MBIA, Inc. Q1 2008 Earnings Call Transcript

May.13.08 | About: MBIA Inc. (MBI)

MBIA, Inc. (NYSE:MBI)

Q1 FY08 Earnings Call

May 12, 2008, 02:00 PM ET

Executives

Greg Diamond - IR

Joseph (Jay) W. Brown - Chairman and CEO

C. Edward Chaplin - Vice Chairman and CFO

Clifford D. Corso - Chief Investment Officer

Mitchell I. Sonkin - Head of Insured Portfolio Management

Analysts

Mark Ciccerelli - Elliot

Al Copersino - Madoff Investment

Andrew Wessel - JPMorgan

Christopher Rasmussen - Citi Investments

Operator

Good afternoon and welcome to the MBIA First Quarter 2008 Financial Results Conference Call. At this time, all lines are in listen-only mode to prevent any background noise. After the prepared remarks, there will be a question-and-answer session, which will begin with the company's responding to questions that has been submitted in advance of the call. [Operator Instructions].

I now like to turn the call over to Greg Diamond, Director of Investor Relations at MBIA. Please go ahead.

Greg Diamond - Investor Relations

Thank you Melissa. Welcome to MBIA's conference call for our first quarter 2008 financial results. The presentation for this event has been posted on MBIA's website as well on the webcast site earlier today. The information for the recorded replay of this event is also available on MBIA's website. The MBIA team that is assembled today, consists of Jay Brown, Chairman and CEO; Chuck Chaplin, Vice Chairman and CFO; Cliff Corso, Chief Investment Officer; Mitch Sonkin, Head of Insured Portfolio Management. The same team will be responding to the questions later in the broadcast.

One note on the presentation before we begin; our prepared remarks will cover the first 43 pages of the presentation. The balance of the slide deck includes a wealth of additional information organized into various appendices. Let's begin.

First, I will read our Safe Harbor disclosure statement, which appears on page 2. 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 different materially from those projected in these forward-looking statements. Risk 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.

Jay?

Joseph (Jay) W. Brown - Chairman and Chief Executive Officer

Thanks Greg. This is my first call since returning to the company, and I'm certainly glad to be back. Although I will say that the communication challenges to putting MBI results in context are certainly immense, I have used letters to owners to communicate important developments in timely fashion, and I will continue to do so in the future. Many of you have asked for enhanced disclosure and we are committed to providing it. In fact, later today you will find a complete listing of our entire structured finance portfolio and some additional detailed information on our multi-sector CDOs will be available on our website. Our objective is very simple; we want to provide you sufficient information, so you can form your own view about the value of your company.

We believe that our loss estimates are realistic against our view of how the of the credit market will play out, but fully recognize that others will have different views. Our objective here is to give you a better appreciation for the difference between our view of expected losses, rating agency's stress case losses, mark-to-market loss estimates, and the super stress losses, which are offered up by a wide variety of sources, including those with certain self interest.

As you will have noted, we have made a major change in the format of our press release to focus on our balance sheet. From our perspective, this is the year of the balance sheet. We've said a promised and fixed income investors are rightly focused on making ensure we can deliver on that promise. When confidence in our financial strength is fully restored, we will reposition to write new, more new business and a more material volume than we are at currently.

This is clearly the most challenging credit environment we have experienced in our history. Things will clearly get worse in the United States, real state market before they get better, but we have tried to factor this into our portfolio analysis. It should be clear that we are not assuming a doomsday scenario. We are also not assuming that real state doesn't get worse from here, we think it will. That said we have clearly made some mistakes and our financial results are suffering. However, we also believe we are in the strong position, which is reflected in the information we have made available today. And importantly, we are taking steps to restore confidence in our bit capabilities among our clients, customers, rating agencies, and our investors.

There is a number of key issues we are going to address today. Probably first and foremost is starting with capital and liquidity. Solvency at MBIA has never been an issue, despite misperceptions to the contrary. The only legitimate question was sufficiency of capital support the AAA rating for both our current portfolio and to do new business. The latest equity offering proceeds it's a holding company, which were intended to support insurance hubs, but were not needed immediately because of our liquidity at our insurance subsidiaries were held at the holding company for the past two months.

Over the past few weeks, we have seen very concerted effort to raise questions about why was the cash sitting at the holding company if it was dedicated to the insurance operations. After discussing this with rating agencies and the insurance departments, many of which received many calls from a variety of sources, mainly the shorts, who have tried to focus on this issue, we made the decision to move $900 million down. This will be accomplished in the next 10 to 30 days.

Chuck and Cliff will provide detail on the liquidity profiles of the holding company, the insurance companies, and asset management. The key takeaway: we have always been keenly aware that we are not a bank and have finite liquidity resources and have always managed the business with that in mind. We have sufficient liquidity at all levels of the company even under severely stressful scenarios. Second major area will be loss reserves and credit impairments. Chuck and Mitch are going to provide the detail here. Question, why was there new activity this quarter.

The major reason is the erupt increase we saw in delinquencies beginning late in August moving through the third and fourth quarter made it extremely difficult to determine the ultimate trajectory of our loss curves. With the passage of time, four more data points, some intensive modeling, use of outside resources in reading what was available from other sources, we have been able to significantly enhance our estimates. Those are the estimates that you saw in are 10-Q and in our press release today.

We have established these results to be consistent with the further housing market deterioration until mid to late 2009. We challenged all our internal teams to dig into each and every transaction and come up with their best estimates, which matched against these expectations about continuous deterioration over this time period. Our objective here was simple; we want to have minimal changes until we have a better idea how 2009 and beyond play out.

We do assume that the liquidity that we have started to see return to the market will return in full status the rest this year proceeds, and then Mitch will talk a bit about why we chose additional housing, flattening out in 2009 at roughly 10 to 15% below where we are today. We do see some signs that the deterioration is beginning to slow, but it is far too early to count on that. Another area that we will talk about is credit impairments in our asset management portfolio. They are extremely manageable. They are expected in a portfolio of $27 billion, and we maintain capital at the asset management level for precisely that reason to manage these impairments.

Looking at our new business environment, it was an extremely challenging first quarter. This was clearly reflected in the uncertainty about our ratings. It was very difficult for us to business in the early part of the year, given the uncertainty about our ratings. Once we did get affirmation with the negative outlook for both S&P and Moody's, we have seen beginnings of new business coming back in the public finance area. We are being very selective in identifying those public credits, which are most likely to not be affected by the current environment... economic environment. The volume is slow, but it is building. It is clear that we will not, and we will remain well below our historical levels until stable outlooks are eventually regained.

Cliff will provide more detail on asset management, but we are writing significant business in that area of our operations and we are able to access funding at very attractive rates. Importantly, we'll also go through a few slides describing why we don't see any forced liquidity event impairing that operation.

Chuck will comment on fair value accounting impacts, which have and will continue to dominate press coverage. He will also review at the end of his presentation how he think about intrinsic value of our balance sheet in contract to how the market has priced expected or forecasted or market sentiment losses into our stock price. As a reminder in all cases, when we are speaking about losses both in our presentation, and in our press release, we are using net present value to match the numbers that are in our financial statements. Due to the fact that a substantial portion of losses, we will pay out will not occur for 30, 40 years in the future, the actual gross losses, those losses when they are actually paid will be much higher than reflected in our income statements or on our balance sheet.

With that, I would like to turn it over to Chuck.

C. Edward Chaplin - Vice Chairman and Chief Financial Officer

Thanks Jay. As Jay mentioned in his latest letter to our shareholders last week, this year is going to be the year of the balance sheet for MBIA. This should have been quite evident from the new format of our financial results press release this morning. We are not therefore going spend very much time or focus on earnings, but I will take two minutes to comment on a few selected items of our operating income if you will turn to slide 5.

Here is a stylized summary of our income statement, where all realized and unrealized gains and losses are pulled out of the segments. The insurance segment shows a $46 million pretax loss driven primarily by a $265 million increase to reserves. I will talk more specifically about that in a few minutes. Our scheduled earned premium was 8% higher than in first quarter 2007, but refundings were much lower, so total premiums were down. But they were only down about 8% compared to last year, and this demonstrates the resilience of our business model in the phase of sharply reduced new business production.

Investment income was higher than 2007, but operating expenses were also higher than last year, primarily because production is down so much that we dramatically reduced the percentage of growth insurances that we differ. The new business that we did write however was far more profitable than that which we booked in Q1 '07. And I will touch on the pace of new business writings in a few more minutes.

Given the difficulties in the capital markets, the performance of our asset management business is even more impressive. The asset management businesses are around $40 million in the quarter versus $25 million last year. The increase is driven by $40 million of expense offsets from buybacks of MTNs. There are some ways in which the current market dislocations benefit us. We can take advantage of our wide CDS spreads by repurchasing MTNs at gains that run through our investment income.

The business also issued $700 million of new gigs at attractive spreads boosting its liquidity positions. And finally, it added $1 billion to advisory assets under management reflecting its strong total return performance. The biggest numbers on the income statement however are the $3.6 billion net unrealized loss on insured credit derivatives and its related tax impact, about which more later. In addition, we had $224 million of impairments of asset liability business assets and about $100 million of miscellaneous gains to get you to the nearly $3.7 billion loss shown here.

The non-operating adjustments that are summarized here will move the mark-to-market in excess of impairments on insured credit dividends, and other timing related gains and losses. We believe that we have a pretty good handle over on the losses related to the housing crisis today; you will be hearing more about that shortly. We are expecting operating income to become positive shortly. On the other hand, we have no idea what to tell you about the future direction of the mark-to-market and therefore of net income. We can forecast a credit performance much more clearly than we can market sentiment.

So, if you will turn to page 6, given that it is the year of the balance sheet, we'll leave the income statement now. There has been a huge focus on our holding company's liquidity, which somewhat mystifies us. Our asset liability business, which is conducted from a legal entity perspective at the wholesale level is managed to be completely self supporting from a liquidity perspective; and ultimately of course the insurance company backed off those liabilities not the holding company, and the rating agencies explicitly take that into consideration in determining the capital adequacy and liquidity position of our insurance company.

Aside from that, the holding company started the quarter with over $430 million in cash. Together with normal dividends and the earnings of the businesses overtime, this provides bullet proof coverage of the roughly $115 million of annual cash operating expenses. At the moment, we'll also have the proceeds of the equity offering at the holding company; but as Jay just referenced, we have decided to contribute $900 million to our insurance subsidiaries, and will do so within 10 to 30 days.

Consistent with our capital strengthening plan, which was put in place in November, this capital supports our AAA ratings and existing and future policyholders. After this contribution, the holding company's cash position covers its ongoing annual needs 4.5 times without dividends from its operating subsidiaries or the earnings from the asset management business.

On slide 7, you will see that in addition we have a $500 million bank line. As it has been much discussed, this line has covenant that can tripped due to volatility in the unrealized marked market; herein lies the ultimate and unintended consequences. When the market begins to recognize the true capital and liquidity strength of our insurance company, our mark-to-market may become more negative and cause us to trip this covenant. This makes no sense and we are working with our bank group to modify the covenant. That said, we are in compliance with the covenants at this time and the line remains available to all MBIA entities. Neither we nor the rating agencies consider the bank lines in our liquidity analysis.

On slide 8, we show a picture of the asset liability business and its liquidity, which is also pretty simple. We issue liabilities and buy assets throughout the curve maintaining a tight duration match to protect earnings and capital, but this does leave us with some cash flows that don't match up perfectly. As a result, we make sure that the liabilities are well laddered, maintain a cash balance that increases when we believe we are facing market liquidity, and maintain a highly liquid portfolio, so that if we did need to liquidate assets to meet maturing liabilities, the haircuts would be small.

The ratio shown here is one of the simplest of the many that we track. Its total assets versus maturing liabilities where the 2009 figure for example excludes asset that would have theoretically been used to retire 2008 liability and so on rolling forward. As you can see the segment holds far more than sufficient invested assets and cash to meet all maturing obligation even without funding. And of course in the first quarter, we issued $700 million in funding and a further $120 million so far in the second quarter. The proceeds of these issuances have been invested in cash and short-term asset to build our liquidity position even further.

