MBIA Inc. (NYSE:MBI)
Q4 2013 Earnings Conference Call
March 4, 2014, 8:00 AM ET
Greg Diamond - Managing Director of Investor Relations
Jay Brown - Chief Executive Officer
Chuck Chaplin - President, Chief Administrative Officer and Chief Financial Officer
Bill Fallon - President & Chief Operating Officer
Anthony McKiernan - Chief Portfolio Officer
Geoffrey Dunn - Dowling & Partners
Brett Gibson - JPMorgan
Jeff Rosenkranz - Cedar Ridge
Kathleen Brady - Morgan Stanley
Welcome to the MBIA Incorporated Fourth Quarter and Full Year 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, Laurie. Welcome to MBIA's conference call for our fourth quarter and full 2013 financial results. After the market closed yesterday, we posted several items on our website, including our financial results press release, our 2013 10-K and our latest quarterly operating supplement. We also posted the annual and audited statutory financial statements for MBIA Insurance Corporation and National Public Finance Guarantee Corporation as well as other items. The financial results press release includes the information for accessing the recorded replay of today's call, which would become available approximately one hour after the event.
Please note that anything said on today's call is qualified by the information provided in the company's 10-K, 10-Q and other SEC filings, as our company's definitive disclosures are incorporated in those filings. Please read our 2013 10-K as it contains our most current disclosures about the company and its financial and operating results. The 10-K also contains information that may not be addressed on today's call. The definitions and reconciliations of the non-GAAP terms that are included in our remarks today may be found in the financial results press release that we issued yesterday afternoon.
And now I'll read our Safe Harbor disclosure statement. Remarks on this conference call today 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 today's call, Jay Brown and Chuck Chaplin will provide some brief comments. Then Bill Fallon and Anthony McKiernan, along with Jay and Chuck, will be available for the question-and-answer session. And now, here's Jay.
Thanks, Greg, and good morning, everyone. Before Chuck gets into a review of what's happened since our last call, I'll take a broader look at our progress over the course of the past year. A year ago, our shareholders faced much more significant risk than they do today. MBIA Corp. had a number of highly volatile exposures, which heightened the possibility that its regulators would take action against it. We were also dealing with litigation over our holding company debt amendments that modified certain cross default provisions.
A substantial portion of MBIA Corp's claims-paying resources at that time were in the form of illiquid putback recoverables. Our primary source of earnings, cash flow and growth National Public Finance Guarantee was mired in litigation challenging the transformation that created it, and it had its own illiquid assets in the form of a substantial loan to MBIA Corp. The holding company had not received a meaningful dividend from its operating subsidiaries in over six years and there was uncertainty over whether it would be able to service its debt obligations as they came due.
Let's fast forward to today, where I'm pleased to say that we've substantially mitigated all of these risks. In MBIA Corp, we have commuted virtually all of the potentially volatile CMBS exposures and the total cost was only modestly above our loss reserve estimates. We've also commuted the majority of the ABS CDOs on which we had reserves at year-end 2012 as well as miscellaneous other groups of exposures.
After collecting $3.7 billion of putback recoverables from Bank of America, ResCap and Flagstar Bank during the year, only the amount related to Credit Suisse remains to be received. Based on our track record and the strength of our case, we continue to feel confident of our ultimate collection in this case too. It is only a matter of time.
At this time, we have also resolved the vast majority of the significant litigations in which the company was involved. In May, MBIA Corp. fully repaid the intercompany loan that National had extended to it. These material improvements in MBIA Corp's risk profile have substantially removed the potential for regulatory action against it for the foreseeable future. While challenges remain, we believe we are in a far better position today to handle them and play right.
These achievements also position National to return to the domestic public finance insurance market once it has been able to achieve the rating level that we believe it deserves. On that note, I know many of you are wondering when the rating agencies might take action with respect to National's ratings. I know that I had made a three to six-month prediction back in August and I've once again shown that when it comes to timing, my forecasting skills are less than precise. I've learned over the past few years not to predict the pace of litigation. And again over the past few months, I've learned that the same should prove true for rating agency actions.
