MBIA Inc (MBI) 2019 Q3 法說會逐字稿

Welcome to the MBIA Incorporated Third Quarter 2019 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, sir.

Thank you, Dorothy. Welcome to everybody to MBIA's conference call for our third quarter 2019 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 and 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. A 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.

For 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 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 takes -- 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. Thank you for being with us today. Our third quarter financial results materially benefited from the sale of uninsured PREPA bonds from the National investment portfolio and lower interest rates. Lower interest rates generated a decrease in losses and loss adjustment expenses as greater estimated loss recoveries outweighed estimates of future loss payments. There were also positive contributions from the sale of unwrapped COFINA bonds that were sold out of the custodial trust that resulted from the restructuring of COFINA earlier this year.

In addition, our per-share results benefited from the repurchase of 4.3 million shares of MBI Inc. common stock during the third quarter. Over the first 9 months of this year, we have repurchased 10.3 million shares. Subsequent to the end of the third quarter through October 29, we repurchased another 400,000 shares. The average price for the 10.7 million shares repurchased during 2019 was $9.11 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 October 29, we had approximately $105 million remaining under our existing share repurchase authorization.

As I mentioned earlier, during the third quarter, National directed the sale of uninsured COFINA bonds out of the custodial trust that was created earlier this year as part of the restructuring of COFINA. The sales comprise all of the remaining COFINA bonds that were held in the custodial trust. The proceeds from the sale paid down a large portion of National's COFINA obligation. Over the course of this year via the restructuring of COFINA and through a combination of commutations and prepayments of National custodial certificates that resulted from the sale of the trust assets, National's insured exposure on its COFINA obligation has reduced from $1.2 billion of gross par plus accreted interest or $4.2 billion of debt service to only $65 million of gross par plus accreted interest or $220 million of debt service.

Turning to MBI Inc. During the third quarter, we called at par $150 million of the 6.4% MBI Inc. senior notes due in 2022. In doing so, we project net interest savings of approximately $18 million over the remaining term of those notes. Subsequent to quarter end, in October, MBI Inc. received an as-of-right dividend of $110 million from National. National's insured portfolio has further reduced to $51 billion gross par outstanding at September 30, 2019. Its leverage ratio of gross par to statutory capital was 20:1, down from 23:1 at year-end 2018.

National's insured exposure to Puerto Rico credits excluding the restructured COFINA exposure was $2.4 billion of gross par, including CAB accreted interest at September 30, 2019.

Since last quarter's conference call, National signed on to the PREPA Restructuring Support Agreement, which raised bondholders support for the agreement to about 90%. Mediation continues for the Puerto Rico general obligation in HTA bonds that we insure. The other credits in our insurance portfolios continue to perform consistent with our expectations.

Now Anthony will cover the financial results.

Thanks, Bill, and good morning, everyone. I will begin with a review of our third quarter 2019 GAAP and non-GAAP results, then cover the holding company balance sheet and lastly, walk through our statutory results for National and MBIA Insurance Corp.

The company reported consolidated GAAP net income of $71 million or $0.86 per share for the quarter ended September 30, 2019, compared to a consolidated GAAP net loss of $45 million or negative $0.50 per share for the quarter ended September 30, 2018. The results for the quarter were driven by several factors: A loss and loss adjustment expense benefited National related to its Puerto Rico exposures due to the effect of lower discount rates on the present value of estimated future recoveries; second, gains from the sale of all of the uninsured PREPA bonds held at National, which had previously been written down from their original cost, and gains on VIEs due to 2 items: An increase in our estimate for our RMBS putback claims from Crédit Suisse; and mark-to-market gains on the COFINA 2 bonds that were sold out of the trusts that are consolidated on the balance sheet. These items were partially offset by higher loss and loss adjustment expense at MBIA Insurance Corp. as well as fair value losses at MBIA Inc. on interest rate swaps, hedging assets supporting the GIC portfolio due to lower interest rates.

The tax expense this quarter relates to changes in our valuation allowance attributable to taxes, unrealized gains and other comprehensive income as required by GAAP. For the quarter, the net of a tax benefit in other comprehensive income and the tax expense in earnings is equity-neutral.

