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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, 1997.
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 exchanqe on which reqistered
- ------------------- -----------------------------------------
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 20, 1998 was $ 7,541,534,910.00
As of March 20, 1998, 97,704,096 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, 1997 are incorporated by
reference into Parts I and II. Portions of the Definitive Proxy Statement of the
Registrant, dated March 30, 1998 are incorporated by reference into Parts I and
III.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (SS 229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
PART I
Item 1. Business
MBIA Inc. (the "Company") is engaged primarily in providing financial
guarantees for municipal bonds, asset-backed and mortgage-backed securities,
selected corporate debt, including investor-owned utility bonds, and debt of
high-quality financial institutions. The Company provides these services both in
the new issue and secondary markets and both domestically and internationally.
These financial guarantees are provided through the Company's wholly-owned
subsidiary, MBIA Insurance Corporation ("MBIA Corp."). MBIA Corp. is the
successor to the business of the Municipal Bond Insurance Association (the
"Association") which began writing financial guarantees for municipal bonds in
1974.
Effective as of December 31, 1989, the Company purchased Bond Investors
Guaranty Insurance Company ("BIG Ins."), another municipal bond insurance
company. Subsequently, MBIA Corp. reinsured the net exposure on the municipal
bond insurance policies previously issued by BIG Ins. (See
"Business--Reinsurance" below) and changed the name of BIG Ins. to MBIA
Insurance Corp. of Illinois ("MBIA Illinois").
In 1990, the Company formed a French company, MBIA Assurance S.A. ("MBIA
Assurance"), to write financial guarantee insurance in the countries of the
international community. MBIA Assurance, which is a wholly-owned subsidiary of
MBIA Corp., writes policies insuring sovereign risk, public infrastructure
financings, asset-backed transactions and certain obligations of corporations
and financial institutions. In September 1995, MBIA Corp. entered into a joint
venture agreement with Ambac Assurance Corporation for the purpose of jointly
marketing financial guarantee insurance outside the United States. Generally,
throughout the text references to MBIA Corp. include the activities of its
subsidiaries, MBIA Illinois and MBIA Assurance.
Financial guarantee insurance provides an unconditional and irrevocable
guarantee of the payment of the principal of and interest on insured obligations
when due. MBIA Corp.'s primary business is insuring obligations issued by
states, municipalities and other governmental authorities, instrumentalities and
agencies. Such obligations are secured by the issuer's taxing power in the case
of general obligation or special tax supported bonds, or by the issuer's ability
to impose and collect fees and charges for public services or specific projects
in the case of most revenue bonds. MBIA Corp. also provides financial guarantees
for structured finance transactions (principally mortgage-backed and
asset-backed securities), investor-owned utility debt and obligations of
high-quality financial institutions. 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 principal economic value of financial guarantee insurance to the
entity offering the obligations is the savings 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.
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. In addition, in 1995 MBIA Corp. received a Triple-A claims-paying
rating from Fitch IBCA, Inc. ("Fitch").
1
The Company also provides investment management products and consulting
services to the public sector through a group of subsidiary companies. These
services include cash management, municipal investment agreements, discretionary
asset management, purchase and administrative services, tax discovery and
compliance, tax audit, analysis and information services and bond administration
services. MBIA Municipal Investors Service Corporation ("MBIA-MISC") provides
cash management services and investment placement services to local governments
and school districts, and provides those clients with fund administration
services. In 1996, MBIA-MISC acquired American Money Management Associates, Inc.
("AMMA") which offers investment and treasury management consulting services to
municipal and quasi-municipal clients. Both MBIA-MISC and AMMA are registered
investment advisors. MBIA Investment Management Corp. ("IMC") offers guaranteed
investment agreements primarily for bond proceeds to states and municipalities.
MBIA Capital Management Corp. ("CMC") performs investment management services
for the Company, MBIA-MISC, IMC and selected external clients. MBIA MuniServices
Company ("MuniServices") was formed in 1996 to provide bond administration,
revenue enhancement and other services to state and local governments. In 1996,
MuniServices acquired an equity interest in Capital Asset Holdings, which
purchases and services delinquent taxes for municipalities. In 1997,
MuniServices acquired (i) the Municipal Tax Bureau entities ("MTB"), which
provide tax revenue compliance and collection services to the public sector and
(ii) MBIA MuniFinancial to provide debt administration services to
municipalities. Early in 1998, MuniServices acquired Municipal Resource
Consultants which specializes in providing revenue enhancement and information
services to municipalities.
Additionally in 1997, the Company formed MBIA & Associates Consulting, Inc.
to provide strategic financial planning and management consulting to state and
local governments, colleges and universities, and international entities.
MBIA Corp. Insured Portfolio
At December 31, 1997, the net par amount outstanding on MBIA Corp.'s
insured obligations (including insured obligations of MBIA Illinois and MBIA
Assurance but excluding the guarantee of $3.2 billion of obligations of IMC (see
"Operations--Miscellaneous")) was $277.1 billion, comprised of $244.0 billion in
new issues and $33.1 billion in secondary market issues. Net insurance in force
was $482.7 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, 1997, MBIA Corp. had 32,568
policies outstanding. These policies are diversified among 8,220 "credits,"
which MBIA Corp. defines as any group of issues supported by the same revenue
source.
2
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, 1997:
MBIA Corp. Original Par Amount Per Issue
as of December 31, 1997
% 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 26,499 81.4% $ 41.1 14.8%
$10-25 million 2,834 8.7 35.4 12.8
$25-50 million 1,505 4.6 39.2 14.2
$50-100 million 966 3.0 48.3 17.4
Greater than $100 million 764 2.3 113.1 40.8
------ ------ ------- ------
Total 32,568 100.0% $ 277.1 100.0%
====== =======
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, 1997 was 11.5 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, 1997 was $28.9 billion.
3
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, 1997 (1)
Bond Type
Number Net Par % of Net
Of Issues Amount Par Amount
Outstanding Outstanding Outstanding
(In billions)
Domestic
Municipal
General obligation 12,016 $70.3 25.4%
Utilities 4,739 40.9 14.8
Health care 2,246 33.3 12.0
Transportation 1,487 20.4 7.4
Special revenue 1,641 18.3 6.6
Higher education 1,359 11.4 4.1
Housing 1,891 8.5 3.1
Industrial development &
pollution control revenue 943 7.7 2.8
Other 539 5.3 1.9
------- ------- ------
Total Municipal 26,861 216.1 78.1
------- ------- ------
Structured Finance* 510 45.3 16.3
Other 4,990 9.2 3.3
------- ------- ------
Total Domestic 32,361 270.6 97.7
------- ------- ------
International
Infrastructure 148 2.8 0.9
Structured Finance* 32 2.1 0.7
Other 27 1.6 0.7
------- ------- ------
Total International 207 6.5 2.3
------- ------- ------
Total 32,568 $277.1 100.0%
======= =======
* Asset/mortgage-backed
- ----------
(1) Excludes IMC's $3.2 billion relating to municipal investment agreements
guaranteed by MBIA Corp.
As illustrated by the table above, approximately 40% 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. MBIA Corp. engages primarily in
insuring municipal bonds. As of December 31, 1997, of the $277.1 billion
outstanding net par amount of obligations insured, $216.1 billion, or 78%,
consisted of municipal bonds, $54.5 billion, or
4
approximately 20%, consisted primarily of asset/mortgage-backed transactions and
investor-owned utility obligations and $6.5 billion or approximately 2%
consisted of transactions done in the international market.
The table below shows the diversification by type of insurance written by
MBIA Corp. in each of the last five years:
MBIA Corp. Net Par Amount by Bond Type (1)
Bond Type 1993 1994 1995 1996 1997
(In millions)
Domestic
Municipal
General obligation $11,952 $11,086 $10,127 $12,807 $13,722
Health care 6,342 3,655 2,913 4,147 7,414
Utilities 9,293 4,858 5,018 6,731 6,868
Transportation 3,419 1,747 2,624 3,146 6,009
Special revenue 3,246 1,888 1,935 3,761 3,100
Higher education 2,126 1,346 1,264 2,106 2,517
Housing 469 876 1,962 1,802 1,791
Industrial development &
pollution control revenue 1,533 1,486 1,155 693 781
Other -- 575 1,240 401 421
------- ------- ------- ------- -------
Total Municipal 38,380 27,517 28,238 35,594 42,623
------- ------- ------- ------- -------
Structured Finance* 3,581 4,832 7,766 18,765 26,596
Other 1,548 1,355 1,289 4,603 3,567
------- ------- ------- ------- -------
Total Domestic $43,509 $33,704 $37,293 $58,962 $72,786
------- ------- ------- ------- -------
International
Infrastructure 190 243 591 788 947
Structured Finance* -- 725 479 896 851
Other -- 980 444 765 385
------- ------- ------- ------- -------
Total International 190 1,948 1,514 2,449 2,183
------- ------- ------- ------- -------
Total $43,699 $35,652 $38,807 $61,411 $74,969
======= ======= ======= ======= =======
* Asset/mortgage-backed
(1) Par amount insured by year, net of reinsurance.
