MBIA Inc (MBI) 2015 Q2 法說會逐字稿

Welcome to the MBIA Inc' s second quarter 2015 financial results conference call. I would now like to turn the call over Greg Diamond, Managing Director of Investor Relations at MBIA. Please go ahead.

Thank you, Maria. And yes, welcome to MBIA conference call for our second quarter financial results. After the market closed yesterday, we issued and posted several items on our websites, including our financial results press release, 10-Q, quarterly operating supplements and statutory financial statements for MBIA Insurance Corporation and National Public Finance Guarantee Corporation. We also posted updates to the listings of our insured portfolios.

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, as our Company's definitive disclosures are incorporated in these filings. We urge investors to read our 2014 10-K, and our second quarter 2015 10-Q, as they contain our most current disclosures about the Company and its financial and operating results. The 10-K and 10-Q also contain information that may not be addressed on today's call.

Regarding the non-GAAP terms included in our remarks today, the definitions and reconciliations for those items may be found in our most recent 10-K and 10-Q financial results press release, or the quarterly operating supplement. The recorded replay of today's call will become available approximately one hour after the end of the call. And, the information for accessing it is included in yesterday's financial results press release.

And now, here is our safe harbor disclosure statement. Our remarks on today's call may contain forward-looking statements. Important factors, such as general market conditions and the competitive environment, could cause our actual results to be materially different than the projected results referenced 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.

For our call today, Jay Brown, Bill Fallon and Chuck Chaplin will provide some introductory comments. Then, Anthony McKiernan will join Bill and Jay and Chuck for the question-and-answer session that will follow. Now, here's Jay.

Good morning and thank you for joining our call this morning. I am pleased, today, to report that MBIA Inc had a good quarter. With $19 million of operating income, and adjusted book value that increased to $27 per share. Premium earnings in investment income were higher, and operating expenses lower, than the comparable quarter of 2014.

However, our attention and the markets attention, was focused on development and news coverage about Puerto Rico. We have devoted considerable resources towards working with the government of the Commonwealth, their advisors and other creditors, towards a consensual restructuring of the Electric Power Authority, and other credits that we insure. That work is ongoing and we don't yet have concrete results to share with you at this time. But, I do want to spend a few minutes on some of the significant issues.

First off, our view of the Puerto Rico related credits hasn't changed materially since our last conference call. With respect to PREPA, we continue to believe that improvements to its operations and liquidity are achievable, without costly litigation or a court intervention. Our commitment to a negotiated outcome was evidenced by our purchase last Friday of the previously disclosed market rate bond issued by PREPA. That PREPA bond provides it with some interim liquidity, puts it on a better near-term footing and allows it to focus on operational improvements that have already been identified.

Several proposals have been made by PREPA and various creditor groups. Any successful proposal must include operational and government improvements, and an increase in the base rate for electricity, which is contractually and legally required. A base rate increase would result in electric rates to the consumer that are still lower than the other Caribbean islands. And, lower than the rates that were in effect in Puerto Rico just a few months ago. Although none of these proposals have been accepted by all sides, we continue to believe that PREPA can be effectively restructured by ultimately paying all of its debts in full. PREPA has made all of its debt service payments to date. Net net, even after our purchase of PREPA bonds last week, our exposure to PREPA has declined by $23 million. So, some positive directions.

Nevertheless, we continue to see press reports and analyst assessments that project significant losses for the bond insurers. While the ultimate outcome is indeed uncertain, there are a few facts about our position that are important to focus on. First and foremost, we guarantee the timely payment of scheduled principal and interest on insured obligations. So, even in the case of an interruption of payments by an issuer, the bonds are not accelerated against us. We would make only scheduled payments, on the issuer's behalf, and have rights to be reimbursed for our claim payments, with interest. Where we are financing an essential asset, such as PREPA, our past experience has typically resulted in repayments that have substantially, or totally mitigated, our losses. In fact, a number of the statements made by PREPA so far have been consistent with such an outcome.

We first established loss reserves for our insured periodical credits during the second quarter of 2014. Our approach to loss reserving on PREPA considers the potential for short-term liquidity stress. We evaluate different probability weighted payment default and recovery scenarios with a range of potential values for the reimbursements we would expect to receive. That evaluation is done every quarter, and the probabilities that we assign to the different scenarios consider the status of our discussions with PREPA, the long-term essentiality of PREPA, the statements made by PREPA and its advisors and, importantly, our legal rights.

