MBIA Inc (MBI) 2007 Q3 法說會逐字稿

Good morning and welcome to the MBIA third-quarter 2007 earnings conference call. At this time, all lines are in listen-only mode to prevent any background noise. After the prepared remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS). I would now like to turn the call over to Greg Diamond, Director of Investor Relations. Please go ahead.

Thank you, Melissa. Good morning and welcome to MBIA's third-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 supplements 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 have also posted new and updated FAQs, as well as other disclosure materials on our website today.

MBIA's conference call for our fourth-quarter earnings release will be held on Thursday, January 31 at 11 a.m. We will release our financial results 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 we will hold a question-and-answer session.

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 guarantys 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, www.MBIA.com. The Company undertakes no obligation to publicly correct or update any forward-looking statements even if it later becomes aware that such results is not likely to be achieved. Now here is Chuck.

Thank you, Greg and good morning, everyone. Thank you for your interest in MBIA and your participation on this call. This morning, as we normally do, I will comment on our financial results. I will largely focus on operating results, but I will also discuss nonoperating aspects, including our mark-to-market. I will also talk about the condition of the insured portfolio, our asset management business and the condition of the markets and then take your questions.

One really significant thing happened in the quarter that had both operating and nonoperating impacts. Real problems in the residential mortgage market triggered a greater appreciation for credit risk throughout the structured finance markets and this had three effects. First, we saw great opportunities to wrap high-grade CDOs with RMBS, CMBS and corporate collateral with great fundamentals and stronger pricing.

Secondly, and on the other hand, we saw continued and perhaps even greater concerns about the residential mortgage positions held by the guarantors. Finally, prices of structured credit instruments of all kinds fell and we had large negative marks to market on our credit default swaps. We don't foresee any actual losses on that portfolio, so we would expect this mark-to-market loss to reverse itself over time. Nevertheless, the total mark of negative $342 million caused us to have a net income loss in the quarter.

Fundamentally, we see this as a favorable environment for MBIA and for its long-term shareholders. As the appreciation of credit risk grows, the demand for our products and services grows and we are building our reservoir of future earnings through new business production.

At the same time, we need to be cautious about the potential for things to go bump in the night in our portfolio. So far, we are generally pleased with the quality and performance of the credits in our insurance portfolio and our balance sheet continues to be strong enough to fund our growth and provide a cushion against any additional capital requirements that may occur in the future. We are maintaining our discipline on expense management and we continue to see good growth opportunities in our asset management business.

Overall, our third-quarter net income per diluted share was a loss of $0.29, down from income of $1.59 for last year's third quarter. Operating income per share, which excludes the effects of net gains and losses on investments, financial instruments at fair value and foreign exchange, was down $0.03 to $1.52 versus last year's third quarter.

Our after-tax operating income for the third quarter was $193 million, down 9% versus last year's third quarter. Excluding the effect of refunding premiums, operating income would have been $1.43 per share, which was 4% higher than the same period last year.

Now I would like to spend a few minutes on business production, which we measure with a non-GAAP measure that we call adjusted direct premium or ADP. For the third quarter of 2007, ADP of $514 million was more than double our production of the third quarter of 2006. While last year's third quarter makes for an easy comparison, this year's quarter had the second-highest quarterly production in our Company's history. It was also the fourth consecutive quarter of year-over-year improved ADP production.

For the first nine months of 2007, ADP totaled $1.2 billion, which already exceeds our full-year production in 2006. Greater demand for our products and better pricing in selected segments contributed to the higher ADP.

In addition, we had a handful of unusual opportunities to insure high-grade, multisector CDO transactions with very attractive credit terms and above-average pricing, which was a direct consequence of the current dislocations in the structured finance markets. At this time, it is unclear whether conditions in the structured credit markets will continue to provide these kinds of opportunities for us and frankly, at the moment, there is reduced issuance in the structured finance world generally, but we will continue to look for transactions like these.

Now, I will provide some details on the production in our market segments. Our global public finance ADP was $177 million, which is 78% higher than last year's third quarter. Last year's third quarter was below average and provides a favorable comparison. This year's quarter is about the average production of the last 15 quarters.

Our domestic public finance production was $110 million, up 62% from last year. Total new issuance in this market was up about 25% and in short volume, was up about 20% and MBIA's marketshare was about 23% for each of the third quarters.

Unlike in structured finance, we haven't seen an appreciable change in risk-adjusted premium rates in this sector. There was a temporary widening of credit spreads in August, which provided us with some excellent opportunities in the secondary market, but spreads narrowed again in September.

The most significant domestic deal in the quarter was a refunding of a Puerto Rico sales tax financing. The remainder of our deal flow was characterized by lots of doubles to use a baseball term, many deals with moderate ADP.

International public finance ADP production was $67 million in the quarter versus a relatively light $32 million last year. This business sector continues to be characterized by large, long gestation transactions, so quarterly results are typically less meaningful. However, the $67 million is slightly above the average production of the past three years.

Four of the five largest ADP deals in public finance globally were international transactions. They included two French toll roads, an electric utility in Australia and a transaction for Comision Federal de Electricidad or CFE, a government-owned electric company in Mexico. The CFE deal represents the second transaction in as many quarters that we have insured for them.

In September, we established a Mexican subsidiary, which will strengthen our existing presence in that market and will position us to build enduring issuer relationships as we support Mexico's continued development. MBIA Mexico is the first US-owned, financial guaranty insurance company in that country to be rated AAA by S&P, Moody's and Fitch.

We believe that the investments we have made in our global insurance platform are paying off allowing us to increase our focus on production in sectors and markets with better profit potential, which can vary significantly from quarter to quarter.

Turning to structured finance now. ADP production in both the US and non-US sectors grew year-over-year. It was the highest quarterly production in our history for structured finance beating the record that was just established last quarter.

To provide a sense of the scale and accomplishment, the $338 million of ADP for global structured finance in the quarter exceeded the total ADP production for the Company in 10 of the last 15 quarters. With that level of strength, it shouldn't be a surprise that many sectors contributed to the results.

The greatest contributors to the increase were commercial mortgage-backed securities, corporate investment-grade CDOs, high-grade multisector CDOs and a single whole business securitization for a consumer contracts company. While spreads remained wide in the US RMBS sector, there was effectively no business to be insured in that sector in the quarter. We didn't insure a single US RMBS deal, although we did insure an RMBS transaction in Mexico.

As you'll see from the updated disclosures in our FAQs on the website, we also insured seven, high-grade, multisector CDOs with US subprime RMBS in the quarter. We didn't insure any mezzanine multisector CDOs. MBIA's insurance coverage attached at a minimum of 50% subordination for each of these deals with a range of four to 17 times the minimum AAA subordination level. These were highly unusual insurance opportunities for which we received above-average credit protection and attractive pricing.

We have updated and supplemented all the prior disclosures that we have made about our risk profile in the US subprime RMBS market both through the direct insurance of subprime RMBS, as well as the inclusion of subprime RMBS in our insured CDOs. These updates were also posted on our website this morning.

We remain very comfortable with our subprime RMBS-related exposures. In fact, it is not just us that is comfortable, all three rating agencies -- Moody's, S&P and Fitch -- have issued reports on their assessment of the bond insurers subprime RMBS-related exposures and MBIA does well under all of their assessments.

