MBIA Inc (MBI) 2007 Q1 法說會逐字稿

Good morning, my name is Karen 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 speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS) Thank you.

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

Thank you, Karen. Good morning and welcome to MBIA's conference call for the first quarter of 2007. This call is also being broadcast live on the Web and recorded replays of the call will be available via telephone and the Internet. 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 second-quarter earnings release will be held on Thursday, July 26 at 11 AM. We will issue the press release for that quarter's earnings before 7 AM on that day.

For today's call, MBIA's Chief Financial Officer, Chuck Chaplin, will deliver some prepared remarks and then he will hold a question-and-answer session. After the Q&A, Chuck will provide some closing remarks.

Before Chuck begins, here is our 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 factors can be found in filings that we have made to the SEC which can be found on our company's website. The company undertakes no obligation to publicly correct or update any forward-looking statement if it later becomes aware that such a result is not likely to be achieved.

Now here is Chuck Chaplin.

Thanks, Greg, and good morning everyone. Greetings from Armonk, where it is springtime. And thank you for your interest in MBIA and your participation on this call. This morning as we normally do, I will summarize and comment on our results and related topics and then take your questions.

Our first-quarter results were largely in line with our expectations. We continued to make favorable headway on a few important fronts including expense management and back book remediations. And our new business production picked up even as the market conditions remain challenging.

Our first-quarter net income per diluted share was $1.46, the same as last year's first quarter. Operating income per share which excludes the effects of net gains and losses on investments, financial instruments at fair value and foreign exchange, increased 2% to $1.48 versus last year's is $1.45. Further adjusting operating income by excluding the impact of accelerated revenue due to refundings resulted in net income of $1.30 per share which was also 2% higher than the same period last year.

The acceleration of premiums into income due to refundings continues to run above historical levels accounting for 19% of the first quarter's total premiums earned. In the six years from 1997 to 2002, refunding contribution averaged 12% and for the last four years, 2003 to 2006, they averaged 17%. Low interest rates and narrow credit spreads are important drivers of refunding activity but it is still very difficult to forecast accelerated premium earnings with very much confidence. At $0.18 per share, the impact of refundings was $0.01 higher than last year's first-quarter.

Now I'd like to spend a few minutes on business production which we primarily measure using a non-GAAP measure that we call adjusted direct premium or ADP. For the first quarter of 2007, ADP was significantly better than the substandard production of the first quarter of 2006 and it was equal to the average of the last 13 quarters which is the period from the beginning of 2004. In fact, this year's ADP of $273 million was our second best ever first-quarter production. And of course it follows a robust fourth-quarter of 2006.

Let's look at the contributions from the different market segments. For U.S. public finance, ADP was up 31%. We also recorded a 45% increase in insured par while the insured par for the industry was up 43% versus last year's first quarter. While issuance is up, credit spreads have remained narrow and have even tightened in certain product areas.

Two of the larger ADP contributors were refunding bonds which had multiple benefits for us. We insured debt issues for the Puerto Rico Highway Transportation Authority and the Citizen's Property Insurance Corporation, and in both cases, we received accelerated premium revenue, reduced our exposure to the credits and booked attracted new business.

Our non-U.S. public finance ADP production was $62 million in the first quarter which is a little better than the 13 quarter average since 2004. This business continues to be lumpy. Three of these deals were among the largest ADP deals that we wrote across all market segments in that quarter.

Over the years we've insured a number of UK water financings and we insured another one for Anglian Water Services in the first quarter. We also insured a bond issuance for the Comision Federal de Electricidad, or CFD, which is the government owned electric company in Mexico. The deal provided financing for the acquisition by CFD of a hydroelectric power plant to be built under Mexico's public private partnership program.

Turning to structured finance, ADP production in U.S. structured finance grew sharply with significant contribution from CDOs and mortgage-backed securities. For each of the CDOs, MBIA's insurance policy attached at either AAA or Super AAA rating levels. We insured several CDOs of investment grade corporate credits as well as multisector CDOs.

Now here is a few quick notes on the multisector CDOs. These deals all had Super AAA underlying ratings where MBIA's insurance typically attached at 2 times the base AAA rating. They all had higher percentages of residential mortgages but we place heavy emphasis on the capabilities of the asset managers regarding their credit selection skills and we also include various limits and restrictions regarding collateral content. We gain additional comfort by involving all of our relevant credit and surveillance experts to review the pieces of collateral in these deals. And because they are managed portfolios, we seek to do business with highly qualified asset managers.

