Mbia Inc Q2 FY2022 Earnings Call

Thank you, Britney. Welcome to MBIA's conference call for our second 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 of 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 two hours after the end of the call and the information for accessing it is included in last week's press announcement and in the financial results report posted yesterday on the MBIA website. Now here is 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. Thanks for being with us today. Since our last conference call, the bond restructuring arrangements for the Puerto Rico Highways and Transportation Authority, or HTA, have advanced largely as planned. In July, National received about half of its overall expected recovery on its HTA exposure, while the other half will be paid upon the effective date of HTA's plan of adjustment. The confirmation hearing for that plan is scheduled for August 17, and subject to its approval, the effective date could be soon after that. National's last significant remaining Puerto Rico exposure is PREPA. Last week, at the mediator's request, the Title III Court approved extending the mediation deadline to August 15 for the parties to agree to terms to develop a confirmable plan of adjustment for PREPA which is being managed by the Puerto Rico Oversight Board. National's exposure to PREPA after its July claims payment is approximately $710 million of gross par value. This year's developments regarding the resolution of National's Puerto Rico exposure have reduced the uncertainty of its potential outcomes and also improved the transparency regarding National's financial condition. Such progress better affords us the opportunity to pursue our strategic objectives, which may include a potential sale of the Company and/or special distributions from National. Given this progress, we do not believe that it is necessary to fully resolve National's remaining PREPA exposure to pursue these strategic alternatives. 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 $1.9 billion from year-end 2021 to $34.6 billion at June 30, 2022. Also, National's leverage ratio of gross par to statutory capital declined to 17:1 at the end of the second quarter, down from 18:1 at year-end 2021. As of June 30, 2022, National had total claims paying resources of $3 billion with cash and investments totaling $2.3 billion and salvage on paid claims of $496 million as per its 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 second quarter 2022 GAAP and non-GAAP results. The Company reported a consolidated GAAP net loss of $36 million or a negative $0.72 per share for the second quarter of 2022 compared to a consolidated GAAP net loss of $61 million or a negative $1.23 per share for the second quarter ended June 30, 2021. The lower net loss this quarter was driven by mark-to-market gains on our interest rate swaps associated with the legacy ALM business driven by higher interest rates, gains on our consolidated VIEs of MBIA Insurance Corp. due to the purchase of MBIA Corp. insured debt and higher investment income. These items were somewhat offset by investment-related losses at National due to mark-to-market losses resulting from higher interest rates, realized losses due to the sale of new Puerto Rico GO bonds and an impairment on its remaining Puerto Rico GO bonds to reflect the current market prices. As of June 30, National sold approximately half of its GO bonds. Subsequent to quarter end, National sold its remaining GO bonds in addition to selling approximately 45% of its Puerto Rico GO-related contingent value instruments or CVIs. Loss in LAE expense at National was increased due to downward estimated price adjustments on its Puerto Rico HTA and CVIs received after the end of the second quarter. National sold approximately 5% of the HTA CVI in July at prices consistent with its June 30 estimates. National intends on repaying all $550 million of its gross insured par of HTA exposure in August upon confirmation. Assuming HTA's final resolution occurs in the third quarter, HTA and CVI values will be reflected through National's investment portfolio performance going forward under GAAP accounting. The Company's adjusted net loss, a non-GAAP measure, was $47 million or a negative $0.93 per diluted share for the second quarter of 2022 compared with adjusted net income of $37 million or $0.76 per diluted share for the second quarter of 2021. The unfavorable change was due primarily to the higher loss in LAE at National due to changes in the estimated value of Puerto Rico HTA CVIs in the second quarter of 2022. MBIA Inc.'s book value per share decreased to a negative $13.63 per share as of June 30, 2022 versus a negative $5.73 per share as of December 31, 2021 primarily due to unrealized losses on investments recorded in comprehensive income driven by higher interest rates and wider credit spreads as well as the $100 million year-to-date net loss. MBIA Corp.'s book value was negative $36.48 per share with over $200 million of accrued but unpaid interest on its surplus notes. I will now take 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 $665 million as of June 30, 2022. Within this total are the following material items. Unencumbered cash and liquid assets held by MBIA Inc. totaled approximately $188 million as of June 30, 2022 compared with $239 million as of December 31, 2021. During the quarter, we purchased $30 million face value of GFL MTNs due in 2024 and 2025 at attractive discounts. The holding company also paid approximately $50 million of scheduled principal payments on euro-denominated MTNs during the quarter. There are no additional principal payments due for the rest of the year. The Corporate segment has also pledged approximately $390 million of assets at market value to the GIC and the interest rate swaps supporting the legacy GIC obligation. Turning to the insurance company's statutory results. National reported a statutory net loss of $44 million for the quarter ended June 30, 2022 versus statutory net income of $23 million for the quarter ended June 30, 2021. The unfavorable comparison was primarily due to loss in LAE in Q2 2022 on the values of Puerto Rico recoveries versus a loss in LAE in Q2 2021. National's gross claim payments on insured Puerto Rico credits are as follows. From inception to 6/30/2022, gross claims paid on insured Puerto Rico exposure totaled approximately $2 billion. In July, National made claims payments primarily for PREPA of $142 million. Turning to MBIA Insurance Corp. Its statutory net loss was $6.3 million for the second quarter of 2022 compared to a statutory net loss of $37.5 million for the second quarter of 2021. The favorable comparison was primarily due to lower loss in LAE expense. As of June 30, 2022, the statutory capital of MBIA Insurance Corp. was $118 million and claims paying resources totaled $711 million. Decreases from year-end 2021 were primarily due to the year-to-date net loss. MBIA Corp.'s insured gross par outstanding reduced by approximately $300 million during the quarter and was $4.2 billion as of June 30, 2022, and 55% of that exposure is non-U.S. public finance credits. With the Zohar CLOs exit from Chapter 11 bankruptcy on August 2, MBIA Corp. will retain interest in asset recovery trust, the goal of monetizing its remaining interest in several legacy portfolio companies over time and pursuing legal remedies in part to recover its credit losses. And now we will turn the call over to the operator to begin the question-and-answer session.

