MBIA Inc (MBI) 2011 Q1 法說會逐字稿

Good morning and welcome to the MBIA Inc. first-quarter 2011 financial results conference call. At this time all lines are in a listen-only mode to prevent any background noise. After the prepared remarks 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, Managing Director of Investor Relations at MBIA. Please go ahead.

Thank you, Jackie. Welcome to MBIA's conference call for our first-quarter 2011 financial results. We are going to follow the same format as last quarter's call. Jay Brown and Chuck Chaplin will provide some brief comments and then we will open the call for a question-and-answer session.

Yesterday afternoon we posted several items on our website, including our 10-Q and quarterly operating supplement for the first quarter. The information for accessing the recorded replay of today's call is included in the financial results press release that we issued yesterday and it's also available on our website.

Our company's definitive disclosures are incorporated in our SEC filings. The purpose of today's call is to discuss some of these disclosures in our most recent 10-Q to facilitate a greater understanding for investors. The 10-Q also contains information that will not be addressed on today's call.

Please note that anything said on today's call is qualified by the information provided in the Company's 10-Q and other SEC filings. Please read our Form 10-Q as it contains our most current and comprehensive disclosures about the Company and its financial and operating results.

Today's Q&A session will be handled by Jay Brown, CEO, and Chuck Chaplin, Co-President, CFO, and Chief Administrative Officer.

Now for our Safe Harbor disclosure statement. Our remarks on this conference call 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 our forward-looking statements. Risks factors are detailed in our 10-K, which is available on our website at www.MBIA.com.

The Company cautions not to place undue reliance on any such forward-looking statements. The Company also undertakes no obligation to publicly correct or update any forward-looking statement if it later becomes aware that such statement is not likely to be achieved. The definitions of the non-GAAP terms that are included in our remarks today may also be found on our website.

With that Jay will begin. Jay?

Thanks, Greg, and good morning, everyone. It has only been a little bit more than two months since our last call. And while we have been quite busy managing our insured portfolios and ongoing litigation matters, we didn't have any big announcements in our press release yesterday so I will keep my comments equally brief.

One of the bigger events of the last few weeks actually didn't involve us at all, but we have been getting a number of questions from investors and the media about what the settlement between Assured Guaranty and Bank of America might mean for us. The short answer is that it has no direct bearing on our case against Bank of America as every case is decided on its own merits.

The more nuanced answer is that, as a practical matter, we think the settlement both confirms again the validity of the claims we have made and the recoveries we have booked in connections with these kinds of exposures.

We have come a long way from the fall of 2008 when we were among the first to pursue mortgage putback litigation. At that time there was a fair amount of market skepticism surrounding our allegations, but since then more and more information has come to light concerning the improper practices and fraudulent conduct of some of the sponsors of these securitizations.

Our filing last week in connection with our suit against Credit Suisse is just the latest example of this behavior. As the volume of settlements continues to pick up, most recently noted with Fannie, Freddie, and now Assured, the market has clearly begun to recognize that it's only a question of when and how much we ultimately recover.

On the CDS front, as we previously reported, we reached a negotiated settlement of $3.3 billion in exposure during the quarter, primarily comprising structured CMBS pools. On average the settlements we reached have again been at levels consistent with our statutory loss reserves. We continue to remain open to settlements of our remaining exposures and discussions with a majority of our various counterparties continue, but we have nothing concrete to report at this time.

The litigation challenging our transformation has also been moving forward, although at a very frustrating pace. More than 18 months after initiating the Article 78 preceding the banks recently made a massive filing that required the New York State Insurance Department to ask for more time to respond and so the process has slowed down yet again. Ironically, after conducting broad discovery and filing thousands of pages as part of their reply in the Article 78 litigation the banks are now arguing in their appeal this month to the state's highest court that they have been denied their right to be heard.

We remain as confident as ever of the ultimate outcome here on all fronts, but it now appears that the process is likely to stretch into early next year. If nothing else, the delays continue to underscore the baselessness of the bank's claims.

