. MUNICIPAL INVESTMENT AGREEMENT PORTFOLIO - The municipal investment agreement portfolio is comprised of fixed-maturity securities and short-term investments. Its fair value equals the quoted market price, if available, of its fixed-maturities plus the amortized cost of its short-term investments, which because of their short duration, is a reasonable estimate of fair value. If a quoted market price is not available for a fixed-maturity security, fair value is estimated using quoted market prices for similar securities. CASH AND CASH EQUIVALENTS, RECEIVABLE FOR INVESTMENTS SOLD, SHORT-TERM DEBT AND PAYABLE FOR INVESTMENTS PURCHASED - The carrying amounts of these items are a reasonable estimate of their fair value. PREPAID REINSURANCE PREMIUMS - The fair value of the Company's prepaid reinsurance premiums is based on the estimated cost of entering into an assumption of the entire portfolio with third party reinsurers under current market conditions. DEFERRED PREMIUM REVENUE - The fair value of the Company's deferred premium revenue is based on the estimated cost of entering into a cession of the entire portfolio with third party reinsurers under current market conditions. LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES - The carrying amount is composed of the present value of the expected cash flows for specifically identified claims combined with an estimate for unidentified claims. Therefore, the carrying amount is a reasonable estimate of the fair value of the reserve. LONG-TERM DEBT - The fair value is estimated based on the quoted market prices for the same or similar securities. MUNICIPAL INVESTMENT AGREEMENTS AND MUNICIPAL REPURCHASE AGREEMENTS - The fair values of municipal investment agreements and municipal repurchase agreements are estimated using discounted cash flow calculations based upon interest rates currently being offered for similar agreements with maturities consistent with those remaining for the agreements being valued. INSTALLMENT PREMIUMS - The fair value is derived by calculating the present value of the estimated future cash flow stream discounted at 9% and 13.25% at December 31, 1995 and December 31, 1994, respectively. As of December 31, 1995 As of December 31, 1994 ----------------------- ----------------------- Carrying Estimated Carrying Estimated In thousands Amount Fair Value Amount Fair Value - ------------ ---------- ---------- ---------- ----------- Assets: Fixed-maturity securities $3,652,621 $3,652,621 $3,051,906 $3,051,906 Short-term investments 198,035 198,035 121,384 121,384 Other investments 14,064 14,064 17,550 17,550 Municipal investment agreement portfolio 2,742,626 2,742,626 1,675,935 1,675,935 Cash and cash equivalents 23,258 23,258 7,940 7,940 Prepaid reinsurance premiums 200,887 174,444 186,492 159,736 Receivable for investments sold 6,100 6,100 945 945 Liabilities: Deferred premium revenue 1,616,315 1,395,159 1,512,211 1,295,305 Loss and loss adjustment expense reserves 42,505 42,505 40,148 40,148 Long-term debt 373,900 427,193 298,790 299,315 Short-term debt 18,000 18,000 17,000 17,000 Municipal investment agreements 2,026,709 2,091,895 1,334,177 1,287,939 Municipal repurchase agreements 615,776 665,564 191,956 188,487 Payable for investments purchased 10,695 10,695 209,966 209,966 Off-balance sheet instruments: Installment premiums - 235,371 - 176,944 18. SUBSEQUENT EVENT In February 1996, the Company completed a public offering of 3,890,000 shares of the Company's common stock. Of the shares offered, 3,120,000 were sold by an existing shareholder and 770,000 were new shares offered by the Company. The company realized $55 million in new capital from the offering. -42- MBIA INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T) 19. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) A summary of selected quarterly income statement information follows: Dollars in thousands except per share amounts 1995 First Second Third Fourth Year - ---- ------- -------- -------- -------- -------- Gross premiums written $70,834 $106,343 $ 92,022 $ 79,288 $348,487 Net premiums written 63,754 94,294 78,945 66,444 303,437 Premiums earned 51,074 53,888 55,609 54,501 215,072 Investment income and realized gains and losses 54,594 55,482 57,536 57,466 225,078 All other revenues 5,112 4,563 5,585 6,812 22,072 Income before income taxes 83,522 85,766 89,008 86,734 345,030 Net income $66,006 $ 67,307 $ 69,834 $ 68,272 $271,419 ------- -------- -------- -------- -------- Net income per common share $ 1.57 $ 1.60 $ 1.65 $ 1.61 $ 6.43 ------- -------- -------- -------- -------- 1994 First Second Third Fourth Year - ---- ------- -------- -------- -------- -------- Gross premiums written $84,311 $109,975 $ 80,099 $ 86,451 $ 360,836 Net premiums written 76,513 91,098 68,088 75,856 311,555 Premiums earned 54,452 53,688 54,730 55,459 218,329 Investment income and realized gains and losses 52,637 50,502 50,158 50,165 203,462 All other revenues 2,538 5,884 5,124 4,199 17,745 Income before income taxes 82,909 83,022 82,513 80,978 329,422 Net income $65,741 $ 64,951 $ 65,047 $ 64,470 $260,209 ------- -------- -------- -------- -------- Net income per common share $ 1.56 $ 1.54 $ 1.54 $ 1.53 $ 6.18 ------- -------- -------- -------- -------- 1993 First Second Third Fourth Year - ---- ------- -------- -------- -------- -------- Gross premiums written $98,025 $154,315 $110,022 $116,985 $479,347 Net premiums written 89,189 133,992 103,535 105,079 431,795 Premiums earned 53,465 58,921 61,237 57,653 231,276 Investment income and realized gains and losses 45,014 47,287 46,333 50,063 188,697 All other revenues 1,834 2,726 2,652 1,793 9,005 Income before income taxes 75,379 82,404 84,405 81,847 324,035 Net income $72,651 $ 63,841 $ 59,817 $ 62,724 $ 259,033 ------- -------- -------- -------- -------- Net income per common share $ 1.71 $ 1.50 $ 1.41 $ 1.48 $ 6.10 ------- -------- -------- -------- -------- Due to the changes in the number of shares outstanding, quarterly per share amounts may not add to the totals for the years. -43- BOARD OF DIRECTORS DAVID H. ELLIOTT (2,4) Chairman and Chief Executive Officer MBIA Inc. WILLIAM O. BAILEY (4,5) Chairman Terra Nova (Bermuda) Holdings, Ltd. JOSEPH W. BROWN, JR. (3,4,5) Chairman, President and Chief Executive Officer Talegen Holdings, Inc. DAVID C. CLAPP (3,5,6) Limited Partner Goldman Sachs & Co. CLAIRE L. GAUDIANI (2,3) President Connecticut College WILLIAM H. GRAY, III (1,2) President and Chief Executive Officer United Negro College Fund, Inc. FREDA S. JOHNSON (1,6) President Government Finance Associates, Inc. DANIEL P. KEARNEY (3,4,6) Executive Vice President Aetna Life and Casualty Company JAMES A. LEBENTHAL (1,4,6) Chairman Lebenthal & Co., Inc. ROBERT B. NICHOLAS (1,6) Private Investor PIERRE-HENRI RICHARD Chairman and Chief Executive Officer Credit Local de France JOHN A. ROLLS President and Chief Executive Officer Deutsche Bank North America* PAUL A. VOLCKER Chairman James D. Wolfensohn Inc. (Retired from the MBIA Inc. board, September 1, 1995) RICHARD L. WEILL (5) President MBIA Inc. Board Committees 1. Audit 2. Committee on Directors 3. Compensation and Organization 4. Executive 5. Finance 6. Risk Oversight SENIOR OFFICERS** MBIA INC. DAVID H. ELLIOTT Chairman and Chief Executive Officer RICHARD L. WEILL President JAMES E. MALLING Executive Vice President JANIS STRONG CHRISTENSEN Senior Vice President LOUIS G. LENZI General Counsel and Secretary KEVIN D. SILVA Senior Vice President JULLIETTE S. TEHRANI Senior Vice President and Chief Financial Officer CHRISTOPHER W. TILLEY Senior Vice President and Treasurer ELIZABETH BREEN SULLIVAN Vice President and Controller MBIA INSURANCE CORPORATION DAVID H. ELLIOTT Chairman and Chief Executive Officer RICHARD L. WEILL President NEIL G. BUDNICK Senior Vice President, Assistant to the Chairman LOUIS G. LENZI General Counsel and Secretary THOMAS O. SCHERER Senior Vice President, Director of Risk Assessment CORPORATE MARKETING, CORPORATE DEVELOPMENT AND MANAGEMENT SERVICES JAMES E. MALLING Executive Vice President MARGARET D. GARFUNKEL