MBIA Inc (MBI) 2006 Q4 法說會逐字稿

Good morning. My name is Elsa and I will be your conference operator today. At this time I would like to welcome everyone to the MBIA, Inc. fourth quarter 2006 earnings conference call. All telephone lines have been placed on mute to prevent background noise. After the Company's remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS).

It is now my pleasure to turn the floor over to your host, Greg Diamond, Director Equity Investor Relations. Sir, you may begin your conference.

Thank you, Elsa. Good morning and welcome to MBIA's conference call for the fourth quarter of 2006. This call is also being broadcast live on the web and recorded replays of the call will be available via telephone and the Internet as well. You may find our earnings press release, our quarterly operating supplement, and other information including the definitions of the non-GAAP terms that we will be using on today's call on our website at www.mbia.com.

The conference call for our first-quarter 2007 earnings release will be held on Thursday, April 26 at 11:00 AM. We will issue the press release for our first-quarter earnings before 7:00 AM on that day. For today's call, Chuck Chaplin, MBIA's Chief Financial Officer, will first deliver some prepared remarks and then he will take your questions.

Before Chuck begins, I need to provide the following disclosure statement. 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 at www.mbia.com.

With that, I will turn the call over to you, Chuck.

Thanks, Greg. Good morning, ladies and gentlemen, and thank you for your interest in MBIA and your participation in our call this morning. It has been customary for us to comment on our results by following and expanding upon the content of our earnings press release. I would like to depart from that a bit today. I will make some comments about the news of yesterday and then provide an assessment of our 2006 performance. Then I will take on the obvious shortfall of the fourth quarter's operating income compared to expectations. I will then review fourth-quarter and full-year ADP production and wrap up my remarks by touching on other elements of our press release. Then finally I will open it up for questions.

There is a lot to cover today and I will try to be responsive to all of your questions. First, yesterday we announced that the long anticipated settlement of the regulatory investigations into AHERF that began back in 2004. We apologize for the last-minute rescheduling of our earnings release. We learned last week that the regulatory settlements would be announced on Monday, that is to say yesterday. We felt it was appropriate to reschedule the earnings release until after the settlements had been announced, given the time proximity.

As you know doubt know, in 2005 we restated our financials and took a $75 million charge for the expected amounts that we would pay in connection with the settlements. The SEC, the New York Attorney General, and the New York Insurance Department have each now approved settlements on the terms that were proposed in early November 2005.

In connection with the settlements, we have appointed an independent consultant to review certain matters which were included in our press release yesterday. The consultant has been working since last summer in anticipation of the approval of the settlements. We don't expect any further enforcement action against the company with respect to any of the matters being reviewed by the independent consultant or with respect to any of the other matters that were under investigation. Of course the independent consultants work is ongoing and we can't predict the outcome or completion of his work with certainty. We are committed to a process for the review and implementation of the independent consultant's conclusions and recommendations.

In connection with the settlements, our outside auditors also conducted a review of our accounting and disclosure for our conduits and advisory fees. A report has been submitted to and reviewed by the regulators. We don't anticipate any further actions on the matters covered by the outside auditors report. As many of you may recall, questions were raised a few years ago about our conduits and advisory fees and we expect that this review will put those questions to rest.

Operationally we have been in a business as usual mode since the end of 2005, except that we have refrained from any stock repurchases until the regulatory settlements were finalized. Now that the settlements have been announced, Gary and I will ask our Board to expand upon our current stock repurchase authorization later this week. Subject to their approval, we expect to issue a press release announcing the resumption of share buybacks. We currently have over $800 million of cash at the holding company with which to commence share repurchases.

We are very pleased to have the settlements behind us and look forward now to managing toward a more efficient capital structure.

As for our earnings, 2006 was a year in which we continued to experience the same challenging marketplace and competitive pressures that have affected our business since 2004. Low rates, tight spreads, and aggressive competition made it difficult to maintain both our market leadership position and our underwriting standards, but we believe that we pulled that off. We had acceptable production of good quality and profitable business. We held the line on expense growth. We significantly reduced the risk in the back book through some very successful remediations. And we enhanced our platform for future growth both in our insurance and in our asset management businesses.

Our full-year operating income hit a new high and our ROE held up at better than 12% despite accumulating capital well above margin of safety levels. All in all, it was a pretty good year.

Now regarding the fourth quarter, our reported operating income clearly was below the consensus expectation among equity analysts. This follows a third quarter where our operating income was significantly above expectations and is in the context of a full year with record operating income.

Just as there were a handful of items that contributed to the above run rate earnings in Q3, there were a few items that combined to make our fourth-quarter operating income below trend. With respect to onetime items, God giveth and also taketh away. I will provide some analysis of our quarterly EPS, but I will focus my comments on our earnings per share excluding refundings, which we sometimes refer to as core earnings.

For the first two quarters of 2006, we reported core earnings of $1.29 per share. While we reported $1.37 per share for the third quarter's core earnings, we noted that a few unusual items benefited that quarter's results. Without them, the third quarter would have been about $0.04 below the EPS of the first two quarters of the year.

