MBIA Inc (MBI) 2008 Q4 法說會逐字稿

Good morning and welcome to the MBIA fourth-quarter 2008 financial results conference call. At this time all lines are in listen-only mode to prevent any background noise. After the prepared remark from the Company, 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 at MBIA.

Thank you. Welcome to MBIA's conference call for our fourth quarter 2008 financial results. Presentation materials for this event are available on MBIA's website. We've also posted information to access the recorded replay of today's call which will be available later this afternoon. On our website. The MBIA presenters for today's event -- sorry, today's event are Jay Brown, CEO; Chuck Chaplin, President and CFO; and Mitch Sonkin, Chief Portfolio Officer. Joining them for the question-and-answer session later on the call will be Cliff Corso, Chief Investment Officer; and Anthony McKiernan, Managing Director and head of Structured Finance and Insured Portfolio Management. Following our prepared remarks we will hold a question-and-answer session. Let's begin.

The second slide of the presentation deck shows our safe harbor disclosure table -- statement which I will now read. This presentation and our remarks may contain forward-looking statements. Important factors such as general market conditions and the competitive environment could cause actual results to differ materially from those projected in these forward-looking statements. Risk factors are detailed in our 10-K, which is available on our website at www.MBIA.com. The Company undertakes no obligation to revise or update any forward-looking statements to reflect changes in events or expectations. In addition, the definitions of the non-GAAP terms that are included in this presentation may also be found on our website at www.MBIA.com. Now I will turn it over to Jay Brown.

Thank you, Greg, and good morning, everyone on the call. Chuck Chaplin and Mitch Sonkin are going to handle the bulk of our detailed prepared remarks this morning. Before they review the significant items for our financial results for 2008 and further introduce our new legal organizational structure, I would like to provide some background information on 2008 and some observations on our key challenges going forward into 2009 and beyond.

When I rejoined MBIA a little over a year ago, the Company had just completed a three-pronged, dilutive capital raise of $2.6 billion designed to stabilize its balance sheet and maintain its AAA ratings based on guidance from the Published Rating Agency capital guidelines. Despite the heroic efforts of the management team in raising this capital in a collapsing capital market environment, it was my belief that we would need to transform the Company if we were to persevere in the rapidly deteriorating global credit and economic environment. After assessing the situation with your Board, we published the 10-point transformation plan that you see here one week after I returned as your CEO. This is the plan we have been following consistently throughout 2008. A year that clearly turned out to be more severe than we could have ever envisioned when we began the year.

We have invested the bulk of your contributed capital in regulated insurance entities and, therefore, our first principle is to provide adequate protection to all policyholders in accordance with the relevant state statutes. All decisions we make in operating these businesses are conducted against a complex and thorough set of statutory regulations. In addition, major decisions affecting these companies are thoroughly reviewed and vetted with the appropriate agencies that regulate these entities.

In particular, I reviewed our transformation plan with our regulators before publishing it in February, 2008 as the guidelines for decisions that we would make for your Company as we transformed the business. The decisions we made to raise capital and split our insurance business into separate legal entities were intended to properly balance our fiduciary obligation to take actions in the best interests of shareholders with our duty to provide adequate protection to all policyholders. We remain committed to maintaining the balance between these objectives.

The original plan I reviewed with your Board, the rating agencies, and our regulators was designed to separate our business from a position of strength over a maximum time period of five years. Unfortunately, the rapid change in the credit environment accompanied by an almost weekly revision of rating agency stress-on-stress evaluations destroyed this option. The down grade of our insurance companies in mid-year immediately created $739 million in realized losses as we needed to liquefy close to $10 billion in high quality investments in an environment with few buyers so that we could meet the early termination of our guaranteed investment contracts that contained rating triggers. Equally important, our need to meet all collateral requirements eliminated the positive net present value income stream of invested assets over future interest and principle payments to owners of our remaining contracts and medium-term noteholders. The goal is to correct this mismatch by mid-2009 as we terminate the remaining gifts and redeploy liquid investments back into longer maturities.

Consistent with principle 5, we retained $1.1 billion from our last equity offing at our holding Company. And as Chuck will explain later, deployed $600 million of that cash in our asset liability management business in the fourth quarter to meet liquidity needs and to avoid making any accelerated claims against MBIA Corporation on behalf of these policyholders. This decision is representative and consistent with other action we have taken and will take to use all of our available resources to meet expected policyholder claims, corporate debt, medium-term note debt, surplus note debt, and preferred debt interest and principal payments while at the same time optimizing long-term shareholder value.

We started working on principle two over a year ago. And we have begun the long and complicated process of creating transparent, legal and operating entities for our public structured and asset management businesses. The first step in this process implemented two weeks ago created the legal separating between our US public finance business and our structured and non-US public finance businesses. The performance of the new Company, National Public Finance Guarantee, whether good or bad will have no direct impact on MBIA Insurance Corp., and likewise the performance of MBIA Insurance Corp. will have no direct impact on the operations of National.

All of the $5.2 billion in invested assets transferred to National came from a portion of the accumulated retained earnings produced by the US public policyholders over the past 35 years. And their remaining deferred revenue for the $553 billion in municipal finance net par that MBIA assumed from MBIA Corp. The invested assets remaining in MBIA Corp. of $6.8 billion consists of capital provided by our shareholders and debtholders, prior earnings produced by both the US public finance and the structured and global public finance, and all of the future revenues associated with our structured and global public finance policies.

Given the high level of uncertainty in today's economic and credit environment, each and every constituency of MBIA would like to have first priority on all available resources of the firm to the exclusion of all other stakeholders. Our overarching guiding principle has been to work with our advisors, regulators, and Board of Directors to create a balanced outcome. We firmly believe that the steps we have taken are consistent with this balance for both MBIA Insurance Corp. and National retaining ample claims resources to color all of their expected obligations. Whether insurance or debt, even in today's stress environment.

Points three through 9 and 10 are somewhat self-explanatory and don't require any further elaboration based on our actions today. Looking forward, Chuck will provide detail on our current legal and operating structures. Each of our businesses has unique challenges ahead. National is open for business, but probably needs to raise a modest amount of capital to demonstrate capital market access and to exceed the quantitative capital environments of both Moody's and S&P to achieve the highest possible ratings.

While we are well in excess of prior AAA models for one agency and at AA for the other, ultimate achievement of ratings consistent with these capital models will rest entirely on the opinion of individuals at the rating agencies. The separate management team at National is firmly committed to meeting these challenges and supporting the US public finance market, which is greatly in need of the capacity National is bringing back to the market.

MBIA Corporation and its insurance subsidiaries face a different set of challenges. While maintaining a high level of liquidity to make timely claims payments to third-party policyholders who are suffering interest and principle shortfalls, the management team is pursuing an agressive remediation strategy to recover a significant portion of these payments from servicers and issuers who did not meet their contractual obligations. In addition, the Company is pursuing active commutation discussions with first party financial institution counterparties, who created, managed, and often booked a profit at inception on the cash and derivative CDO structures which today contain substantial but manageable expected losses, but sky high or even nonexistent mark-to-market valuations.

In almost all cases, these are the exact same large financial institution that's have already received tens of billions in government money for these exact same losses. We have made some progress in 2008 on this front, and we'll be working with these financial institutions and our regulators to reach an equitable solution to the structured finance counterparty issues in the year ahead.

Our asset management business has two challenges ahead. First, they need to maintain their historical high level of investment and service performance for our third-party advisory clients. They certainly accomplished this in 2008 with third-party assets under management down just 3%. Results superior to many other top fixed income firms. Second, they need to manage the remaining assets of the asset liability business to meet its remaining scheduled liabilities. They will also actively continue to repurchase liabilities from those holders who prefer cash now versus running credit and performance risk of this operation many years into the future.

The role of the holding Company, my primary responsibility, is to create conditions that enable the business' values to be maximized. By balancing cash flows among the businesses, raising third party capital where appropriate, which increases value for our shareholders, and restructuring some or all of the existing debt obligations of each of our businesses, reflecting today's credit environment. These are enormous challenges given the global, economic, and credit environment and will require patience as we proceed through the years ahead.

These are the type of challenges, however, that we do thrive on. Our talented people, meaningful embedded economic value, and now clean US public filing finance-only balance sheet at National has positioned MBIA to create tremendous value in this environment for our shareholders. We are absolutely focused on doing just this. I will close here and turn it over to Chuck for his review of 2008 and the structure of our current legal and organizational operations.

Thank you, Jay, and good morning, everyone. Today there are two parts to the rest of this presentation. We will deal with the major issues in our 2008 earnings announcement and then hopefully will get out of the rearview mirror and spend some quality time on the transformation of our insurance platform, and then take your questions on both topics.

On slide five, we showed the agenda. I'll walk through the income, balance sheet, and cash flows for 2008, then Mitch Sonkin will review the status of the insured portfolio. Then I'll take us into the transformation discuss. Then we'll throw it open to questions.

If you turn to slide seven we'll talk about 2008 results. We had a net loss of $2.7 billion versus a loss of $1.9 billion in 2007. The loss is attributable to the ongoing credit crisis and our ratings downgrade. The crisis affects us in four general ways. First, we had unrealized losses on insured credit derivatives or mark to market of $1.8 billion on the year. Within the mark to market we had an increase in impairments of credit derivatives of $1.5 billion. Then we had credit losses on financial guarantee policies of $1.3 billion. Finally, there were realized capital losses upon asset sales and impairments in the asset liability management book that total $1.7 billion.

The mark to market loss was driven by spread widening across virtually all fixed income sectors regardless of expected credit performance. Even the highest quality and most stable performing sectors had poor spread performance in 2008 and spreads are the biggest driver of our negative marks. Continued deterioration in housing market conditions drove our increase in impairments and the losses on insured RMBS securitizations. Mitch Sonkin will cover the portfolio in more detail a little later in the call.

