MBI (2024 - Q2)

Welcome to the MBIA Inc. Second Quarter 2024 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 Dia

Thank you, Ashley. As noted, this is MBIA's conference call for our second quarter 2024 financial results. After the market closed yesterday, we issued and posted several items on our website, including our financial results, our 10-Q, quarterly operating supplement and statutory financial statements for both MBIA Insurance Corporation and the 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, 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 disclosure 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-Qs as well as our financial results report and our quarterly operating supplement. The recorded replay of today's call will become available on the MBIA website approximately two hours after the end of the call. 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 and 10-Qs, which are available on our website at mbia.com. The company cautions not to place undue reliance on any such forward-looking statements. 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 Joe Schachinger will provide introductory comments and then a question-and-answer session will follow. Now here is Bill Fallon.

Thanks, Greg. Good morning, everyone. Thanks for being with us today. Our second quarter 2024 net loss was largely due to National’s net loss for the quarter. A significant increase in our PREPA loss reserve was the primary reason for National’s net loss. While the First Circuit Court of Appeals decision was good for bondholders, the Oversight Board's reaction to the decision has increased uncertainty regarding a timely resolution for PREPA and its creditors. We believe a consensual resolution is in the best interest of PREPA, PREPA's creditors, and the people of Puerto Rico. However, this will only occur if the Oversight Board changes its approach and fulfills its responsibilities under PROMESA. PREPA has the ability to repay its creditors. The Oversight Board does not have the willingness to pay. This must change. Given the range of possible outcomes associated with National’s $836 million PREPA bankruptcy claim. We continue to believe that it is necessary to substantially resolve PREPA before we can restart the process to sell the company. Regarding the balance of National’s insured portfolio, those credits have continued to perform generally consistent with our expectations. The gross par amount outstanding for National’s insured portfolio has declined by approximately $1.4 billion from year end 2023 to $27 billion at the end of the second quarter of this year. National's leverage ratio of gross par to statutory capital was 28 to 1 at the end of the second quarter of 2024. As of June 30th, 2024, National had total claims-paying resources of $1.6 billion in statutory capital and surplus of approximately $1 billion. Now, Joe will provide additional comments about our financial results.

Thank you, Bill, and good morning, all. I will begin with a review of our second quarter 2024 GAAP and non-GAAP results, and then provide an overview of our statutory results. The company reported a consolidated GAAP net loss of $254 million, or a negative $5.34 per share for the second quarter of 2024, compared to a consolidated GAAP net loss of $74 million or a negative $1.46 per share to the second quarter of 2023. The higher GAAP net loss this quarter was largely driven by two items. First is higher loss in LEA at National, which largely related to revising our loss scenarios for our PREPA exposure. Our loss scenarios now contemplate a range of negotiated and litigated outcomes that reflect a greater degree of uncertainty around the ultimate resolution of PREPA's debt. And the second item is higher losses on financial instruments carried at fair value, which largely related to the revaluation of an equity interest received by MBIA Insurance Corp. in a Zohar-related portfolio company in connection with claims paid on the Zohar CDOs. In addition to these items, lower net investment income was mostly offset by lower VIE losses and lower operating expenses this quarter versus the second quarter of 2023. The company's adjusted net loss, a non-GAAP measure, was $138 million or a negative $2.90 per share for the second quarter of 2024 compared with an adjusted net loss of $22 million, or negative $0.45 per share, for the second quarter of 2023. The unfavorable change was primarily due to higher loss in LAE at National in the current quarter related to PREPA. MBIA Inc.'s book value per share decreased $6.51 to a negative $39.07 per share as of June 30th, 2024, versus a negative $32.56 per share as of December 31, 2023, primarily due to the our $340 million consolidated net loss for the 2024 year-to-date period. Included in MBIA Inc.'s book value as of June 30th, 2024, is a negative $47.89 per share of MBIA Insurance Corp.'s book value versus a negative $44.91 per share as of December 31, 2023. I will now spend a few minutes on our Corporate Segment balance sheet. The Corporate Segment, which primarily comprises the activities of the holding company, MBIA Inc., had total assets of approximately $657 million as of June 30, 2024. Within this total are the following material assets: unencumbered and liquid assets held by MBIA Inc., totaled $315 million, compared with $411 million as of December 31, 2023. The decrease was largely due to spending approximately $62 million on retiring GFL euro-denominated medium term note liabilities before their maturities, of which $26 million was spent in the second quarter of 2024. In addition, MBIA Inc. spent $16 million in the current quarter to purchase its senior notes. Both the medium-term notes and the senior notes were purchased at prices accretive to equity. In addition to the unencumbered cash and liquid assets I mentioned, the Corporate Segment's assets included approximately $232 million of assets at market value pledged to guaranteed investment contract holders which fully collateralized those contracts. Turning to the insurance company's statutory results, National reported a statutory net loss of $131 million for the second quarter of 2024, compared to a statutory net loss of $11 million for the second quarter of 2023. The unfavorable variance was primarily driven by higher loss in LAE related to revising our loss scenarios for the PREPA debt restructuring and, to a lesser extent, lower net investment income. As a reminder, net investment income in 2024 reflects lower invested assets due to the as-of-right and special dividends paid by National to MBIA Inc. in the fourth quarter of 2023, which totaled almost $650 million. National’s statutory capital as of June 30th, 2024 was $969 million, down $148 million compared with December 31, 2023, largely due to its net loss for the 2024 year-to-date period of $142 million. Claims-paying resources were $1.6 billion down $51 million from December 31, 2023. As of June 30, 2024, National had gross par outstanding of $27 billion, which is down about $1.4 billion from year-end 2023. This decrease was largely due to regular amortization of National's insured portfolio. Now I'll turn to MBIA Insurance Corp., MBIA Insurance Corp reported a statutory net loss of $35 million for the second quarter of 2024 compared to a statutory net income of zero for the second quarter of 2023. The net loss in the second quarter of this year was driven by loss in LAE on primarily Zohar-related salvage. As of June 30th, 2024, the statutory capital of MBIA Insurance Corp. was $85 million, down from $152 million at year end 2023, primarily due to its net loss for the 2024 year-to-date period of $70 million. Claims-paying resources totaled $355 million at June 30th, 2024 compared to $504 million at year end 2023. MBIA Insurance Corp.’s insured gross par outstanding was $2.5 billion as of June 30th, 2024, down about 12% from year end 2023. The decrease in claims-paying resources and gross par outstanding was partially driven by our proactive de-risking of exposures, for which we held reserves and were paying claims. And now we will turn the call over to the operator to begin the question-and-answer session.

