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 writing new business. Managing the holding company's capital structure to a more stable position that is supportive of our goal of relaunching National and rightsizing our expenses to better align them with our revenue opportunities going forward. Some may find this a bit surprising, but the first step in resuming new business activities at National was to pause for a moment and ask ourselves if we even should. With the litigation behind us, the Board felt it was an appropriate time to consider whether National's business plan can create adequate returns for shareholders in a marketplace that has changed substantially in the 4.5 years since we recapitalized the company. Consequently, we took some time over the past few months to review National's business plan and present it to the Board. I'm pleased to say that at its most recent meeting last week, the Board accepted our recommendation to move forward with National's business plan. Although the recent rating upgrades of National were quite significant, we are still not where we think we should and need to be. We believe that National's financial strength, demonstrated underwriting success and track record of profitability are at the various highest levels in our industry, and that's just not reflected in the current ratings. For example, we believe National's adequacy -- capital adequacy, an important component of the rating analysis, is consistent with AAA ratings. However, it is obvious that rating decisions in the past few years have been largely driven by the litigation overhang and National secured loan to MBIA Corp. We are now reengaging with the rating agencies and requesting that they reflect on National's muni-only focus, business plan, balance sheet and earnings strengths as they would any new entrant into the industry. In a sense, National is a start-up company with a 40-year track record, an extremely high-quality insured book of business and a highly experienced management and analytic team. It would be difficult to understand how a pure startup, with significantly less capital and no existing book of business, could garner higher ratings. National has been in the news a lot recently, primarily in connection with our $88 million of insured exposure to Detroit's general obligation debt and $2.3 billion of exposure to its revenue bonds, primarily for the water and sewer systems. We did increase reserves related to our Detroit GO exposure in the second quarter, including reserves for potential legal and consulting fees. As Detroit's bankruptcy and the plan proposed by the city's emergency manager could raise significant issues for the market as a whole, we plan to pay close attention and dedicate resources to resolution of the situation. It is far too soon to speculate on the outcome, but we have been actively engaged with the city and its advisers. In addition to the Detroit-specific issues, its bankruptcy filing seems to have again stirred those who expect a tsunami of municipal bond defaults and losses to investors. While Detroit has massive problems, many of them are relatively unique and we think that concerns of widespread contagion are overblown. If there's a silver lining to be found here, muni bond defaults have historically resulted in a greater appreciation of the value of bond insurance, so we will continue to remind the market that there will be no losses of principal and interest payments to National-insured bondholders. While National will be the primary driver of our earnings and capital formation from operations in the near-term, we are also committed to growing our investment management business in Cutwater. Our investment track record in key products continues to be strong. We are adding assets under management in our targeted growth areas, even though overall assets under management have fallen due to clients and assets managed for our affiliates and runoff in low margin third-party short-term assets. I believe that our holding company carries more leverage than it should, our legacy of the financial crisis in 5 years of very poor and overly expensive access to the capital markets. Because we now view the holding company as having adequate liquidity against its near-term obligations, we have begun the process of delevering it. We recently redeemed callable near-term debt in the Meridian conduit using liquid assets held by Meridian. As we continue to build liquidity at MBIA Inc., we will continue to take down leverage, including through opportunistic debt repurchases upon reverse inquiries. At some sense -- at some point in time, it may make sense to raise a combination of debt and equity to speed up this process and make faster headway, but we have not yet made that decision and are continuing to evaluate it. Finally, as we have been reducing risk across the enterprise and building our business plans, we know that we need to sharpen our focus on our expense base. Our run rate operating expenses have been obscured by the 9-digit numbers we recorded for legal and consulting expenses and the even larger loss in LAE expenses over the last 5 years. For example, legal, consulting and settlement expenses totaled approximately $87 million in the first half of 2013 alone. Now that we believe that such expenses will be more stable and significantly lower going forward, we are pursuing opportunities to reduce other expenses. That included making the very difficult decision to reduce the size of our workforce in some areas after carefully evaluating the needs of the organization going forward. Near the end of July, we reduced the headcount in our insurance and shared services operations by approximately 25%. All of those who were impacted are extremely dedicated and talented individuals. We're very grateful for their many contributions over the years and wish them well in the future. Expenses related to that action will primarily affect our third quarter results. But we expect the ongoing annual savings to be about equal to the upfront severance and related costs. Finally, we are also starting options for reducing our headquarter's related expenses as we currently need only 1/3 of the space we have in our Armonk campus. This will also help us to establish a lower rate of expense. Chuck will provide some additional perspective on expenses in a moment. In short, 2013 is shaping up as the pivotal year in MBIA Inc.'s emergence from the financial crisis and recession, and we look forward to more normal operations in the near future. Chuck will now provide more details on the numbers.