Senior Vice President, Director of Corporate Development PAUL C. O'SHEA Senior Vice President, Director of Corporate Marketing KEVIN D. SILVA Senior Vice President, Director of Management Services FINANCE JULLIETTE S. TEHRANI Senior Vice President and Chief Financial Officer CHRISTOPHER W. TILLEY Senior Vice President and Treasurer INSURANCE OPERATIONS WILLIAM G. GALLAGHER Senior Vice President, Director of Institutional, Retail and Issuer Marketing GARY P. KARVELIS Senior Vice President, Director of Secondary Market Products THOMAS A. LANDERS Senior Vice President, Director of Market Research MICHAEL J. MAGUIRE Senior Vice President, Director of International Operations DAVID C. STEVENS Senior Vice President, Director of Insured Portfolio Management UNDERWRITING POLICY AND REVIEW JANIS STRONG CHRISTENSEN Senior Vice President, Director of Underwriting Policy and Review MBIA ASSURANCE S.A. MICHAEL J. MAGUIRE President SERGE MARLE Directeur General MBIA INVESTMENT MANAGEMENT CORP. MARGARET D. GARFUNKEL President MBIA MUNICIPAL INVESTORS SERVICE CORPORATION LEON J. KARVELIS, JR. President FRANCIE HELLER Executive Vice President MBIA SECURITIES CORP. Robert M. Ohanesian President *Mr. Rolls became president and chief executive officer of Thermion Systems International in February 1996. **On January 2, 1996, Senior Vice Presidents Arthur M. Warren, Hilda H. Boas and William P. Condon retired. Mr. Warren was succeeded by Julliette S. Tehrani on October 1, 1995 as chief financial officer, and Ms. Boas was succeeded by Kevin D. Silva, who became senior vice president, director of management services on January 1, 1996. Mr. Condon was director of the public finance group. -44- MBIA INC. AND SUBSIDIARIES SHAREHOLDER INFORMATION CORPORATE HEADQUARTERS MBIA Inc. 113 King Street Armonk, New York 10504 914 273-4545 COMMON STOCK LISTING MBIA Inc. common stock is listed on the New York Stock Exchange (symbol: MBI). The approximate number of shareholders of record of MBIA's common stock, including individual owners, was 454 as of December 31, 1995. COMMON STOCK DATA Dividends Paid Market Price* Per Share High Low Close - ---------------------------------------------------- 1995 1st Quarter $.31 64 55 3/8 63 1/4 2nd Quarter .31 69 1/4 59 5/8 66 1/2 3rd Quarter .31 72 3/8 63 1/4 70 5/8 4th Quarter .34 1/2 77 1/2 69 1/4 75 1994 1st Quarter $.26 65 1/4 53 1/2 54 5/8 2nd Quarter .26 61 52 3/4 57 3/8 3rd Quarter .26 62 1/2 56 5/8 59 5/8 4th Quarter .31 59 7/8 47 1/4 56 1/8 *Based on New York Stock Exchange trading data DIVIDEND POLICY Quarterly dividends on MBIA Inc. common stock, when declared, are usually paid on the 15th day of January, April, July and October. ANNUAL MEETING Shareholders are invited to attend our annual meeting, which will be held on Thursday, May 9, 1996 at 10 a.m. at MBIA Inc. in Armonk, New York. SHAREHOLDER INFORMATION Individuals seeking additional information about the company should contact: Judith C. Radasch Vice President, Investor Relations 914 765-3014 Julliette S. Tehrani Senior Vice President and Chief Financial Officer 914 765-3020 TRANSFER AGENT, REGISTRAR AND DIVIDEND DISBURSING AGENT Chemical Mellon Shareholder Services, L.L.C. 85 Challenger Road Overpeck Centre Ridgefield Park, New Jersey 07660 800 288-9541 AUDITORS Coopers & Lybrand L.L.P. New York, New York FORM 10-K A copy of the Company's Form 10-K report to the Securities and Exchange Commission can be obtained by writing to Shareholder Information at MBIA Inc. QUARTERLY REPORTS If you would like to receive quarterly shareholder reports from MBIA, please contact Shareholder Information at MBIA Inc. The company distributes quarterly shareholder reports only on request. -Back Cover- EX-21 5 SUBSIDIARIES Exhibit 21 Subsidiaries of MBIA Inc. Name of Subsidiary State of Incorporation MBIA Insurance Corp. (formerly known as Municipal Bond Investors Assurance Corporation) New York MBIA Assurance S.A. France MBIA Service Corporation Delaware Municipal Issuers Service Corporation New York MBIA Municipal Investors Service Corporation Delaware MBIA Capital Corp. Delaware MBIA Insurance Corp. of Illinois (formerly known Illinois as Bond Investors Guaranty Insurance Company) MBIA Investment Management Corp. Delaware MBIA Securities Corp. Delaware Bond Investors Guaranty Services, Inc. New York EX-23 6 CONSENT CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference into the Registration Statements on Form S-8 (Nos. 33-22441 and 33-46062) of: (1) Our report dated January 22, 1996, on our audits of the consolidated financial statements of MBIA Inc. and Subsidiaries as of December 31, 1995 and 1994, and for each of the three years in the period ended December 31, 1995, which report is incorporated by reference in this 1995 Annual Report on Form 10-K; and (2) Our report dated January 22, 1996, on our audits of the financial statement schedules of MBIA Inc. and Subsidiaries, which report is included in this 1995 Annual Report on Form 10-K. New York, New York March 27, 1996 EX-24 7 POWER OF ATTORNEY POWER OF ATTORNEY The undersigned hereby constitutes and appoints each of David H. Elliott, Richard L. Weill and Louis G. Lenzi as his/her true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him/her and in his/her name, place and stead, in any and all capacities, to sign the Annual Report on Form 10-K of MBIA Inc. for the year ended December 31, 1995 and any or all amendments thereto, and to file the same, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as they might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his/her substitute, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have set my hand and seal this 9th day of March, 1996 - ------------------------ William O. Bailey /s/ Joseph W. Brown - ------------------------ /s/ David C. Clapp - ------------------------ /s/ Claire L. Gaudiani - ------------------------ - ------------------------ William H. Gray /s/ Freda S. Johnson - ------------------------ /s/ Daniel P. Kearney - ------------------------ /s/ James A. Lebenthal - ------------------------ /s/ Robert B. Nicholas - ------------------------- /s/ Pierre-Henir Richard - ------------------------- /s/ John A. Rolls - ------------------------- EX-27 8 FDS
7 1,000 YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 3,652,621 0 0 0 0 0 6,607,346 23,258 0 140,348 7,267,450 42,505 1,616,315 0 0 391,900 0 0 42,077 2,192,189 7,267,450 215,072 219,858 11,312 15,980 10,639 21,283 41,805 345,030 73,611 271,419 0 0 0 271,419 6.43 6.41 0 0 0 0 0 0 0
EX-99 9 Y/E 95 CORP GAAP MBIA INSURANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 1995 and 1994 and for the years ended December 31, 1995, 1994 and 1993 REPORT OF INDEPENDENT ACCOUNTANTS --------------------------------- TO THE BOARD OF DIRECTORS AND SHAREHOLDER OF MBIA INSURANCE CORPORATION: We have audited the accompanying consolidated balance sheets of MBIA Insurance Corporation and Subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, changes in shareholder's equity and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of MBIA Insurance Corporation and Subsidiaries as of December 31, 1995 and 1994, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. As discussed in Note 7 to the consolidated financial statements, effective January 1, 1993 the Company adopted Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes." As discussed in Note 2 to the consolidated financial statements, effective January 1, 1994 the Company adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." \s\ COOPERS & LYBRAND New York, New York January 22, 1996 MBIA INSURANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands except per share amounts)