Regarding the direct mortgage-backed business in the quarter, we insured one subprime mortgage deal with a modest $59 million in net par which carried a AAA rating before we insured it in the secondary market. So while credit spreads have widened meaningfully in the subprime mortgage market, we are being cautious about the whole RMBS sector. All of the other mortgage-backed deals that we insured in the first quarter were either home equity lines of credit or second mortgage transactions for prime borrowers. Three of these deals which totaled $3.3 billion in par value were country-wide home equity securitizations.

The non-U.S. structured finance segment was our only sector with lower year-over-year production. And it was the only segment that had a challenging comparison to last year's first quarter. Non-U.S. structured finance ADP was $26 million for the first quarter, down 50% compared to the first quarter of 2006. Last year we did two large transactions which combined for $43 million of ADP, and this year while we also insured two large transactions, their combined ADP was only about $24 million.

To sum up my comment on production, market conditions in the quarter remain challenging with low interest rates, generally tight credit spreads and intense competition from both within an outside of the bond insurance industry. However starting with last year's fourth quarter, we've seen noticeable improvement with prospects and activities related to new business.

Turning now to our income statement. Scheduled premiums earned increased 2% for the first quarter. Scheduled premiums earned generally had been declining for the last six quarters reflecting the overall downward trend in production since 2003 as well as the effect of the heavy refunding activity in recent years. The first quarter of 2007 is the first quarter in which we had year-over-year growth in scheduled premiums earned since the second quarter of 2005.

As usual, our premiums earned included very little contribution from the new business that we wrote in the quarter. However, those new policies are an important source of our future earnings. In fact, our deferred premium revenue net of prepaid reinsurance premiums plus the present value of future installment premiums, grew by $66 million to $5 billion at quarter end. It was the first time in two years time that we've had two consecutive quarterly increases in the reservoir of our future earnings.

Pretax net investment income for the first quarter increased 5% to $146 million. Excluding interest received on variable interest entities, or VIEs, and interest income on a Northwest Airlines asset that we've consolidated on our balance sheet, pretax net investment income was down 2%. The decline primarily results from lower average invested assets which was largely a function of the $500 million special dividend paid by the insurance company to the holding company in December of last year and the $294 million in payments that we made in the fourth quarter to call two MBIA insured defaulted bonds, the last capital asset tax lien securitization and a multi-sector CDO.

Once again, our fees and reimbursements demonstrated volatility this quarter as they were $10 million versus last year's first quarter of $8 million. Both first-quarter amounts included expense reimbursements from our Eurotunnel remediation efforts. However, the Eurotunnel expense reimbursement was greater in 2007. Despite the comparative strength of our ADP production, fees associated with new business transactions remained a modest component of this revenue item.

Total insurance expenses increased 6% in the first quarter of 2007. The primary driver of the higher total expenses was interest expense which stems from the higher interest expense for the VIEs and the financing of the Northwest Airlines asset that I just mentioned.

The insurance company's operating expenses as shown on the income statement were 11% lower than last year's first quarter. Now from an expense management perspective as we have discussed before, we focus on gross insurance expenses before deferrals and ceding commission income. On that basis, expenses were down 1% versus the comparable quarter.

Keeping with our loss reserving policy, we recognize loss and loss adjustment expense equal to 12% of our scheduled net premiums earned which amounted to $20 million for the quarter. As was true for scheduled premiums earned, loss in LAE increased by 2% versus last year's first quarter.

Our net case loss activity amounted to $34 million in the quarter which resulted in a $13 million reduction to the company's unallocated loss reserve. While there were several credits with either increases or decreases to case loss, there were two in particular that accounted for the overall increase. Earlier this month, we announced our settlement with Royal Indemnity, which resulted in a $20 million reversal of expected recoveries associated with the MBIA insured Student Finance Corporation student loan securitization for which Royal had provided guarantees on the underlying student loans.

The other credit was a CDO where we increased an existing case loss reserve. This deal suffered from poor asset manager performance and poor asset selection. By the way, as I referenced earlier, we have since elevated the importance of asset manager skills assessment and our evaluation of the collateral content of CDOs that we consider for insurance. We may very call this CDO and that factored into our decision to bolster our case loss reserve for it.

I should note that the problems that this CDO experienced were unrelated to the current deterioration in subprime mortgage performance as the deal contains relatively little residential mortgage collateral. We are continuing to monitor the developments in the subprime mortgage market but at this time those developments have not caused any significant concerns regarding our insured book of business.

For those of you have not seen it, we have posted a half dozen or so frequently asked questions on our website which describes the extent and quality of our subprime mortgage exposure which totaled $5.4 billion at quarter end or less than 1% of the outstanding book of business.

Now back to case loss activity. We'd also like to report that due to favorable additional remediation efforts, we now expect not to have any net loss on our Northwest Airlines exposure. As a reminder, in the fourth quarter of 2005, the company booked a $76 million case loss reserve for these credits.

