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MBIA (NYSE:MBI)

Q4 2011 Earnings Call

March 01, 2012 8:00 am ET

Executives

Greg Diamond - Head of Equity Investor Relations

Joseph W. Brown - Chief Executive Officer, Director and Member of Finance and Risk Committee

C. Edward Chaplin - Co-President, Chief Administrative Officer, Chief Financial Officer, Vice-Chairman of MBIA Insurance Corporation and Chief Financial Officer of MBIA Insurance Corporation

Anthony McKiernan - Chief Portfolio Officer and Vice President

Analysts

Arun N. Kumar - JP Morgan Chase & Co, Research Division

Mark Palmer - BTIG, LLC, Research Division

Derek Horton

Alex Ehrhart

David Williams

Steven Stern

Operator

Good morning, and welcome to the MBIA Inc.'s Fourth Quarter 2011 Financial Results Conference Call. [Operator Instructions] I would now like to turn the call over to Greg Diamond, Managing Director of Investor Relations at MBIA. Please go ahead.

Greg Diamond

Thank you, Latricia. Welcome to all to MBIA's Conference Call for the Fourth Quarter 2011 Financial Results. We're going to follow a similar format as last quarter's call. Jay Brown and Chuck Chaplin will provide some brief comments and then we'll open the call for a question-and-answer session. As usual, members of the press and representatives from institutions litigating against us will not be able to ask questions on the call. For today's call, Chuck will be referencing a slide deck during his remarks and that deck can be found on MBIA's website. More specifically, the deck is posted on the Events and Presentations web page of the Investor Relations section of the mbia.com website.

After the market closed yesterday, we posted several other items on our website, including our 2011 10-K and the operating supplement for the fourth quarter, as well as the statutory statements for both National Public Finance Guarantee Corporation and MBIA Insurance Corporation. In addition, the information to access the recorded replay of today's call is available on the website via the financial results press release that we issued yesterday.

The purpose of our call today is to discuss our most recent 10-K, to facilitate a greater understanding of the company for investors. Our company's definitive disclosures are incorporated in our SEC filings. The 10-K also contains information that may not be addressed on today's call. Please note that anything said on today's call is qualified by the information provided in the company's 10-K and other SEC filings. Please read our Form 10-K for 2011, as it contains our most current and comprehensive disclosures about the company and its financial and operating results.

Now I will read our Safe Harbor disclosure statement. Our remarks on this conference call may contain forward-looking statements. Important factors such as general market conditions and the competitive environment could cause actual results to differ materially from those projected in our forward-looking statements. Risk factors are detailed in our 10-K, which is available on our website at mbia.com. The company cautions not to place undue reliance on any such forward-looking statements. The company also undertakes no obligation to publicly correct or update any forward-looking statement if it later becomes aware that such statement is not likely to be achieved. Also, please refer to our financial results, press release available on our website for the definitions and a reconciliation of the non-GAAP terms that are included in our remarks today.

Now Jay will provide some introductory comments. Jay?

Joseph W. Brown

Thanks, Greg, and good morning, everyone. Chuck will take you through our financial results in a moment. But before he does, I want to share a few thoughts on where we stand today in our efforts to transform your company for the future. My comments will be brief as Chuck has fairly extensive comments to make on last year's results.

Looking back, 2011 brought us much closer to achieving the transformation goals that I set out for us 4 years ago. We made significant progress on a number of fronts during the year, particularly as we reduced volatility and potential future losses in our insured portfolio through negotiated settlements of ABS CDO and commercial real estate exposures. At the same time, we advanced our putback suits toward trial while receiving several various favorable rulings along the way. Although we still have a way to go, I feel comfortable in saying that we're very much closer to the end of the process than the beginning. This progress has not been inexpensive. We commuted or reached agreements to commute $32.4 billion of insured exposure in 2011 at a cost of approximately $2.5 billion. But we believe that cost is well worth the confidence gained by eliminating potential future losses in our insured book.