All I can say is that we continue to have a positive and active dialogue with the agencies and that we're hopeful that they will rate National in the AA range in the near term. But the decision and the timing remains solely in their hands, and I am not in a position to offer any additional insight to offer at this time.
I continue to observe that National will be the principal value driver for us for the foreseeable future. We believe that the US muni bond insurance product is viable and that it can generate attractive returns over time. We believe that ultimately the distress we observed in some muni credits will heighten awareness and appreciation of the value of the credit enhancement, surveillance and proactive remediation provided by our insurance coverage. We remain patient and we believe that the fundamental forces supporting the attractiveness of National's business plan will become even more favorable over time.
We also remain convinced that there is a real opportunity in structured finance that we will begin to focus on once National is firmly reestablished later this year. Our employees delivered for all our stakeholders this year, and I would like to take this opportunity to thank them sincerely for their efforts, both those who departed the company in the last year or so and those who remain to carry the firm through its next phase.
We also experienced some churn over at the Board level. Recently, Kewsong Lee stepped down from our Board when he left Warburg Pincus. He had been one of the two directors who joined us in conjunction with Warburg's investment in MBIA Inc. in 2008. Warburg continues to be a great owner as an institution and Kew was a great addition to our Board and continues to be a great personal friend and advisor. We wish him all the best going forward. Sean Carney has replaced Kew as a Warburg designee on our Board and will stand for election for the first time at the May 2014 Annual Meeting.
Our priorities for 2014 are simple. First, we expect National to obtain the necessary ratings to write new US municipal business. National is the largest domestic muni-only insurer and we have no doubt that it will be a strong, capable and effective competitor in this marketplace.
At the same time, we are focusing on improvements in profitability across the entire company. Re-launching National will give us an engine for longer-term revenue growth, but we are equally focused on relentlessly reducing cost to a level that matches our business opportunities going forward. The reductions in legal expenses, headcount and home/office real estate expenses will all contribute to this effort.
You’ll see one small example of this when we mail our annual report later this month. With fewer and fewer people choosing to receive hard copies each year will fulfill our SEC and New York Stock Exchange requirements to provide an annual report by simply mailing our 10-K, and my annual letter to shareholders will be published electronically on our website.
I know I speak for our entire management team when I say that we're very much looking forward to working hard to realize these goals for you in the coming year. Finally, I'd like to mention that the Board and I have agreed that it's in the best interest of the company that I stay in place for another three or four years. We are still working out a few technical details, but we hope to have those finalized before we file our proxy statement in late March.
Now I'll turn it over to Chuck who will provide more detail on our financial results [inaudible].
Thanks, Jay. I'll now go through our consolidated financial results and discuss the segments in some detail. And then I'll finish up with some comments on the consolidated and major legal entity balance sheets and liquidity positions.
Net income in the fourth quarter of 2013 was $132 million compared to $636 million in the fourth quarter of the prior year. The largest driver of the reduction was higher insured losses on financial guarantee policies in MBIA Corp. In addition, while we had gains on insured credit derivatives in both periods, those gains were much lower in this year's fourth quarter. This year's gain on insured credit derivatives was primarily driven by tighter spreads on the underlying collateral in insured transactions.
We also reported non-GAAP measure adjusted pre-tax income that treats all of our insurance policies using insurance type accounting. It avoids the mark-to-market treatment that GAAP requires on insurance credit derivatives and unwinds the consolidation of certain securitizations, which we consolidate as variable interest entities for GAAP. It provides the useful alternative view of our financial results.
We had an adjusted pre-tax loss in the fourth quarter of 2013 of $84 million compared to adjusted pre-tax income of $110 million in the fourth quarter of the prior year. The principle drivers of the change were higher insured losses in MBIA Corp. and lower realized investment gains in National. I'll go through the segments now using our non-GAAP adjusted pre-tax income measures.