Now here is a quick update on our Eurotunnel exposure. Since our last conference call, Eurotunnel's financial statements have been audited and issued and the company's stock has been relisted on the UK and French Exchanges. This shareholder exchange offer is currently underway. If by May 15, at least 60% of the Eurotunnel shares have been tendered, the debt restructuring plan can be implemented and then Eurotunnel can be transformed into a new company with lower leverage.

The restructuring plan calls for Eurotunnel's existing debt to be retired. And the MBIA insured debt will be retired without any losses to MBIA. As we noted on the last call, MBIA made an GDP18 million payment on the FLF2 notes back in February of this year as well as a $1.3 million payment on some MBIA insured senior notes. Based on the terms of the Eurotunnel debt restructuring plan, we will be fully reimbursed for the claims that we've paid as well as our out-of-pocket expenses.

All in all, we've made substantial progress with several current and former problem credits in our insured book and we believe that the portfolio is in better shape than it has been in for quite some time.

From an underlying credit quality perspective, 82% of our outstanding book is rated A or better which is 1 percentage point higher than a year ago. In addition, the percentage of our portfolio rated below investment-grade as determined by Standard & Poor's and Moody's has decreased from 2.1% at March 31, 2006 to 1.9% at the end of the first quarter of 2007. And that same statistic is 1.4% when we use MBIA's ratings on our portfolio.

To wrap up our comments on our insurance operations, pretax operating income from the segment which excludes the effects of net realized gains and net gains and losses on financial instruments at fair value and foreign exchange, was $275 million, up 3% compared to last year's first quarter period.

Also, last week the FASB issued its long-awaited exposure draft on accounting for financial guaranty insurance contracts. As expected, the draft proposes new requirements for loss reserving and premium revenue recognition as well as company disclosures provided for those items. The clock is already ticking on this 60-day comment period. We are down to 52 days now so please share your perspectives with the FASB folks. The proposal has been circulated by some of our sell-side coverage analysts and is also available on the FASB's website.

In addition to providing our comments to the FASB, we will also undertake efforts to assess the potential impact the proposals would have on our financial reporting. However, as several analysts have already correctly indicated, the proposals do not impact the underlying fundamental economics of the financial guaranty business.

Now turning to our investment management services business. We continued to experience strong growth in our asset management products as the first quarter's ending assets under management was 24% above March 31, 2006 at $67 billion. The asset liability product segment experienced solid growth in its investment agreement and medium-term note businesses and assets under management in the third party and advisory services segments grew sharply.

IMS first-quarter 2007 pretax operating income contributed 9% to the company's total pretax operating income and increased 4% versus last year. This is a tough comparison because last year's first quarter included accrual reversals of approximately $2 million from 2005 expenses. Adjusting the numbers to be on more of an apples-to-apples basis, operating income growth would be 14%.

Turning to the corporate segment, it's operating loss increased by 2% versus last year's first quarter. The higher loss is primarily the result of increased legal expenses related to the work of the independent consultant. As our CEO, Gary Dunton, noted in his letter to shareholders in our 2006 annual report, we expect the independent consultant to complete his review during the second quarter.

The higher legal expenses were partially offset by higher net investment income and insurance recoveries. The greater net investment income primarily resulted from higher average assets due to the $500 million special dividend paid from the insurance company to the holding company in December 2006. The insurance recoveries represent the payment that we received on one of our directors and officers insurance policies which reimbursed us for a portion of the expenses we had incurred in the regulatory investigations and related litigation. Based on our D&O coverage and the expenses that we have incurred in connection with these investigations, we are pursuing additional recoveries from our carriers.

Regarding gains and losses, MBIA recorded a net realized gain of $12 million for all business operations compared to a net realized loss of less than $1 million in the first quarter of 2006. The favorable comparison over the prior year is primarily due to the $14 million write-down of a receivables balance in Q1 2006. The receivable was obtained under salvage and subrogation rights from an MBIA insured transaction.

The company also recorded a pretax net loss on financial instruments at fair by and foreign exchange of $16 million for all business operations in the first quarter of 2007 compared to a pretax net gain of $2 million in the first quarter of 2006. This income statement caption now contains several items. We have the impact of foreign exchange which includes the impact of currency fluctuations on financial instruments in our non-U.S. functional currency entities and derivatives used in the investment management segment for hedging where we don't qualify for hedge accounting.

It also includes credit default swaps written as credit protection in the insurance segment and interest and credit hedges in the asset management's business. The CDS, written as part of our insurance business are mostly on deals with AAA and higher attachment points and therefore the marks on those instruments are very small and of course they go to zero over time.

