<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X ] Annual report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 1995.
Commission file number 1-9583
MBIA INC.
(Exact name of registrant as specified in its charter)
Connecticut 06-1185706
(State of Incorporation) (I.R.S. Employer Identification No.)
113 King Street, Armonk, New York 10504
(Address of principal executive offices) (Zip Code)
(914) 273-4545
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common Stock, par value $1 per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No___.
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of March 22, 1996 was $ 3,294,392,871.00.
As of March 22, 1996, 42,853,891 shares of Common Stock, par value $1
per share, were outstanding.
Documents incorporated by reference. Portions of Registrant's Annual Report to
Shareholders for the fiscal year ended December 31, 1995 are incorporated by
reference into Parts I and II. Portions of the Definitive Proxy Statement of the
Registrant, dated March 25, 1996 are incorporated by reference into Parts I and
III.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (SS 229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
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PART I
Item 1. Business
MBIA Inc. (the "Company") insures municipal bonds, asset-backed
securities and other non-municipal obligations through its wholly-owned
subsidiary, MBIA Insurance Corporation ("MBIA Corp."). MBIA Corp. is the
successor to the business of the Municipal Bond Insurance Association (the
"Association"), a consortium of five multi-line insurers, which began writing
municipal bond insurance in 1974. Four of the five members of the Association,
together with certain of their affiliates, participated in the formation of the
Company in December 1986. (See "Certain Relationships and Related
Transactions--Organization of the Company" in the Company's Proxy Statement
dated March 25, 1996 which is incorporated herein by reference.)
Effective as of December 31, 1989, the Company purchased Bond Investors
Guaranty Insurance Company ("BIG Ins."), another municipal bond insurance
company, through the acquisition of all of the common stock of its parent
company, Bond Investors Group, Inc. ("BIG"). Subsequently, MBIA Corp. reinsured
the net exposure on the municipal bond insurance policies previously issued by
BIG Ins. and the Company contributed the common stock of BIG to MBIA Corp. (See
"Business--Reinsurance" below). On August 21, 1990, the Company changed the name
of BIG Ins. to MBIA Insurance Corp. of Illinois ("MBIA Illinois"). Subsequently,
BIG was merged into MBIA Illinois.
In 1990, the Company formed a French company, MBIA Assurance S.A.
("MBIA Assurance"), to write financial guarantee insurance in the countries of
the European community. MBIA Assurance, which is a subsidiary of MBIA Corp.,
writes policies insuring public infrastructure financings, asset-backed
transactions and certain obligations of financial institutions. By the end of
1995, MBIA Corp. and MBIA Assurance had collectively insured 58 international
transactions. In September 1995, MBIA Corp. entered into a joint venture
agreement with AMBAC Indemnity Corporation for the purpose of jointly marketing
financial guarantee insurance within the European Community.
Over the last five years, the Company has undertaken the development of
investment management services which capitalize on its capabilities, reputation
and marketplace relationships. The Company is delivering these services through
a group of subsidiary companies. As of December 31, 1995, in the aggregate,
these investment management ventures contributed $19.9 million in operating
revenues.
Generally, throughout the text references to MBIA Corp. include the activities
of its subsidiaries, MBIA Illinois and MBIA Assurance.
Financial guarantee insurance provides an unconditional and irrevocable
guarantee of the payment of the principal of and interest on insured obligations
when due. MBIA Corp.'s primary business is insuring obligations issued by
states, municipalities and other governmental authorities, instrumentalities and
agencies. Such obligations are secured by the issuer's taxing power in the case
of general obligation or special tax supported bonds, or by the issuer's ability
to impose and collect fees and charges for public services or specific projects
in the case of most revenue bonds. MBIA Corp. also provides financial guarantees
for structured finance transactions (principally morgage-backed and
asset-backed securities), investor-owned utility debt and obligations of
high-quality financial institutions.
MBIA Corp.'s substantial capital base permits it to support a large
portfolio of insured obligations and to write new business. MBIA Corp. primarily
insures obligations which are sold in the new issue and secondary markets, or
which are held in unit investment trusts ("UIT") and by mutual funds. It also
provides surety bonds for debt service reserve funds.
The Association was the first issuer of financial guarantees to receive
both the AAA claims-paying rating from Standard and Poor's Corporation ("S&P"),
which it received in 1974, and the Aaa claims-paying rating from Moody's
Investors Service, Inc. ("Moody's"), which it received in 1984. Both rating
agencies have continuously issued Triple-A claims-paying ratings for MBIA Corp.
and Triple-A ratings to obligations guaranteed by MBIA Corp. Both rating
agencies have also continued the Triple-A rating on MBIA Illinois guaranteed
bond issues which have been reinsured by MBIA Corp. In addition, in 1995 MBIA
Corp. received a Triple-A claims paying rating from Fitch Investors Services,
L.P. ("Fitch").
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The principal economic value of financial guarantee insurance to the
entity offering the obligations is the saving in interest costs resulting from
the difference in the market yield between an insured obligation and the same
obligation on an uninsured basis. In addition, for complex financings and for
obligations of issuers that are not well-known by investors, insured obligations
receive greater market acceptance than uninsured obligations.
The financial guarantee industry is subject to the direct and indirect
effects of governmental regulation, including changes in tax laws affecting the
municipal and asset-backed debt markets. No assurance can be given that future
legislative or regulatory changes might not adversely affect the results of
operations and financial conditions of the Company.
MBIA CORP. INSURED PORTFOLIO
At December 31, 1995, the net par amount outstanding on MBIA Corp.'s
insured obligations (including insured obligations of MBIA Illinois and MBIA
Assurance but excluding the guarantee of $2.7 billion of obligations of MBIA
Investment Management Corp. ("IMC") (see "Operations--Miscellaneous")) was
$188.6 billion, comprised of $163.0 billion in new issues and $25.6 billion in
secondary market issues. Net insurance in force was $344.0 billion.
MBIA Corp. guarantees to the holder of the underlying obligation the
timely payment of the principal of and interest on such obligation in accordance
with its original payment schedule. Accordingly, in the case of a default on an
insured obligation, payments under the insurance policy cannot be accelerated by
the holder. MBIA Corp. will be required to pay principal and interest only as
originally scheduled payments come due.
MBIA Corp. seeks to maintain a diversified insured portfolio designed
to spread risk based on a variety of criteria including revenue source, issue
size, type of bond and geographic area. As of December 31, 1995, MBIA Corp. had
30,778 policies outstanding. These policies are diversified among 7,161
"credits," which MBIA Corp. defines as any group of issues supported by the same
revenue source.
The table below sets forth information with respect to the original par
amount written per issue in MBIA Corp.'s portfolio as of December 31, 1995:
MBIA Corp. Original Par Amount Per Issue
as of December 31, 1995
% of Total
Number of Number of Net Par % of Net
Original Par Amount Issues Issues Amount Par Amount
Written per Issue Outstanding Outstanding Outstanding Outstanding
- ----------------- ----------- ----------- ----------- -----------
(In billions)
Less than $10 million ..... 26,227 85.2 $ 36.3 19.3%
$10-25 million ........... 2,259 7.3 27.8 14.8
$25-50 million ............ 1,133 3.7 29.7 15.7
$50-100 million ........... 699 2.3 34.6 18.3
Greater than $100 million . 460 1.5 60.2 31.9
------ ----- ---- ----
Total ..................... 30,778 100.0 188.6 100.0
====== ===== ===== =====
MBIA Corp. underwrites financial guarantee insurance on the assumption
that the insurance will remain in force until maturity of the insured
obligations. MBIA Corp. estimates that the average life (as opposed to the
stated maturity) of its insurance policies in force at December 31, 1995 was
11.6 years. The average life was determined by applying a weighted average
calculation, using the remaining years to maturity of each insured obligation,
and weighting them on the basis of the remaining debt service insured. No
assumptions were made for any future refundings of insured issues. Average
annual debt service on the portfolio at December 31, 1995 was $17.6 billion.
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The table below shows the diversification of MBIA Corp.'s insured
portfolio by bond type:
MBIA CORP. INSURED PORTFOLIO BY BOND TYPE
AS OF DECEMBER 31, 1995 (1)
NUMBER OF NET PAR % OF NET
ISSUES AMOUNT PAR AMOUNT
BOND TYPE OUTSTANDING OUTSTANDING OUTSTANDING
- --------- ----------- ----------- -----------
(In billions)
Municipal
General obligation ....... 11,445 $ 54.3 28.8%
Utilities ................ 4,931 31.7 16.8
Health care .............. 2,458 27.0 14.3
Special revenue .......... 1,445 13.2 7.0
Transportation ........... 1,562 13.2 7.0
Higher education ......... 1,261 8.4 4.4
Housing .................. 2,671 6.8 3.6
Industrial development and
pollution control revenue 924 6.3 3.4
Other .................... 134 3.6 1.9
------ -------- -------
Total Municipal ......... 26,831 164.5 87.2
------ ------- -------
Non-Municipal
Asset/mortgage-backed .... 256 15.4 8.1
International 53 3.5 1.9
Investor-owned utilities . 3,559 2.2 1.2
Other .................... 79 3.0 1.6
------ ------- -------
Total Non-Municipal ..... 3,947 24.1 12.8
------ ------- -------
30,778 $ 188.6 100.0%
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_____________________________
(1) Excludes IMC's $2.7 billion relating to municipal investment agreements
guaranteed by MBIA Corp.
As illustrated by the table above, approximately 46% of the net par
amount outstanding of the MBIA Corp. insured portfolio consists of general
obligation bonds, which are supported by the full faith and credit and taxing
power of state and local governmental issuers, and water, sewer and electric
revenue bonds, which are secured by a pledge of revenues imposed and collected
by state and local public entities for the provision of essential services. MBIA
Corp. seeks to avoid bond issues which entail excessive single project risk,
over-capacity or customer contract disputes.
To date, MBIA Corp. has engaged primarily in insuring municipal bonds.
As of December 31, 1995, of the $188.6 billion outstanding net par amount of
obligations insured, $164.5 billion, or 87%, consisted of municipal bonds and
$24.1 billion, or approximately 13%, consisted primarily of
asset/mortgage-backed transactions, investor-owned utility obligations and
transactions done in the European market.
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The table below shows the diversification by type of insurance written
by MBIA Corp. in each of the last five years:
MBIA Corp. Net Par Amount Insured by Bond Type (1)
BOND TYPE 1991 1992 1993 1994 1995
- --------- ---- ---- ---- ---- ----
(In millions)
MUNICIPAL
General obligation ..... $ 6,629 $ 8,951 $ 11,952 $ 11,086 $10,127
Utilities .............. 2,903 5,975 9,293 4,858 5,018
Health care ............ 3,715 4,401 6,342 3,655 2,913
Special Revenue ........ 1,475 2,776 3,246 1,888 1,935
Transportation ......... 1,202 2,283 3,419 1,747 2,624
Higher Education ....... 1,052 1,532 2,126 1,346 1,264
Housing ................ 744 592 469
876 1,962
Other .................. 839 966 1,532 2,061 2,395
--- --- ----- ----- -----
TOTAL MUNICIPAL ....... 18,559 27,476 8,379 27,517 28,238
------- ------- ------- ------- -------
NON-MUNICIPAL
Asset/mortgage-backed .. 443 2,842 3,581 4,832 7,766
International -- -- 190 1,948 1,514
Investor-owned utilities 418 476 642 643 412
Other .................. -- 693 907 712 877
------- ------- ------- ------- -------
Total Non-Municipal ... 861 4,011 5,320 8,135 10,569
------- ------- ------- ------- -------
$ 19,420 $ 31,487 $ 43,699 $ 35,652 $38,807
======== ======== ======== ======== ========
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(1) Par amount insured each year, net of reinsurance.
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MBIA Corp. is licensed to write business in all 50 states, the District
of Columbia, France, Guam, the Northern Mariana Islands, the U.S. Virgin Islands
and Puerto Rico. MBIA Illinois is licensed to write business in 48 states, the
District of Columbia and Puerto Rico. MBIA Assurance is licensed to write
business in France. The following table sets forth by state those states in
which MBIA Corp. has at least 2% of its total net par amount outstanding:
MBIA Corp. Insured Portfolio By State
as of December 31, 1995 (1)
Number of Net Par % of Net
Issues Amount Par Amount
Outstanding Outstanding Outstanding
----------- ----------- -----------
(In billions)
State
California 3,122 $ 25.6 13.6%
New York 4,679 15.2 8.0
Florida 1,684 14.6 7.8
Pennsylvania 2,143 10.5 5.6
Texas 2,031 10.4 5.5
New Jersey 1,730 8.7 4.6
Illinois 1,090 8.1 4.3
Ohio 1,017 5.3 2.8
Massachusetts 1,070 5.1 2.7
Michigan 1,012 4.1 2.2
All other states 11,147 77.5 41.0
------ ----- -----
Total United States 30,725 185.1 98.1%
------ ----- ----
International 53 3.5 1.9
-- --- ---
Total 30,778 $188.6 100.0%
====== ====== =====
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(1) Excludes IMC's $2.7 billion relating to municipal investment agreements
guaranteed by MBIA Corp.
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MBIA Corp. has underwriting guidelines that limit the net insurance in
force for any one insured credit. MBIA Corp. has not exceeded any applicable
regulatory single-risk limit with respect to any bond issue insured by it. As of
December 31, 1995, MBIA Corp.'s net par amount outstanding for its ten largest
insured credits totalled $9.1 billion, representing 4.9% of MBIA Corp.'s total
net par amount outstanding, and was as follows:
MBIA Corp.'s Ten Largest Insured Credits
as of December 31, 1995
Net Par
Amount
Outstanding
-----------
(In millions)
Puerto Rico Unlimited General Obligations $1,085
Louisiana State Unlimited General Obligations 1,036
City of New York Unlimited General Obligations 979
New Jersey Single Family Mortgage Revenue Obligations 957
District of Columbia Unlimited General Obligations 926
Massachusetts Unlimited General Obligations 878
Los Angeles City Waste Water 829
Sacramento Municipal Utilities District, Electric Revenue 825
New York Municipal Water Finance Authority 806
Ohio Public Building Authority Lease 777
MBIA CORP. INSURANCE PROGRAMS
MBIA Corp. offers financial guarantee insurance in both the new issue
and secondary markets. At present, no new financial guarantee insurance is being
offered by MBIA Illinois, but it is possible that MBIA Illinois will insure
transactions in the future. MBIA Corp. and MBIA Assurance offer financial
guarantee insurance in Europe and other areas outside the United States. Set
forth below are the different types of programs through which insurance
presently is offered.
NEW ISSUE PROGRAMS:
DIRECT PURCHASE PROGRAM. Under the Direct Purchase Program, an issuer or
underwriter purchases a policy directly from MBIA Corp. and pays the premium
itself. Substantially all MBIA Corp. insured issues that are sold through a
negotiated offering utilize this program. Of those issues which sell through
competitive bidding, some use this program but the majority use the Optional
Bidding Program described below. The critical elements in the Direct Purchase
Program are that the issuer or underwriter determines to use insurance well
before the sale date and then works closely with MBIA Corp. in developing
documentation and legal structure.
OPTIONAL BIDDING PROGRAM. Under the Optional Bidding Program, MBIA Corp. offers
insurance as an option to the underwriters bidding on an issue. It is used only
for issues sold through competitive bidding. Under this program, the MBIA Corp.
policy is purchased and the premium paid by the successful underwriter who
chooses to use MBIA Corp. insurance. The flexibility of this program, where
insurance may be chosen or rejected until sale time, makes adjustment to current
market conditions easy for underwriters. In addition, this program eliminates
any need for the issuer to budget for or allocate bond proceeds to pay the
premium.
SECONDARY MARKET PROGRAMS:
Unit Investment Trusts. MBIA Corp. offers insurance to the UIT market through
ongoing arrangements with investment banking and financial service companies
which are UIT sponsors. MBIA Corp. insurance covers all of the bond issues in
each of the insured unit trusts through one of two programs. Under one program,
each issue in a trust is insured until maturity and, under the other program,
each issue is insured only while it is held in the UIT.
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Mutual Funds. MBIA Corp. offers insurance in the mutual fund sector through
ongoing arrangements with fund sponsors, which are investment advisers to
individual mutual funds or families of mutual funds. All premiums for insuring
bond issues in mutual funds are paid on the "while-in-trust" basis and consist
of monthly charges. Under certain of these policies, MBIA Corp. is committed to
offer insurance to maturity to the sponsor on issues sold out of the fund for an
additional premium payable at the time of sale.
Other Secondary Market Insurance. MBIA Corp. provides insurance on whole and
partial maturities for bond issues which are being traded in the secondary
market in response to requests from bond traders and institutions. MBIA Corp.
charges the purchaser of this insurance a single premium payable upon issuance
of the policy for insuring the designated bonds to maturity.
The following table indicates the percentage of net par outstanding
with respect to each type of insured program:
MBIA CORP. TYPES OF INSURED PROGRAMS
AS OF DECEMBER 31, 1995
NET PAR
AMOUNT % OF NET
TYPE OF PROGRAM OUTSTANDING PAR AMOUNT
(IN BILLIONS) OUTSTANDING
New issue $163.0 86.4%
Secondary market issues
Unit investment trusts ................. 5.7 3.0
Mutual funds ........................... 0.3 0.2
Other secondary market issues .......... 19.6 10.4
------ -----
Total ................................. $188.6 100.0%
====== =====
OPERATIONS
The operations of MBIA Corp. are conducted primarily through two
divisions: the Underwriting, Policy and Review Division and the Insurance
Operations Division. The Insurance Operations Division includes the Public
Finance and the Secondary Market Groups, the Structured Finance and the
International Departments, and the Insured Portfolio Management Group. The
functions of each are more fully described below.
The Public Finance Group, the Secondary Market Group and the Structured
Finance Department each have underwriting authority with respect to certain
categories of business and with respect to credits up to a certain par amount
per category. As a result, they are responsible for analyzing and approving
approximately 80% of the number of issues insured (representing 47% of the gross
par value insured), although their underwriting decisions are monitored by the
Underwriting Policy and Review Division which is responsible for ascertaining
that MBIA Corp.'s underwriting guidelines and procedures are being followed.
With respect to larger, complex or unique credits, as well as all
asset/mortgage-backed transactions and international transactions, MBIA Corp.'s
review and approval procedure has two stages. The first stage consists of
transaction screening and in-depth credit review and structuring by the
appropriate department within the Insurance Operations Division. The second
stage, final review and approval of credit and structure, is performed by the
Underwriting, Policy and Review Division. Pricing, in all cases, is carried out
by the Market Research Group in the Insurance Operations Division, and the
continuing review of insured issues is administered by the Insured Portfolio
Management Group.
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MARKETING AND CREDIT REVIEW:
MBIA Corp.'s marketing activities and initial credit review
functions for municipal transactions are carried out primarily by the Public
Finance Group and the Secondary Market Group. They are also involved in
structuring credits on negotiated new issue business and in insuring secondary
market issues. These groups employ municipal research analysts who have
extensive experience in the municipal bond industry and who develop business
within established credit analysis criteria. Market intelligence and client
contact related to identifying, screening and developing candidates for
insurance are handled by the individual departments within the Insurance
Operations Division. The primary factors in issue screening are credit quality,
legal security and transaction structure, as well as evaluation of the potential
for interest cost savings through the use of insurance. In the area of
asset/mortgage-backed transactions, functions similar to these are performed by
the Structured Finance Department. The International Department performs similar
tasks with respect to financings done outside the United States.
Premium rates are determined by the Market Research Group, MBIA
Corp.'s pricing and syndicate unit, which focuses on the type of business and
credit strength of the bond issue, the maturity and structure of the issue, and
other credit and market factors. Premium rates are based upon established
premium ranges, which take into account capital charges, rating agency models
and degrees of perceived risk. The Market Research Group also conducts extensive
consultation with analysts on the issue and considers updated market
intelligence developed from daily contact with syndicate managers and traders to
help form the most accurate view of the value of MBIA Corp.'s guarantee on each
issue. Minimum pricing standards are established at levels that management
believes should generate an appropriate level of return on capital.
The Company recognizes that adherence to its pricing and quality
standards may result in the loss of business to other insurers offering
insurance at rates or on terms that the Company does not believe to be
appropriate. The Company gives primary emphasis to maintaining its pricing and
quality standards and secondary emphasis to market share.
UNDERWRITING REVIEW:
The Underwriting, Policy and Review Division is responsible for
adherence to MBIA Corp.'s underwriting guidelines and procedures, which are
designed to maintain an insured portfolio with low risk characteristics. MBIA
Corp. maintains underwriting guidelines based on those aspects of credit quality
that it deems important for each category of obligation considered for
insurance. These include economic and social trends, debt management, financial
management, adequacy of anticipated cash flow, satisfactory legal structure and
other security provisions, viable tax and economic bases, adequacy of loss
coverage and project feasibility, including a satisfactory consulting engineer's
report, if applicable. Such guidelines are subject to periodic review. An
inter-divisional committee, the Credit Policy Committee, is responsible for
establishing and maintaining underwriting standards and criteria for all
insurance products.
In order to ensure that the existing guidelines are followed, the
Underwriting, Policy and Review Division monitors and periodically reviews
underwriting decisions made by the Insurance Operations Division. In addition,
on large, unique or complex transactions and on all asset/mortgage-backed
transactions and international transactions (estimated to be about 20% of the
number of issues or 53% of the gross par value insured by MBIA Corp.), the final
underwriting decisions are made by the Underwriting Policy and Review Division.
The Financial Institution Analysis Department of the
Underwriting, Policy and Review Division underwrites and monitors MBIA Corp.'s
direct and indirect exposure to financial institutions with respect to
investment contracts, letters of credit and liquidity facilities supporting
MBIA-insured issues, and recommends limits on such exposures. The department
provides in-depth financial analyses of financial institutions for which there
is existing or proposed exposure and gives advice on related contract terms,
transfers of these instruments to new institutions and renewal dates and
procedures.
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INSURED PORTFOLIO MANAGEMENT:
The Insured Portfolio Management Group is responsible for
monitoring outstanding issues insured by MBIA Corp. This group's first function
is to detect any deterioration in credit quality or changes in the economic or
political environment which could interrupt the timely payment of debt service
on an insured issue. Once a problem is detected, the group then works with the
issuer, trustee, bond counsel, underwriters and other interested parties to deal
with the concern before it develops into a default.
Although MBIA Corp. has to date had only eight insured issues
requiring claim payments for which it has not been fully reimbursed, there are
seven additional insured issues for which case loss reserves have been
established (see "Losses and Reserves" below). Other potential losses have been
avoided through the early detection of problems and subsequent negotiations with
the issuer and other parties involved. In a limited number of instances, the
solution involved the restructuring of insured issues or underlying security
arrangements. More often, MBIA Corp. utilizes a variety of other techniques to
resolve problems, such as enforcement of covenants, assistance in resolving
management problems and working with the issuer to develop potential political
solutions. Issuers are under no obligation to restructure insured issues or
underlying security arrangements in order to prevent losses. Moreover, MBIA
Corp. is obligated to pay amounts equal to defaulted interest and principal
payments on insured bonds on their respective due dates even if the issuer or
other parties involved refuse to restructure or renegotiate the terms of the
insured bonds or related security arrangements. The Company believes that early
detection and continued involvement by the Insured Portfolio Management Group
are crucial in avoiding or minimizing claims on insurance policies.
Once an obligation is insured, the issuer and the trustee are
asked, or in some cases required, to furnish financial information, including
audited financial statements, annually to the Insured Portfolio Management Group
for review. Potential problems uncovered through this review, such as low
operating fund balances, covenant violations, trustee or servicer problems, tax
certiorari proceedings or excessive litigation, could result in an immediate
surveillance review and an evaluation of possible remedial actions. The Insured
Portfolio Management Group also monitors state finances and budget developments
and evaluates their impact on local issuers.
The Company's computerized credit surveillance system records
situations where follow-up is needed, such as letter of credit renewal,
construction status and the receipt of additional data after the closing of a
transaction. Further, issues that experience financial difficulties,
deteriorating economic conditions, excessive litigation or covenant violations
are placed on the appropriate review list and are subject to surveillance
reviews at intervals commensurate to the problem which has been detected.
There are two departments within the Insured Portfolio Management
Group: the Public Finance Portfolio Management Department handles the more
traditional types of issues such as general obligation, utility, special revenue
and health care bonds; and the Structured Finance Portfolio Management
Department is responsible for housing and asset-backed issues.
The Public Finance Portfolio Management Department reviews and
reports on the major credit quality factors of risks insured by the Company,
evaluates the impact of new developments on insured weaker credits and carries
out remedial activity. In addition, it performs analysis of financial statements
and key operating data on a large scale basis and maintains various databases
for research purposes. It responds to consent and waiver requests and monitors
pool programs. This department is responsible for preparing special reports
which include analyses of regional economic trends, proposed tax limitations,
the impact of employment trends on local economies or legal developments
affecting bond security.
The Structured Finance Portfolio Management Department monitors
insured structured finance programs, focusing on the adequacy of reserve
balances and investment of earnings, the status of mortgage or loan
delinquencies and underlying insurance coverage and the performance of the
trustee for insured issues. Monitoring of issues typically involves review of
records and statements, review of transaction documents with regard to
compliance, analysis of cash flow adequacy and communication with trustees.
Review of servicer performance is also conducted through review of servicer
financial statements, review of servicer reports where available and contacts
with program administrators and trustees. The department also carries out
remedial activity on weaker credits.
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INVESTMENT MANAGEMENT SERVICES
Over the last five years, the Company has undertaken the development of
investment management services which capitalize on its capabilities, reputation
and marketplace relationships. The Company is delivering these services through
a group of subsidiary companies. In 1995, in the aggregate, these new ventures
contributed $19.9 million in operating revenues.
MBIA Municipal Investors Service Corporation ("MBIA/MISC"), was
formed as a subsidiary of the Company to provide cash management services for
local governments, school districts and similar authorities. As of December 31,
1995, MBIA/MISC, a registered investment advisor, had approximately 1,250
clients and over $2.5 billion of client assets under management. In addition,
MBIA/MISC provides fund administration services to over 230 clients with
invested assets of $154 million. MBIA/MISC is operating in nine states and the
Commonwealth of Puerto Rico and plans to continue its expansion into additional
states in the near term.
In 1993, the Company formed a wholly-owned subsidiary, MBIA
Investment Management Corp. ("IMC"), to provide an investment vehicle in the
form of investment agreements guaranteed as to principal and interest, for
states, municipalities and municipal authorities. IMC's agreements are
structured with individual terms and draw schedules and the length of the
agreements ranges from one month to forty years. At year-end, IMC had
outstanding investment agreements of $2.6 billion.
In 1994, the Company formed a wholly-owned subsidiary, MBIA
Securities Corp. ("SECO"), to perform investment management services for the
Company, MBIA Corp., MBIA/MISC and IMC. SECO performs internal fixed-income
trading and portfolio management offering the Company greater control over its
investment management activities. At year-end, SECO was managing more than $5
billion of assets for MBIA Corp., IMC and MBIA/MISC.
COMPETITION
The financial guarantee insurance business is highly competitive. In
1995 MBIA Corp. was the largest insurer of new issue long-term municipal bonds,
accounting for 42% of the par amount of such insured bonds. The other principal
insurers in 1995 were AMBAC Indemnity Corporation, Financial Guaranty Insurance
Company, Financial Security Assurance Inc. and Capital Guaranty Insurance Co.,
all of which, like MBIA Corp., have Aaa and AAA claims-paying ratings from
Moody's and S&P, respectively. According to Asset Sales Report, in 1995 MBIA
Corp. was the leading insurer of new issue asset/mortgage-backed securities. The
three principal competitors in this area in 1995 were Capital Markets Assurance
Corp., Financial Security Assurance and Financial Guaranty Insurance Company.
Financial guarantee insurance also competes with other forms of credit
enhancement, including over-collateralization, letters of credit and guarantees
(for example, mortgage guarantees where pools of mortgages secure debt service
payments) provided by banks and other financial institutions, some of which are
governmental agencies or have been assigned the highest credit ratings awarded
by one or more of the major rating agencies. Letters of credit are most often
issued for periods of less than 10 years, although there is no legal restriction
on the issuance of letters of credit having longer terms. Thus, financial
institutions and banks issuing letters of credit compete directly with MBIA
Corp. to guarantee short-term notes and bonds with a maturity of less than 10
years. To the extent that banks providing credit enhancement may begin to issue
letters of credit with commitments longer than 10 years, the competitive
position of financial guarantee insurers, such as MBIA Corp., could be adversely
affected. Letters of credit also are frequently used to assure the liquidity of
a short-term put option for a long-term bond issue. This assurance of liquidity
effectively confers on such issues, for the short term, the credit standing of
the financial institution providing the facility, thereby competing with MBIA
Corp. and other financial guarantee insurers in providing interest cost savings
on such issues. Financial guarantee insurance and other forms of credit
enhancement also compete in nearly all instances with the issuer's alternative
of foregoing credit enhancement and paying a higher interest rate. If the
interest savings from insurance or another form of credit enhancement are not
greater than the cost of such credit enhancement, the issuer will generally
choose to issue bonds without enhancement. MBIA Assurance also competes in the
international market with composite (multi-line) insurers.
-10-
<PAGE>
There are minimum capital requirements imposed on a financial guarantee
insurer by Moody's and S&P to obtain Triple-A claims-paying ratings. Also, under
a New York law, multiline insurers are prohibited from writing financial
guarantee insurance in New York State, except during a transitional period
which, subject to certain specific conditions, will expire in May 1997. See
"Business--Regulation." However, there can be no assurance that major multiline
insurers or other financial institutions will not participate in financial
guarantee insurance in the future, either directly or through monoline
subsidiaries.
REINSURANCE
State insurance laws and regulations, as well as Moody's and S&P,
impose minimum capital requirements on financial guarantee companies, limiting
the aggregate amount of insurance which may be written and the maximum size of
any single risk exposure which may be assumed. MBIA Corp. increases its capacity
to write new business by using treaty and facultative reinsurance to reduce its
gross liabilities on an aggregate and single risk basis.
From its reorganization in December 1986 through December 1987, MBIA
Corp. reinsured a portion of each policy through quota and surplus share
reinsurance treaties. Each treaty provides reinsurance protection with respect
to policies written by MBIA Corp. during the term of the treaty, for the full
term of the policy. Under its quota share treaty MBIA Corp. ceded a fixed
percentage of each policy insured. Since 1988, MBIA Corp. has entered into only
surplus share treaties under which a variable percentage of risk over a minimum
size is ceded, subject to a maximum percentage specified in the treaty.
Reinsurance ceded under the treaties is for the full term of the underlying
policy.
MBIA Corp. also enters into facultative reinsurance arrangements from
time to time primarily in connection with issues which, because of their size,
require additional capacity beyond MBIA Corp.'s retention and treaty limits.
Under these facultative arrangements, portions of MBIA Corp.'s liabilities are
ceded on an issue-by-issue basis. MBIA Corp. utilizes facultative arrangements
as a means of managing its exposure to single issuers to comply with regulatory
and rating agency requirements, as well as internal underwriting and portfolio
management criteria.
As a primary insurer, MBIA Corp. is required to honor its obligations
to its policyholders whether or not its reinsurers perform their obligations to
MBIA Corp. The financial position of all reinsurers is monitored by MBIA Corp.
on a regular basis.
As of December 31, 1995, MBIA Corp. retained approximately 87% of the
gross debt service outstanding of all municipal bonds insured by it, MBIA
Assurance and MBIA Illinois, and ceded approximately 13% to treaty and
facultative reinsurers. MBIA Corp.'s and MBIA Illinois' principal reinsurers are
Enhance Reinsurance Company, Capital Re Management Corporation, Asset Guaranty
Reinsurance Co. and Capital Mortgage Reinsurance Company The first two of these
reinsurers, whose claims paying ability is rated Triple-A by S&P and Moody's,
reinsured approximately 67% of the total ceded insurance in force at December
31, 1995. The other principal reinsurers are rated AA by S&P. All other
reinsurers reinsured less than 5% of the total ceded insurance in force at
December 31, 1995 and are diversified geographically and by lines of insurance
written. MBIA Corp.'s net retention on the policies it writes varies from time
to time depending on its own business needs and the capacity available in the
reinsurance market. The amounts of reinsurance ceded at December 31, 1995 and
1994 by bond type and by state are set forth in Note 12 to the Consolidated
Financial Statements of MBIA Inc. and Subsidiaries.
In connection with the BIG acquisition, MBIA Corp. and MBIA Illinois
entered into a reinsurance agreement under which MBIA Corp. agreed to reinsure
100% of all business written by MBIA Illinois, net of cessions by MBIA Illinois
to third party reinsurers, in exchange for MBIA Illinois' transfer of the assets
underlying the related unearned premium and contingency reserves. Pursuant to
such reinsurance agreement with MBIA Illinois, MBIA Corp. reinsured all of the
net exposure of $30.9 billion, or approximately 68% of the gross debt service
outstanding, of the municipal bond insurance portfolio of MBIA Illinois, the
remaining 32% having been previously ceded to treaty and facultative reinsurers
of MBIA Illinois (see preceding paragraph). MBIA Corp. retroceded 3% and 1% of
this portfolio to its treaty and facultative reinsurers in 1990 and 1991,
respectively; additionally, in 1990, 10% of this portfolio was ceded back to
MBIA Illinois to comply with regulatory requirements.
MBIA Corp. and MBIA Assurance have both a reinsurance agreement and a net
worth maintenance agreement.
-11-
<PAGE>
INVESTMENTS AND INVESTMENT POLICY
The Finance Committee of the Board of Directors of the Company approves
the general investment objectives and policies of the Company, and also reviews
more specific investment guidelines. The Company has investment management and
advisory agreements with an affiliate of a principal shareholder, which provides
for payment of fees on assets under management. These agreements were terminated
on January 1, 1996 at which time SECO commenced management of all of MBIA
Corp.'s consolidated investment portfolios. Certain investments of the Company
and MBIA Assurance related to non-U.S. insurance operations are managed by
independent managers in France.
To continue to provide strong capital resources and claims-paying
capabilities for its insurance operations, the investment objectives and
policies for insurance operations set quality and preservation of capital as the
primary objective subject to an appropriate degree of liquidity. Maximization of
after-tax investment income and investment returns are an important but
secondary objective.
Investment objectives, polices and guidelines related to the Company's
municipal investment agreement business are also subject to review and approval
by the Finance Committee of the Board of Directors. The primary investment
objectives are to preserve capital, to achieve an investment duration that
closely approximates the expected duration of related liabilities, and to
maintain appropriate liquidity. The investment agreement assets are managed by
SECO subject to an investment management agreement between IMC and SECO.
For 1995, approximately 72% of the Company's net income was derived
from after-tax earnings on its investment portfolio (excluding the amounts
earned on investment agreement assets which are recorded as a component of
investment management services revenues). The following table sets forth
investment income and related data for the years ended December 31, 1993, 1994
and 1995:
Investment Income of the Company (1)
Years Ended December 31,
1993 1994 1995
---- ---- ----
(In thousands)
Investment income before expenses (2) $181,598 $196,662 $222,704
Investment expenses 2,714 2,809 2,846
-------- -------- --------
Net investment income before income taxes 178,884 193,853 219,858
Net realized gains 9,727 10,335 11,312
-------- -------- --------
Total investment income before income taxes $188,611 $204,188 $231,170
======== ======== ========
Total investment income after income taxes $159,844 $175,007 $196,269
======== ======== ========
- ----------
(1) Excludes investment income and realized gains and losses from
investment management services subsidiaries.
(2) Includes taxable and tax-exempt interest income.
-12-
<PAGE>
The tables below set forth the composition of the Company's investment
portfolios. The weighted average yields in the tables reflect the nominal yield
on book value as of December 31, 1995, 1994 and 1993.
Investment Portfolio by Security Type
as of December 31, 1995
<TABLE>
<CAPTION>
Investment
Insurance Management Services
------------------------------- -----------------------------------
Investment Category ............ Fair Value Weighted Fair Value Weighted
(in thousands) Average Yield(1) (in thousands) Average Yield (1)
-------------- ----------------- -----------------------------------
<S> <C> <C> <C> <C>
Fixed income investments:
Long-term Bonds:
Taxable Bonds:
U.S. Treasury & Agency
Obligations .................. $ 265,209 6.82% $ 1,028,805 5.90%
GNMAs......................... 58,853 7.07 141,957 7.01
Other Mortgage & Asset
Backed Securities ............ 137,542 6.71 702,144 5.58
Corporate Obligations .......... 366,076 6.12 520,236 6.29
Foreign Obligations (2) ........ 98,620 6.08 122,692 6.86
--------- --------
Total.......................... 926,300 6.46 2,515,834 6.00
Tax-exempt Bonds:
State & Municipal .............. 2,726,321 7.76 -- --
--------- ----------
Total long-term investments .... 3,652,621 7.44 2,515,834 6.00
Short-term investments (3) ........ 198,035 6.49 226,792 5.48
--------- ---------
Total fixed income investments . 3,850,656 7.39% 2,742,626 5.96%
Other investments (4) .............. 14,064 -- -- --
--------- ---------
Total investments ............. $3,864,720 -- $2,742,626 --
========== ==========
</TABLE>
(1) Prospective market yields as of December 31, 1995. Yield on tax-exempt
bonds is presented on a taxable equivalent basis using a 35%
federal income tax rate.
(2) Consists of U.S. demoninated foreign governments and corporate securities.
(3) Taxable and tax-exempt investments, including bonds with a remaining
maturity of less than one year.
(4) Consists of equity investments and other fixed income investments; yield
information not meaningful.
-13-
<PAGE>
Investment Portfolio by Security Type
as of December 31, 1994
<TABLE>
<CAPTION>
Investment
Insurance Management Services
------------------------------- -----------------------------------
Investment Category ............ Fair Value Weighted Fair Value Weighted
(in thousands) Average Yield(1) (in thousands) Average Yield (1)
-------------- ----------------- -----------------------------------
<S> <C> <C> <C> <C>
Fixed income investments:
Long-term Bonds:
Taxable Bonds:
U.S. Treasury & Agency
Obligations .................. $ 180,405 8.52% $ 477,530 7.15%
GNMAs ........................ 70,476 8.76 102,903 8.38
Other Mortgage & Asset
Backed Securities .............. 111,611 8.69 680,530 7.27
Corporate Obligations .......... 235,839 8.44 208,371 8.70
Foreign Obligations (2) ........ 98,558 8.46 53,916 8.70
------ ---------
Total.......................... 696,889 8.54 1,523,250 7.55
Tax-exempt Bonds:
State & Municipal .............. 2,355,017 9.46 -- --
---------- ----------
Total long-term investments .... 3,051,906 9.25 1,523,250 7.55
Short-term investments (3) ........ 121,384 5.56 152,685 6.48
--------- ---------
Total fixed income investments . 3,173,290 9.11% 1,675,935 7.46%
Other investments (4) .............. 17,550 -- -- --
--------- ---------
Total investments .............. $3,190,840 -- $1,675,935 --
========== ==========
</TABLE>
(1) Prospective market yields as of December 31, 1994. Yield on tax-exempt
bonds is presented on a taxable equivalent basis using a 35% federal income
tax rate.
(2) Includes direct obligations of foreign governments and foreign
corporations.
(3) Taxable and tax-exempt investments, including bonds with a remaining
maturity of less than one year.
(4) Consists of marketable equity securities and interests in limited
partnerships; yield information not meaningful
-14-
<PAGE>
Investment Portfolio by Security Type
as of December 31, 1993
<TABLE>
<CAPTION>
Investment
Insurance Management Services
------------------------------- -----------------------------------
Investment Category ............ Amortized Cost Weighted Amortized Cost Weighted
(in thousands) Average Yield(1) (in thousands) Average Yield (1)
-------------------------------- -----------------------------------
<S> <C> <C> <C> <C>
Fixed income investments:
Long-term Bonds:
Taxable Bonds:
U.S. Treasury & Agency
Obligations .................. $ 256,388 7.74% $ 107,358 5.10%
GNMAs ......................... 73,880 8.18 -- --
Other Mortgage & Asset
Backed Securities .............. 49,862 6.68 274,423 4.57
Corporate Obligations .......... 227,495 7.31 19,191 6.68
Foreign Obligations (2) ........ 135,489 7.31 15,420 6.94
--------- - ------
Total.......................... 743,114 7.51 416,392 4.89
Tax-exempt Bonds:
State & Municipal .............. 2,053,585 9.46 -- --
--------- ----------
Total long-term investments .... 2,796,699 8.94 416,392 4.89
Short-term investments (3) ........ 104,205 4.69 122,359 3.26
--------- ---------
Total fixed income investments 2,900,904 8.79% 538,751 4.52%
Other investments (4) .............. 104,681 -- -- --
--------- ---------
Total investments .............. $3,005,585 -- $ 538,751 --
========== ==========
</TABLE>
(1) Prospective yields at amortized cost as of December 31, 1993. Yield on
tax-exempt bonds is presented on a taxable equivalent basis using a 35%
federal income tax rate.
(2) Includes direct obligations of foreign governments and foreign corporations.
(3) Taxable and tax-exempt investments, including bonds with a remaining
maturity of less than one year.
(4) Consists of marketable equity securities and interests in limited
partnerships; yield information not meaningful.
-15-
<PAGE>
The average maturity of the insurance fixed income portfolio excluding
short-term investments as of December 31, 1995 was 10.1 years. After allowing
for estimated principal pre-payments on mortgage pass-through securities, the
duration of the portfolio was 6.8 years.
The table below sets forth the distribution by maturity of the
Company's consolidated fixed income investments:
Distribution of Fixed Income Investments of the Company by Maturity
as of December 31, 1995
<TABLE>
INVESTMENT
INSURANCE MANAGEMENT SERVICES
MATURITY FAIR VALUE % OF TOTAL FAIR VALUE % OF TOTAL
(IN THOUSANDS) FIXED INCOME (IN THOUSANDS) FIXED INCOME
INVESTMENTS INVESTMENTS
<S> <C> <C> <C> <C>
Within 1 year ..................... $ 198,035 5.1% $ 226,793 8.3%
Beyond 1 year but within 5 years ... 567,809 14.8 870,410 31.7
Beyond 5 years but within 10 years 1,340,550 34.8 331,193 12.1
Beyond 10 years but within 15 years 902,002 23.4 364,393 13.3
Beyond 15 years but within 20 years 790,008 20.5 302,659 11.0
Beyond 20 years ................... 52,252 1.4 647,178 23.6
---------- ----- ---------- ----
Total fixed income investments .... $3,850,656 100.0% $2,742,626 100.0%
========== ===== ========== =====
</TABLE>
The quality distribution of the Company's fixed income investments
based on ratings of S&P was as shown in the table below:
Fixed Income Investments by Quality Rating (1)
as of December 31, 1995
<TABLE>
<CAPTION>
INVESTMENT
INSURANCE MANAGEMENT SERVICES
QUALITY RATING FAIR VALUE % OF TOTAL FAIR VALUE % OF TOTAL
(IN THOUSANDS) FIXED INCOME (IN THOUSANDS) FIXED INCOME
INVESTMENTS INVESTMENTS
<S> <C> <C> <C> <C>
AAA .... $1,392,241 37.0% $1,911,117 73.6%
AA ..... 1,404,999 37.4 136,757 5.3
A ...... 860,645 22.9 547,739 21.1
BBB... 103,023 2.7 -- --
BB ..... -- -- -- --
---------- ----- ---------- -----
Total $3,760,908 100.0% $2,595,613 100.0%
========== ===== ========== =====
</TABLE>
(1) Excludes short-term investments with an original maturity of less
than one year, but includes bonds having a remaining maturity of
less than one year.
-16-
<PAGE>
REGULATION
MBIA Corp. is licensed to do insurance business in, and is subject to
insurance regulation and supervision by, the State of New York (its state of
incorporation), the 49 other states, the District of Columbia, France, Guam, the
Northern Mariana Islands, the U.S. Virgin Islands and Puerto Rico and the
Republic of France. MBIA Illinois is licensed in, and is subject to insurance
regulation and supervision by, the State of Illinois (its state of
incorporation), 47 other states, the District of Columbia and Puerto Rico. MBIA
Assurance is licensed to do insurance business in France and is subject to
regulation under the corporation and insurance laws of the Republic of France.
The extent of state insurance regulation and supervision varies by jurisdiction,
but New York, Illinois and most other jurisdictions have laws and regulations
prescribing minimum standards of solvency, including minimum capital
requirements, and business conduct which must be maintained by insurance
companies. These laws prescribe permitted classes and concentrations of
investments. In addition, some state laws and regulations require the approval
or filing of policy forms and rates. MBIA Corp. is required to file detailed
annual financial statements with the New York Insurance Department and similar
supervisory agencies in each of the other jurisdictions in which it is licensed.
MBIA Illinois is required to file detailed annual financial statements with the
Illinois Department of Insurance and similar supervisory agencies in each of the
other jurisdictions in which it is licensed. The operations and accounts of both
MBIA Corp. and MBIA Illinois are subject to examination by these regulatory
agencies at regular intervals.
MBIA Corp. is licensed to provide financial guarantee insurance under
Article 69 of the New York Insurance Law. Article 69 defines financial guarantee
insurance to include any guarantee under which loss is payable upon proof of
occurrence of financial loss to an insured as a result of certain events. These
events include the failure of any obligor on any debt instrument or other
monetary obligation to pay principal, interest, premium, dividend or purchase
price of or on such instrument or obligation, when due. Under Article 69, MBIA
Corp. is licensed to transact financial guarantee insurance, residual value
insurance, surety insurance and credit insurance and such other kinds of
business to the extent necessarily or properly incidental to the kinds of
insurance which MBIA Corp. is authorized to transact. In addition, MBIA Corp. is
empowered to assume or reinsure the kinds of insurance described above.
MBIA Illinois is licensed to provide fidelity and surety and other
miscellaneous lines of insurance under Section 4 of the Illinois Insurance Code.
Section 4 defines fidelity and surety insurance to include becoming surety or
guarantor for any person, co-partnership or corporation in any position or place
of trust or as custodian of money or property, public or private; or becoming a
surety or guarantor for the performance of any person, co-partnership or
corporation of any lawful obligation, undertaking, agreement or contract of any
kind, except contracts or policies of insurance; and underwriting blanket bonds.
Under Section 9, MBIA Illinois is licensed to transact any business activity
reasonably complementary or supplementary to its insurance business. In
addition, MBIA Illinois is empowered to assume or reinsure the kinds of
insurance described above.
As financial guarantee insurers, MBIA Corp. and MBIA Illinois are
required by the laws of New York, California, Connecticut, Florida, Illinois,
lowa, New Jersey and Wisconsin to maintain contingency reserves on their
municipal bond and other financial guarantee liabilities. Under New Jersey,
Illinois and Wisconsin regulations, contributions by such an insurer to its
contingency reserves are required to equal 50% of earned premiums on its
municipal bond business. Under New York law, such an insurer is required to
contribute to contingency reserves 50% of premiums as they are earned on
policies written prior to July 1, 1989 and, with respect to policies written on
and after July 1, 1989, must make contributions over a period of 15 or 20 years
(based on issue type), or until the contingency reserve for such insured issues
equals the greater of 50% of premiums written for the relevant category of
insurance or a percentage of the principal guaranteed, varying from 0.55% to
2.5%, depending upon the type of obligation guaranteed. California, Connecticut,
Iowa and Florida law impose a generally similar requirement. In each of these
states, MBIA Corp. and MBIA Illinois may apply for release of portions of the
contingency reserves in certain circumstances.
The laws and regulations of these states also limit both the aggregate
and individual municipal bond risks that MBIA Corp. and MBIA Illinois may insure
on a net basis. California, Connecticut, Florida, Illinois and New York, among
other things, limit insured average annual debt service on insured municipal
bonds with respect to a single entity and backed by a single revenue source (net
of qualifying collateral and reinsurance) to 10% of policyholders' surplus and
contingency reserves. In New Jersey, Virginia and Wisconsin, the average annual
debt service on any single issue of municipal bonds (net of reinsurance) is
limited to 10% of policyholders' surplus. Other states that do not explicitly
regulate financial guarantee or municipal bond insurance do impose single risk
limits which are similar in effect to the foregoing. California, Connecticut,
Florida, Illinois and New York also limit the net insured unpaid principal
issued by a single entity and backed by a single revenue source to 75% of
policyholders' surplus and contingency reserves.
-17-
<PAGE>
Under New York, California, Connecticut, Florida, Illinois, New Jersey
and Wisconsin law, aggregate insured unpaid principal and interest under
policies insuring municipal bonds (in the case of New York, California,
Connecticut, Florida and Illinois, net of reinsurance) are limited to certain
multiples of policyholders' surplus and contingency reserves. New York,
California, Connecticut, Florida, Illinois and other states impose a 300:1 limit
for insured municipal bonds, although more restrictive limits on bonds of other
types do exist. For example, New York, California and Florida impose a 100:1
limit for certain types of non-municipal bonds.
The Company, MBIA Corp. and MBIA Illinois are also subject to
regulation under insurance holding company statutes of New York, Illinois and
other jurisdictions in which MBIA Corp. and MBIA Illinois are licensed to write
insurance. The requirements of holding company statutes vary from jurisdiction
to jurisdiction but generally require insurance holding companies, such as the
Company, and their insurance subsidiaries, to register and file certain reports
describing, among other information, their capital structure, ownership and
financial condition. The holding company statutes also require prior approval of
changes in control, of certain dividends and other intercorporate transfers of
assets, and of transactions between insurance companies, their parents and
affiliates. The holding company statutes impose standards on certain
transactions with related companies, which include, among other requirements,
that all transactions be fair and reasonable and that those exceeding specified
limits receive prior regulatory approval.
Prior approval by the New York Insurance Department is required for any
entity seeking to acquire "control" of the Company or MBIA Corp. Prior approval
by the Illinois Department of Insurance is required for any entity seeking to
acquire "control" of the Company, MBIA Corp. or MBIA Illinois. In many states,
including New York and Illinois, "control" is presumed to exist if 10% or more
of the voting securities of the insurer are owned or controlled by an entity,
although the supervisory agency may find that "control" in fact does or does not
exist when an entity owns or controls either a lesser or greater amount of
securities. In 1986, the New York Superintendent of Insurance determined that
none of the shareholders of the Company "controlled" the Company since, among
other factors, pursuant to the Shareholders' Agreement, none of them could
individually control the Board of Directors of the Company. This determination
was conditioned upon the Company's giving notice to the New York Superintendent
of Insurance of any changes in the Founding Shareholders' ownership of the
Company's stock or in the Shareholders' Agreement. The Company has given notice
of such stock ownership changes, and in late 1991, the Company notified the New
York Superintendent of the termination of the Shareholders' Agreement, other
than its registration rights provisions. In connection with the acquisition of
MBIA Illinois, the shareholders received a similar determination regarding
control from the Illinois Department of Insurance.
The laws of New York and Illinois regulate the payment of dividends by
MBIA Corp. and MBIA Illinois, respectively, and provide that a New York domestic
stock property/casualty insurance company (such as MBIA Corp.) or an Illinois
domestic stock insurance company (such as MBIA Illinois) may not declare or
distribute dividends except out of statutory earned surplus. In the case of MBIA
Corp., New York law provides that the sum of (i) the amount of dividends
declared or distributed during the preceding 12-month period and (ii) the
dividend to be declared may not exceed the lesser of (a) 10% of policyholders'
surplus, as shown by the most recent statutory financial statement on file with
the New York Insurance Department, and (b) 100% of adjusted net investment
income for such 12-month period (the net investment income for such 12-month
period plus the excess, if any, of net investment income over dividends declared
or distributed during the two-year period preceding such 12-month period),
unless the New York Superintendent of Insurance approves a greater dividend
distribution based upon a finding that the insurer will retain sufficient
surplus to support its obligations and writings. See Note 8 to the Consolidated
Financial Statements of MBIA Inc. and Subsidiaries. In the case of MBIA
Illinois, Illinois law provides that the fair market value of the dividend to be
declared, together with other dividends declared or distributed during the
preceding 12-month period, may not exceed the greater of (a) 10% of
policyholders' surplus as of the previous December 31, and (b) net income during
the previous calendar year (which includes net realized capital gains in an
amount not to exceed 20% of net unrealized capital gains) without the approval
of the Illinois Director of Insurance. The foregoing restrictions are currently
the most restrictive limitations on the ability of MBIA Corp. and MBIA Illinois
to declare and pay dividends.
The foregoing dividend limitations are determined in accordance with
Statutory Accounting Practices ("SAP"), which generally produce statutory
earnings in amounts less than earnings computed in accordance with Generally
Accepted Accounting Principles ("GAAP"). Similarly, policyholders' surplus,
computed on a SAP basis, will normally be less than net worth computed on a GAAP
basis. See Note 3 to the Consolidated Financial Statements of MBIA Inc. and
Subsidiaries.
-18-
<PAGE>
MBIA Corp. and MBIA Illinois are exempt from assessments by the
insurance guarantee funds in the majority of the states in which they do
business. Guarantee fund laws in most states require insurers transacting
business in the state to participate in guarantee associations which pay claims
of policyholders and third-party claimants against impaired or insolvent
insurance companies doing business in the state. In most states, insurers
licensed to write only municipal bond insurance, financial guarantee insurance
and other forms of surety insurance are exempt from assessment by these funds
and their policyholders are prohibited from making claims on these funds.
LOSSES AND RESERVES
The Company's policy is to provide for loss reserves to cover losses
that may be reasonably estimated on its insured obligations over the lives of
such obligations. The loss reserve, at any financial statement date, is the
Company's estimate of the identified and unidentified losses on the obligations
it has insured, including expected costs of settlement.
To the extent that specific insured issues are identified as currently or
likely to be in default, the present value of the expected payments, including
costs of settlement, net of expected recoveries, is allocated within the total
loss reserve as a case basis reserve. At December 31, 1995, $14.5 million of the
$42.5 million reserve for loss and loss adjustment expense represents case basis
reserves, of which $12.4 million is attributable to a health care financing in
Pennsylvania, $2.4 million is attributable to various housing financings in
Texas and $(0.3)million is attributable to salvage accrued on a structured
finance issue.
