MBIA Inc (MBI) 2012 Q3 法說會逐字稿

Good morning and welcome to the MBIA Inc's third quarter 2012 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 the release of our financial results for the third quarter of 2012. For today's call, Jay Brown and Chuck Chaplin will provide some brief comments and then we'll hold a question-and-answer session. Yesterday afternoon after the market closed, we posted several items on our website, including our third quarter 2012 10-Q and Quarterly Operating Supplement. Also, the information for accessing the recorded replay of today's call is available in the financial results press release that we issued yesterday, which is also available on the website.

Our Company's definitive disclosures are incorporated in our SEC filings. Please note that anything said on today's call is qualified by the information provided in the Company's 10-Q, 10K, and other SEC filings.

The 10-Q we filed yesterday also contains information that will not be addressed on today's call. 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. Now I'll 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 or 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. Good morning, everyone. Since our last conference call, relatively little of significance has changed. We continue to await a decision in the Article 78 proceeding in which Bank of America has challenged the Department of Financial Services' approval of the creation of National Public Finance Guarantee. Since the hearing in this matter ended on June 7, I can definitively say that we're five months closer to a decision, but the court has not provided guidance as to when that decision might actually come. I can also reaffirm our confidence in a positive outcome. Beyond that, there's nothing further to report on this matter.

Similarly, our mortgage put-back litigation against Bank of America and its Countrywide subsidiary continues to move forward as summary judgment motions were filed during the quarter. We expect that the hearings on these issues will take place in the next month and decisions to follow sometimes thereafter. We continue to be confident that we will prevail in this litigation, and recent developments, including the lawsuit that the United States has brought against Bank of America, and developments in other monoline collection actions against various mortgage originators only bolster that confidence.

Unfortunately, while loss payments by MBIA Insurance Corp. on insured securitizations backed by ineligible residential mortgages continue to decline, the flow of new delinquencies has not abated as quickly as we had expected. We also have taken additional loss reserves against CMBS pools where the dominant counter-party is Bank of America's Merrill Lynch subsidiary. Although these transactions were structured with deductibles, those deductibles are now likely to be eroded resulting in claims being made to MBIA Insurance Corp. Depending on the timing of the deductible erosion, as well as the timing of collections in our put-back claims, MBIA Insurance Corp. could experience a liquidity shortfall.

Ironically, Bank of America, having manufactured that shortfall by defaulting on its obligations to us, might be the Company's largest debtor and also one of its larger potential creditors. Since the outcome of a liquidity shortfall would likely be adverse for both MBIA Insurance Corp. and for Bank of America, our base case assumption continues to be that there is a negotiated global settlement between the two companies, but we will not accept a non-economic settlement, so clearly there is a risk that a settlement doesn't take place.

With that in mind, we are taking prudent steps now that are intended to mitigate the potential adverse consequences to the stakeholders in the Holding Company and in National from this potential scenario by launching the consent solicitation that we announced last night. If a majority of the bondholders agree, MBIA Inc.'s debt agreements will be amended so that regulatory actions against MBIA Insurance Corp. that may result from an impasse with Bank of America will not create an acceleration in the Holding Company's senior debt securities. We believe the proposed amendments are positive for bondholders and have no cost to policy holders.

While there were no significant developments in our litigation in the quarter we are clearly getting closer to resolving many of the key issues facing your Company, and one thing is certain. The Management team and I remain fully committed to resolving them in ways that properly serve the interest of all of our stakeholders, shareholders, bondholders and policy beneficiaries.

Now Chuck will take you through the financial results for the quarter.

Thanks, Jay. Good morning, everyone. First, our GAAP net income for the quarter was $7 million compared to $444 million in the third quarter of 2011. Once again, the change in the value of insured credit derivatives is the largest part of the year-over-year variance. Last year, the impacts of MBIA's non-performance risk and commutation activity drove a gain on derivatives of $776 million.

In this year's third quarter there was a modest unrealized gain associated with MBIA's Corp.'s non-performance risk and a modest unrealized loss from deteriorating spreads on underlying collateral. The net $33 million loss was the smallest change in insured derivatives values that we've recorded since 2007.

We also report on certain non-GAAP measures of performance, adjusted pre-tax income and Adjusted Book Value. These are measures used by Management in making tactical and strategic decisions about the Company. In the third quarter, we had an adjusted pre-tax loss of $118 million versus a loss of $430 million in last year's third quarter.

