MBIA Inc (MBI) 2007 Q2 法說會逐字稿

Good morning and welcome to the MBIA's second-quarter 2007 earnings conference call. At this time, all lines are in a listen-only mode to prevent any background noise. After the prepared remarks, there will be a question-and-answer session. In order to ask a question or make a comment (OPERATOR INSTRUCTIONS).

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

Thank you. Good morning and welcome to MBIA's second-quarter 2007 earnings release conference call. 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.

We've also posted updates to our FAQs and the disclosure document titled MBIA's CDO Strategy Portfolio Analysis and Subprime RMBS Exposure on our website today. Next week, one week from today, at 9:30 AM we will be hosting a webcasting event. Participants will be able to submit questions via e-mail and the webcasting site. Telephone participants will be listen-only. That event will feature several key MBIA personnel who will address MBIA's approach to the subprime RMBS and CDO sectors. You may check our earnings release or our website for more information about that event.

MBIA's conference call for our third quarter earnings release will be held on Thursday, October 25 at 11 A.M. We will issue the press release for that quarter's earnings before 7 A.M. on that day. For today's call, Chuck Chaplin, MBIA's Chief Financial Officer, will deliver his prepared remarks and then he'll hold a question-and-answer session.

Before Chuck begins, here's 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 differ materially from these forward-looking statements due to various potential factors. Descriptions of these potential factors can be found in the Company's SEC filings which can be accessed by the Company's website. The Company undertakes no obligation to publicly correct or update any forward-looking statement, even if at a later date it becomes aware that such result is not likely to be achieved.

Now here's Chuck Chaplin.

Thank you, Greg, and good morning, everyone. Evidently our second quarter earnings results have piqued some additional interest as we have quite a few more participants on today's call than we have had over the last several calls. So thank you all for your interest in MBIA and your participation on the call.

This morning, as we normally do, I will comment on our operating and financial results. I'll also talk a bit about other matters including our exposure to subprime RMBS directly and in CDO form. And then we'll turn it over and take your questions.

Our second quarter results were rather straightforward and largely in line with expectations. We continue to make favorable headway on a few important fronts including profitable business production, building our reservoir of future earnings, expense management and resolving problem credit in our insured portfolio. Our second quarter net income per diluted share from continuing operations was $1.61, essentially unchanged from last year's second 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 5% to $1.57 versus last year's $1.50. Operating income per share for the second quarter includes $0.05 per share impact of our share repurchase program. Our operating income for the second quarter at $207 million was up 1% versus last year's second quarter.

Further adjusting operating income by excluding the net income effect of accelerated premiums on refunded bonds, results in income of $1.36 per share, which is also 5% higher than the same period last year. While refunding premiums declined 4% versus last year, its net income per share contribution remained the same at $0.21 per share due to the lower weighted average share count in 2007.

The acceleration of premiums into earnings due to refundings continues to run above historical levels, accounted for about 21% of the second quarter's total premiums earned. In the six years from 1997 through 2002, refunding contribution averaged about 12%. For the last four years, 2003 through 2006, they averaged about 17%. Low interest rates and narrow credit spreads have been powerful drivers of refunding activity.

Now I'd like to spend a few minutes on business production which we measure using a non-GAAP metric that we call adjusted direct premium or ADP. For the second quarter of 2007, ADP of $447 million was significantly better than the production of the second quarter of 2006. It was the second highest quarterly production in our Company's history. For the first half of 2007, ADP totals $720 million which amounts to about 70% of our full year 2006 ADP. We believe that favorable trends and demand for our products and pricing contributed to the higher ADP, but we have also made some changes in process and marketing approaches that make us easier to do business with. And the emergence from the cloud of the SEC investigations has likely helped as well.

So let's look at the contributions from the different market segments. Our global public finance ADP was $146 million, which is 17% lower than last year's second quarter. Last year's quarter included two international deals that combined for over $100 million of ADP. Our domestic public finance production was $87 million this year, up 18% from last year. From an insured par perspective we had about a 15% increase versus last year's second quarter while insured par for the industry was up 11%.

While issuance was up, credit spreads have remained narrow and have even tightened in certain product areas. According to our statistics we garnered a 23.5% share of the insured market for the second quarter of 2007, about 1% higher than our market share of the last year's second quarter. Among the significant domestic deals in the quarter were a financing for Tulane University, a refunding deal for a toll road in Colorado and a debt offering for Miami Dade County airport.

International public finance production was $59 million in the quarter versus $102 million last year, almost all of which came from the two deals that I mentioned a moment ago. This business sector continues to be characterized by large, long gestation transactions, so the quarterly trends are less meaningful. But the $59 million is about the average production that we've had over the past three years in this sector.

Globally, the three largest ADP deals in the quarter were all international -- a financing for a hospital under the UK's private finance initiative, a UK electric transmission credit, and a wind farm financing in Germany. We believe that the investments we've made in our global origination and underwriting infrastructure are paying off, allowing us to focus our production efforts on sectors with the strongest profit potential, which do vary significantly from quarter to quarter.

Turning to structured finance, ADP production in both the US and non-US sectors grew sharply, each more than double, compared with last year's second quarter. It was the highest quarterly production in our history for structured finance. To put it in a different light, the $302 million of ADP for global structured finance exceeded the Company's total ADP production for eight out of the last 13 quarters. With that level of strength, it shouldn't surprise you that many sectors contributed to the result.

However, the favorable comparison was largely due to increases from CDO's of commercial mortgage backed securities and commercial real estate; a franchise asset securitization for Domino's Pizza; and investment-grade corporate CDO's. While spreads widened in the subprime mortgage sector, we continue to maintain our cautious and selective approach. We didn't insure a single subprime RMBS deal in the quarter. We did, however, insure two multisector CDO's, both high-grade ABS CDO's with approximately 50% subprime RMBS in their collateral pools.

The largest ADP deals in the quarter included a franchise asset securitization for Domino's Pizza, an aircraft lease portfolio securitization, and a life insurance securitization for Genworth. Other notable deals with large ADP in the quarter include a bank remittances offshore financing for a bank in Kazakhstan, a CMBS CDO, and an investment-grade corporate CDO.

To sum up on production, while ADP was the second highest in our history, market conditions do remain challenging with low interest rates, tight credit spreads and intense competition from both inside and outside of the bond insurance industry. While credit spreads have widened in some sectors, particularly those related to US RMBS, they are still well below historical means in most sectors.

That said, starting with last year's fourth quarter, there's been a noticeable improvement regarding the demand for bond insurance. We hope that the current market concerns will continue to spur greater demand for our products and services just as we have seen during similar situations in the past.

