MBIA Inc (MBI) 2006 Q3 法說會逐字稿

Good morning and welcome to the MBIA third-quarter 2006 earnings conference call. At this time, all lines are in a listen-only mode to prevent any background noise. After the prepared remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS)

I would now like to turn the call over to Greg Diamond, Director, Equity Investor Relations. Please go ahead.

Good morning and welcome to MBIA's conference call for the third quarter of 2006. This call is also being broadcast live via the Internet, and recorded replays of the call will be available by telephone and the Internet as well. You may find our earnings press release, quarterly operating separately supplement, and other information pertaining to MBIA on our website at www.MBIA.com.

The conference call for our fourth-quarter earnings release will be held on Thursday, January 25, 2007, at 11 AM. We will issue the press release for our fourth-quarter earnings before the market opens on that same day.

Today's call will follow a similar format as prior calls. Chuck Chaplin, MBIA's Chief Financial Officer, will describe and comment on our results for the third quarter and the first nine months of this year. After that, we will have a brief question-and-answer exchange.

Before Chuck begins, I will share our disclosure statement with you. During this call, we may provide forward-looking information relating to the future performance of the Company. These forward-looking statements are not guarantees of our future performance. Our actual results may materially differ from these forward-looking statements due to numerous potential factors. Descriptions of these potential factors can be found in filings that we have made to the SEC, which can be found on our Company's website. And with that, I will turn the call over to you, Chuck.

Thanks, Greg. Good morning, everyone, and thank you for your interest in MBIA and your participation on the call. Our financial results for the first nine months were largely in line with our expectations. Diluted net income per share was $4.67, $0.83 more than the same period of 2005 or a 22% increase. That increase includes the $0.52 per share after-tax accrual we made in last year's third quarter, which was our estimate for the amount that we would pay in connection with settling the previously announced investigations by the Securities and Exchange Commission, the New York Attorney General's office, and the New York State Insurance Department.

Operating income per share increased 8% over the first nine months of 2005. In the third quarter, operating income excludes the results of a discontinued operation. We signed a letter of intent to sell our MuniServices operation, and therefore it is now being shown as a discontinued operation on our financial statement. Operating income, excluding the net income effect of refundings, was $3.94 for the first nine months of 2006, which was a 5% increase over the same period last year.

For the third quarter, net income per share increased 53%, including the impact of the accrual we made in last year's third quarter for pending settlement of the regulatory investigation. The third quarter's operating income per share increased 12%; and excluding refundings, operating income per share was up 9%.

The acceleration of premium into income due to refundings continued to be higher than last year's level. For the first nine months of 2006, earnings from refunded issues contributed $0.56 per share, which was up 27% versus the comparable period for last year. The third quarter's $0.18 per share from refundings is an increase of 29% over last year's third quarter.

Now, before going through our income statement, I will talk a bit about our new business activity. Premiums from new policies typically are a very small part of our earnings in the order in which they are issued. But they are a very important source of our future earnings, because they add to our deferred premium revenue and the present value of future installment premiums.

As you know, the challenging market conditions of the last several quarters persisted through the third quarter. Tight credit spreads and intense competition from both within and without the bond insurance industry continued to impact our business production. Despite these pressures, the sum of our deferred premium revenue and PV of installment premiums has remained level at about $4.9 billion over the past year.

For the first nine months of 2006, adjusted direct premium, ADP, declined 31% to $610 million compared to $880 million in the first nine months of 2005. For the third quarter, we recorded $210 million of ADP, which was 10% below last year's level.

The U.S. public finance market continues to be our most challenging sector. MBIA's U.S. public finance ADP was off 50% for the first nine months and was down 30% for the third quarter. While MBIA maintained the second-highest market share of insured volume for 2006, according to the Bond Buyer, the industry's insured volume was off 28%.

Lower credit spreads and differences in the mix of business, including a relative absence of larger, more complex transactions, also contributed to our lower level of premium production. By way of example, our portion of the Yankee Stadium deal has provided us with our second-largest ADP in this segment this year. However, last year, we had five deals larger than Yankee Stadium, all from the transportation and military housing sectors, in which debt issued was -- less debt was issued in the first nine months of this year. Therefore, we have seen fewer opportunities in those sectors this year.