Our fourth quarter reported core earnings are $1.16 per share and there are three primary items that contributed to the below trend results, net investment income, seasoned reimbursements, and operating expenses. The impact of these three items is about $38 million pretax or $0.17 per share after tax.

Let's drill down on each of these items starting with net investment income. When you pull out VIEs and other, as we do on page 11 of the operating supplement, last quarter's adjusted net investment income was $130 million. For this quarter, we are reporting $132 million, not much different. The real variance in net investment income comes from that VIE and other category. While interest expense was flat for the two quarters, the fourth quarter's VIE and other net investment income was $16 million lower or $0.07 per share after tax.

The next item, fees and reimbursements, has also tended to be rather volatile and was $8 million, $4 million, $17 million, and $4 million for the four quarters of 2006 respectively. Q3 included $14 million of expense reimbursements from two credits, which is an unusual amount. The drop from $17 million in Q3 to $4 million and Q4 accounts for $0.06 per share after tax.

Our fourth quarter's operating expense has the last large variance as it came in about $9 million higher than our third quarter's operating expense, which amounts to $0.04 per share after tax. More than half of the variance results from expenses associated with certain incentive compensation awards and a new retirement plan, all of which represent accelerations of future expense. These onetime accelerations will result in lower expenses in the future and they do not represent new compensation.

The other part of the variance stems from the seasonal step up in operating expenses as been typical of our fourth-quarter expenses for each of the last few years. For example in 2005, Q4's operating expenses were about $3 million above Q3. The fourth quarter 2006 variance to fourth quarter 2005 is also affected by some of the same items. Core earnings in Q4 '05 were $1.19 per share and they are $1.16 per share this year. The differences in fees, operating expenses, and other investment income which we just went through summed to about $0.07 per share.

The variances in fees and investment income are due to difficult to forecast particulars and the difference in operating expenses is due to decisions about retirements and the amortization of long-term comp under our plans, which we regard as one time in nature. In addition, those accelerated expenses will now be absent from future periods in which they otherwise would have been expensed, mostly in 2008 and 2009.

The fourth quarter '06 also has lower scheduled earned premiums than the corresponding quarter of last year by $7 million and this shows the cumulative effect of the heavy refunding activity that we have had, nearly $450 million of accelerated income in the last three years.

In our operating supplements, we published the expected future premium earnings of policies then currently on the books. When you look at the numbers for the successive next future quarters, in each of our last five operating supplements, you'll see a decline in expected premium earnings from year-end 2005 through midyear 2006, which then starts to rebound in Q3 and Q4. This trend shows the offsetting impact of new business booked in the second half of 2006 and especially in the fourth quarter.

So the fourth quarter's EPS is below trend. I hope that my explanation puts it into proper context.

Now I would like to move on and talk about our fourth-quarter and full-year ADP production. As you know, there was not any relief from the challenging market conditions during the fourth quarter. Tight credit spreads and intense competition from both within and outside the bond insurance industry persisted. Despite these pressures, in the fourth quarter we generated our best quarterly production of ADP in three years. In fact the fourth quarter accounted for 41% of our 2006 ADP.

As I referenced at the outset, we did not sacrifice our underwriting and pricing discipline and we would not characterize our fourth quarter's production as a change in strategy or business conditions. We did have quite a few international transactions close during the quarter and several of those deals had very attractive premiums. As we have said before, the international business tends to be lumpy and it tends to require longer lead times and it also tends to be more profitable. Such was the case in our fourth quarter.

We also had more flow from our U.S. businesses during the fourth quarter. There has been a noticeable improvement in the pipeline for business opportunities over the last several months. The financings may or may not use insurance, but we hope to win our fair share of the deals that do. Nonetheless we have definitely been reviewing more deals partly as a result of greater municipal issuance.

As you know, we had a particularly difficult first quarter in 2006. That is when we initiated efforts to streamline some of our business processes which should make it easier for our clients to do business with us and strengthen our focus on product niches that we believe hold attractive business opportunities for us. Over the course of the year, we added resources to our teams that focus on residential mortgage-backed securities and financial institutions and by the fourth quarter we were closing more deals in those two sectors.

At this point, we believe we have some good traction which helped us take advantage of our fourth-quarter opportunities. Bear in mind that some of the deals that we closed in Q4 were initiated well before the start of that quarter.

For the full year 2006, ADP declined 6% to $1.03 billion, down from $1.1 billion last year. Considering how modest our first quarter ADP was, we are very pleased to only be down 6% from last year. I mentioned earlier that the fourth quarter's ADP accounted for 41% of the full year's ADP. It is the highest percentage contribution that we have ever had for a quarter, but it is not totally extraordinary. Over the last five years, there has been at least one quarter in four of those years that has accounted for more than one-third of the total ADP for that year.

Now let's look at the contribution from each of the markets that we operate in. For the full year, MBIA's U.S. public finance ADP was down 34%, but it was up 24% for the fourth quarter. The Hudson Yards Infrasctructure transaction in New York City, the Florida Citizens Property Insurance Corporation, which provides residential P&C coverage where private insurance is not available, a tax allocation bond for the city of San Jose, California, and three U.S. military housing deals including one for the Camp Pendleton base were among our largest U.S. public finance ADP deals for the year and they were all closed in the fourth quarter. It is these types of transactions, relatively larger and relatively more complex, that really show off the benefits of bond insurance.