We also adopted a FAS 155 in the first quarter which changes the accounting treatment for certain hybrid financial instruments which is also reflected in this income statement item. Under FAS 155, the change in fair value of certain hybrid financial instruments is recorded on the income statement as part of net gains and losses on finance instruments at fair and foreign exchange. The adoption did not have a material impact on our financial results.

MBIA's analyzed operating return on equity for the first quarter of 2007 was 12.2%. Our return on equity continues to be under pressure from our significant excess capital position. However, we did repurchase $300 million of our shares during the first quarter which leaves us with $700 million of authorization under the current $1 billion share repurchase program approved by the Board in February. We repurchased shares at an average price of $67.09 per share. As I mentioned on last quarter's call, will continue to work toward a more optimum capitalization over the next couple of years.

Yesterday the New York State Insurance Department approved another special dividend of $500 million and the insurance company dividended that amount up to the holding company. With those additional funds, the holding company has approximately $1 billion of available cash to cover shareholder dividends interest on MBIA Inc. debt, holding company expenses and share repurchases. Please note that the special dividend supplants the insurance company's regular dividend capacity for the next twelve months. So, if we want to dividend additional monies to the holding company during that timeframe, we will need to seek approval from the New York Insurance Department for another special dividend.

To sum up the quarter, we were pleased with our business production especially in light of the difficult market conditions. Looking forward, we see favorable growth opportunities in our insurance markets as well as in our asset management products. Notwithstanding the relatively strong ADP production of the first quarter, the current environment of tight credit spreads is likely to constrain ADP production in 2007. We continue to adhere to our pricing and underwriting disciplines and we also will continue to hold the line on expenses. These are all critical factors in our efforts to add long-term value for our shareholders.

So now with that, I will open up the floor for questions.

Thank you. (OPERATOR INSTRUCTIONS) Ken Zerbe of Morgan Stanley.

Thanks. My first question relates to the multisector CDO that you are taking losses on. I guess first of all, was this AAA rated when you originally underwrote the transaction?

It was not, no.

It was not. Okay. Maybe can you just remind us how much of these I guess lower than AAA rated CDOs you currently have exposure to?

Ken, there is some disclosure around the CDO portfolio in the supplement as well as on our website. And if you look at transactions that were originated prior to -- let's see, just trying to -- what we've got is CDOs by vintage. We also have CDOs by credit quality. So AA or lower transactions or about 6% of the CDO portfolio at first quarter.

Okay.

Okay, so the total portfolio has a par outstanding of $109 billion.

Okay, great. So 6% that. And can you quantify the amount of losses you took on the CDO versus the release from the Northwest [LPTCs]?

Ken, we have in general not provided the tail on the amounts of reserves taken on individual cases unless they are very significant or part of a larger story. So we've not provided disclosure around that amount.

Okay, that's fine. In terms of the sector, I think in the press release you mentioned that you are seeing an improving pipeline based on spread widening at certain sectors. Now if I recall correctly I don't think you are a huge fan of the subprime market but that is where we are seeing spread widening. What other sectors were you referring to that you are seeing spread widening that would be a positive for your business?

Sure. There are a handful of sectors where the fairly dramatic spread widening that we've seen in the subprime market seems to have lopped over into including the commercial mortgage-backed securities and including CDOs in general, the lower tranches. But we are also seeing even at the AAA level one or two basis points of improvement in pricing. So, there is some improvement in pricing in those sectors.

Okay, great. And just the last question that I had was on investment management. It looks like earnings declined about $1 million sequentially. Actually I think for the last three quarters, it was sort of closer to the $26 million. Was there any reason for the drop in earnings on a sequential basis?

I do not think so. When you look at their earnings quarter-over-quarter, they have about a 4% increase. Let me just take a look at what we have on a sequential basis.

Yes, closer to 26 for the last three quarters or so.

That is hard to say. It has been pretty flat, Ken.

Okay I will follow up for more detail later. Thank you very much.

Sure.

Rob Ryan of Merrill Lynch.

Good morning. Could you give us a little detail on the timing of the share repurchases during the first quarter given that the sequential decrease in the weighted average shares outstanding was pretty small?

Yes. It is because, Rob, we actually didn't start buying back shares until after the authorization and after the finalization of our settlement. And so we actually weren't in the market until right around the first of February. So your repurchases are sort of back end loaded.

The other thing that we focused on is that while -- I mean we are into a process where we expect to buy back shares in an orderly fashion. We do want to tend to try to buy more shares when prices are lower and then somewhat fewer shares when prices are higher. And our price was declining during that period beginning of February to late to February. And so the volume grew as you went through a period. So it is pretty back end loaded. So you will see a more material impact of first-quarter share repurchases in Q2.

