MBIA Inc (MBI) 2017 Q4 法說會逐字稿

Welcome to the MBIA Inc. Fourth Quarter and Full Year 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, Maria. Welcome to MBIA's conference call for our fourth quarter and full year 2017 financial results.

After the market closed yesterday, we issued and posted several items on our websites, including our financial results, press release, the 10-K, 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 and the other SEC filings as our company's definitive disclosures are incorporated in those documents. We urge investors to read our 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 included in our remarks today are also included in our 10-K 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 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 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, Bill Fallon and Anthony McKiernan will provide some introductory comments. And then a question-and-answer session will follow. Now here's Bill Fallon.

Thanks, Greg. Good morning, everyone. During the fourth quarter, we continued to focus on our priorities of remediating our Puerto Rico credits and managing liquidity and capital. Puerto Rico continues with its efforts to recover from the aftermath of Hurricane Maria, which hit Puerto Rico on September 20 of last year. While key economic areas on the island are up and running, other parts of the island are still without power and clean water. Estimates indicate that it may take several more months before these services are fully restored. In February, the federal government approved $16.5 billion of aid in addition to the $4.9 billion approved in October for Puerto Rico. Based on previous natural disasters in the U.S., there will likely be substantial additional aid approved to help address the humanitarian crisis and the suffering that the residents of Puerto Rico have experienced.

We encourage Governor Rosselló to work with the federal government so that the aid can be distributed quickly and have the maximum benefit to the people of Puerto Rico. In the meantime, preliminary estimates are encouraging for the prospective economic activity on the island. Even the Commonwealth's own revised fiscal plan includes expectations for revenue growth in 3 to 5 years. However, we believe that the new fiscal plan needs to be substantially modified to comply with PROMESA's requirement to respect lawful liens and structures as specified in the Puerto Rico debt indentures and more appropriately reflect a rightsizing of the government. The plan also needs to identify essential or nonessential expenses. We remain committed and ready to work constructively and collaboratively with Puerto Rico and the Oversight Board, and we encourage them to work with creditors in a meaningful way before trying to certify the fiscal plan.

Last month Judge Swain ruled that PROMESA does not require the HTA to continue paying debt service to its creditors holding secured special revenue bonds during the pendency of the Title III proceedings. We respectfully disagree with this decision and are in the process of appealing it. Judge Swain also issued several rulings regarding the Commonwealth's efforts to lend cash and its many accounts to PREPA on a senior-secured basis that would step ahead of existing PREPA creditors and effectively take control of a plan of adjustment for PREPA.

While a $300 million loan was ultimately approved, we believe it was critically important that Judge Swain rejected the Oversight Board's propose -- proposal for a $1 billion facility and permitted a loan only after disallowing the requesting priming lien recognizing that PREPA has failed to adequately demonstrate need for the size of the requested loan or show any efforts to negotiate or source alternatives. Judge Swain also held that PREPA must take into account the interest of its creditors in formulating the terms of this or any future DIP loan.

As previously reported, during the early part of the fourth quarter, National purchased $225 million of MBIA's stock that exhausted our previous share repurchase authorization. Under the new $250 million authorization, National spent approximately $14 million since January 1 to buy 2 million shares at an average price of $7.25. We continue to believe that repurchasing our shares at attractive prices is a very effective way to increase long-term value for our shareholders.

Before I turn the call over to Anthony, I want to highlight that during 2017 we completed the final steps of the multiyear succession plan that saw the departures of our former General Counsel, Ram Wertheim; Controller, Doug Hamilton; and CEO, Jay Brown. Each of them served the company and its shareholders for many years. Their efforts were instrumental in leading the company in the aftermath of the financial crisis. In particular, I'd like to recognize Jay once again for his many contributions to MBIA over his 30 years of involvement with the company. I thank him for all that he has done for us.

Now Anthony will cover the financial results.

Thanks, Bill, and good morning. I will summarize our annual and quarterly GAAP and non-GAAP results, the holding company's liquidity position, and then finish with key financial statutory metrics for National and MBIA Corp.

