-----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, Qkb4oJO8+Cbta6/qKilNlwzDSfV79s5PL1Bk1SZGtb8uaEQ9bk1St8Jzpoc/ZEoA 1bMm8W+7JW/8n6zFOuTseg== 0000950130-97-001304.txt : 19970329 0000950130-97-001304.hdr.sgml : 19970329 ACCESSION NUMBER: 0000950130-97-001304 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 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: 97566153 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 FORM 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, 1996. 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 17, 1997 was $ 4,219,666,628.00. As of March 17, 1997, 43,323,066 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, 1996 are incorporated by reference into Parts I and II. Portions of the Definitive Proxy Statement of the Registrant, dated March 31, 1997 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") is engaged primarily in providing financial guarantees for municipal bonds, asset-backed and mortgage-backed securities, selected corporate debt, including investor-owned utility bonds, and debt of selected financial institutions. The Company provides these services both in the new issue and secondary markets and both domestically and internationally. These financial guarantees are provided through the Company's wholly-owned subsidiary, MBIA Insurance Corporation ("MBIA Corp."). MBIA Corp. is the successor to the business of the Municipal Bond Insurance Association (the "Association") which began writing financial guarantees for municipal bonds in 1974. Effective as of December 31, 1989, the Company purchased Bond Investors Guaranty Insurance Company ("BIG Ins."), another municipal bond insurance company. Subsequently, MBIA Corp. reinsured the net exposure on the municipal bond insurance policies previously issued by BIG Ins. (See "Business-- Reinsurance" below) and changed the name of BIG Ins. to MBIA Insurance Corp. of Illinois ("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. 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 and the Pacific Rim countries. 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 mortgage-backed and asset-backed securities), investor-owned utility debt and obligations of high-quality financial institutions. 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.'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"). Over the last six years, the Company has undertaken the development of investment management services and products which capitalize on its capabilities, reputation and marketplace relationships. The Company is delivering these services to the public sector through a group of subsidiary companies. These services include cash management, municipal investment agreements, discretionary asset management and administrative services. MBIA Municipal Investors Service Corporation ("MBIA- MISC") provides cash management services and investment placement services to local governments and school districts, and provides those clients with fund administration services. In 1996, MBIA-MISC acquired American Money Management Associates, Inc. ("AMMA") which offers investment and treasury management consulting services to municipal and quasi-municipal clients. Both MBIA-MISC and AMMA are registered investment advisors. MBIA Investment Management Corp. ("IMC") offers guaranteed investment agreements primarily for bond proceeds to states and municipalities. MBIA Capital Management Corp. ("CMC") performs investment management services for the Company, MBIA-MISC, IMC and selected external clients. MBIA CORP. INSURED PORTFOLIO At December 31, 1996, 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 $3.3 billion of obligations of IMC (see "Operations--Miscellaneous")) was $233.2 billion, comprised of $204.2 billion in new issues and $29.0 billion in secondary market issues. Net insurance in force was $411.1 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, 1996, MBIA Corp. had 31,929 policies outstanding. These policies are diversified among 7,637 "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, 1996: MBIA CORP. ORIGINAL PAR AMOUNT PER ISSUE AS OF DECEMBER 31, 1996
% 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 26,609 83.4% $ 38.7 16.6% $10-25 million 2,553 8.0 31.6 13.6 $25-50 million 1,317 4.1 34.4 14.7 $50-100 million 838 2.6 42.5 18.2 Greater than $100 million 612 1.9 86.0 36.9 ------ ----- ------ ----- Total 31,929 100.0% $233.2 100.0% ====== ======
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, 1996 was 11.2 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, 1996 was $22.3 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, 1996 (1) BOND TYPE
NUMBER NET PAR % OF NET OF ISSUES AMOUNT PAR AMOUNT DOMESTIC OUTSTANDING OUTSTANDING OUTSTANDING - -------- (IN BILLIONS) MUNICIPAL General obligation 11,763 $ 64.9 27.8% Utilities 4,799 36.5 15.7 Health care 2,386 28.7 12.3 Transportation 1,520 15.7 6.7 Special Revenue 1,543 15.6 6.7 Higher Education 1,309 9.8 4.2 Housing 2,455 7.9 3.4 Industrial Development & Pollution Control Revenue 931 6.8 2.9 Other 169 2.1 0.9 ------ ------ ----- TOTAL MUNICIPAL 26,875 188.0 80.6 ------ ------ ----- STRUCTURED FINANCE* 349 30.2 12.9 OTHER 4,536 9.6 4.3 ------ ------ ----- TOTAL DOMESTIC 31,760 227.8 97.8 ------ ------ ----- INTERNATIONAL - ------------- INFRASTRUCTURE 121 1.8 0.7 STRUCTURED FINANCE* 22 1.7 0.7 OTHER 26 1.9 0.8 ------ ------ ----- TOTAL INTERNATIONAL 169 5.4 2.2 ------ ------ ----- TOTAL 31,929 $233.2 100.0% ====== ======
* Asset/mortgage-backed ___________________ (1) Excludes IMC's $3.3 billion relating to municipal investment agreements guaranteed by MBIA Corp. As illustrated by the table above, approximately 44% 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. 3 MBIA Corp. engages primarily in insuring municipal bonds. As of December 31, 1996, of the $233.2 billion outstanding net par amount of obligations insured, $188 billion, or 81%, consisted of municipal bonds, $39.8 billion, or approximately 17%, consisted primarily of asset/mortgage-backed transactions and investor-owned utility obligations and $5.4 billion or approximately 2% consisted of transactions done in the European market. 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 BY BOND TYPE (1)
BOND TYPE 1992 1993 1994 1995 1996 (In millions) DOMESTIC - -------- MUNICIPAL General obligation $ 8,951 $11,952 $11,086 $10,127 $12,807 Utilities 5,975 9,293 4,858 5,018 6,731 Health care 4,401 6,342 3,655 2,913 4,147 Special Revenue 2,776 3,246 1,888 1,935 3,761 Transportation 2,283 3,419 1,747 2,624 3,146 Higher Education 1,532 2,126 1,346 1,264 2,106 Housing 592 469 876 1,962 1,802 Industrial Development & Pollution Control Revenue 744 1,533 1,486 1,155 693 Other 86 --- 575 1,240 401 ------- ------- ------- ------- ------- TOTAL MUNICIPAL 27,340 38,380 27,517 28,238 35,594 ------- ------- ------- ------- ------- STRUCTURED FINANCE* 2,842 3,581 4,832 7,766 18,765 OTHER 1,305 1,548 1,355 1,289 4,603 ------- ------- ------- ------- ------- TOTAL DOMESTIC 31,487 43,509 33,704 37,293 58,962 ------- ------- ------- ------- ------- INTERNATIONAL - ------------- INFRASTRUCTURE --- 190 243 591 788 STRUCTURED FINANCE* --- --- 725 479 896 OTHER --- --- 980 444 765 ------- ------- ------- ------- ------- TOTAL INTERNATIONAL --- 190 1,948 1,514 2,449 ------- ------- ------- ------- ------- TOTAL $31,487 $43,699 $35,652 $38,807 $61,411 ======= ======= ======= ======= =======
* Asset/mortgage-backed (1) Par amount insured by year, net of reinsurance. 4 MBIA Corp. is licensed to write business in all 50 states, the District of Columbia, Guam, the Northern Mariana Islands, the U.S. Virgin Islands, Puerto Rico the Kingdom of Spain and the Republic of France. 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, 1996 (1)
NUMBER OF NET PAR % OF NET ISSUES AMOUNT PAR AMOUNT OUTSTANDING OUTSTANDING OUTSTANDING (IN BILLIONS) STATE California 3,378 $ 30.8 13.2% New York 4,819 17.0 7.3 Florida 1,632 16.1 6.9 Pennsylvania 2,216 11.5 4.9 Texas 2,052 11.4 4.9 Illinois 1,145 10.2 4.4 New Jersey 1,863 10.0 4.3 Ohio 1,032 6.4 2.8 Massachusetts 1,100 6.0 2.6 Michigan 1,021 5.0 2.1 All other states 11,502 103.4 44.4 ------ ------ ----- Total United States 31,760 227.8 97.8 International 169 5.4 2.2 ------ ------ ----- Total 31,929 $233.2 100.0% ====== ======
_____________________ (1) Excludes IMC's $3.3 billion relating to municipal investment agreements guaranteed by MBIA Corp. 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, 1996, MBIA Corp.'s net par amount outstanding for its ten largest insured municipal credits totalled $10.0 billion, representing 4.3% of MBIA Corp.'s total net par amount outstanding, and for its ten largest structured finance credits, the net par outstanding was $7.4 billion, or 3.2% of the total. 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 5 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. 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, 1996
NET PAR % OF NET AMOUNT PAR AMOUNT TYPE OF PROGRAM OUTSTANDING OUTSTANDING (IN BILLIONS) New issue $204.2 87.6% Secondary market issues Unit investment trusts 5.2 2.2 Mutual funds 0.4 0.2 Other secondary market issues 23.4 10.0 ------ ----- Total $233.2 100.0% ======
OPERATIONS The operations of MBIA Corp. are conducted through the Insurance Operations Division. The Insurance Operations Division includes the Public Finance and the Packaged Products Groups, the Structured Finance and the International Departments, and the Underwriting Policy and Review Department ("UPR"). The functions of each are more fully described below. 6 The Public Finance Group and the Packaged Products Group 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, the business units within these groups are responsible for analyzing and approving approximately 79% of the number of issues insured (representing 45% of the gross par value insured). With respect to larger, complex or unique credits, underwriting is performed by a committee drawn from outside the business unit originating the transaction. For all transactions done by the Structured Finance or International Departments, 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 UPR. 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 within UPR. Marketing and Credit Review: --------------------------- MBIA Corp.'s marketing activities and initial credit review functions for insured transactions are carried out primarily by various departments within the Insurance Operations Division. They are also involved in structuring credits on negotiated new issue business and in insuring secondary market issues. These groups employ research analysts who have extensive experience in the 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 also handled by the various 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. Premium rates are determined by the Market Research Department, 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: ------------------- UPR, which consists of the Structured Finance Underwriting Department, the International Underwriting Analysis Department, the Corporate Risk Department and the Insured Portfolio Management Group, is responsible for adherence to MBIA Corp.'s underwriting guidelines and procedures, which are designed to maintain an insured portfolio with low risk characteristics and for monitoring the insured portfolio. 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, UPR monitors and periodically reviews underwriting decisions made by the Insurance Operations Division. The Corporate Risk Group underwrites and monitors MBIA Corp.'s direct and indirect exposure to financial institutions and other corporate entities 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. 7 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 ten insured issues requiring claim payments for which it has not been fully reimbursed, there are eight 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 8 contacts with program administrators and trustees. The department also carries out remedial activity on weaker credits. Other ----- In 1996, the Company established Strategic Services, Inc. ("SSI") to develop the areas of tax collection and administration for state and local governments. In May, SSI acquired an equity interest in Capital Asset Holdings, an entity engaged in the purchase and servicing of delinquent taxes for municipal entities. In January, 1997, SSI acquired a 95% interest in the entities of the Municipal Tax Bureau, which provide tax revenue compliance and collection services to the public sector. INVESTMENT MANAGEMENT SERVICES Over the last six years, the Company's investment management businesses have expanded their services to the public sector and added new revenue sources. Average assets under management for these businesses have increased from $3.2 billion in 1994 to $6.2 billion in 1996. These assets include IMC's municipal investment agreements, pooled public funds and third- party accounts. With the growth in investments under management, these businesses generated increases in operating income in 1996. MBIA-MISC provides cash management services and fixed-rate investment placement services directly to local governments and school districts. In addition, MBIA-MISC performs investment fund administration services for clients, which provide an additional source of revenue. In late 1996, MBIA-MISC acquired American Money Management Associates, Inc. ("AMMA"), which provides investment and treasury management consulting services for municipal and quasi- public sector clients. Both MBIA-MISC and AMMA are Securities and Exchange Commission registered investment advisers. MBIA-MISC operates in 20 states and the Commonwealth of Puerto Rico and, at year-end 1996, had $4.2 billion of client assets under management. IMC provides guaranteed investment agreements for bond proceeds of states and municipalities. At year-end 1996, principal and accrued interest outstanding on investment agreements was $3.3 billion. At amortized cost, the assets supporting IMC's investment agreement liabilities were $3.3 billion at December 31, 1996. These assets are comprised of high-quality securities with an average credit quality rating of AA. CMC provides investment management services for IMC's investment agreements, MBIA-MISC's municipal cash management programs and MBIA Corp.'s insurance related fixed-income investment portfolios, as well as third-party accounts. CMC assumed full management for MBIA Corp.'s insurance related fixed- income investment portfolios in 1996, which was previously managed externally. CMC is also a registered investment advisor and at year-end 1996 was managing over $10 billion of assets. COMPETITION The financial guarantee insurance business is highly competitive. In 1996 MBIA Corp. was the largest insurer of new issue long-term municipal bonds, accounting for 40% of the par amount of such insured bonds. The other principal insurers in 1996 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 1996 MBIA Corp. was the leading insurer of new issue asset/mortgage-backed securities. The three principal competitors in this area in 1996 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. 9 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 Corp. also competes in the international market with composite (multi-line) insurers. 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, multi-line 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 multi- line 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, 1996, MBIA Corp. retained approximately 88% of the gross debt service outstanding of all transactions insured by it, MBIA Assurance and MBIA Illinois, and ceded approximately 12% 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., Capital Mortgage Reinsurance Company and Axa Re Finance. The first two of these reinsurers, whose claims-paying ability is rated Triple-A by S&P and Moody's, reinsured approximately 63% of the total ceded insurance in force at December 31, 1996. The other principal reinsurers are rated AA by S&P. All other reinsurers reinsured less than 5% of the total ceded insurance 10 in force at December 31, 1996 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, 1996 and 1995 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 Ins. 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. 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. On January 1, 1996 CMC assumed full 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. 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, policies 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 CMC subject to an investment management agreement between IMC and CMC. For 1996, approximately 68% 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, 1994, 1995 and 1996: 11 INVESTMENT INCOME OF THE COMPANY (1)
1994 1995 1996 (IN THOUSANDS) Investment income before expenses (2) $196,662 $222,704 $250,415 Investment expenses 2,809 2,846 2,854 -------- -------- -------- Net investment income before income taxes 193,853 219,858 247,561 Net realized gains 10,335 11,312 11,740 -------- -------- -------- Total investment income before income taxes $204,188 $231,170 $259,301 ======== ======== ======== Total investment income after income taxes $175,007 $196,269 $219,798 ======== ======== ========
_________________________ (l) Excludes investment income and realized gains and losses from investment management services. (2) Includes taxable and tax-exempt interest income. 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, 1996, 1995 and 1994. INVESTMENT PORTFOLIO BY SECURITY TYPE AS OF DECEMBER 31, 1996
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 $ 340,397 7.30% $1,121,511 6.32% GNMAs 71,080 7.62 71,315 7.35 Other mortgage & asset backed 125,382 7.14 767,271 5.92 securities Corporate obligations 468,386 6.78 706,574 6.82 Foreign obligations (2) 152,392 6.87 182,885 7.37 ---------- ---------- Total 1,157,637 7.04 2,849,556 6.43 Tax-exempt bonds: State & municipal 2,992,063 8.03 -- -- ---------- ---------- Total long-term investments 4,149,700 7.76 2,849,556 6.43 Short-term investments (3) 176,088 5.96 443,742 5.65 ---------- ---------- Total fixed income investments 4,325,788 7.69% 3,293,298 6.33% Other investments (4) 29,101 -- -- -- ---------- ---------- Total investments $4,354,889 -- $3,293,298 -- ========== ==========
(1) Prospective market yields as of December 31, 1996. 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. 12 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 The average maturity of the insurance fixed income portfolio excluding short-term investments as of December 31, 1996 was 10.2 years. After allowing for estimated principal pre-payments on mortgage pass-through securities, the duration of the portfolio was 6.7 years. The table below sets forth the distribution by maturity of the Company's consolidated fixed income investments: FIXED INCOME INVESTMENTS BY MATURITY AS OF DECEMBER 31, 1996
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 $ 176,088 4.1% $ 443,742 13.5% Beyond 1 year but within 5 years 638,568 14.8 1,063,272 32.3 Beyond 5 years but within 10 years 1,482,941 34.3 426,650 13.0 Beyond 10 years but within 15 years 978,739 22.6 300,988 9.1 Beyond 15 years but within 20 years 867,268 20.0 405,712 12.3 Beyond 20 years 182,184 4.2 652,934 19.8 ---------- ----- ---------- ----- Total fixed income investments $4,325,788 100.0% $3,293,298 100.0% ========== ==========
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, 1996
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 $1,934,591 45.7% $2,054,403 64.2% AA 1,027,764 24.3 225,838 7.1 A 1,045,042 24.7 841,309 26.3 BBB 227,119 5.3 78,071 2.4 ---------- ----- ---------- ----- Total $4,234,516 100.0% $3,199,621 100.0% ========== ==========
(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. 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, Guam, the Northern Mariana Islands, the U.S. Virgin Islands, Puerto Rico, the Kingdom of Spain 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 15 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 or any issuer of 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, Iowa, 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 (net of reinsurance) 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 (net of reinsurance, refunding, refinancings and certain insured securities). 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. 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, 16 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, Connecticut 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 generally 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. 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 does not include pro rata distributions of any class of the Company's own securities) 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. 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. 17 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, 1996, $20.2 million of the $59.3 million reserve for loss and loss adjustment expense represents case basis reserves, of which $17.6 million is attributable to a health care financing in Pennsylvania. The remaining case basis reserves represent various housing financings and structured finance transactions, the largest of which is $1.1 million. 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. 18 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, 1993 1994 1995 1996 MBIA Corp. Loss ratio (3.5)% 9.8% 0.4% 2.0% Expense ratio 17.6 22.9 20.6 17.6 Combined ratio 14.1 32.7 21.0 19.6 Financial guarantee industry (1) Loss ratio 0.7% 11.3% 5.3% * Expense ratio 23.8 36.3 32.7 * Combined ratio 24.5 47.6 38.0 *
________________________ (1) Industry statistics were taken from the 1995 Annual Report of the Association of Financial Guaranty Insurors. * Not Available. 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, 1993 1994 1995 1996 (DOLLARS IN MILLIONS) MBIA Corp. Net insurance in force $266,784 $304,502 $344,037 $411,106 Qualified statutory capital 1,517 1,731 2,018 2,360 Policyholders' leverage ratio 176:1 176:1 171:1 174:1 Financial guarantee industry (1) Net insurance in force $704,569 $785,126 $895,559 * Qualified statutory capital 5,195 5,807 6,494 * Policyholders' leverage ratio 136:1 135:1 138:1 *
_________________________ (1) Industry statistics were taken from the 1995 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 19 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 guarantor'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. 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 salvage. In 1994 and 1995, MBIA Corp. had financial ratio values within the NAIC test ranges for all ratios. In 1996, 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 premium written. For the year ended December 31, 1996, the growth in net premiums written equalled NAIC test range values of -33% to +33% due to a favorable business environment marked by a strong demand for insurance. 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. 20 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 more 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. 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 $725 million, after MBIA Corp. has incurred, during the period commencing October 1, 1996 and ending September 30, 2003, 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, 2003, 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 27, 1997, the Company had 551 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 55 Chairman and Chief Executive Officer (officer since 1986) Richard L. Weill 54 President (officer since 1989) James E. Malling 55 Senior Executive Vice President (officer since 1991) Neil G. Budnick 42 Executive Vice President (officer since 1992) Janis S. Christensen 47 Executive Vice President (officer since 1992) Louis G. Lenzi 48 General Counsel and Secretary (officer since 1986) Thomas O. Scherer 50 Senior Vice President (officer since 1992) Kevin D. Silva 43 Senior Vice President (officer since 1995) Julliette S. Tehrani 50 Executive Vice President, Chief Financial Officer and Treasurer (officer since 1987)
21 David H. Elliott is 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 Senior Executive Vice President of the Company and the head of the Corporate Marketing, Corporate Development and Investment 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. Neil G. Budnick is Executive Vice President of the Company and MBIA Corp., head of the Public Finance Group and a director of MBIA Corp. Mr. Budnick has been involved in the insurance operations area of MBIA Corp. since joining the Company in 1983. Janis S. Christensen is Executive Vice President of the Company and MBIA Corp., head of the Underwriting Policy and Review Group and a director of MBIA Corp. Ms. Christensen has been responsible for the underwriting function at MBIA Corp. since joining the Company in 1987. Louis G. Lenzi is General Counsel and Secretary of the Company and MBIA Corp. He is also a director of MBIA Corp. Mr. Lenzi has held various legal positions within MBIA Corp. since July of 1984. Thomas O. Scherer is Senior Vice President and head of the Internal Audit and Investment Risk Management Group of the Company and MBIA Corp. Mr. Scherer has held many positions with the Company and its predecessors since joining in 1977. Julliette S. Tehrani is Executive Vice President, Chief Financial Officer and Treasurer of the Company and of MBIA Corp. 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 Finance Division since 1978, including the offices of Vice President and Treasurer from 1982 through 1985. 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. 22 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 1996 Annual Report to Shareholders and is incorporated herein by reference. As of March 27, 1997, 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 32-33 of the Company's 1996 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 34-39 of the Company's 1996 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 40-57 of the Company's 1996 Annual Report to Shareholders and are incorporated by reference. ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 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 31, 1997, 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 31, 1997, 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 31, 1997, which is incorporated by reference. 23 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 31, 1997, 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 1996 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. 40 Consolidated statements of income for the years ended 41 December 31, 1996, 1995 and 1994. Consolidated balance sheets as of December 31, 1996 and 42 1995. Consolidated statements of changes in shareholders' 43 equity for the years ended December 31, 1996, 1995 and 1994. Consolidated statements of cash flows for the years 44 ended December 31, 1996, 1995 and 1994. Notes to consolidated financial statements. 45-57
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, as of December 31, 1996. II Condensed financial information of Registrant for December 31, 1996, 1995 and 1994. IV Reinsurance for the years ended December 31, 1996, 1995 and 1994. The report of the Registrant's independent accountants with respect to the above listed financial statement schedules is included with the schedules. 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.) 24 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. 25 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. 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 March 2, 1987, between the Company and David H. Elliott, incorporated by reference to Exhibit 10.32 to Amendment No. 1 to the 1987 S-1. 10.20. 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. 10.21. 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 26 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. 10.22. 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. 10.23. 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. 10.24. 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, incorporated by reference to Exhibit 10.25 of the Company's Annual Report Form 10-K for the fiscal year ended December 31, 1995 (Comm. File No. 1-9583) (the "1995 10-K"). 10.25. 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. 10.26. 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. 10.27. 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. 10.28. 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. 10.29. 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. 10.30. 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. 10.31. 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"). 10.32. 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. 10.33. 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. 27 10.34. 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. 10.35. 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. 10.36. 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. 10.37. 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. 10.38. 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. 10.39. 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. 10.40. 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. 10.41. 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. 10.42. 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. 10.43. 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, as further amended by the Third Amendment to Revolving Credit Agreement, dated as of May 23, 1996. 10.44. 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. 10.45. 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. 10.46. 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, incorporated by reference to Exhibit 10.47 to the 1995 10-K, as amended by Fifth Amendment to Trust Agreement, dated as of November 1, 1995, as further amended by Sixth Amendment to Trust Agreement, dated as of January 1, 1996. 10.47. 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. 28 10.48. 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. 10.49. 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. 10.50. 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. 10.51. 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. 10.52. 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. 10.53. 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. 10.54. 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. 10.55. 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. 10.56. 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. 10.57. 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 amend, 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, as further amended by the Second Amendment to the First Restated Credit Agreement, dated as of January 1, 1996, and as further amended by the Third Amendment to the First Restated Credit Agreement, dated as of October 1, 1996. 10.58. 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. 10.59. 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. 29 10.60. 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, incorporated by reference to Exhibit 10.61 to the 1995 10-K. 10.61. 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. 10.62. 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. 10.63. 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. 10.64. 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, incorporated by reference to Exhibit 10.65 to the 1995 10-K. 10.65. Investment Services Agreement, effective January 2, 1996, between MBIA Insurance Corp. of Illinois and MBIA Securities Corp., incorporated by reference to Exhibit 10.66 to the 1995 10-K. 10.66. Custody Agreement, as of March 1, 1995, between MBIA Corp. and The Chase Manhattan Bank, N.A, incorporated by reference to Exhibit 10.67 to the 1995 10-K. 10.67. Custody Agreement, as of March 1, 1995, between MBIA Corp. and The Chase Manhattan Bank, N.A, incorporated by reference to Exhibit 10.68 to the 1995 10-K. 10.68. Custody Agreement, as of March 1, 1995, between MBIA Inc. and The Chase Manhattan Bank, N.A., incorporated by reference to Exhibit 10.69 to the 1995 10-K. 10.69. MBIA Inc. 1996 Incentive Plan, effective as of January 1, 1996, incorporated by reference to Exhibit 10.70 to the 1995 10-K. 10.70. MBIA Inc. 1996 Directors Stock Unit Plan, effective as of December 4, 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 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. 10.18. 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 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. 10.47. 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. 10.69. MBIA Inc. 1996 Incentive Plan, effective as of January 1, 1996, incorporated by reference to Exhibit 10.70 to the 1995 10-K. 10.70. MBIA Inc. 1996 Directors Stock Unit Plan, effective as of December 4, 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 31 99. Additional Exhibits - MBIA Corp. GAAP Financial Statements (b) Reports on Form 8-K. The Company filed a report on Form 8-K on January 24, 1996 with respect to the annual audited financials for 1995. 32 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 28, 1997 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 28, 1997 - ---------------------------------- David H. Elliott /s/ Julliette S. Tehrani Executive Vice President, March 28, 1997 - ---------------------------------- Julliette S. Tehrani Chief Financial Officer and Treasurer /s/ Elizabeth B. Sullivan Vice President March 28, 1997 - ---------------------------------- Elizabeth B. Sullivan Controller /s/ Joseph W. Brown * Director March 28, 1997 - ---------------------------------- Joseph W. Brown, Jr. /s/ David C. Clapp * Director March 28, 1997 - ---------------------------------- David C. Clapp /s/ Gary C. Dunton * Director March 28, 1997 - ---------------------------------- Gary C. Dunton 33 SIGNATURE TITLE DATE --------- ----- ---- /s/ Claire L. Gaudiani * Director March 28, 1997 - ---------------------------------- Claire L. Gaudiani __________________________________ Director March 28, 1997 William H. Gray, III /s/ Freda S. Johnson * Director March 28, 1997 - ---------------------------------- Freda S. Johnson /s/ Daniel P. Kearney * Director March 28, 1997 - ---------------------------------- Daniel P. Kearney /s/ James A. Lebenthal * Director March 28, 1997 - ---------------------------------- James A. Lebenthal /s/ Robert B. Nicholas * Director March 28, 1997 - ---------------------------------- Robert B. Nicholas /s/ Pierre-Henri Richard * Director March 28, 1997 - ---------------------------------- Pierre-Henri Richard /s/ John A. Rolls * Director March 28, 1997 - ---------------------------------- John A. Rolls /s/ Richard L. Weill Director March 28, 1997 - ---------------------------------- Richard L. Weill * By /s/ Louis G. Lenzi ------------------------------ Louis G. Lenzi Attorney-in-Fact 34 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 40 of the 1996 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 24 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 February 3, 1997 SCHEDULE I MBIA INC. AND SUBSIDIARIES SUMMARY OF INVESTMENTS, OTHER THAN INVESTMENTS IN RELATED PARTIES DECEMBER 31, 1996 (In thousands)
- ----------------------------------------------------------------------------------------------- COLUMN A COLUMN B COLUMN C COLUMN D AMOUNT AT WHICH FAIR SHOWN IN THE TYPE OF INVESTMENT COST VALUE BALANCE SHEET - ----------------------------------------------------------------------------------------------- FIXED-MATURITIES Bonds: United States Treasury and Government agency obligations $ 418,622 $ 431,282 $ 431,282 State and municipal obligations 2,854,871 2,987,960 2,987,960 Corporate and other obligations 2,302,824 2,320,559 2,320,559 Mortgage-backed 1,244,714 1,259,455 1,259,455 -------------- -------------- -------------- Total fixed-maturities 6,821,031 6,999,256 6,999,256 SHORT-TERM INVESTMENTS 619,830 619,830 619,830 OTHER INVESTMENTS 28,045 29,101 29,101 -------------- -------------- -------------- Total investments $7,468,906 $7,648,187 $7,648,187 ============== ============== ==============
SCHEDULE II MBIA INC. (PARENT COMPANY) CONDENSED BALANCE SHEETS (Dollars in thousands, except per share amounts)
December 31, 1996 December 31, 1995 ------------------- ------------------- ASSETS Investments: Municipal investment agreement portfolio held as available-for-sale at fair value (amortized cost $1,564,499 and $837,791) $1,567,048 $ 851,328 Short-term investments, at amortized cost (which approximates fair value) 6,198 --- ------------------ --------------------- Total investments 1,573,246 851,328 Cash and cash equivalents 413 14,106 Securities borrowed or purchased under agreements to resell 196,400 --- Investment in and amounts due from wholly-owned subsidiaries 2,938,875 2,670,383 Accrued investment income 17,150 8,379 Other assets 3,996 4,001 ------------------ -------------------- Total assets $4,730,080 $3,548,197 ================== ==================== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Municipal investment agreements $1,405,170 $ 892,326 Municipal repurchase agreements 212,271 --- Long-term debt 374,010 373,900 Short-term debt 29,100 18,000 Securities loaned or sold under agreements to repurchase 196,400 --- Deferred income taxes 842 4,688 Payable for investments purchased 3,218 --- Dividends payable 16,453 14,492 Other liabilities 12,919 10,525 ------------------ -------------------- Total liabilities 2,250,383 1,313,931 ------------------ -------------------- 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 - 43,294,243 and 42,077,387 43,294 42,077 Additional paid-in capital 803,078 725,153 Retained earnings 1,518,994 1,261,051 Cumulative translation adjustment (1,042) 2,849 Unrealized appreciation of investments, net of deferred income tax provision of $62,706 and $112,252 116,424 207,648 Unearned compensation - restricted stock (1,051) (426) Treasury stock, at cost; 73,676 shares in 1995 --- (4,086) ------------------ -------------------- Total shareholders' equity 2,479,697 2,234,266 ------------------ -------------------- Total liabilities and shareholders' equity $4,730,080 $3,548,197 ================== ====================
The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto and the accompanying notes. SCHEDULE II MBIA INC. (PARENT COMPANY) CONDENSED STATEMENTS OF INCOME (In thousands)
YEARS ENDED DECEMBER 31 --------------------------------------------------- 1996 1995 1994 --------------- --------------- --------------- Revenues: Net investment income $ 283 $ 646 $ 786 Net realized gains --- 3,535 --- Investment management services income 2,806 2,929 --- Investment management services realized losses (2,549) (5,735) --- Other income --- --- 1,801 --------------- --------------- --------------- Total revenues 540 1,375 2,587 --------------- --------------- --------------- Expenses: Interest expense 32,705 27,786 27,036 Operating expenses 2,384 2,749 2,202 --------------- --------------- --------------- Total expenses 35,089 30,535 29,238 --------------- --------------- --------------- Loss before income taxes and equity in earnings of subsidiaries (34,549) (29,160) (26,651) Benefit for income taxes (10,911) (9,604) (9,240) --------------- --------------- --------------- Loss before equity in earnings of subsidiaries (23,638) (19,556) (17,411) Equity in earnings of subsidiaries 345,801 290,975 277,620 --------------- --------------- --------------- Net income $322,163 $271,419 $260,209 =============== =============== ===============
The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto and the accompanying notes. SCHEDULE II MBIA INC. (PARENT COMPANY) CONDENSED STATEMENTS OF CASH FLOWS (In thousands)