Okay. And could you give us the holding company cash level again and your benchmark for what you'd like to keep there?

Sure. The holding company is currently as of today, frankly, it is at about $1 billion. So we closed the quarter at about right around $500 million and then we had a special dividend that was authorized and processed in the frankly the last 24 hours. So about $1 billion. The standard is that I want to hold at least $300 million of cash at the holding company at all times as a liquidity buffer. So that gives us if you think about that as kind of a minimum, then you have sort of $700 million of available cash for share repurchases at the holding company level.

Okay. We've seen a bit of a trend recently certainly a trend in hybrid issuance but also a trend in using the proceeds of hybrid issuance for the purpose of share a repurchase, basically a further improvement of the capital structure. Are you thinking about that at any point?

Yes. And as we get closer to a place where the capitalization that is on balance sheet today is near a point of efficiency, I think it is reasonably likely that we will end up adding hybrid to the capital structure. But right now I have expensive funded shareholders equity on the balance sheet that I want to use for share repurchase before we start to utilize a hybrid.

Okay. Switching gears. Are there any specific goals of what you would like to see your gross insurance expenses do this year?

We have said that we are looking for gross insurance expenses to be flat at worst in 2007.

Okay, great. Thank you.

Geoff Dunn of KBW.

Thanks, Chuck. I wanted to go back to capital. Obviously I don't think anybody is signaling that we are off to that races with new production and new opportunities. But it sounds like maybe you are turning a corner in terms of capital utilization on growth so you are in a net usage position. When you factor in what you are thinking about doing for buyback, how much of -- does growth get you back to an efficient capital structure and does it play into maybe continuing a buyback in '08?

It's a little bit hard to talk about it and I will tell you why. This is something that I've learned really over the past several months is that -- I've said several times that at year end 2005, the rating agencies were in rough agreement about our capital position and how much over the AAA minimums we were. As the business goes from -- we were in a period of, frankly, declining business production, and now we're in a period of growing business production, hopefully -- knock on wood. The rating agencies are differentially sensitive to the mix of business that you underwrite. So, for example, you write a lot of CDOs, that hurts you with one agency. You write a lot of international public finance, that hurts you with another agency. I think one of the agencies also has a higher charge for domestic municipal-owned utilities, for example. So the mix of new business production has a lot to do with how we trend in terms of capital usage.

And so we are monitoring it pretty carefully and we do report to the agencies every quarter on our share repurchase activity -- expected share repurchase activity, but in the context of a capital forecast, understanding what we're expecting the business mix and capital usage to be.

Having said that, in 2007, even with a meaningful increase in our business production relative to 2006, I still would expect that year-end 2007 we have access capital and that, therefore, we might still be in a position to be buying back shares in 2008. But again, I have got a number of constituencies to deal with -- the three rating agencies, our Board, and the regulators on that. And we do take it on a -- really, on a quarter-by-quarter basis.

Okay. And then just as a follow-up. In the past, there has been a lag between when the rating agencies evaluate your excess capital position and the actual quarter of results you are in. Obviously, they approved the dividend you got yesterday. Up to what point have they evaluated your financials for excess capital; and it is more than a six-month lag, should we assume that you actually have more than that available?

There are a couple of things going on. First is that they do a formal appraisal of our excess capital on an annual basis, but with a six-month lag, as you say. One of the agencies is talking about trying to produce reports on capital position more frequently, and we will sort of see how that goes.

But then they have shared their capital models with us, and so we run them ourselves and try to get a sense of where they are going to be coming out as we go to them with proposals to modify the capital structure. So, you know, we have reviewed, and pretty extensively, the $500 million special dividend that we just took out of the insurance company with all three of the agencies and they are comfortable with it. As that gets consumed, we will back to them next quarter with another report on capital position, capital forecast, usage and share buyback. I guess the short answer to your question is that we are on a reasonably short leash.

Okay, thank you.

Tamara Kravec of Banc of America Securities.

Thank you. Most of my questions have been answered, but I wanted to get a better sense in the subprime area of whether it is a matter of the right price or simply an aversion to the sector, and I guess how you would look at this business if it really does pick up through the remainder of the year.

Yes, Tamara. We've been pretty cautious on the RMBS sector as a whole. Really since 2002, we sort of stepped away from the market and did kind of a reappraisal of the way that we evaluate the deals, the way we evaluate the trend in home prices, as well as really beefing up the way that we look at the seller servicers themselves, and developed our own ratings scale for the seller servicers.