Turning back now to the income statement, scheduled premiums earned increased 3% for the second quarter, marking the second consecutive quarter with a year-over-year increase. Scheduled premiums earned generally had been declining prior to 2007, reflecting the overall downward trend in production since 2003 as well as the effect of the heavy refunding activity in recent years. As usual, our scheduled premiums earned included very little contributions from new policies written in the quarter. However, new business is obviously an important source of our future earnings.

The second quarter was the third consecutive quarter in which our reservoir of future earnings increased. Our net deferred premium revenue -- net of reinsurance -- plus the present value of future installment premiums grew by another $38 million this quarter to $5.2 billion in total. The growth in the present value of our future installment premiums was actually suppressed by the successful remediation of our Eurotunnel related exposure, which resulted in the removal of $106 million of future installment premiums from the reservoir as well as the release of several hundred million dollars of required capital.

Pretax net investment income for the second quarter of $146 million increased 1% versus the prior year's quarter. Excluding interest received on variable interest entities or VIE's, and interest income on the Northwest Airline's assets that were consolidated on our balance sheet, pretax net investment income was down 1%. The negative comparison was primarily due to the two $500 million special dividends that the insurance company paid to the holding company in December 2006 and April 2007, which reduced average invested assets in the insurance segment.

Fees and reimbursements were $4.6 million; $600,000 higher than last year's second quarter. Despite the comparative strength of our ADP production fees that result from new business activity remained modest. Total insurance expenses increased 2% for the second quarter of 2007 compared with last year's second quarter. The largest contributor to the increase was interest expense which resulted primarily from the VIE's. By the way, the VIE interest is directly offset by a like amount of VIE interest income, so it has virtually no impact on our bottom line.

The insurance company's operating expenses were 2% lower than last year's second quarter. From an expense management perspective, we focus on gross insurance expenses which are before deferrals and seating commission income. Our gross insurance expenses for the second quarter were down 1% versus the comparable quarter last year. So, we continued to hold the line on expense growth even as premium production has increased.

Loss and loss adjustment expense, which equals 12% of our scheduled premiums earned -- based on our loss reserving methodology -- amounted to $21 million for the quarter. Therefore, loss and LAE -- just like scheduled premiums earned -- increased 3% versus last year's second quarter. Netting the $21 million reserve addition against our net case loss activity for the second quarter of $17 million yields a $4 million increase to our unallocated loss reserve, which now stands at $203 million.

While the unallocated loss reserve remains relatively low compared with earlier period, it reflects the much improved condition of our outstanding insured portfolio. In addition to writing higher quality business in recent years, both in terms of underlying credit ratings as well as from more conservative underwriting, we have also had several successful remediations of problem credits in the insured portfolio.

One of the more significant credits to be resolved, of course, was Eurotunnel. As a result of the consummation of the safeguard plan which was completed in June, all of Eurotunnel's prior debt was extinguished and MBIA no longer has any exposure to Eurotunnel. MBIA's insured Eurotunnel related exposure has either been terminated or effectively defeased, which has reduced our below investment grade rated exposure by $1.6 billion. In addition, MBIA was fully reimbursed for all of the claims we paid on Eurotunnel related debt and for our out-of-pocket expenses. The net par of MBIA's below investment grade exposure, based on the S&P underlying ratings preference order, now stands at 1.5% at the outstanding book, down from 2.2% at the end of last year's second quarter and 1.9% for the first quarter of this year.

Aside from Eurotunnel, since last quarter the Student Finance Corporation Student Loan Financing was also retired and regularly scheduled principal payments were made by the Metris Master Trust and the Hertz rental car securitizations. If we use MBIA underlying ratings, the below investment grade rated portion of our book business is 7/10 of 1% at June 30, 2007. The primary difference between our ratings and the S&P preference method results from the older rental car fleet deals. These deals did not ringfence their reliance upon GM and Ford for repurchase, so some of the rating agencies rate these deals below investment grade while we do not.

Turning back to the S&P underlying ratings priority basis, 81% of the underlying credit quality of our outstanding book is rated A or better, which is unchanged from a year ago. But perhaps more importantly, the AAA rated content of the outstanding insurance portfolio has increased to 23% versus 19% one year ago. The lower below investment grade rated exposure and the higher content of underlying AAA rated business both serve to reduce the risk profile and capital requirements of the Company.

The bottom line is that we have a very healthy capital position and growing origination opportunities. These are favorable environmental conditions for us. So to wrap up my 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 $277 million, up 1% compared to last year's second quarter.

Now turning to our investment management services business, we continued to experience strong growth in our asset management products. The second quarter's ending assets under management of $68 billion was 27% above the June 30, 2006 level. Both the asset liability products and third party advisory services segments experienced solid growth year-over-year. IMS second quarter 2007 pretax operating income was unchanged versus last year's comparable quarter and contributed 9% to the Company's total pretax operating income. The quarter-over-quarter comparison is flat because of onetime items that total about $2 million which excluded, would show run rate operating income growth here of about 8%.

Turning to the corporate segment, the loss for this segment for the second quarter of 2007 decreased by 11%versus last year's second quarter. The lower loss is primarily the result of increased net investment income from the higher level of assets resulting from the $1 billion of intercompany dividends provided by the insurance company since last year's second quarter and $3 million of insurance recoveries the Company received in connection with the costs associated with the regulatory investigations and related litigation.

At the MBIA Inc. consolidated level, net realized gains for the second quarter of 2007 were $16 million, about the same as a year ago. Net realized gains for the second quarter include a $10 million write-down of an investment in the Bear Stearns high grade structured credit strategy's hedge fund which represents a 91% reduction of MBIA's investment in that fund. This investment was held at the holding company as part of a portfolio of alternative investments intended to provide diversification and comparatively higher returns. This write-down was more than offset by realized gains which include $32 million of gains resulting from our successful remediation of the Delta and Northwest Airlines equipment lease transactions.

The Company also recorded pretax net losses on financial instruments at fair value and foreign exchange of $8 million for all business operations in the second quarter of 2007 compared to pretax gains of $8 million in the second quarter of 2006. This income statement caption incorporates several items. In particular, the second quarter of 2007 includes $14 million of mark to market losses related to credit derivative executed insurance contracts, principally due to wider credit spreads in the CDO sectors. Also in this category, offsetting the negative marked from insurance contract derivatives are the net gains from foreign exchange that I just referred to.

As a reminder, the marks associated with our CDS executed insurance contracts are mostly on deals with underlying ratings of AAA and higher. These marks will go to zero over time as long as the credits perform in line with our underwriting expectations.

