Welcome to the MBIA Inc. Third 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 at MBIA. Please go ahead, sir..

Thank you, Maria. Welcome to MBIA's conference call for our third quarter 2020 financial results.

After the market closed yesterday, we issued and posted several items on our website, 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 portfolios.

Regarding today's call, please note that anything said on this call is qualified by the information provided in the company's 10-K, 10-Qs 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-Qs 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-Qs, 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 was included in last week's press announcement and in the financial results that we posted on the MBIA website yesterday. Now for our safe harbor.

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, which will be followed by a question-and-answer session. Now here is Bill Fallon..

the Commonwealth’s General Obligation Bonds; the Puerto Rico Electric Power Authority, or PREPA; and the Puerto Rico Highway and Transportation Authority, or HTA. There have been no meaningful changes regarding the resolution of the debt of those credits during the last three months.

In September, Judge Swain entered a final order denying the monolines HTA lift stay motion. National and the other monolines have appealed this decision to the first circuit and all argument is expected in February. National is currently proceeding with its litigation against certain underwriters of some of our insured Puerto Rico debt.

The case was remanded to the Commonwealth of Puerto Rico, where we originally had filed it and briefing on the bank's motion to dismiss the case is scheduled to be completed by the end of this month. Most of the credits in our insurance portfolios continue to perform consistent with our expectations.

There has been no material impact on the company's financial performance attributable to the COVID-19 pandemic, but we continue to focus on that risk in connection with our ongoing review of our insured portfolios.

The outstanding gross par of the insured portfolios continued to reduce, where National’s insured portfolio has further declined to $44 billion, down $2 billion from the last quarter. At September 30, 2020, National’s leverage ratio of gross par to statutory capital was 22:1.

During the third quarter, National purchased 8.6 million shares of MBIA's common stock at an average price of $7.23 per share. Year-to-date through September 30, 2020, National has purchased 26.4 million MBIA shares at an average price of $7.50 per share. As of November 2, 2020, MBIA had 53.9 million shares outstanding.

The company's share repurchase authorization has been fully utilized. Since the end of 2015, the company has repurchased 86 million shares of MBIA common stock, which we believe has contributed substantial value to MBIA Inc. shareholders. Now Anthony will cover the financial results..

unencumbered cash and liquid assets held in MBIA Inc. totaled $335 million as of September 30, 2020, versus $375 million as of December 31, 2019.

The decrease was primarily due to increases in collateral requirements associated with the GIC business as a result of COVID-19-related market impacts on credit spreads, which have tightened somewhat from Q1.

As of September 30, 2020, there were $12 million of tax deposits made by National under our tax sharing agreement that had not yet been refunded to National or released to MBIA Inc. and which represented the remaining portion of National's 2018 tax deposits.

As we have stated in recent prior quarters, tax escrow releases are not expected to be a meaningful contributor to holding company liquidity in the future. There were approximately $540 million of assets at market value pledged to the GICs and the interest rate swaps supporting the legacy GIC operation. Today, MBIA Inc.

will receive the annual as-of-right dividend from National in the amount of $81 million. After receiving this dividend, MBIA Inc. will have sufficient assets to cover its estimated foreseeable obligations through at least the end of 2022. Turning to the insurance company's statutory results.

National reported statutory income before taxes of $36 million for quarter ended September 30, 2020, versus income before taxes of $112 million for September 30, 2019. The lower income before taxes this quarter was due to lower capital gains as well as lower premium and investment income.

Q3 2019 benefited from gains related to the sale of PREPA bonds in the investment portfolio. This was somewhat offset by lower loss in LAE expense in the current quarter. National reported a statutory net loss of $8 million for the third quarter of 2020, compared to statutory net income of $87 million for the prior year's comparable quarter.

The unfavorable change was due to the aforementioned lower revenue items as well as a higher tax expense generated in Q3 2020, as the quarter-to-date taxable income reduced the year-to-date taxable loss that under the CARES Act can then be carried back up to five years and a 35% tax rate when applicable.

On July 1, National paid $333 million in gross Puerto Rico-related claims, which increases inception-to-date gross claims paid on insured Puerto Rico bonds to $1.6 billion. As of September 30, 2020, National's total fixed income investment portfolio, including cash and cash equivalents, had a book adjusted carrying value of $2 billion.

Statutory capital was $2 billion, impacted from year-end 2019 by its purchases of MBIA Inc. shares and its year-to-date net loss. Claims paying resources totaled $3.2 billion. Insured gross par outstanding reduced by $1.9 billion during the quarter and now stands at $43.9 billion. Turning to MBIA Insurance Corp.

The statutory net loss was $35 million for the third quarter of 2020, compared to a statutory net loss of $26 million for the third quarter of 2019. The unfavorable result was due to foreign exchange losses in Q3 2020. As of September 30, 2020, the statutory capital of MBIA Insurance Corp. was $328 million versus $476 million as of December 31, 2019.

Claims paying resources totaled $1 billion and cash and liquid assets have remained consistent throughout the year and totaled $129 million. MBIA Corp.'s insured gross par outstanding was $9 billion as of September 30, 2020.

