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spk01: Welcome to the NBIA Inc. Third Quarter 2021 Financial Results Conference Call. I would now like to turn the call over to Greg Diamond, Managing Director of Investor and Media Relations at NBIA. Please go ahead, sir.
spk06: Thank you, Brittany. Welcome to NBIA's conference call for our third quarter 2021 financial results. After the market closed yesterday, we issued and posted several items on our websites, including our financial results, 10Q, 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 insured 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-Q 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 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-Q, 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 result report that we posted on the MBIA website yesterday. Now here's 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-Q, which are available on our website at MVIA.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 is Bill Fallon.
spk05: Thanks, Craig. Good morning, everyone. Thank you for being with us today. As has been the case for many quarters now, our focus and efforts remain on the Puerto Rico Title III proceedings. Since our last conference call, the schedule for restructuring the Puerto Rico GEO and PBA bonds has remained on track with the confirmation hearings beginning on Monday, November 8th and continuing on several dates through and including November 23rd. We expect the plan to be confirmed later this year and implemented early next year. which will be material development for the Commonwealth's emergence from bankruptcy. After the GEO and PBA plan is confirmed, the oversight board is expected to focus its attention on the HTA debt restructuring plan, which is scheduled to be filed with the court by the end of January of next year. Confirmation of that plan will also facilitate the Commonwealth's emergence from bankruptcy and resolve another significant amount of Nationals remaining Puerto Rico exposure. In light of this continued progress on our insured Puerto Rico credits, we modified our loss assumptions for our GO and PBA exposure. And we also sold $199 million, or 16%, of the principal amount of our PREPA-related bankruptcy claims. Anthony will provide additional details on both of these items. The commutation and acceleration of National's GO and PBA bonds And monetizing a portion of our PREPA claims will reduce uncertainty on our Puerto Rico exposure and move us closer to pursuing our strategic objectives, which may include, among other options, a potential sale of the company and or special distributions from National to NBIA Inc. Turning to National's other insured credits, the insured portfolio has continued to perform consistent with our expectations. The outstanding gross par of National's insured portfolio has further reduced. declining $37.7 billion at September 30th, 2021, down $4.1 billion from year-end 2020. At September 30th, 2021, National's leverage ratio of gross part of statutory capital was 19 to 1. Now, Anthony will provide additional comments about our third quarter financial results.
spk04: Thanks, Bill, and good morning. I will begin with a review of our third quarter 2021 GAAP and non-GAAP results. The company reported a consolidated GAAP net loss of $123 million, or negative $2.49 per share, for the third quarter of 2021, compared to a consolidated GAAP net loss of $58 million, or negative $1.11 per share, for the third quarter ended September 30, 2020. The higher net loss this quarter was largely driven by higher loss in LAE incurred at national this quarter, primarily due to the two Puerto Rico items Bill referenced in his opening remarks, and I'll cover in greater detail here. First, national changed its loss reserving scenarios regarding the Puerto Rico Commonwealth GO transaction to incorporate final terms and approval of the plan of adjustment. affirming National's ability and expectation to accelerate its insurance policies in full upon the effective date of the plan of adjustment and reflecting the 27% of bondholders who will have their insurance policies commuted based on the bondholder ballot results. Given that National's insured exposure will be reduced to zero once the plan is implemented, analysis this quarter considered such extinguishment of exposure and the fair value of new consideration to be received at implementation of the plan for the insured bonds that aren't commuted. In prior quarters, the analysis did not assume acceleration or commutation and was based on ongoing claims payments and longer-term recoveries. This change in our claim and recovery reserving assumptions, transitioning to the fair value of new GEO consideration, generated loss and LAE for the quarter. In the end, National's ultimate economic recovery value will depend on the value realized over time from the securities received. Second, related to PREPA, National sold certain bankruptcy claims and a private transaction through the transfer of ownership of $199 million face amount of bonds, representing approximately 16% of the principal amount of the current bond claims in the PREPA Title III case. The Q-SIPS included in the transaction had been fully satisfied by National Insurance claim payments. The transaction, which was executed at a modest discount, monetizes a portion of National's insurance loss recoverable on paid claims into investable cash, reduces National's exposure to PREPA, and furthers our goal of de-risking National's balance sheet as part of our longer-term