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MBIA Issues
Letter to Owners
ARMONK, N.Y.--(BUSINESS WIRE)--MBIA Inc. (NYSE:MBI):
February 18, 2009
Dear Owners:
When I first wrote to you upon my return to MBIA in February of
last year and outlined my goals for transforming the company, I
anticipated that we would have to move fast to deal with both our
own challenges and those we faced in light of the credit crisis
that began in late summer of 2007. As quickly as we moved to preserve
our Triple-A rating through the first half of 2008, it was not fast
enough. The rating agency downgrades in June eliminated our option
to transform our company from a position of strength and we had
to first take all necessary actions to address the potential effects
of these, and probable further, downgrades. Since I last wrote to
you in June we have simultaneously dealt with these effects and
with the evolving external environment and we have continued working
with our insurance regulators and the rating agencies to choose
an optimal path to reposition the company.
Before I address today’s announcement about the status of
our transformation and the formation of a new public finance insurance
company, I would like to reflect on what has changed in the world
around us and what has happened at MBIA in the last eight months.
Following the takeover of Bear Stearns by J.P. Morgan, there was
a false sense by many in the markets that the worst of the credit
crisis was behind us. How wrong we all were! Since then, we have
witnessed a nightmarish collapse of many of the leading global financial
institutions. The FDIC seizure of IndyMac and the decision to place
Fannie and Freddie into conservatorship led very quickly to the
purchase of Merrill Lynch by Bank of America, the bankruptcy of
Lehman, the government takeover of AIG, the Reserve Primary Fund
“breaking the buck,” the conversion of Morgan Stanley
and Goldman Sachs into commercial banks, the purchase of Washington
Mutual by J.P. Morgan and the takeover of Wachovia by Wells Fargo.
Almost immediately, liquidity virtually froze. In response, the
Federal Reserve, Treasury and Congress developed a multitude of
approaches and facilities to get liquidity back into the financial
system here in the United States while other governments and central
banks around the world did the same.
Although the initial Troubled Assets Relief Program was utilized
in a very different way than originally proposed (and some companies
came back for a second round of capital), and did not benefit us
or our industry, we made it through the fall. We are now starting
to hear from the Obama administration and Congress about how they
will use TARP II and the stimulus package to address the ongoing
credit freeze and what has evolved into our worst recession since
the 1930’s. We agree with the position recently taken by the
Securities Industry and Financial Markets Association that the federal
government could play a significant role in providing much needed
liquidity to the municipal and student loan debt markets. Auction
rate securities and variable rate demand notes have been under extreme
stress due to a lack of liquidity rather than any material deterioration
in credit quality. A federally backstopped liquidity facility would
quickly restore order to this important source of low-cost financing
for issuers and facilitate permanent restructurings of this debt.
During the second half of 2008, with economic upheaval in the world
around us, we were busy managing MBIA through our own challenges
and simultaneously preparing for our future. We released our third
quarter financial results which included significantly higher loss
expectations for our second lien RMBS portfolio to reflect the worsening
external environment and the effects of repositioning of our Asset
Liability Management asset portfolio. We repositioned this portfolio
to maintain adequate liquidity as we de-leveraged our ALM business,
which was triggered by the rating agencies’ downgrades. We
also initiated lawsuits and claims against the three major institutions
that we believe did not meet their contractual underwriting commitments
which led to our multi-billion dollar losses on second liens. We
successfully negotiated the reinsurance assumption of the majority
of FGIC’s high quality U.S. public finance portfolio –
significantly adding to future shareholder value – and we
also began the process of unwinding our existing third-party reinsurance
arrangements. Given the trading levels of various MBIA debt instruments
and our common shares, we deployed a modest amount of free cash
to buy our shares and debt at advantageous prices to add to book
value per share.