On page 8, we address the insurance company's liquidity position. Now in the insurance company, we are today facing more significant cash outflows than in the past as a result of cash payment expected on our housing related exposures. This slide shows the next 12 months of estimated cash inflows assuming now we write no new business in 2008, versus outflows including expected loss payments. Approximately $500 million of the $685 million in payment that you see here are related to housing related cases. Even in this no new business scenario, we do not need the cash from maturing assets to pay claims, and we would expect maintain positive operating cash flow.

On slide 10, we provide more information about the timing of payment obligations. The claims that we expect to pay, our housing related exposures are somewhat front end loaded. Both our second mortgage exposures, the first two bar shown here and our CDO square deal for that payment that delayed over the next two to four years with 2009 and 2010 having a heaviest payments on this transaction. But these are expected to be very manageable in the context of operating cash flows and the portfolio. The balance of our multi sector CDO policies cover timely interest and ultimate principal and no payments on these obligations are expected for 10 years or more.

Slide 11 goes into our capital position and you can see that our position has been strengthened in the quarter due to the natural deleveraging of our insured portfolio. And the business that we did right there in the quarter was either neutral or accretive to our capital position. We estimate reductions and capital requirements and related improvements in our capital position relative to AAA benchmarks in a range of $400 million to $500 million depending on which rating agency capital model you are looking at. On an S&P basis, we estimate excess capital to their AAA requirement of approximately $900 million on the quarter and with the current year end 2008 forecast of $1.8 billion.

We believe our short fall to the Moody's target capitalization level declined during the quarter due to amortization and the upgrades of a handful of credits. We believe that we will meet the Moody's target requirement within the next two quarters. Looking towards year-end and beyond, we expect that we will see relief under all models as the volatility in the housing markets subside. To the extent of market plays out according to our expected case, the substantial rating agency capital charges based on stressed case modeling should moderate.

Slide 12, makes several points about loss estimates. First, you can see that on the right, we are holding a capital... holding a lot more capital against housing related risks that our expected case losses shown on the left would suggest. And again as the volatility around expectations subsides, we expect the substantial release of excess capital. The economic losses that MBIA has recognized are based on a probable and estimable basis while of course the rating agencies stresses are for capital requirement on a very remote basis. Also I would note that the market expectation far here, the mark-to-market only covers our multifactor CDOs.

And then I would note for those who believe that market forecast are more reliable than those the fundamental analysts, note that the mark for our market multi-sector CDOs in the fourth quarter was $1.8 billion and is now $5.1 billion, we do not believe that in the past quarter that housing market expectations have gotten more than 2.5 times worse. In fact, we think that there has actually been a little apparent change in fundamental expectations about the market. And as mentioned, the expected losses on MBIA's portfolio are well inside of the worst case assessment embodied in the rating agency capital charges and we believe consistent with their expectations as well.

Over on to slide 13, this data shows the cumulative impactof housing related losses on MBIA's balance sheet. As Mitch will cover in greater detail, we have devoted substantial resources, both our own and third parties to undertake a robust and careful review of our housing related exposures. As housing market trends have developed over the last two quarters, we have refined our expectations for future performance and we are confident that our reserving activity addresses our expectation of continued stressful performance.

The adequacy of our loss reserves will ultimately depend up on of course how actual performance tracks within our expectations, but we believe that we have captured a lot of the pain of this market in these loss assessments. I would also note that we show the asset management impairments here, which are driven by the same market characteristics as I have caused losses on the insurance side. The impairments on the asset liability portfolio that are shown are on a fair value basis and as with our insurance liabilities, we expect actual cash losses to be lower than the fair value impact.

The purpose of slide 14 is to put into context our loss reserve movements. Normally, we build up on unallocated reserves when credit conditions are benign, the formulaic addition and then when we do assess case reserves, those reserves are deducted from the unallocated balance. So, in this quarter we had $510 of case activity related to our RMBS policies, which eliminated the unallocated reserve. We then made a special addition to the unallocated reserve of $265 million. The 22.6 billion that you see here is our normal formulaic reserve edition, and together they produce the GAAP income statement item. The unallocated reserve balance at $230 million is about the same level as we had in Q3, 2007 before the case activity related to RMBS began. We believe this amount is satisfactory to cover all other potential losses in the portfolio.

Slide 15 is the same table that was included in the press release that we issued earlier today, relative to mark-to-market. Not surprisingly, given the level of spread widening that occurred in the quarter, our mark-to-market losses increased meaningfully. In most cases, the table is similar to our fourth quarter 2007 table with spread dominating the mark-to-market losses. However, unlike the fourth quarter table, we also had a reduction in our recovery rate assumptions and some erosion of subordination in our transaction reflecting the worsening credit environment.

We devoted a fair amount of ink to our mark-to-market both in the press release and in our 10-Q filing, so I am not going to belabor my comments here. As we have noted, we don't believe, that fair value accounting provides the proper perspective of the real credit risks and the FAS-157 adjustment introduces even more difficulty in interpretation. We believe investors would be better served to rely upon our loss reserving and credit impairment estimates to gain a more accurate perspective on our expected losses. And of course in this quarter, we are now providing some sensitivity analysis around our expectations. We would argue that our mark-to-market losses are not only unrealized, but they are unreal, since our product do not guarantee market values.

Lastly, given the size of our mark-to-market in the quarter and the magnitude of our cumulative mark-to-market loss, the little more than $7 billion, we've had another sizable addition to our deferred tax assets. There has been a little media coverage of the DTA over the past few weeks. So, let me just say that MBIA has more than enough expected pre-tax profits over the next several years to satisfy the theoretical tax benefit of our current deferred tax asset. I'd say theoretical because in order for the full balance of our DTA to offset our cash tax payment, the cumulative mark-to-market loss would need to become a realized loss, and we don't believe that that is at all likely.

So, if you'll turn to slide 16, our perspective on the mark-to-market also plays into this slide. Here we start with our reported book value per share and present the compensation of our tangible or intrinsic value. Most of the adjusting items will be familiar to those of you, who are familiar with looking at our adjusted book value calculation. The notable exceptions are the second and third bars here. The balance sheet mark-to-market loss netted against our assessment of credit impairments for our insured credit derivatives portfolio. As you can see, our $42 intrinsic value is a far cry from either our current reported book value or adjusted book value. We hope that as investors gain greater comfort with the loss expectations for our business that our stock price will better approximate the company's intrinsic value.

Similarly on page 17, we have ways to go to regain and restore confidence in our insurance contracts in the market. But, we have seen measurable improvements since our AAA ratings were affirmed by Moody's and S&P in late February although our insurance activity does remain well below our historic levels, and we appreciate that it will take time to regain that position. Even still the fact that we are still issuing policies and at an increasing pace as you see here, given the massive disruptions in the capital markets and the lack of consensus now surrounding credit rating is evidence of the strength of the benefits provided by the products and services that we sell.

And with that, I will turn the agenda over to Cliff Corso.

Clifford D. Corso - Chief Investment Officer

Thanks Chuck. Today I am going to cover the first quarter highlights of the investment management segment. And then cover more specifically the topics of liquidity and collateral provisions as they relate to MBI's credit rating. So, let's turn to view page 19, where there are five highlights for the asset management business for the quarter.

First, we produced solid operating earnings. Second we continue to write profitable new business across our mix of asset liabilities products. So, I will refer to ALM and our advisory segment. Third our asset under management at $63 billion remains stable. Fourth; while we did have some impairments, they were well within the capital assessment of this business. And fifth, our liquidity is ample to handle all of our liability requirements. No doubt of the challenging market, but we built our businesses with a careful eye towards the potential for severely stressed markets.

And what we are seeing is the benefit of a balanced business model with the flexibility to handle stress; and indeed as Chuck pointed out, to capitalize on it in many segments as well. So, I'd like to spend a couple of minutes extending upon some of these highlights. First, we are pleased to report increasing free tax operating earnings of $40 million for the quarter and Chuck covered this. So, I would just add that this is a product of solid operating results across the mix as well as the $14 million of profits from the repurchase of the MTNs and the ALM segment.

Second, we had a solid new business production in the quarter. We were able to add significant new liabilities in the ALM business. As Chuck mentioned, $700 million for the quarter had very attractive spread. In our advisory segment, we've capitalized our market volatility by adding nearly $1 billion of external funds and five new clients. The key driver here was our track record, where we outperformed our benchmarks and achieved top quartile performance last year versus our peers. Our cash pool management business in particular has benefited from market volatility and our strong performance. In this business, we've realized record balances of $11 billion and launched our latest pool trust Indiana. We now operate 17 pools in 12 different states.

Third, our asset under management; they remain stable at $63 billion. Although there were some change in the mix between our products as the growth and advisory offset slight declines in conduits and ALM airline business.

Fourth, the asset quality of our investment portfolios remains strong at AA or higher to the insurance in ALM investment portfolios. Not much has changed in the insurance investment portfolio. It remained solid and conservatively managed. We recorded no impairments, nor do we expect any. In the ALM investment portfolio, as noted earlier, we had some manageable credit impairment activity representing less than 1% of the ALM investment portfolio.

We secured primarily in the area that I mentioned on our last call, the unwrapped ABS CDO basket, which in itself is less than 2% of the overall portfolio. When I said that we built the model with preparation for stress markets, one way we do this is to assess capital for potential credit risk and that capital is held at the asset management level. And this activity is well within the capital allocated to the businesses. In terms of the investment accounting rules, the mandate that impairments be taken down to the current market price. It's a very challenging standard considering the lack of liquidity and observable market prices in the ABS sector in general.

I would also note that we continue to collect coupons and principle on the majority of these assets, so the yield impact is not significant. In fact, it represents about three basis points on the overall portfolio. So, because there is minimal impact on investment yield given our expectation that actual losses will be lower than the impairment figure, that they will be stretched over many years, and because we are capitalized to handle credit risk, this is neither a liquidity or capital issues to the ALM business.

Just as Chuck mentioned earlier, our liquidity remains ample, and we are going to get the liquidity in a little bit more detail in the next slide. So, on sum on the whole, despite one of the toughest markets in the generation, we are encouraged that we continue to add new business to restart operating income and maintain a strong balance sheet.

Turning to slide 20, let's talk a little bit about liquidity as it relates to the ALM business. It's business, where simply stated we issued gigs, medium terms nodes, and term repo, use those proceeds by high quality fixed income assets, duration match, the assets, and liabilities, all along the yield curve and earn the spread between assets and liabilities. And in that regards, it's not like... unlike other large insurance company ALM programs.

As a reminder this was a funded business, meaning the liabilities that we issue are backed by a high quality asset portfolio and the minute we'll talk about the significant flexibility of the liability side of the business creates. In terms of prudent liquidity management, further ensured our liabilities were diverse, staggered, and placed throughout the entire yield curve out to 30 years.

I'd also reemphasize that this is a long-dated business by design with the rated average life of both assets and liabilities in excess of five years. We hold the reservoir of cash, and short-term investments of approximately $3.7 billon on the balance sheet dedicated to this business. And just to be clear, these investments are dedicated to be ALM business and are separate from the cash generated from the recent capital raising activities.

On the net business production side, there was a net $1.6 billion of labiality roll off in Q1. All the roll off is covered by available cash, asset amortization and asset maturities. The net decrease is really a function of extreme market volatility, which in essence provide a fewer opportunities that met our criteria. So, the volatility made it a little bit slower, but frankly we can afford to be patient and prudent around selecting the right opportunities. And for right that liquidity continues to improve toward the end of 2008, we expect our new business production to pick up as well.

Finally, I would reemphasize the liquidity coverage chart Chuck showed earlier, where it shows that we have significant resources to meet any and all our liabilities for the next three years and beyond and a multiple of requirements. So, I think it's fair to say that the liquidity position of the ALM business is strong. An additional reason we are comfortable with our liquidity is the diversity and cash flow certainty of our liability portfolio. This was the real strength of the business as you can see on the next slide.

What this table shows is that we utilize a high diversified funding platform, which allows us to access many different investor basis. The mix of liabilities creates a highly certain cash flow profile. In fact 53% of our liabilities have fixed cash flow profiles with no variability whatsoever and this is reflected on the top portion of the table. And of the remaining liabilities that contain flexible withdrawal features, the flexibility is only with regard to specific instruction or debt service payment schedules when needed and does not allow for discretionary withdrawals.

