Q2 2020 MBIA Inc Earnings Call

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Welcome to the M.B. I Inc. second quarter 2020 financial results Conference call.

I would now like to turn the call over to Greg Diamond managing director of Investor and media Relations and the <unk>. Please go ahead Sir.

Thank you Maria welcome to Andy I use conference call for our second quarter 2020 financial results.

After the market close yesterday, we issued in posted several items on our web sites, including our financial results 10-Q quarterly operating supplement and statutory financial statements for both and be a 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's, and other SEC filings as our company's definitive disclosures are incorporated in those documents.

We urge investors to read our most recent 10-K and subsequent 10-Q's 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 todays 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's as well as our financial results report in 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 is included in last week's press announcement and in the financial results that we posted on <unk> on the MBT website yesterday.

Now for our Safe Harbor.

Our remarks on todays 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 MBJ dotcom.

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 and will provide introductory comments, which will be followed by a question and answer session.

Now here's Bill Phelan.

Thanks, Greg.

Good morning, everyone.

Thank you for being with us today.

For the second quarter of 2020, the company's net loss was primarily caused by loss and loss adjustment expenses.

More than half of those loss expenses recorded by National Public Finance guarantee Corporation and the balance by M&A Insurance Corporation.

These losses, largely result, as a national's insured, Puerto Rico exposure and reductions in MBJ Corp.'s estimated recoveries on the Zohar Ceos.

The losses for the second quarter were not meaningfully influenced by the Koby 19 pandemic. However, we will continue to review our insured portfolio to assess the impact from Cobank 19 is a pandemic evolves.

Nationals, Puerto Rico exposure is largely comprised of three credits.

The Commonwealth General obligation bonds.

The Puerto Rico Electric power authority or perhaps.

And the Puerto Rico Highway and transportation authority for H.T.J.

There have been no meaningful changes to our prep NGL credits in the last three months.

Regarding H.T.A. last month the title three court denied our motion seeking to lift the bankruptcy stayed to pursue our property interest.

We disagree with that decision intend to appeal it once it is final.

The provisions of the H.T. a revenue bonds are widely accepted in use across the public finance market.

For the court's ruling could make it more difficult for state and local governments to finance infrastructure projects at attractive rates.

Last week, our litigation against certain underwriters as some of our insured Puerto Rico debt was remanded back to the Commonwealth Court, where we had first filed it.

The case will now proceed in the underwriter banks will soon respond to the complaint.

Most of the credits in our insurance portfolios continue to perform consistent with our expectations.

Yes outstanding gross par of the insured portfolios continues to reduce where national's insured portfolio has further declined to $46 billion.

Down $1.5 billion from last quarter.

At June Thirtyth, 2020 nationals leverage ratio of gross par to statutory capital was 23 to one.

During the second quarter National purchased 9.8 million shares of MBS <unk> common stock at an average price of $7.32 per share.

Year to date.

July 29 2020.

National purchased 22.6 million MBK shares at an average price of $7.58 per share.

As of July 29, 2020, and be I had 57.8 million shares outstanding and $27 million every remaining capacity under its existing share repurchase authorization.

Now Anthony will cover the financial results.

Thanks, Bill and good morning, everyone.

We'll begin with a review of our second quarter 2020, GAAP and non-GAAP results.

The company reported a consolidated GAAP net loss of $106 million or a negative $1.69 cents per share for the quarter ended June thirtyth 2020, compared to a consolidated GAAP net loss of $207 million or negative $2.45 per share for the quarter ended June.

Thirtyth 2019.

The lower net loss this quarter was driven by several factors.

Mark to market gains related to our interest rate swaps in 2020 versus MTM losses in 2019 due to favorable changes to the interest rate curves.

Higher VIP income in 2020 in part due to the reversal of a credit loss allowance on held to maturity investments and an increase in our credit Suisse recovery versus losses in 2019, resulting from Deconsolidating VI use.

Modestly lower loss finale expense and lower interest expense.

These items were somewhat offset by lower investment income.

[noise] loss and loss adjustment expense at National was related to Puerto Rico exposures, focusing on H.T.K. as bill alluded to earlier.

Loss and loss adjustment expense and be a corp was primarily due to were reduction and expected recoveries on claims paid on the Zohar CL lows.

Discount rates played a minimal part and loss analogy for the quarter as the risk free rates on averaged decreased only slightly this quarter versus Q1 2020.

