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Edited Transcript of MBI earnings conference call or presentation 9-Aug-18 12:00pm GMT

Q2 2018 MBIA Inc Earnings Call

ARMONK Aug 27, 2018 (Thomson StreetEvents) -- Edited Transcript of MBIA Inc earnings conference call or presentation Thursday, August 9, 2018 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Anthony Matthew McKiernan

MBIA Inc. - Executive VP & CFO

* Greg Diamond

MBIA Inc. - MD of Investor and Media Relations

* William Charles Fallon

MBIA Inc. - CEO & Director

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Conference Call Participants

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* Andrew Elie Gadlin

Odeon Capital Group LLC, Research Division - Research Analyst

* Bose Thomas George

Keefe, Bruyette, & Woods, Inc., Research Division - MD

* Edwin George Groshans

Height Analytics, LLC - Senior VP & Director of Financial Services

* Peter Vincent Troisi

Barclays Bank PLC, Research Division - Director & Senior Analyst

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Presentation

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Operator [1]

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Welcome to the MBIA Inc. Second Quarter 2018 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.

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Greg Diamond, MBIA Inc. - MD of Investor and Media Relations [2]

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Thank you, Maria. Welcome to MBIA's conference call for our second quarter 2018 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 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-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-Q 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.

The definitions and reconciliations of the non-GAAP terms included in our remarks today are also included in our 10-K and 10-Q as well as our financial results press release and quarterly operating supplements. A 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.

Now here's our safe harbor disclosure statement. Our remarks on today's conference call may contain forward-looking statements. Important factors such as general market conditions could cause our actual results to differ materially from the projected results in our forward-looking statements.

Risk factors are detailed in our 10-K and 10-Q, which are available on our website at mbia.com. The company cautions not to place undue reliance on any such forward-looking statements. The company also undertakes no obligation to publicly correct or update any forward-looking statement if it later becomes aware that such statement is no longer accurate.

For our call today, Bill Fallon and Anthony McKiernan will provide introductory comments, then a question-and-answer session will follow. Now here is Bill Fallon.

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William Charles Fallon, MBIA Inc. - CEO & Director [3]

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Thanks, Greg. Good morning, everyone. Thank you for joining us today.

During the second quarter, we continued to focus on remediation efforts for our Puerto Rico credits and managing our liquidity and capital. With respect to Puerto Rico, the economy continues to rebuild and recover from the devastation caused by hurricanes Irma and Maria last year.

Earlier this week, it was reported that Puerto Rico has now had 7 uninterrupted months of upward trend of economic activity according to the Economic Activity Index prepared by the Economic Development Bank.

Also, in particular, better-than-forecasted sales tax receipts, among other measures, provide additional evidence of the level and scope of commerce on the island. It is these sales tax receipts that are the subject of an agreement for the COFINA debt that was announced yesterday.

We insure approximately $1.2 billion of accreted value of COFINA senior bonds and are a party to yesterday's agreement. While there are many steps required to confirm the COFINA settlement, a December confirmation date has been targeted.

Moving to PREPA. There was a new PREPA restructuring settlement agreement announced recently, but only a minority of bondholders is supporting it, and we are not party to it. In the meanwhile, we continue to await rulings on several litigations underway that may impact developments regarding debt resolutions for our insured Puerto Rico credits. We believe that the 2 decisions this week, the first related to the powers of the Oversight Board vis-à-vis the Governor and the First Circuit's decision to remand the stay relief request in the PREPA case are both positive for creditors.

While it is difficult to predict how the PREPA and other credit negotiations will evolve, we believe that the people of Puerto Rico and the bondholders would benefit from consensual debt resolutions that will allow Puerto Rico to regain access to the Capital Markets more quickly and more economically. In fact, this was the intent of PROMESA. We remain committed to working constructively and collaboratively with Puerto Rico and the Oversight Board to reach reasonable and mutually beneficial debt resolutions.

We believe yesterday's settlement announcement is mutually beneficial, but we also intend to vigorously pursue as necessary our rights and remedies as an insurer of those bonds.

The other credits in our insurance portfolio continue to perform in line with our expectations. National's insured portfolio has further reduced to $64 billion gross par outstanding at the end of the quarter. Its leverage ratio of gross par to statutory capital was 24:1, down from 26:1 at year-end 2017.