Bill, this is John Staley. Your recent comment closely mirrors what you said after the last conference call regarding MBIA's remaining obligations with Puerto Rico and the potential for negotiations to resolve the company's final liquidation. I'm quite confused by the absence of more detailed information. In the past, when MBIA faced significant short interest, someone described it as a melting iceberg. Essentially, it's over; you’re not pursuing any new business, and your legal matters are fairly straightforward. I'm just confused as to why this isn't being addressed more decisively. If it isn't, then why aren’t you buying back stock? Even though it's priced around 12, I have no idea where it will be today. I remember you purchasing shares up to about 9.5 previously. On a risk-adjusted basis, if the book values are close to accurate, it seems like a better buy now than it was before. The only investors left holding your stock are the management, which holds over 17%, and long-term investors like me, who are still seeking clarity on the final strategy and liquidation of this company, especially since there’s no new business being generated. I'm frustrated by the lack of clarity regarding the actions to unlock the embedded value, which now resembles a substantial bond fund. With interest rates rising, the value has dropped somewhat, and what was previously in the 30s of book value now appears to be around 25 or 26, excluding MBIA Insurance. I am just quite frustrated with the ongoing uncertainty about your plans.

Yes. In response to your concerns, we have been strong supporters of share repurchases and have undertaken a significant amount of them. Unfortunately, we currently face a complication as National, the entity through which we repurchased shares, has reached its capacity to buy more MBIA shares. This is the reason we haven't continued repurchasing. Despite various metrics being discussed, we simply lack the capacity at National. On a broader note, we do share your concerns. We have made progress, particularly with the situation in Puerto Rico, which has largely been addressed. Initially, we faced four major exposures, all of which have now been fully resolved. We have also sold the settlements obtained through the restructuring exchange. While it's challenging to predict the timing related to Puerto Rico, we're optimistic about the upcoming HTA hearing, which is adhering to its timeline this year. We've effectively cleared the four large credits. Regarding PREPA, we have reduced our exposure by about 35% over the past year, placing us in a stable position. We don’t need to resolve PREPA immediately and are actively exploring strategic alternatives. However, there are limits to what we can disclose, especially concerning discussions with the Department of Financial Services or potential sales of the Company. We will share pertinent news or updates when we have significant information to disclose, hopefully addressing some of your concerns.

I just hope we get it done. And I'm sure you do too. I mean there’s a lot of overhead being spent here that could be translated into shareholder value if we can just get this wrapped up.

We agree with you.

Just a quick one for me on MBIA Corp. I just had a quick question on your salvage reserves. I see those were up by about $78 million and not much of a change there in the gross reserves. So it looks like you just increased the value of your existing salvage. Can you just add a little more color on that? I think that's just Zohar left. So is that just an increase in the expected value of the Zohar recoveries?

Paul, you're talking about on the statutory salvage?

Correct, yes.

Yes. So on statutory salvage, the existing salvage on Zohar and our residential mortgage-backed securities have been significant. What has been added to salvage is we have been selectively repurchasing MBIA Corp. insured debt for remediation purposes. We're looking to derisk the portfolio at MBIA Corp. So we received committed approval from the New York Department of Financial Services, allowing us to buy back more insured paper for remediation purposes, be it commutation or otherwise. So it's another tool we're using in order to derisk MBIA Corp. The securities associated with those are classified as salvage. That's the reason for the increase.

Got it. Okay. That makes sense.

Thanks, Britney, and thanks to those of you listening to the call today. Please feel free to contact us if you have any additional questions. We also recommend that you visit our website at mbia.com for additional information on our company. Thank you for your interest in MBIA. Good day and goodbye.

Thank you, ladies and gentlemen. This does conclude today's second quarter 2022 financial results conference call. You may now disconnect.