We awaited decision in the Credit Suisse trial as well as progress on the Zohar monetization process given the recent court rulings. And now we will turn the call over to the operator to begin the question-and-answer session..

Thank you. [Operator Instructions] Our first question comes from the line of Tommy McJoynt of KBW..

Hey good morning, guys. So it seems like COVID has posed delays in the proceedings in some of the Puerto Rico restructuring procedures.

Did a simple delay cause you to increase your expected losses on those credits? Do you think you'll potentially be paying claims longer? Or is there really no impact until your ultimate recovery assumptions change?.

At this point, Tommy, when we looked at our analysis this quarter, as we said, the increase in loss reserves was due to accretion primarily in some LAE increases. So we just moved our scenarios forward a quarter. We'll continue to evaluate the timing, but we still think, based on our scenarios, it's going to take some time for this to solve itself.

So we didn't make any material changes to the timing this quarter..

Okay.

And outside of Puerto Rico, what are the kind of top credits that you guys are focused on, I mean establishing reserves against those credits and kind of what gives you confidence that you wouldn't need reserves?.

Yes. As we've looked, Tommy, at the impact of COVID, as I mentioned, we're watching it quite closely. And we do think there obviously have been situations where there's been a reduction in revenues to the municipality that we may be looking at.

However, at this point, we can't identify anywhere they expect to have any claims, so we'll continue to monitor. And a lot of it will depend on how long the impact of COVID goes on. But at this point, there are not situations where we've taken any substantial reserve specifically because of COVID to any of the credits..

Okay. And then last one. So you bought back about 40% of MBIA stock at National over the past couple of years.

Are you in steady replenishing that authorization further? Or kind of what are your plans on capital?.

Yes. I think you're right. We have bought back a substantial amount through National. So this year alone, it's almost been one-third of the shares that were outstanding at the beginning of the year. To your point of view, if you go back probably three years, it’s just under 60% of the shares that were outstanding at that point in time.

So it's been a substantial amount of shares, and we think it's been very beneficial to shareholders. At this point, we're just pausing. We don't have a current authorization. We're just looking at the situation to your point.

Puerto Rico has probably taken a little bit longer than people expected when the Oversight Board that was created under PROMESA was put into place. As I think people are aware, that Board is in transition right now. There should be seven members.

It's down to four because of some resignations, and there's a thought that there may be even additional replacements.

So we would guess over the next month or two that Board will be fully situated and seeded, and then we should get some indication of how they're going to proceed and what that would mean for the timing of the restructuring in Puerto Rico.

Given all that, we do believe the share repurchases can be extremely beneficial, and we'll continue to look at having National buy additional shares in the future. But at this point, as I said, we're just going to pause for a while..

Thanks.

And so just to clarify, what's the timeline on when the PROMESA Board should be – have its full members of that?.

It's hard to know exactly. We would expect in the next couple of months, we would think – actually, before the inauguration of the President here in the U.S. because there are certain appointments that occur based on who has the presidency, who has the majority or minority in the House and in the Senate.

So we would expect those to take place over the next just over two months..

Got it. Thank you..

[Operator Instructions] Our next question comes from the line of Andrew Harte of BTIG..

Hey, good morning.

Maybe to start, could you talk about – has the company received any claims to date that could be attributed to stress arriving from the COVID-19 pandemic?.

We’ve not at this point, no..

Okay. Great.

And then under what circumstances would the company approach to regulator regarding a special dividend from National to the holding company?.

Yes. I think what we've said on that for quite a while now is it would take substantial restructuring in Puerto Rico, so we've had one large credit resolved in Puerto Rico, that was the COFINA credit. As you know, the other three large ones that we have are in different phases of being restructured.

So when there's more progress, then we would evaluate going to the regulator, in this case, New York DFS to consider and discuss a special dividend..

Great. Thank you..

Our next question comes from the line of John Staley of Staley Capital..

Yes. Two questions. Can you comment on the current fiscal state of Puerto Rico? I understand from other sources that they have significant cash balances that'd be upwards of $9 billion or some number like that.

And secondly, with your aggressive strategy of buying stock back and have just simply watched either the adjusted book value or book value decline from the high 30s all the way down to $4 today, which is probably stated, but not adjusted, I'm curious at how you articulate how shareholders such as myself. I own 1 million shares of your stock.

I've had them for a long time.

How we're going to benefit other than through a final exit? And what you see in the value when the market is not acknowledging it, and it's not showing up in any of your financial numbers?.

Yes, okay. Let me start with the first one, and then Anthony can comment on the second, and I may have some additional thoughts as well with regard to your comments on book value, et cetera. With regard to the fiscal situation in Puerto Rico, John, you stated quite correctly.

It seems a little strange, given the way they've approached things that they actually continue to build up a substantial cash balance and your number is pretty much on target. It's in excess of $9 billion, may depend on which accounts we're talking about on the island.

But they have built up substantial cash, and I think that's one of the reasons creditors believe that, in fact, the recoveries or what they can offer to pay is greater than perhaps what they have suggested or offered on certain credits. In addition, it's not just the cash they have. It's also the overall economic situation.

