Earnings Call Transcript - MBI Q2 2025

Operator, Operator

Welcome to the MBIA Inc. Second Quarter 2025 Financial Results Conference Call. I would now like to turn the call over to Greg Diamond, Managing Director of Investor and Media Relations of MBIA. Please go ahead, sir.

Gregory R. Diamond, Managing Director of Investor and Media Relations

Thank you, Erica. Yes, welcome to MBIA's conference call. After the market closed yesterday, we issued and posted several items on our website, 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. 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. A recorded replay of today's call will become available on the MBIA website approximately 2 hours after the end of the call. 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 Joe Schachinger will provide introductory comments, and then a question-and-answer session will follow. Now here is Bill Fallon.

William Charles Fallon, CEO

Thanks, Greg. Good morning, everyone. Thanks for being with us today. Our second quarter 2025 financial results had a lower net loss than the comparable period for 2024. Compared to 2024, our second quarter 2025 financial results benefited from lower losses in LAE and lower investment in VIE losses at MBIA Insurance Corporation. Our priority continues to be resolving National's PREPA exposure, where the timing of that resolution remains uncertain. Currently, the Title III Court is addressing the administrative expense claims. Given the uncertainty associated with the possible outcomes for National's PREPA bankruptcy claim, which is in excess of $800 million, we continue to believe that the process to sell the company to maximize shareholder value will likely require substantially reducing the uncertainty regarding PREPA. 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 $1.1 billion from year-end 2024 to about $24 billion at June 30, 2025. National's leverage ratio of gross par to statutory capital was 26:1 at the end of the second quarter. As of June 30, 2025, National had total claims paying resources of $1.5 billion and statutory capital and surplus in excess of $900 million. Now Joe will provide additional comments about our financial results.

Joseph Ralph Schachinger, CFO

Thank you, Bill, and good morning, all. I will begin with a review of our second quarter 2025 GAAP and non-GAAP results and then provide an overview of our statutory results. The company reported a consolidated GAAP net loss of $56 million or a negative $1.12 per share for the second quarter of 2025 compared with a consolidated GAAP net loss of $254 million or a negative $5.34 per share for the second quarter of 2024. The lower GAAP net loss this quarter was mostly driven by lower losses in LAE at National, primarily on its PREPA exposure. National's loss in LAE for the second quarter of 2025 was $6 million compared with $141 million for the second quarter of 2024. The larger losses in LAE for the second quarter of 2024 were related to National's exit from the then proposed PREPA plan of adjustment, prompting us to revise our loss scenarios to reflect a range of negotiated and litigated outcomes. Also contributing to lower GAAP net losses this quarter, but to a lesser extent, were lower net losses on financial instruments relating to the revaluation of MBIA Insurance Corp.'s equity interest in a Zohar-related portfolio company received in connection with claims paid on the Zohar CDOs and lower losses at MBIA Insurance Corp. related to insured variable interest entities or VIEs. Higher VIE losses in the second quarter of 2024 primarily related to the deconsolidation of a VIE as part of our strategy to derisk MBIA Insurance Corp.'s insured portfolio with no comparable activity in the second quarter of 2025. The company's adjusted net loss, a non-GAAP measure, was $8 million or a negative $0.17 per share for the second quarter of 2025 compared with an adjusted net loss of $138 million or a negative $2.90 per share for the second quarter of 2024. The favorable change was primarily due to the lower losses in LAE at National. MBIA Inc.'s book value per share decreased $2.15 to a negative $43.14 per share as of June 30, 2025, from a negative $40.99 per share as of December 31, 2024. This decrease was primarily due to our $118 million consolidated net loss for the first 6 months of 2025, partially offset by a decrease in unrealized losses on investments recorded in accumulated other comprehensive income. Included in MBIA Inc.'s book value as of June 30, 2025, is MBIA Insurance Corp.'s negative book value of $51.49 per share, which decreased from a negative $49.48 per share as of December 31, 2024. 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 $677 million as of June 30, 2025. Within this total are the following material assets. Unencumbered cash and liquid assets held by MBIA Inc. totaled $355 million, which was down from $380 million as of December 31, 2024, primarily due to interest payments on the corporate segment's debt. In addition to the unencumbered cash and liquid assets, the corporate segment's assets included approximately $214 million of assets at market value pledged to guaranteed investment agreement contract holders, which fully collateralized those contracts. Now I'll turn to the insurance company statutory results. National reported statutory net income of $6 million for the second quarter of 2025 compared with a statutory net loss of $131 million for the second quarter of 2024. The positive variance primarily reflects lower losses in LAE related to National's PREPA exposure. National statutory capital as of June 30, 2025, was $914 million, up $2 million compared with December 31, 2024. The increase in statutory capital was driven by year-to-date net income of $11 million, which was mostly offset by an increase in unrealized losses on investments. Claims paying resources were $1.5 billion and continue to be consistent with December 31, 2024. Now I'll turn to MBIA Insurance Corp. MBIA Insurance Corp. reported statutory net income of $4 million for the second quarter of 2025 compared with a statutory net loss of $35 million for the second quarter of 2024. The favorable variance was primarily due to lower losses in LAE. A small loss in LAE benefit in the current quarter was primarily driven by favorable adjustments to recoveries of paid claims associated with the Zohar CDOs, while $34 million of losses in LAE in the second quarter of 2024 was primarily driven by unfavorable adjustments to our Zohar-related recoveries. As of June 30, 2025, the statutory capital of MBIA Insurance Corp. was $92 million, which was $4 million higher than year-end 2024. Claims paying resources totaled $346 million at June 30, 2025, compared with $356 million at December 31, 2024. MBIA Insurance Corp.'s insured gross par outstanding was $2.2 billion as of June 30, 2025, down from $2.3 billion at year-end 2024. And now we will turn the call over to the operator to begin the question-and-answer session.