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 5% different, the underlying drivers were very different this year. On the revenue side, our premiums earned were $138 million in the second quarter this year compared to $190 million last year. The decline was a result of maturities, terminations, refundings and commutations that took place since June 30 last year. Now we expect premium revenue to continue to decline in the next few quarters, albeit at a slower pace, even as we see National writing new business. Net investment income also declined from $41 million to $73 million -- to $41 million from $73 million in the second quarter of 2012. Higher cash and short-term holdings and lower average investment yields account for the decline. Within our wind-down operations, our conduit had a $2 million loss in the second quarter of this year compared to $32 million of income in last year's second quarter. In order for you to see that effect in our disclosures, you would need to go to the segment footnote for the conduit segment, and then back out the intersegment items. But now returning to the income statement, fees and reimbursements were $15 million lower this year than in last year's second quarter. Finally, all these negative variances were partially offset by realized and unrealized gains which were $32 million this year versus a loss of $3 million in last year's second quarter. The gain this year was associated with the MBIA Inc. debt that we received as part of the global settlement with Bank of America. On the expense side, operating expenses were $104 million in this year's second quarter versus $75 million last year, driven by higher legal expenses and costs related to litigation or settlements of commutations. On the other hand, insured losses were far lower this year at $192 million versus $303 million in Q2 2012. And interest expense was $12 million lower than last year, reflecting lower outstandings. Now we've estimated the cost associated with the completed settlements, commutations and litigations in 2013. They include legal fees, consulting costs and the cost of issuing warrants to Bank of America, and totaled $87 million in the first half of 2013, as Jay has referred. We think that such expenses in the future will be far lower. Jay mentioned that we've also reduced staffing and expect to reduce our expenses related to home office property. When fully implemented, we expect that these initiatives will collectively generate approximately $30 million in annual savings. Consolidated operating expenses for 2013 were previously expected to be approximately $330 million, excluding amortization of deferred acquisition costs. Our target for run rate expenses would be about $200 million to $210 million. And the runoff of legal and consulting expenses, as we've just discussed, and these initiatives, will close most of that gap. We expect to realize the full benefits of these initiatives by the second quarter of 2014, and the costs of severance and related expenses will primarily affect the third quarter of 2013. We also measure our performance using Adjusted Book Value. ABV declined 5% in the first half of 2013 from $30.68 per share at year end 2012 to $29.28 at June 30, 2013, primarily as a result of insured losses and, again, the costs associated with the completed settlements, commutations and litigations. The ABV associated with National alone increased by $0.33 per share from $25.05 to $25.38 in the first half of 2013. Now I'd like to talk about the adjusted pretax income of the segments. The public finance segment conducted in National had pretax income of $14 million in the second quarter of 2013 compared to $148 million in the second quarter of 2012. There were 4 key drivers of this adverse comparison. First, loss in LAE expense was $66 million in this year's second quarter compared to a net benefit of $3 million last year. The biggest driver of this expense was our additions to reserves for certain general obligation credits, including Detroit. Then, premiums declined to $102 million from $130 million last year due to maturities and refundings. Net investment income declined to $35 million from $56 million last year, primarily as a result of the repayment of the secured loan National had made to MBIA Corp. which had a high yield. Finally, operating expenses were $7 million more than last year, primarily due litigation- and settlement-related fees and expenses. The structured finance and international segment operated in MBIA Corp. and its subsidiaries had an adjusted pretax loss of $93 million compared to a loss of $300 million in last year's second quarter. The driver of the difference is much lower insured losses, which were $126 million in Q2 2013 compared to a loss of $306 million in last year's second quarter. This year, the losses were driven primarily by a write-off of salvage related to an unfavorable litigation result and increases in CMBS impairments. Last year's increases to reserves were driven by experience on CMBS, but also on second-lien and first-lien mortgage policies. We should note that the adjusted pretax loss for the structured finance segment includes the impact of interest accruals on the surplus notes. The combined pretax loss of our Advisory segment, the wind-down operations and the Corporate segment, was approximately $91 million compared to a loss of $52 million in last year's second quarter. The primary driver of the higher