Since the end of 2008, we have negotiated termination agreements on approximately $61 billion of exposure. Our commutation efforts continue and they are focused on a small handful of transactions where future volatility remains a concern. The litigation challenging our transformation continued its slow journey through the legal system in 2011, but we saw a measurable progress nonetheless. Seven banks dropped out during the year and one more this past January, which leaves only 4 of the original 18 plaintiffs.

We continue our efforts to resolve our differences with each of these plaintiffs out of court. But in the absence of that, a trial, if necessary, for the Article 78 is scheduled for next quarter. More than 3 years after Transformation was approved, MBIA Insurance Corporation continues to honor all of its obligations while maintaining substantial positive steps toward capital. So we fully expect the court to conclude that the company was solvent at the date of transformation, and the insurance department's decision to approve transformation was appropriate.

As our putback litigation proceeds through the discovery process in preparation for trials, we continue to compile evidence of extensive fraud and misrepresentation in the origination of mortgage loans backing a number of securitizations we insured. Expert testimony on the quality, actually, the lack thereof, of individual mortgage loans is now being filed with the court in our largest case as one of the key steps in preparation for trial. Over the course of the year, there were several rulings on relevant issues impacting our putback litigation that were decided in our favor. Perhaps, the most important one was actually received in January of this year, in which the New York Supreme Court ruled that we do not need to show a causal link between the underlying misrepresentation in claims that we have paid to recover our damages. This ruling should provide us with a straightforward path to recovery of our losses. While we've established $3.1 billion of expected putback recoveries on our balance sheet, we will continue to pursue the full amount that we believe we are owed.

Despite the protestations of the defendants in our litigation, the legitimacy of our mortgage fraud and misrepresentation plans can hardly be in doubt in light of the numerous government investigations in the mortgage securitization process in a number of high-profile settlements which have now taken place. The recent announcement of a new joint federal and state task force led by New York Attorney General Eric Schneiderman, gives us further reasons to hope there will, finally, be accountability for the practices that led to billions of dollars in losses for our company.

Although the uncertainty posed by our litigation issues continues to keep our municipal finance insurance company, National Public Finance Guarantee, on the new business sidelines, the company had another very strong year from a financial performance perspective and its insured portfolio is continuing to perform well. We have not changed our view that there is solid demand for bond insurance, particularly from a well-capitalized U.S. muni-only insurer, and we look forward to meeting that demand once the litigation issues have been resolved.

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

C. Edward Chaplin

Great. Thanks, Jay, and welcome, everyone. I'd like to comment on the quarter and the full year 2011 financial results, and then talk a bit about our balance sheet position at year end 2011, but I'd like to open with some historical information.

The financial crisis began for us in the second half of 2007 when we began to observe behavior in our second-lien portfolio that was inconsistent with the nature and quality of the collaterals represented to us by the sponsors. By year end 2007, it was clear that we would face significant claims payments. We recorded a large loss reserve and commenced the forensic process that found at the mortgages were largely ineligible and led to the establishment beginning in 2009 of substantial putback receivables on the balance sheet. The poor economy also contributed to adverse experience in our ABS CDO and CMBS exposures. We saw very substantial increases in incurred loss and claim payments for the next couple of years and then a very slow reduction and loss severity and portfolio risk, bringing us to today's position. I think that the history may help put today's results into proper context, and I've provided a few slides to help you see these points.

So if you would then turn to Slide 3. At the end of the fourth quarter 2007, our gross par insured was $762 billion, with roughly $431 billion in domestic public finance and $331 billion in structured finance and international insurance, which is the first bar that you see on the far left on this chart. Inside that $331 billion, domestic second-lien exposure was $23 billion, CMBS and CRE CDOs totaled $54 billion and what we have called multi-sector CDOs, or ABS CDOs, were $36 billion. Supporting the whole $762 billion exposure on our balance sheet was statutory capital of $6.4 billion and statutory loss reserves of $926 million. This was the height of risk and leverage in our business and in the global financial system as well.

