MBIA Inc.
Q2 2016 Earnings Call Transcript

Published: 9 Nov 2016

[Operator:]

Welcome to the MBIA Inc. Third Quarter 2016 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.

[Greg Diamond:]

Thank you, Crystal. Welcome to MBIA’s conference call for our third quarter 2016 financial results. After the market closed yesterday, we issued and posted several items on our websites, including our financial results press release, 10-Q, quarterly operating supplements 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 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-Qs and other SEC filings as our company’s definitive disclosures are incorporated in those documents. We urge investors to read our 10-K and our 2016 10-Qs as they contain our most current disclosures about the company and its financial and operating results. The 10-K and 10-Qs also contain information that may not be addressed on today’s call. Regarding the non-GAAP terms included in our remarks today, the definitions and reconciliations of those terms may be found in our 10-K and 10-Q, our financial results press release and our quarterly operating supplements. 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 yesterday’s financial results press release. And 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 the 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, Jay Brown, Anthony McKiernan and Bill Fallon will provide some introductory comments then a question-and-answer session will follow. Now, here is Jay.

[Jay Brown:]

Good morning, everyone. Thank you for joining us today. Under the assumption that more than a few you probably got a bit less sleep than normal last night, we'll keep our comments brief. Since our last conference call, we have continued our progress in several key objectives for our company. While our activities haven't translated significantly into our financial results for this particular quarter or our stock price, we continue to lay the groundwork for a higher valued company in the future. We do remain very confident about our business model and our ability to deliver increased value to our shareholders over time. We also continue to believe that the concerns about the performance of our insured Puerto Rico exposure is the biggest factor influencing our recent stock price. It also appears that the uncertainty of the outcome leading up to yesterday's surprise election results in over how soon and to what degree that that is going to increase interest rates has also impacted the overall stock market and in turn the MBIAs stock price. Also analysts have suggested at least some investors believe that the status of MBI Corp. has caused an overhang on the MBIA stock price. We don't know whether this is an accurate assessment of investor sentiment or not. But we don't believe that MBI Corp. will have a material impact one way or the other on MBIA Inc.'s financial condition. As we stated, National intends to request a special dividend after the uncertainty regarding our Puerto Rico credits is sufficiently reduced. Our overall expectations regarding the resolutions of our Puerto Rico exposures have not changed in any material way. We continue to believe that our ultimate losses will be relatively modest and that we are well situated for receiving meaningful recoveries on our paid claims. However, the exact timeframe for reaching those resolutions is still very unclear. After Anthony covers our GAAP and operating financial results, Bill will address our Puerto Rico credits in greater detail. Before turning it over to Anthony to go to the financial results, I'd like to note that our adjusted book value or ABV remained relatively unchanged at September 30, which was up $2.70 from year-end 2015. Most but not all of the improvement in our ABV per share has resulted from our share repurchases over the course of the year. We will continue to be opportunistic about repurchase our shares as we carefully take into account the holding company's current and forecasted liquidity positions. I will also again highlight that the holding company's liquidity position is evaluated under several modeled stress scenarios. Beyond the usual test reflecting credit and interest rate volatility, we continue to model different scenarios with respect to our GFL MTNs and get portfolios to make sure we have adequate liquidity to be both scheduled in early contract terminations. As we have stated previously at MBI Corp. we are focused on ensuring that there are adequate resources to support claims payments to all of its policyholders, as well as maximizing recoveries for its surplus noteholders and potentially its preferred stockholders. With statutory capital $674 million and claims paying resources of $2.1 million, we continue to view the primary challenge at MBI Corp. to be liquidity not capital. The $770 million Zohar II maturity on January 20, 2017 is obviously the most significant liquidity challenge facing MBIA Corp. The agreement to sell the MBIA UK company is an important first step towards addressing the Zohar II notes maturity. MBI Corp. is now actively seeking to secure financing to enable it to satisfy all the Zohar II claims obligations on January 20, after which it will aggressively seek recoveries on the underlying Zohar notes assets. While we are hopeful that we will be successful in these efforts, there clearly remains some uncertainty. As a result of this uncertainty MBI insurance Corporation has also commenced preparing contingency plans with respect to a potential rehabilitation proceeding in advance that it’s unable to restructure the Zohar II notes or a range financing prior to the notes maturity in January. In each case on terms acceptable to MBIA insurance Corporation, at this time, we cannot provide any further details related to the Zohar matters. Now, Anthony will provide details on our financials and then Bill will provide an update on National's activities.