Our non-U.S. public finance sector continued to be a bright spot for us in 2006. For the full year, ADP was up 179% and the fourth quarter recorded a 417% improvement over last year's fourth quarter. Overall, the Toluca Mexican Toll Road and the Aspire UK military housing financing, which were both closed in the second quarter, remained our two largest ADP deals for this market segment this year. But our fourth quarter was also strong as five of our 12 largest ADP policies in the year were issued in the fourth quarter.

Turning to structured finance, tighter credit spreads and intense competition persisted. MBIA's U.S. structured finance ADP production for 2006 declined 6% compared with last year. However the fourth quarter's ADP was 61% higher than last year's fourth quarter. Hereto, several transactions with larger ADP closed in the fourth quarter, including a couple of CDOs and securitizations of and AXXX insurance book, portfolio of commercial operating assets and portfolio of home equity loans were closed in the fourth quarter with individual ADP's ranging from $7 million to $16 million.

For non-U.S. structured finance, ADP was down 23% for the year, but it was up 214% for the fourth quarter. The fourth quarter's favorable comparison was a result of very modest ADP amounts for last year's fourth quarter. Four of the fourth quarter deals, Yapi Kredi Bank, a future flow transaction for a Turkish Bank, and three global CDO transactions account for 16% of the quarter's ADP production for global structured finance.

While our ADP production for global structured finance was down 13% for 2006, our insured par amount was up 15%. This year's par production had higher average credit quality and therefore somewhat lower premium opportunity than last year. 62% of this year's par had underlying AAA ratings versus 49% last year. So both the mix of business and the competitive environment contributed to the decline in ADP.

Regarding our new business activity, premiums for policies issued in the quarter typically contribute very modestly to our earnings, but they are a very important source of our future earnings. The premiums associated with new policies add to our deferred premium revenue if we collect them up front or they just become a part of the stream of future premiums if we collect them on an installment basis. The earned premiums that result from releasing these two resources into revenue typically accounts for over half of our insurance revenues. At the end of 2006, these two resources stood at $5 billion, up 3% versus year-end 2005, which was the first year-over-year increase since 2003.

Now I will return now to our customary review of the financial results. For 2006, diluted net income per share was $5.99, $0.81 more than 2005 or a 16% increase. The increase includes the $0.52 per share after-tax accrual that we made in last year's third quarter, which at the time was our estimate for the amount that we would pay to settle the previously announced regulatory investigations, and as everyone has learned yesterday, that number has not changed.

Operating income per share increased 5% over 2005, further adjusting operating income by excluding the net income effect of refundings, yields core earnings per share of $5.10 for 2006, which was a 3% increase over last year. For the fourth quarter, net income per share decreased 1%. The fourth quarter's operating income per share was down 4% and excluding refundings operating income per share was down 3%.

The acceleration of premiums into income due to refundings softened a bit in the fourth quarter despite somewhat lower interest rates. For the full year 2006, earnings from refunded issues contributed $0.71 per share after tax, which was up 16% versus last year.

Scheduled premiums earned declined 4% for 2006, reflecting the overall downward trend in ADP production since 2003 as well as the effect of heavy refunding activity over that same period. Scheduled premiums earned also declined 4% for the fourth quarter.

While premiums from refundings abated somewhat in the fourth quarter, they were up 15% for the year, increasing to $162 million from $140 million last year. The four quarters of 2006 had $38 million, $48 million, $42 million, and $34 million of income respectively due to refundings. Each quarter was higher than the corresponding quarter in 2005 until the fourth quarter of 2006. This may mean that the cycle of ever rising refundings is over, but it is too soon to so conclude.

Our total premium earned including scheduled and refunding premiums for the year was 1% lower than 2005. Pretax net investment income for the full year 2006 increased 16% to $598 million. What I would characterize as the underlying organic growth of net investment income was up 6%, which was a function of higher invested assets and higher average investment yields. The balance of the increase arose from three items, interest received on variable interest entities or VIE's; interest received on the Northwest Airlines 2000-1 EETCs; and interest received on reimbursed expenses.

For the fourth quarter, net investment income increased 10%, mostly due to growth in VIE's. The organic growth rate was 3%.

Fees and reimbursements were up 19% for 2006 to $33 million. Almost $16 million of that amount constitutes reimbursements we received for expenses that we previously incurred in connection with remediating two MBIA insured credits. For the fourth quarter, fees and reimbursements were $4 million, down 47% versus the same period last year. As I mentioned earlier, this revenue item has been quite volatile.

Total insurance expenses increased 19% for 2006. The increase resulted from higher VIE interest expense; interest on financing the Northwest Airlines EETCs; and a 10% increase in operating expenses. The increase in operating expenses stems from the lower deferral rate that we adopted for policy acquisition costs in the third quarter of 2005 as well as the acceleration of expenses associated with certain incentive compensation awards and the new retirement plan that I mentioned earlier.