The most important drivers of the difference were lower loss adjustment expense and impairments, and lower impairments on insured credit derivatives primarily on commercial real estate related policies. Last year, we had incurred losses on commercial real estate related deals of $497 million in the third quarter, while this year saw a more modest increase it incurred of $123 million.

Last year's result was driven largely by the cost of commuting transactions, while this year's incurred loss in this sector was driven by deterioration in the underlying portfolios. Adjusted Book Value was also slightly lower in the third quarter, falling to $30.64 per share compared to $31.23 per share at June 30, 2012. Incurred loss of $0.92 a share was partially offset by net positive contributions from operations of $0.33 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 where relevant. The Public Finance segment's pre-tax income was $164 million in the quarter versus $157 million in last year's third quarter. This was above our expectations. The largest driver was realized capital gains on the investment portfolio where we saw $18 million in this year's third quarter versus $5 million last year.

We also had heavy refunding activity which accelerated $82 million of premium income into the third quarter. This was the highest quarterly refunding income we've recorded in the past four years. We expect that refunding income will continue to be elevated for the next few quarters as a result of approaching call dates on bonds issued in the same periods 10 years ago.

National's case loss reserves were essentially unchanged, but we did recognize increased costs associated with legal fees for credits that are in or threatening municipal bankruptcies. We anticipate that state and municipal credits will continue to experience heightened stress over the next couple of years as local governments work to balance budgets and meet their post-retirement benefit obligations. National's statutory capital grew to $3.1 billion in the quarter and its claims paying resources stood at $5.6 billion.

As a result of amortization and refunding, the book of business the capital base supports is now $356 billion in gross par compared to $574 billion at the time of transformation four and a half years ago. Today, National's capitalization is consistent with S&P AA and Moody's AAA ratings requirements, positioning National well to be relaunched into the municipal markets as we resolve the transformation litigations. Regarding National's intercompany financings, the asset swap with MBIA Inc. was reduced by $98 million to $522 million and the outstanding amount of the intercompany secured loan to MBIA Corp. was $1.6 billion at September 30.

The structured finance in International segment largely represented by MBIA insurance Corp. had an adjusted pretax loss of $224 million in the third quarter of 2012 compared to a loss of $556 million in the third quarter of 2011. We had losses in both periods due to high loss and loss adjustment expense, but incurred insurance losses were $252 million in the third quarter this year, down from $631 million in the third quarter last year.

Commercial real estate related losses increased by $123 million as we saw modest additional stress on the CMBS pools that we insure for Bank of America, and in addition, we added one other commercial real estate CDO to our classified list. Although this continues to be the most potentially volatile part of our insurance portfolio, as of this time, no material claims have been paid on commercial real estate exposures.

With respect to our second lien exposures, delinquencies continue to decline but the pace was somewhat slower than our expectations. The result of this is that we now estimate future payments to be somewhat higher than our estimate from last quarter. In addition, voluntary pre-payments of performing loans were somewhat higher than we expected, so we reduced our estimate of future reimbursement from excess spread, and that basically offsets the accretion in our estimate of reimbursements from the put-back recoverable.

Actual claim payments in the quarter of $130 million were basically in line with our expectation, and that amount continued its slow decline. In the second quarter of 2012 and the third quarter of 2011, payments were $139 million and $195 million respectively.

The put-back recoverable on our balance sheet was approximately $3.1 billion at September 30, 2012, virtually unchanged from June 30. The recoverable reflects a discount from the incurred loss of approximately $5 billion on all the second lien RMBS securitizations where we expect to collect on put-backs. We should note that our claims and litigation include these paid and to be paid losses, as well as interest, legal fees and other claims. Our legal claims against Bank of America alone sum to over $4.5 billion.

There also was an increase of $47 million in expected losses on first lien RMBS securitizations as losses upon liquidations increased in the quarter. Those same impacts drove an increase in our incurred loss on ABS CDOs of about $26 million.

The statutory capital and claims paying resources positions of MBIA Corp. stood at $1.5 billion and $5.1 billion respectively as of September 30. The balance sheet contained $1.1 billion of cash and invested assets, of which approximately $386 million was immediately available to meet liquidity demands. The put-back recoverable is an illiquid contra-liability that we will need to collect in order to improve the longer term stability of MBIA Corp.