The company's adjusted net income, a non-GAAP measure, was $115 million or $1.46 per diluted share for the third quarter of 2019 compared with an adjusted net loss of $32 million or negative $0.35 per diluted share for the third quarter of 2018. The favorable change was primarily due to the loss and loss adjustment expense benefit at National in Q3 2019 related primarily to its insured Puerto Rico exposures due to lower discount rates.

In addition, this quarter's adjusted net income included a $32 million gain related to the consolidated COFINA VIEs. Book value per share increased to $12.86 as of September 30, 2019, versus $12.46 as of December 31, 2018, driven primarily by fewer shares outstanding due to share repurchases.

I will now spend a few minutes on the corporate segment balance sheet and the insurance companies. The corporate segment, which primarily includes the activity of the holding company, MBIA Inc., had total assets of approximately $940 million as of September 30, 2019. Within this total are the following material items: Unencumbered cash and liquid assets held by MBIA Inc. totaled $232 million versus $407 million in Q2 2019. The decrease from the prior quarter was primarily due to the voluntary call at par of $150 million of MBIA Inc. 6.4% notes due in 2022 in August; after quarter end, MBIA Inc. received an as-of-right dividend from National in October, totaling $110 million; approximately $530 million of assets at market value were pledged to the GICs and the interest rate swaps supporting the GIC operation; there were also $61 million of cumulative contributions remaining in the tax escrow account, which represents National's 2018 and year-to-date 2019 tax payments.

Turning to the insurance company's statutory results. National reported statutory net income of $87 million for the third quarter of 2019 compared to a statutory net loss of $5 million for the prior year's comparable quarter. The favorable result was primarily due to gains on investments, driven by the aforementioned sale of the uninsured PREPA bonds and lower quarter-over-quarter loss in LAE related to Puerto Rico exposures.

In July 2019, National paid $328 million of Puerto Rico related insurance claims on a gross basis. Inception to date, gross claims through July 2019 for Puerto Rico exposures totaled $1.1 billion. As of September 30, 2019, National's total fixed income investment portfolio, including cash and cash equivalents, had a book adjusted carrying value of $2.7 billion. Statutory capital was $2.5 billion and claims-paying resources totaled $3.7 billion. Gross par outstanding reduced by $3.2 billion during the quarter and now stands at $51.3 billion.

Turning to MBIA Insurance Corp. The statutory loss was $26 million for the third quarter of 2019 compared to statutory net income of $95 million for the third quarter of 2018. The unfavorable result was primarily due to a decline in premiums earned as a result of the acceleration of premiums related to the terminations in the prior year quarter as well as higher loss in LAE related to Zohar credits partially offset by an increase in RMBS related salvage in the current year quarter.

As of September 30, 2019, the statutory capital of MBIA Insurance Corp. was $533 million versus $555 million as of December 31, 2018, and claims-paying resources totaled $1.3 billion. Cash and liquid assets at MBIA Corp. totaled $115 million as of September 30, 2019. During the quarter, MBIA Corp. completed the refinancing of the MZ Funding loan facility.

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 the line of Bose George with KBW.

This is Tommy Mcjoynt, on for Bose. Now that you guys have joined the PREPA RSA, can you walk through the next steps there?

Well, with regard to the RSA, the next key step is the 9019 motion, which at this point is scheduled be heard in mid-January in front of Judge Swain. So that's the next key step in terms of just moving the process along. So we'll wait and see what happens then.

Okay. And then switching over the pace of National's public finance gross par, runoff was picked up a bit this quarter. Do you guys have an outlook for where do you expect that pace to head going into 4Q and then next year as well?

Yes. In general, you can find in our materials the scheduled amortization, which, at this point, just given the size of the book in absolute dollar amount is coming down. The part that is hard to predict is the refundings that take place each quarter. We've indicated in the past that those keep coming down as well, just given that we're beyond really the 10-year call on most of those. So hard to predict, but we're seeing a little bit come off every quarter. And as I said, the scheduled amortization is listed in the materials.

Okay. And then just last one. Did you say what the dollar amount of the gain was on the sale of the uninsured PREPA bonds?

