MBIA Inc. (NYSE:MBI) Q2 2022 Results Conference Call August 4, 2022 8:00 AM ET
Company Participants
Greg Diamond – Managing Director of Investor & Media Relations
Bill Fallon – Chief Executive Officer
Anthony McKiernan – Executive Vice President & Chief Financial Officer
Conference Call Participants
John Staley – Staley Capital
Paul Saunders – Hutch Capital
Operator
Welcome to the MBIA Inc., Second Quarter 2022 Financial Results Conference Call.
I would like to turn the call over to Greg Diamond, Managing Director of Investor and Media Relations at MBIA. Please go ahead, sir.
Greg Diamond
Thank you, Britney. Welcome to MBIA’s conference call for our second quarter 2022 financial results. After the market closed yesterday, we issued and posted several items on our websites, including our financial results, 10-Q, quarterly operating supplement 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 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 disclosures of 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 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 report posted yesterday on the MBIA website.
Now here is 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. 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 introductory comments and then a question-and-answer session will follow.
Now here’s Bill Fallon.
Bill Fallon
Thanks, Greg. Good morning, everyone. Thanks for being with us today.
Since our last conference call, the bond restructuring arrangements for the Puerto Rico Highways and Transportation Authority, or HTA, have advanced largely as planned. In July, National received about half of its overall expected recovery on its HTA exposure, while the other half will be paid upon the effective date of HTA’s plan of adjustment. The confirmation hearing for that plan is scheduled for August 17, and subject to its approval, the effective date could be soon after that.
National’s last significant remaining Puerto Rico exposure is PREPA. Last week, at the mediator’s request, the Title III Court approved extending the mediation deadline to August 15 for the party to agree to [indiscernible] to develop a confirmable plan of adjustment for PREPA which is being managed by the Puerto Rico Oversight Board. National’s exposure to PREPA after its July claims payment is approximately $710 million of gross par [indiscernible].
This year’s developments regarding the resolution of National’s Puerto Rico exposure have [indiscernible] the uncertainty of its potential outcomes and also improved the transparency regarding National’s financial condition. Such progress better affords us the opportunity to pursue our strategic objectives, which may include a potential sale of the Company and/or special distributions from National. Given this progress, we do not believe that it is necessary to fully resolve National’s remaining PREPA exposure to pursue these strategic alternatives.
Turning to National’s other insured credits, the insured portfolio has continued to perform consistent with our expectations. National’s insured portfolio has continued to run off as its outstanding gross par declined by $1.9 billion from year-end 2021 to $34.6 billion at June 30, 2022. Also, National’s leverage ratio of gross par to statutory capital declined to 17:1 at the end of the second quarter, down from 18:1 at year-end 2021. As of June 30, 2022, National had total claims paying resources of $3 billion with cash and investments totaling $2.3 billion and salvage on paid claims of $496 million as per its statutory financial reporting.
Now Anthony will provide additional comments about our financial results.
Anthony McKiernan
Thanks, Bill, and good morning.
I will begin with a review of our second quarter 2022 GAAP and non-GAAP results. The Company reported a consolidated GAAP net loss of $36 million or a negative $0.72 per share for the second quarter 2022 compared to a consolidated GAAP net loss of $61 million or a negative $1.23 per share for the second quarter ended June 30, 2021. The lower net loss this quarter was driven by mark-to-market gains on our interest rate swaps associated with the legacy ALM business [indiscernible] higher interest rates, gains on our consolidated VIEs of MBIA Insurance Corp. due to the purchase of MBIA Corp. insured debt and higher investment income.
These items were somewhat offset by investment-related losses at National. Due to mark-to-market losses resulting from higher interest rates, realized losses due to the sale of new Puerto Rico GO bonds and an impairment on its remaining Puerto Rico GO bonds to reflect the [indiscernible] sale of those bonds at current market prices.
As of June 30, National sold approximately [indiscernible] of its GO bonds. Subsequent to quarter end, National sold its remaining GO bonds in addition to selling approximately 45% of its Puerto Rico GO-related contingent value instruments or CVIs. Loss in LAE expense at National was almost [indiscernible] due to downward estimated price adjustments on its Puerto Rico HTA and CVIs were received after the end of the second quarter. National sold approximately 5% of the HTA CVI in July at prices consistent with its June 30 estimates.