MBIA's trailing four quarters operating return on equity for the second quarter was 12%. Our return on equity continues to be under pressure because we are holding significant capital in excess of requirements. However, we did repurchase another $300 million worth of holding company shares during the second quarter, which leaves us with $400 million remaining under the current $1 billion share repurchase authorization approved by the Board in January 2007.

During the second quarter, we purchased shares at an average price of $66.62. As I mentioned on the last couple of calls, we will continue to work toward an optimum capitalization strategy in which our insurance company maintains a cushion over the AAA minimums ratings requirements and the holding company has at least $300 million of cash on hand. We continue to work and communicate closely with the rating agencies and the regulators on our capital plans and forecasts including developments and trends in the credit markets.

As we announced yesterday, the independent consultant, who is retained by MBIA under its previously announced settlement with the Securities and Exchange Commission, the New York Attorney General's office and the New York Insurance Department has completed his review. The independent consultant concluded that MBIA's accounting and disclosures concerning its investment in Capital Assets Holdings Inc. and for its exposure on notes issued by the US Airways 1998-1 repackaging trust were consistent with GAAP and the federal securities laws.

The independent consultant also reported to the regulators on his examination of the design of the Promontory Financial Group's comprehensive assessment of the Company's compliance organization and monitoring systems, internal audits functions and its governance and controls process as well as MBIA's implementation of Promontory's recommendations. He found that both Promontory's review and the Company's implementation of their recommendations were reasonable.

He also concluded that no further changes or improvements to the Company's policies or procedures were necessary to achieve best practices. We are pleased with the independent consultant's conclusions and we are happy to put this chapter behind us.

So to sum up the quarter, we were very satisfied with our business production and the continued growth in the reservoir of future earnings. 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 two quarters, the current challenging environment and intense competition are likely to continue. We will continue to adhere to our pricing and underwriting disciplines and continue to hold the line on expenses. These are all critical factors in our efforts to create long-term value for our shareholders.

Now let me close with a few remarks on subprime mortgage exposure. The lowered underwriting standards and potentially unsustainable home price increases that we had seen earlier in this decade caused MBIA to pull back from the US RMBS sector. Those effects are now starting to have serious effects on the RMBS sector with some of them spilling over into other sectors from a pricing perspective. The so-called subprime crisis is clearly impacting the financial services company's stock prices.

While we are closely monitoring developments in the subprime mortgage market, we believe that concerns are substantially overblown regarding our insured book of business. So let me summarize our position -- and by the way, this information is available in more detail on our website. As Greg Diamond referenced earlier, you can look on our homepage for the document titled MBIA's CTO Strategy Portfolio Analysis and Subprime RMBS Exposure.

At June 30, 2007, our insured US RMBS portfolio was $34 billion or 5% of the insured book of business. Of that, $5.1 billion or 15% are insured subprime RMBS securitizations. About 1/3 of these securitizations were originated in 2006, so based on Moody's industry data, we insured about 40 basis points of the subprime deals originated last year. 100% of the securitizations tranches that we wrap in 2005 and 2006 were originally, and still are, rated AAA. And none of them have appeared on the list of deals downgraded or placed on watch by S&P and Moody's in the last several weeks.

Overall, 91% of our subprime RMBS portfolio is rated A or higher. While we don't believe that the downgrades and watches that we've seen to date will be the end of the story, we've underwritten these deals with enough subordination that we don't believe that there's any expected loss for us at this time.

We also have exposure to the subprime market through our CDO book. At June 30, we had $24 billion in net par exposure to multisector CDO's. That is the category in which many of the CDO's have RMBS content. The collateral for those deals contained about 36% subprime RMBS on average and it ranges from 16% to 57%. 92% of the CDO's with subprime RMBS collateral are high-grade CDO's, where the collateral ratings are at least A. The other 8% are mezzanine CDO's with collateral predominantly related BBB. We underwrote only one transaction since 2004 with BBB rated collateral.

For all of those recent CDO's, we're attaching at so-called Super AAA levels. Many of the multisector CDO's, both high-grade and mezzanine, also contain CDO tranches as collateral. And some of that CDO collateral will be multisector CDO's themselves which will likely have some subprime mortgage content. But those concentrations will tend to be small. Our diversification requirements would make it very difficult for us to underwrite a CDO with a high degree of mezzanine subprime mortgage collateral either directly or by inclusion in subsidiary CDO's.

The CDO business that we have written with RMBS content in 2006 and 2007 is exclusively attached at the Super AAA level and once again, we're far enough out of the money that we don't believe that either the current market conditions nor those that we can foresee are likely to result in losses for us. As was noted earlier, we are planning to host a teleconference next week to provide you additional perspective about our approach to these sectors. For those of you with detailed questions, we hope that you submit your questions to the e-mail account that we have furnished and of course we hope that you participate in that call.

So now let's open up this call to your questions.

(OPERATOR INSTRUCTIONS) Ken Zerbe, Morgan Stanley.

Great, thanks. Are you more willing to write the CDO of ABS now that credit spreads have widened out so much and structure has just gotten so much better? Or do you still just have a general aversion to that space?

Well, when we look at the transactions that we have done in 2007 in general, they represent higher quality underwriting of the underlying securities, stronger structural protections in the CDO as well as higher pricing. So, yes, we view all of those developments as favorable ones. And so we are spending a meaningful amount of time looking at transactions in that space. And again, the one mezzanine deal that we have done in the past three years was a 2007 deal.

Okay. Second question I had was with your mark to market. If you look at Ambac and SCA and let's, for argument sake, say your portfolios are pretty similar mostly focus super senior tranches, high-grade transactions. Why do you think that your mark to market loss this quarter at $14 million was so much lower than theirs on sort of percent of exposure basis?

It's hard to speculate about the reasons therefore just based on this couple of observations because there's so much more that needs to be taken into consideration including the nature of the transactions, the underlying collateral as well as their structures. But I can talk a little bit about the mark to market process that we use. We have about 230 insurance deals that where we wrap by insuring a credit default swap that attaches to the CDO. More than half of those deals have live dealer quoted spreads for the underlying collateral or they're corporate deals where using corporate generic cash spreads are sort of appropriate measures for determining the volatility of the underlying values of the collateral. So those sources are used to mark those deals to market and I regard those as kind of the easy ones.

However, the remaining transactions require analogs because there's no observable price to base the marks on. Of those remaining deals about 50 of ours are commercial mortgage-backed securities or commercial real estate related, 25% are multisector CDO's and a handful are corporate oriented transactions. Most of our mark at June 30 is generated by the CMBS related and multisector deals. For those transactions, we're using cash spread information that we collect from a variety of sources. For the ABS oriented transactions, we mostly use JPMorgan's spread tables that are specific to the asset class, so they're going to be primarily CMBS, RMBS tables for the relevant credit quality.