We achieved four commutations in the period which reduced the future volatility of expected claims and the total reduction in our ABS CDO exposure was $3.3 billion in the year. And Mitch will also provide more details on the commutation. Realized losses in the asset liability management portfolio were approximately $1.7 billion. $1.2 billion of that came from realized losses or impairments of assets that were sold to raise cash to meet GIC termination or collateral requirements. Offsetting this were gains on derivatives that hedged those assets of $427 million. While our net economic loss was $739 million, as Jay described. The gains on derivatives had been recognized for accounting purposes in earlier periods. We also experienced $553 million of other than temporary impairments of assets in this portfolio that were not sold.

All of these negatives were partially offset economically by gains from securities buybacks which were also driven by the fact that despite the adverse credit environment we have adequate liquidity to seize these opportunities. Behind all of these impact of the recession, the underlying earnings power of the MBIA insurance business continues to be evident. Other than the events which I touched on which undoubtedly are the headlines this year, our insurance segment had over $1.2 billion in pretax, normal operating earnings. I'll note that our expectation for 2009 for that number is that it will be somewhat lower due to lower investment income. But the highlights of 2008 include it being the first year in which MBIA had earned premium of $1 billion, a 19% increase over 2007.

Assuming the FIGIC domestic public finance portfolio ensured that MBIA would remain the largest guarantor of municipal bonds for some time to come and allowed us to grow the reservoir of future premium income. We also reduced our gross insurance expenses by 20% as a result of downsizing action and reversals of accruals for performance based long-term comp plans.

On slide eight, you can see the impact of the physics portfolio on our future earnings profile both in sheer dollar terms at the top, and in terms of the periodic recognition of premiums at the bottom. This helps ensure that the Company has the staying pour to get through the recession with financial resources remaining intact. Slide nine, is the lost reserves and impaired credit derivatives picture. In the fourth quarter we had no extraordinary loss reserves, just our normal formulaic addition for the unallocated reserve. We did, however, have net payments on previously reported loss reserves of $331 million. For the full year, with formulizations of $92 million, we also added to reserves for our RMBS exposures at about $1.2 billion. We also had payments of over $1 billion on RMBS in the year. So reserves ended the year at $1.5 billion.

On the CDO side in the fourth quarter, we incurred impairments of $642 million. There are two parts to this. We added impairments for eight deals that totals about $567 million. Then we commuted or restructured four deals where the amount that we paid was $75 million in excess of the amount that had been reserved as of September 30. So the total is $642 million. For the full year we incurred $1.55 billion of impairments. We made payments of $558 million for the commutations and restructuring and the cumulative outstanding impairment, analagous to the reserve balance at year end stood at $1.2 billion.

On page 10 we show the mark to market. We provide a detailed disclosure of the components of this year's change in fair value of insured credit derivatives in the press release and the 10-K, but here I'd like to focus your attention just on the volatility that has come from this line in our income statement. As we have said many times before, given the nature of our business we don't view the mark to market as reflecting the true economics of our insured portfolio. You can see that we had a $1.7 billion loss on this item in the fourth quarter. The volatility continues, however. If we showed the month of January here we would have income of $1.2 billion, partially offsetting the fourth-quarter loss. Again, these ups and downs do not track the business fundamentals. The biggest impact of the mark has been to obscure the actual performance of the Company, including the impact of incurred credit losses. We real did have losses related to this portfolio that total $1.7 billion over these six quarters. The accounting doesn't permit investors to see this, but we have made substantial supplemental disclosures to try to put these effects on the same basis analytically as our loss reserves.

On page 11, we showed the earnings of the investment management segment without realized gains and losses on invested assets. On this basis, we have roughly break-even performance in the fourth quarter and about $329 million of income for the full year. If you focus in on the asset liability management business and you were to factor out of both the quarter and the full-year numbers, the impact of debt buybacks and related actions, the quarter would have been about negative $56 million, and the full year would have been negative $35 million. The reason for this is that we're holding substantial cash assets against our GIC and NPN liabilities, creating a negative spread and the ALN business is paying nearly $20 million per quarter for a liquidity facility from the insurance Company and from the holding Company. We are working hard to get the remaining term nibble GICs resolved which should bring the run rate closer to break even.

On page 12, securities buybacks have obviously been a source of value for us in 2008. We repurchased across the capital structure, in equity holding company debt, preferred of the insurance company, its surplus notes and global funding obligations that are insured by MBIA Corp. Of the amount shown here, only the gains on debt extinguishment are recorded to the income statement. And we believe that we have added substantial value by repurchasing our stocks at attractive prices.

Page 13 shows consolidated adjusted book value. The bottom line here is that AVB went from $37.55 at the third quarter to $40.06 at year end, a 7% increase. The biggest driver of the change can't be seen directly on the chart if the reduction in share count from buying back shares at prices well below AVB. In the fourth quarter, period end share count had been reduced by 10% compared to 9/30. Partially offsetting this effect is the impact of increased impairments on the insured credit derivatives.

Now, we'll turn to the balance sheet and related issues. So we'll go to slide 15. The consolidated balance sheet shrunk considerably year over year. Total assets are down to $30 billion from $47 billion at year end last year, primarily as a result of the downsizing of the ALM portfolio. You can also see the eight-fold increase this cash and equivalents from $300 million last year to $2.3 billion at year end. Looking at the equity section, we had erosion due largely to the mark-to-market on derivatives, that is derivative liabilities increased by $1.9 billion. And the accumulated other comprehensive income decreased by $1.3 billion driven by unrealized losses on invested assets in the ALM portfolio.

Now on slide 16, let's talk about the insurance company's balance sheet. Here we see in the far chart the major element of MBIA Corp. statutory balance sheet. You might think that with all the turbulence in 2008 that the balance sheet would have been substantially eroded. It has not. Claims pay resources are slightly higher as a result of capital-raising activities. But statutory capital has been slightly eroded by reserves, and that's including reserves on the CDOs. Unlike in GAAP accounting, statutory does require that estimated cash payments on insured derivatives be requested in the financials. The investment portfolio is larger, and cash is higher, too. Up to roughly $2 billion. Insured losses on RMBS and ABS CDOs are higher, as well, but those losses will be paid in cash over a very long period of time. And we have more than adequate assets to fund them. I'm going to provide more details on the loss payment profile a little later. Finally, the amount of insurance we have in force has grown as a result of the FIGIC transaction.

The next slide, slide 17, shows the cash flow picture of MBIA in 2008. Basically, we had negative cash flows in the fourth quarter and for the full year and for the same reason. Loss payments on the RMBS exposures. The amounts paid under commutation, and a purchase of insured bonds that totaled $2.5 billion for the year. Cash in-flows include normal in-flows from premiums and investment income as well as tax refunds, the assets transferred in the FIGIC transaction as well as from reinsurance commutations. I'll provide a forward look on cash flow in a few minutes.

On slide 18, I think that looking at the overall statutory investment portfolio also provides some perspective on 2008. We started with $11 billion in investments in MBIA, and we added $1.81 billion from capital-raising activities. That's the sum of the first three items shown here. Then $717 million from the FIGIC transaction and $946 million from normal activities, that is premiums and investment income. Paid losses and operating expenses then bring us to an investment balance of roughly $12 billion. And intercompany LIPO transactions was larger at year-end 2008 than it was at year-end 2007, which has the effect of grossing up the insurance company's balance sheet. That transaction helped support the asset liability portfolio, and I'll provide more details on that presently. So while recognized liabilities grew in the year as we saw in the prior slide, so did assets.

Slide 19 shows that the insurance portfolio would have shrunk this year but for the addition of the FIGIC portfolio and negotiated reinsurance takebacks. Maturities and terminations reduced the book by $87 billion, shown at the top here in its component part. And then we added $181 billion from the FIGIC portfolio, and took back $14 billion in par from our reinsurers. In connection with those commutations of reinsurance, we received about [$200 million] in cash covering all existing reserves for these policies and amounts to offset potential future volatility in those reinsured exposures.

So let's turn now on slide 20 to the ALM portfolio. The most important point to make here is the second bullet. We think we're well insulated against future liquidity risk in this portfolio. There are no further ratings action triggers in any of the liabilities, and we have $2.6 billion in cash against $2 billion of terminable liabilities. While there does continue to be risk we have a strong excess liquidity cushion. We expect this business to have positive cash flows beginning in May, and we expect to reduce the size over time. We are working hard on achieving the termination of all remaining terminable GICs in the short run.

On slide 21, looking at the balance sheet, the ALM business has a shortfall of assets to liabilities of $600 million. Roughly equal to the intersegment loan from the holding company activities. This shortfall was created by the sales of assets at losses to meet our liquidity needs in 2008 after our rating downgrade. The only demand liabilities on the balance sheet at year end are the terminable GICs roughly $2.4 billion and about $400 million of that has been terminated since year end. If you look at it on a market value basis however, the gap between assets and liabilities is wider. We believe that the liquidity support that the ALM portfolio receives will enable us to avoid for sales of assets while taking opportunities to risk higher debt at discounts. At this point the primary near-term risk in the business is volatility in the collateral posting requirements for hedging contracts and the market value of the posted collateral. We believe that we have an adequate liquidity cushion today to meet any such requirements.

Now on slide 22, I've mentioned a couple of times that assistance has been provided to the ALM business from elsewhere in the entity. And here is a summary of that. We have a $2 billion secured lending facility under which the ALM book has provided security in a $2.7 billion book value portfolio of assets through the insurance company in return for $2 billion in cash. This facility enables the ALM portfolio to meet termination payments and collateral requirements without forcing asset sales. In addition, the corporate segment of the holding Company has lent $600 million of cash on an unsecured basis to the ALM portfolio for total cash support of $2.6 billion. On top of that the insurance company has entered into an asset swap agreement under which MBIA Corp. has lent treasury and agency securities to the ALM portfolio and ALM has lent corporate and high-grade asset-backed securities back to the insurance company. This arrangement has been in place for many years and it's now being used to provide eligible collateral to the ALM book for its nonterminable GICs. These positions are mark to market and about $1.3 billion was outstanding at year end 2008. As referenced on the slide, you will note that we have moved this arrangement to our new insurance company, National Public Finance.

