MBIA Earnings Call Insights: Potential Payouts for Commutations, MBIA UK

On Friday, MBIA Inc (NYSE:MBI) reported its first quarter earnings and discussed the following topics in its earnings conference call. Here’s what the C-suite revealed.

Potential Payouts for Commutations

Arun Kumar – JPMorgan: Couple of questions for you. One is, I am trying to do the math, looking at your cash position and change between year end and the end of March to try to get a handle on what the percentage of those commutations that actually paid out, and I can run through some numbers with you. You started the year end with about $1.6 billion, and you ended with $1.3 billion, but you also left a net reduction of $300 million, but you also paid out your RMBS losses, and your commutations. Could you point us in any direction as to what the potential payouts were for these commutations, as a percentage of par?

C. Edward Chaplin – President, CAO and CFO: No, we don’t comment on the prices of commutations.

Arun Kumar – JPMorgan: The second question I had, given that you commuted $4 billion in the quarter, and you have another $7 billion that you commuted since the quarter end, how has that impacted your reserving policy for future CDOs related to commercial mortgage-backed and others?

C. Edward Chaplin – President, CAO and CFO: In the past couple of quarters, we have disclosed that we had commutations where we paid somewhat more than the then existing loss reserves, and so we have taken those higher prices into account, into evaluating the remaining transactions. I should note that as we think about higher prices for commutations, the probability of commutation should go up as well. So you have both things going on. I did note that on CMBS, other than the incurred loss in the quarter related to commutations committed or executed. We also had about $60 million increase in reserves for the few remaining transactions which is where that would be reflected.

Jay Brown – CEO: I think also if you look at it from the perspective of what’s taken place over the last three and half years when we started through the process of negotiating settlements, the first 5% or 10% settlements didn’t give us much information about the remaining 90%. We’re probably somewhere between 80% and 90% through eliminating all of the volatile exposures and so we have a robust amount of information about what is the estimated cost to eliminate the few remaining transactions and that was reflected during the quarter.

Arun Kumar – JPMorgan: Just turning to I think you made some comments in press release if the need arises that go back to National and get additional loans, is there a number that the regulators are willing to let you take out of National in terms of the secured loans down the road because you’ve taken $400 million since the quarter and then it close to what 1.6, clearly National has additional resources available to it, is there a limit that the regulators are placing on U.S. the amount that you could take out?

Jay Brown – CEO: All draws — any draws under that loan facility are strictly subject to the department’s approval and there are no setters or requirements associated with it in their discretion.

Arun Kumar – JPMorgan: In terms of the surplus note, clearly I think we talked about in the last call and previous calls; it’s costing you exactly $140 million or so excluding the amounts that you’ve bought back in the market. Given that the regulators permitting National to give money to MBIA to full commutations and otherwise is there any move to shut-off the payments on the surplus notes at this point given that other recoveries from BofA or other parties is clearly taking a fair amount of time and the same time the surplus notes are draining the resources available at the MBIA Insurance Corp. Has there been any discussion with them on that issue?

C. Edward Chaplin – President, CAO and CFO: Arun, when you asked your first question, I was so focused on the question that I feel to say good morning. Good morning.

Arun Kumar – JPMorgan: Good morning, Chuck.

C. Edward Chaplin – President, CAO and CFO: Again, the surplus note interest payments are subject to the insurance – the Department of Financial Services prior approvals and they take each as one as they come so I don’t have any information to offer about the next payment which is July 15th. I can tell you that the January 15th payment was approved by the department and when the Company thinks about liquidity management and liquidity planning, we assume that we are paying the surplus note payments because from our perspective, it’s a debt.

Arun Kumar – JPMorgan: Have you got the approval for the July payment which is upcoming, is it something that you last just a couple of weeks before you actually make that payment?

C. Edward Chaplin – President, CAO and CFO: Generally we request approval of the payment about 30 days out, from the payment date?

Arun Kumar – JPMorgan: The last question relates to BofA (NYSE:BAC), you’ve been fairly successful in your ability to depose I think the CEO question him in connection with those putbacks, has there been any progress on the front in terms of actual depositions, other meetings that have taken place.