At June 30, 2018, National had statutory capital of $2.7 billion and claims-paying resources of $4.1 billion.

Turning to other matters, National did not repurchase any shares of MBIA Inc. common stock during the second quarter. On a year-to-date basis, National spent $14 million to buy 2 million shares of MBIA's common shares at an average price of $7.25 per share. We continue to believe that repurchasing our shares at attractive prices is an effective way to increase long-term value for our shareholders. As of August 2, we had $236 million remaining under our existing share repurchase authorization.

For the second quarter, we continued to reduce consolidated operating expenses. Those expenses were $19 million for the quarter, down from $32 million for last year's second quarter.

For the 6 months, operating expenses were down 36% versus last year's first half. We continue to be in a good position to accomplish our objective of reducing operating expenses below $80 million for this year.

Now Anthony will cover the financial results.

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Anthony Matthew McKiernan, MBIA Inc. - Executive VP & CFO [4]

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Thanks, Bill, and good morning. I will summarize our second quarter GAAP and non-GAAP results, the holding company's liquidity position and then finish with key financial statutory metrics for National and MBIA Corp.

The company reported a consolidated GAAP net loss of $146 million or negative $1.64 per share for the quarter ended June 30, 2018, compared to a consolidated GAAP net loss of $1.2 billion or negative $9.78 per share for the quarter ended June 30, 2017.

The loss for this quarter was driven by loss and loss adjustment expense at National related to Puerto Rico exposures as well as a loss due to the deconsolidation of Zohar VIEs from the GAAP balance sheet, specifically the impact of changing the accounting measurement for the Zohar collateral from fair value to insurance loss recoverable.

The positive quarter-over-quarter results were due primarily to lower loss and LAE and the full valuation allowance on the deferred tax asset taken in the second quarter of 2017. Adjusted net loss, our non-GAAP measure for income and loss, was a loss of $51 million or negative $0.58 per diluted share for the second quarter of 2018 compared with an adjusted net loss of $139 million or negative $1.12 per diluted share for the second quarter of 2017.

The favorable change was primarily due to lower quarter-over-quarter loss and loss adjustment expenses in National related to its insured Puerto Rico exposures.

Book value per share was $12.16 as of June 30, 2018, versus $15.44 as of December 31, 2017. Adjusted book value, a non-GAAP measure, was $27.24 per share as of June 30, 2018, versus $28.77 per share as of December 31, 2017.

The decreases in both book value per share and adjusted book value per share since year-end were primarily due to the net loss for the first half of 2018. We noted in our earnings release and 10-Q that this quarter we changed our calculation of ABV to remove the unearned premium revenue that is used in our GAAP loss reserves. The impact of the change was a negative $0.55 to our previously reported ABV at December 31, 2017.

As we stated on our last call, in April, we issued 1.2 million of MBIA common shares in connection with the exercise of warrants related to 9.9 million of MBIA's common shares. In June, we issued another 123,000 MBIA common shares in connection with the exercise of all of the remaining warrants outstanding related to 1.9 million shares of MBIA stock.

Both sets of warrants called for a noncash net settlement of the transactions, which resulted in the issuance of 1.3 million shares in total. There are no more warrants outstanding. As of August 2, 2018, there were 90.7 million of MBIA common shares outstanding.

Turning to the holding company. The Corporate segment's total assets at June 30, 2018, were $1.1 billion. Approximately $525 million in market value assets were pledged to the GICs and interest rate swaps supporting the GIC operation. There is a $108 million tax escrow deposit for National's tax liability for the 2016 tax year and $389 million of cash and liquid assets was held by MBIA Inc.

We anticipate the liquidity of the holding company to be bolstered by the receipt of the annual as-of-right dividend from National in October, which will be approximately $108 million. The holding company today has enough cash and liquid assets to cover operating expenses and debt service into 2022 when the next significant maturities of holding company and GFL debt come due.

Turning to the operating company's statutory results. National had a statutory net loss of $31 million for the second quarter of 2018, primarily due to $56 million of loss and LAE, largely for certain of its Puerto Rico exposures. This compared to a statutory net loss of $124 million for the prior year's comparable quarter with the improved performance due to lower quarter-over-quarter loss and LAE.