Page 23 goes into holding cash, the holding company has a strong balance sheet with $463 million of liquid assets at year end. $225 million of that is in cash or money market fund deposits, most of the rest is US treasury and agency securities. You can see that in 2009, we expect cash outflows of about $100 million, and cash in-flows only from investment income. The sources of holding company cash other than investment income would normally be dividends from the insurance subsidiary and accumulating retained earnings of the asset management business. For 2009, insurance companies' dividends are expected to be constrained. MBIA Corp. just paid an extraordinary dividend on February 17, in connection with transformation so any dividends it makes are subject to approval of the insurance superintendent. The new company, National, doesn't have an as-of-right dividend at inception. And the current run rate earnings of the ALM book that we just went through are negative. So the holding company is likely to consume some of its cash resource into 2009, but we don't have any corporate obligations that are payable on demand. And we're holding several years worth of debt service and expenses in cash. From a legal entity perspective the holding company activities on the ALM portfolio are both part of MBIA Inc. So it is important to us that each of these segments maintain adequate liquidity. And at this point I will turn to Mitch Sonkin.

Thank you, Chuck, and good morning, everyone. Before I take you through a summary review on our portfolio with an emphasis on our RMBS and CDO books, a few comments. As we take stock of the past 18 months, we have all learned that the global economic crisis has touched virtually every sector in our economy. The scope of the crisis has for some time now required heightened vigilance in our monitoring of every asset class within our insured portfolio. A keen eye and attention focused equally on the issues that are clearly apparent today such as our residential mortgage-related exposures, as well as potential issues that are not yet upon us and may well be preventable within the so-called contagion sectors. Our remediation efforts in the residential mortgage-backed area have been industry leading and widespread, especially across our second lien portfolio with comprehensive forensic reviews, appropriate litigation, extensive loan putback and servicing transfer initiatives. We are using every tool at our disposal to procure recoveries for damages we strongly believe have been perpetrated through misrepresentation and irresponsibility by US mortgage-backed issuers, and we believe these efforts are likely to continue for some time. But ultimately be successful.

Our remediation strategy also extends to our residential mortgage-related CDO book. Where we are also reviewing through forensic analysis what we believe may well be potential misrepresentations on exposures, ultimately insured by MBIA. We have been receptive to CDOs counterparties who seek to commute and restructure their exposure to us only where the economics and future loss mitigation profile provides maximum returns to MBIA. As I will discuss later, during the fourth quarter we did indeed commute and restructure four of our worst performancing multisector CDOs that met our criteria. We also increased our expected loss estimates on our multi sector CDO book, as Chuck has noted, to reflect worsening performance of the underlying RMBS collateral supporting those deals. And I'll provide more detail on this shortly.

Please turn to slide 25. I'm going to focus my comments today on a residential mortgage back exposures and start with our direct RMBS portfolio. You have seen slides like this before, but I want to continue to illustrate our RMBS sector and vintage composition which this slide lays out. As was the case with the last four quarters, when you look at our 31.8 RMBS book, the story begins and resides largely with our HELOC and closed end second portfolios. As those books are largely later vintage originations from 2006 and 2007 and concentrated on three issues, Countrywide, Rescap and Indymac, we continue to see volatile performance and significant monthly claims on that portfolio. These three issuers are the servicers on $14.2 billion of our insured transactions which represents approximately 88% of our $16.2 billion second lien mortgage portfolio.

Now let's take a quick look at our subprime and Alt-A portfolios. Please turn to slide 26, and let's start in the top box. Our subprime book totals $4 billion, and this slide lays out for you the asset quality metrics of the subprime book. You can see that current subordination levels generally continue to hover around 30%, remaining strong in these deals. MBIA remains cautiously optimistic that regardless of the current real estate owned and foreclosure buckets as well as mortgage industry projected loss rates our rev traunches will not be materially impacted. This is true for three primary reasons.

First, MBIA provided insurance on first lien product only at the AAA class of subprime deal structures since the beginning of 2004. Second, we have almost zero 2007 exposure. Third, due to substantial subordination and deal loss protections on these deals and the selective strategy, we took toward direct subprime exposure, we consider risks of material loss to be low. So the key takeaway here is right there next to the top box. Real estate-owned properties and foreclosures remain high. However, loss severities are averaging around 50%. Accordingly, our insured traunches still remain sufficiently enhanced.

Now looking briefly on this same slide but in the lower chart, let's review our $3.4 billion of Alt-A exposure. We are closely monitoring the portfolio because of the increase in Alt A deliver responses. This slide gives you a snapshot of current performance trends, enhancement averaging a bit over 8%, and increased foreclosure activity. We attached a AAA original rating levels for all of our Alt-A transactions except for one transaction where we attached a AA. More than 40% of the exposure is of the pre-2005 vintage. While the delinquencies are increasing in the Alt-A book, they are much lower than the Alt-A universe as tabulated for example, on Moody's recent release on Alt-A performance.

For example, average severe delinquencies for our 2007 vintage are about 7% as of December, 2008, while Moody's data indicates that the 2007 Alt-A delinquencies were about 10% as of October, 2008. On an aggregate basis, the credit support for our Alt-A portfolio continues to appear adequate. There are a couple of deals we have elevated to higher concern, loss estimates of our transactions are heavily dependent on foreclosure timelines which of course are increasing. But one important fact to consider is that about 75% of the loans in our Alt-A portfolio are fixed rate mortgages. And these generally have better performance than adjustable rate mortgages. And very significantly we do not have any option ARMs. The average FICO at origination for our portfolio was 700. The average LTV is less than 70% compared to low to mid-70% for an average 2006 Alt-A collateral. Moreover in over 60% of the Alt-A deals our AAA attachment is not in the lowest senior traunch, and about 70% of our Alt-A exposure still retains its natural AAA rating from S&P.

Given this performance, at this point, our projections do not indicate material losses. However, we monitor the portfolio monthly, and the delinquencies do continue to spike, and liquidations from foreclosure and REO buckets start to accelerate. We will then need to review for reserves on this portfolio. So here, too, if you look back to the slide, the key takeaway is what you see adjacent to the lower box. REO and foreclosures are increasing, aggregate loss severities have increased to approximately 40%. But on an aggregated basis, current enhancement levels are adequate.

Now let's turn to slide 27 in our Heloc closed end second portfolio, the area which we had been experiencing significant stress in our RMBS portfolio. You will recall that in the third quarter on our second lien RMBS portfolio, we increased our expected incurred loss estimates by $1 billion, thereby resulting in total increased, total incurred losses of $2.1 billion today, with volatility remaining that could further increase these estimates depending on how future performance progresses. We did not increase our loss reserves in the fourth quarter, since performance for the quarter was well within our expectations. The third-quarter increase was driven by material increases in both new delinquencies and back-end loss experience while roll rates remain flat.

As of December 31, we now have reserves on 71.1% of the second lien deals including essentially all of the 2006, 2007 exposures to Countrywide, Rescap and Indymac. If you recall from my earlier slide, I showed you that MBIA's total net par exposure for HELOCs and closed end seconds was $16.2 billion at December 31, 2008. Which is roughly $8.7 billion closed in seconds and $7.5 billion Heloc securitizations, and that th e majority of those deals had been originated in 2006 and 2007. So while we don't expect many of the remaining second lien deals to experience material losses, the real issue instead is how much volatility remains for the deals we are paying claims on now. And while we didn't increase our impairments on our second lien portfolio in the fourth quarter, we all know that material uncertainty remains, and there is the possibility of additional reserves in the future. So the main drivers here of additional reserves are going to be the rate at which loans enter the delinquency pipeline and then roll the loss, and how long that elevated delinquency performance is maintained before we see any relief. For example, with all of the variables remaining constant, if the fault levels stay elevated for an additional sex-month period beyond our expectations we would estimate additional incurred losses of $500 million on the second lien portfolio.

If you join me on slide 28, you can see some dynamics related to the delinquency and loss continuum. The top chart shows the monthly trends on roll rates. We've essentially seen a general flattening across the various delinquency buckets. As we have said previously, it may not be getting materially worse, but it's not getting better, and the levels remain elevated.

Turning to the bottom chart, it looks like after an extended period of increasing monthly losses in both the Heloc and closed and second portfolios we are starting to see a more of a consistent trend that we are settling into. Our belief is that this represents a peak in monthly losses that will start to decline in the coming months. However, we are also seeing an increase in early stage delinquencies. This increase has been within the general range of our revised estimates to date. But were they to increase at the same pace over the next one or two quarters and roll rates would not show improvement. We will have to further examine reserve adequacy. At this point the question is simply how long this pace can sustain itself when it comes to determining our ultimate credit losses on the second lien book.

I just want to note that we have paid out $1.4 billion in claims as of December 31, 2008. And over 69% of the claims paid on the second lien book were a little over $1 billion, is associated with the deals subject to the litigation that we are engaged in with the vast concentration being Countrywide and Rescap. And I want to pause on an important point here. We continue to give zero credit toward recoveries associated with the litigation and claims we have commenced against Countrywide, Rescap, and Indymac. We feel very strongly about our cases and believe that if we had embedded recoveries in our losses, our projected incurred losses would, in fact, be materially lower than we are projecting at this time. We're simply choosing to be conservative from an accounting perspective, which in no way reflects the high level of confidence we have in our claims. So we're going to continue to monitor the performance of the book, and the reserve adequacy vis-a-vis delinquencies and we're going to be pushing forward on our litigation aggressively. I expect that the second lien portfolio will continue to be a topic of discussion throughout the year.