Our non-U.S. public finance sector has been a bright spot for us this year. While our nine-month ADP was dominated by two deals that we closed in the second quarter, we insured another eight transactions in the third quarter with aggregate ADP of $32 million. At $134 million of ADP for the nine months of 2006, our non-U.S. public finance production was nearly double the ADP of the same period last year.

Tighter credit spreads and intense competition have also negatively impacted MBIA's U.S. structured finance production. For the first nine months of 2006, ADP in this segment declined 29% compared with the first nine months of 2005. However, sequentially, both Q2 and Q3 had strong production with third-quarter ADP of $74 million being 23% higher than last year's third quarter.

While almost every segment of our U.S. structured finance business saw a decline in ADP for the first nine months, there were several risk types that had favorable results in the third quarter. In particular, CDOs, auto loan, ABS, and residential mortgage-backed securities.

For non-U.S. structured finance, ADP was down for both the nine months and the third quarter by 38% to 50%, respectively. While we insured the same number of deals in each quarter, last year's deals included a particularly large premium for an aircraft lease securitization that accounted for over one-third of our non-U.S. structured finance ADP for the third quarter last year; and that makes for a difficult comparison.

While our global structured finance ADP was off 33% for the nine months, our insured par amount was only down 3%. This year's par production had a higher average credit quality than last year. 59% had underlying AAA ratings versus only 46% last year. So both the mix of business and the competitive pricing environment contributed to the ADP decline.

Turning now to our financial statement, scheduled earned premium declined 4% for the first nine months of 2006, reflecting lower business production in 2005 and 2006, as well as the effect of heavy refunding activity in more recent quarters. However, the decline in scheduled earned premiums was only 2% for the third-quarter comparison.

Earned premiums from refundings remained strong this year, growing 28% to $128 million from $100 million for the first nine months of last year. However, sequentially, our third-quarter 2006 earned premium from refunding represented a slowdown from our second quarter's result.

Total earned premiums, including scheduled and accelerated premiums, for the first nine months of 2006 were 1% higher than for the first nine months of 2005.

Pretax net investment income in the first nine months of 2006, excluding net realized gains and losses, increased 18% to $449 million. Approximately one-third of the increase resulted from increases in average invested assets and average pretax yields. Another third of the increase was from interest received on variable interest entities or VIEs, which have no bottom-line impact.

The last third of the increase came primarily from two items -- interest received on the Northwest Airlines (technical difficulty) EETCs, and interest received on reimbursed expenses, which each have a significant bottom-line effect. Excluding the effect of these last items, pretax net investment income for both the nine months and third quarter increased by 6%.

We have included a new table on this in our quarterly operating supplement. It is at the bottom of page 11. It shows the normalized pretax net investment income.

Fees and reimbursements were up 45% in the first nine months of 2006 to $29 million. Almost $16 million of that amount represents reimbursements we received for expenses that we incurred on two MBIA insured credits. I mentioned interest on one of those reimbursements a moment ago.

Total insurance expenses increased 18% in the first nine months. The increase resulted from higher VIE interest expense; interest on financing the Northwest Airlines EETCs that I just mentioned; and a 10% increase in operating expenses. That increase in operating expenses stems from the lower deferral rate that we adopted for policy acquisition costs in the third quarter of 2005.

Starting this quarter, operating expenses on the quarters are now on an apples-to-apples basis from a deferral rate perspective. Third-quarter 2006 operating expenses decreased 4% versus last year.

Gross insurance company expenses, which are expenses prior to deferrals and excluding ceding commission income, declined 3% versus the first nine months of last year. We use gross operating expenses as the primary measure for assessing our expense levels and evaluating our expense management.

In keeping with our loss reserving policy, we recorded 12% (technical difficulty) scheduled net earned premiums as loss and loss adjustment expense for the first nine months of 2006. For the quarter, this resulted in an expense of $20 million. We also incurred $17 million of case activity associated with various credit. Net of these items, unallocated loss reserves grew by $3 million in the quarter.

