MBIA Inc.

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 report and our quarterly operating supplement. Recorded replay for today's call will become available approximately two hours after the end of the call, and the information for accessing it was included in last week's press announcement and in the financial results report that we posted on MBIA's website yesterday. Now I'll read the 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 introductory comments, and then a question-and-answer session will follow. Now here's Bill Fallon.

Thanks, Greg. Good morning, everyone. Thank you for being with us today. Earlier this year, we announced that National signed on as a party to the Puerto Rico GO slash PBA and HTA agreements. The schedule to incorporate those agreements into confirmed plans of reorganization has remained on track. Last week, Judge Swain approved the disclosure statement for the GO plan. The GO plan is expected to be confirmed in November of this year. And the HTA plan is expected to be filed by January 31st, 2022. In addition, AMAC and FIDGIC recently joined the GEO and HTA agreements. This brings the HTA creditor support level above 67%, which is the threshold for confirmability of the HTA plan under PROMESA. and an important precondition to receiving some of the HTA plan distributions on the GEO plan effective date expected early 2022. Although there are schedules in place to consummate these agreements, there can be no assurance of this or that they will become effective on the currently expected timelines. Once these debt restructuring plans are confirmed and effective, we will be in better position to implement our longer-term strategic plans for the company. National also has made important progress in its litigation against certain underwriters of some of its insured Puerto Rico debt. In June of this year, the Commonwealth Court denied the defendant's motion to dismiss the case, and the discovery process has begun. Defendants have filed an appeal of the motion to dismiss ruling. Turning to other credits in Nationals' insured portfolio, most of these credits have continued to perform consistent with our expectations. The outstanding gross par of Nationals' insured portfolio has further reduced, declining $39.5 billion at June 30, 2021, down $2.3 billion from year-end 2020. At June 30, 2021, Nationals' leverage ratio of gross par of statutory capital was 20 to 1, Now, Anthony will provide additional comments about our second quarter financial results.

Thanks, Bill, and good morning. I will begin with a review of our second quarter 2021 gap and non-gap results. The company reported a consolidated gap net loss of $61 million, or a negative $1.23 per share, for the second quarter of 2021, compared to a consolidated gap net loss of $106 million, or a negative $1.69 per share, for the quarter ended June 30th, 2020. The lower net loss this quarter was driven by lower loss and loss adjustment expense at National and MBIA Corp., and a gain on the buyback of GFL medium-term notes at a discount in the corporate segment. These items were partially offset by net mark-to-market losses on financial instruments in 2021 related to our interest rate swaps associated with the gig business due to lower interest rates in 2021 compared with net gains in 2020. There were lower gains on sales of securities at national and lower VIE income. Loss in LAE incurred at national this quarter was negative $42 million, due primarily to the decrease in risk-free rates used to discount our Puerto Rico assumed losses and recoveries. There were no material assumption changes in our credit loss scenarios. Loss in LAE incurred this quarter at MBIA Corp. of $51 million was lower than last year's second quarter of $64 million. With this quarter's losses driven by a reduction in estimated recoveries on claims paid on the Zohar CLOs and lower discount rates impacting the insured first lien RMBS book. The company's adjusted net income, a non-GAAP measure, was $37 million, or $0.76 per diluted share, for the second quarter of 2021, compared with an adjusted net loss of $72 million, or a negative $1.15 per diluted share, for the second quarter of 2020. The favorable change was primarily due to the loss in LAE benefit at national in the second quarter of 2021 versus expense in the second quarter of 2020. Book value per share decreased to negative 66 cents per share as of June 30th, 2021, compared to $2.55 per share as of December 31st, 2020, primarily due to the year-to-date net loss of $167 million. The negative gap book value of MBIA Corp. of $33.51 per share, which includes over $1 billion of accrued but unpaid interest on its surplus notes, has and will materially contribute to the decline in consolidated book value of the company. Management believes that MBIA Corp. does not have significant economic impact on MBIA Inc.' 's shareholder value, which is why it is one of the book value adjustments implemented by management. 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 $850 million as of June 30, 2021. Within this total are the following material items. Unencumbered cash and liquid assets held by MBIA Inc. totaled $238 million as of June 30, 2021, decreasing from $294 million as of December 31, 2020. In the second quarter, the holding company bought back €53 million of GFL MPNs due December 3, 2024, at approximately 78% of par. U.S. dollar proceeds utilized were approximately $50 million. We will continue to evaluate debt buyback opportunities. The holding company has no material principal payments coming due on the Inc. debt or GFL notes for the remainder of 2021. There were approximately $445 million of assets at market value pledged to the GICs and the interest rate swaps supporting the legacy GIC operation. As of June 30, 2021, there were $1.5 million of tax deposits in the tax escrow account, and we expect the tax escrow releases will not be a meaningful contributor to holding company liquidity in the future. Turning to the insurance company's statutory results. National reported statutory net income of $23 million for the quarter ended June 30th, 2021 versus a statutory net loss of $35 million for the quarter ended June 30th, 2020. The favorable result was due to lower loss in LAE on Puerto Rico exposures, partially offset by higher prior year gains on asset sales at National, lower premiums earned and investment income and a current tax benefit in the second quarter of 2020 that included an additional benefit related to the CARES Act. National's gross claims payments on its insured Puerto Rico credits are as follows. During the first half of 2021, National paid $51 million of gross claims. In July, National paid $226 million of gross claims. And inception to date, gross claims paid on insured Puerto Rico exposure total $1.8 billion. As of June 30th, 2021, National's total fixed income investment portfolio, including cash and cash equivalents, had a book adjusted carrying value of $2 billion. Statutory capital was approximately $2 billion and claims paying resources totaled $3.1 billion. Insured gross par outstanding reduced by almost $1 billion during the quarter and was $39.5 billion as of June 30th, 2021. Turning to MBIA Insurance Corp., its statutory net loss was $37 million for the second quarter of 2021 compared to a statutory net loss of $23 million for the second quarter of 2020. The second quarter 2021 loss in LAE was attributable to lower negative incurred losses in the insured second lien RMBS book, partially offset by lower losses on projected recoveries related to the ZOHAR CLO claim payments in the second quarter of 2021 compared to the second quarter of 2020. As of June 30, 2021, the statutory capital of MBIA Insurance Corp. was $160 million. MBIA Corp received non-disapproval from the New York Department of Financial Services for $125 million of contingency reserve release into its statutory surplus during the quarter. Claims paying resources totaled $786 million. MBIA Corp's insured gross par outstanding reduced by almost $1 billion during the quarter and was $6.3 billion as of June 30, 2021. MBIA Corp's largest remaining legacy remediation and projected recoveries are related to the ZOHAR CLOs. And now we will turn the call over to the operator to begin the question and answer session.