corporate strategy. This quarter's loss in LAE reflects the sale, as well as an assumption for future possible sales, of the remaining fully satisfied insured PREPA bonds in our insurance loss recoverable asset, the face amount of which totaled $230 million as of 9-30. The cash received and reduction in our GAAP insurance loss recoverable asset will be reflected in our Q4 results. Offsetting some of the loss in LAE was the assumed inclusion of certain fees that we anticipate receiving under the PREPA RSA. Higher loss in LAE expense at MBIE Corp was driven by continued value deterioration of the underlying portfolio companies and the ZOHAR CLO bankruptcies. In addition to the higher loss in LAE, there was lower VIE income in the current quarter. These adverse results were partially offset by higher premium and fee revenue due to a refinancing of an international public finance credit, an MBIA corp, and gains on the buyback of GFL medium-term notes at a discount in the corporate segment, as we continue to prudently take advantage of such opportunities. The company's adjusted net loss, a non-GAAP measure, was $76 million, or a negative $1.54 per diluted share for the third quarter of 2021, compared with an adjusted net loss of $18 million, or a negative 34 cents per diluted share for the third quarter of 2020. The unfavorable change was due to the higher loss in LAE at national in the third quarter of 2021. Book value per share decreased to a negative $3.12 per share as of September 30th, 2021, compared to a positive $2.55 per share as of December 31st, 2020, primarily due to the year-to-date net loss of $290 million. The negative gap book value of MBIA Corp of $35 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. 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 $826 million as of September 30, 2021. Within this total are the following material items. Unencumbered cash and liquid assets held by MBIA Inc. totaled $210 million as of September 30, 2021, decreasing from $294 million as of December 31, 2020. Through three quarters, the holding company has bought back $106 million of GFL MTNs at approximately 72% of par. The holding company has no material principal payments coming due on the ink debt or GFL notes for the remainder of 2021 and has only 50 million euro of scheduled GFL principal payments through the end of 2022. There were approximately $445 million of assets at market value pledged to the GICs and the interest rate swaps supporting the legacy GIC operation. Turning to the insurance company's statutory results, National reported statutory net income of $61 million for the quarter ended September 30th, 2021 versus a statutory net loss of $8 million for the quarter ended September 30th, 2020. The favorable result was primarily due to a loss in LAE benefit in Q3 2021 on Puerto Rico exposures versus expense in the prior comparable quarter. The Puerto Rico changes I described earlier had the opposite effect on the statutory results versus GAAP. Due to the materially higher discount rate used for STAT applied to the PREPA recoveries, which produced a lower loss from the sale, and ultimately a loss in LA benefit from the probability weighted inclusion of fees due to national under the PREPA RSA. And for the GO bonds, under stat accounting, we continue to utilize scenario-based loss reserving with pricing and timing sensitivities to ultimate disposition to measure loss and recovery value versus the fair value day one analysis required this quarter under GAAP. As recoveries for STAT are discounted at materially higher rates than GAAP, the change in recoveries this quarter produced a loss in LAE benefit. The prior period's results included current tax expense in the third quarter of 2020, decreasing National's year-to-date benefit related to the CARES Act. National's gross claims payments on its insured Puerto Rico credits are as follows. In July, National paid $226 million of gross claims, and inception-to-date gross claims paid on insured Puerto Rico exposure totaled $1.8 billion. As of September 30, 2021, National's total fixed-income investment portfolio, including cash and cash equivalents, had a book-adjusted carrying value of $1.8 billion. Statutory capital was approximately $2 billion, and claims paying resources totaled $3 billion. Insured gross par outstanding reduced by $1.8 billion during the quarter and was $37.7 billion as of September 30, 2021. Turning to MBIA Insurance Corp., its statutory net loss was $17 million for the third quarter of 2021, Patrick T. O' Compared to a statutory net loss of $35 million for the third quarter of 2020. Patrick T. O' The third quarter 2021 loss in LAE was attributable to higher losses on projected recoveries related to SOHR CLO claim payments in the third quarter of 2021 compared to the third quarter of 2020. Patrick T. O' Offset by a material increase in premium and fee income due to the termination of an international public finance credit. MBIA Corp repaid the $130 million of senior notes of MZ funding during Q3 2021. The repayment will materially reduce interest expense going forward. Approximately $70 million of MZ funding junior notes remain outstanding. As of September 30th, 2021, the statutory capital of MBIA Insurance Corp was $143 million. Claims paying resources totaled $728 million. MBIA Corp's insured gross par outstanding reduced by over $600 million during the quarter and was $5.7 billion as of September 30, 2021, and 63% of that exposure is non-U.S. public finance credits. 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.