After the quarter end, on July 1, National paid $206 million of net insurance claims for Puerto Rico bond payments. Year-to-date, net claim payments totaled $272 million. And inception-to-date net claims related to Puerto Rico exposures totaled $673 million. The total fixed income investment portfolio, including cash and cash equivalents, had a book-adjusted carrying value of $3.4 billion as of June 30.

Turning to MBIA Corp., its liquidity was $105 million as of June 30, 2018. It had statutory net income of $37 million for the second quarter of 2018 compared to statutory net income of $25 million for the second quarter of 2017. The favorable variance was primarily due to a make-whole premium from the early termination of a credit and negative net loss and LAE, in 2018, due to additional expected recoveries on our insured second lien RMBS portfolio. As of June 30, 2018, the statutory capital of MBIA Corp. was $489 million and claims-paying resources totaled $1.4 billion.

In May, the Delaware Bankruptcy Court approved a settlement agreement for the Zohar transactions, which featured the appointment of an Independent Director and Chief Restructuring Officer representing the Zohar's repayment thresholds and timing for the repayment of the Zohar transactions.

And now we will turn the call over to the operator to begin the question-and-answer session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Bose George of KBW.

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Bose Thomas George, Keefe, Bruyette, & Woods, Inc., Research Division - MD [2]

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The first question I have is just on the portfolio runoff this quarter. It slowed quite a bit. Was that just the elimination of advance refundings? And just wanted to see what a good run rate was for that portfolio runoff.

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William Charles Fallon, MBIA Inc. - CEO & Director [3]

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Bose, you're correct. It is (inaudible) refundings, and if you recall, while it is difficult to predict exactly what runoff will be, if you go back 10 years, because of the 10-year call feature in most of the bonds that have been insured, you go back, you would expect, and we expect that from this point forward, the refundings will be much, much smaller. Therefore, the runoff in terms of absolute dollars will be less but also recognize that the portfolio is much smaller than it was a few years ago.

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Bose Thomas George, Keefe, Bruyette, & Woods, Inc., Research Division - MD [4]

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Okay. So the current run rate's probably a reasonable one, so kind of what you did this quarter?

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William Charles Fallon, MBIA Inc. - CEO & Director [5]

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Yes. As we said it's hard to forecast. So we don't make specific forecasts. But directionally, it's not surprising that it's come down.

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Bose Thomas George, Keefe, Bruyette, & Woods, Inc., Research Division - MD [6]

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Okay. And then at National, the liquidity position looking at the stat filings it went up -- improved quite a bit. It was, I guess, $735 million from $343 million. Just curious what drove that?

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Anthony Matthew McKiernan, MBIA Inc. - Executive VP & CFO [7]

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A couple of things, Bose. One is the preparation for the claims that were paid on July 1, the $208 million. Preparation for the as-of-right dividend, which will be $108 million in October. And generally, National's looking ahead to reposition its portfolio for outflows, taking interest rate trends and other things into consideration. So that drove the increased liquidity for the quarter end.

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Bose Thomas George, Keefe, Bruyette, & Woods, Inc., Research Division - MD [8]

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Okay. Makes sense. And then just going back to the COFINA settlement, you guys mentioned in the beginning. Just -- was that the settlement that was, I guess, it was announced, whatever, a month-plus ago, or is there something more recent? I just wanted to make sure.

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William Charles Fallon, MBIA Inc. - CEO & Director [9]

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There is something more recent. So approximately a month ago, what you're referring to, the 2 agents, the Commonwealth agent and the COFINA agent indicated there was an agreement. Last night, after the market closed, the Commonwealth and the Oversight Board as well as creditors indicated that the Commonwealth, the Oversight Board and a majority of the COFINA creditors had reached an agreement as well. So there has been progress in that sense.

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Operator [10]

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Our next question comes from the line of Andrew Gadlin of Odeon Capital Group.

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Andrew Elie Gadlin, Odeon Capital Group LLC, Research Division - Research Analyst [11]

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First, just basic question. Anthony, could you repeat your comments on the tax escrow account? How much is in tax escrow right now?

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Anthony Matthew McKiernan, MBIA Inc. - Executive VP & CFO [12]

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There's $108 million of a tax deposit that National had for the 2016 tax year.

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Andrew Elie Gadlin, Odeon Capital Group LLC, Research Division - Research Analyst [13]

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And your expectation right now is that it would be released?

