MBIA Inc (MBI) 2006 Q1 法說會逐字稿

Welcome to the MBIA Inc. first-quarter 2006 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. Greg Diamond, Director of Equity Investor Relations. Sir, you may begin.

Good morning, everyone, and welcome to MBIA's conference call for the first quarter of 2006. This call is also being broadcast via the Internet and a replay recording of the call will be made available on our website approximately two hours after the conclusion of the call. Our earnings press release and quarterly operating supplement have already been posted on our website at www.MBIA.com. After these opening remarks Nick Ferreri, MBIA's Chief Financial Officer, will provide some comments and color regarding our first-quarter results which will be followed by the question-and-answer session.

Regarding the Q&A portion of the call, as with MBIA's prior conference calls, I'd like to remind everyone that we have sponsored this forum so that our shareholders and coverage analysts may gain a greater understanding of our results and our operations. As usual we reserve the right to determine which callers will be enabled to ask questions on this call. Opportunities for questions may also be constrained by the time that has been allotted for this call. However, we urge everyone who doesn't have the opportunity to ask their question on this call to contact me directly at 914-765-3190.

Lastly, before Nick commences with his remarks, I shall give the obligatory disclosure statement. During this call we may provide forward-looking statements that relates to the future performance of the Company. These forward-looking statements are not guarantees of our future performance. Our actual results may differ materially from such forward-looking statements due to a number of potential factors. Additional descriptions of these factors can be found in filings we've made to the SEC which can be found on our website at www.MBIA.com. And with that I'll turn the call over to Nick.

Thanks, Greg. Good morning, everyone. Our first-quarter financial results were largely in line with our expectations. Diluted earnings per share decreased 4% to $1.46 compared to $1.52 in the first quarter of 2005. The decrease was due primarily to an unfavorable comparison of net realized gains on derivative instruments and foreign exchange. Last year's gain amounted to $0.10 per share while this year's gain was only $0.01 per share. Operating income per share, which excludes the effects of net realized gains and losses, increased 3% to $1.45 from $1.41 in the first quarter of 2005.

Our first-quarter results had a higher-than-expected amount of premium earnings from refunded issues. Excluding refunding-related earnings, first-quarter 2006 operating income per share increased 3% to $1.29 from $1.25 for the first quarter of 2005. While interest rates are higher than last year's rates, our premium earnings from refunded issues remain strong. This year's refunding results included two significant terminated deals, one in structured finance and one from non-U.S. public finance, that contributed favorably to our earnings from refunded issues.

Turning to our writings, market conditions continue to challenge our industry. Credit spreads remain tight in most of our markets, debt issuance has declined in some of our markets and competition remains intense from both the uninsured execution and monoline competitors. MBIA's total adjusted direct premium, or ADP, declined 63% versus 2005's first quarter to $116 million. There were a number of factors and trends that impacted our first-quarter writings. The U.S. public finance market experienced a 29% decrease in debt issuance and a 44% decrease in insured par value. The combined effect yielded a 66% reduction in our U.S. public finance ADP versus last year's first quarter.

Looking forward to the balance of the year, we expect competition to remain tough and credit spreads to remain tight. In fact, several industry participants have projected a 30% fall off in overall volume this year which includes a greater percentage decline in refunding deals. However, we believe insured penetration could increase for the balance of the year. We also hope to improve our business production for the balance of the year but, as we have indicated to you, we will not do so if it means sacrificing adequate pricing or acceptable credit terms.

In global public finance, excluding the U.S., we did not close any new deals during the quarter and therefore we recorded no ADP. We continue to see strong competition for European PFI and infrastructure deals. But we are seeing robust opportunities in Latin America and elsewhere. In fact, we have already closed two international public finance deals in the first week of the second quarter, the Aspire Defense Finance UK military housing deal and the Toluca Mexican toll road deal which have provided us with approximately $100 million of combined ADP.

