Welcome to the MBIA 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 MBIA. Please go ahead, sir..

Thank you, Britney. Welcome to MBIA'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, 10-Q, quarterly operating supplements 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 results 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 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 is Bill Fallon..

Thanks, Greg. Good morning, everyone. Thanks 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 restructuring of Puerto Rico GO and PBA bonds has remained on track with the confirmation hearings beginning on Monday, November 8, and continuing on several dates through and including November 23.

We expect the plan to be confirmed later this year and implemented early next year, which will be a material development for the Commonwealth's emergence from bankruptcy.

After the GO 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 National's 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 MBI 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 30, 2021, down $4.1 billion from year-end 2020.

At September 30, 2021, National's leverage ratio of gross par to statutory capital was 19 to 1. Now, Anthony will provide additional comments about our third quarter financial results..

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 Inc.

debt or GFL notes for the remainder of 2021 and has only EUR50 million 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 30, 2021, versus a statutory net loss of $8 million for the quarter ended September 30, 2020. The favorable result was primarily due to a loss and LAE benefit in Q3 2021 on Puerto Rico exposures versus expense in the prior comparable quarter.

The Puerto Rico change as 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 and LAE 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 and 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 payments - 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 and 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 compared to a statutory net loss of $35 million for the third quarter of 2020.

The third quarter 2021 loss and LAE was attributable to higher losses on projected recoveries related to Zohar CLO claim payments in the third quarter of 2021 compared to the third quarter of 2020, 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 30, 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-US 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..

[Operator Instructions] And we will take our first question from Tommy McJoynt with KBW. Your line is now open..

Thanks for taking my questions. So the private agreement of the sale of the PREPA claims was interesting.

Do you think there is an appetite in available capital from other market participants? Should you want to monetize some or even all of the remaining salvage in recoverable assets that you hold? And can you go through which pieces of the recoverable are free to monetize right now?.

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 CUSIPs where National has fully paid claims - I'm sorry, paid claims to fully satisfy those CUSIPs.

I make that distinction because those CUSIPs 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 CUSIPs 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 CUSIPs that have been fully satisfied. It's under $100 million. So there's less to do there..

That's helpful.

And so, was the decision to monetize some of the PREPA versus the GO or HTA, just given that the GO 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?.

That's correct. The GO deal is right around the corner. We still have a material amount of PREPA exposure, and that is obviously lagging behind GO and HTA at this point, and we were able to execute at a level that we were pleased with..

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 would be helpful..

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 those 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 is a 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 MTNs 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..

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 the 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?.

Yes, 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. We do look at metrics, such as the leverage, which we talked about, which continue generally to come - generally is coming down, but we don't have a number at this point for it..

And we will take our next question from John Staley with Staley Capital. Your line is now open..

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 a 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?.

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 of the 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 an accelerated basis.

With regard to your first question, there was a lot of news over the last couple of 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 of weeks ago had 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 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..

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?.

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..

And we will take our next question from Paul Saunders with Hutch Capital. Your line is now open..

Thanks for taking my question. Just two quick ones for me.

The GSL repurchase that you guys made, can you guys disclose which bond or bonds just - or even just kind of the year maturity that you purchased?.

Paul, we purchased 2026 and 2031 maturities this quarter..

Okay. I sort of deduced that by the price. It was hard to back into it if there was one bond. And then just the second question is just on the MBI Corp. side and 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 roughly where you have that recovery marked and sort of your expectations on achieving some recovery there?.

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 year. 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 lien RMBS portfolio is $240 million this quarter..

[Operator Instructions] And we will take our next question from Geoffrey Dunn with Dowling and Partners. Your line is now open..

Good morning. I did see your statement in your press release about the expectation for the restructurings to get approved.

But 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?.

Yes, you're correct. Judge Swain obviously has to approve there's - the 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 - he will confirm the plan.

But again, we'll wait and see what happens starting next week. But I have - I can't give you a quantitative answer to that weighting question..

And then this may be a little technical, I guess. But how do you go about assessing a sale price for your recoverables? Obviously, you have what you've booked.

But what was the process of coming to a sales price, obviously, weighing uncertainty of potential future collateral and market prices? But how did you go about doing that? And then also, given the upside in the market, do you think basically all of your Puerto Rico recoverables theoretically could be monetized through this method, if you judge the valuation is appropriate?.

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 derisking National's 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 derisk the book where we can.

When it came to PREPA, what we looked at is, essentially, when you look 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 will 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 serves several purposes.

It's obviously a strong asset versus a salvage asset, it is investable, and it will increase National's 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.

But we were quite disciplined in the fact that we did not want to take 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 PREPA exposure off the table.

As far as the remaining salvage, again, the salvage asset for the third quarter for National's around $1.3 billion. Again, I talked about the face value PREPA bonds that are left, the bankruptcy rates associated with the $230 million face value of CUSIPs of claims we've paid. A good percentage of the remaining salvage is on GO 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..

Geoff, the other thing....

Okay..

Geoff, the other thing, the more we can reduce Puerto Rico exposure or reduce the view with regard to volatility exposure, the quicker we can get to our strategic alternatives. So that is also a factor as we look at these things because selling those claims obviously helps with that - in that regard..

Yes. 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 an 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?.

No. So the distinction there is the salvage asset is - are essentially a scenario-based recovery value of the agreements that we're going to enter into, whether it's PREPA, GO or HTA. Obviously, this quarter, we moved to a fair value analysis on GO. That is separate from the face value of the CUSIPs that we insured.

So how we look at the sales of these type of deals, Geoff, is that we're selling bankruptcy claims and rights. They happen to be attached to the transfer of ownership of CUSIPs, but we're really selling is the whites under, in this case, with PREPA RSA..

So can you translate your salvage asset as of 9/30 to a face value?.

No..

And we do have a follow-up question from John Staley with Staley Capital. Your line is now open..

Very quick question. As you monetize some of these claims and 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?.

So John, we are - there are limitations we have to buy shares back. There's regulatory limitations to what you can buy. And just as a kind of a thumbnail calculation, it's essentially 50% 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 - 84 million shares of the holding company, we are well beyond any regulatory limit that would allow us to buy shares, a couple of hundred million dollars at this point over the limit.

So we don't have capacity at this point to repurchase any shares at National..

And at this time, I'm showing no further questions. I'd like to turn the floor back over to Greg Diamond for any additional or closing remarks..

Thank you, Britney, 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..

Thank you. Ladies and gentlemen, this does conclude today's third quarter 2021 financial results conference call. You may now disconnect..