The slide shows the deleveraging over time of our structured finance and international portfolio in MBIA Corp. It's gone from $331 billion outstanding at year end '07 to $141 billion today, a decline of about 57%. The reduction in the higher-loss potential exposures, the lower portions of these bars is even greater. Those reductions are primarily due to loss payments in the case of RMBS and commutations of ABS CDOs, CRE CDOs and CMBS pools.

If you'd compare this trajectory with the projection that we had made of portfolio amortization at year end 2007, you get the picture that's shown on Slide 4. At year end 2011, the $141 billion of par outstanding is $74 billion lower than it would have been just from natural amortization.

The greatest proportion of our loss payments has been on second-lien RMBS, and the pattern of these payments is shown on Slide 5. There was a lot of discussion early on about whether there would be a burnout phenomenon in this portfolio, given the extensive misrepresentations about the nature and quality of the underlying loans. However, aggregate delinquencies and, as you can see here, claims payments are declining and our claims payments have been declining now for 2.5 years. The cumulative total of these payments is about $6 billion, and most of that is subject to the claims that we have made against the originators.

Slide 6 shows our loss payments excluding RMBS. There have been very little in the way of regular claims payments on our multi-sector CDO and commercial real estate exposures. Payments have been more sporadic as they're driven by commutation opportunities. These payments are elective and, as you can see, they've clustered around year ends, although I would note activity has been pretty constant since the third quarter of 2010. As Jay said, around that time, our objective is to commute all of the volatile commercial real estate and ABS CDO exposure. And as Jay said just a few minutes ago, 2011 was a key year in this risk reduction effort, as we spent about $2.5 billion to remove the $32.4 billion of exposure.

Slide 7 shows how par has been reduced since year end 2007, as well as from year end 2010 to '11 by the most active sectors. On the right, you see our exposure to structured CMBS pools. We had about $18 billion of exposure to lower-rated CMBS pools at year end 2007, those are the bars on the far right, and it's down to $6 billion at year end 2011. We also made substantial progress in reducing the higher-quality CMBS pools and CRE CDO exposures. So continuing to move to the left, multi-sector CDOs, which topped out at $25 billion -- over $25 billion at year end 2007, have been reduced by 3/4 to about $6 billion. And on the far left, our CDO-squared exposure, which had been in excess of $10 billion, is down to only $200 million in one transaction today. Other than second-lien RMBS, these have been the most problematic sectors in our portfolio, and we have focused our efforts on commuting them. There's more to do, but we've been fairly successful thus far.

Another way to think about our risk reduction is to view the pattern of expected future losses, quantified as statutory loss reserves. And this is shown on Slide 8. At third quarter 2007, reserves were under $200 million. Now this is pre-transformation and most of the reserves at that time were on the public finance portfolio. But by year end 2008, just before the approval of our transformation, reserves had grown to $1.9 billion, where virtually all of the growth had been in the structured finance book. After that, as payments were made and salvage was recognized, the net reserves fell. At year end 2011, we expected to collect more in future salvage receipts than we expected to pay in future claims payments, so our statutory loss reserve was negative at $2.3 billion. Within that account, we have approximately $3.1 billion of putback receivables and about $800 million of other net reserves. Thus, the probability that future reserve growth erodes the capital position of MBIA Corp. seems low. Our capital position is adequate in our view, even though liquidity has declined in 2011 as I will discuss in a few more minutes.

But turning now to the financial results introduced on Slide 9, we'll see that 2011 continues to reflect the cost of achieving that risk reduction. Starting with our results under U.S. GAAP Accounting, for which there is no slide, we had a net loss for the fourth quarter of $626 million compared to net income of $451 million in 2010's fourth quarter. For the full year 2011, the net loss was $1.3 billion versus income of $53 million in 2010. In the fourth quarter and the full year 2011, the market's perception of MBIA Corp.'s credit quality generally improved as the swap and recovery derivatives on our name affect the fair value of the policies for which mark-to-market accounting is required. I would like to attribute the movements to our risk reduction efforts, but that's hard to say, because CDS price changes and, therefore, our GAAP results have in the past been quite disconnected from fundamentals in our business. We believe that our non-GAAP measure adjusted pretax income provides a clearer view of financial performance in the period, and the non-GAAP measure adjusted book value provides useful information on value broker decline in the period.

