MBIA Inc (MBI) 2017 Q3 法說會逐字稿

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

Thank you, Maria. Welcome to MBIA's conference call for our third quarter 2017 financial results. After the market closed yesterday, we issued and posted several items on our websites, including our financial results, press release, 10-Q, quarterly operating supplements and statutory financial statements for both MBIA Insurance Corp and National Public Finance Guarantee. 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-Qs 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-Qs 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 our 10-K and 10-Qs 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 for the 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-Qs, 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, Bill Fallon and Anthony McKiernan will make some introductory statements. Then we will have a question-and-answer session. Now here's Bill.

Thanks, Greg. Good morning, everyone. A lot has happened since our last call. Hurricane Maria hit Puerto Rico causing significant manage and humanitarian crisis on the island. National significantly increased loss reserves primarily due to its insurance on Puerto Rico credits. We repurchased $250 million of stock, and our board approved a new $250 million share repurchase authorization. MBIA Inc. received a $118 million as-of-right dividend from National, and Inc. sold $130 million of its notes that mature in 2034 to National in an arm's-length intercompany transaction. I will address these developments in turn.

First and foremost, on September 20, Hurricane Maria caused widespread devastation to the island of Puerto Rico, knocking out power and communications, water systems, roads, bridges and disrupting many other services. Our thoughts and prayers are with the people of Puerto Rico. Since we believe the focus should be on recovery efforts, we have withdrawn 2 lawsuits related to our insured debt. In support of the island's recovery, the federal government is providing billions of dollars in aid in the form of storm recovery and additionally loaned $4.1 billion to provide liquidity. As the assessment of the devastation continues, we expect additional assistance to be provided. In terms of the debt restructuring discussions, we believe that the Title III proceedings, the mediations and the rewriting of the fiscal plan should not be rushed, particularly given the significant attention that is needed for the restoration of vital infrastructure on the island. We are standing by, and at the appropriate time, we look forward to working constructively and collaboratively with Puerto Rico and the Oversight Board. We believe that a new fiscal plan should be prepared once more information is available, especially regarding the extent and nature of federal aid. Furthermore, the plan should comply with PROMESA by respecting lawful liens and structures specified in debt indentures, identifying essential expenditures, eliminating budgetary cushions, incorporating revenues as accurately as possible and rightsizing the government.

From a financial results perspective, National's Puerto Rico exposure was the largest factor in its $141 million increase in National's GAAP loss and loss adjustment expense. National also recorded a $71 million investment portfolio impairment on uninsured PREPA bonds for the third quarter. Events in Puerto Rico have created substantial market volatility, including volatility in our stock. With the lower stock prices and higher trading volumes of MBIA's common shares over the last 6 weeks, we're able to fully exhaust the $250 million share repurchase authorization that was approved in June.

National purchased 34 million shares at an average price of $7.35. On November 3, our board approved a new authorization of $250 million for share repurchases. We continue to believe that repurchasing our shares at attractive prices is an effective way to increase long-term value for our shareholders. At the holding company, 2 significant developments occurred after the end of the third quarter: first, in October, Inc. received a $118 million as-of-right dividend from National; second, Inc. sold approximately $130 million of its 5.7% 2034 notes, which it held unretired in its treasury account to National. The sale of the notes will have the dual benefit of increasing National's investment portfolio yield and increasing liquidity at Inc. We believe that the liquidity at Inc. is more than sufficient to meet all its obligations over the foreseeable future.

National's insured losses this year, which will result -- excuse me, which will lead to a full year tax loss, have resulted in the refund of National's 2017 estimated tax payment and will cause the refund of at least a portion of its 2015 tax payment. Anthony will provide more details about the tax escrow and MBIA Inc's. liquidity position.

At quarter-end, National's statutory capital was $3.2 billion, and it had $4.5 billion of claims-paying resources. We believe that National's claims-paying resources are sufficient to ensure that policyholders receive all future payments of interest and principal on their bonds as scheduled. National's insured portfolio reduced by another $12 billion in the third quarter to gross par of $82 billion and has decreased by 26% year-to-date. National's leverage ratio of gross par to statutory capital declined to 26:1 as of September 30, 2017, down from 32:1 at year-end 2016. National's insured portfolio outside of its Puerto Rico credits continues to perform within our expectations. Despite heightened refunding over the last several years, National's insured portfolio remains diverse by sector and single risk. Credit quality remains high, with approximately 80% of insured par rated A or better on an S&P priority basis.

