MBIA Inc (MBI) 2017 Q1 法說會逐字稿

Welcome to the MBIA Inc. First Quarter 2017 Financial Results Conference Call. I would now like to turn the call over to Greg Diamond, Managing Director of Investor and Media Relations at MBIA. Please go ahead.

Thank you, Lori. Welcome to MBIA's conference call for our first quarter 2017 financial results.

After the market closed yesterday, we issued and posted several items on our website, including our financial results press release, 10-Q, quarterly operating supplements and statutory financial statements for both MBIA Insurance Corporation and National Public Finance Guarantee Corporation. We also posted updates to the listings of our insurance portfolios.

Regarding today's call, please note that anything said on the 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 documents. We urge investors to read our 10-K and 10-Q as they contain our most current disclosures about the company and its financial and operating results. Those documents also contain information that may not be addressed on today's call.

The definitions and reconciliations of the non-GAAP terms included in our remarks today are also included in those documents as well as our financial results press release and our quarterly operating supplements. The recorded replay of today's call will become available approximately 2 hours after the end of the call, and the information for accessing it is 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 differ materially from the projected results referenced in our forward-looking statements. Risk factors are detailed in our 10-K and 10-Q, which are 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, Anthony McKiernan, and Bill Fallon will provide some introductory comments. Then, a question-and-answer session will follow.

Now here is Bill Fallon.

Thanks, Greg. Good morning, everyone. National continues to make strong progress, notwithstanding the ongoing challenging interest rate environment and Puerto Rico's situation. For today, I'll start with our Puerto Rico exposures. Then, I'll comment on our new business production activities, and I'll finish with National's capital strength.

On May 3, Puerto Rico filed a petition for access to Title III protection under the PROMESA legislation that passed into law last year. Since Title III was created specifically as part of that legislation, we are now, in some ways, in unchartered waters. However, we believe that Puerto Rico and the oversight board, in passing its fiscal plan, failed to satisfy the preconditions for gaining access to Title III in the first place.

Accordingly, National and Assured Guaranty have initiated litigation that contests the status, legality and role of the fiscal plan and requests that the court stay the Title III proceedings. The entire Title III proceeding, including our case, has been assigned to Judge Laura Taylor Swain of the U.S. District Court Southern District of New York, who was appointed by U.S. Supreme Court Chief Justice John Roberts.

Until more is known about the status of the Title III proceeding, there will be some uncertainty regarding the impact on the GO, COFINA and HTA bonds that we insure. It is clear, however, that the oversight board-certified fiscal plan does not comply with PROMESA in many regards, including its requirement that legal structures and priorities be respected. Overall, we still believe that consensually renegotiating and restructuring debt obligations through Title VI of PROMESA is a more appropriate and productive approach for Puerto Rico and its stakeholders, as has been done with PREPA.

PREPA's restructuring support agreement, or RSA, was modified by all of its parties last month, including the governor, and submitted to the oversight board for its approval. The RSA, once implemented, provides a solution for PREPA in a way that is fail -- fair to all parties and is consistent with the governor's energy reform agenda.

Outside of Puerto Rico, the other credits in National's insured portfolio continue to perform within our expectations. During the first quarter of 2017, National issued $252 million of par value in the primary and secondary markets combined. Measured by policies issued, it was our second-highest quarterly production since we reentered the market in 2014. For the last 4 quarters, National insured $1.7 billion of par, which was more than double the $700 million that we insured in the previous 12-month period.

National has expanded its business writings to 27 states, having added 12 states over the 15 months ended March 31, 2017. We are confident in our ability to further expand our production as we continue to enhance the market's understanding of National's strong business model. We also believe that rising interest rates will drive higher demand for bond insurance.

From a financial strength perspective, National ended the quarter with $3.5 billion of statutory capital and $4.6 billion of claims-paying resources. As National's insured portfolio continues to amortize, its capital position and its capital ratio continue to improve. National's insured portfolio reduced by another $8 billion of gross par during the first quarter of 2017, ending the quarter at $102 billion of gross par outstanding. National's leverage ratio of gross par to statutory capital declined to 29:1 from 32:1 at year-end 2016.