The company reported a consolidated GAAP net loss of $1.6 billion, $13.50 per share for the year ended December 31, 2017, compared to a consolidated GAAP net loss of $338 million or negative $2.54 per share for the year ended December 31, 2016.

The adverse year-over-year result was primarily due to the full valuation allowance on the company's net deferred tax assets in the second quarter of 2017 as well as greater loss and loss adjustment expenses in National related to its insured Puerto Rico exposures. Partially offsetting these items was an impairment loss recorded in the fourth quarter of 2016 related to the sale of MBIA UK. The Tax Cuts and Jobs Act that became effective in 2018 had very little impact on our net loss this year as we had already taken a full valuation allowance on our deferred tax asset.

Adjusted net loss, our non-GAAP measure for income, was $410 million or negative $3.45 per diluted share for the year-end 2017 compared with adjusted net income of $30 million or $0.23 per diluted share for year-end 2016. The negative result for 2017 was primarily due to greater loss and loss adjustment expenses and lower-earned premiums at National.

Book value per share was $15.44 as of December 31, 2017, compared with $23.87 as of December 31, 2016. Our non-GAAP adjusted book value per share was $29.32 as of December 31, 2017, compared with $31.88 as of December 31, 2016.

The decreases in both book value per share and adjusted book value per share year-over-year were primarily due to the full valuation allowance on the company's net deferred tax asset and increased losses in National, partially offset by the reduction of shares outstanding resulting from the repurchase of 43 million MBIA common shares in 2017.

For the fourth quarter of 2017, the company reported a consolidated GAAP net loss of $37 million or negative $0.39 per share compared to a consolidated GAAP net loss of $265 million or negative $2.01 per share for the fourth quarter of 2016. The improved result period-over-period was primarily due to the impairment loss related to the sale of MBIA UK recorded in the fourth quarter of 2016 and mark-to-market gains within VIEs in the fourth quarter of 2017, partially offset by greater loss and loss adjustment expenses in National related to Puerto Rico exposures.

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

Adjusted net loss was $167 million or negative $1.52 per diluted share for the fourth quarter 2017 compared with adjusted net loss of $6 million or negative $0.05 per diluted share for the fourth quarter of 2016. The adverse result for the fourth quarter of 2017 was primarily due to the greater loss and loss adjustment expenses and lower premium earnings at National, partially offset by lower operating expenses.

Turning to the holding company. MBIA Inc's. total assets at 12/31/17 were $1.3 billion. Of the total, $590 million in market value assets were pledged for the GICs and interest rate swaps. Also, the tax escrow account had $234 million of deposits, representing National's tax liabilities for the 2015 and 2016 tax years. As of December 31, 2017, MBIA Inc. held cash and liquid assets of $419 million.

As we mentioned on our last call, in November of last year, MBIA Inc. received the annual as-of-right dividend of $118 million from National in October. Due to National's net loss in 2017, National made no deposits into the tax escrow account. And after National's clawback from its 2015 tax payment, the holding company received $18 million in January.

National made $108 million in tax payments to the tax escrow account for its 2016 tax year, which was the balance maintained in the tax escrow at the end of January and represents the amount that could be released to the holding company in January of 2019.

It is worthwhile noting that as a result of the change in the U.S. corporate tax rate from 35% to 21% under the Tax Cuts and Jobs Act, going forward, National's taxable income will be subject to lower tax rates, thereby reducing its tax payment under the company's tax sharing agreement, everything else being equal.

In the fourth quarter, MBIA Inc. repurchased the 100 million euro-denominated global-funding MTN maturing in 2021 at a 16% discount to par. Our next significant payment of GFL and holding company debt now occurs in 2022.

Turning to the operating company's statutory results. National had statutory capital of $2.8 billion and claims-paying resources totaling $4.1 billion as of December 31, 2017. National paid $242 million of insurance claims from its investment portfolio for Puerto Rico bond payments in 2017 and $415 million in total for 2016 and 2017 combined. In January, National paid an additional $69 million in claims related to Puerto Rico debt service.