December 31, 1995 December 31, 1994 ------------------- ---------------- ASSETS Investments: Fixed maturity securities held as available-for-sale at fair value (amortized cost $3,428,986 and $3,123,838 $3,652,621 3,051,906 Short-term investments, at amortized cost (which approximates fair value) 198,035 121,384 Other investments 14,064 11,970 ------------ ------------ Total investments 3,864,720 3,185,260 Cash and cash equivalents 2,135 1,332 Accrued investment income 60,247 55,347 Deferred acquisition costs 140,348 133,048 Prepaid reinsurance premiums 200,887 186,492 Goodwill (less accumulated amortization of $37,366 and $32,437) 105,614 110,543 Property and equipment, at cost (less accumulated depreciation of $12,137 and $9,501) 41,169 39,648 Receivable for investments sold 5,729 945 Other assets 42,145 46,552 ------------ ------------ TOTAL ASSETS $4,462,994 $3,759,167 ============ =========== LIABILITIES AND SHAREHOLDER'S EQUITY Liabilities: Deferred premium revenue $ 1,616,315 $ 1,512,211 Loss and loss adjustment expense reserves 42,505 40,148 Deferred income taxes 212,925 97,828 Payable for investments purchased 10,695 6,552 Other liabilities 54,682 46,925 ------------ ------------ TOTAL LIABILITIES 1,937,122 1,703,664 ------------ ------------ Shareholder's Equity: Common stock, par value $150 per share; authorized, issued and outstanding - 100,000 shares 15,000 15,000 Additional paid-in capital 1,021,584 953,655 Retained earnings 1,341,855 1,134,061 Cumulative translation adjustment 2,704 427 Unrealized appreciation (depreciation) of investments, net of deferred income tax provision (benefit) of $78,372 and $(25,334) 144,729 (47,640) ------------ ------------ TOTAL SHAREHOLDER'S EQUITY 2,525,872 2,055,503 ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $4,462,994 $3,759,167 ============ ============ The accompanying notes are an integral part of the consolidated financial statements.
MBIA INSURANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands)
Years ended December 31 ---------------------------------------- 1995 1994 1993 --------- ---------- ---------- Revenues: Gross premiums written $349,812 $361,523 $479,390 Ceded premiums (45,050) (49,281) (47,552) ---------- ---------- ---------- Net premiums written 304,762 312,242 431,838 Increase in deferred premium revenue (88,365) (93,226) (200,519) ---------- ---------- ---------- Premiums earned (net of ceded premiums of $30,655 $33,340 and $41,409) 216,397 219,016 231,319 Net investment income 219,834 193,966 175,329 Net realized gains 7,777 10,335 8,941 Other income 2,168 1,539 3,996 ---------- ---------- ---------- Total revenues 446,176 424,856 419,585 ---------- ---------- ---------- Expenses: Losses and loss adjustment expenses 10,639 8,093 7,821 Policy acquisition costs, net 21,283 21,845 25,480 Underwriting and operating expenses 41,812 41,044 38,006 ---------- ---------- ---------- Total expenses 73,734 70,982 71,307 ---------- ---------- ---------- Income before income taxes and cumulative effect of accounting changes 372,442 353,874 348,278 Provision for income taxes 81,748 77,125 86,684 ---------- ---------- ---------- Income before cumulative effect of accounting changes 290,694 276,749 261,594 Cumulative effect of accounting changes --- --- 12,923 ---------- ---------- ---------- Net income $290,694 $276,749 $274,517 ========== ========== ========== The accompanying notes are an integral part of the consolidated financial statements.
MBIA INSURANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY For the years ended December 31, 1995, 1994 and 1993 (Dollars in thousands except per share amounts)
Unrealized Additional Cumulative Appreciation Common Stock Paid-in Retained Translation (Depreciation) Shares Amount Capital Earnings Adjustment of Investments ------- -------- ---------- ---------- ---------- -------------- Balance, January 1, 1993 100,000 $ 15,000 $ 931,943 $ 670,795 $ (474) $ 2,379 Net income --- --- --- 274,517 --- --- Change in foreign currency translation --- --- --- --- (729) --- Change in unrealized appreciation of investments net of change in deferred income taxes of $(1,381) --- --- --- --- --- 2,461 Dividends declared (per common share $500.00) --- --- --- (50,000) --- --- Tax reduction related to tax sharing agreement with MBIA Inc. --- --- 11,851 --- --- --- ------- -------- ---------- ---------- ---------- ------------ Balance, December 31, 1993 100,000 15,000 943,794 895,312 (1,203) 4,840 ------- -------- ---------- ---------- ---------- ------------ Net income --- --- --- 276,749 --- --- Change in foreign currency translation --- --- --- --- 1,630 --- Change in unrealized depreciation of investments net of change in deferred income taxes of $27,940 --- --- --- --- --- (52,480) Dividends declared (per common share $380.00) --- --- --- (38,000) --- --- Tax reduction related to tax sharing agreement with MBIA Inc. --- --- 9,861 --- --- --- ------- -------- ---------- ---------- ---------- ------------ Balance, December 31, 1994 100,000 15,000 953,655 1,134,061 427 (47,640) ------- -------- ---------- ---------- ---------- ------------ Exercise of stock options --- --- 5,403 --- --- --- Net income --- --- --- 290,694 --- --- Change in foreign currency translation --- --- --- --- 2,277 --- Change in unrealized appreciation of investments net of change in deferred income taxes of $(103,707) --- --- --- --- --- 192,369 Dividends declared (per common share $829.00) --- --- --- (82,900) --- --- Capital contribution from MBIA Inc. --- --- 52,800 --- --- --- Tax reduction related to tax sharing agreement with MBIA Inc. --- --- 9,726 --- --- --- ======= ======== ========== ========== ========== ============ Balance, December 31, 1995 100,000 $ 15,000 $1,021,584 $1,341,855 $ 2,704 $144,729 ======= ======== ========== ========== ========== ============ The accompanying notes are an integral part of the consolidated financial statements.
MBIA INSURANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
Years ended December 31 ----------------------------------------- 1995 1994 1993 ----------- ------------ ------------ Cash flows from operating activities: Net income $290,694 $276,749 $274,517 Adjustments to reconcile net income to net cash provided by operating activities: Increase in accrued investment income (4,900) (3,833) (5,009) Increase in deferred acquisition costs (7,300) (12,564) (10,033) Increase in prepaid reinsurance premiums (14,395) (15,941) (6,143) Increase in deferred premium revenue 104,104 109,167 206,662 Increase in loss and loss adjustment expense reserves 2,357 6,413 8,225 Depreciation 2,676 1,607 1,259 Amortization of goodwill 4,929 4,961 5,001 Amortization of bond (discount) premium, net (2,426) 621 (743) Net realized gains on sale of investments (7,778) (10,335) (8,941) Deferred income taxes 11,391 19,082 7,503 Other, net 29,080 (8,469) 15,234 ----------- ------------ ------------ Total adjustments to net income 117,738 90,709 213,015 ----------- ------------ ------------ Net cash provided by operating activities 408,432 367,458 487,532 ----------- ------------ ------------ Cash flows from investing activities: Purchase of fixed maturity securities, net of payable for investments purchased (897,128) (1,060,033) (786,510) Sale of fixed maturity securities, net of receivable for investments sold 473,352 515,548 205,342 Redemption of fixed maturity securities, net of receivable for investments redeemed 83,448 128,274 225,608 (Purchase) sale of short-term investments, net (32,281) 3,547 (40,461) (Purchase) sale of other investments, net (692) 87,456 (37,777) Capital expenditures, net of disposals (4,228) (3,665) (3,601) ----------- ------------ ------------ Net cash used in investing activities (377,529) (328,873) (437,399) ----------- ------------ ------------ Cash flows from financing activities: Capital contribution from MBIA Inc. 52,800 --- --- Dividends paid (82,900) (38,000) (50,000) ----------- ------------ ------------ Net cash used by financing activities (30,100) (38,000) (50,000) ----------- ------------ ------------ Net increase in cash and cash equivalents 803 585 133 Cash and cash equivalents - beginning of year 1,332 747 614 ----------- ------------ ------------ Cash and cash equivalents - end of year $2,135 $1,332 $747 =========== ============ ============ Supplemental cash flow disclosures: Income taxes paid $ 50,790 $ 53,569 $ 52,967 The accompanying notes are an integral part of the consolidated financial statements.
MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BUSINESS AND ORGANIZATION MBIA Insurance Corporation ("MBIA Corp."), formerly known as Municipal Bond Investors Assurance Corporation, is a wholly owned subsidiary of MBIA Inc. MBIA Inc. was incorporated in Connecticut on November 12, 1986 as a licensed insurer and, through the following series of transactions during December 1986, became the successor to the business of the Municipal Bond Insurance Association (the "Association"), a voluntary unincorporated association of insurers writing municipal bond and note insurance as agent for the member insurance companies: o MBIA Inc. acquired for $17 million all of the outstanding common stock of New York domiciled insurance company and changed the name of the insurance company to Municipal Bond Investors Assurance Corporation. In April 1995, the name was again changed to MBIA Insurance Corp. Prior to the acquisition, all of the obligations of this company were reinsured and/or indemnified by the former owner. o Four of the five member companies of the Association, together with their affiliates, purchased all of the outstanding common stock of MBIA Inc. and entered into reinsurance agreements whereby they ceded to MBIA Inc. substantially all of the net unearned premiums on existing and future Association business and the interest in, or obligation for, contingent commissions resulting from their participation in the Association. MBIA Inc.'s reinsurance obligations were then assumed by MBIA Corp. The participation of these four members aggregated approximately 89% of the net insurance in force of the Association. The net assets transferred from the predecessor included the cash transferred in connection with the reinsurance agreements, the related deferred acquisition costs and contingent commissions receivable, net of the related unearned premiums and contingent commissions payable. The deferred income taxes inherent in these assets and liabilities were recorded by MBIA Corp. Contingent commissions receivable (payable) with respect to premiums earned prior to the effective date of the reinsurance agreements by the Association in accordance with statutory accounting practices, remained as assets (liabilities) of the member companies. Effective December 31, 1989, MBIA Inc. acquired for $288 million all of the outstanding stock of Bond Investors Group, Inc. ("BIG"), the parent company of Bond Investors Guaranty Insurance Company ("BIG Ins."), which was subsequently renamed MBIA Insurance Corp. of Illinois ("MBIA Illinois"). -6- MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) In January 1990, MBIA Illinois ceded its portfolio of net insured obligations to MBIA Corp. in exchange for cash and investments equal to its unearned premium reserve of $153 million. Subsequent to this cession, MBIA Inc. contributed the common stock of BIG to MBIA Corp. resulting in additional paid-in capital of $200 million. The insured portfolio acquired from BIG Ins. consists of municipal obligations with risk characteristics similar to those insured by MBIA Corp. On December 31, 1990, BIG was merged into MBIA Illinois. Also in 1990, MBIA Inc. formed MBIA Assurance S.A. ("MBIA Assurance"), a wholly owned French subsidiary, to write financial guarantee insurance in the international community. MBIA Assurance provides insurance for public infrastructure financings, structured finance transactions and certain obligations of financial institutions. The stock of MBIA Assurance was contributed to MBIA Corp. in 1991 resulting in additional paid-in capital of $6 million. Pursuant to a reinsurance agreement with MBIA Corp., a substantial amount of the risks insured by MBIA Assurance is reinsured by MBIA Corp. In 1993, MBIA Inc. formed a wholly owned subsidiary, MBIA Investment Management Corp. ("IMC"). IMC, which commenced operations in August 1993, principally provides guaranteed investment agreements to states, municipalities and municipal authorities which are guaranteed as to principal and interest. MBIA Corp. insures IMC's outstanding investment agreement liabilities. In 1993, MBIA Corp. assumed the remaining business from the fifth member of the Association. In 1994, MBIA Inc. formed a wholly owned subsidiary, MBIA Securities Corp. ("SECO"), to provide fixed-income investment management services for MBIA Inc.'s municipal cash management service businesses. In 1995, portfolio management for a portion of MBIA Corp.'s insurance related investment portfolio was transferred to SECO; the management of the balance of this portfolio was transferred in January 1996. 2. SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements have been prepared on the basis of generally accepted accounting principles ("GAAP"). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and -7- MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant accounting policies are as follows: CONSOLIDATION The consolidated financial statements include the accounts of MBIA Corp., MBIA Illinois, MBIA Assurance and BIG Services, Inc. All significant intercompany balances have been eliminated. Certain amounts have been reclassified in prior years' financial statements to conform to the current presentation. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash on hand and demand deposits with banks. INVESTMENTS Effective January 1, 1994, MBIA Corp. adopted Statement of Financial Accounting Standards ("SFAS") 115 "Accounting for Certain Investments in Debt and Equity Securities." In accordance with SFAS 115, MBIA Corp. reclassified its entire investment portfolio ("Fixed-maturity securities") as "available-for-sale." Pursuant to SFAS 115, securities classified as available-for-sale are required to be reported in the financial statements at fair value, with unrealized gains and losses reflected as a separate component of shareholder's equity. The cumulative effect of MBIA Corp.'s adoption of SFAS 115 was a decrease in shareholder's equity at December 31, 1994 of $46.8 million, net of taxes. The adoption of SFAS 115 had no effect on MBIA Corp.'s earnings. Bond discounts and premiums are amortized on the effective-yield method over the remaining term of the securities. For pre-refunded bonds the remaining term is determined based on the contractual refunding date. Short-term investments are carried at amortized cost, which approximates fair value and include all fixed-maturity securities with a remaining term to maturity of less than one year. Investment income is recorded as earned. Realized gains or losses on the sale of investments are determined by specific identification and are included as a separate component of revenues. Other investments consist of MBIA Corp.'s interest in limited partnerships and a mutual fund which invests principally in marketable equity securities. MBIA Corp. records dividends from its investment in marketable equity securities and its share of limited partnerships and mutual funds as a -8- MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) component of investment income. In addition, MBIA Corp. records its share of the unrealized gains and losses on these investments, net of applicable deferred income taxes, as a separate component of shareholder's equity. PREMIUM REVENUE RECOGNITION Premiums are earned pro rata over the period of risk. Premiums are allocated to each bond maturity based on par amount and are earned on a straight-line basis over the term of each maturity. When an insured issue is retired early, is called by the issuer, or is in substance paid in advance through a refunding or defeasance accomplished by placing U.S. Government securities in escrow, the remaining deferred premium revenue, net of the portion which is credited to a new policy in those cases where MBIA Corp. insures the refunding issue, is earned at that time, since there is no longer risk to MBIA Corp. Accordingly, deferred premium revenue represents the portion of premiums written that is applicable to the unexpired risk of insured bonds and notes. POLICY ACQUISITION COSTS Policy acquisition costs include only those expenses that relate primarily to, and vary with, premium production. For business produced directly by MBIA Corp., such costs include compensation of employees involved in marketing, underwriting and policy issuance functions, certain rating agency fees, state premium taxes and certain other underwriting expenses, reduced by ceding commission income on premiums ceded to reinsurers. For business assumed from the Association, such costs were comprised of management fees, certain rating agency fees