The Company believes that the reserves for losses and loss adjustment
expenses are adequate to cover the ultimate net cost of claims. Such reserves
are based on estimates, and there can be no assurance that the ultimate
liability will not exceed such estimates. To the extent that actual case losses
for any period are less than the unallocated portion of total loss reserve,
there will be no impact on the Company's earnings for that period other than an
addition to the reserve which results from applying the loss rate factor to new
debt service insurance. To the extent that case losses, for any period, exceed
the unallocated portion of the total loss reserve, the excess will be charged
against the Company's earnings for that period. The Company periodically
evaluates the appropriateness of the loss rate factor based on actual case loss
experience.
SAP RATIOS
The financial statements in this Form 10-K are prepared on the basis
of GAAP. For reporting to state regulatory authorities, SAP is used.
See Note 3 to the Consolidated Financial Statements of MBIA Inc. and
Subsidiaries.
The SAP combined ratio is a traditional measure of underwriting
profitability for insurance companies. The SAP loss ratio (which is losses
incurred divided by premiums earned), SAP expense ratio (which is underwriting
expenses divided by net premiums written) and SAP combined ratio (which is the
sum of the loss and expense ratios) for MBIA Corp. and for the financial
guarantee industry, which includes the monoline primary insurers (including MBIA
Corp.) and monoline reinsurers, are shown in the table below:
Years Ended December 31,
1992 1993 1994 1995
MBIA Corp. .....................
Loss ratio .................... 2.4% (3.5)% 9.8% 0.4%
Expense ratio ................. 18.3 17.6 22.9 20.8
Combined ratio 20.7 14.1 32.7 21.2
Financial guarantee industry (1)
Loss ratio .................... 13.8% 0.7% 11.3% *
Expense ratio ................. 24.8 23.8 36.3 *
Combined ratio ................ 38.6 4.5 47.6 *
- ----------------------
(1) Industry statistics were taken from the 1994 Annual Report of the
Association of Financial Guaranty Insurors.
* Not Available.
-19
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The SAP loss ratio differs from the GAAP loss ratio because the GAAP
ratio recognizes a provision for unidentified losses. The SAP expense ratio
varies from the GAAP expense ratio because the GAAP ratio recognizes the
deferral of policy acquisition costs and includes the amortization of purchase
accounting adjustments, principally goodwill. In addition, the SAP expense ratio
is calculated using premiums written while the GAAP expense ratio uses premiums
earned.
Net insurance in force, qualified statutory capital (which is comprised
of policyholders' surplus and the contingency reserve), and policyholders'
leverage ratios for MBIA Corp. and for the financial guarantee industry are
shown in the table below:
AS OF DECEMBER 31,
1992 1993 1994 1995
(DOLLARS IN MILLIONS)
MBIA Corp. ............
Net insurance in force ........ $223,056 $266,784 $304,502 $344,037
Qualified statutory capital .... 1,300 1,517 1,731 2,018
Policyholders' leverage ratio .. 172:1 176:1 176:1 171:1
Financial guarantee industry (1)
Net insurance in force ...... $586,579 $704,569 $785,126 *
Qualified statutory capital 4,392 5,195 5,807 *
Policyholders' leverage ratio 134:1 136:1 135:1 *
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(1) Industry statistics were taken from the 1994 Annual Report of the
Association of Financial Guaranty Insurors.
* Not Available.
The policyholders' leverage ratio is the ratio of net insurance in
force to qualified statutory capital. This test is sometimes focused on as a
measure of a company's claims-paying capacity. The Company believes that the
leverage ratio has significant limitations since it compares the total debt
service (undiscounted) coming due over the next 30 years or so to a company's
current capital base. It thereby fails to recognize future capital that will be
generated during the period of risk being measured, arising from unearned
premium reserve and future installment premium commitments. Further, the
leverage ratio does not consider the underlying quality of the issuers whose
debt service is insured and thereby does not differentiate among the risk
characteristics of a financial quarantor's insured portfolio, nor does it give
any benefit for third-party commitments such as standby lines of credit.
To assist state insurance departments in overseeing the financial
condition of the insurance companies in their respective states, the National
Association of Insurance Commissioners (the "NAIC") has developed a system
intended to provide an early warning of impending financial trouble, the
Insurance Regulatory Information System ("IRIS"). IRIS identifies eleven
financial ratios and specifies "usual values" for each ratio. These are derived
from financial statements prepared on a SAP basis. For each of the years 1987 to
1992, MBIA Corp. had financial ratio values within the usual values established
by the NAIC for all of the applicable financial ratio tests with the exception
of the test that measures the change in net premiums written. For the year ended
December 31, 1992 the growth in net premiums written exceeded NAIC test range
values of -33% to +33% due to an extremely favorable business environment marked
by a surge in municipal financings and strong demand for insurance. MBIA Corp.
also had values outside of the normal range for premiums written for the years
ended December 31, 1987, 1990 and 1991. These were due to the assumption by MBIA
Corp. of most of the book of net insured obligations of its predecessor, the
Association, in 1986, and upon the assumption of the entire book of net insured
obligations of MBIA Illinois in 1990 following its acquisition by the Company.
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In 1993, MBIA Corp. had financial ratio values within the NAIC test
ranges for all ratios except loss-related ratios. MBIA Corp. fell below the NAIC
test range values of 0% to +25% for the three loss reserve development ratios
due to the reduction in expected losses related to the Aurora salvage. In 1994
and 1995, MBIA Corp. had financial ratio values within the NAIC test ranges for
all ratios.
MBIA CORP. INSURANCE POLICIES
The insurance policies issued by MBIA Corp. provide an unconditional
and irrevocable guarantee of the payment to a designated paying agent for the
bondholders of an amount equal to the principal of and interest on insured bonds
not paid when due. In the event of a default in payment of principal or interest
by an issuer, MBIA Corp. promises to make funds available in the amount of the
default on the next business day following notification. MBIA Corp. has a Fiscal
Agency Agreement with State Street Bank and Trust Company, N.A. to provide for
this payment upon receipt of proof of ownership of the bonds, as well as upon
receipt of instruments appointing MBIA Corp. as agent for the bondholders and
evidencing the assignment of bondholder rights with respect to the debt service
payments made by MBIA Corp. Even if bondholders are permitted by the indenture
securing the bonds to have the full amount of principal of the bonds, together
with accrued interest, declared due and payable immediately in the event of a
default, MBIA Corp. is required to pay only the principal and interest scheduled
to be paid, but not in fact paid, on each original principal and interest
payment date.
The MBIA Illinois insurance policies provide for payments on default in
substantially the same manner as the MBIA Corp. policies. The paying agent on
MBIA Illinois policies is Bankers Trust Company. MBIA Assurance writes policies
that are substantially similar in coverage and manner of payment to the MBIA
Corp. policies.
RATING AGENCIES
Moody's, S&P and Fitch perform periodic reviews of MBIA Corp. and other
companies providing financial guarantee insurance. Their reviews focus on the
insurer's underwriting policies and procedures and on the issues insured.
Additionally, each rating agency has certain criteria as to exposure limits and
capital requirements for financial guarantors.
The rating agencies have reaffirmed their Triple-A claims-paying
ratings assigned to MBIA Corp., MBIA Illinois and to MBIA Assurance. The rating
for MBIA Illinois is based in significant part on the reinsurance agreement
between MBIA Corp. and MBIA Illinois. The rating of MBIA Assurance is based in
significant part on the reinsurance agreement between MBIA Corp. and MBIA
Assurance and the net worth maintenance agreement between the two parties. See
"Business--Reinsurance."
Although MBIA Corp. intends to comply with the requirements of the
rating agencies, no assurance can be given that these requirements will not
change or that, even if MBIA Corp. complies with these requirements, one or both
rating agencies will not reduce or withdraw their rating. MBIA Corp.'s ability
to attract new business and to compete with other financial guarantors, and its
results of operations and financial condition would be materially adversely
affected by any reduction in its ratings.
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CREDIT AGREEMENT
MBIA Corp. entered into a Credit Agreement, dated as of December 29,
1989, which has been amended from time to time (the "Credit Agreement") with
Credit Suisse, New York Branch ("Credit Suisse") to provide MBIA Corp. with an
unconditional, irrevocable line of credit. The Credit Agreement was amended and
restated by the First Restated Credit Agreement, dated as of October 1, 1993 as
amended by the First Amendment, dated as of September 23, 1994 among MBIA Corp.,
Credit Suisse, as Agent and a consortium of highly rated banks, including Credit
Suisse. The line of credit is available to be drawn upon by MBIA Corp., in an
amount up to $650 million, after MBIA Corp. has incurred, during the period
commencing October 1, 1995 and ending September 30, 2002, cumulative losses (net
of any recoveries) in excess of the greater of $500 million or 6.25% of average
annual debt service. The obligation to repay loans made under the Credit
Agreement is a limited recourse obligation of MBIA Corp. payable solely from,
and secured by a pledge of, recoveries realized on defaulted insured
obligations, from certain pledged installment premiums and other collateral.
Borrowings under the Credit Agreement are repayable on the expiration date of
the Credit Agreement. The current expiration date of the Credit Agreement is
September 30, 2002, subject to annual extensions under certain circumstances.
The Credit Agreement contains covenants that, among other things, restrict MBIA
Corp.'s ability to encumber assets or merge or consolidate with another entity.
EMPLOYEES
As of March 22, 1996, the Company had 366 employees. No employee is
covered by a collective bargaining agreement. The Company considers its employee
relations to be satisfactory.
EXECUTIVE OFFICERS
The executive officers of the Company and their present ages and
positions with the Company are set forth below.
NAME AGE POSITION AND TERM OF OFFICE
David H. Elliott 54 Chairman and Chief Executive Officer
(officer since 1986)
Richard L. Weill 53 President (officer since 1989)
James E. Malling 54 Executive Vice President (officer since 1991)
Hilda H. Boas* 64 Senior Vice President (officer since 1992)
Janis S. Christensen 46 Senior Vice President (officer since 1992)
Louis G. Lenzi 47 General Counsel and Secretary
(officer since 1986)
Kevin D. Silva 42 Senior Vice President
Julliette S. Tehrani 49 Senior Vice President and Chief Financial
Officer(officer since 1987)
Christopher W. Tilley 40 Senior Vice President and Treasurer
(officer since 1994)
Arthur M. Warren* 61 Senior Vice President and
Chief Financial Officer (officer since 1987)
*Retired on January 2, 1996
David H. Elliott is the Chairman and Chief Executive Officer of the
Company and of MBIA Corp. From 1986 to 1991, he served as the President and
Chief Operating Officer of the Company and MBIA Corp He is a director of MBIA
Corp. and was the President of the Association from 1976 to 1980 and from 1982
through 1986.
Richard L. Weill is President of the Company and of MBIA Corp., in
charge of the Insurance Operations Division of MBIA Corp., and a director of
MBIA Corp. From 1989 through 1991, Mr. Weill was General Counsel and Corporate
Secretary of the Company. Mr. Weill was previously a partner with the law firm
of Kutak Rock, with which he had been associated from 1969 to 1989.
James E. Malling is an Executive Vice President of the Company and the
head of the Corporate Marketing, Corporate Development and Management Services
Division, as well as a director of MBIA Corp. Mr. Malling was the President of
the International Finance Division of CIGNA Corporation from 1984 to 1990 and
also served as a director of the Company from December of 1986 to December 31,
1990.
Kevin D. Silva is Senior Vice President of the Company and MBIA Corp.
and a director of MBIA Corp. He has been in charge of the Management
Services Division of MBIA Corp. since joining the Company in late 1995.
Janis S. Christensen is Senior Vice President of the Company and
MBIA Corp., head of the Underwriting Policy and Review Division and a
director of MBIA Corp. Ms. Christensen has been responsible for the
underwriting function at MBIA Corp. since joining the Company in 1987.
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Louis G. Lenzi is General Counsel of the Company and MBIA Corp. He is
also a director of MBIA Corp. Mr.Lenzi has held various legal positions
within MBIA Corp. (and MISC) since July of 1984.
Julliette S. Tehrani is Senior Vice President and Chief Financial
Officer of the Company and a director of MBIA Corp. From 1986 to 1995, Ms.
Tehrani held the position of Senior Vice President and Controller. Ms. Tehrani
has held various positions in the Company's and MlSC's Finance Division since
1978, including the offices of Vice President and Treasurer of MISC from 1982
through 1985.
Christopher W. Tilley is Senior Vice President and Treasurer of the
Company and a director of MBIA Corp. He has held various positions in the
Finance Division of the Company since 1989.
ITEM 2. PROPERTIES
MBIA Corp. owns the 157,500 square foot office building on
approximately 15.5 acres of property in Armonk, New York, in which the Company
and MBIA Corp. have their offices. The Company believes that this office
building is adequate and suitable for its current needs.
ITEM 3. LEGAL PROCEEDINGS
There are no material lawsuits pending or, to the knowledge of the
Company, threatened to which the Company or any of its subsidiaries is a party.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The information concerning the market for the Company's Common Stock
and certain information concerning dividends appears under the heading
"Shareholder Information" on the inside back cover of the Company's 1995 Annual
Report to Shareholders and is incorporated herein by reference. As of March 22,
1996, there were 446 shareholders of record of the Company's Common Stock. The
information concerning dividends on the Company's Common Stock is under
"Business--Regulation" in this report.
ITEM 6. SELECTED FINANCIAL DATA
The information under the heading "Selected Financial and Statistical
Data" as set forth on pages 18-19 of the Company's 1995 Annual Report to
Shareholders is incorporated by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The information under the heading "Management's Discussion and
Analysis of Financial Condition and Results of Operations" as set forth on pages
20-24 of the Company's 1995 Annual Report to Shareholders is incorporated by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company, the Report of
Independent Accountants thereon by Coopers & Lybrand L.L.P. and the unaudited
"Quarterly Financial Information" are set forth on pages 25-43 of the Company's
1995 Annual Report to Shareholders and are incorporated by reference.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANt
Information regarding directors is set forth under "Election of
Directors" in the Company's Proxy Statement, dated March 25, 1996, which is
incorporated by reference.
Information regarding executive officers is set forth under Item 1,
"Business--Executive Officers," in this report.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding compensation of the Company's executive officers
is set forth under "Compensation of Executive Officers" in the Company's Proxy
Statement, dated March 25, 1996, which is incorporated by reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
Information regarding security ownership of certain beneficial owners
and management is set forth under "Election of Directors" and "Security
Ownership of Certain Beneficial Owners" in the Company's Proxy Statement, dated
March 25, 1996, which is incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding relationships and related transactions is set
forth under "Certain Relationships and Related Transactions" in the Company's
Proxy Statement dated March 25, 1996, which is incorporated by reference.
PART IV
ITEM 14.
(a) Financial Statements and Financial Statement Schedules and Exhibits.
1. FINANCIAL STATEMENTS
MBIA Inc. has incorporated by reference from the 1995 Annual Report to
Shareholders the following consolidated financial statements of the Company:
Annual Report to Shareholders
Page(s)
MBIA INC. AND SUBSIDIARIES
Report of independent accountants. 25
Consolidated statements of income for the years ended 26
December 31, 1995, 1994 and 1993.
Consolidated balance sheets at December 31, 1995 and 27
1994.
Consolidated statements of changes in shareholders' 28
equity for the years ended December 31, 1995, 1994 and
1993.
Consolidated statements of cash flows for the years 29
ended December 31, 1995, 1994 and 1993.
Notes to consolidated financial statements 30-43
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2. FINANCIAL STATEMENT SCHEDULES
The following financial statement schedules are filed as part of
this report.
Schedule Title
I Summary of investments, other than investments in
related parties, at December 31, 1995.
III Condensed financial information of
Registrant for December 31, 1995, 1994 and 1993.
VI Reinsurance for the years ended December 31, 1995,
1994 and 1993.
The report of the Registrant's independent accountants with
respect to the above listed financial statement schedules is set forth on page
36 of this Form 10-K.
All other schedules are omitted because they are not applicable
or the required information is shown in the consolidated financial statements or
notes thereto.
3. Exhibits
(An exhibit index immediately preceding the Exhibits indicates
the page number where each exhibit filed as part of this report can be found.)
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3. Articles of Incorporation and By-Laws.
3.1. Restated Certificate of Incorporation, dated August 17,
1990, incorporated by reference to Exhibit 3.1 of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1990 (Comm.
File 1-9583) (the "1990 10-K").
3.2. By-Laws as Amended as of May 7, 1992, incorporated by
reference to Exhibit 3.2 of the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1992 (Comm. File 1-9583) (the "1992 10-K").
10. Material Contracts
10.02. Reinsurance Agreements, each dated as of December 30, 1986,
between the Company and each of The Aetna Casualty and Surety Company, Fireman's
Fund Insurance Company, Aetna Insurance Company and The Continental Insurance
Company, incorporated by reference to Exhibit 10.09 to the 1987 S-1.
10.03. Reinsurance Assumption Agreements, each dated as of December
30, 1986, among the Company, Municipal Bond Investors Assurance Corporation
("MBIA Corp.") and each of The Aetna Casualty and Surety Company, Fireman's Fund
Insurance Company, Aetna Insurance Company and The Continental Insurance
Company, incorporated by reference to Exhibit 10.10 to the 1987 S- 1.
10.04. Endorsement No. 1 to the December 30, 1986 Reinsurance
Agreements, dated as of July 1, 1987, between MBIA Corp. and each of The Aetna
Casualty and Surety Company, Fireman's Fund Insurance Company, Aetna Insurance
Company and The Continental Insurance Company, incorporated by reference to
Exhibit 10.34 to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1987(Comm. File No. 1-9583) (the "1987 10-K").
10.05. Endorsement No. 2 to the December 30, 1986 Reinsurance
Agreements, dated as of October 1, 1987, between MBIA Corp. and each of The
Aetna Casualty and Surety Company, Fireman's Fund Insurance Company, Aetna
Insurance Company and The Continental Insurance Company, incorporated by
reference to Exhibit 10.35 to the 1987 10-K.
10.06. Endorsement No. 3 to the December 30, 1986 Reinsurance
Agreements, dated as of December 31, 1987, between MBIA Corp. and each of The
Aetna Casualty and Surety Company, Fireman's Fund Insurance Company, CIGNA
Property and Casualty Company (formerly Aetna Insurance Company) and The
Continental Insurance Company, incorporated by reference to Exhibit 10.06 to the
Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1989
(Comm. File No. 1-9583) (the "1989 10K")
10.07. Endorsement No. 4 to the December 30, 1986 Reinsurance
Agreements, dated as of January 1, 1988, between MBIA Corp. and each of The
Aetna Casualty and Surety Company, Fireman's Fund Insurance Company, CIGNA
Property and Casualty Company (formerly Aetna Insurance Company) and The
Continental Insurance Company, incorporated by reference to Exhibit 10.07 to the
1989 10-K.
10.08. Endorsement No. 5 to the December 30, 1986 Reinsurance
Agreements, dated as of January 1, 1988, between MBIA Corp. and each of The
Aetna Casualty and Surety Company, Fireman's Fund Insurance Company, CIGNA
Property and Casualty Company (formerly Aetna Insurance Company) and The
Continental Insurance Company, incorporated by reference to Exhibit 10.08 to the
1989 10-K.
10.09. Endorsement No. 6 to the December 30, 1986 Reinsurance
Agreements, dated as of January 1, 1988, between MBIA Corp. and each of The
Aetna Casualty and Surety Company, Fireman's Fund Insurance Company, CIGNA
Property and Casualty Company (formerly Aetna Insurance Company) and The
Continental Insurance Company, incorporated by reference to Exhibit 10.09 to the
1989 10-K.
10.10. Endorsement No. 7 to the December 30, 1986 Reinsurance
Agreements, effective September 30, 1989, between MBIA Corp. and each of The
Aetna Casualty and Surety Company, Fireman's Fund Insurance Company, CIGNA
Property and Casualty Company (formerly Aetna Insurance Company) and The
Continental Insurance Company, incorporated by reference to Exhibit 10.10 to the
1989 10-K.
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10.11. First Amended and Restated Investment Management Agreement,
dated as of December 30, 1986, between Aetna Financial Services, Inc. and MBIA
Corp., incorporated by reference to Exhibit 10.11 to the 1989 10-K, as amended
by Amendment No. 2 to the First Amended and Restated Investment Management
Agreement, dated as of October 1, 1994, as modified by a Consent, effective
February 28, 1994, incorporated by reference to Exhibit 10.11 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1994
(Comm.File No. 1-9583) (the "1994 10-K").
10.12. Restated Management Agreement, dated as of January 5, 1987,
between MISC and Municipal Bond Insurance Association (the "Association"), as
further amended by Supplement to the Restated Management Agreement, dated
September 30, 1989, incorporated by reference to Exhibit 10.16 to the 1989 10-K.
as amended by Second Amendment and Restatement of Management Agreement, dated as
of August 31, 1993, incorporated by reference to Exhibit 10.12 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1993 (Comm.
File No. 1-9583) (the "1993 10-K").
10.13. License Agreement, dated as of December 30, 1986, between the
Company and the Association, incorporated by reference to Exhibit 10.15 to the
1987 S-l.
10.14. MBIA Inc. 1987 Stock Option Plan, incorporated by reference to
Exhibit 10.13 to the 1987 S-1. 10.15. MBIA Inc. Deferred Compensation and Excess
Benefit Plan, incorporated by reference to Exhibit 10.16 to the 1988 10-K, as
amended as of July 22, 1992, incorporated by reference to Exhibit 10.15 to the
Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992
(Comm. File No. 1-9583) (the "1992 10-K").
10.16. MBIA Inc. Employees Pension Plan, amended and restated
effective January 1, 1987, incorporated by reference to Exhibit 10.28 of the
Company's Amendment No. 1 to the 1987 S-1, as further amended and restated as of
December 12, 1991, incorporated by reference to Exhibit 10.18 to the 1991 10-K,
as further amended and restated effective January 1, 1994, incorporated by
reference to Exhibit 10.16 to the 1994 10-K.
10.17. MBIA Inc. Employees Profit Sharing Plan, as amended and
restated effective January 1, 1987, incorporated by reference to Exhibit 10.29
to Amendment No. 1 to the 1987 S-1, as further amended by Amendment dated
December 8, 1988, incorporated by reference to Exhibit 10.21 to the 1989 10-K,
as further amended and restated as of December 12, 1991, incorporated by
reference to Exhibit 10.19 to the 1991 10-K, as further amended and restated as
of May 7, 1992, incorporated by reference to Exhibit 10.17 to the 1992 10K, as
further amended and restated effective January 1, 1994, incorporated by
reference to Exhibit 10.17 to the 1994 10-K.
10.18. MBIA Corp. Split Dollar Life Insurance Plan, dated as of
February 9, 1988, issued by Aetna Life Insurance and Annuity Company,
incorporated by reference to Exhibit 10.23 to the 1989 10-K.
10.19. Stock Option Agreement, dated as of January 1, 1987, between
the Company and William O. Bailey, incorporated by reference to Exhibit 10.31 to
Amendment No. 1 to the 1987 S-1.
10.20. Stock Option Agreement, dated as of March 27, 1987, between the
Company and David H. Elliott, incorporated by reference to Exhibit 10.32 to
Amendment No. 1 to the 1987 S-1.
10.21. Indemnification Agreement, dated as of January 5, 1987, among
MISC, The Aetna Casualty and Surety Company, Fireman's Fund Insurance Company,
The Travelers Indemnity Company, Aetna Insurance Company, The Continental
Insurance Company and the Company, incorporated by reference to Exhibit 10.33 to
Amendment No. 1 to the 1987 S-l.
10.22. Amended and Restated Shareholders' Agreement, dated as of May
21, 1987, among the Company, Aetna Life and Casualty Company, The Aetna Casualty
and Surety Company, Fireman's Fund Insurance Company, CIGNA Guaranty Holdings,
Inc., Aetna Insurance Company, The Continental Insurance Company and The
Fidelity and Casualty Company of New York, incorporated by reference to Exhibit
10.30 to Amendment No. I to the 1987 S-1, as amended by Amendment No. 1 to the
Amended and Restated Shareholders' Agreement, dated as of April 1, 1989, as
amended by Amendment No. 2 to the Amended and Restated Shareholders' Agreement,
dated November 21, 1989, incorporated by reference to Exhibit 10.41 to the 1989
10-K, as amended by Amendment No. 3 to the Amended and Restated Shareholders'
Agreement, dated as of November 30, 1990, incorporated by reference to Exhibit
10.28 to the 1990 10-K and as amended by Amendment No. 4 to the Amended and
Restated Shareholders' Agreement, dated as of September 30, 1991, incorporated
by reference to Exhibit 10.28 to the 1991 10-K.
10.23. Assignment of Warranties, dated April 7, 1989, from Trafalgar
House Real Estate, Inc. to MBIA Corp., incorporated by reference to Exhibit
10.48 to the 1989 10-K.
10.24. Stock Purchase Agreement, dated as of October 27, 1989, among
Government Employees Insurance Company, Bankers Trust New York Corporation,
Xerox Credit Corporation, American International Group, Inc., Salomon Inc and
the Company, as amended by Letter Agreement dated as of January 5, 1990,
incorporated by reference to Exhibit 10.53 to the 1989 10-K.
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10.25. Trust Agreement, effective as of December 31, 1989, among BIG
Ins., MBIA Corp. and Morgan Guaranty Trust Company of New York, incorporated by
reference to Exhibit 10.55 to the 1989 10-K, as amended by Amendment to Trust
Agreement, dated as of February 28, 1995.
10.26. Investment Management Agreement, dated as of January 5, 1990,
between Aetna Financial Services, Inc. and BIG Ins., incorporated by reference
to Exhibit 10.57 to the 1989 10-K, as modified by a Consent, effective February
28, 1994, incorporated by reference to Exhibit 10.27 to the 1994 10-K.
10.27. Surety Bond, dated December 28, 1989, issued by MBIA Corp. to
Citibank, N.A. with regard to the payment obligations of Continental Insurance
Company (the "Continental Surety Bond"), incorporated by reference to Exhibit
10.62 to the 1989 10-K.
10.28. The Fiscal Agency Agreement, dated December 27, 1989, between
MBIA Corp. and Citibank, N.A., with regard to the Continental Surety Bond,
incorporated by reference to Exhibit 10.63 to the 1989 10-K.
10.29. Surety Bond, dated December 28, 1989, issued by MBIA Corp. to
Citibank, N.A. with regard to the payment obligations of CIGNA Property and
Casualty Insurance Company (the "CIGNA Surety Bond"), incorporated by reference
to Exhibit 10.64 to the 1989 10-K.
10.30. Fiscal Agency Agreement, dated December 27, 1989, between MBIA Corp. and
Citibank, N.A., with regard to the CIGNA Surety Bond, incorporated by
reference to Exhibit 10.65 to the 1989 10-K.
10.31. Amended and Restated Tax Allocation Agreement, dated as of
January 1, 1990, between the Company and MBIA Corp., incorporated by reference
to Exhibit 10.66 to the 1989 10-K.
10.32. Endorsement No. 8 to the December 30, 1986 Reinsurance
Agreements, effective June 30, 1988, between MBIA Corp. and each of The Aetna
Casualty and Surety Company, Fireman's Fund Insurance Company, CIGNA Property
and Casualty Insurance Company (formerly Aetna Insurance Company) and The
Continental Insurance Company, incorporated by reference to Exhibit 10.51 to the
Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1990
(Comm. File No. 1-9583) (the "1990 10 K")
10.33. Endorsement No. 9 to the December 30, 1986 Reinsurance
Agreements, effective December 31, 1988, between MBIA Corp. and each of The
Aetna Casualty and Surety Company, Fireman's Fund Insurance Company, CIGNA
Property and Casualty Insurance Company (formerly Aetna Insurance Company) and
The Continental Insurance Company, incorporated by reference to Exhibit 10.52 to
the 1990 10-K.
10.34. Endorsement No. 10 to the December 30, 1986 Reinsurance
Agreements, effective January 1, 1990, between MBIA Corp. and each of The Aetna
Casualty and Surety Company, Fireman's Fund Insurance Company, CIGNA Property
and Casualty Insurance Company (formerly Aetna Insurance Company) and The
Continental Insurance Company, incorporated by reference to Exhibit 10.53 to the
1990 10-K.
10.35. Reinsurance Agreement, dated as of December 31, 1990, between
MBIA Corp. and Bond Investors Guaranty Insurance Company, incorporated by
reference to Exhibit 10.54 to the 1990 10-K.
10.36. Surety Bond, dated August 24, 1990, issued by MBIA Corp. to
Citibank, N.A. with regard to the payment obligations of The Travelers Indemnity
Company (the "Travelers Surety Bond"), incorporated by reference to Exhibit
10.59 to the 1990 10-K.
10.37. Insurer Fiscal Agency Agreement, dated August 24, 1990, between
MBIA Corp. and Citibank, N.A. with regard to the Travelers Surety Bond,
incorporated by reference to Exhibit 10.60 to the 1990 10-K.
10.38. Custody Agreement, dated as of December 30, 1986, between MBIA
Corp. and Morgan Guaranty Trust Company of New York, as amended by the First
Amendment to Custody Agreement, dated as of December 1, 1989, incorporated by
reference to Exhibit 10.62 to the 1990 10-K.
10.39. Closing Agreement, dated September 28, 1990, between Trafalgar
House Property, Inc. and MBIA Corp., incorporated by reference to Exhibit 10.64
to the 1990 10-K.
10.40. Guaranty of Trafalgar House Holdings, Inc., dated as of
September 28, 1990, between Trafalgar House Holdings, Inc. and MBIA Corp.,
incorporated by reference to Exhibit 10.67 to the 1990 10-K.
10.41. Land-Banked Parking Agreement, dated September 28, 1990,
between MBIA Corp. and the Town of North Castle, incorporated by reference to
Exhibit 10.69 to the 1990 10-K.
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10.42. Surety Bond, dated April 5, 1991, issued by MBIA Corp. to
Citibank, N.A. with regard to the payment obligations of The Aetna Casualty and
Surety Company (the "Aetna Surety Bond"), incorporated by reference to Exhibit
10.73 to the 1991 10-K.
10.43. The Fiscal Agency Agreement, dated April 5, 1991, between MBIA
Corp. and Citibank, N.A. with regard to the Aetna Surety Bond, incorporated by
reference to Exhibit 10.74 to the 1991 10-K.
10.44. Revolving Credit Agreement, dated as of February 15, 1991,
between the Company and Credit Suisse, New York Branch, incorporated by
reference to Exhibit 10.76 to the 1991 10-K, as amended by the First Amendment
to Revolving Credit Agreement, dated as of September 30, 1992, incorporated by
reference to Exhibit 10.61 to the 1992 10-K, as further amended by the Second
Amendment to Revolving Credit Agreement, dated as of September 30, 1994,
incorporated by reference to Exhibit 10.48 to the 1994 10-K
10.45. Rights Agreement, dated as of December 12, 1991, between the
Company and Mellon Bank, N.A., incorporated by reference to the Company's
Current Report on Form 8-K, filed on December 31, 1991, incorporated by
reference to Exhibit 10.62 to the 1993 10-K, as amended by Amendment to Rights
Agreement, dated as of October 24, 1994, incorporated by reference to Exhibit
10.49 to the 1994 10-K.
10.46. Owner/Contractor Agreement, dated as of June 1, 1991, between
MBIA Corp. and Trafalgar House Construction Management, Inc., incorporated by
reference to Exhibit 10.77 to the 1991 10-K.
10.47. Trust Agreement, dated as of December 31, 1991, between MBIA
Corp. and Fidelity Management Trust Company, incorporated by reference to
Exhibit 10.64 to the 1992 10-K, as amended by the Amendment to Trust Agreement,
dated as of April 1, 1993, incorporated by reference to Exhibit 10.64 to the
1993 10-K, as amended by First Amendment to Trust Agreement, dated as of January
21, 1992, as further amended by Second Amendment to Trust Agreement, dated as of
March 5, 1992, as further amended by Third Amendment to Trust Agreement, dated
as of April 1, 1993, as further amended by the Fourth Amendment to Trust
Agreement, dated as of July 1, 1995.
10.48. MBIA Inc. Employees Change of Control Benefits Plan, effective
as of January 1, 1992, incorporated by reference to Exhibit 10.65 to
the 1992 10-K.
10.49. Investment Management Agreement, dated as of October 8, 1992,
between Aetna Financial Services, Inc. and the Company, incorporated by
reference to Exhibit 10.66 to the 1992 10-K, as modified by a Consent, effective
February 28, 1994, incorporated by reference to Exhibit 10.53 to the 1994 10-K.
10.50. Endorsements to the December 30, 1986 Reinsurance Agreements
(i) Nos. 11 and 12, both effective June 30, 1992; (ii) No. 14, effective
November 30, 1990; and (iii) No. 16, effective September 30, 1992, each, between
the Company (except with respect to No. 14 which was subsequently assumed by
MBIA Corp.) and each of The Aetna Casualty and Surety Company, Fireman's Fund
Insurance Company, CIGNA Property and Casualty Insurance Company (formerly Aetna
Insurance Company), the Continental Insurance Company, incorporated by reference
to Exhibit 10.69 to the 1992 10-K.
10.51. Surety Bond, dated October 15, 1992, issued by MBIA Corp. to
Citibank, N.A. with regard to the payment obligations of Fireman's Fund
Insurance Company (the "Fireman's Surety Bond"), incorporated by reference to
Exhibit 10.70 to the 1992 10-K.
10.52. Fiscal Agency Agreement, dated October 15, 1992, between MBIA
Corp. and Citibank, N.A. with regard to the Fireman's Surety Bond, incorporated
by reference to Exhibit 10.71 to the 1992 10-K.
10.53. Indenture, dated as of August 1, 1990, between MBIA Inc. and
The First National Bank of Chicago, Trustee, incorporated by reference to
Exhibit 10.72 to the 1992 10-K.
10.54. Reinsurance Agreement. dated as of August 31, 1993, between The
Travelers Indemnity Company and MBIA Corp., incorporated by reference to Exhibit
10.73 to the 1993 10-K.
10.55. Endorsement No. 15 to the December 30, 1986 Reinsurance
Agreements, effective January 1, 1992, between MBIA Corp. and each of The Aetna
Casualty and Surety Company, Fireman's Fund Insurance Company, CIGNA Property
and Casualty Insurance Company (formerly Aetna Insurance Company) and The
Continental Insurance Company, incorporated by reference to Exhibit 10.74 to the
1993 10-K.
10.56. Endorsement No. 17 to the December 30, 1986 Reinsurance
Agreements, effective January 1, 1993, between MBIA Corp. and each of The Aetna
Casualty and Surety Company, Fireman's Fund Insurance Company, CIGNA Property
and Casualty Insurance Company (formerly Aetna Insurance Company) and The
Continental Insurance Company, incorporated by reference to Exhibit 10.75 to the
1993 10-K.
-29
<PAGE>
10.57. Endorsement No. 18 to the December 30, 1986 Reinsurance
Agreements, effective April 1, 1993, between MBIA Corp. and each of The Aetna
Casualty and Surety Company, Fireman's Fund Insurance Company, CIGNA Property
and Casualty Insurance Company (formerly Aetna Insurance Company) and The
Continental Insurance Company, incorporated by reference to Exhibit 10.76 to the
1993 10-K.
10.58. First Restated Credit Agreement, dated as of October 1, 1993,
among MBIA Corp., Credit Suisse, New York Branch, as Agent, Credit Suisse, New
York Branch, Caisse Des Depots Et Consignations, Deutsche Bank AG, Bayerische
Landesbank Girozentrale and Landesbank Hessen-Thuringen Girozentrale, as amended
by an Assignment and Assumption Agreement, dated as of December 31, 1993, among
MBIA Corp., Credit Suisse, New York Branch, as Agent and Assignor and Deutsche
Bank AG, New York Branch, as further amended by a Modification Agreement, dated
as of January 1, 1994, among Deutsche Bank, AG, New York Branch, MBIA Corp. and
Credit Suisse, New York Branch, as Agent, as amended by a Joinder Agreement,
dated December 31, 1993, among Credit Suisse, New York Branch, as Agent,
Sudwestdeutsche Landesbank Girozentrale and MBIA Corp., incorporated by
reference to Exhibit 10.78 to the 1993 10-K, as amended by the First Amendment
to First Restated Credit Agreement, dated as of September 23, 1994, incorporated
by reference to Exhibit 10.63 to the 1994 10-K.
10.59. Net Worth Maintenance Agreement, dated as of November 1, 1991,
between MBIA Corp. and MBIA Assurance S.A., as amended by Amendment to Net Worth
Agreement, dated as of November 1, 1991, incorporated by reference to Exhibit
10.79 to the 1993 10-K.
10.60. Reinsurance Agreement, dated as of January 1, 1993, between
MBIA Assurance S.A. and MBIA Corp., incorporated by reference to Exhibit 10.80
to the 1993 10-K.
10.61. Credit Agreement, dated as of August 31, 1994, among Municipal
Bond Investors Assurance Corporation, the Company, Wachovia Bank of Georgia,
N.A., Banco Santander, The Sumitomo Bank, Ltd., New York Branch, The Chase
Manhattan Bank, N.A., Commerzbank Aktiengesellschaft, The Industrial Bank of
Japan, Limited New York Branch and NBD Bank, N.A., and as further amended by the
First Amendment to Credit Agreement, dated as of October 14, 1994, incorporated
by reference to Exhibit 10.66 to the 1994 10-K, as amended by the Second
Amendment to Credit Agreement, dated as of October 31, 1995.
10.62. Endorsement No. 13 to the December 30, 1986 Reinsurance
Agreements, effective December 1, 1990, between MBIA Corp. and each of The Aetna
Casualty and Surety Company, Fireman's Fund Insurance Company, CIGNA Property
and Casualty Insurance Company (formerly Aetna Insurance Company) and The
Continental Insurance Company, dated as of March, 1993, incorporated by
reference to Exhibit 10.67 to the 1994 10-K.
10.63. Endorsement No. 16 to the December 30, 1986 Reinsurance
Agreements, effective September 30, 1992, between MBIA Corp. and each of The
Aetna Casualty and Surety Company, Fireman's Fund Insurance Company, CIGNA
Property and Casualty Insurance Company (formerly Aetna Insurance Company) and
The Continental Insurance Company, dated as of February 28, 1993, incorporated
by reference to Exhibit 10.68 to the 1994 10-K.
10.64. Endorsement No. 19 to the December 30, 1986 Reinsurance
Agreements, effective October 1, 1993, between MBIA Corp. and each of The Aetna
Casualty and Surety Company, Fireman's Fund Insurance Company, CIGNA Property
and Casualty Insurance Company (formerly Aetna Insurance Company) and The
Continental Insurance Company, dated as of June 30, 1994, incorporated by
reference to Exhibit 10.69 to the 1994 10-K.
10.65. Investment Services Agreement, effective as of April 28, 1995,
between MBIA Insurance Corporation and MBIA Securities Corp., as amended by
Amendment No. 1, dated as of December 29, 1995.
10.66. Investment Services Agreement, effective January 2, 1996,
between MBIA Insurance Corp. of Illinois and MBIA Securities Corp.
10.67. Custody Agreement, as of March 1, 1995, between MBIA Corp. and
The Chase Manhattan Bank, N.A.
10.68. Custody Agreement, as of March 1, 1995, between MBIA Corp. and
The Chase Manhattan Bank, N.A.
10.69. Custody Agreement, as of March 1, 1995, between MBIA Inc. and
The Chase Manhattan Bank, N.A.
10.70. MBIA Inc. 1996 Incentive Plan, effective as of January 1, 1996.
-30-
<PAGE>
Executive Compensation Plans and Arrangements
The following Exhibits identify all existing executive compensation
plans and arrangements:
10.14. MBIA Inc. 1987 Stock Option Plan, incorporated by reference to
Exhibit 10.13 to the 1987 S-1.
10.15. MBIA Inc. Deferred Compensation and Excess Benefit Plan,
incorporated by reference to Exhibit 10.16 to the 1988 10-K, as amended as of
July 22, 1992, incorporated by reference to Exhibit 10.15 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1992 (Comm.
File No. 1-9583) (the " 1992 10-K").
10.16. MBIA Inc. Employees Pension Plan, amended and restated
effective January 1, 1987, incorporated by reference to Exhibit 10.28 of the
Company's Amendment No. 1 to the 1987 S-1, as further amended and restated as of
December 12, 1991, incorporated by reference to Exhibit 10.18 to the 1991 10-K.
10.17. MBIA Inc. Employees Profit Sharing Plan, as amended and
restated effective January 1, 1987, incorporated by reference to Exhibit 10.29
to Amendment No. 1 to the 1987 S-1, as further amended by Amendment dated
December 8, 1988, incorporated by reference to Exhibit 10.21 to the 1989 10-K,
as further amended and restated as of December 12, 1991, incorporated by
reference to Exhibit 10.19 to the 1991 10-K, as further amended and restated as
of May 7, 1992, incorporated by reference to Exhibit 10.17 to the 1992 10-K.
10.19. MBIA Corp. Split Dollar Life Insurance Plan, dated as of
February 9, 1988, issued by Aetna Life Insurance and Annuity Company,
incorporated by reference to Exhibit 10.23 to the 1989 10-K.
10.22. Stock Option Agreement, dated as of January 1, 1987, between
the Company and William O. Bailey, incorporated by reference to Exhibit 10.31 to
Amendment No. 1 to the 1987 S-1.
10.23. Stock Option Agreement, dated as of March 27, 1987, between the
Company and David H. Elliott, incorporated by reference to Exhibit 10.32 to
Amendment No. 1 to the 1987 S-1.
10.65. MBIA Inc. Employees Change of Control Benefits Plan, effective
as of January 1, 1992, incorporated by reference to Exhibit 10.65 to the 1992
10-K.
10.70. MBIA Inc. 1996 Incentive Plan, effective as of January 1, 1996.
11. Statement Re Computation of Per Share Earnings.
13. Annual Report to Shareholders of MBIA Inc. for fiscal year ended
December 31, 1995. Such report is furnished for the information of the
Commission only and, except for those portions thereof which are expressly
incorporated by reference in this Annual Report on Form 10-K, is not to be
deemed filed as part of this report.
21. List of Subsidiaries
23. Consent of Coopers & Lybrand L.L.P.
24. Power of Attorney
27. Financial Data Schedule
99. Additional Exhibits - MBIA Corp. GAAP Financial Statements
(b) Reports on Form 8-K: No reports on Form 8-K were filed by the
Company in 1995
-31-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
MBIA Inc.
(Registrant)
Dated: March 25, 1996 By/s/David H. Elliott
---------------------
Name: David H. Elliott
Title: Chairman
Pursuant to the requirements of Instruction D to Form 10-K under the
Securities Exchange Act of 1934, this Report has been signed below by the
following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/David H. Elliott Chairman and Director March 25, 1996
- -------------------------------
David H. Elliott
/s/ Julliette S. Tehrani Senior Vice President March 25, 1996
- ------------------------------- and
Julliette S. Tehrani Chief Financial Officer
/s/ Elizabeth B. Sullivan Vice President and March 25, 1996
- ------------------------------- Controller
Elizabeth B. Sullivan
Director March 25, 1996
- -------------------------------
William O. Bailey
/s/Joseph W. Brown * Director March 25, 1996
- ------------------------------
Joseph W. Brown, Jr.
/s/David C. Clapp. * Director March 25, 1996
- ------------------------------
David C. Clapp.
-32-
<PAGE>
Signature Title Date
/s/Claire L. Gaudiani * Director March 25, 1996
- ------------------------------
Claire L. Gaudiani
Director March 25, 1996
- ------------------------------
William H. Gray, III
/s/Freda S. Johnson * Director March 25, 1996
- -------------------------------
Freda S. Johnson
/s/Daniel P. Kearney * Director March 25, 1996
- -------------------------------
Daniel P. Kearney
/s/James A. Lebenthal * Director March 25, 1996
- -------------------------------------
James A. Lebenthal
/s/Robert B. Nicholas * Director March 25, 1996
- -------------------------------------
Robert B. Nicholas
/s/Pierre-Henri Richard * Director March 25, 1996
- -------------------------------------
Pierre-Henri Richard
/s/John A. Rolls * Director March 25, 1996
- -------------------------------------
John A. Rolls
- ------------------------------------- Director March 25, 1996
Richard L. Weill
*By/s/Louis G. Lenzi
Louis G. Lenzi
Attorney-in Fact
-33-
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Board of Directors and Shareholders of MBIA Inc.:
Our report on the consolidated financial statements of MBIA Inc. and
Subsidiaries has been incorporated by reference in this Form 10-K from page 25
of the 1995 Annual Report to Shareholders of MBIA Inc. and Subsidiaries. In
connection with our audits of such financial statements, we have also audited
the related financial statement schedules listed in the index on Page 25 of this
Form 10-K.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
\s\ COOPERS & LYBRAND L.L.P.
New York, New York
January 22, 1996
-34
<PAGE>
SCHEDULE I
MBIA INC. AND SUBSIDIARIES
SUMMARY OF INVESTMENTS, OTHER THAN INVESTMENTS IN RELATED PARTIES
December 31, 1995
(In thousands)
Column A Column B Column C Column D
Amount at which
shown in the
Type of investment Cost Value balance sheet
- ------------------ --------- ---------- ---------------
Fixed-maturities
Bonds:
United States
Treasury and
Government
agency obligations $ 256,613 $ 287,206 $ 287,206
State and municipal
obligations 2,553,835 2,726,321 2,726,321
Corporate and other
obligations 1,790,309 1,863,326 1,863,326
Mortgage-backed 1,247,265 1,291,602 1,291,602
---------- ---------- ----------
Total fixed-maturities 5,848,022 6,168,455 6,168,455
Short-term Investments 424,827 XXXXXXX 424,827
Other Investments 13,930 XXXXXXX 14,064
Total investments $6,286,779 XXXXXXX $6,607,346
========== ==========
-35-
<PAGE>
SCHEDULE III
MBIA INC. (PARENT COMPANY)
CONDENSED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
December 31, 1995 December 31, 1994
------------------ -----------------
ASSETS
Investments:
Municipal investment agreement
portfolio held as
available-for-sale at fair
value (amortized cost $837,791) $ 851,328 $ ---
Other investments --- 5,580
---------- ----------
Total investments 851,328 5,580
Cash and cash equivalents 14,106 4,991
Investment in and amounts due from
wholly-owned subsidiaries 2,670,383 2,052,540
Accrued investment income 8,379 ---
Other assets 4,001 3,209
---------- ----------
Total assets $3,548,197 $2,066,320
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Dividends payable $ 14,492 $ 12,901
Municipal investment agreements 892,326 ---
Long-term debt 373,900 298,790
Short-term debt 18,000 17,000
Deferred income taxes 4,688 896
Amounts due to wholly-owned subsidiaries --- 21,934
Other liabilities 10,525 10,083
---------- ---------
Total liabilities 1,313,931 361,604
---------- ---------
Shareholders' Equity:
Preferred stock, par value $1 per
share; authorized shares - 10,000,000;
issued and outstanding shares - none --- ---
Common stock, par value $1 per share;
authorized shares - 200,000,000;
issued shares - 42,077,387 42,077 42,077
Additional paid-in capital 725,153 719,750
Retained earnings 1,261,051 1,057,092
Cumulative translation adjustment 2,849 503
Unrealized appreciation (depreciation) of
investments, net of deferred income tax
provision (benefit) of $112,252 and $(46,292) 207,648 (86,560)
Unearned compensation - restricted stock (426) ---
Treasury stock, at cost - 73,676 shares
in 1995 and 461,763 shares in 1994 (4,086) (28,146)
---------- ----------
Total shareholders' equity 2,234,266 1,704,716
---------- ----------
Total liabilities and shareholders' equity $3,548,197 $2,066,320
========== ==========
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto and the accompanying notes.
-36-
<PAGE>
SCHEDULE III
MBIA INC. (PARENT COMPANY)
CONDENSED STATEMENTS OF INCOME
(In thousands)
Years Ended December 31
------------------------------------
1995 1994 1993
-------- -------- ----------
Revenues:
Net investment income $ 646 $ 786 $ 3,555
Net realized gains 3,535 --- 786
Investment management
services income 2,929 --- ---
Investment management
services realized losses (5,735) --- ---
Other income --- 1,801 401
-------- -------- ----------
Total revenues 1,375 2,587 4,742
-------- -------- ----------
Expenses:
Interest expense 27,786 27,036 26,900
Operating expenses 2,749 2,202 1,273
-------- -------- ----------
Total expenses 30,535 29,238 28,173
-------- -------- ----------
Loss before income taxes, equity
in earnings of subsidiaries
and cumulative effect of
accounting changes (29,160) (26,651) (23,431)
Benefit for income taxes (9,604) (9,240) (8,963)
-------- -------- ----------
Loss before equity in earnings
of subsidiaries and
cumulative effect of
accounting changes (19,556) (17,411) (14,468)
Equity in earnings of subsidiaries 290,975 277,620 260,578
-------- -------- ----------
Net income before cumulative
effect of accounting changes 271,419 260,209 246,110
Cumulative effect of
accounting changes --- --- 12,923
-------- -------- ----------
Net income $271,419 $260,209 $259,033
======== ======== ==========
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto and the accompanying notes.
-37-
<PAGE>
SCHEDULE III
MBIA INC. (PARENT COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31
-------------------------------
1995 1994 1993
--------- --------- ----------
Cash flows from operating
activities:
Net income $ 271,419 $ 260,209 $ 259,033
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Equity in undistributed
earnings of subsidiaries (208,075) (239,620) (223,501)
Net realized losses (gains) on
sales of investments 2,200 --- (786)
(Benefit) provision for deferred
income taxes (50) (28) 28
Other, net (2,556) 18,088 (1,512)
--------- --------- ----------
Total adjustments to net income (208,481) (221,560) (225,771)
--------- --------- ----------
Net cash provided by
operating activities 62,938 38,649 33,262
--------- --------- ----------
Cash flows from investing activities:
Purchase of fixed-maturity
securities (252,125) --- (30,041)
Sale of fixed-maturity securities 246,171 42,728 36,369
Sale of other investments 6,552 --- ---
Purchase for municipal investment
agreement portfolio, net of
payable for investments purchased (940,871) --- ---
Sales from municipal investment
agreement portfolio, net of
receivable for investments sold 106,678 --- ---
Contributions to subsidiaries (52,800) (23,010) (5,010)
Advances (to) from subsidiaries, net (89,550) 3,017 2,119
--------- --------- ----------
Net cash (used) provided by
investing activities (975,945) 22,735 3,437
--------- --------- ----------
Cash flows from financing activities:
Net proceeds from issuance
of long-term debt 74,344 --- ---
Dividends paid (53,179) (45,513) (37,342)
Purchase of treasury stock --- (14,411) (15,255)
Proceeds from issuance of
municipal investment agreements 1,182,298 --- ---
Payments for drawdowns of
municipal investment agreements (297,679) --- ---
Exercise of stock options 16,338 1,986 7,109
--------- --------- ---------
Net cash provided (used) by
financing activities 922,122 (57,938) (45,488)
--------- --------- ----------
Net increase (decrease) in
cash and cash equivalents 9,115 3,446 (8,789)
Cash and cash equivalents
- beginning of year 4,991 1,545 10,334
--------- --------- ---------
Cash and cash equivalents
- end of year $ 14,106 $ 4,991 $ 1,545
========= ========= =========
Supplemental cash flow disclosures:
Income taxes paid $ 443 $ 251 $ 392
Interest paid:
Long-term debt 26,575 26,575 26,416
Short-term debt 1,228 56 ---
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto and the accompanying notes.
-38-
<PAGE>
SCHEDULE III
MBIA INC. (PARENT COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. CONDENSED FINANCIAL STATEMENTS
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these condensed financial
statements be read in conjunction with the Company's consolidated financial
statements and the notes thereto.
2. SIGNIFICANT ACCOUNTING POLICIES
The Parent company carries its investments in subsidiaries under the equity
method.
3. DIVIDENDS FROM SUBSIDIARY
Cash dividends paid to MBIA Inc. from the Company's consolidated
subsidiary, MBIA Corp., were $82,900,000, $38,000,000 and $50,000,000 in 1995,
1994 and 1993, respectively.
4. OBLIGATIONS UNDER MUNICIPAL INVESTMENT AGREEMENTS
The municipal investment agreement business, as described in footnotes 2
and 10 to the consolidated financial statements of MBIA Inc. and Subsidiaries
(which are incorporated by reference in the 10-K), is conducted by both the
Registrant and its wholly owned subsidiary, MBIA Investment Management Corp.
-39-
<PAGE>
SCHEDULE VI
MBIA INC. AND SUBSIDIARIES
REINSURANCE
for the Years Ended December 31, 1995, 1994 and 1993
(In thousands)
Column A Column B Column C Column D Column E Column F
- -------- -------- -------- -------- ----------- -------------
Insurance Ceded Assumed Percentage
Premiums Gross to Other from Other of Amount
Written Amount Value Companies Net Amount Assumed to Net
- -------- -------- -------- ---------- ---------- --------------
1995 $336,768 $45,050 $11,719 $303,437 3.9%
1994 $354,534 $49,281 $6,302 $311,555 2.0%
1993 $458,979 $47,552 $20,368 $431,795 4.7%
-40-
<PAGE>
Securities and Exchange Commission
Washington, D.C. 20549
===============================================================================
Exhibits
to
Form 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1995
Commission File No. 1-9583
================================================================================
-41-
<PAGE>
MBIA Inc.
Exhibit Index
10.25. Trust Agreement, effective as of December 31, 1989,
among BIG Ins., MBIA Corp. and Morgan Guaranty Trust Company of New
York, incorporated by reference to Exhibit 10.55 to the 1989 10-K, as
amended by Amendment to Trust Agreement, dated as of February 28, 1995.
10.47. Trust Agreement, dated as of December 31, 1991,
between MBIA Corp. and Fidelity Management Trust Company, incorporated
by reference to Exhibit 10.64 to the 1992 10-K, as amended by the
Amendment to Trust Agreement, dated as of April 1, 1993, incorporated
by reference to Exhibit 10.64 to the 1993 10-K, as amended by First
Amendment to Trust Agreement, dated as of January 21, 1992, as further
amended by Second Amendment to Trust Agreement, dated as of March 5,
1992, as further amended by Third Amendment to Trust Agreement, dated
as of April 1, 1993, as further amended by the Fourth Amendment to
Trust Agreement, dated as of July 1, 1995.
