MBIA Inc (MBI) 2022 Q3 法說會逐字稿

Welcome to the MBIA Incorporated Third Quarter 2022 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, Chelsea. Yes, welcome to MBIA's conference call for our third quarter 2022 financial results. After the market closed yesterday, we issued and posted several items on our websites, including our financial results, 10-Q, quarterly operating supplement 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 company's 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-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 report and our quarterly operating supplement. 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 last week's press announcement and in the financial results report posted on the MBIA website yesterday.

Now 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 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 provide introductory comments, and 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. As we noted in our third quarter financial results report that we posted on our website yesterday. Given the progress resolving our Puerto Rico exposures, we have retained Barclays to explore potential strategic alternatives for the company including a possible sale of the company. We have not established the time line for completing this process, and there can be no assurance that the process will result in a particular transaction or the strategic outcome.

Also, we do not intend to disclose further developments unless and until we determine that further disclosure is appropriate or necessary.

Since our last conference call, the plan of adjustment to restructure the debt of the Puerto Rico Highways and Transportation Authority or HTA, has been approved by the Title III court. The effective date for implementing the plan is still pending at this time. When the plan becomes effective, National will receive additional cash and newly issued HTA bonds and intends to make insurance claims payments in full that will extinguish its remaining insured exposure of HTA bonds.

National's last remaining significant Puerto Rico exposure is PREPA. In September, the Title III Court ordered the Oversight Board to submit a proposed plan of adjustment for PREPA by December 1. In addition, litigation concerning the nature and extent of PREPA's bondholders security interest in PREPA's revenues will occur simultaneously. No date has been set for the hearing for this litigation. As of September 30, National's remaining exposure to PREPA is approximately $710 million of gross par insured.

Turning to National's other insured credits. The insured portfolio has continued to perform consistent with our expectations. National's insured portfolio has continued to run off as its outstanding gross par declined by $3.4 billion from year-end 2021 to approximately $33 billion at September 30, 2022. Also, National's leverage ratio gross part of statutory capital declined to 17:1 at the end of the third quarter, down from 18:1 at year-end 2021.

As of September 30, 2022, National had total claims paying resources of $2.9 billion with cash and investments totaling $2.5 billion and salvage unpaid claims of $285 million as per statutory financial reporting. Now Anthony will provide additional comments about our financial results.

Thanks, Bill, and good morning. I will begin with a review of our third quarter 2022 GAAP and non-GAAP results. The company reported a consolidated GAAP net loss of $34 million or negative $0.67 per share for the third quarter of 2022 compared to a consolidated GAAP net loss of $123 million or negative $2.49 per share for the third quarter ended September 30, 2021.

The lower net loss this quarter was largely driven by a loss in LAE benefit at MBIA Corp due to higher discount rates applied to its wrapped first lien RMBS, which caused case reserves net of recoveries to decline, lower loss in LAE at National, higher investment income and mark-to-market gains on our interest rate swaps associated with our legacy ALM business due to higher interest rates.

These favorable variances were somewhat offset by net realized investment losses on sold investments. as well as mark-to-market losses on investments due to higher interest rates, lower premium earnings and VIE related losses at MBIA Corp, primarily resulting from the purchase of an MBIA Corp wrapped security, which was largely equity neutral as losses were also released from other comprehensive income.

Loss in LAE expense at National this quarter was primarily due to lower estimated prices on its Puerto Rico HTA related collateral it expects to receive in the fourth quarter of 2022. As of September 30, National sold all of the Puerto Rico GO bonds it had received as part of the GO debt restructuring and approximately 55% of its Puerto Rico GO related contingent value instruments or CVIs.

National also sold approximately 16% of its HTA CVIs during the quarter. The company's adjusted net loss, a non-GAAP measure, was $17 million or a negative $0.34 per diluted share for the third quarter of 2022 compared with an adjusted net loss of $76 million or a negative $1.54 per diluted share for the third quarter of 2021.

The favorable change was due primarily to the lower loss in LAE at National. MBIA Inc.'s book value per share decreased to a negative $15.70 per share as of September 30, 2022, versus a negative $5.73 per share as of December 31, 2021, primarily due to unrealized losses on investments recorded to other comprehensive income driven by higher interest rates and wider credit spreads as well as the $143 million year-to-date net loss.

Included in book value is a negative $37.03 per share book value of MBIA Insurance Corp. I will now spend a few minutes on the corporate segment balance sheet and our insurance company's statutory results. The corporate segment, which primarily includes the activity of the holding company, MBIA Inc., had total assets of approximately $622 million as of September 30, 2022. Within this total are the following material items. Unencumbered cash and liquid assets held by MBIA Inc. totaled approximately $172 million as of September 30, 2022, compared with $239 million as of December 31, 2021.