The public finance segment reported pre-tax income of $89 million in the quarter compared to $202 million in the Q4 of the prior year. Net premiums earned declined to $86 million versus $122 million in the fourth quarter of 2012. There are two components to our earned premium, scheduled and refunded, and both declined in this period. Scheduled premium was $40 million in the Q4 of 2013 compared to $53 million in 2012. Refunded premium declined to $46 million from $69 million when comparing fourth quarter of 2013 to '12. A smaller insured portfolio affects both premium types.
National's net investment income declined to $32 million in the fourth quarter of '13 from $51 million in Q4 of 2012. The primary driver here is the lower average yield, which declined by 140 basis points to 2.7% principally as a result of the pay-off of the $1.7 billion intercompany loans to MBIA Corp., which had earned 7% in National's portfolio last year. This was partially offset as National began to reinvest the cash received when the loan was repaid in May.
The biggest change in National's earnings in 2013's fourth quarter compared to Q4 2012 was in realized investment gains. In 2012, we were repositioning the investment portfolio to take advantage of our enterprise level tax additions and selling assets with substantial interest rate-driven gain. In Q4 2012, we had $74 million in such gains and in Q4 2013 we had nearly $2 million of net losses on investment sales. At this point, the portfolio is almost entirely comprised of taxable securities and market and book values are nearly equal.
Insured losses in National were very small in both periods with a small takedown of approximately $100,000 in the fourth quarter of 2013 and loss in LAE expense of $6 million in 2012's fourth quarter.
Our views of some of the high-profile credits in National's portfolio showed little movement in the quarter. After the end of the calendar year, the emergency manager for the City of Detroit prepared a plan of adjustment intended to move the city toward resolving its Chapter 9 bankruptcy case. The potential for such a plan was considered in making our fourth quarter loss reserve estimates. We expect to continue to work with the city and other creditors toward a solution that respects the relative positions of creditors and put the city on a more stable footing.
As for Puerto Rico, while there's been much negative press coverage of the island's fiscal and macroeconomic challenges and its recent rating downgrade, not much has changed in our thinking. The government is taking a lot of the right steps, in our opinion, which should reduce medium-term liquidity pressure and enhance market confidence. Ultimately, the economy needs to grow in order for Puerto Rico to adequately service its debt over time.
With respect to these two credit, we believe that National is well protected from the capital and liquidity perspective. What remains to be seen is the impact that these cases might have on the rest of the municipal capital markets, where we observed that the majority of credits appear to be on positive trends.
Now returning to National's income statement, operating expenses declined from $17 million to $14 million, primarily as a result of lower legal fees. National is approaching the run rate of expense that we expect. The amortization of DAC in National's income statement is formulaic and follows the trends in the recognition of premium revenue. At year-end 2013, National had $326 million of DAC on its balance sheet after expensing $19 million in the fourth quarter.
Moving on then to the structured finance in international segment, its adjusted pre-tax loss in the fourth quarter 2013 was $159 million compared to a loss of $13 million in the fourth quarter of 2012. The most significant event affecting MBIA Corp. recently was the commutation of originally A content CMBS pools in February 2014. The commutation covering $3 billion in exposures is a part of our fourth quarter 2013 results for statutory reporting purposes and for our non-GAAP measure adjusted pre-tax income.
So economic losses on insured exposures were $162 million in the quarter compared to $38 million in the Q4 of 2012. The primary drivers of the $162 million were the cost of commutations in excess of third quarter statutory loss reserves and changes in the interest rate assumptions that we use for estimating our economic losses, which are update annually. Please note that from GAAP reporting, these commuted policies were mark-to-market at year-end 2013 and the commutation would be a first quarter of 2014 event. All other things being equal, we'll see a pre-tax GAAP gain on insured derivatives of over $400 million in the first quarter of 2014 as a result of the commutation.
