ORANGE COUNTY'S BOND INSURER BETS ON DIVERSIFICATION.

Byline: Sharon R. King The New York Times

For more than a year, shares of MBIA Inc. have been buoyed by expectations that the Orange County bankruptcy would be good for business. The stock rallied sharply after MBIA insured Orange County's offering of nearly $900 million of new bonds this month. And on Monday, MBIA, the nation's largest insurer of municipal bonds, closed at a 52-week high of $79.875.

The Orange County deal garnered MBIA about $29.5 million in fees and brought new interest in the stock. Before the sale, a Salomon Brothers analyst, Caitlin Long, issued a ``buy'' recommendation, citing the prospects of heftier premiums on some of the bonds MBIA insures.

But others have a less sanguine view of the company's near-term prospects. An analyst at Merrill Lynch, Louise Costikyan, last week reinstated coverage of MBIA but gave it only a ``neutral'' rating. (She did rate the stock a ``long-term buy'' for value-seeking investors, however.)

Diversification has taken MBIA into money management for municipalities and insuring asset-backed and international securities.

But MBIA still derives more than 80 percent of its revenues from municipal insurance - guaranteeing the payment of principal and interest on bonds sold by state and local governments. The insurance gives the bonds the highest investment-grade rating of triple-A. It also reduces the borrowing costs of municipalities even after they pay the insurance premium.

``I think it will be a long time before these other areas rival the revenue and income impact that the municipal-bond insurance has,'' said David Litvack, senior director of the financial guarantees group at Fitch Investors Service. ``I think you'll have to temper the growth expectations.''

Merrill Lynch foresees at best only modest growth in municipal-bond issuance in 1996 and 1997, with no significant drop in interest rates to spur refinancings and put extra revenues into the company's coffers. MBIA earns a portion of its insurance premiums each year until a bond matures. But when a bond is refunded or retired early, MBIA gets all of those revenues at once.

As with most bond-insurance companies, MBIA's stock price tends to track adjusted book value, trading in a range that runs from a 15 percent discount to a 35 percent premium to that figure, Costikyan said. Adjusted book value is a calculation of a company's liquidation value and takes into account the present value of future premiums.

By this measure, MBIA is trading at a 5 percent premium, just below its historic average of 7 percent, Costikyan said. She would need to see a rise in the volume of new municipal issues or see the premium drop to a discount to raise her recommendation to a buy, she said.

In February, the market was offered 3.5 million shares of MBIA stock, an amount that included 2.86 million shares sold by Aetna Life and Casualty Co., which had held about 3.8 million MBIA shares in its investment portfolio. The sale by Aetna was negotiated as part of the agreement by Travelers Inc. in November to buy Aetna's property and casualty insurance unit.

As part of that deal, Aetna agreed to pare its $1 billion equity portfolio to about $400 million to accommodate a different investment philosophy at Travelers, which is more heavily skewed toward bonds than equity, said Keith Anderson, a spokesman for Travelers.

``We advised them in the way in which we wanted the equity portfolio structured,'' Anderson said. He declined to give any specific reasons why the MBIA stake was pared. The MBIA sale produced $200 million for Travelers.

Although MBIA has been able to increase its share of the insured market annually, it has done so at a price. In some instances, the company charged lower premiums than competitors to snare business - such as the recent Orange County deal.

It has also foraged in the realm of double-A rated bonds, which are one rank below triple-A and produce lower premiums than the typical insured bond, which is in the range of single-A to triple-B.

And with the rate of growth in volume of newly issued municipal bonds waning and a surge in refundings unlikely, it seems doubtful to some analysts that the company will strongly outperform the market. Moreover, it has begun to insure unsecured corporate debt, a move out of its traditional business that has caused some uneasiness on Wall Street.