Finally, as I mentioned earlier, MBIA secured loan from National had a $1.6 billion balance as of September 30. There were no draws on the loan in the quarter, but interest for the second quarter was added to the loan's balance on the first day of the third quarter in accordance with its -- with the loan terms.

Now moving on to non-insurance activities. Cutwater Asset Management had a small loss in this quarter, virtually the same as in the year ago quarter. The Corporate segment earned $22 million pre-tax in the third quarter compared to a loss of $20 million in last year's third quarter. The positive result this year is due in large part to a $35 million administrative fee paid by the wind-down operations. Now while the Corporate segment received fees of $35 million in each of the last two quarters from wind-down, those fees are subject to significant volatility and they may not be significant in future quarters.

Wind-down had a pre-tax loss of $77 million in the quarter. The loss is more than the expected run rate because of the $35 million fee paid to Corporate and marks to market on hybrid debt obligations and Euro denominated MTNs in that segment.

Both the wind-down operations and the Corporate segment's operations are largely conducted in our Holding Company MBIA Inc. That legal entity had $432 million of cash and highly liquid assets not pledged as collateral at September 30.

In addition to this, it had approximately $371 million in its tax escrow account. We believe that this liquidity position plus expected future cash flows from our operating subsidiaries will be adequate to service the Holding Company's unsecured obligations as they come due in the ordinary course.

Now we are pursuing the consent solicitation that Jay mentioned. It's part of our ongoing effort to make our capital structure more efficient. The action should enhance our ability to access the capital markets in the future by reducing the risk that Holding Company obligations could be untimely accelerated.

We have hired Deutsche Bank Securities to assist us in contacting bondholders, and it's our objective to obtain consent from the holders of a majority of the bonds across our two indentures in the next 10 business days. The transaction won't have any direct impact on our insurance operations.

We would be happy now to respond to any questions that you may have.

(Operator Instructions)

Max Scherr, Panning Capital.

Good morning guys. Thanks for having the call. My first question would be the CMBS exposure, you said you'd made no payments. Just to clarify, was that for the quarter or was that life to date?

We have not made any material payments on commercial real estate exposures since the financial crisis, so just dating back to 2007, we haven't seen any payments yet.

And any sort of insight as to when that may occur? Or is it still very dependent on structure performance, and tough to say?

It's really, it's dependent upon individual mortgage performance and special servicer behavior, so it's hard to forecast.

Great, thanks. Second question would be the intercompany loan from National, do you have availability if you will on that, given the size of the put-back asset?

Draws on the intercompany loan that we've done in the past were individually approved by the insurance regulator, the Department of Financial Services and there isn't any availability, if you will. It's not a line of credit. They are individual loans that we've taken.

And qualitatively, would you say that you feel there's availability there? Would you ask again?

We think that the loan is very well secured by the collateral, so there's an excess of collateral.

So potential availability. And then finally, on page 8 of MBIA Corp.'s piece of your 10-Q, you disclose a deficit of $97 million of qualifying assets to support your contingency reserves?

Yes.

Is that number still $97 million as of November 8, and do you have any clarity on timing as to when you might resolve that with the New York State Insurance?

At this point, we don't have clarity. We've made a request to modify the contingency reserve requirement and we've not gotten a response to that yet.

And any feel for when that may happen or no?

I don't have, no.

Okay, thank you very much for your time.

Arun Kumar, JPMorgan.

Good morning, Jay and Chuck. A couple of questions for you. Can you hear me?

Yes. Good morning.

Okay, good morning. The first question I have is you talked about the consent earlier in the discussion, Jay and so did you, Chuck, but the question is was there any discussion with the regulators that precipitated that request for the consent?

Yes. We did notify the regulator that we're doing this, yes.

So it wasn't that they came to you or in the context of any regulatory action on MBIA Insurance Corp. that precipitated that?

No, it did not.

Okay, the second question is given that you just articulated, Chuck that you have over $1 billion or $1.5 billion of statutory capital that includes the capital and contingency reserve, and the fact you've paid out $130 million in payment in the quarter, is there any likelihood that the regulator could step in in the next three to six months?

It looks like you have capital levels that are fairly substantially above the minimum requirement. The regulator at this point hasn't stopped even the payments on the surplus notes, so to me, the question is it does not seem that regulatory action is somewhat imminent in the next several months or several quarters, but rather this seems to be somewhat more of a defensive action that you're taking to protect the interest at the Holding Company level. Would that be correct?

