MBIA Inc (MBI) 2014 Q3 法說會逐字稿

Welcome to the MBIA Incorporated third-quarter 2014 financial results conference call. Thank you. I would now like to turn the call over to Greg Diamond, Managing Director of Investor Relations at MBIA. Please go ahead

Thank you, Christie. Welcome to MBIA's conference call for our third-quarter 2014 financial results. After the market closed yesterday, we posted several items on our website, including our financial results press release and our third-quarter 10-Q and operating supplements. We also posted two 8-Ks -- one for the financial results and related disclosures, and one for the Board's approval of a new share repurchase authorization. In addition, the statutory financial statements for MBIA Insurance Corporation and National Public Finance Guarantee Corporation, as well as updates to our insured portfolio listings, were also added to the website.

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 documents. Please read our 2013 10-K and third-quarter 10-Q, as they contain our most current disclosures about the Company and its financial and operating results. Those filings also contain information that may not be addressed on today's call.

Also, we will be referencing the non-GAAP terms in our remarks today. The definitions and reconciliations of those terms may be found in the glossary of our quarterly operating supplements and in the financial results press release that we issued yesterday. A recorded replay of today's call will become available approximately one hour after the end of the call. And the information for accessing it was included in yesterday's financial results press release.

Now, I'll read our Safe Harbor disclosure statement. Our remarks on today's conference call may contain forward-looking statements. Important factors, such as general market conditions and the competitive environment, could cause our actual results to be materially different than the projected results referenced 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 our call today, Jay Brown, Bill Fallon, and Chuck Chaplin will provide some brief introductory comments. Then, they will address questions during the question-and-answer session that will follow. Now, here's Jay.

Thanks, Greg, and good morning, everyone. As with last quarter, we made additional progress towards our objectives around increasing profitability, further reducing volatility, and reestablishing a leadership position in domestic municipal bond insurance. Regarding our financial results, we had adjusted pre-tax income of $95 million, compared to a loss of $188 million in last year's third quarter. And again, like last quarter, we had some non-ordinary course of business items that have affected our results this quarter, which Chuck will take you through in a moment.

But, we are beginning to see some sustainable positive effects. The most prominent of these are, first, we are realizing the benefits of significant expense reduction efforts over the past year. Operating expenses, excluding deferred acquisition cost amortization, were $46 million, versus $71 million in last year's third quarter.

Second, loss payments on our second-lien RMBS exposures resulted in a net cash inflow to MBIA Corp. of $18 million. While we've had two straight quarters of favorable results here, and we ultimately expect a substantial net recovery, we could still see more periods of net outflows along the way. We wrote our first primary insurance policies since National was created in 2009. In connection with the refinance of the Detroit Water and Sewer Department's debt, National [wrapped] $300 million of the new debt, and our net exposure to the DWSD was reduced by $432 million.

In part, due to the net recoveries on RMBS and lower operating expenses, our operating cash flow was positive in the quarter -- the second quarter in a row. We have also had two consecutive quarters of increases in adjusted book value, substantially aided by the reduction in reserves against the portion of our deferred tax asset in the second quarter and for uncertain tax positions in the third quarter. While we don't expect those events to recur, they are an important component of our return to more normal operations.

After September 30, we agreed to sell our investment management subsidiary, Cutwater Asset Management, to a subsidiary of the Bank of New York Mellon. And subject to regulatory and other customary approvals, we expect to close the sale early in 2015. We will receive net proceeds that are not material and will enter into an agreement for Cutwater to manage our proprietary investment assets for the next several years. In early October, a journalist advised us that, as a result of a vulnerability in a client-facing server, certain of Cutwater's clients account information had become subject to unauthorized access through the Internet. We hired a third-party experts to conduct a thorough investigation of this event, which is now complete.

We have not identified any unauthorized transactions or other client account activity as a result of this unauthorized access. And, we do not believe that the vulnerability was sufficient to allow a third-party either to gain control over funds invested with Cutwater or to execute an unauthorized transaction. We have communicated throughout this process with Cutwater's clients and are also conducting a broader review of our cyber security posture. We do not expect that this event will impact the anticipated timing of the closing of the Cutwater sale.

Turning to MBIA Corp., we've been focused on exposure and risk reduction. And, in the third quarter, we had commutations or terminations of $4.5 billion of exposure, which, along with normal amortization, brought our gross prior outstanding down to approximately $61 billion from about $80 billion at year-end 2013. Since September 30, we've also commuted an additional $329 million of exposure. The aggregate cost for all these exposure reductions were well within our loss reserve estimates.

