MBIA Inc. (MBI) Q2 2013 Earnings Report, Transcript and Summary

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

Thank you, Jackie. I'd like to welcome to everybody to MBIA's conference call for our second quarter 2013 financial results. After the market closed yesterday, we posted several items on our website, including the latest 10-Q, the operating supplement and the financial results press release. The financial results press release included information for accessing the recorded replay of today's call, which will become available approximately 1 hour after we end. 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 those filings. Please read our second quarter 2013 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 referenced in today's call are available in the 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. For the next portion of our call today, Jay Brown and Chuck Chaplin will provide some brief comments. Then Bill Fallon, along with Jay and Chuck, will be available to answer questions and answers. And now, here is Jay.

Thanks, Greg, and good morning, everyone. At the time of our last conference call, we have just entered into our global settlement with Bank of America and resolved the bank litigation over our transformation by settling with SocGen, the last remaining plaintiff in those cases. Since that time, we've also entered into an agreement with ResCap, its affiliates, and most of the other ResCap creditors. This agreement solidifies the amount of our putback claim and the timing of its receipt. As all of these settlements were consistent with the values we had previously recorded to our financial statements, they didn't have much net impact on our second quarter financial results. However, as Chuck will review, we did have substantial legal and other expenses associated with the litigation and settlement negotiations that are reflected in the second quarter results. It's also worth noting again that back in November, we amended our holding company debt indentures to eliminate the cost default between MBIA Corp. and MBIA Inc. As a result of this action, and the substantial risk reductions in MBIA Corp., which totaled nearly $18 billion in retired and matured exposure during the second quarter alone, we think that the financial profile of the holding company is very significantly improved. While the settlements with Bank of America and SocGen removes significant risks from MBIA Corp., challenges remain. We still need to actually collect the ResCap recoverable as well as potentially commute some remaining policies with underlying CMBS exposure that could have substantial volatility in the future. We will continue to focus on mitigating losses and collecting recoveries in MBIA Corp. But the improvements in the last 9 months do allow us to refocus on the future state of the company. In that regard, we've begun our process of preparing National to begin…

Thanks, Jay, and good morning, everyone. First, I'll walk through the results of the second quarter 2013 at the consolidated and at the segment level, and then make some comments about our risk profile and our balance sheet health. I'll also attempt to put some elements of the income statement in the proper context for future periods, but without making any specific future projections. First, our consolidated GAAP results. In the quarter ended June 30, 2013, we had a net loss of $178 million as compared to net income of $581 million in the second quarter of 2012. Our GAAP results and the comparisons are heavily impacted by the fair value accounting used for insured credit derivatives. In last year's second quarter, credit spreads on MBIA Corp. were widening, higher cost for protection against MBIA Corp. generates gains for us, and that's on top of gains from commuting policies at prices below their fair market values. The combined impact of these 2 income items was $775 million pretax last year. In this year's second quarter, credit spreads went the other way. Upfront costs on protection against MBIA Corp. went from 39 points to 8 points in the quarter, generating a large mark-to-market loss for us. This was partially offset by the positive effect of, again, commuting policies at prices below their mark-to-market levels. The net impact of the realized and unrealized gains and losses on injured derivatives in this quarter was a loss of $182 million pretax. Our non-GAAP measure adjusted pretax income provides an alternative way to analyze our fundamental business performance without the counterintuitive impacts of the accounting for insured derivatives. We had an adjusted pretax loss of $160 million compared to a loss of $152 million in the second quarter of 2012. Although these numbers are only…

[Operator Instructions] Your first question comes from the line of Geoffrey Dunn with Dowling & Partners. Geoffrey M. Dunn - Dowling & Partners Securities, LLC: I guess, first, can you give us an update on your thoughts on the surplus notes and how you hope you can proceed going forward, call it, next year or 2?

Sure. I think when you look at the surplus notes, you really have to think about the situation in MBIA Corp. first. In that regard, and as Chuck went through the balance sheet, he isolated a number of areas that have significant potential volatility still remaining in the portfolio. We also have a substantial collection of recoverables that totals in excess of $1 billion. My sense of that is, is that payments to the surplus notes in terms of interest probably will not occur until those sources of volatility are removed and collection of those recoverables occurs. We have indicated to the market that we would be happy to engage in any conversation to exchange surplus notes for other securities. But at this time, Geoff, the way the market has priced the surplus notes, in our mind, makes it impossible for us to make a rational economic decision to trade them for another security. If there's an adjustment in the prices of securities, we'd be happy to engage in those conversations. But at the levels that they exist today, which the surplus notes, the last time I looked, were trading in the 85 range for those few that actually trade. At those price levels, we can't make the numbers work in exchanging them for any other security at our holding company, whether it's debt or equity. Geoffrey M. Dunn - Dowling & Partners Securities, LLC: Okay. And can you update us on where the Crédit Suisse efforts currently stand with respect to the R&W?