Now before I turn to our CDO and structured pools book, I want to make comments on possible cram-down and loan modification initiatives by the federal government. While we all know it's impossible to predict the success of government initiatives toward stimulating loan modifications and preventative foreclosure measures, and the effect it would have on our book, loan modifications in and of themselves could be an overall positive for our direct, first lien RMBS portfolio due to where we sit at senior traunches and because we have provisions which protect more senior traunches from bankruptcy loss allocations. However, unless criteria specified for the second lien deals when first liens are being modified the overall impact is impossible to predict.

In the case of RMBS transactions underlying our CDOs the impact of cram-downs or modifications could be similar and possibly better than the impact of loan modifications to our direct first lien book. The exposure of our CDOs to shipping interest RMBS transactions is negligible. The bulk of the exposure is to subprime and Alt-A Senior and mezzanine RMBS traunches. As a result modifications and cram-downs which might help borrowers keep up with their payments could in fact increase cash flows to these RMBS traunches which would, of course, be helpful. The real challenge here is implementation. Having bankruptcy judges make decisions on loan terms and principle payments is fraught with complications and potential inefficiencies including overloading the bankruptcy courts.

Now let's turn briefly to our CDO and structure pools. So please join me on slide 29 which summarizes our exposure. MBIA's $124.9 billion CDO and structured pool exposure is primarily classified into the five collateral types you see here, only one of which is experiencing stress related to the US subprime mortgage crisis. And at the multisector CDO portfolio, totaling $27.7 billion. The slight increase in some exposures that you might see in some categories quarter over quarter was due primarily to reinsurance takebacks.

Let me briefly update you on our four primary collateral type portfolios. First, the investment grade corporate portfolio of $39 billion comprises diversified pools of corporate names, insured with deductible to cover losses due to credit events. During the last two quarters, several credit events occurred including Lehman Brothers, Washington Mutual, Fannie, Freddie, and three Icelandic banks. Based on the final CDS protocol prices for Lehman, Freddie, and Fannie and assumed prices for WaMu and the Icelandic banks, the actual aggregate impact to MBIAs portfolio was very small, with overall weighted average enhancement declining about 1%. At this time, the deal deductibles remain strong despite the large names that have defaulted thus far.

Now on the high yield portfolio of $12.7 billion, it's comprised largely of corporate loan obligations with a concentration in middle market loans and to a lesser extent, broadly syndicated bank CLOs and older vintage corporate high-yield bonds. So deals in this category are diversified by both vintage and geography with European and US collateral. Given macro economic conditions and the credit market lock-up, obviously the middle market space requires a lot of attention. But the underlying collateral is generally senior secured loans and the transactions are managed by high quality, nonbank lenders who have their interests aligned by equity positions beneath our insured debt. We are seeing increased CCC buckets in these deals, as you would expect, but there's been no material deterioration to this point.

Now on the commercial real estate portfolio, $45 billion, this is a diversified global portfolio of high quality and highly -- on highly rated structured deals in the global commercial sector. $35 billion of our net exposure in this sector is to structured CMBS pools that aren't truly CDOs. These pools consist of static CMBS reference securities generally ranging from BBB-minus to AAA bonds with the vintage focused on 2005 to 2007 and are subject to a deductible. The remainder of the portfolio is from our commercial real estate CDOs which are made up of CMBS, hybrid transactions and a handful of bolt-on deals.

We have a presentation you should look at on our website that provides a good commentary on our commercial real estate exposures, and we have slides we will be updating summarizing where performance stands today. Obviously there are many divergent views on where commercial real estate performance is headed as it is affected largely by the overall economy. We believe our deals are supported by deductibles commensurate with the risk profile and, importantly, the CMBS pool deals are supported by long-term fixed rate loans through the bulk of the refinancing occurring in 2015 and after.

So the near-term financing risk is not our primary concern, although it certainly is in the marketplace. And as with the marketplace, we have seen delinquencies rapidly increase over the last quarter to a little over 1% from 68 basis points in the prior quarter. We certainly expect delinquencies to increase over the next year given the stress in the office and retail sectors in particular. And we expect that recent rating agency downgrades on CMBS collateral will translate to some of our deals being downgraded during the year. Making projections beyond that is difficult at this time because the underlying performance remains satisfactory.

We do believe that the fundamentals and the supply/demand equation for commercial real estate was certainly far better than for residential mortgages, and that while loan underwriting became more aggressive in mid-2006 and 2007, there is still an underlying corporate cash flow dynamic that we are hopeful will result in a softer landing than in the residential sector. But either way, it's going to be several years before it is clear how deep the commercial real estate sector will be impacted. And it is certainly far too soon to conclude that investment-grade traunches at CMBS will be designated across the board.

With that, let's move to slide 30 to review and discuss this quarter's significant activity on our multisector CDO portfolio. As Chuck mentioned, MBIA successfully executed commutations on restructurings on four of our worst-performancing transactions which resulted in realized losses of $558 million and eliminating the vast majority of volatility of future losses associated with those specific exposures. You can see on this slide, the four categories these commuted transactions fall into.

In the aggregate, the commutations were achieved at or within the general range of existing impairments, and we would have increased the reserves on the deals by several hundred million dollars had we not commuted and restructured them. In two cases, we repaid some opportunity for upside which could actually further reduce our economic costs for the transactions. We did these deals as they matched up squarely with the criteria we believed made these transactions prudent versus paying out impairments over their contractual terms. For example, the price was right in line with our loss expectations, future volatility was material so mitigating that risk was important. The embedded return from claims avoidance in volatility mitigation made sense and the counterparties had a realistic view of the bid and ask. We eliminated net par of $2.7 billion, and an additional net par of approximately $1 billion was strengthened through restructuring either by us retaining a smaller, super senior position benefiting from the turbo of all cash to pay down our rapid exposure after which we would receive any additional upside or through the form of additional subordination on our one CDO squared trade. We're going to continue to entertain commutation and restructuring opportunities to counter parties where appropriate consistent with the criteria laid out. However, I would expect these opportunities may be limited to those counterparts seeking global CDS solutions and bringing us realistic bid and ask expectations.

Turning now to slide 31, this is going to give you a good snapshot on the impairments and the impact on our commutations. As we previously stated the multisector CDO portfolio is where we've been experiencing stress related to the US subprime mortgage crisis. We've had substantial ratings downgrades and impairments on our insured book, and there remains some uncertainty over where ultimate impairments will wind up given the continued volatility in the residential mortgage market. We increased our net impairments during the quarter by $642 million, which brings our total expected incurred losses on the multisector book to $1.7 billion.

You will note that the $1.7 billion results from our realization of lists due to commutations and then increasing our reserves on the remainder of the portfolio to $1.2 billion. So the increase in impairments includes both increases to existing impairments as well as some new additions to the impaired category with similar profiles which are CDOs backed by RMBS collateral with buckets of inter ABS CDOs where our payment obligations are timely interests and ultimate principle. And as we note on the slide, and consistent with previous actions, and as Chuck pointed out, we increased impairment estimates as inter CDO collateral has generally performed as poorly as anticipated and direct RMBS collateral demonstrated deterioration based upon a roll rate methodology for subprime and Alt-A collateral. Specifically, the combination of increases in the early stage delinquencies rolled to loss and severities all combined to increase our loss estimates for 2006 and 2007 subprime and Alt-A collateral.

The performance of the RMBS collateral in these deals and the timing in which collateral deteriance will ultimately drive future impairments remains to be seen. Given the slow movement of foreclosure timelines and the momentum building toward implementation of foreclosure mitigation and loan modification efforts, the next few months will be critical in determining whether there is truly any real momentum toward loan modifications for securitized assets and, therefore, whether we will need to alter impairment levels.

Before I conclude, a few general comments on the rest of the portfolio. So if you'll turn to slide 32, I'll go through those with you. First, our muni book continues to perform satisfactorily despite difficult market conditions. Outside of sporadic credit issues, we are not yet seeing any material sector-related problems that would rival anything like what we are seeing on the structured finance side. We are seeing some softness in selected health care exposures related to certain hospital systems and single site facilities. In prior conference calls, we've discussed our remediation of the [Layneco] tunnel deal where we have an Australian [$1.2 million] exposure through a wrap bond.

During the fourth quarter of 2008, we were in fact able it make significant progress on our remediation efforts and have taken steps to significantly mitigate potential losses. In general now in our consumer-related exposures we continue to see them hold up well with solid credit protection and short remaining average lives. We have no remaining primary market insured credit card exposure. Our auto book transactions are generally funded to required enhancement levels. And while unemployment rate increases could impact that portfolio, we are well positioned for material increases and defaults due to that strong credit enhancement.

Student loan performance, both federally guaranteed and private, has held up well from an asset performance standpoint. But clearly there are funding issues in this space with the collapse of the auction rate and variable rate funding markets that we are dealing with now before we can see any material issue, and currently satisfactory parity levels.

In the FFELP space we are working with issuers towards utilization of alternate funding arrangements, and we believe the new Department of Education conduit will provide some near-term relief until liquidity ultimately returns to the marketplace. We've transferred our state agency-related FFELP exposures to National which, with its rating, we hope will provide some ultimately relief to VRDN and auction rate note borrowers.

Our rental fleet exposures continue to perform as MBIA only maintains exposure to the top three rental fleet operators. This portfolio will be completely repaid by year end 2011, with the pressures on the big-three automakers and macro economic stress the onus is once again, as it was post 9/11 to streamline operation, manage their fleets and maintain adequate liquidity during this downturn.

