MBIA Inc (MBI) 2005 Q2 法說會逐字稿

Hello and welcome to today's MBIA Inc. second-quarter earnings teleconference. At the request of MBIA, this conference is being recorded for instant replay purposes. As a reminder, following today's presentation we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS) At this time I would like to turn the conference over to Mr. Kevin Brown, Director of Investor Relations. Sir, you may begin.

Thank you. It is Willard Hill, Managing Director of Investor Relations. Good morning, everyone. With me today is Nicholas Ferreri, MBIA's Chief Financial Officer. Nick will provide an overview and perspective on our results for the first six months of 2005 which will be followed by a question-and-answer period. Hopefully you have all had a chance to read and digest the earnings release that we issued this morning.

Before we begin, I have an important reminder. During this call we will provide forward-looking information that relates to the future performance of the Company. These forward-looking statements are not guarantees of future performance and our actual results may differ materially due to a number of potential factors. Additional information about these factors can be found in our filings with the SEC which are available on our website at MBIA.com.

With that, I will turn the call over to Nick Ferreri.

Thank you, Willard, and good morning everyone. I'd like to start our call today by summarizing our results for the first half of 2005 and then follow that with a brief Q&A session.

Year-to-date, our financial results have been satisfactory despite challenging market conditions. Starting with earnings, net income per share declined 4% in the first half of this year and net income was down 9% to $388 million. The decline reflects a tough comparison with the same period in 2004 due to significantly lower net realized gains this year.

Operating income per share was up 5% for the first half. With refundings excluded, operating income per share increased 7%, which although below our initial target is acceptable given the current market environment. Year-to-date adjusted direct premium reached $647 million, a solid 18% increase over the same period last year. We believe these results are satisfactory given the easy credit market environment we are experiencing.

In the public finance market, there was an increase in overall U.S. municipal volume during the first half of the year due to favorable market conditions for issuers, such as low longer term interest rates. This contributed to a 57% increase in par value refundings for the public finance market over the same period last year. In addition, insured penetration hit 60% during the first half.

In the asset-backed market, insured transactions reported in the public market accounted for 4% of overall issuance in the first half of the year, down from nearly 8% in the same period last year. This decline reflects a somewhat skewed perception of risk in our industry, where at this time greed surpasses fear as a motivator when it comes time to decide if insurance is the execution selected. Obviously we prosper when fear governs. As a result, the uninsured market remains our biggest competitor.

If we look for a moment at our results by sector, our global public finance ADP was down 3% in the first half primarily attributable to fewer large non U.S. transactions in the first six months of this year. In last year's first half, we did close a very large transportation issue, making the comparison year-over-year a bit more difficult. We along with other financial guarantors, have noticed for some time that large European infrastructure transactions have been difficult to close. This can be attributed to excellent liquidity in the European banks which are very adept and aggressive competitors.

But the positive news is that the deals we are closing reflect greater diversity among sectors and represent a good number of sizable transactions as opposed to the periodic large blockbuster deals.

In Global Structured Finance, ADP increased 60% over the same period last year. The increase was driven by the execution of several large CDO and future flow transactions in the second quarter. This business was strong across all sectors and in this market, our average deal size was greater than in the prior period. While the pipeline for this business is promising, tight spreads and increased competition from senior subordinated financing continue to present a challenge to future writings.

Scheduled earned premiums were $347 million, up 4% for the first six months of the year. The slower growth in scheduled earned premiums was caused by heavy refunding activity over the last several quarters and some decline in our U.S.-based structured finance installment business. Earned premiums from refundings, while down 13%, made a strong showing at 68 million for the first six months in 2005. As expected, we are seeing a slowing in refunding activity but not as sharply as we had anticipated in all likelihood due to continued relatively low interest rates.

Pre-tax net investment income for the insurance segment excluding net realized gains increased 1% for the first six months ended June 30 and 5% during the second quarter due to increases in invested assets and average investment yields, particularly on the shorter end of the curve.

Advisory fees, which tend to be uneven, decreased 54% over the first half of 2004. The decline in fees in the first half of the year reflects both a lack of large complex transactions that provide the opportunity for advisory fees and continuing improvement in the credit quality of our insurance portfolio.