I'll now go through our adjusted pretax income results, where we treat all of our insurance policies using insurance accounting. On Slide 10, you can see that adjusted pretax loss for the fourth quarter was $252 million compared to a loss of $311 million in the fourth quarter of 2010. For the full year, the loss was $497 million compared to a loss of $377 million in 2010. Losses in all periods were driven by increased reserves and credit impairments and settlement costs in the structured finance insured portfolio, primarily for CMBS.

Now I'll talk about the fourth quarter of 2011 from the segment perspective, also shown on Slide 10. Our public finance segment is conducted largely through National Public Finance Guarantee Corp., and National had adjusted pretax income of $163 million in the Q4, compared to $103 million in 2010. The biggest drivers were $73 million of realized capital gains, partially offset by a goodwill write-off of $31 million. The gains are associated with the decision that we made in the third quarter to begin repositioning the investment portfolio from tax exempts to taxable assets.

We also sold assets to fund the secured loan that National made to MBIA Corp. in the fourth quarter. National's portfolio has now moved from 48% taxable assets at year end 2010 to approximately 79% taxable at year end 2011. From a tax planning perspective, we may continue to shift this weight as relative value opportunities arise. Loss and loss adjustment expense for National were a benefit of $1 million in the quarter and a loss of $4 million for the full year. So 2011 turned out to be benign for National despite the stress that we observed in municipal and state budgets, and those problems that bubble up in the press periodically.

National's full year adjusted pretax income was $576 million. We believe that its capacity to continue to generate capital from operations will make it a strong competitor once we're in a position to again begin to write new business.

The structured finance segment is conducted largely in MBIA Insurance Corp., where we had an adjusted pretax loss of $300 million for the quarter. Its full year adjusted pretax loss was $692 million. Again, these losses are driven mostly by incurred loss on CMBS-related policies, offset by net reductions in loss reserves for RMBS and ABS CDOs. This can be seen in some more detail on Slide 11.

For our commercial real estate exposures, we incurred losses of approximately $782 million. We previously disclosed that commutation that we'd undertaken in the fourth quarter were approximately $500 million more costly than our third quarter loss reserves anticipated. Nevertheless, we believe that by commuting these deals, we avoided the potential for significant adverse development in the future. The reserve increase for deals not yet commuted was primarily due to increasing selected commutation prices and probabilities, as well as some additional projected collateral deteriorations.

Early settlement has been our primary risk reduction tool in the multi-sector CDO and commercial real estate sectors. When you consider our cumulative commutation experience up until the fourth quarter of 2011, we've commuted about $37 billion of exposure for gross payments of about $2.2 billion, which was about $100 million under the cumulative loss reserve. At this point, we've commuted $61 billion of exposure, and the total cost is about $400 million over the cumulative loss reserve. While significant in dollar terms, that difference is less than $0.01 on the par amount. Every commutation is its own story and the structures and economics of each deal result from a combination of potential future volatility, counter-party motivation and timing.

Going forward, we may negotiate some settlements above the reserve and we may negotiate some settlements that are below reserves, but we're not planning to make any further off-cycle disclosures about commutation prices. We do expect to make such disclosures as part of our regular quarterly reporting.

Aside from CMBS, we saw a net reserve takedown in the second-lien RMBS area. As the court's recent causation ruling in our lawsuit against Bank of America and Countrywide increased the probability that we will be compensated in full for their wrongdoing. This led to an increase in our estimated putback recoveries for all counterparties. Unfortunately, we also saw a lower-than-expected decline in delinquencies in the quarter, leading to somewhat higher expected claims payment in the future.