We're going through the discovery process. The particular courtroom we're in in New York has been slower than some of the other cases that we've been able to proceed on. At this point in time, it's highly unlikely that we would get a full trial date until towards the end of 2014 or early 2015. I think as other participants in the market have indicated, Crédit Suisse has not participated heavily in any negotiated settlements with any of their counter parties on the RMBS, R&W claims. And so, at this point, we expect that's going to be drawn out probably for another couple of years, unless there's a change in their view on the case. Geoffrey M. Dunn - Dowling & Partners Securities, LLC: Okay. And then my last question, can you talk a little bit about the initial response from the market with National's efforts to relaunch? Is there interest at the single A level or does it really need to be a AA platform? And is there any kind of legacy worry or are people truly viewing National as a complete separate entity?

Jeff, it's Bill speaking. The reaction actually has been quite favorable. Even at the current ratings, we are getting interest, and there have been people who have asked us to wrap certain bonds. There aren't any that we had done yet, but we continue to get inquiries on that front. As Jay mentioned in his comments, we think the capital level of National is very strong. And as Chuck mentioned, we are starting the process of engaging with the rating agencies. So we're quite optimistic about where the ratings are headed directionally and, with regard to the reception and the reaction of the marketplace, both from issuers and investors as well as other intermediaries, meaning banks, financial advisers, so we think we have a very optimistic outlook there.

Your next question comes from the line of Arun Kumar with JPMorgan. Arun N. Kumar - JP Morgan Chase & Co, Research Division: A couple of quick questions for you. Earlier in the commentary, you mentioned recapitalization at the holding company, potential issuance of equity and other debt. Could you, one, talk about what kind of timeline you may be considering? And secondly, number two, assuming you do that successfully, what could be the use of those proceeds other than some of the holding company liquidity issue that you mentioned, would you be attempting to recapitalize the off call of potentially, at some point down the road, revisit what you're going to be doing at the surplus starts, considering that they are a big drain on your capital at this point?

Let me answer that, and then Chuck can come back in a little bit. In terms of timeframes, we're most focused right now on dealing with the rating agencies and getting their thoughts on what's necessary to get National to a higher rating level. In terms of that process, I would expect that's a 3- to 6-month process based on how long it's taken us in the past. We do not need -- I want to be very clear on this, we do not need to retire any debt ahead of schedule at this point in time. Our forecast suggests that we can just gradually deleverage over the next 3 or 4 years and reach our target objectives without raising any equity or issuing any new debt. The only reason to do that would be to reduce some of the higher coupon debt out there and change the relationship between debt and equity. I want to make it also clear that we've had no indications, nothing in our internal analysis or anything we've heard from the rating agencies, suggests that any money has to be put into National to achieve a rating level consistent with what we need in the marketplace. The plans that we have for National include paying dividends over the next several years, including under an assumption of how much business we might write. So the whole focus of that exercise is whether it makes sense to speed up that process, if the prices are right, to do that sooner rather than later. But right now there is no set deadline and we're just working our way through it very carefully in terms of trying to understand the pros and cons of it. In terms of the surplus notes, surplus notes are a drag on the capital of MBIA Corp. Period. And that's where we're looking at MBIA Corp. as a box. And we're trying to determine, if we were to replace those surplus notes or take them out with something at the holding company, it has to make sense for the holding company's shareholders. We're not going to take them out just to take them out because they have a high interest coupon on them.

You just have to keep in mind that the surplus notes are not in the same category as the holding company's senior debt and the MTNs that we've discussed because of their hybrid nature. So they are currently acting as equity in the insurance company capital structure. So we just got to consider it in that light. Arun N. Kumar - JP Morgan Chase & Co, Research Division: Okay, fair enough. Just a quick question on National. I think you mentioned that you're going to be paying dividends at the holding company sometime soon. Correct me if I'm wrong, but I thought I heard you say at the end of the fourth quarter of this year?

No, I think I said that we expect in the fourth quarter, so maybe as soon as October is our expectation.

[Operator Instructions] Our next question comes from the line of Conor Ryan with Saba Capital.

I just had a question around the loan. You said that, in your remarks, that it would be taken out with the proceeds of a ResCap settlement. Does that mean paid down or, essentially, would that liquidity source go away once you receive those proceeds?