YEARS ENDED DECEMBER 31 --------------------------------------------------- 1996 1995 1994 ----------------- ---------------- -------------- Cash flows from operating activities: Net income $ 322,163 $ 271,419 $ 260,209 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed earnings of subsidiaries (316,801) (208,075) (239,620) Net realized losses on sales of investments 2,549 2,200 --- Benefit for deferred income taxes --- (50) (28) Other, net 2,742 (2,556) 18,088 ----------------- ---------------- -------------- Total adjustments to net income (311,510) (208,481) (221,560) ----------------- ---------------- -------------- Net cash provided by operating activities 10,653 62,938 38,649 ----------------- ---------------- -------------- Cash flows from investing activities: Purchase of fixed-maturity securities --- (252,125) --- Sale of fixed-maturity securities --- 246,171 42,728 Purchase of short-term investments (6,198) --- --- Sale of other investments --- 6,552 --- Purchases for municipal investment agreement portfolio, net of payable for investments purchased (1,192,350) (940,871) --- Sales from municipal investment agreement portfolio, net of receivable for investments sold 464,593 106,678 --- Contributions to subsidiaries (17,954) (52,800) (23,010) Advances (to) from subsidiaries, net (21,709) (89,550) 3,017 ----------------- ---------------- -------------- Net cash (used) provided by investing activities (773,618) (975,945) 22,735 ----------------- ---------------- -------------- Cash flows from financing activities: Net proceeds from issuance of common stock 55,233 --- --- Net proceeds from issuance of long-term debt --- 74,344 --- Net proceeds from issuance of short-term debt 11,100 --- --- Dividends paid (60,501) (53,179) (45,513) Purchase of treasury stock --- --- (14,411) Proceeds from issuance of municipal investment and repurchase agreements 1,504,140 1,182,298 --- Payments for drawdowns of municipal investment agreements (786,938) (297,679) --- Exercise of stock options 26,238 16,338 1,986 ----------------- ---------------- -------------- Net cash provided (used) by financing activities 749,272 922,122 (57,938) ----------------- ---------------- -------------- Net (decrease) increase in cash and cash equivalents (13,693) 9,115 3,446 Cash and cash equivalents beginning of year 14,106 4,991 1,545 ----------------- ---------------- -------------- Cash and cash equivalents end of year $ 413 $ 14,106 $ 4,991 ================= ================ ============== Supplemental cash flow disclosures: Income taxes paid $ 305 $ 443 $ 251 Interest paid: Long-term debt 31,722 26,575 26,575 Short-term debt 1,309 1,228 56
The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto and the accompanying notes. SCHEDULE II 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 $29,000,000, $82,900,000 and $38,000,000 in 1996, 1995 and 1994, respectively. 4. OBLIGATIONS UNDER MUNICIPAL INVESTMENT AND REPURCHASE AGREEMENTS The municipal investment and repurchase 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. SCHEDULE IV MBIA INC. AND SUBSIDIARIES REINSURANCE for the Years Ended December 31, 1996, 1995 and 1994 (In thousands)
- ----------------------------------------------------------------------------------------------------------------- COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F PERCENTAGE INSURANCE GROSS CEDED TO OTHER ASSUMED FROM OF AMOUNT PREMIUMS WRITTEN AMOUNT VALUE OTHER COMPANIES NET AMOUNT ASSUMED TO NET - ----------------------------------------------------------------------------------------------------------------- 1996 $434,014 $54,852 $26,661 $405,823 6.6% ---- -------- ------- ------- -------- ---- 1995 $336,768 $45,050 $11,719 $303,437 3.9% ---- -------- ------- ------- -------- ---- 1994 $354,534 $49,281 $ 6,302 $311,555 2.0% ---- -------- ------- ------- -------- ----
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, 1996 COMMISSION FILE NO. 1-9583 ________________________________________________________________________________ MBIA INC. EXHIBIT INDEX 10.43. 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, as further amended by the Third Amendment to Revolving Credit Agreement, dated as of May 23, 1996. 10.46. 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 Agreement to Trust Agreement, dated as of April 1, 1993, as further amended by the Forth Amendment to Trust Agreement, dated as of July 1, 1995, incorporated by reference to Exhibit 10.47 to the 1995 10-K, as amended by Fifth Amendment to Trust Agreement, dated as of November 1, 1995, as further amended by Sixth Amendment to Trust Agreement, dated as of January 1, 1996. 10.57. First Restated Credit Agreement, dated as of October 1, 1993, among MBIA Corp., 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, as further amended by the Second Amendment to the First Restated Credit Agreement, dated as of January 1, 1996, and as further amended by the Third Amendment to the First Restated Credit Agreement, dated as of October 1, 1996. 10.70. MBIA Inc. 1996 Directors Stock Unit Plan, effective as of December 4, 1996. 11. Statement Re Computation of Per Share Earnings. 13. Annual Report to Shareholders of MBIA Inc. for fiscal year ended December 31, 1996. 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 EX-10.43 2 REVOLVING CREDIT AGREEMENT EXHIBIT 10.43 THIRD AMENDMENT to REVOLVING CREDIT AGREEMENT among MBIA INC., THE LENDERS SIGNATORY HERETO, and CREDIT SUISSE, New York Branch, as Agent Dated as of May 23, 1996 THIRD AMENDMENT TO REVOLVING CREDIT AGREEMENT THIS AMENDMENT, dated as of May 23, 1996, between MBIA INC., a Connecticut corporation ("MBIA"), CREDIT SUISSE, a banking corporation organized under the laws of Switzerland, acting through its New York Branch ("Credit Suisse"), and GREENWICH FUNDING CORPORATION, a Delaware corporation ( "GFC"), as Lenders, and Credit Suisse, as Agent for the Lenders (in such capacity, the "Agent"); WHEREAS, MBIA and Credit Suisse are parties to the Revolving Credit Agreement, dated as of February 15, 1991, as amended by the First Amendment thereto dated as of September 20, 1992 and the Second Amendment thereto dated as of September 30, 1994 (as so amended, the "Credit Agreement"); ---------------- WHEREAS, MBIA and Credit Suisse have agreed to certain modifications to the Credit Agreement; MBIA has requested that GFC join, and GFC has agreed to join, the Credit Agreement as a Lender of Term Loans thereunder, and Credit Suisse and GFC, in their capacities as Lenders, desire that Credit Suisse act, and Credit Suisse has agreed to act, as Agent for the Lenders under the Credit Agreement; and WHEREAS, the parties accordingly desire, upon the terms and subject to the conditions hereinafter set forth, to further amend the Credit Agreement in certain respects; NOW, THEREFORE, in consideration of the mutual promises contained herein and other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound hereby, agree as follows: ARTICLE I MODIFICATIONS TO CREDIT AGREEMENT --------------------------------- SECTION 1.1. Defined Terms. - ----------- ------------- (a) Except as otherwise specified herein, terms used in this Amendment and defined in Exhibit A of the Credit Agreement, as modified by this Amendment, shall have the meanings provided in such Exhibit A, as so modified. (b) The preamble to the Credit Agreement is hereby amended and restated to read in its entirety as follows: THIS AGREEMENT, originally dated as of February 15, 1991, among MBIA INC., a Connecticut corporation ("IMBIA"), GREENWICH FUNDING CORPORATION, a Delaware corporation ("GFC"), CREDIT SUISSE, New York Branch ("Credit Suisse"), and each other financial institution from time to time parties hereto as Lenders (GFC, Credit Suisse and each such other institution, collectively, the "Lenders"), and CREDIT SUISSE, New York Branch, as Agent for the Lenders (in such capacity, the "Agent"); SECTION 1.2. Amendments Relating to Revolving Credit and Term Loans. ----------- ------------------------------------------------------ Article 2 of the Credit Agreement is hereby amended and restated to read in its entirety as follows: ARTICLE 2 LOANS ----- Section 2.1. Available Commitment: GFC Option. - ----------- -------------------------------- (a) MBIA may from time to time prior to the Expiration Date request that each Lender make Loans to MBIA hereunder, upon the terms and conditions set forth in this Agreement. (b) In the event that MBIA HAS REQUESTED THAT a Revolving Loan be made under this Agreement prior to the Expiration Date in an amount not exceeding the aggregate Available Commitment of the Lenders at the time of such Revolving Loan, each Lender (other than GFC) severally and not jointly agrees, upon the terms and subject to the conditions of this Agreement, to lend to MBIA its pro rata share of such Revolving Loan or, if less, an amount equal to the Available Commitment of such Lender at such time. (c) In the event that MBIA HAS REQUESTED THAT a Term Loan be made under this Agreement as a GFC Funding Rate Loan prior to the Expiration Date in an amount not exceeding the aggregate Available Commitment of the LENDERS AT THE TIME of such Term Loan, GFC may, at its option by notice to the Agent on or prior to the date on which such Term Loan is to be made hereunder, lend to MBIA all or any portion of such Term Loan upon the terms and conditions set forth in this Agreement. In the event that on the date on which such Term Loan is to be made hereunder, GFC has not made the entire Term Loan, each other Lender agrees, severally and not jointly, upon the terms and subject to the conditions of this Agreement, to lend to MBIA on such date its pro rata share of such Term Loan or of the remaining portion thereof, as the case may be, or, if less, an amount equal to the Available Commitment of such Lender at such time. -2- (d) In the event that MBIA has requested that a Term Loan be made under this Agreement as A QUOTED RATE LOAN, a Federal Funds Rate Loan or a Base Rate Loan prior to the Expiration Date in an amount not exceeding the aggregate Available Commitment of the Lenders at the time of such Term Loan, each Lender (other than GFC) agrees, severally and not jointly, upon the terms and subject to the conditions of this Agreement, to lend to MBIA on such date its pro rata share of such Term Loan or, if less, an amount equal to the Available Commitment of such Lender at such time. (e) For purposes of this Section 2.1, the pro rata share of each Lender (other than GFC) of a Loan or portion thereof shall equal its Commitment as a percentage of the aggregate Commitments of all Lenders other than GFC. Section 2.2. Manner of Borrowing and Disbursement. - ----------- ------------------------------------ (a) Not later than 11:00 a.m., New York City time, on the day on which a Federal Funds Rate Loan or Base Rate Loan is to be made hereunder, not later than 10:00 a.m., New York City time, on the date on which a GFC Funding Rate Loan is to be made hereunder, and not later than three (3) Business Days prior to the date on which a Quoted Rate Loan is to be made hereunder, MBIA shall give the Agent a notice (which notice shall be irrevocable) specifying (i) the date on which such Loan is to be made, which shall be a Business Day, (ii) the amount of the proposed borrowing, (iii) the purpose of the proposed borrowing, (iv) whether such Loan is to be made as a Term Loan or a Revolving Loan and, if such Loan is a Term Loan, the Designated Maturity Date thereof, (v) whether such Loan is to be made as a Base Rate Loan, a Federal Funds Rate Loan or a Quoted Rate Loan or, in the case of a Term Loan, a GFC Funding Rate Loan, and (vi) if such Loan is to be a Quoted RATE LOAN, THE INTEREST PERIOD WITH RESPECT THERETO, WHICH notice shall be substantially in the form of, and contain the certificates contained in, Exhibit B hereto. (b) Each Loan shall be in the amount of at least $10,000 and, in the case of GFC Funding Rate Loans, shall be in integral multiples of $100,000; provided that no Lender shall be required to make its share of a Loan hereunder - -------- if the amount of such Loan would exceed the aggregate Available Commitments of the Lenders on the date of such Loan or if, after giving effect to such Loan, the aggregate outstanding principal amount of Loans owed to all Lenders would be less than $1,000,000; and provided further, that the parties acknowledge that -------- ------- MBIA shall not request a GFC Funding Rate Loan unless, after giving effect to such Loan, the aggregate -3- OUTSTANDING PRINCIPAL amount of all GFC Funding Rate Loans would be less than $1,000,000. (c) Upon receipt of each notice described in paragraph (a), the Agent shall promptly (and not later than thirty (30) minutes after the notice of borrowing from MBIA is received by the Agent in the event that the borrowing is to be made on the same day as such notice) notify each Lender of the contents thereof, and of the amount of such Lender's share of such Loan hereunder or, in the case of a TERM LOAN WHICH IS requested to be made as a GFC Funding Rate Loan, the maximum amount of such Lender's share thereof in the event that GFC does not elect to lend any portion of such Term Loan. Upon receipt by the Agent GFC's election to make or not to make a Term Loan pursuant to SECTION 2.1(C), THE AGENT SHALL GIVE prompt notice of such election to each Lender and to MBIA. In the case of a Revolving Loan or of a Term Loan (or portion thereof) which GFC has not elected or is not entitled to elect to make, each Lender shall, not later than 1:00 p.m. (New York City time) on the date specified in such notice, make available to the Agent at the Agent's Office, for such account as the Agent shall designate, the amount of its share of such Revolving Loan or such Term Loan (or portion thereof) in immediately available funds. In the event that GFC has elected to make a Term Loan or a portion thereof but has failed to make the amount of such Term Loan or of such portion available to the Agent as provided above in this Section prior to 1:00 p.m. (New York City time) on the date on which such Term Loan is to be made, the Agent shall, not later than 1:30 p.m. (New York City time) on SUCH DATE, NOTIFY EACH OTHER Lender of such failure, and each other Lender shall, not later than 3:00 p.m. (New York City time) on such date make available to the Agent at the Agent's Office, for such account as the Agent shall designate, the amount of its share of such Term Loan of such portion thereof in immediately available funds. (d) On the date specified in THE NOTICE DESCRIBED in paragraph (a) above, the Agent shall, subject to the satisfaction of the conditions set forth in Article 4, disburse the amounts made available to the Agent by the Lenders in like funds by transferring such amount to an account of MBIA maintained at the Agent or by wire transfer to an account in New York City pursuant to MBIA's instructions. Section 2.3. Notes - ----------- ----- (a) Each Lender's share of Revolving Loans shall be evidenced by, and be repayable with interest in accordance with the terms of, a single Revolving Loan Note payable to the -4- order of such Lender, substantially in the form of Exhibit C-1 to this Agreement. Each Revolving Loan Note shall be dated the Effective Date (or such later date on which such Note is issued) and shall be duly executed and delivered by MBIA. Each portion of a Term Loan made by a Lender shall be evidenced by, and be repayable with interest in accordance with the terms of, a Term Loan Note payable to the order of such Lender, substantially in the form of Exhibit C-2 to this Agreement. Each Term Loan Note shall be dated the date of the related Term Loan and shall be duly executed and delivered by MBIA. (b) Each LENDER IS IRREVOCABLY AUTHORIZED from time to time to record the date and amount of each Loan, whether such Loan is a Base Rate Loan, a Federal Funds Rate Loan, a Quoted Rate Loan or a GFC Funding Rate Loan and each payment and prepayment with respect to each Loan on the grid attached to the related Note or on a continuation thereof which may be attached thereto by such Lender and made a part thereof, and any such notation shall, absent manifest error, constitute crime facie evidence of the accuracy of the information so ----- ----- recorded; provided, that the failure to make any such notation shall not affect -------- the validity of MBIA's obligations hereunder or under such Note. Section 2.4. Interest Rates and Payment Dates. - ----------- -------------------------------- (a) Each Loan or portion thereof owed to any Lender other than GFC hereunder shall be a Base Rate Loan, a Federal Funds Rate Loan or a Quoted Rate Loan, as designated by MBIA pursuant to Section 2.2(a), 2.4(h) or 2.4(i); provided that no more than five (5) Quoted Rate Loans may be outstanding at - -------- any one time. Any Term Loan (or portion thereof) shall be a GFC Funding Rate Loan for each day during which such Term Loan (or such portion) is owed to GFC. (b) MBIA agrees to pay interest in respect of the unpaid principal amount of each Base Rate Loan for each day from and including the day such Base Rate Loan was made to but excluding the day the principal on such Base Rate Loan is due (whether at maturity, by acceleration or otherwise) or, if earlier, the date on which such Loan ceases to be a Base Rate Loan, at a rate per annum equal to the Base Rate Margin plus the Base Rate, which interest rate shall change as and when the Base Rat e shall change. Such interest shall be payable on each successive Payment Date commencing with the first such date after the making of such Base Rate Loan and when the principal amount of such Base Rate Loan is due (whether at maturity, by acceleration or otherwise) or such Loan ceases to be a Base Rate Loan. -5- (c) MBIA agrees to pay interest in respect of the unpaid principal amount of each Quoted Rate Loan for each day from and including the day such Quoted Rate Loan was made to but excluding the day the principal on such Quoted Rate Loan is due (whether at maturity, by acceleration or otherwise), at a rate per annum equal for each Interest Period applicable thereto to the Quoted Rate Margin plus the applicable Quoted Rate for such Interest Period. Such interest shall be payable on the last day of each Interest Period and when the principal amount of such Quoted Rate Loan is due (whether at maturity, by acceleration or otherwise) or such Loan ceases to be a Quoted Rate Loan. (d) MBIA agrees to pay interest in respect of the unpaid principal amount of each Federal Funds Rate Loan for each day from and including the day such Federal Funds Rate Loan was made to but excluding the day the principal on such Federal Funds Rate Loan is due (whether at maturity, by acceleration or otherwise) or, if earlier, the date on which such Loan ceases to be a Federal Funds Rate Loan, at a rate PER ANNUM equal to the Federal Funds Margin plus the Federal Funds Rate, which interest rate shall change as and when the Federal Funds Rate s hall change. Such interest shall be payable on each successive Payment Date commencing with the first such date after the making of such Federal Funds Rate Loan and when the principal amount of such Federal Funds Rate Loan is due (whether at maturity, by acceleration or otherwise) or such Loan ceases to be a Federal Funds Rate Loan. (e) MBIA agrees to pay interest in respect of the unpaid principal amount of each GFC Funding Rate Loan for each day from and including the day such GFC Funding Rate Loan was made to but excluding the day the principal on such GFC Funding Rate Loan is due (whether at maturity, by acceleration or otherwise) or, if earlier, the date on which such Loan ceases to be a GFC Funding Rate Loan, AT A RATE PER ANNUM equal to the GFC Funding Rate Margin plus the GFC Funding Rate, which interest rate shall change as and when the GFC Funding Rate shall change. Such interest shall be payable on each successive Payment Date commencing with the first such date after the making of such GFC Funding Rate Loan and when the principal amount of such GFC Funding Loan is due (whether at maturity, by acceleration or otherwise) or such Loan ceases to be a GFC Funding Rate Loan. (f) Any overdue principal of any Loan and, to the extent permitted by law, overdue interest thereon shall bear interest (after as well as before judgment), payable on demand, for each day from and including the date payment -6- thereof was due to but excluding the date of actual payment, at a rate per annum equal to (i) in the case of Quoted Rate Loans, until the end of the then current Interest Period, the sum of 2% plus the interest rate otherwise applicable to such Loan, (ii) in the case of Federal Funds Rate Loans and GFC Funding Rate Loans, the sum of 2% plus the interest rate otherwise applicable to such Loan and (iii) otherwise, the sum of 2% plus the Base Rate Margin plus the Base Rate from time TO TIME IN EFFECT, WHICH INTEREST RATE SHALL change as and when the Base Rate shall change. (g) The Agent shall DETERMINE EACH INTEREST RATE applicable to the Loans hereunder. The Agent shall give prompt notice to MBIA and each Lender by telex or cable of each rate of interest so determined, and its determination thereof shall be conclusive, absent manifest error. (h) Subject to the provisions of this Section 2.4(h) and Section 2.5, MBIA shall have the option (i) to convert all or any part of its outstanding Base Rate Loans to Federal Funds Rate Loans or Quoted Rate Loans at any time, (ii) TO CONVERT ALL OR any part OF ITS OUTSTANDING Federal Funds Rate Loans to Base Rate Loans or Quoted Rate Loans at any time, (iii) to convert all or any part of its outstanding Quoted Rate Loans to Federal Funds Rate Loans or Base Rate Loans upon the expiration of the Interest Period applicable to such Quoted Rate Loans, or (iv) to continue all or any part of any Quoted Rate Loans as a Quoted Rate Loan upon the expiration of the Interest Period applicable thereto with either the same or a different Interest Period; provided that, in the case -------- of clause (iv) above or of any conversion of a Loan into a Quoted Rate Loan, there does not exist a Default or an Event of Default at such time. Any part of a Loan converted to or continued as a Quoted Rate Loan pursuant to this Section 2.4(h) shall be in an amount equal to at least $10,000. If MBIA elects to convert a Federal Funds Rate Loan or a Base Rate Loan into a Quoted Rate Loan or a Quoted Rate Loan into a Federal Funds Rate Loan or a Base Rate Loan, or to continue a Quoted Rate Loan but change the Interest Period with respect thereto pursuant to this Section 2.4(h), it shall give the Agent at least three (3) Business Days' prior written notice of such conversion or change. Such notice shall, in the case of a conversion into or continuation of a Quoted Rate Loan, specify the Interest Period applicable to such Loan. In the absence of such notice, MBIA shall be deemed to have elected at the end of each Interest Period for a Quoted Rate Loan to continue (subject to Section 2.5) such Quoted Rate Loan as a Quoted Rate Loan having the same Interest Period. -7- (i) On the date a Term Loan (or portion thereof) ceases to be a GFC Funding Rate Loan, such Term Loan (or such portion) shall automatically convert into a Federal Funds Rate Loan on such date, unless MBIA shall have given the Agent written notice (i) of its election to convert such Loan into a Quoted Rate Loan at least three (3) Business Days' prior to such date or (ii) of its election to convert such Loan into a Base Rate Loan not later than 11:00 a.m., New York City time, on the date on such conversion. Any such notice with respect to a Quoted Rate Loan shall specify the initial Interest Period applicable to such Quoted Rate Loan. SECTION 2.5. SUSPENSION OF CERTAIN RATES of borrowing ----------- ---------------------------------------- (a) If (i) ON ANY DATE on which a Quoted Rate would otherwise be set, the Agent shall have in good faith determined (which determination shall be conclusive) that adequate and reasonable means do not exist for ascertaining such Quoted Rate, or (ii) at any time the Agent shall have determined in good faith (which determination shall be conclusive) that the maintenance or funding of the Loans bearing interest at the Quoted Rate has been made impracticable or unlawful by (A) THE OCCURRENCE of a contingency which materially and adversely affects the interbank eurodollar market, or (B) compliance by Lenders (other than GFC) in good faith with any applicable law or governmental RULE, REGULATION, GUIDELINE OR ORDER OR ANY interpretation thereof and including the ENACTMENT OF ANY NEW law or governmental rule, regulation, guideline or order; then, and in either such event, the Agent shall on such date give notice (by - ---- telephone confirmed in writing) to MBIA and each Lender of such determination, which determination shall commence a Suspension Period. In the event that the Agent shall later determine in good faith (which determination shall be conclusive) that the circumstances giving rise to a Suspension Period no longer exist, it shall give MBIA and each Lender notice (by telephone confirmed in writing) on the day such determination is made, which date shall end such Suspension Period. -8- (b) Upon the commencement and during the continuation of any Suspension Period, all Loans which would otherwise be made or continued as Quoted Rate Loans shall be made or continued instead as Federal Funds Rate Loans or Base Rate Loans, as MBIA may have elected by notice received by the Agent prior to 11:00 a.m., New York City time, on the date on which such Loan is to be made or, in the absence of such notice from MBIA, as Federal Funds Rate Loans. (c) If the Agent notifies MBIA of a determination under subsection (a)(ii) of this Section 2.5, MBIA shall, on the date specified in such notice, either (x) prepay all Quoted Rate Loans in accordance with Section 2.7 hereof or (y) elect by notice received by the Agent (which shall promptly furnish copy thereof to the affected Lender) prior to such date to convert such Loans into Federal Funds Rate Loans or Base Rate Loans. Absent notice from MBIA of its choice of (x) or (y), all Quoted Rate Loans shall automatically be converted into Federal Funds Rate Loans upon such specified date. Section 2.6. Repavment of Loans. - ----------- ------------------ (a) All Revolving Loans shall mature and the aggregate unpaid principal amount thereof shall be due and payable on the Expiration Date. (b) Each Term Loan shall mature and the unpaid principal amount thereof shall be due and payable on the Designated Maturity Date of such Term Loan. Section 2.7. Prepayments. - ----------- ----------- (a) MBIA shall have the right at any time, and from time to time, upon notice to the Agent to prepay Loans, in whole or in part. Any such notice shall be given no later than 10:00 a.m., New York City time, on the date of prepayment in the case of a prepayment of Federal Funds Rate Loans or Base Rate Loans, not later than 5:00 p.m., New York City time, on the Business Day preceding the date of prepayment in the case of a prepayment of GFC Funding Rate Loans, and no later than three (3) Business Days prior a prepayment of Quoted Rate Loans. Any such notice shall specify (i) the amount of the Loans to be prepaid, (ii) whether such prepayment is to be applied to Revolving Loans or Term Loans, or both, (iii) whether such prepayment is to be applied to Federal Funds Rate Loans, Base Rate Loans, Quoted Rate Loans or GFC Funding Rate Loans, or any one or more of the foregoing, (iv) if applicable, what portion of the prepayment is to be applied -9- to each Loan, (v) if applicable, which Quoted Rate Loans and which Term Loans are to be prepaid, and (vi) the date of prepayment (which shall be a Business Day). In the absence of such direction from MBIA, partial principal prepayments of Loans shall be applied (1) first to Base Rate Loans which are Revolving Loans, (2) then to Federal Funds Rate Loans which are Revolving Loans, (3) then to then to other Revolving Loans in chronological order of the expiration of the current Interest Periods for such Loans, (4) then to Base Rate Loans which are term loans in chronological order of maturity, (5) then to Federal Funds Rate Loans which ARE TERM LOANS in chronological order or maturity, (6) then to Term Loans which ARE QUOTED RATE LOANS IN CHRONOLOGICAL ORDER OF the expiration of the current Interest Periods for such Loans, and (7) then to Term Loans which are GFC Funding Rate Loans (b) Amounts to be prepaid pursuant to this Section 2.7 shall irrevocably be due and payable on the date specified in the applicable notice of prepayment. Interest on the amounts prepaid, accrued to the prepayment date, shall be paid on such date and, in the case of (i) a Quoted Rate Loan, if the date of prepayment is other than the expiration date of the Interest Period for such Loan,or (ii) a GFC Funding Rate Loan, if the date of prepayment is other than the maturity date of such Loan, such prepayment shall be accompained by the payment required by Section 3.4. (c) Each prepayment of Loans other than GFC Funding Rate Loans shall be in an amount of at least $10,000, and no partial prepayment of Loans shall be permitted if, after giving effect thereto, the aggregate outstanding principal balance of all Loans would be less than $1,000,000. Each prepayment of GFC Funding Rate Loans SHALL BE IN AN INTEGRAL multiple of $100,000, and no partial prepayment of GFC Funding Rate Loans shall be permitted if, after giving effect thereto, the aggregate outstanding principal balance of the GFC Funding Rate Loans would be less than $1,000,000. (d) Amounts prepaid or repaid in respect of Loans may be borrowed and reborrowed from time to time prior to the Expiration Date subject to the terms and conditions of this Agreement. Section 2.8. Pro Rata Payments. Unless otherwise expressly provided ----------- ----------------- herein, each payment and prepayment of Revolving Loans shall be made to the Lenders pro rata on the basis of the respective unpaid principal amounts of Revolving Loans owed to the Lenders immediately prior to such payment or prepayment, and each payment and prepayment of a Term Loan shall be made to the Lenders to which repayment of such Term -10- Commitments by giving the Agent at least three (3) Business Days notice thereof. Any such reduction shall be in an integral multiple of $100,000 and a reduction not CONSTITUTING A TERMINATION SHALL not be PERMITTED IF, AFTER giving effect thereto, the aggregate Commitments would be less than $1,000,000. Any notice of reduction or termination pursuant to this Section 3.2(a) shall be irrevocable. Any such reduction shall be applied to the Commitment of each Lender (other than GFC) pro rata based upon its respective Commitment as in effect immediately prior to SUCH REDUCTION, and any such termination shall terminate the Commitments of all Lenders. (b) The Commitments of the Lenders hereunder shall automatically be reduced to zero, and the obligations of the Lenders to make additional Loans shall automatically terminate, on the Expiration Date. (b) Clause (iv) of Section 3.4 of the Credit Agreement is hereby amended to add the following at the end thereof: or any PREPAYMENT OR PAYMENT OF ANY GFC FUNDING RATE LOAN (including without limitation pursuant to Section 2.7) on a date which is not the Designated Maturity Date of such Loan. (c) The provisions of Section 3.5(d) of the Loan Agreement shall be inapplicable to GFC, insofar as such provisions may require GFC to make monetary payments to MBIA, but shall apply to any of GFC's Participants in accordance with its terms. If (i) MBIA would be required to make an additional payment (the "Subject Payment") to GFC pursuant to Section 3.5(b) of the Loan Agreement, and (ii) except for the operation of this Section 1.3(c), MBIA -11- would have been entitled to receive a return of or reimbursement for all or a portion of such payment under Section 3.5(d) of the Loan Agreement, then MBIA shall not be required to make the Subject Payment (or such portion thereof) to GFC, unless GFC agrees with MBIA to make any payments under Section 3.5(d) of the Loan Agreement relating to the Subject Payment (or such portion thereof) or has made provisions reasonably satisfactory to MBIA for the making of any such related payments. (d) Section 4.2 is hereby amended to add the following clause (i) following clause (h) THEREOF: (i) In the case of a Term Loan, each Lender making such Term Loan shall have a received a Term Loan Note in respect thereof payable to such Lender in the amount of its share of such Term Loan and stating the Designated Maturity Date of such Term Loan. Any Lender may waive the condition of prior delivery of a Term Loan Note in respect of its share of a Term Loan (and shall be deemed to have done so in the event it makes its pro rata share of such Term Loan prior to such delivery); provided that in the event of any such waiver, MBIA agrees to -------- deliver to such Lender a Term Loan Note as provided in this clause (i) and Section 2.3(a) not later than five (5) Business Days after the date of such Term Loan; and Provided further that the failure of MBIA to deliver a Term Loan Note ---------------- to a Lender shall not affect the validity of any of MBIA's obligations hereunder, including without limitation its obligation to repay such Term Loan together with interest thereon as provided herein. (e) Section 9.9 of the Credit Agreement is hereby amended to add the following at the end thereof: Notwithstanding the foregoing, GFC or any other Lender shall have the right to assign, sell or otherwise transfer in whole or in part its rights and/or OBLIGATIONS UNDER THIS AGREEMENT, the Loan Documents and any Loan or any portion thereof to Credit Suisse or to any other Person consented to in writing by MBIA, in which case such assignee shall have the full rights and obligations of a "Lender", and the assignor shall be relieved and released of its obligations, under this Agreement, the Loan Documents and the Loans to the extent of such assignment. Any such assignee which prior to such assignment was not a Lender shall promptly deliver to MBIA the forms and documents applicable to it contemplated by Section 3.5(c) and shall, by its acceptance of such assignment, be bound by the provisions set forth in the second sentence of Section 3.5(d). -12- For purposes of the Credit Agreement, a "Participant" (as otherwise defined in Section 9.9 of the Credit Agreement) shall also include any bank, insurance company or other financial institution providing liquidity, credit enhancement or back-up acquisition support or facilities to GFC in respect of any GFC Funding Rate Loans, and the rights of a Participant under the Credit Agreement shall apply to any such institution in respect of commitments and obligations to, and its funding of advances to, GFC in respect of GFC Funding Rate Loans. SECTION 1.4. Amendments Relating TO LENDERS AND AGENT. - ----------- (a) Article 9 of the Credit Agreement is hereby amended by adding the following two new Sections thereto following Section 9.13 hereof: Section 9.14. Nonpetition Agreement. Notwithstanding any prior ------------ --------------------- termination of this Agreement, MBIA hereby agrees that it shall not institute against, or join any other person in instituting against, GFC any bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings, or other proceeding under any federal or state bankruptcy or similar law, for one year and a day after the latest maturing commercial paper note, medium term note or other debt security issued by GFC is paid. This Section 9.14 shall survive the termination of this Agreement. Section 9.15. Agent. (a) Each Lender hereby irrevocably appoints and ------------ ----- authorizes the Agent to act as its agent hereunder with such powers as are specifically delegated to the Agent by the terms of this Agreement, TOGETHER WITH SUCH other powers as are reasonably incidental thereto. The Agent (which term as used in this Section and in Section 9.15(d) and the first sentence of Section 9.15(e) shall include reference to its affiliates and its own and its affiliates' officers, directors, employees and agents: (i) shall have no duties or responsibilities except those expressly set forth in this Agreement, and shall not by reason of this Agreement be a trustee for any Lender; (ii) shall not be responsible to any Lender for any recitals, statements, representations or warranties contained in this Agreement, or in any certificate or other document referred to or provided for in, or received by any of them under, this Agreement or any Note or other Loan Document or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other document referred to or provided for herein or therein or for any failure by the Company to perform any of its obligations hereunder or thereunder; (iii) shall not be required to initiate or conduct any litigation or collection proceedings -13- hereunder or under any Note; and (iv) shall not be responsible for any action taken or omitted to be taken by it hereunder or under any other document or instrument referred to or provided for herein or therein or in connection herewith or therewith, except for its own gross negligence or willful misconduct. The Agent may employ agents and attorneys-in-fact and shall not be responsible for the negligence or misconduct of any such agents or attorneys- infact selected by it in good faith. (b) The Agent shall be entitled to rely upon any certification, notice or other communication (including any thereof by telephone, telecopy, telex, telegram or cable) believed by it to be genuine and correct and to have been signed or sent by or on behalf of the proper Person or Persons, and upon advice and statements of legal counsel, independent accountants and other experts selected by the Agent. As to any other matters not expressly provided for by this Agreement, the Agent shall in all cases be fully protected in acting, or in refraining from acting, hereunder or under any Note in accordance with instructions of the Majority Lenders, and such instructions of the Majority Lenders and any action taken or failure to act pursuant thereto shall be binding on each Lender. (c) The Agent, if it is a Lender hereunder, shall have the same rights and powers hereunder as any other Lender and may exercise the same as though it were not acting as the Agent, and in such event the term "Lender" or "Majority Lenders" shall, unless the context otherwise indicates, include the Agent in its individual capacity. (d) Each Lender (other than GFC) agrees to indemnify the Agent (to the extent not reimbursed under Section 9.1, but without limiting the obligations of MBIA under said Section 9.1) for any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind and nature whatsoever which may be imposed on, incurred by or asserted against the Agent in any way relating to or arising out of this Agreement, any Note or any other documents contemplated by or referred to herein or therein or the transactions contemplated hereby (excluding normal administrative costs and expenses incident to the performance of its agency duties hereunder) or the enforcement of any of the terms hereof or of any such other documents, Provided that no Lender shall be liable for any of the -------- foregoing to the extent they arise from the gross negligence or willful misconduct of the party to be indemnified. Each Lender's proportionate share of any obligations under this Section -14- 9.15(d) shall equal such Lender's Commitment as a percentage of the Commitments of all Lenders (other than GFC) or, if no Lender has a Commitment, the aggregate outstanding principal amount of Loans owed to such Lender as a percentage of the aggregate outstanding principal amount of Loans owed to all Lenders other than GFC. This Section 9.15(d) shall survive the termination of this Agreement. (e) Each Lender agrees that it has, independently and without reliance on the Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own credit analysis of and the decision to enter into this Agreement or acquire its share of the Loans and that it will, independently and without reliance upon the Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own analysis