We estimated National had $1.7 billion of excess capital versus the S&P AAA requirement at year-end 2016. We expect this amount to continue to increase with the run-off of the portfolio. As we have mentioned, we expect National to request a special dividend when there is greater clarity regarding Puerto Rico, which we expect to be later this year.

And finally, on April 28, Kroll rating agency reaffirmed its AA+ rating on National. This is the highest rating that any rating agency gives to a bond insurer.

And now Anthony will provide details on our financial results.

Thanks, Bill, and good morning, everyone. We ended the first quarter with National's liquidity and capital in strong positions to meet any uncertainty related to Puerto Rico and the holding company well situated to meet its debt service requirements and meet our medium-term leverage targets.

As we discussed on our previous call, the sale of MBIA UK and new financing facility to satisfy the Zohar II maturity were completed in the first quarter at MBIA Corp., and Corp.'s near- to medium-term strategy will be focused on maximizing recoveries from the Zohar CDOs and our Credit Suisse RMBS-related litigation. Finally, we repurchased 4.8 million shares in the first quarter, which we believe provides material value to our shareholders.

The company reported a consolidated GAAP net loss of $72 million or $0.55 per share for the first quarter of 2017 compared to a consolidated GAAP net loss of $78 million or $0.58 per share for the first quarter of 2016. The reduction in year-over-year consolidated GAAP net loss was primarily due to an increase of fair value gains associated with interest rate swaps and common stock warrants and lower foreign exchange losses, largely offset by greater loss and loss adjustment expenses primarily at MBIA Insurance Corporation and lower premiums earned.

Combined operating income was $9 million for the 3 months ended March 31, 2017, compared with $16 million in the same period of 2016. The $7 million decline was primarily due to a $17 million decrease in net premiums earned.

Adjusted book value per share increased to $33.69 as of March 31, 2017, from $31.88 as of December 31, 2016. The $1.81 increase in ABV per share was driven primarily by a decrease in common shares outstanding resulting from share repurchases during the first quarter of 2017.

Before I walk through highlights in the corporate and U.S. Public Finance segments, I will provide a brief summary of MBIA Corp. now that the sale of MBIA UK has been completed and the new Zohar-related funding facility is in place. MBIA Corp. had statutory net income of $178 million for the first quarter of 2017 compared with the statutory net loss of $55 million for the first quarter of 2016. The favorable variance is primarily due to a $263 million net realized gain associated with the completed sale of MBIA UK, which was almost entirely surplus neutral, partially offset by greater loss and loss adjustment expense incurred.

The net impact of the sale of MBIA UK, after giving full effect in MBIA Corp.'s statutory financial statements over the last 2 quarters, resulted in a net increase of $32 million to MBIA Corp.'s statutory capital. As of March 31, 2017, the statutory capital of MBIA Insurance Corporation was $524 million, and claims-paying resources totaled $1.6 billion.

Turning to our 2 operating segments, 2 segments which comprise operating income. The corporate segment recorded GAAP net income of $10 million in the first quarter of 2017 versus a GAAP net loss of $84 million in the first quarter of 2016. The favorable variance was primarily due to an increase of fair value gains on interest rate swaps and common stock warrants as well as lower foreign exchange losses. The corporate segment recorded an operating loss of $16 million in the first quarter of 2017 compared with an operating loss of $21 million in the same period of 2016.

As of March 31, 2017, MBIA Inc. held cash and liquid assets of $340 million. In addition, there were assets with a market value of $216 million held in its tax escrow account as of March 31, 2017, as well as approximately $700 million in assets pledged to the GICs and interest rate swaps.

During the first quarter of 2017, National's 2014 tax payment of $94 million was released to MBIA Inc. from the tax escrow account in accordance with the company's tax sharing agreement. The company's consolidated net operating loss carryforward for income tax purposes as of March 31, 2017, was approximately $2.6 billion. This comprises almost all of the approximate $1 billion DTA on our consolidated GAAP balance sheet.