10.61. Credit Agreement, dated as of August 31, 1994, among
Municipal Bond Investors Assurance Corporation, the Company, Wachovia
Bank of Georgia, N.A., Banco Santander, The Sumitomo Bank, Ltd., New
York Branch, The Chase Manhattan Bank, N.A., Commerzbank
Aktiengesellschaft, The Industrial Bank of Japan, Limited New York
Branch and NBD Bank, N.A., and as further amended by the First
Amendment to Credit Agreement, dated as of October 14, 1994,
incorporated by reference to Exhibit 10.66 to the 1994 10-K, as amended
by the Second Amendment to Credit Agreement, dated as of October 31,
1995.
10.65. Investment Services Agreement, effective as of
April 28, 1995, between MBIA Insurance Corporation and MBIA
Securities Corp., as amended by Amendment No. 1, dated as of
December 29, 1995.
10.66. Investment Services Agreement, effective
January 2, 1996, between MBIA Insurance Corp. of Illinois
and MBIA Securities Corp.
10.67. Custody Agreement, as of March 1, 1995,
between MBIA Corp. and The Chase Manhattan Bank, N.A.
10.68. Custody Agreement, as of March 1, 1995,
between MBIA Corp. and The Chase Manhattan Bank, N.A.
10.69. Custody Agreement, as of March 1, 1995,
between MBIA Inc. and The Chase Manhattan Bank, N.A.
10.70. MBIA Inc. 1996 Incentive Plan, effective as
of January 1, 1996.
11. Statement Re Computation of Per Share Earnings.
13. Annual Report to Shareholders of MBIA Inc. for fiscal year ended
December 31, 1995. Such report is furnished for the information of the
Commission only and, except for those portions thereof which are
expressly incorporated by reference in this Annual Report on Form 10-K,
is not to be deemed filed as part of this report.
21. List of Subsidiaries
23. Consent of Coopers & Lybrand L.L.P.
24. Power of Attorney
27. Financial Data Schedule
99. Additional Exhibits - MBIA Corp. GAAP Financial Statements
(b) Reports on Form 8-K: No reports on Form 8-K were filed by the
Company in 1995
-42-
<PAGE>
EXHIBIT 10.25
Amendment to Trust Agreement
THIS AMENDMENT TO TRUST AGREEMENT is made and entered into as of February 28
1995, between Municipal Bond Investors Assurance Corporation ("MBIA Corp."),
MBIA Insurance Corp. of Illinois ("MBIA Illinois"), Chase Manhattan Bank, N.A.
("Chase") and Morgan Guaranty Trust Company ("Morgan").
Section 1. Trust Agreement, dated as of December 31, 1989, by and among MBIA
Corp., Chase, MBIA Illinois and Morgan (the "Agreement"), is hereby amended to
replace Morgan, the existing Trustee thereunder, with Chase Manhattan Bank,
N.A., such change to become effective on March 1, 1995.
Section 2. Section 2 of the Agreement is hereby amended in its entirety to
read as follows:
"2. Place of Deposit.
----------------
The assets shall be held by the Trustee at Chase Manhattan Bank, N.A., or,
if appropriate, in book entry form at the Federal Reserve Bank of New York
or in depositories such as the Depository Trust Company."
Section 3. Section 20 of the Agreement is hereby amended to change the
notice address of the Trustee to:
Chase Manhattan Bank, N.A.
4 Chase MetroTech Center
Brooklyn, NY 11245
Attn: Laureen Young
IN WITNESS WHEREOF, the parties have hereunto executed this agreement this
28 day of February, 1995.
Morgan Guaranty Trust Company Municipal Bond Investors Assurance Corp.
By: ___________________________ By:______________________________
Associate Title: Treasurer
Chase Manhattan Bank, N.A. MBIA Illinois Insurance Corp.
By: ___________________________ By:______________________________
Second Vice President Title: Treasurer
<PAGE>
EXHIBIT 10.47
FIRST AMENDMENT TO TRUST AGREEMENT
BETWEEN FIDELITY MANAGEMENT TRUST COMPANY AND
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION
THIS FIRST AMENDMENT, dated as of the twenty-first day of January, 1992, by
and between Fidelity Management Trust Company (the "Trustee") and Municipal Bond
Investors Assurance Corporation (the "Sponsor");
WITNESSETH:
WHEREAS, the Trustee and the Sponsor heretofore entered into trust
agreements dated December 31, 1991, with regard to the MBIA Inc. Master Plan
(the "Plan"); and
WHEREAS, the Trustee and the Sponsor now desire to amend said trust
agreements as provided for in Section 13 thereof;
NOW THEREFORE, in consideration of the above premises the Trustee and the
Sponsor hereby amend the trust agreement by adding Section 4(e)(iii)(C) as
follows:
(C) Purchases and Sales from or to Sponsor. The Trustee may purchase or
--------------------------------------
sell Sponsor Stock from or to the Sponsor if the purchase or sale is for
adequate consideration (within the meaning of section 3(18) of ERISA) and no
commission is charged. If Plan participant or Sponsor contributions under
the Plan are to be invested in Sponsor Stock, the Sponsor may transfer
Sponsor Stock in lieu of cash to the Trust. In this case the number of
shares transferred shall be determined by dividing the amount of the
contribution by the closing price of the Sponsor Stock on any national
securities exchange on the trading day immediately preceding the date as of
which the contribution is made.
IN WITNESS WHEREOF, the Trustee and the Sponsor have caused this First
Amendment to be executed by their duly authorized officers effective as of the
day and year first above written.
MBIA INC. FIDELITY MANAGEMENT TRUST COMPANY
By /s/ Hilda H. Boas Jan 22, 1992 By /s/ 2/11/92
-------------------------------- ------------------------------------
Senior Vice President Date Senior Vice President Date
<PAGE>
SECOND AMENDMENT TO TRUST AGREEMENT
BETWEEN FIDELITY MANAGEMENT TRUST COMPANY AND
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION
THIS SECOND AMENDMENT, dated as of the fifth day of March, 1992, by and
between Fidelity Management Trust Company (the "Trustee") and Municipal Bond
Investors Assurance Corporation (the "Sponsor");
WITNESSETH:
WHEREAS, the Trustee and the Sponsor heretofore entered into trust
agreements dated December 31, 1991, with regard to the MBIA Inc. Master Plan
(the "Plan"); and
WHEREAS, the Trustee and the Sponsor now desire to amend said trust
agreements as provided for in Section 13 thereof;
NOW THEREFORE, in consideration of the above premises the Trustee and the
Sponsor hereby amend the trust agreement by:
. Revising Schedule "G" (Telephone Exchange Guidelines) as attached.
. Adding a sentence to the end of Section 4(c) (Participant Direction) to
read as follows:
The Administrator may, in its discretion and via facsimile, override
a Plan participant direction involving Sponsor Stock.
IN WITNESS WHEREOF, the Trustee and the Sponsor have caused this Second
Amendment to be executed by their duly authorized officers effective as of the
day and year first above written.
MBIA INC. FIDELITY MANAGEMENT TRUST COMPANY
By By /s/ Hilda H. Boas April 6, 1992
-------------------------------- ------------------------------------
Date Senior Vice President Date
<PAGE>
SCHEDULE "G"
TELEPHONE EXCHANGE PROCEDURES
-----------------------------
The following telephone exchange procedures are currently employed by Fidelity
Investments Retirement Services Company (FIRSCO).
Telephone exchange hours are 8:30 a.m. (EST) to 8:00 P.M. (EST) on each business
day. A "business day" is any day on which the New York Stock Exchange is open.
FIRSCO reserves the right to change these telephone exchange procedures at its
discretion.
MUTUAL FUNDS
------------
EXCHANGES BETWEEN MUTUAL FUNDS
------------------------------
Participants may call on any business day to exchange between the mutual
funds. If the request is received before 4:00 p.m. (EST), it will receive
that day's trade date. Calls received after 4:00 P.M. (EST) will be
processed on a next day basis.
COMPANY STOCK
-------------
I. EXCHANGES FROM MUTUAL FUNDS TO COMPANY STOCK
--------------------------------------------
Company Stock exchanges are processed on a monthly cycle. Participants who
wish to exchange out of a mutual fund into Company Stock may call between
the 1st and the 13th of the month. No calls will be accepted after 4:00
p.m. (ET) on the 13th (or previous business day if the 13th is not a
business day).
Mutual fund shares are sold on the 15th of the month (or the previous
business day if the 15th is not a business day) and the Company Stock is
purchased within two (2) business days after the date on which the mutual
fund shares are sold.
II. EXCHANGES FROM COMPANY STOCK TO MUTUAL FUNDS
--------------------------------------------
Participants who wish to exchange out of Company Stock into mutual funds may
call between the 1st and the 13th of the month. No calls will be accepted
after 4:00 P.M. (ET) on the 13th (or previous business day if the 13th is
not a business day).
The Company Stock is sold on the 16th (or the next business day if the 16th
is not a business day) and the subsequent purchase into mutual funds will
take place five (5) business days later. This allows for settlement of the
stock trade at the custodian and the corresponding transfer to Fidelity.
Orders for sales of Company Stock must be share specific.
GIC OPEN-END PORTFOLIO
----------------------
I. EXCHANGES BETWEEN MUTUAL FUNDS AND GIC OPEN-END PORTFOLIO
---------------------------------------------------------
Participants who wish to exchange out of a mutual fund into the GIC Open-End
Portfolio of the Fidelity Group Trust for Employee Benefit Plans (the "Group
Trust") may call on any business day. If the request is received before
4:00 p.m. (EST), it will receive that day's trade date. Calls received
after 4:00 p.m. (EST) will be processed on a next day basis.
<PAGE>
II. EXCHANGES FROM GIC OPEN-END PORTFOLIO TO COMPANY STOCK
------------------------------------------------------
Participants who wish to exchange out of the GIC Open-End Portfolio into
Company Stock may call between the 1st and the 13th of the month. No calls
will be accepted after 4:00 p.m. (ET) on the 13th (or previous business day
if the 13th is not a business day).
GIC Open-End Portfolio shares are sold on the 15th of the month (or the
previous business day if the 15th is not a business day) and the Company
Stock is purchased within two (2) business days after the date on which the
Open-End Portfolio shares are sold.
III. EXCHANGES FROM COMPANY STOCK TO GIC OPEN-END PORTFOLIO
------------------------------------------------------
Participants who wish to exchange out of Company Stock into the GIC Open-End
Portfolio may call between the 1st and the 13th of the month. No calls will
be accepted after 4:00 p.m. (ET) on the 13th (or previous business day if
the 13th is not a business day).
The Company Stock is sold on the 16th (or the next business day if the 16th
is not a business day) and the subsequent purchase into the Open-End
Portfolio will take place five (5) business days later. This allows for
settlement of the stock trade at the custodian and the corresponding
transfer to Fidelity. Orders for sales of Company Stock must be share
specific.
MBIA INC.
By /s/ Hilda H. Boas April 6, 1992
----------------------------------
Date
<PAGE>
THIRD AMENDMENT TO TRUST AGREEMENT
BETWEEN FIDELITY MANAGEMENT TRUST COMPANY AND
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION
THIS THIRD AMENDMENT, dated as of April 1, 1993, by and between Fidelity
Management Trust Company (the "Trustee") and Municipal Bond Investors Assurance
Corporation (the "Sponsor"); and
WITNESSETH:
WHEREAS, the Trustee and the Sponsor heretofore entered into a trust
agreement dated December 31, 1991, with regard to the MBIA, Inc. Master Plan
(the "Plan"); and
WHEREAS, the Trustee and the Sponsor now desire to amend said trust
agreement as provided for in Section 13 thereof;
NOW THEREFORE, in consideration of the above premises the Trustee and the
Sponsor hereby amend the trust agreement by:
. Amending Section 4 by replacing Section 4(f) with the following:
Notes. The Administrator shall act as the Trustee's agent for the
-----
purpose of holding all trust investments in participant loan notes and
related documentation and as such shall (i) hold physical custody of
and keep safe the notes and other loan documents, (ii) collect and
remit all principal and interest payments to the Trustee, (iii) keep
the proceeds of such loans separate from the other assets of the
Administrator and clearly identify such assets as Plan assets and (iv)
cancel and surrender the notes and other loan documentation when a
loan has been paid in full. To originate a participant loan, the Plan
participant shall notify the Trustee of the request by use of the
Telephone Exchange System. The Trustee shall determine, based on the
current value of the Plan participant's account, the amount available
for the loan. The Plan participant shall then direct the Trustee
regarding the amount to be borrowed and the term or period for
repayment. Based on the most recent interest rate supplied by the
Sponsor in accordance with the terms of the Plan, the Trustee shall
advise the Plan participant of such interest rate, as well as the
installment payment amounts. The Trustee shall forward the loan
document to the Plan participant for execution and submission for
approval to the Administrator. The Administrator shall have the
responsibility for approving the loan, via remote access, and
instructing the Trustee of such approval. The Trustee shall send the
loan proceeds to the Administrator or to the Plan participant in
accordance with the directions from the Administrator. In all cases,
such approval by the Administrator shall be made within 30 days of the
Plan participant's initial request (the origination date).
. Amending Schedule "B" to reflect the Loan Fee as follows:
Loan Fees Establishment fee $35.00 per loan account;
annual fee of $15.00 per loan account.
<PAGE>
IN WITNESS WHEREOF, the Trustee and the Sponsor have caused this Third Amendment
to be executed by their duly authorized officers effective as of the day and
year first above written.
MUNICIPAL BOND INVESTORS FIDELITY MANAGEMENT TRUST COMPANY
ASSURANCE CORPORATION
By By
------------------------------ -------------------------------------
Date Senior Vice President Date
<PAGE>
FOURTH AMENDMENT TO TRUST AGREEMENT BETWEEN
FIDELITY MANAGEMENT TRUST COMPANY AND
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION
THIS FOURTH AMENDMENT, dated as of the first day of July, 1995 by and
between Fidelity Management Trust Company (the "Trustee") and Municipal Bond
Investors Assurance Corporation (the "Sponsor");
WITNESSETH:
WHEREAS, the Trustee and the Sponsor heretofore entered into a trust
agreement dated December 31, 1991, with regard to the MBIA Inc. Employees
Pension Plan and the MBIA Inc. Employees Profit Sharing and 401(k) Salary
Deferral Plan (collectively and individually, the "Plan"); and
WHEREAS, the Trustee and the Sponsor now desire to amend said trust
agreement as provided for in Section 13 thereof;
NOW THEREFORE, in consideration of the above premises the Trustee and the
Sponsor hereby amend the trust agreement by:
(1) Amending and adding the following mutual funds to the "investment
options" portions of Schedules "A" and "C", as follows:
Fidelity Overseas Fund
Fidelity Puritan Fund
(2) Amending and adding the following money classification to Schedule
"A", as follows:
Employer Profit Sharing
IN WITNESS WHEREOF, the Trustee and the Sponsor have caused this Fourth
Amendment to be executed by their duly authorized officers effective as of the
day and year first above written.
MBIA INC. FIDELITY MANAGEMENT TRUST COMPANY
By /s/ Hilda H. Boas 6-12-95 By
-------------------------------- ------------------------------------
Date Senior Vice President Date
<PAGE>
EXHIBIT 10.61
SECOND AMENDMENT TO CREDIT AGREEMENT
THIS SECOND AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is made as of
the 31st day of October, 1995, among MBIA INSURANCE CORPORATION and MBIA Inc.
(collectively, the "Borrowers"), WACHOVIA BANK OF GEORGIA, N.A. as Agent and a
Bank, BANCO SANTANDER, THE SUMITOMO BANK, LTD., NEW YORK BRANCH, THE CHASE
MANHATTAN BANK, N.A., COMMERZBANK AKTIENGESELLSCHAFT, THE INDUSTRIAL BANK OF
JAPAN, LIMITED, NEW YORK BRANCH and NBD BANK (formerly known as NBD BANK, N.A.)
(together with their respective successors and assigns the "Existing Banks")
and BANCA MONTE DEI PASCHI DI SIENA S.P.A.
Background:
----------
The Borrowers, the Existing Banks and the Agent have entered into a certain
Credit Agreement, dated as of August 31, 1994 (the "Credit Agreement"), as
amended by that certain First Amendment to Credit Agreement dated October 14,
1994.
The Borrowers, the Existing Banks and the Agent wish to amend the Credit
Agreement in certain respects, as hereinafter provided, and to add Banca Monte
dei Paschi di Siena S.p.A. as a Bank party to the Credit Agreement (as defined
in the Credit Agreement).
NOW, THEREFORE, the parties hereto agree as follows:
SECTION 1. Definitions. Capitalized terms used herein which are not
-----------
otherwise defined herein shall have the respective meanings assigned to them in
the Credit Agreement.
SECTION 2. Amendments. The Credit Agreement is hereby amended as set forth
----------
in this Section 2.
---------
2.1 Amendments to Section 1.01. The definition of Termination Date
--------------------------
contained in Section 1.01 of the Credit Agreement is hereby amended and
restated in its entirety to read as follows:
"Termination Date" means August 30, 1998, and any extensions thereof
made pursuant to Section 2.05(b) hereof.
2.2 Amendment Increasing Aggregate Commitments. The Credit
------------------------------------------
Agreement shall be amended by increasing the total amount of the Commitments to
$250,000,000. The Commitments of the respective Existing Banks shall not be
modified by this Second Amendment to Credit Agreement. The cover page of the
Credit Agreement shall be amended by deleting the amount $225,000,000 and
inserting in place thereof the amount $250,000,000. The Agent shall deliver
replacement Money Market Notes, executed by the Borrower, to the Existing Banks
in the amount of the total Commitments (as increased hereby) in exchange for
the Money Market Notes currently outstanding. The Money Market Notes
currently outstanding will be returned to the Borrowers for cancellation.
2.3 Addition of Banca Monte del Paschi di Siena S.p.A. as a Bank.
------------------------------------------------------------
The Credit Agreement shall be amended by adding Banca Monte del Paschi di Siena
S.p.A. as a Bank (as defined
<PAGE>
in the Credit Agreement) party thereto. Banca Monte del Paschi di Siena S.p.A.
shall have all of the rights and obligations of a Bank under the Credit
Agreement. The lending office and the Commitment of Banca Monte dei Paschi di
Siena S.p.A. shall be as set forth on the signature pages hereof. The Agent
shall deliver to Banca Monte del Paschi di Siena S.p.A. a Syndicated Note,
executed by the Borrowers, in the amount of its Commitment, and a Money Market
Note, executed by the Borrowers in the amount of the total Commitments (as
increased by this Second Amendment to Credit Agreement).
SECTION 3. No Other Amendment. Except for the amendments set forth
------------------
above, the text of the Credit Agreement shall remain unchanged and in full force
and effect. This Amendment is not intended to effect, nor shall it be construed
as, a novation. The Credit Agreement and this Amendment shall be construed
together as a single instrument.
SECTION 4. Representations and Warranties. The Borrowers hereby
------------------------------
represent and warrant in favor of the Agent and the Banks (including, without
limitation, Banca Monte del Paschi di Siena S.p.A.) as follows:
(a) No Default or Event of Default under the Credit Agreement has
occurred and is continuing on the date hereof,
(b) The Borrowers have the corporate power and authority to enter into
this Amendment and to do all acts and things as are required or contemplated
hereunder to be done, observed and performed by them;
(c) This Amendment has been duly authorized, validly executed and
delivered by one or more authorized officers of each of the Borrowers and this
Amendment constitutes the legal, valid and binding obligation of the Borrowers
enforceable against each of them in accordance with its terms; provided, that
the enforceability of this Amendment is subject to general principles of equity
and to bankruptcy, insolvency and similar laws affecting the enforcement of
creditor's rights generally; and
(d) The execution and delivery of this Amendment and the Borrowers'
performance hereunder do not and will not require the consent or approval of any
regulatory authority or governmental authority or agency having jurisdiction
over the Borrowers other than those which have already been obtained or given,
nor be in contravention of or in conflict with the respective Articles of 91
Incorporation or Bylaws of the Borrowers, or the provision of any statute, or
any judgment, order or indenture, instrument, agreement or undertaking, to which
the Borrowers are a party or by which the Borrowers' assets or properties are or
may become bound.
SECTION 5. Counterparts. This Amendment may be executed in multiple
------------
counterparts, each of which shall be deemed to be an original and all of which,
taken together, shall constitute one and the same agreement.
SECTION 6. Governing Law. This Amendment shall be deemed to be made
-------------
pursuant to the laws of the State of Georgia with respect to agreements made and
to be performed wholly in the State of Georgia and shall be construed,
interpreted, performed and enforced in accordance therewith.
SECTION 7. Effective Date. This Amendment shall become effective as of
--------------
October 31, 1995.
2
<PAGE>
IN WITNESS WHEREOF. the parties hereto have caused this Amendment to be
duly executed by their respective authorized officers as of the day and year
first above written.
MBIA INC.
By: /s/ Christopher W. Tully (SEAL)
----------------------------------
Title: Treasurer
MBIA INSURANCE CORPORATION
By: /s/ Christopher W. Tully (SEAL)
----------------------------------
Title: SVP
[Remainder of this page intentionally left blank]
3
<PAGE>
WACHOVIA BANK OF GEORGIA, N.A.,
as Agent and as a Bank
By: /s/ FC Childer
------------------------------
Title: SVP
[Remainder of this page intentionally left blank]
4
<PAGE>
BANCO SANTANDER
By: /s/ Robert E. Schlegel (SEAL)
-------------------------------
Title: VICE PRESIDENT
MANAGER-CORPORATE BANKING
BANCO SANTANDER
/s/ Dom J. Rodriguez
DOM J. RODRIGUEZ
VICE PRESIDENT
BANCO SANTANDER
[Remainder of this page intentionally left blank]
5
<PAGE>
THE SUMITOMO BANK, LTD.,
NEW YORK BRANCH
By: /s/ Yoshinori Kawamura (SEAL)
-------------------------------
Yoshinori Kawamura
Title: Joint General Manager
[Remainder of this page intentionally left blank]
6
<PAGE>
THE CHASE MANHATTAN BANK, N.A.
By: /s/ J. David Parker, Jr. (SEAL)
-------------------------------
J. DAVID PARKER, Jr.
Title: Vice President
[Remainder of this page intentionally left blank]
7
<PAGE>
COMMERZBANK AKTIENGESELLSCHAFT
By: /s/ ??????????????? (SEAL)
-------------------------------
Title:
[Remainder of this page intentionally left blank]
8
<PAGE>
THE INDUSTRIAL BANK OF JAPAN,
LIMITED
NEW YORK BRANCH
By: /s/ Robert Ramage, Jr. (SEAL)
-------------------------------
ROBERT RAMAGE, JR.
Title: SENIOR VICE PRESIDENT
[Remainder of this page intentionally, left blank]
9
<PAGE>
NBD BANK (formerly known as NBD BANK,
N.A.)
By: /s/ Anna R. Hoffman (SEAL)
-------------------------------
ANNA R. HOFFMAN
Title: VICE PRESIDENT
[Remainder of this page intentionally left blank]
10
<PAGE>
$25,000,000 BANCA MONTE DEI PASCHI DI SIENA S.P.A.
By: /s/ ????????????? (SEAL)
-------------------------------
Title:
By: /s/ Brian R. Landy (SEAL)
-------------------------------
Brian R. Landy
Title: Vice President
Lending Office
--------------
Banca Monte dei Paschi di Siena S.p.A.
245 Park Avenue
New York, New York 10167-0036
Telecopy number: (212) 557-8039
Telephone number: (212) 557-8111
11
<PAGE>
MBIA INC. SECRETARY'S CERTIFICATE
----------------------------------
Wachovia Bank of Georgia, N.A.,
as Agent
191 Peachtree Street, N.E.
Atlanta, GA 30303
Ladies and Gentlemen:
Reference is made to the Second Amendment to Credit Agreement, dated as
of October 31, 1995 (the "Second Amendment") to the Credit Agreement, dated as
of August 31, 1994, as heretofore amended (collectively, the "Credit
Agreement") by and among MBIA Inc. ("MBIA"), MBIA Insurance Corporation,
Wachovia Bank of Georgia, N.A., as Agent and as Bank, and the other Banks
signatory thereto. All capitalized terms used herein and not otherwise defined
shall have the meanings assigned to them in the Credit Agreement
The undersigned, Louis G. Lenzi, Secretary of MBIA, hereby certifies that he
has been duly elected, qualified and is acting in such capacity and that, as
such, he is familiar with the facts herein certified and is duly authorized to
certify the same, and hereby further certifies, in connection with the Credit
Agreement that:
1. From August 31, 1994 to and including the date hereof, there has been no
amendment, modification or revocation of the Amended and Restated Certificate of
Incorporation or By-Laws and both are in full force and effect on the date
hereof.
2. Attached hereto as Exhibit C is a complete and correct copy of the
resolution duly adopted by the Board of Directors of MBIA on July 14, 1994
approving, and authorizing the execution and delivery of, the Credit Agreement
and the Notes. Such resolution has not been repealed or amended and is in full
force and effect, and no other resolutions or consents have been adopted by the
Board of Directors of MBIA in connection therewith.
3. Christopher W. Tilley, who as Treasurer of MBIA signed the Second
Amendment and the Notes, was duly elected, qualified and acting as such at the
time he signed the Second Amendment and the Notes, and his signature appearing
on the Second Amendment and the Notes is his genuine signature.
<PAGE>
IN WITNESS WHEREOF, the undersigned has hereunto set his hand as of the 31st
day of October, 1995.
By: /s/ Louis G. Lenzi
------------------------------
Louis G. Lenzi
Secretary
-2-
<PAGE>
EXHIBIT A
---------
RESOLVED, that the Company is authorized to enter into lines of credit with
various financial institutions, for an aggregate amount up to $275 million for
the purpose of drawings by the Company for all general corporate purposes and
the Chairman, President and Chief Executive Officer or any Executive Vice
President or the Senior Vice President and Chief Financial Officer or the Senior
Vice President and Controller or the Treasurer or the Secretary or any Assistant
Secretary of the Company be and each hereby is authorized, directed and
empowered to execute and deliver the credit agreements for and on behalf of the
Company, including necessary counterparts, on the material terms described
herein, but with such changes, modifications, additions or deletions as shall to
the signatory deem necessary, desirable or appropriate, such execution thereof
to constitute conclusive evidence of approval of any and all changes,
modifications or additions, and that from and after the execution of such credit
agreements, the Chairman, President and Chief Executive Officer or any Executive
Vice President or any Senior Vice President or the Secretary or any Assistant
Secretary are hereby authorized, empowered and directed to enter into and
execute any amendments to the credit agreements and do all such acts and things
and to execute all such documents, including but not limited to any notes, as
may be necessary to carry out and comply with the provisions of such credit
agreements as executed, as well as the intent and purposes of this resolution.
<PAGE>
MBIA INSURANCE CORPORATION
--------------------------
SECRETARY'S CERTIFICATE
-----------------------
Wachovia Bank of Georgia, N.A.,
as Agent
191 Peachtree Street, N.E.
Atlanta, GA 30303
Ladies and Gentlemen:
Reference is made to the Second Amendment to Credit Agreement, dated as of
October 31, 1995 (the "Second Amendment") to the Credit Agreement, dated as of
August 31, 1994, as heretofore amended (collectively, the "Credit Agreement") by
and among MBIA Inc., MBIA Insurance Corporation ("MBIA Corp."), Wachovia Bank of
Georgia, N.A., as Agent and as Bank, and the other Banks signatory thereto. All
capitalized terms used herein and not otherwise defined shall have the meanings
assigned to them in the Credit Agreement.
The undersigned, Louis G. Lenzi, Secretary of MBIA Corp., hereby certifies
that he has been duly elected, qualified and is acting in such capacity and
that, as such, he is familiar with the facts herein certified and is duly
authorized to certify the same, and hereby further certifies, in connection with
the Credit Agreement that:
1. From August 31, 1994 to and including the date hereof, there has been no
amendment, modification or revocation of the Restated Charter or By-Laws of MBIA
Corp. except to reflect MBIA Corp.'s name change. Both the Restated Charter and
the By-Laws are in full force and effect on the date hereof.
2. Attached hereto as Exhibit A is a complete and correct copy of the
resolution duly adopted by the Board of Directors of MBIA Corp. on August 12,
1994 approving, and authorizing the execution and delivery of, the Credit
Agreement and the Notes. Such resolution has not been repealed or amended and
is in full force and effect, and no other resolutions or consents have been
adopted by the Board of Directors of MBIA Corp. in connection therewith.
3. Christopher W. Tilley, who as Treasurer of MBIA Corp. signed the Second
Amendment and the Notes, was duly elected, qualified and acting as such at the
time he signed the
<PAGE>
Second Amendment and the Notes, and his signature appearing on the Second
Amendment and the Notes is his genuine signature.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand as of the
31st day of October, 1995.
By: /s/ Louis G. Lenzi
-------------------------
Louis G. Lenzi
Secretary
-2-
<PAGE>
EXHIBIT A
---------
RESOLVED, that the Corporation is authorized to enter into lines of credit
with various financial institutions, for an aggregate amount up to $275 million
for the purpose of drawings by the Corporation for all general corporate
purposes and the Chairman, President and Chief Executive Officer or any
Executive Vice President or the Senior Vice President and Chief Financial
Officer or the Senior Vice President and Controller or the Treasurer or the
Secretary or any Assistant Secretary of the Corporation be and each hereby is
authorized, directed and empowered to execute and deliver the credit agreements
for and on behalf of the Corporation, including necessary counterparts, on the
material terms described herein, but with such changes, modifications, additions
or deletions as shall to the signatory deem necessary, desirable or appropriate,
such execution thereof to constitute conclusive evidence of approval of any and
all changes, modifications or additions, and that from and after the execution
of such credit agreements, the Chairman, President and Chief Executive Officer
or any Executive Vice President or any Senior Vice President or the Secretary or
any Assistant Secretary are hereby authorized, empowered and directed to enter
into and execute any amendments to the credit agreements and do all such acts
and things and to execute all such documents, including but not limited to any
notes, as may be necessary to carry out and comply with the provisions of such
credit agreements as executed, as well as the intent and purposes of this
resolution.
<PAGE>
[LETTERHEAD OF MBIA INSURANCE CORPORATION]
October 31, 1995
To the Banks and the Agent
Referred to Below
c/o Wachovia Bank of Georgia, N.A.,
As Agent
191 Peachtree Street, N.E.
Atlanta, Georgia 30303
Re: Credit Agreement, dated as of August 31, 1994, among MBIA Insurance
Corporation, MBIA Inc., Wachovia Bank of Georgia, N.A., as Agent and the
other Banks signatory thereto, as amended
Ladies and Gentlemen:
I am General Counsel of MBIA Inc., a Connecticut corporation ("MBIA") and NMIA
Insurance Corporation (formerly known as Municipal Bond Investors Assurance
Corporation), a New York stock insurance corporation ("MBIA Corp."). This
opinion is being given in connection with the Credit Agreement, dated as of
August 31, 1994, among MBIA Corp., MBIA, Wachovia Bank of Georgia, N.A., as
Agent (the "Agent") and the other Banks signatory thereto, as amended by the
First Amendment to Credit Agreement, dated as of October 14, 1994 and the Second
Amendment to Credit Agreement, dated as of October 31, 1995 (collectively, the
"Credit Agreement"). All capitalized terms used herein and not otherwise
defined shall have the respective meanings assigned thereto in the Credit
Agreement,
In this connection, I have examined the Credit Agreement, the Notes and such
certificates of public officials, such certificates of officers of MBIA and MBIA
Corp., and copies certified to my satisfaction of such corporate documents and
records of MBIA and MBIA Corp. and of such other papers as I have deemed
relevant and necessary or appropriate for the opinions set forth below. I have
relied upon certificates of public officials and of officers of MBIA and MBIA
Corp. with respect to the accuracy of factual matters contained therein which
were not independently established.
I have also assumed (i) the due execution and delivery, pursuant to due
authorization, of the Credit Agreement by the Agent and the Banks, (ii) the
authenticity of all such documents
<PAGE>
Page 2
submitted to me as originals, (iii) the genuineness of all signatures, and (iv)
the conformity of all such documents submitted to me as copies.
Based upon the foregoing, it is my opinion that:
(1) MBIA is a corporation duly organized and validly existing and in good
standing under the laws of the State of Connecticut, MBIA Corp. is a stock
insurance corporation duly incorporated and validly existing in good standing
under the laws of the State of New York and each has the corporate power
required to carry on their businesses as now being conducted.
(2) The execution, delivery and performance by MBIA and MBIA Corp. of the
Credit Agreement and the Notes (i) are within the corporate powers of MBIA and
MBIA Corp., (ii) have been duly authorized by all necessary corporate action,
(iii) require no action by or in respect of, or filing with, any governmental
body, agency or official, (iv) do not (A) contravene, or constitute a default
under, any provision of applicable law or regulation or of any agreement,
judgment, injunction, order, decree or other instrument which to my knowledge is
binding upon MBIA and MBIA Corp., or (B) in the case of MBIA, violate any
provision of its Amended and Restated Certificate of Incorporation or By-Laws,
and in the case of MBIA Corp., violate any provision of its Restated Charter or
By-Laws, and (v) to the best of my knowledge, except as provided in the Credit
Agreement, do not result in the creation or imposition of any Lien on any asset
of MBIA, MBIA Corp. or any of their Subsidiaries.
(3) The Credit Agreement and the Notes are valid and binding obligations of
MBIA and MBIA Corp., enforceable in accordance with their respective terms,
except that such enforceability may be limited by laws relating to bankruptcy,
insolvency, reorganization, moratorium, receivership and other similar laws
affecting creditors rights generally and by general principals of equity, and
the enforceability as to rights to indemnity thereunder may be subject to
limitations of public policy.
(4) To the best of my knowledge, there is no action, suit or proceeding
before or by any court, arbitrator or any governmental body, agency or official
pending or threatened against MBIA or MBIA Corp. or their Consolidated
Subsidiaries wherein an adverse decision, ruling or finding would (i) materially
and adversely affect the business, consolidated financial position or
consolidated results of operations of MBIA, MBIA Corp. and their Consolidated
Subsidiaries, considered as a whole, or (ii) affect the validity or
enforceability of the Credit Agreement or any Note.
(5) Each Subsidiary of MBIA and MBIA Corp. is a corporation duly organized,
validly existing and in good standing under the laws of its jurisdiction of
incorporation, and has all corporate powers and all material governmental
licenses, authorizations, consents and approvals required to carry on its
business as now conducted.
<PAGE>
Page 3
(6) Neither MBIA nor MBIA Corp. is an "investment company" within the
meaning of the Investment Company Act of 1940, as amended.
(7) Neither MBIA, MBIA Corp. nor any of their Subsidiaries is a "holding
company", or a "subsidiary company" of a "holding company", or an "affiliate" of
a "holding company" or of a "subsidiary company" of a "holding company", as such
terms are defined in the Public Utility Holding Company Act of 1935, as amended.
(8) The choice of law provisions in the Credit Agreement and Notes
designating the law of the State of Georgia as the governing law are enforceable
under the laws of the State of New York. In the event that the choice of law
provisions in the Credit Agreement and Notes designating the law of the State of
Georgia as the governing law are not enforceable, however, and the laws of the
State of New York are applied, the Credit Agreement and Notes constitute valid
and legally binding obligations of MBIA and MBIA Corp. enforceable against MBIA
and MBIA Corp. in accordance with their respective terms under the laws of the
State of New York.
This opinion is delivered to you in connection with the transaction
referenced above and may only be relied upon by you or any Assignee or
Participant under the Credit Agreement, and may not be circulated, quoted or
otherwise referred to without my prior written consent.
Very truly yours,
/s/ Louis G. Lenzi
Louis G. Lenzi
General Counsel
PMK:lp
<PAGE>
<PAGE>
EXHIBIT 10.65
AMENDMENT NO. 1
TO
INVESTMENT SERVICES AGREEMENT
WHEREAS, MBIA Insurance Corporation and MBIA Securities Corp. have
entered into an Investment Services Agreement (the "Agreement"); and
WHEREAS, the parties have agreed to amend said Agreement.
NOW, THEREFORE, the Agreement is hereby amended as follows effective
January 2, 1996:
1. Exhibits B and C of the Agreement are replaced in their entirety by
the substitute Exhibits B and C attached hereto.
2. All other provisions of the Agreement shall remain unchanged.
IN WITNESS WHEREOF, the parties have caused the signatures of their
duly authorized officers to be hereto affixed this 29th day of December, 1995.
MBIA INSURANCE CORPORATION MBIA SECURITIES CORP.
By: /s/ By: /s/
--------------------------- --------------------------
Title: Chief Financial Officer Title: President
<PAGE>
Section II. GUIDELINES
----------
The following shall constitute the Investment Guidelines for MBIA Corp., acting
through its duly authorized officers and/or through its outside investment
advisors:
A. Investments shall be made and maintained in compliance with all
applicable provisions of Article 14 of the New York Insurance Laws, as
amended.
B. Fixed Income Policy
(1) Quality: For fixed-income securities (over 1 year when purchased)
--------
average quality will be AA to AA-, with minimum purchase quality,
BBB. For short-term investments (less than 1 year), only
investments rated Al/P1 (or equivalent rating) or better may be
purchased.
(2) Maturity: The average duration target is a maximum of 7.5 years;
---------
minimum duration is 6.0 years.
(3) Maturity Distribution: Diversification in maturity to minimize
----------------------
reinvestment risk is an objective. Although this objective is not
quantified, a reasonably well-laddered portfolio over a wide range
of maturities is to be achieved.
(4) Insured Obligations: MBIA Corp. may purchase or hold obligations
--------------------
insured by MBIA Corp. or its competitors, subject to an aggregate
limit of 20% of the total investment portfolio.
(5) Other: Securities may be purchased in both public and private
-----
markets, subject to the maintenance of an appropriate level of
overall portfolio liquidity and to all other objectives/guidelines.
C. Equity Policy
MBIA Corp. holds interests in certain equity-oriented investments in
limited amounts. It is MBIA Corp.'s current policy not to purchase
equity oriented securities.
D. Further Restrictions
(1) At the time of purchase, no investment may be in default as to
principal or interest payments and all shall be rated "investment
grade" by at least one nationally-recognized domestic rating
agency.
(2) Only U.S. dollar denominated securities may be purchased, except
those required for MBIA Corp.'s foreign operations.
(3) No investment shall be made in futures or options on futures.
(4) All investments shall be held by a third-party custodian (or via
book entry at the Depository Trust Company or a similarly qualified
clearing corporation), as prescribed in approved custody
agreements, or in other customary forms of safekeeping.
2
<PAGE>
E. Fixed income investments are further limited to the following types and
amounts (with the term "assets" defined by the New York statutes):
<TABLE>
<CAPTION>
Type of Obligation Limitation Basis
------------------ ---------- -----
<S> <C> <C> <C>
(i) Backed by full faith and credit Unlimited In Aggregate
of the United States, including Unlimited Per Issuer or
Government National Mortgage Association Mortgage Pool
direct obligations and guaranteed
mortgage-backed securities.
(ii) Federal National Mortgage Association 10% of Assets In Aggregate
direct obligations and guaranteed 2% of Assets Per Mortgage Pool
mortgage-backed securities.
(iii) Federal Home Loan Mortgage 10% of Assets In Aggregate
Corporation direct obligations and 2% of Assets Per Mortgage Pool
guaranteed mortgage-backed
securities.
(iv) Bonds which have been fully 2% of Assets Per Issuer
collateralized by direct U.S. government
obligations (i.e., prerefunded or
escrowed-to-maturity) and upgraded to
triple-A by at least one nationally-
recognized domestic rating agency.
(v) Obligations not included in Section (iv)
above and backed by full faith and credit of:
(a) Any state government. 5% of Assets Per State
(b) Any political subdivision of a State 2% of Assets Per Issuer
or any municipality within the
United States.
(vi) Obligations not included in Section (iv) 2% of Assets Per Issuer
above and backed by revenue or
other income sources of a single
facility or system.
(vii) Pools of assets rated AAA by at least 5% of Assets In Aggregate
one nationally recognized domestic 0.5% of Assets Per Single Issue
rating agency (excluding assets otherwise
permitted under this agreement).
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
Type of Obligation Limitation Basis
------------------ ---------- -----
<S> <C> <C> <C>
(viii) Securities backed by pools of assets 3% of Assets In Aggregate
rated double-A by at least one 0.5% of Assets Per Single Issue
nationally recognized domestic rating
agency (examples may include, but
are not limited to, commercial or
residential mortgages, automobile
loans).
(ix) Investments in any entity, obligations 1% of Assets Per Issuer
of which are insured by MBIA Corp.,
(and which are identified on a list
furnished BY MBIA Corp. to its
advisors from time-to-time) with the
exception of United States
municipalities rated AA or better by at
least on nationally-recognized
domestic rating agency.
(x) Backed by full faith and credit of a 2% of Assets Per Issuer
non-public corporate entity, whether
foreign or domestic.
(xi) Backed by full faith and credit of 10% of Assets In Aggregate
Canada, its Provinces and other 10% of Assets For Federal Govt.
political subdivisions. 2% of Assets Per all Other
Issuers
(xii) Backed by full faith and credit of 10% of Assets In Aggregate
OECD foreign governments other than 1% of Assets Per Country
in Canada.
(xiii) Repurchase agreements with a bank 2% of Assets In Aggregate
or registered broker-deal, provided 1% of Assets Per Bank or
that all securities underlying such Broker-Dealer
agreements:
(a) Would be eligible
investments under
these Guidelines; and.
(b) Have maturities of one
year or less (unless the
agreement is fully
collateralized and
marked to market daily.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Type of Obligation Limitation Basis
------------------ ---------- -----
<S> <C> <C> <C>
(xiv) investments of one year or 10% of Assets In Aggregate
less in term which are either 1% of Assets Per Bank
direct obligations of or
supported by letters of credit
from banks rated in the
highest short-term category by
at least one nationally-
recognized domestic rating
agency (or judged to be of
equivalent quality).
(xv) Mutual funds or other such 2% of Assets In Aggregate
investment conduits registered
with the SEC under the
Investment Company Act of
1940, as amended (provided
that all investments within
each fund would be eligible
under the Guidelines).
(xvi) Equity-linked debt instruments $100 million In Aggregate
rated A or better by at least $ 10 million Per Issue
one nationally recognized
domestic rating agency with a
maturity no greater than 10
years. Equity index must be
nationally recognized, such as
the S&P 500.
*************************
</TABLE>
This Statement of investment Objective & Guidelines shall remain in effect until
revised or amended by action of the MBIA Corp. Board of Directors, in accordance
with its by-laws.
5
<PAGE>
January 1996
------------
Section III. SPECIFIC INSTRUCTIONS FOR TAXABLE FIXED-INCOME INVESTMENTS
----------------------------------------------------------
In the context of Sections I. and II. above as applicable, the following shall
constitute the specific instructions for taxable fixed-term investments made by
MBIA Corp., acting through MBIA Securities Corp., its investment advisor, it
being understood that these instructions set forth in this Section III. are to
be adhered to notwithstanding any less restrictive provisions in Sections I. and
II.
A. Maturity
--------
The maximum allowable average duration is 7.5 years; minimum
duration is 5.0 years.
B. Quality
--------
Minimum average quality of total portfolio, "A."
Minimum purchase quality, "BBB+."
Maximum of investments held rated less than "A-," 4 percent.
Minimum holding quality, "BBB-."
6
<PAGE>
January 1996
------------
SECTION IV. SPECIFIC INSTRUCTIONS FOR TAX-EXEMPT FIXED-INCOME INVESTMENTS
-------------------------------------------------------------
In the context of Sections I. and II. above as applicable, the following shall
constitute the specific instructions for tax-exempt fixed-term investments made
by MBIA Corp., acting through MBIA Securities Corp., its investment advisor, it
being understood that the instructions set forth in this Section IV. are to be
adhered to notwithstanding any less restrictive provisions in Sections I. and
II.
A. Maturity
--------
The maximum allowable average duration is 7.5 years; minimum
duration is 6.25 years.
B. Quality
-------
Minimum average quality for the tax-exempt portfolio is "AA."
Minimum purchase quality for the tax-exempt portfolio is "BBB."
Minimum holding quality for the taxable portfolio is investment
grade, unless specific waiver of this limit is obtained from MBIA Corp.
Maximum of investments held rated less than A-, 4 percent, unless
specific waiver of this limit is obtained from MBIA Corp.
7
<PAGE>
EXHIBIT C
SCHEDULE OF FEES
MANAGEMENT FEES PER ANNUM
ASSETS UNDER MANAGEMENT IN BASIS POINTS TIMES ASSETS
AT MARKET VALUE ($ MILLIONS) UNDER MANAGEMENT
---------------------------- ----------------------------
All Assets 7.0 bp
Management fees shall be paid quarterly, in arrears, 30 days following the end
of each quarter, based upon the average market value of the assets under
management during such quarter.
"Market Value" shall be determined in accordance with Section 9 of this
Agreement.
11
<PAGE>
INVESTMENT SERVICES AGREEMENT
-----------------------------
This INVESTMENT SERVICES AGREEMENT (the "Agreement") is made as of the 28th
day of April 1995, by and between MBIA Insurance Corporation, a New York
insurance corporation (the "Client"), and MBIA Securities Corp., a Delaware
Corporation (the "Advisor").
RECITALS
--------
WHEREAS, Client seeks investment advisory services in connection with
certain assets owned by it; and
WHEREAS, Advisor is an affiliate of Client and in the business of
providing investment advisory services; and
WHEREAS, Client desires to retain Advisor to render advice and services
to Client pursuant to the terms and conditions of this Agreement and Advisor is
willing to furnish such advice and services.
NOW THEREFORE, in consideration of the covenants and the mutual promises
hereinafter set forth, the parties hereto mutually agree as follows:
1. Authority of the Advisor. (a) Advisor shall have full power to
------------------------
manage and direct the investments of and for Client's account (the "Account"),
without prior consultation with Client, subject, however, to the limitations
referred to in clause (b) of this paragraph 1 and paragraph 5 hereof. This
discretionary authority makes the Advisor agent and attorney-in-fact with full
power and authority on behalf of the Account (i) to buy, sell, exchange, convert
and otherwise trade in any and all stocks, bonds and other securities as the
Advisor may select; and (ii) to establish and deal through accounts with one or
more securities brokerage firms, dealers or banks as Advisor may select;
provided, however, that none of such firms, dealers or banks shall be a person
or entity that controls, or is controlled by, or is under common control with,
Advisor. This discretionary authority shall remain in full force and effect for
the duration of this Agreement or until the Advisor receives written notice from
Client of its termination in accordance with the terms of this Agreement.
(b) Notwithstanding any other provision of this Agreement, it is
understood and acknowledged by the parties hereto that Client shall at all times
have ultimate control of and responsibility with respect to the functions which
Client is delegating to Advisor Pursuant to the terms of this Agreement. In
furtherance of the foregoing, Advisor shall follow the instructions of Client's
Chief Financial Officer in connection with the management and investment of
Account.
2. Custody of Assets. Client has appointed The Chase Manhattan Bank,
-----------------
N.A., as its custodian (the "Custodian") to act under the Custody Agreement,
dated March 1, 1995. The Custodian will take and have possession of the assets
of the Account. Advisor shall not act as
<PAGE>
custodian for Client's Account or take or have possession of any of the assets
thereof, but may issue instructions to the Custodian of such assets as required
in connection with the settlement of transactions effected by Advisor hereunder.
Accounts and records maintained by Advisor in connection with this Agreement
shall be the property of the Client. Notwithstanding the foregoing, or any
other provisions of this Agreement to the contrary, Client and Advisor
acknowledge and agree that Advisor shall at all times own and have custody of
its own general corporate accounts and records.
3. Brokerage. To the extent permitted in paragraph I of this Agreement,
---------
Advisor may place orders for the execution of transactions for the Account with
or through such brokers, dealers, or banks as Advisor may select and, complying
with Section 28(e) of the Securities Exchange Act of 1934, may select brokers-
dealers charging a commission in excess of the commission another broker-dealer
would have charged. The Advisor and other clients advised by the Advisor may
benefit from any information received from broker-dealers selected in connection
with Client's Account.
4. Administrative Services. The Client hereby engages the Advisor to provide
-----------------------
those administrative and securities management services described in Exhibit A
attached hereto.
5. Sub-Advisors and Consultants. Advisor may, at its own expense, employ
----------------------------
other persons to furnish to Advisor statistical and other factual information,
advice regarding economic factors and trends, information with respect to
technical and scientific developments, and such other information, advice and
assistance as Advisor may desire; provided, however, that such subadvisors and
consultants shall not have authority to make investment decisions for Client's
Account.
6. Investment Objectives and Guidelines. Client has provided Advisor
------------------------------------
with a written Statement of Investment Objectives & Guidelines (the
"Guidelines") in the form attached hereto as Exhibit B and incorporated herein
by reference. Advisor agrees to follow the Guidelines when making investments
for Client's Account. Client shall give Advisor prompt written notice of any
investments made for Client's Account which Client believes to have been made
outside the Guidelines. Likewise, Advisor shall give Client prompt written
notice of any investments made for Client's Account which Advisor believes to
have been made outside the Guidelines. Client may change or modify the
Guidelines from time to time by providing the Advisor written notice of such
change or modification. Neither Advisor's acceptance of the Guidelines, nor any
other provision of this Agreement shall be considered a guaranty that any
specific result will be achieved.
7. Allocation of Charges and Expenses. (a) Advisor shall furnish at its
----------------------------------
own expense executive, supervisory and other personnel services, office space,
equipment, utilities and telephone services in connection with supplying the
investment management, advisory, statistical, analytical and research services
contemplated by this Agreement.
(b) Custodian fees, transfer agent fees and brokerage costs, fees and
commissions will be charged to Client's Account.
2
<PAGE>
(c) For all expenses not otherwise covered in subsections (a) and (b) above,
it is understood that Client will pay or reimburse Advisor for such expenses,
including, without limitation, governmental fees, interest charges, taxes, fees
and expenses of independent auditors, legal fees and other expenses connected
with the execution of security transactions or the performance by Advisor of any
other duties under this Agreement or any actions taken by Advisor at the request
of Client. Except for taxes, governmental fees and any other expenses outside
of Advisor's control, Advisor will notify Client not less than five (5) business
days prior to incurring any individual expense under this subsection (c) and
Client shall have five (5) business days from receipt of such notice within
which to notify Advisor of its disapproval of any such expense. Failure of
Client to so notify Advisor of its disapproval within five (5) business days
shall be deemed Client's approval of such expense.
(d) Advisor shall provide Client, no later than thirty (30) days following
the end of each calendar month, with a summary of the investment transactions
for that month, together with a statement of any fees and expenses chargeable to
Client pursuant to subsections (b) and (c) above. Any undisputed amounts shall
be paid by Client within fifteen (15) days of receipt of said statement.
8. Compensation of Advisor. The compensation of Advisor for its services
-----------------------
under the Agreement shall be calculated and paid in accordance with the Schedule
of Fees attached hereto as Exhibit C and incorporated herein by reference. It
is intended by the parties hereto that the compensation rate set forth in that
Schedule of Fees, or any sub sequent amendment thereto, shall reflect Advisor's
costs in providing services to Client, pursuant to this Agreement. The Schedule
of Fees will be reviewed annually and adjusted to reflect any changes in the
Advisor's costs.
9. Valuation. In computing the market value of any security held in the
---------
custody account:
(a) Each security listed on any national securities exchange, for which
recent market quotations are readily available, shall be valued at the last
reported sale price on the principal exchange on which such security is traded,
or, if there has been no recently reported sale, at the last reported bid price;
(b) Unlisted securities shall be valued at the then current bid price, if
market quotations are readily available;
(c) Futures contracts will be valued based on closing settlement prices as
reported on regulated futures exchanges, in accordance with accepted practices
and applicable law and regulations; and
(d) Any other security or asset shall be valued in a manner determined in
good faith by Advisor to reflect its fair market value and such valuation shall
be determinative.
3
<PAGE>
10. Records. Advisor shall maintain accurate and detailed records of all
-------
transactions in connection with the Account, which shall be subject to
inspection by Client upon reasonable notice during Advisor's regular business
hours. It is understood and acknowledged that such records are the property of
the Company and shall be returned to the Company upon termination of this
Agreement. On request, representatives of Advisor shall meet With the Client's
officers and directors and the officers and directors of the Client's parent
company to discuss investment performance and other matters relating to
Advisor's obligations under this Agreement.
11. Duration and Termination. (a) Subject to the provisions of paragraph 13
------------------------
hereof, this Agreement shall commence as of the date set forth above and shall
continue until terminated (i) by mutual consent of Advisor and Client or (ii) as
hereinafter provided. Fees will be prorated to the date of termination and any
unearned portion of repaid fees will be refunded to Client.
(b) Either party may terminate this Agreement without cause upon at least
thirty (30) days prior written notice.
(c) At its discretion, Client may immediately terminate this Agreement by
written notice to Advisor upon the occurrence of any one of the following
events:
(i) The insolvency of Advisor, the inability of Advisor to pay debts as they
mature, the making of an assignment by Advisor for the benefit of creditors, the
dissolution of Advisor, the appointment of a receiver or liquidator for Advisor
or for a substantial part of Advisor's property, or the institution of
bankruptcy, reorganization, arrangement, insolvency or similar proceedings by or
against Advisor under the laws of any jurisdiction; or
(ii) The default under or any violation of the terms of this Agreement by
Advisor which is not cured by Advisor within fifteen (15) days after receipt by
Advisor of notice of such default from Client of the failure of Advisor to
perform satisfactorily its duties as set forth in this Agreement.
(d) At its discretion, Advisor may immediately terminate this Agreement by
written notice to Client upon the occurrence of any one of the following events:
(i) The insolvency of Client, the inability of Client to pay debts as they
mature, the making of an assignment by Client for the benefit of creditors or
the dissolution of Client.
(ii) The default under or any violation of the terms of this Agreement by
Client which is not cured by Client within fifteen (15) days after receipt by
Client of notice of such default from Advisor of the failure of Client to
perform satisfactorily its duties as set forth in this Agreement; or
(iii)The commencement of a delinquency proceeding against Client pursuant to
Article 74 of the New York Insurance Law.