and marketing and legal costs, reduced by ceding commissions received by the Association on premiums ceded to reinsurers. Policy acquisition costs are deferred and amortized over the period in which the related premiums are earned. LOSSES AND LOSS ADJUSTMENT EXPENSES Reserves for losses and loss adjustment expenses ("LAE") are established in an amount equal to MBIA Corp.'s estimate of the identified and unidentified losses, including costs of settlement on the obligations it has insured. To the extent that specific insured issues are identified as currently or likely to be in default, the present value of expected payments, including loss and LAE associated with these issues, net of expected recoveries, is allocated within the total loss reserve as case basis reserves. Management of MBIA Corp. periodically evaluates its estimates for losses and LAE and any resulting adjustments are reflected in current earnings. Management believes -9- MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) that the reserves are adequate to cover the ultimate net cost of claims, but the reserves are necessarily based on estimates, and there can be no assurance that the ultimate liability will not exceed such estimates. CONTINGENT COMMISSIONS Contingent commissions may be receivable from MBIA Corp.'s and the Association's reinsurers under various reinsurance treaties and are accrued as the related premiums are earned. INCOME TAXES MBIA Corp. is included in the consolidated tax return of MBIA Inc. The tax provision for MBIA Corp. for financial reporting purposes is determined on a stand alone basis. Any benefit derived by MBIA Corp. as a result of the tax sharing agreement with MBIA Inc. and its subsidiaries is reflected directly in shareholder's equity for financial reporting purposes. Deferred income taxes are provided in respect of temporary differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The Internal Revenue Code permits financial guarantee insurance companies to deduct from taxable income additions to the statutory contingency reserve, subject to certain limitations. The tax benefits obtained from such deductions must be invested in non-interest bearing U. S. Government tax and loss bonds. MBIA Corp. records purchases of tax and loss bonds as payments of Federal income taxes. The amounts deducted must be restored to taxable income when the contingency reserve is released, at which time MBIA Corp. may present the tax and loss bonds for redemption to satisfy the additional tax liability. PROPERTY AND EQUIPMENT Property and equipment consists of MBIA Corp.'s headquarters and equipment and MBIA Assurance's furniture, fixtures and equipment, which are recorded at cost and, exclusive of land, are depreciated on the straight-line method over their estimated service lives ranging from 4 to 31 years. Maintenance and repairs are charged to expenses as incurred. GOODWILL Goodwill represents the excess of the cost of the acquired and contributed subsidiaries over the tangible net assets at the time of acquisition or contribution. Goodwill attributed to the acquisition of the licensed insurance -10- MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) company includes recognition of the value of the state licenses held by that company, and is amortized by the straight-line method over 25 years. Goodwill related to the wholly owned subsidiary of MBIA Inc. contributed in 1988 is amortized by the straight-line method over 25 years. Goodwill attributed to the acquisition of MBIA Illinois is amortized according to the recognition of future profits from its deferred premium revenue and installment premiums, except for a minor portion attributed to state licenses, which is amortized by the straight-line method over 25 years. FOREIGN CURRENCY TRANSLATION Assets and liabilities denominated in foreign currencies are translated at year-end exchange rates. Operating results are translated at average rates of exchange prevailing during the year. Unrealized gains or losses resulting from translation are included as a separate component of shareholder's equity. 3. STATUTORY ACCOUNTING PRACTICES The financial statements have been prepared on the basis of GAAP, which differs in certain respects from the statutory accounting practices prescribed or permitted by the insurance regulatory authorities. Statutory accounting practices differ from GAAP in the following respects: o premiums are earned only when the related risk has expired rather than over the period of the risk; o acquisition costs are charged to operations as incurred rather than as the related premiums are earned; o a contingency reserve is computed on the basis of statutory requirements and reserves for losses and LAE are established, at present value, for specific insured issues which are identified as currently or likely to be in default. Under GAAP reserves are established based on MBIA Corp.'s reasonable estimate of the identified and unidentified losses and LAE on the insured obligations it has written; o Federal income taxes are only provided on taxable income for which income taxes are currently payable, while under GAAP, deferred income taxes are provided with respect to temporary differences; o fixed-maturity securities are reported at amortized cost rather than fair value; -11- MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) o tax and loss bonds purchased are reflected as admitted assets as well as payments of income taxes; and o certain assets designated as "non-admitted assets" are charged directly against surplus but are reflected as assets under GAAP. The following is a reconciliation of consolidated shareholder's equity presented on a GAAP basis to statutory capital and surplus for MBIA Corp. and its subsidiaries, MBIA Illinois and MBIA Assurance: As of December 31 ----------------- (In thousands) 1995 1994 1993 -------------- ---- ---- ---- GAAP shareholder's equity ... $ 2,525,872 $ 2,055,503 $ 1,857,743 Premium revenue recognition . (328,450) (296,524) (242,577) Deferral of acquisition costs (140,348) (133,048) (120,484) Unrealized (gains) losses ... (223,635) 71,932 -- Contingent commissions ...... (1,645) (1,706) (1,880) Contingency reserve ......... (743,510) (620,988) (539,103) Loss and loss adjustment expense reserves ........... 28,024 18,181 26,262 Deferred income taxes ....... 205,425 90,328 99,186 Tax and loss bonds .......... 70,771 50,471 25,771 Goodwill .................... (105,614) (110,543 (115,503) Other ....................... (12,752) (13,568 (11,679) ------------ ----------- ----------- Statutory capital and surplus ......... $ 1,274,138 1,110,038 $ 977,736 =========== ========= =========== Consolidated net income of MBIA Corp. determined in accordance with statutory accounting practices for the years ended December 31, 1995, 1994 and 1993 was $278.3 million, $224.9 million and $258.4 million, respectively. 4. PREMIUMS EARNED FROM REFUNDED AND CALLED BONDS Premiums earned include $34.0 million, $53.0 million and $85.6 million for 1995, 1994 and 1993, respectively, related to refunded and called bonds. 5. INVESTMENTS MBIA Corp.'s investment objective is to optimize long-term, after-tax returns while emphasizing the preservation of capital and claims-paying capability through maintenance of high-quality investments with adequate liquidity. MBIA Corp.'s investment policies limit the amount of credit exposure to any one -12- MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) issuer. The fixed-maturity portfolio is comprised of high-quality (average rating Double-A) taxable and tax-exempt investments of diversified maturities. The following tables set forth the amortized cost and fair value of the fixed-maturities and short-term investments included in the consolidated investment portfolio of MBIA Corp. as of December 31, 1995 and 1994. Gross Gross Amortized Unrealized Unrealized Cost Gains Losses Fair Value ---- ----- ------ ---------- (In thousands December 31, 1995 Taxable bonds United States Treasury and Government Agency .. $ 6,742 $ 354 -- $ 7,096 Corporate and other obligations ............ 592,604 30,536 (212) 622,928 Mortgage-backed .......... 389,943 21,403 (932) 410,414 Tax-exempt bonds municipal Obligations .............. 2,637,732 175,081 (2,595) 2,810,218 --------- ------- ------ --------- Total fixed- maturities $3,627,021 $ 227,374 (3,739) $3,850,656 ========== ========== ====== ========== Gross Gross Amortized Unrealized Unrealized Cost Gains Losses Fair Value ---- ----- ------ ---------- (In thousands) Taxable bonds United States Treasury and Government Agency $ 15,133 -- (149) $ 14,984 Corporate and other ... obligations ......... 