While there has been a lot of press coverage recently about PREPA that suggests a wide range of losses for bondholders, there isn't anything concrete that we have learned, in the quarter, that suggests any material change in our assessment of PREPA. More generally, we have found that many of the comparisons of Puerto Rico's debt burden, or taxation levels, with those of US states present very incomplete pictures. The often quoted $72 billion of Commonwealth debt includes all of the debt of the municipalities and agencies of Puerto Rico, while the debt of US states, to which it is typically compared, does not include the debt of those lower-level issuers. In addition, and most importantly, most taxpayers in Puerto Rico pay no federal income tax. Which, for citizens in the US, is levied in part to pay the federal debt. Many of the comparisons also failed to adjust for this difference. When we adjust for these differences, and for relative income levels, Puerto Rico's debt burden on its taxpayers is among the lowest of the US states, instead of being the highest, as suggested by many of these comparisons.

The comparisons of the Commonwealth to state debt loads that we see in many new stories overstate the problem that the island faces. When we compare Puerto Rico to sovereign debt levels, it also looks more benign. It's total debt is about 70% of its GDP, which would not be considered high for a sovereign, by comparison. By comparison, the United State's debt is 103% of GDP. Greece's is 180% and Japan is over 200%. However, this characterization is also too simplistic to provide much useful information. What is true is that, Puerto Rico's economy and population have been shrinking. Which has increased fiscal pressure on its citizens at the same time that some of the key benefits it receives under the US tax code were being phased out.

It took a long time for the government in Puerto Rico to begin to react to this. Responding to that stress, the Commonwealth has implemented many of the appropriate changes: reform of public pensions, some reduction in public sector employment, tax rate increases, et cetera. More recently, the Governor of Puerto Rico has appointed a task force to develop a five-year stability plan for the island by September 1. We are looking forward to that next step in the process. We believe that most of the other Puerto Rico credits that we insure also have passed- to medium-term stability.

As we have previously mentioned, all of the issuers made their July 1 debt service payments. And our overall exposure to Puerto Rico, including PREPA, was reduced by $205 million, net of the $45 million bond that we purchased last week. This Monday, one of the public financing corporations didn't make a full payment on its appropriation-based debt. While this is unwelcome news, none of the debt that we've wrapped depends on legislative appropriations for the payment of debt service. Our exposures are backed by dedicated revenue streams and/or the full faith and credit of the Commonwealth.

Lately, there have been some efforts to make Chapter 9 bankruptcy protection available to the Commonwealth, or to some of it's constituent public entities. We view Chapter 9 as a process, not a solution unto itself. Based on our experience, chapter 9 does not avoid litigation or guarantee a streamlined process. The only certainty is that chapter 9 takes a long time and is very expensive. Consider that Detroit paid $178 million in advisor legal fees in just 18 months of bankruptcy. Each of the Puerto Rico issuers has a different debt profile, with different revenue streams. And, it's more appropriate to address them separately. We continue to believe, as I said before, that a consensual approach to restructuring is best. If the Commonwealth, or it's public corporations, are retroactively granted access to chapter 9, creditors would likely be motivated to litigate, to pursue their contractual rights and remedies. The increased costs and the disruption would be an undesirable additional cost for the governments, it's taxpayer and bondholders, many of whom are retail investors and retirees, including many who are citizens of the island.

In the long run, however, we continue to believe that the biggest key to fiscal sustainability for Puerto Rico is to get it's economy growing again. In the near-term, a consensual resolution at PREPA can give the Commonwealth time to achieve stability, and restore market confidence, to pave the way for that growth. We will be posting a presentation to our website in the next few days that summarizes these points, and provides additional context for the island's current financial status and National's position.

The press coverage uncertainty around these credits has clearly taken it's toll on our share price. As a result, the primary method by which we can increase shareholder value in the short term, is through active capital management, including prudent share repurchases. Back in December of last year, our Board authorized a $209 [million] share buyback. We saw extraordinary opportunities to buy shares in the first half of 2015. And as of last week, we had used all but about $60 million of that authorization.