We did not add any case loss reserves for our Hurricane Katrina or our Eurotunnel credit during the quarter. However, regarding Eurotunnel, we did make interest payments totaling about $900,000 during the quarter, which relate to a small portion of our Eurotunnel exposure and for which we expect to be fully reimbursed. About 98% of our Eurotunnel exposure is not direct insurance of Eurotunnel debt, but rather relies upon Eurotunnel debt as collateral for repayment of our insured obligation. The interest payments that we have made were related to the other 2% of our exposure, which is direct debt of Eurotunnel.

Incidentally, on our website, we have additional information on the Eurotunnel credit, including a table that details all of our Eurotunnel exposure.

Touching briefly on the credit quality of our overall insurance portfolio, 81% of our outstanding book carries an underlying rating of A or better, which is unchanged from a year ago. The percentage of our portfolio rated non-investment grade, as determined by Standard & Poor's and Moody's, remains the same as last quarter at about 2.2%.

Moving on now to our investment management services segment, we are seeing continued strong demand for the Company's asset management expertise, as average assets under management year-to-date and excluding our conduit grew 16% to $50 billion. The segment's pretax operating income, which excludes net realized gains, and net gains and losses on derivative instruments and foreign exchange, increased 15% versus last year's first nine months, and contributed 9% to the Company's pretax operating income. Most of the income growth was from our asset liability products.

MBIA recorded net realized gains of $22 million for all business operations for the first nine months of 2006, compared to net realized losses of $5 million in the same period last year. This year's net result included a $10 million gain related to the sale of MBIA's common stock investment in Ram Re, which went public during the second quarter.

Speaking of sales, we have executed a letter of intent to sell our MuniServices operation to an investor group led by the management of MuniServices. Therefore, we have eliminated the municipal services segment on the face of our income statement and moved the MuniServices business to discontinued operations.

Returning to our financial results, MBIA's operating return on equity for the third quarter of 2006 was 12.6%. That is for the trailing four quarters.

As we have mentioned in the last few conference calls -- or actually I have mentioned in the last conference call, and others mentioned prior to that -- starting with the third quarter of 2005, we have refrained from repurchasing shares of MBIA's stock pending the final settlement of the regulatory investigation. A year has now passed since we posted the accrual for a settlement. We believe that we should continue to hold off on share buybacks for now; but we will also continue to evaluate that decision over time.

If we were to decide to reinitiate share repurchases, we would make an announcement in advance of buying any shares. We firmly believe with our very strong capital position and a share price currently below adjusted book value, that share repurchases would be an effective capital management tool. There are approximately 5 million shares remaining unpurchased under our existing Board authorization.

As you have heard several times before, since we are still waiting for a final settlement on the regulatory investigation, we will not be able to comment on any aspect of the investigations at this time.

Now to conclude my scripted remarks, going forward, we see favorable underlying growth opportunities in each of our insurance markets. However, ADP production is likely to be constrained until credit spreads widen. As always, we continue to adhere to our pricing and underwriting discipline, which we believe are critical for adding long-term value for our shareholders.

So now, let's open up the call for your questions.

(OPERATOR INSTRUCTIONS) Ken Zerbe with Morgan Stanley.

I just want to clarify really quickly on the investment income how you broke it up into thirds. You were referring to the thirds of the year-to-date increase, correct? The $69 million year-over-year?

Yes.

Okay. Would it be fair if you assumed that the final third of that, which relates to the Northwest and the interest income from the LPE, that that one-third is for the unusual and nonrecurring amount of about, what, $0.11 per share? Is that the correct number?

Yes, those amounts are unusual. I didn't actually calculate it on a per-share basis. But they are, in fact, nonrecurring.

Okay, so that is roughly $23 million of it. Okay, no problem.

Then can you just talk a bit, in terms of refundings. Was there anything unusual there? I mean, obviously, it is still very, very high. All things considered. Is the termination fees that you are seeing, was there one or two large accounts that maybe have refunded?

I can tell you that forecasting our refundings has been very difficult. In general, if you look at the last say three years, our refundings have on average run at about 17% of total earned premium. But that pace was higher in 2006. It is about 20% of total earned premium in 2006.