and decisions in taking or not taking action under this Agreement or its Notes. The Agent shall not be required to keep itself informed as to the performance or observance by MBIA of this Agreement or any Note or OTHER LOAN DOCUMENTS. (f) Except for actions expressly required of the Agent hereunder, the Agent shall in all cases be fully justified in failing or refusing to act hereunder or under any Note unless it shall receive further assurances to its satisfaction from each Lender (other than GFC) of its indemnification obligations under Section 9.15(d) against any and all liability and expense which may be incurred by it by reason of taking or continuing TO TAKE ANY SUCH ACTION. (g) The Agent may resign as Agent upon 10 days' notice to each Lender and MBIA with such resignation becoming effective upon a successor agent succeeding to the rights, powers and duties of the Agent pursuant to this Section 9.15(g). If the Agent shall RESIGN AS AGENT UNDER THIS Agreement, then the Majority Lenders shall appoint a successor agent, subject to consent by MBIA, which consent shall not be unreasonably withheld. The successor agent shall succeed to the rights, powers and duties of the Agent, and the term "Agent" shall mean such successor agent effective upon its appointment, and the former Agent's rights, powers and duties as Agent shall be terminated, without any other or further act or deed on the part of such former Agent or any of the parties to this Agreement. After any rettiring Agent's resignation as Agent, the provisions of this Section shall inure to its benefit as to any actions TAKEN OR OMITTED TO BE TAKEN BY IT WHILE IT WAS AGENT UNDER THIS AGREEMENT. -15- (b) In addition to the modifications contained in provisions of the Credit Agreement referred to above in this Amendment, references in the Credit Agreement to the "Bank" are hereby amended to constitute references to each of the Lenders, except as follows: (i) For purposes notices to be provided by MBIA to the "Bank" (including without limitation notices of borrowing), such references shall mean the Agent; (ii) For purposes of Section 3.1, such references shall mean each Lender other than GFC; (iii) For purposes of Section 7.2(a), such references shall mean the Agent acting at the direction of the Majority Lenders; (iv) The Agent, in its capacity as such, shall be entitled to the benefits of Section 9.1 of the Credit Agreement. (v) For purposes of any consents or waiver which under the Agreement may be given by the "Bank", including without limitation Section 9.13, such references shall mean the "Majority Lenders" (which may act through the Agent); Provided that any consent or waiver which (A) affects the amount of the - -------- Commitment of any Lender, (B) alters the amount or the timing of any payment hereunder or under any Note, the provisions of Section 3.4 or the requirement pursuant to Section 2.8 of the pro rata application of all amounts received by the Agent in respect of the Loans, (C) permits any subordination of the principal of or interest on any Loan, (D) alters the amount of any fee to be paid to any Lender, or (E) changes the percentage of the Lenders required to constitute the Majority Lenders or otherwise modifies voting rights of Lenders, each shall required the prior written consent of each adversely affected Lender; provided further that any consent or waiver -which enlarges the obligations of - -------- ------- GFC hereunder shall require the prior written consent of GFC; and provided -------- further that any consent or waiver which alters the rights or obligations of the - ------- Agent shall, in addition, require the prior written consent of the Agent. (c) For purposes of Section 9.8 of the Credit Agreement, the initial address of the Agent shall be 12 East 49th Street, New York, New York 10017, Attention: Public Finance Department, Telecopier No. 212-238-5358, and the initial respective addresses of the Lenders shall be as set forth on the signature pages to this Amendment. -16- SECTION 1.5. Amendments to Definitions. - ----------- ------------------------- (a) The definition of "Available Commitment" contained in Exhibit A to the Credit Agreement is hereby amended and restated to read in its entirety as follows: "Available Commitment" shall mean, as of any day with respect to a Lender -------------------- other than GFC, such Lender's Commitment, minus the sum of (a) the outstanding principal amount of Loans owed to such Lender on such day, plus (a) a share of the outstanding principal amount of Loans owned to GFC on such day times a fraction, the numerator of which equals the Commitment of such Lender and the denominator of which equals the aggregate Commitments of all Lenders (other than GFC). (b) The definition of "Business Day" contained in Exhibit A of the Credit Agreement is hereby amended and restated to read in its entirety as follows: "Business Day" shall mean any day excluding (i) Saturday and Sunday and ------------ (ii) any day on which banks in New York City are authorized by law or other governmental action to close. In the case of matters relating to the making, conversion, continuation, payment or prepayment of Quoted Rate Loans or the determination of the Quoted Rate, a "Business Day" shall be such a day which is ------------ also a day for trading by and between banks in U.S. Dollar deposits in the London interbank eurodollar market. (c) The definition of "Commitment" contained in Exhibit A of the Credit Agreement is hereby amended and restated to read in its entirety as follows: "Commitment" shall mean, with respect to any Lender, the amount set forth ---------- opposite its name on the signature pages to this Agreement or any amendment, joinder or related agreement by which such Lender became a party hereto or by which such Lender modified its Commitment hereunder, as such amount may be reduced from time to time pursuant to Section 3.2 or Section 7.2. (d) Clause (d) of the definition of "Interest Period" contained in Exhibit A of the Credit Agreement is hereby amended and restated to read in its entirety as follows: (d) no Interest Period in respect of a Revolving Loan shall extend beyond the Expiration Date in effect on the first day of such Interest Period, and no Interest Period in respect of a Term Loan shall extend beyond the Designated Maturity Date for such Term Loan. (e) The definition of "Note" contained in Exhibit A of the Credit Agreement is hereby amended and restated to read in its entirety as follows: "Note" shall mean each Term Note and each Revolving Loan Note and, unless. the context otherwise requires, shall mean all Term Notes and all Revolving Loan Notes collectively. (f) The following additional definitions and crossreferences are hereby added to Exhibit A of the Credit Agreement in their respective appropriate alphabetical order: "Agent" - Preamble. ----- "CP Disruption Event" means, at any time for any reason whatsoever, GFC ------------------- shall be unable to raise, or shall be precluded or prohibited from raising funds through the issuance of commercial paper notes in the commercial paper market of the United States including, without limitation (i) by virtue of insufficient availability under any liquidity or credit support agreement entered into by GFC with respect to the GFC Funding Rate Loans or (ii) the downgrading of one or more institutions providing commitments to GFC under such support agreements. "Credit Suisse" - Preamble. ------------- "Designated Maturity Date" shall mean, with respect to a Term Loan, the ------------------------ earlier to occur of (a) the date designated by MBIA as the maturity date of such Term Loan in its related notice of borrowing delivered pursuant to Section 2.2(a), which shall not be fewer than thirty (30) days after the date on which such Term Loan is to be made hereunder unless each affected Lender otherwise consents in writing, or (b) the fifth anniversary of the date on which such Term Loan is made. "GFC" - Preamble. --- "GFC Funding Rate" shall mean, for any day, the sum of (i) the weighted ---------------- average of the per annum rates (or, if such rates are expressed as discount rates, the weighted average of the per annum rates resulting from converting such discount rates to an interest bearing equivalent) of GFC's commercial paper notes allocated by GFC to the funding or maintenance of the GFC Funding Rate Loans on such day plus (ii) 0.05% in respect of dealer fees; Provided that if a -------- -18- Disruption Event shall have occurred and be continuing, the GFC Funding Rate for a GFC Funding Rate Loan SHALL EQUAL A QUOTED Rate for overnight periods (as determined by the Agent) from the date of the occurrence of such event to but excluding the next Payment Date and thereafter a Quoted Rate for a one month period (as determined by the Agent) for each period commencing on a Payment Date to but excluding the next following Payment Date (or, if earlier, the Designated MATURITY DATE OF such GFC Funding Rate Loan). "GFC FUNDING RATE LOAN" shall mean a Loan or a portion thereof, the --------------------- interest on which computed at the rate SPECIFIED in Section 2.4(e). "GFC Funding Rate Margin" shall mean two-tenths of one percent (.20%) plus ----------------------- the Applicable Margin. "Lenders" - Preamble. ------- "Majority Lenders" shall mean Lenders holding, in the aggregate, Available ---------------- Commitments and unpaid principal amounts of Loans representing more than 50% of the aggregate of the Available Commitments of all Lenders and the aggregate unpaid principal amounts of all Loans. "Revolving Loan" shall mean a Loan designated by MBIA as a Revolving Loan -------------- in its related notice of borrowing delivered pursuant to Section 2.2(a). "Revolving Loan Note" shall mean each promissory note of MBIA issued to a ------------------- Lender pursuant to Section 2.3 evidencing the Revolving Loans and any other note issued by MBIA and accepted by a Lender or a transferee in exchange, substitution or replacement therefor, as each may be amended from time to time. "Term Loan" shall mean a Loan designated by MBIA as a Term Loan in its --------- related notice of borrowing delivered pursuant to Section 2.2(a). "Term Note" shall mean each promissory note of MBIA issued to a Lender -------- pursuant to Section 2.3 evidencing the Term Loans and any other note issued by MBIA and accepted by a Lender or a transferee in exchange, substitution or replacement therefor, as each may be amended from time to time. SECTION 1.6. Amendments to Exhibits. Exhibits B and C of the Credit ----------- ---------------------- Agreement are hereby amended and restated as set forth as Exhibits B. C-1 and C- 2, respectively, to this Amendment. -19- ARTICLE II REPRESENTATIONS AND WARRANTIES In order to induce the Agent and the Lenders to enter into this Amendment and to induce the Lenders to make Loans under the Credit Agreement as amended hereby, MBIA makes the following representations and warranties to the Agent and the Lenders, which shall survive the execution and delivery of this Amendment and the making of any Loans: SECTION 2.1. Due Authorization, Etc. The execution, delivery and ----------- ---------------------- performance by MBIA of this Amendment and the Loan Documents as amended hereby are within its corporate powers, have been duly authorized by all necessary corporate action and do not and will not (i) violate any provision of any law, rule, regulation (including, without limitation, the Investment Company Act of 1940, as amended, or Regulations G. T. U or X of the Board of Governors of the Federal Reserve System), order, writ, judgment, injunction, decree, determination or award presently in effect having applicability to MBIA or of the corporate charter or by-laws of MBIA, (ii) result in a breach of or constitute a default under any indenture or loan or credit agreement or any other agreement, lease or instrument to which MBIA is a party or by which it or its properties may be bound or affected, or (iii) result in, or require, the creation or imposition of any Lien upon or with respect to any of the properties now owned or hereafter acquired by MBIA, other than, in the case of clauses (ii) and (iii), breaches, defaults or Liens which could not materially and adversely affect the business, assets, operations or financial condition of MBIA and its subsidiaries considered as a whole or of the New York Insurance Subsidiary or the ability of MBIA to perform its obligations under any Loan Document. SECTION 2.2. Approvals. No consent, approval or other action by, or any ----------- --------- notice to or filing with any court or administrative or governmental body is or will be necessary for the valid execution, delivery or performance by MBIA of this Amendment or the Loan Documents as amended thereby. SECTION 2.3. Enforceability. This Amendment and each Loan Document as ----------- -------------- amended hereby, constitutes a legal, valid and binding obligation of MBIA, enforceable against MBIA in accordance with their respective terms, except as such enforceability may be limited by bankruptcy, insolvency, moratorium or other similar laws affecting the enforcement of creditors' rights generally and the availability of equitable remedies, whether such matter is heard in a court of law or a court of equity. -20- SECTION 2.4. Financial STATEMENTS, ETC. (A) MBIA HAS heretofore furnished ----------- ------------------------- to the Agent (i) its audited consolidated and unaudited consolidating balance sheets of at December 31, 1995, the related audited consolidated statements of income, changes in stockholders' equity and financial position or cash flows, as the case may be, and unaudited consolidating statements of income for the year ended December 31, 1995, and (ii) its unaudited consolidated and consolidating balance sheets as of March 31, 1996, and the related consolidated statements of income, changes in stockholders' equity and cash flows for the three months ended March 31, 1996. Such financial statements were prepared in accordance with generally accepted accounting principles consistently applied and present fairly the consolidated financial position and consolidated results of operations and cash flows of MBIA and its subsidiaries at the dates and for the periods indicated therein. There has been no material adverse change in the consolidated financial position or consolidated results of operations or cash flows of MBIA and its subsidiaries taken as a whole or of the New York Insurance Subsidiary since March 31, 1996. (b) MBIA has heretofore furnished to the Agent the annual statements and financial statements of the New York Insurance Subsidiary as filed with the New York Department of Insurance for the year ended December 31, 1995 and the quarterly statements and financial statements of the New York Insurance Subsidiary as filed with such Department for the period ended March 31, 1996. Such annual and quarterly statements and financial statements were prepared in accordance with the statutory accounting principles set forth in the New York Insurance Law, all of the assets described therein were the absolute property of the New York Insurance Subsidiary at the dates set forth therein, free and clear of any liens or claims thereon, except as therein stated, and each such annual statement is a full and true statement of all the assets and liabilities and of the condition and affairs of the New York Insurance Subsidiary as of such dates and of its income and deductions therefrom for the year or quarter ended on such dates. (c) MBIA has heretofore furnished to the Agent a copy of its annual report on Form 10-K for the fiscal year ended December 31, 1995 as filed with the Securities and Exchange Commission and its quarterly report on Form 10-Q of for the quarter ended March 31, 1996 as filed with the Securities and Exchange Commission. Such annual and quarterly reports were prepared in accordance with the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. SECTION 2.5. Confirmation of Representations and Warranties. MBIA hereby ----------- ---------------------------------------------- confirms that its representations and -21- warranties set forth in the Credit Agreement (including without limitation those set forth in Article 5 of the Credit Agreement) are true and correct as of the date hereof, and represents and warrants that no Default or Event of Default has occurred and is continuing. SECTION 2.6. Disclosure. There is no fact known to MBIA which materially ----------- ---------- adversely affects the business, assets, operations or financial condition of MBIA or the ability of MBIA to perform its obligations under any this Amendment or any Loan Document as amended hereby which has not been set forth in this Amendment, in the financial STATEMENTS or reports required to be delivered pursuant to SECTION 2.4 HEREOF. ARTICLE III MISCELLANEOUS ------------- SECTION 3.1. Credit Agreement. Except as expressly modified as contemplated ----------- ---------------- hereby, the Credit Agreement and the other Loan Documents are hereby confirmed to be in full force and effect in accordance with their respective terms. SECTION 3.2. Effectiveness. This Amendment shall be effective when executed ----------- ------------- and delivered by MBIA, GFC, Credit Suisse and the Agent. SECTION 3.3. Survival. All covenants, agreements, representations and ----------- -------- warranties made herein or in any Loan Document or in any certificate, document or instrument delivered pursuant hereto or thereto shall survive the effective date hereof, the making of any Loan and the occurrence of the Expiration Date and shall continue in full force and effect so long as principal of or on any Loan or Note remains outstanding or unpaid, any other amount payable by MBIA under the Credit Agreement as amended hereby, any Note or any other Loan Document remains unpaid or any other obligation of MBIA to perform any other act hereunder or under the Credit Agreement as amended hereby, any Note or any other Loan Document remains unsatisfied or the Lenders have any obligation to make a Loan or any other advance of moneys to MBIA under the Credit Agreement as amended hereby. SECTION 3.4. Severability. Any provision of this Amendment which is ----------- ------------ prohibited, unenforceable or not authorized in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition, unenforceability or nonauthorization without invalidating the remaining provisions hereof or affecting the validity, enforceability or legality of such provision in any other jurisdiction. -22- SECTION 3.5. Successors and Assigns. This Amendment is a continuing ----------- ---------------------- obligation and binds, and the benefits hereof shall inure to, the parties hereto and their respective successors and assigns; provided that MBIA may not transfer or assign any or all of its rights or obligations hereunder except as permitted by Section 9.9 of the Credit Agreement. SECTION 3.6. Amendments. No provision of this Amendment shall be waived, ----------- ---------- amended or supplemented except as provided in Section 9.13 of the Credit Agreement. SECTION 3.7. Governing Law. THIS AMENDMENT SHALL BE GOVERNED BY, AND ----------- ------------- CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. SECTION 3.8. Headings. Section headings in this Amendment are included ----------- -------- herein for convenience or reference only and shall not constitute a part of this Amendment for any other purpose. SECTION 3.9. Counterparts. This Amendment may be executed in several ----------- ------------ counterparts, each of which shall be regarded as the original and all of which shall constitute one and the same Amendment. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their respective officers "hereunto duly authorized as of the date first above written. MBIA, INC. By - - .1 - - NAME: CHRISTOPHER W. TILLEY TITLE:SENIOR VICE PRESIDENT AND TREASURER CREDIT SUISSE, NEW YORK BRANCH, as Agent By Name: Title: By Name: Title: Commitment: $50,000,000 CREDIT SUISSE, NEW YORK BRANCH Address: 12 East 49th Street New York, NY 10017 Attn: Public Finance By Department Name: Telecopy: 212-238-5358 Title: By Name: Title: Address: c/o Credit Suisse, GREENWICH FUNDING CORPORATION New York Branch 12 East 49th Street By: Credit Suisse, New York New York, NY 10017 Branch, as its Attorney Attn: Asset Finance in-Fact Department Telecopy: 212-238-5332 By Name: Title: By Name: Title: - -24 EXHIBIT B TO REVOLVING CREDIT AGREEMENT FORM OF NOTICE OF ----------------- BORROWING --------- [date] CREDIT SUISSE New York Branch as Agent 100 Wall Street New York, New York 10005 Attention: Public Finance Department Re: Borrowing under Revolving Credit Agreement, dated as of February 15, 1991, between MBIA Inc., Credit Suisse, New York Branch, as Agent, and the ----------------- Lenders party thereto --------------------- Dear Sirs: MBIA Inc., a Connecticut corporation ("MBIA"), hereby requests that [a Loan/Loans] be made to MBIA by the Bank under the Revolving Credit Agreement referred to above (as amended, the "Revolving Credit Agreement") as follows (all ---------------- capitalized terms herein having the meanings ascribed thereto in the Revolving Credit Agreement) : 1. The aggregate amount of the Loan[s] (the "Subject Loan[s]") requested hereby IS $ , WHICH AMOUNT DOES NOT exceed the Available Commitment. 2. The Subject Loan[s] are as follows: (a) Amount of Revolving Loans: $ Interest Period Amount (in increments (applicable to Type of Loan of $1,000,000) Quoted Rate Loans) - --------------- (b) Amount of Term Loan: $__ Designated Maturity Date (not in excess of five (5) years) Interest Period Amount (in increments (applicable to Type of Loan of $1,000,000) QUOTED RATE LOANS) 3. The date on which the Subject Loan[s] is/are requested to be made (the "Loan Date") is, 19_, which is a Business Day. 4. Each of the conditions set forth in the Revolving Credit Agreement to the Lenders' obligations to make the Subject Loan[s], including without limitation Article 4 thereof, has been satisfied. 5. The proceeds of the Subject Loan[s] will be applied as provided in Section 6.1 of the Revolving Credit Agreement and more particularly as follows: 6. The statements set forth above shall be true and correct on and as of the Loan Date. 7. The Subject Loan[s] is to be disbursed to the following account: 8. The undersigned is duly authorized and empowered in the name and on behalf of MBIA to present this Notice of Borrowing and to request and obtain the Subject Loan[s] upon and in B-2 accordance with, and subject to, the terms and conditions set forth in the Revolving Credit Agreement and the Loan Documents. IN WITNESS WHEREOF, MBIA has executed and delivered this Notice of Borrowing this _ day of , 19 _ . MBIA INC. By Name: Title: EXHIBIT C-1 TO REVOLVING CREDIT AGREEMENT FORM OF REVOLVING LOAN NOTE MBIA INC. US $[amount of Lender's New York, New York Commitment] , 199_ FOR VALUE RECEIVED, the undersigned, MBIA INC., a Connecticut corporation ("MBIA"), hereby promises to pay to the order of [name of Lender] (the "Lender") at the office of its [address of payment office], in lawful money of the United States of America in immediately available funds, the principal sum of [amount of Lender's Commitment] (US $ ) or, if less, the aggregate unpaid principal amount of the Revolving Loans (as defined in the hereinafter referred to Revolving Credit Agreement) outstanding and payable to the Lender by MBIA under the Revolving Credit Agreement dated as of February 15, 1991 among MBIA, Credit Suisse, New York Branch, as Agent, and the Lenders party thereto (as amended from time to time, the "Revolving Credit Agreement") in the amounts and on the dates set out in the Revolving Credit Agreement. MBIA also promises to pay interest on the unpaid principal amount of each Revolving Loan payable to the Lender from the date on which such Revolving Loan is made until such Revolving Loan is repaid in full at such interest rates and payable on such dates as are determined pursuant to the Revolving Credit Agreement. If any payment on this Revolving Loan Note shall be specified to be made upon a day which is not a Business Day (as defined in the Revolving Credit Agreement), it shall be made on the next succeeding Business Day (or, if earlier, on the Expiration Date as defined in the Agreement), and such extension of time shall in such case be included in computing interest, if any, in connection with such payment; provided, however, that, IN THE EVENT that the -------- day on which any such payment relating to the principal of Revolving Loans bearing interest by reference to the Quoted Rate is due is not a Business Day but is a day of the month after which no further Business Day occurs in such month, then the due date thereof shall be the next preceding Business Day. The Lender is authorized to record the date and amount of each advance of and each payment, prepayment and conversion with respect the Revolving Loans payable to such Lender on the grid attached hereto or on a continuation thereof which shall be attached hereto and made a part hereof, and any such notation shall constitute prima facie evidence of the accuracy of the information so ----------- recorded; provided that the failure to make any such notations shall not affect the validity of MBIA's obligations hereunder. Presentment, demand, protest and notice of dishonor are hereby waived by the undersigned. This Revolving Loan Note evidences Revolving Loans under, and is entitled to the benefits and subject to the provisions of, the Revolving Credit Agreement and the other Loan Documents (as defined therein). The Revolving Credit Agreement, among other things, contains provisions with respect to the acceleration of the MATURITY OF THIS Revolving Loan Note upon the happening of certain stated events, and for mandatory and optional prepayments of the principal of this Revolving Loan Note prior to maturity, all upon the terms and conditions specified therein. This Revolving Loan Note shall be construed in accordance with and governed by the laws of the State of New York. MBIA INC. By Name: Title: GRID
Unpaid Principal Principal Amount Type of Paid or Amount of Notation Date of Loan Loan Prepaid Note Made by - ------------
EXHIBIT C-2 TO REVOLVING CREDIT AGREEMENT FORM OF TERM LOAN ----------------- NOTE ---- MBIA INC. US $[amount of Lender's New York, New York share of Term Loan] ,199 Due [Designated Maturity Date] FOR VALUE RECEIVED, the undersigned, MBIA INC., a Connecticut corporation ("MBIA"), hereby promises to pay to the order of [name of Lender] (the "Lender") AT THE OFFICE OF ITS [ADDRESS OF payment office], on [Designated Maturity Date] IN LAWFUL MONEY of the United States of AMERICA IN IMMEDIATELY AVAILABLE FUNDS, the principal sum of [amount of Lender's share of Term Loan] (US $ ) or, if less, the aggregate unpaid principal balance of this Term Note. MBIA also promises to pay interest on the unpaid principal amount of the Term Loan evidenced hereby from THE DATE ON which such Term Loan is made until such Term Loan is repaid in full at such interest rates and payable on such dates as are determined pursuant to the Revolving Credit Agreement dated as of February 15, 1991 among MBIA, Credit Suisse, New York Branch, as Agent, and the Lenders party thereto (as amended from time to time, the "Revolving Credit Agreement"). If any payment on this Term Loan Note shall be specified to be made upon a day which is not a Business Day (as defined in the Revolving Credit Agreement), it shall be made on the next succeeding Business Day (or, if earlier, on the Expiration Date as defined in the Agreement), and such extension of time SHALL IN such case be included in computing interest, if any, IN CONNECTION with such payment; provided, however, that, in the event that the -------- day on which any such payment relating to the principal of Term Loans bearing interest by reference to the Quoted Rate is due is not a Business Day but is a day of the month after which no further Business Day occurs in such month, then the due date thereof shall be the next preceding Business Day. The Lender is authorized to record the date and amount of each advance of and each payment, prepayment and conversion with respect the Term Loans payable to such Lender on the grid attached hereto or on a continuation thereof which shall be attached hereto and made a part hereof, and any such notation shall constitute prima facie evidence of the accuracy of the information so ----------- recorded; provided that the failure to make any such notations shall not affect the validity of MBIA's obligations hereunder . Presentment, demand, protest and notice of dishonor are hereby waived by the undersigned. This Term Loan Note evidences a Term Loan under, and is entitled to the benefits and subject to the provisions of, the Revolving Credit Agreement and the other Loan Documents (as defined therein). The Revolving Credit Agreement, among other things, contains provisions with respect to the acceleration of the maturity of this Term Loan Note upon the happening of certain stated events, and for mandatory and optional prepayments of the principal of this Term Loan Note prior to maturity, all upon the terms and conditions specified therein. This Term Loan Note shall be construed in accordance with and governed by the laws of the State of New York. MBIA INC. By - - Name: Title: C-2-2 GRID
Unpaid Principal Principal Amount Type of Paid or Amount of Notation Date of Loan Loan Prepaid Note Made by - ------------
EX-10.46 3 TRUST AGREEMENT DATED 12/31/91 EX. 10.46 FIFTH AMENDMENT TO TRUST AGREEMENT BETWEEN FIDELITY MANAGEMENT TRUST COMPANY MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION THIS FIFTH AMENDMENT, dated as of he first day of November, 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 veto a trust agreement dated December 31, 1991, with regard to MBIA Inc. Employees Profit Sharing and 401(k) Salary Deferral 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: (1) Amending and restating Schedule "g" (Telephone Exchange Procedures), in its entirety, as attached. IN WITNESS WHEREOF, the Trustee and the Sponsor have caused this Fifth Amendment to be exempt by their duty authorized officers effective as of the day and year first above written.. MBIA INC. FIDELITY MANAGEMENT TRUST COMPANY By:___________________________ By:______________________________ Date Vice President Date MANAGED INCOME PORTFOLIO ------------------------ I. EXCHANGES BETWEEN MUTUAL FUNDS AND MANAGED INCOME PORTFOLIO ----------------------------------------------------------- Participants who wish to exchange between a mutual fund and the Managed Income Portfolio may call on any business day. If the request is received before 4:00 p.m. (ET), 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 MANAGED INCOME PORTFOLIO INTO SPONSOR STOCK ---------------------------------------------------------- Participants who wish to exchange out of the Managed Income Portfolio into Sponsor Stock may call between the 1st and He 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). Managed Income 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 Sponsor Stock is purchased within two (2) business days after the date on which the Managed Income Portfolio shares are sold. III. EXCHANGES FROM SPONSOR STOCK INTO MANAGED INCOME PORTFOLIO ---------------------------------------------------------- Participants who wish to exchange out of Sponsor Stock into the Managed Income 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 Sponsor 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 Managed Income Portfolio will take place three (3) business days later. This allows for settlement of the stock trade at the custodian and the corresponding transfer to Fidelity. IV. EXCHANGE RESTRICTIONS --------------------- Participants will not be permitted to make direct transfers from the Managed Income Portfolio into a competing fund. Participants who wish to exchange from the Managed Income Portfolio into a competing fund must first exchange into a non-competing fund for a period of 90 days. MBIA INC. FIDELITY MANAGEMENT TRUST COMPANY By:___________________________ By:_______________________________ Date Vice President Date SCHEDULE "G" TELEPHONE EXCHANGE PROCEDURES ----------------------------- The following telephone exchange procedures are currency employed by Fidelity Institutional Retirement Services Company (FIRSCO). Telephone exchange hours are 8:30 a.m. (ET) to 8:00 p.m. (ET) 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 guidelines 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. (ET) it will receive that day's trade date. Calls received after 4:00 p.m. (ET) will be processed on a next day basis. SPONSOR STOCK ------------- I. EXCHANGES FROM MUTUAL FUNDS INTO SPONSOR STOCK ---------------------------------------------- Sponsor Stock exchanges are processed on a monthly cycle. Participants who wish to exchange out of a mutual fund into Sponsor 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 Sponsor Stock is purchased within two (2) business days after the date on which the mutual fund shares are sold. II. EXCHANGES FROM SPONSOR STOCK INTO MUTUAL FUNDS ---------------------------------------------- Participant who wish to exchange out of Sponsor 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 Sponsor Stock is sold on the 16th (or the next business day if the 16th is not a business day) find the subsequent purchase into manual funds will take place three (3) business days later, This allows for settlement of the stock trade at the custodian and the corresponding transfer to Fidelity. SIXTH AMENDMENT TO TRUST AGREEMENT BETWEEN FIDELITY MANAGEMENT TRUST COMPANY AND MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION THIS SIXTH AMENDMENT, dated as of the first day of January, 1996, 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 401(k) Salary Deferral Plan (individually and collectively, 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 the "investment options" portion of Schedules "A" and "an by adding the following fund: Fidelity Value Fund IN WITNESS WHEREOF, the Trustee and the Sponsor have caused this Sixth 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:_______________________________ Date Vice President Date EX-10.57 4 FIRST RESTATED CREDIT AGREEMENT Exhibit 10.57 SECOND AMENDMENT to FIRST RESTATED CREDIT AGREEMENT among MBIA INSURANCE CORPORATION, THE BANKS SIGNATORY HERETO, CREDIT SUISSE New York Branch as Administrative Agent and DEUTSCHE BANK AG New York Branch as Documentation Agent Dated as of January l, 1936 SECOND AMENDMENT THIS AMENDMENT, dated as of January 1, 1996, between MBIA INSURANCE CORPORATION, a New York stock insurance corporation formerly known as Municipal Bond Investors Assurance Corporation ("MBIA"), and CREDIT SUISSE, a banking corporation organized under the laws of Switzerland, acting through its New York Branch ("Credit Suisse"), as Agent for the Banks referred to herein (in such capacity, the "Agent"); WHEREAS, MBIA, the Agent and the Banks identified therein are parties to the First Restated Credit Agreement, dated as of October 1, 1993, as amended by the First Amendment thereto dated as of September 23, 1994 and as supplemented by various Assignment and Assumption Agreements and Joinder Agreements, including the Assignment and Assumption Agreement dated as of the date hereof between Credit Suisse and Deutsche Bank (as so amended and supplemented, the "Credit Agreement"); and ---------------- WHEREAS, MBIA, the Agent and the Banks desire, upon the terms and subject to the conditions hereinafter set forth, to further amend the Credit Agreement in certain respects; NOW, THEREFORE, in consideration of the mutual promises contained herein and other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound hereby, agree as follows: ARTICLE I MODIFICATIONS TO CREDIT AGREEMENT --------------------------------- Section 1.1. Defined Terms. Except as otherwise specified herein, ----------- ------------- terms used in this Amendment and defined in Exhibit A of the Credit Agreement shall have the meanings provided in such Exhibit A. Section 1.2. Amendments Relating to Agents. ----------- ----------------------------- (a) The preamble to the Credit Agreement is hereby amended and restated to read in its entirety as follows: THIS AGREEMENT, dated as of October 1, 1993, among MBIA INSURANCE CORPORATION, a New York stock insurance corporation formerly known as Municipal Bond Investors Assurance Corporation ("MBIA"), the financial institutions from time to time parties hereto as Banks (collectively, the "Banks"), CREDIT SUISSE, New York Branch, as Administrative Agent for the Banks (in such capacity, the "Administrative Agent "), and DEUTSCHE BANK AG, New York Branch, (in such capacity, the "Documentation Agent"); (b) Each reference in the Credit Agreement to the "Agent" is hereby amended to be a reference to the "Administrative Agent", except as such term appears in Article 8 or as otherwise provided in this Amendment. (c) Each reference in Article 8 of the Credit Agreement, other than in the first sentence of Section 8.1 thereof or in Section 8.3(e) or Section 8.7 thereof, to the "Agent" is hereby amended to be a reference to each of the "Administrative Agent" and the "Documentation Agent", with the same effect as though each such provision of Article 8 applied separately to each of the Administrative Agent and the Documentation Agent. (d) The first sentence of Section 8.1 of the Credit Agreement is hereby amended and restated to read in its entirety as follows: Each Bank hereby irrevocably designates and appoints (a) Credit Suisse, New York Branch, as its agent to act as the Administrative Agent as specified herein and in the other Loan Documents, and (b) Deutsche Bank AG, New York Branch, as its agent to act as the Documentation Agent as specified herein and in the other Loan Documents; and each Bank hereby irrevocably authorizes the Administrative Agent or the Documentation Agent, as the case may be, to take such action on behalf of such Bank under the provisions of this Agreement and the other Loan Documents and to give such consents, approvals or directions and to exercise such other powers and perform such duties as are expressly delegated to the Administrative Agent or the Documentation Agent by the terms of this Agreement and the other Loan Documents, together with such other powers as are reasonably incidental thereto. (e) The reference in Section 8.3(e) of the Credit Agreement to the "Agent" is hereby amended to be a reference to the "Administrative Agent", and the reference in the preamble to the Security Agreement to Credit Suisse as the "Agent" shall be deemed to constitute a reference to Credit Suisse in its capacity as the Administrative Agent. -2- (f) Section 8.7 of the Credit Agreement is hereby amended and restated to read in its entirety as follows: Section 8.7 Successor. The Administrative Agent and the Documentation ----------- --------- Agent each may resign as such at any time upon at least 30 days' prior notice to MBIA and all Banks, such resignation not to be effective until a successor Administrative Agent or Documentation Agent, as the case may be, is in place. If the Administrative Agent or the Documentation Agent at any time shall resign, the Majority Banks may appoint another Bank reasonably acceptable to MBIA as a successor Administrative Agent or the Documentation Agent, as the case may be, which shall thereupon become the Administrative Agent or the Documentation Agent hereunder. If no such successor shall have been so appointed by the Majority Banks, and shall have accepted such appointment, within 30 days after the retiring agent has given notice of resignation, then the retiring agent may, on behalf of the Banks, appoint a successor Administrative Agent or the Documentation Agent, as the case may be, which