The holding company expects to receive a $72 million as-of-right dividend from National later this month. The Corporate segment's assets also included approximately $355 million of assets at market value pledged to the GICs and the interest rate swaps supporting the legacy GIC operation.

Turning to the insurance company's statutory results. National reported a statutory net loss of $25 million for the quarter ended September 30, 2022, and versus statutory net income of $61 million for the quarter ended September 30, 2021. The unfavorable comparison was primarily due to loss in LAE in Q3 2022 on the values of HTA recoveries and, to a lesser extent, PREPA recoveries versus a loss in LAE benefit in Q3 2021 as well as realized losses on securities sold during the quarter. Statutory capital and claims-paying resources have remained relatively consistent year-to-date at $1.9 billion and $2.9 billion, respectively.

From inception through 9/30/2022, gross claims paid on insured Puerto Rico exposure totaled approximately $2.3 billion.

Turning to MBIA Insurance Corp. Statutory net income was $50 million for the third quarter of 2022 compared to a statutory net loss of $17 million for the third quarter of 2021. The favorable comparison was primarily due to a loss in LAE benefit in Q3 2022 driven by higher expected Zohar recoveries partially offset by a decline in net premiums earned due to the termination of an international public finance credit in 2021.

In Q3 2022, the Zohar bankruptcy plan became effective and MBIA Corp. received its share of Zohar collateral consisting of portfolio companies and litigation assets through interest in asset recovery entities. Different from our GAAP accounting changes in the estimated recovery values of these asset recovery interest will continue to be recorded as insurance recoveries in our statutory financials.

As of September 30, 2022, the statutory capital of MBIA Insurance Corp. was $162 million and claims paying resources totaled $764 million, increasing from year-end 2021 due primarily to the year-to-date net income of $30 million.

MBIA Corp.'s insured gross par outstanding reduced by approximately $120 million during the quarter and was $4.1 billion as of September 30, 2022. And 55% of that exposure is non-U.S. public finance credits.

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

(Operator Instructions) We'll take our first question from Tommy Mcjoynt with KBW.

Thanks for the update on retaining an adviser. From your perspective, could you just help us understand the feasibility and perhaps the pros and cons of what a sale of National versus a sale of the whole company would look like?

Yes. Tommy, with regard to that, and you've highlighted people in the past have suggested the whole company could be sold, which would be 100% of the common shares. People have also mentioned that National could be sold. It really depends on what the prospective buyer does and how they think about what the combination would be. But at this point, it probably doesn't make sense to get into sort of the pros and cons of each 1 because it really does depend on the buyer that you're talking about. So, I think we'll let that play out and as we have more information, as we said, if it makes sense, we'll communicate that.

Okay. And just thinking of prospective buyers, is it fair to think that both strategic and financial buyers should be in place?

Yes. I think that's definitely the case.

Okay. And then just another question for me. What type of opportunities for buying or settling some of your various obligations at accretive below par values do you expect to become available over the next few months? And what is your capital flexibility at the holding company to pursue those opportunities?

Tom. So as the market has been opportunistic for us, over the last couple of years, we've taken the opportunity to buy back some of the Inc. debt at very solid yields. So I think as of today, the holding company has enough cash and with the as-of-right dividends, we're really looking past 2025 at this point to debt maturities through '27. So we'll continue to take a look at that as opportunities progress. Obviously, we're very sensitive to market volatility related to the ALM business. But I think we feel confident enough in our liquidity position that if opportunities arise, we'll take advantage of it.

Got it. And actually, just last one, I had to follow up on the first part of my question. Just confirming that the kind of the posture is that PREPA does not need to be fully resolved for a sale of the company can happen? Is that still the case?

Yes, we believe that is definitely the case.

Our next question will come from Geoffrey Dunn with Dowling & Partners.

I was hoping you might be able to provide a little bit more color on PREPA. Outside looking in, it seemed like Judge Swain was losing patients with a lack of development of PREPA back in the spring. It sounded like discussions were constructive in the summer, but now we're stretching into the winter and another deadline has been set. Can you share anything about how negotiations have been going on? Has this been constructive and then become more frustrating. Or is this just the normal play out of how this is going to proceed?

Yes, Jeff, there was an omnibus hearing yesterday, as I'm sure you're aware. And so the sequence that you just described continued. Most of this, I think, if not all of it is in the public domain at this point. So as you're aware, the remediation sessions a while back, there was an impasse reached Judge Swain sort of recommended or ordered everyone back. And then in the last sort of 4 to 6 weeks since she recommended or required everyone go back what came out in court yesterday was that there hadn't been a lot of interaction between the parties. She indicated that she wanted any plan that needs to be submitted by the Oversight Board on December 1 require real input that would come from these mediation sessions. And that's really where we are today. So again, there's this date of December 1, when plans have to be filed by the Oversight Board, and we would expect that there would be some type of interaction between now and then.

Our next question will come from Paul Saunders with Hutch Capital.