spk01: At this time, if you would like to ask a question, please press the star and one on your touchtone phone. You may remove yourself from the queue at any time by pressing the pound key. Once again, that is star and one when you would like to ask a question. And we do ask that when posing your question, you pick up your handset to allow optimal sound quality. And we will take our first question from Tony McJoy with KBW. Your line is now open.
spk00: Hey, good morning, guys. Thanks for taking my questions. So the private agreement of the sale of the Prepper claims was interesting. Do you think there is an appetite and available capital from other market participants should you want to monetize some or even all of the remaining salvage and recoverable assets that you hold? And can you go through which pieces of the recoverable are free to monetize right now?
spk04: Sure. Good morning, Tommy. It's Anthony. A few things. One, there is definitely appetite in the market for more sale opportunity like we achieved during the quarter. Specifically, there's a face value of $230 million left on our PREPA salvage. That represents the face amount of Q-SIPS where National has fully paid claims, I'm sorry, paid claims to fully satisfy those Q-SIPS. I make that distinction because those Q-SIPS are the easiest and most available to sell with full and clear transfer of ownership and the associated rights in the bankruptcy with those. Ones that are partially satisfied, it's very difficult to achieve that. So there's 230 million of PREPA available to sell. The largest remaining amount of what I'll call satisfied Q-SIPS are on the GO transaction in our salvage asset. But at this point, we're looking to move forward with the transaction that we described today related to the new GO plan of adjustment. So we don't anticipate at this time selling any more of those claims or selling any of those claims doesn't mean we couldn't. But that's really the inventory we have. For HTA, we have a minimal amount of QSIPs that have been fully satisfied. It's under 100 million. So there's less to do there.
spk00: That's helpful. And so was the decision to monetize some of the PREPA versus the GEO or HTA, just given that the GEO is, I guess, more certain in terms of the timing of the upcoming deal? Is that kind of the right way to think about it?
spk04: That's correct. The GEO deal is right around the corner. We still have a material amount of PREPA exposure, and that is obviously lagging behind GEO and HTA at this point. And we were able to execute at a level that we were pleased with.
spk00: Okay. Thank you. And then switching over to the holding company, could you talk about any upcoming opportunities that the Holdco has to take out some of its remaining liabilities at accretive prices? Obviously, the last two quarters have featured some small takeouts of some of the medium-term notes at a nice 30% discount to par. So if you could put some numbers around how much of the cash balance is available there and kind of which liabilities are callable or available to be repurchased in the market, that'd be helpful.
spk04: Sure. So again, we've got a little over $200 million of liquidity at the holding company right now. Again, our first priority is getting through the near term. And as we've said, the combination of cash today and as of right dividends at National gets us through 2025 at this point. So we've really focused on in the past looking at repurchases within the 2022 to 2025 window to the degree and these opportunities have increased for us over the last few quarters that opportunities beyond 25 come available like they have over the last two quarters. If they come in at attractive prices like we've achieved, we'll certainly continue to look at that. There's very little callable debt left, so the rest of this is really due to market opportunity. So we've got, give or take, $500 million of MTMs and $600 million of Inc. debt, of which on the Inc. side, about $300 million is actually held by National. So that just gives you kind of an idea of the inventory that's out there. But really, we'll continue to look. We get approached relatively often at this point. So when opportunities arise at the levels that we've seen, we'll certainly continue to look at it.
spk00: Thanks. And then just last one, could you walk through some of the – kind of helping us out with sizing up the potential size of a special distribution from national to Inc. I guess you have to make a fair number of assumptions that the fair value marks on the reserves and recoverables are accurate. But I guess just thinking about how much capital is there at national that could be distributed.
spk05: Yeah, Tommy, on that one, it's hard at this point to put a number because obviously it will depend as Puerto Rico gets restructured and we receive some of the collateral or the exchange of bonds. and choose to do, for example, as we did in Cofina, sell some of those. It will depend on where we are, what the remaining portfolio looks like. So it's hard to give you a precise answer. You know, we do look at metrics such as the leverage, which we talk about, which continue generally to come – generally is coming down. But we don't have a number at this point for it.
spk00: Okay. Thank you.
spk01: And we'll take our next question from John Staley with Staley Capital. Your line is now open.
spk02: Good morning, Bill. I have a fairly simple question. The president of Puerto Rico, unsolicited, commented in a recent speech that both houses of their government have, as he said, will approve the restructuring plan. Now, that obviously has to go through this oversight committee. Two questions. One, do you see anything at this point to derail approvals of what you've already agreed to, which I assume the other bondholders have agreed to, if you have any implicit approval from the president and the implication that both houses of their government are going to approve it? Do you see anything to upset this train that seems to be moving very rapidly to conclusion? And secondly, to a layman, a non-insurance guy like me, How will the already paid claims be handled in the recovery? How will they handle that in terms of the negotiations that you have agreed to and are being reviewed by this oversight committee?