5
MBIA Corp. is licensed to write business in all 50 states, the District of
Columbia, Guam, the Northern Mariana Islands, the U.S. Virgin Islands, Puerto
Rico, the Kingdom of Spain and the Republic of France. MBIA Illinois is licensed
to write business in 48 states, the District of Columbia and Puerto Rico. MBIA
Assurance is licensed to write business in France. The following table sets
forth by geographic location in which MBIA Corp. has at least 2% of its total
net par amount outstanding:
MBIA Corp. Insured Portfolio By Geographic Location
as of December 31, 1997 (1)
Number of Net Par % of Net
Issues Amount Par Amount
Geographic Location Outstanding Outstanding Outstanding
(In billions)
California 3,441 $ 35.2 12.7%
New York 4,961 20.4 7.4
Florida 1,577 17.9 6.5
Texas 2,086 13.0 4.7
Pennsylvania 2,209 12.6 4.5
New Jersey 1,859 12.1 4.4
Illinois 1,191 10.9 3.9
Massachusetts 1,085 8.2 3.0
Ohio 1,005 7.1 2.6
Michigan 1,016 6.0 2.2
All other states 11,931 127.2 45.8
------ ------ -----
Total United States 32,361 270.6 97.7
International 207 6.5 2.3
------ ------ -----
Total 32,568 $277.1 100.0%
====== =====
- ----------
(1) Excludes IMC's $3.2 billion relating to municipal investment agreements
guaranteed by MBIA Corp.
MBIA Corp. has underwriting guidelines that limit the net insurance in
force for any one insured credit. MBIA Corp. has not exceeded any applicable
regulatory single-risk limit with respect to any bond issue insured by it. As of
December 31, 1997, MBIA Corp.'s net par amount outstanding for its ten largest
insured municipal credits totalled $12.1 billion, representing 4.4% of MBIA
Corp.'s total net par amount outstanding, and for its ten largest structured
finance credits, the net par outstanding was $10.1 billion, or 3.7% of the
total.
6
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.
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.
7
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, 1997
Net Par % Of Net
Amount Par Amount
Type of Program Outstanding Outstanding
(in billions)
New issue $244.0 88.0%
Secondary market issues
Unit investment trusts 4.9 1.8
Mutual funds 2.2 0.8
Other secondary market issues 26.0 9.4
------ ------
Total $277.1 100.0%
====== ======
Operations
The operations of MBIA Corp. are conducted through the Insurance Operations
Division. The Insurance Operations Division includes the Public Finance and the
Packaged Products Groups, the Structured Finance and the International
Departments, and the Underwriting Policy and Review Department ("UPR"). The
functions of each are more fully described below.
The Public Finance Group and the Packaged Products Group each have
underwriting authority with respect to certain categories of business and with
respect to credits up to a certain par amount per category. With respect to
larger, complex or unique credits, underwriting is performed by a committee
drawn from outside the business unit originating the transaction. For all
transactions done by the Structured Finance or International Departments, MBIA
Corp.'s review and approval procedure has two stages. The first stage consists
of transaction screening and in-depth credit review and structuring by the
appropriate department within the Insurance Operations Division. The second
stage, final review and approval of credit and structure, is performed by UPR.
Pricing, in all cases, is carried out by the Market Research Group in the
Insurance Operations Division, and the continuing review of insured issues is
administered by the Insured Portfolio Management Group within UPR.
Marketing and Credit Review:
MBIA Corp.'s marketing activities and initial credit review functions for
insured transactions are carried out primarily by various departments within the
Insurance Operations Division. They are also involved in structuring credits on
negotiated new issue business and in insuring secondary market issues. These
groups employ research analysts who have extensive experience in the industry
and who develop business within established credit analysis criteria. Market
intelligence and client contact related to identifying, screening and developing
candidates for insurance are also handled by the various departments within the
Insurance Operations Division. The primary factors in issue screening are credit
quality, legal security and transaction structure, as well as evaluation of the
potential for interest cost savings through the use of insurance.
Premium rates are determined by the Market Research Department, MBIA
Corp.'s pricing and syndicate unit, which focuses on the type of business and
credit strength of the bond issue, the maturity and structure of the issue, and
other credit and market factors. Premium rates are based upon established
premium ranges, which take into account capital charges, rating agency models
and degrees of perceived risk. The Market Research Group also conducts extensive
consultation with analysts on the issue and considers updated market
intelligence developed from daily contact with syndicate managers and traders to
help form the most accurate view of the value of MBIA Corp.'s guarantee on each
issue. Minimum pricing standards are established at levels that management
believes should generate an appropriate level of return on capital.
8
The Company recognizes that adherence to its pricing and quality standards
may result in the loss of business to other insurers offering insurance at rates
or on terms that the Company does not believe to be appropriate. The Company
gives primary emphasis to maintaining its pricing and quality standards and
secondary emphasis to market share.
Underwriting Review:
UPR, which consists of the Structured Finance Underwriting Department, the
International Underwriting Analysis Department, the Corporate Risk Department
and the Insured Portfolio Management Group, is responsible for adherence to MBIA
Corp.'s underwriting guidelines and procedures, which are designed to maintain
an insured portfolio with low risk characteristics and for monitoring the
insured portfolio. MBIA Corp. maintains underwriting guidelines based on those
aspects of credit quality that it deems important for each category of
obligation considered for insurance. These include economic and social trends,
debt management, financial management, adequacy of anticipated cash flow,
satisfactory legal structure and other security provisions, viable tax and
economic bases, adequacy of loss coverage and project feasibility, including a
satisfactory consulting engineer's report, if applicable. Such guidelines are
subject to periodic review. An inter-divisional committee, the Credit Policy
Committee, is responsible for establishing and maintaining underwriting
standards and criteria for all insurance products.
In order to ensure that the existing guidelines are followed, UPR monitors
and periodically reviews underwriting decisions made by the Insurance Operations
Division. The Corporate Risk Group underwrites and monitors MBIA Corp.'s direct
and indirect exposure to financial institutions and other corporate entities
with respect to investment contracts, letters of credit and liquidity facilities
supporting MBIA-insured issues, and recommends limits on such exposures. The
department provides in-depth financial analyses of financial institutions for
which there is existing or proposed exposure and gives advice on related
contract terms, transfers of these instruments to new institutions and renewal
dates and procedures.
Insured Portfolio Management:
The Insured Portfolio Management Group is responsible for monitoring
outstanding issues insured by MBIA Corp. This group's first function is to
detect any deterioration in credit quality or changes in the economic or
political environment which could interrupt the timely payment of debt service
on an insured issue. Once a problem is detected, the group then works with the
issuer, trustee, bond counsel, underwriters and other interested parties to deal
with the concern before it develops into a default.
Although MBIA Corp. has to date had only ten insured issues requiring claim
payments for which it has not been fully reimbursed, there are nine 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.
9
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.
Investment Management Services
Over the last seven years, the Company's investment management businesses
have expanded their services to the public sector and added new revenue sources.
MBIA-MISC provides cash management services and fixed-rate investment
placement services directly to local governments and school districts. In
addition, MBIA-MISC performs investment fund administration services for
clients, which provide an additional source of revenue. AMMA provides investment
and treasury management consulting services for municipal and quasi-public
sector clients. Both MBIA-MISC and AMMA are Securities and Exchange Commission
registered investment advisers. MBIA-MISC/AMMA operates in 20 states and the
Commonwealth of Puerto Rico.
IMC provides customized guaranteed investment agreements and flexible
repurchase agreements for bond proceeds and other public funds. At year-end
1997, principal and accrued interest outstanding on investment agreements was
$3.2 billion compared with 3.3 billion at year-end 1996.
CMC provides investment management services for IMC's investment
agreements, MBIA-MISC's municipal cash management programs and MBIA Corp.'s
insurance related fixed-income investment portfolios, as well as third-party
accounts. CMC assumed full management for MBIA Corp.'s insurance related
fixed-income investment portfolios in 1996, which was previously managed
externally. CMC is also a registered investment advisor.
10
Municipal Services
MuniServices provides various consulting and administrative services to
municipal clients through a network of subsidiaries.
MTB offers tax revenue enhancement, compliance and collection services to
public clients. Municipal Resources Consultants, acquired in early 1998,
provides revenue enhancement and related information services to public sector
clients.
MBIA MuniFinancial, acquired in late 1997, provides municipalities in
California and other neighboring states with debt administration, disclosure,
arbitrage rebate and related services.
MBIA & Associates Consulting, Inc., which was formed in 1997, has begun to
provide strategic planning and management consulting to public sector clients.
Recent Developments
In February, 1998, the Company acquired CapMAC Holdings Inc. ("Holdings"),
in a stock-for-stock merger valued at approximately $536 million which was
accounted for as a pooling of interests. Holdings, a Delaware corporation, is
the sole stockholder of Capital Markets Assurance Corporation ("CapMAC"), CapMAC
Financial Services, Inc. ("CFS"), and CapMAC Financial Services (Europe) Limited
("CFS (Europe)"), a subsidiary of CFS. Holdings is also a lead investor in
CapMAC Asia Ltd. ("CapMAC Asia").
The Company has begun to combine the businesses and operations of CapMAC
and the Company and to eliminate certain redundant operations. As part of this
process, the Company's business will be reorganized into three divisions;
financial guarantees for municipal and corporate transactions, financial
guarantees for asset-backed transactions and investment management and municipal
services.
CapMAC insures structured asset-backed, corporate, municipal and other
financial obligations in the U.S. and international capital markets. CapMAC also
provides financial guarantee reinsurance for structured asset-backed, corporate,
municipal and other financial obligations written by other major insurance
companies. CapMAC's claims-paying ability is rated triple-A by Moody's, S&P,
Duff & Phelps Credit Rating Co. ("Duff & Phelps"), and Nippon Investors Service,
Inc. ("Nippon"), a Japanese rating agency. CapMAC focuses on the asset-backed
market while participating on a limited basis in selected transactions in the
primary municipal market. As of December 31, 1997, obligations backed by
consumer, trade and corporate receivables and other taxable obligations
constituted approximately 95% of CapMAC's portfolio of insured obligations while
municipal and government obligations constituted approximately 5%.
CFS and CFS (Europe) provide advisory, consulting and structuring services
to third parties. CFS also provides various services, including underwriting,
reinsurance, marketing, data processing and other services to Holdings, CapMAC
and CFS (Europe), in connection with the operation of the business.
