Earnings Call Transcript - MBI Q4 2023

Greg Diamond, Managing Director of Investor and Media Relations

Thank you, Brittany. Welcome to MBIA's conference call for our full year and fourth quarter 2023 financial results. After the market closed yesterday, we issued and posted several items on our websites, including our financial results, 10-K, quarterly operating supplement and statutory financial statements for both MBIA Insurance Corporation and National Public Finance Guarantee Corporation. 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 other SEC filings, as our company's definitive disclosures are incorporated in those documents. We urge investors to read our 10-K as it contains our most current disclosures about the company and its financial and operating results. The 10-K also contains 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 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 I'll read 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, which is 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 is Bill Fallon.

William Fallon, Executive

Thanks, Greg. Good morning, everyone. Thank you for being with us today. In December, we obtained the approval from the New York Department of Financial Services for National to pay an extraordinary dividend of $550 million from its excess capital, which enables MBIA Inc. to pay an extraordinary dividend of $8 per share to our shareholders that qualified as a return of capital. We also retained about $235 million of National's dividends at the holding company to enhance MBIA Inc.'s liquidity and financial flexibility. At this time, our primary objectives are to resolve our remaining Puerto Rico exposure and then restart the process to sell the company. Regarding PREPA, National's remaining exposure to PREPA was $610 million of gross par insured at year-end 2023. The Title III court begins the confirmation hearing for PREPA's plan of adjustment on Monday, March 4. 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 the Financials' insured portfolio has declined by approximately $3.3 billion from year-end 2022 to $28.4 billion at the end of 2023. National's leverage ratio of gross par to statutory capital at the end of the year was 25:1. At the end of the fourth quarter, National had total claims paying resources of $1.7 billion and statutory capital and surplus of $1.1 billion. Now Anthony will provide additional comments about our financial results.

Anthony McKiernan, Executive

Thanks, Bill, and good morning. I will begin with a review of our fourth quarter and year-end 2023 GAAP and non-GAAP results. The company reported a consolidated GAAP net loss of $138 million or a negative $2.94 per share for the fourth quarter of 2023 compared to a consolidated GAAP net loss of $52 million or negative $1.05 per share for the fourth quarter ended December 31, 2022. The higher GAAP net loss this quarter was largely driven by loss in loss adjustment expense at MBIA Corp. on its first lien RMBS insured credits related primarily to lower risk-free rates, and lower revenues driven by realized losses from sales of investments associated with funding dividends at National and the termination of swaps in the legacy ALM business at the holding company. The company's adjusted net loss, a non-GAAP measure, was $8 million or a negative $0.16 per diluted share for the fourth quarter of 2023 compared with adjusted net income of $15 million or $0.30 per diluted share for the fourth quarter of 2022. The unfavorable change was due primarily to lower premium revenues and nominal loss in loss adjustment expense at National versus a benefit in the prior comparable quarter. For the 12 months ended December 31, 2023, the company reported a consolidated GAAP net loss of $491 million or a negative $10.18 per share compared to a consolidated GAAP net loss of $195 million or negative $3.92 per share for the 12 months ended December 31, 2022. The higher GAAP net loss in 2023 was largely driven by an increase in loss in loss adjustment expense at MBIA Corp. compared to loss in loss adjustment benefits in the prior year, driven by an increase in risk-free rates during 2022 and at National related to Puerto Rico credits. Lower revenues driven by Variable Interest Entity activity at MBIA Corp., which was partially equity neutral, net losses on investments, and higher interest expense related to MBIA Corp. surplus notes. The company's non-GAAP adjusted net loss was $169 million or negative $3.49 per diluted share for the fiscal year 2023 compared with an adjusted net loss of $145 million or a negative $2.90 per diluted share for fiscal year 2022. The unfavorable change was due primarily to higher loss in loss adjustment expense at National. MBIA Inc.'s book value per share decreased to a negative $32.56 per share as of December 31, 2023, versus a negative $16.07 per share as of December 31, 2022, primarily due to the net loss for the year and the $8 per share shareholder distribution in the fourth quarter of 2023. Included in book value as of December 31, 2023, is a negative $44.91 per share book value of MBIA 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 $755 million as of December 31, 2023. Within this total are the following material items: unencumbered cash and liquid assets held by MBIA Inc. totaled approximately $411 million compared with $230 million as of December 31, 2022. The increase was due primarily to approximately $235 million of retained net cash inflows related to the as-of-right and special dividend proceeds from National in Q4 2023. The corporate segment's assets also included approximately $241 million of assets at market value pledged to the Guaranteed Investment Contracts. All swaps supporting the legacy GIC operation were terminated in Q4 2023 and Q1 2024. Turning to the insurance company's statutory results, National reported a statutory net loss of $9 million for the quarter ended December 31, 2023, versus statutory net income of $40 million for the quarter ended December 31, 2022. The unfavorable comparison was primarily due to higher net realized investment losses, higher loss in loss adjustment expense and lower premiums. National reported statutory net loss of $142 million for the year ended December 31, 2023, versus statutory net income of $75 million for the year ended December 31, 2022. The unfavorable comparison was primarily due to higher loss in loss adjustment expense, net realized investment losses, and lower premiums. Statutory capital decreased by $807 million from year-end 2022 and was $1.1 billion as of December 31, 2023, primarily due to the dividend payments in the fourth quarter and the full year net loss. Claims paying resources were $1.7 billion versus $2.4 billion at December 31, 2022. Turning to MBIA Insurance Corp., its statutory net income was $6 million for the fourth quarter of 2023 compared to statutory net income of $16 million for the fourth quarter of 2022. The unfavorable comparison was primarily due to a lower loss in loss adjustment expense benefit in Q4 2023 and lower premium earnings. For the year ended December 31, 2023, Corp. statutory net loss was $28 million compared to statutory net income of $46 million for the year ended December 31, 2022. The unfavorable comparison was primarily due to loss in loss adjustment expense in 2023 on first lien RMBS and salvage write-downs. As of December 31, 2023, the statutory capital of MBIA Insurance Corp. was $152 million, down from $169 million at year-end 2022, primarily due to its year-to-date net loss. Claims paying resources totaled $504 million versus $669 million at year-end 2022. MBIA Corp.'s insured gross par outstanding was $2.9 billion as of December 31, 2023. And now we will turn the call over to the operator to begin the question-and-answer session.