Having said that, we are carefully surveilling all of our credits in the housing sector, including the prime RMBS. We do not have case reserves for any of our recent prime or subprime deals as of September 30, but like most, we have some concerns about the sector and expect future further deterioration over time that may manifest itself as losses in the future.

Returning to our production, while ADP was the second-highest in our history, market conditions remain challenging. Interest rates remain relatively low, credit spreads have widened in many structured finance asset classes, but remain tight in public finance and competition remains intense from both inside and outside the bond insurance industry.

That said, the increased demand for bond insurance, which started with last year's fourth quarter, remains evident. We hope that the current market conditions will continue to generate greater demand for our products and services and will continue to provide us with better opportunities to improve our pricing and returns as has occurred in similar situations in the past.

Now turning back to our income statement. Pretax operating income from the insurance segment, which excludes the effects of net realized gains and net gains and losses on financial instruments at fair value on foreign exchange, was $265 million, down 11% compared to last year's third quarter.

In general, we believe that this quarter demonstrated good fundamentals good fundamentals for the Company. Scheduled premiums earned were higher and operating expenses were lower both year-over-year and sequentially. However, refunding premiums earned, fees and reimbursements and net investment income all had negative variances compared with the same period in 2006.

Refunding premiums declined significantly, falling 57% for the third quarter versus last year. This makes sense as interest rates on new tax exempt issuance were somewhat higher and escrows created in conjunction with advanced refunding transactions were less efficient in the third quarter. Frankly, given how high refunding premiums have been for as long as they have been, I guess they had to drop some time.

For the year-over-year quarter's comparison, the net income per share contribution for the third quarter of 2007 from refunding decreased by $0.09 per share from $0.18. The acceleration of premiums into earnings due to refundings accounted for 9% of total premiums earned in the quarter, which is considerably lower than the 17% average for the four years through 2006.

In general, we just as soon have refunding income. Upfront premium deals that refund make higher contributions to shareholder value than deals that remain on the books for their terms, but the slowdown really only changes the timing of recognition of earnings. The reservoir of future earnings will be higher as a result of this slowdown. It will take a few more quarters to see if this is a temporary disruption or if it is an adjustment to a new normal level.

On the other hand, scheduled premiums earned increased year-over-year for the third consecutive quarter, up 9% versus last year's third quarter. Scheduled premiums earned generally had been declining prior to 2007 reflecting the overall downward trend in production that occurred from 2003 through 2006 combined with the effect of heavy refunding activity in recent years. This is the third quarter in a row that scheduled premiums earned increased over the prior year's quarter and the increase itself has been growing from 2% in Q1 2007 to 9% in the third quarter.

Our reservoir of future earnings continues to grow and yield higher scheduled premium growth. This year's ADP production helps produce the fourth consecutive net deposit into that reservoir. Our deferred premium revenue net of reinsurance activity plus the present value of future installment premiums grew by another $226 million this quarter to $5.4 billion. While premiums collected for new policies contribute relatively little to the premiums earned in the quarter in which they are originated, they are an important source of future earnings.

Moving to investment income. Our pretax net investment income for the quarter was $145 million, a decrease of 11% versus the prior year's quarter. Excluding interest received on variable interest entities and interest income in the third quarter of last year on Northwest Airlines' assets that were consolidated on our balance sheet, pretax net investment income was down 7%. The negative comparison is primarily due to the $1 billion of special dividends that the insurance company paid to the holding company since last year's third quarter, which reduced average invested assets in the insurance segment.

Fees and reimbursements were $4.9 million for the third quarter, $12 million less than last year's third quarter. Last year's fees and reimbursements included $14 million of expense reimbursements from Eurotunnel and another remediated credit.

Total insurance expenses decreased 9% for the third quarter of 2007 compared with last year's third quarter primarily due to an 18% decrease in operating expenses. From an expense management perspective, we focus on our gross insurance expenses, which are expenses before deferrals and ceding commission income.

Our gross insurance expenses for the third quarter were down $4 million or 6% versus the comparable period of last year. The drivers were a change in expense allocation beginning 1/1/07 and lower loss prevention expenses partially offset by higher premium tax expense.

Loss and loss adjustment expense, which equals 12% of our scheduled premiums based on our loss reserving formula, amounted to $22 million for the quarter. Therefore, a loss in LAE, just like scheduled premium earned, increased 9% versus last year's third quarter. Netting the $22 million reserve addition against our net case loss activity for the third quarter of $11 million yields an $11 million increase to our unallocated loss reserve, which increased to $214 million. None of the reserve increases in the quarter were related to 2005 through 2007 subprime or prime mortgage transactions and none of the individual increases in reserves were material.

Portfolio quality and the proportion of troubled cases both improved as a result of a generally benign credit environment and positive remediation outcomes. One of the more significant credits to be resolved this year for instance was Eurotunnel, which reduced our below investment grade rated exposure by $1.6 billion. The net par of MBIA's below investment grade exposure using S&P rating now stands at 1.4% of our outstanding book, down from 2.2% a year ago. If we use MBIA's rating, the below investment grade rated portion of our book of business is about 60 basis points at September 30, 2007. This latter percentage is more consistent with the below investment grade exposure reported by our peer companies.

Turning back though to the S&P underlying ratings priority basis, 82% of the underlying credit quality of our outstanding book is rated A or better, up 1% from a year ago. And the AAA rated portion of our outstanding insurance portfolios increased 25% from 19% one year ago. The lower risk profile helps to lower the capital requirements of the Company overall.

Now, turning to our investment management services business, we continue to experience strong growth in its products. The third quarter's ending assets under management of $66 billion was 12% above the September 30, 2006 level. The growth in assets under management was primarily from asset liability products as assets for the third-party advisory services segment was flat year-over-year.

Sequentially, assets under management declined 3% primarily driven by a decrease in the utilization of East-Fleet, a structured finance conduit managed by MBIA. IMS third-quarter 2007 pretax operating income was up 20% from last year's comparable quarter. The IMS business contributed 11% to the Company's total pretax operating income for the quarter. IMS operating income benefited from an opportunistic debt repurchase made possible by the turmoil in the capital markets, which was worth about $5 million. This more than offset certain one-time expenses.

We also managed a structured investment vehicle named Hudson-Thames, which had $1.8 billion of assets as of September 30 and is dependent on a liquid short-term financing market. Like many other SIVs, Hudson-Thames has been challenged by the current dislocation in the structured finance and asset-backed commercial paper markets and at this point, we are actively seeking alternative solutions to meeting its financing needs. MBIA does not have any obligations to provide liquidity support to the vehicle and we have provided no performance guarantys. At inception, we did invest $16 million in the capital notes of Hudson-Thames, which represents about 12% of the capital notes.

Turning to our corporate segment, the loss for the segment for the third quarter of 2007 increased by 17% versus last year's third quarter. The higher loss results from nearly equal impacts from lower net investment income and higher corporate expense. The decrease in investment income was a result of a $3 million loss on an investment we made in an emerging market debt fund. Corporate expenses were higher by $2 million related to higher expense allocations from the insurance segment and intersegment interest expense partially offset by lower legal expenses.

Net realized losses for the third quarter were $311,000 versus gains of $5 million for last year's third quarter. The year-over-year change was primarily due to customary investment management activity associated with managing the Company's investment portfolio.