In addition, we received specific authorization from our Board that permitted National to buy eight million shares from the Warburg Pincus secondary offering of MBIA common stock. Over time, we expect that those shares will be sent up to MBIA Inc as part of dividends, or other payments that National will make to the holding company. But, our share count for financial reporting purposes has already been reduced by National's purchase. Overall, we've reduced our share count by 24 million shares, we're 13% so far in 2015. Last week, we announced that the Board terminated the existing authorization, and approved a new $100 million share repurchase authorization. We will continue to balance stock repurchases against our liquidity and leverage targets. But, we are well aware of the value creating power of share repurchases. And, we will continue to look for prudent ways to employ it.

Now, Bill will take you through additional details on National's progress. And, Chuck will review our financials with an emphasis on our capital and liquidity positions.

Good Morning. We continue building our sales and marketing organization. As I mentioned last quarter, Tom Wilde joined in January to head up this effort. Since then, we have bolstered our team by hiring Andy Nakahata to lead our Western Region marketing and Tom Metzold to lead our Capital Market operations. We're also bringing on some additional analysts, so we can respond to the increasing market opportunities that we are seeing. I believe that we're fielding the best possible teams. So that, we are positioned to take advantage of both current opportunities, as well as the higher volumes and penetrations that we think will accompany a higher interest rate environment.

Our new business production ramp-up has been slower than we anticipated when we returned to the market last year, due in part to the low interest rate environment. However, I'm pleased to report that we're closing business with more intermediaries, while maintaining our underwriting discipline. In the second quarter, we were at $272 million of par. Our pipeline is robust, as we're getting more FX than in earlier quarters. And, the second quarter reviewed over half of all negotiated transactions that sold with insurance. So, we are starting to develop some momentum on the new business side. It will take many quarters, though, before our new business production replaces that which rolls off of our books.

In the second quarter, as I said, we wrapped $272 million of new par. But, we saw $10 billion of par refunded and another $5.4 billion that matured. Refundings in the first half of this year were 80% higher than last year. This benefits us from an earnings perspective and helps to drive National's outperformance of last year's second quarter operating income.

We have recently completed our rating agency annual reviews. And, the conclusions of Kroll, S&P and Moody's were all made with an acknowledgment of the uncertainty around the Puerto Rico situation. Each of them affirmed our ratings, concluding that National's capitalization of liquidity can withstand their stress-case assumptions about Puerto Rico losses. We've estimated that National has approximately $1 billion of excess capital to the S&P AAA requirement, after the purchase of MBIA Inc shares in the quarter. Consideration of extraordinary dividends from National will come after we achieve greater clarity on our Puerto Rico exposures.

Last time, I mentioned the heightened attention we're giving to our Chicago credits as well. Since our last call, the rating agencies downgraded both the Board of Education and the city's GO bonds, with Moody's bringing them both to below investment-grade, amid challenges related to pension funding and public employee contract negotiations. We don't foresee either credit causing any impairment to our positions at this time. But, we are continuing to gather information about their ability to address the current challenges.

Overall, our portfolio continues to perform well. The credit quality distribution has remained consistent. In the first quarter of 2009, at National's inception, 90% of the portfolio was rated A and above. As of June 30, 2015, 89% is rated A and above. Now, I'll turn it over to Chuck to go through some financial information.

Thanks, Bill, and good morning everyone. As Jay has mentioned, this quarter was a favorable one from an earnings perspective. With combined operating income of $19 million, or $0.11 per share compared to $2 million, or $0.01 per share, in last year's Q2. Some of the drivers here were higher refunded premium and higher investment income and, lower loss and loss adjustment expense and lower operating expenses. The largest impact this quarter was on the tax line where last year, we posted a reserve for an uncertain tax position in the second quarter. We had a normal provision of 35% of pretax operating income in this year's second quarter.

ABV increased to $27 per share, compared to $24.87 per share at December 2014. The drivers that I mentioned contributed, but the biggest impact is from our share buyback activity, which contributed $1.85 to this increase. Given that, I'll spend a few minutes now on share buyback activity and capacity. As Jay summarized, the Board authorized a $200 million program at the end of 2014. We bought back 1.2 million shares under this authorization for $12 million, before December 31 of last year. And then, from January 1 until last Thursday, we bought back 15.5 million shares, for $127 million in MBIA Inc.