Before concluding my remarks, I want to recognize the many contributions of Jay Brown, who stepped down as CEO in September. Jay has been on the MBIA Inc. board for 30 years and served as the CEO twice for a total for 18 years. His leadership of the company is appreciated by all of us and his decision to return to navigate the obstacles created by the financial crisis was critical to the survival of the company. I personally benefited from Jay's expertise and mentorship and thank him for all that he has done for us.

Now Anthony will cover the financial results.

Thanks, Bill, and good morning, everyone. I will summarize our quarterly GAAP and non-GAAP results, walk through the holding company's liquidity position, taking into account the transactions that occurred after the end of the third quarter that Bill described and then finish with key financial statutory metrics for National and MBIA Corp.

First, just to summarize our year-to-date share repurchase activity, including National's repurchases after quarter-end. In 2017, we have repurchased 43 million shares at an average price of $7.55 per share. This reduced our share count outstanding to approximately 92 million shares. The company reported a consolidated GAAP net loss of $267 million, or $2.17 per share, for the third quarter of 2017 compared to consolidated GAAP net income of $31 million, or $0.23 per share, for the third quarter of 2016. The adverse year-over-year result was primarily due to greater loss and loss adjustment expenses in National related to Puerto Rico exposures and, to a lesser degree, increased loss and loss adjustment expense in MBIA Corp.

In addition, we recorded an investment impairment loss on uninsured Puerto Rico bonds owned by National.

Increased losses at National primarily resulted from additional uncertainty in the amount of ultimate recoveries and the timing of those recoveries in the aftermath of Hurricane Maria.

Our cash flow scenarios assume National could be paying claims for the next several years. The write-down of National-owned uninsured Puerto Rico bonds reflect the adjustments to the market value of the bonds that we purchased in 2016, with approximately $140 million of face value. Combined operating loss was $113 million, or $0.91 per diluted share, for the third quarter of 2017 compared with combined operating income of $5 million, or $0.04 per diluted share, for the third quarter of 2016.

The negative result for the third quarter of 2017 was primarily due to the greater loss and loss adjustment expenses at National. Book value per share was $13.88 as of September 30, 2017, compared with $23.87 as of December 31, 2016. Adjusted book value per share was $24.81 as of September 30, 2017, compared with $31.88 as of December 31, 2016. The decreases in both book value per share and adjusted book value per share since year-end 2016 were primarily due to the full valuation allowance on the company's deferred tax asset taken in the second quarter and increased losses in National, partially offset by the reduction of shares outstanding, resulting from the repurchase of 11.7 million MBIA common shares during the first 3 quarters of 2017.

Given the amount of shares that we have repurchased after the end of the quarter, our ABV per share is clearly different now assuming all other things being equal.

Now I would like to take a few minutes to walk through liquidity at the holding company. As of September 30, 2017, MBIA Inc. held cash and liquid assets of $294 million. There were deposits totaling $259 million in the tax escrow account as of September 30, 2017, and approximately $630 million in market value assets pledged for the GICs and interest rate swaps combined. MBIA Inc. relies primarily on as-of-right annual dividends from National as well as tax escrow releases to fund its operations.

As previously mentioned, in October of this year, MBIA Inc. received the annual as-of-right dividend of $118 million from National. The as-of-right dividend is sized at the lesser of National's prior 12 months of net investment income, or 10% of policyholders' surplus, and we are currently governed by the first test.

In addition to the as-of-right dividend, as Bill noted, National purchased approximately $130 million of MBIA Inc's. 2034 5.7% coupon debt from MBIA Inc. in early November. MBIA Inc. repurchased these notes in 2012, but did not retire them. This transaction had no effect on MBIA Inc.'s consolidated outstanding debt obligations.

With the as-of-right dividend and the debt sale, MBIA Inc.'s cash position increased from $294 million at quarter-end to about $540 million to date. This provides additional resources for the holding company to service its debt and expenses, with our next significant MTN and holding company debt maturities occurring in 2021 and 2022, respectively.

Tax escrow releases are subject to the company's tax-sharing agreement. As part of that agreement, to the degree National generates taxable income, taxes are paid into the tax escrow account and are eligible for release to the holding company 2 years later, subject to the 2-year tax loss carryback provision.

The holding company benefits from these releases, as the consolidated enterprise is not a payer of regular cash taxes, given our NOL position. Should National generate a loss during the 2-year tax loss carryback window, it is entitled to claw back some or all of its tax payments. As we stated last quarter, National paid $22 million into the tax escrow account related to the 2017 tax year. That deposit was returned to National on November 1. How much of National's 2015 tax payment of $130 million that will be returned to National in 2018 will depend on National's financial results for the full year of 2017.

As of the end of the third quarter, National has recorded a receivable of $64 million regarding that tax refund.

