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MBIA Inc (MBI) Q4 2018 Earnings Conference Call Transcript

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MBIA Inc  (NYSE: MBI)
Q4 2018 Earnings Conference Call
March 01, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the MBIA, Inc's 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.

Greg Diamond -- Managing Director of Investor and Media Relations

After the market closed yesterday, we issued and posted several items on our websites, 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 they contain 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 and 10-Q as well as our financial results press release and quarterly operating supplements.

The recorded replay for today's call will become available approximately two 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 statements 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.

William C. Fallon -- Chief Executive Officer

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 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%.

Insured accreted value has been reduced to approximately $839 million from $1.2 billion and insured debt service, reduced under $3 billion from $4.2 billion. For the non-commuted 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 sell 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 management Board was unconstitutional. The Court allotted 90 days for the Board appointments 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 state motion to have a receiver appointed to run PREPA.

As I said last quarter, we believe PREPA need several reforms before it's 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 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.

Nationals insured portfolio has further reduced to $58 billion gross par outstanding at year-end. Its leverage ratio of gross part of statutory capital was 23 to 1, down from 26 to 1 at year-end 2017. Switching to MBIA Insurance Corp, we have a July 22 trial date for our RMBS put-back litigation against Credit 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 21st, National spend 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 21st, 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 to maintain controls around our RMBS loss reserve and recovery modeling at a sufficient level of precision to detect or prevent a material misstatements. 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. 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 MBI Inc's 2018 Form 10-K.

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

Anthony McKiernan -- Chief Financial Officer, Executive Vice President

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

The improved results 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 in 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 five 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 or 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 31st, 2017. The improved results 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 in LAE and 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 31st, 2017. 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 31st, 2018 versus $15.44 as of December 31st, 2017. The decrease in book value per share was primarily driven by the net loss for the year. Adjusted book value and non-GAAP measure was $27.38 per share as of December 31st, 2018 versus $28.77 as of December 31st, 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 31st, 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. The were 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 rate dividend of $108 million from National and National purchased from MBIA Inc, on retired inc. debt that the holding company had purchased in earlier periods with the maturities in 2025 and 2034 and a market value of $41 million.

In January of 2019, $91 million of market value related to Nationals 2016 tax deposits was released to MBIA Inc from tax escrow and National received a $5 million refund due to the capital losses incurred in 2018, but we are eligible to be carried back from 2018 taxes. Holding Company's current cash and liquid position covers operating expenses and debt services -- service into 2022 on the next significant maturities of Holding company and GFL Debt come due.

Turning to the operating companies 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. The improved performance due to lower quarter-over-quarter loss in LAE, lower realized capital losses and lower underwriting expenses. All of which offset lower revenue in Q4, 2018. For the year ended December 31st, 2018, National reported a statutory net loss of $27 million compared to a statutory net loss of $321 million for the year ended December 31st, 2017 with the year-over-year improvement also due to lower loss in 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 paid 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 31st, 2018, Nationals total fixed income investment portfolio, including cash and cash equivalents, have a book adjusted carrying value of $3.1 billion. Statutory capital was $2.5 billion in 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 31st, 2017. The favorable change in income was primarily due to higher net premiums earned, due to make hold 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 on LAE expense. As of December 31st, 2018, the statutory capital of MBIA Insurance Corp was $555 million versus $464 million as of December 31st, 2017 and claims-paying resources, totaled $1.3 billion as of December 31st, 2018.

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

Questions and Answers:

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Andrew Gadlin of Odeon Capital Group.

Andrew Gadlin -- Odeon Capital Group -- Analyst

Good morning, guys. I was wondering if you could talk a little bit about the -- 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.

William C. Fallon -- Chief Executive Officer

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 stated for years, we are more than eager to try to come to consensual resolution on any of the credits -- 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 Supreme Court exactly what that means. Further complicating and as you know, at the end of August, the first three 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.

Andrew Gadlin -- Odeon Capital Group -- Analyst

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

William C. Fallon -- Chief Executive Officer

Andrew, 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 resolution on this. I assume the other creditors are as well and if all the parties can come turn 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.

Andrew Gadlin -- Odeon Capital Group -- Analyst

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

William C. Fallon -- Chief Executive Officer

The remainder was primarily MBIA shares.

Andrew Gadlin -- Odeon Capital Group -- Analyst

Got it. Okay. Thank you very much.

Operator

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

Tommy McGillian -- KBW -- Analyst

Hey guys, this is Tommy McGillian (ph) on for Bose. Going along with the Tax Escrow question. What's scheduled to be released if anything in 2020 and I'm pleased there's anything for 2021. Can you just talk about that for a sec?

William C. Fallon -- Chief Executive Officer

So we just, again, we just settled the 2016 tax release. National made no deposits for the '17 -- as for the '17 tax year so we wouldn't expect obviously anything released to Inc. next year and at the moment then there is $55 million in the Escrow for '18 deposits. That either will go to Inc. back to national or some combination thereof.

Tommy McGillian -- KBW -- Analyst

Okay. Great. And then separately, could you kind of give us some details on some of the cost saves that you guys can be targeting over the next year and 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 and expenses related to that?

William C. Fallon -- Chief Executive Officer

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 for approximately $106 million to $175 million of operating expenses. There are some things that we will obviously continue to do, to your point, it's the portfolio runs down, though, 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 two 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 two years and I would expect expenses in sort of the $70 million, $80 million range over '19 and maybe even '20.

Tommy McGillian -- KBW -- Analyst

Okay. Thanks for the clarity there. 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.

William C. Fallon -- Chief Executive Officer

As we stated in the past, we view this is 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.

Tommy McGillian -- KBW -- Analyst

Okay. Thanks guys. Appreciate it.

Operator

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

Jack Barnes -- Samlyn Capital -- Analyst

Hey, good morning guys. Thanks for taking the question. 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 -- it assumes related to Puerto Rico. Can you just talk about what was the driver of the change in expectations of our future loss payments there.

Anthony McKiernan -- Chief Financial Officer, Executive Vice President

Sure. Good morning. So for GAAP purposes, we experienced a reduction in our overall loss in 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 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.

Jack Barnes -- Samlyn Capital -- Analyst

Okay. I read that in the release, but I was struggling with just looking at the breakdown of the two pieces that make up your reserve. One is the gross loss reserve 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.

William C. Fallon -- Chief Executive Officer

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

Jack Barnes -- Samlyn Capital -- Analyst

So you're making the payments in the...

William C. Fallon -- Chief Executive Officer

Just for the -- I'm talking about for the annual loss reserve decrease, we have a 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.

Jack Barnes -- Samlyn Capital -- Analyst

Got it. Okay. Thank you.

Operator

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.

Greg Diamond -- Managing Director of Investor and Media Relations

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 you visit our website at mbia.com for additional information on the company. Thank you for your interest in MBIA. Good day and goodbye.

Operator

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

Duration: ?? minutes

Call participants:

Greg Diamond -- Managing Director of Investor and Media Relations

William C. Fallon -- Chief Executive Officer

Anthony McKiernan -- Chief Financial Officer, Executive Vice President

Andrew Gadlin -- Odeon Capital Group -- Analyst

Tommy McGillian -- KBW -- Analyst

Jack Barnes -- Samlyn Capital -- Analyst

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