In addition, in May, the Board gave a specific authorization for National to purchase eight million shares in the secondary offering, for approximately $70 million. We went to the Board because we wanted to be clear, from a governance perspective, that we could purchase shares from other than the holding company. And, we wanted to make sure that we wouldn't exhaust the $200 million authorization, while operating under a 10b1-5 plan. Last week, the Board terminated the remainder of the authorization from December, and gave us a new authorization of $100 million, which clearly covers all MBIA entities. The purposes of this are to give us some additional authorization capacity. And also, to clarify that any of our entities can engage in buybacks under this authorization.

Now, let me talk about the capacity that we have at the holding company and in National. We consider, generally, three constraints on our ability to buy back shares. One leverage, two liquidity and three alternative investments. At today's stock price, we don't currently see any material alternative uses of our resources that offer better returns than buybacks. And, that would suggest using any excess resources for stock repurchases.

And, as Bill has said, we estimate that we have access capital in National, over and above the S&P AAA level, on the order of $1 billion. We've, obviously, deployed a small amount of that in share repurchases, about $70 million. At this point, although we are fully reserved against our Puerto Rico exposure, given the current uncertainty around the outcome, we think it's prudent to hold off on significant additional buyback activity in National. We're seeking regulatory approval for extraordinary dividends until we have greater clarity. Longer-term, National could be an even more potent source of liquidity to our holding company.

At the holding company level, we're focused on achieving and maintaining investment-grade credit metrics to achieve a lower cost of capital, and to support National's AA range rating. And, that implies achieving and maintaining reasonable leverage levels and liquidity cushions. We've been working toward achieving debt leverage ratios consistent with middle investment-grade ratings by 2018, via a combination of growth in shareholder's equity, and debt reduction, from free cash flow at the holding company. After the buybacks in the first half, we're still basically on track to achieve this goal. And, we expect to continue to balance our buyback activity with that objective.

In addition to leverage, we also need to maintain a conservative liquidity position at the holdco level. We want to hold enough liquidity to bridge a medium-term interruption in cash flows from the operating subsidiaries. In setting our target for minimum liquidity, we consider our upcoming debt maturities, the run rate of operating expenses, stresses that can affect collateralization requirements and Capital Market's access. Our liquidity position at the holding company was $497 million at June 30, which was in excess of our minimum.

The major cash flows into the holding company come from releases from the tax escrow account, which have been in January each year, and dividends from National that have been processed in the fourth quarter. Both of these are dependents on National's operating performance. Ordinary dividends are currently limited by National's debt investment income. And, those dividends do not require regulatory approval.

The tax escrow exists because National has taxable income while MBIA Inc, the taxpayer, has a net operating loss carry-forward. As National has pretax income, it makes payments of it's tax liability into the escrow account at MBIA Inc. Those payments must stay in the escrow for two tax years. And, can be released to the holding company if National is not due a tax refund. We don't consider those deposits to be part of our liquidity until they are actually released from the escrow account.

We previously disclosed that our next expected dividend from National should be approximately $115 million. And, our next expected distribution from the tax escrow, in January 2016, will be approximately $105 million. That distribution will be related to taxes paid by National, back in the 2013 tax year. The payments that National's making this year, 2015, become releasable in 2018. Over the next few years, we expect that these sources, dividends and releases from the tax escrow, will provide enough cash for all of our operating expense and debt service requirements, with a reasonable cushion. But, they are subject to risks. And, that's why we hold the liquidity cushion.

So, let me give an example of how these mechanics would work in a stress situation. National's pretax income for the six months of 2015 was over $140 million. And, it paid taxes into the tax escrow of about $50 million. Just for the sake of this example, let's assume that this performance were to be repeated in the second half. Then, National would have full-year pretax income of $280 million, and would've made $100 million of payments into the escrow. Which, we would then project to be released to the holding company, out in 2018.