On ABS CDOs, we also had a meaningful reserve takedown, which has to do with interest rates. We update the discount rates used to set statutory reserves only once a year, as required, to allow changes in reserves between discount rate sets to reflect the underlying credit conditions, we also lock the LIBOR curve for our loss projections when we fix the discount rate. At this year end, the spread between the discount rate and the LIBOR curve was somewhat greater than at year end 2010. So in a period where there was little change in actual credit performance, the loss reserve nonetheless dropped by $137 million due to interest rate changes. The remaining ABS CDOs on our book are mostly poor performers, where our credit analysis already assumes that most of the collateral fails. As a result, it's likely that the only changes that we'll see in reserves will be due to interest rates or early settlements.

All other policies generated $2 million of loss in the quarter and this All Other category includes our first-lien RMBS portfolio, which has $3.3 billion of subprime exposure and $2.7 billion of all-day exposure as of year end 2011. So the total economic losses to MBIA Corp. were $309 million in the quarter and that's the driver of the $300 million adjusted pretax loss.

So if you would then turn back to Slide 10, the Cutwater, corporate and wind-down segments were all affected by a onetime performance fee paid by an affiliate in the wind-down segment. So wind-down paid a $65 million performance fee to the corporate segment, which then paid $7 million to Cutwater. We do not expect these fees to be recurring. The wind-down operations had a loss of $161 million in the fourth quarter.

Other than the $65 million performance fee that I just referenced, it had a $78 million loss on financial instruments at fair value. This is largely driven by the impact of improved perception of MBIA Corp.'s credit quality on its liabilities subject to mark-to-market accounting. The balance of the operating loss in wind-down is primarily due to the ongoing negative spread between asset revenues and liability expenses.

Now moving away from the income statement, I'd like to make some comments about liquidity and capital, for which I have no slides. First, for MBIA Corp. It had $534 million of cash and highly liquid assets on its balance sheet at year end 2011, down from $1.2 billion at year end 2010. We believe that this amount is adequate against its expected needs and provides a reasonable cushion against stress on RMBS claims payments. However, as I mentioned, we do want to do additional commutations to fully deliver MBIA Corp. to more stable operations sooner.

In the fourth quarter, a portion of the payments for commutations we achieve were funded by borrowing from National under a secured lending arrangement approved by the New York Department of Financial Services. In order to engage in future commutations, MBIA Corp. will need to collect on its putback receivables or borrow additionally. It bears repeating that the need for liquidity from outside of MBIA Corp. is driven by the failure of a small handful of mortgage originators to honor their contracts that call for repurchase or replacement of ineligible mortgage loans in securitizations that we insured. As they meet or are required to meet these commitments, MBIA Corp.'s liquidity will be significantly enhanced.

National has liquidity capacity. Its balance sheet contained over $4 billion of invested assets as of December 31, 2011, as well as its $1.13 billion secured loan to MBIA Corp., and very little is expected in terms of near-term claim payments on its policies. Over time, we expect that both of our insurance companies will have adequate liquidity and earnings to provide dividends to the holding company. However, in the near term, we have agreed with our regulator that neither will pay dividends to MBIA Inc. without the Department of Financial Service's prior written approval. In National's case, that agreement expires in July 2013.

Now at MBIA Inc., our holding company, we have 2 main activities. One, the normal holding company activities associated with owning, operating subsidiarities and an investment portfolio, including tax planning, facilitating capital and liquidity movement, et cetera; and 2, managing the ALM portfolio, which is the bulk of our wind-down operations. The holding company activities had $226 million of cash and highly liquid assets at year end 2011 compared with $295 million at year end 2010. This cash, plus investment income and assets to be released annually from the tax escrow account, more than adequately provide for the debt service and operating expenses of this part of MBIA Inc. for the foreseeable future.

Now while we've managed the ALM portfolio as a stand-alone business, from a legal entity perspective, it's part of the holding company. That portfolio had $160 million of free cash at year end 2011, down from $239 million at year end 2010. Reduction was driven by 2 main factors. First, ALM made $675 million of principal payments in 2011 on its intercompany secured loan from MBIA Corp., as well as over $500 million in principal payments on GICs and MTNs. Second, ALM is exposed to liquidity demands when the value of assets pledged under affiliate and third-party collateral facilities fall as a result of spread widening. In the third quarter of 2011, market spreads widen significantly, reducing ALM's free cash balances. We have begun selling assets into 2012's somewhat more robust market to help mitigate this risk, and we're developing other contingency plans against this spread shock event.