Operator, Operator

And we will take our first question from Tommy McJoynt with KBW. Your line is now open.

Thomas McJoynt, Analyst

Hey good morning. Thanks for taking my questions. I wanted to ask about capital at National. Obviously, well done on getting the approval for the large special dividend out of National. When you think about the amount of capital that's still at National relative to its exposure, how much excess capital do you think is still in that entity? And really just asking, just as we think of a scenario where in case a sale of the company scenario doesn't come to fruition soon, over time, the plan, I assume, would be to continue releasing capital from National. So it'd be helpful to think about how much excess is still there after the December maneuver. Is there a way to like quantify the capital ratio such as surplus to par exposure that you could point to? Or will we just have to wait for the exposure to continue to run off before more excess is freed up? Again, just any help with quantifying this topic would be helpful.

William Fallon, Executive

Yes, Tommy, I think you've hit on probably the two primary things. I think given the size of the portfolio and the runoff and other than the PREPA exposure, what we think of as a very clean portfolio. The two things to look for going forward are the continued runoff of the portfolio, which obviously we report every quarter, and then the resolution of PREPA. And I think as you see those two things continue to happen going forward, you can then start to make some determination with regard to how much capital could come out. Obviously, at the end of the day, New York State Department of Financial Services is the final arbiter of how much capital comes out of our company.

Thomas McJoynt, Analyst

Okay. Got it. And with the liquidity that you now have at the holding company level, this naturally does give you some options for the first time, which is certainly a good thing. Looking at the right side of the holding company balance sheet, can you remind us which of those liabilities are available to repurchase in the open market? Which ones are redeemable right now? And just what is your overall urgency to pay down some of those liabilities at the holding company?

Anthony McKiernan, Executive

Good morning, Tommy, it's Anthony. I think to your point, we are in a good position where we've got additional flexibility because of the inflows from the dividend. So when we look at the kind of liquidity window that I talk about, we're now looking with the cash on hand and assuming as-of-right dividends and normal income over the next few years, we're looking at kind of the 2030 time frame at this point as far as looking out with the current ability of the holding company. We'll look at opportunities to repurchase debt. Specifically, there's no callable debt left at this point. But opportunistically, we look at our medium-term notes and holding company debentures. During the first quarter, we actually did repurchase our 2024 medium-term notes at a discount. So we'll continue to look for opportunities that make sense to us economically. But when it comes to the ability to repurchase the Inc. debentures and the medium-term notes we can repurchase, the Guaranteed Investment Contracts, there's not as much flexibility there for us to actually enforce any kind of terminations on those exposures. So we're really focused on the medium-term notes and the holding company debt.

Thomas McJoynt, Analyst

Okay. Did you do a number of the medium-term notes trade at a discount? Like is there any ability to kind of accelerate some of those repurchases? You mentioned the first quarter one at a discount. I guess what would prevent you from getting more aggressive with repurchasing a number of medium-term notes if they're available at discounts, not sure if they are.

Anthony McKiernan, Executive

The prices have fluctuated, particularly following the dividend and the perspective of the holding company. We will continue to evaluate whether investing in Inc. or repurchasing the debt yields a better return. We are open to pursuing opportunities based on that assessment. Our focus remains on the timeframe around 2028, while we will need to examine the 2030 and later timeframe more closely, but there are certainly opportunities available.