Operator, Operator

We'll take our first question from Tommy Joynt with KBW.

Thomas Patrick McJoynt-Griffith, Analyst

The first one, I see in the 10-Q, a disclosure about National transferring certain PREPA bankruptcy claims to a custodian. So a few questions around that. First, can we interpret this action as a signal that you guys are marketing, selling those claims to potential buyers? And secondly, is there a potential liquid buyer pool for those claims? And then secondly, it looks like you only transferred certain claims of the PREPA side. I guess what made you decide between which ones to transfer and which ones not to transfer?

William Charles Fallon, CEO

Yes. Tommy, what took place is $374 million of claims were transferred to custodian in return. They transferred to us what I referred to as custodial receipts. We feel very good about the litigation with regard to PREPA. As you know, it's been ongoing and is the focus and a priority for us. What happens as we have different bonds where we pay the full debt service, those then become claims versus unpaid bonds. So it's not a question that we pick and choose, right? Those have been completely paid-off bonds. And essentially, by doing this, they are more marketable in that they become effectively securities versus claims. So that's what you saw reported. That's in our 10-Q. With regard to how many buyers there are for this, we believe there are some. As you know, in the past, we sold actually about 1/3 of our PREPA claims going back a few years ago. So there are other interested parties. Whether or not we sell them remains to be seen. But we thought that by doing this, it does make them more marketable. There are certain investment funds that are more likely to be able to hold them because they are now securities, they have their own CUSIP number and things like that.

Thomas Patrick McJoynt-Griffith, Analyst

Okay. Got it. Thanks for clarifying that. And then secondly, looking to some of the recent headlines, the Oversight Board in Puerto Rico saw 5 of its 7 members get terminated by the President. As we think about just like logistically, how this impacts the restructuring and the negotiations between bondholders and the Oversight Board and other stakeholders. How do you guys view that headline? Is it a positive? Does it delay the process? Just what are your viewpoints around that?

William Charles Fallon, CEO

There are many questions from interested parties regarding the recent dismissal of five Board members. It’s uncertain what will happen next. In the coming days, we expect to have more information about the timeline for replacing the Board members, their identities, and their approach. Given the challenges with PREPA and the general desire among creditors for a consensual deal, we hope this situation will ultimately be beneficial. However, until we have answers to those questions and understand the direction of the newly formed Board, any speculation on the outcome would be premature. Historically, in the nine years of PROMESA, four major credits went into Title III, and three of them were resolved through consensus. Currently, the likelihood of achieving a consensual deal in the near term seems low, but perhaps this change could improve the chances for a settlement and expedite the process. Still, we cannot say for sure at this moment.