loss is the mark-to-market on warrants issued to Bank of America in connection with the global settlement. Although the cost of issuing the warrants to BofA was basically an operating expense in the first quarter, which we don't expect to recur, the periodic mark-to-market on the warrant liability is ongoing. And about $24 million was recorded to gains and losses on financial instruments and fair value in this connection in the second quarter. Wind-down and Corporate's adjusted pretax income can be volatile because primarily of the marks-to-market on warrant issued to the BofA and to Warburg Pincus in connection with our 2007 and '08 capital raise as well as the mark-to-market effects of derivatives and foreign exchange. Now I'd like to add some comments on our balance sheet position. Jay mentioned that we believe we should be reducing leverage at the holding company. We have $720 million of senior unsecured debt at the holdco, and $1.6 billion of MTNs issued out of our global funding subsidiary, which we ultimately expect to service from MBIA Inc.'s assets and cash flow. The holding company has about $752 million of invested assets, including $426 million in the tax escrow. The tax escrow is associated with our tax sharing agreement and the assets currently in the account are expected to be released to MBIA Inc. over the next 3 years. In addition to this debt, we also had about $1.1 billion of operating leverage including related derivatives at MBIA Inc. related to GICs that we have issued in the past and $300 million of operating leverage in our Meridian conduit, all as of June 30. While these liabilities are matched against high quality assets and cash, there is a negative spread between asset yields and liability costs in the GIC-related activities, which also must be satisfied from the holding company's other assets. Now we think the liquidity position at the holding company is solid. We expect National to continue to make deposits into the tax escrow for the next several years and to pay ongoing regular dividends to the holding company commencing in the fourth quarter of 2013. But we believe that the burden of the Corporate debt, the MTNs and negative spread is higher than it should be, so we have begun to reduce leverage. In second quarter of 2013, we retired $359 million of debt, mostly in the Meridian subsidiary, and a $121 million Guaranteed Investment Contract matured. In July, we retired another $150 million of Meridian debt. So almost all of this activity affected operating leverage. Over time, we're expecting to reduce both the cost and the amounts of our financial leverage as well, including by reverse inquiry repurchases. A significant part of the consolidated balance sheet is a deferred tax asset associated with net operating loss carryforwards. That NOL is approximately $2.8 billion at mid-year 2013. It's more than double the amount that we reported in the 2012 10-K because certain commutations achieved in the first 6 months of 2013 were of policies whose losses had previously not been recognized -- had not been deducted for tax purposes. At MBIA Corp., our liquidity position has greatly improved compared to March 31. At the end of the second quarter, we had $92 million of cash in the insurer, and we had arranged the $500 million secured credit facility with a Bank of America affiliate. This gives us confidence that we have a substantial cushion against volatility in claims payments at MBIA Corp. The trend in payments on second-lien RMBS continues to be toward lower and lower net payments. In the second quarter, we made $74 million of payments compared to $111 million in the first quarter of 2013, but we know that, that trend can vary. On CMBS, we paid $46 million in the quarter, primarily on 1 transaction with original BBB collateral, but the payment stream here is far more unpredictable than that of the RMBS. All other exposures, excluding the CMBS commuted with Bank of America, had payments in the second quarter of about $26 million. As of June 30, we hadn't needed to draw on the credit facility, but the first draw will likely occur in the near future. We expect that any amounts outstanding on the loan will be repaid when we receive the first distribution from the ResCap estate. This should occur around year end 2013 with other distributions coming in the next several quarters thereafter. The loan facility from the BofA affiliate was intended to be a bridge to MBIA Corp.'s receipt of its largest recoverables. And we now expect that the ResCap settlement provides the takeout. With all the focus on the BofA and Société Générale exposures in the past few quarters, I'd like to give you some data on the insured portfolio in MBIA Corp. as it stands today. In summary, there's been a massive reduction in gross par outstanding, particularly in categories that have caused large losses. The gross par of the portfolio as of June 30 was $86 billion, down from approximately $107 billion at March 31 and $261 billion at the time of transformation back in 2009. Inside that $86 billion portfolio, nearly $10 billion is RMBS. Of that $10 billion of RMBS, almost $6 billion is second-lien RMBS, down from roughly $20 billion at the time of transformation. We have been making payments on these transactions since late 2007 and we're making payments on them today. But we expect that excess spread in the securitizations will cover our aggregate payments by the second quarter