We are now more than two years passed the effective date of our transformation. The transaction that the banks claim made MBIA Insurance Corp. insolvent, yet in all that time no holder of an MBIA or National policy has ever failed to receive their claim payment on time and in full. And we have no expectation that this will change. To the contrary, we remain confident that we have sufficient resources to meet all of our expected obligations going forward.

Now I will turn it over to Chuck for a review of our financial highlights.

Thank you, Jay. As was said, this was a very short quarter, if you will. We published our full-year 2010 earnings on March 1 and then the first quarter closed 30 days later. Not a lot has changed from the trends we discussed at that time.

We seen declining loss payments and declining volatility in our RMBS-related exposures and there is an ever-increasing recognition of the liability of sponsors who placed ineligible mortgages and securitizations that we wrapped. We also saw significant commutation activity in the quarter. On the other hand, we observed some decline in the performance of some of our commercial mortgage-backed securities deals.

On the whole the first quarter was relatively quiet. In terms of GAAP financial statement performance, we had a net loss of $1.1 billion this quarter, reflecting $1.3 billion pretax mark-to-market on insured credit derivatives. The driver is that the markets moved closer to our own assessment of the fundamental credit strength of MBIA Insurance Corp. and that improved perception paradoxically triggered the large unrealized loss.

The [off-balance] sheet market is highly volatile with gains and losses of over $1 billion in each of the past five quarters. The derivative liability on our balance sheet at March 31, 2011, at nearly $6 billion is actually not very different than it was at December 31, 2008, but the quarterly swings have been very significant.

The five-year upfront swap costs on MBIA Insurance Corp. was 56 points at year-end 2010 and had declined to 40 by March 31, 2011. As of a day or so ago, the quoted upfront cost was about 33 points which, all other things being equal, would create a paper loss of about $400 million in the second quarter so far.

The unrealized loss on insured credit derivatives is expected to reverse over time except for credit impairments. We estimate credit impairments through our loss reserve process and they are recorded as loss reserves in our statutory financial books.

To help investors better understand our financial results, we also published two non-GAAP measures -- adjusted book value and adjusted pretax income. They both treat all of our insurance policies on the same basis, as insurance policies that are subject to loss reserve accounting.

Adjusted pretax income was $25 million in the first quarter compared to a loss of $90 million in the first quarter of last year. Adjusted pretax still reflects continued incurred insurance losses resulting from the impact of ineligible loans and RMBS deals and the financial crisis and recession.

Our adjusted book value declined in the quarter by $1.24 per share from $36.81 to $35.57 per share. ABV is a more comprehensive measure than adjusted pretax income and includes the impact of changes in our expected future premiums and, of course, it's after tax.

In the quarter the value of future premium earnings declined by $173 million, roughly the amount of premium that was earned this quarter. Since we also apply our estimate of full-year taxes to the first quarter's pretax income, this also results in a reduction of ABV in this quarter. As we approach year-end 2011, of course, estimated and actual taxes will converge.

At the segment level I will make some comments about adjusted pretax income and the capitalization and liquidity of the major businesses and legal entities.

National Public Finance performed in line with our expectations in the quarter contributing $111 million of pretax income compared to $132 million in last year's first quarter. Refunding activity drove a $25 million reduction in premiums earned. Heavy refundings over the course of 2010 reduced the us scheduled earned premium in the first quarter and then a drop in refunding activity in the first quarter further reduced our premium revenue relative to last year.

In addition, fees were $13 million lower than last year's first quarter as last year we had entered into a reinsurance commutation that had a significant premium which ran through that line, fees and reimbursement. Loss and LAE expenses were $23 million lower than last year providing a partial offset to these lower revenues.

National's capital and liquidity remained strong at March 31. We responded in the quarter to the request for comment from Standard & Poor's on proposed new rating criteria; however, the ultimate impact of S&P's work is uncertain at this point.