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Anthony Matthew McKiernan, MBIA Inc. - Executive VP & CFO [14]

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So the release of the $108 million will depend on National's taxable income at the end of the year. So until we get to the end of the year, we won't know how much that will be at this point.

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Andrew Elie Gadlin, Odeon Capital Group LLC, Research Division - Research Analyst [15]

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And then, you broke out your ever-to-date claims paid in Puerto Rico, which was $673 million. Could you break that out a little further in terms of how much was PREPA, GOs, HTA et cetera?

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Anthony Matthew McKiernan, MBIA Inc. - Executive VP & CFO [16]

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If you go to the website, it will break out the claims by credit through June 30. So there's a credit-by-credit breakdown on the website and our selected exposures.

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Andrew Elie Gadlin, Odeon Capital Group LLC, Research Division - Research Analyst [17]

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Great. Okay. A couple other questions. The COFINA deal that was announced last night, it says that on wrapped COFINAs there could be new bonds in trust to secure custody receipts structure. Can you explain what that means? And what that could mean for MBIA?

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William Charles Fallon, MBIA Inc. - CEO & Director [18]

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Yes. As you know, we have a policy, and we've wrapped the bonds. And right now, what we insure are the capital appreciation bonds that have long-dated maturities going out from 2040 through 2046. And so because of that, there is a scenario, obviously, where the policy stays in place but the bonds are exchanged. There is some detail still to be worked out on the agreement that was announced yesterday in terms of the bonds that are exchanged, what they are exchanged for in terms of both CABs, current interest paying bonds and maturities and obviously, they're working to improve the cash flow alignment and objectives of the Commonwealth. So those things will not match up. Therefore, the bonds go into to this custodial account that you've referenced and then the cash flows from that will be dealt with in terms of those going to, in that scenario, the bond insurers and then the bond insurers paying out on their policies. But there's still a lot of details to be documented in that.

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Andrew Elie Gadlin, Odeon Capital Group LLC, Research Division - Research Analyst [19]

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As a starting point right now, would it be safe to assume that this deal provides 93% of the current accreted value, and then it gives you a higher coupon than frankly you have on the bonds that you've insured, on the policies that you've insured, so that over time that's compound to meet the deficit? Is that a safe way to -- or at least partially, is that a safe way to think about it?

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William Charles Fallon, MBIA Inc. - CEO & Director [20]

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Well, a couple of things. One, there are different ways I suppose to read the materials that were issued last night. But I think, in terms of the recovery, it would be the 93% that you referenced. Then you also see there's a 2 point or 2% restructuring fee. So we would add that as well to get to 95% of the pre-petition numbers. And then in terms of coupons, keep in mind, technically, the CABs don't have a coupon, they have an implied interest rate. And so unclear that what you're suggesting comes about in terms of the difference between the coupon and the implied rate, I think they're pretty close actually.

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Andrew Elie Gadlin, Odeon Capital Group LLC, Research Division - Research Analyst [21]

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Got it. Okay. And then last question on the Zohar accounting issue at corp. Anthony, could you explain what's happening there on an accounting basis?

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Anthony Matthew McKiernan, MBIA Inc. - Executive VP & CFO [22]

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Sure. So prior to this quarter, we had consolidated the Zohar VIEs. There's qualifications for consolidating VIEs on balance sheet that deal with essentially control of the vehicles and what rights you have related to that collateral. So those were on balance sheet and they were accounted for on a fair value basis. Since we entered into the settlement agreement...

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Andrew Elie Gadlin, Odeon Capital Group LLC, Research Division - Research Analyst [23]

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I'm sorry just to cut you off. They were consolidated within the loss and loss reserve line?

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Anthony Matthew McKiernan, MBIA Inc. - Executive VP & CFO [24]

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They're actually in the VIE category on the GAAP balance sheet. So no, loss...

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Andrew Elie Gadlin, Odeon Capital Group LLC, Research Division - Research Analyst [25]

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Okay. But on a stat basis, there were no loss and loss reserves, right?

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Anthony Matthew McKiernan, MBIA Inc. - Executive VP & CFO [26]

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There's no VIE concept in stat. So it's a lot easier. It is in the loss and salvage category for statutory. So this is purely a GAAP convention. So we valued it at fair value. This quarter, we made the decision to deconsolidate based on the terms of the settlement agreement. Therefore, it has been placed into our insurance loss recoverable, and it's now subject to insurance accounting versus fair value accounting. The transition from that presentation is what drove the loss related to the VIE.