The Company also recorded pretax net losses on financial instruments at fair value on foreign exchange of $352 million for all business operations in the third quarter of 2007 compared to pretax net gains of $1 million in the third quarter of 2006. This income statement cash incorporates several items. In particular, the third quarter of 2007 included $342 million of pretax net losses primarily related to credit protection we wrote in credit default swap form. The loss is primarily due to wider credit spreads in the CMBS and RMBS sectors. We expect that in the absence of credit impairment, these marks will reverse to zero over time and at this time, there are no impairments that we have seen or can reasonably foresee.

Our marks to market are derived from actual transaction prices or dealer quotes where they are available and reliable and where they are not from applying an analytical model that relates observed changes in credit spreads on underlying collateral or collateral analogues to theoretical premia that might be charged for guarantys of the subject transactions.

Most of the multisector CDOs, CMBS pools and commercial real estate-related CDOs are marked using this model and they contribute almost all of the $342 million negative mark on the insurance portfolio this quarter. While a portion of the mark reflects real credit deterioration in the underlying collateral, particularly the RMBS space, none of these transactions were regarded as impaired as of quarter-end.

Our positions are protected by subordination and by deal structure, so we believe that the marks mostly represent pricing dislocations of the underlying collateral as a result of market illiquidity.

MBIA's trailing four quarters operating return on equity for the third quarter of 2007 was 11.8%. It is lower than prior quarters primarily as a result of the lower refunding activity in the third quarter that I discussed earlier.

Our return on equity continues to be under pressure because we are holding significant capital in excess of AAA requirements. We did repurchase $60 million worth of our shares during the early part of the third quarter, but with mounting concerns and uncertainties regarding the housing markets, the structured finance sector and the US economy and with improvements in our new business opportunities, we would prefer to retain capital at this time.

We still have $340 million remaining under the current share repurchase authorization and we will continue to keep the rating agencies and regulators apprised of our position and we will reevaluate it in real time.

To sum up the quarter, we are very pleased with our new business production and the continued growth of our reservoir of future earnings and we do not consider the marks associated with our insurance credit derivatives portfolio to be meaningful or problematic.

Looking forward, we see favorable medium and long-term growth opportunities in our insurance markets, as well as for our asset management products. Notwithstanding the relatively strong ADP production of the last three quarters, the volatility and uncertainty of the current credit environment will make it difficult for us to have a firm forecast of near-term production. But we will continue to adhere to our pricing and underwriting disciplines and of course to hold the line on expenses. These are fundamental elements in our strategy to add long-term value for our shareholders. So now, let's open the call up for your questions.

(OPERATOR INSTRUCTIONS). Ken Zerbe, Morgan Stanley.

Great, thanks. Now if I heard you right, it sounded like you said that you use a model to get most of your mark-to-market loss rather than dealer quotes, but obviously dealer quotes were available. Can you just talk a little bit about why that is appropriate? Because I'm just trying to understand or still understand since Ambac's call yesterday how the guarantors can just take such low levels of mark-to-market losses relative to what the rest of the Street is taking on those securities.

Sure. Let me try to address that. It would be difficult for me to talk about what the other firms are doing, particularly the investment banks, but I can talk a bit about our process and why we think it is appropriate.

To mark the portfolio of credit default swaps that we have written to market, what you ideally would be looking for are pricing indications for instruments that reference the underlying bonds that we do, have substantial subordination, have diversion and rapid amortization features if there is deterioration in the underlying and then a pay-as-you-go feature if the defaults in the underlying pierce all the subordination.

What happens in practice is that there are very few relevant observations that have those kinds of characteristics. The only normal course of business type transactions that come close would be negotiated reinsurance transactions that we might use as hedges. So we did have a handful of those in the quarter, so for those deals where we entered into pro rata reinsurance, we mark them to market using the prices the reinsurers charged us, but that is pretty de minimis. It only affects about 5% of our policies.

The vast majority are marked using market quotes for the collateral in the deals and then the subordination in the deal as inputs into an analytical model that then incorporates assumptions about correlation and the relationship between collateral spreads and financial guarantyd premiums to calculate an implied premium then for the deal and then the present value of the difference between the implied premium and the premium that we received is the balance sheet value at period end. So as collateral spreads increase, the implied premium also increases and in our model, that relationship tends to be nonlinear, particularly for large spread movements.

The critical assumption -- the critical choice that has to be made for every deal is where do you get the market quotes for the collateral. So there are some deals where the collateral actually trades or where we are able to get reliable dealer quotes on the collateral items and that is about 10% of the total number of policies that are subject to mark-to-market.

Then we have about -- just for reference, the total number of policies that are subject to mark-to-market is about 257. So about 10% have actual quotes. About 15% are deals where there is a high degree of overlap between our collateral and an index and where that is the case, we use the index to mark them as an input into our model.

For most of the CMBS-based and multisector CDOs, we are marking them using pricing indications from spread tables that are published by the investment banks. And those quotes are going to be for generic, asset-backed new issue deals differentiated by tenor and also by rating and that is about 40% of the transactions that are subject to mark-to-market.

The balance in our portfolio are essentially corporate transactions where we are using corporate bond spreads or generic corporate bond spread tables as inputs into the model. So we believe that the object is to try to get market quotes that are as close to the actual collateral in the CDOs that we wrap as possible as inputs into the model, but the model is necessary to convert those raw quotes on the underlying collateral, which you must remember we don't own out right, to an expected or implied premium for the contingent liability that is our interest in that collateral. Is that helpful?

Yes. I mean very complex stuff, but it is helpful. And now I don't mean to oversimplify your explanation, but obviously I'm sure you have recognized that there is a very large divergence in the prices out there for the CDO collateral in the market. In just your best guess, I mean is part of the difference at least based on your estimate of the value of the underlying collateral? Does that have a bigger effect or is it more the ratio, as you mentioned, between the spread on the CDS versus the CDO? I mean which of those has more of an impact?

I would imagine that in broad terms the thing that is going to have the biggest impact is the structure because our interest in that underlying collateral is different than the interest of a party that owns that collateral outright on an unwrapped basis.

Okay. All right. So just the last question I had was can you just talk about the impact of the recent rating agency RMBS downgrades have had on your CDO portfolio? I think yesterday we saw Ambac downgrade three of its high grade deals. Have you guys made any internal downgrades on your portfolio?

Yes, we have taken a look at all of the recent rating actions, which total, I don't know, 2500 downgrades for Moody's and about 1400 for S&P and let me just summarize the impact. None of the 2005 to 2007 RMBS transactions that we have insured on a direct basis were downgraded. We did have two tranches of older CDOs that we wrapped in the secondary market to have been downgraded. The total par amount there is less than $25 million and actually I think that those downgrades were not part of this most recent round. It was really in the last round I guess back in August.

We have seen subordinated tranches of 16 transactions where we wrapped the senior to be downgraded. Most of them were downgrades still within the investment grade spectrum so that most of that subordinate -- those subordinate pieces are still investment-grade.

And then if you look at the impact of the downgrades of RMBS on our CDOs where they are collateral for the CDOs, we have seen about 16% of the collateral in our multisector CDOs to have been downgraded, but again the majority of those downgrades are within the investment grade space. So there has been some impact. Of course, it is after the quarter-end, but when you put these changes in rating together with others that may come in the future, it is certainly possible that we will have transactions that will hit their overcollateralization triggers, which are rating or WARF-related and trigger some of our rights in those structures like to accelerate cash flow to the senior, potentially ultimately to replace the manager.