461,601 2,353 (23,385) 440,569 Mortgage-backed ......... 317,560 3,046 (12,430) 308,176 Tax-exempt bonds State and municipal obligations ........... 2,450,928 36,631 (77,998) 2,409,561 --------- ------ ------- --------- Total fixed- maturities ......... $3,245,222 $ 42,030 $ (113,962) $3,173,290 ========== ========== ========== ========== Fixed-maturity investments carried at fair value of $8.1 million and $7.4 million as of December 31, 1995 and 1994, respectively, were on deposit with various regulatory authorities to comply with insurance laws. -13- MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The table below sets forth the distribution by expected maturity of the fixed-maturities and short-term investments at amortized cost and fair value at December 31, 1995. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations. Amortized Fair (In thosands Cost Value Maturity Within 1 year ....................... $ 178,328 $ 178,256 Beyond 1 year but within 5 years .... 448,817 477,039 Beyond 5 years but within 10 years .. 1,133,527 1,211,645 Beyond 10 years but within 15 years . 742,790 804,421 Beyond 15 years but within 20 years . 686,871 730,030 Beyond 20 years ..................... 46.745 38,851 -------- -------- 3,237,078 3,440,242 Mortgage-backed ..................... 389,943 410,414 ------- ------- Total fixed-maturities and short-term investments ....................... $3,627,021 $3,850,656 ========== ========== 6. Investment Income and Gains and Losses Investment income consists of: Years ended December 31 ----------------------- (In thousands) ................ 1995 1994 1993 - ------------------------------- ---- ---- ---- Fixed-maturities .............. $ 216,653 $ 193,729 $ 173,070 Short-term investments ...... 6,008 3,003 2,844 Other investments ............. 17 12 2,078 -- -- ----- Gross investment income ..... 222,678 196,744 177,992 Investment expenses ........... 2,844 2,778 2,663 ----- ----- ----- Net investment income ....... 219,834 193,966 175,329 Net realized gains (losses): Fixed-maturities: Gains..................... 9,941 9,635 9,070 Losses................ .. (2,537) (8,851) (744) ------ ------ ---- Net..................... 7,404 784 8,326 Other investments: Gains................... 382 9,551 615 Losses................... (9) -- -- ---- ------ ---- Net....................... 373 9,551 615 --- ----- --- Net realized gains .......... 7,777 10,335 8,941 ----- ------ ----- Total investment income ....... $ 227,611 $ 204,301 $ 184,270 =========== =========== =========== -14- MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Unrealized gains (losses) consist of: As of December 31 ----------------- (In thousands) .................. 1995 1994 - --------------------------------- ---- ---- Fixed-maturities: Gains ......................... $ 227,374 $ 42,030 Losses ........................ (3,739) (113,962) Net .......................... 223,635 (71,932) Other investments: Gains ......................... 287 -- Losses ........................ (821) (1,042) ------- ------ Net ........................... (534) (1,042) ------ ------ Total ........................... 223,101 (72,974) Deferred income tax (benefit) ... 78,372 (25,334) ------ ------- Unrealized gains (losses) - net $ 144,729 $ (47,640) ========= ========= The deferred taxes in 1995 and 1994 relate primarily to unrealized gains and losses on MBIA Corp.'s fixed-maturity investments, which are reflected in shareholders' equity in 1995 and 1994 in accordance with MBIA Corp.'s adoption of SFAS 115. The change in net unrealized gains (losses) consists of: Years ended December 31 ----------------------- In thousands 1995 1994 1993 - ------------ ---- ---- ---- Fixed-maturities ............... $ 295,567 $(289,327) $ 101,418 Other investments .............. 508 (8,488) 3,842 --- ------ ----- Total ........................ 296,075 (297,815) 105,260 Deferred income taxes (benefit) 103,706 (27,940) 1,381 ------- ------- ----- Unrealized gains (losses), net $ 192,369 $(269,875) $ 103,879 ========= ========= ========= 7. INCOME TAXES Effective January 1, 1993, MBIA Corp. changed its method of accounting for income taxes from the income statement-based deferred method to the balance sheet-based liability method required by SFAS 109 "Accounting for Income Taxes." MBIA Corp. adopted the new pronouncement on the cumulative catch-up basis and recorded a cumulative adjustment, which increased net income and reduced the deferred tax liability by $13.0 million. The cumulative effect represents the impact of adjusting the deferred tax liability to reflect the January 1, 1993 tax rate of 34% as opposed to the higher tax rates in effect when certain of the deferred taxes originated. -15- MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) SFAS 109 requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect on tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The tax effects of temporary differences that give rise to deferred tax assets and liabilities at December 31, 1995 and 1994 are as presented below: (In thousands) ................................ 1995 1994 - ----------------------------------------------- ---- ---- Deferred tax assets Tax and loss bonds .......................... $ 71,183 $ 50,332 Unrealized losses ........................... -- 25,334 Alternative minimum tax credit carry forwards 39,072 22,391 Loss and loss adjustment expense reserves ... 9,809 6,363 Other ....................................... 954 3,981 --- ----- Total gross deferred tax assets ............. 121,018 108,401 ======= ======= Deferred tax liabilities Contingency reserve ......................... 131,174 91,439 Deferred premium revenue .................... 64,709 54,523 Deferred acquisition costs .................. 49,122 48,900 Unrealized gains ............................ 78,372 -- Contingent commissions ...................... 7,158 4,746 Other ....................................... 3,408 6,621 ----- ----- Total gross deferred tax liabilities ........ 333,943 206,229 ------- ------- Net deferred tax liability .................. $212,925 $ 97,828 ======== ======== Under SFAS 109, a change in the Federal tax rate requires a restatement of deferred tax assets and liabilities. Accordingly, the restatement for the change in the 1993 Federal tax rate resulted in a $5.4 million increase in the tax provision, of which $3.2 million resulted from the recalculation of deferred taxes at the new Federal rate. The provision for income taxes is composed of: Years ended December 31 ----------------------- (In thousands) .................. 1995 1994 1993 - --------------------------------- ---- ---- ---- Current ......................... $70,357 $58,043 $66,086 Deferred ........................ 11,391 19,082 20,598 ------ ------ ------ Total ......................... $81,748 $77,125 $86,684 ======= ======= ======= -16- MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The provision for income taxes gives effect to permanent differences between financial and taxable income. Accordingly, MBIA Corp.'s effective income tax rate differs from the statutory rate on ordinary income. The reasons for MBIA Corp.'s lower effective tax rates are as follows: Years ended December 31 ----------------------- 1995 1994 1993 ---- ---- ---- Income taxes computed on pre-tax financial income at statutory rates .......... 35.0% 35.0% 35.0% Increase (reduction) in taxes resulting from: Tax-exempt interest ........................ (12.5) (12.0) (10.6) Amortization of goodwill ................... 0.5 0.5 0.5 Other ...................................... (1.1) (1.7) -- ---- ---- ---- Provision for income taxes ......... 