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Andrew Elie Gadlin, Odeon Capital Group LLC, Research Division - Research Analyst [27]

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So -- and how does the insurance accounting differ from fair value accounting in this regard?

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Anthony Matthew McKiernan, MBIA Inc. - Executive VP & CFO [28]

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So I think, in the simplest way, with fair value accounting, you're looking at the value or potential values of the assets without real regard for caps related to what you're necessarily owed. Under insurance accounting, anything you do from a value standpoint, there are caps associated. You can only go as far as what you're owed under your contracts. So it has nothing to do with our view of values being different necessarily under either presentation, but it's under accounting rules, from a recovery standpoint, you can only recover what you're owned. So it's a difference between looking at it almost as an investment versus as an insurance recoverable and that capping is what reduced the accounting value of the Zohar collateral.

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Andrew Elie Gadlin, Odeon Capital Group LLC, Research Division - Research Analyst [29]

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Got it. Is that to say you previously thought you could recover more than you had paid out?

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Anthony Matthew McKiernan, MBIA Inc. - Executive VP & CFO [30]

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No. That's exactly the point. It doesn't necessarily mean there's any change. It just means under VIE accounting, to the degree that there was any scenario where, say, you could collect much more than you were owed, not necessarily capped at that for VIE accounting. It's as if you own everything, whereas, in insurance accounting, you don't. So even if -- so any scenario that would've said we are owed more than we are contractually owed, you're not capped for VIE consolidation purposes for fair value, you are capped for insurance. So just that cap alone would reduce the overall value. So it doesn't have anything to do with the underlying view of value.

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Operator [31]

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Our next question comes from the line of Peter Troisi of Barclays.

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Peter Vincent Troisi, Barclays Bank PLC, Research Division - Director & Senior Analyst [32]

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Just a couple of questions for me. The first one on National. You mentioned a couple of quarters ago that you planned on remixing the investment portfolio at National, and it does look like it's having a positive effect on the book yields there. So can you just help me understand like how far along you are in the investment and reallocation process? And how much higher you think the book yield on National's portfolio can go?

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William Charles Fallon, MBIA Inc. - CEO & Director [33]

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We are partway through. We obviously are not an institution where we're trading and selling our portfolio. We have a lot of things that we hold to maturity. So as we indicated, I think, to your point, several quarters back, as things mature, we will look to invest them in higher-yielding assets. So there's a couple of things at play. We still have a substantial way to go. You can see we have all the statistics in terms of the duration and so it will still take some time. Second, we'll just have to be -- what the absolute level of interest rates are, which from the point, I think, we first indicated have trended up. And as you know, we use the 10-year treasury where it's sort of just under 3%. So as those move up, and we have more maturities, we believe we can continue to increase the yield on that portfolio.

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Peter Vincent Troisi, Barclays Bank PLC, Research Division - Director & Senior Analyst [34]

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Okay. That's helpful. And then just a question on the holdco. You mentioned that the parent company has liquidity to cover OpEx and debt service through 2022 when you have maturity peaks. Can you maybe talk a little bit about how you might approach those 2022 maturities given the liquidity runway that you've kind of talked about?

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Anthony Matthew McKiernan, MBIA Inc. - Executive VP & CFO [35]

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So just to clarify, we have $389 million of liquidity at the holding company today. That gets us into 2022. The as-of-right dividend this year and going forward will enhance that. So just through natural -- the as-of-right dividend in and of itself will help us cover those maturities.

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Peter Vincent Troisi, Barclays Bank PLC, Research Division - Director & Senior Analyst [36]

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Okay. I see. So the comment was relative to the liquidity that you have today on the balance sheet?

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Anthony Matthew McKiernan, MBIA Inc. - Executive VP & CFO [37]

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That's moment in time, yes.

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Peter Vincent Troisi, Barclays Bank PLC, Research Division - Director & Senior Analyst [38]

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Yes. Okay. That makes sense. And then just one more for me on corp. So looks like the loss payments that are coming out of the entity have been pretty stable in like the $30 million range over the past few quarters, but it looks like the paid claims on second lien RMBS have been actually quite low. So I'm just wondering what are the biggest drivers of paid claims on the corp side. Is it mostly first lien RMBS? Or is there anything else there that has been driving loss payments at corp?

