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Edited Transcript of MBI earnings conference call or presentation 1-Mar-19 1:00pm GMT

Q4 2018 MBIA Inc Earnings Call

ARMONK Mar 7, 2019 (Thomson StreetEvents) -- Edited Transcript of MBIA Inc earnings conference call or presentation Friday, March 1, 2019 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

* Jack Barnes

* Thomas Patrick Mcjoynt-Griffith

Keefe, Bruyette, & Woods, Inc., Research Division - Assistant Analyst

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Presentation

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Operator [1]

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Welcome to the MBIA Inc. Fourth Quarter and Full Year 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, Maria. Welcome to MBIA's conference call for our fourth quarter and full year 2018 financial results.

After the market closed yesterday, we issued and posted several items on our website, including our financial results press release, 10-K, quarterly operating supplements and statutory financial statements for both MBIA Insurance Corp. and National Public Finance Guarantee Corp. 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 and other SEC filings as our company's definitive disclosures are incorporated in those documents. We urge investors to read our 10-K as it contains our most current disclosures about the company and its financial and operating results. The 10-K also contains information that may not be addressed on today's call.

The definitions and reconciliations of the non-GAAP terms included in our remarks today are also included in our 10-K as well as our financial results, press release and our quarterly operating supplements. The recorded replay for 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 for our safe harbor disclosure statement. Our remarks on today's conference call may contain forward-looking statements. Important factors, such as general market conditions and the competitive environment, could cause our actual results to differ materially from the projected results referenced in our forward-looking statements. Risk factors are detailed in our 10-K, which is available on our website at mbia.com. The company cautions not to place undue reliance on any such forward-looking statements. The company also undertakes no obligation to publicly correct or update any forward-looking statement if it later becomes aware that such statement is no longer accurate.

For our call today, Bill Fallon and Anthony McKiernan will provide some introductory comments, and 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.

Remediating our Puerto Rico credits continues to be a priority. Last month, the Puerto Rico's sales tax bonds, known as the COFINA bonds, which accounted for approximately half of our insured Puerto Rico debt service exposure, were restructured. As a result of the restructuring, our insured COFINA accreted and debt service exposures had been reduced by 30%. In short, accreted value has been reduced to approximately $839 million from $1.2 billion, and insured debt service reduced to under $3 billion from $4.2 billion. For the noncommuted National insured COFINA bonds, new COFINA bonds have been deposited into a trust. The new trust will operate on a pass-through basis. As the trust receives debt service payments from the new bonds and sells the new bonds, the trust cash will be paid to the trust certificate holders and National's insured exposure will reduce accordingly.

In other Puerto Rico developments, last month, the First Circuit Court of Appeals ruled the appointment process used to seek the members of the Puerto Rico Oversight and Management Board was unconstitutional. The court allotted 90 days for the board appointments to be rectified. The Oversight Board announced yesterday that it will appeal the decision to the U.S. Supreme Court.

Regarding PREPA, a hearing is scheduled for May 8,on our lift stay motion to have a receiver appointed to run PREPA. As I said last quarter, we believe PREPA needs several reforms before its debt can be restructured. PREPA has failed to fix these problems on its own. A receiver, free from impermissible political influence, with experience and proven expertise managing public utilities, will benefit all of PREPA's stakeholders, including the people of Puerto Rico. There is nothing new to report on our general obligation in HTA credits. However, Puerto Rico's economy continues to outperform general expectations, which should benefit all credits. In addition, the settlement of the COFINA bonds has also provided significant additional sales and tax collections to the Commonwealth.

The other credits in our insurance portfolios continue to perform in line with our expectations. National's insured portfolio has further reduced to $58 billion gross par outstanding at year-end. Its leverage ratio of gross par to statutory capital was 23:1, down from 26:1 at year-end 2017.

Switching to MBIA Insurance Corp., we have a July 22 trial date for our RMBS putback litigation against Crédit Suisse. During the fourth quarter, National spent $34 million to buy 3.9 million shares of MBIA's common shares at an average price of $8.70 per share. Subsequent to year-end, through February 21, National spent an additional $4.4 million to purchase 0.5 million shares at an average price of $8.94 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 February 21, we had approximately $200 million remaining under our existing share repurchase authorization. During our annual review of internal control over finance reporting, we concluded that we had a material weakness in our internal controls because we had not designed and maintained controls around our RBS loss reserve and recovery modeling at a sufficient level of precision to detect or prevent a material misstatement. We have commenced the remediation plan with the goal of fully remediating this material weakness as soon as possible.

