MBIA Inc (MBI) 2018 Q1 法說會逐字稿

Welcome to the MBIA Inc. First Quarter 2018 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 first quarter 2018 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 our 10-K and 10-Q, 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 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 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, Bill Fallon and Anthony McKiernan will provide some introductory comments, then a question-and-answer session will follow.

Now here's Bill Fallon.

Thanks, Greg. Good morning, everyone. Thanks for joining us today. During the first quarter, we continued to focus on our priorities of remediating our Puerto Rico credits and managing liquidity and capital. While there has been considerable news coverage on various topics related to Puerto Rico over the last few months, in our view, there have not been many concrete developments.

For the quarter, we increased the probability weighting of certain loss scenarios to reflect the court ruling with respect to the payment of special revenue bonds during the pendency of bankruptcy, as well as continued uncertainty regarding the scope and timing of federal aid Puerto Rico can access to rebuild in the aftermath of Hurricane Maria.

These are the primary reasons for the increases to National's loss reserves for the quarter. In April, the Oversight Board rejected the government's fiscal plans and certified their own fiscal plans for the Commonwealth, PREPA and the Highway & Transportation Authority, among others. We believe that the new certified fiscal plans still fail to properly comply with PROMESA's requirements to respect lawful liens and structures, as specified in the Puerto Rico debt indentures, and to appropriately incorporate a rightsizing of the government. We remain committed to working constructively and collaboratively with Puerto Rico and the Oversight Board. But simultaneously, we intend to vigorously pursue, as necessary, our rights and remedies as an insurer of those bonds.

Last month, the Department of Housing and Urban Development approved $18.5 billion in aid for Puerto Rico, largely for rebuilding housing and infrastructure on the island. Reports have stated that the HUD funds can be used for housing, economic development and infrastructure, which may include repairs to the island's power grid. The other credits in our insurance portfolios continue to perform in line with our expectations. National's insured portfolio has further reduced to $67 billion, gross par outstanding at the end of the quarter. Its leverage ratio gross par to statutory capital was 24:1, down from 26:1 at year-end 2017.

Turning to other matters. During the first quarter, National spent $14 million to buy 2 million shares of MBIA's common shares at an average price of $7.25 per share. We continue to believe that repurchasing our shares at attractive prices is an effective way to increase long-term value for our shareholders. As of May 3rd, we had $236 million remaining under our existing share repurchase authorization.

For the first quarter, we reduced consolidated operating expenses to $20 million, which was a 31% reduction versus last year's first quarter, and puts us in good position to accomplish our objective of operating expenses of less than $80 million for the year.

After the quarter end, MBIA Insurance Corp. announced that it had reached a settlement with Lynn Tilton and other parties, which, if approved by the bankruptcy court, should result in a process to facilitate the repayment of almost $1 billion in insurance claims paid by MBIA Insurance Corp. on the 2 Zohar transactions. The hearing to confirm the settlement is scheduled for May 18.

Now Anthony will cover the financial results.

Thanks, Bill, and good morning, everyone. I will summarize our first quarter 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 $98 million or negative $1.12 per share for the first quarter ended March 31, 2018, compared to a consolidated GAAP net loss of $72 million or negative $0.55 per share for the quarter ended March 31, 2017.

Losses before income taxes for the first quarter of 2018 declined to $96 million versus losses of $120 million for the first quarter of 2017. Lower loss and LAE expense at MBIA Insurance Corp. and favorable mark-to-market changes were partially offset by lower investment income and premium earnings as well as higher loss in LAE expense at National.

The adverse after-quarter -- the adverse after-tax quarter-after-quarter result was primarily due to an increase in our deferred tax valuation allowance this quarter, which offset the tax benefit of our pretax loss. As a reminder, we began recording a full valuation allowance on the DTA in the second quarter of 2017.

Adjusted net loss, our non-GAAP measure for income, was $61 million or negative $0.69 per diluted share for the first quarter of 2018 compared with adjusted net income of $9 million or $0.07 per diluted share for the first quarter of 2017. The unfavorable change was primarily due to higher loss and loss adjustment expenses at National related to its insured Puerto Rico exposures and lower premium earnings.