Okay. But right now, every high grade deal you have wrapped is internally rated AAA?

Every high grade --.

Or CDO?

Well, the rating distribution is the same as disclosed on the website. I mean they are mostly AAA, yes.

Mostly.

Yes.

Okay. I will have to check out the website. Thank you very much.

Corey Gelormini, John Hancock.

Thank you very much. In terms of the updated supplement, the CDOs of commercial real estate jumped from $32 billion to $42 billion and obviously, in your comments about the mark-to-market, I think, at least I heard, that you said a lot of that was related to CMBS. Can you give us some sense of how those deals are structured, what are the attachment points? Is it similar to a high grade asset-backed CDO of asset-backs? I guess how are these things structured and certainly obviously they are all rated very highly, AAA, but trying to get a sense of what enhancements you have in these deals, what are your attachment points?

Given where CMBS spreads are widening, there is certainly talk that commercial real estate structured deals may see some stress in the future. Could you give us more detail on that just like you do your CDOs of asset-backs, which is very helpful?

Sure. Yes, I know that we do not have a table up on the website with respect to CMBS. Most of the growth in that portfolio is in static CMBS pools where what we are wrapping are pools of CMBS. So if you will, it is a diversified portfolio of diversified portfolios of commercial mortgage loans. So the deals that we wrap typically have 30 to 80 different CMBS securitizations in them and then each of the CMBS will have hundreds, could be 200 or 300, individual loans inside the securitization.

So what happens is you are getting, at the level that we wrap, you have an extremely granular portfolio that could be 10,000 individual loans and loan participations in nature. The overcollateralization if you will in these transactions is going to come at three levels.

At the individual commercial loan level, those deals are typically written at a percentage of the assessed valuation of the property and then each of the CMBS has overcollateralization associated with it. And then the pool that we are wrapping will also have a subordination level or a deductible.

We are typically targeting when we size that deductible to get the same kind of multiple of the AAA attachment points that we see in the other ABS CDOs that we do talk about on the websites. So the subordination levels and the subordination strategy is similar. We are attaching in those transactions at a super AAA level.

That's great. And to get more granularity on that, I guess the way you described it is then -- it certainly seems like if you have 80 to 100 securitizations and then you have the underlying loans, so it seemed like it is basically -- as you correctly point out -- a CDOs of a whole bunch of CMBSs, but similar to the excellent disclosure you give on the subprime and the CDOs of real estate, can you give us a sense of what tranches are going into those pools like you do with the other ones and what vintages certainly given that you had a big increase of $10 billion this quarter, I don't know if that is just recent vintages or old deals. So could you give us some flavor that way exactly like the nice disclosure you give on your subprime CDO book?

I can tell you that the large majority of the deals were originated in 2006 and 2007 of the transactions that are going into the pools and obviously they are diversified across property types and across geographies and across borrowers. We have not provided disclosure of the individual CMBS that make up each of the pools. But again the object in structuring them is to create if you will a kind of truly national portfolio when you look at it from the MBIA level because of the fact that there are so many individual commercial mortgage loan observations within.

And getting to the subprime portfolio once again, could you give us some sense of, in terms of your own internal ratings, the CDOs of the subprime? What type of loss assumptions are you using? I know it varies by deal. But I guess to get a sense of how conservative you guys are on the CDOs of ABS, can you give us some range of what loss assumptions you are looking at at the pool? Obviously, you have very high attachment points?

Yes, it would be hard to generalize about the loss assumptions, but we did provide, and I think we talked about this at the last call, a sensitivity analysis for the capital requirements associated with our subprime mortgage exposure and the subprime exposure that is within our CDOs. That was based not so much on loss assumptions within the securities, but on the rating outcomes. And so we said if, for example, if all of the transactions were downgraded a single notch then the increased capital acquirement, I don't have the numbers in front of me, would have been less than $100 million.

By single notch, you mean like AAA -- I mean AAA to AA1 or AAA to AA?

Yes, AAA to AA1. Then we also said, what if everything were downgraded one grade, which would be like AA to A and the increased capital requirement was $100 million to $150 million. And we went further and said, okay, what if everything were downgraded one notch, but then some percentage, I think 10%, of the portfolio, if it were downgraded 10 or 11 notches so that they were being downgraded into below investment grade categories and the increased capital requirement there was roughly $400 million or was a range of I think like $200 to $400 million. The rating agencies have done their own sort of stress testing of the portfolio and have results that are broadly consistent with what we have seen.

And last question just from an accounting point of view on a statutory basis -- I don't know too much about statutory accounting -- but on a stat basis, I assume all this mark-to-market for the CDS would not be in play, correct?

Yes.

I mean obviously if I look at your stats at the end of the third quarter, you would not see this writedown of the mark-to-market. I don't know if there is some adjustment there, but can you give us a sense how statutory accounting and GAAP in terms of this mark-to-market on the CDS differs?

I don't think that you would see any FAS 133 mark-to-market on our statutory accounts just because they are not subject to -- they are not subject to that standard. To the extent that we had actual losses on that portfolio --

That's right. Then it flows through certainly.

Then you would see that in the statutory.

Yes. Very good. Thank you very much.

Geoffrey Dunn, KBW.

Thanks. Good morning, guys. I guess first, it looks like you closed a lot of material international deals this quarter. Is that a big washout of the pipeline or are you just seeing an accelerating of those types of transactions?

Geoff, thank you. The international transactions are hard to -- they are hard to forecast because they tend to be rather large and they have these long gestational periods. So it is hard to sort of generalize from what happens in a quarter to what's going to happen in the next quarter. This does not represent a cleanout of the pipeline. We are still working on transactions and there's probably as much activity out there now as there was in the second quarter for third-quarter closings. But I have to tell you these are notoriously hard to predict in terms of what quarter deals will actually close in.

Okay. Do you have an assessment of your current excess capital position as you've kind of stopped stock buying back stock and are looking at opportunities and trying to be more conservative in the volatility?

Yes, I think -- excess capital, as you know, is in the eye of the beholder. And if you were to look at the most recent assessments of our capital position that were done by the rating agencies, all of them are going to have a conclusion on excess capital that is in excess of $1 billion.

The most recent sort of estimate that you see out there I think is in the Moody's piece on where they did their subprime mortgage and CDO stress test and they found that even if -- I think they said that their worst-case stress test was sort of 10% losses on subprime RMBS and then they said, well, what if those losses were not 10% but were 12% and 14% and 16% and even in the 16% loss case where they saw MBIA having an increased capital requirement of somewhat over $700 million, their conclusion was MBIA would still have excess capital beyond that.

So the fact is we have a very, very healthy capital position at this time, but when you are sitting there talking about stress testing and how much extra capital you need in the event that the stress test comes true, it is hard to say what is truly excess and frankly that is the reason for the shift in our strategy with respect to share repurchases. If you go into a period of uncertainty, we think it is important -- we think it is critical as a AAA rated company for our balance sheet strength to be unquestioned and at this point, it is unquestioned.

