-----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, EJ57ePsYxcqepk9wlrCxz9ZWVNdlAXb/Qq3hkcMblGys6gfLiqH0qrRD952g7TWe 9veMdcwud81UsR/UU/VaOQ== 0000950130-98-004707.txt : 19980928 0000950130-98-004707.hdr.sgml : 19980928 ACCESSION NUMBER: 0000950130-98-004707 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19980924 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19980924 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: 8-K SEC ACT: SEC FILE NUMBER: 001-09583 FILM NUMBER: 98714455 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 8-K 1 FORM 8-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ________ Form 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report: September 24, 1998 Date of Earliest Event Reported: September 24, 1998 MBIA Inc. ------------------------------------------------------------ (Exact name of registrant as specified in its charter) Connecticut 1-9583 06-1185706 --------------- ---------------------- --------------- (State of (Commission File Number) (IRS Employer Incorporation) Identification Number) 113 King Street, Armonk, New York 10504 -------------------------------------------- --------------- (Address of principal executive offices) (Zip Code) (914) 273-4545 ------------------------------------------------------------------ (Registrant's telephone number, including area code) Page 1 of 4 Items 1-6. Not Applicable. Item 7. Financial Statement and Exhibits (c) Exhibits. On February 17, 1998, the Registrant acquired CapMAC Holdings, Inc., and on July 31, 1998, the Registrant acquired 1838 Investment Advisors, Inc. ("1838"), in transactions each accounted for as a "pooling of interest" for financial and accounting reporting purposes (the "Mergers"). The audited consolidated financial statements of the Company have been restated to give effect to the Mergers and are filed herewith, along with the report of PricewaterhouseCoopers LLP dated September 21, 1998 (the "Report"), as Exhibit 99.01. Financial Data Schedules based on the restated financial statements are filed herewith as Exhibits 27.01, 27.02 and 27.03. A Ratio of Earnings to Fixed Charges giving effect to the Mergers is filed herewith as Exhibit 99.02. A Computation of Ratio of Earnings to Fixed Charges giving effect to the Mergers is filed herewith as Exhibit 99.03. On July 28, 1998, the Registrant filed a Registration Statement on Form S-3 (Registration No. 333-60039) (the "Registration Statement") with respect to various securities. On July 31, 1998, the Commission declared the Registration Statement effective. A form of underwriting agreement and opinions of counsel as to the validity of the securities covered by the Registration Statement are filed herewith as Exhibits 1.01, 99.04 and 99.05, respectively. The Consent of PricewaterhouseCoopers LLP to incorporation by reference of their Report in the Registration Statement is filed herewith as Exhibit 23.04. (1.01) Form of Underwriting Agreement (23.04) Consent of PricewaterhouseCoopers LLP (27.01) Financial Data Schedule (27.02) Financial Data Schedule (27.03) Financial Data Schedule (99.01) Report of PricewaterhouseCoopers LLP and Restated Financial Statements (99.02) Ratio of Earnings to Fixed Charges (99.03) Computation of Ratio of Earnings to Fixed Charges (99.04) Opinion of Debevoise & Plimpton (99.05) Opinion of Day, Berry & Howard LLP Item 8. Not Applicable. Page 2 of 4 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. MBIA Inc. By: /s/ LOUIS G. LENZI ----------------------------- Name: Louis G. Lenzi Title: Secretary and General Counsel Date: September 24, 1998 Page 3 of 4 EXHIBIT INDEX Exhibit No. Description - ----------- ----------- (1.01) Form of Underwriting Agreement (23.04) Consent of PricewaterhouseCoopers LLP (27.01) Financial Data Schedule (27.02) Financial Data Schedule (27.03) Financial Data Schedule (99.01) Report of PricewaterhouseCoopers LLP and Restated Financial Statements (99.02) Ratio of Earnings to Fixed Charges (99.03) Computation of Ratio of Earnings to Fixed Charges (99.04) Opinion of Debevoise & Plimpton (99.05) Opinion of Day, Berry & Howard LLP Page 4 of 4 EX-1.01 2 UNDERWRITING AGREEMENT EXHIBIT 1.01 MBIA INC. DEBT SECURITIES ---------- UNDERWRITING AGREEMENT -- STANDARD TERMS ---------------------------------------- SEPTEMBER __, 1998 From time to time MBIA Inc., a Connecticut corporation (the "Company"), proposes to enter into one or more Pricing Agreements (each a "Pricing Agreement") in the form of Annex I hereto, with such additions and deletions as the parties thereto may determine, and, subject to the terms and conditions stated herein and therein, to issue and sell to the firms named in Schedule I to the applicable Pricing Agreement (such firms constituting the "Underwriters" with respect to such Pricing Agreement and the securities specified therein) certain of its debt securities (the "Securities") specified in Schedule II to such Pricing Agreement (with respect to such Pricing Agreement, the "Designated Securities"). The terms and rights of any particular issuance of Designated Securities shall be as specified in the Pricing Agreement relating thereto and in or pursuant to the indenture (the "Indenture") identified in such Pricing Agreement. 1. Particular sales of Designated Securities may be made from time to time to the Underwriters of such Securities, for whom the firms designated as representatives of the Underwriters of such Securities in the Pricing Agreement relating thereto will act as representatives (the "Representatives"). The term "Representatives" also refers to a single firm acting as sole representative of the Underwriters and to an Underwriter or Underwriters who act without any firm being designated as its or their representatives. The obligation of the Company to issue and sell any of the Securities and the obligation of any of the Underwriters to purchase any of the Securities shall be evidenced by the Pricing Agreement with respect to the Designated Securities specified therein. Each Pricing Agreement shall specify the aggregate principal amount of such Designated Securities, the initial public offering price of such Designated Securities, the purchase price to the Underwriters of such Designated Securities, the names of the Underwriters of such Designated Securities, the names of the Representatives of such Underwriters and the principal amount of such Designated Securities to be purchased by each Underwriter and shall set forth the date, time and manner of delivery of such Designated Securities and payment therefor. The Pricing Agreement shall also specify (to the extent not set forth in the Indenture and the registration statement and prospectus with respect thereto) the terms of such Designated Securities. A Pricing Agreement shall be in the form of an executed writing (which may be in counterparts), and may be evidenced by an exchange of telegraphic communications or any other rapid transmission device designed to produce a written record of communications transmitted. The obligations of the Underwriters under this Agreement and each Pricing Agreement shall be several and not joint. 2. The Company represents and warrants to, and agrees with, each of the Underwriters that: (a) A registration statement on Form S-3 (File No. 333-....) (the "Initial Registration Statement") in respect of the Securities has been filed with the Securities and Exchange Commission (the "Commission"); the Initial Registration Statement and any post-effective amendment thereto, each in the form heretofore delivered or to be delivered to the Representatives and, excluding exhibits to the Initial Registration Statement, but including all documents incorporated by reference in the prospectus contained therein, to the Representatives for each of the other Underwriters have been declared effective by the Commission in such form; other than a registration statement, if any, increasing the size of the offering (a "Rule 462(b) Registration Statement"), filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended (the "Act"), which became effective upon filing, no other document with respect to the Initial Registration Statement or document incorporated by reference therein has heretofore been filed or transmitted for filing with the Commission (other than prospectuses filed pursuant to Rule 424(b) of the rules and regulations of the Commission under the Act, each in the form heretofore delivered to the Representatives); and no stop order suspending the effectiveness of the Initial Registration Statement, any post-effective amendment thereto or the Rule 462(b) Registration Statement, if any, has been issued and no proceeding for that purpose has been initiated or threatened by the Commission (any preliminary prospectus included in the Initial Registration Statement or filed with the Commission pursuant to Rule 424(a) under the Act, is hereinafter called a "Preliminary Prospectus"; the various parts of the Initial Registration Statement, any post-effective amendment thereto and the Rule 462(b) Registration Statement, if any, including all exhibits thereto and the documents incorporated by reference in the prospectus contained in the Initial Registration Statement at the time such part of the Initial Registration Statement became effective but excluding Form T-1, each as amended at the time such part of the Initial Registration Statement became effective or such part of the Rule 462(b) Registration Statement, if any, became or hereafter becomes effective, are hereinafter collectively called the "Registration Statement"; the prospectus relating to the Securities, in the form in which it has most recently been filed, or transmitted for filing, with the Commission on or prior to the date of this Agreement, being hereinafter called the "Prospectus"; any reference herein to any Preliminary Prospectus or the Prospectus shall be deemed to refer to and include the documents incorporated by reference therein pursuant to the applicable form under the Act, as of the date of such Preliminary Prospectus or Prospectus, as the case may be; any reference to any amendment or supplement to any Preliminary Prospectus or the Prospectus shall be deemed to refer to and include any documents filed after the date of such Preliminary Prospectus or Prospectus, as the case may be, under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and incorporated by reference in such Preliminary Prospectus or Prospectus, as the case may be; any reference to any amendment to the Initial Registration Statement shall be deemed to refer to and include any annual report of the Company filed pursuant to Sections 13(a) or 15(d) of the Exchange Act after the effective date of the Initial Registration Statement that is incorporated by reference in the Registration Statement; and any reference to the Prospectus as amended or supplemented shall be deemed to refer to the Prospectus as amended or supplemented in relation to the applicable Designated Securities in the form in which it is filed with the Commission pursuant to Rule 424(b) under the Act in accordance with Section 5(a) hereof, including any documents incorporated by reference therein as of the date of such filing); (b) The documents incorporated by reference in the Prospectus, when they became effective or were filed with the Commission, as the case may be, conformed in all material respects to the requirements of the Act or the Exchange Act, as applicable, and the rules and regulations of the Commission thereunder, and none of such documents contained an untrue statement of a material fact or omitted to state a material fact 2 required to be stated therein or necessary to make the statements therein not misleading; and any further documents so filed and incorporated by reference in the Prospectus or any further amendment or supplement thereto, when such documents become effective or are filed with the Commission, as the case may be, will conform in all material respects to the requirements of the Act or the Exchange Act, as applicable, and the rules and regulations of the Commission thereunder and will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that this representation and warranty shall not apply to any statements or omissions made in reliance upon and in conformity with information furnished in writing to the Company by an Underwriter of Designated Securities through the Representatives expressly for use in the Prospectus as amended or supplemented relating to such Securities; (c) The Registration Statement and the Prospectus conform, and any further amendments or supplements to the Registration Statement or the Prospectus will conform, in all material respects to the requirements of the Act and the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act") and the rules and regulations of the Commission thereunder and do not and will not, as of the applicable effective date as to the Registration Statement and any amendment thereto and as of the applicable filing date as to the Prospectus and any amendment or supplement thereto, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that this representation and warranty shall not apply to any statements or omissions made in reliance upon and in conformity with information furnished in writing to the Company by an Underwriter of Designated Securities through the Representatives expressly for use in the Prospectus as amended or supplemented relating to such Securities; (d) Since the respective dates as of which information is given in the Registration Statement and the Prospectus, there has not been any material adverse change, or any development involving a prospective material adverse change, in the general affairs, financial position, shareholders' equity or results of operations of the Company and its subsidiaries taken as a whole, otherwise than as set forth or contemplated in the Prospectus; (e) The Company and each of its subsidiaries has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, with the corporate power and authority to own its properties and conduct its business as described in the Prospectus, and each is duly qualified and in good standing as a foreign corporation authorized to do business in each jurisdiction in which the nature of its business or its ownership or leasing of property requires such qualification, except where the failure to be so qualified would not have a material adverse effect on the business, results of operations or financial condition of the Company and its subsidiaries, taken as a whole; (f) All of the outstanding shares of capital stock of, or other ownership interests in, each of the Company's Significant Subsidiaries, as defined in Rule 1-02 of Regulation S-X ("Significant Subsidiaries"), have been duly authorized and validly issued and are fully paid and non- assessable, and are owned by the Company, free and clear of any security interest, claim, lien, encumbrance or adverse interest of any nature; 3 (g) The Securities have been duly authorized, and, when Designated Securities are issued and delivered pursuant to this Agreement and the Pricing Agreement with respect to such Designated Securities, such Designated Securities will have been duly executed, authenticated, issued and delivered and will constitute valid and legally binding obligations of the Company entitled to the benefits provided by the Indenture, which will be substantially in the form filed as an exhibit to the Registration Statement; the Indenture has been duly authorized and duly qualified under the Trust Indenture Act and constitutes a valid and legally binding instrument, enforceable in accordance with its terms, subject, as to enforcement, to bankruptcy, insolvency, reorganization, moratorium and other laws of general applicability relating to or affecting creditors' rights, general equity principles (whether considered in a proceeding in equity or at law) and an implied covenant of good faith and fair dealing; and the Indenture conforms, and the Designated Securities will conform, to the descriptions thereof contained in the Prospectus as amended or supplemented with respect to such Designated Securities; (h) The issue and sale of the Securities and the compliance by the Company with all of the provisions of the Securities, the Indenture, this Agreement and any Pricing Agreement, and the consummation of the transactions herein and therein contemplated, will not conflict with or result in a material breach or violation of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement or other material agreement or instrument to which the Company is a party or by which the Company is bound or to which any of the property or assets of the Company is subject, nor will such action result in any violation of the provisions of the Amended and Restated Certificate of Incorporation or By-laws of the Company or in any material violation of any statute or any order, rule or regulation of any court or governmental agency or body having jurisdiction over the Company or any of its properties; and no consent, approval, authorization, order, registration or qualification of or with any such court or governmental agency or body is required for the issue and sale of the Securities or the consummation by the Company of the transactions contemplated by this Agreement or any Pricing Agreement or the Indenture, except such as have been, or will have been prior to the Time of Delivery, obtained under the Act and the Trust Indenture Act and such consents, approvals, authorizations, registrations or qualifications as may be required under state securities or Blue Sky laws in connection with the purchase and distribution of the Securities by the Underwriters; (i) The statements set forth in the Prospectus under the captions "Description of Debt Securities" and "Description of Debentures", insofar they purport to constitute a summary of the terms of the Securities, are accurate and complete in all material respects; (j) Neither the Company nor any of its Significant Subsidiaries is in violation of its respective charter or by-laws or in default in the performance or observance of any material obligation, agreement, covenant or condition contained in any indenture, mortgage, deed of trust, loan agreement, lease or other agreement or instrument material to the conduct of the business of the Company and its subsidiaries, taken as a whole, to which it is a party or by which it or any of its properties may be bound; (k) Other than as set forth in the Prospectus, there are no material legal or governmental proceedings pending to which the Company or any of its subsidiaries is a party or of which any property of the Company or any of its subsidiaries is the subject; 4 and, to the best of the Company's knowledge, no such proceedings are threatened or contemplated by governmental authorities or threatened by others; (l) The Company is not and, after giving effect to the offering and sale of the Securities, will not be an "investment company", as such term is defined in the Investment Company Act of 1940, as amended (the "Investment Company Act"); and (m) PricewaterhouseCoopers LLP, who have certified certain financial statements of the Company and its subsidiaries, are independent public accountants as required by the Act and the rules and regulations of the Commission thereunder. 3. Upon the execution of the Pricing Agreement applicable to any Designated Securities and authorization by the Representatives of the release of such Designated Securities, the several Underwriters propose to offer such Designated Securities for sale upon the terms and conditions set forth in the Prospectus as amended or supplemented. 4. Designated Securities to be purchased by each Underwriter pursuant to the Pricing Agreement relating thereto, in the form specified in such Pricing Agreement, and in such authorized denominations and registered in such names as the Representatives may reasonably request upon at least forty-eight hours' prior notice to the Company, shall be delivered by or on behalf of the Company to the Representatives for the account of such Underwriter, against payment by such Underwriter or on its behalf of the purchase price therefor by wire transfer of Federal (same-day) funds to the account specified by the Company to the Representatives at least forty-eight hours in advance or at such other place and time and date as the Representatives and the Company may agree upon in writing, such time and date being herein called the "Time of Delivery" for such Securities. 