MBIA Inc. (MBI) on Q1 2022 Results - Earnings Call Transcript
Operator: Welcome to the MBIA Incorporated First Quarter 2022 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: Thank you, Gretchen. Welcome to MBIA's conference call for our first quarter 2022 financial results. After the market closed yesterday, we issued and posted several items on our websites, including our financial results, 10-Q, quarterly operating supplement 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 company's 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 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 it contains our most current disclosures about the company and its financial and operating results. The 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 report and our quarterly operating supplement. The recorded replay of today's call will become available approximately two hours after the end of the call and the information for accessing is included in last week's press announcement and in the financial results report posted yesterday on the MBIA website. 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 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. 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 and then a question-and-answer session will follow. Now here is Bill Fallon.
Bill Fallon: Thanks, Greg. Good morning, everyone. Thank you for being with us today. Over the last three months there has been significant progress in the restructuring of our Puerto Rico credits. On March 15 of this year, the plan of adjustment for the Commonwealth of Puerto Rico became effective. With the implementation of that plan, all of National's insured Puerto Rico General Obligation, or GO, and Public Building Authority, or PBA, insured exposure has been eliminated. In addition National received cash bonds and contingent value instruments, or CVIs, in exchange for the Puerto Rico GO and PBA debt that were satisfied by National's insurance claims payments. Last week, the Puerto Rico Oversight Board filed the plan of adjustment for the Puerto Rico Highways and Transportation Authority, or HTA, which resolved $657 million of National's HTA bankruptcy claims. National will receive recovery consideration in the form of cash, HTA, CVI and possibly new HTA revenue bonds under this plan, which is subject to a proposed confirmation hearing in August of this year. National's other significant remaining Puerto Rico exposure is PREPA. After Puerto Rico's Governor terminated the latest restructuring support agreement for PREPA in March the Title III Court ordered the Puerto Rico Oversight Board to engage in mediation with stakeholders to develop a confirmable plan of adjustment for PREPA. As of March 31, 2022, National's outstanding insured gross par for PREPA and HTA was approximately $800 million and $600 million respectively. Turning to National's other insured credits, the insured portfolio has continued to perform consistent with our expectations. National's insured portfolio has continued to run off as its outstanding gross par declined by $1.3 billion from year-end 2021 to $35.2 billion at March 31, 2022. And National's leverage ratio of gross part of statutory capital, further declined to 17:1 at the end of the first quarter. Over the last few quarters, the sales of our PREPA bankruptcy claims and the resolution of our insured Puerto Rico GO and PBA exposure have added to National statutory invested assets and reduced its remaining salvage. For the first quarter of 2022, National's statutory investments increased by over $300 million and its insured salvage reserves decreased by over $280 million from year-end 2021. Under statutory accounting at March 31, 2022, National had cash and investments totaling $2.2 billion and salvage on paid claims of $661 million. For statutory accounting the Puerto Rico securities received from the Puerto Rico Commonwealth in exchange for National's GO and PBA bankruptcy claims, continue to be treated as salvage and are not included in its investment holdings. National also had statutory net income and an increase in statutory capital of approximately $100 million for the first quarter of 2022. As we have stated previously progress on the restructuring of our Puerto Rico credits positions us to pursue our strategic objectives, which may include a potential sale of the company and/or special distributions from National. Given the progress that we have made regarding our Puerto Rico exposure, we do not believe that it is necessary to fully resolve National's remaining PREPA exposure to pursue those strategic alternatives. Now, Anthony will provide additional comments about our financial results.