Notwithstanding this controlled efficiency, we did not identify a material misstatement in any of our annual or interim financial statements as a result of the material weakness, and our independent auditor has issued an unqualified opinion on our 2018 consolidated financial statements. More information about our review and conclusion can be found in Item 9A of MBIA Inc.'s 2018 Form 10-K.

Now Anthony will cover the financial results and provide an update on the holding company's liquidity position.

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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 the drivers of our fourth quarter and year-end 2018 GAAP and non-GAAP results and walk through our statutory results for National and MBIA Insurance Corp.

The company reported a consolidated GAAP net loss of $7 million, or negative $0.08 per share, for the quarter ended December 31, 2018, compared to a consolidated GAAP net loss of $37 million, or negative $0.39 per share, for the quarter ended December 31, 2017.

The improved result for this quarter was due to the following: Lower loss and loss adjustment expense at National related to Puerto Rico exposures due to a decrease in the risk-free rates that discount estimated losses and expected future recoveries on past and projected claim payments; updated cash flow scenario analysis and clarification of the final COFINA structure; as well as lower loss and LAE at MBIA Insurance Corp. across several structured finance asset classes.

The positive effects of those items were offset by lower premium earnings, higher mark-to-market losses on our interest rate swaps and realized losses related to the deconsolidation and termination of 5 second-lien RMBS VIEs. The realized losses related to the VIE deconsolidations were due to credit losses previously in other comprehensive income moving to retained earnings through the P&L. The VIE deconsolidations were actually positive for total shareholders' equity, as proceeds received from the transaction exceeded the net assets removed from the balance sheet.

Adjusted net income, our non-GAAP measure for income was $106 million, or $1.20 per diluted share, for the fourth quarter of 2018 compared to an adjusted net loss of $167 million, or negative $1.73 per diluted share, for the fourth quarter of 2017. The favorable change was primarily due to lower quarter-over-quarter loss and loss adjustment expenses at National related to its Puerto Rico exposure and lower operating costs.

For the year ended 12/31/18, the company reported a consolidated GAAP net loss of $296 million, or negative $3.33 per share, compared to a consolidated GAAP net loss of $1.6 billion, or negative $13.50 per share, for the year ended December 31, 2017. The improved result for the year was due to the following items: The full valuation allowance on the deferred tax asset taken in 2017; lower loss and loss adjustment expense at National related to Puerto Rico exposures; lower loss and LAE in MBIA Insurance Corp. across several structured finance asset classes; lower investment losses related to OTTI; and lower operating expenses, all of which offset lower revenues in 2018.

Adjusted net loss for year-end 12/31/18 was $38 million, or $0.42 per diluted share, compared with an adjusted net loss of $410 million, or negative $3.45 per diluted share, for the year ended December 31, 2017. The favorable change was primarily due to lower year-over-year loss and loss adjustment expenses at National and lower operating expenses.

Book value per share was $12.46 as of December 31, 2018 versus $15.44 as of December 31, 2017. The decrease in book value per share was primarily driven by the net loss for the year. Adjusted book value, a non-GAAP measure, was $27.38 per share as of December 31, 2018 versus $28.77 as of December 31, 2017. The decrease in ABV was primarily due to the Puerto Rico related losses at National, somewhat offset by share repurchases.

I will 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 $1.2 billion as of December 31, 2018. Within this total are the following material items: Cash and liquid assets held by MBIA Inc. totaled $457 million; approximately $500 million of assets at market value were pledged to the GICs and interest rate swaps supporting the GIC operation; there was also $125 million of market value assets in the tax escrow account.