For the multisector CDO's, we use the table that's relevant to the predominant asset type. Then we use a binomial expansion technique model to calculate the marks for almost all of these 230 deals. The inputs include, of course, the notional amount, the observed or the assumed spread, diversification, recovery rate assumptions and, of course, the deal structure itself including the subordination.

So that's the methodology that we use to come up with the $14 million mark. I would note that a meaningful part of that comes from the commercial real estate side as opposed to from the multisector side. So it is kind of a different portfolio than we see of the other firms.

Understood, great. The last question I had was just on share buybacks. Maybe you can talk about how much capital you have at the holding company today that is available for share buybacks. And I know over time we've spoken about -- that the rating agencies tend to be a little more cautious about taking a lot of capital out of the insurance company over a short period of time. At what point do the rating agencies start giving you a little pushback and say maybe you shouldn't take capital out for a little while longer, given the $1 billion that you've already taken out in the last six months or so?

Well, they will tell us because we have dialogue with the rating agencies as well as the regulators in real-time about our capital position, capital forecast and sort of the share buyback game plan. So we have been having those dialogues in an ongoing fashion. I don't expect that we would continue to do so. I mean it's appropriate to say that the rating agencies and the regulators have asked those questions just as you have and the rest of the world about what's going on with respect to subprime mortgage exposure and the like, because there is a lot of confusion out there.

At this point we feel pretty good about our capital position. At the end of the quarter we had about $634 million of cash sitting at the holding company. Not all of that's available for share repurchase, mind you. We have said that we will always hold about a $300 million cash cushion up there for liquidity management purposes. So we continue to have resources that will be available. Again, we're continuing to have dialogue with the agencies and the regulators in real time about just what's the process and the progress by which we move cash out of the insurance company enough to the holco and what the sort of pace of share repurchases.

Great. And sorry, just to be a little more specific on that, when do you expect to take your next special dividend?

We're actually having a conversation with New York at this time. So that's an ongoing dialogue.

Perfect. All right. Thank you very much.

Geoffrey Dunn, KBW.

First of all, congratulations. I don't know the market -- what the market's doing but I don't think I could have hoped for a better quarter here. The first question, you've talked before how you didn't like the concept of an ASR, it wasn't -- the economics weren't great for you. You didn't want to bid up the stock for people to sell it to you but the market seems to want to sell it down to you every day. With the way the stock's performing, is there any consideration to look back at an ASR?

We're going to continue to think about whether an ASR makes some sense in the context of our overall capital management strategy. I would just note that at the time that we first talked about this back in January even, the stock was in the '70s, we would have lost a lot of opportunity by engaging in an ASR. As the stock price has fallen, we have been reasonably aggressive in repurchasing the shares in the open market. We continue to believe that open market purchases that don't cost us anything for structure are a great way to return cash to shareholders who will recognize the benefit over time as opposed to immediately. We're not -- we've never been motivated to engage in an ASR or similar structures to get the immediate accounting benefit.

Okay. And then can you just update us on what you're thinking about with respect to debt capacity or a hybrid? Obviously, again, with the buyback opportunity at these current share levels, you will probably want to be as aggressive as possible. Are you -- any specific plans right now for a new debt issue or capital raise?

No specific plans at the moment. We have about a 15% debt to capital ratio and of course we've not issued a hybrid. So, however you think about hybrid capacity it's all available to us at this point. My view has been that as we work through the on-balance sheet shareholders equity that is not deployed in the business, is not risk bearing, that it's going to make sense at some point for us to add a hybrid to the capital structure. That time is obviously coming because we have been basically maintaining the size of shareholders equity via share buyback and we've been adding risk to the book of business because our new business production has been reasonably robust.

So as those two things sort of converge, I do anticipate that we're going to want to and desire to add a hybrid to the capital structure. We did include hybrids in our shelf registration, so we would be able to have access to the market in pretty quick time. And again, there is in my view a bit of an inevitability about us adding hybrid to the capital structure to get to the optimum cost of capital.

Okay. Last question, I think earlier this year S&P indicated they were comfortable with you buying up to $1 billion of stock. With all the credit movements, is it your impression that they're still comfortable with that?

Again, we have ongoing and constant dialogue with the agencies about just this subject. And we did it with them last quarter and as you have seen, we continued to buyback shares in the second quarter. And we're going to be having that dialogue with them this quarter as well.

Tamara Kravec, Banc of America Securities.

Couple of questions. Moody's is out this morning with their report that there's another 9% down in home price depreciation or appreciation, however you want to say it. And yesterday we heard from Ambac about how they stress test their insured portfolio in terms of home price appreciation and looking at a couple of notches of downgrades. If you could talk a little bit about the stress testing that you've done on some of -- particularly on some of the subprime issues, that would be great.

And then also, my second question is are you worried at all about liquidity in the marketplace and there's talk of, of course, that drying up a little bit, particularly in some of the riskier patches. If you could talk about your outlooks there that would be helpful as well. Thanks.

Great. With respect to stress testing, maybe it's good to talk by analogy. When we look at our corporate CDO's, we have a stress test [rubrake] that is reasonably standard. Although, again, every transaction is kind of the spoke. But when we test for no loss underwriting in the corporate CDO world, we're looking at default and loss experience that is roughly five times the peak historical experience and 10 times the average historical experience.

For the non-corporate spaces, where frankly some of that data is not as well available, we are trying to build analog tests that reflect similar levels of severity. And we structure each transaction so that we have no loss in that kind of a dire downside scenario. And as a result, as you have seen in the ABS CDO world where we have this detail on the website, we have essentially only done super senior type transactions over the past couple of years because you need to get -- in part -- because you need to get up to those levels in order to protect us against those kinds of downside scenarios.

Okay. So, our stress testing we believe is quite robust. On the liquidity side, we do not have the problem that some of the dealers of subprime mortgages will have and funds that own subprime mortgages because we generally buy and hold credit risk for term. And so the liquidity of those underlying instruments doesn't create that much concern for us. The place that the illiquidity has an impact, I guess, is going to be in the spreads that we use to mark those underlying CDO's to market.

So the illiquidity has an impact on us from a reported net income perspective, but so long as we're far enough out of the money that we don't expect that there's any realized loss for us in the transactions, all that will happen is that you'll have a negative mark and over time it will accrete to zero.

And what about the actual deal flow in terms of deals being pulled, not enough in the marketplace for you to write? I think you're being selective but are you concerned that all of a sudden deals will stop hitting the market for a period of a couple of months?