Insurance expenses consisting of operating expenses and the amortization of deferred acquisition costs were up by 6% for the first six months of 2005. This increase was due in part to the fact that we have begun to expense MBIA's soft capital facility expenses that totaled $1.7 million year-to-date. In the past we would debit shareholders equity but going forward this expense will appear on the income statement.

The GAAP expense ratio increased to 22.7% from 21.5% in the first half of 2004, reflecting primarily slower growth in overall earned premium.

In keeping with our loss reserve policy, additions to reserves are made each quarter according to a formula based on scheduled earned premiums. Year-to-date we incurred $42 million in loss and loss adjustment expenses. Case-incurred activity for the first half consisted primarily of healthcare credits and tax liens.

Touching briefly on credit quality, we continue to see overall improvements in our portfolio. Over 80% of the total book of business was rated A or better, up from 78% in the second quarter of 2004 and the percentage of our insured portfolio rated non-investment-grade continues to be below 2%.

Our Investment Management business continues to deliver very healthy results, with pretax operating income of $43 million, an increase of 59% over the first six months of last year. Driving this growth is vigorous demand for our asset-liability and third-party Asset Management products.

Looking at the Corporate segment, year-to-date net expenses increased 1%. Higher net investment income due to higher average asset balances helped offset increased expenses for legal fees associated with the continuing regulatory investigations. Expenses associated with the investigation have been substantial. Through the first six months, legal and consulting expenses were approximately $4.5 million.

As to our share buyback program, we repurchased over 5.9 million shares in the first six months of 2005, 2.4 million shares of which were purchased in the second quarter. Approximately 5 million shares remain available under the share repurchase authorization. Over the past 12 months we have repurchased 10.5 million shares.

You may recall that in March I described our new flexible approach to planning at our investors meeting in New York. We developed three plan scenarios; a slower paced economic scenario where GDP growth is moderate, spreads are tight, and interest rates remain low; a base case which reflects a more stable environment of moderate growth and slightly higher interest rates and credit spreads; and a faster case were the economy accelerates.

In each case, we have a variety of tools at our disposal to run our business in the most productive way possible under any economic scenario. However in many ways we are at the mercy of the market and cannot control interest rates, spreads, or product demand. All we can do is to be fully prepared for them.

As a result, we are finding it increasingly difficult to provide accurate forecasts. At this point given the present economic environment, we are somewhere between our slower and base cases in terms of our financial results. And we anticipate that it will be very difficult to achieve the financial targets we identified to you in February, particularly as regards to growth in operating income per share. However, we continue to anticipate that operating return on equity will be at the lower end of the 12 to 14% range in 2005.

So to conclude, MBIA had satisfactory results for the first half of the year. Overall demand for our guarantee products remained solid as evidenced by an 18% increase in adjusted direct premium. As always, we remain committed to our disciplined approach to underwriting and pricing and we continue to manage MBIA to provide long-term growth in shareholder value.

And now I will take your questions.

(OPERATOR INSTRUCTIONS) Geoffrey Dunn, KBW.

Could you first maybe give a little more detail on the case activity in the quarter, both the paid claims and the new addition to case? And break out the amount of exposure you paid out on the osteopathic hospital and what the residual was related to?

Sure. In terms of the case activity, Geoff, case activity was about $18 million, and that was comprised of additional claims associated with Fort Worth Osteopathic Hospital in the range of $5 to $6 million. Additional small losses relating to tax liens, in particular the 1999 transaction of about $3.5 million, and then in addition accretion on the AHERF transaction. And there was one more case reserve established in the quarter on a mortgage-backed structure.

In terms of the paid claims, we paid out and paid off all of the Fort Worth bonds in the quarter. That payment was about $59 million and what we have remaining on the book is about $2-2.5 million of salvage that we still expect to collect.

And what is the residual between the 59 on the Fort Worth and the 118 total?

That is an adjustment and a reclassification on another credit that we had in our portfolio that we reclassified from other assets back to the liability account which offsets the liability account. It was not exactly a paid amount. It was a change in the salvage in subrogation moving back to salvage in subrogation from other assets.

So that counts as a negative on case?

Yes.

And that is the AHERF deal?

Yes.

And then can you just update us with your existing excess capital at the holding company and the progress on getting the additional special dividend?

Sure. We are still waiting pending approval from the New York State Insurance Department for additional dividends, so that remains in a pending status. Overall we are still at an excess capital position but we do, as I say, we await what the New York State Insurance Department will do in that regard.

