Docstoc

Reinsurance Agreement - MBIA INC - 3-30-1999

Document Sample
Reinsurance Agreement - MBIA INC - 3-30-1999 Powered By Docstoc
					SECOND SPECIAL PER OCCURRENCE EXCESS OF LOSS REINSURANCE AGREEMENT (hereinafter referred to as "Agreement") made and entered into by and between MBIA Insurance Corporation, Armonk, New York; and/or MBIA Assurance S. A., Paris, France; and/or any other insurance or reinsurance company subsidiaries of MBIA Inc. listed in Exhibit No. 1 attached to this Agreement (hereinafter referred to as the "Company"), and AXA RE FINANCE S.A. (hereinafter referred to as the "Reinsurer"). In consideration of the mutual covenants hereinafter contained, the parties hereto agree as follows: ARTICLE 1 ACQUISITION In the event that, following the execution of this Agreement, the Company notifies the Reinsurer of a proposed acquisition by the Company of an insurance company (a "Target") and provides the Reinsurer with such due diligence information as the Reinsurer may reasonably request with respect to such Target (including without limitation information relating to the effect on this Agreement of the inclusion of the Target as a reinsured hereunder) (the "Information"), the Reinsurer shall use its best efforts to provide, within 30 days following receipt of the Information, a written notice to the Company which notice shall state whether or not the Reinsurer will consent to the inclusion of such Target as a reinsured hereunder upon consummation of the acquisition of such Target by the Company. If the Reinsurer consents to the inclusion of a Target as a reinsured hereunder, such Target shall be included in the term "Company" from and after the date on which the Company's acquisition of the Target is consummated, and the Company shall prepare and deliver to the Reinsurer an addendum to this Agreement that revises Exhibit #1 to include the name of such Target thereon. The 30-day period referred to above shall not commence until all of the Information reasonably requested by the Reinsurer has been received by the Reinsurer. Effective: September 1, 1998 1 of 16

ARTICLE 2 COMMENCEMENT AND TERMINATION Covering Incurred Losses from 12:01 a.m. Standard Time, September 1, 1998 (the "Effective Date") through 12:01 a.m., Standard Time, September 1, 2004 (the "Termination Date"). "Standard Time" shall mean the time as described in the Policies. This Agreement shall not terminate until all of the obligations by both parties to the Agreement have been fulfilled. ARTICLE 3 BUSINESS AND TERRITORY COVERED This Agreement shall cover all Policies attaching on or after the Effective Date that: (A) provide insurance against financial loss by reason of nonpayment of regularly scheduled principal and interest obligations arising under Issues sold by Issuers domiciled anywhere in the world provided the debt instruments or any other monetary obligations are denominated or payable in the currency of (i) an Organization of Economic

ARTICLE 2 COMMENCEMENT AND TERMINATION Covering Incurred Losses from 12:01 a.m. Standard Time, September 1, 1998 (the "Effective Date") through 12:01 a.m., Standard Time, September 1, 2004 (the "Termination Date"). "Standard Time" shall mean the time as described in the Policies. This Agreement shall not terminate until all of the obligations by both parties to the Agreement have been fulfilled. ARTICLE 3 BUSINESS AND TERRITORY COVERED This Agreement shall cover all Policies attaching on or after the Effective Date that: (A) provide insurance against financial loss by reason of nonpayment of regularly scheduled principal and interest obligations arising under Issues sold by Issuers domiciled anywhere in the world provided the debt instruments or any other monetary obligations are denominated or payable in the currency of (i) an Organization of Economic Cooperation and Development ("OECD") country or (ii) such other country whose sovereign rating is investment grade; provided, however, with respect to (ii) above, that any such debt instrument or other monetary obligation that is denominated in a currency other than the Issuer's domestic currency shall either be (x) investment grade or (y) the Company shall have entered into a currency swap with respect to such instrument or obligation that (I) eliminates all exchange risk thereunder or (II) exchanges the currency risk thereunder for the risk of an OECD currency that enables the transaction to be of investment grade quality, and (B) are classified by the Company as corporate utility debt guarantee insurance, debt service reserve fund surety bonds, investment grade asset-backed securities guarantee insurance, investment grade corporate debt guarantee insurance, investment grade structured finance guarantee insurance, municipal bond guarantee insurance, or municipal note guarantee insurance. The liability of the Reinsurer shall be subject in all respects to all the general and specific stipulations, clauses, waivers, extensions, modifications and endorsements of any of the Policies of the Company's liability, subject to the exclusions set forth in the Exclusions Article and the other terms and conditions of this Agreement as set forth herein. Effective: September 1, 1998 2 of 16

ARTICLE 4 EXCLUSIONS The following general exclusions shall apply in respect of all business ceded to the Reinsurer under this Agreement: A. Assumed reinsurance. However, not to exclude intercompany reinsurance with other subsidiaries of MBIA Inc. and/or business structured as reinsurance which would otherwise be written as insurance; this exception does not require the Company to cede business covered hereunder that has already been ceded to another applicable reinsurance cover. B. Business written by the Company not described in the Business and Territory Article. C. All liability of the Company arising by agreement, operation of law, or otherwise from its participation or membership, whether voluntary or involuntary, in any Insolvency Fund. "Insolvency Fund" includes any Guaranty Fund, Insolvency Fund, Plan, Pool, Association, Fund, or other arrangement, howsoever denominated, established or governed, which provides for any assessment of, or payment, or assumption by the Company of part of any claim, debt, charge, fee, or other obligation of an insurer, or its successors, or assigns which has been

ARTICLE 4 EXCLUSIONS The following general exclusions shall apply in respect of all business ceded to the Reinsurer under this Agreement: A. Assumed reinsurance. However, not to exclude intercompany reinsurance with other subsidiaries of MBIA Inc. and/or business structured as reinsurance which would otherwise be written as insurance; this exception does not require the Company to cede business covered hereunder that has already been ceded to another applicable reinsurance cover. B. Business written by the Company not described in the Business and Territory Article. C. All liability of the Company arising by agreement, operation of law, or otherwise from its participation or membership, whether voluntary or involuntary, in any Insolvency Fund. "Insolvency Fund" includes any Guaranty Fund, Insolvency Fund, Plan, Pool, Association, Fund, or other arrangement, howsoever denominated, established or governed, which provides for any assessment of, or payment, or assumption by the Company of part of any claim, debt, charge, fee, or other obligation of an insurer, or its successors, or assigns which has been declared by any competent authority to be insolvent or which otherwise is deemed unable to meet any claim, debt, charge, fee, or other obligation in whole or in part. ARTICLE 5 REINSURANCE CLAUSE The Reinsurer shall pay up to $50,000,000 Ultimate Net Loss excess of the sum of $60,000,000 Ultimate Net Loss each and every Occurrence, plus the remaining limit under the Company's First Special Excess of Loss Program at the time that a Loss is Incurred (it being understood and agreed that the First Special Excess of Loss Program shall have an aggregate limit of $50,000,000). The Reinsurer shall pay the Company as Ultimate Net Loss recoverable hereunder is Incurred. The aggregate limit of this Agreement shall never exceed $50,000,000 over the term of this Agreement. ARTICLE 6 DEFINITIONS A. "Allocated Loss Adjustment Expenses" as used in this Agreement means all court costs, interest upon judgments, and mitigation, investigation, adjustment, and legal expenses chargeable to: (i) the mitigation, investigation, negotiation, settlement of or defense against a Loss, (ii) loss prevention, mitigation or investigation in respect of Policies as to which the Company has posted a loss reserve, (iii) the investigation and workout of a potential Loss, Effective: September 1, 1998 3 of 16

or (iv) the protection, perfection and exercise of any subrogation or salvage or reimbursement rights or security interests with respect to a Policy. Allocated Loss Adjustment Expenses shall exclude all office expenses and salaries of officials and employees of the Company. B. "Incurred" as used in this Agreement in respect of a Loss means the date and time of Loss recorded on the books and records of the Company with respect to the estimated amount of default of the Issuer's obligation to pay principal or interest pursuant to the terms of a bond, note, or other instrument insured by a Policy. C. "Issue" as used in this Agreement means all obligations of one Issuer sold simultaneously, secured by a single revenue source (with essentially the same structure) or, in the case of structured finance or asset-backed securities, secured by a common pool of assets and, in either case, covered by a Policy. The Company shall be

or (iv) the protection, perfection and exercise of any subrogation or salvage or reimbursement rights or security interests with respect to a Policy. Allocated Loss Adjustment Expenses shall exclude all office expenses and salaries of officials and employees of the Company. B. "Incurred" as used in this Agreement in respect of a Loss means the date and time of Loss recorded on the books and records of the Company with respect to the estimated amount of default of the Issuer's obligation to pay principal or interest pursuant to the terms of a bond, note, or other instrument insured by a Policy. C. "Issue" as used in this Agreement means all obligations of one Issuer sold simultaneously, secured by a single revenue source (with essentially the same structure) or, in the case of structured finance or asset-backed securities, secured by a common pool of assets and, in either case, covered by a Policy. The Company shall be the sole judge of what constitutes one Issue. D. "Issuer" as used in this Agreement means, with respect to an Issue, the entity issuing the bonds, notes, or other instruments comprising the Issue. The Company shall be the sole judge of what constitutes one Issuer. E. "Loss" as used in this Agreement means the actual or, in the Company's best judgment, anticipated amounts of principal and interest for which the Company is liable with respect to all claims under all Policies. F. "Occurrence" as used in this Agreement means an actual or, in the Company's best judgment, anticipated default by an individual Issuer. G. "Ultimate Net Loss" as used herein shall mean the Company's initial estimate of the sum of Loss and Loss Adjustment Expense Incurred by the Company less inuring reinsurance, if any, less any salvage or subrogation as appearing on the Company's books at the time of all interim and/or final adjustment to the Ultimate Net Loss hereunder. For the purposes of determining Ultimate Net Loss and the amount of reinsurance recoverable hereunder prior to the final maturity of any Issue, the Company's actual estimate Loss and Loss Adjustment Expense shall be used. The following shall apply with respect to Ultimate Net Loss herein: I. Nothing in this Definition shall be construed as meaning the Reinsurer shall not pay the amount of reinsurance recoverable hereunder until the actual Ultimate Net Loss has been determined. II. The Company shall make quarterly adjustments to the estimates of Ultimate Net Loss beginning in the third quarter of 1998. The final adjustment to any of Ultimate Net Loss hereunder shall be made seven years after the Company sets its initial Ultimate Net Loss estimate for each Occurrence hereunder (or by mutual agreement at some Effective: September 1, 1998 4 of 16

other time). Such final calculation of Ultimate Net Loss shall be based upon the Company's estimate of Ultimate Net Loss as entered on the Company's books at that time. III. At each adjustment of Ultimate Net Loss, the amount of reinsurance recoverable hereunder shall be recalculated based on such calculation of Ultimate Net Loss. All amounts due the Company shall be payable in accordance with the Accounts, Reports and Payments and the Retention and Limits Articles hereunder. ARTICLE 7 PREMIUM The Company shall pay to the Reinsurer a flat premium equal to $1,500,000, payable no later than 90 days after binding coverage with the Reinsurer. In the event that the final amount of reinsurance recoverable under this Agreement is $0 and if the Agreement is terminated on a cut-off basis, the Reinsurer agrees to pay the Company

other time). Such final calculation of Ultimate Net Loss shall be based upon the Company's estimate of Ultimate Net Loss as entered on the Company's books at that time. III. At each adjustment of Ultimate Net Loss, the amount of reinsurance recoverable hereunder shall be recalculated based on such calculation of Ultimate Net Loss. All amounts due the Company shall be payable in accordance with the Accounts, Reports and Payments and the Retention and Limits Articles hereunder. ARTICLE 7 PREMIUM The Company shall pay to the Reinsurer a flat premium equal to $1,500,000, payable no later than 90 days after binding coverage with the Reinsurer. In the event that the final amount of reinsurance recoverable under this Agreement is $0 and if the Agreement is terminated on a cut-off basis, the Reinsurer agrees to pay the Company a bonus equal to 50% of the Premium hereunder (i.e., $750,000 being 50% of $1,500,000). If such a bonus is due the Company, the Reinsurer shall pay the Company such amount as soon as practicable after termination of the Agreement, but no later than 90 days after the Agreement's termination. ARTICLE 8 ACCOUNTS, REPORTS AND PAYMENTS A. The Company shall furnish to the Reinsurer quarterly accounts of business ceded hereunder within 25 days after the close of each calendar year quarter, showing: the sums of Loss, Loss Adjustment Expense, salvage and subrogation, and Ultimate Net Loss hereunder on paid and Incurred bases, as well as adjustments to the amount of reinsurance recoverable hereunder. The amount of reinsurance recoverable hereunder shall be calculated by taking the Ultimate Net Loss and deducting $60,000,000 of Ultimate Net Loss each and every Occurrence as well as the remaining limit under the Company's First Special Excess of Loss Program at the time such Occurrence is Incurred, but shall never exceed an aggregate limit of $50,000,000. To the extent that the amount of reinsurance recoverable hereunder increases, the Reinsurer shall owe the Company such increase in the amount of reinsurance recoverable hereunder over that recoverable under the prior account; to the extent that the Company's amount of reinsurance recoverable hereunder decreases, the Company shall owe the Reinsurer such decrease in amount of reinsurance recoverable hereunder below that recoverable under the prior account. Effective: September 1, 1998 5 of 16

Such net balance shown shall be payable by the debtor party at the time the account is rendered, if the Company is the debtor party, and within 10 days of the Reinsurer's receipt of the account, if the Reinsurer is the debtor party. B. On a quarterly basis, the Company shall provide the Reinsurer with a listing of all Occurrences with Incurred Ultimate Net Loss in excess of $25,000,000. C. Annually, the Company shall provide the Reinsurer with the following additional information: the top 50 Issuers per bond type (including their Standard & Poor's, Moody's and MBIA ratings, their risk type, the gross and net par, and gross and net debt service), and any relevant information on any Issuers that MBIA puts on its so-called "watch-list." ARTICLE 9 CLAIMS AND LOSSES

Such net balance shown shall be payable by the debtor party at the time the account is rendered, if the Company is the debtor party, and within 10 days of the Reinsurer's receipt of the account, if the Reinsurer is the debtor party. B. On a quarterly basis, the Company shall provide the Reinsurer with a listing of all Occurrences with Incurred Ultimate Net Loss in excess of $25,000,000. C. Annually, the Company shall provide the Reinsurer with the following additional information: the top 50 Issuers per bond type (including their Standard & Poor's, Moody's and MBIA ratings, their risk type, the gross and net par, and gross and net debt service), and any relevant information on any Issuers that MBIA puts on its so-called "watch-list." ARTICLE 9 CLAIMS AND LOSSES (1) The Company shall have complete and sole control of and direction of all efforts to: (i) mitigate, investigate, negotiate, settle or defend a Loss, (ii) prevent, mitigate, or investigate a probable Loss under Policies as to which the Company has posted a loss reserve, (iii) investigate and work out a potential Loss, and (iv) to protect, perfect and exercise any subrogation, salvage or reimbursement rights or security interests with respect to any Policy, and may take any action as it may deem advisable with respect thereto. All Loss settlements by the Company, all salvage and subrogation settlements, and all settlements with an Issuer (or with an underlying obligor of that Issuer), shall be final, conclusive and unconditionally binding upon the Reinsurer. (2) The Reinsurer shall pay to the Company the Reinsurer's Proportionate Share of any loss within one business day following receipt of notice from the Company that the Company has made payment of the Loss. The Reinsurer shall effect payment by wire transfer of federal funds to the party designated by the Company in the notice. Details of the Loss will be provided to the Reinsurer by the Company promptly by mail, or by such other means as requested by the Reinsurer. (3) The Reinsurer shall pay to the Company the Reinsurer's Proportionate Share of any Allocated Loss Adjustment Expenses paid by the Company at the times and in the manner specified in the Accounts, Reports and Payments Article. ARTICLE 10 NET RETAINED LINES (1) This Agreement applies only to that portion of any insurance or reinsurance which the Company retains net for its own account and in calculating the amount of any loss Effective: September 1, 1998 6 of 16

hereunder and also in computing the amount or amounts in excess of which this Agreement attaches, only loss or losses in respect of that portion of any insurance or reinsurance which the Company retains net for its own account shall be included. (2) The amount of the Reinsurer's liability hereunder in respect of any loss or losses shall not be increased by reason of the inability of the Company to collect from any other reinsurers, whether specific or general, any amounts which may become due from them, whether such inability arises from the insolvency of such other reinsurers or otherwise. (3) Reinsurances or pooling agreements effected or entered into by the Company with any of its affiliated companies under common management or common ownership which reduce the individual retained line of the Company shall be disregarded for the purposes of this Agreement.

hereunder and also in computing the amount or amounts in excess of which this Agreement attaches, only loss or losses in respect of that portion of any insurance or reinsurance which the Company retains net for its own account shall be included. (2) The amount of the Reinsurer's liability hereunder in respect of any loss or losses shall not be increased by reason of the inability of the Company to collect from any other reinsurers, whether specific or general, any amounts which may become due from them, whether such inability arises from the insolvency of such other reinsurers or otherwise. (3) Reinsurances or pooling agreements effected or entered into by the Company with any of its affiliated companies under common management or common ownership which reduce the individual retained line of the Company shall be disregarded for the purposes of this Agreement. ARTICLE 11 SALVAGE AND SUBROGATION (1) The Company shall pay the Reinsurer the Reinsurer's Proportionate Share of any Recovery in respect of any Loss covered by the Reinsurer under this Agreement at the times and in the manner specified in the Accounts, Reports and Payments Article. (2) "Recovery", as used in this Agreement means any amount received by the Company in respect of any Loss covered by the Reinsurer under this Agreement whether by subrogation, salvage, or reimbursement from the Issuer (or from an underlying obligor of that Issuer). ARTICLE 12 REINSURANCE FOLLOWS ORIGINAL POLICIES This Agreement shall be construed as an honorable undertaking between the parties hereto and shall not be defeated by technical legal construction, it being the intention of this Agreement that the fortunes of the Reinsurer shall follow the fortunes of the Company. Nothing herein shall in any manner create any obligations or establish any rights against the Reinsurer in favor of any third parties or any persons not parties to this Reinsurance Agreement. ARTICLE 13 REINSURANCE TAX In consideration of the terms under which this Agreement is issued, the Company undertakes not to claim any deduction of the premium hereon when making Canadian tax returns or when Effective: September 1, 1998 7 of 16

making tax returns, other than Income or Profits Tax returns, to any state or territory in the United States of America or to the District of Columbia. ARTICLE 14 FEDERAL EXCISE TAX (This Article applies only to those reinsurers domiciled outside of the United States of America who are not exempt from the Federal Excise Tax.) The Reinsurer has agreed to allow for the purpose of paying the Federal Excise Tax the percentage specified by United States law of the premium payable hereon to the extent such premium is subject to Federal Excise Tax.

making tax returns, other than Income or Profits Tax returns, to any state or territory in the United States of America or to the District of Columbia. ARTICLE 14 FEDERAL EXCISE TAX (This Article applies only to those reinsurers domiciled outside of the United States of America who are not exempt from the Federal Excise Tax.) The Reinsurer has agreed to allow for the purpose of paying the Federal Excise Tax the percentage specified by United States law of the premium payable hereon to the extent such premium is subject to Federal Excise Tax. In the event of any return of premium becoming due hereunder, the Reinsurer will deduct the percentage specified by United States law from the amount of the return and the Company or its agent should take steps to recover the Tax from the United States Government. ARTICLE 15 ACCESS TO RECORDS The Reinsurer shall have the right to inspect at all reasonable times during the currency of the Agreement and thereafter, the books, records and documents of the Company with respect to its participation in the insurance or reinsurance provided by the Company. ARTICLE 16 CURRENCY Where the word "dollars" and/or the sign "$" appear in this Agreement, they shall mean United States dollars, except in those cases where the original policy is issued by the Company in Canadian dollars, in which case they shall mean Canadian dollars. For purposes of this Agreement, where the Company receives premiums or pays losses in currencies other than United States or Canadian currency, such premiums or losses shall be converted into United States dollars at the actual rates of exchange at which these premiums or losses are entered in the Company's books. Effective: September 1, 1998 8 of 16

ARTICLE 17 SERVICE OF SUIT (This Article shall apply only if the Reinsurer is domiciled outside of the United States of America or if the Reinsurer is not authorized in the State of New York.) (1) In the event of the failure of the Reinsurer to pay any amount claimed to be due hereunder, the Reinsurer, at the request of the Company, will submit to the jurisdiction of a court of competent jurisdiction within the United States of America. Nothing in this Article constitutes or should be understood to constitute a waiver of the Reinsurer's rights to commence an action in any court of competent jurisdiction in the United States of America, to remove an action to a district court of the United States of America, or to seek a transfer of a case to another court as permitted by the laws of the United States of America or of any State in the United States of America. It is further agreed that service of process on the Reinsurer in such suit may be made upon Messrs. Mendes & Mount, 750 Seventh Avenue, New York, New York 10019-6829 (or other agent previously designated by the Reinsurer which designation has been previously notified to the Company), and that in any suit instituted against the Reinsurer, the Reinsurer will abide by the final decision of such court or, in the case of an appeal, the

ARTICLE 17 SERVICE OF SUIT (This Article shall apply only if the Reinsurer is domiciled outside of the United States of America or if the Reinsurer is not authorized in the State of New York.) (1) In the event of the failure of the Reinsurer to pay any amount claimed to be due hereunder, the Reinsurer, at the request of the Company, will submit to the jurisdiction of a court of competent jurisdiction within the United States of America. Nothing in this Article constitutes or should be understood to constitute a waiver of the Reinsurer's rights to commence an action in any court of competent jurisdiction in the United States of America, to remove an action to a district court of the United States of America, or to seek a transfer of a case to another court as permitted by the laws of the United States of America or of any State in the United States of America. It is further agreed that service of process on the Reinsurer in such suit may be made upon Messrs. Mendes & Mount, 750 Seventh Avenue, New York, New York 10019-6829 (or other agent previously designated by the Reinsurer which designation has been previously notified to the Company), and that in any suit instituted against the Reinsurer, the Reinsurer will abide by the final decision of such court or, in the case of an appeal, the appellate court. (2) The above-named firm is authorized and directed to accept service of process on behalf of the Reinsurer in any such suit and/or upon the request of the Company to give written undertaking to the Company that such firm will enter a general appearance upon the Reinsurer's behalf in the event such a suit shall be instituted. (3) Further, pursuant to any statute of any state, territory or district of the United States of America which makes provision therefor, the Reinsurer hereon hereby designates the superintendent, commissioner or director of insurance or other officer specified for that purpose in the statute, or his successor or successors in office, as its true and lawful attorney upon whom may be served any lawful process in action, suit or proceeding instituted by or on behalf of the Company or any beneficiary hereunder arising out of this Agreement, and hereby designates the above named as the person to whom the said officer is authorized to mail such process or a true copy thereof. ARTICLE 18 ARBITRATION (1) As a condition precedent to any right of action hereunder, any dispute arising out of or related to this Agreement shall be submitted to the decision of a board of arbitration composed of two arbitrators and an umpire, meeting in Armonk, New York, unless otherwise agreed. Effective: September 1, 1998 9 of 16

(2) The members of the board of arbitration shall be active or retired disinterested officials of insurance or reinsurance companies. Each party shall appoint its arbitrator, and the two arbitrators shall choose an umpire before instituting the hearing. If the respondent fails to appoint its arbitrator within four weeks after being requested to do so by the claimant, the latter shall also appoint the second arbitrator. If the two arbitrators fail to agree upon the appointment of an umpire within four weeks after their nominations, the umpire shall be selected by the regional director of the American Arbitration Association in New York, New York, or the regional director's delegate. (3) The claimant shall submit its initial brief within 20 days from appointment of the umpire. The respondent shall submit its brief within 20 days after receipt of the claimant's brief and the claimant shall submit a reply brief within 10 days after receipt of the respondent's brief. (4) The board shall make its decision with regard to the custom and usage of the insurance and reinsurance business. The board shall issue its decision in writing based upon a hearing in which evidence may be introduced without following strict rules of evidence but in which cross-examination and rebuttal shall be allowed. The board shall make its decision within 60 days following the termination of the hearings unless the parties consent to an

(2) The members of the board of arbitration shall be active or retired disinterested officials of insurance or reinsurance companies. Each party shall appoint its arbitrator, and the two arbitrators shall choose an umpire before instituting the hearing. If the respondent fails to appoint its arbitrator within four weeks after being requested to do so by the claimant, the latter shall also appoint the second arbitrator. If the two arbitrators fail to agree upon the appointment of an umpire within four weeks after their nominations, the umpire shall be selected by the regional director of the American Arbitration Association in New York, New York, or the regional director's delegate. (3) The claimant shall submit its initial brief within 20 days from appointment of the umpire. The respondent shall submit its brief within 20 days after receipt of the claimant's brief and the claimant shall submit a reply brief within 10 days after receipt of the respondent's brief. (4) The board shall make its decision with regard to the custom and usage of the insurance and reinsurance business. The board shall issue its decision in writing based upon a hearing in which evidence may be introduced without following strict rules of evidence but in which cross-examination and rebuttal shall be allowed. The board shall make its decision within 60 days following the termination of the hearings unless the parties consent to an extension. The majority decision of the board shall be final and binding upon all parties to the proceeding. Judgment may be entered upon the award of the board in any court having jurisdiction thereof. (5) If more than one reinsurer is involved in the same dispute, all such reinsurers shall constitute and act as one party for purposes of this Article and communications shall be made by the Company to each of the reinsurers constituting the one party provided, however, that nothing herein shall impair the rights of such reinsurers to assert several, rather than joint, defenses or claims, nor be construed as changing the liability of the reinsurers under the terms of this Agreement from several to joint. (6) Each party shall bear the expense of its own arbitrator and shall jointly and equally bear with the other party the expense of the umpire. The remaining costs of the arbitration proceedings shall be allocated by the board. (7) Unless prohibited by applicable law, an arbitral award hereunder and any judgment thereon shall bear interest from the date the arbitral award was rendered at the rate equal from time to time to the rate publicly announced by Citibank, N. A., as its base rate plus 2%. (8) The parties consent to the jurisdiction of the Supreme Court of the State of New York, County of New York, and of the United States District Court for the Southern District of New York, for all purposes in connection with such arbitration, including without limitation any application to compel arbitration or to confirm an arbitration award. The parties consent that any process or notice of motion or other application to either of said Courts, and any paper in connection with arbitration, may be served by certified mail, return receipt requested, or by personal service or in such other manner as may be permissible under the rules of the applicable court or panel provided a reasonable time for appearances Effective: September 1, 1998 10 of 16

is allowed. Service upon the Company shall be directed to the Company, in care of the Company's General Counsel. Service upon the Reinsurer shall be directed to the Reinsurer in care of its President. ARTICLE 19 INDEMNIFICATION AND ERRORS AND OMISSIONS Any recitals in this Agreement to the terms and provisions of any original insurance or reinsurance are merely descriptive. The Reinsurer is reinsuring, to the amount herein provided, the obligations of the Company under any original insurance or reinsurance. The Company shall be the sole judge as to: (a) what shall constitute a claim or loss covered under any original insurance or reinsurance written by the Company;

is allowed. Service upon the Company shall be directed to the Company, in care of the Company's General Counsel. Service upon the Reinsurer shall be directed to the Reinsurer in care of its President. ARTICLE 19 INDEMNIFICATION AND ERRORS AND OMISSIONS Any recitals in this Agreement to the terms and provisions of any original insurance or reinsurance are merely descriptive. The Reinsurer is reinsuring, to the amount herein provided, the obligations of the Company under any original insurance or reinsurance. The Company shall be the sole judge as to: (a) what shall constitute a claim or loss covered under any original insurance or reinsurance written by the Company; (b) the Company's liability thereunder; and (c) the amount or amounts which it shall be proper for the Company to pay thereunder. The Reinsurer shall be bound by the judgment of the Company as to the obligation(s) and liability(ies) of the Company under any original insurance or reinsurance. Any inadvertent error, omission or delay in complying with the terms and conditions of this Agreement shall not be held to relieve either party hereto from any liability which would attach to it hereunder if such error, omission or delay had not been made, provided such error, omission or delay is rectified immediately upon discovery. ARTICLE 20 INSOLVENCY (1) In the event of the insolvency of the Company, the reinsurance provided by this Agreement shall be payable by the Reinsurer on the basis of the liability of the Company under the Policies ceded without diminution because of the insolvency of the Company or because its liquidator, receiver, conservator or statutory successor (hereinafter referred to as the "Liquidator") has failed to pay all or a portion of any claim. The Liquidator shall give written notice to the Reinsurer of the pendency of a claim against the Company under any Policy ceded to Reinsurers and covered by this Agreement within a reasonable time after such claim is filed in the conservation or liquidation proceeding or in the receivership. During the pendency of such claim, the Reinsurer may investigate such claim and interpose at its own expense, in the proceeding where such claim is to be adjudicated, any defense or defenses that it may deem available to the Company or the Liquidator. The expense thus incurred by the Reinsurer shall be chargeable, subject to the approval of the court, against Effective: September 1, 1998 11 of 16

the Company as part of the expense of conservation or liquidation to the extent of a Proportionate Share of the benefit which may accrue to the Company solely as a result of the defense undertaken by the Reinsurer. (2) Where two or more Reinsurers are involved in the same claim and a majority in interest elect to interpose defense to such claim, the expense shall be apportioned in accordance with the terms of this Agreement as though such expense has been incurred by the Company. (3) The reinsurance provided by this Agreement shall be payable by the Reinsurer to the Company or to the Liquidator, except (a) where the Policy specifically provides another payee of such reinsurance in the event of the insolvency of the Company, and (b) where the Reinsurer with the consent of the direct insured(s) has assumed the obligations of the Company under the Policies as the direct obligations of the Reinsurer to the payees under such Policies and in substitution for the obligations of the Company to such payees. ARTICLE 21

the Company as part of the expense of conservation or liquidation to the extent of a Proportionate Share of the benefit which may accrue to the Company solely as a result of the defense undertaken by the Reinsurer. (2) Where two or more Reinsurers are involved in the same claim and a majority in interest elect to interpose defense to such claim, the expense shall be apportioned in accordance with the terms of this Agreement as though such expense has been incurred by the Company. (3) The reinsurance provided by this Agreement shall be payable by the Reinsurer to the Company or to the Liquidator, except (a) where the Policy specifically provides another payee of such reinsurance in the event of the insolvency of the Company, and (b) where the Reinsurer with the consent of the direct insured(s) has assumed the obligations of the Company under the Policies as the direct obligations of the Reinsurer to the payees under such Policies and in substitution for the obligations of the Company to such payees. ARTICLE 21 SECURITY (l) When a governing body of any jurisdiction in which the Company legally operates or to which it submits, requires as a condition to credit for the reinsurance provided by this Agreement that the Reinsurer post a Letter of Credit for the benefit of the Company, establish a Trust Account for the benefit of the Company or deposit funds under the control of the Company, the Reinsurer shall post and maintain such a Letter of Credit, establish such a Trust Account, or deposit such funds in the form and amount necessary to permit the Company to avoid on any statutory financial statement filed by the Company the penalty to surplus which would result from the loss of credit for the reinsurance. (2) Notwithstanding any other provisions of this Agreement, it is agreed that any Letter of Credit provided under section (1) of this Article, shall be drawn upon and utilized by the Company or its successors in interest only for one or more of the following purposes: (a) to reimburse the Company for the Reinsurer's Proportionate Share of Losses and Allocated Loss Adjustment Expenses paid by the Company under this Agreement; (b) to reimburse the Company for the Reinsurer's Proportionate Share of Refunding Debits; (c) if this Agreement has been terminated pursuant to the Commencement and Termination Article, to reimburse the Company for unearned premium due to the Company; (d) to fund an account with the Company in an amount at least equal to the deduction allowed for the reinsurance provided by this Agreement, from the Company's liabilities for Policies ceded under the Agreement, such amount to include, Effective: September 1, 1998 12 of 16

if applicable, but not be limited to, amounts for contingency reserves, loss reserves for paid, reported and incurred but not reported ("IBNR") losses, allocated loss adjustment expense reserves and unearned premium reserves; or (e) to pay any other amounts the Company claims are due under the Agreement. All of the foregoing should be applied without diminution because of insolvency on the part of the Company or Reinsurer. (3) If the Reinsurer elects to provide a Letter of Credit under section (1) of this Article, the Reinsurer shall cause the Letter of Credit to be issued, in place and effective no later than the "as of date" of the first quarterly filing prepared by the Company for the appropriate regulatory authority after the effective date of this Agreement.

if applicable, but not be limited to, amounts for contingency reserves, loss reserves for paid, reported and incurred but not reported ("IBNR") losses, allocated loss adjustment expense reserves and unearned premium reserves; or (e) to pay any other amounts the Company claims are due under the Agreement. All of the foregoing should be applied without diminution because of insolvency on the part of the Company or Reinsurer. (3) If the Reinsurer elects to provide a Letter of Credit under section (1) of this Article, the Reinsurer shall cause the Letter of Credit to be issued, in place and effective no later than the "as of date" of the first quarterly filing prepared by the Company for the appropriate regulatory authority after the effective date of this Agreement. ARTICLE 22 CONFIDENTIALITY The Reinsurer agrees that it will maintain the confidentiality of the all information presented as a result of this Agreement including, but not limited to the bonds, the basic agreements, the reinsurance undertaken with respect to the bonds, all underlying transactions and underlying obligations, and all certificates, reports, agreements, notices, and communications of any sort relating to any of the foregoing in its communications with third parties, except to the extent required by law, regulation, or order, and except as may be made to the Reinsurer's legal counsel, auditors, and accountants, to Standard & Poor's Corporation, Moody's Investor Services, Inc., Duff & Phelps Corporation, or any other rating agency in connection with their rating of the Reinsurer and except as may be necessary or appropriate in connection with any retrocession, subject to the receipt of a written confidentiality commitment from the proposed retrocessional reinsurer. The Reinsurer and its legal counsel, auditors, and accountants will have no obligation of confidentiality in respect or any information that may be available to the public or become available to the public through no fault of such person. ARTICLE 23 OFFSET Each party hereto shall have, and may exercise at any time and from time to time, the right to offset balance or balances, whether on account of premiums or on account of Losses or otherwise, due from such party to the other party hereto under this Agreement or under any other reinsurance agreement heretofore or hereafter entered into by and between them, and may offset the same against any balance or balances due or to become due to the former from the latter under the same or any other reinsurance agreement between them. The party asserting the right of offset shall have and may exercise such right whether the balance(s) due or to become due to such party from the other are on account of premiums or on account of Losses or otherwise and Effective: September 1, 1998 13 of 16

regardless of the capacity, whether as assuming reinsurer or as ceding company, in which each party acted under the agreement or, if more than one, the different agreements involved. In the event of the insolvency of a party hereto, offsets shall be allowed only in accordance with the provisions of Section 7427 of the Insurance Law of the State of New York. ARTICLE 24 GOVERNING LAW This Agreement shall be governed by the laws of the State of New York. ARTICLE 25

regardless of the capacity, whether as assuming reinsurer or as ceding company, in which each party acted under the agreement or, if more than one, the different agreements involved. In the event of the insolvency of a party hereto, offsets shall be allowed only in accordance with the provisions of Section 7427 of the Insurance Law of the State of New York. ARTICLE 24 GOVERNING LAW This Agreement shall be governed by the laws of the State of New York. ARTICLE 25 INTERMEDIARY Guy Carpenter & Company, Inc., Two World Trade Center, New York, New York, 10048, is hereby recognized as the Intermediary by which this Agreement was negotiated and through which all communications relating hereto including, but not limited to, notices, statements, premiums, return premiums, commissions, taxes, Losses, Allocated Loss Adjustment Expenses, salvage and Loss settlements, shall be transmitted to both parties, except as may be otherwise specified in respect of a wire transfer payment of a Loss (section (2) of the Claims and Losses Article). It is understood, as regards remittances due either party hereunder, that payment by the Company to the Intermediary shall constitute payment to the Reinsurer, but payment by the Reinsurer to the Intermediary shall constitute payment to the Company only to the extent such payments are actually received by the Company. ARTICLE 26 PARTICIPATION The Reinsurer's Percentage Share of the Interests and Liabilities set out in this Agreement is 100% of up to $50,000,000. Effective: September 1, 1998 14 of 16

IN WITNESS WHEREOF the parties hereto, by their respective duly authorized officers, have executed this SECOND SPECIAL PER OCCURRENCE EXCESS OF LOSS REINSURANCE AGREEMENT, in triplicate, as of the dates recorded below: ACCEPTED: At: Armonk, New York this 30th day of December , 1998. MBIA INSURANCE CORPORATION MBIA Assurance, S. A. and/or any other insurance or reinsurance company subsidiaries of MBIA Inc. listed in Exhibit No. 1 attached to this Agreement
/s/ Julliette S. Tehrani -----------------------------------------and at: Funchal Madeira this 22nd day of December , 1998.

AXA RE FINANCE S.A.

IN WITNESS WHEREOF the parties hereto, by their respective duly authorized officers, have executed this SECOND SPECIAL PER OCCURRENCE EXCESS OF LOSS REINSURANCE AGREEMENT, in triplicate, as of the dates recorded below: ACCEPTED: At: Armonk, New York this 30th day of December , 1998. MBIA INSURANCE CORPORATION MBIA Assurance, S. A. and/or any other insurance or reinsurance company subsidiaries of MBIA Inc. listed in Exhibit No. 1 attached to this Agreement
/s/ Julliette S. Tehrani -----------------------------------------and at: Funchal Madeira this 22nd day of December , 1998.

AXA RE FINANCE S.A.
/s/ Christophe Renia -----------------------------------------Senior Vice President

[STAMP]

15 of 16 Effective: September l, 1998 15 of 16

EXHIBIT NO. 1 Insurance and/or Reinsurance Company Subsidiaries Included within the Definition of Company hereunder MBIA Assurance S. A. MBIA Insurance Corporation MBIA Insurance Corp. of Illinois Capital Markets Assurance Corporation 16 of 16 Effective: September 1, 1998 16 of 16

THIRD SPECIAL PER OCCURRENCE EXCESS OF LOSS REINSURANCE AGREEMENT (hereinafter referred to as "Agreement") made and entered into by and between MBIA Insurance Corporation, Armonk, New York; and/or MBIA Assurance S. A., Paris, France; and/or any other insurance or reinsurance company subsidiaries of MBIA Inc. listed in Exhibit No. 1 attached to this Agreement (hereinafter referred to as the"Company"), and ZURICH REINSURANCE (NORTH AMERICA), INC.