We also seek diversity to mitigate risks. The liability profile is granular and uncorrelated. Actually it's the actuarial based cash flows at a portfolio level. We manage approximately 950 separate investment agreements with an average size of $17 million. I think it's worth noting that we have immaterial exposure to the areas of the market focus such as ABS CDO gigs, which comprise only 1.4% of our overall financing. Therefore we maintain a solid liability profile that has minimal cash flow and certainty and doesn't introduce material liquidity risks to our business.

A third aspect of liquidity is the contractual triggers that would introduce further collateralization or liquidation parameters from the down grade of MBI Insurance Corp. This is the slide we showed last time, slide 22. As we built the business, the ALM business, we were careful to consider the impact of down grade triggers and flexible liability withdrawals that are present in the investment agreements area. So, as you look at the table, you can think about our liabilities as being in of three states. They're either collateralized, uncollateralized, or subject to termination.

The key driver here is the rating of MBI Insurance Corp., so let me walk through an example. As you look at the table, you can see on the AAA row, our liabilities outstanding of $25.1 billion, reading across you can see that $8.3 billion of the $25.1 billion are currently collateralized as about half of the credit market is a collateralized market. The remainder $16.8 billion are uncollateralized.

Going down to the AA row, you can see that in essence there are no major changes to our business. Our real terminations and little additional collateral will require it. So, we are significantly out of the money to multiple notched down grades of MBIA. Because there are no material triggers for multiple notches all the way through the AA by design. You can jump to the A level, where we see collateral requirements increase from $8.8 billion to a manageable $12.7 billion. And some terminations totaling $3.1 billion, but in the far rating account [ph], you can see we are still left over $9 billion uncollateralized liabilities and over 87% of all liabilities remain outstanding.

Indeed, we stay north of $9 billion even at BBB level as many of the previously collateralized IAs terminated. There are no material additional termination provisions below the BBB level. So the key takeaway here is that we recognized early on the value of the diversified liability mix, which mitigates the liquidity risk inherent in the decline of ratings.

Before I turn it over to Mitch, I would like to bring it back to some of the key takeaways for the investment management services segment. Carefully considered and constructed the asset management business with an eye on the downside of stressed markets; that's why in one of the toughest markets in a generation, we are encouraged that we continue to add new business due to solid operating income and maintain a strong balance sheet.

Now, I'd like to turn it over Mitch.

Mitchell I. Sonkin - Head of Insured Portfolio Management

Thank you Cliff, good afternoon. I'm Mitch Sonkin, Head of MBIA's Insured Portfolio Management division. I am going to spend the bulk of our time today on the two sectors that have experienced significant stress for last several quarters. U.S. residential mortgage backed securities, specifically our prime secondary book and our multi sector CDO book. I will address the performance issues in those books, provide detail on the loss reserve and impairment numbers Chuck mentioned earlier and discussed our outlook for those sectors, before I get into those areas, however, a few general comments.

First MBIA's overall $668 billion insured portfolio, this position satisfactorily apart from the two sectors we are going to discuss. Second, despite the current economy and market conditions, areas that would be considered potential contingent sectors such as consumer auto, credit card, student loans and CMBS are holding up well. You'll note in the appendix of this presentation, we summarized the performance in those sectors and generally we are seeing acceptable performance. But we are certainly seeing some increases in delinquencies as you would expect in this environment, we see no material causes for concern.

Third, overall, we maintain a strong and diverse portfolio. 83% is rated A or better. We have a highly diversified portfolio based on asset class issuer in service in geography and vintage. And, last we achieved successful completion of several high profile remediations in 2007 among them Eurotunnel and then EETCs in the legacy airline bankruptcies of North Western Delta. We believe our surveillance and work out teams have proven to be the best in the business with the skill, expertise and experience that gives us not only great confidence on our estimates, but in our inability to create remediation opportunities anywhere they exist. So, as we begin our discussion, our focus is un-affect, but our primary portfolio stress is limited to U.S. RMBS related sectors both directly and indirectly through the CDO exposures.

With that, we'll turn to slide 24. I would like to frame our discussion on the RMBS and multi sector CDO portfolios by highlighting the reserves and impairments we took this quarter. First, in the multi sector CDOs, we took 595 million in permanent impairments to 5 high grade and 1 mezzanine cash flow CDO related primarily to performing trends and projections of inner ABS CDO collateral and stressed RMBS collateral. We increased impairments on our three currently impaired CDO squared multi-sector deals by 232 million, which now totals 432 million of impairments reflecting projected credit events that will impact the majority of the 2006 and 2007 vintage inner ABS CDO collateral.

We feel comfortable with the rest of the multi sector CDO squared book. We now have a total of 1 billion of permanent impairments related to the multi sector CDO book, which I will get into more detail on shortly. On the RMBS second lien exposure, we took 495 million in new net case loss reserves related primarily closed-end second performance deterioration. We now have a total of about 1.1 billion of net case loss reserves related to our second lien portfolio.

It is important to know, why we took these reserves and impairments this quarter and there are two main reasons. One, MBIA has attempted to identify and set impairments and reserves on all multi-sector CDOs and secondly in deals, where losses are probable and estimable related to the current housing crisis. We wanted to take those losses and impairments from now, even on CDO deals, where we may not pay any claims for at least 10 years, because we felt it was important to do our best to identify all of our material issues now as we feel quite strangely about our views.

Second, when you consider the losses we took for the quarter, we have taken a view on the housing market that there will be stress at current levels through mid to end 2009 and that ABS CDO collateral will default at high rates over the next few years. Therefore we feel we have a handle on the outflows related to the second lien portfolio and the multi-sector CDO squares over that period, and so future material increases to reserves and impairments would require events significantly challenging our core assumptions being provided today.

Now with that as a foundation for our discussion, let's start by reviewing our direct RMBS portfolio and then we will address the multi-sector CDOs. So please join me on page 25. I would like to start our review of MBIA's backward sector analysis with our $38.4 billion direct RMBS portfolio. These are individual investment grade mortgage-backed securitizations and do not include any RMBS collateral within our CDO book of business, which I will address later. The decrease in our exposure from year end is due to a combination of amortization, and we also reclassified one German multi-family housing deal with a net par outstanding of $1.6 billion, that was classified as a HELOC into a commercial real estate category, which is why the HELOC decline was a little more dramatic than it is.

If you look at the slide, you will see that we separate our RMBS exposure in four areas. First subprime, which includes international covered bond deals and capital relieve trades and first lien alt A. Second, direct subprime, third prime HELOC, and fourth, closed-end seconds. And the prime HELOC and closed-end seconds together comprise our second lien portfolio, which we'll be spending time discussing today. On MBIA's prime business, which is comprised of first and second lien mortgages to high quality borrowers with unblemished credit records, we concentrate on two areas: one, those international capital relief and covered bond transactions, which are supported by prime underlying collateral and a conservatively structured in our solid performers; and second, the prime home equity lines of credit in closed-end seconds. Both are what we refer to generally as the second lien portfolio. To distinguish, HELOCs are floating rate loans, which generally require interest only repayment for a period of time before amortizing, and closed-end seconds are fixed rate second rate mortgages, which generally amortize principle and interest from the asset.

The reserves we have announced in the fourth quarter and the reserves we've taken this quarter directly pertain to the second lien portfolio and accordingly are the focus of our discussion today. Note, in the sub-prime business, MBIA has exclusively ramped only AAA underlying securities in the secondary market since 2004. Our exposures per deal are focused on the first lien product in our glandular usually under $100 million. This book is not showing any material signs of stress at this time.

When dialing inon the performance of our $38.4 billion RMBS book, about $20 billion of the total net par outstanding represented by the prime and subprime book is not a material concern to us at this time, although we are watching it closely due to deal structures, performance and attachment points to protect MBIA's position. On our prime exposure, the total net par at March 31st of 15.4 billion includes international and alt A. Most of this exposure is international capital relief and covered bond deals as I have mentioned insured and above of levels with ample loss protection and these exposures are totaling $11.8 billion, are performing adequately.

And our alt A exposure are $3.6 billion is one which we watch closely as there are market concerns over potential losses and severities. But it is important to note is that we've ramped the majority of the portfolio at AAA attachment levels and we did not play in pay option ARMs, which maybe considered the most volatile loan type in this space. So, we remain cautiously optimistic on this portfolio. We have a slide in the appendix showing current performance trends, enhancements and cumu losses to date.

I am going to skip the prime HELOC and closed-end second categories and return to them in a moment, get a brief look that our subprime direct exposure. As I mentioned before, our total sub-prime book totals $4.2 billion. We provided you with slides in the appendix at pages 62 and 63 that takes a look at the asset quality metrics of the subprime book. You can see that subordination levels remains strong in these deals at this point. And MBIA remains cautiously optimistic that industry projected loss rates will not materially impact our rep trances. We provided insurance on first lien product only at the AAA class of subprime deal structures, since beginning of 2004, and we have almost zero 2007 exposure.

We have focused on the top tier players and we have minimal indirect exposure to monoline subprime issuers, a number of which have experienced solvency issues in the current marketplace. So, when you look at the performing measures in the chart and consider home price declines in the flow of propensity, we utilize a roll for loss methodology meaning the percentages of each delinquency bucket rolling to defaults and stress recoveries to the tune of 50% to 70% loss severities.

Based on our current analysis, MBIA would still maintain adequate credit enhancement all around on this portfolio in our stress cases. So, due to substantial subordination and our deal loss protection on these transactions, and the selective strategy we took towards direct subprime exposure, we consider risk of material loss on this book low although we certainly expect some down grade activity.

Now returning towards HELOC closed-end second deals, this is the area in, which we are experiencing significant stress in our RMBS portfolio. As you will recall, MBIA enhanced in December 2007, net case loss reserves of $614 million directly related to two closed-end second in 12 HELOC transactions with a net par as of December 31st of $7.5 billion on deals, which were issued from 2005 to 2007. In addition we took a $200 million unallocated reserve related to future allocation to closed-end second deals. We have now added a total of $295 million to total second lien reserves, which now aggregate $1.1 billion.

Please turn in to the next slide on page 26. This slide shows the vintage breakdown of MBIA's RMBS exposure. You can clearly see that subprime has not played the major part in our origination strategy and the international has been a solid flow area. However, when you look at 2005, '06, and '07, you will note that MBIA focused origination efforts primarily on prime HELOCs and closed-end second deals.

We did this, because we felt it was a prime product, historical losses were minimal. We felt we were dealing with the best and most prudent originators. In short, the mix seemed to make sense. Obviously, we have learnt lessons from the amount of par we ensured and in the end found out that the type of borrow, we thought we were ultimately ensuring that being a 700 plus FICO or a prime quality borrower was not actually who we thought they were due to layered risk, which will get into shortly.

Let's go the next slide, which gives a breakdown on the second lien portfolio. On this slide on page 27, you can see as we pointed in the last quarter, MBIA continues to focus its attention on prime HELOC enclosed and second portfolios because of the stress we are experiencing and projecting experience in these portfolios over the next few quarters. As shown on the slide, our net par outstanding per HELOC and closed-end seconds was $18.8 billion at the end of the first quarter. The breakdown is $10.1 billion of closed-end seconds and $8.7 billion of HELOC securitization. And the majority of these deals have been originated over the last two years.

MBIA wrapped these deals on a primary basis reattached with the BBB, BBB minus level, and the corresponding rating on these transactions is and still remains AAA. MBIA only wrap prime quality HELOC enclosed and second deals.

As I mentioned the weighted average FICO scores for HELOC and closed end seconds in 2006 was 706 and 719 respectively and the weighted average FICO scores in 2007 was 702 and 710 respectively. Historical loss levels were generally under 5%. In general, credit enhancement considered of over collateralization in excess spread. MBIAs top exposures for the closed-end second and HELOC represented our strategy of maintaining relationships with the top tier issuers and our numbers reflect this as seen on this chart. When you look at the net core outstanding countrywide, this 55% of the book, res cap 28% of the book, and Indymac at near 6% of the book, which in the aggregate totals about 89% of the second lien book.