Starting with the third quarter of 2006, quarterly operating expenses are on an apples-to-apples comparison basis from a deferral rate perspective. The fourth quarters insurance expenses were $19 million or 22% above 2005's fourth quarter.

Now we used gross operating expenses which are expenses prior to deferrals as the primary measure for assessing our expense levels. Our gross insurance company expenses excluding feeding commission income increased 2% versus last year. This increase reversed the nine-month trend of year-over-year lower gross insurance company expenses because the fourth quarter included additional expenses associated with the incentive comp awards and establishment of retirement plan, which I've now mentioned a couple of times. Excluding these accelerated expenses, gross insurance expenses would have decreased 2% for the year. Similarly, adjusting the fourth quarter would result in flat expenses year-over-year.

In keeping with our loss reserving policy, we recorded 12% of our scheduled net premiums earned as loss and loss adjustment expense for 2006 or $81 million. For the quarter, this represented an expense of $20 million. We incurred $66 million of net case loss activity during the quarter, which was associated with several credits. For the year, unallocated loss reserves decreased by $46 million. Year-over-year however, unallocated loss reserves increased by $5 million to $213 million.

Now I would like to provide some additional information on our case loss activity. First I want to highlight the status of capital asset and our exposure to tax liens. We have entered into an agreement with the city of Pittsburgh to sell back to them the Pittsburgh tax liens that were in the last outstanding MBIA insured capital asset tax lien securitization which we called and paid off in December. We also sold our remaining tax liens and the capital asset operating platform to a company that is engaged in tax lien servicing and collection that has been overseeing the servicing operations of capital asset us since July of 2006.

We very well may have crystallized a larger underwriting loss than we would have experienced if we continued to work the tax lien collateral, but it would have taken us many more years to find that out. So we paid the price for greater certainty. In connection with these actions, we incurred $28 million of case activity in the fourth quarter.

Just to be clear, we do have one other tax lien deal that is not associated with capital assets. We own a tax lien portfolio with a carry value of under $5 million, but we do not ensure any other tax lien securitizations and we are happy to report that that chapter in our history has now been closed.

In addition, we decided to adjust the value of an expected recovery on litigation related to the AHERF bankrupt estate. That case, now several years old and which was brought by the AHERF Creditor's Committee, is making its way through the courts. A summary judgment was entered in favor of the defendant in January 2007, which is likely to be appealed by the Creditor's Committee. While we expect the summary judgment to be reversed on appeal, we are recognizing the increased uncertainty of this matter by adjusting our reserve position. As this is an ongoing litigation, there is little else that I can say about it at this time.

We did not add any case loss reserves for our Hurricane Katrina or Eurotunnel credits during the quarter. On Eurotunnel, the debt restructuring has progressed through several milestones since we last spoke. The safeguard plan was approved by the Paris Commercial Court on January 15, 2007, having been previously approved by Eurotunnel's creditors, vendors and employees. As provided by the court, at least 60% of Eurotunnel shares need to be tendered via an exchange offer before the restructuring plan can be implemented and Eurotunnel can be transformed into a new company with a new and reduced debt structure.

However the restructuring plan will not be implemented before the end of January, therefore the FLF1 and FLF2 transactions that we have ensured will not be receiving funds from Eurotunnel to meet February 1 payments. FLF1 has sufficient liquidity and reserves to satisfy the upcoming debt service payment, but FLF2 does not, and we expect that MBIA will need to make a claim payment of GBP18 million to satisfy that debt service payment.

Based upon the terms of the Eurotunnel debt restructuring plan, MBIA would be fully reimbursed for that and earlier claims payments made on Eurotunnel's path. Incidentally, on our website we have additional information on the Eurotunnel credit including tables that identify all of our Eurotunnel exposure. While we have more to go on Eurotunnel, there have been several other credits in our insured book of business where we have helped bring about favorable developments in 2006. The Northwest Airlines EETCs and the New Orleans Regional Transit Authority were among the credits that garnered public attention.

It was a year ago that we established a $76 million loss reserve for our Northwest Airlines exposure. Based on successful efforts in 2006, the loss reserves for Northwest today are less than 10% of that original amount and we may very well have the ability to reduce that loss further.

Our Hurricane Katrina task force has also been very active throughout 2006. We not only secured the repayment of the New Orleans RTA claim MBIA paid during the first quarter but we have also been successful in stabilizing many Katrina impacted credits in our portfolio. Like Eurotunnel, it is still too early to claim victory, but we are pleased with the progress and the status of the Katrina affected credits in our portfolio.

Another successfully remediated credit resulted in expense reimbursements with interest, which were reported in our Q3 results. We were also able to restructure some of our manufactured housing exposure this year to improve the credit support available to each of these deals, which resulted in upgrades of the underlying credit ratings for many of the transactions. These are just a few examples. Several more credits were either improved or resolved with minimal or no losses during 2006.

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 a year ago. However the percentage of our portfolio rated below investment grade as determined by Standard & Poor's and Moody's has decreased from 2.2% last quarter and 2.1% last year to 1.9% at year-end 2006. The decrease is a function of an absolute dollar reduction of below investment grade rated net par as well as an increase in the size of our outstanding book of business and there's about a 50-50 contribution from those two effects.