EXHIBIT NO. 1 Insurance and/or Reinsurance Company Subsidiaries Included within the Definition of Company hereunder MBIA Assurance S. A. MBIA Insurance Corporation MBIA Insurance Corp. of Illinois Capital Markets Assurance Corporation 16 of 16 Effective: September 1, 1998 16 of 16

THIRD SPECIAL PER OCCURRENCE EXCESS OF LOSS REINSURANCE AGREEMENT (hereinafter referred to as "Agreement") made and entered into by and between MBIA Insurance Corporation, Armonk, New York; and/or MBIA Assurance S. A., Paris, France; and/or any other insurance or reinsurance company subsidiaries of MBIA Inc. listed in Exhibit No. 1 attached to this Agreement (hereinafter referred to as the"Company"), and ZURICH REINSURANCE (NORTH AMERICA), INC. (hereinafter referred to as the "Reinsurer"). In consideration of the mutual covenants hereinafter contained, the parties hereto agree as follows: ARTICLE 1 ACQUISITION In the event that, following the execution of this Agreement, the Company notifies the Reinsurer of a proposed acquisition by the Company of an insurance company (a "Target") and provides the Reinsurer with such due diligence information as the Reinsurer may reasonably request with respect to such Target (including without limitation information relating to the effect on this Agreement of the inclusion of the Target as a reinsured hereunder) (the "Information"), the Reinsurer shall use its best efforts to provide, within 30 days following receipt of the Information, a written notice to the Company which notice shall state whether or not the Reinsurer will consent to the inclusion of such Target as a reinsured hereunder upon consummation of the acquisition of such Target by the Company. If the Reinsurer consents to the inclusion of a Target as a reinsured hereunder, such Target shall be included in the term "Company" from and after the date on which the Company's acquisition of the Target is consummated, and the Company shall prepare and deliver to the Reinsurer an addendum to this Agreement that revises Exhibit #1 to include the name of such Target thereon. The 30-day period referred to above shall not commence until all of the Information reasonably requested by the Reinsurer has been received by the Reinsurer. Effective: September 15, 1998 1 of 12

ARTICLE 2 COMMENCEMENT AND TERMINATION Covering Incurred Losses from September 15, 1998 (the "Effective Date") through December 31, 1998 (the "Termination Date"), both days inclusive. "Standard Time" shall mean the time as described in the Policies.

THIRD SPECIAL PER OCCURRENCE EXCESS OF LOSS REINSURANCE AGREEMENT (hereinafter referred to as "Agreement") made and entered into by and between MBIA Insurance Corporation, Armonk, New York; and/or MBIA Assurance S. A., Paris, France; and/or any other insurance or reinsurance company subsidiaries of MBIA Inc. listed in Exhibit No. 1 attached to this Agreement (hereinafter referred to as the"Company"), and ZURICH REINSURANCE (NORTH AMERICA), INC. (hereinafter referred to as the "Reinsurer"). In consideration of the mutual covenants hereinafter contained, the parties hereto agree as follows: ARTICLE 1 ACQUISITION In the event that, following the execution of this Agreement, the Company notifies the Reinsurer of a proposed acquisition by the Company of an insurance company (a "Target") and provides the Reinsurer with such due diligence information as the Reinsurer may reasonably request with respect to such Target (including without limitation information relating to the effect on this Agreement of the inclusion of the Target as a reinsured hereunder) (the "Information"), the Reinsurer shall use its best efforts to provide, within 30 days following receipt of the Information, a written notice to the Company which notice shall state whether or not the Reinsurer will consent to the inclusion of such Target as a reinsured hereunder upon consummation of the acquisition of such Target by the Company. If the Reinsurer consents to the inclusion of a Target as a reinsured hereunder, such Target shall be included in the term "Company" from and after the date on which the Company's acquisition of the Target is consummated, and the Company shall prepare and deliver to the Reinsurer an addendum to this Agreement that revises Exhibit #1 to include the name of such Target thereon. The 30-day period referred to above shall not commence until all of the Information reasonably requested by the Reinsurer has been received by the Reinsurer. Effective: September 15, 1998 1 of 12

ARTICLE 2 COMMENCEMENT AND TERMINATION Covering Incurred Losses from September 15, 1998 (the "Effective Date") through December 31, 1998 (the "Termination Date"), both days inclusive. "Standard Time" shall mean the time as described in the Policies. Notwithstanding the termination of this Agreement as herein provided, the provisions of this Agreement shall continue to apply to all unfinished business hereunder to the end that all obligations and liabilities assumed by a party hereunder prior to such termination shall be fully performed and discharged. ARTICLE 3 BUSINESS AND TERRITORY COVERED This Agreement shall cover all Policies in force and attaching on or after the Effective Date that: (A) provide insurance against financial loss by reason of nonpayment of regularly scheduled principal and interest obligations arising under Issues sold by Issuers domiciled anywhere in the world provided the debt instruments or any other monetary obligations are denominated or payable in the currency of (i) an Organization of Economic

ARTICLE 2 COMMENCEMENT AND TERMINATION Covering Incurred Losses from September 15, 1998 (the "Effective Date") through December 31, 1998 (the "Termination Date"), both days inclusive. "Standard Time" shall mean the time as described in the Policies. Notwithstanding the termination of this Agreement as herein provided, the provisions of this Agreement shall continue to apply to all unfinished business hereunder to the end that all obligations and liabilities assumed by a party hereunder prior to such termination shall be fully performed and discharged. ARTICLE 3 BUSINESS AND TERRITORY COVERED This Agreement shall cover all Policies in force and attaching on or after the Effective Date that: (A) provide insurance against financial loss by reason of nonpayment of regularly scheduled principal and interest obligations arising under Issues sold by Issuers domiciled anywhere in the world provided the debt instruments or any other monetary obligations are denominated or payable in the currency of (i) an Organization of Economic Cooperation and Development ("OECD") country or (ii) such other country whose sovereign rating is investment grade; provided, however, with respect to (ii) above, that any such debt instrument or other monetary obligation that is denominated in a currency other than the Issuer's domestic currency shall either be (x) investment grade or (y) the Company shall have entered into a currency swap with respect to such instrument or obligation that (I) eliminates all exchange risk thereunder or (II) exchanges the currency risk thereunder for the risk of an OECD currency that enables the transaction to be of investment grade quality, and (B) are classified by the Company as corporate utility debt guarantee insurance, debt service reserve fund surety bonds, investment grade asset-backed securities guarantee insurance, investment grade corporate debt guarantee insurance, investment grade structured finance guarantee insurance, municipal bond guarantee insurance, or municipal note guarantee insurance. The liability of the Reinsurer shall be subject in all respects to all the general and specific stipulations, clauses, waivers, extensions, modifications and endorsements of any of the Company's Policies, subject to the exclusions set forth in the Exclusions Article and the other terms and conditions of this Agreement as set forth herein. Effective: September 15, 1998 2 of 12

ARTICLE 4 EXCLUSIONS The following general exclusions shall apply in respect of all business ceded to the Reinsurer under this Agreement: A. Assumed reinsurance. However, not to exclude intercompany reinsurance with other subsidiaries of MBIA Inc. and/or business structured as reinsurance which would otherwise be written as insurance; this exception does not require the Company to cede business covered hereunder that has already been ceded to another applicable reinsurance cover. B. Business written by the Company not described in the Business and Territory Article. C. All liability of the Company arising by agreement, operation of law, or otherwise from its participation or membership, whether voluntary or involuntary, in any Insolvency Fund. "Insolvency Fund" includes any Guaranty Fund, Insolvency Fund, Plan, Pool, Association, Fund, or other arrangement, howsoever denominated, established or governed which provides for any assessment of, or payment, or assumption by the Company of

ARTICLE 4 EXCLUSIONS The following general exclusions shall apply in respect of all business ceded to the Reinsurer under this Agreement: A. Assumed reinsurance. However, not to exclude intercompany reinsurance with other subsidiaries of MBIA Inc. and/or business structured as reinsurance which would otherwise be written as insurance; this exception does not require the Company to cede business covered hereunder that has already been ceded to another applicable reinsurance cover. B. Business written by the Company not described in the Business and Territory Article. C. All liability of the Company arising by agreement, operation of law, or otherwise from its participation or membership, whether voluntary or involuntary, in any Insolvency Fund. "Insolvency Fund" includes any Guaranty Fund, Insolvency Fund, Plan, Pool, Association, Fund, or other arrangement, howsoever denominated, established or governed which provides for any assessment of, or payment, or assumption by the Company of part of any claim, debt, charge, fee, or other obligation of an insurer, or its successors, or assigns which has been declared by any competent authority to be insolvent or which otherwise is deemed unable to meet any claim, debt, charge, fee, or other obligation in whole or in part. ARTICLE 5 REINSURANCE CLAUSE The Reinsurer shall pay up to $70,000,000 Ultimate Net Loss each and every Occurrence excess of $0 Ultimate Net Loss each and every Occurrence. The Reinsurer shall pay the Company as Ultimate Net Loss recoverable hereunder is Incurred. The aggregate limit of this Agreement shall never exceed $70,000,000 over the term of this Agreement. ARTICLE 6 DEFINITIONS A. "Allocated Loss Adjustment Expenses" as used in this Agreement means all court costs, interest upon judgments, and mitigation, investigation, adjustment, and legal expenses chargeable to: (i) the mitigation, investigation, negotiation, settlement of or defense against a Loss, (ii) loss prevention, mitigation or investigation in respect of Policies as to which the Company has posted a loss reserve, (iii) the investigation and workout of a potential Loss, or (iv) the protection, perfection and exercise of any subrogation or salvage or reimbursement rights or security interests with respect to a Policy. Allocated Loss Effective: September 15, 1998 3 of 12

Adjustment Expenses shall exclude all office expenses and salaries of officials and employees of the Company. B. "Incurred" as used in this Agreement in respect of the Company's Loss and Allocated Loss Adjustment Expenses means the date and time such Loss and Allocated Loss Adjustment Expense is recorded on the books and records of the Company with respect to the estimated amount of default of the Issuer's obligation to pay principal or interest pursuant to the terms of a bond, note, or other instrument insured by a Policy. C. "Issue" as used in this Agreement means all obligations of one Issuer sold simultaneously, secured by a single revenue source (with essentially the same structure) or, in the case of structured finance or asset-backed securities, secured by a common pool of assets and, in either case, covered by a Policy. The Company shall be the sole judge of what constitutes one Issue.

Adjustment Expenses shall exclude all office expenses and salaries of officials and employees of the Company. B. "Incurred" as used in this Agreement in respect of the Company's Loss and Allocated Loss Adjustment Expenses means the date and time such Loss and Allocated Loss Adjustment Expense is recorded on the books and records of the Company with respect to the estimated amount of default of the Issuer's obligation to pay principal or interest pursuant to the terms of a bond, note, or other instrument insured by a Policy. C. "Issue" as used in this Agreement means all obligations of one Issuer sold simultaneously, secured by a single revenue source (with essentially the same structure) or, in the case of structured finance or asset-backed securities, secured by a common pool of assets and, in either case, covered by a Policy. The Company shall be the sole judge of what constitutes one Issue. D. "Issuer" as used in this Agreement means, with respect to an Issue, the entity issuing the bonds, notes, or other instruments comprising the Issue. The Company shall be the sole judge of what constitutes one Issuer. E. "Loss" as used in this Agreement means the actual or, in the Company's best judgment, anticipated amounts of principal and interest for which the Company is liable with respect to all claims under all Policies. F. "Occurrence" as used in this Agreement means an: actual or, in the Company's best judgment, anticipated default by an individual Issuer. G. "Policy" as used in this Agreement means each binder, policy, surety bond or contract of insurance or amendment or endorsement thereto issued by the Company and constituting business covered as defined in the Business and Territory Covered Article. H. "Ultimate Net Loss" as used herein shall mean the Company's estimate of the sum of Loss and Allocated Loss Adjustment Expense Incurred by the Company from all Issues of an Issuer less reinsurance recoveries which inure to the benefit of this Agreement, if any, which shall include the remaining limits on the Company's First and Second Special Per Occurrence Excess of Loss Programs, less any salvage or subrogation recoveries as appearing on the Company's books at the time of all interim and/or final adjustment to the Ultimate Net Loss hereunder. For the purposes of determining Ultimate Net Loss and the amount of reinsurance recoverable hereunder prior to the final maturity of any Issue, the Company's estimated Loss and Allocated Loss Adjustment Expense shall be determined based on the Company's annual or quarterly statements, as the case may be. Effective: September 15, 1998 4 of 12

The following shall apply with respect to Ultimate Net Loss herein: I. Nothing in this Definition shall be construed as meaning the Reinsurer shall not pay the amount of reinsurance recoverable hereunder until the actual Ultimate Net Loss has been determined. II. The Company shall make quarterly adjustments to its estimates of Ultimate Net Loss beginning in the third and fourth quarters of 1998. The final adjustment to any Ultimate Net Loss hereunder shall be made seven years after the Termination Date of this Agreement (or by mutual agreement at some other time). Such final adjustment of Ultimate Net Loss shall be based upon the Company's estimate of Ultimate Net Loss as entered on the Company's books at such time. ARTICLE 7 PREMIUM The Company shall pay to the Reinsurer a flat premium equal to $350,000, payable upon execution of this Agreement.

The following shall apply with respect to Ultimate Net Loss herein: I. Nothing in this Definition shall be construed as meaning the Reinsurer shall not pay the amount of reinsurance recoverable hereunder until the actual Ultimate Net Loss has been determined. II. The Company shall make quarterly adjustments to its estimates of Ultimate Net Loss beginning in the third and fourth quarters of 1998. The final adjustment to any Ultimate Net Loss hereunder shall be made seven years after the Termination Date of this Agreement (or by mutual agreement at some other time). Such final adjustment of Ultimate Net Loss shall be based upon the Company's estimate of Ultimate Net Loss as entered on the Company's books at such time. ARTICLE 7 PREMIUM The Company shall pay to the Reinsurer a flat premium equal to $350,000, payable upon execution of this Agreement. ARTICLE 8 ACCOUNTS, REPORTS AND PAYMENTS A. The Company shall furnish to the Reinsurer quarterly accounts of business ceded hereunder within 25 days after the close of each calendar year quarter, showing: the sums of Loss, Allocated Loss Adjustment Expenses, salvage and subrogation, and Ultimate Net Loss hereunder on paid and Incurred bases, as well as adjustments thereto. To the extent that the amount of reinsurance recoverable hereunder increases, the Reinsurer shall owe the Company such increase in the amount of reinsurance recoverable hereunder over that recoverable under the prior account; but in no event shall the Reinsurer's liability over the term of this Agreement exceed $70,000,000; to the extent that the Company's amount of reinsurance recoverable hereunder decreases, the Company shall owe the Reinsurer such decrease in the amount of reinsurance recoverable hereunder below that recoverable under the prior account. Such net balance shown shall be payable by the debtor party at the time the account is rendered, if the Company is the debtor party, and within 45 days of the Reinsurer's receipt of the account, if the Reinsurer is the debtor party. Effective: September 15, 1998 5 of 12

B. On a quarterly basis, the Company shall provide the Reinsurer with a listing of all Occurrences with Incurred Ultimate Net Loss in excess of $25,000,000. ARTICLE 9 CLAIMS AND LOSSES The Company shall have complete and sole control of and direction of all efforts to: (i) mitigate, investigate, negotiate, settle or defend a Loss, (ii) prevent, mitigate, or investigate a probable Loss under Policies as to which the Company has posted a loss reserve, (iii) investigate and workout a potential Loss, and (iv) to protect, perfect and exercise any subrogation, salvage or reimbursement rights or security interests with respect to any Loss under a Policy, and shall take any action as it may deem advisable with respect thereto. All Loss settlements by the Company, all salvage and subrogation settlements, and all settlements with an Issuer (or with an underlying obligor of that Issuer), shall be final, conclusive and unconditionally binding upon the Reinsurer. ARTICLE 10

B. On a quarterly basis, the Company shall provide the Reinsurer with a listing of all Occurrences with Incurred Ultimate Net Loss in excess of $25,000,000. ARTICLE 9 CLAIMS AND LOSSES The Company shall have complete and sole control of and direction of all efforts to: (i) mitigate, investigate, negotiate, settle or defend a Loss, (ii) prevent, mitigate, or investigate a probable Loss under Policies as to which the Company has posted a loss reserve, (iii) investigate and workout a potential Loss, and (iv) to protect, perfect and exercise any subrogation, salvage or reimbursement rights or security interests with respect to any Loss under a Policy, and shall take any action as it may deem advisable with respect thereto. All Loss settlements by the Company, all salvage and subrogation settlements, and all settlements with an Issuer (or with an underlying obligor of that Issuer), shall be final, conclusive and unconditionally binding upon the Reinsurer. ARTICLE 10 SALVAGE AND SUBROGATION (1) The Company shall pay the Reinsurer the Reinsurer's proportionate share of any Recovery in respect of any Loss covered by a Policy covered under this Agreement at the times and in the manner specified in the Accounts, Reports and Payments Article. (2) "Recovery" as used in this Article means any amount received by the Company in respect of any Loss covered by a Policy covered under this Agreement whether by subrogation, salvage, or reimbursement from the Issuer (or from an underlying obligor of that Issuer). ARTICLE 11 REINSURANCE FOLLOWS ORIGINAL POLICIES This Agreement shall be construed as an honorable undertaking between the parties hereto and shall not be defeated by technical legal construction, it being the intention of this Agreement that the fortunes of the Reinsurer shall follow the fortunes of the Company. Nothing herein shall in any manner create any obligations or establish any rights against the Reinsurer in favor of any third parties or any persons not parties to this Agreement. Effective: September 15, 1998 6 of 12

ARTICLE 12 TAXES In consideration of the terms under which this Agreement is issued, the Company undertakes not to claim any deduction of the premium hereon when making Canadian tax returns or when making tax returns, other than Income or Profits Tax returns, to any state or territory in the United States of America or to the District of Columbia. ARTICLE 13 ACCESS TO RECORDS The Reinsurer shall have the right to inspect at all reasonable times during the currency of the Agreement and thereafter, the books, records and documents of the Company with respect to this Agreement. ARTICLE 14

ARTICLE 12 TAXES In consideration of the terms under which this Agreement is issued, the Company undertakes not to claim any deduction of the premium hereon when making Canadian tax returns or when making tax returns, other than Income or Profits Tax returns, to any state or territory in the United States of America or to the District of Columbia. ARTICLE 13 ACCESS TO RECORDS The Reinsurer shall have the right to inspect at all reasonable times during the currency of the Agreement and thereafter, the books, records and documents of the Company with respect to this Agreement. ARTICLE 14 CURRENCY Where the word "dollars" and/or the sign "$" appear in this Agreement, they shall mean United States dollars. For purposes of this Agreement, where the Company receives premiums or pays losses in currencies other than United States currency, such premiums or losses shall be converted into United States dollars at the actual rates of exchange at which these premiums or losses are entered in the Company's books. ARTICLE 15 ARBITRATION (1) As a condition precedent to any right of action hereunder, any dispute arising out of or related to this Agreement shall be submitted to the decision of a board of arbitration composed of two arbitrators and an umpire, meeting in Armonk, New York, unless otherwise agreed. (2) The members of the board of arbitration shall be active or former and disinterested officials of insurance or reinsurance companies. Each party shall appoint its arbitrator, and the two arbitrators shall choose an umpire before instituting the hearing. If the respondent fails to appoint its arbitrator within four weeks after being requested to do so by the claimant, the latter shall also appoint the second arbitrator. If the two arbitrators fail to agree upon the Effective: September 15, 1998 7 of 12

appointment of an umpire within four weeks after their nominations, the umpire shall be selected within four weeks by the regional director of the American Arbitration Association in New York, New York, or the regional director's delegate. (3) The claimant shall submit its initial brief within 20 days from appointment of the umpire. The respondent shall submit its brief within 20 days after receipt of the claimant's brief and the claimant shall submit a reply brief within 10 days after receipt of the respondent's brief. (4) The board shall make its decision with regard to the custom and usage of the insurance and reinsurance business. The board shall issue its decision in writing based upon a hearing in which evidence may be introduced without following strict rules of evidence but in which cross-examination and rebuttal shall be allowed. The board shall make its decision within 60 days following the termination of the hearings unless the parties consent to an extension. The majority decision of the board shall be final and binding upon all parties to the proceeding. Judgment may be entered upon the award of the board in any court having jurisdiction thereof.

appointment of an umpire within four weeks after their nominations, the umpire shall be selected within four weeks by the regional director of the American Arbitration Association in New York, New York, or the regional director's delegate. (3) The claimant shall submit its initial brief within 20 days from appointment of the umpire. The respondent shall submit its brief within 20 days after receipt of the claimant's brief and the claimant shall submit a reply brief within 10 days after receipt of the respondent's brief. (4) The board shall make its decision with regard to the custom and usage of the insurance and reinsurance business. The board shall issue its decision in writing based upon a hearing in which evidence may be introduced without following strict rules of evidence but in which cross-examination and rebuttal shall be allowed. The board shall make its decision within 60 days following the termination of the hearings unless the parties consent to an extension. The majority decision of the board shall be final and binding upon all parties to the proceeding. Judgment may be entered upon the award of the board in any court having jurisdiction thereof. (5) Each party shall bear the expense of its own arbitrator and shall jointly and equally bear with the other party the expense of the umpire. The remaining costs of the arbitration proceedings shall be allocated by the board. (6) Unless prohibited by applicable law, an arbitral award hereunder and any Judgment thereon shall bear interest from the date the arbitral award was rendered at the rate equal from time to time to the rate publicly announced by Citibank, N. A., as its base rate plus 2%. (7) The parties consent to the jurisdiction of the Supreme Court of the State of New York, County of New York, and of the United States District Court for the Southern District of New York, for all purposes in connection with such arbitration, including without limitation any application to compel arbitration or to confirm an arbitration award. The parties consent that any process or notice of motion or other application to either of said Courts, and any paper in connection with arbitration, may be served by certified mail, return receipt requested, or by personal service or in such other manner as may be permissible under the rules of the applicable court or panel provided a reasonable time for appearances is allowed. Service upon the Company shall be directed to the Company, in care of the Company's General Counsel. Service upon the Reinsurer shall be directed to the Reinsurer in care of its President. ARTICLE 16 INDEMNIFICATION AND ERRORS AND OMISSIONS Any recitals in this Agreement to the terms and provisions of any original insurance or reinsurance are merely descriptive. The Reinsurer is reinsuring, to the amount herein provided, Effective: September 15, 1998 8 of 12

the obligations of the Company under any original insurance or reinsurance. The Company shall be the sole judge as to: (a) what shall constitute a claim or loss covered under any original insurance or reinsurance written by the Company; (b) the Company's liability thereunder; and (c) the amount or amounts which it shall be proper for the Company to pay thereunder. The Reinsurer shall be bound by the judgment of the Company as to the obligation(s) and liability(ies) of the Company under any original insurance or reinsurance. Any inadvertent error, omission or delay in complying with the terms and conditions of this Agreement shall not be held to relieve either party hereto from any liability which would attach to it hereunder if such error, omission

the obligations of the Company under any original insurance or reinsurance. The Company shall be the sole judge as to: (a) what shall constitute a claim or loss covered under any original insurance or reinsurance written by the Company; (b) the Company's liability thereunder; and (c) the amount or amounts which it shall be proper for the Company to pay thereunder. The Reinsurer shall be bound by the judgment of the Company as to the obligation(s) and liability(ies) of the Company under any original insurance or reinsurance. Any inadvertent error, omission or delay in complying with the terms and conditions of this Agreement shall not be held to relieve either party hereto from any liability which would attach to it hereunder if such error, omission or delay had not been made, provided such error, omission or delay is rectified immediately upon discovery. ARTICLE 17 INSOLVENCY (1) In the event of the insolvency of the Company, the reinsurance provided by this Agreement shall be payable by the Reinsurer on the basis of the liability of the Company under the Policies ceded without diminution because of the insolvency of the Company or because its liquidator, receiver, conservator or statutory successor (hereinafter referred to as the "Liquidator") has failed to pay all or a portion of any claim. The Liquidator shall give written notice to the Reinsurer of the pendency of a claim against the Company under any Policy ceded to Reinsurers and covered by this Agreement within a reasonable time after such claim is filed in the conservation or liquidation proceeding or in the receivership. During the pendency of such claim, the Reinsurer may investigate such claim and interpose at its own expense, in the proceeding where such claim is to be adjudicated, any defense or defenses that it may deem available to the Company or the Liquidator. The expense thus incurred by the Reinsurer shall be chargeable, subject to the approval of the court, against the Company as part of the expense of conservation or liquidation to the extent of the benefit which may accrue to the Company solely as a result of the defense undertaken by the Reinsurer. (2) The reinsurance provided by this Agreement shall be payable by the Reinsurer to the Company or to the Liquidator, except as provided by Section 4118(A)(l)(a) (relating to Fidelity and Surety Risks) of the Insurance Law of New York or except (a) where the Policy specifically provides another payee of such reinsurance in the event of the insolvency of the Company, and (b) where the Reinsurer with the consent of the direct insured(s) has assumed the obligations of the Company under the Policies as the direct Effective: September 15, 1998 9 of 12

obligations of the Reinsurer to the payees under such Policies and in substitution for the obligations of the Company to such payees. ARTICLE 18 CONFIDENTIALITY The Reinsurer agrees that it will maintain the confidentiality of the all information presented as a result of this Agreement including, but not limited to the bonds, the basic agreements, the reinsurance undertaken with respect to the bonds, all underlying transactions and underlying obligations, and all certificates, reports, agreements, notices, and communications of any sort relating to any of the foregoing in its communications with third parties, except to the extent required by law, regulation, or order, and except as may be made to the Reinsurer's legal counsel, auditors, and accountants, to Standard & Poor's Corporation, Moody's Investor Services, Inc., Duff &

obligations of the Reinsurer to the payees under such Policies and in substitution for the obligations of the Company to such payees. ARTICLE 18 CONFIDENTIALITY The Reinsurer agrees that it will maintain the confidentiality of the all information presented as a result of this Agreement including, but not limited to the bonds, the basic agreements, the reinsurance undertaken with respect to the bonds, all underlying transactions and underlying obligations, and all certificates, reports, agreements, notices, and communications of any sort relating to any of the foregoing in its communications with third parties, except to the extent required by law, regulation, or order, and except as may be made to the Reinsurer's legal counsel, auditors, and accountants, to Standard & Poor's Corporation, Moody's Investor Services, Inc., Duff & Phelps Corporation, or any other rating agency in connection with their rating of the Reinsurer and except as may be necessary or appropriate in connection with any retrocession, subject to the receipt of a written confidentiality commitment from the proposed retrocessional reinsurer. The Reinsurer and its legal counsel, auditors, and accountants will have no obligation of confidentiality in respect or any information that may be available to the public or become available to the public through no fault of such person. ARTICLE 19 GOVERNING LAW This Agreement shall be governed by the laws of the State of New York. ARTICLE 20 INTERMEDIARY Guy Carpenter & Company, Inc., Two World Trade Center, New York, New York, 10048, is hereby recognized as the Intermediary by which this Agreement was negotiated and through which all communications relating hereto including, but not limited to, notices, statements, premiums, return premiums, commissions, taxes, Losses, Allocated Loss Adjustment Expenses, salvage and Loss settlements, shall be transmitted to both parties. It is understood, as regards remittances due either party hereunder, that payment by the Company to the Intermediary shall constitute payment to the Reinsurer, but payment by the Reinsurer to the Intermediary shall constitute payment to the Company only to the extent such payments are actually received by the Company. Effective September 15, 1998 10 of 12

ARTICLE 21 PARTICIPATION The Reinsurer's Percentage Share of the Interests and Liabilities set out in this Agreement is 100% of up to $70,000,000. IN WITNESS WHEREOF the parties hereto, by their respective duly authorized officers, have executed this THIRD SPECIAL PER OCCURRENCE EXCESS OF LOSS REINSURANCE AGREEMENT, in triplicate, as of the dates recorded below: ACCEPTED: At: Armonk, New York this 31st day of December, 1998. MBIA INSURANCE CORPORATION

ARTICLE 21 PARTICIPATION The Reinsurer's Percentage Share of the Interests and Liabilities set out in this Agreement is 100% of up to $70,000,000. IN WITNESS WHEREOF the parties hereto, by their respective duly authorized officers, have executed this THIRD SPECIAL PER OCCURRENCE EXCESS OF LOSS REINSURANCE AGREEMENT, in triplicate, as of the dates recorded below: ACCEPTED: At: Armonk, New York this 31st day of December, 1998. MBIA INSURANCE CORPORATION MBIA Assurance, S. A. and/or any other insurance or reinsurance company subsidiaries of MBIA Inc. listed in Exhibit No. 1 attached to this Agreement
/s/ Julliette S. Tehrani -----------------------------------------and at: this 30th day of December ,1998.

ZURICH REINSURANCE (NORTH AMERICA), INC.
/s/ [ILLEGIBLE] ------------------------------------------

Effective: September 15, 1998 11 of 12

EXHIBIT NO. 1 Insurance and/or Reinsurance Company Subsidiaries Included within the Definition of Company hereunder MBIA Assurance S. A. MBIA Insurance Corporation MBIA Insurance Corp. of Illinois Capital Markets Assurance Corporation Effective: September 15, 1998 12 of 12

SELECTED FINANCIAL AND STATISTICAL DATA MBIA Inc. and Subsidiaries
Dollars in millions except per share amounts 1998 1997 1996 1995 1994 1993 --------------------------------------------------------------------------------------------------------GAAP SUMMARY INCOME STATEMENT DATA: Insurance:

EXHIBIT NO. 1 Insurance and/or Reinsurance Company Subsidiaries Included within the Definition of Company hereunder MBIA Assurance S. A. MBIA Insurance Corporation MBIA Insurance Corp. of Illinois Capital Markets Assurance Corporation Effective: September 15, 1998 12 of 12

SELECTED FINANCIAL AND STATISTICAL DATA MBIA Inc. and Subsidiaries
Dollars in millions except per share amounts 1998 1997 1996 1995 1994 1993 --------------------------------------------------------------------------------------------------------GAAP SUMMARY INCOME STATEMENT DATA: Insurance: Gross premiums written $ 677 $ 654 $ 535 $ 406 $ 405 $ 504 $ Premiums earned 425 351 294 244 241 249 Advisory fees 26 17 11 7 5 1 Net investment income 332 302 265 233 204 189 Net realized gains 30 17 10 13 10 11 Insurance operating income 643 530 453 385 360 353 Investment management operating income (loss) 29 17 18 11 5 (1) Income before income taxes 565 525 448 375 347 339 NET INCOME 433 406 348 290 270 268 NET INCOME PER COMMON SHARE BASIC 4.37 4.18 3.68 3.21 3.00 3.00 DILUTED 4.32 4.12 3.62 3.15 2.96 2.95 --------------------------------------------------------------------------------------------------------GAAP SUMMARY BALANCE SHEET DATA: Investments 10,080 8,908 8,008 6,937 5,069 3,735 Total assets 11,797 10,385 9,031 7,670 5,711 4,320 Deferred premium revenue 2,251 2,090 1,854 1,662 1,538 1,413 Loss reserves 270 103 70 49 45 37 Municipal investment and repurchase agreements 3,485 3,151 3,259 2,642 1,526 493 Long-term debt 689 489 389 389 314 314 Shareholders' equity 3,792 3,362 2,761 2,497 1,881 1,761 Book value per share 38.15 34.09 28.98 27.02 20.92 19.77 Dividends declared per common share 0.790 0.770 0.725 0.655 0.570 0.470 --------------------------------------------------------------------------------------------------------STATUTORY DATA: Net income 510 404 335 287 229 263 Capital and surplus 2,290 1,952 1,661 1,469 1,250 1,124 Contingency reserve 1,451 1,188 959 788 652 561 --------------------------------------------------------------------------------------------------------Qualified statutory capital 3,741 3,140 2,620 2,257 1,902 1,685 Unearned premium reserve 2,324 2,193 1,971 1,768 1,640 1,484 Loss reserves 188 15 10 7 22 8 --------------------------------------------------------------------------------------------------------Total policyholders' reserves 6,253 5,348 4,601 4,032 3,564 3,177 Present value of installment premiums 644 537 443 347 249 234 Standby line of credit & stop loss 900 900 775 700 650 625 --------------------------------------------------------------------------------------------------------TOTAL CLAIMS-PAYING RESOURCES 7,797 6,785 5,819 5,079 4,463 4,036 --------------------------------------------------------------------------------------------------------FINANCIAL RATIOS: GAAP Loss ratio 8.2% 9.1% 6.9% 5.6% 3.9% 3.5% Underwriting expense ratio 24.7 31.0 32.9 35.2 32.9 31.2

SELECTED FINANCIAL AND STATISTICAL DATA MBIA Inc. and Subsidiaries
Dollars in millions except per share amounts 1998 1997 1996 1995 1994 1993 --------------------------------------------------------------------------------------------------------GAAP SUMMARY INCOME STATEMENT DATA: Insurance: Gross premiums written $ 677 $ 654 $ 535 $ 406 $ 405 $ 504 $ Premiums earned 425 351 294 244 241 249 Advisory fees 26 17 11 7 5 1 Net investment income 332 302 265 233 204 189 Net realized gains 30 17 10 13 10 11 Insurance operating income 643 530 453 385 360 353 Investment management operating income (loss) 29 17 18 11 5 (1) Income before income taxes 565 525 448 375 347 339 NET INCOME 433 406 348 290 270 268 NET INCOME PER COMMON SHARE BASIC 4.37 4.18 3.68 3.21 3.00 3.00 DILUTED 4.32 4.12 3.62 3.15 2.96 2.95 --------------------------------------------------------------------------------------------------------GAAP SUMMARY BALANCE SHEET DATA: Investments 10,080 8,908 8,008 6,937 5,069 3,735 Total assets 11,797 10,385 9,031 7,670 5,711 4,320 Deferred premium revenue 2,251 2,090 1,854 1,662 1,538 1,413 Loss reserves 270 103 70 49 45 37 Municipal investment and repurchase agreements 3,485 3,151 3,259 2,642 1,526 493 Long-term debt 689 489 389 389 314 314 Shareholders' equity 3,792 3,362 2,761 2,497 1,881 1,761 Book value per share 38.15 34.09 28.98 27.02 20.92 19.77 Dividends declared per common share 0.790 0.770 0.725 0.655 0.570 0.470 --------------------------------------------------------------------------------------------------------STATUTORY DATA: Net income 510 404 335 287 229 263 Capital and surplus 2,290 1,952 1,661 1,469 1,250 1,124 Contingency reserve 1,451 1,188 959 788 652 561 --------------------------------------------------------------------------------------------------------Qualified statutory capital 3,741 3,140 2,620 2,257 1,902 1,685 Unearned premium reserve 2,324 2,193 1,971 1,768 1,640 1,484 Loss reserves 188 15 10 7 22 8 --------------------------------------------------------------------------------------------------------Total policyholders' reserves 6,253 5,348 4,601 4,032 3,564 3,177 Present value of installment premiums 644 537 443 347 249 234 Standby line of credit & stop loss 900 900 775 700 650 625 --------------------------------------------------------------------------------------------------------TOTAL CLAIMS-PAYING RESOURCES 7,797 6,785 5,819 5,079 4,463 4,036 --------------------------------------------------------------------------------------------------------FINANCIAL RATIOS: GAAP Loss ratio 8.2% 9.1% 6.9% 5.6% 3.9% 3.5% Underwriting expense ratio 24.7 31.0 32.9 35.2 32.9 31.2 Combined ratio 32.9 40.1 39.8 40.8 36.8 34.7 Statutory Loss ratio 8.0 1.2 1.7 0.4 8.7 (3.3) Underwriting expense ratio 16.8 21.2 22.8 27.2 28.3 22.0 Combined ratio 24.8 22.4 24.5 27.6 37.0 18.7 NET DEBT SERVICE OUTSTANDING $595,895 $513,736 $434,417 $359,175 $315,340 $273,630 $22 NET PAR AMOUNT OUTSTANDING $359,472 $303,803 $252,896 $201,326 $173,760 $147,326 $11 ---------------------------------------------------------------------------------------------------------

Dollars in millions except per share amounts 1990 1989 ------------------------------------------------------GAAP SUMMARY INCOME STATEMENT DATA: Insurance: Gross premiums written $ 211 $ 159 Premiums earned 107 91

Premiums earned 107 91 Advisory fees --Net investment income 115 80 Net realized gains --Insurance operating income 181 136 Investment management operating income (loss) --Income before income taxes 165 135 NET INCOME 127 102 NET INCOME PER COMMON SHARE BASIC 1.68 1.39 DILUTED 1.66 1.37 ------------------------------------------------------GAAP SUMMARY BALANCE SHEET DATA: Investments 1,724 1,501 Total assets 2,159 1,904 Deferred premium revenue 902 811 Loss reserves 5 -Municipal investment and repurchase agreements --Long-term debt 200 195 Shareholders' equity 932 777 Book value per share 12.17 10.54 Dividends declared per common share 0.240 0.205 ------------------------------------------------------STATUTORY DATA: Net income 127 84 Capital and surplus 579 485 Contingency reserve 261 216 ------------------------------------------------------Qualified statutory capital 840 701 Unearned premium reserve 926 828 Loss reserves --------------------------------------------------------Total policyholders' reserves 1,766 1,529 Present value of installment premiums 134 90 Standby line of credit & stop loss 500 325 ------------------------------------------------------TOTAL CLAIMS-PAYING RESOURCES 2,400 1,944 ------------------------------------------------------FINANCIAL RATIOS: GAAP Loss ratio 4.7% 0.0% Underwriting expense ratio 33.7 38.5 Combined ratio 38.4 38.5 Statutory Loss ratio 0.0 0.0 Underwriting expense ratio 23.4 31.6 Combined ratio 23.4 31.6 NET DEBT SERVICE OUTSTANDING $157,707 $137,221 NET PAR AMOUNT OUTSTANDING $ 75,979 $ 65,290 -------------------------------------------------------

(34 & 35)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MBIA Inc. and Subsidiaries INTRODUCTION 1998 was a rewarding but challenging year for MBIA. We posted strong operating results in our insurance and investment management segments, increasing shareholder value while preserving and strengthening our Triple-A rating. In 1998 we merged with and successfully completed the integration of CapMAC Holdings Inc. (CapMAC), a leading insurer of structured finance transactions, and 1838 Investment Advisors, Inc. (1838), a full-service asset management firm. These mergers established strong foundations for growth in both our core

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MBIA Inc. and Subsidiaries INTRODUCTION 1998 was a rewarding but challenging year for MBIA. We posted strong operating results in our insurance and investment management segments, increasing shareholder value while preserving and strengthening our Triple-A rating. In 1998 we merged with and successfully completed the integration of CapMAC Holdings Inc. (CapMAC), a leading insurer of structured finance transactions, and 1838 Investment Advisors, Inc. (1838), a full-service asset management firm. These mergers established strong foundations for growth in both our core insurance and asset management segments, and have already achieved combined results that exceed the sum of the individual parts. On the other hand, the year also produced two significant disappointments. The first--the bankruptcy of a large issuer whose debt was insured by MBIA--was mitigated by our general loss reserving policy and our prudent reinsurance program. The second--unacceptable returns in our municipal services segment--was addressed through reorganization and consolidation. All in all, 1998's strong financial results continued to strengthen our balance sheet and Triple-A ratings. RESULTS OF OPERATIONS SUMMARY MBIA continued to report strong operating results in 1998. The following chart presents highlights of our consolidated financial results for 1998, 1997 and 1996. All of the numbers shown below and all of the data contained in this report have been restated to reflect the mergers, which have been accounted for as "pooling of interests."
Percent Change -------------1998 1997 vs. vs. 1998 1997 1996 1997 1996 ---------------------------------------------------------------------------Net income (in millions): As reported $433 $406 $348 7% 17% Excluding onetime charges $482 $406 $348 19% 17% ---------------------------------------------------------------------------Per share data:* Net income: As reported $4.32 $4.12 $3.62 5% 14% Excluding onetime charges $4.81 $4.12 $3.62 17% 14% Operating earnings $4.58 $3.99 $3.53 15% 13% Core earnings $4.19 $3.69 $3.26 14% 13% Book value $38.15 $34.09 $28.98 12% 18% Adjusted book value $53.28 $48.19 $42.16 11% 14% ----------------------------------------------------------------------------