So bottom line, the firm has used some of its liquidity flexibility to retire potentially volatile liabilities and has a lower risk profile as a result. The combination of the lower potential volatility and the near-term prospects for clearing significant litigation from our agenda are significant positives that will help us get to more stable operations in the future.

I would be pleased at this time to respond to any questions that you may have.

Question-and-Answer Session

Operator

[Operator Instructions] Our first call comes from the line of Arun Kumar with JPMorgan.

Arun N. Kumar - JP Morgan Chase & Co, Research Division

Chuck, a couple of questions for you. One is the most recent topic you mentioned, liquidity. If you look at MBIA Insurance Corp. in your supplement, you have about $1.3 billion of cash to down from $2.3 billion a year ago. And in the 10-K, this time you made a lot of not all that cryptic comments about liquidity being impaired presuming if you do not collect on your putbacks. Now at what point do you run out of resources to commute any more transactions, be it CMBS or RMBS, any other type of transaction? And given all the comments that you made, what is the level of discussion that you're having with all these banks that you mentioned earlier in terms of getting to a resolution of this?

C. Edward Chaplin

Okay. There's a couple of questions embedded in that. First, we do not believe that the liquidity position of MBIA Corp. is impaired. We had adequate liquidity against all of the near-term obligations that the company has, and we believe that we have an adequate cushion against stress. I made the point earlier that most of the payments that we're making are better regular claims payments are around RMBS, and those payments have become somewhat more predictable over time as we went through the slides a few minutes ago. So we have -- we think a pretty good view of what the cash payments will be in the near-term. Now commutation payments are elective, and I've made the point before that we do not intend to commute ourselves into a liquidity impairment situation. That is the driver behind the intercompany loan that was put in place in the fourth quarter. The reason for the intercompany loan is that we do have this very substantial putback receivable on the balance sheet, which will be collected, but we're fixing the timing mismatch between the commutation opportunity and the availability of that putback receivable via this loan. So again, to the extent of we engage in additional material commutation activity, we will need to either collect on some or all of the putback receivable or engage in additional borrowing.

Joseph W. Brown

In terms of the conversations, we continue to have conversations with most of our counterparties. As you know, from what's been publicly filed, right now we're scheduled, if a trial is necessary, to go to court in the second quarter. We, obviously, would like to see a settlement with each of the counterparties before entering into that final phase, but there's no guarantees that, that will occur before that time.

Arun N. Kumar - JP Morgan Chase & Co, Research Division

Just another couple of quick questions on this. In terms of the intercompany loan between MBIA Insurance Corp. and the whole cost/ALM business, what amount was repaid in the most recent quarter?

C. Edward Chaplin

The balance as of Q4 is $300 million, and we made a $300 million, approximately, principal payment around the beginning of the fourth quarter. So the balance over the course of 2011 went from $975 million down to $300 million. So I know that in total we paid $675 million.

Arun N. Kumar - JP Morgan Chase & Co, Research Division

Okay. Lastly, in terms of the surplus notes and the drain has been causing on your Op co's resources, the $140 million or so in terms of annual debt service, has any discussion with the regulators in terms of preserving the capital of the Op co at this point, given all the payments that you have been making to commutations and otherwise?

C. Edward Chaplin

I guess we would all agree that the surplus note is really, really expensive, and it has a call date coming up in 2013 and we need to think about how exactly we're going to take it out and/or refinance it at that time, so that we get a more normal cost of capital. However, we did make a payment on the surplus note in January of 2012. Each payment is subject to the approval of the Department of Financial Services, so it's not really within our -- it's their decision each semiannual period, not ours. And they continue to approve those payments, going off the words in their mouths, but they would need to be comfortable with the capital liquidity position of the company at each semiannual period in which they approve those payments. And given its capital adequacy and its liquidity, there was no reason not to approve in this most recent period.

