MBIA Inc. (MBI) Q1 2013 Earnings Report, Transcript and Summary

Good morning, and welcome to MBIA Inc. First Quarter 2013 Financial Results Conference Call. [Operator Instructions] I would now like to turn the call over to Greg Diamond, Managing Director of Investor Relations at MBIA. Please go ahead.

Thank you, Maria. Welcome to MBIA's conference call for our first quarter 2013 financial results. For the first segment of our call today, Jay Brown and Chuck Chaplin will provide some brief comments, then Bill Fallon and Anthony McKiernan will join Jay and Chuck for the question-and-answer session. After the market closed yesterday, we posted several items on our website, including our latest 10-Q, operating supplement and financial results press release. The press release includes the information for accessing the recorded replay of today's call, which will become available approximately 2 hours after the end of the call. Please note that anything said on today's call is qualified by the information provided in the company's 10-Q, 10-K and other SEC filings as our company's definitive disclosures are incorporated in our SEC filings. Please read our first quarter 10-Q as it contains our most current disclosures about the company and its financial and operating results. The 10-Q also contains information that may not be addressed on today's call. The definitions and reconciliations of the non-GAAP terms that will be included in our remarks today may be found in our financial results press release. And now for our Safe Harbor disclosure statement. Our remarks on this conference call may contain forward-looking statements. Important factors such as general market conditions and the competitive environment could cause actual results to differ materially from those projected in our forward-looking statements. Risk factors are detailed in our 10-K, which is available on our website at mbia.com. The company cautions not to place undue reliance on any such forward-looking statements. The company also undertakes no obligation to publicly correct or update any forward-looking statement if it later becomes aware that such statement is no longer accurate. And now Jay will provide some introductory comments. Jay?

Thanks, Greg. And let me say with a newly refreshed level of enthusiasm, good morning, everyone. It truly is a good morning, and a pleasure to speak with you today. Although this call is technically about our first quarter results, I think most of you would agree that they are completely overshadowed by events that took place after the quarter ended. Over the past few weeks, we collected our putback recoverable from Flagstar Bank, we settled the putback recoverable and the CMBS exposure and all the litigation between MBIA and Bank of America Merrill Lynch and Countrywide. We commuted the insured exposure we had to SocGen, bringing an end to the bank litigation over our 2009 transformation as they were the last remaining bank plaintiff. And we negotiated commutations of $1.8 billion of other structured finance exposures, bringing total committed exposures since the end of the first quarter to $13.4 billion. Chuck will take you through the details on these actions, but I want to focus on their strategic importance. Before I do that, though, I want to clear up one point of potential confusion about the impact of the settlements on our financial statements. The financial statements that we published last night include the economic impact of the settlement with Bank of America as well as these other discrete post-March 31 events. That's because the amounts we received from the putbacks and the amounts we paid out on commutations were totally consistent with the estimated amounts that had already been recorded on our balance sheet. So although the transaction settled in the second quarter, their values were consistent with the net balance sheet positions at March 31, 2013, and will have no impact on our income statement or our statutory capital in the second quarter. The differences between these…

Thanks, Jay, and good morning, everyone. First, I'll walk you through the results through March 31, and then talk in more detail about the commutations and settlements. Our GAAP consolidated net income was $164 million in the first quarter compared to net income of $10 million in the first quarter of 2012. The driver here is the increase in the value of putback recoverables in the first quarter this year. Our non-GAAP measure adjusted pretax income provides an alternative way to analyze our fundamental business performance. We had adjusted pretax loss of $20 million in the first quarter compared to a loss of $548 million in the first quarter of 2012. The improvement is driven by significantly higher realized investment gains, lower insured losses and much lower -- and lower litigation and legal costs. Our adjusted book value declined modestly from $30.68 at year end 2012 to $30.56 per share at March 31, primarily due to insured losses. Now a couple of comments about performance at the segment level. The public finance segment conducted in National had pretax income of $142 million compared to $55 million in last year's first quarter. Realized gains on investments were significantly higher than last year and insured losses and litigation costs were significantly lower. The structured finance and international segment operated in MBIA Corp. and its subsidiaries had an adjusted pretax loss of $97 million compared to a loss of $446 million in the first quarter of 2012. The driver of the difference is much lower insured losses, which were $98 million in the first quarter of 2013 versus $402 million in last year's first quarter. Economic losses increased for CMBS exposures by $282 million, primarily reflecting higher expected commutation costs. On the other hand, economic losses for second-lien RMBS decreased. The decrease is…

Okay, Maria. We're ready for questions and answers.