If National were also to recognize additional incurred insurance losses this year, it's pretax earnings would be reduced. And therefore, the payments into the escrow account this year, would be lower. That would impact our liquidity position, out in 2018. At the extreme, if National were to have additional incurred losses of $280 million, there would be no pretax income in 2015. There would be no payments into the escrow and, therefore, nothing to release in 2018. Going further, if National's 2015 were to become negative for this reason, it would be due a tax refund from the holding company. A refund for National's 2015 tax year would reduce the amount scheduled to be released from the escrow in early next year. We know that the amount expected to be released in January 2016 is $105 million.

So, continuing our scenario, if National had additional incurred losses of greater than $280 million, and otherwise would have had taxable income of $280 million, it would be due a refund related to that excess. If the incurred losses were more, if they were $560 million, the tax refund would be about $105 million. And, therefore, there would be nothing to release from the escrow in 2016. That would reduced the holding company's 2016 expected cash inflows by about half. In this case, the tax escrow would still hold about $93 million, expected to be released in 2017.

However, if the additional incurred losses that we saw this year were significant enough, say $850 million, the holding company would owe National a refund, equal to all the assets in the tax escrow account. And, therefore, projected inflows in 2016 and 2017 would be reduced by about half. Finally, if the additional incurred loss were even more than that, National would have a net operating loss carry forward, reducing its tax liability on its future profitability.

In these scenarios where cash inflows are reduced, MBIA Inc might need to use some of its liquidity cushion to pay operating expenses and debt service. Note that National, in this scenario, would still have an as of right dividend capacity. And, of course, we would have a substantial liquidity cushion at the beginning of this stress period. We believe that these resources should be enough to carry our total holding company obligations for a lengthy period. In summary, and based on my example, if a hypothetical, discrete, additional incurred loss were to occur in 2015, and be below $280 million, the impact on holding company liquidity would be felt in 2018, which gives us substantial time to react. If that loss were to be between $280 million and about $850 million, liquidity in 2016 and 2017 would also be affected.

While these scenarios have a very remote probabilities, we believe the holding company has resources to manage through them. However, maintaining those resources are a constraint on our ability to buy back shares, and to make other investments. So, I hope that this has given you a sense of how we're working to balance maintaining sound positions at the holding company level, with realizing on the opportunity of share buybacks.

Now moving on to MBIA Corp. It had a statutory loss in the quarter of $47 million, compared to $29 million in last year's Q2. The biggest driver is loss and loss adjustment expense, where we recorded $69 million in the second quarter of 2015, compared to $54 million last year. We had increases in reserves this year on the CDO portfolio and on our second-lien book.

MBIA Corp has basically operated at a breakeven level, on a statutory net income basis, for the trailing four quarters. MBIA Corp's liquidity position was $412 million, as of June 30. And, it started out the year 2015 at $443 million. The second-lien RMBS portfolio was cash flow positive so far this year, generating about $18.5 million, as excess spread was greater than charge-offs of delinquent loans. We made payments on CMBS exposure's in the six months of a similar amount.

That leaves two high-yield CDO exposures, Zohar I and II. On which, we have previously recorded an expected loss. The first deal matures with $151 million in principal amount, due in November 2015. And the second, due in January 2017, had $808 million of principal amount as of June 2015. While we believe that a global-negotiated solution that would refinance, or restructure, the Zohar CDO's is in the best interest of all parties, a proposal to that end has not materialized at this point. And, may not occur prior to the November 20 maturity date. So, we stand ready to make the November payment. And then, to vigorously exercise our rights to ensure that there's an acceptable resolution prior to the second deal's maturity in January 2017. Other than the high-yield CDO's, the other meaningful liquidity contingency in MBIA Corp is around the receipt of our recoverable from Credit Suisse. On that, we are confident about recovering our carrying value, but we are still uncertain about the timing.

In summary, our combined financial results have a positive trajectory at this point. The momentum in National is building and we've been successful at adding to future shareholder value, through share buybacks, so far in 2015. And, MBIA Corp continues to have adequate resources against it's expected claims. So, at this point, we would be happy to respond to your questions.

(Operator Instructions)

Andrew Gadlin, Odeon Capital Group.

Hi, good morning.

Good morning.

I wanted to ask a question on Cofina, which you didn't mention in the Puerto Rico remarks. And, it is a deep exposure for the Company. It's become very controversial, in recent months, and I was wondering if you could share the Company's views on Cofina.