This commutation represents a major step forward in managing down the volatility of the MBIA Corp. portfolio. So let's review now the major sectors of the remaining $77 billion of insurance in force after the CMBS commutation. At this point, we have $760 million of originally BBB CMBS exposure, but not all of it poses material risk. We're currently making payments on one policy that has approximately $390 million of par outstanding. Then there is one other significant deal, but it has a deductible and much earlier vintage collateral and we expect no losses on it. Combined, these two represent over 90% of our remaining original BBB exposure. There are two other small transactions on which we do not expect much loss volatility.
Aside from these BBB content deals, we have approximately $3.3 billion of CMBS exposure, which consists of originally AAA underlying bonds on which again we do not expect losses. These pieces make up the $7.1 billion in CMBS pool exposure that's described in our disclosures. The $3 billion that was commuted in February will come out of the exposure statistics in our next report. We also have a commercial real estate exposure in the form of $1.2 billion of CRE CDOs and $800 million in European securitizations, neither of which are expected to have material losses.
Moving to other sectors, we have about $1.5 billion remaining in ABS CDO exposure, which will account for the largest part of our economic loss reserves after the commutation achieved in February. We've about $8.8 billion of direct RMBS exposure in the portfolio, including both first and second lien securitization. We expect a substantial net recovery on the second lien sector, including the Credit Suisse putback recoverable and the excess spread recoveries associated with that portfolio. These net recoveries were of the reserves that we have on first lien transaction. Then there is our $4.3 billion high-yield CDO portfolio. While we are continuing to closely monitor some of the exposures in this sector, we continue to believe that there will not be ultimate losses in this portfolio.
Rounding out our structured finance exposures at year-end 2013, MBIA Corp. had insured $16 billion of investment-grade corporate CDO transactions, $10 billion of corporate asset-backed transactions and $2 billion of consumer asset-backed securitizations, all of which were performing adequately. In February of this year, nearly $3 billion of investment-grade corporate CDOs were terminated, which brings the total portfolio down from $77 billion to about $74 billion.
Finally, we have nearly $30 billion of exposure to public finance transactions outside United States, most of which are performing adequately, and we do not expect material losses on this book either. As we continue to reduce the future loss potential in the portfolio, we should close in on breakeven operations in MBIA Insurance Corp. on an adjusted pre-tax basis and profitability on a statutory basis. The difference between the two is primarily due to the treatment of interest on the surplus notes. Interest continues to accrue for adjusted pre-tax income, while in statutory reporting there is no accrual until and unless the Department of Financial Services approves such payment.
MBIA Insurance Corp. also has a subsidiary, MBIA UK, which is in a run-off status. In the fourth quarter of 2013, we determined that profits from that business over time will no longer be permanently invested overseas and we've provided for the resulting US tax consequences in the fourth quarter.
Our advisory services segment operated near breakeven in the fourth quarter. The corporate segment had a pre-tax loss of $31 million, including about $10 million of negative mark-to-market on warrants issued to Warburg Pincus and Bank of America. When our stock price rises, these derivative liabilities grow. The expirations of these warrants are up in 2015 to 2018.
The wind-down operation segment had $13 million of adjusted pre-tax income in the fourth quarter compared to a $51 million loss on last year's Q4. This is primarily the result of positive mark-to-market on interest rate swaps, where we were a net payer of fixed rates and gains on the extinguishment of debt. In addition, in last year's Q4, our conduit, which is part of the wind-down group, paid a substantial fee to the corporate segment.
Now I'd like to make a few comments about balance sheet and liquidity. At this point, we regard the holding company's liquidity as more than adequate. It received its first release from the tax escrow account under the company's tax sharing agreement in January of 2013 and then National paid its first dividend in October. As a result, MBIA Inc. had $359 million in liquid assets as of year-end 2013 after having bought back approximately $192 million of debt in the year. It had enough liquidity to cover its ongoing operating needs for more than three years.
We intend to continue to reduce leverage with holding company resources and those resources grew again in January 2014 when another $167 million of cash was released from the tax escrow. Future risks for the holding company are primarily around spread widening and we're sizing our liquidity to meet those downside scenarios. The holding company no longer has any direct exposure to the liquidity position of MBIA Corp. And this improved position at MBIA Inc. has led to Moody's placing its Ba3 rating on watch for upgrade.