5. The Company agrees with each of the Underwriters of any Designated Securities: (a) To prepare the Prospectus as amended or supplemented in relation to the applicable Designated Securities in a form approved by the Representatives and to file such Prospectus pursuant to Rule 424(b) under the Act not later than the Commission's close of business on the second business day following the execution and delivery of the Pricing Agreement relating to the applicable Designated Securities or, if applicable, such earlier time as may be required by Rule 424(b); to make no further amendment or any supplement to the Registration Statement or Prospectus as amended or supplemented after the date of the Pricing Agreement relating to such Securities and prior to the Time of Delivery for such Securities which shall be disapproved by the Representatives for such Securities promptly after reasonable notice thereof; to advise the Representatives promptly of any such amendment or supplement after such Time of Delivery and furnish the Representatives with copies thereof; to file promptly all reports and any definitive proxy or information statements required to be filed by the Company with the Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act for so long as the delivery of a prospectus is required in connection with the offering or sale of such Securities, and during such same period to advise the Representatives, promptly after it receives notice thereof, of the time when any amendment to the Registration Statement has been filed or becomes effective or any supplement to the Prospectus or any amended Prospectus has been filed with the Commission, of the issuance by the Commission of any stop order or of any order preventing or suspending the use of any prospectus relating to the Securities, of the suspension of the qualification of such Securities for offering or sale in any jurisdiction, of the initiation or threatening of any proceeding for any 5 such purpose, or of any request by the Commission for the amending or supplementing of the Registration Statement or Prospectus or for additional information; and, in the event of the issuance of any such stop order or of any such order preventing or suspending the use of any prospectus relating to the Securities or suspending any such qualification, to promptly use its best efforts to obtain the withdrawal of such order; (b) Promptly from time to time to take such action as the Representatives may reasonably request to qualify such Securities for offering and sale under the securities laws of such jurisdictions as the Representatives may reasonably request and to comply with such laws so as to permit the continuance of sales and dealings therein in such jurisdictions for as long as may be necessary to complete the distribution of such Securities (but in no event longer than one year from the date hereof), provided that in connection therewith the Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any jurisdiction; (c) At or about 10:00 a.m., New York City time, on the New York Business Day next succeeding the date of this Agreement and from time to time, to furnish the Underwriters with copies of the Prospectus in New York City as amended or supplemented in such quantities as the Representatives may reasonably request, and, if the delivery of a prospectus is required at any time in connection with the offering or sale of the Securities and if at such time any event shall have occurred as a result of which the Prospectus as then amended or supplemented would include an untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made when such Prospectus is delivered, not misleading, or, if for any other reason it shall be necessary during such same period to amend or supplement the Prospectus or to file under the Exchange Act any document incorporated by reference in the Prospectus in order to comply with the Act, the Exchange Act or the Trust Indenture Act, to notify the Representatives and upon their request to file such document and to prepare and furnish without charge to each Underwriter and to any dealer in securities as many copies as the Representatives may from time to time reasonably request of an amended Prospectus or a supplement to the Prospectus which will correct such statement or omission or effect such compliance; (d) To make generally available to its securityholders as soon as practicable, but in any event not later than eighteen months after the effective date of the Registration Statement (as defined in Rule 158(c) under the Act), an earnings statement of the Company and its subsidiaries (which need not be audited) complying with Section 11(a) of the Act and the rules and regulations of the Commission thereunder (including, at the option of the Company, Rule 158); (e) During the period beginning from the date of the Pricing Agreement for such Designated Securities and continuing to and including the Time of Delivery for such Designated Securities, not to offer, sell, contract to sell or otherwise dispose of any debt securities of the Company which mature more than one year after such Time of Delivery and which are substantially similar to such Designated Securities, without the prior written consent of the Representatives; and (f) If the Company elects to rely upon Rule 462(b), the Company shall file a Rule 462(b) Registration Statement with the Commission in compliance with Rule 462(b) by 10:00 P.M., Washington, D.C. time, on the date of this Agreement, and the Company 6 shall at the time of filing either pay to the Commission the filing fee for the Rule 462(b) Registration Statement or give irrevocable instructions for the payment of such fee pursuant to Rule 111(b) under the Act. 6. The Company covenants and agrees with the several Underwriters that the Company will pay or cause to be paid the following: (i) the fees, disbursements and expenses of the Company's counsel and accountants in connection with the registration of the Securities under the Act and all other expenses in connection with the preparation, printing and filing of the Registration Statement, any Preliminary Prospectus and the Prospectus and amendments and supplements thereto and the mailing and delivering of copies thereof to the Underwriters and dealers; (ii) the cost of printing or producing this Agreement, any Pricing Agreement, any Indenture, any Blue Sky and Legal Investment Memoranda, closing documents (including any compilations thereof) and any other documents in connection with the offering, purchase, sale and delivery of the Securities; (iii) all expenses in connection with the qualification of the Securities for offering and sale under state securities laws as provided in Section 5(b) hereof, including the fees and disbursements of counsel for the Underwriters in connection with such qualification and in connection with the Blue Sky and Legal Investment Surveys; (iv) any fees charged by securities rating services for rating the Securities; (v) any filing fees incident to, and the fees and disbursements of counsel for the Underwriters in connection with, any required review by the National Association of Securities Dealers, Inc. of the terms of the sale of the Securities; (vi) the cost of preparing the Securities; (vii) the fees and expenses of any Trustee and any agent of any Trustee and the fees and disbursements of counsel for any Trustee in connection with any Indenture and the Securities; and (viii) all other costs and expenses incident to the performance of its obligations hereunder which are not otherwise specifically provided for in this Section. It is understood, however, that, except as provided in this Section, and Sections 8 and 11 hereof, the Underwriters will pay all of their own costs and expenses, including the fees of their counsel, transfer taxes on resale of any of the Securities by them, and any advertising expenses connected with any offers they may make. 7. The obligations of the Underwriters of any Designated Securities under the Pricing Agreement relating to such Designated Securities shall be subject, in the discretion of the Representatives, to the condition that all representations and warranties and other statements of the Company in or incorporated by reference in the Pricing Agreement relating to such Designated Securities are, at and as of the Time of Delivery for such Designated Securities, true and correct, the condition that the Company shall have performed all of its obligations hereunder theretofore to be performed, and the following additional conditions: (a) The Prospectus as amended or supplemented in relation to the applicable Designated Securities shall have been filed with the Commission pursuant to Rule 424(b) within the applicable time period prescribed for such filing by the rules and regulations under the Act and in accordance with Section 5(a) hereof; if the Company has elected to rely upon Rule 462(b), the Rule 462(b) Registration Statement shall have become effective by 10:00 P.M., Washington, D.C. time, on the date of this Agreement; no stop order suspending the effectiveness of the Registration Statement or any part thereof shall have been issued and no proceeding for that purpose shall have been initiated or threatened by the Commission; (b) Counsel for the Underwriters shall have furnished to the Representatives such written opinion, dated the Time of Delivery for such Designated Securities, with respect to the matters covered in subsections (i) (but only as to the Company), (vi), (vii), (viii), (xi), (xii) and (xiii) of Section 7(c) below as well as such other related matters as the 7 Representatives may reasonably request, and such counsel shall have received such papers and information as they may reasonably request to enable them to pass upon such matters. Each of the opinions delivered pursuant to this Section 7(b) may rely as to matters of Connecticut law on the opinion of Day, Berry & Howard LLP or of such other local counsel as shall be reasonably satisfactory to the Representatives. (c) Louis G. Lenzi, Esq., General Counsel of the Company, shall have furnished to the Representatives his written opinion, dated the Time of Delivery for such Designated Securities, in form and substance satisfactory to the Representatives, to the effect that: (i) The Company and each of its subsidiaries (other than MBIA Insurance Corporation ("MBIA Corp."), which is discussed below) has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, with the corporate power and authority to own its properties and conduct its business as described in the Prospectus as amended or supplemented; (ii) The Company and each of its subsidiaries (other than MBIA Corp., which is discussed below) is duly qualified and is in good standing as a foreign corporation authorized to do business in each jurisdiction in which the nature of its business or its ownership or leasing of property requires such qualification, except where the failure to be so qualified would not have a material adverse effect on the business, results of operations or financial condition of the Company and its subsidiaries, taken as a whole; (iii) (A) MBIA Corp. has been duly incorporated, is validly existing as an insurance company in good standing under the laws of the State of New York and (B) is duly licensed and in good standing to conduct its business in each state in the United States and the District of Columbia; (iv) All of the outstanding shares of capital stock of, or other ownership interests in, each of the Company's Significant Subsidiaries have been duly and validly authorized and issued and are fully paid and non-assessable, and are owned of record and, to the best knowledge of such counsel, beneficially by the Company, free and clear of any security interest, claim, lien, encumbrance or adverse interest of any nature; (v) To the best of such counsel's knowledge, there are no legal or governmental proceedings pending or threatened to which the Company or any of its subsidiaries is a party or of which any property of the Company or any of its subsidiaries is the subject which are required to be described in the Prospectus or the Registration Statement and are not so described; (vi) This Agreement and the Pricing Agreement with respect to the Designated Securities have been duly authorized, executed and delivered by the Company; 8 (vii) The Designated Securities have been duly authorized by the Company, and when executed, authenticated, issued and delivered in accordance with the provisions of the Indenture and delivered to and paid for by the Underwriters in accordance with this Agreement, will constitute valid and legally binding obligations of the Company entitled to the benefits provided by the Indenture; and the Designated Securities and the Indenture conform in all material respects to the descriptions thereof in the Prospectus as amended or supplemented; (viii) The Indenture has been duly authorized, executed and delivered by the Company and constitutes a valid and legally binding instrument, enforceable in accordance with its terms, subject, as to enforcement, to bankruptcy, insolvency, reorganization, moratorium and other laws of general applicability relating to or affecting creditors' rights, general equity principles (whether considered in a proceeding in equity or at law) and an implied covenant of good faith and fair dealing; and the Indenture has been duly qualified under the Trust Indenture Act; (ix) The issue and sale of the Designated Securities and the compliance by the Company with all of the provisions of the Designated Securities, the Indenture, this Agreement and the Pricing Agreement with respect to the Designated Securities and the consummation of the transactions herein and therein contemplated will not conflict with or result in a material breach or violation of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement or other material agreement or instrument known to such counsel to which the Company is a party or by which the Company is bound, nor will such actions result in any violation of the provisions of the Amended and Restated Certificate of Incorporation or By-laws of the Company or in any material violation of any laws, administrative regulations or rulings or court decrees under United States Federal law or the laws of the State of Connecticut or the State of New York known to such counsel and applicable to the Company or any of its subsidiaries or their respective properties; (x) No consent, approval, authorization, order, registration or qualification of or with any such court or governmental agency or body is required under United States Federal law or the laws of the State of Connecticut or the State of New York for the issue and sale of the Designated Securities or the consummation by the Company of the transactions contemplated by this Agreement or such Pricing Agreement or the Indenture, except such as have been obtained under the Act and the Trust Indenture Act and such consents, approvals, authorizations, orders, registrations or qualifications as may be required under state securities or Blue Sky laws in connection with the purchase and distribution of the Designated Securities by the Underwriters; (xi) The statements set forth in the Prospectus under the captions "Description of Debt Securities" and "Description of Debentures", insofar as such statements constitute a summary of legal matters, documents or proceedings referred to therein, fairly present, in all material respects, the information called for with respect to such legal matters, documents and proceedings; (xii) The Company is not an "investment company", as such term is defined in the Investment Company Act; and 9 (xiii) The Registration Statement and the Prospectus as amended or supplemented and any further amendments and supplements thereto made by the Company prior to the Time of Delivery for the Designated Securities (other than the financial statements, related schedules and other financial and statistical information therein, as to which such counsel need express no opinion) comply as to form in all material respects with the requirements of the Act and the Trust Indenture Act and the rules and regulations thereunder; although such counsel does not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement or the Prospectus, except for those referred to in the opinion in subsection (xi) of this Section 7(c), such counsel has no reason to believe that, as of its effective date, the Registration Statement or any further amendment thereto made by the Company prior to the Time of Delivery (other than the financial statements, related schedules and other financial and statistical information therein, as to which such counsel need express no opinion) contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that, as of its date, the Prospectus as amended or supplemented or any further amendment or supplement thereto made by the Company prior to the Time of Delivery (other than the financial statements, related schedules and other financial and statistical information therein, as to which such counsel need express no opinion) contained an untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading or that, as of the Time of Delivery, the Prospectus as amended or supplemented or any further amendment or supplement thereto made by the Company prior to the Time of Delivery (other than the financial statements, related schedules and other financial and statistical information therein, as to which such counsel need express no opinion) contains an untrue statement of a material fact or omits to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. In giving such opinion with respect to the matters covered by subsection (xiii) such counsel may state that his opinion and belief are based upon his participation in the preparation of the Registration Statement and Prospectus and any amendments or supplements thereto and review and discussion of the contents thereof, but are without independent check or verification except as specified. Each of the opinions delivered pursuant to this Section 7(c) may rely as to matters of Connecticut law on the opinion of Day, Berry & Howard LLP or of such other local counsel as shall be reasonably satisfactory to the Representatives. (d) Debevoise & Plimpton, counsel for the Company, shall furnish to the Representatives their written opinion, dated the Time of Delivery for such Designated Securities, with respect to the matters covered in subsections (i) (but only as to the Company), (iii)(A), (vi), (vii), (viii), (xi), (xii) and (xiii) of Section 7(c) above as well as such other related matters as the Representatives may reasonably request, and such counsel shall have received such papers and information as they may reasonably request to enable them to pass on such matters. In giving such opinion with respect to the matters covered by subsection (xiii) such counsel may state that their opinion and belief are based upon their participation in the preparation of the Registration Statement and Prospectus and any amendments or supplements thereto and review and discussion of the contents thereof, but are without independent check or verification except as specified. Each of the opinions delivered pursuant to this Section 7(d) may 10 rely as to matters of Connecticut law on the opinion of Day, Berry & Howard LLP or of such other local counsel as shall be reasonably satisfactory to the Representatives. (e) On the date of the execution of the Pricing Agreement for such Designated Securities at a time prior to the execution of the Pricing Agreement with respect to such Designated Securities and at the Time of Delivery for such Designated Securities, the independent accountants of the Company who have certified the financial statements of the Company and its subsidiaries included or incorporated by reference in the Registration Statement shall have furnished to the Representatives a letter, dated the effective date of the Registration Statement or the date of the most recent report filed with the Commission containing financial statements and incorporated by reference in the Registration Statement, if the date of such report is later than such effective date, and a letter dated such Time of Delivery, respectively, to the effect set forth in Annex II hereto, and with respect to such letter dated such Time of Delivery, as to such other matters as may be specified in the Pricing Agreement for such Designated Securities; (f) Since the respective dates as of which information is given in the Prospectus as amended prior to the date of the Pricing Agreement relating to the Designated Securities there shall not have been any material adverse change, or any development involving a prospective material adverse change, in the general affairs, financial position, shareholders' equity or results of operations of the Company and its subsidiaries taken as a whole, otherwise than as set forth or contemplated in the Prospectus as amended prior to the date of the Pricing Agreement relating to the Designated Securities, which in the judgment of the Representatives makes it impracticable or inadvisable to proceed with the public offering or the delivery of the Designated Securities on the terms and in the manner contemplated in the Prospectus as amended or supplemented relating to the Designated Securities; (g) On or after the date of the Pricing Agreement relating to the Designated Securities (i) no downgrading shall have occurred in the rating accorded the Company's debt securities or preferred stock or the financial strength or claims paying ability of MBIA Corp. by any "nationally recognized statistical rating organization", as that term is defined by the Commission for purposes of Rule 436(g)(2) under the Act, and (ii) no such organization shall have publicly announced that it has under surveillance or review, with possible negative implications, its rating of any of the Company's debt securities or preferred stock; (h) On or after the date of the Pricing Agreement relating to the Designated Securities there shall not have occurred any of the following: (i) a suspension or material limitation in trading in securities generally on the New York Stock Exchange; (ii) a general moratorium on commercial banking activities in New York declared by either Federal or New York State authorities; or (iii) the outbreak or escalation of hostilities involving the United States or the declaration by the United States of a national emergency or war, if the effect of any such event specified in this clause (iii) in the judgment of the Representatives makes it impracticable or inadvisable to proceed with the public offering or the delivery of the Designated Securities on the terms and in the manner contemplated in the Prospectus as amended or supplemented relating to the Designated Securities; (i) The Company shall have complied with the provisions of Section 5(c) hereof with respect to the furnishing of prospectuses on the New York Business Day next succeeding the date of this Agreement; and 11 (j) The Company shall have furnished or caused to be furnished to the Representatives at the Time of Delivery for the Designated Securities a certificate or certificates of officers of the Company satisfactory to the Representatives as to the accuracy of the representations and warranties of the Company herein at and as of such Time of Delivery, as to the performance by the Company of all of its obligations hereunder to be performed at or prior to such Time of Delivery, as to the matters set forth in subsections (a) and (f) of this Section and as to such other matters as may be specified in the Pricing Agreement for such Designated Securities. 