Book value per share was $13.97 as of March 31, 2018, versus $15.44 as of December 31, 2017. Our adjusted book value, a non-GAAP measure that management believes provides a better representation of the fundamental value of the company, was $28.60 per share as of March 31, 2018, versus $29.32 as of December 31, 2017. The decreases in both book value per share and adjusted book value per share since year-end were primarily due to the net loss for the quarter, partially offset by a reduction in shares outstanding resulting from the repurchase of 2 million MBIA Inc. common shares during the quarter.

As Bill stated, the average purchase price for the shares was $7.25, and we have $236 million remaining on the $250 million share repurchase authorization approved by the board in November 2017.

On April 16, we filed an 8-K that reported that we issued 1.2 million of MBIA common shares in connection with the exercise of warrants related to 9.9 million of MBIA's common shares. Those warrants were subject to expiration in early May and were exercised based on the closing price of MBIA stock on April 12. The contract called for a noncash net settlement of the transaction, which resulted in the issuance of 1.2 million shares.

There are additional warrants outstanding related to 1.9 million shares of MBIA stock that have comparable terms and are subject to expiration in early August of this year. As of May 3, 2018, there were 90.5 million shares of MBIA common outstanding.

Turning to the holding company. The corporate segment's total assets at March 31, 2018, were $1.2 billion. Of the total, over $550 million in market value assets were pledged to the GICs and interest rate swaps supporting the GIC operation; $108 million represents the tax escrow deposit of National's tax liability for the 2016 tax year; and $419 million was cash and liquid assets held by MBIA Inc.

As we mentioned on our last call, due to National's net loss in 2017, there are no deposits in the tax escrow account for the 2017 tax year. Most of National's 2015 tax payment was returned to National and $18 million was released to the holding company.

In the first quarter, MBIA Inc. repurchased $20 million par of the MBIA Global Funding MTN maturing in July 2018, effectively at par, but sparing the remaining unpaid coupons. The holding company currently has enough cash and liquid assets to cover operating expenses and debt service into 2022 when the next significant maturities of holding company and GFL debt are due.

Turning to the operating company's statutory results. National had a statutory net loss of $1 million for the first quarter of 2018 compared to statutory net income of $32 million for the prior comparable quarter, primarily due to $43 million of loss in LAE, largely for certain of its Puerto Rico exposures.

National maintains statutory capital of $2.7 billion in claims-paying resources totaling $4.1 billion as of March 31, 2018. It paid $69 million of gross insurance claims for Puerto Rico bond payments during the quarter.

The total fixed income investment portfolio, including cash and cash equivalents, had a book-adjusted carrying value of $3.4 billion as of March 31.

Turning to MBIA Corp., its liquidity was $130 million as of March 31, 2018. It had a statutory net loss of $10 million for the first quarter of 2018 compared to statutory net income of $178 million for the first quarter of 2017, with the unfavorable variance primarily due to gains related to the sale of MBIA UK in 2017, somewhat offset by lower loss in LAE expense in 2018.

As of March 31, 2018, the statutory capital of MBIA Insurance Corp. was $455 million, and claims-paying resources totaled $1.5 billion.

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 Bose George of KBW.

First, just on the realized losses this quarter, actually what was driving that? And how much of that was at corp versus National?

The majority of it was at National, and it was just a sale of securities at a loss. So it [wasn't meant to be a high].

Okay, makes sense. And then in terms of the Zohar benefit that you discussed, is that -- is it safe to say that the upside there is really to corp and to MZ Funding, and so from -- in terms of the opco, we shouldn't really worry about that?

That's correct. It's for the benefit of MBIA Insurance Corp.

Okay. And then just switching to Puerto Rico. The -- what Puerto Rico-related events are you guys focused on over the next couple of quarters in terms of things that could drive your reserve in either direction?

Obviously, we would hope that there would be serious meetings, negotiations, mediation with regard to restructuring all the debts in Puerto Rico. On the absence of that, it really is some of the hearings in the court in front of Judge Swain that we'll be looking at, but those are pretty well spaced out over the next several months.

