MBIA Inc (MBI) 2012 Q2 法說會逐字稿

Good morning and welcome to the MBIA Inc.'s second-quarter 2012 financial results conference call. At this time all lines 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 the release of our second-quarter financial results. We are going to follow a similar format as last quarter's call, where Jay Brown and Chuck Chaplin will provide some brief comments and then we will have a question-and-answer session.

After the stock market closed yesterday, we posted several items on our website, including our 10-Q and our operating supplement for the second quarter of 2012. In addition, the information to access the recorded replay of today's call is available on the website via the financial press release we issued yesterday.

The purpose of our call today is to discuss our most recent 10-Q, to facilitate a greater understanding for our investors. Our Company's definitive disclosures are incorporated in our SEC filings. The 10-Q also contains information that may 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, 10-K, and other SEC filings. Please read our latest 10-Q as it contains our most current and most comprehensive disclosures about the Company and our latest financial and operating results.

Also, please refer to our financial results press release that is available on our website for the definitions and reconciliations of the non-GAAP terms that are included in our remarks today.

Before I turn the call over to Jay, I will read our Safe Harbor disclosure statement. Our remarks on today's 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. Risk factors are detailed in our 10-K, which is available on our website at 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 our update any forward-looking statement if it later becomes aware that such statement is no longer accurate.

And now Jay will make some introductory comments. Jay.

Thanks, Greg, and good morning, everyone. Chuck will provide a detailed review of our second-quarter results in a few moments. But, in brief, our adjusted pretax loss for the quarter was driven by additional losses on insured exposures from the usual suspects. We saw deterioration in a handful of volatile 2007 BBB CMBS transactions where the counterparty is a Bank of America subsidiary while the recovery of servicer advances on first lien exposures and continued slower than expected decline in delinquencies on second lien exposures led to incremental losses in the RMBS book of business.

Although we have not entered into any new commutation agreements since our last call, we have made great progress on this front since 2008. And you can be sure that mitigating the remaining future loss volatility in MBIA Insurance Corp.'s insured portfolio remains among our highest priorities.

So, too, is litigating with certain securitization sponsors to force them to honor their contractual obligations to repurchase ineligible loans from transactions we insured, or to pay us full recessionary damages. Our putback litigation against Bank of America and Countrywide has now entered the expert discovery phase, leading up to a filing of summary judgment briefs in September. Absent a settlement, we would expect a trial in 2013.

Despite Bank of America's obvious delaying tactics, which have lengthened the legal process beyond any reasonable expectation, and have even drawn the judge's ire of late, we have rightfully won every meaningful decision along the way and we remain confident of the ultimate outcome. Our direct economic damages from the unpaid Bank of America putbacks are now approaching $5 billion, reflecting both incurred losses and accrued statutory interest. These damages do not reflect the additional damage done to our enterprise through their conscious decision to employ aggressive delay tactics in the litigation and withhold the billions of dollars they owe us in a way to pressure us to accept a heavily-discounted and non-economic settlement. We are prepared to fight this all the way if we cannot reach a reasonable and economic settlement consistent with what we have achieved with all other counter parties.

Shortly after our last call, ResCap and in its RFC and GMAC mortgage subsidiaries filed for bankruptcy. As I noted during that call, their financial condition wasn't news to us and, in fact, was already reflected in the credit valuation of the putback recoverables on our balance sheet. Following the actual bankruptcy filing, we carefully reassessed our expected recoveries from the RFC and GMAC and have adjusted them downward, taking into account the already significantly discounted level and the strength of the claims, even within the context of a bankruptcy proceeding, while also assessing the other potential claims against the estate and the amounts that may be available for distribution to creditors. The hearing in the Article 78 proceeding challenging our transformation concluded in June after almost four weeks.

As we had anticipated, the two remaining bank plaintiffs were unable, in our view, to meet their burden of demonstrating that the approval by the New York State Department of Insurance was arbitrary and capricious or violated the law. To the contrary, we believe the evidence presented at the hearing demonstrated that the Department's actions reflected a lawful, thorough, and thoughtful process undertaken in an effort to achieve important public policy goals, which were similar to actions taken by the bank's own regulators at the time, while protecting policyholders' interests.