Taking a look at our investment management services segment, we continue to experience strong growth in asset management products as year-over-year ending assets under management grew 30% to $64 billion. The segment's 2006 pretax operating income increased 17% versus last year and contributed 9% to the Company's total pretax operating income. Most of the income growth was from our asset liability products.

For the full year, the corporate segment loss was 50% below last year's, mainly driven by last year's accrual for the cost of our settlements. In the fourth quarter, the loss decreased 19% compared to last year as higher corporate expenses were more than offset by reductions in interest expense and higher net investment income. The corporate expense increase reflects greater costs associated with the reviews related to the independent consultant.

There were nearly equal dollar improvements in net investment income and interest expense compared with last year's fourth quarter. The lower interest expense just reflects a reduced amount of outstanding debt. The higher net investment income reflects higher invested assets based on the dividends that the insurance company paid to the holding company during the year.

In December, the New York State Insurance Department issued its approval for the insurance company to dividend up to $500 million to the holding company, an amount that otherwise would have exceeded the insurance company's dividend capacity for the quarter. The full amount was paid to the holding company during the quarter.

MBIA also recorded net realized gains of $15 million for all business operations in 2006, compared to net realized losses of $3 million last year. This year's net result included a $10 million gain related to the sale of our common stock investment in RAM Re, which went public during the second quarter. Our operating return on equity for 2006 was 12.1%.

In summary, in the last year we have cleared up a number of issues from the regulatory settlement to progress made on troubled credits. We also finalized the sale of our MuniServices operations for a small profit, paid off our remaining tax lien securitizations, and sold capital asset.

Looking forward we see favorable underlying growth opportunities in many of our insurance and asset management markets. Notwithstanding the strong ADP production in the fourth quarter, the current environment of tight credit spreads is likely to continue to constrain ADP growth in 2007. As always, we will continue to adhere to our pricing and underwriting disciplines and to hold the line on expenses, which we believe are critical for adding long-term value for our shareholders. We're looking forward to continued growth in our asset management businesses as well.

Now with that, let's open up the call for questions.

(OPERATOR INSTRUCTIONS) Geoffrey Dunn, KBW.

Congratulations on getting past all that regulatory stuff. First question, Chuck, can you talk a little bit further about capital? You have $800 million at the holding company. Do you think you could approach the DOI once again this year? What do you think your options are for total excess capital extraction over the next year or two, assuming spreads don't widen?

As you said, we do have about $840 million of cash at the holding company at the moment which to the extent that our Board agrees with us when we meet later this week, we will commence to start to repurchase shares using that cash. But having said that, we continue to be significantly overcapitalized at the insurance company level and that is true essentially no matter whose capital adequacy measure you focus on.

The most recent sort of official feedback that we have gotten from the three major rating agencies would suggest that at year-end 2005 we were more than $1 billion -- we had capital that was more than $1 billion over AAA minimum requirements at that time and in 2006 we have seen accumulated net income and as I just want through, we have seen a pretty material improvement in the quality of the portfolio and therefore its capital requirement.

Having said that, as we forecast growth going forward, we do anticipate that some of that excess capital is going to be consumed in the business, but it is our objective to try to move from where we are now to a point closer to capital efficiency over a couple years' time. Our capital position is such that I don't believe that it is prudent for us to be trying to get there in one fell swoop, but over a couple of years we would anticipate that that we'll approach capital efficiency and one of the primary tools is likely to be share repurchase.

And have you sounded that intention off the DOI and the rating agencies?

In fact we have. I have met with the New York Insurance Department a couple of times in the past three months to lay out for them our capital management game plan for the next couple of years and I have done that extensively with all three rating agencies. So far, I believe that they are on board and agree with the direction that we are taking. I have committed to them that each quarter we are going to review the share repurchase activity that is taking place, our then current capital position, the forecasted capital position, and the outlook for earnings and new business production with each of the three rating agencies and with our Board of Directors so that there is kind of a decision mode that is going to take place every quarter on share repurchase.

We do -- it is very important to us that we go about this in a prudent way and while it is a more substantial undertaking, rightsizing our capital structure, that we have ever undertaken before. We still want to do it in a way that the rating agencies and the regulators will regard as AAA.

Okay, then just two number follow-ups. Your tax rate jumped in the quarter. It looked like you moved taxables over to equities. If you could comment to the run rate of that. Also, the forecast for the earn-out of earned premiums suggests a big jump into the first quarter. Have there been any significant refundings quarter to date that would jeopardize that trend up?

With respect to tax rate, I do expect -- I'm sorry, with respect to tax rate, we did pick up in the fourth quarter. I would have to come back to you off line with more detail on what causes that. With respect to refundings in the first quarter, we continue to see refunding activity. It continues to be reasonably robust, but it is too soon to say whether it is going to be enough to offset the impact of new business coming on the books in the first quarter in terms of Q1's scheduled earned premium.

I think at third quarter last year we reported that we were pretty much at steady-state. We generated enough business to just offset that which was refunded. Fourth quarter we have an addition to the reservoir of future premium earnings and in the first quarter, while it is too soon to say, I would expect that we will be at that breakeven or better.