shall be one of the Banks and which shall, at the time of such appointment, have the Required Ratings. Notwithstanding the resignation of the Administrative Agent or the Documentation Agent hereunder, the provisions of Sections 8.2 through 8.5 shall continue to inure to the benefit such agent in respect of any action taken or omitted to be taken by it in its capacity as such while it was the Administrative Agent or the Documentation Agent under this Agreement or any Loan Document. (g) Section 10.7 of the Credit -Agreement is hereby amended and restated to read in its entirety as follows: Section 10.7 Notices and Addresses for Notice. All notices and ------------ -------------------------------- other communications provided for hereunder shall be in writing and, (a) if to MBIA, mailed or delivered to it, addressed to it at 113 King Street, Armonk, New York 10504, Attention: Julliette S. Tehrani, Senior Vice President and Chief Financial Officer; (b) if to the Administrative Agent, mailed or delivered to it, addressed to it at 12 East 49th Street, New York, New York 10017, Attention: Public Finance Department; (c) if to the Documentation Agent, mailed or delivered to it, addressed to it at 31 West 52nd Street, New York, New York 10019, Attention: Clinton M. Johnson; and,(d) if to a Bank, mailed or delivered to it at its address as shown on Schedule 1 hereto; or as to any party as such party may direct in a written notice to all other parties. All -3- such notices and other communications shall, when mailed, be effective three days after the date of deposit in the mails, addressed as aforesaid. In lieu of notice by mail or delivery, written notice may be given over telecopier at the appropriate numbers set forth below, such notice over telecopier to be effective when transmitted. If to the Admin- istrative Agent: Telecopier No.: 212-238-5461 If to the Documen- tation Agent: Telecopier No.: 212-474-8013 If to MBIA: Telecopier No.: 914-765-3163 If to a Bank: To it at its telecopier number as set forth on Schedule 1 hereto. (h) Section 10.8(a) of the Credit Agreement is hereby amended and restated to read in its entirety as follows: (a) This Agreement is a continuing obligation and binds, and the benefits hereof shall inure to, MBIA, the Administrative Agent, the Documentation Agent and the Banks and their respective successors and assigns; provided that, except as specifically provided herein, MBIA may ------------- not transfer or assign any or all of its rights or obligations hereunder without the prior written consent of the Administrative Agent and the Majority Banks. (i) Clause (c) of the second sentence of Section 10.12 of the Credit Agreement is hereby amended and restated to read in its entirety as follows: (c) without the prior consent of the Administrative Agent, if it is adversely affected thereby, and the Documentation Agent, if it is adversely affected thereby, no such amendment or waiver shall alter the rights of the Administrative Agent or the Documentation Agent under Article 8. Section 1.3. Amendment to Section 3.1(d). Section 3.1(d) of the Credit ----------- Agreement is hereby amended and restated to read in its entirety as follows: (d) MBIA hereby agrees to pay to the Administrative Agent for its own account or for the account of the Documentation Agent, as the may be, the fees set forth in the fee letter between MBIA and the -4- Administrative Agent which refers to this Section 3.1(d) (the"A-tent Fee Letter"). Section 1.4. Amendments to Definitions. ----------- (a) The definition of "Covered Portfolio" contained in Exhibit A to the Credit Agreement is hereby amended and restated to read in its entirety as follows: "Covered Portfolio" shall mean and include each Insured ----------------- Obligation outstanding on the Effective Date and each Insured Obligation issued thereafter and prior to the date of the first Loan (or such later date to which the Agent and the Majority Banks may consent in writing), other than (a) Insured Obligations listed on Exhibit E hereto, (b) additional Insured Obligations which MBIA hereafter elects in writing to exclude from the Covered Portfolio with the prior written consent of the Agent and the Majority Banks (which writing and consent shall be deemed to constitute an amendment supplementing Exhibit E hereto and shall not be unreasonably withheld); provided that no additional Insured Obligations shall become part of the Covered Portfolio from and after the date on which any Bank has given a notice to MBIA pursuant to Section 7.2(b) hereof as a result of the occurrence of an Event of Default, and (c) any Insured Obligation which any Bank or any Participant is obligated to purchase under the terms of a line of credit, standby bond purchase agreement, letter of credit, liquidity agreement or similar agreement or arrangement; provided that at no time shall the Covered Portfolio contain industrial development bonds having an aggregate Average Annual Debt Service exceeding one percent (11) of the Average Annual Debt Service on the entire Covered Portfolio. (b) The definition of "Insured Obligation" contained in Exhibit A to the Credit Agreement is hereby amended and restated to read in its entirety as follows: "Insured Obligation" shall mean (a) municipal obligation bonds, ------------------ special revenue bonds and industrial development bonds hereof issued by the United States of America, a state thereof or the District of Columbia, a municipality or governmental unit or other political subdivision of the foregoing or any public agency or instrumentality thereof, and (b) other obligations which the Majority Banks have approved in writing, in each case to the extent that the payment of principal thereof, together with interest thereon, is insured, reinsured or -5- otherwise guaranteed by MBIA under an Insurance Contract in compliance with the applicable provisions of the New York Insurance Law. Section 1.5. Consent of Banks. The Agent hereby confirms to MBIA that ----------- ---------------- it has received the consent of all Banks (to the extent required under the Restated Credit Agreement) to the modifications to the Restated Credit Agreement set forth in this Amendment. ARTICLE II REPRESENTATIONS AND WARRANTIES ------------------------------ In order to induce the Agent to enter into this Amendment and the Banks to consent hereto and proceed with the transactions contemplated hereby, MBIA makes the following representations and warranties to the Agent and the Banks, which shall survive the execution and delivery of this Amendment and the making of any Loans: Section 2.1. Due Authorization, Etc. The execution, delivery and ----------- ---------------------- performance by MBIA of the this Amendment and the Loan Documents as amended hereby are within its corporate powers, have been duly authorized by all necessary corporate action and do not and will not (i) violate any provision of any law, rule, regulation (including, without limitation, the New York Insurance Law, the Investment Company Act of 1940, as amended, or Regulations G. T. U or X of the Board of Governors of the Federal Reserve System), order, writ, judgment, injunction, decree, determination or award presently in effect having applicability to MBIA or of the corporate charter or by-laws of MBIA, (ii) result in a breach of or constitute a default under any indenture or loan or credit agreement or any other agreement, lease or instrument to which MBIA is a party or by which it or its properties may be bound or affected, or (iii) result in, or require, the creation or imposition of any Lien upon or with respect to any of the properties now owned or hereafter acquired by MBIA (other than as contemplated by the Loan Documents), other than, in the case of clauses (ii) and (iii), breaches, defaults or Liens which could not materially and adversely affect the business, assets, operations or financial condition of MBIA or the ability of MBIA to perform its obligations under any Loan Document. Section 2.2. Approvals. No consent, approval or other action by, or ----------- --------- any notice to or filing with any court or administrative or governmental body is or will be necessary for the valid execution, delivery or performance by MBIA of this Amendment or the Loan Documents as amended thereby. -6- Document as amended hereby, constitutes a legal, valid and binding obligation of MBIA, enforceable against MBIA in Section 2.3. Enforceability. This Amendment ----------- -------------- and each Loan accordance with their respective terms, except as such enforceability may be limited by bankruptcy, insolvency, moratorium or other similar laws affecting the enforcement of creditors' rights generally and the availability of equitable remedies, whether such matter is heard in a court of law or a court of equity. Section 2.4. Financial Statements etc. (a) MBIA has heretofore ----------- ------------------------ furnished to the Agent (i) the audited consolidated and unaudited consolidating balance sheets of MBIA Inc. and its subsidiaries at December 31, 1994, the related audited consolidated statements of income, changes in stockholders' equity and financial position or cash flows, as the case may be, and unaudited consolidating statements of income for the year ended December 31, 1994, and (ii) the unaudited consolidated and consolidating balance sheets of MBIA Inc. and its subsidiaries as of March 31, June 30, and September 30, 1995, and the related consolidated statements of income, changes in stockholders' equity and cash flows for the three months ended March 31, 1995, the six months ended June 30, 1995 and the nine months ended September 30, 1995. Such financial statements were prepared in accordance with generally accepted accounting principles consistently applied and present fairly the consolidated financial position and consolidated results of operations and cash flows of MBIA Inc. and its subsidiaries and the financial position and results of operations and cash flows of MBIA at the dates and for the periods indicated therein. There has been no material adverse change in the consolidated financial position or consolidated results of operations or cash flows of MBIA Inc. and its subsidiaries taken as a whole or of MBIA since September 30, 1995. (b) MBIA has heretofore furnished to the Agent its annual statements and its financial statements as filed with the Department for the year ended December 31, 1994 and its quarterly statements and financial statements as filed with the Department for the periods ended March 31, 1995, June 30, 1995 and September 30, 1995. Such annual and quarterly statements and financial statements were prepared in accordance with the statutory accounting principles set forth in the New York Insurance Law, all of the assets described therein were the absolute property of MBIA at the dates set forth therein, free and clear of any liens or claims thereon, except as therein stated, and each such Annual Statement is a full and true statement of all the assets and liabilities and of the condition and affairs of MBIA as of such dates and of its income and deductions therefrom for the year or quarter ended on such dates. -7- (c) MBIA has heretofore furnished to the Agent a copy of the annual report on Form 10-K of MBIA Inc. for the fiscal year ended December 31, 1994 as filed with the Securities and Exchange Commission and the quarterly reports on Form 10-Q of MBIA Inc. for each of the quarters ended March 31, 1995, June 30, 1995 and September 30, 1995 as filed with the Securities and Exchange Commission. Such annual and quarterly reports were prepared in accordance with the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. Section 2.5. Covered Portfolio. Substantially all of the Insured ----------- ----------------- Obligations in the Covered Portfolio are insured by MBIA under Insurance Contracts in the form or forms heretofore supplied to the Agent in accordance with MBIA's underwriting criteria as heretofore disclosed to the Agent, and in MBIA's reasonable judgment such Insured Obligations represent an overall risk of loss (based on all factors including without limitation investment quality and geographical and market diversification) which is not materially greater than the risk of loss represented by all of MBIA's Insured Obligations as of the date hereof. Section 2.6. Confirmation of Representations and Warranties. MBIA ----------- ---------------------------------------------- hereby confirms that its representations and warranties set forth in the Restated Credit Agreement (including without limitation those set forth in Article 5 of the Restated Credit Agreement) are true and correct as of the date hereof, and represents and warrants that no Default or Event of Default has occurred and is continuing. Section 2.7. Disclosure. There is no fact known to MBIA which ----------- ---------- materially adversely affects the business, assets, operations or financial condition of MBIA or the ability of MBIA to perform its obligations under any this Amendment or any Loan Document as amended hereby which has not been set forth in this Amendment, in the financial statements or reports required to be delivered pursuant to Section 2.4 hereof. ARTICLE III MISCELLANEOUS ------------- Section 3.1. Restated-Credit Agreement. Except as expressly modified ----------- ------------------------- as contemplated hereby, the Restated Credit Agreement and the other Loan Documents are hereby confirmed to be in full force and effect in accordance with their respective terms. Section 3.2. Effectiveness. This Amendment shall be effective when ----------- ------------- executed and delivered by MBIA and the Agent. -8- Section 3.3. Survival. All covenants, agreements, representations and - ----------- -------- warranties made herein or in any Loan Document or in any certificate, document or instrument delivered pursuant hereto or thereto shall survive the effective date hereof, the making of any Loan and the occurrence of the Expiration Date and shall continue in full force and effect so long as principal of or interest on any Loan or Note remains outstanding or unpaid, any other amount payable by MBIA under the Restated Credit Agreement as amended hereby, any Note or any other Loan Document remains unpaid or any other obligation of MBIA to perform any other act hereunder or under the Restated Credit Agreement as amended hereby, any Note or any other Loan Document remains unsatisfied or the Banks have any obligation to make a Loan or any other advance of moneys to MBIA under the Restated Credit Agreement as amended hereby. Section 3.4. Severability. Any provision of this Amendment which is ----------- ------------ prohibited, unenforceable or not authorized in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition, unenforceability or nonauthorization without invalidating the remaining provisions hereof or affecting the validity, enforceability or legality of such provision in any other jurisdiction. Section 3.5. Successors and Assigns. This Amendment is a continuing ----------- ---------------------- obligation and binds, and the benefits hereof shall inure to, the parties hereto and their respective successors and assigns; provided that MBIA may not transfer or assign any or all of its rights or obligations hereunder except as permitted by Section 10.8 of the Restated Credit Agreement. Section 3.6. Amendments. No provision of this Amendment shall be ----------- ---------- waived, amended or supplemented except as provided in Section 10.12 of the Restated Credit Agreement. Section 3.7. Governing Law. THIS AMENDMENT SHALL BE GOVERNED BY, AND ----------- ------------- CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. Section 3.8. Headings. Section headings in this Amendment are ----------- -------- included herein for convenience or reference only and shall not constitute a part of this Amendment for any other purpose. Section 3.9. Counterparts. This Amendment may be executed in several ----------- ------------ counterparts, each of which shall be regarded as the original and all of which shall constitute one and the same Amendment. -9- IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to be duly executed and delivered by their respective officers "hereunto duly authorized as of the date first above written. MBIA INSURANCE CORPORATION By Name: Christopher W. Tilley Title: Senior Vice President and Treasurer CREDIT SUISSE, New York Branch, as Agent and as a Bank By Name: Title: Name: Title: -10- PROMISSORY NOTE --------------- US$237, 500, 000 New York, New York as of January 1, 1996 FOR VALUE RECEIVED, the undersigned, MBIA INSURANCE CORPORATION, a New York stock insurance corporation formerly known as Municipal Bond Investors Assurance Corporation ("MBIA"), hereby promises to pay to the order of CREDIT SUISSE (the "Bank"), New York Branch, at its offices at 12 East 49th Street, New York, New York, 10017, in lawful money of the United States of America in immediately available funds, the principal sum of Two Hundred Thirty Seven Million Five Hundred Thousand Dollars (US$237,500, 000) or, if less, the aggregate unpaid PRINCIPAL AMOUNT of the Loans (as defined in the hereinafter referred to Credit Agreement) outstanding and payable to the Bank by MBIA under the First Restated Credit Agreement, dated as of October 1, 1993, as heretofore amended and as further amended from time to time (the "Credit Agreement") in the amounts and on the dates set out in the Credit Agreement. MBIA also promises to pay interest on the unpaid principal amount of such Loans from the date on which such Loans are made until the Loans are repaid in full at such interest rates and payable on such dates as are determined pursuant to the Credit Agreement. If any payment on this Note shall be specified to be made upon a day which is not a Business Day (as defined in the Credit Agreement), it shall be made on the next succeeding Business Day, and such extension of time shall in such case be included in computing interest, if any, in connection with such payment. The Bank is authorized to record the date and amount of each Loan and each payment, prepayment and conversion with respect thereto on the grid attached hereto or on a continuation thereof which shall be attached hereto and made a part hereof, and any such notation shall constitute prima facie ----------- evidence of the accuracy of the information so recorded; Provided that the ------------- failure to make any such notations shall not affect the validity of MBIA's obligations hereunder. Presentment, demand, protest and notice of dishonor are hereby waived by the undersigned. This Note evidences the Bank's Loans under, and is entitled to the benefits and subject to the provisions of, and is -2- secured by, the Credit Agreement and the other Loan Documents (as defined therein). The Credit Agreement, among other things, contains provisions with respect to the acceleration of the maturity of this Note upon the happening of certain stated events, and for mandatory and optional prepayments of the principal of this Note prior to maturity, all upon the terms and conditions specified therein. This Note represents a replacement for MBIA's notes, dated December 31, 1993 and September 23, 1994, heretofore issued to the Bank. The payment obligations of MBIA under this Note are limited as provided in Section 2.7 of the Credit Agreement. This Note shall be construed in accordance with and governed by the laws of the State of New York. MBIA INSURANCE CORPORATION By: Name: Christopher W. Tilley Title: Senior Vice President and Treasurer GRID Unpaid Principal Principal Amount of Paid or Amount of Notation Date Loan Prepaid Note Made by - ---- ---- ------- ---- ------- ASSIGNMENT AND ASSUMPTION AGREEMENT dated as of January 1, 1996 Reference is made to the Credit Agreement described in Item 1 of Annex I annexed hereto (as such agreement may hereafter be amended, modified or supplemented from time to time, the "Credit Agreement"). Unless defined in Annex ---------------- I attached hereto, terms defined in or defined for purposes of the Credit Agreement are used herein as so defined. Credit Suisse, New York Branch, as Agent under the Credit Agreement (in such capacity, the "Agent"), and as a Bank (in such capacity, the "Assignor") and Deutsche Bank AG, New York Branch (the "Assignee"), hereby agree as follows: (a) The Assignor hereby sells and assigns to the Assignee without recourse and without representation or warranty (other than as expressly provided herein), and the Assignee hereby purchases and assumes from the Assignor, that interest in and to that portion of the Assignor's Commitment and other rights, duties and obligations under the Credit Agreement, in and to that portion of the Assignor's Loans (if any) as of the date hereof which represents the percentage interest specified in Item 2 of Annex I hereto (the "Assigned Share"). (b) Following the execution of this Agreement by the Agent, the Assignor and the Assignee, the consent hereto by MBIA and payment by the Assignee to the Assignor of the purchase price for the Assigned Share as agreed upon by the Assignor and the Assignee, this Agreement shall become effective as of the Settlement Date specified in Item 3 of Annex I hereto (the "Settlement Date"). As of the Settlement Date, (i) the Assignee's Commitment set forth on Schedule I to the Credit Agreement shall be increased by the amount set forth in Item 2(d) of Annex I hereto and (ii) the Assignor 's Commitment set forth on said Schedule shall be decreased by the same amount. (c) The Assignor (i) represents and warrants that it is the legal and beneficial owner of the interest being assigned by it hereunder and that such interest is free and clear of any adverse claim; (ii) makes no representation or warranty and assumes no responsibility with respect to any statements, warranties and representations made in or in connection with the Credit Agreement or any of the Loan Documents or the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Credit Agreement or any of the Loan Documents or any other instrument or document furnished pursuant thereto; (iii) makes no representation or warranty and assumes no responsibility with respect to the -2- financial condition of or the performance or observance by MBIA of any of its obligations under the Credit Agreement, any of the Loan Documents or any other instrument or document furnished pursuant thereto; and (iv) requests that the Agent request that MBIA exchange the Note held by the Assignor evidencing any Loans made by the Assignor under the Credit Agreement for a new Note payable to the Assignor (if the Assignor has retained any interest in the Commitment as of the Settlement Date and a new Note payable to the Assignee in the full amount of its increased Commitment as of the Settlement Date. (d) The Assignee (i) confirms that it has received a copy of the Credit Agreement, together with copies of the financial statements and SEC Reports referred to therein, and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Agreement; (ii) agrees that it will, independently and without reliance upon the Assignor or the Agent and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Agreement; (iii) confirms its agreement with the provisions of Article 9 of the Credit Agreement and appoints and authorizes the Agent on its behalf to exercise such powers under the Credit Agreement and the other Loan Documents, as are delegated to the Agent by the terms thereof and hereof, together with such powers as are reasonably incidental thereto; and (iv) agrees that it will be bound by all of the terms and conditions of the Credit Agreement and the other Loan Documents and will perform in accordance with their terms all of the obligations which by the terms of the Credit Agreement and the other Loan Documents are required to be performed by it as a Bank. (e) Notwithstanding any provision to the contrary contained in the Credit Agreement, (i) the Assignee's pro rata share of commitment fees, interest payments and other periodic payments will be appropriately adjusted to reflect the period of time during which this Agreement has been in effect, and (ii) to the extent that the Assignee receives any such interest or other amount pursuant to the Credit Agreement in respect of any period of time during which this Agreement was not in effect, or that the Assignor receives any such interest or other amount pursuant to the Credit Agreement in respect of any period of time prior to the time during which this Agreement was in effect, the Assignor or the Assignee, as the case may be, will forthwith pay to the other its pro rata share thereof, appropriately adjusted as provided in clause (iii) above. (f) Any amendment to, waiver of any provision of or consent pursuant to this Agreement, shall be effective with and only upon the prior concurrence of the Agent, MBIA, the Assignor and the Assignee, unless otherwise provided in the Credit Agreement. (g) The address of Assignor and Assignee for purposes of all notices or other communications hereunder or under the Credit Agreement are as set forth on Schedule I to the Credit Agreement, or to such other address as shall be designated by such party pursuant to Section 10.7 of the Credit Agreement. (h) All payments to be made to the Assignor or the Assignee hereunder or under the Credit Agreement shall be made by federal wire in accordance with the Credit Agreement, or as otherwise directed by the Assignor or the Assignee, as the case may be, by notice to the other and to the Agent and as may be acceptable to the Agent. (i) This Agreement shall be binding upon, and inure to the benefit of the parties hereto-and their respective successors and assigns; provided that -------- the Assignee may not assign any of its rights or obligations hereunder except as permitted by Section 10.8 (b) or 10.8(c) of the Credit Agreement. (j) THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. IN WITNESS WHEREOF, the parties hereto have caused this Assignment and Assumption Agreement to be executed by their respective officers "hereunto duly authorized, as of the date first above written, such execution also being made on Annex I hereto. CREDIT SUISSE, NEW YORK BRANCH, as Agent By: Name: Title: By: Name: Title: -4- CREDIT SUISSE, NEW YORK BRANCH, as Assignor By: Name: Title: By: Name: Title: DEUTSCHE BANK AG, NEW YORK BRANCH as Assignee By: Name: Title: By: Name: Title: ACCEPTED AND AGREED TO: MBIA INSURANCE CORPORATION By /s/Christopher W. Tilley Name: Christopher W. Tilley Title: Senior Vice President and Treasurer ANNEX FOR ASSIGNMENT AND ASSUMPTION AGREEMENT ANNEX I 1. Name and Date of Credit Agreement: First Restated Credit Agreement, dated as of October l, 1993, as amended through the First Amendment thereto, dated as of September 23, 1994, among MBIA Insurance Corporation, a New York stock insurance corporation formerly known as Municipal Bond Investors Assurance Corporation, Credit Suisse, a banking corporation organized under the laws of Switzerland, acting through its New York Branch, as Agent, and the Banks signatory thereto. The parties acknowledge that, immediately after giving effect to this Assignment Assumption Agreement, said First Restated Credit Agreement will be further amended by the Second Amendment thereto, dated as of the date hereof. 2. Amounts (as of date of Assignment and Assumption Agreement): (a) Aggregate Amount of Assignor's Commitment $375,000,000 (b) Aggregate Amount of Assignor's Loans Currently Outstanding) $ 0 (c) Percentage of Assignor's Commitment and Loans Assigned 36.6666667% (d) Assigned Amount of Commitment $137,500,000 (e) Amount of Assigned Share of Loans Currently Outstanding N/A 3. Settlement Date: January 2, 1996, effective January 1, 1996 -2- ACCEPTED AND AGREED: CREDIT SUISSE, DEUTSCHE BANK AG New York Branch, as Assignor New York Branch, as Assignee By: By: Name: Name: Title: Title: By: By: Name: Name: Title: Title: CREDIT SUISSE, New York Branch, as Agent By: Name: Title: By: Name: Title: Annex I for Assignment and Assumption Agreement THIRD AMENDMENT to FIRST RESTATED CREDIT AGREEMENT among MBIA INSURANCE CORPORATION, THE BANKS SIGNATORY HERETO, CREDIT SUISSE New York Branch as Administrative Agent and DEUTSCHE BANK AG New York Branch as Documentation Agent Dated as of October 1, 1996 THIRD AMENDMENT THIS AMENDMENT, dated as of October 1, 1996, among MBIA INSURANCE CORPORATION, a New York stock insurance corporation (MBIA"), the financial institutions from time to time parties hereto as Banks (collectively, the "Banks"), CREDIT SUISSE, New York Branch, as Administrative Agent for the Banks (in such capacity, the "Administrative Agent"), and DEUTSCHE BANK AG, New York Branch, (in such capacity, collectively with the Administrative Agent, the "Agents"); WHEREAS, MBIA, the Agents and the Banks identified therein are parties to the First Restated Credit Agreement, dated as of October 1, 1993, as amended by the First Amendment thereto dated as of September 23, 1994 and the Second Amendment thereto dated as of January 1, 1996 and as supplemented by various Assignment and-Assumption Agreements and Joinder Agreements (as so amended and supplemented, the "Credit Agreement"); WHEREAS, Sudwestdeutsche Landesbank, one of the Banks, desires to terminate its Commitment (as defined in the Credit Agreement) and MBIA, the Agents and certain other Banks have agreed to modifications of WHEREAS, MBIA, the Agent and the Banks have agreed pursuant to Section 3.3 of the Credit Agreement to an extension of the Expiration Date (as defined therein) from September 30, 2002 to September 30, 2003; NOW, THEREFORE, in consideration of the mutual promises contained herein and other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound hereby, agree as follows: ARTICLE 1 MODIFICATIONS TO CREDIT AGREEMENT --------------------------------- Section 1.1. Defined Terms. Except as otherwise specified herein, terms used in this Amendment and defined in Exhibit A of the Credit Agreement shall have the meanings provided,in such Exhibit A. Section 1.2. Changes of Commitments. (a) As of October 1, 1996, the Commitment of Sudwestdeutsche Landesbank is hereby terminated, and such Bank shall cease to be a party to the Credit Agreement; provided that (i) such Bank shall remain entitled to the benefits of provisions of the Credit Agreement which by the terms thereof survive the termination of the Credit Agreement as to a Bank and the repayment of all Loans made by such Bank and (ii) such Bank shall remain obligated for its pro rata share (determined in accordance with the Credit Agreement) of amounts payable by Banks pursuant to Section 8.4 of the Credit Agreement (titled "Indemnity") to the extent such amounts relate to or arise out of any period prior to October 1, 1996. (b) As of October 1, 1996, the respective Commitments of the remaining Banks shall be as follows:
Bank Commitment - ---- ---------- Credit Suisse, New York $235,000,000 Branch Deutsche Bank AG, New York $235,000,000 Branch Cooperatieve Centrale $125,000,000 Raiffeisen-Boerenleenbank B.A. (Rabobank Nederland) Caisse des Depots et $ 50,000,000 Consignations Landesbank Hessen- $ 50,000,000 Thoringen Girozentrale Bayerische Landesbank $ 30,000,000 Girozentrale, New York Branch
The parties acknowledge that, giving effect to such changes, the Maximum Commitment shall be $725,000,000. Section 1.3. Expiration Date. The parties hereby agree that the ----------- --------------- Expiration Date, as heretofore extended, is hereby further extended to September 30, 2003 pursuant to the provisions of Section 3.3 of the Credit Agreement. ARTICLE 2 CONDITIONS PRECEDENT Section 2.1. Conditions Precedent to Third Amendment Effective Date. ------------ -------------- The provisions of Article 1 of this Agreement -2- shall become effective as of October 1, 1996 when each of the following conditions has been fulfilled to the reasonable satisfaction of the Agents. If such conditions have not been satisfied on or prior to October 1, 1996, then at the written election of the Agents delivered to MBIA, this Third Amendment shall terminate and be of no further force or effect. (i) There shall exist no Default or Event of Default, and all representations and warranties made by MBIA herein or in any of the Loan Documents shall be true and correct with the same effect as though such representations and warranties had been made at and as of such time. (ii) The following Banks shall have received replacement or additional Notes meeting the requirements of Section 2.3 of the Credit Agreement in the respective principal amounts set forth below (the "Additional Notes"):
Bank Principal Type of - ------------------------------------------------------ Amount Note - ------------------------------------------------- Credit Suisse, New $235,000,000 Replacement York Branch Deutsche Bank AG, New $235,000,000 Replacement York Branch Cooperatieve Centrale $ 75,000,000 Additional Raiffeisen Boerenleenbank B.A. Rabobank Nederland) Landesbank Hessen- $ 25,000,000 Additional Thoringen Girozentrale
(iii) The Agent shall have received each of the following, in form and substance satisfactory to the Agent: (A) a certificate of any two of the President, any Vice President or the Treasurer of MBIA to the effect that the conditions set forth in Section 2.1(a) hereof have been satisfied and that no governmental filings, consents and approvals are necessary to be secured by MBIA in order to permit the borrowing under the Credit Agreement, as modified hereby, the grant of the Lien under the Security Agreement and the execution, delivery and performance in accordance with their respective terms of this Amendment and the other Loan Documents and the consummation of the transactions contemplated hereby and thereby, each of which shall be in full force and effect; (B) copies of the duly adopted resolutions of the Board of Directors of MBIA, or an authorized committee thereof, authorizing the execution, delivery and performance in accordance with their respective terms of this Amendment and the Additional Notes (collectively, the "Third Amendment Documents"), accompanied by ------------------------- a certificate of the Secretary or an Assistant Secretary of MBIA stating as to (A) the effect that such resolutions are in full force and effect, (B) the incumbency and signatures of the officers Signing the Third Amendment Documents on behalf of MBIA, and (C) the effect that, from and after January 1, 1996, there has been no amendment, modification or revocation of the articles of incorporation or by-laws of MBIA; (C) opinions of the General Counsel of MBIA and Kutak Rock, MBIA's counsel, each dated as of October 1, 1996, which are substantially to the effect set forth in the forms attached hereto as, respectively, Exhibits A and B; and (D) such other documents, instruments, approvals (and, if reasonably requested by the Agents or The Majority Banks, duplicates or executed copies thereof certified by an appropriate governmental official or an authorized officer of MBIA) or opinions as the Agents or the Majority Banks may reasonably request. (iv) The Agents shall have received reasonably satisfactory evidence that long- term obligations insured by MBIA are publicly assigned a rating of Aaa by Moody's and AAA by S&P by reason of such insurance. (v) Effective as of October 1, 1996, the Bank Fee Letter shall have been modified in a manner satisfactory to MBIA and the Agents and consented to by all of the Banks. (vi) Effective as of October 1, 1996, the Agent Fee Letter shall have been modified in a manner satisfactory to MBIA and the Administrative Agent. (vii) All corporate and legal proceedings and all instruments in connection with the transactions contemplated by this Amendment and the Loan Documents shall be satisfactory in form and substance to the Agents. A certificate of the Agents delivered to MBIA stating that this Amendment has become effective shall be conclusive evidence thereof. ARTICLE 3 REPRESENTATIONS AND WARRANTIES ------------------------------ In order to induce the Agents and the Banks to enter into this Amendment, MBIA makes the following representations and warranties to the Agent and the Banks, which shall survive the execution and delivery of this Amendment and the making of any Loans: Section 3.1. Due Authorization, Etc. The execution, delivery and ----------- ---------------------- performance by MBIA of the Third Amendment Documents and the Loan Documents as amended thereby are within its corporate powers, have been duly authorized by- all necessary corporate action and do not and will not (i) violate any provision of any law, rule, regulation (including, without limitation, the New York Insurance Law, the Investment Company Act of 1940, as amended, or Regulations G. T. U or X of the Board of Governors of the Federal Reserve System), order, writ, judgment, injunction, decree, determination or award presently in effect having applicability to MBIA or of the corporate charter or by-laws of MBIA, (ii) result in a breach of or constitute a default under any indenture or loan or credit agree- ment or any other agreement, lease or instrument to which MBIA is a party or by which it or its properties may be bound or affected, or (iii) result in, or require, the creation or imposition of any Lien upon or with respect to any of the properties now owned or hereafter acquired by MBIA (other than as contemplated by the Loan Documents), other than, in the case of clauses (ii) and (iii), breaches, defaults or Liens which could not materially and adversely affect the business, assets, operations or financial condition of MBIA or the ability of MBIA to perform its obligations under any Loan Document. Section 3.2. Approvals. No consent, approval or other action by, or ----------- --------- any notice to or filing with any court or adminis- trative or governmental body is or will be necessary for the valid execution, delivery or performance by MBIA of the Third Amendment Documents or the Loan Documents as amended thereby. Section 3.3. Enforceability. Each Third Amendment Document and each ----------- -------------- Loan Document as amended thereby, constitutes a legal, valid and binding obligation of MBIA, enforceable against MBIA in accordance with their respective terms, except as such enforceability may be limited by bankruptcy, insolvency, moratorium or other similar laws affecting the enforcement of creditors' rights generally and the availability of equitable remedies, whether such matter is heard in a court Of law or a court of equity. Section 3.4. Financial Statements, etc. (a) MBIA has heretofore ----------- ------------------------- furnished to the Agents (i) the audited consolidated and unaudited consolidating balance sheets of MBIA Inc. and its subsidiaries at December 31, 1995, the related audited consolidated statements of income, changes in stockholders' equity and financial position or cash flows, as the case may be, and unaudited consolidating statements of income for the year ended December 31, 1995, and (ii) the unaudited consolidated and consolidating balance sheets of MBIA Inc. and its subsidiaries as of March 31 and June 30, 1996, and the related consolidated statements of income, changes in stockholders' equity and cash flows for the three months ended March 31, 1996 and the six months ended June 30, 1996. Such financial statements were prepared in accordance with generally accepted accounting principles consistently applied and present fairly the consolidated financial position and consolidated results of operations and cash flows of MBIA Inc. and its subsidiaries and the financial position and results of operations and cash flows of MBIA at the dates and for the periods indicated therein. There has been no material adverse change in the consolidated financial position or consolidated results of operations or cash flows of MBIA Inc. and its subsidiaries taken as a whole or of MBIA since June 30, 1996. (b) MBIA has heretofore furnished to the Agents its annual statements and its financial statements as filed with the Department for the year ended December 31, 1995 and its quarterly statements and financial statements as filed with the Department for the periods ended March 31, 1996 and June 30, 1996. Such annual and quarterly statements and financial statements were prepared in accordance with the statutory accounting principles set forth in the New York Insurance Law, all of the assets described therein were the absolute property of MBIA at the dates set forth therein, free and clear of any liens or claims thereon, except as therein stated, and each such Annual Statement is a full and true statement of all the assets and liabilities and of the condition and affairs of MBIA as of such dates and of its income and deductions therefrom for the year or quarter ended on such dates. (c) MBIA has heretofore furnished to the Agents a copy of the annual report on Form 10-K of MBIA Inc. for the fiscal year ended December 31, 1995 as filed with the Securities and Exchange Commission and the quarterly reports on Form 10-Q of MBIA Inc. for each of the quarters ended March 31, 1996 and June 30, 1996 as filed with the Securities and Exchange Commission. Such annual and quarterly reports were prepared in accordance with the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. Section 3.5. Covered Portfolio. Substantially all of the Insured ----------- ----------------- Obligations in the Covered Portfolio are insured by MBIA under Insurance Contracts in the form or forms heretofore supplied to the Administrative Agent in accordance with MBIA's underwriting criteria as heretofore disclosed to the Agents, and in MBIA's reasonable judgment such Insured Obligations represent an overall risk of loss (based on all factors including without limitation investment quality and geographical and- market diversification) which is not materially greater than the risk of loss represented by all of MBIA's Insured Obligations as of the date hereof. Section 3.6. Confirmation of Representations and Warranties. MBIA ----------- ---------------------------------------------- hereby confirms that its representations and warranties set forth in the Credit Agreement (including without limitation those set forth in Article 5 of the Credit Agreement) are true and correct as of the date hereof, and represents and warrants that no Default or Event of Default has occurred and is continuing. Section 3.7. Disclosure. There is no fact known to MBIA which ----------- ---------- materially adversely affects the business, assets, operations or financial condition of MBIA or the ability of MBIA to perform its obligations under any the Third Amendment Documents or any Loan Document as amended thereby which has not been set forth in this Amendment or in the financial statements or reports required to be delivered pursuant to Section 3.4 hereof. ARTICLE 4 MISCELLANEOUS ------------- Section 4.1. Credit Agreement. Except as expressly modified as ----------- ---------------- contemplated hereby, the Credit Agreement and the other Loan Documents are hereby confirmed to be in full force and effect in accordance with their respective terms. Section 4.2. Effectiveness. This Amendment shall be effective as ------------ -------------- provided in and subject to Article 2 above when executed and delivered by MBIA, each Agent and each Bank. Section 4.3. Survival. All covenants, agreements, representations and ------------ --------- warranties made herein or in any Loan Document or in any certificate, document or instrument delivered pursuant hereto or thereto shall survive the effective date hereof, the making of any Loan and the occurrence of the Expiration Date and shall continue in full force and effect so long as principal of or interest on any Loan or Note remains outstanding or unpaid, any other amount payable by MBIA under the Credit Agreement as amended hereby, any Note or any other Loan Document remains unpaid or any other obligation of MBIA to perform any other act hereunder or under the Credit Agreement as amended hereby, any Note or any other Loan Document remains unsatisfied or the Banks have any obligation to make a Loan or any other advance of moneys to MBIA under the Credit Agreement as amended hereby. Section 4.4. Severability. Any provision of this Amendment which is ----------- ------------- prohibited, unenforceable or not authorized in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition, unenforceability or nonauthorization without invalidating the remaining provisions hereof or affecting the validity, enforceability or legality of such provision in any other jurisdiction. Section 4.5. Successors and Assigns. This Amendment is a continuing ----------- ----------------------- obligation and binds, and the benefits hereof shall inure to, the parties hereto and their respective successors and assigns; provided that MBIA may not transfer or assign any or all of its rights or obligations hereunder except as permitted by Section 10.8 of the Credit Agreement. Section 4.6. Amendments. No provision of this Amendment shall be ----------- ----------- waived, amended or supplemented except as provided in Section 10.12 of the Credit Agreement. Section 4.7. Governing Law. THIS AMENDMENT SHALL BE GOVERNED BY, AND ----------- --------------- CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. Section 4.8. Headings. Section headings in this Amendment are included ----------- ---------- herein for convenience or reference only and shall not constitute a part of this Amendment for any other purpose. Section 4.9. Counterparts. This Amendment may be executed in several ----------- ------------ counterparts, each of which shall be regarded as the original and all of which shall constitute one and the same Amendment. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their respective officers "hereunto duly authorized as of the date first above written. MBIA INSURANCE CORPORATION By/s/ Julliette Tehrani Name: Title: CREDIT SUISSE, New York Branch, as Administrative Agent and as a Bank By Name: Title: By Name: Title: DEUTSCHE BANK AG, New York Branch, as Documentation Agent and as a Bank By Name: Title: By Name: Title: COOPERATIVE CENTRALE RAIFFEISEN-BOERENLEENBANK B.A. (RABOBANK NEDERLAND) NEW YORK BRANCH By Name: Title: By Name: Title: CAISSE DES DEPOTS ET CONSIGNATIONS By Name: Title: By Name: Title: BAYERISCHE LANDESBANK GIROZENTRALE By Name: Title: By Name: Title: LANDESBANK HESSEN-THORINGEN GIROZENTRALE By Name: Title: By Name: Title: [Terminating Bank] SUDWESTDEUTSCHE LANDESBANK By Name: Title: By Name: Title: EXHIBIT A TO THIRD AMENDMENT Form of Opinion of General Counsel of MBIA, October 1, 1996 The Parties Listed on Schedule I hereto Re: Third Amendment to First Restated Credit Agreement Dated as of October 1, 1993, among MBIA Insurance Corporation, Credit Suisse, New York Branch, as Administrative Agent and as a Bank, Deutsche Bank AG, as Documentation Agent and as a Bank, and the other Banks signatory thereto Ladies and Gentlemen: I am General Counsel of MBIA Insurance Corporation, a New York stock insurance corporation ("MBIA"). This opinion is being given in connection with the Third Amendment, dated as of October 1, 1996 (the "Third Amendment"), to the First Restated Credit Agreement dated as of October 1, 1993 (the "First Restated Credit Agreement") among MBIA, Credit Suisse, New York Branch, as Administrative Agent and as a Bank, Deutsche Bank AG, as Documentation Agent and as a Bank, and the other Banks signatory thereto. The First Restated Credit Agreement, as amended by the Third Amendment, is referred to herein as the "Credit Agreement." All capitalized terms used herein and not otherwise defined shall have the respective meanings assigned thereto in the Credit Agreement. As General Counsel to MBIA, I am familiar with its Restated Charter and its By- Laws, as amended to date, and I have responsibility for supervision of MBIA's insurance regulatory compliance. I have examined such certificates of public officials, such certificates of officers of MBIA and copies certified to my satisfaction of such corporate documents and records of MBIA and of such other papers as I have deemed relevant and necessary for the opinions set forth below. In all such examinations, I have assumed the genuineness of all signatures, the authority to sign and the authenticity of all documents submitted to me as originals. I have also assumed the conformity with the originals of all documents submitted to me as copies. I have relied upon certificates of public officials and of officers of MBIA with respect to the accuracy of factual matters contained therein which were not independently established. Based upon the foregoing, it is my opinion that: (a) MBIA is a stock insurance corporation duly incorporated and validly existing in good standing under the laws of the State of New York and has the corporate power and all requisite licenses and franchises required to carry on its insurance and other business, as now being conducted in the State of New York and in each other jurisdiction where the nature of the business transacted by it makes such qualification necessary, except any jurisdiction other than the State of New York where failure to so qualify would not have a material adverse- effect on the business, assets, operations or financial condition of MBIA or the ability of MBIA to perform its obligations under the Third Amendment, the Credit Agreement, and the Additional Notes (as defined in the Third Amendment) (the "Transaction Documents"). (b) The execution, delivery and performance of the Transaction Documents are within the corporate powers of MBIA, have been duly authorized by all necessary corporate action and do not (i) violate any provision of the Restated Charter of By-Laws of MBIA, (ii) violate any provision of law, rule, regulation (including without limitation, the New York Insurance Law, the Investment Company Act of 1940, as amended, or Regulations G. T. U or X of the Board of Governors of the Federal Reserve System), order, writ, judgment, injunction, decree, determination or award presently in effect having applicability to MBIA the violation of which would affect the validity or enforceability of any of the Transaction Documents or the ability of MBIA to perform its obligations under the Transaction Documents, (iii) result in a breach of or constitute a default under any indenture or loan or credit agreement or any other agreement, lease or instrument to which MBIA is a party or by which it or its properties may be bound or affected or (iv) result in, or require, the creation or imposition of any Lien upon or with respect to any of the properties now owned or hereafter acquired by MBIA (other than as contemplated by the Loan Documents), other than, in the case of clauses (iii) and (iv), breaches, defaults, the Permitted Liens or Liens which could not materially and adversely affect the business, assets, operations or financial condition of MBIA or the ability of MBIA to perform its obligations under the Transaction Documents. (c) To the best of my knowledge, no consent, approval or other action by, or any notice to or filing with, any court or administrative or governmental body is required in connection with the execution, delivery or performance by MBIA of the Transaction Documents. (d) To the best of my knowledge, there is no action, suit, proceeding or investigation before or by any court, arbitrator or administrative or governmental body pending or threatened against MBIA, wherein an adverse decision, ruling or finding would materially and adversely affect (i) the business, assets, operations or financial condition of MBIA, (ii) the A-2 transactions contemplated by the Credit Agreement or (iii) the validity or enforceability of the Transaction Documents. (e) To the best of my knowledge, MBIA is not in violation of any provision of any law, rule, regulation, order, writ, judgment, injunction, decree, determination or award presently in effect having applicability to MBIA or of the Restated Charter or By-Laws of MBIA, or in default under any material indenture, agreement, lease or instrument to which it is a party or by which it or any of its properties may be subject or bound, where such violation or default may result in a material adverse effect on the business, assets, operations or financial condition of MBIA or on its ability to perform its obligations under the Transaction Documents. (f) To the best of my knowledge, MBIA is in compliance with the New York Insurance Law and the regulations of the Department thereunder and with all other applicable federal state and other laws, rules and regulations relating to its insurance and other business, except with respect to failures, if any, to comply which singly or in the aggregate do not have a material adverse effect on the business, assets, operations or financial condition of MBIA or the ability of MBIA to perform its obligations under any of the Transaction Documents. (g) All of the issued and Outstanding capital stock of MBIA is owned beneficially and of record by MBIA Inc., subject to no Liens. There are no options or similar rights of any Person to acquire any such capital stock or any other capital stock of MBIA. This opinion is being furnished to you and your participants in connection with the execution of the Third Amendment, and it is not to be used, circulated, quoted or otherwise referred to for any purpose without my express written consent. Very truly yours, General Counsel A-3 SCHEDULE I Credit Suisse, New York Branch as a Bank and as Administrative Agent 12 East- 49 Street New York, NY 10017 Deutsche Bank AG, New York Branch as a Bank and as Documentation Agent 31 West 52nd Street New York, NY 10019 Cooperative Centrale Raiffeisen Boerenleenbank B.A. (Rabobank Nederland) 245 Park Avenue New York, New York 10167 Caisse des Depots and Consignations c/o CDC Capital, Inc. 9 West 57 Street -- 36th Floor New York, NY 10019 Bayerische Landesbank Girozentrale, New York Branch 560 Lexington Avenue New York, NY 10022 Landesbank Hessen-Thuringen Girozentrale 420 Fifth Avenue New York, NY 10022 A-4 EXHIBIT B TO THIRD AMENDMENT Form of Opinion of Kutak. Rock - ------------------------------ October 1, 1996 To the Parties Listed on Schedule I hereto Re: Third Amendment to First Restated Credit Agreement Dated as of October 1, 1993 among MBIA Insurance Corporation, Credit Suisse, New York Branch, as Administrative Agent and as a Bank, Deutsche Bank AG, New York Branch, as Documentation Agent and as a Bank, and the Other Banks Signatory Thereto Ladies and Gentlemen: This opinion is furnished to you in connection with the Third Amendment, dated as of October 1, 1996 (the "Third Amendment") to the First Restated Credit Agreement dated as of October 1, 1993 (the "First Restated Credit Agreement"), among MBIA Insurance Corporation ("MBIA"), Credit Suisse, acting through its New York Branch, as a Bank and as Administrative Agent, Deutsche Bank AG, New York Branch, as a Bank and as Documentation Agent, and the other Banks signatory thereto. The First Restated Credit Agreement, as amended by the Third Amendment, is referred to herein as the "Credit Agreement." All capitalized terms used herein and not otherwise defined have the meanings assigned thereto in the Credit Agreement. As used herein, "Transaction Documents" means the Third Amendment, the Credit Agreement and the Additional Note (as defined in the Third Amendment). We have acted as special counsel to MBIA in connection with the execution and delivery of the Transaction Documents. In this connection, we have examined the Transaction Documents and such certificates of public officials, such certificates of officers of MBIA, and copies certified to our satisfaction of such corporate documents and records of MBIA, and such other documents as we have deemed necessary or appropriate for the opinions set forth below. We have relied upon such certificates of public officials and of officers of MBIA with respect to the accuracy of factual matters contained therein which were not independently established. We have also assumed (i) the due execution and delivery, pursuant to due authorization, of (A) each document referred to in the immediately preceding paragraph by all parties other than MBIA to such document, and (B) the consent to the Third Amendment of each Bank, (ii) the authenticity of all such documents submitted to us as originals, (iii) the genuineness of all signatures and (iv) the conformity to the originals of all such documents submitted to us as copies. Based upon the foregoing and upon such investigation as we have deemed necessary, we are of the opinion that: (a) MBIA is a stock insurance corporation, duly incorporated and validly existing under the laws of the State of New York, and is licensed and authorized to carry on its business under the laws of the State of New York. (b) Each Transaction Document has been - duly executed and is a valid and binding obligation of MBIA enforceable in accordance with its terms, except that such enforceability maybe limited by laws relating to bankruptcy, insolvency, reorganization, moratorium, receivership and other similar laws affecting creditors' rights generally and by general principles of equity and the enforceability as to rights to indemnity thereunder as may be subject to limitations of public policy. (c) The execution, delivery and performance of the Transaction Documents do not (a) violate any provision of the Restated Charter or Bylaws of MBIA or (b) violate any provision of law (including without limitation the New York Insurance Law or the Investment Company Act of 1940, as amended) or, to the best of our knowledge, any rule or regulation (including without limitation Regulation G. T. U or X of the Board of Governors of the Federal Reserve System) presently in effect having applicability to MBIA the violation of which would (i) affect the validity or enforceability of any Transaction Document or the ability of MBIA to perform its obligations thereunder, (ii) adversely affect the Banks or their rights under any Transaction Document or (iii) materially adversely affect the business, assets, operations or financial condition of MBIA. (d) To the best of our knowledge, no consent, approval or other action by or any notice to or filing with any court or administrative or governmental body is required in connection with the execution, delivery or performance by MBIA of the Transaction Documents. No consent, approval or other action by or any notice to or filing with the Department is required in connection with the execution, delivery or performance by MBIA of the Transaction Documents. (e) Except with respect to MBIA's obligations to pay the Principal of and interest on the Loans, the obligations of MBIA under the Transaction Documents will rank, under the New York Insurance Law, at least pari passu in priority of payment with all other unsecured obligations of MBIA, including without limitation MBIA's obligation to pay claims under Insurance Contracts under the New York Insurance Law, subject, however, to statutory priorities granted to certain claims under Sections 7426 and 7435 of the New York Insurance Law. B-2 In rendering the opinions expressed herein, we express no opinion as to the laws of any jurisdiction other than the State of New York and the federal laws of the United States of America. This opinion is being furnished to you and your participants solely in connection with the execution of the Third Amendment, and it is not to be used, circulated, quoted or otherwise referred to for any purpose without our express written consent. Very truly yours, B-3 SCHEDULE I Credit Suisse, New York Branch as a Bank as Administrative Agent 12 East 49 Street New York, NY 10017 Deutsche Bank AG, New York Branch as a Bank and as Documentation Agent 31 West 52nd Street New York, NY 10019 Cooperative Centrale Raiffeisen Boerenleenbank B.A. (Rabobank Nederland) 245 Park Avenue New York, New York 10167 Caisse des Depots and Consignations c/o CDC Capital, Inc. 9 West 57 Street -- 36th Floor New York, NY 10019 Bayerische Landesbank Girozentrale, New York Branch 560 Lexington Avenue New York, NY 10022 Lande.sbank Hessen-Thuringen Girozentrale 420 Fifth Avenue New York, NY 10022 B-4 EX-10.70 5 MBIA, INC. 1996 DIRECTORS STOCK UNIT PLAN Exhibit 10.70 ------------- 1996 Directors Stock Unit Plan - ------------------------------ Section 1. Purpose - ------------------ The Plan is intended to attract, retain and motivate the best qualified directors for the benefit of the Corporation and its shareholders and to provide such directors an economic interest in the Corporation's Common Shares (the "Common Shares") thereby enhancing a long-term mutuality of interest between such directors and the shareholders. Section 2. Definitions - ---------------------- When used in this Plan, the following terms shall have the definitions set forth in this Section: "Board" shall mean the Board of Directors of the Corporation. ----- "Change in Control" shall mean (i) the occurrence of any merger, ----------------- consolidation, sale of assets, liquidation or reorganization (other than a merger, consolidation or combination in which the Corporation is the continuing corporation and which does not result in its outstanding stock being converted into or exchanged for different securities, cash or other property or any combination thereof which has been approved by the Corporation's stockholders holding at least 50% of the voting stock, or (ii) the first purchase of Common Shares pursuant to a tender or exchange offer (other than an offer by the corporation, any of its subsidiaries, or any employee benefit plan maintained by the Corporation or any of its subsidiaries. "Committee" shall mean the Compensation and Organization Committee of the Board. --------- "Common Shares" shall mean shares of the common stock of the Corporation. ------------- "Corporation" shall mean MBIA Inc. ----------- "Director" shall mean any member of the Board regardless of whether an -------- Eligible Director. "Elialble Director" shall mean a Director who is not an employee of the ----------------- Corporation or any Subsidiary. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. ------------ "Fair Market Value" shall mean the closing price of a Common Share on the ----------------- New York Stock Exchange on the date of determination or, if no sale of Common Shares is recorded on such date, then on the next preceding day on which there was such a sale. Grant" shall mean a grant of Units under Section 3. - ----- "Subsidiary" shall mean any entity of which the Corporation possesses ---------- directly or indirectly fifty percent (50%) or more of the total combined voting power of all classes of stock of such entity. "Termination" shall mean any termination (whether voluntary or involuntary) ----------- of an Eligible Director's service as a Director. "Unit" shall mean a contractual obligation of the Corporation to deliver a Common Share or pay cash based on the Fair Market Value of a Common Share to an Eligible Director or the beneficiary or estate of such Eligible Director as provided herein. -2- Section 3. Units - ---------------- (a) Unit Awards. In each December during the term of the Plan, any Eligible ---------- Director serving as a Director on such date who has been a Director continuously since the prior October 31 shall be awarded $10,000.000 in Units (the amount of Units to be based on the Fair Market Value of a Common Share on the same determination date as used by the Corporation's Stock Option Grant program). (b) Delivery of Common Shares. Subject to the satisfaction of the vesting ------------------------- requirements set forth in Section 4 and except as provided in (c) and (d) below, all Common Shares that are subject to Units credited to an Eligible Director shall be delivered to such Eligible Director and transferred on the books on the Company as of the effective date of such Director Termination. (c) Payment Upon Death. In the event of the death of an Eligible Director, ------------------ the Corporation shall pay to the beneficiary designated by the Eligible Director on a form provided by the Corporation, or, in the absence of such designation, to the Eligible Director's estate, cash in an aggregate amount equal to the product of (i) the number of Units credited to such Eligible Director at the time of Termination multiplied by (ii) the Fair Market Value on the date of Termination. (d) Change in Control. Notwithstanding the foregoing, upon the occurrence ----------------- of a Change in Control, the Corporation shall pay an Eligible Director (or, in the event of the death of an Eligible Director following a Change in Control, the beneficiary or estate determined pursuant to (c) above), not later than 30 days after the Change in Control occurs, cash in an aggregate amount equal to the product of (i) the number of Units credited to such Eligible Director at the time of the Change in Control multiplied by (ii) the Fair Market Value on the date of the Change in Control. (e) Satisfaction of the Corporation's Obligations. Upon the delivery of a --------------------------------------------- Common Share (or the payment of cash with respect to a whole or fractional Common -3- Share) pursuant to the Plan the corresponding Unit (or fraction thereof ) shall be canceled and be of no further force or effect. (f) Dividend Equivalents. Whenever a dividend other than a dividend payable -------------------- in the form of the Corporation's Common Shares is declared with respect to the Corporation's Common Shares, the number of Units credited to an Eligible Director shall be increased by the number of Units determined by dividing (i) the product of (A) the number of Units credited to such Eligible Director on the related dividend record date and (B) the amount of any cash dividend declared by the Corporation on a Common share (or, in the case of any dividend distributable in property other than Common Shares, the per share value of such dividend, as determined by the Corporation for purposes of income tax reporting) by (ii) the Fair Market Value on the related dividend payor, in the case of any dividend distributable in property other than Common Shares, the per share value of such dividend, as determined by the Corporation for purposes of income tax reporting) by (ii) the Fair Market Value on the related dividend payment date. In the case of any dividend declared on the Corporation's Common Shares which is payable in Common Shares, each Eligible Director shall be credited with an additional number of Units equal to the product of (i) the number of Units credited to such Eligible Director on the related dividend record date and (ii) the number of Common Shares (including any fraction thereof) distributable as a dividend on a Common Share. Section 4. Vesting - ------------------ Vesting Schedule. All Units awarded each year pursuant to Section 3 will be ---------------- vested as of the date of the Grant. Section 5. Adjustment for Corporate Transactions - ------------------------------------------------ In the event that any capitalization, reorganization, merger, consolidation, split-up, spin-off, combination, exchange of shares, warrants or rights offering to purchase Common Shares at a price substantially below fair market value, or other similar event affects the Common Shares such that an adjustment is required to preserve, or to prevent enlargement of, the benefits or potential benefits made available under the Plan, then the Board shall adjust the number and kind or shares which thereafter may be awarded under the plan and the number of Units to be granted annually to each Eligible Director under the Plan. Section 6. Administration - ------------------------- The Plan shall be administered by the Committee. Subject to the provisions of the Plan, the Committee shall have plenary authority to interpret the Plan, to prescribe, amend and rescind rules and regulations relating to it, and to determine the terms and provisions of the awards made pursuant to the Plan and to make all other determinations necessary or advisable for the administration of the Plan provided, however, that the Plan shall be administered such that the transactions contemplated hereunder will continue to qualify for the exemptive relief available under Rule 16b-3 of the Exchange Act. Section 7. Amendment and Termination - ------------------------------------ The Board may suspend, revise, amend or discontinue the Plan at any time; provided that, no such action may materially and adversely affect any rights of an Eligible Director under any Grant made pursuant to the Plan without such Director's consent. Unless the Board otherwise specifies at the time of such termination, a termination of the Plan will not result in a distribution with respect to the Units then credited to an Eligible Director under the Plan. Section 8. Effective Date of the Plan - ------------------------------------- The Plan shall be effective as of December 4,1996 and shall terminate as of December 31, 2006 unless extended by the Board or terminated at an earlier date pursuant to section 7 above. SECTION 9. GOVERNING LAW - ------------------------ The Plan shall be construed in all respects under the laws of the State of New York. SECTION 10. GENERAL PROVISIONS - ------------------------------ (a) Nontransferable Grants. Grants made under the Plan may not be assigned ---------------------- or transferred, in whole or in part, either directly or by operation of law (except, in the event of an Eligible Director's death, by will or applicable laws of descent and distribution), including, but not by way of limitation, by execution, levy, garnishment, attachment, pledge, bankruptcy or in any other manner, and no such right or interest of any Eligible Director in the Plan shall be subject to any obligation or liability of such Eligible Director. (b) No Right to Serve as A Director. The Plan shall not impose any ------------------------------- obligations on the Corporation to retain any Eligible Director as a Director nor shall it impose any obligation on the part of any Eligible Director to remain as a Director of the Corporation. (c) No Right to Particular Assets. Nothing contained in the Plan and no ----------------------------- action taken pursuant to the Plan shall create or be construed to create a trust of any kind or any fiduciary relationship between the Corporation and any Eligible Director, the executor, administrator or other personal representative or designated beneficiary of such Eligible Director, or any other persons. Any reserves that may be established by the Corporation in connection with Units granted under the Plan shall continue to be treated as the assets of the Corporation for Federal income tax purposes and remain subject to the claims of the Corporation's creditors. To the extent that any Eligible Director or the executor, administrator, or other personal representative of such Eligible Director, acquires a right to receive any payment from the Corporation pursuant to the Plan, such right shall be no greater than the right of an unsecured general creditor of the Corporation. (d) No Rights as Shareholder. An Eligible Director shall have no rights as a ------------------------ shareholder of the Corporation with respect to any Units granted pursuant to the Plan unless and until Common Shares are delivered pursuant to Section 3 above. (e) Limitations on Liability. Neither the establishment of the Plan nor any ------------------------ modifications thereof nor the creation of any account under the Plan nor the payment of any benefits shall be construed as giving to any participant or other person any legal or equitable right against the Corporation (or any person connected therewith) except as provided by law or any Plan provision. In no event shall the Corporation or any person connected therewith be liable to any person for the failure of any participant or other person to be entitled to any particular tax consequences with respect to the Plan or any contribution thereto or any distributions therefrom. (f) Non-Exclusivity. The adoption of the Plan by the Board shall not be --------------- construed as creating any limitations on the power of the Board to adopt such other compensatory arrangements as it may deem desirable. (g) No Limit on Corporate Action. The existence of the Plan and the Units ----------------------------- granted hereunder shall not affect in any way the right or power of the Board or the shareholders of the Corporation to make or authorize any adjustment, recapitalization, reorganization or other change in the Corporation's capital structure or its business, any merger or consolidation of the Corporation, any issue of bonds, debentures, preferred or prior preference stocks ahead of or affecting Common Stock, the dissolution or liquidation of the Corporation or any sale or transfer of all or part of its assets or business, or any other corporate act or proceeding. (h) Listing of Common Shares and Related Matters. If at any time the Board -------------------------------------------- shall determine in its discretion that the listing, registration or qualification of the Common Shares covered by the Plan upon any national securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition of, or in connection with, the delivery of -7- Common Shares under the Plan, no Common Shares will be delivered unless and until such listing, registration, qualification, consent or approval shall have been effected or obtained, or otherwise provided for, free of any conditions not acceptable to the Board. (i) Severability of Provisions. If any provision of the Plan shall be held -------------------------- invalid or unenforceable, such invalidity or unenforceability shall not affect any other provisions hereof, and the Plan shall be construed and enforced as if such provision had not been included. 0) Incapacity. Any benefit payable to or for the benefit of a minor, an ---------- incompetent person or other person incapable of receipting therefor shall be deemed paid when paid to such person' s guardian or to the party providing or reasonably appearing to provide for the care of such person, and such payment shall fully discharge any liability or obligation of the Board, the Corporation and all other parties with respect thereto. (k) Headings and Captions. The headings and captions herein are provided --------------------- for reference and convenience only, shall not be considered part of the Plan, and shall not be employed in the construction of the Plan. -8- EX-11 6 STATEMENT RE COMPUTATION OF PER SHARE EARNINGS EXHIBIT 11 MBIA INC. AND SUBSIDIARIES for the Years Ended December 31, 1996, 1995 and 1994 Computation of Earnings Per Share Assuming Full Dilution (In thousands except per share amounts)
1996 1995 1994 ------------- ------------- ------------- Net Income $322,163 $271,419 $260,209 ============= ============= ============= Fully diluted shares: Average number of common shares outstanding 42,928 41,763 41,686 Assumed exercise of dilutive stock options 523 559 402 ------------- ------------- ------------- 43,451 42,322 42,088 ============= ============= ============= Earnings per share assuming full dilution $ 7.41 $ 6.41 $ 6.18 ============= ============= =============
EX-13 7 PORTIONS OF ANNUAL REPORT EXHIBIT 13 ANNUAL REPORT 1996 MBIA Inc. 113 King Street Armonk New York 10504 FINANCIAL REVIEW TABLE OF CONTENTS Selected Financial and Statistical Data 32 Management's Discussion and Analysis of Financial Condition and Results of Operations 34 Report on Management's Responsibility 40 Report of Independent Accountants 40 Consolidated Statements of Income 41 Consolidated Balance Sheets 42 Consolidated Statements of Changes in Shareholders' Equity 43 Consolidated Statements of Cash Flows 44 Notes to Consolidated Financial Statements 45 31 SELECTED FINANCIAL AND STATISTICAL DATA MBIA Inc. and Subsidiaries(1)
Dollars in millions except per share amounts 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 =============================================================================================================================== GAAP SUMMARY INCOME STATEMENT DATA: Insurance: Gross premiums written $ 461 $ 348 $ 361 $ 479 $ 369 $ 269 $ 211 $ 159 $ 156 $ 171 Premiums earned 252 215 218 231 163 132 107 91 82 81 Net investment income 248 220 194 179 150 132 115 80 67 54 Net realized gains 12 11 10 10 10 3 --- --- 1 1 Insurance operating income 412 362 342 339 255 207 181 136 116 106 Investment management operating income (loss) 12 7 6 (1) (1) (2) --- --- --- --- Income before income taxes 408 345 329 324 244 190 165 135 118 108 NET INCOME 322 271 260 259 189 145 127 102 92 74 NET INCOME PER COMMON SHARE $ 7.43 $ 6.43 $ 6.18 $ 6.10 $ 4.62 $ 3.74 $ 3.33 $ 2.74 $ 2.45 $ 1.98 - ------------------------------------------------------------------------------------------------------------------------------- GAAP SUMMARY BALANCE SHEET DATA: Investments $ 7,648 $ 6,607 $ 4,867 $ 3,544 $ 2,529 $ 1,961 $ 1,724 $ 1,501 $ 1,104 $ 979 Total assets 8,562 7,267 5,456 4,106 3,049 2,438 2,159 1,904 1,309 1,176 Deferred premium revenue 1,786 1,616 1,512 1,403 1,196 1,019 902 811 520 449 Loss reserves 59 43 40 34 26 21 5 --- --- --- Municipal investment and repurchase agreements 3,259 2,642 1,526 493 --- --- --- --- --- --- Long-term debt 374 374 299 299 299 199 200 195 --- --- Shareholders' equity 2,480 2,234 1,705 1,596 1,382 1,063 932 777 705 620 Book value per share 57.28 53.19 40.96 38.18 33.00 27.58 24.35 21.08 18.80 16.54 Dividends declared per common share 1.45 1.31 1.14 .94 .76 .62 .48 .41 .19 .12 - ------------------------------------------------------------------------------------------------------------------------------- STATUTORY DATA: Net income $ 317 $ 278 $ 225 $ 258 $ 190 $ 149 $ 127 $ 84 $ 71 $ 42 Capital and surplus 1,467 1,274 1,110 978 896 647 579 485 376 361 Contingency reserve 893 744 621 539 404 316 261 216 154 112 - ------------------------------------------------------------------------------------------------------------------------------- Qualified statutory capital 2,360 2,018 1,731 1,517 1,300 963 840 701 530 473 Unearned premium reserve 1,918 1,733 1,620 1,474 1,242 1,044 926 828 591 507 Loss reserves 10 7 22 8 14 12 --- --- --- --- - ------------------------------------------------------------------------------------------------------------------------------- Total policyholders' reserves 4,288 3,758 3,373 2,999 2,556 2,019 1,766 1,529 1,121 980 Present value of installment premiums 288 235 177 186 173 151 134 90 82 82 Standby line of credit 725 650 600 575 500 500 500 325 --- --- - ------------------------------------------------------------------------------------------------------------------------------- TOTAL CLAIMS-PAYING RESOURCES 5,301 4,643 4,150 3,760 3,229 2,670 2,400 1,944 1,203 1,062 - ------------------------------------------------------------------------------------------------------------------------------- FINANCIAL RATIOS: GAAP Loss ratio 6.1% 4.9% 3.7% 3.4% 3.4% 13.0% 4.7% 0.0% 0.0% 0.0% Underwriting expense ratio 28.3 29.3 28.8 27.4 32.0 30.1 33.7 38.5 39.6 35.2 Combined ratio 34.4 34.2 32.5 30.8 35.4 43.1 38.4 38.5 39.6 35.2 Statutory Loss ratio 2.0 0.4 9.8 (3.5) 2.4 12.7 0.0 0.0 0.0 0.0 Underwriting expense ratio 17.6 20.6 22.9 17.6 18.3 20.4 23.4 31.6 32.3 25.3 Combined ratio 19.6 21.0 32.7 14.1 20.7 33.1 23.4 31.6 32.3 25.3 NET DEBT SERVICE OUTSTANDING $411,106 $344,037 $304,502 $266,784 $223,056 $184,604 $157,707 $137,221 $ 90,343 $ 72,837 NET PAR AMOUNT OUTSTANDING $233,244 $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, 1996 - 1989 and income statement amounts for the years ended December 31, 1996 - 1990 include the accounts of MBIA Insurance Corp. of Illinois (formerly BIG Insurance Company) (See Note 1 to consolidated financial statements).