The total gains for the quarter for National was $78 million on its P&L, of which about $69 million was PREPA.

Your next question comes from the line of Geoffrey Dunn with Dowling & Partners.

A few questions. First, I just want to make sure I understand the accounting on the discount. Obviously, rates have been volatile. So you had the drop in the second quarter generate that benefit. But with rates up, I think, quarter-to-date, is it correct that we'd see basically some of that reverse in the fourth quarter?

It's really going to depend on just what the rates are at the time of loss reserves in the fourth quarter. We had about a 33 basis point decline on average in the risk-free rate this quarter, which helped drive the results as far as increasing the recovery value primarily for the Puerto Rico exposures. So it's really just going to depend on where rates are in the fourth quarter when we do our loss reserves.

Okay. But obviously, if it goes back up, there's offset, right? There's no mitigating factor if rates go back up?

All things being equal, that's correct.

Okay. And then what changed with respect to PREPA? I mean, MBI was pretty adamant against the RSA previously. What happened during the quarter to prompt you to sign on to this? Did anything change versus the terms we've seen publicly out there? Can you elaborate a little bit?

The primary factor, Geoff, was the fact that they had more than 2/3 of the creditor group supporting the RSA.

Okay. And then lastly, on the COFINA bond sale. So those bonds were in trust for the remaining liability. Did I hear correctly that you originally, I guess, booked them at a lower value than the par originally received, and then you were able to turn around and sell them at a gain to that adjusted value?

So for the quarter, that's correct. We had -- every quarter from a GAAP standpoint, these are -- this is a VIE. It's a consolidated VIE. So the fair market value from last quarter and then the sale this quarter, we experienced a gain based on the fair value estimate at the time of the sale.

So how does that coincide with the accounting for the reserving? Was that a gain something that was anticipated in the reserving that you had a higher expected valuation on those bonds than what you had to book because of mark-to-market?

Well, again, for GAAP purposes, again, as a VIE, really kind of the concept of loss reserve isn't there. So you have the assets and the liabilities. Just the result is the assets are gone off the balance sheet. And after all the proceeds have been put in and certificate holders have been repaid, the remaining liability for National is the $65 million par plus accrued, which essentially is National's insurance liability obligation that is owed in 2040 and beyond. For stat purposes, it's a normal credit analysis that we do, and the loss reserve that we had at the end of last quarter was not materially changed. So you still wind up in the same place with a $65 million par plus accrued. But based on our prior credit analysis, there was no material change on a stat basis.

(Operator Instructions) Your next question comes from the line of Giuliano Bologna from BTIG.

Congrats on a good quarter. I guess, kind of jumping back to the PREPA topic. It looks like there were a couple additions in the new RSA, where National has the ability to kind of wrap some of the bonds and has a couple of other elements in the revised RSA that National joined. Is there any upside potential from wrapping some of the bonds on the other side of the transaction?

At this point, as you stated, National has the option. And whether or not there's upside, remains to be seen, but they do have the option.

That makes sense. Then thinking about on the Inc. liquidity side. Obviously, as an extra $110 million of liquidity comes up, would it make sense to look at calling or any of the '22 notes early? Are you calling some additional '22 notes early?

Again, I think we'll do what we've done every quarter. We did the $150 million this quarter. We've continually had a view that we want to make sure we have a robust cash position at the holding company. But clearly, as we look out the next several years, we'll look at the '22s as we move forward.

That makes sense. Then the only other question is, as I'm thinking about kind of the operating sense roll forward, it looks like there's a little tick up on the expense side at National today -- or in the last quarter, I should say. Is there anything driving that? And how should we think about the OpEx side going forward?

Yes. On the operating expense side, the main increase for National is the litigation expense related to the case that we filed against the Wall Street banks associated with our Puerto Rico credits. So the legal expense associated with that filing is what drove the operating expenses.

And there are no further questions at this time. I'll turn the call back over to Mr. Greg Diamond.

Thanks, again, Dorothy. And thanks to all of you who listened to the call today. Please contact us 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.

Ladies and gentlemen, that does conclude today's conference call. We thank you for your participation, and ask that you please disconnect your lines.