* All earnings per share are diluted and all per share results have been retroactively adjusted to include the effect of a two-for-one stock split effective October 1, 1997. Core earnings, which exclude the effects of refundings and calls on our insured issues, realized capital gains and losses on our investment portfolio and nonrecurring charges, provide the most indicative measure of our underlying profit. Core earnings per share at $4.19 for 1998 grew by 14% over 1997, following a 13% increase in 1997. This continues our unbroken streak of double-digit increases since we became a public company in 1987. In 1998, for the first time, investment management services contributed significantly to core earnings growth. The investment management services' contribution to core earnings increased by 70% over 1997, reflecting both the impact of the 1838 merger as well as the foundation set by our other investment management businesses. Insurance operations continued their consistent support of core earnings growth with a 17% increase for both years. Our 1998 net income grew 19% excluding one-time charges, or by 17% on a per share basis. In 1997 net

income increased by 17%, which translated to a 14% per share increase. For both years the difference in growth rates between income and per share data reflects the equity capital we raised in 1997. Including the one-time charges, net income increased by 7% for 1998 over 1997. Operating earnings per share, which exclude the impact of realized gains and losses and one-time charges, increased by 15% and 13% for 1998 and 1997, respectively. Our book value at year-end 1998 was $38.15 per share, up from $34.09 at year-end 1997 and $28.98 at yearend 1996. As with core earnings, a more appropriate measure of a financial guarantee company's intrinsic value is its adjusted book value. It is defined as book value plus the after-tax effects of net deferred premium revenue, net of deferred acquisition costs, the present value of unrecorded future installment premiums, and the unrealized gains or losses on investment contract liabilities. The following table presents the components of our adjusted book value per share:
Percent Change -------------1998 1997 vs. vs. 1998 1997 1996 1997 1996 ---------------------------------------------------------------------------Book value $38.15 $34.09 $28.98 12 % 18 % After-tax value of: Net deferred premium revenue, net of deferred acquisition costs 10.91 10.45 9.70 4 % 8 % Present value of future installment premiums* 4.21 3.54 3.02 19 % 17 % Unrealized gain on investment contract liabilities** 0.01 0.11 0.46 (91)% (76)% ---------------------------------------------------------------------------Adjusted book value $53.28 $48.19 $42.16 11 % 14 % ----------------------------------------------------------------------------

* The discount rate used to present value future installment premiums was 9%. ** The unrealized gain on investment contract liabilities is offset by a corresponding gain on the market value of the assets. (36)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MBIA Inc. Our adjusted book value per share was $53.28 at year-end 1998, an 11% increase from year-end 1997 following 14% growth in the preceding year. The increases in both years reflect consistently strong operating results and the growth in new businesses. The 1997 growth was especially impacted by the increase in the fair value of our fixed-income investment portfolios. Compared to the sharp decline in interest rates in 1997, 1998's interest rate movement was relatively flat. FINANCIAL GUARANTEE INSURANCE Business was strong in 1998 and 1997, fueled by a robust economy and record demand for insurance. Par insured across all business lines was up 24%. The credit quality of new business insured improved significantly over that insured in prior years, reflecting the health of the nation's economy, the strength of municipal issuers and a conscious effort on MBIA's part. Adjusted gross premiums written (AGP) totaled $832 million in 1998. At 12%, our AGP growth rate has been consistently high over the past two years. AGP includes our upfront premiums as well as the estimated present value of current and future premiums from installment-based insurance policies issued in the period. Gross premiums written (GPW), as reported in our financial statements, reflects cash receipts only and does not include the value of future premium receipts expected for installment policies originated in the period. MBIA's premium production in terms of AGP and GPW for the last three years is

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MBIA Inc. Our adjusted book value per share was $53.28 at year-end 1998, an 11% increase from year-end 1997 following 14% growth in the preceding year. The increases in both years reflect consistently strong operating results and the growth in new businesses. The 1997 growth was especially impacted by the increase in the fair value of our fixed-income investment portfolios. Compared to the sharp decline in interest rates in 1997, 1998's interest rate movement was relatively flat. FINANCIAL GUARANTEE INSURANCE Business was strong in 1998 and 1997, fueled by a robust economy and record demand for insurance. Par insured across all business lines was up 24%. The credit quality of new business insured improved significantly over that insured in prior years, reflecting the health of the nation's economy, the strength of municipal issuers and a conscious effort on MBIA's part. Adjusted gross premiums written (AGP) totaled $832 million in 1998. At 12%, our AGP growth rate has been consistently high over the past two years. AGP includes our upfront premiums as well as the estimated present value of current and future premiums from installment-based insurance policies issued in the period. Gross premiums written (GPW), as reported in our financial statements, reflects cash receipts only and does not include the value of future premium receipts expected for installment policies originated in the period. MBIA's premium production in terms of AGP and GPW for the last three years is presented in the following table:
Percent Change -------------1998 1997 vs. vs. In millions 1998 1997 1996 1997 1996 ---------------------------------------------------------------------------Premiums written: AGP $832 $741 $664 12% 12% GPW $677 $654 $535 4% 22% ----------------------------------------------------------------------------

We estimate the present value of our total future installment premium stream on outstanding policies to be $644 million at year-end 1998, compared with $537 million at year-end 1997 and $443 million at year-end 1996. MUNICIPAL MARKET New issue volume in 1998 was the second largest in history--second only to 1993. The market has followed a consistent growth pattern that we predicted several years ago. While volume in any year can fluctuate, we believe the municipal market will continue to be a growing one. In addition, insured penetration continued at record levels, resulting in the highest ever insured volume in 1998. Municipal rating upgrades have outnumbered downgrades, and the credit quality of business MBIA is insuring remains very strong. Again in 1998, we maintained our market leadership in the growing new issue municipal market. MBIA's domestic municipal AGP and GPW were down versus 1997 levels. The decline reflects a shift in the book towards lower-risk sectors and stronger credit quality. It also reflects the differences in opportunities presented each year. In 1997 we closed several large one-off deals that were not replicated in 1998. Domestic new issue municipal market information and MBIA's par and premium writings in both the new issue and secondary domestic municipal finance markets are shown in the following table:
Percent Change -------------1998 1997 vs. vs. Domestic Municipal 1998 1997 1996 1997 1996 ---------------------------------------------------------------------------Total new issue market:* Par value (in billions) $255 $194 $162 32 % 20% Insured penetration 55% 54% 52% MBIA market share 36% 42% 40% MBIA insured: Par value (in billions) $58 $48 $40 21 % 20% Premiums (in millions): AGP $416 $440 $366 (5)% 20%

AGP $416 $440 $366 (5)% 20% GPW $405 $435 $368 (7)% 18% ----------------------------------------------------------------------------

* Market data are reported on a sale date basis while MBIA's insured data are based on closing date information. Typically, there can be a one- to four-week delay between the sale date and closing date of an insured issue. STRUCTURED FINANCE MARKET The integration of MBIA's and CapMAC's operations is virtually complete. By all measures, the merger with CapMAC was an extremely positive move for MBIA with improved portfolio diversity and financial performance. We are excited about the many and varied opportunities for growth that we now have in structured finance. Furthermore, we were determined not to let productivity slip in the merger year, and we were successful beyond our expectations in that objective. During 1998 we saw AGP increase and improvement in return margins and average credit quality of the business written. Most notable, but perhaps less visible, MBIA's participation in private and commercial paper asset-backed markets increased significantly, with over one half of AGP generated outside the public market. New issuance in the public assetbacked market was down from last year's record levels, primarily due to market turmoil in the third and fourth quarters. Insurance penetration in the U.S. asset-backed market was nominally higher during 1998. MBIA had a 44% share of the public asset-backed market in 1998, up from 41% in 1997. Private and (37)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MBIA Inc. and Subsidiaries commercial paper asset-backed markets--not reflected in volume or market share statistics--represent significant and growing segments of MBIA's structured finance business. 1998 demonstrated that MBIA is well positioned to participate in this segment as a result of our merger with CapMAC. Details regarding the asset-backed market and MBIA's par and premium writings in both the domestic new issue and secondary structured finance markets are shown in the table below:
Percent Change -------------1998 1997 Domestic vs. vs. Structured Finance 1998 1997 1996 1997 1996 ---------------------------------------------------------------------------Total asset-backed market:* Par value (in billions) $167 $175 $152 (5)% 15% MBIA insured: Par value (in billions) $46 $38 $27 21 % 41% Premiums (in millions): AGP $191 $166 $158 15 % 5% GPW $126 $102 $83 24 % 23% -----------------------------------------------------------------------------

* Market data exclude mortgage-backed securities and private placements. INTERNATIONAL MARKET In late 1995, we formed a joint venture with Ambac Assurance Corporation (another leading Triple-A-rated financial guarantee insurer) to market financial guarantee insurance internationally. This initiative has contributed to a substantial expansion of our international business as evidenced by the growth in premium writings over the past two years. Although a couple of transactions are experiencing stress, all of our international deals, including our Asian deals and emerging-market CBO transactions, are performing satisfactorily, and we do not expect losses. We are monitoring developments in the currency markets in Asia and Latin America very closely to determine the impact on our international book. Korea has recently been upgraded by Fitch, Moody's and S&P to investment grade. The MBIA-AMBAC International joint venture announced an alliance in 1998 in Japan with Yasuda Fire and Marine Insurance Co. Ltd. and Mitsui Marine and Fire Insurance Co. Ltd. With respect to Europe, at this time it is too early to measure the impact of the Euro on our business,

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MBIA Inc. and Subsidiaries commercial paper asset-backed markets--not reflected in volume or market share statistics--represent significant and growing segments of MBIA's structured finance business. 1998 demonstrated that MBIA is well positioned to participate in this segment as a result of our merger with CapMAC. Details regarding the asset-backed market and MBIA's par and premium writings in both the domestic new issue and secondary structured finance markets are shown in the table below:
Percent Change -------------1998 1997 Domestic vs. vs. Structured Finance 1998 1997 1996 1997 1996 ---------------------------------------------------------------------------Total asset-backed market:* Par value (in billions) $167 $175 $152 (5)% 15% MBIA insured: Par value (in billions) $46 $38 $27 21 % 41% Premiums (in millions): AGP $191 $166 $158 15 % 5% GPW $126 $102 $83 24 % 23% -----------------------------------------------------------------------------

* Market data exclude mortgage-backed securities and private placements. INTERNATIONAL MARKET In late 1995, we formed a joint venture with Ambac Assurance Corporation (another leading Triple-A-rated financial guarantee insurer) to market financial guarantee insurance internationally. This initiative has contributed to a substantial expansion of our international business as evidenced by the growth in premium writings over the past two years. Although a couple of transactions are experiencing stress, all of our international deals, including our Asian deals and emerging-market CBO transactions, are performing satisfactorily, and we do not expect losses. We are monitoring developments in the currency markets in Asia and Latin America very closely to determine the impact on our international book. Korea has recently been upgraded by Fitch, Moody's and S&P to investment grade. The MBIA-AMBAC International joint venture announced an alliance in 1998 in Japan with Yasuda Fire and Marine Insurance Co. Ltd. and Mitsui Marine and Fire Insurance Co. Ltd. With respect to Europe, at this time it is too early to measure the impact of the Euro on our business, although we expect it to stimulate debt issuance and insurance. The advent of the Euro eliminates currency risk between member countries from transactions originating in one of the member countries. The remaining risk is credit risk, which is the risk covered by our guarantee. Insurance is expected to be a popular feature of crossborder transactions. Our company's municipal and structured finance international business volume in the new issue and secondary markets for the last three years is illustrated as follows:

Percent Change --------------1998 1997 vs. vs. International 1998 1997 1996 1997 1996 ----------------------------------------------------------------------------Par value (in billions) $11 $5 $8 120% (38)% Premiums (in millions): AGP $189 $105 $108 79% (3)% GPW $112 $91 $60 23% 52 % -----------------------------------------------------------------------------

REINSURANCE Premiums ceded to reinsurers from all insurance operations were $156 million, $117 million and $70 million in 1998, 1997 and 1996, respectively. Cessions as a percentage of GPW increased to 23% in 1998 from 13% in 1996 (with 1997 midway at 18%). The increase in our cession rate was largely driven by portfolio shaping, as we focused on reducing larger single risks across the portfolio. This is consistent with our emphasis on a strong balance sheet. In addition, we are freeing up capacity to write additional business in the

Percent Change --------------1998 1997 vs. vs. International 1998 1997 1996 1997 1996 ----------------------------------------------------------------------------Par value (in billions) $11 $5 $8 120% (38)% Premiums (in millions): AGP $189 $105 $108 79% (3)% GPW $112 $91 $60 23% 52 % -----------------------------------------------------------------------------

REINSURANCE Premiums ceded to reinsurers from all insurance operations were $156 million, $117 million and $70 million in 1998, 1997 and 1996, respectively. Cessions as a percentage of GPW increased to 23% in 1998 from 13% in 1996 (with 1997 midway at 18%). The increase in our cession rate was largely driven by portfolio shaping, as we focused on reducing larger single risks across the portfolio. This is consistent with our emphasis on a strong balance sheet. In addition, we are freeing up capacity to write additional business in the mortgage/home equity sector. Going forward we expect our cession rate to run between 15% and 20% of new writings. Most of our reinsurers are rated Double-A or higher by S&P, or Single-A or higher by A. M. Best Co. Although we remain liable for all reinsured risks, we are confident that we will recover the reinsured portion of any losses, should they occur. PREMIUMS EARNED Premiums are recognized over the life of the bonds we insure. The slow premium recognition coupled with compounding investment income from investing our premiums and capital form a solid foundation for consistent revenue growth. In 1998 and 1997, premiums earned from scheduled amortization increased by 19% and 20%, respectively. These strong increases reflect the additive effect of new premiums written, especially from international and structured finance installment business. Refunded premiums also generated high revenues in 1998. When an MBIA-insured bond issue is refunded or retired early, the related deferred premium revenue is earned immediately. The amount of bond refundings and calls is influenced by a variety of factors such as prevailing interest rates, the coupon rates of the bond issue, the issuer's desire or ability to modify bond covenants and applicable regulations under the Internal Revenue Code. The composition of MBIA's premiums earned in terms of its scheduled and refunded components is illustrated below:
Percent Change -------------1998 1997 vs. vs. In millions 1998 1997 1996 1997 1996 ---------------------------------------------------------------------------Premiums earned: Scheduled $357 $300 $250 19% 20% Refunded 68 51 44 33% 16% ---------------------------------------------------------------------------Total $425 $351 $294 21% 19%

(38)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MBIA Inc. INVESTMENT INCOME Our insurance-related investment income (exclusive of capital gains) increased to $332 million in 1998, up from $302 million in 1997 and $265 million in 1996. These increases were primarily due to the growth of cash flow available for investment. Our cash flows were generated from operations, the compounding of previously earned and reinvested investment income and the addition of funds from financing activities. Insurance-related net realized capital gains were $30 million in 1998, $17 million in 1997 and $10

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MBIA Inc. INVESTMENT INCOME Our insurance-related investment income (exclusive of capital gains) increased to $332 million in 1998, up from $302 million in 1997 and $265 million in 1996. These increases were primarily due to the growth of cash flow available for investment. Our cash flows were generated from operations, the compounding of previously earned and reinvested investment income and the addition of funds from financing activities. Insurance-related net realized capital gains were $30 million in 1998, $17 million in 1997 and $10 million in 1996. These realized gains were generated as a result of ongoing management of the investment portfolio. ADVISORY FEES The company collects fee revenues in conjunction with certain structured finance transactions. In 1998 and 1997, advisory fee revenues increased by 53% and 59%, respectively, reflecting the company's increased structured finance activity. Certain fees are deferred and earned over the life of the related transactions. LOSSES AND LOSS ADJUSTMENT EXPENSES (LAE) We maintain a general loss reserve based on our estimate of unidentified losses from our insured obligations. The total reserve is calculated by applying a risk factor based on a study of bond defaults to net debt service written. To the extent that we identify specific insured issues as currently or likely to be in default, the present value of our expected payments, net of expected reinsurance and collateral recoveries, is allocated within the total loss reserve as case-specific reserves. We periodically evaluate our estimates for losses and LAE and any resulting adjustments are reflected in current earnings. We believe that our reserving methodology and the resulting reserves are adequate to cover the ultimate net cost of claims. However, the reserves are necessarily based on estimates, and there can be no assurance that any ultimate liability will not exceed such estimates. The following table shows the case-specific and unallocated components of our total loss and LAE reserves at the end of the last three years, as well as our loss provision for the last three years:
Percent Change -------------1998 1997 vs. vs. In millions 1998 1997 1996 1997 1996 ---------------------------------------------------------------------------Reserves: Case-specific $189 $25 $20 656% 25% Unallocated 81 78 50 4% 56% ---------------------------------------------------------------------------Total $270 $103 $70 162% 47% Provision $35 $32 $20 9% 60% ---------------------------------------------------------------------------

As mentioned previously, the bankruptcy of a large issuer -- specifically a Pennsylvania hospital group--was a significant disappointment in 1998. The large increase in the case-specific reserve reflects our current estimate of anticipated losses arising from this group. At this time our outstanding reserve for this claim, net of reinsurance, totals $163 million. To date we have received $170 million in reinsurance recoveries and have paid $18 million for debt service and loss adjustment expenses. After reinsurance, the amount incurred by MBIA for this loss totaled $11 million in 1998. Over the three-year period from 1996 through 1998, our provision for losses and LAE increased in tandem with new business writings in accordance with our loss reserving methodology. The changes in the case-specific reserve had no impact on our net income since they were offset by corresponding changes in the unallocated portion of the total reserve. OPERATING EXPENSES In addition to premium volume, the success of the merger with CapMAC and our ability to optimize the synergies inherent in the combination was strongly evident in the area of insurance expenses. The merger-related cost cutting and restructurings of 1998 should continue to improve our expense

ratios in 1999 and thereafter. Those expenses related to the production of our insurance business (policy acquisition costs) are deferred and recognized over the period in which the related premiums are earned. Our company's policy acquisition costs, general operating expenses and total insurance operating expenses, as well as related expense measures, are shown below:
Percent Change -------------1998 1997 vs. vs. In millions 1998 1997 1996 1997 1996 ---------------------------------------------------------------------------Policy acquisition costs, net $35 $35 $30 -17% Operating 70 74 67 (5)% 10% ---------------------------------------------------------------------------Total insurance operating expenses $105 $109 $97 (4)% 12% Expense ratio: GAAP 24.7% 31.0% 32.9% Statutory 16.8% 21.2% 22.8% ----------------------------------------------------------------------------

For 1998, policy acquisition costs net of deferrals remained even with 1997 at $35 million following a 17% increase in 1997. The ratio of policy acquisition (39)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MBIA Inc. and Subsidiaries costs net of deferrals to earned premiums has declined from 10% in 1997 and 1996 to 8% in 1998. This decline reflects the positive impact of increases in both installment premium revenues and ceding commission income. Operating expenses decreased by 5% in 1998 following a 10% increase in 1997. The 1998 decline resulted from the synergies of the CapMAC merger. Financial guarantee insurance companies also use the statutory expense ratio (expenses before deferrals as a function of net premiums written) as a measure of expense management. Our company's 1998 statutory and GAAP expense ratios have improved over both 1997 and 1996, again reflecting the success of the merger. INSURANCE INCOME MBIA's insurance income reached $673 million in 1998, up 23% over 1997. This growth was the product not only of strong revenue growth but also of our disciplined expense management. INVESTMENT MANAGEMENT SERVICES In 1998 after our merger with 1838, we formed a holding company, MBIA Asset Management Corporation, to consolidate the resources and capabilities of our four investment management services. The success of our merger with 1838 showed immediate operating benefits, and all of our investment management franchises had record performances in 1998. Of special note was the 30% increase in operating revenues achieved while investment management expenses held the line at only a 9% growth rate. The table below summarizes our consolidated investment management results over the last three years:
Percent Change -------------1998 1997 vs. vs. In millions 1998 1997 1996 1997 1996 ----------------------------------------------------------------------------

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MBIA Inc. and Subsidiaries costs net of deferrals to earned premiums has declined from 10% in 1997 and 1996 to 8% in 1998. This decline reflects the positive impact of increases in both installment premium revenues and ceding commission income. Operating expenses decreased by 5% in 1998 following a 10% increase in 1997. The 1998 decline resulted from the synergies of the CapMAC merger. Financial guarantee insurance companies also use the statutory expense ratio (expenses before deferrals as a function of net premiums written) as a measure of expense management. Our company's 1998 statutory and GAAP expense ratios have improved over both 1997 and 1996, again reflecting the success of the merger. INSURANCE INCOME MBIA's insurance income reached $673 million in 1998, up 23% over 1997. This growth was the product not only of strong revenue growth but also of our disciplined expense management. INVESTMENT MANAGEMENT SERVICES In 1998 after our merger with 1838, we formed a holding company, MBIA Asset Management Corporation, to consolidate the resources and capabilities of our four investment management services. The success of our merger with 1838 showed immediate operating benefits, and all of our investment management franchises had record performances in 1998. Of special note was the 30% increase in operating revenues achieved while investment management expenses held the line at only a 9% growth rate. The table below summarizes our consolidated investment management results over the last three years:
Percent Change -------------1998 1997 vs. vs. In millions 1998 1997 1996 1997 1996 ---------------------------------------------------------------------------Revenues $65 $50 $47 30% 6 % Expenses 36 33 29 9% 12 % ---------------------------------------------------------------------------Operating income 29 17 18 70% (4)% Realized gains 14 3 2 315% 33 % ---------------------------------------------------------------------------Income $43 $20 $20 111% -----------------------------------------------------------------------------

MBIA Asset Management Corporation is comprised of 1838, MBIA Municipal Investors Services Corp. (MBIA-MISC), MBIA Investment Management Corp. (IMC) and MBIA Capital Management Corp. (CMC). The following provides a summary of each of these businesses: 1838 is a full-service asset management firm with a strong institutional focus. It manages over $7 billion in equity, fixed-income and balanced portfolios for a client base comprised of municipalities, endowments, foundations, corporate employee benefit plans and high-net-worth individuals. 1838 recorded superior performance during the year in its large-cap equity fund, which was up 41% for the year, compared to the S&P 500, which was up 28%. MBIA-MISC provides cash management, investment fund administration and fixed-rate investment placement services directly to local governments and school districts. In late 1996, MBIA-MISC acquired American Money Management Associates, Inc. (AMMA), which provides investment and treasury management consulting services for municipal and quasi-public-sector clients. Both MBIA-MISC and AMMA are Securities and Exchange Commission (SEC)-registered investment advisers and at year-end had $6.2 billion in assets under management, up 43% over 1997's $4.3 billion. IMC provides state and local governments with tailored investment agreements for bond proceeds and other public funds, such as construction, loan origination, capitalized interest and debt service reserve funds. At yearend 1998, principal and accrued interest outstanding on investment and repurchasing agreements was $3.5

billion, compared with $3.2 billion at year-end 1997. At amortized cost, the assets supporting IMC's investment agreement were also at $3.5 billion and $3.2 billion at year-end 1998 and 1997. These assets are comprised of high-quality securities with an average credit quality rating of Double-A. IMC from time-to-time uses derivative financial instruments to manage interest rate risk. We have established policies limiting the amount, type and concentration of such instruments. By matter of policy, derivative positions can only be used to hedge interest rate exposures and not for speculative trading purposes. At year-end 1998, our exposure to derivative financial instruments was not material. CMC is an SEC-registered investment adviser and National Association of Securities Dealers member firm. CMC specializes in fixed-income management for institutional funds and provides investment management services for IMC's investment agreements, MBIA-MISC's municipal cash management programs and MBIA's insurance related portfolios. By year-end 1998, CMC's assets under management increased by 31% over yearend 1997. MUNICIPAL AND FINANCIAL SERVICES MBIA MuniServices Company (MBIA MuniServices)(formerly known as Strategic Services, Inc.) was established in 1996 to provide bond administration, revenue (40)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MBIA Inc. enhancement and other services to state and local governments. In 1996, MBIA MuniServices acquired an equity interest in Capital Asset Holdings, Inc. (Capital Asset), a purchaser and servicer of delinquent tax certificates. Capital Asset also provides a series of services to assist taxing authorities in the preparation, analysis, packaging and completion of delinquent tax obligation sales. In December 1998, MBIA MuniServices acquired Capital Asset's founder's equity interest. In January 1997, MBIA MuniServices acquired a 95% interest in Municipal Tax Bureau (MTB), a provider of tax revenue compliance and collection services to public entities. In July 1997, MBIA MuniServices acquired MuniFinancial, a public finance consulting firm specializing in municipal debt administration. In January 1998, Municipal Resource Consultants (MRC), a revenue audit and information services firm, was also acquired. In 1998 the municipal and financial services operations lost $20 million, including a realized loss of $9 million on our investment in Capital Asset. This compared to operating income of $4 million in 1997 and $1 million in 1996. During the fourth quarter of 1998, MBIA began reorganizing the operations of two subsidiaries, MTB and MRC, into MBIA MuniServices to form a nationwide provider of revenue enhancement services to the public sector. CORPORATE INTEREST EXPENSE In 1998, 1997 and 1996, respectively, we incurred $45 million, $39 million and $35 million of interest expense. The increases in interest expense reflect our long-term debt financings of $50 million in November 1998, $150 million in September 1998 and $100 million in July 1997. OTHER EXPENSES The large increase in other expenses in 1998 is due primarily to the inclusion of the $75 million of one-time charges related to our mergers with CapMAC and 1838 and the reorganization of our Municipal and Financial Services Division. The merger-related charges totaled $49 million and consisted of severance of $22 million, professional services such as legal, consulting and auditing of $15 million, stay bonuses of $8 million, and expenses related to the elimination of duplicate operations of $4 million. Of these amounts, $15 million, $14 million and $4 million relating to severance, professional services and elimination of duplicate operations, respectively, were paid as of year-end 1998.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MBIA Inc. enhancement and other services to state and local governments. In 1996, MBIA MuniServices acquired an equity interest in Capital Asset Holdings, Inc. (Capital Asset), a purchaser and servicer of delinquent tax certificates. Capital Asset also provides a series of services to assist taxing authorities in the preparation, analysis, packaging and completion of delinquent tax obligation sales. In December 1998, MBIA MuniServices acquired Capital Asset's founder's equity interest. In January 1997, MBIA MuniServices acquired a 95% interest in Municipal Tax Bureau (MTB), a provider of tax revenue compliance and collection services to public entities. In July 1997, MBIA MuniServices acquired MuniFinancial, a public finance consulting firm specializing in municipal debt administration. In January 1998, Municipal Resource Consultants (MRC), a revenue audit and information services firm, was also acquired. In 1998 the municipal and financial services operations lost $20 million, including a realized loss of $9 million on our investment in Capital Asset. This compared to operating income of $4 million in 1997 and $1 million in 1996. During the fourth quarter of 1998, MBIA began reorganizing the operations of two subsidiaries, MTB and MRC, into MBIA MuniServices to form a nationwide provider of revenue enhancement services to the public sector. CORPORATE INTEREST EXPENSE In 1998, 1997 and 1996, respectively, we incurred $45 million, $39 million and $35 million of interest expense. The increases in interest expense reflect our long-term debt financings of $50 million in November 1998, $150 million in September 1998 and $100 million in July 1997. OTHER EXPENSES The large increase in other expenses in 1998 is due primarily to the inclusion of the $75 million of one-time charges related to our mergers with CapMAC and 1838 and the reorganization of our Municipal and Financial Services Division. The merger-related charges totaled $49 million and consisted of severance of $22 million, professional services such as legal, consulting and auditing of $15 million, stay bonuses of $8 million, and expenses related to the elimination of duplicate operations of $4 million. Of these amounts, $15 million, $14 million and $4 million relating to severance, professional services and elimination of duplicate operations, respectively, were paid as of year-end 1998. The merger-related severance charge of $22 million represents the estimated cost of terminating approximately 150 employees of MBIA, CapMAC and 1838 whose positions were determined to be duplicative at the time of the respective mergers. As of December 31, 1998, virtually all of these identified employees had been terminated. The reorganization of our Municipal Services Division involved the closing of some operations in our tax discovery and collection unit as well as the integration of the profitable operations of our revenue enhancement unit into MBIA MuniServices. The reorganization-related charges totaled $26 million and related to the write-off of goodwill and other asset impairments (such as accounts receivable). The goodwill was being amortized over a fifteen-year period and the amortization was not material to the results of operations of the company. The amount written off was determined in conjunction with our reorganization and consolidation of the Municipal Services Division, after a thorough analysis of the recoverability of these assets in accordance with Statement of Financial Accounting Standards 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." In 1996 and 1997, other corporate expenses were composed primarily of non-insurance goodwill amortization and general corporate overhead. In 1997 and 1998, other expenses also include the breakeven activities of MBIA & Associates Consulting, Inc. It was established in 1997 to provide assistance to state and local governments, colleges and universities, and international public- and private-sector clients seeking to strengthen their strategic financial planning and management capabilities. TAXES

Our tax policy is to optimize our after-tax income by maintaining the appropriate mix of taxable and tax-exempt investments. However, we will see our tax rate fluctuate from time-to-time as we manage our investment portfolio on a total return basis. Our effective tax rate has increased marginally over the past three years--to 23.4% in 1998 from 22.8% in 1997 and 22.5% in 1996. This reflects the gradual shift in our investment portfolio to a higher proportion of taxable securities. CAPITAL RESOURCES We carefully manage our capital resources to optimize our cost of capital while maintaining appropriate claimspaying resources to sustain our Triple-A claims-paying ratings. At year-end 1998, our total shareholders' equity was $3.8 billion, with total long-term borrowings at $689 million. We use debt financing (41)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MBIA Inc. and Subsidiaries to lower our overall cost of capital, thereby increasing our return on shareholders' equity. We maintain debt at levels we consider to be prudent based on our cash flow and total capital. The following table shows our longterm debt and ratios we use to measure it:
1998 1997 1996 --------------------------------------------------------------------------Long-term debt (in millions) $689 $489 $389 Long-term debt to total capital 15% 13% 12% Ratio of earnings to fixed charges 13.1x 14.1x 13.5x ---------------------------------------------------------------------------

In addition, our insurance company has an $825 million irrevocable standby line of credit facility with a group of major Triple-A rated banks to provide funds for the payment of claims in the event that severe losses should occur. The agreement is for a seven-year term, which expires on October 31, 2005, and, subject to approval by the banks, may be renewed annually to extend the term to seven years beyond the renewal date. Our insurance company also maintains stop-loss reinsurance coverage of $75 million in excess of incurred losses of $150 million. From time to time we access the capital markets to support the growth of our businesses. In July 1997, to provide us with additional capital for growth, we raised $126 million of equity and issued $100 million of 30-year debentures. In September 1998, we issued $150 million of 30-year debentures, and, in November 1998, we issued $50 million of 40-year notes. As of year-end 1998, total claims-paying resources for our insurance company stood at $7.8 billion, a 15% increase over 1997. LIQUIDITY Cash flow needs at the parent company level are primarily for dividends to our shareholders and interest payments on our debt. These requirements have historically been met by upstreaming dividend payments from our insurance company, which generates substantial cash flow from premium writings and investment income. In 1998, operating cash flow was $682 million, a 24% increase from $549 million in 1997. Under New York state insurance law, without prior approval of the superintendent of the state insurance department, financial guarantee insurance companies can pay dividends from earned surplus subject to retaining a minimum capital requirement. In our case, dividends in any 12-month period cannot be greater than 10% of policyholders' surplus. In 1998 our insurance company paid no dividends and at year-end 1998 had dividend capacity in excess of $228 million without special regulatory approval. Our company has significant liquidity supporting its businesses. At year-end 1998, cash equivalents and shortterm investments totaled $444 million. Should significant cash flow reductions occur in any of our businesses, for

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MBIA Inc. and Subsidiaries to lower our overall cost of capital, thereby increasing our return on shareholders' equity. We maintain debt at levels we consider to be prudent based on our cash flow and total capital. The following table shows our longterm debt and ratios we use to measure it:
1998 1997 1996 --------------------------------------------------------------------------Long-term debt (in millions) $689 $489 $389 Long-term debt to total capital 15% 13% 12% Ratio of earnings to fixed charges 13.1x 14.1x 13.5x ---------------------------------------------------------------------------

In addition, our insurance company has an $825 million irrevocable standby line of credit facility with a group of major Triple-A rated banks to provide funds for the payment of claims in the event that severe losses should occur. The agreement is for a seven-year term, which expires on October 31, 2005, and, subject to approval by the banks, may be renewed annually to extend the term to seven years beyond the renewal date. Our insurance company also maintains stop-loss reinsurance coverage of $75 million in excess of incurred losses of $150 million. From time to time we access the capital markets to support the growth of our businesses. In July 1997, to provide us with additional capital for growth, we raised $126 million of equity and issued $100 million of 30-year debentures. In September 1998, we issued $150 million of 30-year debentures, and, in November 1998, we issued $50 million of 40-year notes. As of year-end 1998, total claims-paying resources for our insurance company stood at $7.8 billion, a 15% increase over 1997. LIQUIDITY Cash flow needs at the parent company level are primarily for dividends to our shareholders and interest payments on our debt. These requirements have historically been met by upstreaming dividend payments from our insurance company, which generates substantial cash flow from premium writings and investment income. In 1998, operating cash flow was $682 million, a 24% increase from $549 million in 1997. Under New York state insurance law, without prior approval of the superintendent of the state insurance department, financial guarantee insurance companies can pay dividends from earned surplus subject to retaining a minimum capital requirement. In our case, dividends in any 12-month period cannot be greater than 10% of policyholders' surplus. In 1998 our insurance company paid no dividends and at year-end 1998 had dividend capacity in excess of $228 million without special regulatory approval. Our company has significant liquidity supporting its businesses. At year-end 1998, cash equivalents and shortterm investments totaled $444 million. Should significant cash flow reductions occur in any of our businesses, for any combination of reasons, we have additional alternatives for meeting ongoing cash requirements. They include, among other things, selling or pledging our fixed-income investments from our investment portfolio, tapping existing liquidity facilities and new borrowings. Our company has substantial external borrowing capacity. We maintain two short-term bank lines totaling $650 million with a group of worldwide banks. At year-end 1998, there were no balances outstanding under these lines. Our investment portfolio provides a high degree of liquidity since it is comprised of readily marketable highquality fixed-income securities and short-term investments. At year-end 1998, the fair value of our consolidated investment portfolio increased 13% to $10.1 billion, as shown below:
Percent Change -------------1998 vs. 1997

In millions

1998

1997

In millions 1998 1997 1998 vs. 1997 ---------------------------------------------------------------------------Insurance operations: Amortized cost $6,083 $5,292 15% Unrealized gain 319 275 16% ---------------------------------------------------------------------------Fair value $6,402 $5,567 15% ---------------------------------------------------------------------------Municipal investment agreements: Amortized cost $3,542 $3,242 9% Unrealized gain 136 99 37% ---------------------------------------------------------------------------Fair value $3,678 $3,341 10% ---------------------------------------------------------------------------Total portfolio at fair value $10,080 $8,908 13% ----------------------------------------------------------------------------

The growth of our insurance-related investments in 1998 was the result of positive cash flows and proceeds from our financing activities, as well as an increase in unrealized gains caused by lower interest rates at year-end. The fair value of investments related to our municipal investment agreement business increased 10% to $3.7 billion at year-end 1998. Our investment portfolios are considered to be available-for-sale, and the differences between their fair value and amortized cost, net of applicable taxes, are reflected as an adjustment to shareholders' equity. Differences between fair value and amortized cost arise primarily as a result of changes in interest rates occurring after a fixed-income security is purchased, although other factors influence fair value, including credit-related actions, supply and demand forces and other market factors. The weighted-average credit quality of our fixed-income portfolios has been maintained at Double-A since our inception. Since we generally intend to hold most of our investments to maturity as part of our risk management strategy, we expect to realize a value substantially equal to amortized cost. (42)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MBIA Inc. MARKET RISK The fair values of some of our company's reported financial instruments are subject to change as a result of potential interest rate movements. This interest rate sensitivity can be estimated by projecting a hypothetical increase in interest rates of 1.0%. Based on asset maturities and interest rates as of year-end 1998, this hypothetical increase in interest rates would result in an after-tax decrease in net fair value of our company's financial instruments of $203 million. This projected change in fair value is primarily a result of our company's "fixed-maturity securities" asset portfolio, which loses value with increases in interest rates. Since our company is able and primarily expects to hold the securities to maturity, it does not expect to recognize any adverse impact to income or cash flows under the above scenario. Our company's investment portfolio holdings are primarily U.S. dollar-denominated fixed-income securities including municipal bonds, U.S. government bonds, mortgage-backed securities, collateralized mortgage obligations, corporate bonds and asset-backed securities. In modeling sensitivity to interest rates for the taxable securities, U.S. treasury rates are changed instantaneously by 1.0%, and the option-adjusted spreads of the securities are held constant. Tax-exempt securities are subjected to a change in the Municipal Triple-A General Obligation curve that would be equivalent to a 1.0% taxable interest rate change based on year-end taxable/taxexempt ratios. Simulation for tax-exempts is performed treating securities on a duration-to-worst-case basis. For the liabilities evaluation, where appropriate, the assumed discount rates used to estimate the present value of future cash flows are increased by 1.0%. YEAR 2000 With the new millennium approaching, MBIA is actively managing a high-priority Year 2000 (Y2K) program