Thank you. At this time, if you would like to ask a question, please press star 1 on your telephone keypad. Again, if you would like to ask a question, press the pound key. We'll pause for just a moment for your first question. Your first question is from the line of Tom McJoy with KBW.

Hey, good morning, guys. Thanks for taking my question. So the parent company repurchased those medium-term notes at 78% of PAR. Can you add any other details on the optionality or capacity or appetite to buy back or settle any other liabilities there to the extent they are available below PAR?

Sure. Good morning. We've said that our liquidity window, as we call it, now really looks to 2025. So to the degree we find opportunities primarily within that zone that are attractive to us, we will seriously explore those. Outside of 2025, probably less attractive at this point, but we continue to look at every opportunity. But within that 2025 timeframe is the target.

Okay. Okay, that makes sense. And then switching over to the Puerto Rico side, you touched on the GEO and HTA. Can you give a quick summary of where we stand in terms of the support levels and any potential timeline for the PREPA restructuring plan?

As you know, Tom, PREPA, there's agreement in place, though the attention really has been on the GEO and HTA deals for the first half of this year. So we would expect there to be more attention with regard to moving the PREPA deal forward. But at this point in time, that's really been the summary view of what's happened this year.

Okay. Makes sense. And then last one, so with the CBI, the contingent value instrument expected to be a big part of the recovery here, will you have to make mark-to-market estimates of that CBI value in anticipation of its issuance to the extent it's included in a restructuring deal, or is it more so that you have to wait until the restructuring deal is actually finalized in the courts and the CBIs are actually issued before you would book any mark-to-market to your recovery?

At this point, we don't have the CVI. So what you're seeing is that play out through the loss reserving process. So we go through the scenarios still in terms of setting reserves. But since we don't have the CVI, there's nothing we account for other than the loss reserves. And Anthony, I don't know if you want to add anything at this point.

No, I think that right now in our loss reserves, as Bill said, we're looking forward at the proposed compensation and exchanges related to the Puerto Rico transactions. We're making certain assumptions at that point related to all the compensation, including the CVI. But at this point, until things are more formalized and until those securities are issued, that's really where you see any analysis of that in any movement.

Okay, and so I guess would you expect that over kind of the course of the year until we get to these timelines in November and January, the majority of any marks or adjustments to the loss and loss recovery would just be driven by discount rates and risk-free rates rather than a change in assumptions?

Yeah, as long as we continue to be on schedule and there are no material changes to the actual underlying agreements, your assumption would be correct. We would expect that changes would be far more driven by discount rate movements as we move closer to completion.

Okay, that makes sense. Thank you.

As a reminder, if you would like to ask a question, press star 1 on your telephone keypad. Your next question is from the line of John Staley, the Staley Capital Advisors.

Bill, good morning. I have two questions. At some point in time, through the early stages and even later stages of the Puerto Rican discussions, you were not, MBIA was not totally consistent with their objectives with a sure guarantee with AGO. showing different sections of the bonds, types of bonds. Are you guys still on that way, or are you all consistent now, that you're both on the same page in terms of the restructuring and the compensation related to it and everything else related to it? That's my first question.

Yeah, John, again, thanks for the question. At some level, I think the answer is yes, right? We're now part of the same agreements. So in that sense, I think we're aligned and consistent, as you say.

Good. And secondly, the market is beginning to validate your strategy for capital allocation where you bought back so much stock. I recognize that there are a lot of other issues today related to liquidity, but would you still look at your stock as a buyback strategy? as attractively adding to intrinsic value at these levels if you were able to buy it back.

Yeah, with regard to that, as you know, right, the big part was the last part of your question, which is if we could buy it back. And as you know, we've done almost all of it through national. We've never said, you know, what the exact dollar amount is. We sort of let our actions flow. speak for itself. So at this point, we don't have the ability to national. It's possible that could change in the future. It's possible at some point there'd be an upliquity at the holding company that we could repurchase shares there. And so that's how we'll address that situation. But to your point, we, I think, have been very consistent over time where we have repurchased shares indicating that we do think it is enhancing long-term shareholder value.

Thank you. I'm glad to see the market beginning to agree with you. Thank you, John.

At this time, I am showing no further questions. I would like to turn the floor back over to management for any additional closing remarks.

Thank you, Tamika, 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 our company. Thank you for your interest in MBIA. Good day and goodbye.

Thank you, ladies and gentlemen. This does conclude today's second quarter 2021 financial result conference call. You may now disconnect.