Our Structured Finance and International segment had an adjusted pretax loss of $20 million, a major improvement from first quarter of last year when it lost $113 million. The driver of this performance improvement is lower in current loss. Insurance losses in the quarter were $147 million, the lowest since second quarter of 2009.

There was a net reserve reduction on our RMBS as an increase in putbacks outpaced a change in net payment expectations. The putback increase of nearly $153 million was primarily due to a small increase in the observed breach rate in the securitizations based on file reviews, recording recovery on one additional transaction, and higher expected future payments.

Although the additions to the delinquency pipeline this quarter were basically in line with our projections, voluntary prepayments of mortgages in the securitizations were above expectations. This reduces our expected future excess spread recoveries driving an increase in expected net payments of $80 million. So the net of the putback increase and the further increase in expected future payments results in a net reduction in reserves for RMBS of $73 million.

The total balance of putbacks recorded to the balance sheet is $2.7 billion at this point, relating to total incurred losses of $4.6 billion. The difference reflects discounts for time value, litigation risk and expense, and the credit risk associated with the originators. Over time, our assessments for these factors can change which could result in our putback estimate changing significantly.

We also increased the expected loss associated with our ABS CDOs by about $69 million in the quarter. About $52 million of the increase is associated with deterioration, primarily in subprime mortgage collateral, and the balance is due to interest accretion.

Finally, we increased loss expectations on CMBS by $135 million. The loss is concentrated in a small handful of deals where we observed increases in late-stage delinquency, a key driver in our loss estimation model. The growth in total delinquency continued to slow in the quarter and the pace of loan modifications continued at well over $1 billion per month.

In addition, the commercial mortgage financing market is more liquid and debt service coverage ratios on our portfolio are improving. Having said that this is still an area of great uncertainty.

All other transactions in the Structured Finance and International segment generated about $16 million of economic loss and that is concentrated among primarily older manufactured housing deals.

MBIA Corp. had statutory capital of $2.7 billion at March 31, 2011, and its liquidity position was strong with $926 million of highly-liquid assets on hand. In the quarter we made payments on RMBS of $243 million, a level that continues to decline each quarter, and we entered into a commutation of $3.3 billion of primarily CMBS-related policies. The costs of the early settlements were consistent with our previously established statutory loss reserves.

To maintain our liquidity position MBIA Corp. sold some assets and also received $175 million in prepayments from the ALM segment of the intercompany secured loan. We believe the balance sheet continues to be adequate to fund expected losses.

Moving on to Cutwater Asset Management, it had a good quarter from a customer standpoint with outstanding investment performance and over $600 million of assets gathered from new customers. However, its earnings continue to reflect the investments in infrastructure we are making to build toward a more profitable future and Cutwater had a pretax loss in the quarter of $1 million.

The Corporate segment had $5 million of pretax income, which is greater than expected due to the markdown of warrants issued as part of our 2008 capital raise. The run rate in the Corporate segment is about a $15 million to $20 million quarterly loss driven by interest and operating expenses.

We believe liquidity at the holding company continues to be adequate with $300 million of cash and highly liquid assets. It also holds approximately $114 million of payments of estimated tax liabilities from National under our tax sharing agreement.

The funds are to be escrowed and, if National were to have operating losses that generated tax benefits in its stand-alone tax position in the next two years, those benefits would be paid first from this escrow account. Beyond that the funds can be used for general corporate purposes, including making any other payments under the tax sharing agreement. We do not include these funds in any measure of current liquidity.

The Wind-down Operations segment had a $73 million loss in the quarter. This is driven by $83 million of mark-to-market losses of which $50 million, the largest single impact, was due to the weakening US dollar -- the impact of the weakening US dollar on our euro-denominated liabilities. This was partially offset by $23 million of gains on debt buybacks.