CapMAC Asia is a subsidiary of Holdings formed for the purpose of making
investments in Asia in connection with Holding's strategy to expand its Asian
structured finance business. Holdings currently owns 30.2% of the equity of
CapMAC Asia. CapMAC Asia has invested its capital in Asia Credit Services (Pte)
Ltd. ("Asia Services"), which owns all of the stock of Asian Securitization &
Infrastructure Assurance (Pte) Ltd. ("ASIA Ltd."), a regional financial
guarantee company located in Singapore, rated, at December 31, 1997, double-A by
Duff & Phelps, single-A by S&P and double-A plus by Nippon. At December 31, 1997
and 1996, CapMAC Asia had a $33.8 million and $33.4 million investment in Asia
Services, respectively, representing 33.33% of the outstanding shares of Asia
Services. ASIA Ltd. was formed to provide guarantees of debt securities in the
primary and secondary Asian fixed income capital markets. In January, 1998, S&P
downgraded the credit ratings of certain Asian countries and of Asia Ltd. This
had the effect of downgrading certain credits in CapMAC's insured portfolio and
the reinsurance provided by Asia Ltd. to CapMAC is now being provided by a
non-investment grade provider.
11
No insurance claims have yet arisen as a result of the activity in the Asian
markets. (See page 54 of the Company's 1997 Annual Report to Shareholders - Note
22 to Consolidated Financial Statements.)
Competition
The financial guarantee insurance business is highly competitive. In 1997
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 1997 were Ambac Assurance Corporation, Financial Guaranty Insurance
Company and Financial Security Assurance Inc., 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 1997 MBIA Corp. was the leading insurer of
new issue asset/mortgage-backed securities. The three principal competitors in
this area in 1997 were CapMAC, Financial Security Assurance and Ambac Assurance
Corporation.
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 Corp. also competes in the
international market with composite (multi-line) insurers.
There are minimum capital requirements imposed on a financial guarantee
insurer by Moody's and S&P to obtain Triple-A claims-paying ratings. Also, under
a New York law, multi-line insurers are prohibited from writing financial
guarantee insurance in New York State, except during a transitional period
which, subject to certain specific conditions, expired in May 1997. See
"Business--Regulation." However, there can be no assurance that major multi-line
insurers or other financial institutions will not participate in financial
guarantee insurance in the future, either directly or through monoline
subsidiaries.
Reinsurance
State insurance laws and regulations, as well as Moody's and S&P, impose
minimum capital requirements on financial guarantee companies, limiting the
aggregate amount of insurance which may be written and the maximum size of any
single risk exposure which may be assumed. MBIA Corp. increases its capacity to
write new business by using treaty and facultative reinsurance to reduce its
gross liabilities on an aggregate and single risk basis.
From its reorganization in December 1986 through December 1987, MBIA Corp.
reinsured a portion of each policy through quota and surplus share reinsurance
treaties. Each treaty provides reinsurance protection with respect to policies
written by MBIA Corp. during the term of the treaty, for the full term of the
policy. Under its quota share treaty MBIA Corp. ceded a fixed percentage of each
policy insured. Since 1988, MBIA Corp. has entered into only surplus share
treaties under which a variable percentage of risk over a minimum size is ceded,
subject to a maximum percentage specified in the treaty. Reinsurance ceded under
the treaties is for the full term of the underlying policy.
12
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, 1997, MBIA Corp. retained approximately 88% of the gross
debt service outstanding of all transactions insured by it, MBIA Assurance and
MBIA Illinois, and ceded approximately 12% to treaty and facultative reinsurers.
MBIA Corp.'s and MBIA Illinois' principal reinsurers are Capital Re Management
Corporation, Enhance Reinsurance Company, Capital Mortgage Reinsurance Company,
Axa Re Finance and Asset Guaranty Reinsurance Co. The first two of these
reinsurers, whose claims-paying ability is rated Triple-A by S&P and Moody's,
reinsured approximately 60% of the total ceded insurance in force at December
31, 1997. 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, 1997 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, 1997 and
1996 by bond type and by geographic location are set forth in Note 15 to the
Consolidated Financial Statements of MBIA Inc. and Subsidiaries.
In connection with the BIG Ins. acquisition, MBIA Corp. and MBIA Illinois
entered into a reinsurance agreement under which MBIA Corp. agreed to reinsure
100% of all business written by MBIA Illinois, net of cessions by MBIA Illinois
to third party reinsurers, in exchange for MBIA Illinois' transfer of the assets
underlying the related unearned premium and contingency reserves. Pursuant to
such reinsurance agreement with MBIA Illinois, MBIA Corp. reinsured all of the
net exposure of $30.9 billion, or approximately 68% of the gross debt service
outstanding, of the municipal bond insurance portfolio of MBIA Illinois, the
remaining 32% having been previously ceded to treaty and facultative reinsurers
of MBIA Illinois (see preceding paragraph). MBIA Corp. retroceded 3% and 1% of
this portfolio to its treaty and facultative reinsurers in 1990 and 1991,
respectively; additionally, in 1990, 10% of this portfolio was ceded back to
MBIA Illinois to comply with regulatory requirements.
MBIA Corp. and MBIA Assurance have both a reinsurance agreement and a net
worth maintenance agreement.
13
Investments and Investment Policy
The Finance Committee of the Board of Directors of the Company approves the
general investment objectives and policies of the Company, and also reviews more
specific investment guidelines. On January 1, 1996 CMC assumed full management
of all of MBIA Corp.'s consolidated investment portfolios. Certain investments
of the Company and MBIA Assurance related to non-U.S. insurance operations are
managed by independent managers.
To continue to provide strong capital resources and claims-paying
capabilities for its insurance operations, the investment objectives and
policies for insurance operations set quality and preservation of capital as the
primary objective subject to an appropriate degree of liquidity. Maximization of
after-tax investment income and investment returns are an important but
secondary objective.
Investment objectives, policies and guidelines related to the Company's
municipal investment agreement business are also subject to review and approval
by the Finance Committee of the Board of Directors. The primary investment
objectives are to preserve capital, to achieve an investment duration that
closely approximates the expected duration of related liabilities, and to
maintain appropriate liquidity. The investment agreement assets are managed by
CMC subject to an investment management agreement between IMC and CMC.
For 1997, approximately 66% 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, 1995, 1996 and 1997:
Investment Income of the Company (1)
1995 1996 1997
(In thousands)
Investment income before expenses (2) $222,704 $250,415 $284,591
Investment expenses 2,846 2,854 3,132
-------- -------- --------
Net investment income before income taxes 219,858 247,561 281,459
Net realized gains 11,312 11, 740 17,478
-------- -------- --------
Total investment income before income taxes $231,170 $259,301 $298,937
======== ======== ========
Total investment income after income taxes $196,269 $219,798 $247,233
======== ======== ========
- ----------
(l) Excludes investment income and realized gains and losses from investment
management services.
(2) Includes taxable and tax-exempt interest income.
14
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, 1997, 1996 and 1995.
Investment Portfolio by Security Type
as of December 31, 1997
Investment
Insurance Management Services
Weighted Weighted
Fair Value Average Fair Value Average
Investment Category (in thousands) Yield (1) (in thousands) Yield (1)
Fixed income investments:
Long-term bonds:
Taxable bonds:
U.S. Treasury & Agency obligations $ 394,703 6.90% $ 1,106,396 6.08%
GNMAs 118,670 7.23 105,865 6.91
Other mortgage & asset backed securities 157,363 6.49 726,126 6.03
Corporate obligations 819,944 6.40 691,252 6.49
Foreign obligations (2) 165,506 6.27 300,232 6.73
------------- ------------
Total 1,656,186 2,929,871 6.26
------------- ------------
Tax-exempt bonds:
State & municipal 3,211,068 7.29 --
------------- ------------
Total long-term investments 4,867,254 7.04 2,929,871 6.26
Short-term investments (3) 245,029 5.11 411,523 5.73
------------- ------------
Total fixed income investments 5,112,283 6.95% 3,341,394 6.19%
Other investments (4) 16,802 -- -- --
------------- ------------
Total investments $ 5,129,085 -- $ 3,341,394 --
============= ============
- ----------
(1) Prospective market yields as of December 31, 1997. Yield on tax-exempt
bonds is presented on a taxable bond equivalent basis using a 35% federal
income tax rate.
(2) Consists of U.S. demonimated foreign government 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.
15
Investment Portfolio by Security Type
as of December 31, 1996
Investment
Insurance Management Services
Investment Category Fair Value Weighted Fair Value Weighted
(In thousands) Average Yield (1) (In thousands) Average Yield (1)
Fixed income investments:
Long-term bonds:
Taxable bonds:
U.S. Treasury & Agency obligations $ 340,397 7.30% $1,121,511 6.32%
GNMAs 71,080 7.62 71,315 7.35
Other mortgage & asset backed securities 125,382 7.14 767,271 5.92
Corporate obligations 468,386 6.78 706,574 6.82
Foreign obligations (2) 152,392 6.87 182,885 7.37
---------- ----------
Total 1,157,637 7.04 2,849,556 6.43
Tax-exempt bonds:
State & municipal 2,992,063 8.03 -- --
---------- ----------
Total long-term investments 4,149,700 7.76 2,849,556 6.43
Short-term investments (3) 176,088 5.96 443,742 5.65
---------- ----------
Total fixed income investments 4,325,788 7.69% 3,293,298 6.33%
Other investments (4) 14,851 -- -- --
---------- ----------
Total investments $4,340,639 -- $3,293,298 --
========== ==========
(1) Prospective market yields as of December 31, 1996. Yield on tax-exempt
bonds is presented on a taxable equivalent basis using a 35% federal income
tax rate.
(2) Includes direct obligations of foreign governments and foreign
corporations.
(3) Taxable and tax-exempt investments, including bonds with a remaining
maturity of less than one year.
(4) Consists of marketable equity securities and interests in limited
partnerships; yield information not meaningful.