Thomas McJoynt, Analyst

Got it. Thank you.

Operator, Operator

Thank you. We will take our next question from Ethan Meister, who is a private investor. Your line is now open.

Unidentified Analyst, Analyst

Hi, thanks for taking the call. I just wanted to run through the kind of the current state of play of PREPA as we head into the confirmation hearing. So against the $610 million of par exposure, under the current agreement and assuming it's not changed at the confirmation, you'll get about $599 million in cash plus the $20 million expense fee plus $237 million in notional CDIs. Is that right?

William Fallon, Executive

Yes, that sounds right.

Unidentified Analyst, Analyst

I was surprised that the loss adjustment expenses didn't seem to reflect the positive developments in Q4. Are you just waiting for confirmation and a potential appeal?

William Fallon, Executive

Yes. I think at this point Ethan, you, in a sense, just answered the question. There are a lot of things happening. There's the appeal which you referenced, which happened about a month ago, as we said, confirmation starts next week. That's about a 2- to 2.5-week process we believe. There are some people who have indicated, depending on how Judge Wayne rules, the confirmation could then be appealed. So I think we'll have a whole lot more information over the next couple of months with regard to PREPA, the timing and the resolution of it.

Unidentified Analyst, Analyst

Okay. And I think is it fair to say that there's some upside if the plan goes ahead as projected now?

William Fallon, Executive

Yes. So the way we do this, there are different scenarios that we have to go through for the reserving process. Obviously, one would be what the agreement says. Then there are other scenarios that you have to put forth as well. And I think if everything plays out the way you're suggesting, I think there is the potential for some upside.

Unidentified Analyst, Analyst

Okay. And then my second question is just on the NOLs. So there's $1.2 billion of NOLs that are fully reserved, right?

Anthony McKiernan, Executive

There's $1.2 billion DTA that is not currently on the balance sheet, but that's correct. It's $1.2 billion DTA.

Unidentified Analyst, Analyst

Okay. And $474 million of that is at the National, right? That's their stand-alone NOL?

Anthony McKiernan, Executive

National has a $474 million stand-alone NOL.

Unidentified Analyst, Analyst

Okay. And is there any opportunity to kind of realize any of that value as you're going through the transaction review process?

William Fallon, Executive

The answer is yes, it is something that is looked at. Each prospective buyer will come to their own determination as to how much of that they think they could use going forward.

Unidentified Analyst, Analyst

Okay. Great, thank you.

Operator, Operator

We'll take our next question from John Stanley with Stanley Capital Advisors. Your line is now open.

John Stanley, Analyst

Staley didn't become Stanley. Bill, it's clear that the market doesn't entirely recognize all the complexities within MBIA. I have to admit, this is the first time I’ve seen a company valued at 7.25 or 7.5, wherever it was trading, while paying an $8 return of capital dividend. Now, it's trading at less than cash per share, which is a rough calculation; there’s $8 a share of cash, and the stock is trading below that. I'm uncertain where it will land after all these announcements. It was around $7. I certainly expect challenges in buying stock due to the significant dynamics of the information flow, and you're involved in not just the court matters but other aspects too. However, what is the company's ability to continue buying? I believe you haven't purchased any shares since the third quarter of 2023. Can you participate in the market at all? Additionally, isn’t it reasonable to assume that this residual MBIA entity should be valued at more than cash per share?

Anthony McKiernan, Executive

John, this is Anthony. In response to your first question about share repurchases, we have conducted numerous share buybacks in recent years from National. Currently, National cannot repurchase shares due to the amount it owns and the current trading price compared to its surplus and requirements under New York insurance law. Therefore, any share repurchases would need to come from the holding company. As noted by the previous questioner, we must evaluate this in the context of the best uses of the holding company’s liquidity to enhance the company's value for a strategic alternative. At any given moment, we assess whether it's prudent to buy back debt or to repurchase shares and where that might occur. We do have a share repurchase authorization still in place, but we must weigh that against other opportunities as we work to simplify the company and prepare for a strategic alternative.

William Fallon, Executive

And John, it's Bill. Let me just add to that, which gets really, I guess, to the second part of your question. As we think about this going forward, I think what we've focused on over the last year or so as we set out to sell the company and then pause that process is there were a couple of things that really were the focus of prospective buyers and things that we have focused on as well. One was getting money out of National. The second was resolving our Puerto Rico credits. And at this point, that's just PREPA. I think with regard to the special dividend that came from National at the end of last year and then the distribution of the shareholders, if you remember, that's the first time since the creation of National approximately 15 years ago that we've had any special dividends come out of National. So there was a question whether or not you could get money out? The answer obviously is yes, and it's one of the other callers asked earlier. We think the company is well positioned going forward as we resolve PREPA and the portfolio runs off to get additional money out of National, which I think is only beneficial for our shareholders. The second is the Puerto Rico situation, which again, over the next couple of months, as I indicated, I think we're going to learn a lot more about where that's going and the timing related to PREPA. So both those things, we think, are real positives as you think about the value of the company going forward.

