NEW YORK (Bloomberg) — MBIA Inc. chief executive officer Jay Brown said the largest bond insurer may be able to unwind much of its credit losses because the debt it agreed to back didn't meet contractual promises.

About 66 percent to 80 percent of the Armonk, New York-based company's losses on second-mortgage bonds and mortgage-related collateralised debt obligations, its two worst insurance categories, are tied to collateral that was "ineligible" to be included in the deals, and so its guarantee payouts may be recouped, Brown said today on a conference call.

"The rest of the book is actually performing quite well," he said.

MBIA soared 71 percent this year through yesterday on signs the US recession may be easing and as Brown moves to restructure the company and rebuff insurance claims. Brown's efforts have resulted in lawsuits, both by and against the insurer.

"Significant resources that should be available to policyholders have been diverted to the benefit of the parent company, its executive and its shareholders, in a violation of the law," said David Ichel, a partner at Simpson Thacher & Bartlett LLP in New York, referring to a suit in which his law firm is representing hedge funds seeking to reverse MBIA's split this year of its guarantee business.

The litigation, including a similar suit from Martin Whitman's Third Avenue Management LLC, is "without merit", MBIA said on Monday in a statement.

MBIA, which traded as high as $73.31 in December 2006, fell 82 cents, or 12 percent, to $6.14 in New York Stock Exchange composite trading. On Monday, the company reported its second net profit in seven quarters.

The first-quarter net profit of $696.7 million, or $3.34 a share, compared with a loss of $2.4 billion, or $12.92 a share, a year earlier, MBIA said in a filing with the US Securities and Exchange Commission.

Chief financial officer Chuck Chaplin said on the call that the quarter was "poor", with higher-than-expected second- mortgage delinquencies and the profit stemming from an accounting gain related to its lower creditworthiness.

The better-than-expected results aren't "sustainable" as the surprise "came entirely from improved mark-to-market conditions" tied to perceptions of its credit quality, Steve Stelmach and Amy DeBone, analysts at Arlington, Virginia-based FBR Capital Markets Inc., wrote in a report yesterday.

MBIA said its results were boosted by a $1.6 billion unrealised gain on credit-default swaps. The gain mainly reflected the opposite accounting result of the expenses banks must recognise in earnings when they believe MBIA may not pay out on guarantees.

The quarterly results would have been $4.2 billion weaker without that effect, according to the filing. The results included $693.7 million in pre-tax insurance expenses for second-mortgage bonds, as well as $169 million of pre-tax losses in its investment portfolio, according to the statement.

In February, New York State granted MBIA, the largest bond insurer by outstanding guarantees, the right to split its municipal business from its structured-finance guarantees after record mortgage losses that cost its AAA insurance ratings.

The company is seeking to win new contracts with a unit created to focus on the public-finance guarantees under the plan. Moody's Investors Service downgraded the unit that retained guarantees on $240 billion of mortgage bonds and other complex securities to a speculative grade.

Hedge funds run by Aurelius Capital Management and Fir Tree Partners alleged holders of structured debt with MBIA guarantees were hurt in a "looting" of the resources available to pay their claims. Third Avenue, MBIA's second-largest shareholder as of December 31, according to data compiled by Bloomberg, said the separation devalued notes its holds that were issued in January 2008 by the subsidiary in a bid to save its AAA ratings.

While the suits are a "wildcard", MBIA ended last quarter with $250 million of capital in its municipal-only unit, a level that suggests the insurer may succeed in writing new policies, said Rob Haines, an analyst at CreditSights Inc. in New York.

"It wasn't a good quarter, but if you're looking at how the company is positioning itself going forward and its capital base, there are some signals that MBIA is going to be able to re-enter the market over the intermediate term," he said.