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Edited Transcript of MBI earnings conference call or presentation 7-Nov-18 1:00pm GMT

Q3 2018 MBIA Inc Earnings Call

ARMONK Nov 7, 2018 (Thomson StreetEvents) -- Edited Transcript of MBIA Inc earnings conference call or presentation Wednesday, November 7, 2018 at 1:00:00pm 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

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Presentation

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Operator [1]

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Welcome to MBIA Inc. Third 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, sir.

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

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Thank you, Crystal. Welcome to MBIA's conference call for our third quarter 2018 financial results.

After the market closed yesterday, we issued and posted several items on our website, 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-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 our 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 I'll read the 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-Q, which are available on our website at MBIA.com. The company cautions not to place undue reliance on any such forward-looking statements. 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 being with us today.

Our near-term strategy remains unchanged: remediating our Puerto Rico credits and managing our liquidity and capital. We've made progress on both items. The proposed plan support agreement for the COFINA debt that was announced in August continues to move along with a confirmation hearing requested for January of next year. We remain confident that the plan of adjustment will ultimately be consummated. The proposed deal reduces COFINA's debt service by $17 billion.

Puerto Rico's economy has already begun rebuilding and improving. Various economic measures remain positive, which factored into higher revenues and greater excess funds and revised fiscal plans that have been certified by the Oversight Board.

The Commonwealth's bank cash on deposit, which is an indication of the government's liquidity position, reached $3.8 billion as of October 19. We believe that the improving economy has helped to increase support for the COFINA debt restructuring plan, and they're ought to be favorable for additional debt restructurings as well. However, before PREPA's debt can be restructured, we believe PREPA needs new management, an independent board and an appropriate regulatory regime. We've detailed these concerns in the materials that National filed in October in a motion for relief from the automatic stay that was imposed with PREPA's Title III filing. Ultimately, through our motion, we seek to have a receiver appointed to run PREPA, which will benefit all stakeholders, including the people of Puerto Rico.

We believe that successfully transforming PREPA is critical to the future of Puerto Rico. However, political meddling and PREPA's affairs has further complicated such efforts, as its Board of Directors has made up political appointees that lack utility expertise. The utility has become overstaffed, under-skilled and lacks sufficient transparency. The appointment of a receiver, which would assume operational control of PREPA to protect the interest of PREPA's customers and creditors is necessitated by utility's well-documented history of mismanagement and undue political interference in its operations. An independent receiver will better insulate utility from political influence, stabilize its operations and set it on a path for future success.

In the meanwhile, we remain committed to working constructively and collaboratively with Puerto Rico and the Oversight Board to reach reasonable and mutually beneficial debt resolutions. But we also intend to vigorously pursue, as necessary, our rights and remedies.

The other credits in our insurance portfolios continue to perform in line with our expectations. National's insured portfolio further reduced to $61 billion gross par outstanding at the end of the third quarter. Its leverage ratio of gross par to statutory capital was 23:1, down from 26:1 at year-end 2017.

Regarding MBIA Inc. liquidity, during the quarter, MBIA Inc. repurchased a 2022 Global Funding medium-term note at a discount. And subsequent to the end of the quarter, National paid its annual as-of-right dividend and purchased unretired MBIA Inc. debt, which raised MBIA Inc.'s liquidity to above $500 million, which is sufficient to cover its scheduled debt service payments and operating expenses into 2022.

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, everyone. I will begin by summarizing our third quarter GAAP and non-GAAP results, update you on the latest activity at the holding company, including its current liquidity position and then finish with the key financial statutory metrics for National and MBIA Insurance Corp.

The company reported a consolidated GAAP net loss of $45 million, or negative $0.50 per share, for the quarter ended September 30, 2018, compared to a consolidated GAAP net loss of $267 million, or negative $2.17 per share, for the quarter ended September 30, 2017.