Arun N. Kumar - JP Morgan Chase & Co, Research Division

Okay, fair enough. The last question is related to the loan between National and MBIA Insurance Corp., the secured loan. Is that secured by the putbacks?

C. Edward Chaplin

We actually haven't provided disclosure about the security package for the loan, but it is secured by assets of MBIA Corp. that are very substantial relative to the amount drawn on the loan.

Operator

Your next question comes from the line of Mark Palmer with BTIG.

Mark Palmer - BTIG, LLC, Research Division

Could you comment on the developments in stock in California relative to the company's exposure there? Which of the bonds that you insure actually do have bond reserves that could be tapped before insurance comes into play, and what do you think the impact could be?

C. Edward Chaplin

Sure. Obviously, it's too soon to make definitive statements about this other than we have about $224 million of total exposure. We have about $89 million of exposure that may be impacted by the proposal to suspend their general fund debt service payments. Most of our exposure does benefit from reserve accounts or other pledged revenues, so we think that the near-term impact on National would be minor of a suspension. And we expect to continue to be in voice with Stockton as they work with their creditors toward a solution. Whatever happens, National's bondholders will be paid and that is another demonstration, we believe, of the benefit of bond insurance to this marketplace.

Mark Palmer - BTIG, LLC, Research Division

Another question. As you said, each commutation has its own story. Given the fact that you've been able to achieve as many commutations as you have to this point, you may well have gone through the low-hanging fruit and then the next layer up in terms of difficulty. Is it going to be increasingly difficult to achieve commutations with your remaining counterparties?

C. Edward Chaplin

Anthony, if you'd have an interest in addressing the...

Anthony McKiernan

Sure. I think that I would say that -- I wouldn't say that we've gone to the low-hanging fruit, I'd say that we've gone through some of the highest value targets that we would've liked to have achieved over the last couple of years. Every counterparty has its own motivation. We have our own views on volatility, payment profiles, things of that nature. So I would say that it is a combination of those factors that ultimately lead the commutation, and that we have certainly, so far, commuted some of the highest value targets that we'd be after. So again, there are some left that we need to do, but that amount is far smaller than it was a couple of years ago.

Joseph W. Brown

I think if you look at the chart that Chuck provided on the different types of exposure reductions that have occurred since the end of 2008 -- actually, since the beginning of 2007, if you look through that, at that point in time, far and away the most volatile and the toughest discussion revolved around CDO-squared, where we've eliminated all but one transaction, which was actually a very early 2004 CDO-squared transaction, which has minimal issues associated with it. We then moved to what was the next most volatile area, the ABS CDOs, and did a number of those transactions in 2009 and in 2010. During the last 15, 18 months, we've moved through a significant portion, over 2/3, of the worst-performing BBB and below CMBS and CRE CDOs, and as you'll note, we've eliminated about 2/3 of that. So I think it would be an absolute mistake to characterize the progress of eliminating $61 billion as low-hanging fruit. What we have left is very small number of transactions with a very small number of counterparties. Some of which are in our litigation, there's a few that aren't in the litigation that we're also negotiating with. And we expect that the story on each of those will be somewhat similar to what we've seen in the past, that in aggregate, it should come in around where our reserves are, but individual transactions could be higher or lower depending on the timing and when they occur. It's a complicated process. Some of the conversations have been going on for over 3 or 4 years at this point. Some of the conversations get started and get done in less than a month. And so it's hard to put a characterization around something that involves 2 companies' views, 2 companies' positions and 2 companies' accounting at a particular point in time in terms of, of how they're looking at the transactions. And we've had enough experience, obviously, having negotiated with the vast amount of our counterparties to have a pretty good idea of possible outcomes. So we remain very optimistic that if the counterparty is serious about wanting to try and resolve the differences that we can reach an answer.

C. Edward Chaplin

I would just add that, that the first person that responded to that was Anthony McKiernan, our Chief Risk Officer and Head of Insured Portfolio Management. I apologize we didn't introduce him earlier.