I think that that is correct, Arun. You've identified it.

Okay. Now regarding the surplus notes payments, last time there was a little bit of a hiccup before you got final approval. The next payment is coming up in probably January I believe, and you asked for approval, what, 30 to 45 days or so. Has there been any discussion along those lines about the surplus notes?

Not at this time. Again, as you said, we normally would make the request about 30 or 45 days prior to the payment date.

Okay, a couple of other questions. One is, you noted that 24% of your bondholders are pursuant to the indentures you've identified and got approval from. Do you have any idea who the other bondholders may or may not be?

We have done some research into the holders of the bond so we are contacting all of them.

But you aren't going to publicly disclose them I would think?

No, no.

Okay, the other question is, I think this was Jay or Chuck, one of you mentioned that with regard to BofA that you're considering, or at least contemplating a global settlement between the parties, I think those are the terms you used, when you're referring to potential pay outs on CMBS on one side to the Merrill Lynch wraps deal, the Merrill Lynch originated deals versus the put-backs, is that what you were discussing that you were contemplating some kind of settlement?

Yes.

Okay. Based on comments that you made, I just wanted to ask you would it be fair to say that the amounts that you expect to get from the put-back issue would be substantially not of the payments that you expect to make as part of the wraps to the CMBS securities?

Could you rephrase that? I'm not sure exactly what the question is.

I mean the settlement that you're talking of, hypothetically the global settlement between MBIA and BofA, it will appear that the amount that you expect to pay in terms of settling those CMBS claims against you in terms of the wraps would be substantially less than the amounts you expect to get from the put-backs.

You know, it's very difficult to, you're talking about a hypothetical settlement that hasn't yet taken place, so it's really, I really wouldn't want to try and quantify either side of that settlement at this point in time. Obviously, I think let's be honest. The clear issue is that we haven't yet agreed at a number that makes sense for both parties and until we agree, it's all speculation on anybody's part as to what the relative quanta might be that we would receive versus the credit we might give for the CMBS.

Okay, and the last question is, in terms of any regulatory action that the regulators may take down the road, what kind of lead time do you expect that the Insurance Commissioner or the Office of Financial Services would give you or that you would give them in terms of any kind of regulatory action? Would it be a month or two months, or three months, or something that happens just overnight?

We're obviously -- have had ongoing, weekly in some cases, daily dialogue with the Department about all of the activities going on, given the variety of litigation that we're involved in, plus the issues specific to the financials as they've been impacted by the litigation and the put-backs. I don't, we don't think of it in the context of giving them warning or them giving us warning. If they ever decide it would be necessary to take any kind of administrative steps I'm sure they would give us notice and obviously, if we run into a situation where we have inadequate liquidity or projected inadequate liquidity, that's something we would notify them with plenty of timing in advance.

So it's very hard to say exactly is that a month, two months, three months? It's clearly something that if it comes to pass that we have our situation where liquidity is going to be impacted we're going to notify the Department as soon as possible and then try and work through it with them in terms of what the possible responses should be.

Okay, lastly, on the rating agencies, you said no rating action based on the consent. It does not appear that they're overtly concerned beyond what they already are in terms of the overall financial health of the Company?

That's fair to say. Both of them have issued a statement relative to the consent that's consistent, Arun, with that.

Okay, and Chuck, I promise this is my last question for you. This is again if the -- any regulatory action were to happen on the MBIA Insurance Corp., what would happen to the status of -- what would be the status of the intercompany loans between MBIA Insurance and National, which is secured at this point by the regulators? What would happen to that status of that loan?

Yes, the only response to that is our base case assumption, Arun, is that there isn't any such action.

Okay, fair enough. Thank you, Chuck, thanks, Jay.

Sure thing.

Neil Dorflinger, DLS Capital Partners.

Hi there, can you hear me?

Yes, good morning.

Okay, hi; good morning. You may have touched on this earlier in the call. I may have missed it, so if I that's the case, I apologize. But anyway, a default on those surplus notes, I was under the impression that that would not generate a cross-default with the Holding Company. Is that correct or not?

When you say default on the surplus notes, let's just be a little more precise. The surplus note payments are, each and every payment is subject to the approval, prior approval of the Department of Financial Services, so to the extent that the Department of Financial Services were not to approve a surplus note payment, which would be the circumstance under which we think that it would not be paid, no default would take place so there's no issue of cross default. There wouldn't be a payment default on the surplus notes themselves.