Okay. And then, actually, just one on your reserve. Your reserve relative to your notional risk that remains lower than some peers, like AGO, can you just talk about some of the qualitative differences that could drive some of that?

Yes. First of all, I think it's hard to know exactly what AGO's total reserves are or what our total reserves are. As we stated in the past, we don't specify relating to any specific credit what the reserve is for various reasons. I think there are some differences in terms of the credits. I think, generally speaking, Assured and MBIA, to the best of my knowledge, have a significant amount to similar credits, for example, HTA, PREPA, but different amounts. We have more, I believe, in PREPA; they have more in HTA. We have more senior COFINAs. I don't think they have any senior COFINAs. We both have GO. They have PRASA, we don't. So there are some differences. But I think, as you know, we go through under GAAP, the requirement for the scenarios and the probability weighting and come up with the reserves each quarter for each of the credits.

Our next question comes from the line of Andrew Gadlin of Odeon Capital Group.

Can I ask what drove the increased loss reserves at National this quarter? Bond prices were generally higher. So I'm just wondering what you were looking at that drove those higher reserves?

Yes, there's probably several small things that aren't necessarily significant in themselves. The one, though, that we do point to is in the HTA case. There was a ruling that we have appealed with regard to special revenues. And in the past, in other municipal bankruptcies, those revenues have gone to pay debt during the pendency of the bankruptcy. And Judge Swain ruled that, that would not be the case here, regarding HTA. Again, we disagree, and we will appeal that and have appealed. But the fact of the matter is that means that we will be paying claims as long as the bankruptcy continues on that credit.

And then can you disclose what your aggregate Puerto Rico loss reserves are? Obviously, you won't do it by credit, but can you say what it is in the aggregate?

Yes. We, as you know, reserve every quarter and go through the Puerto Rico credits, but we do not give the aggregate amount at any point in time, even for all the credits.

Okay. And then a couple of smaller questions. The share buyback program was not used to the same extent it has been recently. Can you talk about that decision?

Yes. We continue to look at the stock we have. As we've mentioned, considerable authorization remaining to repurchase shares. I think when we bought a significant amount in the fourth quarter of last year, we bought it at a price -- an average price that was under $7.50. The stock price has been meaningful -- meaningfully above that since then. While we don't have any set price, obviously, we would prefer to buy at lower prices than higher prices. So we continue to evaluate it. We view it as a very dynamic situation. And again, we do believe that repurchasing shares at attractive prices is a good lever for our long-term shareholders.

Great. And then on corp, Anthony, you mentioned having $130 million of liquidity, and I see that in the operating supplement. But I also see, in a different page, about $150 million of cash and short-term investments. What's the difference there?

There are some requirements we have from capital holdings standpoint related to some -- to our foreign operations, so there's a little bit of required capital there. So we try to strip that out for pure liquidity.

Got it. And then the balance of medium-term notes increased by about $25 million quarter-over-quarter, from $765 million to $790 million, despite the fact that you bought in $20 million of MTN. What's going on there?

We had FX changes and some CDS on [Inc.] as well, but primarily it was FX.

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

Do you have any update on the litigation with Crédit Suisse?

The only update we have is that Justice Kornreich, who was overseeing the case for the years that this case has gone on, has announced her retirement. So at this point, we're waiting for a new judge to take the case. That's the only update we have at this point.

Do you think the settlement announced this morning by [RBS] with the government has any impact one way or another on yours?

We don't really have a comment on that, hard to know.

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

You've addressed my question on the loss side. Can you just -- I want to back-check my math on National's capacity for continuing to buy stock. What is your estimate of the remaining ability from first quarter financials?

Well, first of all, just from an authorization standpoint, we have $236 million, and that's what we're authorized to repurchase at this time. Beyond that, there is an ample amount of capacity related to our surplus that we can purchase if we chose to do so.

I believe it's just a financial question, right? So do you have that math available or no?

It's 35% of surplus, Geoff.

(Operator Instructions) I'm showing no further questions at this time. I'll turn the floor back over to management for any additional or closing remarks.

Thank you, Maria. And thanks to those of you for listening to our call today. Please contact us directly if you have any 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, and have a wonderful day.