With the hearing behind us we now await Justice Kapnick's decision. And before anyone asks, we have no idea when that decision might be coming. All we know is that with each passing day we are one day closer to pushing this issue behind us.

A string of municipal bankruptcies in California has raised concerns among investors regarding the ability and willingness of the issuers to meet their obligations. While there are problems to be sure, especially as municipalities try to balance their promises to both bondholders and retired employees, the muni market has continued to function reasonably well, even in the face of these challenges. That said, we are watching each and every case to determine if there is a fundamental shift in either behavior or the interpretation of contracts by the bankruptcy courts.

The defaults that have occurred and the actions we have taken reinforce and serve to underscore the value proposition of bond insurance. As investors benefit not only from an unconditional guarantee of principal and interest payments. But also from our extensive remediation skills and the ability to take aggressive action in support of bondholder rights. So we continue to believe that there will be a solid demand for our product and that National's future remains bright.

Now I'll hand it over to Chuck for a review of our financial results.

Thanks, Jay. And good morning, all. I'll provide a summary of our financial results and our balance sheet positions, and then we'll throw the call open for your questions.

First, our GAAP net income for the quarter was $581 million compared to $137 million in the second quarter of 2011. As has been the case for many quarters, the change in value of insured credit derivatives tells much of the GAAP story. Last year the impacts of the mark-to-market change and commutations reduced income by $75 million. In this year's second quarter they increased income by $775 million. The $775 million includes the impact of MBIA's non-performance risk, where higher cost of protection on the insurance company leads to income gains for us. The $775 million also includes gains on commutations in the quarter, as the cost to commute exposures were less than the marks-to-market that we reversed.

We also report on certain non-GAAP measures of performance, adjusted pretax income, and adjusted book value. These are measures used by management in making tactical and strategic decisions about the Company. In the second quarter, we had an adjusted pretax loss of $152 million versus income of $161 million in last year's second quarter. The most important drivers of the difference were loss and loss adjustment expense, and impairments on insured credit derivatives.

Last year we had a net reduction in total incurred loss, a result of commuting policies at prices below the reserve levels. This year we saw a total of $306 million in incurred loss, driven by additions to CMBS reserves and increased incurred losses on first and second lien mortgage securitizations. Adjusted book value was also lower in the second quarter, falling to $31.23 per share, compared to $32 per share at March 31, 2012. The driver here is the same. Incurred losses reduced ABV by about $1 per share.

I'll go through our business segments now and discuss their results in terms of adjusted pretax income. And make some comments about their capital and liquidity positions where relevant. The public finance segment's pretax income was $147 million in the quarter versus $144 million in last year's second quarter. This was above our expectations. The driver was refunding activity, which accelerated $73 million of premium income into the second quarter. It affected 1,600 policies with $13 billion of par.

National's loss reserve position was essentially unchanged in the quarter. We continue to monitor stress in a handful of credits, and particularly California municipalities, to which Jay alluded. We anticipate that state and municipal credits will continue to experience heightened stress over the next couple of years.

National's statutory capital grew to $3 billion in the quarter. And it's claims-paying resources stood at $5.7 billion. In the second quarter the secured loan to MBIA Corp was increased by approximately $500 million to $1.6 billion as a result of draws that we disclosed in our first-quarter reporting and interest accumulation. However, the asset swap between National and MBIA Inc. was reduced by $379 million to $620 million. So National's liquidity position was only modestly affected by inter-Company lending activity in the quarter. When MBIA Insurance Corp receives payment of the putback recoverables, those payments are required to be paid over to National to the extent of outstandings under the secured loan.

The structured finance and international segment suggested pretax loss was $301 million, compared to income of $188 million in the second quarter of 2011. Total premium fees and investment income were $138 million in the quarter, down from $145 million in last year's second quarter. Operating expenses, interest, and DAC amortization were $116 million compared to $105 million last year. Also, in 2012 second quarter operations were also affected by losses due to foreign exchange rate changes on non-US premiums receivable and a small invested asset impairment.

The real story on MBIA Insurance Corp is in incurred losses. Incurred losses were $306 million in the quarter. CMBS reserves increased as we saw additional stress on the pools that we insure. Our deductibles have been materially eroded in most of the 2006 and 2007 deals that have BBB collateral. This continues to be the most potentially volatile part of our portfolio. But as of this time no material claims have been paid.