The result for the quarter was driven by loss and loss adjustment expense at National related to Puerto Rico exposures and a loss due to the deconsolidation of 3 MBIA Insurance Corp., insured residential mortgage-backed VIEs from the GAAP balance sheet, partially offset by accelerated premium earnings and fee income at MBIA Insurance Corp. The loss related to the VIE deconsolidation was accounting-driven, resulting from the termination of the deals and associated insurance coverage.

Credit losses in other comprehensive income were moved to retained earnings through the P&L. Most importantly, the deconsolidations were actually a positive to total shareholders' equity, as proceeds received from the transaction exceeded the net assets removed from the balance sheet.

Adjusted net loss, our non-GAAP measure for income and loss, was a loss of $32 million, or negative $0.35 per diluted share, for the third quarter of 2018 compared with an adjusted net loss of $113 million, or negative $0.91 per diluted share for the third quarter of 2017. The favorable change was primarily due to lower quarter-over-quarter loss and loss adjustment expenses at National related to its insured Puerto Rico exposures.

Book value per share was $12.22 as of September 30, 2018, versus $15.44 as of December 31, 2017. The decrease in book value per share was driven by losses associated with the deconsolidation of certain VIEs and the additional loss and loss adjustment expense related to our portal Puerto Rico exposures.

As of October 31, 2018, there were 90.7 million of MBIA common shares outstanding. $236 million remains under our current share repurchase authorization. Adjusted book value, a non-GAAP measure, was $26.80 per share as of September 30, 2018, versus $28.77 as of December 31, 2017. The decrease in ABV was primarily due to the Puerto Rico related losses at National.

I'll now spend a minute on the business segments. The corporate segment, which primarily includes the activity of the holding company, MBIA Inc., had total assets of approximately $1.1 billion at September 30, 2018. Approximately $503 million of assets at market value were pledged to the GICs and interest rate swaps supporting the GIC operation. There were $124 million of market value assets in the tax escrow account, which includes $108 million from National's tax liability for the 2016 tax year. There was also $365 million of cash and liquid assets held by MBIA Inc.

During the quarter, we repurchased [30 million] euro par of GFL medium-term notes due in 2022 at a discount.

After the quarter-end, in October, the liquidity of the holding company was increased by the receipt of the annual as-of-right dividend from National of $108 million. In addition, National purchased from MBIA Inc. unretired Inc. debt, with maturities in 2025 and 2034 at a market value of $41 million that the holding company had purchased in earlier periods. Following the dividend and debt sale to National, the holding company's current cash and liquid position of approximately $500 million is sufficient 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 $5 million for the third quarter of 2018 primarily due to $27 million of loss and LAE largely for certain Puerto Rico credits. This compared with statutory net loss of $134 million for the prior year's comparable quarter, with the improved performance due to lower quarter-over-quarter loss in LAE.

National paid insurance claims for Puerto Rico bond payments in January and July of 2018 totaling $277 million. Inception to date, claims related to Puerto Rico exposures totaled $689 million. As of September 30, the total fixed income investment portfolio, including cash and cash equivalents, had a book adjusted carrying value of $3.3 billion. Statutory capital was $2.7 billion and claims-paying resources totaled $4 billion.

Turning to MBIA Insurance Corp. Its liquidity was $157 million as of September 30, 2018. It had statutory net income of $95 million for the third quarter of 2018 compared with statutory net loss of $74 million for the third quarter of 2017. The favorable change in income was primarily due to make-whole premium and the acceleration of earned premiums resulting from the termination of an international public finance credit as well as consent fees on several structured finance transactions.

In addition, negative loss and LAE in Q3 2018 versus higher loss expenses in Q3 2017 were due to additional expected recoveries on our insured second-lien RMBS portfolio.

As of September 30, 2018, the statutory capital of MBIA Insurance Corp. was $587 million versus $464 million at December 31, 2017, and claims-paying resources totaled $1.4 billion.

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) And our first question comes from the line of Bose George with KBW.

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

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First, just wanted to ask about the portfolio runoff. It was a little faster than last quarter. Is there anything unusual there? Or is it just kind of the range where it bounces around?