[Anthony McKiernan:]

Thanks, Jay. And good morning everyone. Combined operating income, our primary non-GAAP metric of short-term performance in the third quarter of 2016 was $5 million or $0.04 per diluted share, compared to $24 million or $0.15 per diluted share for the third quarter of 2015. The decrease is primarily due to higher losses in LAE and lower net premiums earned at National, as we experienced fewer refundings this quarter and declining scheduled premiums earned. Our focus continues to be on ensuring that the holding company maintains adequate liquidity and we will seek the redeployment of some of National's ample excess capital after there is reduced uncertainty regarding the outcomes for our Puerto Rico exposures. Operating expenses are also a focus, as we look out over the next few years. As of the third quarter our 2016 consolidated operating expense trailing 12 month run rate was approximately $135 million. And we targeted a goal of below $100 million by fiscal year 2018. On a GAAP basis, consolidated net income was $31 million, $0.23 per diluted share for the third quarter of 2016 versus a net loss of $35 million or negative $0.23 per diluted share for the third quarter of 2015. The quarter-over-quarter improvement was primarily due to three items, mark-to-market gains on our fixed pay swaps related to MBIA Inc.'s GIC obligations due to higher interest rates, net gains on sales of investments by National and higher fee income for MBIA Corp. related to the partial termination of a transaction during the quarter. These items were partially offset by higher insured losses at National. Book value and adjusted book value per share both increased during the first nine months of the year, primarily reflecting the favorable effect of share repurchases. Book value per share increased from $24.61 as of December 31, 2015 to $26.95 as of September 30, 2016 and ABV per share a non-GAAP measure increased from $29.69 as of December 31, 2015 to $32.39 as of September 30, 2016. Share count decreased from 152 million as of year-end 2015 to 136 million as of September 30, 2016. The company did not repurchase any shares in the third quarter of 2016 and there was $88 million remaining under the company's share repurchase authorization, which was approved during the first quarter this year. As Jay stated, we will continue to repurchase shares on an opportunistic basis and subject to MBIA Inc.'s current and forecast liquidity position. Of note, after quarter end, MBIA Inc. received a $118 million as of right dividend from National as scheduled and MBIA Inc. expects to receive a tax escrow release of up to $94 million in January 2017. Now I would like to take a few moments to walk through highlights in the two operating segments. National's GAAP net income was $44 million for Q3 2016 versus $46 million for the third quarter of 2015 as higher losses in LAE was somewhat offsets by gains on sales of investments. National's operating income was $24 million compared to $48 million in 2015. The drivers of the reduced income were lower earned premiums, as there were lower refunded and scheduled earned premiums and higher loss in LAE associated with Puerto Rico. National's capital adequacy and liquidity positions continue to strengthen. The balance sheet is anchored by National's $4.5 billion investment portfolio which is primarily comprised of highly rated marketable securities. Statutory capital and claims paying resources continue to be strong, totaling over $3.5 billion and $4.7 billion respectively as of September 30, 2016. Moving briefly to the corporate segment. The segment reported a GAAP net loss of $15 million for the third quarter of 2016 versus a net loss of $43 million for the comparable prior year quarter. The $28 million favorable variance was primarily driven by a favorable change in the fair value of interest rate swaps. Key metrics were essentially unchanged for this segment. The segment had a third quarter 2016 operating loss of $19 million versus an operating loss of $24 million for Q3 2015. Our non-GAAP operating results exclude gains and losses on financial instruments at fair value and foreign exchange, among other items and as our results are typically less volatile. As of 9/30/16, MBIA Inc. had an ending liquidity position of $237 million, which excludes its tax escrow account balance of $295 million as of quarter end, as well - as approximately $800 million in assets pledged to get GICs an interest rate swaps. The corporate segments total assets as of September 30, 2016 were $2.4 billion. Now I'll turn it over to Bill who will provide an update on National.