Yes, it is Bill speaking. As you know, it is getting a lot of attention and there are differing views. Our position, I think, is in the camp where Cofina is one of the more secure bonds that people talk about, with regard to Puerto Rico. And, within that we have the senior-lien Cofinas. It hasn't come up, with regard to discussion around any missed payments at this point. And we feel, at this point, comfortable with the Cofina exposures.

There was recently a group with Quinn Emanuel formed with the Cofina bondholders, is the Company involved with that group? And, do you have any thoughts on when negotiations on Cofina could take center stage.

We are aware with the group, through the newspaper reports that you referred to, Quinn Emanuel. We are not part of that group. And, at this point, there's been no specific talk of any negotiations around Cofina. As we've said, all of the payments are being paid. And so, therefore, there's really nothing to talk about. And as I said, within that, there may be some different classes or tiers of the Cofina. But again, we feel very comfortable with our exposure on Cofina.

And then GDB, there's a sizable payment due later this year. There's another group there, involved. Any thoughts on that?

With regard to our GDB exposure, in some ways, ours is a little bit different than most in that, our GDB exposure actually has a Commonwealth guarantee on it, which puts it in the minority of the GDB debt that is outstanding. So, as we show in our exposure reports, we have $267 million of principal, which is our only exposure to GDB. It matures at the end of this year. And again, given everything that's been said with protecting the GO and the Commonwealth credit, we would expect that that payment would be made. But again, we'll wait and see what happens in December.

Got it. Okay. And the final question, I think Chuck mentioned the possibility of dividending from National to the holdco shares, up to the holdco. Any idea on whether that would happen this quarter? Or, in the interest of maintaining liquidity, could that be done at some point later in the future?

There are a couple different ways to do this. The two major payments, if you will, that National makes to the holding company are dividends and payments into the tax escrow. I talked a little bit about the mechanics of that. So, to the extent that National is making payments to the tax escrow. And, were to make those payments, in part, by transferring some of the common.

Then, you actually have an impact on holding company liquidity. But, it's a future impact rather than a current impact. Right now I think that, with respect to dividends, we're expecting them to be paid in cash. Because, that is current liquidity at the holding company level.

Got it. And, if you are to dividend to that, obviously, you would put the shares a little higher than where they are today. Would that create negative investment income? Which would, somewhat, chip away at the dividends, let's say, next year?

No. The shares would be valued at market at the time. So, it doesn't affect the amount of the dividend.

Got it. Okay. Thank you very much.

Nagendra Jayanty, Claren Road.

Actually, my question on dividending of shares has already been answered. Thanks.

Brian Charles RW Pressprich.

Good morning. I just have a couple questions about MBIA Corp. First off, do have any color on the migration of your triple BCBS exposure? I know you had a couple of pulls. You've had exposure to your paying out one, year to date. I don't know if you have any color on what kind of payments and what kind of exposure you have remaining there.

Hi, this is Anthony. I think, as we've said before, we've got one transaction that we're paying claims on. We continue to pay claims on that. It's more recent vintage, 2005 to 2007, BBB CMBS. The remainder of our exposure is actually performing in line with expectations. We don't really expect any issues with the remainder of the exposure.

Okay. Can you release how much of the remaining exposure, for the exposure that you are paying out on, remains? It was about $300 million at the end of the year. Where would that stand now?

About $271 million right now.

$271 million. Thanks. And away from that, just regarding the reserves, the loss in LAE expenses you took during the quarter. Is it safe to assume a lot of those reserves were associated with your Zohar exposure?

In the second quarter, we had reserve increases related to CDO's. But also, on our second-lien RMBS. As we did see a spike in voluntary prepayment activity, early in the quarter, that caused us to reduce the carrying value of the excess spread assets that we've reported. So, there are those two components.

Okay. Do you have any guidance on what the breakdown of the two components is, in the loss in LAE charge for the quarter.

No. We don't want to break that amount down any further.

Okay. That's fair enough. Justify, if I can conceptualize --

To be clear, we have reserved on the assumption that a payments will be made on Zohar, in November. That's included in our scenario. So, you won't see another adjustment next quarter.