Jay Brown – CEO: We really can’t comment on either what’s happening in the litigation front or any discussions we’re having with counterparty.

Arun Kumar – JPMorgan: You said that the file date you expect sometime in early 2013, and is that is based on the level of dialogue you’re having with them or is just your expectation that it would come to trial at that point if you don’t reach a settlement.

C. Edward Chaplin – President, CAO and CFO: Based on where we are on the trial and the schedule, but it’s been agreed to by the two parties. The schedule would suggest that a trial should occur in early 2013 as we’ve unfortunately learned there can be delays and surprises in detours along the way and that can consume time and push it out, but our current best estimate is early 2013.

Arun Kumar – JPMorgan: The commission of the put back you said you, you have on your balance sheet at this point $3.2 billion, but the amount that you could book as a recoverable could be substantially higher. I think the amount where you said $4.8 billion or even higher than that, why wouldn’t you book the additional amounts of recoveries?

C. Edward Chaplin – President, CAO and CFO: The $4.8 billion is what we estimate the value of the contract claims to be and it’s based on our incurred losses to-date. I should note that the claim that we’re actually making in the litigation is higher than that because there are interest and other costs associated with it, but $4.8 billion would be the limit of what would be available to be booked to the balance sheet today, but then we value that $4.8 billion contract claim like any other receivable trying to take into account the potential for collection to be delayed for the counterparts to have financial distress that make them unable to pay a judgment or to pay a settlement and the potential associated with the litigation itself if delays and cost, so there are up kind of an array of this, you will discounts that we take to the contract claim to get to the amount that’s recorded to the balance sheet.


Sajan Shah – Morgan Stanley: My questions move around MBIA UK. Had a couple of questions. The first was, will you be expecting any dividends from MBIA UK this year. Secondly, in the quarter, could you comment on how the equity position booked on the core balance sheet has changed? Then have you had any claims from the UK portfolio? Finally, could you comment on your expectations for the strategy around this division? We hear the portfolio seems less problematic than the U.S. portfolios, could this entity go for standalone rating, or anything like that?

C. Edward Chaplin – President, CAO and CFO: Maybe I will take the first three or four of those, then Jay will jump in. We currently are not planning a dividend from the UK company to MBIA Corp in the calendar 2012. We account for it on the equity method, for statutory reporting and of course it’s consolidated for GAAP. MBIA UK contributes positively to net income. It contributes positively in investment income on our statutory books, and of course into pre-tax income for GAAP. So it is a positive contributor. Its portfolio is one that is performing pretty well, and with respect to claims, there have been no claims by MBIA UK against the network maintenance or reinsurance agreements that it has with MBIA Corp. Over time, MBIA UK also does make claim payments to its policyholders, but there hasn’t been anything above magnitude that would come through to the parent. Then the strategy?

Jay Brown – CEO: In terms of looking at MBIA UK, it had a smaller proportion of structured finance, than MBIA Insurance Corp in the United States had. Among those different transactions, there is only one transaction of any significance, that’s left to deal with. Most of the others could be the runoff that have been commuted away or are scheduled to runoff in the next couple of years. So we have a very different portfolio there and right now, we are waiting until we get through the litigation, because any rating they would achieve, either on a standalone basis would be impacted the same as National has been impacted by the litigation effect that the rating agencies have assigned as a limiter on what would be a standalone rating. So that would be something that we will be addressing later this year, in terms of what our actual plans for that division are. But it continues to be very profitable, it continues to have a substantial portfolio, high quality portfolio, both on the insured side, and the invested asset side. So it is an asset for the corporation that we intend to take advantage of in the years ahead.

Sajan Shah – Morgan Stanley: Thank you. I assume to go then, you said that there had been no claims under the reinsurance and net worth agreements. Have there been any claims actually paid out by the UK entity in the quarter?

Jay Brown – CEO: Not in the quarter, in the history of the company, there has been I think two claims –

C. Edward Chaplin – President, CAO and CFO: Detailed in the annual statements that are available on the website.

Sajan Shah – Morgan Stanley: No, I just wanted to have for the quarter?

Jay Brown – CEO: For the quarter, I don’t believe there were any.