And we actually did some business in 2005 and 2006, although with respect to subprime, where we are originated about $3 billion of direct exposure in '05 and '06, we were really only originating at the AAA level and almost all in the secondary market. In fact, it may be 100% in the secondary market for '05, '06 and the first quarter of 2007.

So we are watching that market, there is price opportunity there that appears to be emerging. We do have excess capital; we can take advantage of that by writing some more business. But we are just being very careful about the underwriting and the pricing on a transaction-by-transaction basis. We don't want to bring in large ADP but have RAROCs, if you know what I mean.

Okay. And it seems like we've had a lot of commentary in the last month or so by newspapers and just strategists and what not about spread widening in the commercial MBS area in terms of collateral that is supported by apartment buildings, office complexes. Are you at all worried about that sector of the market?

We don't have undue concern about that market. And the spread widening today appears to be as much driven by just concerns throughout the mortgage market that is spillover from the subprime meltdown as it really is with respect to the fundamentals of office buildings, shopping centers, apartments and the like.

Okay. Thank you so much.

Darin Arita of Deutsche Bank.

Good morning, Chuck. Just a question here. When you say hold the line on expenses, can you talk about any specific initiatives you have in place to try to keep the growth insurance expenses flat this year?

Sure. Fundamentally, our gross insurance expenses are about 60% or a little bit better than 60% compensation-driven. And the way that you control the growth in compensation is that you control the growth in headcount. And I think we have been pretty judicious about managing headcount growth really in 2006 and going into 2007, as we rolled out an operating efficiency initiative last year that continues now.

In fact, if you look at the trend in our deferred acquisition cost, you will see that we deferred a bit higher proportion of our gross expenses in Q1 '07 than we did in Q1 '06. And in part, that is a reflection of having headcount and compensation a little more heavily weighted on the production side of the house than on the support side of the house, where you are DACing more of the comp expense. So we are pretty focused on staying pretty close to our headcount objectives.

I guess, assuming that the credit spreads widen and growth picks up, to what extent would you need to reverse that, or could you still maintain the headcount and take in the new growth?

We think that our human capital platform today is pretty scalable.

Okay, great. Just turning to the CDOs that were done in the quarter, it sounded like the contents of many of them included residential mortgage collateral. Can you give a little more color on the types of that collateral and what the underlying ratings are for the collateral?

Sure. They are primarily high-grade transactions where the underlying collateral is rated A or better. They do contain residential mortgage collateral. And some of the transactions, to be honest, have residential mortgage collateral that is more than half of the collateral in the transaction. And we are looking at doing business with originators and services that are at the highest quality. They are managed transactions. So we are negotiating with them constraints on the collateral content of the transactions and the extent to which they can be managed.

There are also triggers that, if we were see deterioration in the collateral pools, that would improve the credit backstop that is available to MBIA. But to be fair, they do contain residential mortgage collateral. And fundamentally, what we are looking at is doing business with the highest quality originators and servicers in the marketplace.

To what degree is that residential mortgage collateral subprime mortgages?

I believe that the subprime content is a relatively small. However, again, the deals have collateral sector limits that would allow the managers to add subprime collateral to the pools.

Okay, great. Thank you.

Mark Lane of William Blair & Company.

Good morning. Most of my questions have been asked, but I just had a couple follow-ups. The CDO case loss activity, is that the same CDO that has been an issue the last couple of years?

No. We had a CDO on which we have taken reserves that we called in the fourth quarter.

Okay.

And so this is another CDO. Now, to be frank, both of them have been on watch for some time and sort of the predate the whole subprime mortgage level of concern. And so we did add to reserves on it in this quarter.

So it already had a case reserve set up?

Yes.

Okay. That is a 2001, 2002 vintage -- what --?

I believe that it is an older vintage. Both of those two deals were originated around the same time, around 2000.

Okay. And then the question on the deferral. I was a little bit surprised you deferred so much, because it is not as if gross expenses had changed so dramatically in the last year. And if you back to the third quarter of, I guess, '05 when you lowered your deferral rate pretty dramatically because there was -- partly because the [new risk] environment was not as robust and so you could justify less being attached to production activity.

So, I mean, this quarter was by far the highest rate since you made those changes. And I'm just trying to understand is this a new adjustment or was there something unusual in the quarter?

The quarter is perhaps unusual in that we have more -- higher comp expense as a proportion of the total than we have in typical quarters. If you just look at the amount that we DAC compared to the gross expenses, it's about 37% in first quarter 2007. And you are correct -- it was about 31% in first quarter 2001. But it is really driven by the fact that headcount and comp are more heavily weighted toward areas of the business where we have higher DAC levels.