National intends on repaying all $550 million of its gross insured par of HTA exposure in August upon confirmation. Assuming HTA’s final resolution occurred in the third quarter, HTA and CVI values will be reflected through National’s investment portfolio performance going forward under GAAP accounting. And [indiscernible] will be the sole remaining material Puerto Rico credit [indiscernible] to GAAP insurance loss reserve and recoveries.
The Company’s adjusted net loss, a non-GAAP measure, was $47 million or a negative $0.93 per diluted share for the second quarter of 2022 compared with adjusted net income of $37 million or $0.76 per diluted share for the second quarter of 2021. The unfavorable change was due primarily to the higher loss in LAE at National due to changes in the estimated value of Puerto Rico HTA CVIs in the second quarter of 2022.
MBIA Inc.’s book value per share decreased to a negative $13.63 per share as of June 30, 2022 versus a negative $5.73 per share as of December 31, 2021 primarily due to unrealized losses on investments recorded comprehensive income driven by higher interest rates and wider credit spreads as well as the $100 million year-to-date net loss. MBIA Corp.’s book value was negative $36.48 per share with over [indiscernible] of accrued but unpaid interest on its surplus notes.
I will now take a few minutes on the Corporate segment balance sheet and our insurance company’s statutory results. The Corporate segment, which primarily includes the activity of the holding company, MBIA Inc., had total assets of approximately $665 million as of June 30, 2022. Within this total are the following material items. Unencumbered cash and liquid assets held by MBIA Inc. totaled approximately $188 million as of June 30, 2022 compared with $239 million as of December 31, 2021.
During the quarter, we purchased $30 million face value of GFL MTNs due in 2024 and 2025 at attractive discounts. The holding [indiscernible] also paid approximately $50 million of scheduled principal payments on euro-denominated MTNs during the quarter. There are no additional principal payments due for the rest of the year. The Corporate segment [indiscernible] that’s also [indiscernible] approximately $390 million of assets at market value pledged to the GIC and the interest rate swaps supporting the legacy GIC obligation.
Turning to the insurance company’s statutory results. National reported a statutory net loss of $44 million for the quarter ended June 30, 2022 versus statutory net income of $23 million for the quarter ended June 30, 2021. The unfavorable comparison was primarily due to loss in LAE in Q2 2022 on the values of Puerto Rico [indiscernible] and HTA recoveries versus a loss in LAE [indiscernible] in Q2 2021. National’s gross claim payment [indiscernible] insured Puerto Rico credits are as follows. From inception to 6/30/2022, gross claims paid on insured Puerto Rico exposure totaled approximately [$2 billion]. In July, National made claims payments primarily for PREPA of $142 million.
Turning to MBIA Insurance Corp. Its statutory net loss was $6.3 million for the second quarter of 2022 compared to a statutory net loss of $37.5 million for the second quarter of 2021. The favorable comparison was primarily due to lower loss in LAE expense. As of June 30, 2022, the statutory capital of MBIA Insurance Corp. was $118 million and claims paying resources totaled $711 million. Decreases from year-end 2021 due primarily to the year-to-date net loss of [indiscernible].
MBIA Corp.’s insured gross par outstanding reduced by approximately $300 million during the quarter and was $4.2 billion as of June 30, 2022, and 55% of that exposure is non-U.S. public finance credits. With the Zohar CLOs exit from Chapter 11 bankruptcy on August 2, MBIA Corp. will retain interest in asset [indiscernible] trust, the goal of monetizing its remaining interest in several legacy portfolio companies over time and in the litigation trust, which will pursue legal remedies in part to recover its credit losses.
And now we will turn the call over to the operator to begin the question-and-answer session.
Question-and-Answer Session
Operator
[Operator Instructions] And we will take our first question from John Staley with Staley Capital.
John Staley
Bill, this is John Staley. The comment you just made is almost identical to the comments you made after the last conference call that MBIA’s remaining obligation settlements with Puerto Rico were in such a position that you could begin negotiations to — and take steps resolving the final liquidation of the Company. I am very puzzled by the lack of any more specific information.
Back when the MBIA was a huge short, somebody referred to it as a melting iceberg. I mean you’re done. You’re not writing any new business, your litigation is pretty well defined. I’m just puzzled why this isn’t getting resolved more aggressively. And if it isn’t, why you’re not buying stock, which even though it’s 12 and change, I don’t know where it will be today. I knew you bought it pretty much up to 9.5 or so in the past. On a risk-adjusted basis, if the book values are anywhere near accurate, it’s a better value to buy today than it was before.
