MBIA (MBI) Q2 2019 Earnings Call Transcript

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MBIA (MBI 0.66%)
Q2 2019 Earnings Call
Aug 07, 2019, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Welcome to the MBIA Inc. second-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, Maria. Welcome to MBIA's conference call for our second-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 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-Qs, 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 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 it was 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's Bill Fallon.

Bill Fallon -- Chief Executive Officer

Thanks, Greg. Good morning, everyone. Thank you for being with us today. Our second-quarter net loss was primarily caused by additions to our loss and loss adjustment expenses.

Most of those expenses were attributed to the PREPA and Puerto Rico general obligation bonds insured by National. The PREPA restructuring support agreement has gone to the support of about 72% of bondholders at last reporting. But we are not part of the 72%, we continue to evaluate our options. For our other Puerto Rico credits, Judge Swain has ordered a 120-day stay of litigation activity and a mediation for about $25 billion of Puerto Rico debt, including the general obligation in HK bonds we insure.

The turmoil on legal proceedings surrounding the successor to former Governor Rosselló have caused additional uncertainty and will likely further delay the restructuring process. National's insured exposure to Puerto Rico credits, excluding the restructured COFINA exposure, was $2.6 billion of gross par, including CAB accreted interest at June 30, 2019. Through July 1, 2019, National has paid total insurance claims on Puerto Rico debt of $1.1 billion. Since the COFINA debt restructuring was implemented last quarter, we have continued to undertake measures to further reduce our COFINA exposure.

As of July 31, 2019, our insured COFINA credit par and debt service exposures were $553 million and $1.9 billion, respectively, which are less than half of the $1.2 billion of accreted par and $4.2 billion of debt service that were outstanding at end-year 2018. The other credits of our insurance portfolios continue to perform consistent with our expectations. National's insured portfolio has further reduced a $54.5 billion gross par outstanding at June 30, 2019. It's leverage ratio gross par to statutory capital was 22:1, down from 23:1 at year-end 2018.

During the second quarter, National spent $49.6 million to purchase 5.4 million shares of MBIA Inc. stock at an average price of $9.12 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 June 30th, we had approximately $148 million remaining under our existing share repurchase authorization.

After the end of the quarter, we also issued a notice to call at par $150 million or about 57% of the $265 million of our 2022 MBIA Inc. debentures outstanding. Regarding MBIA Insurance Corp., the trial toward RMBS put back litigation against Crédit Suisse concluded last week, and we expect the ruling after post-trial briefs are submitted. Now Anthony will cover the financial results and provide an update on the holding company's liquidity position.

Anthony McKiernan -- Chief Financial Officer

Thanks, Bill, and good morning. I will begin with the review of our second-quarter 2019 GAAP and non-GAAP results, summarize the entity level liquidity positions and walk through the statutory results for National and MBIA Insurance Corp. The company reported a consolidated GAAP net loss of $170 million or negative $2.02 per share for the quarter ended June 30, 2019, compared to a consolidated GAAP net loss of $146 million or negative $1.64 per share for the quarter ended June 30, 2018. The higher loss for this quarter was primarily due to two factors: first, higher loss and loss adjustment expense at National related to its Puerto Rico exposures and at MBIA Corp.

for it's first lien RMBS. And second, fair value losses on interest rate swaps due to lower interest rates. You will note the $37 million of tax benefit on our GAAP income statement. The tax benefit in our earnings this quarter relates to changes in our valuation allowance attributable to tax expense on unrealized gains and other comprehensive income as required by GAAP.

The net of this tax expense in other comprehensive income and the tax benefit in earnings is equity neutral. The company's adjusted net loss non-GAAP measure was $76 million or negative $0.90 per diluted share for the second quarter of 2019, compared with an adjusted net loss of $51 million or negative $0.58 per diluted share for the second quarter of 2018. The unfavorable change was primarily due to higher quarter-over-quarter loss and loss adjustment expenses at National related to its insured Puerto Rico exposures. In addition, this quarter's adjusted net loss included the $7 million loss related to the consolidated COFINA VIEs.

Book value per share decreased to $12.26 as of June 30, 2019 versus $12.46 as of December 31, 2018, driven primarily by the year-to-date net loss somewhat offset by fewer shares outstanding due to share repurchases. I'll now spend a few minutes on the corporate segment and the insurance companies. The corporate segment, which primarily includes the activity of the holding company, MBIA Inc., had total assets of approximately $1.1 billion as of June 30, 2019. Within this total are the following material items: unencumbered cash and liquid assets held by MBIA Inc.

totaled $407 million. Approximately $550 million of assets at market value were pledged to the GICs and interest rate swaps supporting the GIC operation. There were also $61 million of cumulative contributions remaining in the tax escrow account, which represents National's 2018 and year-to-date 2019 tax payments. Turning to the insurance company statutory results.

National reported a statutory net loss of $100 million for the second quarter of 2019, compared to a statutory net loss of $31 million for the prior year's comparable quarter. The unfavorable result was primarily due to higher quarter-over-quarter loss in LAE-related Puerto Rico exposure. In July 2019, National paid $328 million of Puerto Rico-related insurance claims on a gross basis. Inception to date, gross claim payments through July 2019 for Puerto Rico exposures totaled $1.1 billion.

As of June 30, 2019, National's total fixed income investment portfolio, including cash and cash equivalents had a book adjusted carrying value of $3.2 billion, statutory capital was $2.4 billion and claims payment resources totaled $3.8 billion. Gross par outstanding reduced by $1.7 billion during the quarter, and now it stands at $54.5 billion. Turning to MBIA Insurance Corp., statutory net loss was $41 million for the second quarter of 2019, compared to statutory net income of $37 million for the second quarter of 2018. The unfavorable result was primarily due to higher loss in LAE related to its first lien RMBS credits.