I mean, clearly, there have been a bunch of transactions that we thought were coming to market that have now not come, particularly in the leverage loan area. But then there are other sectors where deal flow is ample. And let me remind you that we are underwriting transactions both in the primary as well as in the secondary market so, in some cases investors are holding assets today that they will desire to purchase an MBIA wrap on. To the extent that one is comfortable with the underwriting in some of the residential mortgage-backed securities -- and I would say that our view is all RMBS are not created equal so while there are some bad deals out there from 2006 and early 2007 vintage, there are also good deals out there. And to the extent that you have capacity and capital, you can almost write as much of that as you wish. So while, yes, there's some concerns about deal flow in the primary market in some markets, we don't believe that that will have a material impact on us, at least in the short run.

Darin Arita, Deutsche Bank.

I guess I was curious with respect to you excess capital position, Chuck. Can you talk about how it's changed since the beginning of the year? I know MBIA has bought back $600 million of stock but Eurotunnel, that exposure's eliminated, the credits have improved throughout your portfolio. You also have some growth as well but can you tell us what the change has been since the beginning of the year?

Yes, let me respond to that this way. It's because of the fact that we're governed by multiple capital models, in order to put a firm answer to a question like that we'd need to sort of work through it with each of the rating agencies as well as with the MBIA capital model. And then we try to reconcile the differences between them. So it's a little hard to make real time hard assessments of a $1 amount.

However, all the points that you make are good ones. The quality of the underlying portfolio is improving. We did have Eurotunnel and the student loan transaction to go away in the second quarter. Between the two of them hundreds of millions of dollars of capital are released. But at the same time, Darin, we're also writing a meaningful amount of new business and some of it is quite capital intensive.

A lot of the growth that we have seen -- I mean it's business that we like but it's capital intensive. A lot of growth that we have seen in the first two quarters has been in the international space. We have done a nice amount of international infrastructure oriented transactions. Those deals are highly capital intensive and on some of the rating agency models they are the highest capital intensive product that we write. So that sort of offsets some of those positives.

So if I had to take a -- to put a mark in the sand I'd say our excess capital position in the insurance -- or in aggregate is somewhat lower than it was at year-end 2006, which is exactly what we planned. So our objective was to try to move toward an efficient capital structure by doing both share repurchase and growing the business. And both of those things are happening. It's a little hard to pin it down to a dollar amount, though.

That's helpful. Turning to expenses, it sounds like one of your goals is trying to maintain growth insurance expenses to hold the line on that. I guess how much operating leverage do you think you could get out of that? It seems like growth is picking up. Your scheduled premiums earned are increasing. If we thought about it in terms of the expense ratio, is there -- how many points of operating leverage do you think you can get?

See, I haven't thought about the ratio itself but we are anticipating that in 2007, our objective in 2007 is to have gross insurance expenses no greater than 2006. So, our expense ratio, which was 24%, something like that, should be lower. I would expect it to be a couple of points lower by the time the year's out.

Okay. Thank you very much.

Heather Hunt, Citigroup.

Congratulations on a very good quarter and closing your investigations. Just a quick follow-up to Darin's and then I have a couple of other questions. In terms of your expenses, now you have three executives who are no longer on the payroll. Did we see the full benefit in this quarter? Or will there be more benefits in the coming quarters?

There will be more benefits in the coming quarters. So, yes. So that's one of the reasons that I'd expect again, even with some of the sort of volume-related growth and expense that takes place that we expect to end the year at worst equal to 2006.

Okay, great. Thanks. And then just turning to your below investment-grade exposure, great improvements there and even this is very encouraging to see. I was wondering if you could kind of describe the new names on there? I know there were three new names. One of them is a little familiar to us. If you could kind of give us some color on those?

First, I'm going to have to pull out the list.

Okay.

So, let me just figure out which ones are new. The rental car transactions were there. [Orkney], I think we've talked about before. Let's see (multiple speakers) -- the two green points, to be honest with you I'd have to get back to you to give you more detailed information. (multiple speakers) Oh, that's right. Because what happened is we took a couple of deals off, right, the Eurotunnel related transaction. These were deals that were -- they were already below investment-grade but they --

They've moved up the list.

Just moved up the list. So the green points are a couple of older manufactured housing related transactions. The AHERF I think was off the list before; now it moves up.

Is that the same AHERF '98 or is it different?

No, I'm afraid so. Yes, it's the same AHERF.

I knows there's been talk about sort of other aspects of that structure.

Right. There are no new investment-grade (multiple speakers) on the list.

They're new to us.

Yes, they're just new to this list because of the removal of the Eurotunnel.

Okay, and so, I mean your outlook on them? Are there specific factors about them that give you comfort or something that you're watching closely?

Frankly, a lot of the transactions that are on this list are ones that we do feel pretty good about. AHERF of course is fully reserved but many of the others are ones that are not ones that we think are particularly problematic. The largest are going to be the rental car transactions which again, they become below investment-grade because of the fact that they're split rated. If you were looking at the MBIA ratings where we do regard those transactions as investment-grade deals, they would drop off the list too and then there'd be a couple more smaller transactions that pop up. But there's really nothing there that is of particular concern.

Okay. Great. And then finally, just turning to reserves, it's sort of coming down every quarter gradually. Obviously your big exposure is coming down as well. I know you said last quarter you're very comfortable with it. I just want to see if there's any change in that outlook pending (inaudible)?

No, we continue to be quite comfortable with our reserve position. And as you point out, the fact that our unallocated reserves are relatively low as a percentage of the portfolio is just a reflection of the fact that the quality of the portfolio has gone up so much.

And then you had a $35 million payment out of reserves. Can you give us a little color on that?

We paid off a transaction in the second quarter. It was an older vintage CDO. So it was a CDO from back in 1999 or 2000 which was paid off with no change in loss of LAE in the quarter.

Gary Ransom, Fox-Pitt Kelton.

Yes, I had a couple of questions. One was on commercial mortgage-backed securities. It sounded like you had done a fair amount of that in the quarter and then on the other hand that was responsible for some of the mark. Can you to just talk about that part of the market a little bit, especially how it compares in terms of opportunities versus the residential market?

Sure. The commercial real estate and CMBS markets have been one that starting really in 2006, we focused one of our origination teams on. And we really believe that we have the best team in the business and that we have a strategic advantage in this area. And as a result, you have seen us add about 15, $16 billion to that book of business in 2007.

There's sort of two flavors of them. There are commercial real estate CDO's and then there are CMBS pools. And while from an underwriting perspective there really isn't that much difference in the way that we look at those two sectors, it does create a little bit of confusion. When we look in our supplement, the commercial real estate CDO's are included in CDO's and the rest is an a line item called commercial mortgage-backed securities. But the underwriting that we do of those two sectors is pretty similar.