What seems to make a lot of the difference is larger transactions that are refunded and/or terminated. In the first three quarters of this year, in each quarter we had four refundings where the accelerated premium was over $1 million. Those 12 make up 30% of the accelerations that we have seen in 2006.

So the large transactions do seem to be the driver of the elevated levels. But you know, each one of those deals has a very unique story associated with it. So it is not -- we wouldn't necessarily tie it to changes in market interest rates or anything like that.

Okay. Maybe can you make any comments on the mortgage-backed market? Are you seeing any deterioration or spread widening in the residential or commercial mortgage-backed area?

You know, this is an area where we have not been terribly active in the past. Although as I have mentioned, we did have some business in the third quarter. So you know, we do see some transactions that are priced at a level that we can justify.

But when you look at the garden-variety MBS transactions that are taking place, many of them are just not going to meet our pricing hurdles.

But it sounds like it is improving just a little bit, at least, for you guys.

Certainly. We had a meaningful increase, (indiscernible) percentage increase. But it is like we went from zero to 4 or $5 million of ADP in the third quarter.

Great, all right. Thank you very much.

Andrew Wessel with JPMorgan.

I just had a question about what you are seeing, specifically, kind of this quarter, and maybe even looking forward, in the structured finance business in the U.S. Are there still a lot of opportunities there for you? Do you feel like, going back to the last question, RMBS, is this a place you can continue to add? Or is it kind of selective and there is the sub structure still putting pressure across pretty much all asset classes in that segment?

I mean, we think the pricing pressure comes from a lot of different sources. It comes from the senior subs; and frankly it comes from us, the monoline industry. So pricing is very razor thin in that market.

Where we think that we see some opportunity is more in the CDO side, and specifically commercial real estate, CMBS and commercial real estate CDOs. So that is an area where we have been more competitive, we have seen more opportunity in the past, and we think we have fielded a very good team there.

(multiple speakers) I was just going to say that the more commoditized products in that space have been challenging for us.

Okay, great. Thanks. Also is there any -- can you provide any color for fourth quarter in terms of refundings? Does it look like pace-wise it is kind of keeping up with what it's been doing in the first nine months? Or is it --? Obviously it is lumpy and a lot of stuff could come in at the end. But from what you are seeing, is it seemingly keeping up with that high pace?

Because obviously everybody is expecting these refundings to kind of kick down. But that has been for pretty much the last year, we have been expecting refundings to kick down. It has been pretty kind of stably high.

I have been expecting them to go down each quarter. In the third quarter, if you look at just what we experienced over the course of the third quarter, by September the pace did seem to be slowing a bit.

But as I said before, it is notoriously hard for us to forecast what is going to happen on refundings, particularly because a lot of the decisions are not driven by market interest rates.

Sure, okay, great. Thank you very much.

Tamara Kravec with Banc of America Securities.

Just a follow-up on Ken's question so I understand. The investment income, $23 million of it, of the difference year-to-date, is nonrecurring?

Let's see. Let me just look at what we have got.

Because that was related to the two sort of nonrecurring events; is that --?

Yes, I would say that with respect to those two items, we do expect that they are not going to remain. We are not expecting to repeat them. And they are not offset by expense, otherwise. So they do drop right to the bottom line.

To the bottom line, right. Okay.

So, we should expect that some of that investment income is ongoing.

I misspoke, let me correct one thing. There is interest expense associated with one of the two items, but there is a meaningful bottom-line impact to them. We do expect that they are not going to remain, going forward.

Okay, did you quantify how much of that actually was in the third quarter, of the $23 million?

You have $23 million of investment income for the nine months.

Right, I know you said it went up 6% in the third quarter, but I -- just wondering, you know, like if there -- was there anything in the comparable quarter in '05 that would make that calculation not an apples-to-apples comparison?

Yes. The pickup in income in the third quarter of 2006 is different and more than the pickup in income in third quarter of 2005.

Right, okay. Then, on the advisory fees, and I am sorry if I missed this and you said this. The strength in that in the third quarter was driven by primarily what?