We expect National to be a profitable company going forward and resume making its tax payment obligations into the tax escrow facility. And for as long as MBIA Inc. has available NOLs, it will benefit from tax escrow releases.

We manage holding company liquidity taking into account potential disruptions to tax escrow releases, and we set liquidity cushions with the assumption that there could be a couple of years where the as-of-right dividend would be the primary inflow to the holding company. We also have access to an advances agreement between National and the holding company sized at 3% of admitted assets of National or approximately $125 million as of September 30, 2017.

Turning to the operating company's statutory results. National had statutory capital of $3.2 billion and claims-paying resources totaling $4.5 billion as of September 30, 2017. National had a $4 billion investment portfolio, and its investments are high quality, and the market value of its fixed income investments approximated the book value of its investments at September 30. National paid $216 million of insurance claims from its investment portfolio for July 1 Puerto Rico bond payments. National had a statutory net loss of $134 million for the third quarter of 2017 compared to a statutory net profit of $40 million for the quarter ended September 30, 2016. The loss in the third quarter of 2017 was primarily due to $139 million of loss in LAE and the owned uninsured Puerto Rico bond write-down I previously summarized.

Turning to MBIA Corp. Its liquidity was $93 million as of 9/30/17. MBIA Corp. had a statutory net loss of $74 million for the third quarter of 2017 and a statutory net loss of $40 million for the third quarter of 2016. The unfavorable variance was primarily due to loss in LAE associated with the expected proceeds from a mortgage insurance settlement related to our second lien RMBS portfolio being less than we previously projected and capitalized interest expense on the Zohar-related loan facility.

As of September 30, 2017, the statutory capital of MBIA Corp. was $473 million and claims-paying resources totaled $1.5 billion. Corp.'s gross par outstanding continues to reduce and was approximately $17 billion as of 9/30/17.

And now we will turn the call over to the operator to begin the question-and-answer session.

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

I was wondering if you could discuss the implications for MBIA's NOLs at MBIA Inc. from the share repurchases. Based on the holdings that were reported as of June 30, it looks like a number of holders would now be 5% owners of MBIA, and I'm wondering if there's a change-of-control risk that's being in place?

Yes, Andrew, with regard to the June 30 holding, there is no change of control when you factor in the share repurchase that occurred.

Meaning -- and why is that? I mean, generally, it's a test of 5% holders. Could this keep -- I mean, could you continue to buy shares without running into this limit? Is there a limit out there that you believe based off of the big holders that you have?

Probably the discussions around a change in control are probably handled best offline. It's rather a detailed calculation, as you are aware. Not every investor who is over 5% counts as a qualified investor with regard to the calculation of a change in control. So that may be what becomes more complicated to see without knowing each of the investors.

Got it. Okay. We will follow up. Another question. At National, there'd now be probably about 35 million shares held, I think, year-to-date. How is those shares count for statutory capital purpose?

The statutory capital, the shares that National owns are a non-admitted asset.

Got it. Okay. Can National resell its stock to the market? Can MBIA Inc. just sell stock directly to National?

We'll answer the first question. National could sell the shares to the market. The second question, you're asking whether Inc. could issue new shares or treasury shares to National?

Yes, exactly. Inc. is holding 100-plus million shares in treasury. Could those also be a future sale?

Technically, it could. But I'm not sure, given that we've been repurchasing shares in the open market, why we would issue shares at this point in time. But it could do it.

Got it. And then would -- could National resell. It now holds $260 million plus of the 2034 notes. Are those free and clear? I'm just wondering National is putting a lot of money into MBIA Inc.'s securities, and there's a lot of uncertainty in Puerto Rico. Obviously, you've thought through permutations of what can happen. I'm trying to understand the flexibility that National has as well as MBIA Inc. in the future.

Keep in mind, National's investment portfolio is about $4 billion. So even when you take, for example, the $250 million of stock that we recently purchased, it's a very, very small portion of National's investment portfolio. With regards to the approximately $266 million of Inc. debt that you referenced, National could sell that back into the marketplace, right? It has a CUSIP. It is a marketable instrument, and it is part of Inc. debt, and, yes, National could sell that. And some of it does trade in the marketplace.

And would you look at other versions of holdco debt, like MTN's? Would that also be a candidate for National to purchase?

Technically, it could do it. But it's not something we haven't considered National buying MTN debt.

Got it. And then last question. Anthony, I think I heard in your comments that at Corp., there was a RMBS settlement for less than previously expected. Which counterparty was that with?