John Stanley, Analyst

Thank you. Thanks again for the distribution. You made a lot of long-term shareholders pleased to see their basis in many cases, certainly, in my case too, way beyond their basis return.

William Fallon, Executive

Thank you for your support.

Operator, Operator

Thank you. We'll take our next question from Paul Saunders with Hutch Capital. Your line is now open.

Paul Saunders, Analyst

Good morning, guys. Thanks for taking my questions. My first question is pretty similar to the first caller. I would start by saying congrats on getting the special dividend out of National. That's impressive and great news. And so similar to the first questionnaire, just operating under the assumption that there is no sale, and you look at your medium-term notes and holdco liabilities, do you expect with kind of the lower investment base and as-of-right dividends from National, that the cash flow can cover the debt as it comes due? Or would part of the assumption be to repay that debt? Would a special dividend be needed at some point in the future to make those payments?

Anthony McKiernan, Executive

So this is Anthony. As I said earlier, where we are now accounting for potentially lower absolute as-of-right dividends just because of the lower investment base. Obviously, part of this depends on what yield possibilities are. We think we're looking at 2030 under the current operating metrics, which, again, is just as-of-right dividends, cash on hand of the company, and normal income at the holding company. So it's always been contemplated that there would be potentially additional special dividends going up to the holding company at some point. But obviously, when you look at National's profile and the time lead we now have, there's an ample amount of time, assuming there was no sale of the company, to fund future debt requirements. In addition, there are other things we do. There are refinancings that we would potentially achieve, and National does hold a very large portion of the 2034 Inc. debt. So that gives us possibilities as far as restructuring and things of that nature if we wanted to do that. So we have several arrows in the quiver there. But again, as far as additional distributions based on kind of a steady-state assumption, we've got ample time for additional distributions, and we're looking more towards 2030 at this point.

Paul Saunders, Analyst

With $400 million of liquidity available at the holding company, it appears that you are adequately positioned to manage your debt until 2028. When asked earlier about repurchasing liabilities, you indicated that your focus is primarily on obligations leading up to 2030. My question concerns your liquidity situation; while you don't have sufficient liquidity to cover all of your debt, you do possess more than enough for your immediate needs. Could you provide more clarity on how this influences the pricing for your debt? There seems to be a significant yield curve, possibly due to your previous comments. Specifically, if you are considering purchasing shorter-term debt at 7% compared to longer-term debt at around 12%, what kind of yield difference would compel you to opt for the longer-term debt instead of the shorter-term option?

William Fallon, Executive

Yes, Paul, it's Bill speaking. You focused on the right thing. We consider all possibilities, and we don't share information regarding the necessary differential. To your point, some details are not disclosed to the public. However, we assess all maturities and make decisions based on the differential. We also consider liquidity at the holding company that Anthony mentioned. So, we're continuously evaluating all those options.

Paul Saunders, Analyst

Okay, sounds good. Thanks, guys. Congrats again.

Operator, Operator

We do have a follow-up from Ethan Meister, who is a private investor. Your line is open.

Unidentified Analyst, Analyst

Hi, thanks again. By 2030, the portfolio at National will significantly run down, right? So you wouldn't even anticipate the capital required there. I mean, it looks like it will be somewhere in the low-teens billions by the end of 2030, right?

William Fallon, Executive

I think that's correct, yes.

Unidentified Analyst, Analyst

I wanted to check on the share repurchase. Is the remaining $71 million all intended for Inc., since I recall it was previously stated to be between National and Inc., but now you've mentioned there's no capacity at National?

William Fallon, Executive

You're correct. It can be used by either entity. Right now, as Anthony described, under the department regulations, we have more capacity at National. So right now, it would only be the Inc. If for some reason, the situation at National were to change in the future, the $71 million would still apply there as well.

Unidentified Analyst, Analyst

Okay. And is that something that you are considering to restart the repurchase after you get through the quiet period here?

William Fallon, Executive

Again, we always look at what the opportunities are with our capital, whether it be debt, shares or anything else we might need it for.

Unidentified Analyst, Analyst

Okay, thank you.

Greg Diamond, Managing Director of Investor and Media Relations

Thank you, Brittany, and thanks to all of you for listening 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 about the company. Thank you for your interest in MBIA. Good day, and goodbye.

Operator, Operator

Thank you, ladies and gentlemen. This does conclude today's MBIA Fourth Quarter and Full Year 2023 Financial Results Conference Call. You may now disconnect your lines, and have a wonderful day.