Here's the way the loan works. We have the ability to draw the loan periodically. As I've referenced, I expect that we will draw it in the second half and soon. And so there will be amounts outstanding when we expect to receive the first distribution from the ResCap estate, right around year end would be our best estimate of that. The amount that we expect to receive in distribution from the ResCap estate should be more than the amount that's outstanding under the loan. And when we receive those proceeds from the putback recoverable, 2 things happen. One is outstanding amounts under the loan are paid down. In this case, as I suggested, it should be paid down to 0. And the availability under the loan is also reduced by the amount received. So that's the sense in which the loan from the BofA affiliate is kind of a bridge loan. When we collect more than $500 million of the proceeds of our putback recoverables, the loan won't exist anymore and we won't need it anymore.

Okay, that is helpful. And then the other question I had was what is your loss estimate for your CMBS exposure before any sort of commutation benefit?

We have not provided disclosure of the individual components of the loss reserves. I think there is a table in our supplement that provides the aggregate loss reserves on all of the CDO exposures, which includes CMBS.

Okay, great. And then outside of the Crédit Suisse -- or potential Credit Suisse and the ResCap settlement, any other potential settlements that you may now be looking towards?

With respect to putback recoverables, those are the 2 that remain outstanding. Just to recap, I think at year end '12, we had about $3.9 billion of putback recoverable on the stat balance sheet. So we've collected about $2.8 billion of that at this point. ResCap and Crédit Suisse account for that remaining $1.1 billion and that's it.

Okay. I'm just trying to have a better sense for what the liquidity may look like because if you think you're getting roughly $800 million from ResCap over time, but you may be drawing down the loan in the interim, I guess, the way to think about it is that, that liquidity, that net liquidity may be $300 million. And then it sounds like you have somewhere around $300 million that you hope to get from Crédit Suisse, as well, is that roughly correct?

Yes. Again, the sum of the 2 is about $1.1 billion.

It really depends on how much we pay out over the next 2 or 3 years which, as Chuck indicated, the amounts that we expect to pay out on the RMBS side are declining very rapidly and we expect that to actually turn cash flow positive sometime early next year, probably the second quarter. And then so the remaining negative cash flow is primarily going to be what we ultimately pay out on the few remaining CMBS exposures.

Your next question comes from the line of Geoffrey Dunn with Dowling & Partners. Geoffrey M. Dunn - Dowling & Partners Securities, LLC: Jay, what do you think is the current limitation on the rating agencies? Let's go with S&P's view on your National rating. It seems that you need AAA capital to offset the largest obligor issue. But that would put you, probably, in the AA slot. So what are the subjective items you think that are limiting their view right now?

Well, the subjective items in the past were the litigation overhang and the collectibility of the loan from MBIA Corp. We believe both of those have been removed. And so what we're engaging in a conversation with them is to try and understand if there other factors that they have not yet identified. And you have to understand that the decision they made to increase the rating of National was done instantaneously without a review of a business plan or any of the other things that are necessary to go through the full rating process, all of which we're starting that dialog with them right now. My expectation is you could do the numbers side-by-side based on public information. National's financial strength gets it there without any problems. And so it will really come down to if we can overcome any articulated issues that they might identify and be able to find out a solution to them. But as of right now, we're fairly optimistic, we should be able to get through that process.

Your next question comes from the line of Matthew Kolling with Providence Equity.

Just a couple of quick clarifications on the Detroit. Can you break down the revenue bonds between first lien exposure and second lien exposure?

Yes. The revenue bonds, the water and sewer, we have about $2.2 billion of exposure. And all of that is secured. So again, I think anything you've been reading indicates that the security is sufficient to cover to debt. There is a proposal that was highlighted again in an article this morning that the city has made, under the proposal that Kevin Orr made last month, to see if they can get more money out of the water and sewer. But in terms of the security there, it clearly covers any debt service out until those bonds mature is the best estimate.

But just factually, I guess, the bonds are organized as first, on first lien versus second lien. Do you guys have those figures? I understand what you're indicating, but can you help us?

Yes. Offline, we can break it out for you, okay? But the way we think about it is it's all secured, but we'll get the numbers offline, you can follow up with Greg.

Okay. And then as far as the geo reserve you took, can you give us a sense of the split between specific for Detroit versus something more general?

No.

That was our final question. I'd now like to turn the floor over to Mr. Greg Diamond for any additional or closing remarks.

Thanks, Jackie. 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 for our website is mbia.com. Thank you for your interest in MBIA. Good day, and goodbye.

This concludes today's conference call. You may now disconnect.