Thomas Patrick McJoynt-Griffith, Analyst

Okay. Got it. And then just last one, looking also at the disclosures in the Q, there's a note that the Oversight Board informed the court that it was intending to modify National's settlement in the forthcoming amended plan. Could you give me some background or some details on what that's referring to?

William Charles Fallon, CEO

Tommy, which disclosure are you referring to?

Thomas Patrick McJoynt-Griffith, Analyst

In the Q, the business developments around PREPA, it reads following the appeal decision, the Oversight Board informed the court, national and other parties that intended to modify national settlement in a forthcoming amended plan.

William Charles Fallon, CEO

Yes. I believe you are referring to the one mentioned in the current quarter, but it is dated; it occurred some time ago. Therefore, I don't think we have any new information to share on that matter. This pertains to the agreement we had, which they wanted to change, leading us to believe they have violated the agreement. Essentially, the agreement has effectively been terminated.

Operator, Operator

And we'll go next to the line of Carlos, Private Investor.

Unidentified Analyst, Private Investor

This is Carlos calling from London. Thank you very much again for your time back in February, and thanks also for the decision to sell the claims or pass them to the custodian. I agree that this increases marketability, so I appreciate that move. It aligns with my suggestions from February. Regarding the repurchase capacity, we still have $71 million available. My suggestion is that if the share price falls again to lower levels, you should consider using this repurchase capacity, as we could buy back about 20% of the shares outstanding. Please keep this possibility in mind if we return to lower levels.

William Charles Fallon, CEO

Yes. No, thank you. We agree with you. We look at potential repurchases of stock constantly. And you are correct, we have authorization remaining and it is something that we are always looking at and trading that off with liquidity issues at the holding company and capacity at National to repurchase based on statutory requirements. So we agree with you. It's something that we will continue to look at.

Unidentified Analyst, Private Investor

Perfect. If at any point, I feel that we have reached hopefully not a level that is lower enough to justify the repurchase, I will, of course, drop you a line. But at the moment, I don't think that it is necessary, but just the idea of the repurchases being a possibility helps us shareholders a lot. Then the next question would be on the cooperation agreement with Assured and Golden Tree, is it still the case that it will expire in December at the end of the year, but that Golden Tree and Assured Guaranty can extend it until the end of March?

William Charles Fallon, CEO

Yes. Go ahead. Joe is going to take.

Joseph Ralph Schachinger, CFO

Carlos, I'm sorry, could you repeat the question?

Unidentified Analyst, Private Investor

Yes. The cooperation agreement with the ad hoc group involving Assured Guaranty and Golden Tree is set to expire at the end of the year, but Golden Tree and Assured have the option to extend it until the end of March. Is that still the case? Is my understanding correct?

Joseph Ralph Schachinger, CFO

Yes. Agreement, Carlos...

William Charles Fallon, CEO

Yes, we are monitoring that situation closely. In light of the news regarding the reconstitution of the Board, we expect to gather new information soon. We hope this will lead to productive discussions and possibly a deal. We will keep reviewing how this situation relates to the co-op agreement, which we believe has been beneficial so far, and we will continue to evaluate it.

Unidentified Analyst, Private Investor

My suggestion is that you don't extend the co-op until we have the November call. That is just a suggestion, a polite suggestion. You are in charge, but that is my recommendation.

Unidentified Company Representative, Unidentified Company Representative

Okay. Thank you.

Unidentified Analyst, Private Investor

The final question is about the PREPA exposure. Currently, the total exposure stands at $657 million. However, I believe we made a significant payment on July 1. Can you provide an updated figure?

Joseph Ralph Schachinger, CFO

Yes. Carlos, we do report that in our operating supplement. As of June 30, the outstanding part was $504 million. And we didn't make a $91 million and $97 million payment on July 1.

Operator, Operator

And we'll go next to the line of John Staley with Staley Capital Advisers.

John Adolphus Staley, Analyst

Bill, when the Trump administration removed five out of seven members of the Oversight Committee, I believe they were all political appointees. Did that include the Chairman?

