MBIA (MBI) Q4 2019 Earnings Call Transcript

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MBIA (MBI 7.74%)
Q4 2019 Earnings Call
Feb 28, 2020, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Welcome to the MBIA Inc. fourth-quarter and full-year 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. After the market closed yesterday, we issued and posted several items on our websites, including our financial results, 10-K, 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 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. 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 report and our quarterly operating supplements. A recorded replay of today's call will become available approximately two hours after the end of the call, and the information for accessing it is included in last week's press release and the financial results we posted on the website yesterday.

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, 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.

Bill Fallon -- Chief Executive Officer

Thanks, Greg. Good morning, everyone. Thank you for being with us today. Remediating our Puerto Rico credits continues to be our main priority.

During the 2019, we were able to resolve and then fully extinguish our Puerto Rico sales tax bond or COFINA exposure. Our COFINA exposure accounted for approximately one half of our total insured Puerto Rico debt service. As a result of the restructuring and the extinguishment of our COFINA exposure, along with claims payments that we have made on our other insured Puerto Rico exposure, our total insured debt service on Puerto Rico bonds has declined from $7.9 billion at year-end 2018 to $3.3 billion at the end of 2019. Our remaining Puerto Rico exposure is largely comprised of three Puerto Rico credits: the Commonwealth pre-2011 General Obligation PBA bonds; the Puerto Rico Electric Power Authority or PREPA; and the Puerto Rico Highways & Transportation Authority or HTA.

At year-end 2019, our exposure to the General Obligation and PBA bonds was about $655 million of gross par or about $833 million of total debt service. Our PREPA exposure was just under $1 billion of gross par or $1.3 billion of total debt service. And our HTA exposure was about $600 million of gross par or $1 billion of total debt service. At this time, there is a restructuring support agreement for the PREPA bonds that has been approved by the Federal Oversight Management Board in over 90% of the PREPA creditors.

The court hearing for the related 9019 motion is scheduled for June. Governor Vazquez and the Puerto Rico Legislature have stated publicly that they do not support the agreement. There is also a planned support agreement between the Oversight Board and a group of Commonwealth bondholders, representing approximately 54% of the par amount. We and the other monolines do not support the proposed agreement and neither does the Commonwealth government.

As yet, there are no specific agreements related to the HTA debt. The GO plan of adjustment does include some proposed payments to the credit, such as HTA, that have callback rights against the Commonwealth but we believe that the amount allocated for these rights understates what HTA is entitled to. We'll pursue these rights through the court process. The other credit in National's insurance portfolio continue to perform in line with our expectations, and the outstanding par of the insured portfolio continues to reduce each quarter.

National's insured portfolio declined to $49 billion of gross par outstanding, down $9 billion or 15% from year-end 2018. National's leverage ratio of gross par to statutory capital declined to 21 to one, down from 23 to one at year-end 2018. During the fourth quarter, National purchased 800,000 shares of MBIA common shares at an average price of $9.25 per share. During 2019, National spent $101 million to purchase 11.1 million shares of MBIA Inc.

common stock at an average price of $9.12 per share. Subsequent to year-end, through February 20, National purchased an additional 3 million shares at an average price of $9.18 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 20, 2020, we had approximately $74 million remaining under our existing share repurchase authorization.

Now, Anthony will cover the financial results.

Anthony McKiernan -- Chief Financial Officer

Thanks, Bill, and good morning. I will begin with the review of our fourth-quarter 2019 and full-year 2019 GAAP and non-GAAP results, then cover the holding company balance sheet, and lastly walk through our statutory results for National and MBIA Insurance Corp. The company reported a consolidated GAAP net loss of $243 million or a negative $3.21 per share for the quarter ended December 31, 2019, compared to a consolidated GAAP net loss of $7 million or negative $0.08 per share for the quarter ended December 31, 2018. The results for the quarter were driven by several factors: increased loss and loss adjustment expense at National related to its remaining Puerto Rico exposures, reflecting both views of the credits and the effect of higher discount rates on the present value of estimated future recoveries; increased loss and loss adjustment expense at MBIA Corp., primarily due to a reduction in expected recoveries on claims paid on the Zohar CLOs; net investment losses due to the impairment of a legacy remediation municipal security, which was subsequently sold in January; fair value VIE loss related to the accelerated $66 million payoff of the remaining COFINA trust certificates, which also eliminated our remaining COFINA exposure.

That fair value loss was equity neutral as losses were reclassified from other comprehensive income into earnings, and higher operating expenses due to legal expenses associated with National's litigation filed in 2019 against a number of investment banks that underwrote Puerto Rico debt. The tax expense for the quarter reflects the early adoption of a new tax accounting guidance, which removed the requirement to allocate taxes between earnings from continuing operations and other comprehensive income and which is equity neutral. Going forward, GAAP quarterly tax expense should be negligible, reflecting the full valuation allowance against our deferred tax asset. These negative earnings impacts were somewhat offset by higher gains on financial instruments at fair value due to higher interest rates benefiting the swaps associated with the GIC book of business and VIE gains due to an increase in our estimate for our RMBS putback recoveries from Credit Suisse.