8. (a) The Company will indemnify and hold harmless each Underwriter against any losses, claims, damages or liabilities, joint or several, to which such Underwriter may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus, any preliminary prospectus supplement, the Registration Statement and the Prospectus as amended or supplemented, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse each Underwriter for any legal or other expenses reasonably incurred by such Underwriter in connection with investigating or defending any such action or claim as such expenses are incurred; provided, however, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in any Preliminary Prospectus, any preliminary prospectus supplement, the Registration Statement and the Prospectus as amended or supplemented, or any such amendment or supplement in reliance upon and in conformity with written information furnished to the Company by any Underwriter of Designated Securities through the Representatives expressly for use therein. (b) Each Underwriter will indemnify and hold harmless the Company against any losses, claims, damages or liabilities to which the Company may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus, any preliminary prospectus supplement, the Registration Statement and the Prospectus as amended or supplemented, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in any Preliminary Prospectus, any preliminary prospectus supplement, the Registration Statement and the Prospectus as amended or supplemented, or any such amendment or supplement in reliance upon and in conformity with written information furnished to the Company by such Underwriter through the Representatives expressly for use therein; and will reimburse the Company for any legal or other expenses reasonably incurred by the Company in connection with investigating or defending any such action or claim as such expenses are incurred. (c) Promptly after receipt by an indemnified party under subsection (a) or (b) above of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under such subsection, notify the indemnifying party in writing of the commencement thereof; but the omission so to notify the indemnifying party shall not relieve it from any liability hereunder except to the extent it is materially prejudiced as a result thereof and in any event shall not relieve it from any liability which it may 12 have to any indemnified party otherwise than under such subsection. In case any such action shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party (who shall not, except with the consent of the indemnified party, be counsel to the indemnifying party), and, after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party under such subsection for any legal expenses of other counsel or any other expenses, in each case subsequently incurred by such indemnified party, in connection with the defense thereof. No indemnifying party shall, without the written consent of the indemnified party, effect the settlement or compromise of, or consent to the entry of any judgment with respect to, any pending or threatened action or claim in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified party is an actual or potential party to such action or claim) unless such settlement, compromise or judgment (i) includes an unconditional release of the indemnified party from all liability arising out of such action or claim and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act, by or on behalf of any indemnified party. The indemnifying party shall not be liable for any settlement of any action effected by an indemnified party without the written consent of the indemnifying party, which consent shall not be unreasonably withheld or delayed. (d) If the indemnification provided for in this Section 8 is unavailable to or insufficient to hold harmless an indemnified party under subsection (a) or (b) above in respect of any losses, claims, damages or liabilities (or actions in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters of the Designated Securities on the other from the offering of the Designated Securities to which such loss, claim, damage or liability (or action in respect thereof) relates. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law or if the indemnified party failed to give the notice required under subsection (c) above, then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company on the one hand and the Underwriters of the Designated Securities on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions in respect thereof), as well as any other relevant equitable considerations (including, without limitation the responsibility of any indemnified party for failing to notify the indemnifying party in accordance with subsection (c)). The relative benefits received by the Company on the one hand and such Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from such offering (before deducting expenses) received by the Company bear to the total underwriting discounts and commissions received by such Underwriters. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or such Underwriters on the other and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Underwriters agree that it would not be just and equitable if contribution pursuant to this subsection (d) were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this subsection (d). The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above in this subsection (d) shall be deemed to include any legal or other 13 expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this subsection (d), no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the applicable Designated Securities underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The obligations of the Underwriters of Designated Securities in this subsection (d) to contribute are several in proportion to their respective underwriting obligations with respect to such Securities and not joint. (e) The obligations of the Company under this Section 8 shall be in addition to any liability which the Company may otherwise have and shall extend, upon the same terms and conditions, to each person, if any, who controls any Underwriter within the meaning of the Act; and the obligations of the Underwriters under this Section 8 shall be in addition to any liability which the respective Underwriters may otherwise have and shall extend, upon the same terms and conditions, to each officer and director of the Company and to each person, if any, who controls the Company within the meaning of the Act. 9. (a) If any Underwriter shall default in its obligation to purchase the Designated Securities which it has agreed to purchase under the Pricing Agreement relating to such Designated Securities, the Representatives may in their discretion arrange for themselves or another party or other parties to purchase such Designated Securities on the terms contained herein. If within thirty-six hours after such default by any Underwriter the Representatives do not arrange for the purchase of such Designated Securities, then the Company shall be entitled to a further period of thirty-six hours within which to procure another party or other parties satisfactory to the Representatives to purchase such Designated Securities on such terms. In the event that, within the respective prescribed period, the Representatives notify the Company that they have so arranged for the purchase of such Designated Securities, or the Company notifies the Representatives that it has so arranged for the purchase of such Designated Securities, the Representatives or the Company shall have the right to postpone the Time of Delivery for such Designated Securities for a period of not more than seven days, in order to effect whatever changes may thereby be made necessary in the Registration Statement or the Prospectus as amended or supplemented, or in any other documents or arrangements, and the Company agrees to file promptly any amendments or supplements to the Registration Statement or the Prospectus which in the opinion of the Representatives may thereby be made necessary. The term "Underwriter" as used in this Agreement shall include any person substituted under this Section with like effect as if such person had originally been a party to the Pricing Agreement with respect to such Designated Securities. (b) If, after giving effect to any arrangements for the purchase of the Designated Securities of a defaulting Underwriter or Underwriters by the Representatives and the Company as provided in subsection (a) above, the aggregate principal amount of such Designated Securities which remains unpurchased does not exceed one-tenth of the aggregate principal amount of the Designated Securities, then the Company shall have the right to require each non-defaulting Underwriter to purchase the principal amount of Designated Securities which such Underwriter agreed to purchase under the Pricing Agreement relating to such Designated Securities and, in addition, to require each non- defaulting Underwriter to purchase its pro rata share (based on the principal amount of Designated Securities which such Underwriter agreed to purchase under such Pricing Agreement) of the Designated Securities of such defaulting 14 Underwriter or Underwriters for which such arrangements have not been made; but nothing herein shall relieve a defaulting Underwriter from liability for its default. (c) If, after giving effect to any arrangements for the purchase of the Designated Securities of a defaulting Underwriter or Underwriters by the Representatives and the Company as provided in subsection (a) above, the aggregate principal amount of Designated Securities which remains unpurchased exceeds one-tenth of the aggregate principal amount of the Designated Securities, as referred to in subsection (b) above, or if the Company shall not exercise the right described in subsection (b) above to require non-defaulting Underwriters to purchase Designated Securities of a defaulting Underwriter or Underwriters, then the Pricing Agreement relating to such Designated Securities shall thereupon terminate, without liability on the part of any non-defaulting Underwriter or the Company, except for the expenses to be borne by the Company and the Underwriters as provided in Section 6 hereof and the indemnity and contribution agreements in Section 8 hereof; but nothing herein shall relieve a defaulting Underwriter from liability for its default. 10. The respective indemnities, agreements, representations, warranties and other statements of the Company and the several Underwriters, as set forth in this Agreement or made by or on behalf of them, respectively, pursuant to this Agreement, shall remain in full force and effect, regardless of any investigation (or any statement as to the results thereof) made by or on behalf of any Underwriter or any controlling person of any Underwriter, or the Company, or any officer or director or controlling person of the Company, and shall survive delivery of and payment for the Securities. 11. If any Pricing Agreement shall be terminated pursuant to Section 9 hereof, the Company shall not then be under any liability to any Underwriter with respect to the Designated Securities covered by such Pricing Agreement except to each non-defaulting Underwriter as provided in Sections 6 and 8 hereof; but, if for any reason attributable to the company Designated Securities are not delivered by or on behalf of the Company as provided herein, the Company will reimburse the Underwriters through the Representatives for all out-of- pocket expenses approved in writing by the Representatives, including fees and disbursements of counsel, reasonably incurred by the Underwriters in making preparations for the purchase, sale and delivery of such Designated Securities, but the Company shall then be under no further liability to any Underwriter with respect to such Designated Securities except as provided in Sections 6 and 8 hereof. 12. In all dealings hereunder, the Representatives of the Underwriters of Designated Securities shall act on behalf of each of such Underwriters, and the parties hereto shall be entitled to act and rely upon any statement, request, notice or agreement on behalf of any Underwriter made or given by such Representatives jointly or by such of the Representatives, if any, as may be designated for such purpose in the Pricing Agreement. All statements, requests, notices and agreements hereunder shall be in writing, and if to the Underwriters shall be delivered or sent by mail, telex or facsimile transmission to the address of the Representatives as set forth in the Pricing Agreement; and if to the Company shall be delivered or sent by mail, telex or facsimile transmission to the address of the Company set forth in the Registration Statement: Attention: Secretary; provided, however, that any notice to an Underwriter pursuant to Section 8(c) hereof shall be delivered or sent by mail, telex or facsimile transmission to such Underwriter at its address set forth in its Underwriters' Questionnaire, or telex constituting such Questionnaire, which address will be supplied to the Company by the Representatives upon request. Any such statements, requests, notices or agreements shall take effect upon receipt thereof. 15 13. This Agreement and each Pricing Agreement shall be binding upon, and inure solely to the benefit of, the Underwriters, the Company and, to the extent provided in Sections 8 and 10 hereof, the officers and directors of the Company, and each person who controls the Company or any Underwriter, and their respective heirs, executors, administrators, successors and assigns, and no other person shall acquire or have any right under or by virtue of this Agreement or any such Pricing Agreement. No purchaser of any of the Securities from any Underwriter shall be deemed a successor or assign by reason merely of such purchase. 14. Time shall be of the essence of each Pricing Agreement. As used herein, "business day" shall mean any day when the Commission's office in Washington, D.C. is open for business. 15. THIS AGREEMENT AND EACH PRICING AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. 16. This Agreement and each Pricing Agreement may be executed by any one or more of the parties hereto and thereto in any number of counterparts, each of which shall be deemed to be an original, but all such respective counterparts shall together constitute one and the same instrument. 16 ANNEX I PRICING AGREEMENT ----------------- [Name and Address of Representatives of Underwriters] September __, 1998 Ladies and Gentlemen: MBIA Inc., a Connecticut corporation (the "Company"), proposes, subject to the terms and conditions stated herein and in the Underwriting Agreement -- Standard Terms, dated September __ 1998 (the "Underwriting Agreement"), to issue and sell to the Underwriters named in Schedule I hereto (the "Underwriters") the Securities specified in Schedule II hereto (the "Designated Securities"). Each of the provisions of the Underwriting Agreement, insofar as such provision relates to the Designated Securities, or the issuance and sale, and not insofar as such provision relates to other Securities, or their issuance or sale, is incorporated herein by reference in its entirety, and shall be deemed to be a part of this Agreement to the same extent as if such provisions had been set forth in full herein; and each of the representations and warranties set forth therein shall be deemed to have been made at and as of the date of this Pricing Agreement, except that each representation and warranty which refers to the Prospectus in Section 2 of the Underwriting Agreement shall be deemed to be a representation or warranty as of the date of the Underwriting Agreement in relation to the Prospectus (as therein defined), and also a representation and warranty as of the date of this Pricing Agreement in relation to the Prospectus as amended or supplemented relating to the Designated Securities which are the subject of this Pricing Agreement. Each reference to the Representatives herein and in the provisions of the Underwriting Agreement so incorporated by reference shall be deemed to refer to you. Unless otherwise defined herein, terms defined in the Underwriting Agreement are used herein as therein defined. The Representatives designated to act on behalf of the Representatives and on behalf of each of the Underwriters of the Designated Securities pursuant to Section 12 of the Underwriting Agreement and the address of the Representatives referred to in such Section 12 are set forth at the end of Schedule II hereto. An amendment to the Registration Statement, or a supplement to the Prospectus, as the case may be, relating to the Designated Securities, in the form heretofore delivered to you is now proposed to be filed with the Commission. Subject to the terms and conditions set forth herein and in the Underwriting Agreement incorporated herein by reference, the Company agrees to issue and sell to each of the Underwriters, and each of the Underwriters agrees, severally and not jointly, to purchase from the Company, at the time and place and at the purchase price to the Underwriters set forth in Schedule II hereto, the principal amount of Designated Securities set forth opposite the name of such Underwriter in Schedule I hereto. If the foregoing is in accordance with your understanding, please sign and return to us counterparts hereof, and upon acceptance hereof by you, on behalf of each of the Underwriters, this letter and such acceptance hereof, including the provisions of the Underwriting Agreement incorporated herein by reference, shall constitute a binding agreement between each of the Underwriters and the Company. It is understood that your acceptance of this letter on behalf of each of the Underwriters is or will be pursuant to the authority set forth in a form of Agreement among Underwriters, the form of which shall be submitted to the Company for examination upon request, but without warranty on the part of the Representatives as to the authority of the signers thereof. Very truly yours, MBIA INC. By: ......................... Name: Title: Accepted as of the date hereof: [Names of Representatives of Underwriters] By:............................... [Names of Authorized Signatory for Representatives] On behalf of each of the Underwriters 2 SCHEDULE I PRINCIPAL AMOUNT OF DESIGNATED SECURITIES TO BE PURCHASED UNDERWRITERS --------- ------------ --------- Total........................................ $ ========= 3 SCHEDULE II TITLE OF DESIGNATED SECURITIES: % Debentures due 2028 AGGREGATE PRINCIPAL AMOUNT: $ PRICE TO PUBLIC: % of the principal amount of the Designated Securities, plus accrued interest, if any, from to PURCHASE PRICE BY UNDERWRITERS: % of the principal amount of the Designated Securities, plus accrued interest from to FORM OF DESIGNATED SECURITIES: Book-entry only form represented by one or more global securities deposited with The Depository Trust Company ("DTC") or its designated custodian, to be made available for checking by the Representatives at least twenty-four hours prior to the Time of Delivery at the office of DTC. SPECIFIED FUNDS FOR PAYMENT OF PURCHASE PRICE: Federal (same day) funds TIME OF DELIVERY: a.m. (New York City time), , 1998 INDENTURE: Indenture, dated as of August 1, 1990, between the Company and The First National Bank of Chicago, as Trustee MATURITY: _______ __, 2028 INTEREST RATE: % INTEREST PAYMENT DATES: months and dates, commencing ....................., 1998 4 REDEMPTION PROVISIONS: No provisions for redemption SINKING FUND PROVISIONS: No sinking fund provisions DEFEASANCE PROVISIONS: The Designated Securities are subject to defeasance and covenant defeasance as provided in Article Thirteen of the Indenture. CLOSING LOCATION FOR DELIVERY OF DESIGNATED SECURITIES: Simpson Thacher & Bartlett 425 Lexington Avenue New York, New York 10017 INFORMATION PROVIDED TO THE COMPANY BY THE UNDERWRITERS PURSUANT TO SECTION 8 OF THE UNDERWRITING AGREEMENT: ADDITIONAL CLOSING CONDITIONS: NAMES AND ADDRESSES OF REPRESENTATIVES: Designated Representatives: Address for Notices, etc.: 5 ANNEX II Pursuant to Section 7(e) of the Underwriting Agreement, the accountants shall furnish letters to the Underwriters to the effect that: (i) They are independent certified public accountants with respect to the Company and its subsidiaries within the meaning of the Act and the applicable published rules and regulations thereunder; (ii) In their opinion, the financial statements and any supplementary financial information and schedules audited (and, if applicable, financial forecasts and/or pro forma financial information) examined by them and included or incorporated by reference in the Registration Statement or the Prospectus comply as to form in all material respects with the applicable accounting requirements of the Act or the Exchange Act, as applicable, and the related published rules and regulations thereunder; and, if applicable, they have made a review in accordance with standards established by the American Institute of Certified Public Accountants of the consolidated interim financial statements, selected financial data, pro forma financial information, financial forecasts and/or condensed financial statements derived from audited financial statements of the Company for the periods specified in such letter, as indicated in their reports thereon, copies of which have been [separately] furnished to the representative or representatives of the Underwriters (the "Representatives") such term to include an Underwriter or Underwriters who act without any firm being designated as its or their representatives [and are attached hereto]; (iii) They have made a review in accordance with standards established by the American Institute of Certified Public Accountants of the unaudited condensed consolidated statements of income, consolidated balance sheets and consolidated statements of cash flows included in the Prospectus and/or included in the Company's quarterly report(s) on Form 10- Q incorporated by reference into the Prospectus as indicated in their reports thereon copies of which [have been separately furnished to the Representatives][are attached hereto]; and on the basis of specified procedures including inquiries of officials of the Company who have responsibility for financial and accounting matters regarding whether the unaudited condensed consolidated financial statements referred to in paragraph (v)(A)(i) below comply as