16
Investment Portfolio by Security Type
as of December 31, 1995
Investment
Insurance Management Services
Investment Category Fair Value Weighted Fair Value Weighted
(In thousands) Average Yield (1) (In thousands) Average Yield (1)
Fixed income investments:
Long-term bonds:
Taxable bonds:
U.S. Treasury & Agency obligations $ 265,209 6.82% $1,028,805 5.90%
GNMAs 58,853 7.07 141,957 7.01
Other mortgage & asset backed securities 137,542 6.71 702,144 5.58
Corporate obligations 366,076 6.12 520,236 6.29
Foreign obligations (2) 98,620 6.08 122,692 6.86
----------- ----------
Total 926,300 6.46 2,515,834 6.00
Tax-exempt bonds:
State & municipal 2,726,321 7.76 --- --
----------- ----------
Total long-term investments 3,652,621 7.44 2,515,834 6.00
Short-term investments (3) 198,035 6.49 226,792 5.48
----------- ----------
Total fixed income investments 3,850,656 7.39% 2,742,626 5.96%
Other investments (4) 14,064 -- --- --
----------- ----------
Total investments $ 3,864,720 -- $2,742,626 --
=========== ==========
(1) Prospective market yields as of December 31, 1996. Yield on tax-exempt
bonds is presented on a taxable equivalent basis using a 35% federal income
tax rate.
(2) Includes direct obligations of foreign governments and foreign
corporations.
(3) Taxable and tax-exempt investments, including bonds with a remaining
maturity of less than one year.
(4) Consists of marketable equity securities and interests in limited
partnerships; yield information not meaningful.
17
The average maturity of the insurance fixed income portfolio excluding
short-term investments as of December 31, 1997 was 10.1 years. After allowing
for estimated principal pre-payments on mortgage pass-through securities, the
duration of the portfolio was 6.3 years.
The table below sets forth the distribution by maturity of the Company's
consolidated fixed income investments:
Fixed Income Investments by Maturity
as of December 31, 1997
Investment
Insurance Management Services
Maturity Fair Value % of Total Fair Value % of Total
(In thousands) Fixed Income (In thousands) Fixed Income
Investments Investments
Within 1 year $ 245,029 4.8% $ 411,523 12.3%
Beyond 1 year but within 5 years 753,051 14.7 872,651 26.1
Beyond 5 years but within 10 years 1,734,760 33.9 563,945 16.9
Beyond 10 years but within 15 years 1,050,596 20.6 211,443 6.3
Beyond 15 years but within 20 years 1,032,227 20.2 402,519 12.1
Beyond 20 years 296,620 5.8 879,313 26.3
---------- ------ ---------- ------
Total fixed income investments $5,112,283 100.0% $3,341,394 100.0%
========== ==========
The quality distribution of the Company's fixed income investments based on
ratings of Moody's was as shown in the table below:
Fixed Income Investments by Quality Rating (1)
as of December 31, 1997
Investment
Insurance Management Services
Fair Value % of Total Fair Value % of Total
(In thousands) Fixed Income (In thousands) Fixed Income
Quality Rating Investments Investments
Aaa $2,573,635 51.4% $2,165,153 66.2%
Aa 1,085,147 21.7 290,676 8.9
A 1,101,553 22.0 767,243 23.4
Baa 245,655 4.9 49,964 1.5
---------- ----- ---------- -----
$5,005,990 100.0% $3,273,036 100.0%
========== ==========
(1) Excludes short-term investments with an original maturity of less than one
year, but includes bonds having a remaining maturity of less than one year.
18
Regulation
MBIA Corp. is licensed to do insurance business in, and is subject to
insurance regulation and supervision by, the State of New York (its state of
incorporation), the 49 other states, the District of Columbia, Guam, the
Northern Mariana Islands, the U.S. Virgin Islands, Puerto Rico, the Kingdom of
Spain and the Republic of France. MBIA Illinois is licensed in, and is subject
to insurance regulation and supervision by, the State of Illinois (its state of
incorporation), 47 other states, the District of Columbia and Puerto Rico. MBIA
Assurance is licensed to do insurance business in France and is subject to
regulation under the corporation and insurance laws of the Republic of France.
The extent of state insurance regulation and supervision varies by jurisdiction,
but New York, Illinois and most other jurisdictions have laws and regulations
prescribing minimum standards of solvency, including minimum capital
requirements, and business conduct which must be maintained by insurance
companies. These laws prescribe permitted classes and concentrations of
investments. In addition, some state laws and regulations require the approval
or filing of policy forms and rates. MBIA Corp. is required to file detailed
annual financial statements with the New York Insurance Department and similar
supervisory agencies in each of the other jurisdictions in which it is licensed.
MBIA Illinois is required to file detailed annual financial statements with the
Illinois Department of Insurance and similar supervisory agencies in each of the
other jurisdictions in which it is licensed. The operations and accounts of both
MBIA Corp. and MBIA Illinois are subject to examination by these regulatory
agencies at regular intervals.
MBIA Corp. is licensed to provide financial guarantee insurance under
Article 69 of the New York Insurance Law. Article 69 defines financial guarantee
insurance to include any guarantee under which loss is payable upon proof of
occurrence of financial loss to an insured as a result of certain events. These
events include the failure of any obligor on or any issuer of any debt
instrument or other monetary obligation to pay principal, interest, premium,
dividend or purchase price of or on such instrument or obligation, when due.
Under Article 69, MBIA Corp. is licensed to transact financial guarantee
insurance, surety insurance and credit insurance and such other kinds of
business to the extent necessarily or properly incidental to the kinds of
insurance which MBIA Corp. is authorized to transact. In addition, MBIA Corp. is
empowered to assume or reinsure the kinds of insurance described above.
MBIA Illinois is licensed to provide fidelity and surety and other
miscellaneous lines of insurance under Section 4 of the Illinois Insurance Code.
Section 4 defines fidelity and surety insurance to include becoming surety or
guarantor for any person, co-partnership or corporation in any position or place
of trust or as custodian of money or property, public or private; or becoming a
surety or guarantor for the performance of any person, co-partnership or
corporation of any lawful obligation, undertaking, agreement or contract of any
kind, except contracts or policies of insurance; and underwriting blanket bonds.
Under Section 9, MBIA Illinois is licensed to transact any business activity
reasonably complementary or supplementary to its insurance business. In
addition, MBIA Illinois is empowered to assume or reinsure the kinds of
insurance described above.
As financial guarantee insurers, MBIA Corp. and MBIA Illinois are required
by the laws of New York, California, Connecticut, Florida, Illinois, Iowa, New
Jersey and Wisconsin to maintain contingency reserves on their municipal bond
and other financial guarantee liabilities. Under New Jersey, Illinois and
Wisconsin regulations, contributions by such an insurer to its contingency
reserves are required to equal 50% of earned premiums on its municipal bond
business. Under New York law, such an insurer is required to contribute to
contingency reserves 50% of premiums as they are earned on policies written
prior to July 1, 1989 (net of reinsurance) and, with respect to policies written
on and after July 1, 1989, must make contributions over a period of 15 or 20
years (based on issue type), or until the contingency reserve for such insured
issues equals the greater of 50% of premiums written for the relevant category
of insurance or a percentage of the principal guaranteed, varying from 0.55% to
2.5%, depending upon the type of obligation guaranteed (net of reinsurance,
refunding, refinancings and certain insured securities). California,
Connecticut, Iowa and Florida law impose a generally similar requirement. In
each of these states, MBIA Corp. and MBIA Illinois may apply for release of
portions of the contingency reserves in certain circumstances.
19
The laws and regulations of these states also limit both the aggregate and
individual municipal bond risks that MBIA Corp. and MBIA Illinois may insure on
a net basis. California, Connecticut, Florida, Illinois and New York, among
other things, limit insured average annual debt service on insured municipal
bonds with respect to a single entity and backed by a single revenue source (net
of qualifying collateral and reinsurance) to 10% of policyholders' surplus and
contingency reserves. In New Jersey, Virginia and Wisconsin, the average annual
debt service on any single issue of municipal bonds (net of reinsurance) is
limited to 10% of policyholders' surplus. Other states that do not explicitly
regulate financial guarantee or municipal bond insurance do impose single risk
limits which are similar in effect to the foregoing. California, Connecticut,
Florida, Illinois and New York also limit the net insured unpaid principal
issued by a single entity and backed by a single revenue source to 75% of
policyholders' surplus and contingency reserves.
Under New York, California, Connecticut, Florida, Illinois, New Jersey and
Wisconsin law, aggregate insured unpaid principal and interest under policies
insuring municipal bonds (in the case of New York, California, Connecticut,
Florida and Illinois, net of reinsurance) are limited to certain multiples of
policyholders' surplus and contingency reserves. New York, California,
Connecticut, Florida, Illinois and other states impose a 300:1 limit for insured
municipal bonds, although more restrictive limits on bonds of other types do
exist. For example, New York, California, Connecticut and Florida impose a 100:1
limit for certain types of non-municipal bonds.
The Company, MBIA Corp. and MBIA Illinois are also subject to regulation
under insurance holding company statutes of New York, Illinois and other
jurisdictions in which MBIA Corp. and MBIA Illinois are licensed to write
insurance. The requirements of holding company statutes vary from jurisdiction
to jurisdiction but generally require insurance holding companies, such as the
Company, and their insurance subsidiaries, to register and file certain reports
describing, among other information, their capital structure, ownership and
financial condition. The holding company statutes also generally require prior
approval of changes in control, of certain dividends and other intercorporate
transfers of assets, and of transactions between insurance companies, their
parents and affiliates. The holding company statutes impose standards on certain
transactions with related companies, which include, among other requirements,
that all transactions be fair and reasonable and that those exceeding specified
limits receive prior regulatory approval.