4
<PAGE>
(e) Upon termination of this Agreement, if Client so elects and for a
period not exceeding the earlier of two (2) months or the date on which Client
appoints a successor to Advisor, Advisor shall be obligated to perform those
investment services which are necessary to ensure the proper management of
Client's Account. Termination of this Agreement shall not relieve either party
of liability for the performance of obligations imposed upon such party during
the effective period of this Agreement which have not been performed at the time
of termination thereof. It is specifically agreed to and acknowledged that
Advisor shall be entitled to fees referred to in paragraph 8 for services
rendered pursuant to this subparagraph (e).
12. Non-Exclusive Contract. The services of the Advisor to Client are not to
----------------------
be deemed to be exclusive. Advisor is free to render service to others. Client
agrees that Advisor may give advice and take action with respect to any of its
other clients which may differ from advice given or the timing or nature of
action taken with respect to Client's Account. Nothing in this Agreement shall
be deemed to impose upon the Advisor any obligation to purchase or sell or to
recommend for purchase or sale by or for Client any security or other property
which Advisor, its officers, employees or affiliates may purchase or sell for
their own accounts or which the Advisor may purchase or sell for the account of
any other client. Client recognizes that transactions in a specific security
may not be accomplished for all or any other clients at the same time or at the
same price.
13. Representations. (a) The Advisor represents and warrants that it is
---------------
registered as an investment advisor with the Securities and Exchange Commission
pursuant to the Investment Advisers Act of 1940 as amended.
(b) Advisor represents and warrants that this Agreement has been duly
authorized in accordance with Advisor's governing documents and when executed
and delivered will be binding upon Advisor in accordance with its terms.
(c) Advisor represents and warrants that it will maintain records in
connection with the Account in accordance with the applicable requirements of
Section 325 of the New York Insurance Law or any successor statute thereto.
(d) Client represents and warrants that this Agreement has been duly
authorized by Client's Board of Directors in accordance with Client's governing
documents and when executed and delivered will be binding upon Client in
accordance with its terms.
14. Department of Insurance Approval. This Agreement is executed by the
--------------------------------
parties with the understanding that it is contingent upon final approval by the
New York Department of Insurance. In the event such approval is not obtained,
the Client shall have the unqualified right to terminate this Agreement without
penalty, provided, however, that any investment action taken by Advisor on
behalf of Client prior to the effective date of such termination shall be at
Client's risk.
15. Applicable Laws. Advisor shall comply with all securities laws and other
---------------
laws applicable to investment managers, including, without limitation, the
Investment Advisers Act of
5
<PAGE>
1940, as amended. Advisor shall comply with the Guidelines in providing its
services hereunder, and, except for monitoring compliance with the provisions of
law referred to in the Guidelines, shall have no independent duty or
responsibility to assure that investments permitted by Client's Guidelines
qualify as permitted investments under applicable insurance laws.
16. Voting Rights. Decisions on voting of proxies will be made by Client.
-------------
17. Liability of Advisor. In providing Client with investment advice and other
--------------------
services as herein provided, neither Advisor nor any officer, director, employee
or agent thereof shall be held liable to Client, its creditors or its
stockholder(s) for errors of judgment or for anything except willful
malfeasance, bad faith or negligence in the performance of its duties or
reckless disregard of its obligations and duties under the terms of this
Agreement. It is further understood and agreed that Advisor may rely upon
information furnished to it reasonably believed to be accurate and reliable.
Nothing herein shall constitute a waiver or limitation of any rights which the
Client may have under any federal securities laws.
18. Confidential Relationship. The terms and conditions of this Agreement, all
-------------------------
information and advice furnished by either party under this Agreement and any
records generated by this Agreement are confidential and shall not be disclosed
to third parties, except as required by law.
19. Notices. All notices and other communications hereunder shall be in
-------
writing and shall be delivered by hand, telecopier, or mailed by registered or
certified mail (return receipt requested) to the parties at the following
addresses and shall be deemed given on the date on which such notice is
received:
To Client at:
Attention: General Counsel
Or by telecopier at:
With a copy to:
Attention: Chief Financial Officer
Or by telecopier at:
To Advisor at:
Attention: President
6
<PAGE>
Or by telecopier at:
Either party may change its address or telecopier number for purposes of this
paragraph by giving the other party written notice of the new address or
telecopier number in the manner set forth below.
20. Waiver. Waiver by either party of any obligation of the other party does
------
not constitute a waiver of any further or other obligation of the other party.
21. Amendment. This Agreement may be modified or amended only by an instrument
---------
in writing signed by duly authorized representatives of both Advisor and Client.
22. Agreement not Assignable. This Agreement is not assignable by either Client
------------------------
or Advisor.
23. Cumulative. All rights, powers and privileges conferred hereunder upon the
----------
parties shall be cumulative and shall not restrict those given by law.
24. Counterparts. This Agreement may be executed in counterparts, each of which
------------
so executed shall be deemed to be an original and such counterparts together
shall constitute but one and the same contract, which shall be sufficiently
evidenced by any such original counterpart.
25. Construction. The captions used in this Agreement are for convenience only,
------------
and shall not affect the construction or interpretation of any of its
provisions. Each of the provisions of this Agreement is severable, and
invalidity or inapplicability of one or more provisions, in whole or in part,
shall not affect any other provision. This Agreement shall be construed in
accordance with the laws of the State of New York, and is subject to the
provisions of the Investment Advisers Act of 1940, as amended, and the rules and
regulations of the Securities and Exchange Commission.
26. Disclosure Statement. Client acknowledges receipt of Advisor's disclosure
--------------------
statement, as required by Rule 204-3 under the Investment Advisers Act of 1940,
not less than 48 hours prior to the date of execution of this Agreement.
27. Dispute Resolution. Any disputes arising under this Agreement shall be
------------------
settled by arbitration in New York City in accordance with the American
Arbitration Association rules then in effect, any award rendered thereon shall
be enforceable in any court of competent jurisdiction.
28. Entirety of Agreement. This Agreement contains the entire agreement between
---------------------
the parties with respect to the subject matter hereof and supersedes and cancels
any prior understandings and agreements between the parties.
7
<PAGE>
IN WITNESS WHEREOF, the parties have caused the signatures of their duly
authorized offices to be hereto affixed.
By: By:
------------------------- -----------------------------
Title: Senior Vice President Title: President, MBIA Securities Corp.
----------------------- --------------------------------
"Client" "Advisor"
8
<PAGE>
EXHIBIT A
ADMINISTRATIVE SERVICES
Advisor will provide the following securities support functions:
- - Settlement/Custody Control
--------------------------
Daily coordination of any securities purchased or sold with investment
manager, brokers and clearance bank. Confirmation of funds movement upon
receipt/delivery of securities. Reconciliation of asset position between
custody bank and investment operations.
- - Transaction Processing
----------------------
Daily recording of individual security transactions on trade date.
- - Income Collection
-----------------
Daily collection and recording principal (maturity/redemption) and interest
payments. Follow up on overdue payments.
- - Bank Reconciliation
-------------------
Monthly reconciliation of all cash transactions in demand deposit accounts.
- - Market Valuation of Assets
--------------------------
Assets priced monthly by an outside service.
- - Investment Accounting Staff Support
-----------------------------------
Staff support will be provided to assist the Client in responding to audit,
tax or other regulatory interrogatories related to investment transactions as
reported.
Independent administrative services which are not provided by Advisor under
this Agreement include:
-- Custody services provided by The Chase Manhattan Bank, N.A. of New
York.
-- Outside audit services.
9
<PAGE>
The following reports will be provided to the Client and will include
transaction reports and investment management reports prepared monthly or
quarterly, as the case may be:
(a) Transaction Reporting:
---------------------
(i) Quarterly detail reports on new commitments.
(ii) Quarterly detail reports on all transactions including purchases,
sales, investment income and return of principal.
(iii) Transactional information on investments, as needed, to support tax
return preparation.
(b) Portfolio Review:
----------------
Quarterly summary and detail on the Client's holdings will be provided.
This report will include market values, overall quality ratings, portfolio
yield and a summary review of market conditions and portfolio strategy.
(c) Performance Reporting:
---------------------
Included as part of the portfolio review will be performance results on
both yields on new commitments and total return for the portfolio.
Performance will be measured against agreed upon indices.
10
<PAGE>
EXHIBIT B
April 1995
----------
MBIA INSURANCE CORPORATION
STATEMENT OF INVESTMENT OBJECTIVES & GUIDELINES
-----------------------------------------------
SECTION I. OBJECTIVES:
----------
A. Preservation of Capital in the context of maintaining triple-A
-----------------------
ratings for MBIA Insurance Corporation ("MBIA Corp.") and supporting
recognition of MBIA Corp.'s financial stability and strength by
insured bond investors, municipal market intermediaries, and other
municipal bond market constituencies.
B. Subject to A. above, optimization of after-tax investment income
----------------------------------------------------------------
to support the predictability and consistency of company earnings
and cash flow.
C. Subject to A. and B. above, optimization of long-term total returns.
-------------------------------------------------------------------
D. Maintenance of reasonable liquidity after taking into account the
-----------------------------------
company's other sources of liquidity (including bank credit
facilities and cash flow) for potential claims-paying and other
corporate needs.
Overall, these objectives call for maintenance of high quality investments,
avoidance of undue volatility in both income and returns and generally minimal
amounts of short-term investments and/or U.S. Treasury obligations for immediate
liquidity. MBIA Corp.'s investment selections will be made with a bias to hold
for the long-term, and to avoid sales or swaps in the absence of compelling
circumstances of tax credit, structural or other economic reasons, and not to
rely on short-term trading or market timing to achieve performance. The mix of
taxable and tax-exempt investments will vary from time to time with both market
conditions and company tax circumstances.
In seeking to achieve these objectives, MBIA Corp. will monitor, evaluate and
report on the performance of its investment managers and the portfolio, using
appropriate market-related benchmarks. In addition, MBIA Corp. will maintain an
awareness of and periodically report on the investment practices and results of
key competitors and comply with the constraints or limitations related to
internal guidelines and regulatory or rating agency considerations.
<PAGE>
SECTION II. GUIDELINES:
----------
The following shall constitute the Investment Guidelines for MBIA Corp., acting
through its duly authorized officers and/or through its outside investment
advisors:
A. Investments shall be made and maintained in compliance with all
applicable provisions of Article 14 of the New York Insurance Laws, as
amended.
B. Fixed Income Policy
(1) Quality: For fixed-income securities (over 1 year when purchased)
-------
average quality will be AA to AA-, with minimum purchase quality,
BBB. For short-term investments (less than 1 year), only investments
rated A1/P1 (or equivalent rating) or better may be purchased.
(2) Maturity: The average duration target is a maximum of 7.5 years;
--------
minimum duration is 6.0 years.
(3) Maturity Distribution: Diversification in maturity to minimize
---------------------
reinvestment risk is an objective. Although this objective is not
quantified, a reasonably well-laddered portfolio over a wide range
of maturities is to be achieved.
(4) Insured Obligations: MBIA Corp. may purchase or hold obligations
-------------------
insured BY MBIA Corp. or its competitors, subject to an aggregate
limit of 20% of the total investment portfolio.
(5) Other: Securities may be purchased in both public and private
------
markets, subject to the maintenance of an appropriate level of
overall portfolio liquidity and to all other objectives/guidelines.
C. Equity Policy
MBIA Corp. holds interests in certain equity-oriented investments in
limited amounts. It is MBIA Corp.'s current policy not to purchase
equity oriented securities.
D. Further Restrictions
(1) At the time of purchase, no investment may be in default as to
principal or interest payments and all shall be rated "investment
grade" by at least one nationally-recognized domestic rating
agency.
(2) Only U.S. dollar denominated securities may be purchased, except
those required for MBIA Corp.'s foreign operations.
(3) No investment shall be made in futures or options on futures.
(4) All investments shall be held by a third-party custodian (or via
book entry at the Depository Trust Company or a similarly qualified
clearing corporation), as prescribed in approved custody
agreements, or in other customary forms of safekeeping.
2
<PAGE>
E. Fixed income investments are further limited to the following types and
amounts (with the term "assets" defined by the New York statutes):
<TABLE>
<CAPTION>
Type of Obligation Limitation Basis
------------------ ---------- -----
<S> <C> <C> <C>
(i) Backed by full faith and credit Unlimited In Aggregate
of the United States, including Unlimited Per Issuer or
Government National Mortgage Association Mortgage Pool
direct obligations and guaranteed
mortgage-backed securities.
(ii) Federal National Mortgage Association 10% of Assets In Aggregate
direct obligations and guaranteed 2% of Assets Per Mortgage
mortgage-backed securities. Pool
(iii) Federal Home Loan Mortgage 10% of Assets In Aggregate
Corporation direct obligations and 2% of Assets Per Mortgage
guaranteed mortgage-backed Pool
securities.
(iv) Bonds which have been fully 2% of Assets Per Issuer
collateralized by direct U.S. government
obligations (i.e. pre-refunded or
escrowed-to-maturity) and upgraded to
triple-A by at least one nationally-
recognized domestic rating agency.
(v) Obligations not included in Section (iv)
above and backed by full faith and credit of:
(a) Any state government. 5% of Assets Per State
(b) Any political subdivision of a State 2% of Assets Per Issuer
or any municipality within the
United States.
(vi) Obligations not included in Section (iv) 2% of Assets Per Issuer
above and backed by revenue or
other income sources of a single
facility or system.
(vii) Pools of assets rated AAA by at least 5% of Assets In Aggregate
one nationally recognized domestic 0.5% of Assets Per Single Issue
rating agency (excluding assets otherwise
permitted under this agreement).
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
Type of Obligation Limitation Basis
------------------ ---------- -----
<S> <C> <C> <C>
(viii) Securities backed by pools of assets 3% of Assets In Aggregate
rated double-A by at least one 0.5% of Assets Per Single Issue
nationally recognized domestic rating
agency (examples may include, but
are not limited to, commercial or
residential mortgages, automobile
loans).
(ix) Investments in any entity, obligations 1% of Assets Per Issuer
of which are insured by MBIA Corp.,
(and which are identified on a list
furnished by MBIA Corp. to its
advisors from time-to-time) with the
exception of United States
municipalities rated AA or better by at
least on nationally-recognized
domestic rating agency.
(x) Backed by full faith and credit of a 2% of Assets Per Issuer
non-public corporate entity, whether
foreign or domestic.
(xi) Backed by full faith and credit of 10% of Assets In Aggregate
Canada, its Provinces and other 10% of Assets For Federal Govt.
political subdivisions. 2% of Assets Per All Other
Issuers
(xii) Backed by full faith and credit of 10% of Assets In Aggregate
OECD foreign governments other than 1% of Assets Per Country
in Canada.
(xiii) Repurchase agreements with a bank 2% of Assets In Aggregate
or registered broker-dealer, provided 1% of Assets Per Bank or
that all securities underlying such Broker-Dealer
agreements:
(a) would be eligible
investments under
these Guidelines; and
(b) have maturities of one
year or less (unless the
agreement is fully
collateralized and
marked to market daily).
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Type of Obligation Limitation Basis
------------------ ---------- -----
<S> <C> <C> <C>
(xiv) Investments of one year or 10% of Assets In Aggregate
less in term which are either 1% of Assets Per Bank
direct obligations of or
supported by letters of credit
from banks rated in the
highest short-term category by
at least one nationally-
recognized domestic rating
agency (or judged to be of
equivalent quality).
(xv) Mutual funds or other such 2% of Assets In Aggregate
investment conduits registered
with the SEC under the
Investment Company Act of
1940, as amended (provided
that all investments within
each fund would be eligible
under the Guidelines).
(xvi) Equity-linked debt instruments $100 million In Aggregate
rated A or better by at least $ 10 million Per Issue
one nationally recognized
domestic rating agency with a
maturity no greater than 10
years. Equity index must be
nationally recognized, such as
the S&P 500.
* * * * * * * * * * *
</TABLE>
THIS STATEMENT OF INVESTMENT OBJECTIVES & GUIDELINES SHALL REMAIN IN EFFECT
UNTIL REVISED OR AMENDED BY ACTION OF THE MBIA CORP. BOARD OF DIRECTORS, IN
ACCORDANCE WITH ITS BY-LAWS.
5
<PAGE>
May 1995
--------
SECTION III. SPECIFIC INSTRUCTIONS FOR FIXED-INCOME INVESTMENTS MANAGED BY
-------------------------------------------------------------
MBIA SECURITIES CORP.
---------------------
In the context of Sections I. and II. above as applicable, the following shall
constitute the specific instructions for fixed-term investments made by MBIA
Corp., acting through MBIA Securities Corp. ("MBIA SECO"), its investment
advisor; it being understood that these instructions set forth in this Section
III. are to be adhered to notwithstanding any less restrictive provisions in
Sections I. and II.
A. Permitted Investments
---------------------
MBIA SECO may invest only in the following categories of fixed income
investments as set forth in Section II of the Guidelines:
Section Type
------- ----
(i) Full faith and credit of the United States
(x) Non-public corporates
(xi) Canadian obligations
(xii) OECD governments
(xiii) Repurchase agreements
(xiv) Short-term investments
B. Maturity
--------
The maximum allowable average duration is 7.5 years; minimum duration is
5.0 years.
C. Quality
-------
Minimum average quality of total portfolio, "A."
Minimum purchase quality, "BBB+."
Maximum of investments held rated less than "A-," 4 percent.
Minimum holding quality, "BBB-."
6
<PAGE>
EXHIBIT C
MANAGEMENT FEES PER ANNUM
ASSETS UNDER MANAGEMENT IN BASIS POINTS TIMES ASSETS
AT MARKET VALUE ($ MILLIONS) UNDER MANAGEMENT
---------------------------- ----------------------------
First $1,000 7.0 bp
Next $1,000 6.0 bp
In excess of $2,000 5.0 bp
Management fees shall be paid quarterly, in arrears, 30 days following the end
of each quarter, based upon the average market value of the assets under
management during such quarter.
"Market Value" shall be determined in accordance with Section 9 of this
Agreement.
11
<PAGE>
[LOGO] MBIA INSURANCE CORPORATION
113 King Street
Armonk, NY 10504
914 273 4545
May 31, 1995
Mr. Kenneth Gingrass
Associate Insurance Examiner
Property/Casualty Bureau
State of New York Insurance Department
160 West Broadway
New York, NY 10013
RE: MBIA Insurance Corporation
Proposed Investment Services Agreement (the "Agreement")
with MBIA Securities Corp.
Dear Mr. Gingrass:
Enclosed please find an executed copy of the Agreement. At your request,
Section 8 on Compensation of Advisor has been revised to state that the Schedule
of Fees (Exhibit C) will be reviewed annually and adjusted to reflect any
changes in MBIA Securities Corp. ("SECO") costs. In addition, as required by
your letter dated May 17, 1995, MBIA Insurance Corporation ("MBIA") commits to
notify the Department when its assets under management by SECO exceeds 20% of
the total admitted assets of MBIA.
If I can be of any further assistance, please call me at (914) 765-3923.
Very truly yours,
/s/ Wendy E. Mrosek
Wendy E. Mrosek
Assistant General Counsel
cc: Jeremiah Sheehan
<PAGE>
EXHIBIT B
---------
January 1996
------------
MBIA INSURANCE CORPORATION
STATEMENT OF INVESTMENT OBJECTIVES & GUIDELINES
-----------------------------------------------
SECTION I. OBJECTIVES
----------
A. Preservation of Capital in the context of maintaining triple-A ratings
-----------------------
for MBIA Insurance Corporation ("MBIA Corp.") and supporting recognition
of MBIA Corp.'s financial stability and strength by insured bond
investors, municipal market intermediaries, and other municipal bond
market constituencies.
B. Subject to A. above, optimization of after-tax investment income to
----------------------------------------------------------------
support the predictability and consistency of company earnings and cash
flow.
C. Subject to A. and B. above, optimization of long-term total returns.
-------------------------------------------------------------------
D. Maintenance of reasonable liquidity after taking into account the
-----------------------------------
company's other sources of liquidity (including bank credit facilities
and cash flow) for potential claims paying and other corporate needs.
Overall, these objectives call for maintenance of high quality investments,
avoidance of undue volatility in both income and returns and generally minimal
amounts of short-term investments and/or U.S. Treasury obligations for immediate
liquidity. MBIA Corp.'s investment selections will be made with a bias to hold
for the long-term, and to avoid sales or swaps in the absence of compelling
circumstances of tax credit, structural or other economic reasons, and not to
rely on short-term trading or market timing to achieve performance. The mix of
taxable and tax-exempt investments will vary from time to time with both market
conditions and company tax circumstances.
In seeking to achieve these objectives, MBIA Corp. will monitor, evaluate and
report on the performance of its investment managers and the portfolio, using
appropriate market-related benchmarks. In addition, MBIA Corp. will maintain an
awareness of and periodically report on the investment practices and results of
key competitors and comply with the constraints or limitations related to
guidelines and regulatory or rating agency considerations.
<PAGE>
<PAGE>
EXHIBIT 10.65
AMENDMENT NO. 1
TO
INVESTMENT SERVICES AGREEMENT
WHEREAS, MBIA Insurance Corporation and MBIA Securities Corp. have
entered into an Investment Services Agreement (the "Agreement"); and
WHEREAS, the parties have agreed to amend said Agreement.
NOW, THEREFORE, the Agreement is hereby amended as follows effective
January 2, 1996:
1. Exhibits B and C of the Agreement are replaced in their entirety by
the substitute Exhibits B and C attached hereto.
2. All other provisions of the Agreement shall remain unchanged.
IN WITNESS WHEREOF, the parties have caused the signatures of their
duly authorized officers to be hereto affixed this 29th day of December, 1995.
MBIA INSURANCE CORPORATION MBIA SECURITIES CORP.
By: /s/ By: /s/
--------------------------- --------------------------
Title: Chief Financial Officer Title: President
<PAGE>
Section II. GUIDELINES
----------
The following shall constitute the Investment Guidelines for MBIA Corp., acting
through its duly authorized officers and/or through its outside investment
advisors:
A. Investments shall be made and maintained in compliance with all
applicable provisions of Article 14 of the New York Insurance Laws, as
amended.
B. Fixed Income Policy
(1) Quality: For fixed-income securities (over 1 year when purchased)
--------
average quality will be AA to AA-, with minimum purchase quality,
BBB. For short-term investments (less than 1 year), only
investments rated Al/P1 (or equivalent rating) or better may be
purchased.
(2) Maturity: The average duration target is a maximum of 7.5 years;
---------
minimum duration is 6.0 years.
(3) Maturity Distribution: Diversification in maturity to minimize
----------------------
reinvestment risk is an objective. Although this objective is not
quantified, a reasonably well-laddered portfolio over a wide range
of maturities is to be achieved.
(4) Insured Obligations: MBIA Corp. may purchase or hold obligations
--------------------
insured by MBIA Corp. or its competitors, subject to an aggregate
limit of 20% of the total investment portfolio.
(5) Other: Securities may be purchased in both public and private
-----
markets, subject to the maintenance of an appropriate level of
overall portfolio liquidity and to all other objectives/guidelines.
C. Equity Policy
MBIA Corp. holds interests in certain equity-oriented investments in
limited amounts. It is MBIA Corp.'s current policy not to purchase
equity oriented securities.
D. Further Restrictions
(1) At the time of purchase, no investment may be in default as to
principal or interest payments and all shall be rated "investment
grade" by at least one nationally-recognized domestic rating
agency.
(2) Only U.S. dollar denominated securities may be purchased, except
those required for MBIA Corp.'s foreign operations.
(3) No investment shall be made in futures or options on futures.
(4) All investments shall be held by a third-party custodian (or via
book entry at the Depository Trust Company or a similarly qualified
clearing corporation), as prescribed in approved custody
agreements, or in other customary forms of safekeeping.
2
<PAGE>
E. Fixed income investments are further limited to the following types and
amounts (with the term "assets" defined by the New York statutes):
<TABLE>
<CAPTION>
Type of Obligation Limitation Basis
------------------ ---------- -----
<S> <C> <C> <C>
(i) Backed by full faith and credit Unlimited In Aggregate
of the United States, including Unlimited Per Issuer or
Government National Mortgage Association Mortgage Pool
direct obligations and guaranteed
mortgage-backed securities.
(ii) Federal National Mortgage Association 10% of Assets In Aggregate
direct obligations and guaranteed 2% of Assets Per Mortgage Pool
mortgage-backed securities.
(iii) Federal Home Loan Mortgage 10% of Assets In Aggregate
Corporation direct obligations and 2% of Assets Per Mortgage Pool
guaranteed mortgage-backed
securities.
(iv) Bonds which have been fully 2% of Assets Per Issuer
collateralized by direct U.S. government
obligations (i.e., prerefunded or
escrowed-to-maturity) and upgraded to
triple-A by at least one nationally-
recognized domestic rating agency.
(v) Obligations not included in Section (iv)
above and backed by full faith and credit of:
(a) Any state government. 5% of Assets Per State
(b) Any political subdivision of a State 2% of Assets Per Issuer
or any municipality within the
United States.
(vi) Obligations not included in Section (iv) 2% of Assets Per Issuer
above and backed by revenue or
other income sources of a single
facility or system.
(vii) Pools of assets rated AAA by at least 5% of Assets In Aggregate
one nationally recognized domestic 0.5% of Assets Per Single Issue
rating agency (excluding assets otherwise
permitted under this agreement).
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
Type of Obligation Limitation Basis
------------------ ---------- -----
<S> <C> <C> <C>
(viii) Securities backed by pools of assets 3% of Assets In Aggregate
rated double-A by at least one 0.5% of Assets Per Single Issue
nationally recognized domestic rating
agency (examples may include, but
are not limited to, commercial or
residential mortgages, automobile
loans).
(ix) Investments in any entity, obligations 1% of Assets Per Issuer
of which are insured by MBIA Corp.,
(and which are identified on a list
furnished BY MBIA Corp. to its
advisors from time-to-time) with the
exception of United States
municipalities rated AA or better by at
least on nationally-recognized
domestic rating agency.
(x) Backed by full faith and credit of a 2% of Assets Per Issuer
non-public corporate entity, whether
foreign or domestic.
(xi) Backed by full faith and credit of 10% of Assets In Aggregate
Canada, its Provinces and other 10% of Assets For Federal Govt.
political subdivisions. 2% of Assets Per all Other
Issuers
(xii) Backed by full faith and credit of 10% of Assets In Aggregate
OECD foreign governments other than 1% of Assets Per Country
in Canada.
(xiii) Repurchase agreements with a bank 2% of Assets In Aggregate
or registered broker-deal, provided 1% of Assets Per Bank or
that all securities underlying such Broker-Dealer
agreements:
(a) Would be eligible
investments under
these Guidelines; and.
(b) Have maturities of one
year or less (unless the
agreement is fully
collateralized and
marked to market daily.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Type of Obligation Limitation Basis
------------------ ---------- -----
<S> <C> <C> <C>
(xiv) investments of one year or 10% of Assets In Aggregate
less in term which are either 1% of Assets Per Bank
direct obligations of or
supported by letters of credit
from banks rated in the
highest short-term category by
at least one nationally-
recognized domestic rating
agency (or judged to be of
equivalent quality).
(xv) Mutual funds or other such 2% of Assets In Aggregate
investment conduits registered
with the SEC under the
Investment Company Act of
1940, as amended (provided
that all investments within
each fund would be eligible
under the Guidelines).
(xvi) Equity-linked debt instruments $100 million In Aggregate
rated A or better by at least $ 10 million Per Issue
one nationally recognized
domestic rating agency with a
maturity no greater than 10
years. Equity index must be
nationally recognized, such as
the S&P 500.
*************************
</TABLE>
This Statement of investment Objective & Guidelines shall remain in effect until
revised or amended by action of the MBIA Corp. Board of Directors, in accordance
with its by-laws.
5
<PAGE>
January 1996
------------
Section III. SPECIFIC INSTRUCTIONS FOR TAXABLE FIXED-INCOME INVESTMENTS
----------------------------------------------------------
In the context of Sections I. and II. above as applicable, the following shall
constitute the specific instructions for taxable fixed-term investments made by
MBIA Corp., acting through MBIA Securities Corp., its investment advisor, it
being understood that these instructions set forth in this Section III. are to
be adhered to notwithstanding any less restrictive provisions in Sections I. and
II.
A. Maturity
--------
The maximum allowable average duration is 7.5 years; minimum
duration is 5.0 years.
B. Quality
--------
Minimum average quality of total portfolio, "A."
Minimum purchase quality, "BBB+."
Maximum of investments held rated less than "A-," 4 percent.
Minimum holding quality, "BBB-."
6
<PAGE>
January 1996
------------
SECTION IV. SPECIFIC INSTRUCTIONS FOR TAX-EXEMPT FIXED-INCOME INVESTMENTS
-------------------------------------------------------------
In the context of Sections I. and II. above as applicable, the following shall
constitute the specific instructions for tax-exempt fixed-term investments made
by MBIA Corp., acting through MBIA Securities Corp., its investment advisor, it
being understood that the instructions set forth in this Section IV. are to be
adhered to notwithstanding any less restrictive provisions in Sections I. and
II.
A. Maturity
--------
The maximum allowable average duration is 7.5 years; minimum
duration is 6.25 years.
B. Quality
-------
Minimum average quality for the tax-exempt portfolio is "AA."
Minimum purchase quality for the tax-exempt portfolio is "BBB."
Minimum holding quality for the taxable portfolio is investment
grade, unless specific waiver of this limit is obtained from MBIA Corp.
Maximum of investments held rated less than A-, 4 percent, unless
specific waiver of this limit is obtained from MBIA Corp.
7
<PAGE>
EXHIBIT C
SCHEDULE OF FEES
MANAGEMENT FEES PER ANNUM
ASSETS UNDER MANAGEMENT IN BASIS POINTS TIMES ASSETS
AT MARKET VALUE ($ MILLIONS) UNDER MANAGEMENT
---------------------------- ----------------------------
All Assets 7.0 bp
Management fees shall be paid quarterly, in arrears, 30 days following the end
of each quarter, based upon the average market value of the assets under
management during such quarter.
"Market Value" shall be determined in accordance with Section 9 of this
Agreement.
11
<PAGE>
INVESTMENT SERVICES AGREEMENT
-----------------------------
This INVESTMENT SERVICES AGREEMENT (the "Agreement") is made as of the 28th
day of April 1995, by and between MBIA Insurance Corporation, a New York
insurance corporation (the "Client"), and MBIA Securities Corp., a Delaware
Corporation (the "Advisor").
RECITALS
--------
WHEREAS, Client seeks investment advisory services in connection with
certain assets owned by it; and
WHEREAS, Advisor is an affiliate of Client and in the business of
providing investment advisory services; and
WHEREAS, Client desires to retain Advisor to render advice and services
to Client pursuant to the terms and conditions of this Agreement and Advisor is
willing to furnish such advice and services.
NOW THEREFORE, in consideration of the covenants and the mutual promises
hereinafter set forth, the parties hereto mutually agree as follows:
1. Authority of the Advisor. (a) Advisor shall have full power to
------------------------
manage and direct the investments of and for Client's account (the "Account"),
without prior consultation with Client, subject, however, to the limitations
referred to in clause (b) of this paragraph 1 and paragraph 5 hereof. This
discretionary authority makes the Advisor agent and attorney-in-fact with full
power and authority on behalf of the Account (i) to buy, sell, exchange, convert
and otherwise trade in any and all stocks, bonds and other securities as the
Advisor may select; and (ii) to establish and deal through accounts with one or
more securities brokerage firms, dealers or banks as Advisor may select;
provided, however, that none of such firms, dealers or banks shall be a person
or entity that controls, or is controlled by, or is under common control with,
Advisor. This discretionary authority shall remain in full force and effect for
the duration of this Agreement or until the Advisor receives written notice from
Client of its termination in accordance with the terms of this Agreement.
(b) Notwithstanding any other provision of this Agreement, it is
understood and acknowledged by the parties hereto that Client shall at all times
have ultimate control of and responsibility with respect to the functions which
Client is delegating to Advisor Pursuant to the terms of this Agreement. In
furtherance of the foregoing, Advisor shall follow the instructions of Client's
Chief Financial Officer in connection with the management and investment of
Account.
2. Custody of Assets. Client has appointed The Chase Manhattan Bank,
-----------------
N.A., as its custodian (the "Custodian") to act under the Custody Agreement,
dated March 1, 1995. The Custodian will take and have possession of the assets
of the Account. Advisor shall not act as
<PAGE>
custodian for Client's Account or take or have possession of any of the assets
thereof, but may issue instructions to the Custodian of such assets as required
in connection with the settlement of transactions effected by Advisor hereunder.
Accounts and records maintained by Advisor in connection with this Agreement
shall be the property of the Client. Notwithstanding the foregoing, or any
other provisions of this Agreement to the contrary, Client and Advisor
acknowledge and agree that Advisor shall at all times own and have custody of
its own general corporate accounts and records.
3. Brokerage. To the extent permitted in paragraph I of this Agreement,
---------
Advisor may place orders for the execution of transactions for the Account with
or through such brokers, dealers, or banks as Advisor may select and, complying
with Section 28(e) of the Securities Exchange Act of 1934, may select brokers-
dealers charging a commission in excess of the commission another broker-dealer
would have charged. The Advisor and other clients advised by the Advisor may
benefit from any information received from broker-dealers selected in connection
with Client's Account.
4. Administrative Services. The Client hereby engages the Advisor to provide
-----------------------
those administrative and securities management services described in Exhibit A
attached hereto.
5. Sub-Advisors and Consultants. Advisor may, at its own expense, employ
----------------------------
other persons to furnish to Advisor statistical and other factual information,
advice regarding economic factors and trends, information with respect to
technical and scientific developments, and such other information, advice and
assistance as Advisor may desire; provided, however, that such subadvisors and
consultants shall not have authority to make investment decisions for Client's
Account.
6. Investment Objectives and Guidelines. Client has provided Advisor
------------------------------------
with a written Statement of Investment Objectives & Guidelines (the
"Guidelines") in the form attached hereto as Exhibit B and incorporated herein
by reference. Advisor agrees to follow the Guidelines when making investments
for Client's Account. Client shall give Advisor prompt written notice of any
investments made for Client's Account which Client believes to have been made
outside the Guidelines. Likewise, Advisor shall give Client prompt written
notice of any investments made for Client's Account which Advisor believes to
have been made outside the Guidelines. Client may change or modify the
Guidelines from time to time by providing the Advisor written notice of such
change or modification. Neither Advisor's acceptance of the Guidelines, nor any
other provision of this Agreement shall be considered a guaranty that any
specific result will be achieved.
7. Allocation of Charges and Expenses. (a) Advisor shall furnish at its
----------------------------------
own expense executive, supervisory and other personnel services, office space,
equipment, utilities and telephone services in connection with supplying the
investment management, advisory, statistical, analytical and research services
contemplated by this Agreement.
(b) Custodian fees, transfer agent fees and brokerage costs, fees and
commissions will be charged to Client's Account.
2
<PAGE>
(c) For all expenses not otherwise covered in subsections (a) and (b) above,
it is understood that Client will pay or reimburse Advisor for such expenses,
including, without limitation, governmental fees, interest charges, taxes, fees
and expenses of independent auditors, legal fees and other expenses connected
with the execution of security transactions or the performance by Advisor of any
other duties under this Agreement or any actions taken by Advisor at the request
of Client. Except for taxes, governmental fees and any other expenses outside
of Advisor's control, Advisor will notify Client not less than five (5) business
days prior to incurring any individual expense under this subsection (c) and
Client shall have five (5) business days from receipt of such notice within
which to notify Advisor of its disapproval of any such expense. Failure of
Client to so notify Advisor of its disapproval within five (5) business days
shall be deemed Client's approval of such expense.
(d) Advisor shall provide Client, no later than thirty (30) days following
the end of each calendar month, with a summary of the investment transactions
for that month, together with a statement of any fees and expenses chargeable to
Client pursuant to subsections (b) and (c) above. Any undisputed amounts shall
be paid by Client within fifteen (15) days of receipt of said statement.
8. Compensation of Advisor. The compensation of Advisor for its services
-----------------------
under the Agreement shall be calculated and paid in accordance with the Schedule
of Fees attached hereto as Exhibit C and incorporated herein by reference. It
is intended by the parties hereto that the compensation rate set forth in that
Schedule of Fees, or any sub sequent amendment thereto, shall reflect Advisor's
costs in providing services to Client, pursuant to this Agreement. The Schedule
of Fees will be reviewed annually and adjusted to reflect any changes in the
Advisor's costs.
9. Valuation. In computing the market value of any security held in the
---------
custody account:
(a) Each security listed on any national securities exchange, for which
recent market quotations are readily available, shall be valued at the last
reported sale price on the principal exchange on which such security is traded,
or, if there has been no recently reported sale, at the last reported bid price;
(b) Unlisted securities shall be valued at the then current bid price, if
market quotations are readily available;
(c) Futures contracts will be valued based on closing settlement prices as
reported on regulated futures exchanges, in accordance with accepted practices
and applicable law and regulations; and
(d) Any other security or asset shall be valued in a manner determined in
good faith by Advisor to reflect its fair market value and such valuation shall
be determinative.
3
<PAGE>
10. Records. Advisor shall maintain accurate and detailed records of all
-------
transactions in connection with the Account, which shall be subject to
inspection by Client upon reasonable notice during Advisor's regular business
hours. It is understood and acknowledged that such records are the property of
the Company and shall be returned to the Company upon termination of this
Agreement. On request, representatives of Advisor shall meet With the Client's
officers and directors and the officers and directors of the Client's parent
company to discuss investment performance and other matters relating to
Advisor's obligations under this Agreement.
11. Duration and Termination. (a) Subject to the provisions of paragraph 13
------------------------
hereof, this Agreement shall commence as of the date set forth above and shall
continue until terminated (i) by mutual consent of Advisor and Client or (ii) as
hereinafter provided. Fees will be prorated to the date of termination and any
unearned portion of repaid fees will be refunded to Client.
(b) Either party may terminate this Agreement without cause upon at least
thirty (30) days prior written notice.
(c) At its discretion, Client may immediately terminate this Agreement by
written notice to Advisor upon the occurrence of any one of the following
events:
(i) The insolvency of Advisor, the inability of Advisor to pay debts as they
mature, the making of an assignment by Advisor for the benefit of creditors, the
dissolution of Advisor, the appointment of a receiver or liquidator for Advisor
or for a substantial part of Advisor's property, or the institution of
bankruptcy, reorganization, arrangement, insolvency or similar proceedings by or
against Advisor under the laws of any jurisdiction; or
(ii) The default under or any violation of the terms of this Agreement by
Advisor which is not cured by Advisor within fifteen (15) days after receipt by
Advisor of notice of such default from Client of the failure of Advisor to
perform satisfactorily its duties as set forth in this Agreement.
(d) At its discretion, Advisor may immediately terminate this Agreement by
written notice to Client upon the occurrence of any one of the following events:
(i) The insolvency of Client, the inability of Client to pay debts as they
mature, the making of an assignment by Client for the benefit of creditors or
the dissolution of Client.
(ii) The default under or any violation of the terms of this Agreement by
Client which is not cured by Client within fifteen (15) days after receipt by
Client of notice of such default from Advisor of the failure of Client to
perform satisfactorily its duties as set forth in this Agreement; or
(iii)The commencement of a delinquency proceeding against Client pursuant to
Article 74 of the New York Insurance Law.
4
<PAGE>
(e) Upon termination of this Agreement, if Client so elects and for a
period not exceeding the earlier of two (2) months or the date on which Client
appoints a successor to Advisor, Advisor shall be obligated to perform those
investment services which are necessary to ensure the proper management of
Client's Account. Termination of this Agreement shall not relieve either party
of liability for the performance of obligations imposed upon such party during
the effective period of this Agreement which have not been performed at the time
of termination thereof. It is specifically agreed to and acknowledged that
Advisor shall be entitled to fees referred to in paragraph 8 for services
rendered pursuant to this subparagraph (e).
12. Non-Exclusive Contract. The services of the Advisor to Client are not to
----------------------
be deemed to be exclusive. Advisor is free to render service to others. Client
agrees that Advisor may give advice and take action with respect to any of its
other clients which may differ from advice given or the timing or nature of
action taken with respect to Client's Account. Nothing in this Agreement shall
be deemed to impose upon the Advisor any obligation to purchase or sell or to
recommend for purchase or sale by or for Client any security or other property
which Advisor, its officers, employees or affiliates may purchase or sell for
their own accounts or which the Advisor may purchase or sell for the account of
any other client. Client recognizes that transactions in a specific security
may not be accomplished for all or any other clients at the same time or at the
same price.
13. Representations. (a) The Advisor represents and warrants that it is
---------------
registered as an investment advisor with the Securities and Exchange Commission
pursuant to the Investment Advisers Act of 1940 as amended.
(b) Advisor represents and warrants that this Agreement has been duly
authorized in accordance with Advisor's governing documents and when executed
and delivered will be binding upon Advisor in accordance with its terms.
(c) Advisor represents and warrants that it will maintain records in
connection with the Account in accordance with the applicable requirements of
Section 325 of the New York Insurance Law or any successor statute thereto.
(d) Client represents and warrants that this Agreement has been duly
authorized by Client's Board of Directors in accordance with Client's governing
documents and when executed and delivered will be binding upon Client in
accordance with its terms.
14. Department of Insurance Approval. This Agreement is executed by the
--------------------------------
parties with the understanding that it is contingent upon final approval by the
New York Department of Insurance. In the event such approval is not obtained,
the Client shall have the unqualified right to terminate this Agreement without
penalty, provided, however, that any investment action taken by Advisor on
behalf of Client prior to the effective date of such termination shall be at
Client's risk.
15. Applicable Laws. Advisor shall comply with all securities laws and other
---------------
laws applicable to investment managers, including, without limitation, the
Investment Advisers Act of
5
<PAGE>
1940, as amended. Advisor shall comply with the Guidelines in providing its
services hereunder, and, except for monitoring compliance with the provisions of
law referred to in the Guidelines, shall have no independent duty or
responsibility to assure that investments permitted by Client's Guidelines
qualify as permitted investments under applicable insurance laws.
16. Voting Rights. Decisions on voting of proxies will be made by Client.
-------------
17. Liability of Advisor. In providing Client with investment advice and other
--------------------
services as herein provided, neither Advisor nor any officer, director, employee
or agent thereof shall be held liable to Client, its creditors or its
stockholder(s) for errors of judgment or for anything except willful
malfeasance, bad faith or negligence in the performance of its duties or
reckless disregard of its obligations and duties under the terms of this
Agreement. It is further understood and agreed that Advisor may rely upon
information furnished to it reasonably believed to be accurate and reliable.
Nothing herein shall constitute a waiver or limitation of any rights which the
Client may have under any federal securities laws.
18. Confidential Relationship. The terms and conditions of this Agreement, all
-------------------------
information and advice furnished by either party under this Agreement and any
records generated by this Agreement are confidential and shall not be disclosed
to third parties, except as required by law.
19. Notices. All notices and other communications hereunder shall be in
-------
writing and shall be delivered by hand, telecopier, or mailed by registered or
certified mail (return receipt requested) to the parties at the following
addresses and shall be deemed given on the date on which such notice is
received:
To Client at:
Attention: General Counsel
Or by telecopier at:
With a copy to:
Attention: Chief Financial Officer
Or by telecopier at:
To Advisor at:
Attention: President
6
<PAGE>
Or by telecopier at:
Either party may change its address or telecopier number for purposes of this
paragraph by giving the other party written notice of the new address or
telecopier number in the manner set forth below.
20. Waiver. Waiver by either party of any obligation of the other party does
------
not constitute a waiver of any further or other obligation of the other party.
21. Amendment. This Agreement may be modified or amended only by an instrument
---------
in writing signed by duly authorized representatives of both Advisor and Client.
22. Agreement not Assignable. This Agreement is not assignable by either Client
------------------------
or Advisor.
23. Cumulative. All rights, powers and privileges conferred hereunder upon the
----------
parties shall be cumulative and shall not restrict those given by law.
24. Counterparts. This Agreement may be executed in counterparts, each of which
------------
so executed shall be deemed to be an original and such counterparts together
shall constitute but one and the same contract, which shall be sufficiently
evidenced by any such original counterpart.
25. Construction. The captions used in this Agreement are for convenience only,
------------
and shall not affect the construction or interpretation of any of its
provisions. Each of the provisions of this Agreement is severable, and
invalidity or inapplicability of one or more provisions, in whole or in part,
shall not affect any other provision. This Agreement shall be construed in
accordance with the laws of the State of New York, and is subject to the
provisions of the Investment Advisers Act of 1940, as amended, and the rules and
regulations of the Securities and Exchange Commission.
26. Disclosure Statement. Client acknowledges receipt of Advisor's disclosure
--------------------
statement, as required by Rule 204-3 under the Investment Advisers Act of 1940,
not less than 48 hours prior to the date of execution of this Agreement.
27. Dispute Resolution. Any disputes arising under this Agreement shall be
------------------
settled by arbitration in New York City in accordance with the American
Arbitration Association rules then in effect, any award rendered thereon shall
be enforceable in any court of competent jurisdiction.
28. Entirety of Agreement. This Agreement contains the entire agreement between
---------------------
the parties with respect to the subject matter hereof and supersedes and cancels
any prior understandings and agreements between the parties.
7
<PAGE>
IN WITNESS WHEREOF, the parties have caused the signatures of their duly
authorized offices to be hereto affixed.
By: By:
------------------------- -----------------------------
Title: Senior Vice President Title: President, MBIA Securities Corp.
----------------------- --------------------------------
"Client" "Advisor"
8
<PAGE>
EXHIBIT A
ADMINISTRATIVE SERVICES
Advisor will provide the following securities support functions:
- - Settlement/Custody Control
--------------------------
Daily coordination of any securities purchased or sold with investment
manager, brokers and clearance bank. Confirmation of funds movement upon
receipt/delivery of securities. Reconciliation of asset position between
custody bank and investment operations.
- - Transaction Processing
----------------------
Daily recording of individual security transactions on trade date.
- - Income Collection
-----------------
Daily collection and recording principal (maturity/redemption) and interest
payments. Follow up on overdue payments.
- - Bank Reconciliation
-------------------
Monthly reconciliation of all cash transactions in demand deposit accounts.
- - Market Valuation of Assets
--------------------------
Assets priced monthly by an outside service.
- - Investment Accounting Staff Support
-----------------------------------
Staff support will be provided to assist the Client in responding to audit,
tax or other regulatory interrogatories related to investment transactions as
reported.
Independent administrative services which are not provided by Advisor under
this Agreement include:
-- Custody services provided by The Chase Manhattan Bank, N.A. of New
York.
-- Outside audit services.
9
<PAGE>
The following reports will be provided to the Client and will include
transaction reports and investment management reports prepared monthly or
quarterly, as the case may be:
(a) Transaction Reporting:
---------------------
(i) Quarterly detail reports on new commitments.
(ii) Quarterly detail reports on all transactions including purchases,
sales, investment income and return of principal.
(iii) Transactional information on investments, as needed, to support tax
return preparation.
(b) Portfolio Review:
----------------
Quarterly summary and detail on the Client's holdings will be provided.
This report will include market values, overall quality ratings, portfolio
yield and a summary review of market conditions and portfolio strategy.
(c) Performance Reporting:
---------------------
Included as part of the portfolio review will be performance results on
both yields on new commitments and total return for the portfolio.
Performance will be measured against agreed upon indices.
10
<PAGE>
EXHIBIT B
April 1995
----------
MBIA INSURANCE CORPORATION
STATEMENT OF INVESTMENT OBJECTIVES & GUIDELINES
-----------------------------------------------
SECTION I. OBJECTIVES:
----------
A. Preservation of Capital in the context of maintaining triple-A
-----------------------
ratings for MBIA Insurance Corporation ("MBIA Corp.") and supporting
recognition of MBIA Corp.'s financial stability and strength by
insured bond investors, municipal market intermediaries, and other
municipal bond market constituencies.
B. Subject to A. above, optimization of after-tax investment income
----------------------------------------------------------------
to support the predictability and consistency of company earnings
and cash flow.
C. Subject to A. and B. above, optimization of long-term total returns.
-------------------------------------------------------------------
D. Maintenance of reasonable liquidity after taking into account the
-----------------------------------
company's other sources of liquidity (including bank credit
facilities and cash flow) for potential claims-paying and other
corporate needs.
Overall, these objectives call for maintenance of high quality investments,
avoidance of undue volatility in both income and returns and generally minimal
amounts of short-term investments and/or U.S. Treasury obligations for immediate
liquidity. MBIA Corp.'s investment selections will be made with a bias to hold
for the long-term, and to avoid sales or swaps in the absence of compelling
circumstances of tax credit, structural or other economic reasons, and not to
rely on short-term trading or market timing to achieve performance. The mix of
taxable and tax-exempt investments will vary from time to time with both market
conditions and company tax circumstances.
In seeking to achieve these objectives, MBIA Corp. will monitor, evaluate and
report on the performance of its investment managers and the portfolio, using
appropriate market-related benchmarks. In addition, MBIA Corp. will maintain an
awareness of and periodically report on the investment practices and results of
key competitors and comply with the constraints or limitations related to
internal guidelines and regulatory or rating agency considerations.
<PAGE>
SECTION II. GUIDELINES:
----------
The following shall constitute the Investment Guidelines for MBIA Corp., acting
through its duly authorized officers and/or through its outside investment
advisors:
A. Investments shall be made and maintained in compliance with all
applicable provisions of Article 14 of the New York Insurance Laws, as
amended.
B. Fixed Income Policy
(1) Quality: For fixed-income securities (over 1 year when purchased)
-------
average quality will be AA to AA-, with minimum purchase quality,
BBB. For short-term investments (less than 1 year), only investments
rated A1/P1 (or equivalent rating) or better may be purchased.
(2) Maturity: The average duration target is a maximum of 7.5 years;
--------
minimum duration is 6.0 years.
(3) Maturity Distribution: Diversification in maturity to minimize
---------------------
reinvestment risk is an objective. Although this objective is not
quantified, a reasonably well-laddered portfolio over a wide range
of maturities is to be achieved.
(4) Insured Obligations: MBIA Corp. may purchase or hold obligations
-------------------
insured BY MBIA Corp. or its competitors, subject to an aggregate
limit of 20% of the total investment portfolio.
(5) Other: Securities may be purchased in both public and private
------
markets, subject to the maintenance of an appropriate level of
overall portfolio liquidity and to all other objectives/guidelines.
C. Equity Policy
MBIA Corp. holds interests in certain equity-oriented investments in
limited amounts. It is MBIA Corp.'s current policy not to purchase
equity oriented securities.
D. Further Restrictions
(1) At the time of purchase, no investment may be in default as to
principal or interest payments and all shall be rated "investment
grade" by at least one nationally-recognized domestic rating
agency.
(2) Only U.S. dollar denominated securities may be purchased, except
those required for MBIA Corp.'s foreign operations.
(3) No investment shall be made in futures or options on futures.
(4) All investments shall be held by a third-party custodian (or via
book entry at the Depository Trust Company or a similarly qualified
clearing corporation), as prescribed in approved custody
agreements, or in other customary forms of safekeeping.
2
<PAGE>
E. Fixed income investments are further limited to the following types and
amounts (with the term "assets" defined by the New York statutes):
<TABLE>
<CAPTION>
Type of Obligation Limitation Basis
------------------ ---------- -----
<S> <C> <C> <C>
(i) Backed by full faith and credit Unlimited In Aggregate
of the United States, including Unlimited Per Issuer or
Government National Mortgage Association Mortgage Pool
direct obligations and guaranteed
mortgage-backed securities.
(ii) Federal National Mortgage Association 10% of Assets In Aggregate
direct obligations and guaranteed 2% of Assets Per Mortgage
mortgage-backed securities. Pool
(iii) Federal Home Loan Mortgage 10% of Assets In Aggregate
Corporation direct obligations and 2% of Assets Per Mortgage
guaranteed mortgage-backed Pool
securities.
(iv) Bonds which have been fully 2% of Assets Per Issuer
collateralized by direct U.S. government
obligations (i.e. pre-refunded or
escrowed-to-maturity) and upgraded to
triple-A by at least one nationally-
recognized domestic rating agency.
(v) Obligations not included in Section (iv)
above and backed by full faith and credit of:
(a) Any state government. 5% of Assets Per State
(b) Any political subdivision of a State 2% of Assets Per Issuer
or any municipality within the
United States.
(vi) Obligations not included in Section (iv) 2% of Assets Per Issuer
above and backed by revenue or
other income sources of a single
facility or system.
(vii) Pools of assets rated AAA by at least 5% of Assets In Aggregate
one nationally recognized domestic 0.5% of Assets Per Single Issue
rating agency (excluding assets otherwise
permitted under this agreement).
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
Type of Obligation Limitation Basis
------------------ ---------- -----
<S> <C> <C> <C>
(viii) Securities backed by pools of assets 3% of Assets In Aggregate
rated double-A by at least one 0.5% of Assets Per Single Issue
nationally recognized domestic rating
agency (examples may include, but
are not limited to, commercial or
residential mortgages, automobile
loans).
(ix) Investments in any entity, obligations 1% of Assets Per Issuer
of which are insured by MBIA Corp.,
(and which are identified on a list
furnished by MBIA Corp. to its
advisors from time-to-time) with the
exception of United States
municipalities rated AA or better by at
least on nationally-recognized
domestic rating agency.
(x) Backed by full faith and credit of a 2% of Assets Per Issuer
non-public corporate entity, whether
foreign or domestic.
(xi) Backed by full faith and credit of 10% of Assets In Aggregate
Canada, its Provinces and other 10% of Assets For Federal Govt.
political subdivisions. 2% of Assets Per All Other
Issuers
(xii) Backed by full faith and credit of 10% of Assets In Aggregate
OECD foreign governments other than 1% of Assets Per Country
in Canada.
(xiii) Repurchase agreements with a bank 2% of Assets In Aggregate
or registered broker-dealer, provided 1% of Assets Per Bank or
that all securities underlying such Broker-Dealer
agreements:
(a) would be eligible
investments under
these Guidelines; and
(b) have maturities of one
year or less (unless the
agreement is fully
collateralized and
marked to market daily).
