MBIA Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Unaudited consolidated results. MBIA operates U.S. public finance insurance (National), corporate activities, and international and structured finance insurance (primarily MBIA Corp.). The company said it did not expect National or MBIA Corp. to write new business.
Financial results and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenues | $12 million | $72 million | $85 million | $149 million |
| Net income (loss) | $(146) million | $(1.229) billion | $(244) million | $(1.301) billion |
| GAAP diluted loss per share | $(1.64) | $(9.78) | $(2.75) | $(10.13) |
| Adjusted net loss, non-GAAP | $(51) million | $(139) million | $(112) million | $(130) million |
| Adjusted loss per diluted share, non-GAAP | $(0.58) | $(1.12) | $(1.27) | $(1.02) |
- Drivers and earnings quality: Lower insurance loss expense supported results: $59 million in Q2 and $131 million for the half, versus $170 million and $264 million, respectively, in 2017. Lower premium earnings, VIE deconsolidation, and volatile fair-value and investment items weighed on revenue. Q2 2018 included a $93 million loss from deconsolidating the Zohar funds. Comparisons with 2017 GAAP losses are also affected by the prior-year $1.019 billion Q2 tax provision following establishment of a full deferred-tax valuation allowance; the much smaller GAAP loss does not by itself indicate comparable operating improvement.
- Cash flow: Six-month operating cash flow was negative $126 million, compared with negative $459 million in 2017; investing activities provided $351 million and financing activities used $174 million. Cash and cash equivalents were $197 million at June 30, including consolidated VIE cash; the balance sheet reports $179 million outside VIEs.
- Balance sheet and debt: Total assets were $8.699 billion, total liabilities $7.584 billion, and total equity $1.115 billion. MBIA Inc. shareholders’ equity was $1.103 billion, down from $1.413 billion at year-end 2017. Reported obligations included $2.184 billion long-term debt, $761 million medium-term notes, $312 million investment agreements, and $2.220 billion of consolidated VIE notes. These categories are not all parent-company debt.
- Reserves and recoverables: Loss and LAE reserves were $1.035 billion versus $979 million at year-end; insurance loss recoverables rose to $1.359 billion from $511 million, principally reflecting reinstated Zohar recoveries after deconsolidation. Management attributed the increase in gross reserves largely to Puerto Rico exposures.
- Liquidity and capital: Management expected MBIA Inc. to have sufficient cash for debt service and general corporate needs, based on projected subsidiary dividends, tax-sharing releases, and other inflows, but cautioned that liquidity risks remain. Parent-company cash and investments for general corporate purposes, excluding tax escrow, were $389 million. National reported $3.5 billion of cash and investments; MBIA Corp. reported $229 million, including $105 million immediately available. National’s statutory capital was $2.666 billion and claims-paying resources were $4.051 billion; MBIA Corp.’s statutory capital was $489 million and claims-paying resources were $1.406 billion.
- Margins: The filing does not present a conventional operating margin measure; reported results reflect financial-guarantee loss estimates, investment valuations, derivatives, and consolidated VIE activity.
Material changes, outlook, and risks
- Revenue declined year over year in both the quarter and half-year, reflecting lower premiums and investment income, prior-year one-off gains, and the Zohar-related VIE accounting change. Adjusted net loss improved in Q2 but worsened for the six-month period.
- National’s insured gross par outstanding was $64.5 billion. Puerto Rico accounted for $3.4 billion of gross insured par, or $3.9 billion including accreted interest on capital appreciation bonds. Puerto Rico defaults on January 1 and July 1, 2018 led National to pay $276 million of gross claims in aggregate. Fiscal-plan, Title III restructuring, and creditor disputes remain unresolved.
- MBIA Corp.’s Zohar-related recoveries are uncertain. A court-approved settlement set a process to monetize Zohar assets and stayed related litigation for at least 15 months; the company warned recoveries may fall short of amounts paid. Credit Suisse put-back litigation and expected RMBS excess-spread recoveries are also uncertain.
- MBIA Corp. had significant statutory constraints: it lacked qualifying assets to support certain required reserves, was not in compliance with certain single-risk limits and admitted-asset requirements, and had negative free and divisible surplus of $16 million. The NYSDFS had not approved surplus-note interest payments; $693 million of interest was unpaid as of July 15, 2018. The filing warns that inadequate liquidity or delayed recoveries could prompt regulatory rehabilitation or liquidation proceedings.
- Management cited a stronger U.S. economy and rising interest rates as potential supports to municipal credit and portfolio returns, while noting risks from Puerto Rico’s recovery, public-finance fiscal stress, market volatility, and higher-than-expected claims. It provided no quantified earnings or revenue guidance.
- Moody’s downgraded National to Baa2 in January 2018 and MBIA Inc. to Ba3; MBIA Corp. remained rated Caa1. S&P and Kroll had withdrawn ratings after MBIA ended rating agreements.
- Other notable items: 1.3 million shares were issued through cashless warrant exercises; 2.0 million shares were repurchased during the half at an average $7.25. The company adopted accounting standards including ASU 2016-01, which moved $162 million from retained earnings to AOCI for instrument-specific credit risk.
Most important facts for investors to verify
- How Puerto Rico restructuring outcomes, claims, and subsequent recoveries affect National’s reserves, statutory capital, and dividend capacity.
- Whether Zohar asset monetization, Credit Suisse litigation, and RMBS/CDO recoveries produce the amounts and timing assumed in reserves and liquidity projections.
- MBIA Corp.’s available liquidity, regulatory compliance, unpaid surplus-note interest, and the NYSDFS’s position on future claim-paying capacity.
- Parent-company liquidity after collateral requirements and the timing and amount of National dividends and tax-escrow releases.
- The distinction between GAAP results and management’s non-GAAP adjusted measures, including the effect of the 2017 tax valuation allowance and 2018 VIE deconsolidation.