Mbia Inc Q2 FY2024 Earnings Call

Welcome to the MBIA Inc. Second Quarter 2024 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, Ashley. As noted, this is MBIA's conference call for our second quarter 2024 financial results. After the market closed yesterday, we issued and posted several items on our website, including our financial results, our 10-Q, quarterly operating supplement and statutory financial statements for both MBIA Insurance Corporation and the 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 disclosure 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 on the MBIA website approximately two hours after the end of the call. 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 Joe Schachinger will provide introductory comments and then a question-and-answer session will follow. Now here is Bill Fallon.

Thanks, Greg. Good morning, everyone. Thanks for being with us today. Our second quarter 2024 net loss was largely due to National’s net loss for the quarter. A significant increase in our PREPA loss reserve was the primary reason for National’s net loss. While the First Circuit Court of Appeals decision was good for bondholders, the Oversight Board's reaction to the decision has increased uncertainty regarding a timely resolution for PREPA and its creditors. We believe a consensual resolution is in the best interest of PREPA, PREPA's creditors, and the people of Puerto Rico. However, this will only occur if the Oversight Board changes its approach and fulfills its responsibilities under PROMESA. PREPA has the ability to repay its creditors. The Oversight Board does not have the willingness to pay. This must change. Given the range of possible outcomes associated with National’s $836 million PREPA bankruptcy claim, we continue to believe that it is necessary to substantially resolve PREPA before we can restart the process to sell the company. Regarding the balance of National’s insured portfolio, those credits have continued to perform generally consistent with our expectations. The gross par amount outstanding for National’s insured portfolio has declined by approximately $1.4 billion from year end 2023 to $27 billion at the end of the second quarter of this year. National's leverage ratio of gross par to statutory capital was 28 to 1 at the end of the second quarter of 2024. As of June 30th, 2024, National had total claims-paying resources of $1.6 billion and statutory capital and surplus of approximately $1 billion. Now, Joe will provide additional comments about our financial results.