Turning back for a moment to commercial real estate, as I stated before, this sector continues to capture headlines as delinquencies increase at a more rapid pace. With conduit delinquencies piercing the 1% market at year end. Near-term refinancing risk continues to be the primary concern, although general stress has been placed on almost all commercial real estate sectors in recent months. As I mentioned before, we're fortunate that the majority of our book features seven to 10-year fixed rate collateral with vintages in the 2004 to 2007 time period. So the impact of refinancing volatility for us over the next three years should not be a major issue in those deals. In addition, those deals feature enhancement levels commensurate with the risk profile. For example, deals with primarily BBB collateral generally have enhancement of 30% to 35%. Having said all that, due to the inherently high leverage associated with CMBS over the last several years, we are focused on monitoring our long-term position in this market, especially on our deals with primarily later vintage, BBB-minus rated collateral. We are ever mindful of the risks inherent in commercial real estate in the severe economic downturn. Again, I refer you to our website if you desire more information on our CMBS exposure. This concludes my portion of our presentation. With that I'll turn it back over to you, Chuck.

Great. Thank you very much, Mitch. We're going to turn now to a discussion of the future. At least we're going to set the table for the future.

So if you'll come to slide 34, please. Jay has pointed out earlier that we fully expected to create separate legal entity platforms for our domestic public finance and structured and international businesses as far back as February, 2008, when MBIA Corp. was still rated AAA. The first steps in the transformation of the Company and its business model were accomplished two weeks ago. The steps are described here in sequence, but they all occurred simultaneously. MBIA Corp. paid two dividends. First to transfer the former MBIA Illinois, now to be known as National Public Finance Guarantee Corporation, and then to capitalize it with $2.09 billion. Then the now-sibling companies entered into quarter share reinsurance of MBIA's public finance business.

The second to pay policy gives those policyholders direct access to National, enabling it, that is to say National's ratings to be suspended to the MBIA-originated policies. The approval letter from the New York State insurance department approving the various steps in the transformation was posted to our website this morning.

On slide 35, the legal entity structure now looks like this. We have a new subsidiary, currently domiciled and regulated in Illinois. It has a Board of Directors of eight, of whom five are the CEO of National and four MBIA senior executives, along with three outside, independent directors. Those eight directors have fiduciary obligations to act in the best interests of National's shareholders, but also have a duty to obey the state insurance statutes governing that separate insurance company. This is no different than the obligations and duties of the directors of MBIA Corp. As you can see, MBIA Corp. has three insurance subsidiaries, and it also ensures the liabilities of the asset liability management business.

National Chief Financial Officer is Tom McLaughlin, a 25-year veteran of the public finance business. Tom has a staff of 40 experienced professionals who are directly employed by National, responsible for marketing and origination, risk and portfolio management, finance and legal. While much infrastructure is outsourced to others within our consolidated group, Tom and his management team will be responsible for deal selection, capital management, and investor relations for the new Company. We anticipate that we will raise third-party capital for National and, therefore, it is designed from the ground up to be separately managed from MBIA Corp. The Company has a so-called negative earn surplus position at inception which under Illinois law would prohibit as-of-right dividends for the next few years. We are expecting to redomicile National to New York, and to request that the earned surplus be reset as a result of the reorganization of our legal entity structure. That is the next big step in fully establishing our new Company.

On slide 36, we show that we have divided MBIA Corps. assets and liabilities between these two new companies or between these two companies. The slide shows the split as if it took place on September 30, 2008. This is the balance sheet profile that we portrayed in our original application to the state filed in December. The objective in the split was to create two investment-grade balance sheets using internal estimates of rating agency capital models. Given the split of the liabilities along business lines, this is the asset division that is suggested. The asset swap facility that we talked about earlier goes to Nationals, as does most of the up-front premium business. Most of the loss reserves stay with MBIA Corp. for its housing-related exposures. A detailed listing of the policies that are reinsured to National is available on our website. Now you cannot see our surplus notes here as they're an element of policyholder surplus, but they are embedded in the $2.5 billion of surplus in MBIA Corp. that you see here.

Slide 37 shows the same view but updated to December 31. Now this information was fully shared with the rating agencies and regulators, prior to executing the transformation. But since we only filed the statutory statements yesterday, this is the first time that we're talking about year end balance sheet publicly. MBIA Corps. asset profile is somewhat smaller than at September 30, since it entered into the five lost mitigation transactions that Mitch referred to under which it made payments to bondholders that is to say four CDO commutations, commutations and the purchase of the majority of the bonds of an international infrastructure project at a discount. We saw this negative cash flow a few slides ago. Losses and LEE and contingency reserves at MBIA Corp. were reduced as well so that the surplus is higher than it was at September 30.

National's assets are larger than at September 30, but only because the asset swap repo notional amount grew from $722 million to $1.3 billion as shown here. Contingency reserves were posted for the FIGIC portfolio in the fourth quarter which caused National surplus to fall to $416 million. Again, all of this was fully discussed with the regulators and rating agencies prior to the approvals and the rating action that's have been taken.

Slide 38 shows the split of claims paying resources, and this is the basis of the capital adequacy analysis that credit analysts performed. The statutory capital, unearned premium, and loss in LAE reserve that's are shown here are direct lifts from the prior slide. The present value of installment premiums mostly goes to MBIA Corp. We also have a bank swap capital facility of $450 million that attaches to the public finance portfolio, but MBIA Corp. is the contract party. This facility has been highly profitable for the banks that back it, and we have offered to convert it to a National facility. But that is still to be done, so we're not counting it here as part of Nationals claims paying resources. The bottom line is the split of our roughly $15 billion of claims paying resources at year end, goes $9 billion to MBIA Corp. and $6 billion to National.

Now going on to slide 39, I'll talk for a few minutes about the asset and insurance portfolios of the two companies. Despite the familiarity of MBIA Corps. combined insurance and portfolios, the split almost puts us in a position of presenting this to you for the first time. This slide gives the high-level view of the National investment portfolio. This is pretty standard bond insurer fare. More than half of the portfolio in municipal bonds, the balance in other high-grade assets. The treasury and agency portfolio here is subject to the asset swap agreement, but it's fully collateralized and is mark to market. The portfolio has very little credit risk, and de minimus, unrealized loss at year end 2008.

On slide 40, MBIA Corp. has a different kind of investment portfolio but one that fits its relative position very well. Because we expect continuing near-term claims payments, mostly on our RMBS, and opportunities to engage in commutations and other value-adding transactions, it holds substantial cash. $2 billion worth or 34% of the asset pool. In addition, it has lent $2 billion to the ALM portfolio, secured by a static collateral pool as I described earlier. This arrangement will take a few years to repay, but at this point the ALM portfolio is expected to fully repay the obligation and to earn the release of its collateral.

Slide 41 introduces the insured portfolios of the two separate companies. This is probably self-evident as the purpose of the transformation is to separate the domestic municipal portfolios from the structured and international. It's important to note that while the structured business has problematic sectors today, we do not believe that it will always be so. There has now been increasing discussion in Washington and in the press about getting the ABS business reinvigorated. We think that going forward there will be at least as much opportunity in the international and structured finance sectors as there is in the domestic municipal business. And of course, with $9 billion in claims paying resources, MBIA Corp. should have enough resources to be a player in these businesses as they come back.

Slide 42 shows the cash flow expectations for the two companies in 2009. We expect substantial positive cash flow from National, about $430 million is the net here. We note that there is an expectation that we will write substantial business this year. Our business plan assumes that we're fully capitalized and rated stable by April 1. Clearly we still have some work to do on that, but even if we wrote no new business, the cash flow of National is expected to still be close to $200 million. On the MBIA Corp. side, we expect basically to break even from a cash perspective this year. But of course, we're counting a $2 billion cash cushion in case this assumption is incorrect, either because payments are higher than we expect or because we enter into commutations or other value-added-type transactions.

Page 43 provides a payment profile for MBIA Corp. It faces its maximum cash outflows in 2009 as the home equity loan and closed end second securitization payments are peaking now and are expected to remain at a very high level all year. Beyond that, expected payments drop off to very low levels until the principle payment -- principal payment are to be made on ABS CDOs 38 years or so hence. We are hoping to settle some of the CDOs via commutation earlier than that.

Slide 44 presents some capital information. We have estimated our position from the rating agency capital models here for National. Our capitalization level exceeds AAA levels for Moody's but falls just at the AA level for S&P. Our objective is to qualify for the highest possible rating. And as Jay referenced that does suggest a capital raise. National's capital position will improve by $150 million per quarter if we raise no new capital and write no new business. But we are hoping to move more quickly than that implies.

On slide 45, MBIA Corps. capitalization is a little harder to talk about because of the volatility of rating agency estimates of expected and stress losses over the past year. What we can do, though, is to measure our claims paying resources against our expected losses for cases that we have reserves against today. We expect to pay out a net present value $2 billion on current cases. Mostly ABS, CDOs and RMBS. S&P has done its own estimate of stress losses on these cases, and their stress is about two times where we are today. Then they add in losses at a depression scenario on all other exposures to get to the cumulative loss that they compare to our capital. Again, we cover the A-level capital requirement with a cushion, but we have no cushion to the AA requirement.

Now Moody's has said that its estimate of losses is roughly equivalent to our claims-paying resources, but at this point they've provided no quantitative analysis to us. The bottom line, though, is the Company has adequate resources to cover expected losses even where expectation is formed against the backdrop of 2008's experience and to cover even stress losses that assume that 2008 is a new norm and then stress is to be extrapolated from there. This gives us great comfort that we will meet our obligations to MBIA Corps. stakeholders.

Page 46 provides the organization as well as ratings information for the companies. Our target of course is to achieve high, stable ratings for National. We are not there yet. The S&P rating is AA-minus with a developing outlook, which means that S&P could go up or down. The determining factors appear to be the degree to which there is investor and issuer acceptance of the business model, and the progress that we make on improving the capital picture.

Now on the Moody's side, National may be the only insurance company out there that's on review for upgrade by Moody's. To get there, Moody's is also looking for some validation from the markets that the business model works and will be accepted over time by issuers and investors. Achieving that will enable them to establish higher ratings for National. Both agencies at this point appear to have accepted a belief that there's very little demand for bond insurance. We believe that there's ample evidence that the problem has been the availability of bond insurers rather than any change in the essential value proposition. In fact, after a period of time like this, when holders of insured bonds are at least so far being paid by the entire industry, there might even be a heightened level of interest in this product going forward. At any rate, it's clear that we have something to prove to the rating agencies in this regard.