In the new issue domestic structured finance market mortgage-backed securities dominated publicly issued ABS deals. Even though there was sizable issuance in the MBS segment of the market in the first quarter we did not participate. In the auto segment where MBIA tends to insure more business, the market experienced a 65% decline in insured par value with only $2.7 billion insured during the first quarter.

MBIA's first-quarter domestic structured financed ADP writings of $15.8 million were down 89% versus last year's first quarter and they consisted primarily of repeat clients in the auto, rental fleet and structured settlement asset classes as well as some secondary market insurance. On the other hand, our international structured finance was the ADP bright spot for the quarter. The $52.2 million of ADP represented a 73% increase versus last year's first quarter and resulted from deals in the CDO and intellectual property asset classes.

Now I'll turn back to our GAAP financial results. We've added a new line to the income statement. Interest expense, which has been added to total insurance expenses, largely represents interest expense associated with the variable interest entities, or VIEs, that we've consolidated onto our balance sheets in accordance with FIN 46. Due to an increase in VIE interest income and interest expense we have elected to add this new line. While interest income for VIEs continues to be shown in net investment income, VIE interest expense has been reclassified to the new line for the current and prior years.

Excluding the change in presentation of VIE interest expense, pretax net investment income increased by 7% and after-tax net investment income increased by 8%. The growth was primarily due to the increase in the asset base of invested assets, but also reflects the slight increase in average pretax investment yields.

Total insurance expenses increased 19% versus the first quarter of 2005. The cause of the increase was due to the newly added interest expense line, which has a like amount of interest income in net investment income, and the 26% increase in operating expenses. The primary reason for the increase in operating expenses stems from the lower deferral rate that the Company adopted for policy acquisition costs in the third quarter of 2005. Gross insurance company expenses, which are prior to any expense deferrals and do not include ceding commission income, declined 1% versus the first quarter of last year. Gross operating expense is the primary measure that the Company focuses on in managing its expenses especially in this difficult market cycle.

In keeping with our GAAP loss reserving policy we added an amount equal to 12% of our scheduled earned premium to our loss reserves through the income statement in the first quarter. Regarding case incurred activity; it was a quiet quarter with only an $11 million addition to case specific reserves. The net effect resulted in a $9 million increase in unallocated loss reserves. Similar to last year's first quarter, this quarter's case incurred activity largely resulted from our prior tax lien deal and accretion to the AHERF transaction.

Touching briefly on the credit quality of our overall portfolio, 81% of our outstanding book carries an underlying rating of A or better which is unchanged from year-end. The percentage of our portfolio rated non-investment grade also remained unchanged from year-end at 2.1%.

Our asset management business registered another excellent quarter driven by continuing strong demand for the Company's asset liability products, average assets under management excluding the conduit grew 14% to $47.5 billion from the first quarter of 2005. Its pretax operating income, which excludes the effects of net realized gains and net unrealized losses on derivative instruments and foreign exchange, increased 6% versus last year's first quarter and resulted in an 8.7% contribution to the Company's pretax operating income.

MBIA recorded net realized losses of $0.9 million for all business operations for the first quarter in 2006 compared to net realized gains of $1.7 million in the first quarter of 2005. The first quarter of 2006 net realized losses included a $13.9 million write-down of a receivable balance that the Company obtained under salvage and subrogation rights.

MBIA's operating return on equity for the first quarter of 2006 was 12.4%. As we noted on the conference call for the fourth-quarter's results, we have refrained from repurchasing shares during the first quarter pending the final settlement relating to the regulatory investigations. There are still approximately 5 million shares remaining under the existing share repurchase authorization.

Lastly adjusted book value at March 31st was $71.21 which increased 1% from 12/31/05. The increase was negatively impacted by a reduction of approximately $160 million in after-tax net unrealized gains due to the effect of rising interest rates on our bond portfolio.

Just as a reminder before we open the lines for questions -- we are still awaiting final settlement on the regulatory investigation and we won't be able to comment on any aspects of the investigations at this time. To sum up, MBIA faced significant challenges during the first quarter and while our top line results were under pressure, our financial results were in line with expectations. As always we continue to adhere to our pricing and underwriting disciplines which we believe are critical tenets to adding long-term shareholder value. And now I'll take your questions.