[Operator Instructions] Our first question comes from the line of Mark Palmer of BTIG.

A few questions. First of all, with regard to the SocGen settlement, there have been some media reports about how that settlement is going to be funded. Just wanted to see if you could shed some light on where the cash to pay for the settlement is coming from?

We can't comment further on the funding.

Okay. Fair enough. With regard to the process associated with relaunching National, if you could walk through what the sequence of events is going to be and what your thoughts are currently about the timing for a relaunch.

. Yes, it's Bill speaking. As you can imagine, there are several things we need to do. I think the 3 primary ones are, first, talking about the financial strength of National, which I know Chuck has talked about consistently over time. And that includes the ratings, which also you heard earlier some of the things that have already happened. S&P did upgrade National to BBB and indicated that it would go to A even when the SocGen settlement was reached, which eliminated the litigation that the banks had started 4 years ago. So that's one area and we're working on that right now. Second is just to re-establish all the connections in the marketplace with broadly defined clients. That would include issuers, investors and intermediaries, intermediaries being the banks and broker dealers. And we have maintained relationships all along. And then, third, there may be some need for a handful of additions to the staff, but we are ready to go organizationally and it would just be over time as we start to do business. So hard to predict exactly the timing, in particular with regard to the ratings, but this is something that we've already started working on. We've been working on it even ahead of these settlements. And we look forward to re-entering the market soon.

I think the biggest obstacle, Mark, which you're probably aware of, is actually the current low interest rate environment creates a limited amount of opportunities in the near term. And so even when we're prepared and have the appropriate ratings that our balance sheet deserves, there is going to be a slow uptick just simply because there's just not going to be that much business that we can create enough value to justify what we have to charge against the capital that we have to put up.

Just one more. With regard to the expected dividends to the hold co from National later this year, can you give us a sense of what the magnitude of those dividends may be?

Yes, we have an as-of-right dividend that at first quarter is measured at about $200 million, and we would expect in the second half of the year to process a dividend. We haven't decided exactly what the amount will be, but the as-of-right amount is about $200 million. And Mark, let me just go back to your first question with respect to the financing of the SocGen commutations. The one thing that I can confirm is that we did not draw on the Bank of America line of credit to enter into that commutation. So that the loan balance there is still 0.

Our next question comes from the line of Arun Kumar of JPMorgan. Arun N. Kumar - JP Morgan Chase & Co, Research Division: First of all, congratulations on all of these commutations and settlements. Great job on that front. I have a couple of questions for you. The first one relates to the CMBS below-investment grade and even the ones you referenced to in the A and AAA tranches. Could you give us some context on how that below-investment grade portfolio is behaving in terms of [indiscernible] in terms of loss development, but also in terms of what kind of attachment points do you have on that remaining below-investment grade CMBS portfolio?

Sure. This is Anthony speaking. We have, as Chuck referenced, a little over $0.5 billion remaining original BBB-rated exposure left. We actually have paid a claim this quarter -- right after the quarter on that exposure. The transaction is actually lumpy from a vintage standpoint and the payment timing, so we would expect that to have sporadic payments over the next couple of years. The A exposure to this point has not reached deductible levels in any material way. The deductibles are very close to what they were when the deals were originally done. General ranges [ph] are around 14% to 15% as far as the deal deductible themselves. And then the AAA exposures are very highly enhanced. We've had very little deterioration or interest shortfalls for that matter in those deals to this point. Arun N. Kumar - JP Morgan Chase & Co, Research Division: Okay. Just turning back a little bit in terms of MBIA Insurance Corp. Now that you've got the settlement from BofA, statutory capital is -- I mean, the quality of the capital at least has significantly improved. You paid back the National loan. In terms of future commitment from the Enterprise Holding Company to warrant Insurance Corp., if the need arises, I'm not saying that it will, but if the need arises, would Corp. or through National, would the Enterprise still be willing to support or lend funds to MBIA Insurance Corp.?