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MBIA Inc. MARKET RISK The fair values of some of our company's reported financial instruments are subject to change as a result of potential interest rate movements. This interest rate sensitivity can be estimated by projecting a hypothetical increase in interest rates of 1.0%. Based on asset maturities and interest rates as of year-end 1998, this hypothetical increase in interest rates would result in an after-tax decrease in net fair value of our company's financial instruments of $203 million. This projected change in fair value is primarily a result of our company's "fixed-maturity securities" asset portfolio, which loses value with increases in interest rates. Since our company is able and primarily expects to hold the securities to maturity, it does not expect to recognize any adverse impact to income or cash flows under the above scenario. Our company's investment portfolio holdings are primarily U.S. dollar-denominated fixed-income securities including municipal bonds, U.S. government bonds, mortgage-backed securities, collateralized mortgage obligations, corporate bonds and asset-backed securities. In modeling sensitivity to interest rates for the taxable securities, U.S. treasury rates are changed instantaneously by 1.0%, and the option-adjusted spreads of the securities are held constant. Tax-exempt securities are subjected to a change in the Municipal Triple-A General Obligation curve that would be equivalent to a 1.0% taxable interest rate change based on year-end taxable/taxexempt ratios. Simulation for tax-exempts is performed treating securities on a duration-to-worst-case basis. For the liabilities evaluation, where appropriate, the assumed discount rates used to estimate the present value of future cash flows are increased by 1.0%. YEAR 2000 With the new millennium approaching, MBIA is actively managing a high-priority Year 2000 (Y2K) program addressing the issue of whether its computer systems can correctly distinguish between the years 1900 and 2000. The company has established an independent Y2K testing lab in its Armonk office, with a committee of business unit managers overseeing the project. MBIA has a budget of $1.13 million for its 1998-2000 Y2K efforts. Expenditures are proceeding as anticipated, and we do not expect the project budget to materially exceed this amount. As of December 31, 1998, we have spent $326 thousand on the project. Since the mid-1990s, MBIA has completed the re-engineering or installation of three internally designed "mission-critical" computer systems at a cost of approximately $11 million. The three systems are: MBIA Information Deal Analysis System (MIDAS), which provides analysis and accounting for MBIA's financial guarantee business; Sales Trading and Accounting Records System (STARS), which provides administrative and client support for MBIA's municipal pooled investment business; and Municipal Agreement Record System (MARS), which provides analytical and accounting support for MBIA's investment agreement business. These systems were designed as Y2Kcompliant. These expenditures are not reflected in our Y2K budget. MBIA has initiated a comprehensive Y2K plan which includes the following phases: assessment--completed in the second quarter of 1998; remediation--completed in the fourth quarter of 1998; testing--completed for STARS in the third quarter of 1998, MARS in the fourth quarter of 1998 and MIDAS with the initial phase completed in the fourth quarter of 1998 (final testing completion expected by the end of the first quarter of 1999); and contingency planning--to be completed in the first quarter of 1999. This plan covers "mission-critical" internally developed systems, vendor software, hardware and certain third-party entities through which we conduct our business. Testing to date indicates that functions critical to the financial guarantee business, both domestic and international (MIDAS), were Y2K-ready as of December 31, 1998. Additional testing will continue throughout 1999. In addition, MBIA's subsidiary companies are actively managing their own Y2K efforts and are expected to meet varying readiness deadlines before yearend. It is not possible at this time to determine whether a subsidiary's Y2K failure would have a material impact on MBIA. Additionally, MBIA is reviewing all ancillary support functions. Evaluation, testing and re-testing will continue throughout 1999. An area of risk to MBIA's financial guarantee business is the potential inability of an issuer, or its trustee or paying agent, to make payments on an MBIA-insured transaction because of failure to be Y2K-ready. To mitigate this risk, we are surveying trustees, paying agents and selected high-volume issuers to determine their readiness. While the survey is not complete, results to date indicate that all respondents are either ready or planning to be ready by late 1999. If MBIA is asked to pay a claim in situations where the issuer's system fails, we will do so

and would expect to recover such payment in a short time period. While it is not possible to predict the extent of such payments, we believe that MBIA has adequate sources of liquidity to cover these payments. (43)

REPORT ON MANAGEMENT'S RESPONSIBILITY AND REPORT OF INDEPENDENT ACCOUNTANTS MBIA Inc. and Subsidiaries REPORT ON MANAGEMENT'S RESPONSIBILITY Management is responsible for the preparation, integrity and objectivity of the consolidated financial statements and other financial information presented in this annual report. The accompanying consolidated financial statements were prepared in accordance with generally accepted accounting principles, applying certain estimates and judgments as required. MBIA's internal controls are designed to provide reasonable assurance as to the integrity and reliability of the financial statements and to adequately safeguard, verify and maintain accountability of assets. Such controls are based on established written policies and procedures and are implemented by trained, skilled personnel with an appropriate segregation of duties. These policies and procedures prescribe that MBIA and all its employees are to maintain the highest ethical standards and that its business practices are to be conducted in a manner which is above reproach. PricewaterhouseCoopers LLP, independent accountants, is retained to audit the company's financial statements. Their accompanying report is based on audits conducted in accordance with generally accepted auditing standards, which include the consideration of the company's internal controls to establish a basis for reliance thereon in determining the nature, timing and extent of audit tests to be applied. The board of directors exercises its responsibility for these financial statements through its Audit Committee, which consists entirely of independent non-management board members. The Audit Committee meets periodically with the independent accountants, both privately and with management present, to review accounting, auditing, internal controls and financial reporting matters.
/s/David H. Elliott ------------------David H. Elliott Chairman

/s/ Neil G. Budnick ------------------Neil G. Budnick Chief Financial Officer and Treasurer

REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of MBIA Inc.: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income and changes in shareholders' equity and cash flows present fairly, in all material respects, the financial position of MBIA Inc. and Subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for

REPORT ON MANAGEMENT'S RESPONSIBILITY AND REPORT OF INDEPENDENT ACCOUNTANTS MBIA Inc. and Subsidiaries REPORT ON MANAGEMENT'S RESPONSIBILITY Management is responsible for the preparation, integrity and objectivity of the consolidated financial statements and other financial information presented in this annual report. The accompanying consolidated financial statements were prepared in accordance with generally accepted accounting principles, applying certain estimates and judgments as required. MBIA's internal controls are designed to provide reasonable assurance as to the integrity and reliability of the financial statements and to adequately safeguard, verify and maintain accountability of assets. Such controls are based on established written policies and procedures and are implemented by trained, skilled personnel with an appropriate segregation of duties. These policies and procedures prescribe that MBIA and all its employees are to maintain the highest ethical standards and that its business practices are to be conducted in a manner which is above reproach. PricewaterhouseCoopers LLP, independent accountants, is retained to audit the company's financial statements. Their accompanying report is based on audits conducted in accordance with generally accepted auditing standards, which include the consideration of the company's internal controls to establish a basis for reliance thereon in determining the nature, timing and extent of audit tests to be applied. The board of directors exercises its responsibility for these financial statements through its Audit Committee, which consists entirely of independent non-management board members. The Audit Committee meets periodically with the independent accountants, both privately and with management present, to review accounting, auditing, internal controls and financial reporting matters.
/s/David H. Elliott ------------------David H. Elliott Chairman

/s/ Neil G. Budnick ------------------Neil G. Budnick Chief Financial Officer and Treasurer

REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of MBIA Inc.: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income and changes in shareholders' equity and cash flows present fairly, in all material respects, the financial position of MBIA Inc. and Subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP -----------------------------New York, New York

REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of MBIA Inc.: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income and changes in shareholders' equity and cash flows present fairly, in all material respects, the financial position of MBIA Inc. and Subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP -----------------------------New York, New York February 2, 1999

(44)

CONSOLIDATED BALANCE SHEETS MBIA Inc. and Subsidiaries
Dollars in thousands except per share amounts December 31, 1998 --------------------------------------------------------------------------------------------------------ASSETS Investments: Fixed-maturity securities held as available-for-sale at fair value (amortized cost $5,565,060 and $4,936,760) $5,884,053 Short-term investments, at amortized cost (which approximates fair value) 423,194 Other investments 94,975 --------------------------------------------------------------------------------------------------------6,402,222 Municipal investment agreement portfolio held as available-for-sale at fair value (amortized cost $3,542,077 and $3,241,703) 3,678,229 --------------------------------------------------------------------------------------------------------TOTAL INVESTMENTS 10,080,451 --------------------------------------------------------------------------------------------------------Cash and cash equivalents 20,757 Securities borrowed or purchased under agreements to resell 538,281 Accrued investment income 126,990 Deferred acquisition costs 230,085 Prepaid reinsurance premiums 352,699 Goodwill (less accumulated amortization of $62,423 and $55,788) 120,681 Property and equipment, at cost (less accumulated depreciation of $39,934 and $31,882) 81,457 Receivable for investments sold 49,497 Other assets 195,666 --------------------------------------------------------------------------------------------------------TOTAL ASSETS $11,796,564 --------------------------------------------------------------------------------------------------------LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Deferred premium revenue $2,251,211 Loss and loss adjustment expense reserves 270,114 Municipal investment agreements 2,587,339 Municipal repurchase agreements 897,718 Long-term debt 688,996 Short-term debt --Securities loaned or sold under agreements to repurchase 573,352 Deferred income taxes 343,896 Deferred fee revenue 42,964 Payable for investments purchased 95,598

CONSOLIDATED BALANCE SHEETS MBIA Inc. and Subsidiaries
Dollars in thousands except per share amounts December 31, 1998 --------------------------------------------------------------------------------------------------------ASSETS Investments: Fixed-maturity securities held as available-for-sale at fair value (amortized cost $5,565,060 and $4,936,760) $5,884,053 Short-term investments, at amortized cost (which approximates fair value) 423,194 Other investments 94,975 --------------------------------------------------------------------------------------------------------6,402,222 Municipal investment agreement portfolio held as available-for-sale at fair value (amortized cost $3,542,077 and $3,241,703) 3,678,229 --------------------------------------------------------------------------------------------------------TOTAL INVESTMENTS 10,080,451 --------------------------------------------------------------------------------------------------------Cash and cash equivalents 20,757 Securities borrowed or purchased under agreements to resell 538,281 Accrued investment income 126,990 Deferred acquisition costs 230,085 Prepaid reinsurance premiums 352,699 Goodwill (less accumulated amortization of $62,423 and $55,788) 120,681 Property and equipment, at cost (less accumulated depreciation of $39,934 and $31,882) 81,457 Receivable for investments sold 49,497 Other assets 195,666 --------------------------------------------------------------------------------------------------------TOTAL ASSETS $11,796,564 --------------------------------------------------------------------------------------------------------LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Deferred premium revenue $2,251,211 Loss and loss adjustment expense reserves 270,114 Municipal investment agreements 2,587,339 Municipal repurchase agreements 897,718 Long-term debt 688,996 Short-term debt --Securities loaned or sold under agreements to repurchase 573,352 Deferred income taxes 343,896 Deferred fee revenue 42,964 Payable for investments purchased 95,598 Other liabilities 253,159 --------------------------------------------------------------------------------------------------------TOTAL LIABILITIES 8,004,347 --------------------------------------------------------------------------------------------------------COMMITMENTS AND CONTINGENCIES Shareholders' Equity: Preferred stock, par value $1 per share; authorized shares-10,000,000; issued and outstanding--none --Common stock, par value $1 per share; authorized shares-200,000,000; issued shares--99,569,625 and 98,754,487 99,570 Additional paid-in capital 1,169,192 Retained earnings 2,246,221 Accumulated other comprehensive income, net of deferred income taxes of $157,410 and $132,026 288,915 Unallocated ESOP shares (4,044) Unearned compensation--restricted stock (6,807) Treasury stock--21,717 shares in 1998 (830) --------------------------------------------------------------------------------------------------------TOTAL SHAREHOLDERS' EQUITY 3,792,217 --------------------------------------------------------------------------------------------------------TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $11,796,564 ---------------------------------------------------------------------------------------------------------

The accompanying notes are an integral part of the consolidated financial statements.

CONSOLIDATED STATEMENTS OF INCOME MBIA Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME MBIA Inc. and Subsidiaries
Years ended Decembe --------------------------------Dollars in thousands except per share amounts 1998 1997 --------------------------------------------------------------------------------------------------------INSURANCE Revenues: Gross premiums written $677,050 $653,848 Ceded premiums (156,064) (116,526) --------------------------------------------------------------------------------------------------------Net premiums written 520,986 537,322 Increase in deferred premium revenue (96,436) (185,827) --------------------------------------------------------------------------------------------------------Premiums earned (net of ceded premiums of $92,873, $62,353 and $48,679) 424,550 351,495 Net investment income 331,802 301,998 Net realized gains 29,962 16,903 Advisory fees 26,130 17,110 --------------------------------------------------------------------------------------------------------Total insurance revenues 812,444 687,506 Expenses: Losses and loss adjustment 34,683 31,877 Policy acquisition costs, net 34,613 34,897 Operating 70,330 74,075 --------------------------------------------------------------------------------------------------------Total insurance expenses 139,626 140,849 --------------------------------------------------------------------------------------------------------Insurance income 672,818 546,657 --------------------------------------------------------------------------------------------------------INVESTMENT MANAGEMENT SERVICES Revenues 65,032 49,999 Expenses 36,012 32,958 --------------------------------------------------------------------------------------------------------Operating income 29,020 17,041 Net realized gains 14,179 3,416 --------------------------------------------------------------------------------------------------------Investment management services income 43,199 20,457 --------------------------------------------------------------------------------------------------------MUNICIPAL AND FINANCIAL SERVICES Revenues 29,392 25,189 Expenses 40,682 20,694 --------------------------------------------------------------------------------------------------------Operating (loss) income (11,290) 4,495 Net realized losses (9,165) ----------------------------------------------------------------------------------------------------------Municipal and financial services (loss) income (20,455) 4,495 --------------------------------------------------------------------------------------------------------CORPORATE Interest expense 44,620 38,645 Other expenses 85,904 7,712 --------------------------------------------------------------------------------------------------------Corporate expenses (130,524) (46,357) --------------------------------------------------------------------------------------------------------Income before income taxes 565,038 525,252 Provision for income taxes 132,310 119,642 --------------------------------------------------------------------------------------------------------NET INCOME $432,728 $405,610 --------------------------------------------------------------------------------------------------------NET INCOME PER COMMON SHARE: BASIC $4.37 $4.18 DILUTED $4.32 $4.12 --------------------------------------------------------------------------------------------------------Weighted average number of common shares outstanding: Basic 98,978,641 96,937,314 Diluted 100,163,014 98,344,163 ---------------------------------------------------------------------------------------------------------

The accompanying notes are an integral part of the consolidated financial statements.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY MBIA Inc. and Subsidiaries
For the years ended December 31, 1998, 1997 and --------------------------------------------------------------------------------------------------------Common Stock Additional --------------------Paid-in Retained In thousands except per share amounts Shares Amount Capital Earnings --------------------------------------------------------------------------------------------------------BALANCE, JANUARY 1, 1996 92,810 $92,810 $906,182 $1,296,311 --------------------------------------------------------------------------------------------------------Comprehensive income: Net income ---347,736 Other comprehensive income: Change in unrealized appreciation of investments net of change in deferred income taxes of $50,874 ----Change in foreign currency translation ----Other comprehensive income Total comprehensive income Net proceeds from issuance of shares 1,690 1,690 53,190 -Allocation of ESOP shares ----Unearned compensation - restricted stock ----Exercise of stock options 958 958 24,931 (1,757) Dividends (declared per common share $0.725, paid per common share $0.708) ---(69,644) --------------------------------------------------------------------------------------------------------BALANCE, DECEMBER 31, 1996 95,458 95,458 984,303 1,572,646 --------------------------------------------------------------------------------------------------------Comprehensive income: Net income ---405,610 Other comprehensive income: Change in unrealized appreciation of investments net of change in deferred income taxes of $(69,337) ----Change in foreign currency translation ----Other comprehensive income Total comprehensive income Net proceeds from issuance of shares 2,679 2,679 125,096 -Allocation of ESOP shares ----Unearned compensation - restricted stock 67 67 3,729 -Stock issued for acquisition 120 120 6,880 -Exercise of stock options 430 430 13,942 -Dividends (declared per common share $0.770, paid per common share $0.765) ---(76,648) --------------------------------------------------------------------------------------------------------BALANCE, DECEMBER 31, 1997 98,754 98,754 1,133,950 1,901,608 --------------------------------------------------------------------------------------------------------Comprehensive income: Net income ---432,728 Other comprehensive income: Change in unrealized appreciation of investments net of change in deferred income taxes of $(25,384) ----Change in foreign currency translation ----Other comprehensive income Total comprehensive income Treasury shares acquired --830 -Allocation of ESOP shares ----Unearned compensation - restricted stock 71 71 4,449 -Exercise of stock options 745 745 29,963 -Dividends (declared per common share $0.790, paid per common share $0.785) ---(88,115) --------------------------------------------------------------------------------------------------------BALANCE, DECEMBER 31, 1998 99,570 $99,570 $1,169,192 $2,246,221 ---------------------------------------------------------------------------------------------------------

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Con't) For the years ended December 31, 1998, 1997 a --------------------------------------------------------------------------------------------------------Unearned Unallocated Compensation Treasury St ESOP Restricted -------------In thousands except per share amounts Shares Stock Shares --------------------------------------------------------------------------------------------------------BALANCE, JANUARY 1, 1996 $(6,497) $(426) $(148) --------------------------------------------------------------------------------------------------------Comprehensive income: Net income ---Other comprehensive income: Change in unrealized appreciation of investments net of change in deferred income taxes of $50,874 ---Change in foreign currency translation ---Other comprehensive income Total comprehensive income Net proceeds from issuance of shares ---Allocation of ESOP shares 1,067 --Unearned compensation - restricted stock -(625) -Exercise of stock options --148 Dividends (declared per common share $0.725, paid per common share $0.708) -----------------------------------------------------------------------------------------------------------BALANCE, DECEMBER 31, 1996 (5,430) (1,051) ---------------------------------------------------------------------------------------------------------Comprehensive income: Net income ---Other comprehensive income: Change in unrealized appreciation of investments net of change in deferred income taxes of $(69,337) ---Change in foreign currency translation ---Other comprehensive income Total comprehensive income Net proceeds from issuance of shares ---Allocation of ESOP shares 1,347 --Unearned compensation - restricted stock -(3,761) -Stock issued for acquisition ---Exercise of stock options ---Dividends (declared per common share $0.770, paid per common share $0.765) -----------------------------------------------------------------------------------------------------------BALANCE, DECEMBER 31, 1997 (4,083) (4,812) ---------------------------------------------------------------------------------------------------------Comprehensive income: Net income ---Other comprehensive income: Change in unrealized appreciation of investments net of change in deferred income taxes of $(25,384) ---Change in foreign currency translation ---Other comprehensive income Total comprehensive income Treasury shares acquired --(22) Allocation of ESOP shares 39 --Unearned compensation - restricted stock -(1,995) -Exercise of stock options ---Dividends (declared per common share $0.790, paid per common share $0.785) -----------------------------------------------------------------------------------------------------------BALANCE, DECEMBER 31, 1998 $(4,044) $(6,807) (22) ---------------------------------------------------------------------------------------------------------

The accompanying notes are an integral part of the consolidated financial statements.

DISCLOSURE OF RECLASSIFICATION AMOUNT: 1996 1997 1998 --------------------------------------------------------------------------------------------------Unrealized appreciation of investments arising during the period, net of taxes $(85,451) $141,747 $78,142 Reclassification of adjustment, net of taxes (8,287) (12,965) (30,100) --------------------Net unrealized appreciation, net of taxes $(93,738) $128,782 $48,042 ---------------------------------------------------------------------------------------------------

CONSOLIDATED STATEMENTS OF CASH FLOWS MBIA Inc. and Subsidiaries
Years ended December 31 Dollars in thousands 1998 1997 --------------------------------------------------------------------------------------------------------CASH FLOWS FROM OPERATING ACTIVITIES: Net income $432,728 $405,610 $3 Adjustments to reconcile net income to net cash provided by operating activities: Increase in accrued investment income (5,900) (12,501) ( Increase in deferred acquisition costs (13,920) (19,276) ( Increase in prepaid reinsurance premiums (63,191) (54,173) ( Increase in deferred premium revenue 159,627 240,000 1 Increase in loss and loss adjustment expense reserves 167,053 32,762 Depreciation 8,174 6,284 Amortization of goodwill 9,051 7,751 Amortization of bond discount, net (22,699) (20,191) ( Net realized gains on sale of investments (34,976) (20,319) ( Deferred income taxes 19,943 13,191 Other, net 26,155 (30,606) --------------------------------------------------------------------------------------------------------Total adjustments to net income 249,317 142,922 1 --------------------------------------------------------------------------------------------------------Net cash provided by operating activities 682,045 548,532 4 --------------------------------------------------------------------------------------------------------CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of fixed-maturity securities, net of payable for investments purchased (2,479,245) (2,296,490) (1,7 Sale of fixed-maturity securities, net of receivable for investments sold 1,102,460 1,336,458 9 Redemption of fixed-maturity securities, net of receivable for investments redeemed 745,515 251,793 2 Purchase of short-term investments (97,177) (15,022) Purchase of other investments (51,769) (559) Sale of other investments 1,785 1,223 Purchases for municipal investment agreement portfolio, net of payable for investments purchased (2,456,265) (1,447,004) (1,8 Sales from municipal investment agreement portfolio, net of receivable for investments sold 2,218,342 1,487,437 1,2 Capital expenditures, net of disposals (22,909) (17,369) ( Other, net (8,098) (14,554) --------------------------------------------------------------------------------------------------------Net cash used by investing activities (1,047,361) (714,087) (1,1 --------------------------------------------------------------------------------------------------------CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuance of common stock -127,775 Net proceeds from issuance of long-term debt 197,113 98,880 Net (repayment) proceeds from (retirement) issuance of short-term debt (20,000) (9,100) Dividends paid (85,667) (76,743) ( Proceeds from issuance of municipal 2,352,908 1,823,422 2,2 investment and repurchase agreements Payments for drawdowns of municipal investment (2,017,056) (1,930,321) (1,6 investment and repurchase agreements Securities loaned or sold under agreements to (98,229) 133,300 to repurchase, net Exercise of stock options 30,708 14,372 --------------------------------------------------------------------------------------------------------Net cash provided by financing activities 359,777 181,585 6 --------------------------------------------------------------------------------------------------------Net (decrease) increase in cash and cash equivalents (5,539) 16,030 ( Cash and cash equivalents - beginning of year 26,296 10,266

CONSOLIDATED STATEMENTS OF CASH FLOWS MBIA Inc. and Subsidiaries
Years ended December 31 Dollars in thousands 1998 1997 --------------------------------------------------------------------------------------------------------CASH FLOWS FROM OPERATING ACTIVITIES: Net income $432,728 $405,610 $3 Adjustments to reconcile net income to net cash provided by operating activities: Increase in accrued investment income (5,900) (12,501) ( Increase in deferred acquisition costs (13,920) (19,276) ( Increase in prepaid reinsurance premiums (63,191) (54,173) ( Increase in deferred premium revenue 159,627 240,000 1 Increase in loss and loss adjustment expense reserves 167,053 32,762 Depreciation 8,174 6,284 Amortization of goodwill 9,051 7,751 Amortization of bond discount, net (22,699) (20,191) ( Net realized gains on sale of investments (34,976) (20,319) ( Deferred income taxes 19,943 13,191 Other, net 26,155 (30,606) --------------------------------------------------------------------------------------------------------Total adjustments to net income 249,317 142,922 1 --------------------------------------------------------------------------------------------------------Net cash provided by operating activities 682,045 548,532 4 --------------------------------------------------------------------------------------------------------CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of fixed-maturity securities, net of payable for investments purchased (2,479,245) (2,296,490) (1,7 Sale of fixed-maturity securities, net of receivable for investments sold 1,102,460 1,336,458 9 Redemption of fixed-maturity securities, net of receivable for investments redeemed 745,515 251,793 2 Purchase of short-term investments (97,177) (15,022) Purchase of other investments (51,769) (559) Sale of other investments 1,785 1,223 Purchases for municipal investment agreement portfolio, net of payable for investments purchased (2,456,265) (1,447,004) (1,8 Sales from municipal investment agreement portfolio, net of receivable for investments sold 2,218,342 1,487,437 1,2 Capital expenditures, net of disposals (22,909) (17,369) ( Other, net (8,098) (14,554) --------------------------------------------------------------------------------------------------------Net cash used by investing activities (1,047,361) (714,087) (1,1 --------------------------------------------------------------------------------------------------------CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuance of common stock -127,775 Net proceeds from issuance of long-term debt 197,113 98,880 Net (repayment) proceeds from (retirement) issuance of short-term debt (20,000) (9,100) Dividends paid (85,667) (76,743) ( Proceeds from issuance of municipal 2,352,908 1,823,422 2,2 investment and repurchase agreements Payments for drawdowns of municipal investment (2,017,056) (1,930,321) (1,6 investment and repurchase agreements Securities loaned or sold under agreements to (98,229) 133,300 to repurchase, net Exercise of stock options 30,708 14,372 --------------------------------------------------------------------------------------------------------Net cash provided by financing activities 359,777 181,585 6 --------------------------------------------------------------------------------------------------------Net (decrease) increase in cash and cash equivalents (5,539) 16,030 ( Cash and cash equivalents - beginning of year 26,296 10,266 --------------------------------------------------------------------------------------------------------Cash and cash equivalents - end of year $20,757 $26,296 $ --------------------------------------------------------------------------------------------------------SUPPLEMENTAL CASH FLOW DISCLOSURES: Income tax paid $108,297 $103,065 $ Interest paid: Municipal investment and repurchase agreements $202,502 $195,344 $1 Long-term debt 39,499 32,953 Short-term debt 1,057 2,017 ---------------------------------------------------------------------------------------------------------

The accompanying notes are an integral part of the consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries NOTE 1: BUSINESS AND ORGANIZATION MBIA Inc. (the company) was incorporated in Connecticut on November 12, 1986 as a licensed insurer and, through a series of transactions during December 1986, became the successor to the business of the Municipal Bond Insurance Association (the Association), a voluntary unincorporated association of insurers writing municipal bond and note insurance as agent for the member insurance companies. The company operates its insurance business primarily through its wholly owned subsidiary, MBIA Insurance Corporation (MBIA Corp.). Effective December 31, 1989, the company acquired for $288 million all of the outstanding stock of Bond Investors Group, Inc. (BIG), the parent company of Bond Investors Guaranty Insurance Company, which was subsequently renamed MBIA Insurance Corp. of Illinois (MBIA Illinois). The acquisition of BIG has been accounted for as a purchase, and the price was allocated to the net assets of the acquired company based on the fair value of such assets and liabilities at the date of acquisition. In 1990, the company formed MBIA Assurance, S.A. (MBIA Assurance), a wholly owned French subsidiary, to write financial guarantee insurance in the international community. MBIA Assurance provides insurance for public infrastructure financings, structured finance transactions and certain obligations of financial institutions. The stock of MBIA Assurance was contributed to MBIA Corp. in 1991 and, pursuant to a reinsurance agreement with MBIA Corp., a substantial amount of the risks insured by MBIA Assurance is reinsured by MBIA Corp. At the end of 1990, MBIA Municipal Investors Services Corporation (MBIA-MISC) was formed as a wholly owned subsidiary of the company. MBIA-MISC operates cooperative cash management programs for school districts and municipalities. In 1993, the company formed a wholly owned subsidiary, MBIA Investment Management Corp. (IMC). IMC provides guaranteed investment agreements to states, municipalities and municipal authorities that are guaranteed as to principal and interest. In 1994, the company formed a wholly owned subsidiary, MBIA Securities Corp., which was subsequently renamed MBIA Capital Management Corp. (CMC). CMC provides fixed-income investment management services for the company, its municipal cash management service businesses and public pension funds. In 1996, MBIA-MISC acquired American Money Management Associates, Inc. (AMMA), which provides investment and treasury management consulting services for municipal and quasi-public-sector clients. In 1996, the company formed a wholly owned subsidiary, Strategic Services, Inc., which was subsequently renamed MBIA MuniServices Company (MBIA MuniServices). Also in 1996, MBIA MuniServices acquired an interest in Capital Asset Holdings, Inc. (Capital Asset), a limited partnership that buys, services and manages delinquent municipal tax liens. In December 1998, MBIA MuniServices acquired Capital Asset's founder's equity interest. In January 1997, MBIA MuniServices acquired a 95 percent interest in the Municipal Tax Bureau (MTB) of Philadelphia, a provider of tax compliance services to state and local governments. In July 1997, MBIA MuniServices acquired MuniFinancial, a public finance consulting firm specializing in municipal debt administration. In January 1998, Municipal Resource Consultants (MRC), a revenue audit and information services firm, was acquired. On February 17, 1998, MBIA Inc. consummated a merger with CapMAC Holdings Inc. (CapMAC). CapMAC operated its insurance business primarily through its wholly owned subsidiary, Capital Markets Assurance Corporation (CMAC). On July 31, 1998, MBIA Inc. completed a merger of its investment management business with 1838 Investment Advisors (1838). See Note 3 for details on these two mergers. In June 1998, MBIA Asset Management Corporation (MBIA-AMC) was formed as a wholly owned subsidiary of the company to consolidate the resources and capabilities of our investment management services. In July 1998, the company contributed the common stock of MBIA-MISC, IMC, CMC and 1838 to MBIA-AMC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries NOTE 1: BUSINESS AND ORGANIZATION MBIA Inc. (the company) was incorporated in Connecticut on November 12, 1986 as a licensed insurer and, through a series of transactions during December 1986, became the successor to the business of the Municipal Bond Insurance Association (the Association), a voluntary unincorporated association of insurers writing municipal bond and note insurance as agent for the member insurance companies. The company operates its insurance business primarily through its wholly owned subsidiary, MBIA Insurance Corporation (MBIA Corp.). Effective December 31, 1989, the company acquired for $288 million all of the outstanding stock of Bond Investors Group, Inc. (BIG), the parent company of Bond Investors Guaranty Insurance Company, which was subsequently renamed MBIA Insurance Corp. of Illinois (MBIA Illinois). The acquisition of BIG has been accounted for as a purchase, and the price was allocated to the net assets of the acquired company based on the fair value of such assets and liabilities at the date of acquisition. In 1990, the company formed MBIA Assurance, S.A. (MBIA Assurance), a wholly owned French subsidiary, to write financial guarantee insurance in the international community. MBIA Assurance provides insurance for public infrastructure financings, structured finance transactions and certain obligations of financial institutions. The stock of MBIA Assurance was contributed to MBIA Corp. in 1991 and, pursuant to a reinsurance agreement with MBIA Corp., a substantial amount of the risks insured by MBIA Assurance is reinsured by MBIA Corp. At the end of 1990, MBIA Municipal Investors Services Corporation (MBIA-MISC) was formed as a wholly owned subsidiary of the company. MBIA-MISC operates cooperative cash management programs for school districts and municipalities. In 1993, the company formed a wholly owned subsidiary, MBIA Investment Management Corp. (IMC). IMC provides guaranteed investment agreements to states, municipalities and municipal authorities that are guaranteed as to principal and interest. In 1994, the company formed a wholly owned subsidiary, MBIA Securities Corp., which was subsequently renamed MBIA Capital Management Corp. (CMC). CMC provides fixed-income investment management services for the company, its municipal cash management service businesses and public pension funds. In 1996, MBIA-MISC acquired American Money Management Associates, Inc. (AMMA), which provides investment and treasury management consulting services for municipal and quasi-public-sector clients. In 1996, the company formed a wholly owned subsidiary, Strategic Services, Inc., which was subsequently renamed MBIA MuniServices Company (MBIA MuniServices). Also in 1996, MBIA MuniServices acquired an interest in Capital Asset Holdings, Inc. (Capital Asset), a limited partnership that buys, services and manages delinquent municipal tax liens. In December 1998, MBIA MuniServices acquired Capital Asset's founder's equity interest. In January 1997, MBIA MuniServices acquired a 95 percent interest in the Municipal Tax Bureau (MTB) of Philadelphia, a provider of tax compliance services to state and local governments. In July 1997, MBIA MuniServices acquired MuniFinancial, a public finance consulting firm specializing in municipal debt administration. In January 1998, Municipal Resource Consultants (MRC), a revenue audit and information services firm, was acquired. On February 17, 1998, MBIA Inc. consummated a merger with CapMAC Holdings Inc. (CapMAC). CapMAC operated its insurance business primarily through its wholly owned subsidiary, Capital Markets Assurance Corporation (CMAC). On July 31, 1998, MBIA Inc. completed a merger of its investment management business with 1838 Investment Advisors (1838). See Note 3 for details on these two mergers. In June 1998, MBIA Asset Management Corporation (MBIA-AMC) was formed as a wholly owned subsidiary of the company to consolidate the resources and capabilities of our investment management services. In July 1998, the company contributed the common stock of MBIA-MISC, IMC, CMC and 1838 to MBIA-AMC. NOTE 2: SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements have been prepared on the basis of generally accepted accounting

principles (GAAP). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant accounting policies are as follows: CONSOLIDATION The consolidated financial statements include the accounts of the company and its significant subsidiaries. All significant intercompany balances have been eliminated. Certain amounts have been reclassified in prior years' financial statements to conform to the current presentation. INVESTMENTS The company's entire investment portfolio is considered available-for-sale and is reported in the financial statements at fair value, with unrealized gains and losses, net of deferred taxes, reflected as a separate component of shareholders' equity. Bond discounts and premiums are amortized using the effective-yield method over the remaining term of the securities. For pre-refunded bonds, the remaining term is determined based on the contractual refunding date. Short-term investments are carried at amortized cost, which approximates fair value, and include all fixedmaturity securities--other than those held in the municipal investment agreement portfolio--with a remaining term to maturity of less than one year. Investment income is recorded as earned. Realized gains or losses on the sale of investments are determined by specific identification and are included as a separate component of revenues. (49)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries Investment income from the municipal investment agreement portfolio is recorded as a component of investment management services revenues. Municipal investment agreement portfolio accrued interest income, receivables for investments sold, and payables for investments purchased are included in the respective consolidated accounts. Other investments include the company's interest in a limited partnership, a mutual fund that invests principally in marketable equity securities and other equity investments. The company records dividends from these investments as a component of investment income. In addition, the company records its share of the unrealized gains and losses on these investments, net of applicable deferred income taxes, as a separate component of shareholders' equity. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash on hand and demand deposits with banks. SECURITIES BORROWED OR PURCHASED UNDER AGREEMENTS TO RESELL AND SECURITIES LOANED OR SOLD UNDER AGREEMENTS TO REPURCHASE Securities borrowed or purchased under agreements to resell and securities loaned or sold under agreements to repurchase are accounted for as collateralized transactions and are recorded at principal or contract value. It is the company's policy to take possession of securities borrowed or purchased under agreements to resell. The company minimizes the credit risk that counterparties to transactions might be unable to fulfill their contractual obligations by monitoring customer credit exposure and collateral value and requiring additional collateral to be deposited with the company when deemed necessary. POLICY ACQUISITION COSTS Policy acquisition costs include only those expenses that relate primarily to, and vary with, premium production. For business produced directly by MBIA Corp., such costs include compensation of employees involved in underwriting and policy issuance functions, certain rating agency fees, state premium taxes and certain other underwriting expenses, reduced by ceding commission income on premiums ceded to reinsurers. Policy acquisition costs are deferred and amortized over the period in which the related premiums are earned. PREMIUM REVENUE RECOGNITION Upfront premiums are earned pro rata over the period of risk.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries Investment income from the municipal investment agreement portfolio is recorded as a component of investment management services revenues. Municipal investment agreement portfolio accrued interest income, receivables for investments sold, and payables for investments purchased are included in the respective consolidated accounts. Other investments include the company's interest in a limited partnership, a mutual fund that invests principally in marketable equity securities and other equity investments. The company records dividends from these investments as a component of investment income. In addition, the company records its share of the unrealized gains and losses on these investments, net of applicable deferred income taxes, as a separate component of shareholders' equity. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash on hand and demand deposits with banks. SECURITIES BORROWED OR PURCHASED UNDER AGREEMENTS TO RESELL AND SECURITIES LOANED OR SOLD UNDER AGREEMENTS TO REPURCHASE Securities borrowed or purchased under agreements to resell and securities loaned or sold under agreements to repurchase are accounted for as collateralized transactions and are recorded at principal or contract value. It is the company's policy to take possession of securities borrowed or purchased under agreements to resell. The company minimizes the credit risk that counterparties to transactions might be unable to fulfill their contractual obligations by monitoring customer credit exposure and collateral value and requiring additional collateral to be deposited with the company when deemed necessary. POLICY ACQUISITION COSTS Policy acquisition costs include only those expenses that relate primarily to, and vary with, premium production. For business produced directly by MBIA Corp., such costs include compensation of employees involved in underwriting and policy issuance functions, certain rating agency fees, state premium taxes and certain other underwriting expenses, reduced by ceding commission income on premiums ceded to reinsurers. Policy acquisition costs are deferred and amortized over the period in which the related premiums are earned. PREMIUM REVENUE RECOGNITION Upfront premiums are earned pro rata over the period of risk. Premiums are allocated to each bond maturity based on par amount and are earned on a straight-line basis over the term of each maturity. Installment premiums are earned over each installment period--generally one year or less. When an insured issue is retired early, is called by the issuer, or is in substance paid in advance through a refunding or defeasance accomplished by placing U.S. Government securities in escrow, the remaining deferred premium revenue is earned at that time, since there is no longer risk to the company. Accordingly, deferred premium revenue represents the portion of premiums written that is applicable to the unexpired risk of insured bonds and notes. ADVISORY FEE REVENUE RECOGNITION The company collects certain advisory fees for services rendered in connection with advising clients as to the most appropriate structure to use for a given structured finance transaction that the company will insure. Advisory fees are deferred and earned consistent with the premium revenues generated on the transactions. GOODWILL Goodwill represents the excess of the cost of acquisitions over the tangible net assets acquired. Goodwill attributed to the acquisition of MBIA Corp. is amortized by the straight-line method over 25 years. Goodwill attributed to the acquisition of MBIA Illinois is amortized according to the recognition of future profits from its deferred premium revenue and installment premiums, except for a minor portion attributed to state licenses, which is amortized by the straight-line method over 25 years. Goodwill attributed to the acquisition of all other subsidiaries is amortized by the straight-line method over 15 years. PROPERTY AND EQUIPMENT Property and equipment consist of the company's headquarters, furniture, fixtures and equipment, which are recorded at cost and are depreciated by the straight-line method over their estimated service lives ranging from 3 to 31 years. Maintenance and repairs are charged to expense as incurred.