spk05: Okay, thanks, John. With regard to the second one, let me deal with that first, which is, where we've insured bonds and we've paid the claims essentially we step into the shoes of the bondholders so we talk about receiving new bonds or collateral depending on how the structure works out so we step into their shoes effectively in terms of any other recoveries but then we're still obligated to the extent that there are bonds outstanding to pay the debt service on those either as it comes due on accelerated basis with regard to your first question There was a lot of news over the last couple weeks with regard to legislation down in Puerto Rico in terms of what the politicians were doing down there. At this point, though, we have the approvals. The Oversight Board under PROMESA believes that they work. They have sort of explained their view and any concerns they might have to Judge Swain. And there was no need for mediation, which Judge Swain, a couple weeks ago, indicated was going to occur, but the parties reached an appropriate agreement. The legislation was passed finally by the Senate in Puerto Rico. The governor is supportive of it. And as we mentioned, the confirmation hearings will start next week on Monday with Judge Swain. And again, while there'll be, I'm sure, lots of discussion and back and forth, we believe that those will now be approved. But they do have the necessary legislation from the politicians in Puerto Rico to move forward.
spk02: Okay. And another question. You did not address on this call the status of the litigation to a number of the underwriters on Wall Street on the whole underwriting of Puerto Rican debt, where they had moved for summary dismissal and that was denied. Is there any update on that litigation?
spk05: Yeah, with regard to that, and you indicated correctly, we have filed a lawsuit against eight banks with regard to their status as underwriters on Puerto Rico debt. The banks appealed that decision. And we're waiting at this point for the appeal decision. So it could come at any time, but it's hard to predict when it will come. But that's the status there. So essentially nothing new.
spk02: Thank you, and good luck wrapping this all up. I look to exit with you. Thank you, Don. All right.
spk01: And we will take our next question from Paul Saunders with Hutch Capital. Your line is now open.
spk07: Good morning. Thanks for taking my question. Just two quick ones for me. The GFL repurchase that you guys made, can you guys disclose which – bond or bonds or even just kind of the year maturity that you purchased?
spk04: Paul, we purchased 2026 and 2031 maturities this quarter.
spk07: Got it. Okay. I sort of deduced that by the price. It was hard to back into it if it was one bond. And then just the second question is just on the NBIA Corp side and the the decline in the Zohar recovery value. Can you comment at all? That's obviously really just kind of gone one way down. Can you just, like, broadly speaking, comment on, you know, roughly where you have that recovery marked and sort of your expectations on achieving, you know, some recovery there?
spk04: Well, you're correct. Things have generally gone in one direction since the bankruptcy three years ago, so we've written down recoveries materially over the last few years. Right now, MBIA Corp has, I'm going to look at the statutory balance sheet, about $240 million of remaining salvage. The majority of that number is related to Zohar recoveries, which again is substantially down from the last prior years. So essentially, the remaining companies that are in the queue to be sold, we are hopeful that the value there will meet or exceed our current salvage expectations. But total salvage, which is Zohar related and primarily some excess spread on our first lean RMBS portfolios, $240 million this quarter.
spk07: Yep. Okay. Thanks for that color. Appreciate it.
spk01: And once again, that is star and 1 if you would like to ask a question. And we will take our next question from Jeffrey Dunn with Dowling and Partners. Your line is now open.
spk03: Thanks. Good morning. I did see your statement in your press release about the expectation for the restructurings to get approved. How do you think about some of the articles out there speculating on the risk that Judge Swain could object to the pension concessions relative to the fiscal forecast? How do you weight that consideration?
spk05: Yes, you're correct. Judge Swain obviously has to approve this. There's speculation with regard to the pensions, which, as you know, has been probably the biggest issue in terms of getting agreement from all the parties. there's really not a quantitative answer to what you're asking in terms of the weight. Obviously different parties to this have their concerns in terms of how the pensions are dealt with. You've seen what the oversight board has said to judge Swain as recently as this week. And so we'll wait and see how this plays out. But again, we think at this point, it looks like the, she will confirm the plan, but again, we'll wait and see what happens starting next week. But I have a, I can't give you a quantitative answer to that waiting question.