to form in all material respects with the applicable accounting requirements of the Act and the Exchange Act and the related published rules and regulations, nothing came to their attention that caused them to believe that the unaudited condensed consolidated financial statements do not comply as to form in all material respects with the applicable accounting requirements of the Act and the Exchange Act and the related published rules and regulations; (iv) The unaudited selected financial information with respect to the consolidated results of operations and financial position of the Company for the five most recent fiscal years included in the Prospectus and included or incorporated by reference in Item 6 of the Company's Annual Report on Form 10-K for the most recent fiscal year agrees with the corresponding amounts (after restatement where applicable) in the audited consolidated financial statements for five such fiscal years which were included or incorporated by reference in the Company's Annual Reports on Form 10-K for such fiscal years; (v) On the basis of limited procedures, not constituting an examination in accordance with generally accepted auditing standards, consisting of a reading of the unaudited financial statements and other information referred to below, a reading of the latest available interim financial statements of the Company and its subsidiaries, inspection of the minute books of the Company and its subsidiaries since the date of the latest audited financial statements included or incorporated by reference in the Prospectus, inquiries of officials of the Company and its subsidiaries responsible for financial and accounting matters and such other inquiries and procedures as may be specified in such letter, nothing came to their attention that caused them to believe that: (A)(i) the unaudited condensed consolidated statements of income, consolidated balance sheets and consolidated statements of cash flows included in the Prospectus and/or included or incorporated by reference in the Company's Quarterly Reports on Form 10-Q incorporated by reference in the Prospectus do not comply as to form in all material respects with the applicable accounting requirements of the Exchange Act and the related published rules and regulations, or (ii) any material modifications should be made to the unaudited condensed consolidated statements of income, consolidated balance sheets and consolidated statements of cash flows included in the Prospectus or included in the Company's Quarterly Reports on Form 10-Q incorporated by reference in the Prospectus for them to be in conformity with generally accepted accounting principles; (B) any other unaudited income statement data and balance sheet items included in the Prospectus do not agree with the corresponding items in the unaudited consolidated financial statements from which such data and items were derived, and any such unaudited data and items were not determined on a basis substantially consistent with the basis for the corresponding amounts in the audited consolidated financial statements included or incorporated by reference in the Company's Annual Report on Form 10-K for the most recent fiscal year; (C) the unaudited financial statements which were not included in the Prospectus but from which were derived the unaudited condensed financial statements referred to in clause (A) and any unaudited income statement data and balance sheet items included in the Prospectus and referred to in clause (B) were not determined on a basis substantially consistent with the basis for the audited financial statements included or incorporated by reference in the Company's Annual Report on Form 10-K for the most recent fiscal year; (D) any unaudited pro forma consolidated condensed financial statements included or incorporated by reference in the Prospectus do not comply as to form in all material respects with the applicable accounting requirements of the Act and the published rules and regulations thereunder or the pro forma adjustments have not been properly applied to the historical amounts in the compilation of those statements; (E) as of a specified date not more than five days prior to the date of such letter, there have been any changes in the consolidated capital stock (other than issuances of capital stock upon exercise of options and stock appreciation rights, upon earn-outs of performance shares and upon conversions of convertible securities, in each case which were outstanding on the date of the latest balance sheet included or incorporated by reference in the Prospectus) or any increase in the consolidated long-term debt of the Company and its subsidiaries, or any decreases in consolidated stockholders' equity or other items specified by the 2 Representatives, or any increases in any items specified by the Representatives, in each case as compared with amounts shown in the latest balance sheet included or incorporated by reference in the Prospectus, except in each case for changes, increases or decreases which the Prospectus discloses have occurred or may occur or which are described in such letter; and (F) for the period from the date of the latest financial statements included or incorporated by reference in the Prospectus to the specified date referred to in clause (E) there were any decreases in consolidated revenues or operating profit or the total or per share amounts of consolidated net income or other items specified by the Representatives, or any increases in any items specified by the Representatives, in each case as compared with the comparable period of the preceding year and with any other period of corresponding length specified by the Representatives, except in each case for increases or decreases which the Prospectus discloses have occurred or may occur or which are described in such letter; and (vi) In addition to the audit referred to in their report(s) included or incorporated by reference in the Prospectus and the limited procedures, inspection of minute books, inquiries and other procedures referred to in paragraphs (iii) and (v) above, they have carried out certain specified procedures, not constituting an audit in accordance with generally accepted auditing standards, with respect to certain amounts, percentages and financial information specified by the Representatives which are derived from the general accounting records of the Company and its subsidiaries, which appear in the Prospectus (excluding documents incorporated by reference), or in Part II of, or in exhibits and schedules to, the Registration Statement specified by the Representatives or in documents incorporated by reference in the Prospectus specified by the Representatives, and have compared certain of such amounts, percentages and financial information with the accounting records of the Company and its subsidiaries and have found them to be in agreement. All references in this Annex II to the Prospectus shall be deemed to refer to the Prospectus (including the documents incorporated by reference therein) as defined in the Underwriting Agreement as of the date of the letter delivered on the date of the Pricing Agreement for purposes of such letter and to the Prospectus as amended or supplemented (including the documents incorporated by reference therein) in relation to the applicable Designated Securities for purposes of the letter delivered at the Time of Delivery for such Designated Securities. 3 EX-23.04 3 CONSENT OF PRICEWATERHOUSECOOPERS LLP EXHIBIT 23.04 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the Registration Statements of MBIA Inc. and Subsidiaries on Forms S-3 (Nos. 333-15003 and 333-60039) and S-8 (Nos. 33-22441 and 33-46062 and 333-34101) of our report dated September 21, 1998, on our audits of the consolidated financial statements of MBIA Inc. and Subsidiaries as of December 31, 1997 and December 31, 1996 and for each of the three years in the period ended December 31, 1997, which report is included in this Current Report on Form 8-K. /s/PricewaterhouseCoopers LLP ----------------------------- New York, New York September 24, 1998 EX-27.01 4 SELECTED FINANCIAL DATA SCHEDULE FOR 1997
7 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 5,211,311 0 0 0 0 0 8,908,296 26,296 0 216,165 10,384,991 103,061 2,090,460 0 0 508,878 98,754 0 0 3,262,758 10,384,991 349,537 301,415 16,903 95,914 31,877 34,897 76,580 525,252 119,642 405,610 0 0 0 405,610 4.18 4.12 0 0 0 0 0 0 0
EX-27.02 5 SELECTED FINANCIAL DATA SCHEDULE FOR 1996
7 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 4,455,122 0 0 0 0 0 8,007,997 10,266 0 196,889 9,030,877 70,299 1,854,137 0 0 418,110 95,458 0 0 2,665,765 9,030,877 292,269 265,467 9,936 63,155 20,149 30,016 68,854 448,415 100,679 347,736 0 0 0 347,736 3.68 3.62 0 0 0 0 0 0 0
EX-27.03 6 SELECTED FINANCIAL DATA SCHEDULE FOR 1995
7 1,000 YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 3,868,327 0 0 0 0 0 6,937,104 27,004 0 176,801 7,670,008 49,053 1,662,082 0 0 406,900 0 0 92,810 2,404,408 7,670,008 244,314 232,701 12,663 40,983 13,780 27,809 58,226 375,009 84,719 290,290 0 0 0 290,290 3.21 3.15 0 0 0 0 0 0 0
EX-99.01 7 RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT 99.01 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of MBIA Inc.: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income and changes in shareholders' equity and cash flows present fairly, in all material respects, the financial position of MBIA Inc. and Subsidiaries at December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion of these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP -------------------------------- New York, New York September 21, 1998 (1) MBIA INC. RESTATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1997 AND 1996 AND FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (2) MBIA INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (RESTATED)
Years ended December 31 ----------------------------------- Dollars in thousands except per share amounts 1997 1996 1995 REVENUES Insurance: Gross premiums written $651,890 $533,513 $405,963 Ceded premiums (116,526) (69,956) (61,042) ---------- ---------- --------- Net premiums written 535,364 463,557 344,921 Increase in deferred premium revenue (185,827) (171,288) (100,607) ---------- ---------- --------- Premiums earned (net of ceded premiums of $62,353, $48,679 and $39,027) 349,537 292,269 244,314 Net investment income 301,415 265,467 232,701 Net realized gains 16,903 9,936 12,663 Advisory fees 17,110 10,786 7,349 Investment management services: Income 47,174 44,331 35,310 Net realized gains (losses) 3,416 2,572 (6,092) Other 28,214 5,466 4,416 ---------- ---------- --------- Total revenues 763,769 630,827 530,661 ---------- ---------- --------- EXPENSES Insurance: Losses and loss adjustment 31,877 20,149 13,780 Policy acquisition costs, net 34,897 30,016 27,809 Operating 76,580 68,854 58,226 Investment management services 29,822 26,357 23,998 Interest 38,653 34,665 29,642 Other 26,688 2,371 2,197 ---------- ---------- --------- Total expenses 238,517 182,412 155,652 ---------- ---------- --------- Income before income taxes 525,252 448,415 375,009 Provision for income taxes 119,642 100,679 84,719 ---------- ---------- --------- NET INCOME $405,610 $347,736 $290,290 ========== ========== ========= NET INCOME PER COMMON SHARE: BASIC $ 4.18 $ 3.68 $ 3.21 DILUTED $ 4.12 $ 3.62 $ 3.15 Weighted average number of common shares outstanding: Basic 96,937,314 94,368,038 90,465,515 Diluted 98,344,163 96,159,066 92,140,436
The accompanying notes are an integral part of the consolidated financial statements. (3) MBIA INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (RESTATED)
Dollars in thousands except per share amounts December 31, 1997 December 31, 1996 ASSETS Investments: Fixed-maturity securities held as available-for-sale at fair value (amortized cost $4,936,760 and $4,303,846) $5,211,311 $4,455,122 Short-term investments, at amortized cost (which approximates fair value) 303,898 209,840 Other investments 51,693 49,737 ---------------- ---------------- 5,566,902 4,714,699 Municipal investment agreement portfolio held as available-for-sale at fair value (amortized cost $3,241,703 and $3,263,211) 3,341,394 3,293,298 ---------------- ---------------- TOTAL INVESTMENTS 8,908,296 8,007,997 Cash and cash equivalents 26,296 10,266 Securities borrowed or purchased under agreements to resell 472,963 217,000 Accrued investment income 121,090 108,589 Deferred acquisition costs 216,165 196,889 Prepaid reinsurance premiums 289,508 235,335 Goodwill (less accumulated amortization of $55,788 and $48,037) 121,642 107,769 Property and equipment, at cost (less accumulated depreciation of $31,882 and $26,650) 66,709 54,606 Receivable for investments sold 13,435 980 Other assets 148,887 91,446 ---------------- ---------------- TOTAL ASSETS $10,384,991 $9,030,877 ================ ================ LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Deferred premium revenue $2,090,460 $1,854,137 Loss and loss adjustment expense reserves 103,061 70,299 Municipal investment agreements 1,974,165 2,290,609 Municipal repurchase agreements 1,177,022 968,671 Long-term debt 488,878 389,010 Short-term debt 20,000 29,100 Securities loaned or sold under agreements to repurchase 606,263 217,000 Deferred income taxes 298,498 216,082 Deferred fee revenue 48,126 39,417 Payable for investments purchased 44,007 52,029 Other liabilities 172,999 143,300 ---------------- ---------------- TOTAL LIABILITIES 7,023,479 6,269,654 ---------------- ---------------- 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 -- 98,754,523 and 95,458,499 98,754 95,458 Additional paid-in capital 1,133,950 984,303 Retained earnings 1,901,608 1,572,646 Cumulative translation adjustment (9,040) (1,056) Unrealized appreciation of investments, net of deferred income tax provision of $132,026 and $62,689 245,135 116,353 Unallocated ESOP shares (4,083) (5,430) Unearned compensation - restricted stock (4,812) (1,051) ---------------- ---------------- TOTAL SHAREHOLDERS' EQUITY 3,361,512 2,761,223 ---------------- ---------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $10,384,991 $9,030,877 ================ ================
The accompanying notes are an integral part of the consolidated financial statements. (4) MBIA INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (RESTATED) For the years ended December 31, 1997, 1996 and 1995
Unrealized Common Stock Additional Cumulative Appreciation In thousands except ---------------- Paid-in Retained Translation (Depreciation) per share amounts Shares Amount Capital Earnings Adjustment of Investments - ------------------------ ------ ------- ---------- ---------- ------------ --------------- BALANCE, JANUARY 1, 1995 91,087 $91,087 $ 838,882 $1,077,766 $ 503 $(92,082) - ------------------------------------------------------------------------------------------------------- Net proceeds from issuance of shares 1,723 1,723 67,300 --- --- --- Allocation of ESOP shares --- --- --- --- --- --- Unearned compensation - restricted stock --- --- --- 116 --- --- Exercise of stock options --- --- ----- (12,806) --- --- Net income --- --- --- 290,290 --- --- Change in foreign currency translation --- --- --- --- 2,330 --- Change in unrealized appreciation of investments net of change in deferred income taxes of $(162,694) --- --- --- --- --- 302,173 Dividends (declared per common share $0.655, paid per common share $0.638) --- --- --- (59,055) --- --- - ------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1995 92,810 92,810 906,182 1,296,311 2,833 210,091 - ------------------------------------------------------------------------------------------------------- Net proceeds from issuance of shares 1,690 1,690 53,190 --- --- --- Allocation of ESOP shares --- --- --- --- --- --- Unearned compensation - restricted stock --- --- --- --- --- --- Exercise of stock options 958 958 24,931 (1,757) --- --- Net income --- --- --- 347,736 --- --- Change in foreign currency translation --- --- --- --- (3,889) --- Change in unrealized appreciation of investments net of change in deferred income taxes of $50,874 --- --- --- --- --- (93,738) Dividends (declared per common share $0.725, paid per common share $0.708) --- --- --- (69,644) --- --- - ------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1996 95,458 95,458 984,303 1,572,646 (1,056) 116,353 - ------------------------------------------------------------------------------------------------------- Net proceeds from issuance of shares 2,679 2,679 125,096 --- --- --- Allocation of ESOP shares --- --- --- --- --- --- Unearned compensation - restricted stock 67 67 3,729 --- --- --- Stock issued for acquisition 120 120 6,880 --- --- --- Exercise of stock options 430 430 13,942 --- --- --- Net income --- --- --- 405,610 --- --- Change in foreign currency translation --- --- --- --- (7,984) --- Change in unrealized appreciation of investments, net of change in deferred income taxes of $(69,337) --- --- --- --- --- 128,782 Dividends (declared per common share $0.770, paid per common share $0.765) --- --- --- (76,648) --- --- - ------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1997 98,754 $98,754 $1,133,950 $1,901,608 $(9,040) $245,135 ======================================================================================================= Unearned Unallocated Compensation- Treasury Stock In thousands except ESOP Restricted ----------------- per share amounts Shares Stock Shares Amount - ------------------------ ----------- -------------- ------ -------- BALANCE, JANUARY 1, 1995 (7,169) --- (924) $(28,146) - ------------------------------------------------------------------------------ Net proceeds from issuance of shares --- --- --- --- Allocation of ESOP shares 672 --- --- --- Unearned compensation - restricted stock --- (426) 12 319 Exercise of stock options --- --- 764 23,741 Net income --- --- --- --- Change in foreign currency translation --- --- --- --- Change in unrealized appreciation of investments net of change in deferred income taxes of $(162,694) --- --- --- --- Dividends (declared per common share $0.655, paid per common share $0.638) --- --- --- --- - ------------------------------------------------------------------------------ BALANCE, DECEMBER 31, 1995 (6,497) (426) (148) (4,086) - ------------------------------------------------------------------------------ Net proceeds from issuance of shares --- --- --- --- Allocation of ESOP shares 1,067 --- --- --- Unearned compensation - restricted stock --- (625) --- --- Exercise of stock options --- --- 148 4,086 Net income --- --- --- --- Change in foreign currency translation --- --- --- --- Change in unrealized appreciation of investments net of change in deferred income taxes of $50,874 --- --- --- --- Dividends (declared per common share $0.725, paid per common share $0.708) --- --- --- --- - ----------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1996 (5,430) (1,051) --- --- - ----------------------------------------------------------------------------- Net proceeds from issuance of shares --- --- --- --- Allocation of ESOP shares 1,347 --- --- --- Unearned compensation - restricted stock --- (3,761) --- --- Stock issued for acquisition --- --- --- --- Exercise of stock option --- --- --- --- Net income --- --- --- --- Change in foreign currency translation --- --- --- --- Change in unrealized appreciation of investments, net of change in deferred income taxes of $(69,337) --- --- --- --- Dividends (declared per common share $0.770, paid per common share $0.765) --- --- --- --- - ----------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1997 (4,083) $(4,812) --- --- =============================================================================
The accompanying notes are an integral part of the consolidated financial statements. (5) MBIA INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (RESTATED)
Years ended December 31 ------------------------------------------------ Dollars in thousands 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 405,610 $ 347,736 $ 290,290 Adjustments to reconcile net income to net cash provided by operating activities: Increase in accrued investment income (12,501) (18,420) (18,877) Increase in deferred acquisition costs (19,276) (20,088) (18,279) Increase in prepaid reinsurance premiums (54,173) (21,277) (22,015) Increase in deferred premium revenue 240,000 192,565 122,622 Increase in loss and loss adjustment expense reserves 32,762 21,246 3,714 Depreciation 6,284 4,949 4,488 Amortization of goodwill 7,751 6,380 6,499 Amortization of bond discount, net (20,191) (20,933) (18,468) Net realized gains on sale of investments (20,319) (12,508) (6,571) Deferred income taxes 13,191 9,521 14,534 Other, net (30,606) 338 51,182 --------------- --------------- -------------- Total adjustments to net income 142,922 141,773 118,829 --------------- --------------- -------------- Net cash provided by operating activities 548,532 489,509 409,119 --------------- --------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of fixed-maturity securities, net of payable for investments purchased (2,296,490) (1,743,180) (1,321,193) Sale of fixed-maturity securities, net of receivable for investments sold 1,336,458 931,033 773,405 Redemption of fixed-maturity securities, net of receivable for investments redeemed 251,793 281,860 121,428 Purchase of short-term investments (15,022) (5,705) (54,591) Purchase of other investments (559) (394) (1,065) Sale of other investments 1,223 862 6,926 Purchases for municipal investment agreement portfolio, net of payable for investments purchased (1,447,004) (1,861,126) (2,210,571) Sales from municipal investment agreement portfolio, net of receivable for investments sold 1,487,437 1,264,033 1,115,239 Capital expenditures, net of disposals (17,369) (10,150) (7,698) Other, net (14,554) (2,445) (10,713) --------------- --------------- -------------- Net cash used by investing activities (714,087) (1,145,212) (1,588,833) --------------- --------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuance of common stock 127,775 54,880 69,023 Net proceeds from issuance of long-term debt 98,880 --- 74,344 Net (repayment) proceeds from (retirement) issuance of short-term debt (9,100) 11,100 --- Dividends paid (76,743) (69,795) (57,595) Proceeds from issuance of municipal investment and repurchase agreements 1,823,422 2,242,872 2,351,206 Payments for drawdowns of municipal investment and repurchase agreements (1,930,321) (1,628,310) (1,251,517) Securities loaned or sold under agreements to repurchase, net 133,300 --- --- Exercise of stock options 14,372 28,218 10,935 --------------- --------------- -------------- Net cash provided by financing activities 181,585 638,965 1,196,396 --------------- --------------- -------------- Net increase (decrease) in cash and cash equivalents 16,030 (16,738) 16,682 Cash and cash equivalents - beginning of year 10,266 27,004 10,322 --------------- --------------- -------------- Cash and cash equivalents - end of year $ 26,296 $ 10,266 $ 27,004 --------------- --------------- -------------- SUPPLEMENTAL CASH FLOW DISCLOSURES: Income taxes paid $ 103,065 $ 79,671 $ 59,516 Interest paid: Municipal investment and repurchase agreements $ 195,344 $ 172,237 $ 104,301 Long-term debt 32,953 32,850 27,703 Short-term debt 2,017 1,309 1,228