Discussion over potential tax reform is increasing, with focus on the reduction in the corporate tax rate to as low as 15%. We look at this potential outcome into 2 ways. From an accounting standpoint, all else being equal, a corporate tax rate reduction to 15% would reduce the DTA by approximately $570 million, which would impact ABV at March 2017 of approximately $3.40. However, from an economic perspective, the impact of any decrease in the DTA is offset over time by higher after-tax earnings and increased capital at National, resulting from additional investment income and lower tax expense on earnings. And important to remember, we won't be a taxpayer for many years.

During the first quarter of 2017, the company repurchased 4.8 million of its common shares at an average price of $8.31 per share. Subsequent to March 31, 2017, through May 4, 2017, the company has repurchased an additional 522,000 shares at an average price of $8.01 per share. As of May 4, 2017, there was $44 million of remaining authorized capacity under the company's current share repurchase program, and there were 129 million of the company's common stock shares outstanding. During the first quarter of 2017, the company also retired $74 million par value of MBIA global funding MTNs through debt repurchases and maturity payments.

The U.S. Public Finance Insurance segment recorded GAAP net income of $27 million for the first quarter of 2017 versus $41 million for the first quarter of 2016. The decline in GAAP net income was primarily due to a $17 million decline in premiums earned. The U.S. Public Finance Insurance segment recorded $25 million of operating income in the first quarter of 2017 compared with $37 million in the same period of 2016. The decline in operating income was also primarily due to the decline in premiums earned.

Total net premiums earned in the U.S. Public Finance Insurance segment were $41 million in the first quarter of 2017, down 29% from $58 million in the same period of 2016. Premiums earned from refunded transactions decreased 35%, and scheduled premiums earned declined by 20%. The decline in scheduled premiums earned resulted from the continued decrease of National's insured portfolio.

Net investment income for the U.S. Public Finance Insurance segment was $31 million in the first quarters of 2017 and 2016 on average assets of $4.2 billion and $4.4 billion for their respective quarters. The U.S. Public Finance Insurance segment recorded loss and loss adjustment expenses of $11 million in the first quarter of 2017 compared to $9 million in the first quarter of 2016. The increase in loss and loss adjustment expense was primarily due to additions for certain Puerto Rico credits in the first quarter of 2017.

And now I will turn it over to Jay for concluding remarks.

Thanks, Anthony. Good morning, everyone. Thanks again for joining us today. Last week, our proxy voting was finalized during our Annual Shareholders Meeting. All of our sitting directors were either elected or reelected, and Bill Fallon was also elected to our board. Bill was nominated to the board, reflecting the importance of National to our future value creation and his expanding responsibilities. All of the other proposals were also approved, and our shareholders expressed their preference for us to maintain our named executive officers' compensation vote on an annual basis.

Earlier on this call, Bill referenced the increased uncertainty that has returned to the Puerto Rico situation since the beginning of this year. We believe that the heightened uncertainty preceding their Title III filing played a significant role in the downward pressure on our company's stock price. In response, during the first quarter, we deployed some of the holding company's liquidity to repurchase shares at those lower prices, spending $40 million on share repurchases.

And then, as Anthony mentioned, from the quarter end through May 1 -- May 4, we've spent an additional $4.2 million on share repurchase. As of May 4, we had $44 million remaining under our existing share purchase -- repurchase authorization.

As Bill mentioned, we expect that National will make a request for a special dividend from the New York Department of Financial Services later this year, if and when the situation in Puerto Rico clarifies. It is likely that supplemental holding company liquidity would then be deployed towards additional share repurchases and debt reductions.

As Anthony noted, our first quarter share repurchase was the largest contributor to our $1.81 increase to our adjusted book value during the quarter. And as I stated during our fourth quarter 2016 financial results conference call, strategic share repurchases are likely to be the most significant tool that we will have to increase adjusted book value over the near term until National's guarantee is more widely accepted by the market. We continue to be pleased with the progress that National is making regarding its reentry into the marketplace, and we expect that progress to become more significant when National gains the same S&P credit rating as its 2 new business competitors and as interest rates continue to rise.

That concludes our prepared remarks. We will now prepare for the question-and-answer session of the call.

(Operator Instructions) Your first question comes from the line of Andrew Gadlin of Odeon Capital Group.