So we haven't changed the formula by which we calculate the amount of expense that is going to be deferred, but there has been a shift in the allocation of headcount and compensation.

So, is that a pretty decent level, then -- kind of a higher 30 number for this year, you think?

I would expect it to be a higher than 31% for the --

No, I mean higher than this level that you saw this quarter -- kind of similar levels?

I don't see it going up from this level, and I would imagine that the first quarter is going to be a little bit heavier than the other three.

Okay. And just on the Eurotunnel expenses, what is the total, cumulative out-of-pocket expenses that you have incurred?

Oh, gee. I do not have that number available.

Over 10 million?

It is hard to say. I would have to follow up with you to talk about that. But let me just make the point, though, that we expect that we are coming to the end of the Eurotunnel journey. And in terms of looking forward, there is it not a lot of additional expected reimbursements.

Okay, thank you.

Heather Hunt of Citigroup.

Thank you and good morning. Congratulations on good production.

Thank you, Heather.

I was just wondering if we can turn to the FASB proposal. I know it is very controversial and it's still yet to be finalized. But I was wondering if you have a sense on premiums. I know it doesn't change the economics of the business, but optically, do you think that the premiums will change very much, like in the 5%, 10%, 15% range? And then a follow-up.

Okay. It's a little premature to talk with any specificity about how premiums will change. First of all, the FASB has released the exposure draft for comment. And without prejudging it, I would expect that a lot of the comment is going to go to the proposal on revenue recognition. They are going to have a round table discussion with the industry, the Big Four and investment analysts, which will take place in July, August, that time frame. And I would expect that a lot of the dialog at that time revolves around the revenue recognition concerns.

The proposal, as it is currently written, will have differential impacts on different aspects of our business. When you just look at things like on installment -- on structured finance transactions, requiring that we utilize the contractual life of the transaction rather than the expected life, that is going to tend to stretch out and reduce the average recognition of premium in a period. But it is not clear what effect that would have on the entire book of business, because it depends upon, obviously, what the difference is between expected and actual, but also on what year you are in, right? So it is conceivable that you could cut over and have higher income for a time and then lower income beyond that. So it is a little hard to judge without actually modeling every transaction.

On the upfront premium side, it seems more clear that the proposal would in general have a modest negative impact on the recognition of premium, and of course stretch it out. Fundamentally, the economics of the business don't change at all as a result of that change in recognition.

I think the bigger problem may be that we don't believe that the recognition tracks the economics of the business. And fundamentally, the accounting is supposed to track the economics of the business. And the FASB is going to get a lot of -- they are certainly going to receive feedback from us to that effect, and I would expect that they will receive feedback from sell-side analysts, from investors, from the Big Four firms that is quite consistent.

And do you think that they are receptive to that, or --? I mean, it sounds like -- it is pretty well known that the industry doesn't really agree with it, and I don't disagree with you. But do you think they are receptive or they just want to have --?

I mean, it is really hard to say. I mean, I can't identify a constituency that is in favor of making the changes; I don't see any diversity of practice among companies that would require a change. And yet there it is. So it is impossible for me to look into the FASB and figure why they are where they are. I just don't know.

Okay, thanks. And then a quick follow-up. Just on the reserve side, I mean, I know it is early days, but do you have a sense, are you comfortable with your reserve position? Or with these kind of ongoing CDO issues, do you think that maybe there might be some edging up of the reserves?

We are actually comfortable with our reserves. And, if anything, we are probably more comfortable now than we've been in the past because there is less -- we believe there is somewhat less uncertainty associated with the back book of business now than there had been in the past. You can see that in the underlying credit quality; you can see it in the percentage of below investment-grade. And we don't publish our watchlist, but those statistics also have been trending down.

As you've had a favorable market environment, kind of a benign credit environment, we have done a lot to remediate some of the problem credit that were in the portfolio a couple of years ago. And frankly, we think we've assembled a surveillance function that is the best in the business and have spent a couple of years really working these transactions hard. So we are pretty -- we are awfully comfortable with our position today.

Now, as for the change in accounting for reserves, I would expect that over time you will see more volatility in the emergence of reserves. But there really shouldn't be much of a change in the overall level over time.

Okay. Thank you. I will let somebody have questions. Thank you very much.

Mike Grasher of Piper Jaffray.

Thanks. My questions have been asked and answered.

[Al Coppersino] of [Madoff].

Great. Thank you very much. I just was curious about the refunding activity; I know it is a very hard thing to forecast, as you've said. But tell me if I'm off-base here. If you look at the book that potentially can refund, I guess most of the U.S. public finance business, and if you look at the underlying interest rates on those credits versus the prevailing interest rate level and you assume there is some delta necessary to make it worth the while of the municipality, are you able to -- have you found that historically that that is a decent guidepost for you all in trying to forecast refundings?