At year-end 2017, National's total fixed income investment portfolio, including cash and cash equivalents had a market value of $3.5 billion. National had a statutory net loss of $95 million for the fourth quarter of 2017 compared to a statutory net income of $52 million for the fourth quarter of 2016. The loss in the fourth quarter of 2017 was primarily due to $174 million of loss in LAE primarily on Puerto Rico exposures.

National's insured portfolio experienced one-off of $10 billion in the fourth quarter and $38 billion for the year, ending with gross par insured of $72 billion as of year-end 2017. For the year, National had a statutory loss of $321 million versus net income of $192 million in 2016 due to $584 million of loss in LAE and realized investment losses of $94 million primarily related to owned uninsured Puerto Rico bonds.

Turning to MBIA Corp. Its liquidity was $145 million as of 12/31/17. MBIA Corp. had statutory net loss of $22 million for the fourth quarter of 2017 and a statutory net loss of $178 million for the fourth quarter of 2016. The favorable variance was primarily due to impairment losses related to the sale of MBIA UK recorded in 2016 and lower loss in LAE in 2017 offset by capitalized interest expense on the Zohar-related MZ funding loan facility. For the year ended 12/31/17 MBIA Corp. had statutory net income of $107 million versus a net loss of $323 million in 2016 for largely, the same reasons impacting the quarter-over-quarter results.

As of December 31, 2017, the statutory capital of MBIA Insurance Corp was $464 million and claims-paying resources totaled $1.5 billion. MBIA Corp.'s gross par outstanding continued to reduce and was approximately $15 billion as of 12/31/17.

Actually, I wanted to make one correction. For 2016 and 2017, National actually paid $465 million of claims, not $415 million.

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

(Operator Instructions) Your first question comes from Andrew Gadlin of Odeon.

Apologies if I missed this in the script earlier. Could you help us understand exactly how much liquidity is available at the holding company? And the biggest components there, as we sit here today obviously, after whatever distributions were made in January?

Today, the liquidity position at the holding -- as of December 31 is $419 million. So the remaining assets generally at the holding company consist of investments that are supported for our ALM business and the tax escrow account, which had a balance of $234 million as of December. So the liquidity position at the end of the year was $419 million, which is cash and liquid investments.

And then there was $18 million additional released after the quarter, right?

After the quarter. That's correct.

And then outside of assets held in the ALM program, where -- which I seem refer to -- that's what you're calling the GICs escrow account. Are there any other assets that are illiquid, but also held at the holding company, like MBIA-originated corporate debt?

There's not any other material assets.

Our next question comes from the line of Bose George of KBW.

In terms of share repurchase activity, it was lower this quarter than last quarter. And just given the capacity at National to repurchase shares, is the main difference between last quarter and this, just the share price being higher, or are there other things you're trying to balance as well?

The share price is one of those things. As we've talked about before, it's something that we're going to do opportunistically. We have plenty of authorization at National. It is a dynamic situation and as you saw, we did use liquidity to purchase at the holding company one of the notes in 2021. So it really is a dynamic situation. We look at lots of factors, including the stock price. As you did see, the share repurchases that we did this year were at a little bit lower price than the previous quarter, and we evaluate this on a regular basis.

And then just in terms of capacity at National to purchase MBIA debt, can you just remind us where that stands? And is that an option in terms of addressing some debt maturities?

I mean, sorry in terms of buying Inc. debt?

Yes.

Yes. Yes. In terms of buying Inc. debt at National. Yes.

Yes. It is definitely a possibility. We did buy some last quarter. And we look at those situations as well.

And just in terms of the capacity to do that, can you remind me what the restriction there is?

Sure. It's generally 10% of admitted assets under Article 14 of the Insurance Law.

Okay. So that works at around 400 -- a little north of $400 million that you guys can own in total?

That's correct.