Finally, we completed our 2007 share repurchase authorization in late June and early July. Since we made those purchases, at an average price of $11.05 per share, we've seen the share price decline further. We believe there is more value added in buybacks today than back in the summer, and we committed to consider a larger share repurchase volume on last quarter's call. Yesterday, our Board authorized a new share buyback program of $200 million. We expect to use it opportunistically, depending upon our view of the intrinsic value of the shares, our current and forecasted capital and liquidity positions, as well as our assessment of alternative uses of available cash for strategic investments.

Now, Bill will provide an update on National.

Thanks, Jay. In our second full quarter after achieving competitive ratings, we wrote our first primary policies in conjunction with the resolution of the Detroit bankruptcy. But there's more to the story than that. We believe that the Detroit bankruptcy and remediation makes several important points about the value of bond insurance and the value that National, specifically, brings to the table.

First, bondholders benefiting from National's wrap missed no principal or interest payments during the bankruptcy, even though the city was not making payments. The resolutions of the unlimited tax GO and the secured Water and Sewer Department debt affirmed the fundamental places of those obligations in the city's capital structure, which had been challenged early in the process. Second, the issuer benefited from more efficient execution by using National's insurance at issuance.

The remediation of our exposures to Puerto Rico is at an early stage. Our total exposure declined by $290 million since June 30, due to paydowns that took place at the very beginning of the third quarter. The Commonwealth has hired an advisor to review PREPA's operations and is moving towards a restructuring of the assets and liabilities of the Puerto Rico Highways and Transportation Authority that we believe will improve its ability to service its debt. Nothing that has happened that changes our fundamental view that the situation remains uncertain, and that the quality of operational management and fiscal leadership, and the Commonwealth's macroeconomic growth rate, will be the primary factors that determine the ultimate outcome.

With respect to our marketing efforts, we have reviewed and bid on many more transactions in both the competitive and negotiated markets during the quarter. With interest rates continuing at low levels, our primary competitor continues to be the uninsured market. But we have seen insurer penetration by our industry increase to about 8% in the third quarter, from about 4% in the third quarter of 2013.

On a prior call, Jay said it would take National a few quarters to start generating meaningful new business, and that is proving to be true. The average par amount of an insured deal is down considerably since 2007. So we need to focus our efforts on the tens of thousands of small issuers across the country. While National had a marketing team in place, we recognized that, to achieve our aspirations, we need to add a number of professionals to our staff. Accordingly, last month, we brought Tom Weyl onboard to lead our new business efforts. One of Tom's priorities will be to build out the team so that National can cover all market segments. Tom has outstanding stature in our industry, as a former Head of Municipal Credit Strategy and Research at Barclays and the former Chair of the National Federation of Municipal Analysts.

We continue to believe in the essential value of municipal bond insurance, and we're investing in that belief. We also think that the volatility and credit performance we are seeing right now will heighten, rather than diminish, demand for bond insurance.

Now, Chuck will review our financial results.

Great. Thanks, Bill. As usual, I'll make some comments about our consolidated financial results in the segments and provide some information on the balance sheets and liquidity positions of our major legal entities before we open it up for your questions. Our measures of performance were all favorable in the quarter. This is the second quarter in a row where our net income and adjusted pre-tax income had favorable comparisons, both year over year and sequentially, and adjusted book value and consolidated operating cash flow improved sequentially.

So, first, a few comments on our consolidated GAAP results. Net income was $173 million, compared to $132 million in last year's third quarter. In the year-ago quarter, the biggest driver was a pre-tax gain of $257 million on the mark-to-market of insured credit derivatives. This year, we had only $24 million of such gains. In this year's third quarter, we had pre-tax revenues -- excluding the mark-to-market -- that increased to $267 million from $163 million in the Q3 of 2013. And all pretax expenses declined to $143 million from $249 million last year. In addition, we released a reserve against an uncertain tax position in the third quarter, which contributed to a tax benefit of $25 million this year, compared to a tax provision of $39 million in last year's third quarter.

We also report a non-GAAP measure -- adjusted pre-tax income -- that treats all of our insurance policies, using an insurance accounting model. It provides a useful alternative view of our financial results. As Jay referenced, we had adjusted pre-tax income of $95 million in the third quarter of 2014, compared to adjusted pre-tax loss of $188 million in last year's third quarter. There were a few effects in this result that are difficult for us to predict or occur infrequently.