Rumors of Our Demise Have Been Greatly Exaggerated
In no way has our strategy been a run-off scenario as all of these
actions were intended to secure our future and to position us to
begin writing business again in the future. While some market participants
have chosen to focus on our recent downgrades and have suggested
that our prospects were nonexistent, that could not be further from
the truth. Our embedded adjusted book value is still over $40 per
share. The FGIC transaction and our recent debt and share buybacks
are just two of the examples of the numerous value enhancing opportunities
available to us in the market. In addition, today’s transformation,
which I will discuss in detail, positions us extremely well to write
new municipal finance business in support of American municipalities
and our economy. Finally, the fact is that we have paid out over
$2 billion in claims over the last two years to those investors
who bought our insured bonds – a benefit that has not been
experienced by those who purchased uninsured bonds! We continue
to position MBIA to pay all expected claims in the future, even
under severe global economic conditions like we are currently experiencing.
When I rejoined MBIA a year ago, one of the first public statements
I made was that I believed that the bond insurance model needed
to change. Within a week of that announcement, we published our
Principles for MBIA’s Transformation. Even at that time, as
we were fighting hard to retain our Triple-A ratings, it was clear
to us that the business model that had served us for the first 34
years of our history had become outdated.
When we published our Principles for Transformation, we indicated
our plan to form separate public, structured and asset management
companies within five years. It was our hope to retain our Triple-A
ratings and reorganize our business model from a position of strength
as excess capital was generated over that time frame. However, with
the downgrades of our credit ratings, we have accelerated the transformation
of your company.
Our New, U.S. Public Finance-Only Financial Guarantee Company
So today’s announcement of our new public finance-only financial
guarantee insurance company, which will conduct business only in
the United States, comes after a year-long and highly complex process
of transformation. Throughout it all, we have been fortunate to
have had the support and assistance of both the New York State and
Illinois Insurance Departments, who understand the value of our
product and the need for a change in the structure of our industry.
We have been working diligently with all of our regulators, the
rating agencies and other parties, as well as MBIA constituencies,
to bring about this announcement. The new company is currently doing
business as MBIA Insurance Corp. of Illinois (which is where it
is domiciled) but we expect its name to be changed shortly to National
Public Finance Guarantee Corporation, or “National.”
We also intend to apply to have the company redomesticated to New
York.
Not a Good Bank/Bad Bank Split
With today’s developments, we have now either accomplished
or made concrete progress on eight of our 10 principles of transformation.
The first of our transformation principles remains the most important:
we remain committed to protecting all of MBIA’s policyholders.
This is not a good bank / bad bank split, although that is how I
expect many observers will report on the change. This is a split
along structured finance and U.S. public finance lines that was
essential as a first step to transform the company, stabilize the
business and help unfreeze the U.S. public finance capital markets.
Our U.S. public finance policyholders need to know that our municipal
business will operate as a separate entity and will not subsidize
our structured business – this split formalizes our commitment.
Our structured finance policyholders should also feel very comfortable
that their policies remain in an entity with ample claims-paying
resources to meet any expected claims, even under our stress loss
scenarios. It is also important to note that, in the process of
securing our transformation, we hired outside advisors while our
regulator did its own background work, and both came to the same
conclusion: that we would continue to have the resources to pay
all expected claims as they come due.
The U.S. public finance market is still functioning, albeit under
significant stress and difficulty, and we are confident that our
guarantee can help improve the liquidity and performance of this
market. Today’s move will provide much needed clean capacity
for new municipal bond insurance and alleviate pressure in the secondary
markets by providing clarity as to the claims-paying resources supporting
MBIA-wrapped municipal bonds. When conditions have sufficiently
improved in the structured finance and international markets, we
intend to re-engage our business activities in those sectors as
well. We continue to evaluate opportunities to pursue business and
enhance shareholder value through all of our other insurance companies
– MBIA Insurance Corporation, MBIA U.K. and MBIA Mexico –
and we will consider forming other entities where it makes good
business sense. However, when we do so, it will be within those
separate legal structures and separate from our U.S. public finance
operations.
Regardless, for all of our business activities, we will
no longer use credit derivatives to guarantee new insurance transactions.
Our exposure to this market injected entirely too much volatility
into our financial statements, which had the unfortunate effect
of reducing confidence in our financial strength.