The portfolio is one that is a very high quality. We have been underwriting these transactions exclusively at super AAA attachment points. So it's been an area where you're able to get very secure financings with pretty decent returns. I don't expect that that is going to last forever. But at the moment it is a fruitful area for us.

Just from a credit quality perspective, 99.8% of the book of business that we have underwritten is rated AAA or higher. The differences between the commercial mortgage-backed securities and the RMBS market is I guess the biggest one that I would point to is that the underwriting is done at the property by property level. So, in the RMBS world where you are analyzing the CDO manager, if it's a CDO, or the seller servicer and the pool characteristics if it's an RMBS pool, here you're underwriting every single commercial mortgage loan that goes into those transactions.

So there's a great deal of information transparency here that you don't see in the RMBS market. And at the same time you get terrific diversification because the deals are going to tend to be ones that have 50 or 100 names in them, each of the names of which is going to be a property that has multiple tenants in it. So there's great sort of granularity of underlying risk in those commercial real estate deals and it's very clear to you as you are underwriting it.

Thank you for that. One other big picture question. If you think about the stress that's going on right now in the mortgage space and compare that to similar stresses that have happened in the past, either with say, credit cards or corporates, what seems the same and what seems different in the current time versus those previous times?

On the commercial real estate side?

No, I'm just -- more broadly. I'm sorry, I'm talking about just the broad subprime issues, just the fear that's in the market, it's broadly pervasive across a lot of areas. We have seen similar times in the past and I'm just wondering if it seems different to you at all or if it is more or less the same?

The answer is probably both. There clearly are similarities in the sense that problems that occur in one sector of the market contage, if you will, into others. And you see a confusion that causes pricing of transactions to get disconnected from the fundamentals of the transaction. And there's less differentiation in price of securities for the credit underwriting that underlies them. So that's the same.

On the other hand, there are a number of things that are different. In the residential mortgage market, we really are facing some -- a potentially unprecedented experience where you see housing prices falling at the same time as you have kind of an affordability crisis among mortgagors. I don't know to what extent we have seen that in the past. At least not at the levels that we are hypothesizing over the next couple of years. So, that in and of itself creates a great deal of uncertainty in the market that people are reacting to.

So, there are some similarities but there are many differences as well. I mean certainly from the standpoint of looking at the impact on the monolines, clearly there is a lack of appreciation for the differences between different players in the capital markets.

All right. Well, thank you very much.

Andrew Wessel, JPMorgan.

I just had one question that's more broad is looking at different sectors and knowing that there's been a lot of spread widening obviously occurred in the mortgage space. What other sectors are you seeing that are getting more [on track] and prices getting significantly better for you outside of kind of residential and commercial mortgage?

If you look at industry sector spreads, really outside of that market there hasn't been a whole lot of improvement. We are seeing spreads that are a bit wider. We're seeing a bit better pricing, maybe 5 to 10% better pricing in many of the sectors in which we operate. But you know at the same time, there are a bunch of sectors in the public finance side and in the consumer asset-backed and other worlds where pricing is as tight as ever. And the competition among monolines for well underwritten transactions is fierce. So the compensation to the monolines in a lot of sectors has not budged at all and in fact may have even come in.

Okay, the question is just real quick, I didn't catch the difference between your rating on the rental car deals and the rating agencies? What was that difference? (multiple speakers) the difference, sorry?

In terms of the underwriting it's really that the rating agencies that -- I think it's one of them in particular -- has a kind of a weak link theory that says that if the credit that is behind the ultimate repurchase obligation at the end for the leases is below investment grade, then the deal is below investment grade, regardless of the quality of coverage in the collateral and the cash spread.

Steve Stelmach, Friedman, Billings, Ramsey.

Hi, good morning and good quarter. Just to follow up real quick on the sort of corporate credit exposures. I know you guys don't take individual quarter credit exposures but it is within the CDO. Are you guys seeing any improvement in spreads there, sort of just piggybacking off of Andrew Wessel's comment?

On the corporate side, I guess there's some improvement in spread in the lower quality sectors as you move down the capital structure. We have not done that much business in that space. So it --

[You're not really a] beneficiary at this point.

-- has not been a big benefit for us.

Okay. And then of your investment grade or high-grade collateral, corporate collateral, what percentage or what dollar amount is actually subject to mark to market? I know investors for whatever reason still are pretty concerned about that?

We have -- if you look at our synthetic CDO book, it's about $100 billion round numbers that is subject to FAS 133. We also have some other transactions where we have attached via CDS, which is really the -- the real driver is the fact that we are writing our protection in the form of CDS.

Well, most of that is RMBS, correct? I was just curious about on the corporate side. We sort of saw a spread wide on the mortgage side now if --?

No, some are corporate as well.

You didn't answer my question. What's the dollar amount of corporate that's mark to market?

I don't really have the dollar amount of corporates but just in terms of the numbers of transactions, you have about 230 transactions where more than half of them have live dealer quotes. And those are going to tend to be transactions that are corporates, the reason you can get live dealer quotes.

So in the CDO space, now I'm just reading from our supplement, in the synthetic CDO space you have about 43% -- no, about 50% are corporate credit oriented, either investment grade or high yield; about half.

Got it. Okay. And then this may be a question for next week but on your mezzanine CDO's, is it 2007 mezz CDO, it was $230 million last quarter; it's substantially less this quarter. What's going on there? That's not just simply prepayment, is it or something else?

No, I think that when we reported that in the 331 disclosure what we provided you was the fully ramped number and what you're seeing in the June 30th is where we actually are now.

Great, thank you very much.

Al Copersino, Madoff.

When was the last time you guys underwrote a primary subprime deal?

A primary sub-prime deal. Now, that's a good question. It's going to be 2003 or '04. (multiple speakers) And [most of] what we've done since then have been secondaries.

And the -- this has obviously been a choice you've stuck by hard and fast. What are the benefits to doing the deals in the secondary format versus the primary?

We've obviously been very selective in the transactions that we have done. We have only attached in any of those deals at AAA levels. The other benefit is that they are -- the bite sizes are quite small, so that the average size of a secondary market subprime deal that we have done has been 40 or $50 million. So it's bite size, more granular diversified portfolio of very high-quality risks.

I guess the last question -- either comment or a question, I'm not really quite sure, but there's obviously been just a whole bunch of disinformation about the Company. So I'm quite glad you guys are going to be doing another call next week. Would you all be willing to do something regularly, say once a month for the near-term? Or is that something that's being bandied about at the Company?