Thank you, Bill, and good morning, all. I will begin with a review of our second quarter 2024 GAAP and non-GAAP results, and then provide an overview of our statutory results. The company reported a consolidated GAAP net loss of $254 million, or a negative $5.34 per share for the second quarter of 2024, compared to a consolidated GAAP net loss of $74 million or a negative $1.46 per share for the second quarter of 2023. The higher GAAP net loss this quarter was largely driven by two items. First is higher loss in LAE at National, which largely related to revising our loss scenarios for our PREPA exposure. Our loss scenarios now contemplate a range of negotiated and litigated outcomes that reflect a greater degree of uncertainty around the ultimate resolution of PREPA's debt. And the second item is higher losses on financial instruments carried at fair value, which largely related to the revaluation of an equity interest received by MBIA Insurance Corp. in a Zohar-related portfolio company in connection with claims paid on the Zohar CDOs. In addition to these items, lower net investment income was mostly offset by lower VIE losses and lower operating expenses this quarter versus the second quarter of 2023. The company's adjusted net loss, a non-GAAP measure, was $138 million or a negative $2.90 per share for the second quarter of 2024 compared with an adjusted net loss of $22 million, or negative $0.45 per share, for the second quarter of 2023. The unfavorable change was primarily due to higher loss in LAE at National in the current quarter related to PREPA. MBIA Inc.'s book value per share decreased $6.51 to a negative $39.07 per share as of June 30th, 2024, versus a negative $32.56 per share as of December 31, 2023, primarily due to our $340 million consolidated net loss for the 2024 year-to-date period. Included in MBIA Inc.'s book value as of June 30th, 2024, is a negative $47.89 per share of MBIA Insurance Corp.'s book value versus a negative $44.91 per share as of December 31, 2023. I will now spend a few minutes on our Corporate Segment balance sheet. The Corporate Segment, which primarily comprises the activities of the holding company, MBIA Inc., had total assets of approximately $657 million as of June 30, 2024. Within this total are the following material assets: unencumbered and liquid assets held by MBIA Inc. totaled $315 million, compared with $411 million as of December 31, 2023. The decrease was largely due to spending approximately $62 million on retiring GFL euro-denominated medium term note liabilities before their maturities, of which $26 million was spent in the second quarter of 2024. In addition, MBIA Inc. spent $16 million in the current quarter to purchase its senior notes. Both the medium-term notes and the senior notes were purchased at prices accretive to equity. In addition to the unencumbered cash and liquid assets I mentioned, the Corporate Segment's assets included approximately $232 million of assets at market value pledged to guaranteed investment contract holders which fully collateralized those contracts. Turning to the insurance company's statutory results, National reported a statutory net loss of $131 million for the second quarter of 2024, compared to a statutory net loss of $11 million for the second quarter of 2023. The unfavorable variance was primarily driven by higher loss in LAE related to revising our loss scenarios for the PREPA debt restructuring and, to a lesser extent, lower net investment income. As a reminder, net investment income in 2024 reflects lower invested assets due to the as-of-right and special dividends paid by National to MBIA Inc. in the fourth quarter of 2023, which totaled almost $650 million. National’s statutory capital as of June 30th, 2024 was $969 million, down $148 million compared with December 31, 2023, largely due to its net loss for the 2024 year-to-date period of $142 million. Claims-paying resources were $1.6 billion, down $51 million from December 31, 2023. As of June 30, 2024, National had gross par outstanding of $27 billion, which is down about $1.4 billion from year-end 2023. This decrease was largely due to regular amortization of National's insured portfolio. Now I'll turn to MBIA Insurance Corp. MBIA Insurance Corp. reported a statutory net loss of $35 million for the second quarter of 2024 compared to a statutory net income of zero for the second quarter of 2023. The net loss in the second quarter of this year was driven by loss in LAE on primarily Zohar-related salvage. As of June 30th, 2024, the statutory capital of MBIA Insurance Corp. was $85 million, down from $152 million at year end 2023, primarily due to its net loss for the 2024 year-to-date period of $70 million. Claims-paying resources totaled $355 million at June 30th, 2024 compared to $504 million at year end 2023. MBIA Insurance Corp.’s insured gross par outstanding was $2.5 billion as of June 30th, 2024, down about 12% from year end 2023. The decrease in claims-paying resources and gross par outstanding was partially driven by our proactive de-risking of exposures, for which we held reserves and were paying claims. And now we will turn the call over to the operator to begin the question-and-answer session.

And we'll take our first question from John Staley from Staley Capital Advisers. Please go ahead.

Yes, Bill, this process, I find extremely frustrating. I don't understand how you have wrapped up and settled so many other Puerto Rico exposures, and yet PREPA stands there being road-blocked by the Oversight Board or by the government or by whatever the issue is. What is the difference between the ability to have settled other exposures to Puerto Rico and yet PREPA stands out there all by itself unable to be resolved? Even a conditional agreement that was sitting up there before the First Circuit, I think you guys withdrew from even before the court ruled. There's something different about PREPA than the other guarantees you had that you wrapped up. As a lay person, how would you explain that difference?

Yeah, John, good morning. First of all, you're absolutely correct. There were four large credits that we had insured in Puerto Rico. Just to fill in what you obviously know, three of the four had been resolved: the GO, the COFINA and the Highway, which were all similar in size to PREPA. It's interesting, and it's probably too long to cover in this call, but there were many people who thought PREPA should have been the first of the credits resolved. As you'd recall, there was actually an agreement in place prior to PROMESA, which was the law that Congress passed that went into effect approximately eight years ago and the initial Oversight Board chose not to approve that agreement. So we've now been at this with this Board for seven years, but there was probably almost two years prior to that where the creditors had agreed to forbear. It's been a very long process. As I said, many thought it should have been the first of the large credits to be restructured. Here we are, and it's going to be the last one. There are lots of opinions as to why this has been difficult. I won't bore you with all the things we've heard during this period of time. The situation, however, is that a First Circuit decision a couple of months ago was favorable to bondholders. Judge Swain has requested mediation. We're about halfway through that 60-day period, and we'll see what the results of the mediation are. But trust me, I'm sure there are a lot of frustrated parties to this whole situation.