Okay, great. Thank you.

Kevin Zerbe, Morgan Stanley.

First of all, can you tell us how much capital you need or how much cash you need at the holding company to meet holding company expenses, whether it is dividends or interest expense etc., over the course of 2007?

Sure, yes. We have a benchmark of roughly $300 million of cash at the holding company, which I would want to have at all times to give me good coverage on the fixed expenses of the holding company, including shareholder dividends, interest expense, and normal operating expenses.

Okay. So if we were looking at buybacks, we would probably take the $840 million of cash you have now minus the $300 million -- comes up to $540 million or so not including any additional amounts you might get from the insurance sub but that seems like a pretty reasonable run rate for buybacks. Would you and again trying to nail you down on a specific number for buybacks in '07, is $500 million for the full year a decent run rate or do you think you might do more or less than that?

Good try. With respect to buybacks, obviously we touched on before going over the capital game plan with the regulators and with the rating agencies. We do have a requirement to get New York Insurance Department approval for any further dividends that come out of the insurance company. I would expect that we will have ongoing dialogue with them about that.

Our share buyback activity in the past has been relatively modest. I think in 2005 we bought back about $300 million worth of shares before we started to truncate that activity in the second half. I would expect that our activity will be more robust than that. And that the amount of share repurchase that we would desire to undertake will be significantly more substantial than that which we have done on an annual basis in the past. Again with an aim to trying to move toward an efficient capital structure over maybe two years.

Okay, so I guess my opinion of that I'm going to take away that $500 million is probably not an outrageously unusual estimate. The other question I had just in terms of AHERF, you increased your reserve related to the Creditor's Committee. How much additional exposure do you have to AHERF? If you were to lose every argument going forward, what is the potential exposure there?

I think that if you were to look at all of the litigation related salvage, if you will, that is incorporated in our case reserve calculations, it is only a few percent. The way I think of it is if we were to lose all the litigation that affect our case loss position, would that make us rethink the 12% of earned premium level for additions to unallocated? It would not be enough to move that needle.

No, I don't mean whether it was going to change your 12%. I mean, what is the ultimate exposure to AHERF that you have remaining in terms of a dollar amount?

I would not want to go into the dollar amount because quite frankly there is an ongoing litigation. That's the problem with discussing that in any more detail.

Is it an open-ended, potentially an open-ended settlement? Such that it does not have a cap on it?

I'm not sure. We're actually making a recovery, so there is a litigation of the plaintiff of which is the Creditor's Committee and to the extent that the Creditor's Committee prevails in the litigation, which we anticipate, we will receive a portion of the proceeds. I think we are maybe 5% of the proceeds.

Okay, I see. That makes sense. Thank you very much.

Rob Ryan, Merrill Lynch.

Just a numbers related question. The portion of net investment income from the VIEs and other sources, the 18.6, if we compared that to the insurance interest expense number of 22.6, what explains that difference this particular quarter and in the regular course of business would we expect those numbers to be essentially the same?

Yes, VIEs should really net against interest expense and investment income. In the third quarter, you will recall that we had a pretty substantial amount of other investment income in that VIE and other line item much of which was associated with the successful remediation on Northwest Airlines. What happened was in the third quarter we actually took about $3 million of what should have been classified as realized gains into net investment income. In the fourth quarter, that is reversed out.

So that is the reason why we are somewhat below. We did not have any extraordinary other investment income in the fourth quarter, so other than that effect, I would have expected those two numbers to net to zero.

Okay, so that is part of the explanation for the earnings shortfall in the quarter? Thinking about it in slightly a different way than you presented, but there it is.

Yes.

Okay, I just want clarify for future any 2007 dividends out of the insurance subsidiary you will have to receive approval. There is no standard quarterly dividend that is more or less [boilerplate] expected on a quarter-by-quarter basis?

That is correct. We received approval for an extraordinary dividend in December and then for the ensuing 12 months, all dividends would be deemed to be extraordinary.

Okay, and you mentioned the share repurchase activity substantially greater than any annual amount that you had done in the past. Was that previous record in 2004 at about $350 million?

I think 2005. I can look it up, but I think it is 2005. The first half of '05 (multiple speakers), yes, 2004 and 2005 are not that much different.

About 340, 350, so you're saying substantially more than that type of level.

Yes.

Okay, and on the compensation related expense during the quarter, you mentioned -- I'm just wondering if you could just help us out with the math. You mentioned that the gross operating expenses excluding this would have been flattish, so what does that boil down to in terms of what is acceleration and senior management stock options? What that actually did to the fourth-quarter earnings?

It adds about $9 million.

Of pretax or after-tax?

Of pretax.

Very good, thank you.

Darin Arita, Deutsche Bank.

I had a question on your return on equity. I think for the full year you mentioned it was 12.1%. If I look at the fourth quarter and sort of try to normalize it, the annualized number is around maybe 11%, 11.5% or so and clearly that is much slower than what MBIA has operated at in the past. So I guess, Chuck, when you're thinking about achieving your efficient capital structure over the next two years, what sort of ROE are you thinking of?