Now let's go to the next slide and examine the performance trends that lead to reserves we've taken on the second lien book. Please join me on slide 28. As we discussed last quarter, during last summer, we began to notice elevated delinquency levels on several 2005-2006 vintage HELOC transactions. Following the virtual shut down of the U.S. mortgage refinancing market as well as the decline in housing prices, our analysis indicated that certain 2005and 2006, and 2007 HELOC deals, we are experiencing performance characteristic including a rapid increase in delinquencies, an inability of access spread, which is interest from loans minus view in interest odd on the notes through outpaced loan charge offs and the failure of certain deals to either build or maintain required over collateralization or deal protection cushion targets.

By quarter end, we had enough data in house and enough correlation among deals to take 614 million in net case loss reserves on 14 deals primarily HELOCs. As you may also remember, we took 200 million unallocated reserve to earmark for closed-end second deals, which at the time did not have data points to justify individual reserves, but were showing performance strength.

This quarter, we were able to make the same assessment and model our expected losses on our closed-end second portfolio, as we were able to do last quarter with the HELOCs. Why now? A combination of items; first, simply because of the young advantage of the closed-end second portfolio, generally 68% was insured in 2007 versus the 2005, 2006 dominating vintage for the HELOCs, we needed to see how delinquencies were rolling to defaults and gain a better understanding of default drivers.

Second, a combination of loan level performance data and issuer specific information helped us to determine our view. If you look on this slide, you can see the weighted average conditional default rate trends of the second lien book, clearly performance trends have been negative reflecting higher levels of delinquencies and default. In December, when we took the first loss reserves on the portfolio, not only were the HELOC CDR is trending significantly higher than the closed-end second deals to respond more consistency, see that negative consistency on overall performance on a deal-by-deal basis.

The closed-end second portfolio has shown starting in December, further signs of deterioration that have now made it clear, that we should take reserves. One question we are always asked is to provide our assumptions when we take loss reserves, which we will do on the next slide, where I will show you, how we calculated our loss reserves on these deals. So, please turn to page 29.

So, how did we come to our quarter one loss reserve numbers? In order to determine reserves for the targeted transactions, we have employed a multi step process, using various collateral performance scenarios to project losses. We feel that the HPA does not directly impact our loss severities, because we apply a 100% loss severity. We do feel however that a prolong period of housing price declines will manifest itself and increase defaults. We believe that our modeling methodology addresses this issue. So assumptions were made to determine the length of the housing market, downturn and recoveries. And we did not give any credit for recent interest rate cuts, increased Freddie, Fannie limits, proposed stimulus legislation or any recoveries.

Loss limits were calculated as follows. Step one was to analyze the existing performance trends. To account for loans that were at least 30 days delinquent, we used issuer specific data to develop roll to loss rates. These roll for loss rates are essentially forcing losses out of the current delinquencies pipeline, essentially creating a conditional default rate. We then assumed a 100% loss severity, which would eliminate any recoveries because of housing price appreciation as well as to address declines in housing prices. This essentially covered the first six months of the deals as existing delinquencies were rolled to defaults and flush through the transactions.

If you now go to the right side of box, step two is where we analyze future performance. For loses on loans that are current on a go forward basis, we calculated losses as follows. We took the current three month averaged conditional default rate to project defaults on a go-forward for month seven to the end of the deal, 2007 digit transactions were subject to be greater of the CDR calculated in step one I mentioned or the three months CDR, the greater of methodology was used so as not to let averages mass current performance trends.

This CDR was then held constant for 12 month period. To consider how we treated home price stress and macro economics stress, note that we applied 100% loss severity to all defaults. To account for the elimination of lower quality borrowers in the pool and the returns to stability, we applied a burnout factor over a 12-month period. So in total, we increased CDRs for a period of 18 months and then over a succeeding 12-month period, we reduced the CDRs. We then applied the burnout factor, which would range from 50% to 100% with a floor in order to reflect to return to normalcy.

Now, let's turn to slide 30 for the results of these exercises. And let's spend some time here. The result is that we are located $152 million of the $200 million reserve we took last quarter and took additional case reserves of $343 million for a total of $495 million in new case loss reserves primarily slated for four closed-end second deals and one hybrid deal, which consist of both closed and seconds and HELOCs. When you take the $640 million in case loss reserves, we took last quarter and $495 million this quarter. Our total reserves against the second lien book are approximately $1.1 billion. We provided for you a list of all of the second lien deals that we are taking loss reserves on and the claims we have paid through March 31 on all those transactions in the appendix on page 65.

From October to March, we paid about $152 million in claims on second lien deals. Slide 66 in the appendix shows the monthly claims payment trends we have made through the end of the first quarter based upon our modeling, we have actually paid out less in claims than we have projected at this point. But it is this timing, where we have estimated conservatively; only time will tell. But it is important takeaway for you that we do feel confident that we have modeled the expected outflows over the next 18 months to two years, so that we would not need to take any material, additional reserves, unless the housing crisis extends basically another year or so beyond our current assumption. We have also provided for you in the appendix, starting on page 67 a brief case study of our country wide HELOC portfolio and what's driving the losses.

It is very clear what patents have emerged, low documentation and high CLTVs are driving losses. When you look at the level of losses being driven by reduced documentation, it is clear to us that a combination of underwriting and the actual borrowers, who received these loans, clearly were not necessarily, who they pretended to be.

And the macro economic environment has exacerbated the situation for borrowers, who were stretched to begin with, feeling that with their property values, potentially under water walking away has become an option. Based on these trends however, we do have hope that we'll review burnout of elevated losses, once the febrile [ph] pig goes through the snake. And we are left with a more stable group of borrowers. So where dose that leave us? We feel confident that we have circled all the deals, that have potential material issuesthat is about 57% of the entire $18.8 billion, second lien book, that has a loss reserve posted to it.

The majority of the remaining portfolio is either pre-2005 dealsthat are performing adequately with a few '06 and '07 deals that we have our eyes on, but are performing adequately to-date. When you look at the reserveswe have taken to the insured part of our impaired transactions and considered the deal structure, loss timing and excess spread, the reserve total to about 10%, deal loss severity to the net $11.5 billion, net par exposure of the deals we have reserved against. Cumulative loss rates on second lien collateral pools that support those exposures range in general from 15% to 35% with some outliers experiencing cumulative collateral pool losses of 40% to 60%.

Let me address why we are comfortable with the results. We believe we've assumed a reasonably long elevated stress period. From a housing price and recovery standpoint, we are looking at a multi year down market, with elevated defaults throughout this period. We performed extremely detailed analysis on each deal and we utilize third parties for verification of certain key assumptions as well as loss projections. Given the nature of our claims on these deals, our parity payments, we expect to be paying the vast majority of these claims, over the next two to three years, before we start saying material recoveries.

An obvious question would be what if the market downturn extends beyond our estimates. Well let's assume that we are off, and that the market downturn extends longer. If we extended our elevated CDR stress period by six months and extended the burnout period to 18 to 24 months instead of 12, what would happen? The answer is the $1.1 billion and estimated losses we project could increase by 54% to $1.7 billion. In any event while no can be certain of the outcome of the current housing crisis, we do believe that our stress losses will be inside the rating agencies stress loss assumptions against, which we hold collateral.

So, let's turn to our outlook on slide 31. You can see from our modeling methodology and loss reserves, we feel that the downturn in the housing market will be with us for 2008 and 2009. But the second lien portfolio provides an additional wrinkle of issues for us because of the junior lien status of the loans, the uncertainty surrounding, ultimately how layered risks will play out in the long run and the lack of historical perspective for these trends on what we thought were prime quality second liens.

To sum up our RMBS reserves, of the $38.4 billion RMBS book, $18.8 billion is second lien that's the HELOC and the closed-end second, of which we have 19 deals totaling $11.5 billion against which we have taken a total of 1.1 billion in reserves; $495 million in this quarter, $614 million in the fourth quarter. The breakdown of these deals we've reserved against is once again in the appendix on page 67.

That's said, we've attempted to surround all the deals in the book, where we expect material deterioration and to set reserves now, rather than bleed out reserves over time based upon a consistent methodology applied across the book. We believe we have a solid handle and potential outflows and would expect no material increases to reserves on this portfolio for at least the rest of the year, probably into the first or second quarter of next year, assuming things do not get substantially worse.

Now, let's turn to slide 32 for my final thoughts in this part of the presentation, I want to end this section with a very important point, one which we have not talked about in detail before in this space and that's remediation. The loss reserve numbers we have taken assume zero recovery from any type of remediations or enforcement of our remedies. I do not believe that will be the result however. For those of you aware of our remediation history, we intend to remediate these fields as vigorously as our past successes and to use every right and remedy and tool at our exposure.

We have had teams of forensic experts that worked for several months reviewing many loans examining whether they should have qualified to have been included in our insured exposures in the first place. To summarize, we believe we have a case for material financial compensation based upon the diligence we and our advisors having performed so far. We also feel strongly, that the nature of our belief is based on strong and incurable facts. We are pursuing this effort; we expect substantial recoveries although I will not estimate those now.

If you now will join me on slide 33, we will review and discuss our other sector of concern, multi-sector CDOs. Let's start by reviewing MBIA's overall CDO portfolio. MBIA's 129.6 billion CDO exposure is primarily classified into five collateral types only one of which is experience stress related to the U.S. subprime mortgage prices, the multi-sector CDO portfolio of $30.7 billion. Let me first describe the four collateral types we have in our $129.6 billion CDO book in orders to put all this in context.

First, we have investment grade portfolio... corporate portfolio of 43 billion, which is performed as expected, and nearly all this exposure is currently rated AAA and the vast majority is at super senior level. In other words, MBI's risk attaches at some multiple of the AAA subordination level and we do not currently expect any material credit deterioration for the book.

The high yield portfolio of $13.4 billion is largely comprised of low leverage middle market special opportunity CLOs, 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 U.S. collateral, and approximately 71% is rated AAA and 98% is AA or better. Likewise, we do not currently expect any material credit deterioration to this book.

The commercial real estate CDO or CMBS portfolio of $42.3 billion is a diversified global portfolio of high quality and highly rated structured deals in the global commercial real estate sector. 32.5 billion of our net exposure in this sector is to structure CMBS pools that are not truly CDOs. Almost all this exposure is currently rated AAA. We do not currently expect any material credit deterioration to this book, and we have some slides on performance in the appendix showing the composition of the book and the low delinquencies that the book is experiencing. Last, the $30.7 billion multi sector CDO book, which includes multi sector CDO squareds is where we are experiencing stress related to the U.S. subprime mortgage crisis. So, let's go to the next slide, where we can breakout the multi sector CDO book and outline the impairments we've taken this quarter.

Turning to slide 34, we provided breakout of the $30.7 billion multi sector CDO portfolio along with total credit impairments on that portfolio as of the end of the first quarter and associated mark-to-market. As a reminder, the collateral and MBIA's multi-sector CDOs include asset backed securities, for example, securitizations of order receivables and credit cards. Commercial mortgage backed securities, other CDOs in various types of residential mortgage backed securities including prime and subprime RMBS. This range of asset classes is down throughout the entire $30.7 billion multi sector CDO portfolio, which is comprised of deals that rely on underlying collateral originally rated single layer above high grade CDOs and in deals that rely in collateral primarily originated BBB mezzanine CDOs.

New let's walk through the impairments we've taken on the $30.7 billion multi-sector CDO book. At December 31st, MBIA recorded $200 million in impairment charges related to three diversified CDOs of high grade CDOs or what we refer to a CDO squared deals that possess the largest bucket of inner CDOs of ABS collateral, to vintage being of the 2006 and 2007 years. We have increased that impairment to $432 million reflecting our views or the projected performance of the CDO of the ABS collateral within the deals. We believe we have a solid handle on the potential losses on these deals now, which I'll discuss further in a minute. This quarter, we also took permanent impairments to five high grade and one mezzanine cash flow CDO totaling $595 million.

Despite the fact that we won't be paying interest claims on these deals for many years and principal isn't due until legal final maturity, which is typically three, five years out, we have decided to take these impairments now due to our views on the future performance on the inner ABS CDO collateral in the high-grade deals and the RMBS performance in the mezzanine deal. Again, I want to emphasize an important takeaway. While we have created impairments of $595 million on these five high-grade and one mezzanine multi-sector CDO deals, we do not expect to pay any interest on these claims, on these deals for 10 years or more based on our current analysis. So in total we now have a little more than $1 billion in impairments against the $30.6 billion multi-sector CDO book. We believe that these impairments reflect the potential future losses, we could experience and certainly reflect a position on ABS CDOs vis-à-vis defaults that have not manifested itself yet, but we expect it will come over the coming few years. We do not expect to take future material impairments on this book for the foreseeable future.