As we described on our last call, during the fourth quarter, Inc. received the annual as-of-right dividend of $108 million from National. And National purchased from MBIA Inc. unretired Inc. debt that the holding company had purchased in earlier periods with maturities in 2025 and 2034 at a market value of $41 million. In January of 2019, $91 million of market value related to National's 2016 tax deposits was released to MBIA Inc. from the tax escrow, and National received a $5 million refund due to capital losses incurred in 2018 that were eligible to be carried back from its 2018 taxes. The holding company's current cash and liquid position covers operating expenses and debt services -- 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 reported statutory net income of $9 million for the fourth quarter of 2018 compared to a statutory net loss of $95 million for the prior year's comparable quarter, with the improved performance due to lower quarter-over-quarter loss and LAE, lower realized capital losses and lower underwriting expenses, all of which offset lower revenue in Q4 2018.

For the year ended December 31, 2018, National reported a statutory net loss of $27 million compared to a statutory net loss of $321 million for the year ended December 31, 2017, with the year-over-year improvement also due to lower loss and LAE and realized capital losses, offset by lower revenue and higher income tax expense in 2018.

National paid $276 million of insurance claims for Puerto Rico bond payments in 2018 on a gross pay basis. In January 2019, National paid $65 million of Puerto Rico related insurance claims on a gross basis. Gross inception-to-date claims through January 2019 for Puerto Rico exposures totaled $756 million. As of December 31, 2018, National's total fixed income investment portfolio, including cash and cash equivalents, had a book adjusted carrying value of $3.1 billion, statutory capital was $2.5 billion and claims paying resources totaled $3.8 billion.

Turning to MBIA Insurance Corp. Statutory net income was $12 million for the fourth quarter of 2018 compared to a statutory net loss of $22 million for the fourth quarter of 2017. The favorable change in income was primarily due to lower loss and LAE expense and foreign exchange gains for Q4 2018, partially offset by lower premium revenues.

For the year ended 12/31/18, MBIA Corp.'s statutory net income was $134 million compared to statutory net income of $106 million for the year ended December 31, 2017. The favorable change in income was primarily due to higher net premiums earned due to make whole premiums and the acceleration of earned premiums resulting from the termination of certain international public finance credits, consent fees in 2018 on several structured finance transactions as well as lower loss and LAE expense.

As of December 31, 2018, the statutory capital of MBIA Insurance Corp. was $555 million versus $464 million as of December 31, 2017, and claims paying resources totaled $1.3 billion as of December 31, 2018.

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 Andrew Gadlin of Odeon Capital group.

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Andrew Elie Gadlin, Odeon Capital Group LLC, Research Division - Research Analyst [2]

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I was wondering if you could talk a little bit about the time -- how Puerto Rico timing will be affected by the developments with the Oversight Board, and how does that figure into your thinking, both for your various negotiations as well as your capital plans?

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

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Yes, Andrew, you can appreciate. It's difficult to predict exactly how some of the events over the last few weeks will impact timing. The Oversight Board has stated that they are still open for business. And as we've stated for years, we are more than eager to try to come to consensual resolution on any of the credits, and at some point all the credits. Having said that, we're all trying to figure out, given the ruling of the First Circuit and the announcement that they are going to try to take this to the Supreme Court exactly what that means, further complicating, as you know, at the end of August the first 3-year term of the Oversight Board members and as written in PROMESA, so we're monitoring the situation very carefully and we'll see how it plays out.

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Andrew Elie Gadlin, Odeon Capital Group LLC, Research Division - Research Analyst [4]

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In terms of PREPA, there's -- the bonds have been rallying recently, and there's some speculation that a deal for that could materialize in the short term. Is that something that you see as possible in this small window?

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

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You're talking about the remaining 90 days that was allotted by the First Circuit. It would seem challenging, but again, I know, we're open to trying to reach a resolution on this, I assume the other creditors are as well. And if all the parties can come to an agreement, then it's possible. I wouldn't say that we believe it's a high likelihood, but I'm not sure that trying to assess probabilities and likelihoods is necessarily very productive.

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Andrew Elie Gadlin, Odeon Capital Group LLC, Research Division - Research Analyst [6]

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Hasn't been in Puerto Rico. Just one detail like question, I guess, on the tax escrow release. Anthony, you mentioned that there was $91 million released in Q1 of this year. I think it's -- the 10-K says $56 million was cash, what's the remainder?

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

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The remainder was primarily MBIA shares.