[Bill Fallon:]

Thanks, Anthony. Good morning everyone. There has been several noteworthy development since our last conference call three months ago. But none of them have had much influence on our third quarter 2016 financial results. I will provide some perspective on the PREPA restructuring, the PROMESA oversight board and selected financial and operating results for National and its business activities. Regarding PREPA the legal challenge, the securitization law known ACT IV [ph] is working its way to the legal system. While the delay from this proceeding almost certainly means that the PREPA restructuring will not occur this year. The benefits of the restructuring support agreement to all parties have not changed and we hope to see the restructuring executed in the first half of 2017. PREPA has met many of the conditions specified in the RSA, including the appointment last week of an independent Board of Directors for PREPA. Turning to PROMESA in the oversight board. In early September the oversight board was established in it has had a couple of board meetings. The board name Jose Carrion the chairman of the board launched efforts to higher legal counsel, and a financial advisor and nominated three professionals to the governor for selection of an interim revitalization coordinator. The board also filed papers with the US District Court, seeking to maintain stays on several litigation matters that had been initiated. In addition, the board set deadline for Puerto Rico officials to deliver revised fiscal plan and a related financial information. We expect work with the oversight board, the Commonwealth and other creditors to address Puerto Rico's challenges, while aggressively pursuing repayment of all National insured debt and the claims we have already paid. Overall, we continue to view the passage of PROMESA and the appointment of the oversight board as positive development for Puerto Rico in its creditors. In addition, we believe that Governor elect José will also be good for Puerto Rico and its creditors. Outside of Puerto Rico, the other credits to National's insured portfolio performing within our expectations. Turning to new business, our production continues to demonstrate steady and sustainable growth. We insured $339 million of gross par during the third quarter, which was nearly as much of the $367 million of gross par that we wrote during the first six months of this year. For the first nine months of 2016 we've insured $706 million of gross particularly, 61% more than the $439 million we insured for the first nine months of last year. The growth is even greater from our policy count perspective. We issued 96 policies for the first nine months of this year versus 33 policies for the first nine months of last year. The markets growing acceptance of national's insurance is also reflected in the number of counterparties with whom we transacted business and repeat business and by the narrowing of National's trading differential as compared to its bond insurance competitors. The bond insurance industry penetration for the first nine months of 2016 was 5.8% of total municipal issuance, compared to 6.6% of the first nine months of 2015. Of the insurable market, that is new issue municipal bonds with triple B to single-A ratings, the insured penetration was 13% which was comparable to the penetration for the first nine months of 2015. Low interest rate continues to be a challenge for the industry. We continue to believe that our industry will experience growth over the coming years in large part due to the value that bond insurance provides to issuers and the market and we believe National is well position to participate in that growth. From a financial perspective, National reported $24 million of operating income for the quarter and it ended the quarter $3.5 billion dollars of statutory capital and $4.7 billion of claims paying resources. As National's insured portfolio continues to amortize, its capital position and its capital ratio continue to improve. National's insured portfolio reduced by notice $13 billion of gross par during the third quarter of 2016 and in the quarter $125 billion of gross par outstanding. National also ended the quarter with a leverage ratio, gross par to statutory capital of 35 to 1, down from 48 to 1 at year-end 2015. After the end of the third quarter in October as Anthony mentioned, National paid and as of right dividend of $118 million to MBIA Inc.. Under S&P stress tests, which was last assessed based on our year-end 2015 insured portfolio and financial condition, we estimate that National had approximately $1.5 billion of excess capital relative to the AAA capital requirement. Given the further delivering of National's insured portfolio and its positive financial results over the first nine months of this year, we believe that amount of excess capital has grown. As mentioned on previous calls, we plan to seek approval for National to pay a special dividend when there is less uncertainty regarding our insured Puerto Rico exposure. Now we will open the call for your questions.