[Operator Instructions] And we'll take our first question from John Staley from Staley Capital Advisers. Please go ahead.

Yes, Bill, this process, I find probably not as frustrating, it’s very frustrating. I don't understand how you have wrapped up and settled so many other Puerto Rican exposures. And yet PREPA stands there being road-blocked by this Oversight Committee or by the government or by whatever the hell the issue is. What is the difference between the ability to have settled other exposures to Puerto Rico and yet PREPA stands out there all by itself unable to be resolved and even a conditional agreement that was sitting up there before the 11th Circuit, I think you guys withdrew from even before the court ruled. I mean there's something different about PREPA than the other guarantees you had that you wrapped up. And I'm just curious, as a lay person, how would you explain that difference?

Yeah, John, good morning. First of all, you're absolutely correct. There were four large credits that we had insured in Puerto Rico. And so just to fill in what you obviously know, three of the four had been resolved, that was the GO, the COFINA and the Highway, which were all sort of similar size to PREPA. And it's interesting and it’s probably too long to cover in this call, but there were many people who thought PREPA should have been the first of the credits resolved. And as you’d recall, there was actually an agreement in place prior to PROMESA, which was the law that Congress passed that went into effect approximately eight years ago and the initial Oversight Board chose not to approve that agreement. So we've now been at this in terms of this Board for the continuation in this Board for seven years, but there was probably almost two years prior to that where the creditors had agreed to forbear. And so it's been a very long process. And as I said, many people thought it should have been the first of the large credits to be restructured. And here we are. And it's going to be the last one. I suppose there's lots of opinions as to why this one's been difficult. I won't bore you with all the things that we've heard during this period of time. The situation, however, is here we sit. There was a First Circuit decision a couple of months ago that was favorable to bondholders. As you know, Judge Swain has requested mediation. We're about halfway through that 60-day period, and we'll see what the results of the mediation are. But trust me, I'm -- like you, I'm sure there's a lot of frustrated parties to this whole situation.

But there's really no substantive difference in terms of the terms of the guarantee. I mean, I assume you have within your guarantee tremendous rights against revenue, etc. But what is the Oversight Board hanging their hat on? What is their issue? It wouldn't allow the independent parties to resolve the damn thing. I mean, these guys are nothing but appointed politicians and lawyers and that guy who's the dean of a school or some damn thing. I mean, they're not even --they're nothing but guys who are sucking off the public tip. So, I mean, I don't get it. What is it that they're contending, we can't let you settle this, yet you settle three other ones? I mean, it makes no sense to me.