Please turn to slide 35 and lets a take closer look at what was behind some of the impairments we took. Here we list CDOs, we took impairments on and you'll notice several facts. First there has been an erosion in subordination. Second, the high-grade deals generally represent the deals with the largest inner ABS CDO bucket versus original subordination and we expect material defaults to those collateral buckets, which is the primary driver of the impairments we are taking. Third, regarding the mezzanine deal that exposure is a principle and interest cap payable in 2053 there in MPV basis we've essentially written that exposure out.

The slide shows the projected inner CDO fogs, which we believe will occur over a five year period, although quite frontloaded. In examining the RMBS collateral, we run various scenarios based on roll-to-loss methodology with a timing default curve that is punitive for 12 to 18 months before burning out to a normalize level. Prepayments speeds range from 10% to 15% and in our modeling that we used to assist us in setting current impairments, cumulative loss ranges are from 16% to 20% to the 2006 and 2007 subprime collateral resulting from our modeling.

Of course the question results what is subprime losses are worst within our current expectations, and what could that use to potential impairments. Well we believe we have stressed the inner CDO collateral adequately, but if were to increase our to roll-to-loss assumption resulting in losses to subprime in the 18% to 23% range, and we mute the benefits of excess spread later in the curve, our impairments to the high-grade deals of $595 million could essentially doubled.

As far as claims payment timing, this is a longer turn payout product. We generally don't project interest claims for 10 years and principal payment would not be required until legal final maturity, which as I had outlined before is generally 45 years out. Now let's look at the multi-sector CDOs squares in the same manner on the next slide.

On slide 36 we will discuss our multi-sector CDO square deals of $8.6 billion where we have taken $432 million of impairments against three transactions. MBIA CDOs of high-grade CDOs are diversified transaction generally anchored by CLOs which are collaterized loan obligations consisting of investment grade corporate debt and containing pockets of other collateral, which may include highly rated tranches of CDOs of ABS collateral. No one transaction contains more than 40% of CDOs of ABS collateral as a percentage of the total collateral base. An important point to note on this slide is that the deals are diversified by collateral and vintage, with 42% originated from 2005 and prior, 32% from 2006 and 26% from 2007. The underlying collateral ratings as of the end of the quarter remains strong with approximately 64% of the underlying collateral rated AAA, 13% AA, 7% A, 4% BBB and 12%, below investment grade.

Unlike the rest of the multi-sector book where we generally paid timely interest and ultimate principle at maturity, for the multi-sector CDO squared deals, when the deductible erodes, we'd start paying claims thereafter on individual pieces of collateral, not on the deal, but the individual pieces of collateral, after a contractual collateral settlement period. So we project starting to pay claims next year through the subsequent five years. When people look at the multi-sector CDO squared book, we often read about outrageous loss ranges in the $45 billion range or higher, associated with the portfolio, where they assume that the whole portfolio is comprised of ABS CDO collateral. It is not, as you can see by the collateral breakdown on the chart. We got the collateral breakdown in the appendix for you, if you, if the corporate market were to materially deteriorate, clearly we could face additional impairments on both the currently impaired transactions and potentially other transactions besides the ones we are mentioning today. However, the corporate collateral on these deals which is predominantly highly rated CLO tranches, continues to perform solidly and we expect no material issues on the collateral this time. This is important to note when you consider true loss potential to MBIA.

Now let's turn to page 37, to discuss impairments on the portfolio. Last quarter, we discussed our impairment analysis and we determined that three deals within this segment would eventually be impaired which we initially quantified to be $200 million. As I have already mentioned we have increased the impairments on these three deals by $230 million, to a total of $432 million or as our analysis on the inner ABS CDO collateral has been refined based on our views of material impairments of that collateral within the three deals.

You can see in the slide that we have projected defaults on large percentages of the inner ABS CDO buckets in these deals with the balance being generally older vintage CDOs which we believe will perform. In these three deals which totaled $3.1 billion as with the majority of our multi-sector CDO squared book, asset performance is guaranteed versus the normal MBIA guarantee of liabilities, in other words, these are deductible deals. MBIAs obligation to paying net losses is only until the deductibles' fully eroded in each subsequent asset experience of credit event is valued. So when you are look at the loss payment timeline, which we've outlined and as I mentioned before, we start to expect plenty of claims next year into the subsequent five years or so.

If you wanted to take to further stress to the multi-sector CDO squares we've already impaired by increasing the loss of the remaining ABS CDO collateral and the smaller RMBS buckets in those deals. We have estimated a stress range of $100 million to $300 million. Therefore when you combine the doubling of the impairments related to the high-grade deals mentioned previously and take the high range of additional stress with multi-sector CDO squares, you would increase our $1 billion in multi-sector impairments to $1.6 billion to $1.9 billion.

So to sum up on the CDOs, the total book $130.6 billion, of that multi-sectors are $30.7 billion including the multi-sector CDOs squared of $8.6 billion. Against that book we have taken total impairments of $1 billion, $27 million, $200 million in the fourth quarter $827 million in the first quarter. And of the total impairments, $432 million are on three multi-sector CDO squares and the balance of $595 million are on five high-grade and one mezzanine multi-sector deal.

To turn page slide... turn to slide 38, I want to emphasize again the position that MBI has in our insured deals because the remains misconceptions about potential impact to our liquidity, based upon some misunderstandings about deal liquidation potential in the CDO book. In all cases, MBIA cannot be accelerated against, and we maintain the right as controlling party within our deals to accelerate at our sole discretion. Acceleration is an additional cash diversion remedy which re-directs cash away from subordinate tranches and funnels it, to accelerate amortization of our senior exposure. Acceleration is distinct from liquidation of the collateral pool which we also direct upon certain events of default, as the sole controlling party within our deals. To emphasize this point, the only way deal liquidates is if we decide to do it, otherwise we pay according to the policy which will be many years in the future for the bulk of the multi-sector book and after deductible erosion for the multi-sector CDO squared.

Please turn to page 39. Briefly, this slide summarizes our outlook. We certainly believe the rating agencies will continue to downgrade collateral and that the ABS CDO mezzanine trenches with 2006 and 2007 subprime RMBS collateral will under perform. We are actively monitoring these deals and ensuring all rights and remedies are being properly administered. As we've attempted to take impairments on the deals we have identified at the highest potential issues; that the highest potential issues in an effort to provide clarity to our views within this book.

Now let me finish by briefly turning to slide 40, and talk about what we were trying to do under the remediation side to these deals and some activity that happened after quarter ended. We terminated two multi-sector deals in April, with net par outstanding of $825 million contractually and without dispute which we do as a positive vis-à-vis enforcements of our CDS contracts. We moved management to five deals during the quarter to a new manager who we believe has refined and embarked on future remediation strategies will be the best positions to assist us in taking advantage of the market opportunities. Reveals [ph] to have a payment blocker language which means upon an event of default of cash all cash gets converted into the senior tranche, we have a very high success rate of enforcing that remedy demonstrating the quality of our deal documentation and structural provisions. We haven't had the issues others may have in enforcing our rights here.

And finally, we continue dialogue with our various counterparties about other potential remediation and market opportunities which are ongoing. This concludes my portion of our presentation. We designed this presentation to try to answers many questions as we have received on our RMBS and CDO book. We have provided slides in the appendix as we supplement to the general date, that we are releasing in this quarter, which provides core performance data on our subprime and Alt-A books, as well as summarizes our comfort with our commercial real estate and consumer books.

And we have also attempted to provide you insight into out views and analytical processes on the two stress segments of our otherwise solid performing book and importantly try to take reserves and impairments with the hopes of eliminating future losses today in order to provide more certainty to future quarters results and demonstrate our identification of problematic credits.

We believe, we understand the scope of the losses we will face, and we'll undertake remedial efforts to ultimately reduce those losses. Thank you.

Joseph (Jay) W. Brown - Chairman and Chief Executive Officer

Thank you, Mitch. If you want to pull up slide 42, Chuck used this slide earlier to explain the adjustments that he would apply in looking at the different screen of our reported book value and what he would characterize as our analytic adjusted book value. As a owner of MBIA since 1986, I have started this chart for the better part of two decades, and this to me has consistently represented the best way to think about the long-term value of your company. The important thing to understand when we look at this chart today, as the introduction as result of FAS-133 and our decision to enter the derivative market approximately a decade ago. The uncertainly associated with unrealized mark-to-market losses. The real question that you should always think about with MBIA is do we have an adequate provision for losses? Most of the other issues that you see rise, detailed questions about accounting, individual questions about transactions etcetera are ignoring the basic fact that the major issue in terms of valuation and the major issue in terms of you understanding what you might want to the value with the company, comes simply down to the question of what you expect our ultimate losses to be? If you look at where we are today in terms of the pricing and the stock as noted in our press release, essentially the market is estimating that we're going to see about $10 billion more in net present value pre-tax losses than what we've recognized today. We don't believe that, can I go to the wrap-up side?

In conclusion of where we are, I think it's very clear that our belief is a bond insured, insurance remains extremely viable. As we look at our product and think about the demands in the U.S and throughout the globe in terms of additional infrastructure, those needs are large and they are growing.

Equally important, bond insurance provides a money back guarantee, recipients of the more than $2 billion in claims, we will pay, will be good testimony to the value of our product. We think we are very well positioned today, we don't believe we have any issues whatsoever in the area of liquidity either our holding company, better asset managing company or either insurance company As such and based on where our prices today, we have no current plans to raise any additional equity for our company.

Importantly because of where we are in the credit environment and particularly where we are in terms of the securities that we have to measure on a mark-to-market basis or contingent liabilities, you can expect that there will be volatility in the quarters ahead. We do believe that the underlying results will become clear and more stable as this year unfolds as we noted earlier this year and we do believe as we end the year, some of the volatility that we've experienced over the last 18 months would be significantly diminished from where we are today.

I think with that, I'll turn it over to Greg to start through the question and answer period.

Greg Diamond - Investor Relations

Okay, thanks Jay. We're going to dedicate one hour for our question and answer session today, so we'll finish up at 4:30... 4:33 to be exact. Here's the format that we'll use for selecting questions, first we'll respond to those questions that were submitted in writing prior to 12:30 P.M today.

We received 40 questions in total, up through this point in time 10 of which were Mr. Ackman questions that came in after 12:30. With that said, we will take several of his questions and respond to them nonetheless, even though on T.V last week he had indicated that we would do otherwise. Rest of the questions that we don't get to, we will... that were submitted in writing, we will respond to in writing.

After handling the written questions, we will then open up the phone lines and give first priority to investors of MBIA shares. Second, will be sell-side equity analysts that follow the company then we will take questions from fixed income, investor community, and lastly we will take questions from anyone else. After the operator announces you, we ask you to state your name, your company affiliation and also your investment relationship with MBIA.

And with that we'll begin. Melissa?

Question And Answer

Operator

Thank you. [Operator Instructions].

Greg Diamond - Investor Relations

Okay, thank you Melissa, we're going to start with the written questions first.

Operator

Okay. Please go ahead.

Greg Diamond - Investor Relations

First question is from Manish Kumar from Golden Associates. In its business plan when does MBIA expect to obtain a stable AAA rating, Jay?

Joseph (Jay) W. Brown - Chairman and Chief Executive Officer

Well, that is the one thing that is not on our control when the rating agencies alter their current outlook on MBIA. But as they've said when I joined the company approximately 10 weeks ago, my expectation is that, that event when we achieve a stable rating, will probably not occur until the end of this year or earlier next year. And the reason for that is because of our significant exposure to the housing market and a belief that there's not going to be enough clarity for the rating agencies to stabilize there long-term estimates for loses. It's our expectation that, that will probably occur towards the end of this year or earlier next year.

Greg Diamond - Investor Relations

Andrew Oliver of Trans-Atlantic Capital. submitted the next set of questions. How many people at MBIA are involved each quarter in surveillance in estimating loses and valuing investments, how many levels of supervision are there, are they outside advisors used and how often are MBIA's estimates discussed with the rating agencies? Rich?