32 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MBIA Inc. and Subsidiaries INTRODUCTION MBIA Inc. (our company or MBIA) is the world's premier financial guarantee company and a leading provider of investment management products and services. Through MBIA Insurance Corp. and its subsidiaries (our insurance company), we provide financial guarantees to municipalities and other bond issuers. Our primary business is insuring municipal bonds issued by governmental units to finance essential public purposes. We also guarantee structured asset-backed and mortgage-backed transactions, selected corporate bonds, including investor-owned utility debt, and obligations of high-quality financial institutions. We provide these products in both the new issue and secondary markets - internationally as well as domestically. MBIA also provides investment management products and services to the public sector. These include cash management, municipal investment agreements, discretionary asset management and administrative services. In addition, through an equity investment we provide services to the municipal sector through the purchase and sale of tax liens. RESULTS OF OPERATIONS - --------------------- Summary - ------- The following chart presents highlights of our consolidated financial results for 1996, 1995 and 1994: Percent Change -------------- 1996 1995 vs. vs. 1996 1995 1994 1995 1994 - --------------------------------------------------------------------- Net income (in millions) $ 322 $ 271 $ 260 19% 4% Per share data: Net income $ 7.43 $ 6.43 $ 6.18 16% 4% Operating earnings $ 7.22 $ 6.35 $ 6.01 14% 6% Core earnings $ 6.62 $ 5.87 $ 5.26 13% 12% Book value $57.28 $53.19 $40.96 8% 30% Adjusted book value $82.94 $76.56 $62.35 8% 23% We believe that core earnings, which exclude the effects of refundings and calls of our insured issues, realized capital gains and losses, accounting changes and other non-recurring items, provides the most indicative measure of our underlying profit trend. Core earnings per share of $6.62 for 1996 grew by 13% over 1995, following a 12% increase in 1995. The consistent increases in core earnings were due primarily to growth in premiums earned and net investment income generated by our insurance operations, as well as the increasing contributions of operating earnings from our investment management services businesses. Our net income grew 19% in 1996 and 4% in 1995. In 1996, on a per share basis, net income increased 16% due to the dilutive effect of the 1996 public offering of additional shares of our company. The difference between the growth rate of core earnings and net income is related to the net income effects of refunded issues and realized capital gains and losses. Operating earnings per share, which excludes the impact of realized capital gains and losses, increased 14% in 1996 and 6% in 1995. 33 Our book value at year-end 1996 was $57.28 per share, up from $53.19 at year-end 1995 and $40.96 at year-end 1994. As with core earnings, we believe that a more appropriate measure of a financial guarantee company's intrinsic value is its adjusted book value. It is defined as book value plus the after-tax effects of our net deferred premium revenue net of deferred acquisition costs plus the present value of unrecorded future installment premiums. The following table presents the components of our adjusted book value per share: Percent Change -------------- 1996 1995 vs. vs. 1996 1995 1994 1995 1994 - --------------------------------------------------------------------- Book value $57.28 $53.19 $40.96 8% 30% After-tax value of: Net deferred premium revenue, net of deferred acquisition costs 21.34 19.73 18.63 8% 6% Present value of future installment premiums* 4.32 3.64 2.76 19% 32% - --------------------------------------------------------------------- Adjusted book value $82.94 $76.56 $62.35 8% 23% - --------------------------------------------------------------------- *The discount rate used to present value future installment premiums was 9% in 1996 and 1995 and 13% in 1994. Our adjusted book value per share was $82.94 at year-end 1996, an 8% increase from year-end 1995. The increase was due to our strong operating results, significant growth in new business written and the 1996 offering of common stock, offset partially by the impact of higher interest rates on the fair value of our fixed-income investment portfolios. In 1995, our adjusted book value grew by 23% due to strong 34 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) MBIA Inc. and Subsidiaries operating results and the added benefit of an increase in the fair value of our fixed-income portfolios resulting from a decline in interest rates at December 31, 1995 compared with December 31, 1994. Financial Guarantee Insurance - ----------------------------- Business was strong in 1996 with total gross premiums written (GPW) increasing significantly to $460.7 million from $348.5 million in 1995. GPW, as reported on our financial statements, reflects cash receipts only and does not include the value of future premium receipts expected for installment-based insurance policies originated in the period. To provide additional information regarding year-to-year changes in new business premium production, we discuss our adjusted gross premiums (AGP), which include our upfront premiums as well as the estimated present value of current and future premiums from installment-based insurance policies issued in the period. MBIA's premium production in terms of GPW and AGP for the last three years is presented in the following table: Percent Change -------------- 1996 1995 vs. vs. In millions 1996 1995 1994 1995 1994 - --------------------------------------------------------------------- Premiums written: GPW $460.7 $348.5 $360.8 32% (3)% AGP $543.8 $372.1 $362.0 46% 3 % The higher year-to-year growth rates of AGP compared with GPW reflect the growing proportion of installment-based policies written by MBIA. We estimate the present value of our total future installment premium stream on outstanding policies to be $288.0 million at year-end 1996, compared with $235.4 million at year-end 1995 and $176.9 million at year-end 1994. MUNICIPAL MARKET In 1996, we maintained our market leadership in the growing new issue municipal market. In addition, through our substantial financial and capital resources, we were able to provide insurance for several large transactions, thereby increasing our par and premium writings. In 1995, with the decline in the new issue municipal market, our par writings were flat. Our premium writings decreased, however, since they are based on total debt service written which declines with lower interest rates. Domestic new issue municipal market information and MBIA's par and premium writings in both the new issue and secondary domestic municipal finance markets are shown in the following table: Percent Change -------------- 1996 1995 vs. vs. Domestic Municipal 1996 1995 1994 1995 1994 - -------------------------------------------------------------------- Total new issue market:* Par value (in billions) $161.9 $142.1 $154.7 14% (8)% Insured penetration 52% 47% 40% MBIA market share 40% 42% 40% MBIA insured: Par value (in billions) $ 39.2 $ 32.6 $ 32.5 20% -- Premiums (in millions) GPW $364.1 $296.9 $324.4 23% (8)% AGP $357.8 $291.6 $318.4 23% (8)% - -------------------------------------------------------------------- *Market data are reported on a sale date basis while MBIA's insured data are based on closing date information. Typically, there can be a one- to four-week delay between the sale date and closing date of an insured issue. STRUCTURED FINANCE MARKET The par value of issues in the asset-backed securities market (excluding private placements and mortgage-backed securities, for which market data are unavailable) increased 40% in 1996 and 43% in 1995. In 1996 and 1995, we achieved substantial gains in both our domestic new issue and secondary market structured finance business (includes asset-/mortgage-backed). Details regarding the asset-backed market and MBIA's par and premium writings in both the domestic new issue and secondary structured finance markets are shown in the table below: Percent Change -------------- 1996 1995 Domestic vs. vs. Structured Finance 1996 1995 1994 1995 1994 - --------------------------------------------------------------------- Total asset-backed market:* Par value (in billions) $151.1 $108.0 $75.5 40% 43% MBIA insured: Par value (in billions) $ 20.4 $ 9.0 $ 5.7 127% 57% Premiums (in millions) GPW $ 52.3 $ 22.9 $15.8 128% 46% AGP $116.0 $ 46.8 $24.3 148% 93% - ---------------------------------------------------------------------- * Market data exclude mortgage-backed securities and private placements. INTERNATIONAL MARKET In late 1995, we formed a joint venture with AMBAC Indemnity Corporation (another leading Triple-A rated financial guarantee insurer) to market financial guarantee insurance internationally. This initiative has contributed to a substantial expansion of our international business as evidenced by 1996 growth rates of 65%, 18% and 69% for international par value, GPW and AGP, respectively. In 1995, international GPW increased by 10% and AGP increased by 24%, despite a decline in par value insured due to the effect of one large transaction in 1994. Our company's municipal and structured 35 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) MBIA Inc. and Subsidiaries finance international business volume in the new issue and secondary markets for the last three years is illustrated below: Percent Change -------------- 1996 1995 vs. vs. International 1996 1995 1994 1995 1994 - --------------------------------------------------------------------- Par value (in billions) $ 3.8 $ 2.3 $ 2.6 65% (11)% Premiums: (in millions) GPW $25.2 $21.3 $19.4 18% 10 % AGP $40.6 $24.1 $19.3 69% 24 % CEDED PREMIUMS Reinsurance allows an insurance company to transfer portions of its insured business to a reinsurance company. In exchange for insuring a portion of our risk, the reinsurance company receives a part of our premium (ceded premium) for which we, in turn, receive a ceding commission. We use reinsurance to increase our capacity to write new business when we are subject to certain single risk limitations and to manage the overall risk profile of our insurance portfolio. Premiums ceded to reinsurers from all insurance operations were $54.9 million, $45.1 million and $49.3 million in 1996, 1995 and 1994, respectively. Cessions as a function of GPW declined from 14% in 1994 to 12% in 1996. Our basic reinsurance treaty calls for a minimum cession rate of 10%. Variances above this rate generally reflect the higher utilization of treaty or facultative reinsurance required to comply with regulatory constraints or our own single risk limits. Most of our reinsurers are rated Double-A or higher by Standard & Poor's Corporation or Single-A or higher by A. M. Best Co. Although we remain liable for all reinsured risks, we believe that we will recover the reinsured portion of any losses which may occur. REVENUES Our insurance revenues are primarily comprised of premiums earned and investment income. Premiums are recognized over the life of the bonds we insure. The slow premium recognition coupled with compounding investment income from investing our premiums and capital form a solid foundation for consistent revenue growth. PREMIUMS EARNED For approximately 80% of our insurance writings, we receive premiums upfront and earn them pro rata over the period of risk of the bond issue. Accordingly, the portion of net premiums earned on each policy in any given year represents a relatively small percentage of the total net upfront premium received. The balance represents deferred premium revenue to be earned over the remaining life of the insured bond issue. For 20% of our new business writings - primarily our structured finance business - - we collect installment premiums. Installment premiums are credited to the deferred premium revenue account when they are received, and are recognized as revenue over each installment period - generally one year or less. When an MBIA-insured bond issue is refunded or retired early the related deferred premium revenue is earned immediately, except for any portion which may be applied as a credit towards insuring the refunding bond issue. The amount of bond refundings and calls is influenced by a variety of factors such as prevailing interest rates, the coupon rates of the bond issue, the issuer's desire or ability to modify bond covenants and applicable regulations under the Internal Revenue Code. The composition of MBIA's premiums earned in terms of its scheduled and refunded components is illustrated below: Percent Change -------------- 1996 1995 vs. vs. In millions 1996 1995 1994 1995 1994 - --------------------------------------------------------------------- Premiums earned: Scheduled $207.3 $181.1 $165.3 14% 10 % Refunded 44.4 34.0 53.0 31% (36)% - --------------------------------------------------------------------- Total $251.7 $215.1 $218.3 17% (1)% The year-to-year increase in premiums earned from scheduled amortization reflects the additive effect of new business written, including the expanding installment premium activity from the structured finance and international sectors. INVESTMENT INCOME Our insurance related investment income increased to $247.6 million in 1996 and $219.9 million in 1995 from $193.9 million in 1994, growing 13% each year. These increases were primarily due to the growth of cash flow available for investment. Our cash flows were generated from operations, the compounding of previously earned and reinvested investment income and the addition of funds from financing activities. Insurance related net realized capital gains were $11.7 million in 1996, $11.3 million in 1995 and $10.3 million in 1994. These realized gains were generated as a result of ongoing management of the investment portfolio. LOSSES AND LOSS ADJUSTMENT EXPENSES (LAE) We maintain a general loss reserve based on our estimate of unidentified losses from our insured obligations. To the extent that we identify specific insured issues as currently or likely to be in default, the present value of our expected payments, net of expected reinsurance and collateral recoveries, are allocated within the total loss reserve as case-specific reserves. We periodically evaluate our estimates for losses and LAE and any resulting adjustments are reflected in current earnings. We believe that our reserving methodology and the resulting reserves are adequate to cover the ultimate net cost of claims. However, the reserves are necessarily based on estimates, and there can be no assurance that any ultimate liability will not exceed such estimates. 36 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) MBIA Inc. and Subsidiaries The following table shows the case-specific and unallocated components of our total loss and LAE reserves at the end of the last three years as well as our loss provision for the last three years: Percent Change -------------- 1996 1995 vs. vs. In millions 1996 1995 1994 1995 1994 - --------------------------------------------------------------------- Reserves: Case-specific $20.2 $14.5 $21.9 40% (34)% Unallocated 39.1 28.0 18.2 39% 54 % - --------------------------------------------------------------------- Total $59.3 $42.5 $40.1 40% 6 % Provision $15.3 $10.6 $ 8.1 44% 31 % Over the three-year period from 1994 through 1996, our provision for losses and LAE increased in tandem with new business writings in accordance with our loss reserving methodology. The changes in the case-specific reserve had no impact on our net income since they were offset by corresponding changes in the unallocated portion of the total reserve. The unallocated reserve has more than doubled since year-end 1994 from $18.2 million to $39.1 million at year-end 1996. OPERATING EXPENSES Those expenses related to the production of our insurance business (policy acquisition costs) are deferred and recognized over the period in which the related premiums are earned. Our company's policy acquisition costs, general operating expenses and total operating expenses, as well as related expense measures, are shown below: Percent Change -------------- 1996 1995 vs. vs. In millions 1996 1995 1994 1995 1994 - --------------------------------------------------------------------- Policy acquisition costs, net $24.7 $21.3 $21.9 16% (3)% Operating 46.6 41.8 41.0 12% 2 % - --------------------------------------------------------------------- Total insurance operating expenses $71.3 $63.1 $62.9 13% --- Expense ratio: GAAP 28.3% 29.3% 28.8% Statutory 17.6% 20.6% 22.9% For 1996, policy acquisition costs net of deferrals increased 16% to $24.7 million following a 3% decrease in 1995, in tandem with our year-to-year fluctuations in premiums earned. The ratio of policy acquisition costs net of deferrals to earned premiums has remained constant at 10% for all three years. In 1996, operating expenses increased 12% subsequent to a relatively small increase in 1995, due to expanded marketing and surveillance initiatives and one significant structured finance transaction for which a related contingent commission was recorded as an operating expense. Financial guarantee insurance companies also use the statutory expense ratio (expenses before deferrals as a function of net premiums written) as a measure of expense management. Our company's 1996 expense ratios have improved over both 1995 and 1994. Investment Management Services - ------------------------------ Over the last six years, our investment management businesses have expanded services to the public sector and added new revenue sources. Average assets under management for these businesses have increased from $3.2 billion in 1994 to $6.2 billion in 1996. These assets include our municipal investment agreements, pooled public funds and third-party accounts. With the growth in investments under management, these businesses generated increases in operating income in 1996 and 1995. We realized $2.6 million of net realized capital gains in 1996 following net realized losses of $6.1 million and $0.7 million for 1995 and 1994, respectively. Pretax financial results for 1996, 1995 and 1994 are summarized below: Percent Change -------------- 1996 1995 vs. vs. In millions 1996 1995 1994 1995 1994 - --------------------------------------------------------------------- Revenues $26.7 $19.9 $16.2 34% 23 % Expenses (14.6) (12.9) (10.6) 13% 21 % - --------------------------------------------------------------------- Pretax operating income $12.1 $ 7.0 $ 5.6 72% 26 % Net realized gains (losses) $ 2.6 $(6.1) $(0.7) 142% (739)% The following provides a summary of each of our primary investment management businesses: MBIA MUNICIPAL INVESTORS SERVICE CORPORATION (MBIA-MISC) provides cash management services and fixed-rate investment placement services directly to local governments and school districts. In addition, MBIA-MISC performs investment fund administration services for clients, which provide an additional source of revenue to our company at little added cost. In late 1996, MBIA-MISC acquired American Money Management Associates, Inc. (AMMA), which provides investment and treasury management consulting services for municipal and quasi-public sector clients. Both MBIA-MISC and AMMA are Securities and Exchange Commission (SEC)-registered investment advisers. 37 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) MBIA Inc. and Subsidiaries The MBIA-MISC organization has a network of investment professionals in twenty states and the Commonwealth of Puerto Rico, providing efficient delivery of its products and services. Since its inception in 1990, MBIA-MISC has successfully grown this distribution network and its revenue base and has plans to expand into additional states, as well as products and markets. At year-end 1996, MBIA-MISC had $4.2 billion of client assets under management compared with $2.5 billion and $1.7 billion at year-end 1995 and 1994, respectively. MBIA INVESTMENT MANAGEMENT CORP. (IMC) provides guaranteed investment agreements for bond proceeds of states and municipalities. At year-end 1996, principal and accrued interest outstanding on investment agreements was $3.3 billion compared with $2.6 billion and $1.5 billion at year-end 1995 and 1994, respectively. At amortized cost, the assets supporting IMC's investment agreement liabilities were $3.3 billion, $2.6 billion and $1.7 billion at December 31, 1996, 1995 and 1994, respectively. These assets are comprised of high-quality securities with an average credit quality rating of Double-A. IMC, from time to time, uses derivative financial instruments to manage interest rate risk. We have established policies limiting the amount, type and concentration of such instruments. By matter of policy, derivative positions can only be used to hedge interest rate exposures and not for speculative trading purposes. At year-end 1996, our exposure to derivative financial instruments was not significant. MBIA CAPITAL MANAGEMENT CORP. (CMC) provides investment management services for IMC's investment agreements, MBIA-MISC's municipal cash management programs and MBIA's insurance related portfolios, as well as third-party accounts. CMC assumed full management for MBIA's insurance related fixed-income investment portfolio in 1996, which was previously managed externally. Public Sector Services - ---------------------- STRATEGIC SERVICES, INC. (SSI) was established in 1996 to provide tax administration and related services to state and local governments. In May 1996, SSI acquired an equity interest in Capital Asset Holdings (Capital Asset), a purchaser and servicer of delinquent tax certificates. It also provides a series of services to assist taxing authorities in the preparation, analysis, packaging and completion of delinquent tax obligation sales. At year-end 1996, Capital Asset had a tax lien portfolio of $485 million. In January 1997, SSI acquired a 95% interest in Municipal Tax Bureau (MTB), a provider of tax revenue compliance and collection services to public sector entities. Interest Expense - ---------------- In 1996, 1995 and 1994, respectively, we incurred $33.5 million, $28.4 million and $27.2 million of interest expense. The increase in interest expense in 1996 was due to the $75 million addition to MBIA's long-term debt in December 1995. In 1995, the increase was a result of short-term bank borrowings under existing lines of credit. Taxes - ----- Our tax policy is to optimize our after-tax income by maintaining the appropriate mix of taxable and tax-exempt investments. Our effective tax rate has remained unchanged at 21% over the three-year period. CAPITAL RESOURCES We carefully manage our capital resources to optimize our cost of capital, while maintaining appropriate claims-paying resources to sustain our Triple-A claims-paying ratings. At year-end 1996, our total capital was $2.5 billion with total long-term borrowings at $374 million. We use debt financing to lower our overall cost of capital, thereby increasing our return on shareholders' equity. We maintain debt at levels we consider to be prudent based on our cash flow and total capital. The following table shows our long-term debt and ratios we use to measure it: 1996 1995 1994 - ------------------------------------------------------------------ Long-term debt (in millions) $374 $374 $299 Long-term debt to total capital 13% 14% 15% Ratio of earnings to fixed charges 13.2x 13.1x 13.1x In addition, our insurance company has a $725 million irrevocable standby line of credit with a group of major worldwide banks to provide funds for the payment of claims in the event that severe losses should occur. The agreement is for a seven-year term which expires on September 30, 2003 and, subject to approval by the banks, may be renewed annually to extend the term to seven years beyond the renewal date. From time to time we access the capital markets to support the growth of our businesses. At year-end 1995, we issued $75 million of debt securities, and in February 1996, we completed a public offering of 3.9 million shares of common stock, of which 770,000 shares were newly issued, for total net proceeds to MBIA of $55 million. In October 1996, to provide us with flexibility to access the capital markets when market and business conditions are favorable, we filed a registration statement with the SEC to allow us to offer and sell a combination of up to $250 million of debt securities, common stock and/or preferred stock. 38 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) MBIA Inc. and Subsidiaries As of year-end 1996, total claims-paying resources for our insurance company stood at $5.3 billion, a 14% increase over 1995. LIQUIDITY Cash flow needs at the parent company level are primarily for dividends to our shareholders and interest payments on our debt. These requirements have historically been met by upstreaming dividend payments from our insurance company which generates substantial cash flow from premium writings and investment income. In 1996, operating cash flow from our insurance company was $521 million, a 28% increase from $408 million in 1995. Under New York state insurance law, without prior approval of the superintendent of the state insurance department, financial guarantee insurance companies can pay dividends from earned surplus subject to retaining a minimum capital requirement. In our case, dividends in any 12-month period cannot be greater than 10% of policyholders' surplus. In 1996 our insurance company paid dividends of $29 million and at year-end 1996 had additional dividend capacity of $118 million without special regulatory approval. Our company has significant liquidity supporting its businesses. At year-end 1996, cash equivalents and short-term investments totaled $183 million. Should significant cash flow reductions occur in any of our businesses, for any combination of reasons, we have additional alternatives for meeting ongoing cash requirements. They include, among other things, selling or pledging our fixed-income investments from our investment portfolio, tapping existing liquidity facilities and new borrowings. Our company has substantial external borrowing capacity. We maintain two short-term bank lines totaling $300 million with a group of worldwide banks. At year-end 1996, $29.1 million was outstanding under these facilities to fund interim cash requirements. Our investment portfolio provides a high degree of liquidity since it is comprised of readily marketable high-quality fixed-income securities and short-term investments. At year-end 1996, the fair value of our consolidated investment portfolio increased 16% to $7.6 billion, as shown below: Percent Change -------------- In millions 1996 1995 1996 vs. 1995 - ------------------------------------------------------------------ Insurance operations: Amortized cost $4,207 $3,641 16 % Unrealized gain 148 224 (34)% - ------------------------------------------------------------------ Fair value $4,355 $3,865 13 % - ------------------------------------------------------------------ Municipal investment agreements: Amortized cost $3,263 $2,646 23 % Unrealized gain 30 96 (69)% - ------------------------------------------------------------------ Fair value $3,293 $2,742 20 % - ------------------------------------------------------------------ Total portfolio at fair value $7,648 $6,607 16 % The growth of our insurance related investments in 1996 was the result of positive cash flows and proceeds from our financing activities, partially offset by the decrease in unrealized gains caused by higher interest rates at year-end. The fair value of investments related to our municipal investment agreement business grew 20% to $3.3 billion from $2.7 billion at year-end 1995, primarily as a result of the continued strong growth of this business. Our investment portfolios are considered to be available-for-sale and the differences between their fair value and amortized cost, net of applicable taxes, are reflected as an adjustment to shareholders' equity. Differences between fair value and amortized cost arise primarily as a result of changes in interest rates occurring after a fixed-income security is purchased, although other factors influence fair value, including credit-related actions, supply and demand forces and other market factors. The weighted-average credit quality of our fixed-income portfolios has been maintained at Double-A since our inception in 1986, and since we generally intend to hold most of our investments to maturity as part of our risk-management strategy, we expect to realize a value substantially equal to amortized cost. 39 REPORT ON MANAGEMENT'S RESPONSIBILITY REPORT OF INDEPENDENT ACCOUNTANTS MBIA Inc. and Subsidiaries REPORT ON MANAGEMENT'S RESPONSIBILITY Management is responsible for the preparation, integrity and objectivity of the consolidated financial statements and other financial information presented in this annual report. The accompanying consolidated financial statements were prepared in accordance with generally accepted accounting principles, applying certain estimates and judgments as required. MBIA's internal controls are designed to provide reasonable assurance as to the integrity and reliability of the financial statements and to adequately safeguard, verify and maintain accountability of assets. Such controls are based on established written policies and procedures and are implemented by trained, skilled personnel with an appropriate segregation of duties. These policies and procedures prescribe that MBIA and all its employees are to maintain the highest ethical standards and that its business practices are to be conducted in a manner which is above reproach. Coopers & Lybrand L.L.P., independent accountants, is retained to audit the Company's financial statements. Their accompanying report is based on audits conducted in accordance with generally accepted auditing standards, which include the consideration of the Company's internal controls to establish a basis for reliance thereon in determining the nature, timing and extent of audit tests to be applied. The Board of Directors exercises its responsibility for these financial statements through its Audit Committee, which consists entirely of independent non-management Board members. The Audit Committee meets periodically with the independent accountants, both privately and with management present, to review accounting, auditing, internal controls and financial reporting matters. /s/ David H. Elliott - ------------------------ David H. Elliott Chairman and Chief Executive Officer /s/ Julliette S. Tehrani - ------------------------ Julliette S. Tehrani Executive Vice President, Chief Financial Officer and Treasurer 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, 1996 and 1995, 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, 1996. 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, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. /s/ COOPERS & LYBRAND L. L. P. - ------------------------------ New York, New York February 3, 1997 40 CONSOLIDATED STATEMENTS OF INCOME MBIA Inc. and Subsidiaries
Years ended December 31 --------------------------------------- Dollars in thousands except per share amounts 1996 1995 1994 ======================================================================================== REVENUES Insurance: Gross premiums written $460,675 $348,487 $360,836 Ceded premiums (54,852) (45,050) (49,281) - ---------------------------------------------------------------------------------------- Net premiums written 405,823 303,437 311,555 Increase in deferred premium revenue (154,111) (88,365) (93,226) - ---------------------------------------------------------------------------------------- Premiums earned (net of ceded premiums of $38,893, $30,655 and $33,340) 251,712 215,072 218,329 Net investment income 247,561 219,858 193,853 Net realized gains 11,740 11,312 10,335 Investment management services: Income 26,663 19,884 16,178 Net realized gains (losses) 2,572 (6,092) (726) Other 5,289 2,188 1,567 - ---------------------------------------------------------------------------------------- Total revenues 545,537 462,222 439,536 - ---------------------------------------------------------------------------------------- EXPENSES Insurance: Losses and loss adjustment 15,334 10,639 8,093 Policy acquisition costs, net 24,660 21,283 21,845 Operating 46,654 41,805 41,026 Investment management services 14,583 12,857 10,611 Interest 33,462 28,439 27,159 Other 2,714 2,169 1,380 - ---------------------------------------------------------------------------------------- Total expenses 137,407 117,192 110,114 - ---------------------------------------------------------------------------------------- Income before income taxes 408,130 345,030 329,422 Provision for income taxes 85,967 73,611 69,213 - ---------------------------------------------------------------------------------------- NET INCOME $322,163 $271,419 $260,209 - ---------------------------------------------------------------------------------------- NET INCOME PER COMMON SHARE $ 7.43 $ 6.43 $ 6.18 - ---------------------------------------------------------------------------------------- WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND COMMON STOCK EQUIVALENTS OUTSTANDING 43,348,048 42,240,011 42,085,943 ========================================================================================
The accompanying notes are an integral part of the consolidated financial statements. 41 CONSOLIDATED BALANCE SHEETS MBIA Inc. and Subsidiaries
Dollars in thousands except per share amounts December 31, 1996 December 31, 1995 ============================================================================================== ASSETS Investments: Fixed-maturity securities held as available-for-sale at fair value (amortized cost $4,001,562 and $3,428,986) $4,149,700 $3,652,621 Short-term investments, at amortized cost (which approximates fair value) 176,088 198,035 Other investments 29,101 14,064 - ---------------------------------------------------------------------------------------------- 4,354,889 3,864,720 Municipal investment agreement portfolio held as available-for-sale at fair value (amortized cost $3,263,211 and $2,645,828) 3,293,298 2,742,626 - ---------------------------------------------------------------------------------------------- TOTAL INVESTMENTS 7,648,187 6,607,346 Cash and cash equivalents 7,356 23,258 Securities borrowed or purchased under agreements to resell 217,000 --- Accrued investment income 104,725 87,016 Deferred acquisition costs 147,750 140,348 Prepaid reinsurance premiums 216,846 200,887 Goodwill (less accumulated amortization of $43,050 and $41,298) 105,138 106,569 Property and equipment, at cost (less accumulated depreciation of $21,642 and $17,625) 50,923 46,030 Receivable for investments sold 980 6,100 Other assets 63,110 49,896 - ---------------------------------------------------------------------------------------------- TOTAL ASSETS $8,562,015 $7,267,450 - ---------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Deferred premium revenue $1,785,875 $1,616,315 Loss and loss adjustment expense reserves 59,314 42,505 Municipal investment agreements 2,290,609 2,026,709 Municipal repurchase agreements 968,671 615,776 Long-term debt 374,010 373,900 Short-term debt 29,100 18,000 Securities loaned or sold under agreements to repurchase 217,000 --- Deferred income taxes 206,492 246,736 Payable for investments purchased 52,029 10,695 Other liabilities 99,218 82,548 - ---------------------------------------------------------------------------------------------- TOTAL LIABILITIES 6,082,318 5,033,184 - ---------------------------------------------------------------------------------------------- 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 -- 43,294,243 and 42,077,387 43,294 42,077 Additional paid-in capital 803,078 725,153 Retained earnings 1,518,994 1,261,051 Cumulative translation adjustment (1,042) 2,849 Unrealized appreciation of investments, net of deferred income tax provision of $62,706 and $112,252 116,424 207,648 Unearned compensation - restricted stock (1,051) (426) Treasury stock, at cost; 73,676 shares in 1995 --- (4,086) - ---------------------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY 2,479,697 2,234,266 - ---------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $8,562,015 $7,267,450 ==============================================================================================
The accompanying notes are an integral part of the consolidated financial statements. 42 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY MBIA Inc. and Subsidiaries
For the years ended December 31, 1996, 1995 and 1994 - ---------------------------------------------------------------------------------------------------------------------------------- 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, 1994 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 compensation - restricted 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) - ---------------------------------------------------------------------------------------------------------------------------------- Net proceeds from issuance of shares 770 770 54,463 --- --- --- --- --- --- Unearned compensation - restricted stock --- --- --- --- --- --- (625) --- --- Exercise of stock options 447 447 23,462 (1,757) --- --- --- 74 4,086 Net income --- --- --- 322,163 --- --- --- --- --- Change in foreign currency translation --- --- --- --- (3,891) --- --- --- --- Change in unrealized appreciation of investments net of change in deferred income taxes of $49,546 --- --- --- --- --- (91,224) --- --- --- Dividends (declared per common share $1.45, paid per common share $1.415) --- --- --- (62,463) --- --- --- --- --- - ---------------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1996 43,294 $43,294 $803,078 $1,518,994 $(1,042) $116,424 $(1,051) --- --- ==================================================================================================================================
The accompanying notes are an integral part of the consolidated financial statements. 43 CONSOLIDATED STATEMENTS OF CASH FLOWS MBIA Inc. and Subsidiaries