LOSSES AND LOSS ADJUSTMENT EXPENSES Loss and loss adjustment expenses (LAE) reserves are established in an amount equal to the company's estimate of identified or case basis reserves and unallocated losses, including costs of settlement, on the obligations it has insured. Case basis reserves are established when specific insured issues are identified as currently or likely to be in default. Such a reserve is based on the present value of the expected loss and LAE payments, net of recoveries under salvage and subrogation rights. The total reserve is calculated by applying a loss factor, determined based on an independent rating agency study of bond defaults, to net debt service written. When a case basis reserve is recorded, a corresponding reduction is made to the unallocated reserve. Management of the company periodically reevaluates its estimates for losses and LAE, and any resulting adjustments are reflected in current earnings. Management believes that the reserves are adequate to cover the ultimate net cost of claims; however, because the reserves are based on estimates, there can be no assurance that the ultimate liability will not exceed such estimates. MUNICIPAL INVESTMENT AGREEMENTS AND MUNICIPAL REPURCHASE AGREEMENTS Municipal investment agreements and municipal repurchase agreements are recorded as liabilities on the balance sheet at the time such agreements are executed. The liabilities for municipal investment and repurchase agreements are carried at the face value of the agreement plus accrued interest, whereas the related assets are recorded at fair value. Investment management services revenues include investment income on the assets underlying the municipal investment agreement portfolio, net of interest expense at rates specified in the agreements, computed daily based upon the outstanding balances. (50)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries DERIVATIVES The company's policies with respect to the use of derivative financial instruments include limitations with respect to the amount, type and concentration of such instruments. The company uses interest rate swaps for hedging purposes as part of its overall risk management strategy. Gains and losses on the derivative financial instruments that qualify as accounting hedges of existing assets and liabilities are included with the carrying amounts and amortized over the remaining lives of the assets and liabilities as an adjustment to interest income or expense. When a hedged asset is sold or liability extinguished, the unamortized gain or loss on the related hedge is recognized in income. Gains and losses on derivative financial instruments that do not qualify as accounting hedges are recognized in current period income. At year-end 1998, the company's exposure to derivative financial instruments was not material. INVESTMENT MANAGEMENT SERVICES OPERATIONS Investment management services revenues are comprised of the net investment income and operating revenues of MBIA-MISC, IMC, CMC and 1838. The operating expenses of MBIA-MISC, IMC, CMC and 1838 are reported in investment management services expenses. MUNICIPAL AND FINANCIAL SERVICES OPERATIONS Municipal and financial services revenues are comprised of the net investment income and operating revenues of MTB, MuniFinancial, MRC and Capital Asset. The operating expenses of MTB, MuniFinancial, MRC and Capital Asset are reported in municipal and financial services expenses. CORPORATE EXPENSES Corporate expenses consist of interest expenses, non-insurance goodwill amortization, general corporate overhead expenses and non-recurring charges. INCOME TAXES Deferred income taxes are provided with respect to the temporary differences between the tax bases of assets and liabilities and the reported amounts in the financial statements that will result in deductible or taxable amounts in future years when the reported amount of the asset or liability is recovered or settled. Such temporary differences relate principally to premium revenue recognition, deferred acquisition costs and the contingency reserve. The Internal Revenue Code permits companies writing financial guarantee insurance to deduct from taxable

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries DERIVATIVES The company's policies with respect to the use of derivative financial instruments include limitations with respect to the amount, type and concentration of such instruments. The company uses interest rate swaps for hedging purposes as part of its overall risk management strategy. Gains and losses on the derivative financial instruments that qualify as accounting hedges of existing assets and liabilities are included with the carrying amounts and amortized over the remaining lives of the assets and liabilities as an adjustment to interest income or expense. When a hedged asset is sold or liability extinguished, the unamortized gain or loss on the related hedge is recognized in income. Gains and losses on derivative financial instruments that do not qualify as accounting hedges are recognized in current period income. At year-end 1998, the company's exposure to derivative financial instruments was not material. INVESTMENT MANAGEMENT SERVICES OPERATIONS Investment management services revenues are comprised of the net investment income and operating revenues of MBIA-MISC, IMC, CMC and 1838. The operating expenses of MBIA-MISC, IMC, CMC and 1838 are reported in investment management services expenses. MUNICIPAL AND FINANCIAL SERVICES OPERATIONS Municipal and financial services revenues are comprised of the net investment income and operating revenues of MTB, MuniFinancial, MRC and Capital Asset. The operating expenses of MTB, MuniFinancial, MRC and Capital Asset are reported in municipal and financial services expenses. CORPORATE EXPENSES Corporate expenses consist of interest expenses, non-insurance goodwill amortization, general corporate overhead expenses and non-recurring charges. INCOME TAXES Deferred income taxes are provided with respect to the temporary differences between the tax bases of assets and liabilities and the reported amounts in the financial statements that will result in deductible or taxable amounts in future years when the reported amount of the asset or liability is recovered or settled. Such temporary differences relate principally to premium revenue recognition, deferred acquisition costs and the contingency reserve. The Internal Revenue Code permits companies writing financial guarantee insurance to deduct from taxable income amounts added to the statutory contingency reserve, subject to certain limitations. The tax benefits obtained from such deductions must be invested in non-interest-bearing U.S. Government tax and loss bonds. The company records purchases of tax and loss bonds as payments of federal income taxes. The amounts deducted must be restored to taxable income when the contingency reserve is released, at which time the company may present the tax and loss bonds for redemption to satisfy the additional tax liability. FOREIGN CURRENCY TRANSLATION Assets and liabilities denominated in foreign currencies are translated at year-end exchange rates. Operating results are translated at average rates of exchange prevailing during the year. Unrealized gains or losses resulting from translation are included as a separate component of shareholders' equity. Gains and losses resulting from transactions in foreign currencies are recorded in current income. NOTE 3: MERGERS WITH CAPMAC AND 1838 On February 17, 1998, the company consummated a merger with CapMAC by exchanging 8.1 million shares of its common stock for all of the common stock of CapMAC. Each share of CapMAC was exchanged for 0.4675 of one share of MBIA Inc. common stock. On July 31, 1998, the company completed a merger of its investment management business with 1838 through the issuance of 1.1 million shares of common stock. Each share of 1838 was exchanged for 2.134 shares of MBIA Inc. The mergers constituted tax-free reorganizations and have been accounted for as pooling of interests under Accounting Principles Board (APB) Opinion No. 16. Accordingly, all prior period consolidated financial statements presented have been restated to include the combined results of operations, financial position and cash flows of CapMAC and 1838 as though they had always been a part of MBIA Inc.

There were no transactions between MBIA Inc., CapMAC and/or 1838 prior to the combinations, and immaterial adjustments were recorded to conform CapMAC's and 1838's accounting policies. Certain reclassifications were made to the CapMAC and 1838 financial statements to conform to the company's presentations. The results of operations for the separate companies and the combined amounts for 1997 and 1996 presented in the consolidated financial statements follow:
Years ended December 31 -----------------------------------------------------------------In thousands 1997 1996 -----------------------------------------------------------------Premiums earned MBIA $299,335 $253,481 CapMAC 52,160 40,557 -----------------------------------------------------------------Combined $351,495 $294,038 -----------------------------------------------------------------Net income MBIA $374,176 $322,163 CapMAC 23,989 19,679 1838 7,445 5,894 -----------------------------------------------------------------Combined $405,610 $347,736 ------------------------------------------------------------------

For the six-month period ended June 30, 1998, 1838's revenues and net income were $12.6 million and $4.6 million, respectively. Effective April 1, 1998, CMAC ceded its portfolio of net insured obligations in exchange for cash and investments equal to its statutory unearned premium and contingency reserves of $176 million to MBIA Corp. Subsequent to this cession, the company contributed the common stock of CMAC to MBIA Corp. (51)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries NOTE 4: RECENT ACCOUNTING PRONOUNCEMENTS In March 1998, the American Institute of Certified Public Accountants' Accounting Standards Executive Committee issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." The Statement requires that entities capitalize certain internal-use software costs once certain criteria are met. The statement is effective for fiscal years beginning after December 15, 1998. The company will adopt SOP 98-1 in 1999. Adoption of SOP 98-1 is not expected to have a material impact on the consolidated financial statements. In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) 133, "Accounting for Derivative Instruments and Hedging Activities." The statement requires companies to recognize all derivatives as either assets or liabilities, with the instruments measured at fair value. The accounting for changes in fair value, gains or losses, depends on the intended use of the derivative and its resulting designation. The statement is effective for fiscal years beginning after June 15, 1999. The company will adopt SFAS 133 by January 1, 2000. Adoption of SFAS 133 is not expected to have a material impact on the consolidated financial statements. NOTE 5: STATUTORY ACCOUNTING PRACTICES The financial statements have been prepared on the basis of GAAP, which differs in certain respects from the statutory accounting practices prescribed or permitted by the insurance regulatory authorities. Statutory accounting practices differ from GAAP in the following respects: o upfront premiums are earned only when the related risk has expired rather than over the period of the risk;

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries NOTE 4: RECENT ACCOUNTING PRONOUNCEMENTS In March 1998, the American Institute of Certified Public Accountants' Accounting Standards Executive Committee issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." The Statement requires that entities capitalize certain internal-use software costs once certain criteria are met. The statement is effective for fiscal years beginning after December 15, 1998. The company will adopt SOP 98-1 in 1999. Adoption of SOP 98-1 is not expected to have a material impact on the consolidated financial statements. In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) 133, "Accounting for Derivative Instruments and Hedging Activities." The statement requires companies to recognize all derivatives as either assets or liabilities, with the instruments measured at fair value. The accounting for changes in fair value, gains or losses, depends on the intended use of the derivative and its resulting designation. The statement is effective for fiscal years beginning after June 15, 1999. The company will adopt SFAS 133 by January 1, 2000. Adoption of SFAS 133 is not expected to have a material impact on the consolidated financial statements. NOTE 5: STATUTORY ACCOUNTING PRACTICES The financial statements have been prepared on the basis of GAAP, which differs in certain respects from the statutory accounting practices prescribed or permitted by the insurance regulatory authorities. Statutory accounting practices differ from GAAP in the following respects: o upfront premiums are earned only when the related risk has expired rather than over the period of the risk; o acquisition costs are charged to operations as incurred rather than deferred and amortized as the related premiums are earned; o a contingency reserve is computed on the basis of statutory requirements, and reserves for losses and LAE are established at present value for specific insured issues that are identified as currently or likely to be in default. Under GAAP, reserves are established based on the company's reasonable estimate of the identified and unallocated losses and LAE on the insured obligations it has written; o federal income taxes are only provided on taxable income for which income taxes are currently payable, while under GAAP, deferred income taxes are provided with respect to temporary differences; o fixed-maturity securities are reported at amortized cost rather than fair value; o tax and loss bonds purchased are reflected as admitted assets as well as payments of income taxes; and o certain assets designated as "non-admitted assets" are charged directly against surplus but are reflected as assets under GAAP. The following is a reconciliation of consolidated shareholders' equity presented on a GAAP basis for the company and its consolidated subsidiaries to statutory capital and surplus for MBIA Corp. and its subsidiaries:
As of December 31 ---------------------------------------------------------In thousands 1998 1997 ---------------------------------------------------------Company's GAAP shareholders' equity $3,792,217 $3,361,512 Contributions to MBIA Corp. 485,738 459,567 Premium revenue recognition (448,250) (413,729) Deferral of acquisition costs (230,085) (216,165) Unrealized gains (450,587) (377,161) Contingency reserve (1,450,413) (1,187,882) Loss and LAE reserves 81,489 77,816 Deferred income taxes 348,534 298,498 Tax and loss bonds 162,523 130,055

Goodwill (90,950) (95,829) Other 89,753 (85,172) ---------------------------------------------------------Statutory capital and surplus $2,289,969 $1,951,510 ----------------------------------------------------------

Consolidated net income of MBIA Corp. determined in accordance with statutory accounting practices for the years ended December 31, 1998, 1997 and 1996 was $509.9 million, $404.4 million and $335.3 million, respectively. NOTE 6: PREMIUMS EARNED FROM REFUNDED AND CALLED BONDS Premiums earned include $68.4 million, $50.9 million and $44.4 million for 1998, 1997 and 1996, respectively, related to refunded and called bonds. NOTE 7: INVESTMENTS The company's investment objective is to optimize long-term, after-tax returns while emphasizing the preservation of capital through maintenance of high-quality investments with adequate liquidity. The company's investment policies limit the amount of credit exposure to any one issuer. The fixed-maturity portfolio is comprised of highquality (average rating Double-A) taxable and tax-exempt investments of diversified maturities. The following tables set forth the amortized cost and fair value of the fixed-maturities and short-term investments included in the consolidated investment portfolio of the company, as of December 31, 1998 and 1997. (52)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries
Gross Gross Amortized Unrealized Unrealized Fair In thousands Cost Gains Losses Value -----------------------------------------------------------------------------December 31, 1998 Taxable bonds United States Treasury and Government Agency $ 517,015 $ 47,637 $ (351) $ 564,301 Corporate and other obligations 3,555,858 145,224 (3,875) 3,697,207 Mortgage-backed 1,684,081 27,918 (965) 1,711,034 Tax-exempt bonds State and municipal obligations 3,773,377 241,200 (1,643) 4,012,934 -----------------------------------------------------------------------------Total $9,530,331 $461,979 $(6,834) $9,985,476 ------------------------------------------------------------------------------

Gross Gross Amortized Unrealized Unrealized Fair In thousands Cost Gains Losses Value -----------------------------------------------------------------------------December 31, 1997 Taxable bonds United States Treasury and Government Agency $ 547,206 $ 30,668 $ (4) $ 577,870 Corporate and other obligations 3,156,676 96,520 (1,114) 3,252,082 Mortgage-backed 1,495,667 30,579 (1,054) 1,525,192 Tax-exempt bonds State and municipal obligations 3,282,812 219,613 (966) 3,501,459 ------------------------------------------------------------------------------Total $8,482,361 $377,380 $(3,138) $8,856,603 ------------------------------------------------------------------------------

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries
Gross Gross Amortized Unrealized Unrealized Fair In thousands Cost Gains Losses Value -----------------------------------------------------------------------------December 31, 1998 Taxable bonds United States Treasury and Government Agency $ 517,015 $ 47,637 $ (351) $ 564,301 Corporate and other obligations 3,555,858 145,224 (3,875) 3,697,207 Mortgage-backed 1,684,081 27,918 (965) 1,711,034 Tax-exempt bonds State and municipal obligations 3,773,377 241,200 (1,643) 4,012,934 -----------------------------------------------------------------------------Total $9,530,331 $461,979 $(6,834) $9,985,476 ------------------------------------------------------------------------------

Gross Gross Amortized Unrealized Unrealized Fair In thousands Cost Gains Losses Value -----------------------------------------------------------------------------December 31, 1997 Taxable bonds United States Treasury and Government Agency $ 547,206 $ 30,668 $ (4) $ 577,870 Corporate and other obligations 3,156,676 96,520 (1,114) 3,252,082 Mortgage-backed 1,495,667 30,579 (1,054) 1,525,192 Tax-exempt bonds State and municipal obligations 3,282,812 219,613 (966) 3,501,459 ------------------------------------------------------------------------------Total $8,482,361 $377,380 $(3,138) $8,856,603 ------------------------------------------------------------------------------

Fixed-maturity investments carried at fair value of $12.0 million as of December 31, 1998 and 1997 were on deposit with various regulatory authorities to comply with insurance laws. A portion of the obligations under municipal investment and repurchase agreements require the company to pledge securities as collateral. As of December 31, 1998 and 1997, the fair value of securities pledged as collateral with respect to these obligations approximated $1.9 billion and $1.8 billion, respectively. The following table sets forth the distribution by expected maturity of the fixed-maturities and short-term investments at amortized cost and fair value at December 31, 1998. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations.
Amortized Fair In thousands Cost Value ----------------------------------------------------------------------Within 1 year $ 609,214 $ 609,214 Beyond 1 yr but within 5 yrs 1,611,852 1,659,022 Beyond 5 yrs but within 10 yrs 1,803,020 1,913,486 Beyond 10 yrs but within 15 yrs 1,040,833 1,137,264 Beyond 15 yrs but within 20 yrs 1,203,057 1,286,931 Beyond 20 yrs 1,578,274 1,668,525 ----------------------------------------------------------------------7,846,250 8,274,442 Mortgage-backed 1,684,081 1,711,034 ----------------------------------------------------------------------Total fixed-maturities and short-term investments $9,530,331 $9,985,476 -----------------------------------------------------------------------

NOTE 8: INVESTMENT INCOME AND GAINS AND LOSSES Investment income consists of:
Years ended December 31 ------------------------------------------------------------------------In thousands 1998 1997 1996 ------------------------------------------------------------------------Fixed-maturities $331,857 $299,069 $261,200 Short-term investments 5,692 8,042 7,463 Other investments 16 (1,542) (383) ------------------------------------------------------------------------Gross investment income 337,565 305,569 268,280 Investment expenses 5,763 3,571 3,133 Net investment income 331,802 301,998 265,147 ------------------------------------------------------------------------Net realized gains (losses): Fixed-maturities Gains 32,211 25,963 17,532 Losses (3,149) (5,877) (5,889) ------------------------------------------------------------------------Net 29,062 20,086 11,643 ------------------------------------------------------------------------Other investments Gains 901 564 333 Losses (1) (3,747) (2,040) ------------------------------------------------------------------------Net 900 (3,183) (1,707) ------------------------------------------------------------------------Total net realized gains 29,962 16,903 9,936 ------------------------------------------------------------------------Total investment income $361,764 $318,901 $275,083 -------------------------------------------------------------------------

Total investment income excludes investment income and realized gains and losses from our investment management and municipal and financial services segments. Net unrealized gains consist of: (53)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries
As of December 31 --------------------------------------------------------In thousands 1998 1997 --------------------------------------------------------Fixed-maturities: Gains $461,979 $377,380 Losses (6,834) (3,138) --------------------------------------------------------Net 455,145 374,242 --------------------------------------------------------Other investments: Gains 2,936 2,976 Losses (7,494) (57) --------------------------------------------------------Net (4,558) 2,919 --------------------------------------------------------Total 450,587 377,161 Deferred income taxes 157,410 132,026 --------------------------------------------------------Unrealized gains, net $293,177 $245,135 ---------------------------------------------------------

The deferred income taxes relate primarily to unrealized gains and losses on the company's fixed-maturity investments, which are reflected in shareholders' equity.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries
As of December 31 --------------------------------------------------------In thousands 1998 1997 --------------------------------------------------------Fixed-maturities: Gains $461,979 $377,380 Losses (6,834) (3,138) --------------------------------------------------------Net 455,145 374,242 --------------------------------------------------------Other investments: Gains 2,936 2,976 Losses (7,494) (57) --------------------------------------------------------Net (4,558) 2,919 --------------------------------------------------------Total 450,587 377,161 Deferred income taxes 157,410 132,026 --------------------------------------------------------Unrealized gains, net $293,177 $245,135 ---------------------------------------------------------

The deferred income taxes relate primarily to unrealized gains and losses on the company's fixed-maturity investments, which are reflected in shareholders' equity. The change in net unrealized gains (losses) consists of:
Years ended December 31 ------------------------------------------------------------In thousands 1998 1997 1996 ------------------------------------------------------------Fixed-maturities $80,903 $196,042 $(146,050) Other investments (7,477) 2,077 1,438 ------------------------------------------------------------Total 73,426 198,119 (144,612) Deferred income taxes 25,384 69,337 (50,874) ------------------------------------------------------------Unrealized gains (losses), net $48,042 $128,782 $ (93,738) -------------------------------------------------------------

NOTE 9: INCOME TAXES The company files a consolidated tax return that includes all of its U.S. subsidiaries. The provision for income taxes is composed of:
Years ended December 31 ------------------------------------------------------------In thousands 1998 1997 1996 ------------------------------------------------------------Current $112,367 $106,452 $ 91,158 Deferred 19,943 13,190 9,521 ------------------------------------------------------------Total $132,310 $119,642 $100,679 -------------------------------------------------------------

The provision for income taxes gives effect to permanent differences between financial and taxable income. Accordingly, the company's effective income tax rate differs from the statutory rate on ordinary income. The reasons for the company's lower effective tax rates are as follows:
Years ended December 31

--------------------------------------------------------------1998 1997 1996 --------------------------------------------------------------Income taxes computed on pre-tax financial income at statutory rates 35.0% 35.0% 35.0% Increase (reduction) in taxes resulting from: Tax-exempt interest (10.8) (10.6) (12.1) Amortization of goodwill 0.4 0.3 0.4 Other (1.2) (1.9) (0.8) --------------------------------------------------------------Provision for income taxes 23.4% 22.8% 22.5% ---------------------------------------------------------------

The company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect on tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The tax effects of temporary differences that give rise to deferred tax assets and liabilities at December 31, 1998 and 1997 are presented below:
In thousands 1998 1997 -----------------------------------------------------------------Deferred tax assets: Tax and loss bonds $160,064 $130,080 Alternative minimum tax credit carryforward 54,722 62,279 Loss and loss adjustment expense reserves 26,458 23,762 Other 53,745 92,099 -----------------------------------------------------------------Total gross deferred tax assets 294,989 308,220 -----------------------------------------------------------------Deferred tax liabilities: Contingency reserve 280,203 229,389 Deferred premium revenue 106,555 154,240 Deferred acquisition costs 77,953 73,081 Unrealized gains 157,410 132,026 Contingent commissions 408 408 Other 16,356 17,574 -----------------------------------------------------------------Total gross deferred tax liabilities 638,885 606,718 -----------------------------------------------------------------Net deferred tax liability $343,896 $298,498 ------------------------------------------------------------------

The company believes that a valuation allowance is unnecessary in connection with the deferred tax assets. NOTE 10: NET INCOME PER COMMON SHARE In February 1997, the FASB issued SFAS 128, "Earnings per Share," effective for financial statements issued for periods ending after December 15, 1997. SFAS 128 established standards for computing and presenting earnings per share (EPS). Under the new standard, basic EPS is computed by dividing income applicable to common stock by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the additional dilution that could occur from employee stock options and other items that could potentially result in the issuance of common stock. The company has adopted this Statement and, as required, has restated all prior-period EPS data presented. The following table provides a reconciliation of the denominator of the basic EPS computation to the denominator of the diluted EPS computation: (54)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries
Years ended December 31 ------------------------------------------------------------------------------1998 1997 1996 ------------------------------------------------------------------------------Net income (in thousands) $432,728 $405,610 $347,736 Basic weighted average shares 98,978,641 96,937,314 94,368,038 Effect of stock options 1,184,373 1,406,849 1,791,028 ------------------------------------------------------------------------------Diluted weighted average shares 100,163,014 98,344,163 96,159,066 ------------------------------------------------------------------------------Basic EPS $4.37 $4.18 $3.68 Diluted EPS $4.32 $4.12 $3.62 -------------------------------------------------------------------------------

Options to purchase 621,244, 292,100 and 256,028 shares of common stock during 1998, 1997 and 1996, respectively, were not included in the computation of diluted EPS because the options exercise price was greater than the average market price of common shares during the respective years. NOTE 11: BUSINESS SEGMENTS MBIA Inc., through its subsidiaries, is a leading provider of financial guarantee and specialized financial services. MBIA provides innovative and cost-effective products and services that meet the credit enhancement, financial and investment needs of its public- and private-sector clients, domestically and internationally. MBIA Inc. has three principal businesses: financial guarantee, investment management services, and municipal & financial services. Each of these is a business segment, with its respective financial performance detailed in this report. Financial guarantee business provides an unconditional and irrevocable guarantee of the payment of principal and interest on insured obligations when due. Investment management services business provides an array of products and services to the public and not-forprofit sectors. These include local government investment pools, investment agreements, and discretionary and non-discretionary portfolio management services. Municipal and financial services business purchases and services municipal real estate tax lien certificates and provides tax compliance services to public sector entities. Business segment results are presented gross of intersegment transactions, which are not material to each segment. The following provides each business segment's revenues, operating income, income (loss) and assets:
Year ended December 31, 1998 -------------------------------------------------------------------------------Investment Municipal & Financial Management Financial In thousands Guarantee Services Services Total ------------------------------------------------------------------------------Operating revenues $ 782,482 $ 65,032 $ 29,392 $ 876,906 Expenses (139,626) (36,012) (40,682) (216,320) -------------------------------------------------------------------------------Operating income 642,856 29,020 (11,290) 660,586 Realized gains (losses) 29,962 14,179 (9,165) 34,976 -------------------------------------------------------------------------------Income (loss) from segments $ 672,818 $ 43,199 $(20,455) 695,562 -------------------------------------------------------------------------------Corporate expenses (130,524) -------------------------------------------------------------------------------Pretax income $ 565,038 -------------------------------------------------------------------------------Segment assets $7,133,425 $4,497,333 $165,806 $11,796,564 --------------------------------------------------------------------------------

Year ended December 31, 1997 -------------------------------------------------------------------------------Investment Municipal & Financial Management Financial In thousands Guarantee Services Services Total ------------------------------------------------------------------------------Operating revenues $ 670,603 $ 49,999 $ 25,189 $ 745,791 Expenses (140,849) (32,958) (20,694) (194,501) ------------------------------------------------------------------------------Operating income 529,754 17,041 4,495 551,290 Realized gains 16,903 3,416 --20,319 ------------------------------------------------------------------------------Income from segments $ 546,657 $ 20,457 $ 4,495 571,609 ------------------------------------------------------------------------------Corporate expenses (46,357) ------------------------------------------------------------------------------Pretax income $ 525,252 ------------------------------------------------------------------------------Segment assets $6,200,516 $4,082,446 $102,029 $10,384,991 -------------------------------------------------------------------------------

(55)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries
Year ended December 31, 1996 -------------------------------------------------------------------------------Investment Municipal & Financial Management Financial In thousands Guarantee Services Services Total ------------------------------------------------------------------------------Operating revenues $ 569,971 $ 47,115 $ 1,399 $ 618,485 Expenses (116,885) (29,328) (274) (146,487) -------------------------------------------------------------------------------Operating income 453,086 17,787 1,125 471,998 Realized gains 9,936 2,572 --12,508 -------------------------------------------------------------------------------Income from segments $ 463,022 $ 20,359 $ 1,125 484,506 -------------------------------------------------------------------------------Corporate expenses (36,091) -------------------------------------------------------------------------------Pretax income $ 448,415 -------------------------------------------------------------------------------Segment assets $5,319,809 $3,679,974 $31,094 $9,030,877 --------------------------------------------------------------------------------

NOTE 12: STOCK SPLIT On September 17, 1997, the board of directors approved a two-for-one stock split, to be effected in the form of a 100% stock dividend payable on October 29, 1997 to shareholders of record as of October 1, 1997. An amount equal to the par value of common shares issued was transferred from additional paid-in capital to the common stock account. This transfer has been reflected in the Consolidated Statements of Changes in Shareholders' Equity at January 1, 1996. All references to the number of common shares, except shares authorized, and to per share information in the consolidated financial statements and related notes, have been adjusted to reflect the stock split on a retroactive basis. NOTE 13: DIVIDENDS AND CAPITAL REQUIREMENTS Under New York state insurance law, MBIA Corp. may pay dividends only from earned surplus subject to the maintenance of a minimum capital requirement. The dividends in any 12-month period may not exceed the lesser of 10% of its policyholders' surplus as shown on its last filed statutory basis financial statements or of adjusted net investment income, as defined, for such 12-month period, without prior approval of the superintendent of the New York State Insurance Department.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries
Year ended December 31, 1996 -------------------------------------------------------------------------------Investment Municipal & Financial Management Financial In thousands Guarantee Services Services Total ------------------------------------------------------------------------------Operating revenues $ 569,971 $ 47,115 $ 1,399 $ 618,485 Expenses (116,885) (29,328) (274) (146,487) -------------------------------------------------------------------------------Operating income 453,086 17,787 1,125 471,998 Realized gains 9,936 2,572 --12,508 -------------------------------------------------------------------------------Income from segments $ 463,022 $ 20,359 $ 1,125 484,506 -------------------------------------------------------------------------------Corporate expenses (36,091) -------------------------------------------------------------------------------Pretax income $ 448,415 -------------------------------------------------------------------------------Segment assets $5,319,809 $3,679,974 $31,094 $9,030,877 --------------------------------------------------------------------------------

NOTE 12: STOCK SPLIT On September 17, 1997, the board of directors approved a two-for-one stock split, to be effected in the form of a 100% stock dividend payable on October 29, 1997 to shareholders of record as of October 1, 1997. An amount equal to the par value of common shares issued was transferred from additional paid-in capital to the common stock account. This transfer has been reflected in the Consolidated Statements of Changes in Shareholders' Equity at January 1, 1996. All references to the number of common shares, except shares authorized, and to per share information in the consolidated financial statements and related notes, have been adjusted to reflect the stock split on a retroactive basis. NOTE 13: DIVIDENDS AND CAPITAL REQUIREMENTS Under New York state insurance law, MBIA Corp. may pay dividends only from earned surplus subject to the maintenance of a minimum capital requirement. The dividends in any 12-month period may not exceed the lesser of 10% of its policyholders' surplus as shown on its last filed statutory basis financial statements or of adjusted net investment income, as defined, for such 12-month period, without prior approval of the superintendent of the New York State Insurance Department. In accordance with such restrictions on the amount of dividends that can be paid in any 12-month period, MBIA Corp. had in excess of $228 million available for the payment of dividends to the company as of December 31, 1998. In 1998 and 1997, no dividends were paid by MBIA Corp. to the company due to cash available from financing activities. In 1996, MBIA Corp. declared and paid dividends of $29 million to the company. The insurance departments of New York state and certain other statutory insurance regulatory authorities, and the agencies that rate the bonds insured by MBIA Corp. and its subsidiaries, have various requirements relating to the maintenance of certain minimum ratios of statutory capital and reserves to net insurance in force. MBIA Corp. and its subsidiaries were in compliance with these requirements as of December 31, 1998. NOTE 14: LONG-TERM DEBT AND LINES OF CREDIT Long-term debt consists of:
As of December 31 --------------------------------------------------In thousands 1998 1997 --------------------------------------------------7.520% Notes due 1999-2002 $ 15,000 $ 15,000 9.000% Notes due 2001 100,000 100,000 9.375% Notes due 2011 100,000 100,000 8.200% Debentures due 2022 100,000 100,000 7.000% Debentures due 2025 75,000 75,000 7.150% Debentures due 2027 100,000 100,000

6.625% Debentures due 2028 150,000 --6.950% Notes due 2038 50,000 ----------------------------------------------------690,000 490,000 Less unamortized discount 1,004 1,122 --------------------------------------------------Total $688,996 $488,878 ---------------------------------------------------

The company's long-term debt is subject to certain covenants, none of which significantly restrict the company's operating activities or dividend-paying ability. MBIA Corp. has a standby line of credit commitment in the amount of $825 million with a group of major TripleA-rated banks to provide loans to MBIA Corp. if it incurs cumulative losses (net of any recoveries) from October 7, 1998 in excess of the greater of $825 million or 4.00% of average annual debt service. The obligation to repay loans made under this agreement is a limited recourse obligation payable solely from, and collateralized by, a pledge of recoveries realized on defaulted insured obligations including certain installment premiums and other collateral. This commitment has a seven-year term expiring on October 31, 2005, and contains an annual renewal provision subject to approval by the bank group. CMAC maintains stop-loss reinsurance coverage of $75 million in excess of incurred losses of $150 million. The company and MBIA Corp. maintain bank liquidity facilities totaling $650 million. During 1998, these facilities replaced existing facilities aggregating $450 million. At December 31, 1997, $20 million was outstanding under those facilities. The company has outstanding letters of credit for MBIA-MISC that are intended to support the net asset value of certain investment pools managed by MBIA-MISC. These letters can be drawn upon in the event the liquidation of such assets at below cost is required. (56)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries NOTE 15: OBLIGATIONS UNDER MUNICIPAL INVESTMENT AGREEMENTS AND MUNICIPAL REPURCHASE AGREEMENTS Obligations under municipal investment agreements and municipal repurchase agreements are recorded as liabilities on the balance sheet based upon proceeds received plus unpaid accrued interest from that date. Upon the occurrence of certain contractually agreed-upon events, some of these funds may be withdrawn at various times prior to maturity at the option of the investor. As of December 31, 1998, the interest rates on these agreements ranged from 2.5% to 8.02%. Principal payments due under these investment agreements in each of the next five years ending December 31 and thereafter, based upon expected withdrawal dates, were as follows:
In thousands Principal Amount ---------------------------------------------------Expected withdrawal date: 1999 $1,170,515 2000 702,480 2001 284,307 2002 131,305 2003 49,329 Thereafter 1,112,543 ---------------------------------------------------Total $3,450,479 ----------------------------------------------------

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries NOTE 15: OBLIGATIONS UNDER MUNICIPAL INVESTMENT AGREEMENTS AND MUNICIPAL REPURCHASE AGREEMENTS Obligations under municipal investment agreements and municipal repurchase agreements are recorded as liabilities on the balance sheet based upon proceeds received plus unpaid accrued interest from that date. Upon the occurrence of certain contractually agreed-upon events, some of these funds may be withdrawn at various times prior to maturity at the option of the investor. As of December 31, 1998, the interest rates on these agreements ranged from 2.5% to 8.02%. Principal payments due under these investment agreements in each of the next five years ending December 31 and thereafter, based upon expected withdrawal dates, were as follows:
In thousands Principal Amount ---------------------------------------------------Expected withdrawal date: 1999 $1,170,515 2000 702,480 2001 284,307 2002 131,305 2003 49,329 Thereafter 1,112,543 ---------------------------------------------------Total $3,450,479 ----------------------------------------------------

IMC also provides agreements obligating it to purchase designated securities in a bond reserve fund at par value upon the occurrence of certain contractually agreed-upon events. The opportunities and risks in these agreements are analogous to those of municipal investment agreements and municipal repurchase agreements. The total par value of securities subject to these agreements was $43 million at December 31, 1998. NOTE 16: NET INSURANCE IN FORCE MBIA Corp. guarantees the timely payment of principal and interest on municipal, asset-/mortgage-backed and other non-municipal securities. MBIA Corp.'s ultimate exposure to credit loss in the event of nonperformance by the insured is represented by the insurance in force as set forth below. As of December 31, 1998, insurance in force, net of cessions to reinsurers, had a range of maturity of 1-41 years. The distribution of net insurance in force by geographic location, excluding $3.5 billion and $3.2 billion relating to IMC municipal investment agreements guaranteed by MBIA Corp. in 1998 and 1997, respectively, is set forth in the following table:
As of December 31 ------------------------------------------------------------------------------------------------------1998 1997 ------------------------------------------------------------------------------------------------Net Number % of Net Net Number % of Net $ in billions Insurance of Issues Insurance Insurance of Issues Insurance Geographic Location In Force Outstanding In Force In Force Outstanding In Force ------------------------------------------------------------------------------------------------Domestic: California $ 76.3 3,681 12.8% $ 68.8 3,455 13.4% New York 61.6 5,310 10.3 38.2 5,057 7.4 Florida 36.1 1,589 6.1 33.1 1,578 6.5 New Jersey 26.2 1,884 4.4 24.7 1,885 4.8 Texas 25.3 2,131 4.2 24.7 2,099 4.8 Pennsylvania 24.7 2,278 4.1 23.0 2,262 4.5 Illinois 23.7 1,275 4.0 20.3 1,236 4.0 Massachusetts 18.4 1,107 3.1 15.5 1,089 3.0 Michigan 14.6 1,066 2.5 11.2 1,032 2.2 Ohio 13.8 1,076 2.3 12.5 1,014 2.4 Subtotal 320.7 21,397 53.8 272.0 20,707 53.0

Nationally diversified 81.7 842 13.7 75.3 746 14.6 Other states 169.0 12,004 28.4 148.3 11,532 28.9 ------------------------------------------------------------------------------------------------------Total domestic 571.4 34,243 95.9 495.6 32,985 96.5 International 24.5 323 4.1 18.1 279 3.5 ------------------------------------------------------------------------------------------------------Total $595.9 34,566 100.0% $513.7 33,264 100.0% -------------------------------------------------------------------------------------------------------

(57)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries The insurance policies issued by MBIA Corp. are unconditional commitments to guarantee timely payment on the bonds and notes to bondholders. The creditworthiness of each insured issue is evaluated prior to the issuance of insurance, and each insured issue must comply with MBIA Corp.'s underwriting guidelines. Further, the payments to be made by the issuer on the bonds or notes may be backed by a pledge of revenues, reserve funds, letters of credit, investment contracts or collateral in the form of mortgages or other assets. The right to such money or collateral would typically become MBIA Corp.'s upon the payment of a claim by MBIA Corp. Under certain MBIA Corp.'s structured asset-backed transactions, a pool of assets covering at least 100% of the principal amount guaranteed under its insurance contract is sold or pledged to a special-purpose bankruptcy remote entity. MBIA Corp.'s primary risk from such insurance contracts is the impairment of cash flows due to delinquency or loss on the underlying assets. MBIA Corp. therefore evaluates all the factors affecting past and future asset performance by studying historical data on losses, delinquencies and recoveries of the underlying assets. Each transaction is reviewed to ensure that an appropriate legal structure is used to protect against the bankruptcy risk of the originator of the assets. Along with the legal structure, an additional level of first-loss protection is also created to protect against losses due to credit or dilution. This first level of loss protection is usually available from reserve funds, excess cash flows, overcollateralization or recourse to a third party. The level of first-loss protection depends upon the historical losses and dilution of the underlying assets, but is typically several times the normal historical loss experience for the underlying type of assets. The distribution of net insurance in force by type of bond is set forth in the table below:
As of December 31 --------------------------------------------------------------------------------------------------1998 1997 --------------------------------------------------------------------------------------------Net Number % of Net Net Number % of Net $ in billions Insurance of Issues Insurance Insurance of Issues Insurance Type of Bond In Force Outstanding In Force In Force Outstanding In Force --------------------------------------------------------------------------------------------Domestic: Municipal: General obligation $140.7 12,694 23.6% $119.5 12,096 23.3% Utilities 80.9 4,895 13.6 75.4 4,775 14.7 Health care 70.9 2,241 11.9 62.2 2,248 12.1 Transportation 46.2 1,543 7.7 40.6 1,503 7.9 Special revenue 42.8 1,787 7.2 34.2 1,653 6.7 Higher education 26.7 1,498 4.5 20.6 1,366 4.0 Housing 22.3 2,161 3.7 18.9 1,896 3.7 Industrial development and pollution control revenue 19.4 1,037 3.3 19.6 943 3.8 Other 5.6 75 0.9 12.5 543 2.4 --------------------------------------------------------------------------------------------Total municipal 455.5 27,931 76.4 403.5 27,023 78.6 --------------------------------------------------------------------------------------------Structured finance* 97.1 850 16.3 74.8 709 14.5 --------------------------------------------------------------------------------------------Other: Investor-owned utilities 13.0 5,068 2.2 11.0 4,872 2.2 Financial institution 5.4 381 0.9 5.8 366 1.1 Corporate direct 0.4 13 0.1 0.5 15 0.1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries The insurance policies issued by MBIA Corp. are unconditional commitments to guarantee timely payment on the bonds and notes to bondholders. The creditworthiness of each insured issue is evaluated prior to the issuance of insurance, and each insured issue must comply with MBIA Corp.'s underwriting guidelines. Further, the payments to be made by the issuer on the bonds or notes may be backed by a pledge of revenues, reserve funds, letters of credit, investment contracts or collateral in the form of mortgages or other assets. The right to such money or collateral would typically become MBIA Corp.'s upon the payment of a claim by MBIA Corp. Under certain MBIA Corp.'s structured asset-backed transactions, a pool of assets covering at least 100% of the principal amount guaranteed under its insurance contract is sold or pledged to a special-purpose bankruptcy remote entity. MBIA Corp.'s primary risk from such insurance contracts is the impairment of cash flows due to delinquency or loss on the underlying assets. MBIA Corp. therefore evaluates all the factors affecting past and future asset performance by studying historical data on losses, delinquencies and recoveries of the underlying assets. Each transaction is reviewed to ensure that an appropriate legal structure is used to protect against the bankruptcy risk of the originator of the assets. Along with the legal structure, an additional level of first-loss protection is also created to protect against losses due to credit or dilution. This first level of loss protection is usually available from reserve funds, excess cash flows, overcollateralization or recourse to a third party. The level of first-loss protection depends upon the historical losses and dilution of the underlying assets, but is typically several times the normal historical loss experience for the underlying type of assets. The distribution of net insurance in force by type of bond is set forth in the table below:
As of December 31 --------------------------------------------------------------------------------------------------1998 1997 --------------------------------------------------------------------------------------------Net Number % of Net Net Number % of Net $ in billions Insurance of Issues Insurance Insurance of Issues Insurance Type of Bond In Force Outstanding In Force In Force Outstanding In Force --------------------------------------------------------------------------------------------Domestic: Municipal: General obligation $140.7 12,694 23.6% $119.5 12,096 23.3% Utilities 80.9 4,895 13.6 75.4 4,775 14.7 Health care 70.9 2,241 11.9 62.2 2,248 12.1 Transportation 46.2 1,543 7.7 40.6 1,503 7.9 Special revenue 42.8 1,787 7.2 34.2 1,653 6.7 Higher education 26.7 1,498 4.5 20.6 1,366 4.0 Housing 22.3 2,161 3.7 18.9 1,896 3.7 Industrial development and pollution control revenue 19.4 1,037 3.3 19.6 943 3.8 Other 5.6 75 0.9 12.5 543 2.4 --------------------------------------------------------------------------------------------Total municipal 455.5 27,931 76.4 403.5 27,023 78.6 --------------------------------------------------------------------------------------------Structured finance* 97.1 850 16.3 74.8 709 14.5 --------------------------------------------------------------------------------------------Other: Investor-owned utilities 13.0 5,068 2.2 11.0 4,872 2.2 Financial institution 5.4 381 0.9 5.8 366 1.1 Corporate direct 0.4 13 0.1 0.5 15 0.1 --------------------------------------------------------------------------------------------Total other 18.8 5,462 3.2 17.3 5,253 3.4 --------------------------------------------------------------------------------------------Total domestic 571.4 34,243 95.9 495.6 32,985 96.5 --------------------------------------------------------------------------------------------International Infrastructure: Sovereign 1.6 32 0.3 1.9 35 0.4 Transportation 1.4 12 0.2 0.8 5 0.1 Sub-sovereign 1.2 44 0.2 1.4 53 0.3 Higher education 0.9 13 0.1 0.6 1 0.1 Housing 0.6 3 0.1 0.3 2 0.1 Health care 0.4 6 0.1 0.2 6 --

