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MBIA (NYSE:MBI)
Q1 2019 Earnings Call
May. 09, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Welcome to the MBIA Inc. first-quarter 2019 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

Thank you, Angie. Welcome to MBIA's conference call for our first-quarter 2019 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 our company's 10-Ks 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 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 other quarterly operating supplements.

The recorded replay of today's call will be available approximately two hours after the end of the call and the information for accessing it is included in yesterday's financial results press release. Now I'll read 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 some introductory comments, then a question-and-answer session will follow.

Now here is Bill Fallon.

Bill Fallon -- Chief Executive Officer

Thanks, Greg. Good morning, everyone. Thank you for being with us today. Last Friday, PREPA and a group representing approximately 48% of the PREPA debt announced that they had signed a definitive restructuring support agreement.

The RSA provides for current bonds to be exchanged for tranche A bond at a rate of 67 and a half percent and a tranche B bond at a rate of 10%, plus a modest fees. In addition, Assured Guaranty, the only monoline that's agreed to the deal, has the opportunity to earn premium by insuring some of the new bonds. The parties to the RSA are trying to recruit additional creditors to join the RSA in an effort to get 67% of the creditors by par and file a plan of adjustment with the court. We're disappointed that this RSA suggested a revenue deal with the secured lien will have a loss in excess of 20%.

We believe that a deal that does not -- that does more to improve the operational and financial performance of PREPA would be better for all parties, including PREPA customers. We will continue to work for a better deal, recognizing the challenges created by the competing objectives of the parties involved. Our motion to appoint a receiver for PREPA has been delayed due to the RSA. Turning to COFINA.

We announced on our last call that COFINA was restructured in February. As of March 31, 2019, our insured COFINA credit par and debt service exposures were $829 million and $2.9 billion, respectively, which are down more than 30% from the $1.2 billion of credit par and $4.2 billion of debt service that were outstanding at year-end 2018. The mechanics of the restructuring also provide for ongoing reductions of our insured COFINA exposure. When the assets in National's custodial trust are monetized, the cash is paid out to certificate shareholders, which prepays our ultimate insurance obligations.

The custodial trust also led to some changes in our financial reporting. Due to the GAAP accounting rules and certain features of the trust structure, we are required to consolidate the assets and liabilities of the trust on our financial statements and all the insurance accounting associated were insured COFINA exposure on earned premium, premium earnings, loss reserves, loss recoveries, etc., had been removed from our financial statements. Anthony will cover the particulars in his comments. In other Puerto Rico developments, President Trump has nominated the current Oversight Board members to finish out the remaining terms, which run through August of this year.

Earlier this week, the First Circuit Court of Appeals granted an additional 60-day extension through July 15 for the Oversight Board to be properly seated. Turning to our other Puerto Rico credits. There have been no substitutive developments regarding the restructuring of our general obligation in HTA credits. As of March 31, 2019, National's outstanding gross par exposure for its Puerto Rico credits, excluding the restructured COFINA, totaled $2.6 billion and total insurance claims paid on Puerto Rico debt through March 31 were $756 million.

The other credits in our insurance portfolios continue to perform consistently with our expectations. National's insured portfolio has further declined to $56 billion gross par outstanding as of March 31, 2019. Its leverage ratio of gross par to statutory capital was 22 to one, down from 21 to one at year-end 2018. Regarding MBIA Insurance Corp., there's a July 20 second trial date for its RMBS put-back litigation against Crédit Suisse.  Now Anthony will cover the financial results and provide an update on the holding company's liquidity position.

Anthony McKiernan -- President

Thanks, Bill, and good morning. I'll begin with a review of our first-quarter 2019 GAAP and non-GAAP results, summarize the entity-level liquidity positions and walk through our statutory results for National and MBIA Insurance Corp. The company reported a consolidated GAAP net loss of $17 million or negative $0.20 per share for the quarter ended March 31, 2019, compared to a consolidated GAAP net loss of $98 million or negative $1.12 per share for the quarter ended March 31, 2018. The improved result for the quarter was primarily due to two factors: first, lower loss and loss adjustment expense at National related to Puerto Rico exposures as a result of lower risk-free rates that are used to discount estimated losses and expected future recoveries on past and projected claim payments; and second, realized gains on the COFINA bonds owned by National as part of the COFINA bond exchange.