What is your liquid capital at the holding company?

We have about 320 million in assets there, most of which is highly liquid.

Okay, thank you.

Rob Ryan, Merrill Lynch.

I was wondering if you could characterize the competitive environment, sort of breaking it down between direct and indirect competition, indirect competition essentially being the uninsured market?

Sure. On the indirect side certainly the Structured Finance business, the uninsured market is in this type of environment with interest rates at this level and spreads at this level and the amount of excess capital out in the marketplace, the uninsured market is taking a good portion of the transactions that we and others as financial guarantors could probably have gotten. So that has remained relatively constant throughout the year. And it has been similar to what we have seen last year as well.

In terms of the direct competition, that has been steady. The primary players are there. We are seeing activity from some of the smaller players as well. So that competition remains quite steady.

Not necessarily intensifying or more aggressive by those trying to establish themselves better?

Now and then, Rob, we do see some odd things in the marketplace by some competitors, but not things that you would say are a trend. But now and again you do see some of that.

But would you say across the board the industry is still fairly disciplined?

Fairly disciplined.

And then the sacrifice of transactional returns on equity in the more difficult competitive environment, how severe would you say that has been off of the very attractive levels they achieved in 2003?

It clearly is a lot less than it was in 2003 and as you know, we have had a tremendous buildup over the last four years going from '99 to 2003. So there is plenty of room to get back but we have seen substantial reductions in premium rates in that regard. But certainly the business that we are writing is meeting our return targets and our hurdle targets.

Great, thank you.

Mark Lane, William Blair & Co.

Your financial targets that you established at your investor meeting and also last quarter included some comments on 2006, and I am presuming that that impacted as well. Are you pulling that guidance officially now or where does that stand?

Well, I would not view it is guidance. We were trying to sort of lay out contrasting what our goals were and what we thought was going to be achieved. We also came up with a different plan to try to make it more clear to individuals what may happen in the economic environment as to how it will affect our business. And clearly what happens with interest rates has a big impact on that.

And so as you recall, we were forecasting a rise in interest rates starting in the second half of this year going out into 2006 and 2007. If that does not take place, then our numbers will look more like this lower graph that I showed and our base case. But at this point, it is too early to tell what type of impact that is going to have for 2006.

And on the U.S. Structured Finance, last quarter you emphasized that there were a couple -- some large transactions that benefited production. Can you quantify the impacts on large deals in the first quarter relative to second quarter? Maybe what the number of deals that were over a certain size last quarter or the total number of deals that you wrote in U.S. Structured Finance first quarter versus second quarter?

I do not have that exact specific information. I do know that for the first six months of this year our average deal size is up over last year. In terms of number of deals, it is close, probably a little bit higher this year. That is about the most color I could add there.

So you are just talking about U.S. Structured Finance?

Yes.

And then on Channel Re, can you say unequivocally that you are committed to the Channel Re structure?

Yes. We are certainly committed to it. We helped establish the company. It gives us great capacity as to have a AAA rated reinsurer out there. Certainly at the time the business environment was different and the need for that reinsurance was greater. But at this point, it works as a great tool for us certainly on the facultative side as well to have a steady reinsurer that is rated AAA that we get full credit from from the rating agencies to be there for portfolio shaping and moving certain credits where we are trying to limit certain exposures and moving that to a good name.

Okay, and what about the ongoing impact on corporate from the consulting and regulatory investigations? What would you expect in the third quarter?

That is hard to say. Just the timing obviously of the investigations, we cannot predict. So we would anticipate that expenses that we have incurred so far would continue and we just need to work through that.

So you haven't accrued for any expected expenses or anything in the second quarter for ongoing consulting fees and that sort of thing?

No, when the expenses are incurred is when we book them.

Okay, thanks.

Mike Grasher, Piper Jaffray.

Just wanted to go back to credit for a second. Could you remind us sort of at what stage of an issue you might move an issue to a specific case reserve from unallocated?

Sure, if we are looking at a credit and we are comfortable that we can come up with a good estimate and it is probable that a loss will be incurred, we will move that to a case reserve.

-- does that have to be in default at the time that you analyzed it or are you continuously monitoring it?