[Operator:]

[Operator Instructions] Your first question comes from the line of Chas Tyson with KBW.

[Chas Tyson:]

Hey, guys, good morning. Just wanted to ask on the reserve position at National first. Obviously, with the claims payments to Puerto Rico, and on the July 1 payment, the reserve has gone pretty well into the negative at this point. So wanted to ask on your perception of the ability to get recoveries there and what the precedents are for something like that in past municipal instances?.

[Jay Brown:]

Yes. Chas, thanks for the question. As you know in past situations the recoveries for National and for the bond insurance industry as a whole had been very, very good. In case of Puerto Rico as you mentioned the PROMESA oversight board is really just getting started. They've started some of the activities as I mentioned. We do think that will be very positive. And so we do think the opportunities for recoveries is quite great. In addition as I mentioned, we do think that Ricardo Rossello, the governor-elect, will also be good for Puerto Rico and for creditors. So we think as we get into next year there will be lots of positive developments with regard to the overall credit situation in Puerto Rico and in particular, we do think at that point recoveries will be addressed.

[Chas Tyson:]

Got it. So I mean, the expectation is that you'll actually be able to get money back for the claims payments you've already made, right? Is that the way, am I thinking about the reserve the right way at this point?

[Jay Brown:]

Correct. There are two different things, we make payments and that may or may not relate to the loss reserves that we have. So for example, as you know, we can make a claim payment and not have any reserves on a specific credit, I am not commenting on those in Puerto Rico specifically, if we believe we're going to get a 100% recovery after a payment.

[Chas Tyson:]

Okay. And then can you just talk about the -- I know the January 1 payment is not as big as July, but just the positioning there now that we've got a new administration that will take office pretty shortly after that, how you guys are thinking about the potential for Puerto Rico to make that payment, if the new of government may change that at all?

[Jay Brown:]

Again, it’s hard to predict at this point between now and when the new governor takes off, it’s the beginning of January exactly what conversations and what decisions are made. But as you mentioned the payments are relatively smaller at the beginning of January versus for example, the July payment that we've gone through the summer. So again, we remain optimistic with regard to what will happen over the next sort of 6 to 9 months. Again, especially with the new governor coming on board and with the oversight board getting up to speed.

[Bill Fallon:]

Chas, and recall it, there's actually - there's two issues associated with Puerto Rico ability to make payments. One is, do they have the money and secondarily do they want to make the payment and since middle of this year, those two have diverged quite a bit in terms of our expectations and where they had cash and could have made payments versus the desire not to make payments on anything if they could get away with it. So one of the things that we believe that - one of the highlights of that all merge very quickly with PROMESA is a much better understanding of where the cash that's being collected through taxes in a variety of other fees where it's going. Because if you look at the overall collections for Puerto Rico they have not deviated that greatly from what expectations were, but obviously the amount of payments going out the door to debtors has been very small.

[Chas Tyson:]

Right. And just switching over to corp. for one last question. Can you talk about the financing strategy you're pursuing there, whether it's focused on financing off of claims payments already made or potential claims payments in the future, or if it's focused on other assets given some of the lack of transparency on potential claims payments, as well as if you've been able to acquire any more of the Zohar notes beyond what will be received in the MBIA UK transaction?

[Jay Brown:]

No comments. Okay. Thank you very much.

[Operator:]

Your next question comes from line of Andrew Gadlin with Odeon Capital Group.

[Andrew Gadlin:]

Hi. Good morning. Thank you for taking my question. Gentlemen, you reserve that National (inaudible) were increased this quarter, and I was just wondering if you could discuss what led to that, given that generally the market perception of Puerto Rico recoveries has increased over the quarter and Chicago creditworthiness, at least the perception of Chicago creditworthiness has also increased? So what was it that you saw that led to the increased reserves this quarter?