Okay, thank you.

Sure.

(Operator Instructions)

Kevin O' Donohue, Aviva.

Hi. Thanks for taking the question. A couple quick ones. On your second lien exposure, I think at the end of the last quarter you said it was around $500 million. You paid $130 million this quarter but now you think it may be larger than you originally thought, so I'm wondering where you think it stands today.

Just trying to fix on the context of the $500 million. The $130 million is the amount of payments that we actually made in the third quarter and we have been making payments on the RMBS since year-end 2007.

Those payments peaked in the second quarter of 2009 and have been in decline thereafter, so just looking at the trajectory, we paid about $195 million in Q3 last year, We paid $140 million just about in last quarter, $130 million this quarter, so the payments are continuing to decline. We expect that they will not only continue to decline, but at some point, there will be net receipts to us of reimbursements from excess spread on the performing loans in those securitizations.

Okay, so but at this point, you don't have any estimate of what your future economic or future payments until you start receiving those receipts is over time?

Well, obviously we do have a forecast; we do expect that going forward that there is at least as much and more reimbursement in present value than there are payments that go out the door, that we've paid most of what we're going to pay.

Okay. Thanks. And then another one would be are there any, or I guess, what would be the timing of any notable outflows from or cash payments from MBIA Insurance Corp. to the Hold Company related to the tax escrow that you described in your comments?

The tax escrow is an artifact of our intercompany tax sharing arrangement, and what it calls for is for the insurance subsidiaries, when they have tax liability, they pay into an escrow account if the consolidated firm doesn't have a tax liability. So it's National that has had pre-tax earnings and therefore tax liability in the last couple of years and has paid into the tax escrow account. So the funds that are sitting there, $371 million at the end of the third quarter, were generated by National tax liability while the Holding Company, the consolidated firm had no liability to the IRS.

Okay, great. And then my last question is, you've touched on this a little bit already, but maybe I'll just take one more shot at it. Your current intercompany loan from National to MBIA Insurance Corp. now accounts for about 30% as I calculate it of National Public Finance's total invested assets. Can you ballpark that in any way, give us a range or sensitivity of some kind as to how large the regulator might let that get?

Again, there haven't been any draws on -- there's been no additional intercompany secured loans since the first quarter of 2012. We have been drawing them to engage in commutations. There hasn't been such activity since then, and anything further would be strictly subject to the regulators' approval, so I'm not sure that there's any way for us to dimensionalize that.

And I'd like to go back to the prior question about the second lien reserves. If you go to Page 40 of the Operating Supplement, we actually provide some of the detail that you'd requested at the bottom of the page. It just shows the components of the quarter end statutory loss reserve, so you can see that the amount that we expect to pay in the future as well as the receipt of excess spread.

Okay, great. Thanks for your answers.

Sure.

Andrew Thau, GMP Securities.

Hi. I was wondering if you could speak to how much of the BofA CMBS might involve insured CDS that might get subordinated in the event of a rehabilitation proceeding?

Virtually all of our exposure to Bank of America in the CMBS sector is in the form of derivatives.

Thank you.

Jonathan Carmel, Carmel Assets.

Good morning. Two questions. First, can you give us any sort of sense whether you can dimensionalize how much subordination in your CMBS was eroded or any kind of estimate as to potential future payment dates, even a range would be helpful.

Yes, we have not provided any detail about that, and again, I would just reiterate that it is difficult to forecast. They are individual decisions made by special servicers about individual commercial mortgages, (multiple speakers) there's no discernible pattern that we see in the behavior.

Okay, and my second question is in regards to the consent solicitation. Clearly, on the 2034 notes, you need 50% of those holders, and I believe you've only got consent of effectively three at this point in time. Is there any chance that you might change the terms of the consent solicitation to try and draw in more people or extend the timeframe? I think that that's likely to be difficult.

We think that the consent is in the best interest of all of the bondholders, and that what we've offered to them is going to be attractive, so that's our expectation is that we get at least 51% of the holders in each indenture to agree to the consent.

Thank you.

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.

Thank you, Jackie. I'd like to point out that we took all of the parties on the call today except for those parties that are involved in litigation against the Company.

Thanks to all of you who joined us for today's call. All the parties that entered the phone, if you have any additional questions please contact me directly. I can be reached at 914-765-3190. We also recommend that you visit our website at 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.