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Type of Obligation Limitation Basis
------------------ ---------- -----
<S> <C> <C> <C>
(xiv) Investments of one year or 10% of Assets In Aggregate
less in term which are either 1% of Assets Per Bank
direct obligations of or
supported by letters of credit
from banks rated in the
highest short-term category by
at least one nationally-
recognized domestic rating
agency (or judged to be of
equivalent quality).
(xv) Mutual funds or other such 2% of Assets In Aggregate
investment conduits registered
with the SEC under the
Investment Company Act of
1940, as amended (provided
that all investments within
each fund would be eligible
under the Guidelines).
(xvi) Equity-linked debt instruments $100 million In Aggregate
rated A or better by at least $ 10 million Per Issue
one nationally recognized
domestic rating agency with a
maturity no greater than 10
years. Equity index must be
nationally recognized, such as
the S&P 500.
* * * * * * * * * * *
</TABLE>
THIS STATEMENT OF INVESTMENT OBJECTIVES & GUIDELINES SHALL REMAIN IN EFFECT
UNTIL REVISED OR AMENDED BY ACTION OF THE MBIA CORP. BOARD OF DIRECTORS, IN
ACCORDANCE WITH ITS BY-LAWS.
5
<PAGE>
May 1995
--------
SECTION III. SPECIFIC INSTRUCTIONS FOR FIXED-INCOME INVESTMENTS MANAGED BY
-------------------------------------------------------------
MBIA SECURITIES CORP.
---------------------
In the context of Sections I. and II. above as applicable, the following shall
constitute the specific instructions for fixed-term investments made by MBIA
Corp., acting through MBIA Securities Corp. ("MBIA SECO"), its investment
advisor; it being understood that these instructions set forth in this Section
III. are to be adhered to notwithstanding any less restrictive provisions in
Sections I. and II.
A. Permitted Investments
---------------------
MBIA SECO may invest only in the following categories of fixed income
investments as set forth in Section II of the Guidelines:
Section Type
------- ----
(i) Full faith and credit of the United States
(x) Non-public corporates
(xi) Canadian obligations
(xii) OECD governments
(xiii) Repurchase agreements
(xiv) Short-term investments
B. Maturity
--------
The maximum allowable average duration is 7.5 years; minimum duration is
5.0 years.
C. Quality
-------
Minimum average quality of total portfolio, "A."
Minimum purchase quality, "BBB+."
Maximum of investments held rated less than "A-," 4 percent.
Minimum holding quality, "BBB-."
6
<PAGE>
EXHIBIT C
MANAGEMENT FEES PER ANNUM
ASSETS UNDER MANAGEMENT IN BASIS POINTS TIMES ASSETS
AT MARKET VALUE ($ MILLIONS) UNDER MANAGEMENT
---------------------------- ----------------------------
First $1,000 7.0 bp
Next $1,000 6.0 bp
In excess of $2,000 5.0 bp
Management fees shall be paid quarterly, in arrears, 30 days following the end
of each quarter, based upon the average market value of the assets under
management during such quarter.
"Market Value" shall be determined in accordance with Section 9 of this
Agreement.
11
<PAGE>
[LOGO] MBIA INSURANCE CORPORATION
113 King Street
Armonk, NY 10504
914 273 4545
May 31, 1995
Mr. Kenneth Gingrass
Associate Insurance Examiner
Property/Casualty Bureau
State of New York Insurance Department
160 West Broadway
New York, NY 10013
RE: MBIA Insurance Corporation
Proposed Investment Services Agreement (the "Agreement")
with MBIA Securities Corp.
Dear Mr. Gingrass:
Enclosed please find an executed copy of the Agreement. At your request,
Section 8 on Compensation of Advisor has been revised to state that the Schedule
of Fees (Exhibit C) will be reviewed annually and adjusted to reflect any
changes in MBIA Securities Corp. ("SECO") costs. In addition, as required by
your letter dated May 17, 1995, MBIA Insurance Corporation ("MBIA") commits to
notify the Department when its assets under management by SECO exceeds 20% of
the total admitted assets of MBIA.
If I can be of any further assistance, please call me at (914) 765-3923.
Very truly yours,
/s/ Wendy E. Mrosek
Wendy E. Mrosek
Assistant General Counsel
cc: Jeremiah Sheehan
<PAGE>
EXHIBIT B
---------
January 1996
------------
MBIA INSURANCE CORPORATION
STATEMENT OF INVESTMENT OBJECTIVES & GUIDELINES
-----------------------------------------------
SECTION I. OBJECTIVES
----------
A. Preservation of Capital in the context of maintaining triple-A ratings
-----------------------
for MBIA Insurance Corporation ("MBIA Corp.") and supporting recognition
of MBIA Corp.'s financial stability and strength by insured bond
investors, municipal market intermediaries, and other municipal bond
market constituencies.
B. Subject to A. above, optimization of after-tax investment income to
----------------------------------------------------------------
support the predictability and consistency of company earnings and cash
flow.
C. Subject to A. and B. above, optimization of long-term total returns.
-------------------------------------------------------------------
D. Maintenance of reasonable liquidity after taking into account the
-----------------------------------
company's other sources of liquidity (including bank credit facilities
and cash flow) for potential claims paying and other corporate needs.
Overall, these objectives call for maintenance of high quality investments,
avoidance of undue volatility in both income and returns and generally minimal
amounts of short-term investments and/or U.S. Treasury obligations for immediate
liquidity. MBIA Corp.'s investment selections will be made with a bias to hold
for the long-term, and to avoid sales or swaps in the absence of compelling
circumstances of tax credit, structural or other economic reasons, and not to
rely on short-term trading or market timing to achieve performance. The mix of
taxable and tax-exempt investments will vary from time to time with both market
conditions and company tax circumstances.
In seeking to achieve these objectives, MBIA Corp. will monitor, evaluate and
report on the performance of its investment managers and the portfolio, using
appropriate market-related benchmarks. In addition, MBIA Corp. will maintain an
awareness of and periodically report on the investment practices and results of
key competitors and comply with the constraints or limitations related to
guidelines and regulatory or rating agency considerations.
<PAGE>
EXHIBIT 10.67
CUSTODY AGREEMENT
To: THE CHASE MANHATTAN BANK, N.A.
Worldwide Insurance Securities Services
3 Chase MetroTech Center, 6th Floor
Brooklyn, New York 11245
Gentlemen:
We hereby request you to open and to maintain a Custody Account in our
name and to hold therein as our custodian, upon the following terms and
conditions, all such securities and similar property as shall be received by and
acceptable to you for the Custody Account. As used herein, the term Custody
Account shall include all such Custody Accounts opened pursuant to this Custody
Agreement.
TRANSACTIONS. Unless you receive contrary written instructions from us,
and subject to the provisions of this Agreement, you are authorized:
(a) To receive all interest and dividends payable on such
property and to credit such interest and dividends to the account or
accounts of ours with you as are designated by us (hereinafter referred
to as the "Cash Account");
(b) To credit all proceeds received from sales and redemptions
of property to the Cash Account;
(c) To debit the Cash Account for the cost of acquiring property
for the Custody Account;
(d) To present obligations (including coupons) for payment upon
maturity, when called for redemption and when income payments are due;
(e) To exchange securities for other securities where the
exchange is purely ministerial as, for example, the exchange of
securities in temporary form for securities in definitive form or the
mandatory exchange of certificates;
(f) To sell fractional interests resulting from a stock split or
a stock dividend and to credit the Cash Account with the proceeds
thereof;
(g) To convert moneys received with respect to securities of
foreign issue into United States dollars whenever it is practical to do
so through customary banking channels. In effecting such conversion you
may use any method or agency available to you, including the facilities
of your own divisions, subsidiaries or affiliates. You shall incur no
liability on account of any loss suffered or expense incurred as a
result of such conversion, including, without limitation, losses arising
from fluctuations in exchange rates affecting any such conversion; and
<PAGE>
(h) To execute in our name, whenever you deem it appropriate,
such ownership and other certificates as may be required to obtain
payments with respect to, or to effect the sale, transfer or other
disposition of, property in our Custody Account and to guarantee as our
signature the signature so affixed.
INSTRUCTIONS. You are authorized to rely and act upon all further
written instructions given or purported to be given by one or more officers,
employees or agents of ours (i) authorized by or in accordance with a corporate
resolution of ours delivered to you or (ii) described as authorized in a
certificate delivered to you by our Secretary or an Assistant Secretary or
similar officer of ours (each such officer, employee or agent or combination of
officers, employees and agents authorized pursuant to clause (i) or described
pursuant to clause (ii) of this paragraph is hereinafter referred to as an
"Authorized Officer"). (The term "instructions" includes, without limitation,
instructions to sell, assign, transfer, deliver, purchase or receive for the
Custody Account, any and all stocks, bonds and other securities or to transfer
funds in the Custody Account or Cash Account.) You may also rely and act upon
instructions when bearing or purporting to bear the facsimile signature of any
of the individuals designated by an Authorized Officer regardless of by whom or
by what means the actual or purported facsimile signature or signatures thereon
may have been affixed thereto if such facsimile signature or signatures resemble
the facsimile specimen or specimens from time to time furnished to you by any of
such Officers, our Secretary or an Assistant Secretary or similar officer of
ours. In addition, you may rely and act upon instructions received by telephone,
telex, TWX, facsimile transmission, bank wire or other teleprocess acceptable to
you which you believe in good faith to have been given by an Authorized Officer
or which are transmitted with proper testing or authentication pursuant to terms
and conditions which you may specify. You may also rely and act upon
instructions transmitted electronically through your TITAN Data Entry System or
any similar electronic instruction system acceptable to you. You shall incur no
liability to us or otherwise as a result of any act or omission by you in
accordance with instructions on which you are authorized to rely pursuant to the
provisions of this paragraph. Any instructions delivered to you by telephone
shall promptly thereafter be confirmed in writing by an Authorized Officer, but
you shall incur no liability for our failure to send such confirmation in
writing, the failure of any such written confirmation to conform to the
telephone instructions which you received, the failure of any such written
confirmation to be signed or properly signed, or your failure to produce such
confirmation at any subsequent time. You shall incur no liability for refraining
from acting upon any instructions which for any reason you, in good faith, are
unable to verify to your own satisfaction. With respect to instructions received
hereunder to transfer funds from the Cash Account to any other account or party,
we agree to implement any callback or other authentication method or procedure
or security device required by you at any time or from time to time. Unless
otherwise expressly provided, all authorizations and instructions shall continue
in full force and effect until canceled or superseded by subsequent
authorizations or instructions received by your safekeeping account
administrator with reasonable opportunity to act thereon. Your
- 2 -
<PAGE>
authorization to rely and act upon instructions pursuant to this paragraph shall
be in addition to, and shall not limit, any other authorization which we may
give you regarding our accounts with you.
We agree that, if you require test arrangements, authentication methods
or procedures or other security devices to be used with respect to instructions
which we may give hereunder, thereafter instructions given by us shall be given
and processed in accordance with terms and conditions for the use of such
arrangements, methods or procedures or devices as you may put into effect and
modify from time to time. We shall safeguard any testkeys, identification codes
or other security devices which you make available to us and agree that we shall
be responsible for any loss, liability or damage incurred by you or by us as a
result of your acting in accordance with instructions from any unauthorized
person using the proper security device. You may electronically record any
instructions given by telephone, and any other telephone discussions with
respect to the Custody Account or transactions pursuant to this Agreement.
Except as may be provided otherwise herein, you are authorized to
execute our instructions and take other actions pursuant to this Agreement in
accordance with your customary processing practices for customers similar to us
and, in accordance with such practices, you may retain agents, including
subsidiaries or affiliates of yours, to perform certain of such functions.
In acting upon instructions to deliver securities against payment, you
are authorized, in accordance with customary securities processing practices, to
deliver such securities to the purchaser thereof or dealer therefor (including
to an agent for any such purchaser or dealer) against a receipt, with the
expectation of collecting payment from the purchaser, dealer or agent to whom
the securities were so delivered before the close of business on the same day.
REGISTRATION. Unless you receive contrary instructions from us, you are
authorized to keep securities in your own vaults registered in the name of your
nominee or nominees or, where securities are eligible for deposit in a central
depository, such as The Depository Trust Company, the Federal Reserve Bank of
New York or the Participants Trust Company, you may use any such depository and
permit the registration of registered securities in the name of its nominee or
nominees, and we agree to hold you and the nominees harmless from any liability
as holders of record. We shall accept the return or delivery of securities of
the same class and denomination as those deposited with you by us or otherwise
received by you for the Custody Account, and you need not retain the particular
certificates so deposited or received.
If any securities registered in the name of your nominee or held in a
central depository and registered in the name of the depository's nominee are
called for partial redemption by the issuer of such securities, you are
authorized to allot the called
- 3 -
<PAGE>
portion to the respective beneficial holders of the securities in any manner
deemed to be fair and equitable by you in your sole discretion.
STATEMENTS. You shall notify us of each securities transaction effected
for our Custody Account and of income on and redemptions of the property in the
Custody Account, as well as furnish us a listing of such property, at such times
upon which you and we mutually agree.
CORPORATE ACTIONS. You shall send us such proxies (signed in blank, if
issued in the name of your nominee or a nominee of a central depository) and
communications with respect to securities in our Custody Account as call for
voting or relate to legal proceedings within a reasonable time after sufficient
copies are received by you for forwarding to customers. In addition, you shall
follow coupon payments, redemptions, exchanges or similar matters with respect
to securities in our Custody Account and advise us of rights issued, tender
offers or any other discretionary rights with respect to such securities, in
each case, of which you receive notice from the issuer of the securities or as
to which notice is published in publications routinely used by you for this
purpose.
CUSTODIAN RESPONSIBILITY. You shall be obligated to indemnify us for
any loss of securities and other property in the Custody Account resulting from
(i) your negligence or willful misconduct, (ii) the negligence or willful
misconduct of your officers or employees, or (iii) the negligence or willful
misconduct of any central depository or other agent retained by you to hold such
securities or property. Except as otherwise provided herein, in no event shall
you be liable or responsible other than for your own negligence or willful
misconduct. In the event of a loss of securities in the Custody Account for
which you are required to indemnify us pursuant to this Agreement, you shall
promptly replace, at your option, such securities or the value thereof
(determined as of the date of the discovery of such loss) and the value of any
loss of rights or privileges resulting from the loss of such securities. Subject
to your obligations set forth above, you shall be liable to us only to the
extent of our general damages (determined based upon the market value of the
property which is the subject of the loss at the date of discovery of such loss)
suffered or incurred as a result of any act or omission of yours which is a
breach of your duties pursuant to this Agreement and for which liability is
legally imposed upon you, and in no event shall you be liable for special,
consequential or punitive damages. General damages shall mean only those damages
as directly and necessarily result from such act or omission without reference
to any special conditions or circumstances of ours or of any transaction,
whether or not you have been advised of any such special conditions or
circumstances.
All collection and receipt of funds or securities and all payment and
delivery of funds or securities under this Agreement shall be made by you as our
agent, at our risk with respect to our actions or omissions and those of persons
other than you, including, without limitation, the risk associated with the
securities processing
- 4 -
<PAGE>
practice of delivering securities against a receipt and the risk that the
counterparty in any transaction into which we enter will not transfer funds or
securities or otherwise perform in accordance with our expectation of its
obligations thereunder (including, without limitation, where, as a result of
such nonperformance, a central depository reverses, or requires repayment of,
any credit given in connection with the transfer of securities).
In no event shall you be responsible or liable for any loss due to
forces beyond your control, including, but not limited to, acts of God, flood,
fire, nuclear fusion, fission or radiation, war (declared or undeclared),
terrorism, insurrection, revolution, riot, strikes or work stoppages for any
reason, embargo, government action, including any laws, ordinances, regulations
or the like which restrict or prohibit the providing of the services
contemplated by this Agreement, inability to obtain equipment or communications
facilities, or the failure of equipment or interruption of communications
facilities, and other causes whether or not of the same class or kind as
specifically named above. In the event that you are unable substantially to
perform for any of the reasons described in the immediately preceding sentence,
you shall so notify us as soon as reasonably practicable.
You shall be responsible for only those duties expressly stated in this
Agreement or expressly contained in instructions to perform the services
described herein given to you pursuant to the provisions of this Agreement and
accepted by you (unless you and we otherwise agree in writing) and, without
limiting the foregoing, you shall have no duty or responsibility:
(a) to supervise the investment of, or make recommendations with
respect to the purchase, retention or sale of, securities or other
property relating to the Custody Account, or to maintain any insurance
on property in the Custody Account for our benefit;
(b) with regard to any security in the Custody Account as to
which a default in the payment of principal or interest has occurred, to
give notice of default, make demand for payment or take any other action
with respect to such default;
(c) except as otherwise specifically provided herein, for any
act or omission, or for the solvency or insolvency, or notice to us of
the solvency or insolvency, of any broker or agent (including any
central depository) which is selected by you (in the absence of gross
negligence or willful misconduct by you in such selection) or by us or
any other person to effect any transaction for the Custody Account or to
perform any service under this Agreement;
(d) to evaluate, or report to us regarding, the financial
condition of any person to which you deliver securities or funds
pursuant to this Agreement; or
- 5 -
<PAGE>
(e) for any loss occasioned by delay in the actual receipt of
notice by you of any payment, redemption or other transaction in respect
to which you are authorized to take some action pursuant to this
Agreement.
OVERDRAFTS. The amount by which payments made by you on our behalf with
respect to property in, or to be received for, the Custody Account, or with
respect to other transactions pursuant to this Agreement, exceed the available
funds in the Cash Account shall be deemed a loan from you to us, payable on
demand, bearing interest at the rate of interest customarily charged by you on
similar loans, provided, however, that you shall have no duty to make any
payment if such payment shall exceed the available funds in the Cash Account.
REIMBURSEMENT. If you choose to credit the Cash Account or the Custody
Account on the payable date, or at any time prior to actual collection or
receipt, for interest, dividends or redemptions, we shall promptly return to you
such amount or property credited, and you may debit the Cash Account or the
Custody Account for such amount or property credited, upon your oral or written
notification to us that you have been unable to collect such amount or property
in the ordinary course of transactions for our account or that such amount or
property was incorrectly credited. You shall have no duty to institute legal
proceedings, file a claim or proof of claim in any insolvency proceeding or take
any action beyond your ordinary collection procedures to collect such amounts or
property, but this Agreement shall not limit or waive any rights which we may
have against any other person obligated to us.
RESPONSIBLE AS PRINCIPAL. We agree that we shall be responsible to you
as a principal for all of our obligations to you arising under or in connection
with this Agreement, notwithstanding that we may be acting on behalf of other
persons, and we warrant our authority to deposit in the Custody Account and Cash
Account any securities and funds which you or your agents receive therefor and
to give instructions relative thereto. We further agree that you shall not be
subject to, nor shall your rights and obligations with respect to this Agreement
and the Custody Account be affected by, any agreement between us and any such
person.
CREDITING AND DEBITING PROCEDURES. With respect to all transactions for
the Custody Account, including, without limitation, dividend and interest
payments and sales and redemptions of securities, availability of funds credited
to the Cash Account shall be based on the type of funds used in the trade
settlement or payment, including, but not limited to, same day availability for
federal or same day funds and next business day availability for clearing house
or next day funds. Subject to the above, with respect to the purchase and sale
of property for the Custody Account, the proceeds from the sale of securities
shall be credited to the Cash Account on the date such proceeds are received by
you and the cost of securities purchased shall be debited to the Cash Account on
the date securities are received by you
- 6 -
<PAGE>
TRANSFER TAXES. You are authorized and directed, unless otherwise
instructed in particular transactions, to claim exemption from transfer taxes on
all transfers and deliveries of securities held for our Custody Account.
OTHER ACCOUNTS. From time to time we may instruct you to open and
maintain more than one Custody Account for us. Unless we and you otherwise
expressly agree, such accounts will be governed by the provisions of this
Agreement.
FEES, INDEMNIFICATION. We agree to pay you compensation for your ser
vices pursuant to this Agreement at the fees of which you shall notify us from
time to time. We also agree to hold you and your agents harmless from, and to
indemnify and reimburse you and them for, all claims, liability, loss and
expense (including out-of-pocket and incidental expenses and legal fees)
incurred by you or them in connection with our Custody Account or your acting
under this Agreement, provided that you or they, as the case may be, have not
acted with negligence or willful misconduct with respect to the events resulting
in such claims, liability, loss and expense.
TERMINATION. Either party may terminate this Agreement at any time upon
thirty days written notice. Our obligations pursuant to the paragraphs under the
headings "Registration", "Overdrafts", "Reimbursement" and "Fees,
Indemnification" shall survive the termination of this Agreement.
NOTICES. Notices with respect to termination, specification of
Authorized Officers and terms and conditions for instructions required hereunder
shall be in writing, and shall be deemed to have been duly given if delivered
personally, by courier service or by mail, postage prepaid, to the following
addresses (or to such other address as either party hereto may from time to time
designate by notice duly given in accordance with this paragraph):
Mr. Antony Elkins Account Name: MBIA Corp. Custody
To us at: MBIA Corp. (Aeltus)
113 King Street
Armonk, NY 10504
To you, to the attention of the individual designated by you as the
safekeeping account administrator for our account, at:
The Chase Manhattan Bank, N.A.
Worldwide Insurance Securities
Services
3 Chase MetroTech Center, 6th Floor
Brooklyn, New York 11245
GOVERNING LAW, SUCCESSORS AND ASSIGNS, HEADINGS. This Agreement shall be
governed by and construed in accordance with the laws of the State of New York,
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<PAGE>
EXHIBIT 10.68
CUSTODY AGREEMENT
To: THE CHASE MANHATTAN BANK, N.A.
Worldwide Insurance Securities Services
3 Chase MetroTech Center, 6th Floor
Brooklyn, New York 11245
Gentlemen:
We hereby request you to open and to maintain a Custody Account in our
name and to hold therein as our custodian, upon the following terms and
conditions, all such securities and similar property as shall be received by and
acceptable to you for the Custody Account. As used herein, the term Custody
Account shall include all such Custody Accounts opened pursuant to this Custody
Agreement.
TRANSACTIONS. Unless you receive contrary written instructions from us,
and subject to the provisions of this Agreement. you are authorized:
(a) To receive all interest and dividends payable on such
property and to credit such interest and dividends to the account or
accounts of ours with you as are designated by us (hereinafter referred
to as the "Cash Account");
(b) To credit all proceeds received from sales and redemptions
of property to the Cash Account;
(c) To debit the Cash Account for the cost of acquiring property
for the Custody Account;
(d) To present obligations (including coupons) for payment upon
maturity, when called for redemption and when income payments are due;
(e) To exchange securities for other securities where the
exchange is purely ministerial as, for example, the exchange of
securities in temporary form for securities in definitive form or the
mandatory exchange of certificates;
(f) To sell fractional interests resulting from a stock split or
a stock dividend and to credit the Cash Account with the proceeds
thereof;
(g) To convert moneys received with respect to securities of
foreign issue into United States dollars whenever it is practical to do
so through customary banking channels. In effecting such conversion you
may use any method or agency available to you, including the facilities
of your own divisions, subsidiaries or affiliates. You shall incur no
liability on account of any loss suffered or expense incurred as a
result of such conversion, including, without limitation, losses arising
from fluctuations in exchange rates affecting any such conversion; and
<PAGE>
(h) To execute in our name, whenever you deem it appropriate,
such ownership and other certificates as may be required to obtain
payments with respect to, or to effect the sale, transfer or other
disposition of, property in our Custody Account and to guarantee as our
signature the signature so affixed.
INSTRUCTIONS. You are authorized to rely and act upon all further
written instructions given or purported to be given by one or more officers,
employees or agents of ours (i) authorized by or in accordance with a corporate
resolution of ours delivered to you or (ii) described as authorized in a
certificate delivered to you by our Secretary or an Assistant Secretary or
similar officer of ours leach such officer, employee or agent or combination of
officers, employees and agents authorized pursuant to clause (i) or described
pursuant to clause (ii) of this paragraph is hereinafter referred to as an
"Authorized Officer"). (The term "instructions" includes, without limitation,
instructions to sell, assign, transfer, deliver, purchase or receive for the
Custody Account, any and all stocks, bonds and other securities or to transfer
funds in the Custody Account or Cash Account.) You may also rely and act upon
instructions when bearing or purporting to bear the facsimile signature of any
of the individuals designated by an Authorized Officer regardless of by whom or
by what means the actual or purported facsimile signature or signatures thereon
may have been affixed thereto if such facsimile signature or signatures resemble
the facsimile specimen or specimens from time to time furnished to you by any of
such Officers, our Secretary or an Assistant Secretary or similar officer of
ours. In addition, you may rely and act upon instructions received by telephone,
telex, TWX, facsimile transmission, bank wire or other teleprocess acceptable to
you which you believe in good faith to have been given by an Authorized Officer
or which are transmitted with proper testing or authentication pursuant to terms
and conditions which you may specify. You may also rely and act upon
instructions transmitted electronically through your TITAN Data Entry System or
any similar electronic instruction system acceptable to you. You shall incur no
liability to us or otherwise as a result of any act or omission by you in
accordance with instructions on which you are authorized to rely pursuant to the
provisions of this paragraph. Any instructions delivered to you by telephone
shall promptly thereafter be confirmed in writing by an Authorized Officer, but
you shall incur no liability for our failure to send such confirmation in
writing, the failure of any such written confirmation to conform to the
telephone instructions which you received, the failure of any such written
confirmation to be signed or properly signed, or your failure to produce such
confirmation at any subsequent time. You shall incur no liability for refraining
from acting upon any instructions which for any reason you, in good faith, are
unable to verify to your own satisfaction. With respect to instructions received
hereunder to transfer funds from the Cash Account to any other account or party,
we agree to implement any callback or other authentication method or procedure
or security device required by you at any time or from time to time. Unless
otherwise expressly provided, all authorizations and instructions shall continue
in full force and effect until canceled or superseded by subsequent
authorizations or instructions received by your safekeeping account
administrator with reasonable opportunity to act thereon. Your
- 2 -
<PAGE>
authorization to rely and act upon instructions pursuant to this paragraph shall
be in addition to, and shall not limit, any other authorization which we may
give you regarding our accounts with you.
We agree that, if you require test arrangements, authentication methods
or procedures or other security devices to be used with respect to instructions
which we may give hereunder, thereafter instructions given by us shall be given
and processed in accordance with terms and conditions for the use of such
arrangements, methods or procedures or devices as you may put into effect and
modify from time to time. We shall safeguard any testkeys, identification codes
or other security devices which you make available to us and agree that we shall
be responsible for any loss, liability or damage incurred by you or by us as a
result of your acting in accordance with instructions from any unauthorized
person using the proper security device. You may electronically record any
instructions given by telephone, and any other telephone discussions with
respect to the Custody Account or transactions pursuant to this Agreement.
Except as may be provided otherwise herein, you are authorized to
execute our instructions and take other actions pursuant to this Agreement in
accordance with your customary processing practices for customers similar to us
and, in accordance with such practices, you may retain agents, including
subsidiaries or affiliates of yours, to perform certain of such functions.
In acting upon instructions to deliver securities against payment, you
are authorized, in accordance with customary securities processing practices, to
deliver such securities to the purchaser thereof or dealer therefor (including
to an agent for any such purchaser or dealer) against a receipt, with the
expectation of collecting payment from the purchaser, dealer or agent to whom
the securities were so delivered before the close of business on the same day.
REGISTRATION. Unless you receive contrary instructions from us, you are
authorized to keep securities in your own vaults registered in the name of your
nominee or nominees or, where securities are eligible for deposit in a central
depository, such as The Depository Trust Company, the Federal Reserve Bank of
New York or the Participants Trust Company, you may use any such depository and
permit the registration of registered securities in the name of its nominee or
nominees, and we agree to hold you and the nominees harmless from any liability
as holders of record. We shall accept the return or delivery of securities of
the same class and denomination as those deposited with you by us or otherwise
received by you for the Custody Account, and you need not retain the particular
certificates so deposited or received.
If any securities registered in the name of your nominee or held in a
central depository and registered in the name of the depository's nominee are
called for partial redemption by the issuer of such securities, you are
authorized to allot the called
- 3 -
<PAGE>
portion to the respective beneficial holders of the securities in any manner
deemed to be fair and equitable by you in your sole discretion.
STATEMENTS. You shall notify us of each securities transaction effected
for our Custody Account and of income on and redemptions of the property in the
Custody Account, as well as furnish us a listing of such property, at such times
upon which you and we mutually agree.
CORPORATE ACTIONS. You shall send us such proxies (signed in blank, if
issued in the name of your nominee or a nominee of a central depository) and
communications with respect to securities in our Custody Account as call for
voting or relate to legal proceedings within a reasonable time after sufficient
copies are received by you for forwarding to customers. In addition, you shall
follow coupon payments, redemptions, exchanges or similar matters with respect
to securities in our Custody Account and advise us of rights issued, tender
offers or any other discretionary rights with respect to such securities, in
each case, of which you receive notice from the issuer of the securities or as
to which notice is published in publications routinely used by you for this
purpose.
CUSTODIAN RESPONSIBILITY. You shall be obligated to indemnify us for any
loss of securities and other property in the Custody Account resulting from (i)
your negligence or willful misconduct, (ii) the negligence or willful misconduct
of your officers or employees, or (iii) the negligence or willful misconduct of
any central depository or other agent retained by you to hold such securities or
property. Except as otherwise provided herein, in no event shall you be liable
or responsible other than for your own negligence or willful misconduct. In the
event of a loss of securities in the Custody Account for which you are required
to indemnify us pursuant to this Agreement, you shall promptly replace, at your
option, such securities or the value thereof (determined as of the date of the
discovery of such loss) and the value of any loss of rights or privileges
resulting from the loss of such securities. Subject to your obligations set
forth above, you shall be liable to us only to the extent of our general damages
(determined based upon the market value of the property which is the subject of
the loss at the date of discovery of such loss) suffered or incurred as a result
of any act or omission of yours which is a breach of your duties pursuant to
this Agreement and for which liability is legally imposed upon you, and in no
event shall you be liable for special, consequential or punitive damages.
General damages shall mean only those damages as directly and necessarily result
from such act or omission without reference to any special conditions or
circumstances of ours or of any transaction, whether or not you have been
advised of any such special conditions or circumstances.
All collection and receipt of funds or securities and all payment and
delivery of funds or securities under this Agreement shall be made by you as our
agent, at our risk with respect to our actions or omissions and those of persons
other than you, including, without limitation, the risk associated with the
securities processing
- 4 -
<PAGE>
practice of delivering securities against a receipt and the risk that the
counterparty In any transaction into which we enter will not transfer funds or
securities or otherwise perform in accordance with our expectation of its
obligations thereunder (including, without limitation, where, as a result of
such nonperformance, a central depository reverses, or requires repayment of,
any credit given in connection with the transfer of securities).
In no event shall you be responsible or liable for any loss due to
forces beyond your control, including, but not limited to, acts of God, flood,
fire, nuclear fusion, fission or radiation, war (declared or undeclared),
terrorism, insurrection, revolution, riot, strikes or work stoppages for any
reason, embargo, government action, including any laws, ordinances, regulations
or the like which restrict or prohibit the providing of the services
contemplated by this Agreement, inability to obtain equipment or communications
facilities, or the failure of equipment or interruption of communications
facilities, and other causes whether or not of the same class or kind as
specifically named above. In the event that you are unable substantially to
perform for any of the reasons described in the immediately preceding sentence,
you shall so notify us as soon as reasonably practicable.
You shall be responsible for only those duties expressly stated in this
Agreement or expressly contained in instructions to perform the services
described herein given to you pursuant to the provisions of this Agreement and
accepted by you (unless you and we otherwise agree in writing) and, without
limiting the foregoing, you shall have no duty or responsibility:
(a) to supervise the investment of, or make recommendations with
respect to the purchase, retention or sale of, securities or other
property relating to the Custody Account, or to maintain any insurance
on property in the Custody Account for our benefit;
(b) with regard to any security in the Custody Account as to
which a default in the payment of principal or interest has occurred, to
give notice of default, make demand for payment or take any other action
with respect to such default;
(c) except as otherwise specifically provided herein, for any
act or omission, or for the solvency or insolvency, or notice to us of
the solvency or insolvency, of any broker or agent (including any
central depository) which is selected by you (in the absence of gross
negligence or willful misconduct by you in such selection) or by us or
any other person to effect any transaction for the Custody Account or to
perform any service under this Agreement;
(d) to evaluate, or report to us regarding, the financial
condition of any person to which you deliver securities or funds
pursuant to this Agreement; or
- 5 -
<PAGE>
(e) for any loss occasioned by delay in the actual receipt of
notice by you of any payment, redemption or other transaction in respect
to which you are authorized to take some action pursuant to this
Agreement.
OVERDRAFTS. The amount by which payments made by you on our behalf with
respect to property in, or to be received for, the Custody Account, or with
respect to other transactions pursuant to this Agreement, exceed the available
funds in the Cash Account shall be deemed a loan from you to us, payable on
demand, bearing interest at the rate of interest customarily charged by you on
similar loans, provided, however, that you shall have no duty to make any
payment if such payment shall exceed the available funds in the Cash Account.
REIMBURSEMENT. If you choose to credit the Cash Account or the Custody
Account on the payable date, or at any time prior to actual collection or
receipt, for interest, dividends or redemptions, we shall promptly return to you
such amount or property credited, and you may debit the Cash Account or the
Custody Account for such amount or property credited, upon your oral or written
notification to us that you have been unable to collect such amount or property
in the ordinary course of transactions for our account or that such amount or
property was incorrectly credited. You shall have no duty to institute legal
proceedings, file a claim or proof of claim in any insolvency proceeding or take
any action beyond your ordinary collection procedures to collect such amounts or
property, but this Agreement shall not limit or waive any rights which we may
have against any other person obligated to us.
RESPONSIBLE AS PRINCIPAL. We agree that we shall be responsible to you
as a principal for all of our obligations to you arising under or in connection
with this Agreement, notwithstanding that we may be acting on behalf of other
persons, and we warrant our authority to deposit in the Custody Account and Cash
Account any securities and funds which you or your agents receive therefor and
to give instructions relative thereto. We further agree that you shall not be
subject to, nor shall your rights and obligations with respect to this Agreement
and the Custody Account be affected by, any agreement between us and any such
person.
CREDITING AND DEBITING PROCEDURES. With respect to all transactions for
the Custody Account, including, without limitation, dividend and interest
payments and sales and redemptions of securities, availability of funds credited
to the Cash Account shall be based on the type of funds used in the trade
settlement or payment, including, but not limited to, same day availability for
federal or same day funds and next business day availability for clearing house
or next day funds. Subject to the above, with respect to the purchase and sale
of property for the Custody Account, the proceeds from the sale of securities
shall be credited to the Cash Account on the date such proceeds are received by
you and the cost of securities purchased shall be debited to the Cash Account on
the date securities are received by you.
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<PAGE>
TRANSFER TAXES. You are authorized and directed, unless otherwise
instructed in particular transactions, to claim exemption from transfer taxes on
all transfers and deliveries of securities held for our Custody Account.
OTHER ACCOUNTS. From time to time we may instruct you to open and
maintain more than one Custody Account for us. Unless we and you otherwise
expressly agree, such accounts will be governed by the provisions of this
Agreement.
FEES, INDEMNIFICATION. We agree to pay you compensation for your
services pursuant to this Agreement at the fees of which you shall notify us
from time to time. We also agree to hold you and your agents harmless from, and
to indemnify and reimburse you and them for, all claims, liability, loss and
expense (including out-of-pocket and incidental expenses and legal fees)
incurred by you or them in connection with our Custody Account or your acting
under this Agreement, provided that you or they, as the case may be, have not
acted with negligence or willful misconduct with respect to the events resulting
in such claims, liability, loss and expense.
TERMINATION. Either party may terminate this Agreement at any time upon
thirty days written notice. Our obligations pursuant to the paragraphs under the
headings "Registration", "Overdrafts", "Reimbursement" and "Fees,
Indemnification" shall survive the termination of this Agreement.
NOTICES. Notices with respect to termination, specification of
Authorized Officers and terms and conditions for instructions required hereunder
shall be in writing, and shall be deemed to have been duly given if delivered
personally, by courier service or by mail, postage prepaid, to the following
addresses (or to such other address as either party hereto may from time to time
designate by notice duly given in accordance with this paragraph):
MBIA Corp.
To us at: Attn: Antony Elkins
113 King Street
Armonk, NY 10504
Account Name: MBIA Corp. Custody
To you, to the attention of the individual designated by you as the
safekeeping account administrator for our account, at:
The Chase Manhattan Bank, N.A.
Worldwide Insurance Securities
Services
3 Chase MetroTech Center, 6th Floor
Brooklyn, New York 11245
GOVERNING LAW, SUCCESSORS AND ASSIGNS, HEADINGS. This Agreement shall be
governed by and construed in accordance with the laws of the State of New York,
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<PAGE>
without regard to laws as to conflicts of laws, and shall be binding on our and
your respective successors and assigns. The headings of the paragraphs hereof
are included for convenience of reference only and do not form a part of this
Agreement.
PRIOR PROPOSALS. This Agreement contains the complete agreement of the
parties hereto with respect to the Custody Account (except as may be expressly
provided to the contrary herein) and supersedes and replaces any previously made
proposals, representations, warranties or agreements with respect thereto by
either or both of the parties hereto. This Agreement shall become effective upon
execution hereof by us and acceptance by you.
SEPARABILITY. Any provisions of this Agreement which may be determined
by competent authority to be prohibited or unenforceable in any jurisdiction
shall, as to such jurisdiction, be ineffective to the extent of such prohibition
or unenforceability without invalidating the remaining provisions hereof, and
any such prohibition or unenforceability in any jurisdiction shall not
invalidate or render unenforceable such provision in any other jurisdiction.
SPECIAL TERMS. The following additional terms and provisions, if any,
are included in and constitute a part of this Agreement:
Municipal Bond Investors
Assurance Corporation
------------------------
By: /s/ Christopher W. Tully
---------------------------
Title: Treasurer
------------------------
Accepted by: Date: March 1, 1995
-------------------------
THE CHASE MANHATTAN BANK, N.A.
By: /s/ Lawrence W. Young
----------------------------
Title: Second Vice President
-------------------------
Date: 2/21/95
-------------------------
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<PAGE>
EXHIBIT 10.69
CUSTODY AGREEMENT
To: THE CHASE MANHATTAN BANK, N.A.
Worldwide Insurance Securities Services
3 Chase MetroTech Center, 6th Floor
Brooklyn, New York 11245
Gentlemen:
We hereby request you to open and to maintain a Custody Account in our
name and to hold therein as our custodian, upon the following terms and
conditions, all such securities and similar property as shall be received by and
acceptable to you for the Custody Account. As used herein, the term Custody
Account shall include all such Custody Accounts opened pursuant to this Custody
Agreement.
TRANSACTIONS. Unless you receive contrary written instructions from us,
and subject to the provisions of this Agreement, you are authorized:
(a) To receive all interest and dividends payable on such
property and to credit such interest and dividends to the account or
accounts of ours with you as are designated by us (hereinafter referred
to as the "Cash Account");
(b) To credit all proceeds received from sales and redemptions
of property to the Cash Account;
(c) To debit the Cash Account for the cost of acquiring property
for the Custody Account;
(d) To present obligations (including coupons) for payment upon
maturity, when called for redemption and when income payments are due;
(e) To exchange securities for other securities where the
exchange is purely ministerial as, for example, the exchange of
securities in temporary form for securities in definitive form or the
mandatory exchange of certificates;
(f) To sell fractional interests resulting from a stock split or
a stock dividend and to credit the Cash Account with the proceeds
thereof;
(g) To convert moneys received with respect to securities of
foreign issue into United States dollars whenever it is practical to do
so through customary banking channels. In effecting such conversion you
may use any method or agency available to you, including the facilities
of your own divisions, subsidiaries or affiliates. You shall incur no
liability on account of any loss suffered or expense incurred as a
result of such conversion, including, without limitation, losses arising
from fluctuations in exchange rates affecting any such conversion; and
<PAGE>
(h) To execute in our name, whenever you deem it appropriate,
such ownership and other certificates as may be required to obtain
payments with respect to, or to effect the sale, transfer or other
disposition of, property in our Custody Account and to guarantee as our
signature the signature so affixed.
INSTRUCTIONS. You are authorized to rely and act upon all further
written instructions given or purported to be given by one or more officers,
employees or agents of ours {i) authorized by or in accordance with a corporate
resolution of ours delivered to you or (ii) described as authorized in a
certificate delivered to you by our Secretary or an Assistant Secretary or
similar officer of ours (each such officer, employee or agent or combination of
officers, employees and agents authorized pursuant to clause (i) or described
pursuant to clause (ii) of this paragraph is hereinafter referred to as an
"Authorized Officer"). (The term "instructions" includes, without limitation,
instructions to sell, assign, transfer, deliver, purchase or receive for the
Custody Account, any and all stocks, bonds and other securities or to transfer
funds in the Custody Account or Cash Account.) You may also rely and act upon
instructions when bearing or purporting to bear the facsimile signature of any
of the individuals designated by an Authorized Officer regardless of by whom or
by what means the actual or purported facsimile signature or signatures thereon
may have been affixed thereto if such facsimile signature or signatures resemble
the facsimile specimen or specimens from time to time furnished to you by any of
such Officers, our Secretary or an Assistant Secretary or similar officer of
ours. In addition, you may rely and act upon instructions received by telephone,
telex, TWX, facsimile transmission, bank wire or other teleprocess acceptable to
you which you believe in good faith to have been given by an Authorized Officer
or which are transmitted with proper testing or authentication pursuant to terms
and conditions which you may specify. You may also rely and act upon
instructions transmitted electronically through your TITAN Data Entry System or
any similar electronic instruction system acceptable to you. You shall incur no
liability to us or otherwise as a result of any act or omission by you in
accordance with instructions on which you are authorized to rely pursuant to the
provisions of this paragraph. Any instructions delivered to you by telephone
shall promptly thereafter be confirmed in writing by an Authorized Officer, but
you shall incur no liability for our failure to send such confirmation in
writing, the failure of any such written confirmation to conform to the
telephone instructions which you received, the failure of any such written
confirmation to be signed or properly signed, or your failure to produce such
confirmation at any subsequent time. You shall incur no liability for refraining
from acting upon any instructions which for any reason you, in good faith, are
unable to verify to your own satisfaction. With respect to instructions received
hereunder to transfer funds from the Cash Account to any other account or party,
we agree to implement any callback or other authentication method or procedure
or security device required by you at any time or from time to time. Unless
otherwise expressly provided, all authorizations and instructions shall continue
in full force and effect until canceled or superseded by subsequent
authorizations or instructions received by your safekeeping account
administrator with reasonable opportunity to act thereon. Your
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<PAGE>
authorization to rely and act upon instructions pursuant to this paragraph shall
be in addition to, and shall not limit, any other authorization which we may
give you regarding our accounts with you.
We agree that, if you require test arrangements, authentication methods
or procedures or other security devices to be used with respect to instructions
which we may give hereunder, thereafter instructions given by us shall be given
and processed in accordance with terms and conditions for the use of such
arrangements, methods or procedures or devices as you may put into effect and
modify from time to time. We shall safeguard any testkeys, identification codes
or other security devices which you make available to us and agree that we shall
be responsible for any loss, liability or damage incurred by you or by us as a
result of your acting in accordance with instructions from any unauthorized
person using the proper security device. You may electronically record any
instructions given by telephone, and any other telephone discussions with
respect to the Custody Account or transactions pursuant to this Agreement.
Except as may be provided otherwise herein, you are authorized to
execute our instructions and take other actions pursuant to this Agreement in
accordance with your customary processing practices for customers similar to us
and, in accordance with such practices, you may retain agents, including
subsidiaries or affiliates of yours, to perform certain of such functions.
In acting upon instructions to deliver securities against payment, you
are authorized, in accordance with customary securities processing practices, to
deliver such securities to the purchaser thereof or dealer therefor (including
to an agent for any such purchaser or dealer) against a receipt, with the
expectation of collecting payment from the purchaser, dealer or agent to whom
the securities were so delivered before the close of business on the same day.
REGISTRATION. Unless you receive contrary instructions from us, you are
authorized to keep securities in your own vaults registered in the name of your
nominee or nominees or, where securities are eligible for deposit in a central
depository, such as The Depository Trust Company, the Federal Reserve Bank of
New York or the Participants Trust Company, you may use any such depository and
permit the registration of registered securities in the name of its nominee or
nominees, and we agree to hold you and the nominees harmless from any liability
as holders of record. We shall accept the return or delivery of securities of
the same class and denomination as those deposited with you by us or otherwise
received by you for the Custody Account, and you need not retain the particular
certificates so deposited or received.
If any securities registered in the name of your nominee or held in a
central depository and registered in the name of the depository's nominee are
called for partial redemption by the issuer of such securities, you are
authorized to allot the called
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<PAGE>
portion to the respective beneficial holders of the securities in any manner
deemed to be fair and equitable by you in your sole discretion.
STATEMENTS. You shall notify us of each securities transaction effected
for our Custody Account and of income on and redemptions of the property in the
Custody Account, as well as furnish us a listing of such property, at such times
upon which you and we mutually agree.
CORPORATE ACTIONS. You shall send us such proxies (signed in blank, if
issued in the name of your nominee or a nominee of a central depository) and
communications with respect to securities in our Custody Account as call for
voting or relate to legal proceedings within a reasonable time after sufficient
copies are received by you for forwarding to customers. In addition, you shall
follow coupon payments, redemptions, exchanges or similar matters with respect
to securities in our Custody Account and advise us of rights issued, tender
offers or any other discretionary rights with respect to such securities, in
each case, of which you receive notice from the issuer of the securities or as
to which notice is published in publications routinely used by you for this
purpose.
CUSTODIAN RESPONSIBILITY. You shall be obligated to indemnify us for any
loss of securities and other property in the Custody Account resulting from (i)
your negligence or willful misconduct, (ii) the negligence or willful misconduct
of your officers or employees, or (iii) the negligence or willful misconduct of
any central depository or other agent retained by you to hold such securities or
property. Except as otherwise provided herein, in no event shall you be liable
or responsible other than for your own negligence or willful misconduct. In the
event of a loss of securities in the Custody Account for which you are required
to indemnify us pursuant to this Agreement, you shall promptly replace, at your
option, such securities or the value thereof (determined as of the date of the
discovery of such loss) and the value of any loss of rights or privileges
resulting from the loss of such securities. Subject to your obligations set
forth above, you shall be liable to us only to the extent of our general damages
(determined based upon the market value of the property which is the subject of
the loss at the date of discovery of such loss) suffered or incurred as a result
of any act or omission of yours which is a breach of your duties pursuant to
this Agreement and for which liability is legally imposed upon you, and in no
event shall you be liable for special, consequential or punitive damages.
General damages shall mean only those damages as directly and necessarily result
from such act or omission without reference to any special conditions or
circumstances of ours or of any transaction, whether or not you have been
advised of any such special conditions or circumstances.
All collection and receipt of funds or securities and all payment and
delivery of funds or securities under this Agreement shall be made by you as our
agent, at our risk with respect to our actions or omissions and those of persons
other than you, including, without limitation, the risk associated with the
securities processing
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<PAGE>
practice of delivering securities against a receipt and the risk that the
counterparty in any transaction into which we enter will not transfer funds or
securities or otherwise perform in accordance with our expectation of its
obligations thereunder (including, without limitation, where, as a result of
such nonperformance, a central depository reverses, or requires repayment of,
any credit given in connection with the transfer of securities).
In no event shall you be responsible or liable for any loss due to
forces beyond your control, including, but not limited to, acts of God, flood,
fire, nuclear fusion, fission or radiation, war (declared or undeclared),
terrorism, insurrection, revolution, riot, strikes or work stoppages for any
reason, embargo, government action, including any laws, ordinances, regulations
or the like which restrict or prohibit the providing of the services
contemplated by this Agreement, inability to obtain equipment or communications
facilities, or the failure of equipment or interruption of communications
facilities, and other causes whether or not of the same class or kind as
specifically named above. In the event that you are unable substantially to
perform for any of the reasons described in the immediately preceding sentence,
you shall so notify us as soon as reasonably practicable.
You shall be responsible for only those duties expressly stated in this
Agreement or expressly contained in instructions to perform the services
described herein given to you pursuant to the provisions of this Agreement and
accepted by you (unless you and we otherwise agree in writing) and, without
limiting the foregoing, you shall have no duty or responsibility:
(a) to supervise the investment of, or make recommendations with
respect to the purchase, retention or sale of, securities or other
property relating to the Custody Account, or to maintain any insurance
on property in the Custody Account for our benefit;
(b) with regard to any security in the Custody Account as to
which a default in the payment of principal or interest has occurred, to
give notice of default, make demand for payment or take any other action
with respect to such default:
(c) except as otherwise specifically provided herein, for any
act or omission, or for the solvency or insolvency, or notice to us of
the solvency or insolvency, of any broker or agent (including any
central depository) which is selected by you (in the absence of gross
negligence or willful misconduct by you in such selection) or by us or
any other person to effect any transaction for the Custody Account or to
perform any service under this Agreement:
(d) to evaluate, or report to us regarding, the financial
condition of any person to which you deliver securities or funds
pursuant to this Agreement; or
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<PAGE>
(e) for any loss occasioned by delay in the actual receipt of
notice by you of any payment, redemption or other transaction in respect
to which you are authorized to take some action pursuant to this
Agreement.
OVERDRAFTS. The amount by which payments made by you on our behalf with
respect to property in, or to be received for, the Custody Account, or with
respect to other transactions pursuant to this Agreement, exceed the available
funds in the Cash Account shall be deemed a loan from you to us, payable on
demand, bearing interest at the rate of interest customarily charged by you on
similar loans, provided, however, that you shall have no duty to make any
payment if such payment shall exceed the available funds in the Cash Account.
REIMBURSEMENT. If you choose to credit the Cash Account or the Custody
Account on the payable date, or at any time prior to actual collection or
receipt, for interest, dividends or redemptions, we shall promptly return to you
such amount or property credited, and you may debit the Cash Account or the
Custody Account for such amount or property credited, upon your oral or written
notification to us that you have been unable to collect such amount or property
in the ordinary course of transactions for our account or that such amount or
property was incorrectly credited. You shall have no duty to institute legal
proceedings, file a claim or proof of claim in any insolvency proceeding or take
any action beyond your ordinary collection procedures to collect such amounts or
property, but this Agreement shall not limit or waive any rights which we may
have against any other person obligated to us.
RESPONSIBLE AS PRINCIPAL. We agree that we shall be responsible to you
as a principal for all of our obligations to you arising under or in connection
with this Agreement, notwithstanding that we may be acting on behalf of other
persons, and we warrant our authority to deposit in the Custody Account and Cash
Account any securities and funds which you or your agents receive therefor and
to give instructions relative thereto. We further agree that you shall not be
subject to, nor shall your rights and obligations with respect to this Agreement
and the Custody Account be affected by, any agreement between us and any such
person.
CREDITING AND DEBITING PROCEDURES. With respect to all transactions for
the Custody Account, including, without limitation, dividend and interest
payments and sales and redemptions of securities, availability of funds credited
to the Cash Account shall be based on the type of funds used in the trade
settlement or payment, including, but not limited to, same day availability for
federal or same day funds and next business day availability for clearing house
or next day funds. Subject to the above, with respect to the purchase and sale
of property for the Custody Account, the proceeds from the sale of securities
shall be credited to the Cash Account on the date such proceeds are received by
you and the cost of securities purchased shall be debited to the Cash Account on
the date securities are received by you.
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<PAGE>
TRANSFER TAXES. You are authorized and directed, unless otherwise
instructed in particular transactions, to claim exemption from transfer taxes on
all transfers and deliveries of securities held for our Custody Account.
OTHER ACCOUNTS. From time to time we may instruct you to open and
maintain more than one Custody Account for us. Unless we and you otherwise
expressly agree, such accounts will be governed by the provisions of this
Agreement.
FEES, INDEMNIFICATION. We agree to pay you compensation for your
services pursuant to this Agreement at the fees of which you shall notify us
from time to time. We also agree to hold you and your agents harmless from, and
to indemnify and reimburse you and them for, all claims, liability, loss and
expense (including out-of-pocket and incidental expenses and legal fees)
incurred by you or them in connection with our Custody Account or your acting
under this Agreement, provided that you or they, as the case may be, have not
acted with negligence or willful misconduct with respect to the events resulting
in such claims, liability, loss and expense.
TERMINATION. Either party may terminate this Agreement at any time upon
thirty days written notice. Our obligations pursuant to the paragraphs under the
headings "Registration", "Overdrafts", "Reimbursement" and "Fees,
Indemnification" shall survive the termination of this Agreement.
NOTICES. Notices with respect to termination, specification of
Authorized Officers and terms and conditions for instructions required hereunder
shall be in writing, and shall be deemed to have been duly given if delivered
personally, by courier service or by mail, postage prepaid, to the following
addresses (or to such other address as either party hereto may from time to time
designate by notice duly given in accordance with this paragraph):
To us at: MBIA Inc. Account Name: MBIA Inc. Custody
Attn: Antony Elkins
113 King Street
Armonk, NY 10504
To you, to the attention of the individual designated by you as the
safekeeping account administrator for our account, at:
The Chase Manhattan Bank, N.A.
Worldwide Insurance Securities
Services
3 Chase MetroTech Center, 6th Floor
Brooklyn, New York 11245
GOVERNING LAW, SUCCESSORS AND ASSIGNS, HEADINGS. This Agreement shall be
governed by and construed in accordance with the laws of the State of New York,
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<PAGE>
without regard to laws as to conflicts of laws, and shall be binding on our and
your respective successors and assigns. The headings of the paragraphs hereof
are included for convenience of reference only and do not form a part of this
Agreement.
PRIOR PROPOSALS. This Agreement contains the complete agreement of the
parties hereto with respect to the Custody Account (except as may be expressly
provided to the contrary herein) and supersedes and replaces any previously made
proposals, representations, warranties or agreements with respect thereto by
either or both of the parties hereto. This Agreement shall become effective upon
execution hereof by us and acceptance by you.