(OPERATOR INSTRUCTIONS). Ken Zerbe, Morgan Stanley.

My first question deals with the U.S. structured finance business. What do you need to see in the market or what do you need to have happen in order for you to write more structured finance business? And I ask because the ADP results -- or your ADP results compared to Ambac's obviously were very, very different this quarter.

Ken, I would say that clearly we need to see an increase in credit spreads in that market. The increase in credit spreads will certainly open up pricing opportunities in order that we can price transactions to what we think are adequate returns. I think in addition we've refrained from the mortgage-backed sector which was pretty robust in the first quarter in the marketplace. But given some concerns that we had in terms of some of the seller/servicers and some of those transactions and some of that pricing we refrained from entering that market at this time.

So I guess broadly speaking, do you think that your competitors are under pricing their business in that market?

We are just not comfortable with some of the pricing in that market. I can't speak to what our competitors are doing.

The second question I had was on your case losses, you mentioned that you took additional losses related to your tax lien portfolio. Is there any reason why you can't take a onetime large loss as opposed to taking small losses in each of the quarters?

Each quarter we have to go through an analysis to make our best case of what the potential loss can be. And as information filters through in terms of how the collections on those tax liens are doing we can react to that information. But until you have adequate information to make a better guess as to what an ultimate loss will be, we can only go as far as we can given the information that we have.

Understood. Are there any particular items that you've seen or what has been changing over the last couple quarters on the margin that has led you to take additional losses?

There's one remaining tax lien transaction. The net exposure to us in that transaction is about $42 million. Right now the bulk of that transaction -- those tax liens are in one city and we're going through the process of trying to make an evaluation as to the collectibility of those tax liens in that city and that's a difficult process -- it's a lengthy process. Up until this point, there had been other states in that particular tax lien transaction that we've sort of worked through and are comfortable in terms of where we stand as to what we can collect in other states or what we can't collect. And as we walk through that process that's how we make a determination, quarter by quarter.

All right, great. Thank you very much.

Gary Ransom, Fox-Pitt, Kelton.

I was wondering if you could talk a little bit about the outlook for refundings in the sense that it's been so heavy lately. Is there something to be said about how much is actually remaining to be eligible for refundings? And whether -- since there's been so much -- is there a lot that's been taken out in the sense that there's not opportunities to refund too much?

It's a difficult question, Gary, and we do struggle with estimating that number ourselves. We view the $38 million that happened in the first quarter as high. I mentioned in my comments that we had two transactions that were pretty large that had an impact on that number in the quarter. But as much as you would certainly believe that a lot of the refunding activity has taken place, continual opportunities pop up given where interest rates may be, given when a particular transaction was first underwritten. So it is hard to predict and we can certainly see continued refunding activity during the year.

Okay, thank you. And another question on the expense side. You mentioned that the gross expense is down 1%. Is that essentially keeping everything flat that you can or are there moving parts in there that are worth talking about?

I don't think there are too many moving parts there. I think in our operating supplement we give quite a good level of detail. You can see that compensation, which is our biggest cost of our gross insurance operating expenses, is down for the quarter. Most of the other line items on there are down. So I don't think there are too many moving parts that really are having a large impact.

Okay, thank you. And maybe one last thing. On the April comment about the large transaction, can you tell us anything about other things that might be in the pipeline that are large transactions?

No, we wanted to highlight the fact that the international public finance business that we do is lumpy. We have said that over the years, and as a result a particular quarter's ADP can be skewed by that fact. So the fact that we had two transactions that were very large and closed a week following the quarter, we just wanted to highlight given the size of those transactions. But I don't want to comment on anything else in the quarter.

All right, thank you.

Mike Grasher, Piper Jaffray.