21.9% 21.8% 24.9% ==== ==== ==== 8. DIVIDENDS AND CAPITAL REQUIREMENTS Under New York state insurance law, MBIA Corp. may pay a dividend only from earned surplus subject to the maintenance of a minimum capital requirement. The dividends in any 12-month period may not exceed the lesser of 10% of its policyholders' surplus as shown on its last filed statutory-basis financial statements, or of adjusted net investment income, as defined, for such 12-month period, without prior approval of the superintendent of the New York State Insurance Department. In accordance with such restrictions on the amount of dividends which can be paid in any 12-month period, MBIA Corp. had approximately $44 million available for the payment of dividends as of December 31, 1995. In 1995, 1994 and 1993, MBIA Corp. declared and paid dividends of $83 million, $38 million and $50 million, respectively, to MBIA Inc. Under Illinois Insurance Law, MBIA Illinois may pay a dividend from unassigned surplus, and the dividends in any 12-month period may not exceed the greater of 10% of policyholders' surplus (total capital and surplus) at the end of the preceding calendar year, or the net income of the preceding calendar year without prior approval of the Illinois State Insurance Department. In accordance with such restrictions on the amount of dividends which can be paid in any 12-month period, MBIA Illinois may pay a dividend only with prior approval as of December 31, 1995. -17- MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The insurance departments of New York state and certain other statutory insurance regulatory authorities and the agencies which rate the bonds insured by MBIA Corp. have various requirements relating to the maintenance of certain minimum ratios of statutory capital and reserves to net insurance in force. MBIA Corp. and MBIA Assurance were in compliance with these requirements as of December 31, 1995. 9. LINES OF CREDIT MBIA Corp. has a standby line of credit commitment in the amount of $650 million with a group of major banks to provide loans to MBIA Corp. after it has incurred cumulative losses (net of any recoveries) from September 30, 1995 in excess of the greater of $500 million and 6.25% of average annual debt service. The obligation to repay loans made under this agreement is a limited recourse obligation payable solely from, and collateralized by, a pledge of recoveries realized on defaulted insured obligations including certain installment premiums and other collateral. This commitment has a seven-year term and expires on September 30, 2002 and contains an annual renewal provision subject to the approval by the bank group. MBIA Corp. and MBIA Inc. maintain bank liquidity facilities aggregating $275 million. At December 31, 1995, MBIA Inc. had $18 million outstanding under these facilities. 10. NET INSURANCE IN FORCE MBIA Corp. guarantees the timely payment of principal and interest on municipal, asset-/mortgage-backed and other non-municipal securities. MBIA Corp.'s ultimate exposure to credit loss in the event of nonperformance by the insured is represented by the insurance in force as set forth below. The insurance policies issued by MBIA Corp. are unconditional commitments to guarantee timely payment on the bonds and notes to bondholders. The creditworthiness of each insured issue is evaluated prior to the issuance of insurance and each insured issue must comply with MBIA Corp.'s underwriting guidelines. Further, the payments to be made by the issuer on the bonds or notes may be backed by a pledge of revenues, reserve funds, letters of credit, investment contracts or collateral in the form of mortgages or other assets. The right to such money or collateral would typically become MBIA Corp.'s upon the payment of a claim by MBIA Corp. -18- MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) As of December 31, 1995, insurance in force, net of cessions to reinsurers, has a range of maturity of 1-43 years. The distribution of net insurance in force by geographic location and type of bond, including $2.7 billion and $1.5 billion relating to IMC's municipal investment agreements guaranteed by MBIA Corp. in 1995 and 1994, respectively, is set forth in the following tables:
As of December 31 ----------------- ($ in billions) 1995 1994 - --------------- ---- ---- Net Number % of Net Net Number % of Net Georgraphic Insurance of Issues Insurance Insurance of Issues Insurance Location In Force Outstanding In Force In Force Outstanding In Force - -------- -------- ----------- -------- -------- ----------- -------- California .. $ 51.2 3,122 14.8 $ 43.9 2,832 14.3% New York .... 30.1 4,846 8.7 25.0 4,447 8.2 Florida ..... 26.9 1,684 7.7 25.4 1,805 8.3 Texas ....... 20.4 2,031 5.9 18.6 2,102 6.1 Pennsylvania 19.7 2,143 5.7 19.5 2,108 6.4 New Jersey .. 16.4 1,730 4.7 15.0 1,590 4.9 Illinois .... 15.0 1,090 4.3 14.7 1,139 4.8 Massachusetts 9.3 1,070 2.7 8.6 1,064 2.8 Ohio ........ 9.1 1,017 2.6 8.3 996 2.7 Michigan .... 7.9 1,012 2.3 5.7 972 1.9 --- ----- --- --- --- --- Subtotal .... 206.0 19,745 59.4 184.7 19,055 60.4 Other ....... 135.6 11,147 39.1 118.8 10,711 38.8 ----- ------ ---- ----- ------ ---- Total U.S. 341.6 30,892 98.5 303.5 29,766 99.2 International 5.1 53 1.5 2.5 18 0.8 --- -- --- --- -- --- $ 346.7 30,945 100.0% $ 306.0 29,784 100.0% ======== ====== ===== ======== ====== =====
-19- MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31 ----------------- 1995 1994 ---- ---- ($ in billions) Net Number % of Net Net Number % of Net Insurance of Issues nsurance Insurance of Issues Insurance Type of Bond In Force Outstanding In Force In Force Outstanding In Force - ------------ -------- ----------- -------- -------- ----------- -------- MUNICIPAL General Obligation $ 91.6 11,445 26.4% $ 84.2 11,029 27.5% Utilities ........ 60.3 4,931 17.4 56.0 5,087 18.3 Health Care ...... 51.9 2,458 15.0 50.6 2,670 16.5 Transportation ... 25.5 1,562 7.4 21.3 1,486 7.0 Special Revenue .. 24.4 1,445 7.0 22.7 1,291 7.4 Industrial development and pollution control revenue 17.2 924 5.0 15.1 1,016 4.9 Housing .......... 15.8 2,671 4.5 13.6 2,663 4.5 Higher education . 15.2 1,261 4.4 14.0 1,208 4.6 ======= ======= ====== ======= ======= ===== Other ............ 7.3 134 2.1 3.8 124 1.2 309.2 26,831 89.2 281.3 26,574 91.9 ======= ======= ======= ======= ======= ===== Non-municipal Asset/mortgage- backed 20.2 256 5.8 12.8 151 4.2 Investor-owned utilities 6.4 3,559 1.8 5.7 2,918 1.9 International .... 5.1 53 1.5 2.5 18 0.8 Other ............ 5.8 246 1.7 3.7 123 1.2 --- --- --- --- --- --- 37.5 4,114 10.8 24.7 3,210 8.1 ---- ----- ---- ---- ----- --- $346.7 30,945 100.0% $306.0 29,784 100.0% ======= ======= ======= ====== ======= =====
11. REINSURANCE MBIA Corp. reinsures portions of its risks with other insurance companies through various quota and surplus share reinsurance treaties and facultative agreements. In the event that any or all of the reinsurers were unable to meet their obligations, MBIA Corp. would be liable for such defaulted amounts. Amounts deducted from gross insurance in force for reinsurance ceded by MBIA Corp., MBIA Assurance and MBIA Illinois were $50.1 billion and $42.6 -20- MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) billion, at December 31, 1995 and 1994, respectively. The distribution of ceded insurance in force by geographic location and type of bond is set forth in the tables below: As of December 31 ----------------- (In billions) 1995 1994 - ------------- ---- ---- % of % of Ceded Ceded Ceded Ceded Insurance Insurance Insurance Insurance Geographic Location In Force In Force In Force In Force - ------------------- -------- -------- -------- -------- California ......... $ 8.8 17.5% $ 7.5 17.6% New York ........... 5.7 11.4 4.9 11.5 New Jersey ......... 3.1 6.1 2.0 4.7 Texas .............. 2.8 5.6 2.5 5.9 Pennsylvania ....... 2.7 5.4 2.6 6.1 Florida ............ 2.3 4.6 2.1 4.9 Illinois ........... 2.2 4.5 2.3 5.4 District of Columbia 1.5 3.0 1.6 3.8 Washington ......... 1.4 2.7 1.2 2.8 Puerto Rico ........ 1.3 2.6 1.1 2.6 Massachusetts ...... 1.1 2.1 0.9 2.1 Ohio ............... 1.0 2.1 0.9 2.1 --- --- --- --- Subtotal ........... 33.9 67.6 29.6 69.5 Other .............. 14.4 28.8 12.3 28.9 ---- ---- ---- ---- Total U. S ..... 48.3 96.4 41.9 98.4 International ...... 1.8 3.6 0.7 1.6 --- --- --- --- $ 50.1 100.0% $42.6 100.0% ======= ===== ===== ===== -21- MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) As of December 31 ----------------- (In billions) 1995 1994 - ------------- ---- ---- % of % of Ceded Ceded Ceded Ceded Insurance Insurance Insurance Insurance Type of Bond In Force In Force In Force In Force - ------------ -------- -------- -------- -------- Municipal General obligation ... $ 11.7 23.3% $ 9.7 22.8% Utilities ............ 9.0 18.0 8.5 20.0 Health care .......... 6.6 13.1 6.5 15.3 Transportation ....... 5.5 11.0 4.5 10.6 Special revenue ...... 3.2 6.4 2.7 6.3 Industrial development and pollution control revenue 3.0 6.0 2.9 6.8 Housing .............. 1.4 2.8 1.0 2.3 Higher education ..... 1.2 2.4 1.2 2.8 Other ................ 2.4 4.8 1.5 3.5 --- --- --- --- 44.0 87.8 38.5 90.4 ==== ==== ==== ==== Non-municipal Asset-/mortgage-backed 3.6 7.2 2.7 6.3 International ........ 1.8 3.6 0.7 1.6 Other ................ 