But there's really no substantive difference in terms of the terms of the guarantee. I assume you have within your guarantee tremendous rights against revenue, etc. What is the Oversight Board hanging their hat on? What is their issue? It wouldn't allow the independent parties to resolve this. These people are appointed politicians and lawyers and academics. I don't get it. What is it that they're contending we can't let you settle, yet you settled three other ones? It makes no sense to me.

John, I think you've articulated what many of the creditors have expressed in different ways over several years. It looks as though this one is going to have to be strongly influenced by the courts. Decisions that are either made by Judge Swain or by the First Circuit on appeal are where many of these decisions have ended up. It looks as though that may be what finally forces a resolution. We believe there is a good opportunity to make a consensual resolution, but it may be one that has to go through the court system for further clarification.

And that court process is yet another 60 days?

That's just the mediation that was requested. What happens after that is very hard to predict at this point.

Are you still at odds with some people who own the bonds like Invesco and some hedge funds? Is that still part of the issue?

No, we're very much aligned now with the majority of the bondholders. There's a large group of us that are all aligned in terms of trying to resolve this with the Board.

So it's literally this appointed Oversight Board that's keeping this thing from being wrapped up?

It's probably a little more complicated than that, but the Oversight Board is staking out its position in what their offer is to bondholders and the bondholders have a different view. As Judge Swain indicated, she hopes there could be some compromise and a resolution that would end this in her court. We'll have to wait and see whether that's possible.

Okay. Thank you very much.

Thank you.

We will take our next question from a private investor. Please go ahead.

Hi, thanks for taking my call. Just a couple of questions. One is, is there still about $70 million remaining under the repurchase authorization?

Yes.

Okay. And do you have any intention to begin to buy back stock?

As we've said before, we continue to look at lots of things, including the liquidity of the holding company and the different obligations of the holding company. As Joe indicated, we did buy back some debt in the second quarter. We'll look at future liquidity of the holding company and at any point in time, if we think the best choice is to use that authority to buy back stock, then we will do that as we've done in the past.

Okay. I wanted to check. Operating expenses came down a little bit in Q2, but it's still $15 million, so that's basically a $60 million annual run rate. That seems fairly high. At this point, absent PREPA and possibly LCOR Alexandria, there are really no problem credits within National, right?

I think that's a reasonable description of the situation.

So can we expect those operating expenses to come down?

We have for a while been focused on reducing operating expenses. If you go back, the trend is down. We would like to continue to reduce operating expenses. Keep in mind, Corp. is part of the situation when you look at those operating expenses, as well as the runoff of the old asset liability management business at the holding company. We are very focused on continuing to get those expenses down. There are already some things we've committed to which we think over the next year or so will continue to bring those down.

Okay. And then just in terms of PREPA, it looks like you've got PREPA down-marked in the mid-40s?

Sorry, is that a question?

Yeah, I mean, is that basically our bogey for wherever a settlement or resolution comes out?

We have never actually communicated exactly what level of recovery the PREPA reserves reflect.

Okay, but at National, I don't think there are significant reserves other than PREPA, right?

It would be fair given our portfolio to conclude that PREPA is the significant portion of our reserves.

Okay. And then just finally, can you provide some idea what's going on with LCOR Alexandria?

There's not a whole lot I can say at this point. It's listed as one of our classified credits. It's office space in the DC area. We have been focused on it for quite a while. We think there is a plan in place that will result in a resolution that will not have any material impact on the company at this point.

Finally, there's a lot of activity in the credit synthetic risk transfer market. Have you explored whether there is an opportunity with the National portfolio to transfer a portion of that risk to the synthetic market?

Without commenting on any specific thing, we are obviously well aware of the synthetic market. There are many things we look at with regard to the National portfolio at any point in time. If there was ever something we thought would be beneficial to our shareholders, we would pursue it.

Okay. All right, thank you.

At this time, I'm showing no further questions. I'd like to turn the floor back over to management for any additional or closing remarks.

Thank you, Ashley. And thanks to those of you listening to our 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.

Thank you, ladies and gentlemen. This does conclude today's MBIA Second Quarter 2024 Financial Results Conference call. You may now disconnect your line and have a wonderful day.