The company's net operating loss carryforward at year-end 2013 was $2.7 billion. The commutation agreed to in February will increase the NOL in the first quarter, all other things being equal. In MBIA Corp., our liquidity position has much improved. We held $827 million of liquid assets at year-end 2013. Although we used a substantial portion of it to achieve the commutation in February 2014, we expect that the remainder together with cash inflows from premiums and investment income net of cash operating expenses to be adequate to service expected liabilities.
The removal of the threat associated with the $3 billion of recently commuted CMBS exposures significantly improves the stability of MBIA Corp.'s liquidity position. Principal remaining risks are around our expectations that the second lien transactions become net providers of liquidity in 2014 through collections of excess spread and then the payment on the one CMBS pool that I mentioned. Our projections call for the second lien net payments to become a cash inflow in the fourth quarter this year.
Higher defaults compared to our expectations, though, would increase liquidity pressure on Corp. in the near term. Likewise, if the CMBS pool underperforms our loss models, we could also see pressure from that source.
Finally, we expect to collect our putback recoverable from Credit Suisse via a settlement or adjudication in the next two years. Delays in that process would also increase medium-term liquidity pressure on Corp.
In addition, as of year-end 2013, we had approximately $170 million of unpaid interest payments on MBIA Corp. surplus notes of 2033 on top of the $953 million of principal amount. These payments are subordinate to policyholders and they do not come due unless and until the Superintendent of the Department of Financial Services approves them. We will continue to provide the regulator information regarding our liquidity position, our forecast of liquidity position and our stress analyses, so that they may make fully informed decision.
Finally, MBIA Corp.'s balance sheet is affected by the cumulative mark-to-market on insured credit derivatives. Largely due to commutations and terminations, the balance sheet fair value at year-end 2013 was $1.1 billion. And this compares to $7.2 billion at its peak in 2008. The commutations and terminations in the first quarter will bring that value down to approximately $350 million, all other things being equal. This is another sign that the imprint that the financial crisis is fading from our financial statement.
National's balance sheet continues to be very healthy and produce ratios that would be consistent with the capital levels for the very highest ratings from S&P and Moody's. There isn't any event that we can foresee on the horizon that might change the status and we will continue to work with the agencies and to expect that National will have ratings at least consistent with the now highest rated companies in our industry.
At this point, we'll be happy to take any questions that you may have.
(Operator Instructions) Your first question comes from the line of Geoffrey Dunn of Dowling & Partners.
Geoffrey Dunn - Dowling & Partners
Jay, can you talk a little bit about post getting the ratings upgraded of National, what do you think the prospects are for improving that company's ROE? I think Chuck mentioned that the expenses are coming down to a level you think are sustainable. Obviously, business might pick up a bit. But what do you need to do there? What are your options there to improve the ROE once you become an active writer again?
With regard to the prospects at National, there're really two parts to it. There is the existing portfolio, which you're well aware of, but I think more importantly is the business opportunity when we get the rating. And as we look at the market, we're starting to see a little bit of a pickup. As we've said before, if interest rates go up, which many people think they will over the course of the next year or two, we think that improves the opportunity. But we're seeing good opportunities to write business in double-digit return in the public finance sector and we will only focus on opportunities that provide attractive returns. So we're quite optimistic about the prospects in that business.
Geoffrey Dunn - Dowling & Partners
And in terms of capital management, obviously you got a dividend out of National. I think the sense is you need to maintain AAA cap to will offset the largest of [obligatory] [ph] test. Is there an ongoing capital management opportunity here as you kind of right size the book as run-off occurs?