One, foreign-exchange effects, primarily reflecting the euro's weakness against the dollar, contributed about $51 million in the third quarter. Two, revenues associated with refundings and terminations were $38 million higher in this year's third quarter than last year. Three, we had a recovery of litigation expenses from our E&O carriers for $29 million. Four, we had mark-to-market gains on warrants of about $19 million. And then, all of these positives were partially offset by our first asset impairment in some quarters of approximately $14 million.

Consolidated premiums and fees on insurance in force were $125 million in this year's third quarter, compared to $140 million in the comparable period last year. As I said, we had $38 million of revenues from refunded or terminated policies, most of which affects this line item. While this is welcome, we expect premium earnings in general to continue to decline. In a few years' time, we would expect that National's new business growth will be sufficient to offset the decline in its scheduled premium associated with portfolio runoff, but we expect that MBIA Insurance Corp.'s premium earnings will continue to decline. Our revenues also reflected the gains from foreign exchange that I referenced and the mark-to-market on the warrants.

Moving to the expense side, insured losses were $58 million, down from $198 million last year. And operating expenses were $44 million in the quarter, versus $71 million in last year's third quarter, primarily due to lower compensation costs. Interest expense was $7 million lower than last year, at $52 million, primarily as a result of debt maturities and buybacks.

Our consolidated operating cash flow was $46 million in this quarter, which was aided by the E&O settlement and the fees associated with policy terminations, in addition to the cash inflows on insured second-lien RMBS. This reflects a sequential increase from $28 million in the second quarter of this year.

Now, I'll just touch on each of the major segments. Our public finance insurance segment is conducted in National Public Finance Guarantee Corp, which reported pre-tax income of $94 million in the third quarter, compared to $6 million in the year-ago quarter. Total revenues for National were $113 million in the third quarter, compared to $74 million in last year's third quarter.

Our earned premiums declined slightly from $74 million from $75 million. While scheduled premium was $10 million lower than last year's, refunded premium was $9 million higher. Investment income improved to $30 million from $26 million last year, as we repositioned the investment portfolio from last year's heavy cash position.

National had an $18-million gain in the third quarter from its share of the E&O settlement. But this was mostly offset by a $14-million realized loss on the impairment of an invested asset. In last year's third quarter, on the other hand, National had $29 million of net realized losses, related primarily to the write-down of our former headquarters' property. National's loss and loss adjustment expense was a benefit of $8 million in the quarter, compared to $35 million of incurred loss in last year's third quarter. The reserve take-downs this quarter were related to multiple GO credits. National operating expenses were $13 million, compared to $17 million in last year's third quarter.

Moving on to the structured finance and international segment, it is primarily operated through MBIA Insurance Corp. and its subsidiaries. It had an adjusted pre-tax loss of $36 million, compared to a loss of $167 million in the year-ago quarter. The largest drivers of the positive variance were lower loss and loss adjustment expense, and lower operating expenses. Insured losses totaled $66 million in the third quarter, compared to $163 million in Q3 2013.

The biggest driver of incurred loss in this Q3 was in our second-lien RMBS portfolio. We have reduced our expectation of future excess spread salvage by increasing our assumptions about voluntary prepayments of second-lien mortgages, reflecting prolonged low interest rates. This assumption change primarily drove $42 million of incurred loss this quarter.

The corporate segment and the wind-down operations are both operated in MBIA Inc. and subsidiaries. The combined results of these two yielded $36 million of pre-tax income in the third quarter, compared to a loss of $80 million in the Q3 2013. Foreign-exchange gains in these segments were $60 million, and marks-to-market on outstanding warrants contributed $19 million. Operating expenses declined from $34 million to $28 million.

Now, a few comments on the balance sheet. Shareholders' equity was $3.9 billion at September 30, compared to $3.3 billion at year-end 2013. The portion of shareholders' equity attributable to MBIA Insurance Corp. was $907 million, compared to $660 million at year-end 2013. Most of the economic value of MBIA Corp. is associated with its contribution to the consolidated deferred tax asset associated with net operating loss carry-forwards. And that consolidated tax benefit of NOLs was $1.1 billion as of September 30, 2014.

MBIA Corp.'s balance sheet had $420 million in liquid assets as of September 30. And we continue to believe that it has adequate resources to cover expected claim payments with an acceptable margin for adverse deviation in the medium term. In the long run, however, it will be important that the positive cash flows from second-lien securitizations continue and that MBIA Insurance Corp. recover its put-back claims against Credit Suisse to make its positive liquidity position more resilient.