William Charles Fallon, CEO

Yes. The current Chair of the Oversight Board was Arthur Gonzalez. He was one of the 5 people who was dismissed by the President.

John Adolphus Staley, Analyst

And he has, am I correct that he has historically been challenging to deal with in terms of his leadership as a professor.

William Charles Fallon, CEO

No, that you're referring to David Skeel. He stepped down a while back. Arthur Gonzalez is a retired bankruptcy judge.

John Adolphus Staley, Analyst

Okay. All right. So who were the 2 that were left and why were they left?

William Charles Fallon, CEO

John, there were no reasons given for that. We just know that the 5 were dismissed. The 2 who are left are Andrew Biggs and John Nixon.

John Adolphus Staley, Analyst

And do you find that a positive or a negative that those 2 that stayed?

William Charles Fallon, CEO

Listen, it's hard for us to assess. We don't deal with sort of each of the 7 Board members. We deal typically through their advisers. There's some contact occasionally with Board members. But as you can imagine, given all the parties involved that most of this is done through lawyers, et cetera, and advisers. So hard to know at the individual Board member level exactly how they view different aspects of the restructuring.

John Adolphus Staley, Analyst

But in order to get this restructuring completed, I gather that while they removed 5 of the 7, the Oversight Board's authority remains in place so that they'll have to put on an additional 5 or 4 or whatever the bylaws require for this oversight Board to continue to function and continue to exercise its so-called oversight power to approve any deal that's done.

William Charles Fallon, CEO

You're correct, John. Some things can proceed, but for the Board to actually approve and confirm a plan, they need to have a quorum. Two directors do not make a quorum under PROMESA; they need four members and a specific number of affirmative votes. Therefore, they will have to add Board members, and from what we understand, that is the intention. It's just a matter of when that happens and who those individuals will be.

John Adolphus Staley, Analyst

Okay. Are there any valuation guidelines regarding the transfer of fully paid bonds? Have there been any transactions in those bonds that indicate what the current market levels are?

William Charles Fallon, CEO

It's not a very deep or liquid market. There have been some trades, but they are quite small. Nothing comparable to the $374 million we transferred to the custodian. The small trades that have occurred have been at about $0.55 on the dollar.

Gregory R. Diamond, Managing Director of Investor and Media Relations

For the uninsured?

William Charles Fallon, CEO

Yes, those are for uninsured bonds, as Greg reminds me. But those are relatively small transactions.

Operator, Operator

And we'll take our next question from Patrick Stadelhofer with Kahn Brothers.

Unidentified Analyst, Analyst

Now that you've turned your claims into easy-to-sell securities, would monetizing half your exposure like you did 4 or 5 years ago, move along a sale process by lowering that uncertainty you talked about and kind of narrow that bid-ask spread? Or would at least help with a special dividend in the alternative?

William Charles Fallon, CEO

It clearly will reduce the uncertainty with regard to PREPA, which, as you know, is one of the things that we've cited needs to happen for us to pursue a sale of the company. So if we were to sell $374 million of our total exposure, which is a little bit in excess of $800 million, that clearly would be a big step in that direction. With regard to the second, a little bit premature to start speculating what happens with regard to special dividends, just given the remaining Puerto Rico exposure. But again, all those things are possibilities and the probability goes up as we take those types of actions that you're suggesting.

Unidentified Analyst, Analyst

And just the question is why did you take a step to transfer to the custodian now as opposed to some of these other tranches that already matured a few years ago? So just, I guess, a question around the timing.

William Charles Fallon, CEO

Yes. I think nothing special about the timing. We've been looking at this. It takes a while to put the program in place. We thought we've gotten to a quantum of bond claims where it was meaningful and that by increasing the marketability of those, it might help facilitate sales if we found attractive prices to transact at. But as we've said, we've also sold them without putting them into a custodian and creating custodial receipts where we have sold claims. But again, we thought it was a good thing to do. Nothing in particular about this time. There was no specific catalyst to doing it right now.

Operator, Operator

And we'll take our next question from Paul Saunders with Hutch Capital.