Our next question comes from the line of Peter Troisi with Barclays.

I just have maybe just another question on the share buybacks. How do you think about the capacity that you have to buy back shares at the holdco versus National? Like is the capacity fungible in your mind? In other words, like is the plan to utilize National's balance sheet to buy back the shares of the holding company before you use actual holding company cash to do stock, and how do you think about that?

Yes. As you know, National has $3.5 billion approximately of assets and so, therefore, there's a lot more flexibility in capacity there. The assets at Inc., so the first priority is to make sure we use those to meet any of the near-term and mid-term -- medium-term obligations in terms of liquidity that the holding company has. So those are some of the factors that we look at. And, again, we try to optimize across those different dimensions.

Okay. That makes sense. And then just on the debt buybacks, do you see any additional opportunities out there to buy back additional MTNs? Or potentially buyback more holding company debt?

Yes. There's definitely opportunities we're continually looking at. As you've seen over the last quarter, we've done it both through National and then Inc. opportunistically was able to purchase the 2021 MTN. So we continue to look at those opportunities. We're obviously more focused on the 2022 maturities at this point. But we will look at good opportunities throughout the maturities spectrum.

Our next question comes from the line of Brett Gibson of JPMorgan.

I wanted to address the Moody's ratings. So for a while, you said that you terminated the agreement there, the rating remains outstanding. Can you talk about why there's still a Moody's rating? And do you have any expectations for how long that will be outstanding?

The answer is, we don't. That really is up to Moody's. We terminated the relationship and asked that the rating be withdrawn. And they will rate it, I guess, as long as they feel they have adequate information to do so. Beyond that, we don't know anything else.

Okay. But they've given you no indication?

Correct.

And then I wanted to address the $10 billion of reduction in par at National. Can you talk about the drivers for that? Was that due any action on your part? Was it normal runoff? Maybe just provide a little bit color -- a little bit more color on that. And does that reduce your future revenue any more than you previously projected?

Yes. So the $10 billion is also consistent with what happened during the fall year for 2017 where we had about $38 billion come off. Really there we think of it in 2 forms -- 2 forms. There's the scheduled amortization where the debt just pays down. And then there are refundings that take place. So there was just a lot of activity. Usually, things have a 10-year call. So when it gets somewhere around the 10-year call, you see quite a bit of refunding activity take place. And so that's what we saw. There wasn't really anything beyond those 2 things across the runoff, either the fourth quarter or for the full year 2017.

Our next question comes from the line of John Staley of Staley Capital Advisers.

I had a question on an update on the Crédit Suisse litigation and wondered the status and any suggestions of potential recovery?

As far as an update, we don't have much of an update right now. There are still proceedings underway. We'll know better soon whether or not there will be a trial date set during this year. So we're waiting on that at this point. As far as recovery estimates, on our balance sheet we have listed loan recoverable there, which is around $407 million. That's the number on our financial statements.

Our next question comes from the line of Jack Barnes of Samlyn Capital.

Just wanted to spend a minute on your loss reserves of Puerto Rico and the methodology for setting them. The reserves are quite a bit lower than peers. I think Ambac's around 10% of gross debt service and AGO is around 15%. You guys on the other hand are around 2%, if I have my math right. And in general, the reserves for the industry just seem low relative to what rating agencies and market participants expect the ultimate loss content on Puerto Rico to be. So I guess, the question is can you just help us better understand the methodology for setting the reserves? And why your reserves might differ in such a meaningful way from both peer levels and from consensus expects the loss content in Puerto Rico to be?