The accompanying notes are an integral part of the consolidated financial statements. (6) MBIA INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BUSINESS AND ORGANIZATION - ---------------------------- MBIA Inc. (the company) was incorporated in Connecticut on November 12, 1986 as a licensed insurer and, through 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 subsidiaries, MBIA Insurance Corporation (MBIA Corp.) and Capital Markets Assurance Corporation (CMAC). On February 17, 1998, MBIA Inc. consummated a merger with CapMAC Holdings Inc. ("CapMAC"), by exchanging 8.1 million shares of its common stock for all of the common stock of CapMAC. Each share of CapMAC was exchanged for 0.4675 of one share of MBIA Inc. common stock. On July 31, 1998, MBIA Inc. completed a merger of its investment management business with 1838 Investment Advisors ("1838") through the issuance of 1.1 million shares of common stock. Each share of 1838 was exchanged for 2.134 shares of MBIA Inc. The mergers constituted tax-free reorganizations and have been accounted for as pooling of interests under Accounting Principles Board Opinion No. 16. Accordingly, all prior period consolidated financial statements presented have been restated to include the combined results of operations, financial position and cash flows of CapMAC and 1838 as though they had always been a part of MBIA Inc. There were no transactions between MBIA Inc., CapMAC and/or 1838 prior to the combinations, and immaterial adjustments were recorded to conform CapMAC's and 1838's accounting policies. Certain reclassifications were made to the CapMAC and 1838 financial statements to conform to MBIA Inc.'s presentations. The results of operations for the separate companies and the combined amounts presented in the consolidated financial statements follow: Year ended Year ended Year ended December 31, December 31, December 31, (Dollar in thousands) 1997 1996 1995 - ------------------------------------------------------------------------------ Premiums earned MBIA $297,377 $251,712 $215,072 CapMAC 52,160 40,557 29,242 ------------------------------------------------ Combined $349,537 $292,269 $244,314 ================================================ Net income MBIA $374,176 $322,163 $271,419 CapMAC 23,989 19,679 14,586 1838 7,445 5,894 4,285 ------------------------------------------------ Combined $405,610 $347,736 $290,290 ================================================ (7) MBIA INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 wholly owned 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 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 December 1995, as part of its strategy to expand into Asia, CapMAC purchased 36.3% of CapMAC Asia Ltd. As of December 31, 1997, CapMAC currently owns 30.7% of CapMAC Asia Ltd. CapMAC Asia Ltd. has a 33.33% investment in Asia Credit Services (Pte) Ltd. ("Asia Services"). Asia Services owns all of the stock of Asian Securitization & Infrastructure Assurance (Pte) Ltd. ("ASIA Ltd."), a regional financial guarantee company located in Singapore. ASIA Ltd. was formed to provide guarantees of high quality debt securities in the primary and secondary Asian fixed income capital markets and, together with Asia Services, to engage in related business activities in the Asian capital markets and to provide technical advice and assistance in connection with Asian securitization transactions. In 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. (8) MBIA INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) In 1996, the company formed a wholly owned subsidiary, Strategic Services, Inc., which was subsequently renamed MBIA MuniServices Company (MuniServices). Also in 1996, MuniServices acquired an interest in Capital Asset Holdings Inc. (Capital Asset), a limited partnership that buys, services and manages delinquent municipal tax liens. In January 1997, MuniServices acquired a 95 percent interest in the Municipal Tax Bureau (MTB) of Philadelphia, a provider of tax compliance services to state and local governments. In July 1997, MuniServices acquired MuniFinancial, a public finance consulting firm specializing in municipal debt administration. In early 1997, CMAC made an investment of 50 million French Francs (approximately 10 million U. S. dollars) in CapMAC Assurance S.A., an insurance subsidiary established in Paris, France. CapMAC Assurance S.A. is licensed to write financial guarantee insurance in the European Union member states. CapMAC Assurance S. A. has had only limited business activity to date. CapMAC Financial Services Inc. ("CFS") and CapMAC Financial Services (Europe) Ltd. ("CFS Europe") receive fees for providing advisory, consulting and structuring services to third parties. CFS also provides various services, including underwriting, reinsurance, marketing, data processing and other services to CapMAC and its other subsidiaries. CapMAC and its other subsidiaries pay CFS a fee for providing such services, but not in excess of CFS' cost for such services. 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 significant 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. (9) MBIA INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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. 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. 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. (10) MBIA INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) PREMIUM REVENUE RECOGNITION Upfront 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. Installment premiums are earned over each installment period - generally one year or less. 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. ADVISORY FEE REVENUE RECOGNITION The company collects certain advisory fees for services rendered in connection with advising clients as to the most appropriate structure to use for a given structured finance transaction that the company will insure. Advisory fees are deferred and earned consistent with the premium revenues generated on the transactions. 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. Goodwill attributed to the acquisition of all other subsidiaries is amortized by the straight-line method over 15 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 by the straight-line method over their estimated service lives ranging from 3 to 31 years. Maintenance and repairs are charged to expense as incurred. LOSSES AND LOSS ADJUSTMENT EXPENSES Loss and loss adjustment expenses (LAE) reserves are established in an amount equal to the company's estimate of identified or case basis reserves and unallocated losses, including costs of settlement, on the obligations it has insured. Case basis reserves are established when specific insured issues are identified as currently or likely to be in default. Such a reserve is based on the present value of the expected loss and LAE payments, net of recoveries under salvage and subrogation rights. The total reserve is calculated by applying a loss factor, determined based on an independent rating agency study of bond defaults, to net debt service written. When a case basis reserve is recorded, a corresponding reduction is made to the unallocated reserve. (11) MBIA INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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, however, because the reserves are based on estimates, there can be no assurance that the ultimate liability will not exceed such estimates. MUNICIPAL INVESTMENT AGREEMENTS AND MUNICIPAL REPURCHASE AGREEMENTS Municipal investment agreements and municipal repurchase agreements are recorded as liabilities on the balance sheet at the time such agreements are executed. The liabilities for municipal investment and repurchase agreements are carried at the face value of the agreement plus accrued interest, whereas the related assets are recorded at fair value. Investment management services income 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 interest rate swaps 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. At year-end 1997, the company's exposure to derivative financial instruments was not material. INVESTMENT MANAGEMENT SERVICES OPERATIONS Investment management services income is comprised of the net investment income and operating revenues of MBIA-MISC, IMC, CMC and 1838. The operating expenses of MBIA-MISC, IMC, CMC and 1838 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 (12) MBIA INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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. Gains and losses resulting from transactions in foreign currencies are recorded in current income. 3. RECENT ACCOUNTING PRONOUNCEMENTS - ------------------------------------ In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 130, "Reporting Comprehensive Income," effective for fiscal years beginning after December 15, 1997. This statement will require the company to report in the financial statements, in addition to net income, comprehensive income and its components including, as applicable, foreign currency items, unearned compensation from restricted stock awards and unrealized gains and losses on certain investments in debt and equity securities. Upon adoption, the company will be required to reclassify financial statements for earlier periods provided for comparative purposes. Adoption of this statement will not change the content of the financial statements; instead it will only change the presentation. Also, in June 1997, the FASB issued SFAS 131, "Disclosures about Segments of an Enterprise and Related Information," effective for fiscal years beginning after December 15, 1997. This statement establishes standards for reporting information about operating segments in annual financial statements, and requires selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographical areas and major customers. Under SFAS 131, operating segments are to be determined consistent with the way that management organizes and evaluates financial information internally for making operating decisions and assessing performance. As a result of the new requirements, the company will be providing additional segment information, however the future presentation and disclosures have not yet been determined. In June 1998, the FASB issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." The statement requires companies to recognize all derivatives as either assets or liabilities, with the instruments measured at fair value. The accounting for changes in fair value, gains or losses, depends on the intended use of the derivative and its resulting designation. The statement is effective for fiscal years beginning after June 15, 1999. The company will adopt SFAS 133 by January 1, 2000. Adoption of SFAS 133 is not expected to have a material impact on the consolidated financial statements. (13) MBIA INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. 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: . upfront 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 unallocated 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. (14) MBIA INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 CMAC: As of December 31 -------------------------- In thousands 1997 1996 - --------------------------------------------------------- Company's GAAP shareholders' equity $3,361,512 $2,761,223 Contributions to MBIA Corp. 459,567 361,494 Premium revenue recognition (413,729) (371,856) Deferral of acquisition costs (216,165) (196,889) Unrealized gains (377,161) (179,042) Contingency reserve (1,187,882) (958,928) Loss and loss adjustment expense reserves 77,816 49,738 Deferred income taxes 298,498 216,082 Tax and loss bonds 130,055 103,364 Goodwill (95,829) (100,718) Other (85,172) (23,364) - --------------------------------------------------------- Statutory capital and surplus $1,951,510 $1,661,104 - --------------------------------------------------------- Consolidated net income of MBIA Corp. and CMAC, determined in accordance with statutory accounting practices for the years ended December 31, 1997, 1996 and 1995 was $404.4 million, $335.3 million and $287.3 million, respectively. 5. PREMIUMS EARNED FROM REFUNDED AND CALLED BONDS - -------------------------------------------------- Premiums earned include $50.9 million, $44.4 million and $34.0 million for 1997, 1996 and 1995, respectively, related to refunded and called bonds. 6. 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. (15) MBIA INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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, 1997 and 1996: Gross Gross Amortized Unrealized Unrealized Fair In thousands Cost Gains Losses Value - ------------------------------------------------------------------------------ December 31, 1997 Taxable bonds United States Treasury and Government Agency $ 547,206 $ 30,668 $ (4) $ 577,870 Corporate and other obligations 3,156,676 96,520 (1,114) 3,252,082 Mortgage-backed 1,495,667 30,579 (1,054) 1,525,192 Tax-exempt bonds State and municipal obligations 3,282,812 219,613 (966) 3,501,459 - ------------------------------------------------------------------------------ Total $8,482,361 $377,380 $(3,138) $8,856,603 - ------------------------------------------------------------------------------ Gross Gross Amortized Unrealized Unrealized Fair In thousands Cost Gains Losses Value - ------------------------------------------------------------------------------ December 31, 1996 Taxable bonds United States Treasury and Government Agency $ 537,725 $ 13,667 $ (997) $ 550,395 Corporate and other obligations 2,745,267 34,595 (16,985) 2,762,877 Mortgage-backed 1,390,995 20,568 (6,621) 1,404,942 Tax-exempt bonds State and municipal obligations 3,102,910 141,991 (4,855) 3,240,046 - ------------------------------------------------------------------------------ Total $7,776,897 $210,821 $(29,458) $7,958,260 - ------------------------------------------------------------------------------ Fixed-maturity investments carried at fair value of $12.0 million and $11.7 million as of December 31, 1997 and 1996, respectively, were on deposit with various regulatory authorities to comply with insurance laws. (16) MBIA INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) A portion of the obligations under municipal investment and repurchase agreements require the company to pledge securities as collateral. As of December 31, 1997 and 1996, the fair value of securities pledged as collateral with respect to these obligations approximated $1.8 billion and $1.5 billion, respectively. The following table sets forth the distribution by expected maturity of the fixed-maturities and short-term investments at amortized cost and fair value at December 31, 1997. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations. In thousands Amortized Cost Fair Value - ---------------------------------------------------------------- Within 1 year $ 675,113 $ 675,133 Beyond 1 year but within 5 years 1,489,052 1,523,381 Beyond 5 years but within 10 years 1,759,479 1,845,653 Beyond 10 years but within 15 years 1,106,117 1,190,167 Beyond 15 years but within 20 years 1,096,739 1,173,131 Beyond 20 years 860,194 923,946 - ---------------------------------------------------------------- 6,986,694 7,331,411 Mortgage-backed 1,495,667 1,525,192 - ---------------------------------------------------------------- Total fixed-maturities and short-term investments $8,482,361 $8,856,603 - ---------------------------------------------------------------- (17) MBIA INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. INVESTMENT INCOME AND GAINS AND LOSSES - ------------------------------------------ Investment income consists of: Years ended December 31 -------------------------------- In thousands 1997 1996 1995 - -------------------------------------------------------------- Fixed-maturities $299,488 $261,200 $227,758 Short-term investments 7,060 7,792 7,922 Other investments (1,542) (383) 112 - -------------------------------------------------------------- Gross investment income 305,006 268,609 235,792 Investment expenses 3,591 3,142 3,091 - -------------------------------------------------------------- Net investment income 301,415 265,467 232,701 - -------------------------------------------------------------- Net realized gains (losses): Fixed-maturities Gains 25,963 17,532 11,427 Losses (5,877) (5,889) (2,672) - -------------------------------------------------------------- Net 20,086 11,643 8,755 - -------------------------------------------------------------- Other investments Gains 564 333 3,917 Losses (3,747) (2,040) (9) - -------------------------------------------------------------- Net (3,183) (1,707) 3,908 - -------------------------------------------------------------- Total net realized gains 16,903 9,936 12,663 - -------------------------------------------------------------- Total investment income $318,318 $275,403 $245,364 - -------------------------------------------------------------- Total investment income excludes investment income and realized gains and losses from MBIA-MISC, IMC, CMC and 1838, which are reported in investment management services income. (18) MBIA INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Net unrealized gains consist of: As of December 31 --------------------- In thousands 1997 1996 - ------------------------------------------------- Fixed-maturities: Gains $377,380 $210,821 Losses (3,138) (29,458) - ------------------------------------------------- Net 374,242 181,363 - ------------------------------------------------- Other investments: Gains 2,976 934 Losses (57) (3,255) - ------------------------------------------------- Net 2,919 (2,321) - ------------------------------------------------- Total 377,161 179,042 Deferred income taxes 132,026 62,689 - ------------------------------------------------- Unrealized gains, net $245,135 $116,353 - ------------------------------------------------- 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 1997 1996 1995 - ------------------------------------------------------------------- Fixed-maturities $196,042 $(146,050) $466,920 Other investments 2,077 1,438 (2,053) - ------------------------------------------------------------------- Total 198,119 (144,612) 464,867 Deferred income taxes 69,337 (50,874) 162,694 - ------------------------------------------------------------------- Unrealized gains (losses), net $128,782 $ (93,738) $302,173 - ------------------------------------------------------------------- (19) MBIA INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. 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 1997 1996 1995 - ------------------------------------------------------------------ Current $106,452 $ 91,158 $70,185 Deferred 13,190 9,521 14,534 - ------------------------------------------------------------------ Total $119,642 $100,679 $84,719 - ------------------------------------------------------------------ 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 ----------------------------- 1997 1996 1995 - -------------------------------------------------------------------- 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 (10.6) (12.1) (12.9) Amortization of goodwill 0.3 0.4 0.5 Other (1.9) (0.8) --- - -------------------------------------------------------------------- Provision for income taxes 22.8% 22.5% 22.6% - -------------------------------------------------------------------- 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. (20) MBIA INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The tax effects of temporary differences that give rise to deferred tax assets and liabilities at December 31, 1997 and 1996 are presented below: In thousands 1997 1996 - ---------------------------------------------------------------- Deferred tax assets: Tax and loss bonds $130,080 $102,222 Alternative minimum tax credit carryforward 62,279 58,068 Loss and loss adjustment expense reserves 23,762 15,200 Other 92,099 20,368 - ---------------------------------------------------------------- Total gross deferred tax assets 308,220 195,858 - ---------------------------------------------------------------- Deferred tax liabilities Contingency reserve 229,389 180,957 Deferred premium revenue 154,240 74,082 Deferred acquisition costs 73,081 67,596 Unrealized gains 132,026 62,689 Contingent commissions 408 1,052 Other 17,574 25,564 - ---------------------------------------------------------------- Total gross deferred tax liabilities 606,718 411,940 - ---------------------------------------------------------------- Net deferred tax liability $298,498 $216,082 - ---------------------------------------------------------------- The company believes that a valuation allowance is unnecessary in connection with the deferred tax assets. 