You mentioned the 5 million shares remaining in the authorization. Assuming someday that you would get back in the game and repurchase some of that, what sources do you have in place to help fund that repurchase?

You have the ordinary dividends that you can take from the insurance company up to the holding company that would be available for share repurchase. As you saw in our 10-K disclosure, we did move in late February another $280 million out of the insurance company up to the holding company. In addition to that, at any point in time we can ask the New York State Insurance Department for a special dividend to take more money out of the insurance company up to the holding company, which would be available for share repurchase.

Okay. And then just to follow-up on your comment about the CDOs that you did internationally, can you give us a little bit more background on the types of CDOs that you had done in terms of the sector they were involved?

I don't really have too much more -- I would just say they are typical CDO type transactions that we were able to do during the quarter. Nothing unique about them.

Okay. And then fixed income assets, they've grown nicely over the past couple of years. Can you tell us more about that business in terms of what makes it attractive and has the growth in the assets been driven more by new acquisitions versus performance?

Are you speaking about assets under management in the fixed income operation or --

Yes.

A lot of that growth is in our asset liability type products that we have. A lot of it is GIC products that are offered to municipalities and other entities and there has been a high demand in terms of that money around waiting to be analyzed. And we were able to put a spread on that business and that's how we could make our money. So that has been attractive for us. In addition, we have expanded our third-party asset management programs and that is also growing our assets under management for fixed income.

Okay, thanks very much.

Rob Ryan, Merrill Lynch.

Good morning. Could you provide a little more color on the sequential decrease in core earned premiums and what might be some level of stability going forward or eventual growth, what you need to see for that important revenue source to at least stabilize?

It's a good question, Rob; we look at that closely. There are a lot of factors that go into what we consider our scheduled earned premium. Obviously the amount of refundings that have taken place do impact that number, so you're constantly pulling out of the high rate -- a high level of refundings that we've seen over the last 2.5 years. So that certainly has impacted whatever potential growth you could have seen in terms of earned premium had those deals stayed out there. So that has one impact.

Obviously the amount of business that we right is also critical. So writing less business for a particular quarter or particular year will flow into what scheduled earned premiums will happen over time. So both of those have obviously significant impacts. The other thing is mix of business. Obviously the tenure of the book, some of the structured finance deals, if they go out longer, will have an impact as to how earned premium will flow through. We have a lot of factors in there in terms of what the scheduled earned premium will be.

Okay. Switching over to the investment portfolio. Given today's new money investment yields, are you more optimistic about some growth or some overall portfolio lift from where you can invest the money today?

Yes. We've shortened our portfolio to a great extent and we've talked about that in the past. And the duration is 5.2 years and if rates continue to rise we'll make a consideration as to whether we want to move further out in the curve. But certainly, I think as you can see, excluding the noise relating to the variable interest entity that's on the investment income line, we saw growth in investment income of 7% and on an after-tax basis 8% because you've seen us move more into our tax-exempt. I think given where rates are and as they continue to rise certainly we can see additional earnings coming through that source.

Okay. And given that last year was somewhat unusual for the pattern of dividends out of the insurance company, now that you've taken $280 million in February, is it your intention to continue with regular quarterly dividends? If so, about what size would they be? And you also mentioned the possibility of a request for a special dividend at some point as well.

If you take the $280 million that we took as a dividend the end of February and take the $95 million that we took at the end of December, we have effectively taken out of the insurance company up to the holding company the statutory limit. So the next time we can go back under just ordinary circumstances would probably be in December of this year. As a result we would probably consider a special dividend if you wanted to take more money out of the insurance company up to the holding company.

Okay. So at this point regular quarterly dividends are unlikely and if we hear of a request for a special dividend then that's the most likely source of dividends out of the insurance subsidiary?

Yes, yes. Keep in mind we have close to $400 million at the holding company right now. But yes, that's what we would do.

Okay, very good. Thank you.

Darin Arita, Deutsche Bank.

Good morning. Can you give us an update on how the discussion went with Moody's regarding MBIA's excess capital position? I think I understood that there was a divergence of view and I was wondering how that may have come together?