Wind-downs also has a natural negative run rate of earnings since it has a deficit of interest-earning assets to liability and operating expenses. The accumulated book value deficit is $387 million at this time. The book value deficit is backed up by all of the assets of MBIA Inc. and, ultimately, by the financial guarantee policy of MBIA Corp.

We believe the business has adequate liquidity for the next few years and adequate liquidity to repay the secured loan from MBIA Corp. by November 2011, its scheduled maturity.

Jay and I would be happy to respond to any questions that you may have at this time.

(Operator Instructions) At this time we have no questions. I would like to turn the floor back over to Mr. Greg Diamond for any additional or closing remarks.

Thank you, Jackie. Thanks to all of you who have joined us for today's call. Please contact me directly if you have questions. I can be reached at 914-765-3190.

Sorry, we have a couple of calls that entered the queue. Go ahead, Jackie, take the first caller please.

Arun Kumar, JPMorgan.

Good morning. Good morning, Chuck. A question for you more from a broader perspective. Yesterday we had AGO's call where they talked about the recoveries they made from BofA/Countrywide and also potential recoveries from other financial institutions and went on to name four of them.

Given the progress that they had made in getting funds from the financial institutions, when can we see tangible progress from MBIA in terms of recovery of actual funds from the organizations?

Arun, obviously it's very difficult to talk about future transactions and when they might occur. As we have said on earlier conference calls, we do have a dialogue with many of our counterparts and we do expect that we will engage in early settlements of CDS exposures over time. And we also expect that we will settle putback liabilities that the seller/servicers have over time.

It's sort of impossible to predict when exactly that might occur, but I will point out that, with respect to our largest single counterpart on the putback side, there is a court process that is quite advanced where we expect, as the judge has required, that the full discovery process be completed in 2011 with an expectation that a trial date would be set for sometime in 2012. And, frankly, the attorneys will tell us or you that these type cases typically do not go all the way through trial.

So we can talk about timing sort of broad generalities. You know that in our financial statements we have to make estimates around timing and on average the financials assume that we settle putback liabilities in late 2012, but that is the best information that I can give.

Okay. I just had a follow-up on the statutory capital provision as it relates to the insurance company. A big chunk of that is your surplus notes that you issued, I think in 2008. Maybe a year or so ago you had mentioned you had -- there was a likelihood that you could take those notes out at some point. Clearly time has transpired between those comments and now and things have changed a bit. What is your position regarding the surplus notes which are a fairly healthy surplus drain in terms of interest payments?

Yes, the surplus notes are callable at par on January 15, 2013, and it is still our plan to retire them at that point.

Okay. Fair enough, thank you.

[Philip G. O'Donnell], Deutsche Bank.

Thanks for taking the question. This is [Sean] on with [Phil]. Just wanted to follow up on the CMBS commutation you guys did last quarter.

When you look at the CMBS BBB and below in your 10-Q it looks like it went down to $15.3 billion from $17.6 billion. Just wanted to confirm when we look at the amount that you probably paid or the gross payments on those commutations it looks like it's around $350 million. So should we infer that you settled those for around $0.10 to $0.15 on the dollar?

Two points. One is obviously we have not disclosed the dollar amount that was paid, although there is information about payments in our disclosures. The total commutation that we engaged in was about -- the par amount is about $3.3 billion.

Yes.

And it consists of primarily CMBS exposure, but there are other exposures as well, corporate type exposures.

But when we look at the breakdown, what you guys provide in your Q that has the ratings threshold that origination, it looks like the bulk of that $3.3 billion would be in the BBB and below bucket. Is that correct?

That is correct.

Yes.

Okay. Should we read into that at all as far as your conversations, what you guys mentioned with other counterparties that are ongoing at this point?

No.

Okay, thank you.

(Operator Instructions) We have no further questions at this time.

Thanks again, Jackie. Thanks to all of you who have joined us for today's call. We recommend that you visit our website at www.MBIA.com for additional information.

Thank you for your interest in MBIA. Good day and goodbye.

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