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Anthony Matthew McKiernan, MBIA Inc. - Executive VP & CFO [39]

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So there's really 2 drivers of loss payments. The largest is the remaining CMBS contract we have. It's a CDS policy. It's a JPMorgan deal. It's with 1 legacy CDS that's remaining at corp. That's a current pay transaction. So that is the lumpiest and probably the largest payments that have been made over the last couple of quarters. The other payments are really first lien RMBS. There are some second lien payments, but again, we've really dominated those payments with recoveries coming in. So what we've seen is you have your excess spread that's coming in as these deals have decreased over time, the pool factors are far lower than they were before. And we've seen a solid increase in subsequent recoveries as well on these transactions as we've worked with the servicers on these transactions to work through modifications and other restructurings on those loans in order to improve performance. We've also done some loan sales as we've talked about in the past on severely delinquent loans that has helped the liquidity at corp on that portfolio.

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Peter Vincent Troisi, Barclays Bank PLC, Research Division - Director & Senior Analyst [40]

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Okay, great. And then that CMBS pool that you mentioned, Anthony, I think, that's down to about $80 million-or-so. How much more loss content in terms of potential payments do you see in that $80 million exposure go forward?

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Anthony Matthew McKiernan, MBIA Inc. - Executive VP & CFO [41]

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We don't give out specific loss reserve numbers on credits. So I'm sorry, I can't give you that number.

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Operator [42]

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(Operator Instructions) Our next question comes from the line Ed Groshans of Height Capital Markets.

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Edwin George Groshans, Height Analytics, LLC - Senior VP & Director of Financial Services [43]

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You mentioned the loss at National was related to the loss and loss adjustment expenses for PR exposure. Can you just talk about what changed in your models that resulted in increase in losses for those exposures?

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William Charles Fallon, MBIA Inc. - CEO & Director [44]

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Yes. As I think you know, every quarter, we sit down, we look at all the information that's available as you can appreciate, it's a dynamic situation. So there's not any one thing. Obviously, it's been known that there have been different negotiations, whether it's been the comments on the COFINA deal, the deal that other bondholders have announced with regard to PREPA. We factor all those things into the scenarios. And the result this time was that there was an increase in the reserves, again, primarily due to Puerto Rico. There's not any 1, 2, 3 specific things that we can point to in terms of the dollars, but it's the whole process and all the new information that's collected during the 3 months.

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Edwin George Groshans, Height Analytics, LLC - Senior VP & Director of Financial Services [45]

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So I guess, is there any specific exposure that had more negative influence on the outcome?

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William Charles Fallon, MBIA Inc. - CEO & Director [46]

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I'm sure there is. We have 4 large credits, but off the top of my head, I'm not sure given the size of the increase in the reserves, that there's anything that is significant or material in that regard. But -- and we don't...

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Edwin George Groshans, Height Analytics, LLC - Senior VP & Director of Financial Services [47]

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Okay. And I know there's been a lot of discussion of the COFINA settlement and, I guess, you are a party to it because, I guess, it's a somewhat favorable outcome. I guess, at the end of the day, when the -- if the structure that we're looking at settles out, would you expect to take additional reserves for that? Or do you think you're fully reserved for what we're looking at?

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William Charles Fallon, MBIA Inc. - CEO & Director [48]

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Okay. As of our filings yesterday, we wouldn't anticipate any material change up or down to the reserves. We'll see how the documentation or everything goes, but again, relative to what was announced yesterday, we think we're appropriately reserved at this point in time.

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Edwin George Groshans, Height Analytics, LLC - Senior VP & Director of Financial Services [49]

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Okay. And then, I think I may be tailing on Anthony's questions, but in the presentation that they talked about certain bonds being issued to the monolines. Could you just to talk about that a little bit?

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William Charles Fallon, MBIA Inc. - CEO & Director [50]

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You're talking about now in the COFINA agreement?

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Edwin George Groshans, Height Analytics, LLC - Senior VP & Director of Financial Services [51]

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Yes. In the COFINA agreement, yes, sorry.