next year, and then we should start receiving net recoveries from the securitizations. Also related to our second lien losses, and Jay referenced this, we also need to actually collect on the ResCap recoverable, and then get to a settlement or adjudication on the Credit Suisse recoverable which, obviously, is still subject to the litigation process. The timing and amount of excess spread and putback recoveries are potentially significant risks for MBIA Corp. In terms of other RMBS, our Alt-A and subprime exposures today are about $3 billion. We have been making some small payments on our Alt-A exposures and they are a small source of remaining potential volatility for MBIA Corp. Our subprime exposure declined by half in the second quarter to about $1 billion and we don't really expect losses on that book. Then, there's about $200 million of prime first mortgage exposure, and $731 million of international first mortgage exposure where we do not have any expectations of material loss. Now moving on from RMBS, we have $11 billion of commercial real estate exposure, of which over $7 billion are in CMBS pools. After the BofA global settlement, we had $837 million of remaining exposure to deals with originally BBB-rated collateral and $3 billion to original A pools. Some of these transactions are potentially significant sources of volatility in the future. We also have $3.5 billion of original AAA pools on which we don't expect any material losses. Finally, we also have $3.9 billion of exposure to commercial real estate CDOs and loan pools which are performing adequately and with modest loss expectations. Beyond the commercial real estate exposure, we had $23 billion in exposure to other types of CDOs as of June 30. Of this, $1.6 billion are ABS CDOs, down from about $31 billion at the time of transformation. This sector had been highly volatile, but we don't expect significant future volatility in credit performance on these transactions. But because they are long-dated, changes in interest rates will affect our reserving. The balance of the CDO portfolio comprises $16 billion of investment grade corporates and $5 billion of high-yield corporates. Although we had a write-off of salvage affecting the high-yield portfolio in the second quarter, we don't expect significant losses beyond that on these Corporate exposures. Then there is $10 billion of Corporate asset-backed exposures across insurance, aircraft and other asset classes. There are a few underperforming deals in this area, but the potential future volatility is small compared to the more problematic sectors that I've just discussed. There was $29.5 billion of exposure to international public finance in the portfolio as of June 30, 2013. Some of it is directly on MBIA Corp.'s book, but more than half is in the MBIA U.K. subsidiary. About 2/3 of the combined portfolio includes utilities and transportation assets, and about 1/3 are exposures to assets with sovereign and sub-sovereign supports. Within that, this category included $2.2 billion of exposure to peripheral countries of Spain, Portugal, Italy and Ireland as of June 30. The one exposure we had in Italy of $328 million was fully repaid in July, and our Portuguese experience was paid down from $600 million to approximately $481 million, also in July. And that debt matures over the next 2 years. So while we have added to reserves modestly for this portfolio in this quarter, the performance of international public finance has been adequate in the past few years. Finally, MBIA Corp. has $1.8 billion of remaining exposure to the consumer sector which is primarily in manufactured housing and student loans. So there are some remaining sources of volatility in MBIA Corp., primarily in RMBS, CMBS, with smaller potential downsides in the Corporate asset-backed and international public finance areas. We believe that the company's balance sheet provides for a cushion against adverse experience with $1.2 billion of statutory capital, $3.6 billion of claims-paying resources and nearly $600 million of total liquidity resources, including now the loan facility. But risk remains and we're aggressively pursuing remediation strategies to eliminate many of these remaining sources of volatility. National's balance sheet is solid with $3.4 billion of stat capital, $5.7 billion of claims-paying resources and, at June 30, nearly $2 billion in on-balance sheet liquidity. This is a result of the repayment of the intercompany secured loan in May, in conjunction with the global settlement with Bank of America. We will be reinvesting most of those proceeds in an investor portfolio that balances, optimizing our investment income while providing some protection against rising interest rates. Finally, we're hoping to make progress with the rating agencies on our insurance company and holding company ratings in the fall. We will be presenting the full National business plan, our holding company capital management expectations and our enterprise risk management strategy for the first time without the confusion of litigation and with National and MBIA Inc. now being fully insulated from exposure to potential volatility in MBIA Corp. The objective is to achieve the highest possible ratings for National and holding company ratings that are supportive of that objective. At this point, I will pause, and Jay, Bill and I will take your questions.

[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.