Utilities 0.4 4 0.1 ------------------------------------------------------------Total infrastructure 6.5 114 1.1 ------------------------------------------------------------Structured finance* 14.8 102 2.5 Other: Investor-owned utilities 1.8 72 0.3 Financial institution 1.0 29 0.1 Corporate direct 0.4 6 0.1 ------------------------------------------------------------Total other 3.2 107 0.5 ------------------------------------------------------------Total international 24.5 323 4.1 ------------------------------------------------------------Total $595.9 34,566 100.0% ------------------------------------------------------------*Asset-/mortgage-backed

0.8 60 0.2 --------------------------------6.0 162 1.2 --------------------------------9.3 76 1.8 0.6 7 0.1 1.9 25 0.4 0.3 9 ---------------------------------2.8 41 0.5 --------------------------------18.1 279 3.5 --------------------------------$513.7 33,264 100.0% ---------------------------------

(58)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries NOTE 17: REINSURANCE MBIA Corp. reinsures exposure with other insurance companies under various treaty and facultative reinsurance contracts, both on a pro rata and excess of loss basis. In the event that any or all of the reinsurers were unable to meet their obligations, MBIA Corp. would be liable for such defaulted amounts. Amounts deducted from gross insurance in force for reinsurance ceded by MBIA Corp. and its subsidiaries were $108.2 billion and $76.6 billion at December 31, 1998 and 1997, respectively. The distribution of ceded insurance in force by type of bond and geographic location is set forth in the following tables:
As of December 31 -----------------------------------------------1998 1997 ----------------------- ----------------------% of % of Ceded Ceded Ceded Ceded In billions Insurance Insurance Insurance Insurance Type of Bond In Force In Force In Force In Force --------------------------------------------- ----------------------Domestic Municipal: Utilities $ 15.5 14.3% $11.6 15.1% General obligation 15.4 14.2 12.3 16.1 Health care 13.4 12.4 8.0 10.5 Transportation 10.6 9.8 9.6 12.5 Special revenue 5.8 5.3 5.0 6.5 Industrial development and pollution control revenue 3.8 3.5 3.3 4.3 Housing 2.3 2.1 1.7 2.2 Higher education 1.7 1.6 1.3 1.7 Other 1.2 1.1 2.7 3.5 --------------------------------------------- ---------------------Total municipal 69.7 64.3 55.5 72.4 Structured finance* 19.5 18.0 8.4 11.0 --------------------------------------------- ---------------------Other: Investor-owned utilities 1.3 1.2 0.5 0.6 Financial inst. 0.9 0.8 1.3 1.7 Corporate direct 0.1 0.1 0.2 0.3 --------------------------------------------- ---------------------Total other 2.3 2.1 2.0 2.6 --------------------------------------------- ---------------------Total domestic 91.5 84.4 65.9 86.0

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries NOTE 17: REINSURANCE MBIA Corp. reinsures exposure with other insurance companies under various treaty and facultative reinsurance contracts, both on a pro rata and excess of loss basis. In the event that any or all of the reinsurers were unable to meet their obligations, MBIA Corp. would be liable for such defaulted amounts. Amounts deducted from gross insurance in force for reinsurance ceded by MBIA Corp. and its subsidiaries were $108.2 billion and $76.6 billion at December 31, 1998 and 1997, respectively. The distribution of ceded insurance in force by type of bond and geographic location is set forth in the following tables:
As of December 31 -----------------------------------------------1998 1997 ----------------------- ----------------------% of % of Ceded Ceded Ceded Ceded In billions Insurance Insurance Insurance Insurance Type of Bond In Force In Force In Force In Force --------------------------------------------- ----------------------Domestic Municipal: Utilities $ 15.5 14.3% $11.6 15.1% General obligation 15.4 14.2 12.3 16.1 Health care 13.4 12.4 8.0 10.5 Transportation 10.6 9.8 9.6 12.5 Special revenue 5.8 5.3 5.0 6.5 Industrial development and pollution control revenue 3.8 3.5 3.3 4.3 Housing 2.3 2.1 1.7 2.2 Higher education 1.7 1.6 1.3 1.7 Other 1.2 1.1 2.7 3.5 --------------------------------------------- ---------------------Total municipal 69.7 64.3 55.5 72.4 Structured finance* 19.5 18.0 8.4 11.0 --------------------------------------------- ---------------------Other: Investor-owned utilities 1.3 1.2 0.5 0.6 Financial inst. 0.9 0.8 1.3 1.7 Corporate direct 0.1 0.1 0.2 0.3 --------------------------------------------- ---------------------Total other 2.3 2.1 2.0 2.6 --------------------------------------------- ---------------------Total domestic 91.5 84.4 65.9 86.0 --------------------------------------------- ---------------------International Infrastructure: Transportation 1.3 1.2 0.4 0.5 Higher education 1.0 0.9 0.7 0.9 Sovereign 0.8 0.7 1.0 1.3 Sub-sovereign 0.4 0.4 0.6 0.8 Utilities 0.4 0.4 --Health care 0.2 0.2 0.2 0.3 Housing 0.1 0.1 ----------------------------------------------- ---------------------Total infrastructure 4.2 3.9 2.9 3.8 --------------------------------------------- ---------------------Structured finance* 11.1 10.3 6.6 8.6 --------------------------------------------- ---------------------Other: Financial inst 0.5 0.5 1.0 1.3 Corporate direct 0.5 0.5 --Investor-owned utilities 0.4 0.4 0.2 0.3 --------------------------------------------- ----------------------

Total other 1.4 1.4 --------------------------------------------Total int'l 16.7 15.6 --------------------------------------------Total $108.2 100.0% ---------------------------------------------

1.2 1.6 ---------------------10.7 14.0 ---------------------$76.6 100.0% ----------------------

* Asset-/mortgage-backed
As of December 31 -----------------------------------------------1998 1997 ----------------------- ----------------------% of % of Ceded Ceded Ceded Ceded In billions Insurance Insurance Insurance Insurance Geographic Location In Force In Force In Force In Force --------------------------------------------- ----------------------Domestic: California $ 12.4 11.5% $10.4 13.6% New York 10.7 9.9 6.1 8.0 New Jersey 5.4 5.0 3.7 4.9 Texas 5.3 4.9 4.0 5.2 Pennsylvania 3.8 3.5 3.0 3.9 Massachusetts 3.7 3.4 3.0 3.9 Illinois 3.4 3.1 2.7 3.5 Florida 3.2 3.0 2.6 3.4 Puerto Rico 3.1 2.9 2.4 3.1 Colorado 2.3 2.1 2.4 3.1 --------------------------------------------- ----------------------Subtotal 53.3 49.3 40.3 52.6 Nationally diversified 14.6 13.5 8.3 10.8 Other states 23.6 21.8 17.3 22.6 --------------------------------------------- ----------------------Total domestic 91.5 84.6 65.9 86.0 International 16.7 15.4 10.7 14.0 --------------------------------------------- ----------------------Total $108.2 100.0% $76.6 100.0% --------------------------------------------- -----------------------

As part of the company's portfolio shaping activity in 1998, the company has entered into facultative share reinsurance agreements with highly rated reinsurers that obligate the company to cede future premiums to the reinsurers through January 1, 2005. Certain reinsurance contracts in 1998 were accounted for on a retroactive basis in accordance with SFAS 113. Ceding commissions received from reinsurers before deferrals were $37.2 million, $20.8 million and $13.7 million in 1998, 1997 and 1996, respectively. In 1998, $170.0 million was received in reinsurance recoveries related to the bankruptcy of a Pennsylvania hospital group. NOTE 18: PENSION AND PROFIT SHARING PLANS The company has a non-contributory, defined contribution pension plan to which the company contributes 10% of each eligible employee's annual total compensation. Pension expense for the years ended December 31, 1998, 1997 and 1996 was $7.3 million, $4.6 million and $3.9 million, respectively. The company also has a profitsharing/401(k) plan that allows eligible employees to contribute up to 10% of eligible compensation. The company matches employee contributions up to the first 5% of total compensation. Company contributions to the profit-sharing/401(k) plan aggregated $2.9 million, $1.9 million and $1.7 million for the years ended December 31, 1998, 1997 and 1996, respectively. The profit-sharing/401(k) plan company match amounts are invested in common stock of the company. Amounts relating to the above plans that exceed limitations established by federal regulations are contributed to a non-qualified deferred compensation plan. In 1998 former CapMAC and 1838 employees were covered under the company's pension and profit-sharing plans. (59)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries NOTE 19: LONG-TERM INCENTIVE PLANS On March 2, 1987, the company adopted a plan for key employees of the company and its subsidiaries to enable those employees to acquire shares of common stock of the company or to benefit from appreciation in the price of the common stock of the company. Options granted will either be Incentive Stock Options (ISOs), where they qualify under Section 422(a) of the Internal Revenue Code, or Non-Qualified Stock Options (NQSOs). ISOs and NQSOs may be granted at a price not less than 100% of the fair value of the company's common stock as determined on the date granted. Options will be exercisable as specified at the time of grant and expire ten years from the date of grant (or shorter if specified or following termination of employment). The board of directors of the company has authorized a maximum of 9,311,122 shares of the company's common stock to be granted as options. As of December 31, 1998, 6,925,872 options had been granted, net of expirations and cancellations, leaving the total number available for future grants at 2,385,250. Options granted through 1990 are exercisable in equal annual installments on each of the first three anniversaries of the grant at 100% of the market price at the date of grant. The options granted from 1991 through 1994 are exercisable in five equal annual installments commencing one year after the date of grant. On all options granted from 1991 through 1994, accelerated vesting and exercisability of those options is possible if the company's return on equity for the year is at least equal to the threshold return on equity specified in the annual financial plan and if earnings per share are at least 2.5% greater than plan earnings per share. In December 1995, the MBIA Inc. Board of Directors approved the "MBIA Long-Term Incentive Program." The incentive program includes a stock option program and adds a compensation component linked to the growth in adjusted book value per share (ABV) of the company's stock. Awards under the long-term program are divided equally between the two components, with 50% of the award given in stock options and 50% of the award (multiplied by a 1.5 conversion factor for the December 1995 award only) to be paid in cash or shares of company stock. Target levels for the option/incentive award are established as a percentage of total salary and bonus, based upon the recipient's position. Awards under the long-term program typically will be granted from the vice president level up to and including the chairman and chief executive officer. The ABV portion of the long-term incentive program may be awarded every year. The 1998 award will cover growth in ABV from December 31, 1998 through December 31, 2001; the 1997 award will cover growth in ABV from December 31, 1997 through December 31, 2000; and the 1995 award will cover growth in ABV from December 31, 1995 through December 31, 1998, with a base line growth of 12% on all awards. The amount to be paid in respect of such award will be adjusted upward or downward based on the actual ABV growth, with a minimum growth of 8% necessary to receive any payment and an 18% growth needed to receive the maximum payment of 200% of the target levels. The amount, if any, to be paid under this portion of the program will be paid in early 2002 for the 1998 award, in early 2001 for the 1997 award and early 1999 for the 1995 award in the form of cash or shares of the company's common stock. Subsequent awards, if any, will be made every year with concomitant payments occurring after the three-year cycle. During 1998, 1997 and 1996, $5.5 million, $3.7 million and $2.9 million, respectively, were recorded as a charge related to the 1998, 1997 and 1995 ABV awards. The stock option grants, which may continue to be awarded every year, provide the right to purchase shares of common stock at the fair value (closing price) of the stock on the date of the grant. Each option vests over five years and has a ten-year term. Prior option grants are not taken into account in determining the number of options granted in any year. In December 1998, 575,430 options were awarded. In December 1995, the company adopted a restricted stock program whereby key executive officers are granted restricted shares of the company's stock. These stock awards may only be sold three or four years from the date of grant, at which time the awards fully vest. In 1998 and 1997, respectively, 52,776 and 73,608 restricted shares (net of cancelled shares) of the company's

stock were granted to certain officers of the company. The fair value of the shares awarded in 1998 and 1997 determined on the grant date was $3.4 million and $4.4 million, respectively, and has been recorded as "Unearned compensation restricted stock" and is shown as a separate component of shareholders' equity. Unearned compensation is amortized to expense over the appropriate three- to four-year vesting period. Compensation expense related to the restricted stock was $1.3 million, $0.9 million and $1.6 million for the years ended December 31, 1998, 1997 and 1996, respectively. In 1992, CapMAC adopted an Employee Stock Ownership Plan (ESOP) to provide its employees the opportunity to obtain beneficial interests in the stock of CapMAC through a trust (the ESOP Trust). The ESOP Trust purchased 350,625 shares of the company's stock. The ESOP Trust financed its purchase of common stock with a loan from the company in the amount of $10 million. The ESOP loan is evidenced by a promissory note delivered to the company. An amount representing unearned employee compensation, equivalent in value to the unpaid balance of the ESOP loan, is recorded as "Unallocated ESOP shares" and is shown as a separate component of shareholders' equity. The company is required to make contributions to the ESOP Trust, which enables the ESOP Trust to service its loan to the company. The ESOP expense is calculated using the shares allocated method. Shares are released for allocation to the participants and held in trust for the employees based upon the ratio of the current year's principal and interest payment to the sum of principal and (60)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries interest payments estimated over the life of the loan. As of December 31, 1998 and 1997, 208,789 and 207,570 shares, respectively, were allocated to the participants. Compensation expense related to the ESOP was $1.3 million and $2.4 million for the years ended December 31, 1997 and 1996, respectively. In October 1995, the FASB issued SFAS 123, "Accounting for Stock-Based Compensation," effective for financial statements for fiscal years beginning after December 15, 1995. SFAS 123 required the company to adopt, at its election, either 1) the provisions in SFAS 123 which require the recognition of compensation expense for employee stock-based compensation plans, or 2) the provisions in SFAS 123 which require the pro forma disclosure of net income and earnings per share as if the recognition provisions of SFAS 123 had been adopted. SFAS 123 explicitly provides that employers may continue to account for their employee stock-based compensation plans using the accounting prescribed by APB Opinion 25, "Accounting for Stock Issued to Employees" (APB 25). The company adopted the disclosure requirements of SFAS 123 effective January 1, 1996 and continues to account for its employee stock-based compensation plans under APB 25. Accordingly, the adoption of SFAS 123 had no impact on the company's financial position or results of operations. As the table below shows, had compensation cost for the company's stock option program been recognized based on the fair value at the grant date, consistent with the recognition provisions of SFAS 123, the impact on the company's net income and earnings per share would not have been material. However, since the options vest over five years and additional awards could be made in future years, the effects of applying SFAS 123 in 1998 are not likely to be representative of the effects on reported net income and earnings per share for future years.
Years ended December 31 ------------------------------------------1998 1997 1996 ------------------------------------------Net income (in thousands): Reported Pro-forma Basic earnings per share: Reported Pro-forma Diluted earnings per share: Reported Pro-forma $432,728 430,224 $4.37 4.35 $4.32 4.30 $405,610 404,180 $4.18 4.17 $4.12 4.11 $347,736 347,046 $3.68 3.68 $3.62 3.61

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries interest payments estimated over the life of the loan. As of December 31, 1998 and 1997, 208,789 and 207,570 shares, respectively, were allocated to the participants. Compensation expense related to the ESOP was $1.3 million and $2.4 million for the years ended December 31, 1997 and 1996, respectively. In October 1995, the FASB issued SFAS 123, "Accounting for Stock-Based Compensation," effective for financial statements for fiscal years beginning after December 15, 1995. SFAS 123 required the company to adopt, at its election, either 1) the provisions in SFAS 123 which require the recognition of compensation expense for employee stock-based compensation plans, or 2) the provisions in SFAS 123 which require the pro forma disclosure of net income and earnings per share as if the recognition provisions of SFAS 123 had been adopted. SFAS 123 explicitly provides that employers may continue to account for their employee stock-based compensation plans using the accounting prescribed by APB Opinion 25, "Accounting for Stock Issued to Employees" (APB 25). The company adopted the disclosure requirements of SFAS 123 effective January 1, 1996 and continues to account for its employee stock-based compensation plans under APB 25. Accordingly, the adoption of SFAS 123 had no impact on the company's financial position or results of operations. As the table below shows, had compensation cost for the company's stock option program been recognized based on the fair value at the grant date, consistent with the recognition provisions of SFAS 123, the impact on the company's net income and earnings per share would not have been material. However, since the options vest over five years and additional awards could be made in future years, the effects of applying SFAS 123 in 1998 are not likely to be representative of the effects on reported net income and earnings per share for future years.
Years ended December 31 ------------------------------------------1998 1997 1996 ------------------------------------------Net income (in thousands): Reported Pro-forma Basic earnings per share: Reported Pro-forma Diluted earnings per share: Reported Pro-forma $432,728 430,224 $4.37 4.35 $4.32 4.30 $405,610 404,180 $4.18 4.17 $4.12 4.11 $347,736 347,046 $3.68 3.68 $3.62 3.61

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1998, 1997 and 1996, respectively; exercise price of $63.8152, $64.7661 and $48.8219; dividend yield of 1.254%, 1.220% and 1.492%; expected volatility of .2392, .2070 and .2110; risk-free interest rate of 4.63%, 5.80% and 5.96%; and expected option term of 5.86, 5.72 and 5.52 years. A summary of the company's stock option plan as of December 31, 1998, 1997 and 1996, and changes during the years ending on those dates, is presented below:
1998 --------------------------Weighted Number Avg. Price Options of Shares per Share --------------------------------------------------------------------Outstanding at beginning of year 4,033,930 $37.0004 Granted 575,430 63.8152 Exercised 744,670 69.6068 Expired or canceled 187,968 60.9160 --------------------------------------------------------------------Outstanding at year end 3,676,722 $42.2626 --------------------------------------------------------------------Exercisable at year end 2,093,075 $29.3722 Weighted-average fair value

per share of options granted during the year $18.1565 ---------------------------------------------------------------------

1997 --------------------------Weighted Number Avg. Price Options of Shares per Share --------------------------------------------------------------------Outstanding at beginning of year 4,049,879 $31.7892 Granted 449,274 64.7661 Exercised 430,314 57.3585 Expired or canceled 34,909 34.5547 --------------------------------------------------------------------Outstanding at year end 4,033,930 $37.0004 --------------------------------------------------------------------Exercisable at year end 2,450,080 $26.9218 --------------------------------------------------------------------Weighted-average fair value per share of options granted during the year $18.3756 ---------------------------------------------------------------------

1996 --------------------------Weighted Number Avg. Price Options of Shares per Share --------------------------------------------------------------------Outstanding at beginning of year 4,529,632 $24.0847 Granted 672,481 48.8219 Exercised 1,105,561 41.1025 Expired or canceled 46,673 29.6053 --------------------------------------------------------------------Outstanding at year end 4,049,879 $31.7892 --------------------------------------------------------------------Exercisable at year end 2,512,278 $24.9806 --------------------------------------------------------------------Weighted-average fair value per share of options granted during the year $14.0875 ---------------------------------------------------------------------

(61)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries The following table summarizes information about the plan's stock options at December 31, 1998:
Weighted-Average

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries The following table summarizes information about the plan's stock options at December 31, 1998:
Weighted-Average Number Remaining Number Range of Average Outstanding Contractual Weighted-Average Exercisable Weighted-Average Exercise Prices at 12/31/98 Life in Years Exercise Price 12/31/98 Exercise Price ------------------------------------------------------------------------------------------------------$12.1880 to $30.0630 1,699,955 3.95 $25.1981 1,533,355 $24.9781 $34.500 to $52.4050 820,907 6.45 43.3264 549,902 40.8650 $56.9510 to $72.7260 1,155,860 9.23 66.6041 9,818 71.9240 ------------------------------------------------------------------------------------------------------Total 3,676,722 6.17 $42.2626 2,093,075 $29.3722 -------------------------------------------------------------------------------------------------------

NOTE 20: SHAREHOLDERS' RIGHTS PLAN In December 1991, the board of directors of the company declared a dividend distribution of one preferred share purchase right (a Right) for each outstanding share of the company's common stock. Each Right entitles its holder to purchase from the company one one-hundredth of a share of the company's Junior Participating Cumulative Preferred Shares at a price of $160, subject to certain adjustments. Initially, the Rights are attached to the common stock and will not be transferable separately nor become exercisable until the earlier to occur of (i) ten business days following the date of the public announcement by the company (the Shares Acquisition Date) that a person or group of persons has acquired or obtained the right to acquire beneficial ownership of 10% or more of the outstanding shares of the company's common stock and (ii) ten business days (or later as may be determined by the board of directors) after the announcement or commencement of a tender offer or exchange offer which, if successful, would result in the bidder owning 10% or more of the outstanding shares of the company's common stock. However, no person shall be deemed to have acquired or obtained the right to acquire the beneficial ownership of 10% or more of the outstanding shares of the company's common stock if the board of directors determines that such acquisition is inadvertent, and such person promptly divests itself of a sufficient number of shares to be below the 10% ownership threshold. If the acquiring person or group acquires beneficial ownership of 10% or more of the company's common stock (except pursuant to a tender or exchange offer for all outstanding common stock of the company, determined by the company's independent directors to be at a fair price and in the best interests of the company and its shareholders), each holder of a Right (other than the acquirer) will be entitled to purchase, for $160, that number of shares of common stock of the company having a fair value of $320. Similarly, if after an acquiring person or group so acquires 10% or more of the company's common stock, the company is acquired in a merger or other business combination and is not the surviving entity, or its common stock is changed or exchanged in whole or in part, or 50% or more of the company's assets, cash flow or earning power is sold, each holder of a Right (other than the acquirer) will be entitled to purchase, for $160, that number of shares of common stock of the acquiring company having a fair value of $320. The board of directors may redeem the Rights in whole at $.01 per Right at any time prior to ten business days following the Shares Acquisition Date. Further, at any time after a person or group acquires 10% or more, but less than 50%, of the company's common stock, the board of directors of the company may exchange the Rights (other than those held by the acquirer) in whole or in part, at an exchange ratio of one share of common stock per Right. The board of directors may also amend the Rights at any time prior to the Shares Acquisition Date. The Rights will expire on December 12, 2001, unless earlier redeemed or exchanged. NOTE 21: RELATED PARTY TRANSACTIONS Since 1989, MBIA Corp. has executed five surety bonds to guarantee the payment obligations of the members of the Association which had their S&P claims-paying rating downgraded from Triple-A on their previously issued Association policies. In the event that they do not meet their Association policy payment obligations, MBIA Corp. will pay the required amounts directly to the paying agent. The aggregate outstanding exposure on these surety bonds as of December 31, 1998 is $340 million. MBIA MuniServices provides financing to Capital Asset under various borrowing arrangements. The net balance

outstanding under these agreements at December 31, 1998 and 1997 was $86.8 million and $49.7 million, respectively, including accrued interest, and is included in other assets on the company's consolidated balance sheet. Net interest earned under these agreements during 1998 and 1997 was $8.1 million and $7.0 million, respectively. (62)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries NOTE 22: PUBLIC OFFERINGS OF COMMON STOCK In July 1997, the company completed a public offering of 2,300,000 new shares of the company's common stock. The company realized $126 million in new capital from the offering. In February 1996, the company completed a public offering of 7,780,000 shares of the company's common stock. Of the shares offered, 6,240,000 were sold by an existing shareholder and 1,540,000 were new shares offered by the company. The company realized $55 million in new capital from the offering. In June 1992, the company granted 1,042,537 warrants to non-employee stockholders to purchase common stock. The warrants expire in June 1999. During 1996, 257,775 warrants were exercised. The exercise of the warrants being cashless resulted in the issuance of 150,422 shares of common stock. During 1997, the company exercised its right to purchase all outstanding warrants for its common stock. As a result, 44,314 warrants were exercised for cash resulting in the issuance of 44,314 shares of common stock, and 740,448 warrants were exercised on a cashless basis resulting in the issuance of 378,848 shares of common stock. NOTE 23: FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair value amounts of financial instruments shown in the following table have been determined by the company using available market information and appropriate valuation methodologies. However, in certain cases considerable judgment has been necessarily required to interpret market data to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amount the company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. FIXED-MATURITY SECURITIES--The fair value of fixed-maturity securities is based upon quoted market prices, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. SHORT-TERM INVESTMENTS--Short-term investments are carried at amortized cost which approximates fair value. OTHER INVESTMENTS--Other investments include the company's interest in a limited partnership and a mutual fund that invests principally in marketable equity securities and other equity investments. The fair value of these investments is based on quoted market prices. MUNICIPAL INVESTMENT AGREEMENT PORTFOLIO--The municipal investment agreement portfolio is comprised of fixed-maturity securities and short-term investments. Its fair value equals the quoted market prices, if available, of its fixed-maturities plus the amortized cost of its short-term investments which, because of their short duration, is a reasonable estimate of fair value. If a quoted market price is not available for a fixed-maturity security, fair value is estimated using quoted market prices for similar securities. CASH AND CASH EQUIVALENTS, RECEIVABLE FOR INVESTMENTS SOLD, SHORT-TERM DEBT, AND PAYABLE FOR INVESTMENTS PURCHASED--The carrying amounts of these items are a reasonable estimate of their fair value. SECURITIES BORROWED OR PURCHASED UNDER AGREEMENTS TO RESELL--The fair value is estimated based upon the quoted market prices of the transactions' underlying collateral. PREPAID REINSURANCE PREMIUMS--The fair value of the company's prepaid reinsurance premiums is based on the estimated cost of entering into an assumption of the entire portfolio with third-party reinsurers under

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries NOTE 22: PUBLIC OFFERINGS OF COMMON STOCK In July 1997, the company completed a public offering of 2,300,000 new shares of the company's common stock. The company realized $126 million in new capital from the offering. In February 1996, the company completed a public offering of 7,780,000 shares of the company's common stock. Of the shares offered, 6,240,000 were sold by an existing shareholder and 1,540,000 were new shares offered by the company. The company realized $55 million in new capital from the offering. In June 1992, the company granted 1,042,537 warrants to non-employee stockholders to purchase common stock. The warrants expire in June 1999. During 1996, 257,775 warrants were exercised. The exercise of the warrants being cashless resulted in the issuance of 150,422 shares of common stock. During 1997, the company exercised its right to purchase all outstanding warrants for its common stock. As a result, 44,314 warrants were exercised for cash resulting in the issuance of 44,314 shares of common stock, and 740,448 warrants were exercised on a cashless basis resulting in the issuance of 378,848 shares of common stock. NOTE 23: FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair value amounts of financial instruments shown in the following table have been determined by the company using available market information and appropriate valuation methodologies. However, in certain cases considerable judgment has been necessarily required to interpret market data to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amount the company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. FIXED-MATURITY SECURITIES--The fair value of fixed-maturity securities is based upon quoted market prices, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. SHORT-TERM INVESTMENTS--Short-term investments are carried at amortized cost which approximates fair value. OTHER INVESTMENTS--Other investments include the company's interest in a limited partnership and a mutual fund that invests principally in marketable equity securities and other equity investments. The fair value of these investments is based on quoted market prices. MUNICIPAL INVESTMENT AGREEMENT PORTFOLIO--The municipal investment agreement portfolio is comprised of fixed-maturity securities and short-term investments. Its fair value equals the quoted market prices, if available, of its fixed-maturities plus the amortized cost of its short-term investments which, because of their short duration, is a reasonable estimate of fair value. If a quoted market price is not available for a fixed-maturity security, fair value is estimated using quoted market prices for similar securities. CASH AND CASH EQUIVALENTS, RECEIVABLE FOR INVESTMENTS SOLD, SHORT-TERM DEBT, AND PAYABLE FOR INVESTMENTS PURCHASED--The carrying amounts of these items are a reasonable estimate of their fair value. SECURITIES BORROWED OR PURCHASED UNDER AGREEMENTS TO RESELL--The fair value is estimated based upon the quoted market prices of the transactions' underlying collateral. PREPAID REINSURANCE PREMIUMS--The fair value of the company's prepaid reinsurance premiums is based on the estimated cost of entering into an assumption of the entire portfolio with third-party reinsurers under current market conditions. DEFERRED PREMIUM REVENUE--The fair value of the company's deferred premium revenue is based on the estimated cost of entering into a cession of the entire portfolio with third-party reinsurers under current market conditions. LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES--The carrying amount is composed of the present

value of the expected cash flows for specifically identified claims combined with an estimate for unidentified claims. Therefore, the carrying amount is a reasonable estimate of the fair value of the reserve. LONG-TERM DEBT--The fair value is estimated based on the quoted market prices for the same or similar securities. MUNICIPAL INVESTMENT AGREEMENTS AND MUNICIPAL REPURCHASE AGREEMENTS--The fair values of municipal investment agreements and municipal repurchase agreements are estimated using discounted cash flow calculations based upon interest rates currently being offered for similar agreements with maturities consistent with those remaining for the agreements being valued. SECURITIES LOANED OR SOLD UNDER AGREEMENTS TO REPURCHASE--The fair value is estimated based upon the quoted market prices of the transactions' underlying collateral. INSTALLMENT PREMIUMS--The fair value is derived by calculating the present value of the estimated future cash flow stream discounted at 9%. (63)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries
As of December 31, 1998 As of December 31, 1997 --------------------------------------------------------------Carrying Estimated Carrying Estimated In thousands Amount Fair Value Amount Fair Value ------------------------------------------------------------------------------------------------ASSETS: Fixed-maturity securities $5,884,053 $5,884,053 $5,211,311 $5,211,311 Short-term investments 423,194 423,194 303,898 303,898 Other investments 94,975 94,975 51,693 51,693 Municipal investment agreement portfolio 3,678,229 3,678,229 3,341,394 3,341,394 Cash and cash equivalents 20,757 20,757 26,296 26,296 Securities borrowed or purchased under agreements to resell 538,281 540,864 472,963 473,841 Prepaid reinsurance premiums 352,699 297,238 289,508 245,613 Receivable for investments sold 49,497 49,497 13,435 13,435 LIABILITIES: Deferred premium revenue 2,251,211 1,939,971 2,090,460 1,795,890 Loss and loss adjustment expense reserves 270,114 270,114 103,061 103,061 Municipal investment agreements 2,587,339 2,665,069 1,974,165 2,024,230 Municipal repurchase agreements 897,718 939,860 1,177,022 1,214,641 Long-term debt 688,996 735,443 488,878 536,871 Short-term debt --20,000 20,000 Securities loaned or sold under agreements to repurchase 573,352 585,872 606,263 607,304 Payable for investments purchased 95,598 95,598 44,007 44,007 OFF-BALANCE SHEET INSTRUMENTS: Installment premiums -644,132 -536,929

NOTE 24: QUARTERLY FINANCIAL INFORMATION (UNAUDITED) A summary of selected quarterly income statement information follows:
In thousands except per share amounts 1998 First Second Third Fourth Year -------------------------------------------------------------------------------Gross premiums written $121,387 $199,040 $167,872 $188,751 $677,050

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MBIA Inc. and Subsidiaries
As of December 31, 1998 As of December 31, 1997 --------------------------------------------------------------Carrying Estimated Carrying Estimated In thousands Amount Fair Value Amount Fair Value ------------------------------------------------------------------------------------------------ASSETS: Fixed-maturity securities $5,884,053 $5,884,053 $5,211,311 $5,211,311 Short-term investments 423,194 423,194 303,898 303,898 Other investments 94,975 94,975 51,693 51,693 Municipal investment agreement portfolio 3,678,229 3,678,229 3,341,394 3,341,394 Cash and cash equivalents 20,757 20,757 26,296 26,296 Securities borrowed or purchased under agreements to resell 538,281 540,864 472,963 473,841 Prepaid reinsurance premiums 352,699 297,238 289,508 245,613 Receivable for investments sold 49,497 49,497 13,435 13,435 LIABILITIES: Deferred premium revenue 2,251,211 1,939,971 2,090,460 1,795,890 Loss and loss adjustment expense reserves 270,114 270,114 103,061 103,061 Municipal investment agreements 2,587,339 2,665,069 1,974,165 2,024,230 Municipal repurchase agreements 897,718 939,860 1,177,022 1,214,641 Long-term debt 688,996 735,443 488,878 536,871 Short-term debt --20,000 20,000 Securities loaned or sold under agreements to repurchase 573,352 585,872 606,263 607,304 Payable for investments purchased 95,598 95,598 44,007 44,007 OFF-BALANCE SHEET INSTRUMENTS: Installment premiums -644,132 -536,929

NOTE 24: QUARTERLY FINANCIAL INFORMATION (UNAUDITED) A summary of selected quarterly income statement information follows:
In thousands except per share amounts 1998 First Second Third Fourth Year -------------------------------------------------------------------------------Gross premiums written $121,387 $199,040 $167,872 $188,751 $677,050 Net premiums written 107,054 171,760 140,374 101,798 520,986 Premiums earned 99,642 104,613 106,159 114,136 424,550 Investment income and realized gains and losses 94,942 89,046 97,583 85,207 366,778 All other revenues 29,849 30,959 31,518 28,228 120,554 Income before income taxes 130,078 159,062 143,580 132,318 565,038 Net income $102,105 $119,029 $108,243 $103,351 $432,728 Net income per common share:* Basic $ 1.03 $ 1.20 $ 1.09 $ 1.04 $ 4.37 Diluted $ 1.02 $ 1.19 $ 1.08 $ 1.03 $ 4.32 -------------------------------------------------------------------------------1997 First Second Third Fourth Year -------------------------------------------------------------------------------Gross premiums written $109,301 $184,539 $147,428 $212,580 $653,848 Net premiums written 98,973 155,433 123,796 159,120 537,322 Premiums earned 83,874 85,948 88,174 93,499 351,495 Investment income and realized gains and losses 76,159 75,750 83,639 86,769 322,317 All other revenues 18,631 19,057 23,970 30,640 92,298 Income before income taxes 124,358 126,224 137,194 137,476 525,252

Net income $ 98,474 $ 98,175 $106,552 $102,409 $405,610 Net income per common share:* Basic $ 1.03 $ 1.02 $ 1.09 $ 1.04 $ 4.18 Diluted $ 1.01 $ 1.01 $ 1.07 $ 1.03 $ 4.12 --------------------------------------------------------------------------------

*Due to the changes in the number of shares outstanding, quarterly per share amounts may not add to the totals for the years. (64)

SUBSIDIARIES OF MBIA INC. NAME OF SUBSIDIARY STATE OF INCORPORATION
MBIA Insurance Corporation Municipal Issuers Service Corporation MBIA Asset Management Corporation MBIA Municipal Investors Service Corporation MBIA Investment Management Corp. MBIA Capital Management Corp. 1838 Investment Advisors, Inc. MBIA Capital Corp. MBIA Services Company MBIA MuniServices Company MBIA-AMBAC International Marketing Services, Pty. Limited MBIA Assurance S.A. MBIA Insurance Corp. of Illinois American Money Management Associates, Inc. Municipal Tax Collection Bureau, Inc. MBIA MuniFinancial John T. Austin, Inc. Allen W. Charkow, Inc. Municipal Resource Consultants Muni Resources, LLC Capital Asset Holdings GP, Inc. CapMAC Holdings Inc. Capital Markets Assurance Corporation CapMAC Financial Services, Inc. CapMAC Financial Services (Europe) Ltd. CapMAC Asia Ltd. New York New York Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Australia France Illinois Colorado Pennsylvania California California California California Delaware Florida Delaware New York Delaware United Kingdom Bermuda

CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the Registration Statements of MBIA Inc. and Subsidiaries on the forms S-3 (No. 333-15003 and 333-60039 and 333-62961) and S-8 (Nos. 33-22441 and 33-46062 and 333-34101) of: (1) Our report dated February 2, 1999, on our audits of the consolidated financial statements of MBIA Inc. and Subsidiaries as of December 31, 1998 and 1997, and for each of the three years in the period ended December 31, 1998, which report is incorporated by reference in this Annual Report on Form 10-K for fiscal year ended December 31, 1998; (2) Our report dated February 2, 1999 on our audits of the financial statement schedules of MBIA Inc. and Subsidiaries, which report is included in this Annual Report on Form 10-K for the fiscal year ended December 31, 1998; and (3) Our report dated February 2, 1999 on our audits of the consolidated financial statements of MBIA Insurance Corporation and Subsidiaries as of December 31, 1998 and 1997, and for each of the three years in the period