Our objective is to maintain ROEs in excess of 12%. There is -- your calculation on fourth quarter, I did not actually calculate the number, but it seems like it is directionally correct. It is the result of just accumulating excess capital over the past six quarters where operating income has been relatively flat.

So the game plan is to reduce the capital base at the same time that we try to boost operating income by managing expenses and adding new business.

Okay, and as you're doing your share repurchases, have you given thought to the method of doing it, whether you do an accelerated program, do it in the open market?

Most likely we will engage in open market repurchases, just as we had done in the past. We considered whether it was possible to do a onetime significant rightsizing of the capital base to accomplish all the ends that would arise from such, and we just do not believe that prudent AAA capital management would permit that. We have discussed this extensively with the rating agencies who even having acknowledged that our capital holding is well in excess of AAA requirements, substantial onetime changes in that financial flexibility would be somewhat of a cause for concern on their side.

Okay, just one last question, if I may. Can you give us what your perspectives are on Florida following the legislation and on the hurricane catastrophe fund and citizens?

I would have to say that I should follow up with you off-line to give you more color on that, because I need to collect some. I know there have been some recent developments on the Citizens Fund.

All right, that would be great. Thank you.

Mark Lane, William Blair & Co.

Two questions. Number one, regarding expense growth for 2007, given your outlook for the business and where spreads are, what do you expect for gross expense growth for '07 generally?

I don't want to make a forward-looking statement about expenses except to say that we are very focused on managing our expense growth, and we think we did a very good job in 2006, where but for the $9 million of onetime expenses in the fourth quarter, we were flat. So you should look for us to continue to try to be pretty assertive about expense management.

The $9 million that was accelerated in the fourth quarter, you said it would result in lower expense going forward. Is that immediate?

Yes, most of the beneficial impact that you'll see of the $9 million will be in '08 and '09. Part of the reason is that some of it is expense that is all accelerated into Q4 '06, but others -- and this is as a result of implementation of FAS 123(R) -- requires that we amortize expense for compensation over the period until a person becomes retirement eligible. Some of that is going to go out into '07, so some of the amortization that is accelerated is accelerated from '09/'08 but into '07 as opposed to into '06.

So my expectation would be with respect to those items that '07 is basically neutral with respect to them, and '08 and '09 is where I get paid back the $9 million, if you will; mostly '08.

Okay, then the second question is what is your current view regarding the FASB accounting changes? And at this point, do you believe that the accounting changes will be inclusive of just more than changes in loss reserving formulas to include changes in potentially revenue recognition?

I wish I knew. That is a difficult question to answer. We have been monitoring the action at the FASB now for many moons. We expected an exposure draft before the end of 2006. That did not happen. We expected it early in 2007. So far we've still not received anything. The FASB has had periodic meetings on the subject, and their direction with respect to loss reserving seems pretty clear. Their direction with respect to revenue recognition, well, quite frankly it is also clear, but we are waiting to see what happens through the exposure draft and comment period before sort of gearing up to respond to it.

So our view is that with respect to the revenue recognition that there is no constituent crying out for a change. It is possible that they change anyway, and we will have to deal with it as it comes.

Okay, thanks.

Tamara Kravec, Banc of America.

Question just about the flow of business in the quarter. It seems like you repeated several times that these are larger, more complex deals coming through on the public finance and structured finance as well as some securitizations. I am curious if you could just give some color as to your perception as to whether you think this is an unusually high level of large deals or whether you think the market is really shifting because of the tight credit spreads and the competition and what we're seeing from alternative products? Is there enough of a pipeline to continue to do large deals like this? Then I have a follow-up.

Sure. The problem with large deals, of course, is that they are lumpy and oftentimes they have these very long gestation periods. It is very difficult to sort of assess when they are going to come to fruition. Of course, when they do come to fruition, you take them. When you look at the transactions that we closed in the fourth quarter, many of them had been in the works probably since the first quarter. And we were never quite sure when we were going to find out if we won or lost those transactions.

So the winds blew the right way in the fourth quarter. A lot of the hard work that our people have put in on these transactions and on competing for these transactions came to fruition at once. Now I can say with respect to looking forward that we are currently working on more deals than we were working on in most of quarters of 2006. Those deals are going to be competitive. The competitive environment is quite strong right now and quite strong across the board, including frankly for larger, more complex transactions. So even the pricing power that we might have seen in a couple of the large monolines, say, two years ago with respect to large complex transactions has also been whittled away.

So there is business out there to do. We're seeing more business than we have seen in a number of quarters. But the pricing on all that stuff is getting tighter and there is competition for everyone of them. So it is really difficult for me to speculate about where we will go going forward. We do think that Q4 was an outside of trend quarter because of the fact that a number of deals that we've been working on came to fruition at once.

Okay, and these deals, at least the more complex ones, are typically higher margin. So is there a way to quantify the effect on your earnings or your margins in terms of the types of deals you're doing now versus, say, six months ago?

Not with great specificity. The larger transactions are going to tend to be more profitable just because there are fewer people that can do them. The more complex transactions are going to be more profitable just because of their inherent complexity and the difficulty of getting them done relative to the more run of the mill transactions. But I really can't be any more specific than that.