Okay. So, what you are reserving for -- the upcoming payment has been reserved for, at this point.

It's included in our scenarios.

Okay. You were actually a step ahead of me, I was about to ask that question. I'm just wondering, when taking a reserve for an upcoming payment, say that might be about $150 million in November of this year, does your net reserve envision a recovery on the other side of that?

Or, for now, are you just reserving for that payment? And then, as a proposal comes forth, maybe over the course of 2016, you might come up with a recovery estimate for your recovery there? Or, are you already taking that into account when you make a reserve, a loss in LAE adjustment now.

Anytime we evaluate a reserve, we look at both the amount going out the door and the range of possibilities of dollars coming back, and the probability of wait back. So, the short answer is, we have anticipated that there will be some recoveries, if not all the recoveries, on that payment that will be made in November.

Okay. Good. Thank you. And then, just finally. While you do state that there has been no proposal forthcoming yet, I imagine you have been in regular contact with Patriarch Partners, regarding some sort of resolution.

No comment.

Fair enough. Thank you.

(Operator Instructions)

[Pete Trawisi], Barclays.

Good morning guys. I just have a follow-up question on your Zohar exposure. During an interview on CNBC in early May, a representative from Patriarch Partners referenced a potential that loans in Zohar I would be put out to bid in May. Can you confirm if that occurred.

We can't comment on that.

Okay. And then, other than the legal final maturity date in November, are there other milestone dates that we should be aware of? Either in the CLO documents for the actual Financial Guarantee policy.

We've got the first Zohar deal maturing in November of this year. The second matures in January 2017. So, those are the two threshold dates, for the exposures themselves. And then, obviously, there's the ongoing SEC issues which have their own dates as well, as far as progress on that front.

Okay. Great. Thank you.

Ed Groshans, Height Analytics.

Thank you. First, let me just say thank you for taking my questions. Just want to focus on capital. During your prepared remarks, you said you have about $1 billion of excess capital at National. Just want to make sure that I understand that that was relative to S&P and Moody's ratings. Is that correct?

That is relative to the S&P capital model. The AAA requirements.

Okay. And, how about on a statutory basis? Do you provide any information about how much excess capital you have on a statutory basis?

The S&P capital model really focuses on statutory capital in its calculations.

Okay. So, what would be the key elements that the state regulator would focus on, when they are looking at your capital? Because lately, the questions I've been getting have been focused on -- your talking about the $150 million of dividends from National to the holdco. And, there seems to be some interest into -- are there specific items that would either lower or limit that dividend from National to the holdco.

Again, the as of right dividends that National can make to the holding company, are limited by its net investment income. So, to the extent that some things happen that cause net investment income to be higher or lower, that will have an impact on the dividendable amount.

Okay. My last question is, several times during your remarks, you mentioned that the outlook for Puerto Rico, and for PREPA, that nothing concrete, there's no material changes. Can I view those comments to mean that there hasn't been any material changes in the reserves that National has taken, relative to its Puerto Rico exposure during the quarter?

We do update the reserves every quarter. And, just one fact for you to be aware of is that, for our GAAP reporting in our operating income, we do update the discount rates that are used every quarter. So as rates rise, there's an impact on our loss reserves. To the extent that rates fall, there's also a small impact. So, there is that volatility that exists in there, in any reserves where we're looking at a long tail cash flow analysis.

So, aside from the rate volatility has there been any other changes?

Just to be clear, we took a very long look at this in the second quarter last year. And, projected out over the next several years what we thought might occur in Puerto Rico, in terms of payment interruptions and potential recoveries. What we said this quarter was, everything we saw was consistent with what we had forecast in the past. We so no material change in our views. So, ergo to your point, we didn't make any major change in our scenarios or reserve levels, at this point, based on what we've seen.

Fantastic. I appreciate that. Thank you very much for taking my questions.

At this time, there are no further questions. I would now like to turn the floor back over to Greg Diamond for any additional or closing remarks.

Thank you, Maria. And, thanks to everyone who joined us for today's call. Please contact me if you've any additional questions. We also recommend that you visit our website MBIA.com, for additional information on our Company. Thank you for your interest in MBIA. Good day and goodbye.

Thank you. This concludes today's call. You may now disconnect and have a wonderful day.