I actually got the operator interrupted during the first call, so I hope I'm not asking any repeat questions here. But my first question is just on your thoughts on debt buybacks. I know you bought a nice slug of debt in the second quarter, and I see you didn't buy any this quarter. And I'm sure you guys know your first to maturity euro notes are sort of offered below 90 now. You've got a lot of cash to address those. I'm just curious your thoughts on those. And then obviously, the longer-dated notes are also at huge discounts yielding double digits and that kind of thing. So just kind of your general thoughts on sitting with cash at the holding company versus buying back debt?

Sure, Paul. It's Anthony. So part of this is going to be a little repetitive because someone did ask previously, so forgive me for that. But -- so again, where the holding company is today. We've got enough cash. And with the as-of-right dividends coming in, we're really looking kind of to 2025 to 2027 at this point. As you said, we've been opportunistic, and I think we've accomplished some solid outcomes on buying back debt over the last couple of years. So we'll continue to look at it. We've been sensitive to, obviously, the market volatility in general the last few months, which is why we've hesitated to embark on additional buybacks, but we're going to continue to look at that as opportunities arise given the holding company liquidity position over the next few months.

On the later dated paper, we've just generally held to looking at the earlier windows, just making sure that we're allocating properly for the holding company's liquidity needs. So generally speaking, we've called it kind of a liquidity window -- and for those who've been following, that's been expanding over time as the holding company's liquidity position has gotten stronger. So as I said, now, we're kind of looking at '25 to '27.

Yes. Okay. And then you mentioned on the prepared remarks, I saw the big increase in salvage value for MBIA Corp. and you said that, that was a write-up or increase in value for Zohar. Can you provide any more color, specifically, just specifically what Zohar collateral that was? Or just any color you can provide.

Yes. Sure. So over the last 2 quarters, the salvage at MBIA Corp. has gone up for 2 reasons. One is we've bought back some of our own wrapped paper for remediation purposes, and that is being classified as salvage under a permitted practice we've got from the New York Department of Financial Services. The other reason is an increase in Zohar recoveries, which has resulted -- since the bankruptcy ended in August, there were a few assets in particular, that we had not ascribed value to because we couldn't before the bankruptcy ended. So there were a few escrow account items and a litigation trust that's been formed after the bankruptcy went effect -- the bankruptcy date went effective, and those values aided to the increase in salvage for Corp.

Okay. That's helpful. And just last one for me. the retention of Barclays is definitely exciting. I think a lot of investors are happy to hear that. Can you provide any sort of context on what that process will look like? How long you think it will last and just sort of steps that you guys are running down in terms of just sort of for us to understand what that timing will look like.

Yes. It's hard to predict exactly how that may play out, but we've been working with Barclays as you're probably aware in these types of situations, there's a bunch of things we needed to do internally to get ready for the process or as part of the process, I should say, and we've done all that work and then it really is talking to prospective buyers or interested parties, and that has started. But beyond that, it's very hard to predict. And I think the nature of these things is that we'll let it play out and a lot of the things will be confidential as we indicated when we have something to say, we'll make sure we communicate it to shareholders.

Okay. And maybe you can't answer this, but is it -- are you running it like additional M&A auction process? Or is this -- or is it more, I guess, information gathering?

I think it's closer to the former, which is I would view this as a pretty traditional process, recognizing that everyone is different, and there are some things about our company that they be very unique to us, but I would consider a very traditional process, which we think will be beneficial for the shareholders.

(Operator Instructions) Our next question will come from John Staley with Staley Capital Advisors.

Bill, I have 2 separate lines of questions that will help me as a very long-term shareholder trying to understand this better. Some months ago, you indicated in the release you received half of the Puerto Rican highway bond settlement proceeds. Then the rest of it seem to get tied up in a squabble between various bondholders as opposed to the Puerto Rican part of Puerto Rican authorities once you guys get settled, then the lawyers for the bondholder start to argue with you. Now you indicated that, that has been resolved, I assume. And from the highway bond proceeds that you expect to get, will they be comparable to what you got in the first half. Or did you have to give up something to Invesco and the other guys that were suing? And how does that then play over to the PREPA where -- are we going to have another situation where you get your stuff politically resolved and then you have squabbles between yourself and the bondholders. It just seems very confusing to me, and it just seems like a tab running for lawyers.

There's a lot of that I could probably comment on, John. I think to the heart of your question, the original agreement in terms of what we will receive in consideration, which was split into 2 parts, none of that has been reduced. You're absolutely correct. We received part of it back in the summer, and there is an additional amount upon the completion of the execution of the deal. The court has approved the plan, there's a process they go through where there's a period where objections can be filed. And therefore, the actual date that the plan will be consummated and consideration will be exchanged has not been set. We thought perhaps it would be discussed yesterday in the omnibus hearing at the -- in front of Judge Swain in the Title III Court, but there was no specific date set -- hard to predict, but it would surprise us if that all occurs this month. But again, there's no specific date, but we'll keep our eye on that. But rest assured, we did not give up anything in the 2 or 3 months that you were describing.