Book value per share decreased to $5.55 per share as of June thirtyth 2020, compared to $10.40 as of December 30, Onest 2019, primarily due to 2020 year to date net loss of $439 million, partially offset by under.

Realized gains on investments and 17 million fewer net shares outstanding due to share repurchases during the first half of the year.

The company's adjusted net loss on non-GAAP measure was $72 million or a negative $1.15 cents per share for the second quarter of 2020, compared with adjusted net loss of $76 million or 90 cents per share for the second quarter of 2019.

The favorable change was primarily due to lower loss and LAE, partially offset by lower net investment income.

I will now spend a few minutes on the corporate segment balance sheet on the insurance companies.

The corporate segment, which primarily includes the activity of the holding company MBIA Inc. had total assets of $1 billion as of June Thirtyth 2020.

Within this total or the following material items.

Unencumbered cash and liquid assets held by MBIA Inc. totaled $325 million as of June Thirtyth 2020 versus $375 million as of December 30, Onest 2019.

The decrease was primarily due to increases in collateral requirements associated with the gift business as a result of Covance 19 related market impacts on credit spreads.

Liquidity increased from Q1 due to a decrease in the aforementioned collateral requirements as spreads tightened during the second quarter.

Liquidity also benefited from an accelerated AOMT tax refund.

As of June Thirtyth 2020, there were $28 million of tax deposits made to the tax escrow account, which represented the remaining portion of nationals 2018 tax payments.

As we stated last quarter tax escrow releases are not expected to be a meaningful contributor to holding company liquidity in the future.

There were approximately $550 million of assets at market value pledged to the gics and the interest rate swaps supporting the get book.

Turning to the insurance companies statutory results National reported a statutory net loss of $35 million for the second quarter of 2020 compared to a statutory net loss of $100 million for the prior years comparable quarter.

The favorable result was primarily due to lower loss in the L. AG and a tax benefit generated in Q2 2020 subject to the cares Act.

We're nationals 2020 tax loss carry back has been extended to net operating loss at a 35% tax rate, partially offset by lower revenue.

After quarter end on July 1st National paid $333 million in gross Puerto Rico related claims, which brings inception to date gross claims paid on insured, Puerto Rico bonds to $1.6 billion.

As of June Thirtyth, 2020, Nationals total fixed income investment portfolio, including cash and cash equivalents had a book adjusted carrying value of $2.3 billion.

Statutory capital was $2 billion impacted from year end 2019 by its purchases of NB Iot Inc. shares year to date net loss and investment unrealized losses.

Claims paying resources totaled $3.3 billion.

Insured gross par outstanding reduced by $1.5 billion during the quarter and now stands at $45.8 billion.

Turning to MBIA insurance Corp. The statutory net loss was $23 million for the second quarter of 2020 compared to a statutory net loss of $41 million for the second quarter of 2019.

The favorable result was primarily due to lower loss and Lee as reduced recoveries related to the Zohar credits were somewhat offset by increased recoveries on our credit Suisse put back receivable and the current year quarter.

We await a decision in the credit Suisse trial as well as progress on the Zohar monetization process given recent court rulings.

And now we will turn the call over to the operator to begin the question and answer session.

Thank you Sir the floor is now open for questions. If you wish to ask a question at this time simply press Star then the number one on your telephone keypad.

If at any point. Your question has been answered and you wish to remove yourself from the Q press the pound key.

Our first question comes from the line as Tommy Jain of KBW.

Hey, good morning, guys. Thanks for taking my question had a question about whether you have any expectation are built into your numbers as to whether there'll be settle support for state and local governments in me I'm next release, though.

And basically will there be an impact I would say if its include with its not grid.

There is not an explicit number but as you can imagine we're carefully monitoring what's going on in DC. These days.

And as you know in the past, while there was a lot of support financially.

This time around at least from Democratic side, there's a lot of talk about specifically money being distributed to state and local government. So we'll wait and see how that plays out and clearly it may have an impact and while we haven't seen any claims immediately from.

For example, general obligations of state or cities.

Over time, there could be more and more stress depending on how the pandemic evolves. So it is an important factor, but no there is not an explicit.

Part of the calculation right now related to that.

Thank you mentioned that in a in your teaching number for loss and loss adjustment expense.

There was really minimal impact he said from cobot 19, and does that kind of broadly accustomed to.