But as I think people are aware, there's been substantial aid. There was approval by President Trump just recently of about $13 billion going to the island that had been previously approved by Congress. About $9 billion of that is for PREPA. So we continue to believe that the situation is perhaps better than people have led on.

So we'll continue to look at that. Then let me have Anthony start on the questions of book value, adjusted book value..

Sure, good morning. So I think just to, first of all, just level set, the book value of the company has gone from $10.40 at December to $4.25. If you look at the adjustments to book value, the main drag on book value is MBIA Corp.

So when you eliminate MBIA Corp., you take the share repurchases into account and make the other assorted adjustments to book value, actually, those adjustments have increased the adjustments to book value from December by, I believe, $5 to $6 a share.

You are correct that the share price today is not necessarily reflecting what our belief of value is at this point. But we do believe that the share repurchases have been accretive. And when you take MBIA Corp. out of the picture, that's really when you can see it..

I hope your patience is running out on realizing that value. Thank you..

[Operator Instructions] Our next question comes from the line of Giuliano Bologna of Compass Point..

Good morning and thank you for taking my questions.

I guess, jumping in on the loss reserve side in Puerto Rico, when I think about the different exposures, you've paid a significant amount of claims already when it comes to the GO and you probably paid more than – you probably have paid more claims from a realized perspective than the current deals we imply from – on the recovery side.

And similarly, probably in a similar position when it comes to PREPA. Just trying to think about where the sources of stress are when you're thinking about the loss reserving analysis and potential losses going forward? Because you probably stand to get some recoveries on past paid claims on GO.

HTA, I guess, is a more – might be a little more debatable because you haven't incurred as much on a relative basis compared to your claims. But just trying to think about where the stress points come in from the perspective of looking at your analysis on the loss reserve side..

So, hi, good morning, Giuliano. So there's a few things. It really depends on the credit. So when you look at the different iterations of the credit, so for PREPA, again, there is a foundation for a transaction there.

So the stress point is if that transaction ultimately doesn't consummate and results in a worse outcome that there's the stress on that credit. For HTA, as you know, how this year has gone, we've made adjustments based on some of the proposed transactions that have been out there and the ruling from last quarter.

So again, there, and I think we'll speak for GO as well, really, the stress just comes down to what the ultimate deal struck will be.

We have – with our probability weighted scenarios, as you know, over the year, taken adjustments, particularly the HTA and GO, reflecting whether it's court rulings or the blowouts of the materials on proposed transactions.

But really, ultimately, the stress on the current recoveries on claims paid or future recoveries really is going to depend on the nature of the transaction struck and the timing of those recoveries coming in..

That makes a lot of sense. Thank you for that. Then I guess thinking about kind of the different puts and takes kind of going back to kind of the topic of the special dividend.

It seems that there's – on a relative basis, because there's a transaction potentially outstanding for PREPA, there's less volatility, where there's a lot more timing and potential volatility in the analysis for GO and HTA.

And I guess, would those be the ones that you would probably – we should be more focused on from a resolution perspective that could at least give you more clarity to potentially request a special dividend?.

Yes, I think you hit on it. I mean both – it's actually both PREPA and the GO would play into the mix as we try to evaluate the situation. And so it's a little bit hard, as you said, to predict timing on the resolution of each of those but those will be the ones that would move this forward..

That makes a lot of sense. Thank you very much and thanks for answering my questions..

Our next question comes from the line of Geoffrey Dunn of Dowling & Partners..

Thanks, good morning..

Good morning..

I wanted to revisit the pausing of the buyback.

Would you categorize it more as kind of taking a breather after doing so much activity over the last three years? Or are we at a point where additional buyback through National is contingent on a little bit more clarity with respect to Puerto Rico? And just a follow up to that, what is your estimate of the remaining capacity for National to buy back MBIA stock?.

Yes. Let me deal with the first, and Anthony will give you the exact number of capacity. I think it's both of the things that you mentioned, Geoff. So we have, as you know, bought back a substantial amount of shares, as I indicated earlier. So over the last three years, I think it's roughly 57% of the shares.

Even this year, we bought back roughly a third of the share since January 1. So we have done a lot. And so I think that's one reason just to pause.

But I do think second, the timing around Puerto Rico is one where we want to make sure actually for the benefit of shareholders as well as policyholders that there's substantial liquidity always at National, which there is at this point.

And as I mentioned a little bit earlier, we do want to see the approach that the new Board, and when I say new Board, there still maybe some of the members that served at the beginning but there's going to be substantial turnover. We'd like to see with the new board and also the new governor, how things start to proceed with regard to timing.

And I think as we get a handle on those things, we are always revisiting share repurchase authorization, and we will continue to do so..

And Geoff, just to follow up on Bill's point on capacity. As of September 30, National had about $250 million of remaining capacity to purchasing shares..

Okay, thank you..

And at this time, there are no further questions. I'd like to turn the call back over to Mr. Greg Diamond for any additional closing remarks..

Thank you, Maria, and thanks to all of you for listening to the call today. Please contact me 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 conference call. You may now disconnect..