Going to slide 47, what have we created now? National is the world's largest municipal bond insurer with ratings that are expected to be both high and stable. It is separate from MBIA Corp. with independent directors and separate underwriting and surveillance staffing. Now, there's been a lot written and said lately by commentators about whether all this is worth it. They said that issuers will no longer appreciate the value of bond insurance, and that investors won't accept bond insurance. They never mentioned the fact that we've already paid out to our policyholders $2 billion in claims. I think those policyholder would agree that there's value to our insurance. Nevertheless, some analysts expect very low insured penetration. One report recently projected single-digit insured penetration going forward, down from 50% traditionally. We think, frankly, that the naysayers have overdone it. There are a variety of indicators that suggest the future for the business.

First, I note that our two competitors who may merge in the near future together wrapped 13% and 14% of new muni issuance in January and February. So together they're already beating some of the penetration predictions. If you add in all credit enhancements including start-up bond insurers and bank letters of credit, penetration for credit enhancements was 19% and 23% for January and February respectively. Third, the fact that two companies attempted to start up bond insurance companies in 2008 indicates that outside entrepreneurs believe that there's value in the business model. In addition, there have been several government initiatives to start up a variety of types of bond insurers to respond to what they perceive to be strong demand. Then finally, there's the feedback that National has received in its two weeks of life. Investors and issuers are very interested in using National, although they await the ratings -- our ratings achieving the high, stable target that we've articulated. We think the secondary markets where we're wrapping over bonds and investors portfolios may recover more quickly than the primary markets. At this point we've already turned down two deals, and we're having preliminary talks with a couple other issuers who may benefit from bond insurance. Interest appears strongest among BBB and A-type issuers who dominated January and February issuance.

Now that we have fully disclosed all the relevant information about National we'll be in a position to market agressive to the fixed income investment community and to issuers. We have developed lists of the top tier investors and multi fee issuers and we've scheduled visits with them. While we maintain a robust dialog with the FA and investment banking community. Now we don't expect that this will be like the 80's and early 90's for MBIA when we could afford to hang back and wait for the phone to ring. But we do have focused resources in National, actively marketing this business. We know that we will need to create and earn confidence in the market. Finally, National will be profitable from day one. If we write no new business we expect our statutory income to be above $300 million this year. If we raise capital for ratings purposes, of course, we would expect higher net investment income and also higher underwriting income.

Finally, on slide 48, here for the first time we're breaking out our adjusted book value into its constituent parts for the business segments. National has an ABB of roughly $18 per share. And we believe very few barriers to its realization. MBIA Corp. continues to be the largest business in our family. But as we said in the past and as Mitch described, there is uncertainty about future credit losses in this business and investors need to formulate their own views about whether and how much they should adjust the impairment and loss amounts that are shown here. The asset management business now has a negative book value, even after adjusting for unrealized losses of about $2.70 a share, and a negative spread is worth another $0.58 per share as the terminable GICs are terminated and we're able to buy back debt at discounts we think we'll be able to improve this as well. Combined consolidated ABB is about $40.06 per share at year end. And with that we would be happy now to open it for your questions.

Thank you. (Operator Instructions)

Thank you. Before the start the open call questions we're going to answer some questions that were presented previously in writing. Before we do that, let me indicate that we did receive some questions about the potential for litigation as a result of the transformation, and we're not inclined to comment on litigation matters. But with that we'll go to the first question that was submitted in advance in writing. Comes from Andrew Oliver of Transatlantic Capital. How will the proposed ability of bankruptcy courts change the terms of residential mortgages affect your estimate of MBIA's losses in this area?

I think before I have Mitch speak to this, since he already provided some comments, I'd like to make the broader comments about each of the different solutions we've seen that's been proposed over the last 18 months to address the combination of mortgage losses and related losses on different types of securitizations. It's our belief as an insurer of over $120 billion of the most complex different types of securitizations out there that the government's efforts to pour money in the top or to put a variety of different band-aids on individual, troubled loans continues to be the wrong approach.

We believe that if America is going to solve our mortgage problem and stabilize the housing market and at the same time fix the financial system, ultimately the only answer is going to be to refinance all of the loans and all of the securitizations. And this includes the preponderance of loans that are good loans in order for those loans to be refinanced at a lower rate. And at the same time, have the ability for the country to absorb the losses on the small portion of loans that ultimately will default. We think the suggestions to buy out loans wholesale across the board and reissue those in the new securitizations is ultimately the only answer that's going to have a significant effect. We think this mortgage change that is being suggested has great social overtones, it has the ability to deal with a small portion of loans. But we think when we look at the macro picture of the overall issue in America facing the housing market and the mortgage securitization market, that the effects of this particular change like most of the others will be very nominal. Mitch or Anthony, you want to add to the individual proposal that's now being discussed?

I guess a couple of comments, first, overall, the proposals keep changing, and there are a number of proposals that are out there. History has also shown us that changes to the bankruptcy law are few and far between, and they're frequently highly contentious. We're in a extraordinary environment now and perhaps that will be different. But I think whatever we're seeing now is not what we necessarily see in the form of a -- of an amendment. That said, there are a couple of ways that potential, what's being called cram-down legislation can effect the transactions. First, it could have the same effect as the principle or loan interest modification in reducing the cash flows in the transaction. But this would primarily affect subordinate traunches and first lien RMBS deals and we only have exposure to senior traunches and direct RMBS first lien deals. Although cram-downs will result in a principle writedown or could result in a principle writedown, they do have the potential to take loans that are not cash flowing and turn them into cash flowing, and that would be a positive.

In shifting interest structure transactions, and these are primarily used with prime and all Alt-A collateral, a bankruptcy cram-down could breach the bankruptcy reserves on some transactions. This would allow losses to be applied pro rata to all traunches including seniors. For us, only about 10% of our first lien portfolio has provisions which allow for allocation and bankruptcy-related losses to the seniors on a pro rata basis. So loan modifications and cram-downs are very difficult to predict for second lien deals, except they could provide relief to borrowers on their first liens so they could make payments on their second liens. But again, it really depend on the form and nature of the legislation. And a quick comment on the RMBS transactions that underlie our CDOs, the impact of cram-downs or modifications could be similar or even better than the impact of loan modifications on the direct first-lien book. The exposure of our CDOs as I mentioned before to shifting interest RMBS transactions is really negligible. The bulk of the exposure is to subprime and Alt-A and mes RMBS traunches. So if the modifications and cram-downs will ultimately help borrowers keep up with their payments, it could increase cash flows to the RMBS traunches.

And I guess my last point is just one that -- a practical point especially being a former bankruptcy lawyer. The real challenge here is always implementation. We-- they have to find a way to find the right tools to try to stimulate modifications if we can't get to the optimal solution, which is a solution that Jay laid out. And flooding or potentially flooding the bankruptcy courts with modifications that need to take place, some might argue might be the last resort. But overall, less than the most efficient way to go about getting modifications.

Okay. Andrew Oliver has another set of questions. In his annual letter to share, Warren Buffett suggests that the basis for claiming the defaults on passives and bonds have been low historically. This falls as it is based on the experience of entities that issued an uninsured bonds not insured bonds. He also states when faced with large revenue shortfalls, what Mayor or City Council is going to choose paying for local citizens in the form of major tax increases over paying to far-away bond insurers? Do you agree with his analysis and forecast?

I think there's three comments that I would make about Andrew's question. First is there is a significant difference between the experience of defaults, between insured versus noninsured. In actual fact, insured bonds have had a better performance over time than uninsured bonds. And the reason for that is very simple. As an insurer, we act much like a bank as a secured lender. We actively get involved long before there are any defaults. And the fact and the experience of the last 35 years has shown us clearly that the actual results for insured bonds are better than uninsured bond.

Second, I would agree with the observation made by Berkshire that the next three or four years are going to be very tough in the public finance area. We certainly expect there's going to be stress. We certainly expect there will be losses, and we certainly expect that the kind of types of defaults that we're going to see are going to be in excess of the historical low norms that some people referred to in looking backwards.

Last, I'll just comment, I thought it was an odd statement to suggest that an insured bondholder would behave differently because they happen to buy an insurance policy when they're issuing bonds. It's somewhat analagous to saying suggesting that because somebody bought insurance on their house that if a fire started they wouldn't try and put it out. We have found our own experience is with -- with all bondholders, bond issuers they all work hard the same as we would to live up to their bond obligations. And they take what steps they believe are necessary to get their finances in order. I think you're seeing that demonstrated across the country right now in multiple jurisdictions as a multitude of different, regulatory elected and nonelected officials struggle with the effects of the economy on their particular bond issues.

Okay. The next question comes from an individual investor. In his letter to the treasury, New York Governor David Paterson suggested creating a not-for-profit municipal bond insurer owned by municipalities. What are your views on this, and will this likely significantly hamper the future prospects for National?

A couple of points. First of all, we welcome the interest of Governor Paterson in the efforts that we and others are making to try to unfreeze the municipal bonds market. The Governor has been very supportive of the things that MBIA is trying to get done, including the establishment of National Public Finance Guarantee Corp. So we appreciate that.

With respect to the creation of a not-for-profit municipal bond insurer, again, as I referenced in my prepared remarks, there are a number of initiatives out there to create bond insurers. We recognize it as evidence that there really is demand for the product. And-- and, frankly, there's -- there's so little capacity in the marketplace today that there are -- there is room for additional competitors. In general, we don't view not-for-profit or government owned or operated insurance companies as efficient or effective in both serving the needs of insureds as well as getting leverage of private capital, but -- but we don't have -- we certainly don't have any objection to new entrants in this marketplace. What is needed today is a more robust market for bond insurance as a part of an initiative to reopen the municipal finance markets. I think those were the key messages that the governor was bringing.