We actually hadn't talked about once a month but there is a great -- as you say, Al, there's a great deal of confusion out there in the marketplace today. People are not getting straight information. In some cases people really don't understand some of the fundamentals of the types of assets that we are talking about. So we think it's appropriate at this time to try to clear that up by providing kind of a full hour or two of opportunity for people to get those questions answered. And I mean it's our objective to always be responsive to the issues that are out there on investors' minds. I don't know that that suggests a regular schedule of such events but certainly we are available and willing to communicate on these issues as they come up.

That's fair. A colleague I heard mention that he was considering shorting MBI because it was a quote/unquote mortgage insurer. So I think the level of misunderstanding is actually pretty severe. But anyways, congratulations and thanks for answering my questions.

Phil Cunningham, Lowe's.

Yes, you told us about the investment in Bear Stearns hedge fund. Do you have any other hedge fund investments?

We do. We have one other hedge fund investment in our holding company portfolio. It's about [$20] million. It's an emerging market debt oriented fund and that's really -- those were the two largest transactions in that portfolio. We use that portfolio really for diversification and yield enhancement purposes. If you look at that, the history of our internal alternative investments although it's small, there has been some yield pickup relative to our core portfolio even after the $10 million write-down on Bear Stearns. So we are getting about a point higher total return on that portfolio than you get on the core investments in the insurance company.

Scott Frost, HSBC.

I saw the exposures that you listed in your high-grade and mezzanine CDO's. Could you just maybe generally tell us what kind of subprime loss rates you would have to experience before your wraps attach on the high-grade CDO's versus the mezzanine CDO's? Is that something that you can tell us?

I mean you can eyeball it I think from the table that's on our website because we provide the amount of subordination below us as well as the amount of subprime content. And so you can sort of hypothesize if you lost this much of the subprime content this would be the impact on the overall portfolio, assuming everything else remained equal. And I think there's enough information there that you can sort of do it on a deal by deal basis. For the record, we don't subscribe to the notion that every subprime mortgage will default and all the RMBS will become worthless.

Right, but just generally speaking. And again would the mezzanine loss rates necessarily be lower because they're collateralized by BBB pieces? That's fair to say too, right?

Yes, and in general the subordination levels that we'll require will be higher.

Right, okay.

Rob Ryan, Merrill Lynch.

Could you just go over the specifics, whether there was any concentration in the relative moderate level of case activity that you had during the quarter? As well as explain that if nothing occurred on any credit that was new, how much case activity you simply would have because of interest accretion each quarter?

There's no large deals. We have about $17 million of case reserves in the quarter. None of them, none of the individual deals are significant. So they're all small. And there is an element of accretion which is a couple million dollars. So even if you had no case activity you'd have a couple million dollars of accretion each quarter.

Mike Grasher, Piper Jaffray.

Congratulations on the quarter. Just the credit quality distribution that you supply in the supplement. My understanding is those are rating agency ratings, is that correct?

Yes, they're all S&P priority ratings.

Okay, how do they compare with your own internal ratings? And maybe it doesn't have as much relevance at the higher grade but certainly curious to learn the difference in some of the lower ratings.

Yes, I would need to get back to you with detailed input on that. The thing that we focus on -- and it is in the supplement -- is the impact at below investment grade. And while there are differences that we have with rating agency ratings both up and down relative to their conclusion, the ones that really make a difference in terms of the profile of the Company and the risk are really those that on one side or the other of the below investment grade divide. And so it's really, it comes down to in large measure those couple of transactions that we regard as investment grade that one of the rating agencies regards as below investment grade that make all the difference in terms of the perceived credit quality of our portfolio.

Understood. Thanks.

Mark Lane, William Blair. Mr. Lane, your line is live. Please un-mute and proceed with your question. We'll move on to the next question, which is from [Rob Davisky] with Credit Suisse.

Just wanted to ask a quick question about the high-grade CDO's. Can you clarify if you have any exposure to the second lien transactions? And also within the mezzanine CDO's that are contained in the high-grade CDO's, you had mentioned they have pretty small exposure to mezzanine CDO's within the high-grade. Can you -- do you have a percentage and a rating distribution? Like is it 5% double in those CDO's or --? If you can give any color on that, that would be great. Thanks.

The mezzanine CDO's are comprised of underlying assets that are BBB in quality and throughout the BBB range. As for the content that are second liens, I'm not sure if I can give you a firm answer on the second lien content of either the mezzanine CDO's or the high-grade. I would need to get back to you on that.

[Tony Delapiana], John Hancock.

Yes, thank you very much, appreciate it. Good call. A few questions. One in terms of your totals CDO exposure. I just want to clarify here. Under the CDO exposure you have CMBS and I was just curious -- trying to look at the page here but -- I was just curious similarly to your comments about high-grade RMBS but mezzanine RMBS, could you give us some color of the commercial real estate CDO's, what vintage and what -- of the CDO I assume you are attaching underlying tranches of CMBC -- what tranches are you attaching at? So similar like you show somewhere else in terms of some vintage comment and where you are attaching in the commercial real estate CDO's.

Sure, the commercial real estate CDO's are, as I said, they are uniformly Super AAA type attachment points. Now, the collateral inside the CDO's will consist of both rated and not rated assets, right, because some of them are going to be [CUSIP] CMBS bonds but there will also whole loans and other types of collateral inside those transactions. So it may be a little less easy to categorize them into high-grade and mezzanine in the way that we have for the RMBS.

Could you give us some comment of vintage of the 32.6 billion by vintage of that stuff?

Yes, about half of it was originated in 2007 and then about 10 billion of it was originated in 2006. So for the most part you are looking at a book of business that is 2007 and '06 originated. That's 25 basically of 32.

And roughly, enhancement levels? I mean certainly we can look at typical CMBS deals.

They really range all over the place. The problem is just the nature of the underlyings because you have some part -- like conduit loans, where the subordination to get the AAA is relatively small. But then frankly others have whole loans and other types of commercial real estate related collateral in them that require much bigger haircuts in order to get the AAA subordination.

And on your new supplement on the CDO's where you talk about the high-grade and the mezzanine. I just want to clarify a few things. I guess first of all, when you attach you show obviously the higher attachment points versus the AAA subordination. I just want to make sure that you are at the most senior position in the capital structure, that you're not attaching mezzanine pieces. You're attaching at the senior most level of the structure.

That's a fair question. All of our positions in the deals that are listed there are the most senior in the capital structure and there is AAA -- there are AAA securities subordinate to us.

And can you give us a sense -- and obviously in the high-grade in the text you talk about the underlying tranches are A or better. I don't know about this supplement but the first quarter supplements mainly AA, some AAA and a small bucket of A. Can you give us a sense of what that small bucket means?

I don't have it front of me but I believe that the small bucket are really transactions that are below investment grade that have been downgraded over time.

