MBIA Inc. (NYSE:MBI)
Q4 2008 Earnings Call
March 3, 2009 8:00 am ET
Greg Diamond – Director of Investor Relations
Jay Brown – CEO
Chuck Chaplin - President and CFO
Mitch Sonkin - Chief Portfolio Officer
Cliff Corso - Chief Investment Officer
Anthony McKiernan - Managing Director, Head of Structured Finance Insured Portfolio Management
Scott Frost – HSBC
Brian Monteleone – Barclays Capital
Terry Shu - Pioneer Investment
Mack Johnson – National Australia Bank
Eleanor Chan - Aurelius Capital
(Operator Instructions) Welcome to the MBIA Fourth Quarter 2008 Financial Results Conference Call. I’d now like to turn the call over to Greg Diamond, Director of Investor Relations at MBIA.
Welcome to MBIA's conference call for our fourth quarter 2008 financial results. Presentation materials for this event are available on MBIA's website. We have also posted information to access the recorded replay of today's call, which will be available later this afternoon on our website.
The MBIA presenters for today's event are Jay Brown, CEO, Chuck Chaplin, President and CFO, and Mitch Sonkin, Chief Portfolio Officer. Joining them for the question and answer session later on the call will be Cliff Corso, Chief Investment Officer, and Anthony McKiernan, Managing Director and Head of Structured Finance Insured Portfolio Management.
Following our prepared remarks, we will hold a question and answer session. Let's begin. The second slide of the presentation deck shows our safe harbor disclosure statement, which I will now read. This presentation and our remarks may contain forward looking statements. Important factors such as general market conditions and a competitive environment could cause actual results to differ materially from those projected in these forward looking statements.
Risks factors are detailed in our 10-K, which is available on our website, www.MBIA.com. The Company undertakes no obligation to revise or update any forward looking statements to reflect changes in events or expectations. In addition, the definitions of the non-GAAP terms that are included in this presentation may be found on our website at www.MBIA.com
Now, I will turn it over to Jay Brown.
Chuck Chaplin and Mitch Sonkin are going to handle the bulk of our detailed prepared remarks this morning. Before they review the significant items for our financial results for 2008 and further introduce our new legal organizational structure I would like to provide some background information on 2008 and some observations on our key challenges going forward into 2009 and beyond.
When I rejoined MBIA a little over a year ago the company had just completed a three prong dilutive capital raise of $2.6 billion designed to stabilize its balance sheet and maintain its AAA ratings based on guidance from the published rating agency capital guidelines. Despite the heroic efforts of the management team in raising this capital in a collapsing capital market environment it was my belief that we would need to transform the company if we were to persevere in the rapidly deteriorating global credit and economic environment.
After assessing the situation with your Board we published the 10 point transformation plan that you see here, one week after I returned as your CEO. This is the plan we have been following consistently throughout 2008, a year that clearly turned out to be even more severe then we could have ever envisioned when we began the year.
We have invested the bulk of your contributed capital in regulated insurance entities and therefore our first principal is to provide adequate protection to all policy holders in accordance with the relevant state statutes. All decisions we make in operating these businesses are conducted against a complex and thorough set of statutory regulations.
In addition, major decisions affecting these companies are thoroughly reviewed embedded with the appropriate agencies that regulate these entities. In particular, I reviewed our transformation plan with our regulators before publishing it in February 2008 as the guideline for decisions that we would make for your company as we transformed our business.
The decisions we made to raise capital and then to split our insurance business into separate legal entities were intended to properly balance our fiduciary obligation to take actions in the best interest of shareholders with our duty to provide adequate protection to all policy holders. We remain committed to maintaining the balance between these objectives.
The original plan I reviewed with your Board, the rating agencies and our regulators was designed to separate our businesses from a position of strength over a maximum time period of five years. Unfortunately the rapid change in the credit environment accompanied by an almost weekly revision of rating agencies stress on stress evaluations destroyed this option.
The downgrade of our insurance companies in mid year immediately created $739 million in realized losses as we needed to liquefy close to $10 billion in high quality investments in an environment with few buyers so that we could meet the early termination of our guaranteed investment contracts that contained rating triggers.
Equally important our need to meet all collateral requirements eliminated the positive net present value income stream of invested assets over future interest and principal payments to owners of our remaining GIC contracts and medium term note holders. The goal is to correct this mismatch by mid 2009 as we terminate the remaining GICs and redeploy liquid investments back into longer maturities.
Consistent with principal five we retained the $1.1 billion from our last equity offering at our holding company. As Chuck will explain later, deployed $600 million of back cash in our asset liability management business in the fourth quarter to meet liquidity needs and to avoid making any accelerated claims against MBI Corporation on behalf of these policy holders.
This decision is representative and consistent with other actions we have taken and will take to use all of our available resources to meet expected policy holder claims, corporate debt, medium term note debt, surplus note debt and preferred debt, interest and principal payments while at the same time optimizing long term shareholder value.
We started working on principal two over a year ago and we have begun the long and complicated process of creating transparent separate legal and operating entities for our public structured and asset management businesses. The first step in this process implemented two weeks ago created the legal separation between our US public finance business and our structured and non-US public finance businesses.
The performance of the new company National Public Finance Guarantee whether good or bad will have no direct impact on MBI Insurance Corp. Likewise the performance of MBI Insurance Corp. will have no direct impact on the operations of National.
All of the $5.2 billion invested assets transferred to National came from a portion of the accumulated retained earnings produced by the US public policy holders over the past 35 years and the remaining deferred revenue for the $553 billion in municipal finance net par that National assumed from MBI Corp.
The invested assets remaining in MBI Corporation of $6.8 billion consists of capital provided by our shareholders and debt holders, prior earnings produced by both the US public finance and the structured and global public finance and all of the future revenues associated with our structured and global public finance policies.
Given the high level of uncertainty in todays economic and credit environment each and every constituency of MBIA would like to have first priority on all available resources of the firm to the exclusion of all other stakeholders. Our overarching guiding principal has been to work with our advisors, regulators, and Board of Directors to create a balanced outcome.
We firmly believe that the steps we have taken are consistent with this balance for both MBI Insurance Corp. and National, maintaining ample claims paying resources to cover all of their expected obligations, whether insurance or debt even in todays stressed environment. Points three through nine and 10 are somewhat self explanatory and don’t require any further elaboration based on our actions to date.
Looking forward, Chuck will provide detail on our current legal and operating structures. Each of our businesses has unique challenges ahead. National is open for business but probably needs to raise a modest amount of capital to demonstrate capital market access and to exceed the quantitative capital requirements that both Moody’s and S&P to achieve the highest possible ratings.
While we are well in excess of prior AAA models for one agency and a AA for the other ultimate achievement of ratings consistent with these capital models will rest entirely on the opinion of individuals at the rating agencies. Separate management team at National is firmly committed to meeting these challenges and supporting the US public finance market which is greatly in need of the capacity National is bringing back to the market.
MBI Corporation and its insurance subsidiaries face a different set of challenges. While maintaining a high level of liquidity to make timely claims payments to third party policy holders who are suffering interest and principal shortfalls the management team is pursuing an aggressive remediation strategy to recover a significant portion of these payments from servicers and issuers who did not meet their contractual obligations.
In addition, the company is pursuing active commutation discussions with first party financial institution counterparties who created, managed, and often booked a profit at inception on the cash and derivative CDO structures which today contain substantial but manageable expected losses but sky high or even non-existent mark to market valuations.
In almost all cases these are the exact same large financial institutions that have already received tens of billions in government money for these exact same losses. We have made some progress in 2008 on this front and we’ll be working with these financial institutions and our regulators to reach an equitable solution to the structured finance counterparty issues in the year ahead.
Our asset management business has two challenges ahead. First, they need to maintain their historical high level of investment and service performance for our third party advisory clients. They certainly accomplished this in 2008 with third party assets under management down just 3%, results superior to many other top fixed income firms.
Second, they need to manage the remaining assets of the asset liability business to meet its remaining scheduled liabilities. They will also actively continue to repurchase liabilities from those holders who prefer cash now versus running credit and performance risk of this operation many years into the future.
The role of the holding company, my primary responsibility, is to create conditions that enable the businesses values to be maximized. By balancing cash flows among the businesses, raising third party capital where appropriate which increases value for our shareholders, and restructuring some or all of the existing debt obligations of each of our businesses reflecting today’s credit environment.
These are enormous challenges given the global economic and credit environment and will require careful execution and patience as we pursue each through the years ahead. These are the type of challenges however that we do thrive on. Our talented people, meaningful embedded economic value, and now clean US public finance only balance sheet at National has positioned MBI to create tremendous value in this environment for our shareholders.
We are absolutely focused on doing just this. I will close here and turn it over to Chuck for his review of 2008 and the structure of our current legal and organizational operations.
Today there are two parts to the rest of this presentation. We will deal with the major issues in our 2008 earnings announcement and then hopefully we’ll get out of the rear view mirror and spend some quality time on the transformation of our insurance platform and then take your questions on both topics.
On slide five we show the agenda. I’ll walk through the income, balance sheet and cash flows for 2008 then Mitch Sonkin will review the status of the insured portfolio and then I’ll take us into the transformation discussion and then we’ll throw it open for questions.
If you’ll turn to slide seven we’ll talk about 2008 results. We had a net loss of $2.7 billion versus a loss of $1.9 billion in 2007. The loss is attributable to the ongoing credit crisis and our ratings downgrades. The crisis affects us in four general ways; first we had unrealized losses on insured credit derivatives or mark to market of $1.8 billion on the year. Within the mark to market we had an increase in impairments of credit derivatives of $1.5 billion. Then we had credit losses on financial guarantee policies of $1.3 billion.