Mitchell I. Sonkin - Head of Insured Portfolio Management

Okay. Well, IPM is staffed with 52 analysts that are anchored by subject matter experts. And we're divided into three areas, Global Structured Finance, Global Public Finance, International. We also have a special situations groups specifically charge with remediation and work out functions. Ultimately, when we consider loss reserves and impairments, we have a loss reserve committee process, that entails quarterly analysis of every credit on our watch list, detailed projections and base and stress case loss estimates as well as remediation strategy.

And the loss reserve committee which is comprised of MBIA senior management reviews all the loss reserve recommendation. As to how many levels of supervision are there? We have subject matter experts, managing the analytical teams, that is segmented by asset classes and sectors. Each team leader reports to a division head, who in turn reports to me. On the question of outside advisors, we do use outside advisors regularly to assist us in remediation, be it for legal or strategic reasons and we've also employed the use of outside advisors to help us triangulate our modeling calculations and to test these assumptions that we use in those modeling. And how, often our MBIA estimates discussed with the rating agencies?

We discuss the portfolio matters with the rating agencies on a regular basis and they receive our quarterly loss reserve reports, we are in constant dialogue on our portfolio exposures with them. And the assumptions we use to get there as well as understanding their methodology, when calculating stress losses on our books.

Greg Diamond - Investor Relations

Okay, the next question comes to us anonymously are you getting current market rates on the bonds market you wrap in the market. There has been talk that MBIA has had to buy business and a the Texas toll road was done at 8 to 9 basis points which is way under current market rates. Jay?

Joseph (Jay) W. Brown - Chairman and Chief Executive Officer

My current market, it's always in moving target, I will testify with great certainty, we are not getting paid as much as perk [ph] share, pathway [ph] is getting paid for their rep [ph] as of this morning. Looking at how we actually price the business, that we get over the first quarter, the best comparison for us is to look back against the adequacy of that price over the last 10 years. Our best time period from pricing was probably in the 2002 time period. And the rates that we are seeing in the first quarter are approximately of those levels. So, we are more than meeting our long-term cost to capital achieving those kinds of prices today.

Greg Diamond - Investor Relations

Okay. Another anonymous question. Are there any comments on the Merro [ph] and SCA lawsuits, where MBIA is in a dual ramped position with alleged conflicting acceleration ability? Silver Martin [ph] CDO one has been recently downgraded by Fitch BBB, so any plan to accelerate by MBIA on the CDO and if so. How does this play out? Mitch.

Mitchell I. Sonkin - Head of Insured Portfolio Management

I'll take this one. We are going to have some limited comments here. First, we are not a parties to loss. Second we can say that, we've six transactions in which we have the super senior position and we believe SCA ramps below us. Third MBIA cannot risk on two high-grade transactions totaling 1.1 billion of gross par, 835 million of net par, highlighted this in my presentation. Due to a decision on the part of the counter party we are facing, not to carryout, our directions on specified deal matters.

Determination was amicable and contractual. All of our other policies remain in effect and MBIA, CDS contracts we've the right to direct the counter party to perform certain actions for the construct [ph] the slot documents. And our control position, within the capital structure. If these directions aren't followed, we can walk away from the swap with no mark-to-market payment of brokerage fee. And as I mentioned, it's important to know that MBIA has exceeded the two, that I referenced above on a contractual basis.

Greg Diamond - Investor Relations

Okay, Andrew Oliver Trans-Atlantic Capital has other question, Chuck this will be for you. How do the auditors of MBIA opined upon loss estimates for the company?

C. Edward Chaplin - Vice Chairman and Chief Financial Officer

Good question, our auditors, Price Waterhouse Coopers audit the process of assessing loss reserves on an annual basis. And provide information about that into the market fee, there disclosures around our 10-K, it's a pretty extensive process. Their subject matter, experts that come in and look at our methodology, they have their modeling teams, that go over the analytical model, that we are using on, and there is a actuarial opinion, that is rendered on an annual basis. Price Waterhouse also reviews our quarterly financial statements and as a result, they also participate in the loss reserve setting process, each quarter and are pretty to the analysis, that is done and the decisions made by the loss reserve committee. But there is not a formal audit on the quarter, that is only an annual process.

Greg Diamond - Investor Relations

Okay, another anonymous question. Could the company provide an update on its exposure to the debt issued by the City of California. Is the company likely to need to establish reserves for any exposure, that it may have to the city.

Mitchell I. Sonkin - Head of Insured Portfolio Management

Let me answer that for those who don't know City of California is a bay area, city of approximately 117,000 people which has been experiencing distress for a variety of macro economic reasons and high labor cost that has threatened, I don't believe they haven't yet filed, but they have to threatened to file there for a municipal bankruptcy. The total MBIA exposure to the city is approximately $50 million. It's broken down into two pieces one is a lease transaction for $4.1 million gross where $3.8 billion net on a lease that is secured by annual appropriations of the city's general revenues and the second is a water revenue bond which was sold in 2006, for which our current exposure is $45 million. The debt service on the water bond is supported by a first million [ph] on the net revenues of the water system. We have not established any case reserves for the city and produce exposures, but the city has not filed. The city is current on its debt service payments and we are confident then the events in the city do go into chapter nine that the bulk of the exposure will ultimately be covered on the special revenue or segregated basis. However I can't rule out the possibility of having to take some small reserves, we'll have to see how it plays out there is no basis to be would yet.

Greg Diamond - Investor Relations

Okay, another anonymous question. Tax questions for local municipalities are under pressure. Do you see this is having any impact on any municipality business? Jay?

Joseph (Jay) W. Brown - Chairman and Chief Executive Officer

Certainly in terms of our existing portfolio, we watch, we watch all of our credits and public financer to make sure that any changes in tax revenues that could effect short term performance are been adequately addressed. I think the bigger issue for us is the long terms fundamental issue in the public finance market that in many of the exposures that we've underwritten historically and once that we are looking at going forward, the big issue is how are the various public entities in this country going get their arms around the combination of pension and healthcare cost. These are the two big long-term issues that affect individual credits to the greatest extend and these are the issues that we constantly have to keep an eye on in terms of determining which credits we underwrite. But as of right now, we don't see any particular short term issues affecting any of our credits in the near term.

Greg Diamond - Investor Relations

I am sorry Jason Neff of ST Investors [ph] asks for collateral underlying CDO exposures, you provided the assumption for what percentage of loans that are current are you not I think that would go into default. Can you provide a similar figure for the second lean our RMBS exposures. After reading the disclosures about the CDRS on second lean exposures, I am still not clear and how the default rates are current loans are derived? Mitch?

Mitchell I. Sonkin - Head of Insured Portfolio Management

Okay I will try to clear it up. If you go back to the presentation we worked through how we derived our loss rates for the second lean book, but to answer your question specifically for the first six months, we derived a CDR by a roll-to-loss method on the existing delinquency pipeline. After flushing out the delinquency pipeline for loans that are current, we used the average three month historical CDR going forward, so that it is what covering future losses on current loans and using a 100% severity means your CDR is an essence your loss percentage. To provide more color we utilized CDRs ranging from around 4% to around 16% with one out layer transaction that had 28% CDR. The roll-to-loss methodology addresses the delinquency buckets as of today into a account from current loans that roll per loss, you would need to report to a seven months methodology in the presentation. So to recap we use the greater of three month CDR with we actually derive CDR and that addresses the current loans that default.

Greg Diamond - Investor Relations

Jason actually have an additional question. How many of your second lean deals are impaired? Mitch?

Mitchell I. Sonkin - Head of Insured Portfolio Management

We have 19 second lean deals that we have taken reserves against. We have listed all those deals in the either in the deck or in the unexpected deck so you will be able to find all the details there.

Greg Diamond - Investor Relations

Robert DiNozzi of SEB Security, asks how... has MBI approach for consider approaching to fed to borrow money it might take restore financial sector confidence in the paper MBI has under read. Chuck will you take that one?

C. Edward Chaplin - Vice Chairman and Chief Financial Officer

Sure I think that this a question about the fed's willingness to take on repo asset held by financial institutions and they did recently liberalize the rules around what kind collateral they would take and from whom they would take it. Two issues... three issues one is the extension did not expand enough to bring in bond insures, number two the financial institutions that can pledge asset of fed own asset than with respect to our insured liabilities they are contains of liabilities only we don't actually have been asked it that we could take it to fed on to pledge, thirdly perhaps more important the purposes of program on the part of the fed is to inject liquidity into the market on four financial institution who are subject to liquidity risk and bonded insures then MBI perhaps and particular, are not subject to material liquidity risks. We talked about this a lot both in this call and in our fourth quarter call, that the risk that we take on is essentially only credit risk, there is essentially no market risks because we do not guarantee the market values of the instruments that we ramp and our business is set up and managed to minimize or eliminate liquidity risks. In general to the extent that the Fed's actions do provide liquidity to the market, that is going to benefit us because of the fact that asset values will start to moderate and you will see a smaller or positive mark- to- market changes but, we don't... the program is not really set up to address credit only exposures.

Greg Diamond - Investor Relations

Okay. An anonymous question, has MBIA insurance guaranteed the swap payments of any municipality, will this guarantee extend to termination payments? If so, could you please describe any steps that the company has or could take to remediate this possible exposure public? Mitch?

Mitchell I. Sonkin - Head of Insured Portfolio Management

Okay. Well have insured municipalities obligations on interest rate swaps related to insured floating rate bonds and secured on parity with the bonds. These transactions provide the municipalities with synthetic fixed rates. Many of our insured auction-rate securities and variable rate demand notes have been swapped to fixed rates through interest rate swaps. MBIA underwrites these transactions assuming that first interest rates increase to the max rate allowed by rollout [ph] within the respective states and second, that the swap terminates prior to maturity. If the municipality can withstand the interest credit risk without the benefit of the swap, the transaction will be considered for credit approval.

In the next part, which is with the guaranteed extent termination payments, we have also insured termination on relatively few swaps. These potential termination payments are capped at a level that risk underwriting has approved after considering the new lease liquidity and cash flow resources and very importantly MBIA controls the spot termination and the issuer cannot terminate without our consent, the swap dealers cannot terminate unless both community and MBIA have been severely downgraded.

In the last part let's see, there are no examples of new swaps that required remediation. Our public finance group portfolio remains very high and swaps that are currently being terminated in connection with auction rate conversions to a fixed rate are typically financing termination payments from liquid resources or through new financers.

Greg Diamond - Investor Relations

Thank you. Okay so that's it we are going to do... we are going to pick up on Bill Ackman questions now and try to get several of them answered. We are not going to read them and based upon the full amount that he wrote for each one but we will try to capture what we think is the essence of his enquiries. So here is the first set. Why does the company use MBIA CDS spreads to calculate the MKN if the company does not believe that MBIA CDS spreads accurately reflect the company's credit worthiness? Is MBIA aware of any other financial guarantor, it has discounted it's CDS liability by discounting the loss using it's own CDS spread. Chuck?

C. Edward Chaplin - Vice Chairman and Chief Financial Officer

Thanks. First, we do use the credit default swap market as an estimate of the market view of MBIA's credit quality for the purposes of determining the fair value of our contingent liability of determining the fair value of our contingent liabilities. This is the process that we have talked about a lot and the fact that there aren't really observable market prices for our insurance policy linked credit default swaps and so, we've developed an analytical model to estimate those fair values. In the first quarter of 2008, we are required under phase [ph] 157 to consider the risk of MBIA zone non-performance in evaluating the fair value of these contingent liabilities. And so, we look for what is an approach to providing that input that is consistent with the way that we look at the contingent liabilities themselves. And for the contingent liabilities we are using market indicated spreads for the collateral in the transactions in order to develop the value that comes out of our model.

So, we thought that it's totally parallel to take a market view of MBIA zone non-performance risk in doing that evaluation. You know, to the extent that the track that makes the point that MBIA believes that it is credit default swap spreads are unreliable, unreliable estimates of the intrinsic credit worthiness of MBIA and that is true. We also believe that the spreads that we observe on many other assets that are collateral in the CDO's that we wrap are unreliable estimates of the underlying credit exposure and that's why we also provide to the market an estimate of the true impairments on those transactions, that is to say, the actual amount of cash that we expect to payout when those transactions are become trouble. And so we believe that those the impairment numbers are much more reliable, way to estimate the cost of having written those contracts, then the mark-to-market is, I made a few comments about that, during the prepared remarks.