SUBSIDIARIES OF MBIA INC. NAME OF SUBSIDIARY STATE OF INCORPORATION
MBIA Insurance Corporation Municipal Issuers Service Corporation MBIA Asset Management Corporation MBIA Municipal Investors Service Corporation MBIA Investment Management Corp. MBIA Capital Management Corp. 1838 Investment Advisors, Inc. MBIA Capital Corp. MBIA Services Company MBIA MuniServices Company MBIA-AMBAC International Marketing Services, Pty. Limited MBIA Assurance S.A. MBIA Insurance Corp. of Illinois American Money Management Associates, Inc. Municipal Tax Collection Bureau, Inc. MBIA MuniFinancial John T. Austin, Inc. Allen W. Charkow, Inc. Municipal Resource Consultants Muni Resources, LLC Capital Asset Holdings GP, Inc. CapMAC Holdings Inc. Capital Markets Assurance Corporation CapMAC Financial Services, Inc. CapMAC Financial Services (Europe) Ltd. CapMAC Asia Ltd. New York New York Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Australia France Illinois Colorado Pennsylvania California California California California Delaware Florida Delaware New York Delaware United Kingdom Bermuda

CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the Registration Statements of MBIA Inc. and Subsidiaries on the forms S-3 (No. 333-15003 and 333-60039 and 333-62961) and S-8 (Nos. 33-22441 and 33-46062 and 333-34101) of: (1) Our report dated February 2, 1999, on our audits of the consolidated financial statements of MBIA Inc. and Subsidiaries as of December 31, 1998 and 1997, and for each of the three years in the period ended December 31, 1998, which report is incorporated by reference in this Annual Report on Form 10-K for fiscal year ended December 31, 1998; (2) Our report dated February 2, 1999 on our audits of the financial statement schedules of MBIA Inc. and Subsidiaries, which report is included in this Annual Report on Form 10-K for the fiscal year ended December 31, 1998; and (3) Our report dated February 2, 1999 on our audits of the consolidated financial statements of MBIA Insurance Corporation and Subsidiaries as of December 31, 1998 and 1997, and for each of the three years in the period ended December 31, 1998, which is included in exhibit 99 to this Annual Report on Form 10-K for the fiscal year ended December 31, 1998.
/s/ PricewaterhouseCoopers LLP

New York, New York March 30, 1999

CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the Registration Statements of MBIA Inc. and Subsidiaries on the forms S-3 (No. 333-15003 and 333-60039 and 333-62961) and S-8 (Nos. 33-22441 and 33-46062 and 333-34101) of: (1) Our report dated February 2, 1999, on our audits of the consolidated financial statements of MBIA Inc. and Subsidiaries as of December 31, 1998 and 1997, and for each of the three years in the period ended December 31, 1998, which report is incorporated by reference in this Annual Report on Form 10-K for fiscal year ended December 31, 1998; (2) Our report dated February 2, 1999 on our audits of the financial statement schedules of MBIA Inc. and Subsidiaries, which report is included in this Annual Report on Form 10-K for the fiscal year ended December 31, 1998; and (3) Our report dated February 2, 1999 on our audits of the consolidated financial statements of MBIA Insurance Corporation and Subsidiaries as of December 31, 1998 and 1997, and for each of the three years in the period ended December 31, 1998, which is included in exhibit 99 to this Annual Report on Form 10-K for the fiscal year ended December 31, 1998.
/s/ PricewaterhouseCoopers LLP

New York, New York March 30, 1999

POWER OF ATTORNEY The undersigned hereby constitutes and appoints each of Richard L. Weill and Louis G. Lenzi as his/her true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him/her and in his/her name, place and stead, in any and all capacities, to sign the Annual Report on Form 10-K of MBIA Inc. for the year ended December 31, 1998, and any or all amendments thereto, and to file the same, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as they might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his/her substitute, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have set my hand this 18th day of March, 1999.
/s/ David C. Clapp ----------------------------David C. Clapp /s/ Freda S. Johnson ----------------------------Freda S. Johnson

/s/ Claire L. Gaudiani ----------------------------Claire L. Gaudiani /s/ James A. Lebenthal ----------------------------James A. Lebenthal

/s/ Daniel P. Kearney ----------------------------Daniel P. Kearney /s/ William H. Gray, III ----------------------------William H. Gray, III

/s/ John A. Rolls -----------------------------

/s/ Pierre-Henri Richard -----------------------------

POWER OF ATTORNEY The undersigned hereby constitutes and appoints each of Richard L. Weill and Louis G. Lenzi as his/her true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him/her and in his/her name, place and stead, in any and all capacities, to sign the Annual Report on Form 10-K of MBIA Inc. for the year ended December 31, 1998, and any or all amendments thereto, and to file the same, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as they might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his/her substitute, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have set my hand this 18th day of March, 1999.
/s/ David C. Clapp ----------------------------David C. Clapp /s/ Freda S. Johnson ----------------------------Freda S. Johnson

/s/ Claire L. Gaudiani ----------------------------Claire L. Gaudiani /s/ James A. Lebenthal ----------------------------James A. Lebenthal

/s/ Daniel P. Kearney ----------------------------Daniel P. Kearney /s/ William H. Gray, III ----------------------------William H. Gray, III

/s/ John A. Rolls ----------------------------John A. Rolls

/s/ Pierre-Henri Richard ----------------------------Pierre-Henri Richard

ARTICLE 7 (Replace this text with the legend) MULTIPLIER: 1,000

PERIOD TYPE FISCAL YEAR END PERIOD START PERIOD END DEBT HELD FOR SALE DEBT CARRYING VALUE DEBT MARKET VALUE EQUITIES MORTGAGE REAL ESTATE TOTAL INVEST CASH RECOVER REINSURE DEFERRED ACQUISITION TOTAL ASSETS POLICY LOSSES UNEARNED PREMIUMS POLICY OTHER POLICY HOLDER FUNDS NOTES PAYABLE PREFERRED MANDATORY PREFERRED COMMON OTHER SE TOTAL LIABILITY AND EQUITY PREMIUMS INVESTMENT INCOME

YEAR DEC 31 1998 JAN 01 1998 DEC 31 1998 5,884,053 0 0 0 0 0 5,884,053 20,757 0 230,085 11,796,564 270,114 2,251,211 0 0 688,996 0 0 99,570 3,692,647 11,796,564 424,550 331,802

ARTICLE 7 (Replace this text with the legend) MULTIPLIER: 1,000

PERIOD TYPE FISCAL YEAR END PERIOD START PERIOD END DEBT HELD FOR SALE DEBT CARRYING VALUE DEBT MARKET VALUE EQUITIES MORTGAGE REAL ESTATE TOTAL INVEST CASH RECOVER REINSURE DEFERRED ACQUISITION TOTAL ASSETS POLICY LOSSES UNEARNED PREMIUMS POLICY OTHER POLICY HOLDER FUNDS NOTES PAYABLE PREFERRED MANDATORY PREFERRED COMMON OTHER SE TOTAL LIABILITY AND EQUITY PREMIUMS INVESTMENT INCOME INVESTMENT GAINS OTHER INCOME BENEFITS UNDERWRITING AMORTIZATION UNDERWRITING OTHER INCOME PRETAX INCOME TAX INCOME CONTINUING DISCONTINUED EXTRAORDINARY CHANGES NET INCOME EPS PRIMARY EPS DILUTED RESERVE OPEN PROVISION CURRENT PROVISION PRIOR PAYMENTS CURRENT PAYMENTS PRIOR RESERVE CLOSE CUMULATIVE DEFICIENCY

YEAR DEC 31 1998 JAN 01 1998 DEC 31 1998 5,884,053 0 0 0 0 0 5,884,053 20,757 0 230,085 11,796,564 270,114 2,251,211 0 0 688,996 0 0 99,570 3,692,647 11,796,564 424,550 331,802 29,962 125,568 34,683 34,613 70,330 565,038 132,310 432,728 0 0 0 432,728 4.37 4.32 0 0 0 0 0 0 0

MBIA INSURANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 1998 and 1997 and for the years ended December 31, 1998, 1997 and 1996

REPORT OF INDEPENDENT ACCOUNTANTS TO THE BOARD OF DIRECTORS AND SHAREHOLDER OF

MBIA INSURANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 1998 and 1997 and for the years ended December 31, 1998, 1997 and 1996

REPORT OF INDEPENDENT ACCOUNTANTS TO THE BOARD OF DIRECTORS AND SHAREHOLDER OF MBIA INSURANCE CORPORATION: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income and changes in shareholder's equity and cash flows present fairly, in all material respects, the financial position of MBIA Insurance Corporation and Subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion expressed above.
/s/ PricewaterhouseCoopers -------------------------PricewaterhouseCoopers LLP

New York, New York February 2, 1999

MBIA INSURANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands except per share amounts)
DECEMBER 31, 1998 ------------------------ASSETS Investments: Fixed-maturity securities held as available-for-sale at fair value (amortized cost $5,565,060 and $4,600,528) Short-term investments, at amortized cost (which approximates fair value) Other investments TOTAL INVESTMENTS Cash and cash equivalents Securities purchased under agreements to resell Accrued investment income Deferred acquisition costs Prepaid reinsurance premiums Goodwill (less accumulated amortization of $52,031 and $47,152) Property and equipment, at cost (less accumulated DEC -------

$5,884,053 423,188 17,850 --------------6,325,091 6,546 187,500 91,239 230,085 352,699 90,950

--

REPORT OF INDEPENDENT ACCOUNTANTS TO THE BOARD OF DIRECTORS AND SHAREHOLDER OF MBIA INSURANCE CORPORATION: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income and changes in shareholder's equity and cash flows present fairly, in all material respects, the financial position of MBIA Insurance Corporation and Subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion expressed above.
/s/ PricewaterhouseCoopers -------------------------PricewaterhouseCoopers LLP

New York, New York February 2, 1999

MBIA INSURANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands except per share amounts)
DECEMBER 31, 1998 ------------------------ASSETS Investments: Fixed-maturity securities held as available-for-sale at fair value (amortized cost $5,565,060 and $4,600,528) Short-term investments, at amortized cost (which approximates fair value) Other investments TOTAL INVESTMENTS Cash and cash equivalents Securities purchased under agreements to resell Accrued investment income Deferred acquisition costs Prepaid reinsurance premiums Goodwill (less accumulated amortization of $52,031 and $47,152) Property and equipment, at cost (less accumulated depreciation of $23,840 and $18,256) Receivable for investments sold Other assets TOTAL ASSETS DEC -------

$5,884,053 423,188 17,850 --------------6,325,091 6,546 187,500 91,239 230,085 352,699 90,950 71,952 33,880 97,970 --------------$7,487,912 ===============

--

-==

LIABILITIES AND SHAREHOLDER'S EQUITY LIABILITIES: Deferred premium revenue Loss and loss adjustment expense reserves Securities sold under agreements to repurchase Deferred income taxes Deferred fee revenue Payable for investments purchased

$ 2,251,211 270,114 187,500 303,407 33,785 29,523

MBIA INSURANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands except per share amounts)
DECEMBER 31, 1998 ------------------------ASSETS Investments: Fixed-maturity securities held as available-for-sale at fair value (amortized cost $5,565,060 and $4,600,528) Short-term investments, at amortized cost (which approximates fair value) Other investments TOTAL INVESTMENTS Cash and cash equivalents Securities purchased under agreements to resell Accrued investment income Deferred acquisition costs Prepaid reinsurance premiums Goodwill (less accumulated amortization of $52,031 and $47,152) Property and equipment, at cost (less accumulated depreciation of $23,840 and $18,256) Receivable for investments sold Other assets TOTAL ASSETS DEC -------

$5,884,053 423,188 17,850 --------------6,325,091 6,546 187,500 91,239 230,085 352,699 90,950 71,952 33,880 97,970 --------------$7,487,912 ===============

--

-==

LIABILITIES AND SHAREHOLDER'S EQUITY LIABILITIES: Deferred premium revenue Loss and loss adjustment expense reserves Securities sold under agreements to repurchase Deferred income taxes Deferred fee revenue Payable for investments purchased Other liabilities TOTAL LIABILITIES

$ 2,251,211 270,114 187,500 303,407 33,785 29,523 135,027 --------------3,210,567 ---------------

---

Shareholder's Equity: Common stock, par value $150 per share; authorized, issued and outstanding - 100,000 shares Additional paid-in capital Retained earnings Accumulated other comprehensive income, net of deferred income tax provision of of $112,283 and $94,416 TOTAL SHAREHOLDER'S EQUITY

15,000 1,491,033 2,566,222

205,090 --------------4,277,345 --------------$7,487,912 ===============

---

TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY

==

The accompanying notes are an integral part of the consolidated financial statements. (2)

MBIA INSURANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands)
Years ended December 31 ----------------------------------------------------1998 1997 1996 ----------------------------------------

MBIA INSURANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands)
Years ended December 31 ----------------------------------------------------1998 1997 1996 ---------------------------------------Revenues: Gross premiums written Ceded premiums Net premiums written Increase in deferred premium revenue Premiums earned (net of ceded premiums of $49,474, $43,734 and $38,893) Net investment income Net realized gains Advisory fees Other Total revenues Expenses: Losses and loss adjustment Policy acquisition costs, net Operating Total expenses Income before income taxes Provision for income taxes Net income $725,269 (149,280) -------------575,989 (166,182) -------------$544,974 (79,781) -------------465,193 (165,858) -------------$462,444 (54,852) -------------407,592 (154,111) --------------

409,807 326,391 29,891 23,964 713 -------------790,766 -------------33,661 33,168 65,445 -------------132,274 -------------658,492 134,593 -------------$523,899 ==============

299,335 282,460 17,478 --1,201 -------------600,474 -------------18,673 27,873 50,016 -------------96,562 -------------503,912 112,904 -------------$391,008 ==============

253,481 247,286 11,740 --3,163 -------------515,670 -------------15,334 24,660 46,654 -------------86,648 -------------429,022 90,562 -------------$338,460 ==============

The accompanying notes are an integral part of the consolidated financial statements. (3)

MBIA INSURANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY For the years ended December 31, 1998, 1997 and 1996

(In thousands except per share amounts)
Common Stock ----------------Shares Amount --------- --------100,000 $15,000 --------- ------------Additional Paid-in Capital -----------$1,021,584 -------------Accumul Othe Comprehe Adjust -------$147 ------

Balance, January 1, 1996 Comprehensive income: Net income Other comprehensive income: Change in unrealized appreciation of investments net of change in deferred income taxes of $26,197 Change in foreign currency translation

Retained Earnings ---------$1,341,855 ---------338,460

-----

-----

-----

-----

(47 (3

MBIA INSURANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY For the years ended December 31, 1998, 1997 and 1996

(In thousands except per share amounts)
Common Stock ----------------Shares Amount --------- --------100,000 $15,000 --------- ------------Additional Paid-in Capital -----------$1,021,584 -------------Accumul Othe Comprehe Adjust -------$147 ------

Balance, January 1, 1996 Comprehensive income: Net income Other comprehensive income: Change in unrealized appreciation of investments net of change in deferred income taxes of $26,197 Change in foreign currency translation Other comprehensive income Total comprehensive income Dividends declared (per common share $290.00) Tax reduction related to tax sharing agreement with MBIA Inc. Balance, December 31, 1996 Comprehensive income: Net income Other comprehensive income: Change in unrealized appreciation of investments net of change in deferred income taxes of $(42,241) Change in foreign currency translation Other comprehensive income Total comprehensive income Capital contribution from MBIA Inc. Tax reduction related to tax sharing agreement with MBIA Inc. Balance, December 31, 1997 Comprehensive income: Net income Other comprehensive income: Change in unrealized appreciation of investments net of change in deferred income taxes of $17,867 Change in foreign currency translation Other comprehensive income

Retained Earnings ---------$1,341,855 ---------338,460

-----

-----

-----

-----

(47 (3

-----------100,000 ----------

------------15,000 -----------

--20,292 -----------1,041,876 --------------

(29,000) -----------1,651,315 ---------391,008

-----95 ------

-----

-----

-----

-----

78 (7

-----------100,000 ----------

------------15,000 -----------

80,000 18,073 -----------1,139,949 --------------

-------------2,042,323 ---------523,899

-----166 ------

-----

-----

-----

-----

34 4

Comprehensive income Capital contribution from MBIA Inc. Tax reduction related to tax sharing agreement with MBIA Inc. -----------------------324,915 26,169 ------------------------------

Balance, December 31, 1998

100,000 ========

$15,000 =========

$1,491,033 ============

$2,566,222 ==========

$205 ======

1998 ------Disclosure of reclassification amount: Unrealized appreciation of investments arising during the period, net of taxes Reclassification of adjustment, net of taxes Net unrealized appreciation, net of taxes

1997 -------

1996 --------

$53,415 (19,331) ------$34,084 =======

$89,536 (11,118) ------$78,418 =======

$(40,074) (7,787) -------$(47,861) ========

The accompany notes are an integral part of the consolidated financial statements. (4)

MBIA INSURANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
Years ended December 31 ---------------------------------------------1998 1997 ------------------- ------------------ ----Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Increase in accrued investment income Increase in deferred acquisition costs Increase in prepaid reinsurance premiums Increase in deferred premium revenue Increase in loss and loss adjustment expense reserves Depreciation Amortization of goodwill Amortization of bond (discount) premium, net Net realized gains on sale of investments Deferred income taxes Other, net Total adjustments to net income Net cash provided by operating activities Cash flows from investing activities: Purchase of fixed-maturity securities, net of payable for investments purchased Sale of fixed-maturity securities, net of receivable for investments sold Redemption of fixed-maturity securities, net of receivable for investments redeemed Sale (purchase) of short-term investments, net Sale (purchase) of other investments, net Capital expenditures, net of disposals Net cash used by investing activities Cash flows from financing activities: Capital contribution from MBIA Inc. Dividends paid Net cash used by financing activities Net increase in cash and cash equivalents Cash and cash equivalents - beginning of year Cash and cash equivalents - end of year Supplemental cash flow disclosures: $ 523,899 $ 391,008 $

(12,638) (75,985) (99,806) 265,983 191,242 5,626 4,879 (15,831) (29,891) 21,856 43,593 ----------------299,028 ----------------822,927 -----------------

(13,407) (6,350) (36,047) 201,905 19,558 3,934 4,889 (10,830) (17,478) 13,382 50,258 -----------------209,814 -----------------600,822 ------------------

----------------------------

(2,800,008) 1,086,973 745,516 (158,339) (527) (18,894) ----------------(1,145,279) ----------------324,915 ------------------324,915 ----------------2,563 3,983 ----------------$ 6,546 =================

(2,090,236) 1,247,860 190,803 (18,922) 664 (10,296) -----------------(680,127) -----------------80,000 -------------------80,000 -----------------695 3,288 -----------------$ 3,983 ==================

(1,

---------( ----------

-------------------

---------$ ==========

MBIA INSURANCE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
Years ended December 31 ---------------------------------------------1998 1997 ------------------- ------------------ ----Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Increase in accrued investment income Increase in deferred acquisition costs Increase in prepaid reinsurance premiums Increase in deferred premium revenue Increase in loss and loss adjustment expense reserves Depreciation Amortization of goodwill Amortization of bond (discount) premium, net Net realized gains on sale of investments Deferred income taxes Other, net Total adjustments to net income Net cash provided by operating activities Cash flows from investing activities: Purchase of fixed-maturity securities, net of payable for investments purchased Sale of fixed-maturity securities, net of receivable for investments sold Redemption of fixed-maturity securities, net of receivable for investments redeemed Sale (purchase) of short-term investments, net Sale (purchase) of other investments, net Capital expenditures, net of disposals Net cash used by investing activities Cash flows from financing activities: Capital contribution from MBIA Inc. Dividends paid Net cash used by financing activities Net increase in cash and cash equivalents Cash and cash equivalents - beginning of year Cash and cash equivalents - end of year Supplemental cash flow disclosures: Income taxes paid $ 523,899 $ 391,008 $

(12,638) (75,985) (99,806) 265,983 191,242 5,626 4,879 (15,831) (29,891) 21,856 43,593 ----------------299,028 ----------------822,927 -----------------

(13,407) (6,350) (36,047) 201,905 19,558 3,934 4,889 (10,830) (17,478) 13,382 50,258 -----------------209,814 -----------------600,822 ------------------

----------------------------

(2,800,008) 1,086,973 745,516 (158,339) (527) (18,894) ----------------(1,145,279) ----------------324,915 ------------------324,915 ----------------2,563 3,983 ----------------$ 6,546 ================= $ 105,451

(2,090,236) 1,247,860 190,803 (18,922) 664 (10,296) -----------------(680,127) -----------------80,000 -------------------80,000 -----------------695 3,288 -----------------$ 3,983 ================== $ 82,125

(1,

---------( ----------

-------------------

---------$ ========== $

The accompanying notes are an integral part of the consolidated financial statements. (5)

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BUSINESS AND ORGANIZATION MBIA Insurance Corporation (MBIA Corp.), formerly known as Municipal Bond Investors Assurance Corporation, is a wholly owned subsidiary of MBIA Inc. MBIA Inc. was incorporated in Connecticut on November 12, 1986 as a licensed insurer and, through a series of transactions during December 1986, became the successor to the business of the Municipal Bond Insurance Association (the Association), a voluntary unincorporated association of insurers writing municipal bond and note insurance as agent for the member

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BUSINESS AND ORGANIZATION MBIA Insurance Corporation (MBIA Corp.), formerly known as Municipal Bond Investors Assurance Corporation, is a wholly owned subsidiary of MBIA Inc. MBIA Inc. was incorporated in Connecticut on November 12, 1986 as a licensed insurer and, through a series of transactions during December 1986, became the successor to the business of the Municipal Bond Insurance Association (the Association), a voluntary unincorporated association of insurers writing municipal bond and note insurance as agent for the member insurance companies. Effective December 31, 1989, MBIA Inc. acquired for $288 million all of the outstanding stock of Bond Investors Group, Inc. (BIG), the parent company of Bond Investors Guaranty Insurance Company (BIG Ins.), which was subsequently renamed MBIA Insurance Corp. of Illinois (MBIA Illinois). In January 1990, MBIA Illinois ceded its portfolio of net insured obligations to MBIA Corp. in exchange for cash and investments equal to its unearned premium reserve of $153 million. Subsequent to this cession, MBIA Inc. contributed the common stock of BIG to MBIA Corp. resulting in additional paid-in capital of $200 million. The insured portfolio acquired from BIG Ins. consists of municipal obligations with risk characteristics similar to those insured by MBIA Corp. On December 31, 1990, BIG was merged into MBIA Illinois. Also in 1990, MBIA Inc. formed MBIA Assurance S.A. (MBIA Assurance), a wholly owned French subsidiary, to write financial guarantee insurance in the international community. MBIA Assurance provides insurance for public infrastructure financings, structured finance transactions and certain obligations of financial institutions. The stock of MBIA Assurance was contributed to MBIA Corp. in 1991 resulting in additional paidin capital of $6 million. Pursuant to a reinsurance agreement with MBIA Corp., a substantial amount of the risks insured by MBIA Assurance is reinsured by MBIA Corp. In 1993, MBIA Inc. formed a wholly owned subsidiary, MBIA Investment Management Corp. (IMC). IMC provides guaranteed investment agreements to states, municipalities and municipal authorities that are guaranteed as to principal and interest. MBIA Corp. insures IMC's outstanding investment agreement liabilities. In 1994, MBIA Inc. formed a wholly owned subsidiary, MBIA Securities Corp., which was subsequently renamed MBIA Capital Management Corp. (CMC). CMC provides fixed-income investment management services for MBIA Inc., its municipal cash management service businesses and public pension funds. In 1995, portfolio management for a portion of MBIA Corp.'s insurance related investment portfolio was transferred to CMC; the management of the balance of this portfolio was transferred in January 1996. (6)

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) On February 17, 1998 MBIA Inc. and CapMAC Holdings Inc. (CapMAC) consummated a merger. Under the terms of the merger, CapMAC shareholders received 0.4675 of a share of MBIA Inc. common stock for each CapMAC share, for a total of 8,102,255 newly issued shares of MBIA Inc. common stock, the value of which was $536 million. On April 1, 1998, the company assumed the net insured obligations of Capital Markets Assurance Corporation (CMAC) in exchange for investments equal to $176.1 million. The cession of the deferred premium revenue (net of prepaid reinsurance premiums) in the amount of $68.2 million has been reflected as a component of gross premium written in the second quarter of 1998. Subsequent to the cession MBIA Inc. contributed the common stock of CMAC to the company resulting in additional paid-in capital of $324.9 million. 2. SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements have been prepared on the basis of generally accepted accounting principles (GAAP). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) On February 17, 1998 MBIA Inc. and CapMAC Holdings Inc. (CapMAC) consummated a merger. Under the terms of the merger, CapMAC shareholders received 0.4675 of a share of MBIA Inc. common stock for each CapMAC share, for a total of 8,102,255 newly issued shares of MBIA Inc. common stock, the value of which was $536 million. On April 1, 1998, the company assumed the net insured obligations of Capital Markets Assurance Corporation (CMAC) in exchange for investments equal to $176.1 million. The cession of the deferred premium revenue (net of prepaid reinsurance premiums) in the amount of $68.2 million has been reflected as a component of gross premium written in the second quarter of 1998. Subsequent to the cession MBIA Inc. contributed the common stock of CMAC to the company resulting in additional paid-in capital of $324.9 million. 2. SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements have been prepared on the basis of generally accepted accounting principles (GAAP). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant accounting policies are as follows: CONSOLIDATION The consolidated financial statements include the accounts of MBIA Corp. and its wholly owned subsidiaries. All significant intercompany balances have been eliminated. Certain amounts have been reclassified in prior years' financial statements to conform to the current presentation. INVESTMENTS MBIA Corp.'s entire investment portfolio is considered available-for-sale and is reported in the financial statements at fair value, with unrealized gains and losses, net of deferred taxes, reflected as a separate component of shareholder's equity. Bond discounts and premiums are amortized using the effective-yield method over the remaining term of the securities. For pre-refunded bonds the remaining term is determined based on the contractual refunding date. Short-term investments are carried at amortized cost, which approximates fair value, and include all fixedmaturity securities with a remaining term to maturity of less than one year. Investment income is recorded as earned. Realized gains or losses on the sale of investments are determined by specific identification and are included as a separate component of revenues. (7)

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Other investments include MBIA Corp.'s interest in a limited partnership and a mutual fund which invests principally in marketable equity securities. MBIA Corp. records dividends from these investments as a component of investment income. In addition, MBIA Corp. records its share of the unrealized gains and losses on these investments, net of applicable deferred income taxes, as a separate component of shareholder's equity. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash on hand and demand deposits with banks. SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE Securities purchased under agreements to resell and securities sold under agreements to repurchase are accounted for as collateralized transactions and are recorded at principal or contract value. It is MBIA Corp.'s policy to take possession of securities purchased under agreements to resell.

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Other investments include MBIA Corp.'s interest in a limited partnership and a mutual fund which invests principally in marketable equity securities. MBIA Corp. records dividends from these investments as a component of investment income. In addition, MBIA Corp. records its share of the unrealized gains and losses on these investments, net of applicable deferred income taxes, as a separate component of shareholder's equity. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash on hand and demand deposits with banks. SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE Securities purchased under agreements to resell and securities sold under agreements to repurchase are accounted for as collateralized transactions and are recorded at principal or contract value. It is MBIA Corp.'s policy to take possession of securities purchased under agreements to resell. MBIA Corp. minimizes the credit risk that counterparties to transactions might be unable to fulfill their contractual obligations by monitoring customer credit exposure and collateral value and requiring additional collateral to be deposited with MBIA Corp. when deemed necessary. POLICY ACQUISITION COSTS Policy acquisition costs include only those expenses that relate primarily to, and vary with, premium production. For business produced directly by MBIA Corp., such costs include compensation of employees involved in underwriting and policy issuance functions, certain rating agency fees, state premium taxes and certain other underwriting expenses, reduced by ceding commission income on premiums ceded to reinsurers. Policy acquisition costs are deferred and amortized over the period in which the related premiums are earned. PREMIUM REVENUE RECOGNITION Upfront premiums are earned pro rata over the period of risk. Premiums are allocated to each bond maturity based on par amount and are earned on a straight-line basis over the term of each maturity. Installment premiums are earned over each installment period - generally one year or less. When an insured issue is retired early, is called by the issuer, or is in substance paid in advance through a refunding or defeasance accomplished by placing U.S. Government securities in escrow, the remaining deferred premium revenue, net of the portion which is credited to a new policy in those cases where MBIA Corp. insures the refunding issue, is earned at that time, since there is no longer risk to MBIA Corp. Accordingly, deferred premium revenue represents the portion of premiums written that is applicable to the unexpired risk of insured bonds and notes. (8)

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ADVISORY FEE REVENUE RECOGNITION MBIA Corp. collects certain advisory fees for services rendered in connection with advising clients as to the most appropriate structure to use for a given structured finance transaction that the company will insure. Advisory fees are deferred and earned consistent with the premium revenues generated on the transactions. GOODWILL Goodwill represents the excess of the cost of acquisitions over the tangible net assets acquired. Goodwill attributed to the acquisition of MBIA Corp. is amortized by the straight-line method over 25 years. Goodwill attributed to the acquisition of MBIA Illinois is amortized according to the recognition of future profits from its deferred premium revenue and installment premiums, except for a minor portion attributed to state licenses, which is amortized by the straight-line method over 25 years. PROPERTY AND EQUIPMENT Property and equipment consists of MBIA Corp.'s headquarters, furniture, fixtures and equipment, which are

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ADVISORY FEE REVENUE RECOGNITION MBIA Corp. collects certain advisory fees for services rendered in connection with advising clients as to the most appropriate structure to use for a given structured finance transaction that the company will insure. Advisory fees are deferred and earned consistent with the premium revenues generated on the transactions. GOODWILL Goodwill represents the excess of the cost of acquisitions over the tangible net assets acquired. Goodwill attributed to the acquisition of MBIA Corp. is amortized by the straight-line method over 25 years. Goodwill attributed to the acquisition of MBIA Illinois is amortized according to the recognition of future profits from its deferred premium revenue and installment premiums, except for a minor portion attributed to state licenses, which is amortized by the straight-line method over 25 years. PROPERTY AND EQUIPMENT Property and equipment consists of MBIA Corp.'s headquarters, furniture, fixtures and equipment, which are recorded at cost and are depreciated on the straight-line method over their estimated service lives ranging from 3 to 31 years. Maintenance and repairs are charged to expenses as incurred. LOSSES AND LOSS ADJUSTMENT EXPENSES Loss and loss adjustment expense (LAE) reserves are established in an amount equal to MBIA Corp.'s estimate of identified or case basis reserves and unallocated losses, including costs of settlement, on the obligations it has insured. Case basis reserves are established when specific insured issues are identified as currently or likely to be in default. Such a reserve is based on the present value of the expected loss and LAE payments, net of recoveries, under salvage and subrogation rights. The total reserve is calculated by applying a loss factor, determined based on an independent rating agency study of bond defaults, to net debt service written. When a case basis reserve is recorded, a corresponding reduction is made to the unallocated reserve. Management of MBIA Corp. periodically evaluates its estimates for losses and LAE and any resulting adjustments are reflected in current earnings. Management believes that the reserves are adequate to cover the ultimate net cost of claims, but the reserves are necessarily based on estimates, and there can be no assurance that the ultimate liability will not exceed such estimates. (9)

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) INCOME TAXES MBIA Corp. is included in the consolidated tax return of MBIA Inc. The tax provision for MBIA Corp. for financial reporting purposes is determined on a stand alone basis. Any benefit derived by MBIA Corp. as a result of the tax sharing agreement with MBIA Inc. and its subsidiaries is reflected directly in shareholder's equity for financial reporting purposes. Deferred income taxes are provided with respect to the temporary differences between the tax bases of assets and liabilities and the reported amounts in the financial statements that will result in deductible or taxable amounts in future years when the reported amount of the asset or liability is recovered or settled. Such temporary differences relate principally to premium revenue recognition, deferred acquisition costs and the contingency reserve. The Internal Revenue Code permits companies writing financial guarantee insurance to deduct from taxable income amounts added to the statutory contingency reserve, subject to certain limitations. The tax benefits obtained from such deductions must be invested in non-interest bearing U.S. Government tax and loss bonds. MBIA Corp. records purchases of tax and loss bonds as payments of federal income taxes. The amounts

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) INCOME TAXES MBIA Corp. is included in the consolidated tax return of MBIA Inc. The tax provision for MBIA Corp. for financial reporting purposes is determined on a stand alone basis. Any benefit derived by MBIA Corp. as a result of the tax sharing agreement with MBIA Inc. and its subsidiaries is reflected directly in shareholder's equity for financial reporting purposes. Deferred income taxes are provided with respect to the temporary differences between the tax bases of assets and liabilities and the reported amounts in the financial statements that will result in deductible or taxable amounts in future years when the reported amount of the asset or liability is recovered or settled. Such temporary differences relate principally to premium revenue recognition, deferred acquisition costs and the contingency reserve. The Internal Revenue Code permits companies writing financial guarantee insurance to deduct from taxable income amounts added to the statutory contingency reserve, subject to certain limitations. The tax benefits obtained from such deductions must be invested in non-interest bearing U.S. Government tax and loss bonds. MBIA Corp. records purchases of tax and loss bonds as payments of federal income taxes. The amounts deducted must be restored to taxable income when the contingency reserve is released, at which time MBIA Corp. may present the tax and loss bonds for redemption to satisfy the additional tax liability. FOREIGN CURRENCY TRANSLATION Assets and liabilities denominated in foreign currencies are translated at year-end exchange rates. Operating results are translated at average rates of exchange prevailing during the year. Unrealized gains or losses resulting from translation are included as a separate component of shareholder's equity. Gains and losses resulting from transactions in foreign currencies are recorded in current income. 3. RECENT ACCOUNTING PRONOUNCEMENTS In March 1998, the American Institute of Certified Public Accountants' Accounting Standards Executive Committee issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." The statement requires that entities capitalize certain internal-use software costs once certain criteria are met. The statement is effective for fiscal years beginning after December 15, 1998. The company will adopt SOP 98-1 in 1999. Adoption of SOP 98-1 is not expected to have a material impact on the consolidated financial statements. (10)

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 4. STATUTORY ACCOUNTING PRACTICES The financial statements have been prepared on the basis of GAAP, which differs in certain respects from the statutory accounting practices prescribed or permitted by the insurance regulatory authorities. Statutory accounting practices differ from GAAP in the following respects: o upfront premiums are earned only when the related risk has expired rather than over the period of the risk; o acquisition costs are charged to operations as incurred rather than deferred and amortized as the related premiums are earned; o a contingency reserve is computed on the basis of statutory requirements, and reserves for case basis losses and LAE are established, at present value, for specific insured issues that are identified as currently or likely to be in default. Under GAAP, reserves are established based on MBIA Corp.'s reasonable estimate of the identified and unallocated losses and LAE on the insured obligations it has written; o federal income taxes are only provided on taxable income for which income taxes are currently payable, while

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 4. STATUTORY ACCOUNTING PRACTICES The financial statements have been prepared on the basis of GAAP, which differs in certain respects from the statutory accounting practices prescribed or permitted by the insurance regulatory authorities. Statutory accounting practices differ from GAAP in the following respects: o upfront premiums are earned only when the related risk has expired rather than over the period of the risk; o acquisition costs are charged to operations as incurred rather than deferred and amortized as the related premiums are earned; o a contingency reserve is computed on the basis of statutory requirements, and reserves for case basis losses and LAE are established, at present value, for specific insured issues that are identified as currently or likely to be in default. Under GAAP, reserves are established based on MBIA Corp.'s reasonable estimate of the identified and unallocated losses and LAE on the insured obligations it has written; o federal income taxes are only provided on taxable income for which income taxes are currently payable, while under GAAP, deferred income taxes are provided with respect to temporary differences; o fixed-maturity securities are reported at amortized cost rather than fair value; o tax and loss bonds purchased are reflected as admitted assets as well as payments of income taxes; and o certain assets designated as "non-admitted assets" are charged directly against surplus but are reflected as assets under GAAP. (11)

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The following is a reconciliation of consolidated shareholder's equity presented on a GAAP basis to statutory capital and surplus for MBIA Corp. and its subsidiaries:
As of December 31 -----------------------------------------In thousands 1998 1997 ----------------------------------------------------------------------------GAAP shareholder's equity $4,277,345 $3,363,859 Premium revenue recognition (448,250) (408,654) Deferral of acquisition costs (230,085) (154,100) Unrealized (gains) losses (321,653) (269,702) Contingency reserve (1,450,413) (1,094,117) Loss and loss adjustment expense reserves 81,489 53,938 Deferred income taxes 303,407 251,134 Tax and loss bonds 162,523 129,508 Goodwill (90,950) (95,829) Other 6,556 (15,839) ----------------------------------------------------------------------------Statutory capital and surplus $2,289,969 $1,760,198 -----------------------------------------------------------------------------

Aggregate net income of MBIA Corp. and its subsidiaries determined in accordance with statutory accounting practices for the years ended December 31, 1998, 1997 and 1996 was $498.2 million, $377.1 million and $316.6 million, respectively.