Anthony McKiernan: Thanks, Bill and good morning. I will begin with a review of our first quarter 2022 GAAP and non-GAAP results. The company reported a consolidated GAAP net loss of $73 million or negative $1.48 per share for the first quarter of 2022 compared to a consolidated GAAP net loss of $106 million or a negative $2.16 per share for the first quarter ended March 31, 2021. The lower net loss this quarter was largely driven by lower loss in LAE expense at National related to its Puerto Rico exposures, as well as a higher loss benefit in MBIA Corp., partially offset by lower fair value gains on financial instruments. National's loss in LAE for the quarter was driven by assumption changes for PREPA related to our ongoing assessment of the value of future compensation on the anticipated date of receipt. National's ultimate economic recovery will depend on the value realized over time from the securities expected to be received, including our sale of these securities and the timing of acceleration of our insurance obligations. To that point, the loss for PREPA was partially offset by increases to recoveries on GO and HTA due to the higher market prices of the contingent value instruments versus our prior assumptions. Going forward on a GAAP basis, gains and losses related to GO bonds and CVI received as part of the implemented plan will be reflected on a fair value basis as part of National's investment portfolio, not through loss in LAE as National's insured exposure has been fully retired and bonds and CVA received are now subject to investment accounting. The company's adjusted net loss a non-GAAP measure was $96 million or a negative $1.94 per diluted share for the first quarter of 2022 compared with an adjusted net loss of $116 million or negative $2.36 per diluted share for the first quarter of 2021. The favorable change was due primarily to the lower loss in LAE at National in the first quarter of 2022, partially offset by lower premiums earned. MBIA Inc.'s book value per share decreased to a negative $10.29 per share as of March 31, 2022 versus a negative $5.73 per share as of December 31, 2021, primarily due to unrealized losses on investments recorded to other comprehensive income, driven by higher interest rates and wider credit spreads as well as the net loss for the first quarter. MBIA Corp.'s book value was a negative $36.16 per share with over $1.1 billion of accrued but unpaid interest on its surplus notes. I will now spend a few minutes on the corporate segment balance sheet and our insurance company's statutory results. The corporate segment, which primarily includes the activity of the holding company MBIA Inc. had total assets of approximately $798 million as of March 31, 2022. Within this total are the following material items: unencumbered cash and liquid assets held by MBIA Inc. totaled approximately $216 million as of March 31, 2022 compared with $239 million as of December 31, 2021. The holding company has approximately $50 million of scheduled principal payments on euro-denominated MTNs through the end of 2022. There were approximately $406 million of assets at market value pledged to the GICs and the interest rate swaps supporting the legacy GIC operation. Turning to the insurance company's statutory results. National reported statutory net income of $104 million for the quarter ended March 31, 2022 versus statutory net loss of $35 million for the quarter ended March 31, 2021. The favorable result was primarily due to a loss in LAE benefit in Q1 2022 on Puerto Rico exposures versus expense in the first quarter of 2021. The reason why National stated a loss benefit for its statutory results versus loss expense for GAAP was due largely to how losses are discounted. For GAAP, the appropriate risk-free rates are used to discount, claims and recoveries. Whereas for statutory accounting, the investment portfolio yield is used to discount claims and recoveries, which is higher than risk-free rates. Therefore, given that PREPA recoveries are discounting at a higher rate for statutory to begin with, the impact of this quarter's reduction in PREPA recovery cash flows was lower for National statutory results and was more than offset by increases to CVI values for GO and HTA. National's gross claim payments on its insured Puerto Rico credits are as follows: from inception, as of 3/31/2022 gross claims paid on insured Puerto Rico exposure totaled approximately $2.2 billion. Within that total in March National made GO claim payments of $277 million, fully repaying its GO insured par outstanding. As of March 2022, HTA and PREPA are National's primary remaining insured Puerto Rico exposures. Statutory capital was $2.1 billion, and claims-paying resources totaled $2.9 billion. Turning to MBIA Insurance Corp. Its statutory net loss was $14 million for the first quarter of 2022, compared to a statutory net loss of $34 million for the first quarter of 2021. The favorable result was primarily due to the lower loss in LAE expense, and lower interest expense somewhat offset by higher FX losses and lower premiums earned. MBIA Corp. paid the full $70 million outstanding of MZ funding junior notes after quarter end in April. Loss in LAE expense this quarter was due primarily to increased interest rates on floating rate insured obligations and accretion of net reserves. As of March 31, 2022 the statutory capital of MBIA Insurance Corp. was $131 million and claims paying resources totaled $726 million, both relatively unchanged from year-end 2021. MBIA Corp.'s insured gross par outstanding reduced by approximately $700 million during the quarter, and was $4.5 billion as of March 31, 2022, and 56% of that exposure is non-US public finance credits. MBIA Corp.'s largest remaining legacy remediation and projected recoveries are related to the Zohar CLOs which are anticipated to exit Chapter 11 bankruptcy in June at this time. And now, we will turn the call over to the operator to begin the question-and-answer session.
Operator: We'll take our first question from Tommy McJoynt from KBW.
Tommy McJoynt: Hey, good morning, guys. Thanks for taking my questions. So could you guys go into a little bit of the details about what's embedded in your current reserve for PREPA and just thinking about maybe timing or haircut just to the extent that we do see a new RSA come out here in the coming months, kind of how we can kind of weigh your kind of the reserves that you've taken against what those trends imply?