Paul Saunders, Analyst

On the transferred claims that we're talking about to the custodian, you mentioned $374 million. Is that all of the claims? Or my understanding was you had about $300 million previously, and now you just paid $92 million. So rough numbers, $390 million, $400 million. Did you leave any behind? And if so, was there a reason for that?

William Charles Fallon, CEO

No, we didn't leave any behind. As I mentioned, you can't transfer until you've paid off the full bond, right? So when you go back, we talk about our PREPA exposure, but it's made up of lots of different bonds that we insured. So even though you saw $91 million getting paid, it's possible that none of those were the last payment on a particular bond. So it's just a question of when you've made the last debt service payment and the bonds have completely paid off that we can then transfer it and create a new CUSIP for it.

Paul Saunders, Analyst

Perfect. That makes perfect sense. And then last one, this is also pretty tiny, but it did look like National's salvage went down a little bit, loss reserves went up slightly. I'm assuming that's changing the recovery assumptions on PREPA. And if so, I mean, I guess, is that right? And if so, is there a reason that you thought sort of PREPA recoveries might be a little bit lower than as of last quarter?

Joseph Ralph Schachinger, CFO

Yes. So the change you're seeing is a result of modifications to assumptions within our PREPA scenarios. Each quarter, we look at those assumptions and we may make modifications. This quarter, we did make a small modification and which generated a small loss, which you're seeing reflected in the results.

Paul Saunders, Analyst

Okay. It seems like you prefer not to elaborate further on that. Was there any specific event that prompted this change? While we're discussing this, does the market's positive view of the Board decision by Trump influence your recovery assumptions, especially since PREPA claim prices might be increasing? Will you consider that in your recovery assumptions for the quarterly balance sheet?

William Charles Fallon, CEO

Yes, Paul, in relation to your earlier comment about the current reserve reflected in the second quarter results, it primarily revolved around timing rather than the dollar or percentage recovery. As we monitor the litigation process each quarter, we try to estimate how much longer it might take, although no one has a definitive answer. The decline in salvage was due to the process taking longer than we anticipated three months ago, and there was no new information about potential offers from the Oversight Board or what the bondholders might accept. Regarding your follow-up question on this week's events and the newly constituted Board expected soon, we will consider that when adjusting our reserves for the third quarter based on new insights. Once the Board is in place with its advisers, they may adopt a new strategy that could enhance the chances of reaching a consensual deal instead of focusing on litigation, which people estimate could prolong the process. Therefore, this will definitely influence our reserves if it alters any of the assumptions in the scenarios we have utilized.

Paul Saunders, Analyst

That's great. And sorry, one more question for you, Bill, while I have the chance, because your openness is really helpful for me. The articles about the Board news are very positive. There is a belief that Trump is bondholder-friendly. Being closer to the situation than I am, do you agree with that? Do you have any insights or have you heard him mention Puerto Rico specifically or anything related to how his views might differ from the current Oversight Board? Or have you heard any expectations regarding Trump's perspective on how he would address the differences between the island, the Oversight Board, and the bondholders?

William Charles Fallon, CEO

So with regard to the last part of your question, none of us here have heard anything from the President with regard to Puerto Rico, right, whether it be any public statements, which we're unaware of any or anything that we've heard through advisers or any of his cabinet or anything like that. With regard to sort of the early part of the question and what does this mean and how we'll be approached and the news seems to have been a positive, as you mentioned, we obviously see all the same things. Given that we've been at this for quite a long time, it would be great if, in fact, sort of the market reaction is correct and this moves along faster than perhaps people anticipated even a week ago. Whether it's going to be more friendly to bondholders, all those things, hopefully, we'll learn more in the very near future. So we like to be optimistic. But again, what we know in terms of facts are that 5 Board members have been dismissed, and that's all we know at this point.

Operator, Operator

At this time, I am showing no further questions. So I'd like to turn the floor back over to Greg Diamond. Please go ahead.

Gregory R. Diamond, Managing Director of Investor and Media Relations

Thank you, Erica, and thanks to those listening to our call today. Please contact us directly if you have 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.

Operator, Operator

We'd like to thank everybody for your participation. Please feel free to disconnect your line at any time.