9. NET INCOME PER COMMON SHARE - ------------------------------- In February 1997, the FASB issued (SFAS) 128, "Earnings per Share", effective for financial statements issued for periods ending after December 15, 1997. SFAS 128 establishes standards for computing and presenting earnings per share (EPS). Under the new standard, basic EPS is computed by dividing income applicable to common stock by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the additional dilution that could occur from employee stock options and other items that could potentially result in the issuance of common stock. The company has adopted this Statement and as required has restated all prior-period EPS data presented. The mergers with CapMAC and 1838, subsequent to year-end, resulted in the issuance of 8,102,255 and 1,191,197 additional common shares, respectively, which are included in the following table. The table provides a reconciliation of the denominator of the basic EPS computation to the denominator of the diluted EPS computation. (21) MBIA INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years ended December 31 ------------------------------------ 1997 1996 1995 - ---------------------------------------------------------------------- Net income (in thousands) $405,610 $347,736 $290,290 - ---------------------------------------------------------------------- Basic weighted average shares 96,937,314 94,368,038 90,465,515 Effect of stock options 1,406,849 1,791,028 1,674,921 - ---------------------------------------------------------------------- Diluted weighted average shares 98,344,163 96,159,066 92,140,436 - ---------------------------------------------------------------------- Basic EPS $4.18 $3.68 $3.21 Diluted EPS $4.12 $3.62 $3.15 Options to purchase 292,100, 256,028 and 477,388 shares of common stock during 1997, 1996 and 1995, respectively, were not included in the computation of diluted EPS because the options exercise price was greater than the average market price of common shares during the respective years. 10. STOCK SPLIT - ---------------- On September 17, 1997, the Board of Directors approved a two-for-one stock split, to be effected in the form of a 100% stock dividend payable on October 29, 1997 to shareholders of record as of October 1, 1997. An amount equal to the par value of common shares issued was transferred from additional paid-in capital to the common stock account. This transfer has been reflected in the Consolidated Statements of Changes in Shareholders' Equity at January 1, 1995. All references to the number of common shares, except shares authorized, and to per share information in the consolidated financial statements and related notes have been adjusted to reflect the stock split on a retroactive basis. 11. DIVIDENDS AND CAPITAL REQUIREMENTS - --------------------------------------- Under New York state insurance law, MBIA Corp. and CMAC may pay dividends 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 $176 million available for the payment of dividends to the company as of December 31, 1997. In 1997, no dividends were paid by MBIA Corp. to the company due to cash available from (22) MBIA INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) financing activities. In 1996 and 1995, MBIA Corp. declared and paid dividends of $29 million and $83 million, respectively, to the company. No dividends were paid by CMAC to CapMAC during the years ended December 31, 1997, 1996 and 1995. No dividends could be paid during these periods because CMAC had negative earned surplus. 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., CMAC and their subsidiaries have various requirements relating to the maintenance of certain minimum ratios of statutory capital and reserves to net insurance in force. MBIA Corp., CMAC and their subsidiaries were in compliance with these requirements as of December 31, 1997. 12. LONG-TERM DEBT AND LINES OF CREDIT - --------------------------------------- Long-term debt consists of: As of December 31 --------------------- In thousands 1997 1996 - ------------------------------------------------- 7.520% Notes due 1999-2002 $ 15,000 $ 15,000 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 7.150% Debentures due 2027 100,000 --- - ------------------------------------------------- 490,000 390,000 Less unamortized discount 1,122 990 - ------------------------------------------------- Total $488,878 $389,010 - ------------------------------------------------- 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 $825 million with a group of major Triple-A-rated banks to provide loans to MBIA Corp. if it incurs cumulative losses (net of any recoveries) from September 30, 1997 in excess of the greater of $825 million or 4.00% 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, 2004, and contains an annual renewal provision subject to approval by the bank group. CMAC maintains stop-loss reinsurance coverage of $75 million in excess of incurred losses of $150 million. (23) MBIA INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The company, MBIA Corp. and CMAC maintain bank liquidity facilities aggregating $450 million. At December 31, 1997 and 1996, $20.0 million and $29.1 million, respectively, were outstanding under these facilities. The company has outstanding letters of credit for MBIA-MISC that are intended to support the net asset value of certain investment pools managed by MBIA-MISC. These letters can be drawn upon in the event the liquidation of such assets at below cost is required. 13. 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 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, 1997, the interest rates on these agreements ranged from 4.35% to 8.25%. 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: 1998 $1,141,366 1999 640,452 2000 261,320 2001 57,886 2002 12,824 Thereafter 1,000,806 - ---------------------------------------------- Total $3,114,654 - ---------------------------------------------- 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, 1997. (24) MBIA INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 14. NET INSURANCE IN FORCE - --------------------------- MBIA Corp. and CMAC guarantee the timely payment of principal and interest on municipal, asset-/mortgage-backed and other non-municipal securities. MBIA Corp.'s and CMAC'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. and CMAC 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 and CMAC'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 or CMAC's upon the payment of a claim by MBIA Corp. or CMAC. Under CMAC's structured asset-backed transactions, a pool of assets covering at least 100% of the principal amount guaranteed under its insurance contract is sold or pledged to a special purpose bankruptcy remote entity. CMAC's primary risk from such insurance contracts is the impairment of cash flows due to delinquency or loss on the underlying assets. CMAC, therefore, evaluates all the factors affecting past and future asset performance by studying historical data on losses, delinquencies and recoveries of the underlying assets. Each transaction is reviewed to ensure that an appropriate legal structure is used to protect against the bankruptcy risk of the originator of the assets. Along with the legal structure, an additional level of first loss protection is also created to protect against losses due to credit or dilution. This first level of loss protection is usually available from reserve funds, excess cash flows, overcollateralization, or recourse to a third party. The level of first loss protection depends upon the historical losses and dilution of the underlying assets, but is typically several times the normal historical loss experience for the underlying type of assets. As of December 31, 1997, insurance in force, net of cessions to reinsurers, had a range of maturity of 1 - 41 years. The distribution of net insurance in force by geographic location and type of bond, excluding $3.2 billion and $3.3 billion relating to IMC municipal investment agreements guaranteed by MBIA Corp. in 1997 and 1996, respectively, is set forth in the following tables: (25)
As of December 31 - --------------------------------------------------------------------------------------------------------- $ in billions 1997 1996 - ----------------------------------------------------------------- ---------------------------------- Net Number % of Net Net Number % of Net Insurance of Issues Insurance Insurance Of Issues Insurance Geographic Location In Force Outstanding In Force In Force Outstanding In Force - ----------------------------------------------------------------- ---------------------------------- Domestic California $ 68.8 3,455 13.4% $ 61.1 3,389 14.1% New York 38.2 5,057 7.4 31.3 4,906 7.2 Florida 33.1 1,578 6.5 29.6 1,633 6.8 New Jersey 24.7 1,885 4.8 19.0 1,886 4.4 Texas 24.7 2,099 4.8 21.9 2,065 5.0 Pennsylvania 23.0 2,262 4.5 21.5 2,268 5.0 Illinois 20.3 1,236 4.0 18.8 1,184 4.3 Massachusetts 15.5 1,089 3.0 11.0 1,102 2.5 Ohio 12.5 1,014 2.4 11.3 1,038 2.6 Michigan 11.2 1,032 2.2 9.6 1,035 2.2 --------- ---------- --------- ---------- --------- --------- Subtotal 272.0 20,707 53.0 235.1 20,506 54.1 Other states 223.6 12,278 43.5 186.2 11,820 42.9 --------- ---------- --------- ---------- --------- --------- Total domestic 495.6 32,985 96.5 421.3 32,326 97.0 International 18.1 279 3.5 13.1 207 3.0 --------- ---------- --------- ---------- --------- --------- Total $513.7 33,264 100.0% $434.4 32,533 100.0% --------- ---------- --------- ---------- --------- ---------
As of December 31 - --------------------------------------------------------------------------------------------------------- $ in billions 1997 1996 - ----------------------------------------------------------------- ---------------------------------- 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 $119.5 12,096 23.3% $111.1 11,830 25.6% Utilities 75.4 4,775 14.7 68.2 4,832 15.7 Health care 62.2 2,248 12.1 54.0 2,388 12.4 Transportation 40.6 1,503 7.9 30.4 1,536 7.0 Special revenue 34.2 1,653 6.7 29.0 1,554 6.7 Higher education 20.6 1,366 4.0 18.0 1,316 4.1 Industrial development and pollution control revenue 19.6 943 3.8 18.1 931 4.2 Housing 18.9 1,896 3.7 17.7 2,460 4.1 Other 12.5 543 2.4 3.9 171 0.9 --------- ---------- --------- --------- --------- --------- Total municipal 403.5 27,023 78.6 350.4 27,018 80.7 --------- ---------- --------- --------- --------- --------- Structured finance* 74.8 709 14.5 54.0 534 12.4 --------- ---------- --------- --------- --------- --------- Other Investor owned utilities 11.0 4,872 2.2 10.0 4,529 2.3 Financial institution 5.8 366 1.1 6.4 237 1.5 Corporate direct 0.5 15 0.1 0.5 8 0.1 --------- ---------- --------- --------- --------- --------- Total other 17.3 5,253 3.4 16.9 4,774 3.9 --------- ---------- --------- --------- --------- --------- Total domestic 495.6 32,985 96.5 421.3 32,326 97.0 --------- ---------- --------- --------- --------- --------- International Infrastructure Sovereign 1.9 35 0.4 0.5 13 0.1 Sub-sovereign 1.4 53 0.3 1.5 48 0.3 Utilities 0.8 60 0.2 0.7 59 0.2 Transportation 0.8 5 0.1 0.9 4 0.2 Higher education 0.6 1 0.1 -- -- -- Housing 0.3 2 0.1 -- -- -- Health care 0.2 6 -- 0.1 3 -- --------- ---------- --------- --------- --------- --------- Total infrastructure 6.0 162 1.2 3.7 127 0.8 --------- ---------- --------- --------- --------- --------- Structured finance* 9.3 76 1.8 6.4 46 1.5 --------- ---------- --------- --------- --------- --------- Other Financial institution 2.2 34 0.4 2.9 33 0.7 Investor owned utility 0.6 7 0.1 0.1 1 -- --------- ---------- --------- --------- --------- --------- Total other 2.8 41 0.5 3.0 34 0.7 --------- ---------- --------- --------- --------- --------- Total international 18.1 279 3.5 13.1 207 3.0 --------- ---------- --------- --------- --------- --------- Total $513.7 33,264 100.0% $434.4 32,533 100.0% --------- ---------- --------- --------- --------- --------- *Asset-/mortgage-backed
(26) MBIA INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 15. REINSURANCE - ---------------- MBIA Corp. and CMAC reinsures exposure with other insurance companies under various treaty and facultative reinsurance contracts, both on a pro rata and excess of loss basis. In the event that any or all of the reinsurers were unable to meet their obligations, MBIA Corp. or CMAC would be liable for such defaulted amounts. Amounts deducted from gross insurance in force for reinsurance ceded by MBIA Corp., CMAC and their subsidiaries were $76.6 billion and $64.1 billion, at December 31, 1997 and 1996, 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 1997 1996 - --------------------------------------------- ---------------------- % of % of Ceded Ceded Ceded Ceded Geographic Insurance Insurance Insurance Insurance Location In Force In Force In Force In Force - --------------------------------------------- ---------------------- Domestic California $10.4 13.6% $9.4 14.7% New York 6.1 8.0 6.3 9.8 Texas 4.0 5.2 2.9 4.5 New Jersey 3.7 4.9 3.3 5.1 Massachusetts 3.0 3.9 1.4 2.2 Pennsylvania 3.0 3.9 2.9 4.5 Illinois 2.7 3.5 2.6 4.1 Florida 2.6 3.4 2.4 3.7 Colorado 2.4 3.1 1.2 1.9 Puerto Rico 2.4 3.1 1.2 1.9 Washington 1.9 2.5 1.9 3.0 District of Columbia 1.6 2.1 1.6 2.5 - --------------------------------------------- ---------------------- Subtotal 43.8 57.2 37.1 57.9 Other states 22.1 28.8 19.6 30.6 - --------------------------------------------- ---------------------- Total domestic 65.9 86.0 56.7 88.5 International 10.7 14.0 7.4 11.5 - --------------------------------------------- ---------------------- Total $76.6 100.0% $64.1 100.0% - --------------------------------------------- ---------------------- (27) MBIA INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) As of December 31 - --------------------------------------------------------------------- In billions 1997 1996 - --------------------------------------------- --------------------- % 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 $12.3 16.1% $14.4 22.5% Utilities 11.6 15.1 10.2 15.9 Transportation 9.6 12.5 6.4 10.0 Health care 8.0 10.5 6.3 9.8 Special revenue 5.0 6.5 3.4 5.3 Industrial development and pollution control revenue 3.3 4.3 3.2 5.0 Housing 1.7 2.2 1.6 2.5 Higher education 1.3 1.7 1.5 2.3 Other 2.7 3.5 1.0 1.6 - --------------------------------------------- --------------------- Total municipal 55.5 72.4 48.0 74.9 - --------------------------------------------- --------------------- Structured finance* 8.4 11.0 6.9 10.8 - --------------------------------------------- --------------------- Other Financial institution 1.3 1.7 1.3 2.0 Corporate direct 0.2 0.3 0.2 0.3 Investor-owned utilities 0.5 0.6 0.3 0.5 - --------------------------------------------- --------------------- Total other 2.0 2.6 1.8 2.8 - --------------------------------------------- --------------------- Total domestic 65.9 86.0 56.7 88.5 - --------------------------------------------- --------------------- International Infrastructure Sovereign 1.0 1.3 0.4 0.6 Higher education 0.7 0.9 --- --- Sub-sovereign 0.6 0.8 0.8 1.2 Transportation 0.4 0.5 0.4 0.6 Health care 0.2 0.3 0.1 0.2 - --------------------------------------------- --------------------- Total infrastructure 2.9 3.8 1.7 2.6 - --------------------------------------------- --------------------- Structured finance* 6.6 8.6 4.4 6.9 - --------------------------------------------- --------------------- Other Financial institution 1.0 1.3 1.3 2.0 Investor-owned utilities 0.2 0.3 --- --- - --------------------------------------------- --------------------- Total other 1.2 1.6 1.3 2.0 - --------------------------------------------- --------------------- Total international 10.7 14.0 7.4 11.5 - --------------------------------------------- --------------------- Total $76.6 100.0% $64.1 100.0% - --------------------------------------------- --------------------- * Asset-/mortgage-backed (28) MBIA INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 16. PENSION AND PROFIT SHARING PLANS - ------------------------------------- The company has a non-contributory, defined contribution pension plan to which the company contributes 10% of each eligible employee's annual total compensation. Pension expense for the years ended December 31, 1997, 1996 and 1995 was $4.6 million, $3.9 million and $3.6 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/401(k) plan aggregated $1.9 million, $1.7 million and $1.5 million for the years ended December 31, 1997, 1996 and 1995, respectively. The profit sharing/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. 17. 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 9,311,122 shares of the company's common stock to be granted as options. As of December 31, 1997, 6,538,410 options had been granted, net of expirations and cancellations, leaving the total number available for future grants at 2,772,712. 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 are 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 for the December 1995 award only) to be paid in cash or shares of company stock. (29) MBIA INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Target levels for the option/incentive award are established as a percentage of total salary and bonus, based upon the recipient's position. 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 year. The December 1997 award will cover growth in ABV from December 31, 1997 through December 31, 2000 and the December 1995 award will cover growth in ABV from December 31, 1995 through December 31, 1998, with a base line growth of 12% on both awards. The amount to be paid in respect of such award will be adjusted upward or downward based on the actual ABV growth with a minimum growth of 8% necessary to receive any payment and an 18% growth needed to receive the maximum payment of 200% of the target levels. The amount, if any, to be paid under this portion of the program will be paid in early 2001 for the December 1997 award and early 1999 for the December 1995 award in the form of cash or shares of the company's common stock. Subsequent awards, if any, will be made every year with concomitant payments occurring after the three-year cycle. During 1997 and 1996, $3.7 million and $2.9 million, respectively, were recorded as a charge related to the December 1997 and December 1995 ABV awards. 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 1997, 449,274 options were awarded. In December 1995, the company adopted a restricted stock program whereby key executive officers are granted restricted shares of the company's stock. These stock awards may only be sold three or four years from the date of grant, at which time the awards fully vest. In 1997 and 1996, respectively, 73,696 and 15,506 restricted shares of the company's stock were granted to certain officers of the company. The fair value of the shares awarded in 1997 and 1996 determined on the grant date is $4.4 million and $0.8 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 appropriate three-to four-year vesting period. In 1992, certain officers of CapMAC were granted 182,633 (85,381 as restated subsequent to the merger with MBIA Inc.) restricted stock units ("RSU") in respect of certain deferred compensation. In December 1995, the RSU's were converted to cash in the amount of $3.7 million, and such officers agreed to defer receipt of such cash amount in exchange for receiving the same number of new shares of restricted stock as the number of RSU's such officers previously held. The cash amount is held by CapMAC and invested in accordance with certain guidelines. Such amount, including the investment earnings thereon, amounted to $3.8 million and $3.7 million at December 31, 1997 and 1996, respectively, and will be paid to each officer upon the occurrence of certain events, but no later (30) MBIA INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) than December 2000. Compensation expense related to the restricted stock and RSU's was $0.2 million, $1.4 million and $1.5 million for the years ended December 31, 1997, 1996 and 1995, respectively. In 1992, CapMAC adopted an Employee Stock Ownership Plan "ESOP" to provide its employees the opportunity to obtain beneficial interests in the stock of CapMAC through a trust (the "ESOP Trust"). The ESOP Trust purchased 750,000 (350,625 as restated subsequent to the merger with MBIA Inc.) shares CapMAC's stock. The ESOP Trust financed its purchase of common stock with a loan from CapMAC in the amount of $10 million. The ESOP loan is evidenced by a promissory note delivered to CapMAC. An amount representing unearned employee compensation, equivalent in value to the unpaid balance of the ESOP loan, is recorded as "Unallocated ESOP shares" and is shown as a separate component of shareholders' equity. CFS is required to make contributions to the ESOP Trust, which enables the ESOP Trust to service its loan to CapMAC. The ESOP expense is calculated using the shares allocated method. Shares are released for allocation to the participants and held in trust for the employees based upon the ratio of the current year's principal and interest payment to the sum of principal and interest payments estimated over the life of the loan. As of December 31, 1997 and 1996 443,810 (207,570 as restated) and 342,739 (160,353 as restated) shares, respectively, were allocated to the participants. Compensation expense related to the ESOP was $1.3 million, $2.4 million and $1.6 million for the years ended December 31, 1997, 1996 and 1995, respectively. In October 1995, the FASB issued 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 (APB) Opinion 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. As the table below shows, 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 1997 are not likely to be representative of the effects on reported net income and earnings per share for future years. (31) MBIA INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years ended December 31 1997 1996 1995 ---------------------------------- Net income (in thousands): Reported $405,610 $347,736 $290,290 Pro-forma 404,881 347,455 290,281 Basic earnings per share: Reported $4.18 $3.68 $3.21 Pro-forma 4.17 3.68 3.21 Diluted earnings per share: Reported $4.12 $3.62 $3.15 Pro-forma 4.11 3.61 3.15 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 1997, 1996 and 1995, respectively; exercise price of $64.7661, $48.8219 and $38.2783; dividend yield of 1.220%, 1.492% and 1.937%; expected volatility of .2070, .2110 and .2787; risk-free interest rate of 5.80%, 5.96% and 5.97%; and expected option term of 5.72, 5.52 and 5.52 years. A summary of the company's stock option plan as of December 31, 1997, 1996 and 1995, and changes during the years ending on those dates, is presented below: 1997 ----------------------------- Weighted Number Avg. Price Options of Shares per Share - --------------------------------------------------------------------------- Outstanding at beginning of year 4,049,879 $31.7892 Granted 449,274 64.7661 Exercised 430,314 57.3585 Expired or canceled 34,909 34.5547 - --------------------------------------------------------------------------- Outstanding at year-end 4,033,930 $37.0004 - --------------------------------------------------------------------------- Exercisable at year-end 2,450,080 $26.9218 - --------------------------------------------------------------------------- Weighted-average fair value per share of options granted during the year $18.38 (32) MBIA INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1996 ----------------------------- Weighted Number Avg. Price Options of Shares per Share - --------------------------------------------------------------------------- Outstanding at beginning of year 4,529,632 $24.0847 Granted 672,481 48.8219 Exercised 1,105,561 41.1025 Expired or canceled 46,673 29.6053 - --------------------------------------------------------------------------- Outstanding at year-end 4,049,879 $31.7892 - --------------------------------------------------------------------------- Exercisable at year-end 2,512,278 $24.9806 - --------------------------------------------------------------------------- Weighted-average fair value per share of options granted during the year $14.09 1995 ----------------------------- Weighted Number Avg. Price Options of Shares per Share - --------------------------------------------------------------------------- Outstanding at beginning of year 5,064,871 $21.8212 Granted 297,684 38.2783 Exercised 764,494 34.4789 Expired or canceled 68,429 29.3345 - --------------------------------------------------------------------------- Outstanding at year-end 4,529,632 $24.0847 - --------------------------------------------------------------------------- Exercisable at year-end 3,250,307 $20.7039 - --------------------------------------------------------------------------- Weighted-average fair value per share of options granted during the year $11.80 The following table summarizes information about the plan's stock options at December 31, 1997:
Weighted-Average Number Remaining Number Range of Outstanding Contractual Weighted-Average Exercisable Weighted-Average Exercise Prices at 12/31/97 Life in Years Exercise Price at 12/31/97 Exercise Price - ---------------------------------------------------------------------------------------------------------- $ 8.2500 to $25.0000 773,661 2.87 $17.9339 773,661 $17.9339 $25.0630 to $30.0630 1,568,918 5.62 27.8143 1,175,798 28.0060 $34.5000 to $72.7260 1,691,351 8.27 54.2430 500,621 38.2654 - ---------------------------------------------------------------------------------------------------------- Total 4,033,930 6.20 $37.0004 2,450,080 $26.9218 - ----------------------------------------------------------------------------------------------------------
(33) MBIA INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 18. 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. (34) MBIA INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 19. RELATED PARTY TRANSACTIONS - ------------------------------- Since 1989, MBIA Corp. has executed five surety bonds to guarantee the payment obligations of the members of the Association 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. The aggregate outstanding exposure on these surety bonds as of December 31, 1997 is $340 million. In 1995, the company sold 78,000 shares of Credit Local de France, a former 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 year ended December 31, 1995 amounted to $2.5 million. 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 $2.2 million, $2.1 million and $1.9 million, respectively, for the years ended December 31, 1997, 1996 and 1995. MuniServices provides financing to Capital Asset under various borrowing arrangements. The net balance outstanding under these agreements at December 31, 1997 and 1996 were $49.7 million and $15.7 million, respectively, including accrued interest, and is included in other assets on the company's consolidated balance sheet. Net interest earned under these agreements during 1997 and 1996 was $7.0 million and $2.1 million, respectively. Certain officers of Dillon, Read & Co. Inc. are directors of CapMAC, and receive no compensation from CapMAC. Dillon, Read & Co. Inc., which serves as investment manager for Saratoga Partners II, a principal stockholder of CapMAC, received an advisory retention fee of $0.2 million in 1995. Additionally, in 1995 Dillon, Read & Co. Inc. received advisory fees of $4.0 million from CapMAC related to the offerings of its common stock. 20. PUBLIC OFFERINGS OF COMMON STOCK - ------------------------------------ In July 1997, the company completed a public offering of 2,300,000 new shares of the company's common stock. The company realized $126 million in new capital from the offering. In February 1996, the company completed a public offering of 7,780,000 shares of the company's common stock. Of the shares offered, 6,240,000 were sold by an existing shareholder and 1,540,000 were new shares offered by the company. The company realized $55 million in new capital from the offering. In July 1996, CapMAC completed a public offering by some of its stockholders of 3,737,500 shares (1,747,281 as restated subsequent to the merger (35) MBIA INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) with MBIA Inc.) of common stock. CapMAC did not receive any proceeds from the offering but incurred costs of $0.4 million. In July 1995, CapMAC sold 500,001 shares (233,750 as restated) of common stock to ORIX USA Corporation ("ORIX"), a subsidiary of ORIX Corporation, a leading Japanese leasing company, resulting in $10 million in new capital. In December 1995, CapMAC sold 2,500,000 new shares (1,168,775 as restated) of its common stock in an initial public offering, resulting in $50 million of new capital. In conjunction with the offering, CapMAC also sold 500,000 shares (233,750 as restated) of common stock to Centre Reinsurance Limited, a wholly owned subsidiary of The Zurich Insurance Company, in a private placement, resulting in $10 million of new capital. In June 1992, CapMAC granted 2,230,025 warrants (1,042,537 as restated) to non-employee stockholders of CapMAC to purchase common stock. The warrants expire in June 1999. During 1996, 551,390 warrants (257,775 as restated) were exercised. The exercise of the warrants being cashless resulted in the issuance of 321,758 shares (150,422 as restated) of common stock. During 1997, CapMAC exercised its right to purchase all outstanding warrants for its common stock. As a result, 94,789 warrants (44,314 as restated) were exercised for cash resulting in the issuance of 94,789 shares (44,314 as restated) of common stock, and 1,583,846 warrants (740,448 as restated) were exercised on a cashless basis resulting in the issuance of 810,371 shares (378,848 as restated) of common stock. 21. 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. (36) MBIA INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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. 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. 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. (37) MBIA INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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, 1997 As of December 31, 1996 ------------------------ ------------------------ Carrying Estimated Carrying Estimated In thousands Amount Fair Value Amount Fair Value - ----------------------------------------------------------------------------- ASSETS: Fixed-maturity securities $5,211,311 $5,211,311 $4,455,122 $4,455,122 Short-term investments 303,898 303,898 209,840 209,840 Other investments 51,693 51,693 49,737 49,737 Municipal investment agreement portfolio 3,341,394 3,341,394 3,293,298 3,293,298 Cash and cash equivalents 26,296 26,296 10,266 10,266 Securities borrowed or purchased under agreements to resell 472,963 473,841 217,000 219,718 Prepaid reinsurance premiums 289,508 245,613 235,335 203,095 Receivable for investments sold 13,435 13,435 980 980 LIABILITIES: Deferred premium revenue 2,090,460 1,795,890 1,854,137 1,596,497 Loss and loss adjustment expense reserves 103,061 103,061 70,299 70,299 Municipal investment agreements 1,974,165 2,024,230 2,290,609 2,297,272 Municipal repurchase agreements 1,177,022 1,214,641 968,671 982,410 Long-term debt 488,878 536,871 389,010 417,976 Short-term debt 20,000 20,000 29,100 29,100 Securities loaned or sold under agreements to repurchase 606,263 607,304 217,000 221,575 Payable for investments purchased 44,007 44,007 52,029 52,029 OFF-BALANCE SHEET INSTRUMENTS: Installment premiums --- 536,929 --- 442,986 22. SUBSEQUENT EVENT - --------------------- On July 21, 1998, MBIA Inc. announced that it expects that the company's unallocated loss reserve will be sufficient to meet anticipated losses arising from the bankruptcy filing of Delaware Valley Obligated Group (DVOG). As a (38) MBIA INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) result, the company does not expect losses from this insured credit to affect its earnings. MBIA has insured $256 million of net par outstanding of DVOG, an entity comprising five hospitals and a medical university in the Philadelphia area that is part of Allegheny Health, Education and Research Foundation (AHERF) based in Pittsburgh, Pa. AHERF has announced that DVOG will be part of a bankruptcy reorganization filing. As of December 31, 1997, the company's unallocated case reserve was $78 million. 23. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) - ------------------------------------------------ A summary of selected quarterly income statement information follows: In thousands except per share amounts 1997 First Second Third Fourth Year - ------------------------------------------------------------------------------ Gross premiums written $108,807 $184,043 $146,941 $212,099 $651,890 Net premiums written 98,479 154,937 123,309 158,639 535,364 Premiums earned 83,380 85,452 87,687 93,018 349,537 Investment income and realized gains and losses 76,056 75,647 83,536 86,495 321,734 All other revenues 18,754 19,179 24,093 30,472 92,498 Income before income taxes 124,358 126,224 137,194 137,476 525,252 Net income $ 98,474 $ 98,175 $106,552 $102,409 $405,610 - ------------------------------------------------------------------------------ Net income per common share: Basic $ 1.03 $ 1.02 $ 1.09 $ 1.04 $ 4.18 Diluted $ 1.01 $ 1.01 $ 1.07 $ 1.03 $ 4.12 - ------------------------------------------------------------------------------ 1996 First Second Third Fourth Year - ------------------------------------------------------------------------------- Gross premiums written $135,628 $152,773 $ 97,124 $147,988 $533,513 Net premiums written 119,003 135,756 83,959 124,839 463,557 Premiums earned 69,180 72,054 74,581 76,454 292,269 Investment income and realized gains and losses 67,018 69,161 72,063 69,733 277,975 All other revenues 14,448 16,542 13,852 15,741 60,583 Income before income taxes 110,346 111,940 115,065 111,064 448,415 Net income $ 84,511 $ 86,960 $ 89,610 $ 86,655 $347,736 - ------------------------------------------------------------------------------ Net income per common share: Basic $ 0.90 $ 0.92 $ 0.95 $ 0.91 $ 3.68 Diluted $ 0.89 $ 0.91 $ 0.93 $ 0.89 $ 3.62 - ------------------------------------------------------------------------------ (39) EX-99.02 8 RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT 99.02 RATIO OF EARNINGS TO FIXED CHARGES The following table sets forth the ratio of earnings to fixed charges for the Company for the periods indicated. Earnings represent consolidated earnings before income taxes and fixed charges. Fixed charges consist of interest and that portion of rental expense deemed representative of the interest factor for such rental expense. The Company had no capitalized interest for the periods presented. Six Months Ended Years Ended December 31, June 30, ------------------------ ---------- 1993 1994 1995 1996 1997 1997 1998 ---- ---- ---- ---- ---- ----- ---- Ratio of earnings to fixed charges(1).. 12.8 12.9 13.3 13.6 14.2 14.5 14.2 - --------------- (1) Fixed charges do not include the amount of fixed charges associated with obligations insured by MBIA Corp. All data retroactively adjusted to reflect the mergers with CapMAC and 1838. EX-99.03 9 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT 99.03 MBIA INC AND SUBSIDIARIES (1) COMPUTATION OF THE RATIO OF EARNINGS TO FIXED CHARGES (IN THOUSANDS EXCEPT FOR RATIOS) THE INFORMATION APPEARING BELOW PRESENTS HISTORICAL CONSOLIDATED FINANCIAL RESULTS FOR THE COMPANY.
SIX MONTHS YEARS ENDED DECEMBER 31 ENDED JUNE 30 ----------------------------------------------------------------- ------------------- 1993 1994 1995 1996 1997 1997 1998 ----------------------------------------------------------------- ------------------- EARNINGS Operating income before taxes $339,790 $347,315 $375,009 $448,415 $525,252 $250,582 $289,140 Interest expense 28,103 28,362 29,642 34,665 38,653 17,913 21,090 Portion of rentals deemed to be interest 765 867 869 886 1,200 591 742 ----------------------------------------------------------------- ------------------- EARNINGS $368,658 $376,544 $405,520 $483,966 $565,105 $269,086 $310,972 ================================================================= =================== FIXED CHARGES Interest expense $ 28,103 $ 28,362 $ 29,642 $ 34,665 $ 38,653 $ 17,913 $ 21,090 Portion of rentals deemed to be interest 765 867 869 886 1,200 591 742 ----------------------------------------------------------------- ------------------- FIXED CHARGES $ 28,868 $ 29,229 $ 30,511 $ 35,551 $ 39,853 $ 18,504 $ 21,832 ================================================================= =================== RATIO OF EARNINGS TO FIXED CHARGES 12.8 12.9 13.3 13.6 14.2 14.5 14.2 ================================================================= ===================
(1) Includes merged company results (MBIA Inc, CapMAC Holdings Inc. & 1838 Investment Advisors) EX-99.04 10 OPINION OF DEBEVOISE AND PLIMPTON EXHIBIT 99.04 [Debevoise & Plimpton Letterhead] September 23, 1998 MBIA Inc. 113 King Street Armonk, New York 10504 MBIA Inc. Registration Statement on Form S-3 ---------------------------------- Ladies and Gentlemen: We have acted as special counsel to MBIA Inc., a Connecticut corporation (the "Company"), in connection with the preparation and filing with the Securities and Exchange Commission (the "Commission") under the Securities Act of 1933, as amended (the "1933 Act"), of a Registration Statement on Form S- 3 (the "Registration Statement"), and the prospectus included therein (the "Prospectus"), relating to the registration by the Company of $350,000,000 in the aggregate of (i) debt securities representing unsecured obligations of the - Company (the "Senior Debt Securities") to be issued pursuant to the Senior Indenture, dated as of August 1, 1990, (the "Senior Indenture"), between the Com pany and The First National Bank of Chicago, as trustee (the "Senior Trustee") and subordinated debt securities ("Subordinated Debt Securities" and, together with the Senior Debt Securities, the "Debt Securities") to be issued pursuant to a Subordinated Indenture, (the "Subordinated Indenture") between the Company and a trustee to be named in a prospectus supplement relating to the Subordinated Debt Securities (the "Subordinated Trustee"), (ii) shares of preferred stock of -- the Company, par value $1.00 per share ("Preferred Stock"), (iii) shares of --- common stock of the Company, par value 2 MBIA Inc. September 23, 1998 $1.00 per share ("Common Stock"), and the rights to purchase Junior Participating Cumulative Preferred Stock of the Company, par value $1.00 per share, or in certain circumstances either Common Stock or the common stock of any acquiring company, related to the Common Stock (the "Rights") to be issued pursuant to the Rights Agree ment, dated December 12, 1991 (the "Rights Agreement"), between the Company and Mellon Bank, N.A., as Rights Agent, (iv) -- such indeterminate number of shares of Common Stock as may be issuable in exchange for or upon conversion of any Subordinated Debt Securities or Preferred Stock that provide for conversion or exchange into Common Stock, and the Rights relating thereto, and (v) such indeterminate number of shares of-Preferred Stock - as may be issuable in exchange for or upon conversion of any Subordinated Debt Securities that provide for conversion or exchange into Preferred Stock. In so acting, we have examined and relied upon the originals, or copies certified or otherwise identified to our satisfaction, of such records, documents, certificates and other instruments as in our judgment are necessary or appropriate to enable us to render the opinion expressed below. Our opinion assumes that the definitive Subordinated Indenture will be in substantially the form filed as an Exhibit to the Registration Statement. In rendering the opinion set forth in paragraph 1 below, we have assumed the corporate authority of the Senior Indenture Trustee to enter into and perform the Senior Indenture. In rendering the opinion set forth in paragraph 2 below, we have assumed the corporate authority of the Subordinated Indenture Trustee to enter into and perform the Subordinated Indenture. Based upon the foregoing, we are of the following opinion: 1. The Senior Indenture has been duly authorized, executed and delivered by the Company. Assuming the Senior Indenture has been duly authorized, executed and delivered by the Senior Trustee, when the Senior Debt Securities have been duly authorized by all necessary corporate action of the Company and duly executed, authenticated, issued, delivered and paid for as contemplated by the Registration Statement and any prospectus supplement relating to the Senior Debt Securities and in accordance with the Senior Indenture, assuming the terms of such Debt Securities have been duly established so as not to violate any applicable law or result in a default under or breach of any agreement or instrument binding upon the Company and so as to comply with any requirement or restriction imposed by any court or governmental body having jurisdiction over the Company, the Senior Debt Securities will be validly issued and will constitute valid and binding obligations of the Company enforceable against the 3 MBIA Inc. September 23, 1998 Company in accordance with their terms, except as may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws of general ap plicability relating to or affecting the rights of creditors and by general principles of equity (whether considered in a proceeding at law or in equity). 2. When the Subordinated Indenture has been duly authorized, executed and delivered by the Company and the Subordinated Trustee, and the Subordinated Debt Securities have been duly authorized by all necessary corporate action of the Company and duly executed, authenticated, issued, delivered and paid for as contemplated by the Registration Statement and any prospectus supplement relating to the Subordinated Debt Securities and in accordance with the Subordinated Indenture, assuming the terms of such Subordinated Debt Securities have been duly established so as not to violate any applicable law or result in a default under or breach of any agreement or instrument binding upon the Company and so as to comply with any requirement or restriction imposed by any court or governmental body having jurisdiction over the Company, (i) the Subordinated Debt Securities will be validly issued and will constitute valid and binding obligations of the Company enforceable against the Company in accordance with their terms, except as may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws of general applicability relating to or affecting the rights of creditors and by general principles of equity (whether considered in a proceeding at law or in equity); and (ii) if the Subordinated Debt Securities are exchangeable for or convertible into Common Stock or Preferred Stock, as the case may be, (a) - when such Common Stock has been duly issued in exchange for or upon conversion of such Subordinated Debt Securities in accordance with the terms of the Subordinated Indenture and the supplemental indenture thereto fixing the terms for such exchange or conversion, such Common Stock will be duly authorized, validly issued, fully paid and nonassessable, assuming authorization of sufficient number of shares of Common Stock in the Company's Restated Certificate of Incorporation, as amended to date, and issuance of such Common Stock in accordance with duly adopted resolutions of the Board of Directors of the Company or a duly authorized committee thereof authorizing the issuance of such Common Stock and fixing the terms of such exchange or conversion, and (b) when (1) the terms of such - - Preferred Stock and of its issuance and sale have been duly established in conformity with the Company's Restated Certificate of Incorporation, as amended to date, so as not to violate any applicable law or result in a default under or breach of any agreement or instrument binding upon the Company and so as to comply with any requirement or restriction imposed by any court or governmental body having jurisdiction over the Company, (2) a - 4 MBIA Inc. September 23, 1998 certificate of amendment to the Company's Restated Certificate of Incorporation (a "Certificate of Amendment") fixing and determining the terms of the Preferred Stock has been filed with the Secretary of State of the State of Connecticut and (3) the Preferred Stock has been duly issued - in exchange for or upon conversion of such Subordinated Debt Securities in accordance with the terms of the Subordinated Indenture and the supplemental indenture thereto fixing the terms for such exchange or conversion, such Preferred Stock will be duly authorized, validly issued, fully paid and nonassessable, assuming authorization of sufficient number of shares of Preferred Stock in the Company's Restated Certificate of Incorporation, as amended to date, and issuance of such Preferred Stock in accordance with duly adopted resolutions of the Board of Directors of the Company or a duly authorized committee thereof authorizing the issuance of such Preferred Stock and fixing the terms of such exchange or conversion. 