Finally, there were realized capital losses upon asset sales and impairments in the asset liability management book that totaled $1.7 billion. The mark to market loss was driven by spread widening across virtually all six income sectors regardless of expected credit performance. Even the highest quality and most stable performing sectors had poor spread performance in 2008 and spreads are the biggest driver of our negative marks.
Continued deterioration in housing market conditions drove our increase in impairments and the losses on insured RMBS securitizations. Mitch Sonkin will cover the portfolio in more detail a little later in the call. We achieved four commutations in the period which reduced the future volatility of expected claims and the total reduction in our ABS CDO exposure was $3.3 billion in the year. Mitch will also provide more details on the commutation.
Realized losses in the asset liability management portfolio were approximately $1.7 billion; $1.2 billion of that amount came from realized losses or impairments of assets that were sold to raise cash to meet GIC termination or collateral requirement. Offsetting this were gains on derivatives that hedged those assets of $427 million. While our net economic loss was $739 million as Jay described the gains on derivatives has been recognized for accounting purposes in earlier periods.
We also experienced $553 million of other then temporary impairments of assets in this portfolio that were not sold. All of these negatives were partially offset economically by gains from securities buy backs which were also driven by the fact that despite the adverse credit environment we had adequate liquidity to seize these opportunities.
Behind all of these impacts of the recession the underlying earnings power of the MBIA Insurance business continues to be evident. Other then the events that I just touched on which admitably are the headlines this year, our insurance segment had over $1.2 billion in pre-tax normal operating earnings. I’ll note that our expectation for 2009 for that number is that it will be somewhat lower due to lower investment income.
The highlights of 2008 include it being the first year in which MBIA had earned premium of $1 billion a 19% increase over 2007. Assuming the FGIC, Domestic Public Finance Portfolio, ensured that MBIA would remain the largest guarantor of municipal bonds for some time to come and allowed us to grow the reservoir of future premium income. We also reduced our gross insurance expenses by 20% as a result of downsizing actions and reversals of accruals for performance based long term comp plans.
On slide eight, you can see the impact of the FGIC portfolio on our future earnings profile both in sheer dollar terms at the top and in terms of the periodic recognition of premiums at the bottom. This helps ensure that the company has the staying power to get through the recession with financial resources remaining in tact.
Slide nine is the loss reserve and impaired credit derivatives picture. In the fourth quarter we had no extraordinary loss reserves just our normal formulaic additions to the unallocated reserves. We did, however, have net payments on previously recorded loss reserves of $331 million. For the full year, we had formula additions of $92 million but we also added to reserves for our RMBS exposures at about $1.2 billion. We also had payments of over $1 billion on RMBS in the year. Reserves ended the year at $1.5 billion.
On the CDO side in the fourth quarter we incurred impairments of $642 million and there are two parts to this. We added impairments for eight deals that total about $567 million. Then we commuted or restructured four deals where the amount that we paid was $75 million in excess of the amount that had been reserved as of September 30th so the total was $642 million.
For the full year, we incurred $1.55 billion of impairments. We made payments of $558 million for the commutations and restructuring and the cumulative outstanding impairment analogist to the reserve balance at year end stood at $1.2 billion.
On page 10 we show the mark to market. We provide detailed disclosure of the components of this years change in fair value of insured credit derivatives in the press release and the 10-K. Here I’d like to focus your attention just on the volatility that has come from this line in our income statement. As we have said many times before, given the nature of our business we don’t view the mark to market as reflecting the true economics of our insured portfolio.
You can see that we had a $1.7 billion loss on this item in the fourth quarter. The volatility continues, however, if we showed the month of January here we would have income of $1.2 billion largely offsetting the fourth quarter loss. Again, these ups and downs do not track the business fundamentals. The biggest impact of the mark has been to obscure the actual performance of the company including the impact of incurred credit losses.
We really did have losses related to this portfolio that total $1.7 billion over these six quarters. The accounting doesn’t permit investors to see this but we have made substantial supplemental disclosures to try to put these effects on the same basis analytically as our loss reserves.
On page 11 we showed the earnings of the investment management segment without realized gains and losses on invested assets. On this basis we have roughly break even performance in the fourth quarter and about $329 million of income for the full year. If you focus in on the asset liability management business and you were to factor out of both the quarter and the full year number, the impact of debt buy backs and related actions the quarter would have been about -$56 million and the full year would have been -$35 million.
The reason for this is that we’re holding substantial cash assets against our GIC and MPN liabilities creating a negative spread, and the ALM business is paying nearly $20 million per quarter for liquidity facilities from the insurance company and from the holding company. We are working hard to get the remaining terminable GICs resolved which should enable us to bring the portfolios run rate closer to break even.
On page 12 security buy backs have obviously been a source of value for us in 2008. We repurchased the cost of capital structure an equity holding company debt preferred of the insurance company, GIC surplus notes and global funding obligations that are insured by MBIA Corp. Of the amount shown here only the gains on debt extinguishment are recorded to the income statement. We believe that we have added substantial value by repurchasing our stock at attractive prices.
Page 13 shows consolidated adjusted book value. The bottom line here is that ABV went from $37.55 at the third quarter to $40.06 at year end a 7% increase. The biggest driver of the change can’t be seen directly on the chart it’s the reduction in share count from buying back shares at prices well below ABV. In the fourth quarter period end share count had been reduced by 10% compared to 9/30. Partially offsetting this effect is the impact of increased impairments on the insured credit derivatives.
Now we’ll turn to the balance sheet and related issues so we’ll go to slide 15. The consolidated balance sheet shrunk considerably year over year. Total assets are down to $30 billion from $47 billion at year end last year primarily as a result of the downsizing of the ALM portfolio. You can also see the age old increase in cash and equivalents from $300 million last year to $2.3 billion at year end.
Looking at the equity section, we had erosion due largely to the mark to market on derivatives that is derivative liabilities increased by $1.9 billion and the accumulated other comprehensive incomes decreased by $1.3 billion driven by unrealized losses on invested assets in the ALM portfolio.
On slide 16 let’s talk about the insurance company’s balance sheet. Here we see in the bar chart the major elements of MBIA Corp.’s statutory balance sheet. You might think that with all the turbulence in 2008 that the balance sheet would have been substantially eroded, it has not. Claims paying resources are slightly higher as a result of capital raising activities but statutory capital has been slightly eroded by reserves and that’s including reserves on the CDOs.
Unlike in GAAP accounting statutory does require that estimated cash payments on insured derivatives be reflected in the financials. The investment portfolio is larger and cash is higher too, up to roughly $2 billion. Insured losses on RMBS and ABS CDOs are higher as well but those losses will be paid in cash over a very long period of time and we have more then adequate assets to fund them. I’m going to provide more details on the loss payment profile a little bit later. Finally, the amount of insurance we have in force has grown as a result of the FGIC transaction.
The next slide, slide 17, shows the cash flow picture of MBIA in 2008. Basically we had negative cash flows in the fourth quarter and for the full year and for the same reasons; loss payments on the RMBS exposures, the amounts paid under commutation and a purchase of insured bonds that totaled $2.5 billion for the year. Cash inflows include normal inflows from premiums and investment income as well as tax refunds, the assets transferred in the FGIC transactions and from reinsurance commutation. I’ll provide a forward look on cash flow in a few minutes.
On slide 18 I think that looking at the overall statutory investment portfolio also provides some perspective on 2008. We started with $11 billion in investments in MBIA and we added $1.81 billion from capital raising activities, that’s to sum up the first three items shown here. Then $717 million from the FGIC transaction and $946 million from normal activities that is premiums and investment income.
Paid losses and operating expenses then bring us to an investment balance of roughly $12 billion. An inter-company repo transaction was larger at year end 2008 then it was at year end 2007 which has the effect of grossing up the insurance company’s balance sheet. That transaction helps support the asset liability portfolio and I’ll provide more details on that presently. While recognized liabilities grew in the year as we saw on the prior slide so did assets.
Slide 19 shows that the insurance portfolio would have shrunk this year but for the addition of the FGIC portfolio and negotiated reinsurance take-back. Maturities and terminations reduced the book by $87 billion shown at the top here and its component parts then we added $181 billion from the FGIC portfolio and took back $14 billion in par from our reinsurers.
In connection with those commutations of reinsurance we received about $200 million in cash covering all existing reserves for these policies and amounts to offset potential future volatility in those reinsured exposures.
Let’s turn now on slide 20 to the ALM portfolio. The most important point to make here is the second bullet. We think we’re well insulated against future liquidity risk in this portfolio. There are no further ratings action triggers in any of the liabilities and we have $2.6 billion in cash against $2 billion of terminable liabilities.
While there does continue to be risks we have a strong excess liquidity cushion. We expect this business to have positive cash flows beginning in May and we expect to continue to reduce its size over time. We are working hard on achieving the termination of all remaining terminable GICs in the short run.
On slide 21 looking at the balance sheet the ALM business had a shortfall of assets to liabilities of $600 million, roughly equal to the inter-segment loan from the holding company activities. This shortfall was created by the sales of assets at losses to meet our liquidity needs in 2008 after our rating downgrade. The only demand liabilities on the balance sheet at year end are the terminable GICs roughly $2.4 billion and about $400 million of that has been terminated since year end.
If you look at it on a market value basis, however, the gap between assets and liabilities is wider. We believe that the liquidity support that the ALM portfolio receives will enable us to avoid forced sales of assets while taking opportunities to retire debt at discounts. At this point, the primary near term risk in the business is volatility in the collateral posting requirements for hedging contracts and the market value of the posted collateral. We believe that we have an adequate liquidity cushion today to meet any such requirements.