[Jay Brown:]

Andrew, as you know every quarter we go through all of the credit and while we don't give a credit by credit breakdown, as you mentioned Puerto Rico was primary factor in the cause of the increase. And really as we said, we go through it every quarter, we look at the situation, you're correct, there is been no sort earth-shattering element. But again we go through scenarios for each credit. There is probabilities associated with those and we come to a conclusion with regard to what the reserves should be. So really it’s nothing other than the normal process at this point in time. You know, again, as you know there is lots of litigation and PROMESA board is getting up to speed. So nothing kind of stood out in particular, I think it's just the aggregation of the process across the different credits.

[Andrew Gadlin:]

Would it be possible maybe to break it down? Would it be possible to say it's more related to timing of recoveries versus actual dollar amounts?

[Jay Brown:]

There is an element of timing and recoveries. In some of the scenarios there are things such as deferment of principal, but with interest being accrued. So all those things come into play, you are absolutely correct.

[Andrew Gadlin:]

Okay. And then you discussed filing a request for a special dividend. I think last quarter, what you said was that you might look to request that at the end of this year. But I just heard you say that you'd be looking to make that request as more of the Puerto Rico restructuring played its course. So I just want to be clear on that and the timing, what your thoughts are.

[Jay Brown:]

Yeah, as you know, the most important thing is the portfolio continues to run off at a very fast pace. So again, if you look at this year, we started the year about a $161 billion a par, were down to $125 billion, so already more than 20% of the portfolio has come off, if you analyze that we probably have 30% of the portfolio come off this year. So while we only do at an annual basis because that's the way S&P runs their test. The excess capital continues to grow with inside National, which is really we think the focus and the core of so much of the value of National. In terms of dividend, I think we've been very consistent saying that we're looking for some degree of the uncertainty the eliminated or mitigated with regard to Puerto Rico that could be several things, that could be actions that the PROMESA board takes, that could be the execution of PREPA, it could be something else that perhaps isn’t front center today. But again, I think every time on the call we said we're looking to reduce some of the uncertainty and then we'll go to the department of financial services to ask for a special dividend, which most likely would be sort of the first of several special dividends over time. So we can right-size the capital inside National.

[Andrew Gadlin:]

And the amount of excess cash by your models is now $1.5 billion. Can you give us some ballpark size of the special dividend that you'd like to get or that you think you might be able to get? I think you said the portfolio is $4.5 billion as of quarter end. You pulled out $100 million first week of October, probably pulling out, I think you said $94 million in January. How big could we be talking here? $500 million, $750 million or something much less?

[Jay Brown:]

Yes, so couple of things. The capital what we call the stat capital National is about $3.5 million at the end of the quarter, you're correct, we took $118 million as of right dividend and that's been pretty consistent now for the last few years. We would expect that number. We have the as of right dividend again next year, it may come down only because of portfolios generating less than earnings. But ballpark it’s in that range. Keep in mind also that taxes that National pays go up to MBIA Inc. as well to provide liquidity for inc. and then in terms of the size of special dividend it will depend on sort of the facts and circumstances at the time in which we apply. But again, we will endeavor to create a more optimal capital structure when the uncertainty has reduced in Puerto Rico.

[Anthony McKiernan:]

I would just add the comment that you know, although we believe the excess capital position is extremely large, you shouldn't assume that were going to make a decision at National to request all of it back at one time. It's much more likely what we'll do is do ask for special dividends over a three or four year time horizon. Because the uncertainty isn’t going to go all away in one fell swoop. We expect it will be a sequential reduction in uncertainty associate with Puerto Rico as PROMESA moves forward and as different debt issues get resolved. So as you look at our potential cash stream coming up from National through special dividends to the extent you want to model it, I would suggest you would want to model it over several years, rather than think it's all going to happen at one time.

[Andrew Gadlin:]

So meaning that you would file for special dividends every, let's just say thee years, something like that?

[Anthony McKiernan:]

I think actually again it will depend on the circumstances of the time, its very possible that we would go for a special dividend in three consecutive years, okay, instead of saying just using number 500 million or maybe that we pick some number - it would be more appropriate to do that over two or three years with a special dividend in each of those three years, but not every third year.