In terms of the losses booked at MBIA Corp., could you talk a little bit about what drove those losses? The slide in the operating supplement that details losses by asset class isn't there anymore. So if you could provide some of that information, it'd be great.

Sure. It's Anthony. The losses for the quarter were primarily driven by model assumptions that we made or changed on our first and second lien RMBS exposures. On the first lien RMBS, after doing diligence visits with a number of our servicers of our first lien transactions, we came away with the view that loss severities related to the delinquent and defaulted loans in those deals, we continue to be elevated for a longer period of time than we've previously assessed. So we made changes on our models, essentially assuming that loss severities would stay higher for longer, and that drove the loss reserve increase on first lien RMBS. On the second lien RMBS, we'd exhibited for the last year, 1.5 years elevated voluntary prepayment rates and delinquencies, which were both staying elevated for longer periods of time as well. So what we did there was change assumptions to both our voluntary prepay assumption and delinquency assumptions. Or essentially, we're keeping voluntary prepays at the current elevated levels and bringing them down over a slower period of time. I mean, on delinquencies, given that we've settled in at a low but steady rate, continue to keep those levels maintained for a longer period of time as these transactions wind down. So those were really the 2 changes for the quarter.

Got it. And then in terms of Bill's remarks about having a -- or applying for a special dividend as, hopefully, the picture in Puerto Rico improves in the second half of the year, what types of things could we be looking for that would be those types of positives?

Yes. Let me give you 2 examples. The first one is the most important. As you know, there is a restructuring support agreement that has been amended relating to PREPA. That has been sent to the oversight board for their approval. If they approve it and it moves forward on the time line that's expected, PREPA should close their exchange and the new deal somewhere around September or October, would be the estimate. So that would be a big milestone. As you know, that's been something that's been worked on for almost 3 years at that point. So that would be perhaps the most important thing that we could reasonably expect to see between now and year-end. Second, as you know, relates to all the other credits. It was announced yesterday that the judge will have the first session next week in Puerto Rico, and we would hope that over the next several months, we'll get greater clarity in terms on how that will proceed. So those will be the things that we'd be looking for.

Got it. And do you think it's possible that the new judge would instruct the board to come up with a new fiscal plan?

We're going to wait and see, and we could all speculate. And I think you're well aware of all the comments that we've made and other creditors have made with regard to questions and lack of transparency on the fiscal plan. So we'll wait and see what the judge chooses to do on that issue.

Your next question comes from Chas Tyson of KBW.

I just want to follow up on the special dividend and kind of the clarity that you're looking for in Puerto Rico, particularly the second point that you noted, Bill, just about how the restructuring process unfolds as we go through this Title III process. I mean, what kind of -- can you talk about what kind of clarity you'd be comfortable with on requesting a special dividend? If things unfold positively or negatively, I mean, how do you think about examples of exactly what kind -- what you look for and -- to pull the trigger on a special dividend request?

Yes. Let me first jump back to PREPA. As you know, when you count some of the bonds that we've purchased related to PREPA, PREPA's been our biggest exposure in Puerto Rico, and that's $1.4 billion. It was roughly 35% of our exposure when people really started focusing on Puerto Rico. So as I mentioned, when that deal gets done later this year, that will be a big part of our exposure that will have been restructured and, we think, put in a good situation from our perspective. So that's perhaps the most important. And at that point, we would view that there is certainty as it relates to the PREPA situation. With regard to the others, which now is just starting to unfold, with regards to this Title III proceeding, we would expect that the judge will start to, one, give some sense of procedurally how she's going to proceed. But at some point over the next several months, I think you'll start to get some indication with regard to many of the issues that have been raised. So for example, as you're well aware, on COFINA, is there a statutory lien? Can the government use any of that money, which, in their fiscal plan, they've essentially aggregated everything together? As you know, on the GOs, the constitution says those are the highest priority. There's been lots of back and forth between that GO holders and the COFINA holders. There's issues with regard to junior and senior COFINA. So there's a lot of issues. And again, we would expect that we'd start to get some sense of the direction where the judge is going on this. And again, as I think we've mentioned and others have mentioned, while it is, at this point, in a Title III, most of these situations end up getting settled in terms of consensual agreements. So there's still a lot that will happen between now and, call it, September, October, November, and those are the types of things that we'll wait and we'll assess. But I think clarity and certainty is what we're looking for, and that will play right into the special dividend that we've talked about.