On advisory fees and reimbursements, we had two significant reimbursements in the third quarter that were reimbursements for loss adjustment and loss prevention expenses on one credit, and loss adjustment expenses on another credit.

Okay, so it is probably more typically in the 5 to 10, which is really where you have been running; would that be fair?

Yes. You know what happens is that, in those two cases, we are being reimbursed for expenses that sort of trickled out over a long period of time. We just received all the reimbursement at once. So it is -- that is an abnormally high level of reimbursement.

Right. Okay. Then just on the Eurotunnel, I know you talked about the interest payments that you made in the quarter. Can you just give us an update on the status of where the bankruptcy rulings are? Kind of what is going on in the background? And whether you still anticipate making any payments on the other 98%? I guess that would probably be beginning February, right?

Yes, the negotiations are ongoing. There is a proposal that is being discussed right now as between management, the buffer creditors, and the ad hoc committee. That seems to have some traction, just based on the feedback that I get from our people over in France. We are closer to a deal than we were the last time I talked to you about this.

It is really too soon to say whether it will be successful, but there does seem to be some progress being made.

In the event that progress is not made, we expect that, if there is no consensual agreement by February of 2007, that we would be in a position to advance interest payments. Again, at this point, we would expect that we would be fully reimbursed for anything that we advance.

Okay. My last question is on the regulatory investigation. I know -- I'm sensitive to the fact that you may not be able to answer some of this. But you have accrued $75 million, right? The total exposure as I understand it is somewhere around $275 million. So would it be fair to say that would be the maximum loss exposure there, minus any kind of fees or penalties that are assessed as part of the investigation?

Yes, let me just go back. I think, what we -- last year in the third quarter, we accrued $75 million, which is our estimate of the cost of a settlement.

Right.

Frankly, the $275 million, I think, is not a number that we recall.

Okay. All right, thank you.

Geoffrey Dunn with KBW.

I wanted to go back to buyback. You guys have signaled all along it is your choice that you're not buying back stock. But that was a choice originally undertaken because you thought a settlement was imminent. Now we are here a year later and we're still waiting on the SEC.

When does your thinking change? I know you are considering it. but what is the factor that makes you shift from waiting and waiting and waiting, to starting to put that excess capital to work to help your returns out?

Thanks, Geoff. We currently expect that a settlement will occur soon. So long as we expect that a settlement will occur soon, we think that it is prudent and appropriate not to be in the market repurchasing our shares.

To the extent that that changes, and it could change for a couple of reasons, right? We could enter into a settlement, or we could not think that a settlement is coming soon any longer. Obviously, either of those two events would change our view.

To the extent that we were still in the same very strong capital position as we are today, we would probably wish to commence repurchasing shares. We would make an announcement to that effect.

Let me ask it differently. I am not sure you can answer this, but you thought a settlement has been imminent and soon for 12 months. So has something changed that you actually now truly think it is soon? Or is it the same thing that could happen any day, just because it is kind of strange that it hasn't happened already?

Obviously, it is out of our control. The only thing I can say is really that we know we are closer to a settlement now than we were last quarter. But I don't -- there is no new news that I have, really, to bring on it.

Okay, thanks.

Rob Ryan with Merrill Lynch.

Just for clarification, back to this investment income confusion. On page 11, the new schedule that you provided (multiple speakers).

Yes, let me just turn to it. Yes.

For the third quarter, you're indicating investment income of 130. 1 on that first line.

Yes, for the core investment portfolio in the insurance company.

Would there be any reason that that is not a ballpark kind of number for the fourth quarter? Just ballpark, maybe a little bit higher on some growth of assets; but that is around what is?

Gee, there are a couple of things that will affect that. Turnover in the portfolio and the level of interest rates that are available for new money are going to have an impact. I guess you would say in general that impact would be to cause investment income to be higher. It is hard to say, I guess.

The flipside, though, is that we are increasing our holdings of tax-exempt paper. That will tend to have a negative impact on pretax investment income. So it depends on how you evaluate those two factors.

Okay. From the other component of it, although it was not the case in the third quarter that the second line, the VIE and other investment income, was approximately offset by VIE interest expense, there was an actual pickup in the third quarter. But going forward in general, most quarters, would you not expect an approximate matching of those two numbers?