Our fourth transformation principle is one of our next projects
– we intend to obtain the highest possible ratings for each
of our insurance subsidiaries. We’ve already been discussing
our plans with the rating agencies and we will continue to work
with them to achieve the best possible outcome – an outcome
that protects policyholders, allows us to be adequately compensated
for our insurance products and generates attractive returns for
our shareholders.
We have more work to do to gain the highest possible ratings for
our insurance businesses, and we are also continuing to pursue a
level playing field regarding the tax status of bond insurers competing
for insurance opportunities in the United States. We expect to make
more progress on the tax front, as bills have been introduced in
the House and Senate and a level playing field is consistent with
positions articulated by the new administration.
An Enduring Value Proposition
We believe that there is still a compelling value proposition for
financial guarantee insurance and ongoing demand for guarantees
from insurers with stable ratings in the highest ratings categories.
The issue of late has clearly been one of supply with most of the
legacy monoline institutions in various forms of winding down their
operations. Financial guarantee insurance has in the past and will
continue in the future to afford issuers with the opportunity to
reduce borrowing costs. Our insurance provides investors with an
additional level of credit protection, an unequivocal and demonstrable
guarantee for the life of the insured debt issue, and the benefit
of our extensive portfolio monitoring and remediation skills throughout
the life of each transaction.
For nearly a year now, we have conducted extensive and multiple
surveys with key parties in the municipal bond debt issuance marketplace:
issuers, investors, traders/brokers, investment bankers and regulators.
The feedback that we have received from participants in the public
finance market is clear: municipal investors require a company focused
exclusively on the U.S. municipal market. We find this encouraging
for both the continued viability of bond insurance and the acceptability
of insurance being provided by our new U.S. public finance-only
company. Our decision to reinsure all of our existing U.S. public
finance policyholders into the National book demonstrates our objective
to satisfy our existing commitments as we work with the 50,000 plus
U.S. issuers on both new issues and restructuring existing debt.
Clearly there will be skepticism and concerns, but we will initiate
efforts to educate market participants and, just as we did 34 years
ago, embark on a multifaceted campaign to improve the understanding
and confidence in our company’s capabilities and financial
strength. With our decades of experience in this industry, we note
with interest the market’s exploration of alternative approaches
to municipal credit enhancement such as a federally funded, government-owned
insurer. While we continue to believe that independent, private-sector
financial guarantee insurers provide the market with the most reliable
access to capital, we do see possible value in a government-owned
reinsurer (rather than a primary market insurer) for providing important
capacity while avoiding potential conflicts of interest and the
operational costs of building world-class risk management, underwriting
and surveillance capabilities. We believe that great care would
have to be exercised to structure the enterprise to avoid the difficulties
that have plagued some GSEs and other government insurers in the
past.
About National Public Finance Guarantee Corporation
With the exit from the market by ACA, SCA, FGIC and CIFG, and the
pending sale of FSA to AGO, we expect that National will be one
of the only substantial financial guarantee insurers in the U.S.
dedicated solely to U.S. public finance business. Its initial portfolio
of $537 billion in net par outstanding will consist of both the
U.S. public finance policies originally insured by MBIA Insurance
Corporation and those reinsured from the FGIC portfolio. All of
the existing affected policyholders will have the direct benefit
of reinsurance provided by National through the cut-through provision
in the reinsurance agreement and second-to-pay policies, which give
MBIA and FGIC policyholders the ability to make a claim for payment
directly against National. The entire portfolio will be posted on
www.MBIA.com until the new company’s website is launched,
and all new policies will be added monthly. We are committed to
providing maximum transparency to facilitate investor analysis at
the detailed level. As noted above, we felt it was critical to include
MBIA’s existing public finance book to facilitate the acceptance
of the new company by municipal bond investors.
We have established National as a subsidiary of a newly formed holding
company directly below MBIA Inc. to both allow investors to have
clarity about its operating results and to facilitate future capital
raising efforts. We believe that over time this will strengthen
your company as a whole. As I noted last year, I believe this structure
would have significantly reduced the cost of the $2.6 billion in
capital we raised in early 2008, benefiting both shareholders and
policyholders.