Last question. It's a shame everybody is focusing on this largely meaningless mark. Looking at the mark though in the quarter, do you have a rough breakdown in terms of what percent was corporate, what percent was CDO of ABS, what percent was CMBS?

I think roughly the -- the largest single element was in our commercial mortgage-backed transactions that were -- let's see, I am looking at a long schedule of things here. But more than 50% of the mark came from the commercial mortgage-backed transactions and then multisector CDOs would have been the next highest percentage, which is probably 30% or 35% and then all the rest are pretty small after that. And mostly -- most of our mark -- the overwhelming portion of our mark comes from the CMBS-related transactions and the multisector CDOs.

Okay. One of these days the market will figure it all out. Thanks.

Heather Hunt, Citigroup.

Thank you. Good morning. Nice quarter.

Thank you.

I wondered if you could just talk a little bit about the CDOs. You have got about 50% subordination as you said. Are you just really taking the top layer and not taking any chances and getting pretty good pricing because I guess it is all high grade?

Yes, and in fact, the new multisector CDOs that we did in the quarter were added to the schedule that is on our website and they are CDOs obviously that contain some subprime mortgage content. I mean we are attaching at the very top of the capital structure and to the extent that -- for the CDOs that we wrapped earlier in 2007, we might have been saying that we were attaching at 1.5 or 2 times the AAA attachment level. For these transactions, we are attaching at more like 4 to 17 times the AAA attachment level. So we are really providing if you will kind of notional hedging for the financial institutions that entered into these transactions with us.

Is it just that they could not get the deals done, so they were willing to do it? I mean the AAA attachment points look like they are from 3.8% to -- well, 13% is the highest. Because the market was just at a standstill, having your insurance is the only way of getting the deal done or I mean it just seems --

These are -- Heather, these are assets that are sitting on the balance sheet.

(multiple speakers).

(multiple speakers). Those assets could be there for a variety of reasons.

So it was after they already bought them?

Right. So as the banks and investment banks faced growing notional balance sheet size, this was an opportunity to hedge some of that.

Got it. Okay. Next question, just on your new business, you had a lot of terrific new business and you said a lot of it came from the fact that spreads had widened out in the quarter. Can you break it down as to how much was just from the volatility in the quarter and how much had been sort of building over the course of the year like from your pipeline?

I was afraid someone would ask that question. I think that it is hard to pin it down to a number because we had -- there were transactions that were in progress that people were working on that may have gotten accelerated into the third quarter as issuers said, geez, I better get this done while there is still a market at all.

So it is a little bit hard to separate, but things like the multisector ABS that we just talked about, the multisector CDOs, those I mean really are -- they are directly a consequence of the dislocation in the markets as financial institutions are looking at trying to -- frankly to shed notional and mark-to-market exposure.

So it is clear that there is a meaningful portion of the ADP in the structured finance sector that came from those opportunistic transactions in the quarter and I mean it is a meaningful number. I'd say it is probably more than $50 million, but I don't know if I could be any more specific than that.

Okay. Well, I guess what that leads up to really is going -- now that we are in the fourth quarter and going into '08, you have had just tremendous growth for the last four quarters, so the comparisons are going to start to become difficult. But the absolute contribution to earnings is good for the long run if you can keep this pace up. So do you think you can keep up the recent run rate or pace that you have had?

It would be really difficult to talk about production, particularly in the fourth quarter just because of where we find ourselves in terms of the environment. Longer term, we are pretty bullish about the prospects for our product in the markets that we serve because we think that all of the dislocations, the illiquidity and everything else that has gone on in the capital markets creates a growing appreciation of credit risk protection and the price stability protection that people get from using our wraps. And so we think there is going to be demand both in the structured finance world, but also in the public finance realm going out into 2008. So we are optimistic about the future, but it would be difficult to boil it down to a number, particularly because of the environment that we see ourselves in right now.

Okay. Thank you very much. I will let other people ask questions. Thanks very much.

Robert Ryan, Merrill Lynch.

Hi, everybody. Could you describe how the subprime RMBS portfolio is behaving? You're not writing new. We don't have a view on those too well because a lot was done in the secondary market. So how quickly is that running off, to what extent have downgrades affected it, that type of thing?

Thanks, Rob. I think the direct subprime portfolio at quarter-end is about $4.7 billion and I believe at quarter-end second quarter was a little over $5 billion. So you have maybe 10% runoff in that book of business over the course of the quarter. You mentioned that a lot of what we have written in 2005 and 2006 were secondary market transactions where we are wrapping only the AAA portions of those securitizations and as of this time, there haven't been any rating actions that affect those AAA tranches. I just want to be -- I don't want to be Pollyanna-ish about this. There have been rating actions that affect tranches below us in securitizations where we wrapped the AAA, but we haven't seen anything to date that suggests that there is any material loss for us in that portfolio.

Very good. Thank you.

Mark Lane, William Blair & Co.

Good morning. I just have a question of clarification on the sensitivity analysis that you provided. What exactly -- the portfolio size that you were referring to, is that all high grade CDOs or the entire CDO book, what is the total size of what you were referencing?

Okay. It was all of our CDOs that contain subprime mortgage collateral. In fact, that portfolio -- I think it is all the CDOs that contain RMBS and as of second quarter, the size of that portfolio is about $17 billion. As of the third quarter, of course, because we did the transactions that we just talked about, the size of that portfolio was I believe $22 million. I am sorry. $19 billion. It grew about 10% quarter-over-quarter.

So the $200 million to $400 million, what you are saying is if 90% of the book went down one grade from AAA to AA and 10% went to below investment grade --

If 90% were downgraded one notch and then 10% were downgraded to below investment grade.

Okay. All right. And so what about the public finance market. You mentioned that you saw some widening in August. What are -- are spreads in September still higher than they were in midyear and competitively, what is going on in that market?

Sure. Overall, spreads at the end of September are probably pretty much back to where they were at the end of June, but I can tell you that in some sectors, particularly healthcare, investor-owned utilities, the spreads at the end of the third quarter actually may have been lower than where we finished the second quarter. It has been very competitive in that market and we did see a pretty dramatic tightening there.

Okay, thanks.

Darin Arita, Deutsche Bank.

Thank you. Just a few questions here. Chuck, in terms of the share repurchase, you mentioned that it slowed down and there are various reasons for that. Should we in any way read into that, the slowdown being MBIA's having greater concerns about potential losses on its credits?

I guess the answer to that is, Darin, is that we are -- we are being very cautious and conservative with respect to capital management at this time because there is uncertainty in the markets. However, our degree of concern about the credits in our portfolio is accurately reflected in the reserve positions that we took in the third quarter. So despite the fact that some of the free-floating anxiety that we have and that the rest of the market has arises from what we see in the housing market from a macro perspective, we didn't really add to reserves for those type credits in the third quarter.

So I have to balance the response. Yes, we are concerned about what we see happening in the housing market, but no, there aren't specific concerns about credits in our portfolio that we are holding excess capital against. We would set reserves against them if that were the case.

All right. That makes sense. And in terms of the high grade CDOs, you have talked about this a little already and the subordination levels are extremely high for the deals done in the third quarter. I mean should we think about that in terms of looking at it at the previously insured high grade CDOs and question whether those subordinations should be higher than they are?