The positive effects of those items were offset by lower premium earnings, a $28 million investment impairment of previously recorded salvage on a legacy muni credit unrelated to Puerto Rico were losses previously in other comprehensive income moved to retained earnings through the P&L and net losses related to the consolidation in this quarter of National's wrapped COFINA trust as an on balance sheet VIE resulting from the COFINA debt restructuring. Due to the consolidation of National's COFINA trust as VIEs under GAAP, we removed our insurance accounting for our COFINA insured exposure as of the closing date of the COFINA restructuring and began recording the financial assets and liabilities of the trusts on our balance sheet at their fair values with changes in fair values recorded to earnings. The bottom-line impact of consolidating the COFINA trusts and the COFINA bond exchange was a negative $21 million to equity for the quarter. Adjusted net income, our non-GAAP measure for income, was $39 million or $0.45 per diluted share for the first quarter of 2019, compared with an adjusted net loss of $61 million or negative $0.69 per diluted share for the first quarter of 2018.

The favorable change was primarily due to lower quarter-over-quarter loss and loss adjustment expenses at National related to its Puerto Rico exposures. You will note this quarter that for SEC guidance for non-GAAP measures, we have included in our publicly reported adjusted net income calculation a $13 million loss related to the aforementioned COFINA VIE consolidation. Management excludes the COFINA VIE impact when internally measuring adjusted net income. Book value per share increased to $13.16 as of March 31, 2019 versus $12.46 as of December 31, 2018, driven primarily by unrealized gains on fixed income investments due to lower interest rates and tighter credit spreads.

Moving on to non-GAAP book value. Following a common letter process and discussions with the SEC, we are no longer publishing adjusted book value, but we will continue to provide the individual adjustments to book value. The largest adjustment to book value continues to be the removal of the negative book value of MBIA Insurance Corp. 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 March 31, 2019. Within this total are the following material items: cash and liquid assets held at MBIA Inc. totaled $486 million; approximately $540 million of assets at market value were pledged to the GICs and interest rate swaps supporting the GIC operation; there was also $55 million of market value assets in the tax escrow account, which represents National's 2018 tax liability. 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, of which $56 million was in cash, with the remainder in MBIA Inc. common shares. And National received a $5 million refund due to the capital losses incurred in 2018 that were eligible to be carried back. The holding company's current cash and liquidity position covers operating expenses and debt service into 2022 when the next significant maturities of holding company and GFL debt come due.

We have not repurchased MBIA Inc. common shares since our previous earnings call on March 1st. And as of May 1st, we had approximately $200 million remaining under our existing share repurchase authorization. Turning to the operating company's statutory results.

National reported statutory net income of $48 million for the first quarter of 2019, compared to a statutory net loss of $1 million for the prior-year's comparable quarter. The improved performance was primarily due to lower quarter-over-quarter loss in LAE expense and a $37 million positive change in net realized capital gains that largely resulted from National owned and National insured COFINA bonds that were exchanged for uninsured COFINA2 bonds as part of the COFINA bond restructuring. These positive items were partially offset by lower premium earnings. National does not consolidate the National COFINA trust in its statutory accounts and continues to apply insurance accounting.

As of March 31, 2019, 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 $2.6 billion and claims-paying resources totaled $3.8 billion. Turning to MBIA Insurance Corp. Statutory net loss was $1 million for the first quarter of 2019, compared to a statutory net loss of $10 million for the first quarter of 2018.

The favorable reduction of loss was primarily due to lower loss in LAE expense and lower foreign exchange losses in Q1 2019. As of March 31, 2019, the statutory capital of MBIA Insurance Corp. was $575 million versus $555 million as of December 31, 2018, and claims-paying resources totaled $1.3 billion. Cash and liquid assets of MBIA Corp.

totaled $165 million as of March 31. Now we will turn the call over to the operator to begin the question-and-answer session.

Questions & Answers:


Operator

[Operator instructions] Your first question comes from the line of Bose George with KBW.

Bose George -- KBW -- Analyst

Yeah, good morning. Actually, my first question, if the PREPA RSA goes through without MBI, what happens next just in terms of logistics? And also, if the PREPA RSA goes through based on the current proposal, would you guys have to take any additional reserves?

Bill Fallon -- Chief Executive Officer

In terms of the process, there are several steps that are anticipated. Ultimately, as I think, people are aware, for a final plan of adjustment, they would need collectively 11% of the creditors. So as I mentioned in my comments, they've started that process. I think the estimates are there's about 48% of the creditors now, and they'll see whether or not they can grow that number.

So that's kind of one of the key numbers and that's just sort of a strict interpretation of the provisions of PROMESA to get there. Now in terms of what happens between the 48% and getting to 67%, if in fact they get there, it's very hard to predict the steps involved. Obviously, we've always been to negotiating with all the parties involved and we remain that way, and we'll see what happens from this point. So just very hard to predict.