I guess my question would have been the underlying tranches. I think you said we do 80 or higher and I think your comment was in the A bucket we have a small bucket in the A rated tranches. And I'm just trying to [get a] sense of that small bucket 10% of the high-grade deals, the -- that's what I'm getting at.

I follow you. Yes, that in each case you'd have about 10% that's allocated to lower quality assets than the names. So the high-grade may have about 10% of assets and a lower credit quality spectrum and some of the mezzanine transactions are going to have an allocation of about 10% to BB type assets.

Last question in terms of the obviously the rest of the our MBS portfolio which is very significant. Could you give us some flavor about their breakout between prime, I mean near prime, all pay, the option arms because certainly if you look at Countrywide the other day I saw a lot of prime home equity type stuff getting into some issues. If you could just comment, give some flavor about the non-subprime part of your book?

Yes, you have about $34 billion of RMBS exposure in total of which about $5 billion is subprime so the rest $29 billion is prime. Of that $29 billion, about $5 billion are prime firsts and the other 24 billion are closed and seconds and home equity loans. All prime.

All right. And I think someone had asked earlier the question on this (inaudible) the CDO's, I think Mr. Frost had asked that question earlier, you gave the subordination levels and you say this stuff is performing fine. Could you give us some sense of what those statistics are? Are we looking at 5% delinquency at this point or can you give a sense of what performing as expected means in terms of the actual numbers?

I'm sorry, is that up on the commercial side?

On the CDO's both the high-grade and the mezzanine you said they are performing as expected especially given the subordination. I'm just trying to get a sense of what delinquency levels those things are experiencing right now and try to compare that versus what you see in the marketplace.

I think that would be hard answer in detail. But we certainly have observed higher delinquency levels in RMBS that we insure on a direct basis. And it stands to reason that the same thing is taking place in some of the collateral for the CDO's. Because of the fact that we are attaching in them so far out of the money we haven't seen anything that would give us concern about our subordination position. But that does not mean that there are not issues that are taking place with respect to the equity in those deals or perhaps the subordinate securities.

Very good, excellent, good quarter, thank you.

Gary Johnson, Alliance.

I had a quick question on the subprime RMBF, 91% A to AAA levels that you come in at. Could you break that out with respect to A about how much of that is represented by A?

I don't actually have that information with me. Again, that's something that we will get into greater depth on, on the call next week. The one point that I can offer is that for the '05, '06 originations, all of them are secondary market transactions that are originated at AAA and the '05, '06 are a bit more than half of the total subprime portfolio.

[Nadu Marianin], Trident Investments.

I had a question really just in terms of the overall correlation of the risks in your portfolios because most of the questions have talked about specific transactions and the stress tests you apply. But based on some of the things that some of the homebuilders have been saying, that people like Countrywide have been saying, in the housing market the downturn seems to have, at least in their opinion, be the worst since the Great Depression. And in some ways at least a Two if not a Three Sigma situation. What are the assumptions you are making looking forward in terms of the correlations of all of your risks?

Because one of the main concerns I have is if you look at the total insurance you have en force it's, I guess it's over $1 trillion worth. And your actual claims paying ability is relatively limited. So given the fact that we appear to be turning in the credit cycle in a very dramatic way and it looks like perhaps a prolonged downturn especially in housing, what are the assumptions you're making in terms of the correlations, in terms of your modeling plus in terms of also what assumptions you're making in terms of what might happen in the credit markets?

A big question; good question. We do stress testing of our entire portfolio. And in those stress tests we are generally assuming market conditions that are significantly worse than were experienced in the last two recessions because that's how we can kind of calibrated it. And it does involve -- that analysis does involve kind of a contagion of problems that begin in one of our scenarios in the RMBS market become more generalized across the economy and have an impact in many of the asset sectors that we're underwriting. And so we've look at the Company's resilience in that regard. And the conclusion that we have come to is that in that dire circumstance, the Company has -- the Company will have a capital hit, that's for sure, but the Company would be far from insolvent and would still be a very highly rated entity.

But in terms of these credit derivative products which are relatively recent vintage, and I think earlier one of you had commented on the fact that you have a relatively limited history, how robust do you feel these models are in terms of projecting defaults and doing these stress tests in the context of these recessionary conditions? Because you really have to go back over 70 years now to look for depressionary environment type home prices. Because I don't believe we've had a nominal decline in national home prices since the Great Depression. And it appears that this year we're going to have one.

You may well be right. That is the reason that we also hold capital against model risk in our capital structure. I just want to address one of the points that you'd made informing the question. It's about our capital base relative to the risks that we take on. At this point the capital that we hold at last measurement date is well in excess of AAA minimums. And all of the AAA minimums that we work against, both in terms of the assets -- the rating agency capital models and the MBIA capital model, all include an allocation of required capital to cover model risk. And it does vary. Some are like 30% add-on for model risks, some are 25. But it is explicitly taken into consideration in the models that we build.

Now, do we know whether that number is right or not? You're absolutely right. There's no way to know definitively but we've tried to be intelligent about capitalizing the Company against quite extreme scenarios. And that is the basis of the rating agencies' analysis of the AAA requirements.

Geoffrey Dunn, KBW.

Thanks, just a follow-up. Now that the regulatory stuff has all gone away here, can you update us on what kind of costs has been associated with that on a quarterly basis? And how much of an incremental savings you might see with the completion?

In the second quarter we spent about $3 million in expenses related to the investigation so that's for the IC as well as all of the -- our own attorneys representing us in that forum. So, it's our anticipation that those expenses do decline over time.

Is there any reason you shouldn't just drop a 3 million run rate sequentially?

That would be my proposal. We'll see how it goes.

Robert Tracy, Kinko's.

Yes, it looks like the spreads on your five-year CDS's have expanded fairly dramatically in like last couple months, from 20 bips to almost 100 bips now. Does that have any impact in terms of you writing new business?

No.

What type of impact does that have on your business in general? Or is it just completely not relevant?

We're dealing in the cash market. And as a result, I mean, it has relatively little impact.

Okay, so it has no impact in terms of you writing new business then?

It has not had any impact with respect to writing new business.

Or on a regulatory standpoint in terms of your capital?

No, it does not have any impact on the regulators.

Thank you. This concludes the Q&A session. Greg, your closing comments.

Thank you, Jackie. And thanks to all of you who joined us for today's call. We hope you consider participating in our call next week on subprime RMBS and CDO's. I encourage those of you with additional questions to contact me directly at 914-765-3190. We also recommend that you visit our website, www.MBIA.com for additional information. Thank you for your interest in MBIA. Good day and goodbye.

Thank you. This concludes today's MBIA conference call. You may now disconnect.