I would add expect that for variable interest entities, they should be pretty much matched. They should be pretty much matched.

Okay. So regardless of where things happens, about year-over-year changes for the first nine months of this year, looking forward, if you keep those two kinds of things in mind you should probably be pretty good?

Yes, I think that is right.

Okay. What is the latest from your perspective on what might come down the road for changes to accounting, based on what you are hearing the FASB is considering?

There are a couple of things. You know, the FASB has got a financial guarantee project underway. There are really three areas I guess that they are looking at. Loss reserving and valuation of claim liabilities, revenue recognition, and then deferred acquisition costs. The first two are likely to have a bigger impact, I guess, than the latter.

On the loss reserving side, the FASB announced that they are going to prepare a draft standard that requires all loss reserve decisions to be reflected in income. The impact of that for us would be some greater earnings volatility.

Just as an example, in the fourth quarter of 2005, we took a large reserve for our Northwest Airlines exposure when they entered bankruptcy. Then in the second quarter of 2006, we released a large part of the reserve that we had taken, as we sold unsecured claims and some of the collateral at better prices than had been anticipated.

So, under the new standard that the FASB is considering or is putting out for public comment, you would see that flow through our earnings as a reduction in earnings in Q4 '05, and then a pop in earnings in Q2 '06. The facts of that case, our disclosures about the case might not be any different, but the geography would.

So it is really too soon to say whether the change that the FASB is considering would have any impact on the amount of reserves that we hold, because we believe that we are currently adequately reserved against probable and estimable losses. But the way that the accumulation of those reserves over time goes through the income statement definitely would be changed. It would lead to some greater earnings volatility.

Then there is the revenue recognition part of the proposal. I think the FASB is a little less far along with respect to income recognition than they are for loss reserves. Their intention is to get all three of them to the finish line at the same time.

The method that the FASB is considering ties the recognition of revenue, of premium income, to the debt service on the underlying obligation; as opposed to the methodology that is used by the entire industry today, which is to tie revenue recognition to both debt service and the passage of time and the extinguishment of exposure.

So the impact of that would likely be, for most insurance policies, that the recognition of income would be slower. So, income would be lower in the early years. Maybe that has a differential impact on companies depending on whether they are large or small, or what their new business is relative to existing business. But suffice it to say that it affects everyone in the industry.

Frankly, the deferred acquisition cost piece, they are less far along than they are on revenue recognition. I don't really -- it is sort of too soon to say whether there is any material impact of that aspect if it. Was that helpful?

Yes. Would you expect a delay in the implementation of the loss reserving part of this whole project, based on the other portions not being as far along? Or could it potentially be piecemeal?

It is hard to say, but we have been attending the FASB meetings. At least, they have sort of said anecdotally that they would like to finish this whole project at once. But obviously it is completely out of our control. If they complete their work on the loss reserve piece, they could move directly to implementation.

Would you anticipate a full-year adoption of this at some point? Meaning that it wouldn't become required as of, let's say, June 30, 2007; it either would be from day one 2007 or delayed until January 1 of '08.

It is really hard to say. I am sorry, I don't even have any background that would help me evaluate that question. I just don't know. It's entirely up to the FASB.

Just from a messiness perspective, perhaps they're listening. Okay, thank you.

Thank you.

Mark Lane with William Blair & Co.

Just had a question regarding gross expenses. It seems like you're doing a pretty good job of managing the absolute level of gross expenses. So if we are continuing to be in a difficult new business environment, do you think it is probable that you will be able to continue to manage that level down a bit into next year?

We are very focused on expense management for just the reason that you have cited. We are actually in the midst of our planning process now for 2007. So I don't still really know where projected expenses are going to come out. But we are asking our business units to think about how expenses would need to adjust in the event that we were to see similar or worse market conditions than we have seen over the past couple of years.

So we're highly sensitive to it, but I don't have a number that I can give you for it.

Okay. So in looking at just the different components within gross expenses, is there anything that you have done down specifically to keep the comp level pretty much flat; and some of these other line items that have maybe been a little bit more variable, like the fees and professional services and the loss prevention expenses?