In terms of the loss reserving, as you know, we continue to take all currently available information into account when we sit down to do our reserves each quarter. We will continue to do that, and we don't comment specifically on any one credit in the reserves associated with that. So we'll just have to wait and see how things evolve.

Bose George -- KBW -- Analyst

And just to clarify, if they can get to the 67% without you guys, do you then pursue sort of your action separately?

Bill Fallon -- Chief Executive Officer

Again, it will depend. We represent approximately 17% of the PREPA credit. And there are provisions that, again, if you get to 67%, you can try, that is the court can try to cram down the other creditors. And so again very hard to predict at this point, but we will obviously continue to look to improve upon the current deal.

Bose George -- KBW -- Analyst

OK. Thanks, that's helpful. And then, actually, just in terms of the loss reserve this quarter, the -- how much of that was driven by the discount rate versus sort of the actual change in the fundamentals?

Anthony McKiernan -- President

The majority of it was due to the discount rate.

Bose George -- KBW -- Analyst

It was. OK. Great. Thanks.

Operator

Your next question comes from the line of Geoffrey Dunn with Dowling & Partners.

Geoffrey Dunn -- Dowling and Partners -- Analyst

Thanks, good morning. I want to follow-up on Bose's question just there. And specifically, if you can try to give a little bit more color or commentary around the actual economic development in the quarter. And specifically, did the formalization of the PREPA RSA and the potential risk to your ability to prosecute for a receiver appointment affect your probability assessment on your reserves in any meaningful way for all of the Puerto Rico exposure, not just one specific credit?

Anthony McKiernan -- President

Geoff, as we said, we don't comment on specific loss reserves. If this -- the PREPA deal itself has been around for a while, so we take all available data, as you know, when we consider our loss reserving. So certainly, that data point's a factor, but we really don't go any further than that.

Geoffrey Dunn -- Dowling and Partners -- Analyst

OK. Then, I guess, from a higher level, I was hoping you can help me understand your reserving then. You've paid $755 million on Puerto Rico and you have a statutory salvage of $614 million. So just making a simple assumption, that's all Puerto Rico, that's about an 82% recovery.

But you only have $12 million stat reserve against $2.6 billion of remaining. Why isn't that latter number and ratio more in keeping with your salvage recovery estimate versus what looks like kind of a negligible reserve against future exposure?

Anthony McKiernan -- President

So I think, there's two pieces, Geoff. One is, just the salvage assumption you're making on GAAP, obviously, you can assume it's all Puerto Rico, but it's not just Puerto Rico, it's salvage on losses of all muni credits. On the stat side, if you look at the gross numbers, you have the $600 million salvage which is on claims that were paid, whether it was Puerto Rico or other credits. You also have a $600-plus-million reserve on future claim payments.

So that's future claims minus recoveries in the future, your gross reserves of over $600 million on a stat basis. So that net of $12 million just on the stat basis is just the way the accounting works, you're netting those two numbers, but you have to actually break them out. So unfortunately, the numbers are similar. So it may be confusing, but the salvage reserve, again, is on payments we've already made and then the gross loss reserve of over $600 million on a stat basis represents losses on future payments net of recoveries in the future.

Geoffrey Dunn -- Dowling and Partners -- Analyst

OK. So $614 million salvage against stuff already paid and you're saying that the reserve against future risk is $600 million plus.

Anthony McKiernan -- President

$626 million, yes.

Geoffrey Dunn -- Dowling and Partners -- Analyst

OK. All right. OK. I may need to follow-up as I think about this.

Thanks.

Bill Fallon -- Chief Executive Officer

OK. Thank you.

Operator

[Operator instructions] Your next question comes from the line of Andrew Gadlin of Odeon Capital Group.

Andrew Gadlin -- Odeon Capital Group -- Analyst

Thanks, guys. My question was just asked.

Greg Diamond -- Managing Director of Investor and Media Relations

OK.

Operator

At this time, there are no further questions. I would now like to turn the call back to Greg Diamond for any additional or closing remarks.

Greg Diamond -- Managing Director of Investor and Media Relations

Thank you, Angie, and thanks to all of those -- all of you listening to the call today. Please contact us directly if you have additional 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.

Operator

[Operator signoff]

Duration: 22 minutes

Call participants:

Greg Diamond -- Managing Director of Investor and Media Relations

Bill Fallon -- Chief Executive Officer

Anthony McKiernan -- President

Bose George -- KBW -- Analyst

Geoffrey Dunn -- Dowling and Partners -- Analyst

Andrew Gadlin -- Odeon Capital Group -- Analyst

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