On slide 22 I mentioned a couple of times that assistance has been provided to the ALM business from elsewhere in the entity. Here is a summary of that. We have a $2 billion secured lending facility under which the ALM book has provided security in a $2.7 billion book value portfolio of assets to the insurance company in return for $2 billion in cash. This facility enables the ALM portfolio to meet termination payments and collateral requirements without forcing asset sales.
In addition, the corporate segment of the holding company has lent $600 million of cash on an unsecured basis to the ALM portfolio for total cash support of $2.6 billion. On top of that the insurance company has entered into an asset swap agreement under which MBIA Corp. has lent treasury and agency securities to the ALM portfolio and ALM has lent corporate and high grade asset backed securities back to the insurance company.
This arrangement has been in place for many years and its now being used to provide eligible collateral to the ALM book for its non-terminable GICs. These positions are mark to market and about $1.3 billion was outstanding at year end 2008. As referenced on this slide you will note that we have moved this arrangement to our new insurance company, National Public Finance.
Page 23 goes into holding company cash. The holding company has a strong balance sheet with $463 million of liquid assets at year end, $225 million of that is in cash or money market fund deposits. Most of the rest is US Treasury and agency securities. You can see that in 2009 we expect cash outflows of about $100 million and cash inflows only from investment income.
The sources of holding company cash other then investment income would normally be dividends from the insurance subsidiary and accumulating retained earnings of the asset management business. For 2009 insurance company dividends are expected to be constrained. MBIA Corp. just paid an extraordinary dividend on February 17th in connection with transformation so any dividends it makes are subject to approval of the insurance superintendent.
The new company, National, does not have an as of right dividend at inception and the current run rate earnings of the ALM book that we just went through are negative. The holding company is likely to consume some of this cash resources in 2009 but we don’t have any corporate obligations that are payable on demand and we’re holding several years worth of debt service and expenses in cash.
From a legal entity perspective of course the holding company activities and the ALM portfolio are both part of MBIA Inc. so it is important to us that each of these segments maintains adequate liquidity.
At this point I will turn to Mitch Sonkin.
Before I take you through a summary view on our portfolio with an emphasis on our RMBS and CDO books a few comments. As we take stock of the past 18 months we’ve all learned that the global economic crisis has touched virtually every sector in our economy.
The scope of the crisis has for some time now required heightened vigilance in our monitoring of every asset class within our insured portfolio, a keen eye and attention focused equally on the issues that are clearly apparent today such as our residential mortgage related exposures as well as potential issues that are not yet upon us and may well be preventable within the so called contagent sectors.
Our remediation efforts in the residential mortgage backed area have been industry leading and widespread especially across our second lien portfolio with comprehensive forensic reviews, appropriate litigation, extensive loan put back and servicing transfer initiatives. We are using every tool at our disposal to procure recoveries for damages we strongly believe have been perpetrated through misrepresentation and irresponsibility by US mortgage backed issuers and we believe these efforts are likely to continue for some time but ultimately be successful.
Our remediation strategy also extends to our residential mortgage related CDO book where we are also reviewing through forensic analysis what we believe may well be potential misrepresentations on exposures ultimately insured by MBIA. We’ve been receptive to CDS counterparties who seek to commute and restructure their exposure to us only where the economics and future loss mitigation profile provides maximum returns to MBIA.
As I will discuss later during the fourth quarter we did indeed commute and restructure four of our worst performing multi-sector CDOs that met our criteria. We also increased our expected loss estimates on our multi-sector CDO book as Chuck has noted to reflect worsening performance of the underlying RMBS collaterals supporting those deals. I’ll provide more detail on this shortly.
Please turn to slide 25. I’m going to focus my comments today on our residential mortgage back exposures and start with our direct RMBS portfolio. You have seen slides like this before but I want to continue to illustrate our RMBS sector and vintage composition which this slide lays out. As was the case with the last four quarters when you look at our 31.8 RMBS book the story begins and resides largely with our HELOC and closed end second portfolios.
As those books are largely later vintage originations from 2006 and 2007 and concentrated on three issuers; Countrywide, ResCap and IndyMac, we continue to see volatile performance and significant monthly claims on that portfolio. These three issuers are the servicers on $14.2 billion of our insured transactions which represents approximately 88% of our $16.2 billion second lien mortgage portfolio.
Now let’s take a quick look at our subprime and Alt-A portfolios. Please turn to slide 26 and let’s start in the top box. Our subprime book totals $4 billion and this slide lays out for you the asset quality metrics of the subprime book. You can see that current subordination levels generally continue to hover around 30% remaining strong in these deals. MBIA remains cautiously optimistic that regardless of the current real estate owned and foreclosure buckets as well as mortgage industry projected loss rates our rap tranches will not be materially impacted.
This is true for three primary reasons. First, MBIA provided insurance on first lien product only at the AAA class of subprime deal structures since the beginning of 2004. Second, we have almost zero 2007 exposure. Third, due to substantial subordination and deal loss protections on these deals and the selective strategy we took towards direct subprime exposure we consider risk of material loss to be low.
The key take away here is right there next to the top box. Real estate owned properties and foreclosures remain high however, loss severities are averaging around 50%. Accordingly, our insured tranches still remain sufficiently enhanced.
Looking briefly on the same slide in the lower chart let’s review our $3.4 billion of Alt-A exposure. Here we are closely monitoring the portfolio because of the overall increase in Alt-A delinquencies. This slide gives you a snapshot of current performance trends, enhancement averaging a bit over 8% and increased foreclosure activity.
We attached a AAA original rating levels for all of our Alt-A transactions except for one transaction where we attached a AA. More then 40% of the exposure is of the pre-2005 vintage and while the delinquencies are increasing in the Alt-A book they are much lower then the Alt-A universe as tabulated for example in Moody’s recent release on Alt-A performance. For example, average severe delinquencies for our 2007 vintage are about 7% as of December 2008 while Moody’s data indicates that the 2007 Alt-A delinquencies were about 10% as of October 2008.
On an aggregate basis the credit support for Alt-A portfolio continues to appear adequate. There are a couple of deals that we have elevated to higher concern. Loss estimates of our transactions are heavily dependent on foreclosure timelines which of course are increasing. One important fact to consider is that about 75% of the loans in our Alt-A portfolio are fixed rate mortgages and these generally have better performance then adjustable rate mortgages. Very significantly we do not have any option ARMs.
The average FICA letter origination for our portfolio was 700 the average LTB is less then 70% compared to low to mid 70% for an average 2006 Alt-A collateral. Moreover in over 60% of the Alt-A deals our AAA attachment is not on the lowest senior tranche and about 70% of our Alt-A exposures still retains its natural AAA rating from S&P.
Given this performance at this point our projections do not indicate material losses. However, we monitor the portfolio monthly and the delinquencies do continue to spike and liquidations from foreclosure and REO buckets start to accelerate we will then need to review for reserves on this portfolio.
Here too if you look back to the slide the key take away is what you see adjacent to the lower box. REO and foreclosures are increasing and aggregate loss severities have increased to approximately 40%. On an aggregated basis current enhancement levels are adequate.
Now let’s turn to slide 27 and our HELOC closed end second portfolio the area which we have been experiencing significant stress in our RMBS portfolio. You will recall that in the third quarter on our second lien RMBS portfolio we increased our expected incurred loss estimates by $1 billion thereby resulting in total increased total incurred losses of $2.1 billion today with volatility remaining that could further increase these estimates depending on how future performance progresses.
We did not increase our loss reserves in the fourth quarter since performance for the quarter was well within our expectations. The third quarter increase was driven by material increases in both new delinquencies and back end loss experience while roll rates remained flat. As of December 31st we now have reserves on 71% of the second lien deals including essentially all of the 2006-2007 exposures to Countrywide, ResCap and IndyMac.
If you’ll recall from my earlier slide I showed you that MBIAs tar exposure for HELOCs and closed end seconds was $16.2 billion December 31, 2008, which is roughly $8.7 billion closed end seconds and $7.5 billion HELOC securitizations and that the majority of those deals had been originated in 2006 and 2007. While we don’t expect many of the remaining second lien deals to experience material losses the real issue instead is how much volatility remains for the deals we are paying claims on now.
While we didn’t increase our impairments on our second lien portfolio in the fourth quarter we all know that material uncertainty remains and there is the possibility of additional reserves in the future. The main drivers here of additional reserves are going to be the rate at which loans entered the delinquency pipeline and then roll to loss and how long that elevated delinquency performance is maintained before we see any relief.
For example, with all other variables remaining constant the default levels stay elevated for an additional six month period beyond your expectations we would estimate additional incurred losses of $500 million on the second lien portfolio.
If you join me on slide 28 you can see some dynamics related to the delinquency and loss continuum. The top chart shows the monthly trends on roll rates. We’ve essentially seen a general flattening across the various delinquency buckets. As we have said previously it may not be getting materially worse but it’s not getting better and the levels remain elevated.
Turning to the bottom chart it looks like after an extended period of increasing monthly losses in both the HELOC and closed end second portfolios we are starting to see more of a consistent trend that we are settling in to. Our belief is that this represents a peak in monthly losses that will start to decline in the coming months.
However, we are also seeing an increase in early stage delinquencies. This increase has been within the general range of our revised estimates to date but were they to increase at the same pace over the next one or two quarters and roll rates would not show improvement we will have to further examine reserve adequacy. At this point the question is simply how long this pace can sustain itself when it comes to determining our ultimate credit losses on the second lien book.
I want to note that we have paid out $1.4 billion in claims as of December 31, 2008, and over 69% of the claims paid on the second lien book are a little over $1 billion is associated with the deals subject to the litigation that we are engaged in with the vast concentration being Countrywide and ResCap.