We also continue to see some increases in incurred loss in our first and second lien RMBS portfolios. The second lien incurred loss reflects modest underlying deterioration in a handful of securitizations. As well as a write-down of our recoverable against subsidiaries of ResCap, which filed for bankruptcy protection during the quarter. Those recoverables are the second largest putback on our balance sheet after that associated with Bank of America.

Our valuation of the recoverable from the ResCap entities has reflected a risk of bankruptcy from the beginning. But we reduced our expected recovery from ResCap in the first and second quarters in light of its deteriorating financial condition. Overall, the putback recoverable of approximately $3.2 billion on our balance sheet grew by $16 million in the quarter, as the decrease in the value of ResCap putback was more than offset by increases in the putback assets associated with other counterparties.

On the first lien side, we increased loss expectations across about a dozen credits for a total of $57 million. These are almost all Alt-A transactions. For comparison, our domestic Alt-A portfolio is about $2.5 billion in par outstanding at June 30. While our second lien portfolio, about which much has been said, was $7.3 billion in par. The incurred loss on Alt-A is reflected in the other column in the economic loss table in our press release.

As Jay mentioned, our goal continues to be to commute most of our insured CDS and related exposures. There were commutations in the second quarter of $8.5 billion of insured exposure. So the potential future volatility of the insured portfolio continued to decrease. All of these commutations had been disclosed in prior quarters. The statutory capital and claims-paying resources positions of MBIA Corp stood at $1.7 billion and $5.2 billion, respectively, as of June 30.

The balance sheet contained $1.3 billion of cash and invested assets, of which approximately $534 million was immediately available to meet liquidity demands. If claims on the Bank of America-originated CMBS exposure become substantial, then we may not have sufficient liquid resources to pay those claims in the absence of a global settlement with Bank of America or the collection of a substantial amount of our putback recoverables.

The trend in payments on second-lien RMBS has resumed its decline, with $139 million paid in the second quarter versus $213 million in the year-ago quarter and $169 million in the first quarter of 2012. Finally, MBIA's secured loan from National had a $1.6 billion balance as of June 30.

Moving on to the corporate segment, it earned $28 million pretax in the second quarter, compared to a loss of $2 million in last year's second quarter. The positive result this year is due to a $35 million administrative fee paid by the wind-down operations. Wind-down had a pretax loss of $81 million in the quarter. That loss is essentially attributable to $59 million of realized losses, primarily on the sale of assets to the corporate segment, and the $35 million fee paid to the corporate segment. The realized losses that I mentioned are eliminated in consolidation because the consolidated firm has not sold those assets.

From January until now, we have sold $1.2 billion of assets of the wind-down operations, including a bit over $800 million sold to the market and nearly $400 million sold to affiliates. This enabled the reduction in the asset swap with National of $715 million, the repayment of the inter-Company secured loan from MBIA Corp, which had $300 million outstanding at the beginning of the year and a sharp reduction in the holding company's liquidity risk from rising spreads.

On the other hand, the book value deficit that we measure in the ALM business inside of wind-down grew by $210 million. Both the wind-down operations and the corporate segments' operations are largely conducted in our holding company MBIA Inc. That legal entity had $336 million of cash and highly liquid assets as of June 30, not counting the approximately $314 million in its tax escrow account. In our release you'll see that we cite $290 million of liquidity in the corporate segment and $46 million of liquidity in the wind-down operations, that's your total $336 million.

Overall, the second quarter was a disappointing one from an adjusted pretax income and ABV perspective. But it brings us a quarter closer to stability of operations in MBIA Corp and in the consolidated firm.

Now we'll throw the line open for your questions.

(Operator Instructions)

Arun Kumar with JPMorgan.

Good morning, Chuck. A couple of questions for you. One is related to your CMBS reserves that you've built up over the past couple of years in terms of loss reserves. When do you expect to start making payments on those? Is there any time line?

Thank you, Arun. It's very difficult to forecast the performance of the underlying mortgages that lie behind the CMBS that are referenced in the pools that we have wrapped because the special servicers are making individual decisions about each mortgage each month. We have a forecast. We have an expectation about what the incurred loss is on those transactions. But timing is extremely difficult to estimate.