At the Holding Company level, we had a liquidity position of $348 million as of September 30, which we believe provides adequate coverage of near-term operating and debt service cash needs. And then, National paid a dividend of $220 million to MBIA Inc. in October, which further improves our financial flexibility.

In our operating supplement, we publish a presentation of selected assets and liabilities of the corporate and asset liability product segment, which provides an estimate of the net debt that must be serviced over time from distributions from operating subsidiaries. That net debt, as of September 30, was $967 million, down from $1.1 billion at year-end 2013.

In summary, we continue to make progress toward returning the Company to a more normal operating environment. And we're confident that we'll reestablish our position as the leader in municipal bond insurance through National and continue to reduce the potential volatility associated with MBIA Corp. -- and build a stronger Holding Company.

As Jay has said, our Company has evolved now into a position where we are considering whether we can begin making investments and shareholder value creation beyond improving these ongoing operations. So, at this point, we'd be happy to respond to any questions that you may have.

(Operator Instructions)

Brett Gibson, JPMorgan.

Good morning, gentlemen. Can you hear me okay?

Just fine.

Very good. Good morning.

So I wanted to start out with the buyback. I guess, the direct question here -- related to this buyback, given everything going on with Puerto Rico, the deficit of assets to liabilities at the holding Company, and obviously the continued deferral of interest on the surplus notes, can you help us understand what gave you and the Board comfort to put up this authorization?

Sure. The holding -- if you look at our financial results of the past year, we've seen improvements in financial position, capitalization, and liquidity pretty much across the board -- across National and MBIA Insurance Corp and the holding Company. The holding Company today is in a position where, again, we think that we have meaningful financial flexibility.

And we believe that it's important that, as we have financial flexibility, that we're deploying it to create shareholder value over time. And as a result, we do think that it's prudent at the this point to indicate that we have the flexibility to buy back some shares, to the extent that that is the highest and best use of that capital.

You mentioned MBIA Insurance Corp and its liquidity position, again, it's improved. We think that the most important things that need to happen there, in terms of making that liquidity position more permanent, is to more fully collect on the excess spread assets that, as you see, we are starting to collect on in a positive way in the past two quarters. And ultimately, to collect the recovery from Credit Suisse.

And again, we've discussed National's position, relative to our Puerto Rico exposure. And we feel very comfortable with our capital and liquidity position there, as well.

Okay. Very good. Thank you.

And then just -- I mean, a further follow-on to that, what can you tell us about the timing of the buyback? What is in your mind? Would the Company consider executing an accelerated share repurchase, or should we expect something to be a little slower and more steady over time?

I would say that there is no timeframe that we've committed to. And there is no limit on the program, as well, in terms of time.

Okay.

And lastly, I just wanted to address what you talked about with the projected inflows from excess spread recoveries and how important that is to MBIA Insurance Corp. Specifically, can you talk about the embedded assumptions that go into the number that you have booked on the balance sheet? I think, for the second-lien, it's about $595 million.

Can you talk about the trends that you've seen from prepay rates and draw rates? And what they need to be to realize that amount over time?

Yes. I think the most important factor that we have been looking at over the past year has been the impact of prepayments on the ultimate collection level. If you go back to second-quarter 2013, as we saw rates begin to rise at the time of the [taper] tantrum, we had the view that rising level of rates -- the rising mortgage rates would stop the flow of voluntary prepayments in our second-lien portfolio and that prepay speeds would drop dramatically from the elevated levels that we were seeing. And we put in place an assumptions, basically, that prepays went to the levels that we saw pre-quantitative easing.

What has happened is that, over the few quarters since then, we've observed, of course, mortgage rates which rose then fell again and are at extremely low levels again today. And prepay speeds, which initially began to drop, reversed course and are now at high levels again.

So what we're doing is, in this quarter, is modifying or assumption and our models from prepay speeds immediately dropping to the pre-QE levels, to prepay speeds remaining at their current levels for an extended period of time and returning to more normal levels over a few years' time. So that's what causes the change in the balance sheet value of the excess spread assets in the third quarter, in addition to the fact that the balance sheet value came down because we received payments.

Great. Thank you very much.

(Operator Instructions)

Brian Charles, RW Pressprich.

Good morning. I have a couple of quick questions.

First off, you say in the press release that you commuted an additional $329 million of exposure at MBIA Corp after the quarter. Do you have any color on what kind of exposure that was? Specifically, I don't suppose it was commutation of high-yield CDO 15 or high-yield CDO 23 by any chance, was it?