Our Goal for Capitalization
It is our intent to capitalize the new company at a level well in
excess of the historical capital requirements for Triple-A ratings.
This may not be the case immediately but we plan to raise sufficient
new third-party capital (at a deliberate pace) on terms that are
beneficial to our existing shareholders. It is not our intent to
dilute existing shareholders and we will explore a variety of options
to raising any capital required. Yes, we have had discussions with
the Treasury Department, and we will continue to explore whether
this is an avenue that can provide capital to a healthy financial
institution on terms that work for all of our constituencies while
supporting the administration’s goal to restore the U.S. credit
markets to a fully functioning basis. Last week’s compensation
amendments to the stimulus bill create obvious challenges to attract,
retain and motivate employees for organizations that accept TARP
funds, and we will study the provisions carefully to determine if
this source of capital is effective for shareholders.
As we have learned painfully over the past year, we cannot anticipate
what level of capital will be required to achieve Triple-A ratings
as the rating agencies have not promulgated a clear, stable and
transparent set of capital requirements for a U.S. public finance-only
monoline insurer.
MBIA Insurance Corporation, MBIA U.K. and MBIA Mexico
While we manage our other insurance subsidiaries and our asset management
operations to continue to meet all of our expected obligations,
we continue to believe that substantial opportunities will emerge
in structured finance and in global credit markets in the months
and years ahead that will create value for our shareholders. We
are actively exploring additional steps in our transformation plan
to take advantage of those opportunities as the credit markets stabilize
both here in the United States and around the world.
The remaining portfolio of business consists of our legacy global
structured business and non-U.S. public finance business, the vast
majority of which is performing consistent with original expectations.
We will continue our efforts to remediate distressed credits most
affected by the real estate crisis and to work with existing issuers
on all other transactions.
We believe, and our regulators concur, that each of these legal
entities remains adequately capitalized with claims-paying resources
and liquidity to meet all expected obligations to policyholders.
We will continue to work with both the various regulators and the
rating agencies to continue our transformation efforts. While we
do expect continued volatility in loss estimates for another year
or so, I expect the steps we have taken and the actions taken by
governments around the world will eventually provide more visibility
and stability in our financial results for these operations.
Conclusion
As a fellow shareholder of MBIA, I want you to understand that our
Board has fully evaluated and considered the impacts to MBIA’s
shareholders for this undertaking. I am confident that the value
proposition for our new public finance-only company will enhance
our returns to our owners. We have not pursued this option lightly
and know that the road to long-term success will still have many
challenges in the years ahead.
It goes without saying that all of your employees’ efforts
and contributions throughout 2008 and into 2009 have played a key
role in getting us to this stage. I am grateful to have the opportunity
to lead the team through this extraordinary period.
We look forward to discussing 2008 results and our new operation
with you on March 3rd.
Sincerely,
Jay Brown
Chairman and CEO
MBIA
Forward-Looking Statements: This release contains statements about
future results that may constitute "forward-looking statements"
within the meaning of the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Readers are cautioned
that these statements are not guarantees of future performance.
There are a variety of factors, many of which are beyond MBIA's
control, which affect the operations, performance, business strategy
and results and could cause its actual results to differ materially
from the expectations and objectives expressed in any forward-looking
statements. Accordingly, readers are cautioned not to place undue
reliance on forward-looking statements which speak only as of the
date they are made. MBIA does not undertake to update forward-looking
statements to reflect the impact of circumstances or events that
arise after the date the forward-looking statements are made. The
reader should, however, consult any further disclosures MBIA may
make in its future filings of its reports on Form 10-K, Form 10-Q
and Form 8-K.
MBIA Inc. (MBI), headquartered in Armonk, New York is a holding
company whose subsidiaries provide financial guarantee insurance,
fixed-income asset management, and other specialized financial services.
The Company services its clients around the globe, with offices
in New York, Denver, San Francisco, Paris, London, Madrid, Mexico
City, Sydney and Tokyo. Please visit MBIA's Web site at www.mbia.com.
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