Yeah. I think if we look at the opportunities at the marketplace that are out there, we think even using what we would call a semi-optimistic view of the world over the next three or four years that the size of National's current portfolio will continue to shrink over that time period. So its capital needs going forward will probably drop for another three or four years. And that's assuming running at a pretty good rate of new businesses, et cetera, that should allow us to continue to both dividend cash out of National and that's currently in our plan, we would expect substantial dividends over the next three years, and also continue because of our positioning of the portfolio, which is essentially 90%-plus and taxable at this point, will continue to generate tax payment that will go up to the holding company held in escrow and eventually be freed up for uses.
So I think if you take a look at those two topics, the capital management solely that comes from National, as Chuck described I think two quarters ago, over a three year or maybe four-year runway, we will essentially without raising any capital get down to the leverage that we would like at the holding company for the long term. And that's pretty much how I would see at this time. If there is anything else we could add to that let me know.
Geoffrey Dunn - Dowling & Partners
I think, Chuck, you mentioned that you think there's opportunities also in structured finance, what are the top areas that you think are opportunities within the next one to three years? And I assume, correct me if I'm wrong, that'll be something you'd only address through Corp.?
You're correct it would not be addressed through National. Whether it's through Corp. or a new vehicle would have to do with what kind of ratings Corp. eventually rises to. As you noted, recently in the past few weeks, Moody's has put out an indication that they're looking at Corp. for a possible upgrade.
In terms of looking at the structured finance area, this is the big if. If you eliminate real estate, meaning the mortgages and the related CDOs, real estate related assets, the other 100-plus assets classes that we've done in structured over the last 25 years that performed incredibly well and made extremely good returns. We would say that it’s worth looking for, the area we're looking at most closely now over probably the next 12 or 18 months and again, this is not something we will turn our eyes to until National is up and running, is obviously the 1 trillion plus mortgage market . We think if that market restructures with the combination of what's going on with the banks and what they're going to be able to keep on balance sheet with what we perceive the government will eventually have to do with Fannie and Freddie, we think there is going to be a [roll] [ph] out there for three or four monoline guarantors. We believe we have a fair amount of expertise in that area, some of which we've learned through the losses we've had, some which we've earned from things we've done right. And so we feel very good that that's going to be a huge area of possible potential future earnings. And it's certainly something that I am anxious for the rating agencies to make up their minds on National and for building the team to get going on that side, because we have several different avenues that we believe we can start to reenter that market that could be profitable in a very short timeframe.
I'd just like to add one comment to that with respect to MBIA Insurance Corp. as a vehicle. One of the things that we would need to consider in this regard would be the current status that Corp. has with respect to earned surplus. It has an earned surplus deficit of about $1.6 billion at this point. And before Corp. could be in a position to make distribution to the holding company, it would need to in effect earn that out, bring that to zero and to positive in order to pay dividends. And so it's just from a timing perspective to the extent that there were business opportunities that we want to pursue in structured, it might make sense to pursue them in a vehicle other than Corp.
I mean it's pretty clear. I think what Chuck is saying is the expertise, the experience base and the data all resides in Corp., but because of structural issues, if we want to reenter that marketplace, and it might be a $500 million to $750 million capital kind of issue in terms of getting enough of a size company to get started, it probably would make more sense to start that in a new vehicle than put it into an existing vehicle.
Your next question comes from the line of Arun Kumar of JPMorgan.
Brett Gibson - JPMorgan
This is Brett Gibson in for Arun. You covered the remaining potentially volatile CMBS in your prepared remarks, but I was hoping you could go into a little more detail. And I was specifically interested in hearing about the CMBS pools 26 and 46 that you lay out in below-investment grade exposures. And one thing I wasn't clear on that I hoped you could square was that in the table you showed that CMBS pool 26 has an internal rating of D, which I believe means that you expect to be at losses. But, Chuck, in your remarks, you said you only expect losses on the $390 million exposure.