Prior approval by the New York Insurance Department is required for any
entity seeking to acquire "control" of the Company or MBIA Corp. Prior approval
by the Illinois Department of Insurance is required for any entity seeking to
acquire "control" of the Company, MBIA Corp. or MBIA Illinois. In many states,
including New York and Illinois, "control" is presumed to exist if 10% or more
of the voting securities of the insurer are owned or controlled by an entity,
although the supervisory agency may find that "control" in fact does or does not
exist when an entity owns or controls either a lesser or greater amount of
securities.
The laws of New York and Illinois regulate the payment of dividends by MBIA
Corp. and MBIA Illinois, respectively, and provide that a New York domestic
stock property/casualty insurance company (such as MBIA Corp.) or an Illinois
domestic stock insurance company (such as MBIA Illinois) may not declare or
distribute dividends except out of statutory earned surplus. In the case of MBIA
Corp., New York law provides that the sum of (i) the amount of dividends
declared or distributed during the preceding 12-month period and (ii) the
dividend to be declared may not exceed the lesser of (a) 10% of policyholders'
surplus, as shown by the most recent statutory financial statement on file with
the New York Insurance Department, and (b) 100% of adjusted net investment
income for such 12-month period (the net investment income for such 12-month
period plus the excess, if any, of net investment income over dividends declared
or distributed during the two-year period preceding such 12-month period),
unless the New York Superintendent of Insurance approves a greater dividend
distribution based upon a finding that the insurer will retain sufficient
surplus to support its obligations and writings. See Note 11 to the Consolidated
Financial Statements of MBIA Inc. and Subsidiaries. In the case of MBIA
Illinois, Illinois law provides that the fair market value of the dividend to be
declared, together with other dividends declared or distributed during the
preceding 12-month period, may not exceed the greater of (a) 10% of
policyholders' surplus as of the previous December 31, and (b) net income during
the previous calendar year (which does not include pro rata distributions of any
class of the Company's own securities) without the approval of the Illinois
Director of Insurance. The foregoing restrictions are currently the most
restrictive limitations on the ability of MBIA Corp. and MBIA Illinois to
declare and pay dividends.
20
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 4 to the Consolidated Financial Statements of MBIA Inc. and
Subsidiaries.
MBIA Corp. and MBIA Illinois are exempt from assessments by the insurance
guarantee funds in the majority of the states in which they do business.
Guarantee fund laws in most states require insurers transacting business in the
state to participate in guarantee associations which pay claims of policyholders
and third-party claimants against impaired or insolvent insurance companies
doing business in the state. In most states, insurers licensed to write only
municipal bond insurance, financial guarantee insurance and other forms of
surety insurance are exempt from assessment by these funds and their
policyholders are prohibited from making claims on these funds.
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, 1997, $24.9 million of the
$78.9 million reserve for loss and loss adjustment expense represents case basis
reserves, of which $18.9 million is attributable to a health care financing in
Pennsylvania. The remaining case basis reserves represent various housing
financings and structured finance transactions, the largest of which is $3.9
million.
The Company believes that the reserves for losses and loss adjustment
expenses are adequate to cover the ultimate net cost of claims. Such reserves
are based on estimates, and there can be no assurance that the ultimate
liability will not exceed such estimates. To the extent that actual case losses
for any period are less than the unallocated portion of total loss reserve,
there will be no impact on the Company's earnings for that period other than an
addition to the reserve which results from applying the loss rate factor to new
debt service insurance. To the extent that case losses, for any period, exceed
the unallocated portion of the total loss reserve, the excess will be charged
against the Company's earnings for that period. The Company periodically
evaluates the appropriateness of the loss rate factor based on actual case loss
experience.
21
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 4 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,
1994 1995 1996 1997
MBIA Corp.
Loss ratio 9.8% 0.4% 2.0% 1.5%
Expense ratio 22.9 20.6 17.6 16.7
Combined ratio 32.7 21.0 19.6 18.2
Financial guarantee industry (1)
Loss ratio 11.3% 5.3% 4.9% *
Expense ratio 36.3 32.7 31.6 *
Combined ratio 47.6 38.0 36.5 *
- ----------
(1) Industry statistics were taken from the 1996 Annual Report of the
Association of Financial Guaranty Insurors.
* Not Available.
The SAP loss ratio differs from the GAAP loss ratio because the GAAP
ratio recognizes a provision for unidentified losses. The SAP expense ratio
varies from the GAAP expense ratio because the GAAP ratio recognizes the
deferral of policy acquisition costs and includes the amortization of purchase
accounting adjustments, principally goodwill. In addition, the SAP expense ratio
is calculated using premiums written while the GAAP expense ratio uses premiums
earned.
Net insurance in force, qualified statutory capital (which is
comprised of policyholders' surplus and the contingency reserve), and
policyholders' leverage ratios for MBIA Corp. and for the financial guarantee
industry are shown in the table below:
As of December 31,
1994 1995 1996 1997
(Dollars in millions)
MBIA Corp.
Net insurance in force $304,502 $344,037 $411,106 $482,653
Qualified statutory capital 1,731 2,018 2,360 2,854
Policyholders' leverage ratio 176:1 171:1 174:1 169:1
Financial guarantee industry (1)
Net insurance in force $785,126 $895,559 $1,076,821 *
Qualified statutory capital 5,807 6,495 7,350 *
Policyholders' leverage ratio 135:1 138:1 147:1 *
- ----------
(1) Industry statistics were taken from the 1996 Annual Report of the
Association of Financial Guaranty Insurors.
* Not Available.
22
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 guarantor's insured portfolio, nor does it give
any benefit for third-party commitments such as standby lines of credit.
To assist state insurance departments in overseeing the financial condition
of the insurance companies in their respective states, the National Association
of Insurance Commissioners (the "NAIC") has developed a system intended to
provide an early warning of impending financial trouble, the Insurance
Regulatory Information System ("IRIS"). IRIS identifies eleven financial ratios
and specifies "usual values" for each ratio. These are derived from financial
statements prepared on a SAP basis. For each of the years 1987 to 1992, MBIA
Corp. had financial ratio values within the usual values established by the NAIC
for all of the applicable financial ratio tests with the exception of the test
that measures the change in net premiums written. For the year ended December
31, 1992 the growth in net premiums written exceeded NAIC test range values of
- -33% to +33% due to an extremely favorable business environment marked by a
surge in municipal financings and strong demand for insurance. MBIA Corp. also
had values outside of the normal range for premiums written for the years ended
December 31, 1987, 1990 and 1991. These were due to the assumption by MBIA Corp.
of most of the book of net insured obligations of its predecessor, the
Association, in 1986, and upon the assumption of the entire book of net insured
obligations of MBIA Illinois in 1990 following its acquisition by the Company.
In 1993, MBIA Corp. had financial ratio values within the NAIC test ranges
for all ratios except loss-related ratios. MBIA Corp. fell below the NAIC test
range values of 0% to +25% for the three loss reserve development ratios due to
the reduction in expected losses related to salvage. In 1994 and 1995, MBIA
Corp. had financial ratio values within the NAIC test ranges for all ratios. In
1996, MBIA Corp. had financial ratio values within the usual values established
by the NAIC for all of the applicable financial ratio tests with the exception
of the test that measures the change in net premium written. For the year ended
December 31, 1996, the growth in net premiums written equaled NAIC test range
values of -33% to +33% due to a favorable business environment marked by a
strong demand for insurance. In 1997, 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.
23
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 more rating
agencies will not reduce or withdraw their rating. MBIA Corp.'s ability to
attract new business and to compete with other financial guarantors, and its
results of operations and financial condition would be materially adversely
affected by any reduction in its ratings.
Credit Agreement
MBIA Corp. entered into a Credit Agreement, dated as of December 29, 1989,
which has been amended from time to time (the "Credit Agreement") with Credit
Suisse, New York Branch ("Credit Suisse") to provide MBIA Corp. with an
unconditional, irrevocable line of credit. The Credit Agreement was amended and
restated by the Second Restated Credit Agreement, dated as of October 1, 1997
among MBIA Corp., Credit Suisse, as Administrative Agent and a consortium of
highly rated banks. The line of credit is available to be drawn upon by MBIA
Corp., in an amount up to $825 million, after MBIA Corp. has incurred, during
the period commencing October 1, 1997 and ending September 30, 2004, cumulative
losses (net of any recoveries) in excess of the greater of $825 million or 4.00%
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, 2004, 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 26, 1998, the Company had 887 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 56 Chairman and Chief Executive Officer (officer since 1986)
Richard L. Weill 55 Vice Chairman (officer since 1989)
Neil G. Budnick 43 President, Public and Corporate Finance Division
(officer since 1992)
John B. Caouette 53 President, Structured Finance Division
(officer since February, 1998)
24
Gary C. Dunton 42 President, Investment Management and Financial Services Division
(officer since January, 1998)
Louis G. Lenzi 49 General Counsel and Secretary (officer since 1986)
Kevin D. Silva 44 Senior Vice President (officer since 1995)
Julliette S. Tehrani 51 Executive Vice President, Chief Financial Officer
and Treasurer (officer since 1987)
David H. Elliott is Chairman and Chief Executive Officer of the
Company and of MBIA Corp. From 1986 to 1991, he served as the President and
Chief Operating Officer of the Company and MBIA Corp. He is a director of MBIA
Corp. and was the President of the Association from 1976 to 1980 and from 1982
through 1986.
Richard L. Weill is Vice Chairman of the Company, President 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.
Kevin D. Silva is Senior Vice President of the Company and MBIA Corp. and a
director of MBIA Corp. He has been in charge of the Management Services Division
of MBIA Corp. since joining the Company in late 1995.
Neil G. Budnick is President, Public and Corporate Finance Division of the
Company and MBIA Corp. and a director of MBIA Corp. Mr. Budnick has been
involved in the insurance operations area of MBIA Corp. since joining the
Company in 1983.