Yes, we know that comp is 60% of our expenses. That is the area that we have focused on the most. You know, in every department at MBIA, we are asking the department heads to identify ways to do what they do more efficiently.

We have taken on a whole array of initiatives to try to contain the growth of headcount. So without going into the minutia of it, headcount growth and compensation growth is a very big focus of the management system here.

Loss prevention expenses are a little more related to what the status is of the portfolio. We are in a benign credit environment. Therefore, we are seeing some lower LPE expenses in 2006, and we would expect to see that trend continue.

Okay, but on the compensation expense, it is basically at this point managing headcount. There is not anything you have done in terms of adjusting benefit plans, or changes in the compensation of bonuses, or anything like that. Is that accurate?

Well, no. Not really. Our bonuses and incentive compensation plans are all predicated upon the performance of the business.

I'm sorry to interrupt; but there's different things you can do in terms of changing mix of stock and cash, and limiting certain things. Other than the fact that the business is not growing this year, an incentive comp would not be -- would reflect that. But there is not any other special things that you're doing that does not appear to manage that number down?

No, we have not been in the -- we have not been reducing benefits and the like. We think that we offer a market-competitive benefit plan and we expect to continue to do so.

Okay, thank you.

Darin Arita with Deutsche Bank.

Just keeping on the expense question here, but going to corporate expenses, it seemed to jump up in the third quarter to $5 million. I think it was running at around 2 to $3 million in the first and second quarters of '06. Is that increase a function of Capital Assets being allocated there, or is there something else?

Yes, in part. We incorporated Capital Asset in the third quarter and that contributes about $500,000 of the increase. The balance of the increase really is legal expenses related to the regulatory investigations and related litigations that have spring up around the regulatory investigations, which we talk about in the 10-K. Actually, I guess they are repeated in the Qs.

Okay. Then I guess turning to the investment management services segment there, the Company has had some very nice growth. Can you just comment on what is driving the demand for that business?

There's two things. First is, on the advisory services side. We have been ramping up a structured investment vehicle that we call [East Fleet]. It is a money market SIV, so it is a short-term investment alternative for financial institutions.

In the third quarter, we added something like $3 billion of assets in that vehicle. So that is part of the asset growth.

I would say that the income growth, though, doesn't really come from that sector, because it is short-term and there is not a lot of spread to be had there. The income growth comes from the asset liability products, where we have seen meaningful growth. It has been pretty steady over the past couple of years as we have issued so-called muni GICs as well as MTNs at triple-A levels to run basically a double-A investment portfolio against and enjoy the credit intermediation spread.

Okay. I think one of the rating agencies has commented about the size of non-financial guaranteed businesses. Is there any constraints on MBIA in growing these businesses here?

Yes, we don't see any constraints that impact on the our plans for the next few years. We have talked about this extensively with the rating agencies. Moody's in particular has been preparing for some months now to issue a paper on non-core businesses. I actually think that it will be issued in the near term. So we have talked about it extensively with them.

Within the range that we are talking right now currently, our asset management businesses generate about 9% of our income. There isn't really a problem with the growth trend that we have been on at the current time. So we are pretty comfortable with our position there.

Great, thank you very much.

Heather Hunt with Citigroup.

I just wonder if you could talk about the case reserve activity. I wonder if you could describe the types of credits that were involved there. Then also were there any tax lien credits involved? Then I have a follow-up.

Sure, we have again the $17 million of additions to -- net additions to case reserves./ While there are a lot of small items in there, the largest are additions to reserves for CDO credit, and also for a mortgage-backed securities credit.

There are increases to reserves in the quarter for tax liens. We have continued to take a sort of see as you go approach to our tax lien portfolio, because we found that our experience in collections early on isn't really instructive for the tax liens that we are still working and trying to prove up, and foreclosing, et cetera.

So there has been a little bit of a drip effect on those, then. So we did have a couple, $3 million of additions to reserves in that book of business for the third quarter. So there isn't anything in the third quarter that really stands out. There are no large additions and there are no large reductions. Unlike second quarter, which was a lot lumpier. It was pretty normal.

