MBIA Inc (MBI) 2005 Q3 法說會逐字稿

Hello and welcome to the MBIA Inc. third-quarter earnings teleconference. At the request of MBIA, this conference is being recorded for instant replay purposes. (OPERATOR INSTRUCTIONS). And now I would like to turn the conference over to Mr. Willard Hill, Managing Director of Investor Relations. Sir, you may begin.

Thank you, Mary, and 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 nine months of 2005, which will be followed by a question-and-answer period. We hope you've had a chance to read and digest the earnings release that we issued this morning.

Before we begin, I would like to remind you that 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. Nick?

Thank you, Willard, and good morning, everyone. We've got a lot of ground to cover today. As usual, I'm going to begin our call with a review of our results for the first nine months of 2005. Then we will have a question-and-answer session following my remarks.

First, let me put this morning's earnings release into context. As we indicated, MBIA has decided to accrue the amount of 75 million representing our estimate based on discussions to date of what we are likely to have to pay in connection with any settlements of the regulatory investigation by the SEC, the New York Attorney General's Office and the New York State Insurance Department into our AHERF-related agreements entered into in 1998.

In anticipation of possible settlements, we have also decided to correct and restate our earnings to 1998 and subsequent years for the AXA Re and Munich Re transactions, which were a part of the AHERF-related agreement. I cannot comment beyond that on any aspect of the investigations or on any potential settlements other than what was described in our release this morning because no settlements have been approved by the regulatory agencies and any settlements reached may have additional or different terms.

I will note that the effects of this restatement do not have a significant impact on the Company's financial position with equity being reduced by approximately $15 million at September 30, 2005.

Our results also reflect another restatement, not directly related to the AHERF agreements noted previously, in which we adjusted our accounting treatment for derivative transactions that technically did not comply with FAS 133 despite their economic effectiveness. This is an issue that other financial services companies are focusing on as well, and because we were restating to the AHERF-related transactions, we will restate each quarter and year affected by the prior method of accounting. For the cumulative effects of the non-cash adjustments resulting from this restatement is a 6.8 million positive mark and is also immaterial to the Company's financial position.

The last three pages of our operating supplement labeled "Special Addendum" will walk you through the details of the impact of the AHERF-related restatement, the FAS 133 restatement and the accrual for estimated penalties and disgorgement.

Now looking at our earnings, net income per share for the first nine months declined 9% and net income at $528 million was down 14%. Excluding the effects of the $75 million accrual, net income per share would have been up 3% over the same period last year. In addition to the impact of the accrual, we also have an unfavorable year-over-year comparison because of the very significant net realized gain from the sale of the common stock investment in 2004.

Operating income per share was up 5% for the quarter and 5% year-to-date. Excluding refunding, operating income per share increased 6% for the quarter and 7% year-to-date.

Turning to our insurance operations, we had an acceptable quarter categorized by steady flow business. Adjusted direct premium was up 15% for the first nine months to $880 million and up 8% for just the third quarter. We're satisfied with those results given the challenging operating environment we are experiencing.

By sector, we saw a municipal issuance surge in the U.S. up 22% in September alone, and while insurance penetration is above last year at this time at 59%, competition among the insurers is correspondingly strong. While our public financing saw steady flow business in the domestic market, notably in the military housing and transportation sectors, we did not experience any large one-off deals to spike our ADP in this sector.

In global markets, we saw European public finance deals continue to decline principally because of the ample liquidity in the European banking system and negative trends in price and credit quality. We had solid growth in our structured finance business for the first nine months with key deals executed to certain future flow issuers, CLOs, operating asset transactions and whole business securitizations in the UK pub industry. We have underwritten some particularly solid transactions in the structured finance market this year, despite the fact that credit spreads remain very tight.

Scheduled earned premiums were flat for the first nine 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. Total premiums earned in the first nine months were $628 million, down 2% from the same period last year due to early terminations in the structured book and continued strong refunding activity. Premiums from refundings are down 12% over the same period last year. Pretax net invested income for the insurance operations increased 2% in the first nine months, driven by growth in the Company's average asset base.

Advisory fee income is down 31% over the same period last year, reflecting uneven demand for these services.

For the quarter, advisory fees were up 55% due to fees earned for work performed on several transactions, but more specifically to expense reimbursements received on certain difficult credits which were recorded on this income statement line.

We saw insurance expenses increase 11% year-to-date due in part to a change in the third quarter in the way operating expenses are deferred and recorded as policy acquisition costs. Given the changes in the levels of new business written over the past few years, the Company is now deferring less costs, which results in a direct increase in operating expenses.

In addition, the Company has incurred a larger amount of loss prevention expense in the quarter and year-to-date. The GAAP expense ratio increased from 21.5% in the first nine months 2004 to 24.4% in the first nine months of 2005, reflecting primarily the increased operating expenses resulting from the change in amortization and the slower growth in overall earned premiums.