John B. Caouette is President, Structured Finance Division of the Company
and MBIA Corp. and a director of MBIA Corp. Mr. Caouette was, until February
1998, the Chairman and Chief Executive Officer of CapMAC Holdings Inc.
Gary C. Dunton is President, Investment Management and Financial Services
Division of the Company and MBIA Corp. and a director of MBIA Corp. Mr. Dunton
was, prior to joining the Company as an officer, a director of the Company and
President of the Family and Business Insurance Group, USF&G Insurance
Louis G. Lenzi is General Counsel and Secretary of the Company and MBIA
Corp. He is also a director of MBIA Corp. Mr. Lenzi has held various legal
positions within the Company and MBIA Corp. since July of 1984.
Julliette S. Tehrani is Executive Vice President, Chief Financial Officer
and Treasurer of the Company and of MBIA Corp. and a director of MBIA Corp. From
1986 to 1995, Ms. Tehrani held the position of Senior Vice President and
Controller. Ms. Tehrani has held various positions in the Company's Finance
Division since 1978.
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 headquarters. The Company also has rental space in New York, New
York, San Francisco, California, Paris, France, Madrid, Spain and Sydney,
Australia. The Company believes that these facilities are 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.
25
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 1997 Annual Report to
Shareholders and is incorporated herein by reference. As of March 26, 1998,
there were 462 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 28-29 of the Company's 1997 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 30-35 of
the Company's 1997 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 36-54 of the Company's
1997 Annual Report to Shareholders and are incorporated by reference.
Item 9. Disagreements on Accounting and Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information regarding directors is set forth under "Election of Directors"
in the Company's Proxy Statement, dated March 30, 1998, 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 30, 1998, which is incorporated by reference.
26
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 30,
1998, 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 30, 1998, which is incorporated by reference.
27
PART IV
Item 14.
(a) Financial Statements and Financial Statement Schedules and
Exhibits.
1. Financial Statements
MBIA Inc. has incorporated by reference from the 1997 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. 36
Consolidated statements of income for the years ended 37
December 31, 1997, 1996 and 1995.
Consolidated balance sheets as of December 31, 1997 and 38
1996.
Consolidated statements of changes in shareholders' 39
equity for the years ended December 31, 1997, 1996 and
1995.
Consolidated statements of cash flows for the years 40
ended December 31, 1997, 1996 and 1995.
Notes to consolidated financial statements. 41-54
2. Financial Statement Schedules
The following financial statement schedules are filed as part of this
report.
Schedule Title
-------- -----
I Summary of investments, other than investments in related
parties, as of December 31, 1997.
II Condensed financial information of Registrant for December
31, 1997, 1996 and 1995.
IV Reinsurance for the years ended December 31, 1997, 1996 and
1995.
The report of the Registrant's independent accountants with respect to the
above listed financial statement schedules is included with the schedules.
All other schedules are omitted because they are not applicable or the
required information is shown in the consolidated financial statements or notes
thereto.
3. Exhibits
(An exhibit index immediately preceding the Exhibits indicates the page
number where each exhibit filed as part of this report can be found.)
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").
28
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
10.01. 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.
10.02. 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.
10.03. 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").
10.04. 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.
10.05. 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")
10.06. 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.
10.07. 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.
10.08. 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.
10.09. Endorsement No. 7 to the December 30, 1986 Reinsurance Agreements,
effective September 30, 1989, between MBIA Corp. and each of The Aetna Casualty
and Surety Company, Fireman's Fund Insurance Company, CIGNA Property and
Casualty Company (formerly Aetna Insurance Company) and The Continental
Insurance Company, incorporated by reference to Exhibit 10.10 to the 1989 10-K.
10.10. 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.
29
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").
10.11. 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.
10.12. MBIA Inc. 1987 Stock Option Plan, incorporated by reference to
Exhibit 10.13 to the 1987 S-1.
10.13. 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").
10.14. 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.
10.15. 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.
10.16. 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.
10.17. Stock Option Agreement, dated as of March 2, 1987, between the
Company and David H. Elliott, incorporated by reference to Exhibit 10.32 to
Amendment No. 1 to the 1987 S-1.
10.18. 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.
10.19. 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.
10.20. 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.
30
10.21. 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.
10.22. 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.
10.23. 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.
10.24. 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.
10.25. 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").
10.26. 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.
10.27. 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.
10.28. 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.
10.29. 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.
10.30. 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.
10.31. 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.
10.32. 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.
10.33. Revolving Credit Agreement, dated as of February 15, 1991, between
the Company and Credit Suisse, New York Branch, incorporated by reference to
Exhibit 10.76 to the 1991 10-K, as amended by the First Amendment to Revolving
Credit Agreement, dated as of September 30, 1992, incorporated by reference to
Exhibit 10.61 to the 1992 10-K, as further amended by the Second Amendment to
Revolving Credit Agreement, dated as of September 30, 1994, incorporated by
reference to Exhibit 10.48 to the 1994 10-K, as further amended by the Third
Amendment to Revolving Credit Agreement, dated as of May 23, 1996, incorporated
by reference to Exhibit 10.43 to the Company's Annual Report on Form 10-K for
fiscal year ended December 31, 1996 (Comm. File No. 1-9583) (the "1996 10-K").
10.34. 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.
31
10.35. 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.
10.36. Trust Agreement, dated as of December 31, 1991, between MBIA Corp.
and Fidelity Management Trust Company, incorporated by reference to Exhibit
10.64 to the 1992 10-K, as amended by the Amendment to Trust Agreement, dated as
of April 1, 1993, incorporated by reference to Exhibit 10.64 to the 1993 10-K,
as amended by First Amendment to Trust Agreement, dated as of January 21, 1992,
as further amended by Second Amendment to Trust Agreement, dated as of March 5,
1992, as further amended by Third Amendment to Trust Agreement, dated as of
April 1, 1993, as further amended by the Fourth Amendment to Trust Agreement,
dated as of July 1, 1995, incorporated by reference to Exhibit 10.47 to the 1995
10-K, as amended by Fifth Amendment to Trust Agreement, dated as of November 1,
1995, as further amended by Sixth Amendment to Trust Agreement, dated as of
January 1, 1996, incorporated by reference to Exhibit 10.46 to the 1996 10-K,
further amended by Seventh Amendment to Trust Agreement, dated as of October 15,
1997.
10.37. 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.
10.38. 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.
10.39. 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.
10.40. 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.
10.41. 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.
10.42. 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.
10.43. 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.
10.44. Endorsement No. 17 to the December 30, 1986 Reinsurance Agreements,
effective January 1, 1993, between MBIA Corp. and each of The Aetna Casualty and
Surety Company, Fireman's Fund Insurance Company, CIGNA Property and Casualty
Insurance Company (formerly Aetna Insurance Company) and The Continental
Insurance Company, incorporated by reference to Exhibit 10.75 to the 1993 10-K.
10.45. 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.
10.46. 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
32
31, 1993, among Credit Suisse, New York Branch, as Agent, Sudwestdeutsche
Landesbank Girozentrale and MBIA Corp., incorporated by reference to Exhibit
10.78 to the 1993 10-K, as amended by the First Amendment to First Restated
Credit Agreement, dated as of September 23, 1994, incorporated by reference to
Exhibit 10.63 to the 1994 10-K, as further amended by the Second Amendment to
the First Restated Credit Agreement, dated as of January 1, 1996, and as further
amended by the Third Amendment to the First Restated Credit Agreement, dated as
of October 1, 1996, incorporated by reference to Exhibit 10.57 to the 1996 10-K,
as further amended and restated by the Second Amended and Restated Credit
Agreement, dated as of October 1, 1997.
10.47. 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.
10.48. 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.
10.49. Credit Agreement, dated as of August 31, 1994, among Municipal Bond
Investors Assurance Corporation, the Company, Wachovia Bank of Georgia, N.A.,
Banco Santander, The Sumitomo Bank, Ltd., New York Branch, The Chase Manhattan
Bank, N.A., Commerzbank Aktiengesellschaft, The Industrial Bank of Japan,
Limited New York Branch and NBD Bank, N.A., and as further amended by the First
Amendment to Credit Agreement, dated as of October 14, 1994, incorporated by
reference to Exhibit 10.66 to the 1994 10-K, as amended by the Second Amendment
to Credit Agreement, dated as of October 31, 1995, incorporated by reference to
Exhibit 10.61 to the 1995 10-K.
10.50. 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.
10.51. 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.
10.52. 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.
10.53. Investment Services Agreement, effective as of April 28, 1995,
between MBIA Insurance Corporation and MBIA Securities Corp., as amended by
Amendment No. 1, dated as of December 29, 1995, incorporated by reference to
Exhibit 10.65 to the 1995 10-K, as further amended by Amendment No. 2 to
Investment Services Agreement, dated January 14, 1997.
10.54. Investment Services Agreement, effective January 2, 1996, between
MBIA Insurance Corp. of Illinois and MBIA Securities Corp., incorporated by
reference to Exhibit 10.66 to the 1995 10-K.
10.55. MBIA Inc. 1996 Incentive Plan, effective as of January 1, 1996,
incorporated by reference to Exhibit 10.70 to the 1995 10-K.
10.56. MBIA Inc. 1996 Directors Stock Unit Plan, effective as of December
4, 1996, incorporated by reference to Exhibit 10.70 to the 1996 10-K.
10.57. Agreement and Plan of Merger among the Company, CMA Acquisition
Corporation and CapMAC Holdings Inc. ("CapMAC"), dated as of November 13, 1997,
incorporated by reference to the Company's Form S-4 (Reg. No. 333-41633) filed
on December 5, 1997.