So I — the only people left in this business of owning your stock, 17% plus in management and people like myself that have been in this thing forever and are looking for the final strategy, the final liquidation of this company since it writes no new business. I’m very frustrated with the lack of more clarity and actual specific action on what the devil is going to happen here to realize the embedded value, which seems to be — I mean, it’s like a huge bond fund right now. So rates went up, so it came down a bit. What was in the 30s of book value appears to be now like 25, 26, if you take out the MBIA Insurance. I’m just a little bit frustrated with the lack of clarity of what the hell you’re going to do.
Bill Fallon
Yes. Just several things in response because you’ve covered a lot of [indiscernible] there. First of all, just one thing with regard to share repurchases and as you know, we have been strong components of repurchasing shares and did a substantial amount of share repurchases. The complication we have now is that National, which is where we purchased the shares, has no more capacity to repurchase MBIA shares. So that’s the complication there, and that’s why we’ve not repurchased shares.
As you described it, irrespective of everything with regard to the different metrics that people look at, it’s just that we don’t have capacity at National. Now apart to the broader [indiscernible] here, we are in agreement with your sentiment. We have been moving along, we think — as you know, Puerto Rico has been a big issue that is substantially resolved. We started with four large exposures which were completely resolved. And even the [indiscernible] we received with the consideration in the restructuring exchange has been sold.
It’s always a little bit hard to predict the timing of Puerto Rico. But as we indicated in our prepared remarks, HTA, the hearing in a couple of weeks and HTA over pretty much this year has gone according to schedule. So we feel pretty good in terms of that one sticking pretty close to the [indiscernible], which would mean that [indiscernible] four large credits [indiscernible].
PREPA, we actually, over the last year or so, have sold about 35% of [indiscernible]. So we’re now [indiscernible] to relatively [indiscernible] as we’ve indicated, we don’t need to resolve PREPA and we have been doing the work to pursue these strategic alternatives. Now as you can appreciate, there are certain things that we cannot say when we get into issues such as discussions with DFS, potential sale of the Company and companies [indiscernible] will be interested in that.
So why I recognize perhaps you and others would like to know more, it will be probably when we have something important to announce or would feel is important in the process to things public that we will do so. So hopefully, that addresses some of your concerns.
John Staley
I just hope we get it done. And I’m sure you do too. I mean there’s a lot of overhead being spent here to — that could be translated into shareholder value if we can just get this wrapped up.
Bill Fallon
We agree with you.
Operator
[Operator Instructions] We will take our next question from Paul Saunders with Hutch Capital.
Paul Hutch
Just a quick one for me on MBIA Corp. I just had a quick question on your salvage reserves. I see those were up by about $78 million and not much of a change there in the gross reserves. So it looks like you just increased the value of your existing salvage. Is that — can you just add a little more color on that? I think that’s just Zohar left. So is that just an increase in the expected value of the Zohar recoveries?
Anthony McKiernan
Paul, you’re talking about on the statutory salvage?
Paul Hutch
Correct, yes.
Anthony McKiernan
Yes. So on statutory salvage, the existing salvage on Zohar and our RMBS [indiscernible] substantially, what has been added to salvage is we have been selectively repurchasing MBIA Corp. insured debt for remediation purposes. We’re looking to derisk the portfolio at MBIA Corp. So we received committed [indiscernible] in the New York Department of Financial Services, allowing us to buy back more insured paper for the purposes of remediation, be it commutation or what have you. So it’s another tool we’re using in order to derisk MBIA Corp. The purpose of that — of those securities are classified as salvage [indiscernible]. That’s the reason for the increase.
Paul Hutch
Got it. Okay. That makes sense.
Operator
[Operator Instructions] At this time, I am showing no further questions. I’d like to turn the floor back over to management for any additional or closing remarks.
Greg Diamond
Thanks, Britney, and thanks to those of you listening to the call today. [indiscernible] to contact us if you have any additional questions. We also recommend that you visit our website at mbia.com for additional information on our company.
Thank you for your interest in MBIA. Good day and goodbye.
Operator
Thank you, ladies and gentlemen. This does conclude today’s second quarter 2022 financial results conference call. You may now disconnect.
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