So while MBIA credit spreads are wide and we think unreliably wide, they are consistent with the spread, that we observed on some of the other asset classes, that are collateral in these transactions. And then so we are treating MBIA in effect the way, that we are treating the balance of collateral. Now with respect to other financial guarantors, every one in the market is adopting FAS-157 in this quarter. There hasn't been to my knowledge a whole of detailed disclosure, about the methodologies that different companies are using to assess there own credit risk.

But let me say this about valuing these credit default swaps written by financial guarantors in general. There is significant diversity of practice, among companies and it would be inappropriate and I believe unfair to identify any single input to the companies calculation the fair values on there CDF, on there insured CDF and to suggest that makes the calculation aggressive or conservative. Because they are still many differences and that methodologies and approaches that are being used, so I'm afraid that the answer to that question is one, I don't know the answer to and if I did, I'm not sure how relevant it would be.

Greg Diamond - Investor Relations

Okay the next set of questions from Mr. Ackman are as follows. MBIA has changed the reference index used to calculate it's mark-to-market losses on CMBS. Therefore reducing the loss, what index is MBIA now using to reduced it's MTM loss. Why does MBIA abandon credit spread information that is deemed unreliable.

C. Edward Chaplin - Vice Chairman and Chief Financial Officer

Yes.That's a good... position with the prior question. And there is a difference in our view of the spreads that we are using to mark our CMBS contingent liabilities, relative to other collateral in CDOs and MBIA's own credit risk. And the reason is that the spread we observed on the CMBS are very wide. And they are very wide in the absence of any material deterioration and credit conditions in the market, in our portfolio, when you look at our, the CMBS deals that we have wrapped, not only had there not been. There is no impairment, there hasn't even been a down grade of a transaction below the AAA level. Based on all internal analysis, we don't see any potential problems on the horizon there, credit fundamentals are actually quite strong in the commercial mortgage sector. And that data is contained in the appendix to the appendix to the presentation.

So these is a place where we think that the very light credit spreads that we observed in market are completely disconnected from underlying credit fundamental, I can't say that with respect to for example, the spreads that we use to mark the multi sector CDO or quite frankly MBIA own credit spreads. Because both the multi sector transaction and MBIA are experiencing, credit loss that is significant for them over history as oppose to the CMBS markets, that is experiencing historically very low adverse credit performance.

So, we view them really as quite different. Now, how do we approach the CMBS, what we did is, to create a synthetic index, by taking the average of the street firms fundamental analysts views of the loss potential in commercial mortgage backed securities and then add to that component of spread, the liquidity premium that built into the CMBS index. So, in effect what we were doing is removing part of the DNA of the CMBS index, that part that reflects underlying propensity to have default and losses replacing that with the fundamental view and then rebuilding the CMBS index with if capital structure and if liquidity premium to create the index that then seeds our mark-to-market model.

And it yields the numbers that are shown in the table that I referred to during the prepared remarks. Let me just say that having made the adjustments, that we have we believe the mark-to-market on our CMBS portfolio, still do not reflect the underlying credit performance that we expect on those transactions because we are anticipating no loss.

Greg Diamond - Investor Relations

Okay, another set of questions from Mr. Ackman. What is the estimate for claims that MBIA will pay on prime and near prime home equity transactions in Q2, Q3, and the full year 2008 and 2009 and thereafter. Why does the company believe that the recent acceleration in number and size of losses is not a harbinger of greater losses in the future? Mitch?

Mitchell I. Sonkin - Head of Insured Portfolio Management

Okay with respect to the first question, which is what is the estimates for claims that we are going to pay? I hope that we've addressed that quite exhaustively in the presentation, nevertheless as of March 31, '08 as I mentioned, we paid claims of 152 million of which the vast majority has been for the HELOCs to-date, I provided a list of the deals, we paid claims on and we are taking reserves on. There are in the appendix. With respect to the projected claim stream, it's for the majority of claims payments to be made starting six months from the date, the transaction was model and continuing for approximately 2-4 years, if you go back you will note in the presentation that we believed the vast majority of the claims, would be paid over the next couple of year. Before we expect meaningful recoveries. And as I also mentioned this does not factor into account any remediation activity, which we also think will provide recoveries on the out flows and in the... expected in the future.

On the second question, why does the company believe that recent acceleration in number and size of loses is not a harbinger loses in the future. A fair question and one that I hope, I also was able to address during the course of the presentation. But let me go back and restate, that we placed reserves on over 50% of our second lien portfolio. We feel that we have fully and correctly identified the vast majority of the transactions in which, we are going to pace a permanent impairment. And that we reached the conclusion by applying significant...to our transaction.

As I tried to laid out exhaustively, we've modeled the elevated CDRs over an eighteen month period which were accompanied by 12 month burn out. We also provided some sensitivity around the numbers, if we extend the stress and the burn out periods. But we do feel, we've certainly identified most problematic credits. And also as a reminder there is no remediation activity factored into our loss reserve numbers. We have remedies in this transactions that we are pursuing strongly. We expect some of those claims we have considered for our loss reserves will actually be decreased by those efforts. We are not giving any credit for that in the numbers but we hope they will manifest themselves in the quarters ahead.

Greg Diamond - Investor Relations

Okay. And the last question that we will take in writing from Mr. Ackman before we move to the open telephone questions is the following. Why has MBIA changed it's thinking about the location of $1.1billion of capital from the holding company to the insurance company? Jay?

Joseph (Jay) W. Brown - Chairman and Chief Executive Officer

The $1.1 billion, that's referenced here, was the gross proceeds that we received from the second equity offering, that was completely back in February. The company at that time indicated that it intended to deploy that, the bulk of that funds into it's insurance operations. In the intervening two and half months, I have been working with the team here with the rating agencies and with the insurance department thinking about our ultimate long term structure, what's the best way, what's the best path to accomplish that. Over the... you know, beginning about 2 or 3 weeks ago, we saw a pattern emerge that we have seen in the past, where suddenly five or six reporters instantaneously start asking us, why is the cash of the holding company, the rating agencies in the insurance departments, are suddenly besieged by questions from quote 'investors', on this subject and suddenly an issue which is largely irrelevant over any kind of near term picture becomes an issue.

Our response to that was to talk to the rating agencies about it, and decide that we would go ahead and we talked to the insurance department about it, we'll go ahead and put 900 million down over the next 10 to 30 days, basically, to take this, to turn this back into a non-issue. We didn't believe it was an issue but we have to be responsive to the fact that sometimes these small issues, which have nothing to do with the big issue which is ultimately how many losses will MBI incur or not incur, can get transformed into serious issues for our long term investors for the company. And so our response in this case was just to act on it before it got out of... got to be an issue that was too significant.

Greg Diamond - Investor Relations

Okay, so about half way through the Q&A period for today, Michelle could I ask you to remind callers about the instructions.

Operator

[Operator Instructions]. Your first question comes from Mark Ciccerelli of Elliot.

Mark Ciccerelli - Elliot

My question relates to the 42 billion of CMBS related CDO and that actually two parts to the question. So, in other CDO categories you provide a breakout of the underlying collateral by vintage in rating but, and particularly for the 32 billion portion which is described as structured CMBS, there is no description of the underlying collateral. So, first part of the question is what is the underlying rating of the collateral that underlies the structured CMBS along with that and what is the attachment point and the attachment point for that collateral?

Mitchell I. Sonkin - Head of Insured Portfolio Management

Okay. Couple of things, first let me describe the CRE CDO which currently comprises 27 transactions totaling 9.9 billion in at net par and that we were careful to perform extensive due diligence on each collateral manager and we continue have a strong dialogue with each of them today. As a whole, those transactions have the following composition, they are 46.3% CMBS, that 32% CRE wound, that 8.8% refunds, 5.5% CRE, CDO, and CMBS re-securitizations, 5.5% ABS & RMBS, kind of a mixed bag with respect to the rest.

Generally, the second type of the CMBS pool transactions comprise $32.5 billion across 42 transactions. The net harmentals [ph] will includes the small portfolio, $321 million of secondary CMBS transactions originated prior to 2005, over 95% of the assets in these transactions are CMBS. We attach it to AAA level at minimum but more typically at the super AAA.

Mark Ciccerelli - Elliot

That one, I am sorry, that attachment is for the, kind of the outer, to the outer structure but for the underlying collateral what is the attachment point?

Mitchell I. Sonkin - Head of Insured Portfolio Management

It is for the outer and what it is at that the inner depends on the transaction.

Mark Ciccerelli - Elliot

Is there a range that you can provide, or reading?

Mitchell I. Sonkin - Head of Insured Portfolio Management

It's pretty wide it's you know I would say probably goes from BBB all the way up?

Joseph (Jay) W. Brown - Chairman and Chief Executive Officer

I think not to cut off the question too soon. But this is one of the areas that has come up in the past month that's been identified. A large number of investors would like some supplementary disclosure around that. So, we are going to be providing similar disclosure to what we provide on the multi sector CDO's in the next month or two. So, rather than try and talk about an entire portfolio and answer individual questions about it. I think we will come back to this later after we do that posting.

Mark Ciccerelli - Elliot

If I could just briefly follow up the other half of the question is, I think generally, probably something approaching the design in a general way. The CDO is described in the K that you just released, as being kind of a page you go. That's the $10 billion portion of this book. But the structured CMBS as I read it, it sounds as though, maybe more of a account to bodies type transaction, where the claims payments are in parallel to the losses and the underlying collateral is that an accurate kind of interpretation?

Mitchell I. Sonkin - Head of Insured Portfolio Management

Those are deductible deals.

Mark Ciccerelli - Elliot

Okay, so, not kind of something that you pay out to 40 years but near term?

Mitchell I. Sonkin - Head of Insured Portfolio Management

Correct.

Mark Ciccerelli - Elliot

Okay.

Greg Diamond - Investor Relations

Very good, Thanks Mark. I would like to remand the callers to identify who they are? What their company affiliation is and what their relationship... investment relation is to MBIA? Melissa, the next caller please?

Operator

Your next question is Al Copersino of Madoff Investment.

Al Copersino - Madoff Investment

Thank you very much, yeah, Madoff Investments long MBIA call. I had two questions. The first is that the book value slide that you showed a couple of times in the presentation. Slide 42 for instance, I think I understand all this, the one element I have a question on is in the loss provision, does that represent the current loss reserves on the book or is that some other future looking asset forward-looking item?

Joseph (Jay) W. Brown - Chairman and Chief Executive Officer

Yes.Al it is the losses that had been recognized. That we just got finished going through. So, it reflects about $2 billion total of impairments and loss reserves on our housing related exposures.

Al Copersino - Madoff Investment

Okay, I'm sorry? My second question was I think, it's I guess sort of follow up to the previous question you just got on slide 38 the multi sector CDO squared. Could you give us a sense of these that, the payments speed I am looking at the last couple lines of slide 38 payments speed for this. Could you give us a sense how fast that those claims may come through?

Joseph (Jay) W. Brown - Chairman and Chief Executive Officer

You know, one thing maybe I could point you to is slide 10.

Al Copersino - Madoff Investment

Okay.

Joseph (Jay) W. Brown - Chairman and Chief Executive Officer

In the deck, that sort of lays out, I mean it's kind of, in a graphical bar chart fashion. The period over which, we think that the claims are actually going to be paid out on each of the classes of deals, what we have, where we expect to make payments. And the CDO squared you would see, them starting to be paid out about mid year 2009, with the payments extending out over the ensuing 3.5 years. So, that sort of the outcome of your deductible type structure that Mitch described.

Al Copersino - Madoff Investment

All right. Thank you, very much.

Operator

Your next question comes from Joe Olefs [ph] of Harvard Management.

Unidentified Analyst

Joe Olefs [ph] Harvard Management, participating in the wrapped mortgage backed securities market. My first question was in relation to the high grade ABS, CDOs, you guys have take impairments on, you have a lot of disclosure about the underlying assumption about the default on the CDO book. Could you talk about, what the write down assumptions where on the RMBS bond level. So not the loan level, we got 16 to 20% loans, but what the percentage of AA and A, RMBS bonds from those deals, that you have assumed get written off?