As of June 30, 2019, the statutory capital of MBIA Insurance Corp. was $499 million. Claims paying resources totaled $1.3 billion. Cash and liquid assets in MBIA Corp.

totaled $135 million as of June 30, 2019. After quarter end, MBIA Corp. completed the refinancing of the MZ Funding loan facility with a new maturity date of January 2022. And now we will turn the call over to the operator to begin the question-and-answer session.

Questions & Answers:

Operator

Thank you. [Operator instructions] Our first question comes from the line of Bose George of KBW.

Bose George -- KBW -- Analyst

Yes. Good morning. First, just, the provision you had related to the PREPA RSA, was that based on expectation that it's going to happen? Or once it gets approved, is there a room for further provisions related to that?

Bill Fallon -- Chief Executive Officer

Yeah. I think with regard to PREPA, the probability, perhaps, has been increasing over the course of this year. However, all these things remain uncertain just given what we've seen with previous PREPA RSAs given the political situation in Puerto Rico, etc., but we do believe that the probability associated with that has gone up from earlier in the year.

Bose George -- KBW -- Analyst

And in terms of the timing for that, can you just remind us what the next steps are?

Bill Fallon -- Chief Executive Officer

It is a somewhat lengthy process. So there are several steps in the Title 3 process with Judge Swain, which likely will take us through this year, and then you're in -- well into next year before it would actually be executed, and that's assuming it closes on schedule.

Bose George -- KBW -- Analyst

OK. Thanks. And then, actually, just switching to the share repurchases from National, can you also just go through the capacity there for share repurchases -- further repurchase activity?

Anthony McKiernan -- Chief Financial Officer

So our remaining repurchase authorization, which is what we're governed by at this point is $148 million. But from a regulatory capacity standpoint, we've still got about $500 million of capacity based on the ratios you need to hit.

Bose George -- KBW -- Analyst

OK. And that number, there is no need to sort of check out -- check with the regulator, etc., before that happened, that's something you guys can do on your own essentially?

Anthony McKiernan -- Chief Financial Officer

That is what the insurance law states. Obviously, we're in touch with the regulator with all material moves we make.

Bose George -- KBW -- Analyst

OK. Great. Thanks.

Operator

Our next question comes from the line of Geoffrey Dunn of Dowling and Partners.

Geoffrey Dunn -- Dowling and Partners -- Analyst

Thank you. Good morning. Just a couple of number questions. In National's liquidity, what was the $323 million benefit from investing activities?

Anthony McKiernan -- Chief Financial Officer

There was a number of portfolio sales over the quarter as we generated cash to pay the July claims and get ready for the as of right dividend in October.

Geoffrey Dunn -- Dowling and Partners -- Analyst

OK. And then I should remember this, and I don't -- can you explain the differences between the GAAP-incurred losses and stat-incurred losses and specifically the delta between the 106 GAAP and the 169 stat this quarter?

Anthony McKiernan -- Chief Financial Officer

The primary difference is really the discount rate. The stat discount rate for National and -- there's two separate discount rates for them. National it's about 3.2%, for Corporate it's a little bit over 5%. But you're discounting the claims and recoveries at the statutory rate.

And then for GAAP, it's the risk-free rate, which, obviously, is stat decreased for each of the past several quarters. So you -- the discount rate is the biggest driver in the differences.

Geoffrey Dunn -- Dowling and Partners -- Analyst

OK. All right. Thank you.

Operator

[Operator instructions] Our next question comes from the line -- oh, it looks like our participant has withdrawn their question. [Operator instructions] And we have a question from the line of Giuliano Bologna of BTIG.

Giuliano Bologna -- BTIG -- Analyst

Good morning, and thanks for taking my questions. looking at the call of the 2020 -- the partial call of the 2022 immaturity, it looks like that would save you roughly $9.6 million a year or, call it, just under $30 million until maturity in interest expense. Are there any other opportunities at holding company level to take out securities in advanced maturities to reduce interest costs?

Bill Fallon -- Chief Executive Officer

Well, the only callable debt of any size we have remaining of the rest of 2022 is, we focused our liquidity window in that range, as you know, for the last few years, and we continue to focus on that now. But we are still in contact with parties who offer securities, our securities back to us from time to time, and if something that we felt was, to your point, saved interest expense and made sense to us, we certainly will look at those opportunities.

Giuliano Bologna -- BTIG -- Analyst

That sounds good. And then, switching over to the tax escrow. Did you mention or is there any disclosure around the amount of the escrow that's related to '18 versus the amount related to the first half of '19?

Anthony McKiernan -- Chief Financial Officer

The majority of the escrow was from '18. It's a little over 50% is from '18. And I believe $7 million is the payments to date in '19.

Giuliano Bologna -- BTIG -- Analyst

That sounds good. Thank you for taking my questions.

Operator

[Operator instructions] There appears to be no further questions at the time. I'd like to turn the call back over to Greg Diamond for any additional or closing remarks.

Greg Diamond -- Managing Director of Investor and Media Relations

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

Good day, and goodbye.

Operator

[Operator signoff]

Duration: 19 minutes

Call participants:

Greg Diamond -- Managing Director of Investor and Media Relations

Bill Fallon -- Chief Executive Officer

Anthony McKiernan -- Chief Financial Officer

Bose George -- KBW -- Analyst

Geoffrey Dunn -- Dowling and Partners -- Analyst

Giuliano Bologna -- BTIG -- Analyst

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