John, I think you've just articulated what many of the creditors have expressed in different ways over several years. So it looks as though this one is going to have to be strongly influenced by the courts, right? Decisions that are either made by Judge Swain or by the First Circuit on appeal, that's where many of these decisions have ended up. And it looks as though that may be what finally forces a resolution of the situation. We believe it. There's a good opportunity to make a consensual, but it may be one that has to go through the court system for even further clarification.

And that court process is yet another 60 days?

That's just the mediation that was requested. What happens after that is very hard to predict at this point.

Are you still at odds with some people who own the bonds like Invesco and Golden, something or other some hedge funds? Is that still part of the issue?

No, we're very much aligned now with the majority of the bondholders. So the people, no, we're all, there's a large group of us that are all aligned in terms of trying to resolve this with the Board.

So it's literally this appointed Oversight Board that's keeping this thing from being wrapped up?

It's probably a little bit more complicated than that, but they're staking out their position in what their offer is to bondholders and the bondholders have a different view. And as Judge Swain indicated, she would like to -- hope that there could be some compromise and a resolution that would end this in her court. But we'll have to wait and see whether that's possible.

Okay. Thank you very much.

Thank you.

[Operator Instructions] We will take our next question from [Mashem] private investor. Please go ahead.

Hi, thanks for taking my call. Just a couple of questions, one is, is there still about $70 million remaining under the repurchase authorization?

Yes.

Okay. And do you have any intention to begin to buy back stock?

As we've said before, we continue to look at lots of things, including the liquidity, the holding company, the different obligations of the holding company. As Joe indicated, we did actually buy back some debt in the second quarter. We'll look at what the future liquidity will be of the holding company and at any point in time, if we think the best choice that we have is to use that to buy back stock, then we will do that as we've done in the past.

Okay. I wanted to check. So the operating expenses came down a little bit in Q2, but it's still $15 million, so that's basically a $60 million run rate? I mean, that seems fairly high for, I mean, at this point, absent PREPA and possibly LCOR Alexandria, there's really no problem credits, right, within National?

I think that's a reasonable description of the situation.

So can we expect those operating expenses to come down?

The answer is we have for a while been focused on reducing operating expenses. I think if you go back, the trend is down. We would like to continue to reduce operating expenses. Keep in mind, we also have Corp., which when you look at those operating expenses, right, is part of the situation as well, as well as the runoff of the old asset liability management business at the holding company. So we are very focused on continuing to get those expenses down. There are already some things we've committed to which we think over the next year or so we'll continue to bring those down.

Okay. And then just in terms of the PREPA, I mean, so it looks like you've got PREPA down-marked in the mid-40s?

Sorry, is that a question?

Yeah, I mean, is that, I mean, so basically that's kind of our bogey for wherever a settlement or resolution comes out?

Yeah, we've never actually communicated exactly what level of recovery the PREPA reserves reflect.

Okay, but I mean that, at National, I don't think there are significant reserves other than PREPA, right?

It would be fair given our portfolio to conclude that PREPA is the significant portion of our reserves.

Okay. And then just finally is, can you just provide some idea what's going on LCOR Alexandria?

Yeah, well, there's not a whole I can say at this point, right? You'll see it, it's listed as one of our classified credits, right? It's office space. I think everyone's familiar with what has happened with office space in and around most major cities. This one is in the DC area. We have been focused on it for quite a while. And we think there is a plan in place that will result in a resolution to this that will not have any material impact on the company at this point.

Okay. And then finally, I just wanted to see, there's a lot of activity in the credit, synthetic risk transfer market. Is that something where you've explored? I wonder if there's an opportunity with the National portfolio to look at transferring a portion of that to the synthetic risk transfer market?

Without commenting on any specific thing, we are obviously well aware of the synthetic market. There are lots of things that we look at with regard to the National portfolio at any point in time. So if there was ever something that we thought would be beneficial to our shareholders, we would pursue it.

Okay. All right, thank you.

[Operator Instructions] At this time, I'm showing no further questions. I'd like to turn the floor back over to management for any additional or closing remarks.

Thank you, Ashley. And thanks to those of you listening to our call today. Please contact us directly if you have any 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.

Thank you, ladies and gentlemen. This does conclude today's MBIA Second Quarter 2024 Financial Results Conference call. You may now disconnect your line and have a wonderful day.