One general comment is we typically don't make specific remarks about internal ratings and the like with respect to the portfolio. However, when you look at any of the exposure data that's in our supplement this quarter, they'll include the transactions that were commuted in the first quarter, because all the exposure data there is as of December 31, 2013. So you'll see those changes take place in the first quarter. So again, the comments that I made about the remaining original BBB CMBS do hold at about $760 million remaining outstanding, $390 million of which we're making payments on, the balance of which we expect will not pose significant risk to the company, either because of the vintage of the collateral or the amount of the subordination or both. And then beyond that, the CMBS portfolio consists of essentially only AAA original collateral transaction. So we don't expect any losses on them.
Brett Gibson - JPMorgan
I was under the impression that the $3 billion of A exposure that you commuted would have been factored into maybe CMBS pools 22 and 34. Any comment that you can give that might square that, because it seems like you have $4 billion of exposures that are rated D.
Again, you'll see the commuted exposures come off in our first quarter reporting.
Brett Gibson - JPMorgan
Any color that you can provide on the Zohar CLO, can you talk about what is the current spending of that, what is off to and if it was eroded by any recent activity?
We don't have any updated information at this time. We are monitoring our exposures, as Chuck said earlier, in the high grade sector very closely.
Brett Gibson - JPMorgan
My last one was related to the liquidity position of the Corp. entity. Can you talk about what go-forward liquidity is following the commutation of the A CMBS? And looking forward, can you talk about if there's any way to monetize the equity stake in the MBIA UK entity?
We think that post the commutation, the liquidity position of Corp. is adequate against its expected liabilities. And again, as I said earlier, we think we're in a much more stable position as there is no single exposure that we could point to that might cause significant risk to Corp.'s liquidity position. The two things that we do focus on are the payments that we are making on the one BBB CMBS that is in payment mode and on the excess spread on the second lien RMBS, where we're expecting that to become a net provider of liquidity in 2014 to the extent that defaults and losses are higher than our expectations in our loss models. Obviously, that might delay that turnaround. So those are kind of the liquidity risks. We think in general the position is adequate.
With respect to monetizing illiquid assets, we have done some work in that regard in the past. The UK entity is one that has significant value. We don't really see at the moment an opportunity to monetize that doesn't impair that value to us. And so maybe there is an opportunity, but we don't see one at this point.
I think there's a couple of things associated with monetizing the value. We've looked, as others have looked, at several of the monoline financial guarantors that are in run-off to try and evaluate what would be an appropriate transaction price. And virtually cases, when we've looked at the buyer, we ended up at numbers that are unfortunately small fractions of the current carrying value of the current owners. And so it's very difficult to come up with a transaction that would be mutually beneficial.
The same is true when we look at the UK company. If people look at a potential buyer, the value they assign to it in terms of its discount and cash flow, it's substantially below what we currently carry in terms of value. So it's difficult for us to see a sale transaction that could create additional value there.
Going back to the first question, I want to just clarify what Chuck said about having adequate liquidity. We clearly believe that MBIA Corp. has adequate liquidity over the foreseeable future, the next three of four years in terms of being able to cover all potential known policyholder claims. What we're not saying, there is no way that you could say there is sufficient liquidity to make any substantial payment on the surplus notes or to pay off to surplus notes. So when we're talking about liquidity, I want to be clear, we're always talking about liquidity as respect to policyholder claims and policyholder liabilities.
We're not speaking at this point to when and how we eventually could trigger our way to deal with the surplus notes, which we do believe we would like to deal with eventually. We would like to figure out some kind of an exchange. But as I have said in past conference calls, our view of the discount value of the surplus notes versus where they currently trade in the marketplace, there is a substantial difference in our own internal assessment versus how the market seems to be breaking them. And that's been the reason that you've not seen any transactions occur on that side.
That could change at any point of time. We could change our internal view if we were to make substantial collections, Credit Suisse and some of the other outstanding issues, or we get more confident that we're beyond the point where there is going to be any volatility in the excess spread. But right now, when you look at the company, which we do say repeatedly that it's in a much, much better place than it was a year ago or two years ago or three years ago, it still sufficient is volatility, it's premature to start to distribute what limited funds we do have available of policyholder surplus.
