MBIA Earnings Call INSIGHTS: CMBS Reserves, Lien Reserve Additions
On Friday, MBIA Inc (NYSE:MBI) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.
Arun Kumar – JPMorgan: Good morning, Chuck. A couple questions for you. One is related to your CMBS reserves that you have built-up over the past couple of years in terms of loss reserves. When do you expect to start making payments on those, is there any timeline?
C. Edward Chaplin – President, CAO and CFO: It’s very difficult to forecast the performance of the underlying mortgages that lie behind the CMBS that are referenced in the pools that we have wrapped, because the special servicers are making individual decisions about each mortgage, each month. So we have a forecast, we have an expectation about what the incurred loss is on those transaction, but timing is extremely difficult to estimate.
Arun Kumar – JPMorgan: In terms of the recoveries you made a couple of comments related to the write-offs related to ResCap and being offset by recoveries being booked on other counter parties. Could you walk us through the line item that actually went through that recovery balance, on your balance sheet, the gross balance obviously didn’t change much, but there must have been a bunch of fairly material amounts that went through it, have you publicly disclosed it anywhere or do you plan to.
C. Edward Chaplin – President, CAO and CFO: We haven’t provided any disclosure that breaks that number down, but we have said it’s in our 10-Q that you have both a reduction in the value of the recoverable from the ResCap entities, but there is also accretion as well as an increase in recoverable associated with increase in incurred loss. So if you just go through, there is a detailed disclosure in the 10-Q about how exactly we developed a number, but we’ve not provide a quantitative breakdown.
Arun Kumar – JPMorgan: Just a follow-up on the claims payments on the CMBS. You stated that a somewhat deferred cost, but do you know when the earliest timeline could be for first material payment, is it a couple of years out or did you think three to five years out or could it be within a year?
C. Edward Chaplin – President, CAO and CFO: It really is impossible to say because of the fact that it’s dependent upon decisions that we haven’t figured out a sort of actuarial way to forecast.
Arun Kumar – JPMorgan: Turning to the ALM business, if you look at the table that you have in your supplement, it is a asset-liability mismatch, as I think about $800 million at this point, given that a lot of the cash is tied up in terms of collateral being posted for the (gigs) and the investment agreements, the MTNs could be somewhat exposed so in terms of meeting those maturities down the road do you think you’d have to go back to National to get an intercompany loan and if that’s the case what do you think would be the regulator’s willingness to allow for an increase from National given that the loan has already gone up a fair amount in this quarter as well?
C. Edward Chaplin – President, CAO and CFO: Our expectation, Arun, continues to be that the deficit in the ALM portfolio is made up over time by the resources of the holding company. Those resources include, obviously, the cash that’s sitting on its balance sheet today if investment income, as well as the cash flows that it will receive over time from its operating subsidiaries. The way I would encourage you to think about that, that deficit is – it’s like its additional holding company debt obligation, that got to be met by all the Holdcos resources.
Arun Kumar – JPMorgan: I think earlier, Chuck, I think couple of quarters ago you mentioned thought process along getting dividends from National and up to now you haven’t any from the – has there been any change in terms of regulatory restrictions on that or I know you’ve agreed not to take dividends but in terms of has there been any change on that front. Clearly, National’s capital position is arguably substantially stronger than MBIA Insurance?
C. Edward Chaplin – President, CAO and CFO: Yeah, there has been no change in our agreement with the regulator not to declare dividends out of National until after I think it is July 2013. But there has been no change.
Lien Reserve Additions
Geoff Dunn – Dowling & Partners Securities: Couple of questions; first, Chuck. Could you elaborate on what drove the first lien reserve additions this quarter for those dozen Alt-A deals.
C. Edward Chaplin – President, CAO and CFO: Actually, Anthony McKiernan and the Head of Insurance Portfolio Management Group is here and could probably provide a more detailed answer than I could.
Anthony McKiernan – Chief Portfolio Officer: The increase to the first lien portfolio Alt-A portfolio was there was a handful of transactions that we saw was that loss severities on the underlying collateral increased materially because of servicer advances that were made during the very long foreclosure processes. So, (indiscernible) happening was the servicers are making these advances. The ultimate properties are being sold and those servicers are able to get those advances back first before the loan is repaid. So we wind up seeing loss severities increase materially on a handful of deals and so we had to make an adjustment to our current experience and make a forward-looking view on those deals as well.
Geoff Dunn – Dowling & Partners Securities: I mean, a lot of these foreclosure processes are obviously extended. Has this prompted any review of your severity expectations for the other first lien exposures?
Anthony McKiernan – Chief Portfolio Officer: We continually review every quarter the severity assumptions for the portfolio. What we’re seeing is certain servicers more than others have had longer timelines and more advancing that’s occurred. So we’ve made those adjustments accordingly.
Geoff Dunn – Dowling & Partners Securities: Then on the CMBS side there is about $18.2 billion remaining of CRE and CMBS exposure. Can you quantify what portion of that is related to BOA or is the top 10 BIG list a good proxy?
C. Edward Chaplin – President, CAO and CFO: We do talk about this in the 10-Q. About $6 billion of our exposure is in the 2006 and ’07 original BBB collateral transactions and the large majority of that is BOA related.
Jay Brown – CEO: Jeff, to be clear virtually all of it is BOA.
Geoff Dunn – Dowling & Partners Securities: Then I think you made a point in the front page of your press release talking about the real remaining loss uncertainty on the CMBS side is in these BOA deals, at the same time you are in litigation with Countrywide. So, you’ve booked the rep and warranty side on the RMBS. When you talk about the potential loss development on CMBS, how confident are you that the current $1 billion impairment in all your CDOs covers that versus adjustments as you move forward in any kind of settlement?
Jay Brown – CEO: It seems like you’ve combined two questions, Jeff. We try and look at the numbers every quarter. In terms of both the underlying and what our expectations are for settlements. What we have reflect in our books right now is both reflects what we think has happened to the underlying transactions and it also reflects our experience across the 20-odd commutations we’ve done with everybody else in the business, though we have a pretty good feeling for what the market settlement levels have been, particularly for similar transactions. That said, each quarter involves us looking again at those assumptions is that if they have to be adjusted. I think one of the reasons we focus so much on this quarter in terms of trying to get investors to look at is to recognize that the majority of volatility that’s left in MBIA Corp. in terms of what could happen over any particular quarter or six months or yearly period, now revolves around what happens with BOA. So, we thought it was important just to highlight that. That said, it’s very difficult to give you any kind of expectation as to whether those numbers will change substantially next quarter or the quarter after hopefully at some point we’ll either have a decision in the courts or we’ll find a way to reach a reasonable settlement with that counterparty.
Anthony McKiernan – Chief Portfolio Officer: Jay, can I add one thing to that. The change in the reserve that we reflect on CMBS for this quarter is essentially all driven by underlying deterioration in the properties that are behind the CMBS that are in the pools as opposed to any change in our expectation about commutation value of probability.