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William Charles Fallon, MBIA Inc. - CEO & Director [52]

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Yes. There's -- as I said, there's details to be worked out, and the issue, as I said, the Commonwealth or -- think about it in terms of COFINA clearly has some objectives in terms of the way they would like their cash flows to work over the next many years. And so when they look at the maturity of the bonds, the debt service schedule, it's not exactly the same as what they have today, and so, those details just need to be worked out in terms of the exchange of the bonds that bondholders have and that monolines wrap and what new bonds are going to be exchanged with the existing bonds. The details will be worked out over the next couple of months.

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Edwin George Groshans, Height Analytics, LLC - Senior VP & Director of Financial Services [53]

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Okay. Do you expect that and I guess, this is the custody arrangement that was mentioned, but would there be, I guess, current interest pay bonds in there as well as CABs then, is that sort of how it's starting to look?

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William Charles Fallon, MBIA Inc. - CEO & Director [54]

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It's very possible.

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Operator [55]

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Our next question comes from the line of [Allan Weinstein] of [Affiliate] Investments.

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Unidentified Analyst, [56]

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I have a 2-part question and maybe the details aren't out yet. On the COFINA agreement, what happens to the interest that hasn't been paid since COFINA stopped paying. Are they going to get current on that or has that been agreed to yet? And then I have a second question.

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William Charles Fallon, MBIA Inc. - CEO & Director [57]

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Yes. In the materials that we released yesterday, the interest that is effectively in escrow with Bank of New York Mellon will go to the COFINA bondholders, again, subject to some of these details on the question that was just -- or asked, excuse me, the exchange of bonds, whether people who currently hold bonds get capital appreciation bonds, current interest bonds and the cash, but it is all in the mix, and it is for the benefit of the COFINA bondholders.

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Unidentified Analyst, [58]

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Okay. And then second part of my question is a higher-level question. One of those 30,000-feet questions. As a long-term shareholder in MBIA, what can I look forward to, vis-à-vis the business model going forward other than running the portfolio off, since you're not insuring bonds anymore given the credit rating. What can long-term shareholders look towards for future opportunities for MBIA?

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William Charles Fallon, MBIA Inc. - CEO & Director [59]

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Yes. As we've talked about in the past, the objectives right now, the priorities need to be dealing with the Puerto Rico credits. Those are the ones I think in the National portfolio that obviously have the greatest visibility. And then it is moving cash from National up to the holding company beyond just what is happening right now, which is through the tax escrow and through the as-of-right dividends. There is also the possibility of getting special distributions. We've been clear in the past that until there is some clarity around Puerto Rico, it probably wouldn't make sense to go to the Department of Financial Services to request that special distribution. Once we're able to increase the flexibility by moving cash to the holding company, then there are possibilities. In addition, we've talked about the increased yield potential at National, but in terms of getting back into the bond insurance business, after S&P downgraded us last year, we made the decision that we did not think that was beneficial for shareholders. So at this point, we are not contemplating reentering the bond insurance business. If things change in the future, I suppose that's something we'd consider, but that is not something that is being considered right now and therefore, it would be potentially, the runoff of the insured portfolio increasing the cash to the holding company and then either investing the money there or giving it back to shareholders, which may be the highest value for the shareholders.

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Operator [60]

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Our next question is a follow-up from the line of Bose George of KBW.

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Bose Thomas George, Keefe, Bruyette, & Woods, Inc., Research Division - MD [61]

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Just had a follow-up on the COFINA settlement. I don't know if you've mentioned this already, but with everyone looks like kind of signed on already, what are the next steps before this is finalized?

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William Charles Fallon, MBIA Inc. - CEO & Director [62]

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Yes. From this point, what needs to happen is the agreement that was announced last night, forms the basis for a plan support agreement. Then the Oversight Board, under PROMESA, needs to take that and create a plan of adjustment that they need to file with the court and then you go through a confirmation process. So that's why I say, there's a December target date. There's a lot of work to be done. A lot of this is documentation and having the lawyers take what was agreed to and putting it into the documents and then following the process under PROMESA. So again, it will take a little bit of time, but that's the outline of the schedule.

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Operator [63]

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And that was our final question. I will now turn the call back over to Greg Diamond for any additional or closing remarks.

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Greg Diamond, MBIA Inc. - MD of Investor and Media Relations [64]

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Thanks, again, Maria. 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 on our company. Thank you for your interest in MBIA. Good day, and goodbye.

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Operator [65]

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Thank you, ladies and gentlemen. This does conclude today's conference call. You may now disconnect.