This was a mortgage settlement -- a mortgage insurance settlement that we were not a direct party to. That was part of our second lien RMBS portfolio. We're under pretty strict confidentiality provisions related to it. So again, we weren't a direct party to it, but our trusts were impacted by it. We expected a certain amount of recovery. We expected that recovery about a year from now. So on a positive side, we're getting that recovery sooner, but it's less than we expected. That's about as much as I can say about it.

Got it. And on Crédit Suisse, could you just remind me when we are in the process there?

At this point, we're really just on the pace of looking at a trial over the next year. At this point, with all the different hearings and so forth that are underway, we believe we're targeting trial in 2018.

Mid-2018 you think?

It's really hard to gauge an exact date of a trial given all the summary judgment hearings and so forth that are underway. The summary judgment motions were just argued, so we're going to need to get some resolution to those items, and then I think it will come clear when a trial day will occur .

Our next question comes from the line of Brett Gibson of JP Morgan.

I wanted to follow up briefly on the repurchase from National of the holdco stock and bonds. So are we -- are you running into any kind of concentration issues from a statutory perspective from the ownership of -- the combined ownership of stock and bonds?

The answer is no. We are aware of any limits that might exist. But no in particular. For example, on the stock, there is -- in terms of any limits, there is plenty of room against any limit that might exist on the statutory regulations.

And what are those limits? Is it 5% of investment portfolio? Is it more? Can you help us understand?

Well, one of the limits under insurance law is a percent of statutory capital. But it's 35% of statutory capital with regard to the equity that we've been purchasing.

It's actually 35% of surplus for equity. And then there is a test related to debt for an individual counterparty that's 10% of admitted assets. So under New York insurance law, if you were to look at it generally, it's under Sections 1408 and 1409. But as Bill said, for equity, in particular, it's 35% of policyholders' surplus. And for debt, it's a separate measurement, which is 10% of admitted assets.

Perfect. Okay. The next one is, did the New York insurance regulator has to approve both of these transactions? Was there a discussion about this? Is that like a positive affirmation?

First of all, just based on your last question, again, we are within all New York insurance law limits, so we did not need to seek approval for these transactions. We always keep the regulator informed of anything that we're doing, especially anything of a material nature.

Okay. And then just lastly on this, does the holdco own any other bonds that it hasn't retired that could be potential candidates for this in the future?

Yes. There's about $50 million of additional MBIA Inc. debt related to the 2034 maturity debt and a smaller amount of our 2025 debt. It's about $50 million in total that it owns and has not retired.

Great. The last one for me is related to the ongoing Zohar liquidation. Can you just discuss how the progress has been relative to expectations? And do you have any sense for any kind of bigger liquidations or anything else that could be possible there, a time line, how is everything looking?

Sure. Well, at this point, there are several different cases that are actually being litigated in different courts. The most near-term item is an action in Delaware court that was filed by the collateral manager for the Zohars related to, generally speaking, equity ownership and control of a certain number of the portfolio companies. At this point, decision is pending, and we're waiting for that. That's probably the nearest term decision that we'd expect. Other than that, we really can't comment on where we are there.

But related to asset sales and liquidation of that, nothing to comment (inaudible)?

I've no comment on that.

Our next question comes from the line of [Jeffrey Dunn] of (inaudible) and Partner.

Anthony, I just wanted to make sure I have the escrow mechanics correct. Given an expectation for tax refund this year, does that affect -- that eliminates any kind of release for 2020? And then the release that we would expect in 1Q '18 will be impaired by yet as an unknown amount based on the additional losses this year. Is that a correct understanding?

That's correct. Your first part, given that we expect there'll be a loss for the year, there will be no contributions for the 2017 tax year, which means no releases in 2020. For the second part of your question, the original expectation was that $130 million would be released in January. At this point, National has a receivable as of the end of the third quarter of $64 million. But how much of that actually is refunded to National, whether it's more or less, will be based on the fourth quarter and full year results for National. So you've got it right.

Okay. And just hypothetically, if the receivable amount exceeded the $130 million this year, would it then eat into the '19 escrow release?

Yes.

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

Just on the 2034s that National bought from the holdco subsequent to the quarter-end, was that $130 million included in the $1.2 billion of assets on the corporate segment balance sheet as of September?

No. Because, again, it's owned by Inc., so it's not on Inc.'s balance sheet.

Okay. So that $130 million really wasn't contemplated anywhere in the particulars disclosed in the operating supplemental then?

That's correct.

At this time, there are no further questions. I will turn the call back over to Mr. Diamond for any additional or closing remarks.

Thank you, Maria. And thanks to all of those for listening to our call today. Please contact us directly if you have 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.

Thank you. Ladies and gentlemen, this does conclude today's conference call. You may now disconnect.