We are continuously monitoring it. It does not have to be in default. If we are monitoring a transaction and we can predict with a high degree of certainty that a default will occur in the future, we will move that to case reserve activity at that point in time.

And would you be paying attention to lower tranches of another issue -- or I mean of the same issue along with other factors as well?

Sure.

And then with regard to operating expenses, they were higher in the quarter. That was simply due to the soft capital?

Yes, primarily.

Thank you for taking my questions.

Darin Arita, Deutsche Bank.

Just a couple of questions here. The first is on the Investment Management services business. The profitability seems to be running higher than in 2004. I recall in the first quarter the expenses were lower than normal. But the second quarter was quite strong as well. Can you talk about what is happening there in that business?

We have seen a lot of strength in that business and in terms of the spread that they are earning, it has grown somewhat and that is the primary reason in the second quarter. As you cited in the first quarter it was some expense reduction in terms of a take down of an accrual which has an effect of helping that boost in the first quarter. The second quarter is just really more spread.

Do you think that the second quarter is somewhat of a sustainable level there?

For the most part, yes.

And could you give us an update on your Eurotunnel exposure? I understand there's been some development there over the past couple of months.

I'm sorry, what was that?

Your Eurotunnel exposure?

Sure, there has been some development on Eurotunnel. It is a large, complex transaction with a very complex debt structure in place. We certainly anticipated that a restructuring would be necessary when we wrote the deal. At this point over the last quarter, a waiver was signed which now allows the debt holders to negotiate with the company and management to try to come up with terms to work out that restructuring as best as possible for everyone. So really it is at the negotiation stage and I don't think there is really much more that we can add at this point.

Does the Company's view still stand that of what the Company's view was in March at the investor meeting?

Sure. The Company's view is at this point is we're not anticipating a loss.

Thank you very much.

Ken Zerbe, Morgan Stanley.

First of all, I was just wondering if you can provide any details or maybe just an update on the regulatory inquiries? Have you heard or received any additional requests for information over the last several months?

The investigations are ongoing. They are progressing I would say smoothly. We are cooperating fully. We have provided a lot of information to the regulatory authorities. And whatever questions come up, we respond to.

So they have been active and giving additional -- or asking for additional information during the quarter?

No, more related to the information that they requested related to the subpoenas.

And the second thing, just wondering if you can provide any commentary on credit spreads in the municipal market? I know you said the uninsured competition is still very significant but how are spreads in each of the different areas?

Well, credit spreads are still generally tight. Certainly on the asset-backed business they remain quite tight. In U.S.-domestic public finance, they are also less than what they were but they remain at I would say in a more reasonable position. And on international, probably a little bit wider. But generally overall still we're in a tight environment.

All right, great. Thanks.

Geoffrey Dunn, KBW.

I wanted to follow up on the question on Channel before. Can you give us an estimate roughly as to how much capital relief you think your reinsurance with Channel provides you? And on a speculative basis, if it ever happened that you have to bring that back on the books, do you feel like you have plenty of capital to do that? And do you think the analysis is correct that that would probably end of being accretive to earnings and returns?

One way to look at that, Geoff, is Channel's hard capital position is any where 360 to $400 million in total, of which we have about 17.4%. They do have a soft (ph) capital facility as well. That's a AAA rated entity. If we were to take all of that business back, I couldn't imagine us needing more capital than that to do that. And as a result in our view, it is a very, very strong solid book at Channel Re and I would be happy to have that book as ours. And most of it is quota share and on the facultative side, it is our business, so taking that back would not be an issue for us.

Okay and then I wanted to follow up. I think we saw reports during the quarter that you are trying to build up your resources within your mortgage-backed segment and maybe some other Structured Finance segments. Can you give a little bit more color on what kind of staffing you're adding and what initial opportunities that might have created for your pipeline?

I think we are seeing strength across many sectors and our staffing levels in that area are just indicative of what we think we can do on the new business side and it has been relatively steady for the last few years in terms of the staffing level. But we will probably look to add a few more now and then.

So no new hires that necessarily open doors to stuff you haven't been aggressively pursuing?

No, I wouldn't say that.

Okay, thanks.

Paulo Pellegrini, Paulson

I just have a question regarding your excess capital position. I have heard on this call as well as other calls comments about the fact that you have some amount at the holding company and then you were talking about the dividend and so on and so forth. Could you just summarize what is going on in terms of excess capital from a regulatory standpoint, excess capital from a rating agency standpoint, and both at the operating subsidiary as well as the holding company? Maybe relate that also to the debt outstanding at the holding company if possible?