No, I would prefer that you look at the deals done in the third quarter and say, wow, they are even more safe than the transactions that they did in the past. We believe that the underwriting of the CDOs that were done, say, before the third quarter is strong. Clearly affected by competitive pressures in the market both in terms of attachment points and pricing, but we continue to be very satisfied with the performance of those CDOs overall. It is just that in the third quarter, we had an extraordinary opportunity to provide some wraps that had unprecedented levels of both subordination and pricing.

Good. I guess it's very consistent with what happened in the market there in the third quarter. And then I guess turning to the direct MBS exposures, can you talk a little more on how the HELOCs and closed-end seconds are performing?

Sure. The HELOC portfolio, frankly, is probably more of a concern than the closed-end seconds, just because they tend to be floating rate. And we do have a meaningful home-equity loan portfolio that we are monitoring very carefully. I think that back when we had the call at the end of July or beginning of August, we had indicated that there were a handful of transactions where we did see some collateral deterioration. That continues to be the case, but, you know, in the quarter we didn't have any transactions that got to the point where we believed that they were impaired. But again, the housing market is not strong right now, and it is entirely possible as we go forward that we would see impairments and/or losses in that portfolio. And that is where we would be focusing, on the home-equity loan side.

And just one last thing in terms of you talked about the SIVs, but can you talk about some of the conduits that you have and how that has fared through the market stress that we have had?

Sure. Well, the conduits are a little bit different animal. They are strictly funding vehicles for our customers, and we regard the transactions that are done in the conduits as kind of the alter ego of insured transactions. So the risks associated with the assets in the conduits are consolidated into our insurance portfolio when we talk about the health of the portfolio and the like.

The challenges that the SIVs are having are primarily around, well, asset marks to market, but also around illiquidity in the short-term financing markets. And our conduits either benefit from matched funding or have 100% commercial paper backup lines, and as a result, we have not had difficulty in getting them financed.

I think our conduit that finances in the CP market is called AAA1, and it has about $800 million of CP outstanding today, which is covered by a little over $1 billion worth of bank backup lines. So we are pretty comfortable -- we are pretty comfortable with its position.

The other entity that would be worth mentioning is East-Fleet, which is a hybrid between kind of a SIV and a conduit. It has about $2.2 billion in footings. And again, it is commercial paper funded, but the commercial paper is directly matched against the assets from a cash flow and maturity perspective. So it also does not have the kinds of problems financing that Hudson-Thames and most of the rest of the SIV world have.

Thank you.

James Fotheringham, Goldman Sachs.

Thank you very much. Just first on the excess capital, just roughly what proportion of the $1 billion or so excess do you intend to apply to further growth in production volumes?

I hadn't thought about it that way, James. The excess capital is going to be available to finance growth until such time as we believe that we are capital constrained, and we are not at that point at this time.

Okay? Then just a quick one on your CMBS exposure. What proportion of the production growth in structured finance this quarter was driven by CMBS transactions in particular? And would you mind just characterizing your outlook for CMBS credit generally, relative to that for RMBS?

It is just interesting to note that some of your key competitors have no exposure here, and I am just wondering on a relative basis why you feel more comfortable growing CMBS exposure now?

I don't have the exact allocation of the production in the quarter to the different classes of structured finance, but CMBS was -- we had robust growth in CMBS in the third quarter. Our outlook for the commercial mortgage markets would say that the fundamentals continue to be quite strong at this time, and the sort of medium-term forecast is also reasonably strong.

You know, the valuation cap rates in the commercial real estate market are probably at cyclical lows, and at some point they are going to rise. Most of the underwriting that we are doing of transactions is on a cash flow and cash flow coverage basis, so you're somewhat less affected by that trend to the extent that it starts to materialize.

So we have a pretty good feeling about the commercial real estate market going forward, in so far as our participation is concerned. Of course, I can't speak for where the other monolines are. We put in place a couple of years ago a team of CMBS and commercial real estate underwriters and deal originators that we think -- we honestly think are the best in the business. And we then were ready to take on transactions at a time when the structured financing of commercial real estate assets really grew. And as a result, we have been able to book a lot of business just over the past -- over the past year.

To the extent that we are at a place now where we may start to run into limits and things as we are looking at new transactions going forward, so I wouldn't necessarily take the growth rate that we have had in 2007 and project that into the future. But we continue to be pleased both with the performance of the existing portfolio that we have got, as well as the prospective performance and our willingness and ability to take on new transactions.

That's great. Thank you very much.

Tamara Kravec, Banc of America Securities.

Thank you, good morning and a good solid quarter. I apologize if this has been asked. I've been having to hop on and off in the last few minutes. You had mentioned in your commentary that you were reviewing your prime book in addition to the subprime, and I think you talked a little bit about the HELOCs. But are you -- is it too early in the space to see how your prime book is performing in general? Do you have any insight on what your surveillance is leading you to conclude?

Only that it is appropriate for us to heighten our surveillance of the HELOC portfolio, and we have been doing that. We haven't had material problems in the portfolio at this point, but given everything that we know about the residential mortgage market, it is concerning. So we do have a heightened level of scrutiny of that area, but in the quarter we didn't have any increases in reserves for any of those assets, which would sort of tells you that there was a -- there is a comfort level with our overall position. But given what we see in the macro economy, it makes sense for us to surveil them very carefully.

Okay. And in your CDO book, are you of the mind that -- you know, we have seen the Moody's downgrades on the RMBS and CDOs, and S&P is obviously doing there, and you had your footnote in your disclosures in terms of the breakdown. But would you expect there to be a fair amount of overlap between the two and the downgrades that they are undertaking?

I'm sorry, overlap between --?

The two. Yesterday, Ambac had said that they probably would not have expected much incremental movement just from the S&P's downgrades, because Moody's had kind of done theirs and there was a fair amount of overlap in the action that they are taking on certain tranches. So I don't know if you have that same sense.

Well, we have gone through all of the downgrades that have been published to date, and so my comments about the impact on our portfolio in terms of downgrades is inclusive of all of those more recent actions.

Okay. That's helpful. And just on CDO production, I know you said it is difficult to look at the near-term and figure out what your production levels are going to be. But I am interested in your thoughts generally on after the CDO market has at some point stabilized, come back, however you want to refer to it, what are your thoughts on how different this is going to look in 2008, 2009? You have written some deals in '07. Do you think that this is a market that undergoes a tremendous amount of change, or do you think you are going to see similar pipeline of transactions in the high-grade space? Or any commentary on that, your thoughts on that would be appreciated.

I guess the main thing that I would say, Tamara, is that we do expect that the banks are not interested in re-intermediating the markets that they are currently holding the assets of right now. And so there is going to be some kind of structured finance outlet for these consumer and business receivables that get generated that will be structured finance in nature.

And we believe that there will be an opportunity for MBIA and for the monolines to participate in those transactions to create more efficient funding. As to what exactly forum, what exactly technology will take the lead, that is a little unclear, but we don't expect the illiquidity that we are observing now to continue into the medium term.

Okay. Thank you so much.

Gary Ransom, Fox-Pitt Kelton.

Yes, good morning. I am looking at the listing of CDOs and looking at how the terms look vastly superior in the last -- in the third quarter versus the previous ones, and then thinking about the embedded ROEs that are in that business. And I wonder -- and maybe not just on the CDO book, but across the book of what you were looking at, can you make some comments about how much improved the ROEs might be, even if it is just qualitative comments, on the capital that was used on that new business?