I want to pause on an important point here. We continue to give zero credit towards recoveries associated with the litigation and claims we have commenced against Countrywide and ResCap and IndyMac. We feel very strongly about our cases and believe that if we had embedded recoveries in our losses our projected incurred losses would in fact be materially lower then we are projecting at this time. We’re simply choosing to be conservative from an accounting perspective which in no way reflects the high level of confidence we have in our claims.
We’re going to continue to monitor the performance of the book and the reserve adequacy vis-à-vis delinquencies and we’re going to be pushing forward on our litigation aggressively. I expect that the second lien portfolio will continue to be a topic of discussion throughout the year.
Before I turn to our CDO and structured pools book I want to make a few comments on possible cram down and loan modification initiatives by the Federal Government. While we all know it’s impossible to predict the success of government initiatives towards stimulating loan modifications and preventative foreclosure measures and the effect it would have on our book.
Loan modifications in an of themselves could be an overall positive for our direct first lien RMBS portfolio due to where we sit at senior tranches and because we had provisions which protect more senior tranches from bankruptcy loss allocations. However, unless criteria are specified for the second lien deals when first liens are being modified the overall impact is impossible to predict.
In the case of RMBS transactions underlying our CDOs the impact of cram downs or modifications could be similar and possibly better then the impact of loan modifications to our direct first lien book. The exposure of our CDOs to shipping interest RMBS transactions is negligible the bulk of the exposure is to subprime and Alt-A senior and mezzanine RMBS tranches.
As a result, modifications and cram downs which might help borrowers keep up with their payments could in fact increase cash flows to these RMBS tranches which would of course be helpful. The real challenge here is implementation. Having bankruptcy judges make decisions on loan terms and principal payments is distraught with complications and potential inefficiencies including overloading the bankruptcy courts.
Now let’s turn briefly to our CDO and structured pools so please join me on slide 29 which summarizes our exposure. MBIA’s $124.9 billion CDO and structured pool exposure is primarily classified into the five collateral types you see here only one of which is experiencing stress related to the US subprime mortgage crisis and that’s the multi-sector CDO portfolio totaling $27.7 billion.
The slight increase in some exposures that you might see in some categories quarter over quarter was due primarily to reinsurance take backs. Let me briefly update you on our four primary collateral type portfolios. First, the investment grade corporate portfolio of $39 billion comprises diversified pools of corporate names insured with deductible to cover losses due to credit events. During the last two quarters several credit events occurred including Lehman Brothers, Washington Mutual, Fannie Freddie and three Icelandic banks.
Based on the final CDS protocol prices from Lehman, Freddie and Fannie and assumed prices for WaMu and the Icelandic banks the actual aggregate impact MBIA’s portfolio was very small with overall weighted average enhancement declining about 1%. At this time the deal deductibles remain strong despite the large names that have defaulted thus far.
In the high yield portfolio $12.7 billion it’s comprised largely of corporate loan obligations with a concentration in middle market loans and to a lesser extent broadly syndicated bank CLOs and older vintage corporate high yield bonds. Deals in this category are diversified by both vintage and geography with European and US collateral.
Given macro economic conditions and the credit market lock up obviously the middle market space requires a lot of attention. The underlying collateral is generally senior secured loans and the transactions are managed by high quality non-bank lenders who have their interest aligned by equity positions beneath our insured debt. We are seeing increased CCC buckets in these deals as you would expect but there has been no material deterioration to this point.
On the commercial real estate portfolio of $45 billion this a diversified global portfolio of high quality and highly rated structured deals in the global commercial sector. Thirty five billion of our net exposure in this sector is to structured CMBS pools that aren’t truly CDOs. These pools consist of static CMDS referenced securities generally ranging from DDD- to AAA bonds with the vintage focused on 2005 to 2007 and they’re subject to a deductible. The remainder of the portfolio is commercial real estate CDOs which are made up of CMBS hybrid transactions and a handful of whole loan deals.
We have a presentation you should look at on our website that provides a good commentary on our commercial real estate exposures and we have a few slides we will be updating summarizing where performance stands today. Obviously there are many diversion deals and where commercial real estate is headed as it is affected largely by the overall economy.
We believe our deals are supported by deductibles commensurate with the risk profile and importantly the CMBS pool deals are supported by long term fixed rate loans for the bulk of the refinancing occurring in 2015 and after. The near term financing risk is not our primary concern although it certainly is in the marketplace. As with the marketplace we have seen delinquencies rapidly increasing over the last quarter to a little over 1% from 68 basis points in the prior quarter.
We certainly expect delinquencies to increase over the next year given the stress in the office and retail sectors in particular and we expect that recent rating agency downgrades on CMBS collateral will translate to some of our deals being downgraded during the year. Making projections beyond that is difficult at this time because the underlying performance remains satisfactory.
We do believe that the fundamentals and the supply demand equation for commercial real estate was certainly far better then for residential mortgages and that while loan underwriting became more aggressive in mid 2006 and 2007 there is still an underlying corporate cash flow dynamic that we are hopeful will result in a softer landing then in the residential sector. Either way its going to be several years before it is clear how deep the commercial real estate sector will be impacted. It is certainly far too soon to conclude that investment grade tranches at CMBS will be decimated across the board.
With that let’s move to slide 30 to review and discuss this quarter’s significant activity on our multi-sector CDO portfolio. As Chuck mentioned, MBIA successfully executed commutations on restructurings on four of our worst performing transactions which resulted in realized losses of $558 million and eliminating the vast majority of volatility of the future losses associated with those specific exposures.
You can see on this slide the four categories these commuted transactions fall in to. In the aggregate the commutations were achieved at or within the general range of existing impairments and we would have increased the reserves on the deals by several hundred million dollars had we not commuted and restructured them.
In two cases we retained some opportunity for upside which can actually further reduce our economic costs for the transactions. We did these deals as they matched up squarely with the criteria we believe made these transactions prudent versus paying out impairments over their contractual terms. For example, the price was right in line with our loss expectations; future volatility was material so mitigating that risk was important. The imbedded return from claims avoidance and volatility mitigation made sense and the counterparties had a realistic view of the bid mask.
We eliminated net par of $2.7 billion and an additional net par of approximately $1 billion was strengthened through restructuring either by us retaining a smaller super senior position benefiting from the turbo of all cash to pay down our rapt exposure after which we would receive any additional upside or through the form of additional subordination on our one CDO² trade.
We’re going to continue to entertain commutation and restructuring opportunities to counterparties where appropriate consistent with the criteria laid out. However, I would expect these opportunities may be limited to those counterparties seeking global CDS solutions and bring us realistic bid mask expectations.
Turning now to slide 31, this is going to give you a good snapshot on the impairments and the impact on our commutations. As we previously stated, the multi-sector CDO portfolio is where we’ve been experiencing stress related to the US subprime mortgage crisis. We’ve had substantial ratings downgrades and impairments on our insured book and there remains some uncertainty over where ultimate impairments will wind up given the continued volatility in the residential mortgage market.
We increased our net impairments during the quarter by $642 million which brings our total expected incurred losses on the multi-sector to $1.7 billion. You will note that the $1.7 billion results from our realization of losses due to our commutations and then increasing our reserves on the remainder of the portfolio to $1.2 billion.
The increase in impairments includes both increases to existing impairments as well as some new additions to the impaired category with similar profiles which are CDOs backed by RMBS collateral with buckets of inner ABS CDOs where our payment obligations are timely interest and ultimate principal.
As we note on this slide and consistent with previous actions, and as Chuck pointed out, we increased impairment estimate inner CDO collateral has generally performed as poorly as we anticipated and direct RMBS collateral demonstrated deterioration based upon a roll rate methodology for subprime and Alt-A collateral.
Specifically, the combination of increases in the early stage delinquencies rolled to loss and severities all combined to increase our loss estimates for on 2006 and 2007 subprime and Alt-A collateral. The performance of the RMBS collateral in these deals and the timing in which collateral deterrents will ultimately drive future impairments remains to be seen.
Given the slow movement of foreclosure timelines and the momentum building toward implementation of foreclosure mitigation and loan modification efforts, the next few months will be critical in determining whether there is truly any real momentum toward loan modifications for securitized assets and therefore whether we will need to alter impairment levels.
Before I conclude a few general comments on the rest of the portfolio and so if you’ll turn to slide 32 I’ll go through those with you. First, our muni book continues to perform satisfactorily despite difficult market conditions. Outside of sporadic credit issues we are not yet seeing any material sector related problems that would rival anything like what we are seeing on the structured finance side. We are seeing some softness in selected healthcare exposures related to certain hospital systems and single sight facilities.
In prior conference call we’ve discussed our remediation of the Lane Cove Tunnel deal where we an Australian $1.2 billion exposure through a rap bond. During the fourth quarter of 2008 we were in fact able to make significant progress on our remediation efforts and have taken steps to significantly mitigate potential losses.
In general now in our consumer related exposures we continue to see them hold up well with solid credit protection and short remaining average lives. We have no remaining primary market insured credit card exposure. Our auto book transactions are generally funded to required enhancement levels and while unemployment rate increases could impact that portfolio we are well positioned for material increases in defaults due to that strong credit enhancement.
Student loan performance of federal guaranteed and private has held up well from an asset performance standpoint but clearly there are funding issues in this space with the collapse of the auction rate and variable rate funding markets that we are dealing with now, before we can see any material issue and currently satisfactory parity levels.
Due to Phelp base we are working with issuers towards utilization of alternate funding arrangements and we believe the new Department of Education conduit will provide some near term relief until liquidity ultimately returns to the marketplace. We transferred our state agency related Phelp exposures to National which with its rating we hope will provide some ultimate relief to VRDN and auction rate note borrowers.