spk03: Okay. And then this may be a little technical, I guess, but how do you go about assessing a sale price for your recoverables? You know, obviously you have what you've booked, but what was the process of coming to a sale price, obviously weighing uncertainty of potential future collateral and market prices and But how did you go about doing that? And then also, you know, given the appetite in the market, do you think basically all of your Puerto Rico recoverables theoretically could be monetized through this method if you judge the valuations appropriate?
spk04: So, hey, good morning, Jeff. It's Anthony. Let me answer this in kind of two parts. On the PREPA sale in particular, what we looked at – again, this is part of just the bigger – picture strategy of de-risking nationals book. And obviously, a large part of that has been in the negotiations on the separate Puerto Rico credits in Title III, but also continuing to look at other ways to de-risk the book where we can. When it came to PREPA, what we looked at is, essentially, when you looked at the future consideration under the RSA, what we perceive to be the future consideration, the risk of execution the amount of PREPA exposure that we have on the books and we'll still have on the books after this and the timing associated with it, we thought about really what amount of proceeds would it take for us to engage in a trade where we would forfeit the RSA consideration, monetize the salvage, the portion of the salvage asset we could, and convert that to investable cash at national, which, you know, serves several purposes. It's obviously a strong asset versus a salvage asset. It is investable and it will increase nationals as of right and ultimately special dividend capacity. So that's the thought process we went to. There was at the end of the day, and again, there's more trades potentially to be done, so I'm not going to go into specific pricing. um but we were quite disciplined in the fact that we did not want to take a a material discount because this was an option to us versus something we had to do but ultimately we were able to come to terms at a level that we felt having the cash in the door that's now deployable was absolutely worth us doing and taking some prep exposure off the table as far as the remaining Salvage, again, the salvage asset for the third quarter for nationals are around $1.3 billion. Again, I talked about the face value, crop of bonds that are left, the bankruptcy relief associated with the $230 million face value of Q-SIPS of claims we've paid. A good percentage of the remaining salvage is on GEO and HTA claim payments. And as we said earlier, we're about to enter into the GO transaction, assuming all goes according to plan. So, I don't currently contemplate a sale of future salvage, given the timeline early next year of completing the GO transaction. As we continue to pay more claims on PREPA and HTA, and more CUSIPs are fully satisfied, As an inventory grows, we'll certainly be open to looking at trades if it makes sense.
spk05: Jeff, the other thing is the more we can reduce Puerto Rico exposure or reduce the view with regard to volatile exposure, the quicker we can get to our strategic alternatives. That is also a factor as we look at these things because selling those claims obviously helps in that regard.
spk03: Yeah, I have to imagine there's a value every bond insurer will put on just putting some of this behind you with certainty. So I understand that. Just a accounting question, I guess, but the salvage asset of $1.3 billion, is that the same as what you're saying is a face value?
spk04: No. So the distinction there is the salvage asset is essentially a scenario-based recovery value of the agreement's that we're going to enter into, whether it's PREPA, GEO, or HTA. Obviously this quarter we moved to a fair value analysis on GEO. That is separate from the face value of the Q-SIPS that we insured. So how we look at the sales of these type of deals, Jeff, is that we're selling bankruptcy claims and rights. They happen to be attached to the transfer of ownership of QSIPS. But what we're really selling is the whites under, in this case, the PREPA RSA.
spk03: So can you translate your salvage asset as a 930 to a face value? No. Okay. All right. Thanks.
spk01: And we do have a follow-up question from John Staley with Staley Capital. Your line is now open.
spk02: Very quick question. As you monetize QSIPS, some of these claims to bring liquidity in. You have capacity to have more stock buybacks. Will you be buying stock in the market at these levels with that liquidity?
spk04: So, John, we are we there are limitations. We have to buy shares back. There's regulatory limitations to what you can buy. And just as a as a kind of a thumbnail calculation, it's essentially 50 percent of national surplus is what we're limited to. Given where the share price is today and the fact that National owns a little more than 84 million shares of the holding company, we are well beyond any regulatory limit that would allow us to buy shares, a couple hundred million dollars at this point over the limit. So we don't have capacity at this point to repurchase any shares at National.
spk02: Thank you.
spk01: And at this time, I am showing no further questions. I'd like to turn the floor back over to Greg Diamond for any additional or closing remarks.
spk06: Thank you, Brittany. And thanks to those of you listening to our 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.
spk01: Thank you, ladies and gentlemen. This does conclude today's third quarter 2021 financial results conference call. You may now disconnect.
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