Years ended December 31 -------------------------------------------------- Dollars in thousands 1996 1995 1994 ================================================================================================================== CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 322,163 $ 271,419 $ 260,209 Adjustments to reconcile net income to net cash provided by operating activities: Increase in accrued investment income (17,709) (18,530) (13,692) Increase in deferred acquisition costs (7,402) (7,300) (12,564) Increase in prepaid reinsurance premiums (15,959) (14,395) (15,941) Increase in deferred premium revenue 170,070 102,760 109,167 Increase in loss and loss adjustment expense reserves 16,809 2,357 6,413 Depreciation 4,341 3,984 3,181 Amortization of goodwill 5,064 5,183 5,027 Amortization of bond discount, net (21,030) (18,468) 619 Net realized gains on sale of investments (14,312) (5,222) (9,609) Deferred income taxes 9,308 11,349 19,067 Other, net (4,931) 17,946 24,560 - ------------------------------------------------------------------------------------------------------------------ Total adjustments to net income 124,249 79,664 116,228 - ------------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 446,412 351,083 376,437 - ------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of fixed-maturity securities, net of payable for investments purchased (1,519,213) (1,149,253) (1,017,306) Sale of fixed-maturity securities, net of receivable for investments sold 873,823 719,523 515,548 Redemption of fixed-maturity securities, net of receivable for investments redeemed 158,087 83,448 128,274 (Purchase) sale of short-term investments (1,523) (32,281) 3,547 Purchase of other investments (14,644) (1,065) (7,864) Sale of other investments 862 6,926 95,320 Purchases for municipal investment agreement portfolio, net of payable for investments purchased (1,861,126) (2,210,571) (1,627,561) Sales from municipal investment agreement portfolio, net of receivable for investments sold 1,264,033 1,115,239 585,648 Capital expenditures, net of disposals (9,245) (4,923) (4,075) - ------------------------------------------------------------------------------------------------------------------ Net cash used by investing activities (1,108,946) (1,472,957) (1,328,469) - ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuance of common stock 55,233 --- --- Net proceeds from issuance of long-term debt --- 74,344 --- Net proceeds from issuance of short-term debt 11,100 --- --- Dividends paid (60,501) (53,179) (45,513) Purchase of treasury stock --- --- (14,411) Proceeds from issuance of municipal investment and repurchase agreements 2,242,872 2,351,206 1,786,574 Payments for drawdowns of municipal investment and repurchase agreements (1,628,310) (1,251,517) (771,156) Exercise of stock options 26,238 16,338 1,986 - ------------------------------------------------------------------------------------------------------------------ Net cash provided by financing activities 646,632 1,137,192 957,480 - ------------------------------------------------------------------------------------------------------------------ Net (decrease) increase in cash and cash equivalents (15,902) 15,318 5,448 Cash and cash equivalents - beginning of year 23,258 7,940 2,492 - ------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents - end of year $ 7,356 $ 23,258 $ 7,940 - ------------------------------------------------------------------------------------------------------------------ SUPPLEMENTAL CASH FLOW DISCLOSURES: Income taxes paid $ 66,101 $ 52,410 $ 53,921 Interest paid: Municipal investment and repurchase agreements $ 113,750 $ 104,301 $ 36,169 Long-term debt 31,722 26,575 26,575 Short-term debt 1,309 1,228 56 ==================================================================================================================
The accompanying notes are an integral part of the consolidated financial statements. 44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries 1. BUSINESS AND ORGANIZATION - ------------------------------- MBIA Inc. (the company) was incorporated in Connecticut on November 12, 1986 as a licensed insurer and, through a 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 operates its insurance business primarily through its wholly owned subsidiary, MBIA Insurance Corporation (MBIA Corp.). 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, 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 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. In 1993, the company formed a wholly owned subsidiary, MBIA Investment Management Corp. (IMC). IMC, which commenced operations in August 1993, provides guaranteed investment agreements to states, municipalities and municipal authorities that are guaranteed as to principal and interest. In 1994, the company formed a wholly owned subsidiary, MBIA Securities Corp. which was subsequently renamed MBIA Capital Management Corp. (CMC). CMC provides fixed-income investment management services for the company, its municipal cash management service businesses and public pension funds. In 1996, the company formed a wholly owned subsidiary, Strategic Services, Inc. (SSI), which acquired an interest in Capital Asset Holdings (Capital Asset), a limited partnership that buys, services and manages delinquent municipal tax liens. 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 and its wholly owned subsidiaries. All significant intercompany balances have been eliminated. Certain amounts have been reclassified in prior years' financial statements to conform to the current presentation. INVESTMENTS The company's entire investment portfolio is considered available-for-sale and is 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. 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. 45 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MBIA Inc. and Subsidiaries Investment income from the municipal investment agreement portfolio is recorded as a component of investment management services income. 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 include the company's interest in a limited partnership and a mutual fund which invests principally in marketable equity securities. The company records dividends from these investments 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. At December 31, 1996, other investments also include the company's investment in Capital Asset which is accounted for on the equity method. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash on hand and demand deposits with banks. SECURITIES BORROWED OR PURCHASED UNDER AGREEMENTS TO RESELL AND SECURITIES LOANED OR SOLD UNDER AGREEMENTS TO REPURCHASE Securities borrowed or purchased under agreements to resell and securities loaned or sold under agreements to repurchase are accounted for as collateralized transactions and are recorded at principal or contract value. It is the company's policy to take possession of securities borrowed or purchased under agreements to resell. The company minimizes the credit risk that counterparties to transactions might be unable to fulfill their contractual obligations by monitoring customer credit exposure and collateral value and requiring additional collateral to be deposited with the company when deemed necessary. 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 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. Policy acquisition costs are deferred and amortized over the period in which the related premiums are earned. 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. GOODWILL Goodwill represents the excess of the cost of acquisitions over the tangible net assets acquired. Goodwill attributed to the acquisition of MBIA Corp. 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. PROPERTY AND EQUIPMENT Property and equipment consist of the company's headquarters, furniture, fixtures and equipment, which are recorded at cost and 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. 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-specific 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. 46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MBIA Inc. and Subsidiaries Investment management services income includes 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 strategy. Gains and losses on the derivative financial instruments that qualify as accounting hedges of existing assets and liabilities are included with the carrying amounts and amortized over the remaining lives of the assets and liabilities as an adjustment to interest income or expense. When a hedged asset is sold or liability extinguished, 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. INVESTMENT MANAGEMENT SERVICES OPERATIONS Investment management services income is comprised of the net investment income and operating revenues of MBIA-MISC, IMC and CMC. The operating expenses of MBIA-MISC, IMC and CMC are reported in investment management services expenses. INCOME TAXES Deferred income taxes are provided with respect to the temporary differences between the tax bases of assets and liabilities and the reported amounts in the financial statements that will result in deductible or taxable amounts in future years when the reported amount of the asset or liability is recovered or settled. Such temporary differences relate principally to premium revenue recognition, deferred acquisition costs and the contingency reserve. The Internal Revenue Code permits companies writing financial guarantee insurance to deduct from taxable income amounts added 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. 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. NET INCOME PER COMMON SHARE Net income per common share is computed based on the weighted average number of shares, including common stock equivalents, outstanding during each period. 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 deferred and amortized 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 that 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. 47 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MBIA Inc. and Subsidiaries 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: As of December 31 ---------------------------------------- In thousands 1996 1995 1994 - ---------------------------------------------------------------------------- Company's GAAP shareholders' equity $2,479,697 $2,234,266 $1,704,716 Contributions to MBIA Corp. 361,494 341,202 273,273 Premium revenue recognition (368,762) (328,450) (296,524) Deferral of acquisition costs (147,750) (140,348) (133,048) Unrealized (gains) losses (179,129) (319,900) 132,852 Contingency reserve (892,793) (743,510) (620,988) Loss and loss adjustment expense reserves 39,065 28,024 18,181 Deferred income taxes 206,234 239,304 69,371 Tax and loss bonds 103,008 70,771 50,471 Goodwill (100,718) (105,614) (110,543) Other (33,324) (1,607) 22,277 - ---------------------------------------------------------------------------- Statutory capital and surplus $1,467,022 $1,274,138 $1,110,038 - ---------------------------------------------------------------------------- Consolidated net income of MBIA Corp., determined in accordance with statutory accounting practices for the years ended December 31, 1996, 1995 and 1994 was $316.6 million, $278.3 million and $224.9 million, respectively. 4. PREMIUMS EARNED FROM REFUNDED AND CALLED BONDS - ---------------------------------------------------- Premiums earned include $44.4 million, $34.0 million and $53.0 million for 1996, 1995 and 1994, respectively, related to refunded and called bonds. 5. INVESTMENTS - ----------------- The company's investment objective is to optimize long-term, after-tax returns while emphasizing the preservation of capital 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, 1996 and 1995: Gross Gross Amortized Unrealized Unrealized Fair In thousands Cost Gains Losses Value - ------------------------------------------------------------------------------ December 31, 1996 Taxable bonds United States Treasury and Government Agency $ 533,666 $ 13,657 $ (997) $ 546,326 Corporate and other obligations 2,718,585 34,559 (16,824) 2,736,320 Mortgage-backed 1,263,511 20,201 (5,460) 1,278,252 Tax-exempt bonds State and municipal obligations 2,925,099 137,389 (4,300) 3,058,188 - ------------------------------------------------------------------------------ Total $7,440,861 $205,806 $(27,581) $7,619,086 - ------------------------------------------------------------------------------ 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 $6,272,849 $326,475 $(6,042) $6,593,282 - ------------------------------------------------------------------------------ Fixed-maturity investments carried at fair value of $7.8 million and $8.2 million as of December 31, 1996 and 1995, 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, 1996 and 1995, the fair value of securities pledged as collateral with respect to these obligations approximated $1.5 billion and $1.2 billion, respectively. 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, 1996. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations. 48 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MBIA Inc. and Subsidiaries In thousands Amortized Cost Fair Value - ---------------------------------------------------------------- Maturity Within 1 year $ 601,050 $ 601,033 Beyond 1 year but within 5 years 1,555,293 1,586,868 Beyond 5 years but within 10 years 1,458,526 1,507,290 Beyond 10 years but within 15 years 901,449 943,746 Beyond 15 years but within 20 years 1,022,485 1,051,583 Beyond 20 years 638,547 650,314 - ---------------------------------------------------------------- 6,177,350 6,340,834 Mortgage-backed 1,263,511 1,278,252 - ---------------------------------------------------------------- Total fixed-maturities and short-term investments $7,440,861 $7,619,086 - ---------------------------------------------------------------- 6. INVESTMENT INCOME AND GAINS AND LOSSES - ------------------------------------------ Investment income consists of: Years ended December 31 -------------------------------- In thousands 1996 1995 1994 - -------------------------------------------------------------- Fixed-maturities $245,109 $216,653 $194,163 Short-term investments 5,244 5,834 2,332 Other investments 62 217 167 - -------------------------------------------------------------- Gross investment income 250,415 222,704 196,662 Investment expenses 2,854 2,846 2,809 - -------------------------------------------------------------- Net investment income 247,561 219,858 193,853 Net realized gains (losses): Fixed-maturities Gains 16,760 9,941 9,635 Losses (5,353) (2,537) (8,851) - -------------------------------------------------------------- Net 11,407 7,404 784 - -------------------------------------------------------------- Other investments Gains 333 3,917 9,551 Losses --- (9) --- - -------------------------------------------------------------- Net 333 3,908 9,551 - -------------------------------------------------------------- Total net realized gains 11,740 11,312 10,335 - -------------------------------------------------------------- Total investment income $259,301 $231,170 $204,188 - -------------------------------------------------------------- Total investment income excludes investment income and realized gains and losses from MBIA-MISC, IMC and CMC, which are reported in investment management services revenues. Net unrealized gains consist of: As of December 31 --------------------- In thousands 1996 1995 - ------------------------------------------------- Fixed-maturities: Gains $205,806 $326,475 Losses (27,581) (6,042) - ------------------------------------------------- Net 178,225 320,433 Other investments: Gains 934 287 Losses (29) (820) - ------------------------------------------------- Net 905 (533) - ------------------------------------------------- Total 179,130 319,900 Deferred income taxes 62,706 112,252 - ------------------------------------------------- Unrealized gains, net $116,424 $207,648 - ------------------------------------------------- The deferred income taxes relate primarily to unrealized gains and losses on the company's fixed-maturity investments, which are reflected in shareholders' equity. The change in net unrealized gains (losses) consists of: Years ended December 31 -------------------------------- In thousands 1996 1995 1994 - ------------------------------------------------------------------ Fixed-maturities $(142,208) $454,805 $(351,040) Other investments 1,438 (2,053) (9,373) - ------------------------------------------------------------------ Total (140,770) 452,752 (360,413) Deferred income taxes (49,546) 158,544 (50,105) - ------------------------------------------------------------------ Unrealized gains (losses), net $ (91,224) $294,208 $(310,308) - ------------------------------------------------------------------ 7. INCOME TAXES - ---------------- The company files a consolidated tax return that includes all of its U.S. subsidiaries. The provision for income taxes is composed of: Years ended December 31 ------------------------------- In thousands 1996 1995 1994 - ------------------------------------------------------------------ Current $76,659 $62,262 $50,146 Deferred 9,308 11,349 19,067 - ------------------------------------------------------------------ Total $85,967 $73,611 $69,213 - ------------------------------------------------------------------ 49 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MBIA Inc. and Subsidiaries 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 ----------------------------- 1996 1995 1994 - -------------------------------------------------------------------- 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 (12.6) (13.4) (12.9) Amortization of goodwill 0.4 0.5 0.5 Other (1.7) (0.8) (1.6) - -------------------------------------------------------------------- Provision for income taxes 21.1% 21.3% 21.0% - -------------------------------------------------------------------- The company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax assets and liabilities 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, 1996 and 1995 are presented below: In thousands 1996 1995 - ---------------------------------------------------------------- Deferred tax assets Tax and loss bonds $102,222 $ 71,183 Alternative minimum tax credit carryforward 58,067 36,871 Loss and loss adjustment expense reserves 13,673 9,808 Other 13,347 4,459 - ---------------------------------------------------------------- Total gross deferred tax assets 187,309 122,321 - ---------------------------------------------------------------- Deferred tax liabilities Contingency reserve 180,957 127,361 Deferred premium revenue 74,082 65,155 Deferred acquisition costs 51,713 51,455 Unrealized gains 62,706 112,252 Contingent commissions 1,052 4,672 Other 23,291 8,162 - ---------------------------------------------------------------- Total gross deferred tax liabilities 393,801 369,057 - ---------------------------------------------------------------- Net deferred tax liability $206,492 $246,736 - ---------------------------------------------------------------- 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 that can be paid in any 12-month period, MBIA Corp. had $118 million available for the payment of dividends to the company as of December 31, 1996. In 1996, 1995 and 1994, MBIA Corp. declared and paid dividends of $29 million, $83 million and $38 million, respectively, to the company. The insurance departments of New York state and certain other statutory insurance regulatory authorities and the agencies that rate the bonds insured by MBIA Corp. and its subsidiaries have various requirements relating to the maintenance of certain minimum ratios of statutory capital and reserves to net insurance in force. MBIA Corp. and its subsidiaries were in compliance with these requirements as of December 31, 1996. 9. LONG-TERM DEBT AND LINES OF CREDIT - -------------------------------------- Long-term debt consists of: As of December 31 --------------------- In thousands 1996 1995 - ------------------------------------------------- 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 75,000 - ------------------------------------------------- 375,000 375,000 Less unamortized discount 990 1,100 - ------------------------------------------------- Total $374,010 $373,900 - ------------------------------------------------- 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 $725 million with a group of major banks to provide loans to MBIA Corp. if it incurs cumulative losses (net of any recoveries) from September 30, 1996 in excess of the greater of $500 million or 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, 2003, and contains an annual renewal provision subject to approval by the bank group. The company and MBIA Corp. maintain bank liquidity facilities aggregating $300 million. At December 31, 1996, $29.1 million was outstanding under these facilities. 50 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MBIA Inc. and Subsidiaries 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, 1996, the interest rates on these agreements ranged from 3.6% to 9.6%. 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 1997 $1,218,581 1998 740,415 1999 300,745 2000 101,727 2001 14,444 Thereafter 845,210 - ---------------------------------------------- Total $3,221,122 - ---------------------------------------------- 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, 1996. 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. As of December 31, 1996, insurance in force, net of cessions to reinsurers, had a range of maturity of 1-42 years. The distribution of net insurance in force by geographic location and type of bond, excluding $3.3 billion and $2.7 billion relating to IMC municipal investment agreements guaranteed by MBIA Corp. in 1996 and 1995, respectively, is set forth in the following tables:
As of December 31 - ----------------------------------------------------------------------------------------------------------------- $ in billions 1996 1995 - ----------------------------------------------------------------------------------------------------------------- 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 - ------------------------------------------------------------------- ------------------------------------------- Domestic California $ 60.7 3,378 14.8% $ 51.2 3,122 14.9% New York 30.4 4,819 7.4 27.4 4,679 8.0 Florida 29.6 1,632 7.2 26.9 1,684 7.8 Texas 21.9 2,052 5.3 20.4 2,031 5.9 Pennsylvania 21.2 2,216 5.1 19.7 2,143 5.7 New Jersey 18.8 1,863 4.6 16.4 1,730 4.8 Illinois 18.5 1,145 4.5 15.0 1,090 4.4 Ohio 11.1 1,032 2.7 9.1 1,017 2.6 Massachusetts 10.9 1,100 2.6 9.3 1,070 2.7 Michigan 9.5 1,021 2.3 7.9 1,012 2.3 - ------------------------------------------------------------------- ------------------------------------------- Subtotal 232.6 20,258 56.5 203.3 19,578 59.1 Other States 170.1 11,502 41.4 135.6 11,147 39.4 - ------------------------------------------------------------------- ------------------------------------------- Total domestic 402.7 31,760 97.9 338.9 30,725 98.5 International 8.4 169 2.1 5.1 53 1.5 - ------------------------------------------------------------------- ------------------------------------------- Total $411.1 31,929 100.0% $344.0 30,778 100.0% - ------------------------------------------------------------------- -------------------------------------------
51 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MBIA Inc. and Subsidiaries
As of December 31 - ----------------------------------------------------------------------------------------------------------------- $ in billions 1996 1995 - ------------------------------------------------------------------- ------------------------------------------- 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 - ------------------------------------------------------------------- ------------------------------------------- Domestic Municipal: General obligation $110.5 11,763 26.9% $ 91.6 11,445 26.6% Utilities 67.9 4,799 16.5 60.3 4,931 17.5 Health care 54.0 2,386 13.1 51.9 2,458 15.1 Transportation 30.3 1,520 7.4 25.5 1,562 7.4 Special revenue 28.9 1,543 7.0 24.4 1,445 7.1 Industrial development and pollution control revenue 18.1 931 4.4 17.2 924 5.0 Higher education 17.8 1,309 4.3 15.2 2,671 4.4 Housing 17.7 2,455 4.3 15.8 1,261 4.6 Other 3.8 169 0.9 7.3 134 2.1 - ------------------------------------------------------------------- ------------------------------------------- Total municipal 349.0 26,875 84.8 309.2 26,831 89.8 Structured finance* 38.6 349 9.4 20.2 256 5.9 Other 15.1 4,536 3.7 9.5 3,638 2.8 - ------------------------------------------------------------------- ------------------------------------------- Total domestic 402.7 31,760 97.9 338.9 30,725 98.5 - ------------------------------------------------------------------- ------------------------------------------- International Infrastructure 3.6 121 0.9 1.6 34 0.5 Structured finance* 2.1 22 0.5 1.6 8 0.5 Other 2.7 26 0.7 1.9 11 0.5 - ------------------------------------------------------------------- ------------------------------------------- Total international 8.4 169 2.1 5.1 53 1.5 - ------------------------------------------------------------------- ------------------------------------------- Total $411.1 31,929 100.0% $344.0 30,778 100.0% - ------------------------------------------------------------------- -------------------------------------------
* Asset-/mortage-backed 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. and its subsidiaries were $57.6 billion and $50.1 billion, at December 31, 1996 and 1995, respectively. The distribution of ceded insurance in force by geographic location and type of bond is set forth in the following tables: As of December 31 - -------------------------------------------------------------------- In billions 1996 1995 - ------------------------------------------- ---------------------- % of % of Ceded Ceded Ceded Ceded Geographic Insurance Insurance Insurance Insurance Location In Force In Force In Force In Force - ------------------------------------------- ---------------------- Domestic California $ 9.4 16.2% $ 8.8 17.5% New York 6.2 10.7 5.7 11.4 New Jersey 3.3 5.7 3.1 6.1 Texas 2.9 5.1 2.8 5.6 Pennsylvania 2.9 5.1 2.7 5.4 Illinois 2.6 4.5 2.2 4.5 Florida 2.4 4.1 2.3 4.6 Washington 1.9 3.2 1.4 2.7 District of Columbia 1.5 2.7 1.5 3.0 Massachusetts 1.4 2.5 1.1 2.1 Ohio 1.3 2.3 1.0 2.0 Puerto Rico 1.2 2.1 1.3 2.6 - ------------------------------------------- ---------------------- Subtotal 37.0 64.2 33.9 67.5 Other states 16.9 29.4 14.4 28.8 - ------------------------------------------- ---------------------- Total domestic 53.9 93.6 48.3 96.3 International 3.7 6.4 1.8 3.7 - ------------------------------------------- ---------------------- Total $57.6 100.0% $50.1 100.0% - ------------------------------------------- ---------------------- 52 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MBIA Inc. and Subsidiaries As of December 31 - --------------------------------------------------------------------------- In billions 1996 1995 - ------------------------------------------------- ----------------------- % of % of Ceded Ceded Ceded Ceded Insurance Insurance Insurance Insurance Type of Bond In Force In Force In Force In Force - ------------------------------------------------- ----------------------- Domestic Municipal: General obligation $14.4 24.9% $11.7 23.3% Utilities 10.2 17.7 9.0 18.0 Transportation 6.4 11.1 5.5 11.0 Health care 6.3 11.0 6.6 13.1 Special revenue 3.4 5.9 3.2 6.4 Industrial development and pollution control revenue 3.2 5.6 3.0 6.0 Housing 1.6 2.7 1.4 2.8 Higher education 1.5 2.6 1.2 2.4 Other 1.0 1.7 2.4 4.8 - ------------------------------------------------- ----------------------- Total municipal 48.0 83.2 44.0 87.8 Structured finance* 4.5 7.9 3.6 7.2 Other 1.4 2.5 0.7 1.3 - ------------------------------------------------- ----------------------- Total domestic 53.9 93.6 48.3 96.3 - ------------------------------------------------- ----------------------- International Infrastructure 1.6 2.7 0.7 1.4 Structured finance* 1.1 1.9 0.2 0.5 Other 1.0 1.8 0.9 1.8 - ------------------------------------------------- ----------------------- Total international 3.7 6.4 1.8 3.7 - ------------------------------------------------- ----------------------- Total $57.6 100.0% $50.1 100.0% - ------------------------------------------------- ----------------------- * Asset-/mortgage-backed 13. PENSION AND PROFIT SHARING PLANS - ------------------------------------- The company has a pension plan covering substantially all 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, 1996, 1995 and 1994 was $3.9 million, $3.6 million and $3.3 million, respectively. The company also has a profit sharing/401(k) plan that 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 $1.7 million, $1.5 million and $1.4 million for the years ended December 31, 1996, 1995 and 1994, 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, $3.0 million, $2.7 million and $2.6 million for the years ended December 31, 1996, 1995 and 1994, respectively, are included in policy acquisition costs. 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, 1996, 3,449,587 options had been granted net of expirations and cancellations, leaving the total number available for future grants at 1,303,424. 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 the 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. 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 53 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MBIA Inc. and Subsidiaries 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 1996 and 1995, $2.9 million and $0.2 million, respectively, were recorded as a charge related to the December 1995 ABV award. Of these amounts, $1.6 million and $0.1 million were included in policy acquisition costs for the same respective periods. The stock option grants, which may continue to be awarded every year, provide the right to purchase shares of common stock at the fair 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 1996, 156,370 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 are 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 three years from the date of grant, at which time the award fully vests. In 1996 and 1995, respectively, a total of 7,753 and 5,640 restricted shares of the company's stock were granted. The fair value of the shares awarded in 1996 and 1995 determined on the grant date, was $0.8 million and $0.4 million, respectively, 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. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) 123, "Accounting for Stock-Based Compensation," effective for financial statements for fiscal years beginning after December 15, 1995. SFAS 123 required 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 adopted the disclosure requirements of SFAS 123 effective January 1, 1996 and continues to account for its employee stock-based compensation plans under APB 25. Accordingly, the adoption of SFAS 123 had no impact on the company's financial position or results of operations. Had compensation cost for the company's stock option program been recognized based on the fair value at the grant date consistent with the recognition provisions of SFAS 123, the impact on the company's net income and earnings per share would not have been material. However, since the options vest over five years and additional awards could be made in future years, the effects of applying SFAS 123 in 1996 are not likely to be representative of the effects on reported net income and earnings per share for future years. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1996 and 1995, respectively; exercise prices $101.875 and $77.125; dividend yields of 1.492% and 1.937%; expected volatility of .2110 and .2787; risk-free interest rates of 5.96% and 5.97%; and expected option terms of 5.52 years for both grants. A summary of the company's Plan as of December 31, 1996, 1995 and 1994, and changes during the years ending on those dates is presented below: 1996 ---------------------------- Weighted Number Average Options of Shares Price per Share - --------------------------------------------------------------------- Outstanding at beginning of year 1,772,480 $ 44.850 Granted 156,370 101.875 Exercised 520,532 82.205 Expired or canceled 22,560 59.210 - --------------------------------------------------------------------- Outstanding at year-end 1,385,758 $ 55.390 - --------------------------------------------------------------------- Exercisable at year-end 795,428 $ 43.410 - --------------------------------------------------------------------- Weighted-average fair value per share of options granted during the year $28.17 54 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MBIA Inc. and Subsidiaries 1995 --------------------------- Weighted Number Average Options of Shares Price per Share - --------------------------------------------------------------------- Outstanding at beginning of year 2,091,087 $40.600 Granted 97,300 77.125 Exercised 382,447 68.957 Expired or canceled 33,460 58.671 - --------------------------------------------------------------------- Outstanding at year-end 1,772,480 $44.850 - --------------------------------------------------------------------- Exercisable at year-end 1,177,100 $37.160 - --------------------------------------------------------------------- Weighted-average fair value per share of options granted during the year $23.59 1994 --------------------------- Weighted Number Average Options of Shares Price per Share - --------------------------------------------------------------------- Outstanding at beginning of year 1,591,487 $35.640 Granted 552,700 54.500 Exercised 47,080 57.902 Expired or canceled 6,020 60.937 - --------------------------------------------------------------------- Outstanding at year-end 2,091,087 $40.600 - --------------------------------------------------------------------- Exercisable at year-end 1,376,847 $32.240 - --------------------------------------------------------------------- Weighted-average fair value per share of options granted during the year $16.67 The following table summarizes information about the Plan's stock options at December 31, 1996:
Weighted-Average Range of Number Outstanding Remaining Contractual Weighted-Average Number Exercisable Weighted-Average Exercise Prices at 12/31/96 Life in Years Exercise Price at 12/31/96 Exercise Price - ---------------------------------------------------------------------------------------------------------------------- $16.50 to $41.125 403,018 3.16 $29.680 403,018 $29.680 $50.00 to $60.125 576,250 7.15 53.530 272,650 52.470 $69.00 to $101.875 406,490 8.26 83.510 119,760 69.000 - ----------------------------------------------------------------------------------------------------------------------- Total 1,385,758 6.32 $55.390 795,428 $43.410 - -----------------------------------------------------------------------------------------------------------------------
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 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. 55 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MBIA Inc. and Subsidiaries 16. RELATED PARTY TRANSACTIONS - -------------------------------- 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 former 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, 1996 is $340 million. In 1995, the company sold 78,000 shares of Credit Local de France, a major shareholder. Realized gains from the sale amounted to $3.5 million. The company had investment management and advisory agreements with an affiliate of a former principal shareholder, which provided for payment of fees on assets under management. Total related expenses for the years ended December 31, 1995 and 1994 amounted to $2.5 million and $2.6 million, respectively. These agreements were terminated on January 1, 1996 at which time CMC assumed full management of MBIA Corp.'s consolidated investment portfolios. The company has various insurance coverages provided by a former principal shareholder, the cost of which totaled $2.1 million, $1.9 million and $1.9 million, respectively, for the years ended December 31, 1996, 1995 and 1994. SSI provides financing to Capital Asset under various borrowing arrangements. The net balance outstanding under these agreements at December 31, 1996 was $15.7 million, including accrued interest and is included in other assets on the company's consolidated balance sheet. Net interest earned under these agreements during 1996 was $2.1 million. 17. PUBLIC OFFERINGS OF COMMON STOCK - -------------------------------------- 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. 18. 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 is based upon quoted market prices, 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 approximates fair value. Other investments - ----------------- Other investments include the company's interest in a limited partnership and a mutual fund that invests principally in marketable equity securities. The fair value of these investments is based on quoted market prices. On December 31, 1996, other investments also include the company's investment in Capital Asset that is accounted for on the equity method. 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 prices, 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. Securities borrowed or purchased under agreements to resell - ----------------------------------------------------------- The fair value is estimated based upon the quoted market prices of the transactions' underlying collateral. 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. 56 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MBIA Inc. and Subsidiaries 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. Securities loaned or sold under agreements to repurchase - -------------------------------------------------------- The fair value is estimated based upon the quoted market prices of the transactions' underlying collateral. Installment premiums - -------------------- The fair value is derived by calculating the present value of the estimated future cash flow stream discounted at 9%.