Our rental fleet exposures continued to perform as MBIA only maintains exposure to the top three rental fleet operators. This portfolio will be completely repaid by year end 2011. With the pressures on the big three automakers and macro economic stress the onus is once again as it was post 9-11 to streamline operations, manage their fleets deftly and maintain adequate liquidity during this downturn.
Turning back for a moment to commercial real estate, as I stated before this sector continues to capture headwinds as delinquencies increase at a more rapid pace with conduit delinquencies piercing the 1% mark at year end. Near term refinancing risk continues to be the primary concern although general stress has been placed on almost all commercial real estate sectors in recent months.
As I mentioned before, we’re fortunate that the majority of our book features seven to 10 year fixed rate collateral with vintages in the 2004 to 2007 time period so the impact of refinancing volatility for us over the next three years should not be a major issue in those deals. In addition, those deals feature enhancement levels commensurate with the risk profile.
For example, deals with primarily BBB collateral generally have enhancement of 30% to 35%. Having said all that, due to the inherently high leverage associated with CMBS over the last several years we are focused on monitoring our long term position in this market especially on our deals with primarily later vintage BBB- rated collateral. We are ever mindful the risk inherent in commercial real estate in this severe economic downturn. I refer you to our website if you desire more information on our CMBS exposure.
This concludes my portion of our presentation. With that I’ll turn it back over to you Chuck.
We’re going to turn now to a discussion of the future or at least we’re going to set the table for the future so if you’ll come to slide 34 please. Jay has pointed out earlier that we fully expected to create separate legal entity platforms for our domestic public finance and structured and international businesses as far back as February 2008 when MBIA Corp. was still rated AAA.
The first steps in the transformation of the company and its business model were accomplished two weeks ago. The steps are described here in sequence but they all occurred simultaneously. MBIA Corp. paid two dividends first to transfer the former MBIA Illinois now to be known as National Public Finance Guarantee Corporation and then to capitalize it with $2.09 billion.
Then the now sibling companies entered into quarter share reinsurance of MBIAs public finance business. The second to pay policy gives those policy holders direct access to National enabling it; National’s ratings to be extended to the MBIA originated policies. The approval letter from the New York State Insurance Department approving the various steps in the transformation was posted to our website this morning.
On slide 35 the legal entity structure now looks like this. We have a new subsidiary currently domiciled and regulated in Illinois. It has a Board of Directors of eight, of whom five are the CEO of National and four MBIA senior executives along with three outside independent directors. Those eight directors have fiduciary obligations to act in the best interest of National shareholders but also have a duty to obey the State Insurance statutes governing that separate insurance company.
This is no different then the obligations and duties of the directors of MBIA Corp. As you can see, MBIA Corp. has three insurance subsidiaries and it also insures the liabilities of the asset liability management business. National’s Chief Executive Officer is Tom McLaughlin a 25 year veteran of the public finance business. Tom has a staff of 40 experienced professionals who are directly employed by National, responsible for marketing and origination, risk and portfolio management, finance and legal.
While much infrastructure is outsourced to others within our consolidated group Tom and his management team will be responsible for deal selection, capital management and investor relations for the new company. We anticipate that we will raise third party capital for National and therefore it is designed from the ground up to be separately managed from MBIA Corp.
The company has a so-called negative earned surplus position at inception which under Illinois law would prohibit as of right dividends for the next few years. We are expecting to re-domicile National to New York and to request that the earned surplus be reset as a result of the reorganization of our legal entity structure. That is the next big step in fully establishing our new company.
On slide 36 we show that we have divided MBIA Corp. assets and liabilities between these two companies. The slide shows the split as if it took place on September 30, 2008. This is the balance sheet profile that we’ve portrayed in our original application to the states filed in December. The objective in this split was to create two investment grade balance sheets using internal estimates of rating agency capital models.
Given the split of the liabilities along business lines this is the asset division that is subjective. The asset swap facility that we talked about earlier goes to National as does most of the up front premium business. Most of the loss reserves stay with MBIA Corp. for its housing related exposures. A detailed listing of the policies that are reinsured to National is available on our website. You cannot see our surplus notes here as they’re an element of policyholder surplus but they are embedded in the $2.5 billion of surplus in MBIA Corp. that you see here.
Slide 37 shows the same view but updated to December 31st. This information was full shared with the rating agencies and regulators prior to executing the transformation. Since we only filed the statutory statements yesterday this is the first time that we’re talking about year end balance sheet publicly.
MBIA Corp.’s asset profile is somewhat smaller then at September 30th since it entered into the five loss mitigation transactions that Mitch referred to under which it made payments to bondholders that is to say four CDO commutations and the purchase of the majority of the bonds of an international infrastructure project at a discount. We saw this negative cash flow a few slides ago.
Loss and LAE and contingency reserves in MBIA Corp. were reduced as well so that the surplus is higher then it was at September 30th. National’s assets are larger then at September 30th but only because the asset swap repo notional amount grew from $722 million to $1.3 billion as shown here. Contingency reserves were posted for the FGIC portfolio in the fourth quarter which caused National’s surplus to fall to $416 million. Again, all of this was fully discussed with the regulators, and rating agencies prior to the approvals and the rating actions that have been taken.
Slide 38 shows the split of claims paying resources and this is the basis of the capital adequacy analysis that credit analysts perform. The statutory capital, unearned premium and loss in LAE reserves that are shown here are direct lists from the prior slide. The present value of installment premiums mostly goes to MBIA Corp.
We also have bank soft capital facility of $450 million that attaches to the public finance portfolio but MBIA Corp. is the contract party. This facility has been highly profitable for the banks that back it and we have offered to convert it to a National facility. That is still be to be done so we’re not counting it here as part of National claims paying resources. The bottom line is the split of our roughly $15 billion of claims paying resources at year end goes $9 billion to MBIA Corp. and $6 billion to National.
Going on to slide 39 I’ll talk for a few minutes about the asset and insurance portfolios of the two companies. Despite the familiarity of MBIA Corp.’s combined investment and insurance portfolios the split almost puts us in the position of presenting this to you for the first time. For this slide gives a high level view of the National investment portfolio.
This is pretty standard bond insurer fare more then half the portfolio in municipal bonds the balance in other high grade assets. The treasury and agency portfolio here is subject to the asset swap agreement but is fully collateralized and is mark to market. The portfolio has very little credit risk and deminimus unrealized loss at year end 2008.
On slide 40 MBIA Corp. has a different kind of investment portfolio but one that fits its relative position very well. Because we expect continuing near term claims payments mostly on our RMBS and opportunities to engage in commutations and other value adding transactions it holds substantial cash, $2 billion worth or 34% of the asset pool.
In addition, it has lent $2 billion to the ALM portfolio secured by a static collateral pool as I described earlier. This arrangement will take a few years to repay but at this point the ALM portfolio is expected to fully repay the obligation and to earn the release of its collateral.
Slide 41 introduces the insured portfolios of the two separate companies. This is probably self evident as the purpose of the transformation is to separate the domestic and municipal portfolios from the structured and international. It’s important to note that while the structured business has problematic sectors today we do not believe that it will always be so. There has now been increasing discussion in Washington and in the press about getting the ABS business reinvigorated.
We think that going forward there will be at least as much opportunity in the international and structured finance sectors as there is in the domestic municipal business. Of course with $9 billion in claims paying resources MBIA Corp. should have enough resources to be a player in these businesses as they come back.
Slide 42 shows the cash flow expectations for the two companies in 2009. We expect substantial positive cash flow from National about $430 million is the net here. We note that there is an expectation that we’ll write substantial business this year, our business plan assumes that we’re fully capitalized and rated stable by April 1st. Clearly we’ve got some work to do on that but even if we wrote no new business the cash flow of National is expected to still be close to $200 million.
On the MBIA Corp. side we expect basically to break even from a cash perspective this year. Of course we’re counting a $2 billion cash cushion in case this assumption is incorrect either because payments are higher then we expect or because we enter into commutations or other value added type transactions.
Page 43 provides a payment profile for MBIA Corp. It bases is maximum cash outflows in 2009 as the home equity loan and closed end second securitization payments are peaking now and are expected to remain at a very high level all year. Beyond that expected payments drop off to very low levels until the principal payments are to be made on ABS CDOs 38 years or so hence. Of course we are hoping to settle some of the CDOs via commutation earlier then that.
Slide 44 presents some capital information. We’ve estimated our position on the rating agency capital model tier for National. Our capitalization level exceeds AAA levels from Moody but falls just at the AA level for S&P. Our objective is to qualify for the highest possible rating and as Jay referenced that does suggest a capital raise. National’s capital position will improve by $150 million per quarter if we raise no new capital and write no new business but we are hoping to move more quickly then that implies.
On slide 45 MBIA Corp.’s capitalization is a little harder to talk about because of the volatility of rating agency estimates of expected and stress losses over the past year. What we can do though is to measure our claims paying resources against our expected losses for cases that we have reserved against today. We expect to pay out on net present value $2 billion on current cases, mostly ABS CDOs and RMBS.
S&P has done its own estimate of stress losses on these cases and their stress is about two times where we are today, then they add in losses in a depression scenario on all other exposures to get to the cumulative loss that they compare to our capital. Again, we cover the A level capital requirement with the cushion but we have no cushion to the AA requirements.
Moody’s has said that its estimate of losses is roughly equivalent to our claims paying resources but at this point they’ve provided no quantitative analysis to us. Bottom line though is the company has adequate resources to cover expected losses even where expectation is formed against the backdrop of 2008’s experience and to cover even stress losses that assume that 2008 is a new norm and then stress is to be extrapolated from there. This gives us great comfort that we will meet all obligations to MBIA Corp. stakeholders.