Sure. In terms of the recoveries, you made a couple of comments related to the write-offs related to ResCap and being offset by recoveries being booked on other counterparties. Could you walk us through the line item that actually went through that recovery balance on your balance sheet? The gross balance obviously didn't change much. But there must have been a bunch of fairly material amounts that went through it. Have you publicly disclosed it anywhere or do you plan to?

We haven't provided any disclosure that breaks that number down. But we have said it's in our 10-Q, that you have both a reduction in the value of the recoverable from the ResCap entities. But there's also accretion, as well as an increase in recoverable associated with increase in incurred loss. So if you just go through the -- there is some detailed disclosure in the 10-Q about how exactly we developed the number but we have not provided a quantitative breakdown.

Okay. Just to follow-up on the claims payment on CMBS. You stated that it's somewhat difficult. But do you know when the earliest time line could be, the first material payment? Is it a couple of years out? Or do you think three to five years out? Or could it be within a year?

It really is impossible to say because of the fact that it's dependent upon decisions that we haven't figured out any actuarial way to forecast.

Okay. Turning to the ALM business, if you look at the table that you have in your supplement, the asset/liability mismatches, I think about $800 million at this point. Given that a lot of the cash is tied up in terms of collateral being posted for the GICs and the investment agreements, the MTNs could be somewhat exposed. So in terms of meeting those maturities down the road, do you think you'll have to go back to National to get an inter-Company loan? And if that's the case, what do you think would be the regulator's willingness to allow for an increase from National, given that the loan has already gone up a fair amount in this quarter, as well?

Yes, our expectation, Arun, continues to be that the deficit in the ALM portfolio is made up over time by the resources of the Holding Company. Those resources include, obviously, the cash that's sitting on its balance sheet today, its investment income, as well as the cash flows that it will receive over time from its operating subsidiaries.

The way I would encourage you to think about that, that deficit, it's like it's additional Holding Company debt obligations that's got to be met by all the HoldCo's resources.

Right. And I think earlier, Chuck, I think it was a couple quarters ago, you mentioned the thought process around getting dividends from National and up to now you haven't taken any from there. Has there been any change in terms of regulatory restrictions on that? I know you have agreed not to take dividends. But in terms of has there been any change on that? Clearly National's capital position is arguably substantially stronger than MBIA Insurance.

There has been no change in our agreement with the regulator not to declare dividends out of National until after, I think, it's July 2013. So there's been no change.

Okay, great. Thank you. I'll just turn it over to the others.

Geoffrey Dunn with Dowling & Partners.

A couple questions. First, Chuck, could you elaborate on what drove the first lien reserve additions this quarter for those dozen Alt-A deals?

Sure. Actually, Anthony McKiernan, the Head of our Insured Portfolio Management Group is here and could probably provide a more detailed answer than I could.

Sure. Good morning. The increase to the first lien portfolio, Alt-A portfolio, was there was a handful of transactions that we saw, was that loss severities on the underlying collateral increased materially because of servicer advances that were made during the very long foreclosure processes. So what you wind up happening was the servicers are making these advances. The ultimate properties are being sold. And those servicers are able to get those advances back first before the loan is repaid.

So we wound up seeing loss severities increase materially on a handful of deals. And so we had to make an adjustment to our current experience and make a forward-looking view on those deals, as well.

Okay. A lot of these foreclosure processors are obviously extended. Has this prompted any review of your severity expectations for the other first lien exposures?

We continually review every quarter the severity assumptions for the portfolio. What we're seeing is certain servicers more than others have had longer time lines and more advancing that's occurred. So we've made those adjustments accordingly.

Okay. And then on the CMBS side, there is about $18.2 billion remaining of CRE and CMBS exposure. Could you quantify which portion of that is related to BofA? Or is the top 10 BIG list a good proxy?

We did talk about this in the 10-Q. About $6 billion of our exposure is in the 2006 and '07 original BBB collateral transactions. And the large majority of that is BofA related.

Jeff, to be clear, virtually all of it is BofA.

Okay. And then I think you made a point in the front page of your press release talking about the real remaining loss uncertainty on the CMBS side is in these BofA deals, at the same time you are in litigation with Countrywide. You have booked the rep and warranty side on the RMBS. When you talk about the potential loss development on CMBS, how confident are you that the current $1 billion impairment on all your CDOs covers that? Versus adjustments as you move forward in any kind of settlement?