I will see if I can remember all of that. On the regulatory side if you just look at how New York State Insurance Department would calculate our capital position, we are in a very excess capital position. So that is not an issue at all. It is just the New York State Insurance Department is just going through their review and then in connection with the investigations that are ongoing I think is part of that delay. But from a sheer numbers standpoint, we are in a very high excess capital position.

In terms of the rating agencies, both S&P and Moody's have models. You have seen I would imagine the S&P report that was issued that talked about our capital position at the end of '04 and there given the ratios you have a strong excess capital position that maintains the lowest count from the end of 2003. We are awaiting receipt of the Moody's model and information to see where we stand with that. We clearly were in the strong excess capital position at the end of '03 so we will see how we fare at the end of '04.

We run our own MBIA model which we think is very robust and that also indicates a very high excess capital position. As indicated, we have $320 million at the holding company. We think that is excess capital and we also think we have excess capital position at the insurance company.

Was there any other part of your question?

Okay, so the 320 at the holding company, you are saying is excess capital in the sense that it could be potentially distributed?

Yes, but we have plenty of uses at the holding company for that money as well.

And when you say that you have excess capital at the insurance company, are you saying that that is excess capital relative to a AAA requirement for both Moody's and S&P and is that what you are waiting for regulatory approval to distribute to the holding company?

The rating agencies make a determination as to whether a bond insurer has -- what is there capital position at the insurance company? We are waiting to see what Moody's results are in regard to that for 12/31/'04. We have received the S&P piece and that indicated that we do have excess capital position at the insurance company already.

In terms of the regulatory side, it is there are requirement as to how much money you can take out of the insurance company which you can put up to the holding company and so there are restrictions on that, just statutory restrictions. And we are just waiting a pending status of that approval to move some money from the insurance company up to the holding company.

So what you're saying is that you have excess capital for Moody's; you have excess capital for S&P; you have excess capital for regulatory purposes. You're not in a position to disclose I take it because otherwise you would have told us how much excess capital you think you have at the operating subsidiary. And so right now it is just sort of regulatory review and investigations that are really holding up a distribution of that capital to the holding company? And that at the holding company you have $320 million of excess capital for which however you have uses?

The only thing I would just clarify that we are awaiting the results from Moody's at the end of '04. And the number is -- when the rating agencies make that determination, they don't give you a hard and fast number so I can't give you a hard and fast number.

Mike Grasher, Piper Jaffray.

Just a follow-up on the advisory fees. I think you highlighted two different reasons for the fees varying from quarter-to-quarter, one being the number of large deals that you do; and then the second being the credit quality also contributing to a decline. Can you elaborate more in terms of how credit quality impacts those fees?

On occasion on a transaction that may go through some type of restructuring or may be looking to do something different, we have the ability to charge fees under those circumstances. So given the increase in the credit quality and the strength of the back book, some of those opportunities are not there.

Understood. Okay, thanks.

Terry Smith, Smith Research

I just was looking at the investment income and I was just was trying to figure out 1% increase and I guess -- is the philosophy there to take the risk on the underwriting side and not on the investment portfolio or is there anything going on with the investment portfolio that might tweak the returns if rates move higher?

Well, generally we do not take significant risks at all in the insurance company. In terms of that increase in 1%, we did move out a significant amount of dividends at the end of '04 into the holding company. So the increase in average asset balances at the insurance company was somewhat limited. In terms of what we will do going forward depending on where we see interest rates go, right now we've kept the portfolio relatively short and the duration is about 5.1. If we see rates rise, we will look to push that out and that could boost the yields on those investments.

Thank you.

This does conclude our question-and-answer session. For closing remarks, I'd like to turn the conference over to our Director of Investor Relations, Mr. Willard Hill.

As there are no additional questions, we will conclude the call here. We'd like to thank everyone for participating in today's call and remind you that you are welcome to call us with any follow-up questions that you may have. As always we encourage you to visit our website where we maintained frequently asked questions site for investors as well as a variety of other financial and portfolio information.

Thanks again for your participation.

Thank you. This does conclude today's conference. Participants, you may disconnect at this time and have a good day.