Page 46 provides the organization as well as ratings information for the company. Our target of course is to achieve high stable ratings for National. We’re not there yet. The S&P rating is AA- with a developing outlook which means that S&P could go up or down. The determining factors appear to be the degree to which investors and issuer acceptance of the business model and the progress that we make on improving the capital picture.
On the Moody’s side National may be the only insurance company out there that’s on review for upgrade by Moody’s. To get there Moody’s is also looking for some validation from the markets that the business model works and will be accepted over time by issuers and investors. Achieving that will enable them to establish higher ratings for National.
Both agencies at this point appear to have accepted a belief that there’s very little demand for bond insurance. We believe that there’s ample evidence that the problem has been the availability of bond insurers rather then any change in the essential value proposition. In fact, after a period of time like this when holders of insured bonds are at least so far being paid by the entire industry there might even be a heightened level of interest in this product going forward. At any rate it’s clear that we have something to prove to the rating agencies in this regard.
On to slide 47, what have we created now? National is the world’s largest municipal bond insurer with ratings that are expected to be both high and stable. It is separate from MBIA Corp. with independent directors and separate underwriting and surveillance staffing. There’s been a lot written and said lately by commentators about whether all this is worth it.
They said that issuers will no longer appreciate the value of bond insurance and that investors won’t accept bond insurance. They never mentioned the fact that we’ve already paid out to our policy holders $2 billion in claims. I think those policyholders would agree that there’s value to our insurance. Nonetheless some analysts expect very low insured penetration. One report recently projected single digit insured penetration going forward down from 50% traditionally.
We think frankly that the naysayers have overdone it. Their variety of indicators that suggest the future for the business first I note that are two competitors who may merge in the near future together raps 13% and 14% of new muni issuances in January and February. Together they’re already beating some of the penetration predictions.
If you add in all credit enhancements including start up bond insurers and bank letters of credit penetration for credit enhancement was 19% and 23% for January and February respectively. Third, the fact that two companies attempted to start up bond insurance companies in 2008 indicates that outside entrepreneurs believe that there’s value in the business model.
In addition, there have been several government initiatives to start up a variety of types of bond insurers to respond to what they’ve perceived to be strong demand. Finally, there’s the feedback that National has received in its two weeks of life. Investors and issuers are very interested in using National although they await our ratings achieving the high stable target that we’ve articulated.
We think the secondary markets where we’re wrapping over bonds and investors portfolios may recover more quickly then the primary markets. At this point we’ve already turned down two deals and we’re having preliminary talks with a couple other issuers who may benefit from bond insurance. Interest appears strongest among BBB and A type issuers who dominated January and February issuing.
Now that we have fully disclosed all the relevant information about National we’ll be in a position to market aggressively to the fixed income investment community and to issuers. We’ve developed lists of the top tier investors and most likely issuers and we’ve scheduled visits with them, while we maintain a robust dialogue with the FA and investment banking community.
We don’t expect that this will be like the 80s and early 90s for MBIA when we could afford to hang back and wait for the phone to ring but we do have focused resources in National actively marketing this business. We know that we will need to create and earn confidence in the market.
Finally, National will be profitable from day one. If we write no new business we expect our statutory income to be above $300 million this year. If we raise capital for ratings purposes of course we would expect higher net investment income and also higher underwriting income.
Finally, on slide 48 here for the first time we’re breaking out our adjusted book value into its constituent parts for the business segments. National has and ABV of roughly $18 per share and we believe very few barriers to its realization. MBIA Corp. continues to be the largest business in our family but as we have said in the past and as Mitch described there is uncertainty about future credit losses in this business and investors need to formulate their own views about whether and how much they should adjust the impairment and loss amount that are shown here.
The asset management business now has a negative book value even after adjusting for unrealized losses of about $2.70 a share and the negative spread is worth another $0.58 per share as the terminable GICs are terminated and we’re able to buy back debt at discounts we think that we’ll be able to improve this as well. Combined consolidated ABV is about $40.06 per share at year end.
With that we would be happy now to open it for your questions.
Before we start the open call questions we’re going to answer some questions that were submitted previously in writing. Before we do that let me just indicate that we did receive some questions about the potential for litigation as a result of the transformation and we’re not inclined to comment on litigation matters. With that we’ll go to the first question that was submitted in advance in writing.
It comes from Andrew Oliver of Transatlantic Capital. How will the proposed ability of bankruptcy courts change the terms of residential mortgages affect your estimate of MBA’s losses in this area?
I’d like to make the broader comments about each of the different solutions we’ve seen that’s been proposed over the last 18 months to address the combination of mortgage losses and related losses on different types of securitization. Its our belief as an insurer of over $120 billion of the most complex different types of securitizations out there that the government’s efforts to pour money in the top or to put a variety of different Band-Aids on individual troubled loans continues to be the wrong approach.
We believe that if America is going to solve our mortgage problem and stabilize the housing market and at the same time fix the financial system ultimately the only answer is going to be to refinance all of the loans in all of the securitizations. This includes the preponderance of loans that are good loans in order for those loans to be refinanced at a lower rate and at the same time have the ability for the country to absorb the losses on the small portion of loans that ultimately will default.
We think the suggestions to buy out loans wholesale across the board and reissue those in the new securitization is ultimately the only answer that’s going to have a significant effect. We think this mortgage change that is being suggested has great social overtones, it has the ability to deal with a small portion of the loans but we think when we look a the macro picture of the overall issue in America facing the housing market and the mortgage securitization market that the effects of this particular change like most of the others will be very nominal.
Overall the proposals keep changing and there are a number of proposals that are out there. History has also shown us that changes to the bankruptcy law are few and far between and they’re frequently highly contentious and that we’re in an extraordinary environment now and perhaps that will be different. Whatever we’re seeing now is not what we necessarily will see in the form of an amendment.
That said there are a couple of ways that potential what’s being called “cram down” legislation can affect the transactions. First, it could have the same effect as the principal or interest loan modification in reducing the cash flows in the transaction but this would primarily affect subordinate tranches in first lien, RMBS deals and we only have exposure to senior tranches and direct RMBS first lien deals.
Although “cram down” could result in a principal write down they do have potential to take loans that are now cash flowing and turn them into cash flowing and that would be a positive. In shifting interest structured transactions, these are primarily used with prime and Alt-A collateral, a bankruptcy cram down could breach the bankruptcy reserves on some transactions and this would allow losses to be applied pro-rata to all tranches including seniors. For us only about 10% of our first lien portfolio has provisions which allow for allocation and bankruptcy related losses to the seniors on a pro-rata basis.
Loan modifications and cram downs are very difficult to predict for second lien deals expect they could provide relief to the borrowers on their first liens so they could make payments on their second liens but again it really depends on the form and nature of the legislation.
On the RMBS transaction that underlie our CDOs the impact of cram downs or modifications could be similar or even better then the impact of loan modifications on the direct first lien book. The exposure of our CDOs as I mentioned before to shifting interest RMBS transactions is really negligible. The bulk of the exposure is to subprime and Alt-A and MES RMBS tranches and so if the modifications and cram downs will ultimately help borrowers keep up with their payments it could increase cash flows to the RMBS tranches.
My last point is just one a practical point especially being a former bankruptcy lawyer. The real challenge here is always implementation. They have to find a way to find the right tools to try to stimulate modifications if we can’t get to the optimal solution which is a solution that Jay laid out. Potentially flooding the bankruptcy courts with modifications that need to take place some might argue might be the last resort but overall less then the most efficient way to go about getting modifications.
Andrew Oliver has another set of questions. In his annual letter this year Warren Buffett suggests that the basis for claiming the default on tax exempts have been low historically is false as it is based on the experienced entity that issued in uninsured bonds not insured bonds. He also states when faced with large revenue shortfalls what mayor or city council is going to choose paying to local citizens in the form of major tax increases over to borrow bond insurers. Do you agree with his analysis and forecast?
Three comments that I’d make about Andrew’s question. First is there is a significant difference between the experience of defaults between insured versus non-insured. In actual fact, insured bonds have had a better performance over time then uninsured bonds. The reason for that is very simple, as an insurer we act much like a bank as a secured lender. We actively get involved long before there are any defaults. The experience in the last 35 years has shown us clearly that the actual results for insured bonds are better then uninsured bonds.
Second, I would agree with the observation made by Berkshire that the next three or four years are going to be very tough in the public finance area. We certainly expect there’s going to be stress. We certainly expect there will be losses and we certainly expect that the types of defaults that we’re going to see are going to be in excess of the historical low norms that some people refer to looking backward.
Last, I’ll comment, I thought it was an odd statement to suggest that an insured bond holder would behave differently because they happen to buy an insurance policy when they’re issuing bonds. Its somewhat [enevolis] to suggesting that’s because somebody bought insurance on their house that if a fire started they wouldn’t try to put it out. We have found our own experience is with all bond holders, bond issuers, they all work hard the same as we would to live up to their bond obligations and they take what steps they believe are necessary to get their finances in order.
I think you’re seeing that demonstrated across the country right now in multiple jurisdictions as a multitude of different regulatory elected and non-elected officials struggle with the effects of the economy on their particular bond issues.
The next question comes from an individual investor. His letter to the treasury, New York Governor David Paterson suggested creating a not for profit municipal bond insurer owned by the municipalities. What are your views on this and will this likely, significantly hamper the future prospects for National?
First of all we welcome the interest of Governor Paterson in the efforts that we and others are making to try to unfreeze the municipal bond market. The Governor has been very supportive of the things that MBIA is trying to get done including the establishment of National Public Finance Guarantee Corp. so we appreciate that.
With respect to the creation of a not for profit municipal bond insurer again as I referenced in my prepared remarks there are a number of initiatives out there to create bond insurers. We recognize it as evidence that there really is demand for the products and frankly there is so little capacity in the marketplace today that there is room for additional competitors.