Sure. So a couple -- why don't I start with the last part and then go to the methodology. As far as our loss reserves, if you're referring to the statutory statements, the loss in LAE that's listed in the statutory liabilities is a net number. So there are salvage recoverables there, and then there are loss reserves there. So the net number does not represent what the gross loss reserves are for Puerto Rico, nor do they represent what the incurred loss are -- loss has been on claims we've already paid. So we've taken a substantial amount of loss in LAE expenses, we said, over $500 million this year on Puerto Rico. So the -- I'm not going to go into exact percentages, but I would say that we are certainly not off from what our peers would be at this point. Second, from the standpoint of methodology, every quarter we evaluate the information that we're given. We have a set modeling regime, which looks at a myriad of possibilities and outcomes related to the amount of payments that we're going to make, for how long we're going to make those payments. And then the timing and amount of recoveries. We update those models every quarter based on the information available to us. And so, for example, this quarter we took an increase in our loss reserves based on our views of the information that we have.

Okay. Great. That's helpful. I guess just drilling down that for one second. If I look at the statutory balance sheet and the reserves there, it appears about $200 million or a little bit less net reserve in National. And I just compare that to say Assured Guaranty, which has about $1.2 billion with a similar gross debt service. And I understand they have a different mix and maybe that's part of the issue. But it just seemed like a large discrepancy in maybe -- is that related mostly to the difference in mix or there are other factors?

Yes. Couple of things. There is difference in mix. It's probably better to have a follow-up call off-line. You've got to go back over multiple years from the time any company started taking reserves on Puerto Rico to get to the actual number. The analysis you're doing is not a complete picture of the reserves that any of those companies have against Puerto Rico and the losses that have been incurred since inception of taking losses.

(Operator Instructions) Our next question comes from the line of Geoffrey Dunn from Dowling & Partners.

First, I think I missed this, but assuming that National's breakeven are better for '18, what is the anticipated escrow release balance for January 19?

$108 million.

$108 million. Okay. And then what is the ability for the company to create more capacity at National for buyback? And National bought stock several years ago. And I think you were able to gradually dividend up to the company or use it to pay expenses. What is the opportunity to shift some of the stock that you bought back in the fourth quarter up to the holding company say over the next year or 2?

Yes. We're still coming the 3 ways that we talk about moving cash or capital for that matter from National to the holding company. So it would be either through the as-of-right dividend. So instead of paying cash, you could pay part of it in the MBIA stock. Same thing with the money for the tax payments that National makes up to the holding company go into escrow or through a special distribution that will be approved by the Department of Financial Services.

Is there an expense mechanism as well, or just basically, replacing cash dividend or escrow fund releases?

Okay. Yes. It would pretty much be in the 3 ways I just described.

Okay. And then when I look at your reserving history for Puerto Rico, obviously, there's been a big acceleration in the last 6 months. I mean, is the hurricane really the big trigger point here that's changed your probability assessments versus call it the prior 18 months?

I think the hurricane is the biggest factor. And as we said before, we continue to look at this. We gather new information. I will admit, we think the information is probably incomplete. But we just continue to look at this and learn and things evolve. But the hurricane was the single biggest factor over the last 6 months.

And for the fourth quarter, was the factor that the fiscal plan -- I think everybody expected it to be a pretty poor plan. Is that the main trigger for the fourth quarter?

Again, it would be a combination of things. The fiscal plan, as you know, the first new version had 0 debt service. Then it had a slight amount of -- or in the revision showed some debt service. But again, I think that was just one factor and again, just what we continue to learn about the situation in total.

Our next question comes from the line of Christian Littlejohn of Marble Ridge Capital.

I was just wondering if you could please give us an update on the [Delaware] litigation from your perspective and any expectation for resolution there?

So on the litigation front right now, the next real date of materiality is March 21, where the appeal is being heard in Delaware, which just to remind you is where several months ago, the Delaware courts decided in favor of the Zohars related to signed equity ownership for 3 portfolio companies that were in the Zohar transactions. That decision was appealed and the hearing is scheduled for March 21. So that's the next court date of import. Other than that, can't really comment on the situation.

Are there other key parts of the litigation you guys are following closely, or is that really the -- a main one that we should be focused on?

There's a myriad of other lawsuits out there, but nothing we would consider to be material at this point.

And at this time, there are no further questions. I would like to turn the floor back over to Greg 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 any questions. We 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.