They were small- and medium-size business loan securitizations.

Okay. But you -- yes. Fair enough. Okay.

And my other quick question is regarding the balance sheet at MBIA Corp, the statutory balance sheet, certainly, looks better at September 30 versus June 30. And it looks like you're free and divisible surplus increased from $80 million to $255 million.

I don't know if you have any color on what impact that might have on the regulator's view of surplus notes, coupon payments, going forward? [And later, I'll have] a part B of that question, too.

Sure. I mean, the free and divisible surplus improved substantially, basically as a result of net income in MBIA Insurance Corp and the change in non-admitted assets. I think we've talked about this a couple of quarters ago, that when our UK subsidiary, particularly, got to be a large share of the surplus of MBIA Insurance Corp, we're required to non-admit a portion of it.

Right.

But then, as Corp has more surplus of its own, if you will, we get to readmit a portion of the UK Company's equity. That happened in the quarter.

We also had contingency reserve releases, as a result of the commutations that Jay referred to. That also increased the free and divisible surplus, to the point where it's about $255 million at the end of the third quarter.

Now, obviously, with respect to the surplus notes, all payments are strictly subject to the discretion of the Department of Financial Services. The closest I would come to discussing that would be to say that -- and I said this in my prepared comments -- that we think that what's necessary for Corp to really be on a very solid and resilient financial footing, is to collect more of the excess spread assets and, finally, to recover on the Credit Suisse. So we know that's out there on the horizon, as well.

Yes. I think, in terms of the way we're -- we really didn't change our view about either the likelihood or the timing of when surplus interest note payments might begin. We still think there is -- as pointed out in the first question -- there is a fair amount of volatility left in MBIA Corp, both in the second-lien portfolio and in a few other remaining credits.

And that we would expect, until those are resolved and, as Chuck points out, until we collect on the Credit Suisse, that it would be unlikely that there will be any payments or any substantial payments on surplus notes, which is why we continue to believe that it will be a long time. But eventually, there will be payments made on those notes as the policyholder claims are first dealt with.

Okay. Fair enough.

And then, one final follow-up to that. I know in previous quarters, you've discussed addressing the surplus notes in some form, perhaps, with the surplus notes holders. I don't know if you have any color on that -- whether or not you've been in communication with some of the various holders and discussing different strategies on how to address the notes?

We have had some additional analysis and some discussions this quarter. We continue to have a fundamental difference, in terms of our views of the net present value, essentially, the current market value of those. What's reflected in the market and our view, in terms of how timing of payments might occur under that, yields a very different economic answer.

And as long as we have that wide a gap, suggesting alternative ways to retire those notes isn't really viable. And since you've got a fundamental economic difference in opinion about how they're valued, it's very hard to come up with the creative transaction to deal with that.

Okay. Fair enough. Thank you.

Thank you. At this time, there are no further questions. I will turn the floor back over to Greg Diamond for any closing remarks.

Thank you. And thanks to all of you who have joined us for today's call.

Whoops. Sorry, we have a new call. Someone entered the queue.

Michelle [Lavier], ESG

Hi. Yes. It's actually Jeff Zigler from Emerging Sovereign Group. I wanted to ask two questions.

Number one, given the press release on the Puerto Rico Highway and Transportation Authority or oil tax increase. And can you comment on your involvement in that process, as was indicated in the press release?

And number two, can you give us any update on the progress of the PREPA negotiations and the forbearance agreement?

Yes. Jeff, it's Bill speaking.

With regard to the highways, what you saw in the press release is consistent with the fact that, yes, we've been in communication. There were constructive conversations leading up to the legislation that was submitted. And other than that, there's not really any additional detail that I can give you.

With regard to PREPA, as you know, there was a preliminary scheduled outlined with the forbearance and amendment during the summer. They have a Chief Restructuring Officer that is reviewing the PREPA operations.

I think any meaningful level of detail we won't see anything until probably March of next year. I'm sure along the way, towards the end of this year, there may be some preliminary views. But I don't think we'll see anything substantive until next year. And that's the situation with regard to both of those credits.

Great, thank you.

And we have no further questions.

All right. Thank you. And thanks to all of you who have joined us for today's call. Please contact me directly if you have any additional questions. We also recommend that you visit our website, MBIA.com, for additional information on our Company.

Thank you for interest in MBIA. Good day, and goodbye.

Thank you. This does conclude today's conference call. You may now disconnect.