No, we have tried -- Al, we have tried several times to come up with a rubric that allows us to go back in time and back test refunding experience, and we just haven't come up with anything that works. I mean, it's not just deals that are open to prepayment; we also get refunding, prerefundings on transactions that are not yet open. In addition, we also have refundings and refunding income on non-U.S. public finance transactions.

Secularly, you might also say that government treasurers are becoming more sophisticated and under more pressure to generate value from their debt portfolios, and so the spread that sort of makes it worth their while to do a refunding may be narrowing. And in addition, of course, you have the secularly low interest rates.

So I mean there are a number of factors that play into this. The spread between taxables and tax exempts has an impact. And we just haven't -- we have tried to create the regression equation that allows us to predict future refunding activities, and we've not come up with anything that works.

That makes sense. In the category of things that are easier to forecast, you will be happy to know that the Bloomberg reporter wrote a characteristically negative article about your very strong quarter. Congratulations on the quarter.

That I can predict. Thank you.

Gary Ransom of Fox-Pitt, Kelton.

Hi. I just had one more question on the broader market environment. I understand that the spreads are narrow, but can you talk a little bit about whether there has been changes in how either competitors have behaved or in how investors or issuers and their demand for credit enhancement might have changed over the last couple of quarters?

Sure. With respect to, Gary, the behavior of the monolines, I don't think there has really been much of a change. I mean, there is a lot of capital in our industry out there seeking to do business, and we all have sectors of the market that we like in which we are quite aggressive. And that has resulted in a quite competitive environment.

On the investor side, this is totally anecdotal, but it may be that as you are seeing spreads start to widen in some of the sectors and a discussion about the potential for economic downturn as the housing market flows into the more general macroeconomy, that investors are somewhat more receptive to bond insurance, and feel the need to be protected from credit risk. It is too soon to declare a trend. But certainly with respect to pricings, volume and just the sheer number of calls that we get on reverse inquiry, that seems to be the case.

So it is fair to say that just the activity, you are saying, does reflect some sort of change over, say, six months ago?

I think so. I think so.

Okay, thank you very much.

Michael Katz of Glenrock Asset Management.

Hello. I just have a follow-up question to Heather Hunt's question regarding the reserves. Can you give us an idea about what the notional amount of guarantees outstanding is in relationship to your capital, and also what the level of the reserves is at the moment, and maybe broken down by various categories?

Yes. And I would just point out that this information is available in our financial supplement. The total book of business is about $620 billion in par outstanding. The claims paid and resources of the firm are roughly $13 billion. And reserves are -- we have about $200 million of unallocated reserves, and case reserves of about $290 million.

I see. Thank you.

Andrew Wessel of JPMorgan.

Hi. Actually, all my questions have been asked and answered. Thanks.

Geoff Dunn of KBW.

Thanks. Actually, just want to follow up on the earlier question about the diluted share count. Check, do you have where your actual diluted share count has settled down into the second quarter, incorporating all the buyback from the first quarter?

I don't have the final quarter end at this point.

Okay. And then could you repeat what you said about when you expect the final report from your consultant, the independent consultant?

In the second quarter is what we currently expect.

So basically, imminent. And then after that report, what is the process thereafter?

It's hard to say. I mean, the report is going to be issued, it goes to our audit committee, it goes to the SEC. And of course I don't know what the report is going to say. We, at this point, don't anticipate any enforcement action that arises out of it, but that is not for us to say.

But to the extent -- let's say nothing [does] happen. Does the consultant stay on or is that basically it?

Our relationship with the consultant really extends only to the end of the completion of this report.

Okay, great. Thank you.

Thank you. This concludes the Q&A session. Mr. Chaplin, make your closing remarks, sir.

Thank you. I'd like to thank everyone for all of your questions, appreciate them.

Before we sign off today, though, I want to take a moment to extend the Company's gratitude and best wishes on behalf of MBIA to three people who will be leaving the company shortly -- Jay Brown, who will retire from MBIA on May 3, following his last shareholders meeting as Chairman of the Board; Neil Budnick, who leaves his role as President after 23 years of dedicated service; and Mark Zucker, who leaves his role as the head of our Global Structured Finance unit. These folks have expanded the company's global footprint and played a key role in shaping our culture, and we wish them all the best as they move on to the next chapter in their lives.

And now I would like to turn it back over to Greg Diamond.

Thanks, Chuck. And 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. We thank you for your interest in MBIA. Good day and goodbye.

Thank you. This does conclude today's MBIA Inc. conference call. You may now disconnect and have a wonderful day.