The last official statement that I believe Moody's put out was when they talked about our capital position as of 12/31/04 and they indicated our capital position was 1.3 times which is basically the limit in terms of the capital position. We've spoken to them subsequently. They had made statements publicly that looking at '05 they would think that given what conditions were that we would be in an excess capital position.

We've had many discussions with them, we've run models, we've updated some of those results to at least June 30, '05. We ourselves have run obviously our capital position all the way through the end of '05. Given the credit quality distribution in our book of business, given the fact that our net par outstanding is lower, our capital base is stronger from net income, the fact that we didn't dividend out a lot of money in '05, it would be very hard pressed for anyone to come up with the conclusion that we wouldn't be in a significant excess capital position.

Okay.

We continue to work with them and as they work through the process we'll see what their results are, but we are comfortable with where our capital is.

Okay, great. And just moving to the public finance market, can you give us the key as in why the insurance penetration rate could move higher throughout the year and why production could also be higher?

Well, I just think if you look historically the insurance penetration rate did drop -- it had steadily climbed over the years. So we're not sure if this drop is indicative of any change in the market. We definitely think it could go back up. I just think the actual market itself being down 29% is significant. That may continue, it may not. I guess we view that we can maybe have more opportunities as the year progresses compared to what happened in the first quarter.

Okay, great. Thank you very much.

(OPERATOR INSTRUCTIONS). Joshua Shanker, Citigroup.

In terms of the return on equity or return for various lines like U.S. public finance and U.S. structured finance, the way the markets are right now with the tight spreads are they close to being adequate in terms of your view on what you need to see as returns, are they not remotely close? Where are we in your estimation on the markets right now?

Obviously if you are looking at individual transactions, returns could be all over the place. You could have some very profitable deals in terms of that we measure the capital. You could have deals that do not hit our hurdle rates. We've tried very hard here to keep our pricing discipline and I think we've shown that in the marketplace. So when we run into transactions that we believe don't get returns that we don't think are adequate we have walked away from that business.

At this point is it debatable -- or it seems like you've made a large statement with your lack of writing this year. And do think it's up for debate at this point?

I don't think it's all that debatable.

Very good. The other question, on the Mexican toll road, what is the underlying rating of the transaction?

I believe that A- is the underlying rating on that transaction.

Okay, thank you very much.

Mark Lane, William Blair.

Good morning. I have two questions. One regarding expenses and one regarding U.S. structured finance. On expenses, if you look at your overall expense base with -- when you look at gross expenses and compare them to your next biggest competitor, I understand that you've talked about the reasons for the differences, etc., but I think you have like 10% more employees in your financial guaranty operation and the absolute expense differential is like $100 million. So is keeping expenses flat this year the best that we can hope for you? What are you doing to look at other ways to become more efficient?

We're very cognizant of that fact. Obviously depending on what type of business we'll be writing will have an impact on how close we will in fact look at that. So given the circumstances, given what we've written we certainly go through the exercise to make sure that we are running as lean and mean as we can and we constantly will take that approach. I think typically expenses will rise a little bit; the fact that we've actually had them dropping we think is a positive sign. We will continue to focus on that and make sure that we're doing it as best that we can. And we'll look at all areas in terms of where potential cost can be looked at to be trimmed.

You know, at the same time, it is difficult to look at one other competitor in the marketplace -- and I know that obviously that's where the public information is. But we do have other companies out there from an expense standpoint that we also need to compare ourselves to.

Also on U.S. structured finance, I can understand that you're going to have some variation production quarter to quarter and product mix and servicer mix issues, but the difference in production seems so dramatic relative to your next largest competitor and you're implying that the main reason is because of pricing issues. But what other issues could there be?

Are there issues of -- product mix issues or servicer relationships or -- you weren't on a rotation program this quarter? Or what other impact was there? Are you telling us that the only reason that you wrote $15 or $16 million of par is because you didn't like the pricing?