In general we don’t view not for profit or government owned or operated insurance companies as efficient or effective in both serving the needs of the insured as well as getting leverage of private capital. We certainly don’t have any objection to new entrants in this marketplace. What is needed today is a more robust market for bond insurance as a part of an initiative to reopen the municipal finance markets. I think those were the key messages that the Governor was framing.
Another individual investor asks, what were the rating agency stress tests case loss estimates for the four commuted transactions? When were these commuted? Were your counterparties aware of the plan to split National and municipal and the structured finance side is so that they agree to the commutation due to perceived weakness of MBIAs future structured finance insurer?
We did not provide any advance information about the transformation to our counterpart in negotiating the commutations that took place in the fourth quarter. Second, every counterpart’s motivation to enter into the transactions that they did with us they’re going to be as diverse as the counterparts themselves. Its hard for us to speculate about to what degree are liquidity concerns versus potential concerns over long term health of MBIA and other things play into the decisions that people make then enter commutations with us.
Another individual investor question, what are the assumptions embedded in the stress case tests that were done by your advisers to determine in the MBIA structured finance business split from its municipal bond business is equitable? Who were the advisers that did these stress cases and how do they compare with the assumptions used by the rating agencies in their stress cases?
The advisers that we’ve worked with include Raymond James that provided a report on reinsurance agreements between National and MBIA. Bridge Associates which looked at the solvency of MBIA Corp. after the transaction. [Dewey Lacuffs] our legal advisor and others. We did have outside advisors on this matter.
Stress analyses were done by those outside advisors. Stress analysis was done by the State of New York on its own in reaching the conclusions that are embodied in the approval letter that we posted on the website today. Of course MBIA we did our own stress analysis to satisfy ourselves that we were acting in a way that’s consistent with our obligations to policyholders in both companies.
The stress analysis that was done takes various forms. To boil it down best because I’m not going to provide all of the assumptions that go into the analysis, to boil it down best might be to say that we have a base case for this recession with respect to housing performance that has things returning to a more normal position in mid year 2010 and the stress tests that we’ve done we’ve extended that period for an additional three years in some of the tests. In a scenario like that we find that MBIA meets all of its obligations to its stakeholders.
The next question from an individual investor, is this a fair statement, if the structured finance subsidiary does not breach statutory capital minimums then the lowest possible value for the unit is zero, i.e. the adjusted book value of National less the debt at the holding company is a good indicator of the value of the company?
It’s a little hard to respond to that since the value of the company obviously is determined by the market. If the question is are MBIA Corp. and National separate with respect to the contributions that they make to enterprise value the answer to that is yes, to the extent that the value of one of them were to turn out to be zero the remaining value of the consolidated firm would be the value of the other.
Another individual investor question, what would need to happen in order for the new structured finance subsidiary reach New York statutory capital minimums i.e. home prices meet supply by ‘x’ percent, unemployment meets the goal, the ‘y’ percent etc. I know MBIs view as well as the commissioner Donato’s view is that the split is equitable in both subsidiaries have adequate claims paying resources, however, the market doesn’t believe that. What needs to happen for the structured finance to blow through its CPR and reach capital levels where Donato’s office has to rehabilitate “that insurer”.
This is another question about scenarios and what kind of scenario would break the company. For any financial institution of course you can design a scenario that results in the company being insolvent. If it goes to the extreme, if we had defaults on all of the bonds that we had wrapped we would have a pretty serious problem.
To come to this question MBIA Corp.’s statutory capital after this split and pro forma for December very first 2008 is about $4.3 billion that’s a statutory surplus plus contingency reserves. If the question is what would it take to wipe that out its actually fairly simple, the after tax losses would have to be $4.3 billion in order to make the company technically insolvent.
Implying pre-tax losses in the $6.6 billion range on top of those which have been recognized to date of roughly $3.8 billion there’s no scenario that we have run that would require that we take that kind of a charge against reserves right now because obviously if we had we would have taken a reserve at this point. Of course if catastrophic losses happen in the future we’ll have accumulated earnings so that the cushion actually grows over time.
The final point to make on this is that the question is about a technical insolvency what happens when you have a reserve that are equal to the stat capital. I would note that even in that case we would anticipate that the company would have substantial cash flow ability to pay all of its obligations as they come due. These are not demand liabilities but ones that would be paid out over time.
Another individual investor question, if the sub was put into rehabilitation by the regulator how much debt would become immediately due and payable and how will that impact the liquidity profile of the holding company? Let’s assume that the world continues to decline, home prices continue to trend down to zero and unemployment soars to the mid teens, a scenario that is likely to deplete capital at the structured finance. If that happens in 2010 for example, walk us through step by step what would happen.
If that should happen by 2010 we’d be living in a very different world then the world that we are experiencing right now. For a lot of things you’d have to say all bets are off. However, there’s a factual question embedded in this which is what’s the impact of rehabilitation on a debt at the holding company. This is about $1 billion of debt outstanding at the holding company that is acceleratable or mandatorily accelerated in the event of a rehabilitation of the insurance company.
There is again no scenario that we have run that suggests that is a likely or reasonable prospect. Therefore, it’s a pretty deep hypothetical question. There is debt at the holding company that would accelerate or be accelerated in the event of a rehabilitation.
Another individual investor, how comfortable are you with the split between muni and structured finance, how much comfort did Donato have with the transaction?
We’re comfortable with the split between National and MBIA Corp. We and the regulator have done a lot of work to satisfy ourselves that we’re meeting all of our obligations to policy holders as well as meeting our fiduciary responsibilities to the owners of the company. We think that we struck the right balance there. Jay referred to it in his opening remarks. The superintendent has made some comments publicly about it. You can read his approval letter which is on our website as of this morning.
The one thing to keep in mind, as I mentioned earlier, everybody has a preference that they’d like to be first in line. As hard as it is to believe most of our large counterparties would prefer that the company goes bankrupt because they perceive that they could accelerate relatively modest credit losses into the massive mark to market recoveries. We don’t believe that would actually happen, for example, in any for of rehabilitation based on a balance between policy holders.
The most important things here is we’ve spent a year looking at this. This is not something we did in the fourth quarter without spending the better part of the year reviewing it. We think it is the right balance between different constituencies. The important thing for all constituencies to remember is that we’re going to operate in a dynamic matter going forward.
We certainly expect to meet all of our obligations. The transaction is designed to enhance that possibility. We think the split makes sense. We will be moving forward fairly aggressively with the next series of steps that we believe are necessary to ultimately get to a more stable long term platform for each of our three or four businesses.
We’re all set for questions. Will you please introduce our first caller.
Your first question comes from Scott Frost – HSBC
Scott Frost – HSBC
You talked about the involvement of the regulator and what it sounds like is that this wasn’t really a benign approval of the split the regulator was fairly affirmative in his determination that your claims paying resources devoted to the legacy business were adequate. Is that correct, am I saying that correctly?
I believe that’s a proper characterization. I talked about this with the regulators when I first rejoined the company a year ago. All of our dialogue over the past year has been focused around accomplishing this split. I would call it an extremely active involvement with the department including a small army, not a large army of people meeting with every aspect of our company in terms of going through every part of the portfolio not just the parts that get talked about everyday but each and every part of the portfolio in terms of understanding what could happen over the medium, near and longer term in terms of both the expected and stress cases.
Scott Frost – HSBC
I want to work this into a discussion of the surplus notes. First of all, is the jump in claims paying ability on slide 16 due to the surplus note raised at MBIA Insurance Corp. Did you say that dividends are now subject to regulatory approval at legacy MBIA up to the holding company is that right?
Let me just take a look back to 16 quickly. The jump in the course of the year in terms of overall surplus was a combination.
Scott Frost – HSBC
Claim same resources.
Resources, those contributed to the increase in resources. The comment that Chuck made earlier about restrictions on dividend capacity apply to National. National has right now until it gets re-domesticated a negative earned surplus and so we have to ask for permission before we can make dividends there.
Scott Frost – HSBC
That’s not the case with insurance right?
We work with the regulators every month in terms of discussing our plans. We’re not about to look at the technical reasons of when or when we can’t pay dividend. Because we just took an extraordinary dividend the “rules” are that we wouldn’t take another dividend for 12 months from MBIA Corp. The point here is that we don’t do any of these actions without talking about it with the department as we go along. It’s not as if just because we have a right to do a dividend that we’re going to take the maximum amount of dividend out of the company not in this particular situation. It’s a very careful dialogue.
In terms of both the surplus notes and the preferred debt that exists for MBIA Corp. we sent advance notice of paying those dividends and interest payments to the insurance department and get their approval before those payments are made according to their schedules. On surplus notes it’s every six month. On the preferred notes it’s quarterly.
Scott Frost – HSBC
In your discussion were potential payment deferrals on surplus notes contemplated as part of the determination of reserve adequacy?
Our plan is to pay off the surplus notes when they mature in four years.
Your next question comes from Brian Monteleone – Barclays Capital
Brian Monteleone – Barclays Capital
You walked around slide 45 MBIA Corp.’s pro forma claims paying resources versus S&P stress test at the A rating. Can you talk about that versus, I didn’t see Moody’s stress test in here, can you talk about that versus the Moody’s stress test?
Sure, I can talk about it. Moody’s has not shared with us their current quantitative view of our capitalization. The last analysis that we have that would be cogent at all would be from mid year last year and Moody’s has made some pretty significant change to the way that they think about both expected and stress losses on the RMBS related sectors since then.
All we know is that they’ve told us orally that, actually I think it is in their release, that they believe that their total losses that they would calculate today would be roughly equal to claims paying resources.