In terms of talking about possibilities for the future, we always look at all the alternatives and try and make sense of what makes the most sense for our shareholders and other constituencies. As Chuck went through the details on our current expectations on the base case, we don't even expect to have to need to draw on the BofA facility. And under stress, we would actually have to use it over the intervening 3 years that it's termed out. So I think in that time frame, it's hard to identify a situation where we would even have to contemplate that question. But I can assure you we look at things very carefully each time to try and say what makes the most sense. And we'll make investments or reallocate capital for the best interest of our shareholders. Arun N. Kumar - JP Morgan Chase & Co, Research Division: Okay. A couple of other questions -- one related to your surplus notes. I think there is a covenant in the BofA bank line that limits your ability to pay the coupon on the surplus notes, do you know at what point would you contemplate in terms of servicing that surplus note down the road?

We have an obligation under the surplus notes, Arun, to request interest payments from the regulator each time they are scheduled. We have been doing that; at this point two of them had been denied. The regulator is also aware that there's a covenant in the Bank of America line that says that we won't pay interest or principal on subordinate obligations such as this until the line is paid off. And so the regulator will, we would expect, take that into consideration as they're making their determination about whether to approve surplus note interest payments in the future. So as a practical matter, we're still in the same position. The company's -- the company's financial performance will have to improve and stability will have to improve before the regulator will be comfortable, we think, approving surplus note interest payment. Now we do think that the surplus note holders are far better off with us having arranged this facility and entered into this settlement than they would have been had we not done so. So we do think that they are better off. Arun N. Kumar - JP Morgan Chase & Co, Research Division: Fair enough. Last question on the putbacks. I think Jay and you, Chuck, both mentioned you have about $1 billion of putback recoverables in your balance sheet with other counterparties. Do you have any time line in which you would like to settle or resolve those issues with those parties?

Well, our time line is very easy. We'd like to do it tomorrow morning, but that's not going to happen. As everybody is well aware, a significant portion of our putback recoverable is as a result of reps and warranty violations by the 2 subsidiaries of ResCap. ResCap is in an extended bankruptcy. A lot of mediation talks are going on. We don't have a specific forecast in terms of when those talks will resolve or whether they will resolve or whether it's going to be a different outcome. It is possible that if there was a successful mediation and that then courts then were able to move through the process to allow ResCap to finish up its bankruptcy, you could see something very late this year or early next year.

[Operator Instructions] Our next question comes from the line of Robert Halder [ph] of Hartfield and Advisors [ph].

First, congratulations to everyone on a magnificent job. We really appreciate it. Two questions. One, did I understand S&P's information this week where it seemed to me that they were saying that they would upgrade National to A after a settlement with SocGen, and it seemed timing wise that the settlement information came out about 10 minutes later. So I just want to make sure I understood that it seemed like they were implying that they would raise the rating to A after that settlement, which obviously would be a great thing for us. And the second question is all of a sudden it looks like MBIA Corp. has capital, et cetera, going forward. So even though it was unthinkable a week ago, have you begun to think about a strategy going forward -- a business strategy for that company?

In terms of the rating agencies, S&P was aware of the SocGen settlement at the time the release went out. They are under a business objective from the time they make a decision to the time they publish. That's one of the things that as a result of some of the issues with rating agencies 5 or 6 years ago, they don't want any information contained inside for a long time, so they try and meet a very timely schedule. I think that's why they were specific in their release that they talked about the potential of a settlement and the elimination or the ending of the litigation between the bank plaintiffs and ourselves. And so we would anticipate they're reviewing that as we speak. And when they make a decision, if there's a change, they'll put it into the marketplace relatively quickly. In terms of a business plan for MBIA Corp., we have had a business plan for MBIA Corp. We do have plans for it in the future. In the short term, meaning the next few years, we do have other liabilities we would like to resolve and we obviously have a significant amount of collections that we have to make on the 2 or 3 different putback recoverables. I think the time for discussing what we're going to do with MBIA Corp. post those activities will be out a year or so and we'll be glad to discuss those alternatives at that time.

There are no further questions at this time. I would now like to turn the floor back over to Greg Diamond for any additional or closing remarks.

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

This concludes today's MBIA First Quarter 2013 Earnings Conference Call. You may now disconnect, and have a great day.