In keeping with our loss reserving policy, additions to reserves are made each quarter according to a formula based on scheduled earned premiums. Year-to-date our loss and loss adjustment expenses, which run through the income statement, are $63 million and flat over the same period last year.

In the third quarter, our case reserves increased $48 million related to transactions in the CDO, manufactured housing and mortgage-backed sectors. Year-to-date, excluding reserve decreases due to payment activity, case reserves increased $89 million.

As you know, we experienced two notable credit events during the third quarter -- two hurricanes in the Gulf region and two airlines filed for bankruptcy. We have not established specific case reserves for our hurricane exposure because we believe it is too early to determine whether we will incur any ultimate losses. We establish a case reserve when a loss is determined to be probable and estimable. While we have made small claim payments, we have been fully reimbursed.

MBIA's exposure to Delta and Northwest Airlines, who both filed for bankruptcy protection during the third quarter, amounts to $1.5 billion in five insured enhanced equipment trust certificates. MBIA ensures the most senior class of certificates in all the EETC transactions, and in each case there are layers of subordinated debt and/or equity below MBIA's insured senior position, which ameliorates any prospective losses on these transactions.

The airline industry also had a positive development with U.S. Airways emerging from bankruptcy and completing its merger with America West. MBIA's net par EETC exposure to U.S. Airways decreased by approximately $239 million with the completion of two sale leaseback transactions on October 31. MBIA's remaining net par exposure to U.S. Airways is approximately $719 million.

Please note that there is additional information concerning our EETC exposure and hurricane exposure in the FAQ section of our website.

We have an allocated loss reserve of $287 million that is funded on a quarterly basis with 12% of scheduled earned premiums to provide for potential losses that may be embedded in the insurance portfolio, but which have not yet been specifically identified or cannot be recently estimated. At this time, based on the information available to us, we believe we have adequate reserves for all of our potentially troubled credits. We will continue to closely monitor developments and will take appropriate actions as warranted.

Our investment management businesses are continuing their superb year with a 52% increase in pretax operating income over the same period last year. Demand for our asset liability and third-party asset management products continues to drive these impressive results.

Corporate expenses year-to-date were $93 million, primarily attributable to the $75 million accrual for penalties and disgorgement. Excluding the effects of the accrual, expenses for the first nine months increased 24% as we incurred increased legal and consulting costs associated with the ongoing investigations.

Turning to our share repurchase activity, we did not buy back any shares in the third quarter. Year-to-date we have repurchased about 5.9 million shares at a price well below their adjusted book value. Adjusted book value at September 30, 2005 was $69.89, an increase of 5% from December 31, 2004.

So in summary we have encountered a number of challenges this quarter, including our regulatory investigations, increased operating expenses driven primarily by the way we have decided to recognize expenses incurred for new business production, and additional case reserves established in our insurance portfolio in connection with a few specific transactions. While we believe ADP was acceptable given the highly competitive markets in which we compete, we are content to ride out the difficult cycle that the industry is currently experiencing. We're committed to building the firm by competing globally for business that meets our credit underwriting standards and profit objectives and to managing our capital to protect our AAA rating.

And now I will take some questions.

(OPERATOR INSTRUCTIONS). Geoffrey Dunn, KBW.

First, on the buyback side, can you talk about the decision not to buy any stock back this quarter and what influenced that decision? And then as we look towards the end of the year, is the timing of any kind of regulatory sentiment or a settlement going to affect the ability to get a special dividend out of the operating company in December?

Well, there are a lot of factors that go into us buying back our stock. I would first start off by saying that we were very aggressive in terms of what we purchased in the first six months of the year at 5.9 million. That was probably above our plan in terms of what we were looking to do, and we did that given what the stock level was and just where we saw that it was a very good opportunity.

In the third quarter, we made an announcement in August that we were moving forward with potential settlement negotiations on our regulatory front. So given that uncertainty at that point in time, that gave us pause. You have the hurricanes as well, which gave us pause, and we clearly have many discussions with the rating agencies in terms of their views. So a lot of that has an impact in terms of what we will do in terms of the stock buyback.

In terms of dividends, we have a pending request for dividends from the insurance with the insurance department to dividend money out of the insurance company up to the holding company. That will remain pending until the regulatory investigations are concluded. Regardless of that, in December we will be able to dividend money out of the insurance company up to the holding company if we so desire.

Okay. On the restatement of the AHERF stuff, I've got a couple of questions this morning regarding any potential impact on restatement of employee benefits back in '98 as you change the P&L for the charge. Can you talk a little bit about that? Basically compensation?

I'm not going to talk about compensation in 1998. That is really a matter for the investigations, and I will wait and hold until that is concluded.

You did not make any changes to that?

No, we did not.

Can you say whether or not you feel like you need to?

Well, we restated the financials for the AHERF-related transactions that we have been in discussions with in terms of the specific accounting guidance that we needed to follow, and that is what the restatement is for.