It seems like you have combined two questions, Geoff. We try and look at the numbers every quarter in terms of both the underlying and what our expectations are for settlements. What we have reflected on our books right now both reflects what we think has happened to the underlying transactions. And it also reflects our experience across the 20-odd commutations we have done with everybody else in the business that we have a pretty good feeling for what the market settlement levels have been. Particularly for similar transactions.

That said, each quarter involves us looking again at those assumptions to decide if they have to be adjusted. And I think one of the reasons we focus so much on this quarter in terms of trying to get investors to look at it is to recognize that the majority of volatility that's left in MBIA Corp in terms of what could happen over any particular quarter or six months or yearly period, now revolves also around what happens with BofA. So we thought it was important just to highlight that.

That said, it's very difficult to give you any kind of expectation as to whether those numbers will change substantially next quarter or the quarter after. Hopefully, at some point we'll either have a decision in the courts or we'll find a way to reach a reasonable settlement with that counterparty.

Could I add one thing to that? The change in the reserve that we reflect on CMBS for this quarter is essentially all driven by underlying deterioration in the properties that are behind the CMBS that are in the pools as opposed to any change in our expectation about commutation value or probability.

Okay. Thank you.

Sajan Shah with Morgan Stanley.

I have a few questions regarding the UK unit, MBIA UK insurance. Could you just comment on the general performance that you have seen there, whether there has been any new claims payments? And the performance of any transactions that you are specifically worried about?

No material claim payments, Sajan, that took place in the second quarter, and no material change in the status of transactions in the portfolio. Either in the performing or in transactions that are on our various caution lists.

And do you have any ambitions to use MBI UK to raise potential liquidity for Corp, maybe, for example, with the sale to National?

Any inter-Company transactions of that type obviously would be subject to regulatory approval. In this case, probably multiple regulatory approvals.

Right. But it's not something that you've considered yet?

At this point we have not considered. Obviously, we haven't taken any actions with respect to that. And at this point there is not a current plan.

Right. Thank you.

It is something that we've looked at and have an understanding of what would be involved to pursue a transaction like that.

Thank you.

Ken Weliczka, Sentinel.

Good morning. Just wanted to ask about the HoldCo cash position. Number one, just wanted to confirm that the payment from the conduit business was the main driver of the increase during Q2. And then, two, wanted to find out if you could give any visibility about the timing and magnitude of any future payments from the conduit business or unregulated entities to the HoldCo?

In the second quarter there were a number of cash flows into the HoldCo. I think when you look at the distribution from the conduit business, that's the largest single item. But there also were cash in-flows from asset sales. There was a settlement with our D&O carriers that reimbursed us for prior expenses. There was a small tax refund in the quarter. So it's miscellaneous items after the fee that was paid from the wind-down operations over to the corporate segment.

In terms of what to expect going forward, in our liquidity forecast I'm not including an expectation of future distributions out of the conduits, although their performance may warrant it. We don't forecast them.

Thank you, Chuck.

This concludes the formal Q&A session of today's call. At this time I would like to turn the call back over to Mr. Greg Diamond for any additional or closing remarks.

I would like to go back to the last question and just add one thing to it because the conduit segment has already paid an additional fee over to the Holding Company in the third quarter. So we'll provide additional disclosure about that in the third quarter. Again, it's not something that we've forecast on a go-forward or routine basis.

Are we all set, Jackie?

Yes, sir.

Thank you. We took the questions of all the parties that were in the queue today. Thanks to all of you who joined us for today's call. Please contact me directly if you have any additional questions. I can be reached at --. We have one more question, Jackie.

Andrew Thau, GMP Securities.

I was just curious. I saw that there have been the amounts paid over to the escrow, under the tax sharing agreement by National ruling that the 2010-2011 tax years. And I was wondering if you can provide any color regarding when those amounts might become available with the tax years having closed?

Sure. The first payment into the tax escrow was $114 million for the tax year, that will now be beyond the two-year carrryback period in early 2013, in January 2013. So that $114 million would be released to the Holding Company at that time. The first potential distribution from the tax escrow.

Thank you.

Okay. Jackie, we're all set.

We have no additional questions.

Thank you. We recommend that you visit our website for additional information at MBIA.com. Thank you for your interest in MBIA today. Good day and good-bye.

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