Mitchell I. Sonkin - Head of Insured Portfolio Management

I don't have the exact percent on AA, and other write-offs, that you are referring to. But with respect to multi sector of CDOs to analyze the RMBS collateral and the CDOs I went through this before, we use a well... methodology which considers each securities, delinquency buckets and estimates the probability, that borrowers in each buckets will ultimately default, consistent with how we analyze our direct subprime exposure. Given the numbers of securities in any CDO.

We use representative roll rates, which we apply to the delinquencies in each bond supporting the CDO, you also severities, upon default and distribute the losses along upfront loaded, timing curb, inline with our market expectation. So in general terms the output depending on the transactions averages for 2006, 2007 subprime losses of 16% to 20% for the high grade ABS, CDOs

Unidentified Analyst

But you can't tell us. What the losses on that...how that translates into the losses and the bond level for those deals roughly?

Mitchell I. Sonkin - Head of Insured Portfolio Management

No I am not able to provide you that detail.

Unidentified Analyst

Okay. I just have one other question, the... there was a second-lien transaction that is not listed, actually it might be a slew [ph] of transactions, it's the CWO 2007 S2 transaction. I think I have noticed that the, that's an $800 million, $850 million deal with the OC, has gone from $7.1 million in February to $3.5 million in April, so it's basically been cut in half in two months and that's... I don't see that listed as one of the impaired second mortgage transactions, I want to see if you could talk about why would that be the case?

Mitchell I. Sonkin - Head of Insured Portfolio Management

Well, the best way for me to tell you is to kind of do the opposite, and that is, we have provided a lot of disclosure in detail on the transactions where we have seen impairments and we had used the methodology that we [indiscernible] The transaction that you are talking about is not on the list, it's because as we run in through the models and stress that we do not see or at least so do not yet see a need to have to post a reserve based on what we currently see is as the OCR excess spread for the amount of cushion that we have in the deal. Okay, if we can check on that deal for you specifically and I'll be happy to do that and email back and answer.

Unidentified Analyst

Okay, thank you.

Operator

Your next question comes from Andrew Wessel of JPMorgan.

Andrew Wessel - JPMorgan

Hi, guys. Andrew Wessel, JPMorgan sell-side research. I had a question, just in terms of you know a couple of statements made about the market, the overall market as the U.S has market that hasn't changed a lot in the first quarter and you know top tier seller services being countrywide in the macro as may rest count etcetera. I don't know if that's, you know if that would be a, it's a market would that playing with that I mean I think there is a large widening of desk spread of the cost to mortgage market and IC mortgages market through the first quarter. You know when you have the backdrop with the philosophy that you all have in place and I think you know looking at your assumptions for your closed-end seconds loans close in your HELOC deals, the assumptions in the losses I think are necessarily conservative but we probably could have said that in the fourth quarter as well. You know what gives you the confidence now as opposed to you know three or four months ago, that you think were they properly reserved for losses and to make the state whether you don't expect a further uptick in the bus [ph]. I mean it seems like a tough statement to make it if you weren't able to live up to that expectation?

Joseph (Jay) W. Brown - Chairman and Chief Executive Officer

I think in a report, Mitch will give you a little color on it about what's different in three or four months but you know it is clear and we will repeat this statement many times, there are lot of estimates out there. There are any number of different views about how the housing market is going to develop in this country over the next two or three years. What we have tried to do here is explain what our assumptions are and how we've put it together. We don't think it's useful, to try and reconcile or answer every other different estimate out there. Most informed sources can read those documents, read those publications, see there are no lying [ph] assumptions and reach their own conclusions. Fundamentally we believe that within a pretty good range of estimates here whether you think our assumptions are right or we are off 6 or 9 months or 12 months. If fundamentally it is not going to be substantial change for MBIA. We have tried identify that for investors. So I think it's... let's look at it in that context and Mitch do you want to respond basically why what's different is it beyond the fact we have 4 to 5 months of data which helps a lot.

Mitchell I. Sonkin - Head of Insured Portfolio Management

Right, and that is a big difference and Andrew to the extent I try to be rather wholesome [ph] in my explanation of that during the presentation but let me just try to pick up on James' point. First of all the reserves that we took during the first quarter were primarily related to our HELOC exposure AND you will recall that because of the vintage of those which are more heavily awaited [ph] to '05 and '06, it put us in a position to have a sufficient amount of performance data that we felt that when we took it and ran it through the model we were confident of that the reserves that we could book on the HELOC portion of the close of the second-lien book and in fact the reserves that we have taken have indicated that our payments and what we are experiencing and actually tracking within those reserves.

You may also recall at that time that because the closed-end second book was predominantly a more younger vintage of 2007 vintage, that we simply did not feel that we had enough data to be able to have the same confidence that we could take the data that we needed, model it and step forward with the same kinds of assumptions and reserves that we do now. So, what we were able to do is take the additional data from those additional months and now we felt that we had enough data to be able to model the results in a similar fashion that we did to the HELOCs which as I said now for months has been tracking within the model and come up with our estimates and during the course of the form in the decayed I have tried to explain why we think that we feel pretty good about those numbers and what the variables could be in terms of how they might be able to move. But, basically we had the additional data that provided us the ability to now have the same level of confidence on the transactions with respect to closed-end seconds. As we did on the HELOCs.

Andrew Wessel - JPMorgan

Okay, great thanks. And then my other question kind of reverts back to one of the first questions that you read. In terms of new business is there...are there some metrics, you can put it on pricing generally, that you saw especially as you know, opportunities, started to pick up. And that graph is very helpful. Thanks for that, post the stabilized or the reaffirmed outlook from any industries?

Joseph (Jay) W. Brown - Chairman and Chief Executive Officer

Ithink the pricing that we are seeing on new transaction is pretty consistent with what we see in the marketplace. There is actually a slide, I think it's the very first slide in the appendix, page 45 that just shows the S&P pricing index. Now this is not from the MBIA for the market overall. But we are seeing a trend, that's very much like this with respect to our pricing. Now you know, we are proud to say that we are not the price leader in this market at this point. And our bonds, our wrapped bonds are not trading where FSA quite frankly are at this point. So, we are more competitive with the other players in the market, than we are with that FSA. But we've been able to price deals in such a way, to get over our hurdle rates of return. And to win our share, the share that's shown in the deck, so, the trend there is quite positive but I mean, it's not. we are not rolling up the mission accomplished banner just yet.

C. Edward Chaplin - Vice Chairman and Chief Financial Officer

And I think, we traditionally have put some pretty good metrics out there on pricing. But as we started this presentation today, from our perspective the least important issue for us over the near term, in terms of what investors have asked us and focused on is the amount of new business. We are not going to do a lot of new business in the first half of this year. We are not going that much business until we get towards the end of the year. And things are stable, and so we are not going to be doing, what our usual focus would be, which is the primary driver in normal times, which is how much new business are you getting, how is it being priced. What is the credit quality etcetera. That will hopefully return next year to be the issue that will dominate some of the questions that we get on this call.

Andrew Wessel - JPMorgan

Great, thanks a lot. And thank you for the presentation I think it's extremely helpful with all the data.

Greg Diamond - Investor Relations

Thank you.

Operator

Your next question comes from Chris Rasmussen of Citi Investments.

Christopher Rasmussen - Citi Investments

Hi, just wanted to enquire obviously, you have a lot of confidence, that you insured dealers are going to perform strongly over time. Would you ever consider adding to the position, you disclose on page 50, 3% of your investment portfolio, already invested MBIA insured deal?

Joseph (Jay) W. Brown - Chairman and Chief Executive Officer

That this, I think at the end of the first quarter. We had approximately 3% of the portfolio in the insurance company invested in MBI deal. We have been reducing that over time, not because we lack any confidence in any of those transactions. But basically it's cause confusion from many investors, who don't quite understand that, we are wrapping a bond, that we also invest in, that doesn't cause any additional risk for the company. So long term, we made the decision a few year backs to migrate that portfolio down its currently down 3%. And over the next few years you probably see it go down to virtually nothing, I mean that's not because, we lack confidence, in any of those deals its just simply, from a presentation point of you, its caused traditional noise for investors in our company and we made the decision to make that change.

Christopher Rasmussen - Citi Investments

So, I take it that applies also to AMBAC and FIGIC [ph] considered deals where there is obviously a lot of value out there but, is this the noise?

Joseph (Jay) W. Brown - Chairman and Chief Executive Officer

I will let Cliff Corso who is our Investment Officer, address that question.

Clifford D. Corso - Chief Investment Officer

You know we actually... and if you have got numbers for a while you will notice that we have been an active buyer of wrap paper rather history. I'm not withstanding the rational that Jay gave on our own wrap portfolio. We do believe that the wrap market can provide a lot of value. There is obviously the wrap market, is a broad market and we want to take advantage of what's available to us in the market place. Particularly in the insurance company investment portfolio where we are a tax payer and our large share of those bonds are wrapped and we do buy other wrap paper soon as we finish with the older and all the primaries of that portfolio. The same is true on the investment, the asset-liability investment portfolio where we do own wrap paper and by the way there is some detail and disclosure here to about 20% of each of those portfolios that's decreased over time as well. But we absolutely would like to take advantage of the wrap market away from our own name [ph].

Christopher Rasmussen - Citi Investments

Great, thanks.

Operator

Your next question comes from Jason Spindel [ph] of Aurelius Capital.

Unidentified Analyst

Hi, this is actually Ellen Chang [ph] from Aurelius Capital. My question has to do with the fact that many originators are plowing [ph] HELOC lines and I'm wondering how that affects your modeling assumptions for HELOCs. I see on page 29 of the slides that you are still using a three months average CRR draw rate on the HELOCs and so my question is what makes you think that the draw rate will stay constant and also if the draw rate drops off to zero wouldn't that eliminate some of the extra subordination that you might otherwise get from the originators funding the draws, should the deals enter a rapid amortization phase?

Mitchell I. Sonkin - Head of Insured Portfolio Management

Yeah. First of all no, it's not going to effect the subordination but let me address the issue on the freezing. Absolutely country wide as well as some other HELOC services have begun to freeze to our requests based on various factors, some are requesting BPO valuation on the properties and the if the current value as vested [ph] on the loan amounts and the line is frozen, some services are freezing through our request based on cycle [ph] drifts and all services freezed alliance [ph], amounts once a bar becomes 30 days delinquent. Now that said, majority of our transactions had high, fairly high utilization rates being the majority of the outstanding credit line has already is been used and thus the draw rates have been relatively modest. And as such the elimination of future balances is not likely to have an impact on our transactions because of the relative small amounts of alliance [ph] that remain outstanding. Okay.

Unidentified Analyst

Okay. Thank you, I have an additional question. There still seems to be some internal inconsistency to me in terms of how you apply the market set. I see that you have dedicated several pages in your 10-Q, describing your by binomial expansion valuation models for valuing your in short credit evidence and in fact the 10-Q sales that 95.9% of those derivatives are valued based on a model type approach and only 0.6% is using specific dealer quotes. So why do you feel comfortable that you use dealer quotes for you own MBIA, CDS spread and yet you know for 96% of your credit derivatives portfolio you are actually using a model and how does management get comfortable of that, you know, this is the right way to do it and that there wouldn't be any internal inconsistency?

Joseph (Jay) W. Brown - Chairman and Chief Executive Officer

As you have said there is extensive disclosure about this in our 10-Q as well as in our press release. There isn't any way for us to value our position other than to use an analytical model. We think the model that we're using is one that provides a reasonable and internally consistent view of the fair value of these insured credit derivative position. We used a variety of spread inputs, we try to identify spread inputs to the model that best exemplify the pricing on the underlying collateral. As it happens for a very little of the underlying collateral are there actual direct quotes that we can use. There are some but it's relatively small because these are if you will, dispoke [ph] pools of assets that we are trying to value and as a result we use spread analogs for most of the collateral that feeds the BEP model. Similarly for MBIA, I mean we are using, that we are using the data that's available.

Unidentified Analyst

Okay. Thank you.

Greg Diamond - Investor Relations

Thank you Ellen [ph]. So that will conclude our call for today. As we said earlier the questions that were submitted in writing that we have not addressed in our prepared remarks or through the Q&A session, we will provide responses to in the near future. We thank you for your participation. I encourage you to send additional questions. In order to contact me directly, my information... contact information is available on the website. 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.

Operator

This does conclude today's conference call. You may now disconnect and have a wonderful day.

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