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Operator [8]

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

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Thomas Patrick Mcjoynt-Griffith, Keefe, Bruyette, & Woods, Inc., Research Division - Assistant Analyst [9]

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This is Tommy Mcjoynt, on for Bose. Going along with the tax escrow question, what's scheduled to be released if anything in 2020? And I don't believe there's anything for 2021. Can you guys just talk about that for a second.

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Anthony Matthew McKiernan, MBIA Inc. - Executive VP & CFO [10]

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So we just, again, we just settled the 2016 tax release. National made no deposits for the '17 -- for the '17 tax year. So we wouldn't expect, obviously, anything released to Inc. next year. And at the moment, then there's $55 million on the escrow for '18 deposits that either will go to Inc., back to National or some combination thereof.

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Thomas Patrick Mcjoynt-Griffith, Keefe, Bruyette, & Woods, Inc., Research Division - Assistant Analyst [11]

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Okay, great. And then separately, could you kind of give some details on some of the cost saves that you guys could be targeting over the next year? And do you kind of expect to sort of be able to trim costs in line with where the portfolio is running off? And then just what you mentioned on the material weakness over internal controls, is there any sort of expected uptick in expenses related to that?

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

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Let me answer the second question first. No, we don't see any significant increase in cost associated with remediating the deficiency. Operating expenses, in general, to your first question, as you've seen, the trend over the last several years has been a significant reduction in operating expenses. Even in the last year, we went from approximately $106 million to under $75 million of operating expenses. There are some things that we will, obviously, continue to do, to your point, as the portfolio runs down. But I wouldn't expect a material change in operating expenses during the 2019 year. We pushed pretty hard to get expenses down over the last 2 years. We will always continue to be on top of this and find ways to take expenses out, but you won't see the types of reduction that you saw over the last 2 years, and I would expect expenses in sort of the $70 million, $80 million range over '19 and maybe even '20.

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Thomas Patrick Mcjoynt-Griffith, Keefe, Bruyette, & Woods, Inc., Research Division - Assistant Analyst [13]

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Okay. And then just lastly, outside of reaching some resolution on COFINA, was there anything else that supported your decision to repurchase shares in the fourth quarter after holding off for a couple of quarters?

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

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As we stated in the past, we view this as a dynamic situation. We look at lots of information with regard to the financial situation, what the shares are trading at, future outlook, et cetera, and we thought it was appropriate and beneficial to the shareholders at the prices that we saw in the fourth quarter and beginning of the first quarter to repurchase the shares.

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Operator [15]

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Our next question comes from the line of Jack Barnes of Samlyn Capital.

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Jack Barnes, [16]

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I noticed that the gross loss reserves in the U.S. public finance segment were down a decent amount maybe $70 million in the quarter, so I assume it's related to Puerto Rico. Can you just talk about what was the driver of the change in expectations about future loss payments there?

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Anthony Matthew McKiernan, MBIA Inc. - Executive VP & CFO [17]

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Sure, good morning. So for GAAP purposes, we experienced a reduction in our overall loss and LAE due primarily to lower discount rates. There was a drop in the risk-free rate across the curve during the fourth quarter. And when you're discounting long-term recoveries at a lower rate, the recoveries are worth more, and that's the main reason for the decrease in reserves for the quarter.

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Jack Barnes, [18]

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Okay. I read that in the release, but I was struggling with the -- just looking at the breakdown of the 2 pieces that make up your reserve, one is the gross loss reserves and the other part is the recoverable. The recoverable went up, which makes sense as you discounted at a lower rate, but that was -- it looked like a smaller driver of the decline in the net reserve, the bigger driver was the decline in the gross loss reserve. Would that be also driven by discounting? Or is that just a function of changes in expectations around loss payments in the future?

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Anthony Matthew McKiernan, MBIA Inc. - Executive VP & CFO [19]

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It's also from loss payments themselves that were made. So that's reducing the loss reserves as well. So, we made...

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Jack Barnes, [20]

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Did you make any payments in the...

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Anthony Matthew McKiernan, MBIA Inc. - Executive VP & CFO [21]

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Just for -- I'm talking about for the annual loss reserve decrease, we had -- part of that is obviously, payments. But yes, part of it is assumptions and part of it is on the recoveries on future claim payments, that's the primary driver.

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Operator [22]

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Thank you. And at this time, there are no further questions. I would like to turn the floor 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 [23]

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

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Operator [24]

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