Brian Monteleone – Barclays Capital
That’s their base case?
Unfortunately that’s all that they shared with us at this point. We’re expecting that as time goes on we’ll get more insight into the way that they’re viewing it but that’s it for the moment.
Brian Monteleone – Barclays Capital
On your CMBS exposure can you tell us what your base case losses are on ’06 and ’07 CMBS collateral in general?
Our losses on our deals are expected to be zero.
Brian Monteleone – Barclays Capital
For a given CMBS deal on average what would you assume losses to be? Moody’s is updated there now and they think on average between 4% and 6%. I’ve seen other people with 10% to 12%. Presumably when you guys are modeling through expected losses to get to your conclusion there you’re making some assumptions for losses on the underlying deals I was just wondering what those assumptions were.
When we’re modeling the transactions in general terms we obviously believe that you’ll have increasing delinquencies as you’ve seen in the last quarter especially for the remainder of the year. That certainly could get to the 2.5% to 3% range. As far as going from that point on where we are today is that below investment grade tranches are certainly in the target zone for potential losses at this point but based on loan level analysis versus just rating base default analysis we think that there’s certainly a long way to go before there’s any kind of certainty that BBB- or investment grade rated tranches would be impacted at this time. That’s our expectation.
Brian Monteleone – Barclays Capital
2.5% to 3% by year end ’09 then no hard forecast beyond that?
We’re currently at 1% a little bit over 1% through January on our portfolio in terms of delinquencies with no losses at this point.
Your next question comes from Terry Shu - Pioneer Investment
Terry Shu - Pioneer Investment
Can you clarify one more time, I still don’t quite understand for the surplus notes let’s say in a worse case scenario that MBI Corp. the insurance subsidiary uses up all of its claims paying resources and it would not have including the surplus notes then what does that mean? Is there any obligation on the part of the holding company to do anything? Does that mean then that the surplus notes don’t get redeemed and they’re wiped out? I’m not sure I fully understand.
In terms of looking at individual securities whether it’s the preferred notes, MTNs, GICs or corporates there’s a lot of legal relationships that I think are too extensive between each of the notes. On this call what we have said is we’re going to work with each individual security class holder to work through the best possible resolution if we get into any issues.
We’re also stand ready as we did during the third and fourth quarters a large number of different types of note holders have said they don’t want to hand around and see how this is all going to work out and have asked if we would re-buy those different notes. Obviously in the last two weeks since we announced this transaction assuming a portion of different note holders have called up and said, “Hey we’re really not interested in staying around, let’s talk about a resolution can you work out a restructuring of these securities.” We’re going to look at all of those different things.
I can paint a scenario where any of our obligations don’t get paid back. You know that we’re in an uncertain world and what we’re trying to do as an organization is balance all of those things and not give any one security preference over any other security, beyond the legal relationships that exist today. That is our over arching goal and that’s certainly what we’ve tried to do.
When we designed this plan we designed the plan in a way that we could meet the repayment of the notes when they click over to the higher interest rate on or before four years from now which is five years from when they were originally issued.
Terry Shu - Pioneer Investment
It boils down really to the legal intricacies as well as regulatory.
The regulator has to approve our payment each time period. We did this in terms of the restructuring to maximize our ability to pay off all obligations not to try and avoid any obligations whatsoever. You’re much better off in terms of running an ongoing enterprise with healthy parts while you work through the issues associated with the subset of the book which for us is largely and predominantly related to two classes of business which is the second lien portfolio which to a large extent is being remediated through litigation. The ABS CDO portfolio which remediating through negotiation discussion and perhaps litigation in the two cases.
Terry Shu - Pioneer Investment
I don’t mean to compare company experiences but at a glance looking at your CDO performance versus [AMBAX] I suppose the one liner why you’re performance is better is that theirs have a substantially higher component of subprime collaterals whereas yours do not. If you look at their portfolio a very large proportion has fallen into below investment grade. I know you probably didn’t look at theirs but that seems to be the case.
No two CDOs have identical performance or are constructed the same way. Any comparisons of portfolios are very, very tough. We provide an extensive amount of detail on our own portfolio in our 10-K and on our website to try and let outside investors form their own opinion. We have looked for other reasons at [AMBAX] portfolio but we don’t spend a lot of time comparing their underwriting mistakes versus our own underwriting mistakes.
Both of us made some mistakes in taking on exposures at a particular bad time in the cycle. Both companies are trying to work their way through it. It’s fewer of these, more of these. I can create a model that says one portfolio is better then another but don’t think it’s very meaningful at this point.
Your next question comes from Mack Johnson – National Australia Bank
Mack Johnson – National Australia Bank
Can you tell us a bit about your soft capital facility $450 million what’s the current maturity meaning by that are you still getting 100% credit for it?
The facility’s got about six years left to go and as you know, once you get into the five year time zone that’s when you start receiving less capital credit for the facility. We were anticipating that to be a declining value at any rate. At this point it is a facility that references losses in the municipal bond book but the counterparty with the bank group is MBIA Corp. which has no municipal bond exposure at this point.
One of the things we want to talk with the bank group about is in effect having that facility travel to National so that it backs up the National portfolio.
Your next question comes from Eleanor Chan - Aurelius Capital
Eleanor Chan - Aurelius Capital
My question relates to the secured inter-company loan from MBIA Corp. to the ALM business. What is it secured by; you mentioned that it is secured by a static pool of collateral. Just curious what kind of securities forms this collateral pool and what is the market value of this collateral.
It is a diversified pool of assets from the ALM portfolio so it does include corporate asset backs and other asset classes via the book value of the collateral pool at this point is well in excess of the amount advanced. The market value is a little bit short it’s about 10% short of the amount advanced. There is, if you will, an unrealized loss on those assets.
Eleanor Chan - Aurelius Capital
The asset swap repo that has been moved to National am I correct that if ultimately there are losses at the ALM business that MBIA Corp. is still on the hook for those losses.
MBIA Corp. is the insurer of the liability issued by the ALM book so yes.
Eleanor Chan - Aurelius Capital
Why did you not pursue a sack structure like [AMBAK] did? You could have capitalized your subsidiary and have it write new business and have it be a subsidiary of MBIA Insurance Corp. instead of moving it as a subsidiary of MBIA Inc.
I’m not going to comment why another company has chosen a different approach.
Eleanor Chan - Aurelius Capital
What would be the disadvantage of pursuing that approach?
I’m not going to comment. It isn’t an approach that we chose.
Eleanor Chan - Aurelius Capital
Given that MBIA Corp. CDS is now trading at 70 points up front how can you say that this entity is still solvent?
The market of where our CDS spreads is nothing we control or spend much time looking at. The only time we spend a lot of time looking at it when we’re negotiating with a counterparty in terms of their own view of our credit worthiness and that goes into what their carrying values on a counterparty credit for us.
Eleanor Chan - Aurelius Capital
Certainly that plays into the amount of mark to market that you take every quarter on your CDO book. You book a gain every quarter so certainly it factors into something.
I think we have booked a loss last quarter if I reach Chuck’s numbers right of $1.7 on mark to market so I think your statement is inaccurate.
Eleanor Chan - Aurelius Capital
What about this quarter?
The quarter is not over let’s wait to see where we are at the end of the quarter.
Eleanor Chan - Aurelius Capital
On the commercial real estate exposure can you explain it looks like the exposure increased by about $2.2 billion this quarter? What accounted for the increase and how much reserves if any have you taken on this portfolio?
The increase was due to the fact that we have started the process of eliminating all of our reinsurance. The process of eliminating that reinsurance is an increase in our outstanding net par it doesn’t change our gross par. The amount that was added in the commercial portfolio reflects that increase from the four different reinsurance commutations that we did during the course of the quarter. We are not carrying any case reserves for any commercial real estate transaction at this time.
Your last question comes from Scott Frost – HSBC
Scott Frost – HSBC
Just making sure I’ve got the mechanics right on some of the match book stuff. It looks like the ALM shortfall of $600 million and the $600 million repo agreement between Hol Co and MBI Insurance that footing is not coincidental is that right?
It actually is coincidental.
Scott Frost – HSBC
The way I understand the mechanics, correct me here if I’m wrong, is insurance repoing $600 million of securities to Hol Co getting $600 million in cash and then ALM repos $2 billion a market value of securities to insurance and gets $7 billion of cash is that the way this is working.
First of all, if you refer to slide 21 is where we show the balance sheet the first item that you’ll see that in house is the inter segment loan so that’s a $600 million loan that is really called inter segment its between the corporate segment of MBIA Inc. and the ALM segment of MBIA Inc. It’s straight up unsecured loan between the two segments.
The next item is the secured loan to ALM that is an agreement between MBIA Corp. the regulated insurance company and MBIA Inc. the holding company specifically the ALM segment within MBIA Inc. The ALM segment has pledged $2.7 billion book value of invested assets to MBIA Corp. in return for $2 billion of cash.
Scott Frost – HSBC
Could you go over how you come up with a determination of the number of years of expense and debt service Hol Co versus cash you hold? Could you specifically break down interest in Hol Co expense as you see them?
It’s roughly $100 million in annual interest and expenses at the holding company. Holding $460 million if you will it covers 4.6 times that run rate expense. Just to be completely fair we do have two debt maturities coming up, one in June of 2010 and March or April of 2011. Both of them are roughly $100 million.
This concludes the Q&A session. Greg your closing remarks.
Thanks to all of you who joined us for today’s call. I encourage those of you with additional questions to contact me directly at 914-765-3190. We also recommend that you visit our website at www.MBIA.com for additional information. Thank you for your interest in MBIA good day and good bye.
This concludes today’s MBIA Fourth Quarter 2008 Financial Results Conference Call. You may now disconnect.
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