Okay. Another individual investor writes, or asks, What were the rating agency stress test loss estimates for the four commuted transactions? When were these commuted? Were your counterparties aware of the plan to split national and municipal and the structured finance side? If so, did they agree to the commutation due to the perceived weakness of MBIA's future structured finance insurer?

I guess I'll start with the response to that. First of all, we did not provide any advance information about the transformation to our counterpart in negotiating the commutations that took place in the fourth quarter. Second, every -- every counterpart's motivation to enter into the transactions that they did with us will -- they're going to be as diverse as the counterparts themselves. And so it's hard for us to speculate about, to what degree liquidity concerns versus, potential concerns over long-term health of MBIA and other things play to this decision that people make to enter into commutations with us.

Okay. Another individual investor question. What are the assumptions embedded in the stress test that were done by your advisors to determine if the MBIA structured finance business split from its municipal bond business is equitable? Who were the advisors, and did these stress cases and how do they compare to the assumptions used by the rating agencies and their stress cases?

Great. Good question. The advisors that we have worked with include Raymond James, that provided a report on reinsurance agreement between National and MBIA. Bridge Associates which looked at the solvency of the MBIA Corp. after the transaction. Dewey LeBoeuf, our legal advisor and others. So we did have outside advisors on this matter. Stress analyses were done by those outside advisors. Stress analysis was done by the State of New York on its own in reaching the conclusions that are embodied in the approval letter that we posted on the website today. And of course, MBIA. We -- we did our own stress analysis to satisfy ourselves that we were acting in a way that's consistent with our obligations to policyholders in both companies. And the stress analysis that was done takes various forms. I think the -- to boil it down best because I'm not going to provide all of the assumptions that go into the analyses, but to boil it down best might be to say that -- that our -- we have a base case for this recession with respect to housing performance that has things returning to a more normal position in mid-year 2010. In the stress test that we've done, we've extended that period for an additional three years. In some of the tests. And in a scenario like that, we find that MBIA meets all of its obligations to its stakeholders.

Okay. The next question from an individual investor again, Is this a fair statement -- if the structured finance subsidiary does not breach statutory capital minimums, then the lowest possible value for the unit is zero, i.e., the adjusted book value of National less the debt at the holding company is a good indicator of the value of the Company?

It's a little hard to respond to that. The value of the Company obviously is determined by the market. But if the question is are MBIA Corp. and National separate with respect to the contributions that they make to enterprise value, the answer to that is, yes. So to the extent that the value of one of them were to turn out to be zero, the remaining value of the consolidated firm would be the value of the other.

Okay. Another individual investor question. What would need to happen in order for the new structured finance subsidiary to breach New York's statutory capital minimums, i.e. oil prices being declined by X percent, unemployment needs to go to Y percent et cetera? I know MBIA's view as well as the commissioner's view is that the split is equitable and both subsidiaries have adequate claims paying resources. However, the market doesn't believe that. What needs to happen for the structured finance to blow through at CPR and or to reach capital levels where its analogous office has to rehabilitate, "that insurer"?

This is sort of another question about scenarios and what kind of scenario would break the Company. It is -- for any financial institution, of course, you can design a scenario that results in the Company being insolvent to go to the extreme, if we had defaults on all of the bonds that we had wrapped, we would have a pretty serious problem. To come to this question, MBIA Corps. statutory capital after the split and pro forma for December 31, 2008, is about $4.3 billion, that's the statutory surplus plus contingency reserves. So if the question is what would it take to wipe that out, it's actually fairly simple. The after-tax losses would have to be $4.3 billion in order to make the Company technically insolvent. And find pre tax losses in the $6.6 billion range on top of those losses which have been recognized to date of roughly $3.8 billion.

There's no scenario that we have run that would require that we take that kind of a charge against reserves right now because obviously if we had we would have taken a reserve at this point. And of course, if catastrophic losses happen in the future, we'll have accumulating earnings so that the cushion actually grows over time.

The final point to make on this is that the questions is about, sort of a technical insolvency, what happens when you have reserves that are equal to the stat capital. I would note that even in that case we would anticipate that the Company would have substantial cash flow ability to pay all its obligations as they come due. Again, these are not demand liabilities but ones that would be paid out over time.

Another individual investor question, If the sub was put into rehabilitation by a regulator, how much debt would become immediately due and payable, and how will that impact the liquidity profile at the holding Company? Let's assume that the world continues to decline, home prices continue to trend down to zero, and unemployment soars to the mid-teens. A scenario that is likely to deplete capital at the structured finance sub. If that happens in 2010, for example, walk us through step by step what would happen.

If that should happen by 2010, we would be living in a very different world than the world that we are experiencing right now. So for a lot of things, you'd have to say all bets are off. However, there's a factual question embedded in this which is, what is the impact of a rehabilitation of debt at the holding company. There is about $1 billion of debt outstanding at the holding Company that is acceleratable or mandatorily accelerated in the event of a rehabilitation of the insurance company. There is, again, no scenario that we have run that suggests that that is a likely or reasonable prospect. Therefore this is a pretty deep, hypothetical question. But if there is debt at the holding Company, that would accelerate or be accelerated in the event of a rehabilitation.

Okay. And this will be our last question before we open up the phone line. It's also from an individual investor. How comfortable are you with the split between muni and structured finance? How much comfort did [Denato] have with the transaction?

We're comfortable with the split between the -- between National and MBIA Corp. We and the regulator have done a lot of work to satisfy ourselves that we are meeting all of our obligations to policyholders as well as meeting our fiduciary responsibilities to the owners of the Company. So we think that we struck the right balance there. Jay referred to it in his opening remarks. The superintendent has made some comments publicly about it. You can read his approval letter. Which is on our website as of this morning.

The one thing to keep in mind here. And again as I mentioned earlier -- everybody has a preference that they would like to be first in line and as hard as it is to believer most of our large counterparties would prefer that the Company go bankrupt because they perceive that they could accelerate relatively modest credit losses into massive mark to market recoveries. We don't believe that would actually happen, for example, in any form of rehabilitation based on a balance between policyholders. I think the most important thing here is we've spent a year looking at this. This is not something we did in the fourth quarter without spending the better part of the year reviewing it. We think it is the right balance between the different constituencies. And I think the important thing for all constituencies to remember is that we're going to operate in a dynamic manner going forward. We certainly expect to meet all of our obligations. The transaction is designed to enhance that possibility. And so we think the split makes sense. And we will -- we will be moving forward fairly aggressively with the next series of steps that we believe are necessary to ultimately get to a more stable, long-term platform for each of our three or four businesses.

Okay. We're all set for questions. Would you please introduce our first caller?

Your first question comes from Scott Frost with HSBC.

Hey. This is sort of a follow-on. You talked about the involvement of the regulator, and what it kind of sounds like is that this wasn't really a benign approval of the split, the regulator was fairly affirmative in his determination that your claims paying resources devoted to the legacy business were adequate. Is that correct? Am I saying that correctly?

I believe that's a proper characterization. I talked about this with the regulators when I first rejoined the Company a year ago. All of our dialog over the past year has been focused around composting this split. I would call it an extremely active involvement with the department including a small army, not a large army of people meeting with every aspects of our Company in terms of going through every part of the portfolio, not just the parts that get talked about every day, but each and every part of the portfolio in terms of understanding what could happen over the medium, near and longer term in terms of both expected and stress cases.

I want to work this into a discussion of the surplus notes. First of all, is the jump in claims paying ability on slide 16 due to the surplus note raised at MBIA Insurance Corp. and did you say that dividends are now subject to regulatory approval at legacy MBIA up to the holding company? Are those two -- is that right?

Let me take a look back to 16 quickly here. The jump in the course of the year in terms of overall surplus was a combination--.

Resources, right?

Resources, yes.. Surplus notes contributed to the increase in resources.

Okay.

The comment that Chuck made earlier about restrictions on dividend capacity applied to National, National has a -- right now until it gets redomesticated a negative earned surplus. So we have to ask for permission before we can make dividends there.

That's not the case with insurance, right?

The reality is -- we work with the regulators every month in terms of discussing our plans. We're not about to look at the technical reasons of when or when we can't pay a dividend because we just took an extraordinary dividend, the "Rules" are that we wouldn't take another dividend for 12 months from MBIA Corp.

Okay. Okay.

Okay. But the point here is -- is that we don't do any of these actions without talking about it with the department as we go along. It's not as if just because we have a right to do a dividend that we're going to take the maximum amount of dividend out of the Company, not in this particular situation. So it's a very careful dialogue. The -- in terms of the -- both the surplus notes and the preferred -- preferred debt that exists for MBIA Corp. we sent advance notice of paying those dividends and interest payments to the insurance department and get their approval before those payments are made. According to their schedules and surplus notes, it's every six months. On the preferred notes, it's quarterly.

Okay. And this is the last follow-up, then I'll get back in queue. But were -- in your discussions, were potential payment deferrals on surplus notes contemplated as part of the determination of reserve adequacy?

Now our plan is to pay off the surplus notes when they mature in four years.

Okay. Thank you.

Your next question comes from the line of [Brian Monteleone] with Barclays Capital.

Hey, Jay, you walked through slide 45, MBIA Corps. pro forma claims paying resources versus S&P stress test at the A rating. Can you talk about -- I didn't see Moody's stress test in here. Can you talk about the average of the Moody's stress test?

Sure, I can talk about it. Moody's has not shared with us their current quantitative view of our capitalization. The last analysis that we have that would be cogent at all would be from midyear last year, and Moody's has made some pretty significant changes to the way that they think about both expected and stressed losses on the RMBS related sectors since then. All we know is that they told us orally that the -- actually, I think it is in their release, that they believe that their total losses that they would calculate today would be roughly equal to claims paying resources.