As of December 31, 1996 As of December 31, 1995 ------------------------- ------------------------- Carrying Estimated Carrying Estimated In thousands Amount Fair Value Amount Fair Value - -------------------------------------------------------------------------------------- ------------------------- ASSETS: Fixed-maturity securities $4,149,700 $4,149,700 $3,652,621 $3,652,621 Short-term investments 176,088 176,088 198,035 198,035 Other investments 29,101 29,101 14,064 14,064 Municipal investment agreement portfolio 3,293,298 3,293,298 2,742,626 2,742,626 Cash and cash equivalents 7,356 7,356 23,258 23,258 Securities borrowed or purchased under agreements to resell 217,000 219,718 --- --- Prepaid reinsurance premiums 216,846 189,631 200,887 174,444 Receivable for investments sold 980 980 6,100 6,100 LIABILITIES: Deferred premium revenue 1,785,875 1,545,976 1,616,315 1,395,159 Loss and loss adjustment expense reserves 59,314 59,314 42,505 42,505 Municipal investment agreements 2,290,609 2,297,272 2,026,709 2,091,895 Municipal repurchase agreements 968,671 982,410 615,776 665,564 Long-term debt 374,010 402,976 373,900 427,193 Short-term debt 29,100 29,100 18,000 18,000 Securities loaned or sold under agreements to repurchase 217,000 221,575 --- --- Payable for investments purchased 52,029 52,029 10,695 10,695 OFF-BALANCE SHEET INSTRUMENTS: Installment premiums --- 287,969 --- 235,371
19. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) - ------------------------------------------------- A summary of selected quarterly income statement information follows:
In thousands except per share amounts 1996 First Second Third Fourth Year - -------------------------------------------------------------------------------------------------------------- Gross premiums written $120,599 $134,001 $ 79,910 $126,165 $460,675 Net premiums written 105,884 122,087 70,874 106,978 405,823 Premiums earned 60,352 62,066 64,538 64,756 251,712 Investment income and realized gains and losses 62,758 65,334 67,636 66,145 261,873 All other revenues 7,087 7,625 7,850 9,390 31,952 Income before income taxes 98,574 100,830 105,258 103,468 408,130 Net income $ 77,625 $ 79,737 $ 83,321 $ 81,480 $322,163 - -------------------------------------------------------------------------------------------------------------- Net income per common share $ 1.81 $ 1.84 $ 1.92 $ 1.87 $ 7.43 - -------------------------------------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------------------------------------
Due to the changes in the number of shares outstanding, quarterly per share amounts may not add to the totals for the years. 57 EX-21 8 LIST OF SUBSIDIARIES EXHIBIT 21 SUBSIDIARIES OF MBIA INC. NAME OF SUBSIDIARY STATE OF INCORPORATION - ------------------ ---------------------- MBIA Insurance Corporation New York MBIA Issuers Service Corporation New York MBIA Municipal Investors Service Corporation Delaware MBIA Investment Management Corp. Delaware MBIA Capital Management Corp. Delaware MBIA Capital Corp. Delaware Strategic Services, Inc. Delaware MBIA-AMBAC International Marketing Australia Services, Pty. Limited MBIA Assurance S.A. France MBIA Insurance Corp. of Illinois Illinois American Money Management Associates, Inc. Colorado Municipal Tax Collection Bureau Pennsylvania EX-23 9 CONSENT OF COOPERS & LYBRAND LLP EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS ---------------------------------- We consent to the incorporation by reference in the Registration Statements of MBIA Inc. on Forms S-3 (No. 333-15003) and S-8 (Nos. 33- 22441 and 33-46062) of: (1) our report dated February 3, 1997, on our audits of the consolidated financial statements of MBIA Inc. and Subsidiaries as of December 31, 1996 and 1995, and for each of the three years in the period ended December 31, 1996, which report is incorporated by reference in this 1996 Annual Report on Form 10-K; and (2) our report dated February 3, 1997 on our audits of the financial statement schedules of MBIA Inc. and Subsidiaries, which report is included in this 1996 Annual Report on Form 10-K. We also consent to the reference to our firm under the caption "Experts" included in the Prospectuses. /s/ COOPERS & LYBRAND L. L. P. New York, New York March 27, 1997 EX-24 10 POWER OF ATTORNEY EXHIBIT 24 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, 1996, 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 this 20th day of March, 1997. /s/ Joseph W. Brown, Jr. /s/ Freda S. Johnson - -------------------------------- ---------------------------- Joseph W. Brown, Jr. Freda S. Johnson /s/ David C. Clapp /s/ Daniel P. Kearney - -------------------------------- ---------------------------- David C. Clapp Daniel P. Kearney /s/ Gary C. Dunton /s/ James A. Lebenthal - -------------------------------- ---------------------------- Gary C. Dunton James A. Lebenthal /s/ Claire L. Gaudiani /s/ Pierre-Henri Richard - -------------------------------- ---------------------------- Claire L. Gaudiani Pierre-Henri Richard /s/ John A. Rolls - -------------------------------- ---------------------------- William H. Gray, III John A. Rolls EX-27 11 FINANCIAL DATA SCHEDULE
7 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 4,149,700 0 0 0 0 0 7,648,187 7,356 0 147,750 8,562,015 59,314 1,785,875 0 0 403,110 43,294 0 0 2,436,403 8,562,015 251,712 247,561 11,740 34,524 15,334 24,660 46,654 408,130 85,967 322,163 0 0 0 322,163 7.43 7.41 0 0 0 0 0 0 0
EX-99 12 ADDITIONAL EXHIBITS EXHIBIT 99 MBIA INSURANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 1996 and 1995 and for the years ended December 31, 1996, 1995 and 1994 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, 1996 and 1995, 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, 1996. 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, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. /S/ COOPERS & LYBRAND L. L. P. New York, New York February 3, 1997. MBIA INSURANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands except per share amounts)
December 31, 1996 December 31, 1995 ----------------- ----------------- ASSETS Investments: Fixed-maturity securities held as available-for-sale at fair value (amortized cost $4,001,562 and $3,428,986) $4,149,700 $3,652,621 Short-term investments, at amortized cost (which approximates fair value) 169,889 198,035 Other investments 14,851 14,064 ---------- ---------- TOTAL INVESTMENTS 4,334,440 3,864,720 Cash and cash equivalents 3,288 2,135 Securities purchased under agreements to resell 108,900 --- Accrued investment income 65,194 60,247 Deferred acquisition costs 147,750 140,348 Prepaid reinsurance premiums 216,846 200,887 Goodwill (less accumulated amortization of $42,262 and $37,366) 100,718 105,614 Property and equipment, at cost (less accumulated depreciation of $14,782 and $12,137) 47,176 41,169 Receivable for investments sold 975 5,729 Other assets 40,871 42,145 ---------- ---------- TOTAL ASSETS $5,066,158 $4,462,994 ========== ========== LIABILITIES AND SHAREHOLDER'S EQUITY Liabilities: Deferred premium revenue $1,785,875 $1,616,315 Loss and loss adjustment expense reserves 59,314 42,505 Securities sold under agreements to repurchase 108,900 --- Deferred income taxes 195,704 212,925 Payable for investments purchased 48,811 10,695 Other liabilities 63,683 54,682 ---------- ---------- TOTAL LIABILITIES 2,262,287 1,937,122 ---------- ---------- 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 1,041,876 1,021,584 Retained earnings 1,651,315 1,341,855 Cumulative translation adjustment (1,188) 2,704 Unrealized appreciation of investments, net of deferred income tax provision of $52,175 and $78,372 96,868 144,729 ---------- ---------- TOTAL SHAREHOLDER'S EQUITY 2,803,871 2,525,872 ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $5,066,158 $4,462,994 ========== ==========
The accompanying notes are an integral part of the consolidated financial statements. -2- MBIA INSURANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands)
Years ended December 31 ---------------------------------------------------- 1996 1995 1994 ------------- -------------- -------------- Revenues: Gross premiums written $462,444 $349,812 $361,523 Ceded premiums (54,852) (45,050) (49,281) ------------- -------------- -------------- Net premiums written 407,592 304,762 312,242 Increase in deferred premium revenue (154,111) (88,365) (93,226) ------------- -------------- -------------- Premiums earned (net of ceded premiums of $38,893, $30,655 and $33,340) 253,481 216,397 219,016 Net investment income 247,286 219,834 193,966 Net realized gains 11,740 7,777 10,335 Other 3,163 2,168 1,539 ------------- -------------- -------------- Total revenues 515,670 446,176 424,856 ------------- -------------- -------------- Expenses: Losses and loss adjustment 15,334 10,639 8,093 Policy acquisition costs, net 24,660 21,283 21,845 Operating 46,654 41,812 41,044 ------------- -------------- -------------- Total expenses 86,648 73,734 70,982 ------------- -------------- -------------- Income before income taxes 429,022 372,442 353,874 Provision for income taxes 90,562 81,748 77,125 ------------- -------------- -------------- Net income $338,460 $290,694 $276,749 ============= ============== ==============
The accompanying notes are an integral part of the consolidated financial statements. -3- MBIA INSURANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY For the years ended December 31, 1996, 1995 and 1994 (In thousands except per share amounts)
Unrealized Common Stock Additional Cumulative Appreciation ------------------- Paid-in Retained Translation (Depreciation) Shares Amount Capital Earnings Adjustment of Investments -------- ------- ---------- ---------- ----------- -------------- Balance, January 1, 1994 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) ------- ------- ---------- ---------- ----------- -------------- 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. --- --- 15,129 --- --- --- ------- ------- ---------- ---------- ----------- -------------- Balance, December 31, 1995 100,000 15,000 1,021,584 1,341,855 2,704 144,729 ------- ------- ---------- ---------- ----------- -------------- Net income --- --- --- 338,460 --- --- Change in foreign currency translation --- --- --- --- (3,892) --- Change in unrealized appreciation of investments net of change in deferred income taxes of $26,197 --- --- --- --- --- (47,861) Dividends declared (per common share $290.00) --- --- --- (29,000) --- --- Tax reduction related to tax sharing agreement with MBIA Inc. --- --- 20,292 --- --- --- ------- ------- ---------- ---------- ----------- -------------- Balance, December 31, 1996 100,000 $15,000 $1,041,876 $1,651,315 $(1,188) $96,868 ======= ======= ========== ========== =========== ==============
The accompanying notes are an integral part of the consolidated financial statements. -4- MBIA INSURANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
Years ended December 31 -------------------------------------- 1996 1995 1994 ---------- -------- ---------- Cash flows from operating activities: Net income $ 338,460 $290,694 $ 276,749 Adjustments to reconcile net income to net cash provided by operating activities: Increase in accrued investment income (4,947) (4,900) (3,833) Increase in deferred acquisition costs (7,402) (7,300) (12,564) Increase in prepaid reinsurance premiums (15,959) (14,395) (15,941) Increase in deferred premium revenue 170,070 104,104 109,167 Increase in loss and loss adjustment expense reserves 16,809 2,357 6,413 Depreciation 2,952 2,676 1,607 Amortization of goodwill 4,896 4,929 4,961 Amortization of bond (discount) premium, net (7,526) (2,426) 621 Net realized gains on sale of investments (11,740) (7,778) (10,335) Deferred income taxes 8,982 11,391 19,082 Other, net 26,687 29,080 (8,469) ---------- --------- ---------- Total adjustments to net income 182,822 117,738 90,709 ---------- --------- ---------- Net cash provided by operating activities 521,282 408,432 367,458 ---------- --------- ---------- Cash flows from investing activities: Purchase of fixed-maturity securities, net of payable for investments purchased (1,519,213) (897,128) (1,060,033) Sale of fixed-maturity securities, net of receivable for investments sold 873,823 473,352 515,548 Redemption of fixed-maturity securities, net of receivable for investments redeemed 158,087 83,448 128,274 Sale (purchase) of short-term investments, net 4,676 (32,281) 3,547 Sale (purchase) of other investments, net 468 (692) 87,456 Capital expenditures, net of disposals (8,970) (4,228) (3,665) ---------- -------- ---------- Net cash used by investing activities (491,129) (377,529) (328,873) ---------- -------- ---------- Cash flows from financing activities: Capital contribution from MBIA Inc. --- 52,800 --- Dividends paid (29,000) (82,900) (38,000) ---------- -------- ---------- Net cash used by financing activities (29,000) (30,100) (38,000) ---------- -------- ---------- Net increase in cash and cash equivalents 1,153 803 585 Cash and cash equivalents - beginning of year 2,135 1,332 747 ---------- -------- ---------- Cash and cash equivalents - end of year $ 3,288 $ 2,135 $ 1,332 ========== ======== ========== Supplemental cash flow disclosures: Income taxes paid $ 63,018 $ 50,790 $ 53,569
The accompanying notes are an integral part of the consolidated financial statements. - 5 - 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 a 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. 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). 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, provides guaranteed investment agreements to states, municipalities and municipal authorities that are guaranteed as to principal and interest. MBIA Corp. insures IMC's outstanding investment agreement liabilities. -6- MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) In 1994, MBIA Inc. formed a wholly owned subsidiary, MBIA Securities Corp. which was subsequently renamed MBIA Capital Management Corp. (CMC). CMC provides fixed-income investment management services for MBIA Inc., its municipal cash management service businesses and public pension funds. In 1995, portfolio management for a portion of MBIA Corp.'s insurance related investment portfolio was transferred to CMC; 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 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. and its wholly owned subsidiaries. All significant intercompany balances have been eliminated. Certain amounts have been reclassified in prior years' financial statements to conform to the current presentation. INVESTMENTS MBIA Corp.'s entire investment portfolio is considered available-for-sale and is reported in the financial statements at fair value, with unrealized gains and losses, net of deferred taxes, reflected as a separate component of shareholder's equity. 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 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. -7- MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Other investments include MBIA Corp.'s interest in a limited partnership and a mutual fund which invests principally in marketable equity securities. MBIA Corp. records dividends from these investments as a 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. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash on hand and demand deposits with banks. SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE Securities purchased under agreements to resell and securities sold under agreements to repurchase are accounted for as collateralized transactions and are recorded at principal or contract value. It is MBIA Corp.'s policy to take possession of securities purchased under agreements to resell. MBIA Corp. minimizes the credit risk that counterparties to transactions might be unable to fulfill their contractual obligations by monitoring customer credit exposure and collateral value and requiring additional collateral to be deposited with MBIA Corp. when deemed necessary. 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 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. Policy acquisition costs are deferred and amortized over the period in which the related premiums are earned. 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 -8- MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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. GOODWILL Goodwill represents the excess of the cost of acquisitions over the tangible net assets acquired. Goodwill attributed to the acquisition of MBIA Corp. 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. PROPERTY AND EQUIPMENT Property and equipment consists of MBIA Corp.'s headquarters, furniture, fixtures and equipment, which are recorded at cost and are depreciated on the straight-line method over their estimated service lives ranging from 2 to 31 years. Maintenance and repairs are charged to expenses as incurred. 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-specific reserves. Management of MBIA Corp. 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. 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 -9- MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) sharing agreement with MBIA Inc. and its subsidiaries is reflected directly in shareholder's equity for financial reporting purposes. Deferred income taxes are provided with respect to the temporary differences between the tax bases of assets and liabilities and the reported amounts in the financial statements that will result in deductible or taxable amounts in future years when the reported amount of the asset or liability is recovered or settled. Such temporary differences relate principally to premium revenue recognition, deferred acquisition costs and the contingency reserve. The Internal Revenue Code permits companies writing financial guarantee insurance to deduct from taxable income amounts added 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. 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 deferred and amortized as the related premiums are earned; -10- MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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; 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: As of December 31 ----------------------------------------- In thousands 1996 1995 1994 - --------------------------------------------------------------------------- GAAP shareholder's equity $2,803,871 $2,525,872 $2,055,503 Premium revenue recognition (368,762) (328,450) (296,524) Deferral of acquisition costs (147,750) (140,348) (133,048) Unrealized (gains) losses (148,138) (223,635) 71,932 Contingency reserve (892,793) (743,510) (620,988) Loss and loss adjustment expense reserves 39,065 28,024 18,181 Deferred income taxes 195,704 205,425 90,328 Tax and loss bonds 103,008 70,771 50,471 Goodwill (100,718) (105,614) (110,543) Other (16,465) (14,397) (15,274) - --------------------------------------------------------------------------- Statutory capital and surplus $1,467,022 $1,274,138 $1,110,038 - --------------------------------------------------------------------------- Consolidated net income of MBIA Corp. determined in accordance with statutory accounting practices for the years ended December 31, 1996, 1995 and 1994 was $316.6 million, $278.3 million and $224.9 million, respectively. -11- MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 4. PREMIUMS EARNED FROM REFUNDED AND CALLED BONDS Premiums earned include $44.4 million, $34.0 million and $53.0 million for 1996, 1995 and 1994, 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 through maintenance of high-quality investments with adequate liquidity. MBIA Corp.'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 MBIA Corp. as of December 31, 1996 and 1995. Gross Gross Amortized Unrealized Unrealized Fair In thousands Cost Gains Losses Value - ----------------------------------------------------------------------------- December 31, 1996 Taxable bonds United States Treasury and Government Agency $ 6,585 $ 171 $ (10) $ 6,746 Corporate and other obligations 767,472 13,978 (7,272) 774,178 Mortgage-backed 472,295 12,185 (4,003) 480,477 Tax-exempt bonds State and municipal obligations 2,925,099 137,389 (4,300) 3,058,188 - ----------------------------------------------------------------------------- Total $4,171,451 $163,723 $(15,585) $4,319,589 - ----------------------------------------------------------------------------- -12- MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Gross Gross Amortized Unrealized Unrealized Fair In thousands Cost Gains Losses Value - -------------------------------------------------------------------------- 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 State and municipal obligations 2,637,732 175,081 (2,595) 2,810,218 - -------------------------------------------------------------------------- Total $3,627,021 $227,374 $(3,739) $3,850,656 - -------------------------------------------------------------------------- Fixed-maturity investments carried at fair value of $7.8 million and $8.2 million as of December 31, 1996 and 1995, respectively, were on deposit with various regulatory authorities to comply with insurance laws. 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, 1996. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations. Amortized Fair In thousands Cost Value - -------------------------------------------------------------------- Maturity Within 1 year $ 158,786 $ 158,768 Beyond 1 year but within 5 years 535,176 561,478 Beyond 5 years but within 10 years 1,218,877 1,263,126 Beyond 10 years but within 15 years 828,646 867,813 Beyond 15 years but within 20 years 807,952 836,153 Beyond 20 years 149,719 151,774 - -------------------------------------------------------------------- 3,699,156 3,839,112 Mortgage-backed 472,295 480,477 - -------------------------------------------------------------------- Total fixed-maturities and short-term investments $4,171,451 $4,319,589 - -------------------------------------------------------------------- -13- MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 6. INVESTMENT INCOME AND GAINS AND LOSSES Investment income consists of: Years ended December 31 ------------------------------------ In thousands 1996 1995 1994 - ---------------------------------------------------------------------- Fixed-maturities $245,109 $216,653 $193,729 Short-term investments 4,961 6,008 3,003 Other investments 61 17 12 - ---------------------------------------------------------------------- Gross investment income 250,131 222,678 196,744 Investment expenses 2,845 2,844 2,778 - ---------------------------------------------------------------------- Net investment income 247,286 219,834 193,966 Net realized gains (losses): Fixed-maturities: Gains 16,760 9,941 9,635 Losses (5,353) (2,537) (8,851) - ---------------------------------------------------------------------- Net 11,407 7,404 784 - ---------------------------------------------------------------------- Other investments: Gains 333 382 9,551 Losses --- (9) --- - ---------------------------------------------------------------------- Net 333 373 9,551 - ---------------------------------------------------------------------- Total realized gains 11,740 7,777 10,335 - ---------------------------------------------------------------------- Total investment income $259,026 $227,611 $204,301 - ---------------------------------------------------------------------- Net unrealized gains consist of: As of December 31 -------------------- In thousands 1996 1995 --------------------------------------------------- Fixed-maturities: Gains $163,723 $227,374 Losses (15,585) (3,739) --------------------------------------------------- Net 148,138 223,635 Other investments: Gains 934 287 Losses (29) (821) --------------------------------------------------- Net 905 (534) --------------------------------------------------- Total 149,043 223,101 Deferred income taxes 52,175 78,372 --------------------------------------------------- Unrealized gains, net $ 96,868 $144,729 --------------------------------------------------- The deferred taxes relate primarily to unrealized gains and losses on MBIA Corp.'s fixed-maturity investments, which are reflected in shareholder's equity. -14- MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The change in net unrealized gains (losses) consists of: Years ended December 31 ------------------------------------ In thousands 1996 1995 1994 - ---------------------------------------------------------------------- Fixed-maturities $(75,497) $295,567 $(289,327) Other investments 1,439 508 (8,488) - ---------------------------------------------------------------------- Total (74,058) 296,075 (297,815) Deferred income taxes (26,197) 103,706 (27,940) - ---------------------------------------------------------------------- Unrealized gains (losses), net $(47,861) $192,369 $(269,875) - ---------------------------------------------------------------------- 7. INCOME TAXES The provision for income taxes is composed of: Years ended December 31 -------------------------------- In thousands 1996 1995 1994 - ------------------------------------------------------------------ Current $81,580 $70,357 $58,043 Deferred 8,982 11,391 19,082 - ------------------------------------------------------------------ Total $90,562 $81,748 $77,125 - ------------------------------------------------------------------ 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 ---------------------------------- 1996 1995 1994 - -------------------------------------------------------------------------- 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 (12.0) (12.5) (12.0) Amortization of goodwill 0.4 0.5 0.5 Other (2.3) (1.1) (1.7) - -------------------------------------------------------------------------- Provision for income taxes 21.1 % 21.9 % 21.8 % - -------------------------------------------------------------------------- MBIA Corp. recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax assets and liabilities 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 -15- MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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, 1996 and 1995 are presented below: In thousands 1996 1995 - ------------------------------------------------------------------ Deferred tax assets Tax and loss bonds $102,222 $ 71,183 Alternative minimum tax credit carryforward 58,068 39,072 Loss and loss adjustment expense reserves 13,673 9,809 Other 3,305 954 - ------------------------------------------------------------------ Total gross deferred tax assets 177,268 121,018 - ------------------------------------------------------------------ Deferred tax liabilities Contingency reserve 186,173 131,174 Deferred premium revenue 76,526 64,709 Deferred acquisition costs 51,713 49,122 Unrealized gains 52,175 78,372 Contingent commissions 491 7,158 Other 5,894 3,408 - ------------------------------------------------------------------ Total gross deferred tax liabilities 372,972 333,943 - ------------------------------------------------------------------ Net deferred tax liability $195,704 $212,925 - ------------------------------------------------------------------ 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 $118 million available for the payment of dividends as of December 31, 1996. In 1996, 1995 and 1994, MBIA Corp. declared and paid dividends of $29 million, $83 million and $38 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 -16- MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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 had $10 million available for the payment of dividends as of December 31, 1996. The insurance departments of New York state and certain other statutory insurance regulatory authorities and the agencies that rate the bonds insured by MBIA Corp. and its subsidiaries have various requirements relating to the maintenance of certain minimum ratios of statutory capital and reserves to net insurance in force. MBIA Corp. and its subsidiaries were in compliance with these requirements as of December 31, 1996. 9. LINES OF CREDIT MBIA Corp. has a standby line of credit commitment in the amount of $725 million with a group of major banks to provide loans to MBIA Corp. if it incurs cumulative losses (net of any recoveries) from September 30, 1996 in excess of the greater of $500 million or 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, 2003 and contains an annual renewal provision subject to approval by the bank group. MBIA Corp. and MBIA Inc. maintain bank liquidity facilities aggregating $300 million. At December 31, 1996, MBIA Inc. had $29.1 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. -17- MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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. As of December 31, 1996, insurance in force, net of cessions to reinsurers, had a range of maturity of 1-42 years. The distribution of net insurance in force by geographic location and type of bond, including $3.3 billion and $2.7 billion relating to IMC's municipal investment agreements guaranteed by MBIA Corp. in 1996 and 1995, respectively, is set forth in the following tables: As of December 31 ----------------------------------------------------------------- $ in billions 1996 1995 - --------------------------------------------- -------------------------------- Net Number % of Net Net Number % of Net Geographic Insurance of Issues Insurance Insurance of Issues Insurance Location In Force Outstanding In Force In Force Outstanding In Force - --------------------------------------------- -------------------------------- Domestic California $ 60.7 3,378 14.6% $ 51.2 3,122 14.8% New York 33.7 5,057 8.1 30.1 4,846 8.7 Florida 29.6 1,632 7.1 26.9 1,684 7.7 Texas 21.9 2,052 5.3 20.4 2,031 5.9 Pennsylvania 21.2 2,216 5.1 19.7 2,143 5.7 New Jersey 18.8 1,863 4.6 16.4 1,730 4.7 Illinois 18.5 1,145 4.5 15.0 1,090 4.3 Ohio 11.1 1,032 2.7 9.1 1,017 2.6 Massachusetts 10.9 1,100 2.6 9.3 1,070 2.7 Michigan 9.5 1,021 2.3 7.9 1,012 2.3 - -------------------------------------------- ---------------------------- Subtotal 235.9 20,496 56.9 206.0 19,745 59.4 Other states 170.1 11,502 41.1 135.6 11,147 39.1 - -------------------------------------------- ---------------------------- Total domestic 406.0 31,998 98.0 341.6 30,892 98.5 International 8.4 169 2.0 5.1 53 1.5 - -------------------------------------------- ---------------------------- Total $414.4 32,167 100.0% $346.7 30,945 100.0% - -------------------------------------------- ---------------------------- -18- MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) As of December 31 ---------------------------------------------------------------- $ in billions 1996 1995 - --------------------------------------------- -------------------------------- Net Number % of Net Net Number % of Net Insurance of Issues Insurance Insurance of Issues Insurance Type of Bond In Force Outstanding In Force In Force Outstanding In Force - --------------------------------------------- -------------------------------- Domestic Municipal: General obligation $110.5 11,763 26.7% $ 91.6 11,445 26.4% Utilities 67.9 4,799 16.4 60.3 4,931 17.4 Health care 54.0 2,386 13.0 51.9 2,458 15.0 Transportation 30.3 1,520 7.3 25.5 1,562 7.4 Special revenue 28.9 1,543 7.0 24.4 1,445 7.0 Industrial development and pollution control revenue 18.1 931 4.4 17.2 924 5.0 Higher education 17.8 1,309 4.3 15.2 1,261 4.4 Housing 17.7 2,455 4.3 15.8 2,671 4.5 Other 3.8 169 0.9 7.3 134 2.1 - --------------------------------------------- ------------------------------ Total municipal 349.0 26,875 84.3 309.2 26,831 89.2 - --------------------------------------------- ------------------------------ Structured finance* 38.6 349 9.3 20.2 256 5.8 Other 18.4 4,774 4.4 12.2 3,805 3.5 - --------------------------------------------- ------------------------------ Total domestic 406.0 31,998 98.0 341.6 30,892 98.5 - --------------------------------------------- ------------------------------ International Infrastructure 3.6 121 0.9 1.6 34 0.5 Structured finance* 2.1 22 0.5 1.6 8 0.5 Other 2.7 26 0.6 1.9 11 0.5 - --------------------------------------------- ------------------------------ Total international 8.4 169 2.0 5.1 53 1.5 - --------------------------------------------- ------------------------------ Total $414.4 32,167 100.0% $346.7 30,945 100.0% - --------------------------------------------- ------------------------------ * Asset-/mortgage-backed 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. and its subsidiaries were $57.6 billion and $50.1 billion, at -19- MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 1996 and 1995, respectively. The distribution of ceded insurance in force by geographic location and type of bond is set forth in the following tables: As of December 31 ------------------------------------------------- In billions 1996 1995 - ---------------------------------------------- ---------------------- % of % of Ceded Ceded Ceded Ceded Insurance Insurance Insurance Insurance Geographic Location In Force In Force In Force In Force - ---------------------------------------------- ---------------------- Domestic California $ 9.4 16.2% $ 8.8 17.5% New York 6.2 10.7 5.7 11.4 New Jersey 3.3 5.7 3.1 6.1 Texas 2.9 5.1 2.8 5.6 Pennsylvania 2.9 5.1 2.7 5.4 Illinois 2.6 4.5 2.2 4.5 Florida 2.4 4.1 2.3 4.6 Washington 1.9 3.2 1.4 2.7 District of Columbia 1.5 2.7 1.5 3.0 Massachusetts 1.4 2.5 1.1 2.1 Ohio 1.3 2.3 1.0 2.0 Puerto Rico 1.2 2.1 1.3 2.6 - ---------------------------------------------- ---------------------- Subtotal 37.0 64.2 33.9 67.5 Other states 16.9 29.4 14.4 28.8 - ---------------------------------------------- ---------------------- Total domestic 53.9 93.6 48.3 96.3 International 3.7 6.4 1.8 3.7 - ---------------------------------------------- ---------------------- Total $57.6 100.0% $50.1 100.0% - ---------------------------------------------- ---------------------- -20- MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) As of December 31 ------------------------------------------------- In billions 1996 1995 - ---------------------------------------------- ---------------------- % of % of Ceded Ceded Ceded Ceded Insurance Insurance Insurance Insurance Type of Bond In Force In Force In Force In Force - ---------------------------------------------- ---------------------- Domestic Municipal: General obligation $14.4 24.9% $11.7 23.3% Utilities 10.2 17.7 9.0 18.0 Transportation 6.4 11.1 5.5 11.0 Health care 6.3 11.0 6.6 13.1 Special revenue 3.4 5.9 3.2 6.4 Industrial development and pollution control revenue 3.2 5.6 3.0 6.0 Housing 1.6 2.7 1.4 2.8 Higher education 1.5 2.6 1.2 2.4 Other 1.0 1.7 2.4 4.8 - ---------------------------------------------- ------------------ Total municipal 48.0 83.2 44.0 87.8 Structured finance* 4.5 7.9 3.6 7.2 Other 1.4 2.5 0.7 1.3 - ---------------------------------------------- ------------------ Total domestic 53.9 93.6 48.3 96.3 - ---------------------------------------------- ------------------ International Infrastructure 1.6 2.7 0.7 1.4 Structured finance* 1.1 1.9 0.2 0.5 Other 1.0 1.8 0.9 1.8 - ---------------------------------------------- ------------------ Total international 3.7 6.4 1.8 3.7 - ---------------------------------------------- ------------------ Total $57.6 100.0% $50.1 100.0% - ---------------------------------------------- ------------------ * Asset-/mortgage-backed 12. EMPLOYEE BENEFITS MBIA Corp. participates in MBIA Inc.'s pension plan covering substantially all 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, 1996, 1995 and 1994 was $3.4 million, $3.2 million and $3.0 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 -21- MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) aggregated $1.5 million, $1.4 million and $1.4 million for the years ended December 31, 1996, 1995 and 1994, 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, $3.0 million, $2.7 million and $2.6 million for the years ended December 31, 1996, 1995 and 1994, 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. During 1996 and 1995, the amounts amortized were $164,000 and $9,000, respectively, of which $102,000 and $5,000 are included in policy acquisition costs. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) 123, "Accounting for Stock-Based Compensation," effective for financial statements for fiscal years beginning after December 15, 1995. SFAS 123 required MBIA Inc. 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. MBIA Inc. adopted the disclosure requirements of SFAS 123 effective January 1, 1996 and continues to account for its employee stock-based compensation plans under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". Accordingly, the adoption of SFAS 123 had no impact on MBIA Corp.'s financial position or results of operations. Had compensation cost for the MBIA Inc. stock option program been recognized based on the fair value at the grant date consistent with the recognition provisions of SFAS 123, the impact on MBIA Corp.'s net income would not have been material. However, since the options vest over five years and additional awards could be made in future years, the effects of applying SFAS 123 in 1996 are not likely to be representative of the effects on reported net income for future years. 13. RELATED PARTY TRANSACTIONS 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 former principal shareholder of MBIA Inc., 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 amount payable by MBIA Corp. on these surety bonds is limited to $340 million. These surety bonds remain outstanding as of December 31, 1996. MBIA Corp. had investment management and advisory agreements with an affiliate of a former principal shareholder of MBIA Inc., which provided for payment of fees on assets under management. Total related expenses for the years ended December 31, 1995 and 1994 amounted to $2.5 million and $2.6 million, respectively. These agreements were terminated on January 1, 1996 at which time CMC assumed full management of MBIA Corp.'s consolidated investment portfolios. Total fees paid to CMC on assets under management for the years -22- MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ended December 31, 1996 and 1995 amounted to $2.8 million and $0.1 million, respectively. MBIA Corp. has various insurance coverages provided by a former principal shareholder of MBIA Inc., the cost of which totaled $2.1 million, $1.9 million and $1.9 million, respectively, for the years ended December 31, 1996, 1995 and 1994. Included in other assets at December 31, 1996 and 1995 is $2.0 million and $1.1 million of net receivables from MBIA Inc. and other subsidiaries. As of December 31, 1996, MBIA Corp. held securities subject to agreements to resell of $108.9 million, and transferred securities subject to agreements to repurchase of $108.9 million with IMC and MBIA Inc. These agreements have a term of less than one year. The interest expense paid and income received relating to these agreements for the year ended December 31, 1996 was $2.3 million and $2.4 million, respectively. 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 is based upon 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 approximates fair value. OTHER INVESTMENTS - Other investments include MBIA Corp.'s interest in a limited partnership and a mutual fund that invests principally in marketable -23- MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) equity securities. The fair value of these 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. SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL - The fair value is estimated based upon the quoted market prices of the transactions' underlying collateral. 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. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE - The fair value is estimated based upon the quoted market prices of the transactions' underlying collateral. INSTALLMENT PREMIUMS - The fair value is derived by calculating the present value of the estimated future cash flow stream discounted at 9%. -24- MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) As of December 31, 1996 As of December 31, 1995 ----------------------- ----------------------- Carrying Estimated Carrying Estimated In thousands Amount Fair Value Amount Fair Value - -------------------------------------------------- ----------------------- ASSETS: Fixed-maturity securities $4,149,700 $4,149,700 $3,652,621 $3,652,621 Short-term investments 169,889 169,889 198,035 198,035 Other investments 14,851 14,851 14,064 14,064 Cash and cash equivalents 3,288 3,288 2,135 2,135 Securities purchased under agreements to resell 108,900 124,471 --- --- Prepaid reinsurance premiums 216,846 189,631 200,887 174,444 Receivable for investments sold 975 975 5,729 5,729 LIABILITIES: Deferred premium revenue 1,785,875 1,545,976 1,616,315 1,395,159 Loss and loss adjustment expense reserves 59,314 59,314 42,505 42,505 Securities sold under agreements to repurchase 108,900 115,838 --- --- Payable for investments purchased 48,811 48,811 10,695 10,695 OFF-BALANCE-SHEET INSTRUMENTS: Installment premiums --- 287,969 --- 235,371 -25- -----END PRIVACY-ENHANCED MESSAGE-----