3. When (i) the terms of the Preferred Stock and of its issuance and - sale have been duly established in conformity with the Company's Restated Certificate of In corporation, as amended, so as not to violate any applicable law or result in a default under or breach of any agreement or instrument binding upon the Company and so as to comply with any requirement or restriction imposed by any court or governmental body having jurisdiction over the Company, (ii) a Certificate of Amendment fixing and determining the terms of the -- Preferred Stock has been filed with the Secretary of State of the State of Connecticut and (iii) the Preferred Stock has been duly issued and sold as --- contemplated by the Registration Statement and any prospectus supplement relating thereto, against payment of the consideration fixed therefor by the Board of Directors or a duly authorized committee thereof, (a) the Preferred Stock will be duly authorized, validly issued, fully paid and nonassessable, assuming authorization of sufficient number of shares of Preferred Stock in the Company's Restated Certificate of Incorporation, as amended to date, and issuance of such Preferred Stock in accordance with duly adopted resolutions of the Board of Directors of the Company or a duly authorized committee thereof authorizing the issuance of such Preferred Stock; and (b) if the Preferred Stock is exchangeable for or convertible into Common Stock, when such Common Stock has been duly issued in exchange for or upon conversion of such Preferred Stock in accordance with the terms of the Certificate of Designation for such Preferred Stock, such Common Stock will be duly authorized, validly issued, fully paid and nonassessable, assuming authorization of sufficient number of shares of Common Stock in the Company's Restated Certificate of Incorporation, as amended to date, and issuance of such Common Stock in accordance with duly adopted resolutions of the Board of Directors of the 5 MBIA Inc. September 23, 1998 Company or a duly authorized committee thereof authorizing the issuance of such Common Stock and fixing the terms of such exchange or conversion. 4. When the Common Stock has been duly issued and sold as contemplated by the Registration Statement and any prospectus supplement relating to the Common Stock, assuming authorization of the issuance of such Common Stock, and receipt of payment of the consideration fixed therefor, by the Board of Directors of the Company or a duly authorized committee thereof, the Common Stock will be validly issued, fully paid and nonassessable. 5. Assuming the Rights Agreement has been duly authorized, executed and delivered by the Rights Agent and the Common Stock has been validly issued (i) against payment of the consideration fixed therefor by the Board of - Directors of the Company or a duly authorized committee thereof or (ii) in -- exchange for or upon conversion of any Preferred Stock or Debt Securities in accordance with the terms of exchange or conversion fixed for such Preferred Stock or Debt Securities, the Rights attributable to such Common Stock will be validly issued. In connection with our opinion set forth in paragraph (5) above, we note that the question whether the Board of Directors of the Company might be required to redeem the Rights at some future time will depend upon the facts and circumstances existing at the time and, accordingly, is beyond the scope of such opinion. To the extent the foregoing opinions involve matters of Connecticut law, we have relied on the opinion of Day, Berry & Howard LLP, Connecticut counsel for the Company, dated today and addressed to you, and this opinion incorporates all of the assumptions and qualifications set forth in that opinion. Our opinion expressed above is limited to the laws of the State of New York and the federal laws of the United States of America. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the use of our name under the caption "Legal Matters" in the Prospectus. In giving such consent, we do not thereby concede that we are within the category of persons whose consent is required under Section 7 of the 1933 Act or the Rules and Regulations of the Commission thereunder. Very truly yours, EX-99.05 11 OPINION OF DAY, BERRY AND HOWARD LLP EXHIBIT 99.05 [Day, Berry & Howard LLP Letterhead] September 23, 1998 MBIA Inc. 113 King Street Armonk, New York 10504 Re: MBIA Inc. Registration Statement on Form S-3 Registration Statement No. 333-60039 Dear Ladies and Gentlemen: We have acted as special Connecticut counsel to MBIA Inc., a Connecticut corporation (the "Company"), as to certain matters of Connecticut law in connection with the preparation and filing with the Securities and Exchange Commission (the "Commission") under the Securities Act of 1933, as amended (the "1933 Act"), of a Registration Statement on Form S-3 (the "Registration Statement"), and the prospectus included therein (the "Prospectus"), relating to the registration by the Company of $350,000,000 in the aggregate of (i) debt securities representing unsecured obligations of the Company (the "Senior Debt Securities") to be issued pursuant to the Senior Indenture, dated as of August 1, 1990, as supplemented from time to time (the "Senior Indenture"), between the Company and The First National Bank of Chicago, as trustee (the "Senior Indenture Trustee") and subordinated debt securities ("Subordinated Debt Securities" and, together with the Senior Debt Securities, the "Debt Securities") to be issued pursuant to a Subordinated Indenture, as supplemented from time to time (the "Subordinated Indenture"), between the Company and a trustee to be named in a prospectus supplement relating to the Subordinated Debt Securities (the "Subordinated Indenture Trustee"), (ii) shares of preferred stock of the Company, par value $1.00 per share ("Preferred Stock"), (iii) shares of common stock of the Company, par value $1.00 per share ("Common Stock"), and the rights to purchase Junior Participating Cumulative Preferred Stock of the Company, par value $1.00 per share, or, in certain circumstances, either Common Stock or the common stock of an acquiring company (the "Rights"), to be issued pursuant to the Rights Agreement, dated as of December 12, 1991 (the "Rights Agreement"), between the Company and Mellon Bank, N.A., as Rights Agent, (iv) such indeterminate number of shares of Common Stock as may be issuable in exchange for or upon conversion of any MBIA Inc. September 23, 1998 Page 2 Subordinated Debt Securities or Preferred Stock that provides for conversion or exchange into Common Stock, and the Rights relating thereto, and (v) such indeterminate number of shares of Preferred Stock as may be issuable in exchange for or upon conversion of any Subordinated Debt Securities that provide for conversion or exchange into Preferred Stock. We have examined the Company's Restated Certificate of Incorporation, as amended to date, the Company's By-Laws, as amended to date, the Rights Agreement, records of the corporate proceedings of the Board of Directors of the Company with respect to the Debt Securities, the Preferred Stock, the Common Stock, the Rights, the Senior Indenture, the Subordinated Indenture, the Registration Statement and the offering contemplated thereby and such other documents, and have made such examination of law, as we have deemed relevant and necessary in order to render our opinion expressed below. We have also examined and relied upon the Senior Indenture and form of the Subordinated Indenture filed as Exhibits to the Registration Statement. The governing law of each of these Indentures is expressly stated to be that of the State of New York. For purposes of the opinion set forth below, we have assumed that the Senior Indenture, the Subordinated Indenture and the Debt Securities, when duly issued, will constitute legal, valid and binding obligations of the Company under the laws of the State of New York (as to which we express no opinion). Our opinion assumes that the definitive Subordinated Indenture will be in substantially the form filed as an Exhibit to the Registration Statement. In rendering the opinion set forth in paragraph 1 below, we have assumed the corporate authority of the Senior Indenture Trustee to enter into and perform the Senior Indenture. In rendering the opinion set forth in paragraph 2 below, we have assumed the corporate authority of the Subordinated Indenture Trustee to enter into and perform the Subordinated Indenture. We have also noted that other large publicly held corporations chartered in Connecticut have adopted rights agreements and issued rights similar to the Rights Agreement and the Rights. In addition, we have noted that the Rights would operate in a way similar to rights issued by numerous other corporations incorporated in Connecticut and in other states. For purposes of this opinion, we have assumed that the Board of Directors of the Company, after fully informing itself with respect to the Rights Agreement and the Rights and after giving due consideration to all relevant matters, determined that the execution MBIA Inc. September 23, 1998 Page 3 and delivery of the Rights Agreement and the issuance of the Rights thereunder would be in the best interests of the Company and its shareholders, that such action by the Board of Directors was not contrary to its fiduciary obligations and that the Rights Agreement has been duly authorized, executed and delivered by the Rights Agent. The Connecticut Business Corporation Act (the "Act") provides a board of directors with broad authority and empowers a Connecticut corporation to issue rights, options or warrants for the purchase of shares of the corporation on such terms, with such form and content, and for such consideration as the board of directors may determine. Sections 33-665(a) and 33-666(c) of the Act provide that all shares of a class or series of stock shall have preferences, limitations and relative rights identical with those of other shares of the same class (except to the extent otherwise provided in the description of the series) or series. A number of courts construing similar provisions of the corporation laws of states other than Connecticut have upheld the issuance of rights substantially similar to the Rights. On the other hand, a number of courts construing similar provisions of the corporation laws of other states have invalidated rights similar to the Rights on the basis that the provisions pursuant to which rights held by certain persons could become void violated the requirements that shares of the same class and series be identical. Courts sustaining the issuance of rights have distinguished between discrimination among shares and discrimination among shareholders, and determined that the relevant statutory authority does not prohibit the latter form of discrimination. The Act requires in effect that all shares of the same class and series be identical, with specified exceptions. However, the Act does not say whether this requirement applies to provisions of rights that have been issued in respect of shares of a particular class or to shareholders or holders of rights who take specified actions resulting in those rights becoming void. There is no published judicial decision interpreting Sections 33-665(a) and 33-666(c) or other provisions of the Act in the context of the issuance of rights similar to the Rights. We also note that the Connecticut legislature has added provisions to the Act which evidence concern for fair treatment of shareholders and other constituencies in light of the prevalence of abusive takeover tactics. These enactments indicate public policy support for the objectives which the Rights are designed to further, which we think would be persuasive to a court faced with a case questioning the validity of the Rights. The opinion set forth below with respect to the Rights is limited to the authorization of the Rights Agreement by the Board and the issue of Rights pursuant to the Rights Agreement, and does not extend to any subsequent action or inaction by the Board with respect to the Rights Agreement, including any decision relating to MBIA Inc. September 23, 1998 Page 4 redemption of the Rights or amendment of the Rights Agreement, which would need to be evaluated in light of all relevant facts, circumstances and legal precedents applicable at that time. Based on the foregoing, we are of the following opinion: 1. The Senior Indenture has been duly authorized, executed and delivered by the Company. Assuming the Senior Indenture has been duly authorized, executed and delivered by the Senior Indenture Trustee, when the Senior Debt Securities have been duly authorized by all necessary corporate action of the Company and duly executed, authenticated, issued, delivered and paid for as contemplated by the Registration Statement and any prospectus supplement relating to the Senior Debt Securities and in accordance with the Senior Indenture, assuming the terms of such Debt Securities have been duly established so as not to violate any applicable law or result in a default under or breach of any agreement or instrument binding upon the Company and so as to comply with any requirement or restriction imposed by any court or governmental body having jurisdiction over the Company, the Senior Debt Securities will be validly issued and will constitute valid and binding obligations of the Company enforceable against the Company in accordance with their terms, except as may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws of general applicability relating to or affecting the rights of creditors and by general principles of equity. 2. When the Subordinated Indenture has been duly authorized, executed and delivered by the Company and the Subordinated Indenture Trustee, and the Subordinated Debt Securities have been duly authorized by all necessary corporate action of the Company and duly executed, authenticated, issued, delivered and paid for as contemplated by the Registration Statement and any prospectus supplement relating to the Subordinated Debt Securities and in accordance with the Subordinated Indenture, assuming the terms of such Subordinated Debt Securities have been duly established so as not to violate any applicable law or result in a default under or breach of any agreement or instrument binding upon the Company and so as to comply with any requirement or restriction imposed by any court or governmental body having jurisdiction over the Company, (i) the Subordinated Debt Securities will be validly issued and will constitute valid and binding obligations of the Company enforceable against the Company in accordance with their terms, except as may be limited by applicable bankruptcy, insolvency, reorganization, moratorium MBIA Inc. September 23, 1998 Page 5 or similar laws of general applicability relating to or affecting the rights of creditors and by general principles of equity; and (ii) if the Subordinated Debt Securities are exchangeable for or convertible into Common Stock or Preferred Stock, as the case may be, (a) when such Common Stock has been duly issued in exchange for or upon conversion of such Subordinated Debt Securities in accordance with the terms of the Subordinated Indenture and the supplemental indenture thereto fixing the terms for such exchange or conversion, such Common Stock will be duly authorized, validly issued, fully paid and nonassessable, assuming authorization of sufficient number of shares of Common Stock in the Company's Restated Certificate of Incorporation, as amended to date, and issuance of such Common Stock in accordance with duly adopted resolutions of the Board of Directors of the Company or a duly authorized committee thereof authorizing the issuance of such Common Stock and fixing the terms of such exchange or conversion, and (b) when (1) the terms of such Preferred Stock and of its issuance and sale have been duly established in conformity with the Company's Restated Certificate of Incorporation, as amended, so as not to violate any applicable law or result in a default under or breach of any agreement or instrument binding upon the Company and so as to comply with any requirement or restriction imposed by any court or governmental body having jurisdiction over the Company, (2) a certificate of amendment to the Company's Restated Certificate of Incorporation, as amended (a "Certificate of Amendment"), fixing and determining the terms of the Preferred Stock has been filed with the Secretary of the State of the State of Connecticut and (3) the Preferred Stock has been duly issued in exchange for or upon conversion of such Subordinated Debt Securities in accordance with the terms of the Subordinated Indenture and the supplemental indenture thereto fixing the terms for such exchange or conversion, such Preferred Stock will be duly authorized, validly issued, fully paid and nonassessable, assuming authorization of sufficient number of shares of Preferred Stock in the Company's Restated Certificate of Incorporation, as amended to date, and issuance of such Preferred Stock in accordance with duly adopted resolutions of the Board of Directors of the Company or a duly authorized committee thereof authorizing the issuance of such of Preferred Stock and fixing the terms of such exchange or conversion. MBIA Inc. September 23, 1998 Page 6 3. When (i) the terms of the Preferred Stock and of its issuance and sale have been duly established in conformity with the Company's Restated Certificate of Incorporation, as amended, so as not to violate any applicable law or result in a default under or breach of any agreement or instrument binding upon the Company and so as to comply with any requirement or restriction imposed by any court or governmental body having jurisdiction over the Company, (ii) a Certificate of Amendment fixing and determining the terms of the Preferred Stock has been filed with the Secretary of the State of the State of Connecticut and (iii) the Preferred Stock has been duly issued and sold as contemplated by the Registration Statement and any prospectus supplement relating thereto, against payment of the consideration fixed therefor by the Board of Directors or a duly authorized committee thereof, (a) the Preferred Stock will be duly authorized, validly issued, fully paid and nonassessable, assuming authorization of sufficient number of shares of Preferred Stock in the Company's Restated Certificate of Incorporation, as amended to date, and issuance of such Preferred Stock in accordance with duly adopted resolutions of the Board of Directors of the Company or a duly authorized committee thereof authorizing the issuance of such Preferred Stock; and (b) if the Preferred Stock is exchangeable for or convertible into Common Stock, when such Common Stock has been duly issued in exchange for or upon conversion of such Preferred Stock in accordance with the terms of the Certificate of Amendment for such Preferred Stock, such Common Stock will be duly authorized, validly issued, fully paid and nonassessable, assuming authorization of sufficient number of shares of Common Stock in the Company's Restated Certificate of Incorporation, as amended to date, and issuance of such Common Stock in accordance with duly adopted resolutions of the Board of Directors of the Company or a duly authorized committee thereof authorizing the issuance of such Common Stock and fixing the terms of such exchange or conversion. 4. When the Common Stock has been duly issued and sold as contemplated by the Registration Statement and any prospectus supplement relating to the Common Stock, assuming authorization of sufficient number of shares of Common Stock in the Company's Restated Certificate of Incorporation, as amended to date, and authorization of the issuance of such Common Stock by, and receipt of payment of the consideration fixed therefor by, the Board of Directors of the Company or a duly authorized committee MBIA Inc. September 23, 1998 Page 7 thereof, the Common Stock will be duly authorized, validly issued, fully paid and nonassessable. 5. Assuming the Rights Agreement has been duly authorized, executed and delivered by the Rights Agent and the Common Stock has been validly issued (i) against payment of the consideration fixed therefor by the Board of Directors of the Company or a duly authorized committee thereof or (ii) in exchange for or upon conversion of any Preferred Stock or Subordinated Debt Securities in accordance with the terms of exchange or conversion fixed for such Preferred Stock or Subordinated Debt Securities, although there is no Connecticut case law or express statutory provision dispositive of the issue and the matter thus is not entirely free from doubt, the Rights attributable to such Common Stock will be validly issued. In connection with our opinion set forth in paragraph 5 above, we note that the question whether the Board of Directors of the Company might be required to redeem the Rights at some future time will depend upon the facts and circumstances existing at the time and, accordingly, is beyond the scope of such opinion. Our opinion expressed above is limited to the laws of the State of Connecticut. Messrs. Debevoise & Plimpton may rely upon this opinion as though it were addressed to them on the date hereof. We hereby consent to the filing of this opinion as an Exhibit to the Registration Statement and to the reference to our firm in the Prospectus under the caption "Legal Matters". In giving such consent, we do not thereby admit that we are in the category of persons whose consent is required under Section 7 of the 1933 Act or the rules and regulations of the Commission thereunder. Very truly yours, /s/ Day, Berry & Howard LLP Day, Berry & Howard LLP WHC/LTW -----END PRIVACY-ENHANCED MESSAGE-----