That said, we will continue to put in a request for the contract obligations each quarter to the insurance department and they ultimately will make a decision of how they see the world and whether they believe it's an appropriate decision to make any payments to surplus noteholders at this time.
Your next question comes from the line Jeff Rosenkranz of Cedar Ridge.
Jeff Rosenkranz - Cedar Ridge
A question about taxes, you have substantial NOLs, which will be a good benefit to National as they reenter the market and ramp that up. And I understand how those funds flow up to Inc. than are escrowed and then that escrow rolls off over time. What was the origin of those tax losses? Was it at Corp.? And if so, how has Corp. been compensated or how might Corp. be compensated in the future for the use of those substantial NOLs and that value?
First of all, the beneficiary of the NOL that the company has will be MBIA Inc., because it's the tax payer. So all of the accumulated net operating loss carryforwards belong to MBIA Inc. So it's part of its tax addition. Under our tax hearing arrangement, we do maintain independent standalone tax positions of the relevant entities. As you know, National has been a tax payer since it was created. MBIA Corp. has had losses. And of course, as the holding company, we have also had losses relating to simply paying interest on outstanding corporate debt, but also because we conducted our asset liability management business there. So those are the two largest contributors to the consolidated net operating loss carryforwards.
Any place in the enterprise where we make profits in the future will benefit from the fact that the company has a large net operating loss carryforward. In addition, we have stated that it's our current intention that to the extent that any of the insurance members has standalone NOLs that aren't used by the consolidated firm, not used by the relevant insurance member that they would be compensated for those as they expire or before they expire. So when you think about the expirations of the NOLs generated by MBIA Insurance Corp., they would be, I think, the years are 2030, '31, '32 is when it might expect to receive payments because of our stated current intention to provide that compensation.
It's also just to your comment that National benefits from NOLs is actually an erroneous statement. MBIA Inc. benefits from the NOLs, because National pays its taxes as if it were a tax payer up to Inc. We actually choose to sub-optimize the National portfolio by investing in taxables to take advantage of that situation. But if National were a standalone company without a parent that add NOLs, we would actually invest the proceeds or the investment portfolio quite differently. And National probably would have a higher after-tax income in that situation if it were within that. So sometimes it's confusing to realize that.
But right now most important thing to remember is we have one and only one tax payer and that tax payer is the beneficiary of the NOLs at this point in time. And we'll have to see how things develop over the years to see how those NOLs get utilized across corporation.
(Operator Instructions) Your next question comes from the line of Chris (inaudible).
Just quick point of clarification looking at your Note 10 in your 10-K. Looked like you own $13 million as a surplus notes at year-end, but also made the statement that to date you've repurchased a total of $47 million par value at an average price of $77.08. Is that suggesting that some additional bonds were repurchased in first quarter '14 or is there a different interpretation?
We repurchased some bonds probably in 2009 or early 2010. $13 million was purchased by the holding company and it still holds them. The balance was repurchased by MBIA Insurance Corp. with regulatory approval. So those are many quarters old, so disclosures and those repurchases.
Your next question comes from the line Kathleen Brady of Morgan Stanley.
Kathleen Brady - Morgan Stanley
Have you provided information on the maturity of the roll off of your Puerto Rico exposure?
Yes, all that information has been provided previously and is available on the National website.
Kathleen Brady - Morgan Stanley
Can you comment on current market reports of potential new deal with Puerto Rico and the implication that that could have for you?
We continue to watch it very carefully. As I think people are aware, Puerto Rico has all the approvals they need from the government to do up to $3.5 billion. The reports are that they will raise about $2.8 billion or $2.9 billion and that you could expect to see that as early as this week, but perhaps it could be next week. So we continue to monitor that quite closely.
At this time, there are no further questions. I'll now return the call to Greg Diamond for any additional or closing remark.
Thank you, Laurie. And thanks all of you who have joined us for today's call. Please contact me directly if you have 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 today. Good bye.
Thank you for participating in the MBIA Incorporated fourth quarter and full year 2013 financial results conference call. You may now disconnect.
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