Also, in the fourth quarter of 2018, there were elevated realized losses related to the deconsolidation and termination of five second-lien RMBS VIEs. For the 12 months ended December 31, 2019, the company reported a consolidated GAAP net loss of $359 million or a negative $4.43 per share, compared to a consolidated GAAP net loss of $296 million or negative $3.33 per share for the year ended December 31, 2018. The results for the year were also driven by several factors: increased loss and loss adjustment expense at MBIA Corp., primarily related to a reduction in expected Zohar recoveries and increased first lien RMBS losses; lower premium earnings due to the continued reduction of the insured portfolio; the previously mentioned muni legacy credit net investment losses and higher operating expenses. These negative impacts were somewhat offset by higher gains on financial instruments at fair value due to the sales of uninsured PREPA and new COFINA bonds during the year, net mark-to-market gains on insured derivatives, and higher total VIE gains related to the consolidated COFINA trusts, higher estimated Credit Suisse RMBS recoveries and elevated realized losses for 2018 due to the deconsolidation and termination of second lien RMBS VIEs.

The company's adjusted net loss, a non-GAAP measure, was $95 million or negative $1.25 per share for the fourth quarter of 2019, compared with adjusted net income of $106 million or $1.20 per share for the fourth quarter of 2018. The unfavorable change was primarily due to the loss and loss adjustment expense at National in Q4 2019 compared to a loss and loss adjustment expense benefit in Q4 2018, which were both related primarily to National's insured Puerto Rico exposures. For the year ended December 31, 2019, the company's adjusted net loss was $17 million or negative $0.21 per share, compared with an adjusted net loss of $38 million or negative $0.42 per share for the year ended December 31, 2018. The favorable change for the year was primarily due to the lower loss and loss adjustment expense at National in 2019.

Book value per share decreased to $10.40 as of December 31, 2019 versus $12.46 as of December 31, 2018, primarily due to the net loss for the year, partially offset by unrealized gains on investments and 10 million fewer net shares outstanding due to share repurchases. I will now spend a few minutes on the corporate segment balance sheet and the insurance companies. The corporate segment, which primarily includes the activity of the holding company, MBIA Inc., had total assets of approximately $1 billion as of December 31, 2019. Within this total are the following material items: unencumbered cash and liquid assets held by MBIA Inc. totaled $375 million as of year-end 2019 versus $457 million at December 31, 2018.

The decrease year-over-year was primarily due to the voluntary call at par in August of $150 million of MBIA Inc.'s 6.4% notes due in 2022. In the fourth quarter of 2019, MBIA Inc. received as-of-right dividends from National totaling $134 million, with $110 million paid in October and another $24 million paid in November. The additional $24 million resulted from excess as-of-right dividend capacity under regulatory guidelines, measuring a three-year look back of dividends paid versus investment income.

Due to the November 5th filing of our Q3 2019 financials versus the three-year look back start date of November 8, 2016, we were able to dividend an additional quarter of investment income. We do not expect this scenario to recur for the foreseeable future and the 2020 as-of-right dividend will now be paid in November. There were approximately $490 million of assets at market value pledged to the GICs and the interest rate swaps supporting the GIC book. And as of December 31, 2019, there were $61 million of cumulative front contributions remaining in the tax escrow account, which represented National's 2018 and year-to-date 2019 tax payments.

In January of 2020, due to a full-year 2019 tax loss at National, MBIA Inc. returned National's 2019 tax deposits of $7 million and $26 million of National's 2018 tax year deposits. Following the returns, $28 million remained in the tax escrow account. The holding company is not expected to receive meaningful liquidity from any future distributions.

Turning to the insurance company's statutory results, National reported statutory net income of $4 million for the fourth quarter of 2019, compared to net income of $9 million for the prior year's comparable quarter. The unfavorable result was primarily due to higher loss in LAE, somewhat offset by a tax benefit generated in December of 2019 when National elected to prepay our remaining insurance obligation with respect to our COFINA exposure in the amount of $66 million, thus reducing the trust obligations to 0. In fiscal year 2019, in addition to the prepayment of our COFINA exposure, National paid $393 million of Puerto Rico-related insurance claims on a gross basis related to the January and July scheduled debt service payments. In January of 2020, National paid $59 million in gross Puerto Rico-related claims, which brings inception-to-date gross claims to $1.2 billion.

As of December 31, 2019, National's total fixed income investment portfolio, including cash and cash equivalents, had a book adjusted carrying value of $2.5 billion. Statutory capital was $2.4 billion and claims paying resources totaled $3.5 billion. Insured gross par outstanding reduced by $2.3 billion during the quarter, and now stands at $48.9 billion. Turning to MBIA Insurance Corp., the statutory net loss was $73 million for the fourth quarter of 2019, compared to statutory net income of $13 million for the fourth quarter of 2018.

The unfavorable result was primarily due to higher loss in LAE related to the Zohar credits in the current-year quarter. As of December 31, 2019, the statutory capital of MBIA Insurance Corp. was $476 million versus $555 million as of December 31, 2018. Claims paying resources totaled $1.2 billion and cash and liquid assets totaled $124 million.

MBIA Corp.'s insured gross par outstanding was $10 billion at year-end 2019. 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] And I'm showing we have no questions at this time, sir.

Greg Diamond -- Managing Director of Investor and Media Relations

OK. Thank you, Maria. We will end the call then. 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: 18 minutes

Call participants:

Greg Diamond -- Managing Director of Investor and Media Relations

Bill Fallon -- Chief Executive Officer

Anthony McKiernan -- Chief Financial Officer

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