Okay. And then how do you think about the sizing of that special dividend request relative to your excess capital base as well as relative to what one of your peers got last year? And I guess the second part of that question is, to the extent that you are able to -- you request and get a special dividend, I mean, how do you think the balance of share repurchases and debt paydown as you guys, I think, are still looking to get to kind of middle investment-grade rating?

With regard to the special dividend, we view it not so much as one and done but an ongoing activity that we would be pursuing inside National. So as we've mentioned, we have, by our estimates, at least $1.7 billion relative to the S&P calculation for AAA capital. And so if we went -- we wouldn't sit there and say, "Oh, we just want a special dividend in 2017 and be done with it." This should be something, given what we would expect even as the portfolio starts to grow somewhere in the future, that we need to rightsize the capital. So while it wouldn't be $1.7 billion that we'd be asking for, if we ask for $200 million, $300 million, we'd also then be looking for additional special dividends in years after that. So ultimately, we need to make sure that we rightsize the capital. We obviously need to trade that off against making sure that we maintain the highest ratings so that National can continue to offer a compelling value proposition to investors. So we'll look at all those things, but we're pretty optimistic in terms of the future in that regard.

Chas, this is Anthony. On the second part of that, related to the holding company, even today, without special dividends, we're managing the holding company, number one, obviously very focused on maintaining the necessary liquidity cushions, but also, despite share repurchases and so forth, moving towards the leverage targets we set for ourselves to get to that mid-investment-grade rating. So even with the special dividend, that would not change the approach and the focus there, and we would just manage that balance in a way to make sure we still achieve the goal that we've set.

Okay. And then last one for me, probably a question for Jay. I mean, can you just talk about MBIA's strategic goals over the next few years? We're obviously in a situation where Puerto Rico is probably going to be with us for a couple of years and bond insurance penetration and production will probably be depressed compared to historical levers. How do you think about executing for shareholders in that kind of environment? And can you talk about any maybe succession planning that you guys have done?

Two different questions there. In terms of the medium term, I think what you see is what you're going to get, which is we're going to continue to manage, from a financial basis, to drive both book value and adjusted book value as high as we can over the medium term through the use of our excess capital and dividends and tax payments that come up from National. Obviously, not relevant to the shareholder question, but we have a big task still remaining on the MBIA Corp. side to resolve both the recapture of the payments we made on the Zohars and also settle the Credit Suisse. In terms of succession planning, the board has worked on this over the last 5 or 6 years. You've seen a number of changes over the last few years, and you'll see a few more in the next couple of years.

Your next question comes from [Michael Temple], a private investor.

Regarding the growth outlook for the core business going forward, which was briefly alluded to, when we look at the deleveraging that took place with roughly $8 billion of net amortizations and bringing the book down to $102 billion, can you maybe give us some guidance? Assuming a positive resolution with Puerto Rico that puts you in a better light, do you believe there is good capacity for the marketplace to be more accepting of the MBIA name such that new production might begin to accelerate and perhaps balance off the continued deleveraging of your existing portfolio?

Yes. Michael, 2 parts of that. The deleveraging that you mentioned is going to continue to happen, as you indicated. While it's sometimes hard to predict exactly what the refundings will be, we've seen the portfolio running off anywhere between sort of 25% and 35% for the last couple of years. And the first quarter of this year continues that trend. So that will definitely continue to happen. And even as we send money up to the holding company through the as-of-right dividend, until we do extraordinary dividends, the ratio, in particular the leverage ratio, is going to continue to come down to levels that nobody has ever seen and well below normal levels. So that will strengthen the company. In terms of the more important part of your question, which is the growth, we believe that the value proposition for bond insurance is extremely compelling. We're at roughly an industry penetration of 6%. When we look at just our experience since 2014, we're growing at extremely rapid rates, admittedly from a small base. But the more we're out in the marketplace, the more we're ensuring deals, the more attention we're getting, the more policies we're then insuring on top of that. So we feel very good about the outlook. We do take a very long-term approach to this. Interest rates have not been conducive to insurance at this point in time. But we do think interest rates are headed higher. I'm not going to predict exactly when that's going to happen, and there's no magical level that interest rates have to get to. So again, we had a significant increase in 2016 in our production. It's continued at the beginning of this year. And we think, longer term, that the penetration for the industry can be much higher and that issuers and their advisers would really benefit from looking at using insurance and lowering the cost of issuance to the municipality that's the issuer. So we feel very good about that.