What was the size and the vintage of the CDO and the MBS credits?

They are both in the -- do we have that here? 1999; and sorry, a 2000; and a 1997. So they're both older vintage credits.

Okay, all right. Thank you. A quick follow-up. Just looking at your top 10 big list. I noticed that the Hertz Vehicle Financing exposure was down within the top 10. I think Greg and I had talked about how you were working on maybe some restructuring as those mature.

Is that part of it? Or what is going on there? Is there any restructuring sort of in the pipeline that can help reduce the below investment-grade exposure?

There isn't a restructuring going on that is going to have a meaningful impact on below investment-grade, that is other than the working of the individual credits. So it has been pretty stable over the past couple of quarters.

So your total big is 2.2% of our outstandings. Obviously, there is some amortization on some of the deals. So that results in some change to the outstanding par amount. But there is nothing (multiple speakers).

It looks like it went down about $155 million, $160 million from the second quarter.

Yes, I think that is just amortization scattered across a number of credits.

Okay. Then, do you have any conversations with the companies? Do you sort of stand firm on your thesis that the car companies are not going to ever walk away from that agreement? Or do you have any --? That seems to be a big concern in the marketplace.

Well, it certainly is a big concern at the rating agencies; and we have heard a lot of feedback from them. You know that as we evaluate these, we are sort of taking the lower of S&P or Moody's ratings. We are more comfortable with those auto credits then they are. And that continues, there is no change in our opinion with respect to that.

Okay. You're in sort of a continual dialogue with the companies, with the issuers?

Yes.

Okay, thank you.

Mike Grasher with Piper Jaffray.

I think you mentioned 5 million shares were remaining on the authorization. Can you remind us how much cash you have available to repurchase; and then also the quarterly dividend amount?

Sure. At the end of the quarter we have about $285 million of cash at the holding company on the balance sheet. That includes $59 million of a dividend that came up from the insurance company at the end of the third quarter. So you have that.

We do have an expectation of a regular dividend from the insurance company of about $100 million in December. We have, frankly, some unused debt capacity. So if we were to move from this environment to one where we could use some cash to buy back some shares, we do have financial resources at the holding company today that can be used for that purpose.

Although, quite frankly, we probably would be requesting an extraordinary dividend of the New York Insurance Department. Otherwise, it will just take forever for us to get to an efficient capital structure.

Okay. What do you estimate the debt capacity to be?

A couple hundred million dollars.

Okay, thank you.

Gary Ransom with Fox-Pitt, Kelton.

I was wondering; we have talked about narrow credit spreads for quite a few quarters now and how touch it is. It is there any sector at all, anywhere, where you actually are seeing improvement in the credit spreads?

We have seen sectors where the credit spreads offer enough opportunity for us to price deals that meet our hurdle rates. But I don't know that there are very many sectors where spreads are actually increasing.

Okay. Just a couple other little questions. Back on the investment income item, these special items that came in. Is it fair to say that those were all taxable income, investment incomes, those special items?

All taxable.

Okay, thank you. Then on the -- you mentioned this mortgage-backed credit that had a case activity. Was that subprime?

I don't have the detail on that. Sorry, Gary. (inaudible)

Okay, then just maybe one last question on the broader picture on credit. You mentioned along the way that you see the credit environment as being benign. Do you see any -- has there been anything that has caused you to wonder if that might be changing in the near future?

The trends in our portfolio continue to be for, you know, on average, improving credit quality. So that is a combination both of deals that were troubled, that were involved in remediation, being resolved, a-la Northwest; and the fact that the business that we are originating is higher quality than business we were originating a year or two ago. So on average, we are seeing positive trends in credit.

Okay, thank you very much.

[Howard Shapiro] with KBW Asset Management.

Hi, my question has been asked and answered. Sorry.

Thank you. There appear to be no further questions. I will turn the floor back over to you.

Well, thank you. Appreciate the time; and we look forward to talking with you all on our fourth-quarter call on January 25. Thank you.

Thank you. This concludes today's conference call. You may now disconnect your lines and have a pleasant day.