They are much improved. From a capital perspective, Gary, when you look at those deals that are on the schedule there, from a rating agency perspective, there is probably no difference in capital because they are all -- you are talking about, you know, slices of the AAA universe. And the rating agencies are not going to allow us to say that a deal that attaches, you know, at 200% of the AAA attachment point gets less capital than one that attaches at ground zero of the AAA attachment point.

So from their perspective, you know, to the extent that you are going up to say from 25% to 50% attachment point and getting paid the same premium, they would say, well, really you have the same returns. We would say from an economic perspective, I mean clearly you have a higher contribution to shareholder value in that latter transaction. But you don't really get credit for that from a rating agency perspective.

The way that we think about it, I mean, we are generating returns in the third quarter in many of the structured finance sectors that are superior to those which we saw in 2006 and early 2007. So we believe this is a good time to have the capital to write new business at these volumes, to the extent it is available to us.

And to the extent that you are looking at a pipeline right now in structured finance, are the conditions similar to what you saw in the third quarter still?

No. If you look at the amount of business that is available out there in structured finance right now, it is lower than you would have seen in -- particularly early in the third quarter. So it wouldn't necessarily take the -- in fact, I definitely would not take the production that we had in the third quarter and annualize it or project it forward in any way. There are some aspects of that that are simply opportunistic. We are in the right place at the right time with the right amount of capital and the right ability to underwrite these trades.

Then one more question on the list of CDOs of ABS. Have any of those deals had their triggers tripped? And then beyond that in your own stress testing, do you foresee many of them having their triggers tripped at some point in the future?

On those transactions where again, I mean, we are attaching in all of them at levels above AAA, we haven't seen any kind of behavior that would trigger any of our rights or remedies.

Okay. Thank you very much then.

Mike Grasher, Piper Jaffray.

Good afternoon. Can you provide any granularity or some perspective on maybe how the '06 versus '05 vintages might be performing, as far as your subprime or even RMBS exposures across the board?

The '06 versus the '05 performance?

Right, the vintages.

Unfortunately, I don't have detailed information about that handy. I would need to follow up with you.

Okay. And then as far as the HELOCs go, a bit more I guess granularity, again, on the LTVs, FICOs geography.

Again, it would be hard to go through that level of detail here on the call, basically, because I don't have the information right in front of me.

Okay. I will circle back. Thank you.

We could follow up with you. Let me just go back to Gary's question that he had asked about deals that hit triggers, because I do want to provide as full information as possible. We did have one transaction. It is a mezzanine CDO of mezzanine collateral that is at the point where cash flows can be diverted to the senior. So it has seen collateral deterioration that brings it to that point. So that is one transaction out of our portfolio.

Mark Mulholland, Matthew 25 Fund.

Chuck, you had mentioned that, I guess, one of the regulators gives you about $1 billion in excess capital; is that correct?

From a rating agency perspective when you look at the last times that they published relative to our capital position, you would calculate $1 billion or more of excess capital for each of the agencies.

Well, does that include -- there is about $300 million left on your buyback. Is that -- in your guy's perspective is that including that capital in that excess capital figure?

With the amount of buyback that we have done already, which we repurchased about $660 million of our shares in 2007, we believe that we still have excess capital in the company that could be used for share repurchase if and when we got to a place of comfort with respect to some of the signs that we are seeing in the macro economy that may affect credits in the future.

I guess, specifically, I was wondering if like once the insurance company had passed up -- paid a dividend of $1 billion to the parent, I was under the impression that wasn't really included from your rating agencies when they talk about your excess capital.

Oh, I follow you. I'm sorry. I am answering the wrong question. No, that is correct. The excess capital number that the agencies focus on will be the excess capital within the insurance company itself. So at the holding company at the end of the quarter, we had about $500 million in cash and that $500 million is there to cover the expenses of the holding company, interest and shareholder dividends and obviously the holding company is the entity that would be involved in share repurchase.

Okay, great. That's what I wanted to clarify.

[Robert Bose], Fannie Mae.

Yes, to follow up on the liquidity questions, are you backing any deals with extendable CP programs?

I do not believe that we have wrapped any extendable CP programs.

Okay. Similar kind of indirect liquidity question on your contingent preferred stock vehicle, do you -- I guess my question is are your premiums set on those and what is happening with the funding of those vehicles? Are they sort of continued to be refunded? Or are people locked into a longer term that those that are funding those that CP or that contingent vehicle?

We have an auction rate preferred stock financing that supports a soft capital facility for the benefit of the holding company. And it, like many or perhaps all auction rate preferred stock programs, started to see its auctions not receive bids below the default rate back in late August. So we are currently paying the default rate to the investors in that program. There is an auction every 28 days and so the securities are continuously offered. At this point, we are still paying at the default rate, which is I think 150 over LIBOR.

That is in addition to the premium you have to have it available, right?

That is the cost of keeping the facility available.

Just the default rate?

Yes.

Okay. Thank you. And is there a way -- you talked about the mark-to-market and limited observations out there and then you switched to mark-to-model. Can you give us any guidance on if you had -- with those illiquid observations out there, if you'd stay with mark-to-market, what the difference would have been in this?

It would be impossible to mark them to market because of the fact that there is no trading market for those positions and that is the reason that we are required to use the model. For any positions, any transactions that we have where there is an actively traded market in that instrument, we are using that price to mark. It is only when there is no observable market price that we use the model.

It sounds like you went across the board. You said there were maybe 5% of observable in some cases. Did you stick with observables in those cases or just go to model on everything?

No, where there actually is a market price, we have used that market price. It just happens that it's a tiny percentage of the portfolio.

Okay. On your investment agreements, $15 billion on the balance sheet, again a liquidity question, what kind of surrender provisions -- any surrender provisions related to your ratings?

No. We don't have material triggers in those transactions.

Thank you.

The investment agreements have some liquidity of risk associated with them because many of them are used for their funding construction draw schedules where the timing can vary relative to what is expected, but they are not rating-sensitive.

Okay. Very good. Thank you.

Terry Shu, JPMorgan.

People have asked most -- if I could just go back to the HELOC deals. I think your comment was that you are watching it closely given the state of the economy and the housing market, etc. and you said I believe that it is entirely possible that some losses may develop. I would assume that you don't, even though you don't have particular issues you are concerned about, that you have stress tests based on different economic scenarios that to the best of your ability in judging it right now, there is still investment grade and therefore by definition, the definition would be remote loss possibility. Am I reading that correctly?

Yes, I think so.

Because when you say it is entirely possible losses may develop that you have done your sensitivity analysis, which is sort of the hallmark of financial guaranty companies that you try to anticipate different potential scenarios and make sure that you are still covered through your trigger points, covenants, etc., etc. So they are, therefore, still -- your internal ratings are still investment grade. I don't want to keep on beating on the same issue, which by definition means remote loss possibility.

Yes, by and large, we believe that the potential for losses continues to be -- continues to be remote and we don't expect material losses at this point.

Right. It just was a little concerning when you say that you are watching it with vigilance as you should, that you are concerned about the economy. That it is entirely likely losses might develop. One would think that you have tested for it, that you have tested for a weaker economic environment, etc., etc.

And in fact we have.

Okay. Thank you.

Scott Frost, HSBC.