0.7 1.4 0.7 1.7 --- --- --- --- 6.1 12.2 4.1 9.6 --- ---- --- --- $ 50.1 100.0% $ 42.6 100.0% ======== ===== ======== ===== Included in gross premiums written are assumed premiums from other insurance companies of $11.7 million, $6.3 million and $20.4 million for the years ended December 31, 1995, 1994 and 1993, respectively. The percentages of the amounts assumed to net premiums written were 3.8%, 2.0% and 4.7% in 1995, 1994 and 1993, respectively. Gross premiums written include $0.2 million in 1994 and $5.4 million in 1993 related to the reassumption by MBIA Corp. of reinsurance previously ceded by the Association. Also included in gross premiums in 1993 is $10.8 million of premiums assumed from a member of the Association. Ceded premiums written are net of $0.2 million in 1995, $1.6 million in 1994 and $2.5 million in 1993 related to the reassumption of reinsurance previously ceded by MBIA Corp. or MBIA Illinois. -22- MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 12. EMPLOYEE BENEFITS MBIA Corp. participates in MBIA Inc.'s pension plan covering all eligible employees. The pension plan is a defined contribution plan and MBIA Corp. contributes 10% of each eligible employee's annual total compensation. Pension expense for the years ended December 31, 1995, 1994 and 1993 was $3.2 million, $3.0 million and $3.1 million, respectively. MBIA Corp. also has a profit sharing/401(k) plan which allows eligible employees to contribute up to 10% of eligible compensation. MBIA Corp. matches employee contributions up to the first 5% of total compensation. MBIA Corp. contributions to the profit sharing plan aggregated $1.4 million, $1.4 million and $1.3 million for the years ended December 31, 1995, 1994 and 1993, respectively. The 401(k) plan amounts are invested in common stock of MBIA Inc. Amounts relating to the above plans that exceed limitations established by Federal regulations are contributed to a non-qualified deferred compensation plan. Of the above amounts for the pension and profit sharing plans, $2.7 million, $2.6 million and $2.6 million for the years ended December 31, 1995, 1994 and 1993, respectively, are included in policy acquisition costs. MBIA Corp. also participates in MBIA Inc.'s common stock incentive plan which enables employees of MBIA Corp. to acquire shares of MBIA Inc. or to benefit from appreciation in the price of the common stock of MBIA Inc. MBIA Corp. also participates in MBIA Inc.'s restricted stock program, adopted in December 1995, whereby key executive officers of MBIA Corp. are granted restricted shares of MBIA Inc. common stock. Effective January 1, 1993, MBIA Corp. adopted SFAS 106 "Employers' Accounting for Postretirement Benefits Other than Pensions." Under SFAS 106, companies are required to accrue the cost of employee post-retirement benefits other than pensions during the years that employees render service. Prior to January 1, 1993, MBIA Corp. had accounted for these post-retirement benefits on a cash basis. In 1993, MBIA Corp. adopted the new pronouncement on the cumulative catch-up basis and recorded a cumulative effect adjustment which decreased net income and increased other liabilities by $0.1 million. As of January 1, 1994, MBIA Corp. eliminated these post-retirement benefits. -23- MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 13. RELATED PARTY TRANSACTIONS The business assumed from the Association, relating to insurance on unit investment trusts sponsored by two members of the Association, includes deferred premium revenue of $1.6 million and $1.9 million at December 31, 1995 and 1994, respectively. In 1993, MBIA Corp. assumed the balance of $10.8 million of deferred premium revenue from a member of the Association which had not previously ceded its insurance portfolio to MBIA Corp. Also in 1993, MBIA Corp. assumed $0.4 million of deferred premium revenue relating to one of the trusts which was previously ceded to an affiliate of an Association member. Since 1989, MBIA Corp. has executed five surety bonds to guarantee the payment obligations of the members of the Association, one of which is a principal shareholder of MBIA Inc., which had their Standard & Poor's claims-paying rating downgraded from Triple-A on their previously issued Association policies. In the event that they do not meet their Association policy payment obligations, MBIA Corp. will pay the required amounts directly to the paying agent instead of to the former Association member as was previously required. The aggregate amount payable by MBIA Corp. on these surety bonds is limited to $340 million. These surety bonds remain outstanding as of December 31, 1995. MBIA Corp. has investment management and advisory agreements with an affiliate of a principal shareholder of MBIA Inc., which provides for payment of fees on assets under management. Total related expenses for the years ended December 31, 1995, 1994 and 1993 amounted to $2.5 million, $2.6 million and $2.4 million, respectively. These agreements were terminated on January 1, 1996 at which time SECO commenced management of MBIA Corp.'s consolidated investment portfolios. In addition, investment management expenses of $0.1 million were paid to SECO for the portion of the investment portfolio transferred in 1995. MBIA Corp. has various insurance coverages provided by a principal shareholder of MBIA Inc., the cost of which was $1.9 million, $1.9 million and $2.0 million for the years ended December 31, 1995, 1994 and 1993, respectively. -24- MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Included in other assets at December 31, 1995 and 1994 is $1.1 million and $14.5 million of net receivables from MBIA Inc. and other subsidiaries. 14. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair value amounts of financial instruments shown in the following table have been determined by MBIA Corp. using available market information and appropriate valuation methodologies. However, in certain cases considerable judgment is necessarily required to interpret market data to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amount MBIA Corp. could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. FIXED-MATURITY SECURITIES - The fair value of fixed-maturity securities equals quoted market price, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. SHORT-TERM INVESTMENTS - Short-term investments are carried at amortized cost which, because of their short duration, is a reasonable estimate of fair value. OTHER INVESTMENTS - Other investments consist of MBIA Corp.'s interest in limited partnerships and a mutual fund which invests principally in marketable equity securities. The fair value of other investments is based on quoted market prices. CASH AND CASH EQUIVALENTS, RECEIVABLE FOR INVESTMENTS SOLD AND PAYABLE FOR INVESTMENTS PURCHASED - The carrying amounts of these items are a reasonable estimate of their fair value. PREPAID REINSURANCE PREMIUMS - The fair value of MBIA Corp.'s prepaid reinsurance premiums is based on the estimated cost of entering into an assumption of the entire portfolio with third party reinsurers under current market conditions. DEFERRED PREMIUM REVENUE - The fair value of MBIA Corp.'s deferred premium revenue is based on the estimated cost of entering into a cession of the entire portfolio with third party reinsurers under current market conditions. LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES - The carrying amount is composed of the present value of the expected cash flows for specifically identified claims combined with an estimate for unidentified claims. Therefore, the carrying amount is a reasonable estimate of the fair value of the reserve. INSTALLMENT PREMIUMS - The fair value is derived by calculating the present value of the estimated future cash flow stream at 9% and 13.25% at December 31, 1995 and December 31, 1994, respectively. As of December 31, ------------------ 1995 1994 ---- ---- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value ------ ---------- ------ ---------- ASSETS: Fixed-maturity securuities $3,652,621 $3,652,621 $3,051,906 $3,051,906 Short-term investments.. 198,035 198,035 121,384 121,384 Other investments ...... 14,064 14,064 11,970 11,970 Cash and cash equivalents 23,258 23,258 1,332 1,332 Prepaid reinsurance premiums .............. 200,887 174,444 186,492 159,736 Receivable for investments sold ...... 5,729 5,729 945 945 LIABILITIES: Deferred premium revenue ............. 1,616,315 1,395,159 1,512,211 1,295,305 Loss and loss adjustment expense reserves ..... 42,505 42,505 40,148 40,148 Payable for investments purchased ........... 10,695 10,695 6,552 6,552 OFF-BALANCE-SHEET INSTRUMENTS: Installment premiums ---- 235,371 --- 176,944 -----END PRIVACY-ENHANCED MESSAGE-----