Mark Palmer - BTIG, LLC, Research Division

One more question. The company sent a letter to the court requesting that BofA come forth with a fraud database, an internal fraud database that Countrywide apparently had been keeping. Have you received any response from the court in terms of BofA producing that through discovery?

Joseph W. Brown

Not yet.

Operator

Our next question comes from the line of Derek Horton with Silver Point Capital.

Derek Horton

I was just wondering if you could comment on the performance of the MBIA U.K. portfolio, and just give us a sense of whether the equity value there had gone up over the year, and if any substantial claims or reserves have been made?

C. Edward Chaplin

Sure. The MBIA U.K. portfolio continues to perform satisfactorily. There are only loss reserves on a small handful of transactions there, and they are not ones that we believe have very high potential volatility. There are transactions of portfolio that we have under surveillance. But at this point, we haven't seen any systemic type risks of the type that we've seen in the domestic structured finance portfolio.

Derek Horton

Got it. And so, I guess I would assume that equity value would've slightly increased then?

C. Edward Chaplin

Yes, we do have positive earnings, which, if you look at it from kind of a statutory perspective, there is a pickup in earnings on MBIA Corp. that comes from the U.K. and it’s been pretty steady.

Derek Horton

Got it, all right. So no claims actually paid, just some reserving?

C. Edward Chaplin

I think that MBIA U.K. -- we've done commutations in the past where some of the policies commuted were in the MBIA U.K. portfolio, so MBIA U.K. did contribute to those commutations. But other than that, we haven't had a material claims payment.

Operator

Next question from the line of Alex Ehrhart with Millennium.

Alex Ehrhart

I was just hoping to ask Arun's earlier question in a different way maybe. I was looking at stat cash invested assets is $1.6 billion. You have $534 million of liquid assets. The loan from National is $1.1 billion. I was kind of looking at that thinking that your collateral maybe kind of maxed out as far as borrowing ability goes against National. Am I thinking about that incorrectly?

Joseph W. Brown

We believe there's substantial additional borrowing capacity at National. We'll have to wait till we get to a situation that would require that. At that point in time, we'll review it with the MBIA Board, we'll also review it with the National Board and the Department of Financial Services to see if everybody agrees with that conclusion.

C. Edward Chaplin

And again, not to beat a dead horse, but we do have a $3.1 billion receivable on the balance sheet, which is -- on which payment has been demanded. At some point, we do expect that it will be collected.

Alex Ehrhart

All right. Of course. And then maybe just one more follow-up. So I was reading through the K last night, I'm not sure if I was reading this correctly or not. It looks like you've agreed to a couple of additional commutations in the fourth quarter that may not have been settled yet. So it looked like we possibly have some more commutation payments, cash going out the door from Corp. coming in the first quarter in addition to the $70 million coupon that you just paid on the surplus notes. Is that right?

C. Edward Chaplin

That's correct, yes.

Operator

The next question comes from the line of David Williams with CQS.

David Williams

Real quick question on the loan from National. I know the question was asked whether it was secured or not, but where is it rank versus the policyholders at MBIA Corp.? Is it parry, junior? How are you thinking about that?

C. Edward Chaplin

I would consider it senior with respect to the collateral.

David Williams

Okay. So I realize you think this is an unlikely event, but in the event of MBIA seizure or inability to pay, et cetera, you view the National loan being paid before policyholders?

C. Edward Chaplin

Our view is that the loan is going to be repaid in the ordinary course.

Operator

Our next question comes from the line of Steven Stern with Stern Investment Advisors (sic) [Advisory].

Steven Stern

Have there been any conversations between the company and the Ambac bankruptcy trustees concerning possible MBIA participation in that bank -- Ambac reorganization?

C. Edward Chaplin

No comment on that.

Operator

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

Greg Diamond

Thank you, Latricia. And thanks to all of you who have joined us for today's call. Please contact me directly if you have additional questions. I can be reached at (914) 765-3190. We also recommend that you visit our website for additional information. The address for our website is mbia.com. Thank you for your interest in MBIA. Good day, and goodbye.

Operator

Thank you for participating in today's conference call. You may now disconnect.

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