[Andrew Gadlin:]

Got it. Okay. That's helpful. Last question. I know that the situation at Corp. and with Zohar is you fluid, but the statutory filings released last night specifically say, and it fits with your remarks, the company is endeavoring to find a financing based off of Zohar assets. But could there be financing based off other assets that Corp. has? Huge premium receivable portfolio, huge excess spread reserves expected, some substantial litigation assets, could there be a financing based off of any of those assets?

[Anthony McKiernan:]

Everything possible. We are focused as it was disclosed on the Zohar assets, part of the reason for that is to balance the potential claim payments to other policyholders beyond Zohar's we go forward. As I said this morning there's no guarantee we will get that done before January 20, but I would comment that we've got a pretty talented team of people here. We solved then awful lot of problems over the last eight years and I remain cautiously optimistic that we'll get this one resolved over the next few months.

[Andrew Gadlin:]

Okay. Great. Thank you very much your time.

[Operator:]

Your next question comes from the line of Sao Rizato with Banco Finantia..

[Sao Rizato:]

Hi. My questions have answered, but I'm sorry, I couldn't take the question off. Apologies.

[Jay Brown:]

No problem.

[Operator:]

[Operator Instructions] And your next question comes from line of Peter Troisi with Barclays.

[Peter Troisi:]

Good morning, guys. Just a question on Corp.'s second lien exposures, just reading through the notes in the supplement, it looks like the $59-million payment on the second liens this quarter was specific to some changes in the collateral in the second quarter. So just want to make sure, one, I'm understanding that correctly. And then I'm trying to better understand if the spike in the second lien payments this quarter was tied to some specific circumstances or if there's some other trend there that we should be aware of?

[Anthony McKiernan:]

Peter, good morning. This is Anthony. On the second lien portfolio, let me walk through why we had increased payments. We've had a dynamic and a second lien book for the last few years where there is a universe of loans that are severely delinquent, so well over 180, because there is no specific charge-offs date in securitizations that they're in, you really don't know what month the servicer is going to charge those loans off. So we've already accounted for those loans and our loss reserves, these are loans we know would default over time. The question just was when would they actually be charged off So at one time this pipeline of loans was actually in the neighborhood of $100 million, the $59 million you see this quarter, a piece of that was a part of that pipeline being charged off during the quarter. To give you the quantum, we're down from about $100 million at the peak, down to about $20 million now. So there should be less month-to-month volatility in our outflows and we would generally expect return to being a net receiver of cash in short order. But there was no dynamic with the collateral or any change to the actual collateral pool that caused it, it was a timing issue.

[Peter Troisi:]

Okay. That's helpful, Anthony. I appreciate it. So the collections on the second liens is also declined this quarter. I think it was $13 million below the quarterly run rate. What drove the decrease there? Is it related to your prior comment or something else on the collections?

[Anthony McKiernan:]

Mostly related to my prior comment, there were some higher delinquency and charge-offs this quarter as well, which affected the excess spread collections for the quarter, but mostly the former.

[Peter Troisi:]

Okay. But it sounds like the net of the gross payments and the recoveries you expect that to be a source of cash going forward?

[Anthony McKiernan:]

Right.

[Peter Troisi:]

Okay. And then just one other from me, it looks like there were a few private sovereign and sub-sovereign exposures that were added to the below-investment-grade list this quarter. I'm assuming those were rated investment grade last quarter, so any common theme there around what led to the downgrades of those exposures?

[Anthony McKiernan:]

They were very specific to those individual credits and while we actually don't expect that there would be any losses on those credits - Spanish credits that we look at on an individual basis and its is really more about just increased monitoring versus any expectation at this point that we have lost on those credit.

[Peter Troisi:]

Okay. Great. Thanks for the answers.

[Operator:]

At this time, there are no further questions in queue. I will now turn the conference back to Mr. Greg Diamond.

[Greg Diamond:]

Thank you, crystal. And thanks to those of you listening to the call. Please contact me directly if you have any additional questions. We also recommend you visit our website at MBIA.com for information on the company. Thank you for your interest in MBIA. Good day and good-bye.

[Operator:]

This concludes today's conference call. You may now disconnect.