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The following is a reconciliation of consolidated shareholder's equity presented on a GAAP basis to statutory capital and surplus for MBIA Corp. and its subsidiaries:
As of December 31 -----------------------------------------In thousands 1998 1997 ----------------------------------------------------------------------------GAAP shareholder's equity $4,277,345 $3,363,859 Premium revenue recognition (448,250) (408,654) Deferral of acquisition costs (230,085) (154,100) Unrealized (gains) losses (321,653) (269,702) Contingency reserve (1,450,413) (1,094,117) Loss and loss adjustment expense reserves 81,489 53,938 Deferred income taxes 303,407 251,134 Tax and loss bonds 162,523 129,508 Goodwill (90,950) (95,829) Other 6,556 (15,839) ----------------------------------------------------------------------------Statutory capital and surplus $2,289,969 $1,760,198 -----------------------------------------------------------------------------

Aggregate net income of MBIA Corp. and its subsidiaries determined in accordance with statutory accounting practices for the years ended December 31, 1998, 1997 and 1996 was $498.2 million, $377.1 million and $316.6 million, respectively. 5. PREMIUMS EARNED FROM REFUNDED AND CALLED BONDS Premiums earned include $68.4 million, $50.9 million and $44.4 million for 1998, 1997 and 1996, respectively, related to refunded and called bonds. 6. INVESTMENTS MBIA Corp.'s investment objective is to optimize long-term, after-tax returns while emphasizing the preservation of capital through maintenance of high-quality investments with adequate liquidity. MBIA Corp.'s investment policies limit the amount of credit exposure to any one issuer. The fixed-maturity portfolio is comprised of highquality (average rating Double-A) taxable and tax-exempt investments of diversified maturities. The following tables set forth the amortized cost and fair value of the fixed-maturities and short-term investments included in the consolidated investment portfolio of MBIA Corp. as of December 31, 1998 and 1997: (12)

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Gross Gross Amortized Unrealized Unrealized In thousands Cost Gains Losses V --------------------------------------------------------------------------------------------------------December 31, 1998 Taxable bonds United States Treasury and Government Agency $ 38,984 $ 770 $ (174) $ 39 Corporate and other obligations 1,543,654 60,867 (1,950) 1,602 Mortgage-backed 632,232 20,614 (690) 652 Tax-exempt bonds State and municipal obligations 3,773,378 241,200 (1,644) 4,012 --------------------------------------------------------------------------------------------------------Total $5,988,248 $323,451 $(4,458) $6,307

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Gross Gross Amortized Unrealized Unrealized In thousands Cost Gains Losses V --------------------------------------------------------------------------------------------------------December 31, 1998 Taxable bonds United States Treasury and Government Agency $ 38,984 $ 770 $ (174) $ 39 Corporate and other obligations 1,543,654 60,867 (1,950) 1,602 Mortgage-backed 632,232 20,614 (690) 652 Tax-exempt bonds State and municipal obligations 3,773,378 241,200 (1,644) 4,012 --------------------------------------------------------------------------------------------------------Total $5,988,248 $323,451 $(4,458) $6,307 ---------------------------------------------------------------------------------------------------------

Gross Gross Amortized Unrealized Unrealized In thousands Cost Gains Losses V --------------------------------------------------------------------------------------------------------December 31, 1997 Taxable bonds United States Treasury and Government Agency $ 6,451 $ 191 $ --$ 6 Corporate and other obligations 1,193,321 36,106 (472) 1,228 Mortgage-backed 541,898 18,659 (732) 559 Tax-exempt bonds State and municipal obligations 3,101,588 213,551 (577) 3,314 --------------------------------------------------------------------------------------------------------Total $ 4,843,258 $268,507 $(1,781) $5,109 ---------------------------------------------------------------------------------------------------------

(13)

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Fixed-maturity investments carried at fair value of $12.0 million and $7.7 million as of December 31, 1998 and 1997, respectively, were on deposit with various regulatory authorities to comply with insurance laws. The following table sets forth the distribution by expected maturity of the fixed-maturities and short-term investments at amortized cost and fair value at December 31, 1998. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations.
Amortized Fair In thousands Cost Value --------------------------------------------------------------------------Maturity Within 1 year $ 423,188 $ 423,188 Beyond 1 year but within 5 years 751,065 790,907 Beyond 5 years but within 10 years 1,392,855 1,488,916 Beyond 10 years but within 15 years 906,424 987,981 Beyond 15 years but within 20 years 921,647 978,708 Beyond 20 years 960,837 985,385 --------------------------------------------------------------------------Mortgage-backed 632,232 652,156 --------------------------------------------------------------------------Total fixed-maturities and short-term investments $5,988,248 $6,307,241

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Fixed-maturity investments carried at fair value of $12.0 million and $7.7 million as of December 31, 1998 and 1997, respectively, were on deposit with various regulatory authorities to comply with insurance laws. The following table sets forth the distribution by expected maturity of the fixed-maturities and short-term investments at amortized cost and fair value at December 31, 1998. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations.
Amortized Fair In thousands Cost Value --------------------------------------------------------------------------Maturity Within 1 year $ 423,188 $ 423,188 Beyond 1 year but within 5 years 751,065 790,907 Beyond 5 years but within 10 years 1,392,855 1,488,916 Beyond 10 years but within 15 years 906,424 987,981 Beyond 15 years but within 20 years 921,647 978,708 Beyond 20 years 960,837 985,385 --------------------------------------------------------------------------Mortgage-backed 632,232 652,156 --------------------------------------------------------------------------Total fixed-maturities and short-term investments $5,988,248 $6,307,241 ---------------------------------------------------------------------------

(14)

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 7. INVESTMENT INCOME AND GAINS AND LOSSES Investment income consists of:
Years ended December 31 -------------------------------------In thousands 1998 1997 1996 --------------------------------------------------------------------Fixed-maturities $326,820 $279,900 $245,109 Short-term investments 5,311 5,676 4,961 Other investments 16 (4) 61 --------------------------------------------------------------------Gross investment income 332,147 285,572 250,131 Investment expenses 5,756 3,112 2,845 --------------------------------------------------------------------Net investment income 326,391 282,460 247,286 Net realized gains (losses): Fixed-maturities: Gains 32,211 22,791 16,760 Losses (3,149) (5,877) (5,353) --------------------------------------------------------------------Net 29,062 16,914 11,407 --------------------------------------------------------------------Other investments: Gains 829 564 333 Losses --------------------------------------------------------------------------Net 829 564 333 --------------------------------------------------------------------Total net realized gains 29,891 17,478 11,740 ---------------------------------------------------------------------

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 7. INVESTMENT INCOME AND GAINS AND LOSSES Investment income consists of:
Years ended December 31 -------------------------------------In thousands 1998 1997 1996 --------------------------------------------------------------------Fixed-maturities $326,820 $279,900 $245,109 Short-term investments 5,311 5,676 4,961 Other investments 16 (4) 61 --------------------------------------------------------------------Gross investment income 332,147 285,572 250,131 Investment expenses 5,756 3,112 2,845 --------------------------------------------------------------------Net investment income 326,391 282,460 247,286 Net realized gains (losses): Fixed-maturities: Gains 32,211 22,791 16,760 Losses (3,149) (5,877) (5,353) --------------------------------------------------------------------Net 29,062 16,914 11,407 --------------------------------------------------------------------Other investments: Gains 829 564 333 Losses --------------------------------------------------------------------------Net 829 564 333 --------------------------------------------------------------------Total net realized gains 29,891 17,478 11,740 --------------------------------------------------------------------Total investment income $356,282 $299,938 $259,026 ---------------------------------------------------------------------

Net unrealized gains consist of:
As of December 31 ------------------------------In thousands 1998 1997 -----------------------------------------------------------Fixed-maturities: Gains $323,451 $268,507 Losses (4,458) (1,781) -----------------------------------------------------------Net 318,993 266,726 -----------------------------------------------------------Other investments: Gains 2,660 3,033 Losses --(57) -----------------------------------------------------------Net 2,660 2,976 -----------------------------------------------------------Total 321,653 269,702 Deferred income taxes 112,283 94,416 -----------------------------------------------------------Unrealized gains, net $209,370 $175,286 ------------------------------------------------------------

(15)

MBIA INSURANCE CORPORATION AND SUBSIDIARIES

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The change in net unrealized gains (losses) consists of:
Years ended December 31 ------------------------------------------------In thousands 1998 1997 1996 -----------------------------------------------------------------------------------Fixed-maturities $52,267 $118,588 $(75,497) Other investments (316) 2,071 1,439 -----------------------------------------------------------------------------------Total 51,951 120,659 (74,058) Deferred income taxes 17,867 42,241 (26,197) -----------------------------------------------------------------------------------Unrealized gains (losses), net $34,084 $78,418 $(47,861) ------------------------------------------------------------------------------------

8. Income Taxes The provision for income taxes is composed of:
Years ended December 31 ----------------------------------------------------In thousands 1998 1997 1996 --------------------------------------------------------------------------Current $112,737 $ 99,522 $ 81,580 Deferred 21,856 13,382 8,982 --------------------------------------------------------------------------Total $134,593 $112,904 $ 90,562 ---------------------------------------------------------------------------

The provision for income taxes gives effect to permanent differences between financial and taxable income. Accordingly, MBIA Corp.'s effective income tax rate differs from the statutory rate on ordinary income. The reasons for MBIA Corp.'s lower effective tax rates are as follows:
Years ended December 31 ---------------------------1998 1997 1996 ----------------------------------------------------------------------Income taxes computed on pre-tax financial income at statutory rates 35.0% 35.0% 35.0% Increase (reduction) in taxes resulting from: Tax-exempt interest (9.1) (10.6) (12.0) Amortization of goodwill 0.3 0.3 0.4 Other (5.8) (2.3) (2.3) ----------------------------------------------------------------------Provision for income taxes 20.4% 22.4% 21.1% -----------------------------------------------------------------------

(16)

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) MBIA Corp. recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect on tax assets and liabilities

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) MBIA Corp. recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect on tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The tax effects of temporary differences that give rise to deferred tax assets and liabilities at December 31, 1998 and 1997 are presented below:
In thousands 1998 1997 ----------------------------------------------------------------------------------Deferred tax assets Tax and loss bonds $160,064 $130,080 Alternative minimum tax credit carryforward 54,722 62,279 Loss and loss adjustment expense reserves 26,458 18,878 Other 46,516 7,444 ----------------------------------------------------------------------------------Total gross deferred tax assets 287,760 218,681 ----------------------------------------------------------------------------------Deferred tax liabilities Contingency reserve 280,203 234,904 Deferred premium revenue 106,555 77,150 Deferred acquisition costs 77,753 53,935 Unrealized gains 112,283 94,416 Contingent commissions 408 408 Other 13,965 9,002 ----------------------------------------------------------------------------------Total gross deferred tax liabilities 591,167 469,815 ----------------------------------------------------------------------------------Net deferred tax liability $303,407 $251,134 -----------------------------------------------------------------------------------

MBIA Corp. believes that no valuation allowance is necessary in connection with the deferred tax assets. 9. DIVIDENDS AND CAPITAL REQUIREMENTS Under New York state insurance law, MBIA Corp. may pay dividends only from earned surplus subject to the maintenance of a minimum capital requirement. The dividends in any 12-month period may not exceed the lesser of 10% of its policyholders' surplus as shown on its last filed statutory-basis financial statements, or of adjusted net investment income, as defined, for such 12-month period, without prior approval of the superintendent of the New York State Insurance Department. (17)

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) In accordance with such restrictions on the amount of dividends which can be paid in any 12-month period, MBIA Corp. had $228 million available for the payment of dividends as of December 31, 1998. In 1998 and 1997 no dividends were paid by MBIA Corp. due to cash available from financing activities. In 1996, MBIA Corp. declared and paid $29 million to MBIA Inc. Under Illinois Insurance Law, MBIA Illinois may pay a dividend from unassigned surplus, and the dividends in any 12-month period may not exceed the greater of 10% of policyholders' surplus (total capital and surplus) at the end of the preceding calendar year, or the net income of the preceding calendar year without prior approval of the Illinois State Insurance Department.

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) In accordance with such restrictions on the amount of dividends which can be paid in any 12-month period, MBIA Corp. had $228 million available for the payment of dividends as of December 31, 1998. In 1998 and 1997 no dividends were paid by MBIA Corp. due to cash available from financing activities. In 1996, MBIA Corp. declared and paid $29 million to MBIA Inc. Under Illinois Insurance Law, MBIA Illinois may pay a dividend from unassigned surplus, and the dividends in any 12-month period may not exceed the greater of 10% of policyholders' surplus (total capital and surplus) at the end of the preceding calendar year, or the net income of the preceding calendar year without prior approval of the Illinois State Insurance Department. In accordance with such restrictions on the amount of dividends which can be paid in any 12-month period, MBIA Illinois had $14.9 million available for the payment of dividends as of December 31, 1998. The insurance departments of New York state and certain other statutory insurance regulatory authorities and the agencies that rate the bonds insured by MBIA Corp. and its subsidiaries have various requirements relating to the maintenance of certain minimum ratios of statutory capital and reserves to net insurance in force. MBIA Corp. and its subsidiaries were in compliance with these requirements as of December 31, 1998. 10. LINES OF CREDIT MBIA Corp. has a standby line of credit commitment in the amount of $825 million with a group of major TripleA rated banks to provide loans to MBIA Corp. if it incurs cumulative losses (net of any recoveries) from October 7, 1998 in excess of the greater of $825 million or 4.00% of average annual debt service. The obligation to repay loans made under this agreement is a limited recourse obligation payable solely from, and collateralized by, a pledge of recoveries realized on defaulted insured obligations including certain installment premiums (18)

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) and other collateral. This commitment has a seven-year term expiring on October 31, 2005, and contains an annual renewal provision subject to approval by the bank group. CMAC maintains stop-loss reinsurance coverage of $75 million in excess of incurred losses of $150 million. MBIA Corp. and MBIA Inc. maintain bank liquidity facilities totaling $650 million. During 1998, these facilities replaced existing facilities aggregating $450 million. At December 31, 1997, $20 million was outstanding under these facilities. 11. NET INSURANCE IN FORCE MBIA Corp. guarantees the timely payment of principal and interest on municipal, asset-/mortgage-backed and other non-municipal securities. MBIA Corp.'s ultimate exposure to credit loss in the event of nonperformance by the insured is represented by the insurance in force as set forth below. As of December 31, 1998, insurance in force, net of cessions to reinsurers, had a range of maturity of 1-41 years. The distribution of net insurance in force by geographic location and type of bond, including $3.5 billion and $3.2 billion relating to IMC's municipal investment agreements guaranteed by MBIA Corp. in 1998 and 1997, respectively, is set forth in the following table:
As of December 31 --------------------------------------------------------------------------------------------------------$ in billions 1998 --------------------------------------------------------------------------------------------------------Net Number % of Net Net Num Geographic Insurance of Issues Insurance Insurance of Iss Location In Force Outstanding In Force In Force Outstand ---------------------------------------------------------------------------------------------------------

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) and other collateral. This commitment has a seven-year term expiring on October 31, 2005, and contains an annual renewal provision subject to approval by the bank group. CMAC maintains stop-loss reinsurance coverage of $75 million in excess of incurred losses of $150 million. MBIA Corp. and MBIA Inc. maintain bank liquidity facilities totaling $650 million. During 1998, these facilities replaced existing facilities aggregating $450 million. At December 31, 1997, $20 million was outstanding under these facilities. 11. NET INSURANCE IN FORCE MBIA Corp. guarantees the timely payment of principal and interest on municipal, asset-/mortgage-backed and other non-municipal securities. MBIA Corp.'s ultimate exposure to credit loss in the event of nonperformance by the insured is represented by the insurance in force as set forth below. As of December 31, 1998, insurance in force, net of cessions to reinsurers, had a range of maturity of 1-41 years. The distribution of net insurance in force by geographic location and type of bond, including $3.5 billion and $3.2 billion relating to IMC's municipal investment agreements guaranteed by MBIA Corp. in 1998 and 1997, respectively, is set forth in the following table:
As of December 31 --------------------------------------------------------------------------------------------------------$ in billions 1998 --------------------------------------------------------------------------------------------------------Net Number % of Net Net Num Geographic Insurance of Issues Insurance Insurance of Iss Location In Force Outstanding In Force In Force Outstand --------------------------------------------------------------------------------------------------------Domestic California $ 76.3 3,681 12.7% $ 68.4 3, New York 65.1 5,684 10.9 40.4 5, Florida 36.1 1,589 6.0 33.0 1, New Jersey 26.2 1,884 4.4 24.6 2, Texas 25.3 2,131 4.2 24.5 1, Pennsylvania 24.7 2,278 4.1 22.7 2, Illinois 23.7 1,275 4.0 20.0 1, Massachusetts 18.4 1,107 3.1 15.5 1, Michigan 14.6 1,066 2.4 12.4 1, Ohio 13.8 1,076 2.3 11.1 1, --------------------------------------------------------------------------------------------------------Subtotal 324.2 21,771 54.1 272.6 20, Nationally diversified 81.7 842 13.6 55.8 Other states 169.0 12,004 28.2 147.3 11, --------------------------------------------------------------------------------------------------------Total domestic 574.9 34,617 95.9 475.7 32, International 24.5 323 4.1 10.1 --------------------------------------------------------------------------------------------------------Total $599.4 34,940 100.0% $485.8 32, ---------------------------------------------------------------------------------------------------------

(19)

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The insurance policies issued by MBIA Corp. are unconditional commitments to guarantee timely payment on the bonds and notes to bondholders. The creditworthiness of each insured issue is evaluated prior to the issuance of insurance and each insured issue must comply with MBIA Corp.'s underwriting guidelines. Further, the payments to be made by the issuer on the bonds or notes may be backed by a pledge of revenues, reserve funds, letters of credit, investment contracts or collateral in the form of mortgages or other assets. The right to such money or collateral would typically become MBIA Corp.'s upon the payment of a claim by MBIA Corp.

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The insurance policies issued by MBIA Corp. are unconditional commitments to guarantee timely payment on the bonds and notes to bondholders. The creditworthiness of each insured issue is evaluated prior to the issuance of insurance and each insured issue must comply with MBIA Corp.'s underwriting guidelines. Further, the payments to be made by the issuer on the bonds or notes may be backed by a pledge of revenues, reserve funds, letters of credit, investment contracts or collateral in the form of mortgages or other assets. The right to such money or collateral would typically become MBIA Corp.'s upon the payment of a claim by MBIA Corp. Under certain MBIA Corp.'s structured asset-backed transactions, a pool of assets covering at least 100% of the principal amount guaranteed under its insurance contract is sold or pledged to a special-purpose bankruptcy remote entity. MBIA Corp.'s primary risk from such insurance contracts is the impairment of cash flows due to delinquency or loss on the underlying assets. MBIA Corp. therefore evaluates all the factors affecting past and future asset performance by studying historical data on losses, delinquencies and recoveries of the underlying assets. Each transaction is reviewed to ensure that an appropriate legal structure is used to protect against the bankruptcy risk of the originator of the assets. Along with the legal structure, an additional level of first-loss protection is also created to protect against losses due to credit or dilution. This first level of loss protection is usually available from reserve funds, excess cash flows, overcollateralization or recourse to a third party. The level of first-loss protection depends upon the historical losses and dilution of the underlying assets, but is typically several times the normal historical loss experience for the underlying type of assets. The distribution of net insurance in force by type of bond is set forth in the table below: (20)

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31 --------------------------------------------------------------------------------------------------------$ in billions 1998 --------------------------------------------------------------------------------------------------------Net Number % of Net Net Insurance of Issues Insurance Insurance of Type of Bond In Force Outstanding In Force In Force Outst --------------------------------------------------------------------------------------------------------Domestic Municipal: General obligation $140.7 12,694 23.6% $118.8 Utilities 80.9 4,895 13.5 75.1 Health care 70.9 2,241 11.8 62.2 Transportation 46.2 1,543 7.7 40.5 Special revenue 42.8 1,787 7.1 34.0 Higher education 26.7 1,498 4.5 20.4 Housing 22.3 2,161 3.7 18.9 Industrial development and pollution control revenue 19.4 1,037 3.2 19.6 Other 5.6 75 0.9 11.4 --------------------------------------------------------------------------------------------------------Total municipal 455.5 27,931 76.0 400.9 --------------------------------------------------------------------------------------------------------Structured finance* 97.1 850 16.2 56.1 --------------------------------------------------------------------------------------------------------Other: Investor owned utility 13.0 5,068 2.2 9.4 Financial institution 5.4 381 0.9 5.8 Corporate direct 3.9 387 0.6 3.5 --------------------------------------------------------------------------------------------------------Total other 22.3 5,836 3.7 18.7 --------------------------------------------------------------------------------------------------------Total domestic 574.9 34,617 95.9 475.7 --------------------------------------------------------------------------------------------------------International Infrastructure: Sovereign 1.6 32 0.3 1.3

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31 --------------------------------------------------------------------------------------------------------$ in billions 1998 --------------------------------------------------------------------------------------------------------Net Number % of Net Net Insurance of Issues Insurance Insurance of Type of Bond In Force Outstanding In Force In Force Outst --------------------------------------------------------------------------------------------------------Domestic Municipal: General obligation $140.7 12,694 23.6% $118.8 Utilities 80.9 4,895 13.5 75.1 Health care 70.9 2,241 11.8 62.2 Transportation 46.2 1,543 7.7 40.5 Special revenue 42.8 1,787 7.1 34.0 Higher education 26.7 1,498 4.5 20.4 Housing 22.3 2,161 3.7 18.9 Industrial development and pollution control revenue 19.4 1,037 3.2 19.6 Other 5.6 75 0.9 11.4 --------------------------------------------------------------------------------------------------------Total municipal 455.5 27,931 76.0 400.9 --------------------------------------------------------------------------------------------------------Structured finance* 97.1 850 16.2 56.1 --------------------------------------------------------------------------------------------------------Other: Investor owned utility 13.0 5,068 2.2 9.4 Financial institution 5.4 381 0.9 5.8 Corporate direct 3.9 387 0.6 3.5 --------------------------------------------------------------------------------------------------------Total other 22.3 5,836 3.7 18.7 --------------------------------------------------------------------------------------------------------Total domestic 574.9 34,617 95.9 475.7 --------------------------------------------------------------------------------------------------------International Infrastructure: Sovereign 1.6 32 0.3 1.3 Transportation 1.4 12 0.2 0.8 Sub-sovereign 1.2 44 0.2 1.4 Higher education 0.9 13 0.1 0.6 Housing 0.6 3 0.1 0.3 Health care 0.4 6 0.1 0.2 Utilities 0.4 4 0.1 0.8 --------------------------------------------------------------------------------------------------------Total infrastructure 6.5 114 1.1 5.4 --------------------------------------------------------------------------------------------------------Structured finance* 14.8 102 2.5 2.6 --------------------------------------------------------------------------------------------------------Other: Investor owned utility 1.8 72 0.3 0.2 Financial institution 1.0 29 0.1 1.9 Corporate direct 0.4 6 0.1 ----------------------------------------------------------------------------------------------------------Total other 3.2 107 0.5 2.1 --------------------------------------------------------------------------------------------------------Total international 24.5 323 4.1 10.1 --------------------------------------------------------------------------------------------------------Total $599.4 34,940 100.0% $485.8 ---------------------------------------------------------------------------------------------------------

* Asset-/mortgage-backed (21)

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 12. REINSURANCE MBIA Corp. reinsures portions of its risks with other insurance companies through various quota and surplus share reinsurance treaties and facultative agreements. In the event that any or all of the reinsurers were unable to meet their obligations, MBIA Corp. would be liable for such defaulted amounts. Amounts deducted from gross insurance in force for reinsurance ceded by MBIA Corp. and its subsidiaries were $108.2 billion and $67.0 billion, at December 31, 1998 and 1997, respectively. The distribution of ceded insurance in force by geographic location and type of bond is set forth in the following tables:
As of December 31 -----------------------------------------------------------------------------------------------------In billions 1998 1997 -----------------------------------------------------------------------------------------------------% of % of Ceded Ceded Ceded Ceded Insurance Insurance Insurance Insurance Geographic Location In Force In Force In Force In Force -----------------------------------------------------------------------------------------------------Domestic California $ 12.4 11.5% $10.4 15.5% New York 10.7 9.9 5.8 8.7 New Jersey 5.4 5.0 3.7 5.5 Texas 5.3 4.9 4.0 6.0 Pennsylvania 3.8 3.5 2.9 4.3 Massachusetts 3.7 3.4 3.0 4.5 Illinois 3.4 3.1 2.7 4.0 Florida 3.2 3.0 2.6 3.9 Puerto Rico 3.1 2.9 2.3 3.4 Colorado 2.3 2.1 2.4 3.6 ----------------------------------------------------------------------------------------------------Subtotal 53.3 49.3 39.8 59.4 Nationally diversified 14.6 13.5 3.4 5.0 Other states 23.6 21.8 19.1 28.6 ----------------------------------------------------------------------------------------------------Total domestic 91.5 84.6 62.3 93.0 International 16.7 15.4 4.7 7.0 ----------------------------------------------------------------------------------------------------Total $108.2 100.0% $67.0 100.0% -----------------------------------------------------------------------------------------------------

(22)

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31 -------------------------------------------------------------------------------In billions 1998 1997 -------------------------------------------------------------------------------% of % of Ceded Ceded Ceded Ceded Insurance Insurance Insurance nsurance Type of Bond In Force In Force In Force In Force -------------------------------------------------------------------------------Domestic Municipal: Utilities $15.5 14.3% $11.5 17.2% General obligation 15.4 14.2 12.1 18.1 Health care 13.4 12.4 8.0 12.0 Transportation 10.6 9.8 9.6 14.3 Special revenue 5.8 5.3 5.0 7.5 Industrial development and

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31 -------------------------------------------------------------------------------In billions 1998 1997 -------------------------------------------------------------------------------% of % of Ceded Ceded Ceded Ceded Insurance Insurance Insurance nsurance Type of Bond In Force In Force In Force In Force -------------------------------------------------------------------------------Domestic Municipal: Utilities $15.5 14.3% $11.5 17.2% General obligation 15.4 14.2 12.1 18.1 Health care 13.4 12.4 8.0 12.0 Transportation 10.6 9.8 9.6 14.3 Special revenue 5.8 5.3 5.0 7.5 Industrial development and pollution control revenue 3.8 3.5 3.2 4.7 Housing 2.3 2.1 1.7 2.5 Higher education 1.7 1.6 1.3 1.9 Other 1.2 1.1 2.7 4.0 -------------------------------------------------------------------------------Total municipal 69.7 64.3 55.1 82.2 -------------------------------------------------------------------------------Structured finance* 19.5 18.0 5.6 8.3 -------------------------------------------------------------------------------Other: Investor-owned utility 1.3 1.2 0.1 0.3 Financial institution 0.9 0.8 1.3 1.9 Corporate direct 0.1 0.1 0.2 0.3 -------------------------------------------------------------------------------Total other 2.3 2.1 1.6 2.5 -------------------------------------------------------------------------------Total domestic 91.5 84.4 62.3 93.0 -------------------------------------------------------------------------------International Infrastructure: Transportation 1.3 1.2 0.4 0.6 Higher education 1.0 0.9 0.6 0.9 Sovereign 0.8 0.7 0.7 1.1 Sub-sovereign 0.4 0.4 0.6 0.9 Utilities 0.4 0.4 0.1 0.1 Health care 0.2 0.2 0.2 0.3 Housing 0.1 0.1 -----------------------------------------------------------------------------------Total infrastructure 4.2 3.9 2.6 3.9 -------------------------------------------------------------------------------Structured finance* 11.1 10.3 1.3 1.9 -------------------------------------------------------------------------------Other: Financial institution 0.5 0.5 0.8 1.2 Corporate direct 0.5 0.5 ----Investor-owned utilities 0.4 0.4 -----------------------------------------------------------------------------------Total other 1.4 1.4 0.8 1.2 -------------------------------------------------------------------------------Total international 16.7 15.6 4.7 7.0 -------------------------------------------------------------------------------Total $108.2 100.0% $67.0 100.0% --------------------------------------------------------------------------------

* Asset-/mortgage-backed (23)

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) As part of the MBIA Corp's portfolio shaping activity in 1998, the company has entered into facultative share reinsurance agreements with highly rated reinsurers that obligate the company to cede future premiums to the reinsurers through January 1, 2005. Certain reinsurance contracts in 1998 were accounted for on a retroactive basis in accordance with SFAS 113. Ceding commissions received from reinsurers before deferrals were $37.2 million, $20.8 million and $13.7 million in 1998, 1997 and 1996, respectively. In 1998, $170.0 million was received in reinsurance recoveries related to the bankruptcy of a Pennsylvania hospital group. 13. EMPLOYEE BENEFITS MBIA Corp. participates in MBIA Inc.'s pension plan covering substantially all employees. The pension plan is a defined contribution plan and MBIA Corp. contributes 10% of each eligible employee's annual total compensation. Pension expense for the years ended December 31, 1998, 1997 and 1996 was $5.9 million, $3.9 million and $3.4 million, respectively. MBIA Corp. also has a profit sharing/401(k) plan which allows eligible employees to contribute up to 10% of eligible compensation. MBIA Corp. matches employee contributions up to the first 5% of total compensation. MBIA Corp. contributions to the profit sharing plan aggregated $2.6 million, $1.6 million and $1.5 million for the years ended December 31, 1998, 1997 and 1996, respectively. The 401(k) plan amounts are invested in common stock of MBIA Inc. Amounts relating to the above plans that exceed limitations established by Federal regulations are contributed to a non-qualified deferred compensation plan. In 1998, former CMAC employees were covered under MBIA Inc.'s pension and profit sharing plans. Of the above amounts for the pension and profit sharing plans, $5.3 million, $3.4 million and $3.0 million for the years ended December 31, 1998, 1997 and 1996, respectively, were included in policy acquisition costs. MBIA Corp. also participates in the "MBIA Long-Term Incentive Program". The incentive program includes a stock option program and adds a compensation component linked to the growth in adjusted book value per share (ABV) of MBIA Inc.'s stock. Awards under the long-term program are divided equally between the two components, with 50% of the award given in stock options and 50% of the award (multiplied by a 1.5 conversion factor for the December 1995 award only) paid in cash or shares of MBIA Inc.'s stock. Target levels for the option/incentive award are established as a percentage of total salary and (24)

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) bonus, based upon the recipient's position. The awards under the long-term program typically will be granted from the vice president level up to and including the chairman and chief executive officer. The ABV portion of the long-term incentive program may be awarded every year. The 1998 award will cover growth in ABV from December 31, 1998 through December 31, 2001; the 1997 award will cover growth in ABV from December 31, 1997 through December 31, 2000; and the 1995 award will cover growth in ABV from December 31, 1995 through December 31, 1998, with a base line growth of 12% on all awards. The amount to be paid in respect of such award will be adjusted upward or downward based on the actual ABV growth with a minimum growth of 8% necessary to receive any payment and an 18% growth needed to receive the maximum payment of 200% of the target levels. The amount, if any, to be paid under this portion of the program will be paid in early 2002 for the 1998 award, in early 2001 for the 1997 award and early 1999 for the 1995 award in the form of cash or shares of MBIA Inc.'s common stock. Subsequent awards, if any, will be made every year with concomitant payments occurring after the three-year cycle. During 1998, 1997 and 1996, $4.8 million, $3.2 million and $2.6 million, respectively, were recorded as a charge related to the 1998, 1997 and 1995 ABV awards. Of these amounts, $3.0 million, $2.0 million and $1.6 million were included in policy acquisition costs for the same respective periods. MBIA Corp. also participates in MBIA Inc.'s restricted stock program, adopted in December 1995, whereby key executive officers of MBIA Corp. are granted restricted shares of MBIA Inc. common stock. These stock

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) bonus, based upon the recipient's position. The awards under the long-term program typically will be granted from the vice president level up to and including the chairman and chief executive officer. The ABV portion of the long-term incentive program may be awarded every year. The 1998 award will cover growth in ABV from December 31, 1998 through December 31, 2001; the 1997 award will cover growth in ABV from December 31, 1997 through December 31, 2000; and the 1995 award will cover growth in ABV from December 31, 1995 through December 31, 1998, with a base line growth of 12% on all awards. The amount to be paid in respect of such award will be adjusted upward or downward based on the actual ABV growth with a minimum growth of 8% necessary to receive any payment and an 18% growth needed to receive the maximum payment of 200% of the target levels. The amount, if any, to be paid under this portion of the program will be paid in early 2002 for the 1998 award, in early 2001 for the 1997 award and early 1999 for the 1995 award in the form of cash or shares of MBIA Inc.'s common stock. Subsequent awards, if any, will be made every year with concomitant payments occurring after the three-year cycle. During 1998, 1997 and 1996, $4.8 million, $3.2 million and $2.6 million, respectively, were recorded as a charge related to the 1998, 1997 and 1995 ABV awards. Of these amounts, $3.0 million, $2.0 million and $1.6 million were included in policy acquisition costs for the same respective periods. MBIA Corp. also participates in MBIA Inc.'s restricted stock program, adopted in December 1995, whereby key executive officers of MBIA Corp. are granted restricted shares of MBIA Inc. common stock. These stock awards may only be sold three or four years from the date of grant, at which time the awards fully vest. Compensation expense related to the restricted stock was $0.9 million, $0.5 million and $0.2 million for the years ended December 31, 1998, 1997 and 1996, respectively, of which $0.5 million, $0.3 million and $0.1 million were included in policy acquisition costs. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) 123, "Accounting for Stock-Based Compensation," effective for financial statements for fiscal years beginning after December 15, 1995. SFAS 123 required MBIA Inc. to adopt, at its election, either 1) the provisions in SFAS 123 which require the recognition of compensation expense for employee stock-based compensation plans, or 2) the provisions in SFAS 123 which require the pro forma disclosure of net income and earnings per share as if the recognition provisions of SFAS 123 had been adopted. MBIA Inc. adopted the disclosure requirements of SFAS 123 effective (25)

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) January 1, 1996 and continues to account for its employee stock-based compensation plans under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". Accordingly, the adoption of SFAS 123 had no impact on MBIA Corp.'s financial position or results of operations. Had compensation cost for the MBIA Inc. stock option program been recognized based on the fair value at the grant date consistent with the recognition provisions of SFAS 123, the impact on MBIA Corp.'s net income would not have been material. 14. RELATED PARTY TRANSACTIONS Since 1989, MBIA Corp. has executed five surety bonds to guarantee the payment obligations of the members of the Association who had their Standard & Poor's Corporation claims-paying rating downgraded from TripleA on their previously issued Association policies. In the event that they do not meet their Association policy payment obligations, MBIA Corp. will pay the required amounts directly to the paying agent. The aggregate outstanding exposure on these surety bonds as of December 31, 1998 is $340 million. Included in other assets at December 31, 1998 is a $45.4 million net receivable from MBIA Inc. and other subsidiaries. As of December 31, 1997, included in other liabilities is a $27.1 million net payable to MBIA Inc. and other subsidiaries.

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) January 1, 1996 and continues to account for its employee stock-based compensation plans under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". Accordingly, the adoption of SFAS 123 had no impact on MBIA Corp.'s financial position or results of operations. Had compensation cost for the MBIA Inc. stock option program been recognized based on the fair value at the grant date consistent with the recognition provisions of SFAS 123, the impact on MBIA Corp.'s net income would not have been material. 14. RELATED PARTY TRANSACTIONS Since 1989, MBIA Corp. has executed five surety bonds to guarantee the payment obligations of the members of the Association who had their Standard & Poor's Corporation claims-paying rating downgraded from TripleA on their previously issued Association policies. In the event that they do not meet their Association policy payment obligations, MBIA Corp. will pay the required amounts directly to the paying agent. The aggregate outstanding exposure on these surety bonds as of December 31, 1998 is $340 million. Included in other assets at December 31, 1998 is a $45.4 million net receivable from MBIA Inc. and other subsidiaries. As of December 31, 1997, included in other liabilities is a $27.1 million net payable to MBIA Inc. and other subsidiaries. MBIA Corp. entered into an agreement with MBIA Inc. and IMC whereby MBIA Corp. held securities subject to agreements to resell of $187.5 million and $182.8 million as of December 31, 1998 and 1997, respectively, and transferred securities subject to agreements to repurchase of $187.5 million and $182.8 million as of December 31, 1998 and 1997. These agreements have a term of less than one year. The interest expense relating to these agreements was $11.1 million and $8.3 million, respectively, for the years ended December 31, 1998 and 1997. The interest income relating to these agreements was $11.6 million and $8.4 million, respectively, for the years ended December 31, 1998 and 1997. (26)

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 15. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair value amounts of financial instruments shown in the following table have been determined by MBIA Corp. using available market information and appropriate valuation methodologies. However, in certain cases considerable judgment is necessarily required to interpret market data to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amount MBIA Corp. could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. FIXED-MATURITY SECURITIES - The fair value of fixed-maturity securities is based upon quoted market price, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. SHORT-TERM INVESTMENTS - Short-term investments are carried at amortized cost which approximates fair value. OTHER INVESTMENTS - Other investments include MBIA Corp.'s interest in a limited partnership and a mutual fund that invests principally in marketable equity securities. The fair value of these investments is based on quoted market prices. CASH AND CASH EQUIVALENTS, RECEIVABLE FOR INVESTMENTS SOLD AND PAYABLE FOR INVESTMENTS PURCHASED - The carrying amounts of these items are a reasonable estimate of their fair value. SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL - The fair value is estimated based upon

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 15. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair value amounts of financial instruments shown in the following table have been determined by MBIA Corp. using available market information and appropriate valuation methodologies. However, in certain cases considerable judgment is necessarily required to interpret market data to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amount MBIA Corp. could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. FIXED-MATURITY SECURITIES - The fair value of fixed-maturity securities is based upon quoted market price, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. SHORT-TERM INVESTMENTS - Short-term investments are carried at amortized cost which approximates fair value. OTHER INVESTMENTS - Other investments include MBIA Corp.'s interest in a limited partnership and a mutual fund that invests principally in marketable equity securities. The fair value of these investments is based on quoted market prices. CASH AND CASH EQUIVALENTS, RECEIVABLE FOR INVESTMENTS SOLD AND PAYABLE FOR INVESTMENTS PURCHASED - The carrying amounts of these items are a reasonable estimate of their fair value. SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL - The fair value is estimated based upon the quoted market prices of the transactions' underlying collateral. PREPAID REINSURANCE PREMIUMS - The fair value of MBIA Corp.'s prepaid reinsurance premiums is based on the estimated cost of entering into an assumption of the entire portfolio with third party reinsurers under current market conditions. DEFERRED PREMIUM REVENUE - The fair value of MBIA Corp.'s deferred premium revenue is based on the estimated cost of entering into a cession of the entire portfolio with third party reinsurers under current market conditions. (27)

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES - The carrying amount is composed of the present value of the expected cash flows for specifically identified claims combined with an estimate for unallocated claims. Therefore, the carrying amount is a reasonable estimate of the fair value of the reserve. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE - The fair value is estimated based upon the quoted market prices of the transactions' underlying collateral. INSTALLMENT PREMIUMS - The fair value is derived by calculating the present value of the estimated future cash flow stream discounted at 9%.
As of December 31, 1998 As of December 31, 1997 --------------------------------------------------------------------------------------------------------Carrying Estimated Carrying Estimat In thousands Amount Fair Value Amount Fair Val --------------------------------------------------------------------------------------------------------ASSETS: Fixed-maturity securities $5,884,053 $5,884,053 $4,867,254 $4,867,25

MBIA INSURANCE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES - The carrying amount is composed of the present value of the expected cash flows for specifically identified claims combined with an estimate for unallocated claims. Therefore, the carrying amount is a reasonable estimate of the fair value of the reserve. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE - The fair value is estimated based upon the quoted market prices of the transactions' underlying collateral. INSTALLMENT PREMIUMS - The fair value is derived by calculating the present value of the estimated future cash flow stream discounted at 9%.
As of December 31, 1998 As of December 31, 1997 --------------------------------------------------------------------------------------------------------Carrying Estimated Carrying Estimat In thousands Amount Fair Value Amount Fair Val --------------------------------------------------------------------------------------------------------ASSETS: Fixed-maturity securities $5,884,053 $5,884,053 $4,867,254 $4,867,25 Short-term investments 423,188 423,188 242,730 242,73 Other investments 17,850 17,850 16,802 16,80 Cash and cash equivalents 6,546 6,546 3,983 3,98 Securities purchased under agreements to resell 187,500 299,412 182,820 203,33 Prepaid reinsurance premiums 352,699 297,238 252,893 218,57 Receivable for investments sold 33,880 33,880 1,616 1,61 LIABILITIES: Deferred premium revenue Loss and loss adjustment expense reserves Securities sold under agreements to repurchase Payable for investments purchased OFF-BALANCE SHEET INSTRUMENTS: Installment premiums

2,251,211 270,114 187,500 29,523

1,939,971 270,114 194,491 29,523

1,984,104 78,872 182,820 23,020

1,716,47 78,87 191,93 23,02

---

644,132

---

349,61

(28)