33
10.58. Amendment No. 1 to Agreement and Plan of Merger among the Company,
CMA Acquisition Corporation and CapMAC Holdings Inc. ("CapMAC"), dated January
16, 1998, incorporated by reference to the Company's Post Effective Amendment
No. 1 to Form S-4 (Reg. No. 333-41633) filed on January 21, 1998.
10.59. Employment Agreement, dated as of June 25, 1992, between CapMAC
Acquisition Corp. and John B. Caouette, incorporated by reference to Exhibit
10.7 of CapMAC's Registration Statement on Form S-1 (Reg. No. 33-982554), filed
in 1992, as amended (the "CapMAC Form S-1").
10.60. CapMAC Employee Stock Ownership Plan, incorporated by reference to
Exhibit 10.18 to the CapMAC Form S-1.
10.61. CapMAC Employee Stock Ownership Plan Trust Agreement, incorporated
by reference to Exhibit 10.19 to the CapMAC Form S-1.
10.62. ESOP Loan Agreement by and between CapMAC and the ESOP Trust dated
as of June 25, 1992, incorporated by reference to Exhibit 10.20 to the CapMAC
Form S-1.
10.63. Deferred Compensation and Restricted Stock Agreement, dated as of
December 7, 1995, between John B. Caouette and CapMAC, incorporated by reference
to Exhibit 10.28 of the CapMAC Annual Report on Form 10-K for the year ended
December 31, 1995 (the "CapMAC 1995 10-K").
10.64. Deferred Compensation and Restricted Stock Agreement, dated as of
December 7, 1995, between Michael L. Hein and CapMAC, incorporated by reference
to Exhibit 10.29 of the CapMAC 1995 10-K.
10.65. Deferred Compensation and Restricted Stock Agreement, dated as of
December 7, 1995, between Charles Jackson Lester and CapMAC, incorporated by
reference to Exhibit 10.31 of the CapMAC 1995 10-K.
10.66. Deferred Compensation and Restricted Stock Agreement, dated as of
December 7, 1995, between C. Thomas Meyers and CapMAC, incorporated by reference
to Exhibit 10.32 of the CapMAC 1995 10-K.
10.67. Deferred Compensation and Restricted Stock Agreement, dated as of
December 7, 1995, between Paul V. Palmer and CapMAC, incorporated by reference
to Exhibit 10.33 of the CapMAC 1995 10-K.
10.68. Deferred Compensation and Restricted Stock Agreement, dated as of
December 7, 1995, between Joyce S. Richardson and CapMAC, incorporated by
reference to Exhibit 10.35 of the CapMAC 1995 10-K.
10.69. Deferred Compensation and Restricted Stock Agreement, dated as of
December 7, 1995, between Ram D. Wertheim and CapMAC, incorporated by reference
to Exhibit 10.35 of the CapMAC 1995 10-K.
34
Executive Compensation Plans and Arrangements
The following Exhibits identify all existing executive compensation plans
and arrangements:
10.12. MBIA Inc. 1987 Stock Option Plan, incorporated by reference to
Exhibit 10.13 to the 1987 S-1.
10.13. MBIA Inc. Deferred Compensation and Excess Benefit Plan,
incorporated by reference to Exhibit 10.16 to the 1988 10-K, as amended as
of July 22, 1992, incorporated by reference to Exhibit 10.15 to the 1992
10-K.
10.14. 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.
10.15. 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.
10.16. 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.
10.17. 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.
10.37. 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.
10.55. MBIA Inc. 1996 Incentive Plan, effective as of January 1, 1996,
incorporated by reference to Exhibit 10.70 to the 1995 10-K.
10.56. MBIA Inc. 1996 Directors Stock Unit Plan, effective as of December
4, 1996.
10.59. Employment Agreement, dated as of June 25, 1992, between CapMAC
Acquisition Corp. and John B. Caouette, incorporated by reference to
Exhibit 10.7 of CapMAC's Registration Statement on Form S-1 (Reg. No.
33-982554), filed in 1992, as amended (the "CapMAC Form S-1").
10.60. CapMAC Employee Stock Ownership Plan, incorporated by reference to
Exhibit 10.18 to the CapMAC Form S-1.
10.61. CapMAC Employee Stock Ownership Plan Trust Agreement, incorporated
by reference to Exhibit 10.19 to the CapMAC Form S-1.
10.62. ESOP Loan Agreement by and between CapMAC and the ESOP Trust dated
as of June 25, 1992, incorporated by reference to Exhibit 10.20 to the
CapMAC Form S-1.
35
10.63. Deferred Compensation and Restricted Stock Agreement, dated as of
December 7, 1995, between John B. Caouette and CapMAC, incorporated by
reference to Exhibit 10.28 of the CapMAC Annual Report on Form 10-K for the
year ended December 31, 1995 (the "CapMAC 1995 10-K").
10.64. Deferred Compensation and Restricted Stock Agreement, dated as of
December 7, 1995, between Michael L. Hein and CapMAC, incorporated by
reference to Exhibit 10.29 of the CapMAC 1995 10-K.
10.65. Deferred Compensation and Restricted Stock Agreement, dated as of
December 7, 1995, between Charles Jackson Lester and CapMAC, incorporated
by reference to Exhibit 10.31 of the CapMAC 1995 10-K.
10.66. Deferred Compensation and Restricted Stock Agreement, dated as of
December 7, 1995, between C. Thomas Meyers and CapMAC, incorporated by
reference to Exhibit 10.32 of the CapMAC 1995 10-K.
10.67. Deferred Compensation and Restricted Stock Agreement, dated as of
December 7, 1995, between Paul V. Palmer and CapMAC, incorporated by
reference to Exhibit 10.33 of the CapMAC 1995 10-K.
10.68. Deferred Compensation and Restricted Stock Agreement, dated as of
December 7, 1995, between Joyce S. Richardson and CapMAC, incorporated by
reference to Exhibit 10.35 of the CapMAC 1995 10-K.
10.69. Deferred Compensation and Restricted Stock Agreement, dated as of
December 7, 1995, between Ram D. Wertheim and CapMAC, incorporated by
reference to Exhibit 10.35 of the CapMAC 1995 10-K.
13. Annual Report to Shareholders of MBIA Inc. for fiscal year ended
December 31, 1997. 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
36
99. Additional Exhibits - MBIA Corp. GAAP Financial Statements
(b) Reports on Form 8-K: The Company filed the following reports on Form
8-K during 1997:
July 10 - Press release in connection with debt and equity offerings.
July 14 - Underwriting agreement and ration of earnings to fixed
charges in equity offering.
September 18 - Press release announcing stock split.
November 19 - Press release regarding merger with CapMAC Holdings Inc.
and agreement and plan of merger.
37
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 27, 1998 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 27, 1998
- -------------------------------
David H. Elliott
/s/ Julliette S. Tehrani Executive Vice President, March 27, 1998
- ------------------------------- Chief Financial Officer
Julliette S. Tehrani and Treasurer
/s/ Elizabeth B. Sullivan Vice President and March 27, 1998
- ------------------------------- Controller
Elizabeth B. Sullivan
/s/ Joseph W. Brown, Jr. * Director March 27, 1998
- -------------------------------
Joseph W. Brown, Jr.
/s/ David C. Clapp * Director March 27, 1998
- -------------------------------
David C. Clapp
38
Signature Title Date
--------- ----- ----
/s/ Claire L. Gaudiani * Director March 27, 1998
- -----------------------------------
Claire L. Gaudiani
/s/ William H. Gray, III * Director March 27, 1998
- -------------------------------------
William H. Gray, III
/s/ Freda S. Johnson * Director March 27, 1998
- -----------------------------------
Freda S. Johnson
/s/ Daniel P. Kearney * Director March 27, 1998
- -----------------------------------
Daniel P. Kearney
/s/ James A. Lebenthal * Director March 27, 1998
- -----------------------------------
James A. Lebenthal
/s/ Pierre-Henri Richard * Director March 27, 1998
- -----------------------------------
Pierre-Henri Richard
- ----------------------------------- Director March 27, 1998
John A. Rolls
/s/ Richard L. Weill Director March 27, 1998
- -----------------------------------
Richard L. Weill
*By /s/ Louis G. Lenzi
- -------------------------------------
Louis G. Lenzi
Attorney-in Fact
39
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 36
of the 1997 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 28 of this
Form 10-K.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
/s/ COOPERS & LYBRAND L. L. P.