Ken Zerbe, Morgan Stanley.

Can you tell us what changed with respect to the other two reinsurers on AHERF that required you to restate earnings? Because I guess originally I thought these were -- these other two were true risk transfer arrangements.

Well, again I don't want to be too specific in terms of the regulatory matters, but going through the investigative process and going through all of the risk transfer technical requirements of FAS 113 and based on all the information that has come through, it is appropriate at this time to correct and restatement the financials on those relating to those agreements.

Okay. Dare if I say, what prompted your change in expense methodology this quarter? I guess part of that is, is there any catch-up in the operating expense line, or is this sort of a good run-rate expense level going forward?

There is no catch-up. It is a run-rate. Periodically we look at our expenses in terms of what should be deferred related to new business production. As you go through a period of increased reduction, as we had in '99 through 2003, if you see your expenses rising, you can certainly defer a certain amount.

Over the last 18 months, our topline production has been more muted. As a result, we take a look at what costs vary with and what are directly related to new business production, and so, therefore, we went through a study and made that change effective in the third quarter.

Okay. Great. The last question I have is on the increase in the unallocated reserves. I think that was 52 million. Did you mention in your prepared remarks what $52 million related to?

No, that was an increase to the case reserve activity, was the 52 million I think you are referring to. Our unallocated loss reserve stands at 287 million at the end of September 30.

Okay. All right. Great. Thank you.

Rob Ryan, Merrill Lynch.

I was hoping you could comment on the general competitive environment both in direct competition, as well as direct competition among the major players.

Well, we are seeing significant competition. You have obviously competition from the four larger financial guarantors that are out there. You have competition certainly in Europe from the banks outside of the financial guaranty space, and that competition continues. And given the credit cycle that we are in, you know certainly you need to look and try to find deals that work for you that are priced right. And, as a result, you know that is going to drive a lot in terms of the business that we are able to do.

Okay. Back on the case reserves, was there any significant activity on the tax lien front?

No, not significant activity. There was small increases to the reserves this quarter related to the tax liens, but no, nothing significant.

And one more, could you go over some of the metrics around the issue of how much excess capital MBIA has and different rating agency views, how that all works and how it fits into your view of excess capital?

Well, there is I guess many different ways to measure the excess capital. We run our own model that we have developed. From that model, we feel that we are still in a significant excess capital position. At this stage, looking at S&P's model as of -- and this is as of 12/31/04 is the last information we have from the rating agency -- they indicated to us we are in a significant excess capital position.

Moody's, on the other hand, has indicated that as of 12/31/04 we were at a -- basically at the level of capital needed, depending on which phrase you wanted to look at, maybe a little bit of excess there.

We certainly talk to Moody's about that. We are both in a position I believe that if you look at our capital position today at 12/31/04 you have just seen positive development along those lines. Obviously we have not taken any money out of the insurance company over the last 10, 11 months, so that money is sitting there. We're still earning, and at the same time, our level of new business production is not as high, and therefore, we are not really growing our insured portfolio. And given the credit sector that we are in, you would certainly anticipate that there would be excess capital being generated just from our ordinary operations.

Okay. Based on the formula for the dividend out of the insurance company that would not necessarily require a special approval, what is that approximate dollar amount?

Late December we would be able to take out roughly $400 million.

And that is just based on your earnings that you have accumulated during the year and the fact that you did not do share repurchases -- excuse me, you did not do dividends earlier?

Right. The formula is you look back the last 12 months and you're allowed to take out approximately 10% of your policyholder surplus.

Amanda Hindlian, Goldman Sachs.

Most of my questions have been asked. Just two quick things. One, can you give a little bit more color on what is driving the increase in the loss prevention expenses?

Yes, some of that is accounting related. On certain transactions that we have, if we incur costs relating to those transactions before that credit gets moved to a claims status, many times we can get reimbursed from those expenses either through the deal structure or through other means.

And so as a result, we have had large payments of expenses that need to go on the loss prevention expense line. But then you need to report that expense reimbursement as income on the fee line. So that is something that is driving those numbers.

Okay and then the other question, which may or may not be something you can touch on, when you look at the 75 million you accrued for any potential settlement, would any such settlement cover all outstanding issues with the SEC, New York AG and New York State Insurance Department, or just some portion of them?

Again, I cannot specifically comment. We came up with the 75 million as our best estimate in terms of the settlement with the SEC, New York AG and New York State Insurance Department at this time.

(OPERATOR INSTRUCTIONS). Sir, apparently this concludes the question-and-answer portion of today's conference. I would like to turn the conference back over to you, Mr. Hill.

Thanks very much. We would like to thank everyone for participating in the call today and remind you that you're welcome to call us with any follow-up questions that you may have.

As always, we encourage you to visit our website where we maintain a "Frequently Asked Questions" site for investors, as well as a variety of other financial and portfolio information. Thank you for your participation.

This concludes today's conference. We thank you for your participation. Have a great day.