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

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I think, Bose, it's pretty much within the range at this point that it bounces around. So as we said before, hard to predict. Some quarters, it's going to be a little bit more than others.

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

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Okay. And then actually, switching to liquidity. When you -- on your tax escrow comments, did you say what your expectation is for the tax escrow account release for the next year?

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Anthony Matthew McKiernan, MBIA Inc. - Executive VP & CFO [5]

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Bose, this is Anthony. The tax escrow release will depend upon the full year taxable income for National. At the end of the third quarter, we would expect the $108 million market value would go to Inc. based on where we are today. But that's going to depend on the fourth quarter for National and what the year-end taxable income is.

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

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Okay. And then actually, one more, just the $689 million that you mentioned, that's the total claims that you've paid to date on Puerto Rico, is that right?

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

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That's correct.

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

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And just how much of that has been offsetting receivable that you guys are showing on the balance sheet?

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Anthony Matthew McKiernan, MBIA Inc. - Executive VP & CFO [9]

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We don't break out the specific receivable in our loss insurance recoverables. It's included in that number, the $1.5 billion on the balance sheet.

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Operator [10]

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(Operator Instructions) And our next question comes from the line of Andrew Gadlin with Odeon Capital Group.

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

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I wanted to ask about the COFINA restructuring, in which you guys have negotiated for a certificate trust structure that seems designed to encourage a commutation. Can you talk a little bit about the structure you're envisioning there as well as the timing relative to the broader COFINA deal?

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William Charles Fallon, MBIA Inc. - CEO & Director [12]

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Yes. If you go through the documents (inaudible) you have, it goes into some level of detail. The timing is such, as I mentioned, there's a hearing that's been requested for January. I think so far, the COFINA time line has stood up from when we first announced the deal. There's always going to be some procedural things that may cause a little bit of a delay, but it's really much stuck to the schedule at this point. So we'll see something, it looks like, as we get into next year. In terms of certificates in the commutation, that's probably dealt with in the future as things -- documentation process process gets firmed up. There are some complicated details. But at the end of the day, it looks as though current bondholders will have a choice as per the documents to either, in a sense, commute and get bonds or to take the certificates. But again, all those details are being documented. So it's probably best just to defer that to a future date.

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

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But in terms of that election that bondholders can make, that will be, I assume, simultaneous to the restructuring, and then there -- you may have some additional dealings with them down the road? Is that accurate?

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William Charles Fallon, MBIA Inc. - CEO & Director [14]

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I think that's a fair description of it.

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

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And then in terms of the note, the MBIA corporate notes that were sold -- MBIA Inc. notes that were sold to National in the quarter-end, I was wondering if you could talk a little bit about the rationale there. Looks like there was a meaningful discount certainly on the [57 to 34] and given the amount of liquidity you have at holdco, I'd love to understand the rationale there.

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

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As we've talked about, Andrew, this is one of the strategies that we've employed over the last year or so to bolster the liquidity at the holding company. Also, it dovetails into National's strategy regarding yielding -- high-yielding assets that in this case, again, we know the credit very well. So we thought it'd fit into the overall strategies at the company. And this essentially represents the last of the unretired Inc. debt at the holding company. But it's really all about getting to the 2022 liquidity window that we've talked about, and this just moves us in that direction.

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William Charles Fallon, MBIA Inc. - CEO & Director [17]

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And also, Andrew, all those deals are done at market value.

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Andrew Elie Gadlin, Odeon Capital Group LLC, Research Division - Research Analyst [18]

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No, I understand that. That's why I'm a little surprised. I mean, we are selling your Inc. debt at 30% discount in one case. Just surprised that -- for MBIA Inc., which has so much liquidity, to see that sale.

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Operator [19]

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

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Greg Diamond, MBIA Inc. - MD of Investor and Media Relations [20]

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Thank you, Crystal, and thanks to all of you for listening to our call today. Please contact us directly if you have any additional questions. We also recommend that you visit our website at mbia.com for additional information on our company. Thank you for your interest in MBIA. Good day, and goodbye.

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Operator [21]

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