So nothing's been lost in terms of the original HTA settlement amount. As it relates to PREPA, while I suppose there are some things that are similar it's very different in that there is no agreement that has been approved by the court at this point with regard to PREPA. We thought we had an agreement that went back quite a while ago, we further restructured the support agreement or RSA that was then rejected by the government of Puerto Rico and subsequently by the Oversight Board.

So as I indicated in an earlier response to a question, we are now in mediation with the Oversight Board on behalf of PREPA. And again, we're not in a position to make any predictions how that will play out, but that's the focus at this point.

Okay. And then when you move to my second question, as you get engaged with Barclays, it strikes me that while you obviously will be having some financial buyers look at this, which would essentially be a liquidation play. It seems to me that the compelling opportunity here is strategic. And it's perhaps a naive question. But if you had a strategic buyer, I would guess the AGO is probably as likely one as anybody because they also have a Puerto Rican expertise and exposure. I'm curious if there. I mean, there's obvious synergy when you eliminate corporate overhead. If you're already in the business, you don't need all the overhead you guys have from directors, to officers, et cetera, in fact, you got it all already. But is there any arbitrage, where you move from a stand-alone MBIA or National, and you move National into a larger entity like AGO. Do they pick up some relief on reserves or from their ratings or from their size, maybe they're ensuring the same bonds that you have in some cases. Is there some kind of arbitrage that a strategic has that it makes them the ability to pay more.

I suppose that question is better answered by those particular parties, but what you're describing is definitely possible. I guess I would focus on it more with regard to the amount of capital if you combined 2 insurance operations. And in particular, a company is focused on their ratings and therefore, when you put the 2 companies together, you can actually hold less capital to retain a certain rating that, to your point, would clearly be a benefit or a synergy. The other one would be to the extent that you're trying to remove money and you need -- in our case, Department of Financial Services approval, same thing to the extent that the portfolio is larger and more diversified, and therefore, when you combine the 2, you don't need to keep the combined capital and that can be released to shareholders to your point, that would also be a benefit to shareholders.

Okay. And I think I asked this once before. But related to MBIA Inc., the insurance entity there, where you have no financial recourse from that company back to your holding company or to National or anything else. Is that transferable? If somebody comes in to buy the whole company, which would clearly be the cleanest transaction. Is there any issue that, that separation of liability exists to the acquiring company?

To your point, MBI Insurance Corp. is completely separate. Their obligations are not the obligations of MBI Inc. or of National. So it is a legally separate entity where the stock is 100% owned by MBI Inc. but it has no obligation to support it.

And that transfers in the deal?

Correct. If you buy 100% of the stock of MBI Inc., which is I think what you're referring to, then that would -- that structure would remain.

And at this time, I am showing no further questions. So I would like to turn the floor back over to management for any additional or closing remarks.

Thank you, Chelsea, and thanks to those of you listening to the call today. Please contact us directly if you have any additional questions. We also recommend -- hold on a second. We've got another person in the queue.

We have a question next from Doug Setherson with Shay Capital.

It's actually Seth. But quick question. The formal the strategic alternative process of actually retaining Barclays, was this in response to an unsolicited approach and somebody reaching out to you guys? Or did you feel comfortable that finally, many DACs were in a row based on what was going on in Puerto Rico?

It's the latter.

And in past calls, you guys have talked about formally or informally looking to maximize shareholder value. What is different about this step versus in the prior quarters?

I think as we've indicated for a while, we have now come to the conclusion that the Puerto Rico restructuring has been substantially complete at this point. I mean, I know we have PREPA, but depending on how you want to estimate it, we're probably 75%, 80% of our way through our large exposures. And even with PREPA, given the back and forth in the negotiations and mediation sessions. There's at least a sense of the parameters around which that 1 might get settled. So we, again, don't believe we have to wait -- and as you're probably aware, it can take a while even from the time and agreements reached to be fully executed, and we thought it was best for our shareholders that we move now in terms of pursuing strategic alternatives.

And that ambiguity or not that it's ambiguous, but even though there are parameters, the fact that there is not a final conclusion, won't impede in value maximization the strategics or financial buyers will be able to get our arms around, I guess, a range and they'll be comfortable enough to pursue something now?

We believe that to be the case. If for some reason, things change, we can always adjust our approach.

And at this time, we have no further questions. I'd like to turn it back to management for closing remarks.

Thanks again, Chelsea, and thanks to everybody else listening to the call. Please call 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.

Thank you, ladies and gentlemen. This does conclude today's MBIA Third Quarter 2022 Financial Results Conference Call. You may now disconnect.