No, that's not the only reason. I think there are certainly clients that like to rotate bond insurers. Some of that rotation did not happen in the quarter, it will happen in other quarters, there's no doubt. I did indicate that there are situations where sometimes we are not comfortable with the credit, we are not comfortable with some of the seller/servicers that are out there at this time. That can change as well. And some of it has to do with price.

So I really do think it is a mix. I wouldn't look at the first quarter and think that that's how it has to be for the rest of the year, but at the same time there are distinctions we make in terms of what we're willing to write and what we're not willing to write.

Okay, thank you.

Ted Wachtell, Millennium Partners.

Just wanted to ask you about the $13.9 million in write-down of a receivable balance that the Company obtained under salvage and subrogation. Was that for Trenwick -- can you tell us? And then I have a quick follow-up.

It was related to a corporate credit that we wrote in the past, correct.

And then the other question I have is regarding some talent you brought in, Bettina Whyte I believe is now a full-time employee there. Can you talk about what she's doing and her team of people are doing there?

Mitch Sonkin runs our IPM or surveillance unit and Bettina works with Mitch. Mitch decided to form a special situations group in our surveillance unit that deals with whatever particular problem credits might arise and Bettina has a great skill set in terms of working through some difficult restructurings or difficult problems. And when those items do in fact come up in the portfolio Bettina would be assigned to those tasks.

So would they be -- when we talk about expense reimbursements --

And by the way, Bettina has been here for about a year now.

Okay, but just recently became full-time?

Yes.

So you formally reported fees and reimbursements as advisory fees. And in the current quarter you said a 27% -- you were at $8.2 million from $6.4 million in the first quarter of '05 reflecting increased expense reimbursements. Can you walk through those expense reimbursements? When you have a restructuring team in place, do they actually become an expense reimbursement?

No. Expense reimbursements are not related to any of our internal costs. But if we're going through a restructuring and we hire outside consultants or an outside legal team, on the particular transaction, depending on the transaction, sometimes those costs can be borne by the transaction itself or by other outside parties. But the fact that we're actually expending the cash and even though we're acting as a flow- through for those expenses, it's necessary to put that through the income statement.

So that item shows up as an operating expense and then when we get that money reimbursed from the outside parties, it shows up as a reimbursement or fee income. So for lack of a better place we decided to change the name of that line from advisory fees to fees and expense reimbursements. And I believe in the first quarter of '06 of $8.2 million, about $2.9 million was actual expense reimbursements. So given the magnitude of the expense reimbursement it's a little more appropriate to change the name of that line.

Okay, thanks.

Jerry Solomon, Bear Stearns.

Good morning. Thanks for taking my question. I missed the first few minutes. I was wondering -- I didn't see anything in your press release or operating supplement, but have you paid any Katrina-related claims during the March quarter?

No, we did not.

Given that we're six months past Katrina, are some of the bonds that you've insured down there, are they hitting the reserve funds before they actually may have to hit you -- may be required to make -- or MBIA may be required to make payments or is that --?

No, there are definitely transactions down there that we have insured that reserve funds have been hit. Clearly the area is still under a lot of stress and we're still looking at those credits with caution. But we'll have to see how that works through, but certainly at this point in time we can't make any calls as to what can happen down there?

Did you say like how many of the par value of the amount of bonds that have hit the reserve funds to-date? Could you tell us what the par value of the bonds that have had reserve funds hit to date have been?

Par value of --?

Of the bonds where the reserve funds have been tapped?

No.

All right, thank you.

Thank you. And this concludes the question-and-answer portion of today's conference. I'd like to turn the conference back over to Mr. Diamond.

Thank you very much, Mary. We also thank everyone who participated on the call today. Once again, I encourage those of you with additional questions to phone me at 914-765-3190. We also recommend visiting our website, www.MBIA.com, where you can find a wide array of additional information on MBIA and our products and services. Thank you for your interest in MBIA. Have a good day.

This concludes today's conference. We thank you for your participation.