SEPARABILITY. Any provisions of this Agreement which may be determined
by competent authority to be prohibited or unenforceable in any jurisdiction
shall, as to such jurisdiction, be ineffective to the extent of such prohibition
or unenforceability without invalidating the remaining provisions hereof, and
any such prohibition or unenforceability in any jurisdiction shall not
invalidate or render unenforceable such provision in any other jurisdiction.
SPECIAL TERMS. The following additional terms and provisions, if any,
are included in and constitute a part of this Agreement:
MBIA Inc.
-----------------------------
By: /s/ Christopher W. Tully
-----------------------------
Title: Treasurer
--------------------------
Accepted by: Date: March 1, 1995
--------------------------
THE CHASE MANHATTAN BANK, N.A.
By: /s/ Lawrence W. Young
-----------------------------
Title: Second Vice President
--------------------------
Date: 2/21/95
--------------------------
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<PAGE>
EXHIBIT 10.70
EXHIBIT A
MBIA INC.
1996 INCENTIVE PLAN
(EFFECTIVE AS OF JANUARY 1, 1996)
1. PURPOSE.
The purposes of the Plan are to enable the Company and its
Subsidiaries to attract, retain, motivate and reward the best qualified
executive officers and key employees by providing them with the opportunity to
earn competitive compensation directly linked to the Company's performance.
2. DEFINITIONS.
Unless the context requires otherwise, the following words as used in
the Plan shall have the meanings ascribed to each below, it being understood
that masculine, feminine and neuter pronouns are used interchangeably and that
each comprehends the others.
(a) "Board" shall mean the Board of Directors of the Company.
(b) "Committee" shall mean the Compensation and Organization Committee
of the Board (or such other committee of the Board that the Board shall
designate from time to time) or any subcommittee thereof consisting of two or
more directors each of whom is an "outside director" within the meaning of
Section 162(m).
(c) "Company" shall mean MBIA Inc.
(d) "Covered Employee" shall have the meaning set forth in
Section 162(m).
(e) "Participant" shall mean (i) each executive officer of the Company
and (ii) each other key employee of the Company or a Subsidiary whom the
Committee designates as a participant under the Plan.
(f) "Performance Period" shall mean each calendar year or multi-year
cycle as determined by the Committee.
(g) "Plan" shall mean the MBIA Inc. 1996 Incentive Plan, as set forth
herein and as may be amended from time to time.
(h) "Section 162(m)" shall mean Section 162(m) of the Internal Revenue
Code of 1986, as amended, and any regulations promulgated thereunder (including
any proposed regulations).
(i) "Subsidiary" shall mean any corporation in which the Company owns,
directly or indirectly, stock representing more than 50% of the voting power of
all classes of stock entitled to vote.
3. ADMINISTRATION.
The Committee shall administer and interpret the Plan, provided that, in
no event, shall the Plan be interpreted in a manner which would cause any award
intended to be qualified as performance-based compensation under Section 162(m)
to fail to so qualify. The Committee shall establish the performance objectives
for any calendar year in accordance with Section 4 and certify whether such
performance objectives have been obtained. Any determination made by the
Committee under the Plan shall be final and conclusive. The Committee may employ
such legal counsel, consultants and agents (including counsel or agents who are
employees of the Company or a Subsidiary) as it may deem desirable for the
administration of the Plan and may rely upon any opinion received from any
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such counsel or consultant or agent and any computation received from such
consultant or agent. All expenses incurred in the administration of the Plan,
including, without limitation, for the engagement of any counsel, consultant or
agent, shall be paid by the Company. No member or former member of the Board or
the Committee shall be liable for any act, omission, interpretation,
construction or determination made in connection with the Plan other than as a
result of such individual's willful misconduct.
4. BONUSES.
(a) Performance Criteria. Within 90 days after each Performance
Period begins (or such other date as may be required or permitted under Section
162(m)), the Committee shall establish the performance objective or objectives
that must be satisfied in order for a Participant to receive a bonus for such
Performance Period. Unless the Committee determines at the time of grant not to
qualify the award as performance-based compensation under Section 162(m), any
such performance objectives will be based upon the relative or comparative
achievement of one or more of the following criteria, as determined by the
Committee: (i) consolidated earnings before income taxes; (ii) earnings per
share; (iii) book value per share; (iv) return on shareholders equity; (v) the
relative performance of peer group companies; (vi) expense management; (vii)
return on investment; (viii) improvements in capital structure; (ix)
profitability of an identifiable business unit or product; (x) maintenance or
improvement of product margins; and (xi) ratio of claims to revenues.
(b) Maximum Amount Payable. If the Committee certifies in writing that
any of the performance objectives established for the relevant Performance
Period under Section 4(a) has been satisfied, each Participant who is employed
by the Company or one of its Subsidiaries on the last day of the Performance
Period for which the bonus is payable shall be entitled to receive (i) an annual
bonus in an amount not to exceed $1,000,000 and/or (ii) a long-term award in an
amount not to exceed $3,000,000. If a Participant's employment terminates for
any reason (including, without limitation, his death, disability or retirement
under the terms of any retirement plan maintained by the Company or a
Subsidiary) prior to the last day of the Performance Period for which the bonus
is payable, such Participant shall receive a bonus equal to the maximum bonus
payable to such Participant under the preceding sentence multiplied by a
fraction, the numerator of which is the number of days that have elapsed during
the Performance Period in which the termination occurs prior to and including
the date of the Participant's termination of employment and the denominator of
which is the total number of days in the Performance Period.
(c) Negative Discretion. Notwithstanding anything else contained in
Section 4(b) to the contrary, the Committee shall have the right, in its
absolute discretion, (i) to reduce or eliminate the amount otherwise payable to
any Participant under Section 4(b) based on individual performance or any other
factors that the Committee, in its discretion, shall deem appropriate and (ii)
to establish rules or procedures that have the effect of limiting the amount
payable to each Participant to an amount that is less than the maximum amount
otherwise authorized under Section 4(b).
(d) Affirmative Discretion. Notwithstanding any other provision in
the Plan to the contrary, (i) the Committee shall have the right, in its
discretion, to pay to any Participant who is not a Covered Employee a bonus for
the year in which the amount paid would ordinarily be deductible by the Company
for federal income tax purposes in an amount up to the maximum bonus payable
under Section 4(b), based on individual performance or any other criteria that
the Committee deems appropriate and (ii) in connection with the hiring any
person who is or becomes Covered Employee, the Committee may provide for a
minimum bonus amount in any Performance Period, regardless of whether
performance objectives are attained.
5. PAYMENT.
Except as otherwise provided hereunder, payment of any bonus amount
determined under Section 4 shall be made to each Participant as soon as
practicable after the Committee certifies that
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one or more of the applicable performance objectives have been attained (or, in
the case of any bonus payable under the provisions of Section 4(d), after the
Committee determines the amount of any such bonus).
6. FORM OF PAYMENT.
The Committee shall determine whether any bonus payable under the 1996
Plan is payable in cash, in shares of Common Stock or in any combination
thereof. The Committee shall have the right to impose whatever conditions it
deems appropriate with respect to the award of shares of Common Stock, including
conditioning the vesting of such shares on the performance of additional
service. The maximum number of shares available for issuance under the Plan
shall be 1,500,000.
7. GENERAL PROVISIONS.
(a) Effectiveness of the Plan. The Plan shall be effective with respect
to calendar years beginning on or after January 1, 1996 and ending on or before
December 31, 2000, unless the term hereof is extended by action of the Board.
(b) Amendment and Termination. Notwithstanding Section 6(a), the Board
or the Committee may at any time amend, suspend, discontinue or terminate the
Plan; provided, however, that no such action shall be effective without approval
by the shareholders of the Company to the extent necessary to continue to
qualify the amounts payable hereunder to Covered Employees as performance-based
compensation under Section 162(m).
(c) Designation of Beneficiary. Each Participant may designate a
beneficiary or beneficiaries (which beneficiary may be an entity other than a
natural person) to receive any payments which may be made following the
Participant's death. Such designation may be changed or canceled at any time
without the consent of any such beneficiary. Any such designation, change or
cancellation must be made in a form approved by the Committee and shall not be
effective until received by the Committee. If no beneficiary has been named, or
the designated beneficiary or beneficiaries shall have predeceased the
Participant, the beneficiary shall be the Participant's spouse or, if no spouse
survives the Participant, the Participant's estate. If a Participant designates
more than one beneficiary, the rights of such beneficiaries shall be payable in
equal shares, unless the Participant has designated otherwise.
(d) No Right of Continued Employment. Nothing in this Plan shall be
construed as conferring upon any Participant any right to continue in the
employment of the Company or any of its Subsidiaries.
(e) No Limitation on Corporate Actions. Nothing contained in the Plan
shall be construed to prevent the Company or any Subsidiary from taking any
corporate action which is deemed by it to be appropriate or in its best
interest, whether or not such action would have an adverse effect on any awards
made under the Plan. No employee, beneficiary or other person shall have any
claim against the Company or any Subsidiary as a result of any such action.
(f) Nonalienation of Benefits. Except as expressly provided herein, no
Participant or beneficiary shall have the power or right to transfer,
anticipate, or otherwise encumber the Participant's interest under the Plan. The
Company's obligations under this Plan are not assignable or transferable except
to (i) a corporation which acquires all or substantially all of the Company's
assets or (ii) any corporation into which the Company may be merged or
consolidated. The provisions of the Plan shall inure to the benefit of each
Participant and the Participant's beneficiaries, heirs, executors,
administrators or successors in interest.
(g) Withholding. Any amount payable to a Participant or a beneficiary
under this Plan shall be subject to any applicable Federal, state and local
income and employment taxes and any other
A-3
<PAGE>
amounts that the Company or a Subsidiary is required at law to deduct and
withhold from such payment.
(h) Severability. If any provision of this Plan is held unenforceable,
the remainder of the Plan shall continue in full force and effect without regard
to such unenforceable provision and shall be applied as though the unenforceable
provision were not contained in the Plan.
(i) Governing Law. The Plan shall be construed in accordance with and
governed by the laws of the State of New York, without reference to the
principles of conflict of laws.
(j) Headings. Headings are inserted in this Plan for convenience of
reference only and are to be ignored in a construction of the provisions of the
Plan.
A-4
<PAGE>
EXHIBIT 11
MBIA INC. AND SUBSIDIARIES
for the Years Ended December 31, 1995, 1994 and 1993
Computation of Earnings Per Share Assuming Full Dilution
(In thousands except per share amounts)
1995 1994 1993
-------- -------- --------
Net Income $271,419 $260,209 $259,033
======== ======== ========
Fully diluted shares:
Average number of common
shares outstanding 41,763 41,686 41,963
Assumed exercise of
dilutive stock options 559 402 504
--------- --------- --------
42,322 42,088 42,467
======== ======== ========
Earnings per share assuming
full dilution $ 6.41 $ 6.18 $ 6.10
======== ======== ========
<PAGE>
MBIA INC.
1995 ANNUAL REPORT
<PAGE>
FINANCIAL PRINCIPLES AND REVIEW
TABLE OF CONTENTS
18 Selected Financial and Statistical Data
20 Management's Discussion and Analysis of Financial Condition and
Results of Operations
25 Report of Independent Accountants
26 Consolidated Statements of Income
27 Consolidated Balance Sheets
28 Consolidated Statements of Changes in Shareholders' Equity
29 Consolidated Statements of Cash Flows
30 Notes to Consolidated Financial Statements
MBIA's financial philosophy is an integral part of the operating structure of
the company. This philosophy is rooted in the following principles, which
provide a framework for decision making -- and have as their ultimate objective
maximizing shareholder value.
FINANCIAL CONSERVATISM
MBIA conducts its financial activities based on a high degree of conservatism,
which influences every aspect of our operations. This prudence is exemplified by
MBIA's sound underwriting procedures, risk-based capital pricing, and a very
high-quality investment portfolio.
TRIPLE-A RATINGS
MBIA is dedicated to maintaining its Triple-A claims-paying ratings. Preserving
these top-level ratings requires us to maintain a strong financial position,
highly dependable liquidity and solid operating cash flows.
SHAREHOLDER RETURNS
MBIA is committed to maximizing total cash returns over the long term. To work
toward this goal, we select businesses with demonstrated ability or potential to
earn attractive returns on capital and generate value.
-17-
<PAGE>
MBIA INC. AND SUBSIDIARIES (1)
YEARS ENDED DECEMBER 31
SELECTED FINANCIAL AND STATISTICAL DATA
The selected financial information in the table below should be read in
conjunction with the consolidated financial statements and notes that appear in
the pages which follow.
<TABLE>
<CAPTION>
Dollars in millions
except per share amounts 1995 1994 1993 1992 1991 1990 1989 1988 1987
- ------------------------- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GAAP SUMMARY INCOME
STATEMENT DATA:
Insurance:
Gross premiums written .....$ 348 $ 361 $ 479 $ 369 $ 269 $ 211 $ 159 $ 156 $ 171
Net premiums written ....... 303 312 432 336 223 181 137 145 152
Premiums earned ............ 215 218 231 163 132 107 91 82 81
Net investment income ...... 220 194 179 150 132 115 80 67 54
Net realized gains ......... 11 10 10 10 3 -- -- 1 1
Investment management services:
Income ..................... 20 16 5 2 1 -- -- -- --
Net realized losses ........ (6) (1) -- -- -- -- -- -- --
Income before income taxes ... 345 329 324 244 190 165 135 118 108
Net income ................... 271 260 259 189 145 127 102 92 74
Net income
per common share ......... $ 6.43 $ 6.18 $ 6.10 $ 4.62 $ 3.74 $ 3.33 $ 2.74 $ 2.45 $ 1.98
======== ======== ======== ======== ======== ======== ======== ======= ======
GAAP SUMMARY
BALANCE SHEET DATA:
Investments ..................$ 6,607 $ 4,867 $ 3,544 $ 2,529 $ 1,961 $ 1,724 $ 1,501 $ 1,104 $ 979
Total assets ................. 7,267 5,456 4,106 3,049 2,438 2,159 1,904 1,309 1,176
Deferred premium
revenue ............ 1,616 1,512 1,403 1,196 1,019 902 811 520 449
Loss reserves ................ 43 40 34 26 21 5 -- -- --
Municipal investment and
repurchase agreements ...... 2,642 1,526 493 -- -- -- -- -- --
Long-term debt ............... 374 299 299 299 199 200 195 -- --
Shareholders' equity ......... 2,234 1,705 1,596 1,382 1,063 932 777 705 620
Book value per share ......... 53.19 40.96 38.18 33.00 27.58 24.35 21.08 18.80 16.54
Dividends declared
per common share 1.31 1.14 .94 .76 .62 .48 .41 .19 .12
==== ==== === === === === === === ===
STATUTORY FINANCIAL
HIGHLIGHTS
Net premiums written .........$ 297 $ 310 $ 440 $ 339 $ 223 $ 355 $ 135 $ 150 $ 156
Net income ................... 278 225 258 190 149 127 84 71 42
Capital and surplus .......... 1,274 1,110 978 896 647 579 485 376 361
Contingency reserve .......... 744 621 539 404 316 261 216 154 112
-------- -------- -------- -------- -------- -------- -------- ------- ------
Qualified statutory
capital ....... 2,018 1,731 1,517 1,300 963 840 701 530 473
Unearned premium reserve ..... 1,733 1,620 1,474 1,242 1,044 926 828 591 507
Loss reserves ................ 7 22 8 14 12 -- -- -- --
-------- -------- -------- -------- -------- -------- -------- ------- ------
Total policyholders'
reserves .... 3,758 3,373 2,999 2,556 2,019 1,766 1,529 1,121 980
Present value of
installment premiums 235 177 186 173 151 134 90 82 82
Standby line of credit ....... 650 600 575 500 500 500 325 -- --
-------- -------- -------- -------- -------- -------- -------- ------- ------
TOTAL CAPITAL RESOURCES .... 4,643 4,150 3,760 3,229 2,670 2,400 1,944 1,203 1,062
===== ===== ===== ===== ===== ===== ===== ===== =====
FINANCIAL RATIOS:
GAAP
Loss ratio ................. 4.9% 3.7% 3.4% 3.4% 13.0% 4.7% 0.0% 0.0% 0.0%
Underwriting expense ratio . 29.3 28.8 27.4 32.0 30.1 33.7 38.5 39.6 35.2
Combined ratio ............. 34.2 32.5 30.8 35.4 43.1 38.4 38.5 39.6 35.2
Statutory
Loss ratio ................. 0.4 9.8 (3.5) 2.4 12.7 0.0 0.0 0.0 0.0
Underwriting expense ratio . 20.8 22.9 17.6 18.3 20.4 23.4 31.6 32.3 25.3
Combined ratio ............. 21.2 32.7 14.1 20.7 33.1 23.4 31.6 32.3 25.3
NET DEBT SERVICE OUTSTANDING ......$344,037 $304,502 $266,784 $223,056 $184,604 $157,707 $137,221 $90,343 $72,837
NET PAR AMOUNT OUTSTANDING ........$188,636 $164,318 $141,387 $112,483 $ 90,043 $ 75,979 $ 65,290 $42,917 $34,319
======== ======== ======== ======== ======== ======== ======== ======= =======
</TABLE>
(1) Balance sheet amounts as of December 31, 1, 1994, 1993, 1992, 1991,
1990, and 1989 and income statement amount for the years ended December 31,
1995, 1994, 1993, 1992, 1991 and 19include the accounts of MBIA Insurance Corp.
of Illinois (formerly BIG Insurance Company) (See Note 1 to consolidated
financial statements).
-18 & 19-
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
MBIA Inc.'s (the "Company" or "MBIA") 1995 net income increased by 4% to
$271.4 million or $6.43 per share compared with $260.2 million or $6.18 per
share in 1994. Comparing 1995 with 1994, core earnings per share increased by
12% to $5.87. Core earnings, which exclude the net income effects from
refundings and calls of insured issues, realized gains and losses, accounting
changes and other non-recurring items, are a more indicative measure of MBIA's
underlying profit trend. The increase in core earnings was primarily due to the
continued combined growth in core premiums earned and net investment income.
Book value at year-end 1995 was $53.19 per share, increasing 30% from $40.96 per
share at year-end 1994, as a result of the growth of the Company's retained
earnings and an increase in the fair value of MBIA's fixed-income investments.
Financial guarantee insurance companies refer to adjusted book value as a more
appropriate measure of their company's intrinsic value. Adjusted book value is
calculated by adding to book value the after-tax effects of (1) net deferred
premiums less deferred acquisition costs and (2) the present value of future
installment premiums on outstanding insurance policies. MBIA's adjusted book
value per share increased to $76.56 at year-end 1995 compared with $62.35 at
year-end 1994.
INSURANCE OPERATIONS
MBIA's primary business is to guarantee principal and interest payments on
municipal bonds sold in the new issue and secondary markets. The Company also
provides financial guarantees for structured finance transactions,
investor-owned utility debt and obligations of high-quality financial
institutions. In addition, MBIA provides financial guarantees for similar
securities in the international markets. The Company is the leading provider of
financial guarantees in both domestic and international markets.
Gross premiums written ("GPW") as reported on the Company's income statements
reflect cash premium receipts during the period, which represents upfront
premiums received for business originated in the period and installment premiums
received for installment-based insurance policies issued in current and prior
periods. GPW does not include the present value of future premiums receivable
for installment-based insurance policies issued in the period. Although most of
MBIA's premiums are collected upfront at policy issuance, MBIA is writing an
increasing proportion of installment premium business. MBIA estimates the
aggregate present value of its future stream of installment premiums to be
$235.4 million at December 31, 1995. To more accurately portray year-to-year
changes in new business production, the Company also discloses adjusted gross
premiums ("AGP"), which represent upfront premiums and the estimated present
value of current period and future installment premiums for installment-based
insurance policies issued in the period.
MBIA's total GPW for 1995 declined 3% to $348.5 million from $360.8 million in
1994. However, total AGP increased 2% to $370.2 million from $362.0 million in
1994, in part reflecting a greater proportion of installment-based business
written.
While the overall long-term new issue municipal bond market declined 9% in 1995
to $141.4 billion of par value, the insured portion of new issue volume rose to
a record 47% from 40% in 1994. This resulted in a 6% increase in insured
municipal volume in 1995, to $66.0 billion from $62.1 billion in 1994. In 1995,
MBIA continued to lead the industry in market share, capturing 42% of the
insured market and a record 20% of all new issue municipal par value. Market
data are reported on a sale date basis while MBIA's financial results are
computed from closing date information. Typically, there can be a one- to
four-week delay between the sale date and closing date of an insured issue.
Total par value insured by MBIA for new issue and secondary market municipal
insurance increased by 4% to $33.8 billion from $32.5 billion in 1994. GPW for
new issue and secondary market municipal insurance declined 7% to $301.3
million, from $324.4 million in 1994. Municipal AGP decreased by 6% to $298.6
million from $318.4 million in the previous year. The decrease in premium
writings was due primarily to a lower ratio of debt service to par value (as a
result of lower interest rates) and a larger percentage of higher credit quality
and lower risk business written in 1995.
MBIA reported substantial gains in its domestic new issue and secondary market
structured finance business insuring a record $9.0 billion of par value in 1995,
a 57% gain over 1994. GPW at $22.9 million reflects a 46% increase over 1994.
Structured finance AGP totaled $46.8 million, up 93% over 1994.
MBIA's international operations insured $2.2 billion of new issue and secondary
market par value. GPW for international business increased by 9% to $21.3
million from $19.4 million in 1994. International AGP increased by 24% to $24.0
million from $19.3 million in 1994.
In 1995, MBIA, jointly with AMBAC Indemnity Corporation (another leading U.S.
Triple-A rated financial guarantee insurer), announced the formation of an
international joint venture to market financial guarantee insurance in the
European Union. The effect of the joint venture on the financial position and
results of operations of the Company was not material in 1995.
-20-
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CON'T)
Ceded premiums to reinsurers from all insurance operations were $45.1 million
in 1995, compared with $49.3 million in 1994, representing 13% and 14% of GPW in
1995 and 1994, respectively. Ceded premiums in 1995 were lower than in 1994,
where ceded premiums were increased by cessions made on two unusually large
international transactions.
The Company monitors on a continual basis the creditworthiness of its
reinsurers, most of which are rated AA or better by Standard & Poor's
Corporation or A or better by A. M. Best Co. In 1995, the maximum amount
reinsured by any one reinsurance company as a percent of the Company's GPW or
debt service outstanding at December 31, 1995 was 4%. The Company remains liable
for risks reinsured but believes that the likelihood of not recovering the
reinsured portion of losses from any of its reinsurers is remote.
Premiums received upfront are earned pro rata over the period of risk. Such
premiums are allocated to each bond maturity based on par amount and are earned
on a straight-line basis over the term of each maturity. Accordingly, the
portion of net premiums earned on each policy in any given year represents a
relatively small percentage of the total net upfront premium received. The
balance represents deferred premium revenue to be earned over the remaining life
of the insured bond issue.
Installment premiums are credited to the deferred premium revenue account in
the period in which such premiums are received, and they are recognized as
revenue over each installment period -- generally one year or less. The revenue
that the Company recognizes from the amortization of deferred premiums for each
period, net of the amortization of prepaid reinsurance premiums, is its premiums
earned for that period.
Premiums earned decreased 1% to $215.1 million in 1995 from $218.3 million in
1994. Earned premiums from scheduled amortization increased by 10% over 1994 but
were offset by the decline in earned premiums associated with refunded and
called bonds during 1995, which were significantly lower than in the prior year.
When an MBIA-insured bond issue is refunded or retired early, the outstanding
liability associated with the refunded or called portion is extinguished and the
related deferred premium revenue is earned immediately, except for any portion
which may be applied as a credit towards insuring the refunding bond issue.
Earned premiums generated by refunded and called bonds in 1995 declined to $34.0
million from $53.0 million in 1994. The amount of bond refundings and calls is
influenced by a variety of factors such as prevailing interest rates relative to
the coupon rates of the bond issue, the issuer's desire to modify bond covenants
and applicable regulations under the Internal Revenue Code.
The fair value of the Company's investment portfolio related to its insurance
operations was $3.9 billion as of December 31, 1995. This portfolio generated
net investment income of $219.9 million in 1995, a 13% increase over the $193.9
million generated in 1994. The increase was primarily the result of the growth
of investments from continued positive operating cash flows and a modest
lengthening of the portfolio's duration. Average invested assets for 1995 were
$3.45 billion at amortized cost compared with $3.12 billion for 1994. Net
realized capital gains in 1995 were $11.3 million, compared with $10.3 million
in the prior year.
The average credit quality rating of the fixed-income investments at year-end
1995 was Double-A. Tax-exempt securities represented 72% of the portfolio at
December 31, 1995 compared with 75% at December 31, 1994.
The provision for losses and loss adjustment expenses during 1995 was $10.6
million compared with $8.1 million in 1994, representing additions to the loss
reserve consistent with the Company's loss reserving methodology. At December
31, 1995, $14.5 million of the $42.5 million loss and loss adjustment expense
reserve was allocated on a case basis compared with $21.9 million of the $40.1
million reserve at year-end 1994. The reduction of the case basis reserves
primarily reflects loss payments made in 1995. The decrease in case reserves had
no impact on net income. At year-end 1995 the Company's unallocated general
reserve was $28.0 million compared with $18.2 million at year-end 1994.
In 1995, policy acquisition costs net of deferrals were $21.3 million,
essentially unchanged from 1994. Policy acquisition costs are amortized over the
period in which the related premiums are earned. Other insurance operating
expenses increased modestly to $41.8 million in 1995 from $41.0 million in the
prior year.
In 1995, the Company incurred $28.4 million of interest expense compared with
$27.2 million in 1994. The increase in 1995 primarily resulted from the
utilization of short-term bank borrowings under existing lines of credit during
the year.
The Company's effective tax rate increased marginally in 1995 to 21.3% compared
with 21.0% in 1994.
-21-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CON'T)
INVESTMENT MANAGEMENT SERVICES
Over the last five years, MBIA has developed investment management services
which capitalize on the Company's capabilities, reputation and marketplace
relationships.
MBIA Municipal Investors Service Corporation ("MBIA/MISC"), a wholly owned
subsidiary of the Company, provides cash management services for local
governments and school districts. As of December 31, 1995, MBIA/MISC had
approximately 1,250 clients and over $2.5 billion of client assets under
management compared with $1.7 billion at year-end 1994. In addition, MBIA/MISC
provides fund administration services to over 230 clients with invested assets
of $154 million. MBIA/MISC offers its services in nine states and the
Commonwealth of Puerto Rico and plans to expand into additional states.
Since 1993, MBIA Investment Management Corp. ("IMC"), another wholly owned
subsidiary of the Company, has provided investment agreements, guaranteed as to
principal and interest, for bond proceeds of states, municipalities and
municipal authorities. At year-end 1995, aggregate principal and accrued
interest outstanding on investment agreements was 2.6 billion compared with $1.5
billion at year-end 1994. The assets supporting IMC's investment agreement
liabilities are high-quality securities with an average credit quality rating of
Double-A and are recorded as a component of the Company's total investments.
Municipal investment and repurchase agreements are recorded as balance sheet
liabilities at the time such agreements are executed. The liability for a
municipal investment or repurchase agreement is carried at the principal value
of the obligation plus accrued interest. Interest expense on municipal
investment and repurchase agreements is computed daily, based upon the
outstanding liability at rates specified in the agreements, and deducted from
the investment income arising from related investment agreement assets. The net
amount of interest income less interest expense is recorded as a component of
investment management services income.
In conducting its business, IMC may, from time to time, use derivative
financial instruments for hedging purposes as part of its overall management of
interest rate risk exposure. The use of such instruments must comply with the
Company's policies restricting their use to prescribed limits, non-speculative
purposes, and exposure to a market or index that represents a class of
investments approved as a direct investment under the Company's existing
investment guidelines. At December 31, 1995, the Company's exposure to
derivative financial instruments (interest rate contracts) was not significant.
In 1994, MBIA Securities Corp. ("SECO"), a wholly owned subsidiary, was
established to provide investment management services for MBIA's investment
agreements, municipal cash management and public pension funds. In 1995,
portfolio management for a portion of MBIA's insurance related investment
portfolio was transferred to SECO; the management of the balance of this
portfolio was transferred in January 1996.
In 1995, the Company's investment management services business contributed
$19.9 million in operating revenues, a 23% increase over 1994 which included
$1.8 million of net proceeds from the sale of MBIA's 49% interest in a joint
venture. Operating expenses increased by 21% to $12.9 million. Net realized
capital losses for 1995 were $6.1 million compared with $0.7 million in 1994.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993
MBIA's 1994 net income was $260.2 million compared with $259.0 million in 1993.
Earnings per share grew 1% to $6.18 from $6.10 in 1993. The Company's 1993
results included an extraordinary net income benefit of $0.30 per share
primarily relating to the adoption of Statement of Financial Accounting
Standards ("SFAS") 109 "Accounting for Income Taxes." Excluding the effect of
accounting changes, earnings per share for 1994 increased 7% over 1993. Core
earnings per share increased 15% to $5.26 in 1994 compared with $4.56 in 1993.
Book value at year-end 1994 was $40.96 per share, a 7% gain from $38.18 per
share in 1993. This increase was due to growth of the Company's business and was
reduced by the impact of SFAS 115 "Accounting for Certain Investments in Debt
and Equity Securities," which was adopted by the Company in 1994. Under SFAS
115, fixed-income investments previously carried at amortized cost are now
classified as available-for-sale and carried at fair value. Changes in the fair
value of securities classified as available-for-sale have no income statement
impact but are recorded, net of taxes, as a component of shareholders' equity.
As of December 31, 1994, this component reduced book value by $2.10 per share.
MBIA's adjusted book value per share at year-end 1994 was $62.35 compared with
$58.36 in 1993.
<PAGE>
INSURANCE OPERATIONS
Total long-term new issue municipal bond volume declined 45% to $154.7 billion
of par value in 1994 from the record $280.2 billion in 1993. The 1994 decline
was due to the unusually sharp rise in interest rates. The insured portion
increased nominally to 40% from 39% in 1993. In 1994, MBIA once again led the
industry in market share, guaranteeing 40% of insured long-term new issue
municipal bond volume.
Influenced significantly by this operating environment, the Company's total GPW
declined 25% to $360.8 million from $479.3 million in 1993. Total AGP decreased
by 23% to $362.0 million from $469.0 million in 1993.
Par value insured by MBIA for new issue and secondary market municipal
insurance declined by 27% to $32.5 billion from $44.8 billion in 1993. GPW for
new issue and secondary market municipal insurance declined by 31% to $324.4
million from $467.1 million in 1993. In 1993, municipal GPW included $16.2
million of assumed premiums of which $10.8 million was related to a portfolio
written by one of the five member companies of MBIA's predecessor, the Municipal
Bond Insurance Association. Municipal AGP decreased by 28% to $318.4 million
from $445.2 million in the prior year. The decrease in 1994 domestic municipal
business was due to both the decline in the municipal bond market as well as to
the 1993 portfolio reassumption.
-22-
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CON'T)
The Company reported an 18% increase in its domestic new issue and secondary
market structured finance business, insuring $5.7 billion of par in 1994
compared with $4.8 billion in 1993. GPW at $15.8 million reflects a 59% increase
over 1993. Structured finance AGP totaled $24.3 million, up 11% over 1993.
MBIA's international operations insured $2.6 billion of new issue and secondary
market par value, up substantially from the $0.2 billion insured in 1993. GPW
for international business increased to $19.4 million compared with $1.3 million
written in 1993.
Premiums ceded to reinsurers from all insurance operations were $49.3 million
in 1994 compared with $47.6 million in 1993. The increase in the proportionate
level of cessions in 1994 was related to an increase in treaty reinsurance due
to capacity constraints and to cessions made on two unusually large
international transactions.
Premiums earned decreased 6% to $218.3 million in 1994 from $231.3 million in
1993. The growth in deferred premium revenue from the addition of new business
in 1993 was more than offset by the decline in earned premiums associated with
refunded and called bonds during 1994, which were significantly lower than in
1993. Earned premiums generated by refunded and called bonds in 1994 declined to
$53.0 million from 1993's $85.6 million.
The fair value of the Company's investment portfolio related to its insurance
operations was $3.2 billion as of December 31, 1994. This portfolio generated
net investment income of $193.9 million in 1994, an 8% increase over the $178.9
million in 1993. This increase was primarily the result of the growth of
investments from continued positive operating cash flow of $376.4 million.
Average investments excluding investment agreement assets were $3.12 billion at
amortized cost in 1994 compared with $2.75 billion in 1993. Tax-exempt
securities represented 75% of the portfolio at December 31, 1994 compared with
70% at December 31, 1993. Net realized capital gains in 1994 were $10.3 million,
compared with $9.7 million in 1993.
The provision for losses and loss adjustment expenses during 1994 was $8.1
million compared with $7.8 million in 1993, representing additions to the loss
reserve consistent with the Company's loss reserving methodology. At December
31, 1994, $21.9 million of the $40.1 million loss and loss adjustment expense
reserve was allocated on a case basis compared with $7.5 million of the $33.7
million reserve at year-end 1993. In 1994, the Company increased its case
reserve with respect to the default of a health care issue and potential future
shortfalls in several single-family housing issues. In 1993, the Company
recognized expected loss recoveries having a present value of approximately
$10.0 million related to a previously established case reserve. Neither the
increase in case reserves nor the recognition of recoveries had any impact on
net income, since the change in the Company's case-specific reserve was offset
by a corresponding change in the unallocated portion of its general loss
reserve.
In 1994, policy acquisition costs net of deferrals decreased $3.6 million to
$21.8 million. Since policy acquisition costs are deferred and amortized over
the period in which the related premiums are earned, this decrease was a
function of the lower level of premiums earned caused by the 1994 decline in
refunding activity. Other insurance operating expenses increased to $41.0
million in 1994 from $37.9 million in 1993.
In 1994, the Company incurred $27.2 million of interest expense compared with
$26.9 million in 1993. The increase in 1994 resulted from utilization of
short-term bank borrowings under existing lines of credit during the year.
The Company's effective tax rate decreased in 1994 to 21.0% compared with 24.0%
in 1993. The decrease was due principally to a higher proportion of tax-exempt
investment income in 1994 compared with 1993.
INVESTMENT MANAGEMENT SERVICES
In aggregate for 1994, the investment management services business contributed
$16.2 million in operating revenue, a substantial increase over 1993's revenue
of $4.7 million. Included in investment management services revenue for 1994 is
$1.8 million of net proceeds from the sale of MBIA's 49% interest in a joint
venture. Operating expenses increased to $10.6 million in 1994 from $5.4 million
in 1993. The increase was due primarily to the expansion of MBIA/MISC into
additional states, expanded operations of IMC and the costs associated with
establishing an internal investment management capability.
As of December 31, 1994, MBIA/MISC had almost 950 clients and over $1.7 billion
of client assets under management compared with $1.5 billion at year-end 1993.
MBIA/MISC also provides fund administration services to over 200 clients with
invested assets of $103 million. MBIA/MISC offers its services in eight states
and plans to continue its expansion into additional states.
-23-
<PAGE>
MBIA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CON'T)
LIQUIDITY AND CAPITAL RESOURCES
At year-end 1995, the fair value of the Company's consolidated investment
portfolio was $6.6 billion, an increase of 36% from $4.9 billion at year-end
1994.
The fair value of investments related to MBIA's insurance activities increased
21% from $3.2 billion at year-end 1994 to $3.9 billion at year-end 1995. The
increase was a result of positive cash flows from MBIA Insurance Corporation's
("MBIA Corp.") insurance premiums and investment activities, a $294 million
increase in the overall market value of the portfolio due to declining interest
rates and the net proceeds of a $75 million public debt offering in December.
The fair value of investments related to MBIA's municipal investment agreement
business grew 64% to $2.7 billion from $1.7 billion at year-end 1994, primarily
as a result of continued strong growth of this business.
The Company's fixed-income investment portfolio has been classified as
available-for-sale in accordance with SFAS 115. The difference between fair
value and amortized cost is primarily related to changes in interest rates, and
if the portfolio is held to maturity, the Company expects to realize an amount
substantially equal to amortized cost.
MBIA Corp.'s liquidity position remained strong, as net cash flow provided by
its operations aggregated $408 million in 1995, an 11% increase from $367
million in 1994. The Company's liquidity is in part dependent upon MBIA Corp.'s
ability to pay dividends to the Company. MBIA Corp.'s net income, consisting of
premium earnings and investment income less losses and expenses, is a source of
continuing additions to earned surplus and dividend-paying capability. Under New
York state insurance law, without prior approval of the superintendent of the
state insurance department, MBIA Corp. may pay a dividend only from earned
surplus subject to the maintenance of a minimum capital requirement. The
dividends in any 12-month period may not exceed the lesser of 10% of its
policyholders' surplus as shown on its last filed statutory-basis financial
statements or adjusted net investment income, as defined, for such 12-month
period. In 1995, MBIA Corp. paid dividends of $83 million and at December 31,
1995 had approximately $44 million available for payment of further dividends to
the Company without requiring prior approval.
MBIA Corp. has an irrevocable standby line of credit with a group of major
banks, which was increased to $650 million as of September 30, 1995, to provide
funds for the payment of claims in the event that severe losses should occur.
The agreement is for a seven-year term expiring on September 30, 2002 but,
subject to approval by the banks, the agreement may be renewed annually to
extend the term to seven years beyond the renewal date. For general corporate
purposes or to further facilitate the immediate payment of claims, should they
occur, the Company and MBIA Corp. maintain short-term liquidity facilities
totaling $275 million with a group of major banks. At December 31, 1995, $18
million was outstanding under these facilities for general corporate purposes.
MBIA Corp. also maintains a high degree of liquidity within its investment
portfolio in the form of readily marketable high-quality fixed-income securities
and short-term investments. In management's opinion, the capital resources of
MBIA Corp. represented by the liquidity of its investment portfolio, its annual
cash flows from operations and bank lines of credit are more than adequate to
meet the Company's expected cash requirements.
In February 1996, the Company completed a public offering of 3.9 million shares
of the Company's common stock, of which 0.8 million shares were new shares
offered by the Company. The Company realized $55 million in new capital from the
offering.
-24-
<PAGE>
MBIA INC. AND SUBSIDIARIES
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of MBIA Inc.:
We have audited the accompanying consolidated balance sheets of MBIA Inc. and
Subsidiaries as of December 31, 1995 and 1994, and the related consolidated
statements of income, changes in shareholders' equity and cash flows for each of
the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of MBIA Inc. and
Subsidiaries as of December 31, 1995 and 1994, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1995 in conformity with generally accepted accounting
principles.
As discussed in Note 7 to the consolidated financial statements, effective
January 1, 1993 the Company adopted Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes." As discussed in Note 2 to the
consolidated financial statements, effective January 1, 1994 the Company adopted
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities."
\s\ COOPERS & LYBRAND L.L.P.
New York, New York
January 22, 1996
-25-
<PAGE>
MBIA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31
----------------------------------------------
Dollars in thousands
except per share amounts 1995 1994 1993
- ------------------------- ----------- ------------ -------------
REVENUES
Insurance:
Gross premiums written $ 348,487 $ 360,836 $ 479,347
Ceded premiums (45,050) (49,281) (47,552)
---------- ---------- ------------
Net premiums written 303,437 311,555 431,795
Increase in deferred
premium revenue (88,365) (93,226) (200,519)
---------- ---------- ------------
Premiums earned (net of
ceded premiums
of $30,655, $33,340
and $41,409) 215,072 218,329 231,276
Net investment income 219,858 193,853 178,884
Net realized gains 11,312 10,335 9,727
Investment management services:
Income 19,884 16,178 4,672
Net realized (losses) gains (6,092) (726) 58
Other 2,188 1,567 4,361
---------- ----------- ------------
Total revenues 462,222 439,536 428,978
---------- ----------- ------------
EXPENSES
Insurance:
Losses and loss adjustment 10,639 8,093 7,821
Policy acquisition costs, net 21,283 21,845 25,480
Operating 41,805 41,026 37,946
Investment management services 12,857 10,611 5,409
Interest 28,439 27,159 26,900
Other 2,169 1,380 1,387
---------- ----------- ------------
Total expenses 117,192 110,114 104,943
---------- ----------- ------------
Income before income taxes 345,030 329,422 324,035
Provision for income taxes 73,611 69,213 77,925
----------- ------------ ------------
Income before cumulative effect
of accounting changes 271,419 260,209 246,110
Cumulative effect of
accounting changes --- --- 12,923
NET INCOME $ 271,419 $ 260,209 $ 259,033
========== =========== ============
Income per common share before
cumulative effect of
accounting change $ 6.43 $ 6.18 $ 5.80
NET INCOME PER COMMON SHARE $ 6.43 $ 6.18 $ 6.10
========== ========== ==========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES AND
COMMON STOCK EQUIVALENTS
OUTSTANDING 42,240,011 42,085,943 42,465,980
========== ========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
-26-
<PAGE>
MBIA INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Dollars in thousands
except per share amounts December 31, 1995 December 31, 1994
- ------------------------ ----------------- -----------------
ASSETS
Investments:
Fixed-maturity securities
held as available-for-sale
at fair value (amortized
cost $3,428,986 and $3,123,838)... $ 3,652,621 $ 3,051,906
Short-term investments,
at amortized cost (which
approximates fair value) ......... 198,035 121,384
Other investments ................... 14,064 17,550
----------- -----------
3,864,720 3,190,840
Municipal investment agreement
portfolio held as
available-for-sale at fair
value (amortized cost
$2,645,828 and $1,738,375) ....... 2,742,626 1,675,935
----------- -----------
TOTAL INVESTMENTS ........... 6,607,346 4,866,775
Cash and cash equivalents ................ 23,258 7,940
Accrued investment income ................ 87,016 68,486
Deferred acquisition costs ............... 140,348 133,048
Prepaid reinsurance premiums ............. 200,887 186,492
Goodwill (less accumulated
amortization of $41,298
and $36,115) .......................... 106,569 111,252
Property and equipment, at
cost (less accumulated
depreciation of $17,625
and $13,917) .......................... 46,030 45,069
Receivable for investments sold .......... 6,100 945
Other assets ............................. 49,896 36,432
----------- -----------
TOTAL ASSETS ................ $ 7,267,450 $ 5,456,439
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deferred premium revenue ............ $ 1,616,315 $ 1,512,211
Loss and loss adjustment
expense reserves ................. 42,505 40,148
Municipal investment
agreements ....................... 2,026,709 1,334,177
Municipal repurchase
agreements ....................... 615,776 191,956
Long-term debt ...................... 373,900 298,790
Short-term debt ..................... 18,000 17,000
Deferred income taxes ............... 246,736 76,843
Payable for investments
purchased ........................ 10,695 209,966
Other liabilities ................... 82,548 70,632
----------- -----------
TOTAL LIABILITIES ........... 5,033,184 3,751,723
----------- -----------
COMMITMENTS AND CONTINGENCIES
Shareholders' Equity:
Preferred stock, par
value $1 per share;
authorized shares
--10,000,000;issued and
outstanding--none ................ -- --
Common stock, par value $1
per share; authorized
shares--200,000,000;
issued shares
-- 42,077,387 .................... 42,077 42,077
Additional paid-in capital .......... 725,153 719,750
Retained earnings ................... 1,261,051 1,057,092
Cumulative translation
adjustment ....................... 2,849 503
Unrealized appreciation
(depreciation) of
investments, net of
deferred income tax
provision (benefit)
of $112,252 and $(46,292) ........ 207,648 (86,560)
Unearned compensation
- restricted stock ............... (426) --
Treasury stock, at cost;
73,676 shares in 1995
and 461,763 shares in 1994 ....... (4,086) (28,146)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY ..... 2,234,266 1,704,716
----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY ........ $ 7,267,450 $ 5,456,439
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
-27-
<PAGE>
MBIA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the years ended December 31, 1995, 1994 and 1993
----------------------------------------------------
<TABLE>
<CAPTION>
Unrealized Unearned
Common Stock Additional Cumulative Appreciation Compensation- Treasury Stock
In thousands except -------------- Paid-in Retained Translation (Depreciation) Restricted ---------------
per share amounts Shares Amount Capital Earnings Adjustment of Investments Stock Shares Amount
- ----------------- ------ ------ ------- --------- ----------- -------------- ---------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE,
JANUARY 1, 1993 41,960 $41,960 $713,762 $ 625,216 $ (489) $ 3,556 -- 79 $ 1,875
------ ------- -------- ---------- ------ -------- ------ ---- -------
Treasury shares
acquired -- -- -- -- -- -- -- 238 15,255
Exercise of
stock options 114 114 5,519 121 -- -- -- (57) (1,355)
Net income -- -- -- 259,033 -- -- -- -- --
Change in foreign
currency
translation -- -- -- -- (729) -- -- -- --
Change in
unrealized
appreciation of
investments net
of change in
deferred income
taxes of $(1,981) -- -- -- -- -- 3,524 -- -- --
Dividends
(declared per
common share
$.94, paid per
common share
$.89) -- -- -- (39,454) -- -- -- -- --
------ ------- -------- ---------- ------ -------- ------ ---- -------
BALANCE,
DECEMBER 31, 1993 42,074 42,074 $719,281 844,916 (1,218) 7,080 -- 260 15,775
------ ------- -------- ---------- ------ -------- ------ ---- -------
Treasury shares
acquired -- -- -- -- -- -- -- 246 14,411
Exercise of stock
options 3 3 469 (526) -- -- -- (44) (2,040)
Net income -- -- -- 260,209 -- -- -- -- --
Change in foreign
currency
translation -- -- -- -- 1,721 -- -- -- --
Change in
unrealized
depreciation of
investments
net of change
in deferred
income taxes
of $50,105 -- -- -- -- -- (93,640) -- -- --
Dividends (declared
per common share
$1.14, paid per
common share $1.09) -- -- -- (47,507) -- -- -- -- --
------ ------- -------- ---------- ------ -------- ------ ---- -------
BALANCE,
DECEMBER 31, 1994 42,077 42,077 719,750 1,057,092 503 (86,560) -- 462 28,146
------ ------- -------- ---------- ------ -------- ------ ---- -------
Unearned compen-
sation restrict-
ed stock -- -- -- 116 -- -- (426) (6) (319)
Exercise of stock
options -- -- 5,403 (12,806) -- -- -- (382) (23,741)
Net income -- -- -- 271,419 -- -- -- -- --
Change in foreign
currency
translation -- -- -- -- 2,346 -- -- -- --
Change in unrealized
appreciation of
investments net
of change in
deferred
income taxes of
$(158,544) -- -- -- -- -- 294,208 -- -- --
Dividends
(declared per
common share $1.31,
paid per common
share $1.275) -- -- -- (54,770) -- -- -- -- --
------ ------- -------- ---------- ------ -------- ------ ---- -------
BALANCE,
DECEMBER 31, 1995 42,077 $42,077 $725,153 $1,261,051 $2,849 $207,648 $(426) 74 $ 4,086
====== ======= ======== ========== ====== ======== ====== ==== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-28-
<PAGE>
MBIA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31
----------------------------------------
Dollars in thousands 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................. $ 271,419 $ 260,209 $ 259,033
Adjustments to reconcile net income to net cash provided
by operating activities:
Increase in accrued investment income ................ (18,530) (13,692) (7,238)
Increase in deferred acquisition costs ............... (7,300) (12,564) (10,033)
Increase in prepaid reinsurance premiums ............. (14,395) (15,941) (6,143)
Increase in deferred premium revenue ................. 102,760 109,167 206,662
Increase in loss and loss adjustment expense reserves 2,357 6,413 8,225
Depreciation ......................................... 3,984 3,181 2,884
Amortization of goodwill ............................. 5,183 5,027 5,069
Amortization of bond discount, net ................... (18,468) 619 (702)
Net realized gains on sale of investments ............ (5,222) (9,609) (9,727)
Deferred income taxes ................................ 11,349 19,067 7,531
Other, net ........................................... 17,946 24,560 15,301
----------- ----------- -----------
Total adjustments to net income ...................... 79,664 116,228 211,829
----------- ----------- -----------
Net cash provided by operating activities ............ 351,083 376,437 470,862
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed-maturity securities, net
of payable for investments purchased ................. (1,149,253) (1,017,306) (816,551)
Sale of fixed-maturity securities, net of
receivable for investments sold ...................... 719,523 515,548 241,711
Redemption of fixed-maturity securities, net of
receivable for investments redeemed .................. 83,448 128,274 225,608
(Purchase) Sale of short-term investments .............. (32,281) 3,547 (40,461)
Purchase of other investments .......................... (1,065) (7,864) (37,778)
Sale of other investments .............................. 6,926 95,320 --
Purchases for municipal investment agreement
portfolio, net of payable for investments purchased .. (2,210,571) (1,627,561) (561,187)
Sales from municipal investment agreement
portfolio, net of receivable for investments sold .... 1,115,239 585,648 70,456
Capital expenditures, net of disposals ................. (4,923) (4,075) (6,770)
----------- ----------- -----------
Net cash used by investing activities ................ (1,472,957) (1,328,469) (924,972)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of long-term debt ........... 74,344 -- --
Dividends paid ......................................... (53,179) (45,513) (37,342)
Purchase of treasury stock ............................. -- (14,411) (15,255)
Proceeds from issuance of municipal investment
agreements and municipal repurchase agreements ....... 2,351,206 1,786,574 518,245
Payments for drawdowns of municipal investment
agreements and municipal repurchase agreements ....... (1,251,517) (771,156) (27,381)
Exercise of stock options .............................. 16,338 1,986 7,109
----------- ----------- -----------
Net cash provided by financing activities ............ 1,137,192 957,480 445,376
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents ........ 15,318 5,448 (8,734)
Cash and cash equivalents - beginning of year ............... 7,940 2,492 11,226
----------- ----------- -----------
Cash and cash equivalents - end of year ..................... $ 23,258 $ 7,940 $ 2,492
=========== =========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Income taxes paid ...................................... $ 52,410 $ 53,921 $ 53,597
Interest paid:
Municipal investment agreements and
municipal repurchase agreements .................... $ 104,301 $ 36,169 $ 358
Long-term debt ....................................... 26,575 26,575 26,416
Short-term debt ...................................... 1,228 56 --
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-29-
<PAGE>
MBIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
MBIA Inc. (the "Company") was incorporated in Connecticut on November 12, 1986
as a licensed insurer and, through the following series of transactions during
December 1986, became the successor to the business of the Municipal Bond
Insurance Association (the "Association"), a voluntary unincorporated
association of insurers writing municipal bond and note insurance as agent for
the member insurance companies:
-The Company acquired for $17 million all of the outstanding common stock of a
New York domiciled insurance company and changed the name of the insurance
company to Municipal Bond Investors Assurance Corporation. In April 1995, the
name was again changed to MBIA Insurance Corporation ("MBIA Corp."). Prior to
the acquisition, all of the obligations of this company were reinsured and/or
indemnified by the former owner.
-Four of the five member companies of the Association, together with their
affiliates, purchased all of the outstanding common stock of the Company and
entered into reinsurance agreements whereby they ceded to the Company
substantially all of the net unearned premiums on existing and future
Association business and the interest in, or obligation for, contingent
commissions resulting from their participation in the Association. The
Company's reinsurance obligations were then assumed by MBIA Corp. The
participation of these four members aggregated approximately 89% of the net
insurance in force of the Association. The net assets transferred from the
predecessor included the cash transferred in connection with the reinsurance
agreements, the related deferred acquisition costs and contingent commissions
receivable, net of the related unearned premiums and contingent commissions
payable. The deferred income taxes inherent in these assets and liabilities
were recorded by the Company. Contingent commissions receivable (payable) with
respect to premiums earned prior to the effective date of the reinsurance
agreements by the Association in accordance with statutory accounting
practices, remained as assets (liabilities) of the member companies.
-The Company acquired from an unrelated company for $68 million all of the
outstanding common stock of Municipal Issuers Service Corporation ("MISC") and
certain related companies. MISC had been the managing general agency of the
Association.
Effective December 31, 1989, the Company acquired for $288 million all of the
outstanding stock of Bond Investors Group, Inc. ("BIG"), the parent company of
Bond Investors Guaranty Insurance Company ("BIG Ins."), which was subsequently
renamed MBIA Insurance Corp. of Illinois ("MBIA Illinois"). The acquisition of
BIG has been accounted for as a purchase and the price was allocated to the net
assets of the acquired company based on the fair value of such assets and
liabilities at the date of acquisition.
In January 1990, MBIA Illinois ceded its portfolio of net insured obligations
to MBIA Corp. in exchange for cash and investments equal to its unearned premium
reserve of $153 million. Subsequent to this cession, MBIA Inc. contributed the
common stock of BIG to MBIA Corp. The insured portfolio acquired from BIG Ins.
consists of municipal obligations with risk characteristics similar to those
insured by MBIA Corp. On December 31, 1990, BIG was merged into MBIA Illinois.
Also in 1990, the Company formed MBIA Assurance S.A. ("MBIA Assurance"), a
wholly owned French subsidiary, to write financial guarantee insurance in the
international community. MBIA Assurance provides insurance for public
infrastructure financings, structured finance transactions and certain
obligations of financial institutions. The stock of MBIA Assurance was
contributed to MBIA Corp. in 1991 and, pursuant to a reinsurance agreement with
MBIA Corp., a substantial amount of the risks insured by MBIA Assurance is
reinsured by MBIA Corp.
At the end of 1990, MBIA Municipal Investors Service Corporation ("MBIA/MISC")
was formed as a subsidiary of the Company. MBIA/MISC operates cooperative cash
management programs for school districts and municipalities.
<PAGE>
At the end of 1992, the Company and Caisse des Depots et Consignations ("Caisse
des Depots") established a jointly owned company, MBIA Investors Capital Corp.
("MICC"), to offer a tender option bond program named TOPSTAR SM. MICC purchased
long-term, high-quality municipal bonds, attached a tender option agreement and
resold the securities as synthetic short-term instruments. MICC was managed by
the Company and CDC Capital Inc., a subsidiary of Caisse des Depots in New York.
In August 1994, the Company sold its 49% ownership interest.