New York, New York
February 3, 1998
SCHEDULE I
MBIA INC. AND SUBSIDIARIES
SUMMARY OF INVESTMENTS, OTHER THAN INVESTMENTS IN RELATED PARTIES
December 31, 1997
(In thousands)
- -----------------------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D
Amount at which
Fair shown in the
Type of investment Cost Value balance sheet
- -----------------------------------------------------------------------------------------------------------------------------------
Fixed-maturities
Bonds:
United States Treasury
and Government
agency obligations $ 359,075 $ 389,504 $ 389,504
State and municipal
obligations 2,998,093 3,211,068 3,211,068
Corporate and other
obligations 2,717,223 2,811,869 2,811,869
Mortgage-backed 1,356,317 1,384,684 1,384,684
---------- ---------- ----------
Total fixed-maturities 7,430,708 7,797,125 7,797,125
Short-term investments 656,552 XXXXXXX 656,552
Other investments 13,695 XXXXXXX 16,802
---------- ---------- ----------
Total investments $8,100,955 XXXXXXX $8,470,479
========== ========== ==========
SCHEDULE II
MBIA INC. (PARENT COMPANY)
CONDENSED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
December 31, 1997 December 31, 1996
----------------- -----------------
ASSETS
Investments:
Municipal investment agreement portfolio
held as available-for-sale at fair value
(amortized cost $1,986,139 and $1,564,499) $ 2,020,489 $ 1,567,048
Short-term investments, at amortized cost
(which approximates fair value) 2,300 6,198
----------- -----------
Total investments 2,022,789 1,573,246
Cash and cash equivalents 3,891 413
Securities borrowed or purchased under
agreements to resell 512,283 196,400
Investment in and amounts due from
wholly-owned subsidiaries 3,593,593 2,938,875
Accrued investment income 22,389 17,150
Receivables for investments sold 11,272 --
Other assets 10,368 3,996
----------- -----------
Total assets $ 6,176,585 $ 4,730,080
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Municipal investment agreements $ 1,356,926 $ 1,405,170
Municipal repurchase agreements 567,897 212,271
Long-term debt 473,878 374,010
Short-term debt 20,000 29,100
Securities loaned or sold under
agreements to repurchase 645,583 196,400
Deferred income taxes 11,973 842
Payable for investments purchased 14,925 3,218
Dividends payable 17,449 16,453
Other liabilities 19,701 12,919
----------- -----------
Total liabilities 3,128,332 2,250,383
----------- -----------
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 - 89,461,035 and 86,588,486 89,461 86,588
Additional paid-in capital 906,744 759,784
Retained earnings 1,825,333 1,518,994
Cumulative translation adjustment (8,558) (1,042)
Unrealized appreciation of investments,
net of deferred income tax provision
of $129,308 and $62,706 240,085 116,424
Unearned compensation - restricted stock (4,812) (1,051)
----------- -----------
Total shareholders' equity 3,048,253 2,479,697
----------- -----------
Total liabilities and shareholders' equity $ 6,176,585 $ 4,730,080
=========== ===========
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto and the accompanying notes.
SCHEDULE II
MBIA INC. (PARENT COMPANY)
CONDENSED STATEMENTS OF INCOME
(In thousands)
Years Ended December 31
-----------------------------------------------------
1997 1996 1995
--------- --------- ---------
Revenues:
Net investment income $ (909) $ 283 $ 646
Net realized gains -- -- 3,535
Investment management
services income 4,469 2,806 2,929
Investment management
services realized losses 202 (2,549) (5,735)
--------- --------- ---------
Total revenues 3,762 540 1,375
--------- --------- ---------
Expenses:
Interest expense 34,762 32,705 27,786
Operating expenses 4,304 2,384 2,749
--------- --------- ---------
Total expenses 39,066 35,089 30,535
--------- --------- ---------
Loss before income taxes
and equity in earnings of
of subsidiaries (35,304) (34,549) (29,160)
Benefit for income taxes (12,444) (10,911) (9,604)
--------- --------- ---------
Loss before equity in earnings
of subsidiaries (22,860) (23,638) (19,556)
Equity in earnings of subsidiaries 397,036 345,801 290,975
--------- --------- ---------
Net income $ 374,176 $ 322,163 $ 271,419
========= ========= =========
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto and the accompanying notes.
SCHEDULE II
MBIA INC. (PARENT COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31
-----------------------------------------------------
1997 1996 1995
----------- ----------- -----------
Cash flows from operating activities:
Net income $ 374,176 $ 322,163 $ 271,419
Adjustments to reconcile net income
to net cash provided by
operating activities:
Equity in undistributed
earnings of subsidiaries (356,536) (316,801) (208,075)
Net realized (gains) losses on
sales of investments (202) 2,549 2,200
Benefit for deferred income taxes -- -- (50)
Other, net (615) 2,742 (2,556)
----------- ----------- -----------
Total adjustments to net income (357,353) (311,510) (208,481)
----------- ----------- -----------
Net cash provided by
operating activities 16,823 10,653 62,938
----------- ----------- -----------
Cash flows from investing activities:
Purchase of fixed-maturity
securities -- -- (252,125)
Sale of fixed-maturity securities -- -- 246,171
Sale (purchase) of short-term investments 3,898 (6,198) --
Sale of other investments -- -- 6,552
Purchases for municipal investment
agreement portfolio, net of payable
for investments purchased (1,276,589) (1,192,350) (940,871)
Sales from municipal investment
agreement portfolio, net of receivable
for investments sold 856,637 464,593 106,678
Contributions to subsidiaries (99,111) (17,900) (52,800)
Advances to subsidiaries, net (96,597) (21,763) (89,550)
----------- ----------- -----------
Net cash used by investing activities (611,762) (773,618) (975,945)
----------- ----------- -----------
Cash flows from financing activities:
Net proceeds from issuance of
common stock 126,377 55,233 --
Net proceeds from issuance
of long-term debt 98,880 -- 74,344
Net proceeds from issuance of
short-term debt (9,100) 11,100 --
Dividends paid (66,841) (60,501) (53,179)
Proceeds from issuance of municipal
investment and repurchase agreements 1,499,080 1,504,140 1,182,298
Payments for drawdowns of
municipal investment agreements (1,195,939) (786,938) (297,679)
Securities loaned or sold under
agreements to repurchase, net 133,300 -- --
Exercise of stock options 12,660 26,238 16,338
----------- ----------- -----------
Net cash provided by financing activities 598,417 749,272 922,122
----------- ----------- -----------
Net (decrease) increase in cash and
cash equivalents 3,478 (13,693) 9,115
Cash and cash equivalents
- beginning of year 413 14,106 4,991
----------- ----------- -----------
Cash and cash equivalents
- end of year $ 3,891 $ 413 $ 14,106
=========== =========== ===========
Supplemental cash flow disclosures:
Income taxes paid $ 1,568 $ 305 $ 443
Interest paid:
Long-term debt 31,825 31,722 26,575
Short-term debt 2,017 1,309 1,228
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto and the accompanying notes.
SCHEDULE II
MBIA INC. (PARENT COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. Condensed Financial Statements
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these
condensed financial statements be read in conjunction with the Company's
consolidated financial statements and the notes thereto.
2. Significant Accounting Policies
The Parent company carries its investments in subsidiaries under the equity
method.
3. Dividends from Subsidiary
In 1997, no dividends were paid by MBIA Corp. to MBIA Inc. In 1996 and
1995, MBIA Corp. declared and paid dividends of $29,000,000 and
$82,900,000, respectively, to MBIA Inc. Also, in 1997 MBIA Investment
Management Corp. declared and paid dividends of $40,500,000 to MBIA Inc.
4. Obligations under Municipal Investment and Repurchase Agreements
The municipal investment and repurchase agreement business, as described in
footnotes 2 and 13 to the consolidated financial statements of MBIA Inc.
and Subsidiaries (which are incorporated by reference in the 10-K), is
conducted by both the Registrant and its wholly owned subsidiary, MBIA
Investment Management Corp.
SCHEDULE IV
MBIA INC. AND SUBSIDIARIES
REINSURANCE
for the Years Ended December 31, 1997, 1996 and 1995
(In thousands)
- ---------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E Column F
Percentage
Insurance Gross Ceded to Other Assumed from of Amount
Premiums Written Amount Value Other Companies Net Amount Assumed to Net
- ---------------------------------------------------------------------------------------------------------------------
1997 $529,665 $ 79,781 $ 13,351 $463,235 2.9%
---- -------- -------- -------- -------- ---
1996 $434,014 $ 54,852 $ 26,661 $405,823 6.6%
---- -------- -------- -------- -------- ---
1995 $336,768 $ 45,050 $ 11,719 $303,437 3.9%
---- -------- -------- -------- -------- ---
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, 1997
Commission File No. 1-9583
- --------------------------------------------------------------------------------
MBIA Inc.
Exhibit Index
10.36. Trust Agreement, dated as of December 31, 1991, between MBIA Corp.
and Fidelity Management Trust Company, incorporated by reference to Exhibit
10.64 to the 1992 10-K, as amended by the Amendment to Trust Agreement, dated as
of April 1, 1993, incorporated by reference to Exhibit 10.64 to the 1993 10-K,
as amended by First Amendment to Trust Agreement, dated as of January 21, 1992,
as further amended by Second Amendment to Trust Agreement, dated as of March 5,
1992, as further amended by Third Amendment to Trust Agreement, dated as of
April 1, 1993, as further amended by the Fourth Amendment to Trust Agreement,
dated as of July 1, 1995, incorporated by reference to Exhibit 10.47 to the 1995
10-K, as amended by Fifth Amendment to Trust Agreement, dated as of November 1,
1995, as further amended by Sixth Amendment to Trust Agreement, dated as of
January 1, 1996, incorporated by reference to Exhibit 10.46 to the 1996 10-K,
further amended by Seventh Amendment to Trust Agreement, dated as of October 15,
1997.
10.46. 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, as further amended by the Second
Amendment to the First Restated Credit Agreement, dated as of January 1, 1996,
and as further amended by the Third Amendment to the First Restated Credit
Agreement, dated as of October 1, 1996, incorporated by reference to Exhibit
10.57 to the 1996 10-K, as further amended and restated by the Second Amended
and Restated Credit Agreement, dated as of October 1, 1997.
10.53. Investment Services Agreement, effective as of April 28, 1995,
between MBIA Insurance Corporation and MBIA Securities Corp., as amended by
Amendment No. 1, dated as of December 29, 1995, incorporated by reference to
Exhibit 10.65 to the 1995 10-K, as further amended by Amendment No. 2 to
Investment Services Agreement, dated January 14, 1997.
10.57. Agreement and Plan of Merger among the Company, CMA Acquisition
Corporation and CapMAC Holdings Inc., dated as of November 13, 1997,
incorporated by reference to the Company's Form S-4 filed on December 5, 1997.
10.58. Amendment No. 1 to Agreement and Plan of Merger among the Company,
CMA Acquisition Corporation and CapMAC Holdings Inc., dated January 16, 1998,
incorporated by reference to the Company's Post Effective Amendment No. 1 to
Form S-4 filed on January 21, 1998.
13. Annual Report to Shareholders of MBIA Inc. for fiscal year ended
December 31, 1997. 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