And that's their base case?

Unfortunately, that's all that they have shared with us at this point. We're expecting that as time goes on we'll get more insight into the way that they're doing it, but that's it for the moment.

Okay. Quick question on your CMBS exposure. Can you tell us what your base case losses are, just on '06 and '07 CMBS collateral in general?

On collateral? Our losses on our deals are expected to be zero.

No, no, not -- so for a given CMBS deal, on average what would you assume losses to be? I think Moody's has updated their analysis, and I think on average, I think maybe it's between 4 and 6%. I've seen other people with 10 to 12%. Presumably when you guys are modeling through expected losses or -- to get to your conclusions there, you are making some assumptions for losses on the underlying deals. I was just wondering what those assumptions were?

I think when we're modeling the transactions, just in general terms, we obviously believe that you will have increasing delinquencies as you've seen in the last quarter, especially for the remainder of the year, certainly to get to the 2.5 to 3% range, but as far as from going from that point on, where we are today is that below investment grade tranches are certainly in the target zone for potential losses at this point, but based on loan level analysis versus just rating based default analysis we think there's certainly a long way to go before there's any kind of certainty that BBB minus or investment grade rated tranches would be impacted at this time, and that's our expectation.

Okay, so 2.5 to 3% by year-end '09, then no hard forecast beyond that?

And that's delinquencies, not losses.

We're currently at 1% a little bit over 1% through January on our portfolio in terms of delinquencies with no losses at this point.

Your next question comes from the line of (inaudible).

If you can clarify it one more time I still don't quite understand. For the surplus notes, let's say in a worst-case scenario that MBIA Corp, the insurance subsidiary, uses up all of its claims paying resources and it would not have -- including the surplus notes. Then what does that mean? Is there any obligation on the part of the holding Company to do anything? Does that mean then the surplus notes don't get redeemed, and they're wiped out? I'm not sure I fully understand.

In terms of looking at individual securities, whether it's the preferred notes, GICs or corporates, there's a plot of legal relationships that I think are too extensive between each of the notes on this call. I think what we have said is we're going to work with each individual security class holder to work through the best possible resolution if we get into any issues. We're also stand ready, as we did during the third and fourth quarter, a large number of different types of note holders have said they don't want to hang around and see how this is all going to work out, and have asked if we would rebuy those different notes. Obviously, in the last few days, or in the last two weeks, since we announced this transaction, a significant portion of different note holders have called up and said, hey, we're really not interested in staying around, let's talk about a resolution. Can you work out a restructuring of these securities? And so we're going to look at all of the different things. I can paint a scenario where any of our obligations don't get paid back. You know that. We're in an uncertain world, and what we're trying to do as an organization is balance all of those things and not give any one security preference over any other security. Beyond the legal relationships that exist today, and I think that is our overarching goal, and that's certainly what we've tried to do. When we designed this plan, we designed the plan in a way that we could meet the repayment of the notes when they click over to the higher interest rate on or before four years from now, which is five years from when they were originally issued.

So it boils down really to the legal intricacies as well as kind of regulatory intervention?

The regulator has to approve our payment each time period, but we're -- we did this in terms of the restructuring to maximize our ability to pay off all obligations, not to try and avoid any obligations whatsoever. I mean, I think you are much better off in terms of running an ongoing enterprise with healthy parts while you work through the issues associated with a subset of the book which for us is largely and predominantly related to two classes of the business, which is the second lien portfolio, which to a large extent is being remediated through litigation, and then the ABS CDO portfolio which we're remediating through negotiation, discussion and perhaps litigation in a few cases.

I don't mean to compare company experiences, but just kind of at a glance, looking at your CDO performance versus AMBACs, I suppose the one-liner, why your performance is better, is theirs have a substantially higher component of subprime collaterals, where as yours do not. Because if you look at their portfolio, a very large proportion has fallen into below investment grade. So is that -- I know, again, you probably didn't look at theirs, but that seems to be the case.

No two CDOs that I have ever looked at have identical performance or are constructed the same way. I think any comparisons of portfolios are very, very tough. We provide an extensive amount of detail on our own portfolio, in our 10-K and on our website to try and let outside investors form their own opinion. We have looked for other reasons at AMBACs portfolio but we don't spend a lot of time comparing their underwriting mistakes versus our own underwriting mistakes. Both of us made some mistakes in taking on exposures at a particular bad time in the cycle, and I think both companies are trying to work their way through it. But fewer of these, more of these, I can create a model that says one portfolio is better than another, but I don't think it's very meaningful at this point.

Thank you.

Your next question comes from the line of Mac Johnson with National Australia Bank.

Good morning, Chuck. Can you tell us a bit about your soft capital facility? $450 million. What's the current maturity, meaning by that are you still getting 100% credit for it?

Yes, Mac, hi. The facility has got about six years left to go, and as you know, once you get into kind of that five-year time zone is when you start receiving less capital credit for the facility.

Right.

So we were sort of anticipating that to be of declining value at any rate. But at this point, it is a facility that references losses in the municipal bond book, but the counter party with the bank group is MBIA Corp., which has no municipal bond exposure at this point. So one of the things that we want to talk with the bank group about is, in effect, having that facility travel to national, so that it backs up the national portfolio.

Understood. Thank you.

Sure.

Your next question comes from the line of Eleanor Chan with Aurelius Capital.

My question relates to the secured inter Company loan from MBIA Corp. to the ALM business. What is it secured by? You mentioned that it was secured a static pool of collateral. Just curious what kind of securities form this collateral pool and what is the market value of this collateral?

Sure. It is a diversified pool of assets from the ALM portfolio, so it does include corporates, asset backs and other asset classes. The book value of the collateral pool at this point is well in excess of the amount advanced. The market value is a little bit short. It's about 10% short of the amount advanced. So there is, if you will, an unrealized loss on those assets.

Okay. And the asset swap repo that has been moved to national, am I correct that if ultimately there is -- there are losses at the ALM business that MBIA Corp. is still on the hook for those losses?

MBIA Corp. is the insurer of the liabilities issued by the ALM book, so yes.

All right. And why did you not pursue a SAC structure like AMBAC did? You could have capitalized your subsidiary and have it write new business and have it be a subsidiary of MBIA insurance Corp. instead of moving it as a subsidiary of MBIA, Inc.?

I'm not going to comment why another company has chosen a different approach.

What would be the disadvantage of pursuing that approach?

I'm not going to comment. It isn't an approach that we chose.

Okay. And given that MBIA Corp. CDS is now trading at 70 points upfront, how can you say that this entity is still solvent?

How can I say that?

Yes.

The market of where our CDS spreads is nothing we control or spend much time looking at. The only time we spend a lot of time -- excuse me, ma'am. The only time we spend a lot of time looking at is it when we're negotiating with a counterparty in terms of their own view of our credit worthiness, and that goes into what their carrying values are on any kind of credits for us.

But certainly that plays into the amount of mark to market that you take every quarter on your CDO book. I mean, you book a gain every quarter. So certainly it factors into something?

I think we have booked a loss last quarter if I read Chuck's numbers right of 1.7 on marked to market so I think your statement is inaccurate.

What about this quarter?

Quarter is not over. Let's wait to see where we are at the end of the quarter.

Okay. And on the commercial real-estate exposure, can you explain, it looks like that exposure increased by about 2.2 billion this quarter. What accounted for the increase, and how much reserves, if any, have you taken on this portfolio?

The increase was due to the fact that we have started the process of eliminating all of our reinsurance. The process of eliminating that reinsurance is an increase in our outstanding net par. It doesn't change our gross par. The amount that was added in the commercial portfolio reflects that increase from the four different reinsurance commutations that we did during the course of the quarter. We are not carrying any case reserves for any commercial real estate transaction at this time.

Could you please move to the next caller.

Your final question is a follow-up question from the line of Scott Frost with HSBC.

Yes, just making sure I've got the mechanics right on some of the matchbook stuff. It looks like the ALM shortfall of $600 million and the $600 million repo agreement between holdco and MBIA insurance that footing is not coincidental, is that right?

It actually is coincidental.

Okay. And the way I understand the mechanics, and again, correct me if I'm wrong here, is insurance repoing $600 million of securities to holdco, getting $600 million in cash, then ALM repos $2 billion in market value of securities to insurance and gets $2.7 billion of cash. Is that the way this is working? And I have another follow-up.

I'll just take you through the steps. First of all, if you refer to slide 21, I think is where we show the balance sheet, the first item that you will see that is sort of in-house, if you will, the intersegment loans, so that the $600 million loan that is really -- it's between the corporate segment of MBIA, Inc., and the ALM segment of MBIA, Inc. It's straight up unsecured loan between the two segments.

Okay.

And the next item is the secured loan to ALM. Now that is an agreement between MBIA Corp., the regulated insurance company, and MBIA, Inc., the holding company, specifically the ALM segment within MBIA, Inc. The ALM segment has pledged $2.7 billion book value of invested assets to MBIA Corp. in return for $2 billion of cash.

Okay. And could you go over how you come up with the determination of the number of years of expense and debt services holdco versus cash you hold? Could you specifically break down interest and holdco expense As you see them?

Sure. And there is a slide on this as well.

Did I miss that? If you can just tell me what the slide is, I'll go there.

$100 million in annual interest and expenses at the holding company.

Okay.

So the holding $460 million, if you will, covers 4.6 times that run rate expense. Just to be completely fair, we do have two debt maturities coming up, one in June of '10, and I think March or April of '11. Both of them are roughly $100 million.

All right, thank you.

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

Thank you very much. And thanks to all of you that joined us for today's call. I encourage those of you with additional questions to contact me directly at 914-765-3190. We also recommend that you visit our website at www.MBIA.com for additional information. Thank you for your interest in MBIA. Good day and good-bye.

That concludes today's MBIA fourth quarter 2008 financial results conference call. You may now disconnect.