MBIA Inc. — 2018 Form 10-K Summary
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2018; it is not a standalone fourth-quarter filing. MBIA manages legacy financial-guarantee portfolios through National (U.S. public finance), MBIA Corp. (international and structured finance), and a corporate segment. Neither insurer is expected to write new business for the foreseeable future.
Key financial metrics
| Metric | 2018 | 2017 |
|---|---|---|
| Total revenue | $162 million | $433 million |
| Net loss | $296 million; $3.33 per diluted share | $1.605 billion; $13.50 per diluted share |
| Adjusted net loss (non-GAAP) | $38 million; $0.42 per diluted share | $410 million; $3.45 per diluted share |
| Losses and loss adjustment expenses | $63 million | $683 million |
| Operating cash flow | $(319) million | $(652) million |
| Cash and cash equivalents, year-end | $280 million | $146 million |
| Investments and cash | $4.294 billion | $4.777 billion |
| Total assets | $8.076 billion | $9.095 billion |
| MBIA Inc. shareholders’ equity / book value per share | $1.119 billion / $12.46 | $1.413 billion / $15.44 |
| Loss and LAE reserves | $934 million | $979 million |
Conventional operating margins are not a useful performance measure for this legacy guarantee-insurance portfolio; the filing does not present a headline margin measure.
- Revenue and earnings: Revenue fell 63%, principally due to lower consolidated VIE revenues, lower fair-value gains, investment-sale losses, and reduced earned premiums. The net loss narrowed substantially as insurance losses declined and the prior-year $944 million tax provision—primarily associated with a full valuation allowance on deferred tax assets—did not recur. In 2018, the income-tax provision was zero.
- Cash flow and liquidity: Operating cash use improved year over year, mainly because claim payments were lower. MBIA Inc. reported corporate liquidity of $457 million at year-end, excluding tax-escrow assets; National held $3.2 billion in cash and investments, including $488 million in cash and short-term investments. Management expected the parent to meet debt service and operating needs over time, principally from National dividends and tax-sharing releases, but gave no assurance.
- Debt and capital: Consolidated long-term debt was $2.249 billion, medium-term notes $722 million, and investment agreements $311 million. The filing reports $3.0 billion of total capital resources. National’s statutory capital was $2.520 billion and claims-paying resources were $3.844 billion, down from $4.123 billion. MBIA Insurance Corporation’s statutory capital was $555 million and claims-paying resources were $1.340 billion, down from $1.487 billion.
- Insurance exposure: National’s insured gross par outstanding was $57.9 billion, versus $71.9 billion in 2017. MBIA Corp.’s was $11.9 billion. National’s Puerto Rico gross par was $3.3 billion (or $3.8 billion including accreted interest on capital-appreciation bonds). National paid $276 million of Puerto Rico claims in 2018; cumulative gross claims were $691 million through year-end and $756 million including January 2019 claims.
Material changes versus the prior comparable period
- Consolidated net loss improved to $296 million from $1.605 billion, while adjusted net loss improved to $38 million from $410 million. Lower 2018 insurance losses were a major factor: $63 million versus $683 million, including lower losses on certain Puerto Rico and RMBS exposures.
- Revenue decreased to $162 million from $433 million. Premiums earned declined to $162 million from $201 million, partly because 2017 had higher refunding premiums. VIE deconsolidations and related valuation effects also materially affected reported revenue.
- Insurance loss recoverable increased to $1.564 billion from $511 million, reflecting, among other factors, recognition of Zohar recoveries following deconsolidation and anticipated Puerto Rico recoveries. The recorded recoveries are estimates and may not be collected in full or on schedule.
- MBIA Inc. shareholders’ equity fell to $1.119 billion from $1.413 billion; adjusted book value per share (non-GAAP) declined to $27.38 from $28.77. The company repurchased 5.8 million shares for approximately $48 million, compared with 43 million shares for $325 million in 2017.
Outlook, risks and unusual items
- Outlook: MBIA expects to manage down existing portfolios rather than write new business. Management said parent-company liquidity was expected to support obligations over the next several years without capital-market access, subject to continued subsidiary dividends, tax-escrow releases, asset performance and other assumptions. No quantitative earnings or revenue guidance was provided.
- Puerto Rico: National’s substantial insured exposure remains subject to Title III restructuring, legal disputes, recovery uncertainty and political and economic risk. The COFINA plan was confirmed in February 2019 and reduced National’s related exposure; other major Puerto Rico restructurings remained unresolved in the filing’s discussion.
- MBIA Corp. recoveries and liquidity: Recovery of approximately $919 million in Zohar claims payments depends substantially on monetizing Zohar assets, whose value is uncertain. RMBS excess-spread and Credit Suisse put-back recoveries are also uncertain. Failure or delay in recoveries could strain MBIA Corp.’s ability to pay claims and could prompt NYSDFS rehabilitation or liquidation action. Management does not expect such a proceeding to have a significant long-term liquidity impact on MBIA Inc., but cannot assure there would be no adverse impact.
- Regulatory and debt constraints: National is the primary expected source of parent-company dividends; it paid $108 million in 2018, with future ordinary dividends expected to be limited. MBIA Insurance Corporation cannot pay dividends without regulatory approval and has not had statutory dividend capacity since 2009. NYSDFS had not approved surplus-note interest payments since 2013; $757 million of interest was unpaid as of January 15, 2019.
- Control weakness: Management and the auditor identified a material weakness in controls over data, assumptions and calculations used in MBIA Corp.’s RMBS loss-reserve and recovery models. No material misstatement was identified and the financial-statement audit opinion was unqualified, but management had not estimated when remediation would be complete. The auditor concluded internal control over financial reporting was not effective.
- Other sensitivities: Loss reserves and recoveries rely on models and management assumptions; results may vary materially with credit performance, litigation outcomes, interest rates, foreign exchange rates and market liquidity. The company also faces collateral-posting, investment-valuation, regulatory, legal and tax-attribute risks. Moody’s rated National Baa2, MBIA Inc. Ba3 and MBIA Corp. Caa1; S&P and Kroll ratings had been withdrawn.
Important facts for investors to verify
- Progress and recovery outcomes in Puerto Rico Title III cases, including the effects of the COFINA plan and National’s remaining claims exposure.
- Actual collections, timing and valuation support for the $1.564 billion insurance loss recoverable, particularly Zohar, Puerto Rico and RMBS-related amounts.
- MBIA Corp.’s cash needs and ability to repay the financing facility, which had a January 2020 maturity, and any NYSDFS action concerning capital, qualifying assets or policyholder claims.
- Remediation and independent testing of the RMBS reserve-and-recovery control material weakness, and whether future filings identify reserve or recovery revisions.
- Parent-company liquidity, collateral requirements, debt maturities and the amount of future National dividends and tax-escrow releases available to MBIA Inc.