Yes, I may have missed this, but did you guys -- you guys talked about some stress tests you put it through. Did you sort of give a stress test in terms of I guess default or loss levels that would really -- where is kind of the breaking point that you see loss levels hitting that would really affect you negatively?

The stress testing that we have done is primarily ratings-based, so it is what is the impact on the portfolio of changes and ratings.

I mean in other words, I guess that is the question, how would -- what stress level would it take to change your ratings?

Yes, I don't know if I can respond to that directly. When you look at, for example, our RMBS portfolio, we have subordination or credit protection that supports us in those transactions of 22% to 28%. So you can sort of --

Is it fair to say that if I saw loss rates of 28% that is generally where you attach at dollar one as a rule of thumb or is that not accurate?

Yes, I was going to say that -- the attachment point or the support that we have in our deal will range from 22% to 28%. But to the extent that you did see losses in those pools that were at that level, were at 28%, then we would start to have dollar for dollar losses beyond that.

There has been a variety of analysts and the rating agencies that have published estimates of what they think worst-case losses will be on the worst of the 2006 subprime securitizations and at this point, none of them rise to that level, but of course that doesn't mean that they will not.

Okay. Thank you.

[Nandu Narayan], Trident Investment Management.

Hi. Look, I was just trying to get to again this mark-to-market loss that you talked about already. Obviously, you are saying you are using a model and various things. You don't think the losses may materialize, but the issue here is it looks like, at least from what you are saying, that the bulk of it is from your derivative transactions from your CDOs and everything else.

But I am just looking at the overall risk in force that you have in terms of notional risk. It looks like, I mean based on the stuff you put out on June 30, something like 18% or thereabouts of your portfolio is BBB, BBB+, in that area. Have you actually taken any mark-to-market hits on just the regular BBB, BBB+, those non-derivative type insurances that you are doing?

Because clearly the concern we have is this a more generalized credit downturn where there is a revulsion to a lot of these complicated instruments and to the extent that you have taken some marks on CDOs, what is a bit scary to me is if you look at I think UBS it was a couple of weeks ago that essentially took a mark-to-market loss on higher than AAA CDOs of over $1 billion.

And if we are just looking here at the $342 million loss, it's still very small in the context of your overall insured portfolio of $600 billion, $650 billion. So really what I am trying to understand is what is your overall call on the credit, especially the lower grade credits that you have in your portfolio?

We do an estimate every quarter -- it's actually done every month, but published every quarter -- of the potential for there to be losses in our portfolio and in our business where we have probable and estimable losses, they would be manifest as case reserves. So we do update our case reserve position every quarter. And as I may have mentioned earlier, we did have an $11 million increase to case reserves in the quarter. So that sort of reflects our expectation about impairments in the portfolio.

The thing that you have to remember about our mark-to-market is that it is applying trading type accounting to buy and hold positions, so there is no liquidity or capital impact of the mark-to-market that took place in the third quarter. It applies to only those transactions where our credit protection is evidenced by a credit default swap subject to FAS 133 accounting for derivatives and hedging instruments. Most of our business is documented via financial guaranty insurance policy and those policies are not subject to FAS 133 and therefore are not mark-to-market.

But my concern really here stems from the fact that you are an insurance company. At some level, you are forward-looking in terms of paying claims. So effectively is what you're saying then that the mark-to-markets here are irrelevant because the markets are wrong because so far this year, the markets have been more than right and the rating agencies have been totally wrong on virtually everything.

So given that that has been at least experienced this year and all of these supposed AAA instruments seem to be rapidly approaching, at least some of them seem to be approaching [junk] levels, what is a bit concerning is, on a forward-looking basis, is it your estimation that not looking at what the rating agencies are saying, what the liquidity issues are, to what degree is the market prices of some of these instruments reflect the true risk?

Again, to the extent that any of these instruments, including those subject to mark-to-market, were impaired, we would provide disclosure of that impairment. So you would see it two ways. I mean if they were on financial guaranty insurance policies, you would see the impairment directly in our loss reserve disclosure. To the extent that any of the positions that are subject to FAS 133 were impaired, we would provide a specific disclosure of that in our financial supplement. And the fact that we haven't means that there is no impairment in that portfolio that we have identified at this time both based on what we know today, as well as what can reasonably be expected.

Okay. Thank you.

Now, I do want to go back to one of the earlier questions that was asked and I was just given some additional information. It was with respect to investment agreements and the liquidity of investment agreements.

It is true that to the extent we have investment agreements with clients and MBIA were to be downgraded into the BBB category, downgraded below A, then we would have the option to either cancel the investment agreement or to post collateral against it at that point.

So I have said earlier that our investment agreements are not subject to any rating triggers and in fact, in general, they are at the BBB level.

[Steve Jones], [LR Capital].

Hi, guys. You just said that the mark-to-market isn't reflective of the loss that you could potentially have. What is it reflective of?

Good question. The mark-to- market is intended to be reflective of the value of that position if you were to pay someone to take you out of it. It is a fair value estimation.

So with that logic, wouldn't you want to go into the market and try and buy some of the other positions out there because they are trading at a discount obviously if they are priced lower, right?

And in fact, that is one of the reasons that we think that we are seeing opportunities to write really profitable business right now.

But that is on new business. This is previous business and older vintages, so is there any risk here? I mean you said it is not reflective of your estimates, but what happens -- like the gentleman just asked before. What happens if the rating agencies are incorrect? At what point do you guys feel that impairment? Where could that mark-to-market loss be greater and where -- you said 16% subprime losses don't affect you, but is it 20%? Is it 25%? Where is your capital concerning to you?

Again, we do -- our process of evaluation of the credits in our portfolio is not rating agency dependent. It is done by MBIA analysts and it is done in real time and we do report out on it on a quarterly basis in the form of a loss reserve disclosure. So there is active reporting on the health of the portfolio from us that is not strictly based on rating agency feedback.

Then I am just a little curious. If you guys wrote these policies in '05 and '06 and subprime has deteriorated significantly, it seems that you have no risk. Why would someone have wrapped these portions of the portfolios -- the point of insurance is to protect yourself of losses and if there seems that there is no instance that you could have a loss is what MBIA seems to be telling us. Why do people buy your product?

What we are providing is protection against remote losses. I mean that is a part of our -- that is an important part of our business model and there has been ongoing demand for protection against those remote losses at least going back over the 34-year history of our Company.

Okay. So just last question. If it is based on remote losses and your model is going back 34 years, have you ever seen a housing market like this in the last 34 years and what is your definition of remote? I mean at what level is this a problem? I am just trying to get to the point where I should be concerned that MBIA isn't -- at what point, do you start to worry?

Steve, it is, as I said earlier, it is possible that as we see the housing market deteriorate that there will be pressure on transactions in our portfolio and I think I said that those -- that pressure could be manifest as losses in the future. We have not seen any to date. That doesn't mean given the potential for an unprecedented experience in the housing sector that there will never be any losses. So it would be unfair to say that we expect that there never will be any loss no matter what happens.

Okay. Thank you very much. Good luck with that.

Sure. Thanks.

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

Thank you, Melissa and thanks to all of you who joined us for today's call. Please call me directly at 914-765-3190 if you have additional questions. We also recommend that you visit our website at www.MBIA.com for additional information. Thank you for your interest in MBIA, good day and goodbye.

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