In 1993, the Company formed a wholly owned subsidiary, MBIA Investment
Management Corp. ("IMC"). IMC, which commenced operations in August 1993,
principally provides guaranteed investment agreements to states, municipalities
and municipal authorities which are guaranteed as to principal and interest.
Also in 1993, MBIA Corp. assumed the remaining business from the fifth member
of the Association.
In 1994, the Company formed a wholly owned subsidiary, MBIA Securities Corp.
("SECO"), which provides fixed-income investment management services for the
Company, its municipal cash management service businesses and public pension
funds.
-30-
<PAGE>
MBIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)
2. SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared on the basis of
generally accepted accounting principles ("GAAP"). The preparation of financial
statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Significant
accounting policies are as follows:
CONSOLIDATION
The consolidated financial statements include the accounts of the Company, MBIA
Corp., MBIA Illinois, MBIA Assurance, SECO, MISC, MBIA/MISC, IMC and BIG
Services, Inc. The investment in MICC was accounted for on the equity method.
All significant intercompany balances have been eliminated. Certain amounts have
been reclassified in prior years' financial statements to conform to the current
presentation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and demand deposits with banks.
INVESTMENTS
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards ("SFAS") 115 "Accounting for Certain Investments in Debt
and Equity Securities." In accordance with SFAS 115, the Company reclassified
its entire investment portfolio (including "fixed-maturity securities" and its
"municipal investment agreement portfolio") as "available-for-sale." Pursuant to
SFAS 115, securities classified as available-for-sale are required to be
reported in the financial statements at fair value, with unrealized gains and
losses, net of deferred taxes, reflected as a separate component of
shareholders' equity. The cumulative effect of the Company's adoption of SFAS
115 was a decrease in shareholders' equity at December 31, 1994 of $87.3
million, net of taxes. The adoption of SFAS 115 had no effect on the Company's
earnings.
Bond discounts and premiums are amortized using the effective-yield method over
the remaining term of the securities. For pre-refunded bonds the remaining term
is determined based on the contractual refunding date. Short-term investments
are carried at amortized cost, which approximates fair value and include all
fixed-maturity securities, other than those held in the municipal investment
agreement portfolio, with a remaining term to maturity of less than one year.
Investment income is recorded as earned. Realized gains or losses on the sale of
investments are determined by specific identification and are included as a
separate component of revenues.
The municipal investment agreement portfolio is comprised of fixed-maturity
securities and short-term investments which are subject to the accounting
policies discussed above. Investment income from the municipal investment
agreement portfolio is recorded as a component of investment management services
income as earned. Municipal investment agreement portfolio accrued interest
income, receivables for investments sold and payables for investments purchased
are included in the respective consolidated accounts.
Other investments consist primarily of the Company's interest in limited
partnerships and a mutual fund which invests principally in marketable equity
securities. In 1994, other investments also contain an investment in marketable
equity securities. The Company records dividends from its investment in
marketable equity securities and its share of limited partnerships and mutual
funds as a component of investment income. In addition, the Company records its
share of the unrealized gains and losses on these investments, net of applicable
deferred income taxes, as a separate component of shareholders' equity.
PREMIUM REVENUE RECOGNITION
Premiums are earned pro rata over the period of risk. Premiums are allocated to
each bond maturity based on par amount and are earned on a straight-line basis
over the term of each maturity. When an insured issue is retired early, is
called by the issuer, or is in substance paid in advance through a refunding or
defeasance accomplished by placing U.S. Government securities in escrow, the
remaining deferred premium revenue, net of the portion which is credited to a
new policy in those cases where the Company insures the refunding issue, is
earned at that time, since there is no longer risk to the Company. Accordingly,
deferred premium revenue represents the portion of premiums written that is
applicable to the unexpired risk of insured bonds and notes.
POLICY ACQUISITION COSTS
Policy acquisition costs include only those expenses that relate primarily to,
and vary with, premium production. For business produced directly by MBIA Corp.,
such costs include compensation of employees involved in marketing, underwriting
and policy issuance functions, certain rating agency fees, state premium taxes
and certain other underwriting expenses, reduced by ceding commission income on
premiums ceded to reinsurers. For business assumed from the Association, such
costs were comprised of management fees, certain rating agency fees and
marketing and legal costs, reduced by ceding commissions received by the
Association on premiums ceded to reinsurers. Policy acquisition costs are
deferred and amortized over the period in which the related premiums are earned.
-31-
<PAGE>
MBIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)
LOSSES AND LOSS ADJUSTMENT EXPENSES
Reserves for losses and loss adjustment expenses ("LAE") are established in an
amount equal to the Company's estimate of the identified and unidentified
losses, including costs of settlement on the obligations it has insured.
To the extent that specific insured issues are identified as currently or
likely to be in default, the present value of expected payments, including loss
and LAE associated with these issues, net of expected recoveries, is allocated
within the total loss reserve as case basis reserves. Management of the Company
periodically evaluates its estimates for losses and LAE and any resulting
adjustments are reflected in current earnings. Management believes that the
reserves are adequate to cover the ultimate net cost of claims, but the reserves
are necessarily based on estimates, and there can be no assurance that the
ultimate liability will not exceed such estimates.
MUNICIPAL INVESTMENT AGREEMENTS AND MUNICIPAL REPURCHASE AGREEMENTS
Municipal investment agreements and municipal repurchase agreements are
recorded as liabilities on the balance sheet at the time such agreements are
executed. The liabilities for municipal investment and repurchase agreements are
carried at the face value of the agreement plus accrued interest, whereas the
related assets are recorded at fair value. Investment management services income
reflects investment income on the assets underlying the municipal investment
agreement portfolio, net of interest expense at rates specified in the
agreements, computed daily based upon the outstanding balances.
DERIVATIVES
The Company's policies with respect to the use of derivative financial
instruments include limitations with respect to the amount, type and
concentration of such instruments. The Company uses derivative financial
instruments for hedging purposes as part of its overall risk management. Gains
and losses on the derivative financial instruments that qualify as accounting
hedges of existing assets and liabilities are included in the carrying amounts
and amortized over the remaining lives of the assets and liabilities as an
adjustment to interest income or expense. When the hedged asset is sold, the
unamortized gain or loss on the related hedge is recognized in income. Gains and
losses on derivative financial instruments that do not qualify as accounting
hedges are recognized in current period income.
CONTINGENT COMMISSIONS
Contingent commissions may be receivable from the Company's and the
Association's reinsurers under various reinsurance treaties and are accrued as
the related premiums are earned.
INVESTMENT MANAGEMENT SERVICES OPERATIONS
For the year ended December 31, 1995, investment management services income is
comprised of the net investment income and operating revenues of MBIA/MISC, IMC
and SECO. Prior to 1995, investment management services income also included the
Company's equity in the earnings of MICC. In 1994, the Company sold its interest
in MICC and included the net proceeds from the sale in investment management
services income. The operating expenses of MBIA/MISC, IMC and SECO are reported
in investment management services expenses.
INCOME TAXES
Deferred income taxes are provided in respect of temporary differences between
the financial statement and tax bases of assets and liabilities using enacted
tax rates in effect for the year in which the differences are expected to
reverse.
The Internal Revenue Code permits financial guarantee insurance companies to
deduct from taxable income additions to the statutory contingency reserve,
subject to certain limitations. The tax benefits obtained from such deductions
must be invested in non-interest bearing U.S. Government tax and loss bonds. The
Company records purchases of tax and loss bonds as payments of Federal income
taxes. The amounts deducted must be restored to taxable income when the
contingency reserve is released, at which time the Company may present the tax
and loss bonds for redemption to satisfy the additional tax liability.
PROPERTY AND EQUIPMENT
Property and equipment consists of the Company's headquarters, furniture,
fixtures and equipment, which are recorded at cost and, exclusive of land, are
depreciated on the straight-line method over their estimated service lives
ranging from 3 to 31 years. Maintenance and repairs are charged to expenses as
incurred.
GOODWILL
Goodwill represents the excess of the cost of the acquisitions of MBIA Corp.,
MISC and MBIA Illinois over the tangible net assets acquired. Goodwill
attributed to the acquisition of MBIA Corp. and MISC is amortized by the
straight-line method over 25 years. Goodwill attributed to the acquisition of
MBIA Illinois is amortized according to the recognition of future profits from
its deferred premium revenue and installment premiums, except for a minor
portion attributed to state licenses, which is amortized by the straight-line
method over 25 years.
EARNINGS PER SHARE
Earnings per share are computed based on the weighted average number of shares,
including common stock equivalents, outstanding during each period.
-32-
<PAGE>
MBIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)
FOREIGN CURRENCY TRANSLATION
Assets and liabilities denominated in foreign currencies are translated at
year-end exchange rates. Operating results are translated at average rates of
exchange prevailing during the year. Unrealized gains or losses resulting from
translation are included as a separate component of shareholders' equity.
NEW ACCOUNTING STANDARDS
In October 1995, the Financial Accounting Standards Board issued SFAS 123,
"Accounting for Stock-Based Compensation," effective for financial statements
for fiscal years beginning after December 15, 1995. SFAS 123 will require the
Company to adopt, at its election, either 1) the provisions in SFAS 123 which
require the recognition of compensation expense for employee stock-based
compensation plans, or 2) the provisions in SFAS 123 which require the pro forma
disclosure of net income and earnings per share as if the recognition provisions
of SFAS 123 had been adopted. SFAS 123 explicitly provides that employers may
continue to account for their employee stock-based compensation plans using the
accounting prescribed by Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB 25"). The Company plans to adopt the
disclosure requirements of SFAS 123 in 1996 and continue to account for its
employee stock-based compensation plans under APB 25. Accordingly, the adoption
of SFAS 123 will not have any impact on the Company's financial position or
results of operations.
3. STATUTORY ACCOUNTING PRACTICES
The financial statements have been prepared on the basis of GAAP, which differs
in certain respects from the statutory accounting practices prescribed or
permitted by the insurance regulatory authorities. Statutory accounting
practices differ from GAAP in the following respects:
-premiums are earned only when the related risk has expired rather than over
the period of the risk;
-acquisition costs are charged to operations as incurred rather than as the
related premiums are earned;
-a contingency reserve is computed on the basis of statutory requirements, and
reserves for losses and LAE are established, at present value, for specific
insured issues which are identified as currently or likely to be in default.
Under GAAP, reserves are established based on the Company's reasonable
estimate of the identified and unidentified losses and LAE on the insured
obligations it has written;
-Federal income taxes are only provided on taxable income for which income
taxes are currently payable, while under GAAP, deferred income taxes are
provided with respect to temporary differences;
-fixed-maturity securities are reported at amortized cost rather than fair
value;
-tax and loss bonds purchased are reflected as admitted assets as well as
payments of income taxes; and
-certain assets designated as "non-admitted assets" are charged directly
against surplus but are reflected as assets under GAAP. The following is a
reconciliation of consolidated shareholders' equity presented on a GAAP basis
for the Company and its consolidated subsidiaries to statutory capital and
surplus for MBIA Corp. and its subsidiaries, MBIA Illinois and MBIA Assurance:
As of December 31
-----------------------------------------
In thousands 1995 1994 1993
- ------------ ---------- ---------- ----------
Company's GAAP
shareholders' equity $2,234,266 $1,704,716 $1,596,358
Contributions to MBIA Corp. 341,202 273,273 263,411
Premium revenue recognition (328,450) (296,524) (242,577)
Deferral of acquisition costs (140,348) (133,048) (120,484)
Unrealized (gains) losses (319,900) 132,852 (3,447)
Contingency reserve (743,510) (620,988) (539,103)
Loss and loss adjustment
expense reserves 28,024 18,181 26,262
Deferred income taxes 239,304 69,371 100,393
Tax and loss bonds 70,771 50,471 25,771
Goodwill (105,614) (110,543) (115,503)
Other (1,607) 22,277 (13,345)
---------- ---------- ----------
Statutory capital
and surplus $1,274,138 $1,110,038 $ 977,736
========== ========== ==========
Consolidated net income of MBIA Corp., determined in accordance with statutory
accounting practices for the years ended December 31, 1995, 1994 and 1993 was
$278.3 million, $224.9 million and $258.4 million, respectively.
4. PREMIUMS EARNED FROM REFUNDED AND CALLED BONDS
Premiums earned include $34.0 million, $53.0 million and $85.6 million for
1995, 1994 and 1993, respectively, related to refunded and called bonds.
5. INVESTMENTS
The Company's investment objective for its core financial guarantee insurance
portfolios is to optimize long-term, after-tax returns while emphasizing the
preservation of capital and claims-paying capability through maintenance of
high-quality investments with adequate liquidity. The Company's investment
policies limit the amount of credit exposure to any one issuer. The
fixed-maturity portfolio is comprised of high-quality (average rating Double-A)
taxable and tax-exempt investments of diversified maturities.
The following tables set forth the amortized cost and fair value of the
fixed-maturities and short-term investments included in the consolidated
investment portfolio of the Company, as of December 31, 1995 and 1994. Included
in the 1995 and 1994 balances are the fixed-maturities and short-term
investments held in the municipal investment agreement portfolio, which had an
amortized cost of $2.6 billion and $1.7 billion, respectively.
-33-
<PAGE>
MBIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)
Gross Gross
Amortized Unrealized Unrealized Fair
In thousands Cost Gains Losses Value
- ------------ ---------- ---------- ---------- ---------
December 31, 1995
Taxable bonds
United States Treasury
and Government
Agency $ 334,289 $ 30,594 $ (1) $ 364,882
Corporate and other
obligations 2,029,269 74,620 (1,603) 2,102,286
Mortgage-backed 1,271,559 46,180 (1,843) 1,315,896
Tax-exempt bonds
State and municipal
obligations 2,637,732 175,081 (2,595) 2,810,218
---------- -------- ------- ----------
Total fixed-maturities $6,272,849 $326,475 $(6,042) $6,593,282
========== ======== ======= ==========
Gross Gross
Amortized Unrealized Unrealized Fair
In thousands Cost Gains Losses Value
- ------------ ---------- ---------- ---------- ---------
December 31, 1994
Taxable bonds
United States Treasury
and Government
Agency $ 160,514 $ - $ (2,630) $ 157,884
Corporate and other
obligations 1,562,947 2,407 (73,027) 1,492,327
Mortgage-backed 809,208 3,095 (22,850) 789,453
Tax-exempt bonds
State and municipal
obligations 2,450,928 36,631 (77,998) 2,409,561
---------- ------- --------- ----------
Total fixed-maturities $4,983,597 $42,133 $(176,505) $4,849,225
========== ======= ========= ==========
Fixed-maturity investments carried at fair value of $8.2 million and $7.4
million as of December 31, 1995 and 1994, respectively, were on deposit with
various regulatory authorities to comply with insurance laws.
A portion of the obligations under municipal investment and repurchase
agreements require the Company to pledge securities as collateral. As of
December 31, 1995, the fair value of securities pledged as collateral with
respect to these obligations approximated $1.2 billion.
The table below sets forth the distribution by expected maturity of the
fixed-maturities and short-term investments at amortized cost and fair value at
December 31, 1995. Expected maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations.
In thousands Amortized Cost Fair Value
- ------------ -------------- ----------
Maturity
Within 1 year $ 400,605 $ 400,533
Beyond 1 year but within 5 years 1,215,919 1,254,408
Beyond 5 years but within 10 years 1,347,840 1,436,025
Beyond 10 years but within 15 years 785,469 848,747
Beyond 15 years but within 20 years 813,460 867,376
Beyond 20 years 437,997 470,297
-- ------- -------
5,001,290 5,277,386
Mortgage-backed 1,271,559 1,315,896
---------- ----------
Total fixed-maturities and
short-term investments $6,272,849 $6,593,282
========== ==========
<PAGE>
6. INVESTMENT INCOME AND GAINS AND LOSSES
Investment income consists of:
Years ended December 31
------------------------------------
In thousands 1995 1994 1993
- ------------ -------- -------- --------
Fixed-maturities $216,653 $194,163 $176,344
Short-term investments 5,834 2,332 3,048
Other investments 217 167 2,206
-------- -------- --------
Gross investment income 222,704 196,662 181,598
Investment expenses 2,846 2,809 2,714
-------- -------- --------
Net investment income 219,858 193,853 178,884
Net realized gains (losses):
Fixed-maturities
Gains 9,941 9,635 10,167
Losses (2,537) (8,851) (1,055)
-------- -------- --------
Net 7,404 784 9,112
-------- -------- --------
Other investments
Gains 3,917 9,551 615
Losses (9) - -
-------- -------- --------
Net 3,908 9,551 615
-------- -------- --------
Total net realized gains 11,312 10,335 9,727
-------- -------- --------
Total investment income $231,170 $204,188 $188,611
======== ======== ========
Total investment income excludes investment income and realized gains and
losses from MBIA/MISC, IMC and SECO, which are reported in investment management
services revenues.
Unrealized gains (losses) consist of:
As of December 31
-----------------------
In thousands 1995 1994
- ------------ -------- ----------
Fixed-maturities:
Gains $326,475 $ 42,133
Losses (6,042) (176,505)
-------- ---------
Net 320,433 (134,372)
Other investments:
Gains 287 2,563
Losses (820) (1,043)
-------- ---------
Net (533) 1,520
-------- ---------
Total 319,900 (132,852)
Deferred income taxes 112,252 (46,292)
-------- ---------
Unrealized gains (losses), net $207,648 $ (86,560)
======== =========
The deferred income taxes in 1995 and 1994 relate primarily to unrealized gains
and losses on the Company's fixed-maturity investments, which are reflected in
shareholders' equity in 1995 and 1994, in accordance with the Company's adoption
of SFAS 115.
-34-
<PAGE>
MBIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)
The change in net unrealized gains (losses) consists of:
As of December 31
--------------------------------------
In thousands 1995 1994 1993
- ------------ --------- --------- ---------
Fixed-maturities $ 454,805 $(351,040) $100,413
Other investments (2,053) (9,373) 5,505
--------- --------- --------
Total 452,752 (360,413) 105,918
Deferred income taxes 158,544 (50,105) 1,981
--------- --------- --------
Unrealized gains (losses)- net $ 294,208 $(310,308) $103,937
========= ========= ========
7. INCOME TAXES
Effective January 1, 1993, the Company changed its method of accounting for
income taxes from the income statement-based deferred method to the balance
sheet-based liability method required by SFAS 109 "Accounting for Income Taxes."
The Company adopted the new pronouncement on the cumulative catch-up basis and
recorded a cumulative adjustment, which increased net income and reduced the
deferred tax liability by $13.0 million. The cumulative effect represents the
impact of adjusting the deferred tax liability to reflect the January 1, 1993
tax rate of 34% as opposed to the higher tax rates in effect when certain of the
deferred taxes originated.
SFAS 109 requires recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax liabilities
and assets are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse. The effect
on tax assets and liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date.
The tax effects of temporary differences that give rise to deferred tax assets
and liabilities at December 31, 1995 and 1994 are presented below:
In thousands 1995 1994
- ------------ -------- ---------
Deferred tax assets
Tax and loss bonds $ 71,183 $ 50,332
Unrealized losses - 46,292
Alternative minimum tax
credit carryforward 36,871 22,391
Loss and loss adjustment
expense reserves 9,808 6,363
Other 4,459 4,008
-------- --------
Total gross deferred
tax assets 122,321 129,386
-------- --------
Deferred tax liabilities
Contingency reserve 127,361 91,439
Deferred premium revenue 65,155 54,523
Deferred acquisition costs 51,455 48,900
Unrealized gains 112,252 -
Contingent commissions 4,672 4,746
Other 8,162 6,621
-------- --------
Total gross deferred
tax liabilities 369,057 206,229
-------- --------
Net deferred tax liability $246,736 $ 76,843
======== ========
<PAGE>
Under SFAS 109, a change in the statutory tax rate requires a restatement of
deferred tax assets and liabilities. Accordingly, the restatement for the change
in the 1993 Federal tax rate resulted in a $5.5 million or $0.13 per share
increase in the 1993 tax provision, of which $3.2 million or $0.08 per share
resulted from the recalculation of deferred taxes at the new Federal rate.
The provision for income taxes is composed of:
Years ended December 31
---------------------------------
In thousands 1995 1994 1993
- ------------ ------- ------- -------
Current $62,262 $50,146 $57,299
Deferred 11,349 19,067 20,626
------- ------- -------
Total $73,611 $69,213 $77,925
======= ======= =======
The provision for income taxes gives effect to permanent differences between
financial and taxable income. Accordingly, the Company's effective income tax
rate differs from the statutory rate on ordinary income. The reasons for the
Company's lower effective tax rates are as follows:
Years ended December 31
---------------------------------
In thousands 1995 1994 1993
- ------------ ------- ------- -------
Income taxes computed on
pre-tax financial income
at statutory rates 35.0% 35.0% 35.0%
Increase (reduction)
in taxes resulting from:
Tax-exempt interest (13.4) (12.9) (11.4)
Amortization of goodwill 0.5 0.5 0.6
Other (0.8) (1.6) (0.2)
---- ----- ----
Provision for income taxes 21.3% 21.0% 24.0%
===== ===== =====
8. DIVIDENDS AND CAPITAL REQUIREMENTS
Under New York state insurance law, MBIA Corp. may pay a dividend only from
earned surplus subject to the maintenance of a minimum capital requirement. The
dividends in any 12-month period may not exceed the lesser of 10% of its
policyholders' surplus as shown on its last filed statutory-basis financial
statements or of adjusted net investment income, as defined, for such 12-month
period, without prior approval of the superintendent of the New York State
Insurance Department.
In accordance with such restrictions on the amount of dividends which can be
paid in any 12-month period, MBIA Corp. had approximately $44 million available
for the payment of dividends to the Company as of December 31, 1995. In 1995,
1994 and 1993, MBIA Corp. declared and paid dividends of $83 million, $38
million and $50 million, respectively, to the Company.
-35-
<PAGE>
MBIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)
The insurance departments of New York state and certain other statutory
insurance regulatory authorities and the agencies which rate the bonds insured
by MBIA Corp. and MBIA Assurance have various requirements relating to the
maintenance of certain minimum ratios of statutory capital and reserves to net
insurance in force. MBIA Corp. and MBIA Assurance were in compliance with these
requirements as of December 31, 1995.
9. LONG-TERM DEBT AND LINES OF CREDIT
Long-term debt consists of:
As of December 31
----------------------
In thousands 1995 1994
- ------------ -------- --------
9.000% Notes due 2001 $100,000 $100,000
9.375% Notes due 2011 100,000 100,000
8.200% Debentures due 2022 100,000 100,000
7.000% Debentures due 2025 75,000 -
-------- --------
375,000 300,000
Less unamortized discount 1,100 1,210
-------- --------
$373,900 $298,790
======== ========
The Company's long-term debt is subject to certain covenants, none of which
significantly restrict the Company's operating activities or dividend-paying
ability.
MBIA Corp. has a standby line of credit commitment in the amount of $650
million with a group of major banks to provide loans to MBIA Corp. after it has
incurred cumulative losses (net of any recoveries) from September 30, 1995 in
excess of the greater of $500 million and 6.25% of average annual debt service.
The obligation to repay loans made under this agreement is a limited recourse
obligation payable solely from, and collateralized by, a pledge of recoveries
realized on defaulted insured obligations including certain installment premiums
and other collateral. This commitment has a seven-year term expiring on
September 30, 2002, and contains an annual renewal provision subject to the
approval by the bank group.
The Company and MBIA Corp. maintain bank liquidity facilities aggregating $275
million. At December 31, 1995, $18 million was outstanding under these
facilities.
The Company has outstanding letters of credit for MBIA/MISC that are intended
to support the net asset value of certain investment pools managed by MBIA/MISC.
These letters can be drawn upon in the event the liquidation of such assets at
below cost is required.
<PAGE>
10. OBLIGATIONS UNDER MUNICIPAL INVESTMENT AGREEMENTS AND MUNICIPAL
REPURCHASE AGREEMENTS
Obligations under municipal investment agreements and municipal repurchase
agreements are recorded as liabilities on the balance sheet based upon proceeds
received at the time such agreements are executed plus unpaid accrued interest
from that date. Upon the occurrence of certain contractually agreed upon events,
some of these funds may be withdrawn at various times prior to maturity at the
option of the investor. As of December 31, 1995, the interest rates on these
agreements ranged from 3.6% to 8.5%.
Principal payments due under these investment agreements in each of the next
five years ending December 31, and thereafter, based upon expected withdrawal
dates, were as follows:
In thousands Principal Amount
- ------------------------------------------
Expected Withdrawal Date
1996 $ 936,169
1997 572,535
1998 272,709
1999 93,774
2000 93,644
Thereafter 637,037
----------
$2,605,868
==========
IMC also provides agreements obligating it to purchase designated securities in
a bond reserve fund at par value upon the occurrence of certain contractually
agreed upon events. The opportunities and risks in these agreements are
analogous to those of municipal investment agreements and municipal repurchase
agreements. The total par value of securities subject to these agreements was
$43 million at December 31, 1995.
11. NET INSURANCE IN FORCE
MBIA Corp. guarantees the timely payment of principal and interest on
municipal, asset-/mortgage-backed and other non-municipal securities. MBIA
Corp.'s ultimate exposure to credit loss in the event of nonperformance by the
insured is represented by the insurance in force as set forth below.
The insurance policies issued by MBIA Corp. are unconditional commitments to
guarantee timely payment on the bonds and notes to bondholders. The
creditworthiness of each insured issue is evaluated prior to the issuance of
insurance and each insured issue must comply with MBIA Corp.'s underwriting
guidelines. Further, the payments to be made by the issuer on the bonds or notes
may be backed by a pledge of revenues, reserve funds, letters of credit,
investment contracts or collateral in the form of mortgages or other assets. The
right to such money or collateral would typically become MBIA Corp.'s upon the
payment of a claim by MBIA Corp.
-36-
<PAGE>
MBIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)
As of December 31, 1995, insurance in force, net of cessions to reinsurers, has
a range of maturity of 1-43 years. The distribution of net insurance in force by
geographic location and type of bond, excluding $2.7 billion and $1.5 billion
relating to municipal investment agreements guaranteed by MBIA Corp. in 1995 and
1994, respectively, is set forth in the tables below:
<TABLE>
<CAPTION>
As of December 31
------------------------------------------------------------------------------------------------
$in billions 1995 1994
- ------------ ---------------------------------------------- -----------------------------------------------
Number % of Net Number % of Net
Net Insurance of Issues Insurance Net Insurance of Issues Insurance
Geographic Location In Force Outstanding In Force In Force Outstanding In Force
- ------------------- ---------------------------------------------- -----------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
California $ 51.2 3,122 14.9% $ 43.9 2,832 14.9%
New York 27.4 4,679 8.0 23.5 4,360 7.7
Florida 26.9 1,684 7.8 25.4 1,805 8.4
Texas 20.4 2,031 5.9 18.6 2,102 6.1
Pennsylvania 19.7 2,143 5.7 19.5 2,108 6.4
New Jersey 16.4 1,730 4.8 15.0 1,590 4.9
Illinois 15.0 1,090 4.4 14.7 1,139 4.8
Massachusetts 9.3 1,070 2.7 8.6 1,064 2.8
Ohio 9.1 1,017 2.6 8.3 996 2.7
Michigan 7.9 1,012 2.3 5.7 972 1.9
------ ---------- ---------- --------- ---------- ----------
Subtotal 203.3 19,578 59.1 183.2 18,968 60.1
Other 135.6 11,147 39.4 118.8 10,711 39.1
------ ---------- ---------- -------- --------- -----------
Total U. S. 338.9 30,725 98.5 302.0 29,679 99.2
International 5.1 53 1.5 2.5 18 0.8
--- -- --- --- -- ---
$344.0 30,778 100.0% $304.5 29,697 100.0%
====== ====== ===== ====== ====== =====
</TABLE>
<TABLE>
<CAPTION>
As of December 31
------------------------------------------------------------------------------------------------
$ in billions 1995 1994
- ------------- ---------------------------------------------- -----------------------------------------------
Number % of Net Number % of Net
Net Insurance of Issues Insurance Net Insurance of Issues Insurance
Type of Bond In Force Outstanding In Force In Force Outstanding In Force
- ------------ ---------------------------------------------- -----------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
General obligation $ 91.6 11,445 26.6% $ 84.2 11,029 27.7%
Utilities 60.3 4,931 17.5 56.0 5,087 18.4
Health care 51.9 2,458 15.1 50.6 2,670 16.6
Transportation 25.5 1,562 7.4 21.3 1,486 7.0
Special revenue 24.4 1,445 7.1 22.7 1,291 7.4
Industrial development and
pollution control revenue 17.2 924 5.0 15.1 1,016 5.0
Housing 15.8 2,671 4.6 13.6 2,663 4.5
Higher education 15.2 1,261 4.5 14.0 1,208 4.6
Other 7.3 134 2.1 3.8 124 1.2
------------ ---------- ------------ ------------ ---------- ------------
309.2 26,831 89.9 281.3 26,574 92.4
------------ ---------- ------------ ------------ ---------- ------------
Non-municipal
Asset-/mortgage-backed 20.2 256 5.8 12.8 151 4.2
Investor-owned utilities 6.4 3,559 1.9 5.7 2,918 1.9
International 5.1 53 1.5 2.5 18 0.8
Other 3.1 79 0.9 2.2 36 0.7
------------ ---------- ------------ ----------- ---------- -----------
34.8 3,947 10.1 23.2 3,123 7.6
------------ ---------- ------------ ----------- ---------- -----------
$344.0 30,778 100.0% $304.5 29,697 100.0%
============ ========== ============ =========== ========== ===========
</TABLE>
-37-
<PAGE>
MBIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)
12. REINSURANCE
MBIA Corp. reinsures portions of its risks with other insurance companies
through various quota and surplus share reinsurance treaties and facultative
agreements. In the event that any or all of the reinsurers were unable to meet
their obligations, MBIA Corp. would be liable for such defaulted amounts.
Amounts deducted from gross insurance in force for reinsurance ceded by MBIA
Corp., MBIA Assurance and MBIA Illinois were $50.1 billion and $42.6 billion, at
December 31, 1995 and 1994, respectively. The distribution of ceded insurance in
force by geographic location and type of bond is set forth in the tables below:
As of December 31
---------------------------------------------
In billions 1995 1994
------------------- ----------------------
% of % of
Ceded Ceded Ceded Ceded
Geographic Insurance Insurance Insurance Insurance
Location In Force In Force In Force In Force
--------- --------- --------- ---------
California $ 8.8 17.5% $ 7.5 17.6%
New York 5.7 11.4 4.9 11.5
New Jersey 3.1 6.1 2.0 4.7
Texas 2.8 5.6 2.5 5.9
Pennsylvania 2.7 5.4 2.6 6.1
Florida 2.3 4.6 2.1 4.9
Illinois 2.2 4.5 2.3 5.4
District of
Columbia 1.5 3.0 1.6 3.8
Washington 1.4 2.7 1.2 2.8
Puerto Rico 1.3 2.6 1.1 2.6
Massachusetts 1.1 2.1 0.9 2.1
Ohio 1.0 2.0 0.9 2.1
----- ----- ----- -----
Subtotal 33.9 67.5 29.6 69.5
Other 14.4 28.8 12.3 28.9
----- ----- ----- -----
Total U. S. 48.3 96.3 41.9 98.4
International 1.8 3.7 0.7 1.6
----- ----- ----- -----
$50.1 100.0% $42.6 100.0%
===== ===== ===== =====
As of December 31
---------------------------------------------
In billions 1995 1994
------------------- ----------------------
% of % of
Ceded Ceded Ceded Ceded
Geographic Insurance Insurance Insurance Insurance
Location In Force In Force In Force In Force
--------- --------- --------- ---------
Municipal
General
obligation $11.7 23.3% $ 9.7 22.8%
Utilities 9.0 18.0 8.5 20.0
Health care 6.6 13.1 6.5 15.3
Transportation 5.5 11.0 4.5 10.6
Special revenue 3.2 6.4 2.7 6.3
Industrial
development and
pollution control
revenue 3.0 6.0 2.9 6.8
Housing 1.4 2.8 1.0 2.3
Higher education 1.2 2.4 1.2 2.8
Other 2.4 4.8 1.5 3.5
----- ----- ----- -----
44.0 87.8 38.5 90.4
----- ----- ----- -----
Non-municipal
Asset-/mortgage-
backed 3.6 7.2 2.7 6.3
International 1.8 3.7 0.7 1.6
Other 0.7 1.3 0.7 1.7
6.1 12.2 4.1 9.6
----- ----- ----- -----
$50.1 100.0% $42.6 100.0%
===== ===== ===== =====
Gross premiums written include $0.2 million in 1994 and $5.4 million in 1993
related to the reassumption by MBIA Corp. of reinsurance previously ceded by the
Association. Also included in gross premiums in 1993 is $10.8 million of
premiums assumed from a member of the Association. Ceded premiums written are
net of $0.2 million in 1995, $1.6 million in 1994 and $2.5 million in 1993
related to the reassumption of reinsurance previously ceded by MBIA Corp. or
MBIA Illinois.
-38-
<PAGE>
MBIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)
13. PENSION AND PROFIT SHARING PLANS
The Company has a pension plan covering eligible employees. The pension plan is
a defined contribution plan and the Company contributes 10% of each eligible
employee's annual total compensation. Pension expense for the years ended
December 31, 1995, 1994 and 1993 was $3.6 million, $3.3 million and $3.3
million, respectively. The Company also has a profit sharing/401(k) plan which
allows eligible employees to contribute up to 10% of eligible compensation. The
Company matches employee contributions up to the first 5% of total compensation.
Company contributions to the profit sharing plan aggregated $1.5 million, $1.4
million and $1.4 million for the years ended December 31, 1995, 1994 and 1993,
respectively. The 401(k) plan company match amounts are invested in common stock
of the Company. Amounts relating to the above plans that exceed limitations
established by Federal regulations are contributed to a non-qualified deferred
compensation plan. Of the above amounts for the pension and profit sharing
plans, $2.7 million, $2.6 million and $2.6 million for the years ended December
31, 1995, 1994 and 1993, respectively, are included in policy acquisition costs.
Effective January 1, 1993, the Company adopted SFAS 106 "Employers'
Accounting for Postretirement Benefits Other than Pensions." Under SFAS 106,
companies are required to accrue the cost of employee post-retirement benefits
other than pensions during the years that employees render service. Prior to
January 1, 1993, the Company had accounted for these post-retirement benefits on
a cash basis. In 1993, the Company adopted the new pronouncement on the
cumulative catch-up basis and recorded a cumulative effect adjustment which
decreased net income and increased their liabilities by $0.1 million. As of
January 1, 1994, the Company eliminated these post-retirement benefits.
14. LONG-TERM INCENTIVE PLANS
On March 2, 1987, the Company adopted a plan for key employees of the Company
and its subsidiaries to enable those employees to acquire shares of common stock
of the Company or to benefit from appreciation in the price of the common stock
of the Company. Options granted will either be Incentive Stock Options ("ISOs"),
where they qualify under Section 422(a) of the Internal Revenue Code, or
Non-Qualified Stock Options ("NQSOs").
ISOs and NQSOs may be granted at a price not less than 100% of the fair value
of the Company's common stock as determined on the date granted. Options will be
exercisable as specified at the time of grant and expire ten years from the date
of grant (or shorter if specified or following termination of employment).
The Board of Directors of the Company has authorized a maximum of 4,753,011
shares of the Company's common stock to be granted as options. As of December
31, 1995, 3,315,777 options had been granted net of expirations and
cancellations, leaving the total number available for future grants at
1,437,234. Options granted through 1990 are exercisable in equal annual
installments on each of the first three anniversaries of the grant at 100% of
the market price at date of grant. The options granted from 1991 through 1994
are exercisable in five equal annual installments commencing one year after the
date of grant. On all options granted from 1991 through 1994, accelerated
vesting and exercisability of those options is possible if the Company's return
on equity for the year is at least equal to the threshold return on equity
specified in the annual financial plan and if earnings per share are at least
2.5% greater than plan earnings per share.
In December 1995, the MBIA Inc. Board of Directors approved the "MBIA Long-Term
Incentive Program." The incentive program includes a stock option program and
adds a compensation component linked to the growth in adjusted book value per
share ("ABV") of the Company's stock. Awards under the long-term program will be
divided equally between the two components, with 50% of the award given in stock
options and 50% of the award (multiplied by a 1.5 conversion factor) to be paid
in cash or shares of Company stock. Target levels for the option/incentive award
are established as a percentage of total salary and bonus, based upon the
recipient's position. The awards under the long-term program typically will be
granted from the Vice President level up to and including the Chairman and Chief
Executive Officer.
-39-
<PAGE>
MBIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)
The ABV portion of the long-term incentive program may be awarded every other
year. The December 1995 award will cover growth in ABV from December 31, 1995
through December 31, 1998, with a base line growth of 12%. The amount to be paid
in respect of such award will be adjusted upward or downward based on the actual
ABV growth with a minimum growth of 8% necessary to receive any payment and an
18% growth needed to receive the maximum payment of 200% of the target levels.
The amount, if any, to be paid under this portion of the program will be paid in
early 1999 in the form of cash or shares of the Company's common stock.
Subsequent awards, if any, will be made every other year with concomitant
payments occurring after the three-year cycle. During 1995, $0.2 million was
recorded as expense related to the December 1995 ABV award.
The stock option grants, which may continue to be awarded every year, provide
the right to purchase shares of common stock at the fair market value (closing
price) of the stock on the date of the grant. Each option vests over five years
and has a ten-year term. Prior option grants are not taken into account in
determining the number of options granted in any year. In December 1995, 97,300
options were awarded. In December 1995, the Company adopted a restricted stock
program whereby key executive officers were granted restricted shares of the
Company's stock. Shares were awarded in the name of the employee, who has all
rights of a shareholder, subject to certain restrictions or forfeitures. This
stock award may only be sold after three years from the date of grant, at which
time the award fully vests.
For the year ended 1995, a total of 5,640 restricted shares of the Company's
stock were granted. The fair value of the shares awarded, determined on the
grant date, is $0.4 million and has been recorded as "Unearned compensation -
restricted stock" and is shown as a separate component of shareholders' equity.
Unearned compensation is amortized to expense over the three-year vesting
period.
Additional information with respect to stock options is summarized below:
1995
-----------------------------
Number Option Price
Options of Shares Per Share
- ------- ---------- ----------------
Outstanding at beginning of year 2,091,087 $16.500 - 69.00
Granted 97,300 - 77.125
Exercised 382,447 16.500 - 69.00
Expired or canceled 33,460 50.125 - 69.00
---------- ----------------
Outstanding at year-end 1,772,480 $16.500 - 77.125
---------- ----------------
Exercisable at year-end 1,177,100 $16.500 - 69.00
========== ================
1994
-----------------------------
Number Option Price
Options of Shares Per Share
- ------- ---------- ----------------
Outstanding at beginning of year 1,591,487 $16.500 - 69.00
Granted 552,700 50.125 - 60.125
Exercised 47,080 23.500 - 50.00
Expired or canceled 6,020 35.125 - 69.00
---------- ----------------
Outstanding at year-end 2,091,087 $16.500 - 69.00
---------- ----------------
Exercisable at year-end 1,376,847 $16.500 - 69.00
========== ================
1993
-----------------------------
Number Option Price
Options of Shares Per Share
- ------- ---------- ----------------
Outstanding at beginning of year 1,559,675 $16.500 - 50.00
Granted 208,400 - 69.00
Exercised 170,588 16.500 - 50.00
Expired or canceled 6,000 35.125 - 69.00
---------- ----------------
Outstanding at year-end 1,591,487 $16.500 - 69.00
---------- ----------------
Exercisable at year-end 1,141,301 $16.500 - 50.00
========== ================
15. Shareholders' Rights Plan
In December 1991, the Board of Directors of the Company declared a dividend
distribution of one preferred share purchase right (a "Right") for each
outstanding share of the Company's common stock. Each Right entitles its holder
to purchase from the Company one one-hundredth of a share of the Company's
Junior Participating Cumulative Preferred Shares at a price of $160, subject to
certain adjustments. Initially, the Rights are attached to the common stock and
will not be transferable separately nor become exercisable until the earlier to
occur of (i) ten business days following the date of the public announcement by
the Company (the "Shares Acquisition Date") that a person or group of persons
has acquired or obtained the right to acquire beneficial ownership of 10% or
more of the outstanding shares of the Company's common stock and (ii) ten
business days (or later as may be determined by the Board of Directors) after
the announcement or commencement of a tender offer or exchange offer which, if
successful, would result in the bidder owning 10% or more of the outstanding
-40-
<PAGE>
MBIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)
shares of the Company's common stock. However, no person shall be deemed to have
acquired or obtained the right to acquire the beneficial ownership of 10% or
more of the outstanding shares of the Company's common stock, if the Board of
Directors determines that such acquisition is inadvertent, and such person
promptly divests itself of a sufficient number of shares to be below the 10%
ownership threshold.
If the acquiring person or group acquires beneficial ownership of 10% or more
of the Company's common stock (except pursuant to a tender or exchange offer for
all outstanding common stock of the Company, determined by the Company's
independent directors to be at a fair price and in the best interests of the
Company and its shareholders), each holder of a Right (other than the acquirer)
will be entitled to purchase, for $160, that number of shares of common stock of
the Company having a fair value of $320. Similarly, if after an acquiring person
or group so acquires 10% or more of the Company's common stock, the Company is
acquired in a merger or other business combination and is not the surviving
entity, or its common stock is changed or exchanged in whole or in part, or 50%
or more of the Company's assets, cash flow or earning power is sold, each holder
of a Right (other than the acquirer) will be entitled to purchase, for $160,
that number of shares of common stock of the acquiring company having a fair
value of $320. The Board of Directors may redeem the Rights in whole at $.01 per
Right at any time prior to ten business days following the Shares Acquisition
Date. Further, at any time after a person or group acquires 10% or more, but
less than 50%, of the Company's common stock, the Board of Directors of the
Company may exchange the Rights (other than those held by the acquirer) in whole
or in part, at an exchange ratio of one share of common stock per Right. The
Board of Directors may also amend the Rights at any time prior to the Shares
Acquisition Date. The Rights will expire on December 12, 2001, unless earlier
redeemed or exchanged.
16. RELATED PARTY TRANSACTIONS
The business assumed from the Association, relating to insurance on unit
investment trusts sponsored by two members of the Association, includes deferred
premium revenue of $1.6 million and $1.9 million at December 31, 1995 and 1994,
respectively.
Since 1989, MBIA Corp. has executed five surety bonds to guarantee the payment
obligations of the members of the Association, one of which is a principal
shareholder, which had their Standard & Poor's Corporation claims-paying rating
downgraded from Triple-A on their previously issued Association policies. In the
event that they do not meet their Association policy payment obligations, MBIA
Corp. will pay the required amounts directly to the paying agent instead of to
the former Association member as was previously required. The aggregate
outstanding exposure on these surety bonds as of December 31, 1995 is $340
million.
Included in other investments at December 31, 1994 are 78,000 shares of common
stock of Credit Local de France, a major shareholder. In 1995, the Company sold
these shares, and realized gains from the sale of $3.5 million.
The Company has investment management and advisory agreements with an affiliate
of a principal shareholder, which provides for payment of fees on assets under
management. Total related expenses for the years ended December 31, 1995, 1994
and 1993 amounted to $2.5 million, $2.6 million and $2.5 million, respectively.
These agreements were terminated on January 1, 1996 at which time SECO commenced
management of MBIA Corp.'s consolidated investment portfolios.
The Company has various insurance coverages provided by a principal
shareholder, the cost of which totaled $1.9 million, $1.9 million and $2.0
million, respectively, for the years ended December 31, 1995, 1994 and 1993.
17. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value amounts of financial instruments shown in the
following table have been determined by the Company using available market
information and appropriate valuation methodologies. However, in certain cases
considerable judgment is necessarily required to interpret market data to
develop estimates of fair value. Accordingly, the estimates presented herein are
not necessarily indicative of the amount the Company could realize in a current
market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
FIXED-MATURITY SECURITIES - The fair value of fixed-maturity securities equals
quoted market price, if available. If a quoted market price is not available,
fair value is estimated using quoted market prices for similar securities.
SHORT-TERM INVESTMENTS - Short-term investments are carried at amortized cost
which, because of their short duration, is a reasonable estimate of fair value.
-41-
<PAGE>
MBIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)
OTHER INVESTMENTS - Other investments consist principally of marketable equity
securities as well as the Company's interest in limited partnerships and a
mutual fund, both of which invest primarily in marketable equity securities. The
fair value of other investments is based on quoted market prices.
MUNICIPAL INVESTMENT AGREEMENT PORTFOLIO - The municipal investment agreement
portfolio is comprised of fixed-maturity securities and short-term investments.
Its fair value equals the quoted market price, if available, of its
fixed-maturities plus the amortized cost of its short-term investments, which
because of their short duration, is a reasonable estimate of fair value. If a
quoted market price is not available for a fixed-maturity security, fair value
is estimated using quoted market prices for similar securities.
CASH AND CASH EQUIVALENTS, RECEIVABLE FOR INVESTMENTS SOLD, SHORT-TERM DEBT AND
PAYABLE FOR INVESTMENTS PURCHASED - The carrying amounts of these items are a
reasonable estimate of their fair value.
PREPAID REINSURANCE PREMIUMS - The fair value of the Company's prepaid
reinsurance premiums is based on the estimated cost of entering into an
assumption of the entire portfolio with third party reinsurers under current
market conditions.
DEFERRED PREMIUM REVENUE - The fair value of the Company's deferred premium
revenue is based on the estimated cost of entering into a cession of the entire
portfolio with third party reinsurers under current market conditions.
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES - The carrying amount is composed of
the present value of the expected cash flows for specifically identified claims
combined with an estimate for unidentified claims. Therefore, the carrying
amount is a reasonable estimate of the fair value of the reserve.
LONG-TERM DEBT - The fair value is estimated based on the quoted market prices
for the same or similar securities.
MUNICIPAL INVESTMENT AGREEMENTS AND MUNICIPAL REPURCHASE AGREEMENTS - The fair
values of municipal investment agreements and municipal repurchase agreements
are estimated using discounted cash flow calculations based upon interest rates
currently being offered for similar agreements with maturities consistent with
those remaining for the agreements being valued.
<PAGE>
INSTALLMENT PREMIUMS - The fair value is derived by calculating the present
value of the estimated future cash flow stream discounted at 9% and 13.25% at
December 31, 1995 and December 31, 1994, respectively.
As of December 31, 1995 As of December 31, 1994
----------------------- -----------------------
Carrying Estimated Carrying Estimated
In thousands Amount Fair Value Amount Fair Value
- ------------ ---------- ---------- ---------- -----------
Assets:
Fixed-maturity
securities $3,652,621 $3,652,621 $3,051,906 $3,051,906
Short-term
investments 198,035 198,035 121,384 121,384
Other investments 14,064 14,064 17,550 17,550
Municipal investment
agreement portfolio 2,742,626 2,742,626 1,675,935 1,675,935
Cash and cash
equivalents 23,258 23,258 7,940 7,940
Prepaid reinsurance
premiums 200,887 174,444 186,492 159,736
Receivable for
investments sold 6,100 6,100 945 945
Liabilities:
Deferred premium
revenue 1,616,315 1,395,159 1,512,211 1,295,305
Loss and loss
adjustment expense
reserves 42,505 42,505 40,148 40,148
Long-term debt 373,900 427,193 298,790 299,315
Short-term debt 18,000 18,000 17,000 17,000
Municipal investment
agreements 2,026,709 2,091,895 1,334,177 1,287,939
Municipal repurchase
agreements 615,776 665,564 191,956 188,487
Payable for
investments
purchased 10,695 10,695 209,966 209,966
Off-balance sheet
instruments:
Installment premiums - 235,371 - 176,944
18. SUBSEQUENT EVENT
In February 1996, the Company completed a public offering of 3,890,000 shares
of the Company's common stock. Of the shares offered, 3,120,000 were sold by an
existing shareholder and 770,000 were new shares offered by the Company. The
company realized $55 million in new capital from the offering.
-42-
<PAGE>
MBIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)
19. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
A summary of selected quarterly income statement information follows:
Dollars in thousands except per share amounts
1995 First Second Third Fourth Year
- ---- ------- -------- -------- -------- --------
Gross premiums
written $70,834 $106,343 $ 92,022 $ 79,288 $348,487
Net premiums
written 63,754 94,294 78,945 66,444 303,437
Premiums earned 51,074 53,888 55,609 54,501 215,072
Investment
income and
realized gains
and losses 54,594 55,482 57,536 57,466 225,078
All other
revenues 5,112 4,563 5,585 6,812 22,072
Income before
income taxes 83,522 85,766 89,008 86,734 345,030
Net income $66,006 $ 67,307 $ 69,834 $ 68,272 $271,419
------- -------- -------- -------- --------
Net income per
common share $ 1.57 $ 1.60 $ 1.65 $ 1.61 $ 6.43
------- -------- -------- -------- --------
1994 First Second Third Fourth Year
- ---- ------- -------- -------- -------- --------
Gross premiums
written $84,311 $109,975 $ 80,099 $ 86,451 $ 360,836
Net premiums
written 76,513 91,098 68,088 75,856 311,555
Premiums earned 54,452 53,688 54,730 55,459 218,329
Investment
income and
realized gains
and losses 52,637 50,502 50,158 50,165 203,462
All other
revenues 2,538 5,884 5,124 4,199 17,745
Income before
income taxes 82,909 83,022 82,513 80,978 329,422
Net income $65,741 $ 64,951 $ 65,047 $ 64,470 $260,209
------- -------- -------- -------- --------
Net income per
common share $ 1.56 $ 1.54 $ 1.54 $ 1.53 $ 6.18
------- -------- -------- -------- --------
1993 First Second Third Fourth Year
- ---- ------- -------- -------- -------- --------
Gross premiums
written $98,025 $154,315 $110,022 $116,985 $479,347
Net premiums
written 89,189 133,992 103,535 105,079 431,795
Premiums earned 53,465 58,921 61,237 57,653 231,276
Investment
income and
realized gains
and losses 45,014 47,287 46,333 50,063 188,697
All other
revenues 1,834 2,726 2,652 1,793 9,005
Income before
income taxes 75,379 82,404 84,405 81,847 324,035
Net income $72,651 $ 63,841 $ 59,817 $ 62,724 $ 259,033
------- -------- -------- -------- --------
Net income per
common share $ 1.71 $ 1.50 $ 1.41 $ 1.48 $ 6.10
------- -------- -------- -------- --------
Due to the changes in the number of shares outstanding, quarterly per share
amounts may not add to the totals for the years.
-43-
<PAGE>
BOARD OF DIRECTORS
DAVID H. ELLIOTT (2,4)
Chairman and Chief Executive Officer
MBIA Inc.
WILLIAM O. BAILEY (4,5)
Chairman Terra Nova (Bermuda) Holdings, Ltd.
JOSEPH W. BROWN, JR. (3,4,5)
Chairman, President and Chief Executive Officer
Talegen Holdings, Inc.
DAVID C. CLAPP (3,5,6)
Limited Partner
Goldman Sachs & Co.
CLAIRE L. GAUDIANI (2,3)
President
Connecticut College
WILLIAM H. GRAY, III (1,2)
President and Chief Executive Officer
United Negro College Fund, Inc.
FREDA S. JOHNSON (1,6)
President Government Finance Associates, Inc.
DANIEL P. KEARNEY (3,4,6)
Executive Vice President
Aetna Life and Casualty Company
JAMES A. LEBENTHAL (1,4,6)
Chairman
Lebenthal & Co., Inc.
ROBERT B. NICHOLAS (1,6)
Private Investor
PIERRE-HENRI RICHARD
Chairman and Chief Executive Officer
Credit Local de France
JOHN A. ROLLS
President and Chief Executive Officer
Deutsche Bank North America*
PAUL A. VOLCKER Chairman
James D. Wolfensohn Inc.
(Retired from the MBIA Inc. board, September 1, 1995)
RICHARD L. WEILL (5)
President MBIA Inc.
Board Committees
1. Audit
2. Committee on Directors
3. Compensation and Organization
4. Executive
5. Finance
6. Risk Oversight
<PAGE>
SENIOR OFFICERS**
MBIA INC.
DAVID H. ELLIOTT
Chairman and Chief Executive Officer
RICHARD L. WEILL
President
JAMES E. MALLING
Executive Vice President
JANIS STRONG CHRISTENSEN
Senior Vice President
LOUIS G. LENZI
General Counsel and Secretary
KEVIN D. SILVA
Senior Vice President
JULLIETTE S. TEHRANI
Senior Vice President and
Chief Financial Officer
CHRISTOPHER W. TILLEY
Senior Vice President and Treasurer
ELIZABETH BREEN SULLIVAN
Vice President and Controller
MBIA INSURANCE CORPORATION
DAVID H. ELLIOTT
Chairman and Chief Executive Officer
RICHARD L. WEILL
President
NEIL G. BUDNICK
Senior Vice President,
Assistant to the Chairman
LOUIS G. LENZI
General Counsel and Secretary
THOMAS O. SCHERER
Senior Vice President,
Director of Risk Assessment
CORPORATE MARKETING, CORPORATE DEVELOPMENT
AND MANAGEMENT SERVICES
JAMES E. MALLING
Executive Vice President
MARGARET D. GARFUNKEL
Senior Vice President,
Director of Corporate Development
PAUL C. O'SHEA
Senior Vice President,
Director of Corporate Marketing
KEVIN D. SILVA
Senior Vice President,
Director of Management Services
FINANCE
JULLIETTE S. TEHRANI
Senior Vice President and
Chief Financial Officer
CHRISTOPHER W. TILLEY
Senior Vice President and Treasurer
<PAGE>
INSURANCE OPERATIONS
WILLIAM G. GALLAGHER
Senior Vice President, Director of
Institutional, Retail and Issuer Marketing
GARY P. KARVELIS
Senior Vice President,
Director of Secondary Market Products
THOMAS A. LANDERS
Senior Vice President,
Director of Market Research
MICHAEL J. MAGUIRE
Senior Vice President,
Director of International Operations
DAVID C. STEVENS
Senior Vice President,
Director of Insured Portfolio Management
UNDERWRITING POLICY AND REVIEW
JANIS STRONG CHRISTENSEN
Senior Vice President,
Director of Underwriting Policy and Review
MBIA ASSURANCE S.A.
