MBIA Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018; filed November 6, 2018. Unaudited consolidated statements. Unless stated otherwise, dollar amounts are in millions.
Business context
MBIA operates through U.S. public finance insurance (National), corporate, and international and structured finance insurance (primarily MBIA Corp.). The company is focused on managing existing insured portfolios, claims and recoveries; it does not expect National or MBIA Corp. to write new business. National stopped actively pursuing new guarantees after a 2017 rating downgrade.
Financial results and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenues | $105 | $33 | $190 | $182 |
| Total expenses | $150 | $306 | $477 | $785 |
| Net loss | $45 | $267 | $289 | $1,568 |
| Loss per diluted share | $0.50 | $2.17 | $3.24 | $12.38 |
| Adjusted net loss (non-GAAP) | $32 | $113 | $144 | $243 |
| Adjusted loss per diluted share (non-GAAP) | $0.35 | $0.91 | $1.62 | $1.93 |
At September 30, 2018, total assets were $8.361 billion, down from $9.095 billion at year-end 2017; total liabilities were $7.241 billion, down from $7.670 billion. MBIA Inc. shareholders’ equity was $1.108 billion, versus $1.413 billion. Book value per share was $12.22 and adjusted book value per share (non-GAAP) was $26.80, compared with $15.44 and $28.77, respectively, at year-end 2017.
Balance-sheet debt and funding included $2.218 billion of long-term debt, $738 million of medium-term notes, $314 million of investment agreements and $1.960 billion of consolidated VIE notes. The filing reports no conventional profit-margin measure. Net investment income was $31 million in Q3 and $96 million year to date, versus $33 million and $122 million in the comparable 2017 periods.
Operating cash flow was negative $323 million for the nine months, compared with negative $693 million in 2017; investing cash flow was positive $836 million and financing cash flow negative $480 million. Cash and cash equivalents at period end were $179 million on the cash-flow statement, including consolidated VIE cash. MBIA Inc.’s corporate liquidity was $365 million, excluding tax escrow; National held $3.4 billion in cash and investments.
Material changes versus prior periods
- Q3 net loss improved to $45 million from $267 million; year-to-date net loss improved to $289 million from $1.568 billion. Lower loss and LAE expenses and fewer OTTI investment losses contributed. The 2017 nine-month loss included a $965 million income-tax provision, mainly from establishing a full valuation allowance against deferred tax assets.
- Consolidated loss and LAE expense was $46 million in Q3 and $177 million for nine months, versus $205 million and $469 million in 2017. Despite the year-over-year decline, management said 2018 loss activity primarily reflected Puerto Rico exposures.
- Gross loss and LAE reserves increased to $1.033 billion from $979 million. Insurance loss recoverables rose to $1.542 billion from $511 million, primarily reflecting recognition of estimated Zohar recoveries following deconsolidation and, to a lesser extent, anticipated recoveries on Puerto Rico claims.
- AFS investments at fair value declined to $3.823 billion from $4.423 billion; the filing attributes increased unrealized investment losses primarily to higher interest rates. The company reported $168 million of gross unrealized losses on AFS investments at quarter-end.
- National’s gross insured par outstanding was $60.8 billion, down from $71.9 billion at year-end. Puerto Rico exposure was $3.271 billion of gross par, or $3.785 billion including accreted interest on capital appreciation bonds; scheduled debt service outstanding was $7.905 billion.
Outlook, risks and unusual items
- Puerto Rico: National paid $276 million of gross claims following January and July 2018 defaults. The Commonwealth and instrumentalities remain in court-supervised restructuring proceedings; fiscal plans, creditor recoveries and federal disaster assistance remain uncertain. Additional concessions or losses could materially affect National.
- Recoveries and MBIA Corp. liquidity: MBIA Corp. seeks recovery of $919 million of claims paid on Zohar I and II, with asset monetization to proceed under a bankruptcy settlement and litigation stay. Recovery amounts and timing are uncertain. Failure to collect expected Zohar, RMBS or Credit Suisse recoveries could impair MBIA Corp.’s ability to pay claims; the NYSDFS could place MBIA Insurance Corporation into rehabilitation or liquidation.
- Capital and liquidity: Management expects MBIA Inc. to have sufficient cash for debt service and general corporate needs, based on projected National dividends, tax-sharing releases and other inflows, but cautions that liquidity could be affected by weaker assets, reduced subsidiary distributions or limited capital-market access. National paid a $108 million dividend to MBIA Inc. after quarter-end. National also bought previously repurchased MBIA Inc. debt, increasing MBIA Inc. liquidity by $41 million.
- Statutory position: National reported $2.682 billion of statutory capital and $4.038 billion of claims-paying resources. MBIA Insurance Corporation reported $587 million of statutory capital and $1.390 billion of claims-paying resources, but lacked enough qualifying assets for certain statutory reserve requirements and was not in compliance with certain single-risk limits. NYSDFS approval is required for surplus-note payments; $725 million of interest was unpaid as of October 15, 2018.
- Puerto Rico and COFINA litigation: Outcomes may affect creditor recoveries. A COFINA plan support agreement contemplated 93.0% recovery for senior bondholders and approximately 56.4% for subordinated holders; the plan remained subject to court confirmation. National’s PREPA-related receiver motion and other litigation were unresolved.
- Accounting and unusual items: The Zohar deconsolidation in Q2 produced a $93 million loss; three additional VIEs were deconsolidated in Q3. The company also corrected two prior-period errors, each $3 million; it concluded the errors were immaterial, and they reduced Q3 2018 net loss by $6 million. Management stated that estimates, particularly insurance reserves, fair values and tax assets, involve significant judgment.
- Tax assets: The company maintained a full valuation allowance of $841 million against its net deferred tax asset. It reported approximately $2.5 billion of NOLs, with expirations from 2031 to 2037, and cautioned that future utilization is uncertain.
No specific earnings or financial guidance was provided. Management described a strategy of running off existing exposures, surveilling and remediating insured portfolios, and pursuing recoveries. Its economic commentary noted a stronger U.S. economy and potentially higher investment returns, while identifying tariffs, market volatility and stressed municipal credits as risks.
Important facts for investors to verify
- Progress, timing and realized value of Zohar, RMBS excess-spread and Credit Suisse recoveries; compare collections with booked recoverables.
- Further Puerto Rico claim payments, restructuring terms and the effect of COFINA, PREPA and other legal outcomes on National’s claims-paying capacity.
- MBIA Inc.’s corporate liquidity, collateral requirements and dependence on National dividends and tax-escrow releases; confirm whether statutory limits permit future distributions.
- MBIA Insurance Corporation’s qualifying-asset and single-risk-limit compliance, unpaid surplus-note interest and any NYSDFS action.
- Reserve assumptions, investment valuations and deferred-tax-asset recoverability, including the extent to which changes reflect estimates rather than cash results.