Potentially and municipalities, taking a more constrained budgets, giving you know lower sales tax resumes and potentially higher expenses related to a dealing with dependent.

The short answer is yes, and behind that again, it we have to wait and see how this evolves, but clearly there's been some stress.

Many of these situations are waiting to see for example, what the government does and then also what response some of the state states in cities have two there the drop and in revenues.

Okay. Thanks, and then last one switching gears a there was the ruling landscape <unk> that you mentioned, Matt that gives the guarantors. The right to proceed claims are going to see or some of the banks for for underwriting in Puerto Rico.

You know any way for us to think about sizing what the potential recovery those could be there I'm, obviously not the RMBS claims and proceed over a number of years and settlements made pretty widely is that a good proxy for what we're seeing here or just how should we think about that.

Conceptually there are some some similarities that you just referred to in terms of sizing. However, it's pretty early in the litigation process.

We obviously feel we have a very strong claim here and as I indicated. The next response is really from the banks.

In the how the Puerto Rico core, which we think is the proper venue for this to be heard. So this is one as it evolves it will be easier to start to size and perhaps even probabilities events, which are trying to do against this but it's pretty early right now to come up with that.

And given the timing of one not ruling came out of the in July there was no financial impact from that and again in Q2 numbers correct no. There's nothing from a that litigation reflected in our recoveries at this point.

Great and stuff.

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Our next question comes from line of Mark Palmer I'd be tea.

Hi, good morning, and thanks for taking my question.

With regard to get the title treat court ruling on H.T.A. could you give us some sense of what the timing is with regard to the appeal of that.

And if you could comment on the broader implications if that ruling is a lot Stan.

Yeah, It first and with regard to the timing there a couple other procedural.

Elements of the litigation, but.

Over the next month or two.

I think there's that's a reasonable period to think of the appeal being filed.

Again, sometimes hard to picked on litigation.

But that will move relatively quickly in terms of whatever action, we need to take.

In terms of the the second part of your question Mark with regards to implications.

And in my comments.

We strongly believe that this was not the right decision. We do believe that it has knock on effects for the broader market.

We do believe that there are liens and placing that this is the way the municipal market.

Has function and that is reflected in the rates that issuers are able to borrow at and if that is not the case than we think that changes the market, but we are.

I'm confident and optimistic that as we pursue this that that is likely be reversed.

Thanks very much.

Thank you.

Again, ladies and gentlemen, if he wants to ask a question simply press Star then the number one on your telephone keypad.

Our next question comes from line of Josh as trough of kind of site.

Thank you good morning, I appreciate the time, a with regards to the insured portfolio national were there any exposures are sectors, where you didn't need to devote additional time for review given the ongoing conditions in and in general any color you could give on sectors or credit is outside of Puerto Rico that you're tracking particularly closely.

Even the ongoing pandemic situation that'd be helpful.

Yes, as you can imagine we've looked at the entire portfolio there clearly some.

Ah that are more likely to face some stress due to the impact of covert 19.

So I'll give you. One example of a sector or sub sector. There are some credits in our national portfolios that are related to rent a car deals and fees associated with railcars and as you can imagine I wouldn't the.

Severe reduction in travel since so much of the rental car business is associated with airports are those are being reviewed very carefully and we'll continue to monitor those.

That's probably the Best example, and there are some others as you can imagine where revenues of just.

Slow down whether they be sales tax type things in certain states are cities.

But again, we're looking at the entire portfolio and again at this point there's been no claims we don't see in the near term any claims but it is one the longer the impact is helped by the issuers.

The more stress they will experience.

Thanks, I appreciate that and if I could just get a second question and could could you give us an update as to what the plans are with regards to potentially requesting approval for a special dividend from National which I think it was originally planned for 2021, but any update on that would be helpful as well.

Yeah, there I don't believe there's never been a date that was put out with regard to a special dividend from national the holding company and what we've said is after there is meaningful progress on the Puerto Rico restructuring.

We would consider going to the department of financial services.

To discuss the special dividend from National up to the holding company and the challenges you're aware is that it's just very hard to estimate the timing of the Puerto Rico restructuring at this point, but.

Hi, and we continue to think about up more in terms of events as opposed to any data on the calendar.

Got it. Thank you very much I appreciate your time.

And ladies and gentlemen that once our final question and with that I would like to conclude today's conference call. Thank you for John in today's MD <unk> second quarter 2020 earnings Conference call. You May now disconnect have a wonderful day.

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