MICHAEL J. MAGUIRE
President
SERGE MARLE
Directeur General
MBIA INVESTMENT MANAGEMENT CORP.
MARGARET D. GARFUNKEL
President
MBIA MUNICIPAL INVESTORS SERVICE CORPORATION
LEON J. KARVELIS, JR.
President
FRANCIE HELLER
Executive Vice President
MBIA SECURITIES CORP.
Robert M. Ohanesian
President
*Mr. Rolls became president and chief executive officer of Thermion Systems
International in February 1996.
**On January 2, 1996, Senior Vice Presidents Arthur M. Warren, Hilda H.
Boas and William P. Condon retired. Mr. Warren was succeeded by Julliette S.
Tehrani on October 1, 1995 as chief financial officer, and Ms. Boas was
succeeded by Kevin D. Silva, who became senior vice president, director of
management services on January 1, 1996. Mr. Condon was director of the public
finance group.
-44-
<PAGE>
MBIA INC. AND SUBSIDIARIES
SHAREHOLDER INFORMATION
CORPORATE HEADQUARTERS
MBIA Inc.
113 King Street
Armonk, New York 10504
914 273-4545
COMMON STOCK LISTING
MBIA Inc. common stock is listed on the New York Stock Exchange (symbol: MBI).
The approximate number of shareholders of record of MBIA's common stock,
including individual owners, was 454 as of December 31, 1995.
COMMON STOCK DATA
Dividends Paid Market Price*
Per Share High Low Close
- ----------------------------------------------------
1995
1st Quarter $.31 64 55 3/8 63 1/4
2nd Quarter .31 69 1/4 59 5/8 66 1/2
3rd Quarter .31 72 3/8 63 1/4 70 5/8
4th Quarter .34 1/2 77 1/2 69 1/4 75
1994
1st Quarter $.26 65 1/4 53 1/2 54 5/8
2nd Quarter .26 61 52 3/4 57 3/8
3rd Quarter .26 62 1/2 56 5/8 59 5/8
4th Quarter .31 59 7/8 47 1/4 56 1/8
*Based on New York Stock Exchange trading data
DIVIDEND POLICY
Quarterly dividends on MBIA Inc. common stock, when declared, are usually paid
on the 15th day of January, April, July and October.
ANNUAL MEETING
Shareholders are invited to attend our annual meeting, which will be held on
Thursday, May 9, 1996 at 10 a.m. at MBIA Inc. in Armonk, New York.
SHAREHOLDER INFORMATION
Individuals seeking additional information about the company should contact:
Judith C. Radasch
Vice President, Investor Relations
914 765-3014
Julliette S. Tehrani
Senior Vice President and
Chief Financial Officer
914 765-3020
TRANSFER AGENT, REGISTRAR AND DIVIDEND DISBURSING AGENT
Chemical Mellon Shareholder Services, L.L.C.
85 Challenger Road
Overpeck Centre
Ridgefield Park, New Jersey 07660
800 288-9541
AUDITORS
Coopers & Lybrand L.L.P.
New York, New York
FORM 10-K
A copy of the Company's Form 10-K report to the Securities and
Exchange Commission can be obtained by writing to Shareholder Information at
MBIA Inc.
QUARTERLY REPORTS
If you would like to receive quarterly shareholder reports from MBIA, please
contact Shareholder Information at MBIA Inc. The company distributes quarterly
shareholder reports only on request.
-Back Cover-
<PAGE>
Exhibit 21
Subsidiaries of MBIA Inc.
Name of Subsidiary State of Incorporation
MBIA Insurance Corp. (formerly known as
Municipal Bond Investors Assurance Corporation) New York
MBIA Assurance S.A. France
MBIA Service Corporation Delaware
Municipal Issuers Service Corporation New York
MBIA Municipal Investors Service Corporation Delaware
MBIA Capital Corp. Delaware
MBIA Insurance Corp. of Illinois (formerly known Illinois
as Bond Investors Guaranty Insurance Company)
MBIA Investment Management Corp. Delaware
MBIA Securities Corp. Delaware
Bond Investors Guaranty Services, Inc. New York
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference into the Registration
Statements on Form S-8 (Nos. 33-22441 and 33-46062) of:
(1) Our report dated January 22, 1996, on our audits of the consolidated
financial statements of MBIA Inc. and Subsidiaries as of December 31,
1995 and 1994, and for each of the three years in the period ended
December 31, 1995, which report is incorporated by reference in this 1995
Annual Report on Form 10-K; and
(2) Our report dated January 22, 1996, on our audits of the financial
statement schedules of MBIA Inc. and Subsidiaries, which report is
included in this 1995 Annual Report on Form 10-K.
New York, New York
March 27, 1996
<PAGE>
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints each of David H.
Elliott, Richard L. Weill and Louis G. Lenzi as his/her true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him/her and in his/her name, place and stead, in any and all capacities, to
sign the Annual Report on Form 10-K of MBIA Inc. for the year ended December 31,
1995 and any or all amendments thereto, and to file the same, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as they might or could
do in person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his/her substitute, may lawfully do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, I have set my hand and seal this 9th day of March, 1996
- ------------------------
William O. Bailey
/s/ Joseph W. Brown
- ------------------------
/s/ David C. Clapp
- ------------------------
/s/ Claire L. Gaudiani
- ------------------------
- ------------------------
William H. Gray
/s/ Freda S. Johnson
- ------------------------
/s/ Daniel P. Kearney
- ------------------------
/s/ James A. Lebenthal
- ------------------------
/s/ Robert B. Nicholas
- -------------------------
/s/ Pierre-Henir Richard
- -------------------------
/s/ John A. Rolls
- -------------------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<DEBT-HELD-FOR-SALE> 3,652,621
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 6,607,346
<CASH> 23,258
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 140,348
<TOTAL-ASSETS> 7,267,450
<POLICY-LOSSES> 42,505
<UNEARNED-PREMIUMS> 1,616,315
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 391,900
0
0
<COMMON> 42,077
<OTHER-SE> 2,192,189
<TOTAL-LIABILITY-AND-EQUITY> 7,267,450
215,072
<INVESTMENT-INCOME> 219,858
<INVESTMENT-GAINS> 11,312
<OTHER-INCOME> 15,980
<BENEFITS> 10,639
<UNDERWRITING-AMORTIZATION> 21,283
<UNDERWRITING-OTHER> 41,805
<INCOME-PRETAX> 345,030
<INCOME-TAX> 73,611
<INCOME-CONTINUING> 271,419
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 271,419
<EPS-PRIMARY> 6.43
<EPS-DILUTED> 6.41
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 1995 and 1994
and for the years ended
December 31, 1995, 1994 and 1993
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
TO THE BOARD OF DIRECTORS AND SHAREHOLDER OF
MBIA INSURANCE CORPORATION:
We have audited the accompanying consolidated balance sheets of MBIA Insurance
Corporation and Subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of income, changes in shareholder's equity and cash
flows for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of MBIA Insurance
Corporation and Subsidiaries as of December 31, 1995 and 1994, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995 in conformity with generally
accepted accounting principles.
As discussed in Note 7 to the consolidated financial statements, effective
January 1, 1993 the Company adopted Statement of Financial Accounting Standards
No. 109 "Accounting for Income Taxes." As discussed in Note 2 to the
consolidated financial statements, effective January 1, 1994 the Company adopted
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities."
\s\ COOPERS & LYBRAND
New York, New York
January 22, 1996
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
------------------- ----------------
ASSETS
Investments:
<S> <C> <C>
Fixed maturity securities held as available-for-sale
at fair value (amortized cost $3,428,986 and
$3,123,838 $3,652,621 3,051,906
Short-term investments, at amortized cost
(which approximates fair value) 198,035 121,384
Other investments 14,064 11,970
------------ ------------
Total investments 3,864,720 3,185,260
Cash and cash equivalents 2,135 1,332
Accrued investment income 60,247 55,347
Deferred acquisition costs 140,348 133,048
Prepaid reinsurance premiums 200,887 186,492
Goodwill (less accumulated amortization of
$37,366 and $32,437) 105,614 110,543
Property and equipment, at cost (less accumulated
depreciation of $12,137 and $9,501) 41,169 39,648
Receivable for investments sold 5,729 945
Other assets 42,145 46,552
------------ ------------
TOTAL ASSETS $4,462,994 $3,759,167
============ ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Deferred premium revenue $ 1,616,315 $ 1,512,211
Loss and loss adjustment expense reserves 42,505 40,148
Deferred income taxes 212,925 97,828
Payable for investments purchased 10,695 6,552
Other liabilities 54,682 46,925
------------ ------------
TOTAL LIABILITIES 1,937,122 1,703,664
------------ ------------
Shareholder's Equity:
Common stock, par value $150 per share; authorized,
issued and outstanding - 100,000 shares 15,000 15,000
Additional paid-in capital 1,021,584 953,655
Retained earnings 1,341,855 1,134,061
Cumulative translation adjustment 2,704 427
Unrealized appreciation (depreciation) of investments,
net of deferred income tax provision (benefit)
of $78,372 and $(25,334) 144,729 (47,640)
------------ ------------
TOTAL SHAREHOLDER'S EQUITY 2,525,872 2,055,503
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $4,462,994 $3,759,167
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands)
<TABLE>
<CAPTION>
Years ended December 31
----------------------------------------
1995 1994 1993
--------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Gross premiums written $349,812 $361,523 $479,390
Ceded premiums (45,050) (49,281) (47,552)
---------- ---------- ----------
Net premiums written 304,762 312,242 431,838
Increase in deferred premium revenue (88,365) (93,226) (200,519)
---------- ---------- ----------
Premiums earned (net of ceded
premiums of $30,655
$33,340 and $41,409) 216,397 219,016 231,319
Net investment income 219,834 193,966 175,329
Net realized gains 7,777 10,335 8,941
Other income 2,168 1,539 3,996
---------- ---------- ----------
Total revenues 446,176 424,856 419,585
---------- ---------- ----------
Expenses:
Losses and loss adjustment expenses 10,639 8,093 7,821
Policy acquisition costs, net 21,283 21,845 25,480
Underwriting and operating expenses 41,812 41,044 38,006
---------- ---------- ----------
Total expenses 73,734 70,982 71,307
---------- ---------- ----------
Income before income taxes and cumulative
effect of accounting changes 372,442 353,874 348,278
Provision for income taxes 81,748 77,125 86,684
---------- ---------- ----------
Income before cumulative effect of
accounting changes 290,694 276,749 261,594
Cumulative effect of accounting changes --- --- 12,923
---------- ---------- ----------
Net income $290,694 $276,749 $274,517
========== ========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY
For the years ended December 31, 1995, 1994 and 1993
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
Unrealized
Additional Cumulative Appreciation
Common Stock Paid-in Retained Translation (Depreciation)
Shares Amount Capital Earnings Adjustment of Investments
------- -------- ---------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1993 100,000 $ 15,000 $ 931,943 $ 670,795 $ (474) $ 2,379
Net income --- --- --- 274,517 --- ---
Change in foreign currency translation --- --- --- --- (729) ---
Change in unrealized appreciation
of investments net of change in
deferred income taxes of $(1,381) --- --- --- --- --- 2,461
Dividends declared (per
common share $500.00) --- --- --- (50,000) --- ---
Tax reduction related to tax sharing
agreement with MBIA Inc. --- --- 11,851 --- --- ---
------- -------- ---------- ---------- ---------- ------------
Balance, December 31, 1993 100,000 15,000 943,794 895,312 (1,203) 4,840
------- -------- ---------- ---------- ---------- ------------
Net income --- --- --- 276,749 --- ---
Change in foreign currency translation --- --- --- --- 1,630 ---
Change in unrealized depreciation
of investments net of change in
deferred income taxes of $27,940 --- --- --- --- --- (52,480)
Dividends declared (per
common share $380.00) --- --- --- (38,000) --- ---
Tax reduction related to tax sharing
agreement with MBIA Inc. --- --- 9,861 --- --- ---
------- -------- ---------- ---------- ---------- ------------
Balance, December 31, 1994 100,000 15,000 953,655 1,134,061 427 (47,640)
------- -------- ---------- ---------- ---------- ------------
Exercise of stock options --- --- 5,403 --- --- ---
Net income --- --- --- 290,694 --- ---
Change in foreign currency translation --- --- --- --- 2,277 ---
Change in unrealized appreciation
of investments net of change in
deferred income taxes of $(103,707) --- --- --- --- --- 192,369
Dividends declared (per
common share $829.00) --- --- --- (82,900) --- ---
Capital contribution from MBIA Inc. --- --- 52,800 --- --- ---
Tax reduction related to tax sharing
agreement with MBIA Inc. --- --- 9,726 --- --- ---
======= ======== ========== ========== ========== ============
Balance, December 31, 1995 100,000 $ 15,000 $1,021,584 $1,341,855 $ 2,704 $144,729
======= ======== ========== ========== ========== ============
The accompanying notes are an integral part of the consolidated
financial statements.
</TABLE>
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Years ended December 31
-----------------------------------------
1995 1994 1993
----------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $290,694 $276,749 $274,517
Adjustments to reconcile net income to net
cash provided by operating activities:
Increase in accrued investment income (4,900) (3,833) (5,009)
Increase in deferred acquisition costs (7,300) (12,564) (10,033)
Increase in prepaid reinsurance premiums (14,395) (15,941) (6,143)
Increase in deferred premium revenue 104,104 109,167 206,662
Increase in loss and loss adjustment expense reserves 2,357 6,413 8,225
Depreciation 2,676 1,607 1,259
Amortization of goodwill 4,929 4,961 5,001
Amortization of bond (discount) premium, net (2,426) 621 (743)
Net realized gains on sale of investments (7,778) (10,335) (8,941)
Deferred income taxes 11,391 19,082 7,503
Other, net 29,080 (8,469) 15,234
----------- ------------ ------------
Total adjustments to net income 117,738 90,709 213,015
----------- ------------ ------------
Net cash provided by operating activities 408,432 367,458 487,532
----------- ------------ ------------
Cash flows from investing activities:
Purchase of fixed maturity securities, net
of payable for investments purchased (897,128) (1,060,033) (786,510)
Sale of fixed maturity securities, net of
receivable for investments sold 473,352 515,548 205,342
Redemption of fixed maturity securities,
net of receivable for investments redeemed 83,448 128,274 225,608
(Purchase) sale of short-term investments, net (32,281) 3,547 (40,461)
(Purchase) sale of other investments, net (692) 87,456 (37,777)
Capital expenditures, net of disposals (4,228) (3,665) (3,601)
----------- ------------ ------------
Net cash used in investing activities (377,529) (328,873) (437,399)
----------- ------------ ------------
Cash flows from financing activities:
Capital contribution from MBIA Inc. 52,800 --- ---
Dividends paid (82,900) (38,000) (50,000)
----------- ------------ ------------
Net cash used by financing activities (30,100) (38,000) (50,000)
----------- ------------ ------------
Net increase in cash and cash equivalents 803 585 133
Cash and cash equivalents - beginning of year 1,332 747 614
----------- ------------ ------------
Cash and cash equivalents - end of year $2,135 $1,332 $747
=========== ============ ============
Supplemental cash flow disclosures:
Income taxes paid $ 50,790 $ 53,569 $ 52,967
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
MBIA Insurance Corporation ("MBIA Corp."), formerly known as Municipal Bond
Investors Assurance Corporation, is a wholly owned subsidiary of MBIA Inc. MBIA
Inc. was incorporated in Connecticut on November 12, 1986 as a licensed insurer
and, through the following series of transactions during December 1986, became
the successor to the business of the Municipal Bond Insurance Association (the
"Association"), a voluntary unincorporated association of insurers writing
municipal bond and note insurance as agent for the member insurance companies:
o MBIA Inc. acquired for $17 million all of the outstanding common stock of
New York domiciled insurance company and changed the name of the insurance
company to Municipal Bond Investors Assurance Corporation. In April 1995, the
name was again changed to MBIA Insurance Corp. Prior to the acquisition, all of
the obligations of this company were reinsured and/or indemnified by the former
owner.
o Four of the five member companies of the Association, together with their
affiliates, purchased all of the outstanding common stock of MBIA Inc. and
entered into reinsurance agreements whereby they ceded to MBIA Inc.
substantially all of the net unearned premiums on existing and future
Association business and the interest in, or obligation for, contingent
commissions resulting from their participation in the Association. MBIA Inc.'s
reinsurance obligations were then assumed by MBIA Corp. The participation of
these four members aggregated approximately 89% of the net insurance in force of
the Association. The net assets transferred from the predecessor included the
cash transferred in connection with the reinsurance agreements, the related
deferred acquisition costs and contingent commissions receivable, net of the
related unearned premiums and contingent commissions payable. The deferred
income taxes inherent in these assets and liabilities were recorded by MBIA
Corp. Contingent commissions receivable (payable) with respect to premiums
earned prior to the effective date of the reinsurance agreements by the
Association in accordance with statutory accounting practices, remained as
assets (liabilities) of the member companies.
Effective December 31, 1989, MBIA Inc. acquired for $288 million all of
the outstanding stock of Bond Investors Group, Inc. ("BIG"), the parent company
of Bond Investors Guaranty Insurance Company ("BIG Ins."), which was
subsequently renamed MBIA Insurance Corp. of Illinois ("MBIA Illinois").
-6-
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In January 1990, MBIA Illinois ceded its portfolio of net insured
obligations to MBIA Corp. in exchange for cash and investments equal to its
unearned premium reserve of $153 million. Subsequent to this cession, MBIA Inc.
contributed the common stock of BIG to MBIA Corp. resulting in additional
paid-in capital of $200 million. The insured portfolio acquired from BIG Ins.
consists of municipal obligations with risk characteristics similar to those
insured by MBIA Corp. On December 31, 1990, BIG was merged into MBIA Illinois.
Also in 1990, MBIA Inc. formed MBIA Assurance S.A. ("MBIA Assurance"),
a wholly owned French subsidiary, to write financial guarantee insurance in the
international community. MBIA Assurance provides insurance for public
infrastructure financings, structured finance transactions and certain
obligations of financial institutions. The stock of MBIA Assurance was
contributed to MBIA Corp. in 1991 resulting in additional paid-in capital of $6
million. Pursuant to a reinsurance agreement with MBIA Corp., a substantial
amount of the risks insured by MBIA Assurance is reinsured by MBIA Corp.
In 1993, MBIA Inc. formed a wholly owned subsidiary, MBIA Investment
Management Corp. ("IMC"). IMC, which commenced operations in August 1993,
principally provides guaranteed investment agreements to states, municipalities
and municipal authorities which are guaranteed as to principal and interest.
MBIA Corp. insures IMC's outstanding investment agreement liabilities.
In 1993, MBIA Corp. assumed the remaining business from the fifth member of
the Association.
In 1994, MBIA Inc. formed a wholly owned subsidiary, MBIA Securities
Corp. ("SECO"), to provide fixed-income investment management services for MBIA
Inc.'s municipal cash management service businesses. In 1995, portfolio
management for a portion of MBIA Corp.'s insurance related investment portfolio
was transferred to SECO; the management of the balance of this portfolio was
transferred in January 1996.
2. SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared on the basis of
generally accepted accounting principles ("GAAP"). The preparation of financial
statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
-7-
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Significant
accounting policies are as follows:
CONSOLIDATION
The consolidated financial statements include the accounts of MBIA Corp., MBIA
Illinois, MBIA Assurance and BIG Services, Inc. All significant intercompany
balances have been eliminated. Certain amounts have been reclassified in prior
years' financial statements to conform to the current presentation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and demand deposits with banks.
INVESTMENTS
Effective January 1, 1994, MBIA Corp. adopted Statement of Financial Accounting
Standards ("SFAS") 115 "Accounting for Certain Investments in Debt and Equity
Securities." In accordance with SFAS 115, MBIA Corp. reclassified its entire
investment portfolio ("Fixed-maturity securities") as "available-for-sale."
Pursuant to SFAS 115, securities classified as available-for-sale are required
to be reported in the financial statements at fair value, with unrealized gains
and losses reflected as a separate component of shareholder's equity. The
cumulative effect of MBIA Corp.'s adoption of SFAS 115 was a decrease in
shareholder's equity at December 31, 1994 of $46.8 million, net of taxes. The
adoption of SFAS 115 had no effect on MBIA Corp.'s earnings.
Bond discounts and premiums are amortized on the effective-yield method
over the remaining term of the securities. For pre-refunded bonds the remaining
term is determined based on the contractual refunding date. Short-term
investments are carried at amortized cost, which approximates fair value and
include all fixed-maturity securities with a remaining term to maturity of less
than one year. Investment income is recorded as earned. Realized gains or losses
on the sale of investments are determined by specific identification and are
included as a separate component of revenues.
Other investments consist of MBIA Corp.'s interest in limited
partnerships and a mutual fund which invests principally in marketable equity
securities. MBIA Corp. records dividends from its investment in marketable
equity securities and its share of limited partnerships and mutual funds as a
-8-
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
component of investment income. In addition, MBIA Corp. records its share of the
unrealized gains and losses on these investments, net of applicable deferred
income taxes, as a separate component of shareholder's equity.
PREMIUM REVENUE RECOGNITION
Premiums are earned pro rata over the period of risk. Premiums are allocated to
each bond maturity based on par amount and are earned on a straight-line basis
over the term of each maturity. When an insured issue is retired early, is
called by the issuer, or is in substance paid in advance through a refunding or
defeasance accomplished by placing U.S. Government securities in escrow, the
remaining deferred premium revenue, net of the portion which is credited to a
new policy in those cases where MBIA Corp. insures the refunding issue, is
earned at that time, since there is no longer risk to MBIA Corp. Accordingly,
deferred premium revenue represents the portion of premiums written that is
applicable to the unexpired risk of insured bonds and notes.
POLICY ACQUISITION COSTS
Policy acquisition costs include only those expenses that relate primarily to,
and vary with, premium production. For business produced directly by MBIA Corp.,
such costs include compensation of employees involved in marketing, underwriting
and policy issuance functions, certain rating agency fees, state premium taxes
and certain other underwriting expenses, reduced by ceding commission income on
premiums ceded to reinsurers. For business assumed from the Association, such
costs were comprised of management fees, certain rating agency fees and
marketing and legal costs, reduced by ceding commissions received by the
Association on premiums ceded to reinsurers. Policy acquisition costs are
deferred and amortized over the period in which the related premiums are earned.
LOSSES AND LOSS ADJUSTMENT EXPENSES
Reserves for losses and loss adjustment expenses ("LAE") are established in an
amount equal to MBIA Corp.'s estimate of the identified and unidentified losses,
including costs of settlement on the obligations it has insured.
To the extent that specific insured issues are identified as currently
or likely to be in default, the present value of expected payments, including
loss and LAE associated with these issues, net of expected recoveries, is
allocated within the total loss reserve as case basis reserves. Management of
MBIA Corp. periodically evaluates its estimates for losses and LAE and any
resulting adjustments are reflected in current earnings. Management believes
-9-
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
that the reserves are adequate to cover the ultimate net cost of claims, but the
reserves are necessarily based on estimates, and there can be no assurance that
the ultimate liability will not exceed such estimates.
CONTINGENT COMMISSIONS
Contingent commissions may be receivable from MBIA Corp.'s and the Association's
reinsurers under various reinsurance treaties and are accrued as the related
premiums are earned.
INCOME TAXES
MBIA Corp. is included in the consolidated tax return of MBIA
Inc. The tax provision for MBIA Corp. for financial reporting purposes is
determined on a stand alone basis. Any benefit derived by MBIA Corp. as a result
of the tax sharing agreement with MBIA Inc. and its subsidiaries is reflected
directly in shareholder's equity for financial reporting purposes.
Deferred income taxes are provided in respect of temporary differences
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse.
The Internal Revenue Code permits financial guarantee insurance
companies to deduct from taxable income additions to the statutory contingency
reserve, subject to certain limitations. The tax benefits obtained from such
deductions must be invested in non-interest bearing U. S. Government tax and
loss bonds. MBIA Corp. records purchases of tax and loss bonds as payments of
Federal income taxes. The amounts deducted must be restored to taxable income
when the contingency reserve is released, at which time MBIA Corp. may present
the tax and loss bonds for redemption to satisfy the additional tax liability.
PROPERTY AND EQUIPMENT
Property and equipment consists of MBIA Corp.'s headquarters and equipment and
MBIA Assurance's furniture, fixtures and equipment, which are recorded at cost
and, exclusive of land, are depreciated on the straight-line method over their
estimated service lives ranging from 4 to 31 years. Maintenance and repairs are
charged to expenses as incurred.
GOODWILL
Goodwill represents the excess of the cost of the acquired and contributed
subsidiaries over the tangible net assets at the time of acquisition or
contribution. Goodwill attributed to the acquisition of the licensed insurance
-10-
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
company includes recognition of the value of the state licenses held by that
company, and is amortized by the straight-line method over 25 years. Goodwill
related to the wholly owned subsidiary of MBIA Inc. contributed in 1988 is
amortized by the straight-line method over 25 years. Goodwill attributed to the
acquisition of MBIA Illinois is amortized according to the recognition of future
profits from its deferred premium revenue and installment premiums, except for a
minor portion attributed to state licenses, which is amortized by the
straight-line method over 25 years.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities denominated in foreign currencies are translated at
year-end exchange rates. Operating results are translated at average rates of
exchange prevailing during the year. Unrealized gains or losses resulting from
translation are included as a separate component of shareholder's equity.
3. STATUTORY ACCOUNTING PRACTICES
The financial statements have been prepared on the basis of GAAP, which differs
in certain respects from the statutory accounting practices prescribed or
permitted by the insurance regulatory authorities. Statutory accounting
practices differ from GAAP in the following respects:
o premiums are earned only when the related risk has expired
rather than over the period of the risk;
o acquisition costs are charged to operations as incurred rather
than as the related premiums are earned;
o a contingency reserve is computed on the basis of statutory requirements and
reserves for losses and LAE are established, at present value, for specific
insured issues which are identified as currently or likely to be in default.
Under GAAP reserves are established based on MBIA Corp.'s reasonable estimate
of the identified and unidentified losses and LAE on the insured obligations
it has written;
o Federal income taxes are only provided on taxable income for which income
taxes are currently payable, while under GAAP, deferred income taxes are
provided with respect to temporary differences;
o fixed-maturity securities are reported at amortized cost rather than fair
value;
-11-
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
o tax and loss bonds purchased are reflected as admitted assets as well as
payments of income taxes; and
o certain assets designated as "non-admitted assets" are charged directly
against surplus but are reflected as assets under GAAP.
The following is a reconciliation of consolidated shareholder's equity
presented on a GAAP basis to statutory capital and surplus for MBIA Corp. and
its subsidiaries, MBIA Illinois and MBIA Assurance:
As of December 31
-----------------
(In thousands) 1995 1994 1993
-------------- ---- ---- ----
GAAP shareholder's equity ... $ 2,525,872 $ 2,055,503 $ 1,857,743
Premium revenue recognition . (328,450) (296,524) (242,577)
Deferral of acquisition costs (140,348) (133,048) (120,484)
Unrealized (gains) losses ... (223,635) 71,932 --
Contingent commissions ...... (1,645) (1,706) (1,880)
Contingency reserve ......... (743,510) (620,988) (539,103)
Loss and loss adjustment
expense reserves ........... 28,024 18,181 26,262
Deferred income taxes ....... 205,425 90,328 99,186
Tax and loss bonds .......... 70,771 50,471 25,771
Goodwill .................... (105,614) (110,543 (115,503)
Other ....................... (12,752) (13,568 (11,679)
------------ ----------- -----------
Statutory capital
and surplus ......... $ 1,274,138 1,110,038 $ 977,736
=========== ========= ===========
Consolidated net income of MBIA Corp. determined in accordance with
statutory accounting practices for the years ended December 31, 1995, 1994 and
1993 was $278.3 million, $224.9 million and $258.4 million, respectively.
4. PREMIUMS EARNED FROM REFUNDED AND CALLED BONDS
Premiums earned include $34.0 million, $53.0 million and $85.6 million for 1995,
1994 and 1993, respectively, related to refunded and called bonds.
5. INVESTMENTS
MBIA Corp.'s investment objective is to optimize long-term, after-tax returns
while emphasizing the preservation of capital and claims-paying capability
through maintenance of high-quality investments with adequate liquidity. MBIA
Corp.'s investment policies limit the amount of credit exposure to any one
-12-
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
issuer. The fixed-maturity portfolio is comprised of high-quality (average
rating Double-A) taxable and tax-exempt investments of diversified maturities.
The following tables set forth the amortized cost and fair value of the
fixed-maturities and short-term investments included in the consolidated
investment portfolio of MBIA Corp. as of December 31, 1995 and 1994.
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
---- ----- ------ ----------
(In thousands
December 31, 1995
Taxable bonds
United States Treasury
and Government Agency .. $ 6,742 $ 354 -- $ 7,096
Corporate and other
obligations ............ 592,604 30,536 (212) 622,928
Mortgage-backed .......... 389,943 21,403 (932) 410,414
Tax-exempt bonds municipal
Obligations .............. 2,637,732 175,081 (2,595) 2,810,218
--------- ------- ------ ---------
Total fixed-
maturities $3,627,021 $ 227,374 (3,739) $3,850,656
========== ========== ====== ==========
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
---- ----- ------ ----------
(In thousands)
Taxable bonds
United States Treasury
and Government Agency $ 15,133 -- (149) $ 14,984
Corporate and other ...
obligations ......... 461,601 2,353 (23,385) 440,569
Mortgage-backed ......... 317,560 3,046 (12,430) 308,176
Tax-exempt bonds
State and municipal
obligations ........... 2,450,928 36,631 (77,998) 2,409,561
--------- ------ ------- ---------
Total fixed-
maturities ......... $3,245,222 $ 42,030 $ (113,962) $3,173,290
========== ========== ========== ==========
Fixed-maturity investments carried at fair value of $8.1 million and
$7.4 million as of December 31, 1995 and 1994, respectively, were on deposit
with various regulatory authorities to comply with insurance laws.
-13-
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The table below sets forth the distribution by expected maturity of the
fixed-maturities and short-term investments at amortized cost and fair value at
December 31, 1995. Expected maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations.
Amortized Fair
(In thosands Cost Value
Maturity
Within 1 year ....................... $ 178,328 $ 178,256
Beyond 1 year but within 5 years .... 448,817 477,039
Beyond 5 years but within 10 years .. 1,133,527 1,211,645
Beyond 10 years but within 15 years . 742,790 804,421
Beyond 15 years but within 20 years . 686,871 730,030
Beyond 20 years ..................... 46.745 38,851
-------- --------
3,237,078 3,440,242
Mortgage-backed ..................... 389,943 410,414
------- -------
Total fixed-maturities and short-term
investments ....................... $3,627,021 $3,850,656
========== ==========
6. Investment Income and Gains and Losses
Investment income consists of:
Years ended December 31
-----------------------
(In thousands) ................ 1995 1994 1993
- ------------------------------- ---- ---- ----
Fixed-maturities .............. $ 216,653 $ 193,729 $ 173,070
Short-term investments ...... 6,008 3,003 2,844
Other investments ............. 17 12 2,078
-- -- -----
Gross investment income ..... 222,678 196,744 177,992
Investment expenses ........... 2,844 2,778 2,663
----- ----- -----
Net investment income ....... 219,834 193,966 175,329
Net realized gains (losses):
Fixed-maturities:
Gains..................... 9,941 9,635 9,070
Losses................ .. (2,537) (8,851) (744)
------ ------ ----
Net..................... 7,404 784 8,326
Other investments:
Gains................... 382 9,551 615
Losses................... (9) -- --
---- ------ ----
Net....................... 373 9,551 615
--- ----- ---
Net realized gains .......... 7,777 10,335 8,941
----- ------ -----
Total investment income ....... $ 227,611 $ 204,301 $ 184,270
=========== =========== ===========
-14-
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unrealized gains (losses) consist of:
As of December 31
-----------------
(In thousands) .................. 1995 1994
- --------------------------------- ---- ----
Fixed-maturities:
Gains ......................... $ 227,374 $ 42,030
Losses ........................ (3,739) (113,962)
Net .......................... 223,635 (71,932)
Other investments:
Gains ......................... 287 --
Losses ........................ (821) (1,042)
------- ------
Net ........................... (534) (1,042)
------ ------
Total ........................... 223,101 (72,974)
Deferred income tax (benefit) ... 78,372 (25,334)
------ -------
Unrealized gains (losses) - net $ 144,729 $ (47,640)
========= =========
The deferred taxes in 1995 and 1994 relate primarily to unrealized
gains and losses on MBIA Corp.'s fixed-maturity investments, which are reflected
in shareholders' equity in 1995 and 1994 in accordance with MBIA Corp.'s
adoption of SFAS 115.
The change in net unrealized gains (losses) consists of:
Years ended December 31
-----------------------
In thousands 1995 1994 1993
- ------------ ---- ---- ----
Fixed-maturities ............... $ 295,567 $(289,327) $ 101,418
Other investments .............. 508 (8,488) 3,842
--- ------ -----
Total ........................ 296,075 (297,815) 105,260
Deferred income taxes (benefit) 103,706 (27,940) 1,381
------- ------- -----
Unrealized gains (losses), net $ 192,369 $(269,875) $ 103,879
========= ========= =========
7. INCOME TAXES
Effective January 1, 1993, MBIA Corp. changed its method of accounting for
income taxes from the income statement-based deferred method to the balance
sheet-based liability method required by SFAS 109 "Accounting for Income Taxes."
MBIA Corp. adopted the new pronouncement on the cumulative catch-up basis and
recorded a cumulative adjustment, which increased net income and reduced the
deferred tax liability by $13.0 million. The cumulative effect represents the
impact of adjusting the deferred tax liability to reflect the January 1, 1993
tax rate of 34% as opposed to the higher tax rates in effect when certain of the
deferred taxes originated.
-15-
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SFAS 109 requires recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred tax
liabilities and assets are determined based on the difference between the
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
The effect on tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date.
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities at December 31, 1995 and 1994 are as presented below:
(In thousands) ................................ 1995 1994
- ----------------------------------------------- ---- ----
Deferred tax assets
Tax and loss bonds .......................... $ 71,183 $ 50,332
Unrealized losses ........................... -- 25,334
Alternative minimum tax credit carry forwards 39,072 22,391
Loss and loss adjustment expense reserves ... 9,809 6,363
Other ....................................... 954 3,981
--- -----
Total gross deferred tax assets ............. 121,018 108,401
======= =======
Deferred tax liabilities
Contingency reserve ......................... 131,174 91,439
Deferred premium revenue .................... 64,709 54,523
Deferred acquisition costs .................. 49,122 48,900
Unrealized gains ............................ 78,372 --
Contingent commissions ...................... 7,158 4,746
Other ....................................... 3,408 6,621
----- -----
Total gross deferred tax liabilities ........ 333,943 206,229
------- -------
Net deferred tax liability .................. $212,925 $ 97,828
======== ========
Under SFAS 109, a change in the Federal tax rate requires a restatement
of deferred tax assets and liabilities. Accordingly, the restatement for the
change in the 1993 Federal tax rate resulted in a $5.4 million increase in the
tax provision, of which $3.2 million resulted from the recalculation of deferred
taxes at the new Federal rate.
The provision for income taxes is composed of:
Years ended December 31
-----------------------
(In thousands) .................. 1995 1994 1993
- --------------------------------- ---- ---- ----
Current ......................... $70,357 $58,043 $66,086
Deferred ........................ 11,391 19,082 20,598
------ ------ ------
Total ......................... $81,748 $77,125 $86,684
======= ======= =======
-16-
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The provision for income taxes gives effect to permanent differences
between financial and taxable income. Accordingly, MBIA Corp.'s effective income
tax rate differs from the statutory rate on ordinary income. The reasons for
MBIA Corp.'s lower effective tax rates are as follows:
Years ended December 31
-----------------------
1995 1994 1993
---- ---- ----
Income taxes computed on pre-tax
financial income at statutory rates .......... 35.0% 35.0% 35.0%
Increase (reduction) in taxes resulting from:
Tax-exempt interest ........................ (12.5) (12.0) (10.6)
Amortization of goodwill ................... 0.5 0.5 0.5
Other ...................................... (1.1) (1.7) --
---- ---- ----
Provision for income taxes ......... 21.9% 21.8% 24.9%
==== ==== ====
8. DIVIDENDS AND CAPITAL REQUIREMENTS
Under New York state insurance law, MBIA Corp. may pay a dividend only from
earned surplus subject to the maintenance of a minimum capital requirement. The
dividends in any 12-month period may not exceed the lesser of 10% of its
policyholders' surplus as shown on its last filed statutory-basis financial
statements, or of adjusted net investment income, as defined, for such 12-month
period, without prior approval of the superintendent of the New York State
Insurance Department.
In accordance with such restrictions on the amount of dividends which
can be paid in any 12-month period, MBIA Corp. had approximately $44 million
available for the payment of dividends as of December 31, 1995. In 1995, 1994
and 1993, MBIA Corp. declared and paid dividends of $83 million, $38 million and
$50 million, respectively, to MBIA Inc.
Under Illinois Insurance Law, MBIA Illinois may pay a dividend from
unassigned surplus, and the dividends in any 12-month period may not exceed the
greater of 10% of policyholders' surplus (total capital and surplus) at the end
of the preceding calendar year, or the net income of the preceding calendar year
without prior approval of the Illinois State Insurance Department.
In accordance with such restrictions on the amount of dividends which
can be paid in any 12-month period, MBIA Illinois may pay a dividend only with
prior approval as of December 31, 1995.
-17-
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The insurance departments of New York state and certain other statutory
insurance regulatory authorities and the agencies which rate the bonds insured
by MBIA Corp. have various requirements relating to the maintenance of certain
minimum ratios of statutory capital and reserves to net insurance in force. MBIA
Corp. and MBIA Assurance were in compliance with these requirements as of
December 31, 1995.
9. LINES OF CREDIT
MBIA Corp. has a standby line of credit commitment in the amount of $650 million
with a group of major banks to provide loans to MBIA Corp. after it has incurred
cumulative losses (net of any recoveries) from September 30, 1995 in excess of
the greater of $500 million and 6.25% of average annual debt service. The
obligation to repay loans made under this agreement is a limited recourse
obligation payable solely from, and collateralized by, a pledge of recoveries
realized on defaulted insured obligations including certain installment premiums
and other collateral. This commitment has a seven-year term and expires on
September 30, 2002 and contains an annual renewal provision subject to the
approval by the bank group.
MBIA Corp. and MBIA Inc. maintain bank liquidity facilities aggregating
$275 million. At December 31, 1995, MBIA Inc. had $18 million outstanding under
these facilities.
10. NET INSURANCE IN FORCE
MBIA Corp. guarantees the timely payment of principal and interest on municipal,
asset-/mortgage-backed and other non-municipal securities. MBIA Corp.'s ultimate
exposure to credit loss in the event of nonperformance by the insured is
represented by the insurance in force as set forth below.
The insurance policies issued by MBIA Corp. are unconditional
commitments to guarantee timely payment on the bonds and notes to bondholders.
The creditworthiness of each insured issue is evaluated prior to the issuance of
insurance and each insured issue must comply with MBIA Corp.'s underwriting
guidelines. Further, the payments to be made by the issuer on the bonds or notes
may be backed by a pledge of revenues, reserve funds, letters of credit,
investment contracts or collateral in the form of mortgages or other assets. The
right to such money or collateral would typically become MBIA Corp.'s upon the
payment of a claim by MBIA Corp.
-18-
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31, 1995, insurance in force, net of cessions to reinsurers,
has a range of maturity of 1-43 years. The distribution of net insurance in
force by geographic location and type of bond, including $2.7 billion and $1.5
billion relating to IMC's municipal investment agreements guaranteed by MBIA
Corp. in 1995 and 1994, respectively, is set forth in the following tables:
<TABLE>
<CAPTION>
As of December 31
-----------------
($ in billions) 1995 1994
- --------------- ---- ----
Net Number % of Net Net Number % of Net
Georgraphic Insurance of Issues Insurance Insurance of Issues Insurance
Location In Force Outstanding In Force In Force Outstanding In Force
- -------- -------- ----------- -------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
California .. $ 51.2 3,122 14.8 $ 43.9 2,832 14.3%
New York .... 30.1 4,846 8.7 25.0 4,447 8.2
Florida ..... 26.9 1,684 7.7 25.4 1,805 8.3
Texas ....... 20.4 2,031 5.9 18.6 2,102 6.1
Pennsylvania 19.7 2,143 5.7 19.5 2,108 6.4
New Jersey .. 16.4 1,730 4.7 15.0 1,590 4.9
Illinois .... 15.0 1,090 4.3 14.7 1,139 4.8
Massachusetts 9.3 1,070 2.7 8.6 1,064 2.8
Ohio ........ 9.1 1,017 2.6 8.3 996 2.7
Michigan .... 7.9 1,012 2.3 5.7 972 1.9
--- ----- --- --- --- ---
Subtotal .... 206.0 19,745 59.4 184.7 19,055 60.4
Other ....... 135.6 11,147 39.1 118.8 10,711 38.8
----- ------ ---- ----- ------ ----
Total U.S. 341.6 30,892 98.5 303.5 29,766 99.2
International 5.1 53 1.5 2.5 18 0.8
--- -- --- --- -- ---
$ 346.7 30,945 100.0% $ 306.0 29,784 100.0%
======== ====== ===== ======== ====== =====
</TABLE>
-19-
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
As of December 31
-----------------
1995 1994
---- ----
($ in billions) Net Number % of Net Net Number % of Net
Insurance of Issues nsurance Insurance of Issues Insurance
Type of Bond In Force Outstanding In Force In Force Outstanding In Force
- ------------ -------- ----------- -------- -------- ----------- --------
MUNICIPAL
<S> <C> <C> <C> <C> <C> <C>
General Obligation $ 91.6 11,445 26.4% $ 84.2 11,029 27.5%
Utilities ........ 60.3 4,931 17.4 56.0 5,087 18.3
Health Care ...... 51.9 2,458 15.0 50.6 2,670 16.5
Transportation ... 25.5 1,562 7.4 21.3 1,486 7.0
Special Revenue .. 24.4 1,445 7.0 22.7 1,291 7.4
Industrial
development and
pollution control
revenue 17.2 924 5.0 15.1 1,016 4.9
Housing .......... 15.8 2,671 4.5 13.6 2,663 4.5
Higher education . 15.2 1,261 4.4 14.0 1,208 4.6
======= ======= ====== ======= ======= =====
Other ............ 7.3 134 2.1 3.8 124 1.2
309.2 26,831 89.2 281.3 26,574 91.9
======= ======= ======= ======= ======= =====
Non-municipal
Asset/mortgage-
backed 20.2 256 5.8 12.8 151 4.2
Investor-owned
utilities 6.4 3,559 1.8 5.7 2,918 1.9
International .... 5.1 53 1.5 2.5 18 0.8
Other ............ 5.8 246 1.7 3.7 123 1.2
--- --- --- --- --- ---
37.5 4,114 10.8 24.7 3,210 8.1
---- ----- ---- ---- ----- ---
$346.7 30,945 100.0% $306.0 29,784 100.0%
======= ======= ======= ====== ======= =====
</TABLE>
11. REINSURANCE
MBIA Corp. reinsures portions of its risks with other insurance companies
through various quota and surplus share reinsurance treaties and facultative
agreements. In the event that any or all of the reinsurers were unable to meet
their obligations, MBIA Corp. would be liable for such defaulted amounts.
Amounts deducted from gross insurance in force for reinsurance ceded by
MBIA Corp., MBIA Assurance and MBIA Illinois were $50.1 billion and $42.6
-20-
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
billion, at December 31, 1995 and 1994, respectively. The distribution of ceded
insurance in force by geographic location and type of bond is set forth in the
tables below:
As of December 31
-----------------
(In billions) 1995 1994
- ------------- ---- ----
% of % of
Ceded Ceded Ceded Ceded
Insurance Insurance Insurance Insurance
Geographic Location In Force In Force In Force In Force
- ------------------- -------- -------- -------- --------
California ......... $ 8.8 17.5% $ 7.5 17.6%
New York ........... 5.7 11.4 4.9 11.5
New Jersey ......... 3.1 6.1 2.0 4.7
Texas .............. 2.8 5.6 2.5 5.9
Pennsylvania ....... 2.7 5.4 2.6 6.1
Florida ............ 2.3 4.6 2.1 4.9
Illinois ........... 2.2 4.5 2.3 5.4
District of Columbia 1.5 3.0 1.6 3.8
Washington ......... 1.4 2.7 1.2 2.8
Puerto Rico ........ 1.3 2.6 1.1 2.6
Massachusetts ...... 1.1 2.1 0.9 2.1
Ohio ............... 1.0 2.1 0.9 2.1
--- --- --- ---
Subtotal ........... 33.9 67.6 29.6 69.5
Other .............. 14.4 28.8 12.3 28.9
---- ---- ---- ----
Total U. S ..... 48.3 96.4 41.9 98.4
International ...... 1.8 3.6 0.7 1.6
--- --- --- ---
$ 50.1 100.0% $42.6 100.0%
======= ===== ===== =====
-21-
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31
-----------------
(In billions) 1995 1994
- ------------- ---- ----
% of % of
Ceded Ceded Ceded Ceded
Insurance Insurance Insurance Insurance
Type of Bond In Force In Force In Force In Force
- ------------ -------- -------- -------- --------
Municipal
General obligation ... $ 11.7 23.3% $ 9.7 22.8%
Utilities ............ 9.0 18.0 8.5 20.0
Health care .......... 6.6 13.1 6.5 15.3
Transportation ....... 5.5 11.0 4.5 10.6
Special revenue ...... 3.2 6.4 2.7 6.3
Industrial development
and pollution
control revenue 3.0 6.0 2.9 6.8
Housing .............. 1.4 2.8 1.0 2.3
Higher education ..... 1.2 2.4 1.2 2.8
Other ................ 2.4 4.8 1.5 3.5
--- --- --- ---
44.0 87.8 38.5 90.4
==== ==== ==== ====
Non-municipal
Asset-/mortgage-backed 3.6 7.2 2.7 6.3
International ........ 1.8 3.6 0.7 1.6
Other ................ 0.7 1.4 0.7 1.7
--- --- --- ---
6.1 12.2 4.1 9.6
--- ---- --- ---
$ 50.1 100.0% $ 42.6 100.0%
======== ===== ======== =====
Included in gross premiums written are assumed premiums from other
insurance companies of $11.7 million, $6.3 million and $20.4 million for the
years ended December 31, 1995, 1994 and 1993, respectively. The percentages of
the amounts assumed to net premiums written were 3.8%, 2.0% and 4.7% in 1995,
1994 and 1993, respectively.
Gross premiums written include $0.2 million in 1994 and $5.4 million in
1993 related to the reassumption by MBIA Corp. of reinsurance previously ceded
by the Association. Also included in gross premiums in 1993 is $10.8 million of
premiums assumed from a member of the Association. Ceded premiums written are
net of $0.2 million in 1995, $1.6 million in 1994 and $2.5 million in 1993
related to the reassumption of reinsurance previously ceded by MBIA Corp. or
MBIA Illinois.
-22-
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. EMPLOYEE BENEFITS
MBIA Corp. participates in MBIA Inc.'s pension plan covering all eligible
employees. The pension plan is a defined contribution plan and MBIA Corp.
contributes 10% of each eligible employee's annual total compensation. Pension
expense for the years ended December 31, 1995, 1994 and 1993 was $3.2 million,
$3.0 million and $3.1 million, respectively. MBIA Corp. also has a profit
sharing/401(k) plan which allows eligible employees to contribute up to 10% of
eligible compensation. MBIA Corp. matches employee contributions up to the first
5% of total compensation. MBIA Corp. contributions to the profit sharing plan
aggregated $1.4 million, $1.4 million and $1.3 million for the years ended
December 31, 1995, 1994 and 1993, respectively. The 401(k) plan amounts are
invested in common stock of MBIA Inc. Amounts relating to the above plans that
exceed limitations established by Federal regulations are contributed to a
non-qualified deferred compensation plan. Of the above amounts for the pension
and profit sharing plans, $2.7 million, $2.6 million and $2.6 million for the
years ended December 31, 1995, 1994 and 1993, respectively, are included in
policy acquisition costs.
MBIA Corp. also participates in MBIA Inc.'s common stock incentive plan
which enables employees of MBIA Corp. to acquire shares of MBIA Inc. or to
benefit from appreciation in the price of the common stock of MBIA Inc.
MBIA Corp. also participates in MBIA Inc.'s restricted stock program,
adopted in December 1995, whereby key executive officers of MBIA Corp. are
granted restricted shares of MBIA Inc. common stock.
Effective January 1, 1993, MBIA Corp. adopted SFAS 106 "Employers'
Accounting for Postretirement Benefits Other than Pensions." Under SFAS 106,
companies are required to accrue the cost of employee post-retirement benefits
other than pensions during the years that employees render service. Prior to
January 1, 1993, MBIA Corp. had accounted for these post-retirement benefits on
a cash basis. In 1993, MBIA Corp. adopted the new pronouncement on the
cumulative catch-up basis and recorded a cumulative effect adjustment which
decreased net income and increased other liabilities by $0.1 million. As of
January 1, 1994, MBIA Corp. eliminated these post-retirement benefits.
-23-
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. RELATED PARTY TRANSACTIONS
The business assumed from the Association, relating to insurance on unit
investment trusts sponsored by two members of the Association, includes deferred
premium revenue of $1.6 million and $1.9 million at December 31, 1995 and 1994,
respectively.
In 1993, MBIA Corp. assumed the balance of $10.8 million of deferred
premium revenue from a member of the Association which had not previously ceded
its insurance portfolio to MBIA Corp. Also in 1993, MBIA Corp. assumed $0.4
million of deferred premium revenue relating to one of the trusts which was
previously ceded to an affiliate of an Association member.
Since 1989, MBIA Corp. has executed five surety bonds to guarantee the
payment obligations of the members of the Association, one of which is a
principal shareholder of MBIA Inc., which had their Standard & Poor's
claims-paying rating downgraded from Triple-A on their previously issued
Association policies. In the event that they do not meet their Association
policy payment obligations, MBIA Corp. will pay the required amounts directly to
the paying agent instead of to the former Association member as was previously
required. The aggregate amount payable by MBIA Corp. on these surety bonds is
limited to $340 million. These surety bonds remain outstanding as of December
31, 1995.
MBIA Corp. has investment management and advisory agreements with an
affiliate of a principal shareholder of MBIA Inc., which provides for payment of
fees on assets under management. Total related expenses for the years ended
December 31, 1995, 1994 and 1993 amounted to $2.5 million, $2.6 million and $2.4
million, respectively. These agreements were terminated on January 1, 1996 at
which time SECO commenced management of MBIA Corp.'s consolidated investment
portfolios. In addition, investment management expenses of $0.1 million were
paid to SECO for the portion of the investment portfolio transferred in 1995.
MBIA Corp. has various insurance coverages provided by a principal
shareholder of MBIA Inc., the cost of which was $1.9 million, $1.9 million and
$2.0 million for the years ended December 31, 1995, 1994 and 1993, respectively.
-24-
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Included in other assets at December 31, 1995 and 1994 is $1.1 million
and $14.5 million of net receivables from MBIA Inc. and other subsidiaries.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value amounts of financial instruments shown in the following
table have been determined by MBIA Corp. using available market information and
appropriate valuation methodologies. However, in certain cases considerable
judgment is necessarily required to interpret market data to develop estimates
of fair value. Accordingly, the estimates presented herein are not necessarily
indicative of the amount MBIA Corp. could realize in a current market exchange.
The use of different market assumptions and/or estimation methodologies may have
a material effect on the estimated fair value amounts.
FIXED-MATURITY SECURITIES - The fair value of fixed-maturity securities equals
quoted market price, if available. If a quoted market price is not available,
fair value is estimated using quoted market prices for similar securities.
SHORT-TERM INVESTMENTS - Short-term investments are carried at amortized cost
which, because of their short duration, is a reasonable estimate of fair value.
OTHER INVESTMENTS - Other investments consist of MBIA Corp.'s interest in
limited partnerships and a mutual fund which invests principally in marketable
equity securities. The fair value of other investments is based on quoted market
prices.
CASH AND CASH EQUIVALENTS, RECEIVABLE FOR INVESTMENTS SOLD AND PAYABLE FOR
INVESTMENTS PURCHASED - The carrying amounts of these items are a reasonable
estimate of their fair value.
PREPAID REINSURANCE PREMIUMS - The fair value of MBIA Corp.'s prepaid
reinsurance premiums is based on the estimated cost of entering into an
assumption of the entire portfolio with third party reinsurers under current
market conditions.
DEFERRED PREMIUM REVENUE - The fair value of MBIA Corp.'s deferred premium
revenue is based on the estimated cost of entering into a cession of the entire
portfolio with third party reinsurers under current market conditions.
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES - The carrying amount is composed of
the present value of the expected cash flows for specifically identified claims
combined with an estimate for unidentified claims. Therefore, the carrying
amount is a reasonable estimate of the fair value of the reserve.
INSTALLMENT PREMIUMS - The fair value is derived by calculating the present
value of the estimated future cash flow stream at 9% and 13.25% at December 31,
1995 and December 31, 1994, respectively.
As of December 31,
------------------
1995 1994
---- ----
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
ASSETS:
Fixed-maturity securuities $3,652,621 $3,652,621 $3,051,906 $3,051,906
Short-term investments.. 198,035 198,035 121,384 121,384
Other investments ...... 14,064 14,064 11,970 11,970
Cash and cash equivalents 23,258 23,258 1,332 1,332
Prepaid reinsurance
premiums .............. 200,887 174,444 186,492 159,736
Receivable for
investments sold ...... 5,729 5,729 945 945
LIABILITIES:
Deferred premium
revenue ............. 1,616,315 1,395,159 1,512,211 1,295,305
Loss and loss adjustment
expense reserves ..... 42,505 42,505 40,148 40,148
Payable for investments
purchased ........... 10,695 10,695 6,552 6,552
OFF-BALANCE-SHEET
INSTRUMENTS:
Installment premiums ---- 235,371 --- 176,944