Okay, and my last question is on the residential MBS and just should we be concerned about your choice of focusing on that niche, given the data that is coming out and what we're seeing in the housing markets? Are you concerned at all about the performance of that asset class?

We certainly monitor it closely. We have been focusing our attention on sectors that we think are relatively less exposed and we have been focusing on the higher tranches in those transactions. Then finally we have been trying to pick our spots with respect to the originators and servicers that we do business with. So we are doing everything that we can to be prudent in that asset class.

I can tell you that you look of the transactions that are having problems today, they are primarily ones originated two, three years ago at a time when our activity in that class was pretty small.

Okay, thank you very much.

Mike Grasher, Piper Jaffray.

My questions have been answered. Thanks very much.

Al (indiscernible)

I heard what you were saying about the fees, how the fees came down from $17 million last quarter to $4 million this quarter and I believe you said that was an impact of $0.06, that difference. My question is would $17 million would not be considered a normal run rate or would that be a more normalized level of those sorts of fees in a quarter?

No, I think if you look at the four quarters of 2006, we had I think $8 million, $4 million, $17 million, and then $4 million again. So $4 million, $5 million was much more our run rate than was $17 million. Just to complete the picture, the $17 million, a large part of it represents reimbursements of expenses that we had incurred in prior periods on credits that were remediated. So it was unusual for us to get those two big catch-ups at the same time.

So the $4 million fees was perhaps unusually low, but if so just by a couple million or so?

At best, yes. Relative to 2006 experience.

Okay, got it. Thank you.

Howard Shapiro, KBW Asset Management.

First of all congratulations on navigating successfully through all of these issues. I just wanted to follow up on Tamara's question. You are sounding the most optimistic on your business prospects you have sounded in quite a while and I'm just wondering if you can help us understand is it because you're doing a better job of penetrating some of these new products in markets? Have the markets just begun to kind of break open? Is there just kind of greater growth in new product opportunities? I guess I'm trying to understand if this is a cyclical improvement or if there is something else going on?

I think it is too soon to say. We've done a lot internally to try to position ourselves to be prepared to take advantage of market opportunities as they arise and as I said, we are seeing more activity right now than we have seen in a while, but I am not prepared to declare that a trend. We worked on transactions in the past that end up -- we worked on some pretty large transactions even beginning in 2006 that we thought might come our way and ended up being done on an uninsured basis.

So it really is too soon to say whether or not there is a turn in the markets, but for sure we are seeing more business that we are working on than we have seen in several quarters.

Great, thanks so much.

Heather Hunt, Citigroup.

Congratulations on working through all the SEC investigations and a good production quarter. I just wanted to focus a little bit on the case reserve activity. I understand that you expect to recover most of the CDO that was called in the quarter. I just wonder if you can kind of talk about your comfort level with your other CDO portfolio that you have in force? I know you've done a lot of remediation in last year and kind of what is your comfort level there? Are there any particular credits on your watch list?

Our CDO portfolio is in pretty good shape. It is substantial. It is $95 billion in par outstanding but I would -- which is about 15% of the overall book. But I would just remind that a huge percentage of that portfolio is AAA in credit quality, so when I look at what is below investment grade in our CDO portfolio, the proportion is much smaller than the below investment grade proportion for the book of business as a whole. It is on the order of 40 basis points of the CDO portfolio.

Now of that 40 basis points, more of it is classified than we would see in the rest of our below investment grade book, so we do find ourselves working through some CDOs from time to time and talking about them on our calls. So a number of the transactions that we have -- that are on the list were ones that were underwritten in the '96 to 2000 timeframe at a time when our underwriting standards were different. The proportion of them that is below AAA is quite high. In fact it might be 100%. I am not sure, but it is very high relative to where we are today.

So we are watching those trades very, very carefully from a surveillance perspective, but we believe that we are in a pretty good reserve position relative to them, that there is no sort of lurking problems out there that we can point to that are meaningful. Having said that, some of these transactions have assets in them that when they do go bad, they really go bad.

What do you think is the maturity date? A lot of this is pretty old. You have had it on the books for in some cases 10 years. How long until they mature and you don't have to worry about them any more?

I think that the transactions that are classified are for the most part have hit rapid amortization triggers, and so whatever cash comes out of them is being applied to pay them down, so the original maturity dates might not make any difference. That is why I can't remember what they are.

All right, then just a quick question on the Orkney exposure and that big ten big that appeared on this quarter and I think is tied to Scottish Re's problem. I guess was there something that triggered it to come on the books this quarter even though Scottish Re kind of had some problems last quarter? Do you -- is it [gen worth] book and are you pretty comfortable with it?

The best I can say is that it is related to the problems that Scottish Re has been having.

Okay, thanks. Those securitizations are pretty generally comfortable -- so in my experience. Thank you.

Thank you. This concludes the Q&A session. Mr. Diamond, I will turn the floor back over to you.

Thank you very much, Elsa. Thanks to all of you who joined us for the call today. I encourage those of you with additional questions to contact me directly at 914-765-3190. We also recommend that you visit our website at www.mbia.com, for additional information on MBIA. We thank you for your interest in MBIA. Good day and goodbye.

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.