To that point about the penetration rate, in previous work that I've gone through, I thought I saw numbers that suggest, as an industry, that maybe the peak penetration rate for the industry was perhaps on the order of 50%. You note that it's currently roughly 6%. Not trying to pin you down to an exact prediction, but from what you've seen and your experience in the marketplace, could 6% become 12%? Could 6% become 20% penetration over the next, say, 2 to 4 years as opposed to asking to predict quarter-to-quarter?

First of all, your reference is correct in that, at its peak, insurance penetration was over 50%. There were many years that it ran 50% and 60%, pre-financial crisis. I think today, with the fact that right now, insurers are AA versus where they used to be AAA, there's a part of the market, which is primarily the under rating -- underlying rating, which we -- AA or AAA, which probably is not going to use insurance just given the strength of the bond insurers. But that still leaves probably roughly half the market. And if you insure sort of half of half, you get numbers that are in the mid-20s in that case. So I think, in your example, 6% could clearly go to 12%, which could go to 20%. And generally, I think people have thought somewhere between 20% and 30% of the total market. And keep in mind, roughly, issuance has been up around the $400 billion level. So if there was penetration of 25% or 30%, you're talking about somewhere between $100 billion to $120 billion that could be insured. So there's plenty of potential there, and I think you're correct in the way you thought about it.

All right. And then one final question regarding Puerto Rico and the special dividend. Since 35% of your exposure is, in fact, PREPA, and we all seem to be optimistic that this one restructuring will be put into force, as you say, September, October time frame, if, in fact, that takes place, as we all hope, will that bring enough clarity to your overall Puerto Rican exposure? Because, clearly, the rest of this is going to probably take much, much longer. Would closure on PREPA be enough for you to confidently go before the regulatory bodies and request some portion of that excess capital for a special dividend?

To your point, the non-PREPA, clearly, could take well past this year, given that we're just starting Title III and it is unknown. With regard to PREPA, if that goes as scheduled, I think it is extremely likely that we would be talking to the Department of Financial Services about a special dividend.

And last question, somewhat nuance, but I'd appreciate your thoughts on it. Since we're talking about "excess capital," and obviously, the regulators are sensitive, but since its excess capital above AAA rating and there will be, hopefully, significant positive progress on fully 1/3 of your book, any real reason to think that they wouldn't be amenable to some requests at that time even though there won't be much clarity on the remaining 2/3 of the book?

Yes. We don't get into the habit of predicting the way regulators are going to respond to any situation, so we'll wait and see.

(Operator Instructions) Your next question comes from the line of Peter Troisi of Barclays.

I think just a follow-up maybe to Andrew's question initially on Corp. It sounds like the case reserves for first lien and second lien exposures maybe went up sequentially, but overall, looks like the case reserves at Corp. in the aggregate went down. So I'm just trying to connect those 2 and fill in the gaps. I mean, is it -- if that's the case, did the CDO reserves -- case reserves go down in the quarter?

It's really more about the payment on Zohar II. So the reserve goes away on Zohar II, and then we get into a recovery mode. So for GAAP, it becomes a VIE, and for stat, it becomes salvage. So your reserve -- your loss reserve for Zohar will go away.

At this time, there are no further questions. I'll now return the call to management for any additional or closing remarks.

Thank you, Lori, and thanks to all of you who listened to our call today. Please contact me directly if you have any additional questions. We also recommend that you visit our website at mbia.com for additional information on the company.

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

That does concludes the MBIA Inc. First Quarter 2017 Financial Results Conference Call. You may now disconnect your lines, and have a wonderful day.