Anthony McKiernan: Sure. Hi, Tommy, it's Anthony. So there are several things. We changed our assumptions this quarter for the value of the remaining PREPA exposure, so our losses and recoveries really to reflect the estimate of what we would perceive to be the market value of new PREPA bonds on the day we receive them. Previously, we were analyzing the value utilizing a hold-to-maturity discounted cash flow approach. And for GAAP that's discounted at risk-free rates. We made this transition earlier for GO and HTA, when we felt we were in a position to make that assessment and we did it this quarter for PREPA. Using that as a backdrop, there's a number of factors that we considered most of which I'm sure you know. The RSA did terminate. So we did reexamine the possible outcomes related to the termination, including the timing and the form of which compensation would be. We did take into account some of the color that the RSA bonds are trading at in light of that. And we do have more color on how the market trades given the new GO bonds and views on expected HTA compensation. So when we look at all those things again the change in our assumptions related to looking at it more of a market value when we receive new compensation, thinking about different aspects of timing? Is it a year? Is it more than that? And looking at how market perception is at this point, we made the change to recoveries this quarter which resulted in the loss expense. The discount rate does have a factor here, because as you're discounting cash flows using the risk-free rate for GAAP purposes in this example, when you look at a market value approach you're taking an impact to those recoveries, because of that change. For stat, as I had said in my comments, we're already discounting recoveries at a higher rate. So the same change made for stat had a much less of an impact on the financial results for National, but that's kind of the mosaic we looked at for the quarter.
Tommy McJoynt : Okay. And then thinking about your base case assumption for kind of the PREPA time line, I know the kind of that's in mediation right now until either June 1 or July 1. Kind of after that what are the kind of the key dates or milestones that we should be on the lookout for in your -- kind of your base case scenario?
Bill Fallon: In terms of PREPA on what comes about from this mediation, which the parties have just entered into. So we should know more probably on the next earnings call. And at that point maybe there'll be a time line that you're asking about.
Tommy McJoynt : Okay. Got it. And just switching gears, what are you guys doing to kind of manage the operating expense side of the business? I mean, the portfolio has been shrinking. So are you kind of taking actions that can kind of rightsize the organization, just kind of as it continues to run down?
Bill Fallon: The answer to that is yes. We a few years back made a considerable reduction in operating expenses. And we keep looking at that constantly and are looking at ways to rightsize the organization as the portfolio runs off as you just described.
Tommy McJoynt : Okay. Thanks for taking my question.
Operator: We'll take our next question from John Staley from Staley Capital Advisement.
John Staley : Bill I was disappointed to see, of course, I don't know all the reasons one of the directors sold stock. And on the other side of that, there were no purchases of stocked by the company. Obviously, you have quite a bit of liquidity restored. You're getting a clearer picture on the profit. And the market has been punishing your stock. In fact, I'm not so sure it hasn't traded lower than some of the levels you've purchased stock in the past. I'm just curious with the picture getting relatively clear and still trading as of yesterday's close at what appears to be a minimum of a 50% discount to adjusted book may be more I'm curious what your approach is on potentially buying stock in the market?
Bill Fallon: Yes. So, John with regard to the comments you mentioned and we think the liquidity at the holding company is good relative to the debt service obligations that we have over many years actually at the holding company. With regard to repurchasing shares as you know we have bought almost all of those shares through National. And I don't have the number off the top of my head. I think the average purchase price was a little under $8. So that in a sense has worked out well for shareholders. However, we're now at a point because of regulatory requirements National is not able to purchase any more shares at this time. So, we've kind of tapped out at this point using National's liquidity to purchase shares. Again, that could change based on certain calculations, but we don't anticipate in the near future that that calculation would change but we'll continue to look at it.
John Staley: All right. Are there other areas that you can't catch you purchased it back to the holding company?
Bill Fallon: We could, but we used most of the liquidity at the holding company to service the debt obligations of the holding company. And as you know the liquidity for the holding company comes primarily from as-of-right dividend of National. That's why we talk about strategic alternatives that we now think we're better positioned to pursue. One of them would be getting a special distribution from National, up to the holding company in the future.
John Staley: Thank you.
Bill Fallon: Thank you.
Operator: We'll take our next question from William Edelberger from – a Private Investor.
Unidentified Analyst: Good morning. I think you said that resolution of PREPA is not necessary to pursue a sale of the company. So, I assume at this point you've met with prospective buyers. I'm wondering if there's any feedback that you can share in particular is the pushback on price or some subset of buyers saying, they'll only take a look after Puerto Rico is fully resolved. What can you say regarding timing of the transaction price portions of the portfolio they're interested in and so on?
Bill Fallon: Yes. As we've mentioned the Puerto Rico restructuring is one of the things that we've indicated is, an important obstacle. However, as I did mention in my comments and you also just mentioned. We don't think we need to resolve all of Puerto Rico. So, we think we're now well positioned and we've seen this really progressing now for several quarters. With regard to specifics of conversations we have with prospective buyers there's nothing really that we can share at this point. As you would know many of those details even when we get into them would be confidential in nature. So, at this point there's really nothing else that we can share other than we do think we are well positioned to pursue these alternatives.
Unidentified Analyst: Thank you.
Operator: It appears we have no further questions at this time. I will go ahead and turn the floor back over to the management for additional or closing remarks.
Greg Diamond: Thank you, Gretchen. And thanks to those